Business WS6 - Income Tax, CGT, Corporation Tax, VAT

Question 1

What is capital gains tax?

Answer 1

• Tax on an increase in an asset’s value during a period of ownership
• It is charged on a chargeable gain made by a chargeable person, on disposal of a chargeable asset in a tax year (6 April until 5 April following year)

Question 2

What is a chargeable person?

Answer 2

• Individuals (personal capacity or as a sole trader)
• PR’s 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)
• Trustees on the disposal of a chargeable asset from a trust fund

Question 3

What is a chargeable asset?

Answer 3

• All forms of real property e.g. land, debts, options
• Shares and incorporeal (intangible) property, e.g. leases.

Does not include
- Sterling (so disposal of cash in sterling) is not a CGT.

Question 4

What is meant by disposal?

Answer 4

• Includes a sale (whether at full value or undervalue) or a gift.
• Death gives rise to IHT and not CGT.

Question 5

What is meant by chargeable gain?

Answer 5

• Part of the gain that is liable to tax (after deduction and any reliefs or exemptions)

Question 6

When does the corporation financial tax year run?

Answer 6

From 1 April to 31 March (financial year).

Question 7

What does the coproration tax rate depend on?

Answer 7

The company’s taxable profits.

Question 8

What are the corporation tax rates as of April 2023?

Answer 8

• Companies with taxable profits of up to £50,000 - small profit rate of 19%
• Companies with taxable profits of more than £250,000 - main rate of 25% (on all of their taxable profits)
• Companies with taxable profits above £50,000 but not exceeding £250,000 are subject to the marginal rate, meaning that the corporation tax rate is tapered so that companies in this bracket are charged at an overall corporation tax rate between 19% and 25%

Question 9

How is the marginal rate calculated for companies whose profits are between 50,000 - 250,000?

Answer 9

• Charging taxable profits at a coproration tax of 25% and then reducing the resulting some by a fraction (which will be set by each financial year)
• 19% for the first 50,000 taxable profits and a rate of 26.5% to the balance.

Question 10

What is the difference between income and capital?

Answer 10

Income profits - generally recurring in nature e.g. rent or trading profits

Capital profit - one off items e.g. an office inreasing in value.

Question 11

When must a business prepare accounts for an accounting period?

Answer 11

A business must prepare accounts for accounting period – 12 months, to show the profit or loss made by its trade during those 12 months.

Question 12

How are trading profits or losses calculated?

Answer 12

1. Chargeable receipts
   Minus
2. Deductible expenditure
   Minus
3. Capital allowance

= TRADE PROFIT OR LOSS

Question 13

What are chargeable receipts?

Answer 13

Something of an income nature rather than capital.
* E.g. income from sales of goods (sales)
* Income from services (profit costs)

Question 14

What are deductible expenditure?

Answer 14

To be a deductible expense the sum must:
* Must not be prohibited by statute (e.g. client business entertainment expense - property party, leasing cars with emissions over a certain level)
* Be of income nature (recurring) and not of capital nature - e.g. goods purchased to sell at a profit (stock) and expenses such as rent, utility bills, business rates, salaries
* Wholly and exclusively for the purpose of trade - e.g. cost of eating out when away from home on business is not included. HMRC allows some expenses to be apportioned so that the part is deductible - e.g. covering utility bills when WFH

Question 15

What are examples of deductible expenses?

Answer 15

• Salaries (as long as they are not excessive given the services that the person carries out)
• Rent on commercial premises
• Utility bills
• Stock
• Contributions to an approved pension scheme for directors / employees
• Interest payments on borrowings

Question 16

What are capital allowances?

Answer 16

• Allow businesses to deduct some of the cost of plant and machinery from chargeable receipts to reduce tax liability.
• You can deduct 18% of the cost of most capital
• Type of material is usually plant and machinery
• Encourages investment as without them the cost of plant and machinery would not be deductible - unfair to a business and could discourage this.

Question 17

What is plant and machinery and by how much does it decrease in value (writing down allowance)?

Answer 17

• Assets used to help carry on a business
• Includes goods, chattles which they keep for permanent use in their business
• Equipment, building tools, computers etc.

