Flashcards in Business Tax AAT L4 Deck (87)
What are the two taxes that affect businesses?
Corporation Tax - Limited companies
Income Tax - Sole traders and Partnerships.
When will capital gains tax need to be considered?
When disposing of business assets.
What is the legal frame work for taxation?
Statute Law - Passed by Parliament, resulting in legislation.
Finance acts - extend from statute law, published annually for each financial year.
Case law - comes from how statutes and finance acts have been applied by the courts.
What are the categories of income?
Property income - rental income from land and property.
Trading income - Profits of trades and professions.
Saving and investment income.
What is the financial year for Corporation tax ?
1st April to 31st March
What is the financial year for Income Tax?
6th April to 5th April
What is a chargeable accounting period (CAP or AP)
A period of 12 months or Less for which a business must submit a CT600 return.
It is due within 12 months of a year end.
Payment must be made within 9 months of the year end.
What is a basis period for income tax?
Tax year in which the accounting year ends.
Return is due by 31st October (Paper) 31st Jan (online) after the end of the tax year.
must be paid by 31st Jan after end of Tax year.
Whan are payments on account in respect of Income tax due?
31st jan before end of tax year
31st july after end of tax year
31st Jan after end of tax year.
How is national insurance dealt with for Sole traders and Partnerships?
FA 2019 rates
Class 2 Flat rate of £3.00 per week if profit over £6365.
Class 4 - payable on profit over £8632
FA 2020 Rates
Class 2 Flat rate of £3.05 per week if profit over £6475.
Class 4 - payable on profit over £9500
Class 4 is calculated as 9% on profits over threshold up to £50,000 and 2% on profit over £50,000.
What is the difference between Tax Planning, Avoidance and Evasion?
Planning - Using legal and ethical methods to reduce tax liability.
Avoidance - Using Tax rules and allowances in a legal way that is other than what was intended.
Evasion - Using illegal methods to avoid paying the correct amount of tax i.e. use of Concealment, Pretense, non disclosure or misrepresentation of facts.
How are profits adjusted to find trading profits for Tax purposes?
Take Profit figure from Financial Accounts
Add back non allowable expenditure
Deduct Non trading income
Gives adjusted trading profit.
What would be allowable trading income?
Income relating directly to the business carried out by the company.
What is not assessable as trading income for tax purposes?
1. Non trading interest received - This will be assessed under investment and property income.
2. Rent received - also assessed under Property income.
3. Gains on disposal of Fixed assets - will be dealt with under capital gains.
4. Dividends received - have been assessed as part of another companies taxable income.
What would be considered as Allowable Expenditure?
Must be revenue, not capital expenditure.
Wholly and exclusively for the purpose of the business trade.
What types of expenditure would be included as allowable?
Normal Cost Of Sales
Normal Business expenditure e.g. Admin and wages
Operating lease payments on vehicles with emissions below 110g/km
Legal expenses relating to the renewal of a short lease.
Interest paid on trade loans
Staff entertaining e.g. Xmas party.
Trade bad debt write off - cannot include Ee loans.
Increases to specific provisions.
Gifts to customers that contain advertisements - no Food, Alcohol or Vouchers.
Ee's but not directors parking fines.
Gifts of trading stock to charities etc.
What would be considered as non allowable expenditure?
Not wholly or exclusively for the purpose of the business trade.
What types of expenditure would be disallowed?
Any capital expenditure
Lease rental payments for high emissions vehicles.
Cost of business entertainment.
Gifts to customers that do not contain advertisements or ar Food, Alcohol or vouchers.
Increases in General provisions.
Fines imposed on the company
Certain legal expenses.
Writing off non-trade loans
What about R&D Expenditure?
Additional tax relief is available to revenue expenditure on R&D costs.
Allowable cost is 230% of actual
Accessible to small to medium companies with <500 employees and < £100 mil turnover.
The R&D must be aiming for scientific advancement.
Why are fines a disallowed expense?
Companies are expected to operate within the law therefore generally fines and penalties along with legal and professional expenses associated with them are allowed.
What about fraud?
Where losses due to fraud carried out by the company directors occurs this is not allowed as an expense.
However petty theft by non-senior employees is generally allowed e.g. Shrinkage (loss of stock due to theft)
Are all charity donations really a non allowable expense?
Generally all charity donations should not be included in the profit for trading purposes figure, the exception to this is small donations to local charities (equivalent to advertising)
Can CapEx be tricky?
Yes - CapEx is not an allowable expense other than the cost of registering a patent.
However CapEx can include costs which might be posted to Repairs and Maintenance - if the expense involves enhancing an existing asset it is not allowable, if it is to return/repair an asset to it's original condition it is allowable.
Is there a fixed rule for all legal expenses?
No - the reason for incurring the legal expense must be considered.
Relating to CapEx - Disallow
Relating to revenue and are trade related - Allow.
Costs for renewing a short lease.
Legal costs for defending title to a fixed asset.
How are leasing charges dealt with?
For cars with emissions up to 110 g/km - allowed in full
For cars with emissions over 110 g/km - standard disallowance of 15% of leasing charges for the year.
What are capital allowances?
These allow companies to write off the cost of their non current assets against their taxable income to reduce the tax that they have to pay.
Annual investment allowance (AIA)
Available on all plant and machinery except cars.
Allowance available is 100% up to allowance level.
CAPS ending up to 31/12/18 - £200,000
CAPs starting between 01/01/19 and 31/12/2020 - £1,000,000
CAPs starting after 01/01/2021 - £200,000
First year allowance (FYA)
Available for certain type of energy efficient plant and machinery
100% of amount can be claimed
New low emission cars < 50g/km
New zero emission goods vehicles.
Writing down allowance (WDA)
Can be claimed on any CapEx that is not eligible for AIA or FYA.
Expenditure is grouped in different pools -
Short life asset - assets (except cars) that will be disposed of within 8 years, pool for each asset, WDA is 18%
Special rate pool - Cars with emissions over 110 g/km, WDA is 8%/6% changes at 1st April 2019.
Main Pool - all assets not in another pool, includes cars < 110 g/km, WDA is 18%.