ACCA PasscardsPaper F6Taxation (UK) FA 2014For exams from 1 April 2015 to 31 March 2016ACCA APPROVED CONTENT PROVIDERACF6PC15.indd 1 17/09/2014 10:56Fundamentals Paper F6Taxation FA 2014(000)ACF6PC13_FP_UK.qxp10/24/20142:52 AMPage iFirst edition 2007, Ninth edition October 2014ISBN 9781 4727 2243 0e ISBN 9781 4727 2566 0British Library Cataloguing-in-Publication DataA catalogue record for this book is available from theBritish LibraryYour learning materials, published by BPP LearningMedia Ltd, are printed on paper obtained from traceablesustainable sources.Published byBPP Learning Media Ltd,BPP House, Aldine Place,142144 Uxbridge Road,London W12 8AAwww.bpp.com/learningmediaPrinted in the United Kingdomby Ricoh UK LtdUnit 2Wells PlaceMerstham, RH1 3LGAll rights reserved. No part of this publication may bereproduced, stored in a retrieval system or transmitted, inany form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the priorwritten permission of BPP Learning Media.BPP Learning Media Ltd2014(000)ACF6PC13_FP_UK.qxp10/24/20142:52 AMPage iiPage iiiWelcome to BPP Learning Media's ACCA Passcards for Fundamentals Paper F6 Taxation (UK). They save you time. Important topics are summarised for you. They incorporate diagrams to kick start your memory. They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media'sACCA Passcards are not just a condensed book. Each card has been separately designed for clearpresentation. Topics are self contained and can be grasped visually. ACCA Passcards are still just the right size for pockets, briefcases and bags. ACCA Passcards focus on the exam you will be facing.Run through the complete set of Passcards as often as you can during your final revision period. The daybefore the exam, try to go through the Passcards again! You will then be well on your way to passing yourexams.Good luck!Contents Preface(000)ACF6PC13_FP_UK.qxp10/24/20142:52 AMPage iiiContents PrefacePage1 Introduction to the UK tax system 12 Computing taxable income 93 Computing the income tax liability 174 Employment income 235 Taxable and exempt benefits.The PAYE system 276 Pensions 357 Property income 418 Computing trading income 459 Capital allowances 5110 Assessable trading income 5711 Trading losses 61Page12 Partnerships and limited liability partnerships 6513 National insurance contributions 6914 Computing chargeable gains 7315 Chattels and the principal private residenceexemption 8116 Business reliefs 8717 Shares and securities 9318 Self-assessment and payment of tax byindividuals 9719 Inheritance tax 10520 Computing taxable total profits 115(000)ACF6PC13_FP_UK.qxp10/24/20142:52 AMPage ivContents Page vPage21 Computing the corporation tax liability 12322 Chargeable gains for companies 12723 Losses 13524 Groups 139Page25 Self-assessment and payment of tax bycompanies 14326 An introduction to VAT 14727 Further aspects of VAT 157(000)ACF6PC13_FP_UK.qxp10/24/20142:52 AMPage vNotes(000)ACF6PC13_FP_UK.qxp10/24/20142:52 AMPage vi1: Introduction to the UK tax systemTopic ListThe overall function and purpose oftaxation in a modern economyDifferent types of taxesPrincipal sources of revenue law andpracticeTax avoidance and tax evasionThis chapter contains background knowledge whichunderpins the whole of your later studies of taxation.(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 1Tax avoidance and tax evasionPrincipal sources ofrevenue law and practiceDifferent types of taxesThe overall function and purpose of taxation in a modern economyEconomic factorsTaxation represents a withdrawal from the UK economy. Tax policies can be used to encourage anddiscourage certain types of activity. Saving Charitable donations Entrepreneurs Investment in plant and machinery Encourages Smoking Alcohol MotoringDiscouragesSocial factorsTax policies can be used to redistribute wealth Direct taxes tax only those who have these resources Indirect taxes discourage spending Progressive taxes target those who can afford to payEnvironmental factorsTaxes may be levied for environmentalreasons Climate change levy Landfill tax(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 2Tax avoidance and tax evasionPrincipal sources ofrevenue law and practiceDifferent types of taxesThe overall function and purpose of taxation in a modern economy1: Introduction to the UK tax system Page 3DirecttaxesIndirect taxesIncome taxIndividuals PartnershipsCorporation taxCompaniesCapital gains taxIndividuals Partnerships Companies (in the form of corporation tax) Inheritance taxIndividualsNational insuranceEmployers Employees Self-employedValue added taxBusinesses (both incorporated and unincorporated)(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 3HM Revenue and CustomsStructure of the UK Tax systemTax avoidance and tax evasionPrincipal sources ofrevenue law and practiceDifferent types of taxesThe overall function and purpose of taxation in a modern economyTreasury Officers of Revenue and Customs Crown Prosecution ServiceAppeals heard by First Tier Tribunal (most cases) Upper Tribunal (complex cases)Sources of revenue law and practiceStatuteStatutory instrumentLawStatements of practiceExtra-statutory concessionsExplanatory leafletsRevenue and Customs BriefInternal Guidance (HMRC manuals) Working TogetherPractice(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 41: Introduction to the UK tax system Page 5European Union Double taxation agreements States may agree to enact Directives to providefor common taxation Value added tax (VAT) Directives oblige UK topass laws in accordance with EU legislation Tax provisions which discriminate against EUfreedoms may be ineffective due to treaty directeffect Exchange of information Prevents income or gains being taxed in morethan one country Income/gain taxed in one country only or creditgiven for tax in one country against tax in othercountry Non-discrimination provisions to protect foreignnationals Exchange of information(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 5Tax avoidance and tax evasionPrincipal sources ofrevenue law and practiceDifferent types of taxesThe overall function and purpose of taxation in a modern economyTax evasionTax avoidance Tax evasion consists of seeking to mislead HMRCby either: Suppressing information, or Providing deliberately false information.Tax avoidance includes any legal method ofreducing your tax burden, eg Using tax shelters, or Participating in schemes designed to minimisetax.LegalIllegal(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 61: Introduction to the UK tax system Page 7General Anti-Abuse Rule (GAAR) HMRC can counteract tax advantages from abusive tax arrangements Tax arrangements involve obtaining a tax advantage as (one of) their mainpurpose(s) Arrangements are abusive if they cannot be regarded as a reasonable course ofaction and result in eg significantly less income, profits or gains being taxable Tax advantage includes relief or repayment of tax HMRC may counteract tax advantages arising by eg increasing the taxpayer'stax liability(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 7Tax avoidance and tax evasionPrincipal sources ofrevenue law and practiceDifferent types of taxesThe overall function and purpose of taxation in a modern economyConcerns whether client is honest with HMRC Professional judgement of accountant Must act honestly and objectively Recommend disclosure to HMRC If no disclosure, cease to act Make money laundering reportInform HMRC but not details of why

