tax- basics

Question 1

Tax - solettrader

Answer 1

Income tax on profits + capital gains tax on capital gains
- Not separate legal entity
- Any profits a sole trader makes are taxed as the individual’s income for income tax purposes and any gains made on one-off non-cash transactions will be charged to the individual as capital gains tax

Question 2

Partnership- tax

Answer 2

Individual income tax on profit share + capital gains tax on capital gains
- Not separate legal entity
- Partnerships are ‘tax transparent’: means that HMRC looks through partnership to the profits and gains of the partners.
- Partners are taxed on their individual shares of profits for income tax and chargeable gains for capital gains tax

Question 3

Limited Liability Partnership

Answer 3

Individual income tax on profit share + capital gains tax on capital gains
- LLPs are a hybrid entity between partnerships and private companies
- While they are treated like a company for liability purposes, they are treated like a partnership for tax purposes (tax transparency)

Partners are taxed as individuals AND taxed on their share of the LLP’s profits and gains

Question 4

Companies- tax

Answer 4

Pay corporation tax + shareholders pay income tax on dividends received
- Separate legal entity from owners
- Companies pay corporation tax on their taxable total profits (‘TTP’) which are made up of the company’s income profits and its capital gains
- The taxable total profit is taxed at a flat rate for the current tax year, and it is the company itself that is liable to pay
- Double taxation of profits: A company will pay corporation tax on its profits before maybe deciding to pay dividends to shareholders. The shareholder receiving dividends will then be taxed to income tax.
- consider this issue when deciding whether to incorporate a company