W6

Question 1

What is the purpose of distinguishing between income and capital in taxation?

Answer 1

Distinguishing between income and capital is important for applying the correct tax treatment. In general, income expenditure can only be deducted from income receipts, while capital expenditure can only be deducted from capital receipts. This helps in reducing the overall tax bill.

Question 2

What are capital allowances in taxation?

Answer 2

Capital allowances are deductions from income receipts that spread the cost of capital expenditure on certain capital items over a period of time. They enable certain types of capital expenditure to be deducted from income receipts, providing tax relief.

Question 3

How are individuals and companies assessed for tax?

Answer 3

Individuals are assessed to tax by reference to the tax year, which runs from 6 April to 5 April. Companies are assessed to tax by reference to the financial year, which runs from 1 April to 31 March. However, companies can choose an accounting period that does not match the financial year.

Question 4

What is the difference between direct and indirect taxes?

Answer 4

Direct taxes are imposed by reference to a taxpayer’s circumstances, such as income or chargeable gains. Indirect taxes are imposed by reference to transactions, such as the value of supplies of goods or services provided. Inheritance Tax is only covered to a limited extent, and Stamp Duty Land Tax is not covered in this module.

Question 5

How can income receipts and capital receipts be distinguished?

Answer 5

Income receipts are money received on a regular basis, such as trading profits, interest from savings, or rent. Capital receipts, on the other hand, are from transactions that are not part of regular activity, such as the sale of a business premises. Distinguishing between the two is important for determining the tax treatment.

Question 6

What is the difference between income expenditure and capital expenditure?

Answer 6

Income expenditure refers to money spent as part of day-to-day trading, such as bills for heating and lighting, rent, and staff wages. Capital expenditure, on the other hand, involves money expended to purchase a capital asset or enhance an existing one. Distinguishing between the two is important for tax purposes.

Question 7

What is the purpose of capital allowances in taxation?

Answer 7

Capital allowances allow businesses to deduct a proportion of their capital expenditure on certain capital items from their income receipts over a period of time. This helps in reducing the overall tax bill by spreading the cost of capital assets.

Question 8

How does the assessment of tax differ for individuals and companies?

Answer 8

Individuals are assessed to tax based on the tax year, while companies are assessed based on the financial year. However, companies can choose an accounting period that does not match the financial year. HMRC collects tax from individuals and businesses through the self-assessment system.

Question 9

What is the purpose of the Pay As You Earn (PAYE) system?

Answer 9

The PAYE system is a method of deducting income tax and employees’ national insurance contributions at source. Employers deduct the tax from employees’ wages or salaries and account for it to HMRC. This ensures that the tax is paid before the employee receives their net income.

Question 10

What is the purpose of indexation allowance in taxation?

Answer 10

Indexation allowance was a tax allowance for companies that took into account inflation based on the Retail Price Index (RPI). It allowed companies to adjust the cost of capital assets for inflation when calculating chargeable gains. However, indexation allowance was frozen on 31 December 2017 and cannot be claimed for periods commencing on or after 1 January 2018.

Question 11

What is the definition of Total Income?

Answer 11

Total Income refers to a taxpayer’s gross income from all sources before any deductions. It is relevant for income tax purposes.

Question 12

What does TTP stand for and what does it represent?

Answer 12

TTP stands for Taxable Total Profits, which are the total taxable income, profits, and chargeable gains of a company. These are subject to corporation tax.

Question 13

What is Value Added Tax (VAT) and who is responsible for collecting it?

Answer 13

Value Added Tax (VAT) is a tax collected by registered businesses on supplies of goods and services. The responsibility for collecting VAT lies with the registered businesses.

Question 14

What are the steps involved in calculating income tax?

Answer 14

The steps involved in calculating income tax are: Total Income, Net Income, Taxable Income, Splitting, Personal Savings Allowance, Applying relevant rates, and adding together the amounts of tax.

Question 15

What is the purpose of the Personal Allowance in income tax calculations?

Answer 15

The Personal Allowance is an amount that is deducted from a taxpayer’s Net Income to reduce their taxable income. It is an annual allowance that each individual is entitled to.

Question 16

What is the Personal Savings Allowance and how does it affect income tax?

Answer 16

The Personal Savings Allowance is an allowance that applies to savings income. For basic rate taxpayers, the first £1,000 of savings income is taxed at the savings nil rate, and for higher rate taxpayers, the first £500 is taxed at the savings nil rate. This allowance reduces the amount of income subject to tax.

Question 17

What are the two methods by which HMRC assesses and collects income tax?

Answer 17

The two methods by which HMRC assesses and collects income tax are Self-Assessment and Deduction at Source. Self-Assessment requires individuals to calculate their own tax bill, while Deduction at Source involves the payer deducting tax and accounting for it to HMRC.

