TX - SUCCESS by Ajith Antony

Taxation (TX-UK)
FA2019
June 2020-March 2021
Dear ACCA aspirants’ kindly note that the contents of this study support
note (TX-SUCCESS) is prepared on the basis of technical articles by ACCA
examining team, past exam papers and the knowledge that I acquired
from various books and my experience and it is not meant for any kind of
commercial purpose.
This is not a substitute for the complete textbook, so use this note for the
final revision and use at the time of practicing revision kits of ACCA
approved publishers.
Ajith Antony
Tx - SUCCESS [Prepared By AJITH ANTONY]
CHAPTER INDEX
CHAPTER NO: CHAPTER PAGE
i SYLLABUS & EXAM PATTERN 03
ii INTRODUCTION 04
01 INCOME TAX COMPUTATION 08
02 EMPLOYMENT INCOME 13
03 PENSION 20
04 PROPERTY INCOME 22
05 CAPITAL ALLOWANCES 25
06 TRADING INCOME 28
07 ASSESSABLE TRADING INCOME 31
08 TRADING LOSSSES - INDIVIDUALS 33
09 PARTNERSHIPS 35
10 NATIONAL INSURANCE CONTRIBUTION 37
11 COMPUTING CHARGEABLE GAINS 40
12 SHARES AND SECURITIES 44
13 CHATTELS AND PPR EXEMPTION 46
14 BUSINESS RELIEFS 48
15 SELF ASSESSMENT - INDIVIDUALS 52
16 CORPORATION TAX LIABILITY 59
17 CHARGEABLE GAINS - COMPANIES 65
18 LOSSES 68
19 GROUPS 70
20 SELF ASSESSMENT - COMPANIES 73
21 INHERITANCE TAX 76
22 VALUE ADDED TAX 99
2
SYLLABUS
1. Income tax
2. Capital gains tax
3. Tax administration and self-assessment
4. Corporation tax
5. Inheritance tax
6. Value added tax
EXAM STRUCTURE
PART A – 30 Marks
15 Questions - 2 Marks each
PART B – 30 Marks
15 Questions – 2 Marks each
3 Scenarios – 5 questions
PART C – 40 Marks
3
INTRODUCTION
TAX YEAR
Tax year in UK runs from 6th April to 5th April
The government uses tax policies to encourage and discourage certain types of
activity.
It encourages:
 Saving on the part of the individual, by offering tax incentives such as tax-free individual
savings accounts (ISAs) and tax relief on pension contributions
 Donations to charities through the Gift Aid scheme
 Entrepreneurs who build their own business, through reliefs from capital gains tax
 Investment in plant and machinery through capital allowances
 Marriage and civil partnerships through the transferable personal allowance (marriage
allowance). Civil partners are members of a couple, who are of the same sex, which has
registered as a civil partnership under the Civil Partnerships Act 2004. Same sex couples
can also marry in England, Wales and Scotland (but not in Northern Ireland).
It discourages:
 Smoking and alcoholic drinks, through the duties placed on each type of product
 Motoring, through fuel duties
Social factors
Different taxes have different social effects:

 Direct taxes based on income and profits (income tax), gains (capital gains tax) or
wealth(inheritance tax) tax only those who have these resources.
 Indirect taxes paid by the consumer (value added tax – VAT) discourage spending and
encourage saving. Lower or nil rates of tax can be levied on essentials, such as food.
 Progressive taxes such as income tax, where the proportion of the income or gains paid
over in tax increases as income/gains rise, target those who can afford to pay. Personal
allowances and the rates of taxation can be adjusted so as to ensure that those on very
low incomes pay little or no tax.
 Taxes on capital or wealth ensure that people cannot avoid taxation by having an
income of zero and just living off the sale of capital assets.
4
Environmental factors
The taxation system accommodates environmental concerns to a certain extent, especially

concerns about renewable and non-renewable sources of energy and global warming.
Examples of tax changes which have been introduced for environmental reasons are:
 The climate change levy, raised on businesses in proportion to their consumption of
energy. It’s claimed purpose is to encourage reduced consumption.
 The landfill tax levied on the operators of landfill sites on each ton of rubbish/waste
processed at the site. Its claimed purpose is to encourage recycling by taxing waste
which has to be stored.
 The changes to rules on the lease or purchase of cars, and taxation of cars and private
fuel provided for employees to be dependent on carbon dioxide (CO2) emissions. Its
claimed purpose is to encourage the manufacture and purchase of low CO2 emission
cars to reduce emissions into the atmosphere caused by driving.
Finance Acts
At least one Finance Act is passed by the UK Parliament each year, incorporating proposals set
out in the Budget, which is presented to Parliament by the Chancellor of the Exchequer in
November. The Act makes changes which apply mainly from the following April. However, in
some years there is more than one Finance Act, for example in a year where there is a General
Election.
This Study Text includes the provisions of the Finance Act 2019. This is the Finance Act
examinable in the exam sessions in June 2020, September 2020, December 2020 and March
2021.
Revenue and capital taxes
Revenue taxes are those charged on income. In this Study Text we cover:
 Income tax
 Corporation tax (on income profits)
 National insurance
Capital taxes are those charged on capital gains or on wealth. In this Study Text we cover:
 Capital gains tax
 Corporation tax (on capital gains)
 Inheritance tax
5
Tax evasion
Tax evasion consists of seeking to pay too little tax by deliberately misleading HMRC
Tax avoidance
It’s the legal method of reducing tax burden of a tax payer
6
FA 2019
TAX RATES AND ALLOWANCES

