#14703 - Tax - Business Law and Practice

Income Tax

Step 1 Calculate grossed up total of all income	Salary Savings Interest (Net Interest x 100/80) Dividends (Net Interest x 100/90) Benefits in Kind Total Income
Step 2 Work out net income	Total Income (Pension Contributions) (Charges on Income) Net Income
Step 3 Work out taxable income: Person allowance = 10,600 Reduced allowance for income over 100,000 = 10,600 - (Net Income - 100,000) 2	Net Income (Personal Allowance) Net Income
Step 4 Apply tax rates to n0n-savings, savings and dividends using the tax rates provided. Use the tax jug, taxing each part on top of the other.
Step 5 Add all taxes together to create the Total Tax Liability	Non-Savings Income Tax Savings Income Tax Dividend Income Tax Total Tax Liability
Step 6 Find the difference between the net and gross savings and deduct for the tax at source	Total Tax Liability (Tax Deducted at Source) Total Tax Payable to HMRC

Step 2

Work out net income

Total Income

(Pension Contributions)

(Charges on Income)

Net Income

Step 3

Work out taxable income:

Person allowance = 10,600

Reduced allowance for income over 100,000 =

10,600 - (Net Income - 100,000)

Net Income

(Personal Allowance)

Net Income

Step 4

Apply tax rates to n0n-savings, savings and dividends using the tax rates provided.

Use the tax jug, taxing each part on top of the other.

Step 5

Add all taxes together to create the Total Tax Liability

Non-Savings Income Tax

Savings Income Tax

Dividend Income Tax

Total Tax Liability

Step 6

Find the difference between the net and gross savings and deduct for the tax at source

Total Tax Liability

(Tax Deducted at Source)

Total Tax Payable to HMRC

Capital Gains Tax

Step 1 Consideration and Expenditure	Consideration/Proceeds of Sale (Initial Expenditure) (Subsequent Expenditure) (Disposal Costs) Chargeable Gain
Step 2 Capital losses	Chargeable Gain (Capital Losses Total Gains
Step 3 Annual Exemption	Total Gains (11,1,00) Net Income
Step 4 Apply tax rates: Entrepreneurs relief can be used for shares in a trading company where the seller owns 5% of the voting rights and are an officer/employee of the company. Where ER applies the tax rate is 10%. If ER does not apply then apply the taxable income as follows: Less than 31,785 = 18% tax More than 31,785 = 28% tax Above & Below = threshold below = 18%, above = 28%

Step 2

Capital losses

Chargeable Gain

(Capital Losses

Total Gains

Step 3

Annual Exemption

Total Gains

(11,1,00)

Net Income

Step 4

Apply tax rates:

Entrepreneurs relief can be used for shares in a trading company where the seller owns 5% of the voting rights and are an officer/employee of the company. Where ER applies the tax rate is 10%.

If ER does not apply then apply the taxable income as follows:

Less than 31,785 = 18% tax
More than 31,785 = 28% tax
Above & Below = threshold below = 18%, above = 28%

Corporation Tax

Roll Over Relief

This can be used when a company disposes of a business assets and purchases a replacement asset. It allows the gain to be carried forward and rolled onto the acquisition cost of the replacement asset.

This relief can be used for: land/buildings, goodwill, plant/machinery, ships, aircrafts, quotas, space stations/satellites. Both assets must fall into the above categories but do not have to be the same.

The replacement must be purchased 12 months before or 3 years after the sale of the asset.

Sale of Old Asset = X

Chargeable Gain = Y

Cost of New Asset = Z

New Deemed Base Cost = Z - Y

Capital Allowances

Year	Allowance	Written Down Value
1	Allowance = 500,000 Cost of Machinery - 500,000 = A 18% of A = B	A - B = WDV1
2	18% of WDV1 = C	WDV1 - C = WDV2
3	18% of WDV2 = D	WDV2 - D = WDV3

Allowance = 500,000

Cost of Machinery - 500,000 = A

18% of A = B

A - B = WDV1

18% of WDV1 = C

WDV1 - C = WDV2

18% of WDV2 = D

WDV2 - D = WDV3

This allows the spread of cost over a period of time, even though it is capital expenditure it should be treated as income. It applies to qualifying expenditure: plant/machinery, energy saving and water technologies.

Companies can deduct 18% of the value of the plant/machinery from their income each year on a reducing balance basis. The capital allowance is 500,000 which allows a company to deduct this amount (plus 18 % in the first year) and an additional 18% for all other years.

Calculating TTP & Tax Liability

Step 1	Calculate the Income Profits: Work out the income - rental, trading, interest and dividend income; Total up the trading losses; this must be: Wholly and exclusively for the purpose of the trade; Not be prohibited by statute (i.e. business entertainment and doubtful debts); Be of an income nature (e.g. wages, salaries, costs, trade expenses, interest on overdrafts etc.) Deduct any capital allowances Total Cost Price - WDV1	Total Income (Expenditure) (Capital Allowances) Total Income Profits
Step 2	Calculate Chargeable Gain: Take sale proceeds: Deduct allowable expenditure (initial cost price, subsequent expenditure that improves the asset and disposal expenditure); Deduct capital and trading losses Deduct indexation and associated costs	Sale Proceeds (Expenditure) (Capital & Trading Losses) (Indexation) Total Chargeable Gain
Step 3	Calculate TTP: Total up Income Profits & Chargeable Gain to make TTP; Apply tax at 20% If profits are less than 1.5m the company pays tax within 9 months and 1 day of the end of the accounting period. If the profits are more than 1.5m then the company pays tax in 4 equal instalments.	Income Profits Chargeable Gain TTP TPP x 20% = Tax Payable to HMRC

Step 1

Calculate the Income Profits:

Work out the income - rental, trading, interest and dividend income;
Total up the trading losses; this must be:
- Wholly and exclusively for the purpose of the trade;
- Not be prohibited by statute (i.e. business entertainment and doubtful debts);
- Be of an income nature (e.g. wages, salaries, costs, trade expenses, interest on overdrafts etc.)
Deduct any capital allowances

Total Cost Price - WDV1

Total Income

(Expenditure)

(Capital Allowances)

Total Income Profits

Step 2

Calculate Chargeable Gain:

Take sale proceeds:
Deduct allowable expenditure (initial cost price, subsequent expenditure that improves the asset and disposal expenditure);
Deduct capital and trading losses
Deduct indexation and associated costs

Sale Proceeds

(Expenditure)

(Capital & Trading Losses)

(Indexation)

Total Chargeable Gain

Step 3

Calculate TTP:

Total up Income Profits & Chargeable Gain to make TTP;
Apply tax at 20%

If profits are less than 1.5m the company pays tax within 9 months and 1 day of the end of the accounting period. If the profits are more than 1.5m then the company pays tax in 4 equal instalments.

Income Profits

Chargeable Gain

TTP

TPP x 20% =

Tax Payable to HMRC

Calculating TPP & Tax Liability with Losses

Year	Capital	Income
1		300,000
2	(35,000) 15,000	(660,000)
3	200,000	1,000,000

300,000

(35,000)

15,000

(660,000)

200,000

1,000,000

Draw up a table keeping the capital and income separate:

Capital losses can only be set off against current or future profits; for example the overall loss of 20,000 (15,000 - 35,000) in Y2 can bet taken of Y3 to make a total capital gain of 180,000.

Income losses can be set off against...

#14703 - Tax - Business Law and Practice

About Oxbridge

More Business Law And Practice Samples