Introduction to business tax Flashcards
Taxes in the UK Business tax introduction The tax year – income tax The financial year – corporation tax HMRC The tax practitioner Tax avoidance and tax evasion
What are the three main types of business structures?
Sole trader, Partnership, Limited company.
What is a sole trader?
A sole trader is a business owned by a single individual who takes on all the risks, including any debts owed by the business. The business is not legally separate from the owner.
What happens if a sole trader’s business becomes bankrupt?
The sole trader is personally responsible for all debts owed by the business.
How is a partnership different from a sole trader business?
A partnership consists of multiple individuals owning a business together, whereas a sole trader is a single individual. Partners may have different ownership shares, which influence profit distribution.
Do partners in a partnership share the business debts?
Yes, all partners are responsible for the debts owed by the business.
What taxes are sole traders and partnerships subject to?
Income Tax on business profits.
National Insurance contributions.
They may also have personal income tax on other income sources, such as rental income or investments.
How is a limited company different from a sole trader or partnership?
A limited company is a separate legal entity (incorporated) and owned by shareholders who have limited liability.
What does “limited liability” mean for shareholders?
Shareholders are only liable for the value of the shares they own and are not personally responsible for the company’s debts if it becomes insolvent.
What taxes do limited companies pay?
Limited companies pay Corporation Tax and National Insurance (related to employees).
What taxes use the fiscal year?
The fiscal year is used for Income Tax and Capital Gains Tax for individuals and partners.
What is a financial year in relation to Corporation Tax?
A financial year is the period used for Corporation Tax and runs from 1 April to 31 March of the following year.
What are the dates for Financial Year 2024?
Financial Year 2024 runs from 1 April 2024 to 31 March 2025.
Where do tax rules and regulations come from?
Tax rules and regulations come from three main sources:
Statute Law – The Annual Finance Act, proposed by the Chancellor and passed by Parliament. The relevant act for this assessment is Finance Act 2024.
Case Law – Court decisions that guide the interpretation of tax legislation, particularly in disputes between HMRC and taxpayers.
HMRC Guidance – Publications such as Extra Statutory Concessions, Statements of Practice, and briefing notes that help interpret tax laws.
What is the role of a tax practitioner?
A tax practitioner acts on behalf of individuals or businesses, ensuring compliance with tax laws while working in the best interests of the client in an open and constructive manner with HMRC.
What are the AAT’s five fundamental principles of professional ethics?
Integrity – Be straightforward and honest in professional and business relationships.
Objectivity – Avoid bias, conflicts of interest, or undue influence in professional judgments.
Professional competence and due care – Maintain up-to-date knowledge and provide competent professional service.
Professional behaviour – Comply with relevant laws and regulations and uphold the profession’s reputation.
Confidentiality – Protect client information and do not disclose it without proper authority unless legally required.
What is money laundering?
Money laundering is the process of converting criminal proceeds into assets that appear to have no criminal connection. It effectively makes “dirty money” appear clean.
What are a tax practitioner’s responsibilities regarding money laundering?
Must have controls and procedures to report suspicions of money laundering.
Must verify a client’s identity before taking them on, using official documents like a passport.
If suspicious, they must report to the Money Laundering Reporting Officer (MLRO) or, for sole practitioners, to the National Crime Agency (NCA).
Failure to report money laundering is a criminal offence, carrying fines or imprisonment.
Who is responsible for errors on a tax return?
While a tax practitioner may prepare a tax return, ultimate responsibility lies with the taxpayer, who must approve it before submission.
What should a tax practitioner do if they become aware of irregularities in a client’s tax affairs?
Establish the facts by discussing them with the client.
Advise the client to disclose the irregularity to HMRC.
If the client agrees, warn them about potential penalties and interest.
If the client refuses, advise them in writing of the risks.
If the client still refuses:
Cease to act for them.
Inform HMRC of the resignation (without stating the reason).
Consider reporting to the MLRO or NCA.
Respond carefully to any professional enquiries from future advisers.
What is the difference between tax avoidance and tax evasion?
Tax avoidance is legal but can be divided into two types:
Government-intended tax planning – Using tax reliefs as intended (e.g., investing in an ISA to avoid income tax).
Aggressive tax avoidance – Exploiting loopholes in ways Parliament didn’t intend (e.g., artificial transactions to gain tax advantages). HMRC’s DOTAS (Disclosure of Tax Avoidance Schemes) helps detect and eliminate such schemes.
Tax evasion is illegal and involves deliberately breaking the law to reduce a tax bill (e.g., failing to declare income). If a tax practitioner suspects tax evasion, they must treat it as an “error” and follow reporting procedures.