Avoid 'tipping-off' the client

(001)ACF6PC13_CH01.qxp10/24/20142:52 AMPage 82: Computing taxable incomeTopic ListScope of income taxComputing taxable incomeChargeable/Exempt incomeDeductible interestThe computation of income tax is a key exam topic. Oneof the 15 mark questions in Section B will focus onincome tax. Income tax will also be tested in Section Aand may also appear in the 10 mark questions inSection B. This chapter deals with computing taxableincome which draws together all of the taxpayer'sincome. In the next chapter you will see how the incometax liability is computed on taxable income.(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 9Computingtaxable incomeDeductible interestScope of income taxChargeable/ Exempt incomeTest 1st: Automatically not UK resident In UK < 16 days in tax year In UK < 46 days in tax year, not resident inany of three previous tax years Works full time overseas in tax year, not inUK > 90 days in tax yearTest 2nd: Automatically UK resident In UK > 183 days in tax year Only home in UK Works full time in UK in tax yearAn individual who is UK resident is taxable on world-wide income.(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 102: Computing taxable income Page 11Test 3rd: UK ties Close family (spouse or civil partner/minor child)resident in UK Home available in UK, used in tax year Substantive work in UK In UK > 90 days in either of two previous tax years Spends more time in UK than anywhere else in taxyear (if previously resident only)Number of ties required to be UK resident depends on number of daysspent in UK in tax year (see Tax Tables)(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 11Computingtaxable incomeDeductible interestScope of income taxChargeable/ Exempt incomeAggregation of incomeA basic principle of income tax is the aggregation ofincome. All of an individual's income for a tax year isadded up in a personal tax computation as total income.Taxable incomeNet income minus personal allowance or higher personalallowance.Adjusted net income Net income less grossed up gift aid/personal pensioncontributions.Net income Total income minus deductible interest and trade losses.Tax liabilityThe amount of tax charged on income.Tax payableThe balance of the tax liability still to be paid.(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 122: Computing taxable income Page 13Personal allowance and higher personal allowanceIndividual born on or after 6 April 194810,000 for 2014/15Restrict if adjusted net income > 100,000 by 1 for each 2 excess (nil if > 120,000).Individual born 5 April 1948 or before10,500 born 6.4.38 to 5.4.48 for 2014/1510,660 born before 6.4.38 for 2014/15Restrict if adjusted net income > 27,000by 1 for each 2 excess to minimum 10,000(unless income > 100,000, thenrestrict as for standard allowance)(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 13Computingtaxable incomeDeductible interestScope of income taxChargeable/ Exempt incomeExempt incomeTypes of incomeIncome taxed at sourceThe main types of income for individuals are: Profits of trades, professions and vocations Income from employment and pensions Property income Savings and investment income, including interestand dividendsMany sorts of investment income are taxed at source:for every 100 of income, the individual only receives80 of interest or 90 of dividends from UK companies.The taxable income in both cases is 100, but credit isgiven for the tax suffered. Premium bond prizes Income from New Individual Savings Accounts (NISAs) Returns on National Savings CertificatesLeave exempt income out ofpersonal tax computations.This applies to bank andbuilding society interest.Tax credits on dividendscan be offset to reducea tax bill but are neverrepaid to a taxpayer. Taxcredits on other taxedincome can be repaid.(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 14Computingtaxable incomeDeductible interestScope of income taxChargeable/ Exempt income2: Computing taxable income Page 15Deductible interestInterest paid on a particular type of loan isdeducted from total income to compute netincome. For purchase of an interest in a partnership, or For purchase of plant and machinery forpartnership (purchase must be by partner), or For purchase of plant and machinery for use inemployment (purchase must be by employee)(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 15Notes(002)ACF6PC13_CH02.qxp10/24/20142:52 AMPage 163: Computing the income tax liabilityTopic ListComputing income taxGift aidChild benefit chargeJointly held propertyIn this chapter we deal with computing income tax, usingtaxable income that was covered in the previous chapter.We also look at how gift aid donations are given taxrelief, the computation of the child benefit charge andhow jointly held property is taxed.(003)ACF6PC13_CH03.qxp10/24/20142:52 AMPage 17Jointly heldpropertyChild benefitchargeGift aid Computingincome taxIf non-savings income does not exceed the starting rate limit, then the savings income is taxed at the startingrate (10%) up to the starting rate limit: 2,880 for 2014/15Total non-savings, savings and dividend income separatelyDeduct deductible interest, losses and the personal allowancefrom non-savings income first, then savings income thendividend incomeTax non-savings income, then savings income, then dividendincomeThere is only one set of rate bands to cover alltypes of income.Broadly interestAt 20%, 40% and 45%At 10%, 20%, 40% and 45%At 10%, 32.5% and 37.5%Computing income tax123The basic rate limit and higher rate limitmust be increased by the gross amount ofany gift aid donation/personal pensioncontribution (amount paid 100/80).(003)ACF6PC13_CH03.qxp10/24/20142:52 AMPage 18Jointly heldpropertyChild benefitchargeGift aid Computingincome tax3: Computing the income tax liability Page 19Gift aid Gift aid donations are charitable gifts of money which qualify for tax relief. Donor must make a gift aid declaration to the charity.Basic rate Basic rate tax relief given by treatingdonation as net of basic rate taxHigher and additionalrateHigher and additional rate tax reliefgiven by increasing limits by grossedup donation(003)ACF6PC13_CH03.qxp10/24/20142:52 AMPage 19Jointly heldpropertyChild benefitchargeGift aid Computingincome taxChild benefit charge Child benefit is paid to individual who cares for at least one child Usually paid to mother and exempt from tax Charge reclaims child benefit received by taxpayer or partnerAdjusted net income > 50,000 < 60,000Charge is 1% of the child benefitamount for each 100 of adjusted netincome in excess of 50,000 Adjusted net income>60,000Charge is full amount of child benefitreceived(003)ACF6PC13_CH03.qxp10/24/20142:52 AMPage 20Jointly heldpropertyChild benefitchargeGift aid Computingincome tax3: Computing the income tax liability Page 21Jointly held propertySpouses and civil partners often hold propertyjointly, sometimes in unequal proportions.For tax purposes treat the income received fromsuch property as shared equally.If the actual interests in the property are unequal,spouses/civil partners can declare this to HMRCand income is then shared in actual proportions.(003)ACF6PC13_CH03.qxp10/24/20142:52 AMPage 21Notes(003)ACF6PC13_CH03.qxp10/24/20142:52 AMPage 224: Employment incomeTopic ListEmployment and self-employmentBasis of assessmentAllowable deductionsAlthough this exam is mainly computational you may beasked to describe the difference between employmentand self-employment in a Section B question.You also need to be aware of the final two topics in thischapter: when employment income is assessed and thedeductions that you may be able to make in computingthe amount of assessable employment income.(004)ACF6PC13_CH04.qxp10/24/20142:51 AMPage 23AllowabledeductionsEmployment andself-employmentBasisof assessmentWhether a contract is a contract of service or acontract for services will depend on a number offactors.Employed or self-employedAn employee works under a contract of service anda self-employed person under a contract for services. The degree of control exercised over theperson doing the work Whether he must accept further work Whether the other party must provide further work Whether he provides his own equipment Whether entitled to benefits eg pension Whether he hires his own helpers What degree of financial risk he takes What degree of responsibility for investmentand management he has Whether he can profit from sound management Whether he can work when he chooses The wording used in any agreement betweenpartiesFactors(004)ACF6PC13_CH04.qxp10/24/20142:51 AMPage 24AllowabledeductionsEmployment andself-employmentBasisof assessment4: Employment income Page 25Earnings are taxed in the year in which they arereceived.Employees/directors are taxed on income fromthe employment: Cash earnings BenefitsEmployment incomeThe general definition of the date of receipt isthe earlier of: The time payment is made The time entitlement to payment arisesDirectors are deemed to receive earnings on the earliestof the following: The time given by the general rule The time the amount is credited in the company'saccounting records The end of the company's period of account (if theamount has been determined by then) When the amount is determined (if after the end ofthe company's period of account)(004)ACF6PC13_CH04.qxp10/24/20142:51 AMPage 25AllowabledeductionsEmployment andself-employmentBasisof assessmentExpenses specifically deductible against earnings:Insurance premiums to cover directors' and employees'liabilities (and payments to meet those liabilities)Subscriptions to relevant professional bodiesQualifying travel expenses costs the employee incurstravelling in the performance of his duties or/and travellingto or from a place attended in the performance of dutiesContributions (within limits) to a registered occupationalpension schemePayments to charity under a payroll deductionscheme12345 The strictness of this test has beenemphasised in many cases.The general rule is that expenses can only be deducted fromearnings if they are incurred wholly, exclusively and necessarilyin performing the duties of the employment. Normal commuting does not qualify Relief is available for expenses incurred by anemployee working at a temporary location ona secondment of 24 months or less If a mileage allowance is paid relief isavailable for any shortfall of allowance actuallypaid below statutory mileage allowanceExam focusIf you have to decide whether an expenseis deductible, put yourself in HMRC'sposition and try to find an argumentagainst deducting it. If you can find aspecific argument, the expense is probablynot deductible.(004)ACF6PC13_CH04.qxp10/24/20142:51 AMPage 265: Taxable and exempt benefits.The PAYE systemTopic ListTaxable benefitsExempt benefitsThe PAYE systemBenefits may be tested as part of a Section B questionor in Section A so it is vital that you are able to calculatethe taxable value of benefits provided to employees. Youalso need to be aware of the benefits that are exemptfrom tax.The deduction of tax from employment income throughthe PAYE system is also important.(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 27VouchersGeneral business expensesThe PAYE systemExemptbenefitsTaxablebenefitsTaxed on most employeesExcept excluded employees (eg earn lessthan 8,500 p.a. and not director) onlytaxable on certain benefits'P11D employees' are employees who arenot excluded employees. Cash vouchers Credit token Non-cash vouchersTaxable on all employees (cost of providing benefit)Reimbursed expenses taxable onemployees (not excluded employees).May make deduction claim.Non-cash benefitsIncluding excluded employees(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 28Accommodation Living expenses5: Taxable and exempt benefits. The PAYE system Page 29Annual value of accommodation is ataxable benefit on all employees, unlessjob related.Additional charge if costs more than75,000.Living expenses connected withaccommodation (eg gas bills) are taxable onP11D employees only. However, if theaccommodation is job-related, the maximumamount taxable is 10% of net earnings.Excess multiplied by official rate ofinterest at the start of the tax yearIncludingexcludedemployeesOriginal cost plus the cost ofimprovements incurred priorto start of tax yearVans 3,090 charge if available for privateuse (not home/work commuting) 581 charge for private fuel(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 29Loans CarsThe PAYE systemExemptbenefitsTaxablebenefitsAnnual taxable benefit for the private use of a car is (price of car capital contributions) %. Cars emitting 75g/km or less = 5% Cars emitting CO2 between 7694g/km = 11%. Cars emitting 95g/km = 12%. Percentage increases by 1% for each 5g/km (rounded down) up to 35%. Percentage increased by 3% for diesel engined cars (not abovemax 35%). Benefit scaled down on a time basis, if car not available allyear. Benefit then reduced by any contribution by employee forprivate use. Fuel for private use is charged as percentage of base figure(21,700, 2014/15). Same percentage as car benefit. Noreduction for partial reimbursement by the employee.Loans of over 10,000 giverise to taxable benefits equalto the difference between theactual interest and interest atthe official rate.A write-off of a loan gives riseto a taxable benefit equal tothe amount written off.12Only taxed onP11D employees(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 30Other benefits5: Taxable and exempt benefits. The PAYE system Page 31In general, if an asset is made available for private use, theannual taxable benefit is 20% of the market value when theasset was first provided, less any employee contribution.If the asset is subsequently givento the employee the taxablebenefit is the higher of:(i) Original MV less amountsalready taxed(ii) Market value at date of giftless any employee contribution. Taxable value of other benefits charged onemployees other than excluded employees Excluded employees taxed only on secondhandvalue as cash earningsCost of provision of benefit less anyamount made good by employee Not used if asset is bicyclePrivate use of asset(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 31The PAYE systemExemptbenefitsTaxablebenefitsExempt benefitsLoans of up to 10,000Entertainment and gifts provided by a third party for an employeeby reason of his employmentLong service awards of up to 50 per year of serviceJob related accommodationWorkplace nurseriesOther childcare provided by employerRecreational/sporting facilities available to employees generallyWorks buses and mini-busesBicycles provided for cycling to workParking places at or near workThe cost of gifts from any one sourcemust not exceed 250 per tax yearThe award must be a non-cash award andthe employee must have worked at least20 yearsLimited to 55/28/25 per week forbasic/higher/additional rate employeeA minibus must have a seating capacity ofnine or more. A works bus must have aseating capacity of 12 or more(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 325: Taxable and exempt benefits. The PAYE system Page 33Removal expenses of up to 8,000Personal incidental expensesMedical premiums to cover treatment outside the UKMobile phones restricted to one phone per employeeMileage allowances of amounts up to the statutory mileage ratesStaff partiesAdditional household costs for homeworkersFor use of the employee's own car forbusiness purposesProvided the cost per staff member peryear is 150 or lessUp to 4 per week may be paid withoutsupporting evidence5 per night for UK/10 per night foroverseas. If exceeded, whole taxable, notjust excess(005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 33PAYE settlement agreementsThe PAYE systemExemptbenefitsTaxablebenefitsThe PAYE system collects tax from employees each payday, with the intention that over a tax year, the correct total of tax duewill be collected.How PAYE works Employer makes FPS to HMRC electronically on orbefore date of payment ('Real Time Information') Includes details of amounts paid to employees, incometax and national insurance deducted, starting andleaving employees Calculations made using PAYE codes, usually oncumulative basisThe employer must pay over the tax and NIC deductedup to the 5th of each month by the 22nd of that month ifelectronic payment (19th if by cheque).PAYE code numbersFormsQuarterly payment is allowed if the averagemonthly total of tax and NICs is less than 1,500PAYE settlement agreements are arrangements under whichemployers settle employees' income tax liabilities on certainbenefits and expense payments.L: Code with personal allowanceP: Code with 1st level higher personal allowance Y: Code with 2nd level higher personal allowanceForm P60 to employee by 31 MayForms P11D/P9D to HMRC and employee by 6 JulyForm P45 to employee when leaves employmentPayment (005)ACF6PC13_CH05.qxp10/24/20142:51 AMPage 346: Pensions Topic ListTypes of pension schemeContributions to pension schemesReceiving benefits from pensionarrangementsA single regime applies to all pensions, whetheroccupational or personal.Pension contributions are a tax efficient way of saving forretirement.(006)ACF6PC13_CH06.qxp10/24/20142:51 AMPage 35Contributions topension schemesReceiving benefits frompension arrangementsTypes of pension schemePension SchemesOccupational Pension SchemePersonal Pension SchemeEmployees onlyAll individualsDefined BenefitsMoney PurchasePension based onearnings andlength of serviceNo guarantee of amountof pension. Investmentsare used to 'build up' fund(006)ACF6PC13_CH06.qxp10/24/20142:51 AMPage 36Annual limitContributions topension schemesReceiving benefits frompension arrangementsTypes of pension scheme6: PensionsPage 37Maximum contribution attracting taxrelief is higher of: Relevant earnings 3,600 pa1,250,000 is maximum value for pension fund.Employment income, trading income andfurnished holiday lettings income 40,000 for 2014/15 C/f unused allowance max three years Tax charge on excess treat asadditional non-savings income Count towards allowances (annual and lifetime) Trade deduction for employer Tax free benefit for employee No NIC for employer or employeeLifetime allowance Annual allowance Employer contributions(006)ACF6PC13_CH06.qxp10/24/20142:51 AMPage 37Contributions topension schemesReceiving benefits frompension arrangementsTypes of pension schemeOccupational pensionPersonalpensionDeduct gross employee contributions directly from earnings to find net earnings Paid net so automatic 20% tax relief Higher rate (and additional rate)taxpayers increase basic rate (andhigher rate) limits by grosscontributions This is the same method of givingtax relief as for gift aid donations Also deduct grosscontributions from netincome to find adjustednet income for PArestriction

