Taxation Flashcards
A woman has run her business as a sole trader. The assets of the business comprise freehold property, debtors, cash, stock in trade, goodwill, and fixed and moveable plant and machinery.
The woman transfers the debtors, stock in trade, goodwill and the fixed and moveable plant and machinery, valued at £300,0000, to a newly incorporated company. In exchange, she receives consideration of 1,000 ordinary shares of £1 each in the company (worth £200,000), and £100,000 of the consideration is left outstanding on loan. The company then rents the premises from the woman.
Will roll-over relief on incorporation automatically apply to any of the gain made on the transfer of the woman’s business to the company?
A-No, the relief will only apply if the woman makes a claim for it to apply.
B-No, because the business was not transferred with all of its assets.
C-No, because part of the consideration received was not in the form of shares in the new company.
D-Yes, because the business is transferred as a going concern and the other conditions for the relief are met.
E-Yes, but only in respect of the proportion of the business assets which are transferred to the company.
Option B is correct, roll-over relief on incorporation will only apply if the business is transferred as a going concern with all of its assets (other than cash). As the freehold property has not been transferred in this instance, the relief is not applicable.
Option A is wrong, because where the conditions for the application of roll-over relief on incorporation apply, the relief is applied without the taxpayer needing to make a claim for relief; rather, they can elect for it not to apply (so).
Option C is wrong: the fact that part of the consideration is met otherwise than in shares does not preclude the relief applying to the proportion of the consideration which is in shares.
Option D is wrong, because even though the business was transferred as a going concern, the other conditions for the application of the relief are not met.
Option E is wrong, as the entire relief, not just a proportion of it, is lost if only a proportion of the business assets are transferred.
Business Law Manual, para 10.9.2
Company A owns 90% of the shares in each of Companies B and C. Company C owns 80% of the shares in Company D.
Company B has made a trading loss of £100,000. It wishes to surrender the loss to Company D, which has made a trading profit of £200,000.
Can Company B surrender the trading loss to Company D?
A-No, because neither Company B nor Company D directly or indirectly hold shares in each other.
B-No, because even though Company B is a 75% subsidiary of Company A, Company D is not.
C-Yes, because Companies A and B form a group of companies, and Companies A, C and D form a group of companies.
D-Yes, because Company B is a 75% subsidiary of Company A, and Company D is a 75% subsidiary of a 75% subsidiary of Company A.
E-Yes, because Companies B and C are 75% subsidiaries of Company A, and Company D is both a 75% subsidiary of Company B and an effective 51% subsidiary of Company A.
Option B is correct: for Company D to be able to surrender its trading losses to Company B, both would need to be 75% subsidiaries of Company A. Company B is a 75% subsidiary of Company A, as it directly owns (over) 75% of its shares. However, Company D is not an indirect 75% subsidiary of Company A: it is only a 72% indirect subsidiary (90% x 80%). It therefore does not form part of a group of companies with Companies A and B.
Option A is wrong, because two companies can be in a group for the purposes of group relief for trading losses even if neither owns shares in the other.
Option C is wrong, because whilst it is true that Companies A and B form a group of companies, and Companies A, C and D form a group of companies, this does not in and of itself entitle Company D to surrender losses to Company B.
Option D is wrong, because it is not a sufficient condition for Company C to be in the same group as Company A that there is a “chain” of 75% subsidiaries.
Option E is wrong, as it applies the test for group relief against chargeable gains, not group relief for trading losses.
Business Law Manual, para 11.6.2.2 and 11.6.2.3
A taxpayer has income comprising a dividend of £1,500 from a private company, salary (gross) of £58,000, and interest on bank savings of £3,000.
Will the taxpayer have to pay tax on their dividend income?
A-No, because no tax is due on dividends, as the company paying the dividend will already have paid corporation tax on the profits out of which the dividend is payable.
B-No, because the dividend will fall within the taxpayer’s personal allowance of £12,570.
C-No, because the dividend will fall within the dividend allowance.
