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ACCA Passcards

Paper F6Taxation (UK)

FA 2014

For exams from 1 April 2015

to 31 March 2016

ACCA APPROVED CONTENT PROVIDER


















Fundamentals Paper F6

Taxation FA 2014












First edition 2007, Ninth edition October 2014

ISBN 9781 4727 2243 0

e ISBN 9781 4727 2566 0

British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the

British Library

Your learning materials, published by BPP LearningMedia Ltd, are printed on paper obtained from traceablesustainable sources.

Published byBPP Learning Media Ltd,BPP House, Aldine Place,142–144 Uxbridge Road,London W12 8AA

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All rights reserved. No part of this publication may bereproduced, stored in a retrieval system or transmitted, iany form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the priorwritten permission of BPP Learning Media.

©

BPP Learning Media Ltd2014






































http://www.bpp.com/learningmedia



Page iii

Welcome to BPP Learning Media's ACCA Passcards for Fundamentals Paper F6 Taxation (UK).

They save you time. Important topics are summarised for you.

They incorporate diagrams to kick start your memory.

They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media'sACCA Passcards are not just a condensed book. Each card has been separately designed for clearpresentation. Topics are self contained and can be grasped visually.

ACCA Passcards are still just the right size for pockets, briefcases and bags.

ACCA Passcards focus on the exam you will be facing.

Run through the complete set of Passcards as often as you can during your final revision period. The day

before the exam, try to go through the Passcards again! You will then be well on your way to passing yourexams.

Good luck!

ContentsPreface





















































ContentsPreface

Page

1 Introduction to the UK tax system 1

2 Computing taxable income 93 Computing the income tax liability 17

4 Employment income 23

5 Taxable and exempt benefits.The PAYE system 27

6 Pensions 35

7 Property income 41

8 Computing trading income 45

9 Capital allowances 51

10 Assessable trading income 57

11 Trading losses 61

Pa

12 Partnerships and limited liabilitypartnerships 6

13 National insurance contributions 6

14 Computing chargeable gains 7

15 Chattels and the principal private residenceexemption 8

16 Business reliefs 8

17 Shares and securities 9

18 Self-assessment and payment of tax by

individuals 919 Inheritance tax 1

20 Computing taxable total profits 1






































ContePage v

Page

21 Computing the corporation tax liability 123

22 Chargeable gains for companies 12723 Losses 135

24 Groups 139

Pa

25 Self-assessment and payment of tax bycompanies 1

26 An introduction to VAT 1

27 Further aspects of VAT 1






















Notes











1: Introduction to the UK tax system

Topic List

The overall function and purpose oftaxation in a modern economy

Different types of taxes

Principal sources of revenue law andpractice

Tax avoidance and tax evasion

This chapter contains background knowledge which underpins the whole of your later studies of taxation.




















Tax avoidanceand tax evasion

Principal sources ofrevenue law and practice

Different typesof taxes

The overall function and purposeof taxation in a modern economy

Economic factorsTaxation represents a withdrawal from the UK economy. Tax policies can be used to encourage anddiscourage certain types of activity.

Saving Charitable donations Entrepreneurs Investment in plant and machinery

Encourages

Smoking Alcohol Motoring

Discourages

Social factorsTax policies can be used to redistribute wealth

Direct taxes – tax only those who have these resources Indirect taxes – discourage spending Progressive taxes – target those who can afford to pay

Environmental factorsTaxes may be levied for environmentalreasons

Climate change levy Landfill tax
























































1: Introduction to the UK tax sysPage 3

Directtaxes

Indirecttaxes

Income tax Individuals Partnerships

Corporation tax Companies

Capital gains tax Individuals Partnerships Companies (in the form of corporation tax)

Inheritance tax Individuals

National insurance Employers Employees Self-employed

Value added tax Businesses (both incorporated and unincorporate





















































HM Revenue and Customs

Structure of the UK Tax system





Treasury

Officers of Revenue and Customs Crown Prosecution Service

Appeals heard by

First Tier Tribunal (most cases) Upper Tribunal (complex cases)

Sources of revenue law and practice

StatuteStatutory instrument

Law

Statements of practice

Extra-statutory concessionsExplanatory leafletsRevenue and Customs BriefInternal Guidance (HMRC manuals)Working Together

Practice










































European Union Double taxation agreements

States may agree to enact Directives to providefor common taxation

Value added tax (VAT) Directives oblige UK topass laws in accordance with EU legislation

Tax provisions which discriminate against EUfreedoms may be ineffective due to treaty directeffect

Exchange of information

Prevents income or gains being taxed in morethan one country

Income/gain taxed in one country only or credgiven for tax in one country against tax in othecountry

Non-discrimination provisions to protect foreignationals

Exchange of information







































General Anti-Abuse Rule (GAAR)

HMRC can counteract tax advantages from abusive tax arrangements

Tax arrangements involve obtaining a tax advantage as (one of) their mainpurpose(s)

Arrangements are abusive if they cannot be regarded as a reasonable course ofaction and result in eg significantly less income, profits or gains being taxable

Tax advantage includes relief or repayment of tax

HMRC may counteract tax advantages arising by eg increasing the taxpayer'stax liability

































Concerns whether client is honest with HMRC

Professional judgement of accountant

Must act honestly and objectively

Recommend disclosure to HMRC

If no disclosure, cease to act

Make money laundering report

Inform HMRC but not details of why

Avoid 'tipping-off' the client



































2: Computing taxable income

Topic List

Scope of income tax

Computing taxable income

Chargeable/Exempt incomeDeductible interest

The computation of income tax is a key exam topic. Onof the 15 mark questions in Section B will focus on income tax. Income tax will also be tested in Section Aand may also appear in the 10 mark questions in Section B. This chapter deals with computing taxable income which draws together all of the taxpayer's income. In the next chapter you will see how the incomtax liability is computed on taxable income.
























Computingtaxable income

Deductibleinterest

Scope ofincome tax

Chargeable/Exempt income

Test 1st: Automatically not UK resident

In UK < 16 days in tax year

In UK < 46 days in tax year, not resident inany of three previous tax years

Works full time overseas in tax year, not inUK > 90 days in tax year

Test 2nd: Automatically UK reside

In UK > 183 days in tax year

Only home in UK

Works full time in UK in tax year

An individual who is UK resident is taxable on world-wide income.



































2: Computing taxable incoPage 11

Test 3rd: UK ties

Close family (spouse or civil partner/minor child)resident in UK

Home available in UK, used in tax year

Substantive work in UK

In UK > 90 days in either of two previous tax yea

Spends more time in UK than anywhere else in tayear (if previously resident only)

Number of ties requiredto be UK resident

depends on number of days

spent in UK in tax year

(see Tax Tables)

































Deductibleinterest

Scope ofincome tax


Aggregation of income

A basic principle of income tax is the aggregation ofincome. All of an individual's income for a tax year isadded up in a personal tax computation as total income.

Taxable income

Net income minus personal allowance or higher person

allowance.

Adjusted net incomeNet income less grossed up gift aid/personal pension

contributions.

Net incomeTotal income minus deductible interest and trade losses.

Tax liabilityThe amount of tax charged on income.

Tax payableThe balance of the tax liability still to be paid.







































Personal allowance andhigher personal allowance

Individual born on or after 6 April 1948

£10,000 for 2014/15

Restrict if adjustednet income > £100,000

by £1 for each £2 excess(nil if > £120,000).

Individual born 5 April 1948 or before

£10,500 born 6.4.38 to 5.4.48 for 2014/15£10,660 born before 6.4.38 for 2014/15

Restrict if adjustednet income > £27,000

by £1 for each £2 excess

to minimum £10,000(unless income > £100,000, thenrestrict as for standard allowance)































Deductibleinterest

Scope ofincome tax


Exempt income

Types of income Income taxed at source

The main types of income for individuals are:

Profits of trades, professions and vocations

Income from employment and pensions

Property income

Savings and investment income, including interestand dividends

Many sorts of investment income are taxed at sourcefor every £100 of income, the individual only receives£80 of interest or £90 of dividends from UK companieThe taxable income in both cases is £100, but credit igiven for the tax suffered.

Premium bond prizes Income from New Individual Savings Accounts (NISAs) Returns on National Savings Certificates

Leave exempt income out of

personal tax computations.

This applies to bank andbuilding society interest.

Tax credits on dividecan be offset to redua tax bill but are neverepaid to a taxpayer.

credits on other taxeincome can be repai





















































Deductibleinterest

Scope ofincome tax



Deductible interest

Interest paid on a particular type of loan is

deducted from total income to compute netincome.

For purchase of an interest in a partnership, or

For purchase of plant and machinery forpartnership (purchase must be by partner), or

For purchase of plant and machinery for use inemployment (purchase must be by employee)

































Notes











3: Computing the income tax liability

Topic List

Computing income tax

Gift aid

Child benefit chargeJointly held property

In this chapter we deal with computing income tax, usintaxable income that was covered in the previous chapteWe also look at how gift aid donations are given tax relief, the computation of the child benefit charge and how jointly held property is taxed.





















Jointly heldproperty

Child benefitcharge

Gift aidComputingincome tax

If non-savings income does not exceed the starting rate limit, then the savings income is taxed at the startingrate (10%) up to the starting rate limit: £2,880 for 2014/15

Total non-savings, savings and dividend income separately

Deduct deductible interest, losses and the personal allowancefrom non-savings income first, then savings income thendividend income

Tax non-savings income, then savings income, then dividendincome

There is only one set of rate bands to cover all

types of income.

