LPC Course: Tax & Accounting Revision 201
Notes 7
LPC Course
Tax & Business Accounting
Revision Note
The word ‘accounts’ has two usual meanings, depending on the context:
1. Records of the money transactions of a business (‘bookkeeping’); and
2. Periodic reports on the performance of a business (also known as ‘financial statements’).
Financial statements are prepared in respect of each ‘accounting period’ of a business.
An accounting period is usually a full year. Every business is free to choose its own accounting period; it is
common for this to match the calendar year or the tax year.
Contents
1. General Information of Taxation ……………………………………………….… 2
2. Income Tax ……………………………………………….… 3
3. Capital Gains Tax ……………………………………………….… 5
4. VAT ……………………………………………….… 7
5. Corporation Tax ……………………………………………….… 9
6. Accounts of Sole Traders ……………………………………………….… 13
7. Year-end Adjustments ……………………………………………….… 15
8. Company Accounts ……………………………………………….… 20
1
, LPC Course: Tax & Accounting Revision 201
Notes 7
1. General Information of Taxation
1. Income and Capital1
Income and Capital
1. In general Income expenditure can only be deducted from income receipts; and
capital expenditure can only be deducted from capital receipts
Income A receipt is the product of how the taxpayer generates money on a regular basis
receipts i.e. the trading profits of a newsagent’s business
Income An expense is incurred as an integral part of day-to-day trading
expenditure i.e. Bills for heating and lighting, rent, marketing and stationery
Capital receipts A receipt is the product of a transaction that is not integral to such regular activity
i.e. “one-off” capital transactions
Capital As with capital receipts, capital expenditure can be seen as a “one-off” transaction
expenditure i.e. expenditure on a particular item
2. Exception Capital allowances can reduce the overall tax bill
Capital Tax allowable depreciation (Tax Relief)
allowances The effect of them being to spread the cost of capital expenditure on certain capital items
over a period of time
This is achieved by a proportion of the capital expenditure being deducted from
income receipts over a period of time2
2. Assessment of tax
Tax years for Individuals and Companies
For individuals The tax year
Individuals are assessed to income tax and capital gains tax on the basis of a tax year
Runs from 6 April in one calendar year to 5 April in the next
Note: In some cases income tax is deducted at source (i.e. PAYE system)
(1) A payer of a sum that is taxable in the hands of the recipient deducts the tax due in
respect of the sum and accounts for it to HMRC on a recipient’s behalf
(2) The recipient of the taxable sum therefore receives the sum net of tax (i.e. after tax
has been deducted)
For companies The financial year
Companies are assessed to corporation tax on the basis of a financial year
Runs from 1 April in one calendar year to 31 March in the next
Note: Tax and Business Accounting
Companies pay corporation tax on all income profits and chargeable gains that arise in
each accounting period
1 Income and capital receipts are subject to different tax rules so it is necessary to identify the nature of the
receipts
2 Refer to p.9
2
, LPC Course: Tax & Accounting Revision 201
Notes 7
2. Income Tax
1. Income Tax terms and Calculation
Income Tax Calculation
Step 1. A taxpayer’s total gross income from all sources
Calculation of Examples of sources: Savings, Dividends, Benefits in kind
Total Income
Step 2. Total Income less available tax reliefs
Calculation of Note: Examples of Tax Reliefs
Net Income (1) Interest on qualifying loans
loans to buy an interest in a partnership;
loans to contribute capital or make a loan to a partnership
loans to buy shares in (or make a loan to) a ‘close’ company
loans to buy shares in an employee-controlled company or invest in a co-
operative
(2) Pension Scheme Contributions
Step 3. Net Income less the personal allowance
Calculation of Note: The personal allowance
Taxable Income (1) for the tax year 2016/17 is £11,000
(2) The amount of this allowance is reduced by £1 for every £2 of Net Income above
£100,000
Formula: £11,000 - (Net Income - £100,000)/2 = Reduced Personal Allowance
Step 4. Where a taxpayer has different types of income it is necessary to split out the different
Split out the types:
different types savings income (e.g. interest received on savings held in bank accounts);
of income dividend income; and
non-savings income (e.g. salary, but it is a wide concept)
o non-savings income = Taxable income – savings income – dividend income
Step 5. <Once you have separated out the different types of income: Step 4>
Calculation of You should calculate whether the taxpayer has the benefit of the personal savings allowance
Personal by looking at their total Taxable Income as follows:
savings
Band of taxable income Personal savings
allowance
Amount of Taxable Income (in total) Name of the Band allowance3
£0 - £32,000 Basic Rate £1,000
£32,001 - £150,000 Higher Rate £5004
over £150,000 Additional Rate 05
Step 6. Use the ‘Measuring Jug’ method and the tax rate below to calculate income tax:
Apply relevant Applying the different tax rates to the different bands of income
tax rates for Think of income being poured into a measuring jug in the following order
separate a. non-savings income;
incomes and b. savings income; and
Add the sum c. dividend income
(1) For Non-savings income and Savings income
Band of taxable income
Income Tax rate
Amount of Taxable Income (in total) Name of the Band
3 Only relates to Savings income
4 If a Tax Payer’s Taxable Income is higher than the basic rate band but does not exceed the higher rate band,
the TP will have the benefit of a personal savings allowance of £500
5 If some of a Tax Payer’s Taxable Income is within the additional rate band, the TP will not have the benefit of
the personal savings allowance
3
Notes 7
LPC Course
Tax & Business Accounting
Revision Note
The word ‘accounts’ has two usual meanings, depending on the context:
1. Records of the money transactions of a business (‘bookkeeping’); and
2. Periodic reports on the performance of a business (also known as ‘financial statements’).
Financial statements are prepared in respect of each ‘accounting period’ of a business.
An accounting period is usually a full year. Every business is free to choose its own accounting period; it is
common for this to match the calendar year or the tax year.
Contents
1. General Information of Taxation ……………………………………………….… 2
2. Income Tax ……………………………………………….… 3
3. Capital Gains Tax ……………………………………………….… 5
4. VAT ……………………………………………….… 7
5. Corporation Tax ……………………………………………….… 9
6. Accounts of Sole Traders ……………………………………………….… 13
7. Year-end Adjustments ……………………………………………….… 15
8. Company Accounts ……………………………………………….… 20
1
, LPC Course: Tax & Accounting Revision 201
Notes 7
1. General Information of Taxation
1. Income and Capital1
Income and Capital
1. In general Income expenditure can only be deducted from income receipts; and
capital expenditure can only be deducted from capital receipts
Income A receipt is the product of how the taxpayer generates money on a regular basis
receipts i.e. the trading profits of a newsagent’s business
Income An expense is incurred as an integral part of day-to-day trading
expenditure i.e. Bills for heating and lighting, rent, marketing and stationery
Capital receipts A receipt is the product of a transaction that is not integral to such regular activity
i.e. “one-off” capital transactions
Capital As with capital receipts, capital expenditure can be seen as a “one-off” transaction
expenditure i.e. expenditure on a particular item
2. Exception Capital allowances can reduce the overall tax bill
Capital Tax allowable depreciation (Tax Relief)
allowances The effect of them being to spread the cost of capital expenditure on certain capital items
over a period of time
This is achieved by a proportion of the capital expenditure being deducted from
income receipts over a period of time2
2. Assessment of tax
Tax years for Individuals and Companies
For individuals The tax year
Individuals are assessed to income tax and capital gains tax on the basis of a tax year
Runs from 6 April in one calendar year to 5 April in the next
Note: In some cases income tax is deducted at source (i.e. PAYE system)
(1) A payer of a sum that is taxable in the hands of the recipient deducts the tax due in
respect of the sum and accounts for it to HMRC on a recipient’s behalf
(2) The recipient of the taxable sum therefore receives the sum net of tax (i.e. after tax
has been deducted)
For companies The financial year
Companies are assessed to corporation tax on the basis of a financial year
Runs from 1 April in one calendar year to 31 March in the next
Note: Tax and Business Accounting
Companies pay corporation tax on all income profits and chargeable gains that arise in
each accounting period
1 Income and capital receipts are subject to different tax rules so it is necessary to identify the nature of the
receipts
2 Refer to p.9
2
, LPC Course: Tax & Accounting Revision 201
Notes 7
2. Income Tax
1. Income Tax terms and Calculation
Income Tax Calculation
Step 1. A taxpayer’s total gross income from all sources
Calculation of Examples of sources: Savings, Dividends, Benefits in kind
Total Income
Step 2. Total Income less available tax reliefs
Calculation of Note: Examples of Tax Reliefs
Net Income (1) Interest on qualifying loans
loans to buy an interest in a partnership;
loans to contribute capital or make a loan to a partnership
loans to buy shares in (or make a loan to) a ‘close’ company
loans to buy shares in an employee-controlled company or invest in a co-
operative
(2) Pension Scheme Contributions
Step 3. Net Income less the personal allowance
Calculation of Note: The personal allowance
Taxable Income (1) for the tax year 2016/17 is £11,000
(2) The amount of this allowance is reduced by £1 for every £2 of Net Income above
£100,000
Formula: £11,000 - (Net Income - £100,000)/2 = Reduced Personal Allowance
Step 4. Where a taxpayer has different types of income it is necessary to split out the different
Split out the types:
different types savings income (e.g. interest received on savings held in bank accounts);
of income dividend income; and
non-savings income (e.g. salary, but it is a wide concept)
o non-savings income = Taxable income – savings income – dividend income
Step 5. <Once you have separated out the different types of income: Step 4>
Calculation of You should calculate whether the taxpayer has the benefit of the personal savings allowance
Personal by looking at their total Taxable Income as follows:
savings
Band of taxable income Personal savings
allowance
Amount of Taxable Income (in total) Name of the Band allowance3
£0 - £32,000 Basic Rate £1,000
£32,001 - £150,000 Higher Rate £5004
over £150,000 Additional Rate 05
Step 6. Use the ‘Measuring Jug’ method and the tax rate below to calculate income tax:
Apply relevant Applying the different tax rates to the different bands of income
tax rates for Think of income being poured into a measuring jug in the following order
separate a. non-savings income;
incomes and b. savings income; and
Add the sum c. dividend income
(1) For Non-savings income and Savings income
Band of taxable income
Income Tax rate
Amount of Taxable Income (in total) Name of the Band
3 Only relates to Savings income
4 If a Tax Payer’s Taxable Income is higher than the basic rate band but does not exceed the higher rate band,
the TP will have the benefit of a personal savings allowance of £500
5 If some of a Tax Payer’s Taxable Income is within the additional rate band, the TP will not have the benefit of
the personal savings allowance
3
