Notes & Practice on Business Taxation

Who is subject to Income Tax?

Aside from individuals, Income Tax must be paid by individuals; partnerships; personal representatives; and trustees.

What are the two major ways by which Income Tax is collected?

1. The Pay As You Earn (PAYE) system. 

Payment of Income Tax by employees and those receiving company pensions is made through the Pay as You Earn (PAYE) system. deducted by the employer, before the employee receives his salary. 

2. Self-Assessment. The self-employed are responsible for making the relevant payment to HMRC. A Self-Assessment return is used to report income and calculate liability. Businesses including sole traders and partnerships, but not companies, are also required to register for Self-Assessment. 

Note: A major advantage of Self-Assessment, as opposed to PAYE, is that self-employed traders can deduct expenses which would not be allowable to employed workers. 

What is a Personal Allowance?

The Personal Allowance is the amount of annual income that an individual can earn before they are required to pay Income Tax. If someone’s taxable income for a tax year is less than their Personal Allowance, they do not have to pay Income Tax. However, if their income exceeds this allowance, they will be taxed on the amount above it. The specific amount of the Personal Allowance depends on factors such as total income, marital status, and disability status. It is important to note that the Personal Allowance needs to be claimed each year in the tax return, and any unused portion cannot be carried over to future years.

What is a Married Couple’s Allowance?

It’s an amount that can be deducted from a person’s tax bill if they are married or in a civil partnership and meet certain criteria. The allowance can be transferred between spouses if it’s not fully utilized. The amount of relief depends on factors such as income and date of marriage/civil partnership.

What is a Marriage Allowance?

It allows a person with an income lower than the Personal Allowance to transfer a portion of their unused allowance to their spouse or civil partner, who must be a basic rate taxpayer. This can only be done if both partners were born after April 6, 1935, and neither is a higher or additional rate taxpayer.

What is a Maintenance Payment Relief?

It is a tax relief that can be claimed by a person who pays maintenance payments to their ex-spouse or former civil partner. To qualify, certain conditions must be met, such as being born before April 6, 1935, being separated or divorced, and making payments under a court order for the maintenance of an ex-spouse or children under 21.

What is a Blind Person’s Allowance?

Blind Person’s Allowance is an additional amount of income that can be claimed by individuals who are certified as blind and are on a local authority register of blind persons or are unable to perform work that requires eyesight. It is added to their tax-free Personal Allowance, allowing them to earn extra income without paying tax. They may be able to transfer this allowance to their spouse or civil partner if they qualify. Both the person and their spouse or civil partner can receive this allowance if they both qualify.

What is a Personal Savings Allowance?

The Personal Savings Allowance exempts certain amounts of savings income from tax for basic and higher rate taxpayers. The allowance is based on the taxpayer’s taxable income, which is their non-savings income (e.g., employment, dividends, pension, social security benefits) and savings income after deducting the Personal Allowance. However, if the savings income within the personal savings allowance pushes the taxpayer into a higher income tax rate band, the amount of the allowance decreases. If the taxpayer’s income exceeds the additional rate threshold, they do not receive any Personal Savings Allowance.

What is a Dividend Allowance?

The Dividend Allowance allows individuals to receive a certain amount of dividend income tax-free, regardless of their non-dividend income. Any dividends received above the Dividend Allowance are subject to tax. The allowance does not reduce the taxpayer’s total income for tax purposes, but it means they do not have to pay tax on the allowable amount of dividend income. Dividends within the allowance still count towards the taxpayer’s basic or higher rate bands, which may affect the tax rate applied to dividends exceeding the allowance. Dividends received by pension funds and those earned on shares held in an Individual Savings Account (ISA) remain tax-free.

What is the financial year of a company?

The tax year is called the ‘financial year’ or ‘fiscal year’ and runs from the 1^st of April to the 31^st of March. This is different from the tax year for individual taxpayers, which runs from the 6^th of April to the 5^th of April.

What are wasting assets?

Tangible moveable assets with a lifespan of 50 years or less are usually exempt from Capital Gains Tax (CGT). Examples include consumer goods like motor vehicles, televisions, and washing machines. Antiques are considered wasting assets if they are plant or machinery, regardless of their actual predictable lifespan. Clocks and watches are always regarded as wasting assets. If a chattel (moveable personal property) is a wasting asset and the taxpayer didn’t claim capital allowances for it or loan it to a business for use as plant, any gain from its disposal is exempt from CGT. However, if the taxpayer used the wasting asset in a business and claimed capital allowances for it, any gain on its disposal will be taxable.

