S.35 Ac of the Income Tax Act, 1961 - PowerPoint

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S.35 Ac of the Income Tax Act, 1961 - PowerPoint Powered By Docstoc
					REVENUE LAW




              1
          HMRC
   On 17 March 2004 the Chancellor
    announced the creation of a new
    government department which is
    to be known as HM Revenue &
    Customs (HMRC)




                                      2
        INCOME TAX.
1. Administration.
              HMRC


Inspectors.          Collectors.




                                   3
2. Appeals.
    The Inspector.
    The Commissioners.
    Chancery Division High Court.
    Court of Appeal.
      House of Lords.
   Edwards v Bairstow and Harrison
    [1956] AC 14.
                                      4
3. The Capital – Income
       Distinction.
•   General
   Pickford v Quirke (1927).
   Receipt deemed to be income by
    statute. (e.g. ss 401-404 ITEPA 2003).
   Shilton v Wilmhurst (1988).


                                         5
5. The Income Tax Year.
6. Rates of Tax 2008/2009.
7. Collection of tax.
•    (a) By Deduction of Tax at Source.
•    (b) By Assessment.



                                          6
        4. ITTOIA 2005
   Part 2: Trading Income
   Part 3: Property Income.
   “Employment income”. Officers
    and employees. (Now in ITEPA)
   Part 4: Savings & Investment
    Income.


                                    7
8. Information Gathering
   Taxpayer under a duty to report his/her
    income. (TMA 1970).
    Information supplied by third Parties,
    e.g. banks, employers.
   Power to enter and search and to
    require information from accountants


                                              8
   Power to raise estimated assessments.
    (TMA S29).

   9. Tax avoidance and evasion.




                                            9
THE TAXATION OF THE
  SELF-EMPLOYED.
   (Part 2 ITTOIA 2005).

   (Trading: buying and/or selling
     goods; Profession: the provision
    of services).



                                        10
Statutory definition of trade:
“Trade” “…as including any
 venture in the nature of a
 trade.” ( S989 ITA 2007)




                                  11
   It follows that a one-off
    trading venture amounts to an
    “adventure in the nature of
    trade”, and any profits are
    liable to income tax.



                                12
“Adventure in the Nature
      of a Trade”.
   profits arising from a “one-off”
    trading venture are liable to
    income tax.

   In what circumstances?



                                       13
     “Badges of Trade”.
(i) Subject matter.
 General

 Rutledge v IRC (1929).



(ii) Length of ownership.
 Turner v Last.




                            14
(iii) Frequency of similar
  transactions.
 Leach v Pogson (1962).



(iv) Supplementary work.
 Taylor v Good (1974).




                             15
(v) Circumstances surrounding the
  sale.
 Stott v Hoddinott (1916).



(vi) Motive.
 Grove v YMCA (1903).




                                16
    1.TAXABLE RECEIPTS
(a) Must be income not capital.
Fees for advice       - income receipts.
Sales of stock       - income receipts.
Sales of fixed assets - capital receipts.

   (But note Pickford v Quirke).

                                            17
(b) Compensation receipts.
   Glenboig Union Fireclay Ltd v IRC
    (1921)

   Burmah SS Co Ltd v IRC (1930).

   Higgs v Olivier (1952).
                                     18
(c) GIFTS.
 IRC v Falkirk Ice Rink (1975).

(d) The receipt must be taxable under the
  Part being assessed.
 (e.g. do not include Employment

  income if calculating Part 2 taxable
  income).


                                        19
      SUMMARY.
 TAXABLE RECEIPTS =
 Income receipts from sale of
  stock/provision of services;
 Compensation receipts for loss of

  revenue profits;
 Gifts received because of the

  business connection.

                                      20
2. ALLOWABLE EXPENSES.
   CONDITIONS:
(a) Must be revenue and not capital
   expenditure.

   British Insulated v Atherton
    [1926].


                                      21
(b) Must be expended
 “…wholly and exclusively
 for the purposes of the
 trade profession or
 vocation.” (Section 34
 ITTOIA 2005).

                            22
(i) CASE LAW.
   Copeman v William Flood Ltd
    (1940)

   Prince v Mapp (1969)


                                  23
   Caillebotte v Quinn (1975)

   Mallalieu v Drummond (1983)

   Bowden v Russell and R (1965)



                                    24
   Watkis v Ashford Sparks (1985)

   Edwards v Warmsley Henshall
    (1968)

   Strong v Woodifield (1906)


                                     25
(ii) TRAVELLING EXPENSES.

   General.

   Newsom v Robertson (1953)



                                26
   Sargent v Barnes (1978)

   Horton v Young (1971)

   Powell v Jackman (2004)

(iii) ACCOUNTANCY CHARGES.
                              27
(iv) TAXES.
 Income tax, CGT, corporation tax.

 Stamp duty, rates.

 NIC – Employee's Class I

 VAT.




                                  28
(v) NEWLY ACQUIRED ASSETS
  AND PRE-TRADING
  EXPENDITURE.
 Law Shipping v IRC (1924)

 Odeon Theatres v Jones (1972)

 Jackson v Laskers H. F. (1956)

 Section 57 ITTOIA 2005.


                                   29
(vi) POLITICAL PAYMENTS.

   Morgan v Tate and Lyle (1955)




                                30
(vii) INDEMNITY INSURANCE.
 Company directors –
  allowable (FA 1995)
(viii)
 Private expenditure
  disallowed

                         31
(ix) Rented house used partly for
 business – up to 2/3 bona fide rent
 deductible.




                                    32
   Owned house – apportion. But
    note

   If part used “exclusively” for
    business – liable to CGT. (S224
    TCGA)


                                      33
(x) Repairs/improvements
   Repairs to premises – allowed.
    (e.g. broken door mended; re-
    plastering; re-decorating)




                                     34
   Improvements – disallowed.
    (e.g. broken wooden door
    scrapped, new UPVC fitted).
   O’Grady v Bullcroft Collieries
    (1932)

   Sam. Jones Ltd v IRC (1951)

                                     35
(xi) S 34 (1) (b) ITTOIA 2005
 Losses not connected with

  the trade disallowed.




                                36
(xii) S 35 ITTOIA 2005
   Bad debts proved as such
   Doubtful debts estimated to be
    bad
   Amounts given up under IVAs
    allowable.


                                     37
   Business Entertainment
    (ITTOIA 2005 S45)

   Business entertainment
    generally disallowed
    (“hospitality of any kind”).

                                   38
Exceptions:
(a) entertainment of own staff;
(b) small gifts carrying
   prominent advert, no more than
   £50 per recipient per year.



                                    39
      3. CAPITAL
     ALLOWANCES
1. COST/DEPRECIATION OF
   CAPITAL ASSETS DISALLOWED
   – BUT….

2. CAPITAL ALLOWANCES (CA’S)
   MAY BE AVAILABLE


                               40
3. CONDITIONS:
(a) must be capital expenditure;
(b) must be “ wholly and
   exclusively..” (S24 CAA 2001)
   (traders/professionals).
(c) (must fall within the CAA 2001).


                                   41
4. “PLANT”
(i) Common law.
   Yarmouth v France (1887)

   Cooke v Beach Stations Caravans
    Ltd (1974).

                                  42
   Munby v Furlong (1977)

   Jarrold v John Good & Sons
    (1963)

   IRC v Barclay Curle (1969)


                                 43
   Dixon v Fitch’s Garage (1975)

   Benson v Yard Arm Club (1978)

   Brown v Burnley Football Club
    (1980)
                                    44
   IRC v Scottish & Newcastle
    Breweries (1982)

   Wimpy International Ltd v
    Warland; Associated Restaurants
    v Warland (1989).

                                      45
   Gray v Seymour Garden Centre
    (1995).

   Attwood v Anduff Car Wash Ltd
    (1995).



                                    46
(ii) The CAA 2001.
(See notes).




                     47
(iii) The Capital Allowances Rates:
 (a) General Plant – Initial cost.

 Expenditure from 2/7/98 to 5/4/04      40%

   Expenditure from 6/4/04 to 5/4/08    50%

   Expenditure from 6/4/08 onwards “ Annual
    Investment Allowance” (“AIA”) for all general
    plant other than cars – the full cost is
    deductible up to a total of £50,000.

                                                48
(b) Computers, software and internet enabled
  mobile phones

   Expenditure from 1/4/2000 to 31/3/04 100%
   Expenditure from 1/4/2004 to 5/4/08    50%
   Expenditure from 6/4/08 – within the AIA.




