Taxation of Small Businesses
Fourth Edition

Taxation of Small Businesses is a practical guide to all aspects of direct taxation of a small business in one volume.  It is ideal for sole practitioners and small partnerships, but will be a handy reference guide for all tax advisers. The book aims to give a clear explanation of the relevant legislation and practical advice on ways of minimising clients’ tax liabilities and warning against common pitfalls.

The fourth edition has been updated to incorporate changes as a result of the Finance Act 2011. This includes new legislation on “disguised remuneration” and furnished holiday lettings. 

The tax advantages of incorporating a small business need weighing up carefully, and business owners need to decide whether or not the advantages outweigh the additional burden of compliance.

Major topics covered by the book include: taxation of business profits, taxation of employment, Corporation Tax, NIC, Capital Gains Tax, Inheritance Tax, Pensions, and Entrepreneurs’ Relief.

Chapter 1.           Income Tax Computation              1

1.1.        Aggregation of Taxpayer’s Income            1

1.2.        Interest 2

1.3.        Payments to Charities     3

1.4.        Personal Allowances Deducted from Net Income  5

1.5.        Computation of Tax         7

1.6.        Tax Reducers      8

1.7.        Tax Retained on Interest, Royalties and Gift Aid donations               11

1.8.        Comprehensive Example               12

1.9.        Death and Separation      13

1.10.      Married Couples – Joint Property               13

1.11.      Minor Children   14

Chapter 2.           Taxation of Trading Income          15

2.1.        Introduction       15

2.2.        Statutory Definitions of Trading   16

2.3.        Statutory Trades               16

2.4.        Case Law             16

2.5.        Gambling and Speculation             19

2.6.        Illegal Activities  20

2.7.        Individuals Trading in Shares         20

2.8.        Definition of Trading – National Insurance              20

2.9.        Mutual Trading  21

2.10.      Capital and Revenue Receipts      21

2.11.      Receipts not Received in Course of Trade               26

2.12.      Other Receipts   28

2.13.      Capital and Revenue Payments    31

2.14.      Expenditure Incurred in the Course of a Trade       33

2.15.      Duality of Purpose            34

2.16.      Repairs and Maintenance              37

2.17.      Replacement of Assets    38

2.18.      Depreciation and Amortisation    38

2.19.      Subscriptions and Donations         38

2.20.      Sponsorship        39

2.21.      Bad Debts            39

2.22.      Provisions            40

2.23.      Payments to Employees & Appropriations of Profit             41

2.24.      Entertainment    42

2.25.      Gifts to Customers and Samples  42

2.26.      Gifts to Educational Establishments and Charities 43

2.27.      Cost of Leasing Cars        43

2.28.      Legal and Professional Fees          44

2.29.      Fines and Payments Against the Public Interest      45

2.30.      Interest and Bank Charges            46

2.31.      Pre-trading Expenditure  46

2.32.      Indirect Taxation              47

2.33.      Compensation and Ex gratia Payments to Former Employees          47

2.34.      Redundancy Payments    47

2.35.      Removal Expenses to New Business Premises        48

2.36.      Premiums for Insurance  48

2.37.      Payments to Employees for Restrictive Undertakings          48

2.38.      Staff Training and Development  49

2.39.      Counselling Courses in Connection with Termination of Employment           49

2.40.      Payments to Secure Release from Unprofitable Contracts 50

2.41.      Payments to Political Parties        50

2.42.      Preservation of Goodwill               50

2.43.      Payments on the Cessation of Trade         50

2.44.      Post-cessation Expenditure           51

2.45.      Rent       51

2.46.      Lease Premium  52

2.47.      Patents and Intellectual Property               53

2.48.      Telephone           53

2.49.      Business Rates and Council Tax    53

2.50.      Security Expenditure        53

2.51.      Loan Guarantee Payments            53

2.52.      Use of Home      54

2.53.      Website Expenditure       55

2.54.      Expenses Connected with Foreign Trades 55

2.55.      Valuation of Stock            56

2.56.      Overseas Aspects of Trading         61

Chapter 3.           Capital Allowances on Plant and Machinery            65

3.1.        Introduction       65

3.2.        Definition of Plant and Machinery              65

3.3.        Assets Deemed to be Plant and Machinery              68

3.4.        Definition of Expenditure              70

3.5.        Date of Expenditure         72

3.6.        Disposal of Assets            73

3.7.        Allowances         74

3.8.        Calculation of Capital Allowances              79

3.9.        Short-life Assets 85

3.10.      Cessations and Successions          88

3.11.      Hire Purchase and Leasing             88

3.12.      Fixtures 89

3.13.      Disposal of Fixtures          91

3.14.      Anti-avoidance   94

Chapter 4.           Industrial Buildings Allowance and Other Allowances          97

