ACCA F6ACCA F6
Taxation
Exam paperExam paper
• 3 hours long
• 15 minutes reading time
• 5 compulsory questions– Q1 – Income Tax– Q2 – Corporation Tax– Q3 – Capital Gains Tax / Chargeable gains– Q4 & Q5 – Any other area of the syllabus– Minimum of 10 marks on VAT
INCOME TAXCOMPUTATION AND PROPERTY INCOME
INCOME TAXCOMPUTATION AND PROPERTY INCOME
Income tax overviewIncome tax overview
• Tax year 6 April – 5 April
• 2009/10
• Calculate taxable income for tax year
• Calculate tax thereon
Taxable incomeTaxable income
Income assessable Basis of assessment
Profits from a trade, profession or vocation (other income)
Tax adjusted profits of the accounts ending in the current tax year
Interest received from UK sources (savings income)
Income from employment (other income)
Income received in the tax year
Dividend income (dividend income)
Property income (other income) Rental profits accruing in the tax year
Grossing upGrossing up
Interest received× 100/80
Dividends received × 100/90
Credit given against income tax liability for tax suffered at source and
10% dividend tax credit
Note: Some interest is received gross, namely Government Stock interest, Treasury stock interest and Exchequer stock interest
Exempt incomeExempt income
• Premium Bond prizes
• Betting/gambling winnings
• Returns on National Savings Certificates
• Income from ISAs
Income tax computationIncome tax computation
Income tax computationIncome tax computation
Note: Tax credits on dividends are never repayable. Offset against IT liability first to allow other tax credits to generate a repayment
DeductionsDeductions
Reliefs
• Qualifying interest– Employees: interest on
loans to purchase P&M for use in employment
– Partners: interest on loans to purchase shares or invest in partnership
• Trading losses
Personal allowances
• Standard - £6,475 (09/10)• Age allowance
– 65+ at any time in tax year– restricted if income
exceeds £22,900– restriction 50% × (net
income − £22,900)– minimum £6,475
Tax ratesTax rates
Different tax rates apply depending on the amount and type of income
Other Savings Dividends
Basic rate band (first £37,400)
20% 20%(see note)
10%
Higher rate (over £37,400)
40% 40% 32.5%
Note: If savings income falls into the first £2,440 of taxable income it is taxed at 10%
Extending basic rate bandExtending basic rate band
• Gift Aid– Paid net of basic rate tax (20%)– Basic rate band extended by gross amount
(net × 100/80) if higher rate tax payer
• Personal pension contributions– As for Gift Aid payments
Property incomeProperty income
Accruals basis
Wholly and exclusively incurred (e.g. bad debts, repairs, insurance)
Aggregate income from all properties
Wear & tear allowance for furnished properties:10% × (Rent – WR – CT)
Lease premiumsLease premiums
Premium X
Less 2% × premium × (n-1) (X)
Assessed on the landlord Y
Where n = number of years of the lease
• Where a premium is paid on the grant of a short (≤50 years) lease– the landlord is taxed on property business income of
• Relief for premium paid if grant sublease– Taxable premium for head lease × Duration of
sublease
Duration of head lease
Property income – other aspectsProperty income – other aspects
• Rent a room – Gross rents ≤ £4,250 = exempt– Gross rents > £4,250 = Normal calculation unless elect
• Furnished holiday lettings– Conditions
• Situated in UK or any EEA country
• Available to let ≥ 140 days, actually let ≥ 70 days
• No long term occupation (≥ 31 days) unless < 155 days
– Advantages• Loss relief as if trading
• CGT reliefs available (rollover & Entrepreneurs’)
• Net relevant earnings for pension contributions
• Capital allowances on furniture
Joint incomeJoint income
• Husband and wife and civil partners– Normal assumption 50:50 split – Can elect for income to be taxed according
to actual entitlement
ISAsISAs
Maximum investment £7,200 (£10,200 age 50+)
Overseas incomeOverseas income
• Individual resident in UK if:– Present in UK for at least 6 months– Makes frequent and substantial visits to the
UK, at least 90 days on average over the previous four tax years
INCOME TAXEMPLOYMENT INCOMEINCOME TAXEMPLOYMENT INCOME
Employment incomeEmployment income
Employment v self employmentMain criteria
• control
• financial risk
• equipment – who provides
• work performance and correction
• holidays and sickness benefits
• exclusivity
Employment income pro-formaEmployment income pro-forma
Employment income - overviewEmployment income - overview
• Basis of assessment– Receipts basis, i.e. assessable for tax year in
which paid (special rules for directors)
• Allowable deductions– Pension contributions– Professional subscriptions– Payroll giving– Travel expenses necessarily incurred– Mileage allowances:
– if rate paid < Approved Mileage Allowance – excess is a taxable benefit
BenefitsBenefits
Benefits
Exempt Taxable on all
P11D employees
Note: P11D employees are those earning ≥ £8,500 pa plus most directors
Exempt benefitsExempt benefits
Include:• Employer pension scheme contributions• Canteen facilities, luncheon vouchers 15p per day• Relocation costs (max £8,000)• Job related accommodation• Mobile telephones – one per employee• Workplace nurseries, childcare contributions (max £55 pw)• £3 pw home working allowance• Staff parties (£150 per head pa)• Car parking• Works buses• Reimbursement of expenses for working away from home (£5
per night in UK, £10 per night overseas)
Assessable on all employeesAssessable on all employees
Benefit Amount assessableCash vouchers Cash for which the voucher can be
exchanged
Non cash vouchers Cost to employer
Credit cards All items purchased for private use (not interest or card charges)
Payment by an employer of an employee’s liability
Amount paid by employer e.g. home telephone
Living accommodation Up to 3 components – see below
Living accommodationLiving accommodationBenefit Amount assessable
