Notes

ACCA Paper F6 (UK)

Taxation (UK)
For exams from June 2015 to March 2016

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ExPress
Notes

Contents

Page |
22

About ExPress Notes

1.

Introduction

2.

Income tax an introduction

3.

Income Tax Employment Income

13

4.

Income Tax Trading Income

18

5.

Capital Allowances

21

6.

Trading Income Basis Assessment

24

7.

Trading Losses (For Sole Traders)

26

8.

Trading Income - Partnerships

28

9.

Property Income

30

10.

Investment Income

32

11.

Pensions

34

12.

National Insurance Contributions

36

13.

Corporation Tax

38

14.

Chargeable Gains (For Companies)

44

15.

46

16.

Corporate Groups and Overseas Tax

Issues
Capital Gains Tax (CGT)

17.

Inheritance Tax (IHT)

53

18.

Value Added Tax (VAT)

58

48

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Chapter 1

Introduction

START
The Big Picture
Paper F6 (UK) introduces candidates to the core principles of taxation in the UK.
The paper is mainly computational and there are 5 compulsory questions in the
exam.
Taxation can get very complicated with a number of detailed calculations and
lots of intricate rules to remember. A successful candidate must have a good
understanding of the core areas of taxation. It is vital therefore that candidates
understand the key areas and do not get bogged down in the detail.
The main taxes are:
Income tax payable by individuals
Corporation tax payable by companies
Capital Gains tax (CGT) payable by individuals (companies pay
corporation tax on their capital gains)
Value Added Tax (VAT) payable by both companies and
unincorporated businesses
National Insurance Contributions (NIC) not strictly a tax but
payable by individuals and employers.

Section A of the exam comprises 15 MCQs worth 2 marks each.

Section B of the exam comprises four 10 mark questions together with
two 15 mark questions (which will focus on income tax and corporation
tax).
Paper F6 has a comprehensive syllabus. These ExPress notes are designed to
provide guidance on the core areas of the syllabus. Whilst we believe that the
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Taxation legislation can change rapidly. These notes are designed to provide
assistance for students taking the F6 (UK) ACCA exam from June 2015 to March
2016. These notes should not be used for any other purpose.
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these notes. The ExP Group does not warrant in any form that these notes
represent the tax legislation
as at the date of reading of these notes.

Chapter 2

Income Tax An Introduction

START
The Big Picture
Income tax is a key area and will be examined.

KEY KNOWLEDGE
Income Tax An Introduction

Individuals who are UK tax resident will be taxed on their worldwide income.
The period of assessment is the tax year. The tax year runs from 6 April to 5
April. For example, the tax year 2014/15 runs from 6 April 2014 to 5 April 2015
(2013/14 runs from 6
April 2013 to 5 April 2014 and so on)
All of an individuals income arising in the tax year will be assessed in the tax year.

KEY KNOWLEDGE
Pro-forma Tax Computation 2014/15

This is the base document for calculating an individuals liability to

income tax.
The pro-forma income tax computation is as follows:
INCOME TAX COMPUTATION 2014/15

Employment income

10,000

Trading income

25,000

Property income

5,000

Bank interest (x 100/80)

1,000

UK dividends (x 100/90)

1,000

Total income

42,000

Less: reliefs

(2,000)

Net income

40,000

Less: Personal allowance (PA)

Taxable income

(10,000)
30,000

Certain income is exempt from income tax including:

Income from certain National Savings Products

Income from Individual Savings Accounts (ISA)
Gambling or betting winnings

Personal Allowances (PA)

Every tax payer is entitled to a PA. For 2014/15 this amount is 10,000. It is an
income tax personal allowance and cannot be set against any other tax liability
such as CGT.
The PA is deducted from an individuals income to give taxable income.
The PA is reduced for individuals with income
>100,000. The reduction is based on adjusted
net income (ANI).

Adjusted Net Income:

Net income
X Less: gross gift aid donations
X
Less: gross personal pension contributions
ANI

X
X

If ANI is >100,000, the PA is reduced by 50% x (ANI - 100,000). Therefore,

individuals with ANI >120,000 do not get a PA.
Personal Age Allowances (PAA)
Individuals who are aged 65 years old are entitled to a PAA (in efect, a higher rate of
PA).
Individuals aged 65 74: 2014/15 PAA = 10,500
Individuals aged 75: 2014/15 PAA = 10,660
The PAA is given in full in the year the individual becomes 65 or 75.
The PAA is aimed to protect elderly people with lower incomes. If however a
person who is entitled to a PAA has ANI above 27,000 (2014/15) the PAA is
reduced by:
50% x (ANI - 27,000)
The PAA can never be reduced to less than the standard PA (10,000) but
note that if an individual has ANI > 100,000 there will be a reduction in the
PA as mentioned above.
Income Tax Liability and Income Tax Payable
Once the taxable income has been calculated, the income tax liability can be
calculated. Note that taxable income is after Personal Allowances.
The rate of income tax depends on the type of income. Employment income,
trading income, property income and bank interest (i.e. all income except
dividends) are taxed at the following rate for 2014/15:
Basic rate

1 to 31,865

20%

Higher rate

31,866 to 150,000

40%

Additional rate

150,001 and above

45%

Income tax on Dividend income is either at 10%, 32.5% or 37.5%.

The summarised income tax rates are:
Other
income

Saving
income *

Dividend
income

1 to 31,865

20%

20%

10%

31,866 to 150,000

40%

40%

32.5%

150,001 and above

45%

45%

37.5%

(these rates will be provided in the exam)

* Note that special rates of tax may apply to savings income if it is in the
first 2,880 of income.

Chapter 3

Income Tax Employment Income

The Big Picture

Employment income represents all income and benefits an individual receives

from his or her employment.

KEY KNOWLEDGE
Income Tax Employment Income
Earning
s
Earnings are taxed on the receipts basis. i.e. the amount of earnings received
in the tax year. There are special rules for directors to prevent them
manipulating the receipt date.
Earnings include salaries, wages, bonuses and benefits received by an individual.

As an example, if an individual receives a salary of 20,000 and benefits of

6,500 his total employment income will be 26,500. This figure then goes to
the income tax computation.
Benefits
Benefits are regularly tested at
Paper F6. Exempt benefits include:

One mobile phone.

