Income tax

Question 1

What roles do courts and HM Revenue and Customs (HMRC) play in income tax law?

Answer 1

• Judiciary:
  
  • Courts interpret statutory provisions to determine their meaning.
  • Cases may be appealed from tax tribunals to the Court of Appeal and, with permission, to the Supreme Court.
  • HMRC Statements:
  • Issues extra-statutory concessions and statements of practice to provide guidance on legislation.
  • These statements do not have legal authority but indicate HMRC’s interpretation of tax rules.

Question 2

What constitutes income, and is there a statutory definition?

Answer 2

• Definition: No comprehensive statutory or judicial definition exists.
  
  • Recurring Nature: Income generally includes amounts received on a recurring basis, such as salaries or bank interest.
  • Legislative Specification: Income tax statutes specifically list what qualifies as income (e.g., trading profits, property income, and savings interest).
  • Excluded Income: Certain types of income are not taxable, such as:
  • Premium bond winnings.
  • Interest on damages for personal injuries or death.
  • Income from ISAs (Individual Savings Accounts).

Question 3

How is income tax liability calculated step by step in the UK?

Answer 3

Step 1: Calculate Total Income

*	Determine Income Sources: Identify all sources of taxable income, including:
*	Trading Income: Profits from business or profession.
*	Property Income: Rental income minus allowable expenses.
*	Savings and Investment Income: Interest from accounts, annuities, dividends.
*	Employment and Pensions Income: Salaries, bonuses, pensions, and social security payments (e.g., maternity pay).
*	Miscellaneous Income: Certain less common incomes specified by legislation.
*	Exclude Non-Taxable Income: Certain income types, like premium bond winnings, interest on ISAs, and some state benefits, are not included.
*	Add Income: Combine the income from all chargeable sources to get the total income.

Step 2: Deduct Allowable Reliefs

*	Allowable Reliefs: Reduce total income by amounts eligible for relief, such as:
*	Interest on Qualifying Loans: Loans for business investments or inheritance tax payments.
*	Other reliefs specified in legislation.
*	Net Income: Total income minus allowable reliefs gives the net income.

Step 3: Deduct Personal Allowances

*	Personal Allowance: The amount of income exempt from tax (2023/24: £12,570).
*	Applied in the following order:
1.	Against NSNDI (Non-Savings, Non-Dividend Income).
2.	Against Savings Income if any personal allowance remains.
3.	Finally, against Dividend Income if any personal allowance remains.
*	Personal Allowance Reduction:
*	Reduced by £1 for every £2 of income above £100,000.
*	Eliminated completely at £125,140 of income.
*	Adjusted Personal Allowance = £12,570 - [(Net Income - £100,000) ÷ 2].
*	The remaining income after applying personal allowances is taxable income.

Step 4: Categorize Income and Apply Tax Rates

*	Categories of Taxable Income:
1.	NSNDI: Salaries, pensions, and other income except savings and dividends.
2.	Savings Income: Interest on savings accounts and similar sources.
3.	Dividend Income: Payments from shares held in companies.
*	Tax Rates:
*	Tax rates vary by income type and tax band (basic, higher, additional rates).
*	For instance, dividends may have a lower rate than NSNDI, and savings income may benefit from allowances like the PSA.

Step 5: Combine Tax Amounts

*	Calculate Tax: Apply the applicable tax rates to each income category separately.
*	Sum Up: Add the tax amounts from each category to determine the total income tax liability.

Example Application:
* Total Income: £60,000 (NSNDI: £50,000; Savings: £5,000; Dividends: £5,000).
* Allowable Reliefs: £2,000 deducted, leaving £58,000.
* Personal Allowance: £12,570 applied, reducing taxable income to £45,430.
* Categorized Taxation:
* NSNDI taxed first.
* Remaining amounts taxed under the savings and dividend rules.

This systematic approach ensures accurate calculation and application of UK income tax law.

Question 4

What allowances and reliefs reduce taxable income?

Answer 4

• Allowable Reliefs: Deductions from total income to calculate net income, such as:
  
  • Interest on qualifying loans (e.g., loans to buy a partnership share or invest in a close trading company).
  • Personal Allowance (2023/24): £12,570, reduced by £1 for every £2 over £100,000 of income.
  • Marriage Allowance: Allows transferring £1,260 of unused allowance to a spouse (if the recipient is not a higher or additional rate taxpayer).
  • Blind Person’s Allowance: An additional £2,870 deduction.

