ACF6PC14 (FA2013)_ACCA Passcards 04/11/2013 11:14 Page 1

ACCA
PAPER F6
TAXATION ( UK ) FA 2013
PASSCARDS
FOR E X A M S I N 2 0 1 4
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Fundamentals Paper F6
Taxation FA 2013
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First edition 2007, Eighth edition December 2013 The contents of this book are intended as a guide and not
ISBN 9781 4727 5306 9 professional advice. Although every effort has been made to
ensure that the contents of this book are correct at the time of
e ISBN 9781 4727 0253 1 going to press, BPP Learning Media makes no warranty that
British Library Cataloguing-in-Publication Data the information in this book is accurate or complete and accept
A catalogue record for this book is available from the no liability for any loss or damage suffered by any person
British Library acting or refraining from acting as a result of the material in
this book.
Published by Printed in the United Kingdom
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Preface Contents

Welcome to BPP Learning Media’s ACCA Passcards for Fundamentals Paper F6 Taxation (UK).
 They save you time. Important topics are summarised for you.
 They incorporate diagrams to kick start your memory.
 They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media’s
ACCA Passcards are not just a condensed book. Each card has been separately designed for clear
presentation. Topics are self contained and can be grasped visually.
 ACCA Passcards are still just the right size for pockets, briefcases and bags.
 ACCA Passcards focus on the exam you will be facing.
Run through the complete set of Passcards as often as you can during your final revision period. The day
before the exam, try to go through the Passcards again! You will then be well on your way to passing your
exams.
Good luck!

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Preface Contents

Page Page
1 Introduction to the UK tax system 1 11 Partnerships and limited liability
2 The computation of taxable income and partnerships 63
the income tax liability 9 12 National insurance contributions 67
3 Employment income 21 13 Computing chargeable gains 71
4 Taxable and exempt benefits. 14 Chattels and the principal private residence
The PAYE system 25 exemption 79
5 Pensions 33 15 Business reliefs 85
6 Property income 39 16 Shares and securities 91
7 Computing trading income 43 17 Self-assessment and payment of tax by
8 Capital allowances 49 individuals 95

9 Assessable trading income 55 18 Inheritance tax 103

10 Trading losses 59 19 Computing taxable total profits 113

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Page Page
20 Computing the corporation tax liability 121 24 Self-assessment and payment of tax by
21 Chargeable gains for companies 125 companies 141

22 Losses 133 25 An introduction to VAT 145

23 Groups 137 26 Further aspects of VAT 155

Page v Contents
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Notes
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1: Introduction to the UK tax system

This chapter contains background knowledge which

Topic List underpins the whole of your later studies of taxation.

The overall function and purpose of

taxation in a modern economy
Different types of taxes
Principal sources of revenue law and
practice
Tax avoidance and tax evasion
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The overall function and purpose Different types Principal sources of Tax avoidance
of taxation in a modern economy of taxes revenue law and practice and tax evasion

Economic factors
Taxation represents a withdrawal from the UK economy. Tax policies can be used to encourage and
discourage certain types of activity.

Encourages Discourages

 saving  smoking
 charitable donations  alcohol
 entrepreneurs  motoring
 investment in plant and machinery

Social factors Environmental factors

Tax policies can be used to redistribute wealth Taxes may be levied for environmental
 Direct taxes – tax only those who have these resources reasons
 Indirect taxes – discourage spending  Climate change levy
 Progressive taxes – target those who can afford to pay  Landfill tax
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The overall function and purpose Different types Principal sources of Tax avoidance
of taxation in a modern economy of taxes revenue law and practice and tax evasion

Income tax  Individuals

 Partnerships

Direct Corporation tax  Companies

taxes Capital gains tax  Individuals

 Partnerships
 Companies (in the form of corporation tax)

Inheritance tax  Individuals

National insurance  Employers

 Employees
 Self-employed
Indirect
Value added tax  Businesses (both incorporated and unincorporated)
taxes
Page 3 1: Introduction to the UK tax system
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The overall function and purpose Different types Principal sources of Tax avoidance
of taxation in a modern economy of taxes revenue law and practice and tax evasion

Structure of the UK Tax system

Treasury
 Officers of Revenue and Customs
HM Revenue and Customs  Receivables management officers
 Crown Prosecution Service
Appeals heard by
 First Tier Tribunal (most cases)
 Upper Tribunal (complex cases) Practice

Sources of revenue law and practice Statements of practice

Extra-statutory concessions
Law Explanatory leaflets
Business economic notes
Statute Revenue and Customs Brief
Statutory instrument Internal Guidance (HMRC manuals)
Working Together
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European Union Double taxation agreements

 States may agree to enact Directives to provide  Prevents income or gains being taxed in more
for common taxation than one country
 Value added tax (VAT) Directives oblige UK to  Income/gain taxed in one country only or credit
pass laws in accordance with EU legislation given for tax in one country against tax in other
country
 Tax provisions which discriminate against EU
freedoms may be ineffective due to treaty direct  Non-discrimination provisions to protect foreign
effect nationals
 Exchange of information  Exchange of information

Page 5 1: Introduction to the UK tax system

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The overall function and purpose Different types Principal sources of Tax avoidance
of taxation in a modern economy of taxes revenue law and practice and tax evasion

Tax evasion Tax avoidance

Tax evasion consists of seeking to mislead HMRC Tax avoidance includes any legal method of
by either: reducing your tax burden, eg
 Suppressing information, or  Using tax shelters, or
 Providing deliberately false information.  Participating in schemes designed to minimise
tax.

Illegal Legal
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General Anti-Abuse Rule (GAAR)

 HMRC can counteract tax advantages from abusive tax arrangements
 Tax arrangements involve obtaining a tax advantage as (one of) their main
purpose(s)
 Arrangements are abusive if they cannot be regarded as a reasonable course of
action and result in eg significantly less income, profits or gains being taxable
 Tax advantage includes relief or repayment of tax
 HMRC may counteract tax advantages arising by eg increasing the taxpayer’s
tax liability

Page 7 1: Introduction to the UK tax system

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The overall function and purpose Different types Principal sources of Tax avoidance
of taxation in a modern economy of taxes revenue law and practice and tax evasion

Concerns whether client is honest with HMRC

 Professional judgement of accountant

 Must act honestly and objectively

 Recommend disclosure to HMRC

 If no disclosure, cease to act   inform HMRC but not details of why

 Make money laundering report



avoid ‘tipping-off’ the client
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2: The computation of taxable income and

the income tax liability

Topic List The computation of income tax is a key exam topic. This
chapter deals with the income tax computation which
Scope of income tax draws together all of the taxpayer’s income. The following
Computing taxable income chapters will cover the rules for computing taxable
income from each different source.
Chargeable/Exempt income
Deductible interest
Computing income tax
Gift aid
Child benefit charge
Jointly held property
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Scope of Computing Chargeable/ Deductible Computing Gift aid

income tax taxable income Exempt income interest income tax

An individual who is UK resident is taxable on world-wide income.

Test 1st: Automatically not UK resident Test 2nd: Automatically UK resident

 In UK < 16 days in tax year  In UK > 183 days in tax year
 In UK < 46 days in tax year, not resident in  Only home in UK
any of 3 previous tax years
 Works full time in UK in tax year
 Works full time overseas in tax year, not in
UK > 90 days in tax year
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Test 3rd: UK ties

Number of ties required  Close family (spouse or civil partner / minor child)
to be UK resident resident in UK
depends on number of days  Home available in UK, used in tax year
spent in UK in tax year
(see Tax Tables)  Substantive work in UK
 In UK > 90 days in either of two previous tax years
 Spends more time in UK than anywhere else in tax
year (if previously resident only)

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Scope of Computing Chargeable/ Deductible Computing Gift aid

income tax taxable income Exempt income interest income tax

Aggregation of income Taxable income

A basic principle of income tax is the aggregation of Net income minus personal allowance or higher personal
income. All of an individual’s income for a tax year is allowance.
added up in a personal tax computation as total income.

Net income Tax liability

Total income minus deductible interest and trade losses. The amount of tax charged on income.

Adjusted net income Tax payable

Net income less grossed up gift aid/personal pension The balance of the tax liability still to be paid.
contributions.
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Personal allowance and

higher personal allowance Individual born 5 April 1948 or before

Individual born on or after 6 April 1948 £10,500 born 6.4.38 to 5.4.48 for 2013/14
£10,660 born before 6.4.38 for 2013/14
£9,440 for 2013/14

Restrict if adjusted
Restrict if adjusted net income > £26,100
net income > £100,000 by £1 for each £2 excess
by £1 for each £2 excess to minimum £9,440
(nil if > £118,880). (unless income > £100,000, then
restrict as for standard allowance)

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Scope of Computing Chargeable/ Deductible Computing Gift aid

income tax taxable income Exempt income interest income tax

Types of income Income taxed at source

The main types of income for individuals are: Many sorts of investment income are taxed at source:
for every £100 of income, the individual only receives
 Profits of trades, professions and vocations £80 of interest or £90 of dividends from UK companies.
 Income from employment and pensions The taxable income in both cases is £100, but credit is
given for the tax suffered.
 Property income
 Savings and investment income, including interest
and dividends This applies to bank and Tax credits on dividends
building society interest. can be offset to reduce
a tax bill but are never
Leave exempt income out of repaid to a taxpayer. Tax
Exempt income personal tax computations. credits on other taxed
income can be repaid.
 Premium bond prizes
 Income from Individual Savings Accounts (ISAs)
 Returns on National Savings Certificates
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Scope of Computing Chargeable/ Deductible Computing Gift aid

income tax taxable income Exempt income interest income tax

Deductible interest
Interest paid on a particular type of loan is
deducted from total income to compute net
income.

 For purchase of an interest in a partnership, or

 For purchase of plant and machinery for
partnership (purchase must be by partner), or
 For purchase of plant and machinery for use in
employment (purchase must be by employee)

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Scope of Computing Chargeable/ Deductible Computing Gift aid

income tax taxable income Exempt income interest income tax

Computing income tax

1 Total non-savings, savings and dividend income separately.
Broadly interest
2 Deduct deductible interest, losses and the personal allowance
from non-savings income first, then savings income then
dividend income. At 20%, 40% and 45%

3 Tax non-savings income, then savings income, then dividend

income. At 10%, 20%, 40% and 45%

At 10%, 32.5% and 37.5%

There is only one set of rate bands to cover all The basic rate limit and higher rate limit
types of income. must be increased by the gross amount of
any gift aid donation/personal pension
contribution (amount paid × 100/80).
If non-savings income does not exceed the starting rate limit, then the savings income is taxed at the starting
rate (10%) up to the starting rate limit: £2,790 for 2013/14.
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Scope of Computing Chargeable/ Deductible Computing Gift aid

income tax taxable income Exempt income interest income tax

Gift aid
 Gift aid donations are charitable gifts of money which qualify for tax relief
 Donor must make a gift aid declaration to the charity

Basic rate Higher and additional

Basic rate tax relief given by treating rate
donation as net of basic rate tax.
Higher and additional rate tax relief
given by increasing limits by grossed
up donation

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Child benefit Jointly held

charge property

Child benefit charge

 Child benefit is paid to individual who cares for at least one child
 Usually paid to mother and exempt from tax
 Charge reclaims child benefit received by taxpayer or partner

Adjusted net income Adjusted net income

> £50,000 < £60,000 >£60,000
Charge is 1% of the child benefit Charge is full amount of child benefit
amount for each £100 of adjusted net received
income in excess of £50,000
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Child benefit Jointly held

charge property

Jointly held property

Spouses and civil partners often hold property
jointly, sometimes in unequal proportions.

For tax purposes treat the income received from

such property as shared equally.

If the actual interests in the property are unequal,

spouses/civil partners can declare this to HMRC
and income is then shared in actual proportions.

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Notes
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3: Employment income

Although this exam is mainly computational you may be

Topic List asked to describe the difference between employment
and self-employment.
Employment and self-employment You also need to be aware of the final two topics in this
Basis of assessment chapter: when employment income is assessed and the
deductions that you may be able to make in computing
Allowable deductions the amount of assessable employment income.
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Employment and Basis Allowable

self-employment of assessment deductions

Employed or self-employed Factors

An employee works under a contract of service and  The degree of control exercised over the
a self-employed person under a contract for services. person doing the work
 Whether he must accept further work
 Whether the other party must provide further work
 Whether he provides his own equipment
 Whether entitled to benefits eg pension
Whether a contract is a contract of service or a  Whether he hires his own helpers
contract for services will depend on a number of  What degree of financial risk he takes
factors.  What degree of responsibility for investment
and management he has
 Whether he can profit from sound management
 Whether he can work when he chooses
 The wording used in any agreement between
parties
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Employment and Basis Allowable

self-employment of assessment deductions

Employment income
Employees/directors are taxed on income from
the employment:
 Cash earnings
 Benefits

Directors are deemed to receive earnings on the earliest

Earnings are taxed in the year in which they are of the following:
received.  The time given by the general rule
 The time the amount is credited in the company’s
accounting records
The general definition of the date of receipt is
the earlier of:  The end of the company’s period of account (if the
amount has been determined by then)
 The time payment is made  When the amount is determined (if after the end of
 The time entitlement to payment arises the company’s period of account)

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Employment and Basis Allowable

self-employment of assessment deductions

The general rule is that expenses can only be deducted from

earnings if they are incurred wholly, exclusively and necessarily  The strictness of this test has been
emphasised in many cases
in performing the duties of the employment.
Expenses specifically deductible against earnings:  Normal commuting does not qualify
 Relief is available for expenses incurred by an
1 Insurance premiums to cover directors’ and employees’ employee working at a temporary location on
liabilities (and payments to meet those liabilities) a secondment of 24 months or less
2
Subscriptions to relevant professional bodies  If a mileage allowance is paid relief is
available for any shortfall of allowance actually
3 Qualifying travel expenses – costs the employee incurs paid below statutory mileage allowance
travelling in the performance of his duties or/and travelling
to or from a place attended in the performance of duties
4
Exam focus
Contributions (within limits) to a registered occupational If you have to decide whether an expense
pension scheme is deductible, put yourself in HMRC’s
5 Payments to charity under a payroll deduction position and try to find an argument
scheme against deducting it. If you can find a
specific argument, the expense is probably
not deductible.
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4: Taxable and exempt benefits.

The PAYE system

Benefits are often examined so it is vital that you are

Topic List able to calculate the taxable value of benefits provided to
employees.You also need to be aware of the benefits
that are exempt from tax.
Taxable benefits
The deduction of tax from employment income through
Exempt benefits the PAYE system is less frequently examined, but it is still
The PAYE system important.
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Taxable Exempt The PAYE

benefits benefits system

Non-cash benefits
Except excluded employees (eg earn less
Taxed on most employees than £8,500 p.a. and not director) only
taxable on certain benefits.
‘P11D employees’ are employees who are
not excluded employees.

General business expenses Vouchers

Reimbursed expenses taxable on  Cash vouchers
employees (not excluded employees).  Credit token
May make deduction claim.  Non-cash vouchers
Taxable on all employees (cost of providing benefit)

Including excluded employees.

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Accommodation Living expenses

Annual value of accommodation is a Living expenses connected with
taxable benefit on all employees, unless accommodation (eg gas bills) are taxable on
job related. P11D employees only. However, if the
Additional charge if costs more than accommodation is job-related, the maximum
£75,000. amount taxable is 10% of net earnings.

Including
excluded Original cost plus the cost of
employees improvements incurred prior
to start of tax year.
Vans
Excess multiplied by official rate of £3,000 charge if available for private use
interest at the start of the tax year. (not home/work commuting).
£564 charge for private fuel.

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Taxable Exempt The PAYE

benefits benefits system

Loans Cars
1 Loans of over £5,000 give Annual taxable benefit for the private use of a car is (price of car –
rise to taxable benefits equal capital contributions) × %.
to the difference between the  Cars emitting 75g/km or less = 5%
actual interest and interest at  Cars emitting CO2 between 76-94g/km = 10%.
the official rate.
 Cars emitting 95g/km = 11%. Percentage increases
2 A write-off of a loan gives rise by 1% for each 5g/km (rounded down) up to 35%.
to a taxable benefit equal to  Percentage increased by 3% for diesel engined cars (not above
the amount written off. max 35%).
 Benefit scaled down on a time basis, if car not available all
year. Benefit then reduced by any contribution by employee for
private use.
Only taxed on  Fuel for private use is charged as percentage of base figure
P11D employees (£21,100, 2013/14). Same percentage as car benefit. No
reduction for partial reimbursement by the employee.
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Private use of asset

If the asset is subsequently given
to the employee the taxable
In general, if an asset is made available for private use, the
benefit is the higher of:
annual taxable benefit is 20% of the market value when the
asset was first provided, less any employee contribution. (i) Original MV less amounts
already taxed
(ii) Market value at date of gift
less any employee contribution.
Other benefits
 Not used if asset is bicycle
 Taxable value of other benefits charged on
employees other than excluded employees
Cost of provision of benefit less any
 Excluded employees taxed only on secondhand amount made good by employee
value as cash earnings

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Taxable Exempt The PAYE

benefits benefits system

Exempt benefits
Loans of up to £5,000
The cost of gifts from any one source
Entertainment and gifts provided by a third party for an employee must not exceed £250 per tax year
by reason of his employment
Long service awards of up to £50 per year of service The award must be a non-cash award and
Job related accommodation the employee must have worked at least
20 years
Workplace nurseries
Other childcare provided by employer Limited to £55/£28/£25 per week for
basic/higher/additional rate employee
Recreational/sporting facilities available to employees generally
Works buses and mini-buses A minibus must have a seating capacity of
9 or more. A works bus must have a
Bicycles provided for cycling to work seating capacity of 12 or more
Parking places at or near work
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Removal expenses of up to £8,000

Personal incidental expenses £5 per night for UK/£10 per night for
overseas. If exceeded, whole taxable, not
Medical premiums to cover treatment outside the UK just excess
Mobile phones – restricted to one phone per employee
Mileage allowances of amounts up to the statutory mileage rates For use of the employee’s own car for
business purposes
Staff parties
Provided the cost per staff member per
Additional household costs for homeworkers year is £150 or less

Up to £4 per week may be paid without

supporting evidence

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Taxable Exempt The PAYE

benefits benefits system

The PAYE system collects tax from employees each payday, with the intention that over a tax year, the correct total of tax due
will be collected.

How PAYE works PAYE code numbers

 Employer makes FPS to HMRC electronically on or L: Code with personal allowance
before date of payment (‘Real Time Information’)
P: Code with 1st level higher personal allowance
 Includes details of amounts paid to employees, income Y: Code with 2nd level higher personal allowance
tax and national insurance deducted, starting and
leaving employees
 Calculations made using PAYE codes, usually on PAYE settlement agreements
cumulative basis
PAYE settlement agreements are arrangements under which
Payment employers settle employees’ income tax liabilities on certain
benefits and expense payments.
The employer must pay over the tax and NIC deducted
up to the 5th of each month by the 22nd of that month if Forms
electronic payment (19th if by cheque).
Form P60 - to employee by 31 May
Forms P11D/P9D - to HMRC and employee by 6 July
Quarterly payment is allowed if the average Form P45 - to employee when leaves employment
monthly total of tax and NICs is less than £1,500
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5: Pensions

A single regime applies to all pensions, whether

Topic List occupational or personal.
Pension contributions are a tax efficient way of saving for
Types of pension scheme retirement.
Contributions to pension schemes
Receiving benefits from pension
arrangements
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Types of Contributions to Receiving benefits from

pension scheme pension schemes pension arrangements

Pension Schemes

Occupational Pension Scheme Personal Pension Scheme

Employees only All individuals

Defined Benefits Money Purchase

Pension based on No guarantee of amount

earnings and of pension. Investments
length of service are used to 'build up' fund
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Types of Contributions to Receiving benefits from

pension scheme pension schemes pension arrangements

Annual limit Lifetime allowance

Maximum contribution attracting tax £1,500,000 is maximum value for pension fund.
relief is higher of:
 Relevant earnings Employment income, trading income and
 £3,600 pa furnished holiday lettings income

Annual allowance Employer contributions

 £50,000 for 2013/14  Count towards allowances (annual & lifetime)
 C/f unused allowance max 3 years  Trade deduction for employer
 Tax charge on excess – treat as  Tax free benefit for employee
additional non-savings income  No NIC for employer or employee

Page 35 5: Pensions
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Types of Contributions to Receiving benefits from

pension scheme pension schemes pension arrangements

Occupational Personal
pension pension

Deduct gross employee contributions  Paid net so automatic 20% tax relief
directly from earnings to find  Higher rate (and additional rate)   Deduct from net
net earnings taxpayers increase basic rate (and income to find
higher rate) limits by gross adjusted net income
contributions for PA restriction

 This is the same method of giving

tax relief as for gift aid donations
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Types of Contributions to Receiving benefits from

pension scheme pension schemes pension arrangements

Pension fund If fund exceeds lifetime allowance

at retirement £1.5m then tax charge on excess

Tax-free lump sum Taxable annual 25% if excess 55% if excess

pension (usually) taken as pension taken as lump sum

Maximum 1/4 of fund

Page 37 5: Pensions
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Notes
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6: Property income

Property income is calculated as if the letting were a

Topic List business run by the taxpayer.
There are special rules for furnished holiday lettings, and
Computation for rooms let in the taxpayer’s own home.
Furnished holiday lettings and Property income is unlikely to be examined in every
rent-a-room relief exam, but when it is examined it could easily form the
whole of a 15 mark question.
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Computation Furnished holiday lettings

and rent-a-room relief

Property income
Property income covers rent from UK property.
Exception
Computation For furnished residential lettings, a 10% wear
and tear allowance can be claimed.
Capital allowances are not available.
1 Calculate property income profits on an accru-
als basis in the same way as you calculate
trading profits. Exception
Accounts are drawn up as for a sole trader but Keep a separate pool of profits/losses from
2 letting furnished holiday lettings
with a year end of 5 April.
Rents and expenses of all properties are
3 pooled to give a single property income figure. Losses
If a lease for n years (50 or less) is granted for
4 a premium, the proportion of the premium Losses are carried forward against future
treated as rent is (premium – (premium × income from the UK property business.
0.02(n–1))).
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Computation Furnished holiday lettings

and rent-a-room relief

Furnished holiday lettings

Furnished Holiday Lettings must be Continuous periods of more
 On a commercial basis than 31 days during which
the accommodation is in the
 Available for letting for 210 days in the tax year same occupation
 Actually let for 105 days in the tax year
 Not in longer term occupation for more than 155 days during the tax year

Furnished holiday lettings are treated as a trade for Rollover relief, entrepreneurs’ relief and gift
many income tax and CGT purposes relief are available
Loss relief – but only c/f against FHL profit
Rent-a-room scheme Capital allowances are available on furniture
The rent-a-room scheme exempts rent of up to £4,250 Income is earnings for pension purposes
a year on rooms in the landlord’s main residence.

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Notes
(007)ACF6PC13_CH07.qxp 11/27/2013 7:14 AM Page 43

7: Computing trading income

The ‘badges of trade’ can be used to determine whether

Topic List or not an individual is carrying on a trade. If a trade is
being carried on, the profits of the trade are taxable as
trading income. Otherwise the profit may be taxable as a
Badges of trade capital gain.
The adjustment of profits In this chapter we will look at the badges of trade and at
the adjustments needed in the computation of trading
Cash basis of accounting
income.
This is a key exam topic.
(007)ACF6PC13_CH07.qxp 11/27/2013 7:14 AM Page 44

Badges The adjustment Cash basis of

of trade of profits accounting

Badges of trade

 The subject matter If on applying the badges of trade HMRC

 The frequency of transactions conclude that a trade is being carried on,
 Similar trading transactions/interests the profits are taxable as trading income.
 The length of ownership
 Organisation as a trade
 Supplementary work and marketing
 A profit motive
 The way in which the asset sold was acquired
 Method of finance
 The taxpayer’s intentions To arrive at taxable trading profits, the net
accounts profit must be adjusted. We look
at this in the rest of this chapter.
(007)ACF6PC13_CH07.qxp 11/27/2013 7:14 AM Page 45

Badges The adjustment Cash basis of

of trade of profits accounting

Certain items of expenditure are not deductible for trading income purposes and so must be added back to the
net accounts profit when computing trading profits. Conversely other items are deductible.

Deductible expenditure

 Expenditure incurred wholly and exclusively for

trade purposes
 Gifts to customers not costing more than £50 per The gift must carry a conspicuous advertisement for
the business and not be food, drink, tobacco or
donee per year
vouchers exchangeable for goods
 Interest on borrowings for trade purposes
 Pre-trading expenditure If incurred in the seven years prior to the start of trade

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Badges The adjustment Cash basis of

of trade of profits accounting

Non-deductible expenditure Employee parking fines incurred whilst on

employer’s business are, however, allowed

 Fines and penalties The cost of initial repairs to make an asset fit to
 Depreciation use is disallowable capital expenditure (Law
Shipping) but the cost of initial repairs to remedy
 Appropriations (eg salary and interest paid to normal wear and tear is allowable (Odeon
proprietor) Associated Theatres Ltd v Jones)
 Capital expenditure Staff entertaining is deductible
 Entertaining
Fees relating to the renewal of a short lease are
 Legal fees relating to capital items deductible
 General provisions
Disallow any general provision for impairment
 Any expense not incurred wholly and exclusively for losses. A specific provision is however allowed.
trade purposes
These are dealt with in the personal tax
 Gift aid donations computation
 Political donations
 Part of leasing cost of cars with CO2 emissions over Disallow 15% of leasing cost
130 g/km
(007)ACF6PC13_CH07.qxp 11/27/2013 7:14 AM Page 47

Badges The adjustment Cash basis of

of trade of profits accounting

Cash basis of accounting

 Normal basis of accounting is accruals basis
Includes
 Cash basis of accounting can be used instead Cash received capital
by small unincorporated businesses less expenditure
 To start cash basis of accounting, receipts Expenses paid on P&M
must not exceed VAT registration threshold (except cars)
 Election required

Profit Loss
Taxable c/f against cash
surplus

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Badges The adjustment Cash basis of

of trade of profits accounting

Only examinable in context of

Fixed rate expenses cash basis

 Motor cars (business mileage)

 Business premises used as trader’s home (eg
guesthouse)

Rates given in question where

relevant
(008)ACF6PC13_CH08.qxp 11/27/2013 7:14 AM Page 49

8: Capital allowances

Topic List Capital allowances are given instead of depreciation, on

plant and machinery. They are trading expenses
deducted in arriving at taxable trading profits.
What is plant? Capital allowances are a frequently examined topic.
Allowances on plant and machinery
Special assets
(008)ACF6PC13_CH08.qxp 11/27/2013 7:14 AM Page 50

What Allowances on Special

is plant? plant and machinery assets

There are two sources of the rules on what qualifies as plant and is therefore eligible for capital allowances.

Statute Case law

Statutory exclusions The courts tend to allow items as plant if they
The following items are excluded as plant by statute. perform a function (eg moveable office
 Buildings and parts of buildings partitions) in the particular trade, rather than
– however, utility systems provided to meet the form part of the setting within which the trade
particular requirements of the trade, lifts, alarm is carried on.
systems and several other items can be plant
 Structures, with some exceptions: dry docks and
pipelines Machinery
 Land
Machinery also qualifies for allowances where
Statutory inclusions machinery is given its ordinary every day
Computer software qualifies as plant by statute. meaning.
(008)ACF6PC13_CH08.qxp 11/27/2013 7:14 AM Page 51

What Allowances on Special

is plant? plant and machinery assets

Main pool includes cars with

Writing down allowances (WDAs) CO2 emissions 130g/km or less
 18% per annum on a reducing balance basis in main pool  without private use
 WDA given on pool balance after adding current period
additions and deducting current period disposals 
 18% × months/12 in a period that is not 12 months long
 Reduced WDAs can be claimed
 Expenditure on long life assets, integral features, thermal
insulation, solar panels and cars with CO2 emissions over
130g/km goes in a special rate pool. WDA is 8% per annum Deduct lower of
on a reducing balance basis
(i) disposal proceeds
 Small balance (up to £1,000) on main pool and/or special
rate pool can be given WDA equal to balance (ii) original cost

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What Allowances on Special

is plant? plant and machinery assets

First year allowances (FYAs) Annual Investment Allowance (AIA)

 FYA of 100% available for expenditure  All businesses are entitled to AIA of £250,000 per 12
on new cars with CO2 emissions month period
95g/km or less
 £250,000 maximum allowance is proportionately
 Not pro-rated in short/long period of
account increased/reduced if period of account is not 12
months
Interaction with VAT  Allocate AIA to assets eligible for lowest rate of WDA
(special rate pool items before main pool items)
 Expenditure exclusive of input VAT if  Transfer balance after AIA to pool for same period
recoverable
WDAs
 Expenditure inclusive of input VAT if not
recoverable eg car not wholly used for
business Expenditure on plant and machinery
(although not cars) is entitled to the AIA.
 Disposal proceeds exclusive of output
VAT
(008)ACF6PC13_CH08.qxp 11/27/2013 7:14 AM Page 53

Balancing adjustments arise

On cessation to deal with When a non-pooled asset is When a column balance

balances remaining after sold. becomes negative.
deduction of disposal proceeds.

Short life assets/private This will be a balancing

use assets charge

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What Allowances on Special

is plant? plant and machinery assets

Short life assets (SLA) Private use assets

 An election can be made to depool assets.  Do not pool private use assets
 Depooled assets must be disposed of within  Show full value of asset/allowances in column
8 years of end of the period of acquisition.  Can only claim the business proportion of
 From a planning point of view depooling is useful allowances
if balancing allowances are expected.
 Conversely, in general, assets should not be  Assets used privately by a
depooled if they are likely to be sold within eight proprietor (not an employee)
years for more than their tax written down values. so not relevant to companies

-Within two years of the end

of the accounting period of
acquisition (companies)
-31 Jan, 22 months from end Otherwise the balance of Not cars
of tax year (unincorporated expenditure must be
businesses) transferred back to pool
(009)ACF6PC13_CH09.qxp 11/27/2013 7:15 AM Page 55

9: Assessable trading income

We have seen how to calculate the taxable trading profits

Topic List for a business. We now see how these profits are
allocated to tax years.
Again, this is a frequently examined topic.
Current year basis
Commencement
Cessation
(009)ACF6PC13_CH09.qxp 11/27/2013 7:15 AM Page 56

Current year Commencement Cessation

basis

Current year basis

The basis period for a tax year is normally the
period of account ending in the year.   There are special rules which apply in the opening
and closing years of a business.
Opening years
Tax year Basis period
1 Date of commencement to following 5 April.
2 (a) If no accounting date ends in year: 6 April - 5 April
(b) If period of account ending in year is less than
Overlap profits
12 months: first 12 months
Any profits taxed twice are
(c) Otherwise: 12 months to accounting date ending overlap profits. They may be
in Year 2 deducted on cessation.
3 12 months to accounting date ending in year
(009)ACF6PC13_CH09.qxp 11/27/2013 7:15 AM Page 57

Current year Commencement Cessation

basis

Final year
The basis period for the final year starts at the end of the basis period for the previous year and ends at cessation.
Any overlap profits are deducted from the final year’s profits.

Example
Brenda has been carrying on a sole trade for many years preparing accounts to 30 April each year. She closes down
her business on 30 September 2013. The results of her final two periods of trading are:
£
y/e 30 April 2013 24,000
p/e 30 September 2013 5,000
Brenda had overlap profits on commencement of £10,000.
The final year is 2013/14 and the basis period for this year runs from 1 May 2012 to 30 September 2013. She can
deduct the overlap profits. Her taxable trading income for 2013/14 is therefore £(24,000 + 5,000 – 10,000) = £19,000.

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Notes
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10: Trading losses

This is another key exam topic.

Topic List
There is no general rule that sole traders can get relief
for their losses. The conditions of a specific relief must be
Carry forward of trading losses complied with. We look at these reliefs in this chapter.
Set against general income
Opening and closing years
(010)ACF6PC13_CH10.qxp 11/27/2013 7:15 AM Page 60

Carry forward of Set against Opening and closing

trading losses general income years

Carry forward trade loss relief

Losses must be set against the first available
A loss not otherwise relieved may be set against the first profits: they cannot be saved up until it suits
available profits of the same trade. the trader to use them.

A loss is calculated in exactly the same way as a profit.

If there is a loss in a basis period the taxable trade
profits for the tax year are nil - instead the loss is Losses may be carried forward for any
available in that tax year to be used as the trader number of years.
chooses.
(010)ACF6PC13_CH10.qxp 11/27/2013 7:15 AM Page 61

Carry forward of Set against Opening and closing

trading losses general income years

Example
Sue starts trading on 1.10.13. Her losses are:
Losses in two overlapping basis periods are y/e 30.9.14 £(50,000)
given to the earlier tax year only. y/e 30.9.15 £(20,000)
Losses for the tax years are:
2013/14 £(25,000)
Relief against general income 2014/15
2015/16
£(50,000 – 25,000) = £(25,000)
£(20,000)
Relief is against the income of the tax year of the loss
Partial claims are not allowed: the whole loss must be set
and/or the preceding tax year. off, if there is income (or, if chosen, gains) to absorb it in
the chosen tax year.
Relief against non-trading income restricted to greater of
25% of adjusted total income and £50,000.
Can extend the claim to net gains of the same year,
less brought forward capital losses. Exam focus
Before recommending relief against general income, consider
whether it would lead to the waste of the personal allowance.
This is often a significant tax planning point.

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Carry forward of Set against Opening and closing

trading losses general income years

Opening years Closing years

A loss incurred in the first four years of trade can A loss incurred in the last 12 months of trade can
be set against general income of the three be set against trading profits in the year of cessation
preceding years under early years trade losses and in the three preceding years under terminal loss
relief relief.

Relief is given in the Relief is given in

earliest year first the latest year first
(FIFO)
Computation of loss (LIFO)

Take the loss of the last tax year plus the proportion of the
loss in the preceding tax year corresponding to the period
from 12 months before cessation to 5 April.
Add overlap profits to the loss in the last year.
(011)ACF6PC13_CH11.qxp 11/27/2013 7:15 AM Page 63

11: Partnerships and limited liability

partnerships

Partnerships are another key exam topic. The technique

Topic List is to allocate the profits between the partners and then
look at each partner independently.
Sharing profits between partners
Losses/Limited liability partnerships
(011)ACF6PC13_CH11.qxp 11/27/2013 7:15 AM Page 64

Sharing profits Losses/Limited

between partners liability partnerships

Compute trading results for a partnership as a whole in the

same way as you would compute the profits for a sole trader

then
Remember to pro-rate the annual
Divide results for each period of account between partners salary/interest if the period is not 12 months
long.

First allocate salaries and interest on capital to the partners,

then share the balance of profits among the partners according When a partner joins, the first period of account
to the profit-sharing ratio for the period of account for his own business runs from the date of joining
to the firm’s next accounting date. The normal
basis period rules for opening years apply to him.
Each partner is taxed as if he were running his own When a partner leaves, the last period of account
business, and making profits and losses equal to his share of for his own business runs from the firm’s most
the firm’s results for each period of account recent accounting date to the day he leaves. The
normal cessation rules apply to him.
(011)ACF6PC13_CH11.qxp 11/27/2013 7:15 AM Page 65

Sharing profits Losses/Limited

between partners liability partnerships

Loss reliefs Limited liability partnership (LLP)

Partners are entitled to the same loss reliefs as In a LLP the liability of the partners is limited to the
sole traders: capital they contributed.
The amount of loss that a partner of a LLP can set
off against general income comprising non-
1 Divide the loss for each period of account partnership income is restricted to the capital that
between the partners the partner contributed up to a maximum of
£25,000.

Next calculate the loss for each tax year

2

3 Consider all available loss reliefs for each

individual partner

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Notes
(012)ACF6PC13_CH12.qxp 11/27/2013 7:16 AM Page 67

12: National insurance contributions

Although often overlooked, national insurance

Topic List contributions represent a significant cost to taxpayers.
National insurance contributions will not be examined as
NICs for employees a separate question, but may be examined in any
NICs for the self-employed question involving income tax or corporation tax.
(012)ACF6PC13_CH12.qxp 11/27/2013 7:16 AM Page 68

NICs for NICs for the

employees self-employed

CLASS 1 CLASS 1A

Primary Secondary Employers pay Class 1A

Employees pay contributions of Employers pay contributions of contributions at 13.8% on most
12% of earnings between the 13.8% on all earnings above the taxable benefits provided for their
primary earnings threshold and secondary earnings threshold. employees. Class 1A is payable
on 22 July if electronic payment
the upper earnings limit; 2% on
(19 July if by cheque) following
earnings above the upper limit.
the end of the tax year.

Exam focus
The earnings thresholds and the upper
earnings limit will be given to you in the
Not reduced by expenses exam.
or pension contributions
(012)ACF6PC13_CH12.qxp 11/27/2013 7:16 AM Page 69

NICs for NICs for the

employees self-employed

The self-employed pay Class 2 and Class 4 NICs.

Class 2
Class 2 are paid at a flat weekly rate. Paid by direct Exam focus
debit or on demand.
In questions which ask whether someone
should trade as a sole trader or through a
company (as a director) the cost of NICs
often tips the balance in favour of being a
Class 4 sole trader.

Class 4 NICs are 9% of any profits falling between

Profits are the taxable profits, as reduced by trading
a lower and an upper limit and 2% above upper losses. Personal pension contributions do not
limit. Class 4 NICs are collected at the same time reduce profits.
as the associated income tax liability.
These limits will be given to you on the exam paper.

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Notes
(013)ACF6PC13_CH13.qxp 11/27/2013 7:16 AM Page 71

13: Computing chargeable gains

Topic List

Chargeable persons, disposals It is important that you can calculate chargeable gains
and assets realised by individuals and calculate their capital gains
tax liability having dealt with losses and the offset of the
Basic computation
annual exempt amount.
Losses
The charge to CGT for individuals
Spouses and civil partners
Part disposals
Damage, loss or destruction
(013)ACF6PC13_CH13.qxp 11/27/2013 7:16 AM Page 72

Chargeable persons, Basic Losses The charge to CGT Spouses and Part Damage, loss
disposals and assets computation for individuals civil partners disposals or destruction

Chargeable persons, disposals and assets

Three elements are needed for a chargeable gain to arise.

1 Athechargeable disposal: this includes sales, gifts and

destruction of assets. Transfer of assets on death is
not chargeable.

A chargeable person: individuals are chargeable

2 persons.  CGT applies primarily to persons
resident in the UK
3 A chargeable asset: most assets are chargeable, but
Cars
some assets are exempt. Some chattels (eg racehorses)
Gilts
QCBs
(013)ACF6PC13_CH13.qxp 11/27/2013 7:16 AM Page 73

Chargeable persons, Basic Losses The charge to CGT Spouses and Part Damage, loss
disposals and assets computation for individuals civil partners disposals or destruction

Actual proceeds or market value in

Computation the case of gifts and disposals which
are not bargains at arms length.
Compute a gain as follows:
£ Include:
Proceeds X (1) Original cost of the asset or market
Less: Cost (X)
__ value if that was used as proceeds for the
Gain X
__ person who sold the asset to this
individual.
(2) Enhancement expenditure which was
reflected in the state and nature of the
asset at the time of disposal or was on
preserving the owner’s legal right to the
asset.
(3) Incidental costs of acquisition and
disposal.

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Chargeable persons, Basic Losses The charge to Spouses and Part Damage, loss
disposals and assets computation CGT for individuals civil partners disposals or destruction

Deduct allowable capital losses from gains in the tax year in which they arise (before deducting the annual
exempt amount).

Any loss which cannot be set off Allowable losses brought forward are only set off to
is carried forward to set against reduce current year gains less current year
future gains. allowable losses to the annual exempt amount.

Order of set off Example

Set off losses against gains not Zoë made gains of £13,900 in 2013/14. She had
qualifying for entrepreneurs’ relief brought forward capital losses of £8,000.
first.
Brought forward capital losses of £3,000 will be set
off in 2013/14. The remaining losses will be carried
forward to 2014/15.
(013)ACF6PC13_CH13.qxp 11/27/2013 7:16 AM Page 75

Chargeable persons, Basic Losses The charge to Spouses and Part Damage, loss
disposals and assets computation CGT for individuals civil partners disposals or destruction

Deduct the annual CGT exempt amount of £10,900 (2013/14) to compute an individual’s taxable gains.



from gains not qualifying for
entrepreneurs’ relief first
Rates
10% - entrepreneurs’ relief gains 18% - within basic rate band 28% - above basic rate limit
 

 
taxable income and remember to increase
gains qualifying for limit by gross gift aid
entrepreneurs’ relief donations/ personal
deducted first pension contributions

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Chargeable persons, Basic Losses The charge to Spouses and Part Damage, loss
disposals and assets computation CGT for individuals civil partners disposals or destruction

No gain/no loss disposals

Disposals between spouses and civil partners do not give rise to gains or losses.

When the second spouse/civil partner sells the asset, assume that he/she bought the asset for its original cost.
(013)ACF6PC13_CH13.qxp 11/27/2013 7:16 AM Page 77

Chargeable persons, Basic Losses The charge to Spouses and Part Damage, loss
disposals and assets computation CGT for individuals civil partners disposals or destruction

Part disposals
On a part disposal, you are only allowed to take Example
part of the cost of the asset into account.
X owns land which originally cost £30,000. It sold a
 Costs attributable solely to the part disposed of quarter interest in the land for £18,000. The
are taken into account in full incidental costs of disposal were £1,000. The
 For other costs, take into account A/(A+B) of market value of the three-quarter share remaining
the cost is estimated to be £36,000. What is the chargeable
– A is the proceeds of the part sold gain?
– B is the market value of the part retained £
Proceeds 18,000
Less: Incidental costs of disposal (1,000)
_____
17,000
18,000
Less: × 30,000 (10,000)
______
18,000 + 36,000
7,000
_____
_____

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Chargeable persons, Basic Losses The charge to Spouses and Part Damage, loss
disposals and assets computation CGT for individuals civil partners disposals or destruction

Damage Loss or destruction

If an asset is damaged and If an asset is destroyed any compensation will normally be
compensation is received, then this will brought into an ordinary CGT disposal computation as
normally be treated as a part disposal. proceeds.

If all the proceeds are used to restore If all the proceeds are applied for the replacement of the asset
the asset the taxpayer can elect to within 12 months, any gain can be deducted from the cost of
disregard the part disposal and deduct the replacement asset.
the proceeds from the cost of the asset.

If only part of the proceeds are applied, the gain is restricted

to the proceeds not applied, and the remainder of the gain is
deducted from the cost of the replacement asset.
(014)ACF6PC13_CH14.qxp 11/27/2013 7:16 AM Page 79

14: Chattels and the principal private residence

exemption

In this chapter we look at the rules which apply for

Topic List calculating the gains on certain special types of asset.

Chattels
Wasting assets
Private residences
(014)ACF6PC13_CH14.qxp 11/27/2013 7:16 AM Page 80

Chattels Wasting Private

assets residences

Chattels
A chattel is an item of tangible moveable property
(eg a painting).
Wasting chattels
Gains on chattels sold for gross proceeds of £6,000 or Wasting chattels are exempt from CGT
less are exempt. unless capital allowances could have been
claimed on them.

The maximum gain on chattels sold for more than  Chattels with a remaining estimated useful life
£6,000 is 5/3 (gross proceeds – £6,000). of 50 years or less.

Losses on chattels sold for under £6,000 are restricted

by assuming the gross proceeds to be £6,000.
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Chattels Wasting Private

assets residences

Wasting asset
A wasting asset is one with an estimated remaining useful life of
50 years or less and whose original value will fall over time.

Wasting assets have their cost written down

over time on a straight line basis. Exception

Assets eligible for capital allowances

Example and used in a trade do not have their
Jo bought a copyright with a remaining life of 40 years cost written down.
for £10,000. He sold the copyright 15 years later for
£30,000. Calculate the gain arising.
£
Proceeds 30,000 Number of years remaining
Less: Cost (£10,000 × 25/40) (6,250)
______
Gain 23,750
______
______ Number of years on acquisition

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Chattels Wasting Private

assets residences

Principal private residence relief Periods of deemed occupation

A gain on the disposal of a PPR is wholly  Absences of up to three These periods

exempt where the owner has occupied the whole years for any reason must normally
residence throughout his period of ownership.  Absences while employed be preceded
abroad and followed
 Absences of up to four by a period of
years while working actual
Where occupation has been for only part of a elsewhere occupation
period, the proportion of the gain exempted is
 The last 36 months of ownership of a
Period of occupation residence is always treated as a period of
Gain × deemed occupation.
Total period of ownership
Provided that there is no other main residence at the time

Exam focus
Draw up a table of periods present or absent, exempt months and chargeable months. Check
that the total of exempt and chargeable months is correct, to avoid making mistakes.
(014)ACF6PC13_CH14.qxp 11/27/2013 7:16 AM Page 83

Business use
When part of residence is used exclusively for business purposes, that part of gain is
taxable. Last 36 month exemption does not apply.

Letting exemption Permitted area

A gain arising whilst a PPR is let is exempt up to The private residence exemption covers a
the lower of: house plus up to half a hectare of grounds.
A larger area may be allowed for
1 £40,000 substantial houses.
2 The amount of the PPR exemption
3 The gain in the let period

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Notes
(015)ACF6PC13_CH15.qxp 11/27/2013 7:16 AM Page 85

15: Business reliefs

In an exam question you should look out for the

Topic List availability of various reliefs. However, do take care to
ensure that you do not claim relief when you are not
Entrepreneurs’ relief allowed to.

Rollover relief
Gift relief
(015)ACF6PC13_CH15.qxp 11/27/2013 7:16 AM Page 86

Entrepreneurs’ Rollover Gift

relief relief relief

Entrepreneurs’ relief Claim by 12 months from 31 January following tax year of disposal

Available for material disposal of Business assets

business assets

 Sole trader business/partnership

 Shares in ‘personal’ trading company owned by
Business owned for one year prior to employee/officer
disposal or business has ceased within
past three years and business owned at ‘Personal’ trading company
least one year prior to cessation requires
Must be the disposal of
shareholding/voting rights
the whole or part of the
of at least 5%
business, not just
individual assets if
Tax net gains at 10% business continues
Lifetime limit of £10m gains
(015)ACF6PC13_CH15.qxp 11/27/2013 7:16 AM Page 87

Entrepreneurs’ Rollover Gift

relief relief relief

Taxpayers can claim to defer gains arising Eligible assets

on the disposal of business assets that are
being replaced if both the old and the new
assets are on the list of eligible assets.  Land and buildings (including parts of buildings) occupied
as well as used only for the purposes of the trade.
The new asset must be bought in the  Fixed (that is, immovable) plant and machinery.
period starting 12 months before and  Goodwill
ending 36 months after the disposal.
A depreciating asset is one with an
Exam focus expected life of 60 years or less
(eg fixed plant and machinery).
If a question mentions the sale of some
business assets and the purchase of Is the new asset a depreciating asset?
others, look out for rollover relief but do not Is the new asset a non-depreciating asset?
just assume that it is available: the assets
might be of the wrong type, eg moveable
plant and machinery.

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Entrepreneurs’ Rollover Gift

relief relief relief

For a non-depreciating asset the gain is deducted If a part of the proceeds of the old asset are not
from the base cost of the new asset. reinvested, the gain is chargeable up to the amount
For a depreciating asset the gain is deferred until it not reinvested.
crystallises at a later date.

The gain crystallises on the earliest of: Relief is proportionately restricted when an asset
has not been used for trade purposes throughout
1 the disposal of the replacement asset its life.
ten years after the acquisition of the
2 replacement asset If a non-depreciating qualifying asset is bought
before the gain crystallises, the deferred gain may
3 the date the replacement asset ceases to be be rolled into the base cost of that asset.
used in the trade
(015)ACF6PC13_CH15.qxp 11/27/2013 7:16 AM Page 89

Entrepreneurs’ Rollover Gift

relief relief relief

Gift relief Qualifying assets

Gift relief may be claimed to defer gains arising on
business assets.  Assets used in a trade
 Shares and securities in trading
company which is either unlisted
or the donor’s personal company
The gain is deducted from the recipient’s base cost.

 If balance sheet of company

Any actual proceeds in excess of cost reduce the contains non business assets gain
gain for which relief can be claimed. eligible restricted to CBA/CA × gain

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Notes
(016)ACF6PC13_CH16.qxp 11/27/2013 7:16 AM Page 91

16: Shares and securities

The matching rules for shares and securities are vitally

Topic List important. If you do not know the matching rules you will
not be able to compute a gain on the disposal of shares.
Matching
The computation
Alterations of share capital
(016)ACF6PC13_CH16.qxp 11/27/2013 7:16 AM Page 92

Matching The Alterations of

computation share capital

The matching rules for shares held by an individual are different to the matching rules for shares held by a
company. Take care not to confuse the two.

Matching rules for individuals

Disposals by individual shareholders are matched with
acquisitions in the following order:
 Same day acquisitions
 Acquisitions within the following 30 days
 Any shares in the share pool
Exam focus
Learn the ‘matching rules’ because a crucial
first step to getting a shares question right is
to correctly match the shares sold to the
original shares purchased.
(016)ACF6PC13_CH16.qxp 11/27/2013 7:16 AM Page 93

Matching The Alterations of

computation share capital

The computation The share pool

The share pool is kept in two columns:
The computation is proceeds less cost.
1 The number of shares

2 The cost

For quoted shares proceeds are calculated as the

lower of:
 1/4 up, and On a disposal the cost is calculated on a pro-rata
 Mid bargain basis.

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Matching The Alterations of

computation share capital

Bonus issues Reorganisations and takeovers

 Bonus issue shares are acquired at no cost.  Apportion the cost of the old shares to the new
 Add the number of shares to the share pool. assets received in proportion to their values.
 Where the new assets include cash, compute a
chargeable gain using the cash received and
the part of the cost of the old shares
apportioned to that cash.
Rights issues  Takeover must be for bona fide commercial
reasons and not for tax avoidance for this
 Rights issue shares are acquired for payment. treatment to apply.
 Add the numbers of shares to the share pool
and add the cost of the rights shares.
(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 95

17: Self-assessment and payment of tax

by individuals

This is a key exam topic. It may appear as part of any

Topic List personal tax question.

Returns
Records and appeals
Payment of tax
Penalties
(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 96

Returns Records and Payment of tax Penalties

appeals

Filing date
The latest filing date for filing a 2013/14 tax return is:
Exception: if notice after 31 July 2014, latest
(1) 31 October 2014 (paper) filing date is end of 3 months after notice.

(2) 31 January 2015 (electronic) Exception: if notice after 31 October 2014,

latest filing date is end of 3 months after
notice.
HMRC randomly select returns to
check. They also select returns where
there is an identified tax risk.
Compliance checks
HMRC may make a compliance check enquiry into a return
provided they give notice by a year after:
(1) The actual filing date (if on or before due filing date)
(2) The 31 January, 30 April, 31 July or 31 October next
following the actual filing date of the return (if filed late).
(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 97

Returns Records and Payment of tax Penalties

appeals

Records Appeals
Records must, in general, be kept  A taxpayer may appeal against:
until the later of: – any assessment, except a self-assessment
– an amendment to a self-assessment or a disallowance of
(1) Five years after the 31 January
a claim or election, following a compliance check or
following the tax year concerned discovery
(where the taxpayer is in – penalties
business); or
 The appeal may be settled by internal review. If not, the
(2) One year after the 31 January hearing is before Tax Tribunal.
following the tax year, otherwise
Powers
 HMRC can investigate dishonest conduct by tax agent -
penalty up to £50,000.
 HMRC may make assessments to recover tax due and
determinations which effectively force the filing of a return.

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(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 98

Returns Records and Payment of tax Penalties

appeals

Payment of tax Each POA is 50% of the prior tax

year’s income tax and Class 4 NIC
Payments on account (POA) of income tax and Class 4 liability less tax suffered at source
NICs must be made on 31 January in tax year and on (de minimis limits £1,000, 80%)
the following 31 July.
The final payment of income tax and Class 4 NICs must
be paid on 31 January following the tax year.
All CGT is due on 31 January following the tax year.

Interest
Interest runs on:
(1) POAs from the normal due dates (31 Jan and 31 July).
(2) Any final payment and CGT from the later of:
(i) 31 January following tax year
(ii) Three months after the notice to file a tax return was issued
(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 99

Returns Records and Payment of tax Penalties

appeals

Penalties for errors

 Common penalty regime for IT, NICs,
CT and VAT Maximum penalty based on Potential Lost
Revenues (PLR):
 Imposed for inaccurate return leading
to understatement of tax, false or  100% if deliberate and concealed
increased loss, false or increased
 70% if deliberate but not concealed
repayment of tax
 30% if careless
 Error may be careless, deliberate but
not concealed, or deliberate and
concealed

Penalties can be reduced

by disclosure (eg 0% for
careless error with
unprompted disclosure)

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Returns Records and Payment of tax Penalties

appeals

Penalties for late notification

 Common penalty regime for IT, NICs, PAYE, CGT, CT and VAT
 Failure may be careless, deliberate but not concealed, or deliberate
and concealed
 Maximum penalty based on PLR as for penalties for error
 Reduced penalties for disclosure: eg 0% if careless failure with
unprompted disclosure within 12 months

Penalty for failure to keep records

£3,000 per tax year/accounting period
(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 101

Penalties for late filing Penalties for late payment

The maximum penalties for delivering a return after (1) Penalty date is 30 days after due date
the filing due date are:
(2) Penalty of 5% of unpaid tax at penalty date if
(1) Return up to 3 months late £100
payment not more than 5 months after penalty
(2) Return over 3 months late As (1) plus £10 date
daily penalty
(max 90 days) (3) Penalty of 5% of unpaid tax at 5 months after
(3) Return over 6 months late As (1) and (2) penalty date if payment between 5 months and
plus greater of 11 months of penalty date
5% of tax and
£300 (4) Penalty of 5% of unpaid tax at 11 months after
penalty date if payment more than 11 months
(4) Return over 12 months late As (1), (2), (3) after penalty date
plus greater of
% of tax (5) Does not apply to payments on account
(conduct related)
and £300

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(017)ACF6PC13_CH17.qxp 11/27/2013 7:17 AM Page 102

Notes
(018)ACF6PC13_CH18.qxp 11/27/2013 7:17 AM Page 103

18: Inheritance tax

Inheritance tax is a tax on transfer of wealth (gifts). It will

Topic List be examined for between 5 and 15 marks in any of
Questions 3, 4 or 5.
Scope/basic principles
CLTs and PETs
Death estate
Transfer of nil rate band
Exemptions
Payment of IHT
(018)ACF6PC13_CH18.qxp 11/27/2013 7:17 AM Page 104

Scope/basic CLTs and Death Transfer of Exemptions Payment

principles PETs estate nil rate band of IHT

Scope of inheritance tax For F6, a gift


Transfer of value
By individuals 
Lifetime or death Transfer of value
A gratuitous disposition which results in an
individual being worse off.

Diminution in value
Usually = gift but watch
out for unquoted shares   The value of the transfer is always the loss to the
(before/after) donor.
(018)ACF6PC13_CH18.qxp 11/27/2013 7:17 AM Page 105

7 year accumulation principle

Need to look back 7 years from chargeable transfer to
see if any chargeable transfers use up available nil rate
band. 

Chargeable transfer 
2013/14 £325,000
Any transfer which is not an exempt transfer.

Chargeable lifetime Potentially exempt transfer Chargeable

transfer (CLT) - (PET) only chargeable if donor transfer on
immediate charge to does not survive 7 years - treat death.
tax. Gift to trust. as exempt until death. Gift to
individual (except spouse/civil
partner).

Page 105 18: Inheritance tax

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Scope/basic CLTs and Death Transfer of Exemptions Payment

principles PETs estate nil rate band of IHT

Chargeable lifetime transfers (CLTs)

IHT charged at date of gift at 20% if exceeds nil rate band
at date of gift.   gross up (20/80) if donor pays lifetime tax as
he has lost both the gift and the IHT paid.
Additional tax on death
The IHT on death on a CLT made in 7 years before death is calculated
as follows:
(1) Take into account all chargeable transfers in 7 yrs before this
transfer (including PETs which have become chargeable)
Exam focus
When you have grossed up a
(2) Calculate the tax at 40% on excess of the gross CLT over nil rate
transfer, you can check your figures
band at death
by computing the 20% tax on the
(3) Deduct taper relief if death between 3-7 yrs after transfer gross transfer.
(4) Deduct lifetime tax - but no repayment if exceeds tapered death tax
(018)ACF6PC13_CH18.qxp 11/27/2013 7:17 AM Page 107

Potentially Exempt Transfers (PETs)

Treat as exempt during lifetime of donor   if donor does survive 7 years from
transfer, PET is exempt transfer

Tax on death
IHT on a PET made in 7 years before death is calculated as follows:
(1) Take into account all chargeable transfers in 7 yrs before this transfer
(including other PETs which have become chargeable)
(2) Calculate tax @ 40% on excess over nil rate band at death
(3) Deduct taper relief if death between 3-7 yrs after transfer

Page 107 18: Inheritance tax

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Scope/basic CLTs and Death Transfer of Exemptions Payment

principles PETs estate nil rate band of IHT

Death estate
 all property owned immediately before death
 less debts, funeral expenses   including cost of tombstone


 incurred in good faith for full

consideration or imposed by Debt secured on property, eg mortgage
law (eg tax to date of death)
 deducted primarily from secured property, eg house
 endowment mortgages not deducted as repaid on
death by insurance
 repayment/interest only mortgages are deductible
(may be separate life cover)
(018)ACF6PC13_CH18.qxp 11/27/2013 7:17 AM Page 109

Tax on death estate

(1) Take into account all transfers in 7 years before death
(including PETs which have become chargeable).

(2) Calculate the tax at 40% on excess over nil rate band at
death.

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Scope/basic CLTs and Death Transfer of Exemptions Payment

principles PETs estate nil rate band of IHT

Transfer of unused nil rate band

 individual (A) dies
 A had spouse/civil partner (B) who
died before A
 B had unused nil rate band on death

Effect Claim
 Nil rate band of A increased by unused nil rate Within 2 years of end of month of A’s death by A’s
band of B PRs.
 Affects additional tax on CLTs, tax on PETs and
death estate
 Scale up if nil rate band increased between B’s
death and A’s death
(018)ACF6PC13_CH18.qxp 11/27/2013 7:17 AM Page 111

Scope/basic CLTs and Death Transfer of Exemptions Payment

principles PETs estate nil rate band of IHT

Exemptions for lifetime transfers  Use v. transfers in date order. Can c/f unused amount
only for one year only. Use current year first before b/f

 Annual (£3,000) 
 Small gifts   £250 or less per donee per tax year

 Marriage   £5,000 from parent

£2,500 from remote ancestor, or party to marriage
 Normal expenditure out of income £1,000 from anyone else

Exemption for lifetime and death

transfers

 Spouse/civil partner

Page 111 18: Inheritance tax

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Scope/basic CLTs and Death Transfer of Exemptions Payment

principles PETs estate nil rate band of IHT

Payment of IHT
Event Liability to pay tax Due date
CLT - lifetime tax Donor unless trustees agree to pay Later of
(1) 30 April just after end of tax year
(2) 6 months after end of month of transfer
CLT - death tax Trustees 6 months from end of month of donor’s death
PET Donee 6 months from end of month of donor’s death

Death estate PRs Earlier of

(1) Delivery of account
(2) 6 months from end of month of donor’s death
(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 113

19: Computing taxable total profits

Topic List In this chapter we will cover the structure of the

computation of taxable total profits. This is an essential
Accounting periods part of your examination as Question 2 is on corporation
Residence tax.
Taxable total profits
Trading profits and property business
income
Loan relationships
Long period of account
(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 114

Accounting Residence Taxable total Trading profits and Loan Long period
periods profits property business income relationships of account

Period of account
A period of account is the period for which accounts are prepared.

Accounting period
An accounting period can never exceed 12 months. If
An accounting period is the period for which
a company prepares accounts for a period exceeding
corporation tax is charged.
twelve months, the period of account must be split
into two accounting periods.

 It starts when the company starts to

trade, or immediately after the end of the
previous accounting period. The first 12 months form The remaining months form
the first accounting period the second accounting period
 It ends 12 months after it starts or, if
earlier, when the period of account ends.
(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 115

Accounting Residence Taxable total profits Trading profits and Loan Long period
periods property business income relationships of account

Residence
A company is resident in the UK if it is
incorporated in the UK or if its central management
and control are in the UK.

A UK resident company is subject to UK

corporation tax on its worldwide profits.

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(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 116

Accounting Residence Taxable total Trading profits and Loan Long period
periods profits property business income relationships of account

Taxable total profits

A company’s taxable total profits are arrived at
by aggregating its various sources of income and
Proforma for calculating taxable
chargeable gains (total profits) and then
deducting qualifying charitable donations and
total profits
certain losses. £
Trading profits X
Profits of trades Interest income X
Miscellaneous income X
Interest from non-trading loan relationships Property business income X
(eg bank/building society interest) Chargeable gains X
__
Total profits X
Any other profits
Less: losses deductible from total profits (X)
Less: qualifying charitable donations (X)
__
Income from land and buildings in the UK Taxable total profits X
__

Dividends from other companies (UK and overseas) are not included in taxable total profits.
(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 117

Accounting Residence Taxable total Trading profits and Loan Long period
periods profits property business income relationships of account

Trading profits
The computation of trading profits follows Remember there is no disallowance of expenditure
income tax principles. or restriction of capital allowances for private use.

Proforma
Property business income
£ £ The computation of property business income
Net profit per accounts X follows income tax principles.
Add expenditure not allowed for
tax purposes X
__
X  Exception: Interest on a loan taken out to buy property
is dealt with under the loan relationship rules, not as
Deduct part of the property business.
Income not taxable as trading income X
Expenditure not charged in the
accounts but allowable for tax X
Property business losses
Capital allowances X
__ Set against total profits of the company for the
(X)
__ same accounting period, then carry the excess
Taxable trading profits X
__ forward as a property business loss.

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(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 118

Accounting Residence Taxable total Trading profits and Loan Long period
periods profits property business income relationships of account

Loan relationships
A company that borrows or invests money has a loan relationship.

Trading loan relationship Non-trading loan relationship

 Held for trade purposes (eg debentures  Held for non-trade purposes (eg building
issued for trade purposes) society account held for investment
 Costs (eg interest) accruing are deductible purposes)
trading income expenses  Tax income accruing as interest income
 Income accruing (eg interest income) is  Deduct expenses accruing from the pool of
taxable as trading income. interest income.

 Net deficits are not

examinable
(019)ACF6PC13_CH19.qxp 11/27/2013 7:17 AM Page 119

Accounting Residence Taxable total Trading profits and Loan Long period
periods profits property business income relationships of account

Long period of account Division of profits

(> 12 months) Divide profits between the accounting periods as follows:
 Trading income: time apportion the amount before
capital allowances
 Compute capital allowances separately for each
period
The first 12 months The remaining months
form the first form the second  Property business income: time apportion
accounting period accounting period  Interest income: allocate to period in which it accrues
 Miscellaneous income: time apportion
Example  Gains: allocate to the period in which they are
If A Ltd prepares accounts for the fifteen months
realised
to 31.12.13, there will be one 12 month
accounting period to 30.9.13 and a second three  Qualifying charitable donations: allocate to the period
month accounting period to 31.12.13. in which they are paid

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Notes
(020)ACF6PC13_CH20.qxp 11/27/2013 7:18 AM Page 121

20: Computing the corporation tax liability

In this chapter we will cover the calculation of the

Topic List corporation tax liability. This too is an essential part of
your examination.
The charge to corporation tax
Associated companies
(020)ACF6PC13_CH20.qxp 11/27/2013 7:18 AM Page 122

The charge to Associated

corporation tax companies

Rates A financial year runs from 1 April in one year to

31 March in the next. Financial Year 2013 (FY 2013)
Rates of corporation tax (CT) are: runs from 1 April 2013 to 31 March 2014.
 Set for financial years
 Dependent on the level of augmented profits If there is a change in the rate of CT, and a company’s
accounting period does not fall entirely into one
financial year, the taxable total profits and augmented
profits of the period are time apportioned to the two
financial years.
Augmented profits
Augmented profits are taxable total profits plus the grossed up amount of dividends (FII) received from non-
associated companies.
(020)ACF6PC13_CH20.qxp 11/27/2013 7:18 AM Page 123

The main rate (FY 2013 – The small profits rate (FY
23%) of CT applies if 2013 – 20%) applies if
augmented profits exceed the augmented profits are below
upper limit. the lower limit.

Marginal relief is given if

augmented profits fall between
the upper and lower limits

Exam focus
It is: standard fraction ×
The marginal relief formula will (Upper limit – augmented profits) × taxable total profits
______________
be given to you in the exam.
augmented profits

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The charge to Associated

corporation tax companies

Upper and lower limits

Exclude dormant companies but
The lower and upper limits are:
include trading non-resident
 Multiplied by months/12 for short accounting companies
periods
 Shared equally between the number of Example
‘associated’ companies in the group A Ltd, which has one associated company,
prepares accounts for the nine months to
31.3.14. The upper limit for this period is
£1,500,000
9/12 × = £562,500
Companies under common control 2
(021)ACF6PC13_CH21.qxp 11/27/2013 7:18 AM Page 125

21: Chargeable gains for companies

This chapter deals with calculating chargeable gains for

Topic List companies.
A key area is the rules for the disposal of shares and
Calculation of chargeable gains securities.
Disposal of shares
Rollover relief
(021)ACF6PC13_CH21.qxp 11/27/2013 7:18 AM Page 126

Calculation of Disposal of Rollover relief

chargeable gains shares

Computation
Compute a gain as follows: (1) Cannot create or increase a loss
£ (2) Round to 3 decimal places before
Proceeds X multiplying by cost.
Less: allowable cost (X)
Less: indexation allowance (X)
__
Chargeable gain X
__

RPI for month of disposal – RPI for month of acquisition

RPI for month of acquisition

1 Include in total profits, and so charged to corporation tax

2 No annual exempt amount
(021)ACF6PC13_CH21.qxp 11/27/2013 7:18 AM Page 127

Calculation of Disposal of Rollover relief

chargeable gains shares

Shares and securities

For company shareholders disposals of
shares and securities are matched with
acquisitions in the following order.
(i) Shares acquired on the same day
(ii) Shares acquired in the previous nine days,
taking earlier acquisitions first
(iii) Shares from the FA 1985 pool

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Calculation of Disposal of Rollover relief

chargeable gains shares

The FA 1985 pool is kept in three columns:

1 The number of shares

Operative event
Operative events are acquisitions and disposals
2 The cost (apart from bonus issues)
3 The indexed cost

At each operative event

Do not round indexation to 3 decimal places after
April 1985. (1) Increase the indexed cost column by the indexed
rise since the date of the last operative event, then
(2) Add the cost of any shares acquired to both the
The indexation allowance is the indexed cost cost/indexed cost columns, or
taken out of the indexed cost column minus the (3) Deduct a pro-rata slice from the cost/indexed cost
cost taken out of the cost column.
columns in respect of any shares disposed of.
(021)ACF6PC13_CH21.qxp 11/27/2013 7:18 AM Page 129

Reorganisations and takeovers

 Apportion the cost and indexed cost of the old
shares to the new assets received in proportion
to their values.
 Where the new assets include cash, compute a
chargeable gain using the cash received and
the parts of the cost and indexed cost of the old
shares apportioned to that cash.
 If just a takeover qualifying for the ‘paper for
paper’ treatment, the cost and indexed cost of
the original holding is passed onto the new
holding which now takes its place.

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Calculation of Disposal of Rollover relief

chargeable gains shares

Companies can claim to defer gains Eligible assets

arising on the disposal of business
assets that are being replaced if:
 Land and buildings (including parts of buildings) occupied
as well as used only for the purposes of the trade.
The old and the new assets
1 are used in the trade of the  Fixed (that is, immovable) plant and machinery.
company
The old and the new assets
2 are on the list of qualifying A depreciating asset is one with an
assets expected life of 60 years or less (eg
fixed plant and machinery).
3 The new asset is bought in
the period starting 12 months Is the new asset a depreciating asset?
before and ending 36 months Is the new asset a non-depreciating asset?
after the disposal
(021)ACF6PC13_CH21.qxp 11/27/2013 7:18 AM Page 131

For a non-depreciating asset the gain is deducted If a part of the proceeds of the old asset are not
from the base cost of the new asset. reinvested, the gain is chargeable up to the amount
For a depreciating asset the gain is deferred until it not reinvested.
crystallises at a later date.

The gain crystallises on the earliest of: Relief is proportionately restricted when an asset
has not been used for trade purposes throughout
1 The disposal of the replacement asset its life.
Ten years after the acquisition of the
2 replacement asset If a non-depreciating qualifying asset is bought
before the gain crystallises, the deferred gain may
3 The date the replacement asset ceases to be be rolled into the base cost of that asset.
used in the trade

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Notes
(022)ACF6PC13_CH22.qxp 11/27/2013 7:18 AM Page 133

22: Losses

In this chapter we will see how a single company may

Topic List obtain tax relief for its trading and non-trading losses.
Losses are a key topic area for exam purposes. The best
Trading losses way of learning how to deal with losses is to practise
questions involving losses in the BPP Learning Media
Non-trading losses Practice and Revision Kit.
(022)ACF6PC13_CH22.qxp 11/27/2013 7:18 AM Page 134

Trading Non-trading
losses losses

Trading losses
A company’s trading loss may be:
(1) Set against other profits of the same accounting Before qualifying charitable donations
period.
(2) Set against profits of the previous 12 months
If pro-rating is necessary, pro-rate profits before
(3) Carried forward to set against the first available qualifying charitable donations to compute maximum
relief.
profits from the same trade.

Reliefs (1) and (2) need to be claimed. A company can choose to claim
relief (1) only (ie relief (1) but not relief (2)). However, if relief (2) is to be
claimed, relief (1) must be claimed first. Relief (3) is given automatically to
any loss not relieved under (1) or (2).
(022)ACF6PC13_CH22.qxp 11/27/2013 7:18 AM Page 135

Cessation of trade The choice between reliefs

 The 12 month carry back period in (2) above is  Relieve losses at the highest possible marginal
extended to 36 months where the trading loss tax rate
arose in the 12 months prior to the cessation of  Consider timing: earlier relief is better than later
trade. relief
 Qualifying charitable donations are unrelieved.

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(022)ACF6PC13_CH22.qxp 11/27/2013 7:18 AM Page 136

Trading Non-trading
losses losses

Non-trading losses

Capital losses Property business income

Capital losses can only be set against Property business losses are first set
capital gains in current or future against total profits for the current period.
accounting periods. They must be set Any excess is then carried forward as
against the first available gains. though it were a property business loss
arising in a later period.
(023)ACF6PC13_CH23.qxp 11/27/2013 7:18 AM Page 137

23: Groups

When presented with a group question in the exam

Topic List always establish the percentage holding at each level
and the effective interest of the holding company in each
Group relief subsidiary. These figures will determine the reliefs
available.
Capital gains group
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Group Capital
relief gains group

Group relief allows the losses of one group company to

be set against the taxable total profits of another.

Group relief group Capital losses cannot be group relieved.

For a group relief group to exist one company must
have a 75% effective interest in the other, or there
must be a third company which has a 75% effective Exam focus
interest in both. Give group relief where it will save most tax:
firstly to companies in the marginal relief band
Losses available to surrender (marginal rate 23.75%), then to companies
paying the 23% rate, then to companies paying
at the 20% rate.
Trading losses
Excess property business losses
Excess qualifying charitable donations
(023)ACF6PC13_CH23.qxp 11/27/2013 7:18 AM Page 139

Group relief is given before relief for any amounts

brought back from later periods.

A claim for group relief is normally made on

Available profits the claimant company’s tax return. It is
Profits available to absorb group relief are total profits ineffective unless notice of consent is also
less qualifying charitable donations and current and given by the surrendering company.
brought forward losses.

Corresponding accounting periods

Group relief is strictly a current period relief. If
accounting periods do not coincide, the profits and
losses must be time-apportioned. Only the profits and
losses of the period of overlap may be matched up.

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Group Capital
relief gains group

Capital gains group Rollover relief

All members of a capital gains group may be treated
A capital gains group starts with the top company as a single unit for the purpose of rollover relief.
(which must be included). It carries on down while
there is a 75% holding at each level and the effective
interest of the top company is over 50%.

No gain/loss arises when an asset is transferred

within a capital gains group.

Two members of a capital gains group can elect to

transfer gains/losses between them.
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24: Self-assessment and payment of tax

by companies

In this chapter we look at both the administration of

Topic List corporation tax (CT) and when that tax must be paid.
This is a key exam topic.
Returns
Payment of tax
(025)ACF6PC13_CH24.qxp 11/27/2013 7:19 AM Page 142

Returns Payment
of tax

Returns Late filing of Return

A company must normally file its CT return by the due
filing date which is the later of:  Initial fixed penalty is £100 rising to £200 if
 Twelve months after the end of the period to which the return is more than three months late
the return relates
 Three months after a notice requiring the return was  Fixed penalties rise to £500 and £1,000 if the
issued return for each of the two preceding periods
was also late
Compliance checks  If the return was between 6 and 12 months
late there is an additional tax geared penalty
Notice to check a return must be given by 12 months of 10% of the tax unpaid six months after the
after filing date
 The actual filing date if filed on or before due filing
date
 If the return is over 12 months late the tax
 The 31 January, 30 April, 31 July or 31 October next geared penalty is 20% of the tax unpaid six
following the actual filing date if filed late months after the filing date

Records must generally be kept for six years from Common penalty regime applies for errors on
the end of the accounting period concerned. return/late notification of chargeability
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Returns Payment
of tax

Due dates Any company that pays CT at the main rate Quarterly instalments
 For a 12 month AP instalments are due in:
 ‘Large’ companies must pay their anticipated CT – months 7 and 10 in the period
liability in quarterly instalments.
– months 1 and 4 in the following period
 Other companies must pay their CT liability nine
months and one day after the end of the accounting  For an AP less than 12 months instalments are
period (AP) due in:
– month 7 of the period
– then at 3 monthly intervals
– final payment in month 4 of next period
– amount of instalment is 3 x CT/n where n is
length of AP and CT is amount due in
instalments
 Instalments are due on 14th day of the month
Interest runs from the due date. Overpaid tax earns interest from the date it is
paid. The position is looked at cumulatively after the date for each instalment.

