[NB. Please note this summary contains references to my Law of Organisations summary, also on sale on this platform.] Clear, precise, detailed, yet concise, Business Practice summary for SQE students. I have devoted so much time and energy to writing these notes-summaries that eventually they paid ...
TOPIC 1 - DIFFERENT TYPES OF BUSINESSES: Read Law of Organisations Summary (Topic 1).
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TOPIC 2 – TAX:
Income tax and capital gains tax for sole traders and partners, or
Corporation tax for companies, and
VAT for most businesses.
TRADING: CALCULATING PROFITS AND PAYING VAT
Sole traders and partners – first step in income tax calculation: trading profit (+ other income = total income)
Companies – first step in corporation tax calculation: income profits (may include company’s trading profits)
Calculating trading profits:
Income profits: those profits which are recurring in nature, such as rent or trading profit.
Capital profit: one-off items, such as an office building increasing in value.
Sole traders: income profits form part of total income for income tax purposes.
Companies’ income profits + capital profits are charged to corporation tax.
Trading profits are calculated in broadly the same way for both income tax and corporation tax, as follows.
Accounting period A business must prepare accounts for an accounting period, usually of 12 months.
of a business: Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit/loss
Chargeable Chargeable receipts: money received for the sale of goods and services.
receipts: The receipts must derive from the business’s trade and be income in nature (ie recurring).
‘Trade’: ‘operations of a commercial character by which the trader provides to customers for reward
some kind of goods or services.’
Deductible Deductible expenditure must be of an income nature and incurred ‘wholly & exclusively’ for the trade.
expenditure: Deductions prohibited by statute: client entertainment & leasing cars with emissions over certain level.
Income in nature: reason for incurring expenditure is so that the business can sell the item at a profit.
‘Wholly & exclusively for the purposes of trade’ – commonly deductible items are:
salaries (as long as they are not excessive given the services that the person carries out);
rent on commercial premises;
utility bills;
stock;
contributions to an approved pension scheme for directors/employees; and
interest payments on borrowings.
Capital Capital allowance allows to deduct a proportion of the cost of most capital items from chargeable receipts.
allowances: Plant & machinery: no statutory definition.
Plant includes whatever apparatus businesspeople use to carry on their business.
all goods and chattels kept for permanent use in business, but not stock in trade.
Written down allowance: allowance of 18% of value of plant & machinery at start of financial year.
= 18% of its total value will be deducted from chargeable receipts, and thus from trading profit.
Example: Queensbury Ltd purchased machinery for £100,000.
Year 1: 18% of £100,000 = £18,000 WDA, leaving the asset with a written-down value of £82,000.
Year 2: 18% of £82,000 = £14,760 WDA, leaving the asset with a written-down value of £67,240.
Year 3: 18% of £67,240 = £12,104 WDA, leaving the asset with a written-down value of £55,136.
= written-down value of pool of plant and machinery is carried forward to the next accounting period.
Pooling: All plant and machinery is pooled and WDA is calculated on the basis of value of the whole pool.
Annual AIA: allows businesses to deduct the whole cost of plant & machinery purchased in that particular
Investment accounting period from chargeable receipts. Cap: at £1,000,000 until 31 March 2024.
Allowance: = the first £1,000,000 of ‘fresh’ qualifying expenditure on plant & machinery: wholly deductible (100%).
NB. A group of companies will receive only one AIA for the group in each accounting period.
AIA will be relevant for assets which are new, second-hand or refurbished.
Full-expensing – Companies can deduct 100% of cost of plant & machinery purchased in that particular accounting period
for companies from chargeable receipts. Amount deductible is uncapped. AIA is in force in addition to full expensing.
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,only: Full-expensing relevant for brand new assets.
When the cost of plant and machinery is more than the AIA:
Let’s assume that Queensbury purchased second-hand machinery for £1.2 million. Queensbury would be
entitled to the AIA of £1,000,000, but this would not cover all of the cost of the new machinery – it cost
£200,000 more than the AIA. Queensbury would be entitled to a WDA of 18% on the balance of £200,000, in
addition to the WDA for an existing pool of plant & machinery of £200,000.
When full expensing applies:
Queensbury’s machinery was new, not second-hand, and cost £1.2 million. Queensbury would be entitled to a
full expensing deduction of 100%, which is £1,200,000.
In addition, Queensbury would be entitled to the WDA of £36,000 in relation to the existing plant and
machinery, making capital allowances of £1,236,000 in total.
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Relief for a trading loss: unincorporated businesses:
A taxpayer is allowed to deduct a trading loss from other income, resulting in them paying less tax overall.
Where the taxpayer is eligible for more than one relief, they may choose which relief to claim.
If there are still some unabsorbed losses, taxpayer can claim relief for the balance of the loss under another
provision if they are eligible.
NB. The taxpayer must apply for the relief – they are not applied automatically by HMRC.
Start-up loss (aka Available when the taxpayer suffers a loss in any of the first 4 tax years of the new business.
early trade losses Loss can set against taxpayer’s total income in the 3 tax years immediately prior to tax year of the loss.
relief): Useful for who starts a business and before that had an income from a former business/employment.
Enables the taxpayer to claim back from HMRC some of income tax they paid in their previous business
or employment in 3 tax yrs prior to loss.
Claim must be made on/before 1st anniversary of 31 Jan following end of tax yr in which loss is assessed.
Carry-across/ Trading losses in an accounting period are treated as losses of the tax year in which the accounting period
one-year carry- ends. There are four options for this relief. The losses can be:
back relief for 1. set against total income from the same tax year; or
trading losses 2. set against total income from the tax year preceding the tax year of the loss.
generally: 3. set against total income from the same tax year until that income is reduced to zero, with the
balance of the loss being set against total income of tax year preceding the tax year of the loss; or
4. set against total income from the tax year preceding the tax year of the loss until that income is
reduced to zero, with the balance of the loss being set against total income of tax year of the loss.
When loss set against total income and reduces it to zero: taxpayer loses benefit of personal allowance.
Claim must be made on/before 1st anniversary of 31 Jan following end of tax yr in which loss is assessed.
Set off against Allows taxpayer to set trading losses against chargeable gains in the same tax year and applies when a
capital gains: taxpayer has claimed carry-across relief but not all of the loss has been absorbed.
Unusual: it allows loss relief against chargeable capital gains as well as against income.
Claim must be made on/before 1st anniversary of 31 Jan following end of tax yr in which loss is assessed.
Carry-forward Taxpayer may carry forward trading loss for a tax year and set it against subsequent profits which the
relief: trade produces in subsequent years, taking earlier years first. Carried forward indefinitely until loss
exhausted.
Must notify HMRC of intention to claim relief no more than 4 yrs after tax year when loss was incurred.
NB. A taxpayer can use all of carry-forward, carry-across and carry-back reliefs in relation to the same
loss, until the loss is wiped out.
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,Carry-back of Any loss incurred by a taxpayer in the final 12 months of trading can be carried across and set against
terminal trading trading profits in the final tax year, and then carried back and set against trading profit in the 3 years
loss: preceding the year of the loss, starting with the year preceding the year of the loss and moving back year
by year until the loss is fully absorbed or the three-year limit is reached, whichever is first. No cap.
Claim must be made no more than 4 yrs after tax year when loss was incurred.
NB. This relief can only be applied to trading income, not to non-trading income or capital gains.
Carry-forward If a taxpayer incorporates their business by transferring it to a company wholly or mainly in return for
relied on shares, any trading losses which have not been relieved can be carried forward and set against any
incorporation of income they receive from the company, such as their salary or dividends. No cap.
business: ‘wholly or mainly in return for shares’: 80% or more of the consideration for the business transferred
must be shares in the company.
Losses can be carried forward indefinitely.
Must notify HMRC of intention to claim relief no more than 4 yrs after tax year when loss was incurred.
Cap on reliefs:
Start-up relief and carry-across/carry-back relief are all subject to a cap of the greater of £50,000 or 25% of
the taxpayer’s income in the tax year in relation to which the relief is claimed.
However, the cap does not usually have a significant impact because the cap only applies to income from
sources other than the trade which produced the loss.
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VALUE ADDED TAX (VAT):
Generally, VAT is charged every time a business supplies goods or services.
The current rate of VAT is a flat rate of 20%.
The business charges the customer VAT at 20% on the value of the goods or services, known as ‘output tax’.
The business deducts from the amount it collects in output tax any VAT it has itself paid (‘input tax’) on
goods or services received, and pays the difference to HMRC.
No cost to the business: it recoups any VAT it has paid from VAT it charges. The consumer takes the burden.
VAT is ‘charged on any supply of goods or services made in the United Kingdom where it is a taxable supply
made by a taxable person in the course or furtherance of any business carried on by him’.
Supply of goods Any transfer of the whole property in goods is a supply of goods (includes intangible goods - ie interest in
and services land or supply of electricity). Anything done for consideration, not a supply of goods = supply of services.
Exempt supplies Some supplies are exempt from VAT: ie residential land, postal services, education and health services.
Taxable person A taxable person is a person who makes or intends to make taxable supplies and who is or is required to be
registered under VAT Act 1994. Currently: person must be registered if value of taxable supplies in
preceding 12 monts exceeded £85,000.
Course of ‘Business’ includes any trade, profession or vocation (s 94 Value Added Tax Act 1994).
business Includes the disposal of a business or any of its assets.
Value of supply This is what the goods or services would cost if VAT were not charged. Ie. ‘£400 plus VAT’. The value of
the supply is £400. - A price is deemed to include VAT unless stated otherwise.
Tax payable to Anyone registered for VAT must submit a return to HMRC and pay the VAT it owes within 1 month from
HMRC the end of each quarter in respect of taxable supplies made in that quarter.
They will pay the VAT they have charged (output tax), less any VAT they have paid in the course of their
business (input tax). If input tax exceeds output tax, the person will receive a rebate.
Zero-rated and Zero-rated and exempt supplies are similar because the customer does not pay any VAT.
exempt supplies A person who makes zero-rated supplies can reclaim the VAT they have paid from HMRC.
A person who makes only exempt supplies cannot register and will not be able to reclaim any VAT.
VAT registration Anyone making taxable supplies of more than £85,000 in any 12-month period must register and charge
VAT, and those making less than this can choose to register but are not obliged to.
Only those registered for VAT can reclaim input tax they have paid. Need to balance out whether being able
to reclaim input tax is worth losing the advantage of being able to undercut VA-registered rivals.
Unlike for other taxes, a partnership can be registered for VAT in the name of the partnership itself.
HMRC issues registered each person with a VAT number which applies to all businesses run by that person.
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, Tax invoices A person making a taxable supply to a taxable person must provide a tax invoice, an invoice showing
information such as the VAT number, the value of supply and the rate of tax charged.
Penalties Failure to comply with VAT legislation: criminal and civil penalties + req to pay any unpaid tax w/ interest.
INCOME TAX:
Income tax is an annual tax renewed each year by Act of Parliament. The charging statute for income tax is
the Income Tax Act 2007 (ITA 2007) as amended by later Finance Acts.
The judiciary plays its part in developing tax law: the meaning of statutory provisions are decided by the court
Dedicated tax tribunals —> appeal to CA —> with leave to SC
Individuals, partners, personal representatives and trustees may have to pay income tax.
Charities: exempt. Companies: corporation tax instead.
Individuals Employed individuals pay income tax if their earnings exceed a certain threshold (tax usually paid directly by
their employer to HMRC). Individuals may also pay income tax on ie income from investments and pensions,
interest on bank accounts, dividends received from companies in which they hold shares.
Sole traders: pay income tax based on an assessment of their trading profits.
Partners Partners are responsible for the tax due on their individual share of partnership profits. Trading profits (and tax)
are apportioned between the partners in accordance with their shares in the income profits of the partnership.
NB. if a partner is not an individual but a company, corporate partner liable to pay corporation tax instead.
PRs PRs pay the deceased’s outstanding income tax and income tax chargeable during administration of the estate.
Trustees Trustees pay income tax on income produced by the trust.
Tax year:
The tax year runs from 6 April until 5 April the following year.
Ie. tax year beginning on 6 April 2023 and ending on 5 April 2024 is referred to as the tax year 2023/24.
How to calculate income tax:
Tax is payable on taxable income: reliefs and allowances are deducted from the income the individual earns.
The three categories of income are:
a. non-savings, non-dividend income (‘NSNDI’) = all sources of income apart from income from savings
and income from dividends;
b. savings income = interest from various sources, such as interest on money held in a bank account;
c. dividend income.
To calculate the income tax payable, you must follow these steps:
Step 1: Total Income charged to income tax under ITTOIA 2005 and ITEPA 2003:
income a. trading income: profits of trade, profession or vocation. This applies to sole traders, trading
partnerships, sole practitioners and professional partnerships;
b. property income: rents and other receipts from land in the UK;
c. savings and investment income: interest, annuities and dividends;
d. employment and pensions income, ie social security payments such as sick pay & maternity pay;
e. certain miscellaneous income which is beyond the scope of this book.
Recipient charged with income tax only if income falls into one of these categories.
—> Not chargeable: interest on damages for personal injuries/death, interest on savings certificates, certain
state benefits, premium bond winnings, income from investment in individual savings account.
Chargeable sources of income are treated differently. To work out taxpayer’s total income, you must:
find out what sources of income the taxpayer has
calculate the income arising under each source and then
add all of the sums together.
= total income.
—> Deductions Tax will already have been deducted at source from income coming from salary (employment).
at source: Employer pays the employee’s income tax directly to HMRC at the time the salary is paid through the
Pay As You Earn (PAYE) system, which also ensures that the personal allowance is deducted.
Deduction must be reflected in income tax calculation: (i) ‘gross up’ any sum received by employee to
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