Taxation Topic 5 - Business Taxes and Value Added Taxes (VAT)

Question 1

During what period is a company’s corporate tax worked out

Answer 1

Corporate tax (CT) is worked out on the company’s accounting period rather than financial year.

Question 2

What tax do sole traders and partners pay

Answer 2

Sole traders and partners pay income tax and CGT, not CT

Question 3

What tax do companies generally pay

Answer 3

Companies generally do not pay income tax or CGT, only CT on the profits and income made, called the Profits Chargeable To Corporation Tax (PCTCT)

Question 4

What types of income can corporate tax be paid on

Answer 4

CT can be charged on:

• Trading profits
• Investment income
• Chargeable gains

Question 5

How often must a company self-assess their CT position

Answer 5

every 12 months

Question 6

What are the rules around exemption from chargeable gains when selling a substanatial number of shares

Answer 6

• Must have owned at least 10% of the company they held shares of for a period of 12 months in the 6 years before the sale
• Must be selling shares in a trading company or the holding company of a trading group. To satisfy this, the company must have been either of these the beginning of the 12-month period that the seller held 10% of shares

Question 7

What 2 things can be deducted from a company’s total income

Answer 7

• Payments to charities under the Gift Aid Scheme
• Interest payments on loans and any royalty payments related to the trade

Question 8

How to calculate Profits Chargeable To Corporation Tax (PCTCT)

Answer 8

1. Add back depreciation (depreciation not deductible but allowances can be made)
2. Add back other non-deductible expenses (e.g. entertainment)
3. Add net chargeable gains (gains – allowances)
4. Deduct losses carried forward

Question 9

What reliefs are available for R&D spending

Answer 9

• Large companies given paid credit up to 13% of the costs incurred
• Small and medium-sized companies (SMEs) are given tax relief on up to 230% of the actual costs

Question 10

What classes a company as a * Small and medium-sized company (SME)

Answer 10

• Hold more than 25% of the capital or voting rights
• Fewer than 500 employees
• Annual turnover under 100m euros
• Assets are not more than 86m euros

Question 11

To complete a self-assessment, a company must…

Answer 11

file a CT report, along with its financial statements, directors’ and auditors’ reports and computations showing how the figures have been calculated.

Question 12

When must a self-assessment be completed by

Answer 12

• This must be done within 12 months after the accounting period or within 3 months of a notice being sent out

Question 13

What are the penalties for late filing of a return

Answer 13

• £100 for 1 day late
• Another £100 for filings that are 3 months late
• HMRC will estimate CT bill and add 10% for filing 6 months late
• Another 10% of any unpaid tax will be added for 12 months late

Question 14

If a company has profits less than £1.5m, then the CT will be payable after

Answer 14

9 months and 1 day after the end of the accounting period.

Question 15

If profits are above £1.5m, CT is payable as…

Answer 15

Quarterly instalments

Question 16

What rules apply if a company wants to claim relief for company losses

Answer 16

• Relief must be claimed within 2 years of end of loss-making period
• Losses can be deducted from income in total period, or carried back to deduct from profits from the preceding 12 months
• Losses in the last year of trading can be carried back 3 years
• Unused losses can be carried forward, in excess of £5m in the current period, only 50% can be used
• Changes of ownership in company may prohibit ANY of this

Question 17

What are ‘groups of companies’

Answer 17

defined as ‘if the proportion of shares in a subsidiary owned by the parent company is at least 75%’

Question 18

What are the perks for ‘groups of companies’

Answer 18

• Current-year losses and brought forward losses incurred after 1 April 2017 can be used on other group companies
• Assets can be transferred between group companies without being liable to capital gains
• A group of companies is classed as one company for rollover relief purposes

Question 19

What are the requirements to be a ‘close company’

Answer 19

• Must have no more than 5 controlling parties
• Must number only directors as its participants (participants can be shareholders, directors, loan creditors)
• If the company ceased, fiver or fewer participants would be entitled to the majority of its assets

Question 20

When loans are paid from close companies, what are the very strict rules

Answer 20

• Tax is charged annually at 32.5% of the outstanding loan and must be paid by the company
• If the loan has been fully repaid or written off within the first 9 months then no tax is due, as long as a new loan hasn’t been taken after paying off the first
• If loan is settled after this period, then the CT for the loan is payable 9 months after the end of that accounting period

Question 21

When companies buy back their shares, any payment in excess of the original purchase price constitutes a distribution, which is subject to

Answer 21

Corporate tax

Question 22

What is an unquoted trading company

Answer 22

company not listed on particular stock exchange, so small companies

Question 23

If unquoted trading companies buy back shares, there is a chance that no CT is payable, but what will have to be paid instead

Answer 23

CGT

Question 24

What are the 3 rates of VAT

Answer 24

• Zero-rated
• Reduced rate (5%)
• Standard rate (20%)

Question 25

What is input and output tax in VAT

Answer 25

INPUT is paid by business on the purchase of the goods and services, and OUTPUT is charged to the customers.

Question 26

To register for VAT, the company must have a total turnover of VAT taxable goods in the last 12 months of

Answer 26

£85,000

Question 27

VAT can be charged at a reduced rate on:

Answer 27

• Domestic heating fuels
• The installation of energy-saving materials
• Contraceptive products
• Certain property renovations or conversions

Question 28

Business making zero-rated supplies do not charge VAT on sales, although they can reclaim input VAT on the purchases they make. These items include:

Answer 28

• Most food and some drinks
• Domestic supplies of water and sewerage
• Hard copy and electronic books and most other publications
• Sales of new residential buildings
• Buildings for use by charities
• Renovated houses that have been empty for 10 years
• Public transport fares
• Sanitary products
• Clothing/footwear for children

Question 29

Examples of exempt supplies from VAT are

Answer 29

• Insurance, finance and credit
• Education and training
• Fundraising events by charities
• Subscriptions to membership organisations

Question 30

Between what margins do second-hand dealers pay VAT on

Answer 30

they pay tax only on the difference between the buying price and their selling price

Question 31

With an agrictultural flat-rate scheme, they do not account for VAT, but they can add a flat-rate to sales to VAT-registered customers of what %

Answer 31

4%

Question 32

Postponed accounting means you can pay VAT on imported goods when

Answer 32

VAT is only paid upon the next VAT return which is every 3 months. This applies to goods imported from the EU.

Question 33

What is the maximum annual turnover for companies that want to use annual accounting

Answer 33

£1.35m

Question 34

If VAT is paid late, what are the following steps relating to surcharges

Answer 34

• On the first time, a surcharge notice will be sent out and if it happens again within the next 12 months then a surcharge will be in place
• For companies with annual turnover of £150,000 or more is 2% of the unpaid VAT
• If the business continues to miss payments, charges of 5%, 10% and 15% can be in place