Business - taxation Flashcards

Question

* Tax payable on the gain FOR Companies

Answer 1

▪ Companies do not pay CGT; they pay corporation tax. Therefore, in relation to gains made by companies, reference should be made to ‘corporation tax on chargeable gains’ rather than CGT.

Answer 2

They are generally exempt from paying it

Answer 3

o Where an individual’s Taxable Income plus total taxable chargeable gains after all allowable deductions (including losses and the AE) is less than the basic rate tax threshold of £37,700, the rate of CGT will be 10%. o Where an individual’s Taxable Income exceeds the basic rate tax threshold of £37,700, the CGT rate will be 20%. o Where an individual’s Taxable Income is less than the basic rate tax band threshold of £37,700 but after the gains are added, the combined total exceeds the threshold that part of the gains within the unused part of the basic rate tax band will be charged to CGT at 10% and any part that exceeds the threshold will be charged at 20%.

Answer 4

o Business Asset Disposal Relief reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals.

Answer 5

o A qualifying disposal is a disposal of: ▪ all or part of a trading business; ▪ assets in a business that used to trade; ▪ shares in a trading company; or ▪ shares in a company that used to trade; ▪ where, in each case, certain conditions are satisfied. The conditions are as follows: o Where someone disposes of all or part of a business: ▪ the business must be a trading business; and ▪ the business must have been owned for at least two years prior to the date of disposal. o Where someone disposes of assets used in a business that used to trade: ▪ the business must have been owned for at least two years before it ceased to trade; ▪ the assets must have been used in the business when it ceased to trade; and ▪ the assets must have been disposed of within three years of the business ceasing to trade. o Where someone disposes of shares in a company: ▪ the company must be and have been for at least two years before to the date of disposal, a trading company; ▪ the shares must have been held for at least two years before the date of disposal; ▪ the person disposing of the shares must have been an officer or employee of the company who holds at least 5% of the ordinary voting shares and is entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least two years before the date of disposal. o Where someone disposes of shares in a company that used to trade: ▪ the shares must (generally) have been owned for at least two years before the company ceased to trade; ▪ the person disposing of the shares must have been an officer or employee of the company who held at least 5% of the ordinary voting shares, and was entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least two years before it ceased to trade; and ▪ the shares must be disposed of within three years of the company ceasing to trade. ▪ Note that Business Asset Disposal Relief is not automatic: in order for it to apply, the taxpayer must make a claim on or before the first anniversary of 31 January following the tax year in which the relevant disposal is made. **▪ Conditions for BADR are 5% shareholding; employee/director; ownership for 2 years or more; not used up lifetime allowance of £1m.**

Answer 6

o o Business Asset Disposal Relief gives each individual a lifetime allowance, which is now set at £1 million.

Answer 7

IR reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of £10 million.

Answer 8

▪ The shares are fully paid ordinary shares and were issued to the individual for cash consideration on or after 17 March 2016; ▪ The company is (and has been since the shares were issued) a trading company or the holding company of a trading group; ▪ At the time of issue of the shares, none of the company’s shares were listed on a recognised stock exchange; ▪ The shares are held by the individual for at least three years from 6 April 2016 (and continuously since issue); and ▪ The individual (or any connected person) is not (nor at any time has been from the date of issue of the shares) an officer or employee of the company (or any connected company).

Answer 9

* Replacement of business assets relief (‘Rollover Relief’) * Gift of business assets relief (‘Hold-over relief’) * Replacement of business assets relief (‘Rollover Relief’)

Answer 10

▪ To avoid having to pay CGT each time certain business assets are sold and replaced, a taxpayer can elect to postpone the CGT liability it realises on the sale of such an asset by ‘rolling over’ the gain into the replacement asset. ▪ This applies to land and buildings, fixed plant and machinery and goodwill. The new asset need not necessarily be of the same type as the old one. It merely needs to be within the list of qualifying assets. ▪ The effect of the relief is that any gain arising from a disposal of a qualifying asset is carried forward and ‘rolled’ into the cost of a qualifying replacement asset. The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over. ▪ Therefore, any tax relief is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased in its place. ▪ It is possible to roll over gains indefinitely provided sufficient qualifying assets are bought within the time limits. ▪ **The annual exemption cannot be used to reduce the gain rolled over.**

Answer 11

Where an individual gives away a business asset, the donor (the person making the gift) and donee (the person receiving the gift) can claim holdover relief. As a transfer at an undervalue or gift, the market value rule will apply. The donor will have no liability to CGT but the donee’s acquisition cost for CGT purposes is reduced by the amount of the donor’s deemed gain. In effect the CGT liability is postponed until the donee ultimately disposes of the asset (although further hold-over relief can be claimed if the donee then gives away the asset). o As in the case of roll-over relief, the whole chargeable gain must be held over if a claim for hold-over relief is made. T**he donor cannot use his annual exemption to reduce the gain held over. ** o Hold-over relief may also be claimed where an asset is sold at undervalue but the hold-over relief will only be available on the gift element, ie the difference between the price paid and the market value. o Business assets on which hold-over relief may be claimed include goodwill, assets used in the business and shares in a trading company not quoted on a stock market.

Answer 12

*individuals (whether in a personal capacity or as a sole trader); *personal representatives (‘PRs’), when they dispose of the assets of the deceased person; *partners, when the partners dispose of a chargeable asset. Each partner is charged separately for their proportion of the gain; and *trustees, on the disposal of a chargeable asset from a trust fund.

Answer 13

**Step 1: Disposal of a chargeable asset** Here, you must identify the disposal of a chargeable asset, for example the sale of a factory. **Step 2: Calculation of the gain** This is the consideration received for the asset less the cost of the asset, in other words the asset’s sale price less its purchase price. Some deductions are allowed, which reduce the gain further, and mean that less tax is ultimately payable **Step 3: Consider reliefs** **Step 4: Aggregate gains/ losses; deduct annual exemption** Gains and losses from all sources must be added together, and the annual exemption **Step 5: Apply the correct rate of tax**

Answer 14

If the chargeable asset is residential property which is not the taxpayer’s main residence, the gains are subject to a surcharge of 8%. This means that any gains which are below the basic rate threshold are taxed at 18% (ie the normal rate of 10% plus the 8% surcharge) and any gains which exceed the basic rate threshold are taxed at 28%, not 20%.

Answer 15

Gains made by trustees and PRs are all taxed at 20%, or, for residential property, 28%.

Answer 16

When someone dies, there is no disposal, so no charge to CGT. The PRs are deemed to acquire the deceased’s assets at the market value at the date of death (known as the probate value). This means that gains which accrued during the deceased’s lifetime are never charged to tax. However, inheritance tax may be payable.

Answer 17

When an asset increases in value, the gain cannot all be regarded as profit. Some of the gain will be as a result of inflation, rather than the asset becoming inherently more valuable.

