Corporation Tax

Question 1

Describe the circumstances under which a person must register for VAT.

Answer 1

A person must register for VAT if their taxable supplies exceed the VAT registration threshold of £90,000 in a year, or if they believe their taxable supplies will exceed this threshold within the next 30 days.

Question 2

How long does a person have to notify HMRC after exceeding the VAT registration threshold?

Answer 2

A person must notify HMRC within 30 days of the end of the month in which their taxable supplies exceeded the VAT registration threshold.

Question 3

Explain the implications of voluntary VAT registration for a business.

Answer 3

Voluntary VAT registration allows a business to recover input VAT, reducing costs, but it also requires the business to charge output VAT on supplies, which may make it less attractive to customers compared to unregistered competitors.

Question 4

What is output VAT?

Answer 4

VAT that a business charges on goods to customers. - VAT put out to the public

Question 5

What is ‘input VAT’?

Answer 5

Input VAT is the VAT that a business pays on its purchases which can be recovered - VAT company puts in to purchases alongside asking price

Question 6

When will a person be registered for VAT if they exceed the threshold?

Answer 6

A person will be registered for VAT from the beginning of the second month after their taxable supplies exceed the threshold. (Aka when 30 day declaration period is up)

Question 7

Describe the conditions under which a VAT registered person can apply for deregistration.

Answer 7

A VAT registered person may apply for deregistration if the value of their future annual taxable supplies will not exceed the VAT deregistration threshold.

Question 8

What is the current VAT deregistration threshold in the UK?

Answer 8

The current VAT deregistration threshold is £88,000.

Question 9

How is a price considered in relation to VAT unless stated otherwise?

Answer 9

A price is deemed to be VAT inclusive unless the contract for the supply of goods or services states otherwise.

Question 10

How can a seller manage input VAT incurred?

Answer 10

A seller can deduct any input VAT that it has incurred, so it only needs to pay HMRC the difference.

Question 11

Define output tax in the context of VAT.

Answer 11

Output tax is the VAT chargeable by a business when making a supply of goods or services, relating to the business’s output.

Question 12

What does a seller keep when the price is expressed as exclusive of VAT?

Answer 12

When the price is expressed as exclusive of VAT, the seller keeps the VAT-exclusive stated price.

Question 13

Describe input tax and its relevance to VAT.

Answer 13

Input tax is the VAT paid by a person on goods or services supplied to them, relating to the goods and services they have purchased.

Question 14

How is the tax rate calculated in relation to inclusive VAT?

Answer 14

The tax rate is calculated as 20 divided by (100 + tax rate), which results in 1/6 for the VAT fraction.

Question 15

How does a VAT registered business manage input and output tax?

Answer 15

A VAT registered business offsets input tax it has suffered against output tax it has charged customers, only accounting for the difference to HMRC.

Question 16

Calculate the VAT paid by Arthur when selling a tree for £200 +VAT.

Answer 16

Arthur sells the tree for £200. The VAT at 20% is £40, so the total amount paid by Boris is £240.

Question 17

Summarize the relationship between input tax and output tax.

Answer 17

Input tax is the VAT on purchases, while output tax is the VAT on sales; businesses offset input tax against output tax and report the difference.

Question 18

Describe the transactions involving Arthur and Boris.

Answer 18

Arthur charged Boris £200 + VAT.

Question 19

Define the VAT fraction used to calculate the VAT element of a VAT inclusive price.

Answer 19

The VAT fraction used to calculate the VAT element of a VAT inclusive price is currently 1/6.

Question 20

Explain what Reduced Rated supply means in VAT terms.

Answer 20

Reduced Rated supply refers to goods and services that are subject to a lower rate of VAT than the standard rate.

Question 21

What does Zero Rated supply indicate in VAT classification?

Answer 21

Zero Rated supply indicates that goods and services are taxable at a rate of 0%, meaning no VAT is charged.

Question 22

How is Exempt supply characterized in relation to VAT?

Answer 22

Exempt supply refers to goods and services that are not subject to VAT at all.

Question 23

Define the reduced rate of VAT.

Answer 23

The reduced rate of VAT is 5% and applies to a very limited number of types of supply.

Question 24

List some supplies that are charged at the reduced rate of VAT.

Answer 24

Supplies charged at the reduced rate of VAT include domestic heating and power, installation of mobility aids for the elderly, stop smoking products, and children’s car seats.

Question 25

What happens to VAT on inputs for businesses making exempt supplies?

