ACCA
TAXATION – UK VARIANT
STUDY NOTES
FA 2018
Exams from June 2019 – March 2020 sessions
Taxation - UK FA
Contents
EXAM FORMAT .................................................................................................................................................... 7
CHAPTER 1: INTRODUCTION TO TAX ................................................................................................................... 8
CHAPTER 2: INTRODUCTION TO INCOME TAX .................................................................................................. 14
CHAPTER 3: EMPLOYMENT INCOME ................................................................................................................. 38
CHAPTER 4: PROPERTY INCOME........................................................................................................................ 54
CHAPTER 5: TRADING PROFITS .......................................................................................................................... 62
CHAPTER 6: CAPITAL ALLOWANCES .................................................................................................................. 71
CHAPTER 7: PARTNERSHIP................................................................................................................................. 82
CHAPTER 8: BASIS PERIOD ................................................................................................................................. 86
CHAPTER 9: LOSS RELIEF .................................................................................................................................... 93
CHAPTER 10: NATIONAL INSURANCE CONTRIBUTIONS .................................................................................. 104
CHAPTER 11: PENSION .................................................................................................................................... 108
CHAPTER 12: INTRODUCTION TO CAPITAL GAINS TAX ................................................................................... 116
CHAPTER 13: SPECIAL RULES ........................................................................................................................... 130
CHAPTER 14: SHARES ...................................................................................................................................... 138
CHAPTER 15: RELIEFS....................................................................................................................................... 148
CHAPTER 16: INHERITANCE TAX ...................................................................................................................... 165
CHAPTER 17: INTRODUCTION TO CORPORATION TAX.................................................................................... 185
CHAPTER 18: LOSSES ....................................................................................................................................... 195
CHAPTER 19: GROUPS ..................................................................................................................................... 202
CHPATER 20: TAX ADMINISTRATION............................................................................................................... 211
CHPATER 21: VALUE ADDED TAX..................................................................................................................... 217
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IMPORTANT NOTE
The following notes have been updated to accommodate the changes in the tax legislation, as
specified in the ACCA Technical Article: Finance Act 2018
Some of the extracts and examples have been directly copied from the stated article, which can be
accessed via the following link:
https://www.accaglobal.com/pk/en/student/exam-support-resources/fundamentals-examsstudy-resources/f6/technical-articles/finance-act-2018.html
The following is an additional list of technical articles that have been used in the creation of these
notes and can all be found on the ACCA website:
https://www.accaglobal.com/pk/en/student/exam-support-resources/fundamentals-examsstudy-resources/f6/technical-articles.html#Taxation-(TX-UK)

Higher skills

Benefits

Adjustment of profit

Motor Cars

Chargeable Gains Part 1 and 2

Inheritance Tax Part 1 and 2

Groups

Value Added Tax Part 1 and 2
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EXAM FORMAT
Time: 3 Hours
Section
Assessment
Syllabus
area
15 Objective Test Questions
Entire
15 Objective Type Questions split Entire
equally between 3 Objective Test Case
Scenarios
3 Long Form Questions:

1 - 10 mark question
Entire

2 - 15 mark questions
B and E
A
B
C
Marks
Recommended Time
30
30
50 minutes
50 minutes
40
80 minutes
100
180 minutes
Assessment Types
Section A:
The technical concepts will be examined as Objective Test Questions, in the following possible formats:

Multiple Choice Questions (MCQs)

Multiple Response Questions (MRQs)

Fill in the Blanks

Drag and Drop

Drop Down List

Hot Spot

Hot Area
These will be a mix of computational and narrative.
Section B:
3 case scenarios will be provided in this section.
5 Objective test questions (format – one of the above listed) will be based around a common case scenario.
These will be a mix of computational and narrative.
For paper based exams Section A and Section B will only cover MCQs.
Section C:
This section will comprise of 3 long form questions (one worth 10 marks and the remaining worth 15
marks each) and this will be predominantly computational.
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CHAPTER 1: INTRODUCTION TO TAX
Definition:
Tax is a source of revenue for the government’s national budget. It is collected with the intention
of public spending and development of the state. Tax is a compulsory contribution applied on
salaries, business profits or added value of goods and services etc.
The taxation affairs are managed by the government in the United Kingdom by a dedicated tax
authority, known as Her Majesty's Revenue and Customs (HMRC).
Purpose of Taxation:
The HMRC uses various tax policies to encourage and discourage certain types of activities; trying
to balance out certain social, environmental, economical etc. factors, in the UK.
Economic:

Using the tax policies, the Government can control the spending and saving of the population. For
example: Savings can be encouraged through tax incentives offered when an individual deposits
their income in an Individual Savings Account (ISA), whereas spending on certain products such
as tobacco, alcoholic drinks etc. can be reduced by levying increased tax (duties).
Social:

Tax policies also bring about social justice when a progressive system of tax is applied. Under such
a system higher income earners pay higher tax amounts.
Tax systems can be:

Progressive: tax charged increases with the increase in income. Example: income tax

Proportional: regardless of level of income, tax proportion remains same. Example: VAT is
borne at the same rate by all consumers. This is felt to be regressive at times, as the
expense is felt more by low income earners.
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
Environmental:
Where possible and if a Government is dedicated to this cause, tax policies can be used to protect
the environment. In UK, the landfill tax discourages Corporations from storing wastage at landfill
sites and pushes them towards recycling to deal with wastage. Rules with greater tax impact on
cars with high CO2 emissions encourage manufacturers and consumers to shift towards
environment friendly cars.
Types of Tax:
Another form of tax classification is as follows:
Direct: Tax paid on income or profits, where the tax payer is aware of the amount being paid to
HMRC.
Indirect: Tax levied on goods and services, where the tax payer may be unaware of the exact
amount of tax suffered. This tax is normally passed on to HMRC via a third party.
Tax
Classification
Tax Payer
Income Tax
Direct
Individuals and Partnerships
Corporation Tax
Direct
Companies
Capital Gains Tax
Direct
Individuals, Partnerships and Companies
Inheritance Tax
Direct
Individuals
Value Added Tax
Indirect
Businesses
Tax can also be categorised as:
Revenue Tax: tax charged on income or revenue – Income Tax or Corporation Tax; or
Capital Tax: tax charged on capital assets – Capital Gains Tax or Inheritance Tax.
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UK Tax System Structure:
The structure of the UK tax system can be shown as follows:
Chancellor of the Exchequer

Treasury
HMRC
Chancellor of the Exchequer: The Chancellor has the overall responsibility for the UK tax
system and one of his roles includes producing the Budget each year.

Treasury: It is responsible for assessing and advising on the general design of the tax system
and its components.

HMRC is responsible for the collection and administration of the taxes as its purpose is to
make sure that money is available to fund public services.
The Commissioners of HMRC implement tax law and oversee its administration whereas the
Officers can assist individuals in their tax calculation.
Interaction with other tax jurisdictions:

Majority of the countries have tax agreements to ensure that income earned by an individual is
not taxed twice.

So income earned by individual would be taxed in only one of the relevant countries.

However in situations where such an agreement does not exist, UK government provides
double taxation relief.
Tax Appellate System:
Tax appeals are heard by the following two Tax Tribunals based on the complexity of the case:

First Tier Tribunal: Deals with most cases other than complex cases.

Upper Tribunal: Deals with the complex cases and any appeals against the First Tier Tribunal.
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Cases are categorized and logged in on either of the following tracks;

Paper track: Includes simplest appeals i.e.an appeal against a fixed penalty. Decision is
normally taken without a hearing.

Basic track: Involves a hearing but exchange of documents beforehand is kept to minimum.

Standard track: Involves a formal hearing. It deals with the cases which require more detailed
management.

Complex track: Includes complicated cases which require specialized knowledge relating to
either some important principle or a large financial sum.
Paper, basic and standard track cases are allocated to the first tier tribunal while complex track
cases are allocated to the upper tier tribunal.
Sources of Tax Law:
Taxpayers in UK can refer to the following for guidance on the tax legislation:
Case Law: Decisions of past tax cases tried and tested through the courts.
Guidelines by HMRC:

Statements of Practice: these set out how HMRC intends to apply the law

Extra – Statutory Concessions: these set out instances where the law may be relaxed

Revenue and Customs Brief: these are views on specific tax points

Agent Update: these are guidelines for tax practitioners
Tax Evasion and Tax Avoidance:

Tax Evasion: Any method to save tax illegally. For example by hiding information, giving
incorrect information etc. Serious cases of tax evasion are treated as criminal acts.

Tax Avoidance: Any method to minimise tax legally. For example by making deposits in tax
saving bank account rather than a regular account.
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Tax payers, accountants and consultants need to be clear on the difference between the two
because evasion has legal repercussions and avoidance, although within legal boundaries can raise
a doubt on the ethics of the practicing party.
HMRC ended up developing the General Anti-Abuse Rule (GAAR), which provides HMRC with
means to counteract tax advantages that have been obtained through abusive tax arrangements
i.e. arrangements, where the primary objective was to obtain tax advantage.
In practice, tax accountants and consultants often face ethical dilemmas and are normally
expected to use the following tax advice:
Use the code of ethics as a guideline, whenever faced with a dilemma:

Professional Competence and Due Care: Accept assignments that you are technically and
practically capable of taking up and perform tasks with the required attention and care.

Integrity: Be honest in your work.

Professional Behaviour: Do not behave in a manner that may discredit the profession.

Confidentiality: Do not disclose any information of the client to any irrelevant person without
specific written authority from the client. This rule can be relaxed if the legal/ professional
duty of the tax practitioner supersedes the need for confidentiality.

Objectivity: Be fair in the dealings with all clients, without any personal bias.
Ethical Dilemma:
Most taxpayers appoint accountants/ tax specialists, whose responsibilities are to prepare and
submit tax returns. While performing these tasks for any tax payer, client confidentiality should be
maintained however; under certain circumstances it becomes the legal duty of an accountant/ tax
practitioner to report a client to an authority.
For example, if a client is suspected to be involved in any illegal activity or tax evasion, then it
becomes the accountant’s/ tax practitioner’s professional duty to report this matter to HMRC.
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Normally before reporting any client, it is recommended that advice be sought from a suitable
party such as ACCA because if reported, the client can react by suing the accountant/ practitioner
for breaching confidentially. The situation may reflect badly on the accountant/ practitioner, if
there was an error made at the consultant’s end.
Dealing with further ethical dilemmas:

There is a material error/ omission in a client’s tax return or the return has not been
filed on time:
Advise the client of the error and the corrective procedure. Also recommend and encourage
the client to disclose the matter to HMRC.

The client refuses to correct the error/ omission:
Discontinue working for the client with immediate effect and inform the client in writing. Next
inform the HMRC of the disassociation with the client without specifying the reason. Finally
report the client’s refusal and the reasons to the Money Laundering Reporting Officer of the
firm or to the National Crime agency, if self-employed.
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CHAPTER 2: INTRODUCTION TO INCOME TAX
Definition: Tax paid by an UK resident individual on taxable income in a tax year. This is
applicable on the resident’s worldwide income.
Tax Year
It runs from 6th April of one year to 5th April of the next. For the exam sessions covering FA 2018,
questions will primarily be based on the tax year 6 April 2018 to 5 April 2019. Tax year is also
denoted as 2018-19.
Residency
A statutory test of residence is in place to determine a person’s residence status each tax year. A
person’s residence status is found by comparing the number of days they are in the UK during a
tax year against how many UK ties they have:
Automatic Overseas Test: An individual is automatically non UK resident, if he/ she meets the
automatic overseas test i.e. if he/ she:

Spent < 16 days in the UK during the tax year.

Was not a resident of UK in the previous three tax years and spent < 46 days in the UK in the
current tax year.

Does not spend more than 90 days in the UK in the current tax year as they work full time
overseas.
Automatic UK Test: An individual is automatically UK resident, if he/ she meets the automatic
UK test i.e. he/she:

Spends ≥ 183 days in the UK during the current tax year
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
Only has a home in the UK and none overseas

Works full-time in the UK
Sufficient Ties Test: An individual whose residency is unclear, even after applying the above
tests has to undergo the Sufficient Ties Test. This is dependent upon the number of days the
individual spends in the UK and the number of ties he/ she has with UK.
Days in UK
Previously Resident
Not Previously Resident
< 16 days
Automatically not UK resident
Automatically not UK resident
16 – 45 days
Resident if 4 or more UK ties met
Automatically not UK resident
46 – 90 days
Resident if 3 or more UK ties met
Resident if 4 UK ties met
91 – 120 days
Resident if 2 or more UK ties met
Resident if 3 or more UK ties met
121 – 182 days
Resident if 1 or more UK ties met
Resident if 2 or more UK ties met
≥ 183 days
Automatically UK resident
Automatically UK resident
UK Ties: These ties comprise of:

Close family: having a spouse/ civil partner, under-age child who are UK resident

Owning a UK residence which is made use of during the tax year

Doing substantive work in UK, whether as an employee or self-employed

Spending > 90 days in the UK in either or both of the previous two tax years

Spending more time in the UK than in any other country during the tax year
A day in the UK is any day in which a person is present in the UK at midnight.
Example – UK Residency Test
James is in the UK for 40 days during the tax year2018-19. He has not previously been resident in
the UK.
For 2018-19 James will automatically be treated as not resident in the UK. He has not been resident
during the three previous tax years, and has spent less than 46 days in the UK.
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Kate is in the UK for 60 days during the tax year 2018-19. Her only home is in the UK.
For 2018-19 Kate will automatically be treated as resident in the UK. She has spent too long in the UK
to be automatically treated as non-resident, and her only home is in the UK.
Maggie has always been resident in the UK, being in the UK for more than 300 days each tax year.
On 6 April 2018 Maggie purchased an overseas apartment where she lived for most of the tax year
2018-19. She also has a house in the UK where her husband and children live. During the tax year
2018-19 Maggie visited the UK for a total of 80 days, staying in her UK house.
For 2018-19 Maggie has spent too long in the UK to be automatically treated as non-resident, and
will not automatically be treated as resident because she does not meet the only home test.
Maggie has been resident in the UK during the three previous tax years, and was in the UK between
46 and 90 days. She is therefore resident in the UK for 2018-19as a result of her three UK ties:

Close family in the UK.

A house in the UK which is made use of.

In the UK for more than 90 days during the previous two tax years.
Nigel has not previously been resident in the UK, being in the UK for less than 20 days each tax
year. On 6 April 2018 he purchased a house in the UK, and during the tax year 2018-19stayed in
the UK for a total of 160 days. Nigel also has an overseas house which was where he stayed for the
remainder of the tax year 2018-19.
Nigel
For 2018-19 Nigel has spent too long in the UK to be automatically treated as non-resident, and
will not automatically be treated as resident because he does not meet the only home test.
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Nigel has not been resident in the UK during the three previous tax years, and was in the UK between
121 and 182 days. He is therefore not resident in the UK for 2018-19as the only UK tie is the house in
the UK which is made use of.
Income Tax Computation
Pro-Forma: The following format is to be used when attempting questions of Section C, which are
based on the calculation of an Individual’s Income Tax. The numerical values used are simply to
explain the flow of information.
Example: Mr. Edward Hayes
Income Tax Computation
Tax Year 6th April 2018 – 5th April 2019
Non Saving
Saving
Dividend
Income
Income
Income
NSI
SI
DI
£
£
£
Total
£
Employment Income (covered later)
32,000
32,000
Property Income (covered later)
10,000
10,000
Trading Profits (covered later)
27,000
27,000
Interest from GILTS (discussed below)
5,000
5,000
Banks & Building Societies Interest (discussed
3,000
3,000
below)
Dividend (discussed below)
Total Income
69,000
Less: Deductible Interest (discussed below)
(1,000)
Net Income
68,000
Less Personal Allowance (discussed below)
(11,850)
TAXABLE INCOME
56,150
8,000
8,000
8,000
8,000
85,000
(1,000)
8,000
8,000
84,000
(11,850)
8,000
8,000
72,150
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Basic Tax Calculation
Step 1: Identify the relevant tax slabs for the taxable income, starting with NSI and then moving
onwards to SI and DI. This sequence has to be followed each time but as observed below there are
different tax slabs & rates for each of the category of income.
Tax Slabs
Capacity
NSI/ SI*
DI
Basic
£1 - £34,500
(£34,500 - £0) = £34,500
20%
7.5%
Higher
£34,501 - £150,000
(£150,000 - £34,500) = £115,500
40%
32.5%
Additional
> £150,000
Unlimited
45%
38.1%
Higher
*A starting rate of 0% applies to savings income where it falls within first £5,000 of taxable
income
Nil Rate Bands
Savings Income: Basic rate taxpayers
£1,000
Savings Income: Higher rate taxpayers
£500
Dividend Income
£2,000
Using the information from the Income Tax Computation above:
NSI income of £56,150 is given priority in utilising the tax slabs and the amount falls in the
following slabs:
Original Capacity Utilised
Capacity Balance post utilisation
Basic Slab
£34,500
(£34,500) £0
Higher Slab
£115,500
(£21,650) £93,850
£56,150

The Basic rate slabs is completely used up by NSI, which is why, SI and DI will now have to fill
up the higher rate and additional higher rate slabs.
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
But in this scenario, the Higher rate slab had a capacity of £115,500, out of which only £21,650
has been used up by NSI, leaving an unused capacity of £93,850, which is more than enough for
both taxable SI of £8,000 and taxable DI of £8,000.

In this scenario Edward Hayes will be considered a higher rate tax payer for 2018-19.
Step 2: Calculate the Tax Liability on a differential basis. Using the tax rates for the relevant slabs,
from the table above, tax liability is first calculated for NSI, then SI and then DI.
Important: Higher Rate tax payers are entitled to a Nil Rate Band of £500 on their taxable
Savings Income and a Nil Rate Band of £2,000 on their taxable Dividend Income.
£
Non Savings Income
Basic Rate: £34,500 x 20%
6,900
Higher Rate: £26,150 x 40%
10,460
Savings Income
Nil Rate Band: £500 x 0
0
Higher Rate: (£8,000 - £500) x 40%
3,000
Dividend Income
Nil Rate Band: £2,000 x 0%
0
Higher Rate: (£8,000 - £2,000) x 32.5%
1,950
Tax Liability
22,310
Step 3: Calculate Tax payable.
When determining an individual’s tax liability, it is only logical to reduce the liability amount by
any tax amount that has already been paid, to avoid double taxation. In the case of employees, tax
is deducted at source under the ‘Pay As You Earn – PAYE’ scheme. This amount is normally given
in the exam question (if the concept is to be tested). In case there is no PAYE amount given in the
exam, the payable amount will be the Tax liability calculated.
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Tax Liability
22,310
Less: Tax Deducted At Source
PAYE – given
(1,000)
Tax Payable
21,310
Step 4: Work out the tax payment instalments.
Income Tax has to be normally paid in 3 instalments unless 80% of an individual’s income tax
liability is deducted at source. For instance, if an individual only earns employment income and
more than 80% of the tax liability is covered by PAYE deduction; the tax payment can be made in a
single instalment.
Where 3 instalments are required, they are calculated and paid as follows:
Instalment
Calculated
Paid By
1st Payment on
50% of tax liability of previous tax
31 January in the relevant tax year
Account
year
2nd Payment on
50% of tax liability of previous tax
Account
year
3rd Balancing
Tax Payable of relevant tax year
31 January following the relevant tax
Payment
less amounts already paid
year
31 July following the relevant tax year
Using information from the example above and assuming tax liability of 2017-18 to be
£18,000.
Tax Payable – 2018/19
£
1st POA – 31st January 2019 (£18,000 x 50%)
9,000
2nd POA – 31st July 2019 (£18,000 X 50%)
9,000
Balancing Payment – 31st January 2020
3,310
(£21,310 – 9,000 – 9,000)
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Components of Income Tax Computation
Taxable Income:
A UK resident’s income from all sources is aggregated in the Income Tax Computation for the
relevant tax year, to arrive at the final Taxable Income amount. This excludes any exempt
income.
The income earned by a taxpayer is categorised as follows:
Non-Savings Income - NSI: This comprises of income earned:

From employment

By running a business

By letting out a property – all are categorised as Non Savings Income.
This category is given a priority over Savings and Dividend income for claiming any deductions,
relief for personal allowance and even in applying the tax rates.
Savings Income - SI: Interest earned on bank deposits or securities are treated as income earned
on savings.

This income is kept separate from NSI because it is taxed at different rates.

The interest amount is received Gross i.e. without any tax deduction.

A Nil Rate Band of £1,000 is available on the Savings income of a Basic Rate tax payer i.e. a
person with taxable income below £34,500, will not pay any tax on the first £1,000 of his/ her
savings income.

Nil Rate Band of £500 for a Higher Rate tax payer i.e. a person with taxable income that falls
between £34,501 and £150,000 will pay no tax on £500 of his/ her savings income. (Seen in
the Income tax computation above)

The Nil Rate Band of £1,000/ £500 counts towards the basic rate and higher rate slabs capacity
utilisation.

Nil Rate Band for savings income is not available for individuals with taxable income of more
than £150,000 i.e. Additional Higher Rate tax payers.
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Taxation - UK FA
Example – Savings Income Nil Rate Band
For the tax year 2018-19, Ali has pension income of £13,600 and savings income of £6,000.
Ali – Income Tax Computation – 2018/19
Pension Income
NSI
SI
Total
£
£
£
13,600
Interest Income
Total Income
13,600
Less Personal Allowance
(11,850)
TAXABLE INCOME
1,750
Notes
£
1
350
Starting Rate: (£5,000 - £1,750) x 0%
2
0
Nil Rate Band: £1,000 x 0%
3
0
Basic Rate: (£6,000 - £3,250 - £1,000) x 20%
4
350
13,600
6,000
6,000
6,000
19,600
(11,850)
6,000
7,750
Non Savings Income
Basic Rate: £1,750 x 20%
Savings Income
Tax Liability
700
Notes:
1. The first £34,500 of NSI are covered by the Basic rate slab and are taxed at 20%. In this
scenario only £1,750 of NSI was taxable.
2. SI has a starting rate slab of first £5,000 that is taxed at 0%. I.e. if an individual’s first £5,000 of
total taxable income are from a Savings Income source, there is zero tax liability on it.
Normally however an individual’s initial income relates to NSI sources and these are huge
amounts, resulting in this option becoming null and void. In this example, only £1,750 of the
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Taxation - UK FA
total taxable income of Ali is from NSI, which leaves (£5,000 - £1,750) £3,250 of the starting
rate slab for SI. Therefore £3,250 is taxed at 0%.
3. For a Basic rate tax payer (which Ali is, because his total taxable income is less than £34,500), a
Nil Rate Band of £1,000 is available. Out of the total SI of £6,000 only £3,250 has been taxed,
which leaves behind (£6,000 - £3,250) £2,750 SI to be taxed. Ali can now use the Nil Rate Band
and will pay tax of 0% on the £1,000.
4. From the total SI of £6,000, only £1,750 is left (£6,000 - £3,250 - £1,000), which will now fall in
the Basic rate slab. SI is taxed at 20% in this slab.
Example – SI Nil Rate Band
For the tax year 2018–19, Ingrid has a salary of £48,900 and savings income of £1,800. Her income
tax liability is:
Ingrid – Income Tax Computation – 2018/19
Employment income
NSI
SI
Total
£
£
£
48,900
Interest Income
Total Income
48,900
Less Personal Allowance
(11,850)
TAXABLE INCOME
37,050
48,900
1,800
1,800
1,800
50,700
(11,850)
1,800
38,850
£
Non Savings Income
34,500 x 20%
6,900
(37,050 – 34,500) 2,550 x 40%
1,020
Savings Income
500 x 0%
(1,800 – 500) 1,300 x 40%
Tax Liability
0
520
8,440
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Taxation - UK FA
Dividend Income – DI: Dividends received from shareholdings in a company are treated
separately due to different tax rates allotted to this income.

This income is received Gross.

A Nil Rate Band of £2,000 is available to all tax payers, regardless of the tax band they fall in:
basic, higher or additional higher. I.e. A tax payer will not pay any tax on £2,000 of dividend
income earned, if any, in a tax year.
Example – Dividend Income Nil Rate Band
For the tax year 2018–19, Ezra has a salary of £59,000 and dividend income of £3,800. Her income
tax liability is:
Employment Income
NSI
DI
Total
£
£
£
59,000
Dividend Income
59,000
Personal allowance
(11,850)
Taxable income
47,150
59,000
3,800
3,800
3,800
62,800
(11,850)
3,800
50,950
£
Non Savings Income
34,500 x 20%
6,900
(47,150 – 34,500) 12,650 x 40%
5,060
Dividend Income
2,000 x 0%
(3,800 – 2,000) 1,800 x 32.5%
Tax Liability
0
585
12,545
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Taxation - UK FA
Example – Basic Income Tax Computation
For the tax year 2018-19, Joe has a salary of £43,000, savings income of £2,000 and dividend
income of £6,000. During the year he paid interest of £300 which was for a qualifying purpose.
Joe’s employer deducted £6,230 in PAYE from his earnings.
Joe
Income Tax Computation
2018-19
Employment Income
NSI
SI
DI
Total
£
£
£
£
43,000
43,000
Interest Income
2,000
Dividend Income
Total Income
43,000
2,000
2,000
6,000
6,000
6,000
51,000
Less: Deductible Interest (discussed below)
(300)
(300)
Less Personal Allowance (discussed below)
(11,850)
(11,850)
TAXABLE INCOME
30,850
2,000
6,000
38,850
Joe is a higher rate tax payer as his total taxable income of £38,850 is more than £34,500 which is
the basic rate slab limit. He will be entitled to £500 Nil rate band on his SI and £2,000 Nil rate band
on his DI.
Notes
£
1
6,170
Nil Rate Band: £500 x 0
2
0
Basic Rate: (£2,000 - £500) x 20%
3
300
4
0
Non Savings Income
Basic Rate: £30,850 x 20%
Savings Income
Dividend Income
Nil Rate Band: £2,000 x 0%
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Higher Rate: (£6,000 - £2,000) x 32.5%
5
1,300
Tax Liability
7,770
Less: PAYE
(6,230)
Tax Payable
1,540
Notes on slab utilisation:
1. First £34,500 of NSI is taxed at 20% but in this scenario NSI was only £30,850, leaving an
unutilised basic slab capacity of (£34,500 - £30,850) = £3,650.
2. The first £500 of SI will be taxed at 0% (Nil Rate band) but they will utilise £500 of the basic
rate band remaining capacity, leaving an unutilised balance of (£3,650 - £500) = £3,150.
3. The remaining amount of SI (£2,000 - £500 covered by Nil Rate Band) = £1,500 will be able to
use the basic rate band still available and leave behind a balance of (£3,150 - £1,500) =
£1,650.
4. The first £2,000 of DI will be taxed at 0% (Nil Rate band) but they will use up the £1,650
balance of the basic rate slab, with the remaining amount of DI falling into the Higher rate slab.
5. The remaining amount of DI (£6,000 - £2,000 covered by the Nil Rate Band) = £4,000 will fall
in the Higher rate band and be taxed at 32.5%.
Exempt Income: The following are examples of receipts which are not taxable as an individual’s
Income:

Interest on National Savings and Investments Certificates

Premium Bond Prizes

Gambling and Lottery winnings

Interest or dividend from Individual Savings Account
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Individual Savings Account – ISA

These are tax efficient savings accounts.

Individuals can invest in Cash ISAs and Stocks and Shares ISA.

For 2018-19, the limit upto which an individual can invest in ISAs is £20,000 per annum, either
as cash and/or shares; or in any combination of the two – such as £10,000 in a cash ISA and
£10,000 in a stock and shares ISA.

The availability of the savings income nil rate band for the basic and higher rate taxpayers
means that there is no tax benefit to investing in cash ISAs for many individuals. But these are
beneficial for higher rate taxpayers.

The availability of the dividends nil rate band means there are no tax advantages to receiving
dividend income from stock and shares ISA, except for the exemption from capital gains tax.
Accrued Income Scheme

This scheme was introduced by the Government to prevent ‘bond washing’; which is a practice
where individuals end up selling their bonds just before a coupon payment is due and repurchasing it once the coupon is paid.

If an individual sells a gilt-edged or similar security, the person buying it will generally get the
next interest payment. The closer it gets to the next interest payment date, the more a buyer
will be prepared to pay for the security.

The individual selling the bond is exempt from any Capital Gains tax so they can carry out the
sale and purchase of the bond multiple times with no tax repercussions.
The value of the security is made up of two amounts:


the basic value (called the clean price), plus

an amount that represents the value of the next interest payment (the accrued interest).
If an individual sells a security with accrued interest, the Accrued Income Scheme treats the
additional amount received as part of his/her Savings income and terms is as accrued income
profit.

If an individual buys a security with accrued interest, he/she will have to pay tax on the full
amount of the next interest payment that they receive. But, because they would have already
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paid an extra amount to buy the security, they could get tax relief under the Accrued Income
Scheme.

The extra amount paid is an accrued income loss, which is deducted from the interest received.
Example – Accrued Income Scheme
On 1 July 2018, Peter purchased £100,000 (nominal value) of GILTS which pay interest at the rate
of 3% for £120,000. Interest is paid half yearly on 30 June and 31 December based on the nominal
value. Peter sold the GILTS on 30 November 2018 to Petra for £121,250 (including accrued
interest).
Tax Implications:

The accrued interest included in the sales proceeds is (£100,000 x 3% x 5/12) = £1,250.

Peter will include the accrued interest as Savings income for 2018-19, even though he has not
received any actual interest.

Petra will receive interest of £1,500 (£100,000 x 3% x 6/12) on 31 December 2018 but will
only include (£1,500 - £1,250) = £250 as Savings Income for 2018-19.
Example – Accrued Income Scheme
On 1 May 2018, Ying purchased £300,000 (nominal value) of GILTS for £180,000, that pay interest
at the rate of 1%. Interest is paid half–yearly on 31 March and 30 September based on the nominal
value. Ying sold the GILTS on 31 January 2019 for £181,000 (including accrued interest), having
received interest of £1,500 on 30 September 2018.
Tax Implication:
Accrued interest for the period 1 May 2018 to 31 January 2019 is (£300,000 x 1% x 9/12) =
£2,250 and this is the amount that Ying will include as her Savings Income for 2018-19.

The Accrued Income scheme only applies where an individual holds GILTS with a total nominal
value in excess of £5,000.

The scheme is not applicable for securities transferred on death.
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Deductible Interest & Personal Allowance
Both Deductible Interest and Personal Allowance are deducted from the Non Savings Income
column on a priority basis. If an individual does not have any or has insufficient NSI, the
deductible interest and the personal allowance can be relieved against total Saving income and
then Dividend income, accordingly.
Deductible Interest: This is interest paid by the individual on Qualifying Loans.
Qualifying loans are ones which have been taken for any of the following Qualifying Purposes:

Loan taken by an employee to purchase plant or machinery for use in employment.

Loan taken by an individual to purchase a share in a partnership.

Loan taken by a partner to purchase plant or machinery for use in the business.

Loan taken for the payment of inheritance tax
Personal Allowance: Individuals are entitled to a tax exempt amount each year, known as the
Personal Allowance.

For 2018-19, this amounts to the first £11,850 of an individual’s taxable income.

Reduction: If the Adjusted Net Income of an individual in a given tax year is > £100,000, his/
her personal allowance amount is reduced and depending upon the income amount, the
allowance may be reduced to Nil.

Adjusted Net Income (ANI) = Net Income – Gross Gift Aid Donation – Gross Personal Pension
Contribution, where;

Net Income is picked up from the Income Tax Computation.

Gift Aid Donation is the charitable donation that an individual has made (if any) and has
decided to Gift Aid. This is given in the exam question and is normally paid net of 20%. For
the purpose of this formula and other tax implications, the amount donated by the
individual as Gift aid is grossed up [Amount x 100/80].

Personal Pension Contribution is the amount contributed by the individual (if any) into an
approved private pension scheme. Like Gift Aid Donation, this is assumed to be paid net of
20% and so has to be grossed up. This will be covered in more detail in the notes on
Pensions.
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
The excess over £100,000 is divided in half and £11,850 reduced by the answer. The Standard
Personal Allowance can be reduced to nil at the most.

If a person’s ANI is ≥ £123,700, the Personal allowance will be nil.
Example – Personal Allowance Reduction
For the tax year 2018-19, May has a trading profit of £159,000. During the year, May made net
Personal Pension contributions of £32,000 and a net Gift Aid donation of £9,600.
Tax implication:
May’s personal allowance of £11,850 will be affected.

ANI = £159,000 – (£32,000 x 100/80) – (£9,600 x 100/80) = £107,000

Reduced Personal Allowance = £11,850 – [(£107,000 - £100,000)/ 2]
= £11,850 - £3,500 = £8,350

May will be entitled to a personal allowance of £8,350 only.

Had she made no personal pension contributions and gift aid donations, her ANI would have
been £159,000 which is more than £123,700; in this case, no calculation would have been
necessary and the personal allowance would be directly shown as Nil.
Example – Personal Allowance Reduction
For the tax year 2018-19, June has a trading profit of £184,000.
£
Trading profit
Less: personal allowance reduced
Taxable income
184,000
0
(As ANI is > £123,700)
184,000
Income tax:
34,500 x 20%
6,900
115,500 x 40%
46,200
34,000 x 45%
15,300
Tax Liability
68,400
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Transferable Personal Allowance:

Spouses/ civil partners can elect to transfer a fixed amount of their personal allowance to each
other.

The transferable amount (also known as the marriage allowance or marriage tax allowance) is
£1,190 for the tax year 2018–19. So the person transferring the allowance will be left with a
personal allowance amount of £10,660 (£11,850 - £1,190).

The benefit is given to the recipient as a reduction from their income tax liability at the basic
rate of tax. The tax reduction is therefore £238 (1,190 at 20%). If the recipient’s tax liability is
less than £238, the tax reduction will be restricted so that the recipient’s tax liability is not
reduced to below zero.

A transfer is not permitted if either spouse or civil partner is a higher or additional rate
taxpayer, and a transfer will generally only be beneficial where one spouse or civil partner is
not making full use of their personal allowance.

If an election is made before the end of the tax year i.e. by the 5 th of April of the relevant tax
year, then it will remain in force for future tax years unless the election is withdrawn or the
conditions for the tax reduction are not met.

Alternatively, an election in respect of the tax year can be made within four years of the end of
the tax year, but in this case it will only apply for the relevant tax year.

The transferable amount of personal allowance will be given in the tax rates and allowances
section of the exam.
Example – Transferable Personal Allowance
Paul and Rai are a married couple. For the tax year 2018–19, Rai has a salary of £35,000 and Paul
has a trading profit of £8,000. They have made an election to transfer the fixed amount of personal
allowance from Paul to Rai.
Paul’s personal allowance is reduced to £10,660 (11,850 – 1,190), and because this is higher than his
trading profit of £8,000 he does not have any tax liability.
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Rai’s income tax liability is:
£
Employment Income
35,000
Personal Allowance
(11,850)
Taxable Income
23,150
Income Tax: £23,150 at 20%
4,630
Personal Allowance Tax reduction (£1,190 x 20%)
(238)
Tax Liability
4,392
Gift Aid Donation and Personal Pension Scheme Contribution

As seen above, both Gift Aid Donation and Personal Pension Scheme Contributions are used to
calculate an Individual’s Adjusted Net Income and identify if there is to be a reduction in their
Personal Allowance amount for a particular tax year.

Both amounts are presumed to be paid net of 20% by the individual and are grossed up, using
the formula ‘Amount x 100/80’.

These gross amounts also affect an individual’s tax slabs.

The Basic Rate Band is extended by the gross amount, thus increasing the amount of taxable
income that will be taxed at a lower rate.

