Business Tax and Personal Tax (Optional Unit)
Business tax fundamentals
Understand how unincorporated businesses and companies are taxed. For sole traders and partnerships, know the basis of assessment, allowable and disallowable expenses, capital allowances, trading losses and the treatment of drawings (not an expense). For companies, know corporation tax on trading profits, the add-back of disallowable items, capital allowances, and the treatment of dividends received and paid. Know the difference between tax avoidance and tax evasion, and the obligations around registration, record keeping and filing deadlines.
Personal tax fundamentals
For individuals, understand income tax on employment, self-employment and savings income, the personal allowance and its taper, and national insurance contributions. Know how capital gains tax applies to disposals, including the annual exempt amount, allowable costs and reliefs in outline. Understand inheritance tax in outline: the nil rate band, chargeable transfers and the main exemptions. Know the administration: self-assessment, payment on account and penalties for late filing.
Traps and a worked rule
Traps: treating drawings as a deductible expense; forgetting to add back disallowable expenditure such as entertaining; applying the personal allowance without checking the taper for high income; and confusing the tax point with the accounting date. Always check the tax year and rates given in the question.
Worked example: A sole trader has accounting profit £60,000, adds back £2,000 disallowable entertaining and deducts capital allowances of £10,000, giving taxable trading profit of £52,000. Drawings are not deducted. Rule of thumb: start from accounting profit, adjust for disallowables and capital allowances, and never deduct drawings or capital expenditure itself.