Fundamental Points Flashcards
What are the 3 methods of operating a business?
Sole trader
Partnership
Limited company
What is income?
Receipt that is expected to recur
Eg trading income.
What is a gain?
A one off profit on the disposal of an asset
What must individuals in sole traders and partnerships pay?
Income tax on trading income
Class 2 and class 4 national insurance
Capital gains tax on disposal of assets
What does statute law consist of?
Acts of parliament and statutory instruments
What is an act of parliament?
Tax legislation created directly by the government that is amended annually by the finance act for the year.
What are statutory instruments?
Detailed rules created on behalf of the government and civil servant s to amend or alter an act without going through parliament.
What is tax evasion and what are the penalties?
When people or business deliberately do not declare and account for the taxes that they owe. It can lead to fines and imprisonment
What is tax avoidance?
Bending the rules of the tax system to try and gain a tax advantage.
What are the steps for reporting tax evasion?
Accountant must ask the client to correct the misstatement.
If client refuses to act, the accountant must cease working for the client.
Then inform HMRC, and MLRO for their company (NCA of self employed)
Do not ‘tip off’ the client to the report
What does the tax computation start with?
Adjustment of profits.
What is the trading allowance for a sole trader?
£1000
Does a sole trader always use the £1000 allowance?
If expenses are less than 1000, they should use the allowance.
If greater than £1000, they should use actual expenses to adjust profit.
What do you add back to net profit before tax?
Depreciation
Goods taken by owner for use
Items charged in accounts but not deductible from trading profit
Income taxable as trading profits what have not been included in accounts
What should be deducted from net profit before tax?
Profit / loss of disposal of fixed assets
Capital allowances
Expenses that have not been charged in the accounts but are deductible from trading profits.
Is capital expenditure allowable?
No
Is revenue expenditure allowable?
Yes - usually
Is repairs to maintain the condition of an asset allowable?
Yes
Are repairs to improve an asset allowable?
No
Is bringing an asset up to date with what would be considered industry norm allowable or not?
Yes
Are repairs to make the asset useable allowable?
No
Are repairs to merely improve the appearance allowable?
Yes
Are doubtful debts allowable?
Only irrecoverable debts incurred wholly and exclusively for the purposes of trade
Are increased and decreases in general provisions allowable?
No an adjustment must be made.
Are specific provisions allowable?
Yes
Are fines and penalties allowable for disallowed?
Disallowed except for parking fines in the employees car while the employee is on business.
Are the costs of registering trade marks and Patents allowable?
Yes
Are incidental costs of obtaining loan finance allowable?
Yes
Is depreciation / amortisation allowable?
No
Are salaries / interest paid to the partner or sole trader allowable?
No
Are private expenses for sole trader / partner allowable?
No
Are irrecoverable debts and specific provisions allowable?
Yes
Are general provisions allowable?
No
Are parent and copyright royalties allowable?
Yea
Is staff entertaining allowable?
Yes
Is not staff entertaining allowable?
No
Are gifts to employees allowable?
Yes
Are gifts to customers allowable?
Only if the 3 below criteria are met:
Cost no more than 50 per diner per year
Carey as conspicuous advert for the business
Are not food, drink, tobacco or vouchers exchangeable for such goods
Are professional / trade subscriptions allowable?
Yes
Are policial donations allowable?
No
Are legal and professional charges that directly relate to trade allowable!
Yes
Are legal and professional
Fees relating to capital items, leases or breaches of laws and regs allowable?
No
Is specialist constultancy work allowable?
No
Is interest in trade loans allowable?
Yes
Is interest on overdue tax allowable?
No
Are the costs of secondments to charities and education allowable?
Yes
Is expenditure incurred in the 7 yrs prior to commencement of trade allowable?
Yes
are removal expenses to new business premises allowable?
Yes
Are travel expenses allowable?
Yes but NOT COMMUTING.
Are redundancy payments allowable?
Yes limit is 3x statutory amount
What goes into the general pool / main pool?
Most expenditure in plant and machinery including cars with CO2 emissions of 50g/kg or less
What’s the maximum AIA limit for a 12 month period?
£1million
Is AIA available on cars?
NO.
Is AIA pro-rated?
Yes
What is a FYA?
Special allowances given in addition to the AIA
What is FYA available on?
Zero emission cars
What % is FYA?
100% ALWAYS
Do you time apportion / prorate FYAs?