(006)ACF6PC13_CH06.qxp10/24/20142:51 AMPage 38Contributions topension schemesReceiving benefits frompension arrangementsTypes of pension scheme6: PensionsPage 39Pension fund at retirementTaxable annualpension (usually)Tax-free lump sumIf fund exceeds lifetime allowance1.25m then tax charge on excess25% if excesstaken as pension55% if excesstaken as lump sumMaximum 1/4 of fund(006)ACF6PC13_CH06.qxp10/24/20142:51 AMPage 39Notes(006)ACF6PC13_CH06.qxp10/24/20142:51 AMPage 407: Property incomeTopic ListComputationFurnished holiday lettings and rent-a-room reliefProperty income is calculated as if the letting were abusiness run by the taxpayer.There are special rules for furnished holiday lettings, andfor rooms let in the taxpayer's own home.Property income could be tested in Section A and/or in aSection B question, either as a 10 mark question or aspart of a 15 mark question.(007)ACF6PC13_CH07.qxp10/24/20142:51 AMPage 41Computation Furnished holiday lettingsand rent-a-room reliefComputationCalculate property income profits on an accruals basis in the same way as you calculate trading profits.Accounts are drawn up as for a sole trader butwith a year end of 5 April.Rents and expenses of all properties arepooled to give a single property income figure.If a lease for n years (50 or less) is granted fora premium, the proportion of the premiumtreated as rent is (premium (premium 0.02(n1))).ExceptionFor furnished residential lettings, a 10% wearand tear allowance can be claimed.Capital allowances are not available.ExceptionKeep a separate pool of profits/losses fromletting furnished holiday lettings.Property incomeProperty income covers rent from UK property.2134LossesLosses are carried forward against futureincome from the UK property business.(007)ACF6PC13_CH07.qxp10/24/20142:51 AMPage 427: Property income Page 43Computation Furnished holiday lettingsand rent-a-room reliefFurnished Holiday Lettings must be On a commercial basis Available for letting for 210 days in the tax year Actually let for 105 days in the tax year Not in longer term occupation for more than 155 days during the tax yearThe rent-a-room scheme exempts rent of up to 4,250a year on rooms in the landlord's main residence.Rollover relief, entrepreneurs' relief and giftrelief are availableLoss relief but only c/f against FHL profitCapital allowances are available on furnitureIncome is earnings for pension purposesContinuous periods of morethan 31 days during whichthe accommodation is in thesame occupationFurnished holiday lettingsFurnished holiday lettings are treated as a trade formany income tax and CGT purposesRent-a-room scheme(007)ACF6PC13_CH07.qxp10/24/20142:51 AMPage 43Notes(007)ACF6PC13_CH07.qxp10/24/20142:51 AMPage 448: Computing trading incomeTopic ListBadges of tradeThe adjustment of profitsCash basis of accountingThe 'badges of trade' can be used to determine whetheror not an individual is carrying on a trade. If a trade isbeing carried on, the profits of the trade are taxable astrading income. Otherwise the profit may be taxable as acapital gain.In this chapter we will look at the badges of trade and atthe adjustments needed in the computation of tradingincome.This is a key exam topic. It may form part of a 15 markSection B question where you may be required tocompute tax adjusted trading profits.(008)ACF6PC13_CH08.qxp10/24/20142:51 AMPage 45Cash basis ofaccountingThe adjustmentof profitsBadgesof trade The subject matter The frequency of transactions Similar trading transactions/interests The length of ownership Organisation as a trade Supplementary work and marketing A profit motive The way in which the asset sold was acquired Method of finance The taxpayer's intentionsBadges of tradeIf on applying the badges of trade HMRCconclude that a trade is being carried on,the profits are taxable as trading income.To arrive at taxable trading profits, the netaccounts profit must be adjusted. We lookat this in the rest of this chapter.(008)ACF6PC13_CH08.qxp10/24/20142:51 AMPage 46Cash basis ofaccountingThe adjustmentof profitsBadgesof trade8: Computing trading income Page 47Certain items of expenditure are not deductible for trading income purposes and so must be added back to thenet accounts profit when computing trading profits. Conversely other items are deductible. Expenditure incurred wholly and exclusively fortrade purposes Gifts to customers not costing more than 50 perdonee per year Interest on borrowings for trade purposes Pre-trading expenditureDeductible expenditureThe gift must carry a conspicuous advertisement forthe business and not be food, drink, tobacco orvouchers exchangeable for goods.If incurred in the seven years prior to the start of trade(008)ACF6PC13_CH08.qxp10/24/20142:51 AMPage 47Cash basis ofaccountingThe adjustmentof profitsBadgesof trade Fines and penalties Depreciation Appropriations (eg salary and interest paid toproprietor) Capital expenditure Entertaining Legal fees relating to capital items General provisions Any expense not incurred wholly and exclusively fortrade purposes Gift aid donations Political donations Part of leasing cost of cars with CO2emissions over130 g/km Non-deductible expenditureEmployee parking fines incurred whilst onemployer's business are, however, allowedThe cost of initial repairs to make an asset fit touse is disallowable capital expenditure (LawShipping) but the cost of initial repairs to remedynormal wear and tear is allowable (OdeonAssociated Theatres Ltd v Jones)Staff entertaining is deductibleFees relating to the renewal of a short lease aredeductibleDisallow any general provision for impairmentlosses. A specific provision is however allowed.These are dealt with in the personal taxcomputationDisallow 15% of leasing cost(008)ACF6PC13_CH08.qxp10/24/20142:51 AMPage 48Cash basis ofaccountingThe adjustmentof profitsBadgesof trade8: Computing trading income Page 49 Normal basis of accounting is accruals basis Cash basis of accounting can be used insteadby small unincorporated businesses To start cash basis of accounting, receiptsmust not exceed VAT registration threshold Election requiredCash basis of accountingCash receivedlessExpenses paidProfitTaxableLossc/f against cashsurplusIncludescapitalexpenditureon P&M(except cars)(008)ACF6PC13_CH08.qxp10/24/20142:51 AMPage 49Cash basis ofaccountingThe adjustmentof profitsBadgesof trade Motor cars (business mileage) Business premises used as trader's home (eg guesthouse)Fixed rate expensesOnly examinable in context ofcash basisRates given in question whererelevant(008)ACF6PC13_CH08.qxp10/24/20142:51 AMPage 509: Capital allowancesTopic ListWhat is plant?Allowances on plant and machinerySpecial assetsCapital allowances are given instead of depreciation, onplant and machinery. They are trading expensesdeducted in arriving at taxable trading profits.Capital allowances are a frequently examined topic.(009)ACF6PC13_CH09.qxp10/24/20142:51 AMPage 51Allowances on plant and machineryWhatis plant?Special assetsStatuteMachineryThere are two sources of the rules on what qualifies as plant and is therefore eligible for capital allowances.Statutory exclusionsThe following items are excluded as plant by statute. Buildings and parts of buildings However, utility systems provided to meet theparticular requirements of the trade, lifts, alarmsystems and several other items can be plant Structures, with some exceptions: dry docks andpipelines LandStatutory inclusionsComputer software qualifies as plant by statute.Machinery also qualifies for allowances wheremachinery is given its ordinary every daymeaning.Case lawThe courts tend to allow items as plant if theyperform a function (eg moveable officepartitions) in the particular trade, rather thanform part of the setting within which the tradeis carried on.(009)ACF6PC13_CH09.qxp10/24/20142:51 AMPage 52Allowances on plant and machineryWhatis plant?Specialassets9: Capital allowances Page 53Writing down allowances (WDAs) 18% per annum on a reducing balance basis in main pool WDA given on pool balance after adding current periodadditions and deducting current period disposals 18% months/12 in a period that is not 12 months long Reduced WDAs can be claimed Expenditure on long life assets, integral features, thermalinsulation, solar panels and cars with CO2emissions over 130g/km goes in a special rate pool. WDA is 8% per annumon a reducing balance basis Small balance (up to 1,000) on main pool and/or specialrate pool can be given WDA equal to balanceDeduct lower of(i) Disposal proceeds(ii) Original costMain pool includes cars withCO2emissions 130g/km or lesswithout private use(009)ACF6PC13_CH09.qxp10/24/20142:51 AMPage 53Allowances on plant and machineryWhatis plant?Special assetsFirst year allowances (FYAs) FYA of 100% available for expenditureon new cars with CO2emissions 95g/km or less Not pro-rated in short/long period ofaccountAnnual Investment Allowance (AIA) All businesses are entitled to AIA of 500,000 per12 month period 500,000 maximum allowance is proportionatelyincreased/reduced if period of account is not12 months Allocate AIA to assets eligible for lowest rate of WDA(special rate pool items before main pool items) Transfer balance after AIA to pool for same periodWDAsExpenditure on plant and machinery(although not cars) is entitled to the AIA.Interaction with VAT Expenditure exclusive of input VAT ifrecoverable Expenditure inclusive of input VAT if notrecoverable eg car not wholly used forbusiness Disposal proceeds exclusive of outputVAT(009)ACF6PC13_CH09.qxp10/24/20142:51 AMPage 549: Capital allowances Page 55Balancing adjustments ariseOn cessation to deal withbalances remaining afterdeduction of disposal proceeds.When a non-pooled asset issold.When a column balancebecomes negative.This will be a balancingchargeShort life assets/privateuse assets(009)ACF6PC13_CH09.qxp10/24/20142:51 AMPage 55Allowances on plant and machineryWhatis plant?Special assetsShort life assets (SLA) An election can be made to depool assets. Depooled assets must be disposed of withineight years of end of the period of acquisition. From a planning point of view depooling is usefulif balancing allowances are expected. Conversely, in general, assets should not bedepooled if they are likely to be sold within eightyears for more than their tax written down values.Not cars Within two years of the endof the accounting period ofacquisition (companies) 31 Jan, 22 months from endof tax year (unincorporatedbusinesses)Otherwise the balance ofexpenditure must betransferred back to poolPrivate use assets Do not pool private use assets Show full value of asset/allowances in column Can only claim the business proportion ofallowances Assets used privately by aproprietor (not an employee)so not relevant to companies(009)ACF6PC13_CH09.qxp10/24/20142:51 AMPage 5610: Assessable trading incomeTopic ListCurrent year basisCommencementCessationWe have seen how to calculate the taxable trading profitsfor a business. We now see how these profits areallocated to tax years.This topic may be tested in Section A or in a Section Bquestion which could be a 10 mark question or as part ofa 15 mark question.(010)ACF6PC13_CH10.qxp10/24/20142:52 AMPage 57Cessation Current yearbasisCommencementCurrent year basisOverlap profits There are special rules which apply in the openingand closing years of a business.Opening yearsAny profits taxed twice areoverlap profits. They may bededucted on cessation.The basis period for a tax year is normally theperiod of account ending in the year.Tax year Basis period1 Date of commencement to following 5 April.2 (a) If no accounting date ends in year: 6 April 5 April(b) If period of account ending in year is less than12 months: first 12 months(c) Otherwise: 12 months to accounting date endingin Year 23 12 months to accounting date ending in year

