ACCA F6 UK

ACCA Paper F6 (UK) Taxation (UK) For exams in 2012

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Notes

ExPress Notes ACCA F6 Taxation UK

Page | 2 © 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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Contents

About ExPress Notes 3

1. Introduction 7

2. Income tax – an introduction 9

3. Income Tax – Employment Income 12

4. Income Tax – Trading Income 16

5. Capital Allowances 19

6. Trading Income – Basis Assessment 23

7. Trading Losses (For Sole Traders) 25

8. Trading Income - Partnerships 28

9. Property Income 30

10. Investment Income 32

11. Pensions 34

12. National Insurance Contributions 36

13. Corporation Tax 38

14. Chargeable Gains (For Companies) 44

15. Corporate Groups and Overseas Tax Issues 46

16. Capital Gains Tax (CGT) 49

17. Inheritance Tax (IHT) 54

18. Value Added Tax (VAT) 59



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Chapter 1

Introduction

START The Big Picture

Paper F6 (UK) introduces candidates to the core principles of taxation in the UK. The paper is mainly computational and there are 5 compulsory questions in the exam.

Taxation can get very complicated with a number of detailed calculations and lots of intricate rules to remember. A successful candidate must have a good understanding of the core areas of taxation. It is vital therefore that candidates understand the key areas and do not get bogged down in the detail.

The main taxes are:

• Income tax – payable by individuals • Corporation tax – payable by companies • Capital Gains tax (CGT) – payable by individuals (companies pay corporation tax

on their capital gains) • Value Added Tax (VAT) – payable by both companies and unincorporated

businesses • National Insurance Contributions (NIC) – not strictly a tax but payable by

individuals and employers.



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Question 1 in the exam will focus on income tax and question 2 will focus on corporation tax.

Paper F6 has a comprehensive syllabus. These ExPress notes are designed to provide guidance on the core areas of the syllabus. Whilst we believe that the items contained herein have a strong chance of being examined, no guarantee can be provided as to what will be examined.

Taxation legislation can change rapidly. These notes are designed to provide assistance for students taking the F6 (UK) ACCA exam in 2012. These notes should not be used for any other purpose.

The ExP Group explicitly denies liability for any action taken as a result of using these notes. The ExP Group does not warrant in any form that these notes represent the tax legislation as at the date of reading of these notes.



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Chapter 2

Income Tax – An Introduction


Income tax is a key area and will be examined.

KEY KNOWLEDGE Income Tax – An Introduction

Individuals who are UK tax resident will be taxed on their worldwide income.

The period of assessment is the tax year. The tax year runs from 6 April to 5 April. For example, the tax year 2011/12 runs from 6 April 2011 to 5 April 2012 (2010/11 runs from 6 April 2010 to 5 April 2011 and so on)

All of an individual’s income arising in the tax year will be assessed in the tax year.



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KEY KNOWLEDGE Pro-forma Tax Computation – 2011/12

This is the base document for calculating an individual’s liability to income tax.

The pro-forma income tax computation is as follows:

INCOME TAX COMPUTATION – 2011/12

£ Employment income 10,000

Trading income 25,000

Property income 5,000

Bank interest (x 100/80) 1,000

UK dividends (x 100/90)

Total income 1,000

42,000 Less: reliefs

Net income (2,000)

40,000 Less: Personal allowance (PA)

Taxable income (7,475)

32,525

Certain income is exempt from income tax including:

• Income from certain National Savings Products • Income from Individual Savings Accounts (ISA) • Gambling or betting winnings

Personal Allowances (PA)

Every tax payer is entitled to a PA. For 2011/12 this amount is £7,475. It is an income tax personal allowance and cannot be set against any other tax liability such as CGT.

The PA is deducted from an individual’s income to give taxable income.

From 2010/11 the PA is reduced for individuals with income >£100,000.

The reduction is based on adjusted net income (ANI).



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Adjusted Net Income:

Net income X

Less: gross gift aid donations X

Less: gross personal pension contributions X

ANI X

If ANI is >£100,000, the PA is reduced by 50% x (ANI - £100,000). Therefore, individuals with ANI >£114,950 do not get a PA. Personal Age Allowances (PAA)

Individuals who are aged ≥ 65 years old are entitled to a PAA (in effect, a higher rate of PA).

Individuals aged 65 – 74: 2011/12 PAA = £9,940

Individuals aged ≥ 75: 2011/12 PAA = £10,090

The PAA is given in full in the year the individual becomes 65 or 75.

The PAA is aimed to protect elderly people with lower incomes. If however a person who is entitled to a PAA has ANI above £24,000 (2011/12) the PAA is reduced by:

50% x (ANI - £24,000)

The PAA can never be reduced to less than the standard PA (£7,475) but note that if an individual has ANI > £100,000 there will be a reduction in the PA as mentioned above.

Income Tax Liability and Income Tax Payable

Once the taxable income has been calculated, the income tax liability can be calculated. Note that taxable income is after Personal Allowances.

The rate of income tax depends on the type of income.

Employment income, trading income, property income and bank interest (i.e. all income except dividends) are taxed at the following rate for 2011/12:

Basic rate £1 to £35,000 20%

Higher rate £35,001 to £150,000 40%



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Additional rate £150,001 and above 50%

Income tax on Dividend income is either at 10%, 32.5% or 42.5%.

The summarised income tax rates are:

Other income

Saving income *

Dividend income

£1 to £35,000 20% 20% 10%

£35,001 to £150,000 40% 40% 32.5%

£150,001 and above 50% 50% 42.5%

(these rates will be provided in the exam)

* Note that special rates of tax may apply to savings income if it is in the first £2,560 of income.



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Chapter 3

Income Tax – Employment Income

The Big Picture

Employment income represents all income and benefits an individual receives from his or her employment.

KEY KNOWLEDGE Income Tax – Employment Income

Earnings

Earnings are taxed on the receipts basis. i.e. the amount of earnings received in the tax year. There are special rules for directors to prevent them manipulating the receipt date.

“Earnings” include salaries, wages, bonuses and benefits received by an individual.

As an example, if an individual receives a salary of £20,000 and benefits of £6,500 his total employment income will be £26,500. This figure then goes to the income tax computation.



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Benefits

Benefits are regularly tested at Paper F6.

Exempt benefits include:

• One mobile phone. • Relocation and removal expenses up to £8,000. • Employer funded training (if training relevant for the job). • Staff canteen or restaurant (provided it’s made available to all employees)

The calculation of the taxable benefit is reduced proportionally if the benefit is provided for only part of the tax year.

In most cases, contributions towards the provision of the benefit are deducted in the calculation of the benefit.

Assessable benefit – Living Accommodation

An employee provided with living accommodation as a result of his employment and which is not exempt job related accommodation would be assessed as follows:

Benefit

All properties

Higher of: 1. Annual value of the accommodation

(figure will be given in the exam). 2. The rent paid by the employer.

Additional charge for “expensive properties” (Cost* minus £75,000) x official rate of interest (interest rate will be provided in the exam).

* If the employer acquired the property more than 6 years before providing it to the employee the market value, when first provided to the employee, should be used rather than cost.

Assessable benefit – motor cars

This is one of the most common benefits provided to employees and is examined on a regular basis.

Benefit:



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List price when new x “relevant %”.

Note the list price is the published brochure price when the car was first registered.

The relevant % depends on the CO2 emissions of the car with the broad concept being that the more un-environmentally friendly the car is the higher the tax charge.

For petrol cars the % is calculated as follows:

CO2 emissions ≤75 grams

% (for petrol cars) 5%

76 - 120 grams 10% 121 to 125 grams 15%

Each complete 5 grams above 125 grams Add an additional 1% to the 15% up to a maximum of 35%.

For diesel cars 3% is added to the figures above but the maximum is still 35%.

EXAMPLE 1 Petrol Car

John is provided with a petrol car with a list price of £22,000 and CO2 emissions of 147 grams. He makes a contribution of £100 per month for the use of the car.

Answer 1:

Percentage:

Base % 15% Plus 1% for each complete 5 grams of CO2 above 125 grams (i.e. 125 to 145 = 4%)

4%

Relevant % 19% % x list price = 19% x £22,000 £4,180 Less contributions (£100 x 12 months) (£1,200) Taxable benefit £2,980

Note that the benefit present when a car is provided is inclusive of servicing and maintenance costs but does not include any private fuel that is paid for by the employer.



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Assessable benefit – private fuel

Some employers may pay all or part of the private fuel bill of an employee. The provision of fuel for private use is a separate benefit from the provision of a car.

The benefit is calculated as follows:

“Relevant %” as calculated for the car benefit x “base figure”.

For 2011/12 the base figure is £18,800 and will be given in the exam.

Using the previous example, if the individual had been provided with fuel for private use the calculation of the benefit for the provision of private fuel would be:

(“Relevant %” as calculated for the car benefit x “base figure”) =

19% x £18,800 = £3,572.

Assessable benefit – private use of vans

The benefit for the private use of a van is a flat rate scale of £3,000 pa.

Private use of employer’s assets

For private use of assets other than cars, vans and mobile phones (which have different rules) the general rule is that the benefit is:

20% of an asset’s market value at the time it was first provided.

Gift of asset – no previous private use.

If an employer buys an asset and then it is given to an employee the benefit is the cost of the asset to the employer.

Gift of asset – after previous private use

If an asset has been used by an employee and then given to him the benefit is calculated as follows:

Higher of:

1. The market value of the asset when gifted. 2. The market value of the asset when first made available less the benefits assessed

on the individual during the time the individual used it but didn’t own it.



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Chapter 4

Income Tax – Trading Income


Trading income is a very important part of the syllabus and is almost always examined in one way or another.

KEY KNOWLEDGE Income Tax – Trading Income

A person receives trading income if he has his own “business”. A person who receives trading income is known as one of the following:

• a “sole trader” • self employed • independent consultant

A person who is employed by a company receives employment income and not trading income.



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Note that a person can receive both employment income (e.g. he has a part time job) and trading income (e.g. he has a part-time business whereby he trades by selling items on eBay)

Badges of trade

This is the term which refers to various tests (or badges) to ascertain whether a particular transaction that an individual undertakes is a capital item (and hence treated under CGT) or a trading item (and hence treated under income tax).

Badges:

1. Subject matter – are the items that were transacted typically items that are used for trading?

2. Frequency of transactions – the more often the transaction is undertaken the more likely it is that the item will be trading.

3. Length of ownership – a shorter period of ownership is more likely to indicate trading.

4. Profit motive – a clear indication to make a profit may indicate a trading item.

5. Supplementary work and marketing – additional work undertaken on the items to make them more marketable may indicate trading.

6. Method of acquisition – an involuntary acquisition of the item (e.g. through inheritance) may indicate capital.

Basis of assessment

An individual who is self employed must prepare accounts. These accounts can be for whatever accounting period end that he chooses. The accounts are then adjusted for tax purposes to get the trading income figure (see adjustment of accounting profit section below).

The trading income figure is then assessed on the individual using the current year basis rules. This is where the trading income assessed in a tax year is the amount in the 12 month accounting period ending in that tax year.

For example, an individual that prepares accounts to 31 December and has adjusted trading income of £35,000 for the year ended 31 December 2011 would have trading income of £35,000 in the tax year 2011/12.



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Adjustment of the accounting profit

An individual’s accounts must be adjusted to obtain the tax adjusted trading profit.

Tax adjusted trading profit

Net profit per accounts 28,000 Add: Disallowed expenditure 5,000 Taxable trading income not included in accounts 4,250

9,250 37,250

Less: Income included within the accounts but not taxable as trading income 1,000

Expenditure not in the accounts but allowable as a trading deduction 250

Capital allowances 3,000 Tax adjusted trading profit

(4,250) 33,000

Disallowable expenditure

General rule – Only expenditure incurred wholly and exclusively for the purposes of the trade is allowable.

Some of the more common forms of disallowable expenditure include:

• Capital expenditure

• Depreciation or amortization charges

• Appropriations (withdrawals) of funds from the business by the sole trader

• Excessive salary paid to a sole trader’s family member

• 3rd

party entertaining (note that employee entertaining is allowable)

• The write off of a non-trade debt

• Subscriptions that are not related to the trade

• Gifts to customers are disallowable unless they satisfy all of the following:

o Cost less than £50 per recipient per year o The gift is not food, drink or tobacco o The gift carries the name, logo or advert for the business



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Chapter 5

Capital Allowances


Depreciation is an accounting adjustment. There are various methods that a business can use to calculate depreciation. For example, straight line method and reducing balance method.

Chapter 4 told us that depreciation charged to the income statement is not an allowable expense and instead is added back in the calculation of the tax adjusted trading profit.

KEY KNOWLEDGE Capital Allowances

Capital allowances are tax allowable amounts that are calculated according to set specific rules. In simple terms, capital allowances could be regarded as the tax equivalent of the accounting depreciation charge.

Capital allowances are claimed on qualifying expenditure incurred on “Plant” (defined) and “Machinery” (not defined)



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Plant and Machinery (P&M)

P&M includes a number of items. The most common ones found in the exams include:

• Machinery • Vehicles (cars and lorries) • Computers (hardware and software) • Office furniture and equipment • Moveable partitioning

Writing down allowance (WDA)

An annual WDA of 20% is given on a reducing balance basis.

Annual Investment Allowance (AIA)

The AIA is a 100% allowance for the first £100,000 spent on P&M by a business in its 12 month accounting period.

• Available to all businesses. • Not available on cars. • For accounting periods >12 months or <12 months (long or short accounting

periods), the £100,000 is pro-rated. • If a business spends more than £100,000 in a 12 month period, the first £100,000 is

eligible for AIA and the balance is eligible for WDA.

Motor cars – purchased on or after

Cars purchased on or after 6 April 2009 are treated according to their CO2 emissions.

6 April 2009

Cars do not qualify for AIA. However, any expenditure on a low emission car (i.e. CO2 ≤110g/km) will qualify for a First Year Allowance of 100% instead of the WDA.

CO2 Emissions

≤110g/km

Treatment

100% FYA

111 – 160 g/km Include in general pool (no AIA or FYA)

≥160 g/km Eligible for 10% WDA (part of special rate pool)



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Motor cars – purchased before

Cars purchased before 6 April 2009 are treated according to their cost.

6 April 2009

AIAs are not available on cars.

Cars costing £12,000 or less:

These are included in the general pool.

Cars costing more that £12,000:

These are classified as “Expensive cars” and are kept outside of the general pool and instead are shown in a separate column for each expensive car.

The maximum WDA for an expensive car is £3,000 pa.

Once the written down value of the car is below £15,000 the WDA is calculated as 20% of the balance.

Note that the car always remains in the separate column even when the balance falls below £12,000.

Private use assets

If the sole trader uses an asset partly for business purposes and partly for private purposes, the asset is kept in a separate column and only the business proportion of the asset is eligible for capital allowances.

Note that private use assets are only present for individuals. Companies never have private use assets in their calculation as companies never use assets privately!

Special Rate Pool

Qualifying expenditure on long life assets (assets with a life >25 years) or high CO2 emission cars (which are privately used by owner of a business) attract a WDA of 10% rather than 20%.



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Chapter 6

Trading Income – Basis Assessment


Chapter 4 introduced the concept of the Current Year Basis (CYB) whereby the adjusted trading profit in an accounting period is assessed in the tax year in which the accounting period ends. There are a number of other rules which need to be looked at.

KEY KNOWLEDGE Trading Income – Basis Assessment

Opening Year Rules

There are special rules for when a sole trader commences business:

Year 1. The profits assessed in year one are the “actual basis”. This is the adjusted profits from the commencement of business until the following 5 April.

Year 2. If there is a 12 month period of account ending in the 2nd

tax year then use the CYB. If there is not a 12 month accounting period then use one of the following:



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Period of Account

Period Assessed

a) the period of account is less than 12 months after commencement

1st

b) the period of account is more than 12 months after commencement

12 months of trading.

The 12 months ended on the accounting date.

c) there is no period of account ending in the 2nd

tax year

The actual profits between 6th April and 5th

April.

Year 3. Assess the 12 months ended on the accounting date in that year. This will normally be the CYB.

As a result of the above rules there is a possibility that profits for certain periods will be assessed in more than one year. These profits are known as “overlap profits”. These overlap profits are carried forward and usually deducted from the assessment in the year the business ceases.

Ongoing business rules

These rules have already been discussed and are the adjusted profits for an accounting period that end in a particular tax year. This is known as the CYB.

Change of accounting date

There are special rules for when a sole trader changes accounting date.

Closing year rules

The broad idea here is that when a business ceases there will be no periods which have not been taxed.

The calculation method is as follows:

1) Identify the tax year in which the business ceases. 2) For the penultimate tax year, identify the CYB assessment. 3) Calculate the profits for the period from the date last assessed in 2) above until the

date of cessation and from this figure delete any overlap profits.



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Chapter 7

Trading Losses (For Sole Traders)


When an individual has a tax adjusted trading amount which is negative, he has a trading loss.

The trading profit

A trading loss may be offset against certain other income in accordance with the rules discussed in this chapter.

figure is £nil.

The main reliefs are:

• Carry forward of the trading loss against future trading profits.

• Offset the loss against total income in the year of the loss and / or the preceding year.

• If a claim against total income has been made there is an optional claim against chargeable gains in the tax year of the loss and / or the preceding tax year.



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• Offset of opening year loss against total income

• Offset of terminal loss against previous trading profits

Carry forward of trading loss

The trading loss is carried forward and set against the first available profit from the same trade.

The amount of the loss to be set off is as much as possible.

Offset of loss against total income

The loss can be offset against total income in the year of the loss and / or the preceding year.

As an example, a loss in an accounting period ending 31 December 2011 arises in the tax year 2011/12 (under CYB). The loss could therefore be offset against total income in either 2011/12 or 2010/11.

Loss relief under this method is optional and subject to a claim by the individual.

The loss relief is against total income. Total income is before the offset of Personal Allowances (PA) and therefore there is a risk that utilising a loss under this method could result in the PA being wasted.

Relieving trading losses against chargeable gains

If a loss remains after a claim against total income a trading loss in 2011/12 can be offset against chargeable gains in 2011/12 and / or 2010/11.

Offset of opening year loss against total income

A trading loss incurred in the first 4 tax years of operation can be offset against total income from the 3 years preceding the tax year of the loss. The loss is offset on a FIFO basis (i.e. against the earliest year first)

Offset of terminal loss against previous trading profits

Unrelieved trading losses of the last 12 months of a business’s activity can be relieved against:

1) Trading profits in the year of cessation, and 2) Carried back and offset against trading profits for the 3 preceding years on a LIFO

basis.



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Chapter 8

Trading Income - Partnerships


In simple terms, partnerships are collections of sole traders that are working together. Profits from a partnership need to be allocated between the partners and then each partner includes their share of the partnership profit as trading income within their own income tax computation.

The profits for the partnership are firstly adjusted to obtain the tax adjusted trading profit (as per the adjustments required for a sole trader mentioned at chapter 4).

The tax adjusted partnership profits are then allocated to each partner.

Calculation

The tax adjusted profits of the partnership are allocated to the partners in accordance with their partnership profit sharing arrangements. Partners may be entitled to a fixed element such as “salary” or interest on loans and these amounts are withdrawn first.

Example: Andrew and Barry are in partnership sharing profits equally after allocating a salary of £10,000 to Andrew. In the year ended 31 December 2011, the adjusted trading profits of the partnership were £50,000.



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Y/E 31/12/11 Total Andrew Barry

Salary £10,000 £10,000 -

Balance to allocate (1:1) £40,000 £20,000

Trading profits

£20,000

£50,000 £30,000 £20,000

The accounts end on 31 December 2011. Therefore under the CYB the trading profits will be assessed in 2011/12 with Andrew being assessed on £30,000 and Barry on £20,000.

Loss relief in partnerships

Trading losses are allocated between the partners in the same manner as trading profits are. Each partner can decide how they obtain relief. For example, partner A could carry the loss forward whilst partner B decides to offset against current year total income.



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Chapter 9

Property Income


Property income represents income received by an individual from property.

Property business profits

This represents rental income received by a landlord.

The assessable property income on an individual is calculated as follows:

Rental income 12,000

Less: deductible expenses

Assessable property income

2,500

9,500

Income and expenses are treated according to the accruals concept and if the individual has more than one property the income and expenses are combined together in the calculation.

The rules concerning whether expenses are deductible broadly follow the rules found within trading income. Examples of deductible expenses include interest on a loan to acquire the property, insurance, etc.



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Losses on property are offset against any property income in the year of the loss. If there are any unrelieved property losses they are carried forward and offset against future property income.

Furnished holiday lettings (FHL)

Property lettings which qualify as FHL have a number of taxation advantages.

There are various requirements for a letting to be able to qualify as FHL. Broadly speaking the furnished property must actually be let for 70 days a year, on a commercial basis and be available to let for 140 days a year. Long term lets must not exceed 155 days.

There are various advantages of being treated as a FHL. One of them being that the losses are treated as though they are trading losses and therefore can be offset against other income.

Premiums received on the grant of a short lease

A short lease is a lease for 50 years or less.

Part of the premium received will be treated as though it was property income received by the landlord. The property income proportion of the premium received will be calculated as follows:

The premium

Less: 2% x (length of lease – 1) x premium

Example: Premium: £20,000; Length of lease: 15 years

Premium received 20,000

Less: 2% x (length of lease – 1) x premium [2% x (15-1) x 20,000]

Property business income

(5,600)

14,400

Rent a room relief

Gross annual rent of £4,250 and below received for the “rent of a room” in a person’s main residence is exempt.

If an individual receives such rent in excess of £4,250, the individual can either:

1) Choose to pay tax on the excess of the rent over £4,250 or, 2) Be taxed in the normal way for property income (rent minus expenses).



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theexpgroup.com

Chapter 10

Investment Income

Savings income - Bank and Building Society interest

Note that for the purposes of the exam; assume that a Bank and a Building Society is the same thing.

Bank interest is received net of 20% tax by individuals. In other words, individuals receive interest after tax of 20% has been withheld by the Bank and paid to HMRC on behalf of the individual.

An individual must show the gross figure of any interest received in their tax computation. The gross amount is the amount including the tax withheld by the bank.

Example:

An individual receives bank interest of £800.

The gross amount of interest shown in the income tax computation is:

£800 x 100/80 = £1,000

The tax withheld by the Bank is £200 (£1,000 - £800). Any tax withheld can be used by the taxpayer to offset against his tax payable.

Rate of tax on savings income

Savings income is normally taxed at the same rates as “other income” (see Chapter 2).

However, a starting rate of tax of 10% will apply to the first £2,560 in certain circumstances.



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theexpgroup.com

To ascertain whether this 10% rate applies, savings income goes “on top” of other income. If the savings income is within the first £2,560 of taxable income then the 10% rate applies to the savings income.

Dividend income

As with savings income, dividends are received net so will need to be grossed up.

Dividends are deemed to be received net of a notional tax credit of 10%. Dividend income needs to be grossed up as follows:

Dividends received x 100/90

The tax credit of 10% can be set against the individual’s tax payable.

Rate of tax on dividend income.

Dividends are treated as being the top part of an individual’s income and “go on top” of other income and savings income. Dividends are then taxed as follows:

Dividend income in the basic rate band (the first £35,000): 10%

Dividend income in the higher rate band (£35,001 to £150,000): 32.5%

Dividend income in the additional rate band (above £150,000): 42.5%



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theexpgroup.com

Chapter 11

Pensions


Pensions are in effect tax efficient retirement savings scheme.

KEY KNOWLEDGE Pensions

There are two main types of pension schemes:

1. Occupational pension schemes (certain employees) 2. Personal pension schemes (employees, sole traders and unemployed)

Individuals can make contributions to a pension scheme of any amount but will only be eligible for tax relief on contributions as follows:

The higher of:

1. £3,600, and



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2. 100% of the individual’s “relevant earnings” (relevant earnings include trading profits and employment income)

Method of obtaining relief – occupational pension scheme

Payments to an occupational pension scheme obtain tax relief at source. The pension payment made by the employee is deducted from the employment income and the employer calculates PAYE on the net amount.

If an employer also makes contributions to the employee’s occupational scheme, those deductions are tax deductible in calculating the employer’s trading income. The contributions will not be treated as a benefit on the employee.

Method of obtaining relief – personal pension scheme

Basic rate tax relief – relief is given automatically as the contributions are made net of the basic rate of income tax (20%).

Higher rate tax relief – relief is given by “extending the basic rate band”. If an individual pays a contribution of £8,000 (net), the contribution is “grossed up” by 100/80 to obtain a gross contribution of £10,000.

The basic rate band of £35,000 is then extended by the gross contribution of £10,000 to obtain a revised basic rate band of £45,000.

The additional rate threshold is extended to £160,000 (£150,000 + £10,000).



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theexpgroup.com

Chapter 12

National Insurance Contributions

National Insurance Contributions (NIC) are not tax as such. Instead they are social security contributions which are payable in addition to any taxes that may be due.

There are various classes of NIC:

Class Payable by

Class 1 primary Employee

Class 1 secondary Employer

Class 1A Employer

Class 2 Self employed

Class 4 Self employed

Class 1 primary and secondary NIC calculated as a % on gross earnings (in effect on cash remuneration such as salary and bonuses but not on most benefits) over £7,225.

The percentages are

Class 1 Employee £1 - £7,225 per year £7,225 - £42,475 per year Above £42,475

Nil % 12.0 %

2.0%



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theexpgroup.com

Class 1 Employer £1 - £7,072 per year Above £7,072

Nil % 13.8 %

Class 1A NIC is payable at a rate of 13.8% by employers on most taxable benefits provided to an employee.

Class 2 NIC is payable at a flat rate of £2.50 per week by self employed individuals.

Class 4 NIC is also paid by self employed individuals. Class 4 NIC is calculated according to the percentages below on the individual’s taxable trading profits.

Class 4 £1 - £7,225 per year £7,226 - £42,475 per year Above £42,475

Nil % 9.0 % 2.0%

NIC rates will be provided in the exam.



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theexpgroup.com

Chapter 13

Corporation Tax


Corporation tax is a key area of the syllabus and will be examined.

KEY KNOWLEDGE Corporation Tax

A period of account is the period that the company prepares accounts for. A company can generally prepare accounts that end on any date that the company chooses and whilst it is normally 12 months long, it can be shorter or longer.

An accounting period is the period for which the charge to corporation tax is made. An accounting period can never exceed 12 months.

Most of the time, the period of account and the accounting period are the same dates (i.e. when the period of account is 12 months long)



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theexpgroup.com

If a company has a period of account longer than 12 months the period of account is divided with the maximum length of an accounting period being 12 months. For example, a period of account of 18 months would have an accounting period of 12 months followed by an accounting period of 6 months.

Corporation tax computation – year ended 31 March 2012

Trading profits 150,000

Property income 30,000

Interest income 5,000

Chargeable gains 50,000

Total profits 235,000

Less: Gift Aid (35,000)

Profits chargeable to corporation tax (PCTCT) 200,000

There are a number of similarities between how items are treated for corporation tax purposes and how they are for income tax purposes. The main differences are:

1. Trading income – main differences for companies

There are no private use asset adjustments. Within income tax a self employed person would need to make adjustments to the deductibility for private use. With companies, the companies themselves clearly don’t use it privately. The private use is taxed on the employees via the benefit on private use.

Similarly for capital allowances purposes there are no private use assets for a company.

2. Property income – main differences for companies

Property income is still assessed on the accruals basis but a company is assessed according to the company’s accounting period whilst an individual is assessed according to the tax year.

Interest on a loan acquired to purchase or improve an investment property is treated under the loan relationship rules unlike individuals who can treat it as a deduction from property income.

3. Interest income – main differences for companies

Bank interest received by a company is received gross with no tax withheld (unlike individuals that receive bank interest net of 20% tax).



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theexpgroup.com

4. Dividends – main differences for companies

Dividends received BY companies are not included within PCTCT. Individuals however include dividends received within their income tax computations.

5. Chargeable gains – main differences for companies

Companies include capital gains as chargeable gains within PCTCT and pay corporation tax on them. Individuals pay Capital gains Tax on gains and not income tax.

6. Gift Aid – main differences for companies

Companies make gift aid payments gross and the amount paid is deducted within PCTCT. Individuals “extend the basic rate band”.

To calculate the corporation tax liability we need to identify the “profits” of a company.

“Profits” = PCTCT + Franked Investment Income (FII)

FII = Gross dividends received from non associated companies.

In other words, FII = (dividends received from companies in which the company has a 50% or less shareholding) x 100/90

“Profits” are used to identify the tax rate that will be used. Note that to identify the actual tax charge we apply the tax rate to PCTCT and not to “Profits”.

The rate of corporation tax used depends on the financial year. The financial year runs from 1 April to the following 31 March.

For financial year 2011 (i.e. the period from 1 April 2011 to 31 March 2012) the rates are:

“Profits” below the lower limit of £300,000 20%

“Profits” between £300,000 and £1,500,000 Marginal Relief

“Profits” above the upper limit of £1,500,000 26%



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theexpgroup.com

EXAMPLE 1 Profits below the lower limit

PCTCT = £200,000

FII = £15,000

Profits = £215,000. This is below the £300,000 limit so the lower rate of corporation tax of 20% applies (FY 2010).

Corporation tax = 20% x £200,000 = £40,000

EXAMPLE 2 Profits above the upper limit

PCTCT = £2,000,000

FII = £50,000

Profits = £2,050,000. This is above the £1,500,000 limit so the full rate of corporation tax of 26% applies (FY 2010).

Corporation tax = 26% x £2,000,000 = £520,000

EXAMPLE 3 Profits in the marginal relief band

If profits fall within the marginal relief band the following calculation is needed:

PCTCT@ full rate

Less: marginal relief

3/200 x (upper limit – profits) x PCTCT/Profits

Example:

PCTCT = £1,000,000

FII = £50,000



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Profits = £1,050,000. This is above the £300,000 limit and below the £1,500,000 limit so marginal relief applies.

Corporation tax =

26% x £1,000,000 = £260,000

Less: 3/200 x (£1,500,000 - £1,050,000) x (£1,000,000/£1,500,000)

Corporation tax: £255,500

(£4,500)

Short Accounting Periods

If an accounting period is less than 12 months the upper and lower limits are reduced proportionally.

Example: A company has a 3 month accounting period ending 31 March 2011.

The upper limit is: £1,500,000 x 3/12 = £375,000

The lower limit is: £300,000 x 3/12 = £75,000

Associated companies

The upper and lower limits are divided by the number of associated companies

Example: Company A owns 100% of company B.

Associated companies = 2

Upper limit: £1,500,000/2 = £750,000

Lower limit: £300,000/2 = £150,000

Accounting Periods that straddle 31 March.

The corporation tax rates for the following years are:

Financial Year 2008 2009 2010 2011

Small companies rate 21% 21% 21% 20%

Full rate 28% 28% 28% 26%

Lower limit 300,000 300,000 300,000 300,000

Upper limit 1,500,000 1,500,000 1,500,000 1,500,000

Marginal relief fraction 7/400 7/400 7/400 3/200 (Relevant details will be provided in the exam)



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theexpgroup.com

When an accounting period covers 2 separate Financial Years and the rates or fractions are different then separate calculations have to be made for each financial year. The corporation tax payable will still be based on the accounting period but the calculation will be split into two.

EXAMPLE Company A

Company A has PCTCT of £2,000,000 for its year ended 31 December 2011. It did not receive any FII.

The year ended 31 December 2011 is partly in FY 10 (1 January 2011 to 31 March 2011) and partly in FY 11 (1 April 2011 to 31 December 2011)

The upper limit is £1,500,000 in both FY 10 and FY 11 so we know that the company will be paying tax at the full rate:

FY10 £2,000,000 x 3/12 x 28%: £140,000

FY11 £2,000,000 x 9/12 x 26%:

Total tax payable for the y/e 31 December 2011 £530,000

£390,000

Trading losses (for companies)

If the corporation tax computation shows a loss, PCTCT is nil.

The company can utilise the loss in the following ways:

• Carry forward the loss to offset against future trading income of the same trade under s393(1) ICTA 1988

• Offset of current year trading loss against current year total profit (before deduction of gift aid) (s393A ICTA 1988)

• If a current year loss offset has been made and there are losses remaining, unused losses can be carried back and offset against total profits (before deduction of gift aid) of the previous 12 months.



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theexpgroup.com

Chapter 14

Chargeable Gains (For Companies)


The taxation of capital gains on individuals is dealt with in depth at chapter 16.

KEY KNOWLEDGE Chargeable Gains (For Companies)

The calculation of chargeable gains for companies is similar to that found for individuals except for a number of major differences. The main ones being:

Companies Individuals

Pay corporation tax on chargeable gains (i.e. the gains are part of PCTCT).

Pay Capital Gains tax (CGT) on the gains and not income tax on the gains.

Companies do not receive an annual exemption. Individuals do receive an annual exemption.

Companies receive indexation allowance (IA). Individuals do not receive indexation allowance

The share matching rules are different. The share matching rules are different.



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theexpgroup.com

Chargeable gains Pro forma (for companies)

Disposal proceeds 100,000

Less: incidental costs of disposal (e.g. advertising or auction fees) (2,000)

Net Proceeds 98,000

Less: allowable expenditure (38,000)

Unindexed gain 60,000

Less: indexation allowance (see below) (15,000)

Chargeable gain / (loss) 45,000

Indexation allowance gives a company some relief for the effect of inflation during the period of ownership of the asset.

IA= the cost of the asset x the movement in the Retail Price Index (RPI)

Share matching Rules (for companies)

When shares in a company are sold, the calculation needs to identify which shares were sold. The shares sold are matched with the following purchases:

1. Shares acquired on the same day. 2. Shares acquired in the 9 days before the sale. 3. Shares in the share pool (or s104 pool or FA 85 pool)



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theexpgroup.com

Chapter 15

Corporate Groups and Overseas Tax Issues

CORPORATE GROUPS The Big Picture

Corporate Groups

When a group of companies exist there are a number of relationships that you need to be aware of. The 2 main ones being:

• Associated companies (>50% control) • Group loss relief (75% control)

Associated Companies

Definition of associated companies.

Two companies are associated with each other if:

• One controls the other, or

• Both are controlled by another company or individual



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theexpgroup.com

Implication of being associated:

1. The upper and lower limits used for determining the rate of corporation tax are divided by the number of associated companies.

• Example: A Ltd owns 65% of B Ltd. The number of associated companies is

2. The upper and lower limits are £750,000 (£1,500,000/2) and £150,000 (£300,000/2) respectively for both A Ltd and B Ltd.

2. Any dividends between associated companies are not treated as FII for the purposes

of calculating a company’s “profits”.

3. Only one annual investment allowance of £100,000 is available for the group.

Group loss relief group

Definition of group relief group.

Two companies are part of a group relief group if:

• One owns 75% of the other, or

• Both are 75% subsidiaries of a 3rd

For sub-subsidiaries to be included within a group relief group then top company should own at least 75% of the sub-subsidiary.

company

Implications of being part of a group relief group:

The main implication is that any amount of the trading losses of one company may be surrendered (“given”) to another group relief group company.

In order to maximise the tax saving, the loss should be surrendered in the following order:

1. To companies that are paying tax in the marginal relief band and who will be suffering a marginal tax rate of 29.75% (FY 2008 to FY 2010) or 27.5% (FY2011).

2. To companies that are paying tax at the full rate of 28% (FY 2008 to FY 2010) or 26% (FY2011).

3. To companies that are paying tax at the small companies rate of 21% (FY 2008 to FY 2010). 20% FY2011.



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theexpgroup.com

OVERSEAS ISSUES The Big Picture

Overseas dividend income is exempt from UK corporation tax.

If a UK company receives foreign income such as overseas branch income it will be included within PCTCT.

It will therefore be liable to both UK and foreign tax. The company will be eligible for double tax relief.

Double Tax Relief (DTR)

Deduct from the UK tax liability the lower of:

1. UK on foreign income, and 2. Overseas tax suffered.



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theexpgroup.com

Chapter 16

Capital Gains Tax (CGT)


CGT is paid by individuals on chargeable disposals of chargeable assets. Companies do not pay CGT but instead pay corporation tax on their chargeable gains. This chapter only deals with individual issues.

Only individuals that are UK tax resident or UK ordinarily resident will pay CGT. The assets disposed of can be located anywhere in the world.

Individuals have a CGT annual exemption (2011/12: £10,600). Gains up to this amount are not taxed.

Capital gains are taxed after taxable income (i.e. as the top portion).

• Taxable gains within the basic rate band are taxed at 18%. • Taxable gains within the additional rate band are taxed at 28%.

If an individual is neither UK tax resident nor UK ordinarily resident then they will not be liable to CGT even if the asset disposed of is located in the UK.

The majority of capital assets are chargeable to CGT. There are however a small number of exempt assets which are outside the scope of CGT. These include:



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theexpgroup.com

• Principal private residence • Cars (including antique or vintage cars) • Certain “chattels” • National Savings Certificates • Assets held within ISAs

Pro forma for computation of capital gains for individuals

Disposal proceeds 100,000

Less: incidental costs of disposal (e.g. advertising or auction fees) (2,000)

Net Proceeds 98,000

Less: allowable expenditure

- Cost of acquisition (28,000)

- Cost of enhancements (10,000)

Capital gain / (loss) 60,000

The gains and losses for an individual are then combined and taxed.

The calculation of CGT is as follows:

Capital gain on asset #1 10,000 Capital gain on asset #2 5,000 Capital loss on asset #3 20,000 Net gains for the tax year 35,000 Less: capital loss brought forward (4,900) Net capital gain 30,100 Less: annual exemption (10,600) Taxable gains 19,500 CGT @ 18% or 28%.

Note that capital losses brought forward are only used to the extent of bringing the net gains for the current year down to the level of the annual exemption.

Transfers between husband and wife (or civil partners)



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Assets transferred between spouses are deemed to be transferred at such a value that neither a gain nor a loss will be created.

The spouse transferring the asset is deemed to have transferred it at the original acquisition cost. When the receiving spouse subsequently disposes of it they will have an acquisition cost equal to the original acquisition cost.

Part disposals

When an asset is part disposed of, we need to identify the proportion of the original cost that relates to the part disposed of. The proportion of the original cost allocated to the disposal is based on the value of the part disposed of and the value of the part retained.

Example:

John bought 5,000 m2

He has just sold 3,000m

of land for £100,000 in January 2004.

2 for £80,000. The market value of the remaining 2,000m2

The “cost” of the land sold for inclusion within the disposal calculation is:

is £30,000.

Cost x [A / (A+B)] where A is the MV of the part sold and B is the MV of the part retained.

Therefore, the cost for the part disposed in this example is £100,000 x [£80,000 / (£80,000 + £30,000)] = £72,727

Chattels

Chattels are tangible, movable items. Examples include antiques such as vases or paintings. There are special rules for chattels that were bought or sold for less than £6,000.

Bought for < £6,000 Bought for > £6,000

Sold for <£6,000 Exempt from CGT Sale proceeds deemed to be

£6,000

Sold for >£6,000

Gain calculated as normal but gain limited to a maximum of 5/3 x (gross proceeds - £6,000)

CGT computed in normal manner

Share matching Rules (for individuals)

When an individual sells shares in a company, the calculation needs to identify which shares were sold. The shares sold are matched with purchases in the following order:

1. Shares acquired on the same day.



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theexpgroup.com

2. Shares acquired in the next 30 days after the sale. 3. Shares in the share pool (or s104 pool or FA 85 pool)

The share pool contains details of the purchase and sale of shares in a particular company. When shares are disposed of out of the share pool, the shares are disposed of at their average cost.

Reliefs – Principal Private Residence (PPR)

PPR relief is available when an individual sells a property that has been his main residence at some stage.

The gain that is exempt is calculated as the gain x (period of occupation / total period of ownership).

Occupation includes both actual occupation and deemed occupation.

“Deemed occupation” includes:

• The last 3 years of ownership (if it was actually occupied at some stage) • Up to 3 years absence for any reason (if preceded and followed by actual occupation) • Up to 4 years absence if working elsewhere in the UK (if preceded and followed by

actual occupation) • Any period of absence if working abroad (if preceded and followed by actual

occupation)

Reliefs – Entrepreneurs’ Relief

Entrepreneurs’ relief reduces the CGT payable on certain qualifying business disposals.

The relief is:

• The first £10m of gains on qualifying business disposals will be taxed at 10%. • Gains above £10m will be taxed at the standard rate of 18% / 28%.

Qualifying business disposals include:

• Businesses carried on by the individual (including partnership shares) • Shares in an individual’s personal trading company (if the individual is an employee

of the company).

Reliefs – Rollover Relief

When a qualifying business asset is sold, any gain arising can be “rolled into” a replacement qualifying asset. The gain is therefore deferred by reducing the base cost of the replacement asset by the gain rolled over.



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theexpgroup.com

Qualifying assets include:

• Land & buildings • Goodwill • Fixed plant & machinery

The replacement asset must be acquired between one year in advance of the disposal and 3 years after the disposal.

If the replacement asset is a “depreciating asset” (in effect, an asset with a life of ≤ 60 years) the gain cannot be rolled over. Instead, the gain will be deferred until the earlier of the following:

• The date the replacement asset is sold. • The date the replacement asset ceases to be used. • 10 years from the date of acquisition of the replacement asset.



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theexpgroup.com

Chapter 17

Inheritance Tax (IHT)


IHT is a capital tax that is charged on a transfer of value of chargeable property by a chargeable person.

A charge to IHT occurs on:

1. The death of an individual. 2. Lifetime gifts in the 7 years preceding death. 3. Certain lifetime transfers.

KEY KNOWLEDGE Transfer of Value, Chargeable Property & Chargeable Person.

The amount of the “transfer of value” is based on the fall in value of the donors’ estate.

Note that this is does not have to necessarily be the open market value of the item.



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theexpgroup.com

For example, the market value of a 2% shareholding in a company will be lower than the fall in value for an individual that owns 51% of the company and then sells 2% of his shareholding. (i.e. because the transfer of the 2% has resulted in control of the company being lost).

Chargeable property represents property that a person owns or is entitled to. Unlike CGT, there are no exempt assets for IHT purposes.

For the purposes of the F6 exam a chargeable person will be a UK domiciled individual who is liable for IHT on their worldwide assets.

KEY KNOWLEDGE When is IHT charged?

IHT is charged:

1. When a person dies. 2. On certain lifetime transfers.

On death:

The main occasion when IHT is charged is on the death of an individual. In this situation IHT is levied on the estate at death as well as any transfers of non-exempt assets in the 7 years before death.

Lifetime transfers:

3 different types of transfers can be made by an individual during his lifetime:

Type of transfer Examples Treatment during life

Treatment if donor lives for

7 years.

Treatment on death within 7

years.

Exempt

Small gift exemption

Annual exemption.

Exempt from IHT

Exempt from IHT

Exempt from IHT

Potentially Exempt

Transfers (PETs)

Most gifts by individuals.

No IHT payable.

Exempt from IHT

PET becomes chargeable to

IHT.

Chargeable Lifetime

Transfers (CLTs)

For F6, all gifts into Trusts. IHT to pay. No further IHT

to pay. Possibly extra IHT to pay.



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Exemptions (lifetime gifts only)

• Small gift exemption (≤ £250 per recipient per year). • Annual exemption (£3,000 per year and can be carried forward for one year if not

used). • Habitual expenditure exemption. • Marriage exemption.

Exemptions (both lifetime and on death)

• Transfers between spouses.

KEY KNOWLEDGE Calculation of IHT on Lifetime Transfers

IHT on CLTs (transfers into a Trust)

Transfer of value X

Less: exemptions (X)

Chargeable amount X

Nil Rate Band (NRB) – all individuals are entitled to a NRB (2011/12: £325,000)

Chargeable amount X Less: NRB available after deduction of gross transfers in the last 7 years (X)

Amount chargeable to IHT X

The rate of IHT depends who pays the tax:

• If the recipient pays the tax - i.e. the trustees (donee). The gift is referred to as a gross gift and the tax rate is 20%.

• If the transferor pays the tax (i.e. the donor) the gift is referred to as a net gift and the tax is 25%



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theexpgroup.com

KEY KNOWLEDGE Calculation of IHT as a result of Death

On the death of an individual there will be IHT payable on:

1. Transfers within the previous 7 years (i.e. PET’s that now become chargeable and potential additional IHT on CLTs)

Broadly speaking, the tax on transfers within the previous 7 years will be taxed at 40% and relief will be given for taper relief (see below) as well as IHT already paid on lifetime transfers.

Taper Relief – the idea behind this is that if people survive for at least 3 years after the transfer the IHT charge is reduced. The rates of taper relief are as follows:

Time between date of gift and date of death.

Taper Relief % applied to the tax due

0 to 3 years Nil 3 to 4 years 20% 4 to 5 years 40% 5 to 6 years 60% 6 to 7 years 80%



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theexpgroup.com

EXAMPLE Death after a lifetime transfer

John made a gift (PET) of £350,000 on 10 January 2008. He died on 10 April 2011. He made no other lifetime transfers.

The death occurred in 2011/12.

PET £350,000

Less: Nil Rate Band

IHT due on £25,000

(£325,000)

IHT due at 40% [£25,000 x 40%] £10,000

Less: Taper Relief of 20% (within 3 to 4 years of death)

IHT due after Taper Relief £8,000

(£2,000)

2. The value of the estate at death.

Calculation of IHT at 40% on the estate at death is looked at after the lifetime transfers have been dealt with.



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theexpgroup.com

Chapter 18

Value Added Tax (VAT)


VAT is an indirect tax which is ultimately borne by the final customer.

VAT occurs when a taxable person makes a taxable supply.

Taxable person: an individual or company that is or should be registered for VAT.

Taxable supply: sales and purchases of goods or services which are not VAT exempt or outside the scope of VAT.

Input VAT Taxable person Output VAT

Input VAT: A taxable person pays input VAT on its purchases of goods or services.

Output VAT: A taxable person charges output VAT on its sales of goods or services.

At the end of each tax period (normally a 3 month period) the input and output VAT is netted off and an excess of output VAT is paid to HMRC whilst an excess of input VAT is recovered from HMRC.

Standard rated supplies: 17.5% VAT rate (up to 3 January 2011) and 20% (from 4 January 2011). Most goods and services are standard rated.



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Zero rated supplies: 0% VAT rate (but importantly still within the scope of VAT so can claim input VAT).

Examples of zero rated include:

• Children’s clothes • Books & newspapers • Non luxury food

Exempt supplies: no VAT is charged and input VAT cannot be reclaimed.

Examples of exempt supplies include:

• Land • Financial services • Education

VAT Registration Requirements

Compulsory registration is required when either:

1. The taxable supplies over the previous 12 months (or since trade commencement date) exceed the registration limit (currently £73,000). HMRC must be notified within 30 days of the end of the month in which the registration limit is exceeded. Registration begins from the end of the month after the month in which the limit was exceeded. or

2. The taxable supplies over the next 30 days alone are anticipated to exceed the registration limit (currently £73,000). HMRC should be informed prior to the end of the 30 days. Registration begins at the start of the 30 days.

Voluntary registration is possible. Advantages include being able to recover relevant input VAT as well as providing an impression of a business being bigger than it really is. Disadvantages include the increased administrative burden.

Pre-registration expenses

Input VAT on goods acquired for business purposes can be recovered if they are still within inventory at date of registration. Given that they are in stock when the business registers for VAT, output VAT will be charged when the goods are sold so it is only fair that input VAT can be claimed (goods acquired more than 3 years prior to registration are excluded).

Input VAT on services provided in the 6 months prior to registration can be recovered.



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Tax point

The tax point is the official date of supply for VAT purposes.

For goods, the basic tax point is when the goods are made available to the customer.

For services, the basic tax point is when the service is performed.

The basic tax point is amended in the following situations:

1. Before the basic tax point – if an invoice is issued or payment is received before the basic tax point the date of the invoice or the payment becomes the tax point.

2. After the basic tax point – if an invoice is issued within 14 days of the basic tax point the date of the invoice becomes the tax point.

VAT relief for bad debts

If a taxable person makes a sale, output VAT is chargeable and will be payable to HMRC. If the debt subsequently becomes a bad debt, the taxable person can obtain VAT bad debt relief by in effect claiming the VAT on the bad debt as input VAT.

In order to qualify for VAT bad debt relief the debt must be >6 months old and be written off in the seller’s accounts.

(end of ExPress Notes)

ACCA F6 UK

Documents

Transcript of ACCA F6 UK