Answer 18

The principal qualifying business assets for the purposes of this relief are land, buildings and goodwill. The asset must be used in the trade of the business rather than being held as an investment. Fixed plant and machinery are qualifying business assets, but their sale usually results in a loss because they are wasting assets. There is no definition of ‘fixed’, but if the asset is moveable, it is unlikely to be classed as fixed. Company shares are not qualifying assets. The relief applies when a qualifying asset is disposed of, and the asset is owned by: * a sole trader, who uses the asset in their trade; * a partnership, which uses the asset in its trade; * an individual partner, where the partnership uses the asset in the partnership trade; or * an individual shareholder, where the asset is used in the trade of the company in which the shareholder owns shares. For this to apply, the company must be their ‘personal company’, meaning that the shareholder must own at least 5 per cent of the voting shares in the company. Provided that both the asset disposed of and the asset acquired fall within the definition of qualifying assets, they do not have to be the same type of asset.

Answer 19

* The taxpayer must acquire the replacement asset within one year before or three years after the disposal of the original asset, unless HMRC allows the taxpayer an extended time period to claim. * the taxpayer must claim the relief within four years from the end of the tax year in which they acquire the replacement asset

Answer 20

This is similar to rollover relief on replacement of business assets, in that the charge to CGT is postponed. It applies, subject to certain conditions, when an individual sells their interest in an unincorporated business (ie a sole trader or partner) to a company. The gain is rolled over into the shares which the seller receives as consideration for the sale of the assets to the company. The CGT is payable when the individual disposes of the shares. This relief encourages people to incorporate and expand their businesses, because if it were not for this relief, often taxpayers would not be able to find the money to pay CGT and invest in the new company. Conditions for the relief to apply * The business must be transferred as a going concern, so after the disposal it must essentially be carried on as the same business but with a different owner. * The consideration must all be in shares issued by the company. If only part of the consideration was shares, for example, 25% of it, then only that percentage of the gain could be rolled over. * The business must be transferred with all of its assets, ignoring cash. If the taxpayer retains any of the assets, for example, if they keep the business premises, then the relief does not apply. How is the relief applied? As with rollover relief on replacement of business assets, the gain is rolled over by notionally deducting it from the cost of acquisition of the new shares. The taxpayer does not have to apply for this relief. HMRC applies it automatically unless the taxpayer chooses not to use it. Note that the annual exemption cannot be used before the gain is rolled over, so the taxpayer loses the benefit of the annual exemption if they apply for rollover relief on incorporation.

Answer 21

It is only available on gifts, or the gift element of a sale at an undervalue. * Only the part of the gain relating to chargeable business assets qualify for the relief. ‘Business assets’ include: ∘ assets used in the donor’s trade, or their interest in such assets, where the donor is a sole trader or a partner whose assets are being used by the partnership; ∘ shares in a trading company which are not listed on a recognised stock exchange (AIM is not deemed to be a stock exchange for the purposes of this condition); ∘ shares in a personal trading company, even if the company is listed on a recognised stock exchange. A ‘personal company’ is one in which the donor owns at least 5% of the company’s voting shares; and ∘ assets owned by the shareholder and used by their personal trading company. * If the donee is a company, the relief does not apply to a gift of shares. * Both the donor and the donee must elect to apply for the relief, because the donee is accepting liability for any CGT payable in relation to the gift when the donee disposes of the asset. The donor and donee must elect for the relief to apply within four years from the end of the tax year of the disposal.

Answer 22

Wasting assets are generally exempt from CGT. Wasting assets are assets with a predictable life of less than 50 years. This includes most consumer goods, for example kitchen appliances and televisions.

Answer 23

Damages for personal injury are exempt from CGT, even though recovery of other damages or compensation could constitute the disposal of a chargeable asset.

Answer 24

Where only part of an asset is disposed of, any initial and subsequent expenditure are apportioned when calculating the gain.

Answer 25

each partner pays a proportion of the CGT based on their percentage ownership of the partnership’s assets. Sometimes the partners have expressly agreed how they will share the partnership’s capital assets.

Answer 26

the disposal proceeds and allowable expenditure must also be apportioned among the partners, according to their share of the asset.

Answer 27

Each partner can make their own decision regarding which reliefs, if any, they want to apply for. When disposing of the partnership’s business assets, the most common reliefs are: 1. rollover relief on the replacement of qualifying business assets; 2. hold- over relief on gifts of business assets; 3. rollover relief on the incorporation of the business; and 4. business asset disposal relief.

Answer 28

When an LLP is used to carry on a trade or profession, it will be treated for most purposes in the same way as an ordinary partnership as far as CGT is concerned. However, when an LLP ceases to trade, it may be treated as a body corporate rather than a partnership for the purposes of capital gains.

Answer 29

Usually, when a shareholder sells their shares back to a company, there will be a charge to income tax for the shareholder rather than CGT. The profit represented by the difference between the consideration the shareholder receives and the issue price of the shares will be taxed as a dividend. However, the shareholder’s profit sometimes attracts CGT instead. Capital gains tax will be relevant when certain conditions are satisfied

Answer 30

1. the buyer must be a trading company and its shares must not be listed on a recognised stock exchange (AIM is not a recognised stock exchange for the purposes of this test); and 2. the purpose of the buyback must either be to raise cash to pay inheritance tax or be for the benefit of the company’s trade (perhaps where there is a rift between shareholders and the company will function more effectively if one of the shareholders sells their shares back to the company); and 3. the seller must have owned the shares they are selling back to the company for at least five years; and 4. the seller must either be selling all of their shares or substantially reducing their percentage shareholding (by at least 25%) to a maximum of 30% of the issued share capital of the company. If it is difficult to decide whether these conditions are met, the taxpayer can apply to HMRC for advance clearance of their proposed tax treatment of the buyback. Whether paying income tax or CGT would result in a lower tax liability will depend on the taxpayer’s circumstances and how much income they earn. If the taxpayer pays CGT, the availability of reliefs such as business asset disposal relief may significantly reduce their liability to CGT. If the taxpayer is a basic rate income taxpayer, then they are likely to benefit from the ordinary income tax rate for dividends (8.75%) and the dividend allowance. It is sometime possible to structure the buyback so that the taxpayer obtains the most favourable tax treatment. 10.18 Assessment and payment of CGT Capital gains tax is paid on all gains in the tax year. Generally it is payable on or before 31 January following the end of the tax year, or 30 days from the making of an assessment, if later. However, a taxpayer is required to submit a provisional calculation of any gains made from the sale of a residential property and pay any tax due within 30 days following completion of the sale. Payment can be made using HMRC’s real- time CGT service, the HMRC property service or by completing a self- assessment tax return in the same way as is required for income tax. Sometimes (although rarely) payment by ten annual instalments is an option. This is only available where: * the disposal was a gift; * the qualifying asset is land, a controlling shareholding in any company or any shareholding (whether controlling or not) in a company whose shares are unquoted; and * the conditions for hold- over relief to apply must not be met. If payment by instalments is an option, the first payment will be due by 31 January following the end of the tax year in which the disposal was made.

