Principles of Taxation Study Manual 2013 PDF
Principles of Taxation Study Manual 2013 PDF
Principles of Taxation Study Manual 2013 PDF
PRINCIPLES OF TAXATION
FA 2012
Professional Stage Knowledge Level
Study Manual
www.icaew.com
Principles of Taxation
The Institute of Chartered Accountants in England and Wales Professional Stage
ISBN: 978-0-85760-458-3
Polestar Wheatons
Hennock Road
Marsh Barton
Exeter
EX2 8RP
If you are a CFAB student, you will be gaining essential knowledge of how businesses work. As your
understanding develops you may be surprised by the variety of roles that chartered accountants take on.
To gain further insight and develop your career, I hope that you choose to continue onto the ACA
qualification.
The ACA will open doors to a highly rewarding career as a financial expert or business leader. Once you
are an ICAEW member, you will join over 138,000 others around the world who work at the highest
levels across all industry sectors, providing valuable financial and business advice. Some of our earlier
members formed today’s global Big Four firms, and you can find an ICAEW Chartered Accountant on
the boards of 80% of the UK FTSE 100 companies.
As part of a worldwide network of over 19,000 students, you will have access to a range of resources
including the online student community, where you can interact with fellow students. Our student
support team is dedicated to helping you every step of the way. Take a look at the key resources
available to you on page viii.
I wish you the very best of luck with your studies and look forward to supporting you throughout your
career.
Michael Izza
Chief Executive
ICAEW
iii
iv
Contents
Introduction vii
Specification grid for Principles of Taxation viii
Key Resources viii
Syllabus and learning outcomes ix
Faculties and Special Interest Groups xviii
ICAEW publications for further reading xix
1. Introduction to taxation 1
2. Introduction to income tax 13
3. Employment income 37
4. Trading profits 57
5. Capital allowances 73
6. Trading profits – basis of assessment 93
7. National insurance contributions 111
8. Capital gains tax – individuals 125
9. Corporation tax 139
10. Value added tax 159
11. Value added tax: further aspects 177
12. Administration of tax 191
13. Ethics 229
Tax Tables FA 2012 249
Index 261
v
vi
1 Introduction
1.1 What is the Principles of Taxation module and how does it fit within the
ACA Professional Stage?
Structure
The ACA syllabus has been designed to develop core technical, commercial, and ethical skills and
knowledge in a structured and rigorous manner.
The diagram below shows the twelve modules at the ACA Professional Stage, where the focus is on the
acquisition and application of technical skills and knowledge, and the ACA Advanced Stage which
comprises two technical integration modules and the Case Study.
If you are studying for CFAB, you will only complete the first six knowledge modules. However, you may
decide to progress to the ACA after you have completed the CFAB qualification.
Introduction vii
2 Specification grid for Principles of Taxation
2.1 Module aim
To enable students to understand the general objectives of tax and to calculate income tax, national
insurance contributions, capital gains tax, corporation tax and VAT in straightforward scenarios.
The following learning outcomes should be read in conjunction with the Taxation table in the ACA
Syllabus 2013 Technical Knowledge document.
1 Objectives, types of tax and ethics
Candidates will be able to explain the general objectives of tax, the influences upon the UK system
of tax, the different types of tax in the UK,and will be able to recognise the ethical issues arising in
the course of performing tax work.
In the assessment, candidates may be required to:
(a) identify the objectives of tax in general terms of economic, social justice and environmental
issues, the range of tax opportunities open to the government and the relative advantages of
different types of tax in meeting the government’s objectives
(b) recognise the impact of external influences, including EU tax policies, on UK tax objectives
and policies
(c) classify entities as individuals, partnerships, or companies for tax purposes and state how they
are taxed
(d) identify who is liable for the following taxes, how the taxes apply to income, transactions and
assets, identify the government bodies responsible for the taxes, and determine when an
individual or entity comes within the scope of the taxes:
capital gains tax
corporation tax
income tax
national insurance
VAT
Introduction ix
(d) recognise the badges of trade
(e) allocate given items of business expenditure as allowable or disallowable for tax purposes and
calculate the adjusted trading profits after capital allowances on plant and machinery of a sole
trader or partnership
(f) allocate the tax adjusted profits of a partnership to each partner and calculate the final
assessable profits for each partner for any given tax year
(g) calculate the assessable trading profits for a new unincorporated business and identify the
overlap profits on the commencement of trade
(h) calculate the final assessable trading profits for an unincorporated business ceasing to trade
(i) calculate total taxable income and the income tax payable or repayable for employed and
self-employed individuals.
(j) calculate the total national insurance contributions payable by employees, employers and self-
employed individuals.
4 Capital gains tax and chargeable gains for companies
Candidates will be able to calculate the amount of capital gains tax payable by individuals and the
chargeable gains subject to corporation tax.
In the assessment, candidates may be required to:
(a) classify persons, assets and disposals as either chargeable or exempt for capital gains purposes
(b) calculate the chargeable gains and losses on the disposal of assets, including indexation where
appropriate
(c) calculate total taxable gains for both individuals and companies and for individuals calculate
the capital gains tax payable
5 Corporation tax
Candidates will be able to calculate the amount of corporation tax payable by companies.
In the assessment, candidates may be required to:
(a) identify chargeable accounting periods for a company
(b) recognise the effect of having one or more associated companies on corporation tax payable
(c) allocate given items of business expenditure as allowable or disallowable for tax purposes and
calculate the adjusted trading profits after capital allowances on plant and machinery
(d) calculate the taxable total profits and the corporation tax payable for a company resident in
the UK which has no associated companies and an accounting period of 12 months or less.
6 VAT
Candidates will be able to calculate the amount of VAT owed by or owed to businesses.
In the assessment, candidates may be required to:
(a) classify supplies in given straightforward situations as exempt, zero-rated, standard-rated,
subject to a reduced rate of 5% or outside the scope of VAT
(b) recognise the implications of supplies being classified as standard-rated, zero-rated or exempt
(c) identify when a business could or should register or deregister for VAT and state the time
limits
(d) determine the tax point for a supply of goods or services
(e) state the principles of VAT payable or repayable on the supply of goods or services by a
taxable person and calculate the monthly, quarterly and annual VAT payable or repayable by
a business
(f) state the alternative schemes for payment of VAT by businesses.
x Principles of Taxation
3 Key Resources
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TUITION
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tuition, take a look at our tuition providers in your area on icaew.com/exams
Introduction xi
4 Syllabus and learning outcomes
Covered
in chapter
2 Administration of taxation
Candidates will be able to identify the obligations the UK system of tax imposes on
taxpayers and the implications for taxpayers of non-compliance.
In the assessment, candidates may be required to:
(a) Identify the records which companies and individuals must retain for tax purposes
and state the periods for which the records must be retained. 11,12
Introduction xiii
Covered
in chapter
5 Corporation tax
Candidates will be able to calculate the amount of corporation tax payable by companies.
In the assessment, candidates may be required to:
(a) Identify chargeable accounting periods for a company. 9
(b) Recognise the effect of having one or more associated companies on corporation tax
payable. 9
(c) Allocate given items of business expenditure as allowable or disallowable for tax
purposes and calculate the adjusted trading profits after capital allowances on plant
and machinery. 9
(d) Calculate the taxable total profits and the corporation tax payable for a company
resident in the UK which has no associated companies and an accounting period of
12 months or less. 9
6 VAT
Candidates will be able to calculate the amount of VAT owed by or owed to businesses.
In the assessment, candidates may be required to:
(a) Classify supplies in given straightforward situations as exempt, zero rated, standard
rated, subject to a reduced rate of 5% or outside the scope of VAT. 10
(b) Recognise the implications of supplies being classified as standard rated, zero rated or
exempt. 10
(c) Identify when a business could or should register or deregister for VAT and state the
time limits. 10
(d) Determine the tax point for a supply of goods or services. 10
(e) State the principles of VAT payable or repayable on the supply of goods or services by
a taxable person and calculate the monthly, quarterly and annual VAT payable or
repayable by a business. 10, 11
(f) State the alternative schemes for payment of VAT by businesses. 11
Introduction xv
TAXATION
Professional Stage
Advanced Stage
Principles of
Title
Taxation
Taxation
Objectives of taxation C
Ethics A
HM Revenue & Customs B
Tax evasion and avoidance C B A
BUSINESS TAXATION
Administration B
Appeals C
Payments B A
Penalties and interest B A
Self assessment B A
Chargeable gains
Chargeable assets C B
Chargeable disposals C B
Chargeable persons C B
Chattels: wasting and non-wasting B
Costs of acquisition and disposal C B
Indexation B A
Leases A
Nil gain/nil loss transfers A
Part disposals B
Pre 31 March 1982 assets A
Qualifying corporate bonds A
Relief for capital losses A
Reorganisations and reconstructions A
Shares and securities (including bonus and rights issues) A
Chargeable gains reliefs
Entrepreneurs’ relief A
Gift relief A
Incorporation relief A
Rollover relief A
Substantial shareholding exemption A
Trading profits
Adjustments to profits B A
Badges of trade B A
Capital allowances B A
Foreign currency transactions A
Long periods of account C A
Pension contributions B A
Royalty payments B
Royalty receipts B
Unincorporated businesses
Basis of assessment – current year basis B A
Change of accounting date B
Commencement and cessation of trade B A
Overlap profits and treatment of opening year losses B A
Partnerships B A
Advanced Stage
Principles of
Title
Taxation
Taxation
Trading losses A
Companies – Taxable total profits
Property income (including lease premiums) A
Trading profits B A
Loan relationships B A
Loan relationships – worldwide debt cap B
Intangible assets B A
Research and development expenditure B A
Research and development tax credits A
Miscellaneous income B A
Chargeable gains B A
Indexation A
Qualifying donations B A
Relief for capital losses A
Trading losses A
Use of deficit on non-trading loan relationships A
Corporation tax computation
Chargeable accounting periods C B A
Close companies A
Corporation tax liability B A
Distributions B
Double tax relief (including underlying tax and withholding tax) B
Liquidation A
Provision of services through a company A
Rates of tax B A
Residence C B
Groups
Associated companies C B A
Capital gains groups A
Changes in group structure A
Change in ownership B A
Consortium relief A
Controlled foreign companies A
Degrouping charges A
Group loss relief A
Group relationships A
Non-coterminous accounting periods A
Overseas companies and branches A
Pre-acquisition gains and losses A
Rollover relief A
Transfer of assets A
Transfer of pricing A
Stamp Duty and Stamp Duty Land Tax
Basic principles B
Chargeable occasions B
Exemptions B
Introduction xvii
Professional Stage
Advanced Stage
Principles of
Title
Taxation
Taxation
VAT
Administration B
Appeals C
Capitals goods scheme A
Group aspects A
Input VAT A
Output VAT A
Overseas aspects A
Partial exemption B
Payments A
Penalties and interest A
Property transactions A
Registration and deregistration A
Small business reliefs A
Taxable person A
Taxable supplies A
Transfer of a business as a going concern B
VAT records and accounts A
PERSONAL TAXATION
Administration
Administration B
Appeals C
PAYE B
Payments B A
Penalties and interest B A
Self assessment B A
Employees
Allowable deductions against employment income A
Employment income B A
Share schemes A
Statutory Mileage Rates Scheme A
Taxable and exempt benefits B A
Termination payments B
Other income
Dividends from UK companies B A
Enterprise Investment Scheme B
Investment income B A
ISAs B B
Property income C A
Lease premiums A
Savings income B A
Venture Capital Trusts B
Income tax computation
Exempt income B A
Gift Aid B A
Income tax liable and payable B A
Income tax charge on child benefit B
Independent taxation and jointly owned assets B A
Advanced Stage
Principles of
Title
Taxation
Taxation
Married couples allowance B A
Pension contributions: provision for retirement B A
Pension contributions: tax reliefs B A
Personal age allowance B A
Personal allowance B A
Rates of tax B A
Taxable persons C A
Capital gains tax
Annual exempt amount B A
Chargeable assets C B
Chargeable disposals C B
Chargeable persons C B
Chattels: wasting and non wasting B
Connected persons A
Converted trading losses B
Costs of acquisition and disposal C B
Leases A
Nil gain/nil loss transfers A
Part disposals B
Pre 31 March 1982 assets A
Qualifying corporate bonds A
Rate of tax B A
Relief for capital losses A
Reorganisations and reconstructions A
Shares and securities (including bonus and rights issues) A
Capital gains tax reliefs
Letting relief A
Principal private residence relief A
Reinvestment relief under EIS B
National insurance contributions
Administration C B
Classes of NIC C B
Directors B
Maximum contributions C
Taxable benefits B
Basic principles of inheritance tax
Chargeable persons B
Chargeable property B
Excluded property B
Inter-spouse transfers A
Rates of tax A
Related property B
Seven year accumulation period A
Inheritance tax on lifetime transfers
Discretionary trusts A
Potentially exempt transfers A
Introduction xix
Professional Stage
Advanced Stage
Principles of
Title
Taxation
Taxation
Inheritance tax on death
Death estate A
Deeds of variation B
Lifetime transfers A
Reliefs and exemptions from inheritance tax
Agricultural property relief B
Annual exemption B
Business property relief A
Gifts to charities and political parties A
Gifts with reservation of benefit B
Marriage exemption A
Normal expenditure out of income A
Quick succession relief B
Small gifts exemption A
Taper relief A
Overseas aspects of personal taxation
Arising basis A
Deemed domicile for IHT A
Domicile A
Foreign assets income and gains A
Double tax relief A
Ordinary residence A
Remittance basis A
Residence A
Temporary absence A
UK taxation of non-domiciled individuals A
xx Principles of Taxation
5 Faculties and Special Interest Groups
The faculties and special interest groups are specialist bodies within ICAEW which offer members
networking opportunities, influence and recognition within clearly defined areas of technical expertise.
As well as providing accurate and timely technical analysis, they lead the way in many professional and
wider business issues through stimulating debate, shaping policy and encouraging good practice. Their
value is endorsed by over 40,000 members of ICAEW who currently belong to one or more of the seven
faculties:
Audit and Assurance
Corporate Finance
Finance and Management
Financial Reporting
Financial Services
Information Technology
Tax
The special interest groups provide practical support, information and representation for chartered
accountants working within a range of industry sectors, including:
Charity and Voluntary sector
Entertainment and Media
Farming and Rural Business
Forensic
Healthcare
Interim Management
Non-Executive Directors
Public Sector
Solicitors
Tourism and Hospitality
Valuation
Students can register free of charge for provisional membership of one special interest group and
receive a monthly complimentary e-newsletter from one faculty of your choice. To find out more and to
access a range of free resources, visit icaew.com/facultiesandsigs
Introduction xxi
6 ICAEW publications for further reading
ICAEW produces publications and guidance for its students and members on a variety of technical and
business topics. This list of publications has been prepared for students who wish to undertake further
reading in a particular subject area and is by no means exhaustive. You are not required to study these
publications for your exams. For a full list of publications, or to access any of the publications listed
below, visit the Technical Resources section of the ICAEW website at icaew.com
ICAEW no longer prints a Members Handbook. ICAEW regulations, standards and guidance are
available at icaew.com/regulations This area includes regulations and guidance relevant to the regulated
areas of audit, investment business and insolvency as well as materials that was previously in the
handbook.
The TECH and AUDIT series of technical releases are another source of guidance available to members
and students. Visit icaew.com/technicalreleases for the most up-to-date releases.
Introduction xxiii
The FRC Guidance on Audit Committees (formerly known as the Smith Guidance)
First published by the Financial Reporting Council in January 2003, and most recently updated in
2010. It is intended to assist company boards when implementing the sections of the UK
Corporate Governance Code dealing with audit committees and to assist directors serving on audit
committees in carrying out their role. Companies are encouraged to use the 2010 edition of the
guidance with effect from 30 April 2011
The UK Stewardship Code
The UK Stewardship Code was published in July 2010. It aims to enhance the quality of
engagement between institutional investors and companies to help improve long-term
returns to shareholders and the efficient exercise of governance responsibilities by setting
out good practice on engagement with investee companies to which the Financial Reporting
Council believes institutional investors should aspire.
A report summarising the actions being taken by the Financial Reporting Council and
explaining how the UK Stewardship Code is intended to operate was also published in
July 2010.
Ethics – icaew.com/ethics
Code of Ethics (part of icaew.com/regulations)
The Code of Ethics helps ICAEW members meet these obligations by providing them with ethical
guidance. The Code applies to all members, students, affiliates, employees of member firms and,
where applicable, member firms, in all of their professional and business activities, whether
remunerated or voluntary.
Instilling integrity in organisations ICAEW June 2009
Practical guidance aimed at directors and management to assist them in instilling integrity in their
organisations. This document may also be helpful to audit firms discussing this topic with clients
and individuals seeking to address issues in this area with their employers.
Introduction xxv
that the financial services industry has the greatest concentration of measurement and modelling
skills of any industry. A downloadable pdf is available at icaew.com/thoughtleadership
Skilled Persons’ Guidance – Reporting Under s166 Financial Services and Markets Act 2000
(Interim Technical Release FSF 01/08)
This interim guidance was issued by ICAEW in April 2008 as a revision to TECH 20/30 to assist
chartered accountants and other professionals who are requested to report under s166 Financial
Services and Markets Act 2000. A downloadable pdf is available at icaew.com/technicalreleases
Introduction xxvii
xxviii Principles of Taxation
CHAPTER 1
Introduction to taxation
Introduction
Examination context
Topic List
1 Objectives of taxation
2 Liability to tax and tax administration
3 Sources of tax law and practice
Summary and Self-test
Answers to Self-test
1
Introduction
Identify the objectives of tax in general terms of economic, social justice and
environmental issues, the range of tax opportunities open to the government and the
relative advantages of different types of tax in meeting the government's objectives
Recognise the impact of external influences, including EU tax policies, on UK tax
objectives and policies
Classify entities as individuals, partnerships, or companies for tax purposes and state how
they are taxed
Identify who is liable for the following taxes, how taxes apply to income, transactions and
assets, identify the government bodies responsible for the taxes, and determine when an
individual or entity comes within the scope of the taxes:
– capital gains tax
– corporation tax
– income tax
– national insurance
– VAT
Recognise the importance of the budget cycle, tax years and the following sources of UK
tax law and practice:
– legislation
– case law
– HM Revenue & Customs manuals, statements of practice and press releases
Syllabus links
The topics covered in this chapter are essential background knowledge which will underpin the whole of
your taxation studies.
Examination context
In the examination candidates may be required to:
Identify the social justice principles being applied for taxation purposes
Recognise external influences on the UK taxation system
Understand which taxes apply to different taxpayers eg partnerships, companies
Identify the responsibilities of HM Revenue & Customs
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
2 Principles of Taxation
1 Objectives of taxation C
H
A
Section overview P
T
The UK tax system has developed piecemeal and has been changed by successive governments in E
accordance with their political objectives. R
1.1 Introduction
The purpose of this chapter is to provide background information which will assist your understanding
of the framework of the UK taxation system, why governments impose tax and the principles of
taxation.
The UK taxation system has developed over centuries on a piecemeal basis. Successive governments
have changed the taxation system in accordance with their political objectives. There has never been an
all-party political consensus about how the UK taxation system should be changed and there probably
never will be.
Introduction to taxation 3
However, the government also needs to raise money for other areas of public expenditure such as
defence, law and order, overseas aid and the running of the government and parliament. There is no
real link between taxation and this type of expenditure.
4 Principles of Taxation
The equity principle
C
– tax should be equitable or just. However, there are many different views as to what is H
equitable A
P
The efficiency principle T
E
– the cost of collecting the tax should be low in relation to the tax raised. Governments are R
generally only concerned with the cost to them of administration, not with costs incurred by
the taxpayer, for example under the Pay As You Earn scheme or value added tax
1
Introduction to taxation 5
The tax proceeds will go into general taxation of the government and are not an insurance policy for
financial institutions.
Section overview
Individuals, partnerships and companies are liable to tax.
Taxes in the UK are administered by HM Revenue & Customs (HMRC).
2.1 Individuals
An individual may be liable to the following taxes:
Income tax (IT), for example on income from investments, income from employment and income
from a business which he operates as a sole trader or as a member of a partnership
Capital gains tax (CGT) on the disposal of capital assets owned by him as investments or used in
his sole trade or partnership
National insurance contributions (NICs) as an employee, as a sole trader or partner, and as an
employer
Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or
services
An individual is taxed annually on his income and gains arising in a tax year.
Definition
Tax year: 6 April in one calendar year to 5 April in the next calendar year. The tax year running from
6 April 2012 to 5 April 2013 is called the 2012/13 tax year.
2.2 Partnerships
A partnership is a group of persons carrying on a business together with a view to making a profit.
Each partner is liable to tax on his share of income and gains of the partnership in a tax year, but not for
tax on the shares of income and gains of the other partners.
