Business tax

Question 1

Legal difference in ownership between assets on finance lease, operating lease, and HP

Answer 1

Finance and operating leased assets have no legal ownership. However, in a finance lease, lessee bears all risks/rewards but in operating it is a short term rental agreement only.

HP assets have legal ownership and capable of being acquired (after period of Hire).

Question 2

Capital Allowances implications on cessation of a business

Answer 2

Balancing adjustments arise in each pool; assets kept for private use are ‘disposed’ at their market value;
no WDAs, FYAs or AIAs in final AP.

Question 3

Is CA allowable on operating, finance and HP leased assets?

Answer 3

Only on HP assets on the cash price (18% / 6% for cars).

Question 4

What is the CAA s.266 election and impact?

Answer 4

Where on a cessation of trade the vendor sells their business to a ‘connected person’, the two parties can jointly elect to transfer all plant and machinery at TWDV (avoiding balancing charge). Commonly seen when a sole trader incorporates their business by transferring it to a company they control.

Effect is no AIA can be claimed by the company acquiring or FYA as assets have been used.

Question 5

What is a partnership?

Answer 5

• Strict definition can be found within Partnership Act 1890 ‘the relationship which exists between persons carrying on a business in common with a view to profit’
  -Working together in business, share profits and losses.
  -Joint ownership is not sufficient, must be carrying on business in common.
  -Partnership agreement should lay out how partnership should be governed.

Question 6

What is the restriction on losses relieved against non-trading income for sole traders/partners?

Answer 6

Total relief which can be deducted cannot exceed:
- 50,000
- 25% of the adjusted total income (total income less gross pension contributions).

Question 7

What claim is made to elect to transfer assets at TWDV rather than balancing charges? (partnership to company/cessation of trade)

Answer 7

s.266 CAA claim - elect to transfer assets at their TWDV.
No need to do this for LLP as no cessation of trade.

Question 8

What are the 3 tests for disguised employment?

Answer 8

Disguised income - at least 80% of income is ‘disguised’ i.e fixed or not dependant on profitability of the firm.
No significant influence - member does not have control or influence over decisions.
No significant contribution - if at least 25% of the ‘disguised income’ is contributed to the firm, then test not met.

Question 9

What is a s.72 loss relief claim?

Answer 9

Early trade loss relief; can carry back loss against net income of three preceding tax years (FIFO).

Question 10

What is a s.71 loss relief claim?

Answer 10

Claim against capital gains, only AFTER s.64 CY/PY claim against net income

Question 11

What is a s.83 loss relief claim?

Answer 11

Carry forward losses and set against future profits of the same trade.

Question 12

What are the s.266 and s.198 elections for (incorporation)?

Answer 12

s.266 - on incorporation, an election can be made by connected persons in writing to HMRC (2 years from transfer) for the assets to be transferred at TWDV. Avoids balancing charges/

s.198 - election made in addition to s.266 where there are fixtures qualifying for CA - fixes the value of fixtures.

Question 13

What is the stock election upon incorporation?

Answer 13

s.178 ITTOIA - transfer between connected persons for stock to be tf at higher of; acquisition value and amount stock was sold for.
Must be made anniversary of SA filing date.

Question 14

When are Class 2 NICs payable?

Answer 14

31 Jan with the balancing payment from income tax via self-assessment

Question 15

Pros and cons of receiving income as dividends?

Answer 15

Pro: no NICs, no PAYE withholding, dividend allowance of £1k tax free, rates lower than non-savings income
Cons: dividends not deductible, do not count as ‘earnings’ for pension purposes, no NICs reduces entitlement to state retirement (could pay voluntary Class 3); only payable if profit making

Question 16

Legal fees for short lease - treatment in adj profits for sole traders?

Answer 16

Renewable: Allowable for short leases <50 years
New lease: capital so not allowed

Question 17

Formula for working out employment income from lease premium?

Answer 17

Premium LESS 2% x premium x (n - 1) = employment income
Allowable deduction for trader = employment income / lease years

Question 18

Rule on restricting lease payments on high emission cars for sole trader?

Answer 18

Disallow 15% of lease costs where emissions >50g/km.
NOT vans

Question 19

Case for sole trader travel from home to office?

Answer 19

Samadian case - home is one of several places of business therefore costs of travel not deductible between home and office.

