Business Law And Practice: Calculating Profits And paying Tax Flashcards
(35 cards)
1
Q
What are the two kinds of profit a business can make?
A
-income (trading profit)
- capital (increase in asset value for example company building)
2
Q
What is name of the tax that companies pay income profits to?
A
- corporation tax
3
Q
Where are sole traders and general partnerships income profits taxed to?
A
- income tax
4
Q
What trading period must a business prepare accounts to show profit or loss?
A
- 12 months
5
Q
How are trading profits or losses calculated?
A
- £chargeable receipts - £deductible expenditure - capital allowances = trading loss or profit
6
Q
What are chargeable receipts?
A
- money received for a business providing services or sale of goods
7
Q
What is a deductible expenditure?
A
- an income nature incurred wholly and exclusively for trade, example (laptop purchased for work)
8
Q
What is income in nature?
A
- a cost a company incurres to sell at a profit for example stocks
9
Q
What are capital allowances?
A
- purchases made that are not considered income in nature can be purchased under capital allowances for example machinery as it’s not a monthly
Purchase they would be making so it would not be income in nature
10
Q
What is a writing down allowance?
A
- a WDA allowance refers to the amount available to businesses to claim back on capital allowances this is 18% per year for each asset
11
Q
What is pooling?
A
- combining the overall value of the capital items to work out the value of the WDA allowance which is 18% a year
12
Q
What is the annual investment allowance for businesses?
A
- it allows businesses to claim back the entire cost of capital items up to £1million in one financial year anything over this will need to be claimed back under the WDA allowance of 18% per year
13
Q
What percentage of the cost of an asset can be deducted under the annual investment allowance?
A
- 100%
14
Q
What is start up tax relief?
A
- if business makes a loss the taxpayer can claim back that loss if there earnings it is available for the first four years
15
Q
What is Carry back relief?
A
- it allows the taxpayer to use any business loss from the current year to reduce taxable income from the previous year
16
Q
When must start up loss relief be claimed by?
A
- 31st of January following the end of the tax year
17
Q
What is Start-Up Loss Relief?
A
- Tax relief letting new businesses offset early losses against previous 4 year’s income for a tax refund.
18
Q
What rate is start up loss relief paid at?
A
- the same rate in which you paid on your tax that you are offsetting
Example: you made a loss of £10,000 in 22/23 tax year and paid 20% on earnings of £50,000 in 2021/22 tax year after carry back relief is applied you can claim a tax refund of £2000
19
Q
How quickly must anyone registered for vat pay it?
A
- must submit a return to HMRC and pay it within one month from the end of each quarter
20
Q
Must a taxable person be registered?
A
- only if the value of their taxable supplies in the proceeding 12 months exceeded £85,000
21
Q
What supplies are exempt from VAT?
A
- supplies of residential land postal services and education and healthcare services
22
Q
When must anyone registered for vat make payment?
A
- within one month from the end of each quarter
23
Q
A
24
Q
What is the
A
25
What is the WDA writing down allowance for plant and machinery and how is it calculated?
- 18% of the total pool calculated annually
Note: this is after applying the annual investment allowance of £1million then the remaining is calcuted at 18%
26
27
What is a close company under UK tax law?
- A close company is a UK-resident company controlled by five or fewer participators, or by any number of participating directors (Income and Corporation Taxes Act 2010, s.439).
Control usually means owning more than 50% of voting power or shares
28
What is the tax consequence under s.455 CTA 2010 when a close company makes a loan to a participator?
- The company must pay a tax charge of 32.5% (known as the s.455 tax) on the amount of the loan if it is not repaid within 9 months of the company’s accounting period end. This is to prevent disguised distributions.
29
What are “distributable profits” under s 830(2) of the Companies Act 2006?
- Distributable profits are a company’s accumulated, realised profits (not already used for distributions or capitalisation), minus its accumulated, realised losses (unless already written off in a lawful reduction or reorganisation of capital). Dividends can only be paid from these profits.
30
What are interim dividends?
Interim dividends are payments made to shareholders partway through the financial year, before final accounts are prepared. They are declared by the directors and do not require shareholder approval, but must be supported by sufficient distributable profits at the time of payment.
31
Can directors of a private company pay interim dividends without shareholder approval?
- Yes. Under MA 30(1)(b), directors can declare interim dividends during the financial year without needing shareholder approval, as long as there are sufficient distributable profits and the company’s finances justify it.
32
What are the consequences of paying an unlawful dividend?
- Shareholders must repay the dividend if they knew (or should have known) it was unlawful (s 847 CA 2006).
• Directors may be personally liable for breach of duty (s 171 and s 174 CA 2006) and may have to repay the unlawful amount to the company.
33
What is the capital maintenance principle in company law?
- Capital maintenance is the rule that a company’s share capital must be kept intact as a permanent fund to protect creditors. It cannot be returned to shareholders unless done through specific legal procedures.
34
How can a company lawfully fund a share buyback while maintaining its capital base?
Under s 692(2)(a) CA 2006, a company can issue new shares to raise funds for a buyback. This keeps the capital base intact because the capital returned to shareholders is replaced by new capital brought in from the fresh share issue.
35
What are the three lawful sources a company can use to fund a share buyback under the Companies Act 2006?
- Distributable Profits – Preferred method; does not reduce capital (s 692(2)(a)).
2. Proceeds of a Fresh Share Issue – New capital replaces what’s returned (s 692(2)(a)).
3. Out of Capital (Private Companies Only) – Allowed if profits are insufficient, but subject to strict procedures to protect creditors (ss 709–723, esp. s 710 CA 2006).