D-Yes, because the dividend allowance is not available to the person, as they are a higher-rate taxpayer.
E-Yes, because dividends are charged as the top slice of income, and tax at the dividend upper rate of 33.75% will be payable.
Option C is correct: the dividend falls within the dividend allowance of £2,000.
DIVIDEND ALLOWANCE NOW £1,000
Option A is wrong: dividends are taxable income (even though it is true that the profits are likely to have been subject to corporation tax when made by the company).
Option B is wrong: the dividend would not fall within the personal allowance, as this would be used up by the non-savings, non-dividend income.
Option D is wrong: the dividend allowance is available in full to higher-rate and additional rate taxpayers.
Option E is wrong: whilst dividends are charged as the top slice of income, the dividend is within the amount of the annual dividend allowance of £2,000.
Business Law Manual, para 9.5.3
personal allowance: £12,570
In the last quarter, a company has made VAT zero-rated supplies of goods of £400,000, and standard-rated supplies of goods of £200,000 + VAT. It has purchased standard-rated goods and services for £300,000 + VAT.
What amount in respect of VAT must the company pay, or can it reclaim, for the quarter?
A-The company must pay £60,000
B-The company must pay £20,000
C-The company can reclaim £17,500
D-The company can reclaim £20,000
E-No amount is due or may be reclaimed.
Option D is correct. The company will have charged output VAT of 0% on the zero-rated supplies, and 20% on the standard-rated supplies. The total output VAT will therefore be £40,000. The company will have charged input VAT at 20% on the purchases of standard-rated goods and services. The total input VAT it will have paid will therefore be £60,000. The company may recover the amount of input tax paid which exceeds the output tax charged.
Option A is wrong, as it includes output tax at 20% on the zero-rated supplies.
Option B is wrong, as it has input and output taxes the wrong way round.
Option C is wrong as it applies an incorrect rate of VAT.
Option E is wrong, as VAT can generally be reclaimed where the amount of input tax paid exceeds the amount of output tax charged.
A sole trader owns a hat design and manufacturing business. The accounting period for the business ends on 5 April each year. In the accounting period ending 5 April 2020, sales amounted to £150,000. Overheads and stock amounted to £45,000. In June 2019 the sole trader bought new machinery for £15,000. There is an existing pool of plant and machinery which had a written down value of £60,000 at the start of the accounting period.
The sole trader recently invested in a friend’s partnership business with the help of a bank loan. In the tax year 2019/2020 the sole trader’s share of partnership profits was £17,000. The interest payable on the bank loan amounted to £1,750.
The personal allowance for 2019/2020 is £12,500. The basic rate tax band limit is £37,500.
Which of the following statements is correct?
A-The sole trader’s income tax liability for tax year 2019/2020 is £26,680.
B-The sole trader’s income tax liability for tax year 2019/2020 is £31,550.
C-The sole trader’s income tax liability for tax year 2019/2020 is £25,980.
D-The sole trader’s income tax liability for tax year 2019/2020 is £25,280.
E-The sole trader’s income tax liability for tax year 2019/2020 is £30,280.
Chargeable receipts = £150,000Deductible expenses (being the aggregate of the overhead and stocks) = £45,000Capital allowances (being the aggregate of that portion of the annual investment allowance applied against new machinery and the writing down allowance applied against existing machinery) = £15,000 + £10,800 = £25,800
Giving:
Trading profits (£150,000 - £45,000 – £25,800) of £79,200
Then add partnership profits (£17,000) less allowable reliefs (interest payable on bank loan of £1,750) less personal allowance (£12,500)
Giving a taxable income of £81,950.
The first £37,500 is taxed at 20%; the rest is taxed at 40%, giving an income tax liability of £25,280.
Option A is wrong as the loan interest has been added to income profits giving an incorrect total income.
Option B is wrong because the sum spent on the new machinery has been added to the pool when calculating the capital allowance deduction giving an incorrect trading profit figure of £91,500.
Option C is wrong because the loan interest to the bank has not been deducted as an allowable relief giving an incorrect net income figure of £96,200.
