Smart Notes Acca f6 2015 (35 Pages)
Smart Notes Acca f6 2015 (35 Pages)
Smart Notes Acca f6 2015 (35 Pages)
azizurrehman89@hotmail.com
ACCA F6
(TAXATION)
ACCA F6
SMART NOTES
Taxation
For Exams in June & December
2015
SMART NOTES
Syllabus Coverage 100%
Marks Oriented (Exam Focused)
35 pages
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ACCA F6
(TAXATION)
CONTENTS
Chapter 1
Chapter 2
Chapter 3
Employment income
Chapter 4
Chapter 5
Chapter 6
Capital allowances
Chapter 7
Basis period
Chapter 8
Trading losses
Chapter 9
Partnership
Chapter 10
Chapter 11
Inheritance tax
Chapter 12
Chapter 13
Chapter 14
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ACCA F6
(TAXATION)
CHAPTER 1
Income Tax Computation
INCOME TAX is paid by a taxable person on his taxable income in a tax year.
Taxable income: Income from all sources except exempt income, minus reliefs & personal allowance.
Tax Year: income tax is calculated for tax year which runs from 6th April to 5th April. 6th April 14 to 5th April 15.
Taxable Person: All individuals including children are called taxable person and pay income tax.
TAXABLE PERSON:
Non UK Resident: Non UK resident persons Pay UK Income tax on his UK Income only.
Automatically treated as Non UK Resident:
A person will automatically be treated as not resident in the UK if he is present in UK for:
Maximum 15 days in a tax year.
Maximum 45 days in a tax year, and who has not been UK resident in previous three tax years.
Maximum 90 days in a tax year, and who works full-time overseas.
A UK resident person: Pay UK income tax on his worldwide income.
Automatically treated as UK Resident:
A person who is in the UK for 183 days or more during a tax year.
A person whose only home is in the UK.
A person who carries out full time work in the UK.
Not Automatically treated as UK Resident:
If a person is not treated UK resident as per Days in UK Not UK Resident in any UK Resident in any of
automatic tests, then his status will be based
of the previous three
the previous three
on no of ties with the UK and no of days they
tax years
tax years
stay in the UK during a tax year.
Upto 15
Automatically non
Automatically not
UK Ties:
resident
resident
Having close family (a spouse/civil partner
16 to 45
Automatically non
Resident if 4 UK ties
or minor child) in the UK.
resident
(or more)
Having a house in the UK which is made use
46 to 90
Resident if 4 UK ties
Resident if 3 UK ties
of during the tax year.
(or more)
Doing substantive work in the UK where 40
91 to 120
Resident if 3 UK ties (or Resident if 2 UK ties
days or more is regarded as substantive.
more)
(or more)
Being in the UK for more than 90 days
121 to 182 Resident if 2 UK ties (or Resident if 1 UK tie
during either of the two previous tax years.
more)
(or more)
Spending more time in the UK than in any
other country in the tax year.
1
TYPES OF INCOME
Exempt Income:
Interest from national savings and investments certificates Income received from New individual saving account (ISA)
Gaming winning, Batting, lottery and premium bonds
Scholarship income and state benefits paid in the event of
winnings
accident, sickness or disability.
Employment income: Income earned by an employee from his employment. e.g salary, bonus & Benefits.
Trading income: Profit generated by a self-employed individual from his trade or profession.
Property income: Income received from land and building situated in UK.
Saving income: Interest is received net of 20% tax so it is gross up as follows: (Interest received X 100/80)
Interest received is Exempt.
New Individual saving account (NISA)
National saving and investment certificates
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ACCA F6
(TAXATION)
OTHER INCOME
XX
XX
XX
SAVING
DIVIDENDS
XX
XX
(1)
XX
(1)
XX
XX
XX
(3)
XX
(3)
XX
XX
(2)
XX
(2)
XX
XX
XX
XX
XX
(XX)
(XX)
(XX)
Personal Allowance
10,000
10,500
10,660
XX
(XX)
(XX)
XX
20%
10%
10%
20%
20%
10%
40%
40%
32.5%
45%
45%
37.5%
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ACCA F6
(TAXATION)
CHAPTER 2
PROPERTY & INVESTMENT INCOME
1
SAVING INCOME:
Saving income mainly consists of interest income. Interest income is received net of 20% tax. But an individual pays
tax on gross income so net interest income must be gross up as follows:
(Interest received X 100/80)
Exceptions:
a) Interest received from individual saving account (ISA) is exempt.
b) Interest received from national saving and investment certificates is exempt.
c) Interest received from national saving and investment bank A/c is received gross and is taxable.
d) Interest received from government securities is received gross and is taxable.
e) Interest received from debentures of listed companies is received gross and is taxable.
NEW INDIVIDUAL SAVINGS ACCOUNTS (NISAS)
ISAs are the most common form of tax efficient investment. An ISA can be opened by any individual aged 18 or over
who is UK resident (although a cash ISA can be opened by an individual aged 16 or over)
Advantages:
Income is free of income tax
Disposals of investments within an ISA are free from capital gains tax
No minimum holding period - withdrawals can be made at any time
Components of an NISA
Cash
Stocks and shares
Subscription limits
For the tax year 2014-15 a person can invest up to 15,000 in NISA. The 15,000 limit is completely flexible, so a
person can invest 15,000 in a cash NISA, or they can invest 15,000 in a stocks and shares NISA, or in any
combination of the two such as 10,000 in a cash NISA and 5,000 in a stocks and shares NISA.
2
DIVIDEND INCOME:
Dividend income is received net of 10% tax. But an individual pays tax on gross income so net dividend income must
be gross up as follows: (Dividend received X 100/90)
10% Tax deducted at source on dividend can reduce income tax liability up-to nil it cannot create income tax
repayable.
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ACCA F6
PROPERTY INCOME:
3.1
(TAXATION)
XX
XX
XX
XX
XX
XX
XX
XX
XX
(XX)
XX
1st Current year property income/loss is aggregated but if there is overall loss then this loss is carry forward
indefinitely and set off against first available future property business profit.
3.4
Rent a Room Relief
If an individual lets furnished room in his main residence then rental income will be lower of:
1
2
Rent
XX
Rent
XX
Less: allowable deductions
(XX)
Less: 4,250 (rent a room relief)
(XX)
Less: 10% wear & tear allowance
(XX)
Profit
XX
Profit
XX
If gross annual receipts are 4,250 or less income is exempt from income tax.
Limit of 4,250 will be reduced if another person also receives income.
4,250 can be divided equally in case of married couple or if rent is received by more than one individual.
3.5
Furnished Holiday Letting (FHL)
Conditions to qualify as FHL:
Benefits of FHL:
Situated in UK, furnished and let commercially.
FHA income Qualifies for personal pension scheme.
Available for letting for 210 days in a tax year.
CGT roll-over & entrepreneur relief is available.
Actually let for 105 days in a tax year.
Capital allowances available on plant and machinery
including furniture and furnishings.
Available for short term letting (31 regular days). If let
on long-term then total of such letting should 155 days.
NOTE: Loss of FHA can only be set off against future income of same FHA
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ACCA F6
(TAXATION)
CHAPTER 3
EMPLOYMENT INCOME
1
Determination of Employment
The following factors are considered in order to determine whether a person is employee or not.
Contract of Service
Equipment: Provided by employer.
Obligation of Work:
Insurance: Provided by employer.
Place of work: Decided by employer
Financial risk: Employees have No financial risk.
Payment: Fix Monthly/ weekly payment.
Control: Employer decides work and time of work.
TYPES OF EMPLOYEES
Higher paid employees or P11D employees: employees earning 8,500 p.a. or directors (Unless Directors earning
<8500 and less than 5% shares of company and full time directors)
Lower paid employees: employees earning less than 8,500 p.a. or non-controlling directors.
2
Calculation of Employment Income:
Employment income is calculated for a tax year (6April5April) on receipt basis rule.
Receipt basis rule for all employees
Receipt basis rule for all Directors
Earning are deemed to be received on
Earning are deemed to be received on earlier of:
earlier of:
a) Payment date
a) Payment date
b) Entitlement date
b) Entitlement date
c) When amount is received as liability in company accounts.
d) Employer Year end date if earnings are determined before year end
e) Determination date if earnings are determined after year end.
ALLOWABLE DEDUCIONS
Fee and subscriptions to professional bodies
Gift aid donations/payment to charity under payroll
deduction scheme.
X
Home
3
EXEMPT BENEFITS
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ACCA F6
(TAXATION)
Home workers additional household expenses of up to 4 Awards for upto 25 under staff suggestion scheme,
per week or 18 per month can be paid tax-free without
which is available to all employees for suggestions
any evidence.
outside their duties.