What is the private residence exemption?

The private residence exemption, also known as principal private residence (PPR) relief, refers to the exemption from Capital Gains Tax (CGT) when selling an individual’s only or main private dwelling house along with its garden or grounds of up to half a hectare (5,000 square meters). The exemption allows owner-occupiers to sell or give away their house without incurring CGT liability. If the garden or grounds exceed half a hectare, relief may not apply to the entire area, but only to the “permitted area” necessary for the reasonable enjoyment of the dwelling house. The exemption can be lost or reduced if the seller did not live in the property as their only or main residence throughout their ownership period. Certain periods of absence may still qualify for relief, and if part of the dwelling house was used exclusively for business purposes, only a portion of the gain will be exempt. Lettings relief is available for properties let as residential accommodation, capped at £40,000, but only if the owner is in shared occupation with the tenant. Married or civil partnership couples can only have one main residence between them, but if they are separated, each may have a different main residence and be entitled to relief on the disposal of their respective residences.

What is hold-over relief on gifts of business assets?

Hold-over relief, also known as business asset gift relief or gift relief, applies when a person transfers an asset (e.g., property or certain shares) to another individual as a gift or sells it for less than its market value. This relief defers the Capital Gains Tax (CGT) liability until the donee (recipient of the gift) disposes of the asset. It allows individuals to make gifts of business assets without immediately triggering CGT.

What is trading loss relief?

• Trading loss relief allows a company to offset its trading losses against other gains or profits in the same accounting period, or carry forward the losses to set off against future profits.
• The maximum carried forward loss offset is usually not limited in time, but from April 2017, it is limited to £5 million plus 50% of profits exceeding that amount.
• The company must continue to carry on a trade and not become small or negligible in the loss-making period and subsequent periods.

What is the loss relief available to a company in its first four years of trade?

• Losses from the first four years of a trade can be carried back and set off against income from all sources generated during the three years preceding the loss, using the earliest years first.

What is the terminal loss relief available to a company which ceases to trade?

• When a company permanently ceases to trade, any loss made in the final 12 months of trading can be set off against profits arising in the three-year period immediately preceding the loss-making period.

What is capital loss relief?

• Capital loss relief applies to losses made when a company sells or disposes of a capital asset.
• These losses cannot be offset against trading income but can be set off against chargeable gains arising in the same accounting period.
• Any unused capital losses can be carried forward indefinitely to set against chargeable gains of future accounting periods.
• From April 2020, the maximum carried forward capital loss offset is limited to £5 million plus 50% of the gain in excess of that amount.
• Capital losses cannot be carried back to offset gains of earlier years.

What is roll-over relief?

• Roll-over relief applies when a business asset is sold, and a new business asset is acquired with the proceeds.
• The chargeable gain amount from the sale is deducted from the purchase price of the new asset, deferring immediate capital gains tax.
• Eligibility requires the business to be trading at the time of both the sale and purchase, the assets to be used in the business, and the purchase to occur within a specific time frame.
• Relief can be claimed within four years of the tax year’s conclusion in which the new asset was purchased or the old asset was sold.

What is incorporation relief?

• Incorporation relief applies when a business is transferred to a company in exchange for shares.
• It allows the delay of taxable gains until the sale or disposal of the shares.
• Eligibility requires the transferor to be a sole trader or in a business partnership, and all business assets (excluding cash) to be transferred in exchange for shares.

What is group relief?

• Group relief allows a company (surrendering company) to surrender its corporation tax loss to another company (claimant company) within the same corporation tax loss relief group.
• The surrendering company must have the beneficial ownership of 75% or more of the capital of the claimant company, or a third company must have the beneficial ownership of 75% or more of both companies’ ordinary share capital.
• Group relief can be claimed in any direction within the group, subject to certain tests.
• The maximum group relief claim is limited to the available loss in the surrendering company or the available profit in the claimant company.
• The relief is typically applied when the companies have the same accounting periods, but special rules apply if the accounting periods differ.

Stay tuned for more notes ………