Income Tax
Normal rates Dividend rates
Basic rate £1 – £37,500 20% 7.5%
Higher rate £37,501 – £150,000 40% 32.5%
Additional rate £150,001 and above 45% 38.1%
Savings income NIL RATE BAND:
Basic Rate - £1,000
Higher Rate - £500
Additional Rate – Not available
Dividend income NIL RATE BAND - £2,000
Personal Allowance
Personal Allowance 12,500
Transferable amount 1,250
Income limit 100,000
7
Chapter : 1
INCOME TAX COMPUTATION
Introduction
There are two main parts to the Income Tax computation, firstly the computation of the
taxpayer’s Taxable Income and secondly the calculation of the Income Tax Liability and Income
Tax Payable. The Taxable Income will be divided into three possible analysis columns, Non-
Savings Income, Savings Income (which is interest income) and Dividend income.
In computing Taxable Income UK taxpayers may be entitled to a deduction of a Personal

Allowance (PA), a level of tax free income. Normal PA available is £12,500 for the 2019/20 tax
year. One of the 15 mark questions in section C of the exam will be on income tax which in
many cases will require the candidate to prepare an income tax computation.
Computation of Taxable Income

An Income Tax Computation is prepared for each taxpayer and records the income to be taxed
for that individual for a tax year. The tax year runs from April 6 to following April 5. The tax year
2019/20 runs from 6 April, 2019 to 5 April, 2020.
8
Proforma –TAXABLE INCOME
Non-savings Savings Dividends Total

Income Income
£ £ £ £
Trading income XX XX
Employment income XX XX
Property income XX XX
Building society interests XX XX
Bank interest XX XX
Other interests XX XX
Dividend income XX XX
Total income XXX XXX XXX XXX
Less:
Qualifying interests (XX) (XX) (XX) (XX)
Trading losses (XX) (XX) (XX) (XX)
Net income XXX XXX XXX XXX
Personal allowance (XX) (XX) (XX) (XX)
Taxable income XXX XXX XXX XXX
9
Exempt Income
The following are the main examples of sources of income that are exempt from income tax
 Interest or bonuses on National Savings & Investment Certificates

 Interest and dividends within an Individual Savings Account [ISA]
 Gaming, lottery and premium bond winnings
Qualifying interests are:
 On a loan to purchase an interest in a partnership or a contribution to the partnership of

capital or a loan
 On a loan to purchase plant or machinery used in the business, by a partner
 On a loan to purchase plant and machinery by an employee if used in the performance
of duties
 On a loan to purchase an interest in a employee controlled company
Tax liability and Tax Payable

Having calculated the taxable income, the next part of the computation is to compute the Tax
Liability and the Tax Payable of the taxpayer
(a) Tax liability = income tax on taxable income
(b) In calculating the Tax Liability it is necessary to take each part of the Taxable Income in
order, non-savings income then savings income and finally the dividend income as these
sources of taxable income have different tax rates that apply to them and rates that also
change depending on how much taxable income the taxpayer has
(c) Tax payable = Total income tax liability – PAYE (Pay As You Earn)
Personal allowance
The Personal Allowance (PA) is a level of tax free income available to UK taxpayers and is
deducted from Net Income to derive Taxable Income on the Income Tax Computation and as
can be seen on the pro forma computation. Personal allowance is deducted from the analysis
10
columns in the order of firstly non-savings income, then savings income and finally dividend
income.
 The normal PA for 2019/20 is £12,500. However if an individuals’ Adjusted Net Income
(ANI) exceeds £100,000 then the PA is reduced by: [ ANI – £100,000 ] × 50%
 ANI = Net income - gross personal pension contributions(PPC) - gross gift aid
payments(GAD)
 Once adjusted net income is therefore ≥ £125,000 the PA is reduced to nil.
Transferable amount of Personal allowance (Marriage allowencce)
An election may be made to transfer a fixed amount of the PA to a spouse or civil partner - the
amount is set at £1,250 for 2019/20. The election is only available when both taxpayers are
either just basic rate taxpayers or non-taxpayers. The election is only likely to be made when
one spouse is a non-taxpayer and has an amount of unused PA that would otherwise be wasted
and the other spouse is only a basic rate taxpayer. The election must be made within 4 years of
the end of the tax year.
The relief is not given as an increase in the PA of the transferee but as a tax credit to be
deducted in deriving the tax liability of the transferee taxpayer and is taken at the basic rate of
tax 20%:
for 2019/20, computed as 1,250 x 20% = 250.
This amount can only reduce the tax liability, it cannot create a repayment. The amount of the
transferable PA will be given in the tax rates and allowances provided in the exam.
Payments to charity under the Gift Aid Donation and Personal Pension
Contributions.
The gift aid system is a tax efficient way by which to give money to charity and is available to
individual taxpayers
Basic rate taxpayers
Payments to charity under gift aid are treated as being paid net of the basic rate of tax (20%).
For a basic rate taxpayer tax relief at the basic rate is automatically obtained as payments are
made to the charity net of basic rate relief being given at source ie to give a charity £100 the
taxpayer need only make a gift aid payment of £80 . The charity will then be able to claim back
11
from HMRC the basic rate tax of £20 thereon collected by HMRC from the taxpayer’s income.
Therefore the donation is NOT shown as a deduction in the calculation of Taxable Income. A
question may tell you what is the amount paid, by the taxpayer, for example £80 and you must
gross up this amount (80 x 100/80) to compute the gross figure, or instead may state amount
paid £100 (gross) and give you the already grossed up figure for you to use - read the
information in the question carefully - as ever!!
Higher rate tax payer
For higher rate taxpayers, 40% tax relief is given as follows:
 20% at source (as noted above), and

 20% through the income tax computation, obtained by extending the basic rate band by
the gross donation
Additional rate tax payer
For additional rate taxpayers, 45% tax relief is given as follows:
 20% at source (as noted above) and

 25% through the income tax computation by extending both the basic rate band and
higher rate band limits by the gross donation (so that more income is taxed at 20%
instead of 40% and 40% instead of 45%)
Child Benefit Income Tax Charge

