Tax Flashcards
Two types of profits businesses can make
Capital - 🗽one-off go up in value. used to help business trade. e.g. office building
Income - recurring or incurred so can sell at profit e.g. rent
(Capital = money invested or available to be. Income = flow of money.)
(think of it like income is safe capital not as much)
First step in tax calculation for unincorporated and incorporated?
Calculate total income (trading profits)
in same way for both
What are trading profits and how are they taxed?
Money business gets from trading
Goes towards income profits
(which is taxed at income rate for unincorporated unless corp partner, or otherwise corporation tax)
Calculate pretty much same way for both
How are trading profit/loss calculated?
Chargeable receipts (ie sales)
MINUS
deductible expenditure (ie expenses occur on regular basis - salaries, stock, rent etc))
MINUS
capital allowances
Chargeable receipts = money received for goods/services. must be income (recurring).
Deductible expenditure (i.e. not capital, legal, wholly and exclusively)
Capital allowances = stuff need to carry out business (not sell) minus WDA
What is deductible expenditure - including examples?
Would food count?
Income nature. Incurred ‘wholly and exclusively’ for the trade and legal to deduce (not some lease cars and client entertainment).
Wholly and exclusively:
- strict interpretation, must not have dual purpose
- e.g. not food cos need to eat regardless
Can deduce expenses where can have identifiable deductible proportion:
- e.g. lighting tax payer WFH
Examples:
- Salaries (as long as not excessive)
- Comm prop rent
- Utility bills
- Stock
- Contributions to pension scheme
- Interest payments on borrowing
What counts as capital allowance?
what is pooling?
Plant and machinery - i.e. essential capital for carrying out business
(e.g. computers)
MINUS WDA
i.e. 18% of the value of all the POOLED plant & machinery
- valued at start of f/year.
(nb u do overall calc at end of f/y)
(once minus WDA from it, that is written down value)
Since pooled:
- if sell one, deduct proceeds of sale from value
minus the small number not the big one ! deduct 18% not the reduced value.
AIA - what is it and who can use it?
Annual Investment Allowance
Deduct from chargeable receipts
Max of £1m each year
Group companies receive one for whole group
Incorporated and unincorporated
New, old and refurbed
MUST HAVE PURCHASED IN THIS ACCOUNTING PERIOD
Full expensing - what is it, who can use and its limits?
Companies
Offset full cost of plant and machinery from chargeable receipts
Uncapped
Brand new items only
Still get back WDA 18%
Remember this particular period
When would you use AIA instead of full expensing?
Unincorporated business
Or incorporated business but second-hand or refurbished items
What order do you figure out capital allowance for plant and machinery?
Existing pool (if is one) gets 18% WDA
If there is full expensing allowance, all covered and no need for 18%
If there is AIA of £1m and some remaining, the balance receives 18% WDA
If neither AIA or full expensing applies, just 18% knocked off all of it
(remember to subtract the 18% - dont think this is right!)
(may need to add together new and old then re-do WDA if there is - depending on what the Q is)
come back to examples of this
If unincorporated and suffer trading loss, what can remedies do and what can you do if entitled to multiple?
As long as taxpayer, reliefs allow to deduct trading loss from other income - meaning less income tax overall
Can choose which relief to apply
If exhausted one relief and still losses, can use another
What are the different reliefs available to unincorporated?
- Start-up loss relief
- Carry-across/one-year carry-back relief
- Set-off against capital gains
- Carry-forward relief
- Carry-back on terminal trading loss
- Carry-forward relief on incorporation of business
Are there caps on reliefs?
Start-up and carry-across/carry-back: cap of 50k or 25% of taxpayer’s income in relevant tax year
Only applies to income from sources other than the trade which produced the loss
When is start-up loss relief available?
Whenever suffer loss in first 4 tax years
Set loss against their total income in three years before the tax year of loss (e.g. salary and rental property - set against combined income)
Can use against income from former job
to claim back tax if paid at higher rate cos it reduces the amount deemed to have had as income
What is carry-across/carry-back relief?
Conditions attached.
As applies to unincorporated.
Total income only. May lose personal allowance. Options to how apply.
Applies to tax year (not accounting period).
4 options:
If trading loss, can:
1. Set the loss against total INCOME from that tax year; or
2. Set against total INCOME from tax year BEFORE year of loss (carry-back).
If income low enough:
3. set against total income from SAME tax year until that is reduced to zero, and set balance against total income for tax year preceding year of loss; OR
4. set against total income from tax year PROCEEDING year of loss until that is reduced to zero, and set balance against total income from tax year of loss
If total income reaches zero, can’t claim personal allowance.
What is set-off against capital gains?
when can u use?