Work buses, subsidized public bus service, and the The cost of work-related training course.
provision of bicycles and cycling safety equipment.
GENERAL RULE
As a general rule cash equivalent value of benefits is taxable to employees unless they are specific statutory rules.
4.1
Vouchers: All kinds of vouchers (e.g. cash vouchers, goods vouchers, lunch vouchers) provided to employees
are taxable on the cost to employer.
4.2
Living Accommodation: Taxable benefit will be
Annual value
Plus: Additional Benefit if cost of accommodation is > 75000 (note 1)
Reduction for unavailability (if unavailability is >30 days)
Contribution by employee for use of house.
Taxable benefit
X
X
X
(X)
(X)
X
Note 1: Additional benefit: Additional benefit = (cost of providing accommodation - 75000) x 3.25%
Cost of providing accommodation:
a) Purchase price
XX
Plus: Capital improvements before start of current tax year
XX
XX
b) If the duration between the date when employer purchase the property and the date when provided to
employee for use is more than 6 years then cost of providing accommodation will be calculated as follows:
Market value of accommodation when it was provided (provision date) to employee
XX
Plus: Capital improvements after provision date but before start of current tax year
XX
XX
Accommodation Provided is Rented By Employer:
Job Related Accommodation: It is Exempt.
Taxable benefit will be higher of:
Accommodation is job related if provided for:
a) Rent actually paid be employer
a) Proper performance of the employees duties
b) Annual value/Ratable value.
b) Better performance of the employees duties
There is no concept of expensive or inexpensive
c) Security arrangement for threat to employees life.
accommodation in this case.
* Directors can claim exemption under first two points.
5
BENIFITS TAXABLE ON P11D EMPLOYEES
GENERAL RULE: As a general rule cost of providing Benefits (mean Marginal or Additional cost) is taxable to
employees unless they are specific statutory rules.
5.1
Expenses Connected With Living Accommodation:
Expenses such as lighting and heating are taxable on the employee if they are paid by employer. If accommodation is
job related, the taxable limit is 10% of other employment income.
5.2
Beneficial Loans: A beneficial loan is one made to an employee below the official rate of interest of 3.25%.
Taxable benefit will be calculated as follows:
Interest expense as per HMRC
X
Interest expense actually paid
(X)
Taxable benefit
X
Interest Expense As Per HMRC: Interest as per HMRC is lower of:
1) Average Method:
2) Strict Method/Precise Method
{(Loan outstanding at start of tax year + Loan outstanding Balance of Loan outstanding in months X months X 3.25%
at end of tax year)/2} x 3.25% (official rate %)
12
Use the method required in exam. If question is silent then use method which gives lower taxable benefit.
If amount of loan is <10,000 then this will be treated as small loan and is exempt.
Qualifying loan (see ch. 1) is not taxable. Loan written off is taxable.
6
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5.3
ACCA F6
(TAXATION)
Car Benefit:
POOL CARS: No taxable benefit will arise if car provided is a pool car. Car is considered pool car if:
a) It is used by more than one employee.
b) Any private use is incidental.
c) It is not normally kept overnight at or near the residence of an employee.
NOT POOL CAR: if car is not pool car then Taxable benefit will be.
List price (Note 1) x CO2 emission %
X
Less: Non availability (if car not available whole year)
(X)
Less: Employee contribution for private use
(X)
Taxable benefit
X
List Price:
It is market price by ignoring the bulk discount
Plus cost to employer of additional accessories.
Less any capital contribution by employee
for use but maximum of 5,000.
5.4
Fuel Benefit: If Employer provide fuel for private use of motor car then fuel benefit will be calculated as:
Fuel benefit = 21,700 x CO2% (calculated for car benefit)
XX
Less: unavailability
(XX)
XX
If employee reimburses the full fuel cost to employer then no fuel benefit will arise however full fuel benefit will
arise if employee reimburses partial fuel cost to employer.
5.5
Approved Millage Allowance (AMA): Millage allowance is paid by employer to employee if employee used
his own vehicle. Amount up to AMA is exempt, excess is taxable and less is allowable deduction.
Up to 10,000 miles
Above 10,000 miles
Cars
45pence/mile
25pence/mile
Motor-cycle
24pence/mile
24pence/mile
Pedal-cycle
20pence/mile
20pence/mile
5.6
Van Benefit:
If van is provided to employee for private use then taxable benefit of 3,090 p.a. will arise. If employer also
provides fuel for the van then additional taxable benefit of 581 p.a. will arise.
Both Van benefit & fuel benefit be divided equally if van is used by more than 1 employee.
Both benefits will be reduced if van is not available for whole year.
5.7
Use Of Asset: If employer provides asset (except those which have special rules e.g. car, vans etc.) to
employee for use Then Taxable Amount is the higher of:
a) 20% market value of the asset when first provided (reduce if not available whole year)
b) Rent paid by employer (if asset is rented by employer)
5.8
Gift Of Asset:
Gifted New Asset To Employee: Taxable benefit will be equal to cost to employer.
1st Asset was Provided For Use Then Subsequently Gifted To Employee: Taxable benefit will be higher of:
1
2
Market value when gifted to employee
X
Market value of Asset when 1st provided
X
Less: benefits already taxed for use of Asset
(X)
Less: Price paid by employee
(X)
Less: Price paid by employee
(X)
Benefit
X
Benefit
X
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ACCA F6
(TAXATION)
CHAPTER 4
PENSION & NATIONAL INSURANCE CONTRIBUTIONS
PENSION
OCCUPATIONAL PENSION SCHEME (OPC)
Class 1A:
It is payable by employer on taxable non-cash benefits
(e.g. living accommodation benefit, car benefit, fuel
benefit, beneficial loan, use of asset, gift of asset etc.)
provided to P11D employee at the rate of 13.8%.
It is allowable deduction for employer and exempt
benefit for employee.
It is paid by 19th July, following the end of the tax year.
19 july 2015 for 2014/15.
Class 2:
Payable by self-employed aged16 until pension age.
Paid 2.75/week if trading profit of tax year exceeds
5,885.
It is not allowable deduction from trading profit.
It is paid in 2 installments 31 January in the tax year and
31 July after the end of tax year.
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ACCA F6
(TAXATION)
Class 1 Secondary:
Class 4: Payable by self-employed aged 16 at the
It is payable by employer for employee on same cash
start of tax year on tax adjusted trading profits as
earnings calculated for class 1 primary contribution.
follows:
It is paid in respect of employees aged 16 until
Trading Profit
Contribution Rates
employee ceases employment.
.1 - 7,956 per year
Nil
Class 1 secondary contribution is calculated as follows:
7,957 - 41,865 per year
9%
Cash Earnings
Contribution Rates
Above 41,865
2%
.1 - 7,956 per year
.1 - 7,956 per year
It is not allowable deduction from trading profit.
Above 7,956
Above 7,956
Payable with income tax under self-assessment system.
Employment Allowance: No class 1 secondary NIC will be
payable by employer if amount of total class 1 secondary
NIC of all employees is 2,000/annum. If class 1 secondary
NIC exceeds 2,000 then NIC above 2000 will be payable to
HMRC.
Allowable deduction for employer & exempt benefit for
employee
CHAPTER 5
INCOME FROM SELF EMPLOYMENT
BADGES OF TRADE: The following tests are used to identify trade. Subject matter, Ownership duration , Frequency
of transactions, Improvement/Supplementary work on goods, Reason for sale ,Motive.
TRADING PROFIT ADJUSTMENTS
Net profit per accounts
ADD BACK: Expenditure not deductible for tax but deducted
ADD BACK: Income not included in but taxable under trading profit
LESS:
Expenditure deductible for tax but not deducted
LESS:
Income not included but taxable under trading profit
Tax adjusted trading profit
Income not included but taxable under trading profit:
Capital Gains, Property Income, Interest Income and Dividend received.
Income included but not taxable under trading profit: Drawings by owner.
ALLOWED AND DISALLOWED EXPENSES
Capital Expenditure is disallowed and Revenue
Expenditure is Allowable.
Initial purchase price and improvement is capital
expenditure and is disallowed.
Replacement of an asset with extended capacity is
disallowed.
Repair to an asset is revenue expenditure and is
allowable.
Rental Expense
Any rent paid for the purpose of trade is allowable.
Leasing charge of car emitting 130 g/km Co2 or less is
allowable.
If CO2 emission of car exceeds 130g/km then 15% of
Rental/leased charges are disallowed.