This relief is primarily provided to encourage individuals to make charitable donations and
save up for their own retirement years.
Example – Gift Aid Donation and Personal Pension Contribution
For the tax year 2018-19, May has a trading profit of £159,000. During the tax year, May made net
personal contributions of £32,000 and a net gift aid donation of £9,600.
Step 1: Gross up the gift aid and pension contribution amount
Gross Gift Aid Donation: £9,600 x (100/80) = £12,000
Gross Personal Pension Contribution: £32,000 x (100/80) = £40,000
Total extension: £52,000
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Step 2: Calculate the taxable income
£
Trading profit
159,000
Personal Allowance – reduced
(8,350)
Taxable Income
150,650
Adjusted Net Income = 159,000 – 12,000 – 40,000 = 107,000
Personal Allowance reduction = £11,850 – [(107,000 – 100,000)/2] = 8,350
Step 3: Extend the basic rate band by the gross amounts
Tax Slabs
Capacity
£1 – (£34,500 + £52,000) = £86,500
(£86,500 - £0) = £86,500
£86,501 – (£150,000 + £52,000) = £202,000
(£202,000 - £86,500) = £115,500
> £202,000
Unlimited
Observe that the donations and contributions have increased the capacity of the Basic Rate slab but
not of the Higher rate slab.
Step 4: Calculate tax liability
£
Non Savings Income
86,500 x 20%
17,300
64,150 x 40%
25,660
Tax Liability
42,960
Child Benefit Income Tax Charge

Child benefit provided to a tax payer or his/ her partner is treated as exempt income, provided
the ANI is ≤ £50,000.
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
But if the Adjusted Net Income of the tax payer is more than £50,000 in a tax year, a child
benefit associated income tax charge arises, which is collected through the self-assessment
system.

This is to recover the benefit from higher rate tax payers.

If the ANI of the tax payer is higher than £60,000 – the income tax charge is equivalent to the
amount of the child benefit amount received.

If the ANI is between £50,000 - £60,000 the income tax charge is 1% of the amount of child
benefit received for every £100 of income over £50,000 and is calculated as follows:

(ANI - £50,000)/ 100 = ‘?’

Tax Charge = Child Benefit x ‘?’ x 1%

The amounts are all rounded down to the nearest whole number.
Example – Child Benefit Income Tax Charge
Gayle lives with his wife and son. In 2018-19, Gayle’s wife received Child Benefit of £2,130 but she
is not a tax payer. Gayle had ANI of £54,000.
Excess ANI = £54,000 - £50,000 = £4,000
£4,000 ÷ 100 = 40
Tax Charge: £2,130 x 40 x 1% = £852
Example – Child Benefit Income Tax Charge
For the tax year 2017–18 Cecil has a salary of £64,000. He received child benefit of £1,056 during
the year.
Cecil’s adjusted net income of £64,000 exceeds £60,000, so the child benefit income tax charge is
£1,056, being the amount of child benefit received.
Example – Child Benefit Income Tax Charge
For the tax year 2017–18 Mavis has a trading profit of £56,000. She received child benefit of
£1,752 during the year.
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Mavis’ adjusted net income of £56,000 is between £50,000 and £60,000. The child benefit income tax
charge is therefore £1,051 (1,752 x 60% ((56,000 – 50,000)/100)).
Jointly Held Property

Income received from property/ assets that are jointly owned by a couple is split equally
between them and both individuals pay income tax on their relevant share.

The income is split equally regardless of the actual ownership ratio, unless the couple declare
the actual proportion in which the income is to be split, to HMRC.

Whether the couple should continue to show only a 50% share of the income each or the actual
proportion depends upon what is the more tax efficient option.
Tax Planning Aspects

Savings Income Nil Rate Band can be effectively used in tax planning for married couples or
couples in a civil partnership by transferring income in the most effective manner.
Example – Transferring Nil Rate Bands
Samuel and Samantha are a married couple. For the tax year 2018–19, Samuel will have a salary of
£90,000. Samantha will have a salary of £30,000 and savings income of £1,500.
Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The remaining £500
of her savings income will be taxable at the rate of 20%.
Samuel is a higher rate taxpayer, so his savings income nil rate band is £500. Transferring sufficient
savings to Samuel so that he receives £500 of the savings income will therefore save income tax of
£100 (500 at 20%) for 2018–19.
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
Nil Rate Bands for Savings and Dividend Income can cause complications in tax planning for
the married couples or civil partnerships.
Example – Transferring Nil Rate Bands
Nigel and Nook are a married couple. For the tax year 2018–19, Nigel will have a salary of
£160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of
£3,800.
Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band.
Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring
the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2018–19.
Nook has fully utilised her dividend nil rate band of £2,000, but Nigel’s nil rate band is unused.
Transferring sufficient investments to Nigel so that he receives £1,800 of the dividend income will
therefore save income tax of £585 (1,800 at 32.5%) for 2018–19.

Incorporating a business or not, needs to be based on the tax impact of each alternative.
Example – Incorporating a Business
Sam is currently self-employed.
If he continues to trade on a self-employed basis, his trading profit for the year ended 5 April 2019
is forecast to be £50,000. Based on this figure, Sam’s total income tax liability and national
insurance contributions (NIC) for the tax year 2018–19 will be £11,999.
Sam is considering incorporating his business on 6 April 2018. The forecast taxable total profits of
the new limited company for the year ended 5 April 2019 will be £50,000. After paying
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corporation tax of £9,500, Sam will withdraw all of the profits by paying himself dividends of
£40,500 during the tax year 2018–19.
Sam’s income tax liability will be:
£
Dividend income
40,500
Personal allowance
(11,850)
Taxable income
28,650
Income Tax:
£
£2,000 x 0%
0
£26,650 x 7.5%
1,999
Tax Liability
1,999
The total tax cost if Sam incorporates his business is £11,499 (9,500 + 1,999). This is an overall saving
of just £500 (11,999 – 11,499) compared to continuing on a self-employed basis.
However incorporation can provide other tax advantages. For example the corporation tax on profits
remaining undrawn within a company is just 19% instead of the 40% and 45% of higher and
additional higher rate taxpayers.
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CHAPTER 3: EMPLOYMENT INCOME
Employment vs Self Employment:
It is important to differentiate between the two as this determines whether the income of an
individual is to be covered under Employment income rules or under the Trading profit rules.
Employment is covered by a contract of service but a contract with self-employed individual
would be written as a contract for service.
Some factors that help indicate whether an individual is employed or works as a trader are:

The degree of control exercised by the person doing work.

Whether he should accept further work?

Whether the other party must provide him/her with further work?

Whether he provides his own equipment and whether he hires his own employees?

Degree of financial risk

Degree of responsibility for investment and management

Whether he can profit from sound management?

Timings of work

The wording used in any agreement between parties.
Calculation:
The following format shows how the information in a question relating to Employment income
can be brought together in a logical manner to arrive at the final amount that is then transferred to
the Income Tax Computation.
The summary of the concepts is also included but this is covered in detail after the format.
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Edward Hayes
Employment Income for the Tax Year 18/19
£
£
Salary
xxxx
Add: Bonus
xxxx
Add: Taxable Benefits:
Vouchers: Cash / Credit Vouchers: at cost
xxxx
Accommodation – Non Job Related
Basic Charge: Annual Value – if owned by company
xxxx
Higher of Annual Value or Rent paid – if rented by company
Additional Charge: (Cost - £75,000) x 2.5%
xxxx
[Owned ≤ 6 yrs: Cost = Purchase price + Subsequent Capex till start of current
tax year
Owned > 6 yrs: Cost = Market value when provided to employee + Subsequent
Capex till start of the current tax year]
Reduction: Time apportionment or Employee contribution
(xxxx)
xxxx
Expenses Related to Accommodation
Non Job Related: Cost of heating, lighting, repair bills + 20% of market
xxxx
value of furniture
Job Related: Lower of Computation above and 10% of Net Earnings of the
employee
Car – Cost x ?%
Cost: List price + Accessories cost (if at least £100) – Capital contribution by
xxxx
employee (maximum £5,000)
Reduction: Time Apportionment and Employee Contribution
(xxxx)
xxxx
Fuel - £23,400 x ?% (the one applied on Car)
xxxx
Reduction: Time apportionment but not employee contribution unless full (xxxx)
reimbursement
xxxx
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Van: Significant private use - £3,350
xxxx
Fuel: Significant private use - £633
xxxx
Reduction: Time apportionment and employee contribution where
(xxxx)
applicable
xxxx
Beneficial Loans: no or full repayment during the year
Loan amount x Interest saved x ?/12m
xxxx
Beneficial Loans: partial repayment – lower of:
Average Method: (Op. Balance + Cl. Balance)/2 x Interest Saved
Strict Method: (Original Amount x Interest Saved x ?/12m) + (Remaining
Amount x Interest Saved x ?/12m)
Provision of Asset – Market Value x 20%
Reduction: Time apportionment and Employee contribution
xxxx
xxxx
(xxxx)
xxxx
Gift of Asset – higher of
Calculation 1: MV of asset when provided – Amount already taxed –
Employee contribution
Calculation 2: MV of asset when gifted – Employee contribution
xxxx
Less: Allowable Deductions:

Contributions to approved payroll deduction schemes
(xxxx)

Contributions to approved occupational pension schemes
(xxxx)

Subscriptions to approved professional bodies
(xxxx)

Liability incurred by employee in course of employment duties
(xxxx)

Travelling Expenses – only for home/ office to client and return journey
(xxxx)

Statutory Mileage Allowance:
SMA entitlement – amount paid by employer = Shortfall
(xxxx)
SMA entitlement – amount paid by employer = Excess – Taxable benefit
TAXABLE EMPLOYMENT INCOME
XXXX
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Salary: Salary is recognised on an accrual basis only for those months of the tax year, in which the
individual is employed.
Basis of assessment of earnings (i.e. salary +bonus+commission)
For employees: It is taken on the earlier of

Date of receipt of earning &

Date when employee becomes entitled to this payment
For directors: It is taken on the earliest of:

The date that the earning has been received.

The date of entitlement to the earning.

The date when it is credited in the records of the company.

The end of the period of accounts, if earning for that period is determined before the end of the
period of account.

The date on which amount is determined, if it is determined after the end of company’s period
of accounts
Benefits: Benefits provided to an employee as a reward or part of the remuneration package or
perks of the designation are taxable as employment income (apart from exempt benefits).
Types of Benefits
Exempt
Assessable on all
employees
Exempt Benefits:

Trivial Benefits: Benefits which do not cost more than £50 per employee and are not cash/
cash voucher, are exempt.

Entertainment to employees by third parties.
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
Gifts to employees by third parties provided the value of gifts to an employee by the same
donor is not more than £250.

First £8,000 of relocation expenses

Welfare counselling

On-site canteen and recreational facilities available for all employees

Workplace parking or nursery

One mobile telephone phone per employee. Mobile phone in excess of this give rise to a taxable
benefit.

Pool car

Loans of upto £10,000

Private medical insurance premium to cover treatment of employee residing outside of UK in
the course of performing work duties

Overnight expenses (upto £5 per night in UK and £10 per night overseas)

Job related accommodation

Working from home allowance of £4 per week

£500 on medical treatment provided to employee who is returning to work after a long period
of absence because of injury or ill health.
Benefits taxable on all employees
General Rules: Keeping in mind the following rules will prove helpful in the calculation of an
individual’s taxable benefits:

Where no special rule exists and the benefit is taxable, the relevant amount is the marginal cost
to the employer of providing that benefit.

If a benefit has continuous use, like accommodation, car etc. and it was not available to the
individual throughout the tax year, the taxable amount should be time apportioned.

If the employee contributes towards the benefit, the benefit charge calculated is reduced by the
employee’s contribution, to arrive at the taxable amount. This does not apply on fuel benefit.
Vouchers:
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
If Cash / Credit Vouchers are provided by the employer, the taxable benefit amount on the
employee is the cost of these vouchers.
Accommodation
Provided for:
Job Related
- Proper performance of duties
EXEMPT
- Better performance of duties
- security of employee
Accommodation
Property owned
by the Employer
Taxable Benefit:
Annual Value
Non Job Related
Property rented
by Employer

Taxable Benefit: Higher of
Rent Paid or Annual Value
Job related accommodation: No taxable benefit arises in respect of job related accommodation
if it is:
i
Necessary for the employee to reside in the accommodation for the proper performance
of his duties.
ii The accommodation is provided for the better performance of the employee’s duties and
the employment is of the type where it is customary for accommodation to be provided
(e.g. Prime Minister’s / Arch Bishop’s residence).
iii The accommodation is provided as a part of a security arrangement because there is a
special threat to the employee’s security

Non- Job related accommodation: If accommodation is provided for any reason apart from the
Job related reasons it is treated as a taxable benefit and the calculation depends upon the
following:
Employer owned accommodation:

Taxable value in this case is the rateable value of the property.
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
An additional charge may arise if the accommodation is worth more than £75,000

The amount of the expensive accommodation benefit is: (Cost of providing the
accommodation - £75,000) x 2.5%
Cost of providing accommodation
If accommodation has been owned for ≤ 6
years:
If the accommodation has been owned for > 6
years:
Cost = Original Purchase Price + Subsequent
Capital Expenditure upto the start of the
current tax year
Cost = Market Value when provided to
employee + Subsequent Capital Expenditure up
to the start of the current tax year

The benefit will be time apportioned if it is available only for part of the year.
Rented accommodation:
Taxable benefit of accommodation that is rented by the employer and provided to the
employee is higher of rent paid by employer and the annual value of the property.
Example – Accommodation Benefit
Alex has been provided with living accommodation since 1 January 2016. Prop plc had purchased
the property in 2015 for £160,000, and it was valued at £185,000 on 1 January 2016.
Improvements costing £13,000 were made to the property during June 2017. The annual value of
the property is £9,100.
The basic benefit is the annual value of £9,100.
The living accommodation cost is in excess of £75,000 so there is an additional benefit. Since the
property was not purchased more than six years before first being provided to Alex, the benefit is
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based on the cost of the property plus subsequent improvements. The additional benefit is therefore
£2,450 ((160,000 + 13,000 – 75,000) at 2.5%).
Example – Accommodation Benefit
Chloe was provided with accommodation on 6 April, 2018 and she lived in the property
throughout the tax year 2018-19. The company had purchased the property in 2009 for £89,000
and it was valued at £145,000 on 6 April 2018. The annual value of the property is £4,600.
The basic benefit is the annual value of £4,600.
The living accommodation cost in excess of £75,000, so there is an additional benefit. Since the
property was purchased more than 6 years before being provided, the benefit is based on the market
value when first provided. The additional benefit is therefore £1,750 ((£145,000 – 75,000) x 2.5%).
Expenses related to accommodation

Employees are taxed on any additional accommodation related expenses paid by the employer.
These related expenses are:
a. Heating, electricity, cleaning, decorating etc.
b. Repairs and maintenance, but not structural repairs: these are assessed according to the
cost to the employer.
c. The use of furniture: the taxable benefit is calculated as Market value of furniture x 20%.

If the accommodation is job related, the assessable benefit of ancillary services and use of
furniture cannot exceed 10% of employee’s net earnings for the tax year. Net earnings mean
total earnings for the year without considering ancillary services and use of furniture less
allowable expenses.
Example – Expenses related to accommodation
Bess was provided with living accommodation from 1 January to 5 April 2019. The property is
rented by Prop plc at a cost of £2,250 per month, and it has an annual value of £10,400. On 1
January 2019, Prop plc purchased furniture for the property at a cost of £16,200. The company
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pays for the running costs relating to the property, and for the period 1 January to 5 April 2019
these amounted to £1,900.
The taxable benefit is the rent paid of £6,750 (2,250 x 3) because this is higher than the annual value
of £2,600 (10,400 x 3/12).
The taxable benefit in respect of the furniture is £810 (16,200 x 20% x 3/12).
The running costs of £1,900 are also taxed as a benefit.
Car

If a car is provided to an employee for private use, a taxable benefit arises.

The charge for the private use is based on the manufacturer’s list price, and is calculated as
follows:
£
(Cost of car) x appropriate %age
X
Time Apportionment (if required)
X
Less: Employee contribution for the private use of the car (if any)
Taxable benefit

(x)
X
Cost of car = List price of the car + Cost of any accessories (if worth at least £100) – Capital
Contribution by the employee (One-off contribution made towards the purchase of the car.
Relief restricted to maximum of £5,000)

The % is based on the CO2 emission as follows but is restricted to a maximum of 37%.
CO2
Petrol
Diesel
(4% increase in % of petrol)
≤ 50 g/km
13%
17%
51 – 75 g/km
16%
20%
76 - 94 g/km
19%
23%
95 g/km
20%
24%
> 95 g/km
1% increase on every 5 g/km increase
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
The car benefit is time apportioned, if the car is made available for private use for only part of
the tax year. It is also time apportioned if the car is not continuously available for atleast 30
days.

Any running costs of the car (except for fuel) if taken care of by the employer, result in no
further taxable benefit.

If the employer provides a driver/ chauffeur to the employee, the salary of the driver is the
taxable benefit for the employee.

Pool cars are an exempt benefit. A pool car is one that is used by more than one employee and
is used only for business journeys (private use is only permitted if it is merely incidental to a
business journey), and where the motor car is not normally kept at or near an employee’s
home.
Example – Motor Car Benefit
Diana was provided with a new petrol powered company car throughout the tax year 2018–19.
The motor car has a list price of £84,600 and an official CO₂ emission rate of 198 grams per
kilometre. Diana paid Fashionable plc £1,200 during the tax year 2018–19 for the use of the motor
car. Diana was unable to drive her motor car for two weeks during February 2018 because of an
accident, so Fashionable plc provided her with a chauffeur at a total cost of £1,800.
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage
is 40% (20% + 20% ((195 – 95)/5)), but this is restricted to the maximum of 37%.
The motor car was available throughout 2018–19, so the benefit is
Basic Charge = £84,600 x 37% = £31,302
Less: Employee contribution of £1,200
Taxable benefit on motor car = £31,302 - £1,200 = £30,102
The contribution by Diana towards the use of the motor car reduces the benefit.
The provision of a chauffeur will result in an additional benefit of £1,800.
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Fuel

A separate benefit arises on the provision of private fuel, and is calculated as: £23,400 x
appropriate %

This is the same % that is applied to calculate the taxable benefit on cars

The benefit is calculated as above where there is any fuel provided for private use; the actual
amount is irrelevant. Therefore any partial reimbursement by the employee will not affect the
taxable benefit.
Example – Fuel Benefit
Diana was provided with fuel for private use between 6 April 2018 and 5 April 2019. She paid
Fashionable plc £600 during the tax year 2018–19 towards the cost of private fuel, although the
actual cost of this fuel was £1,000.
The motor car was available throughout 2018–19, so the fuel benefit is £8,658 (23,400 x 37%).
There is no reduction for the contribution made because the cost of private fuel was not fully
reimbursed.
Van

No benefit arises if there is no significant private use of the van.

In case of private use of the van the taxable benefit is £3,350.

If the employer also provides private fuel for the van, the taxable benefit related to this is £633.
Beneficial Loan

A beneficial loan is one made to an employee by the employer which is either interest free or
the interest paid is less than the official rate of interest.

The taxable benefit is as follows:
£
Interest payable on loan (calculated using official rate of interest)
Less: Interest actually paid (if any)
Assessable benefit
X
(X)
X
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
No assessable benefit arises if the total amount outstanding does not exceed £10,000 at any
time during the tax year.

A benefit arises on interest on the whole loan, if the amount is > £10,000.

If the employer writes off the loan to the employee, the amount written off becomes a taxable
benefit.
Example – Beneficial Loans
Kim was provided with an interest free loan of £24,000 on 1 June 2018, so that she could purchase
a new motor car.
The taxable benefit is £500 (24,000 at 2.5% x 10/12).
Since no repayments have been made during 2018–19, both methods will produce the same result.
Partial Repayment of the loan during the tax year: There are two methods of calculating the
assessable benefit in this situation:
1. Average method
The official rate of interest is applied to the average of the balance at the beginning and at the end
of the year. If the loan was repaid before the year end, then the balance at the time of repayment is
taken.
Opening Balance + Closing Balance
x Interest saved
2
2. Strict method
The official rate of interest is applied to the amount outstanding on a month by month basis.
Example – Beneficial Loan – Partial Repayment
Ming was provided with an interest free loan of £120,000 on 1 May 2018, so that she could
purchase a holiday cottage. Ming repaid £50,000 of the loan on 31 July 2018, and repaid the
balance of the loan of £70,000 on 31 December 2018.
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The benefit calculated using the average method is:
[(120,000 + 70,000)/2] x 2.5% x 8/12 = £1,583
The benefit calculated using the strict method is:
120,000 at 2.5% x 3/12 = £750
70,000 at 2.5% x 5/12 = £729
Total = £1,479
Ming will therefore elect to have the taxable benefit calculated according to the strict method.
In the exam both methods have to be used in such a scenario unless a particular method is
specified.
Provision of Asset

When an employer makes an asset available to an employee for his private use, the employee
is assessed annually on 20% of the market value of the asset when first provided to the
employee.
Gift of Asset

If the asset is subsequently gifted or sold to the employee, the assessable benefit is the greater
of:
a. The market value at the date of the gift / sale less employee contribution (if any).
b. The market value when first provided to the employee less annual 20% assessments less
employee contribution (if any).
Example – Use and Gift of Assets
Joe is employed by Firstly plc. On 6 April 2018 the company provided him with a home
entertainment system costing £4,400 for his personal use. Firstly plc gave the home entertainment
system to Joe on 31 December 2018 for free, although its market value on that date was £3,860.
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The taxable benefit for the use of the home entertainment system is £660 (4,400 x 20% x 9/12).
The taxable benefit for the acquisition of the home entertainment system is the market value of
£3,860, because this is greater than £3,740 (4,400 – 660).
Allowable Deductions:
The general rule is that expenses can only be deducted from earnings if they are incurred wholly,
exclusively and necessarily in performing the duties of the employment.
Expenses specifically deductible against earnings:
1. Insurance premiums to cover directors’ and employees’ liabilities (and payments to meet
those liabilities)
2. Subscriptions to relevant approved professional bodies. E.g.: annual subscription to ACCA
(UK) etc.
3. Qualifying travel expenses – costs the employee incurs travelling in the performance of his
duties or/and travelling to or from a place attended in the performance of duties

Normal commuting i.e. travelling from one’s home to the permanent office and back again,
does not qualify. Expenses of travelling from home to client are only deductible if the
journey is substantially different from normal commute.

Relief is available for expenses incurred by an employee working at a temporary location
on a secondment of 24 months or less.

If Approved Mileage Allowance is paid/ or not paid at all by the employer, then the shortfall
between the following SMA rates and the amount paid by the employer (if any) is treated as
an Allowable Deduction.

Mileage allowance for use of OWN car for business purposes:
Up to 10,000 business miles
45p per mile
Miles over 10,000
25p per mile
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
If the employer pays an amount over and above the figures specified, then the excess
becomes a taxable benefit.
Example – Approved Mileage Allowance
Dan and Diane used their own motor cars for business travel during the tax year 2018–19.
Dan drove 8,000 miles in the performance of his duties, and his employer reimbursed him at the
rate of 60p per mile.
Diane drove 12,000 miles in the performance of her duties, and her employer reimbursed her at
the rate of 30p per mile.
Dan
The mileage allowance received by Dan was £4,800 (8,000 at 60p), and the tax free amount was
£3,600 (8,000 at 45p). The taxable benefit is therefore £1,200 (4,800 – 3,600).
Diane
Diane can make an expense claim of £1,400:
£
10,000 miles at 45p
4,500
2,000 miles at 25p
500
5,000
Mileage allowance received (12,000 at 30p)
(3,600)
Expense Claim
1,400
4. Contributions (within limits) to a registered occupational pension scheme. Both pension
contributions and charitable giving payments are deducted by the employer from pre tax
salary.
5. Payments to charity under a payroll deduction scheme. This is a scheme where, if the
employee elects, a sum of money is deducted from his/ her salary each month by the employer
to be donated to charities.
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Dispensations:

Previously an employer could agree a dispensation with HMRC to avoid the need to report
routine business expenses that were reimbursed to employees.

Dispensations have been replaced with automatic exemptions which apply on expenses that
would be treated as allowable deductions for employees.
Payrolling of Benefits:

Employers can now include the taxable benefits provided to employees in the payroll with the
tax liability being deducted as PAYE.

Payrolled benefits would not have to be reported on the form P11D.

If benefits are not payrolled, they will have to be reported on form P11D.
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CHAPTER 4: PROPERTY INCOME
Definition: Property income covers rent or lease premiums from UK property under the normal
tenancy and lease agreements. UK property constitutes of Land, Buildings, and Yachts etc.
Calculation: The Steps 1 - 3 need to be applied in a columnar format if the individual has rented out
more than one property.
Step 1: Determine the rental income on cash basis for the relevant tax year and on accrual basis, if
the property income receipts exceed £150,000.
Cash basis is the default calculation mode unless specified to the contrary in the exam
Step 2: Calculate the assessable premium, if property leased.
Step 3: Deduct and revenue expenses incurred wholly and exclusively for the letting out of the
property and that are actually paid during the year by the landlord.
In many cases, there will be no difference between the cash basis and the accruals basis.
The following are treated the same under both the cash basis and the accruals basis:

Security deposits (these are returned to the tenant on the cessation of a letting, less
the cost of making good any damage, so they are therefore initially not treated as
income).

Replacement furniture relief.

Relief for property income losses.

Premiums received.

The restriction to finance costs.
Step 4: In case of more than one property the final figures are summed up, providing an
automatic relief for loss from any property.
Step 5: If the net result is taxable property income it is taken to the Income Tax Computation but
if the net result is a property loss, a loss memo is created and the amount is carried
forward for relief against future property income.
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Step 6: In case of a room being let out of the main residence of the individual, the Rent-a-Room
Relief rules apply.
Pro-Forma: The following format should be used when dealing with an exam question:
Edward Hayes
Property Income for the Tax Year 18/19
Rental Income received – for the period the property
Unfurnished
Furnished
Property 1
Property 2
Total
£
£
£
XXX
XXX
XXX
is actually let for
Assessable Premium:
Premium Amount
Less: 2% x Premium Amount x (n – 1)
XXX
XXX
Less: Allowable Expenses paid – for the period the
property is available for letting

Advertising/ Agent’s fees
(xxx)
(xxx)
(xxxx)

Repairs & Maintenance (revenue)
(xxx)
(xxx)
(xxxx)

Water Rates
(xxx)
(xxx)
(xxxx)

Council Tax
(xxx)
(xxx)
(xxxx)

Bad Debts
(xxx)
(xxx)
(xxxx)

Insurance
(xxx)
(xxx)
(xxxx)

Approved mileage allowance (if car used for
-
(xxx)
(xxxx)
property)

Interest on loan to purchase property
(xxx)
(xxx)
(xxxx)

Gardening Expenses
(xxx)
(xxx)
(xxxx)

Replacement Furniture relief (if property is
(xxx)
(xxx)
(XXX)
XXXX
furnished)
TAXABLE PROPERTY INCOME
XXXX
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Rental Income:
Rent is recognised on cash basis in a tax year but only for the months that the property was
actually let out for. It is recognised on accrual basis, if the income receipts exceed £150,000.
Short Term Lease:

A short term lease agreement is one in which the property is let out for a period ≤ 50 years.

A premium is a lump sum received by the landlord at the start of the lease in return for giving
the tenant the exclusive right to use the property for the duration of the lease.

The taxable portion of the premium received is calculated as follows:
Premium assessable as property income
= P – P (2% x (n- 1))
Where p =premium
n
=no of years
Example – Short Term Lease
Harry let out his property on a 25 year lease to his friend Jacob. Jacob paid Harry a premium of
£30,000 for the lease.
Taxable premium for Harry: £30,000 – [£30,000 x 2% x (25-1)] = £15,600

The premium paid by the tenants can be treated as his/ her trading expense, if the property is
being used for business purposes. The assessable premium amount is split into a per annum
expense by dividing the assessable portion over the number of years of the agreement.
Allowable Expenses:

Only expenses that are actually paid are treated against rental income received when
individuals calculate the property income on cash basis. These are recognised on accrual basis
when the individual is required to recognise income on accrual basis.
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
Allowable expenses must be incurred wholly and exclusively for the purposes of the property
letting business and must be revenue, not capital, in nature. (Refer to list of items covered in
the pro-forma).

Expenses are if the property is available for letting even if the property is empty (e.g. repairs
carried out in between old tenants moving out and new tenants moving in).
Expenses incurred while the property is occupied by the owner are not allowed expenses.

Irrecoverable rent is an allowable deduction.

If the owner uses the personal car for the property related matters, the HMRC Approved
Mileage Allowance can be used when calculating property income. This is an alternative to
using the actual motor expenses incurred.

For individuals, interest payable on any loan taken out to purchase or improve the property
(including incidental costs of obtaining the loan finance and any bank overdraft interest in
running the property business) is an allowable expense against the rental income.

Replacement Furniture Relief: the owner of the property can deduct the actual cost of
replacing furniture and furnishings from the property income, even if the property is not fully
furnished.
There is no relief for the initial cost, only relief when the assets are replaced.
The amount of relief is reduced by any proceeds received from selling the old furniture that
has been replaced.
Relief is not given for any improvement element.
Example – Property Income
On 6 July 2018, Nim purchased a freehold house. The property was then let throughout the period
6 July 2018 to 5 April 2019 at a monthly rent of £800, although the rent for March 2019 was not
received until 8 April 2019.
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On 6 July 2018, Nim paid property insurance of £600 for the year ended 5 July 2019.
During July 2018, Nim furnished the property with a cooker costing £440. The cooker was sold
during March 2019 for £110, and replaced with a similar model costing £460.
During the period 6 July 2018 to 5 April 2019, Nim drove 80 miles in her motor car in respect of
her property business. She uses HMRC’s approved mileage allowances to calculate the expense
deduction.
Nim’s property income is:
£
Rent received (800 x 8)
6,400
Insurance
(600)
Replacement furniture relief (460 – 110)
(350)
Mileage allowance (80 miles at 45p)
(36)
Property income
5,414
Finance costs
Tax relief for finance costs in respect of residential property, such as mortgage interest, is to be
restricted to the basic rate.
However, this restriction is being phased in over four years, and for the tax year 2018–19 only
50% of finance costs are subject to the basic rate restriction.
It makes no difference whether the finance was used to purchase the property or was used to pay
for repairs.
The restriction does not apply where finance costs relate to a furnished holiday letting or to nonresidential property such as an office or warehouse. The restriction only applies to individuals and
not to limited companies.
The restriction has no impact on basic rate taxpayers.
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Example – Financing Cost
On 6 April 2018, Fang purchased a freehold house. The property was then let throughout the tax
year 2018–19 at a monthly rent of £1,000.
Fang partly financed the purchase of the property with a repayment mortgage, paying mortgage
interest of £4,000 during the tax year 2018–19. The other expenditure on the property for the tax
year 2018–19 amounted to £1,300, and this is all allowable.
For the tax year 2018–19, Fang has a salary of £80,000.
Fang’s property income is:
£
Rent received (1,000 x 12)
12,000
Mortgage interest (4,000 x 50%)
(2,000)
Other expenses
(1,300)
Property income
8,700
His income tax liability is:
£
Employment income
80,000
Property income
8,700
88,700
Personal allowance
(11,850)
Taxable income
76,850
Income tax
34,500 x 20%
6,900
42,350 x 40%
16,940
23,840
Interest relief (4,000 x 50%) x 20%
Tax liability
(400)
23,440
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Rent-a-Room Relief
When an individual lets out a room in his/ her main residence, they are entitled to a Rent a Room
relief exemption amount of £7,500.
The individual can calculate the taxable rental income as the lower of the following two
alternatives:

Alternative 1: Ignore Rent a Room Relief and calculate taxable income as per the normal rules.
Rental income – Normal revenue expenses related to the room
If the expenses of the individual are more than the income, a property loss will arise that can
be relieved

Alternative 2: Claim Rent a Room Relief, in which case, normal expenses are substituted by
the relief amount.
Rental income accrued - £7,500 (Rent-a-Room Relief amount)
If the rental income is less than £7,500, no loss arises as £7,500 is a relief amount which can
convert taxable income to zero but not into a loss.
Example – Rent a Room Relief
During the tax year 2018-19, Edmond rented out a furnished room in his main residence. He
received rent of £8,540 and incurred allowable expenditure of £2,140 in respect of the room.
If Edward claims rent a room relief, then his property income will be (£8,540 - £7,500) = £1,040
whereas under normal calculation rules, his taxable property income would be (£8,540 - £2,140) =
£6,400. Therefore it is beneficial for Edward to claim Rent a Room Relief.
If the rental income is shared between spouses or civil partners, the special exemption is halved.
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Property Loss

Income and expenses of all property are pooled to give an overall profit or loss figure for the
year. The losses from one property are automatically offset against other property income.

Any surplus losses are carried forward to the next tax year.

Losses carried forward may only be offset against the first future available property income.

Property loss cannot be relieved against any other income in any year.
Furnished Holiday Lettings

Furnished property let out on commercial basis and fulfilling the following criteria:

Available for letting for at least 210 days in a year.

Actually let out for at least 105 days in a year.

Not available for long term occupation (same customer for consecutive > 31 days) for a
total of > 155 days in a year.

Losses from Furnished Holiday Lettings can only be set-off against future profits of the same
FHL business.

The tax treatment of factors associated with Furnished Holiday Lettings are:

Treated as relevant earnings for pension contributions.

Capital allowances available on furniture rather than furniture allowance.

Capital gains rollover relief available on the gains of the business assets, when disposed.
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CHAPTER 5: TRADING PROFITS
Badges of Trade:
Where there is doubt as to whether an activity constitutes a trade or simply a capital disposal, a
number of key factors have been identified through judicial decisions, known as the badges of
trade. The badges of trade give guidance where it is not clear if certain activities constitute a
trade.


Subject matter: Has the asset been purchased for:

Personal Use: indicates capital asset

Investment: indicates capital asset

Reselling at a profit: indicates trading
Frequency of transactions: the more frequent the transactions, the higher indication of the
individual running a trade.

Length of ownership: the shorter the period of ownership of an item, the kore likely that it
was treated as inventory in trade.

Supplementary work and marketing: where additional work is carried out to make a
product/ item more attractive to the buyer, this is a norm of trading.

Reason for sale: If the asset was old under duress, this would be considered a capital disposal.

Profit motive: the absence of a profit motive at the time of buying the item indicates whether
it was planned to be used as inventory or a capital asset.
Tax Adjusted Trading Profits

Individuals running a business normally calculate their profit or loss using Financial
accounting concepts, which the HMRC does not completely agree with for the purpose of tax
calculation.

Rather than maintaining two sets of accounts – one as per Accounting standards and one as
per tax; individuals normally make tax adjustments to their accounting profits.

