THE UNIVERSITY OF LAW
TAX NOTEBOOK
LUKE ROBINSON
, INCOME TAX
TAX YEAR 6TH April 2013 – 5th April 2014
It must have the capability of recurrence, regardless of how regularly
Common types of income include:
DEFINITION OF Profits from running a business
“INCOME” Rents and other income from land
Salaries and other job related benefits
Interest received on loans/bank accounts
Dividends received from investments
Certain state benefits
Interest on National Savings Certificates
Scholarships
EXEMPT INCOME
Interest on damages for Personal Injury or Death
Income from personal bank savings account
Gross income up to £4250 a year for letting a furnished room
Premium bond winning
Total Gross Income = all of the below added together
i) Trading income (will be gross); ITTOIA 2005 PT 2 (see separate notes)
Apply reliefs to trading income figure at this stage
Set against subsequent profits of same trade until loss is absorbed
CARRY-FORWARD (not against profits from rent/salary/dividends/capital gains)
s83 ITA 2007 Take earlier years first and carry on indefinitely
STEP 1
If loss in final 12 months, set against profits in the same trade;
TERMINAL CARRY- company must have ended
CALCULATE THE
BACK Carry-across to set against profits of the same tax year
TOTAL GROSS
s89 ITA 2007 Carry-back to 3 tax years before, taking later years first
INCOME
For 2013/14 loss, claim by 31 January 2016
ii) Rental/property income (will be gross); ITTOIA 2005 PT 3
iii) Salaries (employment and pension income); ITEPA 2003
If told PAYE was deducted, make a note of amount deducted for use later
iv) Savings Interest (need to gross as interest will have been taxed at source); ITTOIA 2005 PT 5
(10/8) x net interest received = gross interest
v) Dividends (need to gross as dividend will have been taxed at source); ITTOIA 2005 PT 4
(10/9) x net interest received = gross dividend
vi) Miscellaneous; purchase of regular items
Does not include capital, inheritance, money from the sale of goods, money from sale of land,
selling inherited shares, purchase equipment one-off
Net Income = Total Gross Income – Allowable Reliefs
State it must be within the cap of £50,% of income (higher value) in order to be deductible
as an allowable relief (only applies to losses of current tax year so not otherwise relevant)
1) Interest payments on a qualifying loan:
Loan to buy share in/contribute capital to partnership
Loan to invest in a “close” trading company
Loan to PRs so that they can pay inheritance tax
STEP 2
2) Relief for Trading Losses (must be a loss)
CALCULATE THE
NET INCOME BY If loss in first 4 tax years of trading
DEDUCTING START-UP Set against taxpayer’s total income in previous 3 tax years
ALLOWANCE s72 ITA 2007 Start with earlier years
RELIEFS For 2013/14 loss, claim by 31/01/16
If loss in any accounting year of trading
CARRY-ACROSS/BACK Set against total income of that tax year; and/or
s64 ITA 2007 Set against tax year of loss or carry back to preceding 1 year
For 2013/14 loss, claim by 31/01/16
Any losses not relieved by s64 or s89 can be relieved when business
CARRY FORWARD ON is transferred to a company wholly or mainly in return for shares in
1
, INCORPORATION OF that company
BUSINESS Losses carried forward, set against income from company as
s86 ITA 2007 dividends or director’s salary
Rarely used
Taxable Income = Net Income – Personal Allowance
STEP 3
*State that when a tax payer’s net income is over £100,000, they lose £1 of their personal allowance for
CALCULATE THE every £2 additional income
TAXABLE INCOME
BY DEDUCTING
PERSONAL NET INCOME PERSONAL ALLOWANCE
ALLOWANCES
£0 - £100,000 £9440
£100,001 - £118,879 *£9440 – (Net income - £100,000)
2
£118,880 and over No personal allowance available
1) First, tax the income (except savings and dividend income)
Separate out income from savings and dividends income
Basic Rate 20% £1 - £32,010 £6,402 if full bracket used
Higher Rate 40% £32,010 - £150,000 (£117,990) £47,196 if full used
Additional Rate 45% Over £150,000 Any excess
2) Then, tax the Savings Income (interest from building society or bank account)
STEP 4
*Starting Rate 10% £1 - £2790
CALCULATE THE Basic Rate 20% £1 - £32,010
TAX
Higher Rate 40% £32,011 - £150,000
Additional Rate 45% Over £150,000
*Applicable if income (except savings and dividend) is < £2790. If not, ignore
3) Finally, tax the Dividend Income
Ordinary 10% £1 - £32,010
Upper 32.5% £32,011 - £150,000
Additional 37.5% Over £150,000
Do not start with the first/second bracket for savings/dividend if it has already been used up
1) Add together all the Income, Savings and Dividends tax liability:
Overall Tax Liability (1) = Income (except savings and dividends) tax liability + Savings Income
tax liability + Dividends Income tax liability
STEP 5
2) Deduct any of the applicable following to account for taxing at source:
CALCULATE PAYE
OVERALL TAX Interest: 20% was added to make it gross, so remove it (difference)
LIABILITY Dividend: 10% was added to make it gross, so now remove it (difference)
Note: if asked whether client has already paid some of their tax bill, state that PAYE (if net), interest
(if net) and dividends (if net) have already been paid to HMRC/deducted at source
Overall Tax Liability (2) = Overall Tax Liability (1) – PAYE – difference between net and gross
interest – difference between net and gross dividends
3) Consider whether client has overpaid tax
If so, can claim a rebate for PAYE and interest, but not for dividends
No instalment options available if the tax due is less than £1000 or more than 80% of the tax due
STEP 6 has already been collected by deduction at source
DISCUSS Instalments:
2
, PAYMENT i) 31 January of current tax year (2014); estimate based on previous years income