4.1.        Industrial Buildings Allowance      97

4.2.        Agricultural Buildings Allowance (ABAs)    97

4.2.1.     Qualifying Expenditure    97

4.3.        Business Premises Renovation Allowance               98

4.4.        Flat Conversion Allowances          101

4.5.        Patents 106

4.6.        Know-how          106

Chapter 5.           Basis Periods      109

5.1.        Current Year Basis (CYB) 109

5.2.        Opening Year Rules          109

5.3.        Closing Year Rules            111

5.4.        Tax Planning on Commencement               111

5.5.        Tax Planning on Cessation             112

5.6.        Change of Accounting Date          112

5.7.        Period Less than 12 Months          113

5.8.        Period More Than 12 Months       113

5.9.        Two Accounting Dates in Tax Year             114

5.10.      No Accounting Date in Tax Year  114

5.11.      Transitional Overlap Relief            114

5.12.      Changes in Size and Nature of Operations               115

5.13.      Death of Trader 116

5.14.      Mergers and Demergers 117

5.15.      Date of Commencement and Cessation    117

5.16.      Successions         117

5.17.      Trader Becoming, or Ceasing to be, UK Resident   118

Chapter 6.           Trading Losses   119

6.1.        Introduction       119

6.2.        Offset Against Future Trading Income       119

6.3.        Transfer of Business to a Company            120

6.4.        Offset Against Total Income and Carry-back          121

6.5.        Offset Against Capital Gains         122

6.6.        Losses in the Early Years of Trading           123

6.7.        Terminal Loss Relief         124

6.8.        Tax Planning and Loss Relief         125

6.9.        Restriction of Loss Relief               125

6.10.      Late Claims         125

Chapter 7.           Property Income               127

7.1.        Introduction       127

7.2.        Basis of Assessment         128

7.3.        Dilapidations      128

7.4.        Lease Premiums 128

7.5.        Sale with Right of Conveyance     133

7.6.        Expenditure Deductible   134

7.7.        Sea Walls             136

7.8.        Mutual Business 136

7.9.        Relief for Capital Expenditure       137

7.10.      Losses   139

7.11.      Furnished Holiday Lettings            140

7.12.      Rent a Room Scheme      142

Chapter 8.           Employment and Self-employment            143

8.1.        Introduction       143

8.2.        Benefits of Self-employment        144

8.3.        Definition of Employment and Self-employment   144

8.4.        Tests for Employment     144

8.5.        Workers Supplied by Agencies      149

8.6.        Non-executive Directors 149

8.7.        Self-employment or a Number of Separate Employments  149

8.8.        Provision of Services Through an Intermediary – Income Tax           150

8.9.        Managed Service Companies        155

8.10.      National Insurance – Deemed Employment            158

8.11.      National Insurance – Deemed Self-employment    159

8.12.      National Insurance – Persons Deemed not to be Employed              159

Chapter 9.           Employment  Income      161

9.1.        Income Tax – Introduction, Charging Legislation and General Definitions    161

9.2.        National Insurance Contributions – Charging Legislation and General Definitions     161

9.3.        Income Tax and National Insurance – a Comparison           162

9.4.        Time of Receipt 163

9.5.        Cash Payments to Employees       164

9.6.        Payments Arising by Reason of Employment          164

9.7.        Payments on Termination of Employment or Variation of Employment Terms          168

9.8.        Damages and Compensation Paid to Employee     173

9.9.        Sick Pay and Sickness and Other Benefits  173

9.10.      Commission, Cashbacks and Discounts     174

9.11.      Tax-free Lump Sum Payments      175

9.12.      Payment of Expenses to Third Parties on Behalf of Employee          176

