Business Law and Practice - Income Tax Flashcards
Individuals
Includes sole traders, partners in business partnership, personal representatives representing estate of deceased and trustees on behalf of a trust
Income
Money that comes in on an occuring or recurring basis
E.g. salary, interest on savings account, profits of a business
Tax year
Runs from 6th April to following 5th April
Collection of the Tax
HMRC collects tax through PAYE and self-assessment systems
- PAYE: employer retains tax from employees making more than £184 per week, submit a full payment submission (FPS) on or before each payday, money retained must be received by HMRC at least monthly - by the 22nd (along with FPS)
- Self-assessment: income from sources other than salary. Must register with HMRC within 3 months of opening and file tax returns by 31st January after tax year end (for electronic returns) and by 31st October after tax year end (for paper returns)
When are taxes due?
First instalment - 31 January of tax year in question
Second instalment - 31 July after the end of the tax year
Balacing instalment - 31 January after the end of the tax year (if necessary)
Each payment on account is 50% of the previous tax year’s liability
Categories of Income
- Non-savings income
- Savings income
- Dividend income
Non-savings income
Employment, pensions, trading income from running one’s own business and property income (e.g. rent)
Savings income
Interests from bank deposits and corporate and government bonds
Income from individual savings accounts and premium bonds is tax free
Dividend income
Money paid to shareholders of a company
Calculating Trading Profit
Gross revenue - (revenue expenses + AIA + writing down allowance)
Revenue related expenses = recurring expenses that are wholly and exclusively incurred for business purposes such as:
- Salaries of employees
- Rent
- Advertising
- Cost of goods/services sold
‘Wholly and exclusively’ = if expense was incurred for both business and personal purposes you can deduct the proportion that is related wholly and exclusively to the business
Revenue related expenses do not include capital assets
AIA = capital items within annual investment allowance
Capital Asset
An asset that is expected to last for years
Annual Investment Allowance (AIA)
If asset falls into AIA the full cost of asset purchase can be deducted up to AIA amount
Costs within AIA are 100% deductable
If the asset is not within the AIA a partial deduction may be available under the Writing Down Allowance
Taxpayers given a AIA each year for plant and machinery (not available for cars, land or buildings)
AIA figure changes regularly
If full AIA not used you cannot carry it forward
Writing Down Allowance
An allowance of a set percentage of capital asset acquisition costs each year
Cost of assets not within AIA are placed within one of several pools
- Main (or general) pool - 18% per annum
- Special rate pool - 6% per annum
Write down deducted from amount in the pool and what is leftover is carried over to the next year
Never available on land but commercial structures and buildings constructed since October 2018 are allowed to deduct a different allowance each year of 3% per annum on cost
Partners
Subject to tax only on proportion of profits allocated to the partner (regardless of whether profits distributed or not)
This will be set out in partnership agreement or an equal split if partnership agreement is silent as to allocation of profits
Partners must nominate one partner who is responsible for filing a partnership tax return
Salaries and interest on capital accounts allocated first and amount remaining divded among the partners
Overlap Profit
A business’s accounting period may be different to the tax year
Some of the profits of its first accounting period will be taxed twice - no relief from double taxation until the business ceases trade or its aligns its accounting period with the tax year
Income Tax Formula
Gross income - qualifying loan interest = net income
- Qualifying loan interest = Interest on loans taken to fund capital contributions or loans to a partnership, investments in a close trading company or interest on loans taken by a personal representative to pay inheritance tax
Net income - allowances and other reliefs = taxable income
Personal Allowance
Available to every individual unless the person has income in excess of £100,000
- For every £2 of income over £100,000 the personal allowance is reduced by £1 (taper)
Changes from year to year
Pay tax on income only over the personal allowance amount
Marriage Allowance
Permits one spouse/civil partner to transfer part of their personal allowance to the other resulting in a credit against tax owed
Three conditions must be met:
- Married or in a civil partnership
- Transferor’s income less than personal allowance
- Recipient a basic rate taxpayer (20%)
Amount that can be transferred changes with the personal allowance
Set up as a tax reduction rather than as an increase to transferee’s personal allowance
Tax Bands
For savings and non-savings income
- Basic rate band
- Higher rate band
- Additional rate band
For 2021/22 the bands were:
- Basic: 20%
- Higher: 40%
- Additional rate: 45%
May need to remember these
Savings Income
Tax bands and rates are the same as for non-savings income
Personal savings allowance:
- Basic Rate Taxpayer - PSA of £1,000
- Higher Rate Taxpayer - PSA of £500
- Additional Rate Taxpayer - No PSA
Interest from a bank, building society, etc
Treat the income within the band as being there but taxed at 0% (nil rate band)
- E.g. a taxpayer who has £37,700 of non-savings income (basic rate taxpayer) and £800 of savings income they are entitled to £500 PSA
Dividend Income
Everyone who receives dividends entitled to a dividend allowance of £2,000 regardless of their tax bracket
Dividend allowance can be used only against dividends
£2,000 isn’t deducted from income - instead, first £2,000 of dividend income is taxed at 0%
Dividend Tax Rates:
- 7.5% for dividends that fall within taxpayer’s basic rate band
- 32.5% for dividends that fall within taxpayer’s higher rate band
- 38.1% for dividends that fall within taxpayer’s additional rate band
Rates unlikely to be tested on exam
Trading Losses
The taxpayer who made the loss can claim the relief - it is not transferrable
Unless partnership agreement provides otherwise a partner’s share of the loss is the same as for profits
Options for offsetting trade losses
Set loss against taxpayer’s net income from current or **prior ** tax year
- All or nothing claim - must use all of the loss
Can offset remaining loss against capital gains in same year
Carry forward against future trading profits (‘carry forward loss relief’)
Use to offset company dividends or salary upon incorporation
Terminal loss relief: allows any trade loss generated in the final 12 months of trade to be carried back to the proceeding three tax years on a last in first out basis and be deducted from trade profits
Anti-Avoidance
Tax evasion: illegal
Tax avoidance: legal
Growth in anti-avoidance legislation which has lead to the General Anti-Abuse Rules (GAAR)
- Can arrangement be reasonably be regarded as a reasonable cause of action?