                                               49
(c) Special Cases

   Energy/water saving plant
    Expenditure from 1/4/2001 - 100%
   Low emission cars
    Expenditure from 1/7/2002 to 31/3/2013 - 100%
   Natural gas/Biogas/hydrogen refuelling equipment -
    100%




                                                    50
   Written down allowances (“WDA”)
    (a) General plant expenditure from 6/4/08 - 20%
    (Previously 25% of the written down value up to
    5/4/08 (available in the first year for cars - up to max
    of £3,000 p.a.)
    (b) WDA of up to £1,000 if the value of the pool is
    £1,000 or less (small businesses only)




                                                          51
         Part 4 ITTOIA
(1)“Interest and Dividends”. (Note
    interest is classified as “Savings
    Income” for the purposes of the
    assessment (Stage 3) and Dividends
    taxed separately )
(2) Examples:
   Bank and Building Society interest.
   Annuities.
   Interest from companies.


                                          52
3. Certain types of income exempt
  e.g. the first £70 of interest
  received from a NSB Ordinary
  account.

4. Basis of Assessment = that
  arising in the tax year.

                                    53
(5) Interest is usually paid net, i.e.
   after the deduction of 20%
   income tax. Always include the
   gross figure in any assessment.
  If given the net figure
   Gross = Net x 100/80
(6) Savings income is taxed @ 10%,
   20% or 40%.

                                         54
EMPLOYMENT INCOME
(1) The Charge.
“The charge to tax on employment
    income… is a charge to tax on
(a) General earnings, and

(b) Specific employment income.”

(s 6 and 7 IT(EP) Act 2003).


                                    55
   “Office”: Directors; Judges.

   “Employment: distinction
    between contract of service
    (employment) and contract for
    services (self- employment).


                                    56
   “General earnings”: “.. any salary, wages or
    fee….” plus

   “..any gratuity.. ” plus

   Taxable benefits

   …received “by reason of the employment.”
    (See Chapters 1 and 2 of Part 3 of IT(EP) Act
    2003)

                                                    57
(2) Are gifts earnings?

   Moorhouse v Dooland (1955).

   Seymour v Reed (1927).

   Moore v Griffiths (1972).

                                  58
   Earnings therefore = cash
    salaries, fees, wages, gifts and
    benefits.

   What sort of benefits?

   Tennant v Smith (1892)

                                       59
   Amount assessable?
   Wilkins v Rogerson (1961)
   ALL Directors and employees are
    assessable on cash and benefits
    which can be converted into cash
    (S 203 IT(EP) Act 2003).


                                       60
In addition the following benefits
  are also assessable on ALL:

(a) Discharge of a debt by the
employer (Nichol v Austin (1935)).

(b) Voluntary pensions .
                                     61
(c) “Golden handshakes” (S 403
   IT(EP) Act 2003).

(d) Non-cash vouchers (S 87
  IT(EP) Act 2003).


                              62
(e) Living accommodation :(see Part 3-
    Chapter 5 of IT(EP) Act 2003)
    ….unless:

(i) “necessary for proper performance of
     duties

(ii) provided for better performance
    and customary
                                         63
(iii) provided for security
  reasons.

   Amount assessable? The
    rateable value of the property.


                                  64
   Benefits in kind assessable on
    directors and employees earning
    £8,500 or more.

   ALL benefits unless specifically
    exempt. (See s 202 IT(EP) Act
    2003).

                                       65
    Employment – Allowable
        Expenditure.
   Must be revenue expenditure.

   Must not be disallowed by statute.

(a) Expenses other than travelling
  expenses.


                                     66
 Must be expended “wholly
  exclusively and necessarily in the
  performance of the duties.”
  (S 336 IT(EP) Act 2003)
(i) General:
 Brown v Bullock (1961)

 Smith v Abbott (1994)

 Simpson v Tate (1925)

                                       67
(ii) Subs to professional bodies
    (S343 IT(EP) Act 2003).
(iii) Actors/entertainers.
(iv) Contributions to “occupational
    pension schemes”
(v) Tools and special clothing
    allowances.

                                      68
(b) travelling expenses.
(S245-258 337-342 IT(EP) Act 2003)

1. “expenses are necessarily
 incurred on travelling in the
 performance of the duties of the
 employment” (S 337 IT(EP) Act
 2003)
                                    69
(a) Deductible in principle.
  Ricketts v Colquhoun (1926)

   Pook v Owen (1969)

   Taylor v Provan (1975)


                                 70
(b) The amount deductible.
    Marsden v IRC (1965)
2. Special situations. (S198 (1A)
(a) Costs of travel from one place
   of work to another and back are
   deductible.


                                     71
(b) Travel from home to temporary
  place of work and back – cost
  deductible. If paid by employer –
  tax free. (“Temporary” –
  intention to move for less than 2
  years).



