ACCA F6
Taxation
Exam paper
• 3 hours long
• 15 minutes reading time
• 5 compulsory questions
– Q1 – Income Tax
– Q2 – Corporation Tax
– Q3 – Capital Gains Tax / Chargeable gains
– Q4 & Q5 – Any other area of the syllabus
– Minimum of 10 marks on VAT
INCOME TAX
COMPUTATION AND
PROPERTY INCOME
Income tax overview
• Tax year 6 April – 5 April
• 2009/10
• Calculate taxable income for tax year
• Calculate tax thereon
Taxable income
Income assessable
Basis of assessment
Profits from a trade, profession
or vocation (other income)
Tax adjusted profits of the
accounts ending in the current
tax year
Interest received from UK
sources (savings income)
Income from employment
(other income)
Income received in the tax year
Dividend income (dividend
income)
Property income (other income)
Rental profits accruing in the tax
year
Grossing up
Interest received
× 100/80
Dividends received
× 100/90
Credit given against income tax
liability for tax suffered at source and
10% dividend tax credit
Note:
Some interest is received gross, namely Government Stock
interest, Treasury stock interest and Exchequer stock interest
Exempt income
• Premium Bond prizes
• Betting/gambling winnings
• Returns on National Savings Certificates
• Income from ISAs
Income tax computation
Income tax computation
Note:
Tax credits on dividends are never repayable. Offset
against IT liability first to allow other tax credits to
generate a repayment
Deductions
Reliefs
• Qualifying interest
– Employees: interest on
loans to purchase P&M for
use in employment
– Partners: interest on loans
to purchase shares or
invest in partnership
• Trading losses
Personal allowances
• Standard - £6,475 (09/10)
• Age allowance
– 65+ at any time in tax year
– restricted if income
exceeds £22,900
– restriction 50% × (net
income − £22,900)
– minimum £6,475
Tax rates
Different tax rates apply depending on the amount and type of income
Other
Savings
Dividends
Basic rate band
(first £37,400)
20%
20%
(see note)
10%
Higher rate
(over £37,400)
40%
40%
32.5%
Note: If savings income falls into the first £2,440 of taxable
income it is taxed at 10%
Extending basic rate band
• Gift Aid
– Paid net of basic rate tax (20%)
– Basic rate band extended by gross amount
(net × 100/80) if higher rate tax payer
• Personal pension contributions
– As for Gift Aid payments
Property income
Accruals basis
Wholly and
exclusively
incurred (e.g. bad
debts, repairs,
insurance)
Aggregate income from
all properties
Wear & tear allowance for
furnished properties:
10% × (Rent – WR – CT)
Lease premiums
• Where a premium is paid on the grant of a short
(≤50 years) lease
– the landlord is taxed on property business income of
Premium
X
Less 2% × premium × (n-1)
(X)
Assessed on the landlord
Y
Where n = number of years of the lease
• Relief for premium paid if grant sublease
– Taxable premium for head lease × Duration of sublease
Duration of head lease
Property income – other aspects
• Rent a room
– Gross rents ≤ £4,250 = exempt
– Gross rents > £4,250 = Normal calculation unless elect
• Furnished holiday lettings
– Conditions
• Situated in UK or any EEA country
• Available to let ≥ 140 days, actually let ≥ 70 days
• No long term occupation (≥ 31 days) unless < 155 days
– Advantages
•
•
•
•
Loss relief as if trading
CGT reliefs available (rollover & Entrepreneurs’)
Net relevant earnings for pension contributions
Capital allowances on furniture
Joint income
• Husband and wife and civil partners
– Normal assumption 50:50 split
– Can elect for income to be taxed according
to actual entitlement
ISAs
Maximum investment
£7,200 (£10,200 age 50+)
Overseas income
• Individual resident in UK if:
– Present in UK for at least 6 months
– Makes frequent and substantial visits to the
UK, at least 90 days on average over the
previous four tax years
INCOME TAX
EMPLOYMENT INCOME
Employment income
Employment v self employment
Main criteria
• control
• financial risk
• equipment – who provides
• work performance and correction
• holidays and sickness benefits
• exclusivity
Employment income pro-forma
Employment income - overview
• Basis of assessment
– Receipts basis, i.e. assessable for tax year in
which paid (special rules for directors)
• Allowable deductions
–
–
–
–
–
Pension contributions
Professional subscriptions
Payroll giving
Travel expenses necessarily incurred
Mileage allowances:
– if rate paid < Approved Mileage Allowance
– excess is a taxable benefit
Benefits
Benefits
Exempt
Taxable
on all
P11D
employees
Note: P11D employees are those earning ≥ £8,500 pa
plus most directors
Exempt benefits
Include:
•
•
•
•
•
•
•
•
•
•
•
Employer pension scheme contributions
Canteen facilities, luncheon vouchers 15p per day
Relocation costs (max £8,000)
Job related accommodation
Mobile telephones – one per employee
Workplace nurseries, childcare contributions (max £55 pw)
£3 pw home working allowance
Staff parties (£150 per head pa)
Car parking
Works buses
Reimbursement of expenses for working away from home (£5
per night in UK, £10 per night overseas)
Assessable on all employees
Benefit
Amount assessable
Cash vouchers
Cash for which the voucher can be
exchanged
Non cash vouchers
Cost to employer
Credit cards
All items purchased for private use (not
interest or card charges)
Payment by an
employer of an
employee’s liability
Amount paid by employer e.g. home
telephone
Living accommodation Up to 3 components – see below
Living accommodation
Benefit
Amount assessable
Basic charge
Higher of
• Annual value
• Rent paid by employer
Expensive
accommodation
charge
Property cost to employer > £75,000
(Cost* − £75,000) × official rate of
interest
(Note – official rate is provided in exam)
Ancillary benefits
• Use of furniture
• Living expenses
(e.g. heating,
electricity,
decorating)
Only apply if employee earns >
£8,500pa
20% × market value when first provided
Cost to employer
* Acquisition cost plus improvements up to start of tax year
Job related accommodation
Benefit
Basic charge
Amount assessable
Exempt
Expensive accommodation Exempt
charge
Ancillary benefits
Calculate as normal but
cannot exceed 10% of
other employment income
Assessable on P11D employees
Benefit
Amount assessable
Cars and fuel