NO
What is the writing down allowance % on the main pool?
18%
Do you prorate the written down allowance?
Yes
N/12 x 18%
What is the small pool limit for a 12 month period?
£1000 instead of the 18% a year
What value are disposals valued at?
Lower of:
Cost at purchase
Proceeds from sale
Which schemes can be pro rated?
AIA and WDA
Is FYA ever adjusted?
No
What schemes can be used when a business ceases to trade?
None. No AIA, no FYA and no WDAs
Upon cessation, what happens if assets are not sold?
Deemed to be disposed of on the final day of trading for their market value.
What is a balancing allowance?
When there is a positive balance left in the pool after removing qualifying expenditure. Basically a CA
What is a balancing charge?
When the balance remaining in the pool is negative, the balancing charge increases taxable trading profits (opposite of CAs)
What assets are not included in the general pool?
Cars with CO2 emissions greater than 50g/kg
Assets not wholly used for business purposes in a unincorporated business
What pool do cars with emissions in excess of 50g/kg?
Special rate pool of 6%
How to treat a private use asset?
Asset put in a separate column
TWDV is reduced by the full amount of AIA / FYA / WDA calculated as normal
A balancing allowance or charge will arise at date of disposal.
ONLY the business proportion is transferred to the allowances column.
Is there ever any provide use adjustments on companies?
No Never
Do you calculate private use assets for employees?
NO, sole traders or partners only.
What are the enhanced capital allowances?
Available to companies only
Available only on new plant and machinery
Not available on cars
What rate is enhanced capital allowances for companies paid at?
130%
When did SBA start applying to buildings?
29th October 2018
What does SBA cover?
Expenditure on the construction of the building or structure itself but NOT the cost of land, planning permission fees or taxes
What can be considered for SBA?
Offices
Retail and wholesale premises
Factories
Warehouses
Walls
Bridges
Tunnels
NOT residential
What is the % for SBA on what basis?
3% straight line over a 33.3 year period
How to treat SBA?
Each building or structure treated separately
Can be prorated where needed
No balancing adjustments on sale - adjustment made to chargeable gain or loss arising by adding the SBA claimed to the sellers disposal proceeds.
How to calculate tax for the first fiscal year?
From the date the business commenced trading to the next April
What is taxed If the period is 12 months?
CYB - the 12 months period ending in the tax year
What is taxed if the length of the second year accounting period is less than 12 months?
First 12 months of trade
What is taxed if the length of the accounting period ending in the second year is greater than 12 months?
Tax the last 12 months of trade
What do you tax if there is no accounting period?
Actual basis, from 6 April to 5 April
What are overlap profits?
Where profits are taxed 2x due to the falling of the accounting period.
When do you get the refund of overlap profits?
When a business ceases trading
When can there be no overlap profits?
When the business uses a 5 April year end
How to we tax the penultimate year before cessation?
Apply CYB - like a normal year.
How do we tax the final year?
Profit not yet taxed minus overlap profits
How to tax if if business strayed trading and ceased trading in the same year?
Basis period is the whole lifespan of the trade
How to tax if the final year is the second year?
The basic period runs from 6 April at the start of the second year to the date of cessation
When is a good year end for cash flows?
Near the beginning of the tax year as you can earn profits but not pay tax on them for a longer period of time
How to divide taxable profits between partners?
FIRST - allocate any salaries and interest on capital between the partners.
SECOND - share the residue of profits between partners in the agreed ratio
What to do when there is a change in the profit sharing agreement?
Apportion the profit before and after the change.
Do before first and then after
How is a new partner taxed?
Using the opening year rules
How is an ongoing partner taxed?
Using the current year basis
How is a retiring partner taxed?
Using the closing year rules
What are the 2 types of national insurance?
Class 2
Class 4
What are the 3 differences between taxation of companies vs sole traders/ partnerships
Companies are entitled to the super deductions (130%)
NEVER any adjustments for private use in companies
Companies can deal with long period of account
What is interest recievable accounted and taxed as?
NTL-R income
What can you deduct a trading loan from?
Trading income
If the loan is for non trading purposes, what do you deduct it from?
Deductible from investment income to give a net investment income figure to be used in computing taxable total profits.
How is NTL-R accounted for?
On an accruals basis
On what basis is property income accounted for?
Accruals basis
How are QCDs accounted for?