Child benefit is a tax free benefit payable to parents irrespective of the level of taxpayer they
may be. If, however a person’s Adjusted Net Income (ANI) (or whose partner) exceeds £50,000
and they receive child benefit, a child benefit income tax charge will arise to gradually remove
the benefit from such higher income earners such that when the ANI reaches £60,000 the
benefit will be entirely removed. If both partners have income over £50,000 the partner with
the higher income is liable for the charge. Where ANI falls between £50,000 and £60,000 the
income tax charge would amount to 1% of the child benefit received for every £100 of income
in excess of £50,000.
If a person’s ANI exceeds £60,000 the benefit fully taxable.
Where ANI 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.
If the ANI is below £50,000 benefit is completely exempted from income tax.
The income tax charge is added with the income tax liability of the taxpayer.
12
Chapter : 2
EMPLOYMENT INCOME
Employee or self-employment?
The main test of an employment as opposed to self-employment is the existence of a contract
of service (employee) compared with a contract for services (self employed).
If there is no contract of service, the following suggest employment.
 The employer controls the manner and method of the work.

 The employee is committed to work a specified number of hours at certain fixed times,
and is paid by the hour, week or month.
 The employee does not provide his own equipment.
 The engagement is for a long period of time.
 The employee cannot profit from sound management.
 The work performed by the employee is an integral part of the business of the employer
and not merely an accessory to it.
 The employee is obliged to work personally and exclusively for the employer, and
cannot hire his own helpers.
 The employee is entitled to benefits normally provided to employees such as sick pay
and holiday pay.
Assessable Incomes
Individuals are assessed on the amount of emoluments received in the tax year. The date
received is taken as the earlier of the date when the employee became entitled to the
payment or the date when it was actually received by the employee.
Emoluments includes:
 Wages
 Salary
 Bonus
 Commission
 Benefits
13
Statutory approved mileage allowances:

 Employees who use their own motor car for business mileage must use the approved
mileage allowances in order to calculate any taxable benefit arising from any mileage
allowances received from their employer.
 For 2019/20 the approved mileage allowance is 45p per mile for the first 10,000
business miles, and then 25p per mile thereafter.
 If an employee receives mileage allowance more or less than the eligible limit, it will
treat as taxable benefit or allowable deduction in calculating the employment income.
The following expenditures can deduct in calculating employment income:

 Payments to charity made under a payroll deduction scheme
 The general rule is that expenses must be incurred wholly, exclusively and necessarily in
the performance of the duties of employment
 Contributions to approved occupational pension schemes
 Fees and subscriptions to relevant professional bodies
 Travel expenses incurred necessarily in the performance of the duties of employment
Taxable benefits
Living accommodation
There is no taxable benefit if the accommodation is job-related
 where it is necessary for the proper performance of the employee’s duties (e.g. a
caretaker)
 for better performance of the employee’s duties and (for that type of employment) it is
customary for employers to provide living accommodation (e.g. hotel-worker)
 Where there is a special threat to the employee’s security and he resides in the
accommodation as part of special security arrangements.
14
LIVING ACCOMMODATION
NON JOB JOB

RELATED RELATED
Exempted
Rented by Owned by
from income
employer employer
tax
Taxable benefit Taxable benefit
Higher of Annual value XX

Annual value Rent paid by
Rent paid by XX employee (XX)
Employer
Less Taxable benefit XX
Rent paid by
Employee (XX) Additional benefit
If the property’s cost ˃£75,000
Taxable benefit XX
(Cost - £75,000)×2.5%
The cost of accommodation is the purchase price of the property
Plus expenditure on improvements incurred before the start of
the Tax year.
If the employer bought the accommodation more than six years

before first providing it to the employee, the property’s market
value when first occupied by the employee is used in the
calculation instead of purchase price
15
Expenses connected with living accommodation

 Expenses such as lighting and heating are taxable on the employee if they are paid by
the employer.
 When the accommodation is job related, the taxable limit is 10% of other employment
income. In addition the payment of council tax by the employer is an exempt benefit if
the accommodation is job related.
Car Benefit
If there is no private use of the car there is no taxable benefit
The benefit is a percentage of the car’s list price
Percentages for the tax year 2019-2020

CO2 emissions Percentage (Petrol)
50g/km or less 16%
51 to 75 g/km 19%
76 to 94 g/km 22%
95 g/km 23%
> 95g/km Add an additional 1% for every 5g/km above 95 g/km
Maximum percentage 37%
The percentage rates are increased by 4% for diesel cars (if it is not satisfied RDE2 tests)
The car benefit is proportionately reduced
Capital contribution
 Reduced from list price of the car
 Maximum of £5,000
Fuel Benefit
£24,100×% (same as car benefit)
The fuel benefit is proportionately reduced
Vans and heavier commercial vehicles

 Annual scale charge £3,430
 Annual fuel charge £655
16
Loan Benefit
 A beneficial loan is one made to an employee below the official rate of interest (2.5%)
 There is no benefit if the loans do not exceed £10,000 in total at any time in the tax year
(deminimis test)
LOAN BENEFIT
𝒐𝒑𝒆𝒏𝒊𝒏𝒈 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈+𝒄𝒍𝒐𝒔𝒊𝒏𝒈 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈

∗ 𝟐. 𝟓% = XX
𝟐
Less: Interest already paid = (XX)
Taxable loan benefit = XX
Outstanding amount × o/s months/12 = XX

Less: Interest already paid = (XX)
Taxable loan benefit = XX
17
Private use of other assets
PRIVATE USE OF OTHER

ASSETS
Acquisition benefit
Higher of:
Current mkt. value XX
Price paid by employee (XX)
XX
Usage benefit
Cost × 20%
mkt. value when first provided XX
Amount already taxed (XX)
Price paid by employee (XX)
XX
Exempt benefits
 Car parking spaces at or near place of work.
 Workplace nurseries
 Contributions by an employer to an approved pension scheme.
 Provision of a mobile telephone for private use (one per employee)
18
 Sport and recreational facilities available generally for the staff.

 Qualifying removal expenses up to £8,000.
 Long service awards up to £50 per each year of service (with a minimum requirement of
20 years service)
 Incidental overnight expenses provide by the employer for overnight stays from home.
Up to £5 per night (UK) and up to £10 per night (overseas)
 Use of employer bicycles if used by employees to and from work.
 Provision of eye care tests and/or corrective glasses for employees using VDU’s
 Contributions towards additional household costs (such as light and heat) incurred by an
employee who works at home up to £4 per week or if higher evidence must be provided
by the employee to justify the expense.
 Christmas parties etc for staff (up to £150 per person per year)
 Annual exemption of £500 per employee where employer pays for medical treatment to
assist the employee in returning to work after a period of absence due to ill health or
injury
19
Chapter: 3
PENSION
Types of pension schemes
Employees may join an occupational pension scheme set up by their employers and/or a
personal pension scheme arranged by the individual directly with a pension provider. Self-
employed individuals may only join a personal pension scheme. To encourage individuals to
join a pension scheme generous tax reliefs have been provided by HMRC.
Occupational schemes will always have contributions made into them by employers and may
also have contributions made by the employee. There are no limits on the amount of
contribution that may be made by the employer but they will count towards the employee’s
annual allowance and the value of the fund for the lifetime allowance.
Contributions made by the employer are exempt benefits for the employee and are not subject
to any NIC payments.
An individual can contribute to pension schemes without any tax charge is the higher of:
 The UK relevant earnings (Employment income, trading income, profit

from FHL )
 £3,600 (gross)
Annual Allowance
Annual allowance = £40,000 P.A
If the Annual allowance for a year is not fully utilsed and the taxpayer was a member of a
pension scheme in that year it is possible to carry forward any unused amount for 3 years.
Pension contributions made in a tax year will firstly use the Annual allowance of that tax year
followed by the unused Annual allowance of the previous 3 tax years, used on a FIFO basis.
If an individual’s adjusted income exceeds £150,000 annual allowance will reduced by £1 for
every £2 (Adj. Income - £150,000) × 50%
Every individual is entitled use the benefit of annual allowance minimum of £10,000
20
A person with £210,000 or more of adjusted income will only be entitled to an annual
allowance of £10,000
ADJUSTED INCOME = Net income + Occupational pension contribution
Annual Allowance Tax Charge

Tax relief is given on pension contributions up to the level of relevant earnings of the
taxpayer for a tax year, if the tax relieved contributions exceed the Annual allowance, there
will be an Annual allowance tax charge, chargeable to income tax.
21
Chapter : 4
PROPERTY INCOME
Introduction
We are now going to look at the computation and taxation of the profits of a
property letting business. First we see how to work out the profit. Usually individuals use the
cash basis. There is a special rule about finance cost. There are also special rules for Furnished
Holiday Lettings (FHL). There are special reliefs available to taxpayers who let out rooms in their
own rooms, Rent-a-room relief. Finally we see how will treat the premium received on granting
a short term lease.
Computation of property income
Rental income XXX
Allowable deductions (XXX)
Property income XXX
Allowable deduction
 Insurance
 Agents’ fees
 Repairs
 Management expenses (Cleaning expenses, Electricity)
 Finance expenses on property income (25%)
 Motor expenses (Statutory approved mileage allowance.
Capital expenditure is not allowable to deduct from property income
Replacement relief
 Tax relief is usually given for the furniture and furnishings

 There is NO relief for the initial cost of furniture and furnishings.
 There is ONLY relief when assets are replaced. This will include furnishings such as
carpets and curtains, electrical equipment such as TV’s, fridges , freezers and washing
machines and even cutlery and crockery
 The amount of relief is reduced by any proceeds from selling the old asset which has
been replaced and relief is not given for any cost which represents an improvement.
22
 Replacement relief does not apply to furnished holiday lettings (FHL)

 Relief is available for revenue expenditure incurred before letting commenced, under
the pre-trading expenditure rules
Property losses
If total expenses exceed total rental income, the property income assessment is nil and the
excess property loss is carried forward and offset against future property income profits only.
Finance Expenses on Property Income
 Only 25% of finance costs will be allowed as an expense deduction against rental
income
 Remaining 75% of finance cost × 20% (deduct from income tax liability)
Furnished holiday lettings

Following conditions must be satisfied
 Availability condition: Available to let for at least 210 days in the tax year.
 Letting relief: The accommodation must actually be let for at least 105 days in the year.
 Occupation condition: No one person occupies the property for more than 31
consecutive days. Long letting must not exceed 155 days in the year.
Rent a Room relief

If an individual lets a room or rooms, furnished, in their main residence as living
accommodation, then a special exemption can apply under rent-a-room relief. The limit on the
exemption is gross rent of £7,500 in a tax year.
If gross rents are not more than the limit, the rents are wholly exempt from income tax and
expenses are ignored.
If gross rent exceeds £7,500 p.a. the tax payer may choose to assess as follows:
1) Ordinary calculation
Gross rent X
Less: expenses (X)
Property income XX
23
2) Alternative calculation
Gross rent XXX
Less: rent a room relief (7,500)
Property Income XXX
The election must be made for 2019/20 by 31 January 2022 (The election must be made for
2019/20 by 31 January 2022)
Premium on lease
When a tenant takes on a new lease he may be required to pay a one-off premium in addition
to the annual rent. If the lease is for less than 50 years, part of the premium is assessed on the
landlord as property income.
Premium received XXX
2%(n-1)×P (XXX)
Property Income XXX
P = Premium received
n = Period of lease in years
Where a trader has paid a premium for a short lease he may deduct the following annual
amount against his Trading profit in each of the years of the lease in which the property is used
in the trade.
Property Income assessed by lessor
Period of lease in years
24
Chapter : 5
CAPITAL ALLOWANCES
Introduction
Capital Allowances replace the disallowed depreciation charge in the adjustment of
profits, giving tax relief against trading profits in respect of expenditure incurred on the cost of
qualifying plant and machinery.
Capital allowances are not available on the cost of a building but are available on integral
features of a building used in the trade including lifts and escalators, electrical systems, heating
and air cooling systems.
If a business is VAT registered and the input VAT is recoverable on the purchase of an asset
then the VAT exclusive net cost will be available for capital allowances.
Capital allowance computations will be prepared for the accounting period of the business
not the tax year and will be deducted from the adjusted trading profit of that accounting
period.
Annual Investment Allowance (AIA)