Question 5

What are the tax-free allowances for savings and dividends?

Answer 5

• Personal Savings Allowance (PSA):
  
  • £1,000 for basic-rate taxpayers.
  • £500 for higher-rate taxpayers.
  • Not available for additional-rate taxpayers.
  • Dividend Allowance: A fixed amount of dividend income that is tax-free each year, depending on legislative provisions for the relevant tax year.

Question 6

How is trading income calculated for sole traders and partners?

Answer 6

• Sole Traders:
  
  1. Calculate chargeable receipts (e.g., revenue from sales).
  2. Deduct allowable expenses (e.g., utility bills, rent) and capital allowances.
  3. The resulting figure is trading profit.
     * Partners:
     * Trading profits are apportioned based on each partner’s share in the partnership income.
     * Corporate partners are liable for corporation tax instead of income tax.

Question 7

How is income from employment and property treated for tax purposes?

Answer 7

• Employment Income:
  
  • Tax is deducted at source through Pay As You Earn (PAYE).
  • The employer deducts income tax and submits it directly to HMRC.
  • Property Income:
  • Income from rents or property-related receipts is taxable.
  • Allowable expenses (e.g., repairs) are deducted from gross rent to determine taxable profit.

Question 8

What are the tax bands, rates, and allowances for savings income in the UK?

Answer 8

1. Basic Rate Taxpayer:
   * Income Band: £0–£37,700.
   * Allowance: £1,000 tax-free savings income.
2. Higher Rate Taxpayer:
   * Income Band: £37,701–£125,140.
   * Allowance: £500 tax-free savings income.
3. Additional Rate Taxpayer:
   * Income Band: Over £125,140.
   * Allowance: No tax-free savings income allowance.

Question 9

Miles has a salary of £29,000 and receives interest of £875 a year. He has no relevant allowable reliefs. Miles is a basic rate taxpayer (as all of his taxable income is within the basic rate tax band). Does Miles need to pay tax on his savings income?

Answer 9

• Total Income: £29,875 (Salary: £29,000; Savings Interest: £875).
• Taxpayer Band: Basic rate taxpayer (income within £0–£37,700).
• Personal Savings Allowance (PSA): £1,000 for basic rate taxpayers.
• Tax on Savings Income:
• Miles’s savings income (£875) is fully covered by the PSA (£1,000).
• Therefore, he pays no tax on his savings income.

Question 10

Isabel has a salary of £75,000, so is a higher rate taxpayer. She has no relevant allowable reliefs. Isabel has a building society savings account and receives £650 annual interest from it. How much tax will Isabel pay on her savings income?

Answer 10

• Total Income: £75,650 (Salary: £75,000; Savings Interest: £650).
• Taxpayer Band: Higher rate taxpayer (income within £37,701–£125,140).
• Personal Savings Allowance (PSA): £500 for higher rate taxpayers.
• Tax on Savings Income:
• £500 of savings income is tax-free under the PSA.
  • The remaining £150 is taxed at 40%.
  • Tax Liability: £150 × 40% = £60.

Question 11

What is the dividend allowance, and how does it work?

Answer 11

• The dividend allowance is £1,000 per year.
  
  • It applies to all taxpayers, including basic, higher, and additional rate taxpayers.
  • The first £1,000 of a taxpayer’s dividend income is tax-free, regardless of their total income or tax bracket.
  • If total dividend income is £1,000 or less, no tax is paid on dividends.

Question 12

How does HMRC treat the PSA and dividend allowance in tax calculations?

Answer 12

• HMRC considers the PSA and dividend allowance as nil rate bands, not exemptions.
  
  • Income within these bands is taxed at a 0% rate, meaning no tax is due, but they do not reduce taxable income.
  • Only the personal allowance reduces taxable income at Step 3 of the tax calculation process.
  • The nil rate bands apply after taxable income is determined.

Question 13

How do you calculate tax on each type of income?

Answer 13

1. Separate taxable income into categories:
   
   • NSNDI (Non-Savings, Non-Dividend Income) – e.g., salaries and rent.
   • Savings Income – e.g., bank interest.
   • Dividend Income – e.g., share dividends.
     2. Subtract savings and dividend income from the total taxable income calculated in Step 3 to determine taxable NSNDI:
     Taxable NSNDI = Taxable Income - Savings Income - Dividend Income.
     3. Apply tax rates to NSNDI first, then to savings and dividend income.

Question 14

In what order is income taxed, and why is this important?

Answer 14

• Income is taxed in slices, starting from the bottom:
  
  1. NSNDI (e.g., salary, rent).
  2. Savings Income.
  3. Dividend Income.
     * This order is critical because the taxpayer’s PSA and dividend allowance depend on the amount of NSNDI.
     * Different types of income have different tax rates, so categorization affects the final tax liability.

Question 15

What are the tax bands and rates for NSNDI in the 2023/24 tax year?

Answer 15

• Basic Rate (20%): £0–£37,700.
  
  • Higher Rate (40%): £37,701–£125,140.
  • Additional Rate (45%): Over £125,140.

Question 16

How is savings income taxed?

Answer 16

• Savings income is taxed after NSNDI.
  
  • The PSA (Personal Savings Allowance) determines how much savings income is taxed at 0%:
  • £1,000 for basic rate taxpayers.
  • £500 for higher rate taxpayers.
  • No PSA for additional rate taxpayers.
    Calculation Steps:
    1. Subtract PSA from total savings income:
    Taxable Savings Income = Savings Income - PSA.
    2. Apply the savings tax rates to the remaining amount.

Question 17

What are the savings income tax rates for 2023/24?

Answer 17

• Starting Rate (0%): £0–£5,000.
  
  • Basic Rate (20%): £5,001–£37,700.
  • Higher Rate (40%): £37,701–£125,140.
  • Additional Rate (45%): Over £125,140.

Question 18

How is savings income taxed in this example? Scenario: Taxable NSNDI = £36,000, PSA = £1,000, Savings Income = £3,000.

Answer 18

Steps:
1. Deduct PSA: £3,000 - £1,000 = £2,000.
2. Apply tax rates to remaining savings income:
* £1,000 taxed at 0% (Savings Starting Rate).
* £1,000 taxed at 20% (Savings Basic Rate).

Tax Liability:
* £1,000 × 0% = £0.
* £1,000 × 20% = £200.

Total Tax on Savings Income: £200.

Question 19

What are the tax rates for dividend income in the 2023/24 tax year?

Answer 19

• Basic Rate: 8.75%.
  
  • Higher Rate: 33.75%.
  • Additional Rate: 39.35%.

Example: A taxpayer with £2,000 in dividend income:
1. £1,000 is tax-free (dividend allowance).
2. Remaining £1,000 is taxed at the applicable rate based on their tax band.

Question 20

Leo has a taxable income of £200,000, of which £30,000 is savings and dividend income. How is his NSNDI of £170,000 taxed, and what is his tax liability?

Answer 20

• Step 1: Determine NSNDI
  
  • Taxable Income: £200,000.
  • Less Savings and Dividend Income: £30,000.
  • NSNDI: £170,000.

Step 2: Apply Tax Rates to NSNDI
1. £37,700 @ 20% (Basic Rate) = £7,540.
2. £87,440 @ 40% (Higher Rate: £125,140 - £37,700) = £34,976.
3. £44,860 @ 45% (Additional Rate: £170,000 - £125,140) = £20,187.

Step 3: Total Tax on NSNDI
* £7,540 + £34,976 + £20,187 = £62,703.

Leo’s tax liability on NSNDI is £62,703.

Question 21

How is remaining taxable savings income taxed based on NSNDI plus PSA?