(010)ACF6PC13_CH10.qxp10/24/20142:52 AMPage 58Cessation Current yearbasisCommencement10: Assessable trading income Page 59Final yearThe basis period for the final year starts at the end of the basis period for the previous year and ends at cessation.Any overlap profits are deducted from the final year's profits.ExampleBrenda has been carrying on a sole trade for many years preparing accounts to 30 April each year. She closes downher business on 30 September 2014. The results of her final two periods of trading are:y/e 30 April 2014 24,000p/e 30 September 2014 5,000Brenda had overlap profits on commencement of 10,000.The final year is 2014/15 and the basis period for this year runs from 1 May 2013 to 30 September 2014. She candeduct the overlap profits. Her taxable trading income for 2014/15 is therefore (24,000 + 5,000 10,000) = 19,000.(010)ACF6PC13_CH10.qxp10/24/20142:52 AMPage 59Notes(010)ACF6PC13_CH10.qxp10/24/20142:52 AMPage 6011: Trading lossesTopic ListCarry forward of trading lossesSet against general income Opening and closing years This is another key exam topic. It is likely to be tested inSection B.There is no general rule that sole traders can get relieffor their losses. The conditions of a specific relief must becomplied with. We look at these reliefs in this chapter.(011)ACF6PC13_CH11.qxp10/24/20142:51 AMPage 61Opening and closingyears Set againstgeneral incomeCarry forward oftrading lossesCarry forward trade loss reliefA loss not otherwise relieved may be set against the firstavailable profits of the same trade.Losses must be set against the first availableprofits: they cannot be saved up until it suitsthe trader to use them.Losses may be carried forward for anynumber of years.A loss is calculated in exactly the same way as a profit.If there is a loss in a basis period the taxable tradeprofits for the tax year are nil instead the loss isavailable in that tax year to be used as the traderchooses.(011)ACF6PC13_CH11.qxp10/24/20142:51 AMPage 62Opening and closingyears Set againstgeneral incomeCarry forward oftrading losses11: Trading losses Page 63Relief against general incomeRelief is against the income of the tax year of the lossand/or the preceding tax year.ExampleSue starts trading on 1.10.14. Her losses are:y/e 30.9.15 (50,000)y/e 30.9.16 (20,000)Losses for the tax years are:2014/15 (25,000)2015/16 (50,000 25,000) = (25,000)2016/17 (20,000)Partial claims are not allowed: the whole loss must be setoff, if there is income (or, if chosen, gains) to absorb it inthe chosen tax year.Exam focusBefore recommending relief against general income, considerwhether it would lead to the waste of the personal allowance.This is often a significant tax planning point.Losses in two overlapping basis periods aregiven to the earlier tax year only.Can extend the claim to net gains of the same year,less brought forward capital losses.Relief against non-trading income restricted to greater of25% of adjusted total income and 50,000(011)ACF6PC13_CH11.qxp10/24/20142:51 AMPage 63Opening and closingyears Set againstgeneral income Carry forward oftrading lossesClosing years A loss incurred in the last 12 months of trade canbe set against trading profits in the year of cessationand in the three preceding years under terminal lossrelief.Opening yearsA loss incurred in the first four years of trade canbe set against general income of the threepreceding years under early years trade lossesreliefComputation of lossTake the loss of the last tax year (6 April to date ofcessation) plus the proportion of the loss in the precedingtax year corresponding to the period from 12 monthsbefore cessation to 5 April.Add overlap profits to the loss in the last year.Relief is given in theearliest year first(FIFO)Relief is given inthe latest year first(LIFO)(011)ACF6PC13_CH11.qxp10/24/20142:51 AMPage 6412: Partnerships and limited liability partnershipsTopic ListSharing profits between partnersLossesPartnerships are another key exam topic. You should beprepared to answer a Section B question on this topic,although it may also be tested in Section A. Thetechnique is to allocate the profits between the partnersand then look at each partner independently.(012)ACF6PC13_CH12.qxp10/24/20142:51 AMPage 65Losses Sharing profitsbetween partnersWhen a partner joins, the first period of accountfor his own business runs from the date of joiningto the firm's next accounting date. The normalbasis period rules for opening years apply to him.When a partner leaves, the last period of accountfor his own business runs from the firm's mostrecent accounting date to the day he leaves. Thenormal cessation rules apply to him.Remember to pro-rate the annualsalary/interest if the period is not 12 monthslong.thenCompute trading results for a partnership as a whole in thesame way as you would compute the profits for a sole traderDivide results for each period of account between partnersFirst allocate salaries and interest on capital to the partners,then share the balance of profits among the partnersaccording to the profit-sharing ratio for the period of accountEach partner is taxed as if he were running his ownbusiness, and making profits and losses equal to his shareof the firm's results for each period of account (012)ACF6PC13_CH12.qxp10/24/20142:51 AMPage 66Losses Sharing profitsbetween partners12: Partnerships and limited liability partnerships Page 67Consider all available loss reliefs for eachindividual partnerNext calculate the loss for each tax yearDivide the loss for each period of accountbetween the partnersPartners are entitled to the same loss reliefs assole traders:Losses123(012)ACF6PC13_CH12.qxp10/24/20142:51 AMPage 67Notes(012)ACF6PC13_CH12.qxp10/24/20142:51 AMPage 6813: National insurance contributionsTopic ListNICs for employeesNICs for the self-employedAlthough often overlooked, national insurancecontributions represent a significant cost to taxpayers.National insurance contributions could be tested inSection A and also as part of a Section B question.(013)ACF6PC13_CH13.qxp10/24/20142:50 AMPage 69NICs for theself-employedNICs foremployeesPrimaryEmployees pay contributions of12% of earnings between theprimary earnings threshold andthe upper earnings limit; 2% onearnings above the upper limit.SecondaryEmployers pay contributions of13.8% on all earnings above thesecondary earnings threshold.CLASS 1 CLASS 1ANot reduced by expensesor pension contributionsExam focusEmployers pay Class 1Acontributions at 13.8% on mosttaxable benefits provided for theiremployees. Class 1A is payableon 22 July if electronic payment(19 July if by cheque) followingthe end of the tax year.Employment allowancereduction up to 2,000per employer for tax yearThe earnings thresholds and the upperearnings limit will be given to you in theexam.(013)ACF6PC13_CH13.qxp10/24/20142:50 AMPage 70NICs for the self-employedNICs foremployees13: National insurance contributions Page 71Class 2Class 2 are paid at a flat weekly rate. Paid by directdebit or on demand.Class 4Class 4 NICs are 9% of any profits falling betweena lower and an upper limit and 2% above upperlimit. Class 4 NICs are collected at the same timeas the associated income tax liability.Exam focusIn questions which ask whether someoneshould trade as a sole trader or through acompany (as a director) the cost of NICsoften tips the balance in favour of being asole trader.These limits will be given to you on the exam paper.Profits are the taxable profits, as reduced by tradinglosses. Personal pension contributions do notreduce profits.The self-employed pay Class 2 and Class 4 NICs.(013)ACF6PC13_CH13.qxp10/24/20142:50 AMPage 71Notes(013)ACF6PC13_CH13.qxp10/24/20142:50 AMPage 7214: Computing chargeable gainsTopic ListChargeable persons, disposals and assetsBasic computationLossesThe charge to CGT for individualsSpouses and civil partnersPart disposalsDamage, loss or destructionIt is important that you can calculate chargeable gainsrealised by individuals and calculate their capital gainstax liability having dealt with losses and the offset of theannual exempt amount.You may find that the basic topics in this chapter aretested in Section A and you should also be prepared toanswer a Section B question containing a number ofdisposals of chargeable assets.(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 73Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge toCGT for individualsBasiccomputationLosses Chargeable persons,disposals and assetsChargeable persons, disposals and assetsThree elements are needed for a chargeable gain to arise.A chargeable disposal: this includes sales, gifts andthe destruction of assets. Transfer of assets on death isnot chargeable.A chargeable person: individuals are chargeablepersons.A chargeable asset: most assets are chargeable, butsome assets are exempt.123 CGT applies primarily to personsresident in the UKCarsSome chattels (eg racehorses)GiltsQCBs(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 74Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge toCGT for individualsBasiccomputationLosses Chargeable persons,disposals and assets14: Computing chargeable gains Page 75ComputationCompute a gain as follows:Proceeds XLess: Cost (X)__Gain X__Actual proceeds or market value inthe case of gifts and disposals whichare not bargains at arms length.Include:(1) Original cost of the asset or marketvalue if that was used as proceeds for theperson who sold the asset to thisindividual.(2) Enhancement expenditure which wasreflected in the state and nature of theasset at the time of disposal or was onpreserving the owner's legal right to theasset.(3) Incidental costs of acquisition anddisposal.(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 75Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge toCGT for individualsBasiccomputationLosses Chargeable persons,disposals and assetsDeduct allowable capital losses from gains in the tax year in which they arise (before deducting the annualexempt amount).Allowable losses brought forward are only set off toreduce current year gains less current year allowablelosses to the annual exempt amount.ExampleZo made gains of 14,000 in 2014/15. She had broughtforward capital losses of 8,000.Brought forward capital losses of 3,000 will be set off in2014/15 to preserve annual exempt amount of 11,000.The remaining losses will be carried forward to 2015/16.Any loss which cannot be set offis carried forward to set againstfuture gains.Set off losses against gains notqualifying for entrepreneurs' relieffirst.Order of set off(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 76Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge to CGTfor individualsBasiccomputationLosses Chargeable persons,disposals and assets14: Computing chargeable gains Page 77Rates18% within basic rate bandDeduct the annual CGT exempt amount of 11,000 (2014/15) to compute an individual's taxable gains.10% entrepreneurs' relief gains 28% above basic rate limit taxable income andgains qualifying forentrepreneurs' reliefdeducted first