Relief unincorporated
Set off losses against chargeable capital gains in same tax year (diff to others which are about income)
Can use if not all loss absorbed from carry-across relief
What is carry-forward relief?
As applies to unincorporated.
Carry losses against subsequent profits which they will get in subsequent years.
Earlier years first but carry forward indefinitely until loss exhausted.
Carries forward indefinitely so doesn’t matter if few years until makes the profit.
But if more than four years go by and still carrying it forward, need to tell HMRC
4 letters in carry. 4 letters HMRC.
Advantages and disadvantage of carry-forward relief?
:) Retain personal allowance benefits
- as applies against company profits only, not total income
:) if can carry across in future, would reduce total income = lower tax band
:( pointless if doesn’t make any profits in future
Disadvantage of start-up, carry-across and carry-back relief?
Lose personal allowance benefits because losses are set against total income
Where this is reduced to zero, lose personal allowance
(this is bcos you have to offset against your total income - inc your personal allowance- til it reaches zero)
ur offsetting personal allowance
so only one retain personal allowance for is carry-forward. only an issue for others if losses set to zero.
What is carry-back of terminal trading loss?
Why would you do it and what are the limits?
NB: as applies to UNINCORPORATED
Any loss incurred (unincorporated) in final (insolvent) 12 months can be carried across and set against trading profits from final tax year
can carry-across despite being loss because can apply against other soruces of income which are connected to trade but not profits of trade
And then carried back and set against trading profits in the 3 years preceding the year of loss (start with year before loss) until absorbed or 3 year limit reached
No limit on amount recover
May get a tax rebate because profits from previous years reduced
Only applies to trading income
not capital gains or non-trading income - e.g. holiday cottage
What is carry-forward relief on incorporation of business? When can you get it?
if u are unincorp business owner and transfer your business to a company
and in return you get 80%+ of shares in the company
you can set any trading losses u made whilst unincorporated against income received from the company
^ usually dividends / salary
No cap.
Carry forward indefinitely but 4 years need to tell HMRC
Input vs output tax and what does HMRC get?
Output = charged
Input = paid
HMRC gets output minus input
(e.g.I paid 10k VAT and charged 5k VAT - I would pay HMRC £5,000 and £5,000 would come from input tax i think)
(and then if i paid more input tax than charged output tax, i would get a rebate)
i.e. if input greater than output, rebate.
What’s a taxable person?
The person who makes or intends to charge tax because supplying goods/services where it is chargeable
85k plus
What is the value of supply?
What it would be worth without VAT
If registered for VAT, what must you do and what must you pay/when?
Register for VAT and submit tax return
Pay VAT owed to HMRC within one month from end of each quarter
(owe the output minus input)
What if you have paid (input) more than you have charged (output)?
Rebate
Why better to be zero-rated than exempt-supplier?
Exempt-supplier CANNOT register so CANNOT reclaim VAT
Zero-rated can reclaim (e.g. book and water)
check children’s books
(zo lucky g syndrome) (she can RECLAIM her power from SP!)
so i don’t charge VAT and if i incur it, i can reclaim
but if i’m exempt, i don’t charge it but if i incur it, i don’t get a rebate from HMRC
Who must register for and charge VAT?
Why would you register even if don’t need to?
Disadvantages of registering?
Must if value of taxable supplies in last 12 months exceeded 85k
Because only registered can reclaim input tax paid
But competitors who aren’t registered don’t need to charge VAT
Does a partnership need to register for VAT in name of individuals?
No - can do in partnership name (unlike for most other taxes)
What should your invoice look like if charging taxable supplies?
Tax invoice containing:
- VAT number
- Value of supply (without VAT)
- Rate of tax charged
Penalties for failure to comply with VAT legislation?
Criminal and civil penalties
AND requirement to pay unpaid plus interest
Who pays income tax?
Individuals (over certain threshold, sole traders considering trading profits)
Personal representatives (deceased’s)
Trustees (income of trust)
Partners (by applying trading profit calculation on their share of profits unincorporated partnership)
Three categories of income and are they all taxable
- NSNDI (non-savings, non-dividend income - everything else)
- Savings income (e.g. interest on bank account)
- Dividend income
Yes
How to calculate income tax payable?
(individual’s tax due)
- Calculate total income
(adding diff ones together/considering any trading loss relief/deductions at source) - Deduct any tax relief (e.g. interest on qualified loans)
(1 minus 2 = net income) - Deduct any personal allowances (minus £12,570)
= Taxable income
Then minus savings and dividend income - Work out what is NSDNDI, savings and dividend income and work out what tax is owed on them each
- Add together tax from step 4
= income tax owed
What forms of income can you be made to pay income tax on/go towards total income?
