Tax

Question 1

What is income tax?

Answer 1

A tax levied on individuals’ income, relevant in contexts such as payments to employees, sole traders, partners, shareholders, lenders, and debenture holders.

Question 2

Who pays income tax?

Answer 2

Individuals.
Personal representatives for deceased persons.
Trustees for trust income.

Question 3

What are the three income categories?

Answer 3

Non-Savings Income - Salaries, trading profits, property income.
Savings Income - Bank interest, bonds.
Dividend Income - Company share dividends.

Question 4

How is trading income calculated?

Answer 4

Gross income minus revenue-related expenses (e.g., salaries, rent).

Question 5

How is taxable income determined?

Answer 5

Gross income - qualifying deductions = Net income
Net income - allowances = Taxable income.

Question 6

What is the personal allowance for 2023/24?

Answer 6

£12,570, this is tapered by £1 for any £2 made over £100,000.

Question 7

What are the tax rates for non-savings income?

Answer 7

Basic Rate: 20% (up to £37,700).
Higher Rate: 40% (£37,701–£125,140).
Additional Rate: 45% (over £125,140).

Question 8

What is the Personal Savings Allowance (PSA)?

Answer 8

£1,000 for basic rate taxpayers (20%)
£500 for higher rate taxpayers. (40%)
No PSA for additional rate taxpayers. (45%)

Question 9

How is dividend income taxed?

Answer 9

£1,000 is taxed at 0%.
Above that: 8.75% (basic), 33.75% (higher), 39.35% (additional).

Question 10

what is the order of calculating income?

Answer 10

First slice - non- savings income
Second slice - Savings income
Thirds slice - Dividend

Question 11

Who pays CGT?

Answer 11

Individuals and partners pay CGT at lower rates than income tax.
Companies pay tax on capital gains at the corporation tax rate.

Question 12

What is the effect of residence on CGT liability?

Answer 12

UK residents are taxed on worldwide capital gains, while non-residents are taxed only on disposals of UK land.

Question 13

What assets are exempt from CGT?

Answer 13

Sterling cash, shares held in an ISA, and gilts (government bonds).
Wasting chattels (movable items with a life of less than 50 years, e.g., cars, boats).
Non-wasting assets worth less than £6,000.

Question 14

How is a capital gain calculated?

Answer 14

CapitalGain= ProceedsofSale −(CostsofAcquisition + IncidentalCosts)

Question 15

What costs are deductible?

Answer 15

Purchase costs (e.g., stamp duty, legal fees).
Costs of sale (e.g., agent fees, advertising).
Capital improvement costs still part of the asset.

Question 16

What is Private Residence Relief (PRR)?

Answer 16

Exempts gains on a property used as a main residence.
Full exemption if the property was the main residence throughout ownership.
Deemed occupation applies in certain periods of absence.

Question 17

What deemed occupation rules apply?

Answer 17

Last 9 months of ownership
Any period of absence for whatever reason up to 3 years
Owner abroad on employment this is unlimited
Absent from property but working elsewhere up to 4 years

Question 18

What is Business Asset Disposal Relief (BADR)?

Answer 18

Reduces CGT to 10% on qualifying gains up to a lifetime limit of £1 million.

All or part of a business carried on for 2 years before disposal
Assets owned and used by individual’s personal trading company in the 2 years before disposal

Question 19

What is Hold Over (Gift) Relief?

Answer 19

Defers CGT on gifted business assets. The donee inherits the donor’s deferred gain, this has to be elected in order to apply.

Question 20

What is Roll-Over Relief?

Answer 20

Defers CGT when proceeds from business asset sales are reinvested in new qualifying assets within 1 year prior or 3 years after sale.

Question 21

What is Incorporation Relief?

Answer 21

Defers CGT when a sole trader or partner transfers business assets to a company, reducing the base cost of the company shares.

Question 22

What is the Annual Exempt Amount?

Answer 22

The first £6,000 (2023/24) of capital gains is tax-free.

Question 23

What are the CGT rates?

Answer 23

10% if total income is within the basic rate band.
20% for income exceeding the basic rate band.
Residential property gains are taxed at 18% or 28%.

Question 24

How are capital losses treated?

Answer 24

Automatically offset against gains in the same year.
Excess losses are carried forward to reduce future gains.
Losses are applied in the most tax-efficient way.

Question 25

Give an example of PRR.

Answer 25

Henry owned a home for 10 years, living there for 7 years, then rented it out. He sells it for a gain of £150,000. Deemed occupation applies for the last 9 months. PRR exempts 7.75/10 of the gain: £150,000 × (7.75/10) = £116,250

Question 26

Give an example of CGT calculation.

Answer 26

Albert has a taxable income of £36,000 and sells an asset for a gain of £70,000. After the £6,000 exempt amount, the gain is £64,000. Unused basic rate band: £36,000 - £12,570 = £23,430. £37,700 - £23,430 = £14,270 CGT Tax liability: £14,270 × 10% = £1,427 £64,000 - £14,270 = £49,730 £49,730 × 20% = £9,946 £1,427 + £9,946 = £11,373 Total: £11,373

Question 27

How does VAT work in practice?

Answer 27

Businesses charge VAT on sales (output tax) and reclaim VAT paid on purchases (input tax), paying HMRC the net difference.

Question 28

What supplies are exempt from VAT?

Answer 28

Supplies such as land, insurance, financial services, education, health services, and postal services.

Question 29

What are the VAT rates in the UK?

Answer 29

Standard Rate: 20% (e.g., most goods and services). Reduced Rate: 5% (e.g., domestic fuel, energy-saving materials). Zero Rate: 0% (e.g., food, books, newspapers).

Question 30

When must a business register for VAT?

Answer 30

When taxable turnover exceeds £85,000 within a 12-month period or is expected to exceed £85,000 in the next 30 days.

Question 31

Can businesses register voluntarily?

Answer 31

Yes, voluntary registration allows reclaiming input tax but requires charging VAT on supplies

Question 32

When can a business deregister?

Answer 32

If taxable turnover falls below £83,000 or the business ceases trading

Question 33

What is the tax point for VAT?

Answer 33

The date when VAT becomes due, typically when goods are delivered or services performed, but can be earlier if payment or invoice occurs first.

Question 34

What must VAT invoices include?

Answer 34

Supplier's VAT number, tax point, supply value, and VAT rate charged

Question 35

How are VAT returns filed?

Answer 35

Electronically every quarter, with payments made via direct debit to HMRC.

Question 36

: How is VAT on VAT-inclusive prices calculated?

Answer 36

For standard-rated supplies, VAT = Total price × 1/6. For reduced rate, VAT = Total price × 1/21

Question 37

Example of VAT accounting for a business?

Answer 37

Sales: £20,000 (standard rate). Purchases: £30,000 (VAT inclusive). Output tax: £20,000 × 20% = £4,000 £20,000×20%=£4,000. Input tax: £30,000 × 1/6 = £5, 000 Net VAT: £4,000−£5,000= −£1,000(repayable by HMRC).

Question 38

What penalties apply for VAT non-compliance?

Answer 38

Late registration: Percentage penalty based on VAT due. Late returns/payment: Surcharges increase with repeated defaults. Under-declaration: Percentage penalties for lack of care or dishonesty. Evasion: Fines up to the amount evaded or imprisonment up to seven years.