remember to increaselimit by gross gift aiddonations/personalpension contributions

from gains not qualifying forentrepreneurs' relief first

(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 77Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge toCGT for individualsBasiccomputationLosses Chargeable persons,disposals and assetsNo gain/no loss disposalsWhen the second spouse/civil partner sells the asset, assume that he/she bought the asset for its original cost.Disposals between spouses and civil partners do not give rise to gains or losses.(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 78Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge toCGT for individualsBasiccomputationLosses Chargeable persons,disposals and assets14: Computing chargeable gains Page 79Part disposalsOn a part disposal, you are only allowed to takepart of the cost of the asset into account. Costs attributable solely to the part disposed ofare taken into account in full For other costs, take into account A/(A+B) ofthe cost A is the proceeds of the part sold B is the market value of the part retainedExampleX owns land which originally cost 30,000. It sold aquarter interest in the land for 18,000. Theincidental costs of disposal were 1,000. Themarket value of the three-quarter share remainingis estimated to be 36,000. What is the chargeablegain? Proceeds 18,000Less: Incidental costs of disposal (1,000)_____17,000Less: 30,000 (10,000)______7,000__________36,000 18,00018,000+(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 79Spouses andcivil partnersPartdisposalsDamage, lossor destructionThe charge toCGT for individualsBasiccomputationLosses Chargeable persons,disposals and assetsLoss or destruction DamageIf an asset is damaged andcompensation is received, then this willnormally be treated as a part disposal.If an asset is destroyed any compensation will normally bebrought into an ordinary CGT disposal computation asproceeds.If all the proceeds are applied for the replacement of the assetwithin 12 months, any gain can be deducted from the cost ofthe replacement asset.If all the proceeds are used to restorethe asset the taxpayer can elect todisregard the part disposal and deductthe proceeds from the cost of the asset.If only part of the proceeds are applied, the gain is restrictedto the proceeds not applied, and the remainder of the gain isdeducted from the cost of the replacement asset.(014)ACF6PC13_CH14.qxp10/24/20142:50 AMPage 8015: Chattels and the principal private residenceexemptionTopic ListChattelsWasting assetsPrivate residencesIn this chapter we look at the rules which apply forcalculating the gains on certain special types of asset.The chattel rules may well be tested in Section A. Therules on private residences could form part of a SectionB question.(015)ACF6PC13_CH15.qxp10/24/20142:50 AMPage 81ChattelsPrivateresidencesWastingassetsChattelsA chattel is an item of tangible moveable property(eg a painting).Wasting chattelsGains on chattels sold for gross proceeds of 6,000 orless are exempt.The maximum gain on chattels sold for more than6,000 is 5/3 (gross proceeds 6,000).Losses on chattels sold for under 6,000 are restrictedby assuming the gross proceeds to be 6,000. Chattels with a remaining estimated useful lifeof 50 years or less.Wasting chattels are exempt from CGTunless capital allowances could have beenclaimed on them.(015)ACF6PC13_CH15.qxp10/24/20142:50 AMPage 8215: Chattels and the principal private residence exemption Page 83Private residencesWastingassetsChattelsExceptionA wasting asset is one with an estimated remaining useful life of50 years or less and whose original value will fall over time.Wasting assets have their cost written downover time on a straight line basis.ExampleJo bought a copyright with a remaining life of 40 yearsfor 10,000. He sold the copyright 15 years later for30,000. Calculate the gain arising.Proceeds 30,000Less: Cost (10,000 25/40) (6,250)______Gain 23,750____________Number of years remainingNumber of years on acquisitionWasting assetAssets eligible for capital allowancesand used in a trade do not have theircost written down.(015)ACF6PC13_CH15.qxp10/24/20142:50 AMPage 83PrivateresidencesWastingassetsChattelsPeriods of deemed occupationThese periodsmust normallybe precededand followedby a period ofactualoccupationProvided that there is no other main residence at the timeA gain on the disposal of a PPR is whollyexempt where the owner has occupied the wholeresidence throughout his period of ownership.Where occupation has been for only part of aperiod, the proportion of the gain exempted isGain ownership of period Totaloccupation of Period Absences of up to threeyears for any reason Absences while employedabroad Absences of up to fouryears while workingelsewhereExam focusDraw up a table of periods present or absent, exempt months and chargeable months. Checkthat the total of exempt and chargeable months is correct, to avoid making mistakes. The last 18 months of ownership of aresidence is always treated as a period ofdeemed occupation.Principal private residence relief (015)ACF6PC13_CH15.qxp10/24/20142:50 AMPage 8415: Chattels and the principal private residence exemption Page 85A gain arising whilst a PPR is let is exempt up tothe lower of:40,000The amount of the PPR exemptionThe gain in the let periodThe private residence exemption covers ahouse plus up to half a hectare of grounds.A larger area may be allowed forsubstantial houses.123Letting exemption Permitted areaWhen part of residence is used exclusively for business purposes, that part of gain istaxable. Last 18 months exemption does not apply.Business use(015)ACF6PC13_CH15.qxp10/24/20142:50 AMPage 85Notes(015)ACF6PC13_CH15.qxp10/24/20142:50 AMPage 8616: Business reliefsTopic ListEntrepreneurs' reliefRollover reliefGift reliefIn a Section B exam question you should look out for theavailability of various reliefs. However, do take care toensure that you do not claim relief when you are notallowed to.(016)ACF6PC13_CH16.qxp10/24/20142:49 AMPage 87Entrepreneurs' reliefGift reliefRollover relief Sole trader business/partnership Shares in 'personal' trading company owned byemployee/officerBusiness assets Available for material disposal ofbusiness assetsBusiness owned for one year prior todisposal or business has ceased withinpast three years and business owned atleast one year prior to cessationEntrepreneurs' reliefTax net gains at 10%Lifetime limit of 10m gains Claim by 12 months from 31 January following tax year of disposal'Personal' trading companyrequiresshareholding/voting rightsof at least 5%Must be the disposal ofthe whole or part of thebusiness, not justindividual assets ifbusiness continues(016)ACF6PC13_CH16.qxp10/24/20142:49 AMPage 88Entrepreneurs' reliefGift reliefRollover relief16: Business reliefs Page 89Taxpayers can claim to defer gains arisingon the disposal of business assets that arebeing replaced if both the old and the newassets are on the list of eligible assets.The new asset must be bought in theperiod starting 12 months before andending 36 months after the disposal.Exam focusIf a question mentions the sale of somebusiness assets and the purchase ofothers, look out for rollover relief but do notjust assume that it is available: the assetsmight be of the wrong type, eg moveableplant and machinery.Is the new asset a depreciating asset?Is the new asset a non-depreciating asset?A depreciating asset is one with anexpected life of 60 years or less(eg fixed plant and machinery). Land and buildings (including parts of buildings) occupiedas well as used only for the purposes of the trade. Fixed (that is, immovable) plant and machinery. GoodwillEligible assets(016)ACF6PC13_CH16.qxp10/24/20142:49 AMPage 89Entrepreneurs' reliefGift reliefRollover reliefFor a non-depreciating asset the gain is deductedfrom the base cost of the new asset.For a depreciating asset the gain is deferred until itcrystallises at a later date.Relief is proportionately restricted when an assethas not been used for trade purposes throughoutits life.If a part of the proceeds of the old asset are notreinvested, the gain is chargeable up to the amountnot reinvested.If a non-depreciating qualifying asset is boughtbefore the gain crystallises, the deferred gain maybe rolled into the base cost of that asset.The gain crystallises on the earliest of:the disposal of the replacement assetten years after the acquisition of thereplacement assetthe date the replacement asset ceases to beused in the trade123(016)ACF6PC13_CH16.qxp10/24/20142:49 AMPage 90Entrepreneurs' reliefGift reliefRollover relief16: Business reliefs Page 91The gain is deducted from the recipient's basecost.Gift relief may be claimed to defer gains arising onbusiness assets. Assets used in a trade Shares and securities in tradingcompany which is either unlistedor the donor's personal companyQualifying assetsGift reliefAny actual proceeds in excess of cost reduce thegain for which relief can be claimed. If balance sheet of companycontains non business assets gaineligible restricted to CBA/CA gain(016)ACF6PC13_CH16.qxp10/24/20142:49 AMPage 91Notes(016)ACF6PC13_CH16.qxp10/24/20142:49 AMPage 9217: Shares and securitiesTopic ListMatchingThe computationAlterations of share capitalThe matching rules for shares and securities are vitallyimportant, in particular in a Section B question. If you donot know the matching rules you will not be able tocompute a gain on the disposal of shares.(017)ACF6PC13_CH17.qxp10/24/20142:48 AMPage 93Matching rules for individualsAlterations ofshare capitalThe computationMatchingThe matching rules for shares held by an individual are different to the matching rules for shares held by acompany. Take care not to confuse the two.Disposals by individual shareholders are matched withacquisitions in the following order: Same day acquisitions Acquisitions within the following 30 days Any shares in the share poolExam focusLearn the 'matching rules' because a crucialfirst step to getting a shares question right isto correctly match the shares sold to theoriginal shares purchased.(017)ACF6PC13_CH17.qxp10/24/20142:48 AMPage 9417: Shares and securities Page 95Alterations ofshare capitalThecomputationMatchingThe share pool is kept in two columns:The number of sharesThe cost12The share pool The computationThe computation is proceeds less cost.On a disposal the cost is calculated on a pro-ratabasis.For quoted shares proceeds are calculated as thelower of: 1/4 up, and Mid bargain(017)ACF6PC13_CH17.qxp10/24/20142:48 AMPage 95Alterations ofshare capitalThe computationMatchingBonus issuesRights issues Rights issue shares are acquired for payment. Add the numbers of shares to the share pooland add the cost of the rights shares. Bonus issue shares are acquired at no cost. Add the number of shares to the share pool. Apportion the cost of the old shares to the newassets received in proportion to their values. Where the new assets include cash, compute achargeable gain using the cash received andthe part of the cost of the old sharesapportioned to that cash. Takeover must be for bona fide commercialreasons and not for tax avoidance for thistreatment to apply.Reorganisations and takeovers(017)ACF6PC13_CH17.qxp10/24/20142:48 AMPage 9618: Self-assessment and payment of tax by individualsTopic ListReturnsRecords and appealsPayment of taxPenalties This is a key exam topic. It may be examined in aSection A question or in a Section B question either aspart of a 15 mark question focused on income tax or in a10 mark question.(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 97PenaltiesPayment of tax Records andappealsReturnsCompliance checksHMRC may make a compliance check enquiry into a returnprovided they give notice by a year after:(1) The actual filing date (if on or before due filing date)(2) The 31 January, 30 April, 31 July or 31 October nextfollowing the actual filing date of the return (if filed late).Filing dateThe latest filing date for filing a 2014/15 tax return is:(1) 31 October 2015 (paper)(2) 31 January 2016 (electronic)Exception: if notice after 31 July 2015, latestfiling date is end of three months after noticeException: if notice after 31 October 2015,latest filing date is end of three months afternoticeHMRC randomly select returns tocheck. They also select returns wherethere is an identified tax risk.(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 98PowersAppealsPenaltiesPayment of tax Records andappealsReturns18: Self-assessment and payment of tax by individuals Page 99RecordsRecords must, in general, be keptuntil the later of:(1) Five years after the 31 Januaryfollowing the tax year concerned(where the taxpayer is inbusiness); or(2) One year after the 31 Januaryfollowing the tax year, otherwise HMRC can investigate dishonest conduct by tax agent penalty up to 50,000. HMRC may make assessments to recover tax due anddeterminations which effectively force the filing of a return. A taxpayer may appeal against: Any assessment, except a self-assessment An amendment to a self-assessment or a disallowanceof a claim or election, following a compliance check ordiscoveryPenalties The appeal may be settled by internal review. If not, thehearing is before Tax Tribunal.(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 99Payment of tax PenaltiesRecords andappealsReturnsPayment of taxPayments on account (POA) of income tax and Class 4NICs must be made on 31 January in tax year and onthe following 31 July.The final payment of income tax and Class 4 NICs mustbe paid on 31 January following the tax year.All CGT is due on 31 January following the tax year.InterestInterest runs on:(1) POAs from the normal due dates (31 Jan and 31 July).(2) Any final payment and CGT from the later of:(i) 31 January following tax year(ii) Three months after the notice to file a tax return was issuedEach POA is 50% of the prior taxyear's income tax and Class 4 NICliability less tax suffered at source(de minimis limits 1,000, 80%)(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 100PenaltiesPayment of tax Records andappealsReturns18: Self-assessment and payment of tax by individuals Page 101Penalties for errors Common penalty regime for IT, NICs,CT and VAT Imposed for inaccurate return leadingto understatement of tax, false orincreased loss, false or increasedrepayment of tax Error may be careless, deliberate butnot concealed, or deliberate andconcealedMaximum penalty based on Potential LostRevenues (PLR): 100% if deliberate and concealed 70% if deliberate but not concealed 30% if carelessPenalties can be reducedby disclosure (eg 0% forcareless error withunprompted disclosure)(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 101PenaltiesPayment of tax Records andappealsReturnsPenalties for late notification Common penalty regime for IT, NICs, PAYE, CGT, CT and VAT Failure may be careless, deliberate but not concealed, or deliberateand concealed Maximum penalty based on PLR as for penalties for error Reduced penalties for disclosure: eg 0% if careless failure withunprompted disclosure within 12 monthsPenalty for failure to keep records3,000 per tax year/accounting period(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 10218: Self-assessment and payment of tax by individuals Page 103Penalties for late payment(1) Penalty date is 30 days after due date(2) Penalty of 5% of unpaid tax at penalty date ifpayment not more than five months afterpenalty date(3) Penalty of 5% of unpaid tax at five months afterpenalty date if payment between five monthsand 11 months of penalty date(4) Penalty of 5% of unpaid tax at 11 months afterpenalty date if payment more than 11 monthsafter penalty date(5) Does not apply to payments on accountPenalties for late filingThe maximum penalties for delivering a return afterthe filing due date are:(1) Return up to three months late 100(2) Return over three months late As (1) plus 10daily penalty (max 90 days)(3) Return over six months late As (1) and (2) plus greater of5% of tax and300(4) Return over 12 months late As (1), (2), (3) plus greater of % of tax (conduct related)and 300(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 103Notes(018)ACF6PC13_CH18.qxp10/24/20142:48 AMPage 10419: Inheritance taxTopic ListScope/basic principlesCLTs and PETsDeath estateTransfer of nil rate bandExemptionsPayment of IHTInheritance tax is a tax on transfer of wealth (gifts). Itapplies to certain gifts made during lifetime and ondeath. Inheritance tax may be examined in Section Aand/or in a 10 mark Section B question.(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 105Scope/basicprinciplesPaymentof IHTExemptions Transfer ofnil rate bandDeathestateCLTs andPETsScope of inheritance taxTransfer of valueBy individualsLifetime or deathDiminution in valueThe value of the transfer is always the loss to thedonor.Transfer of valueA gratuitous disposition which results in anindividual being worse off.

For F6, a gift

Usually = gift but watchout for unquoted shares(before/after)

(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 10619: Inheritance tax Page 1077 year accumulation principleNeed to look back seven years from chargeable transferto see if any chargeable transfers use up available nilrate band.Chargeable lifetimetransfer (CLT) immediate charge totax. Gift to trust.Potentially exempt transfer(PET) only chargeable if donordoes not survive seven years treat as exempt until death. Giftto individual (except spouse/civilpartner).Chargeabletransfer ondeath.

