6a. Tax - Business Flashcards
Income tax
Who pays income tax?
Does a UK tax resident pay UK income tax on foreign income?
- Employees
- Sole traders
- Partners
- Shareholders (on dividends)
- Lenders
- Debenture holders
Yes
Income tax
What are the three categories of income in the order they are collected?
- Non-savings income
- Savings income
- Dividend income
Income tax
What are the the three categories of non-savings income?
- Earnings and pensions
- Trading income
- Property income
Income tax
What is the difference between tax exempt and zero-rated?
Tax exempt means the income is fully exempt from tax calculations and does not form part of income for the purposes of determining tax brackets.
Zero-rated means the income is not exempt from tax and still forms part of the income to determine tax bracket, but it is taxed at 0%.
Income tax
What are five examples of income which are exempt from income tax?
- Interest from National Savings
- Interest or dividends from an ISA
- Winnings on Premium Bonds or any gambling
- Most social security benefits
- Child benefits and tax credits
Income tax
What is the annual investment allowance in the context of capital assets?
If a taxpayer buys a capital asset for their business, they may deduct all of the costs if it is plant or machinery, e.g. tools, machines, and computers, but not cars, land, or buildings
Income tax
In what situation is a Writing Down Allowance available, and what are the percentage allowances which can be deducted per year for (1) life-long assets, and (2) other assets?
If the capital asset purchase exceeds the annual investment allowance.
Life-long assets: 6% per year
Other assets: 18% per year
Assets are pooled if multiple
Income tax
In the case of a partnership, how are partnership profits split for income tax purposes where one of the partners also receives either (1) a salary or (2) interest on capital contributions?
The salary and/or interest are allocated to the partner first, and then the net amount is distributed as partnership profits.
Partner profit must be declared as income and tax paid; Partnership Tax Return must be filed even though the partners pay the tax
Income tax
In the context of the overlap profit problem, what is a taxpaying business’s basis period?
What are overlap profits?
Where a business has an accounting period which is different to the tax year of April 6 to April 5, the period of their accounting period which overlaps with a relevant tax period is the basis period
E.g.:
- Accounting period: Jan 1, 2023 - Dec 31, 2023;
- Basis period is Jan 1, 2023 - April 5, 2023 as part of the 2022/23 tax year.
Where a business has an accounting period which is different to the tax year of April 6 to April 5, and does not make up accounts to April 5 of that year, some profits made in the business’s first and second year of trading will be taxed twice
Income tax
On what three qualifying loans can a taxpayer offset the interest paid against income?
Loans used to fund:
- Capital contributions or loans to a partnership
- Investments in a closed trading company
- Payments of inheritance tax for personal representatives
Income tax
To what degree is the income tax personal allowance (currently £12,570) tapered for income above £100,000?
At what level of income is the personal allowance reduced to £0?
The income tax personal allowance is reduced by £1 for every £2 above £100,000. Therefore, the allowance is reduced to £0 for incomes of £125,140 and above.
The allowance is reduced to £0 for incomes of £125,140 and above.
Income tax
What does the Marriage Allowance allow?
What amount is currently allowed to be transferred?
It allows a person to transfer part of their personal allowance to their spouse or civil partner
£1,260, reducing the spouse/civil partner’s tax liability by £252 (20% of the amount)
Income tax
In addition to being married/in a civil partnership and the transferring spouse having some of their allowance left to transfer, what condition must be met to transfer under the Marriage Allowance?
Recipient spouse must be a basic rate taxpayer
Income tax
What are the tax bands called, what are the monetary thresholds, and what are the percentage rates applying to each?
- Personal allowance: Up to £12,570 – 0%
- Basic rate: £12,571 - £50,270 (next £37,700) – 20%
- Higher rate: £50,271 - £125,140 (next £74,869) – 40%
- Additional rate: £125,140 and above – 45%
Income tax
What is the personal savings allowance amount for each tax band which must be deducted from savings income before tax?
- Basic rate band: £1,000
- Higher rate band: £500
- Additional rate band: No savings allowance at all
Income tax
What is the dividend allowance amount and what tax bands is it available to?
What are the dividend tax rates for each tax band which must be deducted from dividend income before tax?
£2,000. Available to all taxpayers, irrespective of band.
Basic: 8.75%; Higher: 33.75%; Additional: 39.35%
Income tax
Are the personal allowance, personal savings allowance, and dividend allowance considered exemptions or zero-rated?
What is the effect of this?
