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Business Law & Practice > 6. Taxation > Flashcards

6. Taxation Flashcards

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1
Q

Who pays income tax and on what?

A

Individuals

Employment earnings, property income, a partners’ share in trading profits, income from dividends

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2
Q

What is the PA position on how trading profits are divided between each partner?

A

Split equally

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3
Q

Who pays capital gains tax and on what?

A

Individuals and sole traders

Gain on sale of chargeable asset, individual’s sale of shares owned in a company, sale of a leasehold property, PRs

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4
Q

Who pays corporation tax and on what?

A

Companies

Companies’ income profits, companies’ chargeable gains, a company’s share in trading profits from a partnership

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5
Q

What is the calculation for trading profits?

A

Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit / loss

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6
Q

What are chargeable receipts?

A

Money received for sale of goods and services - must be of an “income nature”

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7
Q

What is deductible expenditure?

A

Must be of an “income nature” and “wholly and exclusively for the purposes of trade”

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8
Q

What is “income nature”?

A

Something incurred so that it can be sold at a profit, e.g. stock

Or expenditure that has the quality of recurrence, e.g. utility bills

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9
Q

What is “wholly and exclusively for the purposes of trade”?

A

Commonly the following:

Salaries (as long as not excessive based on service provided)
Rent on commercial premises
Utility bills
Stock
Contributions to approved pension scheme
Interest payments on borrowing

NOT depreciation

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10
Q

What are “capital allowances”?

A

Type of tax relief allowing all or part of an item to be taken off total profits before tax is calculated

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11
Q

How do you calculate the written down allowance for plant & machinery?

A

DEDUCT (from total profits) 18% of the existing pool of P&M

ALSO DEDUCT (from total profits) additional up to £1 million of new / second hand P&M purchased in that account period (AIA)

ALSO DEDUCT (from total profits) any spend on NEW P&M over £1 million - i.e. no cap on new P&M

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12
Q

What reliefs are available for unincorporated businesses when they suffer a trading loss?

A

Start-up loss relief / early trade losses relief

Carry-across / one-year carry-back relief for trading losses

Set-off against capital gains

Carry-forward relief

Carry-back of terminal trading loss

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13
Q

When applying reliefs, how are they used in relation to personal exemption?

A

Used only so far as is necessary to reduce the gains to the level of the annual exemption

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14
Q

What is start-up loss relief / early trade losses relief?

A

In first 4 years of trading, can carry back loss and set against total income in the 3 tax years immediately prior to the tax year of the loss

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15
Q

What is carry-across / one-year carry-back relief for trading losses?

A

Loss can be set against:
1. Total income for same tax year
2. Total income from preceding tax year
3. Total income from same year until reduced to 0, then preceding
4. Total income from preceding tax year until reduced to 0, then same year

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16
Q

What is set-off against capital gains and when can it be used?

A

Allows the taxpayer to set trading losses against chargeable gains in the same tax year – applied when a taxpayer has claimed carry-across relief but not all of the loss has been absorbed

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17
Q

What is carry-forward relief?

A

Loss may be set against subsequent profits, taking earlier years first

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18
Q

What is carry-back of terminal trading loss?

A

Loss in final 12 months set against trading profit in final tax year, and then carried back and set against 3 preceding years

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19
Q

What is carry-forward relief on incorporation of business?

A

If a taxpayer incorporated their business by transferring it to a company wholly or mainly in return for shares, any trading losses which have not been relieved can be carried forward and set against any income they receive from the company

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20
Q

What is the cap for reliefs?

A

Greater of £50,000 or 25% of taxpayer’s income in tax year

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21
Q

What is the threshold over which someone must be registered for VAT purposes?

A

Taxable supplies exceeding £85,000

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22
Q

Can a person who makes only exempt supplies register for VAT?

A

No

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23
Q

Is the supply of residential land chargeable for VAT purposes?

A

No, it is an exempt supply

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24
Q

Who pays capital gains tax?

A

Individuals
Sole traders / partnerships
Personal representatives
Trustees

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25
Q

What is the calculation for capital gains tax?

