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AAT Professional Diploma > Business Tax AAT L4 > Flashcards

Business Tax AAT L4 Flashcards

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1
Q

What are the two taxes that affect businesses?

A

Corporation Tax - Limited companies

Income Tax - Sole traders and Partnerships.

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2
Q

When will capital gains tax need to be considered?

A

When disposing of business assets.

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3
Q

What is the legal frame work for taxation?

A

Statute Law - Passed by Parliament, resulting in legislation.
Finance acts - extend from statute law, published annually for each financial year.
Case law - comes from how statutes and finance acts have been applied by the courts.

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4
Q

What are the categories of income?

A

Property income - rental income from land and property.
Trading income - Profits of trades and professions.
Saving and investment income.

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5
Q

What is the financial year for Corporation tax ?

A

1st April to 31st March

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6
Q

What is the financial year for Income Tax?

A

6th April to 5th April

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7
Q

What is a chargeable accounting period (CAP or AP)

A

A period of 12 months or Less for which a business must submit a CT600 return.
It is due within 12 months of a year end.
Payment must be made within 9 months of the year end.

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8
Q

What is a basis period for income tax?

A

Tax year in which the accounting year ends.
Return is due by 31st October (Paper) 31st Jan (online) after the end of the tax year.
must be paid by 31st Jan after end of Tax year.

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9
Q

Whan are payments on account in respect of Income tax due?

A

31st jan before end of tax year
31st july after end of tax year
31st Jan after end of tax year.

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10
Q

How is national insurance dealt with for Sole traders and Partnerships?

A

Paid annually
FA 2019 rates
Class 2 Flat rate of £3.00 per week if profit over £6365.
Class 4 - payable on profit over £8632
FA 2020 Rates
Class 2 Flat rate of £3.05 per week if profit over £6475.
Class 4 - payable on profit over £9500

Class 4 is calculated as 9% on profits over threshold up to £50,000 and 2% on profit over £50,000.

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11
Q

What is the difference between Tax Planning, Avoidance and Evasion?

A

Planning - Using legal and ethical methods to reduce tax liability.
Avoidance - Using Tax rules and allowances in a legal way that is other than what was intended.
Evasion - Using illegal methods to avoid paying the correct amount of tax i.e. use of Concealment, Pretense, non disclosure or misrepresentation of facts.

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12
Q

How are profits adjusted to find trading profits for Tax purposes?

A

Take Profit figure from Financial Accounts
Add back non allowable expenditure
Deduct Non trading income
Gives adjusted trading profit.

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13
Q

What would be allowable trading income?

A

Income relating directly to the business carried out by the company.

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14
Q

What is not assessable as trading income for tax purposes?

A
  1. Non trading interest received - This will be assessed under investment and property income.
  2. Rent received - also assessed under Property income.
  3. Gains on disposal of Fixed assets - will be dealt with under capital gains.
  4. Dividends received - have been assessed as part of another companies taxable income.
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15
Q

What would be considered as Allowable Expenditure?

A

Must be revenue, not capital expenditure.

Wholly and exclusively for the purpose of the business trade.

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16
Q

What types of expenditure would be included as allowable?

A

Normal Cost Of Sales
Normal Business expenditure e.g. Admin and wages
Operating lease payments on vehicles with emissions below 110g/km
Legal expenses relating to the renewal of a short lease.
Interest paid on trade loans
Staff entertaining e.g. Xmas party.
Trade bad debt write off - cannot include Ee loans.
Increases to specific provisions.
Gifts to customers that contain advertisements - no Food, Alcohol or Vouchers.
Ee’s but not directors parking fines.
Gifts of trading stock to charities etc.

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17
Q

What would be considered as non allowable expenditure?

A

Capital Expenditure

Not wholly or exclusively for the purpose of the business trade.

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18
Q

What types of expenditure would be disallowed?

A 
Any capital expenditure
Depreciation
Lease rental payments for high emissions vehicles.
Cost of business entertainment.
Gifts to customers that do not contain advertisements or ar Food, Alcohol or vouchers.
Increases in General provisions.
Charitable payments.
Fines imposed on the company
Certain legal expenses.
Political donations.
Writing off non-trade loans
Dividends payable.
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19
Q

What about R&D Expenditure?

A

Additional tax relief is available to revenue expenditure on R&D costs.
Allowable cost is 230% of actual
Accessible to small to medium companies with <500 employees and < £100 mil turnover.
The R&D must be aiming for scientific advancement.

