Melville Finance Act 2010-7!12!10

© Pearson Education Limited 2011

Taxation:Finance Act 2010

Sixteenth edition

Alan MelvilleFCA, BSc, Cert. Ed

© Pearson Education Limited 2011Lecturers adopting the main text are permitted to download and photocopy the manual as required.

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Instructor’s Manual

ISBN: 978-0-273-74493-1

Instructor's Manual 2010.indd 1 4/8/10 13:45:27

Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEngland

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Sixteenth edition published 2011


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ISBN: 978-0-273-74493-1

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Melville: Taxation: Finance Act 2010, Instructor’s Manual, 16th ed.

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Instructor's Manual 2010.indd 2 4/8/10 13:45:27

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16th ed.

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Contents

Preface v Chapter 2 Introduction to income tax Solutions 2.5 and 2.6 1 Chapter 3 Personal allowances Solutions 3.8 and 3.9 2 Chapter 4 Payments and gifts eligible for tax relief Solutions 4.8 and 4.9 3 Chapter 5 Income from property Solutions 5.6 and 5.7 5 Chapter 6 Income from savings and investments Solution 6.6 6 Chapter 7 Income from employment Solutions 7.8 and 7.9 7 Chapter 8 Income from self-employment: Computation of income Solutions 8.7 and 8.8 8 Chapter 9 Income from self-employment: Basis periods Solutions 9.6, 9.7, 9.8 and 9.9 9 Chapter 10 Income from self-employment: Capital allowances Solutions 10.7 and 10.8 11 Chapter 11 Income from self-employment: Trading losses Solutions 11.5 and 11.6 13 Chapter 12 Income from self-employment: Partnerships Solution 12.5 14 Chapter 13 Pension contributions Solution 13.6 16 Chapter 14 Payment of income tax, surcharges, interest and penalties Solution 14.4 17 Chapter 15 National Insurance contributions Solutions 15.4 and 15.5 17 Review questions (Set A) Solutions A6, A7, A8 and A9 18 Chapter 16 Introduction to capital gains tax Solutions 16.8, 16.9 and 16.10 22 Chapter 17 Computation of gains and losses Solutions 17.6 and 17.7 23 Chapter 18 Chattels and wasting assets Solutions 18.8, 18.9 and 18.10 24


iv


Chapter 19 Shares and securities Solution 19.8, 19.9, 19.10 and 19.11 26 Chapter 20 Principal private residences Solution 20.5 29 Chapter 21 CGT reliefs Solutions 21.5, 21.6, 21.7 and 21.8 30 Review questions (Set B) Solutions B6, B7, B8, B9 and B10 32 Chapter 22 Introduction to corporation tax Solution 22.6 35 Chapter 24 Computation and payment of the corporation tax liability Solutions 24.6 and 24.7 36 Chapter 25 Income tax and advance corporation tax Solutions 25.5 and 25.6 38 Chapter 26 Corporation tax losses Solution 26.6 39 Chapter 27 Close companies and companies with investment business Solutions 27.4 and 27.5 40 Chapter 28 Groups of companies and reconstructions Solution 28.6 41 Review questions (Set C) Solutions C6, C7, C8, C9 and C10 42 Chapter 29 Value added tax (1) Solution 29.5 45 Chapter 30 Value added tax (2) Solutions 30.5 and 30.6 46 Chapter 31 Inheritance tax Solutions 31.6 and 31.7 47 Chapter 32 Overseas aspects of taxation Solutions 32.7 and 32.8 49 Review questions (Set D) Solutions D5, D6, D7 and D8 51


v


Preface

As indicated in the preface to Taxation, the main book does not contain solutions for those exercises and review questions which are marked with an asterisk (*). This provides lecturers who have adopted the textbook with a source of problems which may be used for tutorial work and revision. The purpose of this Instructor's Manual is to supply suggested solutions to those exercises and questions. I should like to remind the reader that, whilst the review questions are drawn from the past examination papers of the professional accounting bodies, the answers provided here to those questions are entirely my own responsibility.

Alan Melville June 2010


1


Chapter 2 Introduction to income tax

2.5 Total Non-savings Savings

£ £ £ Employment income 7,840 7,840 NSB interest 60 60 Building society interest £9,360 × 100/80 11,700 11,700 ——— ——— ——— Total income 19,600 7,840 11,760 Less: Personal allowance 6,475 6,475 ——— ——— ——— Taxable income 13,125 1,365 11,760 ——— ——— ——— Income tax due Non-savings income : Basic rate 1,365 @ 20% 273.00 Savings income : Starting rate 1,075 @ 10% 107.50 : Basic rate 10,685 @ 20% 2,137.00 ——— 13,125 ——— ———— Tax borne 2,517.50 Less: Tax deducted at source 2,340.00 ———— Tax payable 177.50 ———— Notes: (a) The premium bond prize is exempt from income tax. (b) The NSB interest is received gross and so does not need to be grossed-up. (c) Ivan will also be given credit for any PAYE tax suffered on his salary.

2.6 Total Non-savings Dividends

£ £ £ Business profits 31,680 31,680 Income from property 3,750 3,750 UK dividends £109,890 + tax credit £12,210 122,100 122,100 ——— ——— ——— Total income 157,530 35,430 122,100 Less: Personal allowance 0 0 ——— ——— ——— Taxable income 157,530 35,430 122,100 ——— ——— ——— Income tax due Non-savings income : Basic rate 35,430 @ 20% 7,086.00 Dividend income : Ordinary rate 1,970 @ 10% 197.00 : Upper rate 112,600 @ 32.5% 36,595.00 : Additional rate 7,530 @ 42.5% 3,200.25 ——— 157,530 ——— ———— Tax borne 47,078.25 Less: Tax credits on dividends 12,210.00 ———— Tax payable 34,868.25 ————


2


Chapter 3 Personal allowances

3.8 Husband Wife £ £ Retirement pension 10,870 16,675 Less: Personal allowance 9,640 9,490 ——— ——— Taxable income 1,230 7,185 ——— ——— £1,230 @ 20% 246.00 £7,185 @ 20% 1,437.00 Less: MCA £6,965 @ 10% = £696.50 246.00 MCA transferred from husband 450.50 ——— ———— Tax borne 0.00 986.50 ——— ————

3.9 <------------- Bill --------------> <---------- Hazel ------------> Total Non-savings Dividends Total Non-savings Savings £ £ £ £ £ £ Business profits 45,930 45,930 UK dividends £4,680 + £520 5,200 5,200 Employment income 220,570 220,570 BSI £2,432 × 100/80 3,040 3,040 ——— ——— ——— ——— ——— ——— Total income 51,130 45,930 5,200 223,610 220,570 3,040 Less: Personal allowance 6,475 6,475 0 0 ——— ——— ——— ——— ——— ——— Taxable income 44,655 39,455 5,200 223,610 220,570 3,040 ——— ——— ——— ——— ——— ——— Bill Hazel £ £ 37,400 37,400 @ 20% 7,480.00 7,480.00 2,055 112,600 @ 40% 822.00 45,040.00 5,200 @ 32.5% 1,690.00 73,610 @ 50% 36,805.00 ——— ——— 44,655 223,610 ——— ——— ———— ———— Tax borne and tax liability 9,992.00 89,325.00 Less: Tax credits 520.00 Tax deducted at source 608.00 ———— ———— Tax payable 9,472.00 88,717.00 ———— ———— Note: Hazel will be given credit for tax already paid under the PAYE system.


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Chapter 4 Payments and gifts eligible for tax relief

4.8 <---------- Pauline -----------> <---------- Adrian -------------> Total Non-savings Savings Total Non-savings Dividends £ £ £ £ £ £ Retirement pension 10,930 10,930 Business profits 32,130 32,130 BSI £2,420 × 100/80 3,025 3,025 UK dividends £1,575 + £175 1,750 1,750 ——— ——— ——— ——— ——— ——— Total income 13,955 10,930 3,025 33,880 32,130 1,750 Less: Personal allowance 9,640 9,640 6,475 6,475 ——— ——— ——— ——— ——— ——— Taxable income 4,315 1,290 3,025 27,405 25,655 1,750 ——— ——— ——— ——— ——— ——— Pauline Adrian £ £ 1,290 @ 20% 258.00 1,150 @ 10% 115.00 1,875 @ 20% 375.00 25,655 @ 20% 5,131.00 1,750 @ 10% 175.00 ——— ——— ——— ———— 4,315 27,405 748.00 5,306.00 ——— ——— Less: Maintenance £2,670 @ 10% (267.00 ) MCA £4,490 × 6/12 @ 10% (224.50 ) ——— ———— Tax borne and tax liability 748.00 4,814.50 Less: Tax deducted at source 605.00 Tax credits 175.00 ——— ———— Tax payable 143.00 4,639.50 ——— ———— Notes: (i) Pauline's non-savings income occupies only £1,290 of the basic rate band. This allows £1,150 of

her savings income (£2,440 – £1,290) to be taxed at the starting rate. The remainder of her savings income is taxed at the basic rate.

(ii) Adrian's former wife was born before 6 April 1935, so maintenance relief is available. (iii) MCA is available since Pauline was born before 6 April 1935. Adrian is the higher-income partner

and his income of £33,880 exceeds the income limit by £10,980. Therefore he must lose £5,490 in allowances. His own over-65 personal allowance is first reduced from £9,490 to £6,475 (a reduction of £3,015). The remaining £2,475 is subtracted from the MCA of £6,965, giving an MCA of £4,490. This is then further reduced since the marriage took place part-way through the tax year.

(iv) Pauline will also be given credit for any PAYE tax suffered on her pension.


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4.9 Total Non-savings Dividends

£ £ £ Employment income 114,600 114,600 UK dividends £3,780 + tax credit £420 4,200 4,200 ——— ——— ——— Total income 118,800 114,600 4,200 Less: Personal allowance 1,575 1,575 ——— ——— ——— Taxable income 117,225 113,025 4,200 ——— ——— ——— Income tax due Non-savings income : Basic rate 46,400 @ 20% 9,280.00 : Higher rate 66,625 @ 40% 26,650.00 Dividend income : Upper rate 4,200 @ 32.5% 1,365.00 ——— 117,225 ——— ———— Tax liability 37,295.00 Less: Tax credits on dividends 420.00 ———— Tax payable 36,875.00 ———— Notes: (i) The grossed-up donation is £9,000 (£7,200 × 100/80). (ii) Adjusted net income is £109,800 (£118,800 – £9,000). Therefore the personal allowance is reduced

to £1,575 (£6,475 – 1/2 × £9,800). (iii) The basic rate limit is increased to £46,400 (£37,400 + £9,000). (iv) Tax paid under PAYE would also be deducted.


5


Chapter 5 Income from property

5.6 The income tax assessment on the landlord is £31,200 (£40,000 – 22% of £40,000). Peter's income tax assessment is therefore: £ Premium received 14,000 Less: 2% × 3 × £14,000 840 ——— 13,160

Less: Premium paid £31,200 ×

!

4

12 10,400

——— Assessable premium 2,760 ———

5.7 Total Non-savings Savings

£ £ £ Property income (see notes) 6,300 6,300 Retirement pension 11,284 11,284 Building society interest £9,680 × 100/80 12,100 12,100 ——— ——— ——— Total income 29,684 17,584 12,100 Less: Property losses b/f 6,300 6,300 ——— ——— ——— Net income 23,384 11,284 12,100 Less: Personal allowance (see notes) 9,248 9,248 ——— ——— ——— Taxable income 14,136 2,036 12,100 ——— ——— ——— Income tax due Non-savings income : Basic rate 2,036 @ 20% 407.20 Savings income : Starting rate 404 @ 10% 40.40 : Basic rate 11,696 @ 20% 2,339.20 ——— 14,136 ——— ———— Tax borne 2,786.80 Less: Tax deducted at source 2,420.00 ———— Tax payable 366.80 ———— Notes: (i) Property income is £6,300 (£10,400 – £4,100). Therefore losses brought forward of £6,300 can be

relieved in 2010-11, leaving losses of £250 to carry forward to 2011-12. (ii) Melissa's income is over the income limit by £484 (£23,384 – £22,900). Her personal allowance is

therefore reduced to £9,248 (£9,490 – 1/2 × £484). (iii) Melissa will be given credit for any PAYE tax deducted from her pension.


6


Chapter 6 Income from savings and investments

6.6 Total Non-savings Savings Dividends

£ £ £ £ Income from property £12,620 – £2,220 10,400 10,400 Bank deposit interest £992 × 100/80 1,240 1,240 Gilt interest 1,800 1,800 UK dividends £12,600 + tax credit £1,400 14,000 14,000 ——— ——— ——— ——— 27,440 10,400 3,040 14,000 Income tax @ 20%, 20% or 10% 4,088 2,080 608 1,400 ——— ——— ——— ——— Income after tax 23,352 8,320 2,432 12,600 Administration expenses 2,700 2,700 ——— ——— ——— ——— Income after tax and expenses 20,652 8,320 2,432 9,900 ——— ——— ——— ——— (a) The trustees' tax liability for the year is £4,088. The tax deducted at source of £248 and the tax

credits of £1,400 are deducted, leaving tax payable by the trustees of £2,440.

(b) The income of each life tenant is: Gross Tax deducted Tax credits

£ £ £ Non-savings £8,320 × 1/2 × 100/80 5,200 1,040 Savings £2,432 × 1/2 × 100/80 1,520 304 Dividends £9,900 × 1/2 + tax credit 5,500 550 ——— ——— ——— Total 12,220 1,344 550 ——— ——— ———


7


Chapter 7 Income from employment

7.8 The key points are:

(a) Emma is a P11D employee and is taxed on the full cost of all assessable benefits provided by her employer.

(b) Her bonus will be taxed on the receipts basis.

(c) She will pay income tax (and NICs) under the PAYE system on her salary and bonus, computed using a tax code issued by HMRC. The tax code will reflect her entitlement to personal allowances but these will be set to some extent against her benefits. If the benefits exceed her personal allowances she may be issued a "K" code.

(d) Her general expenses allowance will be treated as part of her earnings for the year and she may then claim a deduction for the expenses incurred. Entertaining expenses will not be allowable.

(e) She will be assessed on a car benefit calculated at between 5% and 35% of the list price of her car, depending on the car's emission rating. She will also be assessed on a fuel benefit which will be equal (in 2010-11) to a percentage of £18,000. The applicable percentage is the same as that used in calculating her assessable car benefit.

(f) The assessment on the beneficial loan will be calculated by applying the official rate of interest to the amount of the loan.

(g) The private medical insurance subscription is a taxable benefit.

7.9 (a) £9,750 + 4% of (£250,000 – £75,000) + £2,300 + 20% of £8,500 = £20,750.

(b) 15% + 10% = 25% of £45,000 = £11,250. Fuel benefit is £4,500 (25% of £18,000).

(c) (4% – 1.25%) × £50,000 is £1,375.

The total of Jim's assessable benefits is therefore £37,875 (£20,750 + £11,250 + £4,500 + £1,375).


8


Chapter 8 Income from self-employment: Computation of income

8.7 The figure of £174 charged to the income statement can be analysed as follows: £ Trade debts written off 638 Staff loan recovered (500) Decrease in general allowance (£150 – £200) (50) Increase in specific allowance (£317 – £231) 86 —— 174 —— The amount allowable is £724 (£638 + £86), so a further £550 should be deducted when calculating the trading profit.

8.8 £ £ £ Net profit for the year (9,142) Add: Disallowed expenditure:

Wages paid to Imran's son 1,000 Personal income tax 3,394 Personal NICs 121 Private medical insurance 414 Telephone (1/6th of £1,650) 275 Repairs 750 Loss on disposal of motor vehicle 422 Speeding fine 700 Motor expenses (1/10th of (£1,165 + £2,815 + £610)) 459 Business entertaining 3,320 Political donation 200 General allowance for bad debts (100) Lease premium amortisation 700 Depreciation 8,749 20,404 ———

Trading income not shown in the accounts: Own consumption (20/80th of £220) 55 20,459 ——— ——— 11,317

Less: Non-trading income: Interest receivable 212 Surplus on sale of office equipment 300 512 ———

Allowable expenditure not shown in the accounts: Lease premium (1/10th of 82% of £7,000) 574 1,086 —— ———

Trading profit (before capital allowances) 10,231 ———


9


Chapter 9 Income from self-employment: Basis periods

9.6 (a) Year Basis Basis period Workings Trading income £ 2007-08 Actual 1/1/08 to 5/4/08 £7,200 × 3/12 1,800 2008-09 12 months to a/c y/e 31/12/08 7,200 date in year 2 2009-10 CYB y/e 31/12/09 5,010 2010-11 CYB y/e 31/12/10 4,570

(b) 2007-08 cannot be averaged (first tax year) 2008-09 can be averaged with 2009-10, since the difference between £7,200 and £5,010 exceeds

30% of £7,200. The revised income for each year is £6,105 (the average of £7,200 and £5,010). Marginal relief is available for 2009-10 and 2010-11, since the difference between £6,105 and

4,570 exceeds 25% of £6,105. Each figure is adjusted by 3 × (£6,105 – £4,570) – 0.75 × £6,105 = £26, revising the trading income to £6,079 for 2009-10 and £4,596 for 2010-11.

9.7 Year Basis period Workings Trading income £ 2005-06 1/10/05 to 5/4/06 £3,500 × 6/7 3,000 2006-07 1/10/05 to 30/9/06 £3,500 + 5/12 × £6,480 6,200 2007-08 y/e 30/4/07 6,480 2008-09 y/e 30/4/08 7,700 2009-10 y/e 30/4/09 7,900 2010-11 1/5/09 to 31/1/11 £8,200 + £7,300 – £5,700 9,800 ——— 41,080 ——— Note: Overlap periods are 1 October 2005 to 5 April 2006 (profits £3,000) and 1 May 2006 to 30 September 2006 (profits £6,480 × 5/12 = £2,700). Therefore total overlap profits are £5,700.

9.8 The year of change is 2009-10 (the first year in which the old date was not used). The basis period for 2008-09 ended on 31 December 2008, so the relevant period is from 1 January 2009 to 31 May 2009. This is less than 12 months so the basis period for 2009-10 is the year to 31 May 2009. Trading income for 2005-06 to 2011-12 is as follows:

Year Basis period Workings Trading income £ 2005-06 1/3/06 to 5/4/06 £43,700 × 1/10 4,370 2006-07 1/3/06 to 28/2/07 £43,700 + 2/12 × £52,590 52,465 2007-08 y/e 31/12/07 52,590 2008-09 y/e 31/12/08 54,300 2009-10 y/e 31/5/09 £54,300 × 7/12 + £71,060 × 5/17 52,575 2010-11 y/e 31/5/10 £71,060 × 12/17 50,160 2011-12 y/e 31/5/11 68,200


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Notes:

(i) The first overlap period runs from 1 March 2006 to 5 April 2006 (1 month) with overlap profits of £4,370.

(ii) The second overlap period runs from 1 January 2007 to 28 February 2007 (2 months) with overlap profits of £52,590 × 2/12 = £8,765.

(iii) The third overlap period runs from 1 June 2008 to 31 December 2008 (7 months) with overlap profits of £54,300 × 7/12 = £31,675.

(iv) Total overlap profits carried forward (10 months) are £44,810.

9.9 The year of change is 2007-08 (the first year in which the old date was not used and the new date was used). The basis period for 2006-07 ended on 30 April 2006, so the relevant period is from 1 May 2006 to 30 June 2007. This is not less than 12 months so the basis period for 2007-08 is the relevant period itself. Trading income is as follows:

Year Basis period Workings Trading income £ 2003-04 1/1/04 to 5/4/04 £33,920 × 3/16 6,360 2004-05 6/4/04 to 5/4/05 £33,920 × 12/16 25,440 2005-06 y/e 30/4/05 £33,920 × 12/16 25,440 2006-07 y/e 30/4/06 29,700 2007-08 1/5/06 to 30/6/07 £33,300 – overlap relief £4,240 29,060 2008-09 y/e 30/6/08 41,600 2009-10 y/e 30/6/09 37,900 2010-11 1/7/09 to 31/5/10 £23,500 – overlap relief £19,080 4,420

Notes:

(i) There is an overlap period from 1 May 2004 to 5 April 2005 (11 months) with overlap profits of £33,920 × 11/16 = £23,320.

(ii) The length of the relevant period on the change of accounting date (14 months) exceeds 12 months by 2 months. Therefore overlap relief is available in 2007-08 of £23,320 × 2/11 = £4,240.

(iii) The remaining overlap profits (£23,320 – £4,240 = £19,080) are relieved on the cessation of trade.


11


Chapter 10 Income from self-employment: Capital allowances

10.7 (a) The building is bought by David during the year to 31 March 2002 and is sold during the year to 31

March 2009. WDAs would be calculated at 4% per annum for the years to 31 March 2002, 2003, 2004, 2005, 2006, 2007 and 2008, giving total WDAs of 7 × 4% of £80,000 = £22,400. This leaves a residue of expenditure at 31 March 2008 of £57,600.

However, the building is in non-industrial use on 31 March 2004, 2005 and 2006 so only notional WDAs are calculated for these three years. Actual WDAs would be given for the other years, totalling 4 × 4% of £80,000 = £12,800.

David cannot claim WDA for the year to 31 March 2009.

(b) The residue of expenditure is £57,600. The tax life of the building ends on 30 June 2026, giving an unexpired life of 17 years and 5 months (17.417 years) on the date of the purchase by Diana. She is therefore entitled to an annual WDA of £57,600 divided by 17.417 = £3,307, multiplied by the appropriate percentage

The period to 5 April 2009 is nine months long and is entirely contained within tax year 2008-09, so her WDA for that period is £3,307 × 9/12 × 75% = £1,860.

WDA for the year to 5 April 2010 is £3,307 × 50% = £1,654 and WDA for the year to 5 April 2011 is £3,307 × 25% = £827. No further IBAs may be claimed by Diana since IBAs are abolished as from 6 April 2011.


