Tax (business) Flashcards
Collection of tax through PAYE system
Each payroll period, employer must deduct appropriate tax from employer’s salary along with NI contributions for those earning more than £184 pw
On or before payday, employers must send to HMRC a report of the money deducted (‘full payment submission’/FPS)
Payments must be submitted to HMRC monthly (or quarterly if paying less than £1500 pm)
If reporting and paying electronically, report and payments must be received by the 22nd
HMRC may assess interest and a penalty for late reports and payments
Penalty = % of the payments made, and the % increases depending on the number of defaults
Collection of tax - self-assessment
ie Usually sole traders or partners of a partnership
Tax returns must be filed by 31 Jan after tax year (if online) or 3 months earlier if paper (ie by 31 October)
Payment dates
- Typically required to make 2 payments on account towards the income tax due for any year
- First due on 31 Jan in tax year in question
- Second due 31 July after end of tax year
- Each payment on account is 50% of the prev tax year’s liability
- Any balancing payment required is due by 31 Jan after the end of the tax year
Penalties payable for late tax return or late/non-payment of tax
Categories of income
- Non-savings income (ie earnings, pensions, trading income, rental income)
- Savings income (ie interest from bank accounts)
- Dividend income (ie received from companies)
Principle re foreign income
General principle = UK resident will pay UK income tax on both their UK and foreign income (resident if spend more than half of tax year in UK)
Income exempt from income tax
Incl:
- Interest from national savings certificates
- Interest/dividends receiving from an ISA
- Winnings on premium bonds and income from betting/gaming/lotteries
- Many social security benefits (not state pension or JSA)
Calculating trading income - general
Ie if sole trader or partner
Calculate trading income to incl in their tax return as non-savings taxable income
Also must register with HMRC within 3 months of becoming self-employed/srtating their business
Consider:
- base calculation incl re revenue-related expenses
- ‘wholly and exclusively test’
- any capital assets bought for the business
- role of partners
- overlap profit problem
Calculating trading income - base calculation
Start with gross income for business’s accounting period (ie 12 month period taxpayer has chosen for keeping financial records of the business, which may be different to the tax year)
Then subtract revenue-related expenses of business (eg salaries)
Cost of one-off items (ie assets) = capital expense => treated differently
Calculating trading income - wholly and exclusively test re revenue expenses
Expenses deductible only to extent they were wholly and exclusively incurred for business purposes
BUT if expenses incurred for both personal + business purposes, HMRC will allow a tax deduction for the business proportion of the expense
Calculating trading income - capital assets bought for business
Taxpayer given annual investment allowance (AIA) which allows them to deduct all of the costs of plant and machinery in accounting period in which they were incurred, up to available AIA amount for that period
Cars/land/buildings excluded
AIA currently £1m
Writing down allowance
- Cost of capital assets exceeds AIA (or is for land/cars building) => writing down allowance available
- Enables taxpayer to deduct a fixed % of the cost of the asset (18% for most assets; 6% for long-life assets)
- Assets of same type may be pooled
- Value of asset reduced by amount of the allowance taken
- Ie allows taxpayer to claim a tax deduction for the cost of an asset over time
Calculating trading income - partners
=> Need to incl in their non-savings income their share of the partnership’s profit
Share = share set out in partnership agreement (agreement silent = each partner has equal share)
Partners must incl their whole share of the partnership’s annual profits, even if the partners decide to retain part/all of the year’s profit in the business
Salaries and interest deducted first
- Of partners (if provided for in the partnership agreement)
=> these sums are allocated to the partic partner first, and the amount remaining after allocating these sums will then be divided among the partners as the partnership agreement provides
Partnership tax return
- Partnership itself does not pay taxes but must file a partnership tax return (declaring income, deductions + expenses)
- Clearly shows net income of the partnership and each partner’s share of that income under the partnership agreement
Calculating trading income - overlap profit problem
Business owners may use a 12 month accounting period that does not coincide with the tax year
Unless trader makes up their accounts to 5 April, some profits made in business’s first accounting period will be taxed twice (= ‘overlap profits’)
Business will not usually get relief for these overlap profits until trade ceases (or if they later change their accounting date to closer to 5 April) = (‘overlap relief’)
Calculating income tax - general equation
Adding income across 3 categories, subtracting any allowances, and multiplying income in each category by the tax applicable to that category
Then subtract out any tax already paid at source (eg through PAYE system)
Result of calculation positive => amount taxpayer still owes
Amount negative => amount repayable
Calculating income tax - net income