Basic charge Higher of•Annual value•Rent paid by employer
Expensive accommodation charge
Property cost to employer > £75,000(Cost* − £75,000) × official rate of interest(Note – official rate is provided in exam)
Ancillary benefits
•Use of furniture•Living expenses (e.g. heating, electricity, decorating)
Only apply if employee earns > £8,500pa
20% × market value when first providedCost to employer
* Acquisition cost plus improvements up to start of tax year If occupied by employee > 6yrs after acquisition, substitute market value when first occupied for cost
Job related accommodationJob related accommodation
Benefit Amount assessable
Basic charge Exempt
Expensive accommodation charge
Exempt
Ancillary benefits Calculate as normal but cannot exceed 10% of other employment income
Assessable on P11D employeesAssessable on P11D employees
Benefit Amount assessable
Cars and fuel Based on carbon dioxide emissions
Vans Scale charge (£3,000 pa, £500 pa for fuel)
Interest free/low interest loan
Based on official rate of interest
Assets loaned Based on 20% market value of the asset
Gift of new asset Cost to employer
Other Marginal cost to the employer
Benefits – cars and fuelBenefits – cars and fuel
Cars
Fuel
Cannot deduct partial contributions for private fuel
•≤ 120g/km = 10% •Include extras
•121g/km – 135g/km = 15% •£80,000 cap
•+1% each 5g/km >135g/km •Employee contributions up to £5,000 deductible•3% supplement for diesel
•Maximum = 35%
Benefits - loansBenefits - loans
• Loans– low interest or interest free loan
ORI = Official rate of interest (given in exam)
– Use lower of average or precise method– No benefits if loans outstanding at any time
in tax year if ≤ £5,000
Interest on outstanding balance × ORI X
Less interest actually paid X
Benefit X
Benefits – use of assetsBenefits – use of assets
• Use and transfer of assets– 20% × market value when first provided– Two calculations for transfer of previously
owned assets to employee – higher of:
– Market value at gift X
– Market value when first used X
Less amounts already taxed (X)
X
INCOME TAXINCOME FROM SELF EMPLOYMENT
INCOME TAXINCOME FROM SELF EMPLOYMENT
Badges of tradeBadges of trade
Test ConsiderSubject matter Personal use? Investment? Trade?
Ownership period Brief period of ownership indicates trading
Frequency of transactions
Repeated similar transactions indicate trading
Improvements Work carried out to make asset more marketable may indicate trading
Reason for sale Forced sale to raise cash indicates not trading
Motive Profit motive indicates trading
Adjustment of profitsAdjustment of profits £
Net profit as per accounts XAdd back
• Disallowed Items X• Taxable trading income not credited in the accounts X
Less:• Non trading income (X)• Expenditure not charged in the accounts but allowable trading expenditure (X)
• Capital allowances (X) –––
Tax-adjusted trading profit X –––
Disallowable expenditureDisallowable expenditure
• Wholly and exclusively incurred– No private items e.g. private motoring– No salary for proprietor
• Capital expenditure– Depreciation replaced by capital
allowances– No loss on sale– No improvements – Review repairs carefully
Disallowable expenditureDisallowable expenditure
• Car leasing costs– CO2 emissions > 160g/km - 15% of leasing
costs disallowed
– CO2 emissions ≤ 160g/km – no adjustment
• Legal costs re capital, except:– Cost of renewing short lease– Cost of defending title to an asset– Cost of raising loan finance
Disallowable expenditureDisallowable expenditure
• Other items include:– Fines/penalties (except employee parking)– Donations (except to local charities)– Gifts (except <£50, advert & not food/drink)– Entertaining (except staff)– Impaired debts (except trade debts)– Interest payable on non-trade loans
• Allowable items- show adjustment as nil
Other adjustmentsOther adjustments
• Taxable trading income not included in the accounts– Goods for own use
• If no adjustment made in the accounts – add back selling price
• If correct entries made in the accounts – only add back profit element
Non trading incomeNon trading income
Property business income
Bank interestDividends received
Capital profits
Income not taxable as
trading income
Other adjustmentsOther adjustments
• Expenditure not charged in the accounts but allowable– Capital allowances– Business expenses borne by proprietor– Portion of short lease premium paid =
Premium assessable on landlord Period of lease
INCOME TAX CAPITAL ALLOWANCESINCOME TAX CAPITAL ALLOWANCES
Capital allowancesCapital allowances
Function
ActiveApparatus
with which the business
carried on
PassiveSetting in which the business carried on
Capital allowances computationCapital allowances computation
• General pool– Everything not in other columns
• Special rate pool– Long life assets– Integral features in buildings– Thermal insulation of buildings– Cars with emissions of above 160g/km
• Single asset ‘pools’– Expensive (£12,000 or more) cars brought forward– Short life assets– Private use (by business owner) assets
General pool pro-formaGeneral pool pro-forma
General pool pro-formaGeneral pool pro-forma
Annual investment allowanceAnnual investment allowance
• First £50,000 expenditure (12 months)
• Pro-rate if period <12 months
• All assets except cars
• Advisable to allocate – Special rate pool– General pool– Short life assets– Private use assets
• Not available in final accounting period
Writing down allowanceWriting down allowance
• 20% on reducing balance basis
• 10% for special rate pool
• Pro-rate if period ≠12 months
• Expensive cars brought forward - maximum £3,000 pa
• Small pool WDA – can write off balance of £1,000 or less (for 12m period)
• Restrict for private use by proprietor
First year allowancesFirst year allowances
• Plant and machinery– 40% FYA on general pool expenditure in
excess of AIA (6 April 2009 - 5 April 2010)– FYA not available on special rate pool
