Corporation Tax And Capital Gains Tax Flashcards
What is direct tax?
imposed directly on the person or enterprise required to pay it e.g. income tax or corporation tax
What is indirect tax?
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.
What is good tax?
Equity and fairness Transparency and visibility Certainty Economy in collection Convenience of payment Simplicity Neutrality
What are the two types of direct taxes?
Trading income tax
Capital taxes
What is trading income?
Tax based on profits of entity
Adjustments made for income/expenses which are not tax deductible/allowable
Different deductions/add backs in different countries.
What is the standard pro forma for tax calculation?
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
What is accounting profit?
profit shown in financial statements before taxation
What is non-trading income?
income not related to main trading activity e.g. rental income, dividend income etc
What are disallowable expenses?
different from expenses allowed for accounting purposes. Include customer entertainment, gift aid payments (unless all profits gift aided), political donations
What is depreciation?
subjective and an accounting entry. Disallowed for tax purposes (includes profit/loss on disposal of asset)
What are capital allowances?
Tax allowance in place of depreciation. Standardised across the tax system
What are the allowances in capital allowance?
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.)
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
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
What is balancing allowance/ charge?
Replace ACCOUNTING profit on disposal with TAX profit ( balancing charge)
Replace ACCOUNTING loss on disposal with TAX loss (balancing allowance).
What is the balancing allowance / charge pro forma?
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).
What is the standard tax calculation pro forma?
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
What is the process to follow when calculating balancing charges / allowances?
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
What are trading losses?
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.
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?
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)
What is cessation of business?
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.
What is capital gains tax and its equation?
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
What is the pro forma for capital gains tax?
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
What are deductible cost of sales?
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
What is exempt from capital gains tax?
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
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
What are capital losses?
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
What are some group tax issues?
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.
What is double taxation?
Dividends do not have tax relief ie. paid out of post tax income and also taxed in shareholders’ hands (double taxation).
How can you deal with double taxation?
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.
What are 2 types of foreign tax?
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
What is transfer pricing?
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.
What is tax avoidance?
minimising tax liability within rule of law.
What is tax evasion?
illegal manipulation to avoid paying tax.
How can you minimise the risk of tax evasion?
Tax at source – reduce opportunity Simplify tax structure Audit Communication Cultural/social changes Punitive penalty structure
What are some indirect taxes?
Excise duties Property tax Wealth tax Consumption tax Single stage tax Multi-stage tax Cascade tax VAT
What is output and input VAT?
Output VAT – charged on sales by company
Input VAT – reclaimed by company on purchases
TAX BURDEN BORNE BY FINAL CONSUMER
How do you calculate VAT payable?
Vat payable = output tax – input tax
What are the rates of VAT on taxable suppliers?
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.
What is VAT registration?
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
What is employee taxation?
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.