Question 18

What is the purpose of the personal tax computation?

Answer 18

The personal tax computation is used to calculate the tax liability of an individual taxpayer in a non-business context. It involves calculating Total Income, Net Income, Taxable Income, and applying the relevant tax rates.

Question 19

What is the definition of Total Income and how is it calculated?

Answer 19

Total Income refers to a taxpayer’s total gross income from all sources. It is calculated by adding together all the receipts from all sources of income, including gross amounts received after deduction of tax at source.

Question 20

What is the purpose of deducting available tax reliefs in the personal tax computation?

Answer 20

Deducting available tax reliefs, such as interest paid on qualifying loans and pension scheme contributions, reduces a taxpayer’s Net Income and ultimately their taxable income. This helps to lower the tax liability.

Question 21

What is Taxable Income and how is it calculated?

Answer 21

Taxable Income is the taxpayer’s Net Income minus the Personal Allowance. It represents the amount of income that is subject to tax. The Personal Allowance is deducted from the Net Income to ascertain the Taxable Income.

Question 22

What are the different types of income and how are they taxed?

Answer 22

The different types of income are non-savings income, savings income, and dividend income. Each type of income is taxed separately, with different tax rates applicable to each. Non-savings income is taxed first, followed by savings income, and then dividend income.

Question 23

How is non-savings income calculated?

Answer 23

To calculate non-savings income, deduct the savings and dividend income figures from the taxable income.

Question 24

What are the different tax bands for taxable income?

Answer 24

The tax bands for taxable income are Basic, Higher, and Additional. The specific income ranges and corresponding tax rates vary for non-savings, savings, and dividends.

Question 25

What is the Personal Savings Allowance and how does it affect tax on savings income?

Answer 25

The Personal Savings Allowance is a tax relief that allows individuals to earn a certain amount of savings income tax-free. The amount of the allowance depends on the individual’s taxable income and tax band. Any savings income beyond the allowance is subject to the applicable tax rate.

Question 26

What is the ‘cake method’ used to explain the calculation of income tax?

Answer 26

The ‘cake method’ is a way to visualize the calculation of income tax. Each type of income is represented as a layer of a cake, and the tax bands are represented as measurements on a ruler next to the cake. The layers of the cake rise according to the amount of tax to be paid on each type of income, and each tax bracket is used up in order.

Question 27

How is the total tax liability calculated at the end of the income tax computation?

Answer 27

The total tax liability is calculated by adding together the amounts of tax calculated for each type of income (non-savings, savings, and dividends) based on the applicable tax rates and bands.

Question 28

How is the tax on interest income calculated?

Answer 28

The tax on interest income is calculated by applying the personal savings allowance to the first portion of savings income, and then applying the applicable tax rate to the remaining portion based on the individual’s tax band.

Question 29

What is the starting point for calculating Capital Gains Tax?

Answer 29

The starting point for calculating Capital Gains Tax is establishing the consideration or proceeds received by the seller on the disposal of the asset, subject to any substitution of market value if the transaction occurs between connected persons or for an undervalue.

Question 30

What happens if a layer of income rises through a tax band in the ‘cake method’ calculation?

Answer 30

If a layer of income rises through a tax band in the ‘cake method’ calculation, the tax rate to be applied will have to be apportioned accordingly. Each tax bracket is used up in turn, and no bracket is used until the one before it has been exhausted.

Question 31

How is the income tax due for the year settled?

Answer 31

The income tax due for the year is settled by making a final payment to HMRC. Alternatively, if the amount is small, it may be recovered through an adjustment to the individual’s PAYE tax code for the following tax year. If the taxpayer has overpaid tax, they will receive a tax refund from HMRC.

Question 32

What is the purpose of Capital Gains Tax (CGT)?

Answer 32

The purpose of Capital Gains Tax (CGT) is to tax the profit that a person might make from disposing of a capital asset that has appreciated in value during their period of ownership.

Question 33

How is Capital Gains Tax (CGT) calculated?

Answer 33

In order to calculate an individual’s capital gains tax liability correctly, the following formula should be used: Sale proceeds/market value - disposal expenditure = Net Sale Proceeds. Net Sale Proceeds - initial expenditure - subsequent expenditure = Total Chargeable Gain. Total Chargeable Gain - carried forward or carried-across losses - annual exemption = Taxable Chargeable Gain. The appropriate rate of CGT is then applied to the Taxable Chargeable Gain.

Question 34

What are some ways to mitigate the Capital Gains Tax (CGT) liability?

Answer 34

There are several ways to mitigate the CGT liability, such as allowable expenditure, Business Asset Disposal Relief, Investors Relief (provided the conditions are fulfilled), losses, and each individual is entitled to an annual exemption.

Question 35

What types of assets are excluded from Capital Gains Tax (CGT)?

Answer 35

The main types of assets excluded from CGT are the principal private residence (PPR), motor cars for private use, certain investments such as government securities and shares held in Individual Savings Accounts (ISAs), and UK sterling and foreign currency held for personal use.

Question 36

What is Business Asset Disposal Relief and how does it affect Capital Gains Tax (CGT)?

Answer 36

Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief or ER) reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals. It is applied to the Taxable Chargeable Gain, which is the gain after all allowable deductions, losses, and the annual exemption.

Question 37

How are disposals between spouses treated for Capital Gains Tax (CGT)?

Answer 37

When one spouse disposes of an asset to the other, legislation deems that neither a gain nor a loss has occurred, so no CGT is payable. The spouse receiving the asset takes over the base cost of the spouse who disposed of it.

Question 38

What is the annual exemption for Capital Gains Tax (CGT)?

Answer 38

Every individual is entitled to an annual exemption. The annual exemption for the current tax year is £6,000.

Question 39

How are capital losses used in Capital Gains Tax (CGT) calculations?

Answer 39

Capital losses can be used to offset capital gains made in the same tax year. If there are insufficient gains to offset the losses, the losses can be carried forward to future tax years until used up.

Question 40

What is the tax rate for Capital Gains Tax (CGT) for individuals?

Answer 40

There are two rates of CGT for individuals: 10% and 20%. Basic rate taxpayers generally pay 10% CGT, while higher and additional rate taxpayers pay 20% CGT.

Question 41

How are disposals between connected persons treated for Capital Gains Tax (CGT)?

Answer 41

If the parties are connected persons, HMRC will deem the seller to have received market value irrespective of the actual sale proceeds. This applies to disposals between relatives, companies under common control, and partners in business.

Question 42

What is the purpose of the annual exemption in Capital Gains Tax (CGT)?

Answer 42

The annual exemption in CGT allows individuals to make up to £6,000 of gains tax-free in the current tax year.

Question 43

What is the purpose of Business Asset Disposal Relief in Capital Gains Tax (CGT)?

Answer 43

Business Asset Disposal Relief reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals. It is applied to the Taxable Chargeable Gain, which is the gain after all allowable deductions, losses, and the annual exemption.

Question 44

How are disposals at an undervalue treated for Capital Gains Tax (CGT)?

Answer 44

If the transaction is between unconnected persons and at an undervalue, then for CGT purposes, the sale is deemed to be at the market value at the date of disposal. However, HMRC will not substitute market value if the seller has simply made a bad bargain.

Question 45

How is tax payable on the gain calculated in capital gains tax?

Answer 45

After calculating the Total Chargeable Gain (total gains after deductions and the annual exemption), losses can be taken into account. Then, all gains are added together to find the Total Taxable Chargeable Gains. The tax payable on the total taxable chargeable gains is calculated based on different rules for companies and individuals.

Question 46

Business Workshop 6.pdf
What is Business Asset Disposal Relief and how does it reduce capital gains tax?

Answer 46

Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief, reduces the higher rate of CGT from 20% to 10% for qualifying disposals. It applies to the Taxable Chargeable Gain (the gain after all allowable deductions, losses, and the annual exemption). Qualifying disposals include trading businesses, assets in a business that used to trade, shares in a trading company, or shares in a company that used to trade, subject to certain conditions.

Question 47

Business Workshop 6.pdf
What are the two main business reliefs that defer liability to capital gains tax?

Answer 47

The two main business reliefs that defer liability to capital gains tax are Replacement of Business Assets Relief (Rollover Relief) and Gift of Business Assets Relief (Hold-over Relief). Rollover Relief allows taxpayers to postpone the CGT liability on the sale of certain business assets by rolling over the gain into a replacement asset. Hold-over Relief applies when an individual gives away a business asset, reducing the donee’s acquisition cost for CGT purposes by the amount of the donor’s deemed gain.

Question 48

What is Business Property Relief (BPR) and when does it apply?

Answer 48

Business Property Relief (BPR) is an exemption for the purposes of Inheritance Tax (IHT). It applies on the transfer of various categories of Business Property. BPR is available on both lifetime transfers and the death estate.

Question 49

How is Capital Gains Tax (CGT) calculated on the sale of an asset?

Answer 49

To calculate Capital Gains Tax (CGT) on the sale of an asset, you need to subtract the disposal expenditure from the net sale proceeds to get the chargeable gain. The chargeable gain is then subject to CGT rates based on the individual’s tax band.