ACCA F6 Taxation FA 2010 Exam paper • 3 hours long • 15 minutes reading time • 5 compulsory questions Q1 – Income Tax Q2 – Corporation Tax Q3 – Capital Gains Tax / Chargeable gains Q4 & Q5 – Any other area of the syllabus Minimum of 10 marks on VAT INCOME TAX COMPUTATION AND PROPERTY INCOME Income tax overview • Tax year 6 April – 5 April • 2010/11 • Calculate taxable income for tax year • Calculate income tax thereon Taxable income Income assessable Profits from a trade, profession or vocation (other income) Basis of assessment Tax adjusted profits of the accounts ending in the current tax yearInterest received from UK sources (savings income) Income from employment (other income) Dividend income Property income (other income) Income received in the tax year Rental profits accruing in the tax year Grossing up Interest received ? 100/80 Dividends received ? 100/90 Credit given against income tax liability for tax suffered at source and 10% dividend tax credit Note: Some interest is received gross, namely interest from Government stock, Treasury stock, Exchequer stock and the National Savings and Investments (NS&I) Bank. Exempt income Premium Bond prizes • Betting/gambling winnings • Returns on NS&I Certificates • Income from ISAs Income tax computation Income tax computation Tax credits on dividends • Tax credits on dividends are never repayable • Offset against IT liability first – to allow other tax credits to generate a repayment Deductions Reliefs • Qualifying interest – Employees: interest on loans to purchase P&M for use in employment – Partners: interest on loans to purchase shares or invest in partnership • Trading losses Deductions Personal allowances • Standard PA = ? ,475 (2010/11) • Personal age allowance (PAA) – – – – 65+ at any time in tax year restricted if ANI exceeds ? 22,900 restriction = 50% ? (ANI ? ?22,900) minimum PAA = ? 6,475 Adjusted net income Reduction of PA • Reduction of PA for high earners – – – – – regardless of age reduced if ANI exceeds ? 100,000 definition of ANI = same as for PAA reduction = 50% ? (ANI – ? 100,000) If ANI exceeds ? 112,950: PA = ? Nil Tax rates Different tax rates apply depending on the amount and type of income Other Basic rate band (first ? 37,400) Higher rate (? 37,401 – ? 150,000) Additional rate (over ? 50,000) 20% 40% 50% Savings 20% (see note) 40% 50% Dividends 10% 32. 5% 42. 5% Note: If savings income falls into the first ? 2,440 of taxable income it is taxed at 10% Extending basic rate band • Gift Aid – Paid net of basic rate tax (20%) – If a higher rate taxpayer: extend BR band by gross amount = (net ? 100/80) – If additional rate taxpayer: extend AR band by gross amount • Personal pension contributions – As for Gift Aid payments Property income Accruals basis Wholly and exclusively incurred (e.
g. impaired debts, repairs, insurance) Aggregate income from all propertiesWear & tear allowance for furnished properties: 10% ? (Rent – WR – CT) Lease premiums • Where a premium is paid on the grant of a short lease (less than 50 years) – the landlord is taxed on property business income of: ? X (X) X Premium Less: 2% ? Premium ? (n – 1) Assessed on the landlord Where n = number of years of the lease • Alternative calculation: – Premium ? (51 – n) 50 Relief for premiums paid • Relief for premium paid available – If grant a sub lease out of a short lease – Relief = deducted from assessment on premium received from sublease – Amount of relief = Taxable premium for head lease ?Duration of sublease Duration of head lease Rent a room relief • Rent a room – – – – Gross rents ? ?4,250 = exempt Gross rents > ? 4,250 = Normal calculation Unless elect for rent a room relief Rent a room relief = to be assessed on: (Rents – ? 4,250) Furnished holiday lettings • Conditions – Available to let ? 140 days – Actually let ? 70 days – No long term occupation (? 31 days), unless < 155 days • Advantages – – – – Loss relief as if trading Net relevant earnings for pension contributions Capital allowances on furniture CGT reliefs available (Rollover & Entrepreneurs? ) Joint income Husband and wife and civil partners – Normal assumption 50:50 split – Can elect for income to be taxed according to actual entitlement ISAs Maximum investment ? 10,200 Overseas income • Individual resident in UK if: – Present in UK for at least 6 months (183 days) – Makes frequent and substantial visits to the UK, at least 91 days on average over the previous four tax years INCOME TAX EMPLOYMENT INCOME Employment income Employment v self employment Main criteria • control • financial risk • equipment – who provides • work performance and correction • holidays and sickness benefits • exclusivityEmployment income pro-forma Employment income – overview • Basis of assessment – Receipts basis (i. e. assessable for tax year in which paid) – Special rules for directors • Allowable deductions – – – – – Pension contributions Professional subscriptions Payroll giving Travel expenses necessarily incurred Mileage allowances: – if rate paid < AMA: allowable deduction – if rate paid > AMA: excess is a taxable benefit Benefits Benefits Exempt Taxable on all P11D employees Note: P11D employees are those earning ? ?8,500 p. a. plus most directors Exempt benefits Include: • • • • • • • • • • Employer pension scheme contributions Canteen facilities, luncheon vouchers 15p per day Relocation costs (max ? 8,000) Job related accommodation Mobile telephones – one per employee Workplace nurseries, childcare contributions (max ? 55 p. w. ) ? 3 p.
w. home working allowance Staff parties (? 150 per head p. a.