WDA is 18%
- 18% of the total value of plant and machinery in each financial year will be deducted from the chargeable receipts
- Each year, P&M will be valued at 18% less

Example: Chiara (Islington) Properties Limited buys plant and machinery for 200k in the first year of trade. Disregarding the annual investment allowance (AIA) the written down value will be as follows:

Y1 : £200k (total value) x 18% = £36k WDA (to be deducted from chargeable receipts). **The plant and machinery now has a WDV of £164k **(200k-36k)

Y2 - £164k (WDV) x18% = £29,520 (WDA) (to be deducted from chargeble receipts). The plant machinery now has a WDV of £134,480k (164k - 29,520)

Question 18

What is the WDV?

Answer 18

Written down value.

Amount after 18% has been reduced.

Question 19

What is meant by pooling?

Answer 19

• Written down allowance eac year is calulcated on the value of all the assets pooled together.
• Makes it much simpler when assets are disposed of individually as the proceeds are deducted from the total value of the pool
• If on sale of all the assets, the sale proce exceeds the WDV, the balance will be included in the chargeable receipt.

Example:
Cliff a sole trader owns plant and machinery, with a pooled WDV of £200k at the start of the account period. He sells an item of machinery for £40k - what will the WDV be?

Pooled WDV = £200k
MINUS
Disposal = £40k
= £140k

WDA of 18% = £28,800
WDV of £131,200 (£160k minus £28,800)

Question 20

What is annual investment allowance (AIA)?

This is the second type of capital allowance.

Answer 20

• Under the AIA, businesses can deduct the entire cost of newly purchased plant and machinery in that account period from chargeable receipts.
• This is subject to £1m cap per year
• Group companies have one AIA between them.
• If the cost of new machinery exceeds the AIA, writing down allowance can be claimed on the balance over the cap.
• This is relevant for assets which are second-hand or refurbished rather than brand new

Example: Dragana a sole trader, has a pool of assets with a written down value of £500k. In the next financial year, she buys new machinery for £2m. What capital allowances will be available?

• The WDV of th existing pool will be £410k (18% of £500k = £90k)
• The full AIA will be £1m (i.e. the cost of new machinery, up to the limit of £1m)
• The written down value of the remaining £1m (i.e. the cost of new machinery over the 1m limit) will be £820k (18% of £1m = £180k)

Total capital allowance = £1m AIA plus WDA of £270k (i.e. £90k plus £180k)

The WDV for the pool in the next financial year will be £1.23m (i.e. £410k plus £820k) x 18% = £1,008,600 (WDA of £221,400 i.e. 18% of £1.23m)

Question 21

What is full expensing capital allowance?

Answer 21

• Allows company to deduct 100% of the cost of newlyplant and machinery purchased in that particular accounting period from chargeable receipts
• Amount deductible is uncapped
• On disposal of the asset, the balance charge is applied equal to 100% of the disposal value where a full expensing has been claimed
  *Has to be brand new asset

Question 22

What are the different reliefs for trading losses?

Answer 22

1. Start up loss relief / early trade loss relief
2. Carry across / carry back one year relief - trade loss relief against general income
3. Carry forward relief
4. Terminal loss relief
5. Carry forward relief on incorporation of business

Question 23

What is start-up loss relief?

Answer 23

• Losses made during the first four years of trade may be set off against against any other income in the 3 tax years before the loss
• Can be used against any other income
• Involves a claim back of tax paid (e.g. from previous job or business
• Set against earlier years first
• Time limit - must be claimed on or before the first anniversary of 31 January following the end of the loss making tax year (e.g. 31 January 2025 if the loss occured in 2022/2023)
• Cap applies (the greater of £50k or 25% of the taxpayers income from other sources in the tax year in relation to which the relief is claimed)

Question 24

What is carry accross / carry back relief?

Answer 24

The amount of the loss may be deducted from any other income taxable in that tax year (carry accross) and/or the preceding tax year (carry back)
* Can be used againsy any other income
* Carry accross can be used against chargeable gains in the same tax year if the loss is not absorbed
* Time limit - must be claimed on or before the first anniversary of the 31 January following the end of the loss-making tax year

Question 25

What is carry forrward relief?

Answer 25

• The amount of loss may be deducted from future income profits of the same trade
• Set against earlier years first
• Can only be used against trading profits from the same trade
• Can be carried forward indefinitely
• Taxpayer is required to notify HMRC no more than 4 years after the end of the loss-making tax year
• No cap applies

Question 26

What is carry-back of terminal loss relief?

Answer 26

• A loss made during the last year of trade may be set off against trading profits connected to the same trade in the final year and in the 3 years prior to the final tax year
• Set against later years first
• Can only be used against income profits of the same trade
• Time limit - claim must be made no more than 4 years after the end of the loss-making tax year
• Involves claiming a rebate on tax paid (i.e. repayment of tax already paid)
• No cap applies

Question 27

What is carry forward relief on incorporation of business?

Answer 27

• Allows trading losses to be set off against any income received from the company (e.g. dividends or directors fees) when an unincorporated busniess is transferred to a company wholly or mainly in return for shares (shares must be at least 80% of the consideration)
• Can be carried forward indefinitely
• Time limit - claim must be made no more than 4 years after the end of the loss-making year
• No cap applies.

Question 28

What are the cap on reliefs?

Answer 28

1) Start up relief
2) Carry across / carry back relief

Are subject to a cap of the greater of £50,000 or 25% of the taxpayers income in the tax year in relation to which the relief is claimed.

The cap doesn’t usually have a signficant impact because the cap only applies to income from sources other than the trade which produced the loss

Question 29

What is VAT?

Answer 29

• VAT is charged on any supply of goods or services made in the United Kingdom
• Where it is a taxable supply
• Made by a taxable person
• In the course of futherance of any business carried on by him

Question 30

What are taxable supplies?

Answer 30

A supply is taxable unless it is exempt.

Question 31

What are the exempt VAT supplies?

Answer 31

1) Residential land
2) Health services
3) Education (well not private schools)
4) Insurance
5) Postal services

Question 32

Who is a taxable person?

Answer 32

• A person who makes or intends to make taxable supplies and who is or is required to be registered under the VAT Act 1994
• Currently, a person must be registered if the value of their taxable supplies in the preceding 12 months exceeded £90k

Question 33

What is the course of a business?

Answer 33

• Includes any trade, profession or vocation.
• A supply in the course of business includes the disposal of a business or any of its assets

Question 34

What is the value of supply?

Answer 34

• VAT is charged on the value of supply of goods and services
• VAT is added on top
• A price is deemed to include VAT unless stated otherways.

Question 35

What is the difference between input tax and output tax?

Answer 35

• Business charge VAT on the value of goods and services provided (output tax)
• It can deduct any VAT paid on the goods and services it uses (input tax) and must account to HMRC for any difference.
• 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

Example - Sertab is a sole trader, she buys goods for £100 plus VAT and sells them for £200 plus VAT. What will be her VAT liability?

Setab has paid input tax of £20 (20% x £100) which she can deduct from the output tax received of £40 (20% x £200).

The total due to HMRC will be £20 (£40-£20)

Question 36

When must VAT tax be paid to HMRC?

Answer 36

Anyone registered for VAT must submit a return to HMRC and pay the VAT it owes within
* 1 month from the end of each quarter in respect of supplies made in that quarter
* Will pay the VAT they have charged (output tax) minus any VAT they have paid in the course of the business (input tax)

Question 37

What are zero-rated and exempt supplies?

Answer 37

• Customer doesn’t have to pay VAT on this tax
• A person who makes zero-rated supplies (e.g. books, non-catering food and water) can reclaim the VAT they have paid from HMRC
• Reduced rate supplies 5% = domestic fuel
• A person who makes only exemp supplies cannot register and will not be able to reclaim any VAT.

Question 38

Who must register fot VAT?

Answer 38

• Anyone making taxable supplies for more than £90,000 in any 12 month period must regsiter and charge VAT
• Those making less can choose to register but not obliged to.
• Only those registered for VAT can reclaim input tax they have paid, so sometimes a businesses will voluntary register so that they can claim input tax
• They will have to work out whether being able to reclaim input tax is worth losing the advantage of being able to undercut VAT -registered rivals when competing for business.

Question 39

What is the difference between exempt supplies and zero-rated supplies?

Answer 39

• A person who only makes exempt supplies - cannot register for VAT
• A person who makes only zero rated supplies can register for VAT and recover input tax paid.

Question 40

What are tax invoices?

Answer 40

• A person making a taxable supply, must provide a tax invoice showing information such as VAT number, value of supply and rate of tax charge
• The person charging VAT must have tax invoices in respect of all the input tax they are reclaiming.

Question 41

What are the penalities for failing to adhere to the legislation in respect of VAT?

Answer 41

• Repayment with interest
• Unlimited fine and imprisonment for up to 7 years for tax evaison
• Fixed financial penalities for failing to keep records
• The ‘default surcharge’ or 15% of the tax for persistent default in filing returns