Answer 25

Businesses making exempt supplies cannot recover VAT suffered on their inputs.

Question 26

How many categories of VAT rates are mentioned in the content?

Answer 26

The content mentions four categories of VAT rates.

Question 27

Describe zero rated supplies and their significance for businesses.

Answer 27

Zero rated supplies are certain goods and services that are taxed at a VAT rate of 0%. They include items like food, sewerage, water, books, public transport, and children’s clothing. For businesses, this is favorable as they can charge no VAT on sales but can recover VAT on inputs.

Question 28

How do zero rated supplies differ from exempt supplies in terms of VAT recovery?

Answer 28

Zero rated supplies allow businesses to charge VAT at 0% and recover VAT on inputs, while exempt supplies do not allow businesses to charge VAT and they cannot recover VAT on inputs, making it a cost.

Question 29

Define exempt supplies and provide examples.

Answer 29

Exempt supplies are goods and services that are not subject to VAT, such as insurance, finance, education, health services, and the sale of land and buildings (unless specific conditions apply).

Question 30

What are the implications for a business making exempt supplies?

Answer 30

A business making exempt supplies does not charge VAT on its sales and cannot recover any VAT on its inputs, which can increase costs.

Question 31

Explain the public policy reasons behind zero rating certain supplies.

Answer 31

Zero rating certain supplies is often done for public policy reasons to make essential goods and services more affordable, such as food and education, thereby supporting social welfare.

Question 32

How does the VAT treatment of new houses differ from that of existing buildings?

Answer 32

New houses are considered zero rated supplies, allowing VAT recovery on inputs, while existing buildings typically fall under exempt supplies unless specific conditions are met.

Question 33

Describe the VAT registration threshold for businesses.

Answer 33

Businesses with turnover above the VAT registration threshold are required to keep their VAT records and make their VAT return online.

Question 34

What is required from taxable businesses regarding VAT invoices?

Answer 34

A taxable business making a standard or reduced rate supply must provide a VAT invoice to the customer within 30 days of the supply and keep a copy.

Question 35

How often must taxable businesses submit a VAT Return to HMRC?

Answer 35

Taxable businesses must submit a VAT Return online to HMRC every three months.

Question 36

When is the due date for submitting a VAT Return?

Answer 36

The due date for submitting a VAT Return is usually within one month and seven days after the end of the VAT period.

Question 37

What is the payment requirement for businesses paying more than £2.3 million a year in VAT?

Answer 37

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.

Question 38

What is the significance of keeping VAT records for businesses?

Answer 38

Keeping VAT records is essential for compliance with tax regulations and for accurate reporting of VAT returns to HMRC.

Question 39

Describe the Flat Rate Scheme for VAT-registered businesses.

Answer 39

The Flat Rate Scheme allows VAT-registered businesses with a taxable annual turnover not exceeding £150,000 (excluding VAT) and a total annual turnover not exceeding £230,000 to charge VAT at a flat rate on turnover instead of on each transaction.

Question 40

How does the Flat Rate Scheme affect input VAT relief?

Answer 40

Under the Flat Rate Scheme, there is generally no relief for input VAT.

Question 41

What are Retail Schemes in the context of VAT?

Answer 41

Retail Schemes are special schemes for retailers who find it difficult to issue VAT invoices for the large number of supplies made directly to the public.

Question 42

Define Cash Accounting in VAT.

Answer 42

Cash Accounting allows businesses with an annual turnover of less than £1,350,000 to account for output tax when the invoice is paid rather than when it is issued.

Question 43

How does input tax recovery work under Cash Accounting?

Answer 43

Under Cash Accounting, input tax can only be recovered when the business pays the supplier.

Question 44

What is the annual turnover threshold for businesses to use the Annual Accounting scheme?

Answer 44

The annual turnover threshold for the Annual Accounting scheme is not exceeding £1,350,000, excluding VAT and exempt supplies.

Question 45

Explain the payment process under the Annual Accounting scheme.

Answer 45

Under the Annual Accounting scheme, VAT is paid by instalments during the year based on the previous year’s VAT liability, with the balance paid when the VAT Return is submitted.

Question 46

How does the Annual Accounting scheme benefit businesses?

Answer 46

The Annual Accounting scheme benefits businesses by allowing them to make an annual VAT Return and pay VAT in instalments throughout the year.

Question 47

Define tax deductible expenditure.

Answer 47

Tax deductible expenditure refers to the costs incurred by a company that can be deducted from its income receipts, thereby reducing its overall tax bill.