Relocation and removal expenses up to 8,000.
Employer funded training (if training relevant for the job).
Staff canteen or restaurant (provided its made available to all employees)

The calculation of the taxable benefit is reduced proportionally if the benefit is

provided for only part of the tax year.
In most cases, contributions towards the provision of the benefit are
deducted in the calculation of the benefit.
Assessable benefit Living Accommodation
An employee provided with living accommodation as a result of his
employment and which is not exempt job related accommodation would be
assessed as follows:
Benefit

All properties

Additional charge for expensive

properties

Higher of:
1. Annual value of the
accommodation
(figure will be given in the
exam).
(Cost* minus 75,000)
x official rate
of interest at the start of the year,
3.25% for
2014/15 (interest rate will be provided in
the

* If the employer acquired the property more than 6 years before providing it
to the employee the market value, when first provided to the employee,
should be used rather than cost.
Assessable benefit motor cars
This is one of the most common benefits provided to employees and is
examined on a regular basis.

Benefit:
List price when new x relevant %.
Note the list price is the published brochure price when the car was first registered.
The relevant % depends on the CO2 emissions of the car with the broad concept
being that the more un-environmentally friendly the car is the higher the tax
charge.
For petrol cars the % is calculated as follows:
CO2 emissions

% (for petrol cars)

75 grams
76 - 94 grams
95 grams or more

5%
11%
12%

Each complete 5 grams above 95 grams

Add an additional 1% to the

12% up to a maximum of 35%.

For diesel cars 3% is added to the figures above but the maximum is still 35%.

EXAMPLE 1
Petrol Car
John is provided with a petrol car with a list price of 22,000 and CO2
emissions of 147 grams. He makes a contribution of 100 per month for the
use of the car.
Answer 1:
Percentage:
Base %
Plus 1% for each complete 5 grams of CO2 above 95 grams
(i.e.
95
to 145%
= 10%)
Relevant
% x list price = 22% x 22,000
Less contributions (100 x 12 months)

12%
10%
22%
4,840
(1,200)

Taxable benefit

3,640

Note that the benefit present when a car is provided is inclusive of servicing
and maintenance costs but does not include any private fuel that is paid for
by the employer.

Assessable benefit private fuel

Some employers may pay all or part of the private fuel bill of an employee. The
provision of fuel for private use is a separate benefit from the provision of a car.
The benefit is calculated as follows:
Relevant % as calculated for the car benefit x base figure.
For 2014/15 the base figure is 21,700 and will be given in the exam.
Using the previous example, if the individual had been provided with fuel for
private use the calculation of the benefit for the provision of private fuel would
be:
(Relevant % as calculated for the car benefit x base figure) =
22% x 21,700 = 4,557.
Assessable benefit private use of vans
The benefit for the private use of a van is a fat rate scale of 3,090 pa. If fuel
is provided for private mileage then this is assessable at a 581 benefit charge.
Private use of employers assets
For private use of assets other than cars, vans and mobile phones (which
have diferent rules) the general rule is that the benefit is:
20% of an assets market value at the time it was first provided.
Gift of asset no previous private use.
If an employer buys an asset and then it is given to an employee the benefit is
the cost of the asset to the employer.
Gift of asset after previous private use
If an asset has been used by an employee and then given to him the benefit is
calculated as follows:

Higher of:
1. The market value of the asset when gifted.
2. The market value of the asset when first made available less the benefits assessed
on the individual during the time the individual used it but didnt own it.

Chapter 4

Income Tax Trading Income

START
The Big Picture
Trading income is a very important part of the syllabus and is almost always
examined in one way or another.

KEY KNOWLEDGE
Income Tax Trading Income
A person receives trading income if he has his own business. A person
who receives trading income is known as one of the following:
a sole trader
self employed
independent consultant
A person who is employed by a company receives employment income and
not trading income.

Note that a person can receive both employment income (e.g. he has a part
time job) and trading income (e.g. he has a part-time business whereby he
trades by selling items on eBay)
Badges of trade
This is the term which refers to various tests (or badges) to ascertain whether a
particular transaction that an individual undertakes is a capital item (and hence
treated under CGT) or a trading item (and hence treated under income tax).
Badges:
1. Subject matter are the items that were transacted typically items that
are used for trading?
2. Frequency of transactions the more often the transaction is
undertaken the more likely it is that the item will be trading.
3. Length of ownership a shorter period of ownership is more likely
to indicate trading.
4. Profit motive a clear indication to make a profit may indicate a trading item.
5. Supplementary work and marketing additional work undertaken on
the items to make them more marketable may indicate trading.
6. Method of acquisition an involuntary acquisition of the item
(e.g. through inheritance) may indicate capital.
Basis of assessment
An individual who is self-employed must prepare accounts. These accounts
can be for whatever accounting period end that he chooses. The accounts are
then adjusted for tax purposes to get the trading income figure (see
adjustment of accounting profit section below).
The trading income figure is then assessed on the individual using the current
year basis rules. This is where the trading income assessed in a tax year is the
amount in the 12 month accounting period ending in that tax year.
For example, an individual that prepares accounts to 31 December and has
adjusted trading income of 35,000 for the year ended 31 December 2014
would have trading income of
35,000 in the tax year 2014/15.

Adjustment of the accounting profit

An individuals accounts must be adjusted to obtain the tax adjusted
trading profit.
Tax adjusted trading profit
Net profit per accounts
Add:
5,000

Less:

28,000

Disallowed expenditure
Taxable trading income not included in accounts
4,250
Income included within the accounts but not taxable as
trading income
Expenditure not in the accounts but allowable as a
trading deduction
Capital allowances

9,250
37,250
1,000
250
3,000

Tax adjusted trading profit

(4,250)
33,000

Disallowable expenditure
General rule Only expenditure incurred wholly and exclusively for the
purposes of the trade is allowable.
Some of the more common forms of disallowable expenditure include:

Capital expenditure

Depreciation or amortization charges

Appropriations (withdrawals) of funds from the business by the sole trader

Excessive salary paid to a sole traders family member

3rd party entertaining (note that employee entertaining is allowable)

The write off of a non-trade debt

Subscriptions that are not related to the trade

Gifts to customers are disallowable unless they satisfy all of the following:
o
o
o

Cost less than 50 per recipient per year

The gift is not food, drink or tobacco
The gift carries the name, logo or advert for the business

Chapter 5

Capital Allowances

START
The Big Picture
Depreciation is an accounting adjustment. There are various methods that a
business can use to calculate depreciation. For example, straight line method
and reducing balance method.
Chapter 4 told us that depreciation charged to the income statement is not
an allowable expense and instead is added back in the calculation of the tax
adjusted trading profit.

