Principles of Tax Recaps

Question 1

Examples of Exempt Income

Answer 1

Interest on NS Certificates/ income from ISAs/ betting, gambling, lottery & premium bond income/ statutory redundancy pay, income tax repayment interest/ apprenticeship bursaries/ compensation payments.

Question 2

What figure should you use when calculating chargeable income?

Answer 2

The gross amount

Question 3

What is the starting rate band?

Answer 3

£5,000 for savings income where the rate of tax is 0%, but only applies if you have savings income falling into the first £5,000 of taxable income (after accounting for NSI).

Question 4

How does Gift Aid work?

Answer 4

Calculate the gross donation, and increase the rate bands by the gross donation amount.

Question 5

How does the marriage allowance work?

Answer 5

Spouse may elect to transfer up to £1,250 of their personal allowance to their spouse. Transferor must be a BRTP or have no tax liability, recipient must be a BRTP, and relief must be given by reducing tax liability of recipient at 20%.

Question 6

General rule for calculating a benefit?

Answer 6

Cost to the employer - any contributions made by the employee.

Question 7

How do you treat job related/non-job related accommodation for tax purposes?

Answer 7

Job related = tax exempt. Non-job related = 2 potential benefits:
1) Basic Rental Benefit - higher of:
- Annual value
Any rent paid by employer (£0 if owned by employer).
2) Additional Yearly Rent Benefit - must cost >£75,000 and been bought by employer.
- Benefit = (Cost - 75k) x2.25% - any employee contributions.
Then consider MARKET VALUE RULE: if acquired >6 years before first provided to employee, use MV when first provided and not cost.

Question 8

How do you calculate ‘cost’ for purpose of calculating the benefit of non-job accommodation?

Answer 8

Cost = Original Cost + improvements made before start of tax year which benefit was provided.

Question 9

How to tax expenses related to provision of living accommodation? (E.g. heat/lighting/water/council tax/cleaning/repairs & maintenance/decoration).

Answer 9

Cost to employer - employee contribution

Question 10

How to tax a car benefit?

Answer 10

Only available for private use (apportion if needed).
Taxable Benefit = % x list price - employee contributions (max. 5k)
+4% diesels, Maximum 37%.

Question 11

What is the taxable fuel benefit for a car?

Answer 11

Same % as car benefit x £24,500

DON’T deduct partial contributions to the fuel

Question 12

What is the taxable benefit on provision of a van for an employee?

Answer 12

Annual benefit = £3,490.
Taxable benefit (if for priv. use and has 0 emissions) = £2,792.

Question 13

What is the taxable benefit for provision of fuel for private use of a van?

Answer 13

Annual amount of £666

Question 14

What is the taxable benefit on assets for employee’s private use?

Answer 14

Higher of:
1) 20% x MV when first provided
2) Rent paid by employer
Apportion for non-business use (if sig.)
No taxable benefit for insig. private use.

Question 15

How do you calculate the taxable benefit of something that is provided in-house by your employer?

Answer 15

Taxable benefit = marginal cost to the employer.

Question 16

What is the trading allowance?

Answer 16

£1,000 - this means if your trading profits as an INDIVIDUAL for a tax year are less than £1,00 then these are not taxed. If above 1k, then you chose:

1) Normal way (accruals basis)
2) Elect to have deemed expenses of £1,000.

Question 17

How do you deal with capex for calculating trading profits?

Answer 17

Disallowable.

Genuine repairs = allowable, improvements = disallowable.

Question 18

How do you deal with appropriation of profit for trading profits?

Answer 18

Sole trader drawings, goods for own use (selling to yourself) and excessive family/friends remuneration is disallowable.

Goods taken for personal use - adjustment made to show what would have happened if sold at market value. (If nothing recorded - add back SP, if cost recorded - add back profit).

Question 19

How do you deal entertainment costs for trading profits?

Answer 19

Customer entertaining = disallowable

Staff entertaining = allowable

Question 20

How do you deal with Gift Aid Charitable donations for trading profits purposes?

Answer 20

Disallowable, as treated under IT by extending rate bands.

Question 21

How do you deal with fines/penalties for trading profits purposes?

Answer 21

All disallowable, except parking fines incurred by employee on a business activity.

Question 22

How do you deal with legal & professional fees for trading profits purposes?

Answer 22

Related to capex, then is disallowable.

Renewal of a short lease (50 yrs or less) is allowable.

Question 23

How do you deal with car leasing and rental costs for trading profits purposes?

Answer 23

15% disallowance if emissions exceed 110 g/km.

Further proportion of lease cost is disallowed if there’s private use by sole trader.

Question 24

What is Capital Allowances allowed on?

Answer 24

Plant & machinery. Not Buildings

Question 25

What is the capital allowances general rule regarding disposal value?

Answer 25

It is the sales proceeds, but cannot exceed the original cost of the asset.
If given away or sold at less than MV, disposal value is the MV at date of disposal.

Question 26

What is the Small Pool Limit?

Answer 26

If balance on the main pool is £1,000 OR LESS, then the whole amount can be written off.
£1,000 is apportioned for non-12 month periods.

Question 27

What are the balancing adjustments for capital allowances purposes?