Answer 21

1. Stage 1: Add PSA to taxable NSNDI to establish the relevant tax rates.
   
   2. Stage 2: Apply the appropriate rates to the remaining taxable savings income:
      * If taxable NSNDI + PSA < £5,000:
      * Taxed at the starting rate for savings (0%).
      * Any remaining taxable savings income over £5,000 taxed at the savings basic rate (20%).
      * If taxable NSNDI + PSA is £5,000–£37,700:
      * Below £37,700: Taxed at the savings basic rate (20%).
      * Over £37,700: Taxed at the higher rate (40%) or additional rate (45%).
      * If taxable NSNDI + PSA exceeds £37,700 but is below £125,140:
      * Below £125,140: Taxed at the savings higher rate (40%).
      * Over £125,140: Taxed at the additional rate (45%).
      * If taxable NSNDI + PSA exceeds £125,140:
      * All remaining savings income taxed at the savings additional rate (45%).

Question 22

Ruth has taxable income (after allowances and reliefs) of £17,300, of which £14,800 is NSNDI and £2,500 is interest. How is her income taxed, and what is her tax liability?

Answer 22

• Taxpayer Band: Basic rate taxpayer.
  
  • PSA: £1,000 taxed at 0%.

Step 1: Tax on NSNDI
1. £14,800 @ 20% (Basic Rate) = £2,960.

Step 2: Tax on Savings Income
1. Savings Income: £2,500.
2. PSA applies to the first £1,000, leaving £1,500 taxable.
3. £1,500 @ 20% (Savings Basic Rate) = £300.

Total Tax Liability: £2,960 (NSNDI) + £300 (Savings Income) = £3,260.

Question 23

Charlotte has taxable income (after allowances and reliefs) of £80,000, of which £77,000 is NSNDI and £3,000 is interest. How is her income taxed, and what is her tax liability?

Answer 23

• Taxpayer Band: Higher rate taxpayer.
  
  • PSA: £500 taxed at 0%.

Step 1: Tax on NSNDI
1. £37,700 @ 20% (Basic Rate) = £7,540.
2. Remaining £39,300 @ 40% (Higher Rate) = £15,720.

Step 2: Tax on Savings Income
1. Savings Income: £3,000.
2. PSA applies to the first £500, leaving £2,500 taxable.
3. £2,500 @ 40% (Savings Higher Rate) = £1,000.

Total Tax Liability: £7,540 + £15,720 (NSNDI) + £1,000 (Savings Income) = £24,260.

Question 24

Colin has taxable income (after allowances and reliefs) of £140,000, of which £123,000 is NSNDI and £17,000 is interest. How is his income taxed, and what is his tax liability?

Answer 24

• Taxpayer Band: Additional rate taxpayer.
  
  • PSA: None (additional rate taxpayers are not entitled to PSA).

Step 1: Tax on NSNDI
1. £37,700 @ 20% (Basic Rate) = £7,540.
2. Remaining £85,300 @ 40% (Higher Rate) = £34,120.

Step 2: Tax on Savings Income
1. Savings Income: £17,000.
2. The portion of savings income below the higher rate limit (£2,140 = £125,140 - £123,000) is taxed at 40%:
* £2,140 @ 40% = £856.
3. The remaining savings income (£14,860) is taxed at 45% (Savings Additional Rate):
* £14,860 @ 45% = £6,687.

Total Tax Liability:
* NSNDI: £7,540 + £34,120 = £41,660.
* Savings Income: £856 + £6,687 = £7,543.
* Grand Total: £41,660 + £7,543 = £49,203.

Question 25

How do you calculate taxable dividend income?

Answer 25

• Deduct the dividend allowance (£1,000 in 2023/24) from the total dividend income:
  Dividend Income - Dividend Allowance = Remaining Taxable Dividend Income.
  
  • The remaining taxable dividend income is then taxed at the appropriate rates.

Question 26

What are the dividend tax rates for the 2023/24 tax year?

Answer 26

• Dividend Ordinary Rate (8.75%): Income up to £37,700.
  
  • Dividend Upper Rate (33.75%): Income between £37,701–£125,140.
  • Dividend Additional Rate (39.35%): Income over £125,140.

Question 27

How do you determine which tax band dividend income falls into?

Answer 27

1. Add the dividend allowance (£1,000) to the sum of taxable NSNDI and savings income.
   
   2. Assess the total dividend income:
      * Within Basic Rate Limit (£0–£37,700): Taxed at 8.75%.
      * Between Basic and Higher Rate Limits (£37,701–£125,140): Taxed at 33.75%.
      * Above Higher Rate Limit (>£125,140): Taxed at 39.35%.

Question 28

What are the steps to calculate tax on dividend income?

Answer 28

1. Deduct Dividend Allowance: Remove £1,000 from the total dividend income.
   
   2. Determine Remaining Taxable Dividend Income.
   3. Categorize by Tax Bands:
      * Identify portions within basic, higher, and additional rate bands.
   4. Apply Tax Rates:
      * Ordinary Rate: 8.75%.
      * Upper Rate: 33.75%.
      * Additional Rate: 39.35%.

Question 29

Mehmet has taxable income of £10,000, of which £6,500 is NSNDI and £3,500 is dividend income. How is his income taxed, and what is his tax liability?

Answer 29

• Taxpayer Band: Basic rate taxpayer.
  
  • Dividend Allowance: £1,000 (taxed at 0%).

Step 1: Tax on NSNDI
1. £6,500 @ 20% (Basic Rate) = £1,300.

Step 2: Tax on Dividend Income
1. Total Dividend Income: £3,500.
2. Dividend Allowance of £1,000 leaves £2,500 taxable.
3. £2,500 @ 8.75% (Dividend Ordinary Rate) = £218.75.

Total Tax Liability: £1,300 (NSNDI) + £218.75 (Dividend Income) = £1,518.75.

Question 30

Rich has taxable income of £57,500, of which £42,500 is NSNDI and £15,000 is dividend income. How is his income taxed, and what is his tax liability?

Answer 30

• Taxpayer Band: Higher rate taxpayer.
  
  • Dividend Allowance: £1,000 (taxed at 0%).

Step 1: Tax on NSNDI
1. £37,700 @ 20% (Basic Rate) = £7,540.
2. Remaining £4,800 @ 40% (Higher Rate) = £1,920.

Step 2: Tax on Dividend Income
1. Total Dividend Income: £15,000.
2. Dividend Allowance of £1,000 leaves £14,000 taxable.
3. £14,000 @ 33.75% (Dividend Upper Rate) = £4,725.

Total Tax Liability: £7,540 + £1,920 (NSNDI) + £4,725 (Dividend Income) = £14,185.

Question 31

Zara has taxable income of £134,000, of which £115,000 is NSNDI and £19,000 is dividend income. How is her income taxed, and what is her tax liability?

Answer 31

• Taxpayer Band: Additional rate taxpayer.
  
  • Dividend Allowance: £1,000 (taxed at 0%).

Step 1: Tax on NSNDI
1. £37,700 @ 20% (Basic Rate) = £7,540.
2. Remaining £77,300 @ 40% (Higher Rate) = £30,920.

Step 2: Tax on Dividend Income
1. Total Dividend Income: £19,000.
2. Dividend Allowance of £1,000 leaves £18,000 taxable.
3. £9,140 @ 33.75% (Dividend Upper Rate) = £3,084.75.
4. Remaining £8,860 @ 39.35% (Dividend Additional Rate) = £3,486.41.

Total Tax Liability:
* NSNDI: £7,540 + £30,920 = £38,460.
* Dividend Income: £3,084.75 + £3,486.41 = £6,571.16.
* Grand Total: £38,460 + £6,571.16 = £45,031.16.

Question 32

Fynn has taxable NSNDI of £20,000, savings income of £1,500, and dividend income of £9,000. How is his income taxed, and what is his tax liability?

Answer 32

• Taxpayer Band: Basic rate taxpayer.
  
  • PSA: £1,000.
  • Dividend Allowance: £1,000.

Step 1: Tax on NSNDI
1. £20,000 @ 20% (Basic Rate) = £4,000.

Step 2: Tax on Savings Income
1. Savings Income: £1,500.
2. PSA of £1,000 leaves £500 taxable.
3. £500 @ 20% (Savings Basic Rate) = £100.

Step 3: Tax on Dividend Income
1. Dividend Income: £9,000.
2. Dividend Allowance of £1,000 leaves £8,000 taxable.
3. £8,000 @ 8.75% (Dividend Ordinary Rate) = £700.

Total Tax Liability: £4,000 (NSNDI) + £100 (Savings Income) + £700 (Dividend Income) = £4,800.

Question 33

Fynn has taxable NSNDI of £34,000, savings income of £1,500, and dividend income of £8,000. How is his income taxed, and what is his tax liability?