KEY KNOWLEDGE
Capital Allowances

Capital allowances are tax allowable amounts that are calculated according to
set specific rules. In simple terms, capital allowances could be regarded as
the tax equivalent of the accounting depreciation charge.

Capital allowances are claimed on qualifying expenditure incurred on Plant (defined) and
Machinery (not defined)

Plant and Machinery (P&M)

P&M includes a number of items. The most common ones found in the exams include:

Machinery
Vehicles (cars and lorries)
Computers (hardware and software)
Ofice furniture and equipment
Moveable partitioning

Writing down allowance (WDA)

An annual WDA of 18% is given on a reducing
balance basis. Annual Investment Allowance (AIA)
The AIA is a 100% allowance for the first 500,000 spent on P&M by a
business in its 12 month accounting period.

Available to all businesses.

Not available on cars.
For accounting periods >12 months or <12 months (long or short
accounting periods), the 500,000 is pro-rated.
If a business spends more than 500,000 in a 12 month period, the first
500,000 is eligible for AIA and the balance is eligible for WDA.

Motor cars
Cars are treated according to their CO2 emissions.
Cars do not qualify for AIA. However, any expenditure on a low emission NEW car (i.e. CO2
95g/km) will qualify for a First Year Allowance of 100% instead of the WDA.
CO2 Emissions
95g/k
m
95g/k
m

Treatment
100% FYA if purchased new only
Include in general pool if purchased second hand.

96 130 g/km

Include in general pool (no AIA or FYA)

>130 g/km

Eligible for 8% WDA (part of special rate pool)

Private use assets

If the sole trader uses an asset partly for business purposes and partly for
private purposes, the asset is kept in a separate column and only the business
proportion of the asset is eligible for capital allowances.
Note that private use assets are only present for individuals. Companies never
have private use assets in their calculation as companies never use assets
privately!
Special Rate Pool
Qualifying expenditure on long life assets (assets with a life >25 years) or high CO2
emission cars (which are privately used by owner of a business) attract a WDA of
8% rather than 18%.

Chapter 6

Trading Income Basis Assessment

START
The Big Picture
Chapter 4 introduced the concept of the Current Year Basis (CYB) whereby
the adjusted trading profit in an accounting period is assessed in the tax year
in which the accounting
period ends. There are a number of other rules which need to be looked at.

KEY KNOWLEDGE
Trading Income Basis Assessment
Opening Year Rules
There are special rules for when a sole trader commences business:
Year 1. The profits assessed in year one are the actual basis. This is the adjusted profits
from the commencement of business until the following 5 April.
Year 2. If there is a 12 month period of account ending in the 2nd tax year then
use the CYB. If there is not a 12 month accounting period then use one of the
following:

Period of Account
a) the period of account is less
than 12 months after
commencement

Period Assessed
1 12 months of trading.
st

b) the period of account is more

than
12 months after
commencement

The 12 months ended on

the accounting date.

c) there is no period of account

ending in the 2nd tax year

The actual profits between 6th

April and 5th April.

Year 3. Assess the 12 months ended on the accounting date in that year. This
will normally be the CYB.
As a result of the above rules there is a possibility that profits for certain periods
will be assessed in more than one year. These profits are known as overlap
profits. These overlap profits are carried forward and usually deducted from the
assessment in the year the business ceases.
Ongoing business rules
These rules have already been discussed and are the adjusted profits for an
accounting period that end in a particular tax year. This is known as the
CYB.
Change of accounting date
There are special rules for when a sole trader changes
accounting date. Closing year rules
The broad idea here is that when a business ceases there will be no periods which have not
been taxed.
The calculation method is as follows:
1) Identify the tax year in which the business ceases.
2) For the penultimate tax year, identify the CYB assessment.
3) Calculate the profits for the period from the date last assessed in 2)
above until the date of cessation and from this figure delete any overlap
profits.

Chapter 7

Trading Losses (For Sole Traders)

START
The Big Picture
When an individual has a tax adjusted trading amount which is negative, he
has a trading loss.
The trading profit figure is nil.
A trading loss may be ofset against certain other income in accordance
with the rules discussed in this chapter.
The main reliefs are:

Carry forward of the trading loss against future trading profits.

Offset the loss against total income in the year of the loss
and / or the preceding year.

If a claim against total income has been made there is an optional

claim against chargeable gains in the tax year of the loss and / or the
preceding tax year.

Offset of opening year loss against total income

Offset of terminal loss against previous trading profits

Carry forward of trading loss

The trading loss is carried forward and set against the first available profit
from the same trade.
The amount of the loss to be set off is as much as
possible. Offset of loss against total income
The loss can be ofset against total income in the year of the loss and / or the preceding
year.
As an example, a loss in an accounting period ending 31 December 2014 arises
in the tax year 2014/15 (under CYB). The loss could therefore be offset against
total income in either
2014/15 or 2013/14.
Loss relief under this method is optional and subject to a claim by the
individual. The loss relief is against total income. Total income is before
the offset of Personal
Allowances (PA) and therefore there is a risk that utilising a loss under this
method could result in the PA being wasted.
Relieving trading losses against chargeable gains
If a loss remains after a claim against total income a trading loss in 2014/15
can be ofset against chargeable gains in 2014/15 and / or 2013/14.
Offset of opening year loss against total income
A trading loss incurred in the first 4 tax years of operation can be ofset against
total income from the 3 years preceding the tax year of the loss. The loss is
offset on a FIFO basis (i.e. against the earliest year first)
Offset of terminal loss against previous trading profits
Unrelieved trading losses of the last 12 months of a businesss activity can be relieved against:
1) Trading profits in the year of cessation, and
2) Carried back and ofset against trading profits for the 3 preceding years on a LIFO basis.

