Corporation Tax And Capital Gains Tax

Question 1

What is direct tax?

Answer 1

imposed directly on the person or enterprise required to pay it e.g. income tax or corporation tax

Question 2

What is indirect tax?

Answer 2

tax imposed on one part of the economy (or expense) with the intention that the tax burden is passed to another. e.g. VAT. Not paid directly to government.

Question 3

What is good tax?

Answer 3

Equity and fairness
Transparency and visibility
Certainty
Economy in collection
Convenience of payment
Simplicity
Neutrality

Question 4

What are the two types of direct taxes?

Answer 4

Trading income tax

Capital taxes

Question 5

What is trading income?

Answer 5

Tax based on profits of entity

Adjustments made for income/expenses which are not tax deductible/allowable

Different deductions/add backs in different countries.

Question 6

What is the standard pro forma for tax calculation?

Answer 6

Accounting profit X
Less: non trade income (X)
Add: disallowable expenses X
Add: Accounting depreciation X
Less: Tax depreciation (X)
+/- Accounting loss/(profit) on disposal X/(X)
Add/(less) Tax profit -BC/(loss-BA) X/(X)
Taxable profit X

Question 7

What is accounting profit?

Answer 7

profit shown in financial statements before taxation

Question 8

What is non-trading income?

Answer 8

income not related to main trading activity e.g. rental income, dividend income etc

Question 9

What are disallowable expenses?

Answer 9

different from expenses allowed for accounting purposes. Include customer entertainment, gift aid payments (unless all profits gift aided), political donations

Question 10

What is depreciation?

Answer 10

subjective and an accounting entry. Disallowed for tax purposes (includes profit/loss on disposal of asset)

Question 11

What are capital allowances?

Answer 11

Tax allowance in place of depreciation. Standardised across the tax system

Question 12

What are the allowances in capital allowance?

Answer 12

Full allowance in year of acquisition.

No allowance in year of disposal.

Year of disposal allowance = balancing allowance or charge (replaces loss or profit on disposal.)

Question 13

Split tax rates different tax years
As in previous example but assume tax rates changed and were:
01/04/14 – 31/3/15 = 24%
01/04/15 – 31/3/16 = 21%
Taxable profit is £47,400
Nb-UK tax year runs from 1 April to 31 March

Recalculate the tax due

Answer 13

Taxable profit from previous example = £47,400
Tax to 30/9/15 would be:
1/10/14 – 31/3/15 = (47,400/12 x 6) x 24% = £5,688

1/4/15 – 30/9/15 = (47,400/12 x 6) x 21%
= £4,977

Total tax payable = £10,665

Question 14

What is balancing allowance/ charge?

Answer 14

Replace ACCOUNTING profit on disposal with TAX profit ( balancing charge)
Replace ACCOUNTING loss on disposal with TAX loss (balancing allowance).

Question 15

What is the balancing allowance / charge pro forma?

Answer 15

Proceeds of sale X
Less: Tax written down value (TWDV) (X)
Balancing charge/(allowance) X/(X)

Proceeds > TWDV = balancing charge (tax profit);
Proceeds < TWDV = balancing allowance (tax loss).

Question 16

What is the standard tax calculation pro forma?

Answer 16

Accounting profit X
Less: non trade income (X)
Add: disallowable expenses X
Add: Accounting depreciation X
Less: Tax depreciation (X)
+/-) Accounting loss/(profit) on disposal X/(X)
Add/(less) Tax profit -BC/(loss-BA) X/(X)
Taxable profit X

Question 17

What is the process to follow when calculating balancing charges / allowances?

Answer 17

Calculate accounting depreciation
Calculate profit/ loss on disposal
Calculate tax allowance. Note – no allowance in year of disposal
Calculate balancing allowance/charge
Fill in proforma

Question 18

What are trading losses?

Answer 18

Company may offset a loss against profits in previous/future periods or transfer loss to another company in the group.
Carry forward to use against FIRST AVAILABLE TRADING PROFIT OF SAME TRADE.
No limit on number of years carrying forward.
UK specific – carry back 12 months only or surrender to group company.
Some countries allow losses to be offset against capital gains in same period.

Question 19

In country Z, trading losses in any year can be carried back one year and any unrelieved losses can be carried forward.
Bell and Co had the following taxable profits:
Year 1 £20,000
Year 2 (£35,000)
Year 3 £14,000
Year 4 £18,000

What are Bell and Co’s taxable profits in each
year?

Answer 19

Year 1 Nil trading profit (£20,000 loss from Yr 2 offset against previous year’s profit )
Year 2 Nil due to £35,000 loss incurred
Year 3 Nil trading profit (£14,000 loss brought forward from Yr 2 & offset in Yr 3 )
Year 4 Taxable profit £17,000 (£1,000
remaining loss brought forward from Yr 2 & offset in Yr 4)

Question 20

What is cessation of business?

Answer 20

UK – Terminal loss relief

Carry back three years

Each country has different rules

Carry back LIFO. Use maximum in each year

Additional rules regarding losses/profits in years previous to year of cessation

Any remainder – surrendered and lost.

Question 21

What is capital gains tax and its equation?

Answer 21

Tax on gains made on disposal of investments and other NON-CURRENT assets

Equation:
Proceeds from sale – historic cost of asset.
Indexation allowance to reflect the RPI (retail price index).
Effect of allowance = reduce gain on which tax is payable

Question 22

What is the pro forma for capital gains tax?

Answer 22

Proceeds of sale X
Less: costs to sell (X)
Net proceeds X
Less: historic/original cost (X)
Less: costs to buy (X)
Less: enhancement costs (X)
Less: indexation allowance (X)
Chargeable gain X

Question 23

What are deductible cost of sales?

Answer 23

Original cost of purchasing the asset

Cost to buy the assets i.e. legal fees, estate agent fees

Costs to sell the asset (as above)

Enhancement costs i.e. extension or something that enhances the value of the asset

Question 24

What is exempt from capital gains tax?

Answer 24

Qualifying corporate bonds
Private motor vehicles
Chattels sold for less than £6,000
Wasting chattels – an asset with a predictable life of less than 50 yrs (e.g. boats and animals) 
a chattel is a tangible movable asset.

Certain disposals exempt from CGT
Gifts to charities or certain assets such as works of art
Gifts to museums or government institutions

Question 25

A company bought an asset for £50,000 on 1/1/13. The asset was sold for £75,000 on 31/8/15.

The indexation factor from January 2013 to August 2015 is 18%.

Capital gains are taxed at 22%.

What is the capital tax payable (rounded to the nearest £)
Sales proceeds 75,000
Less: cost (50,000)
Less: indexation allowance (50,000 x 18%) (9,000)
Chargeable gain 16,000

Tax payable = 16,000 x 22% = £3,520

Question 26

What are capital losses?

Answer 26

Kept separate from trading activities in most countries.

Capital losses can be:
offset against chargeable gains in same period ;
carried forward against future gains
carried back against previous capital gains.
depending on country rules

ROLLOVER RELIEF – may postpone payment of tax on gain if it reinvests all proceeds in a replacement asset. Gain will then be calculated when the replacement is sold

Question 27

What are some group tax issues?

Answer 27

Tax consolidation:
Allows trading losses to be surrendered between different companies

Resident companies

UK – restrictions on loss periods

Capital losses not usually transferable. However, can transfer ownership of capital asset between group on nil gain/nil loss basis.

Question 28

What is double taxation?

Answer 28

Dividends do not have tax relief ie. paid out of post tax income and also taxed in shareholders’ hands (double taxation).

Question 29

How can you deal with double taxation?

Answer 29

Classical system: shareholder and company independent. Double tax levied.
Imputation system. Shareholder receives tax credit = corporate income tax paid by company on dividends.
Partial imputation. Tax credit for shareholder as above but only on part of underlying corporate tax
Split rate. Distinguish between distributed (dividends) and retained profits and charges lower rate on distributed profits.

Question 30

What are 2 types of foreign tax?

Answer 30

Withholding tax- tax deducted at source on items such as interest, dividends, royalties, capital gains etc.
May be taxed in overseas country and in country of receipt (double taxation)

(2) Underlying tax- tax on dividends received from overseas subsidiaries.
Dividends taxed in overseas subsidiary country and in country of receipt (double taxation).
Underlying tax:
tax on profits x gross dividend
Profit after tax

Question 31

What is transfer pricing?

Answer 31

Applies when goods are sold intercompany at favourable prices or intercompany loans are made a favourable rates.
An attempt to avoid tax by moving profit to a country with lower tax rate.
Rules for transfer pricing:
Goods and services- adjustment in corporate tax for entity gaining advantage in order to reflect arms-length profit.
Loans- if higher finance is provided or higher interest is charged than commercial terms, interest on excess finance or excess rate is not allowable for tax purposes.

Question 32

What is tax avoidance?

Answer 32

minimising tax liability within rule of law.

Question 33

What is tax evasion?

Answer 33

illegal manipulation to avoid paying tax.

Question 34

How can you minimise the risk of tax evasion?

Answer 34

Tax at source – reduce opportunity
Simplify tax structure
Audit
Communication
Cultural/social changes
Punitive penalty structure

Question 35

What are some indirect taxes?

Answer 35

Excise duties
Property tax
Wealth tax
Consumption tax
Single stage tax
Multi-stage tax
Cascade tax
VAT

Question 36

What is output and input VAT?

Answer 36

Output VAT – charged on sales by company

Input VAT – reclaimed by company on purchases

TAX BURDEN BORNE BY FINAL CONSUMER

Question 37

How do you calculate VAT payable?

Answer 37

Vat payable = output tax – input tax

Question 38

What are the rates of VAT on taxable suppliers?

Answer 38

Standard rate
Higher rate
Zero rate
Exempt

Businesses selling zero rate goods/services can reclaim input VAT.
Businesses selling exempt sales cannot reclaim input VAT.

Question 39

What is VAT registration?

Answer 39

VAT registration where a taxable person is making a taxable supply
Taxable person = individual/company
Taxable supply = zero/standard rated
Registration once taxable turnover reaches a certain limit
Once registered need to :
Issue VAT invoices
Keep VAT records
Charge VAT
Complete quarterly return to HMRC

Question 40

What is employee taxation?

Answer 40

Taxed on earnings through income tax system.
Earnings = salaries, bonuses, commissions, benefits in kind.
Benefits in kind = non-cash benefits.
Employees deduct expenses “wholly, exclusively and necessarily”
National insurance also payable – employer and employee.
Personal allowance – each year amount not subject to tax.