F6 Lecture Notes FA 2015

Project Mentoring
F6- Taxation (UK)
Lecture and Study Notes

FA 2015
Moiz Iqbal, ACCA

TRAINER/LECTURER
F6- Taxation (UK)
TABLE OF CONTENT
EXAM QUESTION FORMAT _________________________________________________ 5
PART A: UK TAX SYSTEM __________________________________________________ 6
CHAPTER 1: INTRODUCTION TO THE UK TAX SYSTEM____________________________________ 7
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
Use of taxation policies by government _________________________________ 7

Types of taxes in UK _______________________________________________ 7
Direct and Indirect Taxation __________________________________________ 8
Revenue and Capital Taxes __________________________________________ 8
Tax Tribunal ______________________________________________________ 8
Tax Evasion and Tax Avoidance ______________________________________ 9
Structure of the UK tax system ________________________________________ 9
Double Taxation Agreements _________________________________________ 9
General Anti-Abuse Rule (GAAR) ____________________________________ 10
The need for ethical and professional approach _________________________ 10
PART B: INCOME TAX AND NATIONAL INSURANCE CONTRIBUTION ____________ 11

CHAPTER 2: COMPUTING TAXABLE INCOME AND THE INCOME TAX LIABILITY ___________________ 12
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
Residence _______________________________________________________ 12
Computing taxable income __________________________________________ 13
Types of income __________________________________________________ 14
Personal allowance and higher personal allowance ______________________ 16
Qualifying interest or deductible interest _______________________________ 16
Tax rates ________________________________________________________ 16
Gift Aid Donation (Payments to charity under the Gift Aid System) ___________ 16
Adjusted net income _______________________________________________ 17
Child benefit income tax charge ______________________________________ 17
Transferable personal allowance _____________________________________ 17
Jointly held property _______________________________________________ 18
Tax planning for married couples/civil partners __________________________ 18
CHAPTER 3: EMPLOYMENT INCOME ________________________________________________ 19

3.1
3.2
3.3
3.4
3.5
Scope of Employment income _______________________________________ 19

Factors to distinguish between employment and self employment ___________ 19
Basis of assessment for employment income ___________________________ 19
When are earnings received? _______________________________________ 20
Allowable deductions ______________________________________________ 20
CHAPTER 4: TAXABLE AND EXEMPT BENEFITS. THE PAYE SYSTEM _________________________ 22

4.1
4.2
4.3
4.4
4.5
P11D employees and Lower paid employment (Excluded employees) ________ 22

Benefits assessable on all employees _________________________________ 22
Benefits assessable on P11D employees ______________________________ 23
Exempt benefits __________________________________________________ 26
PAYE system ____________________________________________________ 27
CHAPTER 5: PENSIONS _________________________________________________________ 30

5.1
5.2
5.3
5.4
5.5
5.6
Pension schemes _________________________________________________ 30

Contributing to a pension scheme ____________________________________ 30
Methods of giving tax relief __________________________________________ 30
Annual allowance _________________________________________________ 31
Lifetime allowance ________________________________________________ 31
Employer contributions _____________________________________________ 31
CHAPTER 6: PROPERTY INCOME __________________________________________________ 32

6.1
6.2
6.3
6.4
6.5
Furnished and unfurnished property letting _____________________________ 32

Furnished holiday lettings ___________________________________________ 33
Rent a room relief _________________________________________________ 33
Premiums on leases _______________________________________________ 34
Property losses ___________________________________________________ 34
CHAPTER 7: COMPUTING TRADING INCOME __________________________________________ 35

7.1
Badges of trade __________________________________________________ 35
Compiled by Moiz Iqbal, ACCA
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F6- Taxation (UK)
7.2
7.3
7.4
The adjustment of profits ___________________________________________ 35

Deductible and non-deductible expenditure _____________________________ 36
Cash basis of accounting for small businesses __________________________ 38
CHAPTER 8: CAPITAL ALLOWANCES ________________________________________________ 40

8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
Capital allowances ________________________________________________ 40

Plant and machinery qualifying expenditure ___________________________ 40
Types of pool ____________________________________________________ 41
Types of allowances _______________________________________________ 42
Sale of plant and machinery _________________________________________ 43
Balancing charges and allowances ___________________________________ 43
CARS __________________________________________________________ 43
Cessation of trade ________________________________________________ 44
Preparing the Capital Allowance Computation ___________________________ 44
Period of account _________________________________________________ 44
CHAPTER 9: ASSESSABLE TRADING INCOME __________________________________________ 45

9.1
9.2
9.3
Basis periods and tax years _________________________________________ 45

Rules for Basis period _____________________________________________ 45
The choice of an accounting date ____________________________________ 46
CHAPTER 10: TRADING LOSSES ___________________________________________________ 47

10.1
10.2
10.3
10.4
Trade loss reliefs _________________________________________________ 47

Business transferred to a company ___________________________________ 49
Choice between loss reliefs _________________________________________ 49
Capital allowances ________________________________________________ 49
CHAPTER 11: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS _______________________ 50

11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
Introduction ______________________________________________________ 50
Trading income ___________________________________________________ 50
Allocation of the trading profit or trading loss ____________________________ 50
A change in the profit sharing agreement ______________________________ 50
Partnership capital allowances _______________________________________ 50
Commencement and cessation ______________________________________ 50
A change in the membership of a partnership ___________________________ 51
Partnership losses ________________________________________________ 51
CHAPTER 12: NATIONAL INSURANCE CONTRIBUTIONS __________________________________ 52

12.1
12.2
12.3
Employed earners ________________________________________________ 52

Employment Allowance ____________________________________________ 52
Self-employed earners _____________________________________________ 52
PART C: CHARGEABLE GAINS FOR INDIVIDUALS ____________________________ 54

CHAPTER 13: COMPUTING CHARGEABLE GAINS _______________________________________ 55
13.1
13.2
13.3
13.4
13.5
13.6
13.7
13.8
13.9
13.10
Chargeable persons, disposals and assets _____________________________ 55

Pro Forma to Calculate Capital Gain/Loss on Individual Assets _____________ 56
Annual exemption _________________________________________________ 57
Capital losses ____________________________________________________ 57
Payment of CGT __________________________________________________ 57
Rates of CGT ____________________________________________________ 58
Transfers between spouses/civil partners ______________________________ 58
Part Disposals ___________________________________________________ 58
Destruction or loss of an asset _______________________________________ 59
Damage to an asset ______________________________________________ 59
CHAPTER 14: CHATTELS AND THE PRINCIPAL PRIVATE RESIDENCE EXEMPTION ________________ 60
14.1
14.2
14.3
14.4
14.5
Chattels ________________________________________________________ 60
Wasting chattels __________________________________________________ 60
Wasting assets ___________________________________________________ 60
Principal Private Residence Relief ____________________________________ 61
Letting relief _____________________________________________________ 61
CHAPTER 15: BUSINESS RELIEFS__________________________________________________ 62

15.1
15.2
Entrepreneurs' relief _______________________________________________ 62

The replacement of business assets (rollover relief) ______________________ 63
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15.3
Gift or holdover relief ______________________________________________ 64
CHAPTER 16: SHARES AND SECURITIES _____________________________________________ 66

16.1
16.2
16.3
16.4
16.5
16.6
16.7
Valuing quoted and unquoted shares __________________________________ 66

The matching rules for individuals ____________________________________ 66
The share pool ___________________________________________________ 66
Bonus issues ____________________________________________________ 66
Rights Issues ____________________________________________________ 67
Reorganisations and takeovers ______________________________________ 67
Gilts and qualifying corporate bonds __________________________________ 67
PART D: TAX ADMINISTRATION FOR INDIVIDUALS ___________________________ 68

CHAPTER 17: SELF ASSESSMENT AND PAYMENT OF TAX BY INDIVIDUALS _____________________ 69
17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9
17.10
17.11
17.12
17.13
Self assessment tax return __________________________________________ 69

Notification of chargeability _________________________________________ 69
Tax returns ______________________________________________________ 69
Late filing of returns _______________________________________________ 70
Records ________________________________________________________ 70
Claims __________________________________________________________ 70
Payment on account and Balancing payment ___________________________ 70
Interest and Penalty for late payment of tax _____________________________ 71
Capital gains tax __________________________________________________ 72
Enquiries into returns _____________________________________________ 72
Determinations and discovery assessments ____________________________ 72
Penalties for incorrect returns _______________________________________ 73
Appeal against an HM Revenue & Customs amendment to a return _________ 74
PART E: INHERITANCE TAX _______________________________________________ 75

CHAPTER 18: INHERITANCE TAX: SCOPE AND TRANSFERS OF VALUE ________________________ 76
18.1
18.2
18.3
18.4
18.5
18.6
18.7
18.8
18.9
18.10
Introduction ______________________________________________________ 76
Inheritance Tax ___________________________________________________ 76
Chargeable transfers and potentially exempt transfers ____________________ 76
Calculation of tax on lifetime transfers _________________________________ 77
Advantages of making lifetime transfers _______________________________ 79
Calculation of tax on death estate ____________________________________ 79
Transfer of unused nil rate band _____________________________________ 80
Exempt transfer __________________________________________________ 81
Basic inheritance tax planning _______________________________________ 81
Payment of inheritance tax _________________________________________ 82
PART F: CORPORATION TAX ______________________________________________ 83

CHAPTER 19: COMPUTING TAXABLE TOTAL PROFITS AND THE CORPORATION TAX LIABILITY _______ 84
19.1
19.2
19.3
19.4
19.5
19.6
19.7
19.8
19.9
19.10
19.11
19.12
19.13
19.14
19.15
Companies ______________________________________________________ 84
Financial years (FY) _______________________________________________ 84
Period of account _________________________________________________ 84
Accounting period _________________________________________________ 84
Taxable total profits _______________________________________________ 85
Tax Adjusted Trading Profit _________________________________________ 85
Property Income __________________________________________________ 86
Interest income ___________________________________________________ 86
Qualifying Charitable Donations ______________________________________ 87
Dividends _______________________________________________________ 87
Long periods of account ___________________________________________ 87
Rate of corporation tax ____________________________________________ 87
Accounting period in more than one financial year _______________________ 87
Short chargeable accounting periods _________________________________ 88
Long periods of account ___________________________________________ 88
CHAPTER 20: CHARGEABLE GAINS FOR COMPANIES ____________________________________ 89

20.1
General _________________________________________________________ 89
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20.2
20.3
20.4
20.5
20.6
20.7
20.8
20.9
20.10
20.11
Calculation of gains and losses for companies __________________________ 89

The indexation allowance ___________________________________________ 89
Gains and losses _________________________________________________ 90
Share matching rules for companies __________________________________ 90
FA 1985 pool ____________________________________________________ 90
Bonus issues ____________________________________________________ 91
Right issues _____________________________________________________ 91
Reorganisations and takeovers ______________________________________ 91
Relief for replacement of business assets (rollover relief) _________________ 91
Depreciating assets _______________________________________________ 91
CHAPTER 21: LOSSES __________________________________________________________ 92

21.1
21.2
21.3
Trading losses ___________________________________________________ 92

Non-trading losses ________________________________________________ 92
Choice of Loss Relief:______________________________________________ 92
CHAPTER 22: GROUPS _________________________________________________________ 93

22.1
22.2
Types of group ___________________________________________________ 93

Summary _______________________________________________________ 95
CHAPTER 23: SELF ASSESSMENT AND PAYMENT OF TAX BY COMPANIES _____________________ 96

23.1
23.2
23.3
23.4
23.5
23.6
23.7
23.8
23.9
Notification of chargeability _________________________________________ 96

Corporation tax return______________________________________________ 96
Claims __________________________________________________________ 96
Records ________________________________________________________ 97
Enquiries ________________________________________________________ 97
Determinations and Discovery assessments ____________________________ 97
Appeals and Disputes______________________________________________ 97
Penalties for incorrect returns _______________________________________ 98
Payment of tax ___________________________________________________ 98
PART G: VALUE ADDED TAX _____________________________________________ 100

CHAPTER 24: AN INTRODUCTION TO VAT __________________________________________ 101
24.1
24.2
24.3
24.4
24.5
24.6
24.7
24.8
24.9
24.10
24.11
24.12
24.13
24.14
Introduction _____________________________________________________ 101

Taxable Supply __________________________________________________ 101
Basic Computation _______________________________________________ 102
Taxable persons _________________________________________________ 102
VAT registration _________________________________________________ 102
Deregistration ___________________________________________________ 103
VAT Returns ____________________________________________________ 104
Substantial traders _______________________________________________ 104
VAT refunds ____________________________________________________ 104
Tax point ______________________________________________________ 105
Discounts ______________________________________________________ 105
Output VAT ____________________________________________________ 105
Recovery of input VAT ___________________________________________ 106
Irrecoverable input VAT ___________________________________________ 107
CHAPTER 25: FURTHER ASPECTS OF VAT __________________________________________ 108

25.1
25.2
25.3
25.4
25.5
25.6
25.7
Normal VAT invoices _____________________________________________ 108

Records _______________________________________________________ 108
Default surcharge for late payment of VAT ____________________________ 109
Penalties and Interest _____________________________________________ 109
Errors in a VAT return_____________________________________________ 110
Imports, exports, acquisitions and despatches _________________________ 110
Special schemes ________________________________________________ 111
EXAMINABLE TECHNIQUE _______________________________________________ 113

AIM OF PAPER F6 ____________________________________________________________ 113
SUMMARY __________________________________________________________________ 114
KEY FACTS ____________________________________________________________ 116
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F6- Taxation (UK)
Exam Question Format

The syllabus is assessed by a three-hour 15 minute paper-based examination.
The paper will be predominantly computational and all questions are compulsory.
This paper is divided into three sections:
Section A ALL 15 questions (MCQs) are compulsory and MUST be attempted
The questions in Section A will be for 2 marks each.
Section B ALL 15 questions are compulsory and MUST be attempted
It will comprise three 10 mark questions which comprise five multiple choice questions of 2 marks each.
Section C ALL THREE questions are compulsory and MUST be attempted
It will comprise one 10 mark question and two 15 mark questions. The two 15 mark questions will focus
on income tax (syllabus area B) and corporation tax (syllabus area E).
All other questions can cover any areas of the syllabus.
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F6- Taxation (UK)
PART A: UK TAX SYSTEM
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F6- Taxation (UK)
Chapter 1: Introduction to the UK Tax System

1.1
Use of taxation policies by government
Economic factors
Government uses taxation policies to influence economic factors such as employment levels, inflation,
imports/exports etc. and to encourage and discourage certain types of activity to achieve their objectives.
Government encourages
Savings (through tax free Individual Savings Accounts and relief on pension contributions)
Donations and Charities (through gift aid scheme)
Government discourages
Smoking
Alcohol
Motoring
Environmental pollution
Social factors
Government uses taxation policies to redistribute income and wealth.
Environmental factors
Government uses taxation policies to protect the environment
1.2
Landfill tax
Types of taxes in UK
The type of taxes are given below

1) Income Tax- Payable by Individuals and Partnerships
2) National Insurance Contributions- Payable by employers, employees and self-employed.
3) Capital Gains Tax- Payable by individuals, partnerships and Companies (in the form of
corporation tax)
4) Inheritance Tax- Payable by individuals on lifetime and death transfers of assets.
5) Corporation Tax- Payable by companies
6) Value Added Tax (VAT)- Businesses (both incorporated and unincorporated). Payable by the final
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F6- Taxation (UK)
consumer on purchases of most goods and services.
1.3
Direct and Indirect Taxation
Direct taxation
Direct taxes are those paid directly by the taxpayer to the government. Examples are:
Income tax
Corporation tax
Capital gains tax
Inheritance tax
Indirect taxation
Indirect taxes are those paid by taxpayer to an intermediary who passes them on to the government.
1.4
VAT
Revenue and Capital Taxes
Revenue taxes
Revenue taxes are those charged on income. Examples
Income tax
NIC
Corporation tax
Capital taxes
Capital taxes are those charged on capital gains. Examples
1.5
Capital gain tax
Inheritance tax
Tax Tribunal
Tax appeals are heard by Tax Tribunal which is of two tiers

a) First Tier Tribunal- Deals with non-complex cases
b) Upper Tribunal- Deals with complex cases
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F6- Taxation (UK)
1.6
Tax Evasion and Tax Avoidance
Tax evasion- Reducing tax burden illegally by deliberately misleading HMRC

Tax avoidance- Reducing tax burden by legal ways and methods It is the process by which criminals
attempt to conceal the true origin and ownership of the proceeds of their criminal activity, allowing them
to maintain control over the proceeds and ultimately providing a legitimate cover for their sources of
income.
1.7
Structure of the UK tax system
HM Revenue and Customs (HMRC)

The treasury formally imposes and collects taxation. The management of the treasury is the responsibility
of the Chancellor of the Exchequer. The administration function for the collection of tax is undertaken by
HMRC.
Commissioners
At the head of HMRC are the commissioners whose duties are:
(a) to implement statue law
(b) oversee the process of UK tax administration
The main body of HMRC is divided into District offices and accounting and payment offices
District Offices
The Commissioner appoints Officers of HMRC to implement the day to day work of HMRC
Accounts and payment offices
These concentrate on the collection and payment of tax.
1.8
Double Taxation Agreements
Double Taxation agreements between two countries are primarily designed lo protect against the risk of
double taxation where the same income or gains are taxable in two countries. For example an individual
may have a source of income which is taxed in the country in which the income arose but is also taxed
in the individual's country of residence. The agreement could provide that the income is only to be taxed
in one country or that credit is to be given for lax arising in one country against the lax charge in the other
country.
Other countries
The UK has entered into Double Tax Treaties with various countries. These contain rules which prevent
income and gains being taxed twice, but may include a non-discrimination provision preventing a nonresident individual from being treated less favourably than a resident individual. Where there is no double
tax treaty the UK system will allow relief for double tax.
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F6- Taxation (UK)
The European Union

The aim of the EU is to remove barriers and distortions due to different economic and political policies
imposed in different member states.
Although EU members do not have to align their tax systems, members can agree to jointly enact specific
laws known as Directives. The most important example is VAT, as EU members have aligned their
policies according to EU legislation but the members do not need to align the rate.
Cases have been brought before the European Court of Justice regarding the discrimination of nonresidents, some of which have led to a change in UK tax law.
1.9
General Anti-Abuse Rule (GAAR)
HMRC can counteract tax advantages from abusive tax arrangements
Tax arrangements involve obtaining a tax advantage as (one of) their main purpose(s)
Arrangements are abusive if they cannot be regarded as a reasonable course of action and result
in eg significantly less income, profits or gains being taxable
Tax advantage includes relief or repayment of tax
HMRC may counteract tax advantages arising by eg increasing the taxpayer's tax liability
1.10
The need for ethical and professional approach
i)
If an accountant learns of a material error or omission in a client's lax return or of a failure to file a
required lax return, the accountant has a responsibility to advise the client of the error, omission or
failure and recommend that disclosure be made to HMRC.
ii)
If the client, after having had a reasonable time to reflect, does not correct the error then the
accountant should inform the client in writing that it is not possible for accountant to act for that
client.
iii)
The accountant should also notify HMRC that the accountant no longer acts for the clienl bul should
not provide details of the reason for ceasing lo act.
iv)
An accountant whose client refuses lo make disclosure to HMRC, after having had notice of the
error, omission or failure and a reasonable time to reflect, must also report the clients refusal and
the facts surrounding it to the Money Laundering Reporting 0llicer within the accountancy firm or to
the appropriate authority (National Crime Agency) if the accountant is a sole practitioner.
v)
Accountants who suspect or are aware of lax evasion activities by a client may themselves commit
an offence if they do not report their suspicions. The accountant must not disclose to the client, or
anyone else that such a report has been made if the accountant knows or suspects that to do so
would be likely to prejudice any investigation which might be conducted following the report as this
might constitute the criminal offence of 'tipping off
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F6- Taxation (UK)
PART B: INCOME TAX AND

NATIONAL INSURANCE
CONTRIBUTION
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Chapter 2: Computing taxable income and the income tax liability

2.1
Residence
Test 1st: Automatically not UK resident
In UK < 16 days in tax year
In UK < 46 days in tax year, not resident in any of three previous tax years
Works full time overseas in tax year, not in UK > 90 days in tax year
Test 2nd: Automatically UK resident
In UK > 183 days in tax year
Only home in UK
Works full time in UK in tax year
Test 3rd: UK ties
Close family (spouse or civil partner/minor child) resident in UK
Home available in UK, used in tax year
Substantive work in UK
In UK > 90 days in either of two previous tax years
Spends more time in UK than anywhere else in tax year (if previously resident only)
Number of ties required to be UK resident depends on number of days spent in UK in tax year
Days in UK
Previously Resident (R)
Not Previously Resident (R)
<16
Automatically NOT R
Automatically NOT R
16 45
R if 4 UK ties
Automatically NOT R
46 90
R if 3 UK ties
R if 4 UK ties
91 120
R if 2 UK ties
R if 3 UK ties
121 182
R if 1 UK tie
R if 2 UK ties
>183
Automatically R
Automatically R
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Illustration 1
Sebastian was not previously resident in the UK but spent 35 days in the UK during 2015/16. Sebastian
is automatically not resident, as in UK for less than 46 days and not previously resident.
Illustration 2
Fernando was not previously resident in UK but bought a holiday home in the UK on 1 May, 2015 and
lived in it for 140 days in the 2015/16 tax year. The remainder of the year he lived in his home in Spain.
Fernando was in the UK too long (>45 days) to be automatically treated as not resident, but not long
enough to be treated as automatically resident (<183 days) nor did he have his only home in the UK.
Using the table therefore as he has been in UK for between 121 days and 182 days and has only one tie
with the UK (made use of UK house), so as he was not previously UK resident he is therefore not UK
resident in 2015/16.
Illustration 3
Lewis was in the UK for 80 days in 2015/16 when he lived in the only home that he owns. Lewis has
been in the UK too long to be treated as automatically not resident, irrespective of his previous residence.
He will, however be treated as automatically UK resident as his only home is in the UK.
Illustration 4
Jensen has always been UK resident spending about 10 months of the year in the UK, but on 1 May,
2015 he purchased an apartment overseas where he lived for most of the tax year returning to the UK
for a further 50 days in 2015/16 when he stayed at the family home with his wife and children.
Jensen has spent more than 15 days in UK in 2015/16 so will not be automatically not resident. He will
also not be automatically resident in the UK as he has not spent 183 days in the UK nor does he have
his only home in the UK.
As he was in the UK for between 46 and 90 days he will remain resident for 2015/16 as he has 3 UK ties:
- Spouse/children in UK
- A house in the UK that he uses
- In the UK for more than 90 days in previous 2 years
Tax consequences
Generally, a UK resident is liable to UK income tax on his UK and overseas income whereas a non-UK
resident is liable to UK income tax only on income arising in the UK.
2.2
Computing taxable income
Tax year
The tax year, or fiscal year, or year of assessment runs from 6 April to 5 April. For example, the tax
year 2015/16 runs from 6 April 2015 to 5 April 2016.
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Income tax computation

Pro-forma
Non-savings
income
Savings
income
Dividends
Total
Trading Profit
Less Trading Loss relief brought

forward
(X)
(X)
Employment Income
Property Income
Dividends from UK companies

100/90
Building society interest 100/80
Bank deposit interest 100/80
Other interest gross
TOTAL INCOME
Less
2.3
Qualifying interest
(X)
(X)
Other Trading Loss reliefs
(X)
(X)
NET INCOME
Less: Personal Allowance
(X)
TAXABLE INCOME
X
(X)
Types of income
Savings income
Savings income is interest income and is received either gross or net of deduction of basic rate tax at
source
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Income received net of 20% tax
Building society interest
Bank deposit interest
Interest from unlisted companys loan stock
Net interest income must be gross up (Interest received X 100/80)

Income received gross
National Savings & Investment (NSI) Bank Interest
Interest on government securities (gilts)
Interest from listed companys loan stock
Dividend income
Dividends on UK shares are received net of 10% tax credit. Net dividend income must be gross up
(Dividend received X 100/90).
10% Tax deducted at source on dividend can reduce income tax liability up-to nil it cannot create income
tax repayable.
Non-savings income
Trading income
Employment income
Property income
Exempt income
The following incomes are exempt from income tax
Interest or bonuses on National Savings & Investment Certificates
New Individual Savings Account (NISA)- For the tax year 2015-16, a person can invest up to
15,240 in NISA. The 15,240 limit is completely flexible, so a person can invest 15,240 in a
cash NISA, or they can invest 15,240 in a stocks and shares NISA, or in any combination of the
two such as 10,000 in a cash NISA and 5,240 in a stocks and shares NISA.
Gaming, lottery and premium bond winnings
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2.4
Personal allowance and higher personal allowance
Individual born after 5 April 1938

10,600 for 2015/16
Restrict if adjusted net income > 100,000 by 1 for each 2 excess (nil if > 121,200).
2.5
Qualifying interest or deductible interest
Interest on loan is entitled for relief for the following purposes

a. Loan to invest in a partnership
b. Loan to buy plant and machinery for employment use
c. Loan to buy plant and machinery for partnership use
d. Loan to buy interest in employee-controlled company
e. Loan to invest in a co-operative
2.6
Tax rates
The following tax rates and allowances will be reproduced in the examination paper for Paper F6. In
addition, other specific information necessary for candidates to answer individual questions will be
given as part of the question. For example, in the case of corporate chargeable gains the relevant
retail prices index for particular dates will be given.
Income Tax
Normal Dividend
rates
rates
Basic rate
1 31,785
20%
10%
Higher rate
31,786 150,000
40%
32.5%
Additional rate
150,001 and over
45%
37.5%
A starting rate of 0% applies to savings income where it falls within the first
5,000 of taxable income
2.7
Gift Aid Donation (Payments to charity under the Gift Aid System)
Payments to charity under gift aid are treated as being paid net of the basic rate of tax (20%). For a basic
rate taxpayer tax relief at the basic rate is automatically obtained as payments are made to the charity
net of basic rate relief being given at source i.e. to give a charity 100 the taxpayer need only make a gift
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F6- Taxation (UK)
aid payment of 80. The charity will then be able to claim back from HMRC the basic rate tax of 20
thereon collected by HMRC from the taxpayers income. Therefore the donation is not deducted in the
calculation of Taxable Income.
Gross up donation amount (Donation amount X 100/80) and add with basic, higher and additional rate
band.
N.B. The same treatment as gift aid payments will also apply to payments made by individuals into their
Personal Pension Scheme. (discussed later)
2.8
Adjusted net income
Adjusted net income= Net income gross amount of personal pension contribution gift aid donations.
2.9
Child benefit income tax charge
An income tax charge has been introduced where a persons adjusted net income exceeds 50,000 and
they receive child benefit. Child benefit is a tax-free payment that can be claimed in respect of children,
and the tax charge in effect removes the benefit for those on higher incomes.
Where adjusted net income is between 50,000 and 60,000, the income tax charge is 1% of the amount
of child benefit received for every 100 of income over 50,000. For people whose adjusted net income
exceeds 60,000, the amount of the income tax charge is equivalent to the amount of child benefit
received.
Illustration 1
Catherine received child benefit of 1,056 in 2015/16 and has ANI for the year of 54,000.
As Catherines ANI is between 50,000 and 60,000 the child benefit income tax charge is 422 (1,056
x 40% (54,000 50,000 / 100))
Illustration 2
Victoria receives child benefit of 3,147 in respect of her 4 children and has ANI of 77,000.
As Victorias ANI exceeds 60,000 the child benefit income tax charge is 3,147, being the full amount
of the child benefit received.
2.10
Transferable personal allowance
An individual can elect to transfer 1,060 of their personal allowance to their spouse/civil partners if
neither the spouse/civil partner making the transfer nor the spouse/civil partner receiving the transfer can
be a higher rate or additional rate taxpayer.
The spouse/civil partner receiving the transfer does have increased personal allowance. Instead they are
entitled to a tax reducer of 1,060*20%= 212. The tax reduces the individuals tax liability and in case
of less than 212 liability, it is reduced to nil.
The election for transfer is made online by the person making the transfer.
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2.11
Jointly held property
When spouses/civil partners own income generating assets jointly, it is assumed that they are entitled to
equal shares of the income and it is split accordingly on a 50:50 basis between them. However they may
make a joint election to HMRC to split the income according to their actual ownership shares.
2.12
Tax planning for married couples/civil partners
Where one member of a married couple/civil partnership is a basic rate taxpayer and the other a higher
rate taxpayer, income tax liabilities can be minimised by transferring income producing assets from the
higher rate taxpayer to the other spouse or civil partner.
If assets are owned jointly but in unequal proportions, then:
a. If the taxpayer who pays tax at a higher rate of tax than the other spouse/civil partner owns more
than 50% of the asset, no declaration of beneficial interest should be made so that the income is
shared equally, or
b. If the taxpayer who pays tax at a higher rate of tax than the other spouse/civil partner owns less
than 50% of the asset, a declaration of beneficial interest should be made so that the other spouse
or civil partner is taxed on their full amount of income at the lower tax rate.
Thus in the above example a declaration is beneficial, for example, if Janet is a higher rate taxpayer
whilst John is a basic rate taxpayer or if Janet is an additional rate taxpayer and John is either a higher
rate or basic rate taxpayer.
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Chapter 3: Employment income

3.1
Scope of Employment income
An employee is taxable under Employment Income rules.

A self employed person is taxable under Trading Income rules.
Employment income
Income arising from employment under a contract of service
Self employment income
Income arising from carrying out work for customers under a contract for services
3.2
3.3
Factors to distinguish between employment and self employment
Authority
Financial risk
Hours worked
Payment
Responsibility
Obligation to accept work that is offered
Flexibility
Substitute an employed person cannot provide a substitute worker to do the job.
Equipment where a person has to provide his own equipment he is more likely to be self
employed.
Legal rights If a person has the legal right to receive regular remuneration, holiday pay,
redundancy pay or benefits, this can indicate employment rather than self employment.
Basis of assessment for employment income
Employment income
Employees/directors are taxed on income from the employment which is net taxable earnings.
Net taxable earnings = Total taxable earnings Total allowable deductions
Taxable earnings
Taxable earnings from an employment in a tax year are the general earnings received in that tax year.
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General earnings
General earnings are an employee's earnings plus the 'cash equivalent' of any taxable non-monetary
benefits i.e. it includes 2 things:
Earnings
Benefits
'Earnings' means any salary, wage or fee, any gratuity or other profit or incidental benefit obtained by
the employee if it is money or money's worth (something of direct monetary value or convertible into
direct monetary value) or anything else which constitutes a reward of the employment.
3.4
When are earnings received?
General earnings consisting of money

General earnings consisting of money are treated as being received at the earlier of:
1) The date when the payment is made.
2) The date when entitlement to the payment of earnings arises.
If the employee is a director then general earning consisting of money are treated as being received by
the director on the earliest of:
1) The date when the payment is made.
2) The date when entitlement to the payment of earnings arises.
3) The date when the amount is credited in the companys accounts.
4) The end of the period of account if the earnings relate to that period, and hasbeen determined
before the end of the period.
5) The date when the amount is determined if the period of account it relates tohas already ended.
General earnings consisting of taxable benefits
General earnings consisting taxable benefits are generally treated as received when they are provided
to the employee.
Pension income
The receipts basis does not apply to pension income. Pension income is taxed on the amount accruing
in the tax year, whether or not it has actually been received in that year.
3.5
i)
Allowable deductions
Qualifying travel expenses
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Normal/Permanent workplace
Tax relief is not available for cost relating to travel to normal workplace or permanent workplace (like
home to office).
Temporay workplace
Tax relief is available for travel, accommodation and subsistence expenses incurred by an employee
who is working at a temporary workplace on a secondment expected to last up to 24 months. If a
secondment is initially expected not to exceed 24 months, but it is extended, relief ceases to be due from
the date the employee becomes aware of the change.
Site based employees
Site based employees (eg construction workers, management consultants etc) who do not have a
permanent workplace, are entitled to relief for the costs of all journeys made from home to wherever they
are working. This is because these employees do not have an ordinary commuting journey or any normal
commuting costs.
ii)
Other expenses- Relief is given for other expenses incurred wholly, exclusively and necessarily in
the performance of the duties of the employment.
iii)
Contributions to registered occupational pension schemes
iv)
Subscription to professional bodies like ACCA
v)
Payment for liabilities and insurance relating to employment- premiums to cover directors' and
employees' liabilities (and payments to meet those liabilities).
For insurance premiums to qualify, the insurance policy:
a. Must cover only liabilities relating to employment, vicarious liability in respect of liabilities of
another person's employment, related costs and payments to the employee's own
employees in respect of their employment liabilities relating to employment and related costs
b. Must not last for more than two years (although it may be renewed for up to two years at a
time), and the insured person must not be required to renew it
vi)
Charitable donations under payroll deduction scheme
vii)
Mileage allowances
Cars and vans
The allowance for 2014/15 is 45p per mile on the first 10,000 miles in the tax year with each
additional mile over 10,000 miles at 25p per mile.
Motor cycle and pedal cycle
The authorised mileage allowance for employees using their own motor cycle is 24p per mile. For
employees using their own pedal cycle it is 20p per mile.
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If employers pay less than the statutory approved mileage allowance, employees can claim tax
relief up to that level
Chapter 4: Taxable and exempt benefits. The PAYE system

4.1
P11D employees and Lower paid employment (Excluded employees)
P11D employee
Employees earning 8,500 a year or more, and most directors (irrespective of earnings), are P11D
employees.
Lower paid employment
A lower paid employment is one where earnings for the tax year are less than 8,500
Excluded employee
An excluded employee is an employee in lower paid employment who is either not a director of a company
or is a director but has no material interest in the company ('material' means control of more than 5% of
the ordinary share capital) and either:
(a) He is full time working director, or
(b) The company is non-profit-making or is established for charitable purposes only.
Benefits must be included when calculating the figure of 8,500, and these are calculated as if they were
received by a P11D employee.
4.2
Benefits assessable on all employees

a) Vouchers exchangeable for goods and services unless specifically exempt.
b) Living accommodation
Living Accommodation
i.
ii.
There is no taxable benefit if the accommodation is job-related
where it is necessary for the proper performance of the employees duties (e.g. a caretaker); or
for better performance of the employees duties and (for that type of employment) it is customary
for employers to provide living accommodation (e.g. hotel-worker); or
where there is a special threat to the employees security and he resides in the accommodation
as part of special security arrangements.
If the accommodation is not job related then the benefit is the higher of
the accommodations annual value, and
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iii.
iv.
the rent actually paid for it by the employer (if the property is rented)
The benefit is reduced by any rent or contribution paid by the employee
There is an additional benefit where the cost of providing the accommodation is greater than
75,000;
(cost of providing accommodation 75,000) the official rate of interest)
The cost of providing the accommodation is the purchase price of the property plus expenditure
on improvements incurred before the start of the tax year.
If the employer bought the accommodation more than six years before first providing it to the
employee, the propertys market value when first occupied by the employee is used in the
calculation instead of purchase price.
4.3
Benefits assessable on P11D employees
a)
Expenses related to living accommodation
Living expenses connected with accommodation (ex- gas bills, lighting and heating) are taxable on the
employee if they are paid by the employer.
Council tax and water or sewage charges paid by the employer are taxable in full as a benefit unless the
accommodation is 'job-related'.
If furniture is provided then the provision for furniture (Annual value) should be 20% of the cost.
However, if the accommodation is job-related, the maximum amount taxable is 10% of net earnings. For
this purpose, net earnings comprises the total employment income, net of expenses and pension
contributions, but excluding these related expenses.
b)
Private incidental expenses
When an individual has to spend one or more nights away from home, his employer may reimburse
expenses on items incidental to his absence (for example laundry and private telephone calls). Such
incidental expenses are exempt if the total is no more than 5 for each night spent wholly in the UK and
10 for each night spent in overseas. If this limit is exceeded, all of the expenses are taxable, not just the
excess. The expenses include any VAT.
c)
Motor Cars, Vans and heavier commercial vehicles
Motor cars
Car Benefit
i.
If there is no private use of the car there is no taxable benefit
ii.
The benefit is a percentage of the cars list price
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iii.
the list price includes the list price of any accessories fitted to the motor car and costing at
least 100 each, excluding mobile telephones and equipment needed by a disabled
employee..
the list price is reduced by any capital contribution from the employee subject to a maximum
of 5,000
Annual taxable benefit for the private use of a car is (price of car capital contributions) %.
Cars emitting 50g/km or less = 5%
Cars emitting between 51g/km-75g/km = 9%
Cars emitting CO2 between 7694g/km = 13%.
Cars emitting 95g/km = 14%. Percentage increases by 1% for each 5g/km (rounded down)
up to 37% (maximum)
Percentage increased by 3% for diesel engined cars (not above max 35%).
Benefit scaled down on a time basis, if car not available all year. Benefit then reduced by any
contribution by employee for private use.
Fuel benefit
i.
There will be no fuel benefit if there is no private use of fuel provided by the employer.
ii.
The amount of fuel benefit is computed on a base figure of 22,100 multiplied by the percentage
used for calculating the car benefit.
iii.
The fuel scale charge is reduced proportionately where private use fuel is withdrawn (and not
reintroduced during the year) or the car is only given part way through the tax year.
iv.
No reduction for partial reimbursement by the employee to contribute towards the cost of petrol
for private use. If he pays for all fuel used for private motoring the charge is cancelled.
Pool cars
No taxable benefit will arise if car provided is a pool car. Car is considered pool car if:
i.
It is used by more than one employee.
ii.
Any private use is incidental.
iii.
It is not normally kept overnight at or near the residence of an employee.
Ancillary benefits
There are many ancillary benefits associated with the provision of cars, such as insurance, repairs,
vehicle licences and a parking space at or near work. No extra taxable benefit arises as a result of these.
But in case of the cost of providing a driver, it is taxable benefit.
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Vans
i.
Where an employee uses an employers van for journeys between home and work and other
private use is insignificant there is no benefit.
ii.
Where private use is not insignificant the tax charge is 3,150 p.a.
iii.
An additional charge is made for fuel provided for unrestricted private use equal to 594p.a.
iv.
Both benefits are time apportioned if the van is unavailable to the employee for 30 days or more
during any part of the tax year.
Commercial vehicle
If a commercial vehicle of normal maximum laden weight over 3,500 kg is made available for an
employee's private use, but the employee's use of the vehicle is not wholly or mainly private, no taxable
benefit arises.
d)
Beneficial loans
i.
A beneficial loan is one made to an employee below the official rate of interest (assumed to be
3% for 2015/16)
ii.
The benefit is the interest on the loan at the official rate, less any interest actually paid by the
employee.
iii.
The benefit is calculated using the average method or the accurate method
Average method
This uses the loan outstanding at the beginning and the end of the tax year. If the loan is taken
out or paid back during the tax year, that date is used instead of the beginning or end the tax
year.
Accurate method
This calculates benefit day by day on the balance actually outstanding. Either the taxpayer or
HMRC can decide to use the accurate method.
The de minimis test

Non-qualifying loans
The interest benefit is not taxable if the total of all non-qualifying loans to the employee did not exceed
10,000 at any time in the tax year.
When the 10,000 threshold is exceeded, a benefit arises on interest on the whole loan, not just on the
excess of the loan over 10,000.
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Qualifying loans
If the whole of the interest payable on a qualifying loan is eligible for tax relief as deductible interest, then
no taxable benefit arises. If the interest is only partly eligible for tax relief, then the employee is treated
as receiving earnings because the actual rate of interest is below the official rate. He is also treated as
paying interest equal to those earnings. This deemed interest paid may qualify as a business expense
or as deductible interest in addition to any interest actually paid.
e)
i.
Private use of asset

In general, if an asset is made available for private use, the annual taxable benefit is 20% of the
market value when the asset was first provided, less any employee contribution.
ii.
Bicycles provided for journeys to work, as well as being available for private use, are exempt
from the private use benefit rules.
If the asset is subsequently given or sold to the employee, the taxable benefit is the higher of:
Original MV less amounts already taxed less price paid
Market value at date of gift/sell less price paid.
There is an exception to this rule for bicycles which have previously been provided as exempt
benefits. The taxable benefit on acquisition is restricted to current market value, minus the price
paid by the employee.
f)
Scholarships
If scholarships are given to members of an employee's family, the employee is taxable on the cost
unless the scholarship fund's or scheme's payments by reason of people's employments are not more
than 25% of its total payments.
4.4
Exempt benefits
P arking provided by the employer.

E ye care testing paid for by the employer.
R elocation expenses paid by employer up to 8,000.
S taff canteen provided by employer.
O ccupational and personal pension contributions from the employer.
N ursery and childcare payments and vouchers up to 55 per week paid to all staff.
A ccommodation which is job related.
A uthorised mileage allowance paid by employer when employee uses own car, motor bike or bicycle for
their employers business.
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L oan of bicycles and safety equipment to use mainly for travel to and from work and for business
purposes.
I nterest saved on a cheap loan provided the loan is less than or equal to 5,000.
I ndemnity insurance premiums paid by employer.
P rovision of a mobile telephone for private use (one per employee)
O vernight personal expenses paid by employer such as telephone calls home, newspapers etc. Up to
5 per night for overnight says in UK and up to 10 per night for overnight says overseas.
D eath in service benefit.
S taff training courses, staff christmas parties (up to 150 per person per year) and staff counselling.
S ubscriptions paid by an employer to professional bodies
Additional:
a)
Contributions by an employer to an approved pension scheme.
b)
Sport and recreational facilities available generally for the staff.
c)
The loss of the job and to help in finding other work, i.e retraining courses up to 2 years
d)
Contributions towards additional household costs (such as light and heat) incurred by an employee
who works at home up to 4 per week or if higher evidence must be provided by the employee to
justify the expense.
e)
Long service awards up to 50 per each year of service (maximum 20 years)
f)
Use of Employer bicycles if used by employees to and from work.
g)
Childcare voucher up to 55 per week for basic rate taxpayers, 28 per week for higher rate and 25
per week for additional rate taxpayers.
h)
Medical treatment- An annual 500 exemption per employee has been introduced where an
employer pays for medical treatment. The exemption applies where medical treatment is provided
to an employee to assist them to return to work after a period of absence due to ill-health or injury.
4.5
PAYE system
Pay As You Earn

The purpose of the PAYE system is to deduct the correct amount of income tax and National Insurance
Contributions over the year.
Employers duties
The employer has a duty to:
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(a) deduct income tax from the pay of his employees

(b) calculate the amount of NIC that should be deducted
(c) keep a record of each employees pay and deduction
(d) Employers must send income tax and NIC information to HMRC electronically every time employees
are paid (weekly or monthly) and make their monthly PAYE payments electronically on the 22nd of
the month under the Real Time Information reporting system.
(e) For the tax year 2014/15 there are no penalties if submissions made during the tax year are made
late.
(f) send appropriate returns in addition to the to the employee when required.
Application of PAYE
The following count as pay:
(a) salaries, wages, overtime, bonuses
(b) pensions
PAYE codes
(a) An employees PAYE code indicates the amount of tax free pay he is entitled to.
(b) The PAYE code will include the employees personal allowance and any allowable deductions and
be restricted by various taxable amounts.
(c) To obtain the code number the last figure is removed and replaced with a letter
L- Code for PA
K- Increases taxable pay instead of reducing it (benefits exceed allowances) with no tax free
allowances
BR- tax will be deducted at the basic rate
NT- no tax is to be deducted
Changes to coding
An employer must use the last code notified to him for existing employees until new written instructions
are sent from HMRC.
Year end returns
The employer must send to HMRC the following:
By 6 July:
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P11D- Benefits for directors and employees earning in excess of 8,500 for the year
P9D- Benefits of other employees.
The employer must give to the employee:
By 31 May:
P60- Permanent record of pay and tax deducted as well as NICs made in the tax year
By 6 July:
P11D- Benefits for directors and employees earning in excess of 8,500 for the year
P9D- Benefits of other employees.
Employees leaving or joining
(a)
Employees leaving
The employer should complete form P45 and send part 1 to Tax Office and give parts 2, 3 and 4 to the
employee.
(b)
Employees joining
(i) When an employee joins and has a P45 the employer can operate PAYE
(ii) The employer uses the tax code on the P45 if it relates to the current year; otherwise he uses
the emergency code.
(iii) If the employee does not have a P45, the new employee must complete form P46.
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Chapter 5: Pensions
5.1
Pension schemes
Occupational pension scheme (OPC)
Both employee and employer (for employee) contribute.
Employee Contribution is deducted from his employment income and employer contribution
(exempt benefits for employee) is deducted from his trading profit.
Contribution made to OPC is gross.
Personal pension scheme (PPC):
PPC is managed by private institutions.( eg banks)
Anyone may contribute in a personal pension.
Contribution in PPC is gross up by 100/80 and basic & higher rate bands will be extended by
this gross amount
Contributions made by the employer are exempt benefits for the employee and are not subject to any
NIC payments.
5.2
Contributing to a pension scheme
i.
Relief is only available if pension is registered scheme, individual is UK resident and aged under
75.
ii.
Contributions made each tax year by an individual into a pension scheme that will attract tax relief
are limited to the higher of:
the relevant earnings of the taxpayer, being mainly employment income and/or trading
profits plus any profits from furnished holiday lettings, and
3,600 of gross contribution
iii.
This amount will also contribute towards the annual allowance permitted each year.
iv.
Where an individual contributes to more than one pension scheme, the aggregate of his
contributions will be used to give the total amount of tax relief.
5.3
Methods of giving tax relief
Occupational scheme
When an employee makes a contribution into an occupational scheme tax relief is given at source under
the net pay arrangement. The employer will deduct the gross contribution from the individuals
employment income before computing the tax to be deducted under PAYE.
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Illustration 1
If an employee has a gross annual salary of 25,000 and wants to contribute 1,000 into his occupational
pension scheme, the employer over the tax year will pay 1,000 into the pension scheme and put a salary
of 24,000 through PAYE.
This would be presented on the Income Tax Computation as a salary of 25,000 less a pension
contribution of 1,000.
Personal pension scheme
When an individual contributes into a personal pension scheme no such deductions are made from
income on the computation, instead tax relief is given as follows:
5.4
5.5
basic rate tax relief is given at source this means that if the taxpayer pays 800 into his pension
fund, this is deemed to be net of basic rate tax at 20%. HMRC will then pay the pension provider
an amount equivalent to the basic rate deduction (20/80 x 800 = 200). Thus the individuals
pension fund is increased by 1,000 in total.
Higher rate and additional rate taxpayers achieve higher and additional rate relief by extending
the basic and higher rate bands by the gross amount of the personal pension contribution. Hence
in this example the higher rate and additional rate tax bands will increase by 1,000 so that higher
and additional rate tax will only arise above taxable income figures of 32,865 and 151,000
respectively.
Annual allowance
40,000 for 2015/16
C/f unused allowance max three years
Tax charge on excess treat as additional non-savings income
Lifetime allowance
1,250,000 is maximum value for pension fund. If the pension fund exceeds the lifetime allowance at the
time the benefit starts to be taken ('vested') this will give rise to an income tax charge on the excess value
of the fund. The rate of the charge is 55% if the excess value is taken as a lump sum, or 25% if the funds
are left in the scheme to provide a pension.
5.6
Employer contributions
Count towards allowances (annual and lifetime)
Trade deduction for employer
Tax free benefit for employee
No NIC for employer or employee
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Chapter 6: Property income

6.1
Furnished and unfurnished property letting
The following income is liable to assessment under Property Income:

(a)
rents under any lease or tenancy agreement
(b)
premium received on the grant of a short lease
Basis of assessment
Income from land and buildings is computed as if the letting of the property were a business, and the
amount assessable under property income will be the rental business profits for the individual in the tax
year.
Accounts should be drawn up using the accruals basis. Any expenses payable for the same period can
be deducted. Capital expenditure is not allowable.
Allowable deductions
i
ii
To be allowable expenses must have been incurred wholly and exclusively in connection with the
business for example
insurance
agents fees
other management expenses, for example cleaning expenses
repairs
interest on a loan to purchase the property
Capital expenditure is not allowable.
Repairs are allowable revenue expenses.
Improvements are capital and therefore disallowed
iii
Capital allowances may be claimed for expenditure on plant and machinery used for the
maintenance of the property
iv
If the lettings are furnished, tax relief is usually given for the furniture and furnishings by a 10%
wear and tear allowance, calculated as:
10% rental income
or, if the landlord pays council tax, water rates or business rates on the property: 10% (rental
income less council tax / business rates and water rates)
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6.2
Relief is available for revenue expenditure incurred before letting commenced, under the pretrading expenditure rules. ie expenditure incurred up to 7 years prior to renting is treated as being
incurred on day one of the letting business
Furnished holiday lettings
There are special rules for furnished holiday lettings.

The letting is treated as if it were a trade. This means that, although the income is taxed as income from
a UK property business some of, the provisions which apply to actual trades also apply to furnished
holiday lettings as follows:
(a) Capital allowances are available on furniture instead of the wear and tear allowance
(b) Income qualifies as earnings for pension relief
(c) Capital gains tax rollover relief, gift relief and entrepreneurs relief are all available.
The profit or loss is computed for tax years on an accruals basis. Losses may only be carried forward
against future profits from furnished holiday lettings
The lettings must be of UK or European Economic Area furnished accommodation made on a commercial
basis with a view to the realisation of profit.
Conditions
To be treated as a furnished holiday letting, the property must be situated in the European Economic
Area and all of the following conditions must be satisfied:
The property must be available for letting for at least 210 days in the tax year, and
It must actually be let for at least 105 days in the tax year, and
It is not normally occupied for periods of longerterm occupation (i.e. more than 31 consecutive
days to the same person) for periods exceeding 155 days in any 12 month period.
6.3
Rent a room relief
If an individual lets a room or rooms, furnished, in his or her main residence as living accommodation
then gross rents up to 4,250 p.a. are exempt.
The exemption may be ignored if the tax payer wants to generate a loss where expenses exceed income,
or where actual expenses exceed 4,250.
If gross rent exceed 4,250 p.a. the tax payer may choose to assess as follows:
(a) Ordinary calculation

Gross rent
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Less: expenses
(X)
Wear & tear allowance
(X)
Property Income
(b) Alternative calculation (election)
Gross rent
Less: rent a room relief
(4,250)
Property Income
The election must be made for 2015/16 by 31 January 2018 and stays in force until it is revoked.
6.4
Premiums on leases
When a tenant takes on a new lease he may be required to pay a one-off premium in addition to
the annual rent. If the lease is for less than 50 years, part of the premium is assessed on the
landlord as property income, the remainder is treated as a capital receipt. The treatment of the
capital receipt is outside the syllabus
ii
The amount of the premium assessed as Property Income is the premium taxed as property
income is the whole premium, less 2% of the premium for each complete year of the lease, except
the first year.
Taxable property income = P-[2%*(n-1)*P], where P is Premium and n-number of years of lease
Trading Profit deduction for traders

Where a trader has paid a premium for a short lease he may deduct the following annual amount against
his Trading profit in each of the years of the lease in which the property is used in the trade. This is in
addition to any rent paid. It is calculated as Property Income assessment on landlord per annum/Life of
lease
6.5
Property losses
If total expenses exceed total rental income, the property income assessment is nil and the excess
property loss is carried forward and offset against future property income only.
However, FHL losses are dealt with under special rules so that losses from a FHL business must be kept
separate and can only be used against profits of the same FHL business.
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Chapter 7: Computing trading income

7.1
a.
Badges of trade
Subject matter of the transaction
Trading is indicated where the property (subject matter) does not yield an ongoing income or give
personal enjoyment to its owner.
b.
Length of ownership
The sale of property within a short time of its acquisition is an indication of trading.
c.
Frequency of similar transactions
Trading is indicated by repeated transactions in the same subject matter.

d.
Work done on the property
A trading motive is indicated where work is carried out to the property to make it more marketable, or
where steps are taken to find purchasers.
e.
Circumstances responsible for the realisation
A forced sale to raise cash for an emergency is an indication that the transaction is not of a trading nature.
f.
Motive
If a transaction is undertaken with the motive of realising a profit, this is a strong indication of trading.
7.2
The adjustment of profits
The tax adjusted trading profit for inclusion within the income tax computation is not the same as the
profit shown in the individuals statement of profit or loss. Accounting profits before tax are adjusted to
arrive at tax adjusted trading profit. The main adjustments are to disallow for tax certain non-allowable
expenses and to exclude from the assessment any non-trading income
Net profit per accounts
ADD BACK: Expenditure not deductible for tax
X
X
Deduct items not assessed under tax adjusted trading profit

- Income assessable elsewhere
- Non-taxable income
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(X)
Adjusted profits
LESS: Capital allowances
(X)
Tax adjusted trading profit
Note: When preparing this calculation, be careful to start with the NET profit per accounts.
7.3
Deductible and non-deductible expenditure
a) Capital expenditure including depreciation is not allowable
repair to an asset is revenue expenditure and is allowable
improvement to an asset is capital expenditure and is not allowable
b) Reliefs, such as qualifying loan interest payments are not allowable as they are dealt with as a
deduction from total income
c) Patent royalties payable are an allowable deduction for adjusted trading profit.
d) Irrecoverable Debts (Trade debt write offs & allowances)
These are allowable; the tax treatment follows the accounting treatment
However non trade write offs are not allowable and so the expense is added back.
e) Entertaining and gifts
entertaining is disallowed, unless entertaining employees
gifts to employees are allowable
gifts to customers are only allowable if

they cost less than 50 per person per year, and
the gift is not food, drink, tobacco or vouchers exchangeable for goods and services
the gift carries a conspicuous advertisement for the business.
f)
Subscriptions and donations
trade or professional association subscriptions are allowable
charitable donation (Not made under Gift Aid)

if it is wholly and exclusively for trading purposes (e.g promoting business name), and it is to
a local charity then it is allowable
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National charity donations are not allowable
g)
charitable donations (made under Gift Aid) these are not allowable.
Political donations - these are not allowable
Legal and professional charges
allowable if connected with the trade and are not related to capital items
specifically allowed by statute:

costs of obtaining loan finance
costs of renewing a short lease (50 years or less)
h)
Interest payable
i)
Lease rentals on cars with CO2 emissions exceeding 130 g/km
j)
interest paid on borrowings for trading purposes is allowable on an accruals basis therefore no
adjustment is needed. In case of interest received or paid for non trading purpose then it cannot
be part of the tax adjusted trading income computation.
the disallowed amount is 15% of the leasing charges p.a..
Fines and penalties

Disallowed unless the fine is paid on behalf of an employee and incurred whilst on business
k)
The accounting profit must be adjusted for the private expenditure of the business owner. If the
owner uses a car in the business and 20% of his mileages private, then only 80% of motor expenses
are allowable.
However if the owner provides an employee with a car, and 20% of the mileage is for private use by
the employee, then the full amount of motor expenses is allowable. (The employee is taxed on the
private use under Employment Income).
l)
Any deduction described as the owners salary, drawings or interest on capital invested in the
business is disallowed.
m) Interest paid on overdue tax is not deductible and interest received on overpaid tax is not taxable
n)
Any salary paid to the family of the owner of the business must not be excessive.
Only salary at the commercial rate for the work done is allowable.
o)
If an owner removes goods from the business for his own use he must add back the item as a
sale at market value, unless the owner accounts for the cost of the goods in the business accounts
then they need only add back the lost profit on the item.
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p)
Pre-trading expenditure
Allowable if it is expenditure incurred in the seven years before a business commences to trade then
it is treated as an expense incurred on the day the business starts trading and follows the above
rules.
q)
7.4
The general rule is that expenditure not wholly and exclusively for the purpose of the trade is
not allowable
Cash basis of accounting for small businesses
From 6 April 2014 certain small unincorporated businesses (sole traders and partnerships) may elect
to use a cash basis to determine their tax adjusted trading profits instead of the normal accruals basis.
ii
The election is available to those businesses with receipts for a 12 month accounting period
assessable in the tax year that do not exceed the VAT registration limit of 81,000.
iii A trader must leave the scheme if receipts assessable in the previous tax year exceed twice the VAT
registration limit (162,000).
iv The cash basis will assess a business on its cash receipts less cash payments of allowable business
expenses. Payables, receivables and inventory are ignored.
v
The accounting profit must be adjusted for taxation purposes mostly as for accruals accounting with
the main difference being in relation to capital expenditure.
vi Expenditure on plant and machinery which would normally attract capital allowances will now attract
tax relief with capital payments for plant and machinery (except cars) being deductible and capital
receipts from sale of plant and machinery (except cars) being included in the calculation of the
adjusted trading profit.
vii In respect of cars instead of claiming capital allowances the trader may instead use a fixed (or flat)
rate deduction for tax purposes. The actual capital cost of acquiring a car for use in the business, the
running costs and the sale proceeds are excluded from the profit calculation. The trader can instead
claim as a deduction against the trading profit a mileage allowance for the business mileage. The
allowance is at a rate of 45p per mile for the first 10,000 business miles and 25p thereafter.
viii Business premises used partly as trader's home
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:
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Number relevant occupants
Non-business use amount
350
500
3 or more
650
These rates will be given in the examination question, if relevant. Be careful when using these
amounts they are not the deductible expense itself but the disallowable amount.
ix Taxable trading profits for an accounting period under the cash basis are computed as:
Receipts (inc. sale of plant & machinery)
xxx
Expense payments (inc. purchase of plant & machinery) (xxx)

Tax adjusted trading profit / (loss)
x
xx
Basis of assessment
A trader using the cash basis can, like any other trader, prepare his accounts to any date in the year.
The basis of assessment rules which determine in which tax year the profits of an accounting period
are taxed apply in the same way for accruals accounting and cash basis traders.
xi 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. Trading losses
for the accruals accounting traders are dealt with in detail later in this Text.
xii Pre-trading expenditure
Expenditure incurred before the commencement of trade is deductible, if it is incurred within seven
years of the start of trade and it is of a type that would have been deductible had the trade already
started. It is treated as a trading expense incurred on the first day of trading.
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Chapter 8: Capital allowances

8.1
Capital allowances
Capital Allowances replace the disallowed depreciation charge in the adjustment of profits, giving tax
relief against trading profits in respect of expenditure incurred on qualifying plant and machinery.
Plant is generally defined as assets that perform an active function in the business something with
which the trade is carried on and will include office furniture and equipment including moveable office
partitioning. Machinery will include motor vehicles and computers, including building alterations
necessary for the installation of plant and machinery.
Capital allowances are now also available on integral features of a building including lifts and escalators,
electrical systems, heating and air cooling systems
VAT
If a business is VAT registered and the input VAT is recoverable on the purchase of an asset then the
VAT exclusive net cost will be available for capital allowances. If the VAT is not recoverable as on the
purchase of a car or if the business is not VAT registered then the VAT inclusive price will attract capital
allowances.
Plant and machinery qualifying expenditure
8.2
There are two sources of the rules on what qualifies as plant and is therefore eligible for capital
allowances.
Statute
Statutory exclusions
The following items are excluded as plant by statute.
Buildings and parts of buildings
However, utility systems provided to meet the particular requirements of the trade, lifts, alarm
systems and several other items can be plant
Structures, with some exceptions: dry docks and pipelines
Land
Statutory inclusions
Computer software qualifies as plant by statute.
Case law
The courts tend to allow items as plant if they perform a function (eg moveable office partitions) in the
particular trade, rather than form part of the setting within which the trade is carried on.
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Machinery
Machinery also qualifies for allowances where machinery is given its ordinary every day meaning.
8.3
i
ii
Types of pool
General pool or main pool
The cost of most of the plant and machinery purchased by a business becomes part of a pool
called main pool on which capital allowances may be claimed.
Cars having co2 emission between 76g/km 130g/km are included in main pool.
Second hand cars with co2 emissions of 75g/km or below
Addition increases the amount of pool and disposal reduces the amount of pool.
Special rate pool
Following P&M will become part of special rate pool
Long-life assets
It includes Plant and Machinery with a working life of 25 years or more and annual running cost
of 100,000.
Integral features of a building

It includes Electrical & general lighting systems, Cold water systems, Space or water heating
systems, Powered systems of ventilation, cooling or air purification and Lifts and escalators
Motor cars (both new & second hand) with co2 emissions > 130g/km
Thermal insulation of building.
iii Short-life assets (SLA)
Plant and Machinery except cars which individual wishes to sell or scrap within 8 years of the end
of the period of account in which asset is purchased are called short-life assets. Every short life
asset is kept in separate pool.
The election (written notice to HMRC) must be made for short life asset.
AIA and WDA are available as normal.
Balancing allowance or charge arises on disposal within 8 years after the accounting period of
purchase.
If no disposal takes place within eight years after the accounting period of purchase the remaining
balance is transferred to the general pool immediately.
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iv Private use assets
If owner uses an asset for private purposes, capital allowances are given only on business
proportion. Every private use asset is kept in separate pool.
On disposal of asset, balancing charge (if profit) or a balancing allowance (if loss) will arise which
is then reduced to business proportion.
Private use of an asset by an employee has no effect on capital allowances.
8.4
i
ii
Types of allowances
First year allowance (FYA)
FYA of 100% is available in the year of purchase on Purchase of new low emission cars. (75
g/Km co2 or less).
Taxpayer has the option to claim full FYA, partial FYA or even NO FYA. However if partial FYA is
claimed then remaining amount will go to main poll but no WDA will be given in that year.
FYA is not time apportioned if accounting period is short or long than 12 months.
No FYA is available in year of cessation of trade.
Annual investment allowance (AIA)
It is allowance of 500,000 p.a. on new purchased Plant & Machinery except cars.
Value of new purchased Plant & Machinery which exceeds 500,000 p.a. will be transferred to
relevant pool and WDA may be claimed.
500,000 limit is prorated for short and long period of accounts.
No AIA is available in the year of cessation of trade.
Taxpayer has the option to claim full or partial AIA or even no AIA if it does not want to. However
any unused AIA will be wasted.
It is most beneficial to claim the AIA in the following order:

a) Special rate pool
b) General pool
c) Short life assets
d) Private use assets
iii Written down allowance (WDA)
WDA is available on net value (WDV plus addition less disposal).
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WDA of 18 % on reducing balance method is given each year on Main Pool".
WDA of 8% on reducing balance method is given each year on Special Rate Pool".
Full WDA is given in year of purchase and no WDA is given in the year of disposal.
WDA of 8% or 18% is prorated where a period of account is 12 months.
WDA will be restricted to business proportion if there is a private use of the asset.
iv The Small Pools WDA

Where the tax wdv of either the main pool or special rate pool prior to calculating the WDA is less than
1,000, the entire balance may be taken as a WDA in that period. The 1,000 is prorated if the accounting
period is other than 12 months.
8.5
Sale of plant and machinery
On disposal of P&M, lower of the sale proceeds and the original cost is deducted from the balance of the
unrelieved expenditure of the relevant pool
8.6
Balancing charges and allowances
Balancing charges occur when the disposal value deducted exceeds the balance remaining in the pool.
The charge equals the excess and is effectively a negative capital allowance, increasing profits.
Balancing allowances on the main and special pools of expenditure arise only when the trade ceases.
The balancing allowance is equal to the remaining unrelieved expenditure after deducting the disposal
value of all the assets. Balancing allowances may also arise on single pool items whenever those items
are disposed of.
8.7
CARS
Cars emitting 95 g/km co2 (low emission Cars) are eligible for FYA of 100%.
Second hand motor cars emitting 95 g/km co2 or less are included in main pool.
Both new and second hand Cars emitting CO2 between 95 g/km to 130 g/km are included in main
pool.
Both new and second hand Cars emitting CO2 over 130 g/km are included in special rate pool.
If there is private usage of car by proprietor (Not employee) than only business proportion of the
capital Allowance can be claimed. Such cars with an element of private use are kept separate from
the main and special pools and are dealt with in single asset pools. Such cars are entitled to a WDA
of 18% (car with CO2 emissions between 96 and 130 g/km) or 8% (car with CO2 emissions over 130
g/km).
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8.8
Cessation of trade
Not FYA, AIA and WDA is available in last year of trade.
Add addition and deduct disposals made in last period of account from the relevant pool.
Calculate balancing allowance (if loss) or balancing charge (if profit) as appropriate.
8.9
Preparing the Capital Allowance Computation
It is essential to follow a set format in dealing with the additions and disposals of assets in the accounting
period in the preparation of the capital allowance computation:
a) List any tax written down values (unrelieved expenditure) on the pools and any non-pool assets at
the start of the accounting period as given within the question.
b) List expenditure qualifying for AIA, in order, firstly special rate pool and then main pool
c) Add any expenditure in excess of the AIA limit to the relevant pool
d) Add to relevant pool the cost of any cars qualifying for WDA ie cars with CO2 emissions in excess of
95 grams per Km
e) Deduct sale proceeds, to a maximum of original cost, of assets sold during the accounting period
from the relevant pool balance
f)
Deduct sale proceeds, to a maximum of original cost from the tax WDV of any non-pool assets and
compute the relevant balancing adjustment
g) Compute available WDAs on the Tax WDVs computed and deduct therefrom
h) List any new low emission cars purchased during the accounting period and claim the available 100%
FYA
8.10
Period of account
Capital allowances are calculated for each period of account separately. If Period of account exceeds 18
months then it must be split in two periods of account 1st of 12 moths and 2nd of remaining months.
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Chapter 9: Assessable trading income

9.1
Basis periods and tax years
A tax year runs from 6 April to 5 April, but most businesses do not have periods of account ending on 5
April. Thus there must be a link between a period of account of a business and a tax year. The procedure
is to find a period to act as the basis period for a tax year. The profits for a basis period are taxed in the
corresponding tax year. If a basis period is not identical to a period of account, the profits of periods of
account are time-apportioned as required on the assumption that profits accrue evenly over a period of
account. We will apportion to the nearest month for exam purposes.
The same rules apply to link periods of account to tax years regardless of whether the normal accruals
method of accounting or the cash basis is used.
The general rule is that the basis period is the year of account ending in the tax year. This is known as
the current year basis of assessment. For example, if a trader prepares accounts to 31 December
each year, the profits of the year to 31 December 2015 will be taxed in the tax year 2015/16.
This general rule does not apply in the opening or closing years of a business. This is because in the first
few years the business has not normally established a pattern of annual accounts, and very few
businesses cease trading on the annual accounting date.
Apart from the first tax year of trade and the last tax year of trade, HMRC will expect to see 12 months
of profits showing in the income tax computation each year. As the periods of account may not be 12
months long in the opening and closing years, the current year basis may be impossible to apply,
therefore special rules need to be applied to establish which 12 months should be allocated to which tax
year.
9.2
Rules for Basis period
The first tax year

The basis period for the first tax year runs from the date the trade starts to the next 5 April. So a trader
commencing in business on 1 June 2015 will be taxed on profits arising from 1 June 2015 to 5 April 2016
in 2015/16, the first tax year.
The second tax year
(a) If no accounting date ends in year: 6 April 5 April
(b) If period of account ending in year is less than 12 months: first 12 months
(c) Otherwise: 12 months to accounting date ending in Year 2
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The third tax year

12 months to accounting date ending in year
Later tax years
12 months to accounting date ending in year i.e. current year basis
The final year
a) If a trade starts and ceases in the same tax year, the basis period for that year is the whole lifespan
of the trade.
b) If the final year is the second year, the basis period runs from 6 April at the start of the second year
to the date of cessation. This rule overrides the rules that normally apply for the second year.
c) If the final year is the third year or a later year, the basis period runs from the end of the basis period
for the previous year to the date of cessation. This rule overrides the rules that normally apply in the
third and later years.
Overlap profits
Any profits taxed twice are overlap profits. They may be deducted on cessation.
9.3
The choice of an accounting date
The choice of an accounting date may affect when tax is payable on trading profits. It may also create
overlap profits and help or hinder tax planning.
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Chapter 10: Trading losses

10.1
Trade loss reliefs
The reliefs are:

a) Carry forward trade loss relief
Trading loss may be carry forward and set-off from first available future trading profits from same
trade.
Partial claim is not allowed.
Any loss remaining is carried forward until further profits arise.
Losses may carry forward for indefinite number of years until all the loss is relieved i.e. the loss may
be carried forward indefinitely.
b) Trade loss relief against general income
Trading Losses may be set-off from total net income of:

a) Current year only OR
b) Previous year only OR
c) Current year and then previous year OR
d) Previous year and then current year.
Remaining loss after claim against total income may be:
i)
Set off against capital gains
j)
Set off against future trading profit.
CAP limit for Current Year

Maximum loss that can be deducted from current year is higher of:
a) 50,000
b) 25% of total income less gross personal pension cont.
CAP limit for previous Year

Maximum loss that can be deducted from previous year is previous year CAP limit (as above) plus
previous year trading profit.
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Commercial basis
Loss relief cannot be claimed against general income unless the loss-making business is conducted on
a commercial basis.
c) Relief of trading losses against capital gains
Under this section current year trading loss can be set off against the chargeable gains of:
a) Current year only OR

b) Previous year only OR
c) Current year and then previous year OR
d) Previous year and then current year.
The trading loss is first set against general income of the year of the claim, and only any excess loss
is set against capital gains.
d) Early trade losses relief
The relief is available for losses incurred in the first four tax years of trading.
There is no need for the trade to have been carried on in these preceding tax years.
The relief operates against all three preceding tax years on a FIFO basis.
Partial claims are not available and hence personal allowances may again be lost
The loss available for this relief is computed in the same way as profits.
In the early years of the trade it is possible to claim the following reliefs: xx Opening years loss relief
a) Opening year loss relief OR

b) Relief against total income of the current and/or previous tax year OR
c) From Capital gains OR
d) Carry forward against future trading profit
e) Terminal trade loss relief
If trade ceases then Loss of last 12 month of trade may be set off against trading income of previous
3 years on LIFO basis. The terminal loss is loss of the final 12 months of trade, calculated as follows:
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Trading loss from 6 April (before cessation) till date of cessation.
(XX) nil if profit
Trading loss for period starting 12month before date of cessation till the (XX) nil if profit
following 5 april.
Overlap Profits
(XX)
Terminal loss
(XX)
10.2
Business transferred to a company
Relief is available for trading losses on incorporation of an unincorporated trade. Trading losses are
carried forward by the individual and set against first available income derived from the company eg
salary, dividends or interest. Losses are set off firstly against earned income and then unearned income
10.3
Choice between loss reliefs
a) Quick loss Relief

b) Maximum tax saving
c) Personal allowance do not waste
10.4
Capital allowances
The trader may adjust the size of the loss relief claim by not claiming all the capital allowances he is
entitled to: a reduced claim will increase the balance carried forward to the next year's capital allowances
computation. This may be a useful tax planning point to preserve the personal allowance or where the
effective rate of relief for capital allowances in future periods will be greater than the rate of tax relief for
the loss relief.
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Chapter 11: Partnerships and limited liability partnerships

11.1
Introduction
A partnership is a single trading entity. Each individual partner is effectively treated as trading in his own
right and is assessed on his/her share of the adjusted trading profit of the partnership.
11.2
Trading income
(a)
The partnerships tax adjusted profits or loss for an accounting period is computed in the same way
as for a sole trader
(b)
Partners salaries and interest on capital are not deductible as expenses as these are simply an
allocation of trading profit.
11.3
Allocation of the trading profit or trading loss
(a) The trading income or trading loss is divided between the partners according to their profit sharing
arrangements in force during the accounting period.
(b) Partners may firstly be entitled to salaries and interest on capital. The balance of any trading profit
(or loss) will then be allocated in the profit sharing ratio (PSR).
11.4
A change in the profit sharing agreement
If the profit sharing agreement is changed during a period of account, the profit must be time apportioned
before allocation under the different agreements.
11.5
Partnership capital allowances
(a) Capital allowances are deducted as an expense in calculating trading profit.

(b) If assets are used privately, the business proportion is included in the partnerships capital allowances
computation.
11.6
Commencement and cessation
(a) The rules for commencement and cessation are the same as for a sole trader.
(b) The profit is allocated between the partners for accounting periods and then the assessment rules
are applied.
(c) Each partner is effectively taxed as a sole trader on his/her share of the adjusted trading profit
(d) Continuing partners will be assessed using CYB
(e) When a new partner joins a partnership, he is treated as commencing a new trade and hence the
opening years rules apply
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(f) When an old partner leaves a partnership he is treated as ceasing a trade and hence the closing
years rules apply
(g) Each partner has his own overlap profit available for relief.
11.7
A change in the membership of a partnership
(a) As long as there is at least one partner common to the business before and after the change, the
partnership continues.
(b) The commencement or cessation rules apply only to the individual joining or leaving the partnership.
11.8
Partnership losses
(a) Losses are allocated between partners in the same way as profits.
(b) Loss relief claims available are the same as for sole traders.
(c) A partner joining the partnership may claim under opening years loss relief, for losses in the first four
tax years of his membership of the partnership.
(d) This relief is not available to existing partners.
(e) A partner leaving a partnership may claim under terminal loss relief. This relief is not available to
partners remaining in the partnership.
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Chapter 12: National insurance contributions

12.1
Employed earners
Class 1 contributions
Class 1 NIC is paid by employees and employers.
Employees
Class 1 Primary Contributions
The contributions begin when the employee is aged 16 or over. For 2015/16 the rate of employee Class
1 NIC is at 12%. It is paid where cash earnings exceed a threshold of 8,061 per annum, but only up to
an upper limit of 42,385 per annum, however for earnings above 42,385 per annum there is a rate of
2% payable with no limit. The contributions cease when the employee reaches pensionable age.
Employers
Class 1 Secondary Contributions
The rate of employer Class 1 NIC is 13.8%. It is paid on cash earnings that exceed a threshold of 8,112
per annum. These are payable from the employees 16th birthday - but there is no upper age limit.
Class 1A Contributions
The rate of Class 1A NIC is payable only by employers on taxable benefits provided to employees. The
rate is 13.8% multiplied by the assessable value of the benefits.
12.2
Employment Allowance
From 2014/15 HMRC have introduced an annual employment allowance of 2,000 per EMPLOYER to
reduce the Employers Class 1 NIC payable. For example if the employers Class 1 NIC for the tax year
is 5,000 the amount payable will be reduced by the 2,000 employment allowance to 3,000. If the total
employers Class 1 NIC was say 1,500 then this would be reduced to nil.
The employment allowance does not reduce the amount of employer Class 1A NIC payable nor will it
serve to reduce the amount of Class 1 employees NIC.
12.3
Self-employed earners
Class 2 contribution
Self-employed earners pay a flat rate contribution of 2.8 per week from their 16th birthday until they
reach pensionable age. No class 2 contributions are payable if the individuals taxable trading profits are
less than the small profits threshold which is 5,965.
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
201516 will be payable on 31 January 2017.
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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 contribution
The self employed also pay Class 4 contributions which are based on the assessable trading profits
of the tax year.
The rate of Class 4 is 9% and is payable on trading income between 8,061 and 42,385.
For trading income in excess of 42,385, a rate of 2% is payable
Contributions begin if the employee is 16 at the start of the relevant tax year but contributions cease,
when the tax payer reaches pensionable age at the start of the relevant tax year
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PART C: CHARGEABLE
GAINS FOR INDIVIDUALS
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Chapter 13: Computing chargeable gains

13.1
Chargeable persons, disposals and assets
A gain is chargeable if there is a chargeable disposal of a chargeable asset by a chargeable person.

For a chargeable gain to arise there must be:
A chargeable person; and
A chargeable disposal; and
A chargeable asset
otherwise no charge to tax occurs.

Chargeable persons
An individual who is either resident or ordinarily resident in the UK is liable to pay UK CGT on his
worldwide gains and non-resident person in UK will pay CGT on his UK gains only.
Chargeable disposals
The following are chargeable disposals.
Sales of assets or parts of assets
Gifts of assets or parts of assets
The loss or destruction of assets
Date of disposal
Event
Date of disposal
Normal
Date of contract or agreement for disposal of asset.
Conditional contract Date when all the conditions are satisfied and contract become legally binding.
Death transfer
No CGT implication
Chargeable Assets
All assets are chargeable unless specifically exempt.
Exempt assets
Motor vehicles suitable for private use
National Savings & Investment certificates
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Foreign currency for private use
Decorations awarded for bravery
Damages for personal injury
Life insurance policies
Works of art given for national use
Gilt edged securities (Government Securities such as Exchequer Stock)
Qualifying Corporate Bonds (Corporate loan stock such as debentures)
Certain Chattels (tangible moveable property)
Investments held in an ISA
Debts (except debts on a security)
13.2
Pro Forma to Calculate Capital Gain/Loss on Individual Assets
Disposal proceeds
Less: Incidental cost of disposal
(X)
Net proceeds
Less: Allowable Costs (Purchase price, Incidental cost for (X)

purchase, Capital improvements)
Capital Gain / (Capital loss)
X/(X)
Usually the disposal consideration is the proceeds of sale of the asset, but a disposal is deemed
to take place at market value:
Where the disposal is not a bargain at arm's length
Where the disposal is made for a consideration which cannot be valued
Where the disposal is by way of a gift
Incidental costs of disposal may include:
Valuation fees
Estate agency fees
Advertising costs
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Legal costs
Allowable costs include:
The original cost of acquisition
Incidental costs of acquisition
Capital expenditure incurred in enhancing the asset
Enhancement expenditure is capital expenditure which enhances the value of the asset. Excluded from
this category are:
Costs of repairs and maintenance
Costs of insurance
Any expenditure deductible from trading profits
Any expenditure met by public funds (for example council grants)
13.3
Annual exemption
Every individual has an exempt amount for each tax year. For 2015/16 it is 11,100
If the annual exemption is not used it is wasted.
13.4
Capital losses
Where capital losses arise they are set against capital gains in the same tax year.
The set off is made to the maximum possible extent it cannot be restricted to avoid wasting the
annual exemption
If there are insufficient gains to set off the capital losses in the year they arise, the unrelieved capital
losses may be carried forward.
Current year capital losses are deducted in priority to capital losses brought forward. The capital
losses brought forward only reduce capital gains to the level of the annual exemption.
Any unrelieved capital losses brought forward are carried forward to the next tax year.
13.5
Payment of CGT
CGT is due in one amount on 31 January following the tax year (For 2015/16 by 31 January 2017)
No payments on account of the CGT liability are required.
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13.6
Rates of CGT
Taxable gains are usually chargeable to capital gains tax at the rate of 18% or 28% depending on the
individual's taxable income.
13.7
Transfers between spouses/civil partners
Disposals between spouses and civil partners do not give rise to gains or losses.
When the second spouse/civil partner sells the asset, assume that he/she bought the asset for its
original cost.
13.8
Part Disposals
On a part disposal, you are only allowed to take part of the cost of the asset into account.
Costs attributable solely to the part disposed of are taken into account in full.
For other costs, take into account A/(A+B) of the cost
A is the proceeds of the part sold
B is the market value of the part retained
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13.9
Destruction or loss of an asset
If an asset is destroyed any compensation will normally be brought into an ordinary CGT disposal
computation as proceeds.
If all the proceeds are applied for the replacement of the asset within 12 months, any gain can be
deducted from the cost of the replacement asset.
If only part of the proceeds are applied, the gain is restricted to the proceeds not applied, and the
remainder of the gain is deducted from the cost of the replacement asset.
13.10 Damage to an asset
If an asset is damaged and compensation is received, then this will normally be treated as a part
disposal.
If all the proceeds are used to restore the asset the taxpayer can elect to disregard the part disposal
and deduct the proceeds from the cost of the asset.
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Chapter 14: Chattels and the principal private residence exemption

