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Notes ACCA Paper F6 (UK) Taxation (UK) For exams in 2013

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ExPress Notes ACCA F6 Taxation UK

Contents

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About ExPress Notes

3

1.

Introduction

7

2.

Income tax – an introduction

9

3.

Income Tax – Employment Income

12

4.

Income Tax – Trading Income

16

5.

Capital Allowances

19

6.

Trading Income – Basis Assessment

23

7.

Trading Losses (For Sole Traders)

25

8.

Trading Income - Partnerships

28

9.

Property Income

30

10.

Investment Income

32

11.

Pensions

34

12.

National Insurance Contributions

36

13.

Corporation Tax

38

14.

Chargeable Gains (For Companies)

44

15.

Corporate Groups and Overseas Tax Issues

46

16.

Capital Gains Tax (CGT)

49

17.

Inheritance Tax (IHT)

54

18.

Value Added Tax (VAT)

59

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ExPress Notes ACCA F6 Taxation UK

START About ExPress Notes We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: • • • •

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ExPress Notes ACCA F6 Taxation UK

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ExPress Notes ACCA F6 Taxation UK

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ExPress Notes ACCA F6 Taxation UK

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ExPress Notes ACCA F6 Taxation UK

Chapter 1

Introduction

START The Big Picture Paper F6 (UK) introduces candidates to the core principles of taxation in the UK. The paper is mainly computational and there are 5 compulsory questions in the exam. Taxation can get very complicated with a number of detailed calculations and lots of intricate rules to remember. A successful candidate must have a good understanding of the core areas of taxation. It is vital therefore that candidates understand the key areas and do not get bogged down in the detail. The main taxes are: • Income tax – payable by individuals • Corporation tax – payable by companies • Capital Gains tax (CGT) – payable by individuals (companies pay corporation tax on their capital gains) • Value Added Tax (VAT) – payable by both companies and unincorporated businesses • National Insurance Contributions (NIC) – not strictly a tax but payable by individuals and employers.

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ExPress Notes ACCA F6 Taxation UK

Question 1 in the exam will focus on income tax and question 2 will focus on corporation tax. Paper F6 has a comprehensive syllabus. These ExPress notes are designed to provide guidance on the core areas of the syllabus. Whilst we believe that the items contained herein have a strong chance of being examined, no guarantee can be provided as to what will be examined. Taxation legislation can change rapidly. These notes are designed to provide assistance for students taking the F6 (UK) ACCA exam in 2013. These notes should not be used for any other purpose. The ExP Group explicitly denies liability for any action taken as a result of using these notes. The ExP Group does not warrant in any form that these notes represent the tax legislation as at the date of reading of these notes.

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ExPress Notes ACCA F6 Taxation UK

Chapter 2

Income Tax – An Introduction

START The Big Picture Income tax is a key area and will be examined.

KEY KNOWLEDGE Income Tax – An Introduction

Individuals who are UK tax resident will be taxed on their worldwide income. The period of assessment is the tax year. The tax year runs from 6 April to 5 April. For example, the tax year 2012/13 runs from 6 April 2012 to 5 April 2013 (2011/12 runs from 6 April 2011 to 5 April 2012 and so on) All of an individual’s income arising in the tax year will be assessed in the tax year.

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ExPress Notes ACCA F6 Taxation UK

KEY KNOWLEDGE Pro-forma Tax Computation – 2012/13

This is the base document for calculating an individual’s liability to income tax. The pro-forma income tax computation is as follows: INCOME TAX COMPUTATION – 2012/13 £ Employment income

10,000

Trading income

25,000

Property income

5,000

Bank interest (x 100/80)

1,000

UK dividends (x 100/90)

1,000

Total income

42,000

Less: reliefs

(2,000)

Net income

40,000

Less: Personal allowance (PA)

(8,105)

Taxable income

31,895

Certain income is exempt from income tax including: • • •

Income from certain National Savings Products Income from Individual Savings Accounts (ISA) Gambling or betting winnings

Personal Allowances (PA) Every tax payer is entitled to a PA. For 2012/13 this amount is £8,105. It is an income tax personal allowance and cannot be set against any other tax liability such as CGT. The PA is deducted from an individual’s income to give taxable income. From 2010/11 the PA is reduced for individuals with income >£100,000. The reduction is based on adjusted net income (ANI).

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ExPress Notes ACCA F6 Taxation UK

Adjusted Net Income: Net income

X

Less: gross gift aid donations

X

Less: gross personal pension contributions

X

ANI

X

If ANI is >£100,000, the PA is reduced by 50% x (ANI - £100,000). Therefore, individuals with ANI >£114,950 do not get a PA. Personal Age Allowances (PAA) Individuals who are aged ≥ 65 years old are entitled to a PAA (in effect, a higher rate of PA). Individuals aged 65 – 74: 2012/13 PAA = £10,500 Individuals aged ≥ 75: 2012/13 PAA = £10,660 The PAA is given in full in the year the individual becomes 65 or 75. The PAA is aimed to protect elderly people with lower incomes. If however a person who is entitled to a PAA has ANI above £25,400 (2012/13) the PAA is reduced by: 50% x (ANI - £25,400) The PAA can never be reduced to less than the standard PA (£8,105) but note that if an individual has ANI > £100,000 there will be a reduction in the PA as mentioned above. Income Tax Liability and Income Tax Payable Once the taxable income has been calculated, the income tax liability can be calculated. Note that taxable income is after Personal Allowances. The rate of income tax depends on the type of income. Employment income, trading income, property income and bank interest (i.e. all income except dividends) are taxed at the following rate for 2012/13:

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Basic rate

£1 to £34,370

20%

Higher rate

£34,371 to £150,000

40%

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ExPress Notes ACCA F6 Taxation UK

Additional rate

£150,001 and above

50%

Income tax on Dividend income is either at 10%, 32.5% or 42.5%. The summarised income tax rates are: Other income

Saving income *

Dividend income

£1 to £34,370

20%

20%

10%

£34,371 to £150,000

40%

40%

32.5%

£150,001 and above

50%

50%

42.5%

(these rates will be provided in the exam)

* Note that special rates of tax may apply to savings income if it is in the first £2,710 of income.

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ExPress Notes ACCA F6 Taxation UK

Chapter 3

Income Tax – Employment Income

The Big Picture Employment income represents all income and benefits an individual receives from his or her employment.

