BLP - Tax

Question 1

Close Company - criteria, effect

Answer 1

Under control of

• Five or fewer participators
• Any number of participators who is also a director

All loans are caught, except for:

• Credit for six months for goods ordinarily supplied
• Loan where money lending = ordinary business
• Loan to borrower not more than £15,000, where borrower works at company and does not have material interest (indirect control of more than 5% share capital or entitlement to more than 5% of company’s assets on winding up)

Participator = having share or interest in the company

Control = ability to exercise control over company’s affairs (greater than 50%), normally by voting rights or the possession of shares entitling holder to greater part of assets on winding up OR entitling holder to greater part (i.e. over 50%) of income on winding up

Effect - company pays tax at rate for dividends at higher rate (32.5%), UNLESS written off, waived, repaid or satisfied

Individual pays no income tax, UNLESS loan written off or waived

Deadline - paid within 9 months and one day after end of accounting period

Question 2

Investor’s Relief - criteria

Answer 2

• Fully paid ordinary shares, issued for cash on or after 17 March 2016
• Trading company, or holding company of trading group
• NO shares on stock exchange (contrast Entrepreneur’s Relief)
• Shares held for at least three years from 6 April 2016
• Person disposing NOT officer or employee

Question 3

Entrepreneur’s Relief - criteria

Answer 3

• Trading company (i.e. listed or unlisted)
• Shares held at least one year prior to disposal
• Person disposing WAS officer/employee
• Person disposing held at least 5% ordinary shares

Question 4

Corporate tax - deductible expenditure

Answer 4

• Wholly and exclusively for the purposes of trade
• Not prohibited by statute, i.e. not entertainment, bad debts
• Of an income nature

Question 5

Corporate tax - when paid

Answer 5

If total taxable profits 1.5 million or more - payable in four instalments over current
accounting period and the next one

If TTP less than 1.5 million, payable within 9 months and one day of end of accounting period

Question 6

Share buyback - when whole sum treated as capital receipt

Answer 6

• Unquoted trading company
• Seller resident in UK for tax year of sale
• Shares owned for at least 5 years
• Substantial reduction in seller’s shareholding (at least 25%)
• 12 months after purchase, seller must not hold more than 30% of:
• • Company’s issued share capital; or
• • Share and loan capital; or
• • Voting power
• remember shares bought back are cancelled*
• must benefit the trade, and not be part of a tax avoidance scheme or enable shareholder to participate in profits without receiving dividend

Question 7

Assets excluded from capital gains tax

Answer 7

• Principal private residence
• Motor cars for private use
• Wasting tangible movable property, if consideration does not exceed £6,000
• Investments, e.g. ISAs, government bonds
• UK sterling

Question 8

Income tax - deductible expenditure

Answer 8

• INTEREST on qualifying loans:
• • Loans to buy interest in partnership
• • Loans to contribute capital to a business
• • Loans to buy shares in a ‘close’ company
• • Loans to buy shares in employee-controlled company
• Pension scheme contributions

Question 9

Non-savings income formula

Answer 9

Taxable income minus SAVINGS income minus DIVIDEND income

Question 10

‘Connected persons’ for CGT - market value disposal

Answer 10

• Relatives and spouses of the relatives
• Companies, if under common control
• Partners in business

Question 11

Gift- value for CGT

Answer 11

Where gift made, donor deemed to receive the value of the gift at the date it was made

Question 12

Initial expenditure - CGT

Answer 12

Cost price of the asset

Incidental costs of acquisition

Question 13

Subsequent expenditure - CGT

Answer 13

Subsequent expenditure which enhances its value

Expenditure incurred in establishing, preserving or defending title to the asset

Question 14

Rollover relief - CGT

Answer 14

Rolls over gain of disposing of asset into cost of acquiring replacement asset

Question 15

Holdover relief - CGT

Answer 15

Business gives away asset at undervalue

NOT available for quoted shares (i.e. those listed on stock exchange)

Donee’s acquisition cost is reduced by the amount of the donor’s deemed gain (at market value)

Question 16

VAT - input/output, prices

Answer 16

Price deemed VAT inclusive unless stated otherwise

Business can recover input VAT which it has paid, but must give HMRC any output VAT

Business cannot recover input VAT if it does not charge output VAT

Deemed to be 20% for standard supplies

Question 17

VAT - standard rate

Answer 17

Calculating VAT element of VAT-inclusive price - multiply by 1/6

Question 18

VAT - invoice, online return

Answer 18

Where business makes VATable supply, must supply the customer/client with a VAT invoice within 30 days, and keep a copy

Business must submit a VAT return online every 3 months

If business pays more than 2.3 million to HMRC in VAT, it must make monthly instalments on account, and pay balance when submitting quarterly return

Question 19

VAT - special schemes

Answer 19

1. Flat rate scheme: where VAT-registered business has taxable annual turnover of not more than £150,000 and a total annual turnover of not more than £230,000, VAT charged at flat rate on turnover (no relief for input VAT)
2. Retail schemes (where business cannot invoice the large number of customers)
3. Cash accounting - where turnover less than £1,350,000, account for VAT at point invoice is paid
4. Annual turnover not exceeding £1,350,000 - business can make annual return, with VAT paid by instalments, balance paid when VAT return submitted

Question 20

CGT - Capital Allowances on Plant and Machinery (P&M)

Answer 20

Capital Allowance is deductible expenditure for INCOME purposes

Question 21

Assets qualifying for Rollover Relief - CGT

Answer 21

1. Land and buildings
2. Goodwill
3. Fixed plant and machinery
4. Ships and hovercraft
5. Aircraft
6. Milk and potato quotas
7. Space stations
8. Lloyds syndicate capacity

Question 22

Timing of Rollover Relief - CGT

Answer 22

Replacement asset must be purchased within 1 year before or 3 years after the sale of the old asset

Question 23

Use of Proceeds of Sale in Rollover Relief - CGT

Answer 23

If not all the sale proceeds are used to acquire replacement, the amount by which the sale proceeds of the original asset exceed the cost of the replacement (think ‘profit’) is DEDUCTED from the chargeable gain before Rollover Relief, and only remaining amount of gain may be rolled into the new asset

So, if ‘profit’ is greater than the amount of the chargeable gain, then no Rollover Relief can be claimed

Question 24

Goodwill and IP Disposals - Corporation Tax

Answer 24

Disposals of goodwill and IP are treated as INCOME receipts

Question 25

Dividend received by company - Corporation Tax

Answer 25

Dividend income received by a company is NOT included in TTP (since tax liability for the dividend is paid by the company distributing the dividend, before that latter company pays the dividend itself)

Question 26

Corporate Tax - Deductibility of Trading Losses and Capital Losses

Answer 26

Trading loss = tax deductible expenditure exceeds income receipts

Four ways to set off trading losses:

1. Trading losses can be set off against ALL other profits of the SAME accounting year
2. Trading losses can be set off against profits of the PREVIOUS accounting period, but only for the SAME TRADE

Terminal losses - if company ceases trading, any trading loss in final 12 months can be set off against previous THREE years prior to 12 month period

3. a) TRADING losses can be set off against INCOME profits of the SAME TRADE in the future, if losses arose up to 31 MARCH 2017
   b) TRADING losses can be set off against TOTAL PROFITS (i.e. regardless of trade) of future periods if they arose from 1 APRIL 2017
4. Group relief - one company trading loss can surrender that loss to another profitable company in the same group

CAPITAL loss = capital expenditure exceeds capital gain –> CANNOT be set off against trading gains