Chapter 8

Trading Income - Partnerships

START
The Big Picture
In simple terms, partnerships are collections of sole traders that are working
together. Profits from a partnership need to be allocated between the partners
and then each partner includes their share of the partnership profit as trading
income within their own income tax computation.
The profits for the partnership are firstly adjusted to obtain the tax adjusted trading profit
(as per the adjustments required for a sole trader mentioned at
chapter 4). The tax adjusted partnership profits are then allocated
to each partner. Calculation
The tax adjusted profits of the partnership are allocated to the partners in accordance with
their partnership profit sharing arrangements. Partners may be entitled to a fixed element
such as salary or interest on loans and these amounts are withdrawn first.
Example: Andrew and Barry are in partnership sharing profits equally after
allocating a salary of 10,000 to Andrew. In the year ended 31 December
2014, the adjusted trading profits of the partnership were 50,000.

Total

Andrew

Salary

10,000

10,000

Barr
y
-

Balance to allocate (1:1)

40,000

20,000

20,000

50,000

30,000

20,000

Y/E 31/12/14

Trading profits

The accounts end on 31 December 2014. Therefore under the CYB the trading
profits will be assessed in 2014/15 with Andrew being assessed on 30,000 and
Barry on 20,000.
Loss relief in partnerships
Trading losses are allocated between the partners in the same manner as
trading profits are. Each partner can decide how they obtain relief. For example,
partner A could carry the loss forward whilst partner B decides to ofset against
current year total income.

Chapter 9

Property Income

START
The Big Picture
Property income represents income received by an individual from
property.
Property business profits
This represents rental income received by a landlord.
The assessable property income on an individual is calculated as
follows:
Rental income
Less: deductible expenses
Assessable property income

12,00
0
2,50
0
9,50
0

Income and expenses are treated according to the accruals concept and if the
individual has more than one property the income and expenses are combined
together in the calculation.
The rules concerning whether expenses are deductible broadly follow the rules
found within trading income. Examples of deductible expenses include interest
on a loan to acquire the property, insurance, etc.

Losses on property are offset against any property income in the year of the
loss. If there are any unrelieved property losses they are carried forward and
offset against future property income.
Furnished holiday lettings (FHL)
There are various requirements for a letting to be able to qualify as FHL.
Broadly speaking the furnished property must actually be let for 105 days a
year, on a commercial basis and be available to let for 210 days a year. Long
term lets must not exceed 155 days.
Property lettings which qualify as FHL have a number of taxation advantages.
These advantages include the profits being treated as relevant earnings for the
calculation of relief for personal pension contributions, normal capital
allowances being available and the availability of Capital Gains Tax roll over, gift
relief and entrepreneurs relief.
Premiums received on the grant of a short lease
A short lease is a lease for 50 years or less.
Part of the premium received will be treated as though it was property income
received by the landlord. The property income proportion of the premium
received will be calculated as follows:
The premium
Less: 2% x (length of lease 1) x premium
Example: Premium: 20,000; Length of lease: 15 years
Premium received
Less: 2% x (length of lease 1) x premium

20,000
[2% x (15-1) x 20,000]

Property business income

(5,600)
14,400

Rent a room relief

Gross annual rent of 4,250 and below received for the rent of a room in a persons main
residence is exempt.
If an individual receives such rent in excess of 4,250, the individual can either:
1) Choose to pay tax on the excess of the rent over 4,250 or,
2) Be taxed in the normal way for property income (rent minus expenses).

Chapter 10

Investment Income

Savings income - Bank and Building Society interest

Note that for the purposes of the exam; assume that a Bank and a Building
Society is the same thing.
Bank interest is received net of 20% tax by individuals. In other words,
individuals receive interest after tax of 20% has been withheld by the Bank and
paid to HMRC on behalf of the individual.
An individual must show the gross figure of any interest received in their tax
computation. The gross amount is the amount including the tax withheld by
the bank.
Example:
An individual receives bank interest of 800.
The gross amount of interest shown in the income tax computation is:
800 x 100/80 = 1,000
The tax withheld by the Bank is 200 (1,000 - 800). Any tax withheld can be
used by the taxpayer to ofset against his tax payable.
Rate of tax on savings income
Savings income is normally taxed at the same rates as other income (see Chapter 2).

However, a starting rate of tax of 10% will apply to the first 2,880 in certain
circumstances.
To ascertain whether this 10% rate applies, savings income goes on top of
other income. If the savings income is within the first 2,880 of taxable income
then the 10% rate applies to the savings income.
Dividend
income
As with savings income, dividends are received net so will need to be grossed
up. Dividends are deemed to be received net of a notional tax credit of 10%.
Dividend income
needs to be grossed up as
follows: Dividends received x
100/90
The tax credit of 10% can be set against the individuals tax
payable.
Rate of tax on dividend
income.
Dividends are treated as being the top part of an individuals income and
go on top of
other income and savings income. Dividends are then taxed
as follows:
Dividend income in the basic rate band (the first 31,865):
Dividend income in the higher rate band (31,866 to
150,000):
Dividend income in the additional rate band (above
150,000):

10%
32.5
%
37.5
%

Chapter 11

Pensions

START
The Big Picture
Pensions are in effect tax eficient retirement savings scheme.

KEY
KNOWLEDGE
Pensions
There are two main types of pension schemes:
1. Occupational pension schemes (certain employees)
2. Personal pension schemes (employees, sole traders and unemployed)
Individuals can make contributions to a pension scheme of any amount but
will only be eligible for tax relief on contributions as follows:
The higher of:
1. 3,600, and
2. 100% of the individuals relevant earnings (relevant earnings include
trading profits, employment income, but not investment income)

Method of obtaining relief occupational pension scheme

Payments to an occupational pension scheme obtain tax relief at source. The
pension payment made by the employee is deducted from the employment
income and the employer calculates PAYE on the net amount.
If an employer also makes contributions to the employees occupational scheme,
those deductions are tax deductible in calculating the employers trading
income. The contributions will not be treated as a benefit on the employee.
Method of obtaining relief personal pension scheme
Basic rate tax relief relief is given automatically as the contributions are
made net of the basic rate of income tax (20%).
Higher rate tax relief relief is given by extending the basic rate band. If an
individual pays a contribution of 8,000 (net), the contribution is grossed up
by 100/80 to obtain a gross contribution of 10,000.
The basic rate band of 31,865 is then extended by the gross contribution of
10,000 to obtain a revised basic rate band of 41,865.
The additional rate threshold is extended to 160,000 (150,000 + 10,000).

Chapter 12

National Insurance Contributions

National Insurance Contributions (NIC) are not tax as such. Instead they are
social security contributions which are payable in addition to any taxes that
may be due.
There are various classes of NIC:
Class
Payable by Class 1 primary
Employee Class 1 secondary
Employer Class 1A
Employer
Class 2

Self employed

Class 4

Self employed

Class 1 primary and secondary NIC calculated as a % on gross earnings (in

efect on cash remuneration such as salary and bonuses but not on most
benefits)

The percentages are

Class 1 Employee

1 - 7,956 per year

7,957 - 41,865 per year
Above 41,866

Nil %
12.0 %
2.0%

Class 1 Employer

1 - 7,956 per year

Above 7,957
Employment allowance

Nil %
13.8 %
2,000

Class 1A NIC is payable at a rate of 13.8% by employers on most taxable

benefits provided to an employee.
Class 2 NIC is payable at a fat rate of 2.75 per week by self-employed individuals.
Class 4 NIC is also paid by self-employed individuals. Class 4 NIC is calculated according to
the percentages below on the individuals taxable trading profits.
Class 4
1 - 7,956 per year
Nil %
7,957 - 41,865 per
9.0 %
year
2.0%
Above 41,866
NIC rates will be provided in the exam.

Chapter 13

Corporation Tax

START
The Big Picture
Corporation tax is a key area of the syllabus and will be examined.

KEY KNOWLEDGE
Corporation Tax
A period of account is the period that the company prepares accounts for. A
company can generally prepare accounts that end on any date that the
company chooses and whilst it is normally 12 months long, it can be shorter or
longer.
An accounting period is the period for which the charge to corporation tax is
made. An accounting period can never exceed 12 months. Most of the time, the
period of account and the accounting period are the same dates (i.e. when the
period of account is 12 months long)

If a company has a period of account longer than 12 months the period of

account is divided with the maximum length of an accounting period being 12
months. For example, a period of account of 18 months would have an
accounting period of 12 months followed by
an accounting period of 6 months.
Corporation tax computation year ended 31 March 2015
Trading profits
Property income
Interest income
Chargeable gains
Total profits
Less: Qualifying charitable donations (QCD)
Taxable Total Profits (TTP)

150,00
0
30,000
5,000
50,000
235,00
0
(35,000)
200,000

There are a number of similarities between how items are treated for
corporation tax purposes and how they are for income tax purposes. The
main diferences are:
1. Trading income main differences for companies
There are no private use asset adjustments. Within income tax, a selfemployed person would need to make adjustments to the deductibility for
private use. With companies, the companies themselves clearly dont use it
privately. The private use is taxed on the employees via the benefit on private
use.
Similarly for capital allowances purposes there are no private use assets for a company.
2. Property income main diferences for companies
Property income is still assessed on the accruals basis but a company is
assessed according to the companys accounting period whilst an individual is
assessed according to the tax year.
Interest on a loan acquired to purchase or improve an investment property is
treated under the loan relationship rules unlike individuals who can treat it as a
deduction from property income.

3. Interest income main diferences for companies

Bank interest received by a company is received gross with no tax
withheld (unlike individuals that receive bank interest net of 20% tax).
4. Dividends main differences for companies
Dividends received by companies, UK or overseas, are not included within TTP.
Individuals however include dividends received within their income tax
computations.
5. Chargeable gains main differences for companies
Companies include capital gains as chargeable gains within TTP and pay
corporation tax on them. Individuals pay Capital gains Tax on gains and not
income tax.
6. Charitable payments main differences for companies
Companies make Qualifying Charitable Donations (QCDs) and the amount paid
is deducted within TTP. Individuals who make Gift Aid payments to charities
extend the basic rate band.
To calculate the corporation tax liability we need to identify the profits of a company.
Augmented Profits (A) = TTP + Franked Investment Income (FII)
FII = Gross dividends received from non associated companies.
In other words, FII = (dividends received from companies in which the company has a 50%
or less shareholding) x 100/90
Augmented Profits are used to identify the tax rate that will be used. Note
that to identify the actual tax charge we apply the tax rate to TTP and not to A.
The rate of corporation tax used depends on the financial year. The financial year runs from
1 April to the following 31 March.
For financial year 2014 (i.e. the period from 1 April 2014 to 31 March 2015) the rates are:
Profits
20%

below

Profits

the
between

lower

limit

300,000

of
and

300,000
1,500,000

Marginal Relief Profits above the upper limit of 1,500,000

21%

EXAMPLE 1
Augmented Profits below the lower limit
TTP = 200,000
FII = 15,000
Augmented Profits = 215,000. This is below the 300,000 limit so the
lower rate of corporation tax of 20% applies (FY 2014).
Corporation tax = 20% x 200,000 = 40,000

EXAMPLE 2
Augmented Profits above the upper limit
TTP = 2,000,000
FII = 50,000
Augmented Profits = 2,050,000. This is above the 1,500,000 limit so the
full rate of corporation tax of 21% applies (FY 2014).
Corporation tax = 21% x 2,000,000 = 420,000

EXAMPLE 3
Augmented Profits in the marginal relief band
If Augmented Profits fall within the marginal relief band the following calculation
is needed: TTP@ full rate
Less: marginal relief
1/100 x (upper limit profits) x TTP/Profits
Example:
TTP = 1,000,000 FII = 50,000

Augmented Profits = 1,050,000. This is above the 300,000 limit and

below the
1,500,000 limit so marginal relief applies.
Corporation tax =
21% x 1,000,000 =

210,000

Less: 1/400 x (1,500,000 - 1,050,000) x (1,000,000/1,050,000)

(1,071)

Corporation tax:

208,929

Short Accounting Periods

If an accounting period is less than 12 months the upper and lower limits
are reduced proportionally.
Example: A company has a 3 month accounting period ending 31
March 2015. The upper limit is: 1,500,000 x 3/12 = 375,000
The lower limit is: 300,000 x 3/12 = 75,000
Associated companies
The upper and lower limits are divided by the number of associated companies
Example: Company A owns 100% of
company B. Associated companies = 2
Upper limit: 1,500,000/2 = 750,000
Lower limit: 300,000/2 = 150,000
Accounting Periods that straddle 31 March.
The corporation tax rates for the following years are:
Financial Year

2012

2013

2014

Small companies rate

20%

20%

20%

Full rate

24%

23%

21%

300,00
0
1,500,00
0
1/100

300,00
0
1,500,00
0
3/400

300,00
0
1,500,00
0
1/400

Lower limit
Upper limit
Marginal relief fraction

(Relevant details will be provided in the exam)

When an accounting period covers 2 separate Financial Years and the rates or
fractions are diferent then separate calculations have to be made for each
financial year. The corporation tax payable will still be based on the accounting
period but the calculation will be split into
two.

EXAMPLE
Company A
Company A has TTP of 2,000,000 for its year ended 31 December 2014. It did
not receive any FII.
The year ended 31 December 2014 is partly in FY 13 (1 January 2014 to 31 March 2014)
and partly in FY 14 (1 April 2014 to 31 December 2014)
The upper limit is 1,500,000 in both FY 13 and FY 14 so we know that the
company will be paying tax at the full rate:
FY13 2,000,000 x 3/12 x 23%:

120,000

FY14 2,000,000 x 9/12 x 21%:

345,000

Total tax payable for the y/e 31 December 2014

465,000

Trading losses (for companies)

If the corporation tax computation shows a loss,
TTP is nil. The company can utilise the loss in the
following ways:

Carry forward the loss to offset against future trading income of the same trade
Offset of current year trading loss against current year total profit (before
deduction of QCD)
If a current year loss ofset has been made and there are losses
remaining, unused losses can be carried back and ofset against total
profits (before deduction of QCD) of the previous 12 months.

Chapter 14

Chargeable Gains (For Companies)

START
The Big Picture
The taxation of capital gains on individuals is dealt with in depth at chapter 16.

KEY KNOWLEDGE
Chargeable Gains (For Companies)
The calculation of chargeable gains for companies is similar to that found for
individuals except for a number of major diferences. The main ones being:
Companies

Individuals

Pay corporation tax on chargeable

gains (i.e. the gains are part of TTP).

Pay Capital Gains tax (CGT) on the

gains and not income tax on the gains.

Companies do not receive an annual

exempt amount (AEA).

Individuals do receive an annual

exempt amount (AEA).

Companies receive indexation allowance

(IA).
The share matching rules are diferent.

Individuals do not receive indexation

allowance
The share matching rules are diferent.

Chargeable gains Pro forma (for companies)

Disposal proceeds
Less: incidental costs of disposal (e.g. advertising or auction
fees)
Net Proceeds
Less: allowable expenditure
Unindexed gain
Less: indexation allowance (see below)
Chargeable gain / (loss)

100,00
0
(2,000)
98,000
(38,000)
60,000
(15,000)
45,000

Indexation allowance gives a company some relief for the effect of inflation
during the period of ownership of the asset.
IA= the cost of the asset x the movement in the Retail Price
Index (RPI) Share matching Rules (for companies)
When shares in a company are sold, the calculation needs to identify which shares were
sold. The shares sold are matched with the following purchases:
1. Shares acquired on the same day.
2. Shares acquired in the 9 days before the sale.
3. Shares in the share pool

Chapter 15

Corporate Groups

CORPORATE
GROUPS The Big
Picture
Corporate Groups
When a group of companies exist there are a number of relationships that you
need to be aware of. The 2 main ones being:

Associated companies (>50% control)

Group loss relief (75%

control) Associated Companies

Definition of associated companies.
Two companies are associated with each other if:

One controls the other, or

Both are controlled by another company or individual

Implication of being associated:

1. The upper and lower limits used for determining the rate of
corporation tax are divided by the number of associated companies.

Example: A Ltd owns 65% of B Ltd. The number of associated companies is

2. The upper and lower limits are 750,000 (1,500,000/2) and
150,000 (300,000/2) respectively for both A Ltd and B Ltd.

2. Any dividends between associated companies are not treated as FII for the purposes
of calculating a companys augmented profits.
3. Only one annual investment allowance of 500,000 is available for
the group. Group loss relief group
Definition of group relief group.
Two companies are part of a group relief group, if:

One owns 75% of the other, or

Both are 75% subsidiaries of a 3rd company

For sub-subsidiaries to be included within a group relief group then top

company should own at least 75% of the sub-subsidiary.
Implications of being part of a group relief group:
The main implication is that any amount of the trading losses of one
company may be surrendered (given) to another group relief group
company.
In order to maximise the tax saving, the loss should be surrendered in the following order:
1. To companies that are paying tax in the marginal relief band and
who will be suffering a marginal tax rate of 21.25% in FY 2014
(23.75% in FY 2013).
2. To companies that are paying tax at the full rate of 21% in FY 2014 (23% in 2013).
3. To companies that are paying tax at the small companies rate of 20%
in FY 2014 (also 20% in FY 2013).

Chapter
16

Capital
(CGT)

Gains

Tax

START
The Big Picture
CGT is paid by individuals on chargeable disposals of chargeable assets.
Companies do not pay CGT but instead pay corporation tax on their chargeable
gains. This chapter only deals with individual issues.
Only individuals that are UK tax resident or UK ordinarily resident will pay CGT.
The assets disposed of can be located anywhere in the world.
Individuals have a CGT annual exempt amount (AEA) (2014/15: 11,000). Gains
up to this amount are not taxed.
Capital gains are taxed after taxable income (i.e. as the top
portion).

Taxable gains within the basic rate band are taxed at 18%.
Taxable gains within the additional rate band are taxed at 28%.

If an individual is neither UK tax resident nor UK ordinarily resident then they

will not be liable to CGT even if the asset disposed of is located in the UK.
The majority of capital assets are chargeable to CGT. There are however a small
number of exempt assets which are outside the scope of CGT. These include:

Principal private residence

Cars (including antique or vintage cars)
Certain chattels
National Savings Certificates
Assets held within ISAs

Pro forma for computation of capital gains for individuals

Disposal proceeds
Less: incidental costs of disposal (e.g. advertising or auction
fees)
Net Proceeds

100,000
(2,000)
98,000

Less: allowable expenditure

-

Cost of acquisition

(28,000)

Cost of enhancements

(10,000)

Capital gain / (loss)

60,000

The gains and losses for an individual are then combined and
taxed.
The calculation of CGT is as follows:
Capital gain on asset #1
Capital gain on asset #2
Capital loss on asset #3
Net gains for the tax year
Less: capital loss brought forward
Net capital gain
Less: annual exempt amount
Taxable gains

10,000
5,000
20,000
35,000
(4,900)
30,100
(11,000)
19,100

CGT @ 18% or 28%.

Note that capital losses brought forward are only used to the extent of
bringing the net gains for the current year down to the level of the annual
exemption.

Transfers between husband and wife (or civil partners)

Assets transferred between spouses are deemed to be transferred at such a
value that neither a gain nor a loss will be created.
The spouse transferring the asset is deemed to have transferred it at the original
acquisition cost. When the receiving spouse subsequently disposes of it they will
have an acquisition cost equal to the original acquisition cost.
Part disposals
When an asset is part disposed of, we need to identify the proportion of the
original cost that relates to the part disposed of. The proportion of the
original cost allocated to the disposal is based on the value of the part
disposed of and the value of the part retained.
Example:
John bought 5,000 m2 of land for 100,000 in January 2004.
He has just sold 3,000 m2 for 80,000. The market value of the remaining 2,000 m2 is
30,000.
The cost of the land sold for inclusion within the disposal calculation is:
Cost x [A / (A+B)] where A is the MV of the part sold and B is the MV of the part
retained. Therefore, the cost for the part disposed in this example is 100,000 x
[80,000 / (80,000
+ 30,000)] = 72,727
Chattels
Chattels are tangible, movable items. Examples include antiques such as vases
or paintings. There are special rules for chattels that were bought or sold for
less than 6,000.

Sold for
<6,000
Sold for
>6,000

Bought for < 6,000

Bought for > 6,000

Exempt from CGT

Sale proceeds deemed to be

6,000

Gain calculated as normal

but gain limited to a
maximum of
5/3 x (gross proceeds -

CGT computed in
normal manner

Share matching Rules (for individuals)

When an individual sells shares in a company, the calculation needs to identify
which shares were sold. The shares sold are matched with purchases in the
following order:
1. Shares acquired on the same day.
2. Shares acquired in the next 30 days after the sale.
3. Shares in the share pool
The share pool contains details of the purchase and sale of shares in a
particular company. When shares are disposed of out of the share pool, the
shares are disposed of at their average cost.
Reliefs Principal Private Residence (PPR)
PPR relief is available when an individual sells a property that has been his
main residence at some stage.
The gain that is exempt is calculated as the gain x (period of occupation /
total period of ownership).
Occupation includes both actual occupation and deemed occupation.
Deemed occupation includes:

The last 3 years of ownership (if it was actually occupied at some stage)
Up to 3 years absence for any reason (if preceded and followed by actual occupation)
Up to 4 years absence if working elsewhere in the UK (if preceded and
followed by actual occupation)
Any period of absence if working abroad (if preceded and followed
by actual occupation)

Reliefs Entrepreneurs Relief

Entrepreneurs relief reduces the CGT payable on certain qualifying
business disposals. The relief is:
The first 10m of gains on qualifying business disposals will be taxed at 10%.
Gains above 10m will be taxed at the standard rate of
18% / 28%. Qualifying business disposals include:

Businesses carried on by the individual (including partnership shares)

Shares in an individuals personal trading company (if the individual is an employee
of the
company).

Reliefs Rollover Relief

When a qualifying business asset is sold, any gain arising can be rolled into a
replacement qualifying asset. The gain is therefore deferred by reducing the
base cost of the replacement asset by the gain rolled over.
Qualifying assets include:

Land & buildings

Goodwill
Fixed plant & machinery

The replacement asset must be acquired between one year in advance of the
disposal and 3 years after the disposal.
If the replacement asset is a depreciating asset (in efect, an asset with a life
of 60 years) the gain cannot be rolled over. Instead, the gain will be deferred
until the earlier of the following:

The date the replacement asset is sold.

The date the replacement asset ceases to be used.
10 years from the date of acquisition of the replacement asset.

Chapter 17

Inheritance Tax (IHT)

START
The Big Picture
IHT is a capital tax that is charged on a transfer of value of chargeable property by a
chargeable person.
A charge to IHT occurs on:
1. The death of an individual.
2. Lifetime gifts in the 7 years preceding death.
3. Certain lifetime transfers.

KEY KNOWLEDGE
Transfer of Value, Chargeable Property & Chargeable
Person.
The amount of the transfer of value is based on the fall in value of the donors estate.
Note that this is does not have to necessarily be the open market value of the item.

For example, the market value of a 2% shareholding in a company will be lower

than the fall in value for an individual that owns 51% of the company and then
sells 2% of his shareholding. (i.e. because the transfer of the 2% has resulted in
control of the company being lost).
Chargeable property represents property that a person owns or is entitled to.
Unlike CGT, there are no exempt assets for IHT purposes.
For the purposes of the F6 exam a chargeable person will be a UK
domiciled individual who is liable for IHT on their worldwide assets.

KEY KNOWLEDGE
When is IHT
charged?
IHT is charged:
1. When a person dies.
2. On certain lifetime transfers.
On death:
The main occasion when IHT is charged is on the death of an individual. In this
situation IHT is levied on the estate at death as well as any transfers of nonexempt assets in the 7 years before death.
Lifetime transfers:
3 diferent types of transfers can be made by an individual during his lifetime:

Type of
transfer
Exempt

Potentiall
y Exempt
Transfers
(PETs)

Examples
Small gift
exemptio
n Annual
exemptio
n.
Most gifts
by
individuals
.

Treatmen
t during
Exempt
from
IHT
No IHT
payable.

Treatment if
donor lives
for
7
Exempt
from
IHT

Treatment
on death
within 7
years
Exempt
from
IHT

Exempt
from
IHT

PET
becomes
chargeable
to IHT.

Chargeabl
e Lifetime
Transfers
(CLTs)

For F6, all

gifts into
Trusts.

IHT to pay.

Exemptions (lifetime gifts only)

No further
IHT
to
pay.

Possibly
extra
IHT to
pay.

Small gift exemption ( 250 per recipient per year).

Annual exemption (3,000 per year and can be carried forward for one
year if not used).
Habitual expenditure exemption.
Marriage exemption.

Exemptions (both lifetime and on death)

Transfers between spouses.

KEY KNOWLEDGE
Calculation of IHT on Lifetime Transfers
IHT on CLTs (transfers into a Trust)

Transfer of value
X Less: exemptions
(X)
Chargeable amount

Nil Rate Band (NRB) all individuals are entitled to a NRB (2014/15: 325,000)
Chargeable amount
X Less: NRB available after deduction of gross
transfers
in the last 7 years
Amount chargeable to IHT

The rate of IHT depends who pays the tax:

(X)
X

If the recipient pays the tax - i.e. the trustees (donee). The gift is
referred to as a gross gift and the tax rate is 20%.

If the transferor pays the tax (i.e. the donor) the gift is referred to as a
net gift and the tax is 25%

KEY KNOWLEDGE
Calculation of IHT as a result of Death

On the death of an individual there will be IHT payable on:

1. Transfers within the previous 7 years (i.e. PETs that now become chargeable
and potential additional IHT on CLTs)
Broadly speaking, the tax on transfers within the previous 7 years will be taxed
at 40% and relief will be given for taper relief (see below) as well as IHT already
paid on lifetime transfers.

Taper Relief the idea behind this is that if people survive for at least 3
years after the transfer the IHT charge is reduced. The rates of taper relief
are as follows:

Time between date of

gift and date of
death.
0 to 3 years
3 to 4 years
4 to 5 years
5 to 6 years
6 to 7 years

Taper Relief % applied

to the tax due
Nil
20%
40%
60%
80%

EXAMPLE
Death after a lifetime transfer

John made a gift (PET) of 350,000 on 10 January 2011. He died on 10 April 2014. He made
no other lifetime transfers.
The death occurred in 2014/15.
PET
Less: Nil Rate Band
IHT due on

IHT due at 40% [25,000 x 40%]

Less: Taper Relief of 20% (within 3 to 4 years of
death)
IHT due after Taper Relief

350,00
0
(325,00
0)
25,000

10,000
(2,000)
8,000

2. The value of the estate at death.

Calculation of IHT at 40% on the estate at death is looked at after the
lifetime transfers have been dealt with.

Chapter 18

Value Added Tax (VAT)

START
The Big Picture
VAT is an indirect tax which is ultimately borne by the final
customer. VAT occurs when a taxable person makes a
taxable supply.
Taxable person: an individual or company that is or should be registered for VAT.
Taxable supply: sales and purchases of goods or services which are not VAT
exempt or outside the scope of VAT.
Input VAT

Taxable person

Output VAT

Input VAT: A taxable person pays input VAT on its purchases of goods or
services. Output VAT: A taxable person charges output VAT on its sales of
goods or services.
At the end of each tax period (normally a 3 month period) the input and
output VAT is netted off and an excess of output VAT is paid to HMRC whilst
an excess of input VAT is recovered from HMRC.

Standard rated supplies: 20% VAT rate. Most goods and services are standard rated.
Zero rated supplies: 0% VAT rate (but importantly still within the scope of VAT
so can claim input VAT).
Examples of zero rated include:

Childrens clothes
Books & newspapers
Non luxury food

Exempt supplies: no VAT is charged and input VAT cannot be

reclaimed. Examples of exempt supplies include:

Land
Financial services
Education

VAT Registration Requirements

Compulsory registration is required when either:
1. The taxable supplies over the previous 12 months (or since trade
commencement date) exceed the registration limit (currently 81,000).
HMRC must be notified within
30 days of the end of the month in which the registration limit is exceeded.
Registration begins from the end of the month after the month in which
the limit was exceeded.
or
2. The taxable supplies over the next 30 days alone are anticipated to
exceed the registration limit (currently 81,000). HMRC should be
informed prior to the end of the 30 days. Registration begins at the start
of the 30 days.
Voluntary registration is possible. Advantages include being able to recover
relevant input VAT as well as providing an impression of a business being
bigger than it really is. Disadvantages include the increased administrative
burden.
Pre-registration expenses
Input VAT on goods acquired for business purposes can be recovered if they are
still within inventory at date of registration. Given that they are in stock when
the business registers for VAT, output VAT will be charged when the goods are
sold so it is only fair that input VAT
can be claimed (goods acquired more than 3 years prior to registration are excluded).

Input VAT on services provided in the 6 months prior to registration can be

recovered. Tax point
The tax point is the oficial date of supply for VAT purposes.
For goods, the basic tax point is when the goods are made available to the
customer. For services, the basic tax point is when the service is
performed.
The basic tax point is amended in the following situations:
1. Before the basic tax point if an invoice is issued or payment is received
before the basic tax point the date of the invoice or the payment
becomes the tax point.
2. After the basic tax point if an invoice is issued within 14 days of the
basic tax point the date of the invoice becomes the tax point.
VAT relief for bad debts
If a taxable person makes a sale, output VAT is chargeable and will be payable
to HMRC. If the debt subsequently becomes a bad debt, the taxable person can
obtain VAT bad debt relief by in efect claiming the VAT on the bad debt as input
VAT.
In order to qualify for VAT bad debt relief the debt must be >6 months old and be written
off in the sellers accounts.

(end of ExPress Notes)