Option E is wrong because the personal allowance has not been deducted from net income giving an incorrect taxable income of £94,450.
A sole trader set up in business in the tax year 2019/20 when he made a loss of £80,000 (the accounting period for the business ends on April 5 each year). Prior to that, he earned £20,000 from employment in each of the tax years 2016/17 and 2017/18 and £25,000 in 2018/19. He also received a consultancy fee of £10,000 from another business in 2019/20. In addition, he has received rental income of £5,000 for each tax year from 2016/17 to date.
Which of the following best describes the relief he may obtain for the £80,000 loss he suffered in the tax year 2019/20?
A-He can carry across £15,000 of the loss to set against his total income in 2019/20 and carry back a further £25,000 to set against his employment income in 2018/19.
B-He can use start-up relief to apply his loss to his total income for the tax years 2018/19 and 2017/18 and carry forward the remainder of the loss to set against the profits from his business for 2020/21.
C-He can use start-up relief to apply his loss against his total income for the tax years 2016/17 – 2018/19.
D-He can carry forward his entire loss and set it against his rental income and any employment income for the 2020/21 tax year.
E-He can carry forward his relief and set it against future profits from his business, but this will be possible only for the following four tax years.
Option C is correct. Start-up relief is available when the taxpayer suffers a loss in any of the first four tax years of the new business. That loss can be carried back and set against total income in the three years immediately prior to the tax year of the loss.
Option A is wrong because carry back relief must be applied to total income, so it must include the rental income and not merely the earnings from employment.
Option B is wrong because start-up relief must be applied to earlier years first, so it is not possible claim the loss for just the two previous tax years; it must be applied first to the total income for 2016/17.
Carry forward relief must be applied to profits from the trade, so Option D is wrong; and any loss can be carried forward indefinitely, so Option E is also wrong.
A sole trader is calculating his potential income tax liability for the current year. One of his sources of income is from his shop on the riverside. He has estimated that his expenses will be:
£110,000 on stock,
£20,000 on utilities,
£12,000 on part time employees, and
£18,000 on all manner of smaller sundry items.
He is reasonably sure that with a good festive season his final turnover figure should be £245,000. He has an existing pool of plant and machinery that was valued at £35,000 at the end of the last accounts period. This year he has also bought £8,000 of new display equipment and spent £65,000 on building a new combined show and store room.
Which figure correctly states his trading profit for the current year?
A-£5,700
B-£70,700
C-£78,700
D-£85,000
E-£99,300
Option B is correct. Trading profits are represented by:
Turnover minus expenses minus capital allowances
ie:
Turnover of £245,000 minus expenses (stock, utilities, part time wages & Sundries) of £160,000 = £85,000. Less capital allowances of 18% on the existing pool of plant and machinery and an Annual Investment Allowance on the new display equipment 3(35,000 x 18% = £6,300 plus £8,000 = £14,300).
This gives a trading profit of £70,700.
Option A is wrong because whilst the calculation is broadly correct it also, but in error, deducts the spending on the new warehouse/showroom which is a capital item and not plant and machinery.
Option C is wrong because it fails to deduct the annual investment allowance on the new display equipment.
Option D is wrong because no deduction is made in respect of any of the capital allowances.
Option E is wrong because the total of the capital allowances has been added instead of being deducted.
A private company limited by shares has four shareholders owning all the issued share capital in the company equally. A loan of £25,000 by the company to one of the shareholders was agreed at a meeting of the shareholders. The shareholder is an additional rate income taxpayer. Assume for the purposes of this question that the money was advanced last month.
DIVIDEND RATE IS INCORRECT
Which of the following best states the tax consequences of the loan?
A-The company must make a payment of £4,750 to HMRC in respect of the loan (19% of £25,000). It can reclaim this amount when the loan is repaid, waived or written off.
B-The company must make a payment of £8,125 to HMRC in respect of the loan (32.5% of £25,000). It can reclaim this amount when the loan is repaid, waived or written off.
C-The shareholder must make a payment of £9,525 to HMRC in respect of the loan (38.1% of £25,000) as she is an additional rate taxpayer and the loan is taxed as if she received a dividend.
D-The shareholder must make a payment of £1,875 to HMRC in respect of the loan (7.5% of £25,000) as the loan is taxed as if she received a dividend taxed at basic rate.
E-As this is a loan rather than a dividend neither the shareholder nor the company have to make any payments to HMRC.
Option B is correct.
The company is a close company. It is controlled by fewer than five participators. Three shareholders have control of the company. (A ‘participator’ is a person owning [or having the right to own] shares in the company and ‘control’ exists in the hands of those having [or having the right to acquire] more than half the shares in the company). Where a close company lends money to a participator, as here to the shareholder, there are tax implications.
Where a close company lends money to a participator for a sum over £15,000 (so no exceptions apply) as here the company must pay HMRC a sum equivalent to 32.5% of the loan.
Option A is wrong. It is the dividend upper rate (32.5%) which is relevant not the corporation tax rate of 19%. INCORRECT %
Option C is wrong. As long as the money remains a loan, the loan is not taxable in the hands of the borrower.
Option D is wrong. As long as the money remains a loan, the loan is not taxable in the hands of the borrower. If waived or written off the shareholder will be treated as if she received a dividend but as she is an additional rate tax payer the dividend is taxed in her hands at 38.1%.
Option E is wrong as any loan above £15,000 to a participator in a close company requires the company making the loan to pay 32.5% in value of the loan to HMRC as a form of ‘deposit’ in the event that the loan is waived or written off. If the loan is waived or written off, the company will get back the deposit and the shareholder will be treated as receiving a distribution for income tax purposes equal to the value of the loan.
A woman, who is a sole trader, runs a hairdressing business. In the tax year 2019/20, the trading income of the business was £32,500. The woman also received dividends of £10,000 and earned £500 in interest on her savings. She also owns a buy-to-let property and receives £17,500 a year in rent.
Assumption: the personal allowance is £12,500; the personal savings allowance for a basic-rate taxpayer is £1,000 and for a higher-rate taxpayer is £500; the dividend allowance is £2,000.
Which of the following statements best describes the woman’s income tax liability for the tax year 2019/20?
A-Because the woman is a higher rate tax payer, the tax will be calculated at 40% on her total income of £60,500.
B-Because all of the woman’s savings income of £500 falls within the higher rate tax band, tax on the £500 interest received will be calculated at 40%.
C-Because all of the woman’s dividend income of £10,000 falls within the higher rate tax band, the tax on the dividend income of £10,000 will be calculated at 32.5%.
D-Because all of the woman’s trading and rental income falls within the higher rate tax band, the tax on all of her non-savings non-dividend income will be calculated at 40%.
E-Because all of the woman’s non savings non dividend income falls within the basic rate tax band, the tax on her non-savings non-dividend income will be calculated at 20%.
Option E is correct.
Income tax is payable on taxable income, which is the aggregate of the taxpayer’s income from all sources, less any allowable reliefs and personal allowances. Here there are no relevant allowable reliefs, but in the tax year 2019/20, the woman is entitled to a personal allowance of £12,500, making her taxable income £48,000. This means that option A is wrong (£60,500 is her total not her taxable income).
The different types of income are taxed at different rates, and savings and dividend income have their own ‘allowances’, so it is necessary to separate the savings and dividend income from the non-savings non-dividend income (NSNDI). The woman’s NSNDI is therefore £37,500. Income is then taxed in slices: NSNDI is taxed first, savings income next and finally dividend income.
All of the woman’s NSNDI falls (just) within the basic rate band (£0 - £37,500) so it will all be taxed at the basic rate of 20%. Accordingly, option E is correct and option D is wrong.
Option B is wrong as the woman is entitled to a personal savings allowance of £500 so all of her savings income will be taxed at 0%.
Option C is wrong as the woman is also entitled to a dividend allowance of £2,000 so only £8,000 of her dividend income will be taxed at the dividend upper rate of 32.5%.
Following an investigation, a client has been informed by HMRC that they are in breach of the general anti-avoidance rule (‘GAAR’). The client does not wish to contest HMRC’s finding.
Which of the following best describes the consequences for the client?
A-HMRC may request the taxpayer to make just and reasonable adjustments to the amount of tax paid.
B-HMRC may refer the matter to a tax tribunal.
C-HMRC may issue a written warning to the client.
D-HMRC may require the client to pay a fine.
E-HMRC may sue the client for breach of contract for the amount outstanding.
Option A is correct. There is no need to refer the matter to a tribunal, so option B is wrong. HMRC has the power to order the just and reasonable adjustments – there is no such thing as a written warning (option C is wrong), no power to impose a fine in these circumstances (option D is wrong) and no contract, so option E is wrong.
Higher rate tax payers
Taxed first, with rates as follows:
Ø Basic rate: 20%
Ø Higher rate: 40%
Ø Additional rate: 45%
The relevant thresholds (after deducting the personal allowance of £12,750) are:
Ø Basic rate: £0 - £37,700
Ø Higher rate: £37,701 - £125,140
Ø Additional rate: £125,141+
Quick Q:
A company runs a business. On 1 December 2021, it sells a freehold property used for the purposes of the trade for £1,000,000, realising a chargeable gain. On 1 August 2022, it purchases fixed plant and machinery for the purposes of the trade, for £1,250,000.
Can the company claim roll-over relief on a replacement of qualifying business assets in respect of the chargeable gain?
Yes, because the company has re-invested the proceeds of sale of the freehold property in the fixed plant and machinery and the other conditions for the application of the relief are met.
Option E is correct: roll-over relief can be claimed in respect of the entire gain if the proceeds of sale are re-invested, so long as this occurs within the 12 months before the disposal or three years after the disposal, and both the asset disposed of and the asset purchased are qualifying business assets. Freehold property and fixed plant and machinery are both qualifying business assets.
Option A is wrong because the old asset and the new asset do not need to be of the same type.
Option B is wrong because the fixed plant and machinery is a qualifying business asset.
Option C is wrong because companies may claim roll-over relief in relation to their chargeable gains where the relevant conditions are met.
**Option D is wrong because the new asset must have been purchased within the twelve months before or three years after the disposal of the old asset, not twelve months after.
Business Law Manual, para 11.2.2.3
Quick Q:
A company runs a business. On 1 December 2021, it sells an extended freehold property used for the purposes of the trade for £1,000,000. The professional costs associated with the disposal were £15,000.
The property was originally purchased in January 2014 for £375,000. The professional costs associated with the acquisition were £10,000. £250,000 was spent in January 2016 enhancing the asset by building the extension. In February 2017, £20,000 was spent defending a title dispute in relation to the property.
Which of the following is not deductible in calculating the company’s chargeable gain?
Indexation allowance on the £15,000 incidental costs of disposal.
Option E is correct: there is no period of time over which to index the incidental costs of disposal, so Option E is the only item in respect of which no deduction for indexation allowance can be made.
Options A to D are all wrong because each of:
the cost of acquisition (A);
incidental costs of acquisition (B);
the costs of enhancement (C); and
the costs of defending title (D)
are relevant allowable expenditure and so deductible in calculating the gain. Indexation allowance is available to the company for all four of these items of historic relevant allowable expenditure, as they all pre-date the cessation of indexation at the end of 2017.
Business Law Manual para 11.2.2.2
Capital gains tax annual exemption
2023 to 2024 £6,000
Quick Q:
A company is setting up in business providing educational services, which is an exempt supply for the purposes of VAT. The company will purchase a range of goods and services on which it pays VAT at the standard rate.
What advice should be given to the company in respect of VAT?
The company cannot register for VAT, and cannot reclaim the input VAT which it pays on its purchases.
Option C is correct. The company only makes exempt supplies, so cannot register for VAT nor reclaim the input VAT which it pays on its purchases.
