Business 2 Flashcards
Direct tax (imposed by reference to taxpayer’s circumstances)
Income tax
CGT
Corporation tax
Indirect tax
VAT
Income receipts
Money received on a regular basis:
- anything made as part of trade trading profits of any business (similar to salary for individual employee)
- interest paid by bank on savings
- rent received by landlord
- dividends
Capital receipts
Receipt from transaction not part of regular activity : one-off transactions
e.g. selling premises, shares
Income expenditure
Money spent as part of day-to-day trading
Bills/lighting/rent paid out/marketing/wages/general repairs
Interest payable on loans (because paid to lender on regular basis over period of time)
Capital expenditure
Money used to purchase capital assets as part of infrastructure of business or for enduring benefit of business (one-off transaction)
Large items of equipment/machinery
Money spent on enhancing a capital asset other than routine maintenance (even though used to trade, they are one-off purchases)
Income Receipts MINUS Income Expenditure = Trading Profits
set off to reduce overall tax bill
Relief for capital expenditure can only be deducted for tax purposes from proceeds realised when capital asset disposed off
Capital expenditure MINUS capital receipts (original cost of the asset)
Exception: capital allowances allow certain types of capital expenditure to be deducted from income receipts
Capital allowances
Tax relief for capital expenditure usually only when capital asset sold/disposed of (gift)
Tax equivalent of depreciation: capital allowances spread the cost of capital expenditure on certain capital items over a period of time (deducted from income receipts) for businesses (run by individuals or companies)
Individuals tax year
Income tax + CGT in tax year from 6 April to 5 April of next year
Companies financial year
Corporation tax on financial year from 1 April to 31 March of next year
PAYE system (deduction of tax at source)
Sometimes income tax deducted at source - employer does on recipient’s behalf.
Employee receives wage/salary net of tax
Where this done, gross amount must be included when calculating tax liabilities
Two methods HMRC uses to assess + collect income tax
- Self-assessment - individual calculates their tax + submits tax return
- Deduction at source (including PAYE)
Total income
Taxpayer’s gross income from all sources
Net income
Total income minus available tax reliefs (pension contributions, interest on some loans)