- Trading income (profits from trading)
- Property income (rental)
- Savings / investment income (e.g. interest received and dividends)
- Employment and pensions (inc sick/maternity pay etc) (salary should be treated as gross - i.e. before employer sorts tax)
Examples of income which not charged tax on/doesn’t constitute total income?
Interest on damages for personal injury or death
Interest on savings certificates
Some state benefits
Premium bond winnings lol
Income from an ISA
Why should rental income be treated differently when working out total income?
Only charged on profit as permitted to deduct expenses (e.g. repairs)
When is tax deducted from source (income) and when is it not?
Employment stuff = deduction at source
Savings interest and dividends (and rent etc.) = paid gross tax later
What are qualifying loans?
Examples of what isn’t a relief?
(step 2)
Interest payments on qualifying loans, inc:
- buy share/loan/contribute to partnership
- invest in close trading company
- a loan to PRs to pay inheritance tax
(PRs can deduct that interest from income)
Usually minus interest owed from total income (e.g. interest in overdraft or credit card interest)
(close trading = controllled by 5 or less shareholders or controlled by all director-shareholders)
(cap on partnership one for whichever highest - £50k or 25% of their total income minus pension contribution but only if that income comes not from relevant trade)
Order for personal allowance / how it’s set against income?
- NSNDI
- (anything left so under threshold), savings income
- (anything still left) dividend income
Can you carry forward unused personal allowance (i.e. that far underneath the limit) to next tax year?
No, unless marriage allowance applies
How does personal allowance operate for those earning over £100k?
£125,140 or more: no personal allowance
Over £100,000 and below £125,140:
Personal Allowance = £12,570 – [__]
^ [ (net income – £100,000) / 2 ]
Round up to nearest £1
What are the other types of allowance applicable at step 3?
- Marriage Allowance
- transfer up to £1,260 of remaining personal allowance to partner unless they are higher / additional rate taxpayer
(1 son, 2 of them, 60 y/o). - Blind Person’s Allowance
(works like a PA. £2,870) - Property and trading allowances
- if receive gross property or gross trading income below £1k, no income tax or tax return required
(if over £1k, can take £1k allowance against gross income instead of deducting actual expenses to arrive at taxable income figure) - Personal savings and dividend allowances
(dividend = first £1k of dividend income tax-free)
(personal savings - e.g. interest in bank account - = £1000 if basic rate/£500 if higher rate/none if additional rate)
Personal saving allowances - eligibility and rates
Basic rate taxpayer: first £1k of savings income tax free
Higher rate (£37,701 - £125,140): First £500
Additional rate (£125,140) = not eligible
(this is why interest on bank account don’t usually pay tax unless rich)
What forms of allowances are and are not nil-rated? What does this mean?
PSA and dividend allowance - 0% tax due (nil rate)
Personal allowance - is an exemption
One is an exempt from tax and one is just 0%
Means zero rated ones you have to pay more tax on
(cos you are still paying the base amount, just not paying tax on it, whereas if it’s exempt it’s completely knocked off)
Order of taxation (income)
- NSNDI
- Savings
- Dividends
(makes sense - encouraging investment in companies so tax that last)
(we still care about savings but not as much as investment)
Nelly Silly Dra
NSD
Tax RATES for dividends, interest and NSNDI
(inc income for each rate)
*** luce ! imp *
NSNDI:
Basic rate (> 37.7k): 20%
Higher rate (^ - £125,140): 40%
Additional rate (£125,140+): 45%
SAVINGS:
Starting rate (> 5k): 0%
Basic rate (^ - £37.7k): 20%
Higher rate (^ - £125,140): 40%
Additional rate (£125,140+): 45%
DIVIDENDS:
Ordinary rate (>37.7k): 8.75%
Upper (^ - £125,140): 33.75%
Additional (^+): 39.35%
How to calculate tax on PSA and savings income?
Add any PSA to the taxable NSNDI - tax that at the relevant rate
Then charge any remaining taxable savings income at the relevant rate
(add PSA to NSNDI instead of savings income cos pushes to higher tax bracket)
How to work out tax rates for dividends?
Minus whatever dividend allowance is (usually £1k) from the dividend income and then tax whatever’s left
How to work out tax rates for savings income?
Add the PSA to the taxable NSNDI, but it won’t have any tax it’s zero percent - so may as well assume it’s not there (even though it is, but it’s being taxed at zero, so not actually part of the NSNDI’s taxable income)
When does income tax year run?
Will this be same as sole trader’s accounting period?
6 April - 5 April
Sole traders can choose one to suit their business - won’t necessarily be same
What to do if a business’s accounting period doesn’t coincide with the tax year? What types of businesses does this apply to?
- check w Dad*
Ok i get it. Sole traders - when assessing how much income tax they owe - their profits and losses are based on the tax year (6 April - 5 April). NOT their accounting period.
Profits and losses apportioned between the different tax years.
All businesses (inc sole traders/partnerships)
Means when a sole trader is paying income tax, assess it based on the proportion of profits and losses for that tax year - regardless of when their accounting period is.
How to calculate income payable by partner in an unincorporated partnership? (actually not too bad)
- Work out trading profit / loss
- Share based on agreement / PA (what is paid first and percentages for each)
- Put that on tax return (if profit)
How is income tax calculated for partners in partnership who are retiring or joining?
check with Dad
Apportion profits and losses across the diff tax years if business’ accounting period doesn’t coincide
e.g.
George’s tax liability will be limited to profits which he has received from the partnership from the date he joined until 5 April 202X, which is the final date in the income tax year.
How is LLP treated for purposes of income tax?
Same way as ordinary partnership
Availability for relief of trading loss restricted sometimes
Tax implications for shareholders
- Share buyback:
- probably pay as income tax on the money received
- may need to pay CGT if made profit - Income tax relief
A) buy ordinary shares in a close trading company
B) EIS: can deduct a sum equal to 30% of amount invested in qualifying unquoted companies
- max of £2m spent investing
- must not be connected to company.
(so say spent £50k on those investments, can deduct 30% of 50k from income tax liability)
- Close company makes a loan to shareholder and company writes it off
(see later)
close company is a company controlled by:
- 5 or less participators, or
- any number of participators if they are all directors or shadow directors. (all director-shareholders)
- participator is cose relative or business partner. control is over 50% VRs.
What tax do lenders pay on interest received for a loan?
Non-company lender: income tax
(even though it’s interest)
Company: corporation
Employees - what is taxed and what isn’t
Most things:
CHARGEABLE:
- non-cash benefits
e.g. company car/gym membership
- bonuses
Not chargeable:
- employer’s pension contributions, if to HMRC approved scheme
- deductible expenditure
necessary except travelling expenses and pension contributions
own pension contributions are deductible
- low rent / rent free accom if necessary perform job / customary
- special rate loans
- share schees
- First 30k dismissal
When and how would you do self-assessment of tax?
How long to notify HMRC that got income which is liable to tax? Implications if don’t.
Not deducted at source (e.g. rental)
Declare on tax return.
State any income tax already deducted from source.
MUST NOTIFY HMRC by 5 October and file tax return.
- Penalty = fine.
(following end of tax yr)
When must tax returns be filed?
What payments should be made/when?
How to calculate those payments?
Online tax return: 31 January following the relevant tax years end
Paper return: No later than 31 October
Make two payments on account:
1. By 31 January within the tax year
2. By 31 July after the tax year
Any balance on next 31 January
What estimate would be half of tax liability based on previous year’s accounts
(can claim reduced payment if think this would be overpaying)
Reduced of any tax deduced at source (e.g. salaries)
No payment on account required if that takes it below a certain limit (so most employees/pensioners don’t have to)
Penalties for unpaid tax on due date (inc part-payment on account)
Interest charged
Fines
when will GAAR care?
what will happen?
abusive tax arrangements
(tax avoidance fine)
^ if one of main purposes of it was tax advantage
not reas regard reas course action
contrived / abnormal steps
HMRC require just and reas tax adjustments
^ if dispute = PANEL
(not tribunal)
enabler can be liable to pay penalty
(not individual employee but firm)
What are qualifying loans and examples?
one where the capital amount has been used for a qualifying purpose
- to buy share in/loan/contribute to partnership
- to invest in close trading company
- to personal representatives so they can pay inheritance tax
Tax rates
12,571 - 37,700: 20%
37,701 - 125,140 - 40%
125,140.01+ - 45%
What is chargeable gains tax payable on?
CHARGEABLE GAINS made by a chargeable PERSON on the disposal of chargeable ASSETS in tax year
(6 April - 5 April)
Who are ‘chargeable persons’?
(for chargeable gains tax)
- All individuals (regardless personal capacity or sole trader)
- PRs when dispose of a deceased’s assets
- Partners when dispose of chargeable asset
(each partner charged seperately and for their proportion of their gain) - Trustees when dispose of chargeable trust property
CHARITIES ARE EXEMPT
Companies do not pay CGT!
What is a chargeable asset?
‘All forms of property’
Includes:
- debts
- options (e.g. to purchase land)
- incorporeal property (INtangible - e.g. INtellectual property)
Does not include cash if in GBP
What are the 5 steps for calculating chargeable gains tax?
- Identify disposal of a chargeable asset
(by chargeable person) - Calculate the gain made
(i.e. sale price less its purchase price less any deductions) - Any reliefs?
- Add together all gains and losses, deduct annual exemption
- Apply the correct tax rate
Annual exemption for chargeable gains tax?
£6,000
