Tax

Question 1

(General) What is the difference between income receipts and capital receipts?

Answer 1

Income is a receipt of trade, e.g. money paid for a service;

Capital is a receipt of a one-off transaction unconnected with day-to-day trade, e.g. selling a company car

Question 2

(General) What is the difference between income expenditure and capital expenditure?

Answer 2

Income expenditure is money spent on the day-to-day business, e.g. wages.

Capital expenditure is a one-off expenditure, e.g. buying a van.

Question 3

(General) How do deductions work between income and capital?

Answer 3

Income expenditure can be deducted from income receipts for tax purposes.

Capital expenditure can only be deducted from capital receipts, so effectively only when the capital asset is disposed of.

Question 4

(Income) What is a person’s taxable income?

Answer 4

A person’s net income (total income less available reliefs) less the personal allowance (if applicable).

Question 5

What are the sources of total income?

Answer 5

Non-savings;
Savings; and
Dividends.

Non-savings and savings are taxed the same, dividends are taxed differently.

Question 6

What is the:

(i) Savings allowance; and
(ii) Dividends allowance?

Answer 6

(i) Savings allowance - Basic rate taxpayer - £1,000 - Higher rate - £500

(ii) Dividends allowance - No tax paid on the first £1,000 of dividends.

Question 7

What is the personal allowance? When is it reduced?

Answer 7

Personal allowance is £12,570 It is reduced by £1 for every £2 over £100,000 - so £125,140+ earners get no personal allowance.

Question 8

What are the two available income tax reliefs?

Answer 8

(i) Interest paid on qualifying loans (money the individual pays) - e.g. loan to buy an interest/contribute to a partnership; loan to buy shares in a close company;

(ii) Pension scheme contributions - money paid into a pension is tax deductible

Question 9

How do you split the taxable income?

What are their respective tax rates?

Answer 9

Separate the income in order of:

Non-savings; then savings; then dividends.

Basic > 0 – 37,700 > 20% > 20% > 8.75%

Higher > 37,701- 125,000 > 40% > 40% > 33.75%

Additional > +125,001 > 45% > 45% > 39.35%

Question 10

When is CGT charged?

Answer 10

Where there is:

a chargeable disposal;
of a chargeable asset;
by a chargeable person;
which gives rise to a chargeable gain

Question 11

What properties are not chargeable assets for CGT purposes?

Answer 11

Principle private residence; cars for private use; investments e.g. government securities and ISAs

Question 12

What are the tax rates for CGT?

Answer 12

10% - basic rate
20% - additional rate (higher and additional rate tax payers)

Question 13

What is the annual exemption for CGT?

Answer 13

£6,000 - the first £6,000 of capital gains is tax-free

Question 14

What CGT reliefs can an individual benefit from?

Answer 14

Business Asset Disposal Relief: First £1m of qualifying gains from business assets are taxed at 10%. Business assets i.e. shares, whole of a business, assets of business that used to trade.

Rollover Relief: The gain of one asset ‘rolls over’ into the gain of the replacement asset, reduces the price paid on the initial asset (but will increase the liability when the replacement asset is sold)

Hold-Over Relief: When a business asset is gifted, the donor will have no liability for CGT, but the donee will incur liability if/when they sell the asset. Property is inherited at its initial purchase value, not the value at the time of transfer.

Question 15

Under Business Asset Disposal Relief, when can shares benefit from the reduced CGT rate?

Answer 15

When the disposer was an officer or employee of the company and held 5% of the shares for 2 years before sale

Question 16

What is Business Relief?

Answer 16

On death, for IHT:

• 100% relief is available in respect of transfers of a business or interest in a business or shares in an unquoted company;
• 50% applies to shares in a quoted company (but only if the shareholder had control of the company) and to the land, buildings or machinery used for business purposes.

Question 17

Who is a taxable person for VAT purposes?

Answer 17

If the value of a person’s taxable supplies totals more than £85,000, they are required to register for VAT.

If under the £85,000 threshold, they can voluntarily register.

Question 18

What is output and input tax in VAT? How do you calculate the amount of VAT payable?

Answer 18

Output tax: VAT charged when making a supply of goods;

Input tax: VAT paid on goods and services

Amount of VAT payable = Output tax minus input tax.

Question 19

What is the standard rate of VAT? How is it charged?

Answer 19

20% is the standard rate;

It is deemed included in the total price of something unless stated otherwise.

Question 20

What are the types of VAT supply?

Answer 20

Standard Rated;

Zero-rated (food, water, books, newspapers etc): Can still claim input tax on these items.

Exempt (insurance, finance, education, healthcare): Cannot claim input tax.

Question 21

What is the base charge of Corporation Tax?

Answer 21

It is payable on:

all income profits and chargeable gains;
of a body corporate;
that arise in its accounting period.

The sum of profits and gains is ‘TTP’ (Taxable total profits chargeable to corporation tax)

Question 22

What is the calculation of TTP?

Answer 22

Chargeable gains: Sale proceeds less allowable expenditure, indexation allowance, and capital/trading losses.

Income profits: Income receipts less deductible expenditure, capital allowances, and trading losses.

Question 23

What is the corporation tax rate?

Answer 23

25%

Question 24

For corporation tax, what is deductible expenditure for income purposes?

Answer 24

Expenditure that is:
- Wholly and exclusively incurred for the purposes of the trade;
- Not prohibited by statute (e.g. entertaining clients)
- be of an income nature (e.g. rent, wages, interest)

Question 25

How do capital allowances affect a company’s tax payment?

Answer 25

Although they are capital in nature, the allowances act as a deduction against income receipts.

They are tax reliefs available on qualifying items of expenditure.

Question 26

What are the main capital allowances?

Answer 26

Depreciation - Companies can deduct 18% of the value of plant and machinery from their income receipts each year.

Annual Investment Allowance - The company can deduct 100% of expenditure on plant and machinery up to £1m.

Companies also benefit from hold-over and rollover relief.

Question 27

What is straddling and what do companies do in this situation?

Answer 27

It is where a company’s accounting year does not coincide with a financial year.

The TTP of the accounting period is apportioned between the relevant periods for the tax year.

Question 28

How does a company deduct its trading losses?

Answer 28

(1) In the current year, all losses are set off against gains;

(2) if not used in whole/part, a company can carry back losses against the profits from the last period (provided they were carrying on the same trade in both years - must be made within 2 years) - will be able to claim the money paid back from HMRC;

(3) if there are still losses left over, they are automatically carried forward against future profits until the profits are exhausted.

Question 29

How does group relief operate?

Answer 29

One company with a trading loss in the group can surrender that loss to a profitable company so the loss can reduce or eliminate that company’s profits.

Question 30

How can a company deduct capital losses?

Answer 30

Capital losses can only be set off against capital (chargeable) gains.

Generally, capital losses cannot be carried back. They can only be applied to gains in that current year, or carried forward against capital gains

Question 31

What is a close company?

Answer 31

Under the control of:

(i) 5 or fewer participators (shareholder or creditor); or
(ii) any number of participators who are also directors.

Question 32

What companies cannot be a close company?

Answer 32

• If the shares are quoted on a recognised stock exchange; or
• it is controlled by one or more non-close companies

Question 33

What is the tax effect of a loan in a close company?

Answer 33

Unless the loan is in the ordinary course of business or is under £15,000, then:

The company pays corporation tax to HMRC in the rate of dividends of a higher rate tax payer.

Question 34

What happens if a loan has been paid back to a close company, waived or written off?

Answer 34

If paid back, the company can reclaim tax from HMRC.

If waived or written off, the company can still reclaim tax paid to HMRC, but the participator is deemed to have received a dividend, so is taxed as such.