9.13.      Payments for Clothing     177

9.14.      Directorships Held by Partners     177

9.15.      Payment of Employee’s Tax by Employer 177

9.16.      Income Tax – Deduction of Expenses        178

9.17.      Reimbursement of Expenses         180

9.18.      Qualifying Travel Expenses            181

9.19.      Entertainment    183

9.20.      Expenses Incurred by Homeworkers          183

9.21.      Other Deductible Expenses           184

9.22.      Payments and Benefits Exempt from Income Tax and Class 1 National Insurance Contributions     186

Chapter 10.         Benefits in Kind  207

10.1.      Valuation of Benefits in Kind         207

10.2.      Benefits – Definition of Cost         207

10.3.      Lower-paid Employment               208

10.4.      Benefits in Kind and National Insurance Contributions        209

10.5.      Payment of Expenses by Employer             209

10.6.      Gift of Assets to Employees          210

10.7.      Cash Vouchers, Non-cash Vouchers and Credit Tokens       212

10.8.      Payment Made to a Registered Pensions Scheme for the Benefit of Two or More People   216

10.9.      Waiver of Loan  216

10.10.    Job-related Accommodation        216

10.11.    Assets Available for Private Use   222

10.12.    Expenses Connected with Living Accommodation 223

10.13.    Cars       224

10.14.    Fuel for Private Use         229

10.15.    Pool Cars and Vans          230

10.16.    Vans and Heavier Commercial Vehicles     231

10.17.    Emergency Vehicles         232

10.18.    Beneficial Loans               233

10.19.    Scholarships        236

10.20.    Relocation Packages and Guaranteed Selling Price Schemes            237

10.21.    Medical Treatment and Medical Insurance             237

Chapter 11.         National Insurance Contributions               239

National Insurance Contributions and Employees 239

11.1.      Earnings Period  239

11.2.      Aggregation of Earnings 243

11.3.      Rate of Class 1 National Insurance Contributions  248

11.4.      Class 1A Contributions    249

11.5.      Calculation of Contributions         250

11.6.      Class 1A Charge Where Benefits Provided by Third Parties 250

11.7.      Earners over Pensionable Age      251

11.8.      Notional Payments of Class 1 Contributions           252

11.9.      Annual Maximum Contributions   252

National Insurance Contributions and the Self-Employed   253

11.10.    Class 2 Contributions       253

11.11.    Class 4 Contributions       255

Chapter 12.         Pensions              259

12.1.      Introduction       259

12.2.      Scope of Regime              260

12.3.      Registration of Pension Schemes 261

12.4.      Payments by Registered Pension Schemes              262

12.5.      Pension Payments            263

12.6.      Contributions     263

12.7.      Purchase of Shares in Sponsoring Employer            266

12.8.      Loans to Employers         267

12.9.      Unauthorised Payments Charge   267

12.10.    Special Annual Allowance Charge               268

Chapter 13.         Capital Gains Tax              269

13.1.      Scope of Capital Gains Tax (CGT) 269

13.2.      Exemptions         269

13.3.      Residence            270

13.4.      Annual Exemption and Losses      271

13.5.      Offset of Losses against Capital Gains       273

13.6.      Capital Gains Tax Rate    276

13.7.      Disposal Consideration   276

13.8.      Date of Disposal               277

13.9.      Allowable Costs 278

13.10.    Indexation Allowance      279

13.11.    Taper Relief        279

13.12.    Assets Owned at 31 March 1982  279

13.13.    Married Couples               280

13.14.    Disposal to Connected Parties      281

13.15.    Valuation of Assets          282

13.16.    Negligible Value Claim    282

13.17.    Value Shifting     283

13.18.    Disposal by Way of Security          283

13.19.    Hire Purchase Transactions           284

13.20.    Appropriations to and from Trading Stock               284