The AIA gives an allowance of 100% for the first £1,000,000 of qualifying expenditure
incurred in a 12 month accounting period. If the accounting period of the business is other than
12 months then the AIA will be time apportioned accordingly.
AIA is available on the purchase of all plant and machinery except motor cars. Any
expenditure in excess of the AIA limit or on the majority of motor cars will qualify instead for
writing down allowance (WDA)
First Year Allowance (FYA)

New cars with CO2 emissions up to 50g/km attract a 100% FYA. The FYA is never time
apportioned.
25
Writing Down Allowance (WDA)

The cost of most plant and machinery that has not qualified for AIA will be allocated to a pool
of expenditure that will then be eligible for a WDA of either 18% per annum if expenditure
qualifies for the main pool or 6% per annum if allocated to the special rate pool, available on a
reducing balance basis.
WDA will be time apportioned where the accounting period is other than 12 months.
CAPITAL ALLOWANCE COMPUTATION
Main pool Special rate pool

Pvt. Use Short life Capital
asset asset Allowance
Plant & Integral parts of Any assets Assets
equipment, building, used with a life
Items include in Machineries, Car(Co2˃110g/km), privately span of
each pools. capital long life assets by below 8
items. employer. years.
Car(Co251-
110g/km)
Opening TWDV XXX XXX XXX XXX ---
Annual
investment 2 1 4 3 XXX
allowances.(AIA)
£1,000,000
First year
allowance. (FYA) --- --- --- --- XXX
Written down
allowances. (18%) (6%) (18%/6%) (18%/6%) XXX
(WDA) S
Closing TWDV XXX XXX XXX XXX ---
Capital
allowance for --- --- --- --- XXXX
the year
26
Integral features of a building
 Lifts and escalators

 Electrical and general lighting systems
 Cold water systems
 Space or water heating systems
 Systems of ventilation, air cooling or purification
 Thermal insulation of a building
Long life assets
When new, with an expected economic working life of 25 years or more when total
expenditure, based on a 12 month accounting period, exceeds £100,000
Sale of plant and machinery

When plant and machinery is sold in the accounting period the sale proceeds or cost of the
property whichever is lower is deducted from the balance of the unrelieved expenditure of the
relevant pool before computing the WDA.
Small balance on main pool

Where the TWDV of either the main pool or special rate pool prior to calculating the WDA is
less than £1,000, the entire balance may be taken as a WDA in that period. The £1,000 is
prorated if the accounting period is other than 12 months.
Short-life assets
 This allows the acceleration of capital allowances on short-life plant and machinery
where they are sold or scrapped within 8 years following the end of the accounting
period in which it was acquired.
 An election can be made to omit short life assets from the main pool and include them
in their own individual column. This is known as a “depooling” election.
 Capital allowances on each short-life asset are calculated separately
 If no disposal takes place within 8 years of the end of the accounting period in which the
acquisition took place the unrelieved balance is transferred to the pool.
27
Chapter: 6
TRADING INCOME
Introduction
We are going to look at the computation of profits of unincorporated businesses.
We work out a business's profit as if it were a separate entity but, as an unincorporated
business has no legal existence apart from its trader, we cannot tax it separately. We have to
feed its profit into the owner's personal tax computation.
The badges of trade

The badges of trade are used to decide whether or not a trade exists. If one does exist,
the accounts profits need to be adjusted in order to establish the taxable profits.
 The subject matter

 The frequency of transactions
 Existence of similar trading transactions or interests
 The length of ownership
 The organisation of the activity as a trade
 Supplementary work and marketing
 A profit motive
 The way in which the asset sold was acquired
 Method of finance
 The taxpayer's intentions
Trading Profit Adjustment

Accounting profit XX
+Allowed income XX
+Disallowed expenses XX
‐Allowed expenses (XX)
‐Disallowed income (XX)
Tax adjusted trading profit XXX
28
TRADING PROFIT ADJUSTMENTS FOR THE PERIOD OF ACCOUNT
£ £
Net profit as per profit or loss A/c XXX
+ Disallowed expenditures:
 Expenses not related to trade XX
 Capital expenditures XX
 Depreciation/Amortisation/Impairment XX
 Fines or penalties – unless incurred by employees XX
 Increase in provision for receivables XX
 Elements of personal expense by owner XX
 Gift aid donation XX
 Loss on disposal of assets XX
 Entertainment of customers XX
 Donation to political parties and national charities XX
 15% of lease rent for motor cars emitting CO2 > 110g/km XX XXX
 Legal expenses in relation with grand of lease
(--) Allowed expenditure
 Any expenses related to trade XX
 Pre trading expenditures (Within 7 years from commencement XX
st
of trading – Treat as expense on the 1 day of trade)
 Revenue natured expenses XX
 Impaired debts XX
 Entertainment and gift for employees XX
 Donation to local charities for advertisements XX
 Gift to third parties provided <£50 per person per annum; not XX
food/drink or tobacco items and given for advertisement
purpose
 Gift of inventory as sample XX
 Capital allowances XX (XXX)
(--) Disallowed income
 Rental income XX
 Bank interest XX
 Dividend income XX
 Profit on disposal of assets XX
 Decrease in provision for receivables XX (XXX)
+ Allowed income
 Drawings of goods by owner XX
 Impaired debt recovered XX
 Revenue from sale of inventory XX XXX
TAX ADJUSTED TRADING PROFIT XXX
29
CASH BASIS OF ACCOUNTING FOR SMALL BUSINESSES
An election can be made for an unincorporated business to calculate trading profits

on the cash basis (instead of in accordance with generally accepted accounting principles) in
certain circumstances.
The cash basis can only be used by unincorporated businesses (sole traders and partnerships)
whose receipts for the tax year do not exceed £150,000. An election must be made for the cash
basis to apply. The election is generally effective for the tax year for which it is made and all
subsequent tax years.
A business must cease to use the cash basis if:

 Receipts in the previous tax year exceeded twice the limit (i.e. £300,000)
 Receipts for the current year exceed £150,000
Cash receipts include all amounts received relating to the business including cash and card
receipts. They include amounts received from the sale of plant and machinery, other than on
the sale of motor cars.
30
Chapter : 7
ASSESABLE TRADING INCOME

Having adjusted the trading profit of the accounting period and computed and deducted
the capital allowances for this period the tax adjusted trading profit must now be included in
the Income Tax Computation for the relevant Tax Year of assessment.
The problem is that not all traders will prepare their accounts to 5th April so a basis of
assessment is required that will allow HMRC to relate any accounting period of profit to the tax
year in which it will be charged to tax.
Opening year’s rules

First tax year:
Actual profits from commencement of trade to the following 5 April
Second tax year
Is 1st POA ends

in 2nd T.Y.?
YES NO
POA < 12 POA ≥ 12 B.P is the 2nd

months months tax year.
B.P is the First B.P is the last If the 1st POA ends before
12 months of trade 12 months of 1st POA 2nd T.Y, The B.P = 2nd F.Y
31
Third tax year
Basis period is the 12 months to the accounting period end date ending in year 3.
Overlap profit
When a business starts, some profits may be taxed twice because the basis period of the
second year includes some of the period of trading in the first year or because of the basis
period of third tax year overlap with second tax year.
Under the rules determining the basis period of first three tax years of trading, there may be
periods where the basis periods overlap. If profits arise in this period, they are taxed twice.
However a loss in the overlap period can only be relieved once. It must not be double
counted. (Losses never overlap)
Final year rule
The final year basis period runs from the end of the basis period of the previous year to the
cessation date of the trade.
32
Chapter : 8
TRADING LOSSES – INDIVIDUALS
If the basis period for a tax year has a trading loss, the trading profit assessment to include in
the income tax computation is nil. The trading profit figure in an income tax computation can
never be negative
The loss may be relieved according to some rules. A repayment of income tax may result in
some circumstances.
The main reliefs available for a trading loss:
 Carry forward loss relief

 Loss relief against general income and chargeable gains
 Opening years loss relief
 Terminal loss relief
Carry forward of trading losses

 A trading loss may be carried forward and set against the first trading profit of the
same trade in the following years.
 The loss can be carried forward indefinitely
 The trading loss must be set off in full against the next available trading profit
 Any loss remaining is carried forward until further profits arise.
Loss relief against general income & chargeable gains

A trading loss can be relieved against total income (after deducting qualifying interest
payments) of the current year and/or the previous tax year.
Relief cap
The cap is the higher of:
 £50,000 (Plus trading income)

 25% of person’s adjusted total income (Plus trading income)
Adjusted total income = Total income – Gross personal pension contribution
33
Loss relief against capital gains
 Trading loss can be relieved against capital gains, only after the total income of the
current tax year has been reduced to zero by the claim of trading loss under general
income, and an unrelieved loss still remains.
 Remaining unrelieved trading loss is then deducted from the net gains (Gain – C.Y loss)
of current year. This deduction is made before Annual Exempt Amount and before
deducting any capital losses brought forward.
 The maximum amount of relief can claim from capital gain = Net gains of the tax year
LESS any capital losses brought forward.
Opening year loss relief

 The relief is available for losses incurred in the first four years of trading.
 Relief is available set off against the total income of the previous three tax years on
FIFO basis.
 There is no restrictions for relieving amount like relief CAP
Terminal loss relief

 It is set against the trading profit for the tax year of cessation and then against the
trading profits of the previous three tax years on a LIFO basis.
34
Chapter : 9
PARTNERSHIPS AND LIMITED LIABILITY

PARTNERSHIPS
Introduction
In this chapter we will deal with how the income tax rules for traders are
adapted to deal with business partnerships. On the one hand, a partnership is a single trading
entity, making profits as a whole. On the other hand, each partner has a personal tax
computation, so the profit must be apportioned to the partners. The general approach is to
work out the profits of the partnership, then tax each partner as if they were a sole trader
running a business equal to their slice of the partnership.
Computation of trading profit of Partnership
 The partnership’s tax adjusted trading profits or loss for an accounting period is
computed in the same way as trading income computation of individual.
 Partner’s salary and interest on capital deduct from trading income. (These
amounts are disallowed expenses in computing trading income.)
Allocation of trading profit or loss to partners
 The trading profit or loss is divided between the partners according to their profit
sharing ratio.
 Partners may firstly be entitled to salaries and interest on capital. The balance of any
trading profit or loss will then be allocated in the profit sharing ratio.
A change in the profit sharing agreement
If the profit sharing agreement is changed during a period of account, the profit must be
time apportioned and allocated to each partners.
Commencement and cessation of partnership

 The rules for commencement and cessation when a partner joins the partnership or
leaves the partnership are the same as for a sole trader start and cease the trade.
 Trading income assessment rules are applicable in partnership.
 Each partner is effectively taxed as a sole trader on their share of the adjusted trading
profit from partnership.
35
 Continuing partners will be assessed using current year basis.

