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FLK 1 BUSINESS LAW > Introduction to taxation - general principles > Flashcards

Introduction to taxation - general principles Flashcards

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1
Q

Is income tax direct or indirect?

A

Direct.

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2
Q

Is Value Added Tax (VAT) direct or indirect?

A

Indirect.

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3
Q

Is Capital Gains Tax (CGT) direct or indirect?

A

Direct.

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4
Q

Is Corporation Tax direct or indirect?

A

Direct.

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5
Q

How are direct taxes imposed?

A

By reference to a taxpayer’s circumstances.

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6
Q

How is CGT assessed?

A

By reference to an individual’s chargeable gains calculated on the basis of that individual’s circumstances.

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7
Q

How are indirect taxes imposed?

A

By reference to transactions.

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8
Q

How is VAT charged?

A

By reference to the value of supplies of goods or services provided.

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9
Q

What’s the difference between a receipt & an expense?

A

Receipt: money (of whatever nature) that’s paid TO the business - often referred to as income

Expense: money the business pays OUT.

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10
Q

Why is it necessary to distinguish income receipts from capital receipts & income expenditure from capital expenditure?

A

Because, in general, income expenditure can only be deducted from income receipts & capital expenditure can only be deducted from capital receipts to reduce the overall tax bill.

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11
Q

What is the statutory definition for income/capital?

A

There isn’t one - but there are general guidelines established by case law.

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12
Q

Why is it important to be able to distinguish between income & capital?

A

To ensure the correct tax treatment is applied.

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13
Q

What are income receipts?

A

Money received on a regular basis will be classified as an income receipt.

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14
Q

What are some examples of income receipts?

A
  • the trading profits of any business/profession will be income (like a salary received by individual employees)
  • interest a bank pays in relation to savings held in an account is an income receipt for the individual/business
  • rent payments received by a landlord from their tenant is an income receipt of the landlord.
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15
Q

What is a capital receipt?

A

If a receipt is from a transaction that isn’t part of such regular activity
(capital transactions are like one-ff transactions).

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16
Q

What is an example of a capital receipt?

A

If a newsagent owned the premises from which the business operates, any gain on the sale of those premises would be a capital receipt.

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17
Q

What is income expenditure?

A

Money spent as part of day-to-day trading.

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18
Q

What are examples of income expenditure?

A
  • Bills for heating, lighting, rent paid out, marketing, stationary expenses, staff wages & other fees in the general running of a business
  • General repairs
  • Interest payable on loans (as it will be paid to the lender on a regular basis (monthly/quarterly) over a period of time.
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19
Q

What is capital expenditure?

A

Money that is expended to purchase a capital asset as part of the infrastructure of the business or as an enduring benefit for the business.

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20
Q

Can capital expenditure be seen as a one-off transaction?

A

Yes

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21
Q

What are some examples of capital expenditure?

A
  • Expenditure on large items of equipment & machinery or property
  • Expenditure on enhancing a capital asset (other than a routine maintenance)

even though these assets are used to trade, they’re one-off purchases.

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22
Q

Why is it necessary to make a distinction between income & capital expenditure?

A

Because certain income expenditure can be set off against income receipts in a business context to reduce the overall tax bill.