Subtract payments of interest on certain qualifying loans from gross income
Incl loans used to fund:
- Capital contributions to (or loans to) a partnership
- Investments in a close trading company
- Payments of inheritance tax for personal representatives
Calculating income tax - calculating taxable income from net income
ie by deducting available allowances
- Personal allowance
- Ind taxpayers entitled to this
- Amount is changed annually (currently £12,570)
- PA tapered (ie reduced) by £1 for every £2 of income above £100k
- => If taxpayer has net income in excess of £100k + twice the PA, they will not be entitled to any PA - Marriage allowance
- Enables ind to transfer part of their PA to their spouse
- Amount changes (currently £1,260)
- Three conditions must be met:
a) Couple must be married/in a civil partnership
b) Transferring spouse’s income must be less than the PA
c) Recipient spouse must be a basic rate taxpayer
=> transferring spouse gets a credit against tax owed of 20% of the amount transferred
NOTE: Marriage allowance is a tax reduction rather than an increase to the recipient’s PA
Rates of tax - general
Once we have calculated an ind’s taxable income, we need to determine the appropriate rate at which it is taxed
Income taxed in 3 slices, each with up to 4 tax rates
Order = non-savings income, savings income, dividend income
(ie if all basic rate used by non-savings, savings income will start in higher rate)
Rates of tax - non-savings income
Taxed in 3 bands – any income within a band is taxed at the rate applicable to that band
3 bands =
- Basic rate band (20%) - £12,570 - £50,270
- Higher rate band (40%) - £50,271 - £125,140
- Additional rate band (45%) - over £125,140
Rates of tax - savings income
Taxed on the band in which it falls (ie 20%, 40%, 45%)
Must first apply personal savings allowance (before calculating tax on savings income)
PSA -
- Basic rate taxpayer – PSA of £1k
- Higher rate – PSA of £500
- Additional rate – no PSA
PSA is taxable income but at 0% (ie nil rate band)
Rates of tax - dividend income
Taxed any of 3 rates, depending on the tax band within which they fall
But £2k dividend allowance available to all taxpayers regardless of their band
=> first £2k of dividends are taxed at 0%, but (as with PSA) divided allowance will use the relevant portion of the bands at that point of the tax liability calculation
In any case if a taxpayer’s dividends exceed the DA, tax is as follows:
- Dividends within the taxpayer’s basic rate band: 7.5%
- Dividends within the taxpayer’s higher rate band: 32.5%
- Dividends within the taxpayer’s additional rate band: 38.1%
Income tax - trading loss relief
ie results in paying less tax by offsetting the loss against income that would otherwise be taxed
Only trader/partner entitled to claim loss
- Ie loss cannot be transferred to a spouse
- Partnership => each partner’s share of a loss is proportionate to the partner’s share of the partnership profit (unless they agree otherwise)
Four alternatives:
1. Current year/prior year loss relief
2. Carry forward of loss relief
3. Carry forward relief on incorporation of a business
4. Terminal loss relief
Trading loss relief - 4 alternatives to offset
- Current year/prior year loss relief
- Trade losses may be set off against the taxpayer’s total income (ie before PA) from the current year or from the prior year
-Must either utilise all the loss available for relief or relieve all their available income (no partial claims permitted) - Carry forward of loss relief
- Losses may be carried forward and set off against future profits of the SAME TRADE
- Often last resort as delays relief for losses
- Must be set off against the next available trading income (not against other forms of income) - Carry forward relief on incorporation of a business
- Ie when sole trader/partner transfers the business to a company and receives shares in return => can set off any unused trading losses that remain against salary or dividend payments received from the company for any year in which they own those shares - Terminal loss relief
- Trader ceases trading => terminal loss available
- Allows a loss to be deducted from trading profits in the tax year of cessation (if there are any) and then to be carried back to the three preceding tax years, taking later years first (ie last in, first out)
- Losses set off only against profits of the trade (not other income)
Income tax - scope of anti-avoidance provisions
‘general anti-abuse rule’ (GAAR) - seeks to deter taxpayers from entering into schemes that abuse the tax system and promoters of such schemes
Double reasonableness test
- Ie allows HMRC to set aside tax arrangements only if HMRC can provide that the arrangement cannot reasonably be regarded as a reasonable course of action
- High threshold
Remedy = just and reasonable adjustment
- Tax arrangement found to be abusive => HMRC may make a tax adjustment that is just and reasonable in all the circs (eg taxing the income in a legitimate way)
Inheritance tax - business relief for lifetime transfers (general rule)
Reduces the value of the relevant business property given as a lifetime gift to a trust or at death
Applied before any annual exemption
Business must be trading (ie selling goods/services as opposed to merely investing in things)
Overseas company shares are eligible
Rules re meaning of ‘ownership’
Inheritance tax - business relief for lifetime transfers (what is relevant business property?)
