Acca f6 2020 Lecture Notes

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ACCA F6 2020 lecture notes
ACCA DipIFR (Association of Chartered Certified Accountants)
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Course Notes
ACCA TX (FA 2019)
Taxation - United Kingdom
From June 2020 – March 2021
Tutor details

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ii Introduction ACCA TX-UK
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ACCA TX-UK Introduction iii
1Contents
Page
1 Your Exam vii

2 The Taxation Syllabus vii
3 Technical Articles vii
1: The UK tax system 1
1 The tax regime 1
2 The ethical professional 2
3 The scope of income tax 4
4 Residence 4
2: Income tax computation 7
1 Overview 7
2 Pro forma income tax computation 8
3 Taxable income 9
4 Computing income tax payable 11
5 Gift Aid 14
6 The marriage allowance and tax planning for couples 16
7 Steps in computing taxable income and income tax due 19
3: Income from employment 21
1 Income from employment 21
2 Basis of assessment for employees 22
3 Allowable employment income deductions 23
4 Assessable benefits 25
5 Pay as you earn (PAYE) System 32
4: Property and the accrued income scheme 35
1 Property income 35
2 The accrued income scheme 42
5: Self-employment 45
1 Basis of assessment 45
2 The badges of trade 45
3 Adjustment of profits: sole traders and companies 46
4 Cash basis for small businesses 50
6: Capital allowances 53
1 Overview 53
2 The allowances 54
3 Balancing allowances and balancing charges 58
4 Year of cessation 59
5 Approach to capital allowance questions 59
7: Commencement and cessation of trade 61
1 Basis periods 61
2 Opening year rules 62
3 Closing year rules 65
8: Partnerships 67
1 Principles 67
2 Limited liability partnerships (LLPs) 67

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iv Introduction ACCA TX-UK
3 Approach to exam questions 68

9: Trading losses 69
1 Current year and prior year relief 69
2 Carry forward losses 70
3 Factors influencing which loss relief to use 70
4 Losses in the opening years of trade 71
5 Terminal loss relief (closing year of trade) 72
6 Cap on loss relief 74
7 Property business losses 75
8 Overview of the use of trading losses 75
10: Pensions 77
1 Types of pension scheme 77
2 Contributing to a pension scheme 77
3 Annual allowance 78
4 Receiving benefits from a pension scheme 81
11: National insurance 83
1 Class 1 NIC 83
2 Class 2 (self-employed) 84
3 Class 4 (self-employed) 85
12: Capital gains tax (CGT) 87
1 Scope of CGT 87
2 Exempt assets 88
3 Calculating gains and rates of tax 88
4 Capital losses 90
5 Part disposals 91
6 CGT on death 92
7 Inter-spouse transfers 92
8 Connected persons 92
9 Terminology 93
13: Chattels and wasting assets 95
1 Wasting chattels (life < 50 years) 95
2 Non-wasting chattels (life > 50 years) 95
3 Summary 96
4 Chattel scenarios 96
5 Wasting assets (e.g. copyright with a 20-year life) 96
14: CGT reliefs 97
1 Introduction 97
2 Principal private residence Relief 98
3 Rollover relief 100
4 Gift relief 102
5 Entrepreneurs’ relief (ER) 104
6 Investors’ relief 106
15: Shares and securities 107
1 Introduction 107
2 Gifts of quoted shares 107
3 Bonus issues 109
4 Rights issues 109
5 Re-organisations and takeovers 109
6 Gilts and qualifying corporate bonds (QCB) 110

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ACCA TX-UK Introduction v
16: Inheritance tax 111

1 The scope of inheritance tax 111
2 Persons chargeable to IHT 111
3 Transfers of value 111
4 Exempt transfers – lifetime transfers and transfers on death 112
5 Types of lifetime transfer 112
6 Calculation of lifetime tax on lifetime transfers 114
7 Tax payable on death 117
8 The residence nil rate band 120
9 Payment of IHT 122
10 Inheritance tax computation: Step by Step Guide 123
17: Corporation tax 127
1 Scope of corporation tax 127
2 Long periods of account 131
3 Corporation tax liability 132
4 Approach to corporation tax questions 133
18: Corporate gains 135
1 Introduction 135
2 Share matching for companies 136
19: Corporation tax losses 139
1 Trading losses 139
2 Current Year and Prior Year Relief 140
3 Carry forward of losses 141
4 Terminal loss relief 142
5 Capital losses 143
20: Groups of companies 145
1 Two types of group 145
2 Group relief group 146
3 Gains Group 150
21: Value added tax 151
1 The scope of VAT 151
2 Types of supply 152
3 VAT registration 152
4 Computation of VAT liabilities 154
5 VAT invoice 155
6 The valuation of supplies 155
7 Irrecoverable input VAT 156
8 Relief for impairment losses 157
9 Penalties 157
10 Special schemes 158
11 Group registration 159
12 Purchases and sales from outside of the UK 160
22: Obligations for individuals 161
1 Collection of income tax 161
2 Self-assessment 161
3 Record keeping 166
4 Compliance checks and appeals 166
5 HMRC powers 167
6 Time limits 168
7 PAYE real time reporting late filing penalty 168

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vi Introduction ACCA TX-UK
23: Company tax administration 169

1 Self-assessment for companies 169
2 Record keeping 174
3 HMRC determinations 175
4 Compliance checks 175
5 Discovery assessments 175
6 Overpayment relief 176
Solutions to lecture examples 177
Chapter 1 177
Chapter 2 178
Chapter 3 180
Chapter 4 180
Chapter 6 182
Chapter 7 183
Chapter 8 184
Chapter 9 185
Chapter 10 186
Chapter 12 187
Chapter 14 189
Chapter 15 191
Chapter 16 191
Chapter 17 196
Chapter 18 197
Chapter 19 198
Chapter 20 199
Chapter 23 199

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ACCA TX-UK Introduction vii
1 Your Exam
Your examination is a 3-hour computer-based examination.
You will have three hours for the exam PLUS you have up to 10 minutes to familiarise yourself
with the CBE system before starting the exam.
The exam is divided into three sections:

Section A Fifteen objective test (OT) questions worth 2 marks each
Section B Three objective test (OT) cases. Each case consists of five OT questions based
around a common scenario. Each of the objective test questions is worth 2
marks
Section C One 10-mark question and two 15-mark questions
Question style
In sections A and B there are a variety of OT styles. For example, questions may be multiple response,
number entry, pull down list, hot spot, enhanced matching or fill in a table.
The two 15-mark section C questions focus on income tax and corporation tax, but may include a small
number of marks focussing on other taxes. All other questions can cover any area of the syllabus.
The exam is mainly computational and all questions are compulsory.
2 The Taxation Syllabus

Full details of the taxation syllabus can be found on the ACCA website at
https://www.accaglobal.com/content/dam/acca/global/PDF-
students/acca/f6/studyguides/TX%20UK%20-%20June%2020-Mar%2021%20-%20Final.pdf
3 Technical Articles
The ACCA publish a number of technical articles relating to Taxation on their website at
https://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f6/technical-articles.html.
These provide useful additional reading, and are worth reading once you are comfortable with
material in these notes. We suggest looking at them between the tuition and revision stage of your
course.

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The UK tax system
1 The tax regime

The overall functions and purposes of taxation in a modern economy are: to raise finance, regulate
demand and guide behaviour.
1.1 Types of tax

TAX SUFFERED BY
Income Tax - Chapters 1-10 and 22 Individuals – e.g.
Employees
Sole traders
Partners in a partnership
Unemployed
Retired
National Insurance - Chapter 11 Employees
Self-employed
Employers
Capital Gains Tax - Chapters 12-15 Individuals (companies pay corporation tax on capital gains)
Inheritance Tax - Chapter 16 Individuals
Corporation Tax - Chapters 17-20 & 23 Companies
Value Added Tax - Chapter 21 The consumer. Collected by businesses, both
unincorporated and companies.

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2 1: The UK tax system ACCA TX-UK
1.2 The difference between direct and indirect taxation
KEY TERMS
 Indirect tax. An indirect tax, e.g. VAT, is a tax collected by an intermediary (such as a
retailer) from the person who bears the ultimate cost of the tax (the customer). The
intermediary later files a tax return and forwards the tax collected to the HMRC.
 Direct tax. A direct tax is a tax collected by HMRC directly from the taxpayer, e.g.
income tax, corporation tax, capital gains tax.
1.3 Tax avoidance and tax evasion
KEY TERMS
 Avoidance. Avoidance is the LEGAL utilisation of the tax regime to one’s advantage,
e.g. using tax reliefs, changing status through incorporation, living in a low tax country.
 Evasion. Evasion is ILLEGAL. It involves deliberate concealment of the true state of a
taxpayer's affairs. Evasion is a crime that renders the guilty party liable to fines or
imprisonment.
Schemes
 HMRC has targeted many specific tax avoidance schemes with anti-avoidance legislation to
counter the tax advantages gained by the taxpayer.
 HMRC has also introduced:
– Disclosure obligations regarding anti-avoidance tax schemes requiring the declaration of
details of the scheme to HMRC.
– A general anti abuse rule (GAAR) which stops tax advantages (e.g. increased
deduction/decreased income) arising from abusive tax arrangements. Abusive
arrangements are those which cannot be regarded as a reasonable course of action and
are deliberately put in place to avoid tax.
2 The ethical professional

EXAM SMART
It is vitally important that you learn the ethical rules that you, as a qualified professional, will
be governed by.
As an accountant, you are a taxpayer’s agent.

 A taxpayer may appoint an accountant to prepare and submit a tax return, but it is the taxpayer,
not the accountant, who is responsible for the return and paying tax.

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ACCA TX-UK 1: The UK tax system 3
In dealing with clients, the ACCA requires a member to uphold its standards. The ACCA’s code of ethics
and conduct sets out five fundamental principles that members should abide by. These are:
(i) Objectivity
(ii) Professional behaviour
(iii) Professional competence and due care
(iv) Integrity
(v) Confidentiality
It is the responsibility of an accountant who learns of a material error or omission in a

client’s tax return or of a failure to file a return, to advise the client of the situation and to
recommend disclosure to HMRC.
If a client fails to correct a material error/omission or failure, the accountant must:

(1) Cease to act for the client.
An accountant should not provide details to HMRC of why they are ceasing to act.
(2) Inform HMRC that he is no longer acting for the client.
(3) Make a money laundering report.
The money laundering report which sets out the situation is made to the Money Laundering
Reporting Officer (MLRO) within the accountancy firm.
The MLRO must decide whether to make a report to the National Crime agency (NCA).
Where a report is made the client should not be informed as this may amount to tipping off,
which is an offence.
A report to the NCA does not remove the requirement to disclose the information to HMRC.
2.1 Dishonest conduct of tax agents

 There is a civil penalty of up to £50,000 for the dishonest conduct of tax agents.
 In cases where the penalty exceeds £5,000, HMRC may publish details of the penalised agent.
 With agreement of the Tax Tribunal, HMRC can access the working papers of a dishonest agent.

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3 The scope of income tax

Individuals are liable to income tax for a tax year.
KEY TERM
The tax year runs from 6 April to 5 April.
 Individuals who are resident in the UK for a tax year are liable to UK tax on their worldwide
income.
 Non-UK resident individuals are only liable to UK tax on income arising in the UK.
4 Residence
There are statutory tests to determine a person’s residence.
You must consider the tests in the ORDER set out below.
If, for example, one of the automatic non-residence tests is satisfied, then you do not consider the
remaining rules.
STATUTORY TESTS
Test 1: Automatic non-UK resident
A person is automatically NOT resident if, in the tax year, he is in the UK for less than:
 16 days, or
 46 days and has not been UK resident during the three previous tax years (i.e. is arriving in the
UK or is an occasional visitor), or
 91 days, of which fewer than 31 days were working in the UK, and he works full-time overseas.
Test 2: Automatic UK resident
Provided test 1 is not met, a person is automatically resident in the UK in a tax year if he:
 Is in the UK for 183 days or more during the year, or
 He has his only home in the UK, or
 He works full-time in the UK and more than 75% of his working days are in the UK.
Test 3: Sufficient ties test
If (and ONLY if) person’s residence cannot be determined using the automatic tests above, use the
sufficient ties test.
Firstly, determine whether the person is a previous UK resident:
For these purposes:
 A person is a previous UK resident if he was UK resident in one or more of the 3 previous tax
years (usually someone leaving).
 A person who was not UK resident in any of the 3 previous tax years, is not a previous resident
(usually someone arriving).

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ACCA TX-UK 1: The UK tax system 5
Next, count how many ties the individual has with the UK:
There are four UK ties for arrivers and five UK ties for leavers:
(1) Having close family (a spouse/civil partner/cohabitee or minor child) resident in the UK.
(2) Having UK accommodation in which the individual spends at least one night in the tax year.
(3) Doing substantive work in the UK.
This means work for 3 hours or more on 40 or more days in the tax year.
(4) Being in the UK for more than 90 days during either or both of the two previous tax years.
For leavers, there is one further tie:
(5) Spending more time in the UK than in any other country during the tax year.
A day in the UK is any day on which a person is present in the UK at midnight.
Note: It is harder for a person leaving to become non-resident than it is for a person arriving to remain
non-resident.
Once you have decided a person’s previous residence status and the number of ties, determine
residence status for the tax year using the table below:
Days in the UK Previously resident Not previously resident
Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties or more Automatically not resident
46 to 90 Resident if 3 UK ties or more Resident if 4 UK ties
91 to 120 Resident if 2 UK ties or more Resident if 3 UK ties or more
121 to 182 Resident if 1 UK ties or more Resident if 2 UK ties or more
183 or more Automatically resident Automatically resident
EXAM SMART
 The table above will be given to you in the exam.
 In practice, the rules are more complex than described above. However, your Examiner
has confirmed that the above is all that he expects you to know.

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LECTURE EXAMPLE 1.1
Jai was born in the UK and lived here until 31 March 2019 when she retired and went to live in a house
she had purchased overseas. Jai lived overseas throughout 2019/20 except for the 49 days when she
returned for her daughter’s wedding. Whilst in the UK Jai lived with her husband in the house they
jointly own. Her husband continued to work in the UK and lived in the house for 220 days in 2019/20.
To decide whether Jai is UK resident for 2019/20, look at the automatic tests and then the ties:

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Income tax computation
1 Overview
In this chapter you learn how to compute an individual’s income tax liability. In later chapters you will
learn how to compute the income included in that computation.
1.1 The personal tax computation

 The personal tax computation totals all of an individual’s income.
 The exception is that exempt income is not included in the tax computation.
1.1.1 Exempt income

In your exam, you may meet the following types of exempt income:
 Betting winnings
 Interest on National Savings Certificates (This is not an NSB account)
 Damages for personal injury
 Income from Individual Savings Accounts (ISAs) (see below)
 Premium bond winnings
EXAM SMART
Beware! If you see any of these types of income in an exam question, you must state
in your answer that it is exempt income. If you do not state this, you will not
get the mark even if you treat the income as exempt by excluding it from your income tax
computation.

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8 2: Income tax computation ACCA TX-UK
Individual Savings Accounts (ISAs)

 Available to UK resident individuals aged ≥ 18 (or ≥ 16 for cash ISAs).
 Exempt income and capital gains tax.
 May pay into a maximum of one cash ISA and one stocks and shares ISA each year.
 Maximum investment is £20,000. £20,000 can be invested:
 in a cash ISA or
 in a stocks and shares ISA, or
 in a combination of the two, in any proportion the investor wishes.
 May withdraw money from a cash ISA and replace it in the same tax year without the
replacement counting towards the ISA investment limit for that year.
 The savings income nil rate band (see below) removes the benefit of a cash ISA for many.
An ISA may be beneficial for additional rate (see below) and other taxpayers whose savings
income nil rate band is already used.
 Similarly, the dividend nil rate band (see below) removes the advantages of a stocks and shares
ISA for many.
As chargeable gains in a stocks and shares ISA are exempt, a stocks and shares ISA is
advantageous for those who would otherwise have taxable gains (we will look at this when we
study capital gains tax).
2 Pro forma income tax computation

 Income is taxed in slices according to type of income and should be put in one of three columns
in the income tax computation:
Type of income
1 Non-savings (from trading, employment and land & buildings) Bottom slice of income
2 Savings (bank/building society interest) Second slice
3 Dividends Top slice
2.1 Income Tax Pro forma

This proforma gives an overview of what an income tax computation looks like. Refer back to it as you
work through the notes.

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ACCA TX-UK 2: Income tax computation 9
Pro forma computation of taxable income

Non-savings Savings Dividends Total
£ £ £ £
Employment income 29,500 29,500
Trading profit 15,000 15,000
Property profit 12,000 12,000
Bank interest 4,000 4,000
Dividends 6,000 6,000
Total income 56,500 4,000 6,000 66,500
Less: Qualifying interest payments (500) (500)
Less: Trading loss relief (2,000) (2,000)
Net income 54,000 4,000 6,000 64,000
Less: Personal allowance (12,500) (12,500)
Taxable income 41,500 4,000 6,000 51,500
3 Taxable income
 Taxable income is arrived at by adding together all of an individual’s sources of income and
deducting the personal allowance.
 Each of the three types of income, non-savings, savings and dividends is dealt with separately.
3.1 Personal allowance (PA)

All individuals (incl. children & pensioners) receive a PA of £12,500 each tax year.
 For the purposes of your exam, always set against total income in the following order:
(i) Non-savings income, then
(ii) Savings income, then
(iii) Dividends.
EXAM SMART
In some circumstances it is beneficial to deduct the PA from the sources of income in a
different order to that set out above. This is NOT examinable in the TX exam.
 No carry forward or carry back of unused PA.

 In some circumstances (see below), part of the PA can be transferred to a spouse/civil partner.
LECTURE EXAMPLE 2.1: REBEKAH
Rebekah had earnings of £12,000 and bank interest of £10,000. Her taxable income is:

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Reduction in PA for high earning individuals
KEY TERM
Adjusted net income is total income LESS:
Loss relief,
Qualifying interest payments,
Gross pension contributions to an employers’ occupational pension scheme and
Gross Gift Aid contributions and personal pension contributions.
You look at the above items later in this chapter.
 The PA is reduced by £1 for every £2 of income if adjusted net income (ANI) exceeds £100,000.
 A person with ANI of £125,000 or more is not entitled to any PA (125,000 – 100,000 =
25,000/2 = £12,500).
 If a person has ANI between £100,000 and £125,000, the effective marginal rate of
income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a
result of the personal allowance withdrawal.
In this situation it may be beneficial to make additional personal pension contributions
(see below) or Gift Aid donations (see below).
This point is not important in the TX exam (it will be in your ATX studies!!), but for now,
do not worry too much – most TX students find this marginal rate baffling!
LECTURE EXAMPLE 2.2
Jo has a salary of £105,400, building society interest of £2,000 and dividends of £12,600. His taxable
income is:

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EXAM SMART
The income limit of £100,000 and the adjusted net income limit of £125,000 are included in
the tax rates and allowances provided in the examination.
Qualifying interest payments (Eligible interest)

 Deduct from total income before the personal allowance. It does not often appear in TX exams,
but be aware of it.
Deduct first from non-savings income, then from savings income and finally from dividends.
 Includes interest paid on a loan used:
 By a partner to invest (capital or loan) in a partnership.
 By a partner or employee to purchase plant and machinery, including computers.
 To invest in (or make a loan) to a close trading company. A close company is one
controlled by its directors or five or fewer shareholders.
 To invest in a co-operative (in which the taxpayer works).
 To invest in an unquoted employee-controlled trading company in which the employees
own ≥ 50% of the shares.
4 Computing income tax payable

Pro forma computation of tax liability
NSI Savings Dividends Total

Income tax £ £ £ £
Non-savings × 20% 37,500 7,500
Extend Basic rate band by gross personal
pension/Gift Aid × 20% 1,000 200
Excess non-savings × 40% 3,000 1,200
41,500
Savings × 0% (savings allowance) 500 0
Savings × 40% 3,500 1,400
4,000
Dividends × 0% (dividend allowance) 2,000 0
Dividends × 32.5% 4,000 1,300
6,000
Child benefit tax charge 482

Income tax liability 12,082
Less tax suffered under PAYE (6,500)
Income tax due or payable 5,582

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Tax Band Summary

 There are three columns in the pro forma, one for each type of income.
 Different tax rates apply to each type of income.
 To compute tax, deal with each column separately starting with non-savings, then savings and
finally dividends.
Non-Savings Savings Dividends
Additional Rate Band 45% 45% 38.1%**
£150,000
Higher Rate Band 40% 40%* 32.5%**
£37,500
Basic Rate Band 20% 20%* 7.5%**
(1) Non-savings income

 The first £37,500 (basic rate band) of taxable income is taxed at 20%.
 Any excess is taxed at 40% (higher rate band).
 The additional rate of 45% applies to income over £150,000.
(2) Savings income
 Bank and building society interest.
 For the purposes of your exam, all savings income is received gross.
 A starting rate of 0% applies to savings income within the first £5,000 of taxable income.
 A savings income nil rate band applies to basic rate and higher rate taxpayers:
 £1,000 for basic rate taxpayers
 £500 for higher rate taxpayers
 The savings income nil rate band counts towards the basic and higher rate thresholds.
 Savings income in excess of the starting rate and savings income nil rate band is then
taxed in the same way as non-savings income (i.e. at 20% / 40% / 45%).
EXAM SMART
The rates of tax are given in tabular format, in the tax rates and allowances section of your
exam paper.

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LECTURE EXAMPLE 2.3
Jo has a salary of £137,500, and building society interest of £4,500. Jo’s income tax liability is:
(3) Dividend income

 Dividends in the £2,000 nil rate band are taxed at 0%.
 Dividends above the nil rate band but within the basic rate band are taxed at 7.5%.
 Any excess is taxed at 32.5% (higher rate) or 38.1% (additional rate).
 The dividend nil rate band counts towards the basic rate and higher rate thresholds.
 Unlike the starting rate for savings income which only applies in certain limited
circumstances and the savings income nil rate band which depends on the tax position of
the individual, the dividend nil rate band always applies to the first £2,000 of income.

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LECTURE EXAMPLE 2.4
Karishna has a salary of £15,500, building society interest of £3,500 and dividend income of £32,000.
Karishna’s income tax liability is:
5 Gift Aid
 Gifts to a UK registered charity.
 Regular or one-off.
 No maximum or minimum gift.
 Donor must give charity a Gift Aid declaration.
 Gift must be unconditional.
 Donor obtains only limited benefit from the gift (e.g. free access to National Trust properties).
Gift Aid donations are deemed paid net of 20% income tax. The amount paid is the net gift.
GROSS GIFT = net gift X 100/80 (gift × 100/80)
To give higher rate relief extend the basic rate band by the gross gift (gift × 100/80). This looks
strange, but it works!
Similarly, to give additional rate relief, the higher rate limit is increased by the gross gift.
Gift Aid makes no difference to a basic rate taxpayer’s liability, so ignore it completely if the
taxpayer is a basic rate taxpayer.

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ILLUSTRATION: GIFT AID DONATION
Macron earns a salary of £62,500 per annum and has no other income. He gives £8,000 (net) a year to
the Multiple Sclerosis Society (a registered charity) under the Gift Aid scheme.
Macron’s taxable income is:
£
Income from employment 62,500
Personal allowance (12,500)
50,000
His income tax payable is calculated as follows:
£
20% on £37,500 7,500
20% on extended basic rate band - £10,000 (£8,000 × 100/80) 2,000
40% on excess (£50,000 – £47,500) 1,000
10,500
5.1 Child benefit income tax charge

 Child benefit is a tax-free payment that can be claimed in respect of children. In the TX exam,
you will be given the amount of any child benefit claimed.
 An income tax charge applies if a taxpayer in receipt of child benefit (or whose partner is in
receipt of child benefit) has adjusted net income (ANI) of over £50,000 in a tax year.
 ANI is calculated as it is for the restriction of the personal allowance on high income individuals.
 The tax charge removes the benefit for those on higher incomes.
 The charge is 1% of the benefit for each £100 of ANI between £50,000 and £60,000. Once ANI
reaches £60,000 the tax charge is 100% of the benefit.
 The tax charge is added in at arriving at income tax liability (see pro forma above).
 If both partners have income > £50,000, the partner with the higher income is liable for the charge.
However, this will not be examined in TX.
 There is an option for claimants to opt not to receive child benefit in order to avoid the charge.
 When the charge applies the taxpayer must complete a tax return and the charge is collected
through the self-assessment system.
EXAM SMART
The following information will be given in your exam.
Child benefit income tax charge
Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit
received for every £100 of income over £50,000.

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LECTURE EXAMPLE 2.5
Sara Evans receives child benefit of £1,789. She has net income of £57,589, and pays gross gift aid
donations of £400. The child benefit income tax charge is:
6 The marriage allowance and tax planning for couples
Marriage allowance (MA)

 A spouse/civil partner can make a marriage allowance (MA) election to transfer a fixed amount
of their personal allowance to their spouse/civil partner.
 The MA is available provided neither spouse/civil partner is a higher or additional rate taxpayer.
 The election is only beneficial if the transferor does not fully utilise their PA but the recipient
does, so that the total income tax liability of the couple is reduced.
 If an election is made, the fixed amount of £1,250 is transferred.
 Cannot transfer more or less than the fixed amount.
 Full allowance available in the year of marriage.
 Relief is given by adjusting the tax code of employees. Those who are not employees claim relief
through their self-assessment return.
 The effect of the election is:
(i) Transferor’s PA is reduced by £1,250.
(ii) The recipient’s income tax liability is reduced by a maximum of £250 (£1,250 × 20%).
If the recipient’s income tax liability is less than £250, a tax repayment is not possible, but
the transferor’s PA is still reduced by £1,250. At best the relief reduces the recipient’s
income tax liability to £Nil.
 An election can be made:
(i) In advance (by 5 April 2020 for 2019/20).
The election will remain in force for future years, unless it is withdrawn or the conditions
are no longer met.
(ii) In arrears (by 5 April 2024 for 2019/20 – 4 years after the end of the tax year).
In this case the election only applies to the tax year concerned.

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EXAM SMART
The transferable amount of £1,250 is given in the tax rates and allowances in the exam.
LECTURE EXAMPLE 2.6
Jeevan and Falguni are married. Jeevan has an annual salary of £11,450. Falguni has an annual salary
of £42,500. Jeevan makes an election to transfer the marriage allowance to Falguni. Neither Falguni
nor Jeevan has any other income.
Jeevan and Falguni’s income tax liabilities are:
6.1 Other tax planning for couples

 Aim to ensure both partners have sufficient income to cover their respective PA’s.
 Consider transferring income-producing assets to the partner with the lowest marginal tax rate.
 Ownership of the asset must actually be transferred for income to be treated as
belonging to the other partner.
 Treat jointly held property as if owned equally unless the couple make a joint declaration of the
actual shares of ownership.
 This means that the income arising from the property is taxed as if it were shared equally
unless a declaration of actual ownership has been made.

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ILLUSTRATION: JOINTLY HELD PROPERTY
Sue owns 80% of a property which she lets out. Her husband owns the other 20%.
If no declaration of actual ownership is made, Sue and her husband will each be taxed on 50% of the
rental income.
If a declaration is made, Sue will be taxed on 80% of the rental income and her husband will be taxed on
20%.
 Whether it is worth making a declaration of actual interests will depend on who is the higher
rate taxpayer.
 In the above illustration, if Sue pays tax at a higher rate than her husband, it may be beneficial
NOT to make a declaration.
 The availability of the savings income nil rate band and the dividend nil rate band means that it
may not always be most beneficial to transfer income to the partner paying tax at the lowest
marginal rate.
ILLUSTRATION: RUTH AND JES
 Ruth and Jes are in a civil partnership. Ruth has a salary of £175,000 and savings income of
£300. Jes has a salary of £50,000 and dividends of £12,000.
 Ruth, an additional rate taxpayer, is not entitled to a savings income nil rate band. Her savings
income will be taxed at 45%. Transferring savings (and therefore the associated interest income)
to Jes would enable Jes to utilise her savings income nil rate band and would save tax of £135
(£300 x 45%).
 Jes has dividend income in excess of the dividend nil rate band. As a higher rate taxpayer
£10,000 of dividend income will be taxable at 32.5%. Ruth does not utilise her dividend nil rate
band. Transferring sufficient shares to Ruth such that she would be taxable on dividends of
£2,000 would save tax of £650 (£2,000 x 32.5%). The remaining £8,000 of dividends should
remain taxable on Jes as she is only a higher rate taxpayer rather than transferring the shares to
Ruth which would make the dividend income taxable at the additional rate.
ILLUSTRATION: RAVI AND JAITINDER
Ravi and Jaitinder are married. Ravi has a salary of £80,000. Jaitinder has a salary of £25,000 and building
society interest of £1,500.
Jaitinder is a basic rate taxpayer and so has a £1,000 savings nil rate band. Thereafter the next £500 of
interest would be taxed at 20%. It is better if the £500 of interest is transferred to Ravi to use his £500
savings nil rate band.

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7 Steps in computing taxable income and income tax due

EXAM SMART
Once you have worked through this chapter, practise as many income tax questions as
possible. You may wish to refer to the steps below as you work through questions.
Computing taxable income

STEPS
Step 1: Put income from different sources into one of the three columns:
 Non-savings income, Savings income or dividend income.
 If income is exempt show this on the face of the computation.
Step 2: Add up income in each of the three columns and total to find “total income”.
Step 3: Deduct losses and qualifying interest paid to leave “net income”.
Step 4: Deduct any personal allowance to leave “taxable income”.
Computing income tax due
STEPS
Step 1: Calculate income tax at each applicable rate on the three types of income.
Step 2: Deduct any marriage allowance and add back any child benefit tax charge.
Step 3: Finally, deduct tax suffered on employment income to find income tax due or outstanding.

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21
Income from employment
1 Income from employment

EXAM SMART
 This chapter covers core exam topics which will be examined.
 The benefits section is the most important.
1.1 Employment v self-employment

Employees Self-employed
 Have a contract of service with their employer  Enter into a contract for services
 Receive taxable earnings  Pay tax on profits for a tax year
 Pay tax under PAYE system
HMRC apply “multiple tests” to determine the status of a taxpayer to prevent employees from
claiming to be self-employed when they are employees, including:
 Control over the worker
 Obligation to accept work
 Who decides when the work is done
 Hiring of subordinates
 Financial risk/reward, for example finish work early or late
 Who provides equipment
 Wording of contract, (obey orders, obligation to appear, rights etc.)
 Sick pay, holiday pay
 Uniform, (but Tesco insist agency drivers must wear Tesco jacket)
 Job title

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22 3: Income from employment ACCA TX-UK
2 Basis of assessment for employees

KEY TERM
 Taxable earnings means salaries, wages, bonuses, gratuities, tips, benefits, reimbursed
expenses, pensions, including state retirement benefits, whether paid in money or
money’s worth, or ANYTHING ELSE WHICH IS A REWARD OF EMPLOYMENT.
 Directors and employees are taxed when earnings are received.