Zero-rated
The amounts are counted as income for the purposes of determining the applicable tax band, but are taxed at 0%
Income tax
Who can claim a trading loss?
Can it be transferred to a spouse or civil partner?
Only the taxpayer
Losses cannot be transferred
Income tax
What are the four ways with which a taxpayer may be able deal with a loss?
- Set off all of loss against profits from current year or prior year
- If no profits, carry loss forward to offset against future profits in the same trade
- If sole trader/partner incorporates and receives shares, set off losses against future salary or dividend income from the company whilst they are a shareholder
- Terminal loss relief
Income tax
Although partial claims are not allowed in a current year/prior year loss relief situation, what option is available to a taxpayer who does not offset all of their trading loss against total income?
In order to prevent artificially increasing the amount of loss that may be carried back or applied to CGT in a current year/prior year loss relief situation, what is the order in which losses and the personal allowance are applied to income?
They can use the balance to offset any capital gains tax
The loss to be offset is applied to the fullest extent possible, before the personal allowance
Income tax
What does terminal loss relief allow?
When a trader ceases trading, it allows a loss to be deducted in the tax year of cessation and then to be carried back to the three preceding tax years on a last in first out basis
Income tax
What is the double reasonableness test in the context of anti-avoidance?
HMRC can set aside a transaction if they can prove the arrangement cannot reasonably be regarded as a reasonable course of action
Capital gains tax
If an individual is UK resident, are they liable for CGT on all their assets, wherever situated?
Yes
Capital gains tax
Disposals of what type of property is an exception to the general rule that non-UK residents are not liable for CGT in UK?
Disposals of interests in UK land, whether residential or commercial
Capital gains tax
What are two types of assets which are exempt from CGT?
- Wasting chattels
- Non-wasting assets worth less than £6,000
A wasting chattel is any moveable property with a life of less than 50 years, excluding machinery used in business
Capital gains tax
If an individual transfers an asset to their spouse, at what value is the spouse deemed to have acquired the asset at?
The transferring spouse’s acquisition cost
Capital gains tax
What is the requirement for expenditure which enhances the value of an asset to be deductible?
It must still form part of the asset when it is disposed
Capital gains tax
Disposal of what three types of assets qualifies under Business Asset Disposal Relief?
Under Business Asset Disposal Relief, what is the CGT rate paid on qualifying assets, and what is the lifetime limit on this relief?
- All or part of business carried on as a sole trader/partner
- Shares in a company if the taxpayer owns at least 5% and was an officer/employee
- Assets owned and used by the taxpayer’s company
All must be for at least two years before disposal.
10%. £1 million lifetime limit.
Capital gains tax
What is Hold Over (Gift) Relief?
Where an individual disposes of a business asset by giving it away, but donor and recipient agree to defer any gain on to the recipient, who when they dispose of the asset, will be treated as acquiring the gift at the donor’s cost basis
Capital gains tax
What three types of business assets qualify for Hold Over (Gift) Relief?
- Assets used in the business
- Shares in an unquoted company, including the donor’s personal company
- Assets that qualify for agricultural property relief
Capital gains tax
When does Incorporation Relief arise, and how does it operate?
When an individual transfers their sole trader or partnership interest to a company, part or all of the gain from the transfer is deferred by subtracting the acquisition cost of the company shares from the gain, which will then be taxed when the shares are disposed of
Capital gains tax
How does Enterprise Investment Scheme Reinvestment Relief allow deferral of CGT liability?
If an individual reinvests any chargeable gain in shares of qualifying unquoted companies within one year before or three years after, the gain can be deferred until after the shares are disposed of
Capital gains tax
What is the only CGT relief available to companies as well?
Replacement of Business Assets Relief
Capital gains tax
What is the most tax-efficient way to use the CGT annual exempt amount and why?
Put AEA toward gains on residential property first, as they carry rates of 18% and 28% compared to 10% and 20% for all other assets
Capital gains tax
What is the order in which losses are offset against gains of the same year and utilisation of the AEA?
What is the order in which losses which are carried forward are offset against gains and utilisation of the AEA of the year of gains?
Losses are automatically offset, before the AEA is deducted
Losses which are carried forward deducted after the AEA, such that the AEA is not wasted
Corporation tax
Within what time after the end of its financial accounting period must a company (1) pay any corporation tax which is owing, and (2) submit its tax return?
Tax due: Nine months and one day
Return due: Twelve months
Corporation tax
What is the current corporation tax rate?
Up to £50k: 19%
Over £50k: 25%
Corporation tax
What is the difference between the tax-status of dividends paid by a company and to a company?