13.21.    Series of Transactions     284

13.22.    Options 285

13.23.    Debts     286

13.24.    Compensation    286

13.25.    Asset Derived from another Asset              286

13.26.    Location of Assets            286

13.27.    Chattels and Wasting Assets         287

13.28.    Part Disposals     291

13.29.    Leases   292

13.30.    Loss or Destruction of Asset         295

13.31.    Restoration of Assets      296

13.32.    Replacement of Business Assets  298

13.33.    Gift Relief            303

13.34.    Transfer of Assets to a Limited Company 305

13.35.    Entrepreneurs’ Relief       307

13.36.    Losses on Loans to Traders           310

13.37.    Loan Guarantees              310

Chapter 14.         Corporation Tax               313

14.1.      Scope of Corporation Tax             313

14.2.      Trading income  314

14.3.      Loan relationships            318

14.4.      Intangible Fixed Assets    320

14.5.      Derivative Contracts        327

14.6.      Property income               329

14.7.      Chargeable gains              329

14.8.      Indexation Allowance      330

14.9.      Indexation and Losses     331

14.10.    Assets Owned at 31 March 1982  331

14.11.    Assets Owned at 6 April 1965       334

14.15.    Chargeable Accounting Periods   338

14.16.    Computation of Tax Liability         339

14.17.    Corporation Tax – Interaction with Income Tax     344

14.18.    Losses and Corporation Tax          345

14.19.    Groups and Consortia      350

14.20.    Close Companies              359

14.21.    Companies with Investment Business        363

14.22.    Close Investment-holding Companies       364

14.23.    Demergers          365

14.24.    Purchase of own Shares  369

Chapter 15.         Incorporation, Disincorporation and Choice of Business Medium   373

15.1.      Introduction       373

15.2.      Incorporation     373

15.3.      Disincorporation               376

15.4.      Choice of Business Medium          379

15.6.      Salary vs Dividends           384

Chapter 16.         Special Classes of Taxpayers         387

16.1.      Construction Industry Scheme      387

16.2.      Farmers and Market Gardeners    390

16.3.      Authors, Artists and Composers   400

16.4.      Actors, Musicians and Entertainers            400

16.5.      Entertainers – Other Workers       402

16.6.      Builders 402

16.7.      Care Providers    404

16.8.      Barristers             407

16.9.      Bookmakers       408

16.10.    Breweries and Licensed Premises               408

16.11.    Doctors and Dentists       410

16.12.    Motor Dealers – Valuation of Used Vehicle Stocks               411

16.13.    Fishermen           412

16.14.    Franchising          412

16.15.    Solicitors             413

16.16.    Sub-postmasters               414

16.17.    Video and DVD Traders   414

16.18.    Clubs, Societies and other Mutual Organisations   414

16.20.    Credit Unions     421

16.21.    Friendly Societies              422

16.22.    Housing Associations       423

16.23.    Self-build Societies           424

Chapter 17.         Partnerships        425

17.1.      Definitions          425

17.2.      Limited Partnerships        426

17.3.      Limited Liability Partnerships        427

17.4.      Allocation of Profits         428

17.5.      Assessment of Partnerships          429

17.6.      Other Income of Partnership        430

17.7.      Non-trading Partnerships              430

17.8.      Post-cessation Receipts  430

17.9.      Losses   431

17.10.    Notional Losses 431

17.11.    Mergers and Amalgamations        432

17.12.    Restriction on Loss Relief for Limited and Non-Active Partners        432

17.13.    Partnership Property Income        433

17.14.    Corporate Partners          433

17.15.    Partnerships and Capital Gains Tax             434

17.16.    Roll-over and Gift Relief - LLPs     437

 

Index                                   439