The amount received between 6 April 2019 and 5 April 2020 is taxable in 2019/20.
 The exception is that earnings are taxable when an individual becomes entitled to payment, if
earlier than the date of receipt. A bonus receivable on 25 March 2019, is taxed in 2018/19 even
if it is paid after 5 April 2019.
 Certain expenses paid or reimbursed by employers are exempt, i.e. not included in earnings,
provided they would be fully allowed as deductions from employment income (see section 2.1).
Employers do not report such expenses as benefits via the P11D form which means the
employee does not claim the expense as a deduction in his tax return.
ILLUSTRATION: TAXATION OF BONUS
Josh, a salesman receives a basic monthly salary of £3,000 and a bonus which is paid in April each year
and relates to the sales made by Josh in the year to the previous 31 December. Josh becomes entitled
to the bonus on the date it is received.
Recent bonuses are as follows:
Bonus in respect of: Paid Amount
Year to 31 December 2018 30 April 2019 £5,000
Year to 31 December 2019 30 April 2020 £7,500
What is Josh’s employment income for 2019/20?
SOLUTION
£
Salary (£3,000 × 12) 36,000
Bonus (received April 2019) 5,000
Employment income 41,000
 In the case of directors, who are in a position to manipulate the timing of payments, there are
extra rules. Directors are deemed to receive earnings on the earliest of four dates:
(i) The two dates set out above
(ii) When earnings are credited in the company’s accounts
(iii) When earnings are determined:
– Before the end of the period of account = the end of that period
– After the end of a period of account = date the earnings are determined

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ACCA TX-UK 3: Income from employment 23
3 Allowable employment income deductions

In general, expenses can be deducted from employment income if:
 The employee is obliged to incur and pay the expense as the holder of the employment, and
 The expense is incurred wholly, exclusively and necessarily for the purposes of employment.
These words are strictly interpreted and few costs are allowable under this rule.
Examples:
Disallowed Allowed
Examination fees for a trainee solicitor. Business calls from private phone (not line rental).
Smart work clothes. Annual deductions for protective clothing.
Newspapers/magazines for journalists. Costs of working at home, if required to work at
home.
Text books for employee required by employer to £4 per week to cover light and heat etc. if working
study. from home.
Travel to and from evening classes.
Golf club membership for bank manager who used
the club to entertain customers and build his
network of contacts. It is not necessary to belong to
a golf club.
There are many specific rules (see below), which override the general rule.
3.1.1 Travel expenses

 Relief is not given for ordinary commuting costs from home to a permanent workplace.
 Relief is given for an employee’s cost of travelling to a client provided the travel is integral to
the performance of duties. This includes the travel costs of employees who have to move from
place to place during the day (e.g. service engineers).
 There is no relief for travelling between two employments. However, if an employee performs
duties in more than one place for one employer, then relief is given for the cost of travelling
between those places.
 Relief is given if an employee travels directly from home to a temporary workplace.
– A work place is not temporary if an employee works there for a period that lasts, or is
expected to last, more than 24 months.
– Relief is available if an employee passes his permanent workplace on the way to the
temporary workplace provided that any stop at the permanent workplace is only
incidental (e.g. to pick up papers).
Statutory approved mileage allowances

 If an employee makes business journeys in his own vehicle, the employer can pay a tax-free
allowance of up to a statutory amount.
 In addition, an employer can pay up to 5p per mile for each fellow employee who is a passenger
on the same trip.
 If payments received (if any) are less than the statutory amount, an allowable deduction is
available on the shortfall. An allowable deduction is not available in respect of passenger
payments if the employer rate is less than 5p per mile.

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 If payments received exceed the statutory amount, the employee is taxable on the excess.
Statutory amounts, (the rates for cars are given to you in the exam), are:
Cars Motor cycles Bicycles
45 pence per mile (up to 10,000 miles) 24 pence per mile 20 pence per mile
25 pence per mile (on miles in excess of 10,000)
For NIC purposes a flat rate of 45 ppm is used irrespective of actual mileage, with no allowable
deduction if the employer rate is less than this.
LECTURE EXAMPLE 3.1
In the tax year Dave drove 11,000 miles in the performance of his duties.
His employer paid an allowance of 32 pence per mile.
Calculate Dave’s taxable benefit or allowable expense as follows:
3.1.2 Pension contributions and contributions under the payroll deduction scheme
 Deduct employee contributions to an occupational pension scheme and employee contributions
under the payroll deduction scheme from gross salary.
3.1.3 Professional subscriptions

 A subscription to a professional body, e.g. ACCA subscription, is deductible if relevant to the
duties of the employment.
3.1.4 Employment related insurance premiums

 Deductible if paid by employee.

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4 Assessable benefits
4.1 Taxing benefits
 Benefits are taxed when the benefit is provided to the employee.
If a car is first provided on 1 January, the benefit is 3/12 × full year benefit for that tax year. (See
below for more details on cars.)
4.2 Valuing benefits

Employment income includes salary and the value of benefits.
The value of a benefit is usually the marginal or direct cost to the employer of providing that benefit.
Private school teachers, pilots, train drivers etc. who use employer resources are taxed on the
marginal or “direct” cost of providing the resource. (So, train drivers can ride tax free on their day off.)
EXAM SMART
This is an important rule, learn it.
There are special rules for valuing many benefits (see below) which override the above rules.
4.3 Presentation for employment income
EXAM SMART
 Presentation is important in the TX exam, so it is worth pausing here, to think about
how you will present your employment income working.
List employment income in a working and show one line in the income tax computation (See Ch 2).
£
Salary 15,000
Car benefit (calculated in a separate working, W3) 4,000
Fuel benefit (£24,100 × 16%) 3,856
Loan benefit (calculated in a separate working, W4) 620
Accommodation benefit (calculated in a separate working, W5) 3,500
Employment income (put the total in the income tax computation: Ch 2) 26,976
4.4 Cars
Employees with a company car are taxed on a % of:
(i) the list price, plus
(ii) any optional accessories originally provided with the car, and
(iii) any further accessories costing £100 or more provided at a later date.
 Ignore discounts.
 Capital contributions of up to £5,000 by the employee reduce list price.
 Cost of adapting the car to run on road fuel gas is excluded.

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EXAM SMART
Don’t confuse capital contributions with contributions towards running costs. The latter
reduce the annual benefit.
 % depends on car’s CO2 emissions
EXAM SMART
The following information will be given in the tax rates and allowances section of your exam paper.
The base level of CO2 emissions is 95 grams per kilometre. The %s for petrol cars (and diesel cars
meeting the RDE2 standard) with CO2 emissions below this are:
Emissions % applying to petrol cars
50g per kilometre or less 16 %
51g to 75g per kilometre 19 %
76g to 94g per kilometre 22 %
95g per kilometre 23 %
 For every 5g/km over 95g/km (round down to the nearest 5g/km), add 1%.
 Add a further 4% for diesel cars which do not meet the real driving emissions 2 (RDE2)
standard. Diesel cars meeting the standard are treated as though they are petrol cars.
 Max percentage = 37%.
 Contributions towards running costs reduce the taxable benefit.
 Time apportion benefit for less than 12 months’ availability including being unavailable for more
than 30 days continuously.
 Insurance, repairs, road tax etc. are included in the benefit above, so these costs are tax-free
and can be ignored in questions.
 The cost of a chauffeur, however, is an additional benefit.
LECTURE EXAMPLE 3.2
S Ltd provided Cowell with a diesel car with a list price of £52,000. The car cost S Ltd £49,500, and it
has an official CO2 emission rate of 154 grams per kilometre. The car does not meet the RDE2
standard. Cowell was incapacitated for a week in March so the company provided him with a
chauffeur at a cost of £1,000. Cowell’s taxable benefit is:

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4.5 Fuel
If an employee is provided with any fuel for private journeys in a company car, he is taxed on the car
percentage (see above) multiplied by a base figure of £24,100. The base figure is given in the tax rates
and allowances in your exam.
 Time apportion benefit for less than 12 months availability (as for cars).
 Unlike all other benefits, an employee contribution toward the fuel cost does NOT reduce the
taxable amount.
 Planning: contribute toward the running cost of the car, not the fuel.
In the example above, if S Ltd provides Cowell with fuel, the fuel benefit is 37% × £24,100 = £8,917.
Vans
 Benefit if the employee has private use of a van.
 NO benefit if private use is insignificant.
 Travel from home to work does not count as private use.
 Fixed taxable benefit £3,430 per annum. (Additional £655 if private fuel available.)
The benefit figures for vans and van fuel are NOT given to you in your exam.
Accommodation (e.g. living in company flat)

A benefit arises if an employee is provided with living accommodation unless the accommodation is
job related.
(i) If the employer OWNS the property, the employee is taxed on the annual value (the
deemed rent that would have been earned had the property been let to a third party).
EXAM SMART
The Examiner will give you the annual value.
(ii) If employer RENTS from a 3rd party, the taxable benefit is the greater of:
 the rent paid by the employer, OR
 the annual value.
Additional charge
Additional charge if cost > £75,000 (i.e. can only apply where employer owns the property).
 (Cost – £75,000) × official rate of interest (2.5% - this will be provided to you in the exam).
 Cost is the total cost of acquiring and improving the property prior to the start of the tax year.
 Ignore improvements in the current tax year.
 Don’t confuse improvements & repairs. Treat repairs as living expenses (see below).
 Use the market value when first provided plus improvements:
 If acquired > 6 years before its first use by the employee, AND
 Cost plus improvements exceeds £75,000.

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Job related accommodation

 Accommodation is NOT a taxable benefit if it is job related, i.e.
 Necessary (e.g. caretaker), or
 Improves performance and customary to provide, e.g. nurse, or
 Provided for personal security (e.g. Government Minister).
Directors can only claim the first two exemptions above if:
(i) They do not have more than a 5% interest in the company, AND
(ii) Either they are full time working directors or the company is non-profit making or a charity.
Living expenses (electricity, phone, TV licence etc. AND repairs)

 Taxable benefits. Decorating is taxable in the year the work is done.
 If accommodation is job related, the benefit is restricted to a maximum of 10% of the
employee’s earnings and other (non-accommodation) benefits.
LECTURE EXAMPLE 3.3
X Ltd provided Pururavas with an apartment in February 2013. The property was purchased in June
2005 for £150,000 and was valued at £250,000 in February 2013. X Ltd spent £10,000 on
improvements in December 2018 and £1,200 redecorating in June 2019. It has an annual value of
£14,000. The official rate of interest is 2.5%.
Pururavas ’s taxable benefit for 2019/20 is:
Vouchers
 E.g. Marks & Spencer vouchers
Taxable benefit = Cash equivalent
This is also subject to employee & employer NIC, (See Chapter 11).

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Loans (including amounts written off and “cheap” loans)

Taxable benefit = loan × (official rate of interest (2.5 %)) – actual interest paid in the year
Method When Used

Average Opening loan (or loan when first provided) + closing loan The average method
method 2 applies unless an election is
made for the strict method.
Strict Calculate interest on a monthly basis Used if taxpayer or HMRC
method wish.
In the exam calculate using both methods and choose the lower result (unless told otherwise).
 Time apportion benefit if loan outstanding for only part of the tax year.
 Not a taxable benefit if loan ≤ £10,000 throughout the tax year.
If loan exceeds £10,000 at any time in the tax year, whole benefit (not just the excess over
£10,000) is taxable.
 Write off of all loans whether above or below £10,000, is always taxable in full.
ILLUSTRATION: LOAN BENEFIT
Raj borrowed £15,000 interest free from his employer on 1 June. He repaid £4,000 on 31 December.
Raj’s benefit for the tax year is:
15k+11k 10
Average method: ( ) x 0.025 x = £271
2 12
Strict method £
7/12 × 2.5% × £15,000 219
3/12 × 2.5% × £11,000 69
288

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Other assets for private use (boat, furniture, TV etc.)

Taxable benefit = 20% of the market value (MV) when first provided
 Exclusion: bicycles provided for journeys to and from work are tax free.
 If employee subsequently acquires the asset the taxable benefit is the greater of:
 MV at time of employee acquisition, OR
 Original MV less the cumulative taxable benefit to date of employee acquisition (think of
this as “net book value”).
LECTURE EXAMPLE 3.4
Sarah’s employer provided her with a television costing £1,800 for her private use on 1 January 2018.
The television was given to Sarah on 1 July 2019 when its market value was £400.
Sarah’s taxable benefit for 2019/20 is:

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Exempt benefits
EXEMPT EXEMPT
Employer pension contributions. Bikes/safety equipment for travel to/from work.
≤ £5 (£10 overseas) a night for incidental expenses £4 a week or £1 8 a m on th towards household
incurred whilst working away from home. costs if working from home.
If the amount exceeds the limit, full amount chargeable.
One mobile phone. If 2nd provided, benefit is cost of Medical cover for overseas business trips (UK
running 2nd phone to employer. cover taxable).
Pensions advice (up to £500). Canteen meals available to all staff.
First £8,000 of relocation expenses. Work place nursery.
Job related accommodation. Workplace parking.
Annual staff parties ≤ £150 per head. Employer liability insurance, death in service
If cost per head > £150 then whole amount taxable. benefits and PHI.
£150 per head is for the whole year.
The full cost of the party, even if more than £150 per
employee, is fully allowable for the employer.
Awards of up to £5,000 under staff suggestion schemes. Long service awards provided cost not more than
Excess over £5,000 is taxable. £50 per year of service and, if service was at least 20
years, there was no similar award in past 10 years.
Bikes to enable employees to get to and from work or Entertainment provided by genuine 3rd parties
from one workplace to another. (e.g. seats at sporting events).
Buses and minibuses used for journeys to work or Gifts of goods by 3rd parties provided the cost of
between workplaces. all gifts by the same donor to the same employee
does not exceed £250 a year.
If the limit is exceeded the full amount is taxable.
Employer payment of up to £500 for medical treatment Trivial benefits if cost less than £50; not cash/cash
provided to an employee to assist a return to work after voucher; and not provided in recognition of
a period of absence due to ill-health or injury. services.
Loans < £10,000. Sports and recreation facilities available to
employees, but not the general public.
EXAM SMART
If there is an exempt benefit in the exam, identify it as exempt. Don’t ignore it.
This is VITAL: you will not gain the marks for recognising an exempt benefit if you ignore it!
EXAM SMART
The best way of really getting to know which benefits are exempt is to practise lots of
questions, where you will find that certain exempt benefits get tested again and again.

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5 Pay as you earn (PAYE) System

Employers administer PAYE which:
(i) aims to deduct the correct amount of tax & national insurance from employee earnings.
(ii) ensures that taxable non-cash benefits are reported by the employer to HMRC.
(iii) applies to all cash payments made to employees (e.g. salaries, bonuses), to certain assets
which can be readily converted into cash (e.g. gold bars, wine) and, in various ways, to
taxable benefits.
 Employers may opt to collect and pay to HMRC the tax on various benefits through the PAYE
system in the same way as salary (voluntary payrolling). Otherwise benefits are recorded on
form P11D and the tax code adjusted for HMRC to recover the tax. See below.
How PAYE works

 The employer calculates the correct amount of tax & NI to deduct.
 The system works cumulatively.
The employer calculates total tax & NI due from the beginning of the tax year to the end of the
month, deducts the amount collected to date and withholds the difference from pay.
 PAYE is withheld from employee pay on pay day. (Maximum deduction 50%.)
 Large employers (> 250 employees) pay PAYE electronically to HMRC. Others can pay
electronically by choice.
 If electronic payment is made, the payment deadline is the 22nd of the month following the tax
month concerned. Tax months run from 6th to next 5th.
EXAM SMART
The electronic pay day (22nd) should be used in the exam. You do not need to be aware of
the payment deadline for non-electronic payments.
 Can pay quarterly (on 22 July, October, January & April) if average monthly employer PAYE
liability does not exceed £1,500.
 HMRC can require employers to provide security where amounts due under PAYE are seriously
at risk.
HMRC require security from employers who try to defraud the government by deliberately
choosing not to pay PAYE, who build up large debts or who do not respond to HMRC’s attempts
to contact them.
Real time information (RTI)
 Employers must submit income tax and NIC information to HMRC electronically when or before
employees are paid each week or month.
 A year end summary of all the tax and NICs deducted must be provided with the final RTI
submission for the tax year.
 Penalties are charged on a monthly basis if RTI submissions are late (see Chapter 22).

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PAYE codes
 'Tax codes' are used to calculate tax due under PAYE. The tax code computation is as follows:
Allowances £ Deductions £
Personal allowance X Taxable benefits reported on P11D X
Allowable expenses X Adjustment for underpaid tax X
Adjustment for overpaid tax X
X X
(i) If total allowances minus deductions gives a positive figure create the code by replacing
the last digit with a letter.
The letter L shows that the employee is entitled to the basic personal allowance.
(ii) If total allowances minus deductions is a negative figure, rather than adding a suffix to
the code number, add the prefix K. A K code is calculated by removing the last digit and is
then decreased by 1.
The K prefix is used when allowances are less than benefits, i.e. to increase taxable pay.
 PAYE codes may also include income tax on the taxpayer's estimated savings and dividend
income.
ILLUSTRATION: TAX CODE
Tayyeba is a 37-year old who earns £62,190 per annum and has taxable benefits of £2,930 each year
reported on the P11D. Underpaid tax for last year was £100.
The PAYE code is:
£
Personal allowance 12,500
Benefits (2,930)
Underpaid tax from last year £100 × 100/40* (250)
9,320
The tax code for 2019/20 is 932L.

* Reducing the tax free allowance by £250 increases taxable income by £250. As Tayyeba pays tax at
40%, an extra £100 of tax is due on £250 of taxable income.
PAYE forms
HMRC use various forms to administer PAYE:
P60 To employee by 31 May Total taxable pay
Total tax deducted
PAYE code
National Insurance number
Employer’s name and address
P11D To employee and HMRC by 6 July Cash equivalent of all benefits
P45 Given to employee on leaving PAYE code
Income paid and tax deducted from start of tax year to
date of leaving

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PAYE settlement agreement (PSA)

 Employers may enter a PSA and make a single payment by 22 October (19 Oct for postal
payment), after the tax year, to cover income tax & NIC on small or irregular benefits (e.g.
Christmas gifts, staff parties costing > £150).
 Items in a PSA do not have to be put on an employee’s P11D or tax return.
Treatment of benefits
 Taxable benefits may be reported to HMRC on a P11D at the end of the tax year.
HMRC adjust the PAYE code by deducting the value of the benefit. The next year, as the PAYE
code is used to collect tax, it will ensure that tax is collected on both cash payments and
previously reported benefits. However, as benefits may vary from year to year the amount
collected may not be correct.
 Employers may process certain benefits e.g. car, van, fuel, medical insurance and subscriptions
directly through payroll – payrolling of benefits.
Employers who opt for this must report the value of the benefits under the RTI system.
The cash equivalent of the benefit is treated as PAYE income (like salary) of the employee, and
the relevant tax deducted from their actual salary payment and paid across to HMRC with PAYE.

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35
Property income and the

accrued income scheme
1 Property income
EXAM SMART
For your TX exam, you need to be able to deal with:
 Profits arising from the rental/lease of a property
 The rent a room scheme
 Furnished holiday lets
 The premium received on the grant of a short lease
1.1 Profits arising from the rental/lease of a property

 Individuals/partnerships are taxed on property income (rent - expenses) arising in a tax year.
 The cash basis is the default method for calculating income: rent and expenses are accounted
for when cash is received and paid.
For 2019/20, rent received/expenses paid between 6 April 2019 and 5 April 2020 are used to
calculate property income.
 Under the cash basis the period to which an expense/receipt relates is irrelevant.

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36 4: Property income and the accrued income scheme ACCA TX-UK
EXAM SMART
The TX examining team has said that in a question involving property income for individuals
or partnerships, the cash basis should be used unless you are specifically told the contrary.
 If a landlord lets more than one property, the assessable amount in a tax year is the aggregate
of net income from all properties, excluding furnished holiday lettings (see below).
ILLUSTRATION: RENTAL INCOME
Peter lets two properties. Neither qualify as a furnished holiday let.

Property 1 was first let on 1 July 2019 at an annual rent of £12,000 per annum paid on time, quarterly
in advance.
Property 2 was let unfurnished for £500 a calendar month, payable on 8th of each month. The tenant
moved out in January owing rent from December. This rent is irrecoverable. The property was empty
from January to March, but a new tenant moved in on 8 April 2020 having paid the first month’s rent
of £600 on 1 April 2020.
Expenses incurred in respect of the two properties in the last tax year were:
Property 1 Property 2
£ £
Advertising for the new tenant – paid 10 April 2020 720
Bookkeeping and insurance – annual amounts but paid monthly 2,000 1,350
throughout the year at the end of every calendar month
Peter’s assessable rental income is:
£
Rent received (12,000 + 8 × 500 + 600) 16,600
Advertising (not paid in year) (0)
Bookkeeping and insurance (2,000 + 1,350) - paid in year (3,350)
Property income 13,250
Property income is included in the income tax computation as non-savings income, see Chapter 2.
 The rules for property income received by a company are different and are covered later in
these notes. (Take care not to confuse them!)
1.1.1 Allowable deductions

 Expenses incurred wholly and exclusively for a property business are allowable. These include:
(i) Insurance
(ii) Agent’s fees and other management expenses
(iii) Repairs
(iv) Interest on a loan to acquire or improve a non-residential property
 The normal pre-trading expenditure rules apply to expenses incurred before the let
commences.
 If the property is owner-occupied for any part of a year, expenses relating to this private use are
not allowable.

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ACCA TX-UK 4: Property and the accrued income scheme 37
 There are special rules for capital expenditure (see below).
1.1.2 Finance costs

 In general, finance costs incurred to buy or improve property are deductible. This includes
interest payable and the incidental costs of obtaining the finance, e.g. bank fees.
A restriction is being phased in, so that tax relief for finance costs in respect of residential
property (e.g. mortgage interest) is only at the basic rate.
 For 2019/20, 75% of finance costs are subject to the basic rate restriction:
(i) 25% of finance costs are an allowable deduction when calculating property income.
(ii) Tax relief is given on the remaining 75% of costs at the basic rate of 20% by deduction
from the taxpayer’s income tax liability.
 The restriction does not apply where the finance costs relate to a furnished holiday letting (see
below), to non-residential property (e.g. an office or warehouse), or to a company.
LECTURE EXAMPLE 4.1
Faizal let a furnished house throughout 2019/20 at a monthly rent of £1,000. The house is subject to a
repayment mortgage and Faizal paid mortgage interest of £12,000 during 2019/20. Other allowable
expenditure on the property in this tax year was £1,300.
Faizal had a salary of £90,000 in 2019/20.
Faizal’s income tax liability is:

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EXAM SMART
Details of the finance cost restriction will be given in the tax rates and allowances section of
your exam.
1.1.3 Capital expenditure

 Most purchases of equipment are allowable. Exceptions are:
(i) Cars.
(ii) Assets used in a residential property (but see replacement furniture relief below).
(iii) Capital expenditure on improving land and buildings. (Improvements are capital and not
allowable.)
Repairs are not capital, and are allowable.
1.1.4 Cars
 Capital allowances available.
 Actual motoring costs, (e.g. petrol / insurance) also deductible.
 Alternatively, HMRC’s approved mileage allowances can be claimed instead of capital
allowances and actual motoring costs.
EXAM SMART
Approved mileage allowances are included in the tax rates and allowances section of the
exam.
1.1.5 Replacement furniture relief

 Relief available to company landlords (see later) and to individual landlords.
 Initial cost of assets used in residential property, not allowable. No capital allowances.
 Replacement cost of domestic items deductible in residential let.
 The property need NOT be fully furnished.
 Furnishings include beds, TVs, fridges, freezers, carpets, floor coverings, crockery and cutlery.
 Fixtures fixed to the property e.g. radiators and boilers do not qualify for relief.
 No relief for the costs of improvement.
E.g. if a washing machine is replaced with a washer drier, only the cost of an equivalent washing
machine qualifies for relief.
 Relief is reduced by proceeds from the sale of the old asset.
 Relief does not apply to furnished holiday lettings or to accommodation where rent a room
relief claimed. Furniture and furnishings in such properties qualifies for capital allowances.

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LECTURE EXAMPLE 4.2
Rohan lets a furnished house for £1,000 a month. All rent is received on time.
At the start of the last tax year Rohan purchased:
£
Fridge 600
Washing machine 400
Carpets 2,000
In the last tax year the fridge was sold for £320 and replaced with a similar model costing £620. Also,
the washing machine was scrapped with nil proceeds. It was replaced with an upgraded model costing
£480, although the cost of a similar machine would have been £410.
Other allowable expenditure on the property amounted to £3,000.
Rohan’s property income is:
1.1.6 Property income – accruals basis
EXAM SMART
In the TX exam, only use the accruals basis if the question tells you to do so.
 An individual/partnership:
(i) can opt to use the accruals basis.
(ii) must use the accruals basis if property income receipts exceed £150,000.

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 Rental income and related expenses are assessable/deductible on accruals basis in the year to
which they relate.
 If a tenant leaves without paying rent, under the cash basis the amount owed is never taxed.
Under the accruals basis the amount owed is a deductible expense. The irrecoverable debt is
called an impairment loss.
 Expenditure on plant and machinery is not an allowable expense using the accruals basis, but
capital allowances may be available.
 Other rules on allowable expenditure operate in the same way as the cash basis.
ILLUSTRATION: PROPERTY INCOME , CASH V ACCRUALS
Kajel let a property from 1 July 2019 for a rent of £12,000 per annum paid on time, quarterly in advance.
Kajel paid allowable expenses of £200 in December 2019 relating to a burst water pipe and insurance of
£1,400 was paid in July 2019 for the year to 30 June 2020.
Property profits under the cash basis and under the accruals basis are as follows:
Cash basis Accruals basis
£ £
Rental income 12,000 9,000
Less: Allowable expenses (200) (200)
Insurance (1,400) (1,050)
Property income 10,400 7,750
1.1.7 Property losses

 In a tax year profits and losses are netted against each other.
 If there is an overall loss, the property income for that tax year is £NIL.
 A loss is carried forward to set against the first available property profits.
1.2 Rent a room

 Rent of ≤ £7,500 in a tax year from letting furnished rooms in a main residence is tax free.
Cannot be a self-contained flat in a house.
 If rental income > £7,500 the taxpayer can choose to be taxed:
(i) On gross receipts less £7,500, OR
(ii) Under the normal rental income rules (i.e. rent – expenses).

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LECTURE EXAMPLE 4.3
Tara rented out a furnished room in her home throughout the last tax year. She received rent of
£8,500 and incurred allowable expenditure of £2,000 in respect of this room.
Calculate Tara’s property income if:
(i) She claims rent a room relief
(ii) She does not claim rent a room relief
1.3 Furnished holiday lettings (FHL)

 Treat as a trade with profits calculated for tax years.
 Losses can only be carried forward against future FHL profits.
 Capital allowances available on furniture (no replacement furniture relief):
 100% AIA then WDA.
 Income is net relevant earnings for personal pension relief (see Chapter 10).
 Capital gains rollover, entrepreneurs’ and gift reliefs are available (see Chapter 14).
Conditions
Location UK/EEA property only
Available ≥ 210 days in the tax year
Occupied Actually let ≥ 105 days (if > 1 furnished holiday let, an average of 105 days qualifies all
properties)
Occupation Property not let for periods of longer-term occupation for > 155 days
pattern Longer-term occupation is > 31 days
Can let to the same person more than once if each let is not more than 31 days

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1.4 Lease premiums (capital sums paid to secure a lease)

 If lease < 50 years part of the premium is treated by the landlord as rent received in advance.
51−D
 Rent = Premium × (D = duration of lease).
50
 The balance of the premium is treated as a capital disposal. This is not in the syllabus, so ignore
the balance of the premium.
ILLUSTRATION: RENT ON LEASE
Rachman granted Nick a 40-year lease for a premium of £100,000 plus an annual rent of £3,000.
Rachman’s rental income is as follows:
51−40
(1) One-off (Note) £100,000 × = £22,000
50
(2) Annual £3,000
Note: This arises in the tax year in which the lease is granted.
1.4.1 Premiums paid by traders

If traders pay a premium for a lease they can deduct a proportion of the premium each year from
taxable trading income.
Amount assessed on landlord
The annual deduction is:
Life of the lease
EXAM SMART
Remember this deduction in exam questions. Seeing traders paying lease premiums should
trigger something in your mind!
In the illustration above, Nick (the lessee, or tenant), would be allowed the rent of £3,000 per
annum as an expense and £22,000/40 = £550 per annum in respect of the premium.
The deduction of £550 would not be in Nick’s statement of profit, so it is always an adjusting item,
see Chapter 5.
2 The accrued income scheme

 UK government securities (gilts) are exempt from capital gains tax.
Without the accrued income scheme it would be easy to avoid tax on interest from gilts.
 The accrued income scheme only applies if an individual has gilts with a total nominal value in
excess of £5,000 at some time in the tax year.
 When gilts are sold any accrued interest at the date of sale is taxed as savings income of the
seller. The purchaser will not include this amount in savings income.

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ILLUSTRATION: ACCRUED INCOME SCHEME
Jeevan purchased gilts with a nominal value of £200,000 on 1 July. 3% interest is paid half yearly on
30 June and 31 December.
Jeevan sold the gilts on 30 November to Reyha for £242,500 (including accrued interest).
5
The accrued interest included in the sales proceeds is £2,500 (£200,000 × 3% × ). Jeevan must
12
include the accrued interest of £2,500 as savings income in the tax year even though he has not
received any actual interest.
6
Reyha will receive interest of £3,000 (£200,000 × 3% × ) but will include only £500 (£3,000 - £2,500)
12
of this in her savings income in the tax year of purchase.
LECTURE EXAMPLE 4.4
On 1 May Chen purchased gilts with a nominal value of £300,000 paying interest at 2%.
Interest was due on 31 March and 30 September.
Chen sold the gilts for £251,500 including accrued interest on 31 December. She had received interest
of £3,000 on 30 September.
How much interest must Chen include in her savings income for the tax year?

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45
Self-employment
1 Basis of assessment
General rule: The current year basis (CYB)
Assess the profits of the accounting period ending in the tax year.
E.g. assess taxable profits of the year ended 30 June 2019 in 2019/20.
 Special rules in opening and closing years. See Chapter 7.

 NO benefits for the self-employed so forget Chapter 3, for now at least!
2 The badges of trade

Look at a transaction to decide if there is trading or a capital gain. It matters:
(i) rates of tax on income and gains are different, and
(ii) many assets are exempt from CGT (e.g. cars/principal private residences).
This is different from the multiple tests we saw in Chapter 3 where we were assessing whether
someone was an employee or self-employed.
Six principles are used to determine whether a trade exists:
(1) Subject matter – i.e. what is being sold
In CIR v Rutledge, the 1,000,000 toilet rolls case, the Judge said: “We own assets for 3 reasons:
 Personal enjoyment or consumption, or
 Investment potential, or
 To sell at a profit” which constitutes trading.
(2) Frequency of transactions: more indicates trading
(3) Length of ownership: short indicates trading

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46 5: Self-employment ACCA TX-UK
(4) Profit motive: if selling to raise emergency cash, less likely to be trading
(5) Supplementary work:
In CIR v Cape Brandy Syndicate Blending and bottling brandy from barrels was held to be
trading when brandy was sold.
(6) How the asset was acquired: selling an unwanted gift or inheritance is unlikely to be trading
3 Adjustment of profits: sole traders and companies

Net profit per the accounts is rarely the same as taxable trading profit.
 The main reason is that tax law does not allow a tax deduction for all the expenses allowed in
the accounts. These are called disallowed items.
Conversely some tax deductions are not deductions in the accounts.
 Similarly, on the income side, some income included in the accounts is not taxable as trading
income and vice versa.
The adjustments needed to net profits are shown in this proforma:
£
Net profit per accounts x
Add: Disallowed expenditure, for example depreciation x
Add: Income taxable as trading profits but not included in accounts x
Less: Profits in accounts not taxable as trading profits (x)
Less: Deductible expenditure not included in accounts (x)
Adjusted profit x
Less: Capital allowances (Chapter 6), an expense for the period (x)
Taxable profit (put this into the income tax computation, Ch. 2) 15,000
EXAM SMART
Adjustments of profit is in nearly every exam.
The best way to learn which expenses are allowable and which are disallowed is to practise
as many questions as possible.
The general rule is expenses are deductible if incurred wholly and exclusively for trade purposes.
There are many exceptions. Learn the rules below.

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ACCA TX-UK 5: Self-employment 47
Disallowable/allowable items
3.1 Appropriations (i.e. withdrawal of funds from a business)
Appropriations of profit are disallowed. Conversely any expenses of earning profit would be allowed.
Disallowed appropriations Allowable expenses of earning profit
Interest to the owner on capital invested in business Interest on business overdraft, HP contract
Salary/drawings of sole trader/partner
Private proportion of owner’s expenditure, e.g. on Business proportion of expenses
sole trader’s car, telephone etc.
Excessive salary payments to a sole trader’s family Salary paid at a commercial rate for the job
3.2 Capital expenditure

Expenditure on capital assets is disallowed.
Disallowed Allowable
Depreciation, loss on the sale of a non-current asset Capital allowances given as expense instead of
depreciation
Amortisation of a lease
Improvements Repairs
Cost of initial repairs to make an asset usable Initial repairs if asset can be used before repairs
Costs associated with capital, e.g. legal costs Defending title to assets
Fees associated with acquiring new non-current Fees associated with obtaining long term debt
assets finance allowable for a sole trader
Expenses associated with the initial grant of a lease Expense of renewing short lease < 50 years
3.3 Entertaining and gifts

Disallowed Allowed
Entertaining suppliers/customers Entertaining staff
Gifts for employees (BIK for ‘ee)
Gifts (particularly food, drink, tobacco which are Gifts to customers allowed if not food, tobacco or
never allowed) drink and cost ≤ £50 per donee per annum and carry
conspicuous advert. If the total gifts in the tax year
exceeds £50, the full cost is disallowable, not just
the excess.
Gifts of business samples to advertise to the public

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3.4 Subscriptions and donations

Disallowable Allowed
Political subscriptions and donations
Non-trade subscriptions Trade subscriptions
Gift Aid A charitable donation that meets 3 conditions:
1. Wholly and exclusively for trading purposes, and
2. Local and reasonable in size in relation to the
business making the donation, and
3. Made to a registered charity.
3.5 Car leasing

Disallowable Allowed
15% of rental & lease charges if CO2 emissions Rental & lease charges if CO2 emissions ≤ 110g/km
>110g/km
ILLUSTRATION: LEASED CAR
Devan leases a car with a retail price of £14,200 and CO2 emissions of 121g/km. The lease cost is
£1,960 in the year to 31 December 2019. Devan prepares accounts to 31 December.
As the CO2 emissions exceed 110g/km there is a disallowance of 15% x £1,960 = £294. This is added to
the accounting profit in arriving at taxable profits.
3.6 Impairment losses for trade receivables

The write off of a non-trade debt – e.g. loan Write off of a trade debt
to a customer or former employee
Debt collection costs
An allowance for the impairment or irrecoverability of trade
receivables if calculated in accordance with UK GAAP of IFRS
ILLUSTRATION: BAD DEBTS
Bad debts are as follows:

£ £
Written off Balance b/f
Trade debts 1,274 Specific provision 1,185
Loan to former employee 180 General provision 1,225
Balance c/f
Specific provision 1,194 Trade debts recovered 123
General provision 1,260 Profit and loss a/c 1,375
3,908 3,908
The loan to the former employee has been written off. This is not remuneration as the employee has
left so the payment is disallowable and must be added back to arrive at taxable trading profits.
Also, the increase in the general bad debt provision is disallowable – add back £1,260-£1225 = £35.

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3.7 Other items

Fines etc. Employee parking fines incurred whilst on business
Cost of registering trademark/ cost of registering
patent and patent royalties
Damages paid in connection with trade if not a fine
for breaking the law
Redundancy pay in excess of the statutory amount.
On the cessation of trade, the limit is 3 × statutory
amount
Compensation for loss of office if for benefit of trade
Counselling for redundant employees
Payment that is a criminal offence e.g. a bribe Theft/fraud by an employee (not business
owner/director)
Cost of raising share capital Cost of raising loan finance
Pension contributions to a registered scheme if paid
(not accrued) by the end of the year
Expenditure incurred in the 7 years before
commencement of trade: treat as an expense
incurred on day 1 of trade
EXAM SMART
In an adjustment to profits question in the exam where an item would give no adjustment,
for example employee parking fines, you must show this as an adjustment of £0. THIS IS
VITAL: you will not gain the marks available if you do not do this.
ILLUSTRATION
A sole trader has net profits in his accounts of £500,000. The following amounts have been deducted in
arriving at the profit per the accounts:
£
Depreciation 10,000
Advertising the business 2,000
Entertaining clients 1,000
Legal fees re purchase of a new office building 5,000
Calculate the tax adjusted trading profits:
£
Net profit per the accounts 500,000
Add:
Depreciation 10,000
Advertising 0
Entertaining 1,000
Legal fees 5,000
Tax adjusted trading profit 516,000

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3.8 Trading income not shown in the accounts

 A trader is taxed on the selling price of goods taken for own use.
 Any non-monetary consideration received is specifically taxable as trading income. If it has not
been included in the accounts, add the value of the money’s worth to the profits.
3.9 Income in the accounts not taxed as trading profit

 Rental income
 Profit on sale of capital assets
 Interest
All are taxed elsewhere in the individual’s tax computation.
DEDUCT all such non-trading profit from the adjusted profits.
3.10 Deductible expenditure not charged in the accounts

 Capital allowances (see Chapter 6)
 Annual deduction for lease premiums (See Chapter 4)
4 Cash basis for small businesses

 Sole traders and partnerships can choose to calculate profits/losses on a cash rather than
accruals basis if they have annual cash receipts of up to £150,000.
 Can continue to use the cash basis until annual cash receipts exceed £300,000.
 Cash basis not available to companies or limited liability partnerships (see partnership chapter).
EXAM SMART
The revenue limit of £150,000 is given in the tax rates and allowances section of the exam.
 Taxable trading profits are total cash receipts less total allowable expenses paid.
 The cost of plant and machinery (except cars) is an expense. Proceeds of disposals are included
within receipts. Capital allowances (you will meet these in the next chapter) are not available.
 For cars, in your exam use approved mileage allowances to calculate the deduction for business
mileage. Ignore actual running and capital costs of owning a car (i.e. no capital allowances).
4.1 Advantages of the cash basis

 Simpler accounting as there is no need to account for receivables, payables and inventory.
 Profit not taxed until realised and therefore there will be cash available to pay any associated
tax liability.
4.2 Disadvantage of cash basis

 A trading loss can be set only against future trading profits. It cannot be set against total
income. Under the accruals basis many more options for loss relief are available.

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4.3 Flat rate expense deduction

 Any unincorporated business can opt to use flat rate expense adjustments to replace the
calculation of certain actual costs.
EXAM SMART
 In the exam assume the cash basis is not relevant unless mentioned.
 If the cash basis applies assume the flat rate expense adjustment applies.
 The flat rate expense adjustment is available to unincorporated businesses generally
but will only be examined in the context of the cash basis.
Examinable flat rate expense adjustments:

Expense Flat rate expense adjustment
Capital and running costs Allowable deduction calculated using approved mileage rates – these rates are
of motor vehicles given in the exam
Private use of part of a Private use adjustment re household goods/services, rent, food, utilities =
commercial building fixed amount based on the number of occupants
Adjust private element of other expenses (e.g. mortgage interest) as normal
Private accommodation in Private use adjustment re household goods/services, rent, food, utilities =
a guest house or small fixed amount based on the number of occupants
hotel Adjust private element of other expenses (e.g. mortgage interest) as normal
EXAM SMART
In the TX exam, if the flat rate adjustment for private use of a commercial building is
required, it will be provided in the question.
ILLUSTRATION: PAIVI
Paivi is self-employed. For the year to 5 April 2020:

(a) Revenue was £75,000 of which £8,000 was owed as receivables at 5 April 2020.
(b) A car with CO2 emissions of 110 grams per kilometre was purchased for £16,000. The car is used
by Paivi, and 30% of the mileage is for private journeys.
(c) Motor expenses were £2,800. During the year Paivi drove 8,000 business miles.
(d) Other allowable expenses were £2,000 of which £600 was owed as payables at 5 April 2020.
(e) Office equipment was purchased for £7,000.
If Paivi uses the accruals basis, she deducts capital allowances (see Chapter 6) of £9,016. Profit is:
£ £
Revenue 75,000
Less: Motor expenses (£2,800 × 70%) 1,960
Other expenses 2,000
Capital allowances 9,016
(12,976)
Trading profit 62,024

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However, if Paivi uses the cash basis, her trading profit is:
£ £
Revenue (75,000 – 8,000) 67,000
Less: Office equipment 7,000
Motor expenses (8,000 × 45p) 3,600
Other expenses (2,000 – 600) 1,400
(12,000)
EXAM SMART
If you are asked to calculate trading profit using the cash basis, begin with revenue received
and make necessary adjustments to this figure. Do not adjust net profit – this is likely to be
complicated and time consuming.

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53
Capital allowances
1 Overview
EXAM SMART
Capital allowances are tested in virtually every exam.
Deduct capital allowances (CAs) from adjusted profits to arrive at taxable profits.
 Given instead of depreciation.
 Treat as expense for an accounting period.
 Pro-rate allowances if the accounting period is less than or greater than 12 months long.
1.1 Plant and machinery

First, you need to understand what is, and what is not, plant.
1.1.1 Qualifying assets

Buildings are NOT plant:
 Therefore fixed walls, floors, ceilings, windows, stairs or lift shafts are NOT plant.
“The function test”

If an asset performs a FUNCTION in the trade it is plant.
If an asset provides a SETTING in which the business is carried on it is NOT plant.
A football club stand has been held to be part of a setting and therefore, NOT plant.
False ceilings used to hide air conditioning pipes have been held to be part of a setting and NOT plant.

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54 6: Capital allowances ACCA TX-UK
The following qualify as plant The following qualify as plant

Surveillance equipment Cost of strengthening a floor to allow it to take plant
Fire and burglar alarm systems Computer equipment and software
Sprinkler systems Safes, strong rooms
Movable partitions Ambient, or “mood”, lighting, e.g. in a restaurant
2 The allowances
EXAM SMART
All percentages and limits are given in exam.
2.1 Annual investment allowance (AIA)

 100% on qualifying expenditure which includes:
 Plant and machinery,
 Integral features,
 Long life assets and
 Private use assets, but NOT cars.
 Set AIA off in the accounting period expenditure incurred.
 Maximum is £1,000,000 per annum.
 Pro-rate max AIA for periods less than or greater than 12 months.
 AIA not available for cars.
 AIA is given for motorbikes, vans and lorries.
 WDA (writing down allowance - see below), given on expenditure in excess of the qualifying
amount.
2.2 The main pool

 Most purchases of plant, after the AIA, go into the main pool.
 The pool qualifies for an 18% WDA (reducing balance basis) per annum.
 Deduct sale proceeds, (limited to a maximum of original cost), from the pool before calculating
WDA. As most purchases of plant go into the main pool, most assets are sold out of the main
pool (see step 4, section 2.6 below).
 Pro-rate for periods of account/accounting periods less than or greater than 12 months.
 Once the WDA has been deducted from the pool, carry the remainder of the value of the pool
to the next period as the tax written down value (TWDV).

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ACCA TX-UK 6: Capital allowances 55
2.3 Cars
 Treatment depends on CO2 emissions (this information will be given in the exam):
(i) Add cars with emissions from 51 g/km to 110g/km to the main pool and write down in
the main pool at 18% per annum.
(ii) New cars with emissions ≤ 50g/km qualify for a 100% first year allowance.
(iii) Add cars with emissions of > 110g/km to the special rate pool and write down at 6%.
 For low emission cars under (ii) ALWAYS give full FYA whatever the length of the period of
account/accounting period.
EXAM SMART
Never pro rate FYAs.
Watch out for this – the Examiner likes to test that you know to pro rate the AIA but NOT the FYA.
Special rate pool (6% WDA rather than 18%)

 WDA at 6% instead of 18%.
 The special rate pool contains expenditure on:
 Cars with CO2 emissions >110g/km, AIA not available on any cars, and
 Long life assets (life ≥ 25 years), and
 Plant and machinery integral to a building. Integral assets include:
Space or water heating systems Lifts and escalators
Electrical and lighting systems Cold water systems
Powered systems of ventilation, cooling, or air purification
PLANNING POINT
If expenditure on eligible assets in the period exceeds the AIA limit, if possible, claim AIA on
long life assets and integral P&M in preference to claiming it on assets that could go into the
main pool, thus qualifying for 18% WDA on the excess above the limit.

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ILLUSTRATION
Naga prepares accounts to 31 March. On 1 April 2019 the TWDV of her main pool was £96,000. During
the year to 31 March 2020, the following took place:
16 June 2019 Purchased plant for £1,060,000
14 August 2019 Purchased car with CO2 emissions of 108 g/km £22,000
19 August 2019 Purchased new car with CO2 emissions of 50 g/km £28,000
27 February 2020 Sold plant for £12,000. Originally purchased for £10,000
Calculate the maximum capital allowances available for the year.
SOLUTION
AIA/FYA Main pool Allowances
£ £ £
TWDV b/f 96,000
Purchase 1,060,000
AIA (1,000,000) 1,000,000
60,000
Car ≤ 110 g/km 22,000
178,000
Car ≤ 50 g/km 28,000
FYA (28,000) 28,000
Disposal – limited to cost (10,000)
168,000
WDA @ 18% (30,240) 30,240
TWDV c/f 137,760
Allowances 1,058,240
Single asset pools

 Two types of asset are not pooled. Instead given a separate pool for each individual asset.
(i) Assets with some private use by a sole trader or partner.
(ii) Short life assets.
Private use assets

 The trader only receives the business element of CAs on private use assets. However, the AIA,
the FYA or WDA is still calculated in full and deducted from the single asset pool. It is the
allowance actually given that must be pro-rated for business use.
 Each private use asset has its own column in your CA working.
 There will be a balancing allowance or charge, essentially a loss or profit, on disposal.
 Ignore private use by employees, (employees are taxed on the benefit arising from the use of a
company car, see Chapter 3).
EXAM SMART
This last point above is an important one: it’s often examined and often forgotten by
candidates.

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ILLUSTRATION: PRIVATE USE ASSETS
Oggi is a sole trader who makes up accounts to 31 March. Oggi had not previously bought any capital
assets but in the year to 31 March 2020, she purchased two cars:
(i) She spent £10,000 on a car with emissions of 105g/km. This car is used by an employee
and has 20% private use.
(ii) She spent £25,000 on a car with emissions of 120g/km. Oggi uses this car herself. 60% of
her usage is for business purposes.
Oggi can claim capital allowances in respect of these two cars for the year end 31 March 2020 of:
Private use
Main pool asset: car Allowances
£ £ £
TWDV b/f – –
Addition 10,000 25,000
WDA @ 18%/ 6% (1,800) (1,500) × 60% 2,700
TWDV c/f 8,200 23,500
Allowances deducted from taxable profits 2,700
The private use of a car by an employee does not have any effect on capital allowances. Car (i) goes into
the main pool and is given capital allowances as normal.
However, private use by a sole trader restricts the allowances given. Car (ii) must therefore have its own
column. The allowances deducted in the column are the full allowances. The full allowance is pro-rated
by 60% to reflect the business usage and only the pro-rated allowance is actually given to Oggi and
deducted in computing taxable profits.
Short life assets

 Fast depreciating assets, (e.g. computer equipment), can be kept out of the main pool by
making an irrevocable de-pooling election.
 Most assets can be de-pooled, except for cars.
 Time limit for election: 31 January, 22 months after the relevant tax year ends.
 Short life assets qualify for AIA.
 The benefit of the election is that the trader obtains a balancing adjustment on sale. Assuming
proceeds are less than TWDV this will be a balancing allowance.
 If a short life asset is not disposed of within eight years of the end of the basis period (or
chargeable period for companies) in which the expenditure was incurred, then at the beginning
of the next period its TWDV is transferred to the main pool where it is written down as normal.
WDA for small pools

 If the balance on the main or special rate pool (before WDA) is less than the small pool limit at
the end of the chargeable period, a WDA can be claimed up to the value of the small pool limit.
 This means that the pools may be written down to £Nil, rather than there being a small balance
to carry forward on which allowances have to be claimed each year.
 The small pool limit is £1,000 for a 12-month period (pro-rate for short or long periods).

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 This rule does not apply to single asset pools (short life asset, private use asset) as they have
rules to write off the balance of the pool after the disposal of the asset.
ILLUSTRATION: WDA FOR SMALL POOLS
The tax written down value of Nelson’s main pool at 6 April was £850. Nelson can claim £850 as a
writing down allowance for the year.
3 Balancing allowances and balancing charges

 There is always a balancing allowance or charge if a non-pool item is sold, e.g. a short life asset
or a private use asset.
 Balancing allowances in the main pool or special rate pool only arise on cessation of trade (and
then only when sale proceeds are less than the TWDV of the pool).
 Balancing allowances are effectively losses on sale.
 Balancing charges arise at any time when sale proceeds exceed the TWDV of the pool.
 Balancing charges are effectively profits on sale or negative capital allowances.
LECTURE EXAMPLE 6.1
Philip has traded for many years making up accounts to 31 March. At 1 April Philip had a main pool
with a TWDV of £6,250 and a car with 20% private use with a TWDV of £10,000.
In the accounting period Phillip:
 Sold office equipment for £12,200 (original cost £20,000).
 Sold his car for £7,500.
 Bought a new Audi with CO2 emissions of 105g/km for £17,500. The Audi has 20% private use.
Capital allowances available are:

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4 Year of cessation
 No AIA, FYA, or WDA in final accounting period.
 Instead there is a balancing allowance or charge on the disposal of assets.
The pro forma calculation for the final year looks like this:
£
TWDV brought forward 10,000
Additions 15,000
Disposal proceeds, or market value if the trader takes over the asset (12,000)
Balancing allowance, effectively a “loss” on cessation 13,000
5 Approach to capital allowance questions

EXAM SMART
The secret to scoring good marks for the capital allowance questions is to have a methodical
approach to setting out a clear working as described below.
 Get into the habit of following the steps below.
STEPS
Step 1: Consider how many columns are needed, aim for a separate column for each of:
 AIA, if we spend money in this period

 Low emission cars (100% FYA)
 Main pool
 Special rate pool
 Short life asset (separate column for each asset)*(see below)
 Private use asset (separate column for each asset)* (see below)
 Allowances in total
Step 2: Start with balances b/f.
Step 3: Record additions, thinking carefully about where they go.
Step 4: Record disposals. Disposal proceeds are limited to a maximum of original cost.
 There will always be a balancing charge or allowance on sale of non-pooled items marked *.
 Disposals come out of the relevant pool unless a non-pool item is being sold. Deduct
the disposal of a low emission car from the main pool.
Step 5: If disposal proceeds exceed the value of the pool, calculate a balancing charge.
Step 6: Calculate AIA, FYA, WDA, BA, BC, as appropriate.

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LECTURE EXAMPLE 6.2
Juri makes up accounts to 31 March. The tax written down value of the main pool b/f was £22,000 and
the tax written down value of a car at the start of this period was £19,000, CO2 emissions for this car are
110g/km, it is used 70% for business.
The following transactions took place in the year:
£
5 May Purchased equipment 33,000
1 June Purchased car 1 (100g/km) 25,000
5 September Purchased new car 2 (50g/km) 13,000
10 October Purchased car 3 (115g/km) 10,100
5 January Sold a truck (8,000)
15 February Sold car 3 (8,300)
Juri’s capital allowance claim for the year is as follows:

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61
Commencement and
cessation of trade
1 Basis periods
 Tax (fiscal) year runs from 6 April to 5 April.
 Businesses are normally taxed on the CURRENT YEAR BASIS:
 This means the profits for a 12-month period ending in the tax year.
 E.g. trading year ended 30 June 2019 would be the basis period for tax year 2019/2020.
 Special rules apply in:
– the opening years, AND
– when the business ends.
 Adjust profit first, (Chapter 5), secondly apply the basis period rules to this adjusted profit.
EXAM SMART
The last point above about the order in which things are done, is important. LEARN IT NOW.
Students often find the basis period rules tricky when they first meet them, so be prepared
to spend some time on this. It is vital that you can apply these rules.

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62 7: Commencement and cessation of trade ACCA TX-UK
2 Opening year rules

Tax year Basis period Example
First tax year is ALWAYS Actual basis
the tax year the Date of commencement to 5 April
trade starts
Second tax year Ideally CYB (one 12m period ends in the tax year), see Phoebe example later
We will always be or
taxed on 12m of First 12 months of trading (if accounting year-end is < 12 see Rosa example later
profits in the months after commencement of trade),
second tax year if or
we are in
12 months to the accounting year end, ending in tax year, see Mabel example later
business for the
whole of the year or
Actual basis, if no accounting period ends in the tax year
Third year Current year basis (CYB)
12 months to accounting year-end in tax year
Diagram of opening year rules for individuals running a business or in partnership
In the first tax year always tax the profits earned from
commencement to 5 April (actual basis)
In the second tax year, ask two questions:

1) Is there an accounting period ending in this tax year?
Tax the 12 months of the

Yes No tax year (actual)
2) How long is it?
If more than 12 months:

Tax 12 months to the accounting period end.
See Mabel example, later
If 12 months: If less than 12 months:
Tax it. See Tax the first 12 months
Phoebe of trading. See Rosa
example, later example, later
3rd Year repeat Year 2 questions.

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ACCA TX-UK 7: Commencement and cessation of trade 63
KEY TERM
Overlap profits are the profits that are taxed more than once in the opening years. These
can be deducted on change of year-end or on cessation of trade.
A change of year end is not examinable in your exam so for your purposes, you will deduct
overlap profits only on the cessation of trade.
LECTURE EXAMPLE 7.1: ROSA
Rosa commenced trading on 1 November 2018 and had the following results:
7 months to 31 May 2019 £14,000
Year ended 31 May 2020 £36,000
Year ended 31 May 2021 £48,000
Rosa’s assessable profits will be as follows:
Tax Year Basis Period Working Taxable Profit

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EXAM SMART
The number of months of overlap profits always equals the number of months from the
accounting year end to the next 5th April. In the above example, 31 May to 5 April is 10
months.
LECTURE EXAMPLE 7.2: MABEL
Mabel commenced trading on 1 July 2018 and had the following results:
14 months to 31 August 2019 £14,000
Year ended 31 August 2020 £21,000
Year ended 31 August 2021 £30,000
Mabel’s assessable profits will be as follows:
SOLUTION

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ACCA TX-UK 7: Commencement and cessation of trade 65
3 Closing year rules

 The taxpayer stays on the current year basis until, and including, the tax year before the year of
cessation.
 In the tax year of cessation the taxpayer is assessed on any remaining profits (no gaps!) up to
the date of cessation.
 Overlap profits are deducted from the profits of the year of cessation.
LECTURE EXAMPLE 7.3: PHOEBE
Phoebe ceased trading on 30 June 2020, having commenced trading on 1 December 2015. Her results
were as follows:
Year ended 30 November 2016 £9,000
7 months ended 30 June 2020 £21,000
Phoebe’s assessable profits will be as follows:

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67
Partnerships
1 Principles
 Each partner is taxed on his share of profits as if he were a sole trader.
 Partner “salaries” and drawings are not deductible; they are a way of sharing profit.
 Profits are shared according to the profit-sharing arrangements of the accounting period.
1.1 New joiners/leavers (treat as a sole trader commencing or ceasing)
EXAM SMART
Special care is required when a partner joins or leaves:
 He is subject to the normal opening and closing year rules.
 The remaining partners will continue on the CYB.
1.2 Losses
 Each partner is entitled to the same loss reliefs as sole traders.
 Each partner is free to utilise his share of losses in any way he chooses.
2 Limited liability partnerships (LLPs)

 The liability of the partners is restricted to the capital they contributed.
 Partners are taxed in the same way as ordinary partners.

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68 8: Partnerships ACCA TX-UK
3 Approach to exam questions

STEPS
Step 1: Adjust profits for tax, (Chapter 5) and deduct capital allowances, (Chapter 6).
Step 2: Allocate profits to partners in profit sharing ratio (PSR).
Step 3: Calculate each partner’s taxable profit, (Chapter 7 basis periods).
LECTURE EXAMPLE 8.1
Charlie and David have been in partnership for many years sharing profit in the ratio 3:2 after allowing
for a salary of £30,000 per annum for Charlie, (i.e. Charlie gets the first £30,000 of any profit). On
1 May 2018 Kris joined the partnership and the new profit sharing arrangement from this date was:
1 1 1
Charlie ; David ; Kris . No salaries were paid.
2 6 3
The firm has always had a 31 December year end and recent results adjusted for tax purposes and
after the deduction of capital allowances, (i.e. Step 1 already completed in this example) have been as
follows:
£
Year ended 31 December 2017 80,000
Required:
Calculate each partner’s assessments for trading profits for the years 2017/18 to 2019/20 and the
overlap profits for Kris.

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69
Trading losses
1 Current year and prior year relief

If a trader makes a loss, NIL is entered as the “profit” for the basis period;
NEVER include the loss.
 Set losses against an individual’s income then gains.
 The trader can choose to set trading losses against total income of the tax year of the loss
and/or the preceding tax year, so:
 This year, or
 Last year, or
 This, then last, or
 Last, then this, or
 Don’t claim at all.
 Cannot restrict loss claim to preserve income to cover personal allowances.
 The trader can choose which year to set the loss against first.
 If a trading loss has been set against TOTAL INCOME for a given tax year, the trader can then
claim to set excess losses against chargeable gains for that year.
 Set the trading loss against total gains less capital losses for the year (less capital losses
brought forward).
 Loss relief cannot be restricted to preserve the capital gains tax (CGT) annual exempt
amount (see Chapter 12).

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70 9: Trading losses ACCA TX-UK
2 Carry forward losses

 If the trader does not utilise the loss, or, after utilising the loss, he has an unrelieved loss still
available, he MUST carry it forward to offset against the first available profit of the same trade.
There is no choice.
 Losses continue to be carried forward until they are all offset against future profits of the same
trade.
3 Factors influencing which loss relief to use

 Marginal rates of tax,
 The utilisation of personal allowances, and
 Cash flow.
LECTURE EXAMPLE 9.1
Richard has been trading for many years making up accounts to 5 April. He has the following income
and gains for the tax years ended 5 April. The CGT annual exempt amount is £12,000.
Year 1 Year 2
£ £
Trading profit/(loss) 24,200 (130,000)
Other income 3,800 11,500
Capital gains 50,100 12,000
Richard wishes to relieve his trading loss as efficiently as possible.
Richard’s taxable income and taxable gains for the two tax years are:

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ACCA TX-UK 9: Trading losses 71
4 Losses in the opening years of trade

 Losses incurred in any of the first four tax years of the trade can be carried back and set against
TOTAL INCOME of the three tax years preceding the year of loss on a FIFO basis.
 So, go back three years and work forwards.
 If a trade starts in 2019/20 a trading loss in 2019/20 can be set against total income of
2016/17, then 2017/18, then 2018/19.
STEPS
Step 1: Calculate losses incurred in each tax year by using the same basis periods as for profits,
i.e. actual basis then CYB etc.
The same loss cannot be created in two different tax years. See example below.
Step 2: Calculate profits for tax years as normal, except that if a loss is incurred, the profit for
the year is nil.
Step 3: Set up tax computations for all years, before considering loss relief, but leave gaps for
losses to be inserted.
Step 4: Set up a loss memorandum, a working, to keep track of losses.
Step 5: Relieve losses, according to the Examiner’s instructions.
You may have to consider marginal rates of tax, the utilisation of personal allowances and cash flow.
ILLUSTRATION: AARON
Aaron commenced a trade on 1 January 2019. Adjusted trading results, after capital allowances, were:
Year ended 31 December 2019 £(14,000) loss
Year ended 31 December 2020 £5,000 profit
Year ended 31 December 2021 £12,500 profit
Prior to being self-employed, Aaron was employed as a tutor, when his earnings were:
2018/19 £5,000
2015/16 to 2017/18 per annum £75,000
Aaron’s trading loss can be utilised as follows: (Assume current rates apply to all years.)
STEPS
Step 1: Calculate trading losses (same basis periods as for profits)
£
2018/19 Actual basis 1 January 2019 – 5 April 2019 = 3/12 × 3,500
£14,000
2019/20 CYB Year ended 31 December 2019 14,000
Less: loss already utilised in 2018/19 (3,500)
Allowable loss 2019/20 10,500
Note the total loss available is £3,500 + £10,500 = £14,000
2020/21 CYB Year ended 31 December 2020 No loss

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Step 2: Calculate taxable profits for all years, using normal opening year rules
£
2018/19 Actual basis 1 Jan 2019 – 5 April 2019 Nil
2019/20 CYB Year ended 31 December 2019 Nil
2020/21CYB Year ended 31 December 2020 5,000
2021/22 CYB Year ended 31 December 2021 12,500
Step 3: Produce income tax computations, leaving gaps for losses
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22
£ £ £ £ £ £ £
Trading profit nil nil nil nil nil 5,000 12,500
Trading loss b/f
Earned income 75,000 75,000 75,000 5,000 nil nil nil
Total income 75,000 75,000 75,000 5,000 nil 5,000 12,500
Loss relief v total income
Net income
Looking at the figures above, it is obvious that Aaron should carry losses back three years rather than
using them in 2018/19 or 2019/20. This will trigger a repayment of tax suffered at 40%. If Aaron
claimed against the first loss making year he would not recover any tax as his income is covered by
personal allowances in 2018/19.
Step 4: Loss memorandum
£
2018/19 loss 3,500
Set against TOTAL INCOME 2015/16 (3,500)
2019/20 loss 10,500

Set against TOTAL INCOME 2016/17 (10,500)
C/f Nil
Step 5: Relieve losses according to the Examiner’s instructions. See solutions at back of
Question Bank.
5 Terminal loss relief (closing year of trade)

KEY TERM
Terminal loss = loss incurred in the last 12 months of trading.
The terminal loss is calculated as:

6 April to cessation:
Trading loss plus unrelieved overlap profits (if profit overall, show nil here) X
Remainder of final 12 months trading up to 5 April:
Trading loss (if profit overall, show nil here) X
X
Set the terminal loss against trading profit:

 of the year of cessation, and then
 the 3 preceding years, working backwards.

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LECTURE EXAMPLE 9.2
Praj had the following results prior to ceasing trade on 31 October 2019.
£
10 months ended 31 October 2019 (20,000)
Overlap profits from commencement were £2,000.
Praj’s terminal loss, and terminal loss relief, is:

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6 Cap on loss relief

A cap restricts the offset of losses against total income.
 The cap is the higher of:
 £50,000 or
 25% of total income.
 Total income is after deducting gross personal pension contributions (See Chapter 10), but
before deduction of payments under the payroll giving scheme.
Contributions to an occupational pension scheme under net pay arrangements will have already
been deducted when calculating employment income, so no further deduction is necessary.
 An unrestricted loss can be set against profits of the same trade for the preceding tax year.
 The restriction does not apply where losses are being offset against the profits of the
trade which generated them.
 The restriction applies only against other income.
 Any unrelieved restricted loss is carried forward against future profits from the same trade.
EXAM SMART
The cap will be examined only where loss relief is claimed against total income for the tax
year in which the loss arose and/or the preceding year.
The cap does apply in certain other circumstances, but you do not need to worry about this.
ILLUSTRATION: RESTRICTION OF LOSS SET OFF
In the current year to 5 April Jo made a trading loss of £145,000. She made a trading profit of £30,000
in the prior year and had employment income of £125,400 each year.
Assume the personal allowance is £12,500 in both years and Jo claims trading loss relief against her
total income of the current and the previous year. Her taxable income will be:
Prior year Current
year
£ £
Trading profit 30,000 0
155,400 125,400
Loss relief (80,000) (50,000)
75,400 75,400
Personal allowance (12,500) (12,500)
62,900 62,900
 Current year loss relief is capped at £50,000 as this is higher than £31,350 (125,400 × 25%).
 Prior year loss relief against the trading profit of £30,000 is not capped but relief against other
income is capped at £50,000 (the cap is the higher of £50,000 and 25% × £155,400 = £38,850).
Total relief is £80,000 (30,000 + 50,000).
 The balance of the loss of £15,000 (145,000 – 50,000 – 80,000) is carried forward against future
profits of the same trade.

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EXAM SMART
Strangely, the cap is beneficial here. The cap results in most of the loss being relieved against
income otherwise taxable at the higher rate, while personal allowances are available in full
for both tax years.
7 Property business losses

 Profits and losses arising on the letting of property are pooled and the net figure in a tax year is
taxed as non-savings income (see Chapter 2).
 The net profit figure is part of income against which other trading losses may be set.
 Any excess loss is carried forward to set against future property business profits.
 Profits and losses arising on furnished holiday lets (FHL) are treated separately from other
property income. FHL profits and losses are pooled.
 Losses on FHL can only be offset against income from the same FHL business.
8 Overview of the use of trading losses

Relief Carry forward Current year or Loss arising in first Terminal loss
prior year set off four years of trade
(any order)
Set against Future trading Total income before Total income before Trading profit of
profits of the same the personal the personal the same trade
trade allowance allowance
Years available for Carry forward until Current and / or Set off in 3 prior Set off in year of
set off all loss used or prior year years on a FIFO basis cessation and
business ceases then 3 prior
years on a LIFO
basis
Automatic? Automatic relief Claim optional – but Claim optional – but Claim optional –
a claim is ‘all or a claim is ‘all or but a claim is ‘all
nothing’ nothing’ or nothing’
Planning Can claim in one or
both years in any
order. Make claims
which avoid wasting
personal allowances
Claim Agree amount of Claim within Claim within Claim within
loss within 4 years 12 months of 12 months of 4 years of the
of end of tax year in 31 January following 31 January following end of the last
which it arose the end of the tax the end of the tax tax year in which
year in which the year in which the the business
loss arose loss arose operated

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77
10
Pensions
1 Types of pension scheme

Pension schemes registered with HMRC are a tax efficient form of investment as they are not subject
to tax on income or gains.
 A self-employed or non-earning individual can only be a member of a personal pension scheme.
 An employee can be a member of a personal pension scheme and/or an occupational pension
scheme.
(i) Employees can contribute to their pension scheme, and/or
(ii) Employers can contribute to an employee pension scheme. Contributions are:
 an exempt benefit for the employee, and
 a tax-deductible expense for the employer.
2 Contributing to a pension scheme

 Anyone (even if not earning) can contribute to a pension scheme up to the age of 75.
 3rd parties can contribute, e.g. parent for child, spouse for non-working spouse.
2.1 Maximum contributions

 The maximum tax relievable contribution that can be made in the tax year is the higher of:
(i) Earnings (employment and trading (incl. FHL)), OR
(ii) £3,600.

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78 10: Pensions ACCA TX-UK
2.2 Tax relief

 Tax relief may be:
(i) Given at source/via the tax return (personal pension contributions)
 Payments by an individual into a personal pension scheme are deemed to be paid
net of basic rate income tax.
 HMRC gives basic rate tax to the pension company.
 Beyond this, pensions are effectively ignored for basic rate taxpayers.
 Higher rate relief is given on personal pension scheme contributions by increasing
the basic rate limit by the gross amount of contributions made (as for Gift Aid
donations, see chapter 2).
(ii) Given under the net pay arrangements (occupational pension scheme contributions)
 Employers deduct gross contributions from an employee’s pay before operating
PAYE. This saves the employee from having to claim income tax relief.
 Simply reduce salary by the gross amount.
 Do not extend the basic rate band.
3 Annual allowance
 A tax charge arises if gross tax relievable contributions exceed available annual allowances.
 The annual allowance is £40,000.
3.1 Tapered annual allowance

 The annual allowance of £40,000 is reduced by £1 for every £2 by which adjusted income
exceeds £150,000, down to a minimum annual tapered allowance of £10,000.
 A person with adjusted income of £210,000 or more is entitled to an annual allowance of £10,000.
 Tapering applies on a tax year basis, so a taxpayer with variable income might find themselves
entitled to the full £40,000 allowance in some years and a tapered allowance in other years.
KEY TERM
Adjusted income for an employee is net income PLUS:
 Employee contributions to an occupational pension scheme (these will have been
deducted in computing net income),
AND
 Employer contributions to either an occupational or a personal pension scheme.
KEY TERM
Adjusted income for the self-employed is net income.

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ACCA TX-UK 10: Pensions 79
ILLUSTRATION
Alexei has trading profit of £196,000. He has not previously been a member of a pension scheme.
Alexei’s tapered allowance is:
£
Annual allowance 40,000
£196,000−£150,000 (23,000)
Less: Taper ( )
2
17,000
3.2 Carry forward

 Unused annual allowance can be carried forward for up to 3 years.
(i) The current year allowance is used first, then
(ii) The oldest allowance brought forward.
 The annual allowance is not available to carry forward if the individual was not a member of a
pension scheme in the year concerned.
 Employer contributions count towards usage of the annual allowance.
ILLUSTRATION: AVAILABLE ANNUAL ALLOWANCES
Baila and Amit made the following gross personal pension contributions:
Baila Amit
£ £
2016/17 28,000 40,000
2017/18 Nil 27,000
2018/19 30,000 Nil
Baila was not a member of a pension scheme in 2017/18. Amit was a member of a pension scheme in
all three tax years. Neither Baila or Amit’s adjusted income exceeds £150,000 for any tax year.
Baila has unused allowances of:
£12,000 from 2016/17
£Nil from 2017/18 (allowance is lost as Baila was not in a pension scheme that year).
£10,000 from 2018/19
Available allowances for 2019/20 are £62,000 (£40,000 + £10,000 + £12,000) so Baila can invest up to
£62,000 gross in a personal pension without incurring an annual allowance charge (see below).
Amit has unused allowances of £Nil in 2016/17, £13,000 in 2017/18 and £40,000 in 2018/19. Available
allowances for 2019/20 are £93,000 (£40,000 + £13,000 + £40,000) so Amit can invest up to £93,000
gross in a personal pension without incurring an annual allowance charge (see below).

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LECTURE EXAMPLE 10.1
Chen has adjusted income of £200,000 each tax year. He made the following gross personal pension
contributions:
£
Year 1 9,000
Year 2 12,000
Year 3 10,000
What amount of unused allowances does Chen have to carry forward to year 4?
3.3 Annual allowance charge

 If gross contributions exceed the maximum available annual allowances the annual allowance
charge is made at the taxpayer’s marginal rate of tax.
 The annual allowance charge removes the tax relief on the pension contributions in so far as
they exceed available annual allowances. The charge could be in whole or in part at 45%, 40% or
20% depending on the taxable income of the individual.
Muller’s employment income, his only source of income, is £230,000.

He pays gross personal pension contributions of £70,000 to his personal pension scheme and his
employer makes contributions of £20,000 to this scheme. He has £30,000 of allowable unused annual
allowance brought forward.
Muller’s tax liability is:

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ACCA TX-UK 10: Pensions 81
EXAM SMART
The following will be given on your exam paper:
Annual allowance £40,000
Minimum allowance £10,000
Income limit £150,000
The maximum contribution that can qualify for tax relief without any earnings is £3,600.
4 Receiving benefits from a pension scheme

4.1 The lifetime allowance
 Once invested, funds in a pension fund grow tax free.
 There is no limit on total contributions that an individual can pay into a scheme. The only limit is
on the annual contributions on which tax relief is available.
 There is, however, a limit on the amount that an individual can accumulate tax free in a pension
fund. This limit is known as the lifetime allowance.
 The lifetime allowance for 2018/19 is £1,055,000. The lifetime allowance is considered when an
individual becomes entitled to withdraw benefits from the scheme.
EXAM SMART
The lifetime allowance is not included in the tax rates and allowances section of the TX-UK
exam, so you need to learn this figure.
Withdrawing pension benefits from a pension scheme

 From age 55, individuals can withdraw funds from their pension scheme as they wish. For
instance, they could:
(i) withdraw the whole fund as a lump sum, or
(ii) withdraw the tax-free amount (see below) as a lump sum and also buy an annuity (a
regular income for life), or

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(iii) leave the funds in the pension scheme and withdraw cash when required.
 A withdrawal may include a one-off tax-free lump sum of up to 25% of the pension fund.
 The maximum tax-free lump sum is 25% × lifetime allowance.
 Apart from the tax-free lump sum, all other income taken from a pension is taxed as non-
savings income at the individual’s marginal rate.
Withdrawing the whole amount in one year could give rise to a large tax liability if it results in
the taxpayer’s income extending beyond the basic and higher rate band limits.
 The lifetime allowance limits the total funds that can be accumulated tax free in a scheme. If the
limit is exceeded an additional income tax charge applies when funds are withdrawn.
EXAM SMART
The detailed rules for the additional income tax charge are not examinable.

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83
11
National insurance
1 Class 1 NIC
Employee (Class 1 Primary NIC)
 Employees suffer Class 1 at 12% on ‘gross earnings’ from £8,632 to £50,000 per year, and at 2%
on gross earnings above £50,000.
 Earnings include gross pay, including cash equivalent benefits like shopping vouchers but
exclude benefits which cannot be turned into cash, like company cars.
 Class 1 contributions - payable by employees aged 16 or over until they reach state pension
age.
Employer (Class 1 Secondary NIC)

 Class 1 secondary NICs are payable by employers in respect of employees aged 16 or over.
 No upper age limit for employer contributions.
 Employer Class 1 NI is 13.8% of earnings above £8,632, with no upper earnings limit.
 There is an annual employment allowance which businesses can deduct from the total
employer’s Class 1 NIC due.
 The allowance is £3,000 per employer, and is deducted from the total employer Class 1
NIC payable for the tax year. There is no deduction from Class 1A (see below) or from
employee contributions.
 For example, if a business’s total employer’s Class 1 NIC is £18,000, then only £15,000
(18,000 – 3,000) is paid to HMRC. If total employer Class 1 NIC is £3,000 or less, the
amount paid after the employment allowance, is £nil.
 The employment allowance is not available to companies where a director is the sole
employee. The allowance is intended to help employers who support employment rather
than one-man band companies.

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84 11: National insurance ACCA TX-UK
Class 1A NIC employers

 Employers suffer Class 1A NIC at 13.8% on benefits, e.g. company cars.
 Class 1A is not due on exempt benefits or on amounts treated as earnings and assessed to
Class1 NICs (e.g. non-cash vouchers).
EXAM SMART
You will be given national insurance rates and the amount of the employment allowance on
your exam paper.
Administration and payment

 The employer must:
 Calculate the primary and secondary Class 1 NICs due on each pay date.
 Deduct primary NICs from the employee’s earnings and pay them to HMRC on the
employee’s behalf.
 Pay the total of all primary and secondary Class 1 NICs to HMRC together with all income
tax due under the PAYE system.
 For businesses that pay tax and NIC electronically:
(i) Primary and secondary Class 1 NIC is payable by the 22nd each month.
(ii) Class 1A NIC is payable by 22 July following the end of the tax year.
EXAM SMART
For this exam, assume that the business pays tax and NIC electronically.
2 Class 2 (self-employed)
 Class 2 NICs are payable by any self-employed individual who:
 Is aged over 16 but is not of state pension age.
 Has tax adjusted profits that exceed £6,365.
 Flat rate - £3.00 per week.
 HMRC collect Class 2 NICs through the self-assessment system. Payment is due by 31 January
following the end of the tax year along with the balancing payment for income tax and Class 4
NIC (See Chapter 22).
 HMRC can collect unpaid Class 2 by including the unpaid amount in a person’s tax code.

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ACCA TX-UK 11: National insurance 85
3 Class 4 (self-employed)
 Class 4 NICs are payable by self-employed individuals who are aged 16 or over at the start of
the tax year until the end of the tax year in which they reach state pension age.
 9% on profits from £8,632 to £50,000 plus 2% of profits above £50, 000.
 Profits means trading profit adjusted for income tax purposes (see chapter 5), less trading
losses.
 Class 4 NIC is payable with income tax on profits. (See Chapter 22.)
ILLUSTRATION: CLASS 1 NICS
Mr Brice is employed by ABC plc. His salary is £80,000 and he has a company car that creates a taxable
benefit of £15,000 per annum.
Required:
Calculate the Class 1 primary,secondary and Class 1A NICs payable on Mr Brice’s salary and benefits,
stating who suffers the cost, who pays and when the NIC is due (ignore the employment allowance).
SOLUTION
(a) Employee Class 1
£
£41,368 (£50,000 - £8,632) × 12% 4,964
£30,000 (£80,000 - £50,000) × 2% 600
5,564
Suffered by Mr Brice, collected by employer along with income tax under the PAYE system as
Mr Brice is paid (e.g. monthly), and then paid to HMRC on the 22nd of each month following the
month in which the salary is paid.
(b) Employer Class 1
£71,368 (80,000 – 8,632) × 13.8% £9,849
Suffered by ABC plc and paid on the 22nd of each month following the month in which the salary
is paid.
(c) Class 1A
13.8% × £15,000 £2,070
Suffered by ABC plc and payable on 22 July following the end of the tax year.
ILLUSTRATION: CLASS 2 AND CLASS 4 NICS
Nicholas is a partner in FI and his share of profits for the year was £80,000.
£
Class 2 NI 52 × £3.00 = 156
Class 4 NI 9% £41,368 (50,000– 8,632) = 3,723
Plus 2% £30,000 (80,000 – 50,000) = 600
4,479

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86 11: National insurance ACCA TX-UK

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87
12
Capital gains tax (CGT)
1 Scope of CGT
 UK resident individuals are liable to CGT on the disposal of chargeable assets worldwide.
 For this exam, assume non-residents do not pay CGT.
 Companies pay corporation tax on chargeable gains.
A CGT computation looks like this:
Qualifying for
entrepreneurs’ Residential
Gains: relief Other gains property
£ £ £
Main residence (Ch. 14) 20,500
Shares in B Ltd (Ch. 15) 120,000
Shares in A plc (Ch. 15) 14,100
Painting (Ch. 13) 11,000
Part disposal (Ch. 12) 15,000
Chargeable gains 120,000 40,100 20,500
Annual exempt amount (AEA) (0) (0) (12,000)
Taxable gains 120,000 40,100 8,500
CGT at 10% × £120,000 £12,000
CGT at 20% × £40,100 £8,020
CGT at 28% × £8,500 £2,380
 The THREE columns are very important as a different tax rate applies to assets in each of the
columns.

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88 12: Capital gains tax (CGT) ACCA TX-UK
2 Exempt assets
EXEMPT EXEMPT
Wasting chattels (see later) National savings certificates
Foreign currency for private use Cars
Animals (including racehorses etc.) Premium bonds
Decorations for valour, unless purchased Transfers on death
Gilts (government stock) sold by individuals QCBs (corporate loan stock) sold by individuals
EXAM SMART
If an asset is exempt, you should state this in your exam answer in order to gain the marks
available for knowing this. Do not just ignore the asset – you will not gain any marks for just
ignoring it.
3 Calculating gains and rates of tax

3.1 Computing gains
The pro forma gain calculation is:
£
Sale proceeds (net of selling costs) x
Less: costs of acquisition (including buying costs) (x)
Capital Gain x
Less: Annual exempt amount (x)
Taxable gain x
3.2 Computing capital gains tax

How gains are taxed depends on:
(i) the asset disposed of, and
(ii) the level of taxable income.
Gains are effectively treated as a top slice on top of income:
 Gains falling in any remaining basic rate band are taxed at the standard rate of 10% (18% for
residential property).
 Gains above the basic rate band are taxed at the higher rate of 20% (28% for residential
property).

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ACCA TX-UK 12: Capital gains tax (CGT) 89
In 2019/20:
(1) Olly has taxable income of £29,000 and makes taxable gains of £21,500.
(2) Alice has taxable income of £5,000 and makes taxable gains of £17,000.
None of the gains were made on the disposal of residential property.
Olly and Alice’s CGT liabilities for 2019/20 are:

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Extend the basic rate band by gross personal pension contributions and gross Gift Aid donations:
Bruce has taxable income of £33,370 and pays net personal pension contributions of £4,400. He sells a
painting for £48,500 incurring sales commission of £2,500. He bought the painting for £7,500, plus fees
of £500. The CGT due is:
Annual exempt amount

Deduct the annual exempt amount (AEA) of £12,000 from capital gains in the following order:
(i) gains on residential property, then from
(ii) gains not qualifying for entrepreneurs’ relief (see below)
There is a 10% CGT rate for entrepreneurs’ relief gains (see Chapter 14). This means that the
AEA should be deducted from these gains last.
4 Capital losses
 Set capital losses against current capital gains, even if this wastes the annual exempt amount.
 Current losses cannot be restricted.
 Carry forward excess capital losses to set against future capital gains, after deducting the AEA
for the future years (i.e. restrict brought forward losses to allow use of the AEA).
 So, the pro forma computation for this is:
£
Chargeable gain in year X
Less: Allowable loss in year (X)
Net chargeable gain in year X
Less: Annual exempt amount (X)
X
Less: Loss b/f (X)
Taxable gain X
 Chargeable gains are the gains before deduction of the AEA or brought forward losses.

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 Taxable gains are gains after deduction of the AEA and brought forward losses.
 Set capital losses off in the following order:
 First against gains on residential property.
 Next against other gains not qualifying for entrepreneurs’ relief (see below), and
 Finally against any gains qualifying for entrepreneurs’ relief.
Clarence had taxable income of £20,000. Clarence sold a painting and made a gain of £36,000. He also
sold a vase, incurring a loss of 10,000. He had capital losses brought forward of £18,000.
The capital loss carried forward at the end of the tax year is:
5 Part disposals
A
The allowable cost of a part disposal is calculated by using the formula where:
A+B
A = Gross proceeds of the part disposed of, and

B = MV of the part retained.
Raj owns 10 hectares of land. The land cost £100,000. Raj sold 4 of the 10 hectares for £350,000 net of
£20,000 commission, when the remaining 6 hectares were worth £400,000. The land is not a business
asset. This was Raj’s only disposal.
Raj’s taxable gain as a result of the part disposal of the land is:

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5.1 Asset destroyed or lost

 Treated as a sale with proceeds deemed to be the compensation received.
 Disposal date is the date the compensation is received.
 Gain can be rolled into the cost of a replacement asset if the insurance proceeds are re-invested
in a new asset within 12 months of receiving compensation (before or after).
 If < 100% of proceeds are reinvested, a gain will be chargeable now equal to the lower of
proceeds retained OR the original gain:
Receive insurance – use Receive insurance – use
Receive insurance – ALL to replace within 12 PART to replace within 12
No insurance proceeds NO replacement months months
Deemed proceeds = £Nil Deemed proceeds = Deemed proceeds = value Immediate gain = excess
insurance received which gives no gain/loss proceeds that are not
reinvested in replacement
Compute capital loss using Compute gain/loss If proceeds > than value Remainder of gain can be
normal rules. using normal rules. which gives no gain/loss, deferred by electing for
Deduction of allowable deduct the excess from the no gain/loss.
expenditure creates a loss. replacement asset’s cost.
6 CGT on death
 On death, the transferee is deemed to have acquired the asset for its market value at the date
of the transferor’s death, even if the transferee is the spouse of the deceased.
 There is no CGT on death.
7 Inter-spouse transfers
 Spouse 2 replaces spouse 1 as owner:
 Spouse 2 is deemed to acquire the asset at cost at the date spouse 1 acquired it.
 The only exception is if spouse 1 dies and leaves the asset to spouse 2. In this situation,
spouse 2 takes on the asset at probate value, i.e. MV at the date of spouse 1 death.
 Allocate gains on jointly owned assets between spouses.
 Each receives the annual exempt amount.
8 Connected persons
 Transfers between connected persons (other than inter-spouse transfers) are deemed made at
market value. The actual selling price is ignored.

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 We are connected to direct relatives (parents, children, siblings, grandparents and

grandchildren), but not uncles, aunts, nephews, or nieces.
9 Terminology
KEY TERMS
The Examiner uses the following terminology:
Chargeable gain – The capital gain before deducting the annual exempt amount
Taxable gain – The chargeable gain after deducting the annual exempt amount

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95
13
Chattels and wasting assets
KEY TERM
Chattels are tangible movable property, e.g. vases, paintings, furniture, jewellery,
greyhounds, racehorses. That is things you can see, touch and move. Not shares, or
buildings, or leases.
1 Wasting chattels (life < 50 years)

 Wasting chattels are exempt from capital gains tax except for plant and machinery (not cars)
sold for a profit.
 A chattel is a wasting chattel if it has an expected useful life of less than 50 years at the date of
disposal.
Plant and machinery:
 Plant and machinery is always treated as a wasting asset.
 However, If you sell an old machine for more than you paid for it, treat as non-wasting, i.e. you
will make a chargeable gain unless it is bought and sold for less than £6,000.
 Losses on P&M are ignored because the trader claimed capital allowances.
2 Non-wasting chattels (life > 50 years)

 For example: paintings, furniture, jewellery, plant and machinery sold at a profit.
 Gains are exempt if cost and gross proceeds are £6,000 or less.
 If gross proceeds exceed £6,000, the taxpayer is taxed on the lower of:
 the normal gain, or
 5/3 (gross proceeds – £6,000).

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96 13: Chattels and wasting assets ACCA TX-UK
ILLUSTRATION: CHATTELS
Marcus sold a painting for £6,500 (gross of 10% commission). He had purchased the painting
15 months earlier for £4,000.
£
Proceeds (6,500 – 650) 5,850
Cost (4,000)
1,850
Gain restricted to 5/3 (6,500 – 6,000) £833
2.1 Losses
If a non-wasting chattel is sold at a loss, the deemed proceeds are £6,000 (before selling costs). This
rule cannot be used by HMRC to convert a loss into a gain.
ILLUSTRATION: CHATTEL SOLD AT A LOSS
Shula bought a painting for £8,000 and sold it three years later for £4,200. Shula’s capital loss is:
£
Deemed proceeds 6,000
Cost (8,000)
Loss (2,000)
3 Summary
Cost ≤ £6,000 Cost > £6,000
Proceeds ≤ £6,000 Exempt Proceeds deemed to be £6,000 (restricts loss)
Proceeds > £6,000 Normal gain or, if lower, Normal gain or loss
5/3 (gross proceeds – £6,000)
4 Chattel scenarios
Review the following scenarios for chattels to test your understanding of the rules:
Cost Proceeds Gain/(Loss) Reasoning
£ £ £
3,000 5,000 Nil Cost and proceeds < £6,000
5,000 3,000 Nil Cost and proceeds < £6,000
5,000 7,000 1,667 5/3 × (£7,000 – £6,000)
7,000 5,000 (1,000) Deemed proceeds £6,000
10,000 (plant) 7,000 Nil Losses on plant are covered by capital allowances
7,000 (plant) 10,000 3,000 Cost and proceeds > £6,000 – gains on plant are
treated as non-wasting chattels
5 Wasting assets (e.g. copyright with a 20-year life)

Cost is depreciated on a straight-line basis. If we buy a 20-year copyright for £10,000 and sell it five
years later the allowable cost will be 15/20 × £10,000 = £7,500.

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97
14
CGT reliefs
1 Introduction
There are four examinable reliefs. There is normally at least one tested in each exam.
The reliefs are:
(1) Principal private residence relief (PPR)
(2) Rollover relief
(3) Gift relief
(4) Entrepreneurs’ relief (ER)
EXAM SMART
 The four reliefs above are available to individual taxpayers who pay capital gains tax on
their gains.
 The only ONE relief available to a company is rollover relief.
It is worth noting this now as weaker students often waste time in exams giving a company the
other reliefs.
Also note that:
(i) Companies do not pay capital gains tax. Instead they pay corporation tax on their gains.
(ii) Companies are not given an AEA.

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98 14: CGT reliefs ACCA TX-UK
Approach to exam questions

It works, so learn it!
STEPS
Step 1: Calculate gain on disposal of asset.
Step 2: Consider relief to reduce or eliminate gain.
Step 3: Deduct current losses.
Step 4: Deduct the AEA, and finally any losses b/f.
 Set losses and AEA against
(i) Residential property gains, then
(ii) Non-ER gains, then
(iii) ER gains.
Step 5: Calculate CGT at 18%, 28%, 10% or 20%
The rate depends on the type of asset and which band the gain falls in.
Step 6: Calculate base cost of asset/replacement asset as necessary.
2 Principal private residence Relief

Sale of only or main residence is exempt from CGT.
2.1 Part occupation

Period of occupation
Gain × is exempt.
Total period of ownership
The gain that is taxable, after any available AEA, is taxed at residential property rates.
Deemed occupation Condition
Last 18 months of ownership Must have lived in the house at some point in the past
Up to three years for any reason Must have lived in the house at some point before and after absence
Up to four years when the Must have occupied the house at some point before absence but no
employee required to work need to re-occupy after absence if work prevents you from doing so
elsewhere in the UK
Any period when the employee Must have occupied the house at some point before absence but no
required to work outside the UK need to re-occupy after absence if work prevents you from doing so
Pavel bought his house in London on 1 February 2004 for £200,000. He sold it on 1 August 2019 for
£751,900. Pavel lived in the house from the date of acquisition to 1 March 2006. He moved out

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ACCA TX-UK 14: CGT reliefs 99
because his job was re-located to Bristol. Pavel re-occupied on 1 March 2011. Pavel stayed in the
house until 1 July 2014 when he moved out for good to live with his girlfriend.
Pavel’s taxable income for 2019/20 is £61,000. He did not dispose of any other capital assets.
Calculate Pavel’s capital gains tax payable for 2019/20.
2.2 Other points

 If an individual:
(i) owns more than one property:
 must elect for one to be his main residence.
 elect within two years of commencing occupation of the second property.
(ii) is in job-related accommodation or is self-employed and occupying job-related
accommodation (e.g. pub landlord, parish priest), he can deem any other property to be
his main residence.
 No requirement to establish actual occupation.
 Married couples can only have one main residence between them.
2.3 Letting relief

Available to owner of a main residence in addition to PPR relief.
Letting relief is the lowest of:
 Gain in let period (ignoring periods when the property is in actual or deemed
occupation), OR
 Gain exempt under the PPR rules, OR
 £40,000.

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If the property is part let, the last 18 months is deemed to be fully occupied by the owner, if at some
point the property was occupied exclusively by the owner.
 If the property was always part let the 18-month rule does not apply.
ILLUSTRATION: PPR AND LETTING RELIEF
John bought a house on 1 January 2007 for £100,000. He sold it on 1 January 2020 for £484,900. From
1 January 2010 to the date of sale, John let out a third of the house.
£
Proceeds 484,900
Cost (100,000)
Gain before PPR relief 384,900
Exempt Chargeable
1.1.07 to 1.1.10 (fully occupied) 36
1.1.10 to 1.7.18 (part let) 68(2/3) 34(1/3)
1.7.18 to 1.1.20 (last 18 months) 18
122 34
Therefore PPR relief (122/156 × £384,900) (301,012)
Gain before letting relief 83,888
Letting relief, lowest of:
£
Gain in let period 34/156 × 384,900 83,888
PPR relief 301,012
Monetary limit 40,000
Therefore (40,000)
Chargeable gain 43,888
3 Rollover relief
Individuals (and companies) can defer (rollover) a gain on the sale of a qualifying asset if they purchase
a replacement qualifying asset.
3.1 Conditions
 Old and new assets must be used in a trade or trades carried on by the taxpayer.
 Does not have to be the same trade, you could sell a farm and buy a space station.
 New asset must be purchased in the 4-year window running from 12 months before to
36 months after the sale of the old asset.
Qualifying assets Qualifying assets
Land and buildings Fixed plant and fixed machinery
Goodwill Ships, aircraft and hovercraft
Satellites, space stations and spacecraft
 Goodwill for companies is not a qualifying asset as it falls within the intangibles regime instead.
 Shares do not qualify, so no rollover relief on sale or purchase of shares.

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3.2 How rollover relief works

The gain on the sale of the old asset is deducted from (rolled into) the cost of the new asset.
If you retain any of the sale proceeds, your immediate chargeable gain is the lower of:
 The actual gain on the sale of the old asset, or
 The cash retained after reinvestment.
To avoid an immediate chargeable gain, you must reinvest all of the proceeds in a new asset.
ILLUSTRATION: ROLLOVER RELIEF
Bhanu sold a freehold office building for £290,600. The building had been purchased for £148,000.
Bhanu purchased a replacement building for £250,000 four months after the sale of the original
building.
Calculate Bhanu’s chargeable gain on the sale of the old building assuming rollover relief is claimed
and state what the base cost of the replacement building will be.
The chargeable gain on the sale of the old building is:
£
Proceeds 290,600
Cost (148,000)
Gain before relief 142,600
or
The proceeds not re-invested (£290,600 – £250,000) = £40,600
Bhanu’s gain will be £40,600 as this is lower than the actual gain of £142,600.
The base cost of the new building will be £250,000 less the balance of the gain (not taxed) on the sale
of the old building (£142,600 – £40,600).
£
New building 250,000
Gain rolled over on sale of old building (142,600 – 40,600) (102,000)
Base cost of building 148,000
3.3 Depreciating assets

If the replacement asset is a ‘depreciating asset’ the rules are different:
 Depreciating assets include all plant and machinery, AND
 Other assets with an expected life of < 60 years at the acquisition date, e.g. a 57-year lease.
The gain on the sale of the 1st asset is deferred (“frozen”) until the crystallising event.
The crystallising event is the earliest of:
 The sale of the replacement asset,
 10 years from the acquisition of the replacement asset, or
 The date on which the replacement asset ceases to be used in the trade.
It is possible to re-rollover a deferred gain if a non-depreciating asset is purchased before the
crystallising event.

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ILLUSTRATION: DEPRECIATING ASSETS
Warner sold a freehold shop for £200,000 realising a gain of £80,000.

Six months later Warner invested £230,000 in a 57-year lease of a building he intended to use for pie
making. Six years after acquiring the lease, Warner converted the pie factory into holiday
accommodation for his own use.
Show how the gain on the freehold shop will be treated.
As the lease is a depreciating asset, the gain of £80,000 will be frozen until the earliest of:
(1) 10 years after acquisition of lease
(2) Sale of lease (N/A)
(3) When the factory is converted into holiday accommodation (Asset no longer used in trade)
Warner has a gain of £80,000 that crystallises when the factory is converted into holiday
accommodation. The gain is deemed to arise in the tax year that the conversion takes place.
3.4 Time limit

 A rollover relief claim must be made by the later of:
(i) 4 years after the end of the tax year (accounting period) of acquisition of the new asset,
and
(ii) 4 years after the end of the tax year (accounting period) of disposal of the old asset.
4 Gift relief
EXAM SMART
Remember that gifts and sales at under-value are deemed to have been sold for market
value. This is important.
4.1 Assets qualifying for gift relief

This is a very short list!
 Assets used in a business, no minimum period of ownership.
 Shares in an unlisted (including AIM) trading company, no minimum %.
 Shares in quoted trading companies if the donor owns at least 5% of the voting rights.
(No need to own shares for 2 years, nor to work for the business as with ER – see later).
4.2 The relief

 Assets deemed sold at MV.
 The gain is deducted from the market value of the asset transferred, to arrive at the base cost of
the asset in the hands of the donee.
 Joint election required within 4 years of the tax year in which the transfer takes place.

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4.3 Sale at undervalue

 The donor realises a chargeable gain on the difference between actual proceeds and original
cost.
 The base cost for the donee is market value less any gain deferred.
On 15 March 2020, Dillon sold 25,000 shares in Soaked Ltd, an unquoted trading company, for
£250,000. Dillon purchased the shares from his mother on 1 June 2018 for £140,000.
Dillon’s mother had purchased the shares on 15 October 2011 for £128,000. Dillon and his mother
elected to hold over the gain arising on the transfer between them as a gift of a business asset. The
market value of the shares on 1 June 2018 was £188,000.
The chargeable gain arising on Dillon’s disposal on 15 March 2020 is:
4.4 Shares
If giving shares away, gift relief is restricted as follows:
Gain × Chargeable business assets found in the company’s Statement of Financial Position, see
Chargeable assets Illustration (Jake) below.
Chargeable assets include any asset that, if sold, would be subject to CGT.
Chargeable business assets = chargeable assets excluding non-business assets (e.g. paintings, vases,
investments.)

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EXAM SMART
Look out for a question giving lots of detail about a company’s statement of financial position.
ILLUSTRATION: JAKE
Jake gave 5,000 shares in Z Ltd to Mabel. The market value of the shares at that date was £18,000. Jake had
bought the shares for £7,000. Jake and Mabel elected to hold over as much of the gain as possible.
Z Ltd’s statement of financial position contained the following assets:
£
Factory 100 CA and CBA
Painting 10 CA not CBA
Net current assets 40 Not chargeable, ignore
150
Share capital 80
Reserves 70
150
£
Deemed sale proceeds (market value) 18,000
Cost (7,000)
Gain 11,000
Gift relief: £11,000 × 100/110 = (10,000)
Jake’s chargeable gain 1,000
Base cost of shares for Mabel = £18,000 – £10,000 £8,000
5 Entrepreneurs’ relief (ER)

 Assets owned ≥ two years.
 Qualifying assets:
(i) Business assets (including goodwill) owned by a sole trader or partner, when business sold.
(ii) Shares in a trading company where employee shareholder owned ≥ 5% of the shares
before disposal.
 Applies to the first £10m of qualifying gains made during lifetime.
 Gains taxed at 10%.

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Barry sold 30% of B Ltd, an unquoted trading company. This resulted in a gain of £789,000. Barry had
owned the shares for six years and had always been an employee of B Ltd. Barry’s annual exempt
amount had already been set against other gains he had made in the year.
Barry’s CGT liability is:
Taxpayers with ER and non-ER gains

 ER Gains must be considered to establish which tax rate applies to other capital gains.
 Deduct losses/AEA from other gains (gains on residential property first) before ER gains.
 Keep ER gains separate from other gains.
Lecture Example 14.4
In 2019/20 Rosie had taxable income of £4,000 and capital losses of £28,000 brought forward. She sold
a business that she had run as a sole trader for many years. This resulted in the following capital gains:
£
Goodwill 360,000
Freehold office building 270,000
Freehold warehouse (Never used for business purposes) 171,000
801,000
Rosie’s CGT liability is:

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6 Investors’ relief
 For entrepreneurs’ relief to be available on a share disposal , the individual has to be an
employee of the company and hold a minimum 5% shareholding.
 Relief is extended to external investors in unlisted trading companies. The extended relief is
known as investors’ relief. There is no minimum shareholding for this relief.
 Investors’ relief has its own separate £10 million lifetime limit, with qualifying gains being taxed
at 10%.
 To qualify for relief shares must be:
(i) Newly issued shares acquired by subscription
(ii) Owned for at least 3 years after 6 April 2016.
 With certain exceptions (such as being an unremunerated director) the investor must not be an
employee or director whilst owning the shares.
In April 2016 Caleb subscribed for 10,000 ordinary shares in Box Ltd at par value. Box Ltd is an unquoted
trading company with 500,000 £1 shares in issue. Caleb has never been an employee or director of the
company. He sold his shares in Box Ltd on 19 August 2019 for £610,000.
Does Caleb’s disposal qualify for entrepreneurs’ relief or investors’ relief?
What CGT liability arises on the disposal?

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15
Shares and securities
1 Introduction
Special rules apply to identify which shares have been sold if an individual has made multiple
purchases of shares in a particular company, for example 50 different purchases of Vodafone shares.
Matching rules
Match disposals with acquisitions in the following order:
(1) Same day acquisitions,
(2) Acquisitions in the 30 days following the sale (bed and breakfast),
(3) Shares in the share pool (all other acquisitions).
2 Gifts of quoted shares

 If quoted shares are given away (or transferred to a connected person), they are deemed sold at
market value.
 For capital gains purposes, market value is determined by taking the mid-price (i.e. average) of the
price quoted in the Stock Exchange Daily Official List on the disposal date.
If X plc shares were quoted at 160-164 at the end of the day’s trading, the mid-price rule gives a
value of 162.

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108 15: Shares and securities ACCA TX-UK
Dave had the following transactions in the shares of Dunno plc:

1 July 2010 Purchased 3,000 shares for £4,800
15 December 2013 Purchased 4,000 shares for £10,000
20 March 2020 Purchased 1,000 shares for £3,000
20 March 2020 Sold 6,000 shares for £42,000
Dave’s chargeable gain on sale is:

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ACCA TX-UK 15: Shares and securities 109
3 Bonus issues
 Bonus issues are made for no consideration.
 Bonus shares are added to the original acquisitions. We ignore the date of the bonus issue.
 The normal share matching rules are applied after the bonus shares have been allocated.
ILLUSTRATION: BONUS ISSUE
Pete sold 9,000 shares in Paranoid plc in October 2019.

He had acquired the shares as follows:
June 2012 3,000
February 2014 4,000
March 2015 2,000
In July 2016 there was a 1:4 bonus issue.
(a) Allocate the bonus issue
Original Bonus Total
June 2012 3,000 750 3,750
February 2014 4,000 1,000 5,000
March 2015 2,000 500 2,500
11,250
(b) Match the sale with the acquisition

Sell 9,000 out of the 11,250 shares.
Then proceed as for previous lecture example.
4 Rights issues
 A rights issue is simply a purchase of more shares by existing shareholders.
 A rights issue is treated in the same way as a bonus issue for the purposes of allocating the
rights shares.
 The cost of the rights shares is simply added to the cost of the original shares held.
5 Re-organisations and takeovers

5.1 Re-organisation
 A re-organisation occurs when new shares or securities are issued in exchange for the original
shares held.
 The new shares and securities replace the old shares. The original cost is allocated according to
the market value at the date of the reorganisation of the new shares and securities received.
5.2 Takeovers
 On a takeover the same principle applies. Provided the takeover is a “paper for paper” takeover,
(shares and/or loan notes received), no gain crystallises at the time of the takeover.

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110 15: Shares and securities ACCA TX-UK
 If the takeover is funded wholly or partly in cash then a chargeable gain will crystallise at the
date of takeover.
Lisa bought 1,000 shares in Coke! plc, a quoted company, for £16,000 in May 2010.
Seven years later Coke! was taken over by noveg4me plc. For every Coke! share, Lisa received:
£
Cash 4
Three noveg4me shares (MV £6 each) 18
22
Five years after the takeover, Lisa sold her noveg4me shares for £30,000.
Capital gains/losses arising as a result of these transactions are:
6 Gilts and qualifying corporate bonds (QCB)

Gilts are Government issued loan stock, e.g. 3½% War loan.
A QCB is corporate loan stock, not convertible into shares, for example Tesco loan stock.
Disposals of gilts and QCBs by individuals are exempt from CGT.

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111
16
Inheritance tax
1 The scope of inheritance tax

Inheritance tax (IHT) is:
(i) Charged on certain transfers of value (gifts) made during lifetime.
(ii) Charged as a result of an individual’s death on:
 Transfers of value (gifts) made within seven years of death, and
 On the death estate.
2 Persons chargeable to IHT

Worldwide transfers of assets by UK domiciled individuals and UK transfers by non-UK domiciled
individuals.
3 Transfers of value
 Anything that causes a diminution in value in the donor’s estate.
 The measure is the loss for the donor, not the increase in the donee’s wealth.
 Transfers made to a spouse / civil partner in lifetime or on death are exempt transfers.
 There is no transfer of value:
 Where there is no gratuitous intent (e.g. accidentally sell a valuable asset for little
money); or
 The payment is for the maintenance of the family (e.g. payments to a spouse or by a
parent for a minor child).

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112 16: Inheritance tax ACCA TX-UK
Mike owned 70% of FI Ltd. He gave 25% of the share capital to his son. Relative values are:
£
70% holding 300,000
45% holding 140,000
25% holding 50,000
Mike’s transfer of value is as follows:
4 Exempt transfers – lifetime transfers and transfers on death

 To a spouse or civil partner
5 Types of lifetime transfer

Three types of lifetime transfer:
 Potentially exempt transfers (PET)
 Chargeable lifetime transfers (CLT)
 Exempt transfers
5.1 Potentially exempt transfers (PET)

 Lifetime transfers between individuals (except the exempt ones above)
 Become chargeable to IHT if donor dies within seven years after the transfer
 Become exempt from IHT if donor survives seven years after making the gift

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ACCA TX-UK 16: Inheritance tax 113
5.2 Chargeable lifetime transfers (CLT)

 Any transfer by an individual that is not exempt or potentially exempt, i.e. transfer to a trust
 Tax rate 20% if trustee pays tax
 Tax rate 20/80 if donor pays tax
 Additionally, death tax payable if donor dies within seven years of CLT
 Assume donor pays tax unless told otherwise
5.3 Exemptions available ONLY against lifetime transfers (CLTs & PETS)
5.3.1 Small gifts exemption
 ≤ £250 per donee per tax year
 If you give someone £251, there is no small gifts exemption
5.3.2 Marriage exemption

 ≤ £5,000 by parent to child
 ≤ £2,500 by grandparent/ one party of marriage to other
 ≤ £1,000 by any other person
5.3.3 Annual exemption

 £3,000 annual exemption to set against PET or CLT
 Allocate to lifetime transfers in strict chronological order:
 i.e. allocate to PET if made first in tax year, even though the PET may never become
chargeable
 Used after all other exemptions
 Unused portion can be c/f for one year and used AFTER annual exemption of the later year
5.3.4 Normal expenditure out of income

 Normal expenditure out of income is exempt if:
 Typical or habitual payment over several years, and
 Made out of income, and
 It did not affect the transferor’s normal standard of living.
 E.g. grandparent paying school fees
EXAM SMART
 For an easy mark, remember to state on the exam paper that a gift from the list above
or a transfer from a spouse/civil partner is exempt.
 Don’t just ignore an exempt gift as you won’t get the mark for it.
 After you have stated that a gift is exempt you can then ignore that gift.

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During the current tax year, Tony made the following gifts having never previously made any gifts to
anyone:
July £2,900 to Mabel
October £3,600 to Harry
January £450 to Phoebe
Tony’s transfers will be covered by the annual exemption as follows:
6 Calculation of lifetime tax on lifetime transfers

EXAM SMART
Transfers are taxed on a rolling 7-year accumulation.
Each transfer is treated as a top slice on top of the CLTs in the 7 years prior to the transfer.
 Ignore PETs (apart from them using up AEs)

 Value CLTs using “diminution in value” principle
 If the donor is paying the tax, the diminution is the gross gift (the gift plus any tax on the gift)

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KEY TERM
The gross gift is called a “gross chargeable transfer” (an important term).
For example, the gross chargeable transfer is calculated as follows:

£
Gift 100,000
ME, AE say (8,000)
Tax paid by donor (ignore tax paid by donee), say 23,000
Gross chargeable transfer 115,000
 Deduct exemptions and reliefs (e.g. marriage, annual).

 IHT is charged at 0% on any transfer falling within the nil rate band at the date of the
transfer.(See below)
 Any excess is taxed:
 at 20/80 if donor pays the tax, or
 20% if the donee pays the tax.
 If not told otherwise, assume donor pays tax on CLTs.
Nil rate band

 All individuals have a “rolling” nil rate band. This means the nil rate band is used by gross
chargeable transfers in the 7 years before a transfer and only any remaining unused amount is
available to set against the transfer.
 IHT at 0% is charged on gross chargeable transfers within the nil rate band.
EXAM SMART
The Examiner will give you the amount of any nil rate band needed in a question.

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Martin made the following transfers:

£
June 2017 to a discretionary trust 152,000
October 2018 to his wife, Ann 25,000
January 2019 to his daughter Sarah on occasion of her marriage 15,000
February 2020 to a discretionary trust 240,000
Martin had not made any previous transfers. Martin pays the tax due on any of the transfers.
Assume the nil rate band is £325,000 in all years.
Martin’s liability to inheritance tax and gross chargeable transfers will be as follows:

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7 Tax payable on death

Death tax is payable on:
(i) All lifetime transfers made within 7 years before death, AND
(ii) On the death estate.
Deal with gifts made within 7 years of death in chronological order before dealing with the death estate.
7.1 Transfers made within 7 years of death (PETs &CLTs)

Nil rate band
 A nil rate band is available to use when calculating death tax. It is used against lifetime gifts
made within 7 years of death (earliest first) and any nil rate band remaining after this can be
used against the death estate.
 Death tax is payable on lifetime gifts made within the 7 years before death, if they exceed the
available nil rate band.
 When looking at any individual gift, the nil rate band available to use against that gift is reduced
by gross chargeable transfers in the 7 years before the date of the gift.
 Death tax is charged at 40% of any excess over the nil rate band.
 Donees of lifetime gifts are responsible for paying any death tax on those gifts.
Taper relief
 Taper relief reduces IHT due on death if a gift is made more than 3 years before death.
 The % of tax due depends on the number of years the donor survived after the gift was made.
EXAM SMART
The following table will be given in the exam. You do not need to learn it, but remember to
look out for the possibility of taper relief being available.
Survival after lifetime gift % Reduction % Taxable

0<3 years 0 100
3<4 years 20 80
4<5 years 40 60
5<6 years 60 40
6<7 years 80 20

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Tanish died on 15 July 2020. He made the following gifts during his lifetime:
June 2012 Gift to trust (Trustees paid any lifetime tax) £206,000
June 2016 Gift to daughter £375,000
The inheritance tax arising on the above gifts as a result of death will be:
7.2 Death estate

 The death estate is chargeable to IHT.
 Transfers made to a spouse or civil partner are exempt.
 All legal debts can be deducted from the death estate:
– Gambling is not a legal debt.
– Funeral expenses can be deducted.
– Repayment and interest-only mortgages are deductible.
– Endowment mortgages are repaid on death and are not deductible.
 The proceeds received from a life insurance policy are included in the death estate.
 The annual exemption is not available to set against the death estate.

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EXAM SMART
Note: Setting annual exemptions against the death estate is a common error!
Nil rate band

 Death tax is at 0% on the amount of the chargeable estate that falls within the nil rate band
available on death.
 The nil rate band on the death estate is reduced by gross chargeable transfers in the 7 years
before the date of death.
 Death tax is calculated at 40% of the remaining chargeable estate.
 Death tax on the estate is paid out of the estate.
Rahul died on 15 October when he owned the following assets:

 Two rental properties valued at £400,000 and £500,000 respectively. The first property
had an outstanding repayment mortgage of £120,000 and the second property has an
outstanding endowment mortgage of £50,000.
 A life assurance policy on his own life. On the date of his death, the policy had an open
market value of £200,000. Proceeds of £240,000 were received following Rahul’s death.
The cost of Rahul’s funeral was £4,000. Rahul was single and had not made any lifetime transfers.
The IHT due on the death estate is:

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7.3 Transfer of the nil rate band

 Any unused nil rate band arising on the death of a spouse/civil partner can be transferred to a
surviving spouse/civil partner when he/she subsequently dies.
 The nil rate band on the death of the survivor is increased by the proportion that corresponds
to the proportion of the nil rate band unused by the first spouse/civil partner to die.
 The proportion of the nil rate band unused is computed by reference to the nil rate band in
force at the date of the first death. That proportion is applied to the nil rate band in force at the
date of the survivor’s death in order to calculate the value of additional nil rate band available.
 A claim must be made by the personal representatives on the second death.
ILLUSTRATION: TRANSFER OF NIL RATE BAND
Rohan’s wife died in January 2009 when the nil rate band was £312,000. Rohan’s wife used £156,000 of
her nil rate band.
Rohan died in 2019.
What is the total nil rate band available on Rohan’s death?
Firstly, work out what percentage of the nil rate band was not used when Rohan’s wife died:
156,000
× 100 = 50%
312,000
50% of the nil rate band at the date of Rohan’s death can be added to his own nil rate band:
Rohan’s available nil rate band on death is
£
Transfer from wife (50% × £325,000) 162,500
Rohan’s nil rate band 325,000
Total 487,500
8 The residence nil rate band

 An additional nil rate band applies where a main residence is inherited on death by direct
descendants (children and grandchildren).
 The residence nil rate band is £150,000.
 The residence nil rate band is only relevant where:
 Death is on or after 6 April 2017, and
 The estate exceeds the normal nil rate band of £325,000, and
 The estate includes a residence in which the deceased has lived. Any other type of
property, such as a property which has always been let out, does not qualify for the
residence nil rate band.

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ILLUSTRATION
Satpal died on 7 October 2019 leaving an estate valued at £875,000. Under the terms of his will,
Satpal’s estate was left to his children. The estate included a main residence valued at £250,000.
The IHT liability is:
£
£475,000 (£325,000 + £150,000) at nil% 0
£400,000 at 40% 160,000
IHT liability 160,000
 In the same way in which any unused normal nil rate band can be transferred to a surviving
spouse/civil partner, the residence nil rate band is also transferable. It does not matter when
the first spouse died.
Neil died on 19 November 2019 leaving an estate valued at £1,125,000. Neil left his estate to his
children. The estate included a main residence valued at £300,000. Neil’s wife had died on 5 May
2010. She had used all of her nil rate band of £325,000. Neil had not made any lifetime gifts.
Calculate the IHT liability on Neil’s estate.
 The value of the main residence is after deducting any repayment or interest-only mortgage
secured on the property.
 If a main residence is valued at less than the available residence nil rate band, then the
residence nil rate band is reduced to the value of the residence.
 As the residence nil rate band is only available where inheritance is by direct descendants,
rearranging a will can save IHT.

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ILLUSTRATION
Dan has an estate valued at £1,500,000, including a main residence valued at £400,000. He has not
made any lifetime gifts. Dan’s wife died in 2008 and all of her estate was left to Dan. Dan has left his
main residence to his brother, with the residue of the estate to his children.
Dan’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000) but the residence nil
rate band is not available because the main residence will not be inherited by a direct descendant.
Dan could amend his will so that his brother inherits £400,000 of other assets, with the main residence
being included within the residue. A residence nil rate band of £300,000 (150,000 + 150,000) would
then be available, saving IHT of £120,000 (300,000 at 40%).
Dan’s brother could purchase the main residence from the children after Dan’s death.
EXAM SMART
A question will make it clear if the residence nil rate band is available. If there is no mention
of a main residence, assume that it is not available.
9 Payment of IHT
Lifetime tax
 Transfer between 6 April and 30 September : Tax due next 30 April
 Transfer between 1 October and 5 April : Tax due 6 months after the end of month of
transfer
Death tax (on lifetime gifts or death estate)

Due six months after the end of month of death
Paid by Suffered by
Death tax on lifetime transfers Donee Donee
UK free estate Executor Residuary legatee
Foreign free estate Executor Beneficiary

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10 Inheritance tax computation: Step by Step Guide

The key to getting an IHT question right is to take a step by step approach in the following order:
STEPS
Step 1: Categorise each lifetime transfer
Lifetime transfers will be one of the following

 A potentially exempt transfer
 A chargeable lifetime transfer
 An exempt transfer
Note down the tax year of each transfer as you categorise it. You need this to identify where annual
exemptions can be deducted.
EXAM SMART
 For an easy mark, remember to state on the exam paper that a gift is exempt.
 Don’t just ignore an exempt gift as you won’t get the mark for it.
 After you have stated that a gift is exempt you can then ignore that gift.
Step 2: Deal with each lifetime transfer and calculate the lifetime tax on any CLT
 Deal with each transfer in chronological order.

 You need to deal with both PETs and CLTs. Deduct available annual exemptions.
 PETs use up annual exemptions even though they are not yet chargeable.
 Each transfer uses:
 the current year annual exemption, then
 any remaining annual exemption brought forward.
 Use the nil rate band at the date of TRANSFER.
 Deduct any gross chargeable transfers in the previous seven years to work out nil rate
band remaining (PETs are not yet chargeable).
 Tax at 20% if trustees pay tax.
20
 Tax at if the donor pays tax.
80
 Calculate the gross chargeable transfer:
 add tax paid by donor to the transfer after exemptions
 If asked, remember to state the payment date for the lifetime tax and who is responsible
for payment. It’s an easy mark.

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Step 3: Identify PETs or CLTs made in the 7 years before death and calculate death tax on them
 Deal with each transfer in chronological order and make separate calculations.
 PETs more than 7 years before death are now fully exempt and no death tax is payable.
EXAM SMART
For an easy mark, state when a PET is fully exempt on the exam paper.
It may be obvious, but if you do not state the obvious you will not get the mark.
 Calculate tax on transfers made within 7 years of death:

Use the nil rate band at the date of DEATH after deducting any gross chargeable
transfers within 7 years of the date of the gift. The nil rate band at death includes
transferred unused nil rate band of a spouse/civil partner (but not residence nil rate
band).
 Tax excess over nil rate band at 40%.
 Deduct taper relief.
 Deduct any tax already paid during lifetime (CLTs only) (This cannot reduce the liability
below £Nil).
 If asked, remember to state the due date for payment of the death tax and who is
responsible for the payment.
Step 4: Calculate the death tax on the death estate
 Add up all assets minus liabilities in the death estate.

 Deduct spouse/civil partner exemption.
 DO NOT deduct an annual exemption from the death estate.
EXAM SMART
Deducting the annual exemption from the death estate is a common mistake – do not make
it!
 Work out how much nil rate band is available:

(ii) Take the nil rate band at the date of death and deduct any gross chargeable transfers
within 7 years of the date of death,
(iii) Include any nil rate band given as a result of spouse/civil partner not using the full nil rate
band on their (earlier) death,
(iv) Include any available residence nil rate band if there was a residence of the deceased in
the estate. Include any unused residence nil rate band in respect of a spouse,
and tax this much of the death estate at 0%.
 Tax remaining estate at 40%.
 If asked, remember to state the due date for payment of the death tax and who is
responsible for the payment.

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Duke, who had never married, died on 15 January 2020, leaving a death estate valued at £500,000.
Duke made the following gifts during his lifetime:
December 2012 Gift to son £250,000
February 2013 Gift to discretionary trust £425,000
May 2015 Gift to daughter £463,000
The nil rate band was £325,000 in all years.
Required:
Calculate the inheritance tax arising as a result of Duke’s death. State the due date for payment of any
IHT and who is responsible for paying the tax.

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17
Corporation tax
1 Scope of corporation tax

UK resident companies pay corporation tax on taxable total profits (TTP) for an accounting period.
1.1 Residence
A company is resident in the UK if it is:
 Incorporated in the UK, or
 Has its centre of management and control in the UK, e.g. board meetings are held in the UK.
1.2 Accounting period/Period of Account
KEY TERMS
Accounting period (max 12 months) is the period for which taxable total profits are calculated.
Period of account: A period, (usually 12 months), for which a company prepares accounts
(periods of account may be up to 18 months). A long period of account (> 12 months) must
be split into two accounting periods.
1.3 Accounting period start / end dates

The accounting period starts:
 On commencement of trade or acquisition of source of chargeable income (e.g. open bank
account), or
 Immediately after last period ends.
The accounting period ends:
 12 months after start, or

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128 17: Corporation tax ACCA TX-UK
 At end of period of account, or

 Commencement of winding up, or
 Company ceases to be resident in the UK.
ILLUSTRATION : ACCOUNTING PERIODS
S Ltd incorporated on 1st February 2018, opened an interest-bearing bank account on 1st March 2018
and started to trade on 1st April 2018. It prepared its first set of accounts to 31st December 2018 and
its second set of accounts to 31st December 2019.
Its chargeable accounting periods are:
 CAP 1: 1st March 2018-31st March 2018
(When acquired a source of chargeable income to when started trading)
 CAP 2: 1st April 2018 – 31st December 2018
(The end of the prior CAP to the earlier of the end of the period of account and 12 months later)
 CAP 3: 1st January 2019 – 31st December 2019
(The end of the prior CAP to the earlier of the end of the period of account and 12 months later)
1.4 Taxable total profits (TTP)

A company’s taxable total profits for an accounting period are calculated by computing taxable profits
from all sources and deducting qualifying charitable donations (QCDs).
Taxable total profits include:
(i) Worldwide income (excluding dividends)
(ii) Net chargeable gains
Pro forma corporation tax computation

£
Adjusted trading profit (after capital allowances) X
Non-trading loan relationships (net non-trading interest income) X
Property business profits X
Chargeable gains X
Total profits X
Less: Qualifying charitable donations (QCDs) (X)
Taxable total profits (TTP) X
1.4.1 Adjusted trading profits

Most rules for computing taxable trading profits that apply to individuals also apply to companies. The
differences are:
 All wages and salaries (including those of owner directors) are allowable for corporation tax.
 Private use of company assets is ignored, i.e. 100% of the cost incurred is allowable for
corporation tax. The employee or director may be taxed on the benefit.
 The profits of the period of account are adjusted before calculating capital allowances.
If the period of account is more than 12 months, adjusted profits are allocated to each
accounting period before deducting capital allowances. (See below.)

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ACCA TX-UK 17: Corporation tax 129
 Capital allowances are calculated for an accounting period, not a period of account.
 Capital allowances are calculated exactly as for unincorporated businesses EXCEPT that any
private use of company assets by employees or directors is ignored.
 As a company cannot have a long accounting period capital allowances will never be calculated
for a period which is longer than 12 months. (If the period is short, capital allowances are pro-
rated in exactly the same way as they would be for an unincorporated trader.)
1.4.2 Loan relationship rules

Creditor relationship: company lends.
Debtor relationship: company borrows.
Trading loan relationships (most common)

 Interest payable = allowable expense (usual) for corporation tax purposes, i.e. no need to adjust
profit.
 Interest receivable = trading income (e.g. bank or other money lending company).
A loan is a trade loan (therefore interest is allowable) if a company borrows to:
(i) Purchase plant and machinery, or
(ii) Provide working capital, or
(iii) Purchase property used for trading purposes such as an office, warehouse or factory.
Non-trading loan relationships

Debits and credits pooled:
Net credits are taxable investment income. Net debits are not examinable.
Non-trade loans include loans taken out to:
(i) Purchase property which is then let out
(ii) Acquire the share capital of another company
Other examples of interest treated as payable/receivable on a non-trading loan relationship:
 Bank deposit interest receivable
 Interest paid on underpaid tax / Interest received on overpaid tax
1.4.3 Property business profits

 Accruals basis.
 Replacement furniture relief (as for unincorporated businesses) if property let furnished.
 Rents and expenses pooled (as for unincorporated businesses).
 Interest on a loan to buy property is dealt with under the loan relationship rules (see above)
and so is NOT deductible against property profits
1.4.4 Chargeable gains and losses

 Corporation tax is charged on net chargeable gains made during an accounting period.
1.4.5 Qualifying charitable donations

 Qualifying charitable donations (paid gross), are deducted from a company’s total profits.

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 They are disallowed as a trading expense.
FP Ltd’s profit per its accounts is £110,500. The following amounts are included in arriving this figure:
£
Miscellaneous expenses 5,000
Depreciation of office building 10,000
Property business profit 12,000
Non-trading loan interest receivable 8,000
Chargeable gains 2,000
Dividends from UK companies 1,500
Miscellaneous expenses include a qualifying charitable donation paid to Oxfam of £3,000 and £2,000 of
allowable expenses.
Tax adjusted trading profits are:
Taxable total profits are:

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2 Long periods of account

If a company has a period of account longer than 12 months, split it into two accounting periods.
 1st accounting period is ALWAYS 12 months long, and
 2nd accounting period is the remainder (up to six months).
EXAM SMART
It is VITAL that you remember how a long period of account is split. If you get the split wrong
you will get very few marks for the question.
Learn it now. TWELVE MONTHS AND THEN THE REMAINDER.
For example, a 17-month period is split into:

(i) a period of 12 months, followed by
(ii) a period of the remaining 5 months.
Income and gains of the period are allocated as follows, using a 17-month period to illustrate:
Trading income Time apportion 12/17 and 5/17
Capital allowances Two separate calculations:

First accounting period (12m) – normal rules
Second accounting period (5m) - AIA limit and
WDAs restricted to 5/12
Never restrict FYA
Property profits & net non-trade loan income Allocate on an accruals basis in the period to which
it relates
Miscellaneous income Time apportion (as for trading income)
Gains Allocate to the period in which the gain arises
Qualifying charitable donations Allocate to the period in which they are paid
 Dividends from companies other than related 51% group companies are included in augmented
profits in the accounting period in which they are paid. Therefore, these dividends affect when
the corporation tax liability is paid (see chapter 23).

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LECTURE EXAMPLE 17.2: LONG PERIOD OF ACCOUNT
Grove Ltd made up accounts for 15 months to 30 June and had the following results:
£
Non-trade interest income: (accruing £1,000 a month for first 10 months, then £5,000 a 35,000
month)
Property business profits - £3,000 per month 45,000
Capital gain (disposal on last day of 15-month period) 50,000
Qualifying charitable donations (paid 30 September) (10,000)
270,000
TTP for Grove Ltd are:
3 Corporation tax liability

A company’s corporation tax liability is calculated by applying the appropriate rate of corporation tax
to the company’s taxable total profits.
The corporation tax rate is fixed by reference to financial years.
KEY TERM
A financial year runs from 1 April to the following 31 March and is identified by the calendar
year in which it begins.
The year commencing 1 April 2019 is the financial year 2019.
EXAM SMART
 Take care not to confuse financial years with tax years for income tax purposes. This is a
common mistake – the latter run from 6 April in one year to 5 April in the next.
The rate of corporation tax for financial years 2017, 2018 and financial year 2019 is 19%.
The rate of corporation tax for financial year 2016 was 20%.

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EXAM SMART
 The corporation tax rates will be given to you on your exam paper.
 The illustration below shows how CT is calculated when an accounting period falls into
two financial years with a change of rate. However, given that the CT rate has been 19%
for the past three years, it is unlikely that you will have to deal with this split.
ILLUSTRATION: CT RATES
For the year ended 31 December 2017, Real Ltd has taxable total profits of £900,000.
Real Ltd’s corporation tax liability for the year is:
As the company’s accounting period straddles 31 March the corporation tax liability is calculated as:
£
Financial year 2016 £900,000 x 3/12 = £225,000 at 20% 45,000
Financial year 2017 £900,000 x 9/12 = £675,000 at 19% 128,250
Tax liability 173,250
4 Approach to corporation tax questions

STEPS
Step 1: Adjust profits as per sole traders in Chapter 5 and deduct capital allowances to find
taxable trading profits.
Step 2: Record all other income per the pro forma corporation tax computation.
 Income is taxed on the accruals basis so simply take the figures that are in the company’s
statement of profit or loss.
 If you have a long period of account make sure that the period is split into two: the first
period of 12 months and then the remaining period.
Step 3: Calculate corporation tax.
ILLUSTRATION: CORPORATION TAX LIABILITY
Second Place Ltd prepared accounts for the 18 months to 30 September 2019. The company’s only
income for this period of account was trading profits adjusted for tax purposes of £360,000. Calculate
the corporation tax liability for the period.
The long period of account must be split into two accounting periods:
Year to Six months to
31 March 2019 30 Sept 2019
£ £
Trading profits 240,000 120,000
TTP 240,000 120,000
Corporation tax liability @ 19% £45,600 £22,800

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Note: It is VITAL that you split a long period of account into two periods.

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135
18
Corporate gains
1 Introduction
The rules for corporate disposals are similar to those for individuals but there are FIVE important
differences:
(i) Companies DO NOT receive the annual exempt amount.
(ii) Companies pay corporation tax on chargeable gains, they DO NOT pay CGT.
(iii) Gains are included in a corporation tax computation net of current AND b/f capital losses.
(iv) There are slightly different share matching rules for companies (see below).
(v) Companies may benefit from an indexation allowance.
 Previously the indexation allowance ran from the month of acquisition of an asset
to the month of disposal. However, the indexation allowance has been frozen at
December 2017.
 When an asset is purchased prior to December 2017 and subsequently sold, then
the indexation allowance is given from acquisition to December 2017.
 No indexation allowance is available on an asset purchased from January 2018
onwards.
EXAM SMART
 If indexation is available in your exam, then indexation factors will be provided. You do
not need to know how to calculate an indexation factor. A deduction is given for the
cost incurred multiplied by the indexation factor (see below).
Indexation cannot create or increase a loss.

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136 18: Corporate gains ACCA TX-UK
ILLUSTRATION
D Ltd sold a factory on 15 February 2020 for £420,000. The factory was purchased in October 1995 for
£164,000 and was extended at a cost of £37,000 during March 2018.
Indexation factors are:
October 1995 to December 2017 0.856
October 1995 to February 2020 0.899
March 2018 to February 2020 0.029
The chargeable gain is as follows:
£
Disposal proceeds 420,000
Less: cost (164,000)
Less: enhancement expenditure (37,000)
219,000
Indexation allowance (£164,000 × 0.856) (140,384)
78,616
There is no indexation for the enhancement expenditure as it was incurred after December 2017.
2 Share matching for companies

 Match disposals with:
(i) Same day acquisitions, then
(ii) Previous nine days (no IA), then
(iii) Share pool (all acquisitions up to nine days ago).
 In the pool, indexation allowance is calculated whenever shares are bought and sold after the
first purchase of those shares. (Questions will be very straightforward if this point is tested.)
2.1 Bonus issues

 Add the bonus shares to the original acquisition.
 Do not index up the pool for the bonus shares.

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ACCA TX-UK 18: Corporate gains 137
On 20 June 2019 M Ltd sold 62,500 shares in Joi plc for £287,500. M Ltd had originally purchased
100,000 shares on 10 June 1997 for £85,000.
On 12 December 2013 Joi plc made a 1:4 bonus issue.
Indexation factor:
June 1997 to December 2017 0.780
June 1997 to December 2013 0.613
December 2013 to December 2017 0.103
The chargeable gain or capital loss arising from this disposal is:

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138 18: Corporate gains ACCA TX-UK
2.1 Rights issues

Treat as a separate acquisition in the pool. Index up the pool before recording the acquisition.
As in the previous example, but this time it was a 1:4 rights issue for £3 each on 12 December 2013.
2.2 Reliefs available to companies

 The only capital gains relief available to companies is Rollover Relief.
 In general, rollover relief operates in the same way as for individuals.
 The key differences in the rules for companies are:
(i) Goodwill is NOT a qualifying asset for companies.
(ii) The gain deferred is the indexed gain (i.e. after IA).
(iii) A claim must be made within FOUR years of the later of the end of the accounting period
in which the asset is:
– Sold, or
– Replaced.

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139
19
Corporation tax losses
1 Trading losses
Tax adjusted trading losses are computed in the same way as tax adjusted trading profits.
 Start with the loss per the accounts and:
(i) Add back disallowable items in the normal way.
(ii) Calculate capital allowance in the normal way and deduct in arriving at the adjusted loss.
ILLUSTRATION: TAX ADJUSTED TRADING LOSS
For the year to 31 March Third Place Ltd had a loss per its accounts of £40,000. Depreciation of £10,000
had been deducted in arriving at this loss.
Capital allowances of £20,000 are available for the year.
The adjusted trading loss of the year is:
£
Loss per accounts (40,000)
Add: Depreciation 10,000
Less: Capital allowances (20,000)
Tax adjusted trading loss (50,000)
 If a company has made a tax adjusted trading loss, the amount of the tax adjusted loss shown in
the computation of TTP for the period is £Nil.
 The loss may then be available for relief as discussed below.

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140 19: Corporation tax losses ACCA TX-UK
1.1 Reliefs
For the purposes of this exam, there are four methods by which a company can relieve a trading loss:
(i) Current year relief against total profits
(ii) Current and prior year relief against total profits
(iii) Carry forward relief
(iv) Terminal loss relief
Pro forma corporation tax computation with losses

Prior Loss making Subsequent
period(s) period period(s)
£ £ £
Tax adjusted trading profit X NIL X
Other income X X X
Net chargeable gains X X X
Total profits (see below) X X X
Less: Trading loss b/f (iii) (X)
Less: Current year loss relief (i) and (X)
12 month (ii) /36 month (iv) loss carry back (X)
X Nil X
Less: QCD May be wasted May be wasted (X)
Taxable total profits X X X
EXAM SMART
Look carefully at the above pro-forma and refer back to it as you work through this chapter.
The position in which the loss reliefs are shown is vitally important.
2 Current Year and Prior Year Relief

KEY TERM
Total profits include net chargeable gains but are before qualifying charitable donations.
2.1 Current
A company can set a trading loss against its total profits of the same accounting period.
2.2 Carry back

If any loss remains after a current claim, the company can carry the loss back to set against total
profits of the 12 months preceding the loss period.
 If the preceding period is less than 12 months, the loss can be carried back and set against a
proportion of earlier periods to allow a full 12 month carry back.
 The total profits of the earlier accounting period are time apportioned in order to make a 12
month carry back.

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ACCA TX-UK 19: Corporation tax losses 141
 The length of the loss-making period is not important.

Full relief is given against the current period total profits and the remaining loss can be carried
back up to 12 months from the start of the loss-making period.
2.3 How it works

 Three options:
(i) Current year only
(ii) Current then carry back
(iii) No claim.
 Relief is all or nothing.
i.e. the company cannot restrict the offset of a loss in an accounting period.
As the above pro forma shows this may lead to a waste of relief for qualifying charitable
donations.
 Claim within 2 years of the end of the loss-making accounting period.
3 Carry forward of losses

 A loss can be carried forward for offset in future accounting periods.
 Set the loss against total profits before qualifying charitable donations.
 The amount of loss relief can be restricted.
Restriction is beneficial if charitable donations have been paid, as restricting loss relief will
preserve relief for the donation.
 The loss can be carried forward indefinitely.
 There is no need to make a current year or prior year claim first. Losses can be carried forward
(i) After a current year claim only, or
(ii) After a current year and prior year claim, or
(iii) If no current or carry back claims are made.
 Claim within two years of the end of the accounting period in which the loss is relieved.

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ILLUSTRATION: RELIEF IN CURRENT AND PRIOR PERIODS AND CARRY FORWARD
Sip Ltd has the following results:

Yr 1 Yr 2 Yr 3
£ £ £
Trading profit (Loss) 50,000 (80,000) 80,000
Property profits 6,000 10,000 2,000
Charitable donation 5,000 5,000 5,000
Sip Ltd has unrelieved trading losses of £10,000 b/f at the start of year 1. Assuming that Sip Ltd wishes
to claim loss relief as early as possible:
Yr 1 Yr 2 Yr 3
£ £ £
Trading profit 50,000 Nil 80,000
Property income 6,000 10,000 2,000
60,000 30,000 90,000
Less: Loss current period (30,000)
Loss carried back (50,000)
Less: Loss b/f (5,000) (5,000)
5,000 Nil 85,000
Charitable donation relief (5,000) Nil (5,000)
Taxable total profits Nil Nil 80,000
Unrelieved charitable donations 0 £5,000
Trading loss working

£
Loss b/f Year 1 (10,000)
Set off in year 1 but restrict so charitable donation relief preserved 5,000
Carry forward to set off in year 3 (5,000)
£
Year 2 loss (80,000)
Current period relief 30,000
Carry back to previous 12 months 50,000
Remaining Nil
4 Terminal loss relief

 The 12 months carry back against total profits before QCDs is extended to 36 months if the
trading loss arose in the final 12 months of trading.
 The carry back of the loss is on a LIFO basis (i.e. relieve losses against income arising in the most
recent periods first).
 If the company has prepared accounts for a period of less than 12 months in any of the years to
which the loss is to be carried back, an apportionment of total profits is necessary to ensure
that the loss is only carried back to set against 36 months’ worth of total profits.

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ACCA TX-UK 19: Corporation tax losses 143
5 Capital losses
EXAM SMART
Capital losses can be set only against chargeable gains, not against other income/profits, for
the current period.
Any excess is carried forward against future gains. This is why you see the term net
chargeable gains in the above pro forma.
This is important: remember it!
P Ltd ceased trading on 30 September 2020. Results for all its periods of trading are as follows:
Year to Period to Year to Year to Year to
31 Dec 30 Sept 30 Sept 30 Sept 30 Sept
2016 2017 2018 2019 2020
£ £ £ £ £
Trading profit/ (loss) 84,000 13,800 15,200 78,700 (146,800)
Property business profits 5,000 4,600 3,000 – –
Chargeable gain/(loss) (7,000) 8,000
Qualifying charitable donations (800) (1,000) (1,200) – –
Assuming P Ltd claims the maximum possible loss relief, taxable total profits are:

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145
20
Groups of companies
1 Two types of group

Each company within a group is treated as a separate entity and must submit its own tax return based
on its own individual results.
 There are two situations in which special tax rules apply to companies within a group. These are
where there is:
(i) A group relief group and/or
(ii) A gains group.
Group relief group

The advantage of being in a group relief group is that the following can be relieved efficiently within
the group:
(i) Trade losses, and
(ii) Excess QCDs, and
(iii) Excess property business losses.
Gains group
The advantages of being in a gains group is that group companies can:
(i) Transfer capital assets efficiently around the group, and
(ii) Use capital losses efficiently around the group, and
(iii) Maximise the advantages of rollover relief (see below).

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146 20: Groups of companies ACCA TX-UK
2 Group relief group

2.1 Establishing the group
Group relief is available if one company owns at least 75% of the ordinary share capital of the other.
 Indirect holdings are taken into account provided the overall 75% ownership is preserved.
ILLUSTRATION: GROUP RELIEF GROUP
A Ltd
90% 90%
B Ltd D Ltd
85% 80%
C Ltd E Ltd
 A, B, C and D are in a “group relief” group because A has effective control of at least 75% of B, C
and D (90% of 85% is 76.5% of C).
 Any of A, B, C or D could surrender losses to any other member of the A, B, C, D group. Losses
cannot be transferred to or from E by A, B or C.
 D and E are in a separate “group relief” group because D controls at least 75% of E. Losses can
therefore be passed between D and E.
 BUT D cannot pass on losses from E to A, B or C, AND D cannot pass losses from A, B or C to E.
 Group relief groups may include companies resident overseas.

For instance, if B Ltd above were not UK resident A Ltd, B Ltd, C Ltd and D Ltd would still be part
of a group relief group.
B Ltd’s non-residence does not affect which companies are in the group relief group. However,
for the purposes of this examination losses cannot be surrendered to or claimed from non-UK
resident companies.
2.2 The relief

 A loss-making company can surrender:
(i) Trading losses
– Current period
– Brought forward losses to the extent that they cannot be used against the
surrendering company’s own total profits
(ii) Excess QCDs
(iii) Excess property business losses
– Current period and brought forward losses

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ACCA TX-UK 20: Groups of companies 147
 QCDs and property losses are only 'excess' if they exceed any other income and gains before the
deduction of any losses (current year, brought forward or carried back).
 Excess QCDs should be surrendered before excess property business losses because excess
QCDs not offset will otherwise be wasted. Whereas property business losses not relieved in the
current year will be carried forward to set against total profits.
 The claimant company sets the loss against CURRENT PERIOD TTP (i.e. after the deduction of QCDs).
 NO carry back or carry forward is ever allowed.
 For the purposes of this exam, the companies claiming or surrendering group relief must be UK
resident, so if B Ltd in the example above were not UK resident, it would not be able to claim or
surrender losses. It would, however, remain part of the group relief group.
2.3 Corresponding (overlapping) accounting periods

Group relief is available only for profits and losses of overlapping periods.
 If the accounting periods of the surrendering and claimant company are not identical, you need
to pro-rate to find the profits/loss of the overlap period:
Loss available to surrender Profit against which relief can be claimed
Loss of surrendering company × Profit of claimant ×
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿ℎ 𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜𝐿𝐿𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑜𝑜𝐿𝐿𝑜𝑜𝑝𝑝𝑜𝑜𝑝𝑝 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿ℎ 𝑜𝑜𝑜𝑜 𝑜𝑜𝑜𝑜𝐿𝐿𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑜𝑜𝐿𝐿𝑜𝑜𝑝𝑝𝑜𝑜𝑝𝑝
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿ℎ 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑜𝑜𝑜𝑜𝐿𝐿𝐿𝐿𝑝𝑝𝐿𝐿𝑜𝑜𝑝𝑝𝐿𝐿𝐿𝐿 𝑐𝑐𝑜𝑜 𝑜𝑜𝑐𝑐𝑐𝑐𝑜𝑜𝑠𝑠𝐿𝐿𝐿𝐿𝑝𝑝𝐿𝐿𝐿𝐿 𝑜𝑜𝐿𝐿𝑜𝑜𝑝𝑝𝑜𝑜𝑝𝑝 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿ℎ 𝑜𝑜𝑜𝑜 𝑐𝑐𝑜𝑜𝑜𝑜𝑝𝑝𝑐𝑐𝑜𝑜𝐿𝐿𝐿𝐿 𝑐𝑐𝑜𝑜 𝑜𝑜𝑐𝑐𝑐𝑐𝑜𝑜𝑠𝑠𝐿𝐿𝐿𝐿𝑝𝑝𝐿𝐿𝐿𝐿 𝑜𝑜𝐿𝐿𝑜𝑜𝑝𝑝𝑜𝑜𝑝𝑝
The maximum group relief that can be claimed is the lower of:
(i) The loss of the overlap period
(ii) The profit of the overlap period
ILLUSTRATION: OVERLAPPING PERIODS
£
Hans Ltd Loss for the year ended 30 June 2020 (100,000)
Land Ltd Profit for the year ended 30 September 2019 180,000
Land Ltd Profit for the year ended 30 September 2020 40,000
Show the maximum group relief that Land Ltd can claim in each of the above accounting periods.
STEPS
Step 1: Identify the overlap periods
Hans Ltd Year ended 30 June 2020
Land Ltd Year ended 30 Sept 2019 Year ended 30 Sept 2020
Step 2: Calculate profit and loss arising in overlap period
Land Ltd – Year ended 30 September 2019 (Overlap with loss making period is 3 months)
Loss of Hans Ltd available to surrender Profit against which relief can be claimed
3 3
£100,000 × = £25,000 £180,000 × = £45,000
12 12

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Step 3: Calculate maximum group relief

The maximum group relief claim is the lower of:
(i) £25,000
(ii) £45,000
i.e. £25,000
Step 2: Calculate profit and loss arising in overlap period
Land Ltd – Year ended 30 September 2020 (Overlap with loss making period is 9 months)
Loss of Hans Ltd available to surrender Profit against which relief can be claimed
9 9
£100,000 × = £75,000 £40,000 × = £30,000
12 12
Step 3: Calculate maximum group relief

The maximum group relief claim is the lower of:
(i) £75,000
(ii) £30,000
i.e. £30,000
2.4 Approach to group relief examination questions
STEPS
Step 1: Calculate TTP for each group company.
 Before considering loss relief
Step 2: Establish the group relationship.
 Parent owns at least 75% of the shares of the subsidiary
Step 3: Consider whether any trading losses should be surrendered and the order of surrender.
A group member with a loss has the choice of:
(i) Making a claim against its own profits (see chapter 19 rules), and/or
(ii) Surrendering some or all of the loss to another group member, and/or
(iii) Not claiming the maximum capital allowances in order to restrict the current period loss.
Points to consider:
 A group relief claim is very flexible (unlike making a claim to set the loss against the
company’s own current profits, which is all or nothing).
– The surrendering company may group relieve some current year losses and utilise the
rest against its own profits.
– Ensure that QCDs do not become unrelieved as a result of a current period loss claim. If a
QCD becomes excess because of a loss relief claim it is not eligible for group relief.
– If a company was profitable in the previous period, it might be beneficial to retain
enough losses to carry back and obtain a corporation tax refund. However, for a carry
back claim to be made, a current year claim must be made first which could waste QCDs.

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ACCA TX-UK 20: Groups of companies 149
Step 4: Relieve the losses.

Step 5: Calculate TTP etc. as required by the question.
Milky Ltd had the following results for the past three periods:
Year 1 Year 2 Year 3
£ £ £
Adjusted trading profit (loss) 49,000 (60,000) (20,000)
Chargeable gain 1,000 5,000 6,000
Qualifying charitable donation 5,000 5,000 5,000
Milky Ltd has one wholly owned subsidiary, Way Ltd. Way Ltd was incorporated at the start of year 2
and has the following results:
Year 2 Year 3
£ £
Adjusted trading profit 75,000 24,000
Qualifying charitable donation 5,000 5,000
After claiming loss relief in the most efficient manner the taxable total profits for Milky Ltd and Way Ltd
are:

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3 Gains Group
Capital gains advantages are available to members of a capital gains group. These allow:
(i) Assets to be transferred tax efficiently around the group.
(ii) Chargeable gains and capital losses to be transferred around the group.
(iii) Rollover relief (see earlier in these notes) to be used on a group-wide basis.
3.1 Definition of the group

A group exists if there are at least 75% links between two or more companies, and the holding
company has more than 50% indirectly of any sub-subsidiaries.
A Ltd
75%
B Ltd
75%
C Ltd
A, B and C are all part of a gains group because of the 75% links and because A effectively owns
56.25% of C. A company cannot be a member of more than one capital gains group (unlike for a group
relief group).
3.2 Intra group transfers of assets

Companies in a gains group are deemed to transfer assets between them at “no gain, no loss”.
 This treatment is mandatory.
 No claim needed.
 An asset is likely to be transferred around the group in this way if another company wants to
use the asset in its business.
 When the acquiring company sells the asset outside the group, a chargeable gain or allowable
loss arises in the normal way.
3.3 Transfer of chargeable gains and allowable losses

 A joint election can be made to transfer capital gains/current losses from one member of a
gains group to another.
 This election allows the group to maximise the use of capital losses (brought forward and current)
by setting them against chargeable gains made by other group companies in the same period. For
example, a gain can be transferred to a group company with unused capital losses.
 A claim must be made within 2 years of the end of the accounting period in which the gain or
loss being transferred arose.
3.4 Rollover relief

 All companies in a gains group are treated as one for the purposes of rollover relief.

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151
21
Value added tax
1 The scope of VAT

 Charged, usually at 20%, at each stage of the supply chain but borne by the ultimate consumer
of the good or service being sold.
 Based on turnover, not profit.
 Charged on the taxable supply of goods and services made in the UK by a taxable person in any
business he carries on.
 Registered traders deduct the VAT they suffer (input tax) on purchases from VAT they charge
customers (output tax) and pay/recover the difference to/from HMRC.
ILLUSTRATION: VAT
Trek made a Pilot 5.0 road bike out of raw materials costing £100 + VAT. Trek sold the bike to Andy, a
retailer, for £600 +VAT. Andy sold the bike to Sarah for £1,300 plus VAT.
VAT will be charged as follows:
Net sale Output tax Payable
Cost Input tax price 20% to HMRC
£ £ £ £ £
Raw materials supplier – – 100 20 20
Trek 100 20 600 120 100
Andy 600 120 1,300 260 140
VAT suffered by Sarah 260

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152 21: Value added tax ACCA TX-UK)
2 Types of supply
 Most supplies are standard rated (20%) (including restaurant food, hot takeaways, potato
crisps, peanuts, chocolate and chocolate biscuits).
 Some are zero rated (VAT is charged, but at 0%).
 Domestic fuel and power is charged at 5%.
 Some transactions are exempt from VAT (i.e. no VAT is charged).
 Some transactions are outside the scope of VAT, these include wages and the transfer of a
business as a going concern.
2.1 Main zero rated supplies

Zero rated Zero rated
Non-luxury food, incl. cakes, jaffa cakes, tea cakes, and tortilla chips Animal food
Books, newspapers, but adverts in newspapers are standard rated Exports from the UK
Protective clothing, e.g. crash helmets Sewerage and water
Work on listed buildings being used for residential or charitable use New dwellings
Transport of goods and passengers Children’s clothes and shoes
2.2 Exempt supplies
Traders making exclusively exempt supplies cannot register for VAT or recover input tax
Main exempt supplies:

Exempt Exempt
Financial services (but investment advice is standard rated) Insurance
Betting and gaming Health services
Not for profit education and vocational training Burial and cremation services
Entry fees for non-profit making sports competitions
3 VAT registration
3.1 Historical test
 Registration is compulsory if taxable supplies in any period up to the previous 12 months
exceed £85,000.
 The trader has 30 days from the end of the month in which the limit is breached to notify
HMRC of the need to register.
 Registration applies from the start of the month, one month after the limit is breached.

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ACCA TX-UK 21: Value added tax 153
ILLUSTRATION: REGISTRATION – HISTORIC TEST
Zafe started business on 1 June, turning over £7,500 a month for the first six months and £8,500 a
month thereafter.
£
6 months to 30 November 45,000
5 months to 30 April 42,500
Cumulative turnover in up to 12-month period 87,500
Zafe must notify HMRC of his need to register by 30 May. Registration will apply from 1 June.
3.2 Future test

A trader is liable to register if he anticipates turnover exceeding £85,000 in the next 30 days alone.
 30 days to inform HMRC.
 Registration from day 1 of the 30-day period.
ILLUSTRATION: REGISTRATION – FUTURE TEST
Ratty has been trading for many years turning over less than £25,000 per annum. On 1 July Ratty
received a big order and expected to sell £87,500 worth of products during July.
Ratty must inform HMRC by 30 July and has to charge VAT from 1 July.
3.3 Voluntary registration

Any trader making taxable supplies, whether standard or zero rated, can voluntarily register.
 Allows recovery of input tax
 Disguises size of business
 Removes need to check turnover every month
 Introduces discipline to the record keeping of the business
3.4 Recovery of pre-registration input VAT

Recovery of pre-registration input tax is possible if:
 Goods supplied in the previous 4 years are still in stock at date of registration, or
 A non-current asset purchased in the previous 4 years is still in use by the business at the date
of registration, or
 A service was supplied to the trader within 6 months prior to the date of registration.
3.5 De-registration
 A trader can de-register if taxable supplies in the next 12 months will not exceed £83,000.
 Compulsory if no longer making taxable supplies.
 Registration cancelled if status changes, e.g. sole trader to/from partnership or business
incorporates.

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3.6 Miscellaneous
 A transfer of a business as a going concern is outside the scope of VAT therefore it can be
ignored when preparing a VAT return.
 Output VAT must be accounted for on the sale of assets after the cessation of trade if input tax
was claimed on the purchase of those assets and the VAT on sale is > £1,000.
4 Computation of VAT liabilities

4.1 Accounting for VAT
 VAT periods usually three months long.
 VAT periods allocated according to class of trade carried on although trader can request VAT
periods that fit best with his business cycle.
 Most VAT registered businesses have to use making tax digital software to directly submit their
VAT returns to HMRC. They must also keep digital records. These requirements do not apply to
businesses with a turnover below the VAT registration threshold which are also voluntarily
registered.
 VAT returns must be submitted online one month and seven days after the end of the return
period. This is also usually the due date for any VAT payment. Any VAT due must be paid
electronically.
 Repayment traders (input tax > output tax) can request monthly VAT periods.
4.2 Tax point

The basic tax point (BTP) is the date of supply of goods/services. However, the actual tax point (ATP)
may be earlier or later:
 Payment date becomes the ATP if it is received before the BTP.
 Invoice date becomes the ATP if it is issued before the BTP.
 If an invoice is issued within 14 days of the BTP, the invoice issue date becomes the ATP.
ILLUSTRATION: TAX POINT
Pod supplied some fencing for £1,000 plus VAT on 4 November.

Pod received a payment on account of £250 plus VAT on 30 October. She issued a VAT invoice on
8 November and received the balance of £750 plus VAT on 12 December.
Pod’s VAT returns are made up to the end of January, April, July and October.
SOLUTION
Pod must account for the VAT on the payment on account in her October return. She must pay £50
(20% of £250) by 7 December.
The balance of the VAT is accounted for in the return of 31 January by virtue of the issue of the invoice
on 8 November being within 14 days of the BTP. £150 (20% of £750) will be paid by 7 March.

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Sale or return goods – Tax point is the earliest of :

 adoption by the customer, or
 12 months after dispatch.
Vending machines – Tax point is date of collection from machine.
5 VAT invoice
Taxable persons making taxable supplies to another person registered for VAT must supply a VAT
invoice within 30 days of the time of supply and must keep a copy. The invoice must include:
Details Details
Suppliers name, address and VAT registration number Date of issue, tax point, invoice number
Customer’s name and address Rate of cash discount
For each item, a description of goods/services supplied, showing Invoice price excluding VAT
quantity, unit price, rate of VAT and VAT exclusive amount
Total amount of VAT
5.1 Simplified VAT invoices

Any VAT registered business can issue a simplified (or less detailed) VAT invoice where the VAT
inclusive total of the invoice is less than £250.
6 The valuation of supplies

 If a volume discount or prompt payment discount is offered, then VAT must be calculated on
the amount that the customer actually pays.
 For prompt payment discounts, the supplier may not know when the invoice is raised whether
the customer will qualify for the discount. The supplier must therefore charge VAT on the
invoice on the full price and either:
 Issue a credit note if the discount is taken, or
 Show full details of the prompt payment discount and include a statement that the
customer can only recover input tax based on the amount paid to the supplier. If the
discount is taken the supplier must then adjust his records to account for output tax on
the amount received.

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ILLUSTRATION: VALUATION OF SUPPLIES
Vic sold Mark a piece of furniture for £900. Vic offered Mark a 2.5% settlement discount for payment
within seven days.
Assuming Vic shows full details of the prompt payment discount etc. on his invoice, show the net
amount, the VAT, and the amount paid by Mark if:
(a) He takes up the settlement discount
(b) He fails to take up the settlement discount
(a) £
Invoice value 900.00
VAT (20% × £900) 180.00
1,080.00
Mark pays (97.5% × £900) x 1.2 £1,053.00

Vic adjusts his VAT account to ensure the correct amount of VAT (£175.50) is paid to HMRC.
(b) Invoice value: as for (a) £1,080.00

Mark pays £900 × 1.2 £1,080.00
7 Irrecoverable input VAT

 VAT on cars is irrecoverable unless used as a taxi, self-drive car hire or in a driving school. (VAT
on post-purchase accessories and invoiced separately is recoverable.)
 VAT on business entertaining for UK customers. (VAT on staff and overseas customer
entertaining is recoverable.) Unlimited samples can be given to customers.
 Costs for income tax, capital allowances etc. include irrecoverable VAT. If a car costs £10,000
plus VAT, capital allowances will be available on £12,000.
7.1 Private fuel

A business that provides fuel for private mileage has two options:
 Claiming all input tax and calculating output tax according to a scale charge. (The scale charge
will be given in the exam), or
 Charging the employee the full cost of private fuel, claiming all input tax and calculating output
tax on the charge to the employee.
ILLUSTRATION: PRIVATE FUEL
An employee of DEF Ltd is provided with a company car which he uses for both business and private
mileage. DEF Ltd pays for all of the car’s running costs including petrol. The total cost of petrol each

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quarter is £840 of which 20% is for private mileage. The relevant quarterly scale charge is £492. Both
figures are inclusive of VAT.
DEF Ltd can either:
20 20
(a) Claim input VAT of × £840 = £140 and account for output VAT of × £492 = £82 based
120 120
on the scale charge, or
(b) Claim the input VAT of £140, charge the employee £168 for the private fuel and account for
20
output VAT of 120 × £168 = £28. Whilst this is less output VAT, it increases the administrative
burden for DEF Ltd.
8 Relief for impairment losses

 Relief is available 6 months after the due date provided the trader has written the debt off.
 Claims for relief must be made within four years and six months of the payment being due.
 Relief is accounted for as an increase in input tax rather than as a reduction to output tax.
9 Penalties
9.1 Default surcharge
 Applies if VAT return is submitted late or VAT is paid late.
 HMRC issue a surcharge liability notice (SLN) the first time a trader is late submitting a return or
late paying VAT.
 The SLN runs for 12 months (i.e. lasts for next four quarterly returns) but no penalty arises for
the first default.
 If a further default (i.e. late filing or late payment) occurs during the SLN period, the SLN period
is extended for a further 12 months.
 A penalty is only triggered if a payment is late during the SLN period:
Late payment during SLN period Surcharge as % of VAT outstanding at due date
First 2%
Second 5%
Third 10%
Fourth or more 15%
In practice, HMRC rarely enforce penalties of less than £400 at the 2% and 5% rate.
 To escape, the trader must submit returns, and pay VAT, on time for 12 months.
9.2 Serious misdeclaration penalty

 No penalty if taxpayer simply makes a mistake.
 ≤ 30% of the understated tax if taxpayer fails to take reasonable care.
 ≤ 70% of the understated tax if error is deliberate.
 ≤ 100% for concealment of the error.
Penalty may be substantially reduced if taxpayer makes disclosure, especially if unprompted by HMRC.
9.3 Default interest

 Runs from reckonable date (date VAT should have been paid) to date of payment.

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 Arises where no return was made or the return was made incorrectly.
 No interest on errors of less than £10,000 (or 1% of turnover for the VAT period if higher).
These can be corrected on the next return without penalty.
 If the error exceeds the £10,000 or 1% limit, HMRC must be notified.
10 Special schemes
10.1 Cash accounting
 Available for traders whose taxable supplies, excluding VAT, do not exceed £1,350,000,
provided all returns and VAT payments are up to date.
 Once in the scheme, taxable supplies can rise to £1,600,000.
 If taxable supplies >£1,600,000 in an accounting period the trader must leave the scheme, BUT
the trader can still apply cash accounting on outstanding VAT for 6 months after leaving.
 The main advantages of cash accounting are cashflow and automatic bad debt relief.
10.2 Annual accounting

 Eligible if taxable supplies for the next 12 months are not expected to exceed £1,350,000.
 Can join the scheme as soon as registered.
 The trader normally pays 90% of last year’s net VAT liability in 9 equal instalments from months
4 to 12.
 Businesses may apply to HMRC to agree quarterly payments on account instead of the normal
nine monthly payments.
 Balance of VAT due with a single VAT return, 2 months after year-end.
Advantages
 Less administration (only one VAT return)
 Manage cash flow
 Less risk of default surcharge
10.3 Flat rate scheme

 Optional. Advantages include reduced administration and a possible tax saving.
 Trader can pay a flat rate on VAT-inclusive outputs and ignore inputs.
 Rate depends on trade, the flat rate will be given in the exam.
 Input tax on capital expenditure in excess of £2,000 can still be recovered.
 Invoices should show VAT at the normal rate, not the flat rate.
 Customers pay normal rate.
 Available to businesses with taxable turnover (excl. VAT) up to £150,000. Can stay in the scheme
if total turnover, including VAT ≤ £230,000.

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ILLUSTRATION: FLAT RATE SCHEME
Daanii can opt for a flat rate of 8%. Her transactions are:
(All figures are shown net of VAT)
£
Sales (standard rated) 50,000
Sales (zero rated) 10,000
Purchases (all standard rated) 20,000

Under the normal VAT rules Daanii would pay the following VAT:
£
20% (50,000 – 20,000) 6,000
If Daanii opts for the flat rate scheme, she will pay:
£
8% ((1.20 × 50,000) + 10,000) 5,600
Note: We take the VAT inclusive sales figures, hence the 1.20 × 50,000
 A flat rate of 16.5% applies to businesses which have no, or only limited, purchases of goods.
You will not be expected to establish whether the flat rate of 16.5% is applicable, but a question
could be set where this rate applies.
 There is little advantage to using the flat rate scheme if the 16.5% rate applies because it is
equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of 20%. If a
business has much input VAT, then the flat rate scheme will not be beneficial if the 16.5% rate
applies.
ILLUSTRATION
Satpal is VAT registered. He makes annual standard rated sales of £100,000, to the general public.
Annual standard rated expenses are £10,000. Both figures are exclusive of VAT. The relevant flat rate
scheme percentage is 16.5%.
 If Satpal uses the flat rate scheme, then he will pay VAT of £19,800 ((100,000 + 20,000 (output
VAT of £100,000 x 20%)) x 16.5%).
 Using the normal basis of calculating the VAT liability, he would have to pay annual VAT of
£18,000 ((100,000 –10,000) x 20%).
Clearly the normal basis is advantageous.
11 Group registration
 Two or more companies under common control can apply for group registration.
 A “representative member” accounts for the VAT for the group.
 Intra-group transfers are disregarded for VAT purposes.
 Can exclude companies from the group, e.g. repayment traders or exempt suppliers.

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12 Purchases and sales from outside of the UK

Purchase from or sale to a country outside the EU Purchase from or sale to a country within the EU
Import/Export Acquisition/Dispatch
Pay VAT on imports at point of entry to UK Output tax due on acquisitions by UK trader:
Claim input VAT on next VAT return  Transaction is an output and an input
therefore VAT neutral
 Overall the cash in and out is the same as for
UK purchases
 Tax point is earlier of 15th day of month after
month of acquisition and invoice date
Exports: zero rated Dispatches are:
 Zero-rated if to another registered trader
 At the normal rate of VAT for that supply if to a
non-registered customer
ILLUSTRATION: PURCHASES AND SALES FROM OUTSIDE UK
Rajan Ltd purchases goods from an overseas supplier for £10,000 (excluding VAT). Show what cash
payments will be made if the goods are bought from a supplier
(a) Outside the EU
(b) Within the EU
Import from Acquisition from
outside EU within EU
£ £
Paid to the supplier 10,000 10,000
Paid to HMRC at the border 2,000 –
Purchaser charges themselves VAT (reverse charge) 2,000
Input VAT reclaimed on tax return (2,000) (2,000)
Net cash cost 10,000 10,000
Rajan Ltd sells goods for £10,000 (excluding VAT). The goods would be standard rated if they were sold
in the UK. Show the amounts received if the supply is made
(a) Outside the EU
(b) Within the EU to a registered customer
(c) Within the EU to a non-registered customer
Dispatch to EU: Dispatch to EU:
Export registered non registered
outside EU customer customer
£ £ £
Received from customer 10,000 10,000 10,000
Supply zero rated 0 0
VAT charged at 20% 2,000
VAT paid to HMRC on VAT return (2,000)
Net cash received 10,000 10,000 10,000

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161
22
Obligations for individuals
1 Collection of income tax

Income tax may be collected:
(i) Under the PAYE system (e.g. on employment income).
(ii) Under the self-assessment system.
2 Self-assessment
Self-assessment is the system for the deduction of tax which is not deducted under PAYE.
EXAM SMART
The onus is on the taxpayer to provide the information to pay the correct amount of tax on
the due date.
2.1 Filing returns

Paper return due by LATER of Online return due by LATER of
31 October after tax year end 31 January after tax year end (HMRC want us to file online)
3 months after return issued 3 months after the return issued
 HMRC has 9 months from receipt to correct errors.

 Taxpayer has 12 months after due filing date to inform HMRC that return should be amended
(the due filing date for this purpose is 31 January after tax year end or 3 months after the return
was issued).

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162 22: Obligations for individuals ACCA TX-UK
 If a taxpayer does not receive a return, he must notify HMRC by 5 October following the end of
the tax year that he has chargeable income unless:
 There is no CGT liability, and
 No higher rate or additional rate tax is due, and
 Either income is covered by the personal allowance or all tax due has been deducted at
source.
2.2 Payment of tax

The following must be paid by the 31 January following the end of the tax year:
(i) Income tax
(ii) Class 4 NIC
(iii) Class 2 NIC
(iv) Capital gains tax
Payments on account (POA)

 POA may also be required.
 Required when tax and Class 4 NIC for previous year exceeded the income tax and Class 4 NIC
deducted at source, e.g. via PAYE. The excess is called the relevant amount.
 POA each = 50% of the relevant amount for the previous year.
 POA not required
 if relevant amount is below £1,000 or
 if at least 80% of last year’s tax was paid at source (e.g. PAYE).
 Taxpayer can claim to reduce POA to a stated amount, or nil, if he expects a lower liability.
 Taxpayer must state why the liability is expected to be lower.
 Interest is charged if the reduced payment on account turns out to be too low.
 Penalties if reduction was due to fraud or negligence.
Due dates for POA:

Payment Date
1st payment on account 31 January in tax year
nd
2 payment on account 31 July after tax year
Final payment of o/s liability 31 January after tax year
No POA of CGT or Class 2 NICs. All CGT and Class 2 NIC is due on 31 January after the tax year in
which the gains / income occur.

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ACCA TX-UK 22: Obligations for individuals 163
ILLUSTRATION: POA
Ian’s tax bills are:

£
2017/18 8,500 (POA £3,000 each)
2018/19 10,000
2019/20 12,000
Ian’s payments of tax will be:
£
31 January 2019 balancing payment for 2017/18 (£8,500 – 2 × £3,000) 2,500
AND 1st POA for 2018/19 (based on last year’s tax bill, 50% × £8,500) 4,250
31 July 2019 2nd POA for 2018/19 4,250
31 January 2020 balancing payment for 2018/19 1,500
AND 1st POA for 2019/20 5,000
31 July 2020 2nd POA for 2019/20 5,000
31 January 2021 balancing payment for 2019/20 2,000
And 1st POA for 2020/21 6,000
2.3 Interest
 Interest is automatically charged if any tax is paid late.
 Runs from due date until the day before payment date inclusive.
 If taxpayer reduces POA AND there is still a final payment due, interest is due on the POAs, as if
they were the correct amount.
 Interest may be paid by HMRC on any tax overpayment. The interest runs from the date the
payment was due, or the date HMRC received the payment, if later, until the repayment date.
 When repayment interest is paid, it is only paid on the amount of tax that should have been
paid (i.e. normal payments on account such that deliberate overpayments do not attract
interest).
EXAM SMART
Interest is 3.25% on underpaid tax (tax paid late) and 0.5% on repayments of tax. These rates
will be given in the exam.

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ILLUSTRATION: INTEREST
Dave claimed to reduce his payments on account for 2019/20 from £5,000 to £3,500. The first
payment was made on 18 January 2020 and the second on 19 August 2020.
Dave filed his 2019/20 tax return on 10 January 2021. His income tax and NIC liability was £11,000 and
CGT of £3,600 was payable.
Dave paid the balance of tax, being £7,600, on 25 February 2021.
What are the interest implications for Dave?
Payment Interest
(a) (i) First POA £3,500 Nil (as paid on time)
(a) (ii) Reduction in POA £1,500 (£5,000 – Interest runs from 31 January 2020 (due date) to
£3,500) 24 February 2021 (day before payment)
(b) (i) Second POA £3,500 Interest runs from 31 July 2020 to 18 August 2020
(b) (ii) Reduction in POA £1,500 (£5,000 – Interest runs from 31 July 2020 to 24 February 2021
£3,500)
(c) Balancing payment (CGT £3,600 + Interest runs from 31 January 2021 to 24 February
£4,000 income tax) 2021
2.4 Penalties
Penalty for late payment
In addition to interest, penalties may be charged for the late payment of tax.
Penalties apply to:
(i) Balancing payments of income tax, Class 4 NIC, Class 2 and CGT
(ii) Tax due on amendment of self-assessment
(iii) Tax due on discovery assessment
There are no penalties on late paid POA.
Length of delay Penalty

More than 1 month late 5% of tax unpaid at penalty date
More than 6 months late Additional 5%
More than 12 months late Additional 5%
EXAM SMART
Your Examiner has indicated that you should work to the nearest month in calculating interest
and penalties as shown in the table above. In practice the delays have to be looked at as more
than 30 days, more than 5 months and 30 days and more than 11 months and 30 days.
HMRC has the discretion to reduce penalties in special circumstances. The inability to pay does not
constitute special circumstances.

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Penalties for late filing (maximum)

 HMRC is in the process of standardising penalties across taxes for various offences.
 Standardised penalties are being introduced for late filing, but for the purposes of your exam,
you need only know about these rules for individuals:
Length of delay Penalty
1 day £100 fixed penalty
3 months £10 per day for a maximum of 90 days, in addition to the £100 fixed penalty
6 months Greater of 5% of the tax liability and £300, and above penalties
After 12 months:
Deliberate and concealed Greater of 100% of PLR or £300
Deliberate not concealed Greater of 70% of PLR or £300
Other, e.g. carelessness Greater of 5% of PLR or £300
PLR is potential lost revenue.

The tax geared penalties for deliberately submitting a return more than 12 months late can be
reduced. The amount of reduction depends on whether the disclosure was prompted or unprompted.
Penalties for late notification of liability to tax

If a failure to notify chargeability or to register results in a loss of tax, penalties apply.
Maximum penalties are based on potential lost revenue (PLR) but may be reduced in some cases.
KEY TERM
Potential lost revenue is the amount of tax outstanding at the end of the tax year (income
tax & CGT) or accounting period (corporation tax). For VAT purposes, it is the amount
outstanding as a result of the failure.
Maximum penalty Minimum penalty with Minimum penalty with

Behaviour unprompted disclosure prompted disclosure
Deliberate and concealed 100% of PLR 30% of PLR 50% of PLR
Deliberate, not concealed 70% of PLR 20% of PLR 35% of PLR
>12 mths <12 mths >12 mths <12 mths
Careless 30% of PLR 10% of PLR Nil 20% of PLR 10% of PLR
This regime applies to

 Income tax and capital gains tax collected via self-assessment
 Corporation tax (see the next chapter)
 Income tax and NIC collected via PAYE
 National insurance contributions
 VAT
If a taxpayer’s failure is not deliberate, there is no penalty if he can show reasonable excuse but having
insufficient money to pay the penalty is not a reasonable excuse.

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2.4.1 Penalties for incorrect returns

This regime applies to all taxes.
Maximum penalty for failing Unprompted Prompted
Type of error to disclose error disclosure disclosure
Careless 30% of PLR 0% of PLR 15% of PLR
Deliberate, not concealed 70% of PLR 20% of PLR 35% of PLR
Deliberate and concealed 100% of PLR 30% of PLR 50% of PLR
Unprompted disclosure occurs if the taxpayer has no reason to believe HMRC has discovered the
error.
3 Record keeping
Taxpayers must keep the records needed to make a correct and complete return.
Retain records for:
 Income tax and CGT:
(i) Five years after 31 January following the tax year if in business.
These taxpayers must keep all their records (not just those relating to the business) for
five years.
(ii) One year after 31 January if not in business.
 VAT: 6 years.
Maximum penalty = £3,000 for each failure per tax year.
4 Compliance checks and appeals

4.1 Compliance checks
 HMRC can conduct a compliance check into an individual’s tax return.
 HMRC must give written notice of intention to enquire by:
 The first anniversary of the actual submission date, or
 If the return is filed after the due submission date, the quarter day following the first
anniversary of the actual submission date. The quarter days are 31 January, 30 April,
31 July and 31 October.
 HMRC may require taxpayer to produce relevant documentation.
4.2 HMRC determinations

 If no return is submitted by the filing date, HMRC can make a determination of amounts due.
 Must be made:
 For income tax – within 3 years of the statutory filing date, i.e. by 31 January 2024 for
2019/20.

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4.3 Discovery assessments

 Where HMRC discovers a loss of tax it may make a discovery assessment after the usual time
limit for a compliance check.
 Raised following fraud or negligence of taxpayer or if insufficient information is available to
allow HMRC to be aware of any lost tax.
 Time limit for raising discovery assessment is four years (6 years if careless understatement and
20 years for deliberate understatement).
 The time limits run from the end of the tax year (income tax and CGT) or prescribed accounting
period (VAT).
4.4 Overpayment relief

 Where a taxpayer has paid too much tax due to an error or mistake in a tax return, the taxpayer
can make a claim for overpayment relief within four years of the end of the tax year, i.e. for
2019/20 by 5 April 2024
4.5 Appeals
 Taxpayer can request review of a decision to be carried out by an HMRC review officer before
initiating a formal appeal.
 Can appeal against request for documents, amendments made following a compliance check,
right to raise a discovery assessment, a discovery assessment, a VAT assessment, imposition of a
penalty.
 Appeal within 30 days of the event appealing against.
 State grounds for appeal.
 Appeal via “four track” tribunal system:
 “Paper track” hears simplest appeals, normally without a hearing.
 “Basic track” involves a hearing with minimal exchange of documents.
 “Standard track” involves more formality and case management.
 “Complex track” is for long or complex cases or an important principle or a large sum of
money.
 First tier tribunal deals with all but the most complex cases.
 Upper tribunal deals with complex matters and appeals from first tier.
 Disputed tax is payable by due date unless Inspector or commissioners determine otherwise.
 Taxpayer may apply to postpone payment of all or part of tax subject to appeal if appeal relates
to a discovery assessment or tax due as a result of a compliance check.
5 HMRC powers
 Rules cover IT, CT, CGT, VAT, PAYE and NI.
 HMRC request information by making written information notice to taxpayer or third-party bulk
data gatherers such as banks or stockbrokers.
 Requests for information from third parties must normally be agreed by the taxpayer or the first
tier tribunal.
 HMRC can enter and inspect business premises to look at records and assets.

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6 Time limits
 For making a claim - generally 4 years after the end of the tax year.
7 PAYE real time reporting late filing penalty

 Penalties apply for incorrect PAYE returns (see section 2.4.1).
 HMRC will charge employers penalties for late submission of RTI returns. Penalties are charged
on a monthly basis, where the RTI submission is made late.
 No penalty is charged for the first late submission in the tax year. However, subsequent failures
in the same tax year result in a penalty based on the number of employees as follows:
Number of employees Monthly penalty
1–9 £100
10 – 49 £200
50 – 249 £300
250 or more £400
 If the submission is more than 3 months late, an additional penalty of 5% of the tax and national
insurance which should have been reported is charged.

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169
23
Company tax administration
1 Self-assessment for companies

 A company must notify HMRC of commencement of trade within three months of
commencement.
 In addition, a company must:
(i) Calculate its corporation tax liability for each accounting period.
(ii) Submit a corporation tax self-assessment return for each period of account.
(iii) Pay any corporation tax due.
1.1 Company returns (CT 600 return)

 A company must file a return on or before the filing date.
KEY TERMS
The filing date is the later of:
 12 months after the end of the period or
 3 months from date on which notice requiring the return was issued.
 The return must:

(i) Contain all the information needed to calculate a company’s taxable total profits.
(ii) Include a self-assessment of the corporation tax payable for the period.
(iii) Be submitted online.
 A copy of a company’s financial accounts must be submitted with its tax return.

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170 23: Company tax administration ACCA TX-UK
 For a long period of account (i.e. exceeds 12 months) two returns are required:
 One for the first 12 months and
 One for the balance of the period.
BUT the filing date for both returns is 12 months after the end of the long period of account.
On that filing date the company will file one tax computation, one set of financial statements
and two tax returns.
Electronic filing
 All companies must file their accounts and their self-assessment returns electronically using the
‘Inline eXtensible Business Reporting Language’ (iXBRL). iXBRL is the global language for
exchanging business information in an electronic format.
1.2 Payment of corporation tax

 Companies that are not large pay CT nine months and a day after the end of the accounting
period (i.e. for long periods of account, two separate payments will be required).
 Large companies must pay their CT in quarterly instalments.
 All companies must pay their CT electronically.
1.3 Large companies (“augmented profits” > £1,500,000)

 A large company is one with augmented profits for the accounting period in excess of
£1.5 million.
 All other companies are not large.
 The £1.5 million threshold is:
(i) Time apportioned for short accounting periods.
(ii) Divided by the total number of related 51% group companies (see below).
EXAM SMART
The £1.5 million threshold will be given to you on the exam paper.
 A company that becomes large during an accounting period, does not have to pay by
instalments provided:
(i) It was not a large company in the previous accounting period, and
(ii) Its augmented profits for the current accounting period do not exceed £10 million.
1.3.1 Augmented profits
KEY TERMS
Augmented profits are taxable total profits plus dividend income from companies which are
not related 51% group companies.
 Dividends received are exempt from corporation tax and are NOT included in calculating
taxable total profits (TTP).

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ACCA TX-UK 23: Company tax administration 171
 However, dividends from non-related 51% group companies are included in calculating
augmented profits and, therefore, impact on whether a company is large and whether
corporation tax needs to be paid in instalments.
 Dividends received from related 51% group companies are not included in augmented profits.
Fourth Time Ltd had the following results for the year to 31 March 2020:
£
Tax adjusted trading profits 1,000,000
Property business profits 200,000
Capital gain 250,000
Dividend received from a company in which Fourth Time Ltd holds 10% of shares 90,000
Calculate Fourth Time Ltd’s corporation tax liability and state whether it will need to pay corporation
tax in instalments.
1.3.2 Related 51% group companies

 If a company has any related 51% group companies the £1.5 million and the £10 million
thresholds (see above) are divided by the number of related 51% group companies.
 A 51% subsidiary is one where more than 50% of the ordinary share capital is directly or
indirectly owned.
 Two companies are 51% group companies if:
(i) One is a 51% subsidiary of another, or
(ii) Both are 51% subsidiaries of a third company.
 If two companies are 51% owned by an individual, they are NOT 51% group companies.
Dormant companies are NOT included in a 51% group but non-UK resident
companies ARE included if the 51% test is met.
 The number of 51% companies in a group at the end of an accounting period is deemed to be
the number of companies in the group for the next period:
(i) Companies that join a group during the period are deemed to be part of the group from
the beginning of the following period,
(ii) Companies that leave a group during the period are deemed to remain as part of the
group until the end of the period.

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The Pen group has the following group structure:
Pen Ltd
100% 90% 100% 100%
Swan Ltd Cob Ltd Cygnet Inc Duckling Ltd
50% 90%
Chick Ltd Gosling Ltd
Cygnet Inc is not UK resident. All the other companies in the group are UK resident. Duckling Ltd is
dormant, but all the other group companies are active trading companies.
The augmented profits threshold for the purposes of deciding if Pen Ltd must pay quarterly instalments
of corporation tax is:
1.3.3 Quarterly instalments

 Pay in instalments on 14th of months
 7 and 10 in the accounting period,and
 1 and 4 in the following period (months 13 and 16).
 Each instalment is based on the estimated CT liability for the current period.

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ILLUSTRATION: INSTALMENTS
A Ltd had an estimated CT liability of £2,000,000 for the year ended 31 December.
CT will be paid as follows:
£
14 July 500,000
14 October 500,000
14 January 500,000
14 April 500,000
1.3.4 Short periods

If the accounting period is < 12 months long, the final (balancing) payment is due on the later of:
 the 14th of the 4th month in the following period (as it is with a 12-month period), or
 the 14th day of the 7th month after the start of the period.
Each instalment is
3 × CT/n where:
CT = estimated CT liability
n = number of months in the period
In addition, there will be a final balancing payment on the later of the above dates.
ILLUSTRATION: INSTALMENTS FOR SHORT PERIOD
King Ltd had an estimated CT liability of £2,000,000 for the 8-month accounting period to 31 August.
Instalments and due dates of payment are:
£
Each instalment will be: 3 × £2,000,000/8 750,000
Due as follows:
14 July 750,000
14 October 750,000
14 December (balancing payment) 500,000
2,000,000
1.4 Interest
Late payment interest
 Late payment interest is automatically charged if corporation tax is paid late.
It runs from the normal due date to the date of payment.
 Late payment interest can be deducted as an expense (non-trade loan relationship debit) from
interest income.

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Repayment interest
 HMRC pay interest on overpayments of corporation tax.
 Interest runs:
 from the later of the due date and the actual date of payment, to
 the repayment date.
 Repayment interest received by a company is taxable interest income (non-trade loan
relationship credit).
1.5 Penalties
 Penalties may be charged in addition to any interest due for late payment.
Standard penalties
There are standard penalties across all taxes for:
(i) Failure to notify liability to tax.
(ii) Incorrect returns.
We covered the standard penalties in the previous chapter of these course notes.
Other penalties:
Late filing of corporation tax return Failure to keep and retain required records
£100 if return is late or £200 if > three months late* Up to £3,000 per accounting period
and
10% of outstanding tax if > 6 months late
20% of outstanding tax if > 12 months late
* £500/£1,000 if late three times running.
ILLUSTRATION: LATE FILING OF RETURN
For the previous two accounting periods M Ltd has been over 12 months late in filing its tax return. For
the year to 31 March 2020, the finance team were more organised and the return was filed on
10 October 2021. The corporation tax due for the period was £20,000 and was paid on 10 October 2021.
The return for the year to 31 March 2020 was due on 31 March 2021. Therefore it is over 6 months late
and the penalties due are:
 £1,000 Fixed penalty (as this is the third time the return has been late), and
 £2,000 Tax geared penalty (as over 6 months late).
In addition, there will be automatic interest to pay on the late payment of corporation tax.
2 Record keeping
 Taxpayers must keep the records needed to make a correct and complete return.
 Retain corporation tax records for 6 years from end of accounting period.

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3 HMRC determinations
 If no return is submitted by the filing date, HMRC can make a determination of amounts due.
 Must be made for corporation tax within 3 years of the due filing date, i.e. by 31 December
2022 for an accounting period ending on 31 December 2018.
4 Compliance checks
 HMRC can:
(i) Compliance check any self-assessment return, and
(ii) Issue a discovery assessment.
The procedures and rules are similar to those that apply for individuals.
 HMRC may initiate a compliance check as a result of:
 Suspicion that income is undeclared or that deductions are being incorrectly claimed.
 Other information that HMRC have.
 Random selection of return concerned.
 HMRC does not have to give a reason for commencing a compliance check, but it must give
written notice that is going to start a compliance check:
Return filed Written notice of compliance check must be given within 12 MONTHS of:
On time The date the tax return was filed with HMRC
Late The 31 January, 30 April, 31 July or 31 October following the date the tax
return was filed
 HMRC can demand that the company produce documents, accounts or written particulars
connected to the return that it is checking. It may also require full answers to specific questions
connected to the return.
A company has 30 days to comply with the demand, or to make an appeal against it.
 The compliance check ends when HMRC give written notice that is has been completed.
The notice will state the outcome of the check and details of any amendments to the self-
assessment. The company has 30 days to appeal against the amendments.
5 Discovery assessments
 Where HMRC discovers a loss of tax it may make a discovery assessment after the usual time
limit for a compliance check.
 Raised following fraud or negligence of taxpayer or if insufficient information is available to
allow HMRC to be aware of any lost tax. It cannot be raised if full disclosure was made in a
return even if this is later found to be incorrect.
 HMRC will only accept that full disclosure has been made if any contentious items have been
brought to its attention (in practice this is a high threshold to meet).
 Time limit for raising discovery assessment is 4years (6 years if careless understatement and 20
years for deliberate understatement). The time limits run from the end of the accounting
period.

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6 Overpayment relief
 Where a company has paid too much tax due to an error or mistake in a tax return, the
company can make a claim for overpayment relief within four years of the end of the
accounting period.

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177
Solutions to
Lecture examples
Chapter 1
Lecture example 1.1
TESTS
Test 1: Consider automatic non-residence test
Jai is not automatically non-resident.
She was in the UK for too many days in 2019/20 and she does not work overseas.
Test 2: Consider automatic residence test
Jai is not automatically resident. She does not meet any of the 3 tests for automatic residence.
Test 3: Consider previous residence and the number of UK ties
As Jai was resident in the UK during the three tax years prior to 2019/20 she is a previous UK resident.
She was in the UK for 49 days in 2019/20, so she will be UK resident if she has 3 or more UK ties.
Jai’s ties are:
(a) UK resident spouse
(b) Accommodation in the UK which was made use of in the tax year
(c) Being in the UK for more than 90 days during either of the two previous tax years
Therefore Jai is UK resident for 2019/20.

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178 Solutions to Lecture examples ACCA TX-UK
Chapter 2
Lecture example 2.1
NSI SI DIV Total
£ £ £
Earnings 12,000 12,000
Bank Interest 10,000 10,000
22,000
Personal allowance (12,000) (500) (12,500)
Taxable income NIL 9,500 9,500
The personal allowance is deducted firstly from the non-savings income and then from savings income.
This order matters as the different types of income are taxed at different rates.
Lecture example 2.2

NSI SI DIV Total
£ £ £ £
Building society interest 2,000 2,000
Dividends 12,600 12,600
Total income 105,400 2,000 12,600 120,000
1
PA £12,500 - (£120,000 - £100,000) × (2,500) (2,500)
2
Taxable income 102,900 2,000 12,600 117,500
Lecture example 2.3

NSI SI Total
£ £ £
Total income 137,500 4,500 142,000
Personal allowance (income > £125,000) (nil) (0)
Taxable income 137,500 4,500 142,000
Income tax £
Non-savings income 37,500 × 20% 7,500
Balance of non-savings (£137,500 – £37,500) 100,000 × 40% 40,000
Savings allowance (nil rate band) (£500) 500 × 0% 0
Savings income 4,000 × 40% 1,600
142,000
Tax liability 49,100
A savings nil rate band of £500 is available as Jo is a higher rate taxpayer.