The partners are jointly and severally liable for the following taxes:
Income tax of employees deducted under the Pay As You Earn (PAYE) system
National insurance contributions (NICs) as an employer (employer contributions and employee
contributions are collected under the PAYE system)
Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or
services
'Joint and several' liability means that these taxes can be recovered from all or any of the partners.
6 Principles of Taxation
2.3 Companies
C
A company is a legal person formed by incorporation under the Companies Acts. It is legally separate H
from its owners (shareholders) and its managers (directors). A
P
A company is liable for the following taxes: T
E
Corporation tax (CT) on its income and gains R
Income tax of employees deducted under the Pay As You Earn (PAYE) system
National insurance contributions (NICs) as an employer (employer contributions and employee 1
contributions collected under the PAYE system)
Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or
services
The rate of corporation tax is determined by reference to the financial year.
Definition
Financial year: 1 April in one calendar year to 31 March in the next calendar year. The financial year
running from 1 April 2012 to 31 March 2013 is called Financial Year (FY) 2012.
Section overview
Tax law is set out in statute, supplemented by statutory instruments.
A Finance Act is passed each year, following Budget proposals.
Case law interpreting statute law must usually be followed in later cases.
HMRC publishes its interpretation of tax law in various ways.
Introduction to taxation 7
3.1 Legislation
3.1.1 Statutes
The basic rules of the UK taxation system are in a number of tax statutes (Acts of Parliament).
The tax law is amended each year by the Finance Act. This is based on proposals in the Budget put
forward by the Chancellor of the Exchequer in March or April each year. The Finance Act generally
relates to the tax year and financial year starting in April of that year. Therefore, the Finance Act 2012
relates mainly to the tax year 2012/13 and the Financial Year 2012.
Most of the statutory tax law is found in consolidated statutes which contain the law enacted by Finance
Acts over the years. For example, value added tax is dealt with in the Value Added Tax Act 1994 (VATA
1994).
The main direct tax law has also recently been rewritten in plainer English. An example is the
Corporation Tax Act 2010 (CTA 2010).
8 Principles of Taxation
C
Summary and Self-test H
A
P
T
E
R
Summary
Introduction to taxation 9
Self-test
Answer the following questions.
1 Which two of the following are direct taxes?
A Excise duty
B Capital gains tax
C Value added tax
D Corporation tax
2 Governments change their tax policy to achieve 'social justice'. Which of the following has not
been an important principle of social justice in modern politics?
A Progressive principle
B Ability to pay principle
C Neutrality principle
D Regressive principle
3 What are the dates of the Financial Year 2012?
A 1 April 2011 to 31 March 2012
B 1 January 2012 to 31 December 2012
C 1 April 2012 to 31 March 2013
D 6 April 2012 to 5 April 2013
4 Select which two of the following are functions carried out by HM Revenue & Customs
A Collect and administer direct taxes
B Pay and administer jobseekers allowance
C Enforce the minimum wage rules
D Pay and administer the state pension
5 Which two of the following taxes may be payable by a company?
A Income tax on its income
B Corporation tax
C Capital gains tax
D Value added tax
Now, go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
10 Principles of Taxation
C
Answers to Self-test H
A
P
T
1 B and D – capital gains tax and corporation tax E
R
The others are indirect taxes.
2 C – the neutrality principle (taxes should not distort choice).
1
The encourage/discourage examples show that governments do not generally want taxes to be
neutral.
3 C – Financial Year 2012 runs from 1 April 2012 to 31 March 2013.
4 A and C – collect and administer direct taxes and enforce the minimum wage rules.
5 B and D – corporation tax (payable by a company on its income and gains) and value added tax
(as a supplier and a final consumer of goods and services).
Introduction to taxation 11
12 Principles of Taxation
CHAPTER 2
Introduction
Examination context
Topic List
1 Chargeable and exempt income
2 Computation of taxable income
3 Computing tax payable
4 Allowances for taxpayers aged 65 and over
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
13
Introduction
Syllabus links
The topics covered in this chapter are fundamental to your understanding of income tax.
You will be using this knowledge again when you tackle the Taxation paper later on in the Professional
Stage and it will also underpin the technical aspects at the Advanced Stage.
Examination context
In the examination, candidates may be required to:
Differentiate between items which are taxable and exempt for income tax purposes
Calculate taxable income where income has been received net of income tax or without deduction
of tax at source
Categorise taxable income as non savings, savings or dividend income and calculate the tax liability
Identify how tax relief is given for Gift Aid
Compute the allowances available for taxpayers aged 65 and over
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Candidates have historically prepared well for this area of the syllabus. Better prepared candidates are
able to perform well in the more difficult areas of Gift Aid and allowances for taxpayers aged 65 and
over.
14 Principles of Taxation
1 Chargeable and exempt income
Section overview
Income may be chargeable to income tax or exempt from income tax.
Chargeable income is employment income, trading income, property income, savings income,
dividend income and miscellaneous income.
Exempt income includes income from Individual Savings Accounts and premium bond prizes.
Section overview
Some income is received with tax already deducted at source, such as most interest and
employment income, and must be included gross in the income tax computation.
Other income is received without tax being deducted at source, such as trading income and
property income.
Dividend income has a tax credit attached to it which must be included in the tax computation.
There are three types of income in a total chargeable income computation: non-savings income;
savings income; and dividend income.
The total of all chargeable income is called 'net income'.
Taxable income is net income less the personal allowance.
16 Principles of Taxation
2.3 Dividend income
Dividends received from UK companies are dividend income. Dividend income is received with a
deemed tax credit of 10% of the grossed up dividend. The dividend must be grossed up by 100/90 to
obtain the gross equivalent. For example, if you are given a figure for a dividend received of £450 in a
question, you must multiply the dividend by 100/90 to obtain the gross figure of £500 on which there
is a tax credit of £500 10% = £50. Alternatively the question may give you the gross dividend income
figure of £500.
Definition
Net income: The total chargeable income before deducting the personal allowance (see later in this
chapter).
Solution
Net income
Non-savings Savings Dividend
income income income Total
£ £ £ £
Employment income 10,000
Property income 2,000
Building society interest
£240 100/80 300
Dividends
£720 100/90 800
Net income 12,000 300 800 13,100
Premium bond winnings are exempt income and, therefore, not included in the above computation.
Definition
Taxable income: Net income after deduction of the personal allowance.
There is one further step that you need to undertake in order to arrive at the amount of taxable income.
This is to deduct the personal allowance. Every individual taxpayer who is resident in the UK is entitled
to a personal allowance from birth.
The basic personal allowance for 2012/13 is £8,105. There are enhanced personal allowances for
taxpayers aged 65 and over which are covered later in this chapter.
The personal allowance is deducted from the different types of income in the following order:
Non-savings income
Savings income
Dividend income
The full personal allowance of £8,105 is not available for individuals with an adjusted net income of
more than £100,000. The personal allowance is reduced by £1 for every £2 that the individual’s
adjusted net income exceeds £100,000.
The personal allowance will be withdrawn completely where adjusted net income exceeds £116,210.
Therefore any taxpayer subject to the additional rate of tax (see later in this chapter) will not be entitled
to a personal allowance.
18 Principles of Taxation
Worked example: Taxable income
Charlotte receives the following income in 2012/13:
Trading profits £6,600
Bank interest £500
Dividends from UK companies £1,350
Requirement
What is Charlotte's taxable income for 2012/13?
Solution
Charlotte C
H
Taxable income A
Non-savings Savings Dividend P
T
income income income Total
E
£ £ £ £ R
Trading profits 6,600
Bank interest
£500 100/80 625
2
Dividends
£1,350 100/90 1,500
Net income 6,600 625 1,500 8,725
Less personal allowance (6,600) (625) (880) (8,105)
Taxable income Nil Nil 620 620
Net income
Less personal allowance
Taxable income
See Answer at the end of this chapter.
Section overview
Income tax is calculated first on non-savings income, then on savings income and lastly on
dividend income.
There are different rates of tax for each of the three types of income.
Income tax may be payable by (or repayable to) a taxpayer after taking into account tax credits
and tax deducted at source.
Cash gifts to charity are given tax relief under Gift Aid, and affect the taxpayer's basic rate and
higher rate band.
Definition
Tax liability: The total amount of income tax due from a taxpayer.
Once taxable income has been computed, you can calculate the income tax liability. Tax on the three
types of income is calculated in the following order:
Non-savings income
Savings income
Dividend income
For 2012/13, the rates of income tax for non-savings income are as follows:
First £34,370 of taxable income basic rate band 20%
Taxable income between £34,370 and £150,000 higher rate band 40%
Remainder over £150,000 additional rate band 50%
Solution
Krishan
Income tax liability
Non-savings
income
£
Trading profits/Net income 45,000
Less personal allowance (8,105)
Taxable income 36,895
Tax
£
£34,370 20% 6,874
£2,525 40% 1,010
£36,895
Income tax liability 7,884
20 Principles of Taxation
Worked example: Income tax liability on non-savings income
Lois has employment income of £169,000 in 2012/13. This is her only source of income in this tax year.
Requirement
What is Lois’s income tax liability for 2012/13?
Solution
Lois
Non-savings
income
£
Employment income/Net income 169,000 C
Less personal allowance (note) – H
Taxable income 169,000 A
P
Tax T
£34,370 20% 6,874 E
£115,630 40% 46,252 R
£150,000
£19,000 50% 9,500
£169,000 2
Income tax liability 62,626
Note
As Lois’ net income exceeds £116,210 her personal allowance is restricted to nil.
£
Income tax liability
See Answer at the end of this chapter.
Solution
Evie
Income tax liability
Non-savings Savings
income income Total
£ £ £
Property income 8,194
Building society interest
£38,648 100/80 48,310
Net income 8,194 48,310 56,504
Less personal allowance (8,105) (8,105)
Taxable income 89 48,310 48,399
£ £
Tax on non-savings income 89 20% 18
Tax on savings income:
– in starting rate band 2,621 10% 262
2,710
– in basic rate band 31,660 20% 6,332
34,370
– in higher rate band 14,029 40% 5,612
48,399
Income tax liability 12,224
The £89 of non-savings taxable income is taxed first at 20%, the basic rate of tax for non-savings
income.
Savings income is taxed next on a cumulative basis. Since the taxable non-savings income was less than
£2,710 there is £2,621 of savings income in the starting rate band to tax at 10%.
On a cumulative basis a total of £2,710 of taxable income has been taxed so far. This leaves £31,660
(£34,370 – £2,710) of the basic rate band to tax the savings income at the basic rate of 20%.
Finally £14,029 of savings income falls in the higher rate band which is taxed at 40%.
22 Principles of Taxation
For 2012/13, the rates of income tax for dividend income are as follows:
First £34,370 of taxable income basic rate band 10%
Between £34,370 and £150,000 higher rate band 32.5%
Remainder over £150,000 additional rate band 42.5%
£ £
Tax on non-savings income 24,220 20% 4,844
Tax on savings income:
– in basic rate band 5,050 20% 1,010
29,270
Tax on dividend income:
– in basic rate band 5,100 10% 510
34,370
– in higher rate band 4,264 32.5% 1,386
38,634
Income tax liability 7,750
Since the taxable non-savings income was more than £2,710 there is no starting rate band remaining to
tax any savings income at 10%. All of the savings income therefore falls in the basic rate band and is
taxed at 20%.
On a cumulative basis a total of £29,270 of taxable income has been taxed so far. This leaves £5,100
(£34,370 – £29,270) of the basic rate band to tax the dividend income at the basic rate of 10%.
Finally £4,264 of dividend income falls in the higher rate band which is taxed at 32.5%.
Solution
Elise
Non-savings Savings Dividend Total
income income income
£ £ £ £
Employment income 95,875
Property income 31,700
Bank interest
£21,140 100/80 26,425
Dividends
£15,300 100/90 17,000
Net income 127,575 26,425 17,000 171,000
Personal allowance –
Taxable income 127,575 26,425 17,000 171,000
£ £
Tax on non-savings income 34,370 20% 6,874
93,205 40% 37,282
127,575
Tax on savings income
– in higher rate band 22,425 40% 8,970
150,000
– in additional rate band 4,000 50% 2,000
Definition
Tax payable or repayable: The amount of income tax payable by a taxpayer (or repayable by HMRC)
under self assessment after taking into account tax deducted at source.
The final stage that you may be asked to undertake is to compute the tax payable or repayable to the
taxpayer under the self assessment system. Details of this system are covered later in this text.
The tax actually payable by the taxpayer must take into account:
Tax credits received with dividends
Tax deducted at source
24 Principles of Taxation
Tax credits on dividends are set against the tax liability first (restricted to the tax credits on the taxable
dividend). This is because dividend tax credits can only be used to reduce a taxpayer's tax liability. Any
excess tax credits cannot be repaid.
Tax deducted at source on employment income and interest is used to reduce a taxpayer's tax liability
and any excess tax deducted at source can be repaid to the taxpayer.
Joe
Tax payable/repayable 2
£ £
Tax on savings income:
– in starting rate band 2,710 10% 271
– in basic rate band 15 20% 3
2,725
Tax on dividend income:
– in basic rate band 610 10% 61
3,335
Income tax liability 335
Solution
Roz
Taxable income (all non-savings) £ £40,395
Tax
£
£34,370 20% 6,874
£1,250 (£1,000 100/80) 20% (extended band) 250
£4,775 40% 1,910
£40,395
Income tax liability 9,034
A taxpayer who makes a Gift Aid donation in 2012/13 can elect to treat the payment as if it had been
made in 2011/12. This might be beneficial if the taxpayer was liable to higher rate tax in the previous
year but not in the current year. The election must be made to HMRC no later than the date when the
taxpayer files his tax return for the year for which the relief is claimed. If the taxpayer elects to treat the
payment as if it had been made in 2011/12 then the election must be made by no later than 31 January
2013. This election does not affect the position of the charity.
26 Principles of Taxation
4 Allowances for taxpayers aged 65 and over
Section overview
Taxpayers aged 65 or over are entitled to a personal age allowance (PAA).
PAA is reduced once a taxpayer's net income reaches a certain level, but cannot be less than the
basic PA unless net income exceeds £100,000.
Married couples allowance (MCA) is available to married couples and civil partners where either
one of the parties is aged 78 or over at 5 April 2013 (ie at least one spouse or civil partner must
have been born before 6 April 1935).
MCA is a tax reducer at the rate of 10%. C
H
A
P
4.1 Personal age allowance (PAA) T
E
There is a higher personal allowance available to older taxpayers, instead of the basic personal
R
allowance.
The amount of the allowance is dependent on both the taxpayer's age at the end of the tax year and on
the level of his net income. 2
A taxpayer who is aged between 65 years and 74 years at 5 April 2013 (or would have been that age,
but did not live to the end of the tax year) is entitled to a personal age allowance of £10,500.
A taxpayer who is aged 75 or over at 5 April 2013 (or would have been that age, but did not live to the
end of the tax year) is entitled to a personal age allowance of £10,660.
Where the taxpayer's net income exceeds £25,400 in 2012/13, the personal age allowance is reduced
by £1 for every £2 that the net income exceeds £25,400 until the amount of the basic personal
allowance is reached. The PAA cannot fall below £8,105 unless adjusted net income exceeds £100,000,
in which case it can be reduced to £nil – see above.
You should assume a taxpayer is under 65 years of age unless told otherwise.
Solution
Robert is aged 75 by 5 April 2013.
£
Personal age allowance 10,660
Less (£26,060 – £25,400) = £660 ½ (330)
Reduced personal age allowance 10,330
Solution
Angus
Income tax liability
Non-savings
income
£
Net income 15,590
Less PAA (10,660)
Taxable income 4,930
Tax
£
£4,930 20% 986
In the year of marriage/civil partnership, the MCA is reduced by 1/12 for each complete tax month
th th
(running from the 6 of one month to the 5 of the following month) which has passed before the
marriage/registration of the civil partnership.
28 Principles of Taxation
Worked example: Year of marriage/civil partnership
Lucinda was born on 22 August 1937. Her net income for 2012/13 is £18,100. She entered into a civil
partnership with Helen, who was born on 19 July 1933, on 10 December 2012. Helen has net income
for 2012/13 of £12,380.
Requirement
What is the married couple’s allowance for Lucinda in 2012/13?
Solution
Lucinda is aged 75 on 5 April 2013. Helen is aged 79 on 5 April 2013. The MCA is available because
Helen was born before 6 April 1935. However, Lucinda is the taxpayer entitled to claim the MCA since
she has the higher net income in 2012/13. C
H
There are eight complete tax months between 6 April 2012 and 5 December 2012. A
P
The MCA is therefore £7,705 4/12 £2,568 T
E
Note: The MCA tax reducer is £2,568 10% = £257. R
Summary
30 Principles of Taxation
Self-test
Answer the following questions.
1 Which of the following are chargeable to income tax?
A Interest from a NS&I investment account
B Income received from an Individual Savings Account
C £10 Lottery winnings
D Scholarship awarded by a university
4 How is higher rate tax relief given for a Gift Aid donation?
A Deducted from net income
B Treated as paid net of higher rate tax
C Basic rate band extended by grossed up donation
D No higher rate tax relief given
5 A taxpayer aged 67 has net income of £26,300 in 2012/13. What personal age allowance is he
entitled to?
A £10,500
B £10,050
C £9,600
D £8,105
6 A taxpayer aged 45 has employment income of £176,000 in 2012/13. This is her only source of
income in this tax year. What is the income tax liability for 2012/13?
A £60,284
B £63,526
C £62,074
D £66,126
Now go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
Legislation
Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)
Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
Income Tax Act 2007 (ITA 2007)
Employment income – definitions ITEPA 2003 ss. 3 – 13
Types of income and rates of tax ITA 2007 ss. 3 –10, 12, 13, 16 – 20
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You will
not be examined on the contents of this section in your examination.
32 Principles of Taxation
Answers to Interactive questions
Interest arising on an Individual Savings Account is exempt income and, therefore, not included in the
above computation.
Tax
Non-savings
income
£
£34,370 20% 6,874
£2,990 40% 1,196
£37,360
Income tax liability 8,070
34 Principles of Taxation
Answers to Self-test
1 A – interest from a NS&I investment account – chargeable. All the rest are exempt from income
tax.
2 B and D – property income and trading profits are non-savings income.
Interest from a building society is savings income.
Dividend from a UK company is dividend income.
3 B – the rates at which tax is charged on savings income are 10% (starting rate band), 20% (basic
C
rate band), 40% (higher rate band) and 50% (additional rate band). H
A
4 C – higher rate tax relief is given by extending the basic rate band by the grossed up donation.
P
5 B – £10,050 T
E
£ R
Personal age allowance 10,500
Less (£26,300 – £25,400) = £900 1/2 (450)
Reduced personal age allowance 10,050 2
6 D – £66,126
Non-savings
income
£
Employment income/Net income 176,000
Less personal allowance –
Taxable income 176,000
Tax
£34,370 20% 6,874
£115,630 40% 46,252
£150,000
£26,000 50% 13,000
£176,000
Income tax liability 66,126
Employment income
Introduction
Examination context
Topic List
1 Calculation of assessable employment income
2 Taxable and exempt benefits
3 Pay As You Earn (PAYE) system
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
37
Introduction
Identify the key features of the PAYE system and calculate PAYE tax codes for employees
Determine, in straightforward cases, due dates for employers' PAYE and national insurance
payments
Syllabus links
You will meet taxation of employees again in the Application paper, so you need to be very familiar with
the topics in parts 1 and 2 of this chapter to prepare you for the progression to the next level of your
studies.
However, it is unlikely that the PAYE system (described in part 3 of this chapter) would be examined in
the Application paper. You should therefore expect it to be tested in detail in the Principles of Taxation
paper.
Examination context
In the examination candidates may be required to:
Determine how benefits are taxable on P11D employees
Determine how benefits are taxable on P9D employees
Identify which benefits are exempt
Calculate an employee’s coding
Understand the operation of the PAYE system.
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Candidates need to take great care when calculating the value of a benefit, as often one important piece
of information is missed when working this out.
38 Principles of Taxation
1 Calculation of assessable employment income
Section overview
Employment income is income received by an employee or director.
General earnings consist of money and non-monetary benefits received as a result of the
employment.
Definition
General earnings: Any salary, wages or fee, any gratuity or other profit or incidental benefit of any kind
obtained by an employee consisting of money or money's worth, and anything else constituting an
emolument of the employment, together with anything treated under any statutory provision as
earnings (eg benefits).
C
H
A
General earnings therefore include bonuses, commissions, reimbursed expenses, expense allowances,
P
inducements, tips and gratuities (even if received unsolicited from third parties). T
E
R
1.2 Basis of assessment
The basis of assessment of general earnings is the receipts basis. This means that the actual amounts
received between 6 April 2012 and 5 April 2013 are taxable in 2012/13. 3
General earnings consisting of money are treated as received on the earlier of:
The time when payment is made
The time when a person becomes entitled to payment
Solution
£
Salary (£2,100 12) 25,200
Bonus (received May 2012) 2,250
Taxable earnings 2012/13 27,450
General earnings not in the form of money (ie benefits) are taxable when they are received by the
employee.
