Taxation of a business + it's Stakeholders Flashcards
Which direct taxes are applicable to business
Income tax, CGT, corporation
Which indirect taxes are applicable to businesses
VAT
What are direct taxes cf indirect taxes
Direct taxes are imposed by reference to a taxpayer’s circumstances. Indirect taxes are imposed by reference to transactions.
What is a receipt cf an expense
A receipt is money paid TO the business, an expense is money the business pays OUT
Two types of receipt and two types of expense
Income receipts, capital receipts, income expenditure, capital expenditure
Why is it necessary to distinguish between income and capital expenditure and receipts
In general, income expenditure can only be deducted from income receipts and capital expenditure can only be deducted from capital receipts to reduce overall tax bill
What will be classed as an income receipt - guideline definition and three examples
Money received on a regular basis - e.g.
- Trading profits of any business/profession
- Interest the bank pays
- Rent received by a landlord
What will be classed as a capital receipt - guideline definition and example
Money from a one-off transaction
E.g. Gain on the sale of the premises owned by the business
What will be classed as income expenditure - guideline definition and 7 examples (inc two non-obvious examples)
Money spent as part of day-to-day trading
E.g. Bills for heating and lighting
-Rent
-Marketing
-Stationary expenses
- Staff wages
- General repairs
What will be classed as capital expenditure - guideline definition and 3 examples
Money expended to purchase a capital asset as part of the infrastructure of the business or as an enduring benefit for the business - ‘one off’ transactions
E.g. Large items of equipment
Property
Enhancing a capital asset (other than routine maintenance)
How do you calculate trading profits
Income receipts less income expenditure
What do capital allowances allow
A proportion of the cost of some capital assets (i.e. capital expenditure) to be set off against the trading profits (income receipts) of the business each year during the life of the asset concerned
When is tax relief for capital allowances usual usually given
At the time when the capital asset is sold or otherwise disposed of (e.g. by way of gift)
Two methods income tax is collected
Self-assessment
Deduction at source (e.g. PAYE) - the payer of a taxable sum is obliged to deduct tax and account for it to HMRC, recipient receives it sum net of tax
Total income vs net income vs taxable income
Total = gross income from all sources
Net = total income less available tax reliefs
Taxable = net income less personal allowance
Calculating Total income where income has been received by a taxpayer after deduction at source
Need to include gross amount in the calculation, i.e. ‘grossing up’
Things to remember when calculating Total Income
Grossing up if necessary
Savings income rules
Divided income rules
Benefits in Kind
Calculating Total Income - Savings income rules
Basic rate taxpayers are entitled to their £1,000 of interest and higher rate taxpayers to first £500 of interest recieved on savings at the savings nil rate (the ‘personal savings allowance’). Additional rate taxpayers do not get a personal savings allowance
Calculating taxable income - Dividends income rules
No individual pays any tax on first £1000 of dividend income (prior to April 6th 2023 the allowance was £2000) - same for all taxpayers
Calculating Total Income - benefits in kind
Benefits in kind are subject to income tax but are NOT subject to deduction of tax under PAYE, instead employer reports them to HMRC
Calculating Net Income - relevant tax reliefs
- Interest paid on qualifying loans - note interest paid TO the bank - is deducted from Total Income
- Pension scheme contributions
Income tax relief for interest on qualifying loans - what are qualifying loans (4 types)
- Loans to buy an interest in a partnership
- Loans to contribute capital or make a loan to a partnership
- Loans to buy shares in (or make a loan to) a ‘close’ company
- Loans to buy shares in an employee-controlled company or invest in a co-operative
Income tax - next step after calculating net income
Deduct taxpayer’s Personal Allowance in order to ascertain Taxable Income
Income tax - current personal allowance
£12570, reduced by £1 for every £2 of Net Income above £100,000
Income tax - calculation for personal allowance for over £100,000
£12750 - ((Net Income - £100,000)/2) = reduced allowance
Income tax - next step after calculating taxable income
Separating out different types of income (non-savings, savings, and dividend) (NSD (never squash donuts)
Principle behind CGT
Taxing the profit a person might make from disposing of a capital asset which has appreciated in value during period of ownership
When is CGT charged (high level)
Where there is a chargeable disposal of a chargeable asset by a chargeable person which gives rise to a chargeable gain
Period over which CGT is charged
Tax year (i.e. 6 April to 5 April)
When is CGT payable by
On or before the 31 January after the tax year in which the disposal occurs
When will a disposal be chargeable
Sale of an asset; gift of an assert; NOT disposal on death (PRs are deemed to acquire the estate at its then market value)
What is a chargeable asset
Any form of property that is not specifically excluded
What assets are specifically excluded from being chargeable assets
-Principal Private Residence
-Motor cars for private use (including vintage cars)
-Certain investments - government securities, National Savings certificates, shares and securities held in an ISA, life assurance policies
-UK Sterling and any foreign currency held for you or family’s personal use
CGT - when will a property be a PPR
Occupied the PPR as their only or main residence during the whole period of ownership. A married couple can only have one PPR between them
CGT - what will determine chargeable gain
The starting point is always the consideration received (or deemed to have been received)
Then consider whether disposal is at arm’s length or between connected persons
If arm’s length then consideration received is the price paid
If connected persons (not spouses), HMRC will deem the seller to have received market value irrespective of the actual sale proceeds
IF transaction is between unconnected person and at an undervalue then sale is deemed to be market value BUT not if just a bad bargain by seller
Gifts = market value
CGT - who are connected persons
Direct ancestors (parents and grandparents), lineal descendants, and brothers and sisters NOT lateral relatives e.g. aunt uncle nephew niece
Companies under common control
Partners in business
CGT - chargeable gains and charities
Disposals TO charities are treated as made on a no gain/no loss basis.
Gains made BY charities are exempt provided that the gain is made for charitable purposes
CGT - chargeable gains on disposals between spouses
Treated on a no gain no loss basis - in effect the spouse receiving the asset takes over the base cost (ie original cost of the asset to the transferor spouse) from the date of acquiring
CGT - 3 types of allowable expenditure
Initial expenditure, subsequent expenditure, disposal expenditure
CGT - what can make up initial expenditure
The cost price of the asset (base cost) and the incidents costs of acquisition (surveyors’ fees, lawyers’ fee)
CGT - what can make up subsequent expenditure
Expenditure which enhances its value or was incurred in establishing, preserving of defending title to the asset
CGT - what can make up disposal expenditure
Incidental costs of disposal (e.g. agents’ commission)
CGT - capital losses
Might make a capital loss where cost is greater than consideration received on disposal (but not if disposed by gift). CGT charged on overall gains by an individual in a tax year. Capital losses therefore deducted from any capital gains in the same tax year. If insufficient gains to offset full loss then any unrelieved losses can be carried forward - must be used against the first available gains
CGT - annual exemption
Every individual is entitled, not companies. Currently £6000, last tax year was £12,300
CGT - applicable rate of CGT for companies
Companies do not pay CGT they pay corporation tax - taxes on gains are calculated in a similar way and taxed at corporation tax rates
CGT - applicable rate of CGT for individuals
Basic rate taxpayers pay 10% CGT
Higher and additional rate taxpayers pay 20%
What tax MUST you calculate before CGT and why
Income tax - a person’s tax band determines the rate of CGT they pay
CGT - applying income to get CGT calculations
Taxable income plus total chargeable gains is…
less than £37,700 then CGT = 10%
on income alone more than £37,700, then CGT =20%
on income less than £37,700 but after gains added combined total exceeds £37,700, then CGT is 10% on the unused part of the basic rate tax band and 20% on everything over
CGT - summary of CGT calculation
Sale proceeds/market value LESS disposal expenditure = Net Sale Proceeds
Less initial expenditure, less subsequent expenditure = Total Chargeable Gain
Less carried forward or carried-across losses, less annual exemption
= Taxable Chargeable Gain
Apply CGT at appropriate rate
CGT - what is Business Asset Disposal Relief also known as
(previously)
Entrepreneur’s Relief
CGT - high level what is the effect of Business Asset Disposal Relief
Reduces the higher rate of CGT (from 20% to 10%) for gains arising on qualifying disposals
CGT - Business Asset Disposal Relief - 4types of qualifying disposal
Disposal of:
1. All or part of a trading business
2. Assets in a business that used to trade
3. Shares in a trading company
4. Shares in a company that used to trade
CGT - Business Asset Disposal Relief - need a type of qualifying disposal plus…
Satisfaction of the conditions
CGT - Business Asset Disposal Relief - conditions for disposing of all/part of a business
Business must be a trading business AND the business must have been owned for at least two years prior to the date of disposal
CGT - Business Asset Disposal Relief - conditions for disposing of assets in a business that used to trade
Business must have been owned for at least two years before it ceased to trade
Assets must have been used in the business when it ceased to trade
The assets must have been disposed of within three years of the business ceasing to trade
CGT - Business Asset Disposal Relief - conditions for disposing of shares in a company
Company must be, and have been for at least two years before the date of disposal, a trading company
Shares must have been held for at least two years
Person disposing of the shares must have been an officer or employee of the company who holds at least 5% of the ordinary voting shares and is entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least 2 years at date of disposal
CGT - Business Asset Disposal Relief - conditions for disposing of shares in a company that used to trade
Shares owned for at least 2 years before company ceased to trade
Officer or employee of the company who held at 5% of ordinary voting shares, entitled to 5% if profits available for distribution and 5% net assets on winding up, for at least 2 years before ceased to trade
Disposed of within three years of company ceasing to trade
CGT - is Business Asset Disposal Relief automatically applied
No taxpayer must claim it before the first anniversary of 31 January following the tax year in which the disposal was made
CGT - what is the Lifetime Allowance on Business Asset Disposal Relief
£1 million of qualifying gains - anything over would be charged at the normal rate applicable to that individual
CGT - what is Investor’s Relief
Reduces the higher rate of CGT (i.e. 20% to 10%) for gains arising on disposals of qualifying shares
CGT - What is the lifetime limit on Investor’s Relief
£10 million
CGT - Investor’s relief - what makes shares qualifying
- Fully paid ordinary shares issued to an individual for cash consideration on or after 17 Match 2016
- Company is and has been since shares were issue a trading company or holding company of a trading group
- At time of issue none of the company’s shares were listed on a recognised stock exchange
- Shares held by the individual for three years and continuously since issue
- Individual (or any connected person) is not, nor at any time since date of issue has been, an officer or employee of the company or a connected company
CGT - effect of business relief
Defer liability to CGT
CGT - what are the two main business reliefs
Replacement of business assets relief - Rollover relief
AND
Gift of business assets relief - ‘hold-over relief’
CGT - what is rollover relief (replacement of business assets relief)
A taxpayer can elect to postpone the CGT liability it realises on the sale of certain business assets by ‘rolling over’ the gain into the replacement asset
CGT - what assets does rollover relief apply to
Land, buildings, fixed plant and machinery, and goodwill - new asset doesn’t need to be the same type as the old one
CGT - effect of rollover relief
The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over - any tax relief is postponed until the replacement asset is sold and no new qualifying replacement asset purchased in its place
CGT - what is hold-over relief
Where an individual gives away a business asset, and both donor and donee claim hold-over relief, the donor will have no liability to CGT BUT donee’s aquisition cost for CGT purposes is reduced by the amount of the donor’s deemed gain - in effect the CGT liability is postponed until donee ultimately disposes of the asset
CGT - what is the effect of holdover relief
the CGT liability is postponed until donee ultimately disposes of the asset
CGT - when is hold-over relief available
Where the business asset is gifted
OR where the business asset is sold at an undervalue, BUT then the holdover relief can only be available on the gift element (the difference between the price paid and the market value)
CGT - what assets can holdover relief be claimed on
Goodwill
Assets used in the business
Shares in a trading company not quoted on the stock market
What is corporation tax charged on?
Income receipts, less (deductible expenditure, capital allowances and trading losses) = income profits
+
Sale proceeds, less (allowable expenditure, indexation, capital/trading losses) = Chargeable gains
= Total taxable profits
What is deductible expenditure?
Interest paid on loans, wages, office rent, utilities
What is the ‘full expensing’ capital allowance?
A company can claim 100% expenditure on new qualifying plant & machinery during a tax year (most short-term assets are qualifying - vans, office equipment, IT equipment, tools)
- 100% of cost can be deducted from income receipts
What is the annual investment allowance?
Can deduct 100% of the expenditure on qualifying plant & machinery each year up to £1m
How must a company pay its corporation tax? Companies with a TTP or £1.5m or less
Pay HMRC within 9 months and 1 day after the end of the accounting period