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20
Q

Why are fines a disallowed expense?

A

Companies are expected to operate within the law therefore generally fines and penalties along with legal and professional expenses associated with them are allowed.

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21
Q

What about fraud?

A

Where losses due to fraud carried out by the company directors occurs this is not allowed as an expense.
However petty theft by non-senior employees is generally allowed e.g. Shrinkage (loss of stock due to theft)

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22
Q

Are all charity donations really a non allowable expense?

A

Generally all charity donations should not be included in the profit for trading purposes figure, the exception to this is small donations to local charities (equivalent to advertising)

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23
Q

Can CapEx be tricky?

A

Yes - CapEx is not an allowable expense other than the cost of registering a patent.
However CapEx can include costs which might be posted to Repairs and Maintenance - if the expense involves enhancing an existing asset it is not allowable, if it is to return/repair an asset to it’s original condition it is allowable.

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24
Q

Is there a fixed rule for all legal expenses?

A

No - the reason for incurring the legal expense must be considered.
Relating to CapEx - Disallow
Relating to revenue and are trade related - Allow.
Exceptions
Costs for renewing a short lease.
Legal costs for defending title to a fixed asset.

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25
Q

How are leasing charges dealt with?

A

For cars with emissions up to 110 g/km - allowed in full

For cars with emissions over 110 g/km - standard disallowance of 15% of leasing charges for the year.

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26
Q

What are capital allowances?

A

These allow companies to write off the cost of their non current assets against their taxable income to reduce the tax that they have to pay.

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27
Q

Annual investment allowance (AIA)

A

Available on all plant and machinery except cars.
Allowance available is 100% up to allowance level.
CAPS ending up to 31/12/18 - £200,000
CAPs starting between 01/01/19 and 31/12/2020 - £1,000,000
CAPs starting after 01/01/2021 - £200,000

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28
Q

First year allowance (FYA)

A

Available for certain type of energy efficient plant and machinery
100% of amount can be claimed
New low emission cars < 50g/km
New zero emission goods vehicles.

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29
Q

Writing down allowance (WDA)

A

Can be claimed on any CapEx that is not eligible for AIA or FYA.
Expenditure is grouped in different pools -
Short life asset - assets (except cars) that will be disposed of within 8 years, pool for each asset, WDA is 18%
Special rate pool - Cars with emissions over 110 g/km, WDA is 8%/6% changes at 1st April 2019.
Main Pool - all assets not in another pool, includes cars < 110 g/km, WDA is 18%.

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30
Q

Disposal of Pooled assets

A

Assets in single asset pools
The pool should be written down to zero at disposal.
This can be done with a balancing allowance or charge if WDV is not zero after applying WDA.

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31
Q

What is the Small pools allowance?

A

Once the balance on a main or special rate pool is below £1000 (or apportioned value for CAP’s below 12 months) the balance can be cleared by claiming the small pools allowance.
This is not compulsory.

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32
Q

How are capital allowances dealt with for CAPs of less than 12 months?

A

WDA - Time apportioned
AIA - Time apportioned
FYA - not time apportioned
Balancing allowances/Charges - Not time apportioned.

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33
Q

What happens with Capital allowances when a company ceases trading?

A

No WDA, FYA or AIA is claimed in the final CAP
All remaining assets disposed of with profit bought in to computations.
Pools are written down to zero using balancing charges or allowances.

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34
Q

What qualifies as Plant & machinery?

A

Consider
Permanence - Is it present/in use for a long time
Function - is it used in carrying on the trade?
Allowances are not available in the setting in which trade occurs, they need to be apparatus for trade.
Exception - Alterations to a building in order to install plant.

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35
Q

What order should the proforma for calculating capital allowances be in?

A

Will have headings for the different allowances that can be claimed, final column heading will be Allowances.

  1. WDV b/f
  2. Additions in the period.
  3. disposals in the period
  4. calculate WDA values - apportion for short CAPs
  5. Calculate FYA value
  6. Establish WDV to carry forward.
  7. Calculate total allowance for period.
36
Q

What is a chargeable gain?

A

This occurs when a company disposes of certain types of assets.
If disposal results in a loss this can only be off set against gains in the period, any remaining loss should be carried forward.

37
Q

When can a Gain arise?

A

Asset or part of Asset is sold - this is where gains usually occur. Proceeds are selling price.
Asset is given away - Asset is valued at Market value.
Asset is lost or destroyed - proceeds are £0.
Asset is claimed for on insurance - claim proceeds.

38
Q

As assets are assumed to be chargeable unless it is stated they are exempt, which types of asset are exempt?

A

Trading Inventory
Cars
Tangible moveable property (Chattels) bought for

39
Q

What are considered to be the incidental costs of disposal?

A

Basically costs incurred when selling the asset:
Advertising Expense
Auction costs
Estate Agent fee’s

40
Q

What are considered to be in the incidental costs of Acquisition?

A

Legal fee’s

Auction costs.

41
Q

What is indexation allowance?

A

This allows for the effect of inflation on the cost of the asset.
Is given as a rate between the date of acquisition and the earlier of the date of disposal and 31/12/2017.
Assets acquired after 31/12/2017 are not subject to indexation allowance.
Allowance given must never be more than the actual gain - so is restricted in these cases.
It is also not given where the chargeable gain calculation results in a loss.

42
Q

How is the part disposal of an asset dealt with?

A

The original cost of the part being sold is calculated as:
original cost x (proceeds of sale/value of whole asset at sale)
Gain or loss is then calculated as normal.

43
Q

How is improvement expenditure dealt with?

A

When expenditure is capital in nature it is included as an allowable cost in the chargeable gains calculation.
Two sets of indexation allowance will need to be calculated to allow for the original date of acquisition and the date of improvement.

44
Q

How is the disposal of Chattels (Tangible moveable assts) dealt with?

A

Types of assets will be:
Vans,
Furniture,
Portable equipment
Works of Art.
Cars are exempt from the rates that apply here.
1. Asset cost and was sold for £6000 but sold for

45
Q

How are chargeable gains calculated on the disposal of shares, where shares have been acquired at different times and prices (same company shares)

A

In this order:

  1. Shares bought on the same day as the disposal are matched.
  2. Shares bought 9 days before the disposal are matched.
  3. Remaining shares are pooled together FA 1985 pool
46
Q

What is the FA 1985 pool?

A

This pool merges shares, there costs and indexation charged to calculate an average share cost.
The pool cost is the cost of the shares purchased indexed for inflation at the next purchase date.

47
Q

What is roll over relief?

A

This is claimed when an assets is sold and replaced with another, any gain is “rolled” until the replacement asset is sold.
Full deferral can only occur when all proceeds are used for the replacement asset.
Any proceeds not invested will result in an immediate chargeable gain.
Both assets must be from the following categories:
Land & Buildings
Immovable Plant and Machinery
Ships, Aircraft & hovercraft.

48
Q

What types of trading loss relief can be claimed if there is a negative value after tax adjustments?

A

There are two methods of trading loss relief, both are optional
1. Against total profits before qualifying charitable deductions:
Made against current accounting period first
Then previous 12 month period.
Cannot be done as a partial claim.
If no profits for QCD these become surplus (Wasted)
2. Against total future profits before QCD:
If no claim has been made in current or previous period
Company can choose how much to offset.

49
Q

What about Capital Losses?

A

These are automatically offset against current period chargeable gains.
Excess loss is carried forward
Cannot be offset against income.

50
Q

Personal service companies - IR35

A

Applies when a PSC is used to disguise employment.
If applicable:
Treat income from relevant engagements as salary
Account for income tax and NI on the notional salary
Allow deductions for actual salary paid, expenses and flat rate of 5%.

51
Q

What is the order for the corporation tax calculation pro forma?

A
  1. Trading income (After adjustment for capital allowances)
  2. Profits from investments (excluding dividends)
  3. Chargeable gains
  4. Deduct qualifying charitable donations.
52
Q

How are rental losses dealt with?

A
  1. Offset against total taxable profit in the current CAP

2. Remaining losses are carried forward.

53
Q

How is the calculation dealt with when the accounts are for a period greater than 12 months?

A
  1. trading profits are adjusted as usual then time apportioned.
  2. Capital allowances - calculated for each CAP
  3. Interest from non trade investments - on an accrual basis.
  4. Rental income - on an accrual basis.
54
Q

When should corporation tax be paid?

A

Either 9 months and 1 day after the end of the CAP
or
In instalments - if certain criteria are met:
1st payment 7 months and 14 days from start of CAP
3 further payments 3 months apart.
Any remaining balance on the standard due date.

55
Q

What are the criteria for paying corporation tax in instalments?

A

Where the companies profits are over £1,500,000 in a 12 month period (time apportioned for shorter/longer CAP’s)
If a company is part of a group where more than 50% is owned by another company - called 51% subsidiary - the limit is divided among the companies in the group.
If CT liability is below £10,000 it cannot be paid in instalments.

56
Q

What interest rate is charged for late payments?

A

Where payments are by instalment 1.75% is charged

For final payment due 3.25% is charged

57
Q

What are the penalties for late submission?

A

Up to 3 months late - £100
Each month over 3 months and additional £200
This will increase for repeated occurrences.
Where a return is 6-12 months late 10% of CT due can be charged, increasing to 12% if more than 12 months late.

58
Q

What penalties are charged for errors in the return?

A 
Based on a % of the extra tax due
Lack of reasonable care - 0 - 30%
Deliberate - 20-70%
Deliberate & concealed - 30-100%
The penalty can be reduced if errors are admitted to by the tax payer and they cooperate with HMRC.
59
Q

What other penalties and deadlines apply?

A

Starting a new company with liability to pay CT - notify HMRC within 3 months, penalty is 0-100% of CT that would be due.
Records must be kept for 6 years after the end of the CAP - penalty £3000 per CAP
Failure to provide documents requested - £300 plus £60 per day thereafter.
Returns can be amended and HMRC can open an enquiry up to 12 months after the submission date.
Closure of an enquiry can be appealed up to 30 days after.

60
Q

How is interest payable dealt with in the calculation?

A

Make sure to asses whether it is trade or non trade
All amounts must be shown Gross and on an accruals basis.
Watch out where payments/receipts are to individuals as these should be net of 20 % tax.

61
Q

How are patent royalties dealt with?

A

On an accruals basis:
Payable - Trading expense so should require no adjustment.
Receivable - Trading profit, should require no adjustment.
As with interest payments/receipts to individuals will be net of 20% tax but should be shown Gross.

62
Q

How is trading income identified when dealing with sole trader income?

A

Badges of Trade:
Profit Motive - is the activity carried out to intentionally earn a profit?
Subject of activity - is this creating something for personal use?
Length of ownership - how long are the goods owned before being sold on?
Frequency of Transactions - how often do sales and purchases occur?
Supplementary work - are goods bought with the possibility to enhance/improve?
Reason for Acquisition/sale - is it planned with the intention to sell on?
How is the Acquisition financed?

63
Q

How do we differentiate between employed and self employed?

A

As with IR35 there is not a fixed definition, but there are indications such as:
Fixed place and time of work
Equipment provided at no cost to worker.
Required work must be completed by worker, no substitutions.

64
Q

How is trading income for Tax purposes for income tax arrived at?

A

In much the same was as for Ltd companies:
Allowable income - relates directly to the trade.
Allowable expenses - wholly and exclusively for the purpose of the trade.

65
Q

What else is identified as non allowable expenditure?

A

Private expenditure/Drawings:
To be added back when adjusting profit
Private expenditure of the owner
Drawings/Wages of the owner plus related Tax, NI and Pension.
Goods for private use, Cost plus profit lost based on price goods would have been sold for.

66
Q

How are capital allowances calculated?

A

Method of calculation is as with companies, however assets with some private use are treated in a specific way (not applicable to companies)

  1. Assets with part private use must be in a single use asset pool.
  2. Calculation of allowances & pool balances is done in the usual way.
  3. Only the business proportion of the allowance can be claimed.
  4. AIA is available but only the business portion can be claimed.
67
Q

When must sole traders notify HMRC of trading?

A

within 6 month of the end of the tax year.

68
Q

What is trading allowance?

A

When trading on a small scale this can be used instead of normal allowable expenses.
£1000 deduction from Gross trading income.

69
Q

For income tax purposes what is the basis period?

A

For ongoing businesses this is the accounting period that ends in the tax year.
For New business First tax year will be the year the business starts trading, then rules apply based on the length of the first accounting period.

70
Q

If a sole trader business first accounting period is 12 months what rules apply in regard to the basis periods?

A

1st Tax Year - Basis period will be the start date to the end of that tax year.
2nd Tax year - Basis period will be 12 month period that ends in that tax year (overlap)
3rd tax year - normal current year basis will apply

71
Q

If a sole trader business first accounting period is less than 12 months what rules apply in regard to basis periods?

A

1st Tax year - Basis period is Start date to end of that tax year.
2nd Tax Year - Either 12 month period that ends on the accounting date in the 2nd tax year or 1st 12 months of business.
3rd Tax year - normal current year basis.
This may result in two sets of overlaps.

72
Q

If a sole trader business first accounting period is greater than 12 months what rules apply in regard to basis periods?

A

1st Tax year - Basis period is start date to end of that tax year.
2nd Tax year - if there is no accounting period end date in the tax year basis period will be the actual tax year.
3rd tax year - 12months leading to the accounting end date in the 3rd tax year.
This will likely result in overlap between 2nd and 3rd years.

73
Q

What are the basis periods for when a sole trader business ceases trading?

A

The final tax year will be the tax year in which trading ceased.
Basis period - From the end of the basis period for the prior tax year to date trading ceased.
Profits of the final year will be reduced by any overlap profits from the start of trading.

74
Q

What about capital allowances when a sole trader business ceases trading?

A

These are dealt with in the same way as for corporations with the following exceptions:
Where there is private use on the business portion of any balancing charge or allowance can be claimed.
If an asset is bought by the owner it must be included as a disposal at market value.

75
Q

Can a sole trader change their accounting date?

A

Yes as long as:
The first period of accounts ending on the new date are for less than 18 months
HMRC are notified of the change by 31st Jan following the Tax year of the change.

76
Q

What rules apply to basis periods when a change to accounting date is made?

A

Relevant period = period from old accounting date to new.
Relevant period <12 months - basis period is 12 months to new accounting date, any overlap profits are added to balance from start of trading.
Relevant period >12 months - Basis period is from end of last period to new accounting date. Previous overlap profits equal to the no. months this period is over 12 can be deducted.

77
Q

How are trading losses off set for sole traders?

A

This is virtually the same as for corporations except:
Losses can be off set against the prior year without first having offset them against the current.
And offset is done before personal allowance is deducted.

78
Q

How is national insurance for sole traders and partnerships calculated?

A

Class 2 - Charged at a flat rate per week, small profits threshold is £6475.
Class 4 - charged on assessable trading profits over £9,500.
9% on profits between £9,500 and £50,000
2% on profits over £50,000.
NB - NI is not payable by anyone under 16 or of pensionable age.

79
Q

Which self assessment return should be completed?

A 
Full Return (6 Pages)
Business starting up or ceasing trading
Accounting period is not the same as basis period
Overlap profit relief is being claimed
Turnover is above the threshold.
Short return (2 pages)
Only for sole traders 
Accounting and basis period are the same.
Below the turn over threshold
No overlap profit relief.
80
Q

How are trading profits divided between partners?

A

Adjusted trading profit and capital allowances are calculated as for sole traders.
Salaries and interest on capital are allocated to partners.
Apportion remaining profit based on profit share agreement.
Each parter will submit their own individual Tax return.
Loss relief method will be chosen by each partner.

81
Q

How are trading profits and basis period calculated when a new parter joins?

A

New profit sharing agreement applies from the partners join date.
Adjusted profits should be time apportioned to before and after join date.
New partner will have to follow opening basis assessment rules.

82
Q

What returns must be completed by a partnership?

A

SA 800 - Partnership return - this details the partnerships total profits and the profit of each partner.
Each partner must also complete their own self assessment return.

83
Q

How are income tax payments on account calculated?

A

Due in the jan of the Tax year and July after the tax year.
Each payment on account is 50% of prior year Tax and NI due.
These do not have to be made if:
Tax due in the prior year is

84
Q

What are the penalties for late submission of an income tax return?

A

Initial penalty £100
If 3 months late - £10 per day up to max of £900.
6 months late - additional Higher of £300 or 5% of Tax due.
12 months late - additional £300 or 5% of tax due.

85
Q

What are the penalties for late payment of income tax?

A

Interest is charged at 3% for late or short payments
plus the following penalties:
Late balancing amount - 5% of tax due
Still O/S at july 31st - Additional 5% of tax due
Still O/S at 31st Jan - Additional 5% of tax due.

86
Q

What are the penalties for incorrect returns?

A

Returns can be corrected up to 12 moths after the online due date, after this request must be made in writing.
Careless - 0 - 30% of extra tax due
Deliberate - 20-70% of extra tax due
Deliberate & concealed - 30-100% of extra tax due.
These increase by 15/15/20 % if disclosure of error is prompted.

87
Q

What about sole trader and partnership accounting records?

A

These should be retained for 5 years after on line return is due to be submitted.
Penalty is £3000.

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