Employment income 39
2 Taxable and exempt benefits
Section overview
The benefits code deals with taxable benefits and applies in full to most employees.
Certain parts of the benefits code do not apply to employees in 'excluded employment'.
All employees are taxable on the receipt of vouchers and the provision of living accommodation.
Employees not in excluded employment are also taxable on other benefits such as cars, fuel, vans
and use of assets.
There are a number of benefits which are exempt from the charge to income tax.
Definition
Excluded employment:
Does the employee earn
less than £8,500 in NO
the tax year?
YES
Is the employee a
NO
director of the
employing company?
YES
NO
Is he a full-time working
YES director of the company?
NO
In calculating earnings for the £8,500 test, add together the total earnings and benefits that would be
assessable if the employee were paid over £8,500. Do not deduct any expenses. (Allowable expenses are
covered in the Application paper.)
40 Principles of Taxation
2.2 Employees in excluded employment
Employees in excluded employment are only taxable on benefits as follows:
Benefits convertible into cash on the amount of cash that the benefit could be converted into: this
is sometimes called the second hand value
Vouchers
Living accommodation (but not any associated expenses)
Employees in excluded employment are sometimes called 'P9D' employees. This is because their
employers are required to submit form P9D to HMRC under the PAYE system giving details of their
taxable benefits.
Cash vouchers (vouchers exchangeable for cash) – the taxable amount is the sum of money for
which the voucher is capable of being exchanged
3
Credit tokens (eg a credit card) used to obtain money, goods or services – the taxable amount is
the cost to the employer of providing the benefit, less any amount paid by the employee
Vouchers exchangeable for goods and services (eg book tokens) taxable amount is the cost to the
employer of providing the benefit, less any amount paid by the employee
There is an exemption for the first 15p per day of meal vouchers.
Definition
Job related accommodation: Accommodation is job related if:
(a) the accommodation is necessary for the proper performance of the employee's duties (eg
caretaker); or
(b) the accommodation is provided for the better performance of the employee's duties and the
employment is of a kind in which it is customary for accommodation to be provided (eg police
officers); or
(c) the accommodation is provided as part of arrangements in force because of a special threat to the
employee's security (eg members of the government).
A director can only claim one of the first two exemptions if he owns 5% or less of the shares in the
employer company and either he is a full-time working director or the company is non-profit making or
is a charity.
Employment income 41
There are two potential benefits on the provision of living accommodation:
Basic rental benefit
If the living accommodation is owned by the employer, the amount of the benefit is the rent that would
have been paid if it had been let at its annual value (taken to be the rateable value).
The annual value will be given to you in the question.
If the living accommodation is rented by the employer, the amount of the benefit is the higher of the
annual value and the rent actually paid by the employer.
If the employee makes a payment to the employer for his occupation of the property, this reduces the
taxable benefit.
Additional yearly rent
This only applies to expensive accommodation. Expensive accommodation is accommodation which
cost the employer more than £75,000 to provide. The amount of the additional yearly rent is calculated
as:
(Cost of providing the living accommodation less £75,000) the official rate of interest at the start of
the tax year
The cost of providing the accommodation is the total of the original cost of the living accommodation
plus any capital improvements made before the start of the tax year in which the benefit is charged.
Again, if the employee makes a payment to the employer for his occupation of the property, any excess
not set against the basic rental benefit will be used to reduce the additional yearly rent benefit.
Solution
Basic rental benefit
£
Annual value 7,500
Less: rent paid by Kyle (7,500)
Taxable benefit NIL
Additional yearly rental benefit
£
Cost of provision (£150,000 + £15,000) 165,000
Less: lower limit (75,000)
90,000
£90,000 4% 3,600
Less: rental paid by Kyle
(£700 12) = £8,400 – £7,500 (900)
Taxable benefit 2,700
If the accommodation is only available for part of the tax year, the benefit is time apportioned (for exam
purposes, on a monthly basis).
If the property was acquired by the employer more than six years before it is first provided to the
employee, use the market value of the property when it was first provided plus the cost of subsequent
42 Principles of Taxation
improvements to calculate the additional yearly rent charge, instead of the original cost plus
improvements. However, unless the original cost plus improvements exceeds £75,000, the additional
yearly rent charge cannot be imposed, however high the market value.
Employment income 43
Having worked out the list price of the car, the benefit is then calculated by applying a percentage to
that price. The percentage depends on the carbon dioxide (CO2) emissions of the car expressed in
grams per kilometre (g/km). The CO2 emissions figure will be given to you in the question.
The emissions thresholds are as follows:
For cars with zero emissions there is no taxable benefit.
For cars classed as 'ultra- low emission cars', the percentage is 5% for cars with emissions between
one g/km and 75g/km.
For cars with CO2 emissions above 75g/km but less than 100g/km, the percentage is 10%.
For cars with CO2 emissions of 100g/km, the relevant threshold for the year, the percentage is 11%
For every 5kg/km over the 100g/km threshold (rounded down to the nearest 5g/km), an
additional 1% is added, up to a maximum of 35%.
If the employee makes a contribution to the employer for the private use of the car, this contribution
reduces the taxable benefit.
Where the car uses diesel instead of petrol, the percentage is increased by 3%, subject to the overall
maximum of 35%.
If a car is not available for private use for the whole of a tax year, the benefit is time apportioned (for
exam purposes on a monthly basis).
Solution
CO2 emissions are 141g/km, round down to 140g/km
Appropriate percentage:
(140 – 100) = 40g/km in excess of threshold
40 ÷ 5 = 8%
11% + 8% = 19%
£
List price £13,395 19% 2,545
Less: contribution for use £50 12 (600)
Taxable benefit 1,945
44 Principles of Taxation
CO2 emissions are ........................................ g/km, round down to ........................................ g/km
Appropriate percentage:
(............. – 100) = .............. g/km in excess of threshold
............. ÷ 5 = ............. %
11% +……. % +……. % (diesel) = ............. %
List price is £
£ ............. ............. % = £ .............
Time-apportionment
.................................................................................................................................................................
Taxable benefit
.................................................................................................................................................................
See Answer at the end of this chapter.
The car benefit charge is designed to cover the cost of running the car such as repairs, vehicle excise
duty and insurance.
However, there is a separate charge for the provision by the employer of fuel for private use for a car
provided by the employer with private use.
The benefit uses the same percentage calculated for the car benefit. This is then applied to a fixed
amount which is £20,200 in 2012/13. C
H
There is no reduction in the benefit if the employee makes a partial contribution to the cost of private
A
fuel. There is a taxable benefit unless the employee reimburses the employer with the full cost of private P
fuel. If the car for which the fuel is provided is not available for part of the tax year, the fuel benefit is T
time apportioned on the same basis as the car benefit. E
R
Solution
CO2 emissions are 212g/km, round down to 210g/km
Appropriate percentage:
(210 – 100) = 110g/km in excess of threshold
110 ÷ 5 = 22%
11% + 22% + 3% (diesel) = 35% (maximum)
£20,200 35% = ££7,070
No reduction for partial contribution for private fuel.
Employment income 45
There is a separate charge for the provision by the employer of fuel for private use of the van. The
benefit is an annual amount of £550. If the van for which the fuel is provided is not available for part of
the tax year, the fuel benefit is time-apportioned on the same basis as the van benefit.
There is no reduction in the van fuel benefit if the employee makes a partial contribution to the cost of
private fuel.
There is no taxable benefit on the provision of a van for private use where the van has zero CO2
emissions.
2.9.2 Computers
There is no taxable benefit on the provision of a computer to an employee where the private use of it by
the employee is not significant.
Where the private use of the computer is significant the benefit is calculated as under the general rule
above, but then reduced by the percentage of business use. HMRC guidance suggests 40% private use
would be deemed significant.
Solution
(a)
Television
Annual value
20% £1,100 £220
46 Principles of Taxation
Available for six months in tax year
£
£220 6/12 110
Less: employee contribution £10 6 (60)
Taxable benefit 50
Computer
Insignificant private use therefore no taxable benefit £nil
(b)
Computer £
Annual value
20% £2,700 540
Business use (55%) (297)
Taxable benefit 243
C
Worked example: Marginal cost H
A
Leonard is a teacher at a public school. He pays a reduced fee of £2,000 in 2012/13 for his son to P
attend the school. T
E
In 2012/13 the following figures relate to students attending the school. R
£
Normal fee payable per student 3,500
Average cost per student, including a proportion of fixed overheads 2,800 3
Additional cost of an extra student, including extra writing books, food etc 1,500
Solution
First determine which fee cost is relevant.
The marginal cost of providing the place is the equivalent to the additional cost, ie £1,500.
Then deduct the contribution paid by Leonard ie £2,000
This cannot give rise to a negative benefit, so the benefit is nil.
Employment income 47
Childcare payments of up to £55 per week under a contract entered into before 6 April 2011
between the employer and an approved child carer or by childcare vouchers, provided that
childcare payments are available to all employees, with some exclusions for those earning close to
the national minimum wage.
For those joining an approved childcare scheme from 6 April 2011 the amount that is exempt per
week depends on the employee’s basic earnings assessment.
The basic earnings assessment is the individual’s expected earnings for the current tax year. It is
calculated by adding together the employee’s basic earnings and taxable benefits and then
deducting excluded income which includes occupational pension contributions, allowable expense
payments and the personal allowance.
The exemption is as follows:
• Basic rate taxpayer – £55 per week
• Higher rate taxpayer – £28 per week
• Additional rate taxpayer – £22 per week.
For anyone already in a scheme at 6 April 2011 the £55 per week exemption continues to apply
irrespective of their level of earnings.
One mobile telephone available for private use by an employee
Free or subsidised meals in a canteen where such meals are available to all staff
Meal vouchers up to 15p per day
Social events paid for by the employer up to £150 per head per tax year
Entertainment provided by a third party (eg seats at sporting/cultural events)
Non-cash gifts from third parties up to £250 per tax year from the same donor
Provision of a parking space at or near the employee's place of work
Awards of up to £5,000 made under a staff suggestion scheme
Work-related training courses
Sports and recreation facilities available to employees generally but not to the general public
Payments towards the additional costs of an employee working from home (up to £4 per week
without supporting evidence, payments in excess of £4 per week require documentary evidence
that the payment is wholly in respect of such additional costs)
Personal incidental expenses (eg cost of telephone calls home) whilst the employee is required to
stay away overnight on business up to £5 per night in the UK, £10 per night abroad. If
reimbursement by the employer exceeds these daily limits the total amount reimbursed is taxable.
Works buses and subsidies to public bus services
Travel expenses when public transport disrupted, late night journeys and where car sharing
arrangements break down
Use of bicycles or cyclists safety equipment if made available to all employees
Reasonable removal expenses (maximum £8,000) paid for by an employer for a new employment
position or on relocation
Non-cash long service awards in respect of at least 20 years service, not exceeding £50 per year of
service
Eye tests and glasses provided for employees who use VDU equipment
Health-screening assessment or medical check up provided for an employee, by the employer
(maximum of one of each per tax year).
48 Principles of Taxation
3 Pay As You Earn (PAYE) system
Section overview
The PAYE system ensures that tax and NICs are paid on employment income.
th
Amounts deducted under PAYE must usually be paid to HMRC by the 19 of each calendar
month.
HMRC can require security payments from employers who are at risk of deliberately not paying
PAYE.
The amount of tax deducted under PAYE depends on the employee's tax code.
HMRC are introducing the Real Time Information (RTI) reporting system.
Employment income 49
3.3 PAYE codes
The calculation of the PAYE income tax deduction is based on 'tax codes'.
For each tax year, the employee receives a PAYE coding notice (Form P2) setting out the allowances and
deductions available to the employee in that year and the resultant tax code. The employer is informed
of the PAYE code (Form P6), but not the details of how it is calculated.
The tax code computation is as follows:
Allowances £ Deductions £
Personal allowance X Taxable benefits X
Allowable expenses X Adjustment for underpaid tax X
Adjustment for overpaid tax X
X X
If total allowances less total deductions gives a positive figure, the tax code is created by removing the
last digit in the computation and adding a letter at the end. This is usually the letter L showing that the
employee is entitled to the basic personal allowance. If the employee is entitled to a full age personal
allowance the letter to add is P for those aged 65-74 and Y for those aged 75 or older.
Solution
£
Allowance: Personal allowance 8,105
Less: Deduction (taxable benefits) (4,235)
Net allowances 3,870
If total allowances less total deductions give a negative figure, the tax code will have a letter K at the
beginning. The application of a K code will mean that the taxable pay of the employee will be increased
rather than decreased. A K code is calculated in the same way as an L code except that the code is
decreased by 1.
Solution
£
Allowances: Personal allowance 8,105
Less: Deduction (taxable benefits) (9,312)
Net allowances (1,207)
50 Principles of Taxation
The tax deducted using a K code cannot exceed 50% of the amount of actual remuneration on that pay
day, so as not to cause hardship to the employee.
The code number can also reflect unpaid tax on income from earlier years. In this case, gross up the
unpaid tax using the taxpayer's estimated marginal rate of income tax and deduct the grossed up
unpaid tax from total allowances.
Solution
Brandon is a basic rate taxpayer
£
Allowances: Personal allowance 8,105
Less: Deduction (unpaid tax) £300 100/20 (1,500)
Net allowances 6,605
Employment income 51
Summary and Self-test
Summary
Self-test
Answer the following questions.
1 Sandra works for Julian (a sole trader) as a part-time salesperson at a salary of £6,000 a year. On
31 December 2012, she received a bonus of £2,000 in respect of Julian's trading results for the year
ended 30 September 2012. She expects to receive a bonus of £2,500 in December 2013 in respect
of the year ended 30 September 2013.
What are Sandra's assessable earnings for 2012/13?
A £6,000
B £7,250
C £8,000
D £8,250
2 Peter and Jane both work for Apple Ltd (a trading company).
Peter is a director of Apple Ltd. He has no shares in Apple Ltd and works one day a week for a
salary of £8,400.
Jane is an employee and earns £8,600 working two days a week for Apple Ltd.
Which of them is in an 'excluded employment'?
A Both of them
B Neither of them
C Peter
D Jane
52 Principles of Taxation
3 Oliver is employed by Munton plc and earns £20,000 a year. He also receives the following
benefits during 2012/13:
Meal vouchers of £2 per day (240 working days in year)
Pension advice costing £100
Ticket to sporting event from a customer of Munton plc worth £50
What are Oliver's taxable benefits for 2012/13?
A £0
B £444
C £544
D £594
4 Gerald is employed by Zoom plc at a salary of £30,000 a year. He is provided with a car available
for private use from 1 November 2012. The car has CO2 emissions of 142g/km and a list price of
£18,000. The car has a diesel engine.
What is the taxable car benefit?
A £3,960
B £3,420
C £1,650
D £1,425
5 Tricia (aged 30) is employed by Wilton Ltd at a salary of £10,000 per year. She is also entitled to
taxable benefits of £1,800. She has no tax overpaid or underpaid from previous tax years.
C
What is Tricia's tax code for 2012/13? H
A
A 810L P
B 631L T
E
C 630L
R
D 629L
6 David earns £60,000 a year. He is entitled to a basic personal allowance. He has unpaid tax of £920
from 2011/12 which is to be paid through the PAYE system. 3
Employment income 53
Technical reference
Legislation
References relate to Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) unless otherwise stated
Tax on employment income ss.6-8
Vouchers ss.73-96A
HMRC manuals
Employment Income Manual (Found at http://www.hmrc.gov.uk/manuals/eimanual/index.htm)
Employment income: introduction EIM00510
This gives an overview of the benefits code and provides links to further guidance on
individual types of benefit.
Employment income: alphabetical list of particular items EIM01005
This gives links to more unusual types of benefit from employment, including those
which are not taxable.
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You
will not be examined on the contents of this section in your examination.
54 Principles of Taxation
Answers to Interactive questions
Time-apportionment
(£2,500 + £4,600) = £7,100 6/12
Taxable benefit is 3,550
Time-apportionment
£5,168 3/12
Taxable benefit is £1,292
Employment income 55
Answers to Self-test
1 C – £8,000
Sandra's basic salary is £6,000. She is also taxed on the bonus of £2,000 received in the tax year
2012/13. Note that in terms of any benefits, Sandra is a P9D, or excluded, employee.
2 B – Neither of them
Peter earns less than £8,500, but he is a director who does not work full-time and the company is
not non-profit making nor charitable. Therefore Peter is not in excluded employment.
Jane earns over £8,500 a year and so is not in excluded employment.
3 B – £444
Meal vouchers (£2 less 15p per day exempt) = £1.85 240 = £444
Pension advice up to £150 is exempt (assume available to all employees)
Entertainment provided by third party is exempt
4 C – £1,650
CO2 emissions are 142g/km, round down to 140g/km
Appropriate percentage:
(140 – 100) = 40g/km in excess of threshold
40 ÷ 5 = 8%
11% + 8% + 3% (diesel) = 22%
List price is £18,000
£18,000 22% = £3,960
Available for 5 months in tax year
£3,960 5/12 = £1,650
5 C – 630L
£
Allowance: Personal allowance 8,105
Less: Deduction (taxable benefits) (1,800)
Net allowances 6,305
56 Principles of Taxation
CHAPTER 4
Trading profits
Introduction
Examination context
Topic List
1 Badges of trade
2 Adjustment to profits
3 Allowable and disallowable expenditure
4 Other adjustments
Summary and Self-test
Technical reference
Answer to Interactive question
Answers to Self-test
57
Introduction
Allocate given items of business expenditure as allowable or disallowable for tax purposes
and calculate adjusted trading profits of a sole trader or partnership
Syllabus links
The material in this chapter forms the basis of the charge to tax on business profits.
You will be expected to know the main adjustments to profit in the Application paper later on in the
Professional Stage and also as technical background at the Advanced Stage.
Examination context
In the examination candidates may be required to:
Identify and use the badges of trade in a given scenario
Determine whether expenditure incurred is allowable or disallowable in calculating trading profits
Correctly deal with other adjustments required to calculate adjusted trading profits
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
58 Principles of Taxation
1 Badges of trade
Section overview
Taxable trading profits arise from a trade.
It is not always clear whether activities constitute a trade.
The badges of trade are key factors which indicate whether a trade is being carried on.
All the circumstances need to be taken into account to decide whether a taxpayer is carrying on a
trade.
Trading profits 59
1.5 Connection with existing trade
The other activities of the taxpayer should be considered to see whether any similarities exist. For
example, if an accountant sold a car it is unlikely that the accountant would be deemed to be trading. If
however a car mechanic in business as a sole trader sold a car, there is a direct link between repairing
and selling cars. HMRC may seek to tax the profit on the car sale as trading income.
2 Adjustment to profits
Section overview
Trading profits cover income from a trade, profession or vocation.
Profit and loss accounts must be drawn up under recognised accounting principles.
The accounting profit or loss must be adjusted for tax purposes.
2.1 Introduction
Having established that a taxpayer is carrying on a trade, it is necessary to work out what the taxpayer's
taxable trading profits are. The same rules apply to income from professions (eg accountants) so we
will simply refer to trading profits in this text. A taxpayer may carry on a trade as a sole trader or as a
partner in a partnership.
60 Principles of Taxation
2.2 Profit and loss account
UK tax law requires the use of accounts drawn up under recognised accounting principles. This will
usually be in accordance with UK accepted accounting practice (UK GAAP). In some cases, accounts
may be prepared in accordance with International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS).
Section overview
Expenditure is generally allowable if it is incurred wholly and exclusively for the purposes of the trade.
Capital expenditure, appropriations of profit, general provisions, non-trade debts, most C
entertaining and gifts, and fines and penalties are disallowable. H
A
Some expenditure is specifically allowable such as legal costs on the renewal of a short lease. P
T
Leasing costs on expensive cars are restricted. E
R
Definition
Allowable expenditure: Expenditure incurred wholly and exclusively for the purposes of the trade, not
specifically disallowed by legislation.
In theory, if there is a dual purpose for expenditure (eg expenditure for both business and private use),
the whole of the expenditure should be disallowed. In practice, however, HMRC will allow a reasonable
apportionment between business (allowable) and private (disallowable) use.
Expenditure will also be disallowable if it is too remote from the purposes of the trade.
Some expenditure is allowable for accounting purposes, but not for tax purposes. Such expenditure is
disallowable and must be added back to the accounting profit or loss.
Trading profits 61
3.2 Capital expenditure
Capital expenditure is disallowable. Usually, accounting practice would not include capital expenditure
in the profit and loss account in any case. However, repairs and maintenance expenditure often requires
careful review.
Maintenance (eg redecoration) and repair (returning the asset to its original condition) are allowable.
Improvement or enhancement of the asset, however, is a capital expense and must be disallowed. This
would include expenditure on an asset newly acquired in a dilapidated state, where expenditure is
required to bring the asset into use in the business.
Depreciation of capital assets is also disallowable as are any profits or losses on the sale of fixed assets.
For tax purposes depreciation and losses on disposals of fixed assets are added back to the net profit in
the accounts, while profits on disposals of fixed assets are deducted from the net profit in the accounts.
62 Principles of Taxation
Solution
Loan to former employee written off – disallowable, add back £180
Increase in general bad debt provision – disallowable, add back (£1,260 – £1,225) = £35
Following changes in accounting standards, all reductions in the value of debtors are supposed to be
specific in nature. This means that going forward, general provisions are less likely to be seen in practice.
Instead of writing off or providing against a specific debt, debts will now be 'impaired'.
3.9 Interest
Interest paid on money borrowed for business purposes is allowable.
Interest on late payment of tax is disallowable.
Trading profits 63
3.10 Legal and professional fees
Legal and professional fees relating to income are allowable. Examples include collection of trade debts,
employment issues, action for breach of contract, preservation of trading rights and preparation of
accounts.
Legal and professional fees relating to capital expenditure are generally disallowable. Examples include
costs of acquiring capital assets and drawing up a partnership agreement. However the following
expenses relating to capital assets are specifically allowable:
Legal costs relating to the renewal of a short lease (50 years or less)
Costs of registration of a patent or copyright for trade use
Incidental costs of raising long-term finance
Solution
As the CO2 emissions exceed 160g/km there is a flat rate disallowance.
Disallowable amount 15% £1,960 £294
If the sole trader or partner then uses the leased car partly for business and partly for private purposes a
further adjustment would be required to disallow the private usage of the leased car.
64 Principles of Taxation
Worked example: Leased car and private use by sole trader
Jane leases a car with a retail price of £16,000 and CO2 emissions of 200g/km on 1 May 2012.
Jane uses the car partly for business and partly for private purposes. Business usage of 60% has been
agreed with HMRC.
Jane prepares accounts to 31 December each year. The leasing cost up to 31 December 2012 was
£1,600.
Requirement
What is the disallowed amount which needs to be added back?
Solution
Allowable amount
85% £1,600 60% (business use) = £816
Trading profits 65
4 Other adjustments
Section overview
The sale price of goods taken from the business by the owner is trading profit.
Non-trading income must be deducted.
Business expenditure not shown in the accounts is deductible as an allowable expense.
Solution
(a) Add back selling price of £160
(b) Add back profit (£160 – £90) = £70
66 Principles of Taxation
Summary and Self-test
Summary
C
H
A
P
T
E
R
Trading profits 67
Self-test
Answer the following questions.
1 Which of the following is an allowable expense?
A Gift of fleece jackets to customers with trade logo costing £55 each
B Increase in general provision for bad debts
C Legal expenses on employment contracts
D Gift Aid donation
2 Ivan and Ewan are in partnership. Their accounts include the following expenditure:
Lunch meetings with clients £1,090
Parking fines for Ivan £500
Increase in specific provision for trade bad debt £150
What are the total disallowable expenses?
A £650
B £1,240
C £1,590
D £1,740
3 Simon takes goods from his business with a selling price of £540. The cost price is £360. He pays
£100 for the goods.
Simon's accounts show the transaction as drawings of £360.
What is the adjustment required?
A No adjustment required
B £80
C £180
D £540
4 Henry leases a car with a retail price of £20,000 and CO2 emissions of 184g/km on 1 November
2011. The annual leasing charge is £5,000.
What adjustment needs to be made in his accounts for the year ended 31 October 2012?
A No adjustment required
B £750 added back
C £4,250 added back
D £5,000 added back
5 Patrick's accounts show £16,550 on repairs and maintenance during the year to 30 September
2012.
Demolishing out-house and building new toilets £5,950
Repainting offices £3,600
Installing new heating system £7,000
How much should be added back to the accounting profit?
A £9,550
B £10,600
C £12,950
D £16,550
6 Janice leases a car with a retail price of £36,000 and CO2 emissions of 150g/km on 1 July 2012. The
annual leasing charge is £4,700. The car is for business use only.
What adjustment needs to be made in her accounts for the year ended 31 December 2012?
A £1,998
B £705
C £353
D nil
Now, go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
68 Principles of Taxation
Technical reference
Legislation
References relate to Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
Charge to tax on trade profits s.5
Disallowable expenditure
Capital s.33
Wholly and exclusively s.34
Bad debts s.35
Unpaid remuneration s.36
Employee benefits ss.38-44
Business entertainment and gifts ss.45-47
Car hire ss.48-50
Penalties etc s.54
Allowable expenditure
HMRC manuals
Business income manual (Found at http://www.hmrc.gov.uk/manuals/bimmanual/index.htm)
Trade: badges of trade: summary BIM20205
Trading profits 69
Answer to Interactive question
£1,000 on party for five employees Allowable as the £150 limit applies to
employment income not trading profits
(NB taxable benefit for employees)
Gift of desk diary to ten customers with trade logo Allowable (advert, £50 or less)
costing £35 each
£5,000 on new roof for workshop Disallowable (capital), add back £5,000
£500 increase in general bad debt provision Disallowable, add back £500
£50 to local hospital, a registered charity, as sponsor Allowable (small, local, public image)
for new scanner
£150 debt to former employee written off Disallowable, add back £150
£35 parking fines incurred by salesman on business Allowable
£5,000 contribution to registered pension scheme Allowable
Gift of bottle of wine to twenty customers with trade Disallowable (drink), add back £500 (20 £25)
logo costing £25 each
£1,000 donation to the Conservative Party, a political Disallowable (political donation), add back
party £1,000
£1,500 accountancy fees for preparing accounts Allowable
£2,500 on redecoration of office Allowable (maintenance)
£100 interest on late payment of tax Disallowable, add back £100
£6,000 depreciation on capital assets Disallowable add back £6,000
£500 legal fees on grant of a new 25 year lease of Disallowable (not renewal), add back £500
shop
70 Principles of Taxation
Answers to Self-test
5 C – £12,950
Demolishing out-house and building new toilets: disallowable, capital
Repainting offices: allowable
Installing new heating system: disallowable, capital
6 D – nil
As the CO2 emissions are below 160g/km there is no disallowance.
Note: Only (6/12 £4,700) £2,350 leasing charge would be in the accounts for the year ended
31 December 2012.
C
H
A
P
T
E
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Trading profits 71
72 Principles of Taxation
CHAPTER 5
Capital allowances
Introduction
Examination context
Topic List
1 Introduction
2 Main pool: writing down allowances
3 Main pool: first year allowances
4 Annual investment allowance
5 Small plant and machinery pools
6 Single asset pools
7 Balancing adjustments
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
73
Introduction
Calculate the adjusted trading profits after capital allowances on plant and machinery of a
sole trader or partnership
Syllabus links
Capital allowances are an important area of taxation and are examinable at all levels.
You will be expected to be thoroughly conversant with the topics covered in this chapter in the
Application paper and at the Advanced Stage, so it is vital that you make sure you learn the material in
this chapter very well.
Examination context
In the examination candidates may be required to:
Calculate writing down allowances for short or long periods of account
Identify which assets are eligible for first year allowances
Correctly apply the annual investment allowance
Correctly treat cars and other assets with private use by the sole trader or partner
Determine the amount of any balancing adjustment
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
A methodical approach is required to calculate capital allowances. This can be an unnecessarily time-
consuming area if such an approach is not adopted.
74 Principles of Taxation
1 Introduction
Section overview
Capital allowances give tax relief for expenditure on capital assets such as plant and machinery.
Plant includes assets which perform an active (not passive) function in a business and some
expenditure specified in legislation.
Sole traders, partners and companies qualify for capital allowances on assets used in their
businesses.
The acquisition cost of an asset is usually the cost of the asset to the business.
The disposal value of assets in the capital allowances computation cannot exceed original cost.
Capital allowances 75
1.3 Acquisition cost
You will need to identify the acquisition cost of assets qualifying for capital allowances as the allowances
will be based on this amount.
In most cases, you will simply be given a figure for the cost of the asset and will use this in your
computation.
The owner may bring personally-owned assets into the business. This may happen when a business starts.
Here, the acquisition cost for capital allowances is the market value of the asset when it is brought into the
business.
Acquisitions (AIA) X
AIA (X) X
* Only the business use percentage of the WDA on private use assets is taken to the capital allowances
column.
AIA: annual investment allowance
FYA: first year allowance
Expensive car: car which cost over £12,000 pre April 2009 and is not a qualifying low emission car
Private use asset: used partly for non-business purposes by a sole trader or partner
76 Principles of Taxation
2 Main pool: writing down allowances
Section overview
Most expenditure on assets is pooled in the main pool.
For each period of account, acquisition costs are added to the pool and disposal costs deducted
from the pool.
A writing down allowance (WDA) is given on the balance of the pool at the end of the period of
account.
The tax written down value (TWDV) of the pool is carried forward to the start of the next period of
account.
For accounting periods that straddle 6 April 2012 (1 April for companies) a hybrid WDA must be
calculated for the accounting period on a pro rata basis. This rate is arrived at by applying the WDA of
20% to the portion of the accounting period that falls before the change date and the WDA of 18% to
the portion of the accounting period after the change date, then adding them together to find the rate
for the accounting period as a whole. The hybrid rate is rounded to two decimal places.
If the period of account is longer or shorter than 12 months, the WDA is increased or decreased
accordingly.
Once the WDA has been deducted from the pool balance, the remainder of the value of the pool is then
C
carried forward to the start of the next period of account. This amount is called the tax written down H
value (TWDV). It continues to be written down on a reducing balance basis. A
P
T
E
R
Capital allowances 77
Worked example: Writing down allowances
Trump started in business on 1 June 2011. He decided to make up his accounts to 31 December each
year.
He makes the following acquisitions:
1.6.11 Brings Volvo car into business, market value £5,500 (actual cost £7,000) with CO2 emissions
of 145 g/km
1.9.11 Buys Nissan car costing £6,500, with CO2 emissions of 153g/km
He makes the following disposals:
1.9.12 Sells Volvo for £4,000
1.11.12 Nissan car is involved in an accident and is scrapped. Trump receives compensation of £250.
Neither car is used for Trump's non-business journeys and neither car is a qualifying low emission car.
Requirement
Show the maximum capital allowances available for Trump’s first two periods of account.
Solution
Main pool Allowances
Period of account – 1.6.11 to 31.12.11 (7 months) £ £
Acquisitions
1.6.11 Volvo (MV) 5,500
1.9.11 Nissan 6,500
12,000
No disposals
WDA: £12,000 20% 7/12 (time apportioned for 7 month period) (1,400) 1,400
TWDV c/f 10,600
Disposals
1.9.12 Volvo (4,000)
1.11.12 Nissan (250)
6,350
WDA £6,350 18.5% (ie (3/12 20%) + (9/12 18%)) (1,175) 1,175
TWDV c/f 5,175
Section overview
First year allowances (FYAs) may be given in the period of account in which expenditure is
incurred.
All businesses may claim a 100% FYA on certain energy-saving expenditure, low emission cars and
zero emission goods vehicles.
78 Principles of Taxation
3.2 100% first year allowances
There is a 100% FYA for expenditure on designated energy saving technologies, such as equipment that
generates heat and power.
A 100% FYA also applies to expenditure on qualifying low emission cars. To qualify as a low emission car
it must emit not more than 110g/km of CO2 or it must be electrically propelled.
In addition, there is a 100% FYA for expenditure on new and unused zero emission goods vehicles
where expenditure is incurred on or after 6 April 2010 (1 April for companies). This is expected to apply
for five years.
Section overview
An annual investment allowance (AIA) is available for expenditure on plant and machinery, except
cars.
The AIA is given for a 12 month period of account. From 6 April 2012 (1 April for companies) the
AIA is £25,000. Before this, the AIA was £100,000.
Any balance of expenditure in excess of the AIA receives a WDA at the end of the accounting
period.
Any balance of expenditure incurred within an accounting period on which the AIA is not given is
eligible for the WDA. 5
Capital allowances 79
Worked example: Annual investment allowance
Jose has been trading for many years and makes up accounts to 31 December each year. His capital
allowances pool brought forward at 1 January 2012 is £8,000. He makes the following acquistions and
disposals:
1.3.12 Buys a printing press for £126,000
1.2.13 Sells for £480 plant which cost £900 two years earlier
24.4.13 Buys a further printing press for £40,000
Requirement
What are the maximum capital allowances available to Jose for the years ended 31 December 2012 and 2013?
Solution
Main pool Allowances
Period of account – Year ended 31 December 2012 £ £
TWDV b/f 8,000
Acquisitions
1.3.12 Press 126,000
Less AIA ((3/12 × £100,000) + (9/12 × £25,000)) (note) (43,750) 43,750
90,250
WDA @ 18.5% (ie (3/12 × 20%) + (9/12 × 18%)) (16,696) 16,696
TWDV c/f 73,554
Total allowances 60,446
Note: If the expenditure had been incurred on or after 1 April 2012 the AIA would have been restricted
to £18,750 (9/12 × £25,000)
80 Principles of Taxation
FYA Main pool Allowances
£ £ £
Period of Account
year ended….
Acquisitions (FYA):
FYA
Acquisitions (AIA):
AIA
WDA
TWDV c/f
Total allowances
See Answer at the end of this chapter.
Section overview
Businesses may write off small balances remaining at the end of the accounting period in the main
pool.
This applies where the tax written down value at the end of the accounting period is £1,000 or
less.
The £1,000 limit is scaled up or down for long or short accounting periods.
C
H
A
P
T
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Capital allowances 81
6 Single asset pools
Section overview
Some assets are not put in the main pool but have a separate pool for each asset.
This applies to cars costing more than £12,000 acquired before 6 April 2009, and assets with
private use by the sole trader or partner.
6.1 Cars
The treatment of cars depends on whether they were purchased before or on or after 6 April 2009
(1 April for companies).
82 Principles of Taxation
Solution
Main Expensive
pool car Allowances
£ £ £
Period of account
Year ended 5.4.13
TWDV b/f 7,600 16,000
Acquisitions (non AIA or FYA)
car – emissions 150g/km 10,300
17,900 16,000
WDA @ 18% (3,222) (2,880) 6,102
TWDV c/f 14,678 13,120
Total allowances 6,102
Solution
Computer Car Allowances
£ £ £
Period of account
Year ended 30.4.13
TWDV b/f 2,000
Acquisition (no FYA or AIA) 16,000
WDA @ 18% (360) 80% 288
WDA @ 18% (2,880) 70% 2,016
TWDVs c/f 1,640 13,120
Allowances 2,304
C
H
A
P
T
E
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Capital allowances 83
Interactive question 2: Assets with private use [Difficulty level: Exam standard]
Jolene started trading on 1 July 2012. Her first set of accounts were made up to 31 March 2013.
On 1 December 2012, Jolene purchased a car with CO2 emissions of 155g/km for £21,000 which she
uses 70% for business purposes.
Requirement
Using the standard format below, compute the maximum capital allowance for Jolene for the period
ended 31 March 2013.
Car Allowances
£ £
Period of account
........................................ to ........................................
Acquisition
WDA ( ) …..%
TWDV c/f
Allowances
7 Balancing adjustments
Section overview
A balancing charge arises on disposal if too many capital allowances have been given.
A balancing allowance arises on disposal if too few capital allowances have been given.
84 Principles of Taxation
Worked example: Balancing adjustments
Philip has carried on a trade for many years making up accounts to 31 March.
At 1 April 2012, Philip had a main pool with a tax written down value of £6,250, and a Ford car with
20% private use with a tax written down value of £10,000.
On 1 December 2012, Philip sold office equipment for £7,200 (original cost £10,000).
On 1 February 2013, Philip sold his Ford for £7,500. On the same day Philip bought an Audi with CO2
emissions of 145g/km for £17,500. The Audi also has 20% private use.
Requirement
What are the maximum capital allowances available to Philip for the year ended 31 March 2013?
Solution
Main pool Ford Audi Allowances
£ £ £ £
Period of account
Year ended 31.3.13
TWDV b/f 6,250 10,000
Acquisition (no AIA or FYA)
1.2.13 17,500
Disposals
1.12.12 (7,200)
(950)
Balancing charge 950 (950)
–
1.2.13 (7,500)
2,500
Balancing allowance (2,500) 80% 2,000
–
WDA @ 18% (3,150) 80% 2,520
TWDV c/f 14,350
Allowances 3,570
If the balancing charge had exceeded the allowances, the excess charge would have been added to the
adjusted trade profit for the year.
C
H
A
P
T
E
R
Capital allowances 85
Summary and Self-test
Summary
Cars
Main pool – WDA 18% pa
Pools: – cars costing ≤£12,000 prior to 6 April 2009
Main – most assets – cars with emission of not more than 160g/km
Single asset pools: from 6 April 2009
– Old expensive cars Expensive car
– Private use assets – costing >£12,000 prior to 6.4.09
– WDA 18% pa max £3,000 pa
– old rules continue until least 2013/14
Balancing adjustments
– Charge
– Allowance
100% energy-saving
FYAs 100% low emission cars
100% zero emission goods vehicles
86 Principles of Taxation
Self-test
Answer the following questions.
1 David began trading on 1 May 2012. On that date he brought a car into the business (business use
only) valued at £10,000. The car has CO2 emissions of 150g/km
David made up his first accounts to 31 December 2012.
What is the maximum capital allowance that David can claim for the period to 31 December 2012?
A £1,200
B £1,800
C £3,000
D £10,000
2 Terry has been trading for many years making up accounts to 30 September each year.
At 1 October 2011, the tax written down value of his main pool was £8,000.
On 12 October 2011, Terry bought a van for use in the business costing £16,000.
What are the maximum capital allowances that Terry can claim for the year to 30 September
2012?
A £4,560
B £4,320
C £17,440
D £17,520
3 Marcus has been trading for many years making up accounts to 5 April.
The tax written down value of the main pool was £900 at 6 April 2012.
The only other asset in the business for capital allowances purposes was a car, which Marcus uses
75% for business purposes. The tax written down value of the car at 6 April 2012 was £7,000.
On 1 September 2012 Marcus sold the car for £7,800. The original cost was £9,500.
What are the maximum capital allowances available to Marcus for the year ended 5 April 2013?
A £1,700
B £1,500
C £100
D £300
4 Sergio buys a car at a cost of £14,000 on 7 October 2012. The CO2 emissions of the car are
105g/km.
What, if any, first year allowance can he claim?
A £0
B £3,000
C £2,520
D £14,000
5 Nadia starts trading on 1 May 2012. On 1 November 2012 she buys a single item of machinery for C
H
£114,000. What is the maximum capital allowance Nadia can claim for the year ended 30 April A
2013? P
T
A £20,520 E
B £102,520 R
C £25,000
D £41,020
5
Capital allowances 87
6 Aimee starts trading on 1 July 2012. On 1 July 2012 she buys a single item of plant for £80,000.
What is the maximum capital allowance Aimee can claim for the 9 months to 31 March 2013?
A £80,000
B £18,750
C £29,775
D £27,019
7 Jacob has been trading for many years making up accounts to 31 December.
The tax written down values at 1 January 2012 were:
Main pool £11,800
Expensive car (pre-6 April 2009 – 40% private use by Jacob) £14,000
On 15 May 2012 Jacob purchased a car for use by an employee, with CO2 emissions of 135g/km at
a cost of £7,600.
What is the maximum capital allowances that Jacob can claim for the year to 31 December 2012?
A £6,589
B £5,143
C £5,004
D £5,389
Now go back to the Learning outcome in the Introduction. If you are satisfied you have achieved this
objectives, please tick it off.
88 Principles of Taxation
Technical reference
Legislation
References relate to Capital Allowances Act 2001 (CAA 2001)
Qualifying activities ss.15 – 20
Pooling ss.53 – 54
HMRC manual
Capital allowances manual (Found at http://www.hmrc.gov.uk/manuals/camanual/index.htm)
PMAs: Introduction: Outline CA20006
General: Definitions: Chargeable period, accounting period and period of account CA11510
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You
will not be examined on the contents of this section in your examination.
C
H
A
P
T
E
R
Capital allowances 89
Answers to Interactive questions
90 Principles of Taxation
Answers to Self-test
1 A – £1,200
Main pool Allowances
£ £
Period of account
1 May 2012 to 31 December 2012 (eight months)
1 May 2012 Acquisition 10,000
WDA: 18% 8/12 (1,200) 1,200
TWDV c/f 8,800
Allowances 1,200
2 D – £17,520
Main pool Allowances
£ £
Period of account
1 October 2011 to 30 September 2012
TWDV b/f 8,000
Acquisition (AIA)
12 October 2011 Van 16,000
AIA (max £62,500, ie (£100,000 6/12) + (£25,000 6/12)) (16,000) 16,000
WDA @ 19% (ie (20% 6/12) + (18% 6/12)) (1,520) 1,520
TWDV c/f 6,480
Allowances 17,520
3 D – £300
Main pool Car Allowances
£ £ £
Period of account
6 April 2012 to 5 April 2013
TWDV b/f 900 7,000
Disposal
1 September 2012 (7,800)
Balancing charge (800) 75% (600)
WDA ≤ £1,000 (900) 900
TWDV c/f 0
Allowances 300
The pool is written off in full as it does not exceed £1,000
4 D – £14,000
The car is a qualifying low emission car (CO2 emissions 110g/km or less). 100% FYA for such cars.