                                      72
(c) Late-night taxi fares – tax free.

(d) Mileage allowances – tax free up
  to approved amounts – excess
  taxable.


                                        73
(e) Subsistance payments.

(f) Lorry drivers and other
  “travelling appointments”



                              74
    EMPLOYMENT INCOME –
    CAPITAL ALLOWANCES.
1. General rule: “necessarily
   provided for use in the
   performance of the duties..”

   White v Higginbotham (1983)


                                  75
CHARGES ON INCOME –
 abolished by FA 2007.
1. Charges paid NET (i.e. after
    deduction of income tax at basic
    rate)
Examples:
   Charitable payments (including
    "gift aid").
   Patent royalties.

                                       76
2. Charges paid GROSS (i.e. in full
   without any deduction of income
   tax).
Examples:
  "Qualifying loans - e.g. to
   purchase a share in a
   partnership or close company.

                                  77
    TAX TREATMENT.
1. Charges paid net.
Example.
 X pays gift aid of £100 (net) pa to
  Cancer Concern.
 Gross up - £100 x 100/78 = 128

 Deduct £128 from assessable
  income - and add £28 to the tax
  payable.
                                        78
2. Charges paid gross.
Example.
 Y pays £100 (gross) interest pa on
  a loan to buy into a partnership.
 Deduct £100 from assessable
  income - nothing to add on at the
  bottom as no tax retained.

                                   79
 CORPORATION TAX – FY 2008.
 (1 April 2008 to 31 March 2009).

1. Companies pay corporation tax
  on their “profits”, i.e. income
  profits plus capital gains.
 Income profits: apply income tax

  rules.
 Capital gains: apply CGT rules.




                                     80
2.Basis of Assessment – is the
  Accounting Period – then split
  into Financial Years for tax rates.




                                        81
        RATES OF CT
   RATES OF CORPORATION
    TAX




                           82
   Profits       FY 2008         FY 2007
 Small           0-£300,000      0- £300,000
Companies
                  Rate: 21%       Rate: 20%

   Marginal relief: £300,001 -   £300,001
                     £1,500,000   £1,500,000
                    29.75%        32.5%

                                               83
   Profits    FY 2008      FY 2007

   Main rate: £1,500,001   £1,500,001
                  or more    or more
                  28%             30%



                                     84
3. Self Assessment:
  Co. tax return submitted within
   12 months of the end of its AP.

   Accounts and tax computation
    Sent with the return.


                                     85
   CT must be paid within 9 months
    of the end of the AP.
   Penalties and interest encourage
    submission on time.
    The taxation of dividends.
   (See materials).


                                   86
  CLOSE COMPANIES.
Definition (S414 (1) TA 1988)
(i) a company under the control of
    five or fewer “participators”.
               OR
(ii) controlled by directors who are
    “participators”.


                                   87
             BUT
(iii) co not close if quoted and
  35% or more of the shares
  held by the public.




                                   88
 All private companies.
2. Purpose of “close company”
   classification

(a) Originally: To prevent the
   company structure being used as
   a device to avoid tax, for example
   by turning income into capital.

                                    89
(i) “Statutory apportionment”
  (“SA”).
(ii) The parity of income tax and cgt
rates made this obsolete – so SA
abolished.
(b) Now: to prevent some
  avoidance.

                                    90
3. Consequences of close co
   classification.
(a) Section 418: generally any
   benefit provided for a
   participator is to be treated as a
   dividend – unless it is taxed as
   employment income.

                                        91
Example: see handout.
Therefore:
 The benefit cannot be deducted as
  an expense by the company and it
  cannot claim any CA’s.
 The participator is taxed under

  Part 4.

                                  92
(b) Section 419: Loans to
   participators.

   (See materials).



                            93
 Operating a company –
  Tax repercussions.
(a) wages, salaries, fees etc.
 Co deducts as an expense
   from profits.
 Director liable to income tax
   on employment income.


                                  94
   Co and directors liable to
    national insurance.

   Co must operate PAYE.


                                 95
(b) Dividends.
 Co cannot deduct as an
   expense.
 Director liable under Part 4.




                                  96
(c) Company making loans.
  See “loans to participators”.

(d) Company receiving loans.
  Interest payable.
  Deductible as an expense from
   profits.
                                   97
(e) company receiving interest.
  Banks and B. Societies pay
   interest gross to
   companies…...and
  Taxed under Part 2 (but
   corporation tax payable).


                                  98

				
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