acca f6 taxation. exam paper 3 hours long 15 minutes reading time 5 compulsory questions –q1 –...

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


• 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


• 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

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


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


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


• 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


• 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


• 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


• 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

acca f6 taxation. exam paper 3 hours long 15 minutes reading time 5 compulsory questions –q1 –...

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