14.1
Chattels
A chattel is an item of tangible moveable property (eg a painting).
Gains on chattels sold for gross proceeds of 6,000 or less are exempt.
The maximum gain on chattels sold for more than 6,000 is 5/3 (gross proceeds 6,000).
Losses on chattels sold for under 6,000 are restricted by assuming the gross proceeds to be 6,000.
14.2
Wasting chattels
Chattels with a remaining estimated useful life of 50 years or less.
Wasting chattels are exempt from CGT unless capital allowances could have been claimed on them.
The CGT rules are modified for assets eligible for capital allowances.
The wasting chattels exemption does not apply to chattels on which capital allowances have been
claimed or could have been claimed. The chattels rules based on 6,000 do apply.
Where a chattel on which capital allowances have been obtained is sold at a loss, the allowable cost
for chargeable gains purposes is reduced by the lower of the loss and the net amount of allowances
given (taking into account any balancing allowances or charges). The result is no gain and no loss.
This is because relief for the loss has already been given through the capital allowances computation.
If the chattel is sold at a gain the cost is not adjusted for capital allowances. This is because the
capital allowances will have been repaid through the balancing charge.
14.3
Wasting assets
A wasting asset is one with an estimated remaining useful life of 50 years or less and whose original
value will fall over time. Example- copyright.
Wasting assets have their cost written down over time on a straight line basis.
The original cost is therefore reduced by P (C S)/L

Where, P = Period of ownership of seller
L = Predictable Life of asset on acquisition
C = Cost of the asset
S = Scrap / residual value at the end of the assets predictable life
Exception
Assets eligible for capital allowances and used in a trade do not have their cost written down.
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14.4
Principal Private Residence Relief
The sale of an individuals only or main private residence is covered by Principal Private Residence Relief
(PPR). The relief is available in full if the taxpayer occupied the property throughout the entire period of
ownership. Where occupation has been for only part of the period, a proportion of the gain is covered by
the relief.
Gain (Period of occupation/Period of ownership)
Deemed Occupation
There are however periods of absence which are deemed to be full occupation
i.
Last 18 months - if the property was the individuals main residence at some point in time
ii.
Any periods during which the individual was required by his employment to live abroad
iii.
Any period up to four years during which the individual is required to live elsewhere in the UK due
to employment
iv.
Up to three years for any reason.
Points (ii iv) must be preceded and followed by periods of actual occupation, but for points (b c) if the
individual could not reoccupy due to the terms of employment requiring them to work elsewhere, by
concession, the condition of actual occupation following the period of absence is not applied.
Business use
Where part of a residence is used exclusively for business purposes throughout the period of ownership,
the gain in relation to that part is not covered by relief.
The last 18 months rule does not apply to that part unless the business part was at some time used as
part of the only or main residence.
14.5
Letting relief
Letting relief is available to cover any gain not covered by PPR if:
a) owner is absent (not covered by deemed occupation rules) and the property is rented out OR
b) part of the property is rented out, the remaining part being occupied by the taxpayer
Letting relief is the lower of:

i.
PPR relief given
ii.
40,000
iii.
gain attributable to letting
Letting relief cannot convert a gain into an allowable loss.
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If a lodger lives as a member of the owner's family, sharing their living accommodation and eating
with them, the whole property is regarded as the owner's main residence.
Chapter 15: Business reliefs

15.1
Entrepreneurs' relief
This relief is available for individuals disposing of a business or part of a business.
The relief covers the first 10m of qualifying gains that an individual makes during their lifetime. This
gain qualifying is taxed at a lower capital gains tax rate of 10% regardless of a persons taxable
income.
Conditions
The assets must have been owned for one year prior to the date of disposal
The relief is available on:
A disposal of the whole or part of a business run as an unincorporated business (sole trader or
partnership). However the assets must be used for the purpose of the business, so the relief is
not available on investments.
Individual business assets of the individuals or partnerships trading business that has now
ceased. Note the disposal of assets must take place within three years of the cessation of trade.
The disposal of shares in a trading company where the individual has at least a 5% shareholding
in the company and is also an employee (part time or full time) of the company for the 12 months
prior to disposal. There is no restriction of the relief if the company owns investments. The
company is either a trading company or it is not, there is no apportionment of the gain eligible for
relief.
Time limit for claim

The relief must be claimed within 12 months of the 31 January following the end of the tax year in which
the disposal is made. Ex- For 2015/16 by 31 January 2018
Further points
The gains qualifying for entrepreneurs relief must be taken into account when establishing which tax
rate applies to other capital gains in the tax year, in that they are deemed to firstly use any amount
of unused basic rate band.
The annual exemption and any capital losses should however be deducted firstly from gains that do
not qualify for entrepreneurs relief as they are taxed at a higher capital tax gains rate (18% and/or
28%)
The easiest approach in dealing with questions that include gains qualifying for entrepreneurs relief
and gains that do not qualify is to keep the gains separate
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15.2
The replacement of business assets (rollover relief)
A gain may be 'rolled over' (deferred) where the proceeds received on the disposal of a business asset
are spent on a replacement business asset. This is rollover relief.
Conditions
The old asset sold and the new asset bought are both used only in the trade or trades carried on by
the person claiming rollover relief. Where part of a building is in non-trade use for all or a substantial
part of the period of ownership, the building (and the land on which it stands) is treated as two
separate assets, the trade part (qualifying) and the non-trade part (non-qualifying). This split cannot
be made for other assets.
The old asset and the new asset both fall within one (but not necessarily the same one) of the
following classes.
i.
Land and buildings (including parts of buildings) occupied as well as used only for the purpose
of the trade
ii.
Fixed (that is, immovable) plant and machinery
iii.
Goodwill
Reinvestment of the proceeds received on the disposal of the old asset takes place in a period
beginning one year before and ending three years after the date of the disposal.
The new asset is brought into use in the trade on its acquisition
The relief
The gain is not taxed immediately but is postponed until the trader makes a disposal of the
replacement asset without further replacement.
The postponement is achieved by deducting the gain made on the old asset from the cost of the new
one.
Where the disposal proceeds of the old asset are not fully reinvested, the surplus retained reduces
the amount of capital gain that can be rolled over.
Time limit for claim

A claim must be made within 4 years from the end of the tax year in which the disposal occurred. For
disposals in 2015/16 by 5 April 2020.
Non-business use
Where the old asset has not been used in the trade for a fraction of its period of ownership, the amount
of the gain that can be rolled over is reduced by the same fraction. When considering proceeds not
reinvested, the restriction on rollover relief is based on the proportion of proceeds relating to the part of
the asset used in the trade or the proportion relating to the period of trade use.
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Depreciating assets
An asset is a depreciating asset if it is, or within the next ten years will become, a wasting asset.
Thus, any asset with an expected life of 60 years or less is covered by this definition. Plant and
machinery is always treated as depreciating.
If replacement asset is a depreciating asset then gain deferred is not deducted from cost of new asset
(no calculation of base cost). Instead gain is postponed and will be taxable on earlier of:
(a) The disposal of the replacement asset
(b) The date the replacement asset ceases to be used in the trade (but the gain does not crystallise
on the taxpayer's death)
(c) Ten years after the acquisition of the replacement asset (maximum)
If a non-depreciating qualifying asset is bought before the gain crystallises, the deferred gain may be
rolled into the base cost of that asset.
Entrepreneurs relief is only available if any remaining gains after the relief are in relation to the
disposal of the whole business.
If on disposal of whole of business, individual decide to reinvest the disposal proceeds then rollover
relief and entrepreneur relief both will be available. However individual has to claim 1st rollover &
then entrepreneur relief.
15.3
Gift or holdover relief
Gift relief can be claimed on gifts or sales at undervalue on transfers of business assets.
When gift relief is claimed, the donors gain is deferred. The gain is deducted from the donees cost
(market value) i.e. the gain is deducted from the recipient's base cost.
Any actual proceeds in excess of cost reduce the gain for which relief can be claimed
Qualifying business assets

Gift relief may be claimed on the gift of the following assets:
a. Assets used in the trade of:
the donor (i.e. where he is a sole trader)
the donors personal company.
b. Shares and securities of trading companies provided that one of the following conditions apply:
the shares or securities are not quoted on a recognised stock exchange or
the shares or securities gifted are those of the individuals personal company. A company qualifies
as an individuals personal company if at least 5% of the voting rights are owned by the individual
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Assets not wholly used for trading purposes/Non business use

i.
Where only part of an asset is used for trading purposes, or where an asset has been used for only
part of the donors period of ownership, then gift relief is restricted.
ii.
Where the gift is shares and the individual owns at least 5% of the voting rights or the company is
unquoted, then the capital gain on the shares eligible for relief is restricted by a fraction, gain
eligible restricted to (CBA/CA) gain
iii.
This treatment is completely different to that which applies for entrepreneurs relief. Remember that
for entrepreneurs relief purposes there is no question of apportionment. A company is either a
trading company (and therefore qualifies for the entrepreneurs relief) or it is not.
Chargeable assets (CA) and Chargeable business assets (CBA)

i.
An asset cannot be a chargeable asset where a capital gain that might arise on its disposal would
not be a chargeable gain. This provision rules out exempt assets such as motor cars, but not those
that could produce a gain on disposal but currently stand at a loss This will include all chargeable
assets held by the company, both those used in the business and those held as investments.
ii.
Chargeable business assets are those used for the purposes of a companys trade (including
goodwill purchased before 1/4/02, but excluding shares, securities and other assets held as
investments).
Interaction with entrepreneurs relief
When a claim for gift relief is made, the donor may lose entitlement to entrepreneurs relief
If the asset qualifies, gift relief if claimed is applied before entrepreneurs relief.
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Chapter 16: Shares and securities

16.1
Valuing quoted and unquoted shares
Unquoted shares
Market value will be given in exam.
Quoted shares
When quoted shares are gifted, Market value of shares for CGT will be lower of the two prices shown in
the Stock Exchange Daily Official List plus one-half of the difference between those two prices.
Alternatively, it can be calculated as the average of the two prices [(Price 1+Price 2)/2].
16.2
The matching rules for individuals
Where shares are disposed of a problem arises in computing the allowable cost as shares may have
been acquired over several acquisitions at different costs at different dates. Therefore HMRC have
deemed that when shares are disposed of, they are matched against acquisitions in the following order:
(a) Shares acquired on the same day (as the sale)
(b) Shares acquired within the 30 days following the sale if more than one acquisition, use a 'first in, first
out' (FIFO) basis
(c) Shares from the share pool
16.3
The share pool
The share pool is kept in two columns:

(a) The number of shares
(b) The cost
On a disposal the cost is calculated on a pro-rata basis [A/(A + B) fraction]
16.4
Bonus issues
Bonus issues are where a company issues free shares on a proportionate basis to its existing
shareholders.
Bonus issue shares are acquired at no cost.
Add the number of shares to the share pool.
Since bonus shares are issued at no cost there is no need to adjust the original cost.
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16.5
Rights Issues
Rights Issues are where a company seeks to raise new share capital and offers its existing
shareholders the right to acquire on a proportionate basis additional shares in the company at an
advantageous share price.
Rights issue shares are acquired for payment.
Add the numbers of shares to the share pool and add the cost of the rights shares.
16.6
Reorganisations and takeovers
Reorganisation
Exchange of existing shares in a company for other shares of another class in the same company.
Take-over
When a company acquires shares in another company either in exchange for shares, cash or mixture of
both.
Where a takeover is a share for share exchange, known as a paper for paper transaction,
shareholders of the company taken over acquire shares in the acquiring company. This normally
does not constitute a disposal for CGT purposes.
The new shares are deemed to have been acquired at the same time and at the same cost as the
original shares.
If more than one type of share, for example ordinary and preference shares, are acquired in the
takeover company then the cost of the original holding is attributed to the different components of the
new holding on a basis of the market values of the new holding. Thus if a shareholder acquired on
takeover 300,000 of ordinary shares and 100,000 of preference shares in the takeover company
they would acquire respectively 3/4 and 1/4 of the original shareholdings cost. These costs may then
be used to compute any subsequent gain arising on the sale of either those ordinary or preference
shares.
If at takeover, some cash is also received, a capital gain needs to be calculated at takeover for the
cash element received.
16.7
Gilts and qualifying corporate bonds
Disposals of gilt edged securities (gilts) and qualifying corporate bonds by individuals are exempt from
CGT.
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PART D: TAX
ADMINISTRATION FOR
INDIVIDUALS
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Chapter 17: Self assessment and payment of tax by individuals

17.1
Self assessment tax return
Individuals complete their own tax return. The first part details income and capital gains for the tax
year, the second part shows the calculation of the income tax liability.
The tax payer has the choice of filing a paper return or filing electronically online. The dates by which
a return must be filed depends on the method used.
All completed and signed paper returns must be normally filed by 31 October following the end of the
tax year
All online electronic returns must be filed by 31 January following the end of the tax year.
The relevant dates for a 2015/16 return are therefore 31 October 2016 (paper returns) and 31 January
2017 (electronic returns)
The 31 October date will also be the deadline for a taxpayer to complete a paper return if they wish
HMRC to prepare a self assessment on their behalf. For tax returns filed online a self assessment is
automatically provided as part of the online filing service.
The 31 January following the end of the tax year is known as the filing date regardless of whether
the return is filed on paper or electronically. This must be distinguished from the date on which the
return is filed. (Known as the actual filing date) HMRC can amend a tax payer self assessment to
correct obvious errors or mistakes within nine months of receiving the return.
The tax payer can give notice to an officer to amend his tax return within 12 months of the filing date
regardless of whether the return is paper based or filed electronically.
17.2
Notification of chargeability
An individual who receives a source of income subject to income tax or capital gains tax must notify
HMRC by 5th October following the end of the tax year the source arose.
Failure to notify HMRC will result in a standard penalty based on a percentage of tax unpaid on 31
January following the end of the tax year
17.3
Tax returns
Tax returns must usually be filed by 31 October (paper) or 31 January (electronic) following the end of
the tax year.
There are two exceptions to this general rule.
The first exception applies if the notice to file a tax return is issued by HMRC to the taxpayer after 31
July in Year 2, but on or before 31 October in Year 2. In this case, the latest filing date is:
the end of 3 months following the notice, for a non-electronic return.
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31 January in Year 2, for an electronic return.
The second exception applies if the notice to file the tax return is issued to the taxpayer after 31 October
in Year 2. In this case, the latest filing date is the end of 3 months following the notice.
17.4
Late filing of returns
There will be an initial penalty of 100 if the return is filed after the filing date
If a return is more than three months late then there will be a daily penalty of 10 per day (for a
maximum of 90 days)
If a return is more than six months late a penalty of 5% of the tax due on the return will be charged
(subject to a minimum of 300).
If a return is more than twelve months late a further penalty of 5% of the tax due can be charged,
although a higher percentage will be charged if the failure to submit is deliberate.
17.5
Records
Records must be retained until five years after the filing date, which is 31 January 2022 for the year
2015/16 if the tax payer is a business or has properties to let. However records must be retained for
only one year after the filing date, which is 31 January 2018 for the year 2015/16 if not in business.
Copies of original documents except originals of documents showing tax deducted at source must be
retained.
A failure to retain records can result in a penalty of up to 3,000.
The maximum penalty will only be charged in serious cases
17.6
Claims
All claims and elections which can be made in a tax return must be made in this manner if a return
has been issued.
The time limit for making a claim is 4 years from the end of the tax year, unless a different limit is
specifically set.
Error or mistake claim

The time limit is 4 years from the end of the tax year to correct errors in a tax return when the tax would
otherwise be overcharged, for 2015/16 this will be 5 April 2020.
17.7
Payment on account and Balancing payment
Payments on account
Payments on account are usually required where the income tax and Class 4 NICs due in the previous
year exceeded the amount of income tax deducted at source; this excess is known as 'the relevant
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amount'. Income tax deducted at source includes tax deducted at source on interest, PAYE deductions
and tax credits on dividends.
The payments on account are each equal to 50% of the relevant amount for the previous year.
Balancing payment
The balance of any income tax and Class 4 NICs together with all CGT and Class 2 NICs due for a year
Date
Payment
31 January in the tax year
1st payment on account
31 July after the tax year
2nd payment on account
31 January after the tax year
Final payment to settle the remaining liability

(Balancing Payment)
Important/key points
No payments on account are due if the previous years tax payable by self assessment was 1,000
or if more than 80% of the tax liability for the previous year was deducted at source.
Payments on account of CGT are never required.
Class 4 NIC is payable at the same time as the income tax on trading income.
Note, the tax payer can claim to reduce payments on account at any time before 31 January following
the tax year. This would be done if they expected actual income tax and class 4 NIC is expected to
be less than the previous year. If the claim is incorrect, penalties and interest will be charged.
The maximum penalty is the difference between the amounts actually paid on account and the
amounts that should have been paid on account.
17.8
Interest and Penalty for late payment of tax
Late payments
Interest is charged on late payment of tax at a rate of 3.0%.
For 2015/16,
Payment on account: Interest runs from 31/1/2016 or 31/7/2016
Other payments: Interest runs from 31/1/2017
Interest charged is not tax deductible for individuals
In addition late payments of tax will attract a penalty as follows:
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a) If tax is paid more than one month late there will be a penalty of 5% of the amount due.
b) Further penalties of 5% will be charged where tax is unpaid after six months and again twelve
months.
The penalties only apply to the balancing payment, and not payments on account. They therefore
cover income tax, Class 4 NIC, Class 2 NIC and capital gains tax paid late.
Repayment
If tax is repaid, HMRC pay interest at a rate of 0.5% p.a. from 31 January, or if later, the date of
original payment.
Interest received is not taxable for an individual.
17.9
Capital gains tax
Capital gains tax is payable on 31 January after tax year 31 January 2017 for 2015/16.
There are no payments on account for capital gains tax.
Under self assessment, gains must be reported to the HMRC within 6 months of the end of the tax
year in which the asset is sold. (i.e by 5 October)
17.10 Enquiries into returns

HMRC can enquire into a taxpayer return by written notice by the later of:
a) 12 months following the date the return is actually filed.
b) If the return is late (ie after the filing date), 12 months following the relevant quarter days ie 31/1,
30/4, 31/7, 31/10
c) An enquiry may be made due to:
A suspicion that income is understated
Deductions being incorrectly claimed
Other information in HMRCs possession
Being part of a random review process
17.11 Determinations and discovery assessments

(a) If a return is not delivered by the filing date, HMRC may issue a determination of the tax payable
within three years of the filing date. There is no appeal against it.
(b) If HMRC believe that not enough tax has been assessed for an accounting period they can make a
discovery assessment to collect the tax.
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(c) A discovery assessment can only be made if:

HMRC could not reasonably be expected to have been aware of a loss of tax and are supplied with
information to draw their attention to a contentious matter such as the use of a valuation or estimate.
HMRC can raise an assessment within 4 years from end of the tax year if there is no careless or deliberate
behaviour by the taxpayer. This increases to 6 years from the end of the tax year if there is careless
behaviour, and 20 years from the end of the tax year if there is deliberate error or failure to notify a
chargeability to tax.
17.12 Penalties for incorrect returns

The amount of penalty is based on the amount of tax understated, but the actual penalty payable is linked
to the taxpayers behaviour, as follows:
a) The maximum amount of the penalty for error depends on the type of error:
Type of error
Maximum penalty payable
Careless
30% of PLR
Deliberate not concealed
70% of PLR
Deliberate and concealed
100% of PLR
b) there will be no penalty where a taxpayer simply makes a mistake.

c) there will be a moderate penalty (up to 30% of the understated tax) where a tax payer fails to take
reasonable care.
d) there will be a higher penalty (up to 70% of the understated tax) if error is deliberate.
e) there will be an even higher penalty (up to 100% of the understated tax) where there is also
concealment of the error.
f)
PLR is Potential Lost Revenue
g) A penalty for error may be reduced if the taxpayer tells HMRC about the error this is called a
disclosure.
h) An unprompted disclosure is one made at a time when the taxpayer has no reason to believe HMRC
has discovered, or is about to discover, the error. Otherwise, the disclosure will be a prompted
disclosure.
i)
A penalty will be substantially reduced where the taxpayer makes disclosure, especially unprompted
disclosure to HMRC.
j)
The minimum penalties that can be imposed are as follows:
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Type of error
Unprompted
Prompted
Careless
0% of PLR
15% of PLR
Deliberate not concealed
20% of PLR
35% of PLR
Deliberate and concealed
30% of PLR
50% of PLR
Income Tax Fraud

There is a statutory offence of evading income tax. The penalty may be up to seven years in prison or an
unlimited fine or both.
17.13 Appeal against an HM Revenue & Customs amendment to a return

An appeal against an amendment to a return must be made in writing within 30 days of the amendment
and must state the grounds for the appeal. Appeals may initially be made to HMRC. An officer
unconnected with the case will undertake a review. The taxpayer then has 30 days in which to appeal to
the Tribunal.
Tribunal cases are allocated to one of four tracks:
i.
The paper track hears simple appeals, e.g. appeals against the imposition of a fixed penalty. This
is the default track and cases are normally decided without a hearing.
ii.
The basic track involves a hearing but the exchange of documents beforehand is kept to a
minimum.
iii.
The standard track involves cases that are subject to more detailed case management and
formality.
iv.
The complex track is for long or complex cases, or those involving an important principle or a
large financial sum.
A decision of the First Tier Tribunal may be appealed to the Upper Tribunal. A decision of Upper Tribunal
may be appealed to Court of Appeal
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PART E: INHERITANCE TAX
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Chapter 18: Inheritance tax: scope and transfers of value

18.1
Introduction
IHT is charged on transfer of value of chargeable property by a chargeable person.

Chargeable property
Every asset to which the individual is beneficially entitled is called chargeable asset.
Chargeable person
An individual who is domiciled in UK will liable to IHT on transfer of their worldwide assets and individual
who is not domiciled in UK will liable to IHT on transfer of their UK assets only.
Transfer of value:
A gratuitous disposition which results in an individual being worse off. It is calculated by applying
diminution in value rule also called loss to donor as follows:
Value of estate before transfer
Value of estate after transfer
(X)
Diminution in value/ transfer of value
18.2
Inheritance Tax
There are two main chargeable occasions for inheritance tax:

(a) Transfers of value made in the lifetime of the donor (lifetime transfers)
(b) Transfers of value made on death, for example when property is left in a Will (death estate)
An example of a transfer of value is a gift by an individual to another individual.
Another example of a transfers of value is a gift by an individual to trustees. A trust is a legal structure
where one person (the settlor) gives property to one or more people (the trustees) to be held for the
benefit of one or more people (the beneficiaries).
18.3
Chargeable transfers and potentially exempt transfers
Potentially exempt transfer
A potentially exempt transfer (PET) is a lifetime transfer (other than an exempt transfer) made by an
individual to another individual.
A potentially exempt transfer (PET) is exempt from IHT when made and will remain exempt if the
donor survives for at least seven years from making the gift. If the donor dies within seven years of
making the PET, the transfer will become chargeable to IHT.
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Chargeable lifetime transfer
Any other lifetime transfer by an individual (eg a gift to trustees) which is not an exempt transfer is a
chargeable lifetime transfer (CLT).
A chargeable lifetime transfer (CLT) is immediately chargeable to IHT when made.
18.4
Calculation of tax on lifetime transfers
There are two aspects of the calculation of tax on lifetime transfers:

(a) Lifetime tax on CLTs
(b) Additional death tax on CLTs and death tax on PETs, in both cases where the donor dies within
seven years of making the transfer
Lifetime tax
Lifetime inheritance tax on lifetime transfers is chargeable at two rates of tax: a 0% rate (the 'nil rate')
and 20%. The nil rate is chargeable where accumulated transfers do not exceed the nil rate band limit.
The excess is chargeable at 20%.
Donee pays tax
When a CLT is made and the donee (ie the trustees) pays the lifetime tax, follow these steps to work
out the lifetime IHT on it:
Step 1
Look back seven years from the date of the transfer to see if any other CLTs have been made. If so,
these transfers use up the nil rate band available for the current transfer. This is called seven year
accumulation. Work out the value of any nil rate band still available.
Step 2
Compute the gross value of the CLT. You may be given this in the question or you may have to work
out the diminution of value or deduct exemptions (such as the annual exemption described later in this
Chapter).
Step 3
Any part of the CLT covered by the nil rate band is taxed at 0%. Any part of the CLT not covered by the
nil rate band is charged at 20%
Donor pays tax
When a CLT is made and the donor pays the lifetime tax, follow these steps to work out the lifetime IHT
on it:
Step 1
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Look back seven years from the date of the transfer to see if any other CLTs have been made. If so,
these transfers use up the nil rate band available for the current transfer. Work out the value of any nil
rate band still available.
Step 2
Compute the net value of the CLT. You may be given this in the question or may have towork out the
diminution of value or deduct exemptions (such as the annual exemption discussed later in this Chapter).
Step 3
Any part of the CLT covered by the nil rate band is taxed at 0%. Any part of the CLT not covered by the
nil rate band is taxed at 20/80.
Step 4 Work out the gross transfer by adding the net transfer and the tax together. You can check your
figure by working out the tax on the gross transfer.
Death tax
Death inheritance tax on lifetime transfers is chargeable if the donor dies within seven years of making
the lifetime transfer. It is chargeable at two rates: 0% and 40%. The nil rate is chargeable where
accumulated transfers do not exceed the nil rate band limit at the date of death. The excess is chargeable
at 40%.
Taper Relief
The longer the donor survives after making a gift, the lower the death tax. This is because taper relief is
applied to the tax charge as follows:
Time from transfer to date of death
Relief
3 4 years
20%
4 5 years
40%
5 6 years
60%
6 7 years
80%
Death tax on chargeable lifetime transfer and potentially exempt transfer

The IHT on death on a CLT or PET made in seven years before death is calculated as follows:
Look back seven years from the date of the transfer to see if any other chargeable transfers were
made (including PETs which have become chargeable). If so, these transfers use up the nil rate band
available for the current transfer. Work out the value of any nil rate band remaining.
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Compute the value of the CLT or PET. For CLT, this is the gross value of the transfer that you worked
out for computing lifetime tax.
Any part of the CLT or PET covered by the nil rate band is taxed at 0%. Any part of the CLT or PET
not covered by the nil rate band is charged at 40%.
Reduce the death tax by taper relief (if applicable).
Deduct any lifetime tax paid in case of CLT. The death tax may be reduced to nil, but there is no
repayment of lifetime tax.
18.5
Advantages of making lifetime transfers
If the donor makes a potentially exempt transfer and survives seven years, he has reduced his estate
for IHT but the transfer is exempt. No inheritance tax is payable on the transfer and it does not form
part of the seven year cumulation for later transfers.
If the donor makes a chargeable lifetime transfer and survives seven years, he has reduced his estate
for IHT and the only inheritance tax payable is that on the lifetime transfer at lifetime rates.
If the donor does not survive seven years, IHT is payable on lifetime transfers at death rates at the
date of death but taper relief reduces the death tax if the donor survives between three and seven
years.
The values of lifetime transfers cannot exceed the transfer of value when made. Therefore, it is good
tax planning to give away assets which are likely to increase in value such as land and shares.
18.6
Calculation of tax on death estate
An individual's death estate consists of all the property he owned immediately before death (such as land
and buildings, shares and other investments, cars and cash) less debts and funeral expenses.
Debts and funeral expenses
Debts incurred by the deceased can be deducted if they can be legally enforced as they are either
imposed by law or they are a debt for which the deceased received consideration. Specific examples
of the application of these rules include:
Taxes deductible as imposed by law.
Electricity and gas bills deductible as incurred for consideration.
Gambling debts deductible if relates to legal gambling (eg in a licenced casino or betting shop), not
deductible if relates to illegal gambling as not legally enforceable.
Promise to pay an amount to a relative not deductible as no consideration received.
Oral agreement for sale of interest in land not deductible as not legally enforceable since contracts
for such sales must be evidenced in writing.
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Debts incurred by the deceased but payable after the death may be deductible under the above rules,
but the amount should be discounted because of the future date of payment.
Rent and similar amounts which accrue day by day should be accrued up to the date of death.
If a debt is charged on a specific property it is deductible primarily from that property. For example, a
mortgage secured on a house is deductible from the value of that house. This does not include
endowment mortgages as these are repaid upon death by the life assurance element of the mortgage.
Repayment mortgages and interest-only mortgages are deductible.
Reasonable funeral expenses may also be deducted:

-
What is reasonable depends on the deceased's condition in life.
Reasonable costs of mourning for the family are allowed.
The cost of a tombstone is deductible.
Tax on death estate
Take into account all transfers in seven years before death including PETs which have become
chargeable). If so, these transfers use up the nil rate band available for the death estate. Work out
the value of any nil rate band still available.
Compute the value of the death estate.
Calculate the tax at 40% on excess over nil rate band at death.
18.7
Transfer of unused nil rate band
Individual (A) dies
A had spouse/civil partner (B) who died before A
B had unused nil rate band on death
Effect
Nil rate band of A increased by unused nil rate band of B
Affects additional tax on CLTs, tax on PETs and death estate
Scale up if nil rate band increased between B's death and A's death
Claim
Within two years of end of month of A's death by A's PRs.
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18.8
Exempt transfer
The small gifts exemptions

Outright gifts to individuals totalling 250 or less per donee in any one tax year are exempt. If gifts total
more than 250 the whole amount is chargeable.
The annual exemption (AE)
Use against transfers in date order. Can carry forward unused amount for one year only. Use current
year first before b/f.
Where CLTs and PETS made in the same year the CLTs should be made first to use any available
annual exemptions. If used up against the PETs the exemption(s) will be wasted if the PET never
becomes chargeable.
Normal expenditure out of income
For this exemption, the donor must show a regular pattern of giving. Also the donor must have enough
income left to retain their normal standard of living.
Marriage
5,000 from parent
2,500 from remote ancestor, or party to marriage
1,000 from anyone else
Transfers between spouses/civil partners

Any transfers of value between spouses/civil partners are exempt. The exemption covers lifetime gifts
between them and property passing under a will or on intestacy.
18.9
Basic inheritance tax planning
Use exemptions
Donor should ensure that use is made of exemptions in relation to lifetime gifts, in particular the annual
exemption, the marriage/civil partnership exemption, the normal expenditure out of income exemption
and the spouse/civil partner exemption.
When considering how to pass on assets in the death estate, the spouse/civil partner exemption may
be used to ensure that no inheritance tax is payable when the first spouse/civil partner dies.
Make gifts early in life
The earlier that a gift is made in lifetime which is, or may become, a chargeable transfer, the more likely
it is that the donor will survive seven years from making it.
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Make use of the nil rate band

Gifts to trusts are chargeable transfers. If the gift is within the nil rate band, however, there will be no
inheritance tax payable when the gift is made. Transfers are only cumulated for seven years and
therefore, after that time has elapsed, a further gift within the nil rate band can be made to a trust, again
without incurring any immediate payment of inheritance tax.
Skip a generation
Donors may consider giving assets to their children, either during lifetime or on death. Such assets may
then be passed by those children to their own children, the grandchildren of the donor.
If the donor's children already have sufficient assets for their financial needs, it may be beneficial to skip
a generation so that gifts are made to grandchildren, rather than children. This avoids a further charge to
inheritance tax on the death of the children so that gifts will then only be taxed once before being inherited
by the grandchildren, rather than twice.
18.10 Payment of inheritance tax

Event
Liability to pay tax
Due date
CLT lifetime tax
Donor unless trustees agree to pay
Later of
(1) 30 April just after end of tax year
(2) Six months after end of month of
transfer
CLT death tax
Trustees
Six months from end of month of donor's

death
PET
Donee
Six months from end of month of donor's

death
Death estate
Personal Representatives
Earlier of
(1) Delivery of account
(2) Six months from end of month of
donor's
death
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PART F: CORPORATION TAX
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Chapter 19: Computing taxable total profits and the corporation tax
liability
19.1
Companies
Companies must pay corporation tax on their taxable total profits for each accounting period. A
company is any corporate body (limited or unlimited) or unincorporated association, eg sports club.
Residence
A company is resident in the UK if it is incorporated in the UK or if its central management and control
are in the UK. A UK resident company is subject to UK corporation tax on its worldwide profits.
19.2
Financial years (FY)
The tax rates to be used for corporation tax are set for Financial Years (FY). Financial starts on 1st
April and ends on 31 march. FY 2015 = 1 April 2015 to 31 March 2016
19.3
Period of account
A period of account is the period for which accounts are prepared.
19.4
Accounting period
An accounting period is the period for which corporation tax is charged.
An accounting period can never exceed 12 months. If a company prepares accounts for a period
exceeding twelve months, the period of account must be split into two accounting periods.
-
The first 12 months form the first accounting period
The remaining months form the second accounting period
When accounting period start?
It starts when the company starts to trade OR
Immediately after the end of the previous accounting period.
When accounting period start?

It ends on earlier of:
12 months after its start
The end of the company's periods of account
The company's ceasing to be resident in the UK
When a company ceases to trade, or when its profits being liable to corporation tax are ceased.
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19.5
Taxable total profits
A company's taxable total profits are arrived at by aggregating its various sources of income and
chargeable gains (total profits) and then deducting qualifying charitable donations and certain losses.
Pro forma computation
Trading profits
Property business income
Interest income from non-trading loan relationships
Miscellaneous income
Chargeable gains
Total profits
Less losses deductible from total profits
(X)
Less qualifying charitable donations
(X)
Taxable total profits for an accounting period
Notes
Dividends received from other UK and overseas companies are not taxable, dividends paid are not
deductible.
Companies pay corporation tax (not capital gains tax) on chargeable gains
19.6
Tax Adjusted Trading Profit
This calculation is similar to unincorporated business:

Adjusted profit
Less: Capital Allowances
(X)
Tax adjusted trading profit
The rules for unincorporated business are similar for incorporated businesses but with some notable
exceptions:
a. No private element of expenses added back
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b. Drawings (cash or goods) is not relevant for companies. Any distributions are out of post tax profit
c. Family salaries are not relevant for companies
d. Legal fees regarding the issue of share capital are an expense only for companies and as they are
of a capital nature, the expense is disallowed and added back in the adjustment of trading profit
e. Legal fees with regard to registering patents and trademarks are allowable by statute
f.
Interest payable on a non-trading loans are added back, but the expense is deductible instead against
interest income
g. Interest payable to HMRC is treated as non-trading so is also tax relievable against interest income
(interest receivable from HMRC is taxable as interest income)
h. Royalties payable- Relief for royalties payable is given in line with the accounting treatment, and
therefore royalties payable are allowed as a deduction when calculating the adjusted trading profit.
No adjustment is therefore required.
i.
Royalties receivable- The taxation of royalties receivable will follow the accounting treatment on an
accruals basis. Royalties receivable will therefore be included in the adjusted trading profit, with no
adjustment being required.
j.
Capital allowances- As per unincorporated business, but, there are no private use assets.
k. Basis periods- The complicated rules for unincorporated traders are not relevant for companies.
19.7
Property Income
a. As per individuals with some notable exceptions

b. The property income is calculated on an accruals basis
c. Interest payable on a loan to buy a rental property is deductible against interest income not property
income
d. There is no rent a room relief for companies
e. If a company makes a property loss on its properties it must be offset against total profits before
deduction of qualifying charitable donations of the current period and any excess is carried forward
against total profits before qualifying charitable donations of future periods
19.8
Interest income
a. All interest receivable is assessed as interest income on an accruals basis

b. Companies receive all interest GROSS
c. Interest payable is deductible against tax adjusted trading profit if loan used for trading purposes eg
to acquire property or plant & machinery to use in the trade, or to increase working capital. If the loan
is used for non trading purposes then it is deductible against interest income. It is relievable on an
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accruals basis. The main examples of non trading loans are those taken out to acquire a rental /
investment property, or to acquire shares
19.9
Qualifying Charitable Donations
For companies to ensure tax relief is achieved on their charitable donations they should make such
payments under the qualifying charitable donations system. The payment is GROSS and deductible on
a paid basis. Thus in the adjustment of trading profit any such payments should be added back and
instead included as a separate deduction on the Corporation Tax computation
19.10 Dividends
Dividends received from UK and overseas companies are never included as part of Taxable Total
Profits.
19.11 Long periods of account

Long periods of account are split into two accounting periods: the first 12 months and the remainder.
Divide profits between the accounting periods as follows:
a. Trading income: time apportion the amount before capital allowances
b. Compute capital allowances separately for each period
c. Property business income: time apportion
d. Interest income: allocate to period in which it accrues
e. Miscellaneous income: time apportion
f.
Gains: allocate to the period in which they are realised
g. Qualifying charitable donations: allocate to the period in which they are paid
19.12 Rate of corporation tax

For financial year 2015, there is a single rate of corporation tax (the main rate) which is 20%.
Corporation tax payable is calculated as:
Taxable Total Profits corporation tax rate for the financial year(s)
19.13 Accounting period in more than one financial year

If a companys Accounting Period falls within more than one financial year i.e. into 2 FYs, then if the
rates have changed there is a need to apportion the results in to the respective FYs and if not then tax
can be calculated for the accounting period as if it fell within one financial year.
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19.14 Short chargeable accounting periods

The upper and lower limits are limits for a 12 month period. If the accounting period is less than 12
months then the limits need to be time apportioned accordingly.
19.15 Long periods of account

Remember that an accounting period cannot be more than 12 months long. If the period of account
exceeds 12 months it must be split into two accounting periods, the first of 12 months and the second
of the balance.
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Chapter 20: Chargeable gains for companies

20.1
General
A UK resident company is chargeable on its worldwide gains and may dispose of a chargeable asset
not only by sale but also on the loss or destruction of an asset.
20.2
Calculation of gains and losses for companies
20.3
Disposal proceeds (or market value)
Less incidental costs of disposal
(X)
Net proceeds
Less allowable costs
(X)
Unindexed gain
Less indexation allowance
(X)
Chargeable gain
The indexation allowance
a. For companies only, NOT individuals, the increase in value of an asset due to inflation is not taxable
- this increase is removed from the gain by way of indexation allowance.
b. Companies are entitled to an indexation allowance from the month of acquisition until the month of
disposal of an asset and is computed by reference to the movement in the Retail Prices Index (RPI)
c. It is calculated as:
RPI for month of disposal - RPI for month of acquisition
cost of the asset
RPI for month of acquisition

d. The increase in the RPI is expressed as a decimal and is rounded to three decimal places.
e. The indexation allowance cannot increase or create a loss.
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f.
If the RPI has fallen from the month of acquisition to the month of the disposal, the indexation
allowance will be nil.
20.4
Gains and losses
a. Capital gains are chargeable to corporation tax.

b. Capital losses only arise when net proceeds are less than allowable cost. Indexation allowance
may not be used to either create or increase a loss.
c. If capital gains and losses arise in the same accounting period, they are netted off. If the resultant
figure is a gain, it is charged to corporation tax.
d. If the resultant figure is a loss, it is carried forward and set against future capital gains.
e. Capital losses brought forward may only be relieved against capital gains, not any other type of
income.
f.
The terms capital gains and chargeable gains are interchangeable.
20.5
Share matching rules for companies
The shares sold are deemed disposed of in the following order:

a. shares acquired on same day
b. shares acquired in previous 9 days
c. Shares from the FA 1985 pool
The share pool records the number and cost of shares for each acquisition and disposal as it did for
individuals but also has to deal with the fact that companies are entitled to indexation allowance. Thus
whenever shares are purchased or sold a reindexation of the indexed cost of the shares in the pool is
added to the indexed cost total which is recorded in a separate Indexed Cost column of the share pool.
20.6
FA 1985 pool
a. The FA 1985 pool comprises the following shares of the same class in the same company.
Shares held by a company on 1 April 1985 and acquired by that company on or after 1 April
1982
Shares acquired by that company on or after 1 April 1985
b. The first step in constructing the FA 1985 share pool is to calculate the value of the pool at 1 April
1985 by indexing the cost of each acquisition before that date up to April 1985.
c. Disposals and acquisitions of shares which affect the indexed value of the FA 1985 pool are termed
'operative events'. Prior to reflecting each such operative event within the FA 1985 share pool, a
further indexation allowance (an 'indexed rise') must be computed up to the date of the operative
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event concerned from the date of the last such operative event (or from the later of the first
acquisition and April 1985 if the operative event in question is the first one).
d. Indexation calculations within the FA 1985 pool before its April 1985 value are rounded to three
decimal places.
e. Indexation calculations within the FA 1985 pool after its April 1985 value has been calculated are
not rounded to three decimal places. This is because rounding errors would accumulate and
have a serious effect after several operative events.
20.7
Bonus issues
a. A bonus issue increases the number of shares held with no corresponding increase in cost.
b. The bonus shares are simply added to the number of shares column in the pool.
c. Do not however index the cost of the original shares to the date of the bonus as no new cost is
incurred.
20.8
Right issues
a. A rights issue again increases the number of shares held, but this time there is also a cost
associated with the shares. It is therefore dealt with in the same way as any other acquisition
b. The indexed cost in the pool is indexed to the date of the rights issue. The rights shares are added
to the number of shares column and the cost is then added to both the cost and indexed cost
columns in the pool.
20.9
Reorganisations and takeovers
The rules on reorganisation and takeovers apply in a similar way for company shareholders as they do
for individuals. The only difference is the calculation of indexed cost together with the cost which is
apportioned in the same basis.
20.10 Relief for replacement of business assets (rollover relief)

Rules are similar except that goodwill is not a qualifying asset for the purposes of corporation tax.
Deferral is obtained by deducting the indexed gain from the cost of the new asset. The new asset will
have a base cost for chargeable gains purposes of its purchase price less the gain rollover over.
20.11 Depreciating assets

The relief for investment into depreciating assets works in the same way for companies as it does for
individuals. The indexed gain is calculated on the old asset and is deferred until the gain crystallises
on the earliest of:
a. The disposal of the replacement asset
b. The date the replacement asset ceases to be used in the trade
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c. Ten years after the acquisition of the replacement asset
Chapter 21: Losses

21.1
Trading losses
a. Carry forward relief

Trading loss will be carry forward and set off against 1st available future tax adjusted trading profit from
same trade. Loss can be carry forward indefinitely and partial claim is not allowed.
b. Set off trading loss against total profit
Current year trading loss can be off set against:
i)
The total profits before qualifying charitable donation of the current year.
ii) Having first relieved the trading loss against total profit of current year only then any remaining
trading losses can be carried back against total profits before qualifying charitable donation of the
previous 12 months.
iii) Partial claim is not allowed.
c. Terminal Loss Relief
If trading loss arises in last 12 months of trade then this loss can be set off against the total profit of
previous three years on LIFO basis. Partial claim is not allowed.
21.2
Non-trading losses
a. Capital losses
Capital losses are relieved against:
i)
Current year capital gains, then
ii) Net capital gains in future accounting periods.

b. Property Business losses
Property Business losses are relieved by
i)
Setting them off against total profits before deduction of qualifying charitable donations of the
current period, then
ii) By carrying them forward against total profits before qualifying charitable donations of future
periods.
21.3
i)
Choice of Loss Relief:

Tax saving
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ii) Cash flow

iii) Wastage of qualifying charitable donations
Chapter 22: Groups

22.1
Types of group
A group exists for taxation purposes where one company is a subsidiary of another. The percentage
shareholding involved determines the taxation consequences of the fact that there is a group.
The three examinable types of relationship for tax purposes are:
a. Associated companies
Companies are associated with each other if:
One controls the other or
Both are under control of a same person/company
Control means holding >50% of share capital or voting rights, or distributable profits or net assets on
winding up
Tax Implications:
If company becomes connected/associated company during the accounting period it will be treated as
connected company for whole of the accounting period. Overseas companies are included but Dormant
companies are excluded. Dividend received from associated companies is not included in FII. Upper &
lower limits are divided by number of associated companies. Only one AIA is available to a group of
companies and group members can allocate it in any way across the group.
b. 75% subsidiaries/Group relief
The relief allows companies in a 75% group to transfer any part of current year trading losses to set off
against any part of a claimant companys taxable total profit of a corresponding accounting period.
Definition of a 75% group
One company is the 75% subsidiary of another, or
Both companies are 75% subsidiaries of a third company.
The holding company must
own at least 75% of share capital, and
be entitled to at least 75% of the subsidiarys assets on winding up, and
be entitled to at least 75% of the subsidiarys income on a distribution.
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Sub-subsidiaries
The holding company must have an effective interest in the sub-subsidiary of at least 75%
Tax Implications
i)
Group can be formed without ultimate parent company and one company can be part of more than
one group.
ii) Overseas Companies can become part of this group but relief is only available to UK resident
companies unless overseas company is EEA.
iii) Member of 75% loss relied group can transfer:
Unused Trading losses & property business loss
Unused Gift Aid Donation
Unused non trading interest expense.
iv) Only current year losses are eligible for relief. No relief is available for trading losses brought
forward from previous years or trading losses carried back.
v) Where the accounting periods of two group companies are different, then group relief will be
restricted to the corresponding or coterminous period
vi) Capital losses are not eligible for group relief.
vii) Surrendering company (company that surrenders its loss) may surrender as much of loss as it
wants to & it is not necessary to relieve loss against its own income & gains 1st
viii) Claimant company (company to which loss is surrendered) can offsets loss against Taxable Total
Profits of its corresponding Acc. Period but after offsetting its own b/f trading loss.
ix) Factors to consider before surrendering relief are as follows:
The rate of corporation tax is no longer a factor when it comes to the choice between loss reliefs
or when considering group relief claims.
The only relevant factors are now the timing and cash flow in relation to the relief obtained (an
earlier claim is generally preferable) and the extent to which relief for qualifying charitable
donations will be lost.
x) Claimant company may make payments to surrendering company for group relief. Any payment up
to the amount of loss surrendered is ignored for corporation tax purposes.
xi) Losses which arise before joining the group or after leaving the group are ineligible for group relief.
c. Groups for chargeable gains purposes/Chargeable gains groups
Definition
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75% capital gain Group is formed when:
One company is the 75% subsidiary of another, OR
Both companies are 75% subsidiaries of a third company
Sub-subsidiaries
Holding company must have effective interest of 50% in sub-subsidiary.
Note: Group cannot be formed without ultimate parent company and one company cannot be part of
more than one group.
Tax Implications:
i)
Group CO.s can transfer assets between themselves at no gain / no loss & deemed at cost plus
Indexation Allowance
ii) Group companies can transfer only Current year capital gains or capital losses to other group
members. While b/f capital loss is not allowed to transfer.
iii) Election must be made in 2 years from end of accounting period of disposal
iv) Rollover relief is available on a group wide basis Where:
one company sells qualifying asset, and
Another company buys a qualifying asset within the rollover relief qualifying time period.
Gain can be rolled over against purchased asset of other CO.
22.2
Summary
Try to remember the following summary it will be of great help in the exam.
i)
Parent Co controls over 50% of subsidiary
Associated companies for upper and lower limits
ii) Parent Co owns 75% or more of subsidiary (directly and effectively)
Surrender trading losses, excess property business losses, excess qualifying charitable
donations to companies with some taxable total profits for same time period
iii) Parent Co owns 75% or more of subsidiary and subsidiary owns 75% or more of its subsidiaries
Transfer assets between companies automatically at no gain/no loss
Chargeable gains and losses can be matched between group member companies
All companies treated as one for rollover relief purposes
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Chapter 23: Self assessment and payment of tax by companies

23.1
A company falling within the scope of corporation tax for the first time must notify HMRC when its
first accounting period begins, within 3 months of the start of the accounting period. Failure to notify
chargeability to tax within 12 months of the end of the accounting period will lead to a standard
penalty based on a percentage of the tax unpaid 12 months after the end of the accounting period.
23.2
Corporation tax return
Company receives a notice of chargeability to corporation tax after end of accounting period and
must notify HMRC within 12months from end of accounting period if does not receive a notice.
Return
Companys tax return is filed electronically and must include self-assessment of tax with their
accounts.
The return is due for filling on/or before the later of
12 months after the end of the period to which return relates
3 months after the date on which the notice to file the return is received
Failure to submit the return on time will result in penalty as follows:

Return late by
Penalty (1st & 2nd consecutive

failure)
Penalty (3nd & consecutive failure)
Upto 3 months
100
500
More than 3 upto 6 months
200
1000
More than 6 upto 12 months
200 + 10% of tax
1000 + 10% of tax
More than 12 months
200 + 20% of tax
1000 + 20% of tax
23.3
Claims
Wherever possible claims must be made on a tax return or on an amendment to it and must
be quantified at the time the return is made.
If a company believes it has made an error in a return, an error or mistake claim may be made
within four years from the end of the accounting period.
Other claims must be made within four years of the end of the accounting period unless a
different time limit specified.
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23.4
i)
Records
Companies must keep records until the latest of
six years from the end of the accounting period
the date any enquiries are completed
the date after which enquiries may not be commenced
ii) All businesses records and accounts including contracts and receipts must be kept
iii) Failure to keep records can lead to a penalty or up to 3,000 for each accounting period affected
23.5
i)
Enquiries
HMRC may enquire into a corporation tax return provided that they first give written notice that they
are going to enquire.
ii) The notice must be given within a year after the later of:
12 months following the date the return is actually received by HMRC
If the return is late, 12 months following the relevant quarter days i.e. 31/1, 30/4, 31/7, 31/10
iii) An enquiry may be made due to:
A suspicion income is understated
Deductions being incorrectly claimed xx Other information in HMRCs possession xx Being

part of a random review process
23.6
Determinations and Discovery assessments
If a return is not delivered by the filing date, HMRC may issue a determination of the tax payable
within 3 years of the filing date. There is no appeal against it.
Discovery assessment
HMRC can raise an assessment within 4 years from the end of the accounting period; this is extended
to 6 years if there is a careless error or 20 years if there is a deliberate error or failure to notify a
chargeability to tax.
23.7
i)
Appeals and Disputes
The company can appeal against amendments to the corporation tax return.
ii) The appeal must be normally be made within 30 days of the amendment and must state the grounds
for appeal.
iii) The appeals procedure is as per VAT.
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23.8
i)
Penalties for incorrect returns
No penalty where a taxpayer simply makes a mistake
ii) 30% unpaid tax where a tax payer fails to take reasonable care.
iii) 70% unpaid tax if error is deliberate.
iv) 100% unpaid tax if deliberate failure with concealment.
Note: Penalty will be reduced where a taxpayer make a disclosure, especially when this is
unprompted by HMRC.
23.9
Payment of tax
Normal
Corporation tax is payable 9 months and one day after the end of each accounting period.
Quarterly Installments
Available to large companies. Large company is one whose profits are more than 1,500,000.
However, profits include franked investment income (dividend received multiplied by 100/90),
whilst the threshold of 1,500,000 is divided by the number of 51% group companies at the
end of the immediately preceding accounting period. The 1,500,000 threshold is
proportionately reduced where an accounting period is less than 12 months.
The only exception from this rule is that any dividends received from a 51% subsidiary
company (sometimes called group dividends) are ignored and so are not included as FII.
Four quarterly installments will be made on 14th of months 7, 10, 13 and 16 following the
start of the accounting period. Installments are based on the estimated current years liability.
Thus for the accounting year ended 31 March 2016 the first quarterly instalment payment
would be due October 14, 2015 followed by further payments due January 14, April 14 and
July 14, 2016. There will be four instalments and each instalment will be 25% of the estimated
amount due.
If an accounting period is less than 12 months long subsequent instalments are due at three
monthly intervals but with the final payment due in the fourth month of the next accounting
period.
Question- A large company has a corporation tax liability of 880,000 for the eight month
period to 30 September 2015. Accounts had previously always been prepared to 31 January.
Show when the corporation tax liability is due for payment.
Solution- 880,000 must be paid in instalments. The amount of each instalment is 3 *

880,000/8= 330,000. The due dates are:
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14 August 2015
330,000
14 November 2015
330,000
14 January 2016
220,000 (balance)
Quarterly payments are not required if current profits 10 million and the company was not
large in previous year.
Calculating the instalments
Instalments are based on the estimated corporation tax liability for the current period (not the
previous period). A company is required to estimate its corporation tax liability before the end
of the accounting period, and must revise its estimate each quarter. It is extremely important
for companies to forecast their tax liabilities accurately. Large companies whose directors are
poor at estimating may find their companies incurring significant interest charges.
The amount of each instalment is computed by

-
Working out 3 * CT/n, where, CT is the amount of the estimated corporation tax liability
payable in instalments for the period and n is the number of months in the period
Allocating the smaller of that amount and the total estimated corporation tax liability
to the first instalment
Repeating the process for later instalments until the amount allocated is equal to the
corporation tax liability
Other points
Interest due to the HMRC on tax paid late will run from the due date to the date of payment
at a rate of 3.0% per annum.
Interest on overpayments of tax will run from the later of the due date or the date tax was
actually paid at a rate of 0.5% per annum.
Under self assessment interest on tax paid late will be deductible against interest receivable.
Interest received on overpaid corporation tax will be taxable as Interest receivable
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PART G: VALUE ADDED TAX
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Chapter 24: An introduction to VAT

24.1
VAT is an indirect tax charged on most goods and services, supplied within the UK and is
borne by final consumer.
VAT is charged on taxable supplies of goods and services in the UK by taxable persons in
the course of their business. It is collected by VAT registered person and paid to HMRC.
VAT on sales is called output VAT and it is calculated on sales after maximum prompt
payment discount whether taken or not. VAT registered person charge VAT on sales and
payable to HMRC.
VAT on purchases is called input VAT. Input VAT is reclaimed from HMRC.
24.2
i)
Introduction
Taxable Supply
Zero Rated
No VAT is charged but considered as taxable supply for determination of registration limit.
ii) Reduced Rated

VAT is charges at low rate. (Will be given in exams)
iii) Standard Rated
iv) Supply on which VAT is charged @20%.
v) Exempt Supply
vi) Supply on which no VAT is charged.
VAT rates
Standard Rated
20%
On most goods and Services supplied
Zero rated
0%
Non luxury food (except in business e.g restaurants), Books,

newspaper, Sewerage and water services, Children's clothes
and footwear, Medicine, Exports outside the EU. Transport,
gift to charity
Exempt
Low Rated
Finance, Insurance, Postal service, education, health, sports

and land (Not buildings).
5%
Fuel for domestic purpose, energy saving materials
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Some supplies are outside the scope of VAT which includes wages, dividends, other taxes, transfer
of business as a going concern and sales between companies in a VAT group.
24.3
Basic Computation
Output VAT (VAT Charged to customers on sales)
XX
Input VAT (VAT paid an purchases)
(XX)
Net VAT Payable / (Recoverable)
XX/(XX)
24.4
Taxable persons
The term 'person' includes individuals, partnerships (which are treated as single entities, ignoring the
individual partners) and companies. If a person is in business making taxable supplies, then the value
of these supplies is called the taxable turnover. If a person's taxable turnover exceeds certain limits then
he is a taxable person and should be registered for VAT.
24.5
VAT registration
Compulsory registration (Historical test)
Registration is compulsory if at the end of any month accumulated taxable supplies of

previous 12 months exceed 82,000. These figures are exclusive of VAT
HMRC must be informed within 30 days after the end of the month in which taxable supplies
exceed 82,000.
The trader will be registered for VAT from next day of 30 days notification period.
VAT registration is not required if taxable supplies in the following 12 months will not exceed
80,000.
Compulsory registration (Future test)
A person is also liable to be registered if at any time there are reasonable grounds for
believing that his taxable supplies of just following 30 days will exceed 82,000 (Exclusive of
VAT). Then individual is required to inform HMRC before end of those 30 days.
Individual will be registered for VAT from beginning of those 30 days.
Voluntary registration
A person making taxable supplies may apply for VAT registration on voluntary basis by writing
an application to HMRC even if taxable supplies are below 82,000. It will be considered VAT
registered from date of application.
Voluntary registration is advantageous where a person wishes to recover input tax on

purchases. However, charging VAT may make the supply less competitive if customers are
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not VAT registered and the trader may have to absorb the VAT output tax thus reducing his
profit. Therefore, consideration needs to be given to the situation of the customer.
For example, consider a trader who has one input during the period which cost 1,000 plus
200 VAT at 20%; he works on the input which becomes his sole output for the year and he
decides to make a profit of 1,000.
a. If he is not registered he will charge 2,200 and his customer will obtain no relief for any
VAT.
b. If he is registered he will charge 2,000 plus VAT of 400. His customer will have input
tax of 400 which he will be able to recover if he, too, is registered.
If the customer is a non-taxable person he will prefer (a) as the cost to him is 2,200. If he is
taxable he will prefer (b) as the net cost is 2,000. Thus, a decision whether or not to register
voluntarily may depend upon the status of customers.
The decision to register may also depend on the image of the business the trader wishes to
project (registration may give the impression of a substantial business). The administrative
burden of registration should also be considered.
Group registration
Companies under common control may apply for group registration.
Advantages of group registration
No VAT implication on intra-group transactions between members of VAT group.
Group members will file single VAT return on group basis
An application to create, terminate, add or remove a CO. from a VAT group may be made at
any time and there is no compulsion to include every member into VAT group.
Disadvantages of group registration
All VAT group members are jointly and severely responsible for group VAT liability.
Administrative difficulties for making single VAT return.
24.6
Deregistration
Compulsory deregistration
If an individual ceases to make taxable supplies or ceases to trade then individual should inform
HMRC within 30 days and individual would be considered as VAT deregister right from date of
cessation.
Voluntary deregistration
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If individual identifies that his taxable supplies will not exceed 80,000 in the following 12 month then
individual can apply for VAT deregistration on voluntary basis by writing an application to HMRC.
Individual will be considered VAT deregistered from date of application.
Consequences of Deregistration
On deregistration date individual is required to calculate output VAT upon all current and non-current
assets according to their market value and this has to be payable to HMRC and if it has less than 1000
it will be waived off.
This charge will not be applicable if following conditions are satisfied:
The business in transferred as going concern.
Same nature of trade carried on by new business
There is no significant break in the trade.
The new owner is/or will be VAT registered.
If all the condition are satisfied then both transferor and transferee can make joint election to transfer
VAT registration in which case all right & obligation including outstanding VAT will be transferred to
transferee.
24.7
VAT Returns
VAT returns are normally completed on a quarterly basis. Each return shows the total output
VAT and total input VAT for the quarter to which it relates. From 1 April 2012 all businesses
are required to file VAT returns and make VAT payments online.
VAT returns must be filed online and electronic payment made by one month and seven days
after the end of the VAT return period. For example for the quarter ended 30 June 2015 a
business has until 7 August 2015 to file its VAT return online and electronically make its VAT
payment
Because VAT is a self-assessed tax, HMRC make control visits to VAT registered traders.
The purpose of a control visit is to provide an opportunity for HMRC to check the accuracy of
VAT returns.
24.8
Substantial traders
If a trader does not make monthly returns, and the total VAT liability over 12 months to the end of a
VAT period exceeds 2,300,000, he must make payments on account of each quarter's VAT liability
during the quarter.
24.9
VAT refunds
VAT refunds are normally made within 30 days.
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Where it is discovered that VAT has been overpaid in the past, the time limit for claiming a
refund is four years from the date by which the return for the accounting period was due
24.10 Tax point

The tax point is the date used to identify the VAT period which should be used to include the output
or input VAT.
Basic tax point
Goods The date the goods are made available.
Services The date the service is performed
Actual tax point
Often the date used as the tax point is not the basic tax point. The rule to determine the tax point is:
The tax point is the earlier of
The date the cash is received
The basic tax point
If the basic tax point is earlier then replace the basic tax point with the invoice date if the invoice is
issued within 14 days after the basic tax point.
24.11 Discounts
Output VAT is now charged on the actual amount received if a discount is offered for prompt
payment. Previously, output VAT was only chargeable on the net figure, regardless of whether
payment was made within the specified time for the discount to be received. For example, a sales
invoice is issued for 1,000 plus VAT of 200. A 5% discount is offered for payment within seven
days. If the discount is not taken, then the output VAT is simply 200. If the discount is taken, then
the output VAT becomes 190 (950 (1,000 less 5%) x 20%). It will be necessary for the supplier to
either provide details of the potential discount on the sales invoice, or to issue a subsequent credit
note for the discount.
24.12 Output VAT
Goods for own use

Where the trader withdraws goods from the business for own use, output VAT must be
accounted for on the replacement value of the supplies.
Gifts of inventory or non-current assets are treated as taxable supplies at replacement cost,
except gifts of:
goods to the same person which cost the trader 50 or less in a 12month period
Business samples, regardless of the number of same samples given to the recipient
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Gifts of services, whether to employees or customers, are not taxable supplies.
24.13 Recovery of input VAT

Pre-registration input VAT can be reclaimed on first VAT return
On services incurred within six months of registration.
On goods purchased within four years of registration, provided the goods are still on hand at
the date of registration.
Recovery of normal input VAT

i)
Capital vs revenue expenditure

There is no distinction between capital and revenue expenditure for VAT. Output VAT and input
VAT is calculated as normal if these expenditures are incurred for trade.
ii) Business entertaining

Input VAT on entertainment expenses incurred for employees and overseas customers is
recoverable. However Input VAT on entertainment expenses incurred for suppliers and UK
customers is irrecoverable.
iii) Motor cars
Input VAT upon purchase of car is irrecoverable unless there is 100% business use (Pool Car)
in which case 100% recovery available. In case of leased car 50% of input VAT is recoverable
where the car has some private use.
Note that if input VAT cannot be recovered on the purchase of a motor car, no output VAT will
be due on its disposal.
iv) Motor Expenses
Input VAT upon fuel cost and repair & maintenance incurred for employees is recoverable even
if there is private use of car by employee. If employee reimburses full fuel cost then output VAT
will be payable upon reimbursed expenses. However If employee reimburses partial fuel cost
then output VAT will be payable but as per HMRC scale charge. Note that VAT is not charged
on the insurance and road fund licence
v) Relief for Bad Debts
Input VAT on bad debts is recoverable if:
a) 6 months elapsed from due date of payment and
b) Amount written off as bad debts in the seller's books.
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Relief is obtained by adding the VAT element of the impaired debt to the input tax claimed. Claims
for relief for impaired debts must be made within four years and six months of the payment being
due.
vi) Business and non-business expenses
Input VAT on business expenses is recoverable. VAT on non- business items passed through
the business accounts is irrecoverable.
vii) Important Note
For propose of Income Tax, Capital Gain Tax, Corporation Tax, If VAT is recoverable than the
cost must be VAT exclusive (e.g. Plant & machinery cost for capital allowances) and If the VAT
is irrecoverable than the cost must be VAT inclusive (e.g. Car with private use for capital
allowances).
24.14 Irrecoverable input VAT

Some input VAT suffered is irrecoverable, this includes:
Input VAT on entertaining of customers and suppliers.
Input VAT on the cost of cars, unless the car is used 100% for business use.
Input VAT suffered on the supply of personal expenses.
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Chapter 25: Further aspects of VAT

25.1
Normal VAT invoices
A VAT invoice should be issued within 30 days of the date that the taxable supply is treated as being
made.
The original VAT invoice is sent to the customer and forms their evidence for reclaiming input VAT,
and a copy must be kept by the supplier to support the calculation of output VAT.
A VAT invoice must be issued when a standard rated supply is made to a VAT registered
business.
The invoice can be sent electronically provided the customer agrees.
No invoice is required if the supply is exempt, zero rated or to a non VAT registered customer
The invoice must show:

(a) The supplier's name, address and registration number
(b) The date of issue, the tax point and an invoice number
(c) The name and address of the customer
(d) A description of the goods or services supplied, giving for each description the quantity, the unit
price, the rate of VAT and the VAT exclusive amount
(e) The rate of any cash discount
(f) The total invoice price excluding VAT (with separate totals for zero-rated and exempt supplies)
(g) Each VAT rate applicable and the total amount of VAT
If an invoice is issued, and a change in price then alters the VAT due, a credit note or debit note to
adjust the VAT must be issued.
25.2
Records
Every VAT registered trader must keep records for six years.
All records must be kept up to date and in a way which allows:
The calculation of VAT due
Officers of HMRC to check the figures on VAT returns
The following records are needed:

(a) Copies of VAT invoices, credit notes and debit notes issued
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(b) A summary of supplies made

(c) VAT invoices, credit notes and debit notes received
(d) A summary of supplies received
(e) A VAT account
(f) Order and delivery notes, correspondence, appointment books, job books, purchases and sales
books, cash books, account books, records of takings (such as till rolls), bank paying-in slips,
bank statements and annual accounts
(g) Records of zero-rated and exempt supplies, gifts or loans of goods, taxable self-supplies and any
goods taken for non-business use
25.3
Default surcharge for late payment of VAT
If a taxable person submits a VAT return late, or submits a return on time but makes a late
payment of the VAT due, then a default has occurred.
In this case, HMRC will issue a surcharge liability notice which will specify the surcharge
period which normally lasts for 12 months.
If within this period the taxable person concerned makes a further default, a default
surcharge is levied which is calculated as a percentage of the tax paid late.
The rate of surcharge penalty depends on the number of defaults in the surcharge period:
Default in the surcharge Surcharge as a percentage of the VAT unpaid at
period
the due date
First
2%
Second
5%
Third
10%
Fourth or more
15%
Surcharge penalties at the rates of 2% and 5% are not made for amounts less than 400.
Where the rate of surcharge is 10% or 15%, a surcharge penalty is the higher of 30 or the
actual amount of the calculated surcharge.
25.4
In order to escape from the surcharge liability period, a trader must submit four consecutive
quarterly VAT returns on time and also pay any VAT due on time.
Penalties and Interest
Failure to notify liability for registration or change in the nature of supplies by persons exempted from
registration.
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There will be a standard penalty based on a percentage of the VAT lost during the period from when
the notification should havebeen made until it is actually made.
The actual penalty payable is linked to the taxpayers behaviour.
i.
There will be no penalty where the taxpayer has a reasonable excuse for the failure to notify
ii.
There will be a penalty of 30% of the tax unpaid where there is non-deliberate failure to notify
iii.
There will be a penalty of 70% of the tax unpaid where there is deliberate failure to notify
iv.
There will be a penalty of 100% of the tax unpaid where there is deliberate failure to notify
with concealment
However a penalty will be substantially reduced where a taxpayer make a disclosure, especially
when this is unprompted by HMRC.
25.5
Errors in a VAT return
Error
Disclosure
Correction
< De-minimis
Voluntarily
entering Errors
next VAT return
> De-minimis
By application
Voluntarily
application
Discovered by control visit
Penalty
Interest charged
in
Possible
No
by
Possible
@ 3%
Apply
@ 3%
De-minimis level is the greater of:
10,000
1% turnover (subject to on upper limit of 50,000)
25.6
Imports, exports, acquisitions and despatches
Trading with Non-European countries

Exports
The supply of goods is zero rated
The supply of services is outside the scope of UK VAT
Imports
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These are taxed at Standard Rate or Zero Rate as it would have been taxed as UK supplies.
The importation of goods involves UK VAT being paid directly to HMRC at point of entry into
the UK. This is treated as normal input VAT.
The supply of services from non-European countries generally is treated as above. BUT input
VAT is not paid to HMRC at point of entry into the UK (Not goods), the UK customer will
account for UK VAT when the service is performed.
Trading with European countries

Exports (Dispatches)
When a UK VAT registered business supplies goods to another VAT registered business
within the EU the supply is zero rated.
If the customer does not have a VAT registration the UK supplier will charge UK VAT at the
rate in force at the time of the supply.
The same treatment generally applies to the supply of services from a UK VAT registered
business to a EU customer.
Imports (Acquisitions)
25.7
These are taxed at Standard Rate or Zero Rate as it would have been taxed as UK supplies
Special schemes
The cash accounting scheme

VAT is accounted for on the basis of cash receipts and payments, rather than on the basis of invoices
issued and received (therefore automatic relief for bad debts).
Conditions to be satisfied to join the scheme
Taxable turnover (exclusive of VAT) not exceeding 1,350,000 per annum.
VAT returns must be up-to-date and no convictions for VAT offences or penalties in past.
If taxable turnover exceeds 1,600,000 trader will have to exit the scheme.
The annual accounting scheme

A single VAT return for a 12 month period (Normally accounting period of the business) is filed within
two months from end of the period.
VAT is paid in nine equal installments each will be 10% of previous years VAT liability and one
balancing payment. Installments are payable at the end of month 4 to 12 of accounting period.
Balancing payment (or repayment) is made when the return is filed.
Conditions to join the scheme
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Same as cash accounting scheme.

Advantage
Only one VAT return each year so less occasions for VAT penalty and cash flows can be
managed in a better manner.
Only one VAT return each year so fewer occasions to trigger a default surcharge.
Ability to manage cash flow more accurately.
No need for quarterly calculations for input tax recovery
Disadvantage
Have to ensure that supplies does not exceed turnover limit and Timings of VAT payments may
create problem for business.
Need to monitor future taxable supplies to ensure turnover limit not exceeded.
Timing of payments have less correlation to turnover (and hence cash received).
Payments based on previous year's turnover may not reflect current year turnover.
Flat rate scheme

VAT = Sale (VAT inclusive) X Flat rate %
This scheme is available to small businesses. Under this scheme VAT liability is calculated
by simply applying a flat rate percentage to total turnover including zero rate & exempt
supplies. (Flat rate % will be given in exam).
No input VAT is recoverable with the exception of non-current assets having cost more than
2,000.
Conditions to join the scheme
Taxable turnover (exclusive of VAT) not exceeding 150,000 per annum.
VAT returns must be up-to-date and no convictions for VAT offences or penalties in past.
If the taxable turnover exceeds 230,000 the trader will have to exit the scheme.
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Examinable Technique
Aim of Paper F6
To develop knowledge and skills relating to the tax system as applicable to individuals, single companies,
and groups of companies.
Understand the Requirements
Before attempting any question, and in order to impress the markers, you need to understand the
examiner's requirements.
Read the Requirement
Always read the requirement (at the end of the question) first and then the "scenario". If there is more
than one requirement or part in a question, then assess whether they are linked or completely separate.
It is a waste of time to start by reading a question from beginning to end because you will not be able to
appreciate the relevance of the "scenario" until you know the requirements of the examiner.
Take a few minutes to read, highlight and annotate the scenario to pick up important points.
Plan Your Answer
a) Planning your answer is very important and it exhibits a professional attitude.
b) Adequate planning leads to an organised logical structure to your answer, incorporating all the points
you can come up with and highlighting your powers of analysis and communication.
c) Inadequate or lack of planning leads to a disorganised illogical jumble of scraps of thoughts and
ideas, causing you to omit key elements of the question and repeat answer points already made.
Planning before putting pen to paper helps to avoid repetitive, confusing and chaotic answers.
When you are practiced in exam technique, planning many questions should take only five minutes.
Ensure that you read the question thoroughly and highlight key points or note them down to ensure that
you incorporate them in your answer.
Plan your answer in whatever way you prefer: some people like to use "mind maps" or "spidergrams"
and put everything on the page and then assemble it into order; others prefer to put down key headings
and then allocate points to them as they work through the question.
WARNING: never write " sentences"there is no time for them in answer planning and no place for
them in writing out your answer.
Write the Answer
If you have adequately read, thought and planned, this should be the easiest part of the whole exercise.
Points to remember:
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Learn the pro-forma computations and the required answer templates very well so that you can
follow them without a second thought.
Reading through the answered questions in the practice and revision kit in order to memorize the
required answer layout is an efficient strategy.
During the exam, if you are stuck with one specific issue or are unsure about it then just assume
that one of the possibilities is correct and continue to the end of the question.
Marks are provided not only for a correct computation but also for a correct technique.
Show necessary, complex workings separately and clearly explain them.
Set out computations of income tax and VAT accounts in two columns, to make life easier for
yourself and the marker. If the marker can clearly see what you are trying to set out, it is much
easier to award the mark.
Do not blur simple computations with paragraphs of explanation. There is no time and no marks
for lengthy wording. Please see the model answers provided for all prior exams.
Allocate time approximately in proportion to the marks available. The marking scheme is deeply
analysed and fair. If you are spending excess time on a topic, you are doing something wrong.
Try to achieve a good standard of English. Note that although you will not lose marks for spelling
mistakes and poor grammar, you may lose marks if your answer points cannot be understood by
the marker.
Allow plenty of space to present your answer and, if your writing is difficult to read, write on
Every
other
line.
WARNING: Restrict the use of underlining to headings and sub-headings (and use a ruler). Do not waste
time underlining what you consider to be the "key" wordsit is quite unnecessary and may interfere with
the marking process.
The examiner positively discourages rewording of requirements into introductory sentences as
recommended by some (former) examiners and tutors because, not only is it time-consuming, it does not
earn marks too.
Summary
When attempting an exam style and standard question, always practice exam technique so
that it is second nature to you by the time of the real exam.
Spend time thoroughly reviewing your answer against the "model" answer and make a note of
the points you missed. (Do not be despondent if some of the answers you encounter do not
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follow this guidancehistorically "model" answers are written solely to convey technical content
rather than exam technique.)
Study the examiner's comments on candidates' performance in previous exams, areas of
weakness and suggestions for improvements.
Practice "effective writing" in all your studies.
Remember the key elements to examination technique:
(i)
READ: this provides the facts to trigger your knowledge.
(ii)
THINK: without this planning process you will not be able to convey the skills which are
expected of you.
WRITE: concentrate on your style of writing to address the examiners' requirements as directly as
possible.
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Key facts
Compiled by
Moiz Iqbal, ACCA
Email
moiziqbal89@gmail.com
Source
Disclaimer
and These notes have been prepared with the help

of various ACCA text books and exam kits
(BPP & Kaplan), websites, webpages, forums,
online ACCA materials etc. There are a lot of
instances where information is directly copied
from the aforementioned sources and thus the
compiler is not the original writer of the whole
text/information.
Suggestions
Please do not hesitate to send your feedback

directly to the e-mail address provided here.
Sharing
If you think this note can be helpful to anybody,

please do not hesitate to share!!!!!!
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F6- Taxation (UK)

Lecture and Study Notes

Moiz Iqbal, ACCA

F6- Taxation (UK)

Use of taxation policies by government _________________________________ 7

PART B: INCOME TAX AND NATIONAL INSURANCE CONTRIBUTION ____________ 11

CHAPTER 3: EMPLOYMENT INCOME ________________________________________________ 19

Scope of Employment income _______________________________________ 19

CHAPTER 4: TAXABLE AND EXEMPT BENEFITS. THE PAYE SYSTEM _________________________ 22

P11D employees and Lower paid employment (Excluded employees) ________ 22

CHAPTER 5: PENSIONS _________________________________________________________ 30

Pension schemes _________________________________________________ 30

CHAPTER 6: PROPERTY INCOME __________________________________________________ 32

Furnished and unfurnished property letting _____________________________ 32

CHAPTER 7: COMPUTING TRADING INCOME __________________________________________ 35

Badges of trade __________________________________________________ 35

Compiled by Moiz Iqbal, ACCA

F6- Taxation (UK)

The adjustment of profits ___________________________________________ 35

CHAPTER 8: CAPITAL ALLOWANCES ________________________________________________ 40

Capital allowances ________________________________________________ 40

CHAPTER 9: ASSESSABLE TRADING INCOME __________________________________________ 45

Basis periods and tax years _________________________________________ 45

CHAPTER 10: TRADING LOSSES ___________________________________________________ 47

Trade loss reliefs _________________________________________________ 47

CHAPTER 11: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS _______________________ 50

CHAPTER 12: NATIONAL INSURANCE CONTRIBUTIONS __________________________________ 52

Employed earners ________________________________________________ 52

PART C: CHARGEABLE GAINS FOR INDIVIDUALS ____________________________ 54

Chargeable persons, disposals and assets _____________________________ 55

CHAPTER 15: BUSINESS RELIEFS__________________________________________________ 62

Entrepreneurs' relief _______________________________________________ 62

Compiled by Moiz Iqbal, ACCA

F6- Taxation (UK)

Gift or holdover relief ______________________________________________ 64

CHAPTER 16: SHARES AND SECURITIES _____________________________________________ 66

Valuing quoted and unquoted shares __________________________________ 66

PART D: TAX ADMINISTRATION FOR INDIVIDUALS ___________________________ 68

Self assessment tax return __________________________________________ 69

PART E: INHERITANCE TAX _______________________________________________ 75

PART F: CORPORATION TAX ______________________________________________ 83

CHAPTER 20: CHARGEABLE GAINS FOR COMPANIES ____________________________________ 89

Compiled by Moiz Iqbal, ACCA

F6- Taxation (UK)

Calculation of gains and losses for companies __________________________ 89

CHAPTER 21: LOSSES __________________________________________________________ 92

Trading losses ___________________________________________________ 92

CHAPTER 22: GROUPS _________________________________________________________ 93

Types of group ___________________________________________________ 93

CHAPTER 23: SELF ASSESSMENT AND PAYMENT OF TAX BY COMPANIES _____________________ 96

Notification of chargeability _________________________________________ 96

PART G: VALUE ADDED TAX _____________________________________________ 100

Introduction _____________________________________________________ 101

CHAPTER 25: FURTHER ASPECTS OF VAT __________________________________________ 108

Normal VAT invoices _____________________________________________ 108

EXAMINABLE TECHNIQUE _______________________________________________ 113

F6- Taxation (UK)

Exam Question Format

Compiled by Moiz Iqbal, ACCA

F6- Taxation (UK)

PART A: UK TAX SYSTEM

Compiled by Moiz Iqbal, ACCA

F6- Taxation (UK)