Answer 31

the Finance Act 2013 allows HMRC to make adjustments to a taxpayer’s liability to counteract the tax advantages arising from abusive tax arrangements. This is known as the general anti- avoidance rule

Answer 32

Capital gains tax is paid on all gains in the tax year. Generally it is payable on or before 31 January following the end of the tax year, or 30 days from the making of an assessment, if later. However, a taxpayer is required to submit a provisional calculation of any gains made from the sale of a residential property and pay any tax due within 30 days following completion of the sale. Payment can be made using HMRC’s real- time CGT service, the HMRC property service or by completing a self- assessment tax return in the same way as is required for income tax. Sometimes (although rarely) payment by ten annual instalments is an option. This is only available where: * the disposal was a gift; * the qualifying asset is land, a controlling shareholding in any company or any shareholding (whether controlling or not) in a company whose shares are unquoted; and * the conditions for hold- over relief to apply must not be met. If payment by instalments is an option, the first payment will be due by 31 January following the end of the tax year in which the disposal was made

Answer 33

£12,570 o Each individual is entitled to an annual Personal Allowance. The personal allowance is reduced by £1 for every £2 of net income above £100,000. If Net Income is £125,140 or above, none of the PA is available.

Answer 34

For basic rate taxpayers, the first £1,000 of savings income is taxed at the savings nil rate and for higher rate taxpayers, the first £500 is taxed at the savings nil rate of 0% (in each case after the starting rate for savings has been applied, if applicable).

Answer 35

o The first £1,000 of dividend income for all taxpayers is taxed at the dividend nil rate of 0%.

Answer 36

o Self-Assessment o Deduction at source

Answer 37

This means it is up to the individual to calculate the tax bill and not HMRC. Not all individuals are required to complete a selfassessment tax return. For example, employed individuals with uncomplicated tax affairs are not required to complete a selfassessment tax return because their tax is collected via the PAYE (Pay As You Earn) system. Directors, high and additional rate tax payers and self-employed people are examples of individuals who are always required to complete a self-assessment tax return.

Answer 38

▪ This system is used where the payer of a taxable sum is obliged to deduct tax and account for it to HMRC. The recipient of the taxable sum receives it 'net of tax'. One example is the PAYE system.

Answer 39

* A taxpayer’s gross income from all sources

Answer 40

▪ Total Income less available tax reliefs

Answer 41

▪ Net Income less the personal allowance

Answer 42

Step 1: Calculate total income Step 2: Deduct any allowable reliefs to give net income Step 3: Deduct any personal allowance to give taxable income Step 4: Calculate the tax at the applicable rate(s) Step 5: Add together the amounts of tax from Step 4 to give the taxpayer’s overall tax liability Having calculated the taxpayer’s overall liability, reduce that liability by any income tax deducted at source (and therefore paid direct to HMRC). The resulting figure is the income tax which the taxpayer is obliged to pay to HMRC.

Answer 43

Total Income is a taxpayer's total gross income from all sources. ▪ This means that we need to add together all the receipts from all the sources of income of that particular individual. ▪ Where income has been received by a taxpayer after deduction of tax at source (ie 'net of tax'), you will need to include the gross amount in the calculation of Total Income. The calculation for this is known as “grossing up” (you are not expected to do this on this module). ▪ You have already seen that tax is deducted at source from earnings through the PAYE system. ▪ Savings income and dividend income are received gross (ie with no deduction at source). There are some special rules and allowances which apply to these particular types of income, as follows. o Savings ▪ Interest received by the individual on savings is subject to income tax but some taxpayers will have the benefit of a personal savings allowance. Basic rate taxpayers are entitled to their first £1,000, and higher rate taxpayers are entitled to their first £500 of interest received on savings at the savings nil rate. This means that the first £1,000, or £500 respectively of interest received on savings is taxed at 0%. Additional rate taxpayers do not get the benefit of a personal savings allowance. Examples of how savings income is taxed are set out later in this element. o Dividends ▪ Companies pay dividends to shareholders out of profits that have already been charged to corporation tax. To take account of this (in part at least), a dividend allowance was introduced. The effect of this allowance is that no individual pays any tax on the first £1,000 of dividend income they receive. The allowance is the same for all taxpayers, no matter how much nondividend income they receive. ▪ As we will see when we apply the rates of tax, the tax rates for dividends are different to those applicable to other forms of income. There is a useful summary table of the tax rates in Step 4 below. Examples of how dividends are taxed are set out below in this topic. o Benefits in kind ▪ Many employees receive benefits in kind in addition to the salary they are paid in respect of their employment. Benefits in kind include health insurance, company cars and gym membership. ▪ Cash payments of salary (including bonuses) are subject to deduction of tax under PAYE. ▪ Benefits in kind are subject to income tax but are NOT subject to deduction of tax under PAYE. Instead, the employer must report the amount of the benefit to HMRC as well as to the employee. The employee then includes the benefit sums on their tax return if they complete one. Such benefits must be included in the individual’s Total Income.

Answer 44

Once Total Income has been calculated the next stage of the income tax computation is to deduct available tax reliefs in order to establish the taxpayer’s Net Income. The only tax reliefs we look at in this topic are interest PAID on qualifying loans and pension scheme contributions. o Interest paid on qualifying loans ▪ This type of interest is not to be confused with interest received by the individual from a bank on savings held at the bank (considered previously under total income). This interest is the interest an individual must pay TO the bank as the cost of receiving certain qualifying loans from the bank. ▪ Interest on qualifying loans is a form of tax relief because it can be deducted from Total Income to reduce the amount of income subject to tax thereby reducing the tax bill. ▪ The amount of the interest paid on these loans must be deducted from the taxpayer’s Total Income in order to determine the taxpayer’s Net Income. ▪ Qualifying loans include: * loans to buy an interest in a partnership; * loans to contribute capital or make a loan to a partnership; * loans to buy shares in (or make a loan to) a 'close' company (you will learn about these in more detail later); and * loans to buy shares in an employee-controlled company or invest in a co-operative. o Pension scheme contributions ▪ Many individuals pay contributions into a pension scheme, either a scheme set up by their employer (an occupational pension scheme) or a personal pension scheme. Such contributions have the benefit of relief from income tax, subject to certain limits. ▪ Relief on pension contributions is given as follows: An amount equivalent to the pension scheme contributions made by a taxpayer during the tax year are deducted from their Total Income for that year (ie at the same time as interest on qualifying loans). ▪ Note: There are limits to the amount an individual can pay into their pension scheme each year but this is beyond the scope of this topic. Most contributions made by an employer to an employee’s pension scheme will be exempt from income tax. ▪ Certain charitable donations are also eligible for tax relief.

Answer 45

o Once Net Income has been calculated, the next stage of the income tax computation is to deduct the taxpayer's Personal Allowance in order to ascertain the taxpayer’s Taxable Income. o The personal allowance for the tax year 2022/23 is £12,570. The amount of this allowance is reduced by £1 for every £2 of Net Income above £100,000. o Going back to the woman in the example above, the next stage in her income tax computation would be: ▪ Net Income £50,500 ▪ Less Personal Allowance (£12,570) ▪ Taxable Income £37,930 o The personal allowance of £12,570 is reduced by £1 for every £2 of Net Income above £100,000. This means that individuals with Net Income of £125,140 and above will lose the benefit of the personal allowance completely. To work out the reduced allowance for individuals with Net Income between £100,001 and £125,000, follow this formula: ▪ £12,570 – [(Net Income - £100,000) / 2] = reduced allowance

Answer 46

It is CRITICAL that the different types of income (non-savings, savings and dividend) income are separated at this point as they MUST be taxed in the order of non-savings, then savings, and then dividend income as different tax rates apply to each type of income. It may be useful to remember a mnemonic in order to recall which order the incomes are taxed (examples include: “never squash donuts” or “never say die”). o To calculate non-savings income, simply deduct the savings and dividend income figures from the taxable income. o Taxable Income LESS Savings Income LESS Dividend Income = Non-Savings Income

Answer 47

o Basic >0 – 37,700 > 20% > 20% > 8.75% o Higher > 37,701- 125,140 > 40% > 40% > 33.75% o Additional > +125,141 > 45% > 45% > 39.35%

Answer 48

▪ The income tax that remains to be paid must be settled in each year by a final payment to HMRC. Alternatively, if the amount still outstanding and due to HMRC is fairly small, it may be recovered by HMRC through an adjustment to the individual’s PAYE tax code for the following tax year. If it transpires that the taxpayer has overpaid tax during the year the taxpayer will receive a tax refund from HMRC. ▪ Individuals also pay National Insurance Contributions (‘NICs’) out of employment income via the PAYE system. NICs do not affect the individual’s personal income tax computation in any way and will not be considered any further.