KEY KNOWLEDGE Income Tax – Employment Income Earnings Earnings are taxed on the receipts basis. i.e. the amount of earnings received in the tax year. There are special rules for directors to prevent them manipulating the receipt date. “Earnings” include salaries, wages, bonuses and benefits received by an individual.

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ExPress Notes ACCA F6 Taxation UK

As an example, if an individual receives a salary of £20,000 and benefits of £6,500 his total employment income will be £26,500. This figure then goes to the income tax computation. Benefits Benefits are regularly tested at Paper F6. Exempt benefits include: • • • •

One mobile phone. Relocation and removal expenses up to £8,000. Employer funded training (if training relevant for the job). Staff canteen or restaurant (provided it’s made available to all employees)

The calculation of the taxable benefit is reduced proportionally if the benefit is provided for only part of the tax year. In most cases, contributions towards the provision of the benefit are deducted in the calculation of the benefit. Assessable benefit – Living Accommodation An employee provided with living accommodation as a result of his employment and which is not exempt job related accommodation would be assessed as follows: Benefit

All properties

Additional charge for “expensive properties”

Higher of: 1. Annual value of the accommodation (figure will be given in the exam). 2. The rent paid by the employer. (Cost* minus £75,000) x official rate of interest at the start of the year, 4% for 2012/13 (interest rate will be provided in the exam).

* If the employer acquired the property more than 6 years before providing it to the employee the market value, when first provided to the employee, should be used rather than cost. Assessable benefit – motor cars This is one of the most common benefits provided to employees and is examined on a regular basis.

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ExPress Notes ACCA F6 Taxation UK

Benefit: List price when new x “relevant %”. Note the list price is the published brochure price when the car was first registered. The relevant % depends on the CO2 emissions of the car with the broad concept being that the more un-environmentally friendly the car is the higher the tax charge. For petrol cars the % is calculated as follows: CO2 emissions

% (for petrol cars)

≤75 grams 76 - 99 grams 100 grams or more

5% 10% 11%

Each complete 5 grams above 100 grams

Add an additional 1% to the 11% up to a maximum of 35%.

For diesel cars 3% is added to the figures above but the maximum is still 35%.

EXAMPLE 1 Petrol Car John is provided with a petrol car with a list price of £22,000 and CO2 emissions of 147 grams. He makes a contribution of £100 per month for the use of the car. Answer 1: Percentage: Base % Plus 1% for each complete 5 grams of CO2 above 100 grams (i.e. 100 to 145 = 9%)

11% 9%

Relevant %

20%

% x list price = 20% x £22,000 Less contributions (£100 x 12 months) Taxable benefit

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£4,400 (£1,200) £3,200

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ExPress Notes ACCA F6 Taxation UK

Note that the benefit present when a car is provided is inclusive of servicing and maintenance costs but does not include any private fuel that is paid for by the employer.

Assessable benefit – private fuel Some employers may pay all or part of the private fuel bill of an employee. The provision of fuel for private use is a separate benefit from the provision of a car. The benefit is calculated as follows: “Relevant %” as calculated for the car benefit x “base figure”. For 2012/13 the base figure is £20,200 and will be given in the exam. Using the previous example, if the individual had been provided with fuel for private use the calculation of the benefit for the provision of private fuel would be: (“Relevant %” as calculated for the car benefit x “base figure”) = 20% x £20,200 = £4,040. Assessable benefit – private use of vans The benefit for the private use of a van is a flat rate scale of £3,000 pa. If fuel is provided for private mileage then this is assessable at a £550 benefit charge. Private use of employer’s assets For private use of assets other than cars, vans and mobile phones (which have different rules) the general rule is that the benefit is: 20% of an asset’s market value at the time it was first provided. Gift of asset – no previous private use. If an employer buys an asset and then it is given to an employee the benefit is the cost of the asset to the employer. Gift of asset – after previous private use If an asset has been used by an employee and then given to him the benefit is calculated as follows:

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ExPress Notes ACCA F6 Taxation UK

Higher of: 1. The market value of the asset when gifted. 2. The market value of the asset when first made available less the benefits assessed on the individual during the time the individual used it but didn’t own it.

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ExPress Notes ACCA F6 Taxation UK

Chapter 4

Income Tax – Trading Income

START The Big Picture Trading income is a very important part of the syllabus and is almost always examined in one way or another.

KEY KNOWLEDGE Income Tax – Trading Income A person receives trading income if he has his own “business”. A person who receives trading income is known as one of the following: • a “sole trader” • self employed • independent consultant A person who is employed by a company receives employment income and not trading income.

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ExPress Notes ACCA F6 Taxation UK

Note that a person can receive both employment income (e.g. he has a part time job) and trading income (e.g. he has a part-time business whereby he trades by selling items on eBay) Badges of trade This is the term which refers to various tests (or badges) to ascertain whether a particular transaction that an individual undertakes is a capital item (and hence treated under CGT) or a trading item (and hence treated under income tax). Badges: 1. Subject matter – are the items that were transacted typically items that are used for trading? 2. Frequency of transactions – the more often the transaction is undertaken the more likely it is that the item will be trading. 3. Length of ownership – a shorter period of ownership is more likely to indicate trading. 4. Profit motive – a clear indication to make a profit may indicate a trading item. 5. Supplementary work and marketing – additional work undertaken on the items to make them more marketable may indicate trading. 6. Method of acquisition – an involuntary acquisition of the item (e.g. through inheritance) may indicate capital. Basis of assessment An individual who is self employed must prepare accounts. These accounts can be for whatever accounting period end that he chooses. The accounts are then adjusted for tax purposes to get the trading income figure (see adjustment of accounting profit section below). The trading income figure is then assessed on the individual using the current year basis rules. This is where the trading income assessed in a tax year is the amount in the 12 month accounting period ending in that tax year. For example, an individual that prepares accounts to 31 December and has adjusted trading income of £35,000 for the year ended 31 December 2012 would have trading income of £35,000 in the tax year 2012/13.

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ExPress Notes ACCA F6 Taxation UK

Adjustment of the accounting profit An individual’s accounts must be adjusted to obtain the tax adjusted trading profit. Tax adjusted trading profit Net profit per accounts Add:

Less:

28,000

Disallowed expenditure Taxable trading income not included in accounts

5,000 4,250

Income included within the accounts but not taxable as trading income Expenditure not in the accounts but allowable as a trading deduction Capital allowances

9,250 37,250

1,000 250 3,000

Tax adjusted trading profit

(4,250) 33,000

Disallowable expenditure General rule – Only expenditure incurred wholly and exclusively for the purposes of the trade is allowable. Some of the more common forms of disallowable expenditure include: •

Capital expenditure

Depreciation or amortization charges

Appropriations (withdrawals) of funds from the business by the sole trader

Excessive salary paid to a sole trader’s family member

3rd party entertaining (note that employee entertaining is allowable)

The write off of a non-trade debt

Subscriptions that are not related to the trade

Gifts to customers are disallowable unless they satisfy all of the following: o o o

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Cost less than £50 per recipient per year The gift is not food, drink or tobacco The gift carries the name, logo or advert for the business

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ExPress Notes ACCA F6 Taxation UK

Chapter 5

Capital Allowances

START The Big Picture Depreciation is an accounting adjustment. There are various methods that a business can use to calculate depreciation. For example, straight line method and reducing balance method. Chapter 4 told us that depreciation charged to the income statement is not an allowable expense and instead is added back in the calculation of the tax adjusted trading profit.

KEY KNOWLEDGE Capital Allowances

Capital allowances are tax allowable amounts that are calculated according to set specific rules. In simple terms, capital allowances could be regarded as the tax equivalent of the accounting depreciation charge.

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ExPress Notes ACCA F6 Taxation UK

Capital allowances are claimed on qualifying expenditure incurred on “Plant” (defined) and “Machinery” (not defined)

Plant and Machinery (P&M) P&M includes a number of items. The most common ones found in the exams include: • • • • •

Machinery Vehicles (cars and lorries) Computers (hardware and software) Office furniture and equipment Moveable partitioning

Writing down allowance (WDA) An annual WDA of 18% is given on a reducing balance basis. Annual Investment Allowance (AIA) The AIA is a 100% allowance for the first £25,000 spent on P&M by a business in its 12 month accounting period. • • • •

Available to all businesses. Not available on cars. For accounting periods >12 months or <12 months (long or short accounting periods), the £25,000 is pro-rated. If a business spends more than £25,000 in a 12 month period, the first £25,000 is eligible for AIA and the balance is eligible for WDA.

Motor cars Cars purchased on or after 6 April 2009 are treated according to their CO2 emissions. Cars do not qualify for AIA. However, any expenditure on a low emission NEW car (i.e. CO2 ≤110g/km) will qualify for a First Year Allowance of 100% instead of the WDA.

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CO2 Emissions

Treatment

≤110g/km ≤110g/km

100% FYA if purchased new only Include in general pool if purchased second hand.

111 – 160 g/km

Include in general pool (no AIA or FYA)

≥160 g/km

Eligible for 8% WDA (part of special rate pool)

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ExPress Notes ACCA F6 Taxation UK

Private use assets If the sole trader uses an asset partly for business purposes and partly for private purposes, the asset is kept in a separate column and only the business proportion of the asset is eligible for capital allowances. Note that private use assets are only present for individuals. Companies never have private use assets in their calculation as companies never use assets privately! Special Rate Pool Qualifying expenditure on long life assets (assets with a life >25 years) or high CO2 emission cars (which are privately used by owner of a business) attract a WDA of 8% rather than 18%.

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ExPress Notes ACCA F6 Taxation UK

Chapter 6

Trading Income – Basis Assessment

START The Big Picture Chapter 4 introduced the concept of the Current Year Basis (CYB) whereby the adjusted trading profit in an accounting period is assessed in the tax year in which the accounting period ends. There are a number of other rules which need to be looked at.

KEY KNOWLEDGE Trading Income – Basis Assessment Opening Year Rules There are special rules for when a sole trader commences business: Year 1. The profits assessed in year one are the “actual basis”. This is the adjusted profits from the commencement of business until the following 5 April. Year 2. If there is a 12 month period of account ending in the 2nd tax year then use the CYB. If there is not a 12 month accounting period then use one of the following:

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ExPress Notes ACCA F6 Taxation UK

Period of Account

Period Assessed

a) the period of account is less than 12 months after commencement

1st 12 months of trading.

b) the period of account is more than 12 months after commencement

The 12 months ended on the accounting date.

c) there is no period of account ending in the 2nd tax year

The actual profits between 6th April and 5th April.

Year 3. Assess the 12 months ended on the accounting date in that year. This will normally be the CYB. As a result of the above rules there is a possibility that profits for certain periods will be assessed in more than one year. These profits are known as “overlap profits”. These overlap profits are carried forward and usually deducted from the assessment in the year the business ceases. Ongoing business rules These rules have already been discussed and are the adjusted profits for an accounting period that end in a particular tax year. This is known as the CYB. Change of accounting date There are special rules for when a sole trader changes accounting date. Closing year rules The broad idea here is that when a business ceases there will be no periods which have not been taxed. The calculation method is as follows: 1) Identify the tax year in which the business ceases. 2) For the penultimate tax year, identify the CYB assessment. 3) Calculate the profits for the period from the date last assessed in 2) above until the date of cessation and from this figure delete any overlap profits.

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ExPress Notes ACCA F6 Taxation UK

Chapter 7

Trading Losses (For Sole Traders)

START The Big Picture When an individual has a tax adjusted trading amount which is negative, he has a trading loss. The trading profit figure is £nil. A trading loss may be offset against certain other income in accordance with the rules discussed in this chapter. The main reliefs are:

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Carry forward of the trading loss against future trading profits.

Offset the loss against total income in the year of the loss and / or the preceding year.

If a claim against total income has been made there is an optional claim against chargeable gains in the tax year of the loss and / or the preceding tax year.

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ExPress Notes ACCA F6 Taxation UK

Offset of opening year loss against total income

Offset of terminal loss against previous trading profits

Carry forward of trading loss The trading loss is carried forward and set against the first available profit from the same trade. The amount of the loss to be set off is as much as possible. Offset of loss against total income The loss can be offset against total income in the year of the loss and / or the preceding year. As an example, a loss in an accounting period ending 31 December 2012 arises in the tax year 2012/13 (under CYB). The loss could therefore be offset against total income in either 2012/13 or 2011/12. Loss relief under this method is optional and subject to a claim by the individual. The loss relief is against total income. Total income is before the offset of Personal Allowances (PA) and therefore there is a risk that utilising a loss under this method could result in the PA being wasted. Relieving trading losses against chargeable gains If a loss remains after a claim against total income a trading loss in 2012/13 can be offset against chargeable gains in 2012/13 and / or 2011/12. Offset of opening year loss against total income A trading loss incurred in the first 4 tax years of operation can be offset against total income from the 3 years preceding the tax year of the loss. The loss is offset on a FIFO basis (i.e. against the earliest year first) Offset of terminal loss against previous trading profits Unrelieved trading losses of the last 12 months of a business’s activity can be relieved against: 1) Trading profits in the year of cessation, and 2) Carried back and offset against trading profits for the 3 preceding years on a LIFO basis.

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ExPress Notes ACCA F6 Taxation UK

Chapter 8

Trading Income - Partnerships

START The Big Picture In simple terms, partnerships are collections of sole traders that are working together. Profits from a partnership need to be allocated between the partners and then each partner includes their share of the partnership profit as trading income within their own income tax computation. The profits for the partnership are firstly adjusted to obtain the tax adjusted trading profit (as per the adjustments required for a sole trader mentioned at chapter 4). The tax adjusted partnership profits are then allocated to each partner. Calculation The tax adjusted profits of the partnership are allocated to the partners in accordance with their partnership profit sharing arrangements. Partners may be entitled to a fixed element such as “salary” or interest on loans and these amounts are withdrawn first. Example: Andrew and Barry are in partnership sharing profits equally after allocating a salary of £10,000 to Andrew. In the year ended 31 December 2011, the adjusted trading profits of the partnership were £50,000.

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ExPress Notes ACCA F6 Taxation UK

Y/E 31/12/11

Total

Andrew

Barry

Salary

£10,000

£10,000

-

Balance to allocate (1:1)

£40,000

£20,000

£20,000

£50,000

£30,000

£20,000

Trading profits

The accounts end on 31 December 2011. Therefore under the CYB the trading profits will be assessed in 2011/12 with Andrew being assessed on £30,000 and Barry on £20,000. Loss relief in partnerships Trading losses are allocated between the partners in the same manner as trading profits are. Each partner can decide how they obtain relief. For example, partner A could carry the loss forward whilst partner B decides to offset against current year total income.

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ExPress Notes ACCA F6 Taxation UK

Chapter 9

Property Income

START The Big Picture Property income represents income received by an individual from property. Property business profits This represents rental income received by a landlord. The assessable property income on an individual is calculated as follows: Rental income

12,000

Less: deductible expenses

2,500

Assessable property income

9,500

Income and expenses are treated according to the accruals concept and if the individual has more than one property the income and expenses are combined together in the calculation. The rules concerning whether expenses are deductible broadly follow the rules found within trading income. Examples of deductible expenses include interest on a loan to acquire the property, insurance, etc.

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ExPress Notes ACCA F6 Taxation UK

Losses on property are offset against any property income in the year of the loss. If there are any unrelieved property losses they are carried forward and offset against future property income. Furnished holiday lettings (FHL) Property lettings which qualify as FHL have a number of taxation advantages. There are various requirements for a letting to be able to qualify as FHL. Broadly speaking the furnished property must actually be let for 105 days a year, on a commercial basis and be available to let for 210 days a year. Long term lets must not exceed 155 days. There are various advantages of being treated as a FHL. One of them being that the losses are treated as though they are trading losses and therefore can be offset against other income. Premiums received on the grant of a short lease A short lease is a lease for 50 years or less. Part of the premium received will be treated as though it was property income received by the landlord. The property income proportion of the premium received will be calculated as follows: The premium Less: 2% x (length of lease – 1) x premium Example: Premium: £20,000; Length of lease: 15 years Premium received Less: 2% x (length of lease – 1) x premium

20,000 [2% x (15-1) x 20,000]

Property business income

(5,600) 14,400

Rent a room relief Gross annual rent of £4,250 and below received for the “rent of a room” in a person’s main residence is exempt. If an individual receives such rent in excess of £4,250, the individual can either: 1) Choose to pay tax on the excess of the rent over £4,250 or, 2) Be taxed in the normal way for property income (rent minus expenses).

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ExPress Notes ACCA F6 Taxation UK

Chapter 10

Investment Income

Savings income - Bank and Building Society interest Note that for the purposes of the exam; assume that a Bank and a Building Society is the same thing. Bank interest is received net of 20% tax by individuals. In other words, individuals receive interest after tax of 20% has been withheld by the Bank and paid to HMRC on behalf of the individual. An individual must show the gross figure of any interest received in their tax computation. The gross amount is the amount including the tax withheld by the bank. Example: An individual receives bank interest of £800. The gross amount of interest shown in the income tax computation is: £800 x 100/80 = £1,000 The tax withheld by the Bank is £200 (£1,000 - £800). Any tax withheld can be used by the taxpayer to offset against his tax payable. Rate of tax on savings income Savings income is normally taxed at the same rates as “other income” (see Chapter 2). However, a starting rate of tax of 10% will apply to the first £2,710 in certain circumstances.

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ExPress Notes ACCA F6 Taxation UK

To ascertain whether this 10% rate applies, savings income goes “on top” of other income. If the savings income is within the first £2,710 of taxable income then the 10% rate applies to the savings income. Dividend income As with savings income, dividends are received net so will need to be grossed up. Dividends are deemed to be received net of a notional tax credit of 10%. Dividend income needs to be grossed up as follows: Dividends received x 100/90 The tax credit of 10% can be set against the individual’s tax payable. Rate of tax on dividend income. Dividends are treated as being the top part of an individual’s income and “go on top” of other income and savings income. Dividends are then taxed as follows: Dividend income in the basic rate band (the first £34,370):

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10%

Dividend income in the higher rate band (£34,371 to £150,000):

32.5%

Dividend income in the additional rate band (above £150,000):

42.5%

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ExPress Notes ACCA F6 Taxation UK

Chapter 11

Pensions

START The Big Picture Pensions are in effect tax efficient retirement savings scheme.

KEY KNOWLEDGE Pensions There are two main types of pension schemes: 1. Occupational pension schemes (certain employees) 2. Personal pension schemes (employees, sole traders and unemployed) Individuals can make contributions to a pension scheme of any amount but will only be eligible for tax relief on contributions as follows: The higher of: 1. £3,600, and 2. 100% of the individual’s “relevant earnings” (relevant earnings include trading profits, employment income, but not investment income)

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ExPress Notes ACCA F6 Taxation UK

Method of obtaining relief – occupational pension scheme Payments to an occupational pension scheme obtain tax relief at source. The pension payment made by the employee is deducted from the employment income and the employer calculates PAYE on the net amount. If an employer also makes contributions to the employee’s occupational scheme, those deductions are tax deductible in calculating the employer’s trading income. The contributions will not be treated as a benefit on the employee. Method of obtaining relief – personal pension scheme Basic rate tax relief – relief is given automatically as the contributions are made net of the basic rate of income tax (20%). Higher rate tax relief – relief is given by “extending the basic rate band”. If an individual pays a contribution of £8,000 (net), the contribution is “grossed up” by 100/80 to obtain a gross contribution of £10,000. The basic rate band of £34,370 is then extended by the gross contribution of £10,000 to obtain a revised basic rate band of £44,370. The additional rate threshold is extended to £160,000 (£150,000 + £10,000).

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ExPress Notes ACCA F6 Taxation UK

Chapter 12

National Insurance Contributions

National Insurance Contributions (NIC) are not tax as such. Instead they are social security contributions which are payable in addition to any taxes that may be due. There are various classes of NIC: Class

Payable by

Class 1 primary

Employee

Class 1 secondary

Employer

Class 1A

Employer

Class 2

Self employed

Class 4

Self employed

Class 1 primary and secondary NIC calculated as a % on gross earnings (in effect on cash remuneration such as salary and bonuses but not on most benefits)

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ExPress Notes ACCA F6 Taxation UK

The percentages are Class 1 Employee

£1 - £7,605 per year £7,605 - £42,475 per year Above £42,475

Nil % 12.0 % 2.0%

Class 1 Employer

£1 - £7,488 per year Above £7,488

Nil % 13.8 %

Class 1A NIC is payable at a rate of 13.8% by employers on most taxable benefits provided to an employee. Class 2 NIC is payable at a flat rate of £2.65 per week by self employed individuals. Class 4 NIC is also paid by self employed individuals. Class 4 NIC is calculated according to the percentages below on the individual’s taxable trading profits. Class 4

£1 - £7,605 per year £7,605 - £42,475 per year Above £42,475

Nil % 9.0 % 2.0%

NIC rates will be provided in the exam.

Page | 38

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ExPress Notes ACCA F6 Taxation UK

Chapter 13

Corporation Tax

START The Big Picture Corporation tax is a key area of the syllabus and will be examined.

KEY KNOWLEDGE Corporation Tax A period of account is the period that the company prepares accounts for. A company can generally prepare accounts that end on any date that the company chooses and whilst it is normally 12 months long, it can be shorter or longer. An accounting period is the period for which the charge to corporation tax is made. An accounting period can never exceed 12 months. Most of the time, the period of account and the accounting period are the same dates (i.e. when the period of account is 12 months long)

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ExPress Notes ACCA F6 Taxation UK

If a company has a period of account longer than 12 months the period of account is divided with the maximum length of an accounting period being 12 months. For example, a period of account of 18 months would have an accounting period of 12 months followed by an accounting period of 6 months. Corporation tax computation – year ended 31 March 2012 Trading profits

150,000

Property income

30,000

Interest income

5,000

Chargeable gains

50,000

Total profits

235,000

Less: Gift Aid

(35,000)

Profits chargeable to corporation tax (PCTCT)

200,000

There are a number of similarities between how items are treated for corporation tax purposes and how they are for income tax purposes. The main differences are: 1. Trading income – main differences for companies There are no private use asset adjustments. Within income tax a self employed person would need to make adjustments to the deductibility for private use. With companies, the companies themselves clearly don’t use it privately. The private use is taxed on the employees via the benefit on private use. Similarly for capital allowances purposes there are no private use assets for a company. 2. Property income – main differences for companies Property income is still assessed on the accruals basis but a company is assessed according to the company’s accounting period whilst an individual is assessed according to the tax year. Interest on a loan acquired to purchase or improve an investment property is treated under the loan relationship rules unlike individuals who can treat it as a deduction from property income.

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ExPress Notes ACCA F6 Taxation UK

3. Interest income – main differences for companies Bank interest received by a company is received gross with no tax withheld (unlike individuals that receive bank interest net of 20% tax). 4. Dividends – main differences for companies Dividends received BY companies, UK or overseas, are not included within PCTCT. Individuals however include dividends received within their income tax computations. 5. Chargeable gains – main differences for companies Companies include capital gains as chargeable gains within PCTCT and pay corporation tax on them. Individuals pay Capital gains Tax on gains and not income tax. 6. Gift Aid – main differences for companies Companies make gift aid payments gross and the amount paid is deducted within PCTCT. Individuals “extend the basic rate band”. To calculate the corporation tax liability we need to identify the “profits” of a company. “Profits” = PCTCT + Franked Investment Income (FII) FII = Gross dividends received from non associated companies. In other words, FII = (dividends received from companies in which the company has a 50% or less shareholding) x 100/90 “Profits” are used to identify the tax rate that will be used. Note that to identify the actual tax charge we apply the tax rate to PCTCT and not to “Profits”. The rate of corporation tax used depends on the financial year. The financial year runs from 1 April to the following 31 March. For financial year 2012 (i.e. the period from 1 April 2012 to 31 March 2013) the rates are: “Profits” below the lower limit of £300,000 “Profits” between £300,000 and £1,500,000

20% Marginal Relief

“Profits” above the upper limit of £1,500,000

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24%

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ExPress Notes ACCA F6 Taxation UK

EXAMPLE 1 Profits below the lower limit PCTCT = £200,000 FII = £15,000 Profits = £215,000. This is below the £300,000 limit so the lower rate of corporation tax of 20% applies (FY 2012). Corporation tax = 20% x £200,000 = £40,000

EXAMPLE 2 Profits above the upper limit PCTCT = £2,000,000 FII = £50,000 Profits = £2,050,000. This is above the £1,500,000 limit so the full rate of corporation tax of 24% applies (FY 2012). Corporation tax = 24% x £2,000,000 = £480,000

EXAMPLE 3 Profits in the marginal relief band If profits fall within the marginal relief band the following calculation is needed: PCTCT@ full rate Less: marginal relief 1/100 x (upper limit – profits) x PCTCT/Profits Example: PCTCT = £1,000,000 FII = £50,000

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ExPress Notes ACCA F6 Taxation UK

Profits = £1,050,000. This is above the £300,000 limit and below the £1,500,000 limit so marginal relief applies. Corporation tax = 24% x £1,000,000 =

£260,000

Less: 1/100 x (£1,500,000 - £1,050,000) x (£1,000,000/£1,500,000)

(£3,000)

Corporation tax:

£257,000

Short Accounting Periods If an accounting period is less than 12 months the upper and lower limits are reduced proportionally. Example: A company has a 3 month accounting period ending 31 March 2011. The upper limit is: £1,500,000 x 3/12 = £375,000 The lower limit is: £300,000 x 3/12 = £75,000 Associated companies The upper and lower limits are divided by the number of associated companies Example: Company A owns 100% of company B. Associated companies = 2 Upper limit: £1,500,000/2 = £750,000 Lower limit: £300,000/2 = £150,000 Accounting Periods that straddle 31 March. The corporation tax rates for the following years are: Financial Year

2009

2010

2011

2012

Small companies rate

21%

21%

20%

20%

Full rate

28%

28%

26%

24%

Lower limit

300,000

300,000

300,000

300,000

Upper limit

1,500,000

1,500,000

1,500,000

1,500,000

7/400

7/400

3/200

1/100

Marginal relief fraction (Relevant details will be provided in the exam)

Page | 43

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ExPress Notes ACCA F6 Taxation UK

When an accounting period covers 2 separate Financial Years and the rates or fractions are different then separate calculations have to be made for each financial year. The corporation tax payable will still be based on the accounting period but the calculation will be split into two.

EXAMPLE Company A Company A has PCTCT of £2,000,000 for its year ended 31 December 2012. It did not receive any FII. The year ended 31 December 2012 is partly in FY 11 (1 January 2012 to 31 March 2012) and partly in FY 12 (1 April 2012 to 31 December 2012) The upper limit is £1,500,000 in both FY 11 and FY 12 so we know that the company will be paying tax at the full rate: FY11 £2,000,000 x 3/12 x 26%:

£130,000

FY12 £2,000,000 x 9/12 x 24%:

£360,000

Total tax payable for the y/e 31 December 2012

£490,000

Trading losses (for companies) If the corporation tax computation shows a loss, PCTCT is nil. The company can utilise the loss in the following ways: • • •

Page | 44

Carry forward the loss to offset against future trading income of the same trade under s393(1) ICTA 1988 Offset of current year trading loss against current year total profit (before deduction of gift aid) (s393A ICTA 1988) If a current year loss offset has been made and there are losses remaining, unused losses can be carried back and offset against total profits (before deduction of gift aid) of the previous 12 months.

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ExPress Notes ACCA F6 Taxation UK

Chapter 14

Chargeable Gains (For Companies)

START The Big Picture The taxation of capital gains on individuals is dealt with in depth at chapter 16.

KEY KNOWLEDGE Chargeable Gains (For Companies) The calculation of chargeable gains for companies is similar to that found for individuals except for a number of major differences. The main ones being:

Page | 45

Companies

Individuals

Pay corporation tax on chargeable gains (i.e. the gains are part of PCTCT).

Pay Capital Gains tax (CGT) on the gains and not income tax on the gains.

Companies do not receive an annual exemption.

Individuals do receive an annual exemption.

Companies receive indexation allowance (IA).

Individuals do not receive indexation allowance

The share matching rules are different.

The share matching rules are different.

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ExPress Notes ACCA F6 Taxation UK

Chargeable gains Pro forma (for companies) Disposal proceeds

100,000

Less: incidental costs of disposal (e.g. advertising or auction fees)

(2,000)

Net Proceeds

98,000

Less: allowable expenditure

(38,000)

Unindexed gain

60,000

Less: indexation allowance (see below)

(15,000)

Chargeable gain / (loss)

45,000

Indexation allowance gives a company some relief for the effect of inflation during the period of ownership of the asset. IA= the cost of the asset x the movement in the Retail Price Index (RPI) Share matching Rules (for companies) When shares in a company are sold, the calculation needs to identify which shares were sold. The shares sold are matched with the following purchases: 1. Shares acquired on the same day. 2. Shares acquired in the 9 days before the sale. 3. Shares in the share pool (or s104 pool or FA 85 pool)

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ExPress Notes ACCA F6 Taxation UK

Chapter 15

Corporate Groups and Overseas Tax Issues

CORPORATE GROUPS The Big Picture Corporate Groups When a group of companies exist there are a number of relationships that you need to be aware of. The 2 main ones being: • •

Associated companies (>50% control) Group loss relief (75% control)

Associated Companies Definition of associated companies. Two companies are associated with each other if:

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One controls the other, or

Both are controlled by another company or individual

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 Taxation UK

Implication of being associated: 1. The upper and lower limits used for determining the rate of corporation tax are divided by the number of associated companies. •

Example: A Ltd owns 65% of B Ltd. The number of associated companies is 2. The upper and lower limits are £750,000 (£1,500,000/2) and £150,000 (£300,000/2) respectively for both A Ltd and B Ltd.

2. Any dividends between associated companies are not treated as FII for the purposes of calculating a company’s “profits”. 3. Only one annual investment allowance of £25,000 is available for the group. Group loss relief group Definition of group relief group. Two companies are part of a group relief group, if: •

One owns 75% of the other, or

Both are 75% subsidiaries of a 3rd company

For sub-subsidiaries to be included within a group relief group then top company should own at least 75% of the sub-subsidiary. Implications of being part of a group relief group: The main implication is that any amount of the trading losses of one company may be surrendered (“given”) to another group relief group company. In order to maximise the tax saving, the loss should be surrendered in the following order: 1. To companies that are paying tax in the marginal relief band and who will be suffering a marginal tax rate of 25% in FY2012 or 27.5% FY 2011 or 29.75% FY2010. 2. To companies that are paying tax at the full rate of 24% in FY2012, 26% in FY2011 and 28% in FY 2010.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 Taxation UK

3. To companies that are paying tax at the small companies rate of 20% in FY2012 and FY 2011 and 21% in FY2010.

OVERSEAS ISSUES The Big Picture Overseas dividend income is exempt from UK corporation tax. If a UK company receives foreign income such as overseas branch income it will be included within PCTCT. It will therefore be liable to both UK and foreign tax. The company will be eligible for double tax relief. Double Tax Relief (DTR) Deduct from the UK tax liability the lower of: 1. UK on foreign income, and 2. Overseas tax suffered.