• Cars with emissions ≤ 110g/km– 100% FYA available in the period of
acquisition
• Never time apportion FYA
CarsCars
• Expenditure pre 6.4.2009 brought forward– Expensive cars (>£12,000) - depooled:
• 20% WDA, max £3,000 (both for 12m period)• Balancing adjustment on disposal
– Cost ≤ £12,000 - in general pool (20% WDA pa)
• On/after 6.4.2009 depends on CO2 emissions– ≤ 110g/km (‘low emission’) – 100% FYA– 111-160g/km – general pool – 20% WDA
pa– > 160g/km – special rate pool – 10% WDA pa
• Private use - only business proportion allowed
Short life assetsShort life assets
• Each asset has its own column
• < 5 years
• AIA/FYA available
• Balancing adjustment on sale
• Not available on cars
• Asset not sold within 4 years from end of accounting period in which acquired transferred to general pool
Private use assetsPrivate use assets
• Each asset has its own column
• Asset written down by full AIA/FYA/WDA but allowance claimed restricted for business use
• Not relevant for companies
Balancing adjustmentsBalancing adjustments
Proceeds (restricted to original cost)
> Balance on ‘pool’
Balancing charge
Balancing allowance
< Balance on ‘pool’
Exception: A balancing allowance is never given on the general pool or the special rate pool
until business ceases to trade
Business cessationBusiness cessation
• Additions and disposals allocated to relevant pools
• No AIA/FYA/WDA
• Balancing adjustments given
Industrial buildings allowanceIndustrial buildings allowance
• Qualifying expenditure– Cost of
construction/acquiring an industrial building
– Professional fees (e.g. architects, legal fees)
– Preparing land– Associated structures (e.g.
factory car park)
• Non qualifying– Land– Offices, shops, showrooms
(25% rule)– Items qualifying as Plant
and Machinery (e.g. central heating, thermal insulation)
• Main examples – factory, warehouse, staff welfare building, drawing office and hotels
Industrial buildings allowanceIndustrial buildings allowance
• WDA 2% pa – If in industrial use at year end– Within tax life (25 years from date of first
use)
• Disposal– No WDA in year of sale– No BC/BA for vendor
• Second hand buildings – Not examinable
INCOME TAX BASIS OF ASSESSMENT INCOME TAX BASIS OF ASSESSMENT
Basis period rulesBasis period rules
3 scenarios
Ongoing business
Commencement of trade
Cessation of trade
Assessed on 12 month a/c period ending
in tax year
Assessed using ‘opening
year rules’
Assessed using ‘closing
year rules’
Opening year rulesOpening year rules
Opening year rules
• First tax year = year in which business commences trade
• Assessed on profits from date of commencement to following 5 April
• Second tax year – see flow chart
Opening year rulesOpening year rules
Year 2:Is there an accounting period ending in the tax year?
YesIs it 12 months long?
NoAssess on an actual basis from 6 April to 5 April
YesAssess profits of those 12 months = normal current year basis
No
Is it < 12 months?Assess profits of first 12 months of trade
Is it > 12 months?Assess profits of 12 months up to accounting date
Opening year rulesOpening year rules
Third tax year
• Assess 12m/e on accounting date in the 3rd tax year
Overlap profits
• May be taxed on same profits twice, these are known as ‘overlap profits’
• Get relief for overlap profits on cessation
Closing yearsClosing years
Closing year rules
• Final tax year = year in which actually cease to trade
• Assessed on any profits not previously assessed less any overlap profits from commencement
Change of accounting date - conditions
Change of accounting date - conditions
• Change must be notified to HMRC on or before 31 January following the tax year in which the change is to be made
• The first accounts to the new accounting date must not be >18 months
• There must not have been another change of accounting date during the previous five tax years unless for genuine commercial reason
Change of accounting dateChange of accounting date
New date is earlier in the tax year
• The basis period for the tax year of change will be the 12 months to the new accounting date
• Creates extra overlap profits
New date is later in the tax year
• The basis period for the tax year of change will be the period ending with the new accounting date
• Overlap profits will be used to reduce the assessment to 12 months
INCOME TAXPARTNERSHIPSINCOME TAXPARTNERSHIPS
Partnerships – basis of assessment
Partnerships – basis of assessment
Tax adjusted profits/losses
Partner A Partner B Partner C
Share between partners in PSA of accounting period
Tax each partner as if individual sole trader
Note: PSA may allocate salaries and/or interest on capital. These are taxed as trading profit and not salary or interest income
PartnershipsPartnerships
• Capital allowances by partnership– Including those on partners’ own assets
• Partnership changes– Only partner joining/leaving is assessed on special
opening/closing year rules
• Changes in PSA – split period– Allocate profits according to PSA in force
• Partnership losses– Calculated and allocated in same way as profits– Each partner may choose loss relief claims
LLPsLLPs
• LLPs– Amount each partner may be required to
contribute is limited– Taxed using normal partnership rules– Normal loss relief rules except losses set
against total income limited to amount of capital contributed by that partner
INCOME TAXTRADING LOSSESINCOME TAXTRADING LOSSES
Trading lossesTrading losses
Trading losses
Against total income
of the current and/or preceding
tax year
•Offset cannot be restricted to preserve PA
•Excess loss is carried forward
Against future trading profits only
•Relieved against the first available future profits from same trade
•Loss offset cannot be restricted
Additional loss relief after claim against
total income in 09/10 or 08/09 remaining loss can be c/b 3
years against trading income
•Prior year claim unlimited
•Max £50,000 c/b for further two years
Trading lossesTrading losses
• Opening years relief– loss in first four tax years of business– against total income of previous 3 yrs (FIFO)
• Incorporation relief– losses c/f against income derived from company
• Terminal loss relief– loss arising in final 12m of trade (+ overlap profits)– carried back 3 yrs against trading profits
• Relief against capital gains – after claim against total income– treat trading loss as current year capital loss
Trading lossesTrading losses
• Choice of loss relief– Relief as early as possible– As much tax saving as possible– Avoid wasting personal allowance / annual
exemption
PENSIONS AND NATIONAL INSURANCE CONTRIBUTIONSPENSIONS AND NATIONAL INSURANCE CONTRIBUTIONS
Method of giving reliefMethod of giving relief
Pension contribution to:
Personal pension scheme
Occupational scheme
•Basic rate relief (20%) given at source
•Higher rate relief given by extending basic rate band
•Tax relief at basic and higher rates given through the PAYE system, i.e. allowable deduction against employment income
Pensions – maximum contribution
Pensions – maximum contribution
• Can contribute any amount but tax relief only up to maximum contribution
• The maximum tax allowable annual contribution into all pension schemes is the higher of:– £3,600 and – 100% of the individual’s relevant earnings,
chargeable to income tax in the year
• Relevant earnings include trading profits, employment income and furnished holiday letting income
Pension contributionsPension contributions
• Annual allowance (£245,000)– 40% income tax charge on excess
• Lifetime allowance (£1,750,000)– Tax charge on excess:
• If taken as lump sum – 55%• If taken as annual pension – 25%
• Employer’s contributions– Not a taxable benefit– Tax deductible for employer
NIC: Classes of contributionsNIC: Classes of contributions
Class 1 Secondary- EarningsClass 1A - Benefits
NIC paid by
Employees
Employers
Class 2Class 4
Class 1 Primary
Self employed
Employees’ NICEmployees’ NIC
• Class 1 primary– Payable on earnings (see below)– Age 16 - 60 (women) / 65 (men)– 11% on earnings between £5,715 and
£43,875– 1% above £43,875
• Payment dates– Collected through PAYE system
Employers’ NICEmployers’ NIC
• Class 1 secondary– 12.8% × earnings over £5,715– Employees > 16 years old– Collected through PAYE system
• Class 1A– 12.8% × assessable benefits– Payable by 19 July following tax year
Class 1 NIC - EarningsClass 1 NIC - Earnings
Earnings includes
• any remuneration derived from employment and paid in money
• vouchers exchangeable for cash or goods
• reimbursement of cost of travel between home and work
Earnings excludes
• exempt employment benefits
• non-cash benefits• reimbursement of
business expenses
NIC – self employedNIC – self employed
Class 2• Fixed at £2.40 per week• Paid by monthly direct debit or
quarterly billing
Class 4• Paid on taxable trade profits
less losses brought forward• 8% on profits between £5,715
and £43,875 • 1% on profits above £43,875• Paid with income tax under
self assessment• Not payable if under 16, or 60
or over (women) 65 or over (men) at start of tax year
INCOME TAXADMINISTRATIONINCOME TAXADMINISTRATION
Self assessment Self assessment
• Tax return for 2009/10– Due dates – 31 October 2010 (paper)
– 31 January 2011 (electronic)– Notification of chargeability – 5 October 2010
• Amendments to returns– Taxpayer within 12m of 31 January filing date– HMRC within 9m of actual filing date
• Penalties for late filing– ≤ 6 months = £100– 6 – 12 months = further £100– >12 months = additional penalty ≤ 100% tax due
Self assessment Self assessment
• Determination of tax– Issued by HMRC if return not filed by filing date – Can be issued within 3 years of filing date– Assessment replaced by actual return
• Records– Business – retain 5yrs from 31 January filing date– Other taxpayers – retain 1yr– Penalty ≥ £3,000 if fail to keep adequate records
Payment of tax – 2009/10Payment of tax – 2009/10
• Payments on account (‘POA’)– 50% × 2008/09 income tax and Class 4
NICs less tax paid at source– 31 January 2010– 31 July 2010
• Balancing payment– 31 January 2011
• Capital gains tax – 31 January 2011
• Reduction of POA
Interest and surchargesInterest and surcharges
Interest Surcharges
Charged on: All late payments of tax
Charged on:Balancing payment only (not POAs)
Daily rateRuns from due date until day before date of payment
% Tax paid late
Pay > 28 days late
Pay > 6 months late
5% Further 5%
Standard penaltiesStandard penalties
Taxpayer behaviour Maximum penalty (% of revenue lost)
Genuine mistake No penalty
Failure to take reasonable care 30%
Serious or deliberate understatement 70%
Serious or deliberate understatement with concealment 100%
Penalties may be reduced by prompted / unprompted disclosure
• Apply in two circumstances– Inaccuracy in returns (all taxes)– Failure to notify liability to tax (IT, CGT, CT, VAT, PAYE/NIC)
• Penalty = % of potential lost revenue• Depends on behaviour of taxpayer
HMRC powers HMRC powers
• Enquiries– HMRC issue written notice within 12m of filing– Taxpayer can appeal within 30 days
• Discovery assessments– HMRC can raise if discover inaccuracy in return
• HMRC information and inspection powers– Covers IT, CGT, CT, VAT and PAYE– Can request information by written notice– From 3rd parties if agreed by taxpayer / tribunal– Power to enter & inspect business premises
− in order to inspect business records and assets
AppealsAppeals
• Appeals in writing within 30 days of disputed decision– Review by another HMRC officer or refer to Tax Tribunals
• First tier Tribunal deals with:– Default paper cases, e.g. against fixed penalty– Basic cases, straightforward with short hearing– Standard cases, more detailed and formal hearing– Complex cases, sometimes, but usually Upper tier
• Upper tier Tribunal deals with:– Complex cases - specialist knowledge and formal hearing– Judicial review delegated from High Court / Court of Session– Enforcement of decisions, directions & orders by Tribunals– Hearings held in public and decisions published
• Can appeal to Court of Appeal on point of law
PAYEPAYE
• Code numbers– (allowances – deductions) × 1/10
• Due date – 19th of month– Electronic payments – 22nd of month
• Key forms– P45 – when employee leaves– P46 – when employee joins without a P45– P35 – summarises IT/NIC deducted– P14/60 – yearly totals for each employee
CAPITAL GAINS TAXCOMPUTATION AND TAX PAYABLE
CAPITAL GAINS TAXCOMPUTATION AND TAX PAYABLE
Capital gains essentialsCapital gains essentials
Chargeable persons•Individual - resident or ordinarily resident in UK•Company
Exempt disposals•Sale of trading stock•Transfers on death•Transfers to charity
Exempt assets include•Cars•Non wasting chattels bought and sold ≤ £6,000•Wasting chattels•Cash•Qualifying corporate bonds•Sterling currency•Principal private residence•Assets held in ISAs
Chargeable assets•All assets except specifically exempt
Chargeable disposals•Sale•Gift•Exchange•Loss/destruction of asset•Compensation for damage
Pro – forma computationPro – forma computation
Notes £
Gross sale proceeds (1) X
Less: Selling costs (2) (X)
Net selling price X
Less: Allowable costs (3) (X)
Capital gain X
Notes:1. Use market value where transaction not at arm’s length2. Include legal fees, advertising costs, etc.3. Includes purchase price and purchase expenses, (e.g. legal
fees) and any capital enhancement expenditure
Summary for 2009/10Summary for 2009/10
£
Net capital gains for the tax year (after specific reliefs) X
Less: Capital losses brought forward (X)
Net chargeable gains X
Less: Annual exemption (2009/10) (10,100)
Taxable gains X
CGT Payable (18% of taxable gains) X
Capital lossesCapital losses
Current year
• Must be set off against current year capital gains
• Offset before brought forward losses
Brought forward
• Offset restricted to amount needed to reduce net chargeable gains down to the amount of the AE (£10,100 for 2009/10)
Connected personsConnected persons
• Use market value instead of actual proceeds• Loss on disposal only offset against gains to same
connected person
CAPITAL GAINS TAXSPECIAL RULESCAPITAL GAINS TAXSPECIAL RULES
Special rulesSpecial rules
• No gain no loss transfers– Spouse/civil partner- planning opportunities
• Utilising annual exemptions• Utilising capital losses
• Part disposals– Cost of part disposed = Cost ×– A = Proceeds, B = MV of remaining asset
• Chattels– Wasting (expected life ≤ 50 yrs) = exempt– Non-wasting (> 50 yrs) = see below
AA + B
Non wasting chattelsNon wasting chattels
Cost £6,000 or less More than £6,000
Sale proceeds
£6,000 or less
ExemptAllowable loss based on deemed proceeds of £6,000
More than £6,000
Normal gain computation but gain restricted to 5/3 (Gross proceeds-£6,000)
Normal gain computation
Wasting assetsWasting assets
Wasting assets ( life ≤ 50 years)
Chattels (tangible and moveable)
Not chattels e.g. copyright
Not eligible for capital allowancese.g. greyhound
Eligible for capital allowances e.g. plant and machinery used in a trade
Normal gains computation subject to £6,000 chattels rules. Losses not allowed as relieved by CAs
Exempt
Normal gain computationAllowable cost restricted
Cost CLess P x C (X) LAllowable cost X
P = Period of ownershipL = Predictable life
Assets lost or destroyedAssets lost or destroyed
No insurance proceeds
Insurance proceeds received
Normal computation: capital loss
Not reinvested : normal computation
Reinvested within 12 months – elect for no gain/no loss
Assets damagedAssets damaged
No insurance proceeds
No disposal
Insurance proceeds received
Not used in restoration
Used in restoration
Normal part disposal Part disposal unless ‘rollover’ election to deduct proceeds from cost of asset
Shares and securitiesShares and securities
• Value of quoted shares = lower of:– Quarter up rule– Average of highest and lowest marked bargains
• Matching rules– Same day– Next 30 days– Share pool (amalgamated cost of shares)
• Bonus and rights issues – Bonus – increase number of shares at nil cost– Rights – increase number and cost in pool
Reorganisations and takeoversReorganisations and takeovers
Consideration
Cash and shares Share for share
•Part disposal of the original shares
•Gain arises on the cash element of the consideration
•No CGT disposal•Cost of the original shares becomes the cost of the new shares
•Can elect for normal disposal
CAPITAL GAINS TAXRELIEFS FOR INDIVIDUALSCAPITAL GAINS TAXRELIEFS FOR INDIVIDUALS
Principal private residencePrincipal private residence
ownership of Period
occupation of Period
PPR occupied
•Calculate gain•PPR relief
Gain x
For part of period of ownership
Throughout
Gain exempt
ownership of Period
occupation of Periods
Deemed occupationDeemed occupation
Conditional
• Up to 3 years - any reason• Any period working abroad• Up to 4 years working in the
UK• Must be actual occupation
before and after• Condition relaxed if
reoccupation prevented by terms of employment
Unconditional
• Last 36 months of ownership
Letting reliefLetting relief
• Available for periods of letting
• Calculate PPR first
• Letting exemption is lower of:– £40,000– PPR relief– Gain due to letting
Entrepreneurs’ reliefEntrepreneurs’ relief
• Qualifying business disposals– Unincorporated business, or– Personal trading company shares (≥5%)
provided also an employee
• Qualifying ownership period– 12 months
• Given after other reliefs but before capital losses and annual exemption
Entrepreneurs’ reliefEntrepreneurs’ relief
• Relief is given on first £1 million
• Reduce gains by 4/9ths – Gives effective tax rate of 10%
• For 2009/10 disposals claim by 31 January 2012
Rollover reliefRollover relief
Disposal of and reinvestment
In qualifying asset:
•Land and buildings•Fixed plant and machinery•Goodwill•Must be used in the trade
Within qualifying time period:
From 12 months before to 36 months
after the sale
• Claim within 4 years from the end of the tax year
Rollover reliefRollover relief
• Partial reinvestment– A gain arises on the disposal of the original
asset, being the lower of:• the proceeds not reinvested• the capital gain
• Depreciating assets (life < 60yrs)– Gain heldover until earliest of:
• replacement asset sold• cease to use replacement asset in the trade• 10 years from date replacement asset acquired
Gift reliefGift relief
• Individuals only• Qualifying business assets (below)• Donee’s base cost reduced by gain deferred• Joint election by 4yrs from end of tax year of gift• If actual consideration > donor’s cost, excess is
immediately chargeable, balance deferred• Non business use - gain deferred restricted
– Shares (≥5%) – gain deferred = Gain × MV of Chargeable Business
AssetsMV of Chargeable Assets
Qualifying business assetsQualifying business assets
• Assets used in trade of unincorporated business or individual’s personal trading company (≥5% shares)
• Unquoted trading company shares
• Quoted trading company shares if own ≥5%
Incorporation reliefIncorporation relief
Conditions •All the assets of the business (except cash) must be transferred
•The transfer must be of a business as a going concern•Consideration must be wholly or partly in shares
Effect •No gains arise on incorporation•Gain on sale of assets (before Entrepreneurs’ relief) is rolled over against the acquisition cost of shares
Consideration not wholly in shares
•Gain eligible for rollover•Gain x Value of shares issued Total consideration• Immediate gain for non shares consideration
Election •Can elect for incorporation relief not to apply - for 2009/10 by 31 January 2012
•May be beneficial if shares are to be sold shortly after incorporation and assets of business qualify for Entrepreneurs’ relief
CORPORATION TAXOUTLINECORPORATION TAXOUTLINE
Corporation tax Corporation tax
• UK resident companies– Pay corporation tax on worldwide profits
(except overseas dividends) and gains
• Accounting periods– Normally follow company accounts– Period of account > 12 months – split into
two accounting periods
Corporation tax computationCorporation tax computation
Corporation tax computation for the chargeable accounting period
of…months ended…
£
* Trading profit X
* Property business profit X
* Interest income X
Chargeable gains X
–––
Total profits X
Less: Gift Aid (X)
–––
PCTCT X
–––
* Including overseas income
Corporation tax computationCorporation tax computation
• Trading income– No private use adjustments / assets– Include trading interest payable
• Property business profit– Losses set against total income
• Loan relationship rules– Non-trading interest receivable less non-trading
interest payable (see next) – All interest is received gross
• Dividends (UK / overseas) – exempt
Interest payableInterest payable
Non trade loans
• Deducted from interest income
• E.g. Loan to purchase investment property or shares in another company
Trade loans
• Deducted from trading profits
• E.g. Bank overdraft interest, loan to acquire plant, machinery or factory
Long period of accountLong period of account
Where a company’s period of account exceeds 12 months, it is split into 2 CAPs
Profits are allocated to the 2 CAPs as follows:
Adjusted trading profit Time apportion before capital allowances
Capital allowances Calculate separately for each CAP
Interest income Accruals basis
Property business profit Time apportioned
Chargeable gains CAP in which disposal takes place
Gift Aid Paid basis
Franked investment income Receipts basis
Calculation of Corporation taxCalculation of Corporation tax
Financial year
• The rates of tax are fixed for a FY
• FY runs 1/4 - 31/3• FY 2009 starts 1/4/2009
“Profits”
•
• FII = Grossed up UK and overseas dividends received (non-associated)
• “Profits” determines rate charged on PCTCT
PCTCT X
Add FII X
“Profits” X
Calculation of Corporation taxCalculation of Corporation tax
Marginal relief formula :
Level of profits Rate of tax≤ £300,000 21%
£300,001 - £1,500,000 28% less marginal relief
> £1,500,000 28%
CORPORATION TAX CHARGEABLE GAINSCORPORATION TAX CHARGEABLE GAINS
Company chargeable gainsCompany chargeable gains
Summary of key differences:
Company Individual
Tax paid Corporation tax Capital gains tax
Annual exemption N/A 2009/10 £10,100
Indexation allowance Available for full period of ownership
Not available
Capital losses brought forward
Offset in full Restrict so net gains = annual exemption
Shares and securities Indexed cost column neededDifferent matching rules
No indexation allowance
Reliefs Rollover relief onlyGoodwill is not a QBA
Many reliefs available
Capital gains summaryCapital gains summary
£
Gain (transaction 1) X
Gain (transaction 2) X
Loss (transaction 3) (X)
–––
Net gains in period X
Less capital losses b/fwd (X)
–––
Net chargeable gains (include in A
corporation tax computation) –––
Indexation allowanceIndexation allowance
• Allowance based on increase in RPI over period of ownership
• Indexation factor applied to cost / enhancement costs
• Calculation rounded to 3 decimal places (except shares) :
RPI month of disposal − RPI month of acquisition
RPI month of acquisition
• If there is a fall in value in the RPI, the indexation allowance is nil
Shares and securitiesShares and securities
• Matching rules– Same day– Previous 9 days– Share pool
• Bonus issue– Not an operative event, just increase no of shares
• Rights issue– Operative event, increase number of share & cost
• Reorganisations and takeovers– As for individuals
Share pool pro - formaShare pool pro - forma
Rollover reliefRollover relief
• Same as individuals except:– Goodwill is not a qualifying asset– Claim within 4 years from the end of the
accounting period in which asset is sold