) Car parking Works buses Reimbursement of expenses for working away from home (? 5 per night in UK, ? 10 per night overseas) Assessable on all employees Benefit Cash vouchers Non cash vouchers Credit cards Payment by an employer of an employee? s liability Amount assessableCash for which the voucher can be exchanged Cost to employer All items purchased for private use (not interest or card charges) Amount paid by employer (e. g. home telephone) Living accommodation Up to 3 components – see below Living accommodation Benefit Basic charge Amount assessable Higher of • Annual value • Rent paid by employer Expensive accommodation charge Ancillary benefits • Use of furniture • Living expenses Property cost to employer > ? 75,000 (Cost* ? ?75,000) ? official rate of interest (provided in exam) Only apply if employee earns > ? 8,500 p. a: 20% ? MV when first provided Cost to employer (e. . heating, electricity, decorating) If occupied by employee > 6yrs after acquisition; substitute MV when first occupied for cost * Acquisition cost plus improvements up to start of tax year Job related accommodation Benefit Amount assessable Basic charge Exempt Expensive accommodation Exempt charge Ancillary benefits Calculate as normal but cannot exceed 10% of other employment income Assessable on P11D employees Benefit Cars and fuel Vans Interest free / low interest loan Assets loaned Gift of new asset Other Amount assessable Based on carbon dioxide emissions Scale charge = ? ,000 p. a.
Fuel for van = ? 550 p. a. Based on: (official rate of interest ? loan) Based on: (20% ? MV of the asset) Cost to employer Marginal cost to the employer Benefits – cars and fuel Cars • ? 75 g/km = 5% • ? 120 g/km = 10% • 121 g/km – 130 g/km = 15% • +1% each 5 g/km >130 g/km • 3% supplement for diesel • Maximum = 35% • Include extras • ? 80,000 cap • Employee capital contributions up to ? 5,000 = deductible Fuel • Cannot deduct partial contributions for private fuel Benefits – loans • Loans – low interest or interest free loan Interest on outstanding balance ?ORI Less: Interest actually paid Benefit ORI = Official rate of interest (given in exam) ? X (X) X – Use lower of average or precise method – If total loans outstanding at any time in the tax year is ? 5,000 or less: No benefit Benefits – use of assets • Use and transfer of assets – 20% ? MV when first provided – Two calculations for transfer of previously owned assets to employee = higher of: (a) MV at gift (b) MV when first used Less: Amounts already taxed ? X X (X) X INCOME TAX INCOME FROM SELF EMPLOYMENT Badges of trade Test S O F I R M Subject matter Ownership period Frequency of transactions ImprovementsConsider Personal use? Investment? Trade? Brief period of ownership indicates trading Repeated similar transactions indicate trading Work carried out to make asset more marketable may indicate trading Reason for sale Forced sale to raise cash indicates not trading Motive Profit motive indicates trading Adjustment of profits Disallowable expenditure • Wholly and exclusively incurred – No private items (e. g. private motoring) – No salary for proprietor • Capital expenditure – – – – Depreciation replaced by capital allowances No loss on sale No improvements Review repairs carefullyDisallowable expenditure • Car leasing costs – CO2 emissions > 160 g/km: 15% of leasing costs disallowed – CO2 emissions ? 160 g/km: no adjustment • Legal costs re capital except: – Cost of renewing short lease – Cost of defending title to an asset – Cost of raising loan finance Disallowable expenditure • Other items include: – – – – – – Fines/penalties (except employee parking) Donations (except to local charities) Gifts (except < ? 50, advert & not food/drink) Entertaining (except staff) Impaired debts (except trade debts) Interest payable on non-trade loans • Allowable items: Show adjustment as ? Nil Other adjustments • Taxable trading income not included in the accounts – Goods for own use • If no adjustment made in the accounts – add back selling price • If correct entries made in the accounts – only add back profit element Non trading income Property business income Income not taxable as trading income Dividends received Bank interest Capital profits Other adjustments • Expenditure not charged in the accounts but allowable – Capital allowances – Business expenses borne by proprietor – Portion of short lease premium paid = Premium assessable on landlord Period of leaseINCOME TAX CAPITAL ALLOWANCES Capital allowances Function Active function: Apparatus with which the business carried on Passive function: Setting in which the business carried on Capital allowances computation • General pool – Everything not in other columns • Special rate pool – – – – Long life assets Integral features in buildings Thermal insulation of buildings High emission cars (emissions above 160 g/km) • Single asset „pools? – Expensive cars b/f (i. e. Cost ? 12,000 or more) – Short life assets – Private use assets (i. e.
Used by business owner) General pool pro-formaGeneral pool pro-forma Annual investment allowance • • • • First ? 100,000 expenditure (12 months) Pro-rate if period < 12 months All assets except cars Advisable to allocate – – – – Special rate pool General pool Short life assets Private use assets • Not available in final accounting period Writing down allowance • • • • • 20% on reducing balance basis 10% for special rate pool Pro-rate if period not 12 months Expensive cars b/f – max ? 3,000 p. a. Small pool WDA – can write off balance of ? 1,000 or less (for 12 month period) • Restrict for private use by proprietor First year allowances Low emission cars (emissions 110 g/km or less) – 100% FYA available in the period of acquisition • Never time apportion FYA Cars • Expenditure pre 6. 4. 2009 brought forward – Expensive cars (Cost > ? 12,000): • Separate column • 20% WDA, max ? 3,000 (both for 12 month period) • Balancing adjustment on disposal – Cost ? ?12,000 = in general pool (20% WDA p.
a. ) • On/after 6. 4. 2009 depends on CO2 emissions – ? 110 g/km – 111-160 g/km – > 160 g/km (general pool) (special rate pool) 100% FYA 20% WDA p. a. 10% WDA p.
a. • Private use – only business proportion of allowances allowed Short life assets • • • • • • Each asset has its own column Useful life < 5 years AIA available WDA up to disposal as normal Balancing adjustment on sale Not available on cars Asset not sold within 4 years from end of accounting period in which acquired: – transferred to general pool Private use assets • Each asset has its own column • Asset written down by full AIA, FYA, WDA (as applicable) but allowance claimed = restricted to business use only • Not relevant for companies Balancing adjustments Proceeds (restricted to original cost) > Balance on „pool? < Balance on „pool? Balancing charge Balancing allowanceException: A balancing allowance is never given on the general pool or the special rate pool until business ceases to trade Business cessation • Additions and disposals allocated to relevant pools • No AIA / FYA / WDA • Balancing adjustments given on all pools Industrial buildings allowance • Main examples: factory, warehouse, staff welfare building, drawing office and hotels • Qualifying expenditure – Cost of construction / acquiring an industrial building – Professional fees (e. g. architects, legal fees) – Preparing land – Associated structures (e. g.
factory car park) • Non qualifying Land – Offices, shops, showrooms (25% rule) – Items qualifying as Plant and Machinery (e. g. central heating, thermal insulation) Industrial buildings allowance • WDA = 1% p. a.
– If in industrial use at year end – Within tax life (i. e. 25 years from date of first use) • Disposal – No WDA in year of sale – No BC or BA for vendor • Second hand buildings – Not examinable INCOME TAX BASIS OF ASSESSMENT Basis period rules 3 scenarios Commencement of trade Assessed using „opening year rules? Ongoing business Assessed on 12 month a/c period ending in tax year Cessation of trade Assessed using „closing year rules? Opening year rules First tax year = year in which business commences trade – Assessed on profits from date of commencement to following 5 April • Second tax year – see flow chart Opening year rules Year 2: Is there an accounting period ending in the tax year? Yes Is it 12 months long? No Assess on an actual basis from 6 April to 5 April Yes Assess profits of those 12 months = normal current year basis No Is it < 12 months? Assess profits of first 12 months of trade Is it > 12 months? Assess profits of 12 months up to accounting date Opening year rules • Third tax year – Assess 12 m/e on accounting date in the third tax year Overlap profits May be taxed on same profits twice, these are known as „overlap profits? • Get relief for overlap profits on cessation Closing years • Final tax year = year in which actually cease to trade – Assessed on any profits not previously assessed less any overlap profits from commencement Change of accounting date conditions • Change must be notified to HMRC on or before 31 January following the tax year in which the change is to be made • The first accounts to the new accounting date must not be >18 months • There must not have been another change of accounting date during the previous five tax years unless for genuine commercial reasonChange of accounting date New date is earlier in the tax year • The basis period for the tax year of change will be the 12 months to the new accounting date • Creates extra overlap profits New date is later in the tax year • The basis period for the tax year of change will be the period ending with the new accounting date • Overlap profits will be used to reduce the assessment to 12 months INCOME TAX PARTNERSHIPS Partnerships – basis of assessment Tax adjusted profits/losses Share between partners in PSA of accounting period Partner A Partner B Partner CTax each partner as if individual sole trader Note: PSA may allocate salaries and/or interest on capital. These are taxed as trading profit and not salary or interest income Partnerships • Capital allowances by partnership – Including those on partners? own assets • Partnership changes – Only partner joining/leaving is assessed on special opening/closing year rules • Changes in PSA – split period – Allocate profits according to PSA in force • Partnership losses – Calculated and allocated in same way as profits – Each partner may choose loss relief claims LLPs LLPs – Amount each partner may be required to contribute is limited – Taxed using normal partnership rules – Normal loss relief rules except losses set against total income limited to amount of capital contributed by that partner INCOME TAX TRADING LOSSES Trading losses Trading losses Against total income of the current and/or preceding tax year •Offset cannot be restricted to preserve PA •Excess loss is carried forward Against future trading profits only •Relieved against the first available future profits from same trade •Loss offset cannot be restrictedExtension against chargeable gains after claim against total income in current year or prior year •Treat trading loss as CY capital loss •Deducted after CY capital losses but before BF losses Trading losses • Opening years relief – loss in first four tax years of business – against total income of previous 3 yrs (FIFO) • Incorporation relief – losses c/f against income derived from company • Terminal loss relief – loss arising in final 12m of trade (+ overlap profits) – carried back 3 yrs against trading profits Trading losses • Choice of loss relief Relief as early as possible – As much tax saving as possible – Avoid wasting personal allowance / annual exemption PENSIONS AND NATIONAL INSURANCE CONTRIBUTIONS Method of giving relief Pension contribution to: Personal pension scheme •Basic rate relief (20%) given at source •Higher rate relief given by extending basic rate band •Additional rate relief given by extending higher rate band Occupational scheme •Tax relief at basic and higher rates given through the PAYE system (i. e. allowable deduction against employment income) Pensions – tax relief Can contribute any amount but tax relief only up to maximum contribution • Tax relief = Lower of – Gross contributions paid – Maximum tax allowable amount = Higher of: • ? 3,600 • 100% of the individual? s relevant earnings, chargeable to income tax in the year • Relevant earnings include trading profits, employment income and furnished holiday letting income Pension contributions • Annual allowance (? 245,000) – Income tax charge on excess (calculation not examinable) • Lifetime allowance (? 1,750,000) – Income tax charge on excess (calculation not examinable) • Employer? contributions – Not a taxable benefit – Tax deductible for employer NIC: Classes of contributions NIC paid by Employees Self employed Employers Class 1 Primary Class 2 Class 4 Class 1 Secondary – Earnings Class 1A – Benefits Employees? NIC • Class 1 primary – – – – Payable on earnings (see below) Age 16 to retirement age 11% on earnings between ? 5,715 and ? 43,875 1% above ? 43,875 • Payment dates – Collected through PAYE system Employers? NIC • Class 1 secondary – 12. 8% ? earnings over ? 5,715 – Employees > 16 years old – Collected through PAYE system • Class 1A – 12. 8% ? ssessable benefits – Payable by 19 July following tax year Class 1 NIC – Earnings Earnings includes • any remuneration derived from employment and paid in money • vouchers exchangeable for cash or goods • reimbursement of cost of travel between home and work Earnings excludes • exempt employment benefits • non-cash benefits • reimbursement of business expenses NIC – self employed Class 2 • Fixed at ? 2.
40 per week • Paid by monthly direct debit or quarterly billing • Class 4 Paid on taxable trade profits less losses brought forward 8% on profits between ? 5,715 and ? 43,875 1% on profits above ? 3,875 Paid with income tax under self assessment Not payable if under 16 or reached retirement age at start of tax year • • • • INCOME TAX ADMINISTRATION Self assessment • Tax return for 2010/11 – Due dates – 31 October 2011 (paper) – 31 January 2012 (electronic) – Notification of chargeability – 5 October 2011 • Amendments to returns – Taxpayer within 12 months of 31 January filing date – HMRC within 9 month of actual filing date Self assessment • Penalties for late filing ? 3 months = ? 100 3 – 6 months = penalty ? 10 per day (max 90 days) 6 – 12 months = 5% of tax due (min ? 300) > 12 months = 5% of tax due (min ? 00) unless: > 12 months & information deliberately withheld: • Information concealed = 100% (min ? 300) • Information not concealed = 70% (min ? 300) Self assessment • Determination of tax – Issued by HMRC if return not filed by filing date – Can be issued within 3 years of filing date – Assessment replaced by actual return • Records – Business: retain 5 yrs from 31 January filing date – Other taxpayers: retain 1 yr – Penalty ? ?3,000 if fail to keep adequate records Payment of tax – 2010/11 • Payments on account („POA? ) – 50% ? (2009/10 income tax and Class 4 NICs less tax paid at source) – 31 January 2011 – 31 July 2011 Balancing payment – 31 January 2012 • Capital gains tax – 31 January 2012 • Reduction of POA Late payment of tax Interest Charged on: All late payments of tax Penalties Charged on: • IT – balancing payment only (not POAs) • CGT • Class 4 NICs % Tax paid late Pay > 30 days late 5% Pay > 6 months late Further 5% Pay > 12 months late Further 5% Daily rate Runs from: due date To: day before date of payment Standard penalties • Apply in two circumstances – Inaccuracy in returns (all taxes) – Failure to notify liability to tax (IT, CGT, CT, VAT, PAYE/NIC) Penalty = % of potential lost revenue • Depends on behaviour of taxpayer Taxpayer behaviour Genuine mistake Failure to take reasonable care Serious or deliberate understatement Serious or deliberate understatement with concealment Penalties may be reduced by prompted / unprompted disclosure Maximum penalty (% of revenue lost) No penalty 30% 70% 100% HMRC powers • Enquiries – HMRC issue written notice within 12 m of filing – Taxpayer can appeal within 30 days • Discovery assessments – HMRC can raise if discover inaccuracy in return • HMRC information and inspection powers – – – Covers IT, CGT, CT, VAT and PAYE Can request information by written notice From 3rd parties if agreed by taxpayer / tribunal Power to enter & inspect business premises ? in order to inspect business records and assets Appeals • Appeals in writing within 30 days of disputed decision – Review by another HMRC officer or refer to Tax Tribunals • First tier Tribunal deals with: – – – – Default paper cases (e. g. against fixed penalty) Basic cases, straightforward with short hearing Standard cases, more detailed and formal hearing Complex cases, sometimes, but usually Upper tier Appeals Upper tier Tribunal deals with: – Complex cases: specialist knowledge and formal hearing – Judicial review delegated from High Court / Court of Session – Enforcement of decisions, directions & orders by Tribunals – Hearings held in public and decisions published • Can appeal to Court of Appeal on point of law PAYE • Code numbers = (Allowances – Deductions) ? 1/10 • Due date = 19th of month – Electronic payments = 22nd of month • Key forms – – – – P45 – when employee leaves P46 – when employee joins without a P45 P35 – summarises IT/NIC deducted P14/60 – yearly totals for each employeeCAPITAL GAINS TAX COMPUTATION AND TAX PAYABLE Capital gains essentials Chargeable persons • Individual – resident or ordinarily resident in UK • Company Chargeable assets • All assets except specifically exempt Chargeable disposals • Sale • Gift • Exchange • Loss/destruction of asset • Compensation for damage Exempt disposals • Sale of trading inventory • Transfers on death • Transfers to charity Exempt assets include • Cars • Non wasting chattels bought and sold ? ?6,000 • Wasting chattels • Cash • Qualifying corporate bonds • Sterling currency • Principal private residence • Assets held in ISAsPro – forma computation Notes (1) ? X Gross sale proceeds Less: Selling costs Net selling price Less: Allowable costs Capital gain (2) (3) (X) X (X) X Notes: 1. Use market value where transaction not at arm? s length 2. Include legal fees, advertising costs, etc. 3.
Includes purchase price and purchase expenses, (e. g. legal fees) and any capital enhancement expenditure Summary for 2010/11 ? Net capital gains for the tax year (after specific reliefs) Less: Capital losses brought forward Net chargeable gains Less: Annual exemption (2010/11) Taxable gains X (X) X (10,100) X CGT payable for 2010/11 Rate of CGT depends on amount of taxpayer? s total taxable income – If total taxable income and gains are less than upper limit of BRB = CGT at 18% – To extent any gains (or any part of gains) exceed BRB = taxed at 28% • BRB extended for gross Gift Aid and Personal pension contributions • Unused personal allowance cannot be used against gains Capital losses Current year • Must be set off against current year capital gains • Offset before brought forward losses Brought forward • Offset restricted to amount needed to reduce net chargeable gains down to the amount of the AE (? 10,100 for 2010/11)Connected persons • Use market value instead of actual proceeds • Loss on disposal only offset against gains to same connected person CAPITAL GAINS TAX SPECIAL RULES Special rules • No gain no loss transfers – Spouse/civil partner – planning opportunities • Utilising annual exemptions • Utilising capital losses • Part disposals A – Cost of part disposed = Cost ? A + B – A = Proceeds, B = MV of remaining asset – Wasting (expected life ? 50 yrs) = exempt – Non-wasting (> 50 yrs) = see below • Chattels Non wasting chattels Cost ? 6,000 or less More than ? 6,000 Sale proceeds ?6,000 or less More than ? ,000 Exempt Normal gain computation but gain restricted to 5/3 ? (Gross proceeds – ? 6,000) Allowable loss based on deemed proceeds of ? 6,000 Normal gain computation Wasting assets Wasting assets (life ? 50 years) Chattels (i.
e. Tangible and moveable) Not eligible for capital allowances (e. g. Greyhound) Eligible for capital allowances (e. g. Plant and machinery used in a trade) Not chattels (e. g.
Copyright) Normal gain computation Allowable cost restricted Cost Less: P x C L Allowable cost C (X) X Exempt Normal gains computation subject to ? 6,000 chattels rules. Losses not allowed as relieved by CAsP = Period of ownership L = Predictable life Assets lost or destroyed No insurance proceeds Insurance proceeds received Normal computation: capital loss Not reinvested : normal computation Reinvested within 12 months: elect for no gain/no loss Assets damaged No insurance proceeds Insurance proceeds received No disposal Not used in restoration Used in restoration Normal part disposal Part disposal unless „rollover? election to deduct proceeds from cost of asset Shares and securities • Value of quoted shares = lower of: – Quarter up rule – Average of highest and lowest marked bargains • Matching rules Same day – Next 30 days – Share pool (amalgamated cost of shares) • Bonus and rights issues – Bonus – increase number of shares at nil cost – Rights – increase number and cost in pool Reorganisations and takeovers Consideration Cash and shares Share for share • Part disposal of the original shares • Gain arises on the cash element of the consideration • No CGT disposal • Cost of the original shares becomes the cost of the new shares • Can elect for normal disposal CAPITAL GAINS TAX RELIEFS FOR INDIVIDUALS Principal private residence PPR occupied Throughout For part of period of ownershipGain exempt • Calculate gain • PPR relief Gain x Period of occupation Period of ownership Period of ownership Periods of occupation Deemed occupation Conditional • Up to 3 years – any reason • Any period working abroad • Up to 4 years working in the UK • Must be actual occupation before and after • Condition relaxed if reoccupation prevented by terms of employment Unconditional • Last 36 months of ownership Letting relief • Available for periods of letting • Calculate PPR first • Letting exemption is lower of: – ? 40,000 – PPR relief – Gain (after PPR) that is due to lettingEntrepreneurs? relief • Qualifying business disposals – Unincorporated business, or – Personal trading company shares (? 5%) provided also an employee • Qualifying ownership period – 12 months Entrepreneurs? relief • Relief is given on first ? 5 million • Qualifying gains taxed at 10% • Can use losses & AE against other gains first • Qualifying gains treated as using BRB before other gains • For 2010/11 disposals claim by 31 January 2013 Rollover relief Disposal of and reinvestment In qualifying asset: • Land and buildings • Fixed plant and machinery • Goodwill • Must be used in the tradeWithin qualifying time period: From 12 months before to 36 months after the sale • Claim within 4 years from the end of the tax year Rollover relief • Partial reinvestment – A gain arises on the disposal of the original asset, being the lower of: • the proceeds not reinvested • the chargeable gain • Depreciating assets (life < 60yrs) – Gain heldover until earliest of: • replacement asset sold • cease to use replacement asset in the trade • 10 years from date replacement asset acquired Gift relief • Individuals only • Qualifying business assets (below) • Donee? s base cost reduced by gain deferred Joint election = by 4 years from end of tax year of gift Qualifying business assets • Assets used in trade of unincorporated business or individual? s personal trading company (? 5% shares) • Unquoted trading company shares • Quoted trading company shares if own ? 5% interest Gift relief • Sale at undervaluation: If actual consideration > donor? s cost: Excess = immediately chargeable Balance = deferred • Non business use: Gain deferred = restricted to business use proportion only Shares (? 5% interest) Gain deferred = Gain ? MV of CBA MV of Chargeable Assets Incorporation relief Conditions All the assets of the business (except cash) must be transferred • The transfer must be of a business as a going concern • Consideration must be wholly or partly in shares • No gains arise on incorporation • Gain on sale of assets is rolled over against the acquisition cost of shares • Gain eligible for rollover • Gain x Value of shares issued Total consideration • Immediate gain for non shares consideration • Can elect for incorporation relief not to apply – for 2010/11 by 31 January 2013 • May be beneficial if shares are to be sold shortly after incorporation and assets of business qualify for Entrepreneurs? elief Effect Consideration not wholly in shares Election INHERITANCE TAX IHT basics IHT essentials Transfer of value Chargeable property Chargeable person Capital gift „Loss to estate? ALL assets Individual „domiciled? in UK (always will be in F6 exam) IHT basics Occasions of charge Death Gifts within 7 years pre death Other lifetime gifts (CLTs) Lifetime gifts CLTs Definition Any gift which is not exempt or a PET PETs Gift by individual to: • Another individual • Certain trusts (not examinable) Only chargeable if donor dies within 7 years of the gift Death rates DoneeMain examples in exam: • Transfers to any trust Chargeable At date of gift Additional IHT if donor dies within 7 years of the gift Death rates Donee Tax rates Paid by Lifetime rates Donee or donor (gross up gift for tax paid by donor) IHT computations – gifts ? Transfer of value Specific exemptions Exemptions Chargeable transfer Tax calculation: Chargeable transfer Less: Available nil rate band Taxable amount A (X) See next slide X Lifetime tax: X Diminution in value principle (X) Spouse or civil partner (X) Marriage, Annual AAt 20% (CLT where donee to pay tax) or At 25% (CLT where donor pays tax) – then add tax onto chargeable transfer to give gross chargeable amount to c/f Death tax: At 40% (transfers in 7 years pre death) Nil rate band available For calculation of lifetime tax on a CLT (chargeable in donor’s lifetime) Nil rate band (say, gift in 2007/08) Less: CLTs in 7 years pre gift Nil rate band available ? 300,000 (X) X For calculation of death tax on CLTs and PETs within 7 years pre death Nil rate band (death in 2010/11) ? 325,000 Less: CLTs and chargeable PETs in 7 years pre gift Nil rate band available X) X Further computational points Gifts in 3 – 7 years pre death get taper relief on death tax: Time between gift and death 3 – 4 years % of IHT payable 80% 4 – 5 years 5 – 6 years 6 – 7 years 60% 40% 20% Any lifetime tax paid on CLTs falling in 7 years pre death can be credited against death tax but cannot lead to repayment. Further computational points Summary of computation for tax on gifts in 7 years pre death ? X (X) X (X) X Tax on taxable amount at 40% Less: Taper relief (%) % chargeable after taper relief Less: Lifetime tax paid (CLTs only) IHT dueSummary of exemptions and reliefs Lifetime gifts only Lifetime gifts and death estate Annual exemption • ? 3,000 per tax year • Carry forward 1 year only • Use current before b/f Small gifts • ? 250 total gifts per donee per tax year Marriage exemption • ? 5,000 per parent • ? 2,500 per grandparent / party to marriage • ? 1,000 others Inter spouse/civil partner exemption Normal expenditure out of income • Must be able to maintain standard of living • Must be habitual Death estate Freehold property less repayment mortgage (+ accrued interest) ? XForeign property less expenses of realisation (max 5%) All other assets (e. g. cars, shares, bank and building society accounts, assets held in ISAs, insurance policy proceeds) Debts due to deceased Accrued income Less: Outstanding debts and funeral expenses Less: Exempt legacies Gross chargeable estate IHT payable X X X X X (X) X (X) X X Payment of IHT Transfer CLTs between: 6 April – 30 September 1 October – 5 April PETs chargeable as a result of death Due date Following 30 April 6 months after the end of the month of transfer 6 months after the end of the month of deathAdditional tax due on CLTs within 7 years pre death Estate at death 6 months after the end of the month of death 6 months after the end of the month of death Or, if earlier, on delivery of estate accounts to HMRC IHT planning • Use available exemptions • Give lifetime gifts – – – – Donor may survive 7 years Taper relief if survive 3 years Annual exemption available Freezes value of gift • Transfer of deceased spouse? s unused nil rate band – Must claim within 2 years of second death CORPORATION TAX OUTLINE Corporation tax • UK resident companies Pay corporation tax on worldwide profits (except dividends) and gains • Accounting periods – Normally follow company accounts – If period of account > 12 months: split into two accounting periods Corporation tax computation Corporation tax computation for the chargeable accounting period of…months ended… ? * Trading profit X * Property business profit X * Interest income X Net chargeable gains X ––– Total profits X Less: Gift Aid (X) ––– Taxable total profits X ––– * Including overseas income Exclude dividends (UK and overseas) Corporation tax computation • Trading income No private use adjustments / assets – Include trading interest payable • Property business profit – Losses set against total income • Loan relationship rules – Non-trading interest receivable less non-trading interest payable (see next slide) – All interest is received gross • Dividends (UK / overseas) – Exempt Interest payable Non trade loans • Deducted from interest income • E. g. Loan to purchase investment property or shares in another company Trade loans • Deducted from trading profits • E. g.
Bank overdraft interest, loan to acquire plant, machinery or factoryCalculation of Corporation tax Financial year (FY) • The rates of tax = fixed for a FY • FY runs: 1 April to 31 March • FY 2010: starts on 1/4/2010 “Augmented profits” • Taxable total profits Add: FII ? X X “Augmented profits” X • FII = Grossed up UK and overseas dividends received (non-associated) • “Augmented profits” determines rate charged on taxable total profits Calculation of Corporation tax Level of profits ? 300,000 or less Rate of tax 21% ?300,001 – ? 1,500,000 More than ? 1,500,000 28% less marginal relief 28% Marginal relief formula : Long period of account Where a company? period of account exceeds 12 months: • Split into 2 CAPs (first 12 months, then balance period) • Perform 2 separate CT computations and 2 CT liability computations • Pay on 2 different pay days Profits are allocated to the 2 CAPs as follows: Adjusted trading profit Capital allowances Interest income Time apportion before capital allowances Calculate separately for each CAP Accruals basis Property business profit Chargeable gains Gift Aid Franked investment income Time apportioned CAP in which disposal takes place Paid basis Receipts basis CORPORATION TAX CHARGEABLE GAINS Company chargeable gainsSummary of key differences: Company Tax paid Annual exemption Indexation allowance Capital losses b/f Corporation tax N/A Available for full period of ownership Offset in full Individual Capital gains tax 2010/11 = ? 10,100 Not available Restrict so net gains = annual exemption Shares and securities Indexed cost column needed Different matching rules Rollover relief only Goodwill is not a QBA No indexation allowance Reliefs Many reliefs available Capital gains summary Gain (transaction 1) Gain (transaction 2) Loss (transaction 3) Net gains in period Less: Capital losses b/f Net chargeable gains ?X X (X) ––– X (X) ––– A ––– Include A in corporation tax computation Indexation allowance • Allowance based on increase in RPI over period of ownership • Indexation factor applied to cost / enhancement costs • Calculation rounded to 3 decimal places (except shares) : RPI month of disposal ? RPI month of acquisition RPI month of acquisition • If there is a fall in value in the RPI, the indexation allowance is ? Nil Shares and securities • Matching rules – Same day – Previous 9 days – Share pool • Bonus issue – Not an operative event – Just increase number of shares Rights issue – Operative event – Increase number of shares & cost • Reorganisations and takeovers – As for individuals Share pool pro – forma Rollover relief • Same as individuals except: – Goodwill is not a qualifying asset – Claim within 4 years from the end of the accounting period in which asset is sold • Note, no other reliefs available to companies CORPORATION TAX LOSSES Trading loss reliefs Carry forward • Offset against: • First available • Trading profits • Of same trade • Indefinite carry forward Current year relief Carry back relief Offset against • Total profits (income and gains) • Before Gift Aid • Current AP then carry back 12 months (if desired) • Carry forward any remaining losses • Gift Aid is lost if no profits to offset • Must offset maximum amount possible if claimed • Optional claim Trading loss pro-forma Loss relief – planning • Relief at highest rates – Marginal rate = 29. 75% – Main rate = 28% – Small profits rate = 21% • Cash flow advantage of earlier relief • Gift Aid may be wasted Loss relief – other losses • Property business losses Against total income before Gift Aid of current period – Excess losses carried forward against total income before Gift Aid • Capital losses – Automatically set against current year gains – Excess losses carried forward against first available future gains – Can only be relieved against gains CORPORATION TAX GROUPS Associated companies • Definition – One company controls (> 50%) the other, or – Both companies are under control of the same person or persons – Include overseas companies and those joining / leaving group during period – Exclude dormant companies • Effect Small companies limits divided – Dividends not FII – Share Annual Investment Allowance if in a group or is a related business Group relief • Definition – 75% direct or indirect – Overseas companies – included in definition of group, but can? t claim losses • Relief – Surrender current year trading losses, excess gift aid and excess property losses – Claimant company (see next slide) – Only claim for corresponding accounting periods – Tax planning ? save at highest rates ? timing Corporation tax computation Corporation tax computation for the chargeable accounting period of…months ended… Trading profit Less: loss brought forward ?X (X) ––– X X X X X ––– X (X) (X) ––– X (X) ––– X ––– Property business profit Interest income Overseas income Chargeable gains Total profits Less: Loss relief (current year / carried back) Less: Gift Aid Less: Group relief Taxable total profits Capital gains groups • Definition – 75% direct and > 50% indirect – Overseas companies – included in definition of group, but can? t take advantage of reliefs • Effects – NGNL transfers (automatic) – transferee takes over asset at cost plus indexation – Can elect that gains and losses be transferred from one group company to another – Group rollover reliefCORPORATION TAX OVERSEAS ASPECTS Liability to UK Corporation tax • UK resident company – Incorporated in UK – Centrally managed and controlled in UK • Taxed on worldwide profits, other than dividends from UK or overseas companies Overseas operations UK Tax factor Branch Basis of charge to UK CT • Extension of UK operations • 100% of profits arising taxed on UK company • Losses of branch relieved against UK profits • UK losses can relieve overseas branch profits • Available on assets used in the branch Subsidiary • Interest remitted to UK is chargeable to UK CT but dividends are exempt • No relief for losses in the UKRelief for trading losses Capital allowances • Not available Impact on tax rate • None – not an associate • Associated company Relief for overseas taxation • Withholding tax – Overseas tax deducted at source – Recoverable by double tax relief • Double tax relief (DTR) – lower of – Overseas tax on overseas income – UK CT on overseas income Transfer pricing • For F6: Transactions with overseas companies only • Control (> 50%) • Non arm? s length price • UK company gains tax advantage • Increase taxable profits of advantaged company using „arm? length price? CORPORATION TAX SELF ASSESSMENT Due dates • Filing of returns – 12 months after end of period of account, or – 3 moths after date notice to file is issued • Payment dates – Small/marginal companies • 9 months and one day after end of CAP – Large companies (paying tax at 28%) • Instalments on 14th of months 7, 10, 13 and 16 following start of accounting period • Based on estimate of corporation tax liability Late filing penalties Initial fixed penalty ? 100 Rises to ? 200 if return > 3 months late Fixed penalties rise to ? 500 and ? ,000 for 3rd consecutive late return If return 6 to 12 months late: extra tax geared penalty = 10% of tax unpaid 6 months after the filing date If return >12 months late: tax geared penalty rises to 10% of tax unpaid 6 months after filing date Corporation tax returns • Penalties for incorrect returns and late notification of new taxable activity – Subject to standard penalty regime as for IT • Amendments, errors and mistakes – Taxpayer can amend within 12 months of filing date – HMRC correct by 9 months from date return filed – Company can make error or mistake claim within 4 years of end of accounting periodHMRC powers • Enquiries – HMRC issue written notice within 12 months of filing – Company can appeal within 30 days • Discovery assessments – HMRC can raise if discover inaccuracy in return • Information and inspection powers – HMRC has the same powers in respect of companies as for individuals • Appeals – Company has same rights to appeal as individuals VAT VAT – introduction • Indirect tax • Charged on – a taxable supply – by a taxable person – in the UK – in the course or furtherance of a business • Output tax – charged on sales • Input tax – incurred on purchases and expensesVAT – types of supply Exempt Taxable No tax charged Zero rated 0% Standard 17. 5% – up to 3. 1. 11 20% – from 4. 1. 11 Trader unable to register Unable to reclaim input VAT Trader able to register for VAT Can reclaim input VAT VAT – registration Compulsory • Required when value of taxable supplies exceeds the registration threshold (i.
e. ?70,000) • Taxable supplies includes zero rated and standard rated but not exempt supplies Voluntary • Traders making taxable supplies (standard rated or zero-rated) can register at any time • Allows recovery of input tax Registration testsHistoric test • Test at the end of every month • Look back over last 12 months • Notify HMRC within 30 days of the end of the month in which limit exceeded • Registered from start of next month Future test • Turnover in next 30 days will exceed limit • Notify HMRC by the end of the 30 days • Registered with effect from the beginning of 30 days Voluntary registration Advantages • Input tax recoverable • If making zero-rated supplies VAT returns will show VAT repayable – can register for monthly returns to aid cash flow • Avoids penalties for late registration • May give the impression of a more substantial business Disadvantages Output VAT charged on sales – if make standard rated supplies to customers who are not VAT registered will be an additional cost to them – may affect competitiveness • VAT administration VAT groups • Common control • Effects – One VAT return – Representative member responsible – All members liable – No VAT on supplies between group members Deregistration Compulsory deregistration • When cease to make taxable supplies • Inform HMRC within 30 days of ceasing to make taxable supplies • Deregistered from : – Date of cessation – Agreed earlier date Voluntary deregistration • Expect value of taxable supplies in next 12 months to be ? 68,000 • Inform HMRC at any time • Deregistered from : – Date of request – Agreed earlier date VAT – further points • Consequences of deregistration – Deemed supply of all business assets – Exclude items if no input tax reclaimed – Not payable if VAT on deemed supply < ? 1,000 • VAT returns – Quarterly – normal – Monthly – traders in repayment situation • VAT inclusive amounts – VAT = gross amount ? 17. 5/117. 5 (up to 3. 1. 11) – VAT = gross amount ? 20/120 (from 4.
1. 11) Tax point Basic tax point Goods Date goods are available Services Date services are completed Basic tax point is changed to Earlier datePayment made or invoice issued before basic tax point Later date If invoice is issued within 14 days after the basic tax point Actual tax point Date of payment or invoice Actual tax point Date of invoice VAT – output tax • Value of supply – Discounts – include even if not taken up – Gifts • Relief for impaired debts – Debt written off – 6 months – Claim relief as input tax Transfer of going concern • Outside scope of VAT • Conditions – Business transferred as going concern – No significant break in trading – Transferee VAT registered or will become so immediately after transfer – Same type of trade carried on after transferVAT – input VAT • Conditions for reclaim – Incurred by taxable person for use in business – VAT invoice • Non deductible input VAT – Entertaining – Cars – 50% car leasing charges • Motor expenses – 100% allowed if some business use – fuel costs allowed but VAT scale charge added to output tax if any private fuel Pre registration input VAT Conditions to reclaim input VAT: Goods Services Acquired in the 4 years before Supplied in the 6 months registration before registration Still held at date of registration Schemes for small businesses Cash accounting – Account for VAT on cash receipts/payments – Automatic relief for impaired debts – Join if turnover ? ?1,350,000 and VAT up to date • Annual accounting – One VAT return p. a. – submit 2 months after y/e – POA in Months 4 to12, balance with return – Join if turnover ? ?1,350,000 and VAT up to date Schemes for small businesses • Flat rate scheme – Join if taxable turnover for next 12 months ? ?150,000 – Pay VAT as % of VAT inclusive turnover (% based on industry) VAT administration • VAT invoices Issue within 30 days of date of supply – Evidence for reclaiming input VAT – Must contain particular details • VAT records – Retain for 6 years • Discovery assessments, Information and inspection powers and Appeals – Same rules as for IT and CT Penalties • Late notification of liability to register and submission of incorrect return – Standard penalty (not examinable for VAT) • Default surcharge – HMRC issue surcharge liability notice if VAT return or payment are late – Lasts 12 months – Further defaults extend period – Late VAT payments within12 months attract surchargeErrors Disclosure • Small net errors can be voluntarily disclosed on next VAT return • No penalty or penalty interest normally charged • Small is higher of ? 10,000 or 1% turnover with upper limit of ? 50,000 • If not small then disclose separately and pay interest Penalties • Penalty can be charged in line with new penalty regime for incorrect returns (see income tax and corporation tax) VAT errors • Default interest – On voluntary disclosure of errors > de minimis limit – On assessments issued by HMRC to collect undeclared / over claimed VAT Overseas aspects of VAT – EUDestination system Status of parties Rate of VAT Supplier and customer VAT registered Country of origin • Zero rated Destination country • Local rate used Supplier Customer No VAT Pays output VAT based on date of acquisition Claims VAT suffered as input tax Account for output tax Cannot recover VAT as not registered Origin system Supplier registered Customer not registered Country of origin • Rate applicable in country of origin Overseas VAT – non EU Transactions outside the EU Exports Zero rated (Services – outside scope of VAT) Imports Importer accounts for VAT as they bring goods into UK