9
X
X
X
(X)
(X)
X
Car Leasing
Premium paid on grant of short lease is allowable and is
calculated as follows:
(51
n = no of
n)/50
years
of
X Premium
lease.
N
Bad Debts/Allowance For Receivables
Bad debts and allowance for receivables relevant to
trade are allowable e.g. bad debts on credit sales.
General provisions for bad debts are disallowed and
specific provisions are allowable.
Non-trade bad debts are disallowed. ( E.g. bad debt on
loan given to employees, customers and suppliers.)
Recovery of bad debts is taxable.
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ACCA F6
(TAXATION)
Drawings
Drawing by the owner in the form of salary, cash or
goods are disallowed.
Interest on capital is disallowed.
Excessive salary paid to owners family member is
disallowed.
Other Expenses
Qualifying (eligible) interest is disallowed.
Interest paid on borrowings for trading purposes is
allowable. Interest paid on overdue tax is not deductible
and interest received on overpaid tax is not taxable.
Eligible interest is disallowed.
Fines, penalties and payment of damages are all
disallowed unless car parking fine paid on behalf of an
employee.
Pre-trading expenditure is allowable if it is incurred in
the seven years before a business start to trade and
follows the above rules.
Depreciation and amortisation is disallowed.
Expenditure relating to proprietors car, telephone -----etc is disallowed.
Redundancy, loss of office and Removal expenses for
employees
Contributions to pension scheme
Insurance expense and Patent Royalties are allowable.
Payment of Class 1 ( employer) NIC , Class 1A NIC
The general rule is that expenditure not wholly and
exclusively for the purpose of the trade is not allowable.
Payment of class 1 (employee) NIC, Class 2 NIC, Class 4
NIC are disallowed.
Payment of class 1 (employer) NIC, and Class 1A NIC are
allowable.
Employer contribution to pension scheme for employee.
Loss on sale of assets (capital losses) are disallowed.
Capital allowances are allowable.
CHAPTER 6
CAPITAL ALLOWANCES
Capital allowances are available on plant and machinery and deducted from tax adjusted trading profit.
Plant and machinery is something with which a trade is carried on except doors, walls, windows, ceiling, floors and
water system, electrical system, gas system.
Capital allowances are given on original cost and any subsequent capital expenditure. Cost of alterations to the
building needed for installation of plant and computer software cost will also become part of plant & machinery.
GENERAL POOL OR MAIN POOL
The cost of most of the plant and machinery purchased by a business becomes part of a pool called main pool on
which capital allowances may be claimed.
New or second hand Cars having co2 emission between 96g/km 130g/km are included in main pool.
Second hand cars with co2 emissions of 95g/km or below
Addition increases the amount of pool and disposal reduces the amount of pool.
10
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ACCA F6
(TAXATION)
SPECIAL RATE POOL: Following P&M will become part of special rate pool
Long-life assets: it includes P&M with a working life of 25 years or more and annual running cost of 100,000.
Integral features of a building: it includes Electrical & general lighting systems, Cold water systems, Space or
water heating systems, Powered systems of ventilation, cooling or air purification and Lifts and escalators
Motor cars (both new & second hand) with co2 emissions > 130g/km
Thermal insulation of building.
SHORT-LIFE ASSETS (SLA)
P&M except cars which individual wishes to sell or scrap within 8 years of the end of the period of account in which
asset is purchased are called short-life assets. Every short life asset is kept in separate pool.
The election (written notice to HMRC) must be made for short life asset.
AIA and WDA are available as normal.
Balancing allowance or charge arises on disposal within 8 years after the accounting period of purchase.
If no disposal takes place within eight years after the accounting period of purchase the remaining balance is
transferred to the general pool immediately.
PRIVATE USE ASSETS
If owner uses an asset for private purposes, capital allowances are given only on business proportion. Every private
use asset is kept in separate pool.
On disposal of asset, balancing charge (if profit) or a balancing allowance (if loss) will arise which is then reduced to
business proportion.
Private use of an asset by an employee has no effect on capital allowances.
SALE OF PLANT AND MACHINERY
On disposal of P&M deduct the lower of the sale proceeds and the original cost from the total of; TWDV brought
forward on the pool plus Additions to the pool.
FIRST YEAR ALLOWANCE (FYA)
FYA of 100% is available in the year of purchase on Purchase of new low emission cars. (95 g/Km co2 or less).
Taxpayer has the option to claim full FYA, partial FYA or even NO FYA. However if partial FYA is claimed then
remaining amount will go to main poll but no WDA will be given in that year.
FYA is not time apportioned if accounting period is short or long than 12 months.
No FYA is available in year of cessation of trade.
ANNUAL INVESTMENT ALLOWANCE (AIA)
It is allowance of 500,000 p.a. on new purchased P&M other than cars.
Value of new purchased P&M which exceeds 500,000 p.a. will be transferred to relevant pool and WDA of 18% or
8% may be claimed.
500,000 limit is prorated for short and long period of accounts.
No AIA is available in the year of cessation of trade.
Taxpayer has the option to claim full or partial AIA or even no AIA if it does not want to. However any unused AIA
will be wasted.
It is most beneficial to claim the AIA in the following order:
a) Special rate pool b) General pool c) Short life assets d) Private use assets
WRITTEN DOWN ALLOWANCE (WDA)
WDA is available on net value (WDV plus addition less disposal).
WDA of 18 % on reducing balance method is given each year on Main Pool".
WDA of 8% on reducing balance method is given each year on Special Rate Pool".
Full WDA is given in year of purchase and no WDA is given in the year of disposal.
WDA of 8% or 18% is prorated where a period of account is 12 months.
WDA will be restricted to business proportion if there is a private use of the asset.
Small pool WDA
If the Balance in the main pool or special rate pool remains less than 1000 than all amount in the pool is written
off and transferred to allowance column.
1000 limit is for 12 month period so it must be prorated for short and long period of accounts.
11
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ACCA F6
(TAXATION)
CARS
Cars emitting 95 g/km co2 (low emission Cars) are eligible for FYA of 100%.
Second hand motor cars emitting 95 g/km co2 or less are included in main pool.
Both new and second hand Cars emitting CO2 between 95 g/km to 160 g/km are included in main pool.
Both new and second hand Cars emitting CO2 over 130 g/km are included in special rate pool.
If there is private usage of car by proprietor (Not employee) than only business proportion of the capital Allowance
can be claimed.
Cessation of trade
Not FYA, AIA and WDA is available in last year of trade.
Add addition and deduct disposals made in last period of account from the relevant pool.
Calculate balancing allowance (if loss) or balancing charge (if profit) as appropriate.
Note: Such cars must be kept separate from other assets.
Note: Remember if Period of account exceeds 18 months then it must be split in two periods of account 1st of 12
moths and 2nd of remaining months. Capital allowances are calculated for each period of account separately.
Proforma capital allowances computation:
Main Pool Special
Short Life Short Life Private Use Private Use Allowance
Rate Pool asset 1
asset 2
Assets 1
Assets 2
(Business %) (Business %)
WDV b/f
Purchase of CAR which Qualify for FYA
New Motors Cars CO2 95 g/Km
FYA @ 100%
Purchase of CAR which Qualify for AIA
Cars CO2 emission 95 130 g/km
Cars CO2 emission of > 130 g/km
Additions qualify for AIA ( 500,000)
a) Special Rate Pool Additions
Less: AIA
b) Main Pool Additions
Less: AIA (Remaining Amount)
c) Short Life Assets
Less: AIA (Remaining Amount)
d) Private Use Assets
Less: AIA (Remaining Amount)
Disposals:
Lower of cost and Selling Price
WDA @ 18%
WDA @ 8%
WDA @ 18%/8%
X
(X)
X
X
X
X
(X)
X
(X)
X
(X)
X
(X)
X
X
X
X
(X)
X
(X)
(X)
X
(X)
X/(X)
(X)
X/(X)
(X)
X/(X)
X
(X)
X/(X)
(X)
12
X
X
X
BU % only
X/(X)
BU % only
X
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ACCA F6
(TAXATION)
CHAPTER 7
BASIS PERIOD
Rules for matching tax adjusted profits of business with tax years are called basis period rules.
1st Year Rule
1st Basis period will be from start of trade to following 5th April.
Closing date of 1st period of account falls in 2nd tax year.
Yes
Check length of 1st period of account
12 Months
B.P will be 12 month back from
closing date of 1st period of account.
No
< 12 Months
B.P will be next 12 month
from start of trade.
3rd & subsequent B.P will be 12 month back from closing date that falls in relevant tax year.
