F6 Study Notes - Updated PDF

ACCA F6
TAXATION – UK VARIANT
REVISION PACK
FA 2016
Exams from June 2017 – March 2018 sessions
F6 (UK) Taxation FA 2016
Contents
IMPORTANT NOTE .................................................................................................................................................................. 4

EXAM FORMAT........................................................................................................................................................................ 5
INTRODUCTION TO TAX .......................................................................................................................................................... 7
INCOME TAX.......................................................................................................................................................................... 10
Introduction ...................................................................................................................................................................... 10
Residency .......................................................................................................................................................................... 10
Income Tax Computation .................................................................................................................................................. 11
Tax Calculation .................................................................................................................................................................. 11
Components of Income Tax Computation ........................................................................................................................ 13
Jointly Held Property......................................................................................................................................................... 23
Employment Income ......................................................................................................................................................... 25
Property Income ............................................................................................................................................................... 36
Trading Profits ................................................................................................................................................................... 41
Capital Allowances ............................................................................................................................................................ 45
Partnership........................................................................................................................................................................ 51
Basis Period ....................................................................................................................................................................... 54
Loss Relief.......................................................................................................................................................................... 60
National Insurance Contributions ......................................................................................................................................... 68
Pension .............................................................................................................................................................................. 71
CAPITAL GAINS TAX ............................................................................................................................................................... 77
Introduction ...................................................................................................................................................................... 77
Computation ..................................................................................................................................................................... 77
Special Rules...................................................................................................................................................................... 83
Shares ................................................................................................................................................................................ 87
Reliefs ................................................................................................................................................................................ 92
INHERITANCE TAX ................................................................................................................................................................. 99
Introduction ...................................................................................................................................................................... 99
Exemptions...................................................................................................................................................................... 100
Lifetime IHT on Lifetime Transfers .................................................................................................................................. 102
Death IHT on Lifetime Transfers ..................................................................................................................................... 104
Page 2 of 135
Death Estate .................................................................................................................................................................... 106

Inheritance Tax Planning ................................................................................................................................................. 108
CORPORATION TAX ............................................................................................................................................................. 109
Introduction .................................................................................................................................................................... 109
Taxable Total Profits – Components ............................................................................................................................... 110
Long Period of Account ................................................................................................................................................... 111
Losses .............................................................................................................................................................................. 113
Groups ............................................................................................................................................................................. 117
TAX ADMINISTRATION ........................................................................................................................................................ 121
VALUE ADDED TAX .............................................................................................................................................................. 126
Introduction .................................................................................................................................................................... 126
Types of Supplies ............................................................................................................................................................ 126
Registration & Related Matters ...................................................................................................................................... 127
De-registration & Related Matters ................................................................................................................................. 128
Calculation ...................................................................................................................................................................... 129
Administration ................................................................................................................................................................ 131
Penalties & Errors ........................................................................................................................................................... 132
International Transactions .............................................................................................................................................. 133
Accounting Schemes ....................................................................................................................................................... 134
Page 3 of 135
IMPORTANT NOTE
The following notes have been updated to accommodate the changes in the tax legislation, as
specified in the ACCA Technical Article: Finance Act 2016 (updated November 2016).
Some of the extracts and examples have been directly copied from the stated article, which
can be accessed via the following link:
http://www.accaglobal.com/pk/en/student/exam-support-resources/fundamentals-exams-
study-resources/f6/technical-articles/finance-act-2016.html
An additional list of technical articles that will prove helpful and that can all be found on the
ACCA website (http://www.accaglobal.com/pk/en/student/exam-support-
resources/fundamentals-exams-study-resources/f6/technical-articles.html ) are:
 Higher skills
 Benefits
 Adjustment of profit
 Motor Cars
 Chargeable Gains Part 1 and 2
 Inheritance Tax Part 1 and 2
 Groups
 Value Added Tax Part 1 and 2
Page 4 of 135
EXAM FORMAT
Time: 3 Hours + 15 minutes
Exam Format:
Section Assessment Syllabus area Marks Recommended Time

examinable
A 15 Objective Test Questions Entire 30 50 minutes
B 15 Objective Type Questions split equally Entire 30 50 minutes
between 3 Objective Test Case Scenarios
C 3 Long Form Questions: 40 80 minutes
 1 - 10 mark question Entire
 2 - 15 mark questions B and E
100 180 minutes
Excludes 15 minutes
preparation time
Assessment Types
Section A:
The technical concepts will be examined as Objective Test Questions, in the following possible formats:
 Multiple Choice Questions (MCQs)
 Multiple Response Questions (MRQs)
 Fill in the Blanks
 Drag and Drop
 Drop Down List
 Hot Spot
 Hot Area
These will be a mix of computational and narrative.
Section B:
3 case scenarios will be provided in this section. 5 Objective test questions (format – one of the above listed)
will be based around a common case scenario.
These will be a mix of computational and narrative.
For paper based exams Section A and Section B will only cover MCQs.
Section C:
This section will comprise of 3 long form questions (one worth 10 marks and the remaining worth 15 marks
each) and this will be predominantly computational.
Page 5 of 135
Important Syllabus Areas
(Extract: Examiner’s Approach to F6)
1 Income Tax
 Income from employment (in particular, the income assessable, the allowable deductions and
benefits).
 Income from self-employment (in particular, the basis of assessment, the expenditure that is
allowable, assessable profits on commencement and cessation, capital allowances and relief for
trading losses).
 Property and investment income (in particular, property income, savings income and dividend
income).
 The computation of taxable income and the income tax liability.
 The self-assessment system.
 The time limits for the submission of information, claims and payment of tax.
2 Chargeable Gains
 Computation of a person’s chargeable gains.
 Computation of the amount of allowable expenditure for a part disposal.
 Computation of the chargeable gain when a chattel is disposed of.
 Computation of the exemption when a principal private residence is disposed of.
 The share identification rules as they apply to individuals and to companies.
 The computation of the capital gains tax payable by individuals.
 Exemptions and reliefs (entrepreneurs’ relief, rollover relief and holdover relief for gifts).
3 Inheritance Tax
 The seven year accumulation principle.
 The IHT liabilities arising on lifetime transfers.
 The IHT liability on a death estate.
 The annual exemption and the exemption for gifts between spouses.
 The payment of IHT.
4 Corporation Tax
 Taxable total profits (in particular, the expenditure that is allowable in calculating the tax
adjusted trading profit, capital allowances, property business income, chargeable gains and
relief for trading losses).
5 Value Added Tax
 The circumstances in which a person must register for VAT
 The computation of VAT liabilities (in particular, the tax point, the valuation of supplies, non-
deductible input VAT and relief for impairment losses on trade debts)
 The cash accounting, annual accounting and flat rate schemes
Page 6 of 135
INTRODUCTION TO TAX
Definition:
Tax is a source of revenue for the government’s national budget; collected with the intention of public
spending and development of the state. It is a compulsory contribution applied on salaries, business profits or
added to value of goods and services etc.
Types of Tax:
 Direct: Tax paid on income or profits, where the tax payer is aware of the amount being paid to Her
Majesty’s Revenue & Customs (HMRC).
 Indirect: Tax levied on goods and services, where the tax payer may be unaware of the exact amount
of tax suffered. This tax is normally passed on to HMRC via a third party.
Tax to be studied for the F6 Exam Categorisation Tax Payer

Income Tax Direct Individuals and Partnerships
Corporation Tax Direct Companies
Capital Gains Tax Direct Individuals, Partnerships and Companies
Inheritance Tax Direct Individuals
Value Added Tax Indirect Businesses
Tax can also be categorised as Revenue Tax (tax charged on income or revenue – Income Tax or Corporation
Tax) or Capital Tax (tax charged on capital assets – Capital Gains Tax or Inheritance Tax).
HMRC is the department of UK government, responsible for the collection and administration of taxes. Its
purpose is to make sure that money is available to fund public services.
The commissioners of HMRC implement tax law and oversee its administration whereas the Officers can assist
individuals in their tax calculation.
Purpose of Taxation:
The tax policies of a country affect the economic, social, environmental conditions and vice versa.
 Economic:
The Government can control the spending and saving of the population through its tax policies. For
example: Savings can be encouraged through tax incentives offered when an individual deposits their
income in an Individual Savings Account (ISA), whereas spending on certain products such as tobacco,
alcoholic drinks etc. can be reduced by levying increased tax (duties).
Page 7 of 135
 Social:
Tax policies also focus on social justice through progressive system of tax, where higher tax is paid by
those with higher income, profits or wealth.
 Environmental:
Where possible and if a Government is dedicated to this cause, tax policies can be used to protect the
environment. In UK, the landfill tax discourages Corporations from storing wastage at landfill sites and
pushes them towards recycling as the option to dealing with wastage. Rules with greater tax impact on
cars with high CO2 emissions encourage manufacturers and consumers to shift towards environment
friendly cars.
UK Tax System Structure:
The structure of the UK tax system can be shown as follows:
Chancellor of the Exchequer Treasury HMRC
 Chancellor of the Exchequer: The Chancellor has the overall responsibility for the UK tax system and
one of his roles includes producing the Budget each year.
 Treasury: It is responsible for assessing and advising on the general design of the tax system and its
components.
Tax Appellate System:
Tax appeals are heard by the following two Tax Tribunals based on the complexity of the case:
 First Tier Tribunal: Deals with most cases other than complex cases.
 Upper Tribunal: Deals with the complex cases and any appeals against the First Tier Tribunal.
Sources of Tax Law:
 Case Law: Decisions made in tax cases tried and tested through the courts.
 Guidelines by HMRC:
 Statements of Practice: set out how HMRC intends to apply the law
 Extra – Statutory Concessions: set out instances where the law may be relaxed
 Revenue and Customs Brief: views on specific tax points
 Agent Update: guidance for tax practitioners
Page 8 of 135
Tax Evasion and Tax Avoidance:
 Tax Evasion: Any method to save tax illegally. For example by hiding information, giving incorrect
information etc. Serious cases of tax evasion are treated as criminal acts.
 Tax Avoidance: Any method to minimise tax legally. For example by making deposits in tax saving
bank account rather than a regular account.
General Anti-Abuse Rule (GAAR): This rule provides HMRC with means to counteract tax advantages that
have been obtained through abusive tax arrangements i.e. arrangements, where the primary objective was to
obtain tax advantage.
Tax Advice:
In the capacity of a tax advisor, the following code of ethics should be used as a guideline:
 Professional Competence and Due Care: Accepting assignments that you are technically and
practically capable of doing and performing tasks with the required attention and care.
 Integrity: Being honest in your work.
 Professional Behaviour: Not behaving in a manner that may discredit the profession.
 Confidentiality: Not disclosing client information to any irrelevant person without specific written
authority form the client or if legal/ professional duty to do so.
 Objectivity: Being fair in the dealings with all clients, without any personal bias.
Ethical Dilemmas:
 There is a material error/ omission in a client’s tax return; return has not been filed on time:
Advise client of the error and the corrective procedure. Recommend that the matter be disclosed to
HMRC.
 Client refuses to correct error/ omission:
Discontinue working for the client and inform him/ her in writing. Also inform HMRC that you no
longer represent the client without specifying reason.
Report the client’s refusal and the reasons to the Money Laundering Reporting Officer within your firm
or to the National Crime agency, if you work on your own.
Interaction with other tax jurisdictions:
 Majority of the countries have tax agreements to ensure that income earned by an individual is not
taxed twice.
 So income earned by individual would be taxed in only one of the relevant countries.
 However in situations where such an agreement does not exist, UK government provides double
taxation relief.
Page 9 of 135
INCOME TAX
Introduction
Definition: Tax paid by an UK resident individual on his/ her taxable income in a tax year. This is applicable on
the Resident’s worldwide income.
A non UK resident pays income tax on his/ her UK income only.
Tax Year: Runs from 6th April of one year to 5th April of the next. For the exam sessions covering FA 2016,
questions will primarily be based on the tax year 6 April 2016 to 5 April 2017. Tax year is also denoted as 2016-
17.
Residency
 An individual is automatically non UK resident, if he/ she meet the automatic overseas test.
 An individual is automatically UK resident, if he/ she meet the automatic UK test.
 An individual meeting neither of the above will have to meet the sufficient ties test for his/ her residency
status to be determined.
Automatic Overseas Test: An individual is automatically considered a non UK resident if he/ she:
 Was a resident of UK in the previous three tax years and spent < 16 days in the UK in the current tax year.
 Was not a resident of UK in the previous three tax years and spent < 46 days in the UK in the current tax
year.
 Does not spend more than 90 days in the UK in the current tax year as they work full time overseas.
Automatic UK Test: An individual is automatically considered a UK resident is he/ she:

 Spends 183 days or more in the UK during the current tax year
 Has a home in the UK and no home overseas
 Works full-time in the UK during the current tax year
Sufficient Ties Test: An individual whose residency is unclear, even after applying the above tests has to
undergo the Sufficient Ties Test. This is dependent upon the number of days an individual spends in the UK
and the number of ties he/ she has with UK.
Days in UK Previously Resident Not Previously Resident

< 16 days Automatically not UK resident Automatically not UK resident
16 – 45 days Resident if 4 or more UK ties met Automatically not UK resident
46 – 90 days Resident if 3 or more UK ties met Resident if 4 UK ties met
91 – 120 days Resident if 2 or more UK ties met Resident if 3 or more UK ties met
121 – 182 days Resident if 1 or more UK ties met Resident if 2 or more UK ties met
≥ 183 days Automatically UK resident Automatically UK resident
Page 10 of 135
UK Ties:
 Close family: spouse/ civil partner, under-age child who are UK resident
 Owned UK resident where the individual spends atleast one night during the tax year
 Substantive work in UK – employee of self-employed
 Spent more than 90 days in the UK in either or both of the previous two tax years
 Present in UK at mid-night for the same number or more days spent in any other country
Income Tax Computation
Pro-Forma: The following format is to be used when attempting questions of Section C, which are based on
the calculation of an Individual’s Income Tax. The numerical values used are simply to explain the flow of
information.
Example: Mr. Edward Hayes

Tax Year 6th April 2016 – 5th April 2017
NSI SI DI Total
£ £ £ £
Employment Income (covered later) 32,000 32,000
Property Income (covered later) 10,000 10,000
Trading Profits (covered later) 27,000 27,000
Interest from GILTS (discussed below) 5,000 5,000
Interest from Banks & Building Societies (discussed below) 3,000 3,000
Dividend (discussed below) 8,000 8,000
Total Income 69,000 8,000 8,000 85,000
Less: Deductible Interest (discussed below) (1,000) (1,000)
Net Income 68,000 8,000 8,000 84,000
Less Personal Allowance (discussed below) (11,000) (11,000)
TAXABLE INCOME 57,000 8,000 8,000 73,000
Tax Calculation
Step 1: Identify the relevant tax slabs for the taxable income, starting with NSI and then moving onwards to SI
and DI. This sequence has to be followed each time but as observed below there are different tax slabs & rates
for each of the category of income.
Tax Slabs Capacity NSI DI

Basic £1 - £32,000 (£32,000 - £0) = £32,000 20% 7.5%
Higher £32,001 - £150,000 (£150,000 - £32,000) = £118,000 40% 32.5%
Additional Higher > £150,000 Unlimited 45% 38.1%
Page 11 of 135
Tax Slabs Capacity SI

Starting < £5,000 (£5,000 – 0) = £5,000 0%
Basic £5,000 - £32,000 (£32,000 - £5,000) = £27,000 20%
Higher £32,001 - £150,000 (£150,000 - £32,000) = £118,000 40%
Additional Higher > £150,000 Unlimited 45%
Using the information from the Income Tax Computation above:

NSI income of £57,000 is given priority in utilising the tax slabs and the amount falls in the following slabs:
Original Capacity Utilisation Capacity Balance post utilisation
Basic Slab £32,000 (£32,000) £0
Higher Slab £118,000 (£25,000) £93,000
£57,000
 The Basic rate slabs is completely used up by NSI, which is why, SI and DI will now have to fill up the
higher rate and additional higher rate slabs.
 But in this scenario, the Higher rate slab had a capacity of £118,000, out of which only £25,000 has
been used up by NSI, leaving an unused capacity of £93,000, which is more than enough for both
taxable SI of £8,000 and taxable DI of £8,000.
 In this scenario Edward Hayes will be considered a higher rate tax payer for 2016-17.
Step 2: Calculate the Tax Liability on a differential basis. Using the tax rates for the relevant slabs, from the
table above, tax liability is first calculated for NSI, then SI and then DI.
Important: Higher Rate tax payers are entitled to a Nil Rate Band of £500 on their taxable Savings Income
and a Nil Rate Band of £5,000 on their taxable Dividend Income. (More details later)
£
Non Savings Income
Basic Rate: £32,000 x 20% 6,400
Higher Rate: £25,000 x 40% 10,000
Savings Income
Nil Rate Band: £500 x 0 0
Higher Rate: (£8,000 - £500) x 40% 3,000
Dividend Income
Nil Rate Band: £5,000 x 0% 0
Higher Rate: (£8,000 - £5,000) x 32.5% 975
Tax Liability 20,375
Page 12 of 135
Step 3: Calculate Tax payable.

When determining an individual’s tax liability, it is only logical to reduce the liability amount by any tax
amount that has already been paid, to avoid double taxation. In the case of employees, tax is deducted at
source under the ‘Pay As You Earn – PAYE’ scheme. This amount is normally given in the exam question, if the
concept is to be tested. In cases when there is no PAYE amount, the payable amount will be the Tax liability
calculated.

Less: Tax Deducted At Source
PAYE – given (1,000)
Tax Payable 19,375
Step 4: Work out the tax payment instalments.

Income Tax has to be normally paid in 3 instalments unless 80% of an individual’s income tax liability is
deducted at source. For instance, if an individual only earns employment income and more than 80% of his
liability is covered by PAYE deduction; in this case he can make the tax payable payment in a single instalment.
Where 3 instalments are required, they are calculated and paid as follows:
Calculated Paid By
st
1 Payment on Account 50% of tax liability of previous tax year 31 January in the relevant tax year
2nd Payment on Account 50% of tax liability of previous tax year 31 July following the relevant tax year
3rd Balancing Payment Tax Payable of relevant tax year less 31 January following the relevant tax year
Amounts already paid
Using information from the example above and assuming tax liability of 2015-16 to be £18,000.
Tax Payable – 2016/17 19,375

1st POA – 31st January 2017
(£18,000 x 50%) 9,000
2nd POA – 31st July 2017
(£18,000 X 50%) 9,000
Balancing Payment – 31st January 2018
(£19,375 – 9,000 – 9,000) 1,375
Components of Income Tax Computation
Taxable Income:
 A UK resident’s income from all sources (except exempt income) is aggregated in the Income Tax
Computation for the relevant tax year, to arrive at the final Taxable Income amount.
 The income is categorised as follows:
Page 13 of 135
 Non-Savings Income - NSI: Income earned from employment, by running a business, by letting out a
property – all are categorised as Non Savings Income.
- For claiming any deductions, relief for personal allowance and even in applying the tax rates,
this category of income is always utilised first and then followed by SI and then DI – in this
order.
 Savings Income - SI: Interest earned on bank deposits or securities are treated as income earned on
savings. This income is kept separate from NSI because it is taxed at different rates.
- The interest amount is received Gross.
- A Nil Rate Band of £1,000 is available on the Savings income of a Basic Rate tax payer i.e. a
person with taxable income below £32,000, will not pay any tax on £1,000 of his/ her saving
income, if any in a tax year.
- Nil Rate Band of £500 for a Higher Rate tax payer i.e. a person with taxable income that falls
between £32,000 and £150,000 will pay no tax on £500 of his/ her savings income, if any, in a
tax year. (Seen in the Income tax computation above)
- The Nil Rate Band of £1,000/ £500 counts towards the basic rate and higher rate slabs capacity
utilisation.
- Nil Rate Band for savings income is not available for individuals with taxable income of more
than £150,000 i.e. Additional Higher Rate tax payers.
Example – extract from Finance Act 2016 article with modification
For the tax year 2016-17, Ali has pension income of £12,700 and savings income of £6,000.
Income Tax Liability:
Ali – Income Tax Computation – 2016/17

NSI SI Total
£ £ £
Pension Income 12,700 12,700
Interest Income 6,000 6,000
Total Income 12,700 6,000 18,700
Less Personal Allowance (11,000) (11,000)
TAXABLE INCOME 1,700 6,000 7,700
Page 14 of 135
Notes £
Non Savings Income
Basic Rate: £1,700 x 20% 1 340
Savings Income
Starting Rate: (£5,000 - £1,700) x 0% 2 0
Nil Rate Band: £1,000 x 0% 3 0
Basic Rate: (£6,000 - £3,300 - £1,000) x 20% 4 340
Tax Liability 680
Notes:
1. The first £32,000 of NSI are covered by the Basic rate slab and are taxed at 20%. In this scenario only
£1,700 of NSI was taxable.
2. SI has a starting rate slab of first £5,000 that is taxed at 0%. I.e. if an individual’s first £5,000 of total
taxable income are form a Savings Income source, there is zero tax liability on it. Normally however an
individual’s initial income relates to NSI sources and these are huge amounts, resulting in this option
becoming null and void. In this example, only £1,700 of the total taxable income of Ali is from NSI,
which leaves (£5,000 - £1,700) £3,300 of the starting rate slab for SI. Therefore £3,300 is taxed at 0%.
3. For a Basic rate tax payer (which Ali is, because his total taxable income is less than £32,000), a Nil Rate
Band of £1,000 is available. Out of the total SI of £6,000 only £3,300 has been taxed, which leaves
behind (£6,000 - £3,300) £2,700 SI to be taxed. Ali can now use the Nil Rate Band and will pay tax of 0%
on the £1,000.
4. From the total SI of £6,000, only £1,700 is left (£6,000 - £3,300 - £1,000), which will now fall in the
Basic rate slab. SI is taxed at 20% in this slab.
 Dividend Income – DI: Dividends received from shareholdings in a company are treated separately due
to different tax rates allotted to this income.
- This income is received Gross.
- A Nil Rate Band of £5,000 is available to all tax payers, regardless of the tax band they fall in:
basic, higher or additional higher. I.e. A tax payer will not pay any tax on £5,000 of dividend
income, if any, in a tax year.
For the tax year 2016-17, Joe has a salary of £40,000, savings income of £2,000 and dividend income of
£9,000. During the year he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted
£5,800 in PAYE from his earnings.
Page 15 of 135
Income Tax Payable:
Joe
Tax Year 6th April 2016 – 5th April 2017
NSI SI DI Total
£ £ £ £
Employment Income 40,000 40,000
Dividend Income 9,000 9,000
Total Income 40,000 2,000 9,000 51,000
Less: Deductible Interest (discussed below) (300) (300)
Net Income 39,700 2,000 9,000 50,700
Less Personal Allowance (discussed below) (11,000) (11,000)
TAXABLE INCOME 28,700 2,000 9,000 39,700
Joe is a higher rate tax payer as his total taxable income of £39,700 is more than £32,000 which is the basic
rate slab limit. He will be entitled to £500 Nil rate band on his SI and £5,000 Nil rate band on his DI.
Notes £
Non Savings Income
Basic Rate: £28,700 x 20% 1 5,740
Savings Income
Nil Rate Band: £500 x 0 2 0
Basic Rate: (£2,000 - £500) x 20% 3 300
Dividend Income
Nil Rate Band: £5,000 x 0% 4 0
Higher Rate: (£9,000 - £5,000) x 32.5% 5 1,300
Tax Liability 7,340
Less: PAYE (5,800)
Tax Payable 1,540
Notes on slab utilisation:
1. First £32,000 of NSI is taxed at 20% but in this scenario NSI was only £28,700, leaving an unutilised
basic slab capacity of (£32,000 - £28,700) = £3,300.
2. The first £500 of SI will be taxed at 0% (Nil Rate band) but they will utilise £500 of the basic rate band
remaining capacity, leaving an unutilised balance of (£3,300 - £500) = £2,800.
3. The remaining amount of SI (£2,000 - £500 covered by Nil Rate Band) = £1,500 will be able to use the
basic rate band still available and leave behind a balance of (£2,800 - £1,500) = £1,300.
Page 16 of 135
4. The first £5,000 of DI will be taxed at 0% (Nil Rate band) but they will use up the £1,300 balance of the
basic rate slab, with the remaining amount of DI falling into the Higher rate slab.
5. The remaining amount of DI (£9,000 - £5,000 covered by the Nil Rate Band) = £4,000 will fall in the
Higher rate band and be taxed at 32.5%.
 Exempt Income: The following are examples of receipts which are not taxable as an individual’s
Income:
- Interest on National Savings and Investments Certificates
- Premium Bond Prizes
- Child benefit
- Gambling and Lottery winnings
- Interest or dividend from Individual Savings Account
Individual Savings Account – ISA: These are tax efficient savings accounts.
 Individuals can invest in Cash ISAs and Stocks and Shares ISA.
 For 2016-17, the limit upto which an individual can invest in ISAs is £15,240 per annum, either as cash
and/or shares.
 An individual can withdraw money from a cash ISA and replace it in the same tax year without the
replacement counting towards his/ her ISA investment limit.
Example – extract from the Finance Act 2016 article:
On 10 May 2016, Vincent invested £12,000 into a cash ISA and then withdrew £4,000 from this account on 15
February, 2017. He does not have a stocks and shares ISA.
Tax Implication: Vincent can make a further investment of upto £7,240 [£15,240 – (£12,000 - £4,000)] into his
cash ISA for 2016-17 (between 16 February and 5 April).
Accrued Income Scheme:

 If an individual sells a gilt-edged or similar security, the person buying it will generally get the next interest
payment. The closer it gets to the next interest payment date, the more a buyer will be prepared to pay for
the security.
 The value of the security is made up of two amounts:
 the basic value (called the clean price), plus
 an amount that represents the value of the next interest payment (the accrued interest).
 If an individual sells a security with accrued interest, the Accrued Income Scheme treats the additional
amount received as part of his/her Savings income. It is called an accrued income profit.
 If an individual buys a security with accrued interest, he/she will have to pay tax on the full amount of the
next interest payment that they receive. But, because they would have already paid an extra amount to
Page 17 of 135
buy the security, they could get tax relief under the Accrued Income Scheme. The extra amount paid is an
accrued income loss, which is deducted from the interest received.
Example – extract from Finance Act 2016 article:

On 1 July 2016, Peter purchased £100,000 (nominal value) of GILTS which pay interest at the rate of 3% for
£120,000. Interest is paid half yearly on 30 June and 31 December based on the nominal value. Peter sold the
GILTS on 30 November 2016 to Petra for £121,250 (including accrued interest).
Tax Implications:
The accrued interest included in the sales proceeds is (£100,000 x 3% x 5/12) = £1,250.
Peter will include the accrued interest as Savings income for 2016-17, even though he has not received any
actual interest.
Petra will receive interest of £1,500 (£100,000 x 3% x 6/12) on 31 December 2016 but will only include (£1,500
- £1,250) = £250 as Savings Income for 2016-17.
Example – Extract from Finance Act 2016:

On 1 May 2016, Ying purchased £300,000 (nominal value) of GILTS for £180,000, that pay interest at the rate
of 1%. Interest I spaid half – yearly on 31 March and 30 September based on the nominal value. Ying sod the
GILTS on 31 January 2017 for £181,000 (including accrued interest), having received interest of £1,500 on 30
September 2016.
Tax Implication:
Accrued interest for the period 1 May 2016 to 31 January 2017 is (£300,000 x 1% x 9/12) = £2,250 and this is
the amount that Ying will include as her Savings Income for 2016-17.
 The Accrued Income scheme only applies where an individual holds GILTS with a total nominal value in
excess of £5,000.
 For F6, this scheme will only focus on GILTS.
Deductible Interest & Personal Allowance
Both Deductible Interest and Personal Allowance are deducted from the Non Savings Income column on a
priority basis. If an individual does not have any or insufficient NSI, the deductible interest and the personal
allowance can be relieved against total Saving income and then Dividend income, accordingly.
Deductible Interest: This is interest paid by the individual on Qualifying Loans. Qualifying loans are ones which
have been taken for any of the following Qualifying Purposes:
 Loan taken by an employee to purchase plant or machinery for use in employment.
 Loan taken by an individual to purchase a share in a partnership.
Page 18 of 135
 Loan taken by a partner to purchase plant or machinery for use in the business.
Personal Allowance: Individuals are entitled to a tax exempt amount each year, known as the Personal
Allowance.
 For 2016-17, this amounts to the first £11,000 of an individual’s taxable income.
 Reduction: If the Adjusted Net Income of an individual in a given tax year is > £100,000, his/ her personal
allowance amount is reduced and depending upon the income amount, the allowance may be reduced to
Nil.
 Adjusted Net Income (ANI) = Net Income – Gross Gift Aid Donation – Gross Personal Pension
Contribution, where
- Net Income is picked up from the Income Tax Computation.
- Gift Aid Donation is the charitable donation that an individual has made (if any) and has decided to Gift
Aid. This is given in the exam question and is normally paid net of 20%. For the purpose of this formula
and other tax implications, the amount donated by the individual as Gift aid is grossed up. (Amount x
100/80).
- Personal Pension Contribution is the amount contributed by the individual (if any) into an approved
private pension scheme. Like Gift Aid Donation, this is assumed to be paid net of 20% and so has to be
grossed up. This will be covered in more detail in the notes on Pensions.
 The excess over £100,000 is divided in half and £11,000 reduced by the answer. The Standard Personal
Allowance can be reduced to nil at the most.
 If a person’s ANI is ≥ £122,000, the Personal allowance will be nil.
For the tax year 2016-17, May has a trading profit of £159,000. During the year, May made net Personal
Pension contributions of £32,000 and a net Gift Aid donation of £9,600.
Tax implication: May’s personal allowance of £11,000 will be affected.
ANI = £159,000 – (£32,000 x 100/80) – (£9,600 x 100/80) = £107,000
Reduced Personal Allowance = £11,000 – [(£107,000 - £100,000)/ 2] = £11,000 - £3,500 = £7,500
May will only be entitled to a personal allowance of £7,500.
Had she made no personal pension contributions and gift aid donations, her ANI would have been
£159,000 which is more than £122,000; in this case, no calculation would have been necessary and the
personal allowance can directly be shown as Nil.
Page 19 of 135
 Transferable Personal Allowance:
 Spouses/ civil partners can elect to transfer a fixed amount of their personal allowance to each other.
 The transferable amount (also known as the marriage allowance or marriage tax allowance) is £1,100
for the tax year 2016–17, and in subsequent years will be 10% of the actual personal allowance.
 The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of
tax. The tax reduction is therefore £220 (1,100 at 20%). If the recipient’s tax liability is less than £220,
the tax reduction will be restricted so that the recipient’s tax liability is not reduced to below zero.
 A transfer is not permitted if either spouse or civil partner is a higher or additional rate taxpayer, and a
transfer will generally only be beneficial where one spouse or civil partner is not making full use of
their personal allowance.
 If an election is made before the end of the tax year 2016–17, then it will remain in force for future tax
years unless the election is withdrawn or the conditions for the tax reduction are not met.
Alternatively, an election in respect of the tax year 2016–17 can be made before 5 April 2021 (four
years after the end of the tax year), but in this case it will only apply for the tax year 2016–17.
 The transferable amount of personal allowance will be given in the tax rates and allowances section of
the exam.
Paul and Rai are a married couple. For the tax year 2016–17, Rai has a salary of £35,000 and Paul has a trading
profit of £8,000. They have made an election to transfer the fixed amount of personal allowance from Paul to
Rai.
Paul’s personal allowance is reduced to £9,900 (11,000 – 1,100), and because this is higher than his trading
profit of £8,000 he does not have any tax liability.
Rai’s income tax liability is:
£
Employment Income 35,000
Personal Allowance (11,000)
Taxable Income 24,000
Income Tax: £24,000 at 20% 4,800

Personal Allowance Tax reduction (£1,100 x 20%) (220)
Tax Liability 4,580
Gift Aid Donation and Personal Pension Scheme Contribution
 As seen above, both Gift Aid Donation and Personal Pension Scheme Contributions are used to calculate
an Individual’s Adjusted Net Income and identify if there is to be a reduction in the Personal Allowance
amount.
Page 20 of 135
 Both amounts are presumed to paid net of 20% by the individual and are grossed up, using the formula
‘Amount x 100/80’.
 These Gross amounts also affect an individual’s tax slabs.
 The gross amounts extend the Basic Rate band, thus increasing the amount of taxable income that will be
taxed at a lower rate.
 This relief is primarily provided to encourage individuals to make charitable donations and save up for their
own retirement years.
Example:
Edward Hayes has the following taxable income for the tax year 2016-17:
NSI: £57,000
SI: £8,000
DI: £8,000
His tax liability amounts to £20,375 but this is before he remembered that he had made a gift aid donation of
£800 and contributed £2,400 in a personal pension scheme.
Because Edward’s income is well below the ANI limit of £100,000, the reduction in Personal allowance was not
applicable and so has been ignored.
Step 1: Gross up the gift aid and pension contribution amount

Gross Gift Aid Donation: £800 x (100/80) = £1,000
Gross Personal Pension Contribution: £2,400 x (100/80) = £3,000
Total extension: £4,000
Step 2: Extend the basic rate band by the gross amounts

Tax Slabs Capacity
£1 – (£32,000 + £4,000) = £36,000 (£36,000 - £0) = £36,000
£36,000 – (£150,000 + £4,000) = £154,000 (£154,000 - £36,000) = £118,000
> £150,000 Unlimited
Observe that the donations and contributions have increased the capacity of the Basic Rate slab but not of the
Higher rate slab.
Step 3: Re-calculate tax liability

NSI income falls in the following slabs:
£57,000
Basic (36,000)
Higher – balance (21,000)
Page 21 of 135
£
Non Savings Income
Basic Rate: £36,000 x 20% 7,200
Higher Rate: £21,000 x 40% 8,400
Savings Income
Nil Rate Band: £500 x 0% 0
Higher Rate: (£8,000 - £500) x 40% 3,000
Dividend Income
Nil Rate Band: £5,000 x 0% 0
Higher Rate: (£8,000 - £5,000) x 32.5% 975
Edward saved (£20,375 - £19,575) = £800 of income tax because of the gift aid and personal pension
contribution.
Child Benefit Income Tax Charge:
 Child benefit provided to a tax payer or his/ her partner is treated as exempt income.
 But if the Adjusted Net Income of the tax payer is more than £50,000 in a tax year, a child benefit
associated income tax charge arises.
 This is to recover the benefit from higher rate tax payers.
 If the ANI of the tax payer is higher than £60,000 – the income tax charge is equivalent to the amount of
the child benefit amount received.
 If the ANI is between £50,000 - £60,000 the income tax charge is calculated as follows:
(ANI - £50,000)/ 100 = ‘?’
Tax Charge = Child Benefit x ‘?’ x 1%
The amounts are all rounded down to the nearest whole number.
Example:
Gayle lives with his wife and son. In 2016-17, Gayle’s wife received Child Benefit of £2,130 but she is not a tax
payer. Gayle had ANI of £54,000.
Excess ANI = £54,000 - £50,000 = £4,000

£4,000 ÷ 100 = 40
Tax Charge: £2,130 x 40 x 1% = £852
Page 22 of 135
Jointly Held Property
 Income received from property/ assets that are jointly owned by a couple is equally split between and
both individuals pay income tax on their relevant share.
 The income is split equally regardless of the actual ownership ratio, unless the couple declare to the HMRC
the actual proportion in which the income is split.
 Whether the couple should continue to show only a 50% share of the income each or the actual
proportion depends upon what is the more tax efficient option.
Tax Planning Aspects
 Savings Income Nil Rate Band can be effectively used in tax planning for married couples or a couples in a
civil partnership by transferring income in the most effective manner.
Samuel and Samantha are a married couple. For the tax year 2016–17, Samuel will have a salary of £90,000.
Samantha will have a salary of £30,000 and savings income of £1,500.
Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The remaining £500 of her
savings income will be taxable at the rate of 20%. Samuel is a higher rate taxpayer, so his savings income nil
rate band is £500. Transferring sufficient savings to Samuel so that he receives £500 of the savings income will
therefore save income tax of £100 (500 at 20%) for 2016–17.
 Nil Rate Bands for Savings and Dividend Income can cause complications in tax planning for the married
couples or civil partnerships.
Nigel and Nook are a married couple. For the tax year 2016–17, Nigel will have a salary of £160,000 and
savings income of £400. Nook will have a salary of £60,000 and dividend income of £8,000.
Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher
rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will
therefore save income tax of £180 (400 at 45%) for 2016–17.
Nook has fully utilised her dividend nil rate band of £5,000, but Nigel’s nil rate band is unused.
Transferring sufficient investments to Nigel so that he receives £3,000 of the dividend income will therefore
save income tax of £975 (3,000 at 32.5%) for 2016–17.
Page 23 of 135
 Incorporating a business or not, needs to be based on the tax impact of each alternative.
Sam is currently selfemployed.
If he continues to trade on a selfemployed basis, his trading profit for the year ended 5 April 2017 is forecast
to be £50,000. Based on this figure, Sam’s total income tax liability and national insurance contributions (NIC)
for the tax year 2016–17 will be £12,631.
Sam is considering incorporating his business on 6 April 2016. The forecast taxable total profits of the new
limited company for the year ended 5 April 2017 will be £50,000. After paying corporation tax of £10,000, Sam
will withdraw all of the profits by paying himself dividends of £40,000 during the tax year 2016–17.
Sam’s income tax liability will be:
£
Dividend income 40,000
Personal allowance (11,000)
Taxable income 29,000
Income Tax:
£5,000 x 0% 0
£24,000 x 7.5% 1,800
Tax Liability 1,800
The total tax cost if Sam incorporates his business is £11,800 (10,000 + 1,800). This is an overall saving of just
£831 (12,631 – 11,800) compared to continuing on a self-employed basis.
Page 24 of 135
Employment Income
Employment vs Self Employment:
 The difference between the two is important to identify whether an individual will reflect employment
income in the tax return or trading profits.
 Employment is covered by a contract of service but a contract with self-employed individual would be
written as a contract for service.
 Some factors that help indicate whether an individual is employed or works as a trader are:
 Independence to choose or reject work
 Equipment and support workers are provided by the individual or a third party
 Who runs the financial risk and enjoys the rewards etc.
Calculation:
The following format shows how the information in a question relating to Employment income can be brought
together in a logical manner to arrive at the final amount that is then transferred to the Income Tax
Computation. The summary of the concepts is also included but this is covered in detail after the format.
Edward Hayes
Employment Income for the Tax Year 16/17
£ £
Salary xxxx
+ Bonus xxxx
+ Taxable Benefits:
 Vouchers Xxxx
Cash / Credit Vouchers: at cost
 Accommodation – Non Job Related
Basic Charge: Annual Value – if owned by company xxxx
Higher of Annual Value or Rent paid – if rented by company
Additional Charge: (Cost - £75,000) x 3% xxxx
[Owned ≤ 6 yrs: Purchase price + Subsequent Capex till start of current tax year
Owned > 6 yrs: Market value when provided to employee + Subsequent Capex till
start of the current tax year]
Reduction: Time apportionment or Employee contribution
(xxxx)
xxxx
 Expenses Related to Accommodation
Non Job Related: Cost of heating, lighting, repair bills + 20% of market value of xxxx
furniture
Page 25 of 135
Job Related: Lower of Computation above and 10% of Net Earnings of the
employee
 Car – Cost x ?%
Cost: List price + Accessories cost (if at least £100) – Capital contribution by xxxx
employee (maximum £5,000)
Reduction: Time Apportionment and Employee Contribution (xxxx)

xxxx
 Fuel - £22,200 x ?% (the one applied on Car) xxxx
Reduction: Time apportionment but not employee contribution unless full (xxxx)
reimbursement xxxx
 Van: Significant private use - £3,170 xxxx
 Fuel: Significant private use - £598 xxxx
Reduction: Time apportionment and employee contribution where applicable (xxxx)
xxxx
 Beneficial Loans: no or full repayment during the year
Loan amount x Interest saved x ?/12m xxxx
 Beneficial Loans: partial repayment – lower of:
Average Method: (Op. Balance + Cl. Balance)/2 x Interest Saved
Strict Method: (Original Amount x Interest Saved x ?/12m) + (Remaining
Amount x Interest Saved x ?/12m) xxxx
 Provision of Asset – Market Value x 20% xxxx
Reduction: Time apportionment and Employee contribution (xxxx)
xxxx
 Gift of Asset – higher of
Calculation 1: MV of asset when provided – Amount already taxed – Employee
contribution
Calculation 2: MV of asset when gifted – Employee contribution xxxx
- Allowable Deductions:
 Contributions to approved payroll deduction schemes (xxxx)
 Contributions to approved occupational pension schemes (xxxx)
 Subscriptions to approved professional bodies (xxxx)
 Liability incurred by employee in course of employment duties (xxxx)
 Travelling Expenses – only for home/ office to client and return journey (xxxx)
 Statutory Mileage Allowance:
SMA entitlement – amount paid by employer = Shortfall (xxxx)
SMA entitlement – amount paid by employer = Excess – Taxable benefit
TAXABLE EMPLOYMENT INCOME XXXX
Page 26 of 135
Salary:
 Salary is recognised on an accrual basis only for those months of the tax year, in which the individual is
employed.
Benefits:
Types of Benefits
Assessable on all
Exempt
employees
 Benefits provided to an employee as a reward or part of the remuneration package or perks of the
designation are taxable as employment income (apart from exempt benefits).
Exempt Benefits:
 Trivial Benefits: Benefits which do not cost more than £50 per employee and are not cash/ cash voucher,
are exempt.
 Entertainment to employees by third parties.
 Gifts to employees by third parties provided the value of gifts to an employee by the same donor is not
more than £250.
 First £8,000 of relocation expenses
 Welfare counselling
 On-site canteen and recreational facilities available for all employees
 Workplace parking or nursery
 Childcare Allowance:
Tax Payer Amount Exempted
Basic First £55/ week
Higher First £28/ week
Additional Higher First £22/ week
 One mobile telephone phone per employee. Mobile phone in excess of one give rise to a taxable benefit.
 Pool car
 Loans of upto £10,000
 Private medical insurance premium to cover treatment of employee residing outside of UK in the course of
performing work duties
Page 27 of 135
 Job related accommodation

 Working from home allowance of £4 per week
 £500 on medical treatment provided to employee who is returning to work after a long period of absence
because of injury or ill health.
Benefits taxable on all employees:
Rules: Keeping in mind the following rules will prove helpful in the calculation of an individual’s taxable
benefits:
- Where no special rule exists and the benefit is taxable, the relevant amount is the marginal cost to the
employer of providing that benefit.
- If a benefit has continuous use, like accommodation, car etc. and it was not available to the individual
throughout the tax year, the taxable amount should be time apportioned.
- If the employee contributes towards the benefit, the benefit charge calculated is reduced by the
employee’s contribution, to arrive at the taxable amount. This does not apply on fuel benefit.
 Vouchers
 If Cash / Credit Vouchers are provided by the employer, the taxable benefit amount on the employee is
the cost of these vouchers.
 Accommodation
Provided for:
- Proper performance of duties
Job Related EXEMPT
- Better performance of duties
- security of employee
Accommodation
Property owned Taxable Benefit:
by the Employer Annual Value
Non Job Related
Property rented Taxable Benefit: Higher of

by Employer Rent Paid or Annual Value
 Job related accommodation: No taxable benefit arises in respect of job related accommodation if it is:
i. Necessary for the employee to reside in the accommodation for the proper performance of his
duties.
Page 28 of 135
ii. The accommodation is provided for the better performance of the employee’s duties and the
employment is of the type where it is customary for accommodation to be provided (e.g. Prime
Minister’s / Arch Bishop’s residence).
iii. The accommodation is provided as a part of a security arrangement because there is a special
threat to the employee’s security
 Non- Job related accommodation: If accommodation is provided for any reason apart from the Job
related reasons it is treated as a taxable benefit and the calculation depends upon the following:
Employer owned accommodation:
- Taxable value in this case is the rateable value of the property.
- An additional charge may arise if the accommodation is worth more than £75,000
The amount of the expensive accommodation benefit is: (Cost of providing the accommodation -
£75,000) x 3%
Cost of providing accommodation
If accommodation has been owned for ≤ 6 If the accommodation has been owned for > 6
years: years:
Cost = Original Purchase Price + Subsequent Cost = Market Value when provided to
Capital Expenditure upto the start of the employee + Subsequent Capital Expenditure up
current tax year to the start of the current tax year
- The benefit will be time apportioned if it is available only for part of the year.
Rented accommodation:
Taxable benefit of accommodation that is rented by the employer and provided to the employee is
higher of rent paid by employer and the annual value of the property.
Example – extract from technical article on Benefits

Alex has been provided with living accommodation since 1 January 2013. Prop plc had purchased the property
in 2012 for £160,000, and it was valued at £185,000 on 1 January 2013. Improvements costing £13,000 were
made to the property during June 2014. The annual value of the property is £9,100.
- The basic benefit is the annual value of £9,100.

Page 29 of 135
- The living accommodation cost is in excess of £75,000 so there is an additional benefit. Since the
property was not purchased more than six years before first being provided to Alex, the benefit is
based on the cost of the property plus subsequent improvements. The additional benefit is therefore
£2,940 ((160,000 + 13,000 – 75,000) at 3%).
 Expenses related to accommodation

 Employees are taxed on any additional accommodation related expenses paid by the employer. These
related expenses are:
a) Heating, electricity, cleaning, decorating etc.
b) Repairs and maintenance, but not structural repairs: these are assessed according to the cost to the
employer.
c) The use of furniture: the taxable benefit is calculated as Market value of furniture x 20%.
 If the accommodation is job related, the assessable benefit of ancillary services and use of furniture
cannot exceed 10% of employee’s net earnings for the tax year. Net earnings mean total earnings for
the year without considering ancillary services and use of furniture less allowable expenses.
Example – extract from technical article on Benefits with modification

Bess was provided with living accommodation from 1 January to 5 April 2017. The property is rented by Prop
plc at a cost of £2,250 per month, and it has an annual value of £10,400. On 1 January 2017, Prop plc
purchased furniture for the property at a cost of £16,200. The company pays for the running costs relating to
the property, and for the period 1 January to 5 April 2017 these amounted to £1,900.
- The taxable benefit is the rent paid of £6,750 (2,250 x 3) because this is higher than the annual value of
£2,600 (10,400 x 3/12).
- The taxable benefit in respect of the furniture is £810 (16,200 x 20% x 3/12).
- The running costs of £1,900 are also taxed as a benefit.
 Car
 If a car is provided to an employee for private use, a taxable benefit arises.
 The charge for the private use is based on the manufacturer’s list price, and is calculated as follows:
£
(Cost of car) x appropriate %age X
Time Apportionment (if required) x
Less: Employee contribution for the private use of the car (if any) (x)
Taxable benefit x
Page 30 of 135
 Cost of car = List price of the car + Cost of any accessories (if worth at least £100) – Capital Contribution
by the employee (One-off contribution made towards the purchase of the car. Relief restricted to
maximum of £5,000)
 The % is based on the CO2 emission as follows but is restricted to a maximum of 37%.
CO2 Petrol Diesel
(3% increase in % of petrol)
≤ 50 g/km 7% 10%
51 – 75 g/km 11% 14%
76 - 94 g/km 15% 18%
95 g/km 16% 19%
> 95 g/km 1% increase on every 5 g/km increase
 Any running costs of the car (except for fuel) if taken care of by the employer, result in no further
taxable benefit.
 If the employer provides a driver/ chauffeur to the employee, the salary of the driver is the taxable
benefit for the employee.
Example – extract from technical article on Motor Cars with modification

Diana was provided with a new petrol powered company car throughout the tax year 2016–17. The motor car
has a list price of £84,600 and an official CO₂ emission rate of 228 grams per kilometre. Diana paid Fashionable
plc £1,200 during the tax year 2016–17 for the use of the motor car. Diana was unable to drive her motor car
for two weeks during February 2017 because of an accident, so Fashionable plc provided her with a chauffeur
at a total cost of £1,800.
- The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage
is 42% (16% + 26% ((225 – 95)/5)), but this is restricted to the maximum of 37%.
- The motor car was available throughout 2016–17, so the benefit is
o Basic Charge = £84,600 x 37% = £31,302
o Less: Employee contribution of £1,200
o Taxable benefit on motor car = £31,302 - £1,200 = £30,102
- The contribution by Diana towards the use of the motor car reduces the benefit.
- The provision of a chauffeur will result in an additional benefit of £1,800.
 Fuel
 A separate benefit arises on the provision of private fuel, and is calculated as: £22,200 x appropriate %
 This is the same % that is applied to calculate the taxable benefit on cars
 The benefit is calculated as above where there is any fuel provided for private use; the actual amount
is irrelevant. Therefore any partial reimbursement by the employee will not affect the taxable benefit.
Page 31 of 135
Example – extract from technical article on Motor Cars – with modifications

Diana was provided with fuel for private use between 6 April 2016 and 5 April 2017. She paid Fashionable plc
£600 during the tax year 2016–17 towards the cost of private fuel, although the actual cost of this fuel was
£1,000.
- The motor car was available throughout 2016–17, so the fuel benefit is £8,214 (22,200 x 37%).
- There is no reduction for the contribution made because the cost of private fuel was not fully
reimbursed.
 Van
 No benefit arises if there is no significant private use of the van.
 In case of private use of the van the taxable benefit is £3,170.
 If the employer also provides private fuel for the van, the taxable benefit related to this is £598.
 Beneficial Loan
 A beneficial loan is one made to an employee by the employer which is either interest free or the
interest paid is less than the official rate of interest.
 The taxable benefit is as follows:
£
Interest payable on loan (calculated using official rate of interest) X
Less: Interest actually paid (if any) (X)
Assessable benefit X
 No assessable benefit arises if the total amount outstanding does not exceed £10,000 at any time
during the tax year.
 A benefit arises on interest on the whole loan, if the amount is > £10,000.
 If the employer writes off the loan to the employee, the amount written off becomes a taxable benefit.

Kim was provided with an interest free loan of £24,000 on 1 June 2016, so that she could purchase a new
motor car.
- The taxable benefit is £600 (24,000 at 3% x 10/12).

- Since no repayments have been made during 2016–17, both methods will produce the same result.
Page 32 of 135
 Partial Repayment of Loan during the Tax Year: There are two methods of calculating the assessable
benefit in this situation:
1. Average method
The official rate of interest is applied to the average of the balance at the beginning and at the end of
the year. If the loan was repaid before the year end, then the balance at the time of repayment is
taken.
Average Method: Opening Balance + Closing Balance x Interest Saved
2
2. Strict method
The official rate of interest is applied to the amount outstanding on a month by month basis.

Ming was provided with an interest free loan of £120,000 on 1 May 2016, so that she could purchase a holiday
cottage. Ming repaid £50,000 of the loan on 31 July 2016, and repaid the balance of the loan of £70,000 on 31
December 2016.
- The benefit calculated using the average method is: [(120,000 + 70,000)/2] x 3% x 8/12 = £1,900
- The benefit calculated using the strict method is:
120,000 at 3% x 3/12 = £900
70,000 at 3% x 5/12 = £875
Total = £1,775
- Ming will therefore elect to have the taxable benefit calculated according to the strict method.
 In the exam both methods have to be used in such a scenario unless a particular method is specified.
 Provision of Asset
 When an employer makes an asset available to an employee for his private use, the employee is
assessed annually on 20% of the market value of the asset when first provided to the employee.
 Gift of Asset
 If the asset is subsequently gifted or sold to the employee, the assessable benefit is the greater of:
a) The market value at the date of the gift / sale less employee contribution (if any).
b) The market value when first provided to the employee less annual 20% assessments less employee
contribution (if any).
Page 33 of 135
Example – extract from technical article on Benefits with modification

Joe is employed by Firstly plc. On 6 April 2016 the company provided him with a home entertainment system
costing £4,400 for his personal use. Firstly plc gave the home entertainment system to Joe on 31 December
2016 for free, although its market value on that date was £3,860.
- The taxable benefit for the use of the home entertainment system is £660 (4,400 x 20% x 9/12).
- The taxable benefit for the acquisition of the home entertainment system is the market value of
£3,860, because this is greater than £3,740 (4,400 – 660).
Allowable Deductions:
The general rule is that expenses can only be deducted from earnings if they are incurred wholly, exclusively
and necessarily in performing the duties of the employment.
Expenses specifically deductible against earnings:

1. Insurance premiums to cover directors’ and employees’ liabilities (and payments to meet those liabilities)
2. Subscriptions to relevant approved professional bodies. E.g.: annual subscription to ACCA (UK) etc.
3. Qualifying travel expenses – costs the employee incurs travelling in the performance of his duties or/and
travelling to or from a place attended in the performance of duties
 Normal commuting i.e. travelling from one’s home to the permanent office and back again, does not
qualify. Expenses of travelling from home to client are only deductible if the journey is substantially
different from normal commute.
 Relief is available for expenses incurred by an employee working at a temporary location on a
secondment of 24 months or less.
 If a mileage allowance is paid/ or not paid at all by the employer, then the shortfall between the
following SMA rates and the amount paid by the employer (if any) is treated as an Allowable
Deduction.
Mileage allowance for use of OWN car for business purposes:
Up to 10,000 business miles 45p per mile
Miles over 10,000 25p per mile
If the employer pays an amount over and above the figures specified, then the excess becomes a
taxable benefit.
Page 34 of 135
Example – extract from technical article on Motor Cars

Dan and Diane used their own motor cars for business travel during the tax year 2016–17.
Dan drove 8,000 miles in the performance of his duties, and his employer reimbursed him at the rate of 60p
per mile.
Diane drove 12,000 miles in the performance of her duties, and her employer reimbursed her at the rate of
30p per mile.
Dan
The mileage allowance received by Dan was £4,800 (8,000 at 60p), and the tax free amount was £3,600
(8,000 at 45p). The taxable benefit is therefore £1,200 (4,800 – 3,600).
Diane
Diane can make an expense claim of £1,400:
£
10,000 miles at 45p 4,500
2,000 miles at 25p 500
5,000
Mileage allowance received (12,000 at 30p) (3,600)
Expense Claim 1,400
4. Contributions (within limits) to a registered occupational pension scheme. Both pension contributions and
charitable giving payments are deducted by the employer from pre tax salary.
5. Payments to charity under a payroll deduction scheme. This is a scheme where, if the employee elects, a
sum of money is deducted from his/ her salary each month by the employer to be donated to charities.
Dispensations:
Previously an employer could agree a dispensation with HMRC to avoid the need to report routine business
expenses that were reimbursed to employees.
Dispensations have been replaced with automatic exemptions which apply on expenses that would be treated
as allowable deductions for employees.
Payrolling of Benefits:
Employers can now include the taxable benefits provided to employees in the payroll with the tax liability
being deducted as PAYE. Payrolled benefits would not have to be reported on the form P11D.
If benefits are not payrolled, they will have to be reported on form P11D.
Page 35 of 135
Property Income
Definition: Property income covers rent or lease premiums from UK property. UK property constitutes of
Land, Buildings, and Yachts etc.
Calculation: The Steps 1 - 3 need to be applied in a columnar format if the individual has rented out more than
one property.
Step 1: Determine the rental income on an accrual basis for the relevant tax year.
Step 2: Calculate the assessable premium, if property leased.
Step 3: Deduct and revenue expenses incurred wholly and exclusively for the letting out of the property.
Step 4: In case of more than one property the final figures are summed up, providing an automatic relief for
loss from any property.
Step 5: If the net result is taxable property income it is taken to the Income Tax Computation but if the net
result is a property loss, a loss memo is created and the amount is carried forward for relief against future
property income.
Step 6: In case of a room being let out of the main residence of the individual, the Rent-a-Room Relief rules
apply.
Page 36 of 135
Pro-Forma: The following format is to be used when dealing with an exam question related to property
income. The points are covered in detail later.
Edward Hayes
Property Income for the Tax Year 16/17
Unfurnished Furnished
Property 1 Property 2 Total
£ £ £
Rental Income – for the period the property is actually xxxx Xxxx Xxxx
let for
Assessable Premium:
Premium Amount
Less: 2% x Premium Amount x (n – 1)
xxxx Xxxx
Less: Allowable Expenses – for the period the property
is available for letting
 Advertising/ Agent’s fees (xxx) (xxx) (xxxx)
 Repairs & Maintenance (revenue) (xxx) (xxx) (xxxx)
 Water Rates (xxx) (xxx) (xxxx)
 Council Tax (xxx) (xxx) (xxxx)
 Bad Debts (xxx) (xxx) (xxxx)
 Insurance (xxx) (xxx) (xxxx)
 Interest on loan to purchase property (xxx) (xxx) (xxxx)
 Gardening Expenses (xxx) (xxx) (xxxx)
 Replacement Furniture relief (xxx) (xxx)
TAXABLE PROPERTY INCOME XXXX (XXX) XXXX
Rental Income:
 Rent is recognised on an accrual basis in a tax year but only for the months that the property was actually
let out for.
Short Term Lease:

 A short term lease agreement is one in which the property is let out for a period ≤ 50 years.
 A premium is a lump sum received by the landlord at the start of the lease in return for giving the tenant
the exclusive right to use the property for the duration of the lease.
 The taxable portion of the premium received is calculated as follows:
Premium assessable as property income = P – P (2% x (n- 1))

Where p =premium
n =no of years
Page 37 of 135
Example:
Harry let out his property on a 25 year lease to his friend Jacob. Jacob paid Harry a premium of £30,000 for the
lease.
Taxable premium for Harry: £30,000 – [£30,000 x 2% x (25-1)] = £15,600
Allowable Expenses:
 Allowable expenses must be incurred wholly and exclusively for the purposes of the property letting
business and must be revenue, not capital, in nature. (Refer to list of items covered in the pro-forma).
 Expenses are if the property is available for letting even if the property is empty (e.g. repairs carried out in
between old tenants moving out and new tenants moving in).
Expenses incurred while the property is occupied by the owner are not allowed expenses.
 Irrecoverable rent) is an allowable deduction.
 For individuals, interest payable on any loan taken out to purchase or improve the property (including
incidental costs of obtaining the loan finance and any bank overdraft interest in running the property
business) is an allowable expense against the rental income.
 Replacement Furniture Relief: the owner of the property can deduct the actual cost of replacing furniture
and furnishings from the property income.
There is no relief for the initial cost, only relief when the assets are replaced.
The amount of relief is reduced by any proceeds received from selling the old furniture that has been
replaced.
Relief is not given for any improvement element.
Example:
Jane rented out two properties in 2016/17: Nos. 47 and 49.
No. 47 is a furnished property that Jane purchased several years ago. It was let throughout the year at a rent
of £2,500 per month.
No. 49 was purchased on 1 January 2017. It was immediately let on a six month agreement as unfurnished
property at a rent of £1,800 per month. In order to purchase the property, Jane took out a £100,000 bank loan
on 1 January 2017, at a fixed mortgage interest rate of 9% pa.
The following additional expenses relate to 2016/17:

No. 47 No. 49
£ £
Advertising for new tenants Nil 920
Estate agent management fees 2,440 740
Council tax 860 150
Insurance 1,100 160
Page 38 of 135
Repairs 3,200 Nil

Extension 15,000 Nil
Purchase of furnishings:
Cooker 440
Washing machine 330
Floor coverings 2,200
Replacement expenditure:
Cooker (Note 1) 460
Washer –dryer (Note 2) 670
Notes:
1. The new cooker purchased the original one that was disposed for £110. The replacement cooker was a
similar model.
2. The washer-dryer replaced the washing machine that was scrapped with no proceeds. A similar
washing machine would have cost £360.
Jane’s property income – 2016/17

£ £
Rents accrued in 2016/17 (£2,500 × 12 ) + (£1,800 × 3) 35,400
Less: Allowable expenses
Advertising 920
Agents’ management fees (£2,440 + £740) 3,180
Council tax (£860 + £150) 1,010
Insurance (£1,100 + £160) 1,260
Repairs 3,200
Extension (capital and therefore not allowable) Nil
Interest on loan to purchase No.49 (£100,000 × 9% × 3/12) 2,250
(11,820)
Replacement Furniture Relief for Property No.47 only:
Cooker (460 – 110 proceeds of old cooker) 350
Washing machine (ignore improvement element) 360 (710)
Property income assessment 22,870
Rent-a-Room Relief:
When an individual lets out a room in his/ her main residence, they are entitled to a Rent a Room relief
exemption amount of £7,500.
The individual can calculate the taxable rental income as the lower of the following two alternatives:
Page 39 of 135
 Alternative 1: Ignore Rent a Room Relief and calculate taxable income as per the normal rules.
Rental income accrued – Normal revenue expenses related to the room
 Alternative 2: Claim Rent a Room Relief, in which case, normal expenses are substituted by the relief
amount.
Rental income accrued - £7,500 (Rent-a-Room Relief amount)
Under Alternative 1, if the expenses of the individual are more than the income, a property loss will arise that
can be relieved.
Under Alternative 2, if the rental income is less than £7,500, no loss arises as £7,500 is a relief amount which
can convert taxable income to zero but not into a loss.
During the tax year 2016-17, Edmond rented out a furnished room in his main residence. He received rent of
£8,540 and incurred allowable expenditure of £2,140 in respect of the room.
Tax Implication: If Edward claims rent a room relief, then his property income will be (£8,540 - £7,500) =
£1,040 whereas under normal calculation rules, his taxable property income would be (£8,540 - £2,140) =
£6,400. Therefore it is beneficial for Edward to claim Rent a Room Relief.
Property Loss:
 Income and expenses of all property are pooled to give an overall profit or loss figure for the year. The
losses from one property are automatically offset against other property income.
 Any surplus losses are carried forward to the next tax year.
 Losses carried forward may only be offset against the first future available property income.
 Property loss cannot be relieved against any other income in any year.
Furnished Holiday Lettings:

 Furnished property let out on commercial basis and fulfilling the following criteria:
 Available for letting for at least 210 days in a year.
 Actually let out for at least 105 days in a year.
 Not available for long term occupation (same customer for consecutive > 31 days) for a total of > 155
days in a year.
 Losses from Furnished Holiday Lettings can only be set-off against future profits of the same FHL business.
 Tax effect:
 Treated as relevant earnings for pension contributions.
 Capital allowances available on furniture rather than furniture allowance.
 Capital gains rollover relief available on the gains of the business assets, when disposed.
Page 40 of 135
Trading Profits
Badges of Trade:
Where there is doubt as to whether an activity constitutes a trade or simply a capital disposal, a number of
key factors have been identified through judicial decisions, known as the badges of trade. The badges of trade
give guidance where it is not clear if certain activities constitute a trade.
 Subject matter: Has the asset been purchased for:
 Personal Use: indicates capital asset
 Investment: indicates capital asset
 Reselling at a profit: indicates trading
 Frequency of transactions: the more frequent the transactions, the higher indication of the individual
running a trade.
 Length of ownership: the shorter the period of ownership of an item, the kore likely that it was treated as
inventory in trade.
 Supplementary work and marketing: where additional work is carried out to make a product/ item more
attractive to the buyer, this is a norm of trading.
 Reason for sale: If the asset was old under duress, this would be considered a capital disposal.
 Profit motive: the absence of a profit motive at the time of buying the item indicates whether it was
planned to be used as inventory or a capital asset.
Tax Adjusted Trading Profits:

 Individuals running a business normally calculate their profit or loss using Financial accounting concepts,
which the HMRC does not completely agree with for the purpose of tax calculation.
 Rather than maintaining two sets of accounts – one as per Accounting standards and one as per tax;
individuals normally make tax adjustments to their accounting profits.
 This tax adjusted amount is then added to the Income Tax Computation in the relevant tax year. The
relevant tax year is identified by the application of a concept known as Basis Period (covered later).
Calculation:
Step 1: Make the required tax adjustments to the Accounting Profit figure.
Step 2: Reduce Capital Allowances from the profit figure as a Tax substitute for depreciation of capital assets.
Step 3: Apply the basis period rules to match the TATP of a sole trader to a tax year and export the relevant
amount to the current tax year Income Tax Computation.
Step 4: In case of loss, a loss memo is to be created and the trading loss relief options applied.
Page 41 of 135
Pro-Forma: The following is the recommended format for covering Trading profit Adjustments (whether for
self-employed individuals, partnerships or companies).
Trading Profit Adjustments for the Period Of Account
£ £
Net Profit as per Accounts Xxxx
+ Disallowed Expenditure:
 Expenses not related to trade xxx
 Capital expenditure including initial repairs xxx
 Depreciation/ Amortisation/ Impairment of assets xxx
 Fines or penalties – unless incurred by employee xxx
 Increase in general provision for receivables xxx
 Element of personal expense by owner xxx
 Gift aid donation xxx
 Loss on disposal of assets xxx
 Entertainment of suppliers and UK based customers xxx
 Donations to political parties/ national charities xxx
 15% of lease rent for motor cars emitting > 130 g/km CO2 xxx
Xxxx
+ Allowed Income:
 Drawings of goods by owner xxx
 Impaired debt recovered xxx
 Decrease in specific provision for receivables xxx
Xxx
- Disallowed Income:
 Rental income xxx
 Bank interest xxx
 Dividend income xxx
 Profit on disposal of assets xxx
 Decrease in general provision for receivables xxx
(xxx)
- Allowed Expenditure:
 Any expense ‘wholly and exclusively’ related to trade xxx
 Revenue natured expenses such are regular repairs etc xxx
 Impaired debts xxx
 Increase in specific for receivables xxx
 Entertainment and gifts for employees xxx
 Entertainment of Overseas customers xxx
 Donations to local charities for advertisement xxx
 Gifts to third parties provided ≤ £50 per person per annum; not food/ drink/
tobacco items and given for purpose of advertisement xxx
 Gifts of inventory as samples (xxx)
 Capital Allowances
TAX ADJUSTED TRADING PROFIT XXXX
Page 42 of 135
Notes:
 Disallowed expenditure: are those expense items that should not be deducted in arriving at the taxable
profit amount. If they have been deducted in the Accounting profit figure; these amounts should be added
back.
 Allowed expenditure: are expense items that should be deducted to arrive at the taxable profit amount. If
they have already been deducted, these should be marked as ‘0’ in the exam, as they require no
adjustment. But if these have not been dealt with, the amounts should be deducted.
Pre-trading expenditure incurred in the seven years prior to the commencement of the business, is
treated as an expense on the day the business starts trading.
 Disallowed income: are items of income that the HMRC does not consider as part of trade. For example,
dividends received from investments in companies are not trading profits. These should be removed from
the accounting profit figure to arrive at the tax adjusted trading profit amount.
 Allowed income: items of income that according to HMRC are part of trading profits. Such as drawings of
inventory by the owner for personal use is viewed by the HMRC as a sale and therefore requires an
addition in the profit amount.
 For all of the above categories, the following steps should be applied:
1. Identify whether the expense/ income item is allowed or disallowed?
2. Based on this categorisation, should be part of the trading profit amount or not?
3. Has it been treated accordingly in the question?
- If yes, ignore adjustment but mention the item and mark the associated amount as ‘0’ to get marks.
- If no, carry out the necessary addition or deduction.
Cash Basis of Accounting
 An unincorporated business (sole traders and partnerships), whose receipts for a tax year are ≤ £82,000
can make an election to calculate trading profits on the cash basis
 This election applies in the tax year for which it is made and all subsequent tax years.
 The taxable trading profits under the cash basis are calculated as: Cash receipts; less Deductible business
expenses actually paid in the period.
 Cash receipts include all amounts received relating to the business including amounts received from the
sale of plant and machinery, other than on the sale of motor cars.
 Under the cash basis, business expenses are deductible when they are paid. Business expenses for the cash
basis of accounting include capital expenditure on plant and machinery (except motor cars). Only business
expenses are tax deductible so that any private element must be disallowed.
Page 43 of 135
 Fixed rate expenses can be used in relation to expenditure on motor cars and business premises partly
used as the trader's home.
 Fixed rate mileage expense: The fixed rate mileage (FRM) expense can be claimed in respect of motor cars
which are owned or leased by the business and which are used for business purposes by the sole
trader/partner or an employee of the business. The FRM expense is calculated as the business mileage
times the appropriate rate per mile. The appropriate mileage rates for motor cars are 45p per mile for the
first 10,000 miles, then 25p per mile thereafter.
 A fixed rate monthly adjustment can be made where a sole trader/partner uses part of the business
premises as his home eg where a sole trader runs a small hotel or guesthouse and also lives in it. The
adjustment is deducted from the actual allowable business premises costs to reflect the private portion of
household costs, including food, and utilities (eg heat and light). It does not include mortgage interest,
rent, council tax or rates: apportionment of these expenses must be made based on the extent of the
private occupation of the premises. The deductible fixed rate amount depends on how many people use
the business premises each month as a private home:
Number relevant occupants Non-business use amount
1 £350
2 £500
3 or more £650
 Losses: A net cash deficit (ie a loss) can normally only be relieved against future cash surpluses (ie future
trading profits). Cash basis traders cannot offset a loss against other income or gains.
Page 44 of 135
Capital Allowances
Definition: Capital allowances are tax equivalent of depreciation. Add back any depreciation shown in
computing the accounting profit and deduct capital allowances instead.
Plant & Machinery:

Apart from the plant and machinery used in trade, computer software also qualifies as plant by statute.
Also ‘integral features’ of a building (not the building itself) are treated as ‘plant’, e.g.
 Cold water, water heating, Air conditioning systems
 Lighting and electrical systems
 Lifts and escalators
Calculation: The following format is the recommended lay-out for solving Capital Allowances calculations
whether for individuals or companies. Items are explained in detail later.
Capital Allowances for Period of Account

General Special Rate Asset With Short Life Allowances
Pool Pool Personal Use Asset
– 30%
£ £ £ £ £ £
TWDV b/f xxxx xxxx Xxxx xxxx
+ without AIA
Motor Car CO2 : 76 - 130 g/km xxx
Motor Car CO2 > 130 g/km xxx
+ with AIA
P&M xxx
- AIA x ?/12m (200,000) 200,000
xxx
- Disposal (lower of original cost
and proceeds) (xxx) (xxx)
xxx
Balancing Allowance (xxx) Xxx
Xxxx xxxx Xxxx -
- WDA @ 18% x ?/12m (xxx) Xxx
- WDA @ 8% x ?/12m (xxx) Xxx
- WDA @ 18% x ?/12m (xxx)
70% Xxx
+ with FYA
Motor Car CO2 ≤ 75 g/km xxx
- FYA @ 100% (xxx) Xxx
TWDV C/F Xxxx xxxx Xxxx
TOTAL ALLOWANCES XXXX
Page 45 of 135
 General Pool
 The pool groups together:

- Plant and machinery, furniture and equipment etc.
- Motor cars ( CO2 Emission 76g/km- 130g/km)
 All asset in general pool qualify for AIA in the year of purchase
 WDA is available @ 18% per annum
 Written Down Allowances
 The balancing amount of the assets on which capital allowances had been claimed in the previous tax
year is brought forward and is termed – Tax Written Down Value brought forward - TWDV
 Writing down allowance (WDA) is given for a period of account at 18% per annum on reducing balance
basis on the General Pool and at a rate of 8% on the Special Rate Pool.
 The figure remaining (the TWDV) is carried forward to the next period.
 Where a trader prepares accounts for a period longer or shorter than twelve months, the WDA is
increased or decreased accordingly.
 Annual Investment Allowances
 The annual investment allowance (AIA) is available to all kinds of businesses and allows a business to
immediately write off the first £200,000 of expenditure on plant and machinery but not on cars.
 This limit of £200,000 is applicable annually. Expenditure above £200,000 will be eligible for WDA at
the normal rate.
 Where the period of account is more or less than 12 months the limit of £200,000 is proportionately
increased or decreased.
 AIA should be adjusted against the qualifying assets in the following order:
1. Special Rate Pool
2. General Pool
3. Short Life Asset
4. Asset With Personal Use
 First Year Allowances
 This is a special allowance available on Low emission motor cars (Cars emitting < 75g/km CO2).
 When a low emission car is purchased, the entire purchase price is written off in the same year.
 Hence the FYA rate is 100% but this is not time apportioned according to the Period of Account
Page 46 of 135
 Disposal of Assets
 No allowances can be claimed on assets disposed during the period of account. Hence assets disposed
are deducted from the relevant column in the pro-forma.
 The amount deducted is the lower of
- Disposal proceeds
- Original cost of the asset disposed
 Balancing Charge: When the Tax written down value of an asset is < Gross sales proceeds. This is a
negative amount in the Allowances (expense) column and is net off against the allowances of the
period of account. If the resultant amount of the capital allowance is a charge, it is added to the Tax
Adjusted Trading profit amount as Allowed income.
 Balancing Allowance: When the TWDV of the asset is > Sale proceeds. This can never be created on
pools unless the business ceases.
Example:
Jack prepares accounts to 31 March each year. Information for the year ending 31 March 2017 is as follows:
£
1 April 2016 TWDV brought forward 65,000
10 April 2016 Bought plant 534,500
1 May 2016 Bought machinery 112,500
1 July 2016 Sold plant (original cost £38,000 on 01/06/2009) 15,000
Capital allowances for the year ended to 31 March 2017 are as follows.
AIA General pool Allowances
£ £ £
TWDV b/f 65,000
Additions not qualifying for AIA -
Additions qualifying for AIA
Plant 534,500
Machinery 112,500
647,000
Less: AIA (200,000) 200,000
447,000
Less: Disposals (lower of cost and sale proceeds) (15,000)
497,000
WDA (£497,000 x 18%) (89,460) 89,460
TWDV b/f 407,540
Allowances 289,460
Page 47 of 135
 Special Rate Pool

 The pool groups together:
- All long-life assets with a useful life of at least 25 years on which total overall expenditure incurred
within a year is at least £100,000.
- Features those are integral to a building.
- Thermal insulation.
- Cars ( CO2 emission > 160g/km)
 All assets in special rate pool qualify for AIA except cars
 Balancing charge is calculated on disposal; no balancing allowances arise unless the trade is ceased.
 AIA should initially be allocated to assets qualifying for Special Rate Pool as a reduced allowance of 8%
is claimed on these.
Example:
Lucy has been trading for many years, making up accounts to 5 April each year. The tax written down value of
her main pool at 5 April 2016 was £110,000. In the year to 5 April 2017, Lucy had the following expenditure:
10 June 2016 General plant costing £45,000
12 December 2016 Lighting system in shop £40,000
15 January 2017 Car for business use only (C02 emissions 175 g/km) £25,000
26 January 2017 Delivery van £15,000
4 March 2017 Lifts £545,000
Capital Allowances Computation

AIA General pool Special rate Total
£ £ pool allowances
£ £
TWDV b/f 110,000
Additions qualifying for AIA
Lighting 40,000
Lifts 545,000
585,000
AIA (200,000) 200,000
385,000
Transfer balance to special rate pool (385,000) 385,000
Additions qualifying for but not given AIA
Plant 45,000
Van 15,000
Page 48 of 135
Additions not qualifying for AIA

Car 25,000
170,000 410,000
WDA @ 18% (30,600) 30,600
WDA @ 8% (32,800) 32,800
TWDVs c/f 139,400 377,200
Allowances 263,400
 Small pool allowance

 Entire pool amount can be written off if amount is ≤ £1,000.
 Short Life Asset

 A short life asset is an asset which the taxpayer elects to treat as a short life asset and which is not
specifically excluded from being classed as a short life asset.
 Typically this election may be beneficial where the taxpayer expects the asset to have an expected life
of less than eight years from the end of the period of account in which the asset was purchased (i.e.
less than nine years from the date of acquisition).
 The effect of an election is to de-pool such assets, which would otherwise be accounted for in the
general pool.
 Cars and private use assets cannot be short life asset
 Each short life asset has its own column for capital allowances.
 Short life asset qualify for AIA in the year of purchase
 Balancing allowances or balancing charge is calculated in the year of disposal
 If the asset is not disposed of by the end of the eighth year after the end of the period of account in
which the asset was purchased, then the TWDV of the asset is transferred to the general pool.
 Asset With Personal Use

 Special rules apply if asset has any private use along with business use.
 Asset with private use are not added in any of the pools
 Separate column is maintained for every asset with personal use
 WDA @ 18% is available ( if cars according to specified rules)
 Asset with personal use qualify for AIA in the year of purchase
 Balancing allowance or balancing charge is calculated in the year of disposal
 However only the business proportion of allowances can be claimed against the Trading profit.
Page 49 of 135

Ming prepares accounts to 31 December. On 1 January 2016, the tax written down value of plant and
machinery in her main pool was £16,700.
The following transactions took place during the year ended 31 December 2016:
8 January 2016 Purchased motor car (1) £15,600
14 April 2016 Purchased motor car (2) £10,100
12 August 2016 Purchased equipment £218,750
2 September 2016 Purchased motor car (3) £28,300
19 November 2016 Purchased motor car (4) £16,800
12 December 2016 Sold motor car (2) (£8,300)
- Motor car (1) had CO2 emissions of 120 g/km and 20% of its mileage is for private journeys by Ming.
- Motor car (2) has CO2 emissions of 155 g/km.
- Motor car (3) has CO2 emissions of 125 g/km.
- Motor car (4) has CO2 emissions of 70 g/km
Ming - Capital Allowances for year ended 31 December 2016

General Special Rate Asset With Personal Allowances
Pool Pool Use – 30%
£ £ £ £ £
TWDV b/f 16,700
+ without AIA
Motor Car (1) 15,600
+ with AIA
Equipment 218,750
- AIA (200,000) 200,000
18,750
- Disposal (lower of original cost
and proceeds) Motor Car (2) (8,300)
63,750 1,800 15,600
- WDA @ 18% (11,475) 11,475
- WDA @ 8% (144) 144
- WDA @ 18% (2,808)
80% 2,246
+ with FYA
- FYA @ 100% (16,800) 16,800
TWDV C/F 52,275 1,656 12,792
TOTAL ALLOWANCES 230,665
Page 50 of 135
Partnership
Definition: A partnership is a single trading entity, preparing accounts and computing tax adjusted trading
income but with more than one owner. However, the partnership is not a separate entity for tax purposes,
and the partnership is not subject to tax.
Calculation:
Step 1: Make the required tax adjustments to the Accounting Profit figure.
Step 2: Reduce Capital Allowances from the profit figure as a Tax substitute for depreciation of capital assets.
Step 3: Split the Tax Adjusted Trading Profit figure amongst the Partners as per their Profit Sharing agreement.
The TATP is also adjusted to pay off any salaries or interest due towards the partners and the remainder profit
split according to the Partnership agreement.
Step 4: Apply the basis period rules to match the TATP of an individual partner to a tax year and export the
relevant amount to the partner’s Income tax computation.
Step 5: In case of loss, a loss memo is to be created and the trading loss relief options applied
Example:
A, B and C have been trading for many years, preparing accounts to 30 September each year. Adjusted profits
for the year to 30 September 2016 were £160,000.
Profits were shared as follows:
A was paid an annual salary of £10,000,
Interest was paid at 10% on their capital accounts, where the balance on the accounts was A: £50,000; B:
£60,000 and C: £30,000
The Profit Sharing ratio was 2:3:5 for A, B and C respectively.
The profit for the year ended 30 September 2016 is shared as follows:
Total A B C
£ £ £ £
Year ended 30 September 2016 160000
Salary (10,000) 10,000
Interest (10% on capital) (14,000) 5,000 6,000 3,000
Remaining profit in PSR (20:30:50) 136,000 27,200 40,800 68,000

136,000 42,200 46,800 71,000
Page 51 of 135
Change in Profit Sharing Ratio
Any changes in the partnership agreement require the splitting up of the Period of Account into pre-change
and post-change phases. The profit is then split for both phases separately as per the applicable partnership
agreement.
The change in the profit sharing ratio can take place due to the following reasons
1. Change in the profit sharing arrangement by the existing partners
2. Changes in the membership of the partnership
a) a new partner joins the partnership
b) an existing partner leaves the partnership
Example:
X, Y and Z have been trading for many years, preparing accounts to 30 June each year. Their recent tax
adjusted profits have been as follows:
£
Year ended 30 June 2014 147,000
They shared profits equally, until 31 October 2014 when they decided on the following arrangement:
X Y Z
Salary £19,500 £39,000 £49,500
Profit sharing% 50% 30% 20%
The date from which the change in profit sharing ratio is effected, i.e. 31 October 2014, falls in the second
accounting period (year ended on 30 June 2015). Therefore, this accounting period will be divided into two
periods, first up to the old PSR, i.e. from 1 July 2014 to 31 October 2014 and the second from 1 November
2014 to 30 June 2015 (the remaining period). The profits will be allocated accordingly for each period on the
basis of the old and new PSRs.
The allocation of profit among the partners for the three years is as follows:
Total X Y Z
£ £ £ £
2014-15 (Year ended 30 June 2014)
PSR 1:1:1 147,000 49,000 49,000 49,000
2015-16 (Year ended 30 June 2015)
1 July 2012 to 31 October 2014 (4 months)
PSR (1:1:1) 57,000 19,000 19,000 19,000
Page 52 of 135
1 November 2014 to 30 June 2015 (8 months)

Salary (for 8 months) 72,000 13,000 26,000 33,000
Remaining profit PSR (50:30:20) 42,000 21,000 12,600 8,400
171,000 53,000 57,600 60,400
2016-17 (Year ended 30 June 2016)
Salary 108,000 19,500 39,000 49,500
Remaining profit PSR (50:30:20) 72,000 36,000 21,600 14,400
180,000 55,500 60,600 63,900
Loss Relief:
 The two steps for a partnership are
1. share the profits between the partners in the profit sharing ratio of the accounting period.
2. treat each partner as a sole trader.
 These rules continue to be applied when the partnership incurs a loss.

 The partnership loss is allocated to the individual partners in their profit / (loss) sharing ratio of the
accounting period.
 Each partner may then claim their share of loss, as a sole trader. He may claim whatever loss relief is
most beneficial to him/her.
 For example, a partner joining the business is treated as having started a trade and a partner leaving
the partnership is treated as if their business has ceased.
 This impacts not only the Basis period rules but also the Trading loss relief options.
Page 53 of 135
Basis Period
Definition: A tax year runs from 6 April to 5 April, but most businesses do not have periods of account ending
on 5 April. So a link has to be created between the period of account of a business and the tax year. The
procedure is to find a time duration that acts as the basis period for a tax year. The profits for a basis period
are taxed in the corresponding tax year.
The rules in this concept are to be taken literally.
On – Going Business:
Rule: The Period of account is the basis period itself. The relevant tax year is identified by determining which
5th April comes after the period of account end. The profits of the period of account are then taxed in this tax
year.
CURRENT YEAR BASIS RULE

ONGOING BUSINESS
B.P.: The POA itself matched to the tax year
Period of Account
ending after it
Example:
Jacob has been running his business for many years. He always prepares his accounts to 31 December.
For the year ended 31 December 2016, his tax adjusted trading profits were £45,000.
 Applying the Current Year Basis rule, the Basis Period is: 1 January 2016 to 31 December 2016.
 The profits of these 12 months have to be collectively taxed.
 Tax Year: The next 5th April after the 31 st of December 2016 is 5 April, 2017. Since tax years run from 6
April to 5 April, the relevant tax year is 6 April 2016 to 5 April 2017.
 Conclusion: The £45,000 profits of the period of account will be taxed in 2016-17.
Page 54 of 135
Start of Business – Opening Year Rules:

In the first years of trade, we cannot use the current year basis, and so special opening year rules are needed.
First Tax Year:
Rule: The Basis period runs from the date of the start of trade to the following 5 April.
Example:
Annie started trading on 1 January 2017, and prepared her first set of accounts to 31 March 2017.
 The first basis period is: 1 January 2017 to 5 April 2017. The entire first period of account is covered in
this rule.
 Annie will be considered as running an on-going business and the Current year basis rule will be
applied on her next period of account. Assuming that to be 1 April 2017 to 31 March 2018, as per the
CYB rule, the profits of these 12 months will be taxed in 2017-18 entirely.
Second Tax Year:

The basis period for the second tax year depends on the length of the accounting period that ends in the
second tax year.
Rule: If the accounting period ending in the second tax year is more than twelve months long, the basis period
is the twelve months to the period of account end date.
Example:
Rosy commenced her business on 1 January 2016 and prepares accounts to 31 March each year. Her first
accounts are for the period to 31 March 2017.
 The first basis period is: 1 January 2016 to 5 April 2016. 3 months profits are therefore taxed in 2015-
16.
 By default the next tax year is 2016-17 and the end of period of account 31 March 2017, falls in this tax
year. The period of accounts duration is > 12 months.
 The second basis period is the 12 months to the end of the accounting date i.e. 1 April 2016 to 31
March 2017. Profits of 12 months are taxed in 2016-17.
 The period of account was 15 months long and with these two rules the entire profit has been taxed
although in two different tax years.
Rule: If the accounting period ending in the second tax year is less than twelve months long, the basis period is
the first twelve months of trading.
Page 55 of 135
Example:
Lisa commenced trading on 1 November 2015 and prepares accounts to 30 June each year. Her first accounts
are for the period to 30 June 2016.
 The first basis period is: 1 November 2015 to 5 April 2016. 5 months taxed in 2015-16.
 By default the next tax year is 2016-17 and the end of period of account 30 June 2016 falls in this tax
year. The period of accounts duration is < 12 months.
 The second basis period is the first 12 months of trading: 1 November 2015 to 31 October 2016
 Not only will the profit of the first 5 months (1 November 2015 to 5 April, 2016) be taxed twice –
Overlap but this basis period also includes profits from the next set of accounts that Lisa will prepare
from 1 July 2016 to 30 June 2017.
Rule: If there is no accounting period ending in the second tax year, tax the period 6 April to 5 April of the
second tax year.
Example:
Garry commences trading on 1 February 2016 and prepares accounts to 30 June each year. His first accounts
are for the period to 30 June 2017.
 The first basis period is: 1 February 2016 to 5 April 2016. These 2 months match the tax year 2015-16.
 The next tax year is 6 April 2016 to 5 April 2017 but the period of account end date of 30 June 2017
does not fall in this tax year.
 Second basis period will therefore be: the tax year itself – 6 April 2016 to 5 April 2017. 12 months
profits taxed in 2016-17.
 Out of the 17 months of the period of account, profits of 2 and 12 = 14 months have been matched to
tax years and therefore taxed.
 Garry will now need to rely on a third rule to cover the rest of his profits.
Third Tax Year:

The basis period for the third tax year is: twelve months to the accounting date end.
 Garry’s third basis period is: 12 months to the end of his period of account i.e. 1 July 2016 to 30 June
2017. These 12 months profits will be taxed in 2017-18.
 However Garry has now paid tax on 2 + 12 + 12 = 26 months of profits, indicating that he has paid tax
twice on profits of 9 months (24 – 17 months)
Page 56 of 135
START OF A
SITUATIONS OPENING YEAR RULES
BUSINESS
Ends before the 1st B.P.: Start of trade

first next 5th April till the first 5th of April
1st POA ≤ 12 m
2nd B.P.: First 12 m of
trade
Ends before the
1st Period Of
next relevant Tax
Account 1st POA > 12 m
Year
2nd B.P.: 12 m to the
end of the POA
2nd B.P.: The 2nd tax

Ends in the 3rd Tax year itself
Year since the start
of trade 3rd B.P.: 12 m to the
end of the POA
Overlap Profits:
When some profits are taxed more than once in the opening tax years, these profits are called ‘overlap’
profits.
Example:
Vicky started to trade on 1 January 2014 and prepares her first accounts to 30 June 2014 and annually
thereafter. Her results are as follows:
£
Six months to 30 June 2014 13,000
Year to 30 June 2015 27,000
Year to 30 June 2016 42,000
Tax Year Basis Period Working Taxable

profit £
2013-14 Actual (01/01/2014 - 05/04/2014) £13,000 x 3/6 6,500
2014-15 First 12 months of trade (01/01/2014 - 31/12/2014) £13,000 + (£27,000 x 6/13) 26,500
Page 57 of 135
2015-16 CYB (year to 30/06/2015) (01/07/2014 – 30/6/2015) 27,000

2016-17 CYB (year to 30/06/2016) (01/07/2015 – 30/06/2016) 42,000
Overlap profits £
01/01/2014 – 05/04/2014 (3 months) (W1) (£13,000 x 3 months/ 6 months) 6,500
01/07/2014 – 31/12/2014 (6 months) (W2) (£27,000 x 6months/13 months) 13,500
Total 20,000
Closing Year Rules
The final assessment of a sole trader is the tax year in which there is a cessation of trade. A cessation of trade
may occur when the sole trader retires, sells the business or dies. The basis period for the tax year in which
the cessation occurs is determined as follows:
a) If the trade commences and ceases in the same tax year, the basis period is the whole life of the business.
b) If the trade ceases in the second tax year, the basis period runs from 6 April at the start of the second year
to the date of cessation. This rule overrides the usual commencement rules.
c) If the trade ceases in the third tax year or any subsequent year, the basis period runs from the end of the
basis period for the previous tax year to the date of cessation of trade.
Relief is available for the overlap profits arising on commencement, by deducting them from the final tax year
assessment when a business ceases to trade. This ensures that the assessments over the life of the business
equal the total tax-adjusted profits earned by the business. If overlap profits are greater than the assessment
for the final tax year, relief is available for the resulting loss.
Example:
Cinderella has been trading for many years, preparing accounts to 31 December each year. She ceases to trade
on 31 May 2015, profits for the 5 months to that date are £13,300.The overlap profits from the opening years
of her trade were £7,100.
£
Profit for five months: 01/01/2015 - 31/05/2015 13,300
Less: Overlap relief (7,100)
Taxable profit 5,200
Page 58 of 135
CLOSING YEAR RULES
If the last two POAs end in the If the last POA ends in a
same tax year... separate tax year....
B.P.: Combine the two and B.P.: The POA itself and relieve
relieve the overlap profits the overlap profits
Choice of Accounting Date:
 An accounting date of just after the start of the tax year can ensure extended interval between earning
profits and paying tax on those. Additionally tax payer gets a lot of time to carry out effective tax planning.
 An accounting date just before the start of the tax year results in the shortest interval between earning
profits and paying tax on it.
Page 59 of 135
Loss Relief
Introduction: When computing taxable trade profits, profits may turn out to be negative, meaning a loss has
been made in the basis period. A loss is computed in exactly the same way as a profit, making the same
adjustments to the accounts profit or loss.
The HMRC has provided loss relief options in these circumstances.
Factors affecting the choice of loss relief option: The criteria affecting the decision of loss relief options are as
follows:
 Tax saving: which option provides the maximum tax saving of an individual
 Personal Allowance saving: which option saves the Personal Allowance from getting wasted
 As soon as possible: Which option ensures relief the quickest
Loss Relief Options: For the application of the above, an individual has to choose from the following options:
Trading Loss Relief

Options
Carry Forward Current Year Carry Back - 1 year

Opening Year Loss Against future Against Total Income Against Total Income
trading profits for after Deductible after Deductible
Only available in
indefinite period Interest Interest
case of loss in the 1st
4 years of trade.
Carry back loss
against Total Income
after Deductible
Interest of previous Terminal Loss
3 tax years on a FIFO
Basis Loss calculated for
the final 12 months
of trade and carried
back against Trading
Profits of previous 3
tax years on a LIFO
Basis
Page 60 of 135
Carry Forward:
 The trading loss is automatically carried forward against the first future available trading profits till the
entire amount is relieved or the business ceases.
 The amount of loss relieved cannot be restricted in any way but this option works in favour of saving
personal allowances from being wasted. This is because the rest of the individual’s income still available
for claiming the personal allowance.
 The amount of trading loss available to carry forward must be agreed with HMRC within four years of the
end of the tax year in which the loss was incurred.
Current Year and/or Carry Back:

 The individual can claim the trading loss against the total income of the current (loss making) tax year and/
or the preceding tax year.
 The claim can be made for:
 Both years, in any order or
 In either year in isolation
 The total income to be utilised for loss relief is after claiming deductible interest but before claiming
personal allowance. These options will result in wasting the personal allowance of the individual as the loss
amount claimed cannot be restricted.
 A claim must be made within one year of the 31 st of January following the end of the tax year of loss.
Example: claim for a loss in 2016-17 has to be made by 31 January 2019.
 Any amount of loss outstanding after claiming the current year and /or carry back option is automatically
carried forward unless the individual makes a claim to relieve the loss against the Chargeable gains in the
tax year.
Example:
Jack has been trading for many years, preparing accounts to 31 December each year. He made a profit of
£4,200 in the year to 31 December 2014 and incurred a loss of £20,000 in the year to 31 December 2016. He
receives property income of £15,000 in 2015-16 and £17,000 in 2016-17. Assume a personal allowance of
£11,000 each year.
i. Claim against TI of 2016-17 only.
2015-16 2016-17
£ £
Trading income 4,200 0
Property income 15,000 17,000
Less Trading Loss: 2016-17 only 0 (17,000)
Net Income 19,200 0
PA (11,000) Wasted
Taxable income 8,200 0
Page 61 of 135
The balance of the loss, £20,000 - £17,000 = £3,000 will be carried forward and relieved against future trading
profits.
ii. Claim against TI of 2015-16 only.

2015-16 2016-17
£ £
19,200 17,000
Less: 2014-15 only (19,200) 0
Net Income 0 17,000
PA Wasted (11,000)
Taxable income 0 6,000
The balance of the loss: £20,000 - £19,200 = £800 will be carried forward and relieved against future trading
profits.
iii. Claim against TI of 2016-17 and then 2015-16.

2015-16 2016-17
£ £
Property Income 15,000 17,000
19,200 17,000
Less: 2016-17 then 2015-16 (3,000) (17,000)
Net Income 16,200 0
PA (11,000) Wasted
Taxable income 5,200 0
All the loss is relieved.
iv. Claim against 2015-16 and then 2016-17.

2015-16 2016-17
£ £
19,200 17,000
Less: 2015-16 then 2016-17 (19200) (800)
Net Income 0 16,200
Page 62 of 135
PA Wasted (11,000)
Taxable income 0 5,200
All the loss is relieved.
Relief against Chargeable Gains:

 If an individual wants to claim loss relief as soon as possible, apart from the current year and/ or carry back
option, the taxpayer can claim the trading loss against the chargeable gains.
 Only the chargeable gains of the current (loss making) tax year and/ or the preceding year can be used,
that too after the current year and/ or previous year total income has been used up for loss relief.
If the individual has only used the current year total income and not that of the previous year, then the
chargeable gains of only the current year can be used for loss relief.
 The deadline for the claim is the same as for the current year and/ or carry back loss option.
Example:
Todd commenced trading on 1 April 2015 and prepares accounts to 31 March each year. In 2016-17 Todd
incurred a loss of £12,000. He had no other income. His 2015-16 financial position is as follows:
£
Trading income 6,400
Bank interest (gross) 1,200
Capital gains 12,650
Step 1: Set off of loss first against TI

In the tax year 2016-17, Todd has no other income. So, the loss will have to be relieved against the total
income of 2015-16.
2015-16
£
Trading income 6,400
Bank interest (gross) 1,200
7,600
Less: carry back loss (7,600)
Total Income 0
Step 2: Determine amount of loss remaining

£
Loss for 2016-17 12,000
Less: carry back (7,600)
Unrelieved loss 4,400
Page 63 of 135
Step 3: Claim to set off unrelieved losses against chargeable gains

£
Capital gains 2015-16 12,650
Less: Trading loss relief (4,400)
8,250
Less: Annual exemption (restricted) (8,250)
Total chargeable capital gains Nil
 In this case it may not be beneficial to make any claim as most of the income and gains would have
been covered by the personal allowance and annual exemption.
 Todd would need to decide whether he would prefer to receive a small tax refund by utilising these
loss relief options or whether he would prefer to carry the loss forward to offset against future profits.
Restrictions on trade loss relief against general income:
 Loss relief cannot be claimed against general income if the loss-making business is conducted on a
commercial basis.
 An individual taxpayer can only deduct the greater of £50,000 and 25% of adjusted total income when
making a claim for loss relief against general income.
 If a claim is made for relief against general income in the previous year, there is no restriction on the
amount of loss that can be used against trading income (of the same trade). The restriction only applies to
the other income in that year. Any restricted loss can still be carried forward against future profits from
the same trade.
 The limits apply in each year for which relief is claimed. If a current year and a prior year claim are made,
the relief in the current year is restricted to the greater of £50,000 and 25% of the adjusted total income in
the current year. The relief in the prior year is restricted to the greater of £50,000 and 25% of the adjusted
total income in the prior year
Opening Year Loss Relief:
 Special loss relief is available if a self-employed suffers a net loss arising in one or more of the first four tax
years of trading.
 For a trading loss incurred in one of the first four tax years, an individual can make a claim to carry back
the loss against his total income (after deductible interest before personal allowance) in the three
preceding tax years on a first-in-first-out (FIFO) basis.
Page 64 of 135
Example:
Mike has been employed for several years, earning £3,000 per month. He ceased employment on 31
December 2016 and started business as a sole trader on 1 January 2017, preparing accounts to 5 April each
year.
He incurs a loss of £100,000 in the period ended on 5 April 2017.
He has unearned income of £5,000 (gross) each year. Mike claims relief for the loss against the TI of the
previous three years.
The loss arose in 2016-17, so relief is against TI of 2013-14 then 2014-15 then 2015-16.
2013-14 2014-15 2015-16 2016-17
£ £ £ £
Employment income 36,000 36,000 36,000 27,000
Unearned income 5,000 5,000 5,000 5,000
Total Income 41,000 41,000 41,000 32,000
Less: Opening year loss (41,000) (41,000) (18,000) 0
Total income 0 0 23,000 32,000
£
Loss for 2016-17 100,000 (carry back to 2013-14, then 2014-15 and then 2015-16)
2013-14 (41,000)
59,000
2014-15 (41,000)
18,000
2015-16 (18,000)
0
Terminal Loss Relief:
 On cessation of trade, a loss arising in the last 12 months may be set against trading income of the final tax
year and the previous 3 years, providing relief against the last year first (LIFO basis).
 The terminal loss is the loss of the final 12 months of trade and is calculated by adding:
a) The trading loss after making adjustments for the profits, if any, for the period starting from the 6 April
of the final tax year to the date of cessation of trade
b) The trading loss for the period from the previous tax year which falls in the final 12 months of trade
after making adjustments for the profits, if any, during that period, and
c) Any overlap profits brought forward.
Page 65 of 135
 The terminal loss is set against:

a) The trading profits of the tax year in which the trader ceases trading and
b) The trading profits of the previous three tax years, latest year first.
 The claim for this relief must be made within 5 years of 31 January following the tax year in which the
cessation occurs. For example, if cessation occurs in 2016-17, a claim must be made by 31/01/2023.
 On cessation, it is possible to claim relief against TI of the current tax year and/or the previous tax year
instead of, or as well as terminal loss relief.
Example:
Monica has been trading for many years, preparing accounts to 31 July each year. She ceased trading on
31 July 2016. Her results for the last 5 years of trading were as follows:
£
Year to 31 July 2012 17,200
Year to 31 July 2013 21,600
Year to 31 July 2014 18,000
Year to 31 July 2015 900
Year to 31 July 2016 (16,600)
She has overlap profits of £3,600 which have been brought forward. Monica claims terminal loss relief.
Terminal loss is the loss of the final 12 months of trading, and is calculated as follows:
£
Trading loss of the final 12 months of trading
Final tax year 2016-17
( 6 April 2016 to 31 July 2016) (4 months) (£16,600 x 4/13) 5,533
Previous tax year 2015-16
(1 August 2015 to 5 April 2016) (8 months) (£16,600 x 8/13) 11,067
Unused overlap profits b/f 3,600
Terminal loss 20,200
Terminal loss relief is against the trading income for the year of the loss and the three preceding years, with
the latest first.
2012-13 2013-14 2014-15 2015-16 2016-17
£ £ £ £ £
Trading income 17,200 21,600 18,000 900 0
Terminal Loss 0 (1300) (18000) (900) 0
TI 17,200 20,300 0 0 0
Page 66 of 135
Loss memorandum
£
Terminal loss 20,200
Set off in 2015-16 (900)
19,300
Set off in 2014-15 (18,000)
1,300
Set off in 2013-14 (1,300)
0
Page 67 of 135
National Insurance Contributions
National Insurance
Contributions
For Employees For Self Employed
Based on the Taxable

Based on Cash Earnings Based on the Trading
Benefits of the Standard Figure
of the Employee profits of the Individual
Employee
Class 1A
Class 1 Primary Class 2 Class 4
Paid by employer
Paid by employee £2.80 per week £8,061 - £43,000 = 9%
Taxable Benefits @
£8,061- £43,000 = 12% 13.8% > £43,000 = 2%
> £43,000 = 2%
Class 1 Secondary
Paid by employer
≥ £8,113 = 13.8%
Introduction:
National Insurance Contributions are additional payments to HMRC by self-employed and employed
individuals.
Class 1 and class 1A NIC

 If an individual is employed, he is personally liable to Class 1 primary NI contributions. In addition, his
employer (whether a sole trader, a partnership or a company) is liable to Class 1 secondary and Class 1A
contributions for the individual (employee).
 These are commonly referred to as employee’s NICs and employer’s NICs.
Page 68 of 135
 Both Class 1 primary and Class 1 secondary contributions are paid to HMRC under the PAYE system. The
employer acts as a collector of taxes on behalf of HMRC and deducts the primary contributions from the
employee’s salary/wages before payment.
 The due date of payment for Class 1 primary and secondary NICs is the 19th of every month (i.e. 14 days
after the end of each tax month, which is defined as the 6 th of one month to the 5th of the following
month).
 Class 1 secondary contributions paid by the employer are part of the total cost of employing staff and are
charged against profit in the financial accounts. The contributions are incurred wholly and exclusively for
the purposes of the trade and are therefore allowable deductions in the employer’s adjustment of profit
computation.
 For the tax year 2016–17, the rates of employee class 1 NIC are 12% and 2%. The rate of 12% is paid on
earnings between £8,061 per year and £43,000 per year, and the rate of 2% is paid on all earnings over
£43,000 per year.
 The rate of employer’s class 1 NIC is 13.8% and is paid on all earnings over £8,112 per year.
 The rate of class 1A NIC which employers pay on taxable benefits provided to employees is 13.8%.
Employment allowance
 The annual employment allowance for the tax year 2016–17 is £3,000. This can be used by businesses to
reduce the amount of employer’s class 1 NIC which is paid to HM Revenue and Customs.
 For example, if a business’s total employer’s class 1 NIC for the tax year 2016–17 is £4,600, then only
£1,600 (4,600 – 3,000) will be paid to HM Revenue and Customs. If total employer’s class 1 NIC is £3,000 or
less, then the liability will be nil.
 This is not available to companies where a director is the sole employee.

Simone Ltd has only three employees who are each paid £50,000 per year. One of the employees was
provided with the following taxable benefits during the tax year 2016–17:
Company motor car - £6,300
Car fuel - £5,550
Living accommodation - £1,800
£
 Employee class 1 NIC £34,940 (43,000 – 8,060) at 12% 4,193
£7,000 (50,000 – 43,000) at 2% 140
4,333
Total Class 1 Primary NIC £4,333 x 3 12,999
 Employer’s class 1 NIC £41,888 (50,000 – 8,112) at 13.8% 5,781

Total Class 1 Secondary NIC £5,781 x 3 17,343
Employment allowance (3,000)
Page 69 of 135
Payable Amount 14,343
 Employer’s class 1A NIC £13,650 (6,300 + 5,550 + 1,800) at 13.8% 1,884
Class 2 NIC:
 Class 2 NICs are paid by self-employed individuals (i.e. sole traders and each partner in a partnership).
 Class 2 NICs are a personal tax on the self-employed individual, not the unincorporated business.
 For the tax year 2016–17, the rate of class 2 NIC is £2.80 per week.
 Class 2 NIC is payable where profits exceed a small profits threshold of £5,965. The profits used to
establish whether or not the threshold has been exceeded are now the same as those used for class 4 NIC
purposes, being the taxable profits for the tax year.
 Previously, class 2 NIC was either collected in two instalments or paid on a four weekly basis by direct
debit. Class 2 NIC is now payable under the self-assessment system and will be due on 31 January
following the tax year. This is the same due date as for capital gains tax. Therefore, class 2 NIC for the tax
year 2016–17 will be payable on 31 January 2018.
 However, the actual amount of class 2 NIC is still based on the number of weeks of self-employment
during a tax year.
Class 4 NIC:
 Class 4 NICs are paid by self-employed individuals (i.e. sole traders and each partner in a partnership), in
addition to Class 2 NICs.
 Class 4 NICs are paid together with the individual’s income tax liability under the self-assessment system.
 Self-employed individuals are assessed to Class 4 NICs, based on the profits for a tax year.
 The rates of class 4 NIC are 9% and 2%. The rate of 9% is paid on profits between £8,061 and £43,000 and
the rate of 2% is paid on all profits over £43,000.
Example:
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for the tax year
2016–17 are respectively £25,000 and £50,000. The class 4 NIC liabilities are:
 Jimmy: £16,940 (25,000 – 8,060) at 9% = £1,525

 Jenny
£
£34,940 (43,000 – 8,060) at 9% 3,145
£7,000 (50,000 – 43,000) at 2% 140
3,285
Page 70 of 135
Pension
Introduction:
 The government encourages individuals to save for their future by providing reliefs for any contributions
made in approved pension schemes.
 There are two types of schemes: Personal and Occupational.
Pension
Maximum relief available is higher of:

- £3,600 p.a.
- 100% of relevant earnings (Employment Income + Trading Profits)
Personal
Basic rate band extended by the Gross contribution,
if within the limit identified
Occupational
Treated as Allowable Deduction, if within the limit
identified
Net Relevant Earnings:

 Tax relief is available for pension contributions up to the amount of an individual’s net relevant earnings.
 ‘Net relevant earnings” is the total of the employment income, trading income and income from furnished
letting. If the individual does not have any net relevant earnings, relief is available on gross contributions
up to £3,600.
 Hence, the maximum amount of gross pension contribution in a tax year on which an individual can get tax
relief is the higher of:
 an individual’s earnings for the tax year; and
 £3,600
Personal Pension Scheme:

 An individual can contribute any amount, regardless of their earnings, into a personal / private pension
fund even if they already belong to an occupational pension fund.
Page 71 of 135
 Personal pensions are generally offered by banks, insurance companies and financial institutions.
 There is no restriction on the number of pension schemes into which an individual can contribute.
However, the tax relief available on the contribution is subject to certain restrictions such as a limit on the
total amount of contribution which an individual can make to the various pension schemes.
 Relief:
i. Personal pension contributions are made net of basic rate tax of 20% by both employed and self-
employed contributors.
ii. Higher rate tax payers obtain 20% relief plus an additional 20% (40% - 20%) relief is obtained by
extending the basic rate band and the higher rate band by the gross contribution when calculating
income tax.
iii. If the individual is an employee, their employer may make contributions into their personal pension
fund.
These contributions:
 Are exempt benefits.
 Have no limit for the employer.
 Count towards the annual allowance.
Annual Allowance:
 The annual allowance for the tax year 2016–17 is unchanged at £40,000.
 Tapered Annual Allowance: the normal annual allowance of £40,000 is reduced, when a person’s Adjusted
Income exceeds £150,000, where:
Adjusted Income = Net Income + any employee contribution to occupational pension scheme + any
employer’s contributions to occupational or personal pension scheme. (For self-employed individuals,
Adjusted Income is just the Net Income)
The reduction is calculated as follows:
£40,000 – [(Adjusted Income - £150,000)/2]
The annual allowance cannot be reduced to below £10,000.
In scenarios where the Adjusted Income of an individual exceeds £210,000, the minimum tapered annual
allowance of £10,000 can be directly used.

For the tax year 2016-17, Juliet has a trading profit of £196,000. She has never previously been a member of
any pension scheme.
Tax Implication: Juliet’s tapered annual allowance for 2016-17, will be:
£40,000 – [(£196,000 - £150,000)/2] = £17,000
Page 72 of 135
 If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused
allowance for up to three years. The carry forward from the tax years 2013–14 is based on the annual
allowance of £50,000 which was applicable in that year. For 2016-17, the tapered annual allowance may
be carried forward, if it applies.
 Carry forward is only possible if a person is a member of a pension scheme for a particular tax year.
 Therefore, for any year in which a person is not a member of a pension scheme the annual allowance is
lost.
 Contributions in excess of the annual allowance are taxable, so the excess amount is added to the NSI
column of the income tax pro-forma for the calculation of Taxable Income.

Monica and Nicola have made the following gross personal pension contributions during the tax years 2013–
14, 2014–15 and 2015–16:
Monica Nicole
£ £
2013-14 Nil 56,000
2014-15 32,000 19,000
2015-16 28,000 Nil
Monica was not a member of a pension scheme in 2013-14 while Nicole has been a member of a scheme for
all three tax years. Their Adjusted income for 2016-17 is below £150,000.
Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2014–15 and £12,000 (40,000 – 28,000) from
2015–16, so with the annual allowance of £40,000 for 2016–17 a total of £60,000 (40,000 + 8,000 + 12,000) is
available for 2016–17. She was not a member of a pension scheme for 2013–14 so the annual allowance for
that year is lost.
Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2014–15 and £40,000 from 2015–16, so with
the annual allowance of £40,000 for 2016–17 a total of £101,000 (40,000 + 21,000 + 40,000) is available for
2016–17. The annual allowance for 2013–14 is fully utilised, but Nicola was a member of a pension scheme for
2015–16 so the annual allowance for that year is available in full.
 The annual allowance for the tax year 2016–17 is utilised first, then any unused allowances from earlier
years with those from the earliest year used first.
Page 73 of 135
Example – extract from the Finance Act 2016 article

Perry has made the following gross personal pension contributions:
£
2013-14 32,000
2014-15 31,000
2015-16 19,000
2016-17 48,000
Perry’s adjusted income for 2016-17 does not exceed £150,000.
The pension contribution of £48,000 for 2016–17 has used all of Perry’s annual allowance of £40,000 for
2016–17 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (50,000 – 32,000) from 2013–14.
Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2014–15 and £21,000 (40,000 –
19,000) from 2015–16 to carry forward to 2017–18.
The remaining unused allowance from 2013–14 cannot be carried forward to 2017–18 because this is more
than three years ago.
Example – extract from the Finance Act 2016 article

Chong has made the following gross personal pension contributions:
£
2013-14 32,000
2014-15 31,000
2015-16 19,000
2016-17 8,000
Chong’s adjusted income for 2016-17 is £250,000.
Chong’s tapered annual allowance for 2016-17 is £10,000 as his Adjusted Income exceeds £210,000. Chong
has unused annual allowances of £9,000 (40,000 – 31,000) from 2014–15, £21,000 (40,000 – 19,000) from
2015–16 and £2,000 (£10,000 - £8,000) from 2016-17 to carry forward to 2017–18.
 Although tax relief is available on pension contributions up to the amount of earnings for a particular tax
year, the annual allowance acts as an effective annual limit.
 Where tax relieved contributions are paid in excess of the annual allowance (including any brought
forward unused allowances), then there will be an annual allowance charge. This charge is subject to
income tax at a person’s marginal rates.
Page 74 of 135

For the tax year 2016–17, Frank has a trading profit of £95,000 and made gross personal pension contributions
of £45,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is:
£
Trading profit 95,000
Personal allowance (11,000)
Taxable Income 84,000
Income Tax:
£77,000 x 20% 15,400
£7,000 x 40% 2,800
Annual Allowance Charge:
(£45,000 - £40,000) £5,000 x 40% 2,000
Frank has earnings of £95,000 for 2016–17. All of the pension contributions of £45,000 therefore qualify for
tax relief.
As his adjusted income is less than £150,000, the full annual allowance of £40,000 is available.
The annual allowance charge is £5,000 (45,000 – 40,000) being the excess of the pension contributions over
the annual allowance for 2016–17.
Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
Higher rate tax relief is given by extending the basic rate band to £77,000 (32,000 + 45,000).
Lifetime Allowance:
 The lifetime allowance for the tax year 2016–17 is £1,000,000.
 The lifetime allowance applies to the total funds which can be built up within a person’s pension schemes.
 Where the limit is exceeded, there will be an additional tax charge when that person subsequently
withdraws the funds in the form of a pension.
Occupational Pension Scheme:

 An occupational pension scheme is one set up by an employer for his employees.
 The employer generally contributes to the scheme. Some schemes require the employee to contribute,
whereas some are non-contributory.
 Relief:
1. An occupational scheme will usually operate net pay arrangements.
2. The employer deducts the gross pension contributions from the individual’s earnings before applying
PAYE.
Page 75 of 135
Example:
Tom and Jerry are employed with Cheese Ltd earning a salary of £50,000. Tom contributes £10,000 into a
personal pension scheme and Jerry contributes £10,000 into an occupational pension scheme.
Tom has earnings of £50,000 for the tax year 2016-17 which are higher than his contribution to the pension
scheme. Therefore, all of his contributions of £10,000 qualify for tax relief.
Tax relief = £2,000 (£10,000 at 20%).
Amount to be paid to the personal pension company by Tom is £8,000 (£10,000 - £2,000).
Since Tom is a higher-rate taxpayer, he is eligible for higher-rate tax relief. Thus, his basic rate tax band is
extended by £42,000 (£32,000 + £10,000).
Jerry contributes to occupational pension scheme. This contribution is deductible from taxable employment
income.
Their tax computations will appear as follows:

Tom (£) Jerry (£)
Income from employment 50,000 50,000
Less: Contribution to occupational pension - (10,000)
scheme
Net income 50,000 40,000
Less: Personal allowance (11,000) (11,000)
Taxable income 39,000 29,000
Cash outflow
Tom Jerry
(£) (£)
Amount paid towards the pension scheme 8,000 10,000
Income tax paid (£39,000 x 20%) 7,800
(£29,000 x 20%) 5,800
15,800 15,800
Page 76 of 135
CAPITAL GAINS TAX
Introduction
Definition: Chargeable Gains Tax (CGT) is paid on Chargeable gains arising due to Chargeable Disposals of
Chargeable Assets by a Chargeable Person.
Chargeable Person: An UK resident individual or a UK company.
Chargeable Disposal:
 Sale of an asset – Consideration received is taken as the Sales proceeds
 Gift of an asset – The market value of the asset on the date of transfer is considered the sales
proceeds.
 When an asset is damage or destroyed – The insurance proceeds received are treated as the sales
proceeds.
Chargeable Assets: All assets except for the following exempt assets.
Exempt Assets:
 Motor Car
 National Savings & Investments Certificates and ISA Investments
 Premium Bonds
 Wasting Chattels without Capital Allowances (tangible, moveable assets with useful life of ≤ 50 years)
 Principal private residence
 Medals or awards for bravery
Computation
Individuals:
The following format is to be used in the exam, when calculating the gain or loss on the disposal of an asset by
an individual. All the information is provided in the exam question. The test is for a candidate to extract the
relevant date and deal with it appropriately and using the format below will ensure errors in the calculation
are minimised.
Relevant for Individuals

Solved Example £
Gross Disposal Proceeds 150,000
Less: Incidental Disposal Costs E.g. Advertising, Agent’s fees (2,000)
Net Disposal Proceeds 148,000
Page 77 of 135
Less: Allowable Cost

Original Purchase Price (61,000)
Incidental Purchase Costs E.g. Transportation costs (3,000)
Enhancement Expenditure E.g. Capital Expenditure (11,000)
Capital Gain/ Loss 73,000
 This working will be carried out separately for each asset disposed by the individual in the Tax Year.
 Once calculated the gains and losses will be clubbed together.
 Loss Relief:
 Current Year: If there is a loss on any of the assets disposed in the current tax year, it will be set off
against the capital gains of other assets disposed, in the same year.
The maximum amount of loss has to be relieved, even if it results in the Annual Exemption amount
getting wasted.
 Carry Forward: If there is any outstanding capital loss from previous years, it can be carried forward
and set off against future capital gains.
The amount of the carried forward capital loss can be restricted to save the Annual Exemption amount.
If the net result of the current tax year is a loss, this too will be carried forward to be set off against
future capital gains.
 Annual Exemption: HMRC allows £11,100 (tax year 2016-17) of the Capital gains to be exempt from tax.
Once the losses have been set-off, the annul exemption is deducted from the Net gains to arrive at the
Chargeable gain amount.
The annual exemption amount cannot create or increase a loss and is only available for individuals.
The following format is recommended to calculate the Chargeable Gain of an individual for a given tax
year.
£
Gain on asset 1 73,000
+Gain on asset 2 15,000
Total Gains 88,000
Less: Current year capital loss (30,000)
Net Current Year Gains 58,000
Less: Carried forward capital loss (9,000)
(restrict amount to save Annual Exemption)
Net Gains 49,000
Less: Annual Exemption (11,100)
CHARGEABLE GAIN 37,900
Page 78 of 135
 Tax Payment:
 Once the final chargeable gains amount for a tax year has been determined, tax is calculated on the
basis of the following tax slabs:
Rates Tax Slabs CGT Chargeable Gain – Residential
Property
Basic £1 - £32,000 10% 18%
Higher > £32,000 20% 28%
 The rate of CGT is linked to an individual’s taxable income (covered in Income Tax). Gains are only
taxed after the Income Tax has been calculated and the rate applied is dependent upon which tax slab
the gains fall into after the Taxable Income has been covered.
Example:
In 2016-17, John had taxable income of £40,000 and chargeable gains of £15,000.
The tax slabs will first be utilised to calculate John’s income tax. As taxable income is £40,000, it will
utilise John’s basic rate slab fully and a portion of the Higher rate slab too.
The chargeable gains will now fall into the higher rate slab and be taxed at the rate of 20%.
If John had no taxable income in the tax year, then the £15,000 gains would have fallen in the basic
rate slab and be taxed at 10%.
 If the Chargeable gain arises from the disposal of a residential property and there is still a taxable
amount left over after claiming the Principal Private Residence Relief (discussed later), then tax rates of
18% or 28% are applied on this gain, depending upon the tax slabs in falls into.
The annual exempt amount and any capital losses should first be set-off against gain from residential
property.
 Tax submission: The CGT calculated should be paid to HMRC by 31 January following the tax year i.e.
31 January 2018 for the tax year 2016-17.
Link: This is also the deadline for the paying 2016-17, Income Tax Balancing Payment (as covered
before).
 Married Couples:
 Transfer of assets between spouses or registered civil partners do not give rise to any chargeable gain
or loss.
 The asset is deemed to be transferred at cost.
Page 79 of 135
 If an asset is jointly owned by the couple, the gain on the disposal is split equally between the two and
each calculates CGT on his/ her share.
 Important Point
 Identify any exempt disposals so that you do not waste time performing unnecessary calculations.
 An unincorporated business is not treated as a separate entity for CGT purposes. Therefore, when a
business is disposed of, deal with each asset separately.
 Do not forget to deduct the annual exempt amount if it is available.
 It is important to establish how much of a person’s basic rate tax band is available. Remember that a
taxable income figure is after the personal allowance has been deducted.
Companies:
The following format is to be used in the exam, when calculating the gain or loss on the disposal of an asset by
a company.
Relevant for Companies

Solved Example £
Gross Disposal Proceeds – June 2016 150,000
Less: Incidental Disposal Costs E.g. Advertising, Agent’s fees (2,000)
Net Disposal Proceeds 148,000
Less: Allowable Cost
Original Purchase Price – April 2004 (61,000)
Incidental Purchase Costs – April 2004 E.g. Transportation costs (3,000)
Enhancement Expenditure – May 2010 E.g. Capital Expenditure (11,000)
Unindexed Gain (inflated gain) 73,000
 Indexation Allowance: When the asset disposed has been held by a company for more than a year,
additional steps will be required to account for the impact of inflation. This is not required in the case of
individuals.
 Formula to calculate inflation = Cost x Indexation Factor
 The indexation factor is normally provided in the exam and is normally associated with a specific
duration. For example, if asset bought in April 2004 and disposed in June 2016, the inflation impact on
the cost from April’04 to June’16 has to be considered.
 This also means that if any capital expenditure is incurred on the asset at a different date then inflation
impact on the capital expenditure has to be accounted for, using the same formula as above.
Page 80 of 135
 In case, the Indexation Factor is not available, the following formula can be used to arrive at the Indexation
Factor:
RPI in month of disposal – RPI in month of cost
RPI in month of cost
RPI – Retail Price Index is a measure of inflation and using the data provided in the question, the
indexation factor can be arrived at.
Example:
RPI in month of June 2016 – RPI in month of April 2004 = Indexation Factor (April’04 – June’16)
RPI in month of April 2004
 If neither of the above is provided in the case of a disposal by a company, then the examiner does not
want to test this knowledge.
 Sometimes instead of removing the effect of inflation from the Unindexed Gain to arrive at the Indexed
Gain amount, the examiner provides the Indexed Cost of the asset (Cost plus inflation effect). By deducting
the inflated cost from the inflated sales proceeds, the effect of inflation is nullified and the result is the
Indexed Gain. This is a quicker approach than calculating the effect of inflation and then removing it from
the gain but the Indexed Cost is not always provided.
Solved example - continued

Unindexed Gain (inflated gain) 73,000
Less: Indexation Allowance Cost x Indexation Factor
(To remove the effect of inflation from the Original Cost: April 2004 – June 2016 (20,160)
gain calculated.) [(61,000 +3,000) x 0.315)
Capital Expenditure: May 2010 – June 2016 (1,650)
(11,000 x 0.150)
Indexed Gain (un-inflated gain – for tax) 51,190
 This working will be carried out separately for each asset disposed by the company during its Period of
Account.
 Once calculated the gains and losses will be clubbed together.
 Loss Relief:
 Current Year: If there is a loss on any of the assets disposed, it will be set off against the capital gains of
other assets disposed, in the same period of account.
 Carry Forward: If there is any outstanding capital loss, it can be carried forward and set off against
future capital gains only.
The following format can used to determine the net gain or loss of a company for its period of account.
Page 81 of 135
£
Gain on asset 1 51,190
+Gain on asset 2 24,000
Total Gains 75,190
Less: Current year capital loss (5,000)
Net Current Year Gains 70,190
Less: Carried forward capital loss (30,000)
CAPITAL GAIN 40,190
 Companies pay Corporation Tax on the Capital gains rather than CGT like individuals.
 The gain is added in the Corporation Tax Computation of the relevant Period of Account and eventually
Corporation tax calculated and paid depending upon the size of the company (as covered before).
 If the company had a capital loss as the net result, it is not deducted from the other income of profits of
the company. Rather it is recorded and relieved against future capital gains.
Important Points:
 Limited companies are not entitled to the annual exempt amount.
 An indexation allowance is given when calculating chargeable gains for a limited company.
 Chargeable gains are part of a limited company’s total taxable profits. They are not taxed separately.
Page 82 of 135
Special Rules
There are certain circumstances where special rules are applied for the calculation of a chargeable gain/ loss amount on
a disposal. These are relevant for disposals by both individuals and companies.
Part Disposals:
This is when a part of an asset is disposed. While the consideration received will reflect the disposal proceeds
of the part, the cost would have originally been incurred on the whole asset. Therefore the cost has to be
apportioned using the following formula:
*Cost x Market value of part disposed

MV of part disposed + MV of remainder asset
 *Here the cost reflects the original purchase price, any incidental cost of purchase and any capital
expenditure incurred on the whole asset.
 In the case of companies it can be the indexed cost.
 If any cost has only been incurred on the part disposed rather than the whole asset, apportionment of the
cost is not required.
Example – extract from technical article on Chargeable Gains

On 16 February 2017, Joan sold three acres of land for £285,000. She had originally purchased four acres of
land on 17 July 2015 for £220,000. The market value of the unsold acre of land as at 16 February 2017 was
£90,000.
£
Less: £220,000 x 285,000 (167,200)
285,000 + 90,000
Capital Gain 117,800
The cost of the remaining one acre, also referred to as Base Cost will be:
Base Cost = £220,000 - £167,200 = £52,800
CHATTELS
A chattel is a tangible moveable property.
Wasting Chattel: It is a tangible, moveable asset with a useful life of ≤ 50 years.
Non Wasting Chattel: It is a tangible, moveable asset with a useful life of > 50 years.
Wasting Chattels with Capital Allowances:

 Normally wasting chattels are Exempt assets i.e no CGT computation is carried out when they are
disposed.
Page 83 of 135
 But when a wasting chattel is used for business purposes the rules are modified.
 When the asset is sold for a gain, the normal computation and treatment of the gain is carried out.
 But if the asset is sold for a loss, the cost of the asset is adjusted with capital allowances to convert the end
result to no gain no loss.
Example:
£ £
Disposal Proceeds 15,000
Less: Allowable Cost 18,000
Adjustment for Capital Allowances claimed on the asset (3,000)
(15,000)
Capital Gain Nil
Non Wasting Chattels:
In the case of non wasting chattels, the computation of the gain or loss is dependent upon the cost and the
gross disposal proceeds in relation to a £6,000 limit, as below:
Purchase Cost Gross Disposal Proceeds Rule

≤ £6,000 ≤ £6,000 EXEMPT
≤ £6,000 > £6,000 GAIN: Restricted to – Lower Of:
 Normal Gain
 5/3 x (Gross Disposal Proceeds - £6,000)
> £6,000 ≤ 6,000 LOSS: Restricted by substituting Gross Disposal Proceeds with
£6,000
> £6,000 > £6,000 NORMAL COMPUTATION
 Asset bought and sold for less than £6,000

On 18 August 2016, Gloria sold an antique table for £5,600. The antique table had been purchased on 27
May 2015 for £3,200.
Exempt
 Asset bought for ≤ £6,000 but sold for more

On 18 August 2016, Gloria sold an antique clock for £7,200. The antique clock had been purchased on 14
June 2015 for £3,700.
Chargeable Gain will be lower of:
 Normal Gain: £7,200 - £3,700 = £3,500
 Special Rule: 5/3 x (£7,200 - £6,000) = £2,000
Page 84 of 135
 Asset bought for more but sold for ≤ 6,000

On 3 February 2017, Giles sold an antique table for £4,700. The table had been purchased on 2 May 2006
for £10,200.
Capital Loss: restricted
£6,000 - £10,200 = £4,200
 Asset bought and sold for more than £6,000 is covered by regular computation rules.
Wasting Assets:
Asset with a remaining useful life of ≤ 50 years.
The cost of the asset is adjusted for depreciation or amortisation.
Example:
A copyright bought 15 years ago is sold when its remaining useful life is 30 years.
£ £
Less: Allowable Cost or Indexed Cost 90,000
Less: Wasted Cost (£90,000 x 15/45) (30,000)
(60,000)
CAPITAL GAIN/ INDEXED GAIN 74,000
Damaged Assets:
 The Insurance proceeds are taken to be the Gross Disposal Proceeds
 In case of Gain: Normal Part Disposal Computation.
 This gain can be deferred if the insurance proceeds are actually used to repair the damaged asset.
 The gain is deferred by deducting the insurance proceeds from the original cost of the asset. The working
is as follows:
Original Cost – Insurance Proceeds + Cost incurred to repair the asset = Base Cost of the asset
Destroyed Assets:
 The insurance proceeds are deemed to be the Gross Disposal Proceeds
 In case of Loss: Normal computation is carried out and the loss recorded in a loss memo, to be relieved
against capital gains.
 In case of Gain: Normal computation is carried out and the gain is taxable in the same year if the insurance
proceeds are not used to buy a replacement asset.
 The gain and subsequently the tax paid on it can be deferred if the insurance proceeds are used to
purchase a replacement asset. This is done by adjusting the gain of the destroyed asset in the cost of the
replacement asset.
Page 85 of 135
 If the entire insurance proceeds are used then the entire gain can be deferred but if the insurance
proceeds are partially used then a part of the gain will be immediately taxable and the rest can be adjusted
in the replacement asset’s cost.
 The amount of gain immediately taxable is: lower of
a) the gain and
b) amount of cash not re-invested
Example:
An asset was destroyed and insurance proceeds of £63,000 received. The gain calculated on the asset was
£15,000. The insurance proceeds could be used to purchase a replacement asset for 1) £70,000 and 2) £52,000
Option 1 – Cost: £70,000 Option 2 – Cost: £52,000

Immediately taxable: Lower of Immediately taxable: Lower of
a) £15,000 a) £15,000
b) £63,000 - £70,000 = 0 b) £63,000 - £52,000 = £11,000
Gain available for deferral: Gain available for deferral:

£15000 – 0 = £15,000 £15,000 - £11,000 = £4,000
Adjustment against cost of replacement asset Adjustment against cost of replacement asset
New Asset: £ New Asset: £
Original Cost 70,000 Original Cost 52,000
Less: Deferred Gain (15,000) Less: Deferred Gain (4,000)
Base Cost 55,000 Base Cost 48,000
 The gain will now be taxable when the replacement asset is disposed.
 This is known as Rollover Relief, as the gain is rolled over.
Page 86 of 135
Shares
There are special rules related to shares.

Different types of shares of different companies are treated as separate assets and not clubbed together.
In case of Gift: When shares are given as a gift to someone, their disposal proceeds are taken to be the
average of the days quoted price:
Lowest quoted price + Highest quoted price
2
Determining the cost:

 Shares are normally acquired over time so they are purchased at different prices.
 If a part of a shareholding is disposed, it will become difficult to identify what cost to allocate to the shares
disposed and how to calculate the gain.
 The HMRC has provided Share Matching Rules to deal with this. These are:
For Individuals For Companies
1. Cost of shares acquired on the day of the 1. Cost of shares acquired on the day of the
disposal itself disposal itself
2. Cost of shares acquired within the next 30 days 2. Cost of shares acquired in previous 9 days
3. Share Pool 3. FA1985 Share Pool
Remember! We are dealing with specific shares on one company only.

Ivy has had the following transactions in the shares of Jing plc:
1 June 2009 – Purchased 4,000 shares for £6,200.
30 April 2014 – Purchased 2,000 shares for £8,800
15 July 2016 – Purchased 500 shares for £2,500
15 July 2016 – Sold 4,500 shares for £27,000
Applying the share matching rules, we have to identify the cost of the 4,500 shares sold.
Referring to the rules set out for individuals:
1. Same day acquisitions – We have the cost of 500 shares acquired on 15 July - £2,500
2. Next 30 day acquisitions – No shares are acquired after 15 July
3. Share Pool – We now need to get the cost of balancing 4,000 shares from the Share Pool
Page 87 of 135
SHARE POOL – Jing Plc Shares

Date Details No. Of Shares Cost
£
1 June 2009 Purchase 4,000 6,200
30 April 2014 Purchase 2,000 8,800
6,000 15,000
15 July 2016 Disposal (4,000) [£15,000/6,000 shares x 4,000] (10,000)
Balance 2,000 5,000
Now that the cost of 4,500 shares is available, the gain on the disposal can be calculated:
£
Gross Disposal Proceeds – 4,500 shares 27,000
Less: Cost – 500 shares (2,500)
Cost – 4,000 shares (10,000)
Capital Gain 14,500
Less: Annual Exemption (11,100)
Taxable Gain 3,400
 Effectively, the shares of a company are put together in a pool and a running balance maintained.
 Apart from purchases and disposals, there can be the complications of Bonus Issue and Rights Issue.
 Bonus Issue: simply increases the number of shares not the cost but this means that the cost in the pool
will be spread over a higher number of shares.
 Rights Issue: is like a purchase, increasing both the number and the cost of the Share pool.
 The format below shows how a Share pool with all the movements will be presented:
INDIVIDUALS – SHARE POOL

Date Details No. Of Cost
Shares
£
01/01/01 Purchase 5,000 15,000
10/11/02 Purchase 4,000 13,000
9,000 28,000
15/12/03 Bonus Issue – 1 for 2 held 9,000 shares 4,500 -
2
13,500 28,000
20/01/04 Rights Issue – 1 for 5 @ £4 13,500 shares 2,700 2,700 x £4 10,800
5
16,200 38,800
25/02/05 Disposal (6,000) £38,800/ 16,200 (14,370)
shares x 6,000
Balance carried forward 10,200 24,430
Page 88 of 135
Example – extract from technical article on Chargeable Gains with modification:
On 15 June 2016, Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £400,000. Fair Ltd had originally
purchased 40,000 shares in Gong plc on 10 June 1995 for £110,000, and purchased a further 60,000 shares on
20 August 1999 for £180,000. Retail price indices (RPIs) are as follows:
June 1995 - 149.8

August 1999 - 165.5
June 2016 - 259.0
Applying the share matching rules, we have to identify the cost of the 70,000 shares sold.
Referring to the rules set out for companies:
1. Same day acquisitions – No shares were acquired on 15 June 2016.
2. Previous 9 day acquisitions – No shares are acquired in the 9 days prior to 15 June 2016.
3. FA1985 Share Pool – We now need to get the cost of 70,000 shares from the Share Pool
FA1985 SHARE POOL
Date Details No. Of Indexed Cost

Shares
£
10 June’ 95 Purchase 40,000 110,000
Indexation to August 1999 110,000 x [(165.5-149.8)/149.8] 11,529
40,000 121,529
20 Aug’ 99 Purchase 60,000 180,000
100,000 301,529
Indexation to June 2016 301,529 x [(259.0 – 165.5)/165.5] 170,350
100,000 471,879
15 June’ 16 Disposal (70,000) (471,879/100,000 shares) x 70,000 (330,315)
Now that the cost of 70,000 shares is available, the gain on the disposal can be calculated:
£
Gross Disposal Proceeds – 70,000 shares 400,000
Less: Indexed Cost (330,315)
Indexed Gain 69,685
 In the Company’s share pool, the effect of inflation has to be accounted for before every Operative Event.
 An Operative event is one which affects (increases or decreases) the total cost of the share pool. Therefore
purchase, disposal and rights issue are Operative events but not a bonus issue.
 The format below shows how a Share pool with all the movements will be presented:
Page 89 of 135
COMPANIES – FA1985 SHARE POOL
Date Details No. Of Shares Indexed Cost

£
01/01/01 Purchase 5,000 15,000
Indexation Allowance
January 2001 to November 2002 £15,000 x Indexation Factor 3,000
5,000 18,000
10/11/02 Purchase 4,000 13,000
9,000 31,000
15/12/03 Bonus Issue – 1 for 2 4,500 -
13,500 31,000
Indexation Allowance 4,000
November 2002 to January 2004 £31,000 x Indexation Factor
13,500 35,000
20/01/04 Rights Issue – 1 for 5 @ £4 2,700 10,800
16,200 45,800
Indexation Allowance 4,200
January 2004 to February 2005 £45,800 X Indexation Factor
16,200 50,000
25/02/05 Disposal (6,000) (£50,000 / 16,200 shares) x (18,519)
6,000
Re-organisation: This is when the capital structure of the company changes and the old shares are replaced
with new ones. The original investment of the shareholder (individual or company) is passed on to the new
shareholding.
5,000 Old 10,000 New

Ordinary Shares Ordinary Shares
£10,000 £10,000
Page 90 of 135
In case of a combination of new shares being issued in return of the old shareholding, the original cost of the
old shares is apportioned on the basis of the Market Value of the new shares at the time of re-organisation.
5,000 Old
Ordinary Shares
£10,000 £10,000 x £20,000 £10,000 x £30,000

£50,000 £50,000
= £4,000 = £6,000
Takeover: This is when the original company in which the investment had been made is taken over by another
company. The old shares become irrelevant and new shares/ consideration is issued in lieu of the old
shareholding.
In case of a Paper for Paper takeover, the original cost of investment has to be split between a combination of
new shares. The market value of the new shareholding at the time of takeover is the basis of sharing the
original cost. (Refer to Re-organisation)
In case of Mixed Consideration, i.e. cash and shares being received in return of old shareholding, the original
cost is split between the two elements on the basis of market value, but the cash receipt is treated as part
disposal of the original investment so a gain is calculated.
New Shareholding: 20,000 £30,000 x 80,000

shares 100,000
MV: £80,000 Cost = £24,000
Old Shareholding: 10,000
shares @ £30,000
Cost = £30,000 - £24,000
= £6,000
Cash Received: £20,000
Gain = £20,000 - £6,000
= £14,000
Page 91 of 135
Reliefs
Principal Private Residence Relief (PPR) – Individuals only
 An individual becomes entitled to PPR Relief if he/ she dispose off their main residence.
 The entire gain is exempted if the owner occupied the house throughout the period of ownership.
 If the house was not occupied by the owner throughout the period of ownership, this relief only exempts
the amount of gain relating to the period of occupation by the owner.
Gain x Period of occupation
Period of ownership
 Period of Occupation: Covers actual and deemed occupation. The following period of absences are
considered to be deemed occupation:
 The last 18 months of ownership (without any condition attached)
The following are deemed occupation, provided the individual physically resides in the house at some
point before or after the period of absence.
 A period of up to total 3 years. The absence from the house could be due to any reason.
 A period of up to 4 years. The absence is when an individual has to live elsewhere in UK due to work.
 Unlimited period if the absence is only due to the individual working abroad.
 An additional relief in the form of Letting Relief is also available if the individual had let out the property in
their period of absence.
 Letting Relief is deducted from the post PPR Relief gain and is the lower of:
 £40,000
 Gain exempt under PPR
 Gain amount related to the Letting period (this cannot include durations taken to be deemed
occupation)
Example – extract from technical article on Chargeable Gains with modification

On 30 September 2016, Hue sold a house for £381,900. The house had been purchased on 1 October 1996 for
£141,900.
Hue occupied the house as her main residence from the date of purchase until 31 March 2000. The house was
then unoccupied between 1 April 2000 and 31 December 2003 due to Hue being required by her employer to
work elsewhere in the UK.
From 1 January 2004 until 31 December 2010, Hue again occupied the house as her main residence.
The house was then unoccupied until it was sold on 30 September 2016.
Page 92 of 135
Hue let her house out during the periods that she did not occupy it herself.
£
Disposal proceeds 381,900
Less: Cost (141,900)
Gain 240,000
Less: PPR Relief
240,000 x (189/240 months) - working (189,000)
51,000
Less: Letting Relief – lower of:
 £40,000 (40,000)
 £189,000
 £51,000
Capital Gain 11,000
Working – PPR Relief

Details Exempt Chargeable
Months Months
1 October 1996 to 31 March 2000 (occupied) 42 -
1 April 2000 to 31 December 2003 (working in UK) 45 -
1 January 2004 to 31 December 2010 (occupied) 84 -
1 January 2011 to 31 March 2015 (unoccupied) - 51
1 April 2015 to 30 September 2016 (final 18 months) 18 -
189 51
 Where part of a house is used exclusively for business use then the principal private residence exemption
will be restricted as the relief is not available on any business use.
 As in the example above, even after claiming Principal Private Residence Relief and Letting Relief, there is a
resultant gain amount related to the property, then the annual exemption and capital losses should first
be set off against this, as this amount would be taxed at the rates of 18% or 28%.
Entrepreneur’s Relief – Individuals Only
 This relief is available to individuals if:

 Whole or part of a business run as a sole trader is disposed. Relief is only available in respect of
chargeable gains arising from the disposal of assets in use for the purpose of the business. This will
exclude chargeable gains arising from investments.
 Shares of a personal company are sold. (A personal company is one where the individual has at least
5% shareholding and is an employee of the company)
 The business or the shares, both are held for at least 1 year prior to disposal.
 This relief has a lifetime allowance limit of £10 million.
Page 93 of 135
 Gains falling within this limit are taxed at 10%, regardless of the overall earnings of the individual. Outside
this limit, the gains are treated normally.
Example – extract form technical article on Chargeable Gains with modification:
On 30 September 2016, Mika sold a business that she had run as a sole trader since 1 January 2009.
The disposal resulted in the following chargeable gains:
£
Goodwill 260,000
Freehold office building 370,000
Freehold warehouse 170,000
800,000
The warehouse had never been used by Mika for business purposes.
Mika has taxable income of £4,000 for the tax year 2016–17. She has unused capital losses of £28,000 brought
forward from the tax year 2015–16.
To solve this effectively, keep the following points in mind:
 Although gains qualifying for Entrepreneur’s Relief are taxed at 10%, they are assumed to utilise the tax
rates before the gains not qualifying for Entrepreneur’s relief.
 Annual exemption and capital losses should be first treated against those gains that will be taxed at 10% or
20%.
 The following format is recommended when there are gains qualifying for Entrepreneur’s Relief as they
should be kept separate.
Without With
Entrepreneur Entrepreneur
Relief Relief
£ £
Goodwill 260,000
Freehold Office Building 370,000
Warehouse 170,000
Less: Current year capital loss - -
Net current year gains 170,000 630,000
Less: Capital Loss brought forward (28,000) -
Net Gains 142,000 630,000
Less: Annual Exemption (11,100) -
Chargeable Gain 130,900 630,000
Page 94 of 135
Capital Gains Tax Calculation:

£
Gains qualifying for Entrepreneur’s Relief: £630,000 x 10% 63,000
Gains not qualifying for Entrepreneur’s Relief: £130,900 x 20% 26,180
` 89,180
 Mika’s taxable income was only £4,000 which meant that she had the Basic Rate band available for her
Chargeable Gains.
 But the gains qualifying for Entrepreneur’s Relief utilise the available Basic Rate band first, even though
the relevant rate for these gains is 10% regardless of which band they fall into.
 After covering the gains qualifying for entrepreneur’s relief, the remaining gains fall into the higher
rate band and are taxed at 20%.
Investors’ Relief – For Individuals Only
 This version of Entrepreneur’s Relief is available for external investors of trading companies, which are not
listed on the Stock Exchange.
 The lifetime limit of this relief is also £10 million and the qualifying gains are taxed at 10%.
 To qualify, the shares must be:
- Newly issued shares acquired by subscription
- Owned for atleast 3 years after 6 April, 2016
 Since this relief has been introduced but will practically become applicable in the real world for the first
time in 2019-20, this will not be numerically examined in F6 at present.
Gift Relief – For Individuals Only
 Gift relief can be claimed on the gain arising from the gift of a business asset from one individual to
another or when a business asset is sold at undervalue.
 A joint election by the donor and the recipient is made to defer any gain arising from the transaction.
(Remember the MV would have been taken as the sales proceeds)
 The assets qualifying for this relief are:
 Assets used in trade
 Unquoted shares of any company and
 Quoted shares of a personal company. (A personal company here is one in which the individual has at
least 5% shareholding)
 The gain is adjusted in the cost of the asset transferred to the recipient and in this way the gain is not just
deferred but passed on from the donor to the recipient.
 The entire gain is deferred unless the recipient pays an amount for the asset.
 In this case, gain will still be calculated using the Market Value of the asset as this will not be considered an
arm’s length transaction. However a portion of the gain may become immediately taxable on the donor.
 Immediately taxable gain = lower of:
Page 95 of 135
a) Gain and
b) Actual gain [Any consideration received – the cost originally incurred on the asset]
Example:
A father gifted a business asset to his son that was worth £141,000. The asset had originally been bought for
£35,600. The son could have paid his father £51,000 or nothing at all.
Option 1 – No consideration Option 2 – Cash worth £51,000

Immediately Taxable: lower of Immediately Taxable: lower of
a) Gain = 141,000 – 35,600 = £105,400 a) £105,400
b) Actual Gain = 0 – 35,600 = Nil b) 51,000 – 35,600 = £15,400
Gain available for deferral: Gain available for deferral:

£105,400 – 0 = £105,400 £105,400 – 15,400 = £90,000
Son’s Asset: £ Son’s Asset: £

Less: Deferred Gain (105,400) Less: Deferred Gain (90,000)
Base Cost 35,600 Base Cost 51,000
 The gain will now be realised when the recipient disposes it.
 If shares of a personal company are gifted and if the company owns Chargeable Non Business assets (such
as investments or any asset not used in trade) at the time of the gift, then the gift relief is restricted as it
will only be available for the gain related to chargeable business assets.
 The gain available for Gift Relief is calculated using the following formula:
Gain x Market Value of Chargeable Business Assets
Market Value of Chargeable Assets
Example:
Debra gifted shares in her personal company to her grandson Joseph. The gain calculated was £240,000 but on
the date of transfer, the following assets were owned by the company:
£
Warehouse 100,000
Factory 40,000
Investments 50,000
Inventory 40,000
£
Gain 240,000
Gain available for Gift Relief =
240,000 x . 100,000 + 40,000 . (176,842) The entire amount can be deferred if no
100,000 + 40,000 + 50,000 consideration received.
Immediately Taxable 63,158
Page 96 of 135
 Out of the above, only the warehouse and the factory are business assets.
 Investments are not made for business purposes.
 Inventory is a current asset, not eligible for Capital Gains Tax calculation.
Tax Planning Points:
 If a gift is going to result in an immediate chargeable gain, then it might be possible to restrict the gain to
the amount of the annual exempt amount or any available capital losses.
 Where entrepreneurs’ relief is available, it may not be beneficial to claim holdover relief.
Rollover Relief – For Individuals and Companies
 Limited companies can only benefit from rollover relief, and this is applied after taking account of any
indexation allowance. They cannot benefit from entrepreneurs’ relief or holdover relief for the gift of
business assets.
 Gains arising on the disposal of qualifying business assets can be deferred, provided their consideration is
re-invested in a new asset.
Qualifying assets are:
 Goodwill (for individuals only – not relevant for companies)
 Land and Buildings
 Fixed Plant & Machinery
 The re-investment of the proceeds must take place within 1 year prior to the date of disposal or within 3
years from the date of disposal.
 The gain deferred (rolled-over) is reduced from the cost of the replacement asset, if the replacement asset
is a non-depreciating asset.
Non depreciating asset is one with a useful life > 60 years.
 If the replacement asset is a depreciating asset, the gain is not deducted from the cost of the replacement
asset but it is held-over, till it becomes taxable on the earlier of the following events:
 Disposal of the replacement asset
 The depreciating asset is brought into non business use
 Ten years from the date of acquisition of the depreciating asset
 The amount of gain rolled-over, depends upon how much of the amount of the proceeds from the old
asset is re-invested in the new asset.
 If the entire proceeds are re-invested, the entire gain can be rolled over but if the proceeds are partially re-
invested, a part of the gain may become immediately taxable.
 Immediately taxable: Lower of
a) Gain and
b) Cash not re-invested [Proceeds of old asset – cost of new asset]
Page 97 of 135
Example:
Annexe Plc sold a piece of land for £300,000 and realised an Indexed gain of £167,000. The company has the
following two options: 1) buy a replacement freehold building for £310,000 or 2) buy a 30 year leasehold
building for £279,000.
Annexe Plc will buy either one of the two on 31 December 2016.
Option 1 – in a building costing £310,000 Option 2 – in a 30 year leasehold building costing

£279,000
Immediately Taxable: lower of Immediately Taxable: lower of
a) Gain = £167,000 a) Gain = £167,000
b) Cash In hand = £300,000 - £310,000 = NIL b) Cash In hand = £300,000 - £279,000 = £21,000
Gain available for Roll-over: Gain Heldover:

£167,000 – Nil = £167,000 £167,000 - £21,000 = £146,000
New Building: £ New Leasehold Building £

Less: Rolled –over Gain (167,000)
Base Cost 143,000
 Under option 1, the proceeds are fully re-invested in a non-depreciating asset so not only is the entire
gain rolled over but it is adjusted in the cost of the replacement asset.
 Under option 2, the proceeds are partially re-invested in a depreciating asset. As a result, part of the
gain is immediately taxable.
The part for the gain that can be relieved is not adjusted against the cost of the replacement asset as it
is a depreciating one. The deferred gain is held-over and will become taxable on the earlier of the
following dates:
a. Disposal of the leasehold building
b. Transfer of the leasehold building into non-business use
c. 10 years from the date of the purchase of the replacement asset – 31 December 2026.
Page 98 of 135
INHERITANCE TAX
Introduction
Definition: Tax payable on certain assets transferred during the lifetime of an UK domiciled individual or on
the event of his/ her death. This is calculated on the ‘transfer of value’ amount.
Transfer of Value: This is reduction in the value of the donor’s (person transferring the asset) estate, due to
the gratuitous transfer of an asset to a donee (person receiving the asset). It is calculated as:
Value of estate before transfer of asset less value of estate after transfer = Transfer of value
Example – extract from technical article on Inheritance Tax with modifications
On 4 May 2017, Daniel made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an unquoted investment
company. Before the transfer Daniel owned 60,000 shares out of ABC Ltd’s issued share capital of 100,000 £1
ordinary shares.
ABC Ltd’s shares are worth £18 each for a holding of 60%, £10 each for a holding of 45% and £8 each for a
holding of 15%.
Although Daniel’s son received a 15% shareholding valued at £120,000 (15,000 x £8), Daniel’s transfer of value
is calculated as follows:
£
Value of shares before transfer [60,000 x £18] 1,080,000
Value of shares after transfer [45,000 x £10] (450,000)
Transfer of Value 630,000
Types of Transfers:
 Lifetime Transfers:
Potentially Exempt Transfers (PET): These are transfers to individuals, excluding spouse/ registered civil
partner.
 No tax is calculated at the time of this transfer.
 It becomes completely exempt if the donor survives for 7 years or more after making the transfer but
become chargeable if the donor dies within 7 years.
 The value of the transfer is fixed at the time the gift is made.
 In the event of the donor dying within 7 years of making the gift, tax rates and allowances of the year
of death are applied to calculate the IHT. For 2016-17, the IHT rate is 40%.
Chargeable Lifetime Transfers (CLT): These are transfers made by an individual to trustees to hold for the
benefit of other people (beneficiaries).
 An immediate tax charge of 20% (if tax paid by donee) or 25% (if tax paid by donor) arises at the time
of transfer itself.
Page 99 of 135
 The value of the transfer is fixed at the time the asset is transferred to the trust.
 Additional tax charge will arise if the donor dies within 7 years of making the transfer. If the donor
survives for 7 years or more after the transfer, no additional tax will be liable.
 The additional tax charge will be calculated using the tax rates of the year of death. For 2016-17, this is
40%.
 Death Transfers: Transfers from the Estate of an individual in the event of his/ her death. Tax rate= 40%.
Exemptions
 Inter-spouse Exemption: made during lifetime or transfers from death estate, if asset is passed on to the
spouse, it becomes exempt completely from any IHT.
 Small Gift Exemption: Gifts to individuals amounting up to £250 per person in total in a year is exempt. If
value of gift exceeds £250, the entire amount becomes taxable.
 Normal Expenditure Out Of Income: Any transfer meeting the criteria of normal expenditure out of income
is exempt:
 Gift made as part of normal expenditure of an individual
 Paid out of the income of an individual
 Donor is left with sufficient income to maintain his/ her standard of living
 Marriage Gift’s Exemption: amounts given to the bride or groom on the occasion of a marriage are exempt
upto the limit specified by HMRC. The limit is dependent upon the relation of the donor with the bride/
groom.
 Parents: First £5,000 of the gift is exempt
 Grand Parents/ Spouse: First £2,500 are exempt
 Any other relation: First £1,000 are exempt
 Annual Exemption - AE: Upto £3,000 per annum of any asset(s) transferred during a year is exempt. After
the current tax years’ annual exemption amount is used up, the unused annual exemption of the
immediately preceding tax year can be brought forward to further reduce the taxable value of the transfer.
AE amounts are applied to transfers chronologically.
Example – extract from technical article on IHT with modification
Simone made the following gifts:

On 10 May 2016, she made a gift of £1,400 to her son.
On 25 October 2017, she made a gift of £6,000 to her daughter
Page 100 of 135

2016-17: Gift made to son

£
Transfer of value 1,400
Less: Annual Exemption 2016-17 (1,400)
Chargeable Amount 0
2017-18: Gift made to daughter

£
Transfer of value 6,000
Less: Annual Exemption 2017-18 (3,000)
Less: AE brought forward 2016-17
(£3,000 - £1,400) (1,600)
Chargeable Amount 1,400
Nil Rate Band - NRB: IHT is payable if the cumulative transfers of 7 years made by an individual exceed the Nil
Rate Band. This is the limit up to which the Gross Chargeable Amounts (taxable value of the transfers) are
exempt. On exceeding this limit, the excess amount becomes chargeable. For 2016-17 it is £325,000 and this
information is provided in the exam.
 Spouse’s Unused Nil Rate Band : The unused nil rate band at the time of the death of a spouse can be
transferred to the surviving spouse, to be used at the time of his/ her death.
The unused NRB amount of the first spouse is calculated by identifying the % of the NRB that was not
utilised. This % is then applied on the NRB value available at the time of the second spouse’s death.
Example – extract from technical article on Inheritance Tax
Win died on 24 February 2017 leaving an estate valued at £800,000. Only 60% of his wife’s nil rate band was
used when she died on 12 May 2006.
 Win’s personal representatives can claim the wife’s unused nil rate band of £130,000 (325,000 x 40%).
 The amount of nil rate band is therefore £455,000 (325,000 Win’s own NRB + 130,000 transferred from
spouse).
Taper Relief: If death IHT is calculated on the lifetime transfers made by a deceased individual 7 years prior to
his death, the HMRC allows a % reduction on the tax payable of certain transfers.
The % is dependent upon the number of years the individual survived after making the transfer.
Years before death % reduction

Over 3 years but less than 4 years 20
Page 101 of 135
Lifetime IHT on Lifetime Transfers
1. Deal with each transfer chronologically.
2. Identify whether transfer is PET or CLT
3. Determine transfer of value and deduct the available current tax year AE and any used AE from the
immediately preceding tax year, to arrive at the Chargeable Amount.
[Current - the tax year in which the transfer was made.]
4. For a PET, just record the Chargeable amount. This will be the taxable amount due if the donor dies within
7 years from the date of transfer
5. For a CLT, match the Chargeable amount against the available Nil Rate Band.
[Available NRB is the original NRB limit less the cumulative values of any transfers made in the 7 years,
prior to the date of the transfer under consideration]
 If the Chargeable amount is less than the NRB, no lifetime IHT will be applicable.
 If the Chargeable amount exceeds the NRB, the excess is taxable
6. Identify who has taken the responsibility to pay the lifetime IHT on the CLT.
 If the donor: apply a 25% tax rate on the Chargeable amount
 If the donee: apply a 20% tax rate on the Chargeable amount
7. Record the Gross Chargeable Amount for the CLT which is calculated as:
Chargeable amount of CLT + Lifetime IHT on CLT (only if paid by donor)
 The Gross Chargeable amount is the value that will be taxable for Death IHT if the donor dies within 7
years from the date of transfer
8. Tax payment: The deadline for the payment of lifetime IHT is dependent upon the date of the transfer.
 If the transfer is made between 6th April to 30th September – tax is to be paid by 30th April, following
the tax year.
 If transfer is made between 1st October to 5th April – tax is to be paid 6 months after the date of
transfer.
It is recommended that you work through the following example as you study the above steps!
Page 102 of 135

Example:
Jenna made the following lifetime transfers:
11 June 2013: £250,000 gift to her daughter
15 July 2014: £400,000 to a trust
11/06/13 – PET to daughter £ £

Less: Exemptions
Annual Exemption – 13/14 (3,000)
Annual Exemption – 12/13 (3,000)
15/07/14 – CLT
Less: Annual Exemption – 14/15 (3,000)
Annual Exemption – 13/14 Not Available
Nil Rate Band – 14/15 325,000
Utilised (7 years prior to transfer – 15 July 2014) Nil
Less: Available NRB 325,000
Excess Amount 72,000
IHT @ 25% - paid by donor 18,000
Gross Chargeable Amount = 397,000 + 18,000 415,000
Chargeable Amount + Tax paid by donor
The donor will pay the tax on this transfer by 30 April 2015.
Advantages of Lifetime Transfers:
Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.
 A PET is completely exempt after seven years.
 A CLT will not incur any additional IHT liability after seven years.
 Even if the donor does not survive for seven years, taper relief will reduce the amount of IHT payable after
three years.
 The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make gifts of assets
that are expected to increase in value such as property or shares.
Page 103 of 135

Death IHT on Lifetime Transfers
1. Identify all the lifetime transfers made by the individual in the 7 years prior to his/ her death. These
transfers will now be liable for Death IHT.
2. Deal with each lifetime transfer chronologically.
3. In the case of a PET, match the Chargeable amount and against the available NRB.
This is the tricky part!! The NRB limit will be that of the death tax year. However to determine the available
amount of the NRB, the following is to be considered:
[Death tax year NRB limit less Chargeable amounts of transfers made in the previous 7 years of the PET
under consideration.]
 If the Chargeable amount exceeds the NRB, the excess amount is taxed at 40%.
 Taper Relief is utilised to reduce the tax payable.
4. In the case of a CLT, match the Gross chargeable amount against the available NRB.
[Death tax year NRB limit less Chargeable amounts of transfers made in the previous 7 years of the PET
under consideration.]
 The excess amount is taxed at 40%.
 Taper Relief is utilised to reduce the tax payable.
 The lifetime IHT paid on the CLT (whether by doner or donee) is deducted from the tax payable
amount.
5. Tax payment: Tax has to be paid by the donee within 6 months from the month of death of the donor.
It is recommended that you work through the following example as you study the above steps!
Page 104 of 135

Example:
Jenna from the previous example died on the 10th of May 2016.
The lifetime transfers of the 7 years prior to 10 May 2016 will become taxable
11/06/13 – PET to daughter – now taxable £ £

NRB 325,000
Less: Utilised in the 7 years prior to the date of transfer Nil
(11/06/06 – 11/06/13)
Less: Available NRB (325,000)
Excess Amount NIL
Jenna’s daughter would have paid the tax on this transfer (had there been
any) by 30 November 2016.
15/07/14 – CLT – taxable again at death

Gross Chargeable Amount 415,000
NRB 325,000
Less: Utilised in the 7 years prior to date of transfer (244,000)
(15/07/07 – 15/07/14)
Less: Available NRB (81,000)
IHT @ 40% 133,600
Less: Taper Relief (donor survives for less than 2 years from date of transfer) Nil
15/07/14 – 10/05/2016
Less: Lifetime IHT paid on the transfer (18,000)
IHT Payable 115,600
The trustee will pay the tax of £115,600 to HMRC by 30 November, 2016.
Page 105 of 135

Death Estate
1. Identify the Open Market Value OMV of the deceased individual’s assets on the date of his/ her death and
sum them up. All assets are considered as none are exempt from IHT.
Some exceptions to using the OMV rule are:
 Repayment/ Interest mortgage: Normally freehold property is recorded at OMV less any
Repayment/ Interest mortgage the individual had paid on the property.
Endowment mortgage: If the individual has taken an endowment mortgage against the property,
the property is recorded at the OMV without any deductions..
 Life Assurance Policy: This is recorded at the value of the actual proceeds received.
2. The following liabilities or expenses, if incurred, are deducted from the sum of the assets value to arrive at
the Estate Value:
 Funeral expenses
 Debts incurred by deceased, provided they can be legally enforced. So verbal promises and
gambling debts etc, cannot be recovered from the estate.
 Estate administration fee
3. If the deceased left any assets for his/ her surviving spouse, there will no Death tax payable on this transfer
under the Inter-Spouse exemption rule. The value of this transfer will be deducted from the result of Step
2 above, to arrive at the Gross Chargeable Estate Value.
4. The Gross Chargeable Estate Value is matched against the ‘available’ NRB
[Available NRB – is the NRB limit the NRB less the cumulative values of any transfers made in the 7 years,
prior to the death of the individual]
 The excess amount is taxed at 40%
5. Tax payment: The IHT on death estate is paid by the Executor (person handling the estate and tax matters)
and is submitted to HMRC within 6 months from the end of the month of death.
6. The post-tax value of the estate is then distributed amongst the beneficiaries who can be:
 Specific Legatees: Individuals or trust entitled to receive a specific amount or asset.