Based on carbon dioxide emissions
Vans
Scale charge (£3,000 pa, £500 pa for fuel)
Interest free/low
interest loan
Based on official rate of interest
Assets loaned
Based on 20% market value of the asset
Gift of new asset
Cost to employer
Other
Marginal cost to the employer
Benefits – cars and fuel
Cars
• ≤ 120g/km = 10%
• Include extras
• 121g/km – 135g/km = 15%
• £80,000 cap
• +1% each 5g/km >135g/km
• Employee contributions
up to £5,000 deductible
• 3% supplement for diesel
• Maximum = 35%
Fuel
Cannot deduct partial contributions for private fuel
Benefits - loans
• Loans
– low interest or interest free loan
Interest on outstanding balance × ORI
X
Less interest actually paid
X
Benefit
X
ORI = Official rate of interest (given in exam)
– Use lower of average or precise method
– No benefits if loans outstanding at any time
in tax year if ≤ £5,000
Benefits – use of assets
• Use and transfer of assets
– 20% × market value when first provided
– Two calculations for transfer of previously
owned assets to employee – higher of:
– Market value at gift
X
– Market value when first used X
Less amounts already taxed (X)
X
INCOME TAX
INCOME FROM SELF
EMPLOYMENT
Badges of trade
Test
Consider
Subject matter
Personal use? Investment? Trade?
Ownership period
Brief period of ownership indicates trading
Frequency of
transactions
Repeated similar transactions indicate
trading
Improvements
Work carried out to make asset more
marketable may indicate trading
Reason for sale
Forced sale to raise cash indicates not
trading
Motive
Profit motive indicates trading
Adjustment of profits
Net profit as per accounts
Add back
• Disallowed Items
• Taxable trading income
not credited in the accounts
Less:
• Non trading income
• Expenditure not charged in
the accounts but allowable
trading expenditure
• Capital allowances
Tax-adjusted trading profit
£
X
X
X
(X)
(X)
(X)
–––
X
–––
Disallowable expenditure
• Wholly and exclusively incurred
– No private items e.g. private motoring
– No salary for proprietor
• Capital expenditure
– Depreciation replaced by capital
allowances
– No loss on sale
– No improvements
– Review repairs carefully
Disallowable expenditure
• Car leasing costs
– CO2 emissions > 160g/km - 15% of leasing
costs disallowed
– CO2 emissions ≤ 160g/km – no adjustment
• Legal costs re capital, except:
– Cost of renewing short lease
– Cost of defending title to an asset
– Cost of raising loan finance
Disallowable expenditure
• Other items include:
– Fines/penalties (except employee parking)
– Donations (except to local charities)
– Gifts (except <£50, advert & not food/drink)
– Entertaining (except staff)
– Impaired debts (except trade debts)
– Interest payable on non-trade loans
• Allowable items- show adjustment as nil
Other adjustments
• Taxable trading income not included in
the accounts
– Goods for own use
• If no adjustment made in the accounts
– add back selling price
• If correct entries made in the accounts
– only add back profit element
Non trading income
Property
business income
Dividends
received
Income not
taxable as
trading income
Capital profits
Bank interest
Other adjustments
• Expenditure not charged in the
accounts but allowable
– Capital allowances
– Business expenses borne by proprietor
– Portion of short lease premium paid =
Premium assessable on landlord
Period of lease
INCOME TAX
CAPITAL ALLOWANCES
Capital allowances
Function
Active
Apparatus
with which
the business
carried on
Passive
Setting in
which the
business
carried on
Capital allowances computation
• General pool
– Everything not in other columns
• Special rate pool
–
–
–
–
Long life assets
Integral features in buildings
Thermal insulation of buildings
Cars with emissions of above 160g/km
• Single asset ‘pools’
– Expensive (£12,000 or more) cars brought forward
– Short life assets
– Private use (by business owner) assets
General pool pro-forma
General pool pro-forma
Annual investment allowance
•
•
•
•
First £50,000 expenditure (12 months)
Pro-rate if period <12 months
All assets except cars
Advisable to allocate
– Special rate pool
– General pool
– Short life assets
– Private use assets
• Not available in final accounting period
Writing down allowance
•
•
•
•
20% on reducing balance basis
10% for special rate pool
Pro-rate if period ≠12 months
Expensive cars brought forward maximum £3,000 pa
• Small pool WDA – can write off balance
of £1,000 or less (for 12m period)
• Restrict for private use by proprietor
First year allowances
• Plant and machinery
– 40% FYA on general pool expenditure in
excess of AIA (6 April 2009 - 5 April 2010)
– FYA not available on special rate pool
• Cars with emissions ≤ 110g/km
– 100% FYA available in the period of
acquisition
• Never time apportion FYA
Cars
• Expenditure pre 6.4.2009 brought forward
– Expensive cars (>£12,000) - depooled:
• 20% WDA, max £3,000 (both for 12m period)
• Balancing adjustment on disposal
– Cost ≤ £12,000 - in general pool (20% WDA pa)
• On/after 6.4.2009 depends on CO2 emissions
– ≤ 110g/km (‘low emission’)
– 100% FYA
– 111-160g/km – general pool
– 20% WDA pa
– > 160g/km
– special rate pool – 10% WDA pa
• Private use - only business proportion allowed
Short life assets
•
•
•
•
•
•
Each asset has its own column
< 5 years
AIA/FYA available
Balancing adjustment on sale
Not available on cars
Asset not sold within 4 years from end
of accounting period in which acquired
transferred to general pool
Private use assets
• Each asset has its own column
• Asset written down by full
AIA/FYA/WDA but allowance claimed
restricted for business use
• Not relevant for companies
Balancing adjustments
Proceeds
(restricted to original cost)
> Balance on
‘pool’
< Balance on
‘pool’
Balancing
charge
Balancing
allowance
Exception: A balancing allowance is never given
on the general pool or the special rate pool
until business ceases to trade
Business cessation
• Additions and disposals allocated to
relevant pools
• No AIA/FYA/WDA
• Balancing adjustments given
Industrial buildings allowance
• Main examples – factory, warehouse, staff
welfare building, drawing office and hotels
• Qualifying expenditure
– Cost of
construction/acquiring an
industrial building
– Professional fees (e.g.
architects, legal fees)
– Preparing land
– Associated structures (e.g.
factory car park)
• Non qualifying
– Land
– Offices, shops, showrooms
(25% rule)
– Items qualifying as Plant
and Machinery (e.g. central
heating, thermal insulation)
Industrial buildings allowance
• WDA 2% pa
– If in industrial use at year end
– Within tax life (25 years from date of first
use)
• Disposal
– No WDA in year of sale
– No BC/BA for vendor
• Second hand buildings
– Not examinable
INCOME TAX
BASIS OF ASSESSMENT
Basis period rules
3 scenarios
Ongoing
business
Commencement
of trade
Cessation of
trade
Assessed on
12 month a/c
period ending
in tax year
Assessed
using ‘opening
year rules’
Assessed
using ‘closing
year rules’
Opening year rules
Opening year rules
• First tax year = year in which business
commences trade
• Assessed on profits from date of
commencement to following 5 April
• Second tax year – see flow chart
Opening year rules
Year 2:
Is there an accounting period ending in the tax year?
Yes
No
Is it 12 months long?
Assess on an actual basis
from 6 April to 5 April
No
Yes
Assess profits of
those 12 months
= normal current
year basis
Is it < 12 months?
Is it > 12 months?
Assess profits of
first 12 months of
trade
Assess profits of 12
months up to
accounting date
Opening year rules
Third tax year
• Assess 12m/e on accounting date in the
3rd tax year
Overlap profits
• May be taxed on same profits twice,
these are known as ‘overlap profits’
• Get relief for overlap profits on
cessation
Closing years
Closing year rules
• Final tax year = year in which actually
cease to trade
• Assessed on any profits not previously
assessed less any overlap profits from
commencement
Change of accounting date conditions
• Change must be notified to HMRC on or before 31
January following the tax year in which the change is
to be made
• The first accounts to the new accounting date must
not be >18 months
• There must not have been another change of
accounting date during the previous five tax years
unless for genuine commercial reason
Change of accounting date
New date is earlier in the
tax year
New date is later in the tax
year
• The basis period for the
tax year of change will be
the 12 months to the
new accounting date
• Creates extra overlap
profits
• The basis period for the
tax year of change will be
the period ending with
the new accounting
date
• Overlap profits will be
used to reduce the
assessment to 12 months
INCOME TAX
PARTNERSHIPS
Partnerships – basis of
assessment
Tax adjusted
profits/losses
Share between partners in
PSA of accounting period
Partner A
Partner B
Partner C
Tax each partner as if individual sole trader
Note:
PSA may allocate salaries and/or interest on
capital. These are taxed as trading profit and
not salary or interest income
Partnerships
• Capital allowances by partnership
– Including those on partners’ own assets
• Partnership changes
– Only partner joining/leaving is assessed on special
opening/closing year rules
• Changes in PSA – split period
– Allocate profits according to PSA in force
• Partnership losses
– Calculated and allocated in same way as profits
– Each partner may choose loss relief claims
LLPs
• LLPs
– Amount each partner may be required to
contribute is limited
– Taxed using normal partnership rules
– Normal loss relief rules except losses set
against total income limited to amount of
capital contributed by that partner
INCOME TAX
TRADING LOSSES
Trading losses
Trading losses
Against total
income
of the current
and/or preceding
tax year
•Offset cannot
be restricted to
preserve PA
•Excess loss is
carried forward
Against future
trading profits only
•Relieved against
the first available
future profits
from same trade
•Loss offset
cannot be
restricted
Additional loss relief
after claim against
total income in 09/10
or 08/09 remaining
loss can be c/b 3
years against trading
income
•Prior year claim
unlimited
•Max £50,000 c/b for
further two years
Trading losses
• Opening years relief
– loss in first four tax years of business
– against total income of previous 3 yrs (FIFO)
• Incorporation relief
– losses c/f against income derived from company
• Terminal loss relief
– loss arising in final 12m of trade (+ overlap profits)
– carried back 3 yrs against trading profits
• Relief against capital gains
– after claim against total income
– treat trading loss as current year capital loss
Trading losses
• Choice of loss relief
– Relief as early as possible
– As much tax saving as possible
– Avoid wasting personal allowance / annual
exemption
PENSIONS AND NATIONAL
INSURANCE CONTRIBUTIONS
Method of giving relief
Pension contribution to:
Personal pension
scheme
•Basic rate relief
(20%) given at
source
•Higher rate relief
given by extending
basic rate band
Occupational
scheme
•Tax relief at basic
and higher rates
given through the
PAYE system, i.e.
allowable deduction
against employment
income
Pensions – maximum
contribution
• Can contribute any amount but tax relief only
up to maximum contribution
• The maximum tax allowable annual
contribution into all pension schemes is the
higher of:
– £3,600 and
– 100% of the individual’s relevant earnings,
chargeable to income tax in the year
• Relevant earnings include trading profits,
employment income and furnished holiday
letting income
Pension contributions
• Annual allowance (£245,000)
– 40% income tax charge on excess
• Lifetime allowance (£1,750,000)
– Tax charge on excess:
• If taken as lump sum – 55%
• If taken as annual pension – 25%
• Employer’s contributions
– Not a taxable benefit
– Tax deductible for employer
NIC: Classes of contributions
NIC paid by
Employees
Self employed
Employers
Class 1
Primary
Class 2
Class 4
Class 1 Secondary- Earnings
Class 1A - Benefits
Employees’ NIC
• Class 1 primary
– Payable on earnings (see below)
– Age 16 - 60 (women) / 65 (men)
– 11% on earnings between £5,715 and
£43,875
– 1% above £43,875
• Payment dates
– Collected through PAYE system
Employers’ NIC
• Class 1 secondary
– 12.8% × earnings over £5,715
– Employees > 16 years old
– Collected through PAYE system
• Class 1A
– 12.8% × assessable benefits
– Payable by 19 July following tax year
Class 1 NIC - Earnings
Earnings includes
• any remuneration derived
from employment and
paid in money
• vouchers exchangeable
for cash or goods
• reimbursement of cost of
travel between home and
work
Earnings excludes
• exempt employment
benefits
• non-cash benefits
• reimbursement of
business expenses
NIC – self employed
Class 2
Class 4
• Fixed at £2.40 per week
• Paid by monthly direct debit or
quarterly billing
• Paid on taxable trade profits
less losses brought forward
• 8% on profits between £5,715
and £43,875
• 1% on profits above £43,875
• Paid with income tax under self
assessment
• Not payable if under 16, or 60
or over (women) 65 or over
(men) at start of tax year
INCOME TAX
ADMINISTRATION
Self assessment
• Tax return for 2009/10
– Due dates
– 31 October 2010 (paper)
– 31 January 2011 (electronic)
– Notification of chargeability – 5 October 2010
• Amendments to returns
– Taxpayer within 12m of 31 January filing date
– HMRC within 9m of actual filing date
• Penalties for late filing
– ≤ 6 months = £100
– 6 – 12 months = further £100
– >12 months = additional penalty ≤ 100% tax due
Self assessment
• Determination of tax
– Issued by HMRC if return not filed by filing date
– Can be issued within 3 years of filing date
– Assessment replaced by actual return
• Records
– Business – retain 5yrs from 31 January filing date
– Other taxpayers – retain 1yr
– Penalty ≥ £3,000 if fail to keep adequate records
Payment of tax – 2009/10
• Payments on account (‘POA’)
– 50% × 2008/09 income tax and Class 4
NICs less tax paid at source
– 31 January 2010
– 31 July 2010
• Balancing payment
– 31 January 2011
• Capital gains tax – 31 January 2011
• Reduction of POA
Interest and surcharges
Interest
Surcharges
Charged on:
All late payments of tax
Charged on:
Balancing payment only (not
POAs)
Daily rate
Runs from due date until day
before date of payment
% Tax paid late
Pay > 28 days
late
Pay > 6 months
late
5%
Further 5%
Standard penalties
• Apply in two circumstances
– Inaccuracy in returns (all taxes)
– Failure to notify liability to tax (IT, CGT, CT, VAT, PAYE/NIC)
• Penalty = % of potential lost revenue
• Depends on behaviour of taxpayer
Taxpayer behaviour
Genuine mistake
Maximum penalty
(% of revenue lost)
No penalty
Failure to take reasonable care
30%
Serious or deliberate understatement
70%
Serious or deliberate understatement with concealment
100%
Penalties may be reduced by prompted / unprompted disclosure
HMRC powers
• Enquiries
– HMRC issue written notice within 12m of filing
– Taxpayer can appeal within 30 days
• Discovery assessments
– HMRC can raise if discover inaccuracy in return
• HMRC information and inspection powers
–
–
–
–
Covers IT, CGT, CT, VAT and PAYE
Can request information by written notice
From 3rd parties if agreed by taxpayer / tribunal
Power to enter & inspect business premises
− in order to inspect business records and assets
Appeals
• Appeals in writing within 30 days of disputed decision
– Review by another HMRC officer or refer to Tax Tribunals
• First tier Tribunal deals with:
–
–
–
–
Default paper cases, e.g. against fixed penalty
Basic cases, straightforward with short hearing
Standard cases, more detailed and formal hearing
Complex cases, sometimes, but usually Upper tier
• Upper tier Tribunal deals with:
–
–
–
–
Complex cases - specialist knowledge and formal hearing
Judicial review delegated from High Court / Court of Session
Enforcement of decisions, directions & orders by Tribunals
Hearings held in public and decisions published
• Can appeal to Court of Appeal on point of law
PAYE
• Code numbers
– (allowances – deductions) × 1/10
• Due date – 19th of month
– Electronic payments – 22nd of month
• Key forms
– P45 – when employee leaves
– P46 – when employee joins without a P45
– P35 – summarises IT/NIC deducted
– P14/60 – yearly totals for each employee
CAPITAL GAINS TAX
COMPUTATION AND TAX
PAYABLE
Capital gains essentials
Chargeable persons
• Individual - resident or
ordinarily resident in UK
• Company
Chargeable assets
• All assets except
specifically exempt
Exempt assets include
• Cars
• Non wasting chattels bought
and sold ≤ £6,000
• Wasting chattels
• Cash
• Qualifying corporate bonds
• Sterling currency
• Principal private residence
• Assets held in ISAs
Chargeable disposals
• Sale
• Gift
• Exchange
• Loss/destruction of
asset
• Compensation for
damage
Exempt disposals
• Sale of trading stock
• Transfers on death
• Transfers to charity
Pro – forma computation
Gross sale proceeds
Less: Selling costs
Net selling price
Less: Allowable costs
Capital gain
Notes
(1)
£
X
(2)
(X)
X
(X)
X
(3)
Notes:
1. Use market value where transaction not at arm’s length
2. Include legal fees, advertising costs, etc.
3. Includes purchase price and purchase expenses, (e.g. legal
fees) and any capital enhancement expenditure
Summary for 2009/10
£
Net capital gains for the tax year (after specific reliefs)
Less: Capital losses brought forward
Net chargeable gains
Less: Annual exemption (2009/10)
X
(X)
X
(10,100)
Taxable gains
X
CGT Payable (18% of taxable gains)
X
Capital losses
Current year
Brought forward
• Must be set off against
current year capital gains
• Offset before brought
forward losses
• Offset restricted to
amount needed to reduce
net chargeable gains
down to the amount of
the AE (£10,100 for
2009/10)
Connected persons
• Use market value instead of actual proceeds
• Loss on disposal only offset against gains to same
connected person
CAPITAL GAINS TAX
SPECIAL RULES
Special rules
• No gain no loss transfers
– Spouse/civil partner- planning opportunities
• Utilising annual exemptions
• Utilising capital losses
• Part disposals
A
– Cost of part disposed = Cost × A + B
– A = Proceeds, B = MV of remaining asset
• Chattels
– Wasting (expected life ≤ 50 yrs) = exempt
– Non-wasting (> 50 yrs) = see below
Non wasting chattels
Cost
£6,000 or less
More than £6,000
Sale
proceeds
£6,000 or
less
More than
£6,000
Exempt
Allowable loss based on
deemed proceeds of
£6,000
Normal gain
computation but gain
restricted to
5/3 (Gross proceeds£6,000)
Normal gain computation
Wasting assets
Wasting assets ( life ≤ 50 years)
Chattels (tangible and
moveable)
Not eligible for
capital allowances
e.g. greyhound
Exempt
Eligible for capital
allowances e.g. plant
and machinery used in
a trade
Normal gains computation
subject to £6,000 chattels
rules. Losses not allowed
as relieved by CAs
Not chattels e.g. copyright
Normal gain computation
Allowable cost restricted
Cost
Less P x C
L
Allowable cost
C
(X)
X
P = Period of ownership
L = Predictable life
Assets lost or destroyed
No insurance
proceeds
Insurance proceeds
received
Normal
computation:
capital loss
Not reinvested :
normal
computation
Reinvested
within 12 months
– elect for no
gain/no loss
Assets damaged
No insurance
proceeds
Insurance proceeds
received
No disposal
Not used in
restoration
Normal part disposal
Used in restoration
Part disposal unless
‘rollover’ election to
deduct proceeds
from cost of asset
Shares and securities
• Value of quoted shares = lower of:
– Quarter up rule
– Average of highest and lowest marked bargains
• Matching rules
– Same day
– Next 30 days
– Share pool (amalgamated cost of shares)
• Bonus and rights issues
– Bonus – increase number of shares at nil cost
– Rights – increase number and cost in pool
Reorganisations and takeovers
Consideration
Cash and shares
Share for share
•Part disposal of the
original shares
•Gain arises on the
cash element of the
consideration
•No CGT disposal
•Cost of the original
shares becomes
the cost of the new
shares
•Can elect for
normal disposal
CAPITAL GAINS TAX
RELIEFS FOR INDIVIDUALS
Principal private residence
PPR occupied
Throughout
Gain exempt
For part of period of
ownership
•Calculate gain
•PPR relief
Periods of occupation
of occupation
Gain x Period
Period of ow nership
Periodof ownership
Deemed occupation
Conditional
• Up to 3 years - any reason
• Any period working abroad
• Up to 4 years working in the
UK
• Must be actual occupation
before and after
• Condition relaxed if
reoccupation prevented by
terms of employment
Unconditional
• Last 36 months of
ownership
Letting relief
• Available for periods of letting
• Calculate PPR first
• Letting exemption is lower of:
– £40,000
– PPR relief
– Gain due to letting
Entrepreneurs’ relief
• Qualifying business disposals
– Unincorporated business, or
– Personal trading company shares (≥5%)
provided also an employee
• Qualifying ownership period
– 12 months
• Given after other reliefs but before
capital losses and annual exemption
Entrepreneurs’ relief
• Relief is given on first £1 million
• Reduce gains by 4/9ths
– Gives effective tax rate of 10%
• For 2009/10 disposals claim by 31
January 2012
Rollover relief
Disposal of and reinvestment
In qualifying asset:
•Land and buildings
•Fixed plant and
machinery
•Goodwill
•Must be used in the trade
Within qualifying
time period:
From 12 months
before to 36 months
after the sale
• Claim within 4 years from the end of the tax year
Rollover relief
• Partial reinvestment
– A gain arises on the disposal of the original
asset, being the lower of:
• the proceeds not reinvested
• the capital gain
• Depreciating assets (life < 60yrs)
– Gain heldover until earliest of:
• replacement asset sold
• cease to use replacement asset in the trade
• 10 years from date replacement asset acquired
Gift relief
•
•
•
•
•
Individuals only
Qualifying business assets (below)
Donee’s base cost reduced by gain deferred
Joint election by 4yrs from end of tax year of gift
If actual consideration > donor’s cost, excess is
immediately chargeable, balance deferred
• Non business use - gain deferred restricted
– Shares (≥5%) – gain deferred =
Gain × MV of Chargeable Business Assets
MV of Chargeable Assets
Qualifying business assets
• Assets used in trade of unincorporated
business or individual’s personal trading
company (≥5% shares)
• Unquoted trading company shares
• Quoted trading company shares if own
≥5%
Incorporation relief
Conditions
• All the assets of the business (except cash) must be
transferred
• The transfer must be of a business as a going concern
• Consideration must be wholly or partly in shares
Effect
• No gains arise on incorporation
• Gain on sale of assets (before Entrepreneurs’ relief) is
rolled over against the acquisition cost of shares
Consideration
not wholly in
shares
• Gain eligible for rollover
• Gain x Value of shares issued
Total consideration
• Immediate gain for non shares consideration
Election
• Can elect for incorporation relief not to apply - for
2009/10 by 31 January 2012
• May be beneficial if shares are to be sold shortly after
incorporation and assets of business qualify for
Entrepreneurs’ relief
CORPORATION TAX
OUTLINE
Corporation tax
• UK resident companies
– Pay corporation tax on worldwide profits
(except overseas dividends) and gains
• Accounting periods
– Normally follow company accounts
– Period of account > 12 months – split into
two accounting periods
Corporation tax computation
Corporation tax computation for the chargeable accounting period
of…months ended…
£
* Trading profit
X
* Property business profit
X
* Interest income
X
Chargeable gains
X
–––
Total profits
X
Less: Gift Aid
(X)
–––
PCTCT
X
–––
* Including overseas income
Corporation tax computation
• Trading income
– No private use adjustments / assets
– Include trading interest payable
• Property business profit
– Losses set against total income
• Loan relationship rules
– Non-trading interest receivable less non-trading
interest payable (see next)
– All interest is received gross
• Dividends (UK / overseas) – exempt
Interest payable
Non trade loans
• Deducted from interest
income
• E.g. Loan to purchase
investment property or
shares in another
company
Trade loans
• Deducted from trading
profits
• E.g. Bank overdraft
interest, loan to acquire
plant, machinery or
factory
Long period of account
Where a company’s period of account exceeds 12 months, it is split into 2 CAPs
Profits are allocated to the 2 CAPs as follows:
Adjusted trading profit
Time apportion before capital allowances
Capital allowances
Calculate separately for each CAP
Interest income
Accruals basis
Property business profit
Time apportioned
Chargeable gains
CAP in which disposal takes place
Gift Aid
Paid basis
Franked investment income
Receipts basis
Calculation of Corporation tax
Financial year
• The rates of tax are fixed
for a FY
• FY runs 1/4 - 31/3
• FY 2009 starts 1/4/2009
“Profits”
X
• PCTCT
Add FII
X
“Profits”
X
• FII = Grossed up UK and
overseas dividends
received (non-associated)
• “Profits” determines rate
charged on PCTCT
Calculation of Corporation tax
Level of profits
≤ £300,000
Rate of tax
21%
£300,001 - £1,500,000
28% less
marginal relief
> £1,500,000
28%
Marginal relief formula :
CORPORATION TAX
CHARGEABLE GAINS
Company chargeable gains
Summary of key differences:
Company
Individual
Tax paid
Corporation tax
Capital gains tax
Annual exemption
N/A
2009/10 £10,100
Indexation allowance
Available for full period
of ownership
Not available
Capital losses brought Offset in full
forward
Restrict so net gains
= annual exemption
Shares and securities
Indexed cost column
needed
Different matching rules
No indexation allowance
Reliefs
Rollover relief only
Goodwill is not a QBA
Many reliefs available
Capital gains summary
Gain (transaction 1)
Gain (transaction 2)
Loss (transaction 3)
Net gains in period
Less capital losses b/fwd
Net chargeable gains (include in
corporation tax computation)
£
X
X
(X)
–––
X
(X)
–––
A
–––
Indexation allowance
• Allowance based on increase in RPI over
period of ownership
• Indexation factor applied to cost /
enhancement costs
• Calculation rounded to 3 decimal places
(except shares) :
RPI month of disposal − RPI month of acquisition
RPI month of acquisition
• If there is a fall in value in the RPI, the
indexation allowance is nil
Shares and securities
• Matching rules
– Same day
– Previous 9 days
– Share pool
• Bonus issue
– Not an operative event, just increase no of shares
• Rights issue
– Operative event, increase number of share & cost
• Reorganisations and takeovers
– As for individuals
Share pool pro - forma
Rollover relief
• Same as individuals except:
– Goodwill is not a qualifying asset
– Claim within 4 years from the end of the
accounting period in which asset is sold
• Note, no other reliefs available to
companies
CORPORATION TAX
LOSSES
Trading loss reliefs
Carry forward
• Offset against:
• First available
• Trading profits
• Of same trade
• Indefinite carry forward
Current year relief
Carry back relief
• Offset against
• Total profits (income and gains)
• Before Gift Aid
• Current AP then carry back 12 months (if
desired)
• Carry forward any remaining losses
• Gift Aid is lost if no profits to offset
• Must offset maximum amount possible if claimed
• Optional claim
• For loss making periods between 24/11/08 and
23/11/10 carry back relief is extended to 36 months
• No restriction on 12m carry back
• Maximum of £50,000 can be carried back to the
extended period
Trading loss pro-forma
Loss relief - planning
• Relief at highest rates
– Marginal rate – 29.75%
– Full rate – 28%
– Small companies rate – 21%
• Cashflow advantage of earlier relief
• Gift aid may be wasted
Loss relief – other losses
• Property business losses
– Against total income before gift aid of
current period
– Excess losses carried forward against total
income before gift aid
• Capital losses
– Automatically set against current year gains
– Excess losses carried forward against first
available future gains
– Can only be relieved against gains
CORPORATION TAX
GROUPS
Associated companies
• Definition
– One company controls (> 50%) the other, or
– Both companies are under control of the same
person or persons
– Include overseas companies and those joining /
leaving group during period
– Exclude dormant companies
• Effect
– Small companies limits divided
– Dividends not FII
– Share Annual Investment Allowance
Group relief
• Definition
– 75% direct or indirect
– Overseas companies – included in definition of
group, but can’t claim losses
• Relief
– Surrender current year trading losses, excess gift
aid and excess property losses
– Claimant company (see next slide)
– Only claim for corresponding accounting periods
– Tax planning − save at highest rates
− timing
Corporation tax computation
Corporation tax computation for the chargeable accounting period
of…months ended…
Trading profit
Less: loss brought forward
Property business profit
Interest income
Overseas income
Chargeable gains
Total profits
Less: loss relief (current year / carried back)
Less: Gift Aid
Less: Group relief
PCTCT
£
X
(X)
–––
X
X
X
X
X
–––
X
(X)
(X)
–––
X
(X)
–––
X
–––
Capital gains groups
• Definition
– 75% direct and > 50% indirect
– Overseas companies – included in definition of
group, but can’t take advantage of reliefs
• Effects
– NGNL transfers (automatic) – transferee takes
over asset at cost plus indexation
– Can elect that gains and losses be transferred
from one group company to another
– Group rollover relief
CORPORATION TAX
OVERSEAS ASPECTS
Liability to UK Corporation tax
• UK resident company
– Incorporated in UK
– Centrally managed and controlled in UK
• Taxed on worldwide profits, other than
dividends from UK or overseas
companies
Overseas operations
UK Tax factor Branch
Subsidiary
Basis of charge to
UK CT
• Extension of UK
operations
• 100% of profits arising
taxed on UK company
• Interest remitted to UK
is chargeable to UK CT
but dividends are
exempt
Relief for trading
losses
• Losses of branch
relieved against UK
profits
• UK losses can relieve
overseas branch profits
• No relief for losses in
the UK
Capital allowances
• Available on assets used • Not available
in the branch
Impact on tax rate
• None – not an associate
• Associated company
Relief for overseas taxation
• Withholding tax
– Overseas tax deducted at source
– Recoverable by double tax relief
• Double tax relief (DTR) – lower of
– Overseas tax on overseas income
– UK CT on overseas income
Transfer pricing
• For F6 – Transactions with overseas
companies only
• Control (> 50%)
• Non arm’s length price
• UK company gains tax advantage
• Increase taxable profits of advantaged
company using ‘arm’s length price’
• Can make corresponding adjustment in
other company
CORPORATION TAX
SELF ASSESSMENT
Due dates
• Filing of returns
– 12m after end of period of account, or
– 3m after date notice to file is issued
• Payment dates
– Small/marginal companies
• 9m and one day after end of accounting period
– Large companies (paying tax at 28%)
• Instalments on 14th of months 7, 10, 13 and 16
following start of accounting period
• Based on estimate of corporation tax liability
Late filing penalties
Initial fixed penalty £100
Rises to £200 if return > 3 months late
Fixed penalties rise to £500 and
£1,000 for 3rd consecutive late return
If return 6 to 12 months late, extra tax
geared penalty = 10% of tax unpaid 6
months after the filing date
If return >12 months late, tax geared
penalty rises to 10% of tax unpaid 6
months after filing date
Corporation tax returns
• Penalties for incorrect returns and late
notification of new taxable activity
– Subject to standard penalty regime as for IT
• Amendments, errors and mistakes
– Taxpayer can amend within 12m of filing date
– HMRC correct by 9m from date return filed
– Company can make error or mistake claim within
4 years of end of accounting period
HMRC powers
• Enquiries
– HMRC issue written notice within 12m of filing
– Company can appeal within 30 days
• Discovery assessments
– HMRC can raise if discover inaccuracy in return
• Information and inspection powers
– HMRC has the same powers in respect of
companies as for individuals
• Appeals
– Company has same rights to appeal as individuals
VAT
VAT - introduction
• Indirect tax
• Charged on
– a taxable supply
– by a taxable person
– in the UK
– in the course or furtherance of a business
• Output tax – charged on sales
• Input tax – incurred on purchases and
expenses
VAT - types of supply
Exempt
No tax charged
Trader unable to
register
Taxable
Zero rated
Standard
0%
15% - up to 31.12.09
17.5% - from 1.1.10
Trader able to
register for VAT
Unable to reclaim
input VAT
Can reclaim input
VAT
VAT - registration
Compulsory
• Required when value of
taxable supplies exceeds
the registration threshold
(i.e. £68,000)
• Taxable supplies includes
zero rated and standard
rated but not exempt
supplies
Voluntary
• Traders making taxable
supplies (standard rated
or zero-rated) can
register at any time
• Allows recovery of input
tax
Registration tests
Historic test
• Test at the end of every
month
• Look back over last 12
months
• Notify HMRC within 30
days of the end of the
month in which limit
exceeded
• Registered from start of
next month
Future test
• Turnover in next 30 days
will exceed limit
• Notify HMRC by the end
of the 30 days
• Registered with effect
from the beginning of 30
days
Voluntary registration
Advantages
Disadvantages
• Input tax recoverable
• If making zero-rated supplies
VAT returns will show VAT
repayable - can register for
monthly returns to aid cash
flow
• Avoids penalties for late
registration
• May give the impression of a
more substantial business
• Output VAT charged on sales
– if make standard rated
supplies to customers who are
not VAT registered will be an
additional cost to them
– may affect competitiveness
•
VAT administration
Deregistration
Compulsory deregistration
• When cease to make
taxable supplies
• Inform HMRC within 30
days of ceasing to make
taxable supplies
• Deregistered from :
– Date of cessation
– Agreed earlier date
Voluntary deregistration
• Expect value of taxable
supplies in next 12
months to be ≤ £66,000
• Inform HMRC at any time
• Deregistered from :
– Date of request
– Agreed earlier date
VAT – further points
• Consequences of deregistration
– Deemed supply of all business assets
– Exclude items if no input tax reclaimed
– Not payable if VAT on deemed supply <£1,000
• VAT returns
– Quarterly – normal
– Monthly - traders in repayment situation
• VAT inclusive amounts
– VAT = gross amount × 15/115 (up to 31.12.09)
– VAT = gross amount × 17.5/117.5 (from 1.1.10)
Tax point
Basic tax point
Goods
Services
Date goods are available
Date services are completed
Basic tax point is
changed to
Earlier date
Later date
Payment made or invoice
issued before basic tax
point
If invoice is issued within
14 days after the basic tax
point
Actual tax point
Actual tax point
Date of payment or invoice
Date of invoice
VAT – output tax
• Value of supply
– Discounts – include even if not taken up
– Gifts
• Bad debt relief
– Debt written off
– 6 months
– Claim relief as input tax
Transfer of going concern
• Outside scope of VAT
• Conditions
– Business transferred as going concern
– No significant break in trading
– Transferee VAT registered or will become
so immediately after transfer
– Same type of trade carried on after transfer
VAT – input VAT
• Conditions for reclaim
– Incurred by taxable person for use in business
– VAT invoice
• Non deductible input VAT
– Entertaining
– Cars
– 50% car leasing charges
• Motor expenses
– 100% allowed if some business use
– fuel costs allowed but VAT scale charge added to
output tax if any private fuel
Pre registration input VAT
Conditions to reclaim input VAT:
Goods
Services
Acquired in the 4 years before Supplied in the 6 months
registration
before registration
Still held at date of registration
Schemes for small businesses
• Cash accounting
– Account for VAT on cash receipts/payments
– Automatic bad debt relief
– Join if turnover ≤ £1,350,000 and VAT up to date
• Flat rate scheme
– Join if taxable turnover for next 12m ≤ £150,000
– Pay VAT as % of turnover (% based on industry)
• Annual accounting
– One VAT return pa – submit 2 m after y/e
– POA in Months 4-12, balance with return
– Join if turnover ≤ £1,350,000 and VAT up to date
VAT administration
• VAT invoices
– Issue within 30 days of date of supply
– Evidence for reclaiming input VAT
– Must contain particular details
• VAT records
– Retain for 6 years
• Discovery assessments, Information
and inspection powers and Appeals
– Same rules as for IT and CT
Penalties
• Late notification of liability to register
and submission of incorrect return
– Standard penalty regime as for IT and CT
• Default surcharge
– HMRC issue surcharge liability notice if
VAT return or payment are late
– Lasts 12 months
– Further defaults extend period
– Late VAT payments within12 months
attract surcharge
Errors
Disclosure
• Small net errors can be
voluntarily disclosed on
next VAT return
• No penalty or penalty
interest normally charged
• Small is higher of £10,000
or 1% turnover with upper
limit of £50,000
• If not small then disclose
separately and pay
interest
Penalties
• Penalty can be charged
in line with new penalty
regime for incorrect
returns (see Income tax
and corporation tax)
VAT errors
• Default interest
– On voluntary disclosure of errors > de
minimis limit
– On assessments issued by HMRC to
collect undeclared / over claimed VAT