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Principles of tax > Topic 1: Introduction to income tax > Flashcards

Topic 1: Introduction to income tax Flashcards

1
Q

What examples are there of different types of income that are exempt from income tax?

A

1) National savings certificate income
2) Income from ISAs
3) Betting / lotteries / premium bonds etc.
4) Scholarships
5) Some social security such as housing benefit
6) Income tax repayment interest

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2
Q

How much does the starting rate for savings income go up to, what % is it and when is it applicable?

A

It is £5000, 0% and is applicable when an individual has

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3
Q

What happens to savings income 0% rates for basic and higher rate tax payers?

A

For basic rate tax payers, there is £1000 taxed at 0%
For additional rate tax payers, there is £500 taxed at 0%

Which band to apply is chosen by looking at their taxable income (ignoring this nil rate band thing)

An individual could have both the £5k thing (or some of it) and one of these potentially depending on their mix of income amounts

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4
Q

What is the tax year for individuals?

A

6th April - 5th April

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5
Q

What is the tax year for companies?

A

1st April - 31st March

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6
Q

With regards to dividends…. all individuals….

A

regardless of income are allowed a £2000 nil rate on dividends

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7
Q

After the dividend nil rate, what are the % rates for dividends?

A

7.5%, 32.5% and 38.1%

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8
Q

How do you work out the gross donation a charity received via gift aid from someone’s net donation?

A

net x (100/80) - this then basically assumes that everyone is a basic rate (20%) taxpayer (as you have to be a taxpayer to claim gift aid). But what about higher and additional rate tax payers - they arguably have got charged 40% or even 45% on the money they are gifting already.

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9
Q

What happens when higher or additional rate taxpayers donate with gift aid?

A

The basic rate upper limit becomes £37500 + gross donation and the higher rate upper limit becomes £150000 + gross donation

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10
Q

If you want to carry back donated gift aid money in to your 2018/19 tax return even though you donated it in 2019/20 then when is the deadline for saying you want to do this?

A

When you file your 2018/19 tax return (latest deadline would be 31 Jan 2020)

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11
Q

How does the marriage allowance work?

A

Well it DOES NOT increase your personal allowance, you just deduct part (£1250) of the transferor’s personal allowance and you can then take 20% of that (£250) off the transferee’s tax liability. The transferor has to be basic or non taxpayer and the transferee has to be a basic tax payer

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12
Q

What is meant by a ‘receipts basis’ of assessment of employment income?

A

It means that it is assessed in the tax year that you receive it in

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13
Q

What does ‘taxable earnings’ mean?

A

Earnings that are taxable, IT IS THE AMOUNT PRIOR TO THE PERSONAL ALLOWANCE BEING TAKEN OFF

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14
Q

What are the 2 general rules for taxable benefits?

A

Always time apportion benefits if only available for part of the tax year.

Always deduct employee contribution (apart from private fuel)

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15
Q

When is living accommodation provided by an employer tax exempt?

A

When it is job related and one of:

Necessary, customary or security

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16
Q

If I got given say Tesco vouchers from my employer, what is the taxable value of that benefit?

A

The cost of the voucher to the employer

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17
Q

For a director, what extra details are there to whether their provided for accommodation is tax exempt or not?

A

They can only claim necessary accommodation or customary accommodation if:

They own less or equal to 5% of the company AND either:

  • They work full-time OR the company is non-profit making / a charity
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18
Q

If living accommodation is not tax exempt then how is the value worked out?

A
  1. Normally it is the higher of the rental value (if applicable) or the ‘annual value’
  2. IF it is expensive (cost > £75K) then you do the following sum:

Official rate of interest at start of tax year x (cost - 75k)

This ‘cost’ is the original cost + any capital improvements BEFORE the start of the tax year

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19
Q

When should you use market value instead of original cost when working out accommodation benefit value?

A

If >6 years have elapsed when employee moves in since it was purchased

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20
Q

How do you work out the benefit of a car for PRIVATE USE?

A

List price x emissions %

List price includes optional accessories provided with the car and further accessories £100 or more provided later on.

Emissions % thing is in tables

Employee contributions reduces benefit

TIME APPORTION BENEFIT

Covers all running costs except fuel

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21
Q

How is fuel benefit worked out?

A

Basic figure (£24,100) x the car benefit.

NO reduction for partial contribution

TIME APPORTION BENEFIT

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22
Q

What is a key difference between vans and cars tax wise (apart from what is in the tables?)

A

Private use DOES NOT include home to work travel for vans but it is included for cars.

Both time apportion benefit

Employee contribution reduces benefit (like cars)

There is a fixed benefit amount, unlike cars where it is the list price.

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23
Q

How do you work out the annual value of a non house/car asset? like a tv

A

20% of market value OR how much the company rents it for

time apportion

employee contribution reduces benefit

if private use is insignificant then no taxable benefit

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24
Q

how do you work out the value of intangible benefits - such as a school place?

A

cost to employer less employee contributions

in-house benefit = marginal cost to employer

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25
Q

Name as many exempt benefits as you can

A

See favourites pic in phone’

26
Q

When are PAYE payments due?

A

19th of month or 22nd if electronic

large employers > 250 employees must pay electronically

if monthly PAY total =

27
Q

when benefits value (or adjustment for underpaid tax) is more than (personal) allowance(s), how do you make the tax code?

A

take the negative amount, take off end digit, then -1, then stick k in front. I.e. if someone had personal allowance of 12500, taxable benefits of 13000, then that makes -500 You take the end 0 off, -1 and add k and you get k49.

28
Q

When is market value relevant in determining value of accommodation?

A

When it has been owned for 6 years prior to use

29
Q

What is the trading allowance?

A

£1000, available to individuals carried on a trade, if trading receipts < £1000, trading income is not taxable

  • a trader can chose to either take £1k off their trading income for tax or take off their expenses
30
Q

What are some examples of disallowable expenses in a business?

A

improvement or enhancement

depreciation

salary to sole trader or partneR

31
Q

What do you do with general provisions and specific provisions respectively for tax computation?

A

increase in general provision - add back to profit, decrease in general provision, deduct from profit. specific provisions no adjustement.

32
Q

What do you do with trade bad debts and non-trade bad debts for tax computation?

A

Allow trade bad debts, don’t allow non-trade bad debts (this includes loans to employees written off - unless it was a benefit to the employee)

33
Q

What gifts are allowable for tax?

A

1) Staff entertaining
2) gifts to employees
3) trade samples
4) (gifts with business name on it AND not food/drink/tobacco/vouchers AND cost £50 or less)

34
Q

What donations and subscriptions are allowed?

A

Donations to small local charities, NOT national charities

trading stock/used paint and materials to charities/schools

NOT donations made under gift aid

NOT fines and penalties APART from parking fine of employee on business

35
Q

What capital related legal fees ARE allowed?

A

renewal of short lease (50 years), registering trade patent or copyright, raising long term finance

36
Q

How are leasing and rental costs for tax calculated?

A

Hiring/renting/leasing plant and equipment is allowable.

Cars different. If =<110g/km then is allowable. If car is >110g/km co2 then FLAT RATE (i.e. NOT TIME APPORTIONED) 15% x hire charge is disallowed.

If its a pollutey car AND private use then you calculate what would be allowed (85% of hire charge) and then if say 40% is private use, then disallow 40% of the 85% of the hire charge

37
Q

IS REDECORATION MAINTAINENCE OR IMPROVEMENT?

A

maintenance - i.e. allowable expense

38
Q

Re: tax, what do you do when goods taken from a business (by an owner) for private use?

A

Need to be treated as being taken at market value NOT cost

therefore add the market value into the taxable profits bit

39
Q

What should you do with non-trade income in the accounts? - i.e. rental income, profit on disposal of assets, investment income

A

must deduct from profits

40
Q

what should you do if the owner of a business pays for business expenditure on a personal account?