Answer 49

you should be aware that a taxpayer cannot reduce their income tax liability by making gifts of certain income producing items eg shares (which give rise to dividends) or a lump sum (which gives rise to interest) to their children. Instead, under special legislation often referred to as the ‘settlements’ legislation the income is treated as remaining with the taxpayer who made the gift.

Answer 50

Individuals, partners, personal representatives and trustees may have to pay income tax. Charities are generally exempt, and companies instead pay corporation tax

Answer 51

Individuals who are employed will have to pay income tax if their earnings exceed a certain threshold (and this is usually assessed by their employer and paid directly to HMRC by the employer) Sole traders will also have to pay income tax, based on an assessment of their trading profits

Answer 52

Partners are responsible for the tax due on their individual share of the partnership profits. The method of calculating trading profit is the same as for sole traders, but the profit will need to be apportioned between the partners in accordance with their shares in the income profits of the partnership.

Answer 53

Personal representatives pay the deceased’s outstanding income tax and income tax chargeable during the administration of the estate.

Answer 54

Trustees pay income tax on income produced by the trust.

Answer 55

The tax year runs from 6 April until 5 April the following year. This means that an individual will pay tax on all income earned between these dates. The tax year, also called the year of assessment, is described by reference to the calendar years which it straddles. So the tax year beginning on 6 April 2022 and ending on 5 April 2023 is referred to as the tax year 2022/23. By way of example, a person whose income is in the form of a salary will be charged to tax in the tax year 2022/23 for all salary received between 6 April 2022 and 5 April 2023.

Answer 56

(a) trading income: profits of trade, profession or vocation. This applies to sole traders, trading partnerships, sole practitioners and professional partnerships; (b) property income: rents and other receipts from land in the UK; (c) savings and investment income: interest, annuities and dividends; (d) employment and pensions income, including social security payments such as sick pay and maternity pay; and (e) certain miscellaneous income which is beyond the scope of this book.

Answer 57

interest on damages for personal injuries or death, interest on savings certificates, certain state benefits, premium bond winnings and income from investment in an individual savings account (ISA).

Answer 58

*a loan to buy a share in a partnership, or to contribute capital or make a loan to a partnership; *a loan to invest in a close trading company; and *a loan to personal representatives to pay inheritance tax.

Answer 59

Where a person does not have enough income to use their personal allowance fully for that tax year, they can transfer £1,260 of their personal allowance to their spouse or civil partner. This is not available if the recipient is a higher or additional rate taxpayer.

Answer 60

Any taxpayer who is registered blind receives an allowance of £2,600, which is subtracted from net income just like the personal allowance.

Answer 61

Allowances for small amounts of property income and trading income are, generally, available to all UK taxpayers. Where individuals are in receipt of gross property income or gross trading income below £1,000, the income will not be subject to income tax and taxpayers are not required to submit a tax return or, where they have other income, declare it in their tax return. Where gross property or trading income is in excess of £1,000, the taxpayer can choose to take the £1,000 allowance as a deduction against gross income instead of deducting actual expenses to arrive at their taxable income figure.

Answer 62

The first tax year When the business commences, the sole trader will be charged to income tax on the trading profit from date of commencement to the following 5 April. The sole trader must register with HMRC within three months of starting the business. The second tax year In the second tax year of the trade, income tax will be assessed on trading profit for the whole of the 12- month accounting period which ends in that tax year. The third and subsequent tax years After the second tax year in which the sole trader is in business, they will be assessed for income tax based on the trading profits in the 12- month accounting period ending in that tax year. The final tax year In the final year of trading, tax will be assessed on trading profits from the end of the last accounting period until cessation of business. From this will be subtracted any overlap profit (unless it has already been recouped by the sole trader changing their accounting period).

Answer 63

Calculating the income payable by a partner in a partnership comprises the following steps: 1. The partnership’s trading profit will be calculated in the same way as trading profit for a sole trader. By way of recap, the formula is: **Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit/ loss** 2. The trading profit is then shared between the partners in accordance with their agreement (or, if there is no agreement, the Partnership Act 1890). There are two elements to this: the agreement may well set out what will be paid first, for example salaries, interest on capital, and finally any remaining profit. The agreement should also set out each partner’s percentage share of the profits. 3. Each partner will include this figure on their tax return and will be assessed in the ordinary way for income tax, taking account of any applicable reliefs and allowances. If the partnership makes a trading loss instead, the losses will again be shared between the partners in accordance with their agreement, and the partners can each choose how they will claim any applicable reliefs for their share of the loss.

Answer 64

New partners are assessed to income tax for their first two tax years When a partner is leaving the partnership, they will be assessed to income tax on the basis its their final year

Answer 65

If an individual borrows money to buy a share in a partnership or to lend money to a partnership, they can deduct the interest they pay on this borrowing from total income. This loan is a ‘qualifying loan’. This encourages individuals to invest in businesses. There is a cap on the amount of tax relief, of the greater of £50,000 or 25% of the taxpayer’s total income less allowable pension contributions in the tax year where the relief is claimed. However, the cap only relates to income from sources other than the trade which produced the loss, so its effect is limited.

Answer 66

When an LLP is used to carry on a trade or profession, it will be treated for most purposes in the same way as an ordinary partnership as far as income tax is concerned. However, the availability of relief for trading loss is restricted for partners in an LLP in certain conditions

Answer 67

When a ‘close company’ makes a loan to a shareholder, there may be income tax consequences for the shareholder if the close company writes off the loan

Answer 68

When a shareholder sells their shares back to the company in which they are held, their profit will be the difference between the sale price and the issue price of the shares. This will probably be charged to income tax in the same way as a dividend. However, sometimes the shareholder will pay CGT instead on their profit.

Answer 69

Tax legislation includes two income tax reliefs for shareholders. The first is relevant when an individual borrows money to purchase ordinary shares in a close company that carries on a trade, or to lend money to a close company that carries on a trade. The second is income tax relief under the Enterprise Investment Scheme (EIS). It allows the individual to deduct from their income tax liability for the year a sum equal to 30% of the amount they have invested in the ordinary shares of qualifying unquoted companies. The individual can subscribe up to £2 million per tax year in the ordinary shares of qualifying unquoted companies. During the two years before and three years after the share purchase, the taxpayer must not be ‘connected with’ the company, meaning that the combined shareholdings of the taxpayer and their associates (including spouse and close family) must not exceed 30%.

