5): Taxation of a business and its stakeholders - Income Tax

Question 1

Who pays income tax?

Answer 1

Individuals

partners

PRs

trustees

Charities exempt.

Companies pay corporation tax instead.

Question 2

What are the four categories that figures can fall into?

Answer 2

income receipts

capital receipts

income expenditure

capital expenditure.

Question 3

What is income receipt?

Answer 3

receipt of money on a regular/recurring basis

salary, trading profits, income charged on loans, rental income

other forms: pension earnings, interest on savings, dividends, benefits given by employer

Question 4

What are capital receipts?

Answer 4

These are one-off transactions not part of regular activity

examples: selling your car if you don’t sell cars as part of a business.

Question 5

What is income expenditure?

Answer 5

expense incurred due to day-to day trading activities of a business

examples: payment of rent for business premises, paying bills, paying for repairs.

Question 6

What is capital expenditure?

Answer 6

money spent on a new capital asset or enhancing existing asset as part of the business

one-off transaction

examples: buying large equipment, buying new business property, paying for repairs of business property

Question 7

What are the relevant tax periods for individuals and companies?

Answer 7

individuals: tax year: 6 April - 5 April following year

Companies: financial year: 1 April - 31 March following year

Question 8

How is tax collected?

Answer 8

HMRC collects from individuals and businesses via self-assessment system.

PAYE system collects tax at the source

Question 9

Who pays income tax?

Answer 9

individuals:

employees

sole traders

parters in a partnership

company directors

Question 10

Do deceased people have to pay income tax?

Answer 10

Yes.

only if the tax relates to a period when they were working prior to death

AND

on any income received on their estate

Question 11

Who will pay the tax on a deceased person’s estate?

Answer 11

PRs will pay as part of administration

Question 12

What is taxable income for income tax purposes?

Answer 12

income tax paid on receipt of money originating from income profits (regular income generation)

capital profits are not taken into account

Question 13

What is the income tax liability in relation to foreign income?

Answer 13

foreign income: income originating from abroad

if Uk resident: pay tax on foreign income received in tax year

UK resident: if taxpayer has spent at least 183 days in the UK during relevant tax year

Question 14

Who is required to complete a self-assessment tax return?

Answer 14

Directors and Self-employed people

self-employed: must register with HMRC within 3 months of starting the business

Question 15

What are the deadlines for submitting tax returns?

Answer 15

online: 31 January

paper form: 31 October (earlier)

Question 16

What must partners include in their tax return?

Answer 16

partner’s share in partnership profit

partnership profit: distributed in accordance with partnership agreement

Question 17

What are overlap profits?

Answer 17

Occur when a partnership or sole trader has an accounting period different from the tax year (6 April to 5 April).

HMRC uses a basis period for tax purposes, which may result in profits being taxed twice in the first year.

The duplicated profits are called overlap profits.

Question 18

Can overlap profits be returned?

Answer 18

Overlap relief allows the business to recover the tax paid twice when:

The business ceases trading.

OR

The business changes its accounting period to match the tax year.

The relief reduces taxable profits in the year overlap relief is claimed.

Question 19

How is tax collected from employed individuals?

Answer 19

not required to submit self-assessment

PAYE system deducts tax at source

Question 20

What are the three categories of income an individual may receive?

Answer 20

Savings income

Non-savings Non-Divididend income (NSNDI)

Dividend income

Question 21

What is included in savings income?

Answer 21

interest from savings account b

interest from govt and company bonds

income from credit union accounts

Question 22

What does NSNDI include?

Answer 22

salaries and bonuses

trading income from a business

pension earnings

rental income

Question 23

what is dividend income?

Answer 23

dividends received on shares

Question 24

What will partners and sole traders receive instead of a salary?

Answer 24

trading income

Question 25

What are some suggestions for paying less tax through spouse transfers?

Answer 25

transfer the money on deposit or the shares to spouse if they have one of the following:

personal allowance: 12,570

personal savings allowance:

if the spouse would only pay tax at the basic rate.

Question 26

What are some suggestions for paying less tax through applying for a marriage allowance?

Answer 26

ransfer £1,260 of unused personal allowance to a spouse if eligible.

Question 27

How can tax-efficient savings be made?

Answer 27

Contribute to ISAs or other tax-efficient savings accounts.

Increase personal pension contributions to benefit from tax relief and reduce net income.

Question 28

What is loss relief?

Answer 28

if a sole trader or partnership has made a loss in one tax year:

loss can be deducted from next year’s profit to reduce income tax payable

Question 29

When is loss relief used?

Answer 29

before applying personal allowances so total income is reduced

excess loss relief left over can be used to reduce any capital gains made within same tax year

Question 30

What are the general anti-abuse rules (GAAR)?

Answer 30

legislation to stop loopholes exploited by taxpayers