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23
Q

Income Receipts - Income Expenditure = Trading Profits

A
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24
Q

Example - Deduction of income expenditure from income receipts

A
  • A man runs an antique shop
  • He calculates all his income receipts from his trading activities so that he can deduct the income expenses (he has incurred in the course of trading) from the income receipt
  • Examples of deductible income expenses: cost of buying stock, lighting, heating & insurance for shop
  • His tax bill is reduced because his income receipts (amount upon which he’s taxed) are reduced by his income expenditure.
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25
Generally, in what circumstances can relief for capital expenditure be deducted for tax purposes from the proceeds?
When a capital asset is disposed of.
26
Example - Deduction of capital expenditure from capital receipts
- The initial cost of an individual's capital assets, for instance the cost of buying a shop & van used to collect & deliver stock, can't be set off against income receipts in order to reduce the individual's tax bill - If the shops/van was subsequently sold at a gain/profit (capital receipt) for tax purposes it would be possible to reduce the gain/profit made by deducting the original cost of the assets (capita; expenditure).
27
A proportion of the cost of some capital assets (capital expenditure) can be set off against the trading profits (income receipts) of the business each year during the life of the asset concerned - this is done through the system of capital allowances.
28
When is tax relief for capital expenditure usually given?
Tax relief (deductions from tax relief) for capital expenditure is usually only given at the time when the capital asset is sold or otherwise disposed of (eg. by way of gift)
29
What is depreciation?
An accounting concept - whereby the cost of an asset is deducted in the accounts over a period of time.
30
What is the tax equivalent of depreciation?
Capital allowances.
31
What is the purpose of capital allowances?
Capital allowances spread the cost of capital expenditure on certain capital items over a period of time.
32
How is this achieved?
This is achieved by a proportion of the capital expenditure being deducted from income receipts over a period of time.
33
What is an exception to the general rule of capital receipts less capital expenditure?
Capital allowances do enable certain types of capital expenditure to be deducted from income receipts.
34
Are tax years (for individuals) and financial years (for companies) the same as the calendar year, or different?
Different.
35
Does each particular tax have a separate system for its administration?
Yes
36
Who does HMRC collect tax from?
Individuals & businesses (including sole traders, partnerships & companies) via the self assessment system.
37
What tax do companies pay?
Corporation tax on all income profits & chargeable gains that arise in each accounting period.
38
What is the tax year?
6 April in one year to 5 April in the next - individuals are assessed to income tax & CGT on the basis of this tax year.
39
What is the financial year?
1 April in one year to 31 March in the next - companies are assessed to corporation tax on the basis of a financial year.
40
What is the system where tax is deducted at the source?
The system whereby the payer of a sum that is taxable in the hands of the recipient deducts the tax due in respect of the sum and accounts for it to HMRC on the recipient's behalf.
41
What does the recipient of the taxable sum receive?
The sum net of tax (after tax has been deducted).
42
What is an example of a sum where tax is deducted at the source by the payer?
Pay As You Earn system (PAYE).
43
How does PAYE work?
The employer deducts the income tax payable by the employee from the employee's wage/salary & accounts for this tax to HMRC - the employee receives the wage or salary net of income tax.
44
When calculating tax liabilities, does tax that has been deducted at source need to be noted?
Yes, it is important to note where tax has been deducted at source because it's the gross amount of the receipt that must be included in the calculation (rather than the net amount).
45
Definition - annual exemption
for CGT, a tax allowance for individuals only available on annual basis.
46
Definition - annual investment allowance
A special type of capital allowance.
47
Definition - available tax reliefs
Certain payments which reduce an individuals taxpayer's total income - eg interest on certain loans & pension contributions - relevant for income tax only
48
Definition - business asset disposal relief
A tax relief available to individuals in certain circumstances to reduce their chargeable gains - formally known as 'entrepreneurs relief' (ER)
49
Definition - capital allowances
Tax allowances (deductions) for capital expenditure available to businesses (whether run by individuals or companies).
50
Definition - capital gains tax (CGT)
A tax paid by individuals on their taxable chargeable gains.
51
Definition - corporation tax
A tax paid by companies on their taxable total profit (TTP).
52
Definition - current year basis
Income tax is charged on the current year basis. - income earned in the current year, will be taxed in, and according to, the rates applicable to the following year.
53
Definition - dividend income
A band of tax-free dividend income available to individuals for income tax purposes.
54
Definition - financial year
Companies are assessed to corporation tax by reference to financial years - begins 1 April to 31 March - a company's accounting period can differ from the financial year if they choose to change it.
55
Definition - Gross sum
Total sum before tax is levied
56
Definition - net sum
amount left after tax has been paid/deducted.
57
Definition - HMRC
HM Revenue & Customs - the body responsible for collection of all UK taxes
58
Definition - income tax
Tax paid by individuals on their taxable income.
59
Definition - indexation allowance
A tax allowance (deduction) for indexation available to companies in calculating their chargeable (capital) gains - this allowance takes into account inflation based on the Retail Price Index (RPI), so that a company isn't taxed on chargeable gains arising solely because of inflation - indexation allowance was frozen on 31 December 2017 & cannot be claimed for any period commencing on or after 1 January 2018
60
Definition - Investor's relief (IR)
A tax relief available to individuals in certain circumstances to reduce their chargeable gains.
61
Definition - net income
Total income less available tax relief.
62
Definition - non savings income
Income which isn't savings or dividend income such as salary (relevant for income tax only)
63
Definition - Pay As You Earn (PAYE)
The system under which income tax & employees' national insurance contributions are deducted at source (by the employer) from payments of salary & other employment income to employees.
64
Definition - personal allowance
A band of tax-free income for individuals (relevant for income tax only).
65
Definition - personal savings allowance
A band of savings income available for basic and higher rate taxpayers which is taxed at the savings nil rate (relevant for income tax only).
66
Definition - savings income
Income from savings, such as interest (relevant for income tax only).
67
Definition - taxable income
Net income less the personal allowance (income tax only).
68
Definition - tax year
Individuals are assessed to tax by reference to tax years rather than calendar yers. - tax year begins on 6 April and ends on 5 April next year.
69
Definition - total income
A taxpayers gross income from all sources before any deductions (income tax only).
70
Definition - taxable total profits (TTP)
Chargeable to corporation tax - the total of a company's taxable income profits & chargeable gains.
71
Definition - Value Added Tax (VAT)
A tax collected by registered businesses chargeable on supplies of goods & services

FLK 1 BUSINESS LAW (8 decks)

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