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Notes
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25: An introduction to VAT

Topic List
VAT is a tax with many detailed rules.
Scope of VAT At least 10 marks will be given for VAT, and it may be
included as part of question 1 or 2, or as a separate
Zero-rated, exempt and taxable
question.
supplies
Registration
Accounting and administration
Valuation of supplies
Deduction of input tax
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Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

VAT is a tax on revenue/turnover, not on profits. It is A taxable supply is a supply of goods or

imposed at each stage in a chain of sales, in such a services made in the UK other than an exempt
supply
way that the burden falls on the final consumer.

VAT applies to taxable supplies of goods or A taxable person is a person that is registered
services made in the UK by a taxable person in or ought to be registered
the course of a business.

Supplies Gift of goods

A taxable supply is either standard rated or zero- Normally a supply at cost but business gifts are not
rated. Zero-rated supplies are taxed at 0%. supplies if:
Standard rated supplies are normally taxed at 20%.  The cost to the donor is £50 or less, or
 The gift is a sample (unlimited numbers)
An exempt supply is not chargeable to VAT.
(026)ACF6PC13_CH25.qxp 11/27/2013 7:19 AM Page 147

Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

1 Zero-rated supplies
Taxable at 0%
Can recover input VAT
Eg food, books and newspapers

2 Exempt supplies
Not taxable
Cannot recover input VAT
Eg insurance, education and health services

3 Standard rated supplies

Taxable, normally at 20% (5% in some cases)
All supplies which are not zero-rated or exempt

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Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

Compulsory registration Voluntary registration

Must register if: Advantages

1 the value of taxable supplies exceeds the  Input VAT can be reclaimed
registration limit in any past period of up to  The impression of a substantial business is given
12 calendar months, or Disadvantages
2 there are reasonable grounds for believing that  Increased administration
the value of taxable supplies will exceed the  Penalties if VAT/return is late
registration limit in the next 30 days.  Increased cost for non-registered customers

Notification required
The registration limit is currently £79,000.
within 30 days of the end (This limit will be given to you in the exam.)
of the 12 month period. Notification required by
Registration takes effect
from the end of the month
the end of the 30 day Exam focus
period. Registration takes The examiner may favour VAT questions requiring
following the 12 month effect from the beginning of
period. that period. advice to new traders (should they register, etc).
(026)ACF6PC13_CH25.qxp 11/27/2013 7:19 AM Page 149

Voluntary deregistration Pre-registration input VAT

Can deregister voluntarily if the value of taxable Reclaimable VAT is:
supplies in the following one year period will not 1 VAT on goods bought in the four years prior to
exceed £77,000. registration and still held at the date of
registration
2 VAT on services supplied in the six months
VAT is due on all inventory and capital assets on before registration
which input VAT was claimed.

EXCEPTIONS

1 If VAT does not exceed £1,000 it

need not be paid

2 VAT is not due if the business is sold

as a going concern to another
taxable person

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Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

Group registration
Available to companies under common control.
Representative member accounts for all VAT.

Simplifies VAT All members jointly and

accounting severally liable for VAT
No VAT on supplies between group members.

Reduces VAT Improves

accounting cash flow
Any company can be EXCLUDED from group.
Consider excluding companies making zero-rated supplies.
(026)ACF6PC13_CH25.qxp 11/27/2013 7:19 AM Page 151

Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

VAT period Substantial traders

A trader accounts for VAT for each VAT period. If a trader does not make monthly returns, and
Periods are normally three months long, but they the total VAT liability over 12 months to the end
may last for one month or 12 months. A VAT of a VAT period exceeds £2,300,000, he must
return is completed for each period. make payments on account of each quarter’s
VAT liability during the quarter.

Most VAT returns must be filed electronically

within one month and seven days of the end of
the period.

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Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

Tax point Administration

Each supply is treated as taking place on the tax point.  Local VAT offices carry out general
administration, advise taxable persons and
check that the law is being properly applied.
Basic tax point  If HMRC are not satisfied with the figures
Date on which goods removed/made available to supplied by a trader, they can issue
customer. assessments for the VAT which they believe
to be due.
 Most decisions by HMRC can be appealed
against. Appeals are heard by Tax Tribunal.
Actual tax point
Date invoice issued or Alternatively, the invoice
payment made if date, if invoice issued within
before basic tax point 14 days after basic tax point
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Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

Value of supply
The value of a supply is the VAT-exclusive price.
 Value + VAT = consideration

The VAT proportion of the consideration is the ‘VAT fraction’

20 1
=
120 6

Example Discounts
If total consideration is £240, the VAT proportion is
Where a discount is offered for prompt
1
£40 (240 × ) payment, VAT is always chargeable on
6 the discounted amount.

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Scope Zero-rated, exempt Registration Accounting and Valuation of Deduction of

of VAT and taxable supplies administration supplies input tax

Non-deductible VAT
VAT on motor cars not wholly used for business purposes.
VAT on business entertaining (except overseas customers).
VAT on domestic accommodation for directors.
VAT on non-business items.

Fuel Based on CO2 emissions

Impairment losses (Bad debt relief)
VAT on:  Claim within four years and six months
 Fuel used for business purposes: fully deductible  Must be over 6 months old
 Fuel used for private purposes: fully deductible  Must be written off in creditor’s accounts
but account for output VAT based on actual cost  Attribute payments on account in chronological
of fuel or a set scale figure order
Where cost of fuel used for private
purposes is not fully reimbursed to business From when payment is due
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26: Further aspects of VAT

For exam purposes, it is again important that you learn

Topic List the detailed rules covered in this chapter. VAT will be the
subject of at least 10 marks.
VAT invoices and records
Penalties
Overseas aspects
Special schemes
(027)ACF6PC13_CH26.qxp 11/27/2013 7:19 AM Page 156

VAT invoices Penalties Overseas Special

and records aspects schemes

Invoices: required details

Less detailed invoices may be issued
where the invoice is for up to £250
 Name, address and VAT no of supplier (incl VAT).
 Name and address of customer
 Invoice no, date of issue and tax point
 Details of type of supply and the goods/services supplied Records
 For each supply: the quantity, the unit price, VAT rate and VAT records must be kept for six years
the VAT exclusive amount
 The rate of any cash discount
 The total invoice price excl. VAT (with separate totals for
zero rated and exempt supplies)
 Each VAT rate and the total VAT Records must be kept up to date and in a
way which allows:
 The calculations of VAT due
VAT invoices are not required for payments of up to £25  Officers of HMRC to check the figures
(including VAT) which are for telephone calls or car park fees or on VAT returns
made through cash operated machines.
(027)ACF6PC13_CH26.qxp 11/27/2013 7:19 AM Page 157

VAT invoices Penalties Overseas Special

and records aspects schemes

Default surcharge Errors

First late return/payment commences surcharge Common penalty regime applies for errors on
period, then: returns
Default involving late Surcharge as a percentage Errors not exceeding greater of
payment of VAT in the of the VAT outstanding  £10,000 (net error); or
surcharge period at the due date  1% × net VAT turnover for return period (max
First 2% £50,000)
Second 5% may be corrected on the next return. Other errors to
Third 10% be notified in writing, eg letter.
Fourth and over 15% Penalties for error may be imposed in both cases.
2% and 5% surcharges are not normally demanded
unless the amount due would be at least £400. For
Interest on unpaid VAT
the 10% or 15% surcharges a minimum of £30 is Interest is charged on VAT which was or could have
payable. been assessed. It runs from when the VAT should
have been paid to when it is paid. This period
Every time there is a default, the surcharge period is cannot exceed three years.
extended to the anniversary of the end of the default period.

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VAT invoices Penalties Overseas Special

and records aspects schemes

Outside the EU – goods Inside the EU – goods

Imports of goods from outside the EU are subject to When a taxable person supplies goods to a
VAT at the same rate as on a supply within the UK. customer in another EU country, the supply is zero
Exports of goods to outside the EU are zero-rated. rated if the customer is VAT registered.
When goods are supplied to a registered trader in
Tax point earlier of:   the UK from within the EU, VAT (calculated using
 15th of month following acquisition; UK rates) is due and shown on the next VAT return
 invoice date. by the UK buyer of the goods.
Inside the EU – services
Outside the EU – services
VAT treatment generally as for supply of goods.
Import of services from outside EU – same as for
Tax point earlier of time service:
goods.
 completed;
 paid for. Export of services to outside EU – outside scope of
VAT.
(027)ACF6PC13_CH26.qxp 11/27/2013 7:19 AM Page 159

VAT invoices Penalties Overseas Special

and records aspects schemes

Annual accounting scheme

 Annual taxable turnover must not exceed £1,350,000 (excl. VAT)
 Annual VAT return
 Traders normally have to make interim payments on account of their VAT
liability during the year by direct debits

Advantages Disadvantages

 Only one VAT return each year so fewer  Need to monitor future taxable supplies to
occasions to trigger a default surcharge. ensure turnover limit not exceeded.
 Ability to manage cash flow more accurately.  Timing of payments have less correlation to
 No need for quarterly calculations for input turnover (and hence cash received).
tax recovery.  Payments based on previous year’s turnover
may not reflect current year turnover.

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VAT invoices Penalties Overseas Special

and records aspects schemes

Cash accounting scheme Flat rate scheme

 Account for VAT on basis cash paid/received.  Optional scheme for business with tax
exclusive taxable turnover up to £150,000.
 Annual taxable turnover must not exceed
£1,350,000 (excl VAT).  Must leave if VAT inclusive taxable supplies
exceed £230,000.
 To join, all VAT returns/payments must be up
to date (or arrangements have been made to  Flat rate of VAT applies to total tax inclusive
pay outstanding VAT by instalments). turnover.
 Normal VAT invoice issued to VAT registered
customers.

The flat rate percentage to use will be given to

you in your exam.
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Notes
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Notes