chapter 1 – an introduction to taxation

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CHAPTER 1 – AN INTRODUCTION TO TAXATION

Finance Act 2019

Chapter 1 – An Introduction to Taxation

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Introduction

A few years ago, there was an advert on television which claimed that “tax doesn’t have to be taxing”. This may or may not be the case, but there is no doubt that it can be complex and at times quite difficult to understand. Before you can understand the specific tax laws and regulations which you will need for your exam, it is useful to have an understanding of how the UK tax system is structured and how this impacts on the way in which tax is collected.

A Brief History of Tax

Tax has been collected by the Government for centuries to pay for things such as wars and crusades and, in more recent times, Government spending on items such as education, the welfare system, the NHS, local government, defence and so on. There have been many weird and wonderful taxes levied throughout history, but the main forms of taxation which are currently charged in the UK include:

• Income Tax – levied on the earnings of individuals, including profits from self-employment

• Corporation Tax – levied on the profits of limited companies

• Capital Gains Tax – levied on both individuals and limited companies on gains made by selling assets

• Value Added Tax (VAT) – A tax on expenditure of many goods and services

• Inheritance Tax – levied on the estates left by people when they die

There are many other taxes, but these are the main ones you will probably have heard of. In this unit, you will only study Income Tax and Capital Gains Tax, along with National Insurance.

Tax Legislation and Case Law

The Government’s power to raise revenue through taxation is enshrined in a number of Acts of Parliament – known as statutes.

Each year, the Chancellor of the Exchequer produces a budget, in which the Government’s taxation plans for the forthcoming year are laid out. This leads to a new Finance Act becoming law each year, containing the tax rules and rates for that tax (or fiscal) year.

The fiscal year runs from 6th April each year until the following 5th April. The Finance Act 2019 therefore applies to the fiscal year 2019/20, which runs from 6th April 2019 to 5th April 2020.


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In addition to the specific tax statutes and the annual Finance Act, the government will also issue Statutory Instruments (S.Is) – these are not statutes in their own right but are detailed regulations which describe how various elements of the statutes should be implemented.

Furthermore, the UK Tax System has been ‘shaped’ by historical and ongoing legal cases which arise as a result of disputes between HMRC and a taxpayer. These cases – heard and resolved in a tribunal or court – provide guidance on how similar disputes in the future should be resolved.

The Principles of the Tax System

Taxation is the primary method by which Government collects revenues from its citizens, which it then uses to finance public expenditure such as the NHS, armed forces, education, the welfare system and so on.

The key principles of a modern taxation systems are:

Equality or Fairness – the tax burden should be shared amongst all tax payers. It is acknowledged, for example, that wealthier members of society have a greater ability to pay tax than those on the lowest incomes - and so many would say that the wealthier should pay more taxes than the poor.

Certainty – taxpayers should be clear and certain what taxes they owe each year. There should be no ambiguity as to how much should be paid, when it must be paid or how it will be paid. There should be no ‘loopholes’ by which taxpayers can find ways to pay less tax than they should.

Convenience – taxpayers generally do not like to pay tax; the tax system should therefore be designed in such a way as to make the process of paying tax as straightforward and ‘painless’ as possible. In the UK, there have been significant changes in the way in which tax is paid in recent years, due to developments such as the self-assessment process and Making Tax Digital. These are designed to improve the convenience of paying tax for individuals and companies.

Economy – the receipts of taxation go towards public expenditure; therefore, it is essential that as little as possible is wasted in funding the collection process. The benefit of imposing a tax which raises £20 million is greatly diminished if it costs £15 million to administer and collect the tax!

Neutrality – the tax system should not be biased towards or against particular sections of society

Flexibility – whilst the tax system must be robust and certain enough to prevent loopholes, it must still retain a degree of flexibility. This is largely addressed in the UK through the annual Finance Act, which allows the government of the day to set rates and allowances to whatever level it feels are necessary to address its budgetary requirements and manifesto commitments. For example, if the Government is trying to stimulate spending in the economy it could choose to reduce income tax or VAT rates.


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Does not discourage investment – investment by businesses is a key element of allowing a nation’s economy to grow – investment in new factories, research and development or other growth activities creates jobs and wealth (which in turn creates higher tax revenues). Whilst companies are generally taxed on their profits, if the level of taxation is too high it could strip money out of companies who would otherwise invest it.

Tax Structures

The tax structure is the combination of the tax base, thresholds, bands and tax rates that are applied. The tax base is the total income or assets to which a particular tax can be applied. For example, the tax base for both income tax and National Insurance is the total level of income across the whole of the UK. However, this does not necessarily mean that all of UK income is taxed. As you will see later in this book, there are thresholds below which an individual will pay no tax, and bands above which the rate of tax will increase. Adjustment of these thresholds and bands will affect the tax base, whilst adjustment of the prevailing rates of taxation will affect the percentage of the tax base which is collected.

For example, every UK taxpayer has a Personal Allowance in 2019-20 of £12,500 – they do not pay tax on any income up to this level. If the Government decided to raise the Personal Allowance, each taxpayer would pay less tax and the tax base would be reduced – and if nothing else changed the Government would receive less tax revenue.

Progressive, Regressive and Proportional Tax Systems There are many different (and often very complex) ways in which a Government can create a taxation system. As we saw earlier, one of the key principles of a taxation system is fairness. A tax system can be assessed as being either Progressive, Regressive or Proportional.

Under a Progressive tax system, the more an individual earns (or the greater their wealth), the higher the proportion of tax that they will pay. The UK income tax system is broadly progressive, as individuals with income under £12,500 pay no tax on it whilst those with income above £12,500 pay tax at 20% on any income above the £12,500 threshold. This rate then increases to 40% for income above £37,500 (after the personal allowance) and 45% for income above £150,000. You will study this in much more detail later in this text.

A Regressive tax system is one in which an individual tax payer pays a lower proportion of their income or wealth the higher their income or wealth is. For example, National Insurance is a regressive tax (you will study this in more detail later in this book) because higher earners actually pay a lower percentage of National Insurance overall. Employees pay National Insurance at a rate of 12% on any earnings between £8,632 and £50,000, and at a rate of 2% on any earnings above £50,000. Therefore, an employee earning £45,000 would pay National Insurance Contributions of (£45,000 - £8,632) x 12% = £4,364. An employee with an income of £80,000, however, would pay (£50,000 - £8,632) x 12% plus (£80,000 - £50,000) x 2% which is £5,564. Although the higher earner pays more National Insurance in total, when we compare the percentage of their earnings which is paid, we can see why National Insurance is a regressive tax. The lower earner pays (£4,364 / £45,000 x 100) = 9.7% of their earnings, whilst the higher earner pays £5,564 / £80,000 = 6.96%.


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A Proportional tax system is one whereby the proportion of an individual’s earnings paid in tax is the same, regardless of the level of those earnings. For example, a flat rate of tax on all earnings (and with no personal allowance or tax bands) would be proportional.

Her Majesty’s Revenue and Customs (HMRC)

HMRC is the government organisation responsible for administering the UK’s many varied and complex tax laws, ensuring that the correct amount of tax is collected from each individual taxpayer and company each year.

In addition, HMRC provide support to taxpayers and tax practitioners in making sure they submit their tax returns correctly and on time. There is a lot of support on the HMRC website, including the following:

• Statements of Practice – these are HMRC’s interpretation of the law and how they intend to apply it

• Extra-Statutory Concessions – in some situations HMRC may elect not to apply the strict letter of the law – for example, where it would be unfair. However, these situations are becoming rarer and so the number of Extra Statutory Concessions (ESCs) is expected to fall in coming years

• Explanatory Leaflets – providing basic guidance to a wide range of tax issues

• Revenue & Customs Briefs – these give the HMRC view on specific points of tax legislation

The HMRC website (via the ‘Government Gateway’) is also used for individuals and tax practitioners to access, complete and file their annual tax returns. For individuals, this process is known as self-assessment.


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Domicile and Residence

Complications may arise in calculating an individual’s tax liability if some of the income was earned outside the UK, or if the individual spends prolonged periods of time outside the UK. Rules are required to ensure that any income earned is taxed correctly, and is not taxed more than once.

Residence is the test applied to identify where the taxpayer lived during the tax year. Taxpayers are generally classed as being resident in the UK so long as they spend at least 183 days during the year in the UK. Individuals who are classed as being resident in the UK are generally liable to UK tax on all their income, regardless of where in the world it is earned. However, non-UK residents are only liable to pay UK Income Tax on any income that arose in the UK.

Domicile is the test applied to identify the taxpayer’s usual home. This test can be particularly important in Inheritance Tax. There are new rules which apply from 6th April 2017 regarding deemed residence – these rules apply to individuals who are not domiciled in the UK under Common Law. Such individuals are deemed to be domiciled in the UK if they meet either of the following conditions:

Condition A – the individual was born in the UK, their domicile of origin was the UK and were resident in the UK for the 2017-18 tax year (or later years)

Condition B – the taxpayer has been UK resident for at least 15 of the 20 years immediately before the tax year in question

Where a taxpayer is classed as UK Resident but not UK domiciled (or deemed UK domiciled), they will be taxed in full on any UK income and gains. Any overseas income will be taxed either on:

The ‘arising basis’ – worldwide income and gains is UK taxed regardless of where in the world it arose

The ‘remittance basis’ – UK tax is only applied to overseas income which is actually brought into the UK – however, the taxpayer must also pay a ‘remittance basis charge’ of either £30,000 or £60,000 per tax year.

UK domiciled taxpayers are subject to Inheritance Tax on property anywhere in the world. Non-UK domiciled taxpayers must generally only pay Inheritance Tax on property within the UK. You will study Inheritance Tax in more detail later in this book.

You will not be extensively tested on residence and domicile in your assessment, but must be aware of the difference between the two.


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Calculating the Tax Liability

Calculating an individual’s tax liability for the financial year can be a complicated process. So long as you adopt a logical and structured approach it will make sense.

Essentially you must determine how much income the individual has – this could come from a range of different sources including employment, self-employment, property, interest and dividends. Once the income has been determined, the next stage is to deduct the individual’s personal allowance – this is the amount of tax free income the individual is entitled to receive. For most individuals in 2019-20 this is £12,500. Once this has been deducted from the total income, the remainder is taxable income – although different types of income are taxed differently.

Don’t worry at this stage about the complexities of the tax computation – this is covered in a lot more detail in later chapters. For now, just be aware that individuals receive a proportion of their income tax free (usually the first £12,500) and then must pay tax on each form of income according to the rules for that tax year.

The tax liability for any year must be paid to HMRC by 31st January following the end of the tax year – for 2019-20 this means that any tax must be paid by 31st January 2021. For employees (whose income is taxed at source through Pay As You Earn) and those with relatively straightforward tax affairs there is often no need to pay any additional tax as it will have been taxed at source.

Tax Tables and Further Information

Taxation is a complex subject with lots of rules, regulations and rates to learn and remember. In the ‘real world’, of course, accountants can refer to tax guides or information on the internet.

In your AAT Personal Examination, you will be given on-screen tax tables and other information. This is extremely useful in your exam, as you can check specific values or rates before completing tasks; however, these tables should only be used as confirmation of your knowledge. Do not rely on the presence of these tables as a substitute for proper learning, revision and practice.

The tax reference tables which will be provided in your examination can be found at:

https://www.aat.org.uk/myaat/login?destination=/system/files/study_resources/PLTX_FA2019-tax-tables.pdf

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CHAPTER 2 - INCOME FROM EMPLOYMENT

OBJECTIVE

Understand what is meant by “employment income”

SKILLS

Distinguish between employed and self-employed taxpayers Identify when payment to employees should be taxed

Chapter 2 – Income from Employment

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Introduction

It is particularly important to identify whether an individual’s earnings are derived from employment or self-employment, as the tax treatment of each is different.

Employed or Self-Employed?

It is usually fairly obvious whether an individual should be considered to be employed or self-employed. However, with the development of the so-called gig economy, this distinction is becoming quite blurred for a number of people in a wide range of jobs.

It is important to identify whether a tax payer should be classed as employed or self-employed as there are some significant differences in the ways in which their income will be taxed.

Contract of Service or Contract for Services

It is a legal requirement for employers to provide employees with a contract of service, which typically outlines key aspects of the employment such as working hours, salary, entitlement to holidays and sick pay, conduct requirements and so on.

It is also commonplace for individuals or firms agreeing work with customers or clients to raise a contract for services before the work is carried out. This will identify the work to be completed, timescales, price and so on.

Both types of contract provide a legally binding agreement between the two parties. Therefore, it can be useful to examine whether an individual has a contract of service, or a contract for services.

If it is established that the taxpayer has a contract of service this is likely to indicate employment; a contract for services, on the other hand, is suggestive of self-employment.

Relative Advantages of Employment or Self-Employment

There are often tax advantages for an individual who is treated as self-employed rather than an employee. For example, they will be able to claim back any expenses they incurred in running the business – this will reduce their profit and therefore their tax liability. Furthermore, National Insurance contributions are likely to be lower when self-employed. Both of these areas will be considered in more detail later in this book.