Answer 27

Balancing Charge - when too many capital allowances have been given over life of an asset - e.g. when asset is sold in excess of the TWDV.
You deduct this amount from other CAs, and so increasing trading profits.
Balancing Adjustment - when too little capital allowances have been given over life of an asset - e.g. sold for less than the TWDV.
You add this amount to the CAs, and so decreasing trading profits.

Question 28

What are the rules for assessing the trading profits in the second tax year?

Answer 28

Period of account ending in tax year is:

a) <12Ms - First 12 Ms of trading.
b) =12Ms - The 12M period of account ending in the tax year.
c) >12Ms - 12M to end of period of account ending in the tax year.

Question 29

What is the calculation in the final tax year of trade, when assessing the trading profits?

Answer 29

All profits not yet taxed x
LESS Overlap Profits (x)
Taxable Trading Profit x

Question 30

Process to allocate & calculate a partner’s trading profits?

Answer 30

1) Adjust partnership profits (consider allowable/disallowable exp.)
2) Calculate CAs
3) Deduct 3) from 2)
4) Allocate partnership’s TTPs according to PSR
5) Treat each partner separately, and assess their trading profits/

Question 31

What are the classes of NIC and who are they paid by?

Answer 31

Class 1 - Primary paid by employee, Secondary paid by employer.
Class 1A - paid by employer.
Class 2 - paid by self employed individual.
Class 4 - paid by self employed individual.

Question 32

How is class 1 NICs paid?

Answer 32

Primary - starts age 16 and ends state pension age.
Secondary - paid on employees aged 16 or over, but differs for 16-20, 16-24, 21+ or an apprentice.
Earnings constitute all earnings in monetary form (DON’T include taxable benefits, calc. before allowable deductions like pension contributions).

Question 33

How is the earnings period determined for NIC purposes?

Answer 33

If paid weekly, NI calculated weekly.
If paid monthly, NI calculated monthly.
If director, NI ALWAYS calculated annually.

Question 34

What is the employment allowance for employers?

Answer 34

£4,000. Can reduce NIC liability to NIL. Per employer allowance, so regardless of no. employees.

Question 35

Who is employment allowance not available to?

Answer 35

Co. with single director, and no other employees. 
Bus. whose total class 1 secondary NIC liability was £100k or more in previous year.

Question 36

How is Class 1A NIC determined?

Answer 36

13.8% x taxable benefits provided to employees.

Any benefits taxed as earnings under Class 1 are NOT also taxable under Class 1A

Question 37

How is Class 2 NIC determined?

Answer 37

Flat rate weekly contributions of £3.05/week.
Start on 16th birthday but end on state pension age.
NO class 2 NICs payable if individual’s profits

Question 38

What is the small profits threshold for Class 2 NIC purposes?

Answer 38

6,475

Question 39

How is Class 4 NIC determined for individuals?

Answer 39

Based on their taxable trading profit, using the rates from Hardmans.

Question 40

What assets are exempt from capital gains tax?

Answer 40

Cash, motor cars (inc. vintage/classic), most wasting chattels, non-wasting chattels with cost and disposal consideration <6k, gilt-edged securities, NS Certificates, premium bonds, shares/investments in ISAs.

Question 41

What is the annual exempt amount for individuals?

Answer 41

£12,300
Deducted from chargeable gains to produce taxable gains.
Unused amount cannot be c/f.
Not an AE for companies.

Question 42

What is a wasting chattel?

Answer 42

A chattel (tangible moveable property) with predictable life at date of disposal not exceeding 50 years).
E.g. caravans, boats, computers, animals, plant & machinery.
Usually exempt from CGT.

Question 43

What are the taxation rules of non-wasting chattels?

Answer 43

Price and proceeds 6k or less: exempt.
Price 6k or less, proceeds >6k: 5/3(SP-6k)
Price >6k, proceeds 6k or less: Deemed proceeds of 6k.
Price >6k, proceeds >6k: Normal CGT.

Question 44

What is the Corporation Tax Proforma? (per accounting period)

Answer 44

Trading Income x
Property Income x
NTLRs x 
Miscellaneous Income x
Chargeable Gains x
Qualifying Donations paid (x)
TOTAL = Taxable Trading Profits (TTP) x

Question 45

What is the indexation allowance?

Answer 45

Deducted when calculating chargeable gain of a company.
((RPI Disposal - RPI Acquisition)/RPI Acquisition) (3.dp) x COST
Separate IA calculated for enhancement.
Cannot create or increase an unindexed loss.

Question 46

What is the rate of corporation tax and what is it applied to?

Answer 46

Taxable Trading Profit x19% = Corporation Tax Liability

Question 47

How do you calculate a companies size for determining the due date of their corporation tax liability?

Answer 47

Use Augmented Profits.
Augmented profits = TTPs + dividends received other than those within 51Q% group. 
0-£1.5m = Not large.
£1.5m-£20m = Large
£20m+ = V Large

Question 48

What are the conditions where input VAT can be recovered?

Answer 48

1) The goods or services have been supplied.
2) The input VAT recoverable is supported by a VAT invoice.
3) The goods and services are used for a business purpose (mixed use can be apportioned).

Question 49

When is input VAT irrecoverable?

Answer 49

Motor cars with any private use at all.
Goods or services for business entertaining which is not allowable when calculating TTPs - relating to staff entertainment and foreign business customers is recoverable.
Items where no VAT receipt held.
Non-business items.