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ACCA TX-UK Solutions to Lecture examples 179
Lecture example 2.4

NSI SI Dividend Total
£ £ £ £
Dividends 32,000 32,000
Total income 15,500 3,500 32,000 51,000
Taxable income 3,000 3,500 32,000 38,500
Income tax £ £ £ £
Non-savings income × 20%
3,000 600
Savings – starting rate (5,000 – 3,000) × 0% 2,000 0
Savings income nil rate band × 0% 500 0
Savings basic rate × 20% 1,000 200
3,500
Dividend nil rate band × 0% 2,000 0
Dividend (37,500 – 3,000 – 3,500 – 2,000) × 7.5% 29,000 2,175
Dividend higher rate × 32.5% 1,000 325
32,000
Tax liability 3,300
Lecture example 2.5

£
Adjusted net income (£57,589 - £400) 57,189
Less: threshold (50,000)
Excess 7,189
÷ £100 (round down) 71

Charge: 71%× £1,789 1,270
Lecture example 2.6

Jeevan Falguni
£ £
Salary 11,450 42,500
Personal allowance (£12,500 - £1,250) (11,250) (12,500)
Taxable income 200 30,000
Income tax @ 20% 40 6,000
Less: MA (£1,250 × 20%) (250)
Income tax liability 40 5,750
An election to transfer the MA is possible as neither spouse pays higher rate or additional rate tax. The
election must be made to transfer the full £1,250, so even though Jeevan could use £11,450 of the
personal allowance, the full £1,250 must be transferred.

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Chapter 3
Lecture example 3.1
£
Allowance paid 11,000 × 32p 3,520
Less: first 10,000 miles at 45p (4,500)
Next 1,000 miles at 25p (250)
Allowable expense (deduct from taxable salary) (1,230)
Lecture example 3.2

Car benefit £
Round down CO2 emissions to 150 = (150 – 95) = 55/5 = 11
Taxable percentage is 23+11+4 (Diesel) = 38% BUT 37% (MAX)
Benefit 37% × £52,000 (Use list price) 19,240
Chauffeur 1,000
Total taxable benefit arising from the vehicle 20,240
Note: The maximum % is 37%.
Lecture example 3.3

£
Annual value 14,000
Additional benefit
2.5% (£250,000 (MV as acquired > 6 years before first occupation) + £10,000
improvement – £75,000) 4,625
Decorating 1,200
Total taxable benefit arising from the property 19,825
Lecture example 3.4

Use of employer’s TV £ £
20% × £1,800 × 3/12 (6.4.19 – 30.6.19) 90
Gift of TV Greater of:
(i) MV at time of gift 400
(ii) Original value less amounts taxed as benefits
– Original value 1,800
– Already taxed 18 months (1.1.18 – 30.6.19) × 20% × £1,800 (540)
1,260 1,260
Total benefit 1,350
Chapter 4
Lecture example 4.1
£
Rent received (£1,000 × 12) 12,000
Mortgage interest (25% × £12,000) (3,000)
Other expenses (1,300)

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Faizal’s income tax liability is:

Non-savings
income Total
£ £
Property income 7,700 7,700
97,700 97,700
Taxable income 85,200 85,200
Income tax liability:

Non-savings income £
£37,500 @ 20% 7,500
£47,700 @ 40% 19,080
26,580
Interest relief (£12,000 × 75%) × 20% (1,800)
Income tax liability 24,780
Lecture example 4.2

Rohan’s property income is:
£
Rent received (£1,000 × 12) 12,000
Replacement furniture relief:
Fridge (£620 - £320) (300)
Washing machine (410)
Other expenses (3,000)
EXAM SMART
No relief is available for the initial cost of the fridge, washing machine or carpets.
Relief for the replacement fridge is reduced by the proceeds received from the sale of the
original fridge.
No relief is given for the amount spent on the washing machine which represents an
improvement. Relief is restricted to the cost of a similar washing machine.
Lecture example 4.3

(i) If Tara claims rent a room relief, then her property income is £1,000 (£8,500 - £7,500)
(ii) If Tara does not claim rent a room relief, then her property income is £6,500 (£8,500 -
£2,000)
It is therefore advisable for Tara to claim rent a room relief.
Lecture example 4.4

8
Accrued interest for the period 1 May to 31 December is £300,000 × 2% × = £4,000 and this is the
12
amount that Chen must include in savings income for the tax year.

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Chapter 6
Lecture example 6.1
Main pool Old car Audi Allowances
£ £ £ £
Year ended 31 March
TWDV b/f 6,250 10,000
Acquisition (no AIA or FYA)
Car 17,500
Disposals (lower of cost/disposal
proceeds)
Office equipment (12,200)
(5,950)
Balancing charge 5,950 (5,950)
–
Car (7,500)
2,500
Balancing allowance (2,500) 2,000
× 80%
–
WDA @ 18% (3,150)
× 80% 2,520
TWDV c/f 14,350
Balancing charge (1,430)
The overall balancing charge of £1,430 is added to the adjusted trade profit for the year.
Lecture example 6.2

AIA FYA Pool “70% car” b/f S R pool Allowances
£ £ £ £ £ £
WDV b/f 22,000 19,000
Additions
Car 1 25,000
Car 2 13,000
Car 3 10,100
Equipment 33,000
Disposal proceeds (8,000) (8,300)
33,000 13,000 39,000 19,000 1,800
WDA 6% (108) 108
WDA 18% (7,020) (3,420) × 70% 9,414
FYA 100% (13,000) 13,000
AIA – 100% (33,000) 33,000

WDV c/f 31,980 15,580 1,656
Total allowances,
expense for period 55,522

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Chapter 7
Lecture example 7.1
Taxable
Tax Year Basis Period Working Profit
2018/19 1.11.18 to 5.4.19 1st year – actual basis
5/7 × £14,000 £10,000
2019/20 1.11.18 to 31.10.19 2nd year – no 12-month period ending in 2019/20
so use first 12 months
£14,000 + 5/12 × £36,000 £29,000
rd
2020/21 Year ended 31.5.20 3 year – CYB £36,000
th
Overlap profits to be deducted on cessation of trade:
£
1.11.18 to 5.4.19 5/7 × £14,000 10,000
1.6.19 to 31.10.19 5/12 × £36,000 15,000
10 months 25,000
Lecture example 7.2

st
2018/19 1.7.18 to 5.4.19 1 year – actual basis
9/14 × £14,000 £9,000
nd
2019/20 1.9.18 to 31.8.19 2 year – 14-month period ending in tax year
2019/20
So take 12/14 × £14,000 £12,000
2020/21 Year ended 31.8.20 3rd year – CYB £21,000
2021/22 Year ended 31.8.21 4th year – CYB £30,000
Overlap profits to be deducted on cessation of trade:
1.9.18 to 5.4.19 7/14 × £14,000 = £7,000 (7 months)
Lecture example 7.3

2015/16 1.12.15 to 5.4.16 1st year – actual basis (4/12 × £9,000) £3,000
nd
2016/17 Year ended 30.11.16 2 year – CYB (12-month period ends in tax year
2016/17) £9,000
rd
th
th
2019/20 Year ended 30.11.19 5 year – CYB - The final CYB year £30,000
£
2020/21 1.12.19 to 30.6.20 Remaining profits after last CYB 21,000
Less overlap profits (1.12.15 - 5.4.16: 4/12 × 9,000) (3,000)
18,000

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Chapter 8
Lecture example 8.1
The profits are allocated to each partner as follows:
Total Charlie David Kris
Year ended 31 Dec 2017 £ £ £ £
Salary 30,000 30,000 –
PSR (balancing figure) 50,000 30,000 20,000
Total 80,000 60,000 20,000
Year ended 31 Dec 2018

(i) To 30 Apr 2018 (4 months) £ £ £ £
Salary (4/12 × £30,000) 10,000 10,000 –
PSR (balancing figure) 20,000 12,000 8,000
Total (4/12 × £90,000) 30,000 22,000 8,000
PSR (8/12 × £90,000) 60,000 30,000 10,000 20,000

90,000 52,000 18,000 20,000
Year ended 31 Dec 2019

PSR £120,000 £60,000 £20,000 £40,000
Step 3:
Each partner’s taxable profits are as follows:
Charlie David Kris
2017/18 CYB Year ended 31 Dec 2017 £60,000 £20,000
2018/19
CYB for C & D
C & D year ended 31 Dec 2018 £52,000 £18,000
Opening year rules for K
Actual (1 May 2018 to 5 April 2019)
£20,000 + 3/12 × £40,000 £30,000
2019/20 CYB Year ended 31 Dec 2019 £60,000 £20,000 £40,000
Kris’ overlap profits are 3/12 × £40,000 = £10,000

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Chapter 9
Lecture example 9.1
Income calculation Year 1 Year 2
£ £
Trading profit 24,200 Nil
Additional loss relief
Other income 3,800 11,500
Total income 28,000 11,500
Loss relief (i)(28,000)
Adjusted total income 0 11,500
Taxable income 0 0
The personal allowance in year 1 is wasted. £1,000 of the personal allowance is wasted in year 2.
Capital gains calculation Year 1 Year 2
Gains 50,100 12,000
Loss relief (ii)(50,100)
Gain after loss relief nil 12,000
Annual exempt amount (12,00) (12,000)
Taxable gain nil nil
Note: the annual exempt amount in year one is wasted.

Working – Loss memorandum
£
Trading loss Year 2 130,000
Loss relief against total income Year 1 (28,000)
Loss relief against capital gains Year 1 (50,100)
Loss carried forward against future trading profits Year 3 onwards 51,900
Illustration: Aaron
Opening year losses
Step 5: Relieve loss according to Examiner instructions.
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22
£ £ £ £ £ £ £
Trading profit nil nil nil nil nil 5,000 12,500
Trading loss b/f
Earned income 75,000 75,000 75,000 5,000 NIL NIL NIL
Total income 75,000 75,000 75,000 5,000 NIL 5,000 12,500
Loss relief v total income (3,500) (10,500
)
Net income 71,500 64,500 75,000 5,000 nil 5,000 12,500

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Lecture example 9.2

Calculation of terminal loss
£ £
2019/20 6 Apr 2019 to 31 Oct 2019 (7 m) 7/10 × £20,000 (14,000)
Overlap profits (2,000)
(16,000)
2018/19 1 Nov 2018 to 5 Apr 2019
3/10 × £20,000 (6,000)
2/12 × £9,000 1,500
Note 1 (4,500)
Terminal loss available for relief (20,500)
Taxable income is as follows:

2016/17 2017/18 2018/19 2019/20
£ £ £
Trading profit 14,000 5,000 9,000 NIL
Terminal loss relief (Note 2) (6,500) (5,000) (9,000) NIL
Taxable income 7,500 NIL NIL NIL
Note 1: If this figure had been positive it would be shown as NIL.

Note 2: The balance of the £20,500 terminal loss is set against the third preceding tax year.
Note 3: The £1,500 remaining of the total loss (i.e. £20,000 + £2,000 - £20,500) is eligible to offset
against total income of the current year or previous year. As Praj only has trading profits, this
option is not possible here.
Chapter 10
Lecture example 10.1
200,000−150,000
Chen’s tapered annual allowance is £40,000 - 2
= £15,000 each year. Therefore, he has
unused allowances of £6,000 + £3,000 + £5,000 = £14,000 to carry forward.

Muller made a gross pension contribution of £70,000. This is all tax relievable as it is lower than the
greater of:
(i) Relevant earnings of £230,000, and
(ii) £3,600
However, excess pension contributions (subject to the annual allowance charge), are
£
Individual tax relievable contribution 70,000
Employer contribution 20,000
90,000
Less: Tapered annual allowance (10,000)
Unused annual allowance b/f (30,000)
Excess contributions 50,000

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£
Employment income 230,000
Personal allowance (nil as adjusted net income of £160,000 (£230,000 income less Nil
£70,000 gross personal pension contribution) is more than £125,000)
Taxable income 230,000
Income tax £
£107,500 (37,500 + 70,000) at 20% 21,500
£112,500 (220,000 – 107,500) at 40% 45,000
£10,000 at 45% 4,500
Annual allowance charge
£50,000 at 45% 22,500
93,500
The basic (37,500 + 70,000 = 107,500) and higher rate (150,000 + 70,000 = 220,000) limits are increased
by the gross personal pension contributions
Adjusted net income is £230,000 less gross pension contributions of £70,000 = £160,000. Adjusted
income is £230,000 plus employer pension contributions of £20,000 = £250,000.
As adjusted income is greater than £210,000, the tapered annual allowance is £10,000
Chapter 12
Olly:
£
(37,500 – £29,000) £8,500 × 10% 850
(£21,500 – £8,500) £13,000 × 20% 2,600
CGT liability 3,450
Taxable gains are already net of the annual exempt amount.
Taxable income is net of the personal allowance. Olly has £8,500 of unused basic rate band remaining
and this amount of the taxable gains are taxed at 10%. The remainder of the taxable gains of £13,000
are taxed at 20%.
Alice:
£
£17,000 × 10% 1,700
Alice has £32,500 (£37,500 - £5,000) unused basic rate band so her taxable gains are all taxed at 10%

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£
Proceeds (net of selling costs) (48,500 – 2,500) 46,000
Cost (including acquisition costs) (7,500 + 500) (8,000)
Chargeable Gain 38,000
Annual exempt amount (12,000)
Taxable gain 26,000
CGT = 10% × £9,630 (37,500 +(100/80 × 4,400) – 33,370) 963

20% × £16,370 3,274
Total CGT liability 4,237

£
Gain 36,000
Current loss, cannot be restricted (10,000)
Net gains in the year 26,000
AEA (12,000)
Taxable gain 14,000
Less b/f loss (14,000)
The unrelieved loss b/f of (18,000–14,000) = £4,000 is carried forward to future tax years to offset
against future gains.

£
Net proceeds 350,000
370,000
Cost £100,000 × (48,052)
(370,000+400,000)
Taxable gain 289,948

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Chapter 14
Pavel’s gain is:
£
Proceeds 751,900
Cost (200,000)
Gain (before PPR relief) 551,900
Exempt months Chargeable
1.2.04-1.3.06 Occupied 25
1.3.06-1.3.10 Employed UK 4 yrs 48
1.3.10-1.3.11 General exemption < 3 yrs 12
1.3.11-1.7.14 Occupied 40
1.7.14-1.2.18 Balancing period 43
1.2.18-1.8.19 Last 18 months 18
143 43
PPR relief 143/186 × 551,900= (424,310)

Chargeable gain 127,590
Less: AEA (12,000)
115,590
CGT @ 28% (Residential property rates £32,365
apply)

(1) Calculate the gain on the sale at undervalue by Dillon’s mother.
Calculate Dillon’s base cost.
£
Sale by Mother to Dillon
Deemed proceeds = MV (Ignore actual proceeds as connected persons) 188,000
Cost (128,000)
Gain 60,000
Of this, the actual profit of (£140,000 – £128,000) is the Mother’s gain in June 2018. (12,000)
Gain deferred via joint claim for gift relief 48,000
Dillon’s base cost is therefore £188,000 – £48,000 = £140,000

After this, it is plain sailing all the way to 5 marks.
(2) Calculate Dillon’s gain.
£
Proceeds 250,000
Base cost (above) (140,000)
Gain 110,000

Barry’s capital gains tax liability is as follows:
£
Gain 789,000
AEA (already used) (0)
789,000
CGT at 10% = £78,900

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Rosie’s capital gains tax liability is as follows:
Gains qualifying Non-residential
for ER property gains
NOT qualifying
for ER
£
Goodwill 360,000
Freehold office building 270,000
630,000
Other gains £
Freehold warehouse 171,000
Capital loss b/f (28,000)
131,000 £
CGT £630,000 × 10% 63,000
131,000 × 20% 26,200
89,200
Although Rosie’s taxable income is only £4,000 her remaining basic rate band of £33,500 (£37,500 -
£4,000) is fully utilised by her gains qualifying for entrepreneurs’ relief. Therefore, the whole of her
gains not qualifying for entrepreneurs’ relief are taxable at 20% rather than 10%.

Caleb’s disposal does not qualify for entrepreneurs’ relief as the 5% shareholding condition is not met
and he was not an employee or director of Box Ltd. However, the conditions for investors’ relief are
met including the three-year holding period.
Caleb’s capital gains tax liability is:
£
Disposal proceeds 622,000
Less: Cost (10,000 shares at £1 par value) (10,000)
612,000
Less: Annual Exempt Amount (12,000)
Taxable gain 600,000
Capital gains tax at 10% is £60,000

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Chapter 15
Dave’s capital gains are as follows:
£ £
1 Purchase 20 March 2020 (1,000 shares)
Proceeds (£42,000 × 1,000/6,000) 7,000
Cost (3,000)
4,000
2 Share pool (7,000 shares)
Proceeds (£42,000 × 5,000/6,000) 35,000
Cost (W1) (10,571)
24,429
W1 Share pool working

Number Cost
£ £
Purchase 1 July 2010 3,000 4,800
Purchase 15 December 2013 4,000 10,000
7,000 14,800
Disposal 20 March 2020 (5,000) (10,571)
Balance carried forward 2,000 4,229

Lisa is deemed to have sold 4/22 of her Coke! shares for 1,000 × £4.
She is deemed to have replaced 18/22 of her Coke! shares with noveg4me shares.
Takeover
£
Proceeds, 1,000 × £4 4,000
Cost 4/22 × £16,000 (2,909)
Gain 1,091
Sale
£
Proceeds 30,000
Cost (£16,000 - £2,909) (13,091)
Gain 16,909
Chapter 16
Mike’s diminution in value is as follows:
£
Before (70%) 300,000
After (45%) (140,000)
Diminution in value 160,000

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£
July gift to Mabel 2,900
Covered by AE current year (2,900)
PET Nil
£
October gift to Harry 3,600
Covered by AE current year (100)
Covered by AE brought forward (3,000)
PET 500
£
January gift to Phoebe = PET (AEs fully utilised) 450

1 CLT – chargeable in lifetime and on death within 7 years £
June 2017 gift 152,000
Less AE 2017/18 (3,000)
Less AE 2016/17 (3,000)
Chargeable transfer 146,000
Covered by nil rate band as there are no CLTs in the seven years before June 2017.
Therefore no IHT to pay.
2 October 2017 gift to wife, exempt as this is a transfer to a spouse
3 PET – no lifetime tax, chargeable on death within 7 years £
January 2019 gift to Sarah 15,000
Marriage exemption (5,000)
AE 2018/19 (prior year annual exemption already used) (3,000)
4 CLT – chargeable in lifetime and on death within 7 years £

February 2020 gift 240,000
AE 2019/20 (prior year annual exemption already used) (3,000)
237,000
Less: NRB remaining (£325,000 – £146,000 used against CLTs ) (179,000)
Taxable transfer 58,000
IHT at 20/80 × £58,000 (Martin pays) £14,500

Therefore the gross chargeable transfer is £237,000 + £14,500 = £251,500

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Gift June 2012
There is no death tax on this gift as it was made more than 7 years before the date of death.
However, the gift was made within the 7 years before the gift in June 2016, so it will reduce the nil rate
band available to use against the June 2016 gift.
£
Gift 206,000
AE (2012/13 and 2011/12 b/f) (6,000)
Gross chargeable transfer 200,000
Nil band used (200,000)
Gift June 2016

£
Gift to daughter 375,000
AE (2016/17 and 2015/16 b/f) (6,000)
Nil band remaining (125,000)
Taxable transfer 244,000
IHT at £244,000 × 40% × 60% (4 years tapering)
Daughter pays £58,560

Death estate
£
Property one 400,000
Less: mortgage (120,000)
Property two 500,000
Less: mortgage (No deduction for endowment mortgage) –
Life assurance proceeds 240,000
Less: funeral expenses (4,000)
1,016,000
IHT due at 0% (nil rate band, £325,000 × 0%) 0

IHT due at 40% (1,016,000 – 325,000) × 40% 276,400
276,400

IHT liability: £
£625,000 @ 0% (£325,000 + £300,000) 0
£500,000 @ 40% 200,000
200,000

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Step 1: Categorise each lifetime transfer
Gift December 2012 - PET made in 2012/13

Gift February 2013 - CLT made in 2012/13
Gift May 2015- PET made in 2015/16
Step 2: Deal with each lifetime transfer and calculate the lifetime tax paid on any CLT
Gift December 2012
This is a PET made more than seven years before death, so it will never become chargeable.
However, the PET does use the AE for 2012/13 and 2011/12 b/f.
Gift February 2013
This is a CLT. There are no annual exemptions to set against this gift as they were used by the PET in
December 2012. The lifetime tax payable is:
£
Gift 425,000
Annual exemptions (0)
425,000
£
IHT on nil rate band of £325,000 (at date of transfer) 0
20 25,000
IHT on £100,000 ×
80
Lifetime tax due 25,000
Gross chargeable transfer (£425,000 + £25,000) = £450,000

The donor, Duke, was responsible for paying the lifetime tax by 31 August 2013.
Gift May 2015
£
Gift to daughter 463,000
AE (2015/16 and 2014/15 b/f) (6,000)
There is no lifetime tax on this gift as it is a PET.

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Step 3: Identify PETs or CLTs made in the 7 years before death and calculate death tax on them
Gift February 2013

This is a CLT made within seven years of death, so death tax becomes due:
Gross chargeable transfer £450,000
IHT on nil rate band of £325,000 0

IHT on £125,000 (£450,000 - £325,000) × 40% 50,000
50,000
% of tax due after taper relief (20%) 10,000

Less: Lifetime tax due (25,000)
IHT payable £NIL
The nil rate band is reduced by any CLTs or failed PETs made in the seven years before this gift – i.e.
since 1 February 2006. As the only transfer is a PET which is fully exempt, the entire nil rate band is
available.
Lifetime IHT reduces death tax, but it does not result in a repayment where it exceeds the death tax.
Gift May 2015

Gross chargeable transfer £457,000
The nil rate band on death has been fully utilised by the CLT
The IHT due is £457,000 × 40% £182,800
Tax due after taper relief (60%) £109,680
The nil rate band available is reduced by any chargeable lifetime transfers or failed PETs made in the
seven years before this gift – i.e. since 1 May 2008. The PET in 2012 is fully exempt but the CLT in 2013
of £450,000 uses up the entire nil rate band.
IHT of £109,680 is payable by the donee, Duke’s daughter by 31 July 2020.
Step 4: Calculate the death tax on the death estate
The nil rate band available is reduced by any transfers made in the seven years before death i.e. both
the gift in February 2013 and May 2015 – the total value of the gifts is £450,000 + £457,000 =
£907,000 so no nil rate band remains for the death estate.
As the nil rate band has been fully utilised in the seven years before death, the IHT due on the death
estate is £200,000 (£500,000 × 40%).
The IHT must be paid by the personal representatives by 31 July 2020.

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Chapter 17
FP Ltd – Tax adjusted trading profits
£ £
Profits per accounts 110,500
Add: Depreciation 10,000
Charitable donation 3,000
13,000
Less: Income included in accounts but not taxed as trading profit
Non-trading loan interest receivable 8,000
Dividends from UK companies 1,500
(23,500)
Tax adjusted trading profits 100,000
FP Ltd – Taxable total profits

£
Tax adjusted trading profit 100,000
Non trade loan relationship 8,000
Qualifying charitable donation (3,000)
Taxable total profit 119,000
Note: UK dividends are exempt from corporation tax and so are not included in taxable total profit.

TTP for each of the accounting periods is as follows:
12m to 31 March 3m to 30 June
£ £
Trading profit (time apportion: 12/15, 3/15) 120,000 30,000
Non trade interest income 20,000 15,000
Property business profits 36,000 9,000
Capital gain (period of sale) – 50,000
Less: QCD (period of payment) (10,000) –
TTP 166,000 104,000
Interest income and property business profits are allocated on an accruals basis not a simple time
apportionment of the accounts for the period of account.

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Chapter 18
Step 1:
Allocate bonus shares to original holding. (If more than one acquisition, allocate bonus shares
to each one. Bonus shares are deemed acquired at the same time as the original purchases.)
Date Original Bonus (1:4) Total
June 1997 100,000 25,000 125,000
Step 2:
Show the pool and index the pool before recording acquisitions and disposals. Remember,
bonus issues are not an acquisition, so do not index up the pool for the bonus issue.
Date Shares Cost Total
£ £
June 1997 100,000 85,000 85,000
Add bonus 25,000 –
125,000
Index (the cost is indexed to December 2017 from when
incurred, 1997)
£ 85,000 × 0.780 66,300
151,300
Step 3: Record disposal (62,500) (75,650)
Balance retained 62,500 75,650
Step 4: Calculate the gain on sale

£
Proceeds 287,500
Cost (from Step 3) (75,650)
Gain 211,850
Note: There is no indexation to the date of the bonus issue.

Step 1: Allocate rights shares to the pool.
Shares
B/f 100,000
Rights issue 25,000
125,000

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Step 2: Record the acquisition and disposal in the pool (index up to month of acquisition and
disposal)
Indexed
Shares Cost pool
£ £
June 1997 addition 100,000 85,000 85,000
December 2013 rights issue
(1) Indexed rise to rights issue
£85,000 × 0.613 52,105
137,105
(2) Record the purchase ¼ × 100k = 25,000 × £3 = 75,000 75,000
125,000 160,000 212,105
June 2018 sale
(1) Indexed rise to sale
£212,105 × 0.103 21,847
233,952
(2) Record the cost of shares sold (62,500) (80,000) (116,976)
Shares carried forward 62,500 80,000 116,976
Finally, calculate the gain on sale £
Proceeds 287,500
Indexed cost (from above) (116,976)
Gain 170,524
Chapter 19
Year to Period to Year to Year to Year to
31 Dec 30 Sept 30 Sept 30 Sept 30 Sept
2016 2017 2018 2019 2020
£ £ £ £ £
Trading profit 84,000 13,800 15,200 78,700 Nil
Property business profits 5,000 4,600 3,000 – –
Net chargeable gains (8,000 - 7,000) – – 1,000
89,000 18,400 19,200 78,700 Nil
Loss relief (22,250) (18,400) (19,200) (i)(78,700)
66,750
Qualifying charitable donations (800) – – – –
TTP 65,950 Nil Nil Nil Nil
Loss memorandum £
Year ended 30.9.20 146,800
Used YE 30.9.19 (78,700)
Used YE 30.9.18 (19,200)
Used PE 30.9.17 (18,400)
Used YE 31.12.16
(max = 3/12 × 89,000) (22,250)
Unrelieved 8,250

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Chapter 20
Milky Ltd could claim to set its loss of £60,000 in year 2 against its own profits. However, there would
be no point in this as this claim would merely waste qualifying charitable donations (QCD) of £5,000.
Milky Ltd could carry its loss back of £60,000 to set against total profits of £50,000 in year 1. This claim
can only be made if a current year claim is made first. The claim in the current year would waste £5,000
of QCDs. The carry back claim would waste an additional £5,000 of QCDs.
The best loss relief is for Milky Ltd to surrender all of its £60,000 loss in year 2 to Way Ltd.
For year 3, the best relief is to surrender £19,000 of the loss to Way Ltd and to claim relief against its
own current profits for the remaining £1,000.
Year 1 Year 2 Year 3
Milky Ltd
£ £ £
Adjusted trading profit 49,000 NIL NIL
Chargeable gain 1,000 5,000 6,000
Total profits 50,000 5,000 6,000
Less: Current year loss relief (1,000)
50,000 5,000 5,000
Qualifying charitable donation (5,000) (5,000) (5,000)
Taxable total profits 45,000 NIL NIL
Way Ltd Year 2 Year 3

£ £
Adjusted trading profit 75,000 24,000
Qualifying charitable donation (5,000) (5,000)
70,000 19,000
Less: Group loss relief (60,000) (19,000)
Taxable total profits 10,000 NIL
Note that Milky Ltd sets its current year loss relief off against total profits before deducting QCDs.
However, for group relief purposes the loss relief is offset against TTP, i.e. after deducting QCDs.
Chapter 23
£
Tax adjusted trading profits 1,000,000
Property business profits 200,000
Taxable total profits 1,450,000
Dividend 90,000
Augmented profits 1,540,000
Corporation tax liability (£1,450,000 × 19%) £275,500

Corporation tax will be due in instalments as augmented profits exceed £1,500,000.
Note: Corporation tax is calculated on taxable total profits NOT augmented profits. Take care with this
– it is a common exam mistake to use augmented profits rather than TTP in the calculation.

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Pen Ltd 1
Swan Ltd 100% trading subsidiary 1
Chick Ltd 50% (100% × 50%) subsidiary NOT included 0
Cob Ltd 90% trading subsidiary 1
Gosling Ltd 81% (90% × 90%) subsidiary 1
Cygnet Inc Include even though non-resident 1
Duckling Ltd NOT included as dormant 0
5
£1,500,000
The augmented profit threshold for the purpose of deciding if Pen Ltd is large is = £300,000.
5
So, if Pen Ltd’s augmented profits exceed £300,000 it will have to pay its corporation tax liability in
quarterly instalments.

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ii Introduction ACCA TX-UK

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ACCA TX-UK Introduction iii

1 Your Exam vii

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iv Introduction ACCA TX-UK

3 Approach to exam questions 68

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ACCA TX-UK Introduction v

16: Inheritance tax 111

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vi Introduction ACCA TX-UK

23: Company tax administration 169

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ACCA TX-UK Introduction vii

The exam is divided into three sections:

2 The Taxation Syllabus

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The UK tax system

1 The tax regime

1.1 Types of tax

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2 1: The UK tax system ACCA TX-UK

1.2 The difference between direct and indirect taxation

1.3 Tax avoidance and tax evasion

2 The ethical professional

As an accountant, you are a taxpayer’s agent.

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ACCA TX-UK 1: The UK tax system 3

It is the responsibility of an accountant who learns of a material error or omission in a

If a client fails to correct a material error/omission or failure, the accountant must:

2.1 Dishonest conduct of tax agents

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4 1: The UK tax system ACCA TX-UK

3 The scope of income tax

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ACCA TX-UK 1: The UK tax system 5

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6 1: The UK tax system ACCA TX-UK

LECTURE EXAMPLE 1.1

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Income tax computation

1.1 The personal tax computation

1.1.1 Exempt income

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8 2: Income tax computation ACCA TX-UK

Individual Savings Accounts (ISAs)

2 Pro forma income tax computation

2.1 Income Tax Pro forma

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