• Note, no other reliefs available to companies
CORPORATION TAX LOSSESCORPORATION TAX LOSSES
Trading loss reliefsTrading loss reliefs
Carry forward Current year relief Carry back relief
•Offset against:•First available•Trading profits•Of same trade
•Indefinite carry forward
•Offset against•Total profits (income and gains)•Before Gift Aid•Current AP then carry back 12 months (if desired)
•Carry forward any remaining losses•Gift Aid is lost if no profits to offset•Must offset maximum amount possible if claimed•Optional claim•For loss making periods between 24/11/08 and 23/11/10 carry back relief is extended to 36 months
•No restriction on 12m carry back•Maximum of £50,000 can be carried back to the extended period
Trading loss pro-formaTrading loss pro-forma
Loss relief - planningLoss relief - planning
• Relief at highest rates– Marginal rate – 29.75%– Full rate – 28%– Small companies rate – 21%
• Cashflow advantage of earlier relief
• Gift aid may be wasted
Loss relief – other lossesLoss relief – other losses
• Property business losses– Against total income before gift aid of
current period– Excess losses carried forward against total
income before gift aid
• Capital losses– Automatically set against current year gains– Excess losses carried forward against first
available future gains– Can only be relieved against gains
CORPORATION TAXGROUPS CORPORATION TAXGROUPS
Associated companiesAssociated companies
• Definition– One company controls (> 50%) the other, or– Both companies are under control of the same
person or persons– Include overseas companies and those joining /
leaving group during period– Exclude dormant companies
• Effect– Small companies limits divided– Dividends not FII– Share Annual Investment Allowance
Group reliefGroup relief
• Definition– 75% direct or indirect– Overseas companies – included in definition of
group, but can’t claim losses
• Relief– Surrender current year trading losses, excess gift
aid and excess property losses – Claimant company (see next slide)– Only claim for corresponding accounting periods– Tax planning − save at highest rates
− timing
Corporation tax computationCorporation tax computationCorporation tax computation for the chargeable accounting period
of…months ended…
£
Trading profit X
Less: loss brought forward (X)
–––
X
Property business profit X
Interest income X
Overseas income X
Chargeable gains X
–––
Total profits X
Less: loss relief (current year / carried back) (X)
Less: Gift Aid (X)
–––
X
Less: Group relief (X)
–––
PCTCT X
–––
Capital gains groupsCapital gains groups
• Definition– 75% direct and > 50% indirect– Overseas companies – included in definition of
group, but can’t take advantage of reliefs
• Effects– NGNL transfers (automatic) – transferee takes
over asset at cost plus indexation– Can elect that gains and losses be transferred
from one group company to another– Group rollover relief
CORPORATION TAXOVERSEAS ASPECTS CORPORATION TAXOVERSEAS ASPECTS
Liability to UK Corporation taxLiability to UK Corporation tax
• UK resident company– Incorporated in UK– Centrally managed and controlled in UK
• Taxed on worldwide profits, other than dividends from UK or overseas companies
Overseas operationsOverseas operations
UK Tax factor Branch SubsidiaryBasis of charge to UK CT
•Extension of UK operations
•100% of profits arising taxed on UK company
• Interest remitted to UK is chargeable to UK CT but dividends are exempt
Relief for trading losses
•Losses of branch relieved against UK profits
•UK losses can relieve overseas branch profits
•No relief for losses in the UK
Capital allowances •Available on assets used in the branch
•Not available
Impact on tax rate •None – not an associate • Associated company
Relief for overseas taxationRelief for overseas taxation
• Withholding tax– Overseas tax deducted at source– Recoverable by double tax relief
• Double tax relief (DTR) – lower of– Overseas tax on overseas income – UK CT on overseas income
Transfer pricingTransfer pricing
• For F6 – Transactions with overseas companies only
• Control (> 50%)
• Non arm’s length price
• UK company gains tax advantage
• Increase taxable profits of advantaged company using ‘arm’s length price’
• Can make corresponding adjustment in other company
CORPORATION TAXSELF ASSESSMENTCORPORATION TAXSELF ASSESSMENT
Due datesDue dates
• Filing of returns– 12m after end of period of account, or– 3m after date notice to file is issued
• Payment dates– Small/marginal companies
• 9m and one day after end of accounting period
– Large companies (paying tax at 28%)• Instalments on 14th of months 7, 10, 13 and 16
following start of accounting period• Based on estimate of corporation tax liability
Late filing penaltiesLate filing penalties
Initial fixed penalty £100Initial fixed penalty £100
Rises to £200 if return > 3 months lateRises to £200 if return > 3 months late
Fixed penalties rise to £500 and £1,000 for 3rd consecutive late returnFixed penalties rise to £500 and £1,000 for 3rd consecutive late return
If return 6 to 12 months late, extra tax geared penalty = 10% of tax unpaid 6 months after the filing date
If return 6 to 12 months late, extra tax geared penalty = 10% of tax unpaid 6 months after the filing date
If return >12 months late, tax geared penalty rises to 10% of tax unpaid 6 months after filing date
If return >12 months late, tax geared penalty rises to 10% of tax unpaid 6 months after filing date
Corporation tax returnsCorporation tax returns
• Penalties for incorrect returns and late notification of new taxable activity– Subject to standard penalty regime as for IT
• Amendments, errors and mistakes– Taxpayer can amend within 12m of filing date– HMRC correct by 9m from date return filed– Company can make error or mistake claim within 4
years of end of accounting period
HMRC powersHMRC powers