5 D – £41,020
£
AIA in full 25,000
WDA (£114,000 – £25,000) @ 18% 16,020 C
Total capital allowance 41,020 H
A
6 D – £27,019 P
T
9 month period of account. E
R
AIA and WDA are pro rated for short period of account. Note though that a FYA is never pro rated.
£
AIA in full (£25,000 9/12) 18,750 5
WDA (80,000 – 18,750) 18% 9/12 8,269
Total capital allowance 27,019
Capital allowances 91
7 B – £5,143
Expensive
Main pool car Allowances
£ £ £
Period of account
Year ended 31 December 2012
TWDV b/f 11,800 14,000
Acquisition – car (no FYA or AIA) 7,600
19,400
WDA @ 18.5% (ie (20% 3/12) + (18% 9/12)) (3,589) 3,589
WDA @ 18.5% (max £3,000) (2,590) x 60% 1,554
15,811 11,410
5,143
92 Principles of Taxation
CHAPTER 6
Introduction
Examination context
Topic List
1 Current year basis
2 Opening years
3 Overlap profits
4 Closing years
5 Partnerships
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
93
Introduction
Calculate the assessable trading profits for a new unincorporated business and identify the
overlap profits on the commencement of trade
Calculate the final assessable trading profits for an unincorporated business ceasing to
trade
Allocate the tax-adjusted profits of a partnership to each partner and calculate the final
assessable profits for each partner for any given tax year
Syllabus links
The topics covered in this chapter are very important to your knowledge of how an unincorporated
business is taxed.
When you tackle the Application paper later on in the Professional Stage, you will be expected to be
very familiar with the concepts in this chapter.
Examination context
In the examination candidates may be required to:
Correctly apply the current year basis for taxing trading profits
Calculate the taxable trading profits in the opening years of a business, including overlap profits
Determine the taxable trading profits in the final tax year of a business
Understand how partnership profits are allocated to individual partners and are taxed on them
individually
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
A significant amount of practice is required by candidates in order to be able to deal efficiently with
opening year rules for sole traders and partnerships.
94 Principles of Taxation
1 Current year basis C
H
A
Section overview P
T
Rules are needed to link a period of account of an unincorporated business to a tax year. E
R
Under the current year basis, the basis period for the tax year is the 12 month period of account
ending in that tax year.
6
Solution
The basis period for 2012/13 is the period of account ending 31 December 2012.
Sasha's taxable trading profit for 2012/13 is therefore £15,000
2 Opening years
Section overview
Special rules are needed in the opening years of a business.
In the first tax year, the actual basis applies (commencement to following 5 April).
In the second tax year, the basis period depends on the length of the period of account (if any)
ending in that tax year.
In the third tax year, the current year basis usually applies.
Solution
The first tax year is 2012/13 as 1 October 2012 falls within this tax year.
The basis period runs from 1 October 2012 to 5 April 2013 (6 months).
The taxable trading profit taxed in 2012/13 is therefore £18,000 x 6/12 = £9,000
96 Principles of Taxation
Solution
C
First tax year (2011/12) H
Actual basis A
Basis period 1 January 2012 to 5 April 2012 P
T
3/12 £12,000 £3,000
E
Second tax year (2012/13) R
nd
12 month period of account ending in 2 tax year
Basis period 1 January 2012 to 31 December 2012
y/e 31 December 2012 £12,000 6
Interactive question 1: First and second tax years [Difficulty level: Exam standard]
Scott started trading on 1 November 2011. He decided to make up his accounts to 31 July. His taxable
trading profit for the 9 month period of account to 31 July 2012 is £18,000 and for the year ended
31 July 2013 is £48,000.
Requirement
Using the standard format below, compute the amounts of taxable trading profit taxed in the first two
tax years of trading.
First tax year (20...../.....)
Basis period ............. to .............
£
Second tax year (20...../.....)
Basis period ............ to ............
£
See the Answer at the end of this chapter.
3 Overlap profits
Section overview
The application of the opening year rules means that some taxable trading profits may be taxed
twice.
Such profits are called overlap profits.
Solution
First tax year (2011/12)
Actual basis
Basis period 1 June 2011 to 5 April 2012
10/14 £20,160 £14,400
Second tax year (2012/13)
nd
Period of account in 2 tax year exceeds 12 months
Basis period 1 August 2011 to 31 July 2012
12/14 £20,160 £17,280
Overlap profits
Period of overlap 1 August 2011 to 5 April 2012
Overlap profits
8/14 £20,160 £11,520
98 Principles of Taxation
Interactive question 2: Opening years [Difficulty level: Exam standard]
C
Connie starts a trade on 1 January 2011 and has the following taxable trading profits: H
A
6 months to 30 June 2011 £28,500 P
12 months to 30 June 2012 £48,000 T
E
Requirement R
Using the standard format below, show the amounts of taxable trading profits taxed in the first three
tax years of trading and the amount of overlap profits.
6
First tax year (20......./.......)
Basis period ............. to .............
£
Second tax year (20......./.......)
Basis period ............. to .............
£
Third tax year (20...../.....)
Basis period ............ to ..............
£
Overlap profits
Period of overlap............. to ............. and ............. to .............
Overlap profits
£
See the Answer at the end of this chapter.
4 Closing years
Section overview
The final tax year is the tax year in which the business ceases to trade.
The basis period for the final tax year is from the end of the basis period for the previous tax year
to the date of cessation.
Any overlap profits are deducted from taxable trading profits in the final tax year.
Interactive question 3: Opening and closing years [Difficulty level: Exam standard]
Ian started trading on 1 August 2008. He chose to make up his accounts to 31 May each year.
Ian had the following taxable trading profits:
10 months to 31 May 2009 £24,000
y/e 31 May 2010 £31,000
y/e 31 May 2011 £44,000
Ian's business ceased on 30 April 2012. His taxable trading profits for the last eleven months of the
business were £38,000.
Requirement
Using the standard format below, show the amounts of taxable trading profits taxed in all tax years.
First tax year (20...../.......)
Basis period .............. to ..............
£
Second tax year (20...../.......)
Basis period .............. to ..............
£
Third tax year (20...../......)
Basis period .............. to ..............
£
Overlap profits
Period of overlap .............. to .............. and .............. to ..............
Overlap profits
£
Penultimate tax year (20...../.......)
Basis period .............. to ..............
£
Final tax year (20...../.....)
Basis period .............. to ..............
Less: overlap profits
£
See the Answer at the end of this chapter.
Opening and closing year rules apply to partners who join and leave the partnership but the
continuing partners remain on the current year basis.
For the year ended 31 March 2013 Erin has taxable trading profits of £30,000 and Cassandra has
taxable trading profits of £25,000. As the partnership is not new this will be taxed on each partner on a
CYB in 2012/13.
Legislation
References relate to Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) unless otherwise
stated.
Current year basis s.198
Partnerships ss.846-856
HMRC manual
Business income manual (Found at http://www.hmrc.gov.uk/manuals/bimmanual/index.htm)
Computation of liability: The current year basis of assessment rules: General rule BIM71010
Computation of liability: The current year basis of assessment rules: Basis of BIM71015
assessment in commencement years
Computation of liability: The current year basis of assessment rules: Overlap relief BIM71075
Computation of liability: The current year basis of assessment rules: Basis of BIM71025
assessment on cessation
Partnerships: Computation & assessment: Profits and Losses Computed at BIM72210
Partnership Level
Partnerships: Computation & assessment: Allocation of Profits and Losses BIM72240
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You
will not be examined on the contents of this section in your examination.
Overlap profits
Period of overlap 1 January 2011 to 5 April 2011 and 1 July 2011 to 31 December 2011
Overlap profits
3/6 £28,500 £14,250
6/12 £48,000 £24,000
£38,250
Overlap profits
Period of overlap 1 August 2008 to 5 April 2009 and 1 June 2009 to 31 July 2009
Overlap profits
8/10 £24,000 £19,200
2/12 £31,000 £5,167
£24,367
The basis of assessment in the first tax year is the actual basis between commencement and the
following 5 April.
7/8 £8,000
Basis period 1 September 2012 to 5 April 2013 £7,000
3 D – £4,860
First tax year (2011/12)
Actual basis
Basis period 1 January 2012 to 5 April 2012
Second tax year (2012/13)
Period of account in second tax year less than 12 months
Basis period 1 January 2012 to 31 December 2012
Third tax year (2013/14)
Current year basis
Basis period 1 November 2012 to 31 October 2013
Overlap profits
Period of overlap 1 January 2012 to 5 April 2012 and 1 November 2012 to 31 December 2012
Overlap profits
3/10 £3,000 £900
2/12 £23,760 £3,960
£4,860
4 B – £7,800
Final tax year (2012/13)
Basis period 1 January 2012 to 31 March 2013
y/e 31 December 2012 £5,600
p/e 31 March 2013 £4,500
£10,100
Less: overlap profits £(2,300)
£7,800
As the partnership is not new this will be taxed on each partner on a CYB in 2012/13.
National insurance
contributions
Introduction
Examination context
Topic List
1 Classes and payment of national insurance contributions
2 Class 1 NICs
3 Class 1A NICs
4 Class 2 NICs
5 Class 4 NICs
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
111
Introduction
Identify the key features of the PAYE and national insurance system
Syllabus links
It is important that you understand the calculations in this chapter as they are a vital element in
considering the overall tax position of an individual and should not be overlooked.
When you tackle the Application paper later on in the Professional Stage, you will learn more about
national insurance contributions, for example those paid by directors.
Examination context
In the examination candidates may be required to:
Calculate national insurance contributions payable by employees and their employers
Calculate national insurance contributions payable by sole traders and partners
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Section overview
National insurance contributions (NICs) are used to fund state benefits.
Class 1 contributions are paid by employees and employers.
Class 1A contributions are paid by employers.
Class 2 contributions and Class 4 contributions are paid by self-employed individuals.
NICs are administered by the National Insurance Contributions Office (NICO).
Section overview
Class 1 primary contributions are paid by employees.
Class 1 secondary contributions are paid by employers.
Contributions are based on the employee’s earnings period (usually weekly or monthly).
No contributions are due on earnings below the earnings threshold.
For primary contributions only, there is an upper earnings limit above which contributions are due
at a lower rate.
2.1 Introduction
An employed individual is liable to Class 1 primary NICs. The employer is liable to Class 1 secondary
NICs.
The amount of Class 1 NICs payable depends on the age of the employee, the level of the employee’s
earnings in the ‘earnings period’ and whether he is ‘contracted out’ of the State Second Pension (S2P).
All employees aged between 16 and state retirement age (currently 65 for men, 60 for women rising to
th
65 by November 2018) are liable to pay Class 1 primary NICs. Payments start on the employee’s 16
th th
birthday and cease on her 60 or his 65 birthday.
From December 2018 the state retirement age for both men and women will start to increase to reach
66 in October 2020.
Employers must pay Class 1 secondary NICs for all employees aged over 16. There is no upper age limit.
An employee’s earnings for Class 1 NIC purposes include all earnings received in monetary form: salary,
commission, bonus plus vouchers exchangeable for cash, goods or services. Earnings do not usually
include any taxable benefits.
Most employees are paid at regular intervals (weekly or monthly). This period is the ‘earnings period’.
Part of Class 1 NICs are used to fund the S2P. If the employee has contracted out of the S2P via
membership of his employer’s occupational pension scheme, Class 1 NICs are payable at a reduced rate.
From 6 April 2012 contracting out is abolished for money-purchase schemes. It continues to be
available for salary-related schemes. Additionally, from 6 April 2012 individuals can no longer contract
out of S2P if they are members of a personal pension scheme. However, for the purposes of this exam,
you should assume that employees are not contracted out of S2P.
Solution
Meg
(£424 – £146) = £278 12% £33
C
Munroe H
£ A
P
(£3,540– £634) = £2,906 12% = 349
T
(£4,080 – £3,540) = £540 2% = 11 E
Total 360 R
7
In the examination, you might be asked to work out the annual NICs payable by an employee. In this
case, it is acceptable to use the annualised limits of £7,605 (PT) and £42,475 (UEL) if the employee is
paid evenly throughout the tax year. If the employee receives an additional payment such as a bonus in
one earnings period, it will be necessary to calculate the NICs in relation to weekly or monthly earnings
periods instead.
Solution
Raj
11 months
£
(£2,300 – £634) = £1,666 12% = £200 11 months 2,200
1 month
(£3,540 – £634) = £2,906 12% = 349
(£4,300 – £3,540) = £760 2% 15
2,564
Debbie
£2,300 12 = £27,600 – £7,605 = £19,995 12% 2,399
Solution
Meg
(£424 – £144) = £280 13.8% £39
Munroe
(£4,080 – £624) = £3,456 13.8% £477
Again, if you are required to compute the annual secondary NICs payable by an employer, you can use
the annualised ST of £7,488. In this case, the payment of additional amounts, such as bonuses, will not
affect the calculation since there is no upper earnings limit for secondary contributions.
1 month
£ (............. – .............) = £............. .............% =
£ (............. – .............) = £............. .............% =
1 month
£ (............. – .............) = £............. .............% =
Section overview
Class 1A contributions are payable by employers on taxable benefits provided to employees.
Solution
Class 1A
(£810 + £3,500) = £4,310 13.8% £595
The vouchers exchangeable for goods are earnings and so will be subject to Class 1 NICs. Pension
advice up to £150 is an exempt benefit.
4 Class 2 NICs
Section overview
Class 2 contributions are paid by the self-employed at a fixed weekly rate.
There is an exception where earnings are below the small earnings exception.
5 Class 4 NICs
Section overview
Class 4 contributions are based on tax adjusted earnings.
No contributions are due on earnings below the annual lower profits limit.
Contributions are due at a lower rate on earnings above the annual upper profits limit.
Nisar is self employed. He makes up accounts to 31 December each year. His taxable trading profit for
the year ended 31 December 2012 is £45,000 and he estimates his taxable trading profit for the year to
7
31 December 2013 will exceed this figure.
Requirement
Using the standard format below, compute the Class 2 and Class 4 NICs payable by Nisar for 2012/13.
Class 2 contributions £
............. £ .............
Class 4 contributions
(£............. – £.............) = £............. .............%
(£............. – £.............) = £............. .............%
Summary
A £4,859
B £3,826
7
C £4,516
D £3,313
3 Maureen is employed by Treen Ltd. In 2012/13, she was paid a monthly salary of £2,518. In
September 2012 she was paid a bonus of £5,000.
What are the Class 1 primary contributions payable by Maureen for 2012/13?
A £3,313
B £2,915
C £4,226
D £3,822
4 James has been self-employed for many years. His taxable trading profits are as follows:
y/e 31 October 2012 £14,210
y/e 31 October 2013 £20,000
What are his Class 4 NICs for 2012/13?
A £594
B £855
C £792
D £1,279
5 Len is self-employed. He makes up his accounts to 31 March each year and for the year ended
31 March 2013, his taxable trading profit is £55,000.
What are the total NICs payable by Len for 2012/13?
A £3,389
B £3,527
C £4,300
D £4,430
6 Julie works for D Ltd earning £15,000 per year. She benefits from childcare vouchers provided by
D Ltd of £55 per week for 50 weeks in the tax year. Julie has a company car on which there is a
taxable benefit of £4,500 per year.
What Class 1A National Insurance contributions are D Ltd required to make?
Class 1A contributions £
Legislation
References relate to Social Security Contributions and Benefits Act 1992 (SSCBA 1992)
Class 1 contributions ss.5 – 9
HMRC manual
National insurance manual (Found at http://www.hmrc.gov.uk/manuals/nimmanual/index.htm)
Class 1 Structural Overview: General NIM01001
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You
will not be examined on the contents of this section in your examination.
1 month
(£6,598 – £624) = £5,974 13.8% 824
3,189
You could also have used the annualised method which would give:
(£30,611 – £7,488) = £23,123 13.8% £3,191
Class 4 contributions
y/e 31 December 2010
3 B – £2,915
Class 1 Primary contributions
11 months
£
(£2,518 – £634) = £1,884 12% = £226 11 months 2,486
1 month
(£3,540 – £634) = £2,906 12% 349
(£7,518 – £3,540) = £3,978 2% 80
2,915
4 A – £594
Class 4 contributions
y/e 31 October 2012
(£14,210 – £7,605) = £6,605 9% 594
Class 4 contributions
y/e 31 March 2013
£
(£42,475 – £7,605) = £34,870 9% 3,138
(£55,000 – £42,475) = £12,525 2% 251
3,389
Introduction
Examination context
Topic List
1 Chargeable and exempt persons, assets and disposals
2 Computing a gain or loss
3 Capital gains tax payable by individuals
4 Chattels
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
125
Introduction
Classify persons, assets and disposals as either chargeable or exempt for capital gains
purposes
Calculate total taxable gains for both individuals and companies and for individuals
calculate the capital gains tax payable
Syllabus links
The topics in this chapter are basic knowledge that you will be expected to know very well when you
study for the Application paper and at the Advanced Stage.
In the Application paper, you will learn more about capital gains, including the rules for more
complicated disposals such as shares and leases, how to use capital losses and capital gains tax reliefs.
Examination context
In the examination candidates may be required to:
Determine when a gain or loss arises
Compute a gain or loss on disposal of a capital asset
Calculate the capital gains tax payable for the tax year
Calculate any gain or loss on disposal of a chattel
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Section overview
Individuals pay capital gains tax (CGT), companies pay corporation tax on their chargeable gains.
Chargeable persons include individuals, partners and companies.
Chargeable disposals include sales and gifts.
Death is not an occasion of charge for CGT, but there is a tax-free uplift of the value of assets
passed on death.
Chargeable assets include tangible and intangible assets.
Exempt assets include cars, some chattels and investments held in ISAs.
1.1 Introduction
A capital gain may arise on the disposal of a capital asset such as land, shares or a work of art. Usually, if
the asset has increased in value since it was acquired, there will be a chargeable gain on its disposal. If
the asset has fallen in value, there will be an allowable loss on its disposal.
In this chapter we will deal primarily with the rules on capital gains for individuals. Individuals pay
capital gains tax (CGT) on their taxable gains. CGT applies to taxable gains in a tax year. For example,
an individual will be liable to CGT in 2012/13 on gains arising between 6 April 2012 and 5 April 2013. C
H
Similar rules apply to capital gains realised by companies and we will deal with the differences between A
the two sets of rules when you study corporation tax later in this text. P
T
The first step in deciding whether there is a chargeable gain or allowable loss is to ascertain whether a E
chargeable person has made a chargeable disposal of a chargeable asset. We will deal with this R
question in the remainder of this section.
8
1.2 Chargeable persons
Chargeable persons include:
Individuals
Business partners, who are each treated as owning a share of partnership assets and taxed
individually on the disposal of that share (details not in your syllabus)
Companies, which pay corporation tax on their chargeable gains, not CGT
Some persons are specifically exempt from capital gains. These include registered charities and friendly
societies, local authorities, registered pension schemes, investment trusts and approved scientific
research associations.
Section overview
A gain or loss is calculated by deducting allowable costs from disposal consideration.
Disposal consideration is sale proceeds or market value.
Allowable costs include costs of acquiring the asset and cost of enhancing its value.
Solution
£ £
Gross sale proceeds 180,000
Less: auctioneers' fees (4,500)
legal fees (1,200)
Net disposal consideration 174,300
Less: acquisition cost 120,000
surveyor's fees 1,500
legal fees 1,000
enhancement expenditure (central heating) 2,000 (124,500)
Chargeable gain 49,800
Note that the repairs to the roof and the redecoration are not capital expenditure and so cannot qualify
as enhancement expenditure. The cost of the sun room is not deductible as enhancement expenditure
because it is not reflected in the value of the cottage at the time of disposal.
( )
Chargeable gain/Allowable loss
Section overview
Each individual is entitled to an annual exempt amount each tax year.
CGT is chargeable separately from income tax, at 18% or 28%, depending on the individual’s
taxable income.
Solution
Olly £
(£34,370 – £28,500) £5,870 18% 1,057
(£20,000 – £5,870) £14,130 28% 3,956
CGT liability 5,013
Taxable income is net of the personal allowance. Olly has £5,870 of unused basic rate band remaining
and this amount of the taxable gains are taxed at 18%. The remainder of the taxable gains of £14,130
are taxed at 28%.