Answer 70

Under the ITTOIA 2005, a lender (unless the lender is a company and therefore pays corporation tax) must pay income tax on interest received in relation to a loan. If the lender/ debenture-holder is a company, interest received is income, chargeable to corporation tax.

Answer 71

Employees, including directors, pay income tax on employment income, pensions income and Social Security income. Employment income includes ‘earnings’, which means all benefits received by the employee (or director) which derive from their office or employment as a reward for their services. This is whether they are paid by the employer or by a third party. It is not just salaries which are taxable; non- cash benefits, bonuses and tips are also taxable, but a personal gift would not be because this is not a reward for services. Other payments, such as certain lump sums received at the beginning and end of a person’s employment, are chargeable, as are compensation for unfair dismissal and damages for wrongful dismissal (although the dismissed employee receives the first £30,000 of the compensation or damages free of tax).

Answer 72

*it is necessary for the employee to live on the premises in order to perform their duties, for example, certain caretakers; or *the accommodation is provided so that the employee can perform their duties better and it is customary in that type of employment to have their accommodation provided, for example, a police officer.

Answer 73

If the employee benefits from special rate loans from the employer, there is no charge to tax when the total amount outstanding on any loans to that employee does not exceed £10,000 at any time in the tax year.

Answer 74

Directors and other employees are not taxed on the employer’s pension contributions if they are paying into an HMRC approved scheme.

Answer 75

Sometimes employers provide non- cash benefits relating to shares in the employer company. Benefits can include a gift of the shares, the sale of the shares at a favourable price or an option to purchase shares in the future. There are possible tax advantages for both parties in using the schemes, but the detail is outside the scope of this book.

Answer 76

An employee can deduct from their income expenditure which is incurred wholly, exclusively and necessarily in the performance of their duties. This is a stricter test than that for deductible expenditure when calculating trading income. The requirement for necessity means that it must be shown that the employee could not perform their duties without the expenditure in question. The strictness of the test means that few items of expenditure will satisfy it, so it is modified in relation to travelling expenses and pension contributions. The employee’s contributions to an occupational pension scheme or personal pension scheme are deductible and travelling expenses need not be wholly and exclusively incurred in the performance of their duties. This means that travelling from one place of work to another would generally be deductible, but travelling to work would not, because an employee only commences performing their duties when they arrive at work. The effect of the rules on deductible expenditure is that any of the employee’s expenses which are deductible will be subtracted from total income so that less of the employee’s income is charged to tax. The employee is not permitted to deduct any expenditure which has been reimbursed by their employer

Answer 77

A taxpayer who has income that is liable to tax is required by law to notify HMRC of this within six months of the end of the relevant tax year. The penalty for default is a fine.

Answer 78

There are different tax returns for different types of income and they are issued soon after 5 April each year. Taxpayers are encouraged by HMRC to file an online tax return. The online tax return and any payment must be filed by 31 January following the tax year to which the return relates. If the taxpayer wishes to file a paper return, the submission date is earlier: no later than 31 October. The taxpayer must make two payments on account towards the income tax due for any tax year, and a final balancing payment to meet any tax still outstanding. The payment dates are: * first payment on account: by 31 January in the tax year in question; * second payment on account: by 31 July after the end of the tax year; and * any balancing payment (calculated once the tax year is over) is due on the next 31 January.

Answer 79

HMRC charges interest on any tax unpaid at the due date for payment. This applies to both payments on account and balancing payments. There are also fixed penalties – fines – for late or non- payment. Taxpayers must maintain adequate records to support the information in their tax return, and there is a penalty for default. HMRC has the power to carry out audits and make enquiries to check whether the tax return is accurate. Taxpayers can appeal against assessments to the First- Tier Tribunal (Tax).

Answer 80

The GAAR applies to income tax and also applies to the other taxes covered in this book, namely capital gains tax, corporation tax, inheritance tax and National Insurance.

Answer 81

The Finance Act 2013 allows HMRC to make adjustments to a taxpayer’s liability to counteract the tax advantages arising from abusive tax arrangements (s 209). The burden is on HMRC to show that the arrangement is abusive.

Answer 82

Section 207 of the Finance Act 2013 defines ‘tax arrangement’ and ‘abusive’. An arrangement is a ‘tax arrangement’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangement. A tax arrangement is ‘abusive’ if entering into or carrying out the arrangement cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances. Those circumstances include: * whether the effect of the arrangement is consistent with the policy objectives of the tax legislation; * whether the means of achieving those results involves one or more contrived or abnormal steps; and * whether the arrangements are intended to exploit shortcomings or loopholes in the tax legislation. If the tax arrangements accord with established practice, and HMRC had indicated its acceptance of that practice before the arrangement was entered into, this might indicate that the arrangement is not abusive. The ‘cannot reasonably be regarded as a reasonable course of action’ element of the test for ‘abusive’ is known as the double reasonableness test, and it allows a wide range of potentially acceptable behaviour on the part of the taxpayer.

Answer 83

t will notify the taxpayer of why it considers that a tax advantage has arisen to the taxpayer from tax arrangements that are abusive, and set out the tax adjustments (or ‘counteraction’) that the officer considers ought to be taken. The adjustments must be ‘just and reasonable’, and can be made either by the taxpayer or HMRC. If counteraction is proposed by HMRC, the taxpayer is permitted to make written representations in their defence, and the matter will then be referred to the GAAR advisory panel (‘Panel’), who will issue their opinion by way of a notice to the taxpayer advisory panel (‘Panel’), who will issue their opinion by way of a notice to the taxpayer

Answer 84

* Any supply of goods or services made in the UK * Where it is a taxable supply * Made by a taxable person * In the course or furtherance of any business carried on by that person.

Answer 85

* At the end of any month if the value of their taxable supplies in the period of one year or less has exceeded the VAT registration threshold (the person must notify HMRC within 30 days of the end of that month and will be registered from the beginning of the second month after the taxable supplies went over the threshold); or * At any time if there are reasonable grounds for believing that the value of their taxable supplies in a period of 30 days then beginning will exceed the VAT registration threshold (the person must notify HMRC within the 30 days and will be registered from the beginning of the 30-day period).

Answer 86

The current registration threshold is £85,000.

Answer 87

Voluntary registration means that input VAT can be recovered (which is helpful to a business in reducing costs). However, it also means that the business will have to charge output VAT on supplies of goods and services to its customers (which may make the business less attractive to customers than its unregistered competitors).

Answer 88

A VAT registered person may apply to have the registration cancelled and accordingly cease to be ‘taxable’ (even though continuing to carry on the business) where the value of their future annual taxable supplies will not exceed the VAT deregistration threshold. The current deregistration threshold is £83,000.

Answer 89

The VAT chargeable by a business when making a supply of goods or services is called ‘output’ tax. The VAT relates to the ‘output’ of the business.

Answer 90

The VAT paid by a person on goods or services supplied to the person is called ‘input’ tax. The VAT relates to goods and services ‘bought in’ by the person.

Answer 91

The standard rate of VAT is currently 20%.

Answer 92

A price is deemed to be VAT inclusive unless the contract for the supply of goods or services states otherwise (if a contract is silent this is the case). In other words, the stated consideration paid for the supply includes any VAT payable.

Answer 93

* Standard rated * Reduced rated * Zero rated * * Exempt

Answer 94

* Generally, the standard rate of VAT is 20%. * A supply by a business will be standard rated unless it falls within one of the other three categories. * A VAT registered business charges VAT at standard rate on its outputs and recovers any VAT suffered on its inputs (unless it makes supplies which fall into the exempt category below).

Answer 95

* A very limited number of types of supply are charged at 5%. * These include supplies such as domestic heating and power, installation of mobility aids for the elderly, smoking cessation products and children’s car seats.

Answer 96

* Certain supplies are zero rated for public policy reasons. Zero rated supplies include food (within certain categories), sewerage and water, books/newspapers, talking books for the blind, new houses and the construction of new houses, public transport and children’s clothing. * Zero rated supplies still fall into the category of taxable supplies. This means that when a VAT registered business makes zero rated supplies it charges VAT at the rate of 0% on its outputs and it can recover any VAT suffered on its inputs. This is, therefore, a very favourable supply for a business to make.

Answer 97

* Supplies that are exempt include the provision of insurance, finance, education/health services and the sale of land and buildings (unless it comprises a new commercial building or the supplier of a commercial building has chosen to make the supply standard rated by waiving the exemption). * When a business makes exempt supplies it does not charge VAT on its supplies but equally it is not able to recover any VAT suffered on its inputs. This input tax is a cost to the business.

Answer 98

Businesses with turnover above the VAT registration threshold are required to keep their VAT records and make their VAT return online. Smaller businesses may choose to do so.

Answer 99

* A taxable business making a standard (or reduced) rate supply of goods or services to another taxable business must supply the customer/client with a VAT invoice within 30 days of the supply and keep a copy. HMRC carries out regular inspections of businesses to ensure that input and copy output invoices have been kept.

Answer 100

* Taxable businesses must submit a VAT Return online to HMRC every three months. The due date for payment is usually within one month and seven days after the end of the VAT period. The VAT return must show the total output tax charged on the making of taxable supplies during that VAT period less the total input tax attributable to the making of taxable supplies. At the same time the business must pay to HMRC the excess of the output tax charged over the input tax suffered. Businesses that normally pay more than £2.3 million a year to HMRC in VAT must make monthly payments on account and then pay the balance when submitting the quarterly VAT return.

Answer 101

* Retail schemes 1. There are special schemes for use by retailers who find it difficult to issue VAT invoices for the large number of supplies that they make direct to the public. * Cash accounting 1. Businesses whose annual turnover is less than £1,350,000 (excluding VAT and excluding exempt supplies) may opt to use a cash accounting scheme if they comply with certain conditions, ie output tax is accounted for when the invoice is paid rather than issued. However, input tax can only be recovered when the business pays the supplier. * Annual accounting 1. Businesses with an annual turnover not exceeding £1,350,000 (excluding VAT and excluding exempt supplies) may be permitted by HMRC to make an annual VAT return. The VAT is paid by instalments during the year (based on the previous year’s VAT liability) with the balance being paid when the VAT return is submitted. * Flat rate scheme 1. Where a VAT-registered business has a taxable annual turnover not exceeding £150,000 (excluding VAT) and a total annual turnover (ie to include the VAT charged to the business, and the value of any exempt and other non-taxable income) not exceeding £230,000 the business may elect that VAT be charged at a flat rate on turnover rather than on every single transaction. 2. There is however not normally any relief for input VAT. The flat rate will depend on the type of business and HMRC publishes a table setting out the applicable rates for the different types of business such as hairdressers and estate agents. Since 1 April 2017, there are anti-avoidance rules requiring ‘limited cost traders’ who use a flat rate scheme to account for VAT at a rate of 16.5%.

Answer 102

Any transfer of the whole property in goods is a supply of goods, and this will include intangible goods such as an interest in land or a supply of electricity. Anything done for consideration which is not a supply of goods is a supply of services. An example is the provision of legal advice.

Answer 103

A taxable person is a person who makes or intends to make taxable supplies and who is or is required to be registered under the Value Added Tax Act 1994. Currently, a person must be registered if the value of their taxable supplies in the preceding 12 months exceeded £85,000.

Answer 104

‘Business’ includes any trade, profession or vocation (s 94 Value Added Tax Act 1994). A supply in the course of business includes the disposal of a business or any of its assets.

Answer 105

Anyone registered for VAT must submit a return to HMRC and pay the VAT it owes within one month from the end of each quarter in respect of taxable supplies made in that quarter. They will pay the VAT they have charged (output tax), less any VAT they have paid in the course of their business (input tax). If input tax exceeds output tax, the person will receive a rebate. HMRC may allow or require a taxpayer to make monthly returns in certain circumstances.

Answer 106

* All income profits and * Chargeable gains * Of a body corporate * That arise in its accounting period.

Answer 107

sum of a company’s income profits and chargeable gains is known as ‘TTP’

Answer 108

Companies are assessed to corporation tax by reference to the financial year (1 April – 31 March).

Answer 109

The amount of TTP will determine the amount of corporation tax payable.

Answer 110

The rate of corporation tax for the 2022/2023 tax year was a flat rate of 19%. As of 1 April 2023, the main rate increased to 25% for companies with TTP greater than £250,000. If a company’s TTP is £50,000 or less the corporation tax rate is 19%. If a company’s TTP is over £50,000 and up to £250,000 a company may claim marginal relief which has a tapering effect on the tax rate.

Answer 111

Can deduct deductible expenditure, capital allowances, trading losses

Answer 112

Sales proceeds then deduct allowable expenditure, indexation allowance, capital/trading losses.

Answer 113

Basic rule that income receipts and expenditure arise through everyday trading whereas capital receipts and expenditure arise from one-off transactions

Answer 114

* Rental income; * Trading income; * Interest (eg from bank savings accounts); and * Dividend income.

Answer 115

These are receipts of an income nature which arise from the company’s business or trading activity (and which are not exempt receipts).

Answer 116

Expenditure by a company that the company is permitted to deduct from its income receipts, thereby reducing its overall tax bill.

Answer 117

* Be ‘[...] wholly and exclusively’ incurred for the purposes of the trade 1. eg expenditure which is partially by way of gift will not be deductible whereas if expenditure was needed to produce an item for sale such as raw materials it would be; 1. Can’t deduct expensives that have nothing to do with their business * Not be prohibited by statute 1. eg business entertainment expenditure (ie money spent by a company entertaining its clients) and 2. provisions made in accounts for doubtful debts (ie those that are not yet written off but there is uncertainty about whether they will be paid or not); and * Be of an income nature 1. where it has an element of recurrence eg rent, utility/energy costs, interest paid, wages, repairs. 1. SOMETHING THAT WILL REPEAT ITSELF

Answer 118

Capital expenditure is generally only deductible from capital receipts and not usually deductible to calculate income profits. In addition, depreciation (an accounting concept) is not an allowable deduction for tax purposes. Therefore, to allow businesses to spread the cost of certain capital assets over a period, ‘capital allowances’ are given which are capable of deduction against income receipts. Even though capital allowances relate to capital expenditure, the allowances are treated as a deduction for income purposes in calculating income profits. Capital allowances are, therefore, tax reliefs available on certain qualifying items of expenditure.