Broadly interest

At 20%, 40% and 45%

At 10%, 20%, 40% and 45%

At 10%, 32.5% and 37.5%

Computing income tax

1

2

3

The basic rate limit and higher rate limit

must be increased by the gross amount oany gift aid donation/personal pensioncontribution (amount paid × 100/80).










































Child benefitcharge


3: Computing the income tax liabPage 19

Gift aid

Gift aid donations are charitable gifts of money which qualify for tax relief.

Donor must make a gift aid declaration to the charity.

Basic rateBasic rate tax relief given by treating

donation as net of basic rate tax

Higher and additionalrate

Higher and additional rate tax reliefgiven by increasing limits by grossed

up donation


































Child benefitcharge


Child benefit charge

Child benefit is paid to individual who cares for at least one child

Usually paid to mother and exempt from tax

Charge reclaims child benefit received by taxpayer or partner

Adjusted net income

> £50,000 < £60,000Charge is 1% of the child benefit

amount for each £100 of adjusted netincome in excess of £50,000

Adjusted net income

>£60,000Charge is full amount of child benefit

received


































Child benefitcharge


3: Computing the income tax liabPage 21

Jointly held property

Spouses and civil partners often hold property jointly, sometimes in unequal proportions.

For tax purposes treat the income received fromsuch property as shared equally.

If the actual interests in the property are unequal,spouses/civil partners can declare this to HMRCand income is then shared in actual proportions.




























Notes











4: Employment income

Topic List

Employment and self-employment

Basis of assessment

Allowable deductions

Although this exam is mainly computational you may beasked to describe the difference between employment and self-employment in a Section B question.

You also need to be aware of the final two topics in thischapter: when employment income is assessed and thedeductions that you may be able to make in computing

the amount of assessable employment income.






















Allowabledeductions

Employment andself-employment

Basisof assessment

Whether a contract is a contract of service or acontract for services will depend on a number offactors.

Employed or self-employed

An employee works under a contract of service anda self-employed person under a contract for services.

The degree of control exercised over theperson doing the work

Whether he must accept further work

Whether the other party must provide further wo

Whether he provides his own equipment

Whether entitled to benefits eg pension

Whether he hires his own helpers

What degree of financial risk he takes

What degree of responsibility for investmentand management he has

Whether he can profit from sound manageme Whether he can work when he chooses

The wording used in any agreement betweenparties

Factors
















































Allowabledeductions


Basisof assessment

4: Employment incoPage 25

Earnings are taxed in the year in which they arereceived.

Employees/directors are taxed on income fromthe employment:

Cash earnings Benefits

Employment income

The general definition of the date of receipt isthe earlier of:

The time payment is made The time entitlement to payment arises

Directors are deemed to receive earnings on the earlieof the following:

The time given by the general rule

The time the amount is credited in the company's

accounting records The end of the company's period of account (if the

amount has been determined by then)

When the amount is determined (if after the end othe company's period of account)















































Allowabledeductions


Basisof assessment

Expenses specifically deductible against earnings:

Insurance premiums to cover directors' and employees'liabilities (and payments to meet those liabilities)

Subscriptions to relevant professional bodies

Qualifying travel expenses – costs the employee incurstravelling in the performance of his duties or/and travellingto or from a place attended in the performance of duties

Contributions (within limits) to a registered occupational

pension schemePayments to charity under a payroll deductionscheme

1

2

3

4

5

The strictness of this test has beenemphasised in many cases.

The general rule is that expenses can only be deducted fromearnings if they are incurred wholly, exclusively and necessarily

in performing the duties of the employment.

Normal commuting does not qualify Relief is available for expenses incurred by

employee working at a temporary location oa secondment of 24 months or less

If a mileage allowance is paid relief isavailable for any shortfall of allowance actuapaid below statutory mileage allowance

Exam focusIf you have to decide whether an expensis deductible, put yourself in HMRC'sposition and try to find an argumentagainst deducting it. If you can find aspecific argument, the expense is probabnot deductible.



























































5: Taxable and exempt benefits.The PAYE system

Topic List

Taxable benefits

Exempt benefits

The PAYE system

Benefits may be tested as part of a Section B question or in Section A so it is vital that you are able to calculatthe taxable value of benefits provided to employees.Youalso need to be aware of the benefits that are exempt from tax.

The deduction of tax from employment income through the PAYE system is also important.























VouchersGeneral business expenses

The PAYEsystem

Exemptbenefits

Taxablebenefits

Taxed on most employees

Except excluded employees (eg earn less

than £8,500 p.a. and not director) onlytaxable on certain benefits

'P11D employees' are employees who arenot excluded employees.

Cash vouchers

Credit token

Non-cash vouchers

Taxable on all employees (cost of providing benefit)

Reimbursed expenses taxable onemployees (not excluded employees).

May make deduction claim.

Non-cash benefits

Including excluded employees




































Accommodation Living expenses

5: Taxable and exempt benefits. The PAYE sysPage 29

Annual value of accommodation is a

taxable benefit on all employees, unless job related.

Additional charge if costs more than£75,000.

Living expenses connected with

accommodation (eg gas bills) are taxable P11D employees only. However, if theaccommodation is job-related, the maximuamount taxable is 10% of net earnings.

Excess multiplied by official rate ofinterest at the start of the tax year

Includingexcludedemployees

Original cost plus the cost ofimprovements incurred priorto start of tax year

Vans

£3,090 charge if available for privateuse (not home/work commuting)

£581 charge for private fuel







































Loans Cars

The PAYEsystem

Exemptbenefits

Taxablebenefits

Annual taxable benefit for the private use of a car is (price of car –

capital contributions) × %. Cars emitting 75g/km or less = 5%

Cars emitting CO2 between 76–94g/km = 11%.

Cars emitting 95g/km = 12%. Percentage increasesby 1% for each 5g/km (rounded down) up to 35%.

Percentage increased by 3% for diesel engined cars (not abovmax 35%).

Benefit scaled down on a time basis, if car not available allyear. Benefit then reduced by any contribution by employee fo

private use. Fuel for private use is charged as percentage of base figure

(£21,700, 2014/15). Same percentage as car benefit. Noreduction for partial reimbursement by the employee.

Loans of over £10,000 give

rise to taxable benefits equalto the difference between theactual interest and interest atthe official rate.

A write-off of a loan gives riseto a taxable benefit equal tothe amount written off.

1

2

Only taxed onP11D employees























































Other benefits


In general, if an asset is made available for private use, theannual taxable benefit is 20% of the market value when theasset was first provided, less any employee contribution.

If the asset is subsequently givento the employee the taxable

benefit is the higher of:(i) Original MV less amounts

already taxed

(ii) Market value at date of gift

less any employee contribution.

Taxable value of other benefits charged on

employees other than excluded employees

Excluded employees taxed only on secondhandvalue as cash earnings

Cost of provision of benefit less anyamount made good by employee

Not used if asset is bicycle

Private use of asset



































The PAYEsystem

Exemptbenefits

Taxablebenefits

Exempt benefits

Loans of up to £10,000Entertainment and gifts provided by a third party for an employeeby reason of his employment

Long service awards of up to £50 per year of service

Job related accommodation

Workplace nurseries

Other childcare provided by employer

Recreational/sporting facilities available to employees generally

Works buses and mini-busesBicycles provided for cycling to work

Parking places at or near work

The cost of gifts from any one sourcemust not exceed £250 per tax year

The award must be a non-cash award the employee must have worked at lea20 years

Limited to £55/£28/£25 per week forbasic/higher/additional rate employee

A minibus must have a seating capacitnine or more. A works bus must have aseating capacity of 12 or more







































Removal expenses of up to £8,000

Personal incidental expensesMedical premiums to cover treatment outside the UK

Mobile phones – restricted to one phone per employee

Mileage allowances of amounts up to the statutory mileage rates

Staff parties

Additional household costs for homeworkers

For use of the employee's own car forbusiness purposes

Provided the cost per staff member peryear is £150 or less

Up to £4 per week may be paid withoutsupporting evidence

£5 per night for UK/£10 per night for

overseas. If exceeded, whole taxable, n just excess





























PAYE settlement agreements

The PAYEsystem

Exemptbenefits

Taxablebenefits

The PAYE system collects tax from employees each payday, with the intention that over a tax year, the correct total of tax dwill be collected.

How PAYE works Employer makes FPS to HMRC electronically on or

before date of payment ('Real Time Information')

Includes details of amounts paid to employees, incometax and national insurance deducted, starting andleaving employees

Calculations made using PAYE codes, usually oncumulative basis

The employer must pay over the tax and NIC deductedup to the 5th of each month by the 22nd of that month ifelectronic payment (19th if by cheque).

PAYE code numbers

Forms

Quarterly payment is allowed if the averagemonthly total of tax and NICs is less than £1,500

PAYE settlement agreements are arrangements under whicemployers settle employees' income tax liabilities on certainbenefits and expense payments.

L: Code with personal allowanceP: Code with 1st level higher personal allowanceY: Code with 2nd level higher personal allowance

Form P60 – to employee by 31 MayForms P11D/P9D – to HMRC and employee by 6 JulyForm P45 – to employee when leaves employment

Payment





















































6: Pensions

Topic List

Types of pension scheme

Contributions to pension schemes

Receiving benefits from pensionarrangements

A single regime applies to all pensions, whether occupational or personal.

Pension contributions are a tax efficient way of saving fretirement.





















Contributions topension schemes

Receiving benefits frompension arrangements

Types ofpension scheme

Pension Schemes

Occupational Pension Scheme Personal Pension Scheme

Employees only All individuals

Defined Benefits Money Purchase

Pension based onearnings andlength of service

No guarantee of amountof pension. Investmentsare used to 'build up' fund





























Annual limit




6: PensPage 37

Maximum contribution attracting taxrelief is higher of:

Relevant earnings

£3,600 pa

£1,250,000 is maximum value for pension fund.

Employment income, trading income andfurnished holiday lettings income

£40,000 for 2014/15 C/f unused allowance max three years Tax charge on excess – treat as

additional non-savings income

Count towards allowances (annual and lifetime) Trade deduction for employer Tax free benefit for employee No NIC for employer or employee

Lifetime allowance

Annual allowance Employer contributions


















































Occupationalpension

Personalpension

Deduct gross employee contributionsdirectly from earnings to find

net earnings

Paid net so automatic 20% tax relief

Higher rate (and additional rate)taxpayers increase basic rate (andhigher rate) limits by gross

contributions

This is the same method of givingtax relief as for gift aid donations

Also deduct grosscontributions from neincome to find adjus

net income for PArestriction











































6: PensPage 39

Pension fundat retirement

Taxable annualpension (usually)

Tax-free lump sum

If fund exceeds lifetime allowance£1.25m then tax charge on excess

25% if excesstaken as pension

55% if excesstaken as lump su

Maximum 1/4 of fund
































Notes











7: Property income

Topic List

Computation

Furnished holiday lettings andrent-a-room relief

Property income is calculated as if the letting were a business run by the taxpayer.

There are special rules for furnished holiday lettings, anfor rooms let in the taxpayer's own home.

Property income could be tested in Section A and/or inSection B question, either as a 10 mark question or as part of a 15 mark question.






















Computation Furnished holiday lettingsand rent-a-room relief

Computation

Calculate property income profits on anaccruals basis in the same way as youcalculate trading profits.

Accounts are drawn up as for a sole trader butwith a year end of 5 April.

Rents and expenses of all properties are

pooled to give a single property income figure.If a lease for n years (50 or less) is granted fora premium, the proportion of the premiumtreated as rent is (premium – (premium ×0.02(n–1))).

Exception For furnished residential lettings, a 10% wearand tear allowance can be claimed.Capital allowances are not available.

Exception Keep a separate pool of profits/losses fromletting furnished holiday lettings.

Property income

Property income covers rent from UK property.

2

1

3

4

LossesLosses are carried forward against futureincome from the UK property business.










































7: Property incoPage 43

Computation Furnished holiday lettingand rent-a-room relief

Furnished Holiday Lettings must be

On a commercial basis

Available for letting for 210 days in the tax year

Actually let for 105 days in the tax year

Not in longer term occupation for more than 155 days during the tax year

The rent-a-room scheme exempts rent of up to £4,250a year on rooms in the landlord's main residence.

Rollover relief, entrepreneurs' relief and giftrelief are available

Loss relief – but only c/f against FHL profit

Capital allowances are available on furniture

Income is earnings for pension purposes

Continuous periods of mo

than 31 days during whichthe accommodation is in tsame occupation

Furnished holiday lettings

Furnished holiday lettings are treated as a trade formany income tax and CGT purposes

Rent-a-room scheme













































Notes











8: Computing trading income

Topic List

Badges of trade

The adjustment of profits

Cash basis of accounting

The 'badges of trade' can be used to determine whetheor not an individual is carrying on a trade. If a trade is being carried on, the profits of the trade are taxable as trading income. Otherwise the profit may be taxable as capital gain.

In this chapter we will look at the badges of trade and athe adjustments needed in the computation of trading

income.

This is a key exam topic. It may form part of a 15 mark Section B question where you may be required to compute tax adjusted trading profits.


























Cash basis ofaccounting

The adjustmentof profits

Badgesof trade

The subject matter The frequency of transactions Similar trading transactions/interests The length of ownership Organisation as a trade Supplementary work and marketing A profit motive The way in which the asset sold was acquired Method of finance The taxpayer's intentions

Badges of trade

If on applying the badges of trade HMRconclude that a trade is being carried othe profits are taxable as trading incom

To arrive at taxable trading profits, the naccounts profit must be adjusted. We loat this in the rest of this chapter.














































Badgesof trade

8: Computing trading incoPage 47

Certain items of expenditure are not deductible for trading income purposes and so must be added back to thnet accounts profit when computing trading profits. Conversely other items are deductible.

Expenditure incurred wholly and exclusively fortrade purposes

Gifts to customers not costing more than £50 perdonee per year

Interest on borrowings for trade purposes

Pre-trading expenditure

Deductible expenditure

The gift must carry a conspicuous advertisement fthe business and not be food, drink, tobacco orvouchers exchangeable for goods.

If incurred in the seven years prior to the start of tr










































Badgesof trade

Fines and penalties

Depreciation

Appropriations (eg salary and interest paid toproprietor)

Capital expenditure

Entertaining

Legal fees relating to capital items

General provisions

Any expense not incurred wholly and exclusively fortrade purposes

Gift aid donations

Political donations

Part of leasing cost of cars with CO2 emissions over

130 g/km

Non-deductible expenditure Employee parking fines incurred whilst onemployer's business are, however, allowed

The cost of initial repairs to make an asset fit touse is disallowable capital expenditure (Law Shipping ) but the cost of initial repairs to remednormal wear and tear is allowable (Odeon Associated Theatres Ltd v Jones )

Staff entertaining is deductible

Fees relating to the renewal of a short lease aredeductible

Disallow any general provision for impairmentlosses. A specific provision is however allowed.

These are dealt with in the personal taxcomputation

Disallow 15% of leasing cost






































































Badgesof trade

8: Computing trading incoPage 49

Normal basis of accounting is accruals basis

Cash basis of accounting can be used insteadby small unincorporated businesses

To start cash basis of accounting, receiptsmust not exceed VAT registration threshold

Election required

Cash basis of accounting

Cash received

less

Expenses paid

Profit

Taxable

Loss

c/f against cashsurplus

Includescapital

expendituon P&M

(except ca













































Badgesof trade

Motor cars (business mileage)

Business premises used as trader's home(eg guesthouse)

Fixed rate expenses Only examinable in context ofcash basis

Rates given in question where

relevant



























9: Capital allowances

Topic List

What is plant?

Allowances on plant and machinery

Special assets

Capital allowances are given instead of depreciation, onplant and machinery. They are trading expenses deducted in arriving at taxable trading profits.

Capital allowances are a frequently examined topic.



















Allowances onplant and machinery

Whatis plant?

Specialassets

Statute

Machinery

There are two sources of the rules on what qualifies as plant and is therefore eligible for capital allowances.

Statutory exclusions

The following items are excluded as plant by statute.

Buildings and parts of buildings

– However, utility systems provided to meet theparticular requirements of the trade, lifts, alarmsystems and several other items can be plant

Structures, with some exceptions: dry docks andpipelines

LandStatutory inclusions

Computer software qualifies as plant by statute.

Machinery also qualifies for allowances whermachinery is given its ordinary every daymeaning.

Case law

The courts tend to allow items as plant if theyperform a function (eg moveable officepartitions) in the particular trade, rather thanform part of the setting within which the tradeis carried on.











































Whatis plant?

Specialassets

9: Capital allowanPage 53

Writing down allowances (WDAs)

18% per annum on a reducing balance basis in main pool

WDA given on pool balance after adding current periodadditions and deducting current period disposals

18% × months/12 in a period that is not 12 months long

Reduced WDAs can be claimed

Expenditure on long life assets, integral features, thermalinsulation, solar panels and cars with CO2 emissions over

130g/km goes in a special rate pool. WDA is 8% per annum

on a reducing balance basis Small balance (up to £1,000) on main pool and/or special

rate pool can be given WDA equal to balance

Deduct lower of

(i) Disposal proceeds(ii) Original cost

Main pool includes cars withCO2 emissions 130g/km or les

without private use


















































Whatis plant?

Specialassets

First year allowances (FYAs)

FYA of 100% available for expenditure

on new cars with CO2 emissions95g/km or less

Not pro-rated in short/long period ofaccount

Annual Investment Allowance (AIA)

All businesses are entitled to AIA of £500,000 per

12 month period

£500,000 maximum allowance is proportionatelyincreased/reduced if period of account is not12 months

Allocate AIA to assets eligible for lowest rate of WDA(special rate pool items before main pool items)

Transfer balance after AIA to pool for same periodWDAs

Expenditure on plant and machinery(although not cars) is entitled to the AIA.

Interaction with VAT

Expenditure exclusive of input VAT ifrecoverable

Expenditure inclusive of input VAT if notrecoverable eg car not wholly used forbusiness

Disposal proceeds exclusive of outputVAT





















































9: Capital allowanPage 55

Balancing adjustments arise

On cessation to deal withbalances remaining afterdeduction of disposal proceeds.

When a non-pooled asset issold.

When a column balancebecomes negative.

This will be a balancingcharge

Short life assets/privateuse assets



























Whatis plant?

Specialassets

Short life assets (SLA)

An election can be made to depool assets. Depooled assets must be disposed of within

eight years of end of the period of acquisition.

From a planning point of view depooling is usefulif balancing allowances are expected.

Conversely, in general, assets should not bedepooled if they are likely to be sold within eightyears for more than their tax written down values.

Not cars

– Within two years of the endof the accounting period ofacquisition (companies)

– 31 Jan, 22 months from endof tax year (unincorporatedbusinesses)

Otherwise the balance ofexpenditure must be

transferred back to pool

Private use assets

Do not pool private use assets Show full value of asset/allowances in colum

Can only claim the business proportion ofallowances

Assets used privately by aproprietor (not an employee)so not relevant to companies

























































10: Assessable trading income

Topic List

Current year basis

Commencement

Cessation

We have seen how to calculate the taxable trading proffor a business. We now see how these profits are allocated to tax years.

This topic may be tested in Section A or in a Section B question which could be a 10 mark question or as part a 15 mark question.






















CessationCurrent yearbasis

Commencement

Current year basis

Overlap profits

There are special rules which apply in the openand closing years of a business.

Opening years

Any profits taxed twice areoverlap profits. They may bededucted on cessation.

The basis period for a tax year is normally the

period of account ending in the year.

Tax year Basis period

1 Date of commencement to following 5 April.

2 (a) If no accounting date ends in year: 6 April – 5 April

(b) If period of account ending in year is less than

12 months: first 12 months(c) Otherwise: 12 months to accounting date ending

in Year 2

3 12 months to accounting date ending in year





































CessationCurrent yearbasis

Commencement

10: Assessable trading incoPage 59

Final yearThe basis period for the final year starts at the end of the basis period for the previous year and ends at cessation.

Any overlap profits are deducted from the final year's profits.

ExampleBrenda has been carrying on a sole trade for many years preparing accounts to 30 April each year. She closes dowher business on 30 September 2014.The results of her final two periods of trading are:

£y/e 30 April 2014 24,000p/e 30 September 2014 5,000

Brenda had overlap profits on commencement of £10,000.

The final year is 2014/15 and the basis period for this year runs from 1 May 2013 to 30 September 2014. She candeduct the overlap profits. Her taxable trading income for 2014/15 is therefore £(24,000 + 5,000 – 10,000) = £19,00






























Notes











11: Trading losses

Topic List

Carry forward of trading losses

Set against general income

Opening and closing years

This is another key exam topic. It is likely to be tested inSection B.

There is no general rule that sole traders can get relief for their losses.The conditions of a specific relief must complied with. We look at these reliefs in this chapter.





















Opening and closingyears

Set againstgeneral income

Carry forward oftrading losses

Carry forward trade loss relief

A loss not otherwise relieved may be set against the firstavailable profits of the same trade.

Losses must be set against the first availableprofits: they cannot be saved up until it suits

the trader to use them.

Losses may be carried forward for anynumber of years.

A loss is calculated in exactly the same way as a profit.If there is a loss in a basis period the taxable tradeprofits for the tax year are nil – instead the loss isavailable in that tax year to be used as the traderchooses.

































Opening and closingyears

Set againstgeneral income

Carry forward oftrading losses

11: Trading losPage 63

Relief against general incomeRelief is against the income of the tax year of the lossand/or the preceding tax year.

ExampleSue starts trading on 1.10.14. Her losses arey/e 30.9.15 £(50,000)

y/e 30.9.16 £(20,000)Losses for the tax years are:2014/15 £(25,000)2015/16 £(50,000 – 25,000) = £(25,002016/17 £(20,000)

Partial claims are not allowed: the whole loss must be soff, if there is income (or, if chosen, gains) to absorb it inthe chosen tax year.

Exam focusBefore recommending relief against general income, considwhether it would lead to the waste of the personal allowancThis is often a significant tax planning point.

Losses in two overlapping basis periods aregiven to the earlier tax year only.

Can extend the claim to net gains of the same year,less brought forward capital losses.

Relief against non-trading income restricted to greater o25% of adjusted total income and £50,000













































12: Partnerships and limited liabilitypartnerships

Topic List

Sharing profits between partners

Losses

Partnerships are another key exam topic.You should beprepared to answer a Section B question on this topic,although it may also be tested in Section A. The technique is to allocate the profits between the partnersand then look at each partner independently.




















LossesSharing profitsbetween partners

When a partner joins, the first period of accounfor his own business runs from the date of jointo the firm's next accounting date.The normal

basis period rules for opening years apply to h

When a partner leaves, the last period of accofor his own business runs from the firm's mostrecent accounting date to the day he leaves. Thnormal cessation rules apply to him.

Remember to pro-rate the annualsalary/interest if the period is not 12 monthslong.

then

Compute trading results for a partnership as a whole in thesame way as you would compute the profits for a sole trader

Divide results for each period of account between partners

First allocate salaries and interest on capital to the partners,then share the balance of profits among the partnersaccording to the profit-sharing ratio for the period of account

Each partner is taxed as if he were running his ownbusiness, and making profits and losses equal to his shareof the firm's results for each period of account



































LossesSharing profitsbetween partners

12: Partnerships and limited liability partnershPage 67

Consider all available loss reliefs for eachindividual partner

Next calculate the loss for each tax year

Divide the loss for each period of accountbetween the partners

Partners are entitled to the same loss reliefs assole traders:

Losses

1

2

3




























Notes











13: National insurance contributions

Topic List

NICs for employees

NICs for the self-employed

Although often overlooked, national insurance contributions represent a significant cost to taxpayers.

National insurance contributions could be tested in Section A and also as part of a Section B question.


















NICs for theself-employed

NICs foremployees

13: National insurance contributiPage 71

Class 2

Class 2 are paid at a flat weekly rate. Paid by directdebit or on demand.

Class 4

Class 4 NICs are 9% of any profits falling betweena lower and an upper limit and 2% above upperlimit. Class 4 NICs are collected at the same timeas the associated income tax liability.

Exam focusIn questions which ask whether someonshould trade as a sole trader or through company (as a director) the cost of NICsoften tips the balance in favour of being sole trader.

These limits will be given to you on the exam pa

Profits are the taxable profits, as reduced by tradlosses. Personal pension contributions do notreduce profits.

The self-employed pay Class 2 and Class 4 NICs.




































14: Computing chargeable gains

Topic List

Chargeable persons, disposalsand assets

Basic computation

Losses

The charge to CGT for individuals

Spouses and civil partners

Part disposals

Damage, loss or destruction

It is important that you can calculate chargeable gains realised by individuals and calculate their capital gains tax liability having dealt with losses and the offset of theannual exempt amount.

You may find that the basic topics in this chapter are tested in Section A and you should also be prepared to

answer a Section B question containing a number of disposals of chargeable assets.




























Spouses andcivil partners

Partdisposals

Damage, losor destructio

The charge toCGT for individuals

Basiccomputation

LossesChargeable persons,disposals and assets

Chargeable persons, disposals and assets

Three elements are needed for a chargeable gain to arise.

A chargeable disposal: this includes sales, gifts andthe destruction of assets. Transfer of assets on death isnot chargeable.

A chargeable person: individuals are chargeablepersons.

A chargeable asset: most assets are chargeable, butsome assets are exempt.

1

2

3

CGT applies primarily to personsresident in the UK

CarsSome chattels (eg racehorses)

GiltsQCBs

















































Partdisposals



Basiccomputation


14: Computing chargeable gaPage 75

Computation

Compute a gain as follows: £Proceeds XLess: Cost (X)__Gain X__

Actual proceeds or market valuethe case of gifts and disposals whare not bargains at arms length.

Include:

(1) Original cost of the asset or marketvalue if that was used as proceeds for person who sold the asset to thisindividual.

(2) Enhancement expenditure which wasreflected in the state and nature of theasset at the time of disposal or was onpreserving the owner's legal right to thasset.

(3) Incidental costs of acquisition anddisposal.






























































Partdisposals



Basiccomputation


Deduct allowable capital losses from gains in the tax year in which they arise (before deducting the annualexempt amount).

Allowable losses brought forward are only set off toreduce current year gains less current year allowablelosses to the annual exempt amount.

ExampleZoë made gains of £14,000 in 2014/15. She had brough

forward capital losses of £8,000.Brought forward capital losses of £3,000 will be set off in2014/15 to preserve annual exempt amount of £11,000.The remaining losses will be carried forward to 2015/16

Any loss which cannot be set offis carried forward to set againstfuture gains.

Set off losses against gains notqualifying for entrepreneurs' relieffirst.

Order of set off










































Partdisposals


The charge to CGTfor individuals

Basiccomputation



Rates

18% – within basic rate band

Deduct the annual CGT exempt amount of £11,000 (2014/15) to compute an individual's taxable gains.

10% – entrepreneurs' relief gains 28% – above basic rate limit

taxable income andgains qualifying forentrepreneurs' relief

deducted first

remember to increaselimit by gross gift aiddonations/personal

pension contributions

from gains not qualifying forentrepreneurs' relief first






















































Partdisposals



Basiccomputation


No gain/no loss disposals

When the second spouse/civil partner sells the asset, assume that he/she bought the asset for its original cos

Disposals between spouses and civil partners do not give rise to gains or losses.



