Alice £
£17,000 18% 3,060
Alice has £29,370 unused basic rate band so her taxable gains are all taxed at 18%
C
H
A
P
T
E
Interactive question 2: CGT liability [Difficulty level: Exam standard] R
CGT liability:
See Answer at the end of this chapter.
Section overview
Chattels are tangible moveable property.
Wasting chattels are usually exempt from CGT.
Non-wasting chattels are usually chargeable to CGT.
Non-wasting chattels bought and sold for £6,000 or less are exempt.
Marginal relief applies to gains on non-wasting chattels sold for more than £6,000.
Losses are restricted on non-wasting chattels sold for less than £6,000.
Solution
£ £
Gross proceeds 7,000
Less: costs of sale (350)
Net disposal proceeds 6,650
Less: cost χ(4,000)
Gain 2,650
Gain cannot exceed 5/3 £(7,000 – 6,000) 1,667
Therefore chargeable gain on sale 1,667
Solution
£ £
Gross proceeds (deemed) 6,000
Less: costs of sale (270)
Net disposal proceeds 5,730
Less: cost (8,000)
Allowable loss (2,270)
C
H
A
P
T
E
R
Summary
Legislation
References relate to Taxation of Chargeable Gains Act 1992 (TCGA 1992)
Chargeable persons s.2
Chattels s. 262
HMRC manual
Capital gains manual (Found at http://www.hmrc.gov.uk/manuals/cgmanual/index.htm)
Persons chargeable: general CG10700
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You will
not be examined on the contents of this section in your examination.
1 A – £885
£ £
Gross proceeds 25,500
Less: costs of sale (1,250)
Net disposal proceeds 24,250
Less: cost (10,000)
Chargeable gain 14,250
Less: annual exempt amount (10,600)
Taxable gain 3,650
2 A and C.
A vintage Bentley car – all cars are exempt assets
Painting worth £4,500 (cost £1,500) – non-wasting chattel acquisition cost and disposal proceeds
of £6,000 or less.
3 A and C.
Cost of advertising on sale
Installing completely new heating system
Repairs and redecoration are not capital in nature and are not enhancement expenditure.
4 A – £23,000
£ £
Gross proceeds 40,000
Less: auctioneers' fees (2,000)
Net disposal consideration 38,000
Less: acquisition cost (MV at date of death) (15,000)
Chargeable gain 23,000
Corporation tax
Introduction
Examination context
Topic List
1 Charge to corporation tax
2 Taxable total profits
3 Computation of corporation tax
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
139
Introduction
Recognise the effect of having one or more associated companies on corporation tax
payable
Allocate given items of business expenditure as allowable or disallowable for tax purposes
and calculate the adjusted trading profits after capital allowances on plant and machinery
Calculate the taxable total profits and the corporation tax payable for a company resident
in the UK which has no associated companies and an accounting period of 12 months or
less
Syllabus links
The topics in this chapter form the basis of the charge to tax on companies. You will learn more details
about how companies are taxed in the Application paper and at the Advanced stage, for example the
use of trading losses and groups of companies.
Examination context
In the examination candidates may be required to:
Identify the correct chargeable accounting periods of a company
Calculate the taxable total profits for a company
Calculate the corporation tax payable by a company
Understand the impact of associated companies
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Section overview
Companies are chargeable to corporation tax.
A UK resident company is chargeable on its worldwide profits.
A company is charged to tax for a chargeable accounting period which cannot exceed 12 months.
1.2 Residence
A company is liable to corporation tax on its worldwide profits if it is resident in the United Kingdom.
A company is resident in the UK if either:
It is incorporated in the UK; or
It is incorporated outside the UK, but its central management and control are exercised in the UK
Solution
First chargeable accounting period: 1 January 2012 to 31 December 2012
Second chargeable accounting period: 1 January 2013 to 30 April 2013
Section overview
Trading profits after capital allowances is dealt with as trading income.
Income from renting out property is dealt with as property income.
Loan relationships include interest income and interest expense. Loan relationships may include
trading credits and debits and non-trading credits and debits.
Gains made by companies are chargeable to corporation tax, with indexation allowance available.
Qualifying donations are deducted to arrive at taxable total profits.
Solution
Capital allowances
Main pool Allowances
£ £
Chargeable accounting period
1 April 11 to 31 March 12
TWDV b/f 24,000
WDA @ 20% (4,800) 4,800
TWDV c/f 19,200
Chargeable accounting period
1 April 12 to 30 June 12
Disposal (3,000)
16,200
WDA @ 18% /12
3
(729) 729
TWDV c/f 15,471
1.4.11 to 1.4.12 to
31.3.12 30.6.12
£ £
Tax adjusted profits (12:3) 240,000 60,000
Less: capital allowances (4,800) (729)
Trading income 235,200 59,271
C
2.3 Property income H
A
A company's rental income from property situated in the UK is taxed as property income. Rent received P
is dealt with on an accruals basis. This means that only rent relating to the chargeable accounting T
period is taken into account. The date of receipt is not relevant. E
R
Solution
Rent accrued 1 January 2012 to 31 July 2012
£24,000 7/12 £14,000
Interest payable on a loan taken out by a company for the purpose of buying or improving let property
is not an allowable expense for property income. Instead it is dealt with under the loan relationship rules
(see later in this section). No further knowledge of the property income calculation is required at this
level.
(a) There is no chargeable gain nor allowable loss on the disposal as indexation cannot create a loss.
(b) The allowable loss is £1,800. Indexation cannot increase an allowable loss.
Treatment for Allowable trading expense to set Trading receipt treated as trading
corporation tax against trading income income
Basis of assessment Accruals basis Accruals basis
Main examples Bank overdraft interest Rare – a company will not usually
Interest on loans to buy plant and lend money for trade purposes
machinery
C
Interest on loans to buy premises for H
use in the trade A
P
If the company has been lent money or lends money for a non-trade purpose, there is a non-trading T
loan relationship. E
R
Non-trading loan relationships
Solution
£
Building society interest 5,000
Bank interest 2,000
Repayment interest on overpaid tax 50
7,050
Less: Interest on loan taken out to acquire let property (3,250)
Non-trading loan relationship 3,800
Section overview
The rate of corporation tax depends on the augmented profits of the company.
The main rate applies if the company has augmented profits above the upper limit.
The small profits rate applies if the company has augmented profits below the lower limit.
Marginal relief applies for companies between the limits.
The limits for the rates are scaled down in short accounting periods.
The limits are divided between associated companies.
Definitions
Augmented profits: taxable total profits plus franked investment income
Franked investment income (FII): exempt dividends and tax credits received from UK and overseas
companies, other than those received from companies which are 51% subsidiaries of the receiving
company. The net dividend received needs to be grossed up by 100/90 to arrive at FII.
Solution
£
Taxable total profits 1,300,000
Add: £189,000 100/90 210,000
Augmented profits 1,510,000
Main rate applies
£1,300,000 24% 312,000
Note that the rate of tax is applied to taxable total profits, not to augmented profits.
Solution
£
Taxable total profits 500,000
Add: £9,000 100/90 10,000
Augmented profits 510,000
Requirement
Using the standard format below, compute the corporation tax liability of R Ltd.
£
Taxable total profits
Add: £................... 100/90
Augmented profits
FY2011 FY2012
3/12 9/12
£ £
Taxable total profits 362,500 1,087,500
FII 25,000 75,000
Augmented profits 387,500 1,162,500
£ £
FY2011: taxable total profits 26% = £362,500 26% 94,250
FY2012: taxable total profits 24% = £1,087,500 24% 261,000
Total corporation tax liability £355,250
Note: Once it is determined that K Ltd pays tax at the main rate the corporation tax liability could be
calculated as follows.
£
FY2011: 3/12 £1,450,000 26% 94,250
FY2012: 9/12 £1,450,000 24% 261,000
Total corporation tax liability 355,250
y/e 30.09.12
£
Taxable total profits 650,000 9
FII 50,000
Augmented profits 700,000
Marginal relief
applies
FY2011 FY2012
6/12 6/12
£ £
Taxable total profits 325,000 325,000
FII 25,000 25,000
Augmented profits 350,000 350,000
Solution
A Ltd, C Ltd, D Inc, and E Ltd as T Ltd has over 50% of the shares of each company. All four companies
are treated as associated with T Ltd for the whole of the chargeable accounting period. There are five
associated companies in total ie remember to include the parent company.
B Ltd is not associated because it is dormant.
F Ltd is not associated because T Ltd owns 50% or less of the shares of the company.
Solution
X Ltd
51%
Y Ltd
51%
Z Ltd
X Ltd controls Y Ltd, and Y Ltd controls Z Ltd. Therefore X Ltd effectively controls Z Ltd through its
shareholding in Y Ltd.
X Ltd, Y Ltd and Z Ltd are all treated as associated companies, so there are three associated companies.
Where a company is associated with one or more companies, the small profits rate limits are divided
equally between the associated companies.
Mr Smith controls both C Ltd and D Ltd so there are two associated companies.
Limits for marginal relief for 2 associated companies:
Upper limit £1,500,000 ÷ 2 = £750,000
Lower limit £300,000 ÷ 2 = £150,000
Main rate of corporation tax (24%) applies.
You will not be expected to compute the corporation tax liability of a company with associated
companies.
Summary
Legislation
References relate to Corporation Tax Act (CTA 2009) unless otherwise stated
Charge to corporation tax ss.2-3
Small profits rate and marginal relief CTA 2010 s.18 and
s.19
HMRC manual
Company Taxation manual (Found at http://www.hmrc.gov.uk/manuals/ctmanual/index.htm)
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You
will not be examined on the contents of this section in your examination.
1 C – £3,000
£20,000 18% 10/12 = £3,000
There is no private use reduction for companies. A taxable benefit will arise for the director.
2 C – 12 months to 30 November 2012, 4 months to 31 March 2013
A chargeable accounting period cannot be more than 12 months long. A long period of account is
always split into a first chargeable accounting period of 12 months and then a second chargeable
period of the remainder of the period of account.
3 A and D – interest payable on loan to purchase property to let and interest on overdue corporation
tax.
Bank overdraft interest and interest on a loan to purchase machinery are dealt with as trading loan
relationships and deductible from trading income.
4 B – £132,500
£
Trading income 490,000
Chargeable gains 60,000
Loan relationships 90,000
640,000
Less: Qualifying donation (50,000)
Taxable total profits 590,000
6 £105,270
245.2 142.1
= 0.726 (to 3 dp) £145,000 = £105,270
142.1
7
y/e 31 December 2012
£
Taxable total profits 1,310,000
FII (£270,000 100/90) 300,000
Augmented profits 1,610,000
Introduction
Examination context
Topic List
1 The principles of value added tax (VAT)
2 Classification of supplies
3 Registration and deregistration
4 Output VAT
5 Input VAT
Summary and Self-test
Technical reference
Answer to Interactive question
Answers to Self-test
159
Introduction
State the principles of VAT payable or repayable on the supply of goods or services by a
taxable person
Syllabus links
The topics in this chapter and the following chapter form the basis of your understanding of value
added tax.
At Application level you will deal with further aspects of VAT such as groups and overseas transactions.
Examination context
In the examination candidates may be required to:
Determine when a transaction is within the scope of VAT, and the impact of it being a taxable or
exempt supply
Identify when VAT registration/deregistration are required/desirable
Calculate the VAT applying to a supply, starting at either the VAT inclusive or exclusive figure
Determine the tax point of a supply
Deal with additional aspects of input tax and output tax such as bad debts, discounts etc
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Candidates have historically been weak at VAT questions. This is probably because there are a large
number of small issues to learn rather than one main pro forma to contend with. It is essential that
candidates take time to understand and become competent at VAT at an early stage.
Section overview
VAT is payable by the final consumer of goods and services.
VAT is collected at each stage of the distribution chain.
VAT is charged on a taxable supply by a taxable person in the course of a business carried on by
him.
Solution
Gerald William Fiona
£ £ £
Output tax 16 24 32
Less: input tax (nil) (16) (24)
Net excess 16 8 8
Definition
Taxable supply: any supply of goods or services made in the UK other than an exempt supply or a
supply outside the scope of VAT.
We will look at this definition in more detail when we consider the classification of supplies later in this
chapter.
Definition
Taxable person: a person making taxable supplies who is, or who is required to be, registered for VAT.
Person includes a sole trader, a partnership (not the individual partners) and a company.
A taxable person is required to charge output VAT on any taxable supplies made, and may also recover
input VAT on supplies paid for. A person who is not a taxable person cannot charge output VAT on
supplies or recover input VAT.
We look at the conditions to register for VAT later in this chapter.
2 Classification of supplies
Section overview
Supplies may be outside the scope of VAT, exempt or taxable.
A supply of goods arises when ownership of goods passes from one person to another.
A supply of services arises when there is a supply for consideration which is not a supply of goods.
Exempt supplies do not have output VAT charged on them.
Taxable supplies may be at zero rate, reduced rate or standard rate.
Taxable supplies have output VAT charged on them.
10
Section overview
Compulsory registration is required if a person's taxable turnover exceeds the registration
threshold.
Voluntary registration may be applied for if a person is making taxable supplies below the
registration threshold.
There is an exemption from registration if a person is making only or mostly zero rated supplies.
Deregistration applies if taxable supplies cease or fall below the deregistration threshold.
On 1 February 2013, Caroline sold a machine used in her business for £2,500 (excluding VAT).
Requirement
On what date is the VAT registration threshold first exceeded by Caroline, by what date will she need to
notify HMRC and what is the date from which she will be registered?
The threshold will therefore be exceeded after 10 months (£7,750 10 = £77,500) which is 30 April
2013.
Caroline must notify HMRC by 30 May 2013.
She will be registered from 1 June 2013.
3.4 Deregistration
Deregistration may be compulsory or voluntary.
Deregistration is compulsory if a person ceases to make taxable supplies and has no intention of making
taxable supplies. The person must notify HMRC within 30 days. Deregistration will take effect on the C
date taxable supplies ceased. H
A
A person is eligible for voluntary deregistration if his estimated taxable turnover for the next twelve P
months will not exceed the statutory deregistration threshold. T
E
From 1 April 2012, the deregistration threshold is £75,000. R
Voluntary deregistration takes effect from the date on which the request is made or from an agreed later
date.
10
From October 2012 it will be compulsory to deregister from VAT online.
4 Output VAT
Section overview
VAT is charged on the value of the taxable supply.
The time of supply is called the tax point.
The basic tax point is when goods are removed or made available or when services are completed.
The actual tax point may be before or after the basic tax point.
Any discount, even if not taken up, is taken into account when valuing the supply.
Fuel for private motoring by the owner or an employee is charged at a scale rate.
Bad debt relief is given for debts more than six months old.
Solution
VAT on VAT-exclusive supplies
£395 20% £79
VAT on VAT-inclusive supplies
£3,450 1/6 £575
For reduced rate supplies VAT is charged at 5% on the VAT exclusive value of the supply.
If the VAT-inclusive price is given for reduced rate supplies, the VAT component of the consideration is
5/105.
Solution
VAT on VAT-exclusive supplies
£500 5% £25
VAT on VAT-inclusive supplies
£1,260 5/105 £60
If VAT is not charged on a taxable supply in error then it is the responsibility of the trader who made the
supply to pay the outstanding VAT over to HMRC. The amount received by the trader on the sale is
treated as being inclusive of VAT.
C
H
A
P
T
E
R
10
Solution
£
Value before discount 1,000
Less: discount (3% £1,000) (30)
Value of supply 970
VAT charged (£970 20%) £194
Note that it is irrelevant that the discount is not taken up.
Fuel provided for private motoring by the owner or an employee is charged at a scale rate. The fuel
scale charge is based solely on the CO2 rating of a car. There are no adjustments for fuel type. Fuel scale
charges will be provided in the exam when fuel for private motoring is tested.
Solution
£416 1/6 £69
5 Input VAT
Section overview
Most input VAT can be recovered by a taxable person who is VAT registered.
VAT is not recoverable on motor cars (unless used exclusively for business purposes) or business
entertaining.
Pre-registration input VAT may be recoverable.
Input VAT is also recoverable on fuel supplied for private use where the VAT scale charge for output tax
applies. 10
Input tax on assets purchased for the use of employees (as opposed to directors or sole traders or
partners) which have an element of private use is allowable in full. Such benefits are a legitimate
business expense and are provided for the purposes of the business – mainly to reward or motivate
staff. The VAT incurred on their provision is consequently all input tax and no apportionment is
Summary
C
H
A
P
T
E
R
10
Assuming only the settlement discount is taken, how much output VAT should be charged?
A £1,800
B £1,710
C £1,910
D £2,000
3 ABC Ltd registered for VAT on 1 August 2012. It only makes standard rated supplies.
ABC Ltd incurred VAT on accountancy services relating to the business on 1 May 2012.
ABC Ltd bought a car for use by an employee for £10,000. The employee uses the car 40%
privately.
To what extent is input VAT recoverable?
A Fully recoverable on both accountancy and car
B Fully recoverable on accountancy, partially recoverable on car
C Fully recoverable on accountancy, irrecoverable on car
D Irrecoverable on both accountancy and car
4 On 30 April, Jones ordered a new machine. On 16 May, he paid a deposit of £10,000. The
machine was despatched to Jones on 31 May. On 13 June, an invoice was issued to Jones for the
balance due of £45,000. This was paid on 20 June.
What is the tax point for the £10,000 deposit?
A 30 April
B 16 May
C 31 May
D 13 June
5 Julie should have registered for VAT on 1 March 2013.
On 5 March 2013, she supplied services to Wilma for £1,000 without charging VAT. Wilma is also
registered for VAT and makes standard rate supplies.
How much output VAT is payable on this supply and who should pay it?
A £167 payable by Julie
B £167 payable by Wilma
C £200 payable by Julie
D £200 payable by Wilma
Now go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
Legislation
References relate to Value Added Tax Act 1994 (VATA 1994) unless otherwise stated
Scope of VAT on taxable supplies s.4
Registration Sch 1
To find out more practical information about VAT, access the relevant section of the HMRC website
through the main home page (http://www.hmrc.gov.uk/).
A series of guides is available online at
http://www.hmrc.gov.uk/vat/index.htm?_nfpb=true&_pageLabel. For example, Introduction to VAT is a
summary of the most common VAT issues and a good place to start finding out how it affects you and
your business.
There is also a VAT telephone helpline: +44 (0)845 010 9000 (+44 2920 501 261 from abroad)
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You will
not be examined on the contents of this section in your examination.
C
H
A
P
T
E
R
10
Goods removed 10 May, invoice issued 26 May, 10 May (basic tax point)
payment received 1 June
Goods removed 28 May, invoice issued 26 May, 26 May (actual tax point, invoice before basic
payment received 1 June tax point)
Goods removed 16 May, invoice issued 26 May, 26 May (actual tax point, invoice within 14
payment received 1 June days after basic tax point)
Goods removed 20 May, invoice issued 26 May, 18 May (actual tax point, payment before basic
payment received 18 May tax point)
Goods removed 8 May, invoice issued 26 May, Deposit: 1 May (actual tax point, payment
deposit received 1 May, balance received 1 June before basic tax point)
Balance: 8 May (basic tax point)
Although Julie failed to apply for registration on time, she is still liable to account to HMRC for
output VAT on her taxable supplies from the compulsory registration date.
C
H
A
P
T
E
R
10
Introduction
Examination context
Topic List
1 Accounting for VAT
2 Small business reliefs
3 VAT records and accounts
Summary and Self-test
Technical reference
Answer to Interactive question
Answers to Self-test
177
Introduction
Identify the records which companies and individuals must retain for tax purposes
Determine, in straightforward cases, due dates for businesses' VAT returns and payments
Calculate the monthly, quarterly and annual VAT payable or repayable by a business
Syllabus links
The topics in this chapter and the previous chapter form the basis of your understanding of value added
tax.
Many of the administrative aspects of VAT are not tested in the Taxation paper, so you may expect to
find them in the Principles of Taxation paper. At Application level you will deal with further aspects of
VAT such as groups and overseas transactions.
Examination context
In the examination candidates may be required to:
Calculate the VAT payable or reclaimable for a period
Identify the schemes available to small businesses and apply the rules of the schemes
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
All purchases and entertaining expenses are standard rated. The bad debt, in respect of a standard rated
supply, was written off in August 2012. The payment for the original sale was due on 31 January 2012.
Requirement
What is the VAT payable for the quarter and when is it due for payment?
Bad debt relief is available because the debt is more than six months old from the due date of payment.
Wages are outside the scope of VAT.
Input tax on UK customer entertaining is irrecoverable.
Solution
Tax point is the basic tax point for order 1, and the invoice date for order 2 (as it is within 14 days of
basic tax point and before payment received).
The quarter ended 30 June 2012 only includes the VAT charged on order 2 as the quarter runs from
1 April 2012 to 30 June 2012. The VAT payable electronically on 7 August 2012 is £136.
Order 1
Tax point is 2 March 2012
VAT @ 20% of £1,200 £240
Order 2
Tax point is 10 April 2012
VAT @ 20% of £680 £136
Input tax £
( )
VAT payable
See Answer at the end of this chapter.