2014/15 325,000Chargeable transferAny transfer which is not an exempt transfer.(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 107Scope/basicprinciplesPaymentof IHTExemptions Transfer ofnil rate bandDeathestateCLTs andPETsChargeable lifetime transfers (CLTs)IHT charged at date of gift at 20% if exceeds nil rate bandat date of gift.Additional tax on deathThe IHT on death on a CLT made in seven years before death iscalculated as follows:(1) Take into account all chargeable transfers in seven yrs before thistransfer (including PETs which have become chargeable)(2) Calculate the tax at 40% on excess of the gross CLT over nil rateband at death(3) Deduct taper relief if death between threeseven yrs after transfer(4) Deduct lifetime tax but no repayment if exceeds tapered death taxExam focusWhen you have grossed up atransfer, you can check your figuresby computing the 20% tax on thegross transfer. Gross up (20/80) if donor pays lifetime tax ashe has lost both the gift and the IHT paid.

(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 10819: Inheritance tax Page 109Potentially Exempt Transfers (PETs)Treat as exempt during lifetime of donorTax on deathIHT on a PET made in seven years before death is calculated as follows:(1) Take into account all chargeable transfers in seven yrs before thistransfer (including other PETs which have become chargeable)(2) Calculate tax @ 40% on excess over nil rate band at death(3) Deduct taper relief if death between threeseven yrs after transfer if donor does survive seven yearsfrom transfer, PET is exempt transfer

(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 109Scope/basicprinciplesPaymentof IHTExemptions Transfer ofnil rate bandDeathestateCLTs andPETsDeath estate All property owned immediately before death Less debts, funeral expensesIncurred for consideration orimposed by law (eg tax todate of death)

Debt secured on property, eg mortgage Deducted primarily from secured property, eg house Endowment mortgages not deducted as repaid ondeath by insurance Repayment/interest only mortgages are deductible(may be separate life cover)Including cost of tombstone

(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 11019: Inheritance tax Page 111Tax on death estate(1) Take into account all transfers in seven years before death(including PETs which have become chargeable).(2) Calculate the tax at 40% on excess over nil rate band atdeath.(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 111Scope/basicprinciplesPaymentof IHTExemptions Transfer ofnil rate bandDeathestateCLTs andPETsTransfer of unused nil rate band Individual (A) dies A had spouse/civil partner (B) whodied before A B had unused nil rate band on deathEffect Nil rate band of A increased by unused nil rateband of B Affects additional tax on CLTs, tax on PETs anddeath estate Scale up if nil rate band increased between B'sdeath and A's deathClaim Within two years of end of month of A's death byA's PRs.(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 112Scope/basicprinciplesPaymentof IHTExemptions Transfer ofnil rate bandDeathestateCLTs andPETs19: Inheritance tax Page 113 Annual (3,000) Small gifts Marriage Normal expenditure out of incomeExemptions for lifetime transfersonly Spouse/civil partnerExemption for lifetime and deathtransfers 250 or less per donee per tax year 5,000 from parent2,500 from remote ancestor, or party to marriage1,000 from anyone else