A

STEP 1 Sale price of asset LESS purchase price LESS initial expenditure LESS subsequent expenditure (incurred to enhance the value of an asset) LESS incidental costs of disposal LESS indexation

STEP 2 Consider reliefs

STEP 3 Deduct annual exemption (£6,000)

STEP 4 Apply correct rate of tax

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26
Q

How do you calculate indexation on an asset?

A

Acquisition cost x indexation factor PLUS
Incidental costs of acquisition x indexation factor PLUS
Subsequent expenditure x indexation factor

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27
Q

Does repair and maintenance to an asset constitute subsequent expenditure?

A

No

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28
Q

What reliefs are available for CGT purposes?

A

Relief on replacement of business assets (“rollover” relief)

Rollover relief on incorporation of a business

Hold-over relief on gifts

Business asset disposal relief

29
Q

Which relief is automatically applied if the conditions are met?

A

Rollover relief on incorporation of a business

Taxpayer need to opt out of it

30
Q

What is relief on replacement of business assets (“rollover” relief)?

A

Enables sale of qualifying business assets (i.e. fixed assets) provided proceeds are invested into other qualifying business assets

31
Q

How is rollover relief applied?

A

Any indexed gain on the asset which is “rolling over” is deducted from the acquisition cost of the replacement asset to produce an adjusted acquisition cost for tax purposes on a subsequent disposal

32
Q

Does fixed plant and machinery count as a qualifying asset?

A

Yes

33
Q

When must a new qualifying business asset be bought in order to apply for relief on replacement of business assets?

A

Within 1 year before or 3 years after disposal

34
Q

Are company shares a qualifying asset for the purposes of relief on replacement of business assets?

A

No

35
Q

What is rollover relief on incorporation of a business?

A

Relief which is applied to shares that an individual receives as consideration for sale of an interest in an unincorporated business to a company

36
Q

What are the 3 conditions for the application of rollover relief on incorporation of a business?

A
  1. Business transferred as a going concern
  2. Consideration all in shares
  3. Business transferred with all its assets (excluding cash)
37
Q

What is hold-over relief on gifts?

A

Allows an individual to make a gift of certain types of business asset, or sell them at an undervalue, without paying CGT

38
Q

What are the 4 conditions for the application of hold-over relief on gifts?

A
  1. Only available on gifts, or gift element of a sale at an undervalue
  2. Only the part of the gain relating to chargeable business assets qualify for the relief
  3. If donee is a company, relief does not apply to gift of shares
  4. Both donor and donee must elect to apply for the relief
39
Q

What is business asset disposal relief?

A

Reduction of tax to flat 10% rate for the disposal of qualifying business assets

40
Q

When does business asset disposal relief apply to sole traders or partnerships?

A

When they dispose of the whole or a part of a business, provided either disposed as a going concern, or disposed of in cessation of the business

41
Q

When does business asset disposal relief apply to company shares?

A

When company is trading

Disposer is a shareholder of AT LEAST 5%

OR

Disposer is an employee or officer of the company

AND

Above requirements have been satisfied for at least 2 years from either prior to date of disposal or date of cessation of company

42
Q

Can unused annual exemption be carried forward to the next tax year, for CGT purposes?

A

No

43
Q

When is the annual exemption applied?

A

Deducted from gains and losses from all sources which are added together

Taxpayer can choose to apply the annual exemption first to the gains that attract
the higher tax rates if the taxpayer has gains on more than one disposal which are subject to
tax at different rates

44
Q

What kind of assets are exempt from CGT?

A

Wasting assets, i.e. those with a predictable life of less than 50 years

45
Q

When is residential property exempt from CGT?

A

When it is a private residence that has been occupied as main and only residence through period of ownership (not including last 9 months)

46
Q

What are the tax rates for the different categories of chargeable assets?

A

Under £37,700 - 10%

Anything exceeding the threshold is taxed at 20%

47
Q

How much is residential property taxed at for CGT purposes?

A

An addition 8% on top of the 10 or 20%

48
Q

How much are gains made by trustees/ PRs taxed at?

A

20%

28% for residential property

49
Q

How is CGT applicable in relation to disposals between spouses / civil partners?

