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Income Tax: Income: no stat definition. Element of recurrence.

ce. Tax Year: 6/4/10 5/4/11 Statutes: Income Tax Act 2007 (ITA 07), Income Tax (Trading & Other Income) Act 2005 (ITTOIA 05), Income Tax (Earnings & Pensions) Act 2003 (ITEPA 03).

Income Tax Liability: Step One: Calculate Total Income. Step Two: Deduct Allowable Reliefs (= Net Income) Step Three: Deduct Personal Allowances (= Taxable Income) Step Four: Calculate Tax on Taxable Income at appropriate rate. (Starting, Basic & Higher) Step Five: Add Tax from Step Four to give total Tax Liability. Step Six: Deduct anything already paid. Step One: Chargeable Sources of Income (Trading Income, Property Income, Savings & Investment Income, Miscellaneous Income ITTOIA 05)(Employment & Pensions Income ITEPA 03) Exemptions (Social Security inc Child Benefits, Interest National Savings, Interest Damages for PI/Death, Income from ISAs, Dividends in PEPs, Gross Income from Letting Furnished Room up to 4,250, Certain Insurance Payments inc Sickness, Premium Bonds, Contributions from Employer to Approved Pension Scheme) Grossing Up when tax deducted at source on Interest, Dividends & Employment Income. (Interest /8 x10) (Dividends /9 x10)

Step Two: Deduct Allowable Reliefs to find Net Income. (Interest Paid on Qualifying Loan inc loan to buy a share, contribute capital or make a loan to a partnership) (Loan to invest in close trading company) (Loan to PR to pay IHT) Step Three: Deduct Personal Allowance to find Taxable Income. (6,475) (Age 65-75 = 9,490) (Over 75 = 9.640)

Step Four: Calculate Tax using Appropriate Rate:


Rate Starting (0 - 2,440) Income N/A 20% Interest 10% 20% Dividend N/A 10%

Basic (Up to 37,400) Higher (37,400 150,000) Additional (Above 150,000)

40%

40%

32.50%

50%

50%

42.50%

Step Five: Add Tax from Step Four to give total Tax Liability. Step Six: Deduct anything already paid. (Interest, Dividend & Employment Payments deducted at Source) Dates for Payment: 3 instalments. First 2 estimated on basis of previous years profits. Paid on 31/1 of current tax year and 31/7 following end tax year. Balancing payment (or refund) made 31/1 following year. For 2010/11 31/1/11, 31/7/11 & 31/1/12

Calculating Trading Profits: Trading Profit/Loss = Chargeable Receipts Deductible Expenditure Capital Allowances Chargeable Receipts: To be chargeable, receipts of business must derive from its trade and be of an income rather than capital nature. Trade = commercial character whereby trader provides customer with good/service for a reward. (Ransom v Higgs) Result from trading activity Income = any money received for something purchased for re-sale at profit (stock) will be income in nature. Capital Receipts would arise from the sale of an asset.

Deductible Receipts: Expenditure of income nature which has been incurred wholly and exclusively for trade and deduction of which is not prohibited by statute (entertainment). (s34 ITTOIA 05) (Ch4 Part 3 CTA 09) Expenditure of an Income Nature: (i) (ii) Expenditure on an item incurred for purpose of enabling trader to sell at a profit (stock) Element of recurrence (Utilities, salaries, rent, interest on borrowing, stationery, marketing, fuel)

Wholly and exclusively for purpose of Trade: Not a meal while away on business (Caillebotte v Quinn) Not clothing for barrister in Court (Mallalieu v Drummond) Capital Allowances: Capital Allowances Act 2001 (s52-59 CAA 01) - expenditure incurred on certain assets/activities will result in a percentage deduction from the trading profits. Principally Plant & Machinery (office equipment, computers, tools, manufacturing equipment) (apparatus used to carry on business Yarmouth v France) Encourages investment. For each 12 month accounting period taxpayer can deduct a Writing Down Allowance of up to 20% reducing Written Down Value (value of pool of assets) for following year. Year One: 20% of 15k = 3k WDA leaves 12k as WDV Year Two: 20% of 12k = 2400k - WDA leaves 9600 as WDV Year One: 20% of 9600 = 1920 - WDA leaves 7680 as WDV Sale Assets: If asset sold will be necessary to compare WDV with sale price. If profit made will form part of years chargeable receipts. Pooling: Traders own more than one item plant/machinery so all assets pooled together and WDA given on whole pool. If asset sold the price (Total Disposable Receipts) is deducted from the WDV at start of accounting period (Available Qualifying Expenditure) New WDA will be WDV at AQE minus TDR. Then minus WDA from WDV. (Eg: 80k WDV at AQE - 20k TDR (disposal) = 60k. WDA of 60k = 12k. New WDV = 48k.) Annual Investment Allowance (AIA): Ongoing business. Maximum 100,000. First 100,000 of fresh qualifying expenditure on plant/machinery wholly deductible.

Capital Allowance: AIA on first 100k of new expenditure. WDV now remaining 30k + 80k existing = 110k. WDA = (20% of 110k) + 100k = 122k Capital Allowance. Special Rules: Life Long Assets (expected working life of 25 years) and Integral Features (escalators, lighting, air con) less generous WDA of 10%. Form special rate pool. Energy Saving Assets: first year allowance of 100% on assets certified as energy saving by HM Treasury in addition to AIA. Cars: WDA complex dependent on emissions. Accounting Periods: Business accounting period usually 1/1 to 31/12 while tax year 6/4 to 5/4. First Year: in first tax year tax assessed on profits made in that tax year, ie: from date commencement (1/1/10) to following 5/4/10 for 2009/10. Second Year: based on normal year but may be some overlap profit, ie: profit 1/1/10 31/12/10 assessed as part of 2010/11 inc first year profits which have already been taxed. Normal Rule: tax assessed on profits of 12 month accounting period which ends in that tax year, ie: profits from 1/1/10 31/12/10 from part of tax year 2010/11. Closing Year: Assessed on profits from end last accounting period to end business less deduction for any overlap. Tax Relief: