lOMoARcPSD|1371842
ACCA Tax (F6) notes for exams up to Mar 2022
Taxation UK (Association of Chartered Certified Accountants)
Studeersnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 1
Contents
PURPOSE OF TAX: ........................................................................................................................ 2
PRINCIPAL SOURCES OF TAX LAW:.............................................................................................. 2
SYSTEMS FOR SELF-ASSESSMENT: .............................................................................................. 4
Self Assessment for Individuals ................................................................................................... 5
SELF-ASSESSMENT TAX RETURN:............................................................................................. 5
INCOME TAX CALCULATION: ................................................................................................... 6
THE AMOUNT PAYABLE: .......................................................................................................... 6
Self Assessment for Companies .................................................................................................. 8
SELF ASSESSMENT TAX RETURN: ............................................................................................. 8
CORPORATION TAX:................................................................................................................. 8
Penalties for Non Compliance ................................................................................................... 10
Direct vs. Indirect Tax ................................................................................................................ 11
Summary ................................................................................................................................ 11
Tax Avoidance vs. Tax Evasion .................................................................................................. 12
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
PURPOSE OF TAX:
Important role of the government: To set fiscal policy, determining how much tax to collect
from individuals and companies operating in the economy and how this tax will be spent.
Tax is the main means of raising the necessary funds to provide general services. Some taxes
are collected and pooled into a general fund but others are collected for a specific purpose, for
example money collected from Road Tax is used to maintain the country’s roads and national
insurance is used to fund the national health service.
Tax is also used by most governments as a means of gaining favour with the voting population
or to encourage certain behaviour. For example, offering tax reliefs for people who pay into
pensions or donate to charity. It also acts as a way to discourage certain behaviours eg smoking
and drinking by increasing taxes on cigarettes and alcohol.
PRINCIPAL SOURCES OF TAX LAW:
Tax legislation consists of a number of primary acts which generally apply to a specific tax.
Some example would be:






Corporation Tax Act 2010;
Income Tax (Earnings and Pensions) Act 2003;
Capital Allowance Act 2001;
Inheritance Tax Act 1984;
Taxation of Chargeable Gains Act 1992;
Many other sources.
Secondary legislation consists of lots of different things such as Statutory Instruments and
Regulations. These are sometimes referred to as delegated legislation as they are passed at a
lower, perhaps more local level.
Note: In addition to these acts, a Finance Act is passed each year as a result of changes to tax
law following a budget.
For individuals the rates and allowances referred to in the Finance Act will be for the tax (fiscal)
year which is about to start on 6 April after budget day (which is in the previous Autumn).
For companies the tax rates change in a similar way, but with reference to a Financial Year
rather than a tax year which runs from 1 April of one year to 31 March of the next.
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Statements of Practice in tax are similar to Generally Accepted Accounting Practice (GAAP) in
financial accounting. These are issued by HM Revenue and Customs and whilst not specifically
law, they are a summary of general practice which is accepted.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
SYSTEMS FOR SELF-ASSESSMENT:
Main purpose of the self-assessment systems: to pass the burden for preparing and filing tax
returns to the taxpayer.
Self-assessment requires the taxpayer to gather their own information and submit it to HM
Revenue and Customs, by a set deadline.
An enquiry or investigation can be opened on a purely random basis or because HM Revenue
and Customs have reason to believe there is an error in the return. If that is the case, the
taxpayer is required to produce all documents and evidence which could reasonably be
expected to be available.
HM Revenue and Customs have a period of 12 months from the filing of a return in order to
open an enquiry and will do so by issuing a formal notice to the taxpayer of their intentions,
which will also state what information the taxpayer is required to provide to them.
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Self Assessment for Individuals
SELF-ASSESSMENT TAX RETURN:
The following individuals must submit tax returns:




Self-employed taxpayers;
Individuals with higher than basic rate limit;
Taxpayers with untaxed income;
Taxpayers who made a chargeable capital gain.
A self-assessment tax return for a particular tax year must be filed before:
Paper return
Filed before 31 October following tax year
Electronically
Filed before 31 January following tax year
Late notice to file
January)
Filed within 3 months after date of issue of return/notice (if later than 31
Note: If a return is not submitted by 31 October, it must then be filed electronically. Penalties
will only apply to returns filed after the normal 31 January deadline.
Late filing of a return will initially result in penalties:
 Late filing penalty of £100;
 Daily penalties of £10 per day where returns are more than 3 months late;
 Additional penalty of 5% of the liability to tax or £300 if greater where returns are more
than 6 months late;
 Further penalty of 5% of the liability to tax or £300 if greater where returns are more
than 12 months late. This could be increased to 70% of the tax due if there was
deliberate withholding of information but no concealment and up to 100% of the tax
due if there was concealment as well (min £300).
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
INCOME TAX CALCULATION:
After the end of the tax year, an income tax calculation can be put together:
General rule: Income tax payable is due on 31 January following the end of the tax year.
However, some taxpayers may also fall within a payment on account system, whereby some tax
may already have been paid on account of tax due for the year. These payments on account are
due twice:
1) The first is paid on 31 January falling within the tax year in question;
Payment on account system = 50% * Amount payable for previous tax year
Note: If there is a reason to believe that tax payable for this year will be less, the
taxpayer can ask to reduce the payments to 50% of what they expect to be payable for
the year.
2) The second is paid on 31 July after.
THE AMOUNT PAYABLE:
Payments on account = Income tax + Class 4 National Insurance
Tax payable under self-assessment <
£1,000
Payable in full as balancing payment on 31
January following tax year
Tax payable under self-assessment <
20% of total tax liability
Payable in full as balancing payment on 31
January following tax year
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Note: Any capital gains tax due for the year would also be payable on 31 January as would any
liability to Class 2 national insurance.
Late payment of tax of any type will incur interest charges and surcharges (penalties):
1)
2)
3)
4)
Surcharge of 5% of the unpaid tax where the balancing payment is 30 days late;
Additional surcharge of 5% of the unpaid tax where the balancing payment is 6 months late;
Further surcharge of 5% of the unpaid tax where the balancing payment is 12 months late.
Interest will be charged at 2.75% for late payment by the tax payer and the taxpayer will
receive interest at 0.5% from HMRC on any repayments.
Note: For the purpose of the exam you are to assume that the Taxpayer has NOT taken
advantage of the Coronavirus measure to delay their second payment on account for July 2020.
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Self Assessment for Companies
SELF ASSESSMENT TAX RETURN:
General rule: A company must submit its corporation tax return 12 months after the end of the
accounting period.
Note: If an accounting period is longer than 12 months (up to 18 months is allowed), this
accounting period would actually need 2 corporation tax returns - one for the first 12 months
and the second for the remaining months - we shall come back to this later in the course.
The penalties for late filing of corporation tax returns are exactly the same as those for late
filing of personal tax returns:
1)
Late filing penalty of £100;
2)
Another £100 if return is more than 3 months late;
3)
Additional penalty of 10% of the tax unpaid where returns are more than 6 months late;
4)
Further penalty of 10% of the tax unpaid where returns are more than 12 months late.
CORPORATION TAX:
General rule: Corporation tax is paid nine months and 1 day after the end of the chargeable
accounting period.
However, sometimes companies are required to pay their corporation tax by instalments if they
are large.
A large company is one which has augmented profits of more than the profit threshold, which is
£1.5 million.
Augmented profit = Taxable Total Profit (TTP) + Dividends received
Note: Dividends received exclude those received from 51% group companies.
The £1.5 million profit threshold is adjusted for two factors:
 Where the CAP is short, it must be time apportioned: £1.5 million * n/12;
 Where there are 51% group companies, the profit threshold is shared equally amongst
them: £1.5 million / number of members of a 51% group.
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
There are two situations where a company is large but would not have to pay their tax by
instalments (it would be paid on the normal basis):
 Where the corporation tax payable for the period is less than £10,000;
 Where the company was not large in the previous CAP (unless augmented profits for
this period are greater than £10 million).
The instalment payments are due as follows:
 The first payment is due 6 months plus 13 days from the start of the chargeable
accounting period;
 Subsequent payments are each due 3 months after the previous instalment;
 The final payment is due 3 months plus 14 days from the end of the chargeable
accounting period.
Note: The instalment system for companies requires payments to be made based on the
forecast liability for this period.
Late payment interest
If a company pays its corporation tax late it will be charged interest at a rate of 2.75%.
If a company has overpaid its corporation tax then HMRC will refund the amount along with
interest at 0.5%.
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Penalties for Non Compliance
This system of calculating penalties is far more transparent than older methods and means that
taxpayers across the country, dealt with by different tax offices, will have the same end result.
The penalties that apply to incorrect returns work as follows:
Behaviour
Deliberate and
concealed
Deliberate but not
concealed
Careless
Max
penalty
Min with unprompted
disclosure
Min with prompted
disclosure
100%
30%
50%
70%
20%
35%
30%
0%
15%
A failure is deliberate and concealed where the failure is deliberate and the taxpayer makes
arrangements to conceal the situation giving rise to the obligation.
A failure is deliberate but not concealed where the failure is deliberate but no arrangements
are made to conceal the situation giving rise to the obligation.
Note: There are no penalties for inaccuracies where the company has taken reasonable care.
Disclosure is unprompted if the company has no reason to believe HMRC have or will discover
the failure. Disclosure takes place where a company tells HMRC about the failure, gives HMRC
reasonable help and allows HMRC access to records to check the amount of unpaid tax.
The percentage penalty is applied to the “potential lost revenue”, i.e. the extra tax due.
Where a taxpayer fails to notify chargeability or fails to retain appropriate records, the
following penalties must be applied:
1)
2)
For companies, the penalty for failing to keep the records is £3,000 per chargeable
accounting period. Records should be kept for a period of 6 years from the end of the
chargeable accounting period.
For individuals, the penalty for failing to keep the records is again £3,000 per tax year.
Normally records must be kept for 22 months from the end of the tax year but taxpayers
who are self-employed are required to keep their records for 5 years and 10 months from
the end of the tax year.
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Direct vs. Indirect Tax
An Indirect Tax is one that is charged on the value of goods and services rather than on income
or profits. So, when you buy a new T-shirt, for example, you will be paying for the t-shirt plus an
additional amount for the tax. This tax is on the T-shirt and not directly on you as an individual
but you suffer it indirectly because you have chosen to buy the t-shirt.
In contrast to this – think about Income Tax. This is a tax on the income that you as an
individual has earned over the tax year and so this is a tax that is specific to you as an individual
and so this is an example of a Direct Tax.
Summary
Indirect taxes
VAT
Stamp duty
Direct taxes
Income tax
Corporation tax
Capital gains tax
Inheritance tax
National insurance
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Tax Avoidance vs. Tax Evasion
Finally let's briefly consider the issue of:
Tax avoidance (which is legal ways of reducing tax bills) versus tax evasion (which is illegal and
carries heavy financial penalties as well as potential imprisonment).
There are many anti-avoidance pieces of legislation which HMRC have brought in to clamp
down on what they see as tax evasion. We have covered some of these in this course in the
relevant tax sections.
In addition, any tax-avoidance schemes must be reported to HMRC for its approval. Those who
persistently engage in tax avoidance schemes which are rejected by HMRC will be subject to a
regime of increasing penalties and in some cases their personal details may be published by
HMRC.
It is a very complex area but a general rule of thumb is that if a scheme or transaction does not
appear to be a reasonable approach to take and the sole reason for such a complicated series
of transactions is to exploit a loophole in tax legislation then there is a good chance HMRC will
view this as abusive and take steps to extract more tax or a penalty from the business or
individual.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 2
Contents
RESIDENCE STATUS: .................................................................................................................... 3
The Income Tax Proforma and Investment Income .................................................................... 5
THE INCOME TAX PROFORMA: ................................................................................................ 5
INVESTMENT INCOME: ............................................................................................................ 6
SAVINGS INCOME: ................................................................................................................... 6
DIVIDEND INCOME AND THE DIVIDEND ALLOWANCE: ........................................................... 6
ILLUSTRATION OF SAVINGS AND DIVIDEND ALLOWANCE ...................................................... 7
TAX-FREE AND EXEMPT FORMS OF INCOME: ......................................................................... 8
Personal Allowances and Taxable Income .................................................................................. 9
Tax Rates and Banding to Calculate Income Tax Liability ......................................................... 11
Calculation of Income Tax Payable ........................................................................................... 13
Income from Employment - The Basics .................................................................................... 15
PROFORMA: ........................................................................................................................... 15
Income from Employment - Vehicles ........................................................................................ 17
MILEAGE: ............................................................................................................................... 17
COMPANY CAR: ..................................................................................................................... 18
FUEL PROVIDED BY EMPLOYER: ............................................................................................ 20
COMPANY VAN: ..................................................................................................................... 21
Income from Employment - Accommodation .......................................................................... 22
INTRODUCTION: .................................................................................................................... 22
NON JOB-RELATED ACCOMMODATION: ............................................................................... 22
JOB-RELATED ACCOMMODATION: ........................................................................................ 23
ILLUSTRATION: ....................................................................................................................... 23
Income from Employment - Loans ............................................................................................ 25
Income from Employment - Other Benefits.............................................................................. 26
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - Sundry Topics ............................................................................... 28
REAL TIME INFORMATION SYSTEM: ...................................................................................... 28
PAYROLL DEDUCTIONS: ......................................................................................................... 28
EMPLOYMENT RELATED FORMS AND PAYROLLING OF BENEFITS: ....................................... 29
EMPLOYEE VS SELF-EMPLOYED: ............................................................................................ 29
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
RESIDENCE STATUS:
General rule: An individual who is determined to be UK resident for a tax year is liable to UK tax
on their worldwide income whereas a non-resident individual is only liable on income arising in
the UK.
There are three stages to determining whether an individual is UK resident or not:
1) Consider whether that individual is automatically resident overseas.
An individual would be determined to be automatically resident overseas if:
-
they were UK resident in any of the last 3 tax years but physically present in the UK for
less than 16 days in the tax year under review;
they were physically present for less than 46 days during the tax year, being the year in
which they first come to the UK;
they were employed overseas on a full time contract and their days in the UK total less
than 91 days for the tax year.
Note: no further tests need to be considered if the circumstances for this person fall within any
of these tests.
2) Consider whether the individual is automatically UK resident (if stage 1 didn’t produce an
answer).
An individual would be determined to be automatically UK resident if:
-
they spend at least 183 days in the UK during the tax year;
their only home is situated in the UK;
they are deployed in the UK on a full time contact.
Note: If the circumstances for this person fall within any of these tests, they are considered UK
resident and no further work is necessary.
3) Consider the number of ties that individual has to the UK compared to the number of days
physically spent in the UK (if no answer can be achieved from the first two stages).
There are five potential ties to UK:
-
close family in the UK, like spouses and children under the age of 18;
a house in the UK available for at least 91 days of the tax year;
for those not resident in the UK in any of the 3 previous tax years, days in the UK totalling
more than the number of days spent in any other country;
90 days or more in the UK in either of the previous 2 tax years;
substantive work undertaken in the UK for 40 days or more during the tax year.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The tax legislation provides a table of how many days an individual can spend in the UK for a tax
year depending upon whether they were previously UK resident or not to match with these
ties:
Note: The tax legislation tells us to count only those days when a person is present in the UK at
midnight.
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The Income Tax Proforma and Investment Income
THE INCOME TAX PROFORMA:
NON-SAVINGS
INCOME
SAVINGS
INCOME
DIVIDEND
INCOME
(NSI)
(SI)
(DI)
£
£
£
Trading Income
X
Carried forward trade loss
relief
(X)
Employment Income
X
Property Income
X
Bank/building society interest
X
Dividends from UK companies
TOTAL INCOME
X
X
X
X
X
X
Deduct:
Current year & carry back loss
relief*
(X)
(X)
Qualifying interest *
NET INCOME
X
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Personal Allowance*
(X)
TAXABLE INCOME
X
X
X
*deductions are firstly taken from NSI then SI and then DI
You need to ensure that you can reproduce this proforma quickly and efficiently in your exam.
Do not include all the lines if they are not relevant to the question - it just wastes time.
INVESTMENT INCOME:
The investment income can be split further between:
1)
Savings income
2)
Dividend income
The investment income is assessed on the ‘received basis’ so we only take into account the
amounts actually received during the tax year.
SAVINGS INCOME:
Tax Deduction at Source
There are a few sources of interest where tax is deducted at source but these are not
examinable at TX level. Therefore, for the purpose of the exam, all interest received should be
treated as the full taxable amount, without the taxpayer having yet paid any income tax on it.
Personal Savings Allowance
The personal savings allowance is £1,000 for a basic rate taxpayer, £500 higher rate taxpayer
and nil for an additional rate taxpayer. This is an amount of savings income which the
individual can earn in the tax year but pay no tax on at all.
DIVIDEND INCOME AND THE DIVIDEND ALLOWANCE:
Dividends received as considered as the taxable income amount and no further adjustment is
required. An allowance of £2,000 is currently available to all the taxpayers.
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
ILLUSTRATION OF SAVINGS AND DIVIDEND ALLOWANCE
NON-SAVINGS
INCOME
Employment Income
SAVINGS INCOME
DIVIDEND INCOME
20,500
Savings Income
10,000
Dividend Income
TOTAL INCOME
12,000
10,000
12,000
8,000
10,000
12,000
NSI:
8,000
20%
1,600
SI: savings allowance
balance
1,000
9,000
0%
20%
0
1,800
2,000
10,000
0%
7.5%
0
750
Personal Allowance
TAXABLE INCOME
20,500
(12,500)
TAX:
DI: dividend allowance
TAX LIABILITY
4,150
Note: in this illustration the individual is a basic rate taxpayer as their taxable income is less
than £37,500 (the basic rate limit). They therefore get a savings allowance of £1,000. A higher
rate taxpayer would only receive a savings allowance of £500. The dividend allowance of £2,000
is available to all taxpayers regardless of the level of their earnings.
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TAX-FREE AND EXEMPT FORMS OF INCOME:
The main form of exempt income comes from investments made through ISAs.
There are two types of ISA that are relevant in TX:
-
Cash ISA
-
Stocks/shares ISA
Income from ISAs is exempt from income tax so in our income tax calculation we do not include
this income.
There is a limit which permits a maximum investment during the tax year of £20,000 and this
can be all cash or all stocks and shares or a mixture of the two.
Other types of exempt income include:
-
Prizes (including lottery and premium bond prizes)
-
National Savings Certificate interest
-
Scholarships or educational grants
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Personal Allowances and Taxable Income
The personal allowance for FA 2020 is set at £12,500 but this is gradually reduced to nil where a
person’s adjusted net income exceeds (ANI) £100,000.
Note: The personal allowance is reduced by £1 for every £2 of ANI above the income limit.
Therefore, a person with ANI of £125,000 or more is not entitled to any personal allowance.
Adjusted net income is calculated as follows:
Total income per tax calculation
X
Personal pension contributions (gross)
(X)
Gift aid donations (gross)
(X)
Adjusted net income (ANI)
X
Personal pension contributions and gift aid donations are paid by individuals net of 20% tax.
Therefore, when you are calculating ANI you must gross up the payments by 100/80.
Illustration:
In 2020/21 James has total income of £130,000, he pays £8,000 into a personal pension and
makes a donation to charity under the gift aid scheme of £100.
His adjusted net income (ANI) would be:
Total income
130,000
Personal pension contributions (gross) £8,000 x 100/80
(10,000)
Gift aid donations (gross) £100 x 100/80
(125)
Adjusted net income (ANI)
119,875
His personal allowance would be restricted to:
Personal allowance
12,500
Restriction: (119,875 - £100,000)/2
(9,937)
Adjusted personal allowance
2,563
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Marriage allowance is a possibility to transfer a fixed amount of the personal allowance
(£1,250 for 2020/21) to a spouse or registered civil partner. This amount is deducted from the
tax calculation IT IS NOT added to the other spouse/civil partners personal allowance.
Tax reduction = £1,250*20% = £250
Key rules:
1) If the recipient’s tax liability is less than £250 then the recipient’s tax liability is not reduced
below zero;
2) A transfer is not permitted if either spouse or civil partner is a higher or additional rate
taxpayer;
3) It is generally only beneficial where one party is not making full use of their personal
allowance;
4) The deadline for making the election is 4 years after the end of the tax year. Once an election
to transfer has been made, it remains effective until it is withdrawn or the conditions are no
longer met.
Tax
X
Less:
Marriage allowance (£1,250 x 20%)
Interest relief (see notes on property income)
(X)
(X)
Tax liability
X
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Tax Rates and Banding to Calculate Income Tax Liability
There are differing rates of tax for differing types of income and also different tax bands. The
tax bands which apply to all types of income are:
 The basic rate band - the normal rate of tax of 20% on income up to £37,500;
 The higher rate band - a higher rate of tax for those with higher incomes, 40% on
income between £37,500 and £150,000;
 The additional rate band - a higher rate of tax of 45% for those with an income over
£150,000 per year;
 The special savers rate tax band - a government incentive for savers but only applies
where the saving income block of the tower (see below) remains low enough to fit at
least partly in the savers rate band of £5,000. Savings income falling within this band is
taxed at a rate of 0%. If taxable non-savings income is greater than £5,000 then none of
this band will apply.
One way to work through each of these bands is to consider the income being built up like a
tower of lego bricks:
Note: The ordinary tax rate for dividends is 7.5%, the upper rate is 32.5% and the additional
rate is 38.1%.
Rules:
 Any allowance which is set against income, such as the personal allowance, is usually
used first against the “Other/Earned” income (non savings income) layer and so only
reduces savings or dividend income if the lower layers are too low to fully make use of
the allowance;
 Whatever the taxable income at the end of the calculation, we apply the tax bands to
the different types of income in the same order - Other/earned income first, the savings
income next and leaving the dividend income to last, often referred to as “top slicing” of
this type of income.
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Tax is calculated once the income tax proforma has been completed and a taxable income
figure produced. Note: Taxable income is AFTER deduction of the personal allowance where
applicable.
Illustration
Nicola has the following taxable income:
NSI £
Net income
SI £
120,000
Personal allowance
DI £
20,000
10,000
20,000
10,000
NIL
Taxable income
120,000
Tax calculation:
NSI:
£37,500 x 20%
(£120,000 - £37,500) x 40%
£7,500
£33,000
SI:
£500 x 0%
£19,500 x 40%
£0
£7,800
DI:
£2,000 x 0%
£8,000 x 32.5%
0
£2,600
Tax liability
£50,900
Notes:
Nicola’s ANI is above £125,000 so she is not entitled to a PA deduction
Nicola is entitled to both the savings allowance and the dividend allowance but as she is a
higher rate taxpayer her savings allowance is restricted to £500.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Calculation of Income Tax Payable
The income tax liability is the total amount of tax which HM Revenue and Customs expects to
collect from this individual for the year.
Income tax payable is the final amount of tax which the individual still needs to pay over to HM
Revenue and Customs, under the self assessment system, after taking account of tax deducted
at source on all types of income. It is calculated as follows:
Income tax liability - Tax paid at source = Income tax payable
There are different types of income:
 Income from employment. It is subject to tax at source under the PAYE scheme, because
employer makes a deduction from salaries before paying them on to the employee;
 Income from self employment. It is not subject to tax at source for exam purposes but in
reality there are certain trades where tax is effectively deducted at source;
 Property income. It is not subject to tax at source;
 Savings and dividend income. These are not taxed at source.
Illustration:
Pete has employment income of £60,000 and has had PAYE deducted of £9,700. He has no
other income.
His tax payable/repayable would be:
Employment income
60,000
Net income
60,000
Personal allowance
(12,500)
Taxable income
47,500
Tax:
NSI:
37,500 x 20%
10,000 x 40%
7,500
4,000
Tax liability
11,500
13
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Tax deducted at source: PAYE
(9,700)
Tax payable
1,800
In this illustration, Pete is required to make a payment of tax of £1,800 to HMRC.
14
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - The Basics
PROFORMA:
1) Salary - employment income is calculated on what is called the received basis - rather
than thinking about what should have been received during a tax year, we look at what
actually has been received in that time and take this to be the salary for the year.
2) Bonus and commission - the rule is that the date the bonus (or commission) is treated as
being received in the earliest of:
(i)
when it is actually received;
(ii)
when the employee was entitled to receive it.
Note: The period to which the bonus (or commission) relates is actually irrelevant.
3) Benefits:
a) Tax-free or exempt benefits. These are things which an employer can provide to or
pay for an employee but which are not counted in any way as part of that
employee’s income. The most common examples would be:
- Parking provided by the employer, either using an on-site park or a “paid for”
space;
- Workplace charging points for electric or hybrid cars;
- Eye care testing paid by the employer;
- Relocation expenses of up to £8,000 to cover selling and transportation costs;
- Staff welfare facilities such as a canteen, gym or nursery;
- Pension contributions paid by the employer;
- Pension advice available to all employees up to £500 per tax year (greater
amounts are taxable in full)
- Use of home as office contributions from the employers of up to £6 per week
(to cover light and heat etc. whilst working at home);
- One mobile phone provided by the employer for both business and personal
calls;
- Overnight personal expenses paid by the employer whilst working away from
home. Up to £10 per night is tax free if working overseas and up to £5 per night
if working elsewhere in the UK (costs that are only being incurred because you
are away from home for work);
- Training courses;
- Christmas and other staff parties provided the cost is less than £150 per person
per year;
- Counselling;
- Up to £500 pa for recommended medical treatment to assist with a return to
work;
- Use of workplace charging points for electric or hybrid cars;
15
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
-
Expenses incurred in providing employee with 1 health screening assessment
and 1 medical check up in any year;
Long service awards where the service is not less than twenty years and the
cost does not exceed £50 for each year of service;
Work to home travel where employee is required to work later than usual on
irregular occasions;
Bicycle safety equipment if the main use of the bicycle is to cycle to work;
Subscriptions to professional bodies.
Note: Any combination or indeed all of these could be paid for you by your
employer without anything being included as part of your employment income.
b) Other benefits provided by the employer are potentially chargeable to income tax.
4) Reimbursed expenses - anything reimbursed by the employer is added into employment
income as an additional receipt but given the name we then need to consider whether
these were actually allowable expenses. An expense can be deducted from employment
income provided it is incurred wholly, exclusively and necessarily in their performance
of our employment duties.
5) Other allowable deductions from employment income would include:
- Donations made to charity through a payroll deduction scheme;
- Employee contributions to an occupational pension plan;
- Subscriptions paid by an employee to a relevant professional body;
- Deficits on a mileage allowance.
16
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - Vehicles
There are various ways in which employers can help employees in relation to their travel if they
need a vehicle for both business and personal purposes:
MILEAGE:
This only relates to the scenario where the car is that of the employee (owned or leased) and
the employee is covering the day to day running costs of the car, such as the insurance, fuel and
tax.
Approved rate: 45p per mile for the first 10,000 miles in the year, and then 25p per mile
thereafter.
Key concern: The employer should only reimburse for business miles that include miles
travelled:
 Between the employee’s normal place of work and a temporary site such as a customer
or supplier;
 Between home and a temporary site such as a customer or supplier;
 Between home and a temporary place of work (for a period of less than two years).
Remember: The journey between home and the normal place of work can never be considered
business in nature.
Note: Amounts reimbursed to an employee using the approved rates are tax free, so we would
not need to include the reimbursed amount as income, nor would we deduct any allowable
expenses.
Amount reimbursed > Tax-free amount
Extra employment income
Amount reimbursed < Tax-free amount
Allowable expense
17
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
COMPANY CAR:
This relates to the scenario where the car belongs to the employer but he allows the employee
to use it not just to undertake business journeys, but also to take it home at the end of the
working day and use it for personal journeys as well.
Company car benefit = List price of the car * %
The list price of a car is the result of three things:
1)
2)
3)
The dealer price of the car when new;
The cost of any extras;
Any capital contribution paid by the employee (capped at a maximum deduction of
£5,000).
A percentage (%) is based on the CO2 emissions of the car:
Fixed
percentages:
Calculated
percentages:
Hybrid-electric motor cars with CO2 emissions between See electric range
1-50g - use the electric range to determine car benefit %
table below
51-54g
13%
55g
14%
55g+
14 + (Calculate*)
For diesel cars (not meeting RDEC2)
Maximum
Add 4%
37%
*Calculated percentage = (CO2 - 55)/5
Notes:
CO2 figure entered is rounded down to the nearest 5 or 0.
Diesel cars that meet the RDEC2 standard do not have a 4% surcharge.
Remember:
1)
2)
Time apportioning is necessary if the car is available for only part of the year;
If the employee makes regular contributions towards private use of the car (rather than
capital contributions), these are deducted from the benefit calculated.
18
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Illustration 1:
On 6 October 2020, James is provided with a diesel car that does not meet the requirements of
RDEC. It’s list price is £22,000, it has CO2 emissions of 120g/km and James contributed £6,000
towards the cost of the car.
Calculate the company car benefit for 2020/21.
Calculate the %:
(120 - 55)/5 = 13.
Add on the base percentage of 14 plus the diesel supplement of 4 and the % is:
13 + 14 + 4 = 31%
List price less capital contribution (max £5,000) = £22,000 - £5,000 = £17,000
£17,000 x 31% x 6/12 = £2,635 (remember that the car was only provided for half of the year).
Electric cars
Electric cars with 0g/km CO2 emissions are taxed at 0%.
For emissions between 1g/km and 50g/km - use the range table below.
For emissions of more than 50g/km - use the normal company car benefit rules above.
Range
%
130 miles or more
0%
70 to 129 miles
3%
40 to 69 miles
6%
30 to 39 miles
10%
Less than 30 miles
12%
Note: These rules are effective from 6/4/2020. You will not be tested on the old rules. In the
exam, assume all cars were registered on or after 6/4/2020.
19
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Illustration 2:
Peter is provided with an electric car from 6/4/2020. It has a range of 97 miles, CO2 emissions
of 15g/km and the car cost the company £32,000. The list price is £35,000.
Calculate the taxable benefit:
According to the range table the % will be 3%.
The list price is always used and not the discounted price.
So, £35,000 x 3% = £1,050.
Peter will be taxed on an additional £1,050 during the tax year 2020/21.
Note: the % tables will be given to you in the exam.
FUEL PROVIDED BY EMPLOYER:
This relates to the situation where the employer pays for all of the fuel for the car, to cover
both business and personal journeys. We calculate a car fuel benefit as follows:
Fuel benefit = Base level * %
Base level for 2020/21 = £24,500
Percentage (%) - the same percentage used for the company car calculation.
Remember:
1)
2)
3)
4)
Time apportioning is necessary where the fuel is provided for part of the year;
No deduction from the benefit is allowed for any contributions the employee makes
towards their private fuel;
The calculation of a car fuel benefit is not affected by how many private journeys the
employee makes;
Contributions towards some of the private fuel has no effect unless there is no private
fuel provided by the employer at all.
20
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
COMPANY VAN:
In this situation we simply use a given van benefit figure of £3,490 per annum for 2020/21.
Remember:
1)
2)
3)
4)
5)
6)
Time apportioning is necessary for the van benefit where the employer only provides the
van for part of the year;
A deduction from the benefit is allowed for any contributions the employee makes towards
their private use of the van;
If the only private use is minimal and incidental to business use, no benefit is included as
employment income;
Employers sometimes pay for the fuel for vans in the same way but the benefit for this is
simply given as £666 per annum for 2020/21;
Time apportioning is necessary for the van fuel benefit where the employer only provides
fuel for part of the year;
No deduction from the benefit is allowed for any contributions the employee makes
towards their private fuel.
21
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - Accommodation
INTRODUCTION:
It is important to understand whether the accommodation is job-related or non-job related.
The accommodation is qualified as job-related if it satisfies one of the following conditions:
1)
2)
3)
It is necessary for the employee to live in this specific property to be able to properly
perform their duties, eg a lighthouse keeper; or
It is customary within the industry that the employee works for accommodation to
be provided, eg a Vicar; or
The accommodation is necessary as there is some special threat to the personal
security of the employee as a result of their employment, e.g. the Prime Minister.
NON JOB-RELATED ACCOMMODATION:
Where the accommodation is non-job related, there is a basic pro forma used to calculate the
value of the benefit which arises:
Basic charge
X
Additional charge
X
Ancillary services
X
Total benefit
£X
1) The basic charge is the higher of:
a)
The annual value of the property,
b)
The rent paid by the employer for the property.
2) The additional charge, also called the further or expensive property charge, is calculated as
follows:
Additional charge = (X - 75,000) x official rate of interest
The official rate of interest = 2.25% for the current tax year;
X - the amount which can be determined by looking at two parts:
a)
To decide whether to start with the original purchase price or the market value at
the date the employee first moves into the property:
22
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
b)
To think about any capital improvements made to the property. Rule: We only add
into “X” capital improvements completed before the start of the tax year we are
working on.
Note: Additional charge will only apply if the property originally cost the employer at
least £75,000 to buy (i.e. it is not being rented).
3) Ancillary services are additional items or costs covered by the employer as well as merely
providing the property for the employee to live in. There are two elements here to
calculate:
a)
Use of furniture (if paid for by employer):
Use of furniture = 20% x market value of furniture when made available
b)
Household running expenses. Anything which the employee would normally pay for
themselves in relation to their home and instead being paid for by the employer are
included here (gas, electric, water or even the council tax charges).
Remember: The accommodation benefit is time apportioned where the property is only
available for part of the year and we are allowed to deduct employee contributions from the
value of the benefit.
JOB-RELATED ACCOMMODATION:
If the accommodation qualifies as job-related, the basic and further charge do not apply - they
are exempt. The only potential benefit for job-related accommodation is in relation to the
ancillary services, but they are capped at a maximum of 10% of employment income.
ILLUSTRATION:
Jack was provided with accommodation by his employer for the whole of the current tax year.
The property was purchased by his employer 10 years ago when its market value was £150,000.
When Jack moved into the property the market value was £210,000. The annual value of the
property is £3,500 and Jack's employer paid household running expenses of £2,100. Jack paid
his employer £100 per month for use of the property.
23
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The taxable benefit would be:
Annual value
£3,500
Additional charge (£210,000 - 75,000) x 2.25%
£3,037
Household running costs
£2,100
Contributions made by Jack (£100 x 12months)
Taxable benefit
(£1,200)
£7,437
24
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - Loans
There are situations when an employer loans money to an employee and either charges them
no or a low-rate of interest.
Exemption: If the value of the loan remains below £10,000 for the whole of the tax year, no
benefit is calculated as it is exempt.
Note: If the value of the loan exceeds £10,000 at any point in the tax year, a benefit is
calculated for the whole year not just the period where the balance is greater than the limit.
The following formula is used in order to calculate the benefit:
Loan value * official rate of interest
Official rate of interest for the current tax year = 2.25%.
There are two potential methods to calculate the loan value:
a) The average method - a simple average loan balance calculated as:
Balance at start of tax year/when first made (if mid-year)
+ Balance at end of tax year/when repaid (if mid-year)
Average loan balance =
2
b) The precise or accurate method - we calculate the balance on the loan at the end of
each month and charge interest at a monthly equivalent rate for that month:
Average loan balance = Loan balance at the end of each month * 2.25% * 1/12
Remember:
1)
2)
We time apportion if the loan does not exist for the whole tax year;
We can deduct any interest which the employee pays to the employer.
25
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - Other Benefits
There are some other benefits which have specific calculation methods:
1) Employers help with medical costs. There are two possible scenarios here:
a) The employer pays for membership of a medical insurance scheme for the employee
(and members of the employee's family as well). If this is the case, this is a taxable
benefit but is calculated as simply the cost to the employer;
b) The employer pays all or some of the cost of the employee receiving medical treatment
to help them return to work quicker:
Amount paid by employer
< £500

Exempt, no benefit is charged
Amount paid by employer
> £500

Total cost is a benefit
2) Employer allows an employee to make use of an asset owned by the employer for private
purposes (except for car, van, living accommodation). For other assets, we use the “Use of”
method to calculate the benefit:
Benefit = 20 % * Market value when made available to employee
Remember:
1) The benefit is time apportioned where the asset is only available for part of the year;
2) We are allowed to deduct employee contributions from the value of the benefit.
Note: If a bicycle loaned to employees to travel to and from work or for business purposes, this
is an exempt benefit.
3) Employer allows an employee to take ownership of the asset. If this is the case, the benefit
is calculated as the higher of:
a)
Cost to employer less “use of” benefits already taxed less any employee
contribution;
Original cost of asset
X
Benefits already taxed for previous ‘use of’ asset
(X)
Employee contribution
(X)
Total
X
26
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
b)
Market value of asset when gifted less any employee contribution.
Market value when gifted
X
Employee contribution
(X)
Total
X
Note: For any other benefits provided by an employer where no specific calculation method
exists, the cost to employer principle would be used, and both of the general principles of time
apportioning and deducting employee contributions would apply.
27
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Employment - Sundry Topics
REAL TIME INFORMATION SYSTEM:
HM Revenue and Customs require employers to use a RTI (Real Time Information) system to
send details to them every time an employee is paid.
There are two key advantages to this “real time” reporting:
1)
2)
HM Revenue and Customs have information about deductions that the employer has
taken, so that they can chase money if it is not paid over when due;
HM Revenue and Customs have information about the earnings of any given individual
so that this information can be used by other government offices.
PAYROLL DEDUCTIONS:
The employer is required to deduct income tax and employee’s national insurance from the
payment for the work done, which they then pay on to HM Revenue and Customs on behalf of
the employee.
When calculating income tax, the income from all sources is accumulated for tax purposes.
Employers use PAYE codes for each employee. The code is calculated as follows:
Personal allowance
X
Allowable expenses expected to be paid
X
Taxable benefits estimated
(X)
Adjustments for tax underpayments
X/(X)
Total
X
Taxable benefits < (Personal allowance + Allowable expenses)

Code ends with L
Taxable benefits > (Personal allowance + Allowable expenses)

Code starts with a K
28
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
EMPLOYMENT RELATED FORMS AND PAYROLLING OF BENEFITS:
It is important to be aware of the key employment related forms:
1)
2)
3)
P60 - shows the employee their gross earnings for the year and how much tax and national
insurance has been deducted. Deadline is 31 May;
P11D - shows the value of benefits provided to the employee. Employers are required to
give a copy of this form to the employee by the 6 July after the tax year if any benefits
were provided. Alternatively the employer could apply to HMRC to tax the benefits being
provided to the employee via the PAYE system instead of reporting them on the P11D. This
is known as payrolling of benefits. The employee will therefore pay tax on the benefits
during the tax year and doesn’t then have to report them on their tax return. The employer
therefore would not need to include the benefit on a P11D.
P45 - produced when an employee ceases to be employed (for whatever reason). It
provides the necessary information for the new employer about earnings and tax deducted
to date for the tax year.
EMPLOYEE VS SELF-EMPLOYED:
If an individual claims to be self-employed, they regularly submit an invoice for the hours they
worked and request payment in full without any deduction of tax or national insurance.
HM Revenue and Customs requires the employer to assess whether that person really is self
employed or they should be treated as an employee by looking at seven factors:
1)
2)
3)
4)
5)
6)
7)
Conditions of pay;
Integral position;
Risk;
Control;
Legal rights;
Equipment;
Substitute.
29
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 3
Contents
BADGES OF TRADE ...................................................................................................................... 3
Income from Self Employment - Adjustment of Profits.............................................................. 6
PROFORMA: ............................................................................................................................. 6
DISALLOWABLE EXPENSES: ...................................................................................................... 6
INCOME ADJUSTMENTS: ......................................................................................................... 7
PRE TRADING EXPENDITURE: .................................................................................................. 8
Income from Self Employment - Capital Allowances on P+E and Structures and Buildings
Allowance .................................................................................................................................... 9
ITEMS QUALIFYING FOR CAPITAL ALLOWANCE: ..................................................................... 9
BALANCING ADJUSTMENTS ON SALE OF AN ITEM: .............................................................. 10
SMALL POOL BALANCE CLAIM: .............................................................................................. 10
SHORT LIFE ASSETS: ............................................................................................................... 10
STRUCTURES AND BUILDINGS ALLOWANCE (SBA)................................................................ 10
Income from Self-Employment - Capital Allowances on Cars................................................... 13
Income from Self Employment - Introduction to Basis Periods and CYB ................................. 14
Income from Self Employment - Basis Period Opening Year Rules .......................................... 16
Income from Self Employment - Basis Period Opening Years - Extra Example ........................ 20
QUESTION - JOE: .................................................................................................................... 20
QUESTION - RACHEL: ............................................................................................................. 21
Income from Self Employment - Basis Period Closing Year Rules ............................................ 25
Income from Self Employment - Partnerships .......................................................................... 26
Income from Self Employment - Introduction to Losses .......................................................... 28
INTRODUCTION TO LOSSES: .................................................................................................. 28
FACTORS INFLUENCING TAX RELIEF: ..................................................................................... 28
Income from Self Employment - Further Losses ....................................................................... 32
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Cash Basis of Accounting ........................................................................................................... 34
GENERAL PRINCIPLES:............................................................................................................ 34
OTHER SPECIFIC AREAS:......................................................................................................... 34
Property Income........................................................................................................................ 35
ELEMENTS OF PROPERTY INCOME: ....................................................................................... 35
SPECIAL RULES FOR ALLOWABLE EXPENSES: ........................................................................ 36
PROPERTY LOSSES: .................................................................................................................... 39
Relief for Pension Contributions ............................................................................................... 40
TYPES OF PENSION CONTRIBUTIONS: ................................................................................... 40
TAX RELIEF LIMITS: ................................................................................................................ 40
PENSION WITHDRAWALS: ..................................................................................................... 41
Relief for Pension Contributions - Example .............................................................................. 42
Relief for Qualifying Loan Interest ............................................................................................ 45
Sundry Income Tax Topic .......................................................................................................... 46
GIFT AID DONATIONS: ........................................................................................................... 46
CHILD BENEFIT TAX CHARGE: ................................................................................................ 46
National Insurance Contributions ............................................................................................. 48
DEFINITION: ........................................................................................................................... 48
EMPLOYED INDIVIDUALS: ...................................................................................................... 48
SELF-EMPLOYED INDIVIDUALS: ............................................................................................. 49
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
BADGES OF TRADE
Sometimes people don’t realise that they are trading. For example, someone who repairs and
then sells antique chairs as a hobby would probably not consider themselves to be trading.
However, HMRC may not see it like that and that is why they introduced the Badges of Trade.
These help HMRC to differentiate between a person who is trading and one who simply has a
hobby or investment.
If a person is deemed to be trading they will be subject to Income Tax and National Insurance
on their profits.
If they are not deemed to be trading they could be caught under the capital gains rules and be
subject to capital gains on their profits (this is covered in later chapters).
The badges are things to consider as a whole. No one badge is more influential than another it is a grey area. In an exam situation you would talk through each badge and come to a
conclusion based on your findings.
The Badges of Trade are as follows:
 The subject matter of the transaction - so are these the kind of goods or services that
are normally used for trading - for example if someone buys 1 million toilet rolls, would
you think that they have bought them for their own personal use or to sell on (trade)?
 The period of ownership - the longer this is the less likely it is that the item is part of a
trade
 The frequency with which this type of transaction has occurred - the more frequent, the
greater the likelihood there is a trade going on, e.g. repair and sell 20 cars in a year.
 Any supplementary work or improvements made to the item before it is sold - this
doesn't necessarily mean a trade is definitely occurring as often people will want to
make improvements to an item for their own enjoyment but it is just trying to build up a
picture using these badges as to whether there is a trade.
 Any marketing undertaken in order to sell the asset - again on its own this wouldn’t be
enough to prove a trade was in existence as often people will use an agent to sell
something
 The reason for the sale - was there suddenly a need for cash that meant someone had
to sell an asset that they otherwise wouldn't have? if so, then that suggests there may
not be a trade here.
 The motive for the transaction - was it to make a profit? if so, that suggests there may
be a trade happening.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Those are the main badges of trade but there are three other questions HMRC might use to
make their judgement:
 the method of acquisition of the asset - if we inherited an asset that we don’t like and
then sell it immediately, it is much less likely that we are carrying on a trade
 financing of the asset - if we have taken out a short-term loan for example to fund an
asset purchase it is more likely that when we sell it that we were doing so as part of a
trade than if we had taken out a long-term loan
 similarity to existing trading activities - if this transaction is quite similar to activities that
the individual already carries on as a trade it is more likely that this particular
transaction is also trade related
So remember that no one of these questions or badges is more important or decisive than the
others and we need to make a judgement after considering them all.
Once we have decided that a person is trading, we will deem them to be self-employed.
Self-employment is where an individual runs a business, either by himself or with others, but
have not created a separate legal entity for that business by forming a legal company.
There are some issues with calculation of profit or loss for tax purposes:
 The profit or loss calculation. Some accounting standards allow a business choice as to
how to deal with a particular item. Tax authorities prefer rules which mean that
everybody is treated the same when the profit or loss is calculated;
 The period of time. A business can choose to prepare accounts to any date each year,
whereas tax calculations are prepared for a tax year, which runs specifically from 6 April
of one year to 5 April of the next.
There are certain steps that must be followed in order to calculate income from self
employment:
Step 1 - Adjustment of profit for the accounting period. This represents an adjustment to the
figure in the accounts to remove or replace anything which HM Revenue and Customs will not
accept.
Step 1 (a) - Capital allowances. We will always reverse the depreciation charge and replace it
with capital allowances.
Step 2 - Basis periods. At this stage we decide which accounting period(s) to look at for the
given tax year either in full or in part.
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Note: With a partnership, there will be a further stage to consider between Steps 1 and 2,
which is to allocate the profits between the partners.
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Adjustment of Profits
PROFORMA:
A proforma for calculation of tax adjusted profit would be:
£
Profit/(loss) per the accounts
£
X/(X)
Add: Disallowable expenses
X
Missing items of income
X
X
Less: Capital allowances
X
Non-trading income
X
Missing items of expenditure
X
(X)
Tax adjusted profit for period
£X
DISALLOWABLE EXPENSES:
The disallowable expenses are items which have been included in the financial accounts as
expenses but shouldn’t have been from tax perspective, so to reverse that entry we add them
back to the profit.
Note: If the expense is allowable, we do not need to make any adjustment.
We would add back a proportion of such costs as the cost of a mobile phone or the running
costs for a car to represent the personal use of such items.
There are many disallowable expenses and some of the most common adjustments would
include:
1) Legal fees. Legal fees on the purchase of capital items are not allowable deductions.
Specific rule: Legal fees relating to the purchase of a short lease are disallowed but if they
relate to the renewal of a short lease they are allowable;
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
2) Fines. Fines are generally disallowed but if an employer pays a fine charged when an
employee was undertaking work for them, this is allowable;
3) Gifts. Gifts to customers/suppliers are allowable if they meet two conditions:
a)
They cost no more than £50 per recipient;
b)
They bear the business logo or some form of advertisement.
Specific rule: Any gift of food, alcohol or tobacco is always disallowed regardless of the cost
or any advertisement;
4) Donations. Donations are only allowable deductions if they are “small and local”;
5) Entertaining. The key fact is who is being entertained:
a)
Staff entertaining is an allowable expense;
b)
Entertaining of customers or suppliers is disallowable;
6) Capital expenditure. Capital expenditure is always disallowable. In most cases there is no
adjustment necessary as the capital additions appear in the SFP rather than the P&L.
However, sometimes small amounts of capital expenditure are written off;
7) Car hiring or leasing. The rate of allowance given for a car purchased by a business is
dependent upon the CO2 emissions. For hired or leased car, where the CO2 emissions of that
car are greater than 110g, we add back a fixed rate of 15% of the hire costs;
8) Lease premiums (example of “missing items of expenditure”). Any accounting entry for the
lease in the P&L should be added back and replaced with an allowable deduction for tax
purposes. In order to calculate it, we need to split the lease premium between a “capital” and
“revenue” element:
Capital element = Lease premium * 2% * (n-1) <= doesn’t qualify for any tax deduction
Revenue element = Lease premium - Capital element <= deducted from profit in equal share
over the life of the lease
INCOME ADJUSTMENTS:
If the accounts include any income which does not come from the ordinary trade (e.g. interest
received), we take these back out.
Items of missing income often relates to goods taken for own use. The tax legislation requires
us to make an adjustment to record the missing sale at the full selling price, not just the original
cost of the goods.
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
PRE TRADING EXPENDITURE:
Often when someone is setting up a business they will start to incur expenses before they start
to trade. A deduction is therefore permitted for any expenditure related to the business
incurred in the seven years prior to the commencement of the trade.
The type of expenditure that is allowable so long as it would have been permitted as a
deduction had it occurred after the trade commenced and the deduction is made in the first
period of trade as if it had been incurred on day one of the trade.
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Capital Allowances on P+E
and Structures and Buildings Allowance
ITEMS QUALIFYING FOR CAPITAL ALLOWANCE:
Non-current fixed assets such as furniture, machinery, equipment, as well as vehicles qualify for
capital allowance.
Remember: Buildings do not qualify for any allowance, but there are some components which
may qualify under the name of “integral features” (lifts, escalators, external solar shading, air
cooling or air purification, ventilation system, water and heating systems).
For tax purposes we group assets based on what allowances are available for them, so there
are two categories:
1) Main/general pool - includes a mixture of different types of assets such as vans,
machinery, computers, furniture etc.
Writing down allowance rate (WDA): 18% per annum.
Annual Investment Allowance (AIA): £1,000,000 per annum.
Note: The AIA was reduced to £200,000 from 1 January 2021, but for exams up to and
including 31 March 2022, the AIA will remain at £1,000,000.
2) Special rate pool - includes integral features (see above), long life assets, where more than
£100,000 has been spent per annum, and high CO2 cars (which we see in a later topic).
Long life assets are those that have an expected useful life from when it was very first
brought into use of more than 25 years. Aircraft would be an example of a long life asset.
Writing down allowance rate (WDA): 6% per annum.
Annual Investment Allowance (AIA): £200,000 per annum.
The AIA rate is applied for items purchased during the period and is a limit which allows
expenditure of up to that amount to be claimed in full against profits.
Note: It is beneficial to use the AIA against special rate pool items before main pool items to
maximise the allowances available for the period in question.
Remember: If accounts are prepared for a period of less or more than 12 months, we still
prepare a calculation for the time covered by the financial accounts, but the AIA and WDA will
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
need to be time apportioned to match the length of the accounting period. This does not relate
to the balancing adjustments.
BALANCING ADJUSTMENTS ON SALE OF AN ITEM:
When the item is sold, it is accounted for at lower of the original cost and sale proceeds to see
whether any further allowance is available, or if too many allowances have been given to date:
Further allowances are still due
Too many allowances have been given
Claim a balancing allowance
Balancing charge arises (negative amount)
Note: For the main and special rate pools, we do not get a balancing allowance as a result of
the sale of individual items. If the business ceases to trade, a final allowance will be given to
write the pool(s) down to nil.
SMALL POOL BALANCE CLAIM:
This applies where the balance on the main and/or special rate pool is less than £1,000 and
allows the balance of the pool to be claimed in full rather than claiming only 18 or 6% of the
balance.
SHORT LIFE ASSETS:
A short life asset is any item (other than cars) with an expected life of 8 or fewer years:
-
It is separated out from the pool and appears in a column on its own.
It still qualifies for the AIA and WDA as normal;
Any balance of unclaimed allowances when the item is sold or scrapped can be claimed
in that year, whereas this is not allowed where a single item is sold from a pool.
STRUCTURES AND BUILDINGS ALLOWANCE (SBA)
A new type of capital allowance has been introduced for when a building (or structure) has
been constructed on or after 29 October 2018. In the Taxation exam you will only be examined
on buildings (or structures) constructed after 6 April 2020 (1 April for limited companies).
Relief is given annually at 3% on a straight line basis. If the building (or structure) is purchased
part way through the year then the allowance given in the first year will need to be time
apportioned.
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
This relief applies to: Offices, retail and wholesale premises, factories and warehouses (as well
walls, bridges and tunnels).
Exclude:
1. cost of Land;
2. any part of the building (or structure) that qualifies for capital allowances as an Integral
feature as the rate of allowance for integral features is higher than SBA’s (6% compared to
3%)
The building (or structure) must be used for a qualifying activity, such as trade or property
letting.
The SBA can only be claimed from when the building (or structure) is brought into qualifying
use.
A separate SBA is given for each building (or structure) qualifying for relief.
Illustration
On 1 May 2020 James buys a newly constructed factory for use in his trade, and starts using it
on 1 July 2020.
Total cost = £520,000
Includes:
Land = £50,000
Air conditioning system = £30,000
Lift = £15,000
What capital allowances will be available for James in the year ended 31 March 2021, assuming
he has already used his AIA for the year?
Answer: £12,263
Integral features: Both the lift and the air conditioning system qualify for capital allowances as
integral features £30,000 + £15,000 = 45,000 x 6% = £2,700.
SBA: Exclude the cost of the land and integral features from the purchase price.
£520,000 - £50,000 - £30,000 - £15,000 = £425,000
£425,000 x 3% x 9/12 = £9,563.
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
On the sale of a building (or structure) where SBA’s have been claimed
On the sale of a building (or structure):
 No balancing allowance or balancing charge is calculated;
 Structure and buildings allowances claimed are added to the sales price when
calculating the chargeable gain or allowable loss on disposal for capital gains.
 The buyer will continue to claim 3% on the ORIGINAL purchase price by the first owner
NOT on the price they have just paid for the building (or structure).
Note: You should assume that any question involving the purchase (as opposed to the new
construction) of a building, the SBA is not available unless stated otherwise.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self-Employment - Capital Allowances on Cars
The main rules for us to take into account with cars are:
1) There is no AIA allowed for the purchase of cars, although it is available on the purchase of a
van;
2) The WDA for a car is based on the level of CO2 emissions:
CO2 ≤ 50g
100% FYA*
Low and medium emission cars form part of the
main/general pool
CO2 51
-110g
CO2 > 110g
18% WDA
6% WDA
-
High emission cars are included into the special
rate pool
*First-year allowance (FYA) - also called a “spot allowance” as it is available on the day of
purchase rather than for the accounting period. It is not time apportioned.
Note: If the issue of personal use by the business owner is relevant to any car, it is not pooled,
but instead will appear in a separate column.
3) If a car is used by the business owner for both business and personal purposes, we will only
be able to offset part of the allowance against profits. This rule does not apply in capital
allowance computations for companies where there is private use of the car by employees.
13
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Introduction to Basis Periods
and CYB
Problem: Tax legislation requires all individuals to declare income for the period of time being 6
April of one year to 5 April of the next.
General idea: A trader is allowed to choose to prepare the financial accounts to whatever date
they like. The idea of the basis period rules is to give us a set of rules to follow to determine
what profits to declare as income for what tax year.
Choosing a year end
A year end date that is early in the tax year such as April or May has the advantage that it will
give the taxpayer longer between earning the profits for that period and paying the tax due on
them, but it will potentially result in higher overlap profits (these are where profits end up
being taxed twice in the early years of trade which we will read about later).
A year end date late in the tax year such as January or February on the other hand means that
there will be less risk of significant overlap profits in the early years of the trade but there will
be less time than between the profits being earned and the tax being due on them. So the
choice of accounting date is quite an important one that a business owner should consider
before starting up the business.
To see how Current Year Basis (CYB) works, we need to use a timeline:
CYB rule: If there is a 12 month accounting period ending within the tax year, we can take the
profit for that 12 month accounting period and use that as if it were our income for that tax
year.
In the case described above, the profit for the year ended 31 December 2021 would be treated
as income from self employment for the 2021/22 tax year.
14
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
If the trader continues to trade and prepare accounts for 12 months at a time, we will simply
take the next 12 months profit into the next tax year on an annual basis. In this case, the 31
December 2022 profits will be taxed in 2022/23.
Note: Using CYB does not actually “match” our accounting periods up with our tax years and we
do not do any type of apportionment calculations in most cases.
Opening (or early) year rules are applied when the business has recently started and this is the
first period of accounts. In this case, the accounting period may be longer or shorter than 12
months.
Closing year rules are applied when the business has ceased and the date of cessation is
something other than the normal accounting date.
15
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Basis Period Opening Year
Rules
When a trader first starts trading, the normal current year basis rules won’t work properly.
Remember: The best way to approach questions is to set up a timeline to summarise all of the
dates quoted.
There are a number of general rules to follow:
a) Year 1 - the first tax year when the person is trading.
Rule: We should declare income from self employment for this year for the period starting
when trade begins and ending next 5 April:
b) Year 2 - the second tax year in which the person is trading and this is generally the problem
year.
Rule: We use two questions:
1) Is there any accounting period ending in this second tax year?
No: The basis period for Year 2 will be the actual tax year dates, i.e. 6th April to 5th
April;
Yes: Go to the next question.
2) How long is that accounting
period (the whole period from start to finish)?
16
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
There are three possible answers:
-
Less than 12 months: The 12 months that we use as the basis period is the first 12 months of
trade i.e. starting when the business first began, we count forward 12 months and take the
profit for this period.
-
Exactly 12 months: We can actually adopt current year basis. We have a 12 month accounting
period ending in the tax year so our basis period will be this 12 months.
-
More than 12 months: We use 12 months to the AP end date as the basis period, i.e. starting
when the AP finishes, we count back 12 months and take the profit for this period.
17
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Note: In any tax year other that the first and last, we must include 12 months of profit and only
12 months.
c) Year 3 - in most cases will are able to adopt the normal current year basis rule. There will
usually be a 12 month accounting period ending in the tax year, which we will then take to be
our basis period. If not, we need to use the same approach as for the Year 2 to determine what
the basis period should be.
Illustration
Tom starts trading on 1 January 2019 and chooses a 30 June year end. His trading profits are as
follows:
Period ended 30 June 2019 £20,000
Year ended 30 June 2020
£48,000
His profits will be taxed as follows:
Year 1: 2018/19
Taxable profits
1 January 2019 to 5 April 2019 (commencement to 5th April) 3/6 x £20,000
£10,000
Year 2: 2019/20
Is there an accounting period ending in the 2nd tax year? Yes 30 June 2019.
Is it long, short or 12 months? Short because it is only 6 months long.
Therefore, tax 12 months from date of commencement:
1 January 2019 to 31 December 2019
18
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
6 months to 30 June 2019
£20,000
6 months to 31 December 2019 (6/12 x £48,000)
£24,000
£44,000
Year 3: 2020/21
Is there an accounting period ending in the 3rd tax year? Yes 30 June 2020.
Is it long, short or 12 months? 12 months
Therefore, tax the 12 months to 30 June. This is called current year basis.
£48,000
Note: you may have noticed that we taxed some of the profits twice. For example, we used half
of the £20,000 profits in the first tax year and then we used the whole £20,000 again in the
second tax year. Similarly, we used half of the £48,000 profits in the second tax year and all of
the £48,000 again in the third tax year.
These are called overlap profits. In this example the total overlap profits would be £10,000 +
£24,000 = £34,000
These are the profits that are taxed twice. You can only get relief for these overlap profits when
you cease to trade (see later in the course) or change your accounting date (not examinable in
your Taxation exam).
19
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Basis Period Opening Years Extra Example
QUESTION - JOE:
Joe started trading on 1 December 2016 preparing accounts to 31 March each year. His tax
adjusted trading profits were:
16 months period to 31 March 2018 £48,000
Year to 31 March 2019
£26,600
SOLUTION - JOE:
Note: With a March year end, the AP and tax dates are effectively the same, as we ignore the 5
days of April.
Working through our rules:
1) Year 1 for Joe will be the 2016/17 tax year as the start date of 1 December 2016 falls
within that year. We said that for year 1 we always take the period between when trade
begins and the next 5 April so here it is the period 1 December 2016 to 5 April 2017. Here
we need to find the profit for the 4 months covering December to March.
This 4 month period forms parts of the first AP to 31 March 2018 but be careful - this AP
is 16 months long so to find the profit for the 4 months we want we must take 4/16 of
the £48,000 profit for that AP to give us £12,000.
2) Year 2 is our problem year, and here is the 2017/18 tax year.
Question 1: Is there an AP ending in the tax year? On our timeline we can see the black
line marked 31 March 18, so there is an AP.
Question 2: How long is the AP? Here it is a 16 month AP. So from our rules, the basis
period is the 12 months to the end of that AP. Working backwards 12 months from 31
March takes us to 1 April so the basis period for year 2 is 1 April 2017 to 31 March 2018.
20
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
What we want to do is calculate a profit for this 12 month period. To do this, we will take 12/16
of the £48,000 profit for the 16 months to March 2018:
£48,000 x 12/16 = £36,000
3) Moving on to year 3, we said in most cases we would be adopting CYB rules by this year.
So Year 3 for Joe is 2018/19 and if we look at the timeline, the AP ending between 6 April
2018 and 5 April 2019 is the year ended 31 March 2019 which is indeed 12 months long,
so we can simply take the profits for this year of £26,600 as income for 2018/19.
What is interesting this time though if you look at the completed timeline is that there are no
overlap periods which is correct. As 31 March is basically the same as the end of the tax year,
there will never be any overlap period with a March year end.
QUESTION - RACHEL:
Rachel started trading on 1 February 2016 preparing accounts to 31 July each year. Her tax
adjusted trading profits were:
18 months period to 31 July 2017
£9,000
Year to 31 July 2018
£14,000
SOLUTION - RACHEL:
We again start with the timeline:
21
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Working through our rules:
1) Year 1 for Rachel will be the 2015/16 tax year as the start date of 1 February 2016 falls
within that year. We said that for year 1 we always take the period between when trade
begins and the next 5 April so here it is the period 1 February 2016 to 5 April 2016.
Here we need to find the profit for the 2 months covering February to March. This 2
month period forms parts of the first AP to 31 July 2017 but be careful - this AP is 18
months long so to find the profit for the 2 months we want we must take 2/18 of the
£9,000 profit for that AP to give us £1,000.
2) Year 2 is our problem year, and here is the 2016/17 tax year.
Question 1: Is there an AP ending in the tax year - on our timeline we can see there are
no black lines between the blue lines showing 5 April 2016 and 5 April 2017. So we don’t
need Question 2 this time - we now know that the basis period is the tax year itself (6
April to 5 April). What we want to do is calculate a profit for this 12 month period. To do
this, we will take 12/18 of the £9,000 profit for the 18 months to July 2017:
£9,000 x 12/18 = £6,000
3) Moving on to Year 3, we said that in most cases we would be adopting CYB rules by this
year. So Year 3 for Rachel is 2017/18 and if we look at the timeline, the AP ending between
6 April 2017 and 5 April 2018 is the same period ended 31 July 2017 we have been using
all along.
22
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
This is 18 months long, so we cannot adopt CYB. Instead, we will use the same process as we
use for Year 2 - we do have an AP ending in the tax year so moving on to Q2 we ask how long it
is. Here it is 18 months so we will take the 12 months ending with the AP end date of 31 July
2017 i.e 1 August 2016 to 31 July 2017.
What we need to do is calculate a profit for this 12 month period. To do this, we will again take
12/18 of the £9,000 profit for the 18 months to July 2017. Note: It is a different 12 month
period to that included in Year 2, even though the value will obviously be the same.
In this case, if we move on to year 4 (2018/19) we will see that CYB will now apply here, as the
AP ending in the tax year in the 12 month period to 31 July 2018 so the £14,000 profit for this
period will be included as income for 2018/19.
So to complete this final example we just need to look at the overlap periods:
-
In Year 1 we taxed 1 February 2016 to 5 April 2016 (2 months);
-
In Year 2 we taxed 6 April 2016 to 5 April 2017 (12 months);
-
In Year 3 we taxed 1 August 2016 to 31 July 2017 (12 months);
-
In Year 4 we taxed Year to 31 July 2018.
So the only overlap period is between 1 August 2016 and 5 April 2017, an 8 month period out of
that long 18 month accounting period giving us overlap profits of £4,000:
So let’s just note one final point on these overlap profits:
The 18 month AP to 31 July 2017 was used as the basis in some way for Years 1, 2 and 3. Across
those three tax years, we have included 26 months of average monthly profits (2 in year 1, 12 in
23
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
year 2 and 12 in year 3) but really only 18 months of profit was made. The difference between
this 26 and 18 is the 8 months overlap period.
24
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Basis Period Closing Year
Rules
When a trader ceases to trade, all we are interested in is the date of cessation and the effect on
the basis periods.
When we are at the end of the company’s life cycle, there are two things for us to look at:
1) We need to make sure that all profits generated by the business have been included and
subject to tax in some tax year or another:
a)
We need to work out what is the final tax year based on the date of cessation;
b)
In the final tax year, we include any profits not yet included in an earlier year;
c)
For every year that the trader is in business, we need to include 12 months of
profit as income, except for the first and last year.
2) We need to deal with those overlap profits, if any were created when the business first
started trading:
a)
On a cessation, the overlap profits are deducted in full even if this means that the
figures for the final year net down to nil or a negative amount;
b)
The number of months of overlap profit is irrelevant.
Jack ceases to trade on 31 March 2019. His profits for the last three periods were:
Year ended 31 December 2017
£12,000
Year ended 31 December 2018
£10,000
Period ended 31 March 2019
£2,000
His overlap profits brought forward were £4,000
In this case, Jack ceases to trade in the tax year 2018/19. His profits from 31 December 2017
will have been taxed in the 2017/18 tax year and so in the final tax year he will be taxed on
profits from the year ended 31 December 2018 and the period ended 31 March 2018.
2017/18 Taxed on
y/e 31 December 2017
£12,000
2018/19
y/e 31 December 2018
£10,000
Less:
p/e 31 March 2019
£ 2,000
overlap profits b/f
£(4,000)
Taxed on
£ 8,000
25
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Partnerships
A partnership is a collection of individuals working together with the common aim of making a
profit.
You could think of them as a group of sole traders who happen to work under the name of one
business.
Problem: The partnership is not considered a taxable person. Instead, each of the partners pays
their own income tax on the profits they are entitled to.
These stages to calculate income from self employment for a partnership are:
- Step 1 - The adjustment of profit stage
-
exactly the same way as
for individual owner.
Step 1 (a) - To calculate the capital allowances for the
accounting period
Key difference at this stage: There are two or more business owners now. So any private
expenses of any of the partners will need to be added back and the car used by each partner for
both business and personal purposes will be a private use car to be put into its own column in
the capital allowance calculation.
-
Step 1 (b) - To allocate profits to each of the partners based
on legal
agreement
This is an extra step for
partnerships.
Remember:
1)
2)
Where the profit sharing agreement changes part way through an accounting period, we
would need to split the period into two and time apportion the profits accordingly;
We ignore the partnership as a whole and now tax each individual partner based on their
own position.
This stage is the same as for
individual owner.
- Step 2 - To look at the basis period issue
26
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
General rule: If one partner left during the year, we would need to consider the closing year
rules. If another partner joined the partnership during the period, we would consider the
opening year rules.
27
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Introduction to Losses
INTRODUCTION TO LOSSES:
The first point to make when we have a loss for the period is that we still complete the
adjustment of profits in exactly the same way and mostly the basis period rules are the same.
However, there is one difference: if the capital allowances would mean that our figures net
down to a loss, we can choose not to claim them or to claim them in part.
Below are the steps that we should follow if the business has a loss for the period:
1)
In income tax calculation we need to show that a person has nil income from self
employment;
2)
We take the losses to a loss memo and consider whether we can claim any tax relief.
FACTORS INFLUENCING TAX RELIEF:
There are three possible factors to take into account to decide how best to make use of losses:
1)
The timing of when we get the relief;
2)
The rate of tax at which relief will be given;
3)
The possible waste of other forms of tax relief.
Option 1: Current year / Carry back
This option has the advantage of giving relief now rather than having to wait for it.
Here we can choose whether we would like to start with a claim against the total income of the
same year as the loss arises in or the previous tax year. We have the choice of setting against
either or both years, and in whichever order we prefer.
Restrictions:
1)
2)
If we decide to claim our losses in either year, we must offset as much as possible,
and cannot make a partial claim;
Where we claim to set losses against any non-trading income, there is a maximum
offset which is calculated as the greater of:
a) £50,000 or
28
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
b) 25% x gross income, where gross income is the total income for the year less any
gross personal pension contributions made.
Option 1 (a): Current year / Carry back against capital gains
We consider this option only once a claim has been made against income of the same or
previous tax year of the loss.
If we still have losses to claim relief for, we can now set them against any chargeable gains
arising in the current or previous year.
Restrictions:
1)
2)
This can only be for the matching year e.g. current year against income and current
year against gains, or carry back against income and carry back against gains. NOT
current year against income and carry back against gains or vice versa;
We must offset as much as possible, and cannot make a partial claim.
Option 2: Carry forward against future profits from the same trade
This is the default option, so if we claim to do nothing else with our losses, they will
automatically carry forward and be matched with the next profits as they arise from the same
trade.
Note: Most questions will tell you which option(s) to use.
Example 1: current year, carry back and carry forward loss relief.
Jasper has a trading loss of £20,000 in 2020/21 and a trading profit of £5,000 in 2019/20.
In 2020/21 Jasper also has other income of £8,000
Show how Jasper can get relief for this loss assuming Jasper wishes to use the loss as soon as
possible and comment on any loss left to carry forward.
29
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Solution:
2019/20 (£)
Trading income
Other income
Total income
2020/21 (£)
5,000
0
0
8,000
5,000
8,000
Current year loss claim
(8,000)
Carry back loss claim
(5,000)
Net income
0
Loss memo:
Trading loss
£(20,000)
Used in current year 2020/21
£8,000
Used in prior year 2019/20
£5,000
Loss left to carry forward
£(7,000)
30
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
0
lOMoARcPSD|1371842
Example 2 Current year against gains
Julie has a trading loss in 2020/21 of £28,000
She also has other income of £10,000 and a capital gain in 2020/21 of £30,000
How much of the loss is available to be offset against the capital gain in 2020/21?
Solution:
Julie has income in 2020/21 of £10,000. Although this would be covered by the personal
allowance, the current year loss MUST be offset against this income for the capital loss relief
option to be available.
2020/21
(£)
10,000
(10,000)
0
Income tax
Total income
Current year loss claim
Net income
2020/21
(£)
30,000
Capital gains
Current year capital gains
Income tax loss relief against gains
Lower of:
Trade loss left (28,000 – 10,000 =) £18,000
And
Capital gain £30,000
Chargeable gain
(18,000)
12,000
31
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Income from Self Employment - Further Losses
There are two special situations where an additional choice of loss relief may be available:
1) Where a business makes losses in the early years, when first starting to trade:
 It applies where losses arise in any of the first 4 tax years of trade;
 It allows the loss to be carried back over an extended period of 3 tax years rather than
just one, and set against total income;
 We have to take our losses back on a FIFO basis so that we go back to the earliest year
first eg if the loss was made in 2020/21 you could first carry it back to 2017/18, then to
2018/19 and then to 2019/20;
 Restriction of the greater of
(i)
£50,000 and
(ii)
25% x gross income applies here just like it does to the current/carry back option.
Note: If this business has only recently started to trade, the opening year basis period rules will
be relevant too, and we will need first to determine which year the losses actually arise in.
2) Where a business makes losses in the final period of trade, before ceasing:
 It is the relief we might be able to claim for losses arising in the final 12 months of trade;
 It gives us an extended carryback period of 3 tax years but we only set the losses against
profits from the same trade;
 We work on a LIFO basis rather than a FIFO so the losses are matched with more recent
years first.
 The calculation of this loss includes any overlap profits brought forward.
 This loss relief is commonly referred to as Terminal Loss Relief.
Note: The “£50,000” restriction does not apply here, we are only setting losses against trading
profits with this option.
Problem: The biggest difficulty with terminal loss relief is actually determining what the
terminal loss is. So unless the trader ceases to trade on their normal accounting date, there will
be some extra work necessary to determine the terminal loss.
Calculation of Terminal Loss:
The terminal loss is the loss in the last 12 months of trade. Which seems easy enough BUT you
need to split the last 12 months at 6 April.
For example, if you have a 31 December year end and then you ceased to trade on 30
September, you would have the period 1 October to 5 April and then the period 6 April to 30
32
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
September. The additional complication with this example is the 31 December year end.
Essentially you will have three calculations to carry out. One for the period 1 October to 31
December, the next for 1 January to 5 April and finally 6 April to 30 September.
An additional complication is that if the period prior to 6 April creates a profit, you DO NOT
include it in the terminal loss figure. BUT - if it produces a loss then you DO include it in the
terminal loss figure.
Terminal loss calculation example:
Trader ceases on 30 September 2021 with a loss of £21,000. In the year to 31 December 2020
Trader made a profit of £6,000.
Post 5 April 2021
6.4.21 to 30.9.21
Pre 6 April 2021
1.10.20 to 31.12.20
1.1.21 to 5.4.21
Terminal loss
6/9 x (£21,000)
3/12 x £6,000
3/9 x (£21,000)
(£14,000)
1,500
(£7,000)
(£5,500)
(£19,500)
Note:
the pre 6 April 2021 period produced an overall loss and as such the whole loss is included in
the Terminal Loss figure.
33
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Cash Basis of Accounting
GENERAL PRINCIPLES:
Key idea: A taxpayer who does not pay an accountant to help them complete their tax return is
more likely to be able to complete it correctly for himself using this approach, so a lot of the
complex rules of accounting are ignored.
General rule: This method can be used by unincorporated traders only, and only if their
turnover for the year does not exceed £150,000. Once turnover exceeds twice the threshold
(£300,000 for 2020/21), the cash basis can no longer be used.
The main principle of cash basis of accounting:
1)
Income is accounted for when it is actually received;
2)
Allowable expenses are deducted when they are actually paid.
OTHER SPECIFIC AREAS:
Other specific areas include:
 Capital allowances cannot be claimed but instead the cost of capital equipment is
deducted from profit in full in the year when it is paid (however, no deduction is allowed
for the cost of a car);
 We disallow the cost of the goods taken for own use when adopting cash basis
(compared to making the adjustment based on the selling price of the goods);
 A maximum deduction from profits of £500 is permitted for loan interest whereas
ordinarily we would deduct the full cost;
 Traders are allowed to make use of flat-rate expenses for things like use of home as
office and the statutory approved mileage allowance to further simplify the process;
 If after deduction of relevant expenses a loss is realised for the year, the only way that
loss can be relieved is to carry it forward to set against future trade profits. The normal
current year/carry back options against income and gains are not available, nor is the
early years relief.
34
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Property Income
ELEMENTS OF PROPERTY INCOME:
The default basis to be used for property income for individuals and partnerships is the cash
basis. Under this basis rent is included on a received basis rather than a receivable/accruals
basis, and expenses are deducted on a paid basis rather than a payable basis. So anything that
was actually paid out or received in between 6th April and 5th April each year is used in the
calculation of property income.
The individual or partnership can choose to use the accruals basis if they wish and it is
compulsory where property receipts are more than £150,000.
In the exam, unless you are told otherwise, you should assume that the cash basis is being used
for property income for an individual or partnership (companies still use the accruals basis).
The calculation of property income for a tax year could include various elements:
1) Rent received in the year;
2) Revenue element of premiums received during the year. Premium is a large lump-sum
amount received when the tenant first moves in (when property is rented for a long
period of time). If any premiums are received for a short lease (less than 50 years) we
should include a part of it in the calculation of property income:
Total premium received
X
Capital element*
(X)
Balance
£X
*Capital element = Total premium received * 2% * (n-1)
3) Allowable expenses paid in the year. Any expenses which directly relate to the letting of
the property can be deducted from income for tax purposes, such as:
-
Agent’s fees;
-
Advertising costs;
-
Mortgage interest paid on any borrowings taken to purchase the property.
Note: Capital expenditure is not deducted from income (e.g. capital element of repairs
and maintenance).
35
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
SPECIAL RULES FOR ALLOWABLE EXPENSES:
There are some expenses which may need to be considered in more detail:
a) Purchased furniture
The purchase of furniture will be seen as capital expenditure and as such will not be deducted
from income. However, when that furniture is replaced, the replacement cost can be deducted
from income – this is called Replacement Furniture Relief. The replacement asset must be a
direct replacement for the original asset and not a substantially different/improved version.
b) Rent-a-room relief applies to the situation where a lodger lives in the person’s main
residence with them. The first £7,500 of income from that lodger is exempt from tax. However,
there are a few rules applying to this:
-
The exemption is against income not profit, so if claiming rent-a-room, no deduction of
actual expenses is made;
The relief is given per property not per tenant so if there are 2 or even 3 lodgers, the
maximum exemption is still £7,500;
If the property is owned jointly, by husband and wife for example, the £7,500 is split
between the two owners equally, they can’t claim a full exemption each;
The £7,500 is a per annum figure but does not have to be time apportioned if the income
arises in only a few months.
c) Furnished holiday lets.
This activity looks more like a trading one because someone is likely to be visiting the property
more regularly and working there. Conditions which must be met for a property to qualify as a
FHL:
-
Situated in the UK or European Economic Area;
Let for short periods (less than 31 days per occupier);
Let on a commercial basis;
Available for letting at least 210 days in the tax year;
Actually let for at least 105 days in the tax year.
Advantages to a property being treated as a FHL:
-
Capital allowances can be claimed for the cost of furniture purchased for the property;
The income from a FHL counts as relevant earnings for pension purposes;
Certain forms of capital gains relief for businesses are available on the sale/gift of a FHL
such as entrepreneurs relief, gift relief, rollover relief.
36
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
d) Restriction on property income finance costs
The tax relief available for finance costs on residential properties such as mortgage interest are,
however, restricted to the basic rate of tax.
So they will get a basic rate reduction from their income tax liability instead of deducting the
interest cost from their profits before the tax is calculated on the property income.
This change to previous rules is being phased in over 4 years from 2017/18.
In the tax year 2020/21 0% of the finance costs will be subject to this restriction.
So 0% of the mortgage interest cost can be deducted in calculating the property income. The
whole mortgage interest cost is instead used as an income tax reducer in the income tax
computation calculated as:
[interest expense x 100%] x 20%
The tax reduction cannot be used to create a loss situation so there can be no tax refund as a
result of applying it.
It doesn't matter if the finance was used to buy the property or to pay for repairs to it.
The restriction doesn’t apply to finance costs for a furnished holiday letting or to nonresidential property, and the rules only apply to individuals not to companies.
This restriction only impacts higher and additional rate taxpayers in terms of restricting tax
relief but the restriction is still performed for ALL taxpayers even though the outcome will not
have an affect on the tax liability of basic rate taxpayers.
Illustration - restriction on property income finance costs
James has employment income of £50,000 and rental income of £15,000 from a house with
allowable rental expenses totalling £3,000 and mortgage interest costs of £2,000.
The property business profit on the house will be the £15,000 rental income less rental
expenses of £3,000 and 0% of the mortgage interest of £2,000. This means the profit is
£12,000.
This £12,000 should be included in James’ income tax computation as property income as
normal and so tax is calculated on it as per the usual rules.
Then what happens is that James can claim a tax reduction of 20% of 100% of the mortgage
interest costs so 20% of (£2,000 x 100%) £400.
37
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
This is deducted at the very end of the income tax computation just before we arrive at the tax
liability.
Tax calculation:
Employment income £50,000 - £12,500 PA = 37,500
£37,500 x 20%
= £7,500
Property income
£12,000 x 40%
= £4,800
Less: tax reducer
£2,000 x 100% x 20%
= £(400)
Tax liability
£11,900
Prior to 2017/18 James would only have been taxed on £10,000 of property income at 40%
£4,000.
The additional £400 (£4,800 - £400 - £4,000) of tax due in 2020/21 as a result of the new rules is
due to only getting 20% relief on the amount that is not deductible from property income
(£2,000 x 20%) £400 instead of £2,000 x 40% £800.
38
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
PROPERTY LOSSES:
The normal rule is that where a property loss arises for a tax year that loss will be:
1)
Matched with property profits from other rentals in the same tax year;
2)
Carried forward to match with future property profits.
Exception: FHL are kept separate from other properties, so normal property losses cannot be
set against FHL profits, and FHL losses can only be carried forward and matched with future FHL
profits.
39
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Relief for Pension Contributions
TYPES OF PENSION CONTRIBUTIONS:
There are two types of pension contributions:
1) Occupational pension contributions - only available to employees. The employee makes
a contribution, which is deducted from their pay by the employer before tax. The
employer may also make a contribution on behalf of the employee (no tax or national
insurance is payable in this case).
Note: The tax relief on the contributions is given at source. This means that employment
income is reduced by the amount paid into the pension scheme before the employment
income is taxed and so less income is subject to tax.
2) Personal pension contributions - available to anybody. An individual pays money over to
a financial institute which then administers a scheme for them. The amount paid is always
paid net of BR tax, so when we work on PPCs paid we always need to gross them up by
100/80.
Note: These schemes only give relief at source at the BR, so if the taxpayer is liable at HR
or AR, further relief needs to be given to them. In this case we extend the basic rate and
higher rate tax bands thus giving more income taxed at the lower rates 20% rather than
40%, or 40% rather than 45%
The mechanics of this tax relief is the same as we saw for gift aid donations.
TAX RELIEF LIMITS:
There is no limit on what pension contributions can be made, only on what tax relief can be
given. Tax relief will only be given on contributions up to the greater of:
a) £3,600;
b) 100% of relevant earnings. This includes only earned income (employment income, selfemployment income and property income from a furnished holiday lettings (FHL)).
The second limit is an Annual allowance, which has been set at £40,000 since 2014/15. This
limit acts as an upper limit for everybody, regardless of their level of income. This allowance is
tapered where an individual’s adjusted income* exceeds £240,000. The tapering is based on
the loss of £1 of the allowance for every £2 by which the person’s adjusted income exceeds
£240,000 down to a minimum annual allowance of £4,000. Therefore, a person with adjusted
income of £312,000 or more, will only be entitled to an annual allowance of £4,000 (£40,000 –
((£312,000 – 240,000)/2).
40
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
*adjusted income is net income plus any employee contributions to occupational pension
schemes plus employer contributions to personal and / or occupational pension schemes.
Contributions remain within the
available AA
No effect
Contributions are higher than the
available AA
Calculate an AA charge
AA charge = Total contributions - AA available
Note: An individual can bring forward unused AA from the last three tax years on a FIFO basis,
provided they were a member of a pension scheme for those earlier years.
PENSION WITHDRAWALS:
The main points to be aware of are:
1)
2)
3)
Withdrawals cannot be made before the age of 55;
A maximum 25% can be withdrawn as a lump sum tax-free;
The balance is used to provide an income, either through the purchase of an annuity
or as direct withdrawals but this income is subject to normal income tax.
There is a lifetime allowance of £1,073,100 (for 2020/21) which applies to the total funds which
can be built up within a person’s pension schemes.
41
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Relief for Pension Contributions - Example
QUESTION
Frank has trading profits of £280,000 for 2020/21 and made a gross Personal Pension
Contribution (PPC) of £50,000. He does not have any b/f unused AA.
SOLUTION
As Frank has relevant earnings of £280,000, the full £50,000 of PPC is qualifying in accordance
with the first limit.
Frank will, therefore, have physically paid just 80% of the £50,000 but for the tax calculation, it
is the gross amount of £50,000 which we make use of.
Frank does not have any unused AA available to b/f from the last three years so he can only
make use of the 2020 /21 AA of £40,000. However, his adjusted income is greater than
£240,000 so we need to calculate the tapered AA available to him:
(Adjusted income £280,000 - £240,000) / 2 = £20,000
Annual allowance available = £40,000 - £20,000 = £20,000
This means that there is an AA charge based on £30,000 (£50,000 contribution less £20,000
Annual Allowance) which we must add to his income tax liability calculation.
Frank has income in excess of £100,000 so we also need to consider whether he is entitled to
any Personal allowance (PA). Remember, that the figure we use to calculate the PA available is
adjusted net income being total income (£2 80,000 for Frank) less any gross PPC and gross
gift aid donations. So even when we deduct Frank’s £50,000 PPC his income is still above the
£125,000 upper limit. Therefore, he is not entitled to any PA.
We can start to calculate Frank’s IT liability:
Taxable income
£280,000
Trading profit
PA
Nil
£280,000
Taxable income
In order to calculate the tax charges we now need to extend the tax bands for the PPC:
42
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
-
The BR band of 37,500 will be extended by 50,000 to £87,500;
-
The HR band of 150,000 will be extended by 50,000 to 200,000
Income tax liability
£87,500 x 20%
£17,500
£112,500 x 40%
£ 45,000
£80,000 X 45%
£36,000
Annual allowance charge
£30,000 x 45%
£13,500
Income tax liability
£112,000
If Frank had not made any PPC, his IT liability would have been:
Income tax liability - no PPC
£37,500 x 20%
£7,500
£112,500 x 40%
£45,000
£150,000
£130,000 x 45%
£58,500
Income tax liability
£ 111,000
Tax relief against PPC
In accordance with the first limit, the £50,000 of PPC qualified initially for relief, so Frank paid
just 80% being £50,000 - tax relief given at source £10,000 (20%).
Through the tax calculation, the tax bands have been extended by the £50,000 (as this is the
qualifying amount according to that first limit) giving Frank £50,000 of extra income being taxed
at 20% instead of 40% or 45%. If we look at the second calculation of income tax liability, we
can see that £50,000 was being taxed at 45%. This gives him an extra 25% relief on £50,000
(12,500).
43
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
However, the AA charge of £30,000 acts as an upper limit and reverses the relief given on this
part of the PPC - this has been subject to a tax charge at 45%.
The net effect through the tax calculation is calculated as follows:
Relief via extending bands
£12,500
Withdrawn via AA charge
£13,500
Net effect
£(1,000)
44
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Relief for Qualifying Loan Interest
Interest on qualifying loans is always paid gross - tax is never deducted at source for payment
of qualifying interest. The amount of interest actually paid is the amount which can be
deducted. There is no limit on the amount of the loan that qualifies for the tax relief.
The types of loan that qualify for tax relief are:
 Loans taken out by an employee to purchase plant and machinery (P&M) for use in his
employment (e.g. laptop). If the P&M is used partly for business and partly for personal
purposes, only part of the interest would count as qualifying loan interest;
 Loans taken out by a partner to purchase P&M for use by his/her partnership;
 Loans taken out to buy into a partnership.
When we claim to set anything against income to reduce taxable income, we must do it in the
following order:
Other
Savings
Dividends
X
X
X
1st
2nd
Last
X
X
X
Income
Qualifying loan interest
Net income
45
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Sundry Income Tax Topic
GIFT AID DONATIONS:
Gift aid donations are payments made by a person to a registered charity under the gift aid
scheme. It is something we would like to claim tax relief on.
The gift aid scheme is an incentive scheme intended to encourage taxpayers to be charitable.
The payment made by the taxpayer is treated as being net of basic rate tax (i.e. grossed up by
100/80) provided they confirm that they are at least a basic rate taxpayer.
For taxpayers who are liable to tax at the higher rate or additional rate there is further relief
available. It is given via an extension of the basic rate and higher rate tax band for the gross
value of the donation.
In exam questions, look out for payments to charities under the gift aid scheme. If you are
provided with the amount paid by the taxpayer then you will need to multiply it by 100/80 to
get the amount that you need to extend the tax bands by.
Using the earlier example, you would be given the amount paid by the taxpayer as £80. This
then needs to be ‘grossed up’ by 100/80 to give £100.
This £100 is then added to the tax bands.
Basic rate band: £37,500 + £100 = £37,600
Higher rate band: £150,000 + £100 = £150,100
CHILD BENEFIT TAX CHARGE:
Child benefit is available to the person who has responsibility for the child (they do not need to
be the parent) at a rate of £20.70 per week (£1,076.40pa) for the first child and £13.70 per
week (712.40) for each subsequent child.
However, if that person or their partner earns more than £50,000 some of the benefit will need
to be repaid.
Once one person's earnings reach £60,000 the full amount is repayable.
The amount repayable is called the child benefit tax charge and is calculated as follows:
1% of the benefit received is repaid per £100 of earnings over £50,000.
46
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
For example, Jane earns £58,000 and has received child benefit of £1,076.40.
£58,000 - 50,000 = £8,000
£8,000 / 100 = 80
80 x 1% = 0.8
Amount repayable is 0.8 x £1,076.40 = £861.12
This is due by 31 January following the end of the tax year in which the benefit was received
and is declared via the self assessment tax return.
47
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
National Insurance Contributions
DEFINITION:
National insurance is a different form of tax compared to income tax which is used by the
government for specific purposes, separate to those funded by income tax. The main use of
NICs collected is to fund the benefit and state pension system in the UK.
It is payable on earned income only (self-employment and employment income), but not
savings or dividend income.
EMPLOYED INDIVIDUALS:
NICs for employed individuals is all calculated under Class 1 but it is split out into 3 types (for
exam purposes):
1) Employee Class 1 - contribution which the employee himself is liable to pay. Rate: Firstly
at 12%, then drops to 2%;
The bands for Class 1 employee national insurance are as follows:
a)
£0 - £9,500 @ 0%
b)
£9,501 to £50,000 @ 12%
c)
Above £50,000 @ 2%
2) Employer Class 1 - contribution which the employer is liable to pay. Rate: 13.8%;
The bands for Class 1 employer national insurance are as follows:
a)
£0 - £8,788 @ 0%
b)
Above £8,788 @ 13.8%
Class 1A - additional contribution payable on the total value of benefits provided by an
employer to all employees for a tax year. It is paid only by the employer. Rate: 13.8% on
the whole amount of the benefit. There is no 0%
48
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Class 1 employee and employer contributions are payable on cash and cash equivalents,
so this would consist of:
Included
-
Salary;
Bonuses;
Vouchers;
Excess mileage allowances;
Mileage exceeding tax-free
claim (based on 45/25p rates).
Excluded
-
Company cars;
Accommodation;
Loans.
Only subject to
Class 1A NIC
When an employer makes a deduction for PAYE tax, they also make a deduction for the NIC.
The total amount deducted from the employees is then paid on to HM Revenue and Customs
on the 19th following the end of the tax month (or 22nd if paid electronically).
There is an employment allowance of £4,000 which can be used by Class 1 employees to reduce
the amount of national insurance payable. However, if the sole employee is also a director of
the company, the £4,000 is not available.
SELF-EMPLOYED INDIVIDUALS:
NICs for self-employed individuals is collected through two systems:
1) Class 2:




It is a fixed weekly amount of £3.05 (for 2020/21) for every week that the individual is
self-employed;
NICs would only be payable for the time when they were actually trading, not the whole
year;
If taxable profits for the year are below profits threshold of £6,475 (for 2020/21), no NIC
is payable;
The total Class 2 NI charge will be due on 31 January following the end of the tax year.
2) Class 4:


It is charged on the value of taxable profits for the year at rates of 9% and 2% in a similar
way to Employee Class 1 NICs;
The bands for Class 4 national insurance are as follows:
£0 - £9,500 @ 0%
£9,501 to £50,000 @ 9%
49
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842

Above £50,000 @ 2%
It is paid along with income tax, through the payments on accounts and balancing
payments system.
50
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 4
Contents
The Scope of Taxation of Capital Gains ....................................................................................... 2
Basic Principles of Calculating Gains ........................................................................................... 3
BASIC PRO FORMA FOR INDIVIDUALS: .................................................................................... 3
CONNECTED PERSONS: ............................................................................................................ 4
BASIC PRO FORMA FOR COMPANIES: ..................................................................................... 4
The Computation of Capital Gains Tax ........................................................................................ 7
Basic Principles of Calculating Losses and Using Them............................................................... 9
Part Disposals ............................................................................................................................ 10
Wasting and Non-Wasting Chattels .......................................................................................... 11
DEFINITIONS: ......................................................................................................................... 11
CAPITAL GAINS AND LOSSES:................................................................................................. 11
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The Scope of Taxation of Capital Gains
Capital gains arise where a disposal of a capital asset is made, either by an individual or by a
company.
For a chargeable gain to arise there needs to be three things:
1) Chargeable disposal. This refers to the actual event happening. Almost all situations
whereby the asset is no longer owned will be a chargeable disposal so this would include:
- Sale;
- Gift;
- Compensation for loss (insurance claims, compensation for compulsory purchase).
Exception: Assets transferred as result of death and gifts of assets to charities.
2) Chargeable asset. This refers to assets that are not exempt. The main exceptions are:
- Cars (of any type);
- Cash and cash equivalents;
- Government securities;
- Shares in a NISA;
- Wasting and certain non-wasting chattels;
- Main residence.
3) Chargeable person. This relates to those who actually pay tax on a capital gain so includes
people and companies.
Remember: People pay capital gains tax on their total capital gains for a tax year whereas
companies declare their capital gains as part of their profits for a period and pay corporation
tax on them.
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Basic Principles of Calculating Gains
BASIC PRO FORMA FOR INDIVIDUALS:
The basic pro forma for calculating gains looks as follows:
For an individual£
ProceedsX
Incidental costs of sale(X)
Net proceedsX
Allowable costs:
Base cost(X)
Incidental costs of acquisition(X)
Enhancement expenditure(X)
Capital gain£X
1) Proceeds:
- Where the disposal is a normal sale this will be the amount received for the asset;
- Where the asset is being gifted, this line will be the market value of the asset at the
date of the gift;
- Where the asset is lost or destroyed we would use the amount of insurance proceeds
as compensation;
2) Incidental cost of sale/purchase. These include any professional fees or other expenses
incurred as a result of the sale or purchase (estate agents, auction fees, solicitor fees,
stamp duty);
3) Allowable expenses - Base cost. In many cases this will be the original price paid for the
asset. However:
- Where the asset was inherited, this will be the market value when the other person
died, referred to as the probate value;
- Where the asset was gifted by a connected person, this will be the market value at
the date of the gift;
- Where the asset was gifted by a spouse/registered civil partner this will be their
original cost;
- Where some form of relief has been claimed in the past, the base cost may be some
other calculated figure;
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
4) Allowable expenses - Enhancement expenditure. This is any expenses/costs incurred in
improving the asset in some way, e.g. adding extensions or conservatories.
CONNECTED PERSONS:
An individual is connected to many others for tax purposes, including:
- Spouse or registered civil partner; - Rule: gifts of assets are deemed to take place at no gain no
loss.
- Relatives meaning brother, sister, ancestor or lineal descendant; Rule: the gift is deemed to
take place at the market value at the date of the gift (even if cash changes hands).
- Spouse’s relatives;
- Business partners.
BASIC PRO FORMA FOR COMPANIES:
The basic pro forma for calculating gains looks as follows:
For a company
£
Proceeds
X
Incidental costs of sale
(X)
Net proceeds
X
Allowable costs:
Base cost
(X)
Incidental costs of acquisition
(X)
Enhancement expenditure
(X)
Unindexed gain
X
Indexation allowance
(X)
Indexed (or chargeable) gain
£X
Indexation allowances are only available to companies up to December 2017 when Indexation
was frozen and are an allowance to account for the time value of money. Calculation of the
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
indexation allowance is based on the retail price index (RPI) and is applied to the cost /
enhancement figures. The indexation factor will be given to you in the TX exam.
Note: Where an asset was originally purchased or acquired and then enhanced at some other
date, it is necessary to calculate a separate indexation allowance based on each date that an
allowable cost was incurred.
For example, if an asset was purchased for £150,000 in April 2002 and sold in the current tax
year (post Dec 2017) for £380,000, the indexation factor would be 0.583 and this would be
multiplied by the cost of £150,000 to give an indexation allowance of £87,450.
If the asset was then enhanced by £50,000 in June 2010, there would be a second indexation
allowance for the period from June 2010 until December 2017 of £12,050 (0.241 x £50,000).
The disposal calculation would therefore be:
For a company
£
Proceeds
380,000
Incidental costs of sale
(X)
Net proceeds
380,000
Allowable costs:
Base cost
(150,000)
Incidental costs of acquisition
(X)
Enhancement expenditure
(50,000)
Unindexed gain
180,000
Indexation allowance on cost
(87,450)
Indexation allowance on enhancement
(12,050)
Indexed (or chargeable) gain
£80,500
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
There are two rules of indexation to be aware of:
1) Indexation allowances cannot increase an unindexed loss, so if you calculate a loss just by
deducting costs from proceeds then there is no need to calculate any indexation
2) Indexation allowances cannot turn an unindexed gain into an indexed loss. If you deduct
indexation and your gain becomes a loss then your gain becomes NIL.
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The Computation of Capital Gains Tax
General rule: The results of all disposals taking place during the year are effectively pooled such
that capital losses are automatically set against capital gains arising in the same year, to leave
net gains for the year.
The net gains are then reduced by an Annual exemption - £12,300 for the 2020/21 tax year
regardless of the level of income or gains:
Net gains - Annual exemption = Taxable gains
There are two rates of capital gains tax in normal circumstances and one special rate:
1)Basic rate of 10% (18% for disposals of residential property)
2)Higher rate of 20% (28% for disposals of residential property);
3)Special rate of 10% - applied when Business Asset Disposal Relief or Investors’ Relief are
available.
Note: There is no additional rate of capital gains tax like there is for income tax.
Remember: If the basic rate band has already been used up by taxable income, any gains are
automatically subject to the higher rate of capital gains tax.
If you recall the tower of lego bricks with different types of income, we now want to add the
taxable gains to the top of the tower:
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Payment of capital gains tax
Capital gains tax is payable on 31 January following the end of the tax year in which the gain
was made UNLESS the tax is due from a disposal of residential property.
A payment on account must be made within 30 days of the disposal of a residential property
and a return must be submitted at the same time
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Basic Principles of Calculating Losses and Using Them
Key rule: Capital losses are calculated in exactly the same way as capital gains.
Remember: For companies, the indexation allowance up to December 2017 is normally
available to reduce the chargeable gain but cannot create or increase a loss.
For an individual, the rules for claiming a capital loss are fairly restricted:
1)Losses must first be matched with other capital gains arising in the same tax year
2)Any remaining losses can only be carried forward and matched with future capital gains
Connected person rule: Capital losses arising on transfers between connected persons are
subject to a restriction in their use; the loss can only be set against capital gains arising on other
transactions with the same connected person.
Capital b/f rule: With brought forward capital losses, they must be offset AFTER deducting the
AEA. This way, only the smallest amount of loss needs to be used. The rest can be carried
forward to use against future capital losses. On all other occasions of claiming losses, the claim
made must be for the maximum amount possible.
There are reliefs called Investor’s Relief and Business Asset Disposal Relief. These reliefs fixed
the rate of CGT on qualifying gains at 10%. When allocating b/f and current year capital losses,
it is important to think about where they would save the most tax, eg against assets being taxed
at more than 10%.
Note: For companies, the loss relief rules are the same as for individuals but without any of the
complications, as companies are not entitled to any AE nor to claim Investors' Relief or Business
Asset Disposal Relief.
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Part Disposals
A part disposal includes a disposal of a physical part of an asset, e.g. a small corner of a larger
field.
Problem: We need to define how much of the original cost of the asset relates to the part being
disposed of.
Solution: For tax purposes we use the following formula:
Original cost allocated to part disposal = A / (A+B)
A - the value of the part we are selling;
B - the value of the remainder at the date of the part disposal.
The capital gain on the sale would be calculated as follows:
Capital gain = Proceeds - Original cost allocated to part disposal
The base cost of the asset still owned would be calculated as follows:
Total original cost - Original cost allocated to part disposal
Example:
George purchased 4 acres of land in 2012 for £80,000. In the current tax year he sold 1 acre for
proceeds of £40,000. The market value of the remaining 3 acres is £170,000.
The capital gain on sale would be calculated as follows:
£
Proceeds 40,000
Cost (80,000 x (40,000/(40,000+170,000))(15,238)
Capital gain 24,762
The base cost of the remaining 3 acres would be £64,762 (£80,000 - £15,238)
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Wasting and Non-Wasting Chattels
DEFINITIONS:
A chattel is any item which is tangible and moveable so would include a wide variety of assets
excluding things like copyrights and goodwill, which are intangible in nature and buildings
which are not moveable.
A wasting chattel is a tangible moveable asset with an expected life of less than 50 years (e.g.
racehorse).
A non-wasting chattel is a tangible moveable asset with an expected life of more than 50 years
(e.g. jewelry, paintings, antiques and furniture).
CAPITAL GAINS AND LOSSES:
General rule: Wasting chattels are exempt for capital gains purposes.
The calculation of the gain or loss on disposal of a non-wasting chattel depends on how the
proceeds and original cost compare to a chattel limit of £6,000:
Both sale proceeds and original cost < £6,000Exempt, no gain nor loss arises
Both sale proceeds and original cost > £6,000Gain or loss on disposal calculated in the normal
way
One of the figures is below and the other is above Apply special chattel rules the £6,000
Special chattel rules include the following scenarios:
1) Sale at a gain i.e. sell for more than £6,000 but purchased for less than £6,000. We use the
lower of:
 The gain arising using the normal method: Capital gain = Proceeds - incidental
costs base cost - enhancement expenditure
 Special chattel calculated as follows:
5/3 * (gross proceeds - £6,000)
2) Sale at a loss i.e. sell for less than £6,000 but purchased for more than £6,000. We calculate
the loss using a deemed proceeds figure of £6,000.
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Illustrations:
1) Paul sold a vase for £8,000. It cost £1,200 7 years ago.
Proceeds > £6,000
Cost < £6,000
The gain is therefore the lower of:
Normal disposal calculation: Proceeds £8,000 - Cost £1,200 = £6,800
or
5/3 x (gross proceeds £8,000 - £6,000) = £3,333
Paul will be taxed on a gain of £3,333.
2) Peter sold a vase for £4,000. It cost £14,000 5 years ago.
Proceeds < £6,000
Cost > £6,000
Deem the proceeds to be £6,000 to restrict the loss:
Proceeds£6,000
Cost £14,000
Loss£8,000
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 5
Contents
Matching and Pooling of Shares for Individuals ......................................................................... 2
MATCHING AND POOLING PRINCIPLES: .................................................................................. 2
COMPLICATIONS: ..................................................................................................................... 2
Matching and Pooling of Shares for Companies ..................................................................... 4
Bonus and Rights Issues and the Effect on Company Share Pools .......................................... 6
Other Share Topics ...................................................................................................................... 8
VALUATION OF QUOTED SHARES: ........................................................................................... 8
COMPANY TAKEOVERS AND REORGANISATIONS: .................................................................. 8
PRR and Letting Relief ................................................................................................................. 9
PRIVATE RESIDENCE RELIEF: .................................................................................................... 9
LETTING RELIEF: ..................................................................................................................... 10
Business Asset Disposal Relief and Investors’ Relief ................................................................. 11
BUSINESS ASSET DISPOSAL RELIEF ........................................................................................ 11
INVESTORS’ RELIEF ................................................................................................................ 12
Gift Relief ................................................................................................................................... 14
Gift Relief on Shares .............................................................................................................. 15
Rollover Relief ........................................................................................................................... 17
DEFINITION: ........................................................................................................................... 17
NORMAL ROLLOVER RELIEF: .................................................................................................. 17
ROLLOVER RELIEF IN INSURANCE SITUATIONS: ........................................................................ 19
HOLDOVER RELIEF: .................................................................................................................... 19
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Matching and Pooling of Shares for Individuals
MATCHING AND POOLING PRINCIPLES:
Main issue: Where we have acquired shares in the company in a series of transactions and then
sell some of our shares, we need to decide which shares are being sold in order to use the
correct base cost in our capital gain or loss calculation.
Where an individual makes a sale of shares we start by matching with:



Same day acquisitions;
Acquisitions in the next 30 days;
The share pool (contains all shares purchased before the date of sale). The cost of
shares is calculated using AVCO method - this method is explained in the video
Once we have “matched” the shares sold, we will calculate a separate gain or loss for each
“batch” of shares:
Batch 1
Batch 2
Proceeds
X
X
X
Allowable costs
(X)
(X)
(X)
Gain
X
X
X
Batch 3
COMPLICATIONS:
A bonus issue is where an existing shareholder is given additional shares by the company but at
no cost. A 2 for 1 bonus issue would mean the company will be giving a shareholder 2 extra
shares for every 1 they already hold.
Solution: In our share pool we will need to record these extra shares but they will have no cost,
so will dilute the average cost per share.
A rights issue is where the company offers an existing shareholder the opportunity to buy
additional shares in proportion to the existing shareholding, but at a price generally lower than
they are currently worth.
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Solution: In our share pool we will need to record the additional shares in the share pool along
with their cost, just like any other purchase.
Example:
Peter disposes of 1,000 Wool Plc shares on 8 October 2020.
He purchased his Wool Plc shares as follows:
22 January 2012
500 shares
10 September 2015
750 shares
10 October 2020 50 shares
Applying the matching rules, Peter would be disposing of the following shares:
Same day
- None
Next 30 days - 50 shares acquired on 10 October 2020
Share pool
- 950 shares from the share pool which contains both the 2012 and the 2015
share acquisitions.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Matching and Pooling of Shares for Companies
There are some slightly different rules in matching and pooling of shares for individuals and
companies.
Where a company makes a sale of shares we start by matching with:
 Same day acquisitions;
 Acquisitions in the last 9 days;
 The share pool (contains all shares purchased before the date of sale).
Companies are entitled to claim indexation allowance up to December 2017, which is calculated
by looking at the change in inflation rates between the date of purchase and date of sale. In
your exam you will be given the indexation factor to use. You will not need to calculate it.
Problem: With share pooling we don’t actually decide which shares we are pulling out, so it is a
problem to identify the purchase date.
Solution: We need to continually index the share pool on a rolling basis rather than calculating
the allowance at the date of sale. The mechanics is to index the cost between operative events
(purchases, sales, rights issues).
A share pool working will have an extra column, headed up “Indexed cost” in which we will
record the running indexation allowance (calculated using the retail price index):
Date
X/X/20XX
Operating event
Event #1
Number
X/(X)
Cost
Indexed cost
X/(X)
Indexation
X/X/20XX
X
Event #2
X/(X)
X/(X)
Indexation
X/X/20XX
X/(X)
X/(X)
X
Event #3
C/F
X/(X)
X/(X)
X/(X)
X/(X)
X/(X)
X/(X)
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Once we have “matched” the shares sold, we will complete a gain or loss calculation:
Share pool
Proceeds
X
Cost
(X)
Indexation (indexed cost - cost)
(X)
Indexed gain
X
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Bonus and Rights Issues and the Effect on Company Share Pools
QUESTION:
On 1 August 2018 Tomato plc sold 1,500 shares in Banana plc for £34,725. Tomato plc had
acquired shares in Banana plc as follows:



5 May 1998 Purchase of 2,500 shares for £4,385
4 April 2001 Took up a 1 for 2 bonus issue
19 January 2002 Took up a 1 for 3 rights issue for shares at 140p each
Relevant Indexation factors are


May 98 - Jan 2002
Jan 2002 - December 2017
0.043
0.615
SOLUTION:
A bonus issue is an issue of further shares to existing shareholders for which no payment is
made i.e. free shares.
A rights issue is an issue of further shares to existing shareholders for which some payment is
made, but less than the full market value. We also said that we only index between operative
events, and that a bonus issue is not an operative event.
Firstly let’s consider the matching rules:
There are no shares purchased on either 1 August 2018 or the previous 9 days so all of the
1,500 shares sold come from the share pool. So now let’s put together the share pool working:
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Number
Cost
Indexed cost
5.5.98
Purchase
2,500
4,385
4,385
4.4.01
Bonus issue 1:2 Not operative
1,250
0
0
3,750
4,385
4,385
Index to rights issue
May 98 - Jan 02
0.043 x 4,385
Jan 02
Rights issue 1:3
3,750 / 3 =
1,250 x 140p =
Index to sale
189
1,250
1,750
1,750
Jan 02 - Aug 18 (Dec 17 in reality)
0.615 x 6,324
3,890
5,000
1.8.18
Sale
6,135/5,000 x 1,500
10,761/5,000 x 1,500
10,214
(1,500)
(1,841)
(3,064)
3,500
CF
6,135
4,294
Now that we have the figures from the share pool we can calculate the gain:
Proceeds
34,725
Cost
(1,841)
Indexation (3,064 - 1,841)
(1,223)
Gain
£31,661
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
7,150
lOMoARcPSD|1371842
Other Share Topics
VALUATION OF QUOTED SHARES:
The way in which quoted shares are valued for capital gains purposes is called a mid-price
method. It says we take the range of daily values (highest and lowest price) and take a simple
average.
Mid-price =
Highest price + lowest price
2
COMPANY TAKEOVERS AND REORGANISATIONS:
Takeovers and reorganisations are the situations where we purchase shares in one company
and then that company is subject to a takeover or reorganisation such that our shares are
exchanged for something else (cash, other shares, mixture of both):
Shares were fully exchanged for cash
Normal disposal
Shares were exchanged for other shares
(ordinary or preference)
No capital gains implications at the date of
the exchange
Shares were exchanged for mixture of
different types of share
Define how much of original cost relates to
each batch of shares using A/(A+B) formula
Shares were exchanged for mixture of
shares and cash
Split out the original cost between shares
exchanged for shares and shares
exchanged for cash using A/(A+B) formula
and calculate a disposal based on the cash
element.
Cash proceeds
X
Less original cost of shares x (cash/(cash+shares))
(X)
Gain on disposal
X
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
PRR and Letting Relief
PRIVATE RESIDENCE RELIEF:
The basic principle of private residence relief (PRR) is that when a person buys a house, lives in
it for so many years and then sells it, any profit they make on that disposal is tax free.
PRR is available on an individual’s main residence and there are several rules which must be
applied:




Individual can have only one main residence at a time;
Spouses or registered civil partners have to have the same main residence;
Main residence can only include a garden of up to half an acre (0.203 hectares) in size;
Where a part of property is used exclusively for business purposes, it will be seen as
business premises and a proportionate share of the gain on sale will not be exempted by
PRR;
 PRR is always available for periods of actual occupation however, it might also be
available for periods where the person wasn’t living there if the absent period qualifies
for deemed occupation:
₋ The last 9 months of ownership provided the property has been the main
residence at some point;
₋ Any period of time spent working overseas;
₋ A maximum of 4 years spent working elsewhere in the UK;
₋ A maximum of 3 years for any reason.
For b,c and d the owner must live in the property before and after the period of absence for the
period to be classed as deemed occupation although the rules are relaxed when reoccupation is
not possible due to work commitments.
In order to calculate the amount of gain which is exempt we use the following formula:
Exempt gain = Total gain x
Actual + deemed occupation periods
Total ownership period
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
LETTING RELIEF:
Letting relief is available to reduce any remaining gain that has not qualified for PRR relief BUT
ONLY IF THE PROPERTY IS ALSO OCCUPIED BY THE OWNER.
Letting Relief is restricted to the lower of:
a)
£40,000;
b)
PRR claimed;
c)
The gain attributable to the letting.
Illustration:
Mel sold her main residence for £575,000. She purchased it 12 years ago for £300,000.
Mel has always lived in the house but 25% of it has always been let to tenants.
PRR relief would be available for the whole period of ownership but only at a rate of 75%.
£
Proceeds
575,000
Cost
(300,000)
Gain
275,000
PR
R relief (75%
x £275,000)
(206,250)
Letting relief - lower of:
£40,000
£206,250 (ppr relief figure)
£68,750 (gain attributable to letting 25% x £275,000 = £68,750)
(40,000)
Chargeable gain
166,250
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Business Asset Disposal Relief and Investors’ Relief
BUSINESS ASSET DISPOSAL RELIEF
There are two conditions that must be met in order to claim business asset disposal relief:
 Asset must have been owned for at least TWO years before sale; and
 A qualifying asset.
A qualifying asset for business asset disposal relief will mainly be a business, but this could be:
 An unincorporated business such as a sole trade or a partnership share; or
 Shares in a trading company, provided the individual owned at least 5% of the shares in
the company and was an employee for the TWO years before sale.
Note: For a qualifying gain in 2020/21 the election would need to be made by 31 January 2023
(it must be made one year from the 31 January following the end of the tax year in which the
disposal is made).
Business asset disposal relief effect: Reduction of CGT rate to a fixed rate of 10% regardless of
the level of income.
Limit: Business asset disposal relief can only apply to a maximum of £1 million of qualifying
gains in a person’s lifetime.
Illustration
Petra sells her sole trader business which she started 5 years ago to an unconnected person.
She made the following gains on the disposal of the business:
Goodwill
£100,000
Freehold building 1 (used in trade)
£150,000
Freehold building 2 (not used in the trade) £120,300
She has capital losses brought forward of £40,000.
The CGT due on the disposal of her business would be as follows (assume Petra is a higher rate
taxpayer):
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Gains qualifying for business
asset disposal relief £
Goodwill
100,000
Freehold building 1
150,000
Gains not qualifying for business
asset disposal relief £
Freehold building 2
120,300
AE
(12,300)
Capital losses b/f
(40,000)
Taxable gains
250,000
68,000
Tax:
@ 10%
@ 20%
CGT due
25,000
13,600
Note: the AE and losses are first set off against the gains not qualifying for ER as these are taxed
at the higher rate.
INVESTORS’ RELIEF
Investors’ relief effectively just extends business asset disposal relief to external investors in
unquoted trading companies.
To qualify for investors’ relief shares must be:
 Newly issued and acquired by subscription;
 Owned for at least 3 years after 6 April 2016.
£10m lifetime limit in addition to the entrepreneurs’ relief limit.
Gains taxed at 10%
Investor must NOT be an employee or director of the company whilst holding the shares in that
company.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Illustration
On 9 July 2016 Mike subscribed for 100,000 £1 ordinary shares in Chelt Ltd, an unquoted
trading company, at their par value. This represented a 2% holding.
He is neither an employee nor a director of the company.
On 6 November 2020 he sold the shares for £600,000.
Mike’s shareholding does not qualify for business asset disposal relief as he was not an
employee and he did not hold 5% or more of the share capital of Chelt Ltd.
However, the gain does qualify for investors’ relief - newly issued shares acquired by
subscription and owned for more than 3 years.
Mike’s CGT liability would be:
Chargeable gain
£500,000
AE
(£12,300)
Taxable gain
£487,700
Tax at 10% £48,77
0
13
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Gift Relief
Gift relief is a form of relief which acts as a deferral, i.e. it allows us to take a gain on which tax
should be paid now (at the point of disposal) and effectively carry it forward until some point in
the future, normally when another disposal is made.
Gift relief can be claimed where:
 A gift or sale at undervalue to a connected person occurs;
 The donee/recipient of the gift is UK resident;
 The gift is of a qualifying asset. This can be summarised as business assets and would
include:
₋ Unincorporated businesses (sole trade, partnership share);
₋ Shares in an unquoted trading company;
₋ Shares in a quoted trading company provided the individual owned at least 5% of
the total shares in the company;
₋ Assets owned personally used by own business.
Gift relief is only available if a joint election is made, signed and agreed to by both the donor
(the person making the gift) and the donee. It must be made within 4 years from the end of the
tax year in which the gift is made.
14
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Gift Relief on Shares
When looking at shares as a gift we can only consider shares in trading companies.
Remember: where there are investment assets held within a trading company, part of the value
of the shares being gifted does not relate to a trading company, and so the amount of gift relief
is potentially restricted.
The gain which can be deferred via a gift relief claim is calculated as:
Gift relief claim = Gain x
Chargeable business assets (CBA)
Chargeable assets (CA)
Chargeable asset - any asset which is not exempt for capital gains (main exempt assets are:
cars, cash etc.).
Chargeable business assets - subcategory of chargeable assets which excludes any assets that
are investment in nature (assets excluded are: investment properties, quoted shareholdings,
surplus cash funds being held on deposit).
Illustration:
Sarah gifted all of her shares in KLS PLC to her son, Sam. Sarah was not an employee of KLS PLC.
The gain on sale was £400,000 and the assets of the business at the date of sale were:
Freehold warehouse (rented out to another business)
£120,000
Freehold office building
£150,000
Freehold factory
£200,000
Current assets
£20,000
As the warehouse was rented out it would not qualify as a business asset and therefore Sarah
would only get partial gift relief. (Note: current assets are not subject to capital gains tax on
disposal and therefore they are neither CA’s or CBA’s)
15
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Gift relief would be:
Gain £400,000 x ((CBA £150,000+200,000)/(CA £120,000+£150,000 + £200,000))
= £297,872.
This gain would be deferred until Sam sells the shares and there would need to be a joint
agreement in place (between Sarah and Sam) for gift relief to apply.
Sarah would pay tax immediately on the remaining gain of £102,128.
16
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Rollover Relief
DEFINITION:
Rollover relief is a form of deferral relief so any gain for which we claim for the relief, no tax is
payable at the point of disposal but will become chargeable instead at some point in the future.
We can break down the rollover relief into three forms:
 Normal rollover relief;
 Rollover relief given in insurance situations;
 Holdover relief.
NORMAL ROLLOVER RELIEF:
The conditions to be met in order to be able to claim rollover relief are:
 Qualifying assets are being sold and bought;
 The purchase takes place within a qualifying period.
Qualifying assets are those which are used within a trade and which come from a given list.
That list includes:
₋
₋
₋
₋
₋
Land and buildings;
Fixed plant and machinery;
Goodwill (for individuals only);
Ships, aircraft, hovercraft, satellites, space stations and spacecraft;
Some other industry specific assets such as milk quotas etc.
Note: Both the asset sold and the replacement asset purchased need to come from this list but
not necessarily from the same category. Partial business use will only allow us to claim partial
relief.
Qualifying period is the timeframe within which the replacement asset must be purchased. It is
48 months long but staggered around the date of sale such that we can look at purchase made
in the 12 months before the sale takes place or up to 36 months after:
17
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
18
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
ROLLOVER RELIEF IN INSURANCE SITUATIONS:
Insurance payout can result in chargeable gain. In this case, we can consider claiming a rollover
relief to defer paying any tax on that gain if we are buying a replacement asset.
The conditions for this form of relief are slightly different:
 All assets qualify (even if they are personal assets);
 The qualifying period is limited to 12 months after receipt of the insurance proceeds.
General rules:


Provided the full insurance proceeds are reinvested, the full gain can be deferred by
setting it against the actual cost of the replacement asset;
If any proceeds are not reinvested, some gain will remain chargeable at the point of
the disposal, being the lower of:
₋
Proceeds not reinvested;
₋
Actual gain.
HOLDOVER RELIEF:
Holdover relief is the relief which would apply if the replacement asset purchased was a
depreciating one, i.e. one with a life of less than 60 years.
The conditions for holdover relief are exactly the same as for rollover relief and we claim either
full or partial relief based on how much of the proceeds from sale are reinvested.
When claiming holdover relief the deferred gain is merely frozen and carried forward. It
becomes chargeable again on the earliest of:
a)
Date of sale;
b)
Cessation of use in trade;
c)
10 year anniversary from purchase.
Note: Even though rollover relief is more beneficial, we are only allowed to claim holdover
relief if we are buying a depreciating asset.
19
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 6
Contents
CHARGEABLE ACCOUNTING PERIOD (CAP): ................................................................................ 2
COMPANIES LIABLE TO PAY TAX: ................................................................................................ 3
Taxable Total Profits (TTP) .......................................................................................................... 3
Trade Profits ................................................................................................................................ 4
ADJUSTMENT OF PROFIT FOR THE ACCOUNTING PERIOD: .................................................... 4
Capital Allowances for Companies - Example ............................................................................. 7
Property Income for Companies ............................................................................................... 11
COMPARISON WITH SELF EMPLOYMENT .............................................................................. 11
PROPERTY LOSS ..................................................................................................................... 11
Non-Trade Loan Relationships .................................................................................................. 12
Company Trade Losses .............................................................................................................. 13
COMPARISON WITH SELF EMPLOYMENT: ............................................................................. 13
OPTIONS FOR LOSS RELIEF: ................................................................................................... 13
SPECIAL FORMS OF LOSS RELIEF: .......................................................................................... 14
Corporation Tax Liabilities ......................................................................................................... 15
Long Accounting Periods ........................................................................................................... 16
Loss Relief Groups ..................................................................................................................... 17
GROUPS CHARACTERISTICS: .................................................................................................. 17
LOSS GROUPS ARE ALLOWED TO SURRENDER/CLAIM: ........................................................ 18
OVERLAPPING PERIODS RULES: ............................................................................................. 19
FACTORS INFLUENCING THE RELIEF: ..................................................................................... 19
75% Capital Gains Groups ......................................................................................................... 20
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
CHARGEABLE ACCOUNTING PERIOD (CAP):
Corporation tax is the tax charge paid by companies on their profits.
Chargeable accounting period is the period for which companies pay tax, which starts:
 The day after the previous CAP ended;
 The day trade begins;
 The day the company acquires a source of income.
A CAP ends on the earliest of:





12 months after it began;
The end of the financial accounting period;
The cessation of trade;
The point at which the company no longer has a source of income;
The date the company goes into administration.
Remember: CAP cannot be longer than 12 months, but Companies Act allows a company to
prepare financial statements for anything up to 18 months in length. Companies decide for
themselves what their tax period is and this will differ from company to company. Note: if a
period of account is longer than 12 months then two CAP’s must be calculated, one for the first
12 months and another for the remaining months of the long period.
Do not confuse the following terminology:
Period of account - the financial reporting period or year end - so the period of time that the
company prepares its’ financial statements for (max 18 months).
Chargeable accounting period - tax reporting period which may or may not be the same as the
period of account (max 12 months)
Financial year - the company equivalent of a tax year, being the period from 1 April of one year
to 31 March of the next.
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
COMPANIES LIABLE TO PAY TAX:
Remember: It does not matter whether the company is quoted (plc) or unquoted (ltd), both are
taxed in the same way.
However, we need to consider the residence position of a company:
Incorporated in the UK
Incorporated outside the UK Managed from the UK
Incorporated outside the UK Managed from outside the
UK
Automatically treated as UK
resident
Treated as UK resident
Not treated as UK resident
Taxable Total Profits (TTP)
Remember: Unlike individuals, where income is subject to income tax, and capital gains are
subject to capital gains tax, companies pay the same tax, Corporation Tax, on all profits.
In order to calculate TTP we need to calculate all of the different types of income and gains a
company has for the CAP. These could include:
1)Trade profits;
2)Property profits;
3)Interest income (non-trade loan relationship surpluses). Companies receive all of their
interest gross and it is all taxable;
4)Capital gains.
Note: Companies receive all of their income gross so there are no grossing up calculations
necessary when calculating TTP.
Qualifying Charitable Donations (QCDs) are donations made by the company to a registered
charity. It is the equivalent of the gift aid donations for individuals although companies make
their donations gross. The full gross value is deducted from total profits.
Dividends are a type of income on which companies do not pay tax. We don’t include dividends
received by a company in TTP regardless of what company they are received from.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Trade Profits
When we looked at income tax we saw the steps required to calculate trade profits. Now we
need to look at how this compares to how we calculate trade profits for corporation tax
purposes.
Step 1: Adjustment of profit for the accounting period. This is calculated in almost the same
way regardless of type of business entity.
Step 1 (a): Capital allowances. Accounting standards allow entities to choose their depreciation
policy. So, for consistency between entities, we add accounting depreciation back under Step 1
and replace it with the tax equivalent of depreciation which is called capital allowances.
Step 2: Basis periods. Companies do not have any equivalent of the basis period rules that we
use for individuals. In most cases the tax adjusted profit is simply added into the TTP
calculation. Exception: Where the accounting period is long, we split it into two CAPs.
ADJUSTMENT OF PROFIT FOR THE ACCOUNTING PERIOD:
For individuals we used the following proforma:
£
Profit/(loss) per the accounts
£
X/(X)
Add: Disallowable expenses
X
Missing items of income
X
X
Less: Capital allowances
X
Non-trading income
X
Missing items of expenditure
X
(X)
Tax adjusted profit for period
£X
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
1) Disallowable expenses. These are items which were included in the financial accounts as
expenses but which shouldn’t be there as far as HMRC are concerned. They include:
 Depreciation/amortisation of tangible/intangible NCA;
 Certain legal fees;
 Fines;
 Certain gifts;
 Donations;
 Entertainment (other than employees);
 Capital expenditure;
 Lease premiums (replaced with different deduction).
Key things to remember:
a. In company calculations of trade profits, we should never have any private use
adjustments for expenses. If the expense is allowable then the full amount paid
is an allowable deduction;
b. Dividends paid are a distribution of after tax profits and are not an allowable
deduction from profits;
c. Costs associated with share issue are not allowable deductions from profits.
2) Missing items of income/expenditure. No adjustment for missing income or expenditure
should arise, as all company expenditure should have been paid from the company funds and
therefore already accounted for.
3) Capital allowances. For a company, CA’s are calculated for a CAP, not for the accounting
period. Where the CAP is short, some of the allowances will need to be time apportioned,
such as the max AIA available and the WDA’s (but we never time apportion FYAs). There will
never be a long period for capital allowances for companies., if the accounting period is more
than 12 months long then two CA computations need to be produced.
There are no private use adjustments to make when calculating capital allowances for a
company. Private use of car by employee is ignored for tax purposes. When we decide
where a new car should appear in the CA computation for a company, the only choices are
the main or special rate pools - there are no private use columns in a company’s capital
allowances computation.
Structures and Buildings Allowance - this is an annual tax deduction of 3% (straight line) of
the capital cost (excluding land) of structures and buildings used for the purpose of the
trade or property letting where the building has been constructed AFTER 1/4/2020. Always
time apportion the first year if it was brought into use part way through the year. You
cannot claim it on the cost of the Land and capital allowances should be claimed on integral
features in preference to this allowance as they are at a higher rate.
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
4) Non-trading income. The purpose of this adjustment is to recalculate profit without any of
the items which will not be taxed under the category of trade profits, e.g. investment
income
Remember: Operating profit does not include items of non-trading income. If you are given
a starting point of profit before tax, adjustments would be needed to strip out any nontrading income.
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Capital Allowances for Companies - Example
QUESTION:
Mighty Ltd has a tax written down value on it’s main pool of £87,800 to bring forward as at 1
April and has provided details of the following capital allowances purchases for the current
year:
-
-
-
In May there was a purchase of a newly constructed freehold factory building for
£578,000 (including land of £50,000) This building was brought into use on 1 July. This
total price included a ventilation system, a lift, and a cold water system. All of these
items are integral features and totalled £342,000 of the price;
In June there was a purchase of machinery for £101,600. In order to site the
machinery, the company had to pay £7,700 for alterations to the building;
In September a payment of £41,200 was made to local builders to construct a new
decorative wall around the company car park;
In October there was a purchase of movable partition walls for £72,900. These are
used to divide up the large office space and are moved regularly to allow for more or
less desk space in each department;
In March there was a purchase of two cars costing £17,300 each. The first had CO2
emissions of 105g and is used as a pool car to make deliveries or collect parts as
needed. The second had CO2 emissions of 180g and is used by the factory manager.
He estimates that his private use of the car is 60%.
SOLUTION:
You will note that there are a lot of purchases, some of which qualify for AIA (remember, it is
only cars which do not) but some of these purchases are items which should appear in the
special rate pool whilst others would appear in the main pool. Let’s start by looking at each
item in turn to see:
 Is it qualifying for CA?; and if so
 Where should it appear?
1) May - Purchase of a newly constructed freehold factory building for £578,000. Newly
constructed buildings qualify for structures and buildings allowance and the integral features
will qualify for CA’s. In this case we have three particular items, all of which will be included
in the CA calculation. As integral features, these will appear in the special rate pool but they
do qualify for the AIA. The stratures and buildings allowance will be calculated separately.
2) June - Purchase of machinery for £101,600. Machinery is again a qualifying asset for CA
purposes and also any costs associated with getting that machinery to the right location and
into a condition in which it can be used count as part of the cost. So here the £7,700 paid for
building alterations will be added to the cost of the machine, and both will count for the CA.
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
But machinery would appear as part of the main pool, and qualify for AIA so this is the start
of the issue whereby we have qualifying AIA additions which would appear in each of our
pools.
In order to maximise the allowances available for the year, the AIA should be allocated first
to any special rate pool additions and only any balance of the AIA available should be set
against main pool additions.
3) September - Payment of £41,200 to local builders to construct a new decorative wall
around the company car park. The important word here is “decorative” - we can only claim
CA on items which perform a function in the business so this item is not qualifying for CA
purposes.
4) October - Purchase of movable partition walls for £72,900. Moveable partition walls are an
example of an item which we would not generally consider to be plant and machinery but
which are specifically mentioned in legislation as being qualifying assets for CA purposes,
which would form part of the main pool, and would qualify for AIA.
5) March - Purchase of two cars costing £17,300 each. So here we are moving away from AIA
additions to think about how to deal with the two cars purchased. Remember we said that a
fundamental difference to CA computations for companies is that there are never any
private use assets - the factory manager is an employee and as such his private use of the
second car is ignored.
The treatment of the cars is therefore based solely on their CO2 emissions - in this case the
first is a medium emission car, so would be put into the main pool, and the second is a high
emission case and so would be put into the special rate pool.
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
So now we can start to put together the full computation:
Workings Main pool
Tax wdv b/f
Special rate pool
87,800
Allowances
-
AIA additions
1) Special rate pool
Integral features
342,000
AIA
(342,000)
342,000
2) Main pool
Machinery
101,600
Alterations
7,700
Moveable partitions
72,900
182,200
AIA
(182,200)
Amount transferred to main
pool
182,200
-
-
Nil
Balance
Non AIA additions (cars)
CO2 105g / 180g
17,300
17,300
Subtotal
105,100
17,300
WDA 18% / 6%
(18,918)
(1,038)
Tax WDV c/f
£86,182
£16,262
Total allowances
18,918+1,038
£544,156
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Structures and buildings allowance (SBA).
The factory was brought into use on 1 July meaning that we can claim 9 months of SBA for the
year ended 31 March.
£
Total cost
578,000
Less: Land
(50,000)
Less: Integral features
(342,000)
Remaining cost
186,000
SBA 3% x 9/12
4,185
In future years the full £186,000 x 3% can be claimed.
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Property Income for Companies
COMPARISON WITH SELF EMPLOYMENT
For individuals, property income is always calculated for the tax year, whereas for companies
we work on the CAP.
The pro forma then for calculating property income should look as follows:
£
Rent receivable in CAP
£
X
Premiums received in CAP
X
Capital element
(X)
X
Allowable expenses
(X)
Property income/loss
X/(X)
Key points
Interest (borrowing costs) paid on finance taken in order to purchase the property are never an
allowable deduction from rents receivable for companies or individuals. For companies, they
are treated under the Non Trade Loan Relationship (NTLR) rules. For individuals, they are
treated as a tax reducer at 20%. Replacement furniture and furnished holiday lettings apply to
companies in exactly the same way as they do to individuals.
Rent-a-room relief is not available for a company.
PROPERTY LOSS
Key rule: Property losses arising in a particular CAP can be set against total profits of the same
CAP. Unutilised loss can be carried forward and matched with the total profits of the next
period and the company can choose the amount of loss to be relieved against total profits. The
balance is then carried forward until the whole loss has been utilised.
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Non-Trade Loan Relationships
The calculation of the figure for Non-trade loan relationships (NTLR) is the combination of all
types of interest received by the company less any non-trade related interest paid. This
includes:
1) Interest received. It is included on an accruals basis. Companies receive all of their interest
gross, so there is no need for grossing up for tax already paid at source.
2) Non-trade related interest paid. We need to review the total interest expense to see the
purpose of the borrowings:
Borrowings relate to trading activity
Interest expense is a deduction from
activity
Interest expense is an allowable deduction
Borrowings do not relate to trading interest
received
Borrowings that relate to trading activity would include:
- Borrowings to purchase new machinery for use in the business;
- Day-to-day overdraft facility to meet working capital needs.
Borrowings that do not relate to trading activity would include:
- Borrowings to purchase an investment property which is being let out;
- Borrowings to purchase shares in another company.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Company Trade Losses
COMPARISON WITH SELF EMPLOYMENT:
The rules as to how trade losses can be relieved are different for individuals and companies. For
individuals we identified three key factors that might influence our choice of relief:
1)The timing of when we get the relief;
2)The rate of tax at which relief will be given; These are the same for companies
3)The possible waste of other forms of tax relief.
Note: It will always be better to gain some tax relief now rather than wait for it and the
maximum possible amount of relief will always be preferable.
OPTIONS FOR LOSS RELIEF:
Several ways in which a company can claim relief for a trade loss of the current CAP:
Option 1: Current period - to set the loss against total profits arising in the same CAP. Total
profits includes all types of profit before the deduction of any Qualifying Charitable Donations
(QCDs) paid.
Advantage: The company will pay less tax for this period so will achieve some relief now.
Disadvantage: We cannot make a partial claim and in some cases making a current period claim
will waste the QCDs paid during this CAP as there will not be any profits to deduct them
against.
Option 1 (a): Carry back - to carry losses back to an earlier period/periods. A company must first
relieve as much loss as possible against profits of the loss making period (Option 1). The carry
back period is the twelve months prior to the start of the loss making CAP.
Option 2: Carry forward - to take forward unrelieved losses arising post April 2017 and match
them with the total profits of the company, not just the trade profits – this is different to
carried forward losses for individuals. The loss will continue to be carried forward until
sufficient total profits have been made to relieve it in full. The amount of loss used can be
restricted to preserve QCDs paid.
Note: you will not be tested on pre April 2017 company losses.
13
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
SPECIAL FORMS OF LOSS RELIEF:
1) Terminal loss relief is available only in one special scenario, which is where the company
ceases to trade. A terminal loss is the loss arising in the final period of trade, and for a
company allows us to use an extended carry back of 36 months on a LIFO basis.
Key difference compared to individuals: For companies, terminal losses are set against total
profits, i.e. the same as the carry back option (for individuals they are set against profits
from the same trade only).
2) Another special scenario is when the company is part of a group (considered in separate
session).
14
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Corporation Tax Liabilities
Taxable Total Profit is the figure that we will charge corporation tax on.
The tax charge is calculated as follows:
Trade profits
X
Property profits
X
Interest income
X
Capital gains
X
Total profit
X
Qualifying Charitable Donation (QCD)
(X)
TTP
X
Tax at 19%
X*19%
Remember: All companies pay tax at the same rate of 19%, regardless of what they do and the
level of their profits.
Note: For the purposes of the exam there is no need to have any working knowledge of
determining the size of a company (to determine the tax rate) or any marginal relief
calculations which apply under pre FA15 legislation.
15
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Long Accounting Periods
General idea: Where the financial accounting period is longer than 12 months (18 months is the
maximum permitted) we need to prepare two calculations by splitting the long accounting
period into two CAPs for tax purposes.
We can look at the company that had prepared a 16 month period of accounts covering 1 April
20X5 to 31 July 20X6:
Now we need to understand how we proceed from the point of determining our CAPs to
actually split the profits between them:
1)
2)
3)
4)
5)
Trade profits are allocated across the CAPs in two parts:
a)
We take the profits adjusted for everything except CAs and split this on a
simple pro-rate basis;
b)
We calculate CAs for each CAP in turn as two separate calculations:
i. For CAP 1 we bring forward the tax written down value and then look only
at purchases and disposals made during the CAP;
ii. For CAP2 we carry down the tax written down value from CAP 1 looking
only at purchases and disposals taking place in this CAP. Remember that
this CAP is short so some of those allowances will need to be pro-rated.
Property profits are assessed on an accruals basis so the profit can be allocated
between the two CAPs by simply pro-rating the number of months in each.
Interest income (NTLR profits) is assessed on an accruals basis and so it can be spread
across the CAPs on a pro-rate basis as well.
Chargeable gains arise on a particular date so we allocate any gain (or loss) on the
disposal based on which of the CAPs the date of disposal falls within.
QCDs payment will be on a particular date so we allocate the payment based on which
of the CAPs the date of disposal falls within.
16
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Loss Relief Groups
GROUPS CHARACTERISTICS:
Remember: Groups for tax purposes are entirely different to groups for accounting purposes.
Loss group is sometimes referred to as a group relief group. A group is defined as a loss group in
case of the following:
1)A minimum direct relationship between any two companies of at least 75%;
2)A minimum indirect relationship between companies of at least 75%.
The 75% condition means that (all of the criteria must be met):
a)
b)
c)
The parent company has at least 75% ownership of the ordinary share capital of the
company;
Those shares entitle the holder to at least 75% of the distributable profits that are available
to the equity holders;
Those shares entitle the holder to at least 75% of the company's assets that are available for
distribution to the equity holders on a winding up.
Example 1:
Example 2:
17
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Remember: In a loss group trade losses can be moved in any direction between group
members. Only companies can be part of the group.
LOSS GROUPS ARE ALLOWED TO SURRENDER/CLAIM:
1. Trading
losses;
2. NTLR
deficits;
Company could give away the entire loss without setting it against
own profits
3. Excess
property
losses;
4. Excess
management
expenses;
Only excess amounts can be surrendered (company must use it itself
before trying to give it away)
5. Excess
QCDs paid.
Key advantage of group relief: Flexibility - company may choose how much to give away and
who to within the group so the loss could be spread across various other group members.
Carried forward trade losses and carried forward property losses arising from 1 April 2017 can
now be group relieved. Note that a carried forward trading loss can only be surrendered as
group relief if it cannot be set off against the surrendering company’s own total profits first.
18
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
OVERLAPPING PERIODS RULES:
1)
2)
3)
Losses can only be surrendered and matched with taxable total profits of the same period
(current CAP);
Where the group does not exist for the whole period, group relief is only available for the
period when the group relationship is met;
Where the companies prepare their accounts to different dates we need to identify the
periods common to both companies to ensure we only surrender losses to match with profits
of the same period.
FACTORS INFLUENCING THE RELIEF:
There are three factors which influence our choice of relief:
1)
2)
3)
Timing of relief. It is usually best to get relief as soon as possible rather than waiting for relief
in future periods;
Rate of relief. The rate of corporation is set to continue to fall so it would be best to avoid
carrying losses forward;
Waste of other allowances. Group relief has the advantage of not wasting the relief available
for QCDs paid.
Note: Choosing to surrender losses to one group member rather than another would help to
keep the due date for corporation tax at 9m+1day after the CAP rather than paying it by
instalments.
19
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
75% Capital Gains Groups
For a 75 % capital gains group to exist, the relationship that needs to exist is:
 Minimum 75% directly between any two companies;
 Minimum 50% indirectly between any two companies.
Example 1:
Example 2:
Remember: The difference in the indirect relationship requirement is a key difference between
loss groups and capital gains groups.
Capital gains groups are allowed to claim the following forms of relief:
1)
2)
3)
The use of capital losses across the group. The loss can be transferred to other group
members to match with capital gains arising across the group.
Key advantage: Flexibility - allows for either the loss or gains to be transferred to another
company in full or part.
Note: A brought forward capital loss cannot be transferred to another company.
The movement of capital assets between group companies. Where capital assets move
between members of a capital gains group, transfer will automatically be deemed to take
place at nil gain nil loss (NGNL). The effect of this is that the base cost will be the original
cost plus indexation for the period.
Note: This is automatic and applies even when the transferee pays for the capital asset.
The rollover relief for group purchases. Where one of the group members disposes an asset
qualifying for rollover relief, purchases of qualifying assets made by any of the group
members can be considered in order to claim rollover relief
Note: The company making the sale does not itself have to be buying replacement assets.
20
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 7
Contents
Introduction to Inheritance Tax .................................................................................................. 2
DEFINITIONS: ........................................................................................................................... 2
LIFETIME GIFTS AND EXEMPTIONS:......................................................................................... 2
Inheritance Tax Valuation Rules .................................................................................................. 5
Computation 1 Lifetime Transfers .............................................................................................. 6
Computation 2 Revised Lifetime Transfers ................................................................................. 8
Computation 3 - The Death Estate ............................................................................................ 10
Transfer of NRB ......................................................................................................................... 12
The Advantages of Lifetime Giving............................................................................................ 13
Payment of inheritance tax ....................................................................................................... 14
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Introduction to Inheritance Tax
DEFINITIONS:
Inheritance tax (IHT) is generally considered as a death tax, but there are other occasions where
Inheritance tax is chargeable as well.
Gift or transfer is any occasion whereby capital wealth is transferred. This could be a lifetime
transfer of a particular asset and on death it is where wealth is passed on in accordance with
the deceased’s will.
Note: It is advisable to work through gifts in the order they are made.
Domicile is the factor which determines what is liable or not liable for IHT.
The three main occasions of IHT charge are:
 Certain lifetime gifts when they are made.
 Lifetime gifts made within the 7 year period prior to death;
 Death.
General rule: An individual who is UK domiciled or deemed domiciled is liable to UK IHT on their
worldwide assets whereas somebody who is not UK domiciled or deemed domiciled is still
liable to UK IHT but only on any assets which are situated in the UK.
LIFETIME GIFTS AND EXEMPTIONS:
Only certain lifetime gifts are subject to IHT. Lifetime gift can be classified as:
1) PET (Potentially exempt transfer):
-This would be any gift of capital made by an individual to another individual;
-It is not subject to any tax charge, however it does make use of certain exemptions available
but not the Nil Rate Band (NRB);
-If the donor dies within 7 years of making a PET, it becomes chargeable and is referred to as
a failed PET.
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
2) CLT (Chargeable lifetime transfer):
-This is where a gift of capital is made by an individual into a trust;
-It is chargeable at the point it is made but if the donor dies within 7 years of making it, the
transfer is
charged again at the point of death.
Note: Gifts made to a spouse or registered civil partner are always exempt, whether they
be made in lifetime or on death.
There are certain exemptions which apply only to transfers made in lifetime:
1)Small gifts exemption. If the value of the transfer is less than £250 per recipient per
annum, the whole thing is exempt and we do nothing further. If the amount is
greater than £250 the whole value remains chargeable;
2)Gifts in consideration of marriage. This applies where the donee is getting married. The
amount of the exemption depends on the nature of the relationship between the
donor and donee:
-A parent to a son/daughter - £5,000 maximum;
-A grandparent to grandson/daughter - £2,500 maximum;
-Each party of the marriage to one another - £2,500 maximum;
-Anybody else - £1,000 maximum.
Note: These limits must be memorised as they are not provided.
In the case of this exemption, if a gift of more than the permitted maximum is made, we
deduct the maximum and leave the remainder chargeable.
3) Normal expenditure out of income. If we can demonstrate that the gift is just another
example of an individual spending their annual income, then it is not a transfer of value, and
so no IHT charge arises.
There are two key factors to demonstrate:
-It should not affect the person’s standard of living;
-It should be regular or habitual in nature.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
4) Annual exemption. The amount is £3,000 per tax year. An individual must first make use of
any AE available for the tax year in which the transfer is made and then they are allowed to
bring forward any unused AE from the immediately preceding tax year and use this as well.
5) Marriage/civil partner exemption is the exemption which is applied both in lifetime and on
death transfers. It simply allows value to be transferred between the couple with no tax
charge.
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Inheritance Tax Valuation Rules
Where assets like properties and shares are transferred the first thing we need is the value of
the asset to be able to calculate the tax charge.
There is a particular IHT valuation approach called diminution in value. This applies to any
situation where assets become more valuable the more of them are owned.
Example: Shares become more valuable the more control of a company the shareholder has. So
if I give away the shares, it will not just reduce my wealth, but it will also reduce the value of
shares I still own.
Approach: To compare the overall wealth of the donor before and after the gift. The difference
becomes the transfer value for IHT purposes.
For example, if I own 80% of the shares in T Plc and give away 35%, I will then only own 45%.
The values are as follows:
80% shareholding £100,000
45% shareholding £ 35,000
35% shareholding £25,000
The transfer of value for IHT would be £100,000 - £35,000 = £65,000 as this is the value that my
estate has fallen by.
Contrast this with capital gains tax where we look at the value of the asset we have transferred
so in this case for CGT we would use the value of the 35% shareholding of £25,000 as the
proceeds.
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Computation 1 Lifetime Transfers
Nil rate band (NRB) is the amount of wealth that an individual can have before any IHT becomes
chargeable. Giving capital away whilst an individual is alive may affect how much NRB is
available to offset against the assets they still own.
7-year cumulation period approach: Every time an individual would like to use some or all of
the NRB, they must first check how much is available by looking back over what has happened
in the previous 7 years.
The amount of NRB that is available to use can be determined as follows:
NRB for the tax year in which the gift is made (will be given in the question) X
CLTs made in previous 7 years - Gross value (only CLTs, PETs are ignored) (X)
Remaining NRB available to use now X
We then need to determine the correct tax rate to use:
-If the donee pays the tax the rate to use is 20%;
-If the donor pays the tax the rate to use is 25%.
Note: The gross value will need to be calculated to include the tax if this was paid by the donor.
This would be the value of the gift after exemptions plus life tax paid.
Illustration:
Mark makes the following lifetime gifts:
1/2/10 £70,000 to his daughter
1/2/14£250,000 to a trust (gross chargeable transfer £200,000)
1/2/17 £70,000 to his son
1/2/19 £300,000 to a trust
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The nil rate band is £325,000.
When looking at how much of the nil rate band is available for the 1/2/19 gift, we must look
back 7 years to 1/2/12 for any gifts that are chargeable to IHT during life.
1/2/101/2/141/2/171/2/19
PETCLTPETCLT
As we can see - there is only the 1/2/14 CLT and 1/2/17 PET that fall within the 7 year period.
Remember though - the PET is not chargeable in life and so it is ignored in this calculation.
Therefore, the nil rate band available for the CLT on 1/2/19 would be:
£325,000 - £200,000 = £125,000 (note: we always use the GCT of a CLT when calculating the nil
rate band)
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Computation 2 Revised Lifetime Transfers
We need to understand which lifetime gifts need to be revisited and charged as a result of the
donor dying and how the tax charge is calculated.
Step 1: Make a note of all of the lifetime transfers made, no matter what the date or type.
Step 2: Note the date of death.
Step 3: Calculate the 7 year period prior to death. Anything which happened within this 7 years
will be charged under computation 2.
Step 3 (a): If there is a PET within this 7 years, we refer to this as a failed PET as it has failed to
reach exempt status and instead become chargeable. The starting point for computation 2 is
the frozen value we already calculated in computation 1.
Step 3 (b): When revisiting a CLT the starting point is the gross value we already calculated in
computation 1.
Step 4: We now need to consider the amount of NRB. Remember that our starting point in
computation 2 is a maximum NRB based on the tax year of death. We need to consider how
much of this is available for use against this particular transfer.
Difference 1: We need to look back over the 7 years before the gift was made.
Difference 2: We are looking at any chargeable transfers, so we take into account both CLTs and
failed PETs.
Step 5: Charge the tax. Remember that we will use the death rate of 40%.
Step 6: Claim taper relief. Use the tax tables to see what % of taper relief you can claim based
on the gap between the date of the gift and the date of death.
Step 7: Deduct any tax already paid in lifetime to reduce the amount to pay as a result of death.
This can only reduce the tax charge, and not cause an overpayment position.
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Putting all of this together we can produce a proforma for computation:
CLT/Failed PET
IHT @ 40%
Review timeline to
determine what to
Always
revisit charged at
Start with
same rate.
gross/frozen value
Review NRB.
Taper relief
IHT pd lifetime on this
trf
IHT due as a
result of death
Calculate gap
between
transfer and
death.
Check tables to
determine % of
taper relief.
Claim % x tax
charge.
Look back to Comp 1 to
see what tax, if any,
was paid in lifetime on
this transfer.
Deduct here regardless
of rate used in lifetime.
Work across
columns 2-4 to
leave the final
amount payable.
Note: This cannot
be less than nil.
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Computation 3 - The Death Estate
For the death estate calculation, we are taxing the total wealth of the person (net worth) who
has died on that particular date. It includes:
1. Almost all of the assets owned at the date of death based on their market value on that
date. The market value of an asset is generally referred to as its probate value. For life
assurance policies we include the amount which will actually be received by the estate
when the life policy pays out.
Remember: There is no such thing as an exempt asset for IHT purposes (cars, cash,
shares held in an ISA are chargeable).
2. Liabilities at the date of death (bank overdrafts, loans, hire purchases, credit cards and
unpaid taxes). There are some special rules:
a. Mortgages: Endowment mortgages are linked to life policies intended to pay the mortgage
off directly on the death of the individual, so these types of mortgages are not deducted in the
death estate. The only mortgages which we deduct in the death estate are repayment and
interest mortgages as these operate exactly like normal loans.
b. Not legally enforceable things like gambling debts and verbal agreements or promises to
make payments are not deductible.
c. Funeral costs can also be deducted from the estate as well as liabilities.
Note: Anything which is being left to an exempt body is deducted at this stage (e.g. legacies
to the spouse or to a charity).
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Once we’ve put together a death estate calculation, we need to:
1. Consider the chargeable amount starting with calculation of NRB available, which is a
maximum of the NRB for the tax year in which the person died.
2. Look back over the previous 7 years and review the value of chargeable transfers in that
period, including both CLTs and failed PETs:
Previous transfers total > maximum NRB No NRB available
Previous transfers total < maximum NRBThe difference is available to set off against
the estate
3. Once the NRB / RNRB (see below) has been deducted any remaining value is subject to
IHT at the death rate of 40%.
Residence nil rate band (RNRB)
If the death estate includes a main residence that has been left in the will to a direct
descendent, such as a child or grandchild, then a RNRB of £175,000 will be deductible from the
value of the death estate before it is taxed. Note: if the value of the residence is less than
£175,000 then only the value of the residence can be deducted as the RNRB, not the full
£175,000.
The residence nil rate band only applies where an individual dies on or after 6 April 2017, their
estate exceeds the normal nil rate band of £325,000 and their estate includes a main residence
(this does not include property that has been let out).
Any amount of unused RNRB can be transfered to the surviving spouse (it does not matter
when the first spouse died). For example, if Mrs Banes died in April 2012, the residence nil rate
band did not exist in 2012 and so she would not have used any of it. This means that when Mr
Banes dies in May 2000, he can use his own RNRB plus 100% of the RNRB of Mrs Bates, at the
current value eg £175,000.
In the exam – a question will make it clear if the RNRB is available.
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Transfer of NRB
Every individual is entitled to their own NRB and RNRB. When we talk about married couples,
they can own assets worth £650,000 without worrying about potential IHT liabilities on their
death plus £350,000 if their estate includes a residential property that is left in the will to a
direct descendent. s
Best advice: In a married couple the value of the assets they each hold in their name should be
roughly equal, so they are each able to make use of the NRB/RNRB they are entitled to.
There are two possible scenarios here:
1) When both spouses die on the same day, their assets would be passed on in accordance
with their will and they would each have a NRB to reduce the amount chargeable.
2) When one of the spouses dies, the unused NRB/RNRB can be transferred from one spouse
to another on the second death. This can be done provided an election is made to claim
the unused NRB/RNRB 2 years from the end of the month of death of the second spouse.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The Advantages of Lifetime Giving
The advantages of making lifetime gifts are that:
1) Lifetime giving fixes the value on which IHT is charged at the date of the gift (a good thing if
we know our assets will increase in value);
2) There are exemptions available on lifetime transfers which aren’t available for the death
estate;
3) The effective rate of tax for lifetime transfers may be less than 40% which would be charged
on the death estate:
a)There may be taper relief available which has the effect of reducing the rate of tax. As
long as I live for at least 3 years from making the gift, the effective rate of tax is lower
for lifetime transfers;
b)If I were to live for 7 years or more after the gift, the effective rate of tax would be nil;
The only disadvantage is the potential capital gain tax liability. So if there is a substantial gain
this may outweigh the IHT advantages.
Remember: Despite all advantages there is one key reason for not giving all or most of the
assets away during the lifetime - people want to use their assets.
13
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Payment of inheritance tax
Lifetime tax due on lifetime transfers
The rate of life tax depends upon who is paying the tax.
If donor pays – the rate is 20%
If the donee pays – the rate is 25%
The donor is the person giving the gift and the donee is the person receiving the gift.
If the transfer is made in the first half of the tax year (between 6 April and 5 October) – the due
date for the tax is 30 April
If the transfer is made in the second half of the tax year (between 6 October and 5 April) – the
due date for the tax is 6 months after the end of month of transfer.
Tax due on life gifts at death
The death tax is always paid by the donee (the person receiving the gift) and is due 6 months
after the end of month of death.
Tax due on the death estate
This is paid by the executors of the estate, 6 months after the end of month of death. The tax is
suffered by the person receiving the remainder of the estate after all specific legacies have
been paid.
14
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
TX-Module 8
Contents
The Basic Computation of the VAT Liability ................................................................................ 3
RECOVERY OF INPUT VAT AND IMPAIRMENT LOSSES ................................................................ 4
RECOVERY OF INPUT VAT: ....................................................................................................... 4
IMPAIRMENT LOSSES:.............................................................................................................. 4
The Time and Rating of Supplies ................................................................................................. 5
TAX POINT OF SUPPLY: ............................................................................................................ 5
RATING OF SUPPLIES: .............................................................................................................. 5
Historic Test Compulsory Registration ........................................................................................ 7
Future Test Compulsory Registration ......................................................................................... 8
Voluntary Registration ................................................................................................................ 9
Group Registration .................................................................................................................... 10
VAT GROUP CHARACTERISTICS: ............................................................................................ 10
CHOOSING THE MEMBERS OF THE VAT GROUP: .................................................................. 11
Pre Registration Input VAT .................................................................................................... 11
VAT Administration ................................................................................................................... 12
THE DATE FOR SUBMISSION OF RETURN AND PAYMENT: .................................................... 12
VAT INVOICES: ....................................................................................................................... 12
DISCOUNTS: ........................................................................................................................... 13
PENALTIES FOR LATE RETURNS AND PAYMENTS: ................................................................. 13
Overseas Trading Aspects of VAT .............................................................................................. 15
GOODS: .................................................................................................................................. 15
SERVICES: ............................................................................................................................... 15
Cash Accounting Scheme .......................................................................................................... 16
Annual Accounting Scheme....................................................................................................... 17
Flat Rate Scheme ....................................................................................................................... 18
1
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Private Use, Irrecoverable VAT and Scale Charge ..................................................................... 19
IRRECOVERABLE input vat ..................................................................................................... 19
2
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The Basic Computation of the VAT Liability
The fundamental calculation of the VAT liability for a given period of time is:
Output VAT
X
Input VAT
(X)
VAT payable
£X
Output VAT is the total of all VAT charged on sales of goods and services made by the trader in
the period. This would include:
 The sale of items normally traded by the business and charged at the standard rate;
 Any sales of capital goods on which VAT should be charged;
Note: Whilst zero rated goods are considered taxable, the VAT is charged at 0% so nothing
would actually be included in output VAT for these.
Input VAT is the total of all VAT charged to the trader by its suppliers on goods and services for
the period. This would include:




The purchase of goods for resale;
Capital items for use in the business;
Services required by the business (legal and professional fees);
Overheads for the business premises.
Output VAT > Input VAT  VAT payable
Output VAT < Input VAT  Overpayment of VAT
Rules for calculation of VAT amount:
VAT exclusive amount VAT = Sale/Purchase amount * 20%
VAT inclusive amount VAT = Sale/Purchase amount * 20/120
NOTE: the reduced rate of VAT for the hospitality sector (15/7/2020 to 13/1/2021) is not
examinable.
3
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
RECOVERY OF INPUT VAT AND IMPAIRMENT LOSSES
RECOVERY OF INPUT VAT:
The following conditions must be met for a recovery of Input VAT to be permitted:
1) The supply must be made to the taxable person and the trader is a taxable person at the
time the supply was made;
2) The supply of goods or services must have been made for a business purpose.
Remember: When supply is made for both business and private purposes, the input tax has
to be apportioned and only the input tax which relates to the business purpose is available
for credit;
3) The claimant must hold the required evidence of their purchase;
4) The input tax must not be specifically blocked from credit. The two main items where the
input tax is blocked are:
a) Business entertainment. This includes situations where customers or suppliers are
entertained for business purposes. The input tax on the entertainment of staff and
entertainment of overseas customers is not included within this and would be recoverable
in the normal way.
b) Motorcars. The input tax charged on a motor car purchased by a taxable person is not
recoverable (not applicable for vans and motorcycles).
Exception: When a motor car was purchased exclusively for business use and private use
is not available.
IMPAIRMENT LOSSES:
Relief is available for the impairment losses provided:
1) The debt is at least 6 months past the due date. This is not generally going to be the
invoice date, as
most traders allow some time for their customers to pay;
2) The debt is written off as irrecoverable in the books of the trader.
4
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The Time and Rating of Supplies
TAX POINT OF SUPPLY:
The basic tax point (BTP) for a supply of goods is the date on which the goods are removed
from the supplier (date of despatch). For services it is the date on which the service is
performed.
The basic tax point can be overridden by an actual tax point in various circumstances:
1)Events before the BTP:
a)Where there is a receipt of payment earlier than the basic tax point;
b)Where a tax invoice is issued before the basic tax point.
2)Events within given period after BTP: an invoice is issued within 14 days of the BTP (late
overrider).
Note: If there is a continuous supply of services, the tax point is the earlier of invoice date and
payment date.
RATING OF SUPPLIES:
There are a number of schedules, which give specific lists of goods or services which fall under
that particular rating.
Schedule 8 lists those goods and services which are zero rated (taxable in nature but the tax is
charged at 0%).
They include:
 Certain food;
 Books;
 Medicines.
5
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Schedule 9 lists those goods and services which are exempt (not taxable and are not subject to
any tax charge). They include:
 Land;
 Postal services;
 Certain educational supplies.
Key difference between zero rated and exempt items is that in order to register for VAT the
trader must be making some taxable supplies (they include zero rated).
Note: If goods or services do not appear on the lists provided in schedules 8 or 9, the supply
must be treated as standard rated (20%).
6
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Historic Test Compulsory Registration
Under historic test, we look backwards over a period of no more than 12 months and review
the level of taxable turnover of a business over that period.
There are a few key points to highlight:
 Period of review. The historic test is performed at the end of every calendar month and
requires the trader to total their supplies over a period of no more than 12 months.
Note: The period may be less if the business has not actually traded for 12 months.
 Taxable turnover. The taxable turnover for the period under review is compared to the
VAT registration threshold which changes with each finance act. In later sessions you
will learn what counts as taxable (or not).
Remember: Once we determined the point at which it is necessary to be VAT registered we
need to submit an application to HM Revenue and Customs within one month to complete the
process. The registration becomes effective from the first day of the second month after you go
over the threshold. For example, if you exceed the threshold by 31 July you must notify HMRC
within 30 days, ie by 30 August, and you will be VAT registered from 1 September.
7
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Future Test Compulsory Registration
Future test is where instead of looking back we look ahead. This test has to be monitored on an
ongoing, daily basis, not just at the end of a given month.
Note: This test looks at the 30 day window in isolation ignoring previous results.
Remember: If the trader has reasonable grounds to suspect that their taxable supplies in the
next 30 days alone will be greater than the registration threshold, they fail this future test and
will be required to register.
If taxable supplies to date have not breached the registration limit but we think that it will in a
30 day period, there must be some reason for that such as:
1)The business is new and so there is no “to date” turnover;
2)There is a new contract or new branch which will result in significantly higher sales levels.
Once the point at which registration becomes necessary has been determined, the trader has
one month to notify HMRC but the registration becomes effective immediately.
Issue: Once registered for VAT, traders need to issue valid VAT invoices including a note of the
VAT registration number, which is unknown until the registration application has been
submitted and processed.
Solution: This can be dealt with by issuing invoices stating “VAT registration number to follow”
in the short term, and then re-issuing those invoices with the number once it is known.
8
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Voluntary Registration
Voluntary registration applies where there is no compulsory reason for a trader to register, but
where they might want to voluntarily register anyway.
There is only one condition where voluntary registration is possible - the trader must be making
taxable supplies (not necessarily all, at least some of them).
Remember: Both zero and standard rated supplies count as taxable for registration purposes.
Advantages of being VAT registered:
 Recovery of input VAT paid. After registration VAT becomes recoverable which reduces
the net cost of goods and services supplied to the business and increases the profit;
 Disguise the size of the business. Voluntary registration is one of the ways to help make
the business appear more established or larger;
 Avoid potential late filing issues. Having to constantly ensure that the registration limits
have not been breached creates quite a burden for traders. If it is likely that the
business will have to be registered at some point, it might be better to register early
voluntarily;
 Improved business records. The requirement to complete VAT returns on a regular basis
means that the trading records will need to updated regularly which means that they
are better kept.
Disadvantages of being VAT registered would include:
 Extra administration of completing and submitting returns;
 Risk of penalties and interest for late payment/returns;
 Potential loss of business if customers are not VAT registered.
The registration rules are:




An application to register for VAT would need to be completed and submitted to HMRC;
There is no deadline for submitting an application;
The date of registration cannot be backdated earlier than the date trade begins;
HMRC will require an evidence that a trade exists or will exist (supplier agreements,
sales contracts or bank account details).
9
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Group Registration
VAT GROUP CHARACTERISTICS:
Two or more companies can register as a VAT group if:
1)Each body has its principal or registered office in the UK;
2)They are under common control, for example one or more company is a subsidiary of a
parent company.
As a VAT group, the members are effectively registered as one entity, rather than each
company having its own VAT registration which means that:
 One VAT return is completed and submitted for the VAT group as a whole, rather
than a return being filed by each of the members;
 No VAT is charged on goods or services sold by one member of the VAT group to
another.
Note: There is no effect on actual cost - the normal course of events would be for the seller to
charge VAT which the buyer would then reclaim on their next VAT return.
Remember: The companies being under common control simply means that a VAT group can
exist as opposed to meaning that it definitely does.
Disadvantages of VAT group registration would include:
 All members of the group are jointly and severally liable for the group VAT liability
and/or errors;
 Turnover of the entire group is considered when determining whether it is possible to
use certain VAT schemes.
10
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
CHOOSING THE MEMBERS OF THE VAT GROUP:
Where a VAT group is registered, one member has to be appointed as the representative
member, i.e. company responsible for submitting the return and/or payment and liaising with
HMRC. However, all of the group companies remain liable for the group liability.
If there is a risk that the company may become insolvent (for example, it has a turbulent cash
history or makes only zero rated supplies), it might be better to leave it with its own
registration to avoid passing the liability on to the other companies.
From 1/11/19 the controller of a group of companies no longer has to be a company
The controller of a group of companies can be a member of the VAT group if it is
 a company (as per old rules)
 a sole trader
 a partnership
Controller must carry on a trade in UK and own more than 50% of company's Ordinary Share
Capital (as before)
Pre Registration Input VAT
Pre registration input VAT (VAT which has been incurred before the date of registration and
which can be claimed back) can be recovered:
 On goods purchased in the four years prior to registration, provided they are still on
hand at the date of registration. This covers the purchase of certain fixed assets and
items of inventory purchased before the business has registered, or even before it
began trading (relevant invoices must be provided);
 On services purchased in the six months prior to registration. This might include some
professional fees for advice in setting up a new business or maybe some leasing costs
for machinery hired.
11
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
VAT Administration
THE DATE FOR SUBMISSION OF RETURN AND PAYMENT:
VAT returns are generally completed on a quarterly basis although it is possible to ask to
complete monthly returns (good for zero rated suppliers) or to complete annual returns.
For normal quarterly return the due date for its electronic submission is 1 month and 7 days
after the end of the period. The payment is due on the same.
If the trader registers to pay by direct debit, this is taken from their bank account 3 days later, 1
month and 10 days after the end of the period.
VAT INVOICES:
In order to be a valid VAT invoice it must show all of the following information:











A sequential identifying invoice number;
The date of the supply;
The date when this VAT invoice is being issued;
The supplier's name, address and VAT registration number;
The name and address of the person to whom the goods or services are supplied;
A description sufficient to identify the goods or services being supplied;
The quantity of goods or the extent of services supplied, and the rate of VAT applicable
and the amount that is being charged, net of VAT;
The total amount being charged, net of VAT;
The rate of any discount offered;
The total amount of tax chargeable, expressed in sterling;
The unit price.
In any case where the consideration for a supply doesn’t exceed £250, a simplified VAT invoice
can be issued containing only the following particulars:





The name, address and registration number of the supplier;
The time of the supply;
A description sufficient to identify the goods or services supplied;
The total amount payable including VAT;
For each rate of VAT chargeable, the gross amount payable including VAT, and the VAT
rate applicable.
12
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
HMRC allow the issue of a retailer invoice if both conditions are met:
 The supplier must be a retailer, so must be selling directly to the public;
 The value of the supply (including VAT) must be less than £250.
A retailer invoice will comprise of the following:





The name, address and VAT registration number of the supplier;
The date of the supply;
A description sufficient to identify the goods or the services supplied;
The total payable which is including VAT;
The rate of tax applicable.
DISCOUNTS:
Where a discount for prompt payment of invoices is offered, VAT is still charged on the full
value of the supply.
If the customer subsequently settles the invoice early enough to be able to claim the discount,
a credit note should be issued showing the discount and VAT thereon accordingly.
PENALTIES FOR LATE RETURNS AND PAYMENTS:
General rule: Penalties for incorrect returns follow the same rules as for all other taxes.
But the default surcharge position does require further explanation:
 The first time that a return or payment is late, no actual monetary penalty is charged,
however, the trader is issued with a notice of a surcharge liability period, which runs for
12 months from the late period;
 Any subsequent late returns or payments within this period will incur monetary
penalties but also the extension of the SLP.
Extension of the SLP: SLP notice is issued to a trader who will have to submit and pay 4
subsequent VAT returns on time to get out of it.
13
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
The penalties which apply for late payments and/or returns within the SLP are calculated as a %
of unpaid VAT:
No. of defaults in current surcharge period
% of unpaid VAT
1
2%
2
5%
3
10%
4
15%
Note: No penalty will be charged for the first or second late return/payment in an SLP if it
amounts to less than £400. The minimum penalty for the 3rd/4th defaults is £30.
Making tax digital
Following the introduction of making tax digital, most VAT registered businesses now have to
use making tax digital software to directly submit their VAT returns to HMRC. They also have to
keep digital records. The requirements do not apply to businesses with a turnover below the
VAT registration threshold of £85,000 but which are voluntarily registered for VAT.
VAT returns still have to be filed within one month and seven days of the end of the relevant
quarter. Any VAT payable is due at the same time, and must be paid electronically.
14
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Overseas Trading Aspects of VAT
Note: assume the EU acquisitions rules still apply until after the March 2022 examinations.
GOODS:
Non-EU export: Supplies are always zero-rated. The trader must keep documentary evidence
(airway or shipping documentation) that the goods have indeed left the EU.
Non-EU import: Supplies are subject to an import duty at the point of entry to the UK, which is
a charge to VAT. The VAT on imports is paid directly to HMRC at the point of entry to the UK.
This import duty is included on the next VAT return completed and in the amount to claim back
by way of a reduction in the VAT liability.
EU dispatches:
Customer is VAT registered
Supply is zero rated (VAT registration
number must be quoted on invoice)
Customer is not VAT registered (or VAT
registration number is not provided)
Supply is subject to VAT (20% or zero rated
depending on goods)
EU acquisitions: No import duty is payable when the goods enter the UK. A trader is required to
charge VAT on the goods at the standard rate and include this as part of Output VAT to the next
VAT return. However, having then been charged VAT, that becomes Input VAT to be recovered
on the same return and the net effect will be nil.
SERVICES:
The place of supply is different depending upon the nature of the customer:
B2B supply The place of supply is based on the location of the customer
B2C supply The place of supply is based on the location of the supplier
15
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Cash Accounting Scheme
There are conditions which have to be met to join the scheme:
 The annual taxable turnover of the business must not exceed £1.35 million;
 Once in the scheme, if annual turnover exceeds this limit that is fine, but the trader will
have to “leave” once annual turnover exceeds a limit of £1.6 million;
 The business has been compliant with VAT obligations, which means all returns and
payments must have been made on time;
 There have been no prior convictions for VAT offences.
Under the cash accounting scheme we look at the VAT element of the monies received from
customers and payments made to suppliers during the period.
Remember: Cash accounting scheme for VAT purposes is not the same as the cash basis of
accounting for income tax purposes.
The advantages of adopting the cash accounting scheme are:
 The trader will only pay VAT on to HMRC when cash has already been received from the
customer;
 If that customer never pays, no VAT will ever be paid on (automatic bad debt relief);
The disadvantage is that we can only claim back VAT on our supplies when payment has been
made by us to our supplier.
Note: Cash accounting scheme is useful if the trader suffers a lot of bad debts, or has customers
which take a long time to pay.
16
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Annual Accounting Scheme
Under Annual accounting scheme traders submit just one VAT return each year instead of
completing VAT returns on the normal quarterly basis.
The problem with normal VAT returns is that traders find it difficult to keep up with their record
keeping and filing the VAT returns on time.
Deadline for annual return: 2 months after the return date (compared to 1 month + 7 days for
quarterly returns).
With annual accounting, there are fairly complex rules for VAT payments:
 Payments of VAT are spread across ten payments;
 Nine of these are instalments which are paid during the VAT period;
 The final (10th) payment is a balancing payment to clear down the total liability for the
year;
 The payments are made on the last day of each of months 4-12 counting from the
beginning of the 12 months period;
 When we have to make our first payment, we make payments on account based on the
previous year’s VAT liability (as we don’t know how much VAT will be payable):
Payment on account = VAT liability for previous year / 10
To join the annual accounting scheme, the business must meet the following conditions:
 The annual taxable turnover of the business must not exceed £1.35 million;
 Once in the scheme, if annual turnover exceeds this limit that is fine, but the trader will
have to “leave” once annual turnover exceeds a limit of £1.6 million;
 The business has been compliant with VAT obligations, which means all returns and
payments must have been made on time;
 There have been no prior convictions for VAT offences.
Note: It is possible to join more than one scheme, e.g. a trader can join both the cash and
annual accounting schemes provided they meet the conditions.
17
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Flat Rate Scheme
To be allowed to join the flat rate scheme, the business must meet the following conditions:
 The annual taxable turnover of the business must not exceed £150,000. The trader will
have to “leave” once annual turnover exceeds a limit of £230,000;
 The business has been compliant with VAT obligations, which means all returns and
payments must have been made on time;
 There have been no prior convictions for VAT offences.
When using the flat rate scheme, there is no deduction of any input VAT charged. Instead, the
scheme allocates a flat rate to the trader, based on the industry they work in (all rates are lower
than the 20% standard rate).
FA 2017 saw the introduction of a fixed percentage of 16.5% for limited cost traders.
Remember: The fixed percentage is applied to the VAT inclusive sales figure and charged on all
income. However, the trader continues to charge VAT to the customer at the normal rates
regardless of using the flat rate scheme. You will be told in the TX exam if the trader in question
is a limited cost trader.
18
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Private Use, Irrecoverable VAT and Scale Charge
Here we will be looking at three sub-topics:
1) VAT on private use
2) Irrecoverable Input VAT and
3) VAT on Private Fuel
PRIVATE USE
General rule:
The key rule around private use is that only the input tax relating to business use of an asset is
recoverable if it is used for private and business use.
IRRECOVERABLE input vat
The following input tax is not recoverable:
a) If motor cars are not used wholly for business purposes. As a result, VAT is not charged if the
car is then subsequently sold. Input tax on accessories fitted after the original purchase is
recoverable (if the accessory is for business purposes). Input tax on repairs and maintenance
is fully recoverable.
b) VAT on entertaining, except of overseas customers and of staff.
Example:
Here is a question on VAT and the related effect on capital allowance carrying values:
RVP Ltd, which is registered for VAT, incurred the following expenditure (including VAT) during
the quarter ended 31 March:
New car for staff (private use) £12,500
Three new vans £25,300
Container lorry £22,000
Entertaining – UK customers £8,200
Entertaining – Employees £4,000
19
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
How much VAT can be reclaimed in respect of the above and on what amount will RVP Ltd be
entitled to claim capital allowances?
Here is the answer:
VAT
Vans (25,300 x 20/120) £4,216
Lorry (22,000 x 20/120) £3,667
Entertaining employees (4,000 x 20/120)
£667
Total VAT £8,550
Capital allowance values
Car £12,500
Vans (25,300 – 4,216)£21,084
Lorry (22,000 – 3,667)£18,333
VAT ON PRIVATE FUEL
Finally we will take about VAT on private fuel.
Input tax on all road fuel purchased by the business is potentially recoverable. There are three
options for dealing with this:
a) Reclaim input tax on all fuel purchased. Charge output tax based on either the full cost of the
private fuel supplied (This requires detailed mileage records to be kept) or alternatively the
output VAT can be calculated using the scale charge regime. A scale charge reflects the output
VAT in respect of private use. The fuel scale charge is based on the CO2 emissions of the car.
See the example that follows.
b) Claim input VAT only on the fuel purchased for business journeys. This requires the business
to keep detailed mileage records of business and private use. No output tax is charged in
respect of private use. In effect, the private fuel is not brought into the business’s VAT
calculations.
c) Not to claim any input tax (Including business input VAT) in respect of fuel purchased by the
business. No output VAT is charged. In effect, the fuel is not brought into the business’s VAT
calculations.
20
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)
lOMoARcPSD|1371842
Example:
Now for a question to fully understand this:
Oliver is an employee of RVP Ltd. He has the use of a car which is used for both business and
private mileage for the current VAT quarter. RVP Ltd pays all the petrol costs in respect of the
car, totalling £1,000 (of which 20% is for private mileage). The relevant quarterly scale charge is
£450. Both figures are inclusive of VAT.
Here are a couple of questions to consider in this scenario:
1) What is the VAT effect of the above on RVP Ltd if it uses the quarterly scale charge?
2) What is the VAT effect of the above on RVP Ltd if it charges Oliver for the private fuel?
Here are the answers:1) Output VAT of £75 (450 /120 x 20). Input VAT of £167 (1,000/120 x 20):
If Oliver is not charged for the private fuel then RVP Ltd can reclaim input VAT of £167
(1,000/120 x 20) and will have to account for output VAT of £75 (450/120 x 20). The net £72
(£167 – £75) will be reclaimable from HMRC.
2) Output VAT of £33 (£1000 x 20% private x 20/120). Input VAT of £167:
If Oliver is charged £200 (1,000 x 20%) for the private fuel then RVP Ltd will reclaim input
VAT of £167 (1000/120 x 20) but will have to account for output VAT on the money received
from John of £33 (200 x 20/120) based on the charge to Oliver.
21
Gedownload door Ruth Wallerlei (qp80168@hotmail.com)