Question 48

How is Corporation Tax assessed for companies?

Answer 48

Companies are assessed to corporation tax by reference to the financial year, which runs from 1 April to 31 March.

Question 49

What is the main rate of Corporation Tax for the 2024/2025 tax year for companies with TTP greater than £250,000?

Answer 49

The main rate of Corporation Tax for the 2024/2025 tax year is 25% for companies with TTP greater than £250,000.

Question 50

What Corporation Tax rate applies to a company with TTP of £50,000 or less?

Answer 50

A company with TTP of £50,000 or less is subject to a Corporation Tax rate of 19%.

Question 51

How does marginal relief affect Corporation Tax for companies with TTP between £50,000 and £250,000?

Answer 51

Companies with TTP over £50,000 and up to £250,000 may claim marginal relief, which has a tapering effect on the tax rate.

Question 52

How is dividend income treated for corporation tax purposes in the UK?

Answer 52

Dividend income received by a company is generally exempt from corporation tax and is not included in that company’s taxable total profits (TTP) for tax purposes.

Question 53

Explain why dividends are not tax deductible for the company paying them.

Answer 53

Dividends are not tax deductible for the company paying them because they are paid out of profits that have already been taxed, and the tax already paid satisfies the recipient company’s tax liability.

Question 54

Give an example of an expenditure that would not be tax deductible.

Answer 54

An example of a non-deductible expenditure is business entertainment expenses, as they are often prohibited by statute.

Question 55

What types of expenditures are generally considered deductible?

Answer 55

Generally deductible expenditures include costs like rent, interest paid, wages, and repairs, as they are of an income nature and recur.

Question 56

Explain why partially gifted expenditures are not tax deductible.

Answer 56

Partially gifted expenditures are not tax deductible because they do not meet the requirement of being wholly and exclusively incurred for trade purposes.

Question 57

What is the significance of the term ‘wholly and exclusively’ in tax deductible expenditures?

Answer 57

The term ‘wholly and exclusively’ signifies that the expenditure must be entirely for the purpose of the trade to qualify for tax deduction.

Question 58

Describe the tax treatment of interest payments on business loans.

Answer 58

Interest paid on business loans is generally a deductible income expense, allowing companies to reduce their taxable profits and overall tax bill.

Question 59

Define corporate interest restriction (CIR).

Answer 59

Corporate interest restriction (CIR) is a rule that limits the amount of interest a company can deduct for tax purposes when its net interest expense exceeds £2 million.

Question 60

How does the corporate interest restriction (CIR) affect companies with high net interest expenses?

Answer 60

For companies with more than £2 million of net interest expense in the UK, the amount of interest they can deduct is restricted to a maximum of 30% of their income receipts.

Question 61

Is depreciation deductible for tax purposes?.

Answer 61

Depreciation is not an allowable deduction for tax purposes.

Question 62

Identify what qualifies as expenditure for capital allowances.

Answer 62

Qualifying expenditure includes expenditure incurred on plant and machinery.

Question 63

Who can benefit from capital allowances?

Answer 63

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

Question 64

Describe the process of claiming capital allowances on plant and machinery.

Answer 64

Companies can deduct 18% of the value of plant and machinery from their income receipts each year on a reducing balance basis, which reduces the tax written down value (TWDV) for future claims.

Question 65

Describe the Annual Investment Allowance (AIA).

Answer 65

The AIA allows a company or unincorporated business to deduct 100% of expenditure on new, used, or refurbished plant and machinery (P&M) up to a specified amount, currently £1 million per year.

Question 66

How does the AIA affect capital allowances for expenditures over £1 million?

Answer 66

For expenditures over £1 million, the company can deduct the AIA of £1 million plus 18% of the balance of the expenditure.

Question 67

Explain the indexation allowance for companies.

Answer 67

The indexation allowance continues to be available for companies but is frozen up to 31 December 2017.

Question 68

Define the Substantial Shareholding Exemption (SSE).

Answer 68

The SSE is a relief that can exempt from corporation tax the whole of a chargeable gain when a company disposes of shares in a trading company, provided certain conditions are met.

Question 69

What is the minimum shareholding requirement for a company to qualify for the Substantial Shareholding Exemption?

Answer 69

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.

Question 70

How does the Substantial Shareholding Exemption differ for companies and individuals?

Answer 70

The SSE is available for companies but not for individual sellers.

Question 71

Can companies claim Business Asset Disposal Relief or Investors’ Relief to reduce tax on chargeable gains?