Partdisposals



Basiccomputation



Part disposals

On a part disposal, you are only allowed to take

part of the cost of the asset into account. Costs attributable solely to the part disposed of

are taken into account in full

For other costs, take into account A/(A+B) ofthe cost– A is the proceeds of the part sold– B is the market value of the part retained

ExampleX owns land which originally cost £30,000. It soldquarter interest in the land for £18,000. Theincidental costs of disposal were £1,000.Themarket value of the three-quarter share remainingis estimated to be £36,000.What is the chargeabgain?

£Proceeds 18,00Less: Incidental costs of disposal (1,00____

17,00

Less: × 30,000 (10,00_____

7,00________36,00018,000

18,000

+



























































Partdisposals



Basiccomputation


Loss or destructionDamage

If an asset is damaged andcompensation is received, then this willnormally be treated as a part disposal.

If an asset is destroyed any compensation will normally bebrought into an ordinary CGT disposal computation asproceeds.

If all the proceeds are applied for the replacement of the asswithin 12 months, any gain can be deducted from the cost ofthe replacement asset.

If all the proceeds are used to restorethe asset the taxpayer can elect todisregard the part disposal and deductthe proceeds from the cost of the asset.

If only part of the proceeds are applied, the gain is restrictedto the proceeds not applied, and the remainder of the gain isdeducted from the cost of the replacement asset.









































15: Chattels and the principal private residencexemption

Topic List

Chattels

Wasting assets

Private residences

In this chapter we look at the rules which apply for calculating the gains on certain special types of asset.

The chattel rules may well be tested in Section A.The rules on private residences could form part of a SectionB question.





















Chattels

Privateresidences

Wastingassets

Chattels

A chattel is an item of tangible moveable property

(eg a painting).

Wasting chattels

Gains on chattels sold for gross proceeds of £6,000 orless are exempt.

The maximum gain on chattels sold for more than£6,000 is 5/3 (gross proceeds – £6,000).

Losses on chattels sold for under £6,000 are restrictedby assuming the gross proceeds to be £6,000.

Chattels with a remaining estimated useful of 50 years or less.

Wasting chattels are exempt from CGTunless capital allowances could have beeclaimed on them.
































15: Chattels and the principal private residence exempPage 83

Privateresidences

Wastingassets

Chattels

Exception

A wasting asset is one with an estimated remaining useful life of

50 years or less and whose original value will fall over time.

Wasting assets have their cost written downover time on a straight line basis.

ExampleJo bought a copyright with a remaining life of 40 yearsfor £10,000. He sold the copyright 15 years later for£30,000. Calculate the gain arising.

£Proceeds 30,000Less: Cost (£10,000 × 25/40) (6,250)______Gain 23,750____________

Number of years remaining

Number of years on acquisition

Wasting asset

Assets eligible for capital allowancesand used in a trade do not have theircost written down.








































15: Chattels and the principal private residence exempPage 85

A gain arising whilst a PPR is let is exempt up tothe lower of:

£40,000

The amount of the PPR exemption

The gain in the let period

The private residence exemption covers house plus up to half a hectare of groundA larger area may be allowed for

substantial houses.12

3

Letting exemption Permitted area

When part of residence is used exclusively for business purposes, that part of gain istaxable. Last 18 months exemption does not apply.

Business use






























16: Business reliefs

Topic List

Entrepreneurs' relief

Rollover relief

Gift relief

In a Section B exam question you should look out for thavailability of various reliefs. However, do take care to ensure that you do not claim relief when you are not allowed to.



















Entrepreneurs'relief

Giftrelief

Rolloverrelief

Sole trader business/partnership

Shares in 'personal' trading company owned byemployee/officer

Business assets

Available for material disposal of

business assets

Business owned for one year prior todisposal or business has ceased withinpast three years and business owned atleast one year prior to cessation

Entrepreneurs' relief

Tax net gains at 10%

Lifetime limit of £10m gains

Claim by 12 months from 31 January following tax year of disposal

'Personal' trading companyrequiresshareholding/voting rights

of at least 5%

Must be the disposal othe whole or part of the

business, not justindividual assets ifbusiness continues










































Giftrelief

Rolloverrelief

16: Business rePage 89

Taxpayers can claim to defer gains arisingon the disposal of business assets that arebeing replaced if both the old and the new

assets are on the list of eligible assets.

The new asset must be bought in theperiod starting 12 months before andending 36 months after the disposal.

Exam focusIf a question mentions the sale of somebusiness assets and the purchase of

others, look out for rollover relief but do notjust assume that it is available: the assetsmight be of the wrong type, eg moveableplant and machinery.

Is the new asset a depreciating asset?

Is the new asset a non-depreciating asset?

A depreciating asset is one withexpected life of 60 years or less(eg fixed plant and machinery).

Land and buildings (including parts of buildings) occuas well as used only for the purposes of the trade.

Fixed (that is, immovable) plant and machinery.

Goodwill

Eligible assets



















































Giftrelief

Rolloverrelief

For a non-depreciating asset the gain is deductedfrom the base cost of the new asset.

For a depreciating asset the gain is deferred until itcrystallises at a later date.

Relief is proportionately restricted when an ashas not been used for trade purposes throughits life.

If a part of the proceeds of the old asset are notreinvested, the gain is chargeable up to the amou

not reinvested.

If a non-depreciating qualifying asset is boughtbefore the gain crystallises, the deferred gain mbe rolled into the base cost of that asset.

The gain crystallises on the earliest of:

the disposal of the replacement asset

ten years after the acquisition of the

replacement asset

the date the replacement asset ceases to beused in the trade

1

2

3







































Giftrelief

Rolloverrelief

16: Business rePage 91

The gain is deducted from the recipient's basecost.

Gift relief may be claimed to defer gains arising onbusiness assets. Assets used in a trade

Shares and securities in tradingcompany which is either unlistedor the donor's personal company

Qualifying assetsGift relief

Any actual proceeds in excess of cost reduce the

gain for which relief can be claimed.

If balance sheet of companycontains non business assets gain

eligible restricted to CBA/CA × gain






































Notes











17: Shares and securities

Topic List

Matching

The computation

Alterations of share capital

The matching rules for shares and securities are vitally important, in particular in a Section B question. If you dnot know the matching rules you will not be able to compute a gain on the disposal of shares.



















Matching rules for individuals

Alterations ofshare capital

Thecomputation

Matching

The matching rules for shares held by an individual are different to the matching rules for shares held by acompany. Take care not to confuse the two.

Disposals by individual shareholders are matched withacquisitions in the following order:

Same day acquisitions

Acquisitions within the following 30 days

Any shares in the share pool

Exam focusLearn the 'matching rules' because a crucifirst step to getting a shares question right to correctly match the shares sold to theoriginal shares purchased.































17: Shares and securPage 95


Thecomputation

Matching

The share pool is kept in two columns:

The number of shares

The cost

1

2

The share poolThe computation

The computation is proceeds less cost.

On a disposal the cost is calculated on a pro-ratabasis.

For quoted shares proceeds are calculated as thelower of:

1/4 up, and

Mid bargain






































Thecomputation

Matching

Bonus issues

Rights issues

Rights issue shares are acquired for payment.

Add the numbers of shares to the share pool

and add the cost of the rights shares.

Bonus issue shares are acquired at no cost.

Add the number of shares to the share pool.

Apportion the cost of the old shares to the new

assets received in proportion to their values. Where the new assets include cash, compute

chargeable gain using the cash received andthe part of the cost of the old sharesapportioned to that cash.

Takeover must be for bona fide commercialreasons and not for tax avoidance for thistreatment to apply.

Reorganisations and takeovers







































18: Self-assessment and payment of taxby individuals

Topic List

Returns

Records and appeals

Payment of taxPenalties

This is a key exam topic. It may be examined in a Section A question or in a Section B question either as part of a 15 mark question focused on income tax or in10 mark question.





















PenaltiesPayment of taxRecords andappeals

Returns

Compliance checks

HMRC may make a compliance check enquiry into a return

provided they give notice by a year after:(1) The actual filing date (if on or before due filing date)(2) The 31 January, 30 April, 31 July or 31 October next

following the actual filing date of the return (if filed late)

Filing date

The latest filing date for filing a 2014/15 tax return is:

(1) 31 October 2015 (paper)

(2) 31 January 2016 (electronic)

Exception: if notice after 31 July 2015, latestfiling date is end of three months after notice

Exception: if notice after 31 October 2015,latest filing date is end of three months afternotice

HMRC randomly select returns tocheck.They also select returns wherethere is an identified tax risk.

































Powers

Appeals


Returns

18: Self-assessment and payment of tax by individuPage 99

Records

Records must, in general, be kept

until the later of:

(1) Five years after the 31 Januaryfollowing the tax year concerned(where the taxpayer is inbusiness); or

(2) One year after the 31 Januaryfollowing the tax year, otherwise

HMRC can investigate dishonest conduct by tax agent –

penalty up to £50,000.

HMRC may make assessments to recover tax due anddeterminations which effectively force the filing of a return.

A taxpayer may appeal against:

– Any assessment, except a self-assessment– An amendment to a self-assessment or a disallowance

of a claim or election, following a compliance check ordiscovery

– Penalties

The appeal may be settled by internal review. If not, thehearing is before Tax Tribunal.














































Payment of tax PenaltiesRecords andappeals

Returns

Payment of tax

Payments on account (POA) of income tax and Class 4

NICs must be made on 31 January in tax year and onthe following 31 July.

The final payment of income tax and Class 4 NICs mustbe paid on 31 January following the tax year.

All CGT is due on 31 January following the tax year.

Interest

Interest runs on:

(1) POAs from the normal due dates (31 Jan and 31 July).

(2) Any final payment and CGT from the later of:(i) 31 January following tax year(ii) Three months after the notice to file a tax return was issued

Each POA is 50% of the prior taxyear's income tax and Class 4 NICliability less tax suffered at source

(de minimis limits £1,000, 80%)

































Returns


Penalties for errors

Common penalty regime for IT, NICs,CT and VAT

Imposed for inaccurate return leadingto understatement of tax, false orincreased loss, false or increasedrepayment of tax

Error may be careless, deliberate butnot concealed, or deliberate andconcealed

Maximum penalty based on Potential LostRevenues (PLR):

100% if deliberate and concealed

70% if deliberate but not concealed

30% if careless

Penalties can be reducedby disclosure (eg 0% forcareless error withunprompted disclosure)












































Returns

Penalties for late notification

Common penalty regime for IT, NICs, PAYE, CGT, CT and VAT

Failure may be careless, deliberate but not concealed, or deliberateand concealed

Maximum penalty based on PLR as for penalties for error

Reduced penalties for disclosure: eg 0% if careless failure withunprompted disclosure within 12 months

Penalty for failure to keep records£3,000 per tax year/accounting period





























Penalties for late payment

(1) Penalty date is 30 days after due date

(2) Penalty of 5% of unpaid tax at penalty date ifpayment not more than five months afterpenalty date

(3) Penalty of 5% of unpaid tax at five months aftpenalty date if payment between five monthsand 11 months of penalty date

(4) Penalty of 5% of unpaid tax at 11 months aftepenalty date if payment more than 11 months

after penalty date

(5) Does not apply to payments on account

Penalties for late filingThe maximum penalties for delivering a return after

the filing due date are:(1) Return up to three months late £100

(2) Return over three months late As (1) plus £10daily penalty(max 90 days)

(3) Return over six months late As (1) and (2)plus greater of5% of tax and£300

(4) Return over 12 months late As (1), (2), (3)plus greater of% of tax(conduct related)and £300









































Notes











19: Inheritance tax

Topic List

Scope/basic principles

CLTs and PETs

Death estateTransfer of nil rate band

Exemptions

Payment of IHT

Inheritance tax is a tax on transfer of wealth (gifts). It applies to certain gifts made during lifetime and on death. Inheritance tax may be examined in Section Aand/or in a 10 mark Section B question.






















Scope/basicprinciples

Paymentof IHT

ExemptionsTransfer ofnil rate band

Deathestate

CLTs andPETs

Scope of inheritance taxTransfer of value

By individuals

Lifetime or death

Diminution in valueThe value of the transfer is always the loss to thedonor.

Transfer of valueA gratuitous disposition which results in anindividual being worse off.

For F6, a gift

Usually = gift but watchout for unquoted shares

(before/after)







































19: InheritancePage 107

7 year accumulation principleNeed to look back seven years from chargeable transfto see if any chargeable transfers use up available nilrate band.

Chargeable lifetime

transfer (CLT) –immediate charge totax. Gift to trust.

Potentially exempt transfer

(PET) only chargeable if donordoes not survive seven years –

treat as exempt until death. Giftto individual (except spouse/civilpartner).

Chargeable

transfer ondeath.

2014/15 £325,0Chargeable transfer

Any transfer which is not an exempt transfer.






































Paymentof IHT


Deathestate

CLTs andPETs

Chargeable lifetime transfers (CLTs)IHT charged at date of gift at 20% if exceeds nil rate band

at date of gift.

Additional tax on deathThe IHT on death on a CLT made in seven years before death iscalculated as follows:

(1) Take into account all chargeable transfers in seven yrs before thistransfer (including PETs which have become chargeable)

(2) Calculate the tax at 40% on excess of the gross CLT over nil rateband at death

(3) Deduct taper relief if death between three–seven yrs after transfer

(4) Deduct lifetime tax – but no repayment if exceeds tapered death tax

Exam focusWhen you have grossed up a

transfer, you can check your figureby computing the 20% tax on thegross transfer.

Gross up (20/80) if donor pays lifetime tax ahe has lost both the gift and the IHT paid.















































Potentially Exempt Transfers (PETs)

Treat as exempt during lifetime of donor

Tax on death

IHT on a PET made in seven years before death is calculated as follows:

(1) Take into account all chargeable transfers in seven yrs before thistransfer (including other PETs which have become chargeable)

(2) Calculate tax @ 40% on excess over nil rate band at death

(3) Deduct taper relief if death between three–seven yrs after transfer

if donor does survive seven yearsfrom transfer, PET is exempt transfer




























Paymentof IHT


Deathestate

CLTs andPETs

Death estate

All property owned immediately before death

Less debts, funeral expenses

Incurred for consideration orimposed by law (eg tax todate of death)

Debt secured on property, eg mortgage

Deducted primarily from secured property, eg hous

Endowment mortgages not deducted as repaid ondeath by insurance

Repayment/interest only mortgages are deductible(may be separate life cover)

Including cost of tombstone












































Tax on death estate

(1) Take into account all transfers in seven years before death(including PETs which have become chargeable).

(2) Calculate the tax at 40% on excess over nil rate band atdeath.



















Paymentof IHT


Deathestate

CLTs andPETs

Transfer of unused nil rate band

Individual (A) dies

A had spouse/civil partner (B) whodied before A

B had unused nil rate band on death

Effect Nil rate band of A increased by unused nil rate

band of B

Affects additional tax on CLTs, tax on PETs anddeath estate

Scale up if nil rate band increased between B'sdeath and A's death

ClaimWithin two years of end of month of A's death byA's PRs.











































Paymentof IHT


Deathestate

CLTs andPETs


Annual (£3,000)

Small gifts

Marriage

Normal expenditure out of income

Exemptions for lifetime transfers

only

Spouse/civil partner

Exemption for lifetime and death

transfers

£250 or less per donee per tax year

£5,000 from parent£2,500 from remote ancestor, or party to marriage£1,000 from anyone else

Use against transfers in date order. Can c/f unuseamount for one year only. Use current year firstbefore b/f




















































Paymentof IHT


Deathestate

CLTs andPETs

Payment of IHTEvent Liability to pay tax Due date

CLT – lifetime tax Donor unless trustees agree to pay Later of

(1) 30 April just after end of tax year(2) Six months after end of month of transfer

CLT – death tax Trustees Six months from end of month of donor's death

PET Donee Six months from end of month of donor's death

Death estate PRs Earlier of

(1) Delivery of account(2) Six months from end of month of donor's

death




































20: Computing taxable total profits

Topic List

Accounting periods

Residence

Taxable total profits

Trading profits and property businessincome

Loan relationships

Long period of account

In this chapter we will cover the structure of the computation of taxable total profits. This is an essentialpart of your examination as one 15 mark Section B question will focus on corporation tax.























Residence Trading profits andproperty business income

Accountingperiods

Long periodof account

Loanrelationships

Taxable totalprofits

An accounting period can never exceed 12 months. Ifa company prepares accounts for a period exceedingtwelve months, the period of account must be splitinto two accounting periods.

The first 12 months formthe first accounting period

The remaining months formthe second accounting per

Period of account

A period of account is the period for which accounts are prepared.

Accounting period

An accounting period is the period for whichcorporation tax is charged.

It starts when the company starts to

trade, or immediately after the end of theprevious accounting period.

It ends 12 months after it starts or, ifearlier, when the period of account ends.









































Accountingperiods


Loanrelationships


20: Computing taxable total proPage 117

Residence

A company is resident in the UK if it isincorporated in the UK or if its central managementand control are in the UK.

A UK resident company is subject to UKcorporation tax on its worldwide profits.































Accountingperiods


Loanrelationships


Proforma for calculating taxabletotal profits£

Trading profits XInterest income XMiscellaneous income XProperty business income XChargeable gains X__Total profits XLess: losses deductible from total profits (X)

Less: qualifying charitable donations (X)__Taxable total profits X____

A company's taxable total profits are arrived at

by aggregating its various sources of income andchargeable gains (total profits) and thendeducting qualifying charitable donations and

certain losses.

Dividends from other companies (UK and overseas) are not included in taxable total profits

Profits of trades

Interest from non-trading loan relationships(eg bank/building society interest)

Any other profits

Income from land and buildings in the UK

Taxable total profits

















































Accountingperiods


Loanrelationships



Trading profits

Exception: Interest on a loan taken out to buy propis dealt with under the loan relationship rules, not aspart of the property business.

Property business losses

The computation of trading profits followsincome tax principles.

Set against total profits of the company for thesame accounting period, then carry the excessforward as a property business loss.

Proforma£ £

Net profit per accounts XAdd expenditure not allowed for

tax purposes X__X

DeductIncome not taxable as trading income X

Expenditure not charged in theaccounts but allowable for tax XCapital allowances X__

(X)__Taxable trading profits X____

Remember there is no disallowance of expenditureor restriction of capital allowances for private use.

Property business income

The computation of property business incomefollows income tax principles.




























































Accountingperiods


Loanrelationships


Trading loan relationship Non-trading loan relationship

Loan relationshipsA company that borrows or invests money has a loan relationship.

Held for trade purposes (eg debenturesissued for trade purposes)

Costs (eg interest) accruing are deductibletrading income expenses

Income accruing (eg interest income) istaxable as trading income.

Held for non-trade purposes (eg buildingsociety account held for investmentpurposes)

Tax income accruing as interest income

Deduct expenses accruing from the pool ofinterest income.

Net deficits are notexaminable













































Accountingperiods


Loanrelationships



ExampleIf A Ltd prepares accounts for the fifteen monthsto 31.12.14, there will be one 12 monthaccounting period to 30.9.14 and a second threemonth accounting period to 31.12.14.

The first 12 monthsform the first

accounting period

The remaining monthsform the second

accounting period

Division of profits

Divide profits between the accounting periods as follow

Trading income: time apportion the amount beforecapital allowances

Compute capital allowances separately for eachperiod

Property business income: time apportion

Interest income: allocate to period in which it accru

Miscellaneous income: time apportion

Gains: allocate to the period in which they arerealised

Qualifying charitable donations: allocate to the perin which they are paid

Long period of account(> 12 months)
























































Notes











21: Computing the corporation tax liability

Topic List

The charge to corporation tax

Associated companies

In this chapter we will cover the calculation of the corporation tax liability. This too is an essential part of your examination.

















Associatedcompanies

The charge tocorporation tax

Rates of corporation tax (CT) are:

Set for financial years

Dependent on the level of augmented profits

A financial year runs from 1 April in one year to31 March in the next. Financial Year 2014 (FY 2014

runs from 1 April 2014 to 31 March 2015.

If there is a change in the rate of CT, and a companyaccounting period does not fall entirely into onefinancial year, the taxable total profits and augmenteprofits of the period are time apportioned to the twofinancial years.

Augmented profits are taxable total profits plus the grossed up amount of dividends (FII) received from non-

associated companies.

Rates

Augmented profits
































21: Computing the corporation tax liabPage 125

Marginal relief is given ifaugmented profits fall between

the upper and lower limits

The main rate (FY 2014 –21%) of CT applies if

augmented profits exceed theupper limit.

The small profits rate (FY2014 – 20%) applies if

augmented profits are belowthe lower limit.

Exam focusThe marginal relief formula willbe given to you in the exam.

It is: standard fraction ×(Upper limit – augmented profits) ×

profitsaugmented

profitstotaltaxable






































Associatedcompanies

The charge tocorporation tax

Upper and lower limits

The lower and upper limits are:

Multiplied by months/12 for short accountingperiods

Shared equally between the number of'associated' companies in the group

Exclude dormant companies but

include trading non-residentcompanies

Companies under common control

ExampleA Ltd, which has one associated companyprepares accounts for the nine months to31.3.15. The upper limit for this period is

9/12 × = £562,500

2

£1,500,000

































22: Chargeable gains for companies

Topic List

Calculation of chargeable gains

Disposal of shares

Rollover relief

This chapter deals with calculating chargeable gains focompanies.

A key area is the rules for the disposal of shares and securities.



















Calculation ofchargeable gains

Disposal ofshares

Rollover relief

Computation

Compute a gain as follows:

£Proceeds XLess: allowable cost (X)Less: indexation allowance (X)__Chargeable gain X__

(1) Cannot create or increase a loss

(2) Round to three decimal placesbefore multiplying by cost.

RPI for month of disposal – RPI for month of acquisiti

RPI for month of acquisition

1

2

Include in total profits, and so charged to corporation tax

No annual exempt amount



































Disposal ofshares

Calculation ofchargeable gains

Rollover relief

The FA 1985 pool is kept in three columns:

The number of shares

The cost

The indexed cost

Operative events are acquisitions and disposals(apart from bonus issues)

Do not round indexation to three decimal placesafter April 1985.

The indexation allowance is the indexed costtaken out of the indexed cost column minus thecost taken out of the cost column.

At each operative event

(1) Increase the indexed cost column by the indexerise since the date of the last operative event, th

(2) Add the cost of any shares acquired to both the

cost/indexed cost columns, or

(3) Deduct a pro-rata slice from the cost/indexed cocolumns in respect of any shares disposed of.

1

2

3

Operative event









































22: Chargeable gains for companPage 131

Reorganisations and takeovers

Apportion the cost and indexed cost of the oldshares to the new assets received in proportionto their values.

Where the new assets include cash, compute achargeable gain using the cash received andthe parts of the cost and indexed cost of the oldshares apportioned to that cash.

If just a takeover qualifying for the 'paper forpaper' treatment, the cost and indexed cost ofthe original holding is passed onto the new

holding which now takes its place.




























Rollover reliefCalculation ofchargeable gains

Disposal ofshares

Companies can claim to defer gainsarising on the disposal of businessassets that are being replaced if:

The old and the new assetsare used in the trade of thecompany

The old and the new assetsare on the list of qualifyingassets

The new asset is bought inthe period starting 12 months

before and ending 36 monthsafter the disposal

1

2

3Is the new asset a depreciating asset?

Is the new asset a non-depreciating asset?

A depreciating asset is one with anexpected life of 60 years or less (efixed plant and machinery).

Land and buildings (including parts of buildings) occupieas well as used only for the purposes of the trade.

Fixed (that is, immovable) plant and machinery.

Eligible assets














































22: Chargeable gains for companPage 133

For a non-depreciating asset the gain is deductedfrom the base cost of the new asset.

For a depreciating asset the gain is deferred until itcrystallises at a later date.

Relief is proportionately restricted when an ashas not been used for trade purposes throughits life.

If a part of the proceeds of the old asset are notreinvested, the gain is chargeable up to the amounot reinvested.

If a non-depreciating qualifying asset is boughtbefore the gain crystallises, the deferred gain mbe rolled into the base cost of that asset.

The gain crystallises on the earliest of:

The disposal of the replacement asset

Ten years after the acquisition of the

replacement asset

The date the replacement asset ceases to beused in the trade

1

2

3



































Notes











23: Losses

Topic List

Trading losses

Non-trading losses

In this chapter we will see how a single company may obtain tax relief for its trading and non-trading losses.Losses are a key topic area for exam purposes. The beway of learning how to deal with losses is to practise questions involving losses in the BPP Learning Media Practice & Revision Kit.




















Non-tradinglosses

Tradinglosses

A company's trading loss may be:

(1) Set against other profits of the same accountingperiod

(2) Set against profits of the previous 12 months

(3) Carried forward to set against the first availableprofits from the same trade

Before qualifying charitable donations

If pro-rating is necessary, pro-rate profits beforequalifying charitable donations to compute maximrelief.

Reliefs (1) and (2) need to be claimed. A company can choose to claimrelief (1) only (ie relief (1) but not relief (2)). However, if relief (2) is to beclaimed, relief (1) must be claimed first. Relief (3) is given automatically toany loss not relieved under (1) or (2).

Trading losses






























23: LosPage 137

Cessation of trade

The 12 month carry back period in (2) above isextended to 36 months where the trading lossarose in the 12 months prior to the cessation oftrade.

Qualifying charitable donations are unrelieved.

The choice between reliefs

Relieve losses at the highest possible margina

tax rate

Consider timing: earlier relief is better than latrelief




























Non-tradinglosses

Tradinglosses

Non-trading losses

Capital losses can only be set againstcapital gains in current or futureaccounting periods. They must be setagainst the first available gains.

Property business losses are first setagainst total profits for the current period.Any excess is then carried forward asthough it were a property business lossarising in a later period.

Capital losses Property business income


























24: Groups

Topic List

Group relief

Capital gains group

When presented with a group question in the exam always establish the percentage holding at each level and the effective interest of the holding company in eacsubsidiary. These figures will determine the reliefs available.



















Trading lossesExcess property business lossesExcess qualifying charitable donations

Losses available to surrender

Capitalgains group

Grouprelief

Group relief allows the losses of one group company tobe set against the taxable total profits of another.

For a group relief group to exist one company musthave a 75% effective interest in the other, or theremust be a third company which has a 75% effectiveinterest in both.

Exam focusGive group relief where it will save most tax:firstly to companies in the marginal relief band(marginal rate 21.25%), then to companiespaying the 21% rate, then to companies paying

at the 20% rate.

Capital losses cannot be group relieved.Group relief group
































Corresponding accounting periods

24: GroPage 141

Available profitsProfits available to absorb group relief are total profitsless qualifying charitable donations and current andbrought forward losses.

Group relief is strictly a current period relief. Ifaccounting periods do not coincide, the profits andlosses must be time-apportioned. Only the profits anlosses of the period of overlap may be matched up.

Group relief is given before relief for any amounbrought back from later periods.

A claim for group relief is normally made the claimant company's tax return. It isineffective unless notice of consent is alsgiven by the surrendering company.




























No gain/loss arises when an asset is transferredwithin a capital gains group.

Capitalgains group

Grouprelief

A capital gains group starts with the top company

(which must be included). It carries on down whilethere is a 75% holding at each level and the effectiveinterest of the top company is over 50%.

Rollover reliefAll members of a capital gains group may be treat

as a single unit for the purpose of rollover relief.

Capital gains group

Two members of a capital gains group can elect totransfer gains/losses between them.


























