BUSINESS LAW AND PRACTICE
CHAPTER 7 TRADING PROFITS AND VAT
Full expensing
The ‘super deduction’ came to an end on 1 April 2023 and was replaced with full expensing.
Full expensing (FE) applies to companies only and not unincorporated businesses. It allows companies to deduct 100% of the cost of plant and machinery purchased in the relevant accounting period from chargeable receipts. Unlike the annual investment allowance (AIA), it is uncapped. It is likely that full expensing will end on 31 March 2026, although it may be extended.
Revision tip
It is important to be aware of the crucial differences between the AIA and FE, even though the percentage allowance is the same for both. FE is uncapped and applies to companies and to brand new assets only. AIA is capped, applies to unincorporated businesses as well as companies and to assets in any condition (new, second-hand and refurbished).
The VAT registration threshold is now £90,000.
CHAPTER 8 INCOME TAX
Important update – 2024/25
Please note the following:
Dividend rates have increased as follows:
- Basic rate 8.75%
- Higher rate 33.75%
- Additional rate 39.35%
The dividend allowance has been reduced to £500
The additional rate threshold has been reduced to £125,140
The personal allowance remains £12,570
The marriage allowance is now £1,260 and the blind person’s allowance is £3,070
The basis of assessment to income tax for unincorporated businesses (including partnerships) has changed.
Calculation of IT: sole traders
For SQE1, you need to have a good working knowledge of how IT is calculated for sole traders.
A sole trader will prepare accounts for the business for an ‘accounting period’ (usually 12 months) to show how much profit/loss has been made (see Chapters 5 and 7). The accounting period will not always match the IT year, so it is necessary to know the rules for assessment of trading profits.
If the business has made a profit, IT is payable on those income profits. If the business has made a loss, relief may be available (see Chapter 7).
Basis of assessment
The rules relating to the basis of assessment of the income profits of unincorporated business (ie sole traders and private individuals in partnerships) were simplified from the tax year 2023/24.
Where an accounting period does not correspond with a tax year, profits or losses will be apportioned between the relevant tax years, generally on a daily basis (ie the number of days of the accounting period that fall within the relevant tax year).
Calculation of IT: partners
For SQE1, you need to have an appreciation of the way in which the income profits of partnerships are determined and assessed. The rules relating to the basis of assessment of the income profits of unincorporated business (ie sole traders and private individuals in partnerships) were simplified from the tax year 2023/24. Allocation and appropriation of profits between the partners is considered further in Chapter 5.
Partnerships generally
A partnership will be charged IT on the income profits the business makes in the same way as sole traders (see Chapter 7).
The basis of assessing the taxable profit of the business for any given tax year is the same basis as applies to sole traders.
The taxable profit is apportioned between the partners as agreed between them for the relevant accounting period (see Chapter 5). This could be under the default provisions of the PA, a formal partnership agreement, or some other express or implied agreement between them.
Partners are separately taxed on their own share of the partnership’s profits and each partner is liable to pay their own tax. It is not a partnership liability as the partnership is not a separate legal entity.
If the partnership has made a loss, each partner may choose what type of relief to claim in respect of their share of the loss (see Chapter 7).
Change of partners
When the composition of a partnership changes (eg a partner leaves or a new partner joins), profits or losses will be apportioned between the relevant tax years. This is because for each individual partner, the business begins when they become a partner and ends when they cease to be a partner.
CHAPTER 9 CAPITAL GAINS TAX
Important update – 2024/25
Please note the following:
The annual exemption is now £3,000 for the tax year 2024/25.
For the tax year 2024/25, gains made up to and including 29 October 2024 (see below) on the disposal of residential property (which is not exempted by principal private residence relief) are at an upper rate, which means that such gains falling below the basic rate threshold will be taxed at 18% and above the threshold at 24%
The recent budget has amended the relevant rates of CGT for part of the current tax year, with new rates applying from 30 October 2024.
The relevant rates are as follows –
6 April 2024 to 29 October 2024
- 10% – basic rate
- 20% – higher rate
- 18% – basic rate residential property gains
- 24% – higher rate residential property gains
- 10% for gains qualifying for Business Asset Disposal Relief
30 October 2024 onwards
- 18% – basic rate (including residential property gains)
- 24% – higher rate (including residential property gains)
- 10% for gains qualifying for Business Asset Disposal Relief
The lifetime limit for investors’ relief reduced to £1m for qualifying disposals on or after 30 October 2024
CHAPTER 10 CORPORATION TAX
Important update – 2024/25
Please note the following update:
There are now three applicable rates for corporation tax.
Up to and including FY 2022, all companies were taxed at a flat rate of 19%.
With effect from FY 2023, the rate of tax is determined by the level of the company’s taxable profits in the accounting year:
- Companies with taxable profits of up to £50,000 are subject to a standard small profits rate of 19%.
- Companies with taxable profits of more than £250,000 are subject to the main rate of 25% (on the taxable profits in their entirety).
- Companies with taxable profits above £50,000 but not exceeding £250,000 are subject to a marginal rate.
The small profits and marginal rates do not apply to certain types of close companies.
With the marginal rate the profits are taxed at 25% with marginal relief applying to reduce the sum payable. The level of relief decreases as the profits get closer to £250,000. The idea is to soften the transition into the main rate. For convenience, where the marginal rate applies, tax can be calculated by taxing the first £50,000 at 19% and the balance at 26.5%.
The levy payable when a close company makes a loan to a participator is now 33.75%