Use against transfers in date order. Can c/f unusedamount for one year only. Use current year firstbefore b/f(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 113Scope/basicprinciplesPaymentof IHTExemptions Transfer ofnil rate bandDeathestateCLTs andPETsPayment of IHTEvent Liability to pay tax Due dateCLT lifetime tax Donor unless trustees agree to pay Later of(1) 30 April just after end of tax year(2) Six months after end of month of transferCLT death tax Trustees Six months from end of month of donor's deathPET Donee Six months from end of month of donor's deathDeath estate PRs Earlier of(1) Delivery of account(2) Six months from end of month of donor'sdeath(019)ACF6PC13_CH19.qxp10/24/20142:48 AMPage 11420: Computing taxable total profits Topic ListAccounting periodsResidenceTaxable total profits Trading profits and property businessincomeLoan relationshipsLong period of accountIn this chapter we will cover the structure of thecomputation of taxable total profits. This is an essentialpart of your examination as one 15 mark Section Bquestion will focus on corporation tax.(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 115Residence Trading profits andproperty business incomeAccounting periodsLong periodof accountLoan relationshipsTaxable totalprofits An accounting period can never exceed 12 months. Ifa company prepares accounts for a period exceedingtwelve months, the period of account must be splitinto two accounting periods.The first 12 months formthe first accounting periodThe remaining months formthe second accounting periodPeriod of accountA period of account is the period for which accounts are prepared.Accounting periodAn accounting period is the period for whichcorporation tax is charged. It starts when the company starts totrade, or immediately after the end of theprevious accounting period. It ends 12 months after it starts or, ifearlier, when the period of account ends.(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 116Residence Trading profits andproperty business incomeAccounting periodsLong periodof accountLoan relationshipsTaxable totalprofits 20: Computing taxable total profitsPage 117ResidenceA company is resident in the UK if it isincorporated in the UK or if its central managementand control are in the UK.A UK resident company is subject to UKcorporation tax on its worldwide profits.(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 117Residence Trading profits andproperty business incomeAccounting periodsLong periodof accountLoan relationshipsTaxable totalprofits Proforma for calculating taxabletotal profitsTrading profits XInterest income XMiscellaneous income XProperty business income XChargeable gains X__Total profits XLess: losses deductible from total profits (X)Less: qualifying charitable donations (X)__Taxable total profitsX____A company's taxable total profits are arrived atby aggregating its various sources of income andchargeable gains (total profits) and thendeducting qualifying charitable donations andcertain losses.Dividends from other companies (UK and overseas) are not included in taxable total profits.Profits of tradesInterest from non-trading loan relationships(eg bank/building society interest)Any other profitsIncome from land and buildings in the UKTaxable total profits(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 118Residence Trading profits andproperty business incomeAccounting periodsLong periodof accountLoan relationshipsTaxable totalprofits 20: Computing taxable total profitsPage 119Trading profits Exception: Interest on a loan taken out to buy propertyis dealt with under the loan relationship rules, not aspart of the property business.Property business lossesThe computation of trading profits followsincome tax principles.Set against total profits of the company for thesame accounting period, then carry the excessforward as a property business loss.Proforma Net profit per accounts XAdd expenditure not allowed fortax purposes X__XDeduct Income not taxable as trading income XExpenditure not charged in the accounts but allowable for tax XCapital allowances X__(X)__Taxable trading profits X____Remember there is no disallowance of expenditureor restriction of capital allowances for private use.Property business incomeThe computation of property business incomefollows income tax principles.(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 119Residence Trading profits andproperty business incomeAccounting periodsLong periodof accountLoan relationshipsTaxable totalprofits Trading loan relationship Non-trading loan relationshipLoan relationshipsA company that borrows or invests money has a loan relationship. Held for trade purposes (eg debenturesissued for trade purposes) Costs (eg interest) accruing are deductibletrading income expenses Income accruing (eg interest income) istaxable as trading income. Held for non-trade purposes (eg buildingsociety account held for investmentpurposes) Tax income accruing as interest income Deduct expenses accruing from the pool ofinterest income. Net deficits are notexaminable(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 120Residence Trading profits andproperty business incomeAccounting periodsLong periodof accountLoan relationshipsTaxable totalprofits 20: Computing taxable total profitsPage 121ExampleIf A Ltd prepares accounts for the fifteen monthsto 31.12.14, there will be one 12 monthaccounting period to 30.9.14 and a second threemonth accounting period to 31.12.14.The first 12 monthsform the firstaccounting periodThe remaining monthsform the secondaccounting periodDivision of profits Divide profits between the accounting periods as follows: Trading income: time apportion the amount beforecapital allowances Compute capital allowances separately for eachperiod Property business income: time apportion Interest income: allocate to period in which it accrues Miscellaneous income: time apportion Gains: allocate to the period in which they arerealised Qualifying charitable donations: allocate to the periodin which they are paidLong period of account(> 12 months)(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 121Notes(020)ACF6PC13_CH20.qxp10/24/20142:51 AMPage 12221: Computing the corporation tax liabilityTopic ListThe charge to corporation taxAssociated companiesIn this chapter we will cover the calculation of thecorporation tax liability. This too is an essential part ofyour examination.(021)ACF6PC13_CH21.qxp10/24/20142:47 AMPage 123AssociatedcompaniesThe charge tocorporation taxRates of corporation tax (CT) are: Set for financial years Dependent on the level of augmented profitsA financial year runs from 1 April in one year to31 March in the next. Financial Year 2014 (FY 2014)runs from 1 April 2014 to 31 March 2015.If there is a change in the rate of CT, and a company'saccounting period does not fall entirely into onefinancial year, the taxable total profits and augmentedprofits of the period are time apportioned to the twofinancial years.Augmented profits are taxable total profits plus the grossed up amount of dividends (FII) received from non-associated companies.RatesAugmented profits(021)ACF6PC13_CH21.qxp10/24/20142:47 AMPage 12421: Computing the corporation tax liability Page 125Marginal relief is given if augmented profits fall betweenthe upper and lower limitsThe main rate (FY 2014 21%) of CT applies ifaugmented profits exceed theupper limit.The small profits rate (FY2014 20%) applies ifaugmented profits are belowthe lower limit.Exam focusThe marginal relief formula willbe given to you in the exam.It is: standard fraction (Upper limit augmented profits) profits augmentedprofits total taxable(021)ACF6PC13_CH21.qxp10/24/20142:47 AMPage 125AssociatedcompaniesThe charge tocorporation taxUpper and lower limitsThe lower and upper limits are: Multiplied by months/12 for short accountingperiods Shared equally between the number of'associated' companies in the groupExclude dormant companies butinclude trading non-residentcompaniesCompanies under common controlExampleA Ltd, which has one associated company,prepares accounts for the nine months to31.3.15. The upper limit for this period is9/12 = 562,50021,500,000(021)ACF6PC13_CH21.qxp10/24/20142:47 AMPage 12622: Chargeable gains for companiesTopic ListCalculation of chargeable gainsDisposal of shares Rollover reliefThis chapter deals with calculating chargeable gains forcompanies.A key area is the rules for the disposal of shares andsecurities.(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 127Calculation ofchargeable gainsDisposal ofshares Rollover reliefComputationCompute a gain as follows:Proceeds XLess: allowable cost (X)Less: indexation allowance (X)__Chargeable gainX__(1) Cannot create or increase a loss(2) Round to three decimal placesbefore multiplying by cost.RPI for month of disposal RPI for month of acquisitionRPI for month of acquisition12Include in total profits, and so charged to corporation taxNo annual exempt amount(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 128Disposal ofsharesCalculation ofchargeable gainsRollover relief22: Chargeable gains for companies Page 129Shares and securitiesFor company shareholders disposals ofshares and securities are matched withacquisitions in the following order.(i) Shares acquired on the same day(ii) Shares acquired in the previous nine days,taking earlier acquisitions first(iii) Shares from the FA 1985 pool(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 129Disposal ofsharesCalculation ofchargeable gainsRollover reliefThe FA 1985 pool is kept in three columns:The number of sharesThe costThe indexed costOperative events are acquisitions and disposals(apart from bonus issues)Do not round indexation to three decimal placesafter April 1985.The indexation allowance is the indexed costtaken out of the indexed cost column minus thecost taken out of the cost column.At each operative event(1) Increase the indexed cost column by the indexedrise since the date of the last operative event, then(2) Add the cost of any shares acquired to both thecost/indexed cost columns, or(3) Deduct a pro-rata slice from the cost/indexed costcolumns in respect of any shares disposed of.123Operative event(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 13022: Chargeable gains for companies Page 131Reorganisations and takeovers Apportion the cost and indexed cost of the oldshares to the new assets received in proportionto their values. Where the new assets include cash, compute achargeable gain using the cash received andthe parts of the cost and indexed cost of the oldshares apportioned to that cash. If just a takeover qualifying for the 'paper forpaper' treatment, the cost and indexed cost ofthe original holding is passed onto the newholding which now takes its place.