Answer 33

• Taxpayer Band: Higher rate taxpayer.
  
  • PSA: £500.
  • Dividend Allowance: £1,000.

Step 1: Tax on NSNDI
1. £34,000 @ 20% (Basic Rate) = £6,800.

Step 2: Tax on Savings Income
1. Savings Income: £1,500.
2. PSA of £500 leaves £1,000 taxable.
3. £1,000 @ 20% (Savings Basic Rate) = £200.

Step 3: Tax on Dividend Income
1. Dividend Income: £8,000.
2. Dividend Allowance of £1,000 leaves £7,000 taxable.
3. £1,200 @ 8.75% (Dividend Ordinary Rate) = £105.
4. Remaining £5,800 @ 33.75% (Dividend Upper Rate) = £1,957.50.

Total Tax Liability:
* NSNDI: £6,800.
* Savings Income: £200.
* Dividend Income: £105 + £1,957.50 = £2,062.50.
* Grand Total: £6,800 + £200 + £2,062.50 = £9,062.50.

Question 34

Chris carries on a business in partnership as an environmental consultant. He earns £52,000 from the partnership’s trade for 2023/24. He also received £2,400 in interest from Waterlooville Building Society and £12,000 in dividends. What reliefs and allowances can Chris claim?

Answer 34

• Loan Interest Relief: £2,400 (loan taken to invest in the partnership).
  
  • Personal Savings Allowance (PSA): £500 (as a higher rate taxpayer).
  • Dividend Allowance: £1,000.
  • Personal Allowance: £12,570 (deducted from total income).

Question 35

Chris earns £52,000 from his partnership, £2,400 in savings interest, and £12,000 in dividends. What is his total income for 2023/24 before deductions?

Answer 35

• Trade Profits: £52,000.
  
  • Savings Interest: £2,400.
  • Dividends: £12,000.
  • Total Income: £66,400.

Question 36

Chris took out a loan to invest in his partnership, incurring £2,400 in loan interest. How does this affect his taxable income?

Answer 36

• Loan Interest Deduction: £2,400.
  
  • Net Income After Reliefs: £66,400 - £2,400 = £64,000.

Question 37

After reliefs, Chris has a net income of £64,000. What is his taxable income after applying his personal allowance?

Answer 37

Personal Allowance: £12,570.
Taxable Income: £64,000 - £12,570 = £51,430.

Question 38

Chris’s taxable NSNDI is £37,030 (calculated after subtracting savings and dividend income). How is this taxed

Answer 38

• Tax Band: Falls entirely within the basic rate threshold (£0–£37,700).
  
  • Tax Calculation: £37,030 @ 20% = £7,406.

Question 39

Chris’s taxable savings income is £2,400. How is this taxed given he is a higher rate taxpayer?

Answer 39

• PSA: £500 taxed at 0%.
  
  • Remaining Savings Income: £1,900.
  • £170 taxed at 20% (Basic Rate) = £34.
  • £1,730 taxed at 40% (Higher Rate) = £692.
  • Total Tax on Savings Income: £34 + £692 = £726.

Question 40

Chris’s total dividend income is £12,000. How is this taxed? and Considering Chris’s partnership trade income, savings interest, and dividend income, what is his total tax liability for 2023/24?

Answer 40

A:
* Dividend Allowance: £1,000 taxed at 0%.
* Remaining Dividend Income: £11,000.
* Entire £11,000 taxed at 33.75% (Dividend Upper Rate).
* Tax Calculation: £11,000 @ 33.75% = £3,712.50.

total tax liability
* NSNDI Tax: £7,406.
* Savings Income Tax: £726.
* Dividend Income Tax: £3,712.50.
* Total Tax Liability: £7,406 + £726 + £3,712.50 = £11,844.50.

Question 41

What taxes are sole traders subject to, and when are they required to register for VAT?

Answer 41

Taxes: Sole traders are almost always subject to income tax and may also pay capital gains tax (CGT) on disposals of chargeable assets and inheritance tax (IHT) depending on their trade and circumstances.
* VAT Registration: If the sole trader’s chargeable supplies exceed £85,000 in any 12-month period, they must register for VAT.

Question 42

How is a sole trader’s trading profit assessed for income tax purposes?

Answer 42

• Accounting Period: Sole traders choose an accounting period, typically 12 months, which may not align with the income tax year (6 April–5 April).
  
  • Rules Up to 2022/23:
  • Profits were assessed based on the accounting period ending within the tax year.
  • The first year of trading was taxed on profits from commencement to the following 5 April.
  • In the second year, businesses were taxed twice on some profits, but excess tax was recoverable in the final year.
  • New Rules from 6 April 2024:
  • Profits and losses will be apportioned between tax years based on the number of days falling in each tax year.
  • Effective immediately for new businesses starting in the 2023/24 tax year.

Question 43

How are partnerships taxed, and how are profits shared?

Answer 43

• Tax Treatment:
  
  • Partnerships are not separate legal entities. Individual partners are responsible for paying income tax on trading profits or capital gains tax (CGT) on disposals of chargeable assets.
  • Corporate partners pay corporation tax instead of income tax or CGT.
  • Profit Sharing Formula:
  • Trading Profit = Chargeable Receipts - Deductible Expenditure - Capital Allowances.
  • Shared among partners per the partnership agreement or, if absent, the Partnership Act 1890.

Question 44

How are new and retiring partners in a partnership taxed?

Answer 44

• New Partners: Apportion profits from the start date within the tax year.
  
  • Retiring Partners: Apportion profits and losses up to the date they leave the partnership.
  • From 2024/25, profits and losses will be apportioned between tax years if the accounting period doesn’t align with the tax year.

Question 45

What reliefs are available for individuals borrowing to invest in a partnership?

Answer 45

• Qualifying Loan: Interest on loans to buy a share in or lend to a partnership can be deducted from total income.
  
  • Relief Cap:
  • The greater of £50,000 or 25% of total income (less allowable pension contributions).
  • Scope: Only applies to income unrelated to the trade producing the loss.

Question 46

How are LLPs taxed compared to ordinary partnerships?

Answer 46

• LLPs are taxed similarly to ordinary partnerships for income tax purposes.
  
  • Restrictions on Reliefs: Loss relief is limited under certain conditions for LLP partners.

Question 47

What are the income tax implications for shareholders?

Answer 47

1. Loan to Participator: If a close company writes off a loan made to a shareholder, it may trigger an income tax liability for the shareholder.
   
   2. Share Buybacks:
      * Profits are usually taxed as a dividend.
      * In specific circumstances, profits may be subject to CGT instead.
   3. Enterprise Investment Scheme (EIS):
      * Income tax relief allows deduction of 30% of the investment amount in qualifying unquoted companies, up to £2 million per year.
      * Conditions: The investor must not own more than 30% of shares (directly or with family) in the company.

Question 48

What is the difference between tax avoidance and tax evasion?

Answer 48

Tax Avoidance: Using legal provisions to reduce tax liability, though it may violate the spirit of the law.
* Tax Evasion: Using illegal methods (e.g., underreporting income) to avoid paying taxes, punishable under law.

Question 49

What is the purpose of the GAAR, and how does it address abusive tax arrangements?

Answer 49

GAAR targets abusive tax arrangements under the Finance Act 2013.
* Criteria for Abuse:
1. Contrived steps that violate policy objectives.
2. Exploitation of loopholes in tax laws.
* Double Reasonableness Test:
* Taxpayer’s actions must be judged as not a reasonable course of action under tax law.

Question 50

What steps does HMRC follow if they find a breach of the GAAR

Answer 50

1. Notification: Taxpayer informed of breach and proposed adjustments.
   
   2. GAAR Advisory Panel: Reviews the case and gives its opinion.
   3. Adjustments: HMRC imposes “just and reasonable” adjustments to the tax liability.
   4. Appeal: Taxpayer has the right to appeal the decision to a tribunal.

Question 51

Who is liable for penalties for enabling abusive tax arrangements?

Answer 51

• Enablers: Individuals, companies, or partnerships facilitating abusive arrangements.
  
  • Penalty Amount: Equals the financial benefit received for enabling the arrangement.
  • Exemptions: Employees acting under their employer’s direction are exempt; the employer may be penalized instead.