NOTE: Some profits may fall into more than one basis period in the opening years and are known as overlap profits. An
overlap, relief will be available on cessation, or sometimes, on change of accounting date.
Closing Year Rule
Change of
accounting
Date.
1) Identify the last tax year 2) Make B.P by using subsequent year rule except last tax year.
3) Last B.P will be from next date of previous B.P till date of cessation.
An unincorporated business is allowed to change its accounting date if certain conditions are met.
Conditions to be met:
Must be notified to HMRC on or before 31 January following the tax year in which change is to be made.
The first new period of account must not exceed 18 months in length,
If first new period of account is longer than 18 months, then two sets of accounts will have to be prepared.
There must not have been another change of accounting date during the previous five tax years. (This
condition may be ignored if HMRC accept that present change is made for genuine commercial reasons.)
Basis Period for the tax year in which accounting date changes
Short period of
Short period of account Long period of account
account and one
and two closing dates
and closing date end in a
closing date end
end in a tax year.
tax year.
in a tax year.
B.P will be 12 month B.P will be from start of
B.P for that year will be
back from new
previous period of acc. till same as new accounting
accounting date.
new accounting date.
period.
Overlap profit relief will
Overlap profit relief will be
This will create
be given upto months
given upto months
further overlap profit
exceeding 12 months.
exceeding 12 months.
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CHAPTER 8
TRADING LOSSES
If the basis period has a trading loss, the trading profit assessment to include in the income tax computation is nil. But
remember trading loss can never be overlapped.
Carry forward of trading losses (S.83)
Relief of trading losses against capital gains
Trading loss may be carry forward and set-off from first
Under this section current year trading loss can be set off
available future trading profits from same trade.
against the chargeable gains of:
Losses may carry forward for indefinite number of years
a) Current year only OR
b) Previous year only OR
until all the loss is relieved.
c) Current year and then previous year OR
Partial claim is not allowed.
d) Previous year and then current year.
Claim must be made to carry forward trading losses
The trading loss is first set against general income of the
within 4 years from the end of year of loss. E.g until 5
year of the claim, and only any excess loss is set against
April 2019 for losses arising in 2014/15.
capital gains.
It is disadvantageous from perspective of cash flow, time Partial claim is not allowed.
value of money, uncertainty about future profit and
Claim for loss must be made by 31 January which is 22
relief may take long time to materialise.
months after the end of tax year of loss. E.g until 31
January 2017 for losses arising in 2014/15.
Loss relief against total net income
Trading Losses may be set-off from total net income of:
a) Current year only OR
b) Previous year only OR Relief of trading losses incurred in early years of trade
(opening years loss relief)
c) Current year and then previous year OR
Loss
can never be overlapped. So loss considered in B.P
d) Previous year and then current year.
of
one
tax year will not be considered in next tax year.
Partial claim is not allowed.
Trading
loss incurred in any of the first Four Tax years of
Remaining loss after claim against total income may be:
trade then this loss may be set off against total income of
Set off against capital gains
previous 3 years on FIFO basis.
Set off against future trading profit.
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ACCA F6
(TAXATION)
CHAPTER 9
PARTNERSHIP
A partnership is a single trading entity. Each individual partner is effectively treated as trading in his own right and is
assessed on his/her share of the adjusted trading profit of the partnership.
Trading income: Partnerships tax adjusted profits or loss for an accounting period is computed in the same way as
for a sole trader and Partners salaries & interest on capital are not deductible: these are an allocation of profit.
Allocations of trading profit/trading loss: Trading profit/trading loss for the accounting period is divided between
partners according to their profit sharing ratio but after deduction of Partners salaries and interest on capital.
A change in the profit sharing agreement: If the profit sharing agreement is changed during a period of account, the
profit must be time apportioned before allocation to partners.
Partnership capital allowances: Capital allowances are deducted as an expense in calculating trading profit. If assets
are used privately, the business proportion is included in the partnerships capital allowances computation.
Commencement and cessation:
Rules for commencement and cessation are same as for sole trader. Profit is allocated between the partners for
accounting period; then the assessment rules are applied and each partner is effectively taxed as a sole trader.
When a partner joins a partnership, he is treated as commencing and when a partner leaves a partnership he is
treated as ceasing. Each partner has his own overlap profit available for relief.
Change in members of partnership: Until there is at least one partner common to business before and after the change,
partnership continues. Commencement or cessation rules apply to individual joining or leaving partnership.
Partnership Losses: Losses are allocated between partners in same way as profits & Loss relief claims available are
same as for sole traders. A partner joining the partnership may claim opening year loss relief, for losses in the first
four years of his membership of partnership. A partner leaving a partnership may claim terminal loss relief.
Partnership investment income: Interest and dividend income is kept separate from trading profit but are shared
among partners according to their profit sharing ratio. After sharing income each partner is taxed independently.
Limited Liability Partnership: If partnership is limited liability partnership then the partners share the trading loss
among themselves up to maximum of capital they have contributed in the partnership.
PARTNERSHIP CAPITAL GAINS: Each partner:
Deemed to own a fractional share (as per profit sharing ratio) of every asset of partnership.
Taxed in his own right on his share of partnership gains along with his own personal gains.
Annual exemption and CGT relief is available in normal way.
Disposal of partnership Assets to third party:
Change in
partnership
agreement
after
Calculate gains as normal
Revaluation:
Allocate the gain between partners
No charge to CGT unless occurs after a
revaluation in the accounts.
Distribution to partners
If there has been revaluation
Chargeable gain arise on a partner selling his
Normal gain computation
partnership share
Using statement of financial position value of
Partner purchasing partnership share is also
asset as consideration.
liable to gain as per partnership share but It
can be deferred against base cost of asset.
CASH BASIS FOR SMALL BUSINESSES
Cash basis means profit will be calculated on the basis of cash received and expenses paid in the period of account.
Unincorporated businesses (i.e. sole traders and partnerships) having annual turnover under the VAT registration limit
(81,000 with effect from 1 April 2014) can choose to calculate profits / losses on cash basis rather than the normal
accruals basis. Note: The cash basis option is not available to companies, and limited liability partnerships (LLPs)
Under the cash Basis:
A business can prepare its accounts to any date in the year on the basis of cash receipts and payments.
there is no distinction between capital and revenue expenditure in respect of plant, machinery and equipment for tax
purposes, therefore:
Purchases are allowable deductions when paid for, and
Proceeds are treated as taxable cash receipts when an asset is sold.
A flat rate expense deduction for motor car expenses is claimed instead of capital allowances.
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ACCA F6
(TAXATION)
CHAPTER 10
CAPITAL GAIN TAX - INDIVIDUALS
1
Introduction
CGT is charged on gains arising on chargeable disposals of chargeable assets by chargeable persons.
Chargeable Disposal: An asset is regarded as disposed, if its ownership changes. E.g. Sale of whole or part of an asset,
Gift of an asset, Loss or total destruction of an asset.
Date of disposal:
Event
Date of disposal
Normal
Conditional contract
Date when all the conditions are satisfied and contract become legally binding.
Death transfer
No CGT implication
Chargeable Assets: All assets are chargeable unless specifically exempt. Exempt assets include:
Motor vehicles
National Savings & Investment certificates
Cash, Debtors and trading inventory
Decorations awarded for bravery
Damages for personal injury
Shares in VCT
Chargeable Person: An individual who is either resident or ordinarily resident in the UK is liable to pay UK CGT on his
worldwide gains and non-resident person in UK will pay CGT on his UK gains only.
Pro Forma to Calculate Capital Gain/Loss on Individual Assets
Disposal proceeds
Less: Incidental cost of disposal
Net proceeds
Less: Allowable Costs (Purchase price, Incidental cost for purchase, Capital improvements)
Capital Gain / (Capital loss)
16
X
(X)
X
(X)
X/(X)
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Disposal proceeds
Disposal Actual consideration is used when the transaction is made at arm's length.
Market value is used in other cases for example when the disposal is a gift
Disposal proceeds will be the Actual Selling price if Disposal is made to an unconnected Person and Disposal
proceeds will be the Market value of asset disposed off if Disposal is made to a connected.