Answer 119

Qualifying expenditure includes expenditure incurred on plant and machinery. There are other special capital allowances that apply to, for example, long life assets, research and development expenditure and certain costs of construction and renovation of commercial buildings but these are outside the scope of these materials.

Answer 120

Capital allowances are also available to individuals and partnerships carrying on a trade as well as to companies.

Answer 121

Companies can deduct 18% of the value of plant and machinery (P&M) from their income receipts each year on a ‘reducing balance’ basis. This means that when a company claims capital allowances in one year on P&M, the value of the P&M for tax purposes is reduced by 18%. This value is referred to as the ‘tax written down value’ or ‘TWDV’ of the P&M. When the company claims capital allowances in the following year, it will claim 18% of the TWDV of the P&M after it has been reduced by the previous year’s capital allowances claim.

Answer 122

Another type of capital allowance is the annual investment allowance (AIA). This enables a company to deduct 100% of expenditure on P&M up to a specified amount. This is currently £1 million in each year. The normal capital allowance of 18% can be applied to the balance of any expenditure above that amount. Therefore, if a company has spent more than £1 million in 2023 on P&M, the company is entitled to deduct from income profits the AIA of £1 million plus 18% of the balance of the expenditure. After the first year, the allowance reverts back to 18% per annum on a reducing balance basis – THE 18% IS TAXED ONE THE REDUCED AMOUNT THE YEAR BEFORE.

Answer 123

In response to the Covid-19 pandemic, the government introduced a temporary capital allowance which allowed companies to claim 130% first-year relief on expenditure incurred from 1 April 2021 until 31 March 2023 on qualifying plant and machinery. The Super-deduction allowance did not apply to second-hand, used or leased assets. Unlike the AlA, there was no expenditure limit on the super-deduction allowance. We will not consider this further as it is no longer available.

Answer 124

* From the 1 April 2023 until 31 March 2026, a new capital allowance was introduced by the government. This allowance allows companies only to deduct 100% of the cost of new and unused plant and machinery. The amount deductible is uncapped. Full expensing is a first-year allowance meaning that a claim must be made in the period in which the expenditure on the plant and machinery is incurred.

Answer 125

* There is no annual exemption for companies. * Indexation allowance continues to be available for companies but is frozen up to 31 December 2017. * The substantial shareholding exemption, or SSE, is a relief that can exempt from corporation tax the whole of a chargeable gain that arises when a company disposes of shares in a trading company (or the holding company of a trading group) provided certain conditions are met. The disposing company must have held at least 10% of the ordinary share capital of the company whose shares are being disposed of for at least 12 consecutive months in the last six years. This relief is not available for individual sellers but companies cannot reduce the tax they pay on their chargeable gains by claiming business asset disposal relief or investors’ relief unlike individuals.

Answer 126

Available when you replace one qualifying assets with another – does not need to be replaced with the same type of asset This relief is a tax deferral mechanism, which can be used by individuals or companies to defer tax that would otherwise be due in respect of a gain arising when an asset is disposed of.

Answer 127

* Where a company disposes of a qualifying business asset and it (or a company in its group) buys another qualifying asset (referred to as the ‘replacement asset’); * Where a sole trader or partnership disposes of a qualifying business asset and buys another qualifying asset; * Where an individual, other than a sole trader, owns a business asset, sells that asset and buys another qualifying asset and both assets are used by either:  - A company which is the individual’s personal company; or  - A partnership of which the individual is a partner.

Answer 128

The gain from a disposal of a qualifying asset is carried forward and ‘rolled’ into the acquisition cost of a qualifying replacement asset. The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over. Therefore, tax is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased. It is possible to roll over gains indefinitely, provided sufficient qualifying replacement assets are bought within the time limits.

Answer 129

* Land and buildings; * Goodwill; * Fixed plant and machinery; * Ships and hovercraft; * Aircraft, and * Lloyd’s syndicate capacity.

Answer 130

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

Answer 131

Rollover relief can be restricted when not all of the sale proceeds of the original asset are used to acquire the new asset. The amount by which the sale proceeds of the original asset exceed the cost of the replacement asset is deducted from the chargeable gain before rollover relief and only the remaining amount of the gain can be rolled over. Essentially the gain to be rolled over is reduced by £1 for every £1 of the sale proceeds not reinvested.

Answer 132

If, when the cost of the replacement asset is deducted from the sale proceeds of the original asset, the resulting figure is greater than the amount of the gain, no rollover relief claim can be made.

Answer 133

* Dividends paid to UK companies are subject to corporation tax unless the dividend falls within one of a number of exemptions. However, the exemptions are very broad and the general effect of the rules is that all dividends are exempt from corporation tax unless certain anti- avoidance provisions apply. * Dividend income received by a company is therefore generally exempt from corporation tax and is therefore not included in that company’s TTP for tax purposes. A company pays a dividend out of profits that have already been taxed so the tax already paid satisfies the recipient company’s tax liability in respect of the dividend. * For the same reason, the dividend is not tax deductible for the company paying it.

Answer 134

Sometimes a company’s accounting year does not coincide with a financial year (FY). This complicates the corporation tax calculation if the rates of corporation tax for the FYs are different. Where this occurs, the TTP of the accounting period must be apportioned between FYs and the relevant proportions of TTP must be taxed at the applicable rates for the FYs.

Answer 135

* Current year profits o Trading losses can be set off against all other profits (ie so both income profits and chargeable gains) in the same accounting year. A claim must be made within two years after the end of the accounting period in which the trading loss arose.  If this is negative, see if you can offset this with the chargeable gains * Previous year profits o If trading losses cannot be used in whole or part against current profits (chargeable gains), a company can carry back any remaining trading losses against taxable profits (again both income and chargeable gains) from the previous accounting period. o The company must have been carrying on the same trade in both years to be able to carry the trading loss back to be set off against the previous year’s profits. o A claim must be made within 2 years after the end of the accounting period in which the trading loss arose. If a company ceases trading, any trading loss in the final 12 months of trading can be carried back and set against any profits made in the three years prior to the start of the final 12 months. * Future trading profits o If there are still trading losses unused they are automatically carried forward and set against all the company’s taxable total profits (so both income profits and chargeable gains) in the future. The company must continue to trade in the loss-making trade in the period in which the losses are used but use of the losses is not restricted to profits of the same trade. o The company may use (ie set off) carried forward losses against taxable profits of up to £5 million in each accounting period (the ‘deductions allowance’), provided that the deductions allowance has not already been used for the purposes of setting off carried forward capital losses against capital gains in that same period (see below). o Where, in any accounting period, the company has unrelieved taxable profits in excess of the available deductions allowance for that period, carried forward losses may be used to relieve a maximum of 50% of the unrelieved profits (this is referred to as ‘loss restriction’). Where the company is in a group of companies, the deductions allowance applies to the group as a whole, rather than each individual company within the group.  Note. The fact that the deductions allowance applies for the purposes of both carried forward trading losses and carried forward capital losses requires a company to make tactical decisions about how to allocate the allowance between the two in any particular accounting period. 4. Group relief * Where a group relief group exists, one company with a trading loss can surrender that loss to another profitable company in the group so that the surrendered loss can reduce or eliminate that company’s profits.