 When a new partner joins a partnership, they are treated as commencing a new trade
and the opening years rules apply on the new partner.
 When an old partner leaves a partnership they are treated as ceasing a trade and the
final years rules apply.
 Each partner has their own overlap profits.
Losses are allocated between partners in the same way as profits. Loss relief claims available
are the same as sole traders.
36
Chapter : 10
NATIONAL INSURANCE CONTRIBUTIONS (NIC)
Introduction
National insurance contributions may be tested in Sections A or B or as part of a 15
mark or 10 mark question in Section C. You must be absolutely clear who is liable for which
class of contributions.
We look at the national insurance contributions payable under Classes 1 and 1A in respect of
employment and under Classes 2 and 4 in respect of self-employment.
Class 1 Employee £1–£8,632 per year Nil
£8,633–£50,000 per year 12%
£50,001 and above per year 2%
Class 1 Employer £1–£8,632 per year Nil
£8,633 and above per year 13.8%
Employment allowance £3,000
Class 1A Flat rate 13.8%
Class 2 £3.00 per week
Small profits threshold £6,365
37
Class 4 £1–£8,632 per year Nil
£8,633–£50,000 per year 9%
£50,001 and above per year 2%
An employer can make a claim to reduce its total Class 1 employer's contributions by an
employment allowance equal to those contributions, subject to a maximum allowance of
£3,000 per tax year.
Employers must pay Class 1A NIC at 13.8% in respect of most taxable benefits. Taxable benefits
are calculated in accordance with income tax rules.
No Class 2 contributions are payable if the individual's taxable trading profits are less than the
small profits threshold which is £6,365 (2019/20).
Additionally, the self-employed pay Class 4 NICs, based on the level of the individual's taxable
trading profits.
38
PART 2
CHARGEABLE GAINS FOR

INDIVIDUALS
39
Chapter : 11
COMPUTING CHARGEABLE GAINS

Introduction
Here we look at the circumstances in which a chargeable gain or allowable loss may
arise. Then we look at the detailed calculation of the gain or loss on a disposal of an asset. Then
consider the annual exempt amount and look at the relief for capital losses. If only part of an
asset has been disposed of we need to know how to allocate the cost between the part
disposed of and the part retained and we consider the damage or destruction of an asset.
A gain is chargeable if there is a chargeable disposal of a chargeable asset by a chargeable

person.
Chargeable disposals
 Sales of assets or parts of assets
 Gifts of assets or parts of assets
 The loss or destruction of assets
Chargeable assets
All forms of property, wherever in the world they are situated, are chargeable assets unless
they are specifically designated as exempt.
The following are exempt assets.

 Motor vehicles suitable for private use
 National Savings and Investments certificates and premium bonds
 Gilt-edged securities (treasury stock)
 Qualifying corporate bonds (QCBs)
 Certain chattels
 Investments held in individual savings accounts (ISAs)
 Foreign currency bank accounts held by individuals
 Decorations for bravery where awarded, not purchased
 Damages for personal or professional injury
 Debts (except debts on a security)
Chargeable persons
 UK Resident Individuals
 UK Resident Companies
40
Basic computation
Disposal proceeds XX
Incidental costs of disposal (XX)
Net proceeds XX
Allowable costs (XX)
Gain XX
Incidental costs of disposal

 Valuation fees
 Estate agency fees
 Advertising costs
 Legal costs
Allowable costs include:

 The original cost of acquisition
 Incidental costs of acquisition
 Capital expenditure incurred in enhancing the asset
Annual exempt amount = £12,000
Capital losses
Losses are set off against gains of the same year and any excess carried forward. Brought
forward losses are set off after the annual exempt amount.
Allowable losses of the same year
 Allowable capital losses arising in a tax year are deducted from gains arising in the same
tax year before the annual exempt amount.
 An individual who has gains taxable at more than one rate of tax may deduct any
allowable losses in the way that produces the lowest possible tax charge.
The maximum loss available for use in this relief is computed as the net gains of the
tax year LESS any capital losses brought forward.
 Any loss which cannot be set off is carried forward to set against future gains. Losses
must be used as soon as possible.
41
Capital gains tax payable by individuals

Normal Residential
Property Property
Basic rate £1 – £37,500 10% 18%
Higher rate £37,501 & above 20% 28%
Gains are taxed at 20% on assets other than residential property if the individual's taxable
income exceeds the basic rate limit, if the gain araised from the disposal of a residential
property gains are taxed on 28%.
If the individual's taxable income falls below the basic rate limit, gains on assets other
than residential property are taxed at 10% up to the basic rate limit and 20% above the limit. If
it is a residential property gains are taxed on 18% and 28% respectively.
The annual exempt amount and allowable losses should be deducted first from residential
property gains and secondly from gains on other assets, it is beneficial way to reduce CGT
payable.
Payment date for CGT

Capital gains tax is payable by 31 January following the end of the tax year
Transfers between spouses/civil partners

Disposals between spouses or members of a civil partnership are made on a no gain no
loss basis and do not give rise to a chargeable gain or allowable loss.
Part disposals
On a part disposal, the cost must be apportioned between the part disposed of and the
part retained.
Computation:
Proceeds XX
Cost of part disposed of (XX)
Gain XX
Cost of part disposed of = 𝒐𝒔𝒕

A = Value of the part disposed of
B = Mkt.value of the remainder
42
The damage, loss or destruction of an asset

If an asset is destroyed any compensation or insurance monies received will normally be
brought into an ordinary CGT disposal computation as proceeds.
If all the proceeds are applied for the replacement of the asset within 12 months, any gain can
be deducted from the cost of the replacement asset.
Damage to an asset
If an asset is damaged then the receipt of any compensation or insurance monies received will
normally be treated as a part disposal.
If all the proceeds are applied in restoring the asset the taxpayer can elect to disregard
the part disposal. The proceeds will instead be deducted from the cost of the asset.
43
Chapter : 12
SHARES AND SECURITIES

Introduction
Shares and securities need special rules because an individual may hold several
shares or securities in the same company, bought at different times for different prices but
otherwise identical. We need to identify the shares which are disposed to compute the gain or
loss.
Valuing quoted shares

Quoted shares are valued as the lower of the two prices shown in the Stock Exchange
Daily Official List plus one-half of the difference between those two prices.
OR
The average value of highest quoted price and lowest quoted price of the day.
The matching rules for individuals

 Same day acquisitions
 Acquisitions within the following 30 days
 Any shares in the share pool
The share pool

In making computations which use the share pool, we must keep track of:
 The number of shares
 The cost of the shares
If any disposal are made that should be deduct from the pool
Bonus issues
When a company issues bonus shares all that happens is that the size of the original
holding is increased. Since bonus shares are issued at no cost there is no need to adjust the
original cost.
Rights issues
The difference between a bonus issue and a rights issue is that in a rights issue the
new shares are paid for by the shareholder and this results in an adjustment to the original
cost.
44
Reorganisations
A reorganisation takes place where new shares or a mixture of new shares and
debentures are issued in exchange for the original shareholdings. The new shares take the place
of the old shares.
Takeovers
A chargeable gain does not arise on a 'paper for paper' takeover. The cost of
the original holding is passed on to the new holding which takes the place of the original
holding.
The exchange must take place for bona fide commercial reasons and does not have
as its main purpose, or one of its main purposes, the avoidance of CGT or corporation tax.
45
Chapter : 13
CHATTELS AND PPR EXEMPTION

Introduction
Now turn our attention to specific assets, starting with chattels. Where there is a
disposal of low value assets, the chattels rules may apply to restrict the gain or allowable loss.
The gain may even be exempt in certain circumstances. We look at the detailed rules.
Chattels
 A chattel is tangible moveable property.
 A wasting asset is an asset with an estimated remaining useful life of 50 years or less.
 Gains on most wasting chattels are exempt and losses are not allowable.
Computation of gains from Non-wasting chattels
PROCEEDS COST Calculation

≥£6,000 ≥£6,000 Normal computation
˃£6,000 <£6,000 Lower of:
 Normal gain
 5/3×(gp - £6,000)
<£6,000 >£6,000 Proceeds deemed to be
£6,000
<£6,000 <£6,000 Exempt
gp = Gross proceeds
Wasting assets
The normal capital gains computation is amended to reflect the anticipated depreciation
over the life of the asset.
The cost is written down on a straight line basis, and it is this depreciated cost which is
deducted in the computation.
46
Principal Private Residence (PPR) Exemption
There is an exemption for gains on principal private residences, but the exemption may
be restricted because of periods of non-occupation or because of business use.
The PPR relief calculated as
Total gain × Period of occupation

Total period of ownership
Deemed occupation
 Last 18 months of ownership (without any condition)
The period of occupation is also deemed to include certain periods of absence, provided the
individual had no other exempt residence at the time and the period of absence was at some
time both preceded and followed by a period of actual occupation.
 Any period (or periods taken together) of absence, for any reason, up to three years
 Any periods of absence to live abroad required by their employment
 Any period (or periods taken together) of absence up to four years to live elsewhere in
the UK required by their work.
Business use
Where part of a residence is used exclusively for business purposes throughout the
entire period of ownership, the gain attributable to use of that part is taxable. The 'last 18
months always exempt' rule does not apply to that part.
Letting relief
The principal private residence exemption is extended to any gain accruing while the
property is let, up to a certain limit.
The letting must be for residential use. The extra exemption is restricted to the lowest of:
 The amount of the total gain which is already exempt under the PPR provisions
 The gain accruing during the letting period (the letting part of the gain)
 £40,000 (Maximum)
47
Chapter : 14
BUSINESS RELIEFS
Introduction
These reliefs are available for individuals disposing of a business, business assets or
parts of a business. Reliefs are available any disposals which are satisfy the specific criteria’s.
Criteria’s for each relief is different.
Entrepreneurs’ relief
Conditions:
 The assets must have been owned for 2 years prior to the date of disposal
 Disposal of the whole or part of a business run as an unincorporated business (sole

trader or partnership)
 A disposal of one or more assets in use for the purposes of a business at the time at
which the business ceases to be carried on provided that:
 The business was owned by the individual throughout the period of two years
 The date of cessation is within three years ending with the date of the disposal.
 A disposal of shares or securities of a company where the company is the individual's

personal company
Personal company:
 The individual holds at least 5% of the ordinary share capital
 The individual can exercise at least 5% of the voting rights in the
company
The operation of the relief
The rate of tax on this chargeable gain is 10% regardless of the level of the individual's taxable
income.
An individual may use losses on assets not qualifying for entrepreneurs' relief and the annual
exempt amount in the most beneficial way. This will be achieved if these amounts are set off in
the following order:
 Residential property gains
 Other gains not qualifying for entrepreneurs' relief
 Entrepreneurs' relief gains
48
There is a lifetime limit of £10 million of gains
Claim
The relief must be claimed within 12 months of the 31 January following the end of the
tax year in which the disposal is made.
Investors' relief
 Investors' relief is similar to entrepreneurs' relief.
 Qualifying shares must satisfy the following conditions:

 They must be new ordinary shares in an unlisted trading company
 Which have been subscribed for by the individual making the disposal
 The shares must have been issued by the company on or after 17 March 2016
 The shares held continuously by that individual usually for at least three years
 There is no minimum shareholding requirement.
 The individual must not usually be an officer or employee of the company (There is an
exception for unremunerated directors.)
 There is a £10 million lifetime limit of gains on which investors' relief can be claimed
 The relief must be claimed within 12 months of the 31 January following the end of the
tax year in which the disposal is made.
Rollover relief
A gain may be 'rolled over' (deferred) where the proceeds received on the disposal of a
business asset are spent on a replacement of another business asