W7

Question 1

Who is considered a taxable person for VAT purposes?

Answer 1

A taxable person is an individual, partner, company, or unincorporated organization who is, or is required to be, registered for VAT purposes and carries on any economic activity on a regular basis in the course or furtherance of any business.

Question 2

What are the requirements for VAT registration?

Answer 2

A person is required to be registered for VAT if the value of their taxable supplies in a period of one year or less exceeds the VAT registration threshold. Alternatively, a person can register voluntarily.

Question 3

What is the current VAT registration threshold?

Answer 3

The current VAT registration threshold is £85,000.

Question 4

What is the purpose of voluntary VAT registration?

Answer 4

Voluntary registration allows a business to recover input VAT (reducing costs), but it also requires the business to charge output VAT on supplies to customers, which may make the business less attractive to customers compared to unregistered competitors.

Question 5

What is VAT de-registration?

Answer 5

VAT de-registration is the process where a VAT registered person applies to have their registration cancelled and ceases to be taxable if the value of their future annual taxable supplies will not exceed the VAT de-registration threshold.

Question 6

What is the current VAT de-registration threshold?

Answer 6

The current VAT de-registration threshold is £83,000.

Question 7

What is the difference between output tax and input tax?

Answer 7

Output tax is the VAT chargeable by a business when making a supply of goods or services, while input tax is the VAT paid by a person on goods or services supplied to them.

Question 8

How does a VAT registered business account for VAT?

Answer 8

A VAT registered business offsets the input tax it has suffered (on goods and services purchased) against the output tax it has charged customers or clients (on its own supplies). The business only accounts for the difference to HMRC, acting as a tax collector in collecting and paying the tax on the value added by the business in the supply chain.

Question 9

What is the standard rate of VAT?

Answer 9

The standard rate of VAT is currently 20%.

Question 10

How is VAT calculated on a VAT inclusive price?

Answer 10

When the standard rate of VAT applies, to calculate the VAT element of a VAT inclusive price, you should multiply the price by the VAT fraction, which is currently 1/6. The seller must account for the VAT element amount to HMRC.

Question 11

What are the different types of supply for VAT purposes?

Answer 11

A business can make four kinds of supply: standard rated, reduced rated, zero rated, and exempt. Standard rated supplies are charged at the standard rate of VAT (currently 20%). Reduced rated supplies are charged at a reduced rate of 5%. Zero rated supplies are charged at a rate of 0% but still fall into the category of taxable supplies. Exempt supplies include insurance, finance, education/health services, and the sale of land and buildings.

Question 12

What is the requirement for a VAT registered business to provide a VAT invoice?

Answer 12

A taxable business making a standard or reduced rate supply of goods or services to another taxable business must supply the customer/client with a VAT invoice within 30 days of the supply and keep a copy.

Question 13

How often must taxable businesses submit a VAT Return to HMRC?

Answer 13

Taxable businesses must submit a VAT Return online to HMRC every three months.

Question 14

When is the due date for payment of VAT?

Answer 14

The due date for payment is usually within one month and seven days after the end of the VAT period.

Question 15

What does the VAT return show?

Answer 15

The VAT return must show the total output tax charged on the making of taxable supplies during that VAT period, less the total input tax attributable to the making of taxable supplies.

Question 16

What are the payment requirements for businesses that pay more than £2.3 million a year in VAT?

Answer 16

Businesses that normally pay more than £2.3 million a year to HMRC in VAT must make monthly payments on account and then pay the balance when submitting the quarterly VAT return.

Question 17

What are some special schemes for VAT accounting?

Answer 17

There are a number of special schemes designed to simplify accounting for VAT or to reduce VAT liability, such as retail schemes, cash accounting, annual accounting, and flat rate scheme.

Question 18

What is the cash accounting scheme for VAT?

Answer 18

Businesses whose annual turnover is less than £1,350,000 (excluding VAT and excluding exempt supplies) may opt to use a cash accounting scheme if they comply with certain conditions. In this scheme, output tax is accounted for when the invoice is paid rather than issued, and input tax can only be recovered when the business pays the supplier.

Question 19

What is the annual accounting scheme for VAT?

Answer 19

Businesses with an annual turnover not exceeding £1,350,000 (excluding VAT and excluding exempt supplies) may be permitted by HMRC to make an annual VAT return. The VAT is paid by instalments during the year (based on the previous year’s VAT liability) with the balance being paid when the VAT return is submitted.

Question 20

What is the flat rate scheme for VAT?

Answer 20

Where a VAT-registered business has a taxable annual turnover not exceeding £150,000 (excluding VAT) and a total annual turnover (including the VAT charged to the business and the value of any exempt and other non-taxable income) not exceeding £230,000, the business may elect that VAT be charged at a flat rate on turnover rather than on every single transaction. However, there is normally no relief for input VAT.

Question 21

What are the anti-avoidance rules for the flat rate scheme since April 1, 2017?

Answer 21

Since April 1, 2017, there are anti-avoidance rules requiring limited cost traders who use a flat rate scheme to account for VAT at a rate of 16.5%.

Question 22

What is corporation tax and when is it payable?

Answer 22

Corporation tax is payable on all income profits and chargeable gains of a body corporate that arise in its accounting period. The sum of a company’s income profits and chargeable gains is known as TTP (taxable total profits chargeable to corporation tax). Companies are assessed to corporation tax by reference to the financial year (1 April - 31 March). Note that because a company can choose its accounting period, it is often different from the financial year, which is the same for all companies.

Question 23

What is the rate of corporation tax for the 2022/2023 tax year?

Answer 23

The rate of corporation tax for the 2022/2023 tax year was a flat rate of 19%. As of 1 April 2023, the main rate increased to 25% for companies with TTP greater than £250,000. If a company’s TTP is £50,000 or less, the corporation tax rate is 19%. If a company’s TTP is over £50,000 and up to £250,000, a company may claim marginal relief, which has a tapering effect on the tax rate.

Question 24

What is the calculation of TTP for corporation tax?

Answer 24

The calculation of TTP for corporation tax involves deducting deductible expenditure, capital allowances, and trading losses from income profits. For chargeable gains, sales proceeds are deducted from allowable expenditure, indexation allowance, and capital/trading losses. The amount of TTP determines the amount of corporation tax payable.

Question 25

What is the purpose of capital allowances?

Answer 25

Capital allowances are deductions that companies can claim on their tax returns for the depreciation of plant and machinery (P&M) used in their business. These deductions help to reduce taxable profits and lower the amount of tax a company has to pay.

Question 26

How are capital allowances calculated for plant and machinery?

Answer 26

When a company claims capital allowances on plant and machinery (P&M), it can deduct 18% of the tax written down value (TWDV) of the P&M after it has been reduced by the previous year’s capital allowances claim. For example, if the TWDV of P&M is 100,000, the capital allowances figure will be 18% of 100,000, which is 18,000, and the TWDV for the purposes of calculating next year’s capital allowances will be 82,000 (100,000 - 18,000).

Question 27

What is the annual investment allowance (AIA) and how does it work?

Answer 27

The annual investment allowance (AIA) is another type of capital allowance that allows a company to deduct 100% of expenditure on plant and machinery (P&M) up to a specified amount. Currently, the AIA limit is 1 million per year. Any expenditure above this limit can still be subject to the normal capital allowance rate of 18% on a reducing balance basis.

Question 28

How does the super-deduction capital allowance work?

Answer 28

The super-deduction capital allowance was introduced by the government as a temporary measure in response to the Covid-19 pandemic. It allows companies to claim 130% first-year relief on qualifying plant and machinery expenditure incurred between 1 April 2021 and 31 March 2023. However, this allowance does not apply to second-hand, used, or leased assets.

Question 29

What is full expensing and how does it differ from other capital allowances?

Answer 29

Full expensing is a new capital allowance introduced by the government. It allows companies to deduct 100% of the cost of new and unused plant and machinery without any expenditure limit. This means that there is no cap on the amount that can be deducted. Full expensing is a first-year allowance, meaning that the claim must be made in the period when the expenditure on the plant and machinery is incurred.

Question 30

What is rollover relief and when can it be used?

Answer 30

Rollover relief is a tax deferral mechanism that allows individuals or companies to defer tax on gains arising from the disposal of qualifying assets. It can be used when one qualifying asset is replaced with another. The gain from the disposal of the original asset is carried forward and rolled into the acquisition cost of the replacement asset. Rollover relief can be used indefinitely as long as sufficient qualifying replacement assets are bought within the time limits.

Question 31

What are the differences between capital allowances for companies and individuals?

Answer 31

There are several differences between capital allowances for companies and individuals. For example, companies do not have an annual exemption for capital gains tax, while individuals do. Companies can also claim indexation allowance, which is frozen up to 31 December 2017. Additionally, companies can benefit from the substantial shareholding exemption (SSE) relief, which allows them to exempt the whole of a chargeable gain when disposing of shares in a trading company, subject to certain conditions.

Question 32

What is the purpose of the substantial shareholding exemption (SSE) relief?

Answer 32

The substantial shareholding exemption (SSE) relief is a tax relief that can exempt companies from paying corporation tax on the chargeable gain that arises when they dispose of shares in a trading company or the holding company of a trading group. To qualify for SSE relief, the disposing company must have held at least 10% of the ordinary share capital of the company being disposed of for at least 12 consecutive months in the last six years.

Question 33

What is the purpose of rollover relief for replacement of business assets?

Answer 33

Rollover relief for replacement of business assets allows individuals or companies to defer tax on gains arising from the disposal of a qualifying business asset when it is replaced with another qualifying asset. The gain is carried forward and rolled into the acquisition cost of the replacement asset, reducing the tax liability until the replacement asset is sold or no new qualifying replacement asset is purchased.

Question 34

What types of assets qualify for rollover relief?

Answer 34

Various types of assets qualify for rollover relief, including land and buildings, goodwill, fixed plant and machinery, ships and hovercraft, aircraft, and Lloyd’s syndicate capacity.

THE ASSETS DO NOT NEED TO BE THE SAME TYPE

Question 35

What is the timing requirement for the purchase of a replacement asset in order to qualify for rollover relief?

Answer 35

The replacement asset must be purchased within 12 months before or three years after the sale of the old asset to qualify for rollover relief.

Question 36

How does rollover relief work when not all of the sale proceeds are used to acquire the new asset?

Answer 36

When not all of the sale proceeds from the original asset are used to acquire the new asset, the amount by which the sale proceeds exceed the cost of the replacement asset is deducted from the chargeable gain before rollover relief. Only the remaining amount of the gain can be rolled over.

Question 37

Under what conditions can a claim for rollover relief be made?

Answer 37

A claim for rollover relief cannot be made if the gain is greater than £80,000.

Question 38

What are the exemptions for dividend income received by a company?

Answer 38

Dividends paid to UK companies are generally subject to corporation tax unless they fall within certain exemptions. The exemptions are broad, and the general effect is that all dividends are exempt from corporation tax unless specific anti-avoidance provisions apply.

Question 39

Why is dividend income received by a company generally exempt from corporation tax?

Answer 39

Dividends paid by a company come from profits that have already been taxed, so the tax already paid satisfies the recipient company’s tax liability in respect of the dividend. Additionally, the dividend is not tax deductible for the company paying it.

Question 40

What is the concept of ‘straddling’ in relation to accounting periods and corporation tax calculation?

Answer 40

Straddling occurs when a company’s accounting year does not coincide with a financial year. This complicates the corporation tax calculation if the rates of corporation tax for the financial years are different. In such cases, the taxable total profits (TTP) of the accounting period must be apportioned between the financial years and taxed at the applicable rates for each year.

Question 41

What are the different ways in which trading losses can be set off against taxable profits?

Answer 41

Trading losses can be set off against current year profits, previous year profits, or future trading profits. A claim must be made within two years after the end of the accounting period in which the trading loss arose. If a company ceases trading, any trading loss in the final 12 months of trading can be carried back and set against profits made in the three years prior to the start of the final 12 months.

Question 42

What is the deductions allowance for carried forward trading losses and how is it applied?

Answer 42

Carried forward trading losses can be set off against all the company’s taxable total profits in the future. The company may use carried forward losses against taxable profits of up to £5 million in each accounting period, provided that the deductions allowance has not already been used for setting off carried forward capital losses against capital gains in the same period.

Question 43

What is group relief in relation to trading losses?

Answer 43

Group relief allows one company with a trading loss to surrender that loss to another profitable company in the group. This reduces or eliminates the profits of the receiving company. Group relief exists where a group relief group is formed.

Question 44

What are the anti-avoidance rules related to trading losses?

Answer 44

There are rules in place to prevent trading losses from being carried forward or back if the company has been sold to a new owner and the nature of the trade has substantially changed within five years after the sale. These rules aim to prevent buyers from acquiring loss-making companies solely to make use of their losses.

Question 45

What was the temporary extension of carry back of trading losses introduced for?

Answer 45

As a temporary measure to assist companies affected by the pandemic, the government extended the period over which trading losses could be carried back. Trading losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022 could be carried back for one year without a cap, and for a further two years subject to a cap.

Question 46

How are capital losses treated for corporation tax purposes?

Answer 46

Capital losses can generally only be set off against capital gains. They can be set off against capital gains in the current year and carried forward to set off against future capital gains. The company may use carried forward capital losses against capital gains of up to the available Deductions Allowance in the relevant accounting period, provided that the deductions allowance has not already been used for setting off carried forward trading losses against trading profits in the same period.

Question 47

To be deductible for tax purposes the expenditure must:

Answer 47

• Be ‘[…] wholly and exclusively’ incurred for the purposes of the trade
  1. eg expenditure which is partially by way of gift will not be deductible whereas if expenditure was needed to produce an item for sale such as raw materials it would be;
  1. Can’t deduct expensives that have nothing to do with their business
• Not be prohibited by statute
  1. eg business entertainment expenditure (ie money spent by a company entertaining its clients) and
  2. provisions made in accounts for doubtful debts (ie those that are not yet written off but there is uncertainty about whether they will be paid or not); and
• Be of an income nature
  1. where it has an element of recurrence eg rent, utility/energy costs, interest paid, wages, repairs.
  1. SOMETHING THAT WILL REPEAT ITSELF

Question 48

What is the procedure for companies with taxable total profits (TTP) of £1,500,000 or less?

Answer 48

Companies with TTP of £1,500,000 or less estimate their tax liability and pay HMRC within 9 months and one day of the end of the accounting period. They must file a tax return electronically within 12 months of the end of the accounting period, along with their accounts. Unless HMRC examines or makes enquiries into the tax return, the tax computation is usually regarded as finalised 12 months after the filing date. Interest accrues on any under or over-payments.

Question 49

What is the deductibility of interest paid by companies?

Answer 49

Interest paid on business loans is generally deductible as an expense. A company can deduct the amount of interest it has paid from its profits to reduce the taxable total profits (TTP) and thereby reduce the overall tax bill.

Question 50

What are the rules regarding the deductibility of interest paid by companies?

Answer 50

Interest paid on business loans is generally deductible as an expense. It can be deducted from profits to reduce the taxable total profits (TTP) and the overall tax bill. However, there may be specific rules and limitations depending on the circumstances, so it is important to consult tax regulations and seek professional advice.

Question 51

What is the corporate interest restriction (CIR)?

Answer 51

The corporate interest restriction (CIR) is a rule that restricts the amount of interest a company can deduct from its income receipts. If a company has more than £2 million of net interest expense in the UK in any year, the amount of interest it can deduct is limited to a maximum of 30% of its income receipts.

Question 52

What is withholding tax and when is it applicable?

Answer 52

Withholding tax is a tax deducted at source from certain payments, such as income tax under the PAYE system. It is applicable when a company has an obligation to withhold tax from certain interest payments, especially in an international context. The person making the payment, such as the employer in the case of PAYE, has the obligation to withhold the tax payable by the person receiving the payment and pay it over to HMRC.

Question 53

Under what circumstances can a company make gross interest payments without deducting tax?

Answer 53

A company can make gross interest payments without deducting tax if it pays interest to another UK corporation tax-paying company or a UK bank.

Question 54

What is the definition of taxable total profits (TTP) for corporation tax purposes?

Answer 54

Taxable total profits (TTP) for corporation tax purposes include both income profits and chargeable gains. Deductible expenditure can reduce income profits if it is incurred wholly and exclusively for the purposes of the trade, is not prohibited by statute, and is of an income nature. Capital allowances can reduce income receipts, and allowable expenditure can reduce chargeable gains.

Question 55

What is the purpose of rollover relief on replacement qualifying business assets?

Answer 55

Rollover relief on replacement qualifying business assets defers any tax due on the disposal of a qualifying asset by rolling the gain into and thereby reducing the base cost of the replacement qualifying asset.

THE ASSETS CAN BE DIFFERENT THINGS

Question 56

What is the definition of a close company for tax purposes?

Answer 56

A company is considered a close company if it is under the control of five or fewer participators, people who hold more than 50% of the shareholding, or any number of participators who are also directors. Control means the ability to exercise control over the company’s affairs, usually through voting rights or possession of or entitlement to issued share capital or assets.

Question 57

What is the tax effect for a company and a recipient participator in relation to loans in a close company?

Answer 57

For a company, it must pay corporation tax on the amount of the loan, calculated at the rate of income tax payable on dividends by higher rate taxpayers. The tax must be paid within a specific timeframe. If the loan is written off or waived, the recipient participator is deemed to receive a dividend equal to the amount of the loan written off or waived.

Question 58

What is the tax treatment for loans in a close company?

Answer 58

All advances of credit in a close company are caught by the close company tax regime, except for specific exceptions such as loans in the form of credit given by the company for goods or services normally supplied by the company in the course of business, loans made in the ordinary course of the company’s business, and loans to borrowers that meet certain criteria. The tax effect for the company is paying corporation tax on the loan amount, while the recipient participator may be deemed to receive a dividend if the loan is written off or waived.

Question 59

What does the term ‘distribution’ mean for close companies?

Answer 59

The term ‘distribution’ has an extended meaning for close companies. It includes living accommodation and other benefits in kind provided to participators, but not when such benefits are provided by reason of employment.

Question 60

What are the transactions in securities rules and when do they apply?

Answer 60

The transactions in securities rules may apply to a transaction involving a close company if it gives any person a tax advantage by changing a receipt that would have been treated as income for tax purposes into a capital receipt. For example, if a close company with substantial distributable profits is wound up and the profits are passed to shareholders as a capital payment instead of a dividend, the transactions in securities rules may apply.

Question 61

When should one apply for advance clearance from HMRC regarding transactions that may fall within the transactions in securities rules?

Answer 61

When acting on a transaction that may fall within the transactions in securities rules, it may be advisable to apply to HMRC for advance clearance. This clearance would state that HMRC is satisfied that the provisions do not apply to the transaction. The client’s specialist tax advisers will be responsible for assessing whether this would be advisable on a particular transaction.

Question 62

What are the tax implications when a close company lends money to a participator?

Answer 62

If a close company lends money to a participator, there are tax effects on both the company and the borrower. The participator must pay income tax on the loan at the rate of income tax payable in dividends by a higher rate taxpayer, while the company must pay corporation tax at a rate of income tax payable in dividends by a basic rate taxpayer.

Question 63

What advice should be given to a client regarding the applicability of tax reliefs when selling land and purchasing new premises?

Answer 63

The client can deduct the chargeable gain from the sale of land against the price of the new premises to give a new base cost for the premises. This helps in reducing any chargeable gain arising from a future sale of the premises.