This tax adjusted amount is then added to the Income Tax Computation in the relevant tax
year. The relevant tax year is identified by the application of a concept known as Basis Period
(covered later).
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Calculation:
Step 1: Make the required tax adjustments to the Accounting Profit figure.
Step 2: Reduce Capital Allowances from the profit figure as a Tax substitute for depreciation of
capital assets.
Step 3: Apply the basis period rules to match the TATP of a sole trader to a tax year and export the
relevant amount to the current tax year Income Tax Computation.
Step 4: In case of loss, a loss memo is to be created and the trading loss relief options applied.
Pro-Forma: The following is the recommended format for covering Trading profit Adjustments
(whether for self-employed individuals, partnerships or companies).
Trading Profit Adjustments for the Period Of Account
£
Net Profit as per Accounts
£
XXXX
ADD: Disallowed Expenditure:

Expenses not related to trade
xxx

Capital expenditure including initial repairs
xxx

Depreciation/ Amortisation/ Impairment of assets
xxx

Fines or penalties – unless incurred by employee
xxx

Increase in general provision for receivables
xxx

Element of personal expense by owner
xxx

Gift aid donation
xxx

Loss on disposal of assets
xxx

Entertainment of suppliers and UK based customers
xxx

Donations to political parties/ national charities
xxx

15% of lease rent for motor cars emitting > 110 g/km CO2
xxx
XXXX
ADD: Allowed Income:

Drawings of goods by owner
xxx
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
Impaired debt recovered
xxx

Decrease in specific provision for receivables
xxx
XXX
LESS: Disallowed Income:

Rental income
xxx

Bank interest
xxx

Dividend income
xxx

Profit on disposal of assets
xxx

Decrease in general provision for receivables
xxx
(XXX)
LESS: Allowed Expenditure:

Any expense ‘wholly and exclusively’ related to trade
xxx

Revenue natured expenses such are regular repairs etc
xxx

Impaired debts
xxx

Increase in specific for receivables
xxx

Entertainment and gifts for employees
xxx

Entertainment of Overseas customers
xxx

Donations to local charities for advertisement
xxx

Gifts to third parties provided ≤ £50 per person per annum; not food/
drink/ tobacco items and given for purpose of advertisement

Gifts of inventory as samples

Capital Allowances
TAX ADJUSTED TRADING PROFIT
xxx
(XXX)
XXXX
Notes:

Disallowed expenditure: are those expense items that should not be deducted in arriving at
the taxable profit amount. If they have been deducted in the Accounting profit figure; these
amounts should be added back.

Allowed expenditure: are expense items that should be deducted to arrive at the taxable
profit amount. If they have already been deducted, these should be marked as ‘0’ in the exam,
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as they require no adjustment. But if these have not been dealt with, the amounts should be
deducted.
Pre-trading expenditure incurred in the seven years prior to the commencement of the business,
is treated as an expense on the day the business starts trading.

Disallowed income: are items of income that the HMRC does not consider as part of trade. For
example, dividends received from investments in companies are not trading profits. These
should be removed from the accounting profit figure to arrive at the tax adjusted trading profit
amount.

Allowed income: items of income that according to HMRC are part of trading profits. Such as
drawings of inventory by the owner for personal use is viewed by the HMRC as a sale and
therefore requires an addition in the profit amount.

For all of the above categories, the following steps should be applied:
1. Identify whether the expense/ income item is allowed or disallowed?
2. Based on this categorisation, should be part of the trading profit amount or not?
3. Has it been treated accordingly in the question?
a. If yes, ignore adjustment but mention the item and mark the associated amount as ‘0’ to
get marks.
b. If no, carry out the necessary addition or deduction.
Example – Trading Profit Adjustments
Na Style commenced self-employment as a hairdresser on 1 January 2014. The following
information is available for the tax year 2018/19:
Na’s income statement for the year ended 30 June 2018 is as follows:
Notes
£
Income
£
62,300
Expenses
Depreciation
Motor expenses
1,300
1
2,200
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Professional fees
2
1,650
Property expenses
3
12,900
Purchases
4
4,700
Other expenses
5
16,550
(39,300)
Net profit
21,700
1. Na charges all the running expenses for her motor car to the business. During the year ended
30 June 2018. Na drove a total of 8,000 miles, of which 7,000 were for private journeys.
2. The figure for professional fees consists of £390 for accountancy and £1,260 for legal fees in
connection with the grant of a new five-year lease of parking spaces for customers’ motor cars.
3. Na lives in a flat that is situated above her hairdressing studio, and one-third of the total
property expenses of £12,900 relate to this flat.
4. During the year ended 30 June 2018 Na took goods out of the hairdressing business for her
personal use without paying for them, and no entry has been made in the accounts to record
this. The goods cost £250(an amount that has been deducted under ‘purchases’) and had a
selling price of £450.
5. The figure for other expenses of £16,550 includes £400 for a fine in respect of health and
safety regulations, £80 for a donation to a political party and £160 for a trade subscription to
the Guild of small hairdressers.
6. Na uses her private telephone to make business telephone calls. The total cost of the private
telephone for the year ended 30 June 2018 was £1,200, and 20% of this related to business
telephone calls. The cost of the private telephone is not included in the income statement
expenses of £39,300.
7. Capital allowances for the year ended 30 June 2018 are £810
Page 66 of 244
Taxation - UK FA
Na Style tax adjusted trading profit for year ended 30 June 2018
£
Net profit
£
21,700
Add: Depreciation
1,300
Motor expenses – private use 7,000/8,000 ×£2,200
1,925
Professional fees – accountancy
0
Professional fees – lease
1,260
Property expenses – private use 1/3×£12,900
4,300
Purchases – goods taken for own use (selling price)
450
Other expenses – fine
400
Other expenses – political party donation
80
Other expenses – trade subscription
0
9,715
31,415
Less: Telephone – business use 20% ×£1,200
(240)
Capital allowances
(810)
(1,050)
Tax adjusted trading profit
30,365
Cash Basis of Accounting
An unincorporated business (sole traders and partnerships), whose receipts for a tax year are ≤
£150,000 can make an election to calculate trading profits on the cash basis and can continue to
do so until the revenue is £300,000.
This election applies in the tax year for which it is made and all subsequent tax years.
The taxable trading profits under the cash basis are calculated as:
Cash receipts less Deductible business expenses actually paid in the period.
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
Cash receipts include all amounts received relating to the business including amounts received
from the sale of plant and machinery, other than on the sale of motor cars.

Under the cash basis, business expenses are deductible when they are paid. Business expenses
for the cash basis of accounting include capital expenditure on plant and machinery (except
motor cars). Only business expenses are tax deductible so that any private element must be
disallowed.

Fixed rate expenses can be used in relation to expenditure on motor cars and business
premises partly used as the trader's home.

Fixed rate mileage expense: The fixed rate mileage (FRM) expense can be claimed in respect
of motor cars which are owned or leased by the business and which are used for business
purposes by the sole trader/partner or an employee of the business.
The FRM expense is calculated as the business mileage times the appropriate rate per mile.
The appropriate mileage rates for motor cars are 45p per mile for the first 10,000 miles, then
25p per mile thereafter.

A fixed rate monthly adjustment can be made where a sole trader/partner uses part of the
business premises as his home eg where a sole trader runs a small hotel or guesthouse and
also lives in it.
The adjustment is deducted from the actual allowable business premises costs to reflect the
private portion of household costs, including food, and utilities (eg heat and light).
It does not include mortgage interest, rent, council tax or rates: apportionment of these
expenses must be made based on the extent of the private occupation of the premises.
The deductible fixed rate amount depends on how many people use the business premises
each month as a private home:
Page 68 of 244
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
Number relevant occupants
Non-business use amount
1
£350
2
£500
3 or more
£650
Losses: A net cash deficit (ie a loss) can normally only be relieved against future cash surpluses
(ie future trading profits). Cash basis traders cannot offset a loss against other income or gains.
Trading profits or loss under the cash basis is calculated as follows:
Receipts (including from sale of equipment)
XXX
Less: Payments (including for purchase of equipment)
(XXX)
Trading profit or loss
XXX
Example – Cash Basis of Accounting
Winifred commenced self-employment as a surveyor on 6 April 2018. The following information is
available for the year ended 5 April 2019:
1.
Revenue was £62,600, of which £3,800 was owed as receivables at 5 April 2019.
2.
On 6 April 2018 office equipment was purchased for £4,700.
3.
On 10 April 2018 a motor car with CO₂ emissions of 98 grams per kilometer was purchased for
£15,600. The motor car is used by Winifred, and 60% of the mileage is for private journeys.
4.
Motor expenses were £4,800. During the year ended 5 April 2019 Winifred drove 9,000
business miles.
5.
Other expenses (all allowable) were £13,300, of which £700 was owed as payables at 5 April
2019.
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If Winifred uses the normal basis, then her trading profit for the year ended 5 April 2019 will be:
£
Revenue – accrued
£
62,600
Expenses:
Motor expenses (4,800 x 40%)
1,920
Other expenses
13,300
Capital Allowances (4,700 + 1,123)
5,823
(21,043)
Trading profit
41,557

The office equipment purchased for £4,700 qualifies for the annual investment allowance.

The motor car has CO₂ emissions between 51 and 110 grams per kilometer, and therefore
qualifies for writing down allowances at the rate of 18%. The allowance for the year ended 5
April 2019 is £1,123 (15,600 x 18% = 2,808 x 40%).
If Winifred uses cash basis, then her trading profit for the year ended 5 April 2019 will be:
£
Revenue (62,600 – 3,800)
£
58,800
Expenses:
Office equipment
4,700
Motor expenses (9,000 miles at 45p per mile)
4,050
Other expenses (13,300 – 700)
12,600
(21,350)
Trading profit
37,450
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Taxation - UK FA
CHAPTER 6: CAPITAL ALLOWANCES
Definition: Capital allowances are tax equivalent of depreciation. Add back any depreciation
shown in computing the accounting profit and deduct capital allowances instead.
Plant & Machinery:
Apart from the plant and machinery used in trade, computer software also qualifies as plant by
statute.
Also ‘integral features’ of a building (not the building itself) are treated as ‘plant’, e.g.

Cold water, water heating, Air conditioning systems

Lighting and electrical systems

Lifts and escalators
Calculation: The following format is the recommended lay-out for solving Capital Allowances
calculations whether for individuals or companies. Items are explained in detail later.
Capital Allowances for Period of Account
£
TWDV b/f
General
Special
Asset With
Short
Pool
Rate
Personal
Life
Pool
Use – 30%
Asset
£
£
£
£
XXX
XXX
XXX
XXX
Allowances
£
Addition without AIA
Motor Car CO2 :
51 - 110 g/km
XXX
Motor Car CO2
> 110 g/km
XXX
Addition with AIA
P&M
AIA x ?/12m
XXX
(200,000)
200,000
XXX
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Less disposal
(lower of original
(xxx)
(xxx)
cost and proceeds)
XXX
Balancing
(xxx)
XXX
Allowance
XXXX
Less: WDA @ 18% x
XXXX
XXXX
(xxx)
XXX
?/12m
Less: WDA @ 8% x
(xxx)
XXX
?/12m
Less: WDA @ 18% x
(xxx)
?/12m
70%
XXX
Addition with FYA
Motor Car CO2
≤ 50 g/km
Less: FYA @ 100%
xxx
(xxx)
TWDV C/F
XXX
XXXX
XXXX
XXXX
TOTAL
ALLOWANCES
XXXX
Purchases: Treatment of VAT for Capital Allowance Purposes

If the business purchasing the assets is a VAT registered business, then the value included in
the Capital allowance computation is the VAT exclusive figure. This is applicable for all
noncurrent assets except for car with personal use.

If the business is not registered for VAT, Capital allowance is calculated over VAT inclusive
figures over all noncurrent assets.
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General Pool

The pool groups together:

Plant and machinery, furniture and equipment etc.

Motor cars ( CO2 Emission 51 g/km- 110 g/km)

All asset in general pool qualify for AIA in the year of purchase

WDA is available @ 18% per annum
Written Down Allowances

The balancing amount of the assets on which capital allowances had been claimed in the
previous tax year is brought forward and is termed – Tax Written Down Value brought
forward - TWDV

Writing down allowance (WDA) is given for a period of account at 18% per annum on reducing
balance basis on the General Pool and at a rate of 8% on the Special Rate Pool.

The figure remaining (the TWDV) is carried forward to the next period.

Where a trader prepares accounts for a period longer or shorter than twelve months, the WDA
is increased or decreased accordingly.
Annual Investment Allowances

The annual investment allowance (AIA) is available to all kinds of businesses and allows a
business to immediately write off the first £200,000 of expenditure on plant and machinery
but not on cars.

This limit of £200,000 is applicable annually. Expenditure above £200,000 will be eligible for
WDA at the normal rate.

Where the period of account is more or less than 12 months the limit of £200,000 is
proportionately increased or decreased.

AIA should be adjusted against the qualifying assets in the following order:
1. Special Rate Pool
2. General Pool
3. Short Life Asset
4. Asset With Personal Use
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First Year Allowances

This is a special allowance available on Low emission motor cars (Cars emitting < 50 g/km
CO2).

When a low emission car is purchased, the entire purchase price is written off in the same
year.

Hence the FYA rate is 100% but this is not time apportioned according to the Period of Account
Disposal of Assets

No allowances can be claimed on assets disposed during the period of account. Hence assets
disposed are deducted from the relevant column in the pro-forma.


The amount deducted is the lower of

Disposal proceeds

Original cost of the asset disposed
Balancing Charge: When the Tax written down value of an asset is < Gross sales proceeds.
This is a negative amount in the Allowances (expense) column and is net off against the
allowances of the period of account. If the resultant amount of the capital allowance is a
charge, it is added to the Tax Adjusted Trading profit amount as Allowed income.

Balancing Allowance: When the TWDV of the asset is > Sale proceeds. This can never be
created on pools unless the business ceases.
Example – Capital Allowances
Jack prepares accounts to 31 March each year. Information for the year ending 31 March 2019 is
as follows:
£
1 April 2018
TWDV brought forward
65,000
10 April 2018
Plant purchased
534,500
1 May 2018
Bought machinery
112,500
1 July 2018
Sold plant (original cost £38,000 on 01/06/2011)
15,000
Page 74 of 244
Taxation - UK FA
Capital allowances for the year ended to 31 March 2019 are as follows.
AIA
General
Allowances
pool
£
TWDV b/f
£
£
65,000
Additions not qualifying for AIA
-
Additions qualifying for AIA
Plant
534,500
Machinery
112,500
647,000
Less: AIA
(200,000)
200,000
447,000
Less: Disposals (lower of cost and sale proceeds)
(15,000)
497,000
WDA (£497,000 x 18%)
(89,460)
TWDV b/f
407,540
Allowances
89,460
289,460
Special Rate Pool

The pool groups together:

All long-life assets with a useful life of at least 25 years on which total overall expenditure
incurred within a year is at least £100,000.

Features those are integral to a building.

Thermal insulation.

Cars ( CO2 emission > 110 g/km)

All assets in special rate pool qualify for AIA except cars

WDA is available @ 8% per annum

Balancing charge is calculated on disposal; no balancing allowances arise unless the trade is
ceased.
Page 75 of 244
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
AIA should initially be allocated to assets qualifying for Special Rate Pool as a reduced
allowance of 8% is claimed on these.
Example – Special Rate Pool
Lucy has been trading for many years, making up accounts to 5 April each year. The tax written
down value of her main pool at 5 April 2018 was £110,000.
In the year to 5 April 2019, Lucy had the following expenditure:
10 June 2018
General plant costing £45,000
12 December 2018
Lighting system in shop £40,000
15 January 2019
Car for business use only (C02 emissions 175 g/km) £25,000
26 January 2019
Delivery van £15,000
4 March 2019
Lifts £545,000
Capital Allowances Computation
AIA
£
TWDV b/f
General pool
£
Special rate
Total
pool
allowances
£
£
110,000
Additions qualifying for AIA
Lighting
40,000
Lifts
545,000
585,000
AIA
(200,000)
200,000
385,000
Transfer to special rate pool
(385,000)
385,000
Additions qualifying for but not
given AIA
Plant
45,000
Van
15,000
Page 76 of 244
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Additions not qualifying for AIA
Car
25,000
170,000
WDA @ 18%
(30,600)
WDA @ 8%
TWDVs c/f
410,000
30,600
(32,800)
139,400
32,800
377,200
Allowances
263,400
Small pool allowance

Entire pool amount can be written off if amount is ≤ £1,000.
Short Life Asset

A short life asset is an asset which the taxpayer elects to treat as a short life asset and which is
not specifically excluded from being classed as a short life asset.

Typically this election may be beneficial where the taxpayer expects the asset to have an
expected life of less than eight years from the end of the period of account in which the asset
was purchased (i.e. less than nine years from the date of acquisition).

The effect of an election is to de-pool such assets, which would otherwise be accounted for in
the general pool.

Cars and private use assets cannot be short life asset

Each short life asset has its own column for capital allowances.

Short life asset qualify for AIA in the year of purchase

WDA is available @ 18% per annum

Balancing allowances or balancing charge is calculated in the year of disposal

If the asset is not disposed of by the end of the eighth year after the end of the period of
account in which the asset was purchased, then the TWDV of the asset is transferred to the
general pool.
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Example – Short Life Asset
Mr. A runs a small business and the following data is related to y/e 31/3/2019.

WDV of the general pool as at 1 April 2018 was £120,000

WDV of a short life asset (1) on the same date was £60,000

Additions during the year were:


Office equipment for £160,000

Short life asset (2) for £170,000

Processing machine for £40,000

Car with CO2 emission of 100 g/km for £15,000
P & M was sold for £15,000 on 31st December 2018. It was purchased for £12000 on 9 August
2010.
AIA
WDV b/f
General
Short life
Short life
pool
asset (1)
asset (2)
£
£
£
£
-
120,000
60,000
Total
£
-
+ Addition not qualifying for AIA Car
15,000
+ Addition qualifying for AIA
1600,000 + 40,000 =
AIA
200,000
(200,000)
200,000
SLA (2) Addition but no AIA
170,000
available
Disposal
WDA @ 18%
(12000)
-
123000
60,000
(22140)
WDA @ 18%
WDV c/f
Total allowances
-
100860
22,140
(10,800)
(30,600)
49,200
139,400
41,400
263,540
Page 78 of 244
Taxation - UK FA
Asset With Personal Use

Special rules apply if asset has any private use along with business use.

Asset with private use are not added in any of the pools

Separate column is maintained for every asset with personal use

WDA @ 18% is available ( if cars according to specified rules)

Asset with personal use qualify for AIA in the year of purchase

Balancing allowance or balancing charge is calculated in the year of disposal

However only the business proportion of allowances can be claimed against the Trading profit.
Example – Capital Allowances Computation
Ming prepares accounts to 31 December. On 1 January 2018, the tax written down value of plant
and machinery in her main pool was £16,700.
The following transactions took place during the year ended 31 December 2018:
8 January 2018
Purchased motor car (1)
£15,600
14 April 2018
Purchased motor car (2)
£10,100
12 August 2018
Purchased equipment
£218,750
2 September 2018
Purchased motor car (3)
£28,300
19 November 2018
Purchased motor car (4)
£16,800
12 December 2018
Sold motor car (2)
(£8,300)

Motor car (1) had CO2 emissions of 100 g/km and 20% of its mileage is for private journeys by
Ming.

Motor car (2) has CO2 emissions of 135 g/km.

Motor car (3) has CO2 emissions of 105 g/km.

Motor car (4) has CO2 emissions of 45 g/km
Page 79 of 244
Taxation - UK FA
Ming - Capital Allowances for year ended 31 December 2018
£
TWDV b/f
General
Special
Asset With
Pool
Rate
Personal Use –
Pool
30%
£
£
£
Allowances
£
16,700
+ without AIA
Motor Car (1)
15,600
Motor Car (2)
10,100
Motor Car (3)
28,300
+ with AIA
Equipment
- AIA
218,750
(200,000)
200,000
18,750
- Disposal (lower of original
cost and proceeds) Motor
(8,300)
Car (2)
63,750
- WDA @ 18%
1,800
15,600
(11,475)
- WDA @ 8%
11,475
(144)
- WDA @ 18%
144
(2,808)
80%
2,246
+ with FYA
Motor Car (4)
- FYA @ 100%
TWDV C/F
TOTAL ALLOWANCES
16,800
(16,800)
16,800
52,275
1,656
12,792
230,665
Page 80 of 244
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Motor car (1) is kept separately because there is private use by Ling. This motor car has
CO2 emissions between 51 and 110 grams per kilometre and therefore qualifies for writing down
allowances at the rate of 18%.
Motor car (2) had CO2 emissions over 110 grams per kilometre and therefore qualifies for writing
down allowances at the rate of 8%. Even though it is the only asset in the special rate pool, there is no
balancing allowance on the disposal of this motor car because the expenditure is included in a pool.
Motor car (3) has CO2 emissions between 51 and 110 grams per kilometre and therefore qualifies for
writing down allowances at the rate of 18% in the main pool.
Motor car (4) has CO2 emissions of up to 50 grams per kilometre and therefore qualifies for the 100%
first year allowance.
Page 81 of 244
Taxation - UK FA
CHAPTER 7: PARTNERSHIP
Definition: A partnership is a single trading entity, preparing accounts and computing tax
adjusted trading income but with more than one owner. However, the partnership is not a
separate entity for tax purposes, and the partnership is not subject to tax.
Calculation:
Step 1: Make the required tax adjustments to the Accounting Profit figure.
Step 2: Reduce Capital Allowances from the profit figure as a Tax substitute for depreciation of
capital assets.
Step 3: Split the Tax Adjusted Trading Profit figure amongst the Partners as per their Profit
Sharing agreement. The TATP is also adjusted to pay off any salaries or interest due towards the
partners and the remainder profit split according to the Partnership agreement.
Step 4: Apply the basis period rules to match the TATP of an individual partner to a tax year and
export the relevant amount to the partner’s Income tax computation.
Step 5: In case of loss, a loss memo is to be created and the trading loss relief options applied
Example - Partnership
A, B and C have been trading for many years; preparing accounts to 30 September each year.
Adjusted profits for the year to 30 September 2018 were £160,000.
Profits were shared as follows:

A was paid an annual salary of £10,000,

Interest was paid at 10% on their capital accounts, where the balance on the accounts was A:
£50,000; B: £60,000 and C: £30,000

The Profit Sharing ratio was 2:3:5 for A, B and C respectively.
Page 82 of 244
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The profit for the year ended 30 September 2018 is shared as follows:
Total
A
B
C
£
£
£
£
Year ended 30 September 2018
160,000
Salary
(10,000)
10,000
Interest (10% on capital)
(14,000)
5,000
6,000
3,000
Remaining profit in PSR (20:30:50)
136,000
27,200
40,800
68,000
136,000
42,200
46,800
71,000
Change in Profit Sharing Ratio
Any changes in the partnership agreement require the splitting up of the Period of Account into
pre-change and post-change phases. The profit is then split for both phases separately as per the
applicable partnership agreement.
The change in the profit sharing ratio can take place due to the following reasons
1. Change in the profit sharing arrangement by the existing partners
2. Changes in the membership of the partnership
a) a new partner joins the partnership
b) an existing partner leaves the partnership
Example – Change in Profit Sharing Ratio
X, Y and Z have been trading for many years, preparing accounts to 30 June each year. Their recent
tax adjusted profits have been as follows:
£
Year ended 30 June 2016
147,000
Year ended 30 June 2017
171,000
Year ended 30 June 2018
180,000
Page 83 of 244
Taxation - UK FA
They shared profits equally, until 31 October 2016 when they decided on the following
arrangement:
X
Salary
Y
Z
£19,500 £39,000 £49,500
Profit sharing%
50%
30%
20%
The date from which the change in profit sharing ratio is effected, i.e. 31 October 2016, falls in the
second accounting period (year ended on 30 June 2017). Therefore, this accounting period will be
divided into two periods, first up to the old PSR, i.e. from 1 July 2016 to 31 October 2016 and the
second from 1 November 2016 to 30 June 2017 (the remaining period). The profits will be allocated
accordingly for each period on the basis of the old and new PSRs.
The allocation of profit among the partners for the three years is as follows:
Total
X
Y
Z
£
£
£
£
147,000
49,000
49,000
49,000
57,000
19,000
19,000
19,000
Salary (for 8 months)
72,000
13,000
26,000
33,000
Remaining profit PSR (50:30:20)
42,000
21,000
12,600
8,400
171,000
53,000
57,600
60,400
Salary
108,000
19,500
39,000
49,500
Remaining profit PSR (50:30:20)
72,000
36,000
21,600
14,400
180,000
55,500
60,600
63,900
2016-17 (Year ended 30 June 2016)
PSR 1:1:1
2017-18 (Year ended 30 June 2017)
1 July 2012 to 31 October 2014 (4 months)
PSR (1:1:1)
1 November 2016 to 30 June 2017
(8 months)
2018-19 (Year ended 30 June 2018)
Page 84 of 244
Taxation - UK FA
Loss Relief:
Normally the following two steps are applied in determining the profit of the partners:
1. Share the profits between the partners in the profit sharing ratio of the accounting period.
2. Treat each partner as a sole trader.
These rules continue to be applied when the partnership incurs a loss:

The partnership loss is allocated to the individual partners in their profit / (loss) sharing ratio
of the accounting period.

Each partner may then claim their share of loss, as a sole trader. He may claim whatever loss
relief is most beneficial to him/her.

For example, a partner joining the business is treated as having started a trade and a partner
leaving the partnership is treated as if their business has ceased.

This impacts not only the Basis period rules but also the Trading loss relief options.
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CHAPTER 8: BASIS PERIOD
Introduction: A tax year runs from 6 April to 5 April, but most businesses do not have periods of
account ending on 5 April. So a link has to be created between the period of account of a business
and the tax year.
The procedure is to find a time duration that acts as the basis period for a tax year. The profits for
a basis period are taxed in the corresponding tax year.
The rules in this concept are to be taken literally.
On – Going Business:
Rule: The Period of account is the basis period itself. The relevant tax year is identified by
determining which 5th April comes after the period of account end. The profits of the period of
account are then taxed in this tax year.
ONGOING BUSINESS
Period of Account
CURRENT YEAR BASIS RULE
B.P.: The POA itself matched to the tax
year ending after it
Example – On-going Business
Jacob has been running his business for many years. He always prepares his accounts to 31
December.
For the year ended 31 December 2018, his tax adjusted trading profits were £45,000.

Applying the Current Year Basis rule, the Basis Period is: 1 January 2018 to 31 December 2018.

The profits of these 12 months have to be collectively taxed.

Tax Year: The next 5th April after the 31st of December 2018 is 5 April, 2019. Since tax years run
from 6 April to 5 April, the relevant tax year is 6 April 2018 to 5 April 2019.

Conclusion: The £45,000 profits of the period of account will be taxed in 2018-19.
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Start of Business – Opening Year Rules:
In the first years of trade, the current year basis rule cannot be applied and so special opening
year rules are needed.
START OF A
BUSINESS
SITUATIONS
Ends before the
first next 5th April
OPENING YEAR RULES
1st B.P.: Start of trade
till the first 5th of April
1st POA ≤ 12 m
2nd B.P.: First 12 m of
trade
1st Period Of
Account
Ends before the
next relevant Tax
Year
Ends in the 3rd Tax
Year since the start
of trade
1st POA > 12 m
2nd B.P.: 12 m to the
end of the POA
2nd B.P.: The 2nd tax
year itself
3rd B.P.: 12 m to the
end of the POA
First Tax Year:
Rule: The Basis period runs from the date of the start of trade to the following 5 April.
Example – Opening Year Rule
Annie started trading on 1 January 2019, and prepared her first set of accounts to 31 March 2019.

The first basis period is: 1 January 2019 to 5 April 2019. The entire first period of account is
covered in this rule.
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
Annie will be considered as running an on-going business and the Current year basis rule will be
applied on her next period of account. Assuming that to be 1 April 2019 to 31 March 2020, as per
the CYB rule, the profits of these 12 months will be taxed in 2019-20 entirely.
Second Tax Year:
The basis period for the second tax year depends on the length of the accounting period that ends
in the second tax year.
Rule: If the accounting period ending in the second tax year is more than twelve months long, the
basis period is the twelve months to the period of account end date.
Example – Opening Year Rule
Rosy commenced her business on 1 January 2018 and prepares accounts to 31 March each year.
Her first accounts are for the period to 31 March 2019.

The first basis period is: 1 January 2018 to 5 April 2018. 3 months profits are therefore taxed in
2017-18.

By default the next tax year is 2018-19 and the end of period of account 31 March 2019, falls in
this tax year. The period of accounts duration is > 12 months.

The second basis period is the 12 months to the end of the accounting date i.e. 1 April 2018 to 31
March 2019. Profits of 12 months are taxed in 2018-19.

The period of account was 15 months long and with these two rules the entire profit has been
taxed although in two different tax years.
Rule: If the accounting period ending in the second tax year is less than twelve months long, the
basis period is the first twelve months of trading.
Example – Opening Year Rule
Lisa commenced trading on 1 November 2017 and prepares accounts to 30 June each year. Her
first accounts are for the period to 30 June 2018.
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
The first basis period is: 1 November 2017 to 5 April 2018. 5 months taxed in 2017-18.

By default the next tax year is 2018-19 and the end of period of account 30 June 2018 falls in this
tax year. The period of accounts duration is < 12 months.

The second basis period is the first 12 months of trading: 1 November 2017 to 31 October 2018

Not only will the profit of the first 5 months (1 November 2017 to 5 April, 2018) be taxed twice –
Overlap but this basis period also includes profits from the next set of accounts that Lisa will
prepare from 1 July 2018 to 30 June 2019.
Rule: If there is no accounting period ending in the second tax year, tax the period 6 April to 5
April of the second tax year.
Example – Opening Year Rule
Garry commences trading on 1 February 2018 and prepares accounts to 30 June each year. His
first accounts are for the period to 30 June 2019.

The first basis period is: 1 February 2018 to 5 April 2018. These 2 months match the tax year
2017-18.

The next tax year is 6 April 2018 to 5 April 2019 but the period of account end date of 30 June
2019 does not fall in this tax year.

Second basis period will therefore be: the tax year itself – 6 April 2018 to 5 April 2019. 12 months
profits taxed in 2018-19.

Out of the 17 months of the period of account, profits of 2 and 12 = 14 months have been matched
to tax years and therefore taxed.

Garry will now need to rely on a third rule to cover the rest of his profits.
Third Tax Year:
The basis period for the third tax year is: twelve months to the accounting date end.
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
Garry’s third basis period is: 12 months to the end of his period of account i.e. 1 July 2018 to 30
June 2019. These 12 months profits will be taxed in 2019-20.

However Garry has now paid tax on 2 + 12 + 12 = 26 months of profits, indicating that he has paid
tax twice on profits of 9 months (24 – 17 months)
Overlap Profits
When some profits are taxed more than once in the opening tax years, these profits are called
‘overlap’ profits.
Example – Overlap Profits
Vicky started to trade on 1 January 2016 and prepares her first accounts to 30 June 2016 and
annually thereafter. Her results are as follows:
£
Six months to 30 June 2016
13,000
Year to 30 June 2017
27,000
Year to 30 June 2018
42,000
Tax
Basis Period
Working
Year
Taxable profit
£
15-16
Actual (01/01/2016 - 05/04/2016)
£13,000 x 3/6
6,500
16-17
First 12 months of trade
£13,000 + (£27,000 x 6/13)
26,500
(01/01/2016 - 31/12/2016)
17-18
CYB (year to 30/06/2017)
27,000
(01/07/2016 – 30/6/2017)
18-19
CYB (year to 30/06/2018)
42,000
(01/07/2017 – 30/06/2018)
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Overlap profits
£
01/01/2016 – 05/04/2016 (3 months) (W1) (£13,000 x 3 months/ 6 months)
6,500
01/07/2016 – 31/12/2016 (6 months) (W2) (£27,000 x 6months/13 months)
13,500
Total
20,000
Closing Year Rules
The final assessment of a sole trader is the tax year in which there is a cessation of trade. A
cessation of trade may occur when the sole trader retires, sells the business or dies.
CLOSING YEAR RULES
If the last two POAs end in the
same tax year...
If the last POA ends in a
separate tax year....
B.P.: Combine the two and
relieve the overlap profits
B.P.: The POA itself and relieve
the overlap profits
The basis period for the tax year in which the cessation occurs is determined as follows:
a) If the trade commences and ceases in the same tax year, the basis period is the whole life of the
business.
b) If the trade ceases in the second tax year, the basis period runs from 6 April at the start of the
second year to the date of cessation. This rule overrides the usual commencement rules.
c) If the trade ceases in the third tax year or any subsequent year, the basis period runs from the
end of the basis period for the previous tax year to the date of cessation of trade.
Relief is available for the overlap profits arising on commencement, by deducting them from the
final tax year assessment when a business ceases to trade. This ensures that the assessments over
the life of the business equal the total tax-adjusted profits earned by the business.
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If overlap profits are greater than the assessment for the final tax year, relief is available
for the resulting loss.
Example – Closing Year
Cinderella has been trading for many years, preparing accounts to 31 December each year. She
ceases to trade on 31 May 2017, profits for the 5 months to that date are £13,300.The overlap
profits from the opening years of her trade were £7,100.
£
Profit for five months: 01/01/2017 - 31/05/2017
13,300
Less: Overlap relief
(7,100)
Taxable profit
5,200
Choice of Accounting Date:

An accounting date of just after the start of the tax year can ensure extended interval between
earning profits and paying tax on those. Additionally tax payer gets a lot of time to carry out
effective tax planning.

An accounting date just before the start of the tax year results in the shortest interval between
earning profits and paying tax on it.
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CHAPTER 9: LOSS RELIEF
Introduction: When computing taxable trade profits, profits may turn out to be negative, meaning
a loss has been made in the basis period.
A loss is computed in exactly the same way as a profit, making the same adjustments to the
accounts profit or loss. But instead of charging tax, HMRC has provided loss relief options in these
circumstances.
Factors affecting the choice of loss relief option:
The criteria affecting the decision of loss relief options are as follows:

Tax saving: which option provides the maximum tax saving of an individual

Personal Allowance saving: which option saves the Personal Allowance from getting wasted

As soon as possible: Which option ensures relief the quickest
Loss Relief Options
Trading Loss Relief
Options
Opening Year Loss
Carry Forward
Current Year
Carry Back - 1 year
Only available in
case of loss in the
1st 4 years of
trade. Carry back
loss against Total
Income after
Deductible
Interest of
previous 3 tax
years on a FIFO
Basis
Against future
trading profits for
indefinite period
Against Total
Income after
Deductible Interest
Against Total
Income after
Deductible Interest
Terminal Loss
Loss calculated for
the final 12
months of trade
and carried back
against Trading
Profits of previous
3 tax years on a
LIFO Basis
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For the application of the above, an individual has to choose from the following options:
Carry Forward:

The trading loss is automatically carried forward against the first future available trading
profits till the entire amount is relieved or the business ceases.

The amount of loss relieved cannot be restricted in any way but this option works in favour of
saving personal allowances from being wasted. This is because the rest of the individual’s
income still available for claiming the personal allowance.

The amount of trading loss available to carry forward must be agreed with HMRC within four
years of the end of the tax year in which the loss was incurred.
Current Year and/or Carry Back:

The individual can claim the trading loss against the total income of the current (loss making)
tax year and/ or the preceding tax year.


The claim can be made for:

Both years, in any order or

In either year in isolation
The total income to be utilised for loss relief is after claiming deductible interest but before
claiming personal allowance. These options will result in wasting the personal allowance of the
individual as the loss amount claimed cannot be restricted.

A claim must be made within one year of the 31st of January following the end of the tax year of
loss. Example: claim for a loss in 2018-19 has to be made by 31 January 2021.

Any amount of loss outstanding after claiming the current year and /or carry back option is
automatically carried forward unless the individual makes a claim to relieve the loss against
the Chargeable gains in the tax year.
Example – Trading Loss Relief
Jack has been trading for many years, preparing accounts to 31 December each year. He made a
profit of £4,200 in the year to 31 December 2016 and incurred a loss of £20,000 in the year to 31
December 2018. He receives property income of £15,000 in 2017-18 and £17,000 in 2018-19.
Assume a personal allowance of £11,850 each year.
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Claim against TI of 2018-19 only.
i.
2017-18
2018-19
£
£
Trading income
4,200
0
Property income
15,000
17,000
0
(17,000)
19,200
0
(11,850)
Wasted
7,350
0
Less Trading Loss
Net Income
PA
Taxable income
The balance of the loss, £20,000 - £17,000 = £3,000 will be carried forward and relieved against
future trading profits.
Claim against TI of 2017-18 only.
ii.
2017-18
2018-19
£
£
Trading income
4,200
0
Property income
15,000
17,000
19,200
17,000
(19,200)
0
0
17,000
Wasted
(11,850)
0
5,150
Less trading loss
Net Income
PA
Taxable income
The balance of the loss: £20,000 - £19,200 = £800 will be carried forward and relieved against future
trading profits.
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Claim against TI of 2018-19 and then 2017-18.
iii.
2017-18
2018-19
£
£
Trading income
4,200
0
Property Income
15,000
17,000
19,200
17,000
Less: 2018-19 then 2017-18
(3,000)
(17,000)
Net Income
16,200
0
PA
(11,850)
Wasted
4,350
0
Taxable income
All the loss is relieved.
Claim against 2017-18 and then 2018-19.
iv.
2017-18
2018-19
£
£
Trading income
4,200
0
Property income
15,000
17,000
19,200
17,000
(19200)
(800)
0
16,200
Wasted
(11,850)
0
4,350
Less: 2017-18 then 2018-19
Net Income
PA
Taxable income
All the loss is relieved.
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Relief against Chargeable Gains

If an individual wants to claim loss relief as soon as possible, apart from the current year and/
or carry back option, the taxpayer can claim the trading loss against the chargeable gains.

Only the chargeable gains of the current (loss making) tax year and/ or the preceding year can
be used, that too after the current year and/ or previous year total income has been used up
for loss relief.
If the individual has only used the current year total income and not that of the previous year,
then the chargeable gains of only the current year can be used for loss relief.

The deadline for the claim is the same as for the current year and/ or carry back loss option.
Example – Relief against Chargeable Gain
Todd commenced trading on 1 April 2017 and prepares accounts to 31 March each year. In 201819 Todd incurred a loss of £12,000. He had no other income. His 2017-18 financial position is as
follows:
£
Trading income
6,400
Bank interest (gross)
1,200
Capital gains
12,650
Step 1: Set off of loss first against TI
In the tax year 2018-19, Todd has no other income. So, the loss will have to be relieved against the
total income of 2017-18.
2017-18
£
Trading income
6,400
Bank interest (gross)
1,200
7,600
Less: Carry back loss
Total Income
(7,600)
0
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Step 2: Determine amount of loss remaining
£
Loss for 2018-19
12,000
Less: carry back
(7,600)
Unrelieved loss
4,400
Step 3: Claim to set off unrelieved losses against chargeable gains
£
Capital gains 2017-18
12,650
Less: Trading loss relief
(4,400)
8,250
Less: Annual exemption (restricted)
Total chargeable capital gains

(8,250)
0
In this case it may not be beneficial to make any claim as most of the income and gains would
have been covered by the personal allowance and annual exemption.

Todd would need to decide whether he would prefer to receive a small tax refund by utilising
these loss relief options or whether he would prefer to carry the loss forward to offset against
future profits.
Restrictions on trade loss relief against general income:

Loss relief cannot be claimed against general income if the loss-making business is conducted
on a commercial basis.

An individual taxpayer can only deduct the greater of £50,000 and 25% of adjusted total
income when making a claim for loss relief against general income.

If a claim is made for relief against general income in the previous year, there is no restriction
on the amount of loss that can be used against trading income (of the same trade). The
restriction only applies to the other income in that year. Any restricted loss can still be carried
forward against future profits from the same trade.
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
The limits apply in each year for which relief is claimed. If a current year and a prior year claim
are made, the relief in the current year is restricted to the greater of £50,000 and 25% of the
adjusted total income in the current year. The relief in the prior year is restricted to the greater
of £50,000 and 25% of the adjusted total income in the prior year
Example – Restriction on Loss Relief
For the year ended 5 April 2018 Gloria made a trading loss of £145,000, having made a trading
profit of £30,000 for the year ended 5 April 2017. She has employment income of £125,000 in
each of the tax years 2016–17 and 2017– 18.
If Gloria claims relief for the trading loss against her total income for both 2016–17 and 2017–18,
her taxable income will be as follows:
2016-17
2017-18
£
£
Trading profit
30,000
0
Employment income
125,000
125,000
155,000
125,000
(80,000)
(50,000)
75,000
75,000
Personal Allowance
(11,850)
(11,850)
Taxable Income
63,150
63,150
Loss Relief
Loss relief for 2017–18 is capped at £50,000 as this is higher than £31,250 (125,000 x 25%).
For 2016–17, the loss relief claim against the trading profit of £30,000 is not capped. Relief against
other income is again capped at £50,000, so the total loss relief claim is £80,000 (30,000 + 50,000).
The balance of the loss of £15,000 (145,000 – 50,000 – 80,000) will be carried forward against future
profits from the same trade.
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Somewhat strangely, the cap can actually be beneficial in some situations. In Gloria’s case, the
application of the cap has resulted in most of her loss being relieved against income otherwise
taxable at the higher rate, while her personal allowances have been preserved for both tax years
Opening Year Loss Relief

Special loss relief is available if a self-employed suffers a net loss arising in one or more of the
first four tax years of trading.

For a trading loss incurred in one of the first four tax years, an individual can make a claim to
carry back the loss against his total income (after deductible interest before personal
allowance) in the three preceding tax years on a first-in-first-out (FIFO) basis.
Example – Opening Year Loss
Mike has been employed for several years, earning £3,000 per month. He ceased employment on
31 December 2018 and started business as a sole trader on 1 January 2019, preparing accounts to
5 April each year.
He incurs a loss of £100,000 in the period ended on 5 April 2019.
He has unearned income of £5,000 (gross) each year. Mike claims relief for the loss against the TI
of the previous three years.
The loss arose in 2018-19, so relief is against TI of 2015-16 then 2016-17 then 2017-18.
2015-16
2016-17
2017-18
2018-19
£
£
£
£
Employment income
36,000
36,000
36,000
27,000
Unearned income
5,000
5,000
5,000
5,000
Total Income
41,000
41,000
41,000
32,000
Less: Opening year loss
(41,000)
(41,000)
(18,000)
0
0
0
23,000
32,000
Total income
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£
Loss for 2018-19
100,000
2015-16
(41,000)
(carry back to 2015-16, then 2016-17 and then 2017-18)
59,000
2016-17
(41,000)
18,000
2017-18
(18,000)
0
Terminal Loss Relief

On cessation of trade, a loss arising in the last 12 months may be set against trading income of
the final tax year and the previous 3 years, providing relief against the last year first (LIFO
basis).

The terminal loss is the loss of the final 12 months of trade and is calculated by adding:
a. The trading loss after making adjustments for the profits, if any, for the period starting
from the 6 April of the final tax year to the date of cessation of trade
b. The trading loss for the period from the previous tax year which falls in the final 12 months
of trade after making adjustments for the profits, if any, during that period, and
c. Any overlap profits brought forward.

The terminal loss is set against:
a. The trading profits of the tax year in which the trader ceases trading and
b. The trading profits of the previous three tax years, latest year first.

The claim for this relief must be made within 5 years of 31 January following the tax year in
which the cessation occurs. For example, if cessation occurs in 2018-19, a claim must be made
by 31/01/2025.

On cessation, it is possible to claim relief against TI of the current tax year and/or the previous
tax year instead of, or as well as terminal loss relief.
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Example – Terminal Loss
Monica has been trading for many years, preparing accounts to 31 July each year. She ceased
trading on 31 July 2018. Her results for the last 5 years of trading were as follows:
£
Year to 31 July 2014
17,200
Year to 31 July 2015
21,600
Year to 31 July 2016
18,000
Year to 31 July 2017
900
Year to 31 July 2018
(16,600)
She has overlap profits of £3,600 which have been brought forward. Monica claims terminal loss
relief.
Terminal loss is the loss of the final 12 months of trading, and is calculated as follows:
£
Trading loss of the final 12 months of trading
Final tax year 2018-19
( 6 April 2018 to 31 July 2018) (4 months) (£16,600 x 4/13)
5,533
Previous tax year 2017-18
(1 August 2017 to 5 April 2018) (8 months) (£16,600 x 8/13)
11,067
Unused overlap profits b/f
3,600
Terminal loss
20,200
Terminal loss relief is against the trading income for the year of the loss and the three preceding
years, with the latest first.
Trading income
Terminal Loss
TI
2014-15
2015-16
2016-17
2017-18
2018-19
£
£
£
£
£
17,200
21,600
18,000
900
0
0
(1300)
(18000)
(900)
0
17,200
20,300
0
0
0
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Loss memorandum
£
Terminal loss
20,200
Set off in 2017-18
(900)
19,300
Set off in 2016-17
(18,000)
1,300
Set off in 2015-16
(1,300)
0
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Taxation - UK FA
CHAPTER 10: NATIONAL INSURANCE CONTRIBUTIONS
Introduction:
National Insurance Contributions are additional payments to HMRC by self-employed and
employed individuals.
National Insurance
Contributions
For Employees
Based on Cash Earnings
of the Employee
Class 1 Primary
Paid by employee
£8,425- £46,350 = 12%
> £46,350 = 2%
For Self Employed
Based on the Taxable
Benefits of the
Employee
Class 1A
Paid by employer
Taxable Benefits @
13.8%
Standard Figure
Based on the Trading
profits of the Individual
Class 2
Class 4
£2.95 per week
£8,424 - £46,350 = 9%
> £46,350 = 2%
Class 1 Secondary
Paid by employer
≥ £8,425 = 13.8%
with £3,000
employment allowance
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Class 1 and class 1A NIC

If an individual is employed, he is personally liable to Class 1 primary NI contributions. In
addition, his employer (whether a sole trader, a partnership or a company) is liable to Class 1
secondary and Class 1A contributions for the individual (employee).

These are commonly referred to as employee’s NICs and employer’s NICs.

Both Class 1 primary and Class 1 secondary contributions are paid to HMRC under the PAYE
system. The employer acts as a collector of taxes on behalf of HMRC and deducts the primary
contributions from the employee’s salary/wages before payment.

The due date of payment for Class 1 primary and secondary NICs is the 19th of every month
(i.e. 14 days after the end of each tax month, which is defined as the 6 th of one month to the 5th
of the following month).

Class 1 secondary contributions paid by the employer are part of the total cost of employing
staff and are charged against profit in the financial accounts. The contributions are incurred
wholly and exclusively for the purposes of the trade and are therefore allowable deductions in
the employer’s adjustment of profit computation.

For the tax year 2018–19, the rates of employee class 1 NIC are 12% and 2%.
The rate of 12% is paid on earnings between £8,424 per year and £46,350 per year, and the
rate of 2% is paid on all earnings over £46,350 per year.

The rate of employer’s class 1 NIC is 13.8% and is paid on all earnings over £8,424 per year.

The rate of class 1A NIC which employers pay on taxable benefits provided to employees is
13.8%.
Employment allowance

The annual employment allowance for the tax year 2018–19 is £3,000. This can be used by
businesses to reduce the amount of employer’s class 1 NIC which is paid to HM Revenue and
Customs.
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
For example, if a business’s total employer’s class 1 NIC for the tax year 2018–19 is £4,600,
then only £1,600 (4,600 – 3,000) will be paid to HM Revenue and Customs. If total employer’s
class 1 NIC is £3,000 or less, then the liability will be nil.

This is not available to companies where a director is the sole employee.
Example – Class 1 and 1A NIC
Simone Ltd has only three employees who are each paid £55,000 per year. One of the employees
was provided with the following taxable benefits during the tax year 2018–19:
Company motor car - £6,300
Car fuel - £5,850
Living accommodation - £1,800
£
Employee class 1 NIC
£37,926 (46,350 – 8,424) at 12%
4,551
£8,650 (50,000 – 46,350) at 2%
173
4,724
Total Class 1 Primary NIC
£4,724 x 3
14,172
Employer’s class 1 NIC
£46,576 (50,000 – 8,424) at 13.8%
6,427
Total Class 1 Secondary NIC
£6,427 x 3
19,281
Employment allowance
(3,000)
Payable Amount
16,281
Employer’s class 1A NIC
£13,950 (6,300 + 5,850 + 1,800) at 13.8%
1,925
Class 2 NIC

Class 2 NICs are paid by self-employed individuals (i.e. sole traders and each partner in a
partnership).

Class 2 NICs are a personal tax on the self-employed individual, not the unincorporated
business.
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
For the tax year 2018–19, the rate of class 2 NIC is £2.95 per week.

Class 2 NIC is payable where profits exceed a small profits threshold of £6,205. The profits
used to establish whether or not the threshold has been exceeded are now the same as those
used for class 4 NIC purposes, being the taxable profits for the tax year.

Previously, class 2 NIC was either collected in two instalments or paid on a four weekly basis
by direct debit. Class 2 NIC is now payable under the self-assessment system and will be due
on 31 January following the tax year. This is the same due date as for capital gains tax.
Therefore, class 2 NIC for the tax year 2018–19 will be payable on 31 January 2020.

However, the actual amount of class 2 NIC is still based on the number of weeks of selfemployment during a tax year.
Class 4 NIC

Class 4 NICs are paid by self-employed individuals (i.e. sole traders and each partner in a
partnership), in addition to Class 2 NICs.

Class 4 NICs are paid together with the individual’s income tax liability under the selfassessment system.

Self-employed individuals are assessed to Class 4 NICs, based on the profits for a tax year.

The rates of class 4 NIC are 9% and 2%. The rate of 9% is paid on profits between £8,424 and
£46,350 and the rate of 2% is paid on all profits over £46,350.
Example – Class 2 and 4 NIC
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for
the tax year 2018–19 are respectively £25,000 and £50,000. The class 4 NIC liabilities are:
Jimmy: £16,576 (25,000 – 8,424) at 9% = £1,492
Jenny
£
£37,926 (46,350 – 8,424) at 9%
3,413
£8,650 (50,000 – 46,350) at 2%
173
3,586
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CHAPTER 11: PENSION
Introduction: The government encourages individuals to save for their future by providing reliefs
for any contributions made in approved pension schemes.
There are two types of schemes: Personal and Occupational.
Pension
Maximum relief available is higher of:
- £3,600 p.a.
- 100% of relevant earnings (Employment Income + Trading Profits)
Personal
Basic rate band extended by the Gross contribution,
if within the limit identified
Occupational
Treated as Allowable Deduction, if within the limit
identified
Net Relevant Earnings

Tax relief is available for pension contributions up to the amount of an individual’s net
relevant earnings.

‘Net relevant earnings” is the total of the employment income, trading income and income from
furnished letting. If the individual does not have any net relevant earnings, relief is available on
gross contributions up to £3,600.

Hence, the maximum amount of gross pension contribution in a tax year on which an
individual can get tax relief is the higher of:
an individual’s earnings for the tax year; and £3,600
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Personal Pension Scheme

An individual can contribute any amount, regardless of their earnings, into a personal / private
pension fund even if they already belong to an occupational pension fund.

Personal pensions are generally offered by banks, insurance companies and financial
institutions.

There is no restriction on the number of pension schemes into which an individual can
contribute. However, the tax relief available on the contribution is subject to certain
restrictions such as a limit on the total amount of contribution which an individual can make to
the various pension schemes.
Relief:

Personal pension contributions are made net of basic rate tax of 20% by both employed
and self-employed contributors.

Higher rate tax payers obtain 20% relief plus an additional 20% (40% - 20%) relief is
obtained by extending the basic rate band and the higher rate band by the gross
contribution when calculating income tax.

If the individual is an employee, their employer may make contributions into their personal
pension fund.

These contributions:
-
Are exempt benefits.
-
Have no limit for the employer.
-
Count towards the annual allowance.
Annual Allowance

The annual allowance for the tax year 2018–19 is unchanged at £40,000.

Tapered Annual Allowance: the normal annual allowance of £40,000 is reduced, when a
person’s Adjusted Income exceeds £150,000, where:
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Adjusted Income = Net Income + any employee contribution to occupational pension scheme +
any employer’s contributions to occupational or personal pension scheme. (For self-employed
individuals, Adjusted Income is just the Net Income)
The reduction is calculated as follows:
£40,000 – [(Adjusted Income - £150,000)/2]
The annual allowance cannot be reduced to below £10,000.
In scenarios where the Adjusted Income of an individual exceeds £210,000, the minimum
tapered annual allowance of £10,000 can be directly used.
Example – Annual allowance
For the tax year 2018-19, Juliet has a trading profit of £196,000. She has never previously been a
member of any pension scheme.
Juliet’s tapered annual allowance for 2018-19, will be:
£40,000 – [(£196,000 - £150,000)/2] = £17,000

If the annual allowance is not fully used in any tax year, then it is possible to carry forward any
unused allowance for up to three years.

Carry forward is only possible if a person is a member of a pension scheme for a particular tax
year.

Therefore, for any year in which a person is not a member of a pension scheme the annual
allowance is lost.

Contributions in excess of the annual allowance are taxable, so the excess amount is added to
the NSI column of the income tax pro-forma for the calculation of Taxable Income.
Example – Annual allowance
Monica and Nicola have made the following gross personal pension contributions during the tax
years 2015–16, 2016–17 and 2017–18:
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Monica
Nicole
£
£
2015-16
Nil
46,000
2016-17
32,000
19,000
2017-18
28,000
Nil
Monica was not a member of a pension scheme in 2015-16 while Nicole has been a member of a
scheme for all three tax years. Neither Monica’s nor Nicole’s adjusted income exceeds £150,000
for any tax year.
Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2016–17 and £12,000 (40,000 –
28,000) from 2017–18, so with the annual allowance of £40,000 for 2018–19 a total of £60,000
(40,000 + 8,000 + 12,000) is available for 2018–19. She was not a member of a pension scheme for
2015–16 so the annual allowance for that year is lost.
Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2016–17 and £40,000 from 2017–
18, so with the annual allowance of £40,000 for 2018–19 a total of £101,000 (40,000 + 21,000 +
40,000) is available for 2018–19. The annual allowance for 2015–16 is fully utilised, but Nicola was a
member of a pension scheme for 2017–18 so the annual allowance for that year is available in full.
The annual allowance for the tax year 2018–19 is utilised first, then any unused allowances from
earlier years with those from the earliest year used first.
Example – Annual allowance
Perry has made the following gross personal pension contributions:
£
2015-16
22,000
2016-17
31,000
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2017-18
19,000
2018-19
48,000
Perry’s adjusted income does not exceed £150,000 in any tax year.
The pension contribution of £48,000 for 2018–19 has used all of Perry’s annual allowance of £40,000
for 2018–19 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (50,000 – 32,000)
from 2015–16.
Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2016–17 and £21,000
(40,000 – 19,000) from 2017–18 to carry forward to 2019–20.
The remaining unused allowance from 2015–16 cannot be carried forward to 2019–20 because this
is more than three years ago.
Example – Annual allowance
Chong has made the following gross personal pension contributions:
£
2015-16
32,000
2016-17
31,000
2017-18
19,000
2018-19
8,000
Chong’s adjusted income for 2018-19 is £250,000 but for previous years it did not exceed
£150,000.
Chong’s tapered annual allowance for 2018-19 is the minimum of £10,000 as his Adjusted Income
exceeds £210,000. Chong has unused annual allowances of £9,000 (40,000 – 31,000) from 2016–17,
£21,000 (40,000 – 19,000) from 2017–18 and £2,000 (£10,000 - £8,000) from 2018-19 to carry
forward to 2019–20.
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
Although tax relief is available on pension contributions up to the amount of earnings for a
particular tax year, the annual allowance acts as an effective annual limit.

Where tax relieved contributions are paid in excess of the annual allowance (including any
brought forward unused allowances), then there will be an annual allowance charge. This
charge is subject to income tax at a person’s marginal rates.
Example – Tax Charge
For the tax year 2018–19, Frank has a trading profit of £97,000 and made gross personal pension
contributions of £45,000. He does not have any brought forward unused annual allowances.
Frank’s income tax liability is:
£
Trading profit
97,000
Personal allowance
(11,850)
Taxable Income
85,150
Income Tax:
£79,500 x 20%
15,900
£5,650 x 40%
2,260
Annual Allowance Charge:
(£45,000 - £40,000) £5,000 x 40%
Tax Liability
2,000
20,160
Frank has earnings of £97,000 for 2018–19. All of the pension contributions of £45,000 therefore
qualify for tax relief.
As his adjusted income is less than £150,000, the full annual allowance of £40,000 is available for
2018-19.
The annual allowance charge is £5,000 (45,000 – 40,000) being the excess of the pension
contributions over the annual allowance.
Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
Higher rate tax relief is given by extending the basic rate band to £79,500 (34,500 + 45,000).
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Lifetime Allowance

The lifetime allowance for the tax year 2018–19 is £1,030,000.

The lifetime allowance applies to the total funds which can be built up within a person’s
pension schemes.

Where the limit is exceeded, there will be an additional tax charge when that person
subsequently withdraws the funds in the form of a pension.
Occupational Pension Scheme

An occupational pension scheme is one set up by an employer for his employees.

The employer generally contributes to the scheme. Some schemes require the employee to
contribute, whereas some are non-contributory.

Relief:
1. An occupational scheme will usually operate net pay arrangements.
2. The employer deducts the gross pension contributions from the individual’s earnings before
applying PAYE.
Example – Occupational Pension Scheme
Tom and Jerry are employed with Cheese Ltd earning a salary of £50,000. Tom contributes
£10,000 into a personal pension scheme and Jerry contributes £10,000 into an occupational
pension scheme.
Tom has earnings of £50,000 for the tax year 2018-19 which are higher than his contribution to the
pension scheme. Therefore, all of his contributions of £10,000 qualify for tax relief.
Tax relief = £2,000 (£10,000 at 20%).
Amount to be paid to the personal pension company by Tom is £8,000 (£10,000 - £2,000).
Since Tom is a higher-rate taxpayer, he is eligible for higher-rate tax relief. Thus, his basic rate tax
band is extended by £44,500 (£34,500 + £10,000).
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Jerry contributes to occupational pension scheme. This contribution is deductible from taxable
employment income.
Their tax computations will appear as follows:
Tom (£)
Jerry (£)
50,000
50,000
-
(10,000)
Net income
50,000
40,000
Less: Personal allowance
(11,850)
(11,850)
Taxable income
38,150
28,150
Income from employment
Less: Contribution to occupational pension scheme
Cash outflow
Amount paid towards the pension scheme
Income tax paid
(£38,150 x 20%)
Tom (£)
Jerry (£)
8,000
10,000
7,630
(£28,150 x 20%)
5,630
15,630
15,630
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CHAPTER 12: INTRODUCTION TO CAPITAL GAINS TAX
Definition: Chargeable Gains Tax (CGT) is paid on Chargeable gains arising due to Chargeable
Disposals of Chargeable Assets by a Chargeable Person.
Chargeable Person: An UK resident individual or a UK company.
Chargeable Disposal:

Sale of an asset – Consideration received is taken as the Sales proceeds

Gift of an asset – The market value of the asset on the date of transfer is considered the sales
proceeds.

When an asset is damage or destroyed – The insurance proceeds received are treated as the
sales proceeds.
Chargeable Assets: All assets except for the following exempt assets.
Exempt Assets:

Motor Car

National Savings & Investments Certificates and ISA Investments

Premium Bonds

Wasting Chattels without Capital Allowances (tangible, moveable assets with useful life of ≤ 50
years)

Principal private residence

Medals or awards for bravery
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Computation for Individuals
The following format is to be used in the exam, when calculating the gain or loss on the disposal of
an asset by an individual. All the information is provided in the exam question.
The test is for a candidate to extract the relevant date and deal with it appropriately and using the
format below will ensure errors in the calculation are minimised.
Relevant for Individuals
Solved Example
£
Gross Disposal Proceeds
Less: Incidental Disposal Costs
150,000
E.g. Advertising, Agent’s fees
Net Disposal Proceeds
(2,000)
148,000
Less: Allowable Cost
Original Purchase Price
(61,000)
Incidental Purchase Costs
E.g. Transportation costs
(3,000)
Enhancement Expenditure
E.g. Capital Expenditure
(11,000)
Capital Gain/ Loss

73,000
This working will be carried out separately for each asset disposed by the individual in the Tax
Year.

Once calculated the gains and losses will be clubbed together.
Disposal proceeds:

The amount of consideration received for the asset is the disposal proceeds.

Unless asset has been sold below its market value, in that case market value is taken.

The date on which the contract is made is taken as the date of disposal.
Incidental cost of disposal
The cost which is incurred for the sake of disposal is called incidental cost of disposal and it
includes:
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
Fees and commissions for professional services

Advertising costs

Legal costs

Estate agency fees etc.
Allowable expenditure:

The purchase cost/acquisition cost of the asset.

If asset was acquired as a gift then market value at the date of gift is taken as purchase price.

If asset was acquired on death then market value at the date of death (probate value) is taken as
purchase price.

Expenditure on enhancing the value of the asset and is being reflected in the state and nature of
asset.

Expenditure that has been incurred for the sake of purchase of asset is called incidental cost of
purchase. E.g. expenditure incurred to establish, preserve or defend taxpayers’ title to the
asset.

Repairs, maintenance and insurance (i.e. revenue expenditures) are not allowable.
Loss Relief
Current Year: If there is a loss on any of the assets disposed in the current tax year, it will be set
off against the capital gains of other assets disposed, in the same year.
The maximum amount of loss has to be relieved, even if it results in the Annual Exemption amount
getting wasted.
Carry Forward: If there is any outstanding capital loss from previous years, it can be carried
forward and set off against future capital gains.
The amount of the carried forward capital loss can be restricted to save the Annual Exemption
amount.
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If the net result of the current tax year is a loss, this too will be carried forward to be set off against
future capital gains.
Annual Exemption
HMRC allows £11,700 (tax year 2018-19) of the Capital gains to be exempt from tax. Once the
losses have been set-off, the annul exemption is deducted from the Net gains to arrive at the
Chargeable gain amount.
The annual exemption amount cannot create or increase a loss and is only available for
individuals.
The following format is recommended to calculate the Chargeable Gain of an individual for a given
tax year.
£
Gain on asset 1
73,000
+Gain on asset 2
15,000
Total Gains
88,000
Less: Current year capital loss
(30,000)
Net Current Year Gains
58,000
Less: Carried forward capital loss
(9,000)
(restrict amount to save Annual Exemption)
Net Gains
49,000
Less: Annual Exemption
(11,700)
CHARGEABLE GAIN
37,300
Example – Chargeable Gain
Andy sold a factory on 15 February 2019 for £320,000. The factory was purchased on 24 January
2000 for £164,000, and was extended at a cost of £37,000 during March 2010. During May 2012,
the roof of the factory was replaced at a cost of £24,000 following a fire.
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Andy incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of
£5,400 in connection with the disposal.
£
Gross Disposal Proceeds
320,000
Less: Incidental Disposal Costs
(5,400)
Net Disposal Proceeds
314,600
Less: Allowable Cost
Original Purchase Price
(164,000)
Incidental Purchase Costs
(3,600)
Enhancement Expenditure
(37,000)
Capital Gain
110,000
Less: Annual Exempt amount
(11,700)
Taxable gain
98,300
Example – Chargeable Gain
For the tax year 2018–19, Nim has chargeable gains of £18,000. He has unused capital losses of
£16,100 brought forward from the tax year 2017–18.
£
Chargeable gains
18,000
Capital losses brought forward
(6,300)
11,700
Less: Annual Exempt amount
Taxable gain
(11,700)
0
The carried forward loss amount of £16,100 is restricted to only £6,300, in order to save the annual
exemption amount. The amount could not have been restricted if the loss was a current year one.
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Tax Payment

Once the final chargeable gains amount for a tax year has been determined, tax is calculated on
the basis of the following tax slabs:

Rates
Tax Slabs
CGT
Chargeable Gain – Residential Property
Basic
£1 - £34,500
10%
18%
Higher
> £34,500
20%
28%
The rate of CGT is linked to an individual’s taxable income (covered in Income Tax). Gains are
only taxed after the Income Tax has been calculated and the rate applied is dependent upon
which tax slab the gains fall into after the Taxable Income has been covered.

However residential property has slightly different taxation rules – discussed later.
Example – Tax Computation
For the tax year 2018–19, Adam has a salary of £41,000. During the year, he made net personal
pension contributions of £4,400. On 15 June 2018, Adam sold an antique table and this resulted in
a chargeable gain of £20,000.
Adam’s taxable income is £29,150 (41,000 less the personal allowance of 11,850). His basic rate tax
band is extended to £40,000 (34,500 + 5,500 (4,400 x 100/80)), of which £10,850 (40,000 – 29,150) is
unused.
Adam’s taxable gain of £8,300 (20,000 less the annual exempt amount of 11,700) is fully within the
unused basic rate tax band, so his capital gains tax liability is therefore £830 (8,300 at 10%).
Example - Tax Computation
For the tax year 2018–19, Bee has a trading profit of £60,000. On 20 August 2018, she sold an
antique vase and this resulted in a chargeable gain of £19,500.
Bee’s taxable income is £48,150 (60,000 – 11,850), so all of her basic rate tax band has been used.
The capital gains tax liability on her taxable gain of £7,800 (19,500 - 11,700) is therefore £1,560
(7,800 at 20%).
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Example - Tax Computation
For the tax year 2018–19, Chester has a salary of £40,000. On 25 October 2018, he sold a
residential property and this resulted in a chargeable gain of £46,500.
Chester’s taxable income is £28,150 (40,000 – 11,850), so £6,350 (34,500 – 28,150) of his basic rate
tax band is unused. The capital gains tax liability on Chester’s taxable gain of £34,800 (46,500 –
11,700) is therefore:
£
6,350 x 18%
1,143
28,450 x 28%
7,966
Tax Liability
9,109

If the Chargeable gain arises from the disposal of a residential property and there is still a
taxable amount left over after claiming the Principal Private Residence Relief (discussed later),
then tax rates of 18% or 28% are applied on this gain, depending upon the tax slabs in falls
into.

The annual exempt amount and any capital losses should first be set-off against gain from
residential property.
Example – Capital Loss
For the tax year 2018–19, Douglas does not have any income. On 15 June 2018, he sold an antique
vase and this resulted in a chargeable gain of £15,800. On 28 August 2018, he sold a residential
property and this resulted in a chargeable gain of £39,200.
Douglas’ capital gains tax liability is:
£
Residential property gain
Less: Annual exempt amount
39,200
(11,700)
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27,500
Other gains
15,800
Capital gains tax
27,500 x 18%
4,950
7,000 (34,500 – 27,500) x 10%
700
8,800 (15,800 – 7,000) x 20%
1,760
Tax Liability
7,410
Tax submission: The CGT calculated should be paid to HMRC by 31 January following the tax year
i.e. 31 January 2020 for the tax year 2018-19.
Married Couples

Transfer of assets between spouses or registered civil partners do not give rise to any
chargeable gain or loss.

The asset is deemed to be transferred at cost.

If an asset is jointly owned by the couple, the gain on the disposal is split equally between the
two and each calculates CGT on his/ her share.
Example – Married Couple
Bill and Cathy are a married couple.
They disposed of the following assets during the tax year 2018–19:
On 10 July 2018, Bill and Cathy sold a residential property for £380,000. The property had been
purchased on 1 December 2015 for £290,000. No principal private residence exemption is
available.
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On 5 August 2018, Bill transferred his entire shareholding of 20,000 £1 ordinary shares in Elf plc
to Cathy. On that date the shares were valued at £64,000. Bill’s shareholding had been purchased
on 21 September 2016 for £48,000.
On 7 October 2018, Cathy sold the 20,000 £1 ordinary shares in Elf plc which had been transferred
to her from Bill. The sale proceeds were £70,000.
Bill and Cathy each have taxable income of £60,000 for the tax year 2018–19.
Jointly owned property
The chargeable gain on the residential property is £90,000 (380,000 – 290,000).
Bill and Cathy will each be assessed on £45,000 (90,000 x 50%) of the chargeable gain.
Billy – CGT Liability
Residential property gain
Less: Annual exempt amount
£
45,000
(11,700)
33,300
Capital gains tax
33,300 x 28%
9,324
The transfer of the 20,000 £1 ordinary shares in Elf plc to Cathy does not give rise to any chargeable
gain or capital loss, because it is a transfer between spouses.
Cathy – CGT Liability
Residential property gain
Less: Annual exempt amount
£
45,000
(11,700)
33,300
Ordinary shares in Elf plc
Disposal proceeds
Cost
70,000
(48,000)
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Taxation - UK FA
22,000
Capital gains tax
33,300 x 28%
9,324
22,000 x 20%
4,400
Tax Liability
13,724
Bill’s original cost is used in calculating the chargeable gain on the disposal of the shares in Elf plc
Important – Exam guidelines

Identify any exempt disposals so that you do not waste time performing unnecessary
calculations.

An unincorporated business is not treated as a separate entity for CGT purposes. Therefore,
when a business is disposed of, deal with each asset separately.

Do not forget to deduct the annual exempt amount if it is available.

It is important to establish how much of a person’s basic rate tax band is available. Remember
that a taxable income figure is after the personal allowance has been deducted.
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Computation for Companies
The following format is to be used in the exam, when calculating the gain or loss on the disposal of
an asset by a company.
Relevant for Companies
Solved Example
£
Gross Disposal Proceeds – June 2018
Less: Incidental Disposal Costs
150,000
E.g. Advertising, Agent’s fees
Net Disposal Proceeds
(2,000)
148,000
Less: Allowable Cost
Original Purchase Price – April 2006
(61,000)
Incidental Purchase Costs – April 2006
E.g. Transportation costs
(3,000)
Enhancement Expenditure – May 2012
E.g. Capital Expenditure
(11,000)
Unindexed Gain (inflated gain)
73,000
Indexation Allowance:

When the asset disposed has been held by a company for more than a year, additional steps
will be required to account for the impact of inflation. The impact calculated is termed
Indexation Allowance and is deducted from the gain of the asset to determine the final gain
without the impact of inflation.
This is not required in the case of individuals.

Formula to calculate inflation = Cost x Indexation Factor

The indexation factor is normally provided in the exam and is normally associated with a
specific duration. For example, if an asset is bought in April 2006 and disposed in June 2017,
the inflation impact on the cost from April’06 to June’17 has to be considered.

This also means that if any capital expenditure is incurred on the asset at a different date then
inflation impact on the capital expenditure has to be accounted for, using the same formula as
above.
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
The indexation allowance has now been frozen at December 2017. For example, if an asset is
bought in April 2006 and disposed in June 2018, only the inflation impact on the cost from
April’06 to December’17 can be considered.

So in the exam:

When an asset is purchased prior to December 2017 and subsequently sold, then the
indexation allowance will be given from the month of acquisition up to December 2017.

When an asset is purchased from January 2018 onwards and subsequently sold, then no
indexation allowance will be available.


Where the indexation allowance is available, then indexation factors will be provided.
Sometimes instead of removing the effect of inflation from the Unindexed Gain to arrive at the
Indexed Gain amount, the examiner provides the Indexed Cost of the asset (Cost plus inflation
effect).
By deducting the inflated cost from the inflated sales proceeds, the effect of inflation is nullified
and the result is the Indexed Gain. This is a quicker approach than calculating the effect of
inflation and then removing it from the gain but the Indexed Cost is not always provided.
Solved example – continued
Unindexed Gain (inflated gain)
Less: Indexation Allowance
73,000
Cost x Indexation Factor
(To remove the effect of inflation from Original Cost: April 2006 – June 2018
the gain calculated.)
(20,160)
[(61,000 +3,000) x 0.315)
Capital Expenditure: May 2012 – June 2018
(1,650)
(11,000 x 0.150)
Indexed Gain (un-inflated gain – for
51,190
tax)

The indexation allowance cannot be used to create or increase a capital loss.

This working will be carried out separately for each asset disposed by the company during its
Period of Account.
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Loss Relief:

Once calculated the gains and losses will be clubbed together.

Current Year: If there is a loss on any of the assets disposed, it will be set off against the
capital gains of other assets disposed, in the same period of account.