• Enquiries– HMRC issue written notice within 12m of filing– Company can appeal within 30 days
• Discovery assessments– HMRC can raise if discover inaccuracy in return
• Information and inspection powers– HMRC has the same powers in respect of
companies as for individuals
• Appeals– Company has same rights to appeal as individuals
VATVAT
VAT - introductionVAT - introduction
• Indirect tax
• Charged on – a taxable supply– by a taxable person – in the UK – in the course or furtherance of a business
• Output tax – charged on sales
• Input tax – incurred on purchases and expenses
VAT - types of supplyVAT - types of supply
TaxableExempt
No tax charged
Trader unable to register
Unable to reclaim input VAT
Zero rated Standard
0% 15% - up to 31.12.0917.5% - from 1.1.10
Trader able to register for VAT
Can reclaim input VAT
VAT - registrationVAT - registration
Compulsory
• Required when value of taxable supplies exceeds the registration threshold (i.e. £68,000)
• Taxable supplies includes zero rated and standard rated but not exempt supplies
Voluntary
• Traders making taxable supplies (standard rated or zero-rated) can register at any time
• Allows recovery of input tax
Registration testsRegistration tests
Historic test
• Test at the end of every month
• Look back over last 12 months
• Notify HMRC within 30 days of the end of the month in which limit exceeded
• Registered from start of next month
Future test
• Turnover in next 30 days will exceed limit
• Notify HMRC by the end of the 30 days
• Registered with effect from the beginning of 30 days
Voluntary registrationVoluntary registration
Advantages• Input tax recoverable• If making zero-rated supplies
VAT returns will show VAT repayable - can register for monthly returns to aid cash flow
• Avoids penalties for late registration
• May give the impression of a more substantial business
Disadvantages• Output VAT charged on sales
– if make standard rated supplies to customers who are not VAT registered will be an additional cost to them
– may affect competitiveness
• VAT administration
DeregistrationDeregistration
Compulsory deregistration
• When cease to make taxable supplies
• Inform HMRC within 30 days of ceasing to make taxable supplies
• Deregistered from :– Date of cessation – Agreed earlier date
Voluntary deregistration• Expect value of taxable
supplies in next 12 months to be ≤ £66,000
• Inform HMRC at any time• Deregistered from :
– Date of request– Agreed earlier date
VAT – further pointsVAT – further points
• Consequences of deregistration– Deemed supply of all business assets– Exclude items if no input tax reclaimed– Not payable if VAT on deemed supply <£1,000
• VAT returns– Quarterly – normal– Monthly - traders in repayment situation
• VAT inclusive amounts– VAT = gross amount × 15/115 (up to 31.12.09)– VAT = gross amount × 17.5/117.5 (from 1.1.10)
Tax pointTax point
Basic tax point
GoodsDate goods are available
Basic tax point is changed to
Later dateIf invoice is issued within
14 days after the basic tax point
Earlier datePayment made or invoice issued before basic tax
point
Actual tax pointDate of invoice
Actual tax pointDate of payment or invoice
ServicesDate services are completed
VAT – output taxVAT – output tax
• Value of supply– Discounts – include even if not taken up– Gifts
• Bad debt relief– Debt written off– 6 months – Claim relief as input tax
Transfer of going concernTransfer of going concern
• Outside scope of VAT
• Conditions– Business transferred as going concern– No significant break in trading– Transferee VAT registered or will become
so immediately after transfer– Same type of trade carried on after transfer
VAT – input VATVAT – input VAT
• Conditions for reclaim– Incurred by taxable person for use in business– VAT invoice
• Non deductible input VAT– Entertaining – Cars– 50% car leasing charges
• Motor expenses – 100% allowed if some business use– fuel costs allowed but VAT scale charge added to
output tax if any private fuel
Pre registration input VATPre registration input VAT
Conditions to reclaim input VAT:
Goods Services
Acquired in the 4 years before registration
Supplied in the 6 months before registration
Still held at date of registration
Schemes for small businessesSchemes for small businesses
• Cash accounting– Account for VAT on cash receipts/payments– Automatic bad debt relief– Join if turnover ≤ £1,350,000 and VAT up to date
• Flat rate scheme– Join if taxable turnover for next 12m ≤ £150,000– Pay VAT as % of turnover (% based on industry)
• Annual accounting– One VAT return pa – submit 2 m after y/e– POA in Months 4-12, balance with return– Join if turnover ≤ £1,350,000 and VAT up to date
VAT administrationVAT administration
• VAT invoices– Issue within 30 days of date of supply– Evidence for reclaiming input VAT– Must contain particular details
• VAT records– Retain for 6 years
• Discovery assessments, Information and inspection powers and Appeals– Same rules as for IT and CT
PenaltiesPenalties
• Late notification of liability to register and submission of incorrect return– Standard penalty regime as for IT and CT
• Default surcharge– HMRC issue surcharge liability notice if
VAT return or payment are late– Lasts 12 months– Further defaults extend period – Late VAT payments within12 months
attract surcharge
ErrorsErrors
Disclosure
• Small net errors can be voluntarily disclosed on next VAT return
• No penalty or penalty interest normally charged
• Small is higher of £10,000 or 1% turnover with upper limit of £50,000
• If not small then disclose separately and pay interest
Penalties
• Penalty can be charged in line with new penalty regime for incorrect returns (see Income tax and corporation tax)
VAT errorsVAT errors
• Default interest– On voluntary disclosure of errors > de
minimis limit– On assessments issued by HMRC to
collect undeclared / over claimed VAT
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