Question 20

What is a sole trader taxable on?

Answer 20

Receipts of money or moneys worth

Question 21

What are the 3 conditions that must be fulfilled to amount to ‘disguised employment’?

Answer 21

-80% of the income must be ‘fixed’ and independent on performance of company
-individual does not have control/influence over the LLP / or equal voting share in management
-no personal risk - contribution to LLP is less than 25% of the fixed income

Question 22

Who do the disguised employment conditions apply to?

Answer 22

LLPs

Question 23

Impact of reaching retirement age for NICs?

Answer 23

Do not pay Class 2 NICs after reaching retirement age.
Liable for Class 4 throughout entire tax year if not reached retirement age at beginning of year.

Question 24

What is the standard basis for accounts preparation for businesses

Answer 24

The ‘going concern’ accruals basis (both sole trader and limited company).

Takes account of amounts received and paid, as well as future amounts receivable and payable within the year (not actually paid)

Question 25

Business receipts threshold for cash basis to apply?

Answer 25

Less than 150k in a tax year, if over 300k then no longer applies

Question 26

Impact of CAs under cash basis?

Answer 26

No CAs other than for cars purchased by business.
Expenses allowable where wholly and exclusively test met; subject to any personal use restriction

Question 27

Treatment of following under the cash basis:
-goods taken for own use
-interest costs
-car leasing costs

Answer 27

Goods taken - the COST of good is disallowed
Interest costs - maximum of £500 of loan/interest can be deducted each period
Car leasing - all car leasing deductible without emission based restriction

Question 28

Restriction on losses under cash basis?

Answer 28

Only carried forward against FUTURE trading income

Question 29

What is the marginal relief fraction?

Answer 29

3/200 x (UL - Aug) x TTP/Aug

Question 30

When should the SBA be applied from?

Answer 30

The later of the date the building is brought into use (production commences) or where the expenditure is incurred

Question 31

What is the impact of duality of purpose?

Answer 31

The whole expense will be disallowed unless an apportionment can be made between the personal and business costs

Question 32

Impact of McQueen case (sponsorship)?

Answer 32

Sponsorship is allowed where there is a direct correlation between sponsorship costs and gaining new clients.
Marketing advantage must be clear and successful (not vague)

Question 33

When is staff entertaining allowable?

Answer 33

Where function is an annual party, all employees are invited, and the cost per head does no exceed £150

Question 34

Acts for company and sole trader expenses in considering allowable deductions?

Answer 34

Company - CTA 09
Sole trader - ITTOIA 05

Question 35

Costs for setting up share schemes - allowable?

Answer 35

Share schemes - not deductible as capital (enduring benefit)
Approved schemes (SIPs, CSOPs) allowable.

Question 36

When must an appeal be made in response to a discovery assessment?

Answer 36

Within 30 days of the DA date of issue

Question 37

When are business gifts allowed for a sole trader?

Answer 37

Total cost of all assets to same person in a year is not more than £50, bears business name and logo, and gift does not include food, drink or tobacco.

Question 38

When is R&D relief available?

Answer 38

Where a project seeks to make a recognisable advance in science or technology, through the resolution of an uncertainty.

Question 39

When does Test 1 of the annual maxima rules apply?

Answer 39

When the taxpayer either has more than one employment or has a self-employed trade (both Class 1 and 2 NICs).
As Class 2 is weekly - USE WEEKLY LIMITS first

Question 40

What is the annual maximum compared to? (NICs)

Answer 40

Test 1 - the class 1 NICs actually paid to determine the amount of any Class 2 NICs payable or whether a refund of Class 1 is due.
Test 2 - the class 4 NICs payable

Question 41

When does Test 2 of annual maxima apply?

Answer 41

When a taxpayer is both employed and self-employed so is liable o Classes 1,2,4. Determines the amount of Class 4 NICs payable. USE ANNUAL LIMITS first

Question 42

Implications of entering into a PSA?

Answer 42

Allows employer to settle employee tax liability for minor or irreg benefits.
Class 1B is charged on grossed-up value of benefits included in PSA (benefit + income tax included in PSA) @ 13.8%

Question 43

Due date for Class 1B NICs?

Answer 43

22 October following end of tax year if made electronic (or 19 Oct). Income tax payable same ime

Question 44

How long does a long service award have to be to be exempt?

Answer 44

min 20 years