Business (Corporation Tax & VAT)

Question 1

What is VAT?

Answer 1

VAT is charged on any supply of goods or services made in the UK, where it is a taxable supply, made by a taxable person, in the course of a furtherance of any business.

Question 2

If the partnership deed doesn’t contain an asset surplus ratio, when dealing with tax such as CGT how to we deterime how tax is apportioned?

Answer 2

If there is no express provision in the partnership deed, the asset surplus-sharing ratio is deemed to be the partnership profit-sharing ratio.

Question 3

How does an asset surplus ratio in a partnership agreement impact CGT?

Answer 3

When a partnership acquires an asset, each partner’s share in the acquisition value is determined by their share in the asset surplus at that time.

For example, if Xs ratio is 40%, X covers 60% of the CGT.

Question 4

What is a ‘taxable person’?

Answer 4

A ‘taxable person’ is a person required to be registered for VAT when the value of their taxable supplies exceeds the VAT registration threshold or is expected to exceed it.

Question 5

What is the VAT registration threshold?

Answer 5

The VAT registration threshold is £90,000.

Question 6

What is the VAT de-registration threshold?

Answer 6

The de-registration threshold is £88,000, at which a VAT-registered person can apply to cancel their registration.

Question 7

What is the difference between output tax and input tax?

Answer 7

Output tax is charged by businesses on their taxable supplies

Input tax is paid on supplies received.

The business offsets input tax against output tax to account for the difference.

Input Tax - Output Tax = Difference Account to HMRC

Question 8

What is output tax?

Answer 8

Output tax is the VAT chargeable by a business when making a supply of goods or services.

Question 9

What is input tax?

Answer 9

Input tax is the VAT paid by a person or company on goods or services supplied to them.

Question 10

How is VAT payable calculated?

Answer 10

A price is deemed to be VAT inclusive unless the contract states otherwise.

The standard rate of VAT is 20%

The seller can deduct input VAT that it has incurred and pay the difference:

Price X 0.20 = Output Tax - Input Tax = VAT to Account to HMRC

Question 11

If Boris buys wood from Arthur for £200 + VAT, what is the price?

Answer 11

£200 x 0.2 = £40 = £240

Question 12

If Boris buys wood from Arthur for £200 + VAT, and uses the wood to make an object and sells it to Carol for £400 + VAT, how much VAT does Boris need to account to HMRC?

Answer 12

£200 x 0.20 = £40 = £240 (Cost of Wood - Output)
£400 x 0.20 = £80 = £480 (Income from Sale - Input)

£80 (Output) - £40 (Input) = £40 VAT to HMRC

Question 13

What is the standard rate of VAT?

Answer 13

The standard rate of VAT is 20%, but this can vary depending on the type of supply.

Question 14

What are the reduced rate supplies for VAT?

Answer 14

Reduced rate supplies are charged at 5% VAT, for businesses falling within….

• Domestic heating
• Mobility aids
• Smoking cessation products
• Children’s car seats.

Question 15

What are zero-rated supplies for VAT?

Answer 15

Zero-rated supplies are charged at 0% VAT, and can recover VAT suffered such as ….

• Certain food categories
• Sewerage and water
• Books and newspapers
• Talking books for the blind
• New houses
• Construction of new housing
• Public transport
• Children clothing

Question 16

What are exempt supplies for VAT?

Answer 16

Exempt supplies do not charge VAT but cannot recover VAT on inputs, including…

• Provision of insurance
• Finance
• Education
• Health services
• Sale of land/buildings (unless new commercial)

Question 17

What is required for businesses to account for VAT?

Answer 17

Businesses with turnover above the VAT registration threshold must…

• Supply the customer with a VAT invoice within 30 days of supply and keep a copy.
• File VAT returns every 3 months. Businesses that normally pay more than £2.3 million a year to HMRC in VAT must make monthly payments on account.
• May use schemes to simplify VAT accounting like Retail Schemes, Cash Accounting, or Annual Accounting.

Question 18

What is Corporation Tax?

Answer 18

Corporation Tax is payable on all income profits and chargeable gains of a body corporate that arise during its accounting period.