On a PAID basis
If QCD has been deducted in calculating trading profit, what to do in tax computation?
Must be added back
What to do with the amount actually paid when computing taxable total profits?
Deducted from total profits
How to deal with dividends income in the tax computation?
They are EXEMPT.
If they have been included in net profit in the accounts, they will need to be deducted to get total taxable.
How to deal with dividends paid?
Add back
How to sort tax for a period > 12 months?
Split into 2 - one 12 month period, and the remainder
How do you apportion trading income?
Apportion on a time basis.
How to apportion capital allowances and balancing charges?
Calculated separately for each period. AIA and WDAs need to be apportioned.
How is property income apportioned?
Over the period the property is actually rented out eg on an accruals basis
How is NTL-R ( investment income) apportioned?
On an accruals basis
How are qualifying charitable donations allocated?
In the accounting period in which they are paid.
How are chargeable gains allocated to a period?
With reference to the date that the asset was sold
What goes in the tax computation for TTF if there is a trading loss?
Nil / 0
How is loss dealt with in a partnership?
Loss split between partners
What are the 3 choices on how to relieve losses?
Carry forward of losses against future trading income
Losses set against total income in the tax year of the loss - CY
Losses set against total income for the prior year - PY
When are losses available for set off against total income?
PY and / or CY
No partial claim - maximum loss must be set off in that year
What are the rules with losses if within first 4 rules of trading?
Can be carried back for 3 tax years for the full amount - but it has to cover all of them not just 1 or 2 or only part of the loss. FIFO basis
What are the rules of terminal loss relief?
May be relieved by loss relief if total income in the normal way.
Allowas relief against profits in the heat of cessation and the 3 PRECEDING years on a LIFO Basis
Loss is increased by overlap profits
Basics of current year loss relief against total profits?
Trading loss may be relieved against total profits including gains before QCDs (charity) in the period in which the loss arose
Basics of carry back loss relief?
Can be carried back before QCDs of the last 12 months.
Carry back can only be made after a current year claim.
Have to carry back the maximum amount , any loss remaining after carry back MUST be carried forward and offset
What about a loss when a company ceases trading?
Carry forward relief no longer available?
Carry back period is extended to 3 months for the losses in the 12 months prior to the cease of trade - LIFO basis
How are capital losses set against for companies?
Can only be set against capital gains. FIRSTLY against current period gains, SECOND against future gains.
NO CARRY BACKS.
What to consider when making a choice against loss method of offset?
The rate at which relief will be obtained
How quickly relief will be obtained
The extent to which the personal allowance may be wasted
When do we take market value for disposals?
When it’s a gift OR knowingly sold at less value than market value
What costs are deducted in the chargeable Gains proforma?
Incidental costs of disposal
Allowable costs
Enhancement expenditure
When did the indexation allowance stop?
December 2017
What is the indexation allowance?
Cost X factor (given in exam)
Can indexation allowance allow / create an allowable loss?
No
When can an indexed gain be rolled over?
Where it arises on the disposal of a business asset if another business asset is acquired
What are the conditions for an indexed gain being rolled over?
Old and new asset must be used in qualifying trade
Old and new asset must both be qualifying assets
What categories must both old new and assets fall into?
Land and buildings used for the purpose of trade
Fixed plant and machinery
What are the timing limits for the ROR?
One year before replacements or 3 years after the date of disposal
What if not all profits are re invested?
Any proceeds not re invested are deducted from the gain
What are the matching rules for companies?
- Aquisitions on same day as disposal
- Acquisitions in prior 9 days - FIFO basis
- Shares from FA1985 pool
When are bonus shares treated as being acquired?
On the date of the original acquisition of shares given rise to the bonus issue
Is indexation required on business shares?
No - because there is no additional cost.
Are rights issues an operative event?
Yes
Do you index capital gains tax for individuals?
No.
What is the annual exempt amount for capital gains tax?
12300
How to calculate the capital gains?
Gains - CY capital losses - annual exempt amount
What rate is CGT payable at?
10% for basic rate bands
20% for any excess above the BRB
What % is BADR?
Taxed at 10%
What should you offset AE against non eligible or eligible?
Non eligible
What do you tax first, ineligible gains or eligible gains?
Eligible gains - so not often does any BR remain for the excess ineligible gains
What are the 3 conditions for BADR?
