Summary Notes Flashcards
What is tax avoidance?
- Organise tax affairs to minimise tax bill
- Legal
- e.g. efficient use of losses, investment in ISA, use of spouse exemption for IHT
What is tax evasion?
- Understating income/gains
- Overstating expenses
- False claims for allowances
- Failure to disclose chargeability to tax
- Illegal
What should you do if you discover an error made by HMRC?
- Accountants are advised to include in their letters of engagement authority to advise HMRC of errors
- Otherwise client consent is required
- If consent withheld consider:
– Seeking legal advice
– Ceasing to act for the client.
What is professional conduct in relation to taxation standards (PCRT)?
- Client specific
- Lawful
- Disclosure and transparency
- Tax planning arrangements
- Professional judgement and appropriate documentation.
What are the fundamental principles?
Integrity
Objectivity
Competence and due care
Confidentiality
Professional behaviour
What is your capacity as an agent?
Acting on client’s behalf – client retains responsibility for accuracy so this is a low risk activity
Submission of self-assessment returns
Confidentiality:
– no disclosure unless authorised by taxpayer
– only overridden if:
client suspected of money laundering
HMRC exercises statutory powers to obtain information
court order forces accountant to make disclosure.
Conflict of interest:
– accountant aware that client not making full disclosure
– advise client of possible consequences
– if no action taken by client:
cease to act for client
inform client and HMRC of cessation.
What is your capacity as principal?
Provision of tax advice
May be liable to the taxpayer if advice is incorrect or inappropriate so this is considered to be a high risk activity.
What are some anti=money laundering procedures?
Training
Due diligence
Reporting (internal/external).
What are some defences against failing to report money laundering?
Lack of training (but offence for employer)
Privilege reporting exemption
Reasonable excuse
Outside UK and not illegal where occurring.
What are the minimums of professional indemnity insurance?
If gross fee income < £600,000: min = higher of 2.5 × gross fee income and £100,000
Otherwise: min = £1.5m
What do you deduct and add (after percentage calculations) from income tax to give the liability?
Less:
Marriage allowance @ (£1,260 × 20%) (X)
DTR (lower of overseas tax and UK tax) (X)
Relief for finance costs on residential property income (X)
Add:
Child benefit tax charge X
What counts as exempt income?
NSC
- NSC
ISA (interest and dividends)
Lottery winnings/betting winnings/premium bond prizes
Statutory redundancy pay
Scholarships.
What constitutes qualifying loan interest?
Interest paid on loan used to:
Buy plant/machinery for use in partnership/employment
Buy interest in a close company/employee controlled company/cooperative
Invest in/make loan to a partnership
Pay IHT
How do you account for gift aid?
Gross up amount paid by 100/80:
– BRTP – no adjustment in IT comp
– HRTP – extend basic rate band by gross donation
– ARTP – extend basic and higher rate bands by gross donation.
How do you calculate the child benefit tax charge?
Rate of child benefit: eldest child £21.15 per week, each other child £14 per week
A tax charge may apply based on adjusted net income (ANI)
– ANI ≤ £50,000 = no charge
– ANI > £50,000 but ≤ £60,000 = charge at 1% benefit received per £100
income between £50k and £60k
– ANI > £60,000 = charge of full child benefit.
How do you calculate property income and when must you use the accruals basis?
Working
£
Rents received in the tax year X
Less: Allowable expenses paid (X)
–––
Property income X
–––
Allowable expenses deductible for period property let or available for let.
If receipts exceed £150,000 the accruals basis must be used (otherwise cash basis used).
Finance costs on residential property are not an allowable expense from property income. Instead they qualify for 20% basic rate relief at the bottom of the income tax computation.
How do you account for the property allowance?
Rent received ≤ £1,000 = exempt
Rent received > £1,000 then tax the lower of:
– Normal rental income calculation
– Rent received less £1,000.
If you see an individual with property receipts > £1,000 and expenses
< £1,000 you need to be able to identify that it will be beneficial to claim the property allowance.
When do you have rent-a-room relief?
Rental income ≤ £7,500 = exempt
Rental income > £7,500 then tax the lower of:
– Normal rental income calculation
– Rent received less £7,500.
How do you deal with property losses?
Net off profits and losses if there is more than one property.
Net loss is put in the income tax computation as NIL and rolled forward against future property income ONLY.
How do you treat pensions on retirement?
Individuals can usually take up to 25% of their pension fund tax free (subject to the lifetime allowance).
The drawdown of other income is taxed as NSI at the taxpayer’s marginal rate of tax.
If the pension fund exceeds the lifetime allowance then there will be extra tax charges at retirement.
What are some common benefits in kind? (key exemptions)
Job-related accommodation
Subsidised canteen available to all staff
Car parking (at or near place of work)
Insignificant private use of computer equipment
Employer’s pension contributions
Removal and relocation costs (up to £8,000)
Annual social events (not more than £150 per head per year)
Mobile phones (one per employee)
Bicycles and safety equipment available to all employees
Health-screening/checkup (one per tax year).
Loans ≤ £10,000 p.a
How do you tax cars/vans in the employment income working?
Car benefit – list price × CO2 emissions %
Fuel benefit re cars – £24,600 × CO2 emissions %
Vans – £3,500 (£Nil if zero emissions)
Fuel benefit re vans – £669
Are vouchers for goods or services taxabe?
Yes, at the cost to the employer
How do you tax living accomodation?
Living accommodation:
£
Annual charge X
Expensive charge ([Value – £75,000] × 2%) X
–––
X
–––
How do you tax the use of assets?
Use of assets – 20% × market value when first provided
- Time apportioned for usage
How do you tax assets gifted by the employer?
New asset gifted – cost to employer
Asset gifted after employee has had use of asset benefit is higher of:
– MV when gifted
– MV when first provided less previous private use benefits
How do you tax beneficial loans? (those given at a lower rate of interest than the national rate)?
Beneficial loans – loan amount (average/strict method) × 2% less interest paid
(no benefit if total loans ≤ £10,000 throughout tax year)
How do you tax the statutory mileage rate scheme?
Statutory mileage rates – approved mileage allowance payments for business
use of privately owned car, van, motor cycle, or bicycle
Payments received higher than SMR, excess = taxable
Payments received lower than SMR, shortfall = tax deductible
What are allowable deductions for employment income?
Occupational pension scheme contributions
Contributions to a payroll giving scheme
Professional subscriptions
How do you calculate trading income for an unincorporated business?
Approach
Step 1 Tax adjusted profit for the accounting period X
Step 2 Less: Capital allowances for the accounting period (X)
–––
X
–––
Step 3 Match tax adjusted
profits after CA for
accounting period
to tax year using
basis period rules
How do you apply the cash basis for an unincorporated business?
If the trader has claimed the cash basis calculate trading profit on cash
receipts/payments rather than accruals
Adjust for tax as normal
Capital payments are claimed instead of capital allowances for plant and
machinery (except cars).
What do you ADD to the net profit per accounts to reach tax adjusted profit? (Sole trader/Ltd company)
Add: Disallowable expenditure
Loss on disposal of NCA
- Depreciation
- Capital expenditure
- Private element of expenditure by owner
- Unreasonable payments to family members
- Increase in general provision
- Write-off of non-trade debt
- Client entertaining
- Gifts (unless cost ≤ £50, advertise business, not food drink or tobacco)
- Gift aid donations
- Non-trade subscriptions
- Fines (unless parking fines incurred by employee)
- Legal fees re capital items (unless registering patent or renewing short
lease)
- 15% x leased car payments if CO2 emissions > 50 g/km
Interest on late payment of tax
- Accrued pension contributions
X
Add: Taxable trading income not credited in accounts
What do you DEDUCT from net profit per accounts to achieve tax adjusted trading profit?
Less: Income included in accounts not taxable as trading income
- Profit on disposal of NCA
- Decrease in general provision
- Rental income
- Interest received
- Exempt income
(X)
- Less: Deductible expenditure not charged in accounts
What goes in the main pool?
Any asset that doesn’t belong in another pool
What goes in the special rate pool?
Long life assets – assets with
expected working life of ≥ 25
years and total spend >
£100,000 in a 12 month
accounting period
Integral features
Thermal insulation
Solar panels
Cars with CO2 emissions >
50 g/km
What goes in a single asset pool?
Private use assets
(by owner) –
unincorporated
businesses only
Short life assets –
expected to be
used for not more
than 8 years
Explain how to use FYA, AIA, and WDA?
FYA @100%
Qualifying assets
Never time apportion.
AIA
£1,000,000 p.a
Time apportion for length of accounting period
Use against SRP then MP
Excess gets WDA.
WDA
Main pool – 18%
SRP – 6%
Time apportion for length of accounting period.
How do you account for disposals from main pool and special rate pool?
Deduct lower of proceeds and original cost
If a positive balance remains, carry on giving WDA as normal
If a negative balance arises, eliminate with balancing charge.
How do you account for disposals from single asset pools?
Deduct lower of proceeds and original cost
If a positive balance remains, eliminate with balancing allowance
If a negative balance arises, eliminate with balancing charge.
What do you do if the main pool/SRP TWDV before WDA is less than or equal to £1000?
If main pool/SRP TWDV before WDA is £1,000, write down to nil (time
apportion the £1,000 for long/short accounting periods).
How do you treat capital allowances if the trader is VAT registered?
If VAT registered, include all assets except cars net of VAT.
Do you apply WDA/FYA/AIA when ceasing to trade?
If ceasing to trade, no WDA/FYA/AIA in final accounting period – just balancing adjustments
What qualifies for SBA?
Look in Hardman’s
How much is SBA and when can it be claimed?
An SBA of 3% is available on qualifying expenditure.
The SBA can only be claimed from when the asset is brought into use by the business
Are there balancing adjustments on disposals qualifying for SBA?
On disposal there is no balancing adjustment. The buyer takes over the remainder of the SBA period receiving the same 3% SBA as the original buyer.
For CGT purposes, on disposal the proceeds received by the seller are increased by the SBAs claimed to date.
