Tax deductible Flashcards
Caillebotte v Quinn (1975)
Mr. Quinn, a sub-contract carpenter, worked on sites within a 40-mile radius of his home. He couldn’t go home for lunch and spent an average of 40 pence on lunch, compared to an estimated 10 pence for a light lunch at home. Mr. Quinn argued that the additional cost was necessary to maintain energy levels and keep warm during physical work. The General Commissioners agreed, allowing the additional lunch cost as a deduction from Mr. Quinn’s trading profits.
However, Templeman J said there was a duality of purpose here:
“a Schedule C taxpayer, like any other taxpayer, must eat in order to live; he does not eat in order to work.”
Badges of Trade
- The subject matter of the transaction [Rutledge v IRC (1929)]
- The frequency of similar transactions [Pickford v Quirke (1927)]
- The circumstances responsible for the realisation [The Hudson’s Bay Company v Stevens (1909)]
- Supplementary work on or in connection with the property realised [Cape Brandy Syndicate v IRC (1927)]
- The motive for the transaction [Wisdom v Chamberlain (1968)]
- Length of ownership
Additional 3
- the source of finance for the transaction
- the circumstances surrounding the acquisition of the asset
- whether the subject matter of transaction is in any way related to trades and other activities carried on by the taxpayer
Deductible Expenses
- Must be incurred wholly and exclusively for the purpose of the trade
- Must be revenue item, not a capital expense
- Must be specifically disallowed by statute
Wholly and Exclusively
Remoteness test and Duality test
Revenue not capital expenditure
Tax deductible examples
- Small donations to local charities
- Theft by member of staff
- Training (update expertise)
- Repairs
- Loans, interest on qualifying loans for partners or employees
- Incidental costs of obtaining the loan will be deductible if the interest is tax deductible
- Registration cost of patents
- Wages of staff who are seconded to work for a charity or an educational institution
- Fines and penalties incurred by employees
- Entertainment of genuine employees of the business (below £150)
- Gift to customers (less than £50 - no food, drink or tobacco)
- Gifts to employees
- 15% disallowance applies to cars with CO2 emission of more than 130g/km
- Payments made to staff who are made redundant
- Pre-trading expenses (7 year prior to the date of trade commencement)
- Debts written off
- NS&I Easy access savings account
- Director’s emoluments
- Legal cost debt collection, renegotiations of directors’ service agreement
Non-deductible tax examples
- Food and drinks
- Clothing (exceptions with uniforms and costumes)
- Misappropriation, theft of profits
- Self-education (New expertise or skill)
- Improvement (increase value of an asset)
- Interest paid on overdue tax
- Wages of staff who are seconded to work for another organisation
- Professional fees and charges not deductible if they relate to capital assets or non-trading items
- Fine and penalties unless by employee
- Expenditure on hospitality and entertainment of customers and clients
- Provisions for general purposes
- Depreciation
- Legal fees depends on what they relate to
- Drawings
- Capital expenditure in general
- National Insurance Contributions
- Venture Capital Trusts
- Legal fee of re issue of shares
Remoteness test:
whether the expense is closely enough related to the daily running of the business, or whether it relates to an activity outside of the business
[Morgan v Tate & Lyle Ltd (1954)]
Duality test
Considers if the trader gets some private, as well as business related, benefit from the expense
[Caillebotte v Quinn (1975)]
[Mallalieu v Drummond (1983)]
it may be possible to split the payment up using an acceptable allocation formula and allow the business portion as a deductible expense.
Revenue not capital expenditure
- Enduring benefit test: if the expense brings into existence something that has enduring benefit for the trade, if it does, it is probably capital and hence not a deductible expense
- E.g. self-education provides new expertise, it is capital nature BUT training course is to update expertise already possessed, it is revenue expenditure
- repairs allowable for deduction but improvements are not.
Repairs v Improvement
Repairs allowable for deduction but improvements are not deductible
Repair means restoring an asset to its original condition, whereas an improvement means making the asset bigger or better in some way, therefore changing its character.
Non-trading income
Are deducted in the TATP
- Rental income (property income)
- Bank interest (taxed on savings)
- Profit from sale of plant (capital gain)
Computing taxable income 3/8 steps
Step 1: Aggregating the categories of income.
