The Taxation of small businesses

492 Pages·2020·6.057 MB·English

by  Malcolm D. James

The Taxation of Small Businesses 2020-2021 2020-
Malcolm James 2021
T
About this publication
a
This is a practical guide to all aspects of direct taxation of small businesses
x
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 a Malcolm James
clear explanation of the relevant legislation and practical advice on ways of t
minimising clients’ tax liabilities and warning against common pitfalls. i
o
The thirteenth edition has been updated to incorporate changes as a result of
n
the Finance Act 2020.

o
The tax advantages of incorporating a small business need weighing
up carefully, and business owners need to decide whether or not the f

advantages outweigh the additional burden of compliance. Major topics
S
covered by the book include:
m
• Taxation of Business Profits,
• Taxation of Employment, The Taxation
a
• Corporation Tax,
l
• National Insurance, l

• Capital Gains Tax,
B
• Inheritance Tax, and M of Small
• Pensions u
a
l s
The author
c
i
o
Malcolm James is the Head of Department of the Accounting, Economics n Businesses
l
and Finance Department at Cardiff Metropolitan University and has m e
lectured widely on the subject of taxation on both professional and
s
J
undergraduate courses. He has also lectured for the Chartered Institute of
a
s
Taxation and written a number of articles for their journal Tax Adviser and m
e
is the Chief Examiner for taxation by the Institute of Financial Services.
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Before becoming a lecturer he worked for several large firms of accountants s s 2020-2021
and also in industry.  

Spiramus
Spiramus provides practical and professional ISBN 9781910151730
publications in tax, accountancy, finance and 90000 >
the laws related to running a business.
For more information contact:
Spiramus Press Ltd Tel: [phone]
102 Blandford Street Email: [email protected]

London W1U 8AG www.spiramus.com 9 781910 151730
United Kingdom
Taxation of
Small Businesses
2020/21

Malcolm James

Cardiff Metropolitan University
First published October 2008

This (thirteenth) edition published September 2020
by Spiramus Press Ltd
102 Blandford Street
London W1U 8AG
Telephone [phone]
www.spiramus.com

© Spiramus Press Ltd

ISBN
9781910151730 Paperback
9781913507022 Ebook

All rights reserved. No part of this publication may be reproduced in any material
form (including photocopying or storing it in any medium by electronic means and
whether or not transiently or incidental to some other use of this publication) without
the prior written permission of the copyright owner except in accordance with the
provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a
licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road,
London W1P 4LP.
British Library Cataloguing-in-Publication Data.
A catalogue record for this book is available from the British Library.

The right of Malcolm James to be identified as the author of this work has been
asserted by him in accordance with the Copyright, Designs and Patents Act, 1988.

Printed and bound in Great Britain by Grosvenor Group (Print Services) Ltd
Preface
This book is intended for advisors to small businesses, whether they are sole
traders, partnerships or small companies. Whilst such businesses may vary
greatly, their affairs will generally be handled by sole practitioners and small
partnerships. This book has therefore been written with their needs in mind
and covers the situations which they are likely to encounter in practice, but is
necessarily not exhaustive. It also recognizes that such practices have limited
resources for reference books and that it is therefore necessary to cover
situations which may be encountered more rarely, but where guidance may
be all the more necessary due to the infrequency with which they occur. For
example, the CGT treatment of assets held at 6 April 1965 and 31 March 1982
is not now relevant to individuals and unincorporated businesses. However,
many small companies may own assets, particularly land and buildings
which were acquired before those dates, therefore these topics have been
included in the book. The book has also attempted not just to set out the law
in a particular area, but also, where appropriate, the practice of HM Revenue
& Customs as set out in their manuals. Whilst such practice may not be a
definitive statement of the law it will generally be prohibitively expensive to
challenge it through the courts and it is advisable to be forewarned of
HMRC’s stance in a particular situation.
I would like to thank everyone at Spiramus Press for their assistance and
comments in the writing of this book and also Wyn Derbyshire for his advice
on Chapter 12 (Pensions).
If any reader has comments for corrections or improvements to the book,
please contact the publisher, and I will delighted to incorporate them into
future editions.
The book reflects the law as at 15 July 2020.
TAXATION OF SMALL BUSINESSES iii
About the author
Malcolm James is the Head of Department of the Accounting, Economics and
Finance Department at Cardiff Metropolitan University and has lectured
widely on the subject of taxation on both professional and undergraduate
courses. He has also lectured for the Chartered Institute of Taxation and
written a number of articles for their journal Tax Adviser and has been
recently appointed as the Chief Examiner for taxation by the Institute of
Financial Services. Before becoming a lecturer he worked for several large
firms of accountants and also in industry.
iv TAXATION OF SMALL BUSINESSES
CONTENTS
Contents
About the author ............................................................................................... iv
Contents .............................................................................................................. v
List of abbreviations .................................................................................... xxvi
Tables of authorities ...................................................................................xxvii
Chapter 1. Income Tax Computation 1
1.1. Aggregation of Taxpayer’s Income ......................................................... 1
1.2. Interest ........................................................................................................ 2
1.3. Limit on Deductions from Adjusted Net Income ................................. 3
1.4. Payments to Charities ............................................................................... 4
1.4.1. Gift Aid scheme ................................................................................... 4
1.4.2. Gifts of land and buildings or shares .................................................. 5
1.5. Personal Allowances Deducted from Net Income ................................ 6
1.5.1. Introduction ........................................................................................ 6
1.5.2. Personal allowance .............................................................................. 6
1.5.3. Transfer of Personal Allowance .......................................................... 7
1.5.4. Blind person’s allowance ..................................................................... 7
1.5.5. Trading allowance ............................................................................... 8
1.5.6. Property allowance.............................................................................. 9
1.6. Computation of Tax .................................................................................. 9
1.6.1. Tax rates ............................................................................................. 9
1.6.2. Scottish and Welsh rates of income tax ............................................. 10
1.6.3. Extension of basic rate band .............................................................. 10
1.6.4. Savings allowance ............................................................................. 10
1.6.5. Dividends Nil Rate Band .................................................................. 11
1.7. Tax Reducers ............................................................................................ 12
1.7.1. Categories of tax reducers ................................................................. 12
1.7.2. Married couple’s age allowance (MCAA) ......................................... 13
1.7.3. Reduction in MCAA ......................................................................... 13
1.7.4. Marriage during tax year ................................................................. 14
1.7.5. Transfer of MCAA ............................................................................ 14
1.7.6. Maintenance payments ..................................................................... 14
1.8. Tax Retained on Interest, Royalties and Gift Aid donations ............. 15
1.9. Comprehensive Example........................................................................ 15
1.10. Death and Separation .............................................................................. 16
1.10.1. Death ................................................................................................. 16
1.10.2. Divorce and separation ..................................................................... 16
1.11. Married Couples – Joint Property ......................................................... 17
1.12. Minor Children ........................................................................................ 17
1.13. High Income Child Benefit Charge ....................................................... 17
TAXATION OF SMALL BUSINESSES v
CONTENTS
Chapter 2. Taxation of Trading Income 19
2.1. Introduction .............................................................................................. 19
2.2. Statutory Definitions of Trading ............................................................ 20
2.3. Statutory Trades ....................................................................................... 20
2.4. Case Law ................................................................................................... 20
2.4.1. Badges of trade .................................................................................. 20
2.4.2. Trading or investment ...................................................................... 20
2.4.3. Profit motive ..................................................................................... 21
2.4.4. Subject matter ................................................................................... 22
2.4.5. Frequency of transactions ................................................................. 22
2.4.6. Length of ownership .......................................................................... 23
2.4.7. Supplementary work ......................................................................... 23
2.4.8. Manner in which assets are acquired and circumstances surrounding sale
......................................................................................................... 23
2.5. Gambling and Speculation ...................................................................... 23
2.6. Illegal Activities ........................................................................................ 24
2.7. Individuals Trading in Shares ................................................................ 24
2.8. Definition of Trading – National Insurance ......................................... 24
2.9. Mutual Trading ........................................................................................ 25
2.10. Election to Use Cash Basis ...................................................................... 25
2.10.1. Conditions for making election ......................................................... 25
2.10.2. Amendments to rules relating to computation of profits .................. 26
2.10.3. Transitional provisions – unrelieved capital expenditure ................. 27
2.10.4. Spreading of adjustment income ....................................................... 28
2.11. Capital and Revenue Receipts ................................................................ 28
2.11.1. General principles ............................................................................. 28
2.11.2. Compensation for loss or sterilisation of profit-making apparatus ... 28
2.11.3. Compensation for loss of profit ......................................................... 29
2.11.4. Compensation for loss of or damage to fixed assets ........................... 30
2.11.5. Compensation and liability to tax ..................................................... 30
2.11.6. Know-how ......................................................................................... 31
2.11.7. Foreign currency transactions .......................................................... 31
2.11.8. Grants ............................................................................................... 32
2.12. Receipts not Received in Course of Trade ............................................ 33
2.12.1. Non-contractual receipts .................................................................. 33
2.12.2. Unclaimed money ............................................................................. 33
2.12.3. Commission, discounts and cashback ............................................... 33
2.12.4. Sponsorship ....................................................................................... 34
2.13. Other Receipts .......................................................................................... 35
2.13.1. Rebates, insurance receipts, damages, statutory payments and interest
......................................................................................................... 35
2.13.2. Release from debts ............................................................................. 35
vi TAXATION OF SMALL BUSINESSES
CONTENTS
2.13.3. Directors’ fees and professional appointments .................................. 35
2.13.4. Rent receivable .................................................................................. 36
2.13.5. Casual receipts .................................................................................. 36
2.13.6. Receipts in kind ................................................................................. 37
2.13.7. Post-cessation receipts ...................................................................... 38
2.13.8. Coronavirus Support Payments ....................................................... 38
2.14. Capital and Revenue Payments ............................................................. 40
2.15. Expenditure Incurred in the Course of a Trade .................................. 41
2.16. Duality of Purpose................................................................................... 43
2.16.1. General principles ............................................................................. 43
2.16.2. Expenditure on meals........................................................................ 43
2.16.3. Business clothing .............................................................................. 44
2.16.4. Travel and motoring expenses .......................................................... 44
2.16.5. Duality of purpose – other items ....................................................... 45
2.17. Repairs and Maintenance ....................................................................... 46
2.18. Replacement of Assets ............................................................................ 46
2.19. Depreciation and Amortisation ............................................................. 47
2.20. Subscriptions and Donations ................................................................. 47
2.21. Sponsorship .............................................................................................. 48
2.22. Bad Debts .................................................................................................. 48
2.23. Provisions ................................................................................................. 49
2.24. Payments to Employees & Appropriations of Profit .......................... 50
2.25. Entertainment........................................................................................... 51
2.26. Gifts to Customers and Samples ........................................................... 52
2.27. Gifts to Educational Establishments and Charities ............................. 52
2.28. Cost of Leasing Cars ................................................................................ 52
2.29. Legal and Professional Fees ................................................................... 53
2.30. Fines and Payments Against the Public Interest ................................. 54
2.31. Interest and Bank Charges ..................................................................... 54
2.32. Pre-trading Expenditure ......................................................................... 55
2.33. Indirect Taxation ...................................................................................... 55
2.34. Compensation and ex gratia Payments to Former Employees .......... 56
2.35. Redundancy Payments ........................................................................... 56
2.36. Removal Expenses to New Business Premises .................................... 57
2.37. Premiums for Insurance ......................................................................... 57
2.38. Payments to Employees for Restrictive Undertakings ....................... 57
2.39. Staff Training and Development ........................................................... 57
2.40. Counselling Courses in Connection with Termination of Employment
............................................................................................................ 58
2.41. Payments to Secure Release from Unprofitable Contracts ................ 58
2.42. Payments to Political Parties .................................................................. 59
TAXATION OF SMALL BUSINESSES vii
CONTENTS
2.43. Preservation of Goodwill ........................................................................ 59
2.44. Payments on the Cessation of Trade ..................................................... 59
2.45. Post-cessation Expenditure ..................................................................... 59
2.46. Rent ............................................................................................................ 60
2.47. Lease Premium ......................................................................................... 60
2.48. Patents and Intellectual Property ........................................................... 61
2.49. Telephone .................................................................................................. 61
2.50. Business Rates and Council Tax ............................................................. 62
2.51. Security Expenditure ............................................................................... 62
2.52. Loan Guarantee Payments ...................................................................... 62
2.53. Use of Home ............................................................................................. 62
2.54. Website Expenditure ............................................................................... 64
2.55. Expenses Connected with Foreign Trades ............................................ 64
2.56. Valuation of Stock .................................................................................... 65
2.56.1. General principles ............................................................................. 65
2.56.2. Appropriations of stock ..................................................................... 67
2.56.3. Long-term contracts .......................................................................... 67
2.56.4. Discontinuation of trade ................................................................... 68
2.57. Overseas Aspects of Trading .................................................................. 68
2.57.1. Chargeability of overseas trades ........................................................ 68
2.57.2. Computation of profits of overseas trades ......................................... 68
2.57.3. Traders not resident in the UK ......................................................... 68
2.57.4. Payments to entertainers and sportsmen .......................................... 69
Chapter 3. Capital Allowances on Plant and Machinery 71
3.1. Introduction .............................................................................................. 71
3.2. Definition of Plant and Machinery ........................................................ 71
3.2.1. Statutory rules .................................................................................. 71
3.2.2. Case law ............................................................................................ 73
3.3. Assets Deemed to be Plant and Machinery .......................................... 74
3.3.1. Thermal insulation of industrial buildings ....................................... 74
3.3.2. Assets acquired for personal security ................................................ 75
3.3.3. Computer software ............................................................................ 75
3.4. Definition of Expenditure ....................................................................... 76
3.4.1. General principle .............................................................................. 76
3.4.2. Grants, subsidies and contributions ................................................. 76
3.4.3. Loan interest ..................................................................................... 76
3.4.4. Exchange rate fluctuations ............................................................... 77
3.4.5. Assets originally acquired for non-qualifying purposes ................... 77
3.4.6. Assets acquired at undervalue .......................................................... 77
3.5. Date of Expenditure ................................................................................. 77
3.6. Disposal of Assets .................................................................................... 78
viii TAXATION OF SMALL BUSINESSES
CONTENTS
3.7. Allowances ............................................................................................... 79
3.7.1. Writing down allowance (WDA)...................................................... 79
3.7.2. Annual investment allowance (AIA) ................................................ 80
3.7.3. Assets elligle for 100% ECA ............................................................. 81
3.8. Calculation of Capital Allowances ........................................................ 83
3.8.1. Categories of plant and machinery .................................................... 83
3.9. Short-life Assets ....................................................................................... 87
3.10. Cessations and Successions .................................................................... 90
3.10.1. Cessations ......................................................................................... 90
3.10.2. Successions ....................................................................................... 90
3.11. Hire Purchase and Leasing .................................................................... 90
3.12. Fixtures...................................................................................................... 91
3.12.1. Definition .......................................................................................... 91
3.12.2. Fixture installed in building in which qualifying activity is carried on91
3.12.3. Transfer of allowances to lessee ......................................................... 92
3.12.4. Equipment leases ............................................................................... 92
3.13. Disposal of Fixtures ................................................................................. 93
3.13.1. Sale of qualifying interest ................................................................. 93
3.13.2. Expiry of qualifying interest ............................................................. 94
3.13.3. Discontinuance of qualifying activity ............................................... 94
3.13.4. Use of fixture for purpose other than qualifying activity .................. 94
3.13.5. Transfer of allowances to lessee ......................................................... 94
3.13.6. Severance of fixture ........................................................................... 94
3.13.7. Fixture which is subject of an equipment lease or is owned by energy
services provider ............................................................................... 94
3.13.8. Merger of interest ............................................................................. 94
3.13.9. Apportionment of sale proceeds ........................................................ 95
3.13.10. Allowances claimed by subsequent owner ........................................ 95
3.13.11. Fixtures – anti-avoidance provision .................................................. 96
3.14. Anti-avoidance ......................................................................................... 96
Chapter 4. Other Allowances 98
4.1. Business Premises Renovation Allowance ........................................... 98
4.1.1. Qualifying expenditure ..................................................................... 98
4.1.2. Qualifying building .......................................................................... 99
4.1.3. Relevant interest ............................................................................. 100
4.1.4. Initial allowance .............................................................................. 100
4.1.5. Writing down allowance ................................................................. 100
4.1.6. Grants and payments towards expenditure .................................... 101
4.1.7. Balancing adjustments .................................................................... 101
4.1.8. Termination of lease ........................................................................ 102
4.2. Patents ..................................................................................................... 103
TAXATION OF SMALL BUSINESSES ix