Section overview
The annual accounting scheme allows a business to submit one VAT return a year.
The cash accounting scheme allows a business to account for VAT on a cash basis.
Under the flat rate scheme, output VAT is based on a fixed percentage of VAT inclusive turnover
but there is no recovery of input VAT.
Solution
Payments on account
1/10 £12,800 £1,280
Due by 30 September 2012 and then at the end of each month until 31 May 2013
Balancing payment
(£16,250 – [£1,280 9]) £4,730
Solution
VAT inclusive turnover
120 6
£25,200 (or ) £30,240
100 5
VAT due £30,240 9 % £2,722
A business may join the flat rate scheme if the value of its annual taxable supplies (excluding VAT) does
not exceed £150,000.
The main advantages of the scheme are:
Reduction in the burden of administration of preparing the VAT return as no records of input VAT
need be kept
Frequently less VAT payable to HMRC than under the normal rules
Section overview
VAT records must be kept to support output VAT charged and the claim for recoverable input
VAT.
Records must be kept for at least six years.
A VAT invoice must contain details such as the tax point, VAT registration number and details of
the supply.
3.1 Records
HMRC requires a taxable person to keep ‘adequate’ records and accounts of all transactions to support
both output VAT charged and the claim for recoverable input VAT.
The main records to be kept should include:
Order and delivery notes
Purchase invoices, copy sales invoices and credit notes
Purchase and sales day books
Records of daily takings (eg till rolls)
Cash book
Bank statements and paying-in slips
Annual accounts (P&L account and Balance Sheet)
11
Records para 31
To find out more practical information about VAT, access the relevant section of the HMRC website
through the main home page (http://www.hmrc.gov.uk/).
A series of guides is available online at
http://www.hmrc.gov.uk/vat/index.htm?_nfpb=true&_pageLabel.
Information about the range of special schemes and options to simplify VAT for small businesses is
available at http://www.hmrc.gov.uk/vat/start/schemes/basics.htm.
There is also a VAT telephone helpline: 0845 010 9000 (+44 2920 501 261 from abroad)
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You will
not be examined on the contents of this section in your examination.
Administration of tax
Introduction
Examination context
Topic List
1 Penalties for errors
2 Penalties for failure to notify
3 Record keeping
4 Penalties for late filing of returns
5 Pay As You Earn (PAYE)
6 Income tax and capital gains tax – returns and payment
7 Income tax and capital gains tax – penalties and interest
8 Corporation tax – returns and payment
9 Corporation tax – penalties and interest
10 Value added tax – penalties and interest
11 Compliance checks and appeals
12 HMRC powers
13 Business Payment Support Service
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
191
Introduction
Identify the records which companies and individuals must retain for tax purposes and
state the periods for which the records must be retained
Identify the key features of the self assessment system for both companies and individuals
Syllabus links
The topics in this chapter are important background knowledge which you will require for the
Application paper and at the Advanced Stage.
Examination context
In the examination candidates may be required to:
Determine due dates for employers' PAYE and national insurance returns and payments, including
penalties for non compliance
Determine when a tax return is required and its submission date, including the penalties for non
compliance
Identify the administrative issues affecting individuals and companies
Determine the payment dates and amounts of payments to be made by both individuals and by
companies of all sizes
Identify and calculate the penalties and interest payable by individuals and companies for non
compliance
Recognise when penalties for VAT are due and determine the amount of the penalties
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Section overview
A common penalty regime applies to the making of errors in tax returns.
Penalties are based on the Potential Lost Revenue (PLR) arising as a result of the error.
Maximum penalties range from 30% to 100% of the PLR dependent on whether the error is
careless or deliberate.
Penalties can be reduced if the taxpayer discloses the error to HMRC or if there is reasonable
excuse. They can also be suspended in certain circumstances.
C
Appeals can be made against the penalties levied. H
A
P
T
1.1 Common penalty regime E
A common penalty regime relates to situations where a taxpayer has made an error/inaccuracy in a tax R
return. The regime covers income tax, national insurance contributions, corporation tax and value
added tax. Penalties are based on the Potential Lost Revenue (PLR) and range from 30% to 100% of the
PLR. Penalties may be reduced or suspended. 12
Solution
The Potential Lost Revenue as a result of Ruth’s error is:
£(57,000 – 49,000) = £8,000 [40% (income tax) + 2% (NICs)] £3,360
Unprompted disclosure where a careless mistake has been made can reduce the penalty to nil.
Solution
The Potential Lost Revenue as a result of Graham’s error is:
£12,000 40% £4,800
Graham’s error is deliberate but not concealed so the maximum penalty for the error is:
£4,800 70% £3,360
Graham has made a prompted disclosure so the minimum penalty for the error is:
£4,800 35% £1,680
1.10 Appeals
Appeals can be made against:
The imposition of a penalty
The amount of a penalty
A decision not to suspend a penalty
The conditions set by HMRC in relation to the suspension of a penalty
Appeals are made to an independent tribunal, which will usually be the First-tier Tribunal of the Tax
Chamber.
It is also possible to opt for an internal review by an independent HMRC officer. This is potentially a
quick and inexpensive way to resolve a dispute.
Section overview
A common ‘failure to notify’ penalty applies to failures on or after 1 April 2010.
Maximum penalties are based upon Potential Lost Revenue but can be reduced under certain
circumstances.
Penalties may be mitigated if there is reasonable excuse.
The minimum penalties shown above presume that the maximum reductions for disclosure apply. In
practice, however, the reductions given are up to the HMRC officer involved and could result in a higher
penalty being payable.
Note that there is no zero penalty for reasonable care (unlike for penalties for errors on returns),
although the penalty may be reduced to 0% if the failure is rectified within 12 months through
unprompted disclosure.
The penalties may also be reduced at HMRC’s discretion in ‘special circumstances’. ‘Special
circumstances’ are expected to be very rare.
2.4 Appeals
Taxpayers have a right of appeal against penalty decisions to the First-tier Tribunal, which may confirm,
substitute or cancel the penalty.
3.1 Introduction
There is a common framework for record keeping for income tax, capital gains tax, corporation tax, VAT
and PAYE.
One set of high level rules applies across the above taxes, but the detailed rules for each tax remain
unchanged.
Section overview
There is a common penalty regime for the late filing of tax returns.
These penalties apply to returns for periods of at least six months and combine a mixture of fixed
and tax geared penalties.
4.1 Introduction
There is a common penalty regime for the late filing of tax returns. It applies to all the main taxes
including income tax, capital gains tax and corporation tax.
Section overview
There are a number of PAYE forms used to provide information to ensure that tax is deducted
correctly.
Non compliance with PAYE requirements will lead to penalties.
P9D End of year form recording details of benefits Send to HMRC and copy to employee by
provided to employees in excluded employment 6 July following end of tax year
P11D End of year form recording details of benefits Send to HMRC and copy to employee by
provided to employees not in excluded 6 July following end of tax year
employment
P60 End of year form recording details of gross pay, Supply to each employee by 31 May
tax deducted and NICs for both employer and following end of tax year
employee
P14 Same details as P60 Send to HMRC by 19 May following end
of tax year
P35 End of year summary of tax and NICs deducted Send to HMRC by 19 May following end
for all employees of tax year
P45 Particulars of employee leaving: 4 part document One part sent to HMRC when employee
recording tax code, gross pay to date, tax and leaves, other three parts given to
NICs deducted employee (one kept by employee, one by
his new employer and the third sent by
new employer to HMRC)
From 6 April 2011 all employers must submit their end of year P14 and P35 forms, and P45 leaver forms
electronically. Other PAYE forms may be submitted either on paper or electronically. The introduction of
P14 and P35, £100 monthly per Penalty not exceeding 100% of the income
C
50 employees tax and NICs payable for the year of
H
assessment but not paid by 19 April (22 April A
for electronic payment) following the end of P
the year of assessment T
E
P9D and £300 per return £60 per day R
P11D
12
5.3 PAYE payments: penalties
There is also a penalty for late payment of in-year deductions collected via PAYE (ie income tax and NIC
apart from Class 1A and Class 1B). The penalty applies to all employers, irrespective of the number of
employees.
The penalty depends on the number of defaults in any 12 month period.
The percentage penalty is applied to the total amount that is late in the tax year, but ignoring the first
late payment in the year. Where a penalty has been imposed and the tax remains unpaid at 6 or 12
months the penalty is 5% of tax unpaid, even if there is only one late payment in the year.
The total penalty for the year to date is calculated each time the penalty is imposed and any amounts
already imposed are deducted from the total due.
Solution
As there are eight failures in the year, the penalty percentage is 3% of the total amount of the late
payments, excluding the first. Therefore the total penalty will be calculated as 3% of £84,000 (being 7
£12,000), so £2,520.
Genevieve may have paid more than one penalty during the year, however her total penalty will be
£2,520.
Section overview
Not all taxpayers have to submit a tax return.
A taxpayer may be issued with a full tax return or a short tax return.
Partnerships are required to submit a tax return.
Income tax not deducted at source and Class 4 NICs are payable in a maximum of three
instalments.
Capital gains tax is payable in one lump sum.
Underpayments of less than £2,000 may be collected through the PAYE system.
(c) The return was issued on 14 October 2013, Winifred wishes to compute her own tax liability and
submit a paper return 12
Solution
(a) Later of 31 October 2013 and 10 June 2013, ie 31 October 2013
(b) Later of 31 January 2014 and 12 March 2014, ie 12 March 2014
(c) Later of 31 October 2013 and 14 January 2014, ie 14 January 2014
If a taxpayer is sent a return by HMRC it must be submitted to HMRC by the due date even if there is no
income to declare.
For the tax year 2012/13 payments on account are not required where the amount of the tax paid C
under self assessment in the previous year was less than: H
A
£1,000; or P
20% of the total tax liability (income tax and Class 4) T
E
R
6.8 Balancing payments
A balancing payment or repayment is due by 31 January following the end of the tax year. The
balancing payment comprises any unpaid income tax and Class 4 NICs, together with capital gains tax 12
payable for the year.
Solution
Amounts payable on 31 January 2014:
£
Total income tax liability 20,000
Less: tax deducted under PAYE and at source (12,500)
7,500
Less: payments on account 2 £3,000 (6,000)
Balancing payment for 2012/13 1,500
CGT 2012/13 5,000
First payment on account for 2013/14 £7,500 ½ 3,750
Where the taxpayer is an employee and has underpaid tax of less than £3,000, the underpayment can
usually be collected by adjusting his PAYE code for the following tax year, unless the taxpayer requests
otherwise. For the underpayment to be collected via PAYE the return must be filed on paper by
31 October following the tax year end or online by 30 December following the tax year end.
Section overview
Penalties are used to enforce the self assessment system, for example for late submission of tax
returns and for late payment of tax.
Interest is payable by the taxpayer on late paid tax and penalties. Interest is payable by HMRC on
overpaid tax.
7.1 Penalties
The self assessment system is enforced through a system of penalties, some of which were considered
earlier in this chapter, including those for late filing of returns.
Requirement
Calculate any penalties due.
Solution
First payment on account due 31 January 2012, paid 31 March 2012, but no penalties on payments on
account.
Second payment on account paid on due date 31 July 2012.
Solution
First payment on account due 31 January 2012, paid 31 March 2012, 59 days late (1.2.12 – 30.3.12).
Interest = 59/366 £2,000 3% = £10
Second payment on account paid on due date 31 July 2012, so no interest due.
Balancing payment due 31 January 2013, paid 16 March 2013, 43 days late (1.2.13 – 15.3.13).
Interest 43/365 £3,000 3% = £11
Section overview
If a company has taxable total profits it must notify HMRC of its chargeability to corporation tax.
HMRC will issue a company with a tax return shortly after the end of its period of account.
The tax return includes a tax computation and the company must also submit accounts and
supporting calculations.
Small and medium sized companies pay corporation tax in one lump sum.
Large companies are required to pay corporation tax in four equal instalments.
Requirement
When will T Ltd be required to pay instalments of corporation tax for the year ended 31 December
2012?
Solution
Chargeable accounting period starts 1 January 2012.
Instalments due 14 July 2012, 14 October 2012, 14 January 2013 and 14 April 2013
Solution
1 February 2013
Section overview
Penalties are payable, for example on late submission of tax returns and late payment of tax.
Interest is payable by a company on late paid tax and penalties.
Interest is payable by HMRC on overpaid tax.
9.1 Penalties
A fixed penalty is charged where a company fails to notify commencement of the first chargeable
accounting period. Failure to notify commencement within three months can lead to a maximum
penalty of £300.
Penalties are also charged if a company submits a late return. Tax-geared penalties may also apply to
returns submitted late. These penalties have been considered earlier in this chapter.
The tax liability was due to be paid on 1 April 2013. The tax was paid 10 months late.
Maximum penalty for late payment of tax is:
(10% £50,000) £5,000
There is a 5% penalty at the filing date and a further 5% penalty three months after the filing date. The
tax had been paid by nine months after the filling date.
C
H
A
P
Interactive question 3: Penalties [Difficulty level: Exam standard] T
E
State the maximum penalties for the following events, briefly stating the reason for your answer. R
Solution
Corporation tax due 1 July 2012, paid 14 September 2012, so 74 days late.
Interest 74/365 £50,000 3% £304
Interest charged on late paid corporation tax is an allowable non-trading loan relationships expense.
Section overview
There are penalties for late registration; late returns and late payments of VAT; failure to file
returns online and incorrect returns.
Interest may be payable on late paid VAT and overpayments of VAT.
If a return is still outstanding after six months a further penalty applies of 5% of the tax due.
If a return is still outstanding after 12 months a further penalty applies:
100% of tax due where withholding of information is deliberate and concealed
70% of tax due where withholding of information is deliberate but not concealed
5% of tax due in other cases
The tax geared penalties are all subject to a minimum of £300 and can be reduced for disclosure, with
higher reductions if the disclosure is unprompted (see earlier in this chapter).
The VAT return for the quarters ended 31 July 2012 and 31 October 2012 were submitted on time so
there is no penalty and no change to the penalty period.
12
The VAT return for the quarter ended 31 January 2013 was due on 7 March 2013 and was therefore
submitted late. A penalty of £200 will be charged and the penalty period will be extended to 7 March
2014.
If the taxpayer can satisfy HMRC that there is 'reasonable excuse' for the late filing of the return, no
penalty is payable nor does the failure count for the purpose of starting a penalty period to run.
Late payment penalties can be suspended where the taxpayer agrees a time to pay arrangement, unless
he abuses the arrangement.
Reason for loss of tax Income tax and CGT Corporation tax VAT
The time limits run from the end of the accounting period (corporation tax), tax year (income tax and
CGT) or prescribed accounting period (VAT).
11.4 Appeals
A taxpayer may make an appeal against:
A request by HMRC to submit documents, supporting records etc in the course of a compliance check
Amendments made to a self assessment as the result of a compliance check
HMRC's right to raise a discovery assessment
A discovery assessment
A VAT assessment
Imposition of a penalty
The appeal must be made in writing within 30 days of the relevant event and must specify the grounds
for the appeal.
The taxpayer may also apply to postpone payment of all or part of the tax whilst waiting for the appeal
decision. This only applies in the case of appeal against a discovery assessment or tax payable as a result
of a compliance check.
12 HMRC powers
This section is new.
Section overview C
HMRC may use its statutory powers to request information and documents from taxpayers and H
A
even third parties via a written information notice. P
T
HMRC can issue an inspection notice and enter the premises of a taxpayer whose liability is being
E
checked. R
Summary
Common penalty Information and
regime inspect ion powers
C
H
A
P
T
E
R
12
Late payment
of tax
Legislation
Penalties for incorrect returns Sch 24 FA 2007
Appeals ss.48-54
Corporation tax – References relate to Finance Act 1998 (FA 1998) Schedule 18 unless otherwise stated
Notification of liability within three months of the start of the first chargeable FA 2004 s.55
accounting period
Tax return para 3
Appeals SI 1986/590
HMRC manuals
Income Tax Self Assessment: The Legal Framework (Found at
http://www.hmrc.gov.uk/manuals/salfmanual/Index.htm)
Payment of Tax: Payments on Account SALF303
Payment of Tax: Automatic Interest and Late Payment Penalties: Interest Charged on SALF305
Late Payments of Tax
Payment of Tax: Automatic Interest and Late Payment Penalties: Late Payment SALF308A
Penalties on Unpaid Income Tax and Capital Gains Tax
Enquiring into Tax Returns: Outline SALF402
For corporation tax there is the company taxation manual. This can be found at
http://www.hmrc.gov.uk/manuals/ctmanual/index.htm)
To find out more practical information about VAT, access the relevant section of the HMRC website
through the main home page (http://www.hmrc.gov.uk/).
A series of guides is available online at
http://www.hmrc.gov.uk/vat/index.htm?_nfpb=true&_pageLabel.
Information about the range of special schemes and options to simplify VAT for small businesses is
available at http://www.hmrc.gov.uk/vat/start/schemes/index.htm.
There is also a VAT telephone helpline: 0845 010 9000
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You will
not be examined on the contents of this section in your examination.
Normal due date for tax return for 2012/13 issued Later of 31 January 2014 and 20 February 2014,
20 November 2013, taxpayer to submit an ie 20 February 2014
electronic return online
C
Notify HMRC of need to issue tax return for 5 October 2013 H
2012/13 A
P
Overpayment relief claim relating to 2012/13 5 April 2017 T
E
Keep business records for 2012/13 31 January 2019 R
Normal due date for tax return for 2012/13 issued Later of 31 October 2013 and 31 July 2013,
31 May 2013, HMRC to calculate tax and paper ie 31 October 2013
12
return to be submitted
Keep personal records for 2012/13 31 January 2015
Amend tax return for 2012/13 submitted 31 January 2015
30 November 2013
Notified HMRC of new source of income for Maximum £1,200 penalty (for failure to notify –
2012/13 on 5 December 2013, paid all £4,000 of 30% potential lost revenue). This may be
tax due on 25 January 2014 reduced to nil for unprompted disclosure and
payment in full within 12 months.
Tax return for 2012/13 issued May 2013, Due date was 31 October 2013, less than six
submitted return electronically 30 March 2014 months late. Initial penalty of £100 and daily
penalty of £10 from 1 February 2014 up to
29 March.
Balancing payment of tax of £2,000 for 2012/13 £2,000 5% = £100 – due date was 31 January
paid 30 April 2014 2014, less than six months late
Destroyed supporting records for 2012/13 on £3,000
1 May 2014
Tax return for 2012/13 issued June 2013, Due date was 31 January 2014, over 6 months
submitted electronically on 15 September 2014, late. Initial penalty of £100, daily penalty of £10
tax liability £1,000. for 90 days (£900), 5% of tax due but subject to
minimum of £300 once six months late.
Balancing payment of tax of £3,000 for 2012/13 £3,000 10% = £300 – due date was 31 January
paid 30 September 2014 2014, over six months late
Notified HMRC on 10 January 2014 of Maximum penalty 30% potential lost revenue
chargeability for accounting period ended (£2,250). If disclosure is unprompted then may be
30 November 2012. This is not the company's first reduced to nil. Notification should be by
chargeable accounting period. Corporation tax 30 November 2013, therefore less than 12 months
liability £7,500 paid on same date late
Tax return for accounting period ended 31 July £100 – return due 31 July 2013, ie less than three
2012 submitted 30 September 2013 months late
Destroyed records on 10 August 2016 for £3,000 – should have kept records until
accounting period ended 31 December 2012 31 December 2018
Tax return for accounting period ended 31 £2,000 – for return filed late. The return was due
October 2012 submitted 30 November 2014, 31 October 2013, ie over 12 months late so £100
corporation tax due of £10,000 paid 30 plus £900 plus £500 (5% of tax due subject to
September 2014 minimum of £300) plus further £500 once 12
months late (unless deemed to be as a result of
the deliberate withholding of information in which
case penalty could be up to 100% of the unpaid
tax)
£1,500 – for tax paid late. 5% penalty at filing
date and at three and nine months after filing date
Total minimum penalty for late filing and late
payment is £2,000 + £1,500 = £3,500
1 A – 13 January 2015
The return was due on 31 January 2014 and was submitted on time. HMRC has until the first
anniversary of the actual submission of the return to give notice of a compliance check.
2 B – 15 May 2014
HMRC has nine months from the actual submission date to make corrections to a self assessment.
3 C – 5 October 2013
C
The business began in 2012/13 (5 May 2012) and James must notify HMRC by 5 October H
A
following the end of that tax year.
P
4 B – £100 T
E
The tax return was due on 31 January 2013 and so is less than three months late. R
5 C – 31 January 2015
Personal tax records must be retained for one year after 31 January following the end of the tax 12
year (for 2012/13, 31 January 2015).
6 B – by 31 May 2013
7 C – 14 April 2012
The second instalment is due in the 10th month of the accounting period.
8 D – 28 February 2019
Records must be kept for a minimum period of six years after the end of the accounting period.
9 B – £1,000
As the return is filed less than six months late only the fixed £100 late filing penalty plus the 90
days at £10 per day penalty apply, giving a total penalty of £1,000.
10 B – for y/e 30 November 2012 by 1 September 2013, for y/e 30 November 2013 by instalments.
S Ltd is a large company for the first time in the year ended 30 November 2012 and so does not
have to pay tax by instalments in that year. It is also a large company in the year ended 30
November 2013 and so does have to pay tax in instalments in that year.
11 C – £1,400
The PLR as a result of John's error is £7,000 40% £2,800
John's error is deliberate and concealed (active steps to conceal the error by the creation of false
invoices) but he has made a prompted disclosure so the minimum penalty is 50% of £2,800 which
is £1,400.
12 A – 100% of potential lost revenue
E – 30% of potential lost revenue.
13 C – All employers must file P14, P35 and P45 forms electronically
D – Only employers with at least 250 employees are required to make payments electronically.
Ethics
Introduction
Examination context
Topic List
1 Fundamental principles
2 Threats and safeguards framework
3 Ethical conflict resolution
4 Conflicts of interest
5 Anti-money laundering
6 Tax avoidance and tax evasion
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
229
Introduction
Identify the five fundamental principles given in the IFAC Code of Ethics for Professional
Accountants and the ICAEW Code of Ethics, and the guidance in relation to a tax practice
with regard to:
Syllabus links
The topics covered in this chapter are essential knowledge for the whole of your Taxation studies. They
will ensure that advice and communication is appropriate and in keeping with the requirements of the
ICAEW.
Examination context
In the examination candidates may be required to:
Apply the five fundamental principles to given scenarios
Determine safeguards to be put in place when threats are made to the fundamental principles
Advise on the ethical resolution of conflicts
Give appropriate guidance relating to conflicts of interest, money laundering and the distinction
between tax evasion and tax avoidance
For extra question practice on these topics go to the section of the Question Bank covering this chapter.
Section overview
The International Federation of Accountants (IFAC) has produced a Code of Ethics for professional
accountants ('IFAC Code').
The revised ICAEW Code of Ethics ('ICAEW Code') is derived from the IFAC Code of Ethics.
Additional requirements and discussion are also included in the ICAEW Code.
The IFAC Code aims to ensure high-quality ethical standards for use by professional accountants
around the world.
Part A of both the IFAC and ICAEW Codes establishes the fundamental principles of professional
ethics for accountants.
Definition
Professional accountant: A member of the ICAEW.
C
Professional accountants have a responsibility to act in the public interest as well as considering their H
client or employer. The Codes require professional accountants to comply with the following five A
P
fundamental principles: T
E
Integrity
R
Objectivity
Professional competence and due care
Confidentiality 13
Professional behaviour
1.2 Integrity
Definition
Integrity: Professional accountants shall be straightforward and honest in all professional and business
relationships.
A professional accountant shall not knowingly be associated with any information where he believes that
the information:
Contains a materially false or misleading statement
Contains statements or information furnished recklessly
Omits or obscures information required to be included where such omission or obscurity would be
misleading.
When a professional accountant becomes aware that he has been associated with such information, he
shall take steps to be disassociated from that information.
Ethics 231
1.3 Objectivity
Definition
Objectivity: Professional accountants shall not allow bias, conflict of interest or the undue influence of
others to override professional or business judgements.
Relationships that bias or unduly influence the professional judgement of the professional accountant
shall be avoided.
Conflicts of interest are considered in more detail later in this chapter.
Definition
Professional competence and due care: Professional accountants have a continuing duty to:
Maintain professional knowledge and skill at the level required to ensure that clients or employers
receive competent professional service based on current developments in practice, legislation and
techniques; and
Act diligently in accordance with applicable technical and professional standards when providing
professional services.
Competent professional service requires the exercise of sound judgement in applying professional
knowledge and skill. Competence entails:
Attainment of professional competence; and
Maintenance of professional competence, requiring a continuing awareness and understanding of
relevant issues.
The professional accountant shall take steps to ensure that those working for him have appropriate
training and supervision.
Any limitations relating to the service being provided must be made clear to avoid misinterpretation.
1.5 Confidentiality
Definition
Confidentiality: Professional accountants shall:
Respect the confidentiality of information acquired as a result of professional and business
relationships;
Refrain from disclosing such information without proper and specific authority unless there is a
legal or professional right or duty to disclose; and
Refrain from using such information for their personal advantage or the advantage of third parties.
Definition
Professional behaviour: Professional accountants shall comply with relevant laws and regulations and
avoid any action that discredits the profession. C
H
A
P
T
This includes actions which a reasonable and informed third party, having knowledge of all relevant E
information, would conclude negatively affects the good reputation of the profession. R
Professional accountants shall conduct themselves with courtesy and consideration towards all with
whom they come into contact and shall not:
13
Make exaggerated claims for the services they are able to offer, the qualifications they possess, or
experience they have gained
Make disparaging references or unsubstantiated comparisons to the work of others
Section overview
The circumstances in which professional accountants operate may give rise to specific threats to
compliance with the five fundamental principles.
The Codes provide a framework to help identify, evaluate and respond to these threats.
The professional accountant is then able to apply safeguards to eliminate the threats or reduce
them to an acceptable level.
As a result, compliance with the five fundamental principles is not compromised.
Ethics 233
2.1 Threats
Professional accountants are obliged to evaluate any threats as soon as they know, or should be
expected to know, of their existence.
Both qualitative and quantitative factors should be taken into account in considering the significance of
any threat.
Most threats to compliance with the fundamental principles fall into the following categories:
Self-interest threats, which may occur as a result of the financial or other interests of a
professional accountant or of an immediate or close family member
Self-review threats, which may occur when a previous judgment needs to be re-evaluated by the
professional accountant responsible for that judgment
Advocacy threats, which may occur when a professional accountant promotes a position or
opinion to the point that subsequent objectivity may be compromised
Familiarity threats, which may occur when, because of a close relationship, a professional
accountant becomes too sympathetic to the interests of others
Intimidation threats, which may occur when a professional accountant may be deterred from
acting objectively by threats, actual or perceived
2.2 Safeguards
Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad
categories:
Safeguards created by the profession, legislation or regulation.
Safeguards in the work environment.
Safeguards created by the profession, legislation or regulation include, but are not restricted to:
Educational, training and experience requirements for entry into the profession
Continuing professional development requirements
Corporate governance regulations
Professional standards
Professional or regulatory monitoring and disciplinary procedures
External review by a legally empowered third party of the reports, returns, communications or
information produced by a professional accountant
Certain safeguards may increase the likelihood of identifying or deterring unethical behaviour. Such
safeguards, which may be created by the accounting profession, legislation, regulation or an employing
organisation, include, but are not restricted to:
Effective, well publicised complaints systems operated by the employing organisation, the
profession or a regulator, which enable colleagues, employers and members of the public to draw
attention to unprofessional or unethical behaviour
An explicitly stated duty to report breaches of ethical requirements
The nature of the safeguards to be applied will vary depending on the circumstances.
When applying the conceptual framework, a professional accountant may encounter situations in which
threats cannot be eliminated or reduced to an acceptable level, either because the threat is too
significant or because appropriate safeguards are not available or cannot be applied. In such situations,
the professional accountant shall decline or discontinue the specific professional service involved or,
when necessary, resign from the engagement (in the case of a professional accountant in public
practice) or the employing organisation (in the case of a professional accountant in business).
Section overview
To ensure compliance with the fundamental principles a professional accountant may need to
resolve a conflict in applying the principles.
The conflict resolution process may be formal or informal.
In both cases the same steps are to be followed.
If a significant conflict cannot be resolved, a professional accountant may wish to obtain professional
advice from the relevant professional body or legal advisors, and thereby obtain guidance on ethical and
legal issues without breaching confidentiality. The ICAEW runs a confidential ethics helpline service.
If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional
accountant should, where possible, refuse to remain associated with the matter creating the conflict.
The professional accountant may determine that, in the circumstances, it is appropriate to withdraw
from the engagement team or specific assignment, or to resign altogether from the engagement or the
firm.
Ethics 235
Interactive question 2: Ethical conflict resolution [Difficulty level: Exam standard]
The same facts as above.
After considering the six factors James decided to consult the Finance Director of the charity, Brenda.
James feels that Brenda has not taken sufficient steps to resolve the issue.
Requirement
Outline the options open to James.
See Answer at the end of this chapter.
4 Conflicts of interest
Section overview
Part B of both the IFAC Code and the ICAEW Code illustrates how the fundamental principles are
applied in certain situations for professional accountants in public practice.
One of the illustrations given in part B contains details relating to conflicts of interest.
Solution
A threat to objectivity may be created.
Evaluation of threats includes consideration as to whether the professional accountant has any business
interests or relationships with the client or a third party that could give rise to threats. If threats are other
than clearly insignificant, safeguards should be considered and applied as necessary.
5 Anti-money laundering
Section overview
The ICAEW Members' Regulations and guidance includes anti-money laundering guidance.
This guidance has been prepared to assist professional accountants in complying with their
obligations in relation to the prevention, recognition and reporting of money laundering.
Failure to take account of the guidance could have serious legal, regulatory or professional
disciplinary consequences.
5.1 Introduction
Accountants are required to comply with the Proceeds of Crime Act 2002 (POCA) as amended by the
Serious Organised Crime and Police Act 2005 (SOCPA) and the Money Laundering Regulations 2007
(the Regulations).
The ICAEW Members’ Regulations and guidance includes guidance issued by the Consultative
Committee of Accountancy Bodies (CCAB) in December 2007.
Ethics 237
5.2 Money laundering
Definition
Money laundering: The term used for a number of offences involving the proceeds of crime or terrorist
funds. It now includes possessing, or in any way dealing with, or concealing, the proceeds of any crime.
Records of client identification need to be maintained for five years after the termination of a client
relationship by any part of the firm providing relevant business. Records of transactions also need to be
maintained for five years, from the date when all activities in relation to the transaction were completed.
5.7 Penalties
Offences may be tried in a Magistrate's Court or in a Crown Court depending on severity. Cases tried in
the Crown Court can attract unlimited fines and the following terms of imprisonment:
Up to fourteen years, for the main money laundering offences
Up to five years, for the failure to report offence and the tipping off offences
Up to two years imprisonment for contravention of the systems requirements of the Regulations
Ethics 239
5.8 Supervisory bodies
The 2007 Regulations require all businesses to be supervised by an appropriate anti-money laundering
supervisory authority. The ICAEW is one of the approved supervisory authorities for the accountancy
sector. Accountants not regulated by one of the approved bodies will be supervised by HMRC.
Section overview
Tax evasion is illegal and tax avoidance is legal.
Tax evasion could lead to prosecution for both the client and his accountant.
Tax avoidance may not be possible due to the decision in the Ramsay case.
13
Ethics 241
Summary and Self-test
Members’ Regulations
and guidance
D Obtain advice from the ICAEW ethics advisory group giving full details of the client and the
finance director involved
13
4 A professional accountant is considering performing services for clients who are in dispute with
each other in relation to the matter or transaction in question.
Which two of the following fundamental principles are threatened in this situation?
A Objectivity
B Professional competence and due care
C Confidentiality
D Professional behaviour
5 Which of the following actions by a taxpayer would not constitute tax evasion?
A Obtaining tax free interest by investing in an ISA
B Claiming capital allowances on a fictitious item of plant
C Omitting to declare rental income received
D Overstating the value of purchases
Now go back to the Learning outcomes in the Introduction. If you are satisfied you have achieved this
objective please tick it off.
Ethics 243
Technical reference
This technical reference section is designed to assist you when you are working in the office. It should
help you to know where to look for further information on the topics covered in this chapter. You
will not be examined on the contents of this section in your examination.
13
Ethics 245
Answers to Self-test
1 A and C – Conflict of interest and Disclosure of information are issues which may challenge the
fundamental principles.
2 C – This example is directly stated in the Code of a situation where the principle of confidentiality is
not considered breached.
3 A – In a situation of conflict resolution within an organisation, it is appropriate to approach those
charged with governance, to document action taken and to approach a relevant professional body.
If the finance director is engaged in money laundering, option A could constitute tipping off.
4 A and C
5 A – This is an example of legitimate tax avoidance, whereas the others all constitute tax evasion.
247
248 Principles of Taxation
ICAEW - KNOWLEDGE LEVEL
TAX TABLES FA 2012
SYLLABUS AREA: ADMINISTRATION
SUBMISSION DATES
Submission dates for 2012/13 personal self-assessment tax returns
Return filed online Later of:
31 January 2014
3 months from the date of issue of return
Paper returns: Later of:
31 October 2013
3 months from the date of issue of return
Submission dates for corporation tax returns
Must be filed by 12 months from the end of the period of account
Submission dates for PAYE returns
Forms Filing date
P14, P35 19 May following the tax year end
P60 (to employees) 31 May following the tax year end
P9D and P11D 6 July following the tax year end
PAYMENT DATES
Payment dates for income tax
(1)
First interim payment 31 January in the tax year
(1)
Second interim payment 31 July following the tax year end
Balancing payment 31 January following the tax year end
(1) Interim payments are not required if:
the tax paid by assessment for the previous year was less than £1,000; or
more than 80% of the tax liability the previous year was collected at source.
Payment dates for capital gains tax
Capital gains tax is payable by the 31 January following the tax year end
Payment dates for corporation tax
Corporation tax Nine months and one day after the end of an accounting period
th
Corporation tax by instalments The 14 day of months 7, 10, 13 and 16 counted from the start of
a 12 month accounting period
Payment dates for VAT
Online return Due date
Electronic payment 7 calendar days after the last day of the month following the end
of the return period
Direct debit payment Collected automatically 3 working days after electronic payment
due date
VAT errors
An error made on a VAT return can be corrected on the next return provided it was not deliberate and
does not exceed the greater of:
£10,000 (net under-declaration minus over-declaration); or
1% x net VAT turnover for return period (maximum £50,000)
Alternatively, a ‘small’ error which is not deliberate may be corrected via the submission of form
VAT652.
Errors which are not ‘small’ or errors which are deliberate should be notified to HMRC on form VAT652.
2012/13
NIC CLASS 1 CONTRIBUTIONS Annual Monthly Weekly
Lower earnings limit (LEL) £5,564 £464 £107
Primary earnings threshold (PET) £7,605 £634 £146
Secondary earnings threshold (SET) £7,488 £624 £144
Upper earnings limit (UEL) £42,475 £3,540 £817
Class 1 Primary contributions on earnings between PET & UEL 12%
Class 1 Primary contributions on earnings above UEL 2%
Class 1 Secondary contributions on earnings above SET 13.8
%
Class 1A contributions 13.8
%
2012/13
NIC CLASS 2 CONTRIBUTIONS
Normal rate £2.65 pw
Small earnings exception £5,595 pa
VAT
Standard rate of VAT 20%
Reduced rate of VAT 5%
2012/13
NIC CLASS 1 CONTRIBUTIONS Annual Monthly Weekly
Lower earnings limit (LEL) £5,564 £464 £107
Primary earnings threshold (PET) £7,605 £634 £146
Secondary earnings threshold (SET) £7,488 £624 £144
Upper earnings limit (UEL) £42,475 £3,540 £817
Class 1 Primary contributions on earnings between PET & UEL 12%
Class 1 Primary contributions on earnings above UEL 2%
Class 1 Secondary contributions on earnings above SET 13.8
%
Class 1A contributions 13.8
%
2012/13
NIC CLASS 2 CONTRIBUTIONS
Normal rate £2.65 pw
Small earnings exception £5,595 pa
PAYE CODES
L tax code with basic personal allowance
P tax code with full personal allowance for person aged 65-74
Y tax code with full personal allowance for those aged 75 or over
K total allowances are less than total deductions
Marginal relief
CAPITAL ALLOWANCES
259
260 Principles of Taxation
A D
Accounting periods, 141 Data-holder notices, 218
Actual basis, 96 Deregistration, 165
Adjustment to profit, 60 Determinations, 216
Allowable costs for CGT purposes, 129 Disallowable expenditure, 61
Allowable expenditure, 61 Discovery assessments, 216
Annual accounting scheme, 181 Disposal consideration, 128
Annual exemption, 130 Dividend income, 17
Annual investment allowance, 79 Dividends received, 144
Anti-money laundering, 237 Donations and subscriptions, 63
Appeals, 216
Appropriations of profit, 62
Assets available for private use, 46 E
Assets with private use, 83
Associated companies, 152 Earnings, 114
Augmented profits, 148 Earnings for Class 2, 118
Earnings period, 114
Employment income, 39
B Employment payments and pensions, 64
Entertainment and gifts, 63
Bad debt claims, 169 Environmental concerns, 5
Bad debts, 62 Ethical conflict resolution, 235
Badges of trade, 59 European Union, 5
Balancing allowance, 84 Excluded employment, 40
Balancing charge, 84 Exempt benefits, 40, 47
Balancing payments, 205 Exempt income, 15
Basis period, 95 Exempt supply, 163
Benefits code, 40 Exemption from registration, 165
Business Payment Support Service, 218 Expenditure not shown in the accounts, 66
Expenses connected with the provision of living
accommodation, 43
C External influences, 5
Extra-statutory concessions, 8
Capital Allowances, 75
Capital expenditure, 62
Car leasing, 64 F
Cars and fuel for private use, 43
Cars costing more than £12,000, 82 Financial year, 7
Case law, 8 Fines and penalties, 63
Cash accounting scheme, 182 First year allowances, 78
Chargeable assets, 128 Flat rate scheme, 183
Chargeable disposals, 127 Franked investment income (FII), 148
Chargeable gains, 144 Fuel benefit, 45
Chargeable income, 15 Fundamental principles, 231
Chargeable persons, 127
Chattels, 132
Civil partners, 28 G
Class 1 NICs, 114
Class 1A NICs, 117 General earnings, 39
Class 2 NICs, 117 General provisions, 62
Class 4 NICs, 118 Gift Aid, 26, 63
Closing years, 99 Gift Aid donations, 146
Common penalty regime, 193 Gross income, 16
Company, 7
Compliance check, 215
Compulsory registration, 164 H
Confidentiality, 232, 239 HMRC powers, 217
Conflict of interest, 236 HMRC publications, 8
Current year basis, 95
261
I P
Income taxed at source, 16 'P11D' employees, 41
Indexation allowance, 144 P60, 200
Information powers, 217 'P9D' employees, 41
Input VAT, 169 Partnership tax returns, 203
Inspection powers, 218 Partnerships, 6, 101
Integrity, 231 Pay As You Earn (PAYE) system, 49, 200
Interest, 63 PAYE codes, 50
Interest on late paid corporation tax, 211 PAYE forms, 200
Interest on overpaid corporation tax PAYE penalties, 201
(repayment interest), 212 Payments on account, 204
Interest on overpaid VAT, 215 Penalties, 206, 210
Interest on unpaid VAT, 215 Penalties for errors, 193
Irrecoverable Value Added Tax, 64 Penalties for failure to notify, 196
Irrecoverable VAT, 170 Penalties for late filing of returns, 199, 212
ISAs, 15 Pension income, 17
Penultimate tax year, 100
Personal age allowance, 27
J Personal allowance, 18
Pre-registration VAT, 170
Job related accommodation, 41 Professional accountant, 231
Professional behaviour, 233
Professional competence and due care, 232
L Property income, 143
Last tax year, 99
Late registration penalty, 212
Legal and professional fees, 64 R
Legislation, 8 Real Time Information PAYE reporting, 51, 201
Living accommodation, 41 Reasonable care, 196
Loan relationships, 144, 147, 211 Record keeping, 198
Reduced rate, 163
Registration, 164
M Repayment interest, 208, 212
Main pool, 77
Main rate of corporation tax, 149
Management of the economy, 3 S
Marginal relief, 149 S2P, 114
Married couples allowance (MCA), 28 Safeguards, 234, 237
Miscellaneous income, 17, 146 Savings income, 17
Money laundering, 238 Security for payment of PAYE, 49
Senior accounting officer, 199
Short accounting periods, 150
N Short tax return, 203
National Insurance Contributions, 113 Single asset pools, 82
Net income, 17 Small plant and machinery pools, 81
Non-savings income, 17 Small profits rate of corporation tax, 149
Non-trading income in accounts, 66 Social justice, 4
Social Security income, 17
Sources of tax law and practice, 7
O Standard rate, 163
Statutory instruments, 8
Objectivity, 232 Substantial traders, 181
Opening year rules, 96 Supply of goods, 162
Opening years, 95 Supply of services, 163
Other benefits, 47
Output VAT, 166
Outside the scope, 163
Overlap profits, 98, 100
Index 263
264 Principles of Taxation
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