Answer 71

No, companies cannot reduce the tax they pay on their chargeable gains by claiming Business Asset Disposal Relief or Investors’ Relief.

Question 72

Discuss the flexibility of the replacement asset in the tax deferral mechanism.

Answer 72

The replacement asset does not need to be the same type of asset as the one that was disposed of, providing flexibility in asset replacement.

Question 73

What types of assets qualify for Rollover Relief?

Answer 73

Qualifying assets include land and buildings, goodwill, fixed plant and machinery, ships and hovercraft, aircraft, and Lloyd’s syndicate capacity.

Question 74

Describe the timing requirements for purchasing a replacement asset after selling an old asset.

Answer 74

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

Question 75

Explain the relationship between the sale proceeds and the cost of the new asset in determining Rollover Relief eligibility.

Answer 75

The relationship is that if the sale proceeds from the original asset minus the cost of the new asset results in a figure greater than the chargeable gain, Rollover Relief cannot be claimed.

Question 76

Define the term ‘TTP’ in the context of corporation tax.

Answer 76

TTP stands for Total Taxable Profit, which must be apportioned between financial years when the accounting period straddles different financial years.

Question 77

What should be considered regarding leap years when calculating the days for tax purposes?

Answer 77

Leap years should be considered because they have 29 days in February, which can affect the total day count for tax calculations.

Question 78

Explain the process for carrying back trading losses to previous year profits.

Answer 78

If trading losses cannot be used against current profits, a company can carry back any remaining losses against taxable profits of the previous accounting period, provided the same trade was carried on in both years. A claim must be made within 2 years after the end of the accounting period in which the loss arose.

Question 79

What happens to trading losses if a company ceases trading?

Answer 79

If a company ceases trading, any trading loss in the final 12 months can be carried back and set against any profits made in the three years prior to the start of the final 12 months.

Question 80

How long does a company have to make a claim for trading loss relief?

Answer 80

A company must make a claim for trading loss relief within two years after the end of the accounting period in which the loss arose.

Question 81

Define the Deductions Allowance in the context of carried forward losses.

Answer 81

The Deductions Allowance allows a company to set off carried forward losses against taxable profits of up to £5 million in each accounting period.

Question 82

What happens if a company has unrelieved taxable profits exceeding the Deductions Allowance?

Answer 82

If unrelieved taxable profits exceed the Deductions Allowance, carried forward losses may be used to relieve a maximum of 50% of the unrelieved profits, known as ‘loss restriction’.

Question 83

Describe the concept of group relief in the context of trading losses.

Answer 83

Group relief allows one company within a group that has a trading loss to surrender that loss to another profitable company in the same group, thereby reducing or eliminating the profitable company’s taxable profits.

Question 84

How do anti-avoidance rules affect the use of trading losses after a company sale?

Answer 84

Anti-avoidance rules prevent trading losses from being carried forward or back if the company has been sold to a new owner and the nature of its trade has substantially changed within five years of the sale.

Question 85

Describe the rules for allowable expenditure related to chargeable disposals by companies.

Answer 85

The same rules apply as for individuals, allowing deductions for initial expenditure, subsequent expenditure (such as costs of defending title and enhancement expenditure), and costs of disposal.

Question 86

Describe how capital losses can be utilized in relation to capital gains.

Answer 86

Capital losses can generally only be set off against capital gains in the current year, and they cannot usually be carried back to a previous year.

Question 87

How can unused capital losses be managed in future accounting periods?

Answer 87

Unused capital losses can be carried forward and set against any capital gains in future accounting periods.

Question 88

What is the maximum percentage of unrelieved capital gains that can be relieved by carried forward capital losses?

Answer 88

Carried forward capital losses may be used to relieve a maximum of 50% of the unrelieved capital gains in any accounting period.

Question 89

Explain the time limit for claiming capital losses to HMRC.

Answer 89

A claim must be made to HMRC within four years from the end of the accounting period in which the capital loss arose to crystallise the loss.

Question 90

How long can capital losses be carried forward within a company?

Answer 90

Capital losses can be carried forward indefinitely within the company that made them.

Question 91

Describe the procedure for companies with a TTP of £1,500,000 or less regarding tax payment.

Answer 91

Companies must estimate their tax liability and pay HMRC within 9 months and one day of the end of the accounting period.

Question 92

What is the deadline for filing a tax return for companies with a TTP of £1,500,000 or less?

Answer 92

The tax return must be filed electronically within 12 months of the end of the accounting period.

Question 93

How does interest apply to tax payments for companies with a TTP of £1,500,000 or less?

Answer 93

Interest will accrue on any under or over-payments.

Question 94

What is the payment procedure for companies with a TTP of more than £1,500,000?

Answer 94

Companies are required to pay their tax bills in four installments over the course of the relevant accounting period and the next one.

Question 95

How does the mechanics of corporation tax self-assessment work for companies with a TTP of more than £1,500,000?

Answer 95

Companies must make tax payments in four installments based on their estimated tax liability over the relevant accounting periods.

Question 96

Describe the condition under which Rollover Relief cannot be claimed.

Answer 96

Rollover Relief cannot be applied if the difference between the sale proceeds and the cost of the replacement asset is greater than the gain amount.

Question 97

How is the chargeable gain calculated before Rollover Relief?

Answer 97

The chargeable gain before Rollover Relief is calculated by taking the sale proceeds of the qualifying asset, subtracting the acquisition cost, and then subtracting the indexation allowance.

Question 98

How is a close company defined?

Answer 98

A company is defined as a close company if it is under the control of five or fewer participators, or any number of participators who are also directors.

Question 99

Define a ‘Participator’ in the context of a company.

Answer 99

A ‘Participator’ is a person having a share or interest in the capital or income of the company, such as shareholders and some creditors.

Question 100

Describe what ‘Control’ means in relation to a company.

Answer 100

‘Control’ refers to the ability to exercise control over the company’s affairs, typically through voting rights or by possessing or being entitled to issued share capital that allows for more than 50% of the company’s income if distributed, or the greater part of the company’s assets upon winding up.

Question 101

What is the significance of having more than 50% of issued share capital in a company?

Answer 101

Having more than 50% of issued share capital allows a participator to control the greater part of the company’s income if it is distributed.

Question 102

List the two conditions under which a company is considered a close company.

Answer 102

A company is considered a close company if it is under the control of five or fewer participators, or any number of participators who are also directors.

Question 103

Describe the exclusions from the definition of a close company.

Answer 103

A company will not be considered a close company if its shares are quoted on a recognized stock exchange or if it is controlled by one or more non-close companies.

Question 104

How does being a wholly-owned subsidiary of a non-close company affect a company’s status as a close company?

Answer 104

A wholly-owned subsidiary of a non-close company will not be subject to the close company tax regime.

Question 105

Explain the conditions under which a loan to a borrower is exempt from being classified as an advance of credit.

Answer 105

A loan to a borrower is exempt if, along with other outstanding loans from the company, it does not exceed £15,000, the borrower works full-time for the company, and the borrower does not have a material interest in the company.

Question 106

How is ‘Material Interest’ defined in relation to a company?

Answer 106

Material Interest is defined as having indirect control of more than 5% of the ordinary share capital of the company or an entitlement to more than 5% of the assets available upon winding up.

Question 107

What is the role of ‘nominees’ in assessing control of a close company?

Answer 107

A ‘nominee’ is a person who owns property on behalf another, and their rights and entitlements must be considered when assessing a person’s control.

Question 108

Describe the tax obligation of a company regarding loans made to participators.

Answer 108

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. This tax must be paid within nine months and one day after the end of the accounting period in which the loan is made.

Question 109

How can a company recover tax paid on a loan to a participator?

Answer 109

The company may claim a refund of the tax paid if the loan is repaid, satisfied, written off, or waived.

Question 110

Define the tax implications for a participator if a loan is written off or waived.

Answer 110

If the loan is written off or waived, the participator is deemed to receive a dividend equal to the amount of the loan written off or waived for income tax purposes.

Question 111

What is the tax effect for a participator who repays a loan in full?

Answer 111

There is no tax effect for the participator if he pays back the loan in full.

Question 112

How do Transactions in Securities rules affect close companies?

Answer 112

These rules counteract tax advantages that arise when a close company distributes profits as capital payments instead of dividends, which are taxed as income.

Question 113

Define the tax implications of winding up a close company.

Answer 113

Winding up a close company and distributing profits as capital payments may trigger the Transactions in Securities rules, which aim to prevent tax advantages.

Question 114

How does the close company tax regime function as anti-avoidance legislation?

Answer 114

The close company tax regime prevents or discourages taxpayers from exploiting some of the tax benefits of incorporation.

Question 115

Explain the purpose of the close company tax regime.

Answer 115

The purpose of the close company tax regime is to prevent tax avoidance by discouraging the exploitation of tax benefits associated with incorporation.