 Residual Legatee: Individual who inherits the remaining estate after the specific legacies has been
transferred. This is the individual who actually ends up bearing the burden of the Inheritance Tax
calculated and paid on the death estate.
It is recommended that you look at the following format as you study the steps above!
Page 106 of 135
Solved Example:
Jenna who died on the 10th of May 2016 had the following assets and debts on the day of her death, out of
which she left £50,000 to her son and the remainder estate to her daughter.
Death Estate – Open Market Value £ £

Freehold Property 400,000
Less: Repayment Mortgage (240,000)
160,000
Property with endowment mortgage 100,000
Stocks and Shares 45,000
Insurance policy – proceeds actually received 110,000
Motor Cars 5,000
Personal Chattels 17,000
Debts owed to the individual at the time of death 30,000
Cash and Bank accounts (including ISAs) 45,000
512,000
Less: Debts payable at time of death 67,000
Outstanding Taxes 46,000
Funeral Expenses 10,000
(123,000)
Estate Value 389,000
Less: Legacies to the spouse nil
Gross Chargeable Estate 389,000
Nil Rate Band 325,000
Less: Utilised in 7 years prior to date of death (244,000)
(415,000)
Less: Available NRB nil
IHT @ 40% 155,600
£155,600 will be paid to HMRC by the executor by 30
November 2016.
Distribution of estate:
£
Gross Chargeable Estate 389,000
Less: Death IHT (155,600)
Estate available for distribution 233,400
Less: Specific legacy to son (50,000)
Residual Estate for daughter 183,400
Page 107 of 135

Inheritance Tax Planning
Make gifts early in life

 Gifts should be made as early in life as possible so that there is a greater chance of the donor surviving for
seven years.
 Gifts made just before death will be of little or no IHT benefit, and may result in a capital gains tax liability
(whereas transfers on death are exempt disposals for capital gains tax purposes).
Make use of the nil rate band

 Gifts can be made to trusts up to the amount of the nil rate band every seven years without incurring any
immediate charge to IHT.
 Gifts to trusts within seven years of each other will be subject to the seven year cumulation period, whilst
an immediate charge to IHT will arise if a gift exceeds the nil rate band.
Skip a generation
 When making gifts either during lifetime or on death, it can be beneficial to skip a generation so that gifts
are made to grandchildren rather than children. This avoids a further charge to IHT when the children die.
 Gifts will then only be taxed once before being inherited by the grandchildren, rather than twice.
 Of course such planning depends on the children already having sufficient assets for their financial needs
Page 108 of 135

CORPORATION TAX
Introduction
Definition: Tax paid by a UK Resident company on its Taxable Total Profits of an Accounting Period. It is taxed
on worldwide income.
UK Resident Company: A company that has been incorporated in the UK or whose central control and
management is in the UK i.e. the board of directors meet in UK.
Period of Account: A period of account is the duration for which a company prepares its accounts. This is
normally 12 months long but can be longer or shorter than this.
Accounting Period: Is usually the Period of Account (POA) itself, provided the POA ≤ 12 months.
 If the POA > 12 months, it is split into two Accounting Periods – the first 12 months and the balancing
months.
Taxable Total Profits: This is the Company’s taxable profit amount and is arrived at using the following
calculation format:
XYZ Ltd.
Accounting Period Y/e 31/03/17
£
Tax Adjusted Trading profit 130,000
Less: Carried forward trading loss – if any (2,000)
Property Income 15,000
Capital Gain 34,000
Interest Income 6,000
Total Income 183,000
Less: Current year and carry back trading loss – if any -
Less: Qualifying Charitable Donation – always paid gross (10,000)
Taxable Total Profits 173,000
Add: Dividend income from non group companies 20,000
Total Profits 193,000
 The Corporation Tax rate is applied on the Taxable Total Profits.

 Dividend income from other companies is also a commonly received income but as it is exempt from
Corporation Tax, it is not included in the Taxable Total Profits amount.
Financial Year: The tax rates for companies are set for financial years and run from 1 April to 31 March.
For the FY 2016 (1 April 2016 to 31 March 2017) the tax rate is 20%.
In the example above Corporation Tax (CT) is £173,000 x 20% = £34,600
Page 109 of 135

CT Payment: The deadline by which Companies need to pay their Corporation Tax for an Accounting Period
depends upon the size of the company and this is determined by looking at the Total Profits (Taxable Total
Profits plus Dividends from Non-group companies).
 Small Companies – Companies with Total Profits < £1,500,000 will pay the tax in a single instalment
within 9 months and 1 day from the end of the Accounting Period.
 Large Companies – Companies with > £1,500,000 total profits will pay their tax in 4 instalments based
on the current Accounting Period’s estimated tax liability. The instalments start on the 14th day of the
7th month in the Accounting Period and then onwards quarterly.
Taxable Total Profits – Components
Tax Adjusted Trading Profits:

The adjustment of profits is primarily the same as that of self-employed individuals but there are the following
minor differences:
 The personal use element in any of the expenses is ignored as now the individuals making the personal use
such as directors etc. are employees of the company.
 Qualifying charitable donation is eligible for relief so it cannot be treated as a business expense and is
disallowed i.e. added back to arrive at the tax adjusted profit amount.
 Income that is recognised under any other head such as rent from property etc. is not made part of tax
adjusted trading profits but are included in the CT computation separately.
 Pre-trading expenditure is treated as an allowed expense in the first set of accounts. These are trading
expenses incurred in the 7 years prior to trade.
Capital Allowances:
 These are calculated according to Accounting Periods and as an accounting period can never be longer
than 12 months, for companies the calculation of capital allowances can only be upto a maximum of 12
months.
 The concept of asset with private use is not applicable for companies as the individual making the private
use of the asset will be an employee, regardless of designation. Private use of assets by an employee is
ignored and is treated as a taxable benefit for the employee.
Property Income:
 The same rules as that for individuals apply for the calculation of a company’s property income.
 If a company has more than one properties let out, the net property income will be clubbed together and
added in the Corporation Tax computation as the final property income amount.
 The treatment of interest on loan taken to purchase the property let out is different from individuals. The
expense is not deducted from property income rather it is deducted from Interest Income.
Page 110 of 135

Loan Relationship leading to interest income:

 If a company has given a non- business loan or invested in debentures, deposited money in bank accounts
etc. and as a result is receiving interest income; it is included separately in the CT calculation.
 Interest is always received gross by the companies.
 Any interest expense incurred for business purposes is treated as an allowed expense against tax adjusted
trading profits.
 If the expense relates to non-business relationship, then it is deducted from the interest income for the
accounting period.
Qualifying Charitable Donations relief:

 Qualifying Charitable Donations are always paid gross and are deducted to arrive at the Taxable Total Profit
amount.
 These may be wasted in favour of certain loss relief options and this becomes a point of consideration
when deciding upon the choice of loss relief option.
Long Period of Account
 If the POA is longer than 12 months, the company will calculate CT for two separate Accounting Periods.
 The first accounting period will cover the income and related expenses and reliefs for the first 12 months
of the period of account.
 The second Accounting period will cover the data for the balancing months of the period of account.
 The income will be split into two Accounting periods, using the following criteria:
 Trading profit before Capital Time Apportioned
Allowances
 Capital Allowances Calculated for each Accounting period
 Property Income Time Apportioned
 Interest Income Accrual Basis
 Capital Gain Matched to the Accounting Period based on the date of disposal
 Qualifying Charitable Donation Matched to the AP according to the date of payment
Example:
Elongated Plc created its accounts for the 18 month period ended 30 June 2016 and it contained the following
information:
£
Trading Income (before capital allowances adjustment) – Note 1 360,000
Property income 90,000
Interest income – Note 2 68,000
Capital Gain – Note 3 45,000
Qualifying Charitable Donation – Note 4 30,000
Page 111 of 135
Notes:
1. The tax written down value of the assets as at 1 January 2015 was £60,000. No purchases or disposals
were made.
2. Interest of £4,000 per month is accrued. £68,000 is the interest received.
3. An asset was disposed on 24 March 2015.
4. The donation was made on 16 February 2016.
Elongated Plc
Corporation Tax Computation
12 months to 31 December 2015 6 months to 30 June 2016
£ £
Trading profit 240,000 180,000
Less: Capital Allowance (W1) (10,800) (8,856)
Property Income 60,000 30,000
Capital Gain 45,000 -
Total Income 382,200 225,144
Less: Qualifying Charitable Donation - (30,000)
------------- ------------
Taxable Total Profits 382,200 195,144
------------- ------------
CT Liability @ 20% 76,440 39,029
st st
CT Submission deadline – small company 1 October 2016 1 April, 2017
W1: Capital Allowances:

Year ended 31 December 2015: £60,000 x 18% = £10,800
Tax written down value carried forward: £60,000 - £10,800 = £49,200
6 months period ended 30 June 2016: £49,200 x 18% = £8,856

Tax written down value carried forward: £49,200 - £8,856 = £40,344
Page 112 of 135

Losses
Trading Loss Relief:
Trading Loss Relief Options
Current Year and Carry Back

Carry Forward Against current year Total Profits Terminal Loss
before Qualifying CharitableDonation
Against future trading profits for Carry back of loss for 3 years against
and only after that carry back 12
indefinite period the Total Profits before QCD.
months against Total profits before
QCD
 Options:
 Carry Forward: A trading loss of an accounting period is automatically carried forward against the first
available future trading profits.
There is no time limit attached with this option and no need for the company to make a claim.
This option does not waste the Qualifying charitable donations (QCD) if any as the other income of the
company is available for QCD relief.
 Current Year: A company can claim to relieve its trading loss against total income (before QCD) of the
same accounting period.
Any outstanding loss will automatically be carried forward against future trading profits only.
While this option gives immediate loss relief, there is a risk of wasting the QCD relief.
Claim for this option must be made within 2 years of the end of the Accounting period in which the loss
arose.
 Current Year and Carry Back: A company can claim to relieve its trading loss against total income
(before QCD) of the current accounting period and then carry back any unrelieved loss against total
income (before QCD) of the previous 12 months.
If there is still unrelieved loss, it will automatically be carried forward against future trading profits.
The loss cannot be directly carried back; it first has to be relieved against current year income.
A lot more QCD relief will be wasted under this option.
Claim for this option must be made within 2 years of the end of the Accounting period in which the loss
arose.
Example:
Trouble Limited has shared the following details for its four accounting periods after having suffered a trading
loss of £300,000 in the year ended 31 March 2016.
Page 113 of 135
The company makes a qualifying charitable donation of £100 per month. It has opted to relieve its loss as soon
as possible.
y/e 31 December 3 months to 31 y/e 31 March y/e 31 March

2014 March 2015 2016 2017
£ £ £ £
Trading Profit 100,000 20,000 - 15,000
Less: Carried forward loss(3) - - - (15,000)
Property income 50,000 50,000 50,000 50,000
Total Income 150,000 70,000 50,000 50,000
Less: Current year loss(1) (50,000)
Less: Carry back loss(2) (112,500) (70,000)
QCD (1,200) Wasted Wasted (1,200)
Taxable Total Profits 36,300 - - 48,800
Loss Memo:
£
Trading Loss – y/e 31 March 2016 300,000
(1)
Current year loss relief – y/e 31 March 2016 (50,000)
250,000
(2)
Carry back loss relief – 3 months to 31 March 2015 (70,000)
180,000
(2)
Carry back loss relief – 9 months from 31 December 2014
(150,000/12) x 9 months (112,500)
67,500
(3)
Carry forward loss relied – y/e 31 March 2017 (15,000)
52,500
 As the company preferred to relieve its loss as soon as possible, the current year and carry back loss
relief was the first option to apply, with the outstanding loss carried forward.
 Had the company opted to save its QCD for each accounting period, then only the carry forward option
should have been exercised.
 Terminal Loss: Trading loss generated in the last 12 months of trading can be relived through the following
options:
 Current year
 Current year and Carry back
 Terminal Loss: where the trading loss is carried back and relieved against the total profits (before QCD)
of the previous 3 years (36 months), with the latest year given priority.
 The carry forward relief is no longer an option in this scenario as the company is ceasing and will no
longer be generating trading profits.
Page 114 of 135

Example:
Wrap It Up Limited has shared the following details for its last four accounting periods.
Trading Profit QCD
£ £
y/e 31 December 2013 100,000 5,000
3 months to 31 March 2014 25,000 1,000
y/e 31 March 2015 60,000 5,000
y/e 31 March 2016 20,000 5,000
y/e 31 March 2017 (210,000) 5,000
y/e 31 December 3 months to 31 y/e 31 March y/e 31 March

2013 March 2014 2015 2016
£ £ £ £
Trading Profit 100,000 25,000 60,000 20,000
Total Income 100,000 25,000 60,000 20,000
Less: Terminal loss (75,000) (25,000) (60,000) (20,000)
QCD (5,000) Wasted Wasted Wasted
Taxable Total Profits 20,000 - - -
Loss Memo:
£
Trading Loss – y/e 31 March 2017 210,000
Terminal Loss – y/e 31 March 2016 (20,000)
190,000
Terminal Loss – y/e 31 March 2015 (60,000)
130,000
Terminal Loss – 3 months to 31 March 2014 (25,000)
105,000
Terminal Loss – 9 months from y/e 31 December 2013
(100,000/ 12) x 9 = 75,000 (75,000)
Loss unrelieved and wasted 30,000
 The company did not have any other income, in the current year i.e. 31 March 2017, against which to
relieve any of its loss, so the Terminal Loss relief option as directly applied.
 Applying the ‘later year, first’ rule, the loss was treated against 12 months of total profits of year ended
31 March 2016, then further carried back against 12 months profits of 31 March 2015.
 As the amount still remained unrelieved it was carried back against the 3 months to 31 March 2014
and the company was left with the balance of 9 months against which to relieve the loss. These were
taken from the year ended 31 December 2013.
Page 115 of 135

 After claiming a 36 month terminal loss relief, the company was still left with £30,000 which will
remain unrelieved
 Factors affecting loss relief choice: The following factors need to be taken into account when deciding
upon the loss relief options:
 As soon as possible: If a company wants to relieve its loss as soon as possible, it should opt for the
current year and carry back option.
 Saving qualifying charitable donations: There is a higher possibility of having the QCD relief wasted
under the current year, carry back option. If this is the case, the loss should be carried forward.
A company can also consider reducing the amount of capital allowances claimed in an accounting period
and therefore reducing its trading loss.
 Capital Loss:
 Capital Losses can only be treated against Capital gains of the current Accounting period or carried
forward against future capital gains.
 Loss from Property let out:

 Property losses are deductible against Total Profits (before QCD) of the current year and any unused
amount is carried forward against the future Total Profits (before QCD), as well.
Page 116 of 135

Groups
 ASSOCIATE:
 A Group of company is formed when one company acquires one or more Associate company.
 An associate company is when one company acquires 51% or more of the shareholding in another
company. The acquiring company is called the parent company and the acquired company is called the
Associate.
 If the parent company acquires an associate or disposes the shareholding in an associate during an
accounting period, it is considered that the companies are part of the group throughout the relevant
accounting period.
 Even an overseas resident company can become an associate.
 Dormant companies cannot be considered as associates.
 The impact of the having a group is that the Profit slab threshold of £1,500,000 is split amongst the
number of the companies in the group, affecting the Corporation tax liability payment method.
Example:
Patron Ltd has 4 associates in the Accounting Period ended 31 March 2016. Patron Ltd’s taxable total profits
amount to £450,000 and has never been below £400,000.
 As the Taxable Total Profits are less than £1,500,000, Patron Ltd should pay its CT liability within 9
months and 1 day from the end of the Accounting Period.
 But as it is part of a group of 5 – 4 associates and Patron Ltd itself; the profit threshold is split between
the 5 companies and becomes £300,000.
 Now Patron Ltd will be considered a Large rate company as its TTP is more than the threshold. It will
therefore pay its CT liability in 4 instalments.
 TRADING LOSS GROUP – 75% 75%:

 Parent company must have direct hold of atleast 75% and effective hold of atleast 75% for companies
to become members of this group.
 Members of this group can share Trading losses, Unrelieved Property losses and Unrelieved Qualifying
Charitable Donations, with each other.
Example – extract from the technical article on Groups

Fruit Ltd is the parent company for a group of companies. The group structure is:
Fruit Ltd 100% Apple Ltd 80% Banana Ltd 80% Cherry Ltd
For the year ended 31 March 2017, Fruit Ltd has an unrelieved trading loss.
- Fruit Ltd will be able to group relief its trading loss to Apple Ltd and/or Banana Ltd.
- Fruit Ltd does not have the required 75% shareholding in Cherry Ltd (100% x 80% x 80% = 64%).
Page 117 of 135
 The % of shareholding does not affect the loss amount to be shared, however there is a restriction
based on the number of corresponding months in an accounting period.
Example – extract from technical article on Groups
Sofa Ltd owns 100% of the ordinary share capital of both Settee Ltd and Futon Ltd. For the year ended 31
March 2017, Sofa Ltd had a trading loss of £200,000.
For the year ended 30 June 2016, Settee Ltd had taxable total profits of £240,000, and for the year ended
30 June 2015 will have taxable total profits of £90,000.
Futon Ltd commenced trading on 1 January 2015, and for the three month period ended 31 March 2017
had taxable total profits of £60,000.
- The accounting periods of Settee Ltd and Sofa Ltd are not coterminous i.e. do not correspond exactly.
Therefore, Settee Ltd’s taxable total profits and Sofa Ltd’s trading loss must be apportioned on a time
basis.
- For the year ended 30 June 2016, group relief is restricted to a maximum of £50,000, being the lower
of £60,000 (240,000 x 3/12) and £50,000 (200,000 x 3/12).
- For the year ended 30 June 2017, group relief is restricted to a maximum of £67,500, being the lower
of £67,500 (90,000 x 9/12) and £150,000 (200,000 x 9/12).
- Futon Ltd did not commence trading until 1 January 2017, so group relief is restricted to a maximum of
£50,000, being the lower of £60,000 and £50,000 (200,000 x 3/12).
 The surrendering company and the claimant company can decide upon the amount of loss to be
shared. Surrendering Company: is the company giving up its loss and Claimant Company: is the
company accepting the loss.
 Only current years losses can be group relieved. The claimant company is assumed to have relieved its
own losses first and then claims the group loss against its Total Profits (after Qualifying Charitable
Donation).
 The claim for group relief is made on the Claimant Company’s tax return.
 Companies will consider the group loss relief option if they wish to get their loss relieved as soon as
possible or wish to save their Qualifying Charitable Donations.
Page 118 of 135


Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the year
ended 31 March 2017 are as follows:
Lae Ltd Mon Ltd

£ £
Trading loss (18,100) (11,200)
Property business profit/(loss) (26,700) 60,900
Loan interest received 1,600 3,300
Capital loss (19,200) 0
Qualifying charitable
(4,800) (3,200)
donations
All the loan interest received is in respect of loans that were made for non-trading purposes.
Maximum claim by Mon Ltd

- The group relief claim by Mon Ltd is calculated after deducting qualifying charitable donations, and on
the assumption that a claim is made for the current year trading loss.
- The maximum amount of group relief that can be claimed by Mon Ltd is therefore £49,800 (60,900 +
3,300 – 3,200 – 11,200).
Maximum surrender by Lae Ltd

- The property business loss and the qualifying charitable donations can be surrendered to the extent
that they are unrelieved, so £29,900 of these can be surrendered (26,700 + 4,800 – 1,600).
- It is not possible to surrender capital losses as part of a group relief claim.
- The maximum potential surrender by Lae Ltd is £48,000 (18,100 + 29,900).
- The maximum group relief claim is therefore £48,000.
 CAPITAL GAINS GROUP – 75% 50%:

 The parent company must have a direct hold of atleast 75% and effective hold of atleast 50% for
companies to become members of this group.
Example – extract from the technical article on Groups

Fruit Ltd is the parent company for a group of companies. The group structure is:
Fruit Ltd 100% Apple Ltd 80% Banana Ltd 80% Cherry Ltd
- Fruit Ltd, the parent company, must have an effective interest of over 50% in each subsidiary company.
- Fruit Ltd, Apple Ltd, Banana Ltd and Cherry Ltd therefore form a chargeable gains group.
 Overseas companies cannot be members of this group.
Page 119 of 135

 Capital losses cannot be transferred rather it is assumed that capital assets are transferred to group
members at cost before being sold to third parties.
 Rollover relief can also be claimed between two companies.
 Joint election has to be made within two years of the end of the Accounting Period by both the
companies.

Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. Both companies prepare accounts to 31
March.
On 15 August 2016, Rod Ltd sold an office building, and this resulted in a chargeable gain of £120,000.
On 20 February 2017, Stick Ltd sold a factory and this resulted in a capital loss of £35,000.
As at 1 April 2016, Stick Ltd had unused capital losses of £40,000.
- Rod Ltd and Stick Ltd must make a joint election by 31 March 2019, being two years after the end
of the accounting period (the year ended 31 March 2017) in which the disposal outside of the
group occurred.
- Stick Ltd’s otherwise unused capital loss of £35,000 and brought forward capital losses of £40,000
can be set against the chargeable gain of £120,000.
Page 120 of 135

TAX ADMINISTRATION
INDIVIDUALS CORPORATIONS
Self Assessment:
It is the responsibility of the individual and the companies to inform the HMRC of their earnings and calculate
their own tax liabilities.
Paper Return: by 31st October following the tax year Online: within 12 months from the end of the Period
Online Return: by 31st January following the tax year of Account
(This is known as the ‘filing date’) Or 3 months after the issue of the return
Or 3 months after the issue of the return Companies have to use IxBRL
Amendments:
Corrections of the errors in the tax returns.
By HMRC: within 9 months of the actual filing date By HMRC: within 9 months of the actual filing date
By Individual: within 12 months of the ‘filing date’ By Company: within 12 months of the filing date
Penalty for late submission: Penalty for late submission:

< 3 months - £100 < 3 months - £100
3 – 6 months - £10/ day for 90 days 3 – 6 months - £200
6 – 12 months – 5% of unpaid tax (minimum £300) 6 – 12 months – 10% of unpaid tax
> 12 months – additional 5% of unpaid tax (min £300) > 12 months – 20% of unpaid tax
Notification of Chargeability:
It is the responsibility of the individual or company to let HMRC know of their taxability. Standard penalty is
imposed in case of non compliance.
Deadline: within 6 months following the tax year – 5th Deadline: within 3 months from the start of the
October following the tax year. relevant Accounting Period
Determination:
Where the return is not submitted on time, the HMRC can determine the amount of tax liability on behalf of the
tax payer. They have 3 years from the filing date to do so and the only way to get this removed is by submitting
the actual tax return.
Records:
Business records have to be maintained otherwise a penalty of £3000 per annum will be applicable.
Business records include details of receipts and expenses, capital transactions etc.
Duration: For business records 5 years from the 31st Duration: For 6 years following the accounting period
January following the tax year and other for 12 months they relate to.
from the filing date.
Page 121 of 135

Payment of Tax:
1st POA: 31st January in the tax year (50% of previous Small Rate Companies: 9 months plus 1 day from the
tax years’ tax payable) end of the Accounting Period
2nd POA: 31st July following the tax year (50% of the Large Rate Companies: 4 instalments beginning from
previous tax years’ tax payable) the 14th day of the 7th month of the Accounting period
3rd BP: 31st January following the tax year and quarterly thereafter. Based on current years’
estimate.
Reduced Payments on Accounts:

Amount of POA can be claimed and reduced but in
case of error interest will be charged.
Interest:
If payments are not made on time interest is charged at 3% from the due date to the date of payment.
Delayed Balancing Payment Penalty: NA

> 1 month late: 5% of unpaid amount
> 6 months: additional 5% of unpaid amount
> 12 months: additional 5% of unpaid tax
Standard Penalties:
Imposed on Failure to notify about chargeability, submission of incorrect tax return, failure to notify HMRC of
underassessment and deliberately supplying wrong information
Genuine Mistake: No penalty
Failure to take reasonable care: 30% of tax lost (minimum penalty: nil)
Serious or deliberate understatement: 70% of tax lost (minimum penalty: 20%)
Serious or deliberate understatement with concealment: 100% of tax lost (minimum penalty: 30%)
Compliance Checks:
Enquiry:
HMRC can enquire into a return with 12 months of the actual filing date to ensure accuracy and completeness.
They have to give a written notice and the tax payer may appeal against it. A written notice is also given to mark
the end of the enquiry and once again the tax payer may either comply or appeal within 30 days of the notice.
Information and Inspection Powers:

HMRC can inspect business records, assets and premises. They can also ask for supplementary information.
Discovery Assessment:
HMRC can normally carry out an enquiry within 12 months of the actual filing date but can also raise a Discovery
Assessment at a later date where fraud or negligence is suspected and full disclosure has not been made.
Basic Time Limit: 4 years from the end of the tax year or the Accounting period
Careless Error: 6 years
Deliberate Error: 20 years
Page 122 of 135
The PAYE system:

 The objective of the PAYE system is to collect the correct amount of tax and NIC at source from the
employees income over the year. An employee's PAYE code is designed to ensure that allowances etc are
given evenly over the year.
 It is the employer's duty to deduct income tax and national insurance contributions from the pay of his
employees, otherwise the employer will be penalised.
 Process:
 Employers must report PAYE information to HMRC under the Real Time Information (RTI) system.
 Under RTI, an employer is required to submit information to HMRC electronically. This can be done by:
o Using commercial payroll software
o Using HMRC's Basic PAYE Tools software (designed for use by an employer who has up to nine
employees)
o Using a payroll provider (such as an accountant or payroll bureau) to do the reporting on behalf
of the employer
 The employer reports payroll information electronically to HMRC, on or before any day when the
employer pays someone (ie in 'real time').
 The software works out the amount of PAYE tax to deduct on any particular pay day by using the
employees' code numbers.
 Payment:
 Under PAYE, income tax and national insurance is normally paid over to HMRC monthly, 17 days after
the end of the tax month (if paid electronically) or 14 days after the end of the tax month (if paid by
cheque).
 Large employers (with 250 or more employees) must make electronic payments.
 If an employer's average monthly payments under the PAYE system are less than £1,500, the employer
may choose to pay quarterly, within 17 or 14 days (depending on the method of payment) of the end
of each tax quarter
 PAYE forms
 Employers must complete forms P60, P9D, P11D and P45 as appropriate.
 Form P60 is a year-end return. At the end of each tax year, the employer must provide each employee
with a form P60. This shows total taxable earnings for the year, tax deducted, code number, NI number
and the employer's name and address. The P60 must be provided by 31 May following the year of
assessment.
 A P45 is needed when an employee leaves. When an employee leaves, a form P45 (particulars of
Employee Leaving) must be prepared. This form shows the employee's code and details of his income
and tax paid to date and is handed to the employee. One of the parts is the employee's personal copy.
Page 123 of 135
If the employee takes up a new employment, he must hand another part of the form P45 to the new
employer. The details on the form are used by the new employer to calculate income tax due under
PAYE when the payroll is next run.
 Forms P11D record details of benefits. A copy of the form P11D must also be provided to the employee
by 6 July. The details shown on the P11D include the full cash equivalent of all benefits, so that the
employee may enter the details on his self-assessment tax return.
 Interest and penalties

 Daily interest is charged on late payments of income tax and NICs under PAYE by taking the number of
days by which a payment is late and applying the relevant late payment interest rate. HMRC make the
charge after the end of the tax year.
 Late payment penalties may be charged on PAYE amounts that are not paid in full and on time.
 Employers are not charged a penalty for the first late PAYE payment in a tax year, unless that payment
is over six months late. The amounts of the penalties on subsequent late payments in the tax year
depend on how much is late each time and the number of times payments are late in a tax year. The
maximum penalty is 4% of the amount that is late in the relevant tax month and applies to the 11th (or
more) late payment that tax year. Where the tax remains unpaid at six months, the further penalty is
5% of tax unpaid, with a further 5% if tax remains unpaid at 12 months, even if there is only one late
payment in the year.
 There are also penalties for making late returns under RTI which are imposed on a monthly basis. The
first late submission of the tax year is ignored. Further late submissions will attract penalties based on
the number of employees as follows:
Number of employees Monthly penalty
1 to 9 £100
10 to 49 £200
50 to 249 £300
250 or more £400
If the return is more than three months late, there is an additional penalty due of 5% of the tax and NIC
due.
HMRC allows a return to be up to three days late before imposing a penalty.
 PAYE settlement agreements

 PAYE settlement agreements (PSAs) are arrangements under which employers can make single
payments to settle their employees' income tax liabilities on expense payments and benefits which are
minor, irregular or where it would be impractical to operate PAYE.
Page 124 of 135

iXBRL:
All companies have to file their self assessment returns using the inline Extensible Business Reporting
Language. This is the standard format for exchanging information electronically. Data is tagged so that it can
be easily read by a computer.
Companies can use the following alternatives to submit their return in the appropriate format:
 Integrated software applications: automatically inserts iXBRL tags.

 Managed tagging service: the tagging is outsourced to agents.
 Conversion software applications: company can tag each item of data themselves.
Page 125 of 135

VALUE ADDED TAX
Introduction
Definition: Value Added Tax is an indirect tax collected by VAT registered businesses (individuals or
companies) from customers on the turnover from taxable supplies of inventory, capital assets or services.
It is tax on value added. The following is a basic explanation of the process:
A VAT registered The final consumer buys

wholesaler sells a product the product for £150 and
to the retailer for £100 has to bear the burden of
plus £20 VAT VAT
The VAT registered retailer recovers

the £20 VAT paid. He adds his profit
share and VAT to the cost of the
product and sells it for £150
Types of Supplies
Types of Supplies
Registered buisnesses are required to collect Businesses providing only these products
VAT on these products or services or services cannot register for VAT.
E.g.: land, financial services. education,
Taxable insurance etc.
Exempt
Registered businesses do not

Registered businesses collect collect any VAT on these
VAT at the rate of 20% on these products or services
products or services. Taxable
supplies that are not zero rated. E.g.: children's clothing, books,
medicine, transport etc.
Standard Rated Zero Rated
Page 126 of 135

Important! You will be informed in the exam if a supply is exempt, zero rated or standard rated.
Registration & Related Matters

VAT Registration: A business making taxable supplies can register voluntarily for VAT but tax authorities have
made registration Compulsory if Taxable Turnover (Turnover form Taxable supplies – not capital assets) is >
£83,000 p.a.
There are two tests to assess whether a business is required to compulsorily register for VAT.
Historic Test Future Test

Test Procedure: Carried out at the end of a month. Carried out at the start of the month.
The sum of last 12 months’ Taxable Estimate the taxable turnover of the next
Turnover is assessed. 30 days.
Deadline to notify Within next 30 days/ By the end of the Within the next 30 days/ By the end of
HMRC: next month on form VAT 1. the same month on form VAT 1.
Date of Registration: The first day of the month after the The start of the month in which turnover
notification deadline. was > than £83,000.
Example: At the end of March 2017 the turnover of At the start of November 2016, ABC place
XYZ Plc for the previous 12 months estimated that the turnover for the
amounted to £85,000. month will be £84,100.
HMRC was notified by 30 April, 2017 and HMRC was to be notified by the 30th of
the business was registered from the 1st November 2016 and the business will be
of May. considered registered from the 1st of
November.
Impact of Registration:
 Businesses are issued a certificate of registration and allotted a specific number, which is specified on
all invoices.
 Businesses have to collect Output VAT on all standard rated supplies on behalf of HMRC and pass it on
after adjusting for Input VAT.
 VAT expense incurred on purchases (Input VAT) of goods and services bought from another VAT
registered business can be recovered. This is done by adjusting the amount of Input VAT paid against
the Output VAT collected and then passing on the balancing amount to HMRC, or requesting a VAT
refund.
 Both Output VAT collection and recovery of any Input VAT only commences after registration.
 VAT records are maintained and VAT returns submitted normally after every quarter.
 In case of customer defaulting on payment, the burden of paying the Output VAT on the sale falls on
the business.
Page 127 of 135

Pre-Registration Input VAT: As a concession, HMRC allows the recovery of Input VAT paid by a business prior
to registration but with conditions attached:
 Inventory & Assets for business purpose: If these were purchased 4 years prior to date of registration
and are still held by the business at the date at registration, the associated Input VAT can be recovered
by the business.
 Services for business purpose: Those availed 6 months prior to date of registration.
Group VAT Registration: UK resident companies under common control (of another company or an individual)
can opt for a Group VAT Registration. A representative of the group is made responsible for managing the VAT
return and payments of all the group members although all parties are still equally liable. No VAT is collected
on Inter group purchases and sales.
De-registration & Related Matters

VAT De-Registration: Businesses can Voluntarily de-register if the Taxable Turnover is going to become <
£81,000 p.a. but they can be asked to Compulsorily de-register by HMRC if they start making only Exempt
supplies or if the business ceases. Notification: within 30 days of cessation or becoming liable of being de-
registered.
Post De-registration Output VAT Collection: Once de-registered, businesses will still be required to collect
Output VAT on those assets and inventory items on which the Input VAT had been recovered by the business.
HMRC is willing to ignore this measure if the Output VAT collected from these items will be ≤ £1000.
Sale of Business: When a business is sold, the VAT implications are dependent upon how the disposal is taking
place:
Piecemeal Basis Going Concern Basis

 Output VAT collected on each Inventory and  This is not treated as a taxable supply, so Output
asset item sold. But not if the amount is ≤ £1,000. VAT is not applicable.
 Registration Number cancelled.  Registration number is cancelled if the buyer
already has a VAT registration number of his/ her
own and if not then the seller can transfer his
registration number to the new owner.
A business is considered as Going Concern if all of the following conditions are met:
 There is no significant break in the trading
 The buyer carries out the same type of trade
 The buyer is already registered or will become liable to register after the transfer
Page 128 of 135

Calculation
VAT Period: VAT calculation is normally carried out after every 3 months/ quarter. The duration for which the
VAT is calculated is termed VAT period.
Tax Point: This is the date on which the transaction is recorded so that VAT is accounted for in the correct VAT
period. The default date on which the transaction is recorded is called the Basic Tax Point but in certain
circumstances it is over-ridden by the Actual Tax Point. See table below.
Inventory/ Assets Services

Basic Tax Point: This is the date when goods are Basic Tax Point: This is the date when services are
physically transferred actually performed
Actual Tax Point: Over-rides the Basic Tax Point.
 Earlier: Date of Invoice being issues or the actual Cash transfer – if either of these events occur before
the Basic Tax Point
 Later: Date of Invoice being issued - if this date falls within 14 days from the Basic Tax Point
VAT Calculation Points:
 To determine VAT from a VAT Inclusive figure: Amount x 20/120 = VAT

 To determine VAT from a VAT Exclusive figure: Amount x 20% = VAT
 Revenue vs Capital items: There is no distinction between the two for the calculation of VAT
 Discounts: Output VAT is charged on the actual amount received, making it necessary for the supplier to
specify the potential discount on the sales invoice or issue a subsequent credit note, if the offered discount
is taken up.
 Impaired debts: The recovery of Output VAT on the impaired debts is possible if 6 months from the due
date of payment have passed and the amount had actually been written off in the books.
 Non Business use: Output VAT is calculated on goods and services used for non-business purposes.
 Goods supplied free of cost: Output VAT is calculated on these. In the case of goods supplied as gifts, no
VAT is required if the value of the gift is less than £50 per customer in a 12 month period.
 Samples: Output VAT is not calculated on goods given away as samples.
 Entertainment expenses: Input VAT is recoverable on entertainment expenses incurred only for overseas
customers.
 Personal expenses: Input VAT related to the personal element of expenses is not recoverable.
 Motor cars: Input VAT is irrecoverable on motor cars purchased, unless they have a 100% business use.
 Fuel: Input VAT is recoverable on the fuel used in motor cars. But if there is an element of personal
use, Output VAT is calculated as well on a scale charge (given in the exam).
If an employee is charged the full cost for private fuel, Output VAT is calculated on the amount
charged.
 Repairs: Input VAT on motor car repairs regardless of whether there was business or private use, is
recoverable.
Page 129 of 135

Example – Comprehensive Calculation – extract from technical article on VAT
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2017. The following
information is available:
 Cash sales amounted to £50,400, of which £46,200 was in respect of standard rated sales and £4,200
was in respect of zero- rated sales. All of these sales were to non VAT registered customers.
 Sales invoices totalling £128,000 were issued in respect of credit sales to VAT registered customers.
These sales were all standard rated, and none of these customers were offered a discount for prompt
payment.
 On 20 February 2017, a credit sales invoice for £7,400 was issued in respect of a standard rated supply
to a VAT registered customer. To encourage this previously late paying customer to pay promptly,
Gwen offered a 10% discount for payment within 14 days of the date of the sales invoice. The
customer paid within the 14 day period.
 Standard rated materials amounted to £32,400, of which £600 were taken by Gwen for her personal
use.
 Standard rated expenses amounted to £24,800. This includes £1,200 for entertaining UK customers.
 On 15 March 2017, Gwen sold a motor car for £9,600, and purchased a new motor car at a cost of
£16,800. Both motor cars were used for business and private mileage. These figures are inclusive of
VAT where applicable.
 The new motor car was used 70% for business mileage. During the quarter ended 31 March 2017,
Gwen spent £1,128 on repairs to the motor car and £984 on fuel for both business and private mileage.
The relevant quarterly scale charge is £468. All figures are inclusive of VAT
 On 28 March 2017, Gwen sold machinery for £3,600, and purchased new machinery at a cost of
£21,600. She paid for the new machinery on this date, but did not take delivery or receive an invoice
until 6 April 2017. These figures are inclusive of VAT where applicable.
 On 31 March 2017, Gwen wrote off impairment losses in respect of three invoices that were due for
payment on 15 August 2016, 15 September 2016 and 15 October 2016 respectively. The amount of
output VAT originally paid in respect of each invoice was £340.
 During the quarter ended 31 March 2017, £600 was spent on mobile telephone calls, of which 40%
relates to private calls.
Unless stated otherwise all of the above figures are exclusive of VAT.
Solution:
VAT Return – Quarter ended 31 March 2017
£
Output VAT
Cash Sales (46,200 x 20%) 9,240
Credit Sales (128,000 x 20%) 25,600
Discounted Sale (7,400 x 90% x 20%) 1,332
Motor Car 0
Fuel Scale Charge (468 x 20/120) 78
Machinery (3,600 x 20/120) 600
Goods for personal use (600 x 20%) 120
Input VAT
Page 130 of 135
Materials (32,400 x 20%) (6,480)

Expenses [(24,800 – 1,200) x 20%] (4,720)
Motor Car 0
Fuel (984 x 20/120) (164)
Motor Repairs (1,128 x 20/120) (188)
Machinery (21,600 x 20/120) (3,600)
Impairment Losses (340 + 340) (680)
Telephone (600 x 60% x 20%) (72)
VAT Payable 21,066
 If the late paying customer had not paid within the 14 day period, then output VAT on the discounted sale
would have been £1,480 (7,400 at 20%).
 Input VAT would not have been recovered in respect of the motor car sold because it was not used
exclusively for business purposes. Therefore, output VAT is not due on the disposal. Similarly, input VAT
cannot be recovered in respect of purchase of the new motor car.
 Output VAT is charged on the materials that Gwen has taken out from the business for her personal use.
 Input VAT on business entertainment is not recoverable unless it relates to the cost of entertaining
overseas customers.
 Gwen can recover the input VAT in respect of the new machinery purchased in the quarter ended 31
March 2017 because the actual tax point was the date that the machinery was paid for.
 Relief for an impairment loss is not given until six months from the time that payment is due. Therefore
relief can only be claimed in respect of the invoices due for payment on 15 August 2016 and 15 September
2016.
 An apportionment is made where a service such as the use of a telephone is partly for business purposes
and partly for private purposes.
Administration
VAT Invoice: This is issued to VAT registered customers within 30 days of the supply being made and includes
the following details:
 Suppliers VAT Registration No.  Tax Point
 VAT exclusive amounts  Total VAT exclusive amount
 Rate of VAT for each supply  Amount of VAT Payable
Customers not registered for VAT do not require a detailed VAT invoice as they cannot claim the VAT amount
paid.
Additionally in cases where the VAT inclusive total of the invoice is less than £250, a simplified VAT invoice
may be issued but this will still include the following:
 Supplier’s name and address  Suppliers VAT Registration No.
 Tax point  Description of goods/ services
 Rate of VAT for each supply  VAT inclusive total
Page 131 of 135

VAT Return: The VAT return includes the calculation of VAT payable/ refundable (Output VAT – Input VAT) for
the VAT period.
VAT being a self – assessed tax, will lead to HMRC conducting control visits to check the accuracy of the VAT
returns.
Submission Deadline: The VAT Return is filed on-line and any VAT payable submitted within 1 month and 7
days from the end of the VAT Period.
VAT Refund: Claims for refund of VAT are subject to a four year time limit.
Penalties & Errors
Default Surcharge: This becomes applicable if the VAT return is not submitted on time or if the VAT is not paid
on time. If the VAT payment is delayed, then a surcharge may incur.
For example: A business submits its VAT return for quarter ended 31/03/17 by 31 July 2017.
 In this case, the business will immediately come under observation, termed the ‘Default Surcharge Liability
Notice Period’ for one year from the end of the relevant VAT period i.e. from 31/03/17 till 31/03/18.
 The observation will end without penalty, if the returns of the next 4 VAT Periods are submitted on time.
 If further delays are made in the submission of the VAT returns, while under observation; the observation
period will keep on extending: 1 year from the relevant quarter. E.g. if return of quarter ended 30/09/16
not submitted on time the observation period will now end on 30/09/18. A penalty will also be imposed if
VAT payment delayed while under observation.
No. Of Error Penalty

1 2% of unpaid tax Not collected if amount is <
2 5% of unpaid tax £400 Not collected if VAT to be
3 10% of unpaid tax refunded.
4 15% of unpaid tax
Errors in VAT Return: If there errors in a VAT return, resulting in under payment of VAT, the business may
suffer from a penalty and a penalty interest. This depends upon the value of the error.
De-Minimis Limit: Higher of £10,000 or 1% of Turnover

If Error < De-Minimis Limit identified If Error > De-Minimis Limit identified
 Error is voluntarily disclosed in the next VAT  A Separate disclosure should be made
return voluntarily to HMRC
 There will be a possible penalty linked to  There will be a possible penalty linked to
behaviour of the tax payer but no penalty behaviour of the tax payer
interest  Penalty interest will also be imposed
Page 132 of 135

International Transactions
Transactions from outside the European Union:
 Imports: Input VAT is charged at the time of import and can be recovered within the period in which
the goods were imported.
Regular importers can get an account set-up with HMRC to get the VAT accounted for on a monthly
basis.
 Exports: When goods are exported, these are treated as Zero Rated supplies.
Transactions within the European Union:
 Acquisitions: When goods are purchased from within the EU, then VAT is accounted for according to
the date of acquisition.
The date of acquisition is the earlier of VAT invoice being issued or the 15th day of the month following
the transaction.
Reverse Charge Procedure: Input VAT and Output VAT related to the transaction are both shown on
the same VAT return of the purchaser.
 Despatch: Goods sold within the EU are treated as Zero Rated supplies if the supply is made to a VAT
registered business or it will be treated as a Standard Rated supply, if made to Non VAT Registered
business.
International Services:
 The place of supply is where the customer is situated.

 In case of international services being received, the place of supply will be UK.
Transaction is recorded on the earlier of date when service is completed or date of cash payment.
Reverse Charge Procedure applies here too.
 In case of international services being offered, this is considered as outside the scope of VAT.
Page 133 of 135

Accounting Schemes
For small businesses, HMRC has introduced a number of schemes to help ease cash flow problems or administrative burden.
CASH ACCOUNTING SCHEME ANNUAL ACCOUNTING SCHEME FLAT RATE SCHEME

Objective: Helps reduce cash flow issues. Objective: Helps reduce administrative burden. Objective: Helps simplify the calculation of VAT.
Conditions: Conditions: Conditions:
 Taxable Turnover (VAT exclusive) ≤  Taxable Turnover (VAT exclusive) ≤  Taxable Turnover (VAT exclusive) ≤ £150,000
£1,350,000 per annum £1,350,000 per annum per annum and Total Turnover (VAT inclusive
 Up to date VAT records and returns  Up to date VAT records and returns and including exempt supplies) ≤ £230,000 per
annum
 Up to date VAT records and returns
Features: Features: Features:
 The date of actual cash received or paid  The VAT period is extended to 12 months  Output VAT and Input VAT is actually collected/
becomes the tax point and recorded in and the VAT return submitted once within paid at the standard rate but on the VAT return,
the relevant VAT period two months from the end of the annual VAT shared with HMRC, VAT payable is calculated at
 Provides automatic relief for impaired Period. the Flat Rate % given by the HMRC. (Given in
debts.  Default surcharges are avoided due to low the exam)
administrative challenges
Calculation: Calculation: Calculation:
For E.g.: For E.g.: For E.g.:
Quarter ended 31st March, 2017 Year ended 31st December, 2016 Quarter ended 31st March, 2017
Output VAT: Cash Sales x 20% Output VAT: Sales x 20% VAT Payable: Total Turnover x Flat Rate %
Less: Input VAT: Cash purchases x 20% Less: Input VAT: Purchases x 20%
Total Turnover: This is made up of VAT inclusive
th th
Return Submission Deadline: 7 May, Return Submission Deadline: 28 February, amounts of taxable supplies turnover and also
2017 2017 includes turnover from exempt supplies.
VAT Payment Deadline: 7th May, 2017 VAT Payment Deadline: paid in 10 instalments
First 9 instalments: calculated as 10% of Input VAT: is not deducted as it is made up for in
previous year VAT payable. Instalments start the reduced %.
from the 4th month of the VAT period and are
paid by the end of each month VAT Return Submission Deadline: 7th May, 2017
Final instalment: calculated as balancing VAT Payment Deadline: 7th May, 2017
payment and paid with the VAT return.

F6 Study Notes - Updated PDF

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

F6 Study Notes - Updated PDF

Hochgeladen von

Copyright:

Verfügbare Formate

ACCA F6

IMPORTANT NOTE .................................................................................................................................................................. 4

Death Estate .................................................................................................................................................................... 106

Section Assessment Syllabus area Marks Recommended Time

Tax to be studied for the F6 Exam Categorisation Tax Payer

UK Tax System Structure:

The structure of the UK tax system can be shown as follows:

Chancellor of the Exchequer Treasury HMRC

Tax Appellate System:

Sources of Tax Law:

Tax Evasion and Tax Avoidance:

Interaction with other tax jurisdictions:

A non UK resident pays income tax on his/ her UK income only.

Automatic UK Test: An individual is automatically considered a UK resident is he/ she:

Days in UK Previously Resident Not Previously Resident

Income Tax Computation

Example: Mr. Edward Hayes

Tax Slabs Capacity NSI DI

Tax Slabs Capacity SI

Using the information from the Income Tax Computation above:

Step 3: Calculate Tax payable.

Tax Liability 20,375

Step 4: Work out the tax payment instalments.

Tax Payable – 2016/17 19,375

Components of Income Tax Computation

Example – extract from Finance Act 2016 article with modification

Income Tax Liability:

Ali – Income Tax Computation – 2016/17

Example – extract from Finance Act 2016 article with modification

Income Tax Payable:

Notes on slab utilisation:

Example – extract from the Finance Act 2016 article:

Accrued Income Scheme:

Example – extract from Finance Act 2016 article:

Example – Extract from Finance Act 2016:

Deductible Interest & Personal Allowance

Example – extract from Finance Act 2016 article with modification

Tax implication: May’s personal allowance of £11,000 will be affected.

ANI = £159,000 – (£32,000 x 100/80) – (£9,600 x 100/80) = £107,000

Reduced Personal Allowance = £11,000 – [(£107,000 - £100,000)/ 2] = £11,000 - £3,500 = £7,500

May will only be entitled to a personal allowance of £7,500.

 Transferable Personal Allowance:

Example – extract from Finance Act 2016 article with modification

Income Tax: £24,000 at 20% 4,800

Gift Aid Donation and Personal Pension Scheme Contribution

Step 1: Gross up the gift aid and pension contribution amount

Step 2: Extend the basic rate band by the gross amounts

Step 3: Re-calculate tax liability

Child Benefit Income Tax Charge:

Excess ANI = £54,000 - £50,000 = £4,000

Jointly Held Property

Tax Planning Aspects

Example – extract from the Finance Act 2016 article:

Example – extract from the Finance Act 2016 article:

Sam is currently selfemployed.

Employment vs Self Employment:

Reduction: Time Apportionment and Employee Contribution (xxxx)

TAXABLE EMPLOYMENT INCOME XXXX

 Job related accommodation

Benefits taxable on all employees:

Property rented Taxable Benefit: Higher of

Cost of providing accommodation

Example – extract from technical article on Benefits