Summary Tax Law (Distinction)

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

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, 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:
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, 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
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, 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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