Property, trading and employment income
- Income from owning and renting out property (not taxed at source)
- Income from employment (usually already deducted via PAYE)
o PAYE deducted at the end of the computation
Savings and investment income
- Bank deposit interest and the building society interest
o Usually received as gross (no tax withheld by the payer of interest)
Exempt income
- .. can be received without any income tax becoming due
o Increase in the value of National Savings and Investments savings certificate
o Premium bond prizes, betting and lottery winnings and other competition prizes
o Gifts
o Interest from ISA or Junior ISA
o Interest from Child Trust funds
o Some social security bene
o Social Security Benefits (child benefit and universal credit)
o Shares allotted to employees under approved schemes (Share option plans)
o Educational grants and scholarships (for the recipient)
o Statutory redundancy pay (max of £30,000) when employment is terminated
o Payment for death in service or in respect of disability sustained at work (e..g personal injury payments)
o Lump sums received from approved pension schemes
o Qualifying care relief (fostering and shared lives carer income) (Up to £18,140 per residence, plus £375 (for a child under 11 years of age) and £450 per week (for a child/adult older than 11))
Step 2: Dealing with deductible reliefs
E.g. trading loss, pension contributions paid gross
Total income - reliefs = Net income
Step 3: Personal allowances
At this moment it is £12,570
Can also include a blind person allowance
Net income – Personal allowance = Taxable income
Computing tax liability Step 4-8
Step 4: Income tax rates
What tax rate apply to the total taxable income.
As part of step 1: the income categories are classified into one of three types
Non savings
Savings income
Dividend income
Important that each of these income types has its own tax rates
Step 5: Tax borne
The outcome from applying the tax rates to the taxable income, and
- represents the amount of tax that taxpayer is liable for on his or her taxable income
- before any tax reduction (which can reduce the tax borne) or
- additional tax on their income (that may increase it)
Step 6: Tax reductions
There is a stage of tax borne for any entitlements the taxpayer has for tax reductions.
There is a limited range of special reduction that includes
- married couples’ and
- civil partners’ reduction for elderly taxpayers,
qualifying maintenance payments and some special schemes for tax deductible investments.
Tax relief for any foreign taxed paid at source (double tax relief) is given at this point in the computation
Step 7: Additional tax
To add in any extra tax that may be due (Rare)
- Extra tax where gift aid is claimed on donations to charities but insufficient tax has been paid to cover the claim [4.38]
- Pension related surcharges [Chapter 5]
Step 8: Tax payable
The result of completing all the steps.
Sum needed to pay to HMRC to settle their income tax bill for the year. (Some tax has already deducted at source (e.g. paid via the taxpayer employer)
- This step is the full computation is to deduct from the overall tax liability for the year any sums that form part of this total liability but have already been paid to HMRC during the tax year
For example
- PAYE
- Tax paid at source on patent royalties
Any owed after deducting these sums already paid over, it must be paid to HMRC directly.
- Likely to be due by 31 January following the end of the tax year (latest date)
- However, some cases, sums may be due earlier in the tax year [chapter 6]
OVERPAYMENT: If the taxpayer has paid more tax during the year than the final tax liability, the taxpayer will receive a refund from HMRC of the tax overpaid.
- E.g. when taxpayer’s circumstances have changed during the year (e.g. they lost their job or retired)
- Must be requested.
IMPORTANT TO NOTE
Rounded down to the nearest pound. (Step 1-3)
Rounded down to the whole penny (Step 4-7)
To ensure you do not get rounding errors in your tax computation.
Allowances summary
First, ECA/FYA – does the new asset qualify for 100% for a low emission car
Then AIA - if so, £1,000,000 becomes fully deductible in addition to any ECA/FYA
Lastly, special treatment items and AIA excess – main pool or special pool
Disposals
Removing original value. However, if the proceeds for selling the asset is lower than the original value, you must use that value instead of the original cost.
Balancing allowance
If WDV > Disposal then balancing allowance equals the whole of the excess can be claimed.
If WDV < Disposal, balancing charge equal to the excess will be levied on the taxpayer.
Structural Building Allowances (SBA)
- No balancing charges or allowances
- Seller ceases to claim from the point of sale and buyer becomes eligible to pick up the remainder of the period of allowance still available.
- 3%
- not including cost of land
- annual allowances can be claimed for 33.5 years
