#3373 - Taxation Crib Sheet - Business Law and Practice

Income Tax

1. Calculate Total Income

   1. Aggregate of all income from all source which charge to Income Tax

      1. Employment

      2. Property Income

      3. Trading profits

      4. Dividends

         1. Tax credit of 10% at source so need to gross up

            1. Dividends X 10/9 = GROSS dividends

      5. Interest

         1. Taxed 20% at source so need to gross up

            1. Interest X 5/4 = GROSS interest

2. Deduct any allowable reliefs to give NET INCOME

   1. Interest on money borrowed to buy a share in a partnership

   2. Interest on a loan to invest in a close trading company

   3. Interest on a loan to personal representatives to pay inheritance tax

3. Deduct personal allowance to give TAXABLE INCOME

   1. For 2011/12 it is 7,475

   2. Where income is greater than 100,000 the personal allowance is reduced by 1 per every 2 of income above the limit

      1. 7475 – ((net income – 100,000)/2) = adjusted personal allowance

4. Calculate tax payable on taxable income

   1. Employment Income = Income – (gross savings + dividend income)

      1. 20% for anything between 0 - 35,000

      2. 40% between 35,001 – 150,000

      3. 50% for over 150,000

   2. Interest

      1. 10% for 0 – 2560

      2. 20% for 2561 – 35,000

      3. 40% for 35,001 – 150,000

      4. 50% for over 150,000

   3. Dividends – always taxed last as the upper-most slice of income

      1. 10% if taxed at the basic rate

      2. 32.5% if taxed at the higher rate

      3. 42.5% if taxed at the additional rate

5. Add together the values to calculate the total tax liability subtracting what has already been paid

   1. 10% dividends have been paid

   2. 20% gross interest has been paid

   3. Any PAYE contributions

6. When is payment due by?

   1. Half instalment on 31 Jan of the current tax year

   2. Half instalment on 31 July of the next tax year

   3. Balance remaining/rebate on 31 Jan of next tax year

Trading Profit

Trading profit = Chargeable receipts – deductible expenditure – capital allowances

For partnerships allocate trading profit between the partners according to the way in which income profits were shared under their agreement for that accounting period

The property & income of a LLP are treated as the property & income of the members of the LLP

1. Chargeable Profits

   1. Must derive from trade

   2. Must be income in nature

2. Deductible expenditure

   1. Must be income in nature

   2. Must be wholly & exclusively used for the purposes of trade

      1. Cannot be used for providing entertainment or gifts in connection with a trade

         1. Subject to limited exceptions

      2. Cannot have a dual purpose

      3. Dividends are not deductible

   3. Deduction cannot be prohibited by statute

   4. Examples of deduction

      1. Salaries

      2. General overheads

      3. Marketing costs

      4. Health insurance for employees

      5. Pre-trading expenditure

         1. Stock

      6. Business rates

      7. Stationary/postage

3. Capital allowances

   1. Allow the depreciation of capital assets to be brought into account for taxation purposes and offset against income profit

   2. Claim allowances where a person carries on a qualifying activity and incurs qualifying expenditure

      1. Plant & machinery have a writing down allowance of 20%

         1. Long life assets have a less generous writing down allowance of 10%

            1. Assets which last for 25 years or longer

               1. Integral appliance – part of the fabric of the building such as lifts or air conditioning units

         2. If plant & machinery are sold, it will be necessary to compare the written-down value of the asset at time of sale with the actual sale price. If a profit results, this may be the subject of a balancing charge and form a chargeable receipt in the accounting period in which the sale takes place. If a loss result there may be a balancing allowance – a deduction from chargeable receipts

            1. If assets are part of a pool then sale proceeds are deducted from the value of the pool so there is generally no balancing allowance or charge until trade is discontinued or the whole pool is sold

      2. AIA = annual investment allowance of up to 100,000

         1. Fresh, qualifying expenditure

         2. Anything over the 100,000 threshold can be added to the pool and written down

      3. Energy saving

         1. Enhanced for the first year for 100% on assets certified by HM Treasury to be energy saving

            1. In addition to AIA

Income tax is assessed on trading profits of the 12 month accounting period which ends in the tax year

Loss Reliefs for Sole Traders – Income Tax Act 2007

Deduct trading losses from other income
Ability to claim under different provisions, but cannot claim relief for the same loss twice

1. Sole Trader register with HMRC within 3 months of starting their business

   1. 1^st tax year profits are made from the date of commencement until 5^th April

   2. 2^nd tax year profits are made from the date of commencement until anniversary

   3. Final tax year profits are made from the end of the last accounting period until the date of cessation, minus the overlap profit (2^nd year profit – 1^st year profit)
      

2. Reliefs

   1. S.72 Carry-back start up relief

      1. Loss occurs in first 4 years of trading

         1. Loss can be set against total income in 3 years preceding the tax year of the loss (earlier years first)

      2. Wastes personal allowance

      3. Claim must be made on or before the first anniversary of 31^st January following the tax year in which the loss was assessed

   2. S.64 Carry across/carry back one year relief

      1. Loss occurs in any accounting period

         1. Loss can be set against total income in the tax year in which the accounting year of the loss ends OR/AND the preceding tax year

         2. Loss set off against capital gains once total income exhausted

      2. Wastes personal allowance as the relief must be used on the whole of the income

      3. Claim must be made on or before the first anniversary of 31^st January following the tax year in which the loss was assessed

   3. S.83 Carry Forward Relief

      1. Loss occurs in any accounting period

         1. Loss set against subsequent tax year trading profits or subsequent profits of the same trade until loss is absorbed (take earlier year firsts)

      2. Allows personal allowance to be set off against other income

      3. Claim must be made no more than 4 years after the end of the tax year to which the loss relates

   4. S.89 Terminal relief by carry back

      1. Loss in final 12 months of trading

         1. Loss set against trading profits or previous profits of the same trade in final tax year, then in the 3 years preceding the final tax year (latest years first)

      2. Claim must be made no more than 4 years after the end of the tax year to which the loss relates

   5. Carry forward relief on incorporation

      1. Business transferred to company wholly or mainly in return for the issue of shares (at least 80% of the consideration for the transfer must consist of shares in the company)

      2. Loss occurs up to incorporation

         1. Loss can be set against subsequent income of the company until it is absorbed

Once carry forward relief has been used, it is not possible to carry-back. Therefore use carry forward relief once other relief options have been exhausted

Capital Gains Tax

1. Identify a chargeable disposal

   1. Is XXXX a chargeable disposal?

      1. A sale or a gift of a chargeable asset

         1. Not wasting assets – life under 50 years

            1. Non-wasting assets up to 6000

         2. Not those already accounting for in capital allowances – plant & machinery

      2. Not on death

      3. Not to a spouse

         1. Spouse will be deemed to have acquired gift at original acquisition cost, not value upon transfer

      4. Primary residence exempt

      5. Stirling Exempt

      6. National Savings Certificate exempt
         

2. Calculate Gain or Loss

   1. Proceeds of disposal
      Less
      Incidental costs of disposal
      Gives
      NET PROCEEDS OF DISPOSAL
      Less
      Initial expenditure

Acquisition cost/value

Incidental costs of acquisition

Less
Subsequent expenditure (any expense wholly & exclusively incurred in enhancing the asset’s value)

Not routine maintenance
Gives
GAIN OR LOSS

3. Apply Reliefs

   1. Disposal to a connected person will be deemed to be made at market value rather than the actual sale price

      1. Connected person = spouse, civil partner, parents, grandparents, children, grandchildren & siblings & business partners

   2. Roll over relief on the replacement of qualifying business assets

      1. Allows for the deferral of gains when qualifying assets are disposed of and then replaced

         1. Land, buildings & goodwill (rarely will be plant & machinery unless fixed)

         2. Must be used in trade of business (i.e. cannot be superfluous to needs)

         3. Must acquire replacement assets either year before disposal or up to 3 years after

         4. Replacement asset need not be the same as disposed asset

      2. Claim must be submitted no more than 4 years after the end of the tax year in which the replacement asset is acquired

   3. Hold over relief on gifts of business assets

      1. Gifts & sales at an undervalue of business assets

      2. Defers gain until donee disposes of asset

         1. Used in donor’s trade

            1. Unquoted shares

            2. Shares in personal trading company

               1. 5% shares owned by shareholder

         2. Both donor and donee must elect for relief to apply

         3. Election must be made no more than 4 years after the end of the tax year of the disposal

   4. Roll over relief on the incorporation of a business

      1. Business transferred by a sole trader or individual partner to a company in return for shares in the company

      2. Business must be carried on as same business and transferred with all its assets

      3. HMRC will apply relief unless taxpayer elects otherwise

         1. Election must be made no later than the second anniversary of 31^st January following the tax year of the incorporation

         2. If the shares acquired as a result of the incorporation are sold before the end of the tax year that followed the tax year of incorporation, the election must be made no later than the first anniversary of 31^st January following the tax year of incorporation

   5. Entrepreneurs’ Relief

      1. Tax relief of 10% where there has been a qualifying disposal

         1. Whole...