A

it is allowable to be deducted

41
Q

Would you count computer software licences as?

A

Plant and machinery - therefore can claim capital allowance on it

42
Q

are capital allowances calculated for period of account or tax year?

A

period of account

43
Q

how do you do a write down allowance for a main pool?

A

pro-rate for non-12 month periods, date of acquisition is irrelevant, 18% is written down after adding additions and taking away disposals (proceeds limited to cost)

44
Q

what do you know about first year allowances?

A

never time apportioned.

100% on energy saving equipment, new and unussed zero emission goods vehicles, new low emission cars - electric or emission <50 on/after 1 April 2018 or 75 before 1 April 2018

45
Q

what is the annual investment allowance?

A

DOESN’T APPLY TO CARs but applies to most other plant and machinery.

it is £1m per year.

all additions up to £1m receive 100% relief

balance of expenditure above £1m receives normal WDA

allocate the AIA to assets otherwise getting the worst allowances, i.e. not 100% FYA assets

46
Q

After additions and disposals, what happens if a written down main pool is =

A

You write it off instead of normal process.

You pro-rate the £1k for non 12 month periods

47
Q

what about assets with private use by the business owner?

A

kept in separate pool.

work out amount you would normally allow but only deduct business use %

48
Q

what happens when you dispose of a PRIVATE USE asset and it is sold for more (or less) than the written down value?

A

If sold for more then the difference is charged from the tax allowances (or added to adjusted trading profit), need to times by business % use. do opposite for if made a loss

49
Q

what happens if in the main pool, too many allowances have been claimed, i.e. proceeds of disposal > twdv of pool?

A

pool becomes negative and the excess is given back as a balancing charge

if proceeds of disposal

50
Q

for ongoing business, what period of account will be taxed in the ‘19/’20 tax year?

A

Whichever ENDS in the 19/20 tax year

51
Q

how do you work out first tax years?

A

the day the business is started to the next 5 April!!!!! Only would therefore be 12 month period if started the business at start of April

52
Q

what do you do for the second tax year if there is a period of account ending in the second tax year and it is 12 months long?

A

current year basis - i.e. the tax year it ends in is the one it counts as

53
Q

what do you do for the second tax year if there is a period of account ending in the second tax year and it is LESS THAN 12 months long?

A

tax the FIRST 12 months from commencement

54
Q

what do you do for the second tax year if there is a period of account ending in the second tax year and it is MORE THAN 12 months long?

A

TAX 12 MONTHS TO THE END OF THE PERIOD OF ACCOUNT

55
Q

what do you do for the second tax year if there is NOT a period of account ending in the second tax year?

A

use the actual tax year (6 April - 5 April)

56
Q

what happens if an accounting period ending in the third tax year is more than 12 months long?

A

you take the LAST 12 months of that accounting period

57
Q

what are the rules for closing year?

A

ALL PERIODS OF ACCOUNT WHICH FINISH IN THE TAX YEAR IN THE DATE OF CESSATION ARE TAXED AND THEN OVERLAP PROFITS TAKEN OFF

OVERLAP PROFITS ARE taken off profits still to be taxed

58
Q

what is the basis period for the penultimate tax year?

A

current year basis UNLESS no period ending in penultimate tax year, in that case, tax 12 months to normal year end

59
Q

what is the cash basis of accounting all about?

A

can be used by unincorporated businesses (not companies) with receipts =<150k

a trader must leave the scheme if previous tax year receipts >= 300k

accounting profit is receipts less expenses in the period

capex (apart from cars) is allowable, proceeds on disposal of P&M should therefore be tqxed as receipts

interest (up to 500 a year max is allowable)

60
Q

do you or do you not pro-rate capital allowances for sole traders for business/personal use?

A

You do not

61
Q

if you commute to work as your only private use of a work van, is this tax-able or tax-exempt?

A

tax exempt

Principles of tax (6 decks)

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