Disposal of whole / part of an unincorporated business
Disposal of assets used in an unincorporated business that has ceased trading
Disposal of shares / securities
What are the rules surrounding the disposal of an unincorporated business?
Has been owned for at least 2 years
What are the rules surrounding the disposal of assets used in the business that has ceased trading?
2 years of ownership
Assets must be sold within 3 years of cessation
What are the rules surrounding the disposal of shares?
F - five %
T - trading company
T - two years ownership
W - work there
What is the lifetime limit of BADR?
£1 million
What value is a gift deemed to be transferred at?
Market value
What value does the recipient acquire the asset for?
Market value - deferred gain
What are the conditions for gifts?
Assets used in a trade by the donor or by a donors company
Shares in an unlisted company (any %)
Shares in the donors company - must be greater than or = to 5%
What does the disposal of goodwill generate?
Deemed sold at MV, if internally generated, base cost will be 0.
Goodwill gives rise to a chargeable (capital) gain.
What tax does the sale of land and building generate?
A capital / chargeable gain / (loss)
What tax arises on the sale of plant and machinery?
If sold at a profit, any gain is not usually taxable.
If sold at a loss, no capital loss available.
Capital allowance purposes: MV will be deducted and then balancing adjustments will arise.
What tax arises on the disposal of net current assets / stocks?
If the assets MV exceeds the cost, this will increase trading profit.
If the assets MV is less than their cost, this will reduce trading profit
What happens in the event of the disposal of a company?
Company will be transferred to new ownership with no real tax consequences. The individual will sell their shares in the business and will be taxed via CGT for this.
What are some badges of trade?
Subject matter
Ownership
Frequency of transactions
Improvement expenditure
Reason for sale
Motive for profit
Existence of similar trading interests
Source of finance
Method of acquisition
What liability does a ST / Partnership have?
Personal liability - risky
What liability does a company have?
Separate legal entity - protected by limited liability.
Do STs / Partnership have to post on companies house?
No - more private
How are the tax on profits charged for ST / Partnerships?
Income tax
Class 2 and class 4 NIC
How are profits taxed on companies?
Corporation tax at 19%
Class 1 NICs employer
Tax payment period for ST / partnerships?
Two payments - 31st Jan and 31 July
Tax payment period for companies?
9 months and one day after the end of the accounting period
How can you extract profits from a ST / partnership?
Drawings or salaries
How do you extract profit from a company?
Directors salary or dividends.
What’s the best way for a ST / partnership to extract profits in terms of tax?
On salary - pay income tax and class 1 employees NIC.
On dividends- income tax due on dividends greater than the allowance. No NICs, therefore DIVIDENDS are better.
What is the better extractions of profits for companies?
Salary - class 1 employer NICS - these are deductible from profits thus reducing TTP and saving corporation tax. Better option.
Dividends - not tax deductible, must be added back to TTP. No NICs so no CT saving
What are the penalties for late notification of chargeability?
100% where deliberate and concealed.
70% where deliberate but not concealed
30% in any other case
What was the paper due date for paper returns for 21/22?
31 Oct
What was the filing date for online returns 21/22?
31 Jan 23
How long should individual records be left for?
One year after 31 Jan after end of tax year.
5 years of self employed or have property income.
Time at which enquiries can no longer be opened
Time at which enquiries are concluded
Max penalty for failing to keep records is £3000
When may penalties for errors in individuals be imposed?
Been careless
Made a deliberate error
Made a deliberate error and attempted to conceal it
What is repayment interest paid on?
Over payments of:
Payments on account
Final payments of tax
Penalties
When can the agent disclose client information?
If money laundering is suspected.
How must companies submit their tax returns?
All companies must subir them online via the CT600 form
What if the period of account is longer than 12 months?
There will be 2 accounting periods - a tax return must be filed for each accounting period
How long must companies keep records for?
Latest of:
Six years from the end of the accounting period
The date when any enquiries are completed
The date after which enquiries may not be commenced.
Penalties of up to £3000
What are the penalties of late documents requested by HMRC?
£300 penalty
£60 a day until they’re produced
When is corporation tax due for non large companies?
Due for payment nine months and one day after the end of the accounting period for a company will augmented profits ( TTP + Dividends) if less than £1.5m
How are large companies expected to pay their estimated tax liability?
In 4 quarterly instalment a
When may a large company not have to pay corporation tax by instalment?
Augmented profits do not exceed £10million
It was not a large company in the PY