A

When one makes a disposal to the other, there is deemed to be no gain or loss

When recipient then disposes of the asset, they pay CGT on any gain made by them and spouse / civil partner is period of both people’s ownership

50
Q

How is payment of CGT divided when a partnership makes a gain on the disposal of an asset?

A

Each partner pays proportion of CGT payable based on their percentage ownership of partnership assets

51
Q

What are the 4 conditions in which CGT will be charged instead of income tax when a shareholder sells back shares?

A
  1. Buyer an unlisted trading company (exlc listing on AIM)
  2. Purpose of buyback is to raise cash to pay IHT / for benefit of company’s trade
  3. Seller owned shares for 5 years prior
  4. Seller either selling all shares or substantially reducing by at least 25%
52
Q

When is CGT payable?

A

In full on or before 31 January in the year following the end of the relevant tax year

53
Q

In what circumstances can payment of CGT be done by instalments?

A
  1. Disposal was a gift AND
  2. Qualifying asset is land / controlling shareholding in a company or any shareholding in unquoted company AND
  3. Conditions for hold-over relief to apply are NOT met
54
Q

What is the calculation for corporation tax?

A

STEP 1 Calculate income profits (i.e. trading profits + property income)

STEP 2 Calculate chargeable gains

STEP 3 Calculate total profits (income profits + chargeable gains) and apply any reliefs available against total profits

STEP 4 Calculate tax

55
Q

How do you calculate chargeable gains for corporation tax purposes?

A
  1. Proceeds of disposal LESS costs of disposal LESS initial and subsequent expenditure LESS indexation allowance
  2. Apply reliefs
56
Q

What reliefs are available to reduce chargeable gains total for corporation tax purposes? (I.e. within Step 2 of the calculation)

A

Rollover relief on replacement of qualifying business assets

57
Q

What reliefs are available within Step 3 of the calculation for corporation tax purposes?

A

Carry-across / carry-back relief

Terminal carry-back relief

Carry-forward relief

58
Q

For incorporated businesses, when can the carry-across / carry-back relief be applied?

A

Within the year of the loss or previous 12 months

59
Q

For incorporated businesses, when can terminal carry-back relief by applied?

A

Within the year of the loss and 3 years previous to final 12 months of trading (taking later periods first)

60
Q

What additional requirements must be met in order for an incorporated business to use carry-forward relief?

A
  1. Must be made within 2 years of end of accounting period in which company will apply losses to reduce total profits
  2. Maximum that can be claimed is £5 million plus 50% of remaining total profits
61
Q

What are the tax rates for corporation tax?

A

Up to £50,000 = 19%

More than £250,000 = 25%

Above £50,000 but less than £250,000 = marginal rate, i.e. tapered to between 19% and 25%

62
Q

Are corporations entitled to any annual exemption for corporation tax purposes?

A

No

63
Q

What is a close company?

A

Controlled by 5 or fewer participators

OR

Controlled by participators (any number) who are directors / shadow directors

64
Q

When a close company loans money to a participator or their associates (i.e. close relative or business partner), what are the implications?

A

Must pay HMRC amount equivalent to 32.5% of the loan

Tax is repaid to the company is loan is later repaid / written off

65
Q

When is tax not payable on a loan from a close company to a participator or their associates?

A

Loan is made in ordinary course of a money-lending business

OR

Loan under £15,000 and borrower works full-time for company AND owns 5% or less of company’s shares

66
Q

When is the deadline for filing the self-assessment return with HMRC?

A

31 October for paper
31 January for online

67
Q

When is corporation tax payable for more companies?

A

Within 9 months and 1 day from end of relevant accounting period

68
Q

For large companies (annual taxable profits over £1,500,000) when is corporation tax due?

A

In 4 instalments:

o Six months and 13 days after the start of the accounting period
o Three months from the first instalment due date
o Three months from the second instalment due date
o Three months and 14 days after the end of the accounting period

69
Q

For very large companies (annual taxable profits over £20,000,000) when is corporation tax due?

A

In 4 instalments:

o Two months and 13 days after the start of the accounting period
o Three months from the first instalment due date
o Three months from the second instalment due date
o Three months from the third instalment due date

Business Law & Practice (7 decks)

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