OPTIONS ii) 31 July following the end of the tax year (2014)
iii) 31 January following the end of the tax year (2015); balancing payment or refund
TRADING INCOME/PROFITS
Trading Income = Chargeable Receipts – Deductible Expenditure – Capital Allowances
Sole trader/partner only (company pays corporation tax)
STEP 1
State that chargeable receipts are money derived from a trade
INDENTIFY State that chargeable receipts are income in nature
CHARGEABLE
Sales/revenue/profits
RECEIPTS
State that some expenditure is deductible because it is:
i) Income in nature
STEP 2 ii) Incurred wholly and exclusively for business purposes
iii) Not statute barred
DEDUCT
DEDUCTIBLE Salaries, overheads and electricity, marketing/PR, transport costs, rental income, bills, stock
EXPENDITURE purchase, business rates, stationary and postage, interest on borrowing, payment of premiums
on private health insurance
X Eating out on business trip, special clothing
X Capital Expenditure
Most commonly an allowance for expenditure on plant and machinery; “any apparatus/chattels
kept for use in the business except stock in trade”; Yarmouth v France
New Assets: Annual Investment Allowance (AIA) available up to £250,000 (100% of the expense
deductible) in current/each accounting period
STEP 3
Existing Assets & Above AIA: written down allowance (WDA) for the year is deductible;
DEDUCT
CAPITAL Standard WDA = written down value x 0.18; pay tax on 18% less than you would
ALLOWANCES
Special* WDA = written down value x 0.08; pay tax on 8% less than you would
*Includes Long Life Assets (life expectancy of 25 years+) and Integral Features (AC/lifts/escalators)
Special assets can be eligible for AIA (if new) until the £250,000 is used
Remember the value is a deductible allowance, so less £250,000 (if used) and the written down
value, from the chargeable receipt
STEP 4
If it is a profit, it is taxed along with other income (less carried forward trading loss)
FINALISE If it is a loss, there is no profit to be taxed
CALCULATION
RELIEF ADVANTAGES/DISADVANTAGES & PROBLEMS
RELIEF ADVANTAGES DISADVANTAGES
Rebate for tax paid in previous years
Reduced burden on new businesses when Lose personal allowance for previous years
START-UP at highest risk of failure and in need of (income offset and becomes nil)
RELIEF capital to buy assets/repay
Rebate for income previously taxed on May not use up all of loss
CARRY Allows relief on total income; beneficial Loses out on personal allowance if reduce
ACROSS/CARR if there is a second income from balance to nil (only want to bring income to
Y BACK employment/renting property £9440 to make full use)
Flexible as to which year it is taken first
Can keep going indefinitely; can withhold All loss will eventually be used up
losses to offset later Must wait until future profits of trade become
Allows personal allowance to be set taxable before there is a benefit from the loss
CARRY against other income; it is not wasted Losses can only be set against trade profits not
FORWARD Set against later years when client total income
earning more and thus in higher tax Only good if business makes profit in future
3
, bracket Might not be offsetting loss in some years;
client would pay income tax at a higher value
TERMINAL Can reclaim tax paid in previous years Loss may not be totally relieved; use in
CARRY BACK from HMRC conjunction with another relief
Personal allowance not wasted
CAPITAL GAINS TAX
If asked for “capital tax consequences”, you must deal with both IHT and CGT
Taxes the rise in value (gains) made during period of ownership
Taxed on the disposal of the asset within the tax year; 6th April 2013 – 5th April 2014
STEP 1 Triggered when:
a) A chargeable person (individual/trustee/PR/individual partners in partnership assessed
IDENTIFY THE proportionately)
CHARGEABLE b) Disposes (sale/exchange/gift/exchange, not death)
DISPOSAL c) Of a chargeable asset:
Land, buildings, premises and shares held in other companies
X Stock, plant & machinery, private vehicles, sterling, national savings certificates
“X, a chargeable person, is [GIVING/SELLING TO/EXCHANGING WITH] Y. This is a chargeable disposal
for CGT purposes of a chargeable asset, Z.”
Deal with each disposal separately
STEP 2 START Proceeds of disposal (consideration)
If sale to connected person for lower price (gift element), market value used
CALCULATE LESS Incidental costs of disposal (legal/estate agent fees)
THE GAIN OR LESS Initial expenditure (acquisition cost//apportion if sale of part/value on inheritance)
LOSS
LESS Incidental costs of acquisition (legal fees/stamp duty)
LESS Subsequent expenditure
Incurred wholly & exclusively to enhance value of asset as reflected in sale price
Costs in defending title / structural/extension, not interior redecoration
Reliefs only apply if there is a gain
Full Relief from Tax
STEP 3 Only/main private dwelling house and ½ hectare of land (not holiday residence)
Chattels and wasting assets of life expectancy < 50 years
APPLY RELIEFS Antiques valued at £6000 or less
X Damages for personal injury
LOOK AT EACH
ASSET Business Reliefs to Postpone/Reduce Tax
SEPARATELY Consider and apply/discount each one separately (see separate notes)
Entrepreneur’s relief
Hold-over relief when asset is given away (gift/sale as undervalue)
Roll-over relief on replacement of a qualifying business asset
Roll-over relief on incorporation of a business
Relief for investment in certain unquoted shares
Ensure gains qualifying for Entrepreneur’s relief are kept separate
If net gain, deduct the annual exemption of £10,900
Better to deduct this from gains that do not qualify for ER to get maximum value (they are offset
against the greater tax rates of 18% and 28% before the 10%)
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