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10.8 Main Special VW car BMW car All'ces pool rate pool (30% p.u.) (30% p.u.)

£ £ £ £ £ y/e 30/9/10 WDV b/f 113,190 9,900 14,500 Additions (no AIA or FYA) 13,400 8,200 32,000 ——— ——— 126,590 18,100 Disposals (5,310) (17,200) ——— 121,280 ——— Balancing charge (2,700) × 70% (1,890) ——— WDA @ 20% 24,256 24,256 WDA @ 10% 1,810 1,810 WDA @ 20% 6,400 × 70% 4,480 ——— 97,024 Additions 75,000 AIA @ 100% 75,000 - 75,000 ——— Additions 19,600 FYA @ 40% 7,840 11,760 7,840 ——— ——— ——— ——— WDV c/f 108,784 16,290 25,600 ——— Total allowances 111,496 ——— 1/10/10 - 31/3/11 Disposals (110,000) (18,300) (29,000) ——— ——— Balancing charges (1,216) (2,010) (3,226) ——— ——— ——— Balancing charge (3,400) × 70% (2,380) ——— ——— Total allowances (5,606) ——— Notes: (i) Maximum AIA for the year to 30 September 2010 is £75,000 (6/12 × £50,000 + 6/12 × £100,000).

Capital allowances for the year are maximised by setting this AIA entirely against the expenditure on 12 May 2010 (which is not eligible for FYA).

(ii) The car bought in July 2010 has emissions exceeding 160g/km and is therefore allocated to the special rate pool.

(iii) The car sold for £3,000 in July 2010 must have been originally allocated to the main pool, since it was acquired before 6 April 2009 and was not expensive.

(iv) Main pool disposals in the year to 30 September 2010 are £5,310 (£1,310 + £3,000 + £1,000).


13


Chapter 11 Income from self-employment: Trading losses

11.5 £ Trading loss 6/4/10 to 31/5/10 £(36,300) × 2/11 (6,600) Trading loss 1/6/09 to 5/4/10 £(6,840) × 1/12 + £(36,300) × 9/11 (30,270) Overlap relief (7,140) ——— Terminal loss (44,010)

——— The loss may be relieved as follows (later years first):

2007-08 2008-09 2009-10 2010-11 £ £ £ £ Trading income 39,190 16,120 0 0 Investment income 20,000 20,000 20,000 20,000 ——— ——— ——— ——— Total income 59,190 36,120 20,000 20,000 Less: Terminal loss relief (27,890) (16,120) - - ——— ——— ——— ——— Net income 31,300 20,000 20,000 20,000 ——— ——— ——— ———

11.6 (a) Craig's trading income is:

Year Basis period Workings Trading income £

2008-09 1/8/08 to 5/4/09 (£5,460 – £1,140) × 8/12 2,880 2009-10 y/e 31/7/09 £5,460 – £1,140 4,320 2010-11 y/e 31/7/10 nil

(b) The loss in 2010-11 is £29,320 (£27,400 + £1,920). The choices are as follows:

(i) Use early trade losses relief to relieve the loss against the total income of 2007-08, 2008-09 and 2009-10, in that order. These income figures are £4,940, £5,070 (£2,190 + £2,880) and £5,830 (£1,510 + £4,320) respectively. This claim would be pointless since total income in each of these years is fully covered by Craig's personal allowance.

(ii) Relieve the loss against the total income of 2010-11 and/or 2009-10. There is no income in 2010-11 and income of £5,830 in 2009-10 is covered by Craig's personal allowance. However, a claim to relieve losses against total income can be extended by a claim to set any unrelieved losses against capital gains. It may be worth sacrificing the 2009-10 personal allowance so as to be able to set the majority of the loss against the "large capital gain" of that year.

(iii) Carry the loss forward against future trading profits. This assumes that future trading profits are to be expected and that Craig will accept the delay in obtaining loss relief.

More information is needed about the size of the capital gain before a decision can be made. The option of claiming less than the full entitlement of capital allowances should be taken into account when making the final decision.


14


Chapter 12 Income from self-employment: Partnerships

12.5 Cluppins Raddle Bardell Winkle Total £ £ £ £ £ 1/11/06 - 31/5/07 2,000 4,000 6,000

——— ——— ——— y/e 31/5/08 1/6/07 - 31/12/07 £12,000 × 7/12 2,333 4,667 7,000 1/1/08 - 31/5/08 £12,000 × 5/12 1,750 2,000 1,250 5,000

——— ——— ——— ——— 4,083 6,667 1,250 12,000

——— ——— ——— ——— y/e 31/5/09 1/6/08 - 28/2/09 £3,000 × 9/12 788 900 562 2,250 1/3/09 - 31/5/09 £3,000 × 3/12 375 281 94 750

——— ——— ——— ——— ——— 788 1,275 843 94 3,000

——— ——— ——— ——— ——— y/e 31/5/10 4,000 3,000 1,000 8,000

——— ——— ——— ——— Cluppins Year Basis period Workings Trading income £ 2006-07 1/11/06 to 5/4/07 £2,000 × 5/7 1,429 2007-08 1/11/06 to 31/10/07 £2,000 + 5/12 × £4,083 3,701 2008-09 1/11/07 to 28/2/09 £4,083 × 7/12 + £788 – overlap profits of £1,429 1,741

Raddle Year Basis period Workings Trading income £ 2006-07 1/11/06 to 5/4/07 £4,000 × 5/7 2,857 2007-08 1/11/06 to 31/10/07 £4,000 + 5/12 × £6,667 6,778 2008-09 y/e 31/5/08 6,667 2009-10 y/e 31/5/09 1,275 2010-11 y/e 31/5/10 4,000

There is one overlap period from 1 November 2006 to 5 April 2007 (profits £2,857) and another overlap period from 1 June 2007 to 31 October 2007 (profits £6,667 × 5/12 = £2,778). So total overlap profits are £5,635.


15


Bardell Year Basis period Workings Trading income £ 2007-08 1/1/08 to 5/4/08 £1,250 × 3/5 750 2008-09 1/1/08 to 31/12/08 £1,250 + 7/12 × £843 1,742 2009-10 y/e 31/5/09 843 2010-11 y/e 31/5/10 3,000

There is one overlap period from 1 January 2008 to 5 April 2008 (profits £750) and another overlap period from 1 June 2008 to 31 December 2008 (profits £843 × 7/12 = £492). Total overlap profits are £1,242.

Winkle Year Basis period Workings Trading income £ 2008-09 1/3/09 to 5/4/09 £94 × 1/3 31 2009-10 1/3/09 to 28/2/10 £94 + 9/12 × £1,000 844 2010-11 y/e 31/5/10 1,000

There is one overlap period from 1 March 2009 to 5 April 2009 (profits £31) and another overlap period from 1 June 2009 to 28 February 2010 (profits £1,000 × 9/12 = £750). Total overlap profits are £781.


16


Chapter 13 Pension contributions

13.6 (a) Total Non-savings Savings

£ £ £ Trading income 27,490 27,490 Bank interest (£27,208 × 100/80) 34,010 34,010 ——— ——— ——— Total income 61,500 27,490 34,010 Less: Personal allowance 6,475 6,475 ——— ——— ——— Taxable income 55,025 21,015 34,010 ——— ——— ——— Income tax due Non-savings income : Basic rate 21,015 @ 20% 4,203.00 Savings income : Basic rate 23,885 @ 20% 4,777.00 : Higher rate 10,125 @ 40% 4,050.00 ——— 55,025 ——— ———— Tax borne 13,030.00 Less: Tax deducted at source 6,802.00 ———— Tax payable 6,228.00 ———— Note: The gross amount of the pension contributions is £7,500 (£6,000 × 100/80). Therefore the basic rate band has been extended to £44,900 (£37,400 + £7,500).

(b)

If Irma was born in 1942, she is over 65 throughout 2010-11 and so age-related personal allowances must be considered. Her adjusted net income is £54,000 (£61,500 – £7,500). This greatly exceeds the 2010-11 income limit of £22,900 and so it is evident that she will claim only the basic personal allowance of £6,475. Her income tax liability will therefore be the same as in (a) above.


17


Chapter 14 Payment of income tax, surcharges, interest and penalties

14.4 (i) The first POA is 15 days late. Surcharges do not apply to POAs but interest is due of £14.75

(£12,000 × 3% × 15/366). (ii) The second POA is 45 days late. Interest is due of £44.26 (£12,000 × 3% × 45/366). (iii) £14,000 of the balancing payment is 3 days late. This is not more than 28 days so there is no

surcharge but interest is due of £3.44 (£14,000 × 3% × 3/366). (iv) £4,000 of the balancing payment is 319 days late. Surcharges of £200 each (£4,000 × 5%) are

levied on 29 February 2012 (payable 30 March 2012) and on 1 August 2012 (payable 31 August 2012). Interest due on the balancing payment is £104.59 (£4,000 × 3% × 319/366). Interest due on the surcharges (paid 260 days late and 106 days late respectively) is £6.00 (£200 × 3% × 260/366 + £200 × 3% × 106/366).

Chapter 15 National Insurance contributions

15.4 Brenda's Class 1 NICs are assessed on an annual basis, not month by month. Her salary in 2010-11 is £72,000 (12 × £6,000), which is increased by the bonus to £92,000. Class 1 contributions are not payable in respect of the BUPA subscription or the car (not convertible into cash). Class 1A applies to these. Brenda's primary Class 1 contributions are 9.4% × (£40,040 – £5,715) + 11% × (£43,875 – £40,040) + 1% × (£92,000 – £43,875) = £4,129.65. The secondary Class 1 contributions payable by her employer are 9.1% × (£40,040 – £5,715) + 12.8% × (£92,000 – £40,040) = £9,774.45.

The car's emission rating gives an applicable percentage of 37% (15% + 19% + 3%) restricted to 35%. The car benefit assessed on Brenda for income tax purposes is £9,100 (35% × £26,000) and the assessable fuel benefit is £6,300 (35% × £18,000). The Class 1A contribution payable by Brenda's employer is £2,067.20 (12.8% × (£9,100 + £6,300 + £750)).

15.5 Leonard will have paid NICs as follows:

£ Class 1 (12 × 11% × (£2,798 – £476)) 3,065.04 Class 2 (53 @ £2.40) 127.20 Class 4 (8% × (£10,500 – £5,715)) 382.80 ———— 3,575.04 ———— His combined Class 1 and Class 2 contributions are within the allowed maximum for 2010-11 of £4,279.22 so there is no possibility of a Class 1 or Class 2 refund. But his combined Class 1, 2 and 4 contributions exceed the allowed maximum for 2010-11 of £3,180.00. Therefore Leonard is entitled to a refund of Class 4 contributions. Since he has paid only £382.80 in Class 4 contributions, the refund is restricted to £382.80, reduced by one-eighth to £334.95.


18


Review questions (Set A)

A6 (a) Employment income is taxed on the receipts basis. (b) Income tax and NICs are deducted from remuneration under the PAYE system and must be paid

over to HM Revenue and Customs within 14 days of the end of the tax month in which the remuneration is paid (17 days if payment is made by electronic means).

