The ExP Group
ACCA TX
ExPress
Notes
Taxation (UK)
SBL
BT
MA
SBR
FA
AFM
LW
APM
PM
ATX
TX
AAA
FR
AA
FM
Valid for June 2022, September 2022, December 2022 and March 2023 exam sittings
ACCA TX
The ExP Group
ExPress Notes
s
t
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Page
Welcome to your ExPress notes
3
1.
Introduction
4
2.
Income tax – an introduction
5
3.
Income Tax – Employment Income
7
4.
Income Tax – Trading Income
11
5.
Capital Allowances
14
6.
Trading Income – Basis Assessment
16
7.
Trading Losses (For Sole Traders)
18
8.
Trading Income - Partnerships
20
9.
Property Income
21
10.
Investment Income
23
11.
Pensions
24
12.
National Insurance Contributions
26
13.
Corporation Tax
28
14.
Chargeable Gains (For Companies)
31
15.
Corporate Groups and Overseas Tax Issues
33
16.
Capital Gains Tax (CGT)
35
17.
Inheritance Tax (IHT)
39
18.
Value Added Tax (VAT)
43
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ACCA TX
The ExP Group
ExPress Notes
Hello
Thank you for downloading a copy of these ExPress notes and I hope you
find them useful for your studies.
Steve Crossman
CEO The ExP Group
We provide these ExPress notes free of charge to individual students
as part of our CSR initiatives. The notes are designed to help students
assimilate and understand the most important areas for the exam as
quickly as possible.
A word of warning though in that they have not been designed to cover
everything in the syllabus so you should only use these notes for either
an overview of the key areas before you start your main studies or as part
of your final revision in the run up to your exams.
Importantly though, we want you to be successful in your exams so good
luck with your studies and please do let us know how you get on.
All the best,
Steve
About The ExP Group
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Disclaimer : © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission needs to be obtained in
advance if you are planning on using them on a training course you’re delivering. Reproduction by any means for any other purpose is prohibited. These materials are for
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ACCA TX | ExPress Notes
1
1
The ExP Group
Introduction
The Big Picture
The Taxation (TX - UK) paper introduces candidates to the core principles of taxation in the UK. The
paper is mainly computational.
Taxation can get very complicated as there are a number of detailed calculations and lots of intricate
rules to remember. A successful candidate must have a good understanding of the core areas of
taxation. It is vital therefore that candidates understand the key areas and do not get bogged down in
the detail. The main taxes are:
•
Income tax – payable by individuals
•
Corporation tax – payable by companies
•
Capital Gains tax (CGT) – payable by individuals (companies pay corporation tax on
their capital gains)
•
Value Added Tax (VAT) – payable by both companies and unincorporated businesses
•
National Insurance Contributions (NIC) – not strictly a tax but payable by
individuals and employers.
Section A of the exam comprises 15 Objective Test (OT) questions worth 2 marks each.
Section B of the exam comprises three short scenarios. Each scenario has five OT questions worth 2
marks each.
Section C of the exam comprises one 10 mark and two 15 - mark constructed response questions. The
15- mark questions in section C will cover income tax and corporation tax. Other questions in the paper
may ask about any topic of the syllabus.
The TX paper has a comprehensive syllabus. These ExPress notes are designed to provide guidance on
the core areas of the syllabus. Whilst we believe that the items contained herein have a strong chance
of being examined, no guarantee can be provided as to what will be examined. Taxation legislation can
change rapidly. These notes are designed to provide assistance for students taking the TX(UK) ACCA
exam from June 2022 to March 2023. These notes should not be used for any other purpose. The ExP
Group explicitly denies liability for any action taken as a result of using these notes. The ExP Group does
not warrant in any form that these notes represent the tax legislation as at the date of reading of these
notes.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 4
ACCA TX | ExPress Notes
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2
The ExP Group
Income Tax – An
Introduction
The Big Picture
Income tax is a key area and will be examined.
Key Knowledge – Income tax: an introduction
Individuals who are UK tax resident will be taxed on their worldwide income. The period of assessment
is the tax year. The tax year runs from 6 April to 5 April. For example, the tax year 2021/22 runs from 6
April 2021 to 5 April 2022 (2020/21 runs from 6 April 2020 to 5 April 2021 and so on). All income of the
individual arising in the tax year will be assessed in the tax year.
Key Knowledge – pro forma tax computation 2021/22
This is the base document for calculating an individual’s liability to income tax.
The pro-forma income tax computation is as follows:
INCOME TAX COMPUTATION – 2021/22
£
Non-savings income
Employment income
10,000
Trading income
25,000
Property income
Savings income
5,000
Bank interest
1,000
UK dividends
1,000
Total income
42,000
Less: reliefs
(2,000)
Net income
40,000
Less: Personal allowance (PA)
(12,570)
Taxable income
27,430
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
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to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
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ACCA TX | ExPress Notes
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Certain income is exempt from income tax including:
•
•
•
Income from certain National Savings Products
Income from Individual Savings Accounts (ISA)
Gambling or betting winnings
Personal Allowances (PA)
Every taxpayer is entitled to a PA. For 2021/22 this amount is £12,570. It is an income tax personal
allowance and cannot be set against any other tax liability such as CGT.
The PA is deducted from an individual’s net income to give taxable income.
The PA is reduced for individuals with income >£100,000.
The reduction is based on adjusted net income (ANI).
Adjusted Net Income:
Net income
X
Less: gross gift aid donations
X
Less: gross personal pension contributions
X
ANI
X
If ANI is >£100,000, the PA is reduced by 50% x (ANI - £100,000). Therefore, individuals with ANI
>£125,140 do not get a PA.
Income Tax Liability and Income Tax Payable
Once the taxable income has been calculated, the income tax liability can be calculated. Note that
taxable income is after the Personal Allowance.
The rate of income tax depends on the type of income. The rates for 2021/22 are:
Normal
rates
Dividend
rates
Basic rate
£1 to £37,700
20%
7.5%
Higher rate
£37,701 to £150,000
40%
32.5%
Additional rate
£150,001 and above
45%
38.1%
Savings nil rate band
- basic rate taxpayers £1,000
- higher rate taxpayers £500
Dividend nil rate band
- all taxpayers £2,000
* Note that a starting rate of tax of 0% applies to savings income if it falls within the first £5,000 of
taxable income. These rates will be provided in the exam.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
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Page 6
ACCA TX | ExPress Notes
The ExP Group
Marriage Allowance (MA)
The MA allows a spouse or civil partner to transfer a fixed amount of the personal allowance to their
spouse/civil partner.
The MA is NOT available if either spouse/civil partner is a higher rate or additional rate taxpayer.
The amount that can be transferred is fixed at 10% of the PA (i.e. 10% x £12,570 = £1,260).
The maximum tax saving is 20% x £1,260 = £252.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 7
ACCA TX | ExPress Notes
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3
The ExP Group
Income Tax –
Employment Income
The Big Picture
Employment income represents all income and benefits an individual receives from his or her
employment.
Key Knowledge – income tax: employment income
Earnings
Earnings are taxed on the “receipts” basis. i.e. the amount of earnings received in the tax year. There
are special rules for directors to prevent them manipulating the receipt date.
“Earnings” include salaries, wages, bonuses, commissions and benefits received by an individual.
As an example, if an individual receives a salary of £20,000 and benefits of £6,500 the total employment
income will be £26,500. This figure is then included in the income tax computation.
Benefits
Benefits are regularly tested in the TX paper. The general rule is to tax the employer’s cost of providing
the benefit unless there are specific rules for exempting it or valuing it.
Exempt benefits include:
•
•
•
•
One mobile phone.
Relocation and removal expenses up to £8,000.
Employer funded training (if training relevant for the job).
Staff canteen or restaurant (provided it’s made available to all employees).
The calculation of the taxable benefit is reduced proportionally if the benefit is provided for only part of
the tax year.
In most cases, contributions towards the provision of the benefit are deducted from the taxable amount
of the benefit.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
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ACCA TX | ExPress Notes
The ExP Group
Assessable benefit – Living Accommodation
An employee provided with living accommodation by their employer, and which is not exempt jobrelated accommodation, would be assessed as follows:
Benefit
All properties
Additional charge for “expensive properties”
Higher of:
1. Annual value of the accommodation
(figure will be given in the exam), and
2. The rent paid by the employer.
(Cost* minus £75,000) x official rate of
interest at the start of the year, 2%% for
2021/22 (interest rate will be provided in the
exam).
* If the employer acquired the property more than 6 years before providing it to the employee the
market value, when first provided to the employee, should be used rather than cost.
Assessable benefit – motor cars
This benefit is examined on a regular basis.
Benefit:
List price when new x “relevant %”.
Note the list price is the published brochure price when the car was first registered. It may be reduced
by a maximum contribution paid towards the car of £5,000.
The relevant % depends on the CO2 emissions of the car with the broad concept being that the more
un-environmentally friendly the car is the higher the tax charge.
For hybrid-electric motor cars with CO2 emissions between 1 – 50 grams per km the electric range of the
car is relevant:
Electric range in miles
≥ 130
70-129
40-69
30-39
<30
%
1
4
7
11
13
For electric-powered cars with zero CO2 emissions the benefit is 1%.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 9
ACCA TX | ExPress Notes
The ExP Group
For petrol cars the % is calculated as follows:
CO2 emissions grams per km
% (for petrol cars and diesel cars meeting the
RDE2 standard)
51 - 54
55
14
15
Each complete additional 5 grams above 55
grams
Add an additional 1% to the 14% up to the
maximum of 37%
For diesel cars that do not meet the RDE2 standard 4% is added to the figures above, but the maximum
is still 37%.
Example – petrol
Throughout 2021/22, John is provided with a petrol- powered car that has a list price of £22,000 and
CO2 emissions of 147 grams. He contributes £100 per month towards the use of the car.
Answer:
Percentage:
Base %
Plus 1% for each complete 5 grams of CO2 above 55 grams (i.e.
55 to 145 = 18%)
15%
18%
Relevant %
33%
% x list price = 33% x £22,000
Less contributions (£100 x 12 months)
Taxable benefit
£7,260
(£1,200)
£6,060
Note that the car benefit covers the servicing and maintenance costs but does not include any private
fuel that is paid for by the employer.
Assessable benefit – private fuel
Some employers may pay all or part of the private fuel of an employee. The provision of fuel for private
use is a separate benefit from the provision of a car.
The benefit is calculated as follows:
“Relevant %” as calculated for the car benefit x “base figure”.
For 2021/22 the base figure is £24,600 and will be given in the exam.
Using the previous example, if the individual had been provided with fuel for private use the calculation
of the benefit for the provision of private fuel would be:
(“Relevant %” as calculated for the car benefit x “base figure”) =
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 10
ACCA TX | ExPress Notes
The ExP Group
33% x £24,600 = £8,118.
Assessable benefit – private use of vans
For 2021/22 the benefit for the private use of a van is a flat rate scale of £3,500 pa. No benefit arises if
the private use of the van is insignificant. If fuel is provided for private mileage, then this is assessable
at a £669 benefit charge.
Private use of employer’s assets
For private use of assets other than cars, vans and mobile phones (which have different rules) the
general rule is that the benefit is:
20% of an asset’s market value at the time it was first provided.
Gift of asset – no previous private use.
If an employer buys an asset and then it is given to an employee, the benefit is the cost of the asset to
the employer.
Gift of asset – after previous private use
If an asset has been used by an employee and then gifted the benefit is calculated as follows:
Higher of:
1. The market value of the asset when gifted, and
2. The market value of the asset when first made available less the benefits assessed on the
individual during the time the individual used it but didn’t own it.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 11
ACCA TX | ExPress Notes
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4
The ExP Group
Income Tax –
Trading Income
The Big Picture
Trading income is a very important part of the syllabus and is almost always examined in one way or
another.
Key Knowledge – income tax: trading income
A person receives trading income if he has his own “business”. A person who receives trading income is
known as one of the following:
•
•
•
a “sole trader”
self employed
independent consultant
A person who is employed by a company receives employment income and not trading income.
Note that a person can receive both employment income (e.g. from a part time job) and trading income
(e.g. from a part-time business selling items over the internet)
Badges of trade
This is the term which refers to various tests (or badges) to ascertain whether a particular transaction
that an individual undertakes is a capital item (and hence treated under CGT) or a trading item (and
hence treated under income tax).
Badges:
1. Subject matter – are the items that were transacted typically items that are used for trading?
2. Frequency of transactions – the more often the transaction is undertaken the more likely it is that
the taxpayer is trading.
3. Length of ownership – a shorter period of ownership is more likely to indicate trading.
4. Profit motive – a clear intention to make a profit may indicate a trading.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 12
ACCA TX | ExPress Notes
The ExP Group
5. Supplementary work and marketing – additional work undertaken on the items to make them
more marketable may indicate trading.
6. Method of acquisition – an involuntary acquisition of the item (e.g. through inheritance) and
subsequent sale is not likely to indicate trading.
Basis of assessment
An individual who is self-employed must prepare accounts. These accounts can be for whatever
accounting period end the individual chooses. The accounts are then adjusted for tax purposes to arrive
at the trading income figure (see adjustment of accounting profit section below).
The trading income figure is then assessed on the individual using the current year basis (CYB) rules.
This is where the trading income assessed in a tax year is the amount of the 12- month accounting
period ending in that tax year.
For example, an individual that prepares accounts to 31 December and has adjusted trading income of
£35,000 for the year ended 31 December 2021 would have trading income of £35,000 in the tax year
2021/22.
Adjustment of the accounting profit
An individual’s accounts must be adjusted to obtain the tax adjusted trading profit.
Tax adjusted trading profit
£
£
28,000
Net profit per accounts
Add:
Less:
Disallowed expenditure
Taxable trading income not included in accounts
Income included within the accounts but not taxable as
trading income
Expenditure not in the accounts but allowable as a trading
deduction
Capital allowances
5,000
4,250
9,250
37,250
1,000
250
3,000
Tax adjusted trading profit
(4,250)
33,000
Disallowable expenditure
General rule: Only expenditure incurred wholly and exclusively for the purposes of the trade is allowable.
Some of the more common forms of disallowable expenditure include:
•
Capital expenditure
•
Depreciation or amortization charges
•
Appropriations (withdrawals) of funds from the business by the sole trader
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
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Page 13
ACCA TX | ExPress Notes
The ExP Group
•
Excessive salary paid to a sole trader’s family member
•
3rd party entertaining (note that employee entertaining is allowable if it is not incidental to the
entertainment of others)
•
A non-trade debt written-off.
•
Subscriptions that are not related to the trade
•
Gifts to customers, unless they satisfy all of the following:
o
o
o
Cost less than £50 per recipient per year, and
The gift is not food, drink, tobacco or vouchers, and
The gift carries the name, logo, or advertisement for the business
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 14
ACCA TX | ExPress Notes
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The ExP Group
Capital Allowances
The Big Picture
Depreciation is an accounting adjustment. There are various methods that a business can use to
calculate depreciation. For example, straight line method and reducing balance method.
Chapter 4 told us that depreciation charged to the income statement is not an allowable expense and
instead is added back in the calculation of the tax adjusted trading profit.
Key Knowledge – capital allowances
Capital allowances are tax allowable amounts that are calculated according to set specific rules. In
simple terms, capital allowances could be regarded as the tax equivalent of the accounting depreciation
charge.
Capital allowances are claimed on qualifying expenditure incurred on “Plant” (defined) and “Machinery”
(not defined)
Plant and Machinery (P&M)
P&M includes many assets. The most common ones found in the exams include:
•
•
•
•
•
Machinery
Vehicles (cars and lorries)
Computers (hardware and software)
Office furniture and equipment
Moveable partitioning
Writing down allowance (WDA)
An annual WDA of 18% is given on a reducing balance basis.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
These materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advi ce on any specific issue. Refer
to our full terms and conditions of use. No liability for damag e arising from use of these notes will be accepted by the ExP Group.
Page 15
ACCA TX | ExPress Notes
The ExP Group
Annual Investment Allowance (AIA)
The AIA is a 100% allowance for the first £1,000,000 spent on P&M by a business in its 12- month
accounting period.
•
•
•
•
Available to all businesses.
Not available on cars.
For accounting periods >12 months or <12 months (long or short accounting periods), the
£1,000,000 is pro-rated.
If a business spends more than £1,000,000 in a 12- month period, the first £1,000,000 is eligible
for AIA and the balance is eligible for WDA.
Motor cars
Cars are treated according to their CO2 emissions.
Cars do not qualify for AIA. However, any expenditure on a NEW zero emission car will qualify for a First
Year Allowance of 100% instead of the WDA.
CO2 Emissions
Treatment
0g/km
1-50g/km
100% FYA if purchased new only
Eligible for 18% WDA (part of main pool with no AIA or
FYA)
Eligible for 6% WDA (part of special rate pool with no
AIA or FYA)
>50g/km
Private use assets
If the sole trader uses an asset partly for business purposes and partly for private purposes, the asset is
kept in a separate column and only the business proportion of the asset is eligible for capital allowances.
Note that private use assets are only present for individuals. Companies never have private use assets in
their calculation as companies never use assets privately!
Special Rate Pool
Qualifying expenditure on long life assets (assets with a life >25 years) or high CO2 emission cars
(>50g/km attract a WDA of 6% rather than 18%.
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obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
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Page 16
ACCA TX | ExPress Notes
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The ExP Group
Trading Income –
Basis of Assessment
The Big Picture
Chapter 4 introduced the concept of the Current Year Basis (CYB) whereby the adjusted trading profit in
an accounting period is assessed in the tax year in which the accounting period ends. There are many
other rules which need to be looked at.
Key Knowledge – trading income: basis of assessment
Opening Year Rules
There are special rules for when a sole trader commences business:
Year 1. The profits assessed in year one is on the “actual basis”. This is the adjusted profits from the
commencement of business until the following 5 April.
Year 2. If there is a 12- month period of account ending in the 2nd tax year, then use the CYB. If there is
not a 12- month accounting period, then use one of the following:
Period of Account
Period Assessed
a) the period of account is less than 12
months after commencement
1st 12 months of trading.
b) the period of account is more than 12
months after commencement
The 12 months ending on the accounting
date in the 2nd year.
c) there is no period of account ending in
the 2nd tax year
The actual profits between 6th April and
5th April.
Year 3. Assess the 12 months ended on the accounting date in that year. This will normally be the CYB.
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As a result of the above rules there is a possibility that profits for certain periods will be assessed in
more than one year. These profits are known as “overlap profits”. These overlap profits are carried
forward and usually deducted from the assessment in the year the business ceases.
Ongoing business rules
These rules have already been discussed and are the adjusted profits for an accounting period that end
in a particular tax year. This is known as the CYB (current year basis).
Closing year rules
The broad idea here is that when a business ceases, there will be no profits which have not been taxed.
The calculation method is as follows:
1) Identify the tax year in which the business ceases.
2) For the penultimate tax year, identify the CYB assessment.
3) Calculate the profits for the period from the date last assessed in 2) above until the date of
cessation and from this figure deduct any overlap profits.
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7
7
The ExP Group
Trading Losses (for
Sole Traders)
The Big Picture
When an individual has a tax adjusted trading amount which is negative, this is known as a trading loss.
The trading profit figure in the income tax computation is £nil.
A trading loss may be offset against certain other income in accordance with the rules discussed in this
chapter.
The main reliefs are:
•
Carry forward of the trading loss against future trading profits.
•
Offset the loss against total income in the tax year of the loss and / or the
preceding tax year.
•
If a claim against total income has been made there is an optional claim against
chargeable gains in the tax year of the loss and / or the preceding tax year.
•
Offset of opening year loss against total income
•
Offset of terminal loss against previous trading profits
Carry forward of trading loss
The trading loss is automatically carried forward and set against the first available profit from the same
trade.
The amount of the loss to be set off is as much as possible.
Offset of loss against total income
The loss can be offset against total income in the tax year of the loss and / or the preceding tax year.
As an example, a loss in an accounting period ending 31 December 2021 arises in the tax year 2021/22
(under CYB). The loss could therefore be offset against total income in either 2021/22 or 2020/21.
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Loss relief under this method is optional and subject to a claim by the individual.
The loss relief is against total income and the maximum amount possible must be used for a given year.
Total income is before the offset of Personal Allowances (PA) and therefore there is a risk that utilising a
loss under this method could result in the PA being wasted.
Relieving trading losses against chargeable gains
If a loss remains after a claim against total income, a trading loss in 2021/22 can be offset against
chargeable gains in 2021/22 and / or 2020/21.
Offset of opening year loss against total income
A trading loss incurred in the first 4 tax years of operation can be offset against total income from the 3
years preceding the tax year of the loss. The loss is offset on a FIFO basis (i.e. against the earliest year
first)
Offset of terminal loss against previous trading profits
Unrelieved trading losses of the last 12 months of a business’s activity can be relieved against:
1) Trading profits in the year of cessation, and
2) Carried back and offset against trading profits for the 3 preceding tax years on a LIFO basis.
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ACCA TX | ExPress Notes
8
8
The ExP Group
Trading Income –
Partnerships
The Big Picture
In simple terms, partnerships are collections of sole traders that are working together. Profits from a
partnership need to be allocated between the partners and then each partner includes their share of the
partnership profit as trading income within their own income tax computation. The profits for the
partnership are firstly adjusted to obtain the tax adjusted trading profit (as per the adjustments required
for a sole trader mentioned at chapter 4).
The tax adjusted partnership profits are then allocated to each partner.
Calculation
The tax adjusted profits of the partnership are allocated to the partners in accordance with their
partnership profit sharing arrangements. Partners may be entitled to a fixed element such as “salary” or
interest on capital and these amounts are withdrawn first.
Example: Andrew and Barry are in partnership sharing profits equally after allocating a salary of
£10,000 to Andrew. In the year ended 31 December 2021, the adjusted trading profits of the
partnership were £50,000.
Y/E 31/12/21
Total
Andrew
Barry
Salary
£10,000
£10,000
-
Balance to allocate (1:1)
£40,000
£20,000
£20,000
£50,000
£30,000
£20,000
Trading profits
The account period ends on 31 December 2021. Therefore, under the CYB the trading profits will be
assessed in 2021/22 with Andrew being assessed on £30,000 and Barry on £20,000.
Loss relief in partnerships
Trading losses are allocated between the partners in the same manner as trading profits are. Each
partner can decide how they obtain relief. For example, partner A could carry the loss forward whilst
partner B decides to offset against current year total income.
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ACCA TX | ExPress Notes
9
9
The ExP Group
Property Income
The Big Picture
Property income represents income received by an individual from property.
Property business profits
This represents rental income received by a landlord.
The assessable property income on an individual is calculated as follows:
£
Rental income
12,000
Less: deductible expenses
2,500
Assessable property income
9,500
Income and expenses are normally treated according to the cash basis but in certain circumstances
the accruals basis. If the individual has more than one property, the income and expenses are
aggregated in the calculation.
The rules concerning whether expenses are deductible broadly follow the rules found within trading
income – wholly and exclusively. Examples of deductible expenses include insurance, repairs, and
agents’ fees.
Interest on a loan to buy or improve a non-residential property that is let is deductible from the
property income.
For 2021/22 tax relief for interest on loans for let residential property is given by deducting 20% of
the costs from the taxpayer’s income tax liability.
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Losses on property are offset against any property income in the year of the loss. If there are any
unrelieved property losses, they are carried forward and offset against future property income.
Furnished holiday lettings (FHL)
There are various requirements for a letting to be able to qualify as FHL. Broadly speaking the furnished
property must actually be let for 105 days a year, on a commercial basis and be available to let for 210
days a year. Long term lets must not exceed 155 days.
Property lettings which qualify as FHL have many taxation advantages. These advantages include the
profits being treated as relevant earnings for the calculation of relief for personal pension contributions,
normal capital allowances being available on plant and machinery and the availability of Capital Gains
Tax rollover, gift relief and business asset disposal relief.
Premiums received on the grant of a short lease
A short lease is a lease for 50 years or less.
Part of the premium received will be treated as though it was property income received by the landlord.
The property income proportion of the premium received will be calculated as follows:
The premium
Less: 2% x (length of lease – 1) x premium
Example: Premium: £20,000; Length of lease: 15 years
£
Premium received
Less: 2% x (length of lease – 1) x premium
20,000
[2% x (15-1) x £20,000]
Property business income
(5,600)
14,400
Rent-a-room relief
Gross annual rent of £7,500 and below received for the “rent of a room” in a person’s main residence is
exempt.
If an individual receives such rent and it exceeds £7,500, the individual can either:
1) Choose to pay tax on the excess of the rent over £7,500 or,
2) Be taxed in the normal way for property income (rent minus expenses).
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Page 23
ACCA TX | ExPress Notes
10
0
The ExP Group
Investment Income
Savings income - Bank and Building Society interest
Note that for the purposes of the exam; assume that a Bank and a Building Society is the same thing.
Rate of tax on savings income
There is a savings income nil rate band of £1,000 for basic rate taxpayers and £500 for higher rate
taxpayers.
Savings income is normally taxed at the “normal rates” (see Chapter 2).
However, if savings income falls within the first £5,000 of taxable income, then savings income is taxed
at 0%.
To ascertain whether this 0% rate applies, savings income goes “on top” of other income. If the savings
income is within the first £5,000 of taxable income, then the 0% rate applies to the savings income.
Rate of tax on dividend income.
Dividends are treated as being the top part of an individual’s income and “go on top” of other income
and savings income.
The first £2,000 of dividend income falls within the dividend nil rate band and is tax free. Note that this
dividend nil rate band applies to all taxpayers.
Dividends are then taxed as follows:
Dividend income in the basic rate band (the first £37,700):
7.5%
Dividend income in the higher rate band (£37,701 to £150,000):
32.5%
Dividend income in the additional rate band (above £150,000):
38.1%
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Page 24
ACCA TX | ExPress Notes
11
1
The ExP Group
Pensions
The Big Picture
Pensions are in effect tax efficient retirement savings scheme.
Key Knowledge – pensions
There are two main types of pension schemes:
1. Occupational pension schemes (certain employees)
2. Personal pension schemes (employees, sole traders and unemployed)
Individuals can make contributions to a pension scheme of any amount but will only be eligible for tax
relief on contributions as follows:
The higher of:
1. £3,600, and
2. 100% of the individual’s “relevant earnings” (relevant earnings include trading profits,
employment income, FHL but not investment income)
Method of obtaining relief – occupational pension scheme
Payments to an occupational pension scheme obtain tax relief at source. The pension payment made by
the employee is deducted from the employment income and the employer calculates PAYE on the net
amount.
If an employer also makes contributions to the employee’s occupational scheme, those deductions are
tax deductible in calculating the employer’s trading income. The contributions will not be treated as a
benefit on the employee.
Method of obtaining relief – personal pension scheme
Basic rate tax relief – relief is given automatically as the contributions are made net of the basic rate of
income tax (20%).
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Higher rate tax relief – relief is given by “extending the basic rate band”. If an individual pays a
contribution of £8,000 (net), the contribution is “grossed up” by 100/80 to obtain a gross contribution of
£10,000.
The basic rate band of £37,700 is then extended by the gross contribution of £10,000 to obtain a
revised basic rate band of £47,700.
The additional rate threshold is extended to £160,000 (£150,000 + £10,000).
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ACCA TX | ExPress Notes
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12
National Insurance
Contributions
National Insurance Contributions (NIC) are not tax as such. Instead, they are social security
contributions which are payable in addition to any taxes that may be due.
There are various classes of NIC:
Class
Payable by
Class 1 primary
Employee
Class 1 secondary
Employer
Class 1A
Employer
Class 2
Self employed
Class 4
Self employed
Class 1 primary and secondary NIC calculated as a % on gross earnings (in effect on cash
remuneration such as salary and bonuses but not on most benefits)
The percentages for 2020/21 are
Class 1 Employee
£1 - £9,568 per year
£9,569 - £50,270, per year
Above £50,270
Nil%
12.0%
2.0%
Class 1 Employer
£1 - £8,840 per year
Above £8,841
Employment allowance
Nil%
13.8%
£4,000
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Class 1A NIC is payable at a rate of 13.8% by employers on most taxable benefits provided to an
employee.
Class 2 NIC is payable at a flat rate of £3.05 per week by self-employed individuals.
Class 4 NIC is also paid by self-employed individuals. Class 4 NIC is calculated according to the
percentages below on the individual’s taxable trading profits.
Class 4
£1 - £9,568 per year
£9,569 - £50,270 per year
Above £50,270
Nil %
9.0 %
2.0%
NIC rates will be provided in the exam.
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ACCA TX | ExPress Notes
13
The ExP Group
Corporation Tax
The Big Picture
Corporation tax is a key area of the syllabus and will be examined.
Key Knowledge – corporation tax
A period of account is the period that the company prepares accounts for. A company can generally
prepare accounts that end on any date that the company chooses and whilst it is normally 12 months
long, it can be shorter or longer.
An accounting period is the period for which the charge to corporation tax is made. An accounting
period can never exceed 12 months. Most of the time, the period of account and the accounting period
are the same dates (i.e. when the period of account is 12 months long)
If a company has a period of account longer than 12 months the period of account is divided with the
maximum length of an accounting period being 12 months. For example, a period of account of 18
months would have an accounting period of 12 months followed by an accounting period of 6 months.
Corporation tax computation – year ended 31 March 2022
£
Trading profits
150,000
Property income
30,000
Interest income
5,000
Chargeable gains
50,000
Total profits
235,000
Less: Qualifying charitable donations (QCD)
(35,000)
Taxable Total Profits (TTP)
200,000
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There are many similarities between how items are treated for corporation tax purposes and how they
are for income tax purposes. The main differences are:
1. Trading income – main differences for companies
There are no private use asset adjustments. Within income tax, a self-employed person would need to
adjust profits for the deductibility for private use. With companies, the companies themselves clearly
don’t use assets privately. The private use is taxed on the employees via the benefit on private use.
Similarly, for capital allowances purposes there are no private use assets for a company.
2. Property income – main differences for companies
Property income is assessed on the “accruals” basis, but a company is assessed according to the
company’s accounting period whilst an individual is assessed according to the tax year.
Interest on a loan acquired to purchase or improve an investment property is treated under the loan
relationship rules by companies.
3. Dividends – main differences for companies
Dividends received by companies, UK or overseas, are not included within TTP. Individuals however
include dividends received within their income tax computations.
4. Chargeable gains – main differences for companies
Companies include capital gains as chargeable gains within TTP and pay corporation tax on them.
Individuals pay Capital Gains Tax on gains and not income tax.
5. Charitable payments – main differences for companies
Companies make Qualifying Charitable Donations (QCDs) and the amount paid is gross and is deducted
within TTP. Individuals who make Gift Aid payments net of tax to charities “extend the basic rate band”.
Corporation Tax
The corporation tax rate applied to TTP is the published rate for the Financial Year. The Financial Year
starts on 1 April and ends on 31 March in the following year. Financial Year 2021 runs from 1 April 2021
to 31 March 2022. The rate for financial years 2018-2021 is 19%.
Augmented profits are needed to identify whether a company is large and needs to pay the tax liability
in quarterly instalments. A company is large if its augmented profits are more than £1.5 million (prorated for periods of less than 12 months).
“Augmented Profits” (A) = TTP + Dividends received (but do NOT include dividends from related 51%
group companies)
Trading losses (for companies)
The company can utilise a trading loss in the following ways:
•
•
Carry forward the loss to offset against future total profits before QCDs (partial claims are
allowed)
Offset against the current year total profits before QCDs (optional but no partial claims allowed)
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ACCA TX | ExPress Notes
•
The ExP Group
(After offsetting against current year) carry back 12 months against total profits before QCDs
(optional but no partial claims allowed). If a loss arises in the final 12 months of trading it is
possible to make a claim to carry the loss back against total profits of the previous three years on
a LIFO basis.
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Page 31
ACCA TX | ExPress Notes
14
The ExP Group
Chargeable Gains
(for Companies)
The Big Picture
The taxation of capital gains on individuals is dealt with in depth at chapter 16.
Key Knowledge – chargeable gains (for companies)
The calculation of chargeable gains for companies is similar to that for individuals except for a few major
differences. The main ones being:
Companies
Individuals
Pay corporation tax on chargeable gains (i.e.
the gains are part of TTP).
Pay Capital Gains tax (CGT) on the gains and
not income tax on the gains.
Companies do not receive an annual exempt
amount (AEA).
Individuals do receive an annual exempt
amount (AEA).
Companies receive indexation allowance (IA).
Individuals do not receive indexation allowance
The share matching rules are different.
The share matching rules are different.
Chargeable gains Pro forma (for companies)
£
Disposal proceeds
100,000
Less: incidental costs of disposal (e.g. advertising or auction fees)
(2,000)
Net Proceeds
98,000
Less: allowable expenditure
Unindexed gain
Less: indexation allowance (see below)
Chargeable gain / (loss)
(38,000)
60,000
(15,000)
45,000
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The ExP Group
Indexation allowance gives a company some relief for the effect of inflation during the period of
ownership of the asset.
IA= the cost of the asset x the movement in the Retail Price Index (RPI) [this movement in the RPI is
known as the indexation factor]
IA is frozen on December 2017
Share matching Rules (for companies)
When shares in a company are sold, the calculation needs to identify which shares were sold. The
shares sold are matched with the following purchases:
1. Shares acquired on the same day.
2. Shares acquired in the 9 days before the sale (FIFO basis).
3. Shares in the share pool
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Page 33
ACCA TX | ExPress Notes
15
The ExP Group
Corporate Groups
The Big Picture
Corporate Groups
When a group of companies exist, there are 2 main relationships that you need to be aware of:
•
•
Group loss relief
Gains group
Group loss relief group
Definition of group relief group.
Two companies are part of a group relief group, if:
•
One owns 75% of the other, or
•
Both are 75% subsidiaries of a 3rd company
For sub-subsidiaries to be included within a group relief group then the top company should own at least
75% of the sub-subsidiary.
Implications of being part of a group relief group:
The main implication is that trading losses of one company may be surrendered (“given”) to another
group relief group company.
Gains group
Definition of gains group.
A capital gains group comprises the parent company and its 75% subsidiaries. The parent company
must have an effective (indirect) interest of more than 50% in sub-subsidiaries.
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The ExP Group
The Implications of being part of a gains group include:
- assets can be transferred around the group in a tax efficient way
- there are efficient ways of utilising capital losses within the group
- rollover relief can be maximised.
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Page 35
ACCA TX | ExPress Notes
16
The ExP Group
Capital Gains Tax
(CGT)
The Big Picture
CGT is paid by individuals on chargeable disposals of chargeable assets. Companies do not pay CGT but
instead pay corporation tax on their chargeable gains. This chapter only deals with CGT for individuals.
For the purposes of the TX exam, only individuals that are UK tax resident are liable to CGT. The assets
disposed of can be located anywhere in the world.
Individuals have a CGT annual exempt amount (AEA) (2021/22: £12,300). Gains up to this amount are
not taxed.
Capital gains are taxed after taxable income (i.e. as the top slice).
•
•
Taxable gains within the basic rate band are taxed at 10% (18% for residential property).
Taxable gains above the basic rate band are taxed at 20% (28% for residential property).
Most capital assets are chargeable to CGT. There are however a small number of exempt assets which
are outside the scope of CGT. These include:
•
•
•
•
•
Main residence
Cars (including classic or vintage cars)
Certain “chattels”
National Savings Certificates
Investments held within ISAs
Pro forma for computation of capital gains for individuals
£
Disposal proceeds
Less: incidental costs of disposal (e.g. advertising or auction fees)
100,000
(2,000)
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Net Proceeds
The ExP Group
98,000
Less: allowable expenditure
-
Cost of acquisition (including acquisition expenses)
(28,000)
-
Cost of enhancements
(10,000)
Capital gain / (loss)
60,000
The gains and losses for an individual are then combined and taxed.
The calculation of CGT is as follows:
£
Capital gain on asset #1
Capital gain on asset #2
Capital loss on asset #3
Net gains for the tax year
Less: capital loss brought forward
Net capital gain
10,000
5,000
20,000
35,000
(4,900)
30,100
Less: AEA
(12,300)
Taxable gains
17,800
Note that capital losses brought forward are only used to the extent of bringing the net gains for the
current year down to the level of the AEA. The AEA is therefore not wasted.
Transfers between husband and wife (or civil partners)
Assets transferred between spouses are deemed to be transferred at such a value that neither a gain
nor a loss will be created.
The spouse transferring the asset is deemed to have transferred it at the original acquisition cost. When
the receiving spouse subsequently disposes of the asset, the acquisition cost is equal to the original
acquisition cost.
Part disposals
When an asset is partly disposed of, we need to identify the proportion of the original cost that relates
to that part. The proportion of the original cost allocated to the disposal is based on the value of the
part disposed of and the value of the part retained.
Example:
John bought 5,000m2 of land for £100,000 in January 2005.
He has just sold 3,000m2 for £80,000. The market value of the remaining 2,000m2 is £30,000.
The “cost” of the land sold for inclusion within the disposal calculation is:
Cost x [A / (A+B)] where A is the MV of the part sold and B is the MV of the part retained.
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Therefore, the cost for the part disposed in this example is £100,000 x [£80,000 / (£80,000 + £30,000)]
= £72,727.
Chattels
Chattels are tangible, movable items. Examples include antiques, vases, furniture or paintings. There are
special rules for chattels that were bought or sold for less than £6,000.
Bought for ≤ £6,000
Bought for > £6,000
Sold for
≤£6,000
Exempt from CGT
Gross sale proceeds deemed to
be £6,000
Sold for
>£6,000
Gain calculated as normal, but
gain limited to a maximum of
5/3 x (gross sale proceeds £6,000)
CGT calculated as normal
Share matching Rules (for individuals)
When an individual sells shares in a company, the calculation needs to identify which shares were sold.
The shares sold are matched with purchases in the following order:
1. Shares acquired on the same day.
2. Shares acquired in the next 30 days after the sale.
3. Shares in the share pool
The share pool contains details of the purchase and sale of shares in a particular company. When shares
are disposed of out of the share pool, the shares are disposed of at their average cost.
Reliefs – Private Residence Relief (PRR)
PRR is available when an individual sells a property that has been their main residence at some time
during the period of ownership.
The gain that is exempt is calculated as the gain x (period of occupation / total period of ownership).
Occupation includes both actual occupation and deemed occupation.
“Deemed occupation” includes:
•
•
•
•
The last 9 months of ownership (exempt, unconditionally)
Up to 3 years absence for any reason (if at some time preceded and followed by actual occupation)
Up to 4 years absence if working elsewhere in the UK (if at some time preceded and followed by
actual occupation)
Any period of absence if working abroad (if at some time preceded and followed by actual
occupation)
Reliefs – Business asset disposal relief
Business asset disposal relief (BADR) reduces the CGT payable on certain qualifying business disposals.
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The relief is:
•
•
The first £1m of gains on qualifying business disposals will be taxed at 10%.
Gains above £1m will be taxed at the usual CGT rates.
Qualifying business disposals include:
•
•
Businesses carried on by the individual (including share in partnership)
Shares in an individual’s personal trading company (if the individual is an employee of the
company).
Reliefs – Rollover Relief
When a qualifying business asset is sold, any gain arising can be “rolled into” a replacement qualifying
asset. The gain is therefore deferred by reducing the base cost of the replacement asset by the gain
rolled over.
Qualifying assets include:
•
•
•
Land & buildings
Goodwill
Fixed plant & machinery (i.e. not moveable)
The replacement asset must be acquired between one year in advance of the disposal and 3 years after
the disposal.
If the replacement asset is a “depreciating asset” (in effect, an asset with a life of ≤ 60 years) the gain
cannot be rolled over. Instead, the gain will be deferred until the earliest of the following:
•
•
•
The date the replacement asset is sold.
The date the replacement asset ceases to be used in the business.
10 years from the date of acquisition of the replacement asset.
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obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
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ACCA TX | ExPress Notes
17
The ExP Group
Inheritance Tax
(IHT)
The Big Picture
IHT is a capital tax that is charged on a transfer of value of chargeable property by a chargeable
person.
A charge to IHT occurs on:
1. The death of an individual.
2. Lifetime gifts in the 7 years preceding death.
3. Certain lifetime transfers.
Key Knowledge – transfer of value, chargeable property
& chargeable person
The amount of the “transfer of value” is based on the fall in value of the donor’s estate.
Note that this is does not have to necessarily be the open market value of the item.
For example, the market value of a 2% shareholding in a company will be lower than the fall in value for
an individual that owns 51% of the company and then sells 2% of his shareholding. (i.e. because the
transfer of the 2% has resulted in control of the company being lost).
Chargeable property represents property that a person owns or is entitled to. Unlike CGT, there are
no exempt assets for IHT purposes.
For the purposes of the TX exam a chargeable person will be a UK domiciled individual who is liable
for IHT on their worldwide assets.
Key Knowledge – when is IHT charged?
IHT is charged:
1. When a person dies.
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2. On certain lifetime transfers.
On death:
The main occasion when IHT is charged is on the death of an individual. In this situation IHT is levied on
the estate at death as well as any transfers of non-exempt assets in the 7 years before death.
Lifetime transfers:
3 different types of transfers can be made by an individual during their lifetime:
Type of transfer
Exempt
Examples
Small gift
exemption and
Annual
exemption.
Treatment
during life
Treatment if
donor lives for
7 years.
Treatment on
death within 7
years.
Exempt from
IHT
Exempt from
IHT
Exempt from
IHT
Potentially
Exempt
Transfers
(PETs)
Most lifetime gifts
by individuals.
No IHT
payable.
Exempt from
IHT
PET becomes
chargeable to
IHT at 40%.
Chargeable
Lifetime
Transfers
(CLTs)
For TX, all gifts
into Trusts.
IHT to pay at
20% or 25%.
No further IHT
to pay.
Possibly extra
IHT to pay.
Exemptions (lifetime gifts only)
•
•
•
•
Small gift exemption (≤ £250 per recipient per year).
Annual exemption (£3,000 per year and can be carried forward for one year if not used).
Normal expenditure from income.
Marriage exemption.
Exemptions (both lifetime and on death)
•
Transfers between spouses (including civil partnerships).
Key Knowledge – calculation of IHT on lifetime
transfers
IHT on CLTs (transfers into a Trust)
Transfer of value
X
Less: exemptions
(X)
Chargeable amount
X
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obtained in advance if you are planning on using them on a training course you’re delivering. Reproduction by any means fo r any other purpose is prohibited.
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Nil Rate Band (NRB) – all individuals are entitled to a NRB (2021/22: £325,000)
Chargeable amount
Less: NRB available after deduction of gross
chargeable transfers in the last 7 years
X
(X)
Amount chargeable to IHT
X
The rate of IHT applied depends on who pays the tax:
•
If the recipient pays the tax - i.e. the trustees (donee). The gift is referred to as a gross gift and
the tax rate is 20%.
•
If the transferor pays the tax (i.e. the donor) the gift is referred to as a net gift and the tax rate
is 25%.
Key Knowledge – calculation of IHT following the death
of the donor
On the death of the donor, IHT is payable on:
1. Transfers within the previous 7 years (i.e. PETs that now become chargeable and potential
additional IHT on CLTs)
Broadly speaking, the tax on transfers within the previous 7 years will be taxed at 40% and relief will be
given for taper relief (see below) as well as IHT already paid on lifetime transfers.
Taper Relief – the idea behind this is that if people survive for at least 3 years after the transfer the IHT
charge is reduced. The rates of taper relief are as follows:
Time between date of gift
and date of death.
0
3
4
5
6
to
to
to
to
to
3
4
5
6
7
years
years
years
years
years
Taper Relief (reduction %
applied to the tax due)
Nil
20%
40%
60%
80%
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Example – death after a lifetime transfer
John made a gift (PET) of £350,000 on 10 January 2018. He died on 10 April 2021. He made no other
lifetime transfers.
The death occurred in 2021/22.
PET
Less: Nil Rate Band
IHT due on
IHT due at 40% [£25,000 x 40%]
£350,000
(£325,000)
£25,000
£10,000
Less: Taper Relief of 20% (within 3 to 4 years of death)
(£2,000)
IHT due after Taper Relief
£8,000
2. The value of the estate at death.
Calculation of IHT at 40% on the estate at death is looked at after the lifetime transfers have been dealt
with. Reasonable funeral expenses, outstanding tax liabilities and other debt is deducted from the assets
before deducting the available NRB.
3. Residence nil rate band (RNRB)
An additional nil rate band up to a maximum of £175,000 in 2021/22, is available when calculating the
IHT on the death estate if a residential house which has been the deceased’s residence is inherited on
death by the deceased’s direct descendants. In other words, if a parent dies and leaves their house to a
child the RNRB will be given.
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18
Value Added Tax
(VAT)
The Big Picture
VAT is an indirect tax which is ultimately borne by the final customer.
VAT occurs when a taxable person makes a taxable supply.
Taxable person: an individual or company that is or should be registered for VAT.
Taxable supply: sales and purchases of goods or services which are not VAT exempt or outside the
scope of VAT.
Input VAT
Taxable person
Output VAT
Input VAT: A taxable person pays input VAT on its purchases of goods or services.
Output VAT: A taxable person charges output VAT on its sales of goods or services.
At the end of each tax period (normally a 3- month period) the input and output VAT is netted off and
an excess of output VAT is paid to HMRC whilst an excess of input VAT is recovered from HMRC.
Standard rated supplies: 20% VAT rate. Most goods and services are standard rated.
Zero rated supplies: 0% VAT rate (but importantly still within the scope of VAT so can claim input
VAT and taken into account when determining the date from which the entity should be registered).
Examples of zero rated include:
•
•
•
Children’s clothes
Books & newspapers
Non luxury food
Exempt supplies: no VAT is charged, and input VAT cannot be reclaimed.
Examples of exempt supplies include:
•
Land
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•
•
•
The ExP Group
Financial services
Education
Insurance
VAT Registration Requirements
Compulsory registration is required when either:
1. The taxable supplies over the previous 12 months (or since trade commencement date) exceed
the registration limit (currently £85,000). HMRC must be notified within 30 days of the end of the
month in which the registration limit is exceeded. Registration begins from the end of the month
after the month in which the limit was exceeded.
or
2. The taxable supplies over the next 30 days alone are anticipated to exceed the registration limit
(currently £85,000). HMRC should be informed prior to the end of the 30 days. Registration
begins at the start of the 30 days.
Voluntary registration is possible. Advantages include being able to recover relevant input VAT as well as
providing an impression of a business being larger than it really is. Disadvantages include the increased
administrative burden.
Pre-registration expenses
Input VAT on goods acquired for business purposes can be recovered if they are still within inventory at
date of registration. Given that they are in stock when the business registers for VAT, output VAT will be
charged when the goods are sold so it is only fair that input VAT can be claimed (goods acquired more
than 3 years prior to registration are excluded).
Input VAT on services provided in the 6 months prior to registration can be recovered.
Tax point
The tax point is the official date of supply for VAT purposes.
For goods, the basic tax point is when the goods are made available to the customer.
For services, the basic tax point is when the service is performed.
The basic tax point is amended in the following situations:
1. Before the basic tax point – if an invoice is issued or payment is received before the basic tax
point the date of the invoice or the payment becomes the tax point.
2. After the basic tax point – if an invoice is issued within 14 days of the basic tax point the date of
the invoice becomes the tax point.
VAT relief for impairment losses
If a taxable person makes a sale, output VAT is chargeable and will be payable to HMRC. If the debt
subsequently becomes irrecoverable it is said to be impaired. The taxable person can obtain VAT
impairment loss relief by in effect claiming the VAT on the irrecoverable debt as input VAT. To qualify for
VAT impairment losses relief the debt must be >6 months old and be written off in the seller’s accounts.
Disclaimer: © 2022 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Written permission need s to be
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Page 45