For test Flashcards
(7 cards)
Self-employed v Employed
Contract of service:
- Indicates employment
- Will be taxed under employment income rule as an employee
Contract for service:
- Self employed
- Taxed under trading income rules
- Usually results in lower income tax and national insurance bills, taxpayers, and those that hire them, often try to achieve trading status if they can
Parts of the contract may include:
- Who has control in the relationship
- Who provides the equipment
- Whether further work must be accepted by the taxpayer
- Whether the employer must provide further work
- Who is responsible for providing other staff to help the taxpayer?
- Who bears the financial risk involved in the contract?
- Who benefits from efficient management of the contract
- Whether the taxpayer can choose when to work on the contract
Deductible expenses
Wholly and exclusively test: any expenditure must be wholly and exclusively incurred for the purpose if the trade
Remoteness: incurred that expenditure in order to undertake the business you are in
Duality: related to the business but only the business portion
VAT
Taxable person: a trader, have to register for VAT once their annual turnover of a taxable supply reaches a registration threshold of £85k each year.
Taxable supply: includes all forms of business supply made in return for consideration (i.e. for money) unless it is explicitly exempted by law.
Registration for VAT: rolling 12-month basis and not a function of when your financial year end - therefore it is crucial to keep an eye on it.
A trader liable for registration when:
- at the end of any month the value of the goods supplied to date in a 12 month period > £85k
- At any time if there are reasonable grounds for believing the value of taxable supplies in the next 30 days will exceed £ 85k
The trader should charge VAT as soon as his turnover exceed £85k but should not issue VAT invoices until he receives formal registration.
Failing to register in time:
- Trader will still be liable to account for VAT
- If they can’t recover from customers, they would have to pay themselves.
Voluntary registration
- Input tax suffered can be reclaimed
- The trader may appear to be a larger business than actually are
- VAT registered customers can reclaim output tax charged to them.
- However, non-VAT registered customers will have to bear VAT costs.
Deregistration:
- May be voluntary or compulsory
- Compulsory de-registered if cease to make taxable supplies
- Voluntary de-register if can demonstrate level of supplies in the next 12 months will not exceed deregistration limit > £83k
Disaggregating
- There is an incentive for businesses to stay below £85,000 if their customers are not registered for tax
For example: A pub and function rooms (in the same building) would be classed as 2 businesses. HMRC want to prevent this
- If businesses are ‘closely bound’, this would not be allowed
Eg: share the same kitchen, same suppliers, same waiting staff
‘Closely bound’ refers to:
1. Financial links
2. Economic links
3. Organisation links
HMRC would classify this as being an artificial disaggregation of businesses
Legislation exists to prevent avoidance of registration by having >1 business (disaggregation) using a combined turnover rule
Trading income v employment income
- Income Tax and NICs
- Self-employed individuals pay Class 2 and Class 4 NICs.
- Employed individuals have their income tax and NICs deducted automatically through the PAYE system by their employer.
- Tax Allowances and Deductions:
- Self-employed individuals can deduct allowable business expenses from their trading profits before calculating their tax liability. Eligible for certain tax reliefs and allowances, such as the AIA.
- Employed individuals have fewer opportunities for tax deductions, as their expenses are typically limited.
- Pension Contributions:
- Self-employed individuals can make pension contributions and receive tax relief on these contributions.
- Employed individuals may have the option to contribute to a workplace pension scheme, with contributions deducted from their pre-tax income.
- Employment Benefits:
- Employed individuals may receive benefits such as company cars.
- Self-employed individuals do not typically receive employment benefits.
Tax planning opportunities available to the self-employed include:
- Maximizing allowable expenses: Keeping detailed records of business expenses.
- Pension contributions: Making contributions to a personal pension scheme.
- Income splitting: Employing family members in the business and paying them a salary or dividends.
Tax planning opportunities available to the employed include:
- Salary sacrifice schemes: In exchange part of their salary for non-cash benefits, such as childcare vouchers.
- Maximizing tax-free allowances: such as for savings interest.
- Flexible working arrangements: Reducing commuting costs and improve work-life balance.
Implications for the sustainability of the UK economy. For example:
- Encouraging self-employment can foster innovation, contributing to economic growth and job creation.
- However, disparities in tax treatment may create inequities in the tax system and affect government revenue.
International tax
- Tax Planning involves strategies to minimize their tax liability within the boundaries of the law.
- Tax Avoidance is the use of legal methods and loopholes in tax laws to minimize tax liability. It often involves exploiting ambiguities in tax laws to achieve a tax advantage that was not intended by lawmakers.
- Tax Evasion is the illegal act of deliberately conceal information to avoid paying taxes owed. It can result in severe penalties, including fines and imprisonment.
Multinational companies minimizing tax liabilities, here are three common approaches:
- Transfer Pricing: Multinational companies may manipulate transfer prices on goods, services, or intellectual property transferred between their subsidiaries in different countries to shift profits to territories with lower tax rates. Arm’s length price rule - easier to manipulate hard to priced goods (e.g R&D and management services). These companies can use the Advanced Pricing Agreement option to avoid double taxing.
- Thin Capitalisation and Debt Shifting: In the UK, interest expense is deductible but not dividends. Providing a financing incentive towards debt, shifting profit from high to low tax jurisdictions. Interest expense will be deductible in the US and pay tax on the interest in the UK (which has a lower corporation tax rate)
Can inflate interest rate charged to get more profits out of US and into the UK
- Diverted Profit: Where a company avoids UK Tax by avoiding having a Permanent Establishment in the UK and/or makes payments that lack ‘economic substance’.
To combat tax avoidance schemes and ensure that every company pays its fair share of tax, the UK government has introduced various provisions and measures, including:
- Transfer Pricing laws in place. Transfers between connected companies must occur at the equivalent ‘arm’s length price’. They can adjust the Transfer price and charge tax accordingly if not occurred (subjected to penalties)
- Thin Capitalisation Rules: restricting amount of interest expense (between group companies) that will be allowed as a deduction for tax purposes.
- Diverted Profit Tax: the company will be liable for UK tax of 25% on the profit that have been diverted.
Treaties: cover how the 2 countries will treat double taxation if it arises
Residence of UK and Domicile
Resident of the UK – taxed on
Worldwide income and capital gains.
Non-resident of the UK
taxed only on UK source income (but generally not capital gains).
Resident of but not Domiciled in the UK – taxed on foreign income only if remitted to the UK
If also domiciled in UK taxed on
- Worldwide income and capital gains
Domicile claim another country is your permanent home
VAT Returns
- registered traders submit VAT return, with any VAT payable, within 1 month of end of tax period
- tax period is normally 3 months long and ends on last day of month
- periods used throughout year depends on trade you are in (HMRC chooses)