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Being an employee also has advantages. These typically include:

• Protection against unlawful deduction from wages

• The right to receive the National Minimum Wage

• The right to paid holidays

• The right to be accompanied at a grievance or disciplinary hearing

• Protection when whistleblowing (reporting illegal or unethical practices)

• Protection against discrimination

• The right to equal treatment for part-time workers

• Protection against being disadvantaged for trade union membership

The Three Core Tests of Employment

There are three core tests which are applied in determining whether or not an individual is employed or self-employed. These are:

• Mutuality of Obligation (MOO) – whether both parties have obligations towards each other

• Control – who controls key decisions such as when and where to work, and how the work must be completed

• Personal service – whether the individual must complete the work themselves, or whether they can appoint someone else to do it.

The more influence and control the other party (the employer or client) can exert on the taxpayer, the more likely it is that the taxpayer must be considered to be employed. Conversely, the more control an individual has, the more likely it is that they will be classed as self-employed.

HMRC are constantly testing the ‘employed status’ of workers in the so-called gig economy where the distinction between being employed or self-employed is often very blurred.


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Case Study – Pimlico Plumbers In 2018, the Supreme Court rejected an appeal from Pimlico Plumbers over an earlier ruling relating to the employment status of a plumber, Gary Smith. Smith was a plumber who worked on a self-employment contract basis exclusively for Pimlico Plumbers for six years. After suffering a heart attack, Smith requested a reduction in his work schedule from five days a week to three. His request was denied and he was dismissed.

Although Smith paid self-employed tax and was VAT-registered, the Court of Appeal ruled that he was an employee based upon his lack of control over the work, as he was contractually obliged to do a minimum number of hours work a week and did not have the right to transfer his work to a subordinate.

The Supreme Court judgement said: “The dominant feature of Mr Smith’s contracts with Pimlico was an obligation of personal performance.”

Further information on this case can be found at:

https://www.lawgazette.co.uk/law/supreme-court-dismisses-appeal-in-pimlico-plumbers-employment-case/5066462.article

Example 2.1

Jennifer works for Gollum Ltd, a graphics design company for three days a week. She works at the company’s premises in London between 9.00a.m. and 5.00p.m. on Mondays, Tuesday and Wednesdays as a video film producer. She is given assignments by her manager and is expected to work on these (using the company’s equipment) during her time at work. When Jennifer had a two week holiday in Scotland recently, she received holiday pay from her employer.

Jennifer also does freelance video production work for a wide range of clients when she is not working for Gollum Ltd. She carries this work out at her home, picking up leads from a specialist website. She has a profile page on this website and also a showcase of her previous work, meaning that potential clients can approach her to do work on their behalf. Jennifer uses her own equipment, and is free to accept or decline approached from potential clients and to negotiate the fees she charges to them.

Identify whether Jennifer is likely to be considered employed or self-employed for each of her sources of income.


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Solution 2.1

Jennifer is likely to be considered as an employee of Gollum Ltd, but her income from the other work she does is more likely to be considered to be from self-employment.

Factors Suggesting Employment

Any of the following factors could indicate an individual is employed – and conversely where any of the opposites are true, this would suggest self-employment. A ‘balanced’ approach is taken in forming the final judgement, as every individual is different.

• The individual has little responsibility for investment or management of the business

• The individual cannot usually choose when or where he works

• The individual only works for one organisation

• The wording in any contract is indicative of employed status

• The individual does not provide the majority of tools or equipment

• The individual is not able to hire other helpers

• The individual must be offered further work, and must accept this work

• The individual has little financial risk attached to the work

• The individual is entitled to sick pay and holiday pay

• The individual has little scope to benefit from sound financial management


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Case Study

In March 2019 the television celebrity Lorraine Kelly won a dispute over an outstanding £1.2 million tax bill (approximately £900,000 income tax and £300,000 national insurance).

HMRC claimed that she was an employee of ITV when she was hosting the shows “Lorraine” and “Daybreak”. Her management company had signed a contract in 2012 which HMRC claimed was a contract of employment.

However, the tribunal ruled that the contract was a contract for services – that Ms Kelly ‘performs’ on the television shows and that in effect ITV pay for the performance as a ‘chatty personality’. Because the contract had no provisions for sick pay or holiday, and because Ms Kelly was free to work elsewhere, the judge ruled that she was not an employee. Ms Kelly could be classed as a "theatrical artist", which would mean any payments to an agent would be allowed as a tax-deductible expense.

Further details on this case can be found at https://www.bbc.co.uk/news/entertainment-arts-47648053

CHECK YOUR LEARNING 2.1

Henry is a musician. He plays regularly for the Mellingham Symphony Orchestra, including undergoing tours of the country and concerts in a wide range of cities and towns around the UK. He is committed to 108 appearances with the orchestra over the next twelve months. He also offers music lessons to children, writes books on the history of music for a publisher, and occasionally deputises for other musicians in other bands.

Examine Henry’s different sources of income and identify whether each is likely to be considered to be from employment or self-employment.

The answer to this task can be found at the end of this chapter.


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When Is Income Earned?

One key issue in determining how much income from employment an individual has earned during a tax year is deciding when any income is deemed to have been earned.

All employment income is deemed to have been earned on the earlier of:

• The time that payment is actually made, and

• The time the employee becomes entitled to the payment

For directors of limited companies, the income is deemed to have been earned on the earliest of:

• The date that payment is actually made

• The date the employee becomes entitled to the payment

• The date when the payment is credited in the company’s accounting records

• The end of the company’s period of account (if the amount of the payment has been determined by then)

• The date the amount is actually determined (if after the end of the period of account)


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Example 2.2

Paul is an employee of Brechin Ltd. His salary at the start of 2019-20 is £35,700 per annum. From 6th October 2019 Paul receives a 3% pay rise. On 6th March 2020 the company announced that all staff would receive a performance-related bonus payment of £1,800 in relation to the company achieving its strategic objectives for 2019-20. The company announced that this bonus would be paid in the payroll at the end of April 2020.

Calculate Paul’s income from employment for 2019-20?

Solution 2.2

£35,700 x 6/12 = £17,850.00 (6th April – 5th October 2019)

£36,771 x 6/12 = £18,385.50 (6th Oct 2018 – 5th April 2020)

£36,235.50

Plus Bonus £ 1,800.00

£38,035.50

Example 2.3

Shane is a director of Locherne Ltd. On 24th April 2019 the company decided that Shane is entitled to a bonus payment of £6,000 in relation to the company’s period of account which ended on 31st March 2019. Shane is entitled to receive this bonus on 1st July 2019, but the company actually credits the money to his directors’ account on 21st June. Shane doesn’t actually withdraw the money until 3rd August.

Identify on what date Shane is deemed to have received the bonus for tax purposes.


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Solution 2.3

Shane is a director of the company, so the income is deemed to have been earned on the earliest of:

• The date that payment is actually made (3rd August)

• The date the employee becomes entitled to the payment (1st July)

• The date when the payment is credited in the company’s accounting records (21st June)

• The end of the company’s period of account if the amount of the payment has been determined by then (not applicable in this scenario as the amount had not been determined)

• The date the amount is actually determined (if after the end of the period of account) (24th April)

The earliest of these dates is 24th April 2019, and so the bonus payment will be treated as being received on this date.

Example 2.4

Lawrie is a director of Carnoustie Ltd. On 13th November 2019 the company decided that Lawrie is entitled to a bonus payment of £9,000 in relation to the company’s period of account which ended on 31st December 2019. Lawrie is entitled to receive this bonus on 1st April 2020, but the company doesn’t actually credit the money to his directors’ account until 10th April. Lawrie doesn’t actually withdraw the money until 15th May 2020.

Identify on what date Lawrie is deemed to have received the bonus for tax purposes


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Solution 2.4

Lawrie is a director of the company, so the income is deemed to have been earned on the earliest of

• The time that payment is actually made (15th May 2020)

• The time the employee becomes entitled to the payment (1st April 2020)

• The time when the payment is credited in the company’s accounting records (10th April 2020)

• The end of the company’s period of account (if the amount of the payment has been determined by then) (31st December 2019)

• The date the amount is actually determined if after the end of the period of account (not applicable in this case as the amount was determined before the end of the period of account)

The earliest of these dates is 31st December 2019, and so the bonus payment will be treated as being received on this date.

CHECK YOUR LEARNING 2.2

Brenda is a director of Rhino Ltd. On 15th April 2019 the company determines that Brenda is entitled to a bonus payment of £8,000 in relation to the company’s period of account which ended on 31st March 2019. Under the terms of her contract, Brenda is entitled to receive this bonus on 1st August 2019, but the company actually credit the money to her director’s account on 30th June. However, she doesn’t actually withdraw the money until 1st September.

On what date is Brenda deemed to have received her bonus?

The answer to this task can be found at the end of this chapter.


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Pay As You Earn (PAYE)

All employers must deduct income tax from employees under the PAYE system. The tax collected should include tax due on all money earnings (i.e. salary or wages) and also on any benefits in kind. Employees therefore receive their pay net of tax at the appropriate rate. This means that most employees do not face a tax liability at the end of the tax year in respect of their employment income; however, it does still form a vital part of an individual’s tax computation.

The PAYE system requires an employer to collect tax from the employee’s pay on behalf of HMRC. At the end of each period the employer informs HMRC how much the employee has been paid and how much tax they have had deducted.

Every individual has a tax code; this is given to the employee by HMRC and helps the employer to calculate how much tax they should deduct from the employee`s pay. In 2019-20, most individuals’ tax codes will be 1250L. The numbers in the tax code relate to the amount of Personal Allowance the individual is entitled to (in 2019-20 the standard Personal Allowance is £12,500 – this will be explored in more detail in a later chapter) and the letter relates to the individual’s personal circumstances which may alter how much allowance they can receive. An individual may have more than one tax code – for example, a taxpayer with two jobs may have tax code 1250L applied to earnings from the main job, and tax code BR applied to the second job (meaning all income from that job should be taxed at the basic rate). A tax code of D0 would be applied if all income from a particular employment is to be taxed at the higher rate; for example, a taxpayer with a main salary of £60,000 a year who also has a second job which pays £8,000 a year will be given a tax code of D0 in relation to the second job.

The tax code is a vital piece of information for all employers.

The employer should deduct enough tax each week/month so that at the end of the year the employee has paid the correct amount of tax on their wages.

P45 and P60

When an employee leaves their job they are given a P45. This shows how much money the employee has earned in the tax year, and how much tax they have paid on those earnings.

The P45 contains a number of sections, although each contains broadly the same information.

Part 1A is for the employee to keep for their records.

Part 2 is used by a new employer to continue the payroll correctly for the new employee, taking into account their earnings from the previous job.

Part 3 is completed by the new employer and then returned to HMRC so that the transfer of employment can be recorded.


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Any employee who is in post on 5th April each year is entitled to receive a P60. Employers can choose to use any design of P60 they wish, although it must be approved by HMRC. The P60 is an ‘end of tax year’ summary of the individual’s earnings from that employment during the tax year; it shows the total amount paid to the employee and any tax deducted. The information on the P60 (as well as any P45s) is essential if the individual needs to complete a self-assessment tax return. All employees must be given their P60 by 31st May following the end of the financial year.

If a new employee does not have a P45 (perhaps because it is their first job, or because they have not yet received it from their previous employer) they must complete the New Starter Checklist form which is available on the HMRC website.


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Answers to Check Your Learning Tasks

ANSWER 2.1

Henry would need to consider all the factors for each of his sources of income. His income from the orchestra would probably be classed as employment income, due to the ongoing nature of the work, his commitment to future tours and lack of choice over when and where to play, and his lack of involvement in management or investment.

His income from teaching children, on the other hand, is probably classed as self-employment – he would expect to benefit financially from his work, and has far greater choice over when and where to work. If the teaching business expanded, he could hire other staff to carry out lessons for him.

The arrangement with the publisher may be a difficult situation to classify; it is likely to be determined by issues such as any commitment to write a number of books over a period of time, how much time a week he spends writing and so on.

When Henry deputises for other musicians, he presumably has the choice to accept or decline the offer to work and has no ongoing commitment to accept further work – suggesting income from this would most likely be classed as self-employment.

In all cases it would be useful to see the exact wording of any agreements or contracts, as this may also indicate how the income is to be treated


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ANSWER 2.2

Brenda is a director, so is deemed to receive the bonus on the earliest of:

The time that payment is actually made (1st September 2019)

The time she becomes entitled to the payment (1st August 2019)

The time when the payment is credited in the company’s accounting records (30th June 2019)

The end of the company’s period of account if the amount of the payment has been determined by then. This is not applicable in this case as the amount hadn’t been determined at that date

The date the amount is actually determined (if after the end of the period of account) (15th April 2019)

The earliest of these dates is 15th April 2019, and so the bonus payment will be treated as being received on this date.

chapter 1 – an introduction to taxation

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