Carry Forward: If there is any outstanding capital loss, it can be carried forward and set off
against future capital gains only.
The following format can used to determine the net gain or loss of a company for its period of
account.
£
Gain on asset 1
51,190
Add: Gain on asset 2
24,000
Total Gains
75,190
Less: Current year capital loss
(5,000)
Net Current Year Gains
70,190
Less: Carried forward capital loss
(30,000)
CAPITAL GAIN
40,190

Companies are not entitled to annual exemption.

They pay Corporation Tax on the Capital gains rather than CGT like individuals.

The gain is added in the Corporation Tax Computation of the relevant Period of Account and
eventually Corporation tax calculated and paid depending upon the size of the company.
Example – Chargeable Gains for a Company
Delta Ltd sold a factory on 15 February 2019 for £420,000. The factory was purchased on 24
October 1995 for £164,000, and was extended at a cost of £37,000 during March 2018.
Delta Ltd incurred legal fees of £3,600 in connection with the purchase of the factory, and legal
fees of £6,200 in connection with the disposal.
Indexation factors are:
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October 1995 to December 2017
0.856
October 1995 to February 2019
0.899
March 2018 to February 2019
0.029
£
Gross Disposal Proceeds
420,000
Less: Incidental Disposal Costs
(6,200)
Net Disposal Proceeds
413,800
Less: Allowable Cost
Original Purchase Price
(164,000)
Incidental Purchase Costs
(3,600)
Enhancement Expenditure
(37,000)
Unindexed Gain (inflated gain)
209,200
Less: Indexation Allowance (£167,600 x 0.856)
(143,466)
Indexed Gain
65,734
There is no indexation allowance for the enhancement expenditure of £37,000 because this was
incurred after December 2017
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CHAPTER 13: SPECIAL RULES
There are certain circumstances where special rules are applied for the calculation of a chargeable
gain/ loss amount on a disposal. These are relevant for disposals by both individuals and
companies.
Part Disposals
This is when a part of an asset is disposed. While the consideration received will reflect the
disposal proceeds of the part, the cost would have originally been incurred on the whole asset.
Therefore the cost has to be apportioned using the following formula:
*Cost x
Market value of part disposed
MV of part disposed + MV of remainder asset

*Here the cost reflects the original purchase price, any incidental cost of purchase and any
capital expenditure incurred on the whole asset.

In the case of companies it can be the indexed cost.

If any cost has only been incurred on the part disposed rather than the whole asset,
apportionment of the cost is not required.
Example – Part Disposal
On 16 February 2019, Joan sold three acres of land for £285,000. She had originally purchased
four acres of land on 17 July 2017 for £220,000. The market value of the unsold acre of land as at
16 February 2019 was £90,000.
£
Gross Disposal Proceeds
Less: £220,000 x
285,000
285,000
285,000 + 90,000
Capital Gain
(167,200)
117,800
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The cost of the remaining one acre, also referred to as Base Cost will be:
Base Cost = £220,000 - £167,200 = £52,800
Example – Part Dispoal
On 20 February 2019, Furgus sold an acre of land for £130,000. He had originally purchased four
acres of land on 13 April 2007 for £210,000.
During January 2019, Furgus spent £22,800 clearing and levelling all four acres of land. The
market value of the unsold three acres of land as at 20 February 2019 was £350,000. Furgus
incurred legal fees of £3,200 in connection with the disposal.
Furgus – Capital gain
£
Disposal proceeds
130,000
Cost
(56,875)
Enhancement expenditure
(6,175)
Incidental costs
(3,200)
Capital Gain
63,750

The cost relating to the acre of land sold is £56,875 (210,000 x 130,000/(130,000 + 350,000)).

The cost of clearing and levelling the land is enhancement expenditure. The cost relating to the
acre of land sold is £6,175 (22,800 x 130,000/480,000).

The incidental costs relate entirely to the acre of land sold, and so they are not apportioned.
Chattels

A chattel is a tangible moveable property.

Wasting Chattel: It is a tangible, moveable asset with a useful life of ≤ 50 years.

Non Wasting Chattel: It is a tangible, moveable asset with a useful life of > 50 years.
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Wasting Chattels with Capital Allowances:

Normally wasting chattels are Exempt assets i.e no CGT computation is carried out when they
are disposed.

But when a wasting chattel is used for business purposes the rules are modified.

When the asset is sold for a gain, the normal computation and treatment of the gain is carried
out.

But if the asset is sold for a loss, the cost of the asset is adjusted with capital allowances to
convert the end result to no gain no loss.
Example – Wasting Chattel
£
Disposal Proceeds
£
15,000
Less: Allowable Cost
18,000
Adjustment for Capital Allowances claimed on the asset
(3,000)
(15,000)
Capital Gain
Nil
Non Wasting Chattels:
In the case of non-wasting chattels, the computation of the gain or loss is dependent upon the cost
and the gross disposal proceeds in relation to a £6,000 limit, as below:
Purchase
Gross Disposal
Rule
Cost
Proceeds
≤ £6,000
≤ £6,000
EXEMPT
≤ £6,000
> £6,000
GAIN: Restricted to – Lower Of:
 Normal Gain
 5/3 x (Gross Disposal Proceeds - £6,000)
> £6,000
≤ 6,000
LOSS: Restricted by substituting Gross Disposal Proceeds with
£6,000
> £6,000
> £6,000
NORMAL COMPUTATION
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Example – Non-wasting Chattel
On 18 August 2018, Gloria sold an antique table for £5,600 and an antique vase for £7,200. The
antique table had been purchased on 27 May 2017 for £3,200 and the antique vase had been
purchased on 14 June 2017 for £3,700.
The antique table is exempt from CGT because the gross sale proceeds were less than £6,000.
The chargeable gain on the antique vase is restricted to £2,000 ((7,200 – 6,000) x 5/3) because this is
less than the normal gain of £3,500 (7,200 – 3,700).
Example – Non-wasting Chattel
Giles sold the following assets during the tax year 2018–19:
On 3 February 2019, he sold an antique table for £4,700. The table had been purchased on 2 May
2008 for £10,200.
On 12 March 2019, he sold machinery for £22,600. The machinery had been purchased on 1 June
2015 for £34,000. Giles claimed capital allowances totalling £11,400 in respect of this machinery.
Table
The table has been sold for less than £6,000, so the proceeds are deemed to be £6,000 (rather than
£4,700).
The allowable capital loss is therefore £4,200 (6,000 – 10,200).
Machinery
The cost of £34,000 is reduced by the capital allowances claimed of £11,400, giving an allowable cost
of £22,600.
Since the proceeds are also £22,600, the disposal is on a no gain, no loss basis.
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Taxation - UK FA
Wasting Assets

Asset with a remaining useful life of ≤ 50 years.

The cost of the asset is adjusted for depreciation or amortisation.
Example – Wasting Assets
On 31 March 2019, Mung sold a copyright for £9,600. The copyright had been purchased on 1
April 2014 for £10,000 when it had an unexpired life of 20 years.
The chargeable gain on the copyright is:
£
Gross Disposal Proceeds
9,600
Cost (10,000 x 15/20)
(7,500)
CAPITAL GAIN
2,100
Damaged Assets

The Insurance proceeds are taken to be the Gross Disposal Proceeds

In case of Gain: Normal Part Disposal Computation.

This gain can be deferred if the insurance proceeds are actually used to repair the damaged
asset.

The gain is deferred by deducting the insurance proceeds from the original cost of the asset.
The working is as follows:
Original Cost – Insurance Proceeds + Cost incurred to repair the asset = Base Cost of the asset
Example – Damaged Assets
On 1 October 2018, an antique carpet owned by Juliet was damaged by a flood. The carpet had
been purchased on 17 November 2014 for £69,000. Juliet received insurance proceeds of £12,000
on 12 December 2018 and she spent a total of £13,400 during December 2018 restoring the
carpet. Juliet has made a claim to ignore the part disposal rules.
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Taxation - UK FA

The insurance proceeds of £12,000 received by Juliet have been fully applied in restoring the
carpet.

There is therefore no disposal on the receipt of the insurance proceeds.

The revised base cost of the carpet is £70,400 (69,000 – 12,000 + 13,400).
Destroyed Assets

The insurance proceeds are deemed to be the Gross Disposal Proceeds

In case of Loss: Normal computation is carried out and the loss recorded in a loss memo, to be
relieved against capital gains.

In case of Gain: Normal computation is carried out and the gain is taxable in the same year if
the insurance proceeds are not used to buy a replacement asset.

The gain and subsequently the tax paid on it can be deferred if the insurance proceeds are used
to purchase a replacement asset. This is done by adjusting the gain of the destroyed asset in
the cost of the replacement asset.

If the entire insurance proceeds are used then the entire gain can be deferred but if the
insurance proceeds are partially used then a part of the gain will be immediately taxable and
the rest can be adjusted in the replacement asset’s cost.

The amount of gain immediately taxable is: lower of
a) the gain and
b) amount of cash not re-invested
Example – Destroyed Asset
An asset was destroyed and insurance proceeds of £63,000 received. The gain calculated on the
asset was £15,000. The insurance proceeds could be used to purchase a replacement asset for 1)
£70,000 and 2) £52,000
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Taxation - UK FA
Option 1 – Cost: £70,000
Option 2 – Cost: £52,000
Immediately taxable: Lower of
Immediately taxable: Lower of
a)
£15,000
a)
£15,000
b)
£63,000 - £70,000 = 0
b)
£63,000 - £52,000 = £11,000
Gain available for deferral:
Gain available for deferral:
£15000 – 0 = £15,000
£15,000 - £11,000 = £4,000
Adjustment against cost of replacement Adjustment against cost of replacement
asset
asset
New Asset:
£
New Asset:
£
Original Cost
70,000
Original Cost
52,000
Less: Deferred Gain
(15,000)
Less: Deferred Gain
(4,000)
Base Cost
55,000
Base Cost
48,000

The gain will now be taxable when the replacement asset is disposed.

This is known as Rollover Relief, as the gain is rolled over.
Example – Destroyed Asset
On 20 October 2018, an antique table owned by Claude was destroyed in a fire. The table had been
purchased on 23 November 2016 for £50,000. Claude received insurance proceeds of £74,000 on
6 December 2018 and on 18 December 2018 he paid £75,400 for a replacement table.

The insurance proceeds of £74,000 received by Claude have been fully reinvested in a replacement
table.

There is therefore no disposal on the receipt of the insurance proceeds.

The gain of £24,000 (insurance proceeds of £74,000 less original cost of £50,000) is set against
the cost of the replacement table, so its base cost is £51,400 (75,400 – 24,000).
Assume that the replacement table only cost £71,500.
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Taxation - UK FA

The insurance proceeds not reinvested of £2,500 (74,000 – 71,500) are taxed as a chargeable gain
in 2018-19.

The balance of the gain of £21,500 (24,000 – 2,500) is set against the cost of the replacement
table, so its base cost is now £50,000 (71,500 – 21,500).
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Taxation - UK FA
CHAPTER 14: SHARES

There are special rules related to shares.

Different types of shares of different companies are treated as separate assets and not clubbed
together.
In case of Gift:
When shares are given as a gift to someone, their disposal proceeds are taken to be the average of
the days quoted price:
Lowest quoted price + Highest quoted price
2
Example – Gift of shares
Maude made a gift of her entire shareholding of 10,000 £1 ordinary shares in Night plc to her
daughter. On the date of the gift, the shares were quoted at £5.10 – £5.18.

Maude and her daughter are connected persons, so the market value of the gifted shares is
used.

The shares in Night plc are valued at £5.14 ((£5.10 + £5.18)/2), being the mid-price based on
the day’s quoted price.

Any bargain prices are not relevant to the calculation.

The deemed proceeds figure is therefore £51,400 (10,000 x 5.14).
Where an unquoted company is concerned, a share valuation is based on the market value of the
shares gifted rather than the diminution in value (this is the basis for inheritance tax purposes).
Example – Gift of shares
On 4 May 2018, Daniel made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an unquoted
investment company. Before the transfer, Daniel owned 60,000 shares out of ABC Ltd’s issued
Page 138 of 244
Taxation - UK FA
share capital of 100,000 £1 ordinary shares. ABC Ltd’s shares are worth £18 each for a holding of
60%, £10 each for a holding of 45% and £8 each for a holding of 15%.
The value of the gifted shares is £120,000 (15,000 x £8).
Determining the cost:

Shares are normally acquired over time so they are purchased at different prices.

If a part of a shareholding is disposed, it will become difficult to identify what cost to allocate
to the shares disposed and how to calculate the gain.

The HMRC has provided Share Matching Rules to deal with this. These are:
For Individuals
For Companies
1. Cost of shares acquired on the day of the 1. Cost of shares acquired on the day of the
disposal itself
disposal itself
2. Cost of shares acquired within the next 30 2. Cost of shares acquired in previous 9 days
days
3. Share Pool
3. FA1985 Share Pool
Example – Individual: Shares
Ivy has had the following transactions in the shares of Jing plc:
1 June 2011 – Purchased 4,000 shares for £6,200.
30 April 2016 – Purchased 2,000 shares for £8,800
15 July 2018 – Purchased 500 shares for £2,500
15 July 2018 – Sold 4,500 shares for £27,000
Applying the share matching rules, we have to identify the cost of the 4,500 shares sold.
Referring to the rules set out for individuals:
1. Same day acquisitions – We have the cost of 500 shares acquired on 15 July - £2,500
2. Next 30 day acquisitions – No shares are acquired after 15 July
3. Share Pool – We now need to get the cost of balancing 4,000 shares from the Share Pool
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Taxation - UK FA
SHARE POOL – Jing Plc Shares
Date
Details
No. Of Shares
Cost
£
1 June 2011
Purchase
4,000
6,200
30 April 2016
Purchase
2,000
8,800
6,000
15,000
15 July 2018
Disposal
(4,000)
Balance
2,000
[£15,000/6,000 shares x 4,000]
(10,000)
5,000
Now that the cost of 4,500 shares is available, the gain on the disposal can be calculated:
£
Gross Disposal Proceeds – 4,500 shares
27,000
Less: Cost – 500 shares
(2,500)
Cost – 4,000 shares
Capital Gain

(10,000)
14,500
Effectively, the shares of a company are put together in a pool and a running balance
maintained. A separate pool is maintained for shares of different companies and for each type
of shares – ordinary or preference.

Apart from purchases and disposals, there can be the complications of Bonus Issue and Rights
Issue.

Bonus Issue: simply increases the number of shares not the cost but this means that the cost
in the pool will be spread over a higher number of shares.

Rights Issue: is like a purchase, increasing both the number and the cost of the Share pool.
The format below shows how a Share pool with all the movements will be presented:
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Taxation - UK FA
INDIVIDUALS – SHARE POOL
Date
Details
No. Of
Cost
Shares
£
01/01/01
Purchase
5,000
15,000
10/11/02
Purchase
4,000
13,000
9,000
28,000
4,500
-
13,500
28,000
15/12/03
20/01/04
Bonus Issue
9,000
1 for 2 held
2
Rights Issue
13,500
1 for 5 @ £4
5
2,700
2,700 x £4
16,200
25/02/05
Disposal
(6,000)
Balance c/f
10,200
10,800
38,800
£38,800/ 16,200 x 6,000
(14,370)
24,430
Example – Individuals: Share Pool
On 22 January 2019, Oliver sold 30,000 £1 ordinary shares in Pink plc for £140,000. Oliver had
purchased 40,000 shares in Pink plc on 9 February 2017 for £96,000. On 3 April 2018, Pink plc
made a 1 for 2 bonus issue.
Oliver’s chargeable gain for 2018–19 is:
£
Gross Disposal Proceeds
140,000
Less: cost
(48,000)
Capital Gain
92,000
Oliver was issued with 20,000 (40,000 x 1/2) new ordinary shares as a result of the bonus issue.
The cost of the shares sold is therefore £48,000 (96,000 x 30,000/(40,000 + 20,000)).
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Taxation - UK FA
Example – Individuals: Share Pool
On 22 January 2019, Quinn sold 30,000 £1 ordinary shares in Red plc for £140,000. Quinn had
purchased 40,000 shares in Red plc on 9 February 2016 for £100,000. On 3 May 2018, Red plc
made a 1 for 2 rights issue. Quinn took up her allocation under the rights issue in full, paying £3.00
for each new share issued.
Quinn’s chargeable gain for 2018-19 is
£
Gross Disposal Proceeds
140,000
Less: cost
(80,000)
Capital Gain
60,000
Quinn was issued with 20,000 (40,000 x 1/2) new ordinary shares under the rights issue at a cost of
£60,000 (20,000 x £3.00).
The cost of the shares sold is therefore £80,000 ((100,000 + 60,000) x 30,000/(40,000 + 20,000)).
Example – Corporations: Share Pool
On 15 June 2019, Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £430,000.
Fair Ltd had originally purchased 40,000 shares in Gong plc on 10 June 1995 for £110,000, and
purchased a further 60,000 shares on 20 August 1999 for £180,000. Indexation factors are:
June 1995 to August 1999:
0.105
August 1999 to December 2017:
0.680
Applying the share matching rules, the cost of the 70,000 shares sold has to be identified.
Referring to the rules set out for companies:
1. Same day acquisitions – No shares were acquired on 15 June 2019.
2. Previous 9 day acquisitions – No shares are acquired in the 9 days prior to 15 June 2019.
3. FA1985 Share Pool – The cost of 70,000 shares will be extracted from the Share Pool
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FA1985 SHARE POOL
Date
Details
No. Of
Indexed Cost
Shares
£
10 June’
Purchase
40,000
110,000
95
Indexation to August
110,000 x 0.105
11,550
1999
20 Aug’
Purchase
40,000
121,550
60,000
180,000
100,000
301,550
99
Indexation to December
301,550 x 0.680
205,054
2017
15 June’
Disposal
100,000
506,604
(70,000) (506,604/100,000 shares) x
(354,623)
19
70,000
Balance carried forward
30,000
151,981
The indexation impact is only accounted for till 31st December, 2017.
£
Gross Disposal Proceeds – 70,000 shares
Less: Indexed Cost
Indexed Gain

430,000
(354,623)
75,377
In the Company’s share pool, the effect of inflation has to be accounted for before every
Operative Event.

An Operative event is one which affects (increases or decreases) the total cost of the share
pool. Therefore purchase, disposal and rights issue are Operative events but not a bonus issue.
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The format below shows how a Share pool with all the movements will be presented:
COMPANIES – FA1985 SHARE POOL
Date
Details
No. Of
Indexed Cost
Shares
£
01/01/08
Purchase
5,000
15,000
Indexation Allowance
January 2008 to November
£15,000 x Indexation Factor
3,000
2010
10/11/10
15/12/11
Purchase
Bonus Issue – 1 for 2
5,000
18,000
4,000
13,000
9,000
31,000
4,500
-
13,500
31,000
Indexation Allowance
4,000
November 2010 to January
£31,000 x Indexation Factor
2012
20/01/12
Rights Issue – 1 for 5 @ £4
13,500
35,000
2,700
10,800
16,200
45,800
Indexation Allowance
4,200
January 2012 to December
£45,800 X Indexation Factor
2017
16,200
25/02/19
Disposal
(6,000)
50,000
(£50,000 / 16,200 shares) x
(18,519)
6,000
Balance carried forward
10,200
31,481
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Taxation - UK FA
Re-organisation:
This is when the capital structure of the company changes and the old shares are replaced with
new ones. The original investment of the shareholder (individual or company) is passed on to the
new shareholding.
5,000 Old
10,000 New
Ordinary Shares
Ordinary Shares
£10,000
£10,000
In case of a combination of new shares being issued in return of the old shareholding, the original
cost of the old shares is apportioned on the basis of the Market Value of the new shares at the time
of re-organisation.
5,000 Old
Ordinary Shares
£10,000
£10,000 x £20,000
£50,000
= £4,000
£10,000 x £30,000
£50,000
= £6,000
Takeover:
This is when the original company in which the investment had been made is taken over by
another company. The old shares become irrelevant and new shares/ consideration is issued in
lieu of the old shareholding.
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In case of a Paper for Paper takeover, the original cost of investment has to be split between a
combination of new shares. The market value of the new shareholding at the time of takeover is
the basis of sharing the original cost. (Refer to Re-organisation)
Example – Re-organisation
On 28 March 2019, Rita sold her entire holding of £1 ordinary shares in Sine plc for £55,000. Rita
had originally purchased 10,000 shares in Sine plc on 5 May 2016 for £14,000. On 7 August 2017,
Sine plc had a reorganisation whereby each £1 ordinary share was exchanged for two new £1
ordinary shares and one £1 preference share. Immediately after the reorganisation, each £1
ordinary share in Sine plc was quoted at £2.50 and each £1 preference share was quoted at £1.25.
Rita’s chargeable gain for 2018-19 is:
£
Gross Disposal Proceeds
55,000
Less: Cost
(11,200)
Indexed Gain
43,800
Under the reorganisation, Rita received new ordinary shares valued at £50,000 (2 x 10,000 x £2.50)
and preference shares valued at £12,500 (10,000 x £1.25).
The cost attributable to the ordinary shares is therefore £11,200 (14,000 x 50,000/(50,000 + 12,500).
In case of Mixed Consideration, i.e. cash and shares being received in return of old shareholding,
the original cost is split between the two elements on the basis of market value, but the cash
receipt is treated as part disposal of the original investment so a gain is calculated.
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New Shareholding: 20,000
shares
£30,000 x 80,000
MV: £80,000
Cost = £24,000
Old Shareholding: 10,000
shares @ £30,000
100,000
Cost = £30,000 - £24,000
Cash Received: £20,000
= £6,000
Gain = £20,000 - £6,000
= £14,000
Example - Takeover
Richard purchased 10,000 £1 ordinary shares in Split plc on 21 July 2015 for £23,100. On 28
August 2018, Split plc was taken over by Combined plc. For each of his £1 ordinary shares in Split
plc, Richard received two £1 ordinary shares in Combined plc plus £2.50 in cash. Immediately
after the takeover, Combined plc’s £1 ordinary shares were quoted at £4.00.
Richard’s chargeable gain for 2018-19 is:
£
Gross Disposal Proceeds (10,000 x 2.50)
25,000
Less: Cost
(5,500)
Gain
19,500
On the takeover, Richard received cash of £25,000 and ordinary shares in Combined plc valued at
£80,000 (2 x 10,000 x £4.00).
The cost attributable to the cash element is therefore £5,500 (23,100 x 25,000/(25,000 + 80,000)).
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CHAPTER 15: RELIEFS
Introduction
There are various reliefs available to individuals which are claimed to defer the gains to future tax
years (hence deferring the tax liabilities). On the other hand there are various reliefs which either
exempts the whole or part gain.
Principal Private Residence Relief (PPR)

Available for individuals disposing their personal residence - subject to conditions

An individual becomes entitled to PPR Relief if he/ she dispose off their main residence.

The entire gain is exempted if the owner occupied the house throughout the period of
ownership.

If the house was not occupied by the owner throughout the period of ownership, this relief
only exempts the amount of gain relating to the period of occupation by the owner.
Gain x
Period of occupation
Period of ownership

Period of Occupation: Covers actual and deemed occupation. The following period of
absences are considered to be deemed occupation:

The last 18 months of ownership (without any condition attached)
The following are deemed occupation, provided the individual physically resides in the
house at some point before or after the period of absence.

A period of up to total 3 years. The absence from the house could be due to any reason.

A period of up to 4 years. The absence is when an individual has to live elsewhere in UK
due to work.


Unlimited period if the absence is only due to the individual working abroad.
An additional relief in the form of Letting Relief is also available if the individual had let out
the property in their period of absence.
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
Letting Relief is deducted from the post PPR Relief gain and is the lower of:

£40,000

Gain exempt under PPR

Gain amount related to the Letting period (this cannot include durations taken to be
deemed occupation)
Example – Principal Private Residence Relief
On 30 September 2018, Hue sold a house for £381,900. The house had been purchased on 1
October 1998 for £141,900.
Hue occupied the house as her main residence from the date of purchase until 31 March 2002. The
house was then unoccupied between 1 April 2002 and 31 December 2005 due to Hue being
required by her employer to work elsewhere in the UK.
From 1 January 2006 until 31 December 2012, Hue again occupied the house as her main
residence.
The house was then unoccupied until it was sold on 30 September 2018.
Hue let her house out during the periods that she did not occupy it herself.
£
Disposal proceeds
381,900
Less: Cost
(141,900)
Gain
240,000
Less: PPR Relief
240,000 x (189/240 months) - working
(189,000)
51,000
Less: Letting Relief – lower of:

£40,000

£189,000

£51,000
Capital Gain
(40,000)
11,000
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Working – PPR Relief
Details
Exempt Months
Chargeable Months
1 October 1996 to 31 March 2000 (occupied)
42
-
1 April 2000 to 31 December 2003 (working in UK)
45
-
1 January 2004 to 31 December 2010 (occupied)
84
-
1 January 2011 to 31 March 2015 (unoccupied)
-
51
18
-
189
51
1 April 2015 to 30 September 2016 (final 18 months)

Where part of a house is used exclusively for business use then the principal private residence
exemption will be restricted as the relief is not available on any business use.
Example – Business Use
On 30 September 2018, Mae sold a residential property for £186,000. The property had been
purchased on 1 October 2008 for £122,000. Throughout the period of ownership, the property
was occupied by Mae as her main residence, but one of the property’s eight rooms was always
used exclusively for business purposes by Mae
£
Disposal proceeds
Less: Cost
Gain
Less: PPR Relief
Capital Gain
186,000
(122,000)
64,000
(56,000)
8,000
The principal private residence exemption is restricted to £56,000 (64,000 x 7/8).

As in the example above, even after claiming Principal Private Residence Relief and Letting
Relief, there is a resultant gain amount related to the property, then the annual exemption and
capital losses should first be set off against this, as this amount would be taxed at the rates of
18% or 28%.
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Entrepreneur’s Relief

This relief is available for individuals only

This relief is available to individuals if:

Whole or part of a business run as a sole trader is disposed. Relief is only available in
respect of chargeable gains arising from the disposal of assets in use for the purpose of the
business. This will exclude chargeable gains arising from investments.

Shares of a personal company are sold. (A personal company is one where the individual
has at least 5% shareholding and is an employee of the company)

The business or the shares, both are held for at least 1 year prior to disposal.

This relief has a lifetime allowance limit of £10 million.

Gains falling within this limit are taxed at 10%, regardless of the overall earnings of the
individual. Outside this limit, the gains are treated normally.
Example – Entrepreneur’s Relief
On 25 January 2019, Michael sold a 30% shareholding in Green Ltd, an unquoted trading
company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares
since 1 March 2012 and was an employee of the company from that date until the date of disposal.
He has taxable income of £8,000 for the tax year 2018–19.
£
Shareholding in Green Ltd.
800,000
Less: Annual exempt amount
(11,700)
Gain
788,300
Capital Gain Tax: 788,300 x 10%
78,830
Example – Entrepreneur’s Relief
On 30 September 2018, Mika sold a business that she had run as a sole trader since 1 January
2012.
The disposal resulted in the following chargeable gains:
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£
Goodwill
260,000
Freehold office building
370,000
Freehold warehouse
170,000
800,000
The warehouse had never been used by Mika for business purposes.
Mika has taxable income of £5,000 for the tax year 2018–19. She has unused capital losses of
£28,000 brought forward from the tax year 2017–18.
To solve this effectively, keep the following points in mind:

Although gains qualifying for Entrepreneur’s Relief are taxed at 10%, they are assumed to utilise
the tax rates before the gains not qualifying for Entrepreneur’s relief.

Annual exemption and capital losses should be first treated against those gains that do not
qualify for entrepreneur’s relief – giving preference to gains from residential property, if any.

The following format is recommended when there are gains qualifying for Entrepreneur’s Relief
as they should be kept separate.
Without
With
Entrepreneur Relief
Entrepreneur Relief
£
£
Goodwill
260,000
Freehold Office Building
370,000
Warehouse
Less: Current year capital loss
170,000
-
-
Net current year gains
170,000
630,000
Less: Capital Loss brought forward
(28,000)
-
Net Gains
142,000
630,000
Less: Annual Exemption
(11,700)
-
Chargeable Gain
130,300
630,000
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Capital Gains Tax Calculation:
£
Gains qualifying for Entrepreneur’s Relief: £630,000 x 10%
63,000
Gains not qualifying for Entrepreneur’s Relief: £130,300 x 20%
26,060
`
89,060

Mika’s taxable income was only £4,000 which meant that she had the Basic Rate band available
for her Chargeable Gains.

But the gains qualifying for Entrepreneur’s Relief utilise the available Basic Rate band first, even
though the relevant rate for these gains is 10% regardless of which band they fall into.

After covering the gains qualifying for entrepreneur’s relief, the remaining gains fall into the
higher rate band and are taxed at 20%.
Investors’ Relief

This relief is also available for individuals only.

This version of Entrepreneur’s Relief is available for external investors (individuals) of
unlisted trading companies i.e. companies which are not listed on the Stock Exchange.

The lifetime limit of this relief is also £10 million and the qualifying gains are taxed at 10%.

To qualify, the shares must be:


Newly issued shares acquired by subscription

Owned for atleast 3 years after 6 April, 2016

There is no minimum shareholding requirement
Since this relief has been introduced but will practically become applicable in the real world
for the first time in 2019-20, only the knowledge of qualifying conditions and advantages is
important for now.
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Gift Relief

This relief is available for individuals only

Gift relief can be claimed on the gain arising from the gift of a business asset from one
individual to another or when a business asset is sold at undervalue.

A joint election by the donor and the recipient is made to defer any gain arising from the
transaction. (Remember the MV would have been taken as the sales proceeds)

The assets qualifying for this relief are:

Assets used in trade

Unquoted shares of any company and

Quoted shares of a personal company. (A personal company here is one in which the
individual has at least 5% shareholding)

The gain is adjusted in the cost of the asset transferred to the recipient and in this way the gain
is not just deferred but passed on from the donor to the recipient.

The entire gain is deferred unless the recipient pays an amount for the asset.

In this case, gain will still be calculated using the Market Value of the asset as this will not be
considered an arm’s length transaction. However a portion of the gain may become
immediately taxable on the donor.

Immediately taxable gain = lower of:
a) Gain and
b) Actual gain [Any consideration received – the cost originally incurred on the asset]
Example – Gift Relief
A father gifted a business asset to his son that was worth £141,000. The asset had originally been
bought for £35,600. The son could have paid his father £51,000 or nothing at all.
Option 1 – No consideration
Option 2 – Cash worth £51,000
Immediately Taxable: lower of
Immediately Taxable: lower of
a)
Gain = 141,000 – 35,600 = £105,400
a)
£105,400
b)
Actual Gain = 0 – 35,600 = Nil
b)
51,000 – 35,600 = £15,400
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Gain available for deferral:
Gain available for deferral:
£105,400 – 0 = £105,400
£105,400 – 15,400 = £90,000
Son’s Asset:
£
Son’s Asset:
£
Original Cost
141,000
Original Cost
141,000
Less: Deferred Gain
(90,000)
Base Cost
51,000
Less: Deferred Gain
Base Cost
(105,400)
35,600
The gain will now be realised when the recipient disposes it.
Example – Gift Relief
On 15 August 2018, Xia sold 10,000 £1 ordinary shares in Yukon Ltd, an unquoted trading
company, to her daughter for £75,000. The market value of the shares on that date was £110,000.
The shareholding was purchased on 10 July 2017 for £38,000. Xia and her daughter have elected
to hold over the gain as a gift of a business asset.
£
Deemed proceeds
110,000
Cost
(38,000)
72,000
Holdover Relief (72,000 – 37,000)
(35,000)
`Capital Gain
37,000
Xia and her daughter are connected persons, and therefore the market value of the shares sold is
used.
The consideration paid for the shares exceeds the allowable cost by £37,000 (75,000 – 38,000). This
amount is immediately chargeable to capital gains tax (CGT).
The daughter’s base cost will be £75,000 (110,000 – 35,000).
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Example – Gift Relief
Bertie has a holding of 8,000 £1 ordinary shares in Gift Ltd, an unquoted trading company, which
he had originally purchased for £3.50 per share. The current market value of the shares is £8.50,
but Bertie is going to sell some of the holding to his son at £6.00 per share during the tax year
2018-19. Bertie and his son will elect to hold over any gain as a gift of a business asset.
The consideration paid for each share will exceed the allowable cost by £2.50 (6.00 – 3.50), and this
amount will be immediately chargeable to CGT.
The annual exempt amount for 2018-19 is £11,700, so Bertie can sell 4,680 shares (11,700/2.50) to
his son without this resulting in any CGT liability.

If shares of a personal company are gifted and if the company owns Chargeable Non
Business assets (such as investments or any asset not used in trade) at the time of the gift, then
the gift relief is restricted as it will only be available for the gain related to chargeable business
assets.

The gain available for Gift Relief is calculated using the following formula:
Gain x
Market Value of Chargeable Business Assets
Market Value of Chargeable Assets
Example – Gift Relief
Debra gifted shares in her personal company to her grandson Joseph. The gain calculated was
£240,000 but on the date of transfer, the following assets were owned by the company:
£
Warehouse
100,000
Factory
40,000
Investments
50,000
Inventory
40,000
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£
Gain
240,000
Gain available for Gift Relief =
240,000 x .
100,000 + 40,000
.
(176,842) The entire amount can be deferred if no
100,000 + 40,000 + 50,000
Immediately Taxable
consideration received.
63,158

Out of the above, only the warehouse and the factory are business assets.

Investments are not made for business purposes.

Inventory is a current asset, not eligible for Capital Gains Tax calculation.
Example – Gift Relief
On 5 October 2018, Zia made a gift of her entire holding of 20,000 £1 ordinary shares in Apple Ltd,
a personal company, to her daughter. The market value of the shares on that date was £200,000.
The shares had been purchased on 1 January 2016 for £140,000. On 5 October 2018, the market
value of Apple Ltd’s chargeable assets was £150,000, of which £120,000 was in respect of
chargeable business assets. Zia and her daughter have elected to hold over the gain as a gift of a
business asset.
£
Deemed proceeds
Cost
200,000
(140,000)
60,000
Holdover Relief: £60,000 x (120,000 / 150,000)
(48,000)
Capital Gain
12,000
Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), being the proportion of
chargeable assets to chargeable business assets.
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Tax Planning Points:

If a gift is going to result in an immediate chargeable gain, then it might be possible to restrict
the gain to the amount of the annual exempt amount or any available capital losses.

Where entrepreneurs’ relief is available, it may not be beneficial to claim holdover relief.
Example – Tax Planning
On 10 April 2018, Pia made a gift of her entire holding of 60,000 £1 ordinary shares (a 60%
shareholding) in Zuper Ltd, an unquoted trading company, to her daughter Rita. Pia had
purchased the shares on 1 June 2008 for £60,000, and was an employee of the company from that
date until 10 April 2018. The market value of the shares on 10 April 2018 was £260,000.
Rita sold the 60,000 £1 ordinary shares in Zuper Ltd on 28 March 2019 for £270,000. She has
never been an employee or a director of the company.
Both Pia and Rita are higher rate taxpayers, and neither of them made any other chargeable gains
during the tax year 2018-19.
No election for holdover relief
£
Deemed proceeds
260,000
Cost
(60,000)
200,000
Less: Annual exemption
(11,700)
188,300
Capital Gains Tax £188,300 x 10%
18,830
Rita will not have a CGT liability for 2018–19 because her chargeable gain of £10,000 (270,000 –
260,000) is less than the annual exempt amount.
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Election for holdover relief
£
Deemed proceeds
Cost
£
270,000
260,000
Held over gain
(200,000)
(60,000)
210,000
Less: Annual exemption
(11,700)
198,300
Capital Gains Tax £198,300 x 20%
39,660
Rita’s disposal does not qualify for entrepreneurs’ relief because she was not an officer or an
employee of Zuper Ltd, and she has not met the qualifying conditions for one year prior to the date of
disposal.
A claim for holdover relief will result in an overall CGT liability of £39,660 compared to £18,830 if no
claim is made. A claim is therefore not beneficial.
Rollover Relief

This relief is available for both companies and individuals

Limited companies can only benefit from rollover relief, and this is applied after taking account
of any indexation allowance. They cannot benefit from entrepreneurs’ relief or holdover relief
for the gift of business assets.

Gains arising on the disposal of qualifying business assets can be deferred, provided their
consideration is re-invested in a new asset. Qualifying assets are:

Goodwill (for individuals only – not relevant for companies)

Land and Buildings

Fixed Plant & Machinery
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
The re-investment of the proceeds must take place within 1 year prior to the date of disposal
or within 3 years from the date of disposal.

The old and new assets must both be qualifying assets and be used for trade purposes.

The new asset must be brought into use in the trade at the time that it is acquired.

The gain deferred (rolled-over) is reduced from the cost of the replacement asset, if the
replacement asset is a non-depreciating asset.
Non depreciating asset is one with a useful life > 60 years.

If the replacement asset is a depreciating asset, the gain is not deducted from the cost of the
replacement asset but it is held-over, till it becomes taxable on the earlier of the following
events:


Disposal of the replacement asset

The depreciating asset is brought into non business use

Ten years from the date of acquisition of the depreciating asset
The amount of gain rolled-over, depends upon how much of the amount of the proceeds from
the old asset is re-invested in the new asset.

If the entire proceeds are re-invested, the entire gain can be rolled over but if the proceeds are
partially re-invested, a part of the gain may become immediately taxable.

Immediately taxable: Lower of
a) Gain and
b) Cash not re-invested [Proceeds of old asset – cost of new asset]
Example – Rollover Relief
Annexe Plc sold a piece of land for £300,000 and realised an Indexed gain of £167,000. The
company has the following two options:
1) buy a replacement freehold building for £310,000 or
2) buy a 30 year leasehold building for £279,000.
Annexe Plc will buy either one of the two on 31 December 2016.
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Option 1 – in a building costing £310,000
Option 2 – in a 30 year leasehold building
costing £279,000
Immediately Taxable: lower of
Immediately Taxable: lower of
a) Gain = £167,000
a) Gain = £167,000
b) Cash In hand = £300,000 - £310,000 = NIL
b) Cash In hand = £300,000 - £279,000 =
£21,000
Gain available for Roll-over:
Gain Heldover:
£167,000 – Nil = £167,000
£167,000 - £21,000 = £146,000
New Building:
Original Cost
£
310,000
Less: Rolled –over
(167,000)
Base Cost
143,000
£
Building
Original Cost
Gain

New Leasehold
279,000
Under option 1, the proceeds are fully re-invested in a non-depreciating asset so not only is the
entire gain rolled over but it is adjusted in the cost of the replacement asset.

Under option 2, the proceeds are partially re-invested in a depreciating asset. As a result, part
of the gain is immediately taxable.
The part for the gain that can be relieved is not adjusted against the cost of the replacement asset
as it is a depreciating one. The deferred gain is held-over and will become taxable on the earlier of
the following dates:
a.
Disposal of the leasehold building
b.
Transfer of the leasehold building into non-business use
c.
10 years from the date of the purchase of the replacement asset – 31 December 2026.
Example – Holdover Relief
Violet sold a factory on 15 August 2018 for £320,000 and this resulted in a chargeable gain of
£85,000. She is considering the following alternative ways of reinvesting the proceeds from the
sale of her factory:
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
A freehold warehouse can be purchased for £340,000.

A freehold office building can be purchased for £275,000.

A leasehold factory on a 40-year lease can be acquired for a premium of £350,000.

A freehold factory can be purchased for £230,000.

The reinvestment will take place during November 2018.
Freehold warehouse
The sale proceeds are fully reinvested, so the whole of the chargeable gain can be rolled over.
The base cost of the warehouse will be £255,000 (340,000 – 85,000).
Freehold office building
The sale proceeds are not fully reinvested, so £45,000 (320,000 – 275,000) of the chargeable gain
cannot be rolled over. This amount will be chargeable in 2018–19.
The base cost of the office building will be £235,000 (275,000 – (85,000 – 45,000)).
Leasehold factory
The sale proceeds are fully reinvested, so the whole of the chargeable gain can be held over.
The factory is a depreciating asset, so the base cost of the factory will not be adjusted.
The chargeable gain will be held over until the earlier of November 2028 (10 years from the date of
acquisition), the date that the factory is sold, or the date that it ceases to be used in the business.
Freehold factory
No rollover relief will be available because the amount not reinvested of £90,000 (320,000 – 230,000)
exceeds the chargeable gain. The chargeable gain of £85,000 will therefore be taxed in 2018–19.
The base cost of the factory will remain at £230,000.
Non-Business Use:
When the asset disposed of was not used entirely for business purposes, then the proportion of
the chargeable gain relating to the non-business use does not qualify for rollover relief
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Example – Non Business Use
Willow sold a freehold factory on 8 November 2018 for £146,000 and this resulted in a chargeable
gain of £74,000. The factory was purchased on 15 January 2016. 75% of the factory had been used
for business purposes by Willow as a sole trader, but the other 25% was never used for business
purposes. Willow purchased a new freehold factory on 10 November 2018 for £156,000.
£
Gain
74,000
Rollover Relief (74,000 – 18,500)
(55,500)
18,500
The proportion of the chargeable gain relating to non-business use is £18,500 (74,000 x 25%), and
this amount does not qualify for rollover relief.
The sale proceeds are fully reinvested, so the balance of the gain can be rolled over.
The base cost of the new factory is £100,500 (156,000 – 55,500).
Basic capital gains tax planning
Delay a disposal until the following tax year
Delaying a chargeable disposal that is going to be made towards the end of a tax year until the
beginning of the next tax year, will postpone the resulting CGT liability by one year.
Example:
Zach is going to make a chargeable disposal on 5 April 2019.
If Zach makes the disposal on 5 April 2019 (tax year 2018-19), then the due date for the CGT liability
will be 31 January 2020. If he postpones the disposal by one day until 6 April 2020 (tax year 2019–
20), then the due date will be one year later – 31 January 2021.
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Spread a disposal over two tax years
Spreading a disposal over two tax years will mean that two annual exempt amounts are available.
For a basic rate taxpayer, more of the gain will be taxed at the lower rate of CGT. Such planning
works particularly well with quoted shares since a disposal can easily be divided into two.
Example
Juliet’s taxable income for the tax years 2018-19 and 2019-20 will be £21,000. During March
2019, she is going to dispose of 50,000 £1 ordinary shares in Great plc, and this will result in a
chargeable gain of £2 per share. Juliet will not make any other disposals during the tax years
2018-19 and 2019-20.
Based on the rates and allowances for the tax year 2018-19, Juliet should dispose of at least 12,600
shares in 2018-19 and postpone the disposal of at least 12,600 shares in Great plc until the tax year
2019-20. The resulting chargeable gain of £25,200 (12,600 x £2) will enable her annual exempt
amount of £11,700 and unused basic rate tax band of £13,500 (34,500 – 21,000) for 2019-20 to be
utilised. The CGT saving will be £3,690:
£
Annual exempt amount (11,700 x 20%)
2,340
Lower rate tax saving (13,500 x 10%) [20% - 10%]
1,350
CGT Saving
3,690
Match chargeable gains and capital losses
If a chargeable gain has been made, then investments standing at a loss could be disposed of
during the same tax year in order to create a capital loss. However, care needs to be taken so that
the annual exempt amount is not wasted.
Example:
Som is a higher rate taxpayer and has already made a chargeable gain of £29,400 for the tax year
2018-19. She has 20,000 £1 ordinary shares in Worthless plc which are currently standing at a
capital loss of £3.00 per share.
Som could dispose of 5,900 shares in Worthless plc before 5 April 2019. The resulting capital loss of
£17,700 (5,900 x £3) will reduce her taxable gains to nil (29,400 – 17,700 – 11,700).
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CHAPTER 16: INHERITANCE TAX
Definition: Tax payable on chargeable assets transferred (gifted) during the lifetime of a
chargeable person or on the event of his/ her death. This is calculated on the ‘transfer of value’
amount.
Chargeable person is a UK domiciled individual
Chargeable assets are the world-wide assets of the chargeable person
Transfer of Value: This is reduction in the value of the donor’s (person transferring the asset)
estate, due to the gratuitous transfer of an asset to a donee (person receiving the asset). It is
calculated as:
Value of estate before transfer of asset less value of estate after transfer = Transfer of value
Example – Transfer of Value
On 4 May 2018, Daniel made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an unquoted
investment company. Before the transfer Daniel owned 60,000 shares out of ABC Ltd’s issued
share capital of 100,000 £1 ordinary shares.
ABC Ltd’s shares are worth £18 each for a holding of 60%, £10 each for a holding of 45% and £8
each for a holding of 15%.
Although Daniel’s son received a 15% shareholding valued at £120,000 (15,000 x £8), Daniel’s
transfer of value is calculated as follows:
£
Value of shares before transfer
[60,000 x £18]
1,080,000
Value of shares after transfer
[45,000 x £10]
(450,000)
Transfer of Value
630,000
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Types of Transfers
Lifetime Transfers
Potentially Exempt Transfers (PET):

These are transfers to individuals, excluding spouse/ registered civil partner.

No tax is calculated at the time of this transfer.

It becomes completely exempt if the donor survives for 7 years or more after making the
transfer but become chargeable if the donor dies within 7 years.

The value of the transfer is fixed at the time the gift is made.

In the event of the donor dying within 7 years of making the gift, tax rates and allowances of
the year of death are applied to calculate the IHT. For 2018-19, the IHT rate is 40%.
Example - PET
Sophie died on 23 January 2019. She had made the following lifetime gifts:
8 November 2011 – a gift of £450,000 to her son.
12 August 2016 – a gift of a house valued at £610,000 to her daughter. By 23 January 2019, the
value of the house had increased to £655,000.
The gift to Sophie’s son on 8 November 2011 is a PET. Because the PET was made more than seven
years before the date of Sophie’s death it is exempt from IHT.
The gift to Sophie’s daughter on 12 August 2016 is a PET and is initially ignored. It becomes
chargeable as a result of Sophie dying within seven years of making the gift, and the transfer will be
charged to IHT based on the rates and allowances for 2018-19.
Chargeable Lifetime Transfers (CLT):

These are transfers made by an individual to trustees to hold for the benefit of other people
(beneficiaries).

An immediate tax charge of 20% (if tax paid by donee) or 25% (if tax paid by donor) arises at
the time of transfer itself.
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
The value of the transfer is fixed at the time the asset is transferred to the trust.

Additional tax charge will arise if the donor dies within 7 years of making the transfer. If the
donor survives for 7 years or more after the transfer, no additional tax will be liable.

The additional tax charge will be calculated using the tax rates of the year of death. For 201819, this is 40%.
Example - CLT
Lim died on 4 December 2018. She had made the following lifetime gifts:
2 November 2011 – a gift of £420,000 to a trust.
21 August 2016 – a gift of a house valued at £615,000 to a trust. By 4 December 2018, the value of
the house had increased to £650,000.
The gift to the trust on 2 November 2011 is a CLT, and will be immediately charged to IHT based on
the rates and allowances for 2011-12. There will be no additional tax liability as the gift was made
more than seven years before the date of Lim’s death.
The gift to the trust on 21 August 2016 is a CLT, and will be immediately charged to IHT based on the
rates and allowances for 2016-17. Lim has died within seven years of making the gift so an additional
tax liability will arise based on the rates and allowances for 2018-19.
Pro-forma for the calculation of Lifetime Transfer
£
Transfer of value
xxx
Less: exemptions
Small gift exemption
(xxx)
Marriage exemption
(xxx)
Annual exemption
(xxx)
Chargeable amount of gift
xxx
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Death Transfers:

Transfers from the Estate of an individual in the event of his/ her death.

Tax rate= 40%.
Exemptions
Inter-spouse Exemption: Gifts to spouses (and registered civil partners) are exempt from IHT. This
exemption applies both to lifetime gifts and on death.
Small Gift Exemption: Gifts to individuals amounting up to £250 per person in total in a year is
exempt. If value of gift exceeds £250, the entire amount becomes taxable.
Example – Small Gifts
During the tax year 2018-19, Peter made the following gifts:
On 18 May 2018, he made a gift of £240 to his son.
On 5 October 2018, he made a gift of £400 to his daughter.
On 20 March 2019, he made a gift of £100 to a friend.
The gifts on 18 May 2018 and 20 March 2019 are both exempt because they do not exceed £250. The
gift on 5 October 2018 for £400 does not qualify for the small gifts exemption because it is more than
£250. It will instead be covered by Peter’s annual exemption for 2018-19 (see the next section).
Normal Expenditure Out Of Income: Any transfer meeting the criteria of normal expenditure out
of income is exempt:

Gift made as part of normal expenditure of an individual i.e. must be a habitual expense

Paid out of the income of an individual

Donor is left with sufficient income to maintain his/ her standard of living.

For example, regular annual gifts of £2,500 made by a person with an annual income of
£100,000 would probably be exempt. But a one-off gift of £70,000 made by the same
person would probably not be.
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Marriage Gift’s Exemption: amounts given to the bride or groom on the occasion of a marriage are
exempt upto the limit specified by HMRC. The limit is dependent upon the relation of the donor
with the bride/ groom.

Parents: First £5,000 of the gift is exempt

Grand Parents/ Spouse: First £2,500 are exempt

Any other relation: First £1,000 are exempt
Example – Marriage Gift Exemption
On 19 September 2018, William made a gift of £20,000 to his daughter when she got married. He
has not made any other gifts since 6 April 2017.
The gift is a PET, but £5,000 will be exempt as a gift in consideration of marriage and William’s
annual exemptions for 2018-19 and 2017-18 are also available. The value of the PET is therefore
£9,000 (20,000 – 5,000 – 3,000 – 3,000).
Annual Exemption - AE:

Upto £3,000 per annum of any asset(s) transferred during a year is exempt.

After the current tax years’ annual exemption amount is used up, the unused annual exemption
of the immediately preceding tax year can be brought forward to further reduce the taxable
value of the transfer. Therefore the maximum amount of annual exemption available in any tax
year is £6,000 (£3,000 x 2).

AE amounts are applied to transfers chronologically.
Example – Annual Exemptions
Simone made the following gifts:
On 10 May 2017, she made a gift of £1,400 to her son.
On 25 October 2018, she made a gift of £6,000 to her daughter
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2017-18: Gift made to son
£
Transfer of value
Less: Annual Exemption 2017-18
Chargeable Amount
1,400
(1,400)
0
2018-19: Gift made to daughter
£
Transfer of value
Less: Annual Exemption 2018-19
6,000
(3,000)
Less: AE brought forward 2017-18
(£3,000 - £1,400)
Chargeable Amount
(1,600)
1,400
Nil Rate Band - NRB:

IHT is payable if the cumulative transfers of 7 years made by an individual exceed the Nil Rate
Band.

This is the limit up to which the Gross Chargeable Amounts (taxable value of the transfers) are
exempt. On exceeding this limit, the excess amount becomes chargeable. For 2018-19 it is
£325,000 and this has been the same since 2009-10.

An additional nil rate band is available where a main residence is inherited on death by direct
descendants (children and grandchildren).

For the tax year 2018-19, the residence nil rate band is £125,000. The residence nil rate band
is only relevant 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. Any other type of
property, such as a property which has been let out, does not qualify for the residence nil rate
band
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Spouse’s Unused Nil Rate Band:

The unused nil rate band at the time of the death of a spouse can be transferred to the
surviving spouse, to be used at the time of his/ her death.

A claim for the transfer of any unused nil rate band should be made within 2 years after the
death of first spouse and is made by the personal representatives who are looking after the
estate of the second spouse to die.

The amount that can be claimed is based on the proportion of the nil rate band not used when
the first spouse died. Even though the first spouse may have died several years ago when the
nil rate band was much lower, the amount that can be claimed on the death of the second
spouse is calculated using the current limit of £325,000.

The unused NRB amount of the first spouse is calculated by identifying the % of the NRB that
was not utilised. This % is then applied on the NRB value available at the time of the second
spouse’s death.
Example – Spouse’s Unused Nil Rate Band
Win died on 24 February 2019 leaving an estate valued at £800,000 (the residence nil rate band is
not available). Only 60% of his wife’s nil rate band was used when she died on 12 May 2009.
On 10 May 2016, Win made a gift of £200,000 to his son. This figure is after deducting the annual
exemption amounts.

Lifetime transfer – 10 May, 2016: will be treated as a PET

Additional liability arising on death – 10 May, 2016: none as covered by the Nil Rate Band

Death estate – 24 February, 2019:

Win’s personal representatives can claim the wife’s unused nil rate band of £130,000 (325,000 x
40%).

The amount of nil rate band is therefore £455,000 (325,000 Win’s own NRB + 130,000
transferred from spouse).

£200,000 of the Nil Rate Band is utilised by the PET, so £255,000 is left for the death estate

IHT liability on the estate will therefore be £800,000 - £255,000 = £545,000 x 40% = £218,000
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Taper Relief:

If death IHT is calculated on the lifetime transfers made by a deceased individual 7 years prior
to his death, the HMRC allows a % reduction on the tax payable of certain transfers.

The % is dependent upon the number of years the individual survived after making the
transfer.
Years before death
% reduction
Over 3 years but less than 4 years
20
Over 4 years but less than 5 years
40
Over 5 years but less than 6 years
60
Over 6 years but less than 7 years
80
Example – Taper Relief
Winnie died on 9 January 2019. She had made the following lifetime gifts:
2 February 2012 – A gift of £460,000 to a trust. The trust paid the IHT arising from this gift.
16 August 2015 – A gift of £320,000 to her son
These figures are after deducting available exemptions.
The nil rate band for the tax years 2011–12 and 2015–16 it is £325,000.
2 February 2012
£
Chargeable Transfer
Nil Rate Band
Utilised (7 years prior to transfer)
£
460,000
325,000
Nil
Less: Available NRB
325,000
Excess Amount
135,000
IHT @ 20% - paid by donee
27,000
16 August 2015
Potentially Exempt Transfer
320,000
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Liabilities on death
CLT
460,000
Nil Rate Band
325,000
Utilised (7 years prior to transfer)
Nil
Less: Available NRB
325,000
Excess amount
135,000
IHT @ 40%
54,000
Taper relief reduction – 80%
(43,200)
10,800
Less: IHT already paid
(27,000)
IHT payable on CLT
0
PET
320,000
IHT @ 40%
128,000
Taper relief reduction – 20%
(25,600)
IHT payable on PET
102,400
Lifetime IHT on Lifetime Transfers
1. Deal with each transfer chronologically.
2. Identify whether transfer is PET or CLT
3. Determine transfer of value and deduct the available current tax year AE and any used AE from
the immediately preceding tax year, to arrive at the Chargeable Amount.
[Current - the tax year in which the transfer was made.]
4. For a PET, just record the Chargeable amount. This will be the taxable amount due if the donor
dies within 7 years from the date of transfer
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5. For a CLT, match the Chargeable amount against the available Nil Rate Band.
[Available NRB is the original NRB limit less the cumulative values of any transfers made in the
7 years, prior to the date of the transfer under consideration]

If the Chargeable amount is less than the NRB, no lifetime IHT will be applicable.

If the Chargeable amount exceeds the NRB, the excess is taxable
6. Identify who has taken the responsibility to pay the lifetime IHT on the CLT.

If the donor: apply a 25% tax rate on the Chargeable amount

If the donee: apply a 20% tax rate on the Chargeable amount
7. Record the Gross Chargeable Amount for the CLT which is calculated as:
Chargeable amount of CLT + Lifetime IHT on CLT (only if paid by donor)

The Gross Chargeable amount is the value that will be taxable for Death IHT if the donor dies
within 7 years from the date of transfer
8. Tax payment: The deadline for the payment of lifetime IHT is dependent upon the date of the
transfer.

If the transfer is made between 6th April to 30th September – tax is to be paid by 30th April,
following the tax year.

If transfer is made between 1st October to 5th April – tax is to be paid 6 months after the date of
transfer.
It is recommended that you work through the following example as you study the above steps!
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Example – Lifetime IHT on Lifetime Transfers
Jenna made the following lifetime transfers:
11 June 2016: £250,000 gift to her daughter
15 July 2017: £400,000 to a trust
11/06/16 – PET to daughter
£
Transfer of Value
£
250,000
Less: Exemptions
Annual Exemption – 16/17
(3,000)
Annual Exemption – 15/16
(3,000)
Chargeable Amount
244,000
15/07/17 – CLT
Transfer of Value
400,000
Less: Annual Exemption – 17/18
(3,000)
Annual Exemption – 16/17
Not Available
Chargeable Amount
Nil Rate Band – 17/18
Utilised (7 years prior to transfer – 15 July 2017)
397,000
325,000
Nil
Less: Available NRB
325,000
Excess Amount
72,000
IHT @ 25% - paid by donor
18,000
Gross Chargeable Amount =
397,000 + 18,000
415,000
Chargeable Amount + Tax paid by donor
The donor will pay the tax on this transfer by 30 April 2018.
Advantages of Lifetime Transfers:
Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.

A PET is completely exempt after seven years.

A CLT will not incur any additional IHT liability after seven years.
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
Even if the donor does not survive for seven years, taper relief will reduce the amount of IHT
payable after three years.

The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make
gifts of assets that are expected to increase in value such as property or shares.
Death IHT on Lifetime Transfers
1. Identify all the lifetime transfers made by the individual in the 7 years prior to his/ her death.
These transfers will now be liable for Death IHT.
2. Deal with each lifetime transfer chronologically.
3. In the case of a PET, match the Chargeable amount and against the available NRB.
This is the tricky part!! The NRB limit will be that of the death tax year. However to determine
the available amount of the NRB, the following is to be considered:
[Death tax year NRB limit less Chargeable amounts of transfers made in the previous 7 years
of the PET under consideration.]

If the Chargeable amount exceeds the NRB, the excess amount is taxed at 40%.

Taper Relief is utilised to reduce the tax payable.
4. In the case of a CLT, match the Gross chargeable amount against the available NRB.
[Death tax year NRB limit less Chargeable amounts of transfers made in the previous 7 years
of the PET under consideration.]

The excess amount is taxed at 40%.

Taper Relief is utilised to reduce the tax payable.

The lifetime IHT paid on the CLT (whether by doner or donee) is deducted from the tax
payable amount.
5. Tax payment: Tax has to be paid by the donee within 6 months from the month of death of the
donor.
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It is recommended that you work through the following example as you study the above steps!
Example – Death IHT on Lifetime Transfers
Jenna from the previous example died on the 10th of May 2019.
The lifetime transfers of the 7 years prior to 10 May 2019 will become taxable
11/06/16 – PET to daughter – now taxable
£
Chargeable Amount
NRB
Less: Utilised in the 7 years prior to the date of transfer
£
244,000
325,000
Nil
(11/06/09 – 11/06/16)
Less: Available NRB
(325,000)
Excess Amount
NIL
Jenna’s daughter would have paid the tax on this transfer (had there been any) by 30
November 2019.
15/07/17 – CLT – taxable again at death
Gross Chargeable Amount
NRB
Less: Utilised in the 7 years prior to date of transfer
415,000
325,000
(244,000)
(15/07/10 – 15/07/17)
Less: Available NRB
(81,000)
Excess Amount
334,000
IHT @ 40%
133,600
Less: Taper Relief
Nil
(donor survives for less than 2 years from date of transfer)
15/07/17 – 10/05/2019
Less: Lifetime IHT paid on the transfer
(18,000)
IHT Payable
115,600
The trustee will pay the tax of £115,600 to HMRC by 30 November, 2019.
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Death Estate
A person’s estate includes the market value of every asset which they own at the date of death
such as property, shares, motor vehicles, cash, receivables and other investments including ISA as
nothing is exempt for IHT.
Exception: A person’s estate also includes the proceeds from life assurance policies even though
these proceeds will not be received until after the date of death. The actual market value of a life
assurance policy at the date of death is irrelevant.
1. Identify the Open Market Value OMV of the deceased individual’s assets on the date of his/ her
death and sum them up. All assets are considered as none are exempt from IHT.
Some exceptions to using the OMV rule are:

Repayment/ Interest mortgage: Normally freehold property is recorded at OMV less any
Repayment/ Interest mortgage the individual had paid on the property.

Endowment mortgage: If the individual has taken an endowment mortgage against the
property, the property is recorded at the OMV without any deductions..

Life Assurance Policy: This is recorded at the value of the actual proceeds received.
2. The following liabilities or expenses, if incurred, are deducted from the sum of the assets value
to arrive at the Estate Value:

Funeral expenses

Debts incurred by deceased, provided they can be legally enforced. So verbal promises and
gambling debts etc, cannot be recovered from the estate.

Estate administration fee
3. If the deceased left any assets for his/ her surviving spouse, there will no Death tax payable on
this transfer under the Inter-Spouse exemption rule. The value of this transfer will be deducted
from the result of Step 2 above, to arrive at the Gross Chargeable Estate Value.
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4. The Gross Chargeable Estate Value is matched against the ‘available’ NRB
[Available NRB – is the NRB limit the NRB less the cumulative values of any transfers made in
the 7 years, prior to the death of the individual]
The excess amount is taxed at 40%
5. Tax payment: The IHT on death estate is paid by the Executor (person handling the estate and
tax matters) and is submitted to HMRC within 6 months from the end of the month of death.
6. The post-tax value of the estate is then distributed amongst the beneficiaries who can be:

Specific Legatees: Individuals or trust entitled to receive a specific amount or asset.

Residual Legatee: Individual who inherits the remaining estate after the specific legacies
has been transferred. This is the individual who actually ends up bearing the burden of the
Inheritance Tax calculated and paid on the death estate.
It is recommended that you look at the following format as you study the steps above!
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Example: Jenna who died on the 10th of May 2019 had the following assets and debts on the day of
her death, out of which she left £50,000 to her son and the remainder estate to her daughter.
There was no residence nil rate band.
Death Estate – Open Market Value
Freehold Property
Less: Repayment Mortgage
£
£
400,000
(240,000)
160,000
Property with endowment mortgage
100,000
Stocks and Shares
45,000
Insurance policy – proceeds actually received
110,000
Motor Cars
5,000
Personal Chattels
17,000
Debts owed to the individual at the time of death
30,000
Cash and Bank accounts (including ISAs)
45,000
512,000
Less: Debts payable at time of death
67,000
Outstanding Taxes
46,000
Funeral Expenses
10,000
(123,000)
Estate Value
389,000
Less: Legacies to the spouse
nil
Gross Chargeable Estate
Nil Rate Band
Less: Utilised in 7 years prior to date of death
389,000
325,000
(244,000)
(415,000)
Less: Available NRB
nil
Excess Amount
389,000
IHT @ 40%
155,600
£155,600 will be paid to HMRC by the executor by 30 November 2019.
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Distribution of estate:
£
Gross Chargeable Estate
389,000
Less: Death IHT
(155,600)
Estate available for distribution
233,400
Less: Specific legacy to son
(50,000)
Residual Estate for daughter
183,400
Example – Inheritance Tax
Andy died on 31 December 2018. At the date of his death he owned the following assets:

A main residence valued at £425,000. This had an outstanding interest-only mortgage of
£180,000.

Motor cars valued at £63,000.

Ordinary shares in Herbert plc valued at £54,000.

Building society deposits of £25,000.

Investments in individual savings accounts valued at £22,000, savings certificates from NS&I
(National Savings and Investments) valued at £19,000 and government securities (gilts)
valued at £34,000.

A life assurance policy on his own life. On 31 December 2018, the policy had an open market
value of £85,000 and proceeds of £100,000 were received following Andy’s death.
During his lifetime, Andy had contributed into a personal pension scheme. The pension fund was
valued at £167,000 at the time of his death.
On 31 December 2018, Andy owed £700 in respect of credit card debts and he had also verbally
promised to pay the £800 legal fee of a friend. The cost of his funeral amounted to £4,300.
The residence nil rate band is not available.
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Death Estate – Open Market Value
Property
Less: Repayment Mortgage
£
£
425,000
(180,000)
245,000
Motor Cars
63,000
Ordinary shares in Herbert plc
54,000
Building society deposits
25,000
Other investments (22,000 + 19,000 +34,000)
75,000
Proceeds of life assurance policy
100,000
Pension fund
0
562,000
Less: Debts payable at time of death
Credit card debts
700
Funeral Expenses
4,300
(5,000)
Chargeable Estate Value
557,000
Nil Rate Band
325,000
Excess Amount
232,000
IHT @ 40%
92,800

The promise to pay the friend’s legal fee is not deductible because it is not legally enforceable.

Unlike capital gains tax, there is no exemption for motor cars, individual savings accounts, saving
certificates from NS&I or for government securities.

The IHT liability on the life assurance policy could have easily been avoided if the policy had been
written into trust for the beneficiaries of Andy’s estate. The proceeds would have then been paid
direct to the beneficiaries, and not formed part of Andy’s estate. However, this aspect is not
examinable at TX (UK).

The pension fund of £167,000 is outside of Andy’s estate.
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Death Estate with Residence Nil Rate Band
Example – Residence Nil Rate Band
Sophie died on 26 May 2018 leaving an estate valued at £825,000. Under the terms of her will,
Sophie’s estate was left to her children. Sophie’s estate included a main residence valued at
£275,000.
Death Estate – Open Market Value
£
Gross Chargeable Estate
£
825,000
Nil Rate Band
325,000
Residence Nil Rate Band
125,000
Less: Available NRB
450,000
Excess Amount
375,000
IHT @ 40%
150,000
Example – Residence Nil Rate Band
Tony died on 16 August 2018 leaving an estate valued at £725,000. Under the terms of his will,
Tony’s estate was left to his grandchildren. The estate included a main residence valued at
£385,000.
On 30 April 2016, Tony had made a potentially exempt transfer of £400,000 to his son.

Lifetime transfer on 30 April, 2016 will be treated as a PET of £400,000.

However as Tony dies within 7 years of the transfer, the PET will become chargeable on death
but only to the extent that it exceeds the Nil Rate Band of £325,000. So chargeable amount will
be £400,000 - £325,000 = £75,000 x 40% = £30,000.

Although the Nil Rate Band has been fully utilised, the Residence Nil Rate Band of £125,000
will be available to use against the death estate calculation. So chargeable amount will be
£725,000 - £125,000 = £600,000 x 40% = £240,000
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Inheritance Tax Planning
Make gifts early in life

Gifts should be made as early in life as possible so that there is a greater chance of the donor
surviving for seven years.

The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make
gifts of assets that are expected to increase in value such as property or shares.

A PET is exempt during lifetime and will eventually be completely exempt if donor dies after
seven years.

A CLT will not incur any additional IHT liability after seven years.

Even if the donor does not survive for seven years, whether in case of PET or CLT, taper relief
will reduce the amount of IHT payable after three years.

Gifts made just before death will be of little or no IHT benefit, and may result in a capital gains
tax liability (whereas transfers on death are exempt disposals for capital gains tax purposes).
Make use of the nil rate band

Gifts can be made to trusts up to the amount of the nil rate band every seven years without
incurring any immediate charge to IHT.

Gifts to trusts within seven years of each other will be subject to the seven year cumulation
period, whilst an immediate charge to IHT will arise if a gift exceeds the nil rate band.
Skip a generation

When making gifts either during lifetime or on death, it can be beneficial to skip a generation
so that gifts are made to grandchildren rather than children. This avoids a further charge to
IHT when the children die.

Gifts will then only be taxed once before being inherited by the grandchildren, rather than
twice.

Of course such planning depends on the children already having sufficient assets for their
financial needs
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CHAPTER 17: INTRODUCTION TO CORPORATION TAX
Definition: Tax paid by a UK Resident company on its Taxable Total Profits of an Accounting
Period. It is taxed on worldwide income.
UK Resident Company: A company that has been incorporated in the UK or whose central control
and management is in the UK i.e. the board of directors meet in UK.
Period of Account: A period of account is the duration for which a company prepares its
accounts. This is normally 12 months long but can be longer or shorter than this.
Accounting Period: Is usually the Period of Account (POA) itself, provided the POA ≤ 12 months.
When does an accounting period start?
When

Company starts to trade.

Company’s profits become liable to corporation tax.

When previous accounting period finishes.
When does an accounting period come to an end?

After 12 months of its start

On the completion of previous accounting period

On the start of dissolution of company

When a company ceased to be UK resident

When company does not remain liable to corporation tax
If the POA > 12 months, it is split into two Accounting Periods – the first 12 months and the
balancing months.
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Taxable Total Profits
This is the Company’s taxable profit amount and is arrived at using the following calculation
format:
XYZ Ltd.
Accounting Period Y/e 31/03/19
£
Tax Adjusted Trading profit
130,000
Less: Carried forward trading loss – if any
(2,000)
Property Income
15,000
Capital Gain
34,000
Interest Income
6,000
Total Income
183,000
Less: Current year and carry back trading loss – if any
-
Less: Qualifying Charitable Donation – always paid gross
(10,000)
Taxable Total Profits
173,000
The Corporation Tax rate is applied on the Taxable Total Profits.
Financial Year: The tax rates for companies are set for financial years and run from 1 April to 31
March.
For the FY 2018 (1 April 2018 to 31 March 2019) the tax rate is 19%.
In the example above Corporation Tax (CT) is £173,000 x 19% = £32,870
CT Payment: The deadline by which Companies need to pay their Corporation Tax for an
Accounting Period depends upon the size of the company and this is determined by looking at the
Total Profits (Taxable Total Profits plus Dividends from Non-group companies).

Small Companies – Companies with Total Profits < £1,500,000 will pay the tax in a single
instalment within 9 months and 1 day from the end of the Accounting Period.
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
Large Companies – Companies with > £1,500,000 total profits will pay their tax in 4
instalments based on the current Accounting Period’s estimated tax liability. The instalments
start on the 14th day of the 7th month in the Accounting Period and then onwards quarterly.
Taxable Total Profits – Components
Tax Adjusted Trading Profits:
The adjustment of profits is primarily the same as that of self-employed individuals but there are
the following minor differences:

The personal use element in any of the expenses is ignored as now the individuals making the
personal use such as directors etc. are employees of the company.

Qualifying charitable donation is eligible for relief so it cannot be treated as a business expense
and is disallowed i.e. added back to arrive at the tax adjusted profit amount.

Income that is recognised under any other head such as rent from property etc. is not made
part of tax adjusted trading profits but are included in the CT computation separately.

Pre-trading expenditure is treated as an allowed expense in the first set of accounts. These are
trading expenses incurred in the 7 years prior to trade.
Capital Allowances:

These are calculated according to Accounting Periods and as an accounting period can never
be longer than 12 months, for companies the calculation of capital allowances can only be upto
a maximum of 12 months.

The concept of asset with private use is not applicable for companies as the individual making
the private use of the asset will be an employee, regardless of designation. Private use of assets
by an employee is ignored and is treated as a taxable benefit for the employee.
Property Income:

Taxable property income is calculated on accrual basis for corporations.

If a company has more than one properties let out, the net property income will be clubbed
together and added in the Corporation Tax computation as the final property income amount.
Page 187 of 244
Taxation - UK FA

The treatment of interest on loan taken to purchase the property let out is different from
individuals. The expense is not deducted from property income rather it is deducted from
Interest Income.

Any loss is set off against the same accounting period’s total profits (before claiming relief for
Qualifying Charitable Donations). Any outstanding property loss is then carried forward
against future total profits (before QCD).
Loan Relationship leading to interest income:

If a company has given a non- business loan or invested in debentures, deposited money in
bank accounts etc. and as a result is receiving interest income; it is included separately in the
CT calculation.

Interest is always received gross by the companies.

Any interest expense incurred for business purposes is treated as an allowed expense against
tax adjusted trading profits.

The following are considered trade purposes:

Purchase of plant and machinery

Providing working capital

Purchasing property to be used for trading purposes such as an office, warehouse or
factory.

If the expense relates to non-business relationship, then it is deducted from the interest
income for the accounting period.

Non-trade purposes, include:

Purchasing property which is then let-out

Acquiring the share capital of another company
Qualifying Charitable Donations relief:

Qualifying Charitable Donations are always paid gross and are deducted to arrive at the
Taxable Total Profit amount.

These may be wasted in favour of certain loss relief options and this becomes a point of
consideration when deciding upon the choice of loss relief option.
Page 188 of 244
Taxation - UK FA
Long Period of Accounts:

If the POA is longer than 12 months, the company will calculate CT for two separate
Accounting Periods.

The first accounting period will cover the income and related expenses and reliefs for the first
12 months of the period of account.

The second Accounting period will cover the data for the balancing months of the period of
account.

The income will be split into two Accounting periods, using the following criteria:

Trading profit before Capital Time Apportioned
Allowances

Capital Allowances
Calculated for each Accounting period

Property Income
Time Apportioned

Interest Income
Accrual Basis

Capital Gain
Matched to the Accounting Period based on the date of
disposal

Qualifying Charitable Donation
Matched to the AP according to the date of payment
Example – Corporation Tax
Elongated Plc created its accounts for the 18 month period ended 30 June 2018 and it contained
the following information:
£
Trading Income (before capital allowances adjustment) – Note 1
360,000
Property income
90,000
Interest income – Note 2
68,000
Capital Gain – Note 3
45,000
Qualifying Charitable Donation – Note 4
30,000
Page 189 of 244
Taxation - UK FA
Notes:
1. The tax written down value of the assets as at 1 January 2017 was £60,000. No purchases or
disposals were made.
2. Interest of £4,000 per month is accrued. £68,000 is the interest received.
3. An asset was disposed on 24 March 2017.
4. The donation was made on 16 February 2018.
Elongated Plc
Corporation Tax Computation
12 months to 31 December
6 months to 30 June
2017
2018
£
£
Trading profit
240,000
180,000
Less: Capital Allowance (W1)
(10,800)
(8,856)
Property Income
60,000
30,000
Capital Gain
45,000
-
Interest Income
48,000
24,000
382,200
225,144
-
(30,000)
-------------
------------
382,200
195,144
-------------
------------
76,440
39,029
1st October 2018
1st April, 2019
Total Income
Less: Qualifying Charitable Donation
Taxable Total Profits
CT Liability @ 20%
CT Submission deadline – small
company
W1: Capital Allowances:
Year ended 31 December 2017: £60,000 x 18% = £10,800
Tax written down value carried forward: £60,000 - £10,800 = £49,200
Page 190 of 244
Taxation - UK FA
6 months period ended 30 June 2018: £49,200 x 18% = £8,856
Tax written down value carried forward: £49,200 - £8,856 = £40,344
Example – Corporation Tax
Sofa Ltd is a manufacturer of furniture. The company’s summarized profit and loss account for the
year ended 31 March 2019 is as follows:
Note
£
Gross Profit
£
272,300
Operating expenses
Depreciation
87,100
Professional Fees
1
19,900
Repairs and Renewals
2
22,800
Other expenses
3
64,000
Operating profit
Profit from sale of fixed assets
(193,800)
78,500
4
4,300
5
8,400
Income from investments
Bank interest
91,200
Interest payable
6
Profit before taxation
(31,200)
60,000
Note 1 – Professional fees
£
Accountancy and audit fee
3,400
Legal fees in connection with the issue of share capital
7,800
Legal fees in connection with the renewal of a ten year property lease
2,900
Legal fees in connection with the issue of debentures (see note 6)
5,800
Page 191 of 244
Taxation - UK FA
Note 2 – Repairs and renewals
The figure of £22,800 for repairs and renewals includes £9,700 for constructing a new wall around
the company’s premises and £3,900 for repairing the wall of an office building after it was
damaged by a lorry. The remaining expenses are all fully allowable.
Note 3 – Other expenses
The figure of £64,000 for other expenses includes £1,360 for entertaining suppliers; £700 for
entertaining employees; £370 for counseling services provided to an employee who was made
redundant; and a fine of £420 for infringing health and safety regulations. The remaining expenses
are all fully allowable.
Note 4 – Profit on disposal of shares
The profit on the disposal of shares of £4,300 is in respect of a shareholding that was sold on 29
October 2018. Chargeable gain is £4,000 after taking account of any indexation allowance.
Note 5 – Bank interest received
The bank interest was received on 31 March 2019. The bank deposits are held for non-trading
purposes.
Note 6 – Interest payable
Sofa Ltd raised a debenture loan on 1 July 2018, and this was used for trading purposes. Interest of
£20,800 was paid on 31 December 2018 and £10,400 was accrued at 31 March 2019.
Note 7 – Plant and machinery
On 1 April 2018 the tax written down values of the general pool was £16,700.
Following transactions took place during the year ended 31 March 2019:
12 May 2018
Purchased equipment
£10,900
8 June 2018
Purchased motor car (1)
£11,400
2 August 2018
Purchased motor car (2)
£22,200
8 January 2019
Sold a lorry
(£7,600)
Page 192 of 244
Taxation - UK FA
The lorry sold on 8 January 2019 for £7,600 originally cost £24,400. CO 2 emission of car 1 is 105
g/km and CO2 emission of car 2 is 136g/km.
£
Profit before taxation
60,000
Depreciation
87,100
Accountancy and audit fee
Legal fees in connection with the issue of share capital
0
7,800
Renewal of lease
0
Legal fee in connection with the issue of debentures
0
Construction of new wall
9,700
Repairs
Entertaining suppliers
0
1,360
Entertaining employees
0
Counselling services
0
Health and safety fine
420
Profit on disposal of shares
(4,300)
Bank interest received
(8,400)
Interest payable
Capital allowances – Plant and machinery (working 1)
Trading profit
0
(16,366)
137,314

The cost of renewing a short-lease (less than 50 years) is allowable as a trading expense.

The cost of obtaining loan finance is allowable as a trading expense under the loan relationship
rules as the loan was used for trading purposes.

The new wall is not allowable, being capital in nature.

The only exception to the non-deductibility of entertainment expenditure is when it is in
respect of employees.

The costs of counselling services for redundant employees are allowable.

Interest on a loan used for trading purposes is deductible in calculating the trading loss on an
accruals basis.
Page 193 of 244
Taxation - UK FA
Working 1: Capital Allowances
AIA
General Pool
Special Rate Pool
Allowances
£
£
£
£
TWDV b/f
16,700
Additions with AIA
Equipment
10,900
AIA
(10,900)
10,900
Additions without AIA
Motor Car 1
11,400
Motor Car 2
22,200
Disposal
(7,600)
20,500
WDA @ 18%
(3,690)
WDA @ 8%
3,690
(1,776)
TWDV c/f
16,810
1,776
20,424
16,366
Sofa Ltd
Y/e 31st March, 2019
£
Trading Profit
137,314
Interest Income
8,400
Chargeable Gain
4,000
Taxable Total Profits
149,714
Tax Liability = £149,714 x 19% = £28,446
Page 194
Taxation - UK FA
CHAPTER 18: LOSSES
Trading Loss Relief
Trading Loss Relief Options
Current Year and Carry Back
Carry Forward
Against future total profits for
indefinite period
Against current year Total Profits
before Qualifying
CharitableDonation and only after
that carry back 12 months against
Total profits before QCD
Terminal Loss
Carry back of loss for 3 years
against the Total Profits before
QCD.
Options:
Carry Forward

From 1 April, 2017, the trading loss of an accounting period can be carried forward against the
first available future Total Profits.

A claim must be made within two years of the end of the accounting period in which the loss is
relieved.

As it is possible to restrict the amount of loss that is relieved, this option does not waste the
Qualifying charitable donations (QCD).
Current Year

A company can claim to relieve its trading loss against total income (before QCD) of the same
accounting period.

Any outstanding loss will automatically be carried forward against future trading profits only.

While this option gives immediate loss relief, there is a risk of wasting the QCD relief.

Claim for this option must be made within 2 years of the end of the Accounting period in which
the loss arose.
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Taxation - UK FA
Current Year and Carry Back:

A company can claim to relieve its trading loss against total income (before QCD) of the current
accounting period and then carry back any unrelieved loss against total income (before QCD)
of the previous 12 months.

If there is still unrelieved loss, it will automatically be carried forward against future trading
profits.

The loss cannot be directly carried back; it first has to be relieved against current year income.

A lot more QCD relief will be wasted under this option.

Claim for this option must be made within 2 years of the end of the Accounting period in which
the loss arose.
Example – Trading Loss Relief
Giver Ltd commenced trading on 1 April 2017. The company’s results are:
Year ended 31 March 2018
Year ended 31 March 2019
£
£
(18,200)
47,300
Property business income
13,400
12,200
Chargeable gain
5,100
0
(3,000)
0
Trading profit/ (loss)
Qualifying charitable donations
Current year loss relief claim against total profits
Y/E 31 March 2018
Y/E 31 March 2019
£
£
0
47,300
Property business income
13,400
12,200
Chargeable gain
5,100
0
18,500
59,500
Trading profit
Loss Relief: Current year
Qualifying charitable donations – wasted
(18,200)
(300)
0
0
59,500
Taxable Total Profits
Page 196
Taxation - UK FA
Loss Memo:
£
Trading Loss – y/e 31 March 2018
18,200
Current year loss relief – y/e 31 March 2018
(18,200)
0
Carry forward loss relief claim against total profits
Year ended 31 March
Year ended 31 March
2018
2019
£
£
0
47,300
Property business income
13,400
12,200
Chargeable gain
5,100
0
18,500
59,500
Trading profit
Loss Relief: Carry forward
(18,200)
Qualifying charitable donations
(3,000)
0
Taxable Total Profits
15,500
41,300
Loss Memo:
£
Trading Loss – y/e 31 March 2018
18,200
Carry forward loss relief – y/e 31 March 2019
(18,200)
0
Terminal Loss:

Trading loss generated in the last 12 months of trading can be relived through the following
options:

Current year

Current year and Carry back
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Taxation - UK FA

Terminal Loss: where the trading loss is carried back and relieved against the total profits
(before QCD) of the previous 3 years (36 months), with the latest year given priority.

The carry forward relief is no longer an option in this scenario as the company is ceasing and
will no longer be generating trading profits.
Example – Trading Loss Relief
Wrap It Up Limited has shared the following details for its last four accounting periods.
Trading Profit
QCD
£
£
y/e 31 December 2015
100,000
5,000
3 months to 31 March 2016
25,000
1,000
y/e 31 March 2017
60,000
5,000
y/e 31 March 2018
20,000
5,000
y/e 31 March 2019
(210,000)
5,000
y/e 31
3 months to 31
y/e 31 March
y/e 31 March
December 2015
March 2016
2017
2018
£
£
£
£
Trading Profit
100,000
25,000
60,000
20,000
Total Income
100,000
25,000
60,000
20,000
Less: Terminal loss
(75,000)
(25,000)
(60,000)
(20,000)
QCD
(5,000)
Wasted
Wasted
Wasted
Taxable Total Profits
20,000
-
-
-
Loss Memo:
£
Trading Loss – y/e 31 March 2019
210,000
Terminal Loss – y/e 31 March 2018
(20,000)
190,000
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Taxation - UK FA
Terminal Loss – y/e 31 March 2017
(60,000)
130,000
Terminal Loss – 3 months to 31 March 2016
(25,000)
105,000
Terminal Loss – 9 months from y/e 31 December 2015
(100,000/ 12) x 9 = 75,000
(75,000)
Loss unrelieved and wasted

30,000
The company did not have any other income, in the current year i.e. 31 March 2019, against
which to relieve any of its loss, so the Terminal Loss relief option as directly applied.

Applying the ‘later year, first’ rule, the loss was treated against 12 months of total profits of
year ended 31 March 2018, then further carried back against 12 months profits of 31 March
2017.

As the amount still remained unrelieved it was carried back against the 3 months to 31 March
2016 and the company was left with the balance of 9 months against which to relieve the loss.
These were taken from the year ended 31 December 2015.

After claiming a 36 month terminal loss relief, the company was still left with £30,000 which
will remain unrelieved
Factors affecting loss relief choice

The following factors need to be taken into account when deciding upon the loss relief options:

As soon as possible: If a company wants to relieve its loss as soon as possible, it should opt
for the current year and carry back option.

Saving qualifying charitable donations: There is a higher possibility of having the QCD relief
wasted under the current year, carry back option. If this is the case, the loss should be
carried forward.

A company can also consider reducing the amount of capital allowances claimed in an
accounting period and therefore reducing its trading loss.
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Taxation - UK FA
Capital Loss:
Capital Losses can only be treated against Capital gains of the current Accounting period or
carried forward against future capital gains.
Example – Capital Loss
Even Ltd’s results are:
Year ended 31 March
Year ended 31 March
2019
2020
£
£
Trading profit/ loss
56,000
(17,000)
Property business income
4,000
10,000
(8,000)
85,000
Chargeable gain/ (capital loss)
The corporation tax liability of Even Ltd for the years ended 31 March 2019 and 2020 is:
Year ended 31 March
Year ended 31 March
2019
2020
£
£
Trading profit
56,000
0
Property business income
4,000
10,000
0
77,000
60,000
87,000
0
(17,000)
Taxable Total profits
60,000
70,000
Corporation tax at 19%
11,400
13,300
Chargeable gain: capital loss net off
Loss Relief: Trading loss
The capital loss for the year ended 31 March 2019 is carried forward, so the chargeable gain for the
year ended 31 March 2020 is £77,000 (85,000 – 8,000).
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Taxation - UK FA
Loss from Property let out:

Property losses are deductible against Total Profits (before QCD) of the current year and any
unused amount is carried forward against the future Total Profits (before QCD), as well.
Example – Property Loss
Flexible Ltd commenced trading on 1 April 2017. The company’s results are:
Year ended 31 March
Year ended 31 March
2018
2019
£
£
Trading profit/ (loss)
(78,200)
43,800
Property business income/ (loss)
(13,600)
15,700
Chargeable gain
0
18,900
Qualifying charitable donations
0
(800)
Flexible Ltd’s taxable total profits for the year ended 31 March 2019 are:
£
Trading profit
43,800
Property business income
15,700
Chargeable gain
18,900
78,400
Loss Relief: restricted to save QCD
(77,600)
800
Qualifying Charitable Donation
(800)
Taxable Total Profits
0

The claim for loss relief must be made by 31 March 2021.

The unrelieved losses of £14,200 (78,200 + 13,600 – 77,600) will be carried forward against
total profits.

If there had been any 75% group companies, then the unrelieved losses could have been
surrendered as group relief.
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CHAPTER 19: GROUPS
Companies are said to be related (i.e. 51% related company) if:

one company is under the control of another, or

Two or more companies are under the common control of another person, which could be
another company, an individual or a partnership.

But excludes dormant companies and no trading holding companies.
Control means an interest of more than 50% in:

The share capital, or

The voting rights, or

The rights to the distributable profits, or

The net assets on a winding up of the company.
ASSOCIATE

A Group of company is formed when one company acquires one or more Associate company.

An associate company is when one company acquires 51% or more of the shareholding in
another company. The acquiring company is called the parent company and the acquired
company is called the Associate.

If the parent company acquires an associate or disposes the shareholding in an associate
during an accounting period, it is considered that the companies are part of the group
throughout the relevant accounting period.

Even an overseas resident company can become an associate.

Dormant companies cannot be considered as associates.

The impact of the having a group is that the Profit slab threshold of £1,500,000 is split amongst
the number of the companies in the group, affecting the Corporation tax liability payment
method.
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Taxation - UK FA
Example - Associate
Patron Ltd has 4 associates in the Accounting Period ended 31 March 2019. Patron Ltd’s taxable
total profits amount to £450,000 and has never been below £400,000.

As the Taxable Total Profits are less than £1,500,000, Patron Ltd should pay its CT liability within
9 months and 1 day from the end of the Accounting Period.

But as it is part of a group of 5 – 4 associates and Patron Ltd itself; the profit threshold is split
between the 5 companies and becomes £300,000.

Now Patron Ltd will be considered a Large rate company as its TTP is more than the threshold. It
will therefore pay its CT liability in 4 instalments.
Trading Loss Group – 75% 75%
There are two types of group relationship:

The 75% group relationship which is necessary to claim group relief.

The 75% group relationship which is necessary for chargeable gains purposes.
The definition of a 75% subsidiary company for chargeable gains purposes is looser than that for
group relief purposes. This is because the required 75% shareholding need only be met at each
level in the group structure.
Example – Group Structure
Fruit Ltd is the parent company for a group of companies. The group structure is:
Fruit
100%
Ltd
Apple
80%
Ltd
Banana
80%
Cherry Ltd
Ltd
For the year ended 31 March 2019, Fruit Ltd has an unrelieved trading loss.
Group Relief Group:

For group relief purposes, one company must be a 75% subsidiary of the other, or both
companies must be 75% subsidiaries of a third company.
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Taxation - UK FA

The parent company must have an effective interest of at least 75% of the subsidiary’s
ordinary share capital.

The parent company must also have the right to receive at least 75% of the subsidiary’s
distributable profits and net assets on a winding up.

Fruit Ltd will therefore be able to group relief its trading loss to Apple Ltd and Banana Ltd.

Fruit Ltd does not have the required 75% shareholding in Cherry Ltd (100% x 80% x 80% =
64%).
Chargeable gains group

Companies form a chargeable gains group if at each level in the group structure there is a
75% shareholding.

However, Fruit Ltd, the parent company, must have an effective interest of over 50% in each
subsidiary company.

Fruit Ltd, Apple Ltd, Banana Ltd and Cherry Ltd therefore form a chargeable gains group.
Claiming Group Relief

Group relief is not restricted according to the percentage shareholding. Therefore, if a parent
company has a trading loss, then 100% of that loss can be surrendered to a 75% subsidiary
company, and if a 75% subsidiary company has a trading loss, then 100% of that loss can be
claimed as group relief by the parent company.

It is possible to surrender both current year losses and carried forward losses, although the
rules are slightly different in each case.

The claimant company claims group relief against its taxable total profits after the deduction of
any qualifying charitable donations.
Example – Claiming Group Relief
For the year ended 31 March 2019, Ballpoint Ltd has a trading profit of £510,000, a chargeable
gain of £32,000, and paid qualifying charitable donations of £2,000.
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Taxation - UK FA
Ballpoint Ltd has a 100% subsidiary company, and for the year ended 31 March 2019 claimed
group relief of £40,000 from this company.
The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2019 is
£
Trading profit
510,000
Chargeable gain
32,000
542,000
Qualifying Charitable Donation
(2,000)
540,000
Group Relief
(40,000)
Taxable Total Profits
500,000
Corporation Tax at 19%

95,000
When the accounting periods of the claimant company and the surrendering company are not
coterminous, then group relief may be restricted. There may also be a restriction where an
accounting period is less than 12 months long
Example – Non Coterminous Accounts
Sofa Ltd owns 100% of the ordinary share capital of both Settee Ltd and Futon Ltd. For the year
ended 31 March 2019, Sofa Ltd had a trading loss of £200,000.
For the year ended 30 June 2018, Settee Ltd had taxable total profits of £240,000, and for the year
ended 30 June 2019 will have taxable total profits of £90,000.
Futon Ltd commenced trading on 1 January 2019, and for the three month period ended 31 March
2019 had taxable total profits of £60,000.
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Taxation - UK FA

The accounting periods of Settee Ltd and Sofa Ltd are not coterminous i.e. do not correspond
exactly. Therefore, Settee Ltd’s taxable total profits and Sofa Ltd’s trading loss must be
apportioned on a time basis.

For the year ended 30 June 2018, group relief is restricted to a maximum of £50,000, being the
lower of £60,000 (240,000 x 3/12) and £50,000 (200,000 x 3/12). The coterminous period is 1
April to 30 June 2018.

For the year ended 30 June 2019, group relief is restricted to a maximum of £67,500, being the
lower of £67,500 (90,000 x 9/12) and £150,000 (200,000 x 9/12). The coterminous period is 1
April to 30 June 2019.

Futon Ltd did not commence trading until 1 January 2019, so group relief is restricted to a
maximum of £50,000, being the lower of £60,000 and £50,000 (200,000 x 3/12). The
coterminous period is 1 January to 31 March 2019.

However, the ability to set off carried forward losses could circumvent these restrictions, with
further group relief maybe possible against Settee Ltd’s taxable total profits for the period 1
April to 30 June 2019.

The surrendering company and the claimant company can decide upon the amount of loss to
be shared.

Surrendering Company: is the company giving up its loss and Claimant Company: is the
company accepting the loss.

As well as trading losses, it is possible to surrender unrelieved property business losses and
qualifying charitable donations.

In working out the taxable total profits against which group relief can be claimed, the claimant
company is assumed to use any current year losses which it has, even if such a loss relief claim
is not actually made.
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Taxation - UK FA
Example Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the
year ended 31 March 2019 are as follows:
Lae Ltd
Mon Ltd
£
£
Trading Loss
(18,100)
(11,200)
Property business income/ loss
(26,700)
60,900
1,600
3,300
Capital loss
(19,200)
0
Qualifying Charitable Donations
(4,800)
(3,200)
Loan interest received
All the loan interest received is in respect of loans that were made for non-trading purposes.
Maximum claim by Mon Ltd

The group relief claim by Mon Ltd is calculated after deducting qualifying charitable donations,
and on the assumption that a claim is made for the current year trading loss.

The maximum amount of group relief that can be claimed by Mon Ltd is therefore £49,800
(60,900 + 3,300 – 3,200 – 11,200).
Maximum surrender by Lae Ltd

The property business loss and the qualifying charitable donations can be surrendered to the
extent that they are unrelieved, so £29,900 of these can be surrendered (26,700 + 4,800 – 1,600).

It is not possible to surrender capital losses as part of a group relief claim.

The maximum potential surrender by Lae Ltd is £48,000 (18,100 + 29,900).

The maximum group relief claim is therefore £48,000.
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Taxation - UK FA
Carry Forward Claims

Carried forward trading losses and property business losses arising after 1 April 2017 can be
surrendered as group relief to the extent that they cannot be set off against the surrendering
company’s own total profits for the period in question.

If the claimant company has its own carried forward losses it must use those before making a
claim.

A company may only claim or surrender group relief for carried forward losses once it has
used its own losses as far as possible.

The companies must have overlap periods in common.

Qualifying charitable donations cannot be carried forward.
Example – Carry Forward Loss
Noo Ltd owns 100% of the ordinary share capital of Oon Ltd. Both companies commenced trading
on 1 April 2017. The results of each company for the years ended 31 March 2018 and 2019 are:
YE
YE
31/03/2018
31/03/2019
£
£
Trading Profit
28,800
93,800
Property business income
4,600
5,200
Trading profit/ loss
(62,900)
13,300
Property business income/ loss
(13,600)
1,700
Noo Ltd.
Oon Ltd
Year ended 31 March 2018
Oon Ltd can surrender £33,400 (28,800 + 4,600) of its losses to Noo Ltd.
Losses of £43,100 (62,900 + 13,600 – 33,400) are carried forward.
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Year ended 31 March 2019
Oon Ltd must initially set the carried forward losses against its own total profits of £15,000 (13,300 +
1,700).
The remaining losses of £28,100 (43,100 – 15,000) can be surrendered to Noo Ltd, reducing that
company’s taxable total profits to £70,900 (93,800 + 5,200 – 28,100).
Capital Gains Group – 75% 50%

The parent company must have a direct hold of atleast 75% and effective hold of atleast 50%
for companies to become members of this group.

Overseas companies cannot be members of this group.

Capital losses cannot be transferred rather it is assumed that capital assets are transferred to
group members at cost before being sold to third parties.

Rollover relief can also be claimed between two companies.

The transfers will not give rise to any chargeable gain or capital loss.

Arranging that wherever possible, chargeable gains and capital losses arise in the same
company will result in the optimum use being made of capital losses.

These can either be offset against chargeable gains of the same period, or carried forward
against future chargeable gains.

However, an asset does not actually have to be moved between group companies in order to
match chargeable gains and capital losses. It is possible for two companies in a chargeable
gains group to make a joint election so that matching is done on a notional basis.

The election has to be made within two years of the end of the accounting period in which the
asset is disposed of outside the group, and will specify which company in the group is treated
for tax purposes as making the disposal.

The advantages of the election compared to actually transferring an asset between group
companies (prior to disposal outside of the group) are:

The two-year time limit for making an election means that tax planning regarding the set off of
capital losses and chargeable gains can be done retrospectively.
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Taxation - UK FA

The administrative and legal costs involved with an actual transfer of an asset can be avoided.
Example – Capital Gains Group
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to
31 March.
On 15 August 2018, Rod Ltd sold an office building, and this resulted in a chargeable gain of
£120,000.
On 20 February 2019, Stick Ltd sold a factory and this resulted in a capital loss of £35,000.
As at 1 April 2018, Stick Ltd had unused capital losses of £40,000.

Rod Ltd and Stick Ltd must make a joint election by 31 March 2021, being two years after the end
of the accounting period (the year ended 31 March 2019) in which the disposal outside of the
group occurred.

Stick Ltd’s otherwise unused capital loss of £35,000 and brought forward capital losses of £40,000
can be set against the chargeable gain of £120,000.
Factors affecting loss relief claim option:
Because of the single rate of corporation tax of 19%, the rate of corporation tax is not a factor
when it comes to the choice between loss reliefs or when considering group relief claims. The only
relevant factors are the timing of the relief obtained (an earlier claim is generally preferable), and
the extent to which relief for qualifying charitable donations will be lost.
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CHPATER 20: TAX ADMINISTRATION
INDIVIDUALS
CORPORATIONS
Self Assessment:
It is the responsibility of the individual and the companies to inform the HMRC of their earnings and
calculate their own tax liabilities.
Paper Return: by 31st October following the tax Online: within 12 months from the end of the
year
Period of Account
Online Return: by 31st January following the tax Or 3 months after the issue of the return
year (This is known as the ‘filing date’)
Companies have to use IxBRL
Or 3 months after the issue of the return
Amendments:
Corrections of the errors in the tax returns.
By HMRC: within 9 months of the actual filing date
By HMRC: within 9 months of the actual filing date
By Individual: within 12 months of the ‘filing date’
By Company: within 12 months of the filing date
Penalty for late submission:
Penalty for late submission:
< 3 months - £100
< 3 months - £100
3 – 6 months - £10/ day for 90 days
3 – 6 months - £200
6 – 12 months – 5% of unpaid tax (minimum £300)
6 – 12 months – 10% of unpaid tax
> 12 months – additional 5% of unpaid tax (min > 12 months – 20% of unpaid tax
£300)
Notification of Chargeability:
It is the responsibility of the individual or company to let HMRC know of their taxability. Standard penalty
is imposed in case of non compliance.
Deadline: within 6 months following the tax year – Deadline: within 3 months from the start of the
5th October following the tax year.
relevant Accounting Period
Determination:
Where the return is not submitted on time, the HMRC can determine the amount of tax liability on behalf of
the tax payer. They have 3 years from the filing date to do so and the only way to get this removed is by
submitting the actual tax return.
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Records:
Business records have to be maintained otherwise a penalty of £3000 per annum will be applicable.
Business records include details of receipts and expenses, capital transactions etc.
Duration: For business records 5 years from the Duration: For 6 years following the accounting
31st January following the tax year and other for 12 period they relate to.
months from the filing date.
Payment of Tax:
1st POA: 31st January in the tax year (50% of Small Rate Companies: 9 months plus 1 day from
previous tax years’ tax payable)
the end of the Accounting Period
2nd POA: 31st July following the tax year (50% of the Large Rate Companies: 4 instalments beginning
previous tax years’ tax payable)
from the 14th day of the 7th month of the Accounting
3rd BP: 31st January following the tax year
period and quarterly thereafter. Based on current
years’ estimate.
Reduced Payments on Accounts:
Amount of POA can be claimed and reduced but in
case of error interest will be charged.
Interest:
If payments are not made on time interest is charged at 3% from the due date to the date of payment.
Delayed Balancing Payment Penalty:
NA
> 1 month late: 5% of unpaid amount
> 6 months: additional 5% of unpaid amount
> 12 months: additional 5% of unpaid tax
Standard Penalties:
Imposed on Failure to notify about chargeability, submission of incorrect tax return, failure to notify
HMRC of underassessment and deliberately supplying wrong information
Genuine Mistake: No penalty
Failure to take reasonable care: 30% of tax lost (minimum penalty: nil)
Serious or deliberate understatement: 70% of tax lost (minimum penalty: 20%)
Serious or deliberate understatement with concealment: 100% of tax lost (minimum penalty: 30%)
Taxation - UK FA
Compliance Checks:
Enquiry:
HMRC can enquire into a return with 12 months of the actual filing date to ensure accuracy and
completeness. They have to give a written notice and the tax payer may appeal against it. A written notice
is also given to mark the end of the enquiry and once again the tax payer may either comply or appeal
within 30 days of the notice.
Information and Inspection Powers:
HMRC can inspect business records, assets and premises. They can also ask for supplementary
information.
Discovery Assessment:
HMRC can normally carry out an enquiry within 12 months of the actual filing date but can also raise a
Discovery Assessment at a later date where fraud or negligence is suspected and full disclosure has not
been made.
Basic Time Limit: 4 years from the end of the tax year or the Accounting period
Careless Error: 6 years
Deliberate Error: 20 years
The PAYE system:

The objective of the PAYE system is to collect the correct amount of tax and NIC at source from
the employees income over the year. An employee's PAYE code is designed to ensure that
allowances etc are given evenly over the year.

It is the employer's duty to deduct income tax and national insurance contributions from the
pay of his employees, otherwise the employer will be penalised.
Process:

Employers must report PAYE information to HMRC under the Real Time Information (RTI)
system.
Taxation - UK FA

Under RTI, an employer is required to submit information to HMRC electronically. This can be
done by:

Using commercial payroll software

Using HMRC's Basic PAYE Tools software (designed for use by an employer who has up to
nine employees)

Using a payroll provider (such as an accountant or payroll bureau) to do the reporting on
behalf of the employer

The employer reports payroll information electronically to HMRC, on or before any day when
the employer pays someone (ie in 'real time').

The software works out the amount of PAYE tax to deduct on any particular pay day by using
the employees' code numbers.
Payment:

Under PAYE, income tax and national insurance is normally paid over to HMRC monthly, 17
days after the end of the tax month (if paid electronically) or 14 days after the end of the tax
month (if paid by cheque).

Large employers (with 250 or more employees) must make electronic payments.

If an employer's average monthly payments under the PAYE system are less than £1,500, the
employer may choose to pay quarterly, within 17 or 14 days (depending on the method of
payment) of the end of each tax quarter
PAYE forms

Employers must complete forms P60, P9D, P11D and P45 as appropriate.

Form P60 is a year-end return. At the end of each tax year, the employer must provide each
employee with a form P60. This shows total taxable earnings for the year, tax deducted, code
number, NI number and the employer's name and address. The P60 must be provided by 31
May following the year of assessment.

A P45 is needed when an employee leaves. When an employee leaves, a form P45 (particulars
of Employee Leaving) must be prepared. This form shows the employee's code and details of
his income and tax paid to date and is handed to the employee. One of the parts is the
Taxation - UK FA
employee's personal copy. If the employee takes up a new employment, he must hand another
part of the form P45 to the new employer. The details on the form are used by the new
employer to calculate income tax due under PAYE when the payroll is next run.

Forms P11D record details of benefits. A copy of the form P11D must also be provided to the
employee by 6 July. The details shown on the P11D include the full cash equivalent of all
benefits, so that the employee may enter the details on his self-assessment tax return.
Interest and penalties

Daily interest is charged on late payments of income tax and NICs under PAYE by taking the
number of days by which a payment is late and applying the relevant late payment interest
rate. HMRC make the charge after the end of the tax year.

Late payment penalties may be charged on PAYE amounts that are not paid in full and on time.

Employers are not charged a penalty for the first late PAYE payment in a tax year, unless that
payment is over six months late. The amounts of the penalties on subsequent late payments in
the tax year depend on how much is late each time and the number of times payments are late
in a tax year. The maximum penalty is 4% of the amount that is late in the relevant tax month
and applies to the 11th (or more) late payment that tax year. Where the tax remains unpaid at
six months, the further penalty is 5% of tax unpaid, with a further 5% if tax remains unpaid at
12 months, even if there is only one late payment in the year.

There are also penalties for making late returns under RTI which are imposed on a monthly
basis. The first late submission of the tax year is ignored. Further late submissions will attract
penalties based on the number of employees as follows:

Number of employees
Monthly penalty
1 to 9
£100
10 to 49
£200
50 to 249
£300
250 or more
£400
If the return is more than three months late, there is an additional penalty due of 5% of the tax
and NIC due.

HMRC allows a return to be up to three days late before imposing a penalty.
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PAYE settlement agreements
PAYE settlement agreements (PSAs) are arrangements under which employers can make single
payments to settle their employees' income tax liabilities on expense payments and benefits which
are minor, irregular or where it would be impractical to operate PAYE.
iXBRL:
All companies have to file their self assessment returns using the inline Extensible Business
Reporting Language. This is the standard format for exchanging information electronically. Data is
tagged so that it can be easily read by a computer.
Companies can use the following alternatives to submit their return in the appropriate format:

Integrated software applications: automatically inserts iXBRL tags.

Managed tagging service: the tagging is outsourced to agents.

Conversion software applications: company can tag each item of data themselves.
Taxation - UK FA
CHPATER 21: VALUE ADDED TAX
Definition: Value Added Tax is an indirect tax collected by VAT registered businesses (individuals
or companies) from customers on the turnover from taxable supplies of inventory, capital assets
or services. It is tax on value added. The following is a basic explanation of the process:
A VAT registered
wholesaler sells a
product to the retailer
for £100 plus £20 VAT
The final consumer
buys the product for
£150 and has to bear
the burden of VAT
The VAT registered retailer recovers the £20
VAT paid. He adds his profit share and VAT
to the cost of the product and sells it for
£150
Types of Supplies
Types of Supplies
Registered buisnesses are required to collect
VAT on these products or services
Taxable
Registered businesses collect
VAT at the rate of 20% on these
products or services. These are
Taxable supplies that are not
zero rated.
Standard Rated
Businesses providing only these products
or services cannot register for or collect
VAT.
E.g.: land, financial services, education,
insurance etc.
Exempt
Registered businesses do not
collect any VAT on these
products or services
E.g.: children's clothing, books,
medicine, transport etc.
Zero Rated
Taxation - UK FA
Important! The question in the exam will specify if a supply is exempt, zero rated or standard
rated.
Impact of exemption:
Businesses that are exempt from VAT registration, save on administrative costs but suffer because
they are unable to recover any VAT they have paid (Input VAT) on their purchases or expenses.
Example – Types of supplies
Cathy will commence trading in the near future. She operates a small aeroplane, and is considering
three alternative types of business. These are:
(1) Training, in which case all sales will be standard rated for VAT
(2) Transport, in which case all sales will be zero-rated for VAT, and
(3) An air ambulance service, in which case all sales will be exempt from VAT.
For each alternative, Cathy’s sales will be £80,000 per month (exclusive of VAT), and standard
rated expenses will be £15,000 per month (inclusive of VAT).
Standard rated supplies

Cathy will be required to register for VAT because she is making taxable supplies.

Output VAT of £16,000 (80,000 x 20%) per month will be due, and input VAT of £2,500 (15,000 x
20/120) per month will be recoverable.
Zero-rated supplies

Cathy can apply for exemption from registration for VAT because she is making zero-rated
supplies, otherwise she should still register as these are taxable supplies.

Output VAT will not be due, but input VAT of £2,500 per month will be recoverable.
Exempt supplies

Cathy will not be required or permitted to register for VAT because she will not be making
taxable supplies.

Output VAT will not be due and no input VAT will be recoverable.
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Registration & Related Matters
VAT Registration: A business making taxable supplies can register voluntarily for VAT but tax
authorities have made registration compulsory if its Taxable Turnover (turnover form taxable
supplies – not capital assets) is > £85,000 p.a.
There are two tests to assess whether a business is required to compulsorily register for VAT.
Historic Test
Test Procedure:
Future Test
This is carried out at the end of a This is carried out at the start of the
month.
month.
The sum of the business last 12 The business’s taxable turnover for
months’ of taxable turnover is the next 30 days is estimated.
assessed.
If in either test, the taxable turnover of the business turns out to be > £85,000, then
HMRC should be Within the next 30 days or by the Within the next 30 day or by the end
notified:
end of the next month on the Form of the same month on Form ‘VAT 1’.
‘VAT 1’.
Once the notification is processed by the HMRC, the business becomes registered from
Date of
The first day of the month after the The start of the month in which
Registration:
notification deadline.
Example:
At the end of March 2019 the At the start of November 2018, ABC
turnover was > than £85,000.
turnover of XYZ Plc for the previous place estimated that the turnover for
12 months amounted to £87,000.
the month will be £86,100.
HMRC must be notified by the 30th of
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HMRC was notified by 30 April, 2019 November 2018 and the business
and the business was registered will be considered registered from
from the 1st of May.
the 1st of November.
Exception to this rule: A business is not required to register for VAT inspite of meeting the
historic or future test criteria, if the taxable turnover of the next 12 months is not expected to
exceed the deregistration threshold of £83,000. (Deregistration is dealt later)
But failure to register for VAT when required to do so, is an offence. Businesses become liable to
pay the standard penalty imposed due to the late notification of chargeability to tax (discussed
later)
Example – Historic Test for Registration
Robert commenced trading on 1 January, 2018. His sales since he commenced trade have been as
follows:
Standard rated
Zero-rated
£
£
January
3,200
0
February
2,800
0
March
3,300
0
April
5,100
600
May
2,700
0
June
3,700
400
July
3,900
200
August
5,500
100
2018
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September
4,300
0
October
12,100
0
November
6,900
700
December
8,200
300
January
8,800
900
February
16,500
1,200
2019

Robert will become liable to compulsorily register for VAT when his taxable supplies turnover
exceeds £85,000 in a 12 month period.

When a cumulative total of his monthly revenue is maintained, the limit is exceeded by the end of
February 2019, when his income of last 12 months amounts to £85,400
(3,300 + 5,100 + 600 + 2,700 + 3,700 + 400 + 3,900 + 200 + 5,500 + 100 + 4,300 + 12,100 + 6,900 +
700 + 8,200 + 300 + 8,800 + 900 + 16,500 + 1,200)

Robert is required to inform HMRC by the 30 th of March, 2019 (30 days after the limit is exceeded)

Once processed, Robert will be registered from the 31 st of March, 2019 or an agreed earlies date.
Example – Future test for registration
Bee commenced trading on 1 October 2018. Her sales have been as follows:
2018
£
October
4,600
November
5,400
December
23,900
2019
January
97,700
Bee’s sales are all standard rated.
Taxation - UK FA

On 1 January 2019, Bee realised that her sales for January 2019 were going to exceed £85,000,
and therefore immediately registered for VAT.

Businesses must register for VAT if at any time they expect their taxable supplies for the following
30-day period to exceed £85,000.

Bee realised that her taxable supplies for January 2019 were going to exceed the £85,000. She
was therefore liable to register from 1 January 2019, being the start of the 30-day period.

Bee had to notify HM Revenue and Customs by 30 January 2019, being 30 days from the date that
the expectation arose.
Voluntary Registration:
A person who makes taxable supplies below the VAT threshold is not required to register for VAT.
However, they can have an option to register voluntarily.
Advantages of Registration

Input VAT on purchases and expenses is recoverable (thus managing cash flow issues).

Business is considered to be involved in conducting their activities on substantial level.

It is particularly advantageous to register if the business is zero-rated, as it can recover input
VAT but does not have to pay output VAT as it is charged at 0%.
Example – Voluntary registration
Bee’s sales are all made to VAT registered businesses and her input VAT for the period 1 October
to 31 December 2018 was £12,400. This input VAT would not be recoverable were Bee to register
for VAT on 1 January 2019.

Bee’s sales are all to VAT registered businesses, so output VAT can be passed on to customers.

Her revenue would therefore not have altered if she had voluntarily registered for VAT on 1
October 2018.

It would therefore have been beneficial for Bee to have voluntarily registered for VAT on 1
October 2018 because additional input VAT of £12,400 would have been recovered.
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Disadvantages of Registration

Administrative burden is increased

By adding VAT to the selling price of good might demotivate non VAT registered
customers(e.g. members of general public) due to the increased selling price for good for
which they are not entitled to recover VAT. The problem of losing customer can be avoided if
business keeps its original selling price as it is, reduce it with the figure of VAT and thus
lowering the profit margin.

However, this is not a disadvantage if:
o
The business is zero-rated (and so does not charge any VAT), or
o
All customers are VAT-registered and so can recover the VAT charged (as their input
VAT).
Post Registration:

Registered businesses are issued a certificate of registration and allotted a specific number,
which they are required to specify on all invoices issued after registration.

They have to collect Output VAT on all standard rated supplies on behalf of HMRC and pass it
on after adjusting for any Input VAT.
VAT expense incurred on purchases (Input VAT) of goods and services bought from another
VAT registered business can be recovered. This is done by adjusting the amount of Input VAT
paid against the Output VAT collected in a VAT Period and then passing on the balancing
amount to HMRC. If the Input VAT paid is more than the Output VAT collected, then the
business can request a VAT refund.

Both Output VAT collection and recovery of any Input VAT only commences after registration.

VAT records are maintained and VAT returns submitted normally after every quarter (VAT
Period).

In case of customer defaulting on payment, the burden of paying the Output VAT on that
particular sale falls on the business.
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
Whether or not output VAT can be passed on to customers is also an important factor when
deciding whether to remain below the VAT registration limit, or whether it is beneficial to
accept additional work which results in the limit being exceeded.
Example – Tax planning
Danny has been in business for several years. All of his sales are standard rated and are to
members of the general public. He is not registered for VAT.
At present, Danny’s annual sales are £82,500. He is planning to put up his prices, and this will
increase annual sales to £88,000. There is no further scope for any price increases. Danny’s
standard rated expenses are £15,700 per year (inclusive of VAT).
Prior to putting up his prices, Danny’s net profit is £66,800 (82,500 – 15,700).
If Danny puts up his prices, then he will exceed the VAT registration limit of £85,000, and will have to
register for VAT.
Output VAT will have to be absorbed by Danny because sales are to the general public and there is no
further scope for price increases.
The revised annual net profit will be:
£
Income (88,000 x 100/120)
Expenses (15,700 x 100/120)
Net Profit
73,333
(13,083)
60,250
This is a decrease in Danny’s net profit of £6,550 (66,800 – 60,250), so it is not beneficial for him to
put up his prices.
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Pre-Registration Input VAT:
Normally registered businesses are allowed to recover any Input VAT they may have paid only
after the registration process is complete but as a concession the HMRC also allows the recovery of
Input VAT paid by a business prior to registration. However the following conditions are attached:

Inventory & Assets used for business purpose: If items of these categories were purchased 4
years prior to date of registration and are still held by the business at the date at registration,
the associated Input VAT can be recovered by the business.

Services for business purpose: Those availed 6 months prior to date of registration.
Example – Pre-registration input VAT
Elisa commenced trading on 1 January 2019 and registered for VAT on 1 April 2019. She had the
following inputs for the period 1 January to 31 March 2019:
January
February
March
£
£
£
Goods purchased
3,400
14,200
26,400
Advertising services
2,600
3,000
3,600
Non-current assets
0
0
64,000
On 1 April 2019, Elisa had an inventory of goods which had cost £13,800. The non-current assets
were not used until after Elisa registered for VAT on 1 April 2019.
The above figures are all exclusive of VAT.

Input VAT of £2,760 (13,800 x 20%) can be recovered on the inventory at 1 April 2019.

The inventory was not acquired more than four years prior to registration, nor was it sold or
consumed prior to registration. The goods must have been acquired for business purposes.

The same principle applies to non-current assets, so input VAT of £12,800 (64,000 x 20%) can be
recovered on the non-current assets purchased during March 2019.
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
Input VAT of £1,840 ((2,600 + 3,000 + 3,600) x 20%) can be recovered on the advertising services
incurred from 1 January to 31 March 2019.

This is because the services were not supplied more than six months prior to registration. The
services must have been supplied for business purposes.

The total input VAT recovery is £17,400 (2,760 + 12,800 + 1,840).
Group VAT Registration:
UK resident companies under common control (of another company or an individual) can opt for a
Group VAT Registration.
The following conditions apply on the group that register for VAT:

One of the company controls the others, or they are under the common control of the same
person

Each company is UK resident

It is not necessary for all eligible companies to be members of a VAT group. For example
companies making zero-rated supplies are advised not to be a part of VAT group as their
refund of VAT would be used to offset any VAT payable by the group.

All group members are jointly and severally liable for any VAT due.

Supplies between group members are ignored and not eligible for VAT calculations.

The group appoints a representative member to be responsible for submitting VAT returns
and paying VAT on behalf of the group.

Only one VAT return is submitted for the whole group, which reduces the group’s
administrative burden. However collating information from the various group members may
become problematic for the appointed representative.

Disadvantage: Various limits, such as those for the cash and annual accounting schemes (see
later), apply to the group as a whole rather than to each individual member.
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Calculation
VAT Period: VAT calculation is normally carried out after every 3 months/ quarter. The duration
for which the VAT is calculated is termed VAT period.
Tax Point: This is the date on which the transaction is recorded so that VAT is accounted for in
the correct VAT period. The default date on which the transaction is recorded is called the Basic
Tax Point but in certain circumstances it is over-ridden by the Actual Tax Point. See table below.
Inventory/ Assets
Services
Basic Tax Point: This is the date when goods Basic Tax Point: This is the date when services
are physically transferred
are actually performed
Actual Tax Point: Over-rides the Basic Tax Point.
 Earlier: Date of Invoice being issues or the actual Cash transfer – if either of these events
occur before the Basic Tax Point
 Later: Date of Invoice being issued - if this date falls within 14 days from the Basic Tax Point
Sale or return basis
If goods are delivered on sale or return basis, tax point is the date which is earlier of

12 months after the date of dispatch of good.

The goods are actually sold.
Continuous supplies
Earlier of cash received and invoice issued
Taxation - UK FA
Example – Tax point
Denzil is a self-employed printer who makes standard rated supplies. For a typical printing
contract he receives a 10% deposit at the time that the customer makes the order. The order
normally takes 14 days to complete, and Denzil issues the sales invoice three to five days after
completion. Some customers pay immediately upon receiving the sales invoice, but many do not
pay for up to two months.

The tax point for each 10% deposit is the date that it is received.

Invoices are issued within 14 days of the basic tax point (the date of completion), so the invoice
date is the tax point for the balance of the contract price.
VAT Calculation Points:

To determine VAT from a VAT Inclusive figure, the following formula should be used:
Amount x 20/120 = VAT

To determine VAT from a VAT Exclusive figure, the following formula should be used:
Amount x 20% = VAT
Example – VAT Calculation
Zoe is in the process of completing her VAT return for the quarter ended 31 March 2019. The
following information is available:

Sales invoices totalling £128,000 were issued in respect of standard rated sales.

Standard rated expenses amounted to £24,800.

On 15 February 2019, Zoe purchased machinery at a cost of £24,150. This figure is inclusive of
VAT.
Unless stated otherwise all of the above figures are exclusive of VAT.
Taxation - UK FA
VAT Return – Quarter ended 31 March 2019
Output VAT
£
Sales (128,000 x 20%)
£
25,600
Input VAT
Expenses (24,800 x 20%)
4,960
Machinery (24,150 x 20/120)
4,025
(8,985)
VAT Payable
16,615

Revenue vs Capital items: There is no distinction between the two for the calculation of VAT

Discounts: Output VAT is charged on the actual amount received, making it necessary for the
supplier to specify the potential discount on the sales invoice or issue a subsequent credit note,
if the offered discount is taken up.

Impaired debts: The recovery of Output VAT on the impaired debts is possible if 6 months
from the due date of payment have passed and the amount had actually been written off in the
books.

Non Business use: Output VAT is calculated on goods and services used for non-business
purposes.

Goods supplied free of cost: Output VAT is calculated on these. In the case of goods supplied
as gifts, no VAT is required if the value of the gift is less than £50 per customer in a 12 month
period.

Samples: Output VAT is not calculated on goods given away as samples.

Entertainment expenses: Input VAT is recoverable on entertainment expenses incurred only
for overseas customers.
Taxation - UK FA

Personal expenses: Input VAT related to the personal element of expenses is not recoverable.

Motor cars: Input VAT is irrecoverable on motor cars purchased, unless they have a 100%
business use.

Where a leased motor car is available for private use, then 50% of Input VAT on leasing costs is
non-deductible.
Example – leased car
During the quarter ended 31 March 2019, Jimi, a sole trader, leased a motor car at a cost of £960
(inclusive of VAT). The motor car is used by Jimi and 70% of the mileage is for private journeys.
The motor car is available for private use, so £80 (960 x 20/120 x 50%) of the input VAT is nondeductible.

Fuel: Input VAT is recoverable on the fuel used in motor cars. But if there is an element of
personal use, Output VAT is calculated as well on a scale charge (given in the exam).

If an employee is charged the full cost for private fuel, Output VAT is calculated on the amount
charged.
Example – Fuel impact
Ivy Ltd provides one of its directors with a company motor car which is used for both business
and private mileage. For the quarter ended 31 March 2019 the total cost of petrol was £720, with
the director being charged £216 for the private use element. Both figures are inclusive of VAT. Ivy
Ltd will include the following entries on its VAT return for the quarter ended 31 March 2019:
Output VAT
£
Charge to director (216 x 20/120)
36
Input VAT
Fuel (720 x 20/120)
120
Taxation - UK FA

Repairs: Input VAT on motor car repairs regardless of whether there was business or private
use, is recoverable.
Example – Comprehensive Calculation
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2019. The
following information is available:

Cash sales amounted to £50,400, of which £46,200 was in respect of standard rated sales and
£4,200 was in respect of zero- rated sales. All of these sales were to non VAT registered
customers.

Sales invoices totalling £128,000 were issued in respect of credit sales to VAT registered
customers. These sales were all standard rated, and none of these customers were offered a
discount for prompt payment.

On 20 February 2019, a credit sales invoice for £7,400 was issued in respect of a standard
rated supply to a VAT registered customer. To encourage this previously late paying customer
to pay promptly, Gwen offered a 10% discount for payment within 14 days of the date of the
sales invoice. The customer paid within the 14 day period.

Standard rated materials amounted to £32,400, of which £600 were taken by Gwen for her
personal use.

Standard rated expenses amounted to £24,800. This includes £1,200 for entertaining UK
customers.

On 15 March 2019, Gwen sold a motor car for £9,600, and purchased a new motor car at a cost
of £16,800. Both motor cars were used for business and private mileage. These figures are
inclusive of VAT where applicable.

The new motor car was used 70% for business mileage. During the quarter ended 31 March
2019, Gwen spent £1,128 on repairs to the motor car and £984 on fuel for both business and
private mileage. The relevant quarterly scale charge is £336. All figures are inclusive of VAT

On 28 March 2019, Gwen sold machinery for £3,600, and purchased new machinery at a cost of
£21,600. She paid for the new machinery on this date, but did not take delivery or receive an
invoice until 6 April 2019. These figures are inclusive of VAT where applicable.
Taxation - UK FA

On 31 March 2019, Gwen wrote off impairment losses in respect of three invoices that were
due for payment on 15 August 2018, 15 September 2018 and 15 October 2018 respectively.
The amount of output VAT originally paid in respect of each invoice was £340.

During the quarter ended 31 March 2019, £600 was spent on mobile telephone calls, of which
40% relates to private calls.
Unless stated otherwise all of the above figures are exclusive of VAT.
VAT Return – Quarter ended 31 March 2019
£
Output VAT
Cash Sales (46,200 x 20%)
9,240
Credit Sales (128,000 x 20%)
25,600
Discounted Sale (7,400 x 90% x 20%)
1,332
Motor Car
0
Fuel Scale Charge (336 x 20/120)
56
Machinery (3,600 x 20/120)
600
Goods for personal use (600 x 20%)
120
Input VAT
Materials (32,400 x 20%)
(6,480)
Expenses [(24,800 – 1,200) x 20%]
(4,720)
Motor Car
0
Fuel (984 x 20/120)
(164)
Motor Repairs (1,128 x 20/120)
(188)
Machinery (21,600 x 20/120)
(3,600)
Impairment Losses (340 + 340)
(680)
Telephone (600 x 60% x 20%)
(72)
VAT Payable
21,044
Taxation - UK FA

If the late paying customer had not paid within the 14 day period, then output VAT on the
discounted sale would have been £1,480 (7,400 at 20%).

Input VAT would not have been recovered in respect of the motor car sold because it was not
used exclusively for business purposes. Therefore, output VAT is not due on the disposal.
Similarly, input VAT cannot be recovered in respect of purchase of the new motor car.

Output VAT is charged on the materials that Gwen has taken out from the business for her
personal use.

Input VAT on business entertainment is not recoverable unless it relates to the cost of
entertaining overseas customers.

Gwen can recover the input VAT in respect of the new machinery purchased in the quarter
ended 31 March 2019 because the actual tax point was the date that the machinery was paid
for.

Relief for an impairment loss is not given until six months from the time that payment is due.
Therefore relief can only be claimed in respect of the invoices due for payment on 15 August
2018 and 15 September 2018.

An apportionment is made where a service such as the use of a telephone is partly for business
purposes and partly for private purposes.
De-registration & Related Matters
VAT De-Registration:
Businesses can voluntarily de-register if the taxable turnover falls below £83,000 p.a. and is
expected to continue with this trend.
De-registration becomes effective from the date requested by the business or the date mutually
agreed.
Businesses can be asked to compulsorily de-register by HMRC if:

They start making only exempt supplies

The business ceases
Taxation - UK FA

The business changes its location from UK

Legal structure of the business changes
Notification:
HMRC must be notified within 30 days of the business becoming liable of being de-registered. The
de-registration effect comes into force from the date the condition is fulfilled.
Post De-registration Output VAT Collection:
Once de-registered, the business is required to collect Output VAT on those assets (except motor
cars) and inventory items on which the Input VAT had been recovered by the business.
HMRC is willing to ignore this collection if the Output VAT from these items is ≤ £1000.
Sale of Business: When a business is sold, the VAT implications are dependent upon how the
disposal is taking place:
Piecemeal Basis
Going Concern Basis
Output VAT collected on each Inventory and This is not treated as a taxable supply, so
asset item sold. But not if the amount is ≤ Output VAT is not applicable.
£1,000.
Registration number is cancelled if the buyer
Registration Number cancelled.
already has a VAT registration number of his/
her own and if not then the seller can transfer
his registration number to the new owner.
A business is considered as Going Concern if all of the following conditions are met:

There is no significant break in the trading

The buyer carries out the same type of trade

The buyer is already registered or will become liable to register after the transfer
Taxation - UK FA
Example – Sale of business
Fang is registered for VAT but intends to cease trading on 31 March 2019. On the cessation of
trading, Fang can either sell his non-current assets and inventory on a piecemeal basis to
individual purchasers, or he can sell his entire business as a going concern to a single purchaser.
Sale of assets on a piecemeal basis

Upon the cessation of trading, Fang will cease to make taxable supplies so his VAT registration
will be cancelled on 31 March 2019 or an agreed later date.

He will have to notify HM revenue and Customs by 30 April 2019, being 30 days after the date of
cessation.

Output VAT will be due in respect of non-current assets and inventory on hand at 31 March 2019
on which input VAT has been claimed (although output VAT is not due if it totals less than
£1,000).
Sale of business as a going concern

If the purchaser is already registered for VAT, then Fang’s VAT registration will be cancelled as
above.

If the purchaser is not registered for VAT, then they can take over Fang’s VAT registration, though
from a commercial point of view this may be inadvisable.

A sale of a business as a going concern is not treated as a taxable supply, and therefore output
VAT is not due
Administration
VAT records:

A taxable person is required to keep detailed records and evidences of all transactions to
support VAT returns (unless it is a member of the flat rate scheme).

Records must be kept for at least six years.
Taxation - UK FA

The records that must be retained include:

Sales and purchase invoices

Sales and purchase day books

Cash book, bank statements, vouchers

VAT accounts and returns

Statement of comprehensive income/profit and loss account and statement of financial
position /balance sheet
VAT Invoice:
This is issued to VAT registered customers within 30 days of the supply being made and includes
the following details:

Suppliers VAT Registration No.

Tax Point

VAT exclusive amounts

Total VAT exclusive amount

Rate of VAT for each supply

Amount of VAT Payable
Customers not registered for VAT do not require a detailed VAT invoice as they cannot claim the
VAT amount paid.
Additionally in cases where the VAT inclusive total of the invoice is less than £250, a simplified
VAT invoice may be issued but this will still include the following:

Supplier’s name and address

Suppliers VAT Registration No.

Tax point

Description of goods/ services

Rate of VAT for each supply

VAT inclusive total
VAT Return:
The VAT return includes the calculation of VAT payable/ refundable (Output VAT – Input VAT)
for the VAT period.
VAT being a self – assessed tax, will lead to HMRC conducting control visits to check the accuracy
of the VAT returns.
Taxation - UK FA
Submission Deadline: The VAT Return is filed on-line and any VAT payable submitted within 1
month and 7 days from the end of the VAT Period.
Large businesses with an annual liability of more than £2 million must pay VAT by making
st
payments of account. 1 payment on account and 2nd payment on account is made At the end of the
second month in a quarter and At the end of the last month in a quarter respectively and each of
them is equal to 1/24th of the total VAT liability for the previous year while balance is paid At the
end of the first month in next quarter.
VAT Refund: Claims for refund of VAT are subject to a four year time limit after the end of the
relevant quarter.
Penalties & Errors
Default Surcharge: This becomes applicable if the VAT return is not submitted on time or if the
VAT is not paid on time. If the VAT payment is delayed, then a surcharge may incur.
For example: A business submits its VAT return for quarter ended 31/03/17 by 31 July 2017.

In this case, the business will immediately come under observation, termed the ‘Default
Surcharge Liability Notice Period’ for one year from the end of the relevant VAT period i.e.
from 31/03/17 till 31/03/18.

The observation will end without penalty, if the returns of the next 4 VAT Periods are
submitted on time.

If further delays are made in the submission of the VAT returns, while under observation; the
observation period will keep on extending: 1 year from the relevant quarter. E.g. if return of
quarter ended 30/09/16 not submitted on time the observation period will now end on
30/09/18. A penalty will also be imposed if VAT payment delayed while under observation.
Taxation - UK FA
No. Of
Penalty
Error
Collected if amount is > £400
1
2% of unpaid tax
Not collected if VAT to be
2
5% of unpaid tax
refunded.
3
10% of unpaid tax
Higher of actual amount of
4
15% of unpaid tax
VAT surcharge and £30
Example – Default Surcharge
Li has submitted her VAT returns as follows:
Quarter Ended
VAT paid -
Submitted
£
30 September 2017
6,200
Two months late
31 December 2017
28,600
One month late
31 March 2018
4,300
On time
30 June 2018
7,600
On time
30 September 2018
1,900
On time
31 December 2018
3,200
On time
31 March 2019
6,900
Two months late
Li always pays any VAT which is due at the same time that the related VAT return is submitted.
The late submission of the VAT return for the quarter ended 30 September 2017 will have resulted in
HM Revenue and Customs issuing a surcharge liability notice specifying a surcharge period running
to 30 September 2018.
The late payment of VAT for the quarter ended 31 December 2017 will result in a surcharge of £572
(28,600 x 2%).
In addition, the surcharge period will have been extended to 31 December 2018.
Li then submitted four VAT returns on time.
Taxation - UK FA
The late submission of the VAT return for the quarter ended 31 March 2019 will therefore only result
in a surcharge liability notice (specifying a surcharge period running to 31 March 2020).
Default interest
Default interest is charged on any unpaid amount from the date the VAT should have been paid to
the date of payment.
Errors in VAT Return: If there errors in a VAT return, resulting in under payment of VAT, the
business may suffer from a penalty and a penalty interest. This depends upon the value of the
error.
De-Minimis Limit: Higher of £10,000 or 1% of Turnover
If Error < De-Minimis Limit identified


If Error > De-Minimis Limit identified
Error is voluntarily disclosed in the next 
A Separate disclosure should be made
VAT return
voluntarily to HMRC
There will be a possible penalty linked to 
There will be a possible penalty linked to
behaviour of the tax payer but no penalty
behaviour of the tax payer
interest

Penalty interest will also be imposed
Example – Errors in VAT Return
During March 2019, Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase
of three motor cars when completing its VAT return for the quarter ended 31 December 2018.

If the error is less than the higher of £10,000 or 1% of Zoo Ltd’s turnover for the quarter ended 31
March 2019, then the error can be voluntarily disclosed by simply entering it on the VAT return
for the quarter ended 31 March 2019.

If the error exceeds the limit, then it can be voluntarily disclosed but disclosure must be made
separately to HM Revenue and Customs.
Taxation - UK FA

There will only be penalty interest where separate disclosure is required, but a penalty for an
incorrect return might be imposed in either case.

The amount of penalty is based on the amount of VAT understated, but the actual penalty payable
is linked to a taxpayer’s behaviour.

HM Revenue and Customs will not charge a penalty if Zoo Ltd has taken reasonable care,
provided the company informs them of the error.

However, claiming input VAT on the purchase of motor cars is more likely to be treated as
careless, since Zoo Ltd would be expected to know that such input VAT is not recoverable.

The maximum amount of penalty will therefore be 30% of the amount of input VAT incorrectly
claimed, but this penalty could be reduced to nil if unprompted disclosure is made to HM Revenue
and Customs.
International Transactions
Transactions from outside the European Union:

Imports: Input VAT is charged at the time of import, at the point of entry of the imports and at
the same rate as that applied on the goods purchased in the UK. This can be recovered within
the period in which the goods were imported.
Regular importers can get an account set-up with HMRC to get the VAT accounted for on a
monthly basis, if a bank guarantee is available.

Exports: When goods are exported, these are treated as Zero Rated supplies.
Transactions within the European Union:

Acquisitions: When goods are purchased from within the EU, then VAT is accounted for
according to the date of acquisition.

The date of acquisition is the earlier of VAT invoice being issued or the 15 th day of the
month following the transaction.

Reverse Charge Procedure: Input VAT and Output VAT related to the transaction are
both shown on the same VAT return of the purchaser.
Taxation - UK FA

Despatch: Goods sold within the EU are treated as Zero Rated supplies if the supply is made to
a VAT registered business or it will be treated as a Standard Rated supply, if made to Non VAT
Registered business.
International Services:

The place of supply is where the customer is situated.

In case of international services being received, the place of supply will be UK.

Transaction is recorded on the earlier of date when service is completed or date of cash
payment.


Reverse Charge Procedure applies here too.
In case of international services being offered, this is considered as outside the scope of VAT.
Example
Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing
£1,000 (exclusive of VAT) from either a UK supplier or from a supplier situated outside the
European Union.

If Yung Ltd purchases the goods from a UK supplier, then it will pay the supplier £1,200 (1,000
plus VAT of 200 (1,000 x 20%)), and then reclaim input VAT of £200.

If the goods are instead purchased from a supplier situated outside the European Union, then
Yung Ltd will pay £1,000 to the supplier, £200 to HM Revenue and Customs, and will be able to
reclaim input VAT of £200.

In each case, Yung Ltd has paid £1,200 and reclaimed £200.
Yung Ltd also has the option of purchasing goods from a supplier situated in the European Union.

Yung Ltd will pay £1,000 to the supplier. On its VAT return, the company will then show output
VAT of £200 and input VAT of £200.
The end result is the same as with an import from outside the European Union, but with a European
Union acquisition there is no need to actually pay the VAT subsequent to its recovery as input VAT.
Taxation - UK FA
Example
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated
services from VAT registered businesses situated elsewhere within the European Union. As
business to business services, these are treated as being supplied in the UK.

VAT will be accounted for on the earlier of the date that the service is completed or the date it is
paid for.

The VAT charged at the UK VAT rate should be declared on Wing Ltd’s VAT return as output VAT,
but will then be reclaimed as input VAT on the same VAT return (this is known as the reverse
charge procedure).
Taxation - UK FA
Accounting Schemes
For small businesses, HMRC has introduced a number of schemes to help ease cash flow
problems or administrative burden.
Cash Accounting Scheme

Small businesses account will account for VAT when cash is paid and received, rather than
on the tax point dates.

The business does not have to pay VAT until it has received the cash from its customers’
cash flow issues are managed.

It therefore receives automatic bad debt relief if a customer does not pay.

A business can only join the cash accounting scheme if:

its taxable supplies in the next 12 months are not expected to exceed £1,350,000
(excluding VAT)

will have to leave the scheme if taxable turnover exceeds £1600,000 (excluding VAT)

its VAT returns are up to date and has paid all outstanding VAT liabilities

It has not committed any VAT offences in the last 12 months.
Annual Accounting Scheme

Small businesses submit only one VAT return each year and spread their payments of VAT
evenly throughout the year.

Administrative burden is reduced as only single return is prepared.

Assists in making cash budget.

Payment schedule is given as follows:

HMRC estimate the total VAT liability for the year, based on the previous year.

10% of this estimate is paid in nine equal monthly installments (payments on accounts)
and they are paid on the last day of every month starting in the 4th month and finishing
on the last day of the 12th month.

Balancing payment along with annual VAT return is submitted to HMRC within two
months of the end of the year.

A business can only join the annual accounting scheme if:
Taxation - UK FA

its taxable supplies in the next 12 months are not expected to exceed £1,350,000
(excluding VAT)


will have to leave the scheme if taxable turnover exceeds £1600,000 (excluding VAT)
Disadvantage: This VAT scheme is not really beneficial to those that claim back VAT on
regular basis. This is mainly because the business owner can only claim repayments once a
year.
Flat Rate Scheme

The flat rate scheme can simplify the way in which small businesses calculate their VAT
liability.

Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat
rate percentage to total income. This removes the need to calculate and record output VAT
and input VAT.

The flat rate percentage is applied to the gross total income figure (including exempt
supplies) with no input VAT being recovered. The percentage varies according to the type
of trade that the business is involved in, and is provided in the examination
Example:
Omah registered for VAT on 1 January 2019. He has annual standard rated sales of £100,000,
and these are all made to the general public. Omah has annual standard rated expenses of
£16,000. Both figures are exclusive of VAT. The relevant flat rate scheme percentage for
Omah’s trade is 13%.

Omah can join the flat rate scheme if his expected taxable turnover (excluding VAT) for the
next 12 months does not exceed £150,000.

He can continue to use the scheme until his total turnover (including VAT, but excluding sales
of capital assets) for the previous year exceeds £230,000.

The main advantage of the scheme is the simplified VAT administration. Omah’s customers are
not VAT registered, so there will be no need to issue VAT invoices.

Using the normal basis of calculating the VAT liability, Omah will have to pay annual VAT of
£16,800 ((100,000 – 16,000) x 20%).
Taxation - UK FA

If he uses the flat rate scheme, then Omah will pay VAT of £15,600 ((100,000 + 20,000 (output
VAT of 100,000 x 20%)) x 13%), which is an annual saving of £1,200 (16,800 – 15,600)

A flat rate of 16.5% has been introduced for those businesses which have no, or only a
limited amount of, purchases of goods.

There is very little advantage to using the flat rate scheme if the 16.5% rate applies because
it is equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of
20%. If a business has much input VAT, then the flat rate scheme will not be beneficial if the
16.5% rate applies.
Example:
Assume that the relevant flat rate scheme percentage for Omah’s trade is instead 16.5%.

If Omah uses the flat rate scheme, then he will now pay VAT of £19,800 ((100,000 + 20,000) x
16.5%).

This is £3,000 (19,800 – 16,800) more than the normal basis of calculating the VAT liability.

Small businesses account for VAT at a flat rate percentage of VAT-inclusive turnover. The
appropriate flat rate percentage will be given in the examination.

The flat rate scheme simplifies the preparation of the VAT return.

The scheme therefore reduces the administrative burden

The mechanics of the flat rate scheme are as follows:

The business issues VAT invoices to VAT registered customers and to charge all
customers for VAT at the normal rates (e.g. standard, reduced or zero-rated)

However, at the end of the return period, the taxable person pays to HMRC the amounts
calculated by appropriate flat rate × VAT inclusive turnover

A business can only join the flat rate scheme if its taxable supplies (excluding VAT) in the
next 12 months are not expected to exceed £150,000 and total turnover (including exempts
sales) should not exceed £230,000
Taxation - UK FA
CASH ACCOUNTING SCHEME
ANNUAL ACCOUNTING SCHEME
FLAT RATE SCHEME
Objective: Helps reduce cash flow Objective: Helps reduce administrative Objective: Helps simplify the calculation of
issues.
burden.
VAT.
Conditions:
Conditions:
Conditions:


Taxable Turnover (VAT exclusive) ≤ 
Taxable Turnover (VAT exclusive) ≤ 
Taxable
£1,350,000 per annum
£1,350,000 per annum
£150,000 per annum and Total Turnover
Up to date VAT records and returns
(VAT
Up to date VAT records and returns

Turnover
inclusive
(VAT
and
exclusive)
including
≤
exempt
supplies) ≤ £230,000 per annum

Features:


Features:
Up to date VAT records and returns
Features:
The date of actual cash received or 
The VAT period is extended to 12 
Output VAT and Input VAT is actually
paid becomes the tax point and
months and the VAT return submitted
collected/ paid at the standard rate but on
recorded in the relevant VAT period
once within two months from the end of
the VAT return, shared with HMRC, VAT
Provides
the annual VAT Period.
payable is calculated at the Flat Rate %
Default surcharges are avoided due to
given by the HMRC. (Given in the exam)
automatic
impaired debts.
relief
for

low administrative challenges
Taxation - UK FA
CASH ACCOUNTING SCHEME
ANNUAL ACCOUNTING SCHEME
FLAT RATE SCHEME
Calculation:
Calculation:
Calculation:
For E.g.:
For E.g.:
For E.g.:
Quarter ended 31st March, 2019
Year ended 31st December, 2018
Quarter ended 31st March, 2019
Output VAT: Cash Sales x 20%
Output VAT: Sales x 20%
VAT Payable: Total Turnover x Flat Rate %
Less: Input VAT: Cash purchases x Less: Input VAT: Purchases x 20%
20%
Total Turnover: This is made up of VAT
Return
Submission
Deadline:
28th inclusive amounts of taxable supplies turnover
Return Submission Deadline: 7th May, February, 2019
and also includes turnover from exempt
2019
VAT Payment Deadline: paid in 10 supplies.
VAT Payment Deadline: 7th May, 2019
instalments
First 9 instalments: calculated as 10% of Input VAT: is not deducted as it is made up for
previous year VAT payable. Instalments in the reduced %.
start from the 4th month of the VAT period
and are paid by the end of each month
VAT Return Submission Deadline: 7th May,
Final instalment: calculated as balancing 2019
payment and paid with the VAT return.
VAT Payment Deadline: 7th May, 2019