(c) The date of receipt for tax purposes is the earliest of: (i) the date that the income is actually received by the employee (ii) the date that the employee becomes entitled to receive the income

and, for a company director only: (iii) the date that the income is credited to the director in the company's records (iv) the end of a period of account, if the amount of the director's income for that period is

determined before it ends (v) the date that the amount of the director's income for a period of account is determined, if this

falls after the end of that period.

A7 (a) Adjusted profit for year to 30 June 2010

£ £ Net profit per accounts 36,000 Less: Reduction in general inventory reserve 8,000

Reduction in general bad debt allowance 150 NSB interest 160 Lease premium (£6,000 × 90%) × 1/6th 900 9,210 ——— ——— 26,790

Add: Own consumption £500 × (160,000/239,500) 334 Wages £2,600 + £125 2,725 Repairs and renewals 3,107 Political donation 100 Claud's income tax 17,549 Loan to former employee w/off 250 Legal costs £250 + £200 + £190 640 Depreciation 850 Car leasing charge (see note below) 3,640 Loss on sale of office furniture 60 Gift Aid donations 200 Interest on overdue tax 130 Speeding fine 65 1/3rd of remaining motor expenses 645 Lease premium 6,000 Relocation expenditure 2,395 38,690 ——— ———

65,480 Less: Capital allowances 480 ———

Adjusted profit 65,000 ———


19


Note re leased car ("new" rules since leased on or after 6 April 2009): The leased car has emissions which exceed 160g/km and so 15% of the lease rental payments are

disallowed. If the car were used entirely for business purposes, the allowable part of the leasing charge would be £7,140 (85% × £8,400). But business mileage accounts for only 2/3rds of the car's use so the allowable part of the charge is £7,140 × 2/3 = £4,760. The expenditure added back is £3,640 (£8,400 – £4,760).

(b) Class 4 NICs for 2010-11 8% × (£43,875 – £5,715) + 1% × (£65,000 – £43,875) = £3,264.05.

(c) Income tax liability for 2010-11 £ Business profits 65,000 NSB interest 70 ——— 65,070 Less: Personal allowance 6,475 ——— Taxable income 58,595 ——— 50,000 @ 20% 10,000.00 8,595 @ 40% 3,438.00 ——— 58,595 ——— ———— Tax borne 13,438.00 ————

Note: The basic rate band is extended by £250 (£200 × 100/80) for the Gift Aid donation and by £12,350

(£9,880 × 100/80) for the pension contributions, giving £50,000 (£37,400 + £250 + £12,350).

A8 (i) Gifts and entertainment. As regards gifts, the schedule should list gifts to employees (which are

allowable as a trading expense though possibly taxable on the employee) and gifts to others. Most gifts to others will not be allowable, but gifts costing no more than £50 per donee per annum are allowable so long as they carry a prominent advertisement for the business and are not food, drink or tobacco. Certain gifts made to charities, community amateur sports clubs or designated UK educational establishments are also allowable. As regards entertainment, the schedule should distinguish between staff entertaining (which is allowable) and customer entertaining (which is not allowable).

(ii) Major repairs. Sufficient information must be provided in order to distinguish between revenue expenditure (allowable) and capital expenditure (not allowable, though capital allowances may be available). The decisions in important cases such as Odeon Associated Theatres Ltd v Jones (1971) and Law Shipping Co Ltd v CIR (1923) should be used to differentiate between revenue and capital.

(iii) Redundancy pay. Redundancy payments made by a continuing business for trade purposes are normally allowable. But when a trade ceases, allowable payments are restricted to no more than three times the amount of any statutory redundancy pay. The schedule must therefore distinguish between the two types of payment and, in the case of payments made on cessation of a trade, also provide information on the employees' entitlement to statutory redundancy pay.


20


A9 (a) Capital allowances on plant and machinery:

Main pool Car 1 Car 2 Allces (20% private) (20% private) £ £ £ £ 1/10/08 - 31/12/09 Additions 12,200 WDA £3,000 × 15/12 3,750 × 80% 3,000 Additions 6,000 AIA @ 100% 6,000 0 6,000 ——— ——— ——— WDV c/f 0 8,450 ——— Total allowances 9,000 ——— y/e 31/12/10 Additions 13,000 Disposals (7,000) ——— Balancing allowance 1,450 × 80% 1,160 ——— WDA @ 10% 1,300 × 80% 1,040 ——— ——— WDV c/f 0 11,700 ——— Total allowances 2,200 ——— y/e 31/12/11 Disposals (2,000) ——— Balancing charge (2,000) (2,000) ——— WDA @ 10% 1,170 × 80% 936 Additions 2,400 AIA @ 100% 2,400 0 2,400 ——— ——— ——— WDV c/f 0 10,530 ——— ——— ——— Total allowances 1,336 ———

Adjusted profits (after deduction of capital allowances):

Adjusted profit CAs on IBAs Adjusted profit before CAs P & M after CAs £ £ £ £ 1/10/08 to 31/12/09 37,000 9,000 - 28,000 y/e 31/12/10 24,000 2,200 - 21,800 y/e 31/12/11 42,000 1,336 52 40,612 Note: IBA is (1% × £20,000 × 95/365) = £52.


21


Trading income:

Year Basis period Workings Trading income £

2008-09 1/10/08 to 5/4/09 £28,000 × 6/15 11,200 2009-10 1/1/09 to 31/12/09 £28,000 × 12/15 22,400 2010-11 y/e 31/12/10 21,800 2011-12 y/e 31/12/11 40,612

Overlap profits (1/1/09 to 5/4/09) are £28,000 × 3/15 = £5,600.

(b) Sephora's income tax liability for 2010-11: £ £ Income from employment

Salary 46,445 Car benefit (25% × £21,000, less £300 contribution) 4,950 Fuel benefit (25% × £18,000) 4,500 Beneficial loan (£90,000 @ 3%) 2,700

——— Total Income 58,595 Less: Personal allowance 6,475 ——— Taxable income 52,120 ——— 37,900 @ 20% 7,580.00 14,220 @ 40% 5,688.00 ——— 52,120 ——— ———— Tax liability 13,268.00 ————

Note: The basic rate band has been extended by £500 (£400 × 100/80) from £37,400 to £37,900 because

of the Gift Aid donation.


22


Chapter 16 Introduction to capital gains tax

16.8 2007-08 2008-09 2009-10 2010-11 £ £ £ £ Capital gains 6,500 9,000 12,900 19,200 Less: Allowable losses 12,700 2,350 nil 7,500 ——— ——— ——— ——— Net gains (losses) (6,200) 6,650 12,900 11,700 Less: Relief for losses b/f nil nil 2,800 1,600 ——— ——— ——— ——— (6,200) 6,650 10,100 10,100 Less: Annual exemption nil 6,650 10,100 10,100 ——— ——— ——— ——— CGT assessment nil nil nil nil ——— ——— ——— ——— Annual exemption lost 9,200 2,950 nil nil Unrelieved losses c/f 6,200 6,200 3,400 1,800

16.9 2009-10 2010-11 £ £ Capital gains 12,800 38,700 Less: Allowable losses nil nil ——— ——— Net gains 12,800 38,700 Less: Relief for losses b/f nil 2,000 ——— ——— 12,800 36,700 Less: Annual exemption 10,100 10,100 ——— ——— CGT assessment 2,700 26,600 ——— ——— Unrelieved losses c/f 3,750 1,750

The £3,750 loss can be relieved only against gains arising on subsequent disposals to Ahmed's father.

16.10 (a) (b) £ £ Net gains 24,900 24,900 Less: Trading losses - 11,200 ——— ——— 24,900 13,700 Less: Capital losses b/f 13,700 3,600 ——— ——— 11,200 10,100 Less: Annual exemption 10,100 10,100 ——— ——— CGT assessment 1,100 nil ——— ——— Unrelieved capital losses c/f nil 10,100

The trading losses claim must be for the lower of the eligible trading loss (£18,500) and the maximum amount (£11,200) i.e. £11,200.


23


Chapter 17 Computation of gains and losses

17.6 (a) £ £ Sale proceeds 185,000 Less: Market value 31 March 1982 58,500 Enhancement expenditure July 1995 14,000 72,500 ——— ——— Chargeable gain 112,500 ——— Note: All costs incurred up to 31 March 1982 (including the enhancement expenditure in June 1981) are ignored in the calculation of the chargeable gain.

(b) If the buyer of the asset is Jon's wife (who lives with him) the sale proceeds are replaced by a deemed disposal value of £72,500 so as to give a no-gain, no-loss result.

Jon's wife's deemed acquisition cost is also £72,500. On a subsequent disposal of the asset by her, she will be treated as if she acquired the asset for £72,500, not £185,000.

17.7 Disposal of first flat, September 2008: £ Sale proceeds 95,000 Less: Part market value 31 March 1982:

!

£95,000

£95,000 + £105,000 × £42,000 (19,950)

Part enhancement November 1987:

!

£95,000

£95,000 + £105,000 × £18,000 (8,550)

——— Chargeable gain 66,500 ———

Disposal of second flat, January 2011: £ Sale proceeds 110,000 Less: Remainder of market value 31 March 1982: (£42,000 – £19,950) (22,050) Remainder of enhancement expenditure: (£18,000 – £8,550) (9,450) ——— Chargeable gain 78,500 ———


24


Chapter 18 Chattels and wasting assets

18.8 (a) If James and Julia are unrelated (and are not connected in any way) then each of the two disposals is

treated separately. The proceeds of the second disposal do not exceed £6,000 and therefore that disposal is exempt from CGT. The computation of the gain arising on the first disposal is as follows: £ Sale proceeds 6,750 Less: Part cost:

!

£6,750

£6,750 + £5,750 × £4,000 2,160

——— Chargeable gain 4,590 (restricted to £1,250) ———

The gain is restricted to £750 × 5/3 = £1,250.

(b) If James and Julia are connected persons then (since the assets concerned form a set) the two disposals are treated as one for CGT purposes. The gain arising is as follows:

£ Sale proceeds (£6,750 + £5,800) 12,550 Less: Cost 4,000 ——— Chargeable gain 8,550 ———

The maximum gain is (£12,550 – £6,000) × 5/3 = £10,917. The actual gain is less than this and so the gain remains at £8,550.

18.9 Rebasing applies since the patent was acquired before 31 March 1982. When the patent was valued on 31 March 1982 it had a 33-year life. When it was sold there were four years remaining. Therefore the computation is as follows:

£ Sale proceeds 13,000 Less: Unexpired portion of market value at 31 March 1982:

!

4

33 × £20,000 2,424



25


18.10 The computation of the chargeable gain is as follows: £ Sale proceeds 15,000 Less: Proportion of cost

!

51.614 " 33.304

72.770 × £35,000 8,807

——— 6,193 Less: Property income assessment (£8,375) 6,193 ——— Chargeable gain nil ——— Notes: (i) P1 = 50.038 + 3.153 × 6/12 = 51.614 (11.5 years) (ii) P2 = 31.195 + 4.219 × 6/12 = 33.304 (6.5 years) (iii) P3 = 72.770 (20 years) (iv) The property income assessment is:

£ Premium received 15,000 Less: £15,000 × (5 – 1) × 2% 1,200 ——— 13,800 Less: Relief for premium paid:

!

5

20 × (£35,000 – £35,000 × (20 – 1) × 2%) 5,425

——— 8,375 ———

(v) The relief given for the property income assessment is restricted to £6,193 so as not to create a loss.


26


Chapter 19 Shares and securities 19.8 The 1,200 shares disposed of on 24 July 2010 are matched as follows:

(a) The first match is against the 300 shares acquired on the same day as the disposal. These 300 shares were acquired for £1,400 and sold for £2,100 (300 × £7), so the chargeable gain on these 300 shares is £700.

(b) The next match is against the shares acquired within the next 30 days. These are:

(i) 400 shares acquired on 10 August 2010 for £2,500. These were sold for £2,800 (400 × £7), so the chargeable gain on these 400 shares is £300.

(ii) 350 shares acquired on 20 August 2010 for £2,600. These were sold for £2,450 (350 × £7), so the allowable loss on these 350 shares is £150.

(c) The final match of 150 shares is against the s104 holding. The shares acquired before 31 March 1982 are added into this holding at their market value at that date. The s104 holding is as follows:

Number of Allowable shares expenditure £ Acquired 2 October 1979 200 640 Acquired 10 January 1981 150 480 Acquired 5 December 2000 400 1,420 Acquired 8 November 2005 250 1,160 –––– ––––– 1,000 3,700 Sold 24 July 2010 (150/1,000ths) (150) (555) –––– ––––– s104 holding c/f 850 3,145 –––– –––––

These 150 shares were acquired for £555 and were sold for £1,050 (150 × £7), so the chargeable gain on these 150 shares is £495.

The overall chargeable gain is £1,345 (£700 + £300 – £150 + £495).


27


19.9 The disposal in November 2010 must have come from the s104 holding. The shares acquired before 31 March 1982 are included at their market value at that date. The s104 holding is as follows:

Number of Allowable shares expenditure £ Acquired 24 August 1975 800 960 Acquired 23 November 1980 1,200 1,440 Acquired 26 February 1995 1,600 2,400 Acquired 11 October 2004 400 800

––––– ––––– 4,000 5,600 Rights issue June 2010 200 300

––––– ––––– 4,200 5,900 Sold November 2010 (1,260/4,200ths) (1,260) (1,770)

––––– ––––– s104 holding c/f 2,940 4,130

––––– ––––– The 1,260 shares were acquired for £1,770 and were sold for £3,780 (1,260 × £3), so the chargeable gain is £2,010.

19.10 Susan has received £5,280 and her shares have a residual value of £2,640. Therefore she has made a 2/3rds part disposal. The s104 holding is:

Number of Allowable shares expenditure £ Acquired 11 January 2003 1,500 4,800 Acquired 20 January 2010 1,140 5,700

––––– –––––– 2,640 10,500 Distribution January 2011 (2/3rds) - (7,000)

––––– –––––– s104 holding c/f 2,640 3,500

––––– –––––– The allowable loss is £1,720 (£7,000 – £5,280).


28


19.11 Steven received 5,000 shares in Concave plc, worth £20,000, plus £5,000 in cash i.e. a total of £25,000. The amount received in cash is 20% of the total. Therefore this does not rank as a small capital distribution and must be treated as a part disposal. The s104 holding is as follows:

Number of Allowable shares expenditure £ Acquired 9 May 2003 2,000 8,000 Acquired 28 November 2008 500 2,500

––––– –––––– 2,500 10,500 Distribution February 2011 (20%) - (2,100)

––––– –––––– s104 holding after distribution 2,500 8,400

––––– –––––– s104 holding (Concave plc) c/f 5,000 8,400

––––– –––––– The chargeable gain is £2,900 (£5,000 – £2,100).


29


Chapter 20 Principal private residences

20.5 £ Sale proceeds 190,000 Less: Acquisition cost 65,000 ———— Chargeable gain (before PPR exemption) 125,000 ———— Terry owned the property for 20 years (240 months). He was actually resident in the entire property for the first 60 months. He was then absent (not for a work-related reason) for the next 48 months, of which 36 months are exempt as absence for any reason, leaving 12 chargeable months. Finally, he was resident in three-quarters of the house for 132 months, using the other quarter for business purposes. The gain may be analysed as follows:

Exempt as a PPR: £ £125,000 × 96/240 50,000 £125,000 × 132/240 × 3/4 51,563 ———- 101,563

Gain arising during 12 months absence: £125,000 × 12/240 6,250

Gain arising during business use: £125,000 × 132/240 × 1/4 17,187 ———- 125,000 ———-

The £101,563 is exempt and the £6,250 is covered by letting relief of £6,250 (which is the lowest of £6,250, £101,563 and £40,000). This leaves a chargeable gain of £17,187.


30


Chapter 21 CGT reliefs

21.5 The original building was acquired before 31 March 1982, so rebasing applies. The gain on this disposal is calculated as follows:

£ Sale proceeds 875,000 Less: Market value at 31 March 1982 125,000 ——–— Chargeable gain 750,000 ——–— Norman reinvested all of the sale proceeds in the new building except for £155,000. Therefore £155,000 of the gain is immediately chargeable and the remaining £595,000 is rolled-over. The gain on the disposal of the second building is calculated as follows:

£ Sale proceeds 730,000 Less: Allowable cost (£720,000 – £595,000) 125,000 ———— Chargeable gain 605,000 ————

21.6 In 2005-06, Ruth invested the entire sale proceeds of the building in a depreciating asset. Therefore the gain of £42,500 could be held-over (for a maximum of 10 years). In 2010-11, Ruth invested all but £15,000 of the sale proceeds of the original building in a new building. Therefore £27,500 (£42,500 – £15,000) of the gain is now rolled-over against the new building. The remaining £15,000 continues to be held-over against the plant and will crystallise no later than June 2015.

21.7 (a) ER is 4/9ths of £351,000 = £156,000. This leaves a chargeable gain of £195,000. CGT is payable at

18%, giving a CGT liability of £35,100.

(b) CGT payable is £570,000 (10% of £5,000,000 + 28% of £250,000).

(c) Including the gain relating to the associated disposal, total gains are £171,000. CGT is payable is 10%, giving a CGT liability of £17,100.


31


21.8 The gain arising on the gift is as follows:

£ Disposal value 500,000 Less: Acquisition cost 140,000 ——— Chargeable gain 360,000 ——— Gift relief is available only insofar as the gain relates to chargeable business assets. The company's chargeable assets are the freehold (£1,700,000), the goodwill (£500,000) and the investments (£100,000). Motor cars and current assets (e.g. stock, debtors, cash) are not chargeable assets. Of the chargeable assets, the freehold and the goodwill are also chargeable business assets. The held-over gain is therefore:

!

£1,700,000 + £500,000

£1,700,000 + £500,000 + £100,000 × £360,000 = £344,348.

The remaining £15,652 of the gain is immediately chargeable to CGT. The friend's deemed acquisition cost is £155,652 (£500,000 – £344,348).


32


Review questions (Set B)

B6 £ £ Sale proceeds 300,000 Less: Incidental costs of disposal 5,200 ———– 294,800 Less: Acquisition cost 50,000 Enhancement expenditure 20,000 70,000 ——— ———– Chargeable gain before PPR exemption 224,800 ———– Mrs Stapleton owned the house for 19 years (228 months), as follows:

Exempt Liable Reason (i) 1 June 1991 to 31 March 1992 10 Actual residence (ii) 1 April 1992 to 31 October 1992 7 For any reason (iii) 1 November 1992 to 31 December 1993 14 Working abroad (iv) 1 January 1994 to 31 December 2005 144 Actual residence (v) 1 January 2006 to 31 May 2010 36 17 Last 36 months —— — 211 17 —— — The PPR exemption is £208,039 (£224,800 × 211/228), leaving £16,761. Letting relief is available at the lowest of £208,039, £16,761 and £40,000 i.e. £16,761, so the chargeable gain is £nil.

B7 (a) Section 104 holding Number of Allowable shares expenditure £

Bought 1 January 2001 1,000 4,200 Bought 19 June 2002 700 2,950 Bought 31 December 2008 1,200 5,620 ——— ——— 2,900 12,770 Rights issue 31 May 2009 725 2,538 ——— ——— 3,625 15,308 Bought 11 August 2010 400 2,100 ——— ——— 4,025 17,408 Sold 31 January 2011 (4,025) (17,408) ——— ——— s104 holding c/f nil nil ——— ———

The chargeable gain is £20,592 (£38,000 - £17,408).


33


(b) (i) Capital gains are taxed at 18% or 28% (not at income tax rates of 20%, 40% or 50%). (ii) Capital gains accruing before 31 March 1982 are not taxable. (iii) Capital gains may attract roll-over relief, gift relief etc. (iv) Trading profits are earned income for the purpose of computing the maximum pension

contributions in a tax year on which tax relief is available. (v) A wider range of expenditure is allowed against a trading profit than a capital gain. (vi) Trading losses enjoy a wider selection of loss reliefs than capital losses.

B8 (i) The lease was a 30-year lease originally (Schedule 8 percentage 87.330%) and had 15.5 years left to

run when it was assigned (Schedule 8 percentage 61.617 + 6/12 × 2.499 = 62.866%). The gain arising on the disposal is as follows: £ Sale proceeds 75,000 Less: Unexpired portion of cost

!

62.866

87.330 × £20,000 14,397


(ii) Kay's disposal cannot be considered as a small part-disposal of land, since the disposal proceeds exceed 20% of the value of the land prior to the sale (20% × £78,000 = £15,600). Therefore the gain arising on the disposal is as follows: £ Sale proceeds 18,000 Less: Part cost

!

£18,000

£18,000 + £60,000 × £20,000 4,615


(iii) Section 104 holding Number of Allowable shares expenditure £

Bought January 1981 4,000 32,000 Rights issue March 1994 1,000 7,000 Bought November 1996 3,000 24,000 ——— ——— 8,000 63,000 Bonus issue January 2002 4,000 - ——— ——— 12,000 63,000 Sold March 2011 (7/12ths) (7,000) (36,750) ——— ——— s104 holding c/f 5,000 26,250 ——— ———

The shares were sold for £56,000. The chargeable gain is £19,250 (£56,000 - £36,750).


34


B9 Gillian will receive the following in return for her 10,000 shares in Downtown plc:

£ 2,000 ordinary shares in Upmarket plc 20,000 4,000 preference shares in Upmarket plc 12,000 Cash 6,000 ———– 38,000 ———–

The cash of £6,000 is more than 5% of the total and exceeds £3,000, so this cannot be treated as a small capital distribution. The s104 holding is: Number of Allowable shares expenditure £ Bought January 2005 10,000 20,000 Distribution October 2010 (6/38ths) - (3,158) ——— ——— s104 holding after distribution 10,000 16,842 ——— ——— The chargeable gain arising on this disposal is £2,842 (£6,000 - £3,158).

Note:

The 10,000 shares in Downtown plc are now replaced by the 2,000 ordinary and 4,000 preference shares in Upmarket plc, with a total allowable expenditure of £16,842. This allowable expenditure is split between the ordinary and preference shares as follows:

(i) The 2,000 ordinary shares have allowable expenditure of £10,526 (£16,842 × £20,000/£32,000). (ii) The 4,000 preference shares have allowable expenditure of £6,316 (£16,842 × £12,000/£32,000).

B10 The company's chargeable assets total £8,000,000, of which all but the listed shares (£1,000,000) are chargeable business assets. So the held-over gain is £350,000 (£400,000 × £7,000,000/£8,000,000).

The remainder of the gain (£50,000) is immediately chargeable.


35


Chapter 22 Introduction to corporation tax

22.6 The company's trading income is as follows: £ £ Net loss per accounts (15,270) Add: Non-trading income: Dividends receivable 4,000 Debenture interest receivable 6,000 Bank interest receivable 12,600 Income from property 4,000 Profit on sale of investments 22,490 49,090 ——— ———— (64,360) Less: Disallowed expenses: Depreciation 108,300 ———— 43,940 Less: Capital allowances 32,700 ———— Trading income 11,240 ———— The chargeable profits for the year are: £ Trading income 11,240 Income from non-trading loan relationships 18,600 Income from property 4,000 Chargeable gain 8,450 ——— Chargeable profits 42,290 ——— Notes: (i) Dividends receivable are FII and do not form part of the company's chargeable profits. (ii) Debenture interest receivable is assessed on the accruals basis. Therefore the amount assessable is

£6,000, even though no interest was actually received during the accounting period. Bank interest of £12,600 is also assessed on the accruals basis.

(iii) The company has accounted for rents receivable on the accruals basis which is the correct basis for tax purposes.

(iv) The debenture interest and patent royalties payable (computed on the accruals basis and shown gross) are allowable trading expenses.


36


Chapter 24 Computation and payment of the corporation tax liability

24.6 The chargeable profits for the year to 31 March 2011 are: £ Trading income 360,282 Income from non-trading loan relationships 12,957 Chargeable gains 295,327 ———— 668,566 Less: Qualifying charitable donations 24,600 ———— Chargeable profits 643,966 ———— Augmented profits for the year are £670,966 (£643,966 + (£24,300 + £2,700)). This is between the lower and upper limits for FY2010. Therefore the corporation tax liability for the year is as follows:

£ Corporation tax on £643,966 @ 28% 180,310.48 Less: Marginal relief:

!

7

400 × (£1,500,000 – £670,966) ×

!

£643,966

£670,966 13,924.22

————— Corporation tax liability 166,386.26 —————

24.7 The 14 months to 31 December 2010 will be divided into two accounting periods i.e. the 12 months to 31 October 2010 and the 2 months to 31 December 2010. The chargeable profits, FII and augmented profits for each accounting period are as follows: 12 months to 2 months to 31/10/10 31/12/10 £ £ Adjusted trading profits (time apportioned) 1,211,578 201,930 Less: Capital allowances 222,650 37,210 ———— ———— Trading income 988,928 164,720 Chargeable gains 16,575 21,692 Building society interest:

y/e 31/10/10 (£3,500 + £4,000 – £3,000) 4,500 2 mths to 31/12/10 (£4,300 – £4,000) 300

———— ———— Chargeable profits 1,010,003 186,712 FII (£3,150 + £350) 3,500 ———— ———— Augmented profits 1,013,503 186,712 ———— ———— Each accounting period should be considered separately:


37


12 months to 31 October 2010

This accounting period falls partly into FY2009 and partly into FY2010. Augmented profits are between the lower and upper limits (which are the same in both FYs) so corporation tax is payable at the main rate less marginal relief. Chargeable profits and augmented profits are time-apportioned between the FYs and the computation is as follows:

FY2009 (5 months) £ £ Corporation tax on £420,835 @ 28% 117,833.80 Less: Marginal relief:

!

7

400 × (£625,000 – £422,293) ×

!

£420,835

£422,293 3,535.10 114,298.70

————— FY2010 (7 months) Corporation tax on £589,168 @ 28% 164,967.04 Less: Marginal relief:

!

7

400 × (£875,000 – £591,210) ×

!

£589,168

£591,210 4,949.13 160,017.91

————— ————— Corporation tax liability 274,316.61 ————— The upper limit used in each marginal relief calculation ("U") is £1,500,000, scaled down in accordance with the length of the period for which marginal relief is being calculated. For the five months which fall into FY2009, this limit is £625,000 (5/12ths of £1,500,000). For the seven months which fall into FY2010, the limit is £875,000 (7/12ths of £1,500,000).

Since corporation tax rates and limits did not change between FY2009 and FY2010, it was not strictly necessary to split the computation between the financial years.

2 months to 31 December 2010

This accounting period falls entirely into FY2010. For a 2-month period, the lower and upper limits are reduced to £50,000 (2/12ths of £300,000) and £250,000 (2/12ths of £1,500,000). Augmented profits of £186,712 lie between these limits. Therefore the computation is:

FY2010 £ Corporation tax on £186,712 @ 28% 52,279.36 Less: Marginal relief:

!

7

400 × (£250,000 – £186,712) ×

!

£186,712

£186,712 1,107.54

———— Corporation tax liability 51,171.82 ————


38


Chapter 25 Income tax and advance corporation tax

25.5 £ £ Net profit per the accounts 59,255 Less: Non-trading income: Profit on sale of tangible fixed asset 542 Other income 15,000 15,542 ——— ——— 43,713 Add: Disallowed expenses Depreciation 5,764 ——— 49,477 Less: Capital allowances 5,318 ——— Trading income 44,159 Non-trading income from intangible fixed assets 6,000 Chargeable gain 212 ——— Chargeable profits 50,371 ——— FII is £10,000 (£9,000 + £1,000) so augmented profits are £60,371 (£50,371 + £10,000). The chargeable profits are charged to tax at the FY2010 small profits rate of 21%. £ Corporation tax on £50,371 at 21% 10,577.91 Less: Income tax repayable: (20% × £4,000) – (20% × £2,000) 400.00 ———— Corporation tax payable 1 January 2012 10,177.91 ————

25.6 Year to 30 September 2010 FII is £10,000 (£9,000 + tax credit £1,000). Uplifted FII is £11,250 (£10,000 × 9/8). If ACT had not been abolished, franked payments would have been £37,500 (£30,000 × 100/80). Shadow ACT is 20% of £26,250 (£37,500 – £11,250) = £5,250. The maximum ACT set-off is 20% of £32,000 = £6,400. Therefore surplus ACT of £1,150 (£6,400 – £5,250) is relieved, leaving surplus ACT carried forward of £850.


39


Chapter 26 Corporation tax losses

26.6 Before considering the claims to set the trading loss against total profits, the company's chargeable profits for each of the three years to 31 March 2009 were as follows:

y/e 31/3/07 y/e 31/3/08 y/e 31/3/09 £ £ £

Trading income 61,900 77,400 64,200 Less: Qualifying charitable donations 3,400 3,400 3,400 ——— ——— ——— Chargeable profits 58,500 74,000 60,800 ——— ——— ——— Corporation tax @ 19%/20%/21% 11,115 14,800 12,768

With the trading loss claims, the position is:

y/e 31/3/07 y/e 31/3/08 y/e 31/3/09 y/e 31/3/10 £ £ £ £

Trading income 61,900 77,400 64,200 - Chargeable gains, less losses b/f - - - 5,200 ——— ——— ——— ——— 61,900 77,400 64,200 5,200 Less: Trade loss relief (a) - - - 5,200 ——— ——— ——— ——— 61,900 77,400 64,200 0 Less: Trade loss relief (b) - 50,000 64,200 - ——— ——— ——— ——— 61,900 27,400 0 0 Less: Qualifying charitable donations 3,400 3,400 - - ——— ——— ——— ——— Chargeable profits 58,500 24,000 0 0 ——— ——— ——— ——— Trade losses c/f - - - 53,100 Unrelieved charitable donations - - 3,400 3,400

The tax liability for the year to 31 March 2008 is now £4,800 (£24,000 × 20%) and the liability for the year to 31 March 2009 is now £nil. The required repayment is £22,768 (£10,000 + £12,768).

Interest on the £10,000 repayment runs from 1 January 2011 (for 14 days). Interest on the £12,768 runs from 1 January 2010 (for 379 days). Therefore interest is due as follows:

(£10,000 × 0.5% × 14/365) + (£12,768 × 0.5% × 379/365) = £68.21.

The total repayment, including interest, is £22,836.21 (£22,768 + £68.21).

If the company ceased trading on 31 March 2010, the unrelieved trade losses £53,100 could be carried back and set first against the remaining profits of the year to 31 March 2008 and then against the profits of the year to 31 March 2007. This would generate further repayments. These would carry interest as from 1 January 2011.


40


Chapter 27 Close companies and companies with investment business

27.4 If Siobhan had not repaid part of the loan, the company would have been required to pay tax of £25,000 (25% of £100,000) on 1 January 2011. As it is, the company must pay £11,250 (25% of £45,000) on that date. This sum is recovered on 1 January 2012.

Siobhan is taxed in 2010-11 on income of £45,000 (net) which is grossed-up to £50,000. Some or all of this income may be taxed at the dividend upper rate of 32.5% or the dividend additional rate of 42.5%. The company is denied any tax relief in relation to the amount of the loan which has been written off.

27.5 (a) This is a close company whose income is mainly derived from letting property (presumably on a

commercial basis to non-connected persons). The company is not a CIC and therefore the small profits rate is available. The tax due is 21% of £89,600 = £18,816.

(b) It would make no difference if the property income were trading income instead. (c) If the property income were a net credit on non-trading loan relationships instead, the company

would be a CIC and the small profits rate would not be available. Tax due would be 28% of £89,600 = £25,088.


41


Chapter 28 Groups of companies and reconstructions

28.6 1/12/09 - 31/3/10 1/4/10 - 30/11/10 (4 months) (8 months) £ £ T Ltd chargeable profit:

£210,000 × 4/12 70,000 £138,000 × 8/12 92,000

B Ltd loss of £174,000 58,000 116,000 Maximum group relief 58,000 92,000

Total group relief is £150,000, leaving £24,000 of the trading loss unrelieved. A claim could be made to set £3,000 of this loss against the chargeable gains of B Ltd for the year to 30 November 2010. This would save tax at 21% and pave the way for a further claim to set the remainder of the loss against the company's total profits for the previous year. Alternatively, the entire £24,000 could be carried forward for relief against future trading profits. Assuming that this is the chosen course of action, the corporation tax due would be as follows:

B Ltd y/e 30/11/10 FY2009

Chargeable profits = £1,000 Lower limit (£300,000 × 1/2 × 4/12) = £50,000 Corporation tax on £1,000 @ 21% = £210

FY2010 Chargeable profits = £2,000 Lower limit (£300,000 × 1/2 × 8/12) = £100,000 Corporation tax on £2,000 @ 21% = £420

Total tax for the period = £630

T Ltd y/e 31/3/10 Chargeable profits = £152,000 (£210,000 – group relief £58,000). Lower limit (£300,000 × 1/2) = £150,000 Upper limit (£1,500,000 × 1/2) = £750,000 £ Corporation tax on £152,000 @ 28% 42,560.00 Less: Marginal relief:

!

7

400 × (£750,000 – £152,000) ×

!

£152,000

£152,000 10,465.00

———— Corporation tax liability 32,095.00 ———— T Ltd y/e 31/3/11

Chargeable profits = £46,000 (£138,000 – group relief £92,000). Lower limit (£300,000 × 1/2) = £150,000. Corporation tax on £46,000 @ 21% = £9,660.00.


42


Review questions (Set C)

C6 12 months to 3 months to 30/11/10 28/2/11 £ £ Trading profits (time apportioned) 600,000 150,000 Less: Capital allowances: Plant and machinery (39,000) (26,000) IBAs (Working 1): 2nd hand factory (13,889) (2,604) New factory (2,000) - ———— ———— Trading income 545,111 121,396 Less: Losses b/f 400,000 - ———— ———— 145,111 121,396 Bank interest receivable:

£4,900 + £3,800 + £4,300 – £4,500 8,500 £4,800 + £4,000 – £4,300 4,500

Building society interest receivable 8,400 - Chargeable gains (Working 2) - - ———— ———— 162,011 125,896 Less: Qualifying charitable donations 16,000 - ———— ———— Chargeable profits 146,011 125,896 FII (£27,000 + £3,000) 30,000 FII (£18,000 + £2,000) 20,000 ———— ———— Augmented profits 176,011 145,896 ———— ———— Lower limit 300,000 75,000 Upper limit 1,500,000 375,000 Corporation tax @ 21% on £146,011 30,662.31 Corporation tax @ 28% on £125,896 35,250.88

Less: 7/400 × (£375,000 – £145,896) ×

!

£125,896

£145,896 3,459.70

———— ———— Corporation tax payable 1/9/11 and 1/12/11 30,662.31 31,791.18 ———— ———— Working 1 (IBAs) (i) The residue of expenditure for the second-hand factory is £250,000 and there are six years

remaining of the tax life, so UU Ltd can claim an annual WDA equal to the appropriate percentage of £41,667 (1/6th of £250,000). WDA for the year to 30/11/10 is £13,889 ((4/12 × £41,667 × 50%) + (8/12 × £41,667 × 25%)). WDA for the three months to 28/2/011 is £2,604 (3/12 × £41,667 × 25%).

(ii) WDA for the new factory for the year to 30/11/10 is £2,000 ((2% × £150,000 × 4/12) + (1% × £150,000 × 8/12)). There is no balancing adjustment on the sale.


43


Working 2 (Capital gains) The indexation factor on the disposal of the factory is (226.8 – 188.9)/188.9 = 0.201, so that indexation allowance is £30,150 (£150,000 × 0.201) and the chargeable gain is £169,850 (£350,000 – £150,000 – £30,150). All the proceeds of the sale were re-invested in the purchase of the factory in March 2010, so the entire gain is rolled-over. No gain is chargeable immediately so the capital losses brought forward are carried forward again to the next accounting period.

C7 (i) If S Ltd and T Ltd become subsidiaries, there will be three associated companies and the lower and

upper limits will be divided equally between these companies. Each company's limits will become £100,000 and £500,000. The corporation tax due for the year to 31 March 2011 will be:

£ R Ltd £220,000 @ 28% 61,600 Less: 7/400 × (£500,000 – £220,000) 4,900 ——— 56,700 S Ltd £20,000 @ 21% 4,200 T Ltd £20,000 @ 21% 4,200 ——— Total 65,100 ———

(ii) If S Ltd and T Ltd are wound up, there will be only one company and the limits will be available in full. The combined profit for the year will be £260,000, with tax due of 21% × £260,000 = £54,600. This is a saving of £10,500.

C8 (a) In the year to 31 March 2008, X Ltd will be assessed on rents of £13,333 (£20,000 × 8/12) plus the

premium of £49,600 (£80,000, less 19 × 2%) totalling £62,933. Y Ltd will be able to deduct 8/12 × £2,480 (£49,600 × 1/20) from its trading profits for the year i.e. £1,653.

(b) Y Ltd's property income for the year to 31 March 2011 is: £ £ Rents receivable 28,000 Less: Rent payable 20,000 8,000 ——— Premium received 45,000 Less: 4 × 2% × £45,000 3,600 ——— 41,400 Less: 5/20 × £49,600 12,400 29,000 ——— ——— Income from property 37,000 ———

(c) Assuming that X Ltd owns the property, the company has granted a short lease out of a freehold. This is treated as a part disposal. The disposal proceeds are £30,400 (£80,000, less the property income assessment of £49,600).

Y Ltd has granted a short sub-lease out of a short head-lease. The gain will be calculated using the Schedule 8 TCGA 1992 table of percentages and then reduced by the £29,000 property income assessment. This reduction cannot be used to create a loss.


44


C9 Main headings are: Basis of assessment and rates of tax; National Insurance contributions; Distribution of profits; Pension contributions; Due dates of payment of tax and NICs; Relief for trading losses; Chargeable gains on disposals of business assets. (See Chapter 27 for more detail).

C10 (a) HD Ltd SD Ltd (12 months) (9 months)

£ £ Trading income 890,000 - Income from non-trading loan relationships 6,000 4,000 Income from property 2,000 8,000 Chargeable gains - 20,000 ———— ——— 898,000 32,000 Less: Qualifying charitable donations 4,000 - ———— ——— 894,000 32,000 Less: Group relief 68,000 Trading loss relief against total profits 32,000 ———— ——— Chargeable profits 826,000 - ———— ——— Unrelieved donations - 5,000

The corresponding accounting period is the six months to 31 December 2010, so group relief is restricted to the lower of £894,000 × 6/12 and £102,000 × 6/9 = £68,000.

HD Ltd has chargeable profits and augmented profits of £826,000 (the intra-group dividend is ignored when computing augmented profits). No marginal relief is available since the upper limit is halved to £750,000. The corporation tax payable is £826,000 × 28% = £231,280.

Corporation tax payable by SD Ltd is £nil (assuming that a claim is made to set the trading loss against total profits of the loss-making period). If no such claim is made, the chargeable profits of SD Ltd will be £27,000 and corporation tax will be due at 21%, giving a tax liability of £5,670.

With the £32,000 claim, trading losses remaining unrelieved are £2,000. These may be carried back against total profits of the previous 12 months or surrendered to HD Ltd in the year to 31 December 2011 or carried forward for relief against future trading profits.

Without the claim, losses remaining unrelieved are £34,000. These may be surrendered to HD Ltd in the year to 31 December 2011 or carried forward for relief against future trading profits.

(b) HD Ltd cannot surrender its capital losses to SD Ltd. However, if the assets disposed of by SD had first been transferred (on a no-gain, no-loss basis) to HD, the capital gain arising on their eventual disposal would have belonged to HD and HD's capital losses could then have been set against this gain.

Alternatively, the two companies could jointly elect by 31 March 2013 that the gains of £20,000 realised by SD Ltd should be treated as if they had been realised by HD Ltd. This would have the same effect as an actual transfer.


45


Chapter 29 Value added tax (1)

29.5 (a)/(b)

A person should register for VAT as soon as the value of that person's taxable supplies for the year ended on the last day of any month exceeds the registration threshold (£70,000 as from 1 April 2010). HM Revenue and Customs should be notified within 30 days of the end of the month in question. Registration will usually take effect as from the beginning of the next month but one. Registration is not required if HMRC is satisfied that taxable turnover during the next 12 months will not exceed the deregistration threshold (£68,000 from 1 April 2010).

Registration is also required if there are reasonable grounds for believing (at any time) that taxable turnover during the next 30 days alone will exceed the registration threshold. In this case, HMRC should be notified no later than at the end of the 30-day period and registration will take effect as from the beginning of that period.

(c) One consequence of failing to register is that the person concerned becomes personally liable for the output tax which should have been charged to customers since the date on which registration should have occurred, and it may well be impossible to recover this VAT in retrospect from the customers. A further consequence is that the person will become liable to certain penalties (see Chapter 30).

(d) Voluntary deregistration is allowed if HMRC is satisfied that the person's taxable turnover will not exceed the deregistration threshold (£68,000 from 1 April 2010) in the next 12 months. Compulsory deregistration occurs when a registered person entirely ceases to make taxable supplies or when a change of legal status occurs.

(e) A person whose taxable supplies do not exceed the registration threshold may register for VAT voluntarily. This means that output tax must be charged to customers but it enables the person concerned to recover input tax. If the person's supplies are all zero-rated or are made mainly to customers who are themselves taxable persons, the fact that output tax must be charged may not deter customers.


46


Chapter 30 Value added tax (2)

30.5 £ £ Output tax Standard-rated supplies £319,600 × 7/47 47,600 Zero-rated supplies £88,000 @ 0% 0

——— 47,600

Input tax Attributable to taxable supplies = 35% × £118,000 41,300 Non-attributable:

£272,000 + £88,000£272,000 + £88,000 + £440,000 = 45% × 25% × £118,000 13,275 54,575 ——— ———

Reclaimable from HMRC 6,975 ———

Notes:

(i) The value of standard-rated supplies used in the calculation of non-attributable input tax which may be reclaimed is £319,600 × 40/47 = £272,000.

(ii) The simplified de minimis tests cannot be used because input tax exceeds £625 per month and exempt supplies are more than 50% of the value of all supplies.

30.6 Output tax £ Standard-rated supplies £39,400 @ 17.5% 6,895.00 Fuel scale charge £326 × 7/47 48.55 ————

6,943.55 Input tax £ Standard-rated purchases 25,800 Car repairs 120 Standard-rated expenses 9,700 Plant and machinery 8,000 Motor van 12,000 ——— 55,620 @ 17.5% 9,733.50 ——— ———— Reclaimable from HMRC 2,789.95 ———— Notes: (i) All of the exports are zero-rated. (ii) Input tax on car repairs may be reclaimed in full. (iii) Insurances are exempt. (iv) Input tax on entertaining expenses may not be reclaimed. (v) Input tax on a motor van may be reclaimed (unlike input tax on a motor car).


47


Chapter 31 Inheritance tax

31.6 The value of the gift to Hazel's grandson is reduced by the annual exemptions for 2005-06 and 2004-05 to £294,000. The gift is a PET so no lifetime tax was payable. Previous gross chargeable transfers in the seven years to date (2 April 1999 to 1 April 2006) were £266,000. Tax due at the death rates applicable on 17 December 2010: £ £59,000 (£325,000 – £266,000) @ 0% 0 £235,000 @ 40% 94,000 ——— 94,000 Less: Taper relief (4-5 years) @ 40% 37,600 ——— 56,400 Less: Lifetime tax paid 0 ——— IHT payable by 30 June 2011 56,400 ———

31.7 The value of each gift after deduction of exemptions is as follows: Value AE for AE for Value before current previous after AE year year AE £ £ £ £ 2002-03 Relevant property trust 100,000 3,000 3,000 94,000 2003-04 Gift to daughter 250,000 3,000 - 247,000 Gift to son 250,000 - - 250,000 2007-08 Relevant property trust 450,000 3,000 3,000 444,000

Lifetime tax liability on transfers made in seven years to date of death

The gift to the son was a PET, so no lifetime tax was payable. The gift to a trust made on 10 June 2007 was a chargeable lifetime transfer. Previous gross chargeable transfers in the seven years to date (11 June 2000 to 10 June 2007) were £94,000, so lifetime tax of £59,500 was due as follows:

Net Gross Tax £ £ £

£206,000 (£300,000 – £94,000) grossed up @ 0% 206,000 206,000 0 £238,000 grossed up @ 20% 238,000 297,500 59,500 ———— ———— ——— Totals 444,000 503,500 59,500 ———— ———— ——— Tax liability on death: Lifetime transfers made in seven years to date of death

The gift to the daughter was a PET made more than seven years before death and is exempt. A liability on death must be calculated for the gift to the son and the gift to the trust.


48


(i) Gift to son on 1 August 2003

The gross value of this transfer is £250,000 and previous gross chargeable transfers in the seven years to date (2 August 1996 to 1 August 2003) were £94,000. Tax due at the death rates applicable on 11 July 2010 is as follows: £ £231,000 @ 0% 0 £19,000 @ 40% 7,600 ——– 7,600 Less: Taper relief (6-7 years) @ 80% 6,080 ——– 1,520 Less: Lifetime tax paid 0 ——– IHT payable by son on 31 January 2011 1,520 ——–

(ii) Gift to trust on 10 June 2007

The gross value of this transfer is £503,500 and previous gross chargeable transfers in the seven years to date (11 June 2000 to 10 June 2007) were £344,000 (£94,000 + £250,000), absorbing the whole of the nil-rate band. Tax due at death rates applicable on 11 July 2010:

£ £503,500 @ 40% 201,400 Less: Taper relief (3-4 years) @ 20% 40,280 ——––– 161,120 Less: Lifetime tax paid 59,500 ——––– IHT payable by trustees on 31 January 2011 101,620 ——–––

Tax liability on death: Estate

Chargeable transfers in the seven years to the date of death have absorbed the whole of the nil-rate band. Tax on the estate is therefore £200,000 (40% of £500,000), payable on 31 January 2011.


49


Chapter 32 Overseas aspects of taxation

32.7 £ Trading income 38,175 Income from property £2,200 × 100/55 4,000 Bank interest £1,600 × 100/80 2,000 ——— Total income 44,175 Less: Personal allowance 6,475 ——— Taxable income 37,700 ——— Income tax Basic rate band : Non-savings income 35,700 @ 20% 7,140.00 : Savings income 1,700 @ 20% 340.00 Higher rate : Savings income 300 @ 40% 120.00 ——— ———— 37,700 7,600.00 ——— Less: Double tax relief, lower of: (a) foreign tax = £1,800 (b) UK tax on foreign income = £860 (see note) 860.00 ———— 6,740.00 Less: Tax suffered by deduction from bank interest 400.00 ———— Tax payable 6,340.00 ———— Note: If the foreign income of £4,000 is ignored, Donald has taxable income of £33,700. The income tax due on this would be £33,700 @ 20% = £6,740.00. Therefore the tax due on the foreign income is £860 (£7,600.00 – £6,740.00). £940 of foreign tax is unrelieved.

32.8 UK Overseas Total £ £ £ Trading income 720,000 720,000 Chargeable gains 120,000 120,000 Foreign dividend 18,000 18,000

———— ———— ———— 840,000 18,000 858,000 Less: Qualifying charitable donations 80,000 - 80,000

———— ———— ———— Chargeable profits 760,000 18,000 778,000

———— ———— ———— Corporation tax @ 28% 212,800 5,040 217,840 Less: Unilateral DTR (5,040) (5,040)

———— ———— ———— Corporation tax liability 212,800 - 212,800

———— ———— ———— Maximum ACT set-off 152,000 - 152,000

———— ———— ————


50


Notes: (i) The grossed-up foreign dividend is £8,400 × 100/70 = £12,000. (ii) Underlying tax is £12,000/£50,000 × £25,000 = £6,000. The taxable dividend is £18,000 (£12,000 +

£6,000) and foreign tax suffered totals £9,600 (iii) The upper limit is £1,500,000 divided by 20 = £75,000, so corporation tax is due at 28%. (iv) DTR is limited to the UK tax due on the overseas income. Foreign tax paid of £4,560 remains

unrelieved. (v) Maximum ACT set-off against tax on UK income is £152,000 (20% of £760,000). For the overseas

income the maximum set-off is £nil.


51


Review questions (Set D) D5 (i) Accumulative turnover up to the end of November is £42,200. This becomes £55,200 by the end of

December and £70,700 (exceeding the registration threshold of £70,000) by the end of January. It will be necessary to notify HMRC within 30 days of the end of January 2011 and registration will probably take effect from 1 March 2011. Delay is inadvisable since there are penalties for delaying registration beyond the due date.

(ii) The input tax relating to stock held on the date of registration may be reclaimed. (iii) The input tax relating to the van is recoverable but not the input tax relating to the car. The input tax

relating to all motor expenses, including all petrol, is recoverable but Mr Deans will have to account for output tax in respect of the fuel provided for private use. The amount of output tax due is calculated in accordance with set scale charges which depend upon the car's emissions.

(iv) Bad debt relief is available so long as at least six months have elapsed since the date of supply and Mr Deans has written off the debt in his books. The cash accounting scheme would provide automatic bad debt relief.

D6 (a) Output tax is 7/47 × £30,652 = £4,565. Input tax is 7/47 × £10,830 (£4,087 + £6,130 + £613) =

£1,613. VAT payable to HMRC is therefore £2,952.

(b) £ £ £ Profit to 28 February 2010 46,500

Add: 3 months to 31 May 2010: UK sales £30,652 × 40/47 26,087 Exports 8,000 ——— 34,087 Materials £4,087 × 40/47 + £2,800 6,278 General expenses £6,130 × 40/47 5,217 Wages 7,000 Hire of machinery £613 × 40/47 522 Bank charges 500 19,517 14,570 ——— ——— ——— 61,070 Add: Balancing charges: Plant £12,625 (£25,000 – £12,375) + Car £750 (£6,000 – £5,250) 13,375 ——— Adjusted profit for year to 31 May 2010 74,445 ———

(c) The basis period for 2010-11 (the year of cessation) runs from the end of the basis period for tax year 2009-10 up to the date of the cessation. The basis period for 2009-10 would have been the year to 31 May 2009, so the basis period for 2010-11 is the year to 31 May 2010.

Transitional overlap relief is available in relation to the profits earned between the end of the basis period for 1996-97 and 5 April 1997. The 1996-97 basis period would have been the 24 months to 31 May 1996, so transitional overlap relief is available in relation to the profits of the period from 1 June 1996 to 5 April 1997. The 2010-11 trading income is: £ Adjusted profits of y/e 31 May 2010 74,445 Transitional overlap relief £45,000 × 10/12 37,500 ——— 36,945 ———


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(d) Shop Workshop Goodwill £ £ £ Disposal proceeds 200,000 130,000 180,000 Less: Cost 30,000 21,000 - ——— ——— ——— Chargeable gain 170,000 109,000 180,000 ——— ——— ——— The total gain (before entrepreneurs' relief) is £459,000. Entrepreneurs' relief is 4/9ths of £459,000 = £204,000, leaving a chargeable gain of £255,000.

D7 (a) A Ltd controls B Ltd, C Ltd, D Ltd, O Inc and E Ltd, so these six companies are associated

companies. The upper limit for each company is £250,000 (£1,500,000 × 1/6th) and the lower limit is £50,000 (£300,000 × 1/6th).

(b) A Ltd, C Ltd, D Ltd and E Ltd form a 75% group. B Ltd is owned by a consortium consisting of X Ltd and A Ltd.

(c) As regards the consortium of X Ltd, A Ltd and B Ltd, losses of £9,000 (15% of £60,000) may be surrendered by X Ltd to B Ltd.

As regards the group of A Ltd, C Ltd, D Ltd and E Ltd, the losses of C Ltd and E Ltd (£72,000 in total) may be surrendered to A Ltd or D Ltd. At least £53,000 should be surrendered to A Ltd so as to bring the chargeable profits of that company down to £50,000. This will save tax at the marginal rate of 29.75%. The remaining £19,000 could be surrendered to either A Ltd or D Ltd, saving tax at 21% in both cases. The simplest approach is to surrender the whole £72,000 to A Ltd.

The corporation tax liability of each UK resident company is as follows:

X Ltd B Ltd A Ltd C Ltd D Ltd E Ltd £ £ £ £ £ £ Trading profits - 60,000 103,000 - 35,000 - Group relief - 9,000 72,000 - - ——— ——— ——— ——— ——— ——— Chargeable profits - 51,000 31,000 - 35,000 - ——— ——— ——— ——— ——— ——— Tax @ 21% - - 6,510 - 7,350 - Tax @ 28% - 14,280 - - - - Marginal relief - 3,483 - - - - ——— ——— ——— ——— ——— ——— Corporation tax due - 10,797 6,510 - 7,350 - ——— ——— ——— ——— ——— ———

Note: Marginal relief for B Ltd is (£250,000 – £51,000) × 7/400 = £3,483.

(d) A Ltd owns only 65% of B Ltd, so B Ltd is not a member of the group headed by A Ltd and group relief cannot pass between B Ltd and the members of that group. Group relief would be available if A Ltd increased its stake in B Ltd to 75%.


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D8 The report should make the following main points: (a) The group may elect for a VAT group registration. This has the following effects:

(i) The input tax suffered by the group as a whole is set against the output tax charged by the group as a whole.

(ii) One of the companies in the group is nominated as the "representative member" and this company takes responsibility for submitting VAT returns and accounting for VAT on behalf of the entire group.

(iii) Supplies between group members are not regarded as taxable supplies and are ignored for VAT purposes.

(b) It is not necessary to include all the group companies in the VAT group or to have only one VAT group. It may be wise to bring together all the companies which make largely zero-rated supplies (and which therefore receive regular repayments of VAT) into one VAT group and choose to make monthly returns for this group, so improving the cash flow position. Companies which make standard-rated supplies could form another VAT group, making quarterly returns.

(c) If one company has a mixture of taxable supplies and exempt supplies it may be prudent to exclude this company from the VAT group, since the existence of the exempt supplies would make the group as a whole partially exempt and this may restrict the amount of input tax which the group can recover.

(d) Exports are generally zero-rated. Therefore companies whose supplies consist mostly of exports will probably receive regular VAT repayments (see above).

(e) VAT is charged on the import of goods and is usually payable at the point of entry. This VAT is then treated as input tax in the usual way.

Melville Finance Act 2010-7!12!10

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Transcript of Melville Finance Act 2010-7!12!10