Dividends paid out: not tax deductible
Dividends received: usually exempt from tax so not added to taxable income
Corporation tax
What are the two ways in which a company can treat its trading losses?
- Set off all of loss against profits (before donations) from current or if no profits in current, a preceding accounting period
- If no profits, carry loss forward to offset against future profits (after donations) in a future accounting period
Corporation tax
What is a close company?
Company resident in UK and controlled by either:
- Five or fewer shareholders, or
- Any number of directors who are also shareholders
Corporation tax
What happens if a close company makes a loan to a shareholder who is also a director/employee and charges no interest on this?
What is triggered if the loan is over £10,000?
A taxable benefit arises valued at the current official interest rate
If the loan is over £10,000, the benefit must be reported and taxed as earnings
Corporation tax
If a close company makes a loan to a shareholder, even if interest is charged, what is the amount of the notional tax payment which must be deposited with HMRC and within what time limit should this payment be made?
Is the payment refunded when the loan is repaid or written off?
The company must pay to HMRC 33.75% of the loan if not repaid within nine months and one day after the end of the accounting period in which the loan was made
It is not tax-deductable
Yes
Value added tax
What is VAT charged on?
Any supply of goods or services made in the UK, unless exempt, which is made by a taxable person whilst carrying on business
Value added tax
The supply of what six things is exempt from VAT?
LIFE HP
- Land
- Insurance
- Financial services
- Education
- Health services
- Postal services
Value added tax
The supply of what five things is zero-rated from a VAT perspective?
FBWTR
- Food (other than in catering context)
- Books/newspapers
- Water/sewer services
- Transport
- Residential construction
Value added tax
The supply of what three things is taxed at a reduced VAT rate of 5%?
- Domestic fuel
- Installation of energy-saving materials
- Child car seats
Value added tax
When must a business compulsorily register for VAT?
If its gross income excluding exempt goods will in any 12-month period exceed the VAT threshold which is currently £85,000
Value added tax
What are the two ways to test if gross income will exceed the VAT threshold?
- Historic test
- Future test
Value added tax
What does (1) the historic test and (2) the future test look at and how soon must registration occur after passing the threshold with these methods?
- Taxable sales in the preceding 12 months, on a rolling basis
- Taxable sales in the next 30 days alone
HMRC must be notified with 30 days.
Value added tax
Who is not able to voluntarily register for VAT?
Someone who only supplies exempt items or services
Value added tax
When may a business voluntarily deregister for VAT?
If taxable turnover falls below £83,000 for a 12-month period
Value added tax
Who may opt to charge VAT even though it would normally be exempt?
Owners of interests in commercial land and building who are leasing out the premises
Value added tax
Where tax on an interest in commercial land or buildings is opted for, who might this be a problem for?
Tenants who wholly or partially make exempt supplies, as they will not be able to recover input tax on their lease
Value added tax
What type of property does the option to tax not apply to?
Residential
Value added tax
What two things must be distinguished from exempt land which an owner may opt to charge VAT?
- Supply (i.e. construction) of new commercial building (taxed at 20%, not exempt)
- Sale of a commercial building less than three years old (taxed at 20%, not exempt)
Value added tax
Within what time limit can someone who opts to charge VAT change their mind, such that HMRC will revoke the option as if it had never been exercised?
If the option to tax has been put into practice, after what amount of time can it be revoked with the consent of HMRC?
Six months, as long as it hasn’t been put into practice
20 years
Value added tax
When must a registered business account for VAT?
One month after the end of each VAT quarter
Value added tax
What determines the accounting period within which a supply of goods or services will fall?
The tax point (time of supply)
Value added tax
What is the default tax point for (1) goods and (2) services?
- The time the goods are removed, or the time they are made available to the person to whom they are supplied
- When the service is performed
Value added tax
What are two situations in which the tax point will be altered?
- If supplier issues VAT invoice or receives payment before the goods are delivered or made available, the tax point becomes that invoice or payment date
- If a VAT invoice is issued within 14 days after the default tax point, the invoice date becomes the new tax point
Value added tax
What are two things on which the VAT cannot be reclaimed?
- Cars
- Business entertaining
Value added tax
What is a quick way to calculate the VAT from a VAT-inclusive figure at (1) the standard rate, and (2) the reduced rate, and why is this the case?
Standard rate: Divide the VAT-inclusive amount by 6 (x + 20% VAT = 6/5*x)
Reduced rate: Divide the VAT-inclusive amount by 21 (x + 5% VAT = 21/20x)
