Consolidation notes on BLP Taxation covering:
- Taxing individuals (income tax and capital gains tax - how to calculate)
- Taxing businesses (corporation tax)
/!/ These notes have been restructured to optimise exam performance and thus are in table formats /!/
/!/ These notes were writt...
o deduct tax at source from wages paid to
Business Law and Practice – employees (PAYE) and pay national
Taxation insurance (NI) contributions;
o SDLT/ SD/ VAT depending on
transactions.
(1) Introduction to Business
Must submit a corporation tax self-
Tax assessment return and must pay by the
prescribe deadlines
TTP <1.5m = 9 months and 1
Calculator required – silent, day after end of accounting
non-programmable, non- Why do lawyers period
scientific, no cover. need to know
about tax? Tax TTP > 1.5m = via quarterly
Tax rate summary provided determines how instalments
in the exam. people do business,
how much money a
Tax question in the BLP business makes o What about SH?
assessment. and how business Pay IT on salary and dividends
deals are as well as NICs (deducted at
In the exam, round down structured.
each individual figure to source via PAYE)
the nearest pound at each What tax does the
stage of the calculation. Pay CGT on their chargeable
different business gains
media pay? Tax depends on whether you are a company or
an individual. Tax may have an impact on which business May have to submit an individual’s self
medium you choose but need to be weighed against assessment tax return by 31 January in
commercial considerations. the year following the tax year for fear of
interest/ penalties.
Companies GPs and LLPs Sole
traders
Partnerships and LLP are tax transparent = HMRC
Corporation X - Co
Tax (CT) looks through the GP/ LLP to the partners/
members, who are taxed on their share of the
profits and chargeable gains.
Income Tax X - SH X – tax X
(IT) transparency
o Partners taxed as individuals:
pay income tax (IT) on their
Capital Gains X - SH X - tax X share of the profits
Tax (CGT) transparency
capital gains tax (CGT) on any
PAYE / X – Co / SH X – GP/ LLP if capital gains;
employer and employees
employee self-employed NICs – lower
National
than NICs.
Insurance
Contributions
(NICs) Partners must complete a self-assessment tax
return and pay the tax by 31 January in the year
following the tax year for fear of interest/ penalties.
Self-employed X – tax X
NICs transparency
o Partnership pays:
VAT / SDLT/ SD X - Co X – GP / LLP X
PAYE and NI if employees;
Companies pay: SDLT/ SD/ VAT depending on
o corporation tax (CT) on profits & transactions.
chargeable gains;
o Pay IT, CGT, self-employed NI Incurred because of day- Brings into existence a
to-day trading capital asset as part of
o SDLT/ SD/ VAT depending on the infrastructure of the
transactions. business or an enduring
benefit
Self-employed so must register as self-employed e.g., bills for heating, e.g., equipment,
with HMRC and must subject a self-assessment tax light, rent, marketing, machinery, property.
return and pay tax by 31 January in the year stationery, general
following the end of the tax year for fear of repairs, wages, etc.
interest/ penalties.
What are the special rules – the exceptions to the general
rules?
N.B. Payment of dividends by a Ltd are In in nature but
CGT, IT and CT are direct taxes, imposed by not tax deductible as paid out of profits that have
reference to an individual’s circumstances and paid been subject to corporation tax = not expenses
to the government directly. VAT, SD and SDLT are
indirect taxes, imposed by reference to Dividends received by a Ltd are In in nature but not
transactions. taxable (vs. individual whose dividends received are
taxable)
Tax lawyers will advise clients on business tax (for
the business medium they intend to set up) and Capital allowances allow certain types of Cap
individual tax (as will pay IT on the dividends) Expenditure to be deducted from In Receipts
double taxation.
e.g., depreciation is a capital allowance
Certain taxes are payable at the source = the (=cost of an asset is deducted in the
recipient of the taxable sum receives the sum net accounts over time)
of tax (as the payer has already deducted it and
accounted to HMRC). when calculating tax
liabilities, must include gross amount vs. net.
(2) Taxing individuals– IT and CGT
A. Income tax
Capital (Cap) vs. income (In)
What is income tax?
Receipts / expenses must be correctly categorised into Cap or
In to ensure that they are subject to the correct tax regimes. Income tax is a tax paid by individuals on their taxable
income.
What are the general rules?
How is income tax charged?
Rule 1: IT is paid on In receipts – allowable income
expenditure because these are the trading profits. On a current year basis (‘tax year’) = income earned from 6
April 2021 – 5 April 2022.
Rule 2: CGT is paid on Cap receipts – allowable capital
expenditure. How is income tax collected?
*allowable cap expenditure isn’t normally deducted until the Self-assessment by the individual (=always
capital asset is disposed of. directors, self-employed vs. employed individuals
with uncomplicated tax affairs) of their tax liability.
In Receipts Cap Receipts
Deduction at source - the recipient of the taxable
the result of a taxpayer’s not part of a taxpayer’s sum receives the sum net of tax (as the payer has
regular activities = regular activities = one already deducted it and accounted to HMRC).
regular payments off payment when calculating tax liabilities, must include gross
amount vs. net.
e.g., trading profits, e.g., sale of premises,
What are the three types of income for individuals and what
interest on loans, rent. sale of shares (unless a
tax rates are they subject to?
broker and then would
be integral)
Types of income
In Expenditure Cap Expenditure
Non-Savings (taxed first) – income which is not savings or
dividend income such as salary
loan to a partnership, buy shares to a ‘close’ company, an
Savings (taxed second) – income from savings such as employee-controlled company, or invest in a co-operative)
interest.
3. Find the taxable income
Dividends (taxed third).
Net income – personal allowance (which
Benefits in kind – which we ignore on the LPC may be reduced from the £12,570)
!/! If Net In < 100k = £12,570.
Personal allowance (PA) = £12,570 of income free
from IT. If Net In between 100,001k and 125,140 =
use formula.
Certain items of income are exempt from IT =
gaming and betting prizes, income from ISAs, If Net In above In > £125,140 = no PA.
income or gains from a Child Trust Fund or Junior
ISA, compensation for loss of employment <30k,
periodical payments for damages and 4. Find non-savings income
compensation for PI, certain redundancy payments.
Taxable income – savings income –
dividend income
Rates of tax:
5. Determine whether the personal savings
allowance is available
If additional rate taxpayer = taxable
income at (3) is > 150k = no personal
savings allowance
If higher rate taxpayer = taxable income
at (3) is between 37,700k and 150,000k =
personal savings allowance is £500
If basic rate taxpayer = taxable income at
(3) is < £37,700 = personal savings
allowance of £1000
!/! if available, this applies to the first £500/ £1000
(depending on amount available) of savings income.
Savings income = 0% provided that within first 5k of taxable
income so only if non-savings and savings = less than 5k.
6. Apply the tax rates in the correct order using the
unlikely LPC scenario but beware as might come up in MCQ.
sliding scale –, non-savings, savings (figure at 5) and
dividends.
How do you calculate IT?
!/! remember that X may qualify for PSA so must account for
that here (see 5).
1. Find the total income
But if the PSA is 500 and the savings amount is only 250 then
Gross income non-savings + savings + only apply the 0 rate to the 250, the other 250 that you could
dividends have had doesn’t go into the measuring jug!!
!/! If income has been received net of tax (i.e., salary), you But if no savings then no PSA so don’t add in.
must use the gross amount here.
!/! first £2000 of dividend income = 0%
!/! Certain items of income are exempt from IT.
!/! think of a measuring jug = each type of income is poured
2. Find the net income on top of the other, with the effect of each tax bracket used
up in turn and no tax bracket is used until the one before has
Total income – available tax reliefs been exhausted.
e.g., pension contributions, interest on qualifying loans (inc. In the exam, state ‘this leaves £X of basic rate band to be
buy an interest in a partnership, contribute capital or make a used up’ to show your workings.
7. Find the total tax liability Must be paid by 31 January following the tax year in which
disposal occurs, so if disposal in 2021/2022 then must be paid
Savings liability from (6) + Non-savings by 31 January 2023.
liability from (6) + dividends liability from
(6) When is CGT charged?
On any gain resulting when a chargeable person (the latter is
!/! If given salary in gross, but payslips show that tax was assumed for purposes of LPC) makes a chargeable disposal of
already deducted at the source via PAYE then deduct the a chargeable asset
amount of income tax paid from the total tax liability. If
given in gross, in exam say, ‘To calculate the tax actually Disposal: sale or gift of an asset
payable to HMRC, we would need to deduct the tax deducted o Disposal must result in a gain, which is the
at source by Melissa’s employer through the PAYE system.’ consideration received.
Sale at arm’s length = price paid
Personal allowance reduction: calculation
Sale between connected persons (relatives
= a band of tax-free income for individuals. and relatives’ spouses = direct ancestors,
partners in business, companies under
PA is reduced by £1 for every £2 of net income > 100k. So: common control) = market value
If In < 100k = £12,570.
Sale at undervalue between unconnected
If In between 100,001k and 125,140 = use formula. persons = market value at date of disposal
!/! if bad bargain, it will remain the price
If above In > £125,140 = no PA. of the bargain.
!/! Still do the calculation Gift = market value at the date of the gift.
Calculation
o No gain (or loss) when a spouse/ civil partner
disposes of an asset to the other spouse/ civil
partner = no CGT.
o No gain/ loss when disposal to charities provided
the gain is applied for charitable purposes.
How can you reduce your IT liability?
Think about whether there is a spouse to whom you can
transfer money/ shares. e.g., if the spouse has no Asset: all forms of property except for:
income, then she could benefit from the PA + lower
band rate of tax. o Principal private residence
Married couples = only one PPR.
Think about transferring shares/ savings into tax Two homes = question of fact as to which
efficient saving vehicles such as ISAs as the gains on one is the PPR but can elect within 2 years of
assets within ISAs are exempt from tax. acquiring the second home which one is PPR
If not in AO of PPR for last 18 months of
Think about increasing the personal pension ownership = doesn’t stop it from being your
contributions to benefit from tax relief and thus reduce PPR.
Net Income.
o Motor cars for private use
B. Capital gains tax o Wasting chattels, i.e., a predictable life not more
than 50 years, e.g., TV, washing machine
What is CGT?
o Other tangible moveable property
Taxing the profit that a person might make from disposing of If gross sale proceeds < 6k = no CGT
a capital asset that has appreciated in value during their
ownership. If gross sale proceeds between 6 and 15k =
lower of the actual chargeable gain 5/3rds of
When must CGT be paid? the excess consideration of 6k
Tax year = 6 April to 5 April following year. o Investments such as government securities, ISAs
and Life Assurance
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