f6 passcard.pdf
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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
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Fundamentals Paper F6
Taxation FA 2014
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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
www.bpp.com/learningmedia
Printed in the United Kingdomby Ricoh UK Ltd
Unit 2Wells PlaceMerstham, RH1 3LG
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
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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
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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
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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
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Notes
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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.
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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
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Tax avoidanceand tax evasion
Principal sources ofrevenue law and practice
Different typesof taxes
The overall function and purposeof taxation in a modern economy
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
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HM Revenue and Customs
Structure of the UK Tax system
Tax avoidanceand tax evasion
Principal sources ofrevenue law and practice
Different typesof taxes
The overall function and purposeof taxation in a modern economy
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
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1: Introduction to the UK tax sysPage 5
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
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1: Introduction to the UK tax sysPage 7
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
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Tax avoidanceand tax evasion
Principal sources ofrevenue law and practice
Different typesof taxes
The overall function and purposeof taxation in a modern economy
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
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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.
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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.
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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)
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Computingtaxable income
Deductibleinterest
Scope ofincome tax
Chargeable/Exempt income
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.
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2: Computing taxable incoPage 13
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)
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Computingtaxable income
Deductibleinterest
Scope ofincome tax
Chargeable/Exempt income
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
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Computingtaxable income
Deductibleinterest
Scope ofincome tax
Chargeable/Exempt income
2: Computing taxable incoPage 15
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)
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Notes
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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.
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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).
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Jointly heldproperty
Child benefitcharge
Gift aidComputingincome tax
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
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Jointly heldproperty
Child benefitcharge
Gift aidComputingincome tax
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
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Jointly heldproperty
Child benefitcharge
Gift aidComputingincome tax
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.
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Notes
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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.
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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
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Allowabledeductions
Employment andself-employment
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)
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Allowabledeductions
Employment andself-employment
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.
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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.
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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
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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
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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
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Other benefits
5: Taxable and exempt benefits. The PAYE sysPage 31
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
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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
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5: Taxable and exempt benefits. The PAYE sysPage 33
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
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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
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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.
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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
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Annual limit
Contributions topension schemes
Receiving benefits frompension arrangements
Types ofpension scheme
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
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Contributions topension schemes
Receiving benefits frompension arrangements
Types ofpension scheme
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
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Contributions topension schemes
Receiving benefits frompension arrangements
Types ofpension scheme
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
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Notes
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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.
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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.
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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
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Notes
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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.
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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.
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Cash basis ofaccounting
The adjustmentof profits
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
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Cash basis ofaccounting
The adjustmentof profits
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
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Cash basis ofaccounting
The adjustmentof profits
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
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Cash basis ofaccounting
The adjustmentof profits
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
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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.
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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.
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Allowances onplant and machinery
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
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Allowances onplant and machinery
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
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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
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Allowances onplant and machinery
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
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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.
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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
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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
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Notes
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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.
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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.
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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
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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.
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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
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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
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Notes
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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.
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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.
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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.
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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
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Spouses andcivil partners
Partdisposals
Damage, losor destructio
The charge toCGT for individuals
Basiccomputation
LossesChargeable persons,disposals and assets
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.
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Spouses andcivil partners
Partdisposals
Damage, losor destructio
The charge toCGT for individuals
Basiccomputation
LossesChargeable persons,disposals and assets
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
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Spouses andcivil partners
Partdisposals
Damage, losor destructio
The charge to CGTfor individuals
Basiccomputation
LossesChargeable persons,disposals and assets
14: Computing chargeable gaPage 77
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
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Spouses andcivil partners
Partdisposals
Damage, losor destructio
The charge toCGT for individuals
Basiccomputation
LossesChargeable persons,disposals and assets
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.
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Spouses andcivil partners
Partdisposals
Damage, losor destructio
The charge toCGT for individuals
Basiccomputation
LossesChargeable persons,disposals and assets
14: Computing chargeable gaPage 79
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
+
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Spouses andcivil partners
Partdisposals
Damage, losor destructio
The charge toCGT for individuals
Basiccomputation
LossesChargeable persons,disposals and assets
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.
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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.
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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.
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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.
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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
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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.
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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
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Entrepreneurs'relief
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
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Entrepreneurs'relief
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
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Entrepreneurs'relief
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
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Notes
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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.
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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.
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17: Shares and securPage 95
Alterations ofshare capital
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
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Alterations ofshare capital
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
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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.
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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.
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Powers
Appeals
PenaltiesPayment of taxRecords andappeals
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.
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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%)
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PenaltiesPayment of taxRecords andappeals
Returns
18: Self-assessment and payment of tax by individuPage 101
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)
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PenaltiesPayment of taxRecords andappeals
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
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18: Self-assessment and payment of tax by individuPage 103
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
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Notes
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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.
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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)
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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.
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Scope/basicprinciples
Paymentof IHT
ExemptionsTransfer ofnil rate band
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.
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19: InheritancePage 109
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
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Scope/basicprinciples
Paymentof IHT
ExemptionsTransfer ofnil rate band
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
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19: InheritancePage 111
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.
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Scope/basicprinciples
Paymentof IHT
ExemptionsTransfer ofnil rate band
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.
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Scope/basicprinciples
Paymentof IHT
ExemptionsTransfer ofnil rate band
Deathestate
CLTs andPETs
19: InheritancePage 113
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
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Scope/basicprinciples
Paymentof IHT
ExemptionsTransfer ofnil rate band
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
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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.
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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.
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Residence Trading profits andproperty business income
Accountingperiods
Long periodof account
Loanrelationships
Taxable totalprofits
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.
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Residence Trading profits andproperty business income
Accountingperiods
Long periodof account
Loanrelationships
Taxable totalprofits
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
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Residence Trading profits andproperty business income
Accountingperiods
Long periodof account
Loanrelationships
Taxable totalprofits
20: Computing taxable total proPage 119
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.
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Residence Trading profits andproperty business income
Accountingperiods
Long periodof account
Loanrelationships
Taxable totalprofits
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
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Residence Trading profits andproperty business income
Accountingperiods
Long periodof account
Loanrelationships
Taxable totalprofits
20: Computing taxable total proPage 121
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)
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Notes
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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
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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
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Notes
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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
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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
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Notes
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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.
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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
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26: An introduction to VPage 149
Accounting andadministration
Taxable andexempt supplies
Deduction oinput tax
RegistrationScopeof VAT
Valuation ofsupplies
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
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Accounting andadministration
Taxable andexempt supplies
Deduction oinput tax
RegistrationScopeof VAT
Valuation ofsupplies
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
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Accounting andadministration
26: An introduction to VPage 153
Taxable andexempt supplies
Deduction oinput tax
RegistrationScopeof VAT
Valuation ofsupplies
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
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Valuation ofsupplies
26: An introduction to VPage 155
Accounting andadministration
Taxable andexempt supplies
Deduction oinput tax
RegistrationScopeof VAT
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
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Deduction oinput tax
Accounting andadministration
Taxable andexempt supplies
RegistrationScopeof VAT
Valuation ofsupplies
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
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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.
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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
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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.
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Specialschemes
PenaltiesVAT invoicesand records
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.
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Specialschemes
PenaltiesVAT invoicesand records
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
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Specialschemes
PenaltiesVAT invoicesand records
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.
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Notes
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Notes
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