(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 131Rollover relief Calculation ofchargeable gainsDisposal ofshares Companies can claim to defer gainsarising on the disposal of businessassets that are being replaced if:The old and the new assetsare used in the trade of thecompanyThe old and the new assetsare on the list of qualifyingassetsThe new asset is bought inthe period starting 12 monthsbefore and ending 36 monthsafter the disposal123Is the new asset a depreciating asset?Is the new asset a non-depreciating asset?A depreciating asset is one with anexpected life of 60 years or less (egfixed plant and machinery). Land and buildings (including parts of buildings) occupiedas well as used only for the purposes of the trade. Fixed (that is, immovable) plant and machinery.Eligible assets(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 13222: Chargeable gains for companies Page 133For a non-depreciating asset the gain is deductedfrom the base cost of the new asset.For a depreciating asset the gain is deferred until itcrystallises at a later date.Relief is proportionately restricted when an assethas not been used for trade purposes throughoutits life.If a part of the proceeds of the old asset are notreinvested, the gain is chargeable up to the amountnot reinvested.If a non-depreciating qualifying asset is boughtbefore the gain crystallises, the deferred gain maybe rolled into the base cost of that asset.The gain crystallises on the earliest of:The disposal of the replacement assetTen years after the acquisition of thereplacement assetThe date the replacement asset ceases to beused in the trade123(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 133Notes(022)ACF6PC13_CH22.qxp10/24/20142:47 AMPage 13423: LossesTopic ListTrading lossesNon-trading lossesIn this chapter we will see how a single company mayobtain tax relief for its trading and non-trading losses.Losses are a key topic area for exam purposes. The bestway of learning how to deal with losses is to practisequestions involving losses in the BPP Learning MediaPractice & Revision Kit.(023)ACF6PC13_CH23.qxp10/24/20142:47 AMPage 135Non-tradinglossesTradinglossesA company's trading loss may be:(1) Set against other profits of the same accountingperiod(2) Set against profits of the previous 12 months(3) Carried forward to set against the first availableprofits from the same tradeBefore qualifying charitable donations If pro-rating is necessary, pro-rate profits beforequalifying charitable donations to compute maximumrelief.Reliefs (1) and (2) need to be claimed. A company can choose to claimrelief (1) only (ie relief (1) but not relief (2)). However, if relief (2) is to beclaimed, relief (1) must be claimed first. Relief (3) is given automatically toany loss not relieved under (1) or (2).Trading losses(023)ACF6PC13_CH23.qxp10/24/20142:47 AMPage 13623: Losses Page 137Cessation of trade The 12 month carry back period in (2) above isextended to 36 months where the trading lossarose in the 12 months prior to the cessation oftrade. Qualifying charitable donations are unrelieved.The choice between reliefs Relieve losses at the highest possible marginaltax rate Consider timing: earlier relief is better than laterrelief(023)ACF6PC13_CH23.qxp10/24/20142:47 AMPage 137Non-tradinglossesTradinglossesNon-trading lossesCapital losses can only be set againstcapital gains in current or futureaccounting periods. They must be setagainst the first available gains.Property business losses are first setagainst total profits for the current period.Any excess is then carried forward asthough it were a property business lossarising in a later period.Capital losses Property business income(023)ACF6PC13_CH23.qxp10/24/20142:47 AMPage 13824: GroupsTopic ListGroup reliefCapital gains groupWhen presented with a group question in the examalways establish the percentage holding at each leveland the effective interest of the holding company in eachsubsidiary. These figures will determine the reliefsavailable.(024)ACF6PC13_CH24.qxp10/24/20142:47 AMPage 139Trading lossesExcess property business lossesExcess qualifying charitable donationsLosses available to surrenderCapitalgains groupGroupreliefGroup relief allows the losses of one group company tobe set against the taxable total profits of another.For a group relief group to exist one company musthave a 75% effective interest in the other, or theremust be a third company which has a 75% effectiveinterest in both.Exam focusGive group relief where it will save most tax:firstly to companies in the marginal relief band(marginal rate 21.25%), then to companiespaying the 21% rate, then to companies payingat the 20% rate.Capital losses cannot be group relieved.Group relief group(024)ACF6PC13_CH24.qxp10/24/20142:47 AMPage 140Corresponding accounting periods 24: Groups Page 141Available profitsProfits available to absorb group relief are total profitsless qualifying charitable donations and current andbrought forward losses.Group relief is strictly a current period relief. Ifaccounting periods do not coincide, the profits andlosses must be time-apportioned. Only the profits andlosses of the period of overlap may be matched up.Group relief is given before relief for any amountsbrought back from later periods.A claim for group relief is normally made onthe claimant company's tax return. It isineffective unless notice of consent is alsogiven by the surrendering company.(024)ACF6PC13_CH24.qxp10/24/20142:47 AMPage 141No gain/loss arises when an asset is transferredwithin a capital gains group.Capitalgains groupGroupreliefA capital gains group starts with the top company(which must be included). It carries on down whilethere is a 75% holding at each level and the effectiveinterest of the top company is over 50%.Rollover reliefAll members of a capital gains group may be treatedas a single unit for the purpose of rollover relief.Capital gains groupTwo members of a capital gains group can elect totransfer gains/losses between them.(024)ACF6PC13_CH24.qxp10/24/20142:47 AMPage 14225: Self-assessment and payment of tax by companiesTopic ListReturnsPayment of taxIn this chapter we look at both the administration ofcorporation tax (CT) and when that tax must be paid.This is a key exam topic.(025)ACF6PC13_CH25.qxp10/24/20142:47 AMPage 143Paymentof taxReturnsA company must normally file its CT return by the duefiling date which is the later of: Twelve months after the end of the period to whichthe return relates Three months after a notice requiring the return wasissuedNotice to check a return must be given by 12 monthsafter The actual filing date if filed on or before due filingdate The 31 January, 30 April, 31 July or 31 October nextfollowing the actual filing date if filed late Initial fixed penalty is 100 rising to 200 ifthe return is more than three months late. Fixed penalties rise to 500 and 1,000 if thereturn for each of the two preceding periodswas also late. If the return was between six and 12 monthslate there is an additional tax geared penaltyof 10% of the tax unpaid six months after thefiling date. If the return is over 12 months late the taxgeared penalty is 20% of the tax unpaid sixmonths after the filing date.Late filing of ReturnRecords must generally be kept for six years fromthe end of the accounting period concerned.ReturnsCompliance checksCommon penalty regime applies for errors onreturn/late notification of chargeability (025)ACF6PC13_CH25.qxp10/24/20142:47 AMPage 144Paymentof taxReturns25: Self-assessment and payment of tax by companies Page 145Due dates For a 12 month AP instalments are due in: Months 7 and 10 in the period Months 1 and 4 in the following period For an AP less than 12 months instalments aredue in: Month 7 of the period Then at three monthly intervals Final payment in month 4 of next period Amount of instalment is3 CT/n where n islength of AP and CT is amount due ininstalments Instalments are due on 14th day of the monthAny company that pays CT at the main rateInterest on overdue tax runs from the due date. Overpaid tax earns interest. Interest received andinterest paid are dealt with as credits and debits on a non-trading loan relationship. 'Large' companies must pay their anticipated CTliability in quarterly instalments. Other companies must pay their CT liability ninemonths and one day after the end of the accountingperiod (AP)Quarterly instalments (025)ACF6PC13_CH25.qxp10/24/20142:47 AMPage 145Notes(025)ACF6PC13_CH25.qxp10/24/20142:47 AMPage 14626: An introduction to VATTopic ListScope of VATTaxable and exempt suppliesRegistrationAccounting and administrationValuation of suppliesDeduction of input taxVAT is a tax with many detailed rules.VAT may be examined in Section A and in a 10 markquestion in Section B.(026)ACF6PC13_CH26.qxp10/24/20144:08 PMPage 147Accounting andadministrationTaxable andexempt suppliesDeduction ofinput taxRegistration Scopeof VATValuation ofsuppliesA taxable supply is a supply of goods orservices made in the UK other than an exemptsupply.VAT is a tax on revenue/turnover, not on profits. It isimposed at each stage in a chain of sales, in such away that the burden falls on the final consumer.VAT applies to taxable supplies of goods orservices made in the UK by a taxable person inthe course of a business.A taxable person is a pers