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Š 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 Taxation UK

Chapter 16

Capital Gains Tax (CGT)

START The Big Picture CGT is paid by individuals on chargeable disposals of chargeable assets. Companies do not pay CGT but instead pay corporation tax on their chargeable gains. This chapter only deals with individual issues. Only individuals that are UK tax resident or UK ordinarily resident will pay CGT. The assets disposed of can be located anywhere in the world. Individuals have a CGT annual exemption (2011/12: £10,600). Gains up to this amount are not taxed. Capital gains are taxed after taxable income (i.e. as the top portion). • •

Taxable gains within the basic rate band are taxed at 18%. Taxable gains within the additional rate band are taxed at 28%.

If an individual is neither UK tax resident nor UK ordinarily resident then they will not be liable to CGT even if the asset disposed of is located in the UK. The majority of capital assets are chargeable to CGT. There are however a small number of exempt assets which are outside the scope of CGT. These include:

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ExPress Notes ACCA F6 Taxation UK

• • • • •

Principal private residence Cars (including antique or vintage cars) Certain “chattels” National Savings Certificates Assets held within ISAs

Pro forma for computation of capital gains for individuals Disposal proceeds

100,000

Less: incidental costs of disposal (e.g. advertising or auction fees)

(2,000)

Net Proceeds

98,000

Less: allowable expenditure -

Cost of acquisition

(28,000)

-

Cost of enhancements

(10,000)

Capital gain / (loss)

60,000

The gains and losses for an individual are then combined and taxed. The calculation of CGT is as follows: Capital gain on asset #1 Capital gain on asset #2 Capital loss on asset #3 Net gains for the tax year Less: capital loss brought forward Net capital gain Less: annual exemption Taxable gains

10,000 5,000 20,000 35,000 (4,900) 30,100 (10,600) 19,500

CGT @ 18% or 28%.

Note that capital losses brought forward are only used to the extent of bringing the net gains for the current year down to the level of the annual exemption.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 Taxation UK

Transfers between husband and wife (or civil partners) Assets transferred between spouses are deemed to be transferred at such a value that neither a gain nor a loss will be created. The spouse transferring the asset is deemed to have transferred it at the original acquisition cost. When the receiving spouse subsequently disposes of it they will have an acquisition cost equal to the original acquisition cost. Part disposals When an asset is part disposed of, we need to identify the proportion of the original cost that relates to the part disposed of. The proportion of the original cost allocated to the disposal is based on the value of the part disposed of and the value of the part retained. Example: John bought 5,000 m2 of land for £100,000 in January 2004. He has just sold 3,000m2 for £80,000. The market value of the remaining 2,000m2 is £30,000. The “cost” of the land sold for inclusion within the disposal calculation is: Cost x [A / (A+B)] where A is the MV of the part sold and B is the MV of the part retained. Therefore, the cost for the part disposed in this example is £100,000 x [£80,000 / (£80,000 + £30,000)] = £72,727 Chattels Chattels are tangible, movable items. Examples include antiques such as vases or paintings. There are special rules for chattels that were bought or sold for less than £6,000.

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Bought for < £6,000

Bought for > £6,000

Sold for <£6,000

Exempt from CGT

Sale proceeds deemed to be £6,000

Sold for >£6,000

Gain calculated as normal but gain limited to a maximum of 5/3 x (gross proceeds - £6,000)

CGT computed in normal manner

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ExPress Notes ACCA F6 Taxation UK

Share matching Rules (for individuals) When an individual sells shares in a company, the calculation needs to identify which shares were sold. The shares sold are matched with purchases in the following order: 1. Shares acquired on the same day. 2. Shares acquired in the next 30 days after the sale. 3. Shares in the share pool (or s104 pool or FA 85 pool) The share pool contains details of the purchase and sale of shares in a particular company. When shares are disposed of out of the share pool, the shares are disposed of at their average cost. Reliefs – Principal Private Residence (PPR) PPR relief is available when an individual sells a property that has been his main residence at some stage. The gain that is exempt is calculated as the gain x (period of occupation / total period of ownership). Occupation includes both actual occupation and deemed occupation. “Deemed occupation” includes: • • • •

The last 3 years of ownership (if it was actually occupied at some stage) Up to 3 years absence for any reason (if preceded and followed by actual occupation) Up to 4 years absence if working elsewhere in the UK (if preceded and followed by actual occupation) Any period of absence if working abroad (if preceded and followed by actual occupation)

Reliefs – Entrepreneurs’ Relief Entrepreneurs’ relief reduces the CGT payable on certain qualifying business disposals. The relief is: • The first £10m of gains on qualifying business disposals will be taxed at 10%. • Gains above £10m will be taxed at the standard rate of 18% / 28%. Qualifying business disposals include: • •

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Businesses carried on by the individual (including partnership shares) Shares in an individual’s personal trading company (if the individual is an employee of the company).

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 Taxation UK

Reliefs – Rollover Relief When a qualifying business asset is sold, any gain arising can be “rolled into” a replacement qualifying asset. The gain is therefore deferred by reducing the base cost of the replacement asset by the gain rolled over. Qualifying assets include: • • •

Land & buildings Goodwill Fixed plant & machinery

The replacement asset must be acquired between one year in advance of the disposal and 3 years after the disposal. If the replacement asset is a “depreciating asset” (in effect, an asset with a life of ≤ 60 years) the gain cannot be rolled over. Instead, the gain will be deferred until the earlier of the following: • • •

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The date the replacement asset is sold. The date the replacement asset ceases to be used. 10 years from the date of acquisition of the replacement asset.

© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes ACCA F6 Taxation UK

Chapter 17

Inheritance Tax (IHT)

START The Big Picture IHT is a capital tax that is charged on a transfer of value of chargeable property by a chargeable person. A charge to IHT occurs on: 1. The death of an individual. 2. Lifetime gifts in the 7 years preceding death. 3. Certain lifetime transfers.

KEY KNOWLEDGE Transfer of Value, Chargeable Property & Chargeable Person. The amount of the “transfer of value” is based on the fall in value of the donors’ estate. Note that this is does not have to necessarily be the open market value of the item.

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ExPress Notes ACCA F6 Taxation UK

For example, the market value of a 2% shareholding in a company will be lower than the fall in value for an individual that owns 51% of the company and then sells 2% of his shareholding. (i.e. because the transfer of the 2% has resulted in control of the company being lost). Chargeable property represents property that a person owns or is entitled to. Unlike CGT, there are no exempt assets for IHT purposes. For the purposes of the F6 exam a chargeable person will be a UK domiciled individual who is liable for IHT on their worldwide assets.

