Please enable JavaScript.
Coggle requires JavaScript to display documents.
TAX - Coggle Diagram
TAX
CAPITAL GAINS TAX - payable on gain made when an indiv/trustee/partnership disposes of a capital
- asset is separate and apart from individuals income tax
-
CALCULATING GAINS =
DISPOSAL PROCEEDS (or deemed proceeds for gifts) - COST OF ACQUISITION = CAPITAL GAIN / LOSS
- DISPOSAL PROCEEDS = proceeds of sale BUT if asset gifted OR transaction is with connected person (family member / comp) = proceeds deemed to be ASSETS MARKET VALUE POINT = MARKET VALUE ON DAY OF GIFT
- can deduct thinkgs like legal / advertising costs, valuation fees, any stamp duty land tax paid, money spent on enhancing asset (e.g. money spent to build an extension on property PROVIDED enhancement reflected in value of asset at date of sale(enhancement MUST still be part of asset when sold)) e.g. money spent on boundary dispute with neighbour is allowable cost
-
EXEMPTED ASSETS = Cash / shares in ISA / gilts(Gov Bonds) / wasting chattels(tangible movable property with life less than 50 years(e.g. race horse/ farm animals / cars / boats / watches)
- BASICALLY MOST machines not used in business BECAUSE machines used in business ARE TAXABLE
EXCEPTION - e.g. selling BUSINESS computer (wasting chattel)
ALSO EXEMPTION FOR NON WASTING CHATTEL = when non-wasting chattel worth LESS THAN £6K - e.g. could be jewellery also antiques
PRIVATE RESIDENCE RELIEF (PRR)- GAIN ON MAIN RESIDENCE CAN BE EXEMPTED THROUGH PRIVATE RESIDENCE RELIEF = Means someone selling their home wont pay capital gains tax on ANY / at least PART of any gain that they make
CALCULATION = MULTIPLY THE GAIN ON DISPOSAL OF PERSONS PRINCIPAL RESIDENCE by PRR fraction = (time of owners occupation/length of ownership)
- Deemed occupation = owner not there BUT PRETEND they are
1st period of deemed occupation = LAT 9 MONTHS OF OWNERSHIP IS ALWAYS DEEMED OCCUPATION, as long as property owners main residence at some time BEFORE the sale
PERIODS OF ABSENCE - moving out and then back in - 3 reasons can be applied cumulatively(more than one can be applied)
- If owner left house to work oversees and returns - ANY AMOUNT OF TIME AS LONG AS THEY COME BACK AND LIVE IN HOUSE AGAIN so 100% of their capital gains tax will be exempt under private residence relief
- times when owner leaves elsewhere to work in UK MAXIMUM OF 4 YEARS
- Very specific absence for any reason (UP TO 3 YEARS)
EFFECT OF RESIDENCE
- Residence chargeable regardless of location of asset(if indiv who disposed of asset is UK resident = chargeable to CGT no matter where in world asset located)
- Non-resident NOT chargeable regardless of loca of asset
- EXCEPTION = NON-RESIDENTS are chargeable to tax if they dispose of interest in land situated in UK
BUSINESS ASSET DISPOSAL RELIEF - 14% -lifetime gains of up to £1,00,000 can apply - business assets must be owend for atleast 2 years and FOLLOWING 2 CATEGORIES -
1.all or part of a trading business carried on as sole trader or partnership
2.shares in trading company PROVIDED indiv owns at least 5% voting shares (it is their personal company)
AND must be OFFICER / EMPLOYEE of comp for 2 years prior to disposal
3.assets owned and used by individuals personal trading comp/partnership in 2 years prior to disposal
HOLD OVER (GIFT) RELIEF - defer gain into others hands - only some assets qualify BUT ANY ASSET QUALIFIES WHEN GIFTING TO A TRUST
-
REPLACEMENT OF BUSINESS ASSETS RELIEF - or ROLLOVER RELIEF = must be purchased in 4 year window 1 before and 3 after
- both assets must be qualifying e.g. land/buildings OR fixed plant/machinery
- ONLY RELIEF THAT APPLIES TO COMPANIES AND NONCORPORATE BUSINESSES
-
CALCULATION OF CGT
INDIVIDUAL HAS TAX FREE ALLOWANCE for CGT = annual exempt amount / annual exemption for ease of reference = £3000 - reliefs applied FIRST THEN ANNUAL EXEMPTION - UNLESS BUSINESS ASSET DISPOSAL RELIEF 14% TAX AFTER DEDUCTED ANNUAL EXEMPTION