Question 19

What determines the tax payable for Corporation Tax?

Answer 19

The amount of Taxable Total Profits (TPP), which includes both….

• Income Profits
• Chargeable Gains

Question 20

What is the Corporation Tax rate for a company with a TPP more than £250,000?

Answer 20

25%.

Question 21

What is the Corporation Tax rate for a company with TPP of £50,000 or less?

Answer 21

19%.

Question 22

What is the Corporation Tax rate for a company with TPP of over £50,000 and under £250,000

Answer 22

A company may claim marginal relief which has a tapering effect that will be between 19% and 25%

Question 23

How is income profit calculated for Corporation Tax?

Corporation Tax >Step 1

Answer 23

• Adding up chargeable income receipts
• Deducting all tax-deductible expenditure.

Question 24

What types of income are chargeable for Corporation Tax?

Corporation Tax >Step 1

Answer 24

• Rental income
• Trading income
• Interest

Question 25

Are dividends taxable for Corporation Tax?

Corporation Tax >Step 1

Answer 25

Dividends received by UK companies are generally exempt from Corporation Tax unless certain anti-avoidance provisions apply.

Question 26

What is deductible expenditure for Corporation Tax?

Corporation Tax >Step 1

Answer 26

Deductible expenditure must be…
* Wholly and exclusively incurred for the purpose of trade
* Not prohibited by statute
* Be of an income nature with an element of recurrence

For example…
* Wages
* Heating costs
* Trade expenses
* Advertising costs
* Interest paid on business loans

Question 27

What is Corporate Interest Restriction?

Corporation Tax >Step 1

Answer 27

Interest paid on business loans will generally be deductible income expense.

However, where a company has more than £2 million of net interest expense, the amount a company can deduct is restricted to 30% of its income receipts.

Question 28

Are dividends deductible for corporation tax by the company paying the divident?

Corporation Tax >Step 1

Answer 28

No. Dividends are not tax deductible

Question 29

What are capital allowances for Corporation Tax?

Corporation Tax >Step 2; Adjusting income for Capital Allowances

Answer 29

Capital allowances allow companies to reduce income receipts by claiming deductions for…

• Capital Allowance on Plant and Machinery (Main Rate Allowance); and
• Annual Investment Allowance

Question 30

How much can a company deduct for capital expenditure on plant and machinery?

Main Rate Allowance > Corporation Tax

Corporation Tax >Step 2; Adjusting income for Capital Allowances

Answer 30

Companies can deduct 18% of the value of plant and machinery each year on a reducing balance basis.

For example… the company purchase machinery worth £345,000.

Year 1: 18% x £345,000 = £62,100 WDV = (£345,000 - £62,100) = £282,900

Year 2: 18% x £282,900 = £50,922 WDV = (£282,900 - £50,922) = £231,978

Question 31

What is the Annual Investment Allowance for plant and machinery?

Corporation Tax >Step 2; Adjusting income for Capital Allowances

Answer 31

• Companies can deduct 100% of expenditure on qualifying plant and machinery up to £1 million per year.
• The capital allowance (main rate allowance) of 18% can be applied to the balance of any expenditure above that amount.

Question 32

What is Full Expensing for Corporation Tax?

Corporation Tax >Step 2; Adjusting income for Capital Allowances

Answer 32

Full Expensing allows companies to deduct 100% of the cost of new, unused plant machinery from 1 April 2023 to 31 March 2026.

Question 33

How are chargeable gains calculated for Corporation Tax?

Corporation Tax >Step 3: Calculating Chargeable Gains

Answer 33

Subtracting…
* allowable expenditure
* indexation allowance
* capital/trading losses
…. from sale proceeds

Question 34

What are allowable expenditure?

Corporation Tax >Step 3: Calculating Chargeable Gains

Answer 34

Deduct from sale proceeds….

• Disposal Expenditure: Incidental costs of disposal
• Initial Expenditure: The cost of the asset (the base cost paid) & the incidental cost of acquisition
• Subsequent expenditure on enhancing the asset value or incurred establishing, preserving or defending title to the asset.
• Substantial Shareholding Exemption: exempt corporation tax the whole of a chargeable gain when a company disposes of shares in a trading or holding company provided the company held at least 10% of the ordinary share capital for at least 12 consecutive months in the last 6 years.