KEY KNOWLEDGE When is IHT charged? IHT is charged: 1. When a person dies. 2. On certain lifetime transfers. On death: The main occasion when IHT is charged is on the death of an individual. In this situation IHT is levied on the estate at death as well as any transfers of non-exempt assets in the 7 years before death. Lifetime transfers: 3 different types of transfers can be made by an individual during his lifetime:

Type of transfer Exempt Potentially Exempt Transfers (PETs)

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Examples Small gift exemption Annual exemption. Most gifts by individuals.

Treatment during life

Treatment if donor lives for 7 years.

Treatment on death within 7 years.

Exempt from IHT

Exempt from IHT

Exempt from IHT

No IHT payable.

Exempt from IHT

PET becomes chargeable to IHT.

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ExPress Notes ACCA F6 Taxation UK

Chargeable Lifetime Transfers (CLTs)

For F6, all gifts into Trusts.

No further IHT to pay.

IHT to pay.

Possibly extra IHT to pay.

Exemptions (lifetime gifts only) • • • •

Small gift exemption (≤ £250 per recipient per year). Annual exemption (£3,000 per year and can be carried forward for one year if not used). Habitual expenditure exemption. Marriage exemption.

Exemptions (both lifetime and on death) •

Transfers between spouses.

KEY KNOWLEDGE Calculation of IHT on Lifetime Transfers IHT on CLTs (transfers into a Trust)

Transfer of value

X

Less: exemptions

(X)

Chargeable amount

X

Nil Rate Band (NRB) – all individuals are entitled to a NRB (2012/13: £325,000) Chargeable amount Less: NRB available after deduction of gross transfers in the last 7 years Amount chargeable to IHT

X (X) X

The rate of IHT depends who pays the tax:

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ExPress Notes ACCA F6 Taxation UK

If the recipient pays the tax - i.e. the trustees (donee). The gift is referred to as a gross gift and the tax rate is 20%.

If the transferor pays the tax (i.e. the donor) the gift is referred to as a net gift and the tax is 25%

KEY KNOWLEDGE Calculation of IHT as a result of Death

On the death of an individual there will be IHT payable on: 1. Transfers within the previous 7 years (i.e. PET’s that now become chargeable and potential additional IHT on CLTs) Broadly speaking, the tax on transfers within the previous 7 years will be taxed at 40% and relief will be given for taper relief (see below) as well as IHT already paid on lifetime transfers.

Taper Relief – the idea behind this is that if people survive for at least 3 years after the transfer the IHT charge is reduced. The rates of taper relief are as follows:

Time between date of gift and date of death. 0 3 4 5 6

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to to to to to

3 4 5 6 7

years years years years years

Taper Relief % applied to the tax due Nil 20% 40% 60% 80%

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ExPress Notes ACCA F6 Taxation UK

EXAMPLE Death after a lifetime transfer

John made a gift (PET) of £350,000 on 10 January 2008. He died on 10 April 2011. He made no other lifetime transfers. The death occurred in 2011/12. PET Less: Nil Rate Band IHT due on

IHT due at 40% [£25,000 x 40%] Less: Taper Relief of 20% (within 3 to 4 years of death) IHT due after Taper Relief

£350,000 (£325,000) £25,000

£10,000 (£2,000) £8,000

2. The value of the estate at death. Calculation of IHT at 40% on the estate at death is looked at after the lifetime transfers have been dealt with.

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ExPress Notes ACCA F6 Taxation UK

Chapter 18

Value Added Tax (VAT)

START The Big Picture VAT is an indirect tax which is ultimately borne by the final customer. VAT occurs when a taxable person makes a taxable supply. Taxable person: an individual or company that is or should be registered for VAT. Taxable supply: sales and purchases of goods or services which are not VAT exempt or outside the scope of VAT. Input VAT

Taxable person

Output VAT

Input VAT: A taxable person pays input VAT on its purchases of goods or services. Output VAT: A taxable person charges output VAT on its sales of goods or services. At the end of each tax period (normally a 3 month period) the input and output VAT is netted off and an excess of output VAT is paid to HMRC whilst an excess of input VAT is recovered from HMRC.

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ExPress Notes ACCA F6 Taxation UK

Standard rated supplies: 17.5% VAT rate (up to 3 January 2011) and 20% (from 4 January 2011). Most goods and services are standard rated. Zero rated supplies: 0% VAT rate (but importantly still within the scope of VAT so can claim input VAT). Examples of zero rated include: • • •

Children’s clothes Books & newspapers Non luxury food

Exempt supplies: no VAT is charged and input VAT cannot be reclaimed. Examples of exempt supplies include: • • •

Land Financial services Education

VAT Registration Requirements Compulsory registration is required when either: 1. The taxable supplies over the previous 12 months (or since trade commencement date) exceed the registration limit (currently £77,000). HMRC must be notified within 30 days of the end of the month in which the registration limit is exceeded. Registration begins from the end of the month after the month in which the limit was exceeded. or 2. The taxable supplies over the next 30 days alone are anticipated to exceed the registration limit (currently £77,000). HMRC should be informed prior to the end of the 30 days. Registration begins at the start of the 30 days. Voluntary registration is possible. Advantages include being able to recover relevant input VAT as well as providing an impression of a business being bigger than it really is. Disadvantages include the increased administrative burden. Pre-registration expenses Input VAT on goods acquired for business purposes can be recovered if they are still within inventory at date of registration. Given that they are in stock when the business registers for

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ExPress Notes ACCA F6 Taxation UK

VAT, output VAT will be charged when the goods are sold so it is only fair that input VAT can be claimed (goods acquired more than 3 years prior to registration are excluded). Input VAT on services provided in the 6 months prior to registration can be recovered. Tax point The tax point is the official date of supply for VAT purposes. For goods, the basic tax point is when the goods are made available to the customer. For services, the basic tax point is when the service is performed. The basic tax point is amended in the following situations: 1. Before the basic tax point – if an invoice is issued or payment is received before the basic tax point the date of the invoice or the payment becomes the tax point. 2. After the basic tax point – if an invoice is issued within 14 days of the basic tax point the date of the invoice becomes the tax point. VAT relief for bad debts If a taxable person makes a sale, output VAT is chargeable and will be payable to HMRC. If the debt subsequently becomes a bad debt, the taxable person can obtain VAT bad debt relief by in effect claiming the VAT on the bad debt as input VAT. In order to qualify for VAT bad debt relief the debt must be >6 months old and be written off in the seller’s accounts.

(end of ExPress Notes)

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ACCA F6 UK 2013 notes