Answer 136

There are rules that prevent trading losses being carried forward or back where the company has been sold to a new owner and the nature of the trade of the company has substantially changed within five years after the sale. These rules were introduced to prevent buyers acquiring loss- making companies purely to make use of their losses.

Answer 137

Capital losses can generally only be set off against capital gains (also called chargeable gains). Capital losses can be set off against capital gains in the current year, but they cannot generally be carried back to a previous year (DIFFERENT FROM TRADING LOSSES). If there are capital losses unused in the current year, they can be carried forward and set against any capital gains in future accounting periods. The company may use carried forward capital losses against capital gains of up to the available Deductions Allowance in the relevant accounting period, provided that the deductions allowance has not already been used for the purposes of setting off carried forward trading losses against trading profits in that same period (see above in the trading losses subsection for the current cap/allowance). Where, in any accounting period, the company has unrelieved capital gains in excess of the available deductions allowance for that period, carried forward capital losses may be used to relieve a maximum of 50% of the unrelieved gains. Capital losses can be carried forward indefinitely within the company that made them but to crystallise the loss, a claim must be made to HMRC within four years from the end of the accounting period in which the loss arose.

Answer 138

* Company estimates its tax liability and pays HMRC within 9 months and one day of the end of the accounting period. * Company must file (electronically) a tax return within 12 months of the end of the accounting period to which it relates, together with its accounts. This will show how a company has calculated its tax liability. * Unless HMRC examine or make enquiries into the tax return to establish whether or not the correct tax has been paid, the company’s tax computation will usually be regarded as finalised 12 months after the filing date for the tax return. * Interest will accrue on any under or over-payments.

Answer 139

Companies with TTP of more than £1.5 million are required to pay their tax bills in four instalments over the course of the relevant accounting period and the next one.

Answer 140

Interest paid on business loans will generally be a deductible income expense ie a company can deduct the amount of the interest it has paid from its profits to reduce the TTP and thereby reduce the overall tax bill. Where a company (or group of companies) has more than £2 million of net interest expense in the UK any year, the amount of interest a company may deduct is restricted to, broadly, a maximum amount equal to 30% of its income receipts. This is known as the corporate interest restriction, or CIR.

Answer 141

Tax is deducted at source from certain payments (eg income tax under the PAYE system). This is known as ‘withholding tax’, the person making the payment (in the case of PAYE, the employer) has an obligation to withhold the tax payable by the person receiving payment and pay it over to HMRC. A company which pays interest may have an obligation to withhold tax from the payment, especially in an international context. However, a company which pays interest to another UK corporation tax paying company or a UK bank is allowed to make those payments without deducting tax from the payments (ie the company can make a gross payment of interest).

Answer 142

The close company tax regime is an example of anti-avoidance legislation as it prevents or discourages taxpayers from exploiting some of the tax benefits of incorporation.

Answer 143

* Five or fewer participators (shareholders); or * People who hold more than 50% of the shareholding * So if 5 or fewer together add up to 50% of the shareholding!!!!!!!!!!!! * Any number of participators who are also directors. * People who hold more than 50% of the shareholding

Answer 144

A participator is a person having a share or interest in capital or income of the company, for example, shareholders and some creditors.

Answer 145

Control means the ability to exercise control over the company’s affairs, normally by voting rights, or the possession of or entitlement to: * Issued share capital allowing the greater part (ie more than 50%) of income of the company if distributed; or * The greater part of assets of the company on winding up.

Answer 146

* Its shares are quoted on a recognised stock exchange; or * It is controlled by one or more non-close companies, and it could only be a close company by treating a non-close company as one of the five or fewer participators having control.

Answer 147

Associate means any close relative, ie spouse, parent (or remoter forebear), child (or remoter issue), brother or sister.

Answer 148

‘Loans’: All advances of credit are caught, except for: * A loan in the form of credit given by a company in respect of goods or services normally supplied by the company in the course of business where the duration of the credit does not exceed six months or the company’s normal limit; or * A loan made in the ordinary course of a company’s business which includes money lending; or * A loan to a borrower which, together with other outstanding loans made by the company to that borrower, does not exceed £15,000 in aggregate and the borrower works full time for the company and does not have a ‘material interest’ in the close company. The company must pay corporation tax to HMRC on the amount of the loan, calculated at the rate of income tax payable on dividends by higher rate taxpayers. The tax must be paid within nine months and one day after the end of the accounting period in which the loan is made. The company may claim a refund of the tax paid if the loan is repaid, satisfied, written off or waived.

Answer 149

This means indirect control of more than 5% of the ordinary share capital of the company or an entitlement on winding up of more than 5% of the assets available.

Answer 150

If the loan is written off or waived, the participator is deemed, for income tax purposes, to receive a dividend equal to the amount of the loan written off/waived. There is no tax effect for the participator if they pay back the loan in full.

Answer 151

The term ‘distribution’ has an extended meaning for close companies. It includes living accommodation and other benefits in kind provided (ie distributed) to participators (but not where such benefits are provided by reason of employment).

Answer 152

As only individuals pay IHT, it is possible to form a company and make a transfer through that company. There is anti-avoidance legislation, which means that a transfer of value by a close company results in the value of the gift being apportioned between its shareholders.

Answer 153

The transactions in securities rules may apply, broadly, to a transaction involving a close company, where the transaction gives any person a tax advantage by changing a receipt which would have been treated as income for tax purposes, into a capital receipt. For example, where a close company has substantial distributable profits and instead of being passed to shareholders as a dividend (and taxed as income), the close company is wound up and the profits passed to shareholders as a (capital) payment on a winding up, the transactions in securities rules may apply. Where they apply, the rules operate to counteract the tax advantage. When acting on a transaction which may fall within the transactions in securities rules, it may be advisable to apply to HMRC for advance clearance. Clearance would state that HMRC is satisfied that the provisions do not apply to the transaction. Your client’s specialist tax advisers will be responsible for assessing whether this would be advisable on a particular transaction.

Answer 154

Step 1: Calculate income profits Step 2: Calculate chargeable gains Step 3: Calculate total profits and apply any available reliefs against total profits Step 4: Calculate tax at the appropriate rates

Answer 155

Proceeds of disposal (or market value in the case of a gift or sale at an undervalue) LESS Costs of disposal = Net proceeds of disposal LESS Other allowable expenditure (initial and subsequent expenditure) = Gain (before indexation) or loss LESS Indexation allowance = Gain (after indexation)

Answer 156

you must add together the company’s income profits and capital gains. The resulting figure is the company’s total profits for the accounting period.

Answer 157

because it minimises risk, allows the business to run a number of different operations in a more organised way and streamlines management structure. Given that each company in a group of companies is a separate legal entity, each company will be charged to tax separately. However, tax legislation exists to try to ensure that operating as a group of companies is tax neutral; that is, it is no more or less advantageous from a tax point of view than trading as a single company.

Answer 158

This relief allows the company to transfer certain losses and expenses to another company within the same qualifying group. The transferee will then use the loss or expense to reduce its taxable profit. Both companies must fit the definition of a group in order for this relief to be used.