Question 35

What is Rollover Relief?

Corporation Tax >Step 3: Calculating Chargeable Gains

Answer 35

Rollover Relief defers tax on a gain when a company disposes of an asset and purchases a qualifying replacement asset. Tax is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased

Qualifying assets include:
* Land and Buildings
* Goodwill
* Fixed plant and machinery
* Ships and hovercraft
* Aircraft

The replacement asset must be purchased within 12 months before or 3 years after the sale of the old asset.

Question 36

How are trading losses treated for Corporation Tax?

Corporation Tax >Step 4: Deducting Trading Losses and Capital Losses

Answer 36

When reducing taxable profits, trading losses can be set off against (a) trading profits; and (b) chargeable gain in the following order….

1. Carry trading losses across the accounting period
2. Then, if remaining, carry back to previous accounting period; then, if any losses remaining
3. Carry forward indefinitely

Use trading losses against trading profits first, and then against chargeable gains.

Question 37

What is Group Relief for trading losses?

Corporation Tax >Step 4: Deducting Trading Losses and Capital Losses

Answer 37

Group Relief allows a company with a trading loss to surrender the loss to another profitable company within the same group.

Question 38

How are capital losses treated for Corporation Tax?

Answer 38

Capital losses can only be set off against chargeable gains in the following order….

1. Carry across to chargeable gain in Current accounting period;
2. Carry forward indefinitely

You cannot carry back capital losses to previous accounting periods.

Question 39

What are the self-assesment rules for a Company with TTP of £1,500,000 or less?

Answer 39

• Pay HMRC within 9 months and 1 day of the end of accounting period
• File a tax return within 12 months of end of accounting period
• Finalised 12 months after the filing date for the tax return

Question 40

What are the self-assesment rules for a companies with TPP of more than £1,500,000

Answer 40

Pay tax bills in four instalments over the course of the relevant accounting period and the next one.

Question 41

What is a close company and what tax impact does it have?

Answer 41

A close company is controlled by…
* 5 or fewer participants or
* Directors with 50% or more shares,

They are subject to special tax treatment

Question 42

What is the tax treatment for loans to participators in a close company?

Answer 42

Loans to participators in a close company are subject to Corporation Tax at the rate of income tax payable on dividends by higher rate taxpayers

Question 43

What is the tax treatment for distributions from a close company?

Answer 43

Tax must be paid on distributions from a close company, including accommodation and benefits in kind, unless provided due to employment.

Question 44

What is the purpose of the Transactions in Securities rules for close companies?

Answer 44

The Transactions in Securities rules prevent tax advantages by changing income receipts into capital receipts in close companies.

Question 45

For roll over relief, when is a gain immediately paid and how does this impact the amount rolled over?

Answer 45

Under roll-over relief, when the proceeds from selling a business asset exceed the cost of a replacement asset, the excess is immediately chargeable to tax.

For example, sale at £300,000. New purchase at £280,000

Deduct the amount paid (e.g. it isn’t being rolled over). Any other gain (in excess of the amount paid) is rolled over.

For example a gain of £50,000, but £20,000 was paid immediately. £30,000 is rolled over

Question 46

How is hold over relief calculated in a sale at an undervalue?

Answer 46

In a sale at undervalue with hold-over relief,** the seller’s gain** (e.g. market value £500k - Original cost of £200k = £300k) is reduced by the amount received by the seller in excess of the original cost of the assets sold (Recieved £400; - Original Cost £200k = £200k = £300k - £200k = £100k helfd over)

The deferred gain reduces the base cost of the asset for the buyer, and the buyer will be liable for capital gains tax on this deferred gain when they eventually dispose of the asset.

Question 47

In a sale at undervalue with hold-over relief, how is the buyer’s base cost calculated ?

Answer 47

The buyer’s base cost is calculated as the current market value of the asset minus the deferred gain.

For example, A buys a house for £120k and sells it to B at £130k. The market value is £150k. The base cost for B is £150k - £10k (130k - 120k).