Entitled to 100% relief if:
1. A sole trade business or partnership interest to a trust
2. Shares in an unlisted trading company
Entitled to 50% relief if:
1. Shares in a quoted trading company if the donor has voting control of the company (ie more than 50% of the ordinary shares);
2. Land or buildings or plant and machinery owned by an ind and used either by a partnership of which they are a member or a company they control
[note: Related property is considered in determining control]
Inheritance tax - business relief for lifetime transfers (rule re ownership)
Rule = donor must have owned the property for at least 2 years before the transfer
Exceptions incl:
1. Replacing one business property asset with another within a 3-year period
2. Inheriting business property assets from spouse
VAT - what is a taxable supply
=
1. For consideration
2. Supply of goods or services
3. Made by a taxable person
4. In the UK
5. In the course or furtherance of the taxable person’s business
6. Must not be exempt from tax
VAT - charging rates
Tax charged on the ‘value of the supply’ (defined widely)
Standard = 20%
Zero-rated supply (ie 0% tax) = food (unless catering), books and newspapers, water and sewerage services, transport, and residential construction
Exempt = LIFE HP (land, insurance, financial services, education, health services, postal services)
Outside scope of VAT = BSc (sale of a business and sale of shares of a company)
Registering for VAT
Business must register for VAT if turnover will exceed the VAT threshold (£90k) within any 12 months period (historic test) or if looking forward, the threshold is expected to be exceeded in the following 30 days alone (future test)
When determining whether threshold is reached, exempt supplies are NOT included but zero-rated and reduced rate supplies ARE included
Historic test met => business must register for VAT within 30 days and must charge VAT from the start of the following month
Future test met => HMRC must be notified before the 30 day period ends and VAT must be charged from the date the business was aware that its taxable supplies were going to exceed the registration threshold within the 30 day period
Voluntary register for VAT and deregistering
Business may voluntarily register for VAT, which enables it to cover VAT it paid on its own purchases (ie input tax)
Business may deregister for VAT if its taxable turnover falls below £88k for a 12 month period and must deregister within 30 days of the time it ceases trading/stops supplying goods subject to VAT
VAT - Tax point
ie time of supply
Determines accounting period within which a supply of goods or services falls
Goods => tax point is time goods are removed or time they are made available to the person to whom they are supplied
Services => time service is performed
BUT basic tax point can be varied
- Eg if supplier issues a VAT invoice/receives payment before date goods delivered, tax point brought forward to that date
- Eg if VAT invoice issued within 14 days after basic tax point, invoice date becomes the new tax point
VAT invoices
Must be provided by person making a taxable supply
Incl supplier’s VAT number, the tax point, value of the supply, rate of tax charged
Invoices can be used by a business seeking to deduct input tax from their output tax
VAT invoices must be issued to all customers, regardless of their VAT status
VAT return and reclaiming VAT
Business must file electronic VAT return each quarter, and payment of any VAT due is made by direct debit to HMRC
Amount payable = VAT business charged its customers on all supplies of goods and services (ie output tax) less their input tax
Input tax exceeds output tax => HMRC will issue a rebate
VAT records
Business registered for VAT must keep records and accounts of all taxable goods and services that it receives or supplies in course of business
Might incl:
- Annual accounts
- Bank statements
- Invoices for purchases and sales
- Daily records of takings
- Relevant correspondence
- Summary of input and output VAT for the period must be kept
VAT penalties
Fails to comply => liable for civil and criminal penalties, plus interest on late supply
Eg
- Taxpayer’s failure to register when required will cause a penalty charge of a % of the VAT due from when they should have registered (% increases the longer the delay)
- Person submits a return late or does not pay the VAT due on time => HMRC can impose a % surcharge on the VAT due (surcharge increases to a max 15% for consistent defaults)
- If amount of VAT due is under-declared due to sig or repeated lack of care => penalty can be charged (alsi as % of tax that should have been paid)
- Dishonest evasion of tax => more serious penalties
- Penalty can be imposed up to amount of VAT evaded
- Also unlimited fine and imprisonment for up to 7 years
CGT - definition and who pays
= profit realised when a capital asset is disposed of
Inds and partners v companies
- Inds/partners pay tax on capital gains at a rate lower than the tax rate on their savings and non-savings income
- Companies do NOT pay CGT – instead taxed at company tax rate (19%)
Effect of residence
- Resident in UK => liable for CGT on any assets they own, regardless of where asset situated
- Not UK resident => not liable even if asset is situated in UK
- Exception = non-UK residents chargeable to CGT if they dispose of interests in UK land, whether residential or commercial
Assets exempted from CGT
Eg
- cash in sterling and gilts (government bonds)
- Wasting chattels (ie moveable property with a life of less than 50 years)
- Eg cars, boats, watches, farm animals
- Incl machinery not used in business (but are taxable if used in business) - Non-wasting chattels disposed off for less than £6k
- Eg jewellery, fine art, antiques
Disposals exempted from CGT
- Transfers on death
- Person who takes property takes it as its then market value (probate value - ie value on death)
- Uplifted probate value is used to determine whether the estate is subject to IHT - Transfers between spouses
- But if then disposed of by recipient spouse we use figure donor spouse acquired it for - Transfers to charities
Collection of CGT
Due and payable on 31 Jan following year in which the gain was made
Details of disposals are incl in an ind’s tax return
Unlike income tax, payments on account of CGT are not required on 31 Jan and 31 July following tax year
Disposals of UK residential property => any CGT due must be reported and paid within 60 days of completion
Calculation of gains - CGT
Proceeds of sale (or market value) - costs of acquisition = capital gain
Proceeds of sale:
- Start with price paid (unless asset disposed of by gift or transaction with connected person => market value used instead)
- Then deduct incidental costs of disposal (incl legal fees, valuation fees, and any advertising costs)
Costs of acquisition:
- Incl allowable costs and expenses, and actual cost of acquiring asset in the first place
- Cost of enhancements added to acquisition costs (provided enhancement still part of the asset when it is sold/disposed of)
- Costs relating to title added to acquisition costs (ie re reserving, defending, establishing title, and any legal fees in a boundary dispute)
CGT reliefs - general
- Private residence relief
- Business asset disposal relief (BADR)
- Hold over (gift) relief
- Replacement of business asset relief
- Incorporation relief
- Enterprise investment scheme reinstment relief (EIS)
CGT reliefs - private residence relief
Exempts all or part of gain which arises on a property which an ind has used as their home
Reduces capital gain rather than deferring it to later date
Calculated by: gain x (period of occupation of property/period of ownership)
- Also consider deemed occupation
CGT reliefs - BADR
Available on gains made by inds on the sale/gift of certain business assets incl:
- All or part of a trading business (carried on as sole trader/partner for at least 2 years before disposal)
- Shares in a trading company if the ind owns at least 5% of the ordinary voting shares of the company (ie it is their ‘personal company’) and was an officer or employee of the company for 2 years before disposal
- Assets owned and used by the ind’s personal trading company or trading partnership in the 2 yrs before disposal
Qualifying gain => taxed at 10%
- Lifetime limit of £1m
CGT reliefs - holdover relief
ie enables an ind to give away certain types of business assets without paying CGT (must be as a gift)
Donor and donnee must agree that the donor will not pay CGT and that when the donnee sells the asset they’ll pay CGT on both their gain and the deferred gain of the donor
Accomplished by calculating donor’s gain (market value – acquisition cost) and subtracting it from the donee’s acquisition cost (market value) = donee’s base cost
Base cost used to calculate gain upon when the donee disposes of the asset
Qualifying assets incl:
- Assets used for the purposes of a trade or profession carried on by the transferor or their personal company (as defined above)
- Shares in an unquoted trading company
- Shares in the transferor’s personal company
- Assets that qualify for agricultural property relief
CGT reliefs - replacement of business assets relief
When disposes of a capital asset at a profit and uses the profit to buy a replacement asset within one year before or 3 years after the disposal
Allows a company to defer a gain (and => the corp tax due) to when that replacement asset is then sold
Calculated by subtracting gain from acquisition cost of the new asset
Only relief also available to companies
CGT reliefs - incorporation relief
Also a deferral mechanism
Applies when an ind transfers their business or partnership interest as a going concern to a company
Gain is deferred by subtracting gain from acquisition cost of the company shares the transferor receives in exchange for the business interest transferred
Gain will be taxed when the transferor disposes of the shares
CGT reliefs - enterprise investment scheme reinvestment relief (EIS)
Purpose = to encourage investment in small companies
Ind can defer payment of CGT on any chargeable gain by investing in shares in a qualifying unquoted trading company (EIS company)
Either up to 1 year prior to gain being made or in 3 years after gain is made
Deferred gain chargeable when EIS shares are sold
Calculating CGT - general considerations/process
- Annual exempt amount
- Rates of CGT
- What to do re losses