Other Allowable Costs
Incidental costs:
Cost of acquisition and any incidental costs of acquisition
Fee & commission of agent, legal fee,
Capital expenditure on enhancing the value of the asset
advertising cost, auctioneers fee, agency fee
Pro Forma to Calculate Capital Gain Tax (CGT)
Capital Gain on disposal of asset
X
Less: Capital loss on disposal of asset
(X)
Net Capital Gains in tax year
X
Less: Capital losses brought forward
(X)
Less: Trading loss (S-261B)
(X)
Net Capital Gains
X
Less Annual exemption
(10,900)
Taxable Gains
X
Annual exemption: Every individual has an exempt amount for each tax year. For 2014/15 it is 11,000
Rates of CGT: CGT rates are determined after considering a taxable income. CGT rate of 18% is applied on gains up to
remaining basic rate band of 31,865. CGT rate of 28% is applied on gains in excess of the basic rate band.
Payment of CGT
CGT is due in one amount on 31 January following the tax year (2014/15 by 31 January 2016)
2
Transfer of Assets between Husband and Wife or Between Civil Partners
The transfer of assets is considered at acquisition cost instead of actual Proceeds so No gain/ No loss.
3
Capital Losses
Capital losses are deducted from capital gains of the same tax year; the unrelieved capital losses may be carried forward and deducted
from future capital gains but up to the level that the annual exemption do not waste.
4.1
Chattels: A chattel is a tangible moveable asset.
Non-Wasting Chattels:
Wasting Chattels:
Chattels with remaining life of >50 years are called Non- Chattels with remaining life of 50 years are called
wasting chattels. E.g. Antiques and paintings.
wasting chattels. These are exempt from CGT. E.g.
chargeable gain or capital loss is calculated as follows:
racehorses and greyhounds.
Plant & Machinery: There is an exception for P & M on
Cost
Proceeds
Treatment
which capital allowances have been claimed.
6,000 6,000
Exempt
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4.2
Asset Lost or Destroyed
No Insurance Proceed
Insurance Proceed Received
Disposal Proceed Nil No Replacement
Replacement of Asset within 12 Months
Allowable cost
(X)
of Asset
Full Reinvestment: No gain/no Loss Partial Reinvestment:
Capital Loss
...X.
Insurance Proceed
Less: Allowable cost
Capital Gain
Roll-Over Relief
Normal CGT
calculation.
4.3
Asset Damaged
No Insurance Proceed
No Disposal
Not Used to Restore the Asset:
Treat as Part Disposal.
Disposal Proceed
X
Allowable cost:
Original cost X A
(X)
A+B
.
Gain/ Loss
X .
A= insurance proceed
B= M.V of damaged asset
.
X
(X)
X
(X)
Nil
X
(X)
...X
Some
gain
is
chargeable
immediately which is lower of:
a) Total gain
b) Proceed not reinvested
Gain Deffered will be = total gain
less gain chargeable immediately
X
(X)
(X)
4.4
Part Disposal if there is a part disposal of an asset then gain or loss on that asset can be calculated as follows.
Disposal Proceed
X
A= market value of part disposed off
B= market value of remaining part
Less: Allowable cost [ Cost x A/A+B ]
(X)
X
5
DISPOSAL OF SHARES
(individuals)
5.1
Valuation rule for shares
Unquoted shares: Market value will be given in exam. Matching Rules on Sale of Shares (Individuals)
Quoted shares: When quoted shares are gifted, Shares sold will be matched in the following order:
Market value of shares for CGT will be lower of:
a) Shares purchased on the same day
a) Lower quoted price + 1/4 ( higher quoted price b) Shares purchased on the following 30 days of sale
lower quoted price )
c) Shares from Share Pool
b) (Highest marked bargain + Lowest marked Share Pool: Contains all shares purchased before date of
bargain)/2
disposal and consist of two columns; 1st of Number of
shares and 2nd of Cost of shares.
5.2
RIGHT SHARES: The right shares are added in previous shareholding as normal acquisition in the share pool
5.3
BONUS SHARES: Treated in the same way as right shares except that the Bonus Shares do not have cost.
5.4
REORGANISATION AND TAKEOVER
REORGANISATION: Exchange of existing shares in a company for other shares of another class in the same company.
TAKE-OVER: When a company acquires shares in another CO. either in exchange for shares, cash or mixture of both.
Consideration in Shares only
Consideration in cash and shares
No CGT at the time of takeover or reorganisation. It is treated as part disposal and gain or loss is calculated is
Cost of original shares becomes cost of new shares follows:
Where the shareholder receives more than one Disposal Proceed (cash)
X
type of shares in exchange for the original shares, Less: Allowable cost
then cost of original shares is allocated to the new Cost of original shares X Cash Received
(X)
Cash Received + M.V of new shares
.
shares by reference to the market value of new
X
shares.
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ACCA F6
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6.1
Principal Private Residence Relief (PPR relief): It applies when an individual disposes off his only or main private
residence or dwelling house which he owned. If an individual has more than one residence, he can nominate one
residence as his principal residence by notifying HMRC in written. Married Couple/Civil Partners are entitled to only one
residence between them for the purpose of Principal Private Residence exemption.
Calculating the Relief: If a person lives in PPR during the whole period of ownership the whole gain is exempt. Where
there has been a period of absence from PPR the procedure is as follows.
Capital gain on disposal
Less: PPR Relief = Gain X
X
Period of occupation
Period of ownership
(X)
X
Periods of occupation: Period of occupation includes periods of both Actual occupation and Deemed occupation
Deemed occupation: Periods of deemed occupations are:
a) Last 18 months of ownership
Points b-d will only apply if at some time both before & after period of absence there is a period of actual occupation
by the owner. Reoccupying is not necessary for point c and d if prevented by terms of his employment.
Business use: Where part of a residence is used for business purposes throughout period of ownership, relief is not
available on gain related to that part. However last 36 months still applies to that part unless the business part was at
some time used as main residence.
Letting relief: Letting relief is available to cover any gain not covered by PPR if Owner is absent (not covered by
deemed occupation rules) and the property is rented out or Part of the property is rented out, the remaining part
being occupied by the taxpayer. Letting relief is the lower of:
a) PPR relief given
b) 40,000
c) Part of the remaining gain (after PPR relief) which relates to a period of letting
6.2
Entrepreneurs' relief: Relief covers the first 10m of qualifying gains that an individual makes during their
lifetime. This gain qualifying is taxed at a lower capital gains tax rate of 10% regardless of a persons taxable income.
Relief must be claimed within 22 months from end of tax year of disposal. For 2014/15 by 31 January 2016.
Qualifying Business Disposals:
Disposal of assets of unincorporated trading business within three years from cessation.
Shares are in individuals personal trading company and he is also an employee (full time or part time) of CO.
(CO. in which individual owns 5% of ordinary shares & 5% voting right is called personal trading company.)
Qualifying Ownership Period: The assets must have been owned for one year prior to the date of disposal
Further points
Relief is not available on gains arising from disposal of individual assets or assets held for investment purpose.
The annual exemption and any capital losses should however be deducted from gains that do not qualify for
entrepreneurs' relief as they are taxed at a higher capital tax gains rate (18% and/or 28%)
Easy way is to keep the gains, qualifying for entrepreneur's relief and not qualifying in separate column.
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6.3
Roll-Over Relief: Roll-over relief means postponed or deferred gain. The gain is not taxed immediately but is
postponed until the individual makes a disposal of the replacement asset.
This relief is available if a qualifying business asset is sold and another qualifying business asset is purchased within
the qualifying time period.
Base cost of new asset is calculated by deducting the gain on old asset against the cost of new/ reinvested asset.
An individual must claim the relief within 4 years from the end of the tax year of disposal.
Qualifying Business Asset: Rollover relief is available on assets which are used in business. Qualifying assets include
Land and buildings, Fixed plant & machinery (unmovable) and Goodwill.
Qualifying Time Period: New asset must be purchased within 1 year before and 3 years after disposal of old asset.
Partial Reinvestment of Proceeds: If there is full reinvestment roll-over relief is available on full gain. If there is partial
reinvestment of proceeds then part of the gain is taxable at the time of disposal.
Gain Chargeable at the time of disposal is lower of:
b) Full gain
Non-business use Full rollover relief is only available if asset being disposed was used entirely for business during
whole period of ownership. If there is private use of asset rollover relief is only available on business portion.
Reinvestment in depreciating assets An asset with an expected life of 60 years (e.g. Fixed plant & machinery) is
called depreciating asset. If replacement asset is a depreciating asset then gain deferred is not deducted from cost of
new asset (no calculation of base cost) Instead gain is postponed and will be taxable on earlier of:
(i) disposal of new asset (ii) Date the new asset ceases to be used in trade
Tax planning
Unused annual exemption of current year & b/f capital losses is also available then do not claim roll over relief.
If individual wants to retain some amount of cash out of disposal proceeds before reinvestment then it should be
equal to the b/f capital loss plus annual exemption plus 261-B trading loss.
If on disposal of whole of business, individual decide to reinvest the disposal proceeds then rollover relief and
entrepreneur relief both will be available. However individual has to claim 1st rollover & then entrepreneur relief.
6.4
RELIEF FOR THE GIFT OF BUSINESS ASSETS
A gift relief is only available on gift of qualifying business assets. Donor (person making the gift) is treated as making a
disposal at market value and donee (person receiving the gift) is treated as if he had acquired a gift at market value. When
gift relief is claimed, the donor has no gain. The gain is deducted from the donees cost (market value) In order to claim
gift relief Donee must be Uk resident. This can be illustrated as follows:
DONOR
DONEE
Gift
Proceed
MV
Cost
MV
Less: Cost
(X)
(X)
Gain
(X)
Nil
Availability of the relief: Claim must be made by both donor & donee and must be made 4 years from the end of the
tax year in which the disposal occurred. For a gift made in 2013/14 the claim must be made by 5 April 2017.
Qualifying assets: Gift relief may be claimed on the gift of the following assets:
Assets used in the trade of Donor (Sole trader or partner in partnership) or Donors personal trading company
Unquoted shares and securities of any trading company.
Quoted shares or securities of the individual donors personal trading company. (CO. in which individual owns 5% of
ordinary shares & 5% voting right is called personal trading company.)
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Sale at undervalue: (Gift relief is also available for sales made below market value and above cost.)
Proceeds received above original cost are chargeable to CGT immediately and the remaining gain can be deferred.
Gift of Shares:
Gift of shares
Unquoted shares of any CO.
Quoted shares
Personal trading company
6.5
Chargeable assets
Chargeable assets (CA): Any asset, if sold would give rise to capital gain or loss is called chargeable asset.
Chargeable business assets (CBA): Any chargeable asset that is used by business in his trade is called chargeable
business asset. Shares, securities and other assets held as investments are not chargeable business assets.
Incorporation relief:
Incorporation relief is available when an individual transfers his business into company. On transfer into company, assets
of the business are deemed to be disposed of at market value to the company.
Conditions for the relief:
All the assets of the business (other than Capital gain on business assets transferred to company is deferred
cash) must be transferred
by deducting it from the cost of the companys shares acquired.
The transfer must be of a business as a If some consideration given by company for the assets is not shares
going concern
(e.g. in cash) the capital gain eligible for incorporation relief is:
Consideration must be wholly or partly in
shares.
Capital Gain X
An individual can elect not to receive incorporation relief. Election must be made by 31 January, 34 months after the
end of tax year of disposal. This election might be made if the taxpayer has losses and/or annual exemption which
would otherwise be deferred under incorporation relief.
Incorporation involves disposal of whole or part of business so entrepreneurs relief can also be claimed. If election is
made to disapply incorporation relief, entrepreneurs relief can then be claimed. This may be beneficial
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ACCA F6
(TAXATION)
CHAPTER 11
INHERITANCE TAX
1
INTRODUCTION:
Due Date of Payment of IHT For life time tax on CLTs, the due date depends upon date of the gift:
Date of CLT
6 April --------------- 30 September
1 October -------------- 5 April
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ACCA F6
Taper Relief:
Years between Transfer & death
3 years or less
More than 3 but less than 4
More than 4 but less than 5
More than 5 but less than 6
More than 6 but less than 7
Reduction in
death tax
0%
20%
40%
60%
80%
XX
XX
XX
XX
XX
XX
XX
XX
(XX)
(XX)
XX
XX
(XX)
XX
IHT payable (IHT @ 40%)
XX
Cost of administrating the estate by executor is not an allowable expense as it is incurred after the death.
Due Dates of Payment of Death IHT: IHT arising on death is payable by the Personal Representatives (PRs). The time
limit for this is 6 months from the end of the month in which the death occurred.
10
Transfer of Unused Nil Rate Band
If any partner in the spouse dies with unused nil rate band then the other partner may claim to increase his/her nil rate band by
the amount of unused nil rate band of deceased partner.
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ACCA F6
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CHAPTER 12
CORPORATION TAX
1
INTRODUCTION:
Companies resident in the UK are chargeable to corporation tax on worldwide income and gains. Company is UK resident
if it is either incorporated in UK or incorporated overseas but centrally managed and controlled from UK.
Calculation of Corporation Tax Liability:
X LTD; Corporation Tax Computation For the 12 months
ended XX/XX/XX
Trading Profits
XX
Interest Income
XX
Income From Foreign Sources
XX
Rental Income
XX
Chargeable Gains (profit on disposal of assets)
XX
Total profit
XX
Less: Charges on Income (Gift Aid Donation)
(XX)
Total Taxable Profit (TTP)
XX
Add: Franked Investment Income (FII)
XX
Augmented Profits
XX
Financial Years (FY): The tax rates to be used for corporation tax are set for Financial Years (FY). Financial starts on 1 st
April and ends on 31 march. FY 2014 = 1 April 2014 to 31 March 2015
Period of Account: It is the duration for which the company prepares it accounts. It is generally 12 months long, but
can be longer or shorter than 12 monts.
Accounting Period:
It is the period according to which corporation tax is paid. It can be 12 months but never >12 months.
When accounting period start?
When accounting period end? It ends on earlier of:
When a company starts to trade
12 months after its start
When the previous accounting period ends.
The end of the company's periods of account
The company's ceasing to be resident in the UK
When a company ceases to trade, or when its profits being
liable to corporation tax are ceased.
Corporation tax Liability:
Corporation tax liability is calculated as:
Taxable Total Profits X corporation tax rate for financial year
to
1,500,000
1,500,001
to
above
Fraction
FY2013
20%
FY2014
20%
24% Less
23% Less
21% Less
24%
23%
21%
1/100
3/400
1/400
If Augmented profit falls between 300,000 and 1,500,000 then marginal relief applies and corporation tax payable
is calculated as follows:
Taxable Total Profits x Main Rate
=
X
Less: Marginal Relief
=
(X)
X
Taxable Total Profits
Marginal relief =
Fraction* x (upper limit - augmented profits)
X
Augmented Profits
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ACCA F6
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2.5
Foreign Income:
Any foreign income must be included to calculate TTP. Foreign income is gross up by any foreign tax suffered.
2.6
Qualifying Charitable Donations:
Qualifying charitable donations which disallowed from trading profit will be deducted from total profit in main Performa
of corporation tax computation.
All donations by company are gross so no need of grossing up.
If qualifying charitable donations exceeds trading profit then remaining donation will be wasted or can be transferred to
75% group member.
2.7
PATENT ROYALTIES:
Patent royalties are received gross from another company and net of basic rate tax from individuals.
They are chargeable on an accrual basis, under trading profits calculation, if patents are held for trading purposes and
are treated under the category of Other Income, if held for non-trading purposes.
Patent royalties paid are treated as trading expense deductible (if related to trade).
Patent royalties are paid net to an individual and gross to another company.
2.8
CHARGEABLE GAINS: A company is liable to corporation tax on its total net chargeable gains in the CAP.
Calculating net chargeable gains of a company
Calculation of gains and losses for companies
Capital gains arising on disposals in CAP
X
Disposal proceeds (or market value)
X
Less incidental costs of disposal
(X)
Less: Allowable losses arising on disposals in CAP (X)
Net proceeds
X
Less allowable costs
(X)
Less: Allowable losses b/f from previous CAPs
(X)
Un-indexed gain
X
Net chargeable gains
X
Less indexation allowance
(X)
Chargeable gain
X
Indexation allowance: Indexation allowance gives a company some allowance for the effect of inflation in calculating
a gain. It is given from the date of expenditure to the date of disposal. IA cannot create nor increase a capital loss.
Indexation Allowance = Cost X Indexation Factor
Indexation Factor = (RPI in month of disposal RPI in month of expenditure)
RPI in month of expenditure
DISPOSAL OF SHARES AND SECURITIES :
ROLLOVER RELIEF :
All rules are same as individuals except
Rollover relief is the only capital gains relief
available to companies. It allows the deferral
Matching Rule:
Shares acquired on same day
Shares acquired on previous 9 days
Shares in share pool.
On disposal or acquisition of shares indexation allowance is added in cost.
Bonus Issues
Bonus shares are added in share pool with no increase in cost.
Not index the cost of original shares to the date of bonus
Rights Issues
It increases the number of shares and cost of share pool.
Pool is indexed to the date of the rights issue.
LOSSES COMPANIES
TRADING LOSSES
Carry forward relief (Section 45):
Trading loss will be carry forward and set off against 1st available future TATP from same trade. Loss can be carry
forward indefinitely and partial claim is not allowed.
Set Off Trading Loss Against Total Profit. (Section 37):
Current year trading loss can be off set against:
a) The total profits before gift aid of the current year.
b) Having first relieved the trading loss against total profit of current year only then any remaining trading losses can
be carried back against total profits before gift aid of the previous 12 months.
c) Partial claim is not allowed.
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ACCA F6
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Tax Implications: If CO. becomes connected CO. during the accounting period it will be treated as connected CO.
for whole of the accounting period. Overseas COs are included but Dormant COs are excluded. Dividend received from
associated COs is not included in FII. Upper & lower limits are divided by number of associated COs. Only one AIA is
available to a group of companies and group members can allocate it in any way across the group.
4.2
75% Loss Relief Group:
75% Loss Relief Group is formed when:
One company is the 75% subsidiary of another, OR Both companies are 75% subsidiaries of a third company
Company is 75% subsidiary of another if other company:
own 75% of share capital, & Entitled to 75% of subsidiarys assets on winding up, & Entitled to 75% of subsidiarys
income on distribution.
Sub-subsidiaries: Holding company must have an effective interest of 75% in sub-subsidiary.
Tax Implications:
Group can be formed without ultimate parent company and one company can be part of more than one group.
Overseas Companies can become part of this group but relief is only available to UK resident companies unless overseas
company is EEA.
Member of 75% loss relied group can transfer:
Unused Trading losses & property business loss
Unused Gift Aid Donation
Unused non trading interest expense.
Only current year losses are eligible for relief and Capital losses are not eligible for group relief.
Surrendering CO. (CO. that surrenders its loss) may surrender as much of loss as it wants to & it is not necessary to relieve
st
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ACCA F6
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4.3
75% Capital gains Group: 75% capital gain Group is formed when:
One company is the 75% subsidiary of another, OR Both companies are 75% subsidiaries of a third company
Sub-subsidiaries: Holding CO. must have effective interest of 50% in sub-subsidiary.
Note: Group cannot be formed without ultimate parent CO. and one CO. cannot be part of more than one group.
Tax Implications:
Group CO.s can transfer assets between themselves at no gain / no loss & deemed at cost plus Indexation Allowance
Group companies can transfer only Current year capital gains or capital losses to other group members. While b/f capital loss
is not allowed to transfer. Election must be made in 2 years from end of accounting period of disposal
Rollover relief is available on a group wide basis Where:
one company sells qualifying asset, and
Another company buys a qualifying asset within the rollover relief qualifying time period.
Gain can be rolled over against purchased asset of other CO.
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ACCA F6
(TAXATION)
CHAPTER 13
VALUE ADDED TAX (VAT)
1
INTRODUCTION:
VAT is an indirect tax charged on most goods and services, supplied within the UK and is borne by final consumer.
VAT is charged on taxable supplies of goods and services in the UK by taxable persons in the course of their business. It
is collected by VAT registered person and paid to HMRC.
VAT on sales is called output VAT and it is calculated on sales after maximum prompt payment discount whether taken
or not. VAT registered person charge VAT on sales and payable to HMRC.
VAT on purchases is called input VAT. Input VAT is reclaimed from HMRC.
2 Types of supply.
Taxable Supply
Zero Rated: No VAT is charged but considered as taxable supply for determination of registration limit.
Reduced Rated: VAT is charges at low rate. (Will be given in exams)
Standard Rated: Supply on which VAT is charged @20%.
Exempt Supply: supply on which no VAT is charged.
VAT rates are:
Standard Rated
20%
On most goods and Services supplied
Zero rated
0%
Non luxury food (except in business e.g restaurants), Books, newspaper,
Sewerage and water services, Children's clothes and footwear, Medicine,
Exports outside the EU. Transport, gift to charity
Exempt
Finance, Insurance, Postal service, education, health, sports and land (Not
buildings).
Low Rated
5%
Fuel for domestic purpose, energy saving materials
Some supplies are outside the scope of VAT which includes wages, dividends, other taxes, transfer of business as a
going concern and sales between companies in a VAT group.
Basic Computation
OUT PUT VAT (VAT Charged to customers on sales)
INPUT VAT (VAT paid an purchases)
Net VAT Payable / (Recoverable)
XX
(XX)
XX/(XX)
Tax Point: Tax point or time of supply determines when output VAT will be due.
The basic tax point is the date goods are made available to the customer or service completed.
If an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point.
If an invoice is issued within 14 days of the basic tax point, the invoice date will becomes the actual tax point.
VAT Periods: VAT period (also known as Tax Period) is the period covered by a VAT return. It is usually three months
(quarterly returns). VAT return must be submitted and VAT must be paid within one month after the period. A
registered person can elect for monthly VAT returns if his input tax regularly exceeds his output tax.
2
REGISTRATION
2.1
Compulsory Registration (Historical Test)
Registration is compulsory if at the end of any month accumulated taxable supplies of previous 12 months exceed
81,000. These figures are exclusive of VAT
HMRC must be informed within 30 days after the end of the month in which taxable supplies exceed 81,000.
The trader will be registered for VAT from next day of 30 days notification period.
VAT registration is not required if taxable supplies in the following 12 months will not exceed 79,000.
2.2
Compulsory Registration (Future Test)
A person is also liable to be registered if at any time there are reasonable grounds for believing that his taxable supplies
of just following 30 days will exceed 81,000 (Exclusive of VAT). Then individual is required to inform HMRC before end
of those 30 days.
Individual will be registered for VAT from beginning of those 30 days.
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2.3
ACCA F6
(TAXATION)
Voluntary Registration
A person making taxable supplies may apply for VAT registration on voluntary basis by writing an application to HMRC even if
taxable supplies are below 81,000. It will be considered VAT registered from date of application.
2.4
VAT Group registration: Companies under common control may apply for group registration.
Advantages of group registration:
No VAT implication on intra-group transactions between members of VAT group.
Group members will file single VAT return on group basis
An application to create, terminate, add or remove a CO. from a VAT group may be made at any time and there is no
compulsion to include every member into VAT group.
2.5
Recovery of Input VAT:
Input VAT is recoverable by taxable persons on goods and services which are supplied to them for business purposes. A
VAT invoice is needed to support the claim.
Recovery of Pre-Registration Input VAT on Goods: It will be recoverable if Goods were acquired in previous 4 years
from date of registration for business purpose and are still on hand upon the date of registration.
Recovery of Pre-Registration Input VAT on Services: It will be recoverable if Services were acquired in previous 6
months from date of registration for business purpose.
Recovery of Normal Input VAT:
Capital vs revenue expenditure: There is no distinction between capital and revenue expenditure for VAT. Output VAT
and input VAT is calculated as normal if these expenditures are incurred for trade.
Business entertaining: Input VAT on entertainment expenses incurred for employees and overseas customers is
recoverable. However Input VAT on entertainment expenses incurred for suppliers and UK customers is irrecoverable.
Motor cars: Input VAT upon purchase of car is irrecoverable unless there is 100% business use (Pool Car)
in which case 100% recovery available. In case of leased car 50% of input VAT is recoverable where the car has some
private use.
Note that if input VAT cannot be recovered on the purchase of a motor car, no output VAT will be due on its disposal.
Motor Expenses: Input VAT upon fuel cost and repair & maintenance incurred for employees is recoverable even if there is
private use of car by employee. If employee reimburses full fuel cost then output VAT will be payable upon reimbursed
expenses. However If employee reimburses partial fuel cost then output VAT will be payable but as per HMRC scale
charge. Note that VAT is not charged on the insurance and road fund licence
Relief for Bad Debts: Input VAT on bad debts is recoverable if:
a) 6 months elapsed from due date of payment and
b) Amount written off as bad debts in the seller's books.
Relief is obtained by adding the VAT element of the impaired debt to the input tax claimed.
Claims for relief for impaired debts must be made within four years and six months of the payment being due.
Business and non-business expenses: Input VAT on business expenses is recoverable. VAT on non- business items passed
through the business accounts is irrecoverable.
Important Note: For propose of Income Tax, Capital Gain Tax, Corporation Tax, If VAT is recoverable than the cost must
be VAT exclusive (e.g. Plant & machinery cost for capital allowances) and If the VAT is irrecoverable than the cost must be
VAT inclusive (e.g. Car with private use for capital allowances).
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Consequences of Deregistration:
On deregistration date individual is required to calculate
output VAT upon all current and non-current assets
according to their market value and this has to be payable to
HMRC and if it has less than 1000 it will be waived off.
This charge will not be applicable if following conditions are
satisfied:
The business in transferred as going concern.
Same nature of trade carried on by new business
There is no significant break in the trade.
The new owner is/or will be VAT registered.
If all the condition are satisfied then both transferor and
transferee can make joint election to transfer VAT
registration in which case all right & obligation including
outstanding VAT will be transferred to transferee.
SPECIAL SCHEMES
4.1
Cash Accounting Scheme: VAT is accounted for on the basis of
cash receipts and payments, rather than on the basis of invoices issued
and received (therefore automatic relief for bad debts).
Conditions to be satisfied to join the scheme:
Taxable turnover (exclusive of VAT) not exceeding 1,350,000 per annum.
VAT returns must be up-to-date and no convictions for VAT offences or
penalties in past.
If taxable turnover exceeds 1,600,000 trader will have to exit the scheme.
4.2
ANNUAL ACCOUNTING SCHEME
A single VAT return for a 12 month period (Normally accounting period of
the business) is filed within two months from end of the period.
VAT is paid in nine equal installments each will be 10% of previous years
VAT liability and one balancing payment. Installments are payable at the
end of month 4 to 12 of accounting period. Balancing payment (or
repayment) is made when the return is filed.
Conditions to join the scheme are same as cash accounting scheme.
Advantage: Only one VAT return each year so less occasions for VAT penalty
and Cash flows can be managed in a better manner.
Disadvantage: Have to ensure that supplies does not exceed turnover limit
and Timings of VAT payments may create problem for business.
(TAXATION)
Deregistration
Compulsory Deregistration:
If an individual ceases to make taxable supplies or ceases
to trade then individual should inform HMRC within 30
days and individual would be considered as VAT
deregister right from date of cessation.
Voluntary Deregistration:
If individual identifies that his taxable supplies will not
exceed 79,000 in the following 12 month then individual
can apply for VAT deregistration on voluntary basis by
writing an application to HMRC. Individual will be
considered VAT deregistered from date of application.
ACCA F6
4.3
FLAT RATE SCHEME
VAT = Sale (VAT inclusive) X Flat rate %
This scheme is available to small
businesses. Under this scheme VAT
liability is calculated by simply applying
a flat rate percentage to total turnover
including zero rate & exempt supplies.
(Flat rate % will be given in exam).
No input VAT is recoverable with the
exception of non-current assets having
cost more than 2,000.
Conditions to join the scheme:
Taxable turnover (exclusive of VAT) not
exceeding 150,000 per annum.
VAT returns must be up-to-date and no
convictions for VAT offences or penalties
in past.
If the taxable turnover exceeds 230,000
the trader will have to exit the scheme.
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ACCA F6
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ADMINISTRATION OF VAT
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ACCA F6
(TAXATION)
CHAPTER 14
SELF ASSESSMENT FOR INDIVIDUALS
1
NOTIFICATION OF LIABILITY TO INCOME TAX AND CGT
Individuals who are chargeable to income tax or CGT shall receive a notice to file a return from HMRC. An individual who
does not received a notice to file a return are required to give notice of chargeability to an Officer of the Revenue and
Customs within six months from the end of the tax year i.e. by 5 October 2012 for 2011/12.
2
SUBMISSION OF TAX RETURNS: The tax return comprises a Tax Form, together with supplementary pages for
particular sources of income. The time limit for submission of a tax return is as follows:
Notice Received
Electronic Return
Non-Electronic Return
By 31 July after end of tax year
31 January after end of tax year 31 October after end of tax year
After 31 July but before 31 October after tax year 31 January after end of tax year 3 months after notice
After 31 October after end of tax year
3
KEEPING OF RECORDS: All records must be retained until 5 years after the 31 January following tax year where
taxpayer is in business (eg. a sole trader or partner or letting property) or 1 year after the 31 January following tax year
otherwise (eg. employee). Maximum penalty to each failure to keep &retain records is 3,000 per tax year.
4
TAX RETURN: A return may be amended by HMRC to correct any obvious error or omission within nine months
after the day on which the return was actually filed.
The taxpayer may amend his return (including the tax calculation) within twelve months after the filing date.
5
CLAIMS: All claims and elections must be made in a tax return. Time limit for making a claim for Current year
trading loss relief, carry back trading loss relief, early year trading loss relief and rent a room relief is by 31 January which
is approximately 22 months after end of tax year. For all other claims time limit is 4 years after end of tax year.
7
TAX EVASION and TAX AVOIDANCE: Tax evasion is illegal and Tax avoidance is legal way to reduce tax liability
8
DISCOVERY ASSESSMENTS: If an officer of HMRC discovers an error an assessment may be raised to recover the
tax lost. The normal time limit for discovery assessment is 4 years after the end of the tax year, but it may be extended to
20 years where tax is lost due to deliberate understatement.
9
DETERMINATIONS: if tax return is not submitted by due filing date even If notice has received from HMRC. An
officer of HMRC may make a determination of the amounts liable to income tax and CGT tax. Such a determination
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10
ACCA F6
(TAXATION)
PAYMENT
1st payment on account 2nd payment on account
Final Balancing payment
Payment on Account
RELEVANT AMOUNT = Previous year Income Tax + Previous year Class 4 NIC. Previous year tax at source
Relevant Amount X 50% = Payment on Account
Payments on account are not required if the relevant amount fails below a de minimis limit of 1000.
Final Balancing Amount: Current year Income Tax + Current year Class 4 NIC + Current year CGT - Current year tax at
source - Both Payment on Accounts.
11
PENALTIES ON LATE BALANCING PAYMENT OF TAX
PAID
Penalty
More than 30 days but Within 6 months after the due date
5%
More than 6 months but not more than 12 months after the due date
10%
More than 12 months after the due date
15%
Interest on late paid tax: Interest is chargeable on late payment of both payments on account and balancing payments.
Interest runs from due date till actual date of payment. (Interest Rate will be given in exam)
12
PENALTIES FOR ERRORS
Maximum Penalty:
Minimum Penalties: Unprompted disclosure is one made at a time
Types of error
Penalty (% of PLR)
when HMRC has not discovered, or is not about to discover error.
Careless
30%
Types of error
Unprompted Prompted
Deliberate not concealed
70%
Careless
0%
15%
Deliberate & concealed
100%
Deliberate not concealed
20%
35%
Deliberate and concealed
30%
50%
13
PENALTIES FOR LATE NOTIFICATION
There is a common penalty regime for late notifications of chargeability of tax or register for tax, including income tax,
NICs, CGT, corporation tax and VAT. Penalties may be reduced if a taxpayer makes unprompted or prompted disclosure.
Maximum Penalty:
Minimum Penalties: Unprompted disclosure is one made at a time
Types of error Maximum penalty payable
when HMRC has not discovered, or is not about to discover error.
(% of PLR)
Types of error
Unprompted (% of PLR) Prompted (% of PLR)
Careless
30%
Careless
0%(< 12m)10%(>12m) 10%{<12m)20%(>12m)
Deliberate not
70%
Deliberate not
20%
35%
concealed
concealed
Deliberate and
100%
Deliberate and
30%
50%
concealed
concealed
16
PENALTIES FOR LATE FILING OF TAX RETURN
Tax return Late upto 3 Months: Penalty is 100
Tax return Late by more than 3 Months but upto 6: 100 + ( 10 per day between 3 months to 6 months)
Tax return late by more than 6 months but upto 12 months: Penalty is greater of: 5% of Tax Liability and 300
Tax return late by more than 12 months
Type of conduct
Careless
Deliberate not concealed
Deliberate and Concealed
PENALTY
Greater of:
Greater of:
Greater of:
5% of Tax Liability
70% of Tax Liability
100% of Tax Liability
300
300
300
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8
Determinations and Discovery assessments: If a return is not delivered by the filing date, HMRC may issue a
determination of the tax payable within 3 years of the filing date. There is no appeal against it.
Discovery assessment: HMRC can raise an assessment within 4 years from the end of the accounting period; this is
extended to 6 years if there is a careless error or 20 years if there is a deliberate error or failure to notify a chargeability to
tax.
9
Appeals and Disputes The company can appeal against amendments to the corporation tax return. The appeal
must be normally be made within 30 days of the amendment and must state the grounds for appeal. The appeals
procedure is as per VAT .
10
Penalties for incorrect returns
No penalty where a taxpayer simply makes a mistake
30% unpaid tax where a tax payer fails to take reasonable care.
70% unpaid tax if error is deliberate.
100% unpaid tax if deliberate failure with concealment.
Note: Penalty will be reduced where a taxpayer make a disclosure, especially when this is unprompted by HMRC.
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36