Introduction to taxation - general principles Flashcards
Is income tax direct or indirect?
Direct.
Is Value Added Tax (VAT) direct or indirect?
Indirect.
Is Capital Gains Tax (CGT) direct or indirect?
Direct.
Is Corporation Tax direct or indirect?
Direct.
How are direct taxes imposed?
By reference to a taxpayer’s circumstances.
How is CGT assessed?
By reference to an individual’s chargeable gains calculated on the basis of that individual’s circumstances.
How are indirect taxes imposed?
By reference to transactions.
How is VAT charged?
By reference to the value of supplies of goods or services provided.
What’s the difference between a receipt & an expense?
Receipt: money (of whatever nature) that’s paid TO the business - often referred to as income
Expense: money the business pays OUT.
Why is it necessary to distinguish income receipts from capital receipts & income expenditure from capital expenditure?
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.
What is the statutory definition for income/capital?
There isn’t one - but there are general guidelines established by case law.
Why is it important to be able to distinguish between income & capital?
To ensure the correct tax treatment is applied.
What are income receipts?
Money received on a regular basis will be classified as an income receipt.
What are some examples of income receipts?
- 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.
What is a capital receipt?
If a receipt is from a transaction that isn’t part of such regular activity
(capital transactions are like one-ff transactions).
What is an example of a capital receipt?
If a newsagent owned the premises from which the business operates, any gain on the sale of those premises would be a capital receipt.
What is income expenditure?
Money spent as part of day-to-day trading.
What are examples of income expenditure?
- 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.
What is capital expenditure?
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.
Can capital expenditure be seen as a one-off transaction?
Yes
What are some examples of capital expenditure?
- 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.
Why is it necessary to make a distinction between income & capital expenditure?
Because certain income expenditure can be set off against income receipts in a business context to reduce the overall tax bill.
Income Receipts - Income Expenditure = Trading Profits
Example - Deduction of income expenditure from income receipts
- 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.
Generally, in what circumstances can relief for capital expenditure be deducted for tax purposes from the proceeds?
When a capital asset is disposed of.
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).
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.
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)