Calculating CGT - annual exempt amount
Available for every ind (similar to personal allowance for income tax)
Changes year on year (approx £3k)
=> first 3k in year are exempt and not chargeable to CGT
=> to arrive at taxable gains, need to take chargeable gains remaining after all reliefs (other than Business Asset Disposal Relief) and deduct 3k (/AEA)
- BADR available => deduct AEA first then apply BADR’s 10% rate after that
Unused AEA cannot be carried forward
Calculating CGT - rates
Depends on level of ind’s taxable income and nature of asset being disposed
- 10% (to the extent that they do not exceed the ind’s unused income tax basic rate band, or 20% to the extent they do exceed that amount)
- Unused basic rate band = amount of basic rate band remaining after an ind’s income has been taxed
- Ind pays income tax at higher or dividend upper rates (/additional) => CGT rate is 20%
Gains from residential property
=> 10% and 20% rates increase to 18% and 28%
- Applies to gains on UK AND overseas property
Calculating CGT - approach re CGT losses
Capital losses set against capital gains (Not normally set against taxpayer’s income)
Automatic offset
ie capital losses set against capital gains in the same tax year automatically
- AEA is deducted after relief for current year capital losses
Most tax efficient use allowed
Ie taxpayers can deduct losses in the most beneficial way to minimise tax liability
- Losses should be offset against gains taxed at higher rates in priority
=> losses should be allocated to gains in respect of residential property in priority, and then against other gains not eligible for BADR
Excess loss may be carried forward
- Ie if losses exceed gains
- Chargeable gains in the year will be nil and AEA will be lost
- AEA not used => it cannot be carried forward or transferred to another person (is just wasted)
Corporation tax - what and rate
Companies liable to pay 19% CT on income and chargeable gains (‘taxable profits’)
Likely to have trading profits, non-trading profits, property income and capital gains
Able to deduct payments to national charities as ‘qualifying charitable deductions’
Formula for calculating tax for a company’s accounting period (no longer than 12 months) = (trade profit + other income + chargeable gains – charitable donations) x 19
Collection of corporation tax - when paid
Company’s profits under £1.5m => must pay within 9 months and 1 day after end of its financial accounting year
Tax returns for same period must be submitted 12 months after end of a company’s financial accounting period
Company’s profits over £1.5m => have to pay tax earlier and in quarterly instalments
Calculating trade profit - corporation tax
= trade income – cost of sales and capital allowances
Allowable deductions
- Salary and bonuses paid to directors and employees
Vs dividends:
= a distribution of all/part of profits to shareholders
- NOT a deductible expense for the company
- Ind shareholders must also pay dividend tax on the income they receive
- Dividends received by a company from another company usually are exempt from CT
Calculating chargeable gains - corporation tax
Corp tax paid on net chargeable gains
Net gains are all chargeable gains made in accounting period less any current period capital losses and any unused capital losses brought forward
Companies do NOT receive an annual exemption
Corporation tax - reliefs
- Replacement of business asset (rollover relief)
- When dispose of a capital asset at a profit and uses the profit to buy a replacement asset within one year before or 3 years after the disposal
- Allows a company to defer a gain (and => the corp tax due) to when that replacement asset is then sold
- Calculated by subtracting gain from acquisition cost of the new asset - Trading loss relief
- Company makes a loss when its income is less than its expenses
- Trading loss options incl:
a) Setting it against total profits (before qualifying charitable donations) in the current accounting period (if there are any other profits)
b) Carrying it back to set it against total profits (before qualifying charitable donations) in the preceding 12 months (only done after current period offset); and
c) Carrying it forward to set it against total profits (after qualifying charitable donations) of a later accounting period
What is a close company
= a company that is resident in the UK and is controlled by either:
1. 5 or fewer participators (shareholders); or
2. Any number of directors who are also shareholders
Most companies in UK = close companies
Close company rules
- CC makes a loan to a participator/shareholder who is also an employee/director and either charges (1) no interest or (2) charges interest below the officiel rate
=> the forgone interest is a taxable benefit if teh loan exceeds £10k - CC that makes a loan to a participator must pay HMRC an amount equal to 32.5% of the loan
-Payment must be made within 9 months and 1 day after the end of the accounting period in which the loan was made
- Payment will be refunded to the company when the loan is repaid of written off
- Written off => taxed as dividend distribution to the participator
- Payment of the 32.5% tax isn’t deductible as an expense for the company