25: Self-assessment and payment of taxby companies

Topic List

Returns

Payment of tax

In this chapter we look at both the administration of corporation tax (CT) and when that tax must be paid.This is a key exam topic.


















Paymentof tax

Returns

A company must normally file its CT return by the duefiling date which is the later of:

Twelve months after the end of the period to whichthe return relates

Three months after a notice requiring the return wasissued

Notice to check a return must be given by 12 monthsafter

The actual filing date if filed on or before due filingdate

The 31 January, 30 April, 31 July or 31 October nextfollowing the actual filing date if filed late

Initial fixed penalty is £100 rising to £200 if

the return is more than three months late. Fixed penalties rise to £500 and £1,000 if th

return for each of the two preceding periodswas also late.

If the return was between six and 12 monthlate there is an additional tax geared penaltyof 10% of the tax unpaid six months after thfiling date.

If the return is over 12 months late the tax

geared penalty is 20% of the tax unpaid sixmonths after the filing date.

Late filing of Return

Records must generally be kept for six years fromthe end of the accounting period concerned.

Returns

Compliance checks

Common penalty regime applies for errors onreturn/late notification of chargeability




















































Paymentof tax

Returns

25: Self-assessment and payment of tax by companPage 145

Due dates For a 12 month AP instalments are due in:

– Months 7 and 10 in the period– Months 1 and 4 in the following period

For an AP less than 12 months instalments aredue in:

– Month 7 of the period– Then at three monthly intervals– Final payment in month 4 of next period– Amount of instalment is 3 × CT/n where n

length of AP and CT is amount due in

instalments Instalments are due on 14th day of the month

Any company that pays CT at the main rate

Interest on overdue tax runs from the due date. Overpaid tax earns interest. Interest received andinterest paid are dealt with as credits and debits on a non-trading loan relationship.

'Large' companies must pay their anticipated CTliability in quarterly instalments.

Other companies must pay their CT liability ninemonths and one day after the end of the accountingperiod (AP)

Quarterly instalments












































Notes











26: An introduction to VAT

Topic List

Scope of VAT

Taxable and exempt supplies

Registration

Accounting and administration

Valuation of supplies

Deduction of input tax

VAT is a tax with many detailed rules.

VAT may be examined in Section A and in a 10 mark question in Section B.





















Accounting andadministration

Taxable andexempt supplies

Deduction oinput tax

RegistrationScopeof VAT

Valuation ofsupplies

A taxable supply is a supply of goods orservices made in the UK other than an exempsupply.

VAT is a tax on revenue/turnover, not on profits. It isimposed at each stage in a chain of sales, in such away that the burden falls on the final consumer.

VAT applies to taxable supplies of goods orservices made in the UK by a taxable person inthe course of a business.

A taxable person is a person that is registereor ought to be registered.

Normally a supply at cost but business gifts are n

supplies if:

The cost to the donor is £50 or less, or The gift is a sample (unlimited numbers)

A taxable supply is standard rated, reduced-rated, or

zero-rated.An exempt supply is not chargeable to VAT.

Gift of goodsSupplies















































26: An introduction to VPage 149






Zero-rated suppliesTaxable at 0%

Can recover input VATEg food, books and newspapers

Reduced-rated suppliesTaxable at 5%Can recover input VATEg fuel for domestic use

1

2

Exempt suppliesNot taxable

Cannot recover input VATEg insurance, education and health servic

Standard-rated suppliesTaxable at 20%Can recover input VATAll supplies which are not zero-rated,

reduced-rated or exempt

3

4


















































Group registration

Available to companies under common control.

Representative member accounts for all VAT.

No VAT on supplies between group members.

Any company can be EXCLUDED from group.

Consider excluding companies making zero-rated supplies.

Reduces VATaccounting

Improvescash flow

Simplifies VATaccounting

All members jointly andseverally liable for VAT













































Most VAT returns must be filed electronicallywithin one month and seven days of the end ofthe period.

A trader accounts for VAT for each VAT period.Periods are normally three months long, but theymay last for one month or 12 months. A VATreturn is completed for each period.

VAT periodIf a trader does not make monthly returns, and

the total VAT liability over 12 months to the endof a VAT period exceeds £2,300,000, he mustmake payments on account of each quarter'sVAT liability during the quarter.

Substantial traders














































Discounts

Where a discount is offered for prompayment, VAT is always chargeable othe discounted amount.

Value of supply

The VAT proportion of the consideration is the 'VAT fraction'

6

1

120

20=

Example

If total consideration is £240, the VAT proportion is

£40 (240 × )6

1

The value of a supply is the VAT-exclusive price.

Value + VAT = consideration


















































Non-deductible VAT

FuelVAT on:

Fuel used for business purposes: fully deductible

Fuel used for private purposes: fully deductiblebut account for output VAT based on actual costof fuel or a set scale figure

Impairment losses (Bad debt relief)

From when payment is dueWhere cost of fuel used for privatepurposes is not fully reimbursed to business

VAT on motor cars not wholly used for business purposes

VAT on business entertaining (except overseas customers)VAT on domestic accommodation for directorsVAT on non-business items

Based on CO2 emissions

Claim within four years and six months

Must be over six months old

Must be written off in creditor's accounts

Attribute payments on account in chronologicalorder




















































27: Further aspects of VAT

Topic List

VAT invoices and records

Penalties

Overseas aspects

Special schemes

For exam purposes, it is again important that you learn the detailed rules covered in this chapter.


















VAT invoicesand records

Records

Specialschemes

Penalties Overseasaspects

Name, address and VAT no of supplier

Name and address of customer Invoice no, date of issue and tax point Details of type of supply and the goods/services supplied For each supply: the quantity, the unit price, VAT rate and

the VAT exclusive amount

The rate of any cash discount The total invoice price excl. VAT (with separate totals for

zero rated and exempt supplies)

Each VAT rate and the total VAT

Invoices: required detailsLess detailed invoices may be issuewhere the invoice is for up to £250

(incl VAT).

VAT invoices are not required for payments of up to £25(including VAT) which are for telephone calls or car park fees ormade through cash operated machines.

VAT records must be kept for six years

Records must be kept up to date and in

way which allows: The calculations of VAT due

Officers of HMRC to check the figureon VAT returns



















































Specialschemes

PenaltiesVAT invoicesand records

Overseasaspects

27: Further aspects of VPage 159

Default surchargeFirst late return/payment commences surchargeperiod, then:

Default involving late Surcharge as a percentage payment of VAT in the of the VAT outstanding surcharge period at the due date

First 2%Second 5%Third 10%Fourth and over 15%

2% and 5% surcharges are not normally demandedunless the amount due would be at least £400. Forthe 10% or 15% surcharges a minimum of £30 ispayable.

Errors

Common penalty regime applies for errors onreturns

Every time there is a default, the surcharge period isextended to the anniversary of the end of the default period.

Errors not exceeding greater of

£10,000 (net error); or 1% × net VAT turnover for return period (max

£50,000)may be corrected on the next return. Other errors tobe notified in writing, eg letter.Penalties for error may be imposed in both cases.

Interest on unpaid VATInterest is charged on VAT which was or could havbeen assessed. It runs from when the VAT shouldhave been paid to when it is paid. This periodcannot exceed three years.























































Specialschemes


Overseasaspects

Outside the EU – goods

Services supplied to UK business customer

Inside the EU – goods

Services supplied by UK traderExport of services by UK registered trader tobusiness customer outside UK – outside scope ofUK VAT.

Tax point earlier of:

15th of month following acquisition month; invoice date.

Services supplied to business customer in UK fromwithin EU treated as supplied in UK. Output VAT payable

and input VAT claimed by UK registered trader.

Tax point earlier of time service:

Completed; Paid for.

Imports of goods from outside the EU are subject to

VAT at the same rate as on a supply within the UK.Exports of goods to outside the EU are zero-rated.

When a taxable person supplies goods to a

customer in another EU country, the supply is zerrated if the customer is VAT registered.

When goods are supplied to a registered trader inthe UK from within the EU, output VAT payable aninput VAT claimed by UK registered trader.
















































Specialschemes


Overseasaspects

27: Further aspects of VPage 161

Need to monitor future taxable supplies to

ensure turnover limit not exceeded. Timing of payments have less correlation to

turnover (and hence cash received). Payments based on previous year's turnov

may not reflect current year turnover.

Disadvantages

Annual accounting scheme

Annual taxable turnover must not exceed £1,350,000 (excl. VAT)

Annual VAT return

Traders normally have to make interim payments on account of their VATliability during the year by direct debits

Only one VAT return each year so fewer

occasions to trigger a default surcharge. Ability to manage cash flow more accurately. No need for quarterly calculations for input

tax recovery.

Advantages















































Specialschemes


Overseasaspects

Cash accounting scheme

Account for VAT on basis cash paid/received.

Annual taxable turnover must not exceed£1,350,000 (excl VAT).

To join, all VAT returns/payments must be upto date (or arrangements have been made topay outstanding VAT by instalments).

Flat rate scheme

Optional scheme for business with taxexclusive taxable turnover up to £150,000.

Must leave if VAT inclusive taxable suppliesexceed £230,000.

Flat rate of VAT applies to total tax inclusiveturnover.

Normal VAT invoice issued to VAT registered

customers.

The flat rate percentage to use will be given toyou in your exam.










































Notes









f6 passcard.pdf

Documents

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