- COMPANIES DONT GET ANNUAL EXEMPTION
CGT RATE VARIABLES
- Indiv's taxable income - if indiv has any basic rate band remaining after taxing income THEN gains fall within that remaining band are taxed at
18% basic rate
24% higher rate
- Disposed asset's nature
-
-
THESE RELIEFS BELOW DONT OFFER RELIEF LIKE PPR - INSTEAD IF APPLICABLE RESULT IN LOWER RATE OF TAX BEING PAID OR ATLEAST DEFERRING TO LATER DATE
ENTERPRISE INVESTMENT SCHEME - EIS relief
- encourages investment in small companies - by allowing CGT deference ON ANY GAIN MADE BY INVESTING THAT GAIN IN SMALL COMP
- GAINS INVESTED ARE FROZEN - dont reduce acquisition cost of EIS shares sold later
- to qualify same time frame as rollover = investment must happen year prior to gain indiv seeking to defer or up to 3 years after
INCOME TAX - Tax paid by individuals. COMPANIES pay corporate tax
INDIVIDUALS = sole traders / aprtners in a business partnership / personal representatives representing estate of dead person / trustees on behalf of trust
CATEGORIES OF INCOME - 3 categories of income - figure out 1st slice before moving onto 2nd slice etc
-
-
NON-SAVINGS INCOME - employment income / pensions / trading income from running own business / property income
-
-
-
COLLECTION OF TAX - GOV body responsible = HMRC collects through combination of Pay As You Earn + Self-Assessment system
PAYE = involves employers/pension providers deducting income tax payments to employees/pensioners by using tax code allocated by HMRC
- Each payroll period employers must deduct appropriate amount from ANY employee EARNING MORE £184 /W
- Employer must submit Full Payment Submission ON/BEFORE each payday
- Money retained must be received by HMRC at least monthly - by 22nd (ALONG WITH FPS)
SELF ASSESSMENT = individuals who have SIGNIFICANT INCOME OTHER THAN SALARY AHVE TO SELF REPORT
- For SQE likely business owners - sole traders / partners in business partnership
- These peeps MUST register with HMRC WITHIN 3MONTHS of opening business
- AND HAVE TO FILE TAX RETURNS BY 31ST JAN AFTER END OF TAX YEAR e.g. for tax year 25-26 = file return by 31 Jan 27
- 31 JAN DATE IS FOR FILING ELECTRONICALLY - OR - 3 MONTHS EARLY 31st OCT
WHEN TAXES DUE = 1st INSTALMENT = 31 JAN
2nd INSTALMENT = 31 JULY
- EACH SHOULD REPRESENT 50% OF PREVIOUS TAX LIABILITY
- Balancing instalment = 31 JAN - if fell short of total amount due with first 2 instalments
PARTNERS = calc profits of partnership business in same way as sole trader (above)
- BUT EACH PARTNER DOES NOT PAY TAX ON ENTIRE PROFITS OF PARTNERSHIP instead PROPORTION OF PROFITS ALLOCATED TO PARTNER
Share of profit allocated (amount each partner must include as nonsavings income on their tax return) (in addition to any other non savings income might have) = set out for them in partnership agreement
- if agreement SILENT = each partner allocated EQUAL share
- partners MUST CLAIM their share of profit whether or not money actually distributed to them
- partners MUST NOMINATE 1 PARTNER whose job it is to file partnership tax return on behalf of partnership - informational only - so HMRC knows income/expenses/deductions/each partners share of profit OR loss
- ONLY INFORMATIONAL = partnership doesn't pay income tax itself
INCOME TAX FORMULA = GROSS INCOME - QUALIFYING LOAN INTEREST = NET INCOME
NET INCOME - ALLOWANCES + OTHER RELIEFS = TAXABLE INCOME
QUALIFYING LOAN INTEREST = interest on loans to a partnership / investments in a close trading comp (means small business) / interest on loans taken by personal representative to pay inheritance tax
e.g. if solicitor takes out loan to enable make capital contrib on becoming partner in law firm - they can deduct interest on loan
every indiv entitled to deduct PERSONAL ALLOWANCE FROM THEIR ANNUAL NET INCOME = people NOT COMP - amount changes every year
- YOU PAY TAX ONLY AFTER £X AMOUNT = 25/26 = £12,570
TAPER = HMRC starts to take back personal allowance if income over £100K = for every £2 over £100K personal allowance reduced by £1 - e.g. if amount of net income over £100K x2 as much as personal allowance WILL COMPLETELY DISAPPEAR
MARRIAGE ALLOWANCE = permits 1 spouse to transfer part of their personal allowance to the other spouse in order to give other spouse a CREDIT AGAINST TAX OWED - 3 conditions
- Married / cp
- Transferors income less than personal allowance
- Recipient a basic rate taxpayer =20%
transfer value of allowance as a credit against tax owed = recipient cannot get a refund based on credit = value of allowance is 20 5 of amount transferred
OVERLAP PROFIT PROBLEM - business might want to make up accounts with different start and end dates SO if Business's accounting period doesn't end on 5th April SOME OF PROFITS IN FIRST PERIOD TAXED TWICE
- No relief from double taxation until business ceases trade OR aligns accounting period to tax year
TRADING LOSSES = Claim For Relief = goes to taxpayer who made the loss can claim relief = NOT TRANSFERABLE
Taxpayer who made loss CANNOT TRANSFER to spouse / child / business partner
- Unless partnership agreement provides otherwise, business partners share of loss is in same proportion as their share of the profit
- If partnership agreement silent OR there is no partnership agreement = EQUALLY SHARE LOSSES
OPTIONS FOR OFFSETTING TRADE LOSSES - 4 options
- set losses against taxpayers net income from CURRENT / PRIOR tax year (DONE BEFORE APPLYING PERSONAL ALLOWANCE - so if loss exceeds personal allowance WILL BE LOST FOR THE YEAR)
- ALL OR NOTHING APP = tax payer must use all of loss available against current or prior years income
- Can offset remaining loss against CAPITAL GAINS IN SAME YEAR
2nd option = Carry forward against future trading profits = NOTE this loss can be used ONLY AGAINST FUTURE PROFITS OF SAME BUSINESS AND NOT AGAINST ANY OTHER INCOME
3rd - if sole or partnership incorporates business in exchange for SHARES of newly formed company and had UNUSED TRADE LOSSES - can use losses to offset SALARY / DIVIDENDS MIGHT RECEIVE from that company they formed = CANT TRANSFER LOSS TO COMP BUT CAN USE LOSS TO OFFSET SALARY / DIVIDENDS THEY RECEIVE FROM COMPAN THEY HAVE INCORPORATED
4th = TERMINAL LOSS RELIEF = allows any trade loss generated in FINAL 12 MONTHS OF TRADE to be carried back to preceding 3 tax years on a LAST IN , FIRST OUR BASIS and be deducted from trade profits
Taxpayer would have to REFIGURE tax due for preceding years and get REFUND based on refigured amounts
ANTI - AVOIDANCE
GENERAL ANTI-ABUSE RULE = GAAR - deter taxpayers from entering into schemes abuse tax system + promoters of scheme
- Ultimately can allow HMRC to set aside tax arrangements if HMRC can prove arrangement in q cannot reasonably be regarded as reasonable course of action = DOUBLE REASONABLENESS TEST = HIGH THRESHOLD for HMRC to clear
= independent advisory panel also has to agree that arrangements are abusive before HMRC can proceed
- as well as making adjustments for tax saving counteracted through GAAR notice, taxpayer will also face PENALTY of 60% of counteracted ADVANTAGE
CORPORATION TAX AND VAT
VAT RATES - normally 20% BUT reduced rate of 5% on domestic fuel / installation of energy saving materials / child car seats and "zero rate" 0% supplies(food/books/newspapers/water/sewerage services/transport/residential construction)
EXEMPTIONS = sale of company shares + sale of business as a going concern
VAT REGISTRATION
COMPULSARY REGISTRATION - 2 tests ONLY ONE NEEDS TO BE SATISFIED
- HISTORIC TEST = if value of taxable supplies made by business in previous 12 months exceeds VAT registration threshold (£85K) business MUST register - if satisifed HMRC must be satisfied within 30 days
- FUTURE TEST = reasonable grounds believing that value of taxable supplies to be made in next 30 days alone ignoring any sales to date will exceed VAT registration threshold - within 30 day period during which threshold is expected to be exceeded
VOLUNTARY REGISTRATION - might do to recover input tax or seem established / if above test not satisfied
VAT DEREGISTRATION
- REQ = STOPS TRADING
- REQ = STOP MAKING TAXABLE SUPPLIES
- VOLUNTARY = TAXABLE SUPLIES <£83K IN 12 MONTH PERIOD
INTRODUCTION TO VAT - tax on consumers good/services (exempt = supply of land, insurance, financial services, education, health services, postal services) - can offset input tax and output tax
OPTION TO TAX
SUPPLY OF LAND + BUILDINGS
- most are exempt e.g. sale or lease of building
- HOWEVER owners of interest in commercial land and buildings may opt to charge VAT, so they can recover input tax they have to pay in operating building
- purchase of commercial building less than 3 years old is standard rated supply = purchaser must pay VAT at 20%
- can opt to tax so they can recover their input tax for building when sell OR lease part of it
- NOTE option to tax is building by building basis DOESNT APPLY TO RESIDENTIAL BUILDINGS
- CAN BE REVOKED WITHIN 6 MONTHS (if no VAT charged on rent in meantime) OTHERWISE IRREVOCABLE FOR 20 YEARS - if building sol before then new owner can opt to tax
CLOSE COMPANY ANTI-AVOIDANCE RULES - CLOSE = comp controlled by 5 or less shareholders OR by any number of shareholders who are company's directors
control = more than 50% ownership of comp OR of its voting rights
ANTI-AVOIDANCE RULES =
- income tax due on no OR low interest loans
- tax is on unpaid interest
tax charge is only on interest foregone NOT ON VALUE OF LOAN ITSELF
- IF LOANS BELOW £10K IN AGGREGATE = DONT HAVE TO PAY INCOME TAX ON THE INTEREST BENEFIT
- Comp pays penalty tax of 32.5%(dividend tax rate imposed on higher rate taxpayer) on loan
- 9 M and 1 D after end of accounting period - which is when the loan was made
- refunded when loan repaid / waived
- If waived borrower owes tax on amount forgiven
ACCOUNTING FOR VAT
Registered business must account VAT one month after end of each VAT quarter - which months? decided by HMRC
VAT INVOICES MUST INCLUDE
- Suppliers VAT no.
- Tax point
- Value of supply
- Rate of tax charged
Businesses can use these to deduct/recover input tax from output tax
must be issued to ALL customers
VAT on cars cannot be reclaimed (personal use prospect so prevalent) + VAT on business entertaining cannot be reclaimed either (too easy to abuse)
- paid more input than collected output = refund (e.g. bookstores selling 0 rated)
Businesses req to keep VAT reords including summary of all its inputs and output tax and all invoices received TO PROVE HOW MUCH INPUT TAX PAID
Late submissinos of returns and late payment of VAT due to HMRC can be penalised up to maximum of 15% of VAT due for persistent defaulters
Penalties also imposed for under declarations of VAT due
IN VERY WORST CASES TAX EVASION INVOLVING VAT CAN ONLY RESULT IN HIGH PENALTY CHARGES BUT ALSO CRIMINAL SANCTIONS SUCH AS FINES AND IMPRISONMENT
COLLECTION OF TAX
SMALL COMP = 19% - DUE 9 MONTHS AND 1 DAY from end of accounting period
tax return due 12 months from the periods end
-
CORPORATION TAX FORMULA
trade profit
+other income
+chargeable gains
-charitable deductions
(^^taxable income^^) x 19% = tax
ignore dividends paid or received by comp - former not deductible latter exempt from corp tax
- WHEN COMP distributes dividends to its shareholders it has NO tax consequences for the company
CHARGEABLE GAINS =
- Companies do not pay capital gains tax
- Capital gains charged as income - taxed at 19%
- No annual exemption
- can defer chargeable gains by reinvesting in other assets = REPLACEMENT OF BUSINESS ASSETS RELIEF is available - PROVIDED both assets qualify = ROLLOVER RELIEF
LOSS RELIEF OPTIONS
- LOSS MAY BE OFFSET AGAINST PROFITS OF SAME ACCOUNTING PERIOD
- LOSS MAY BE OFFSET AGAINST TOTAL PROFITS PRIOR TO 12 MONTH ACCOUNTING PERIOD (can only be done after current year has been made first)
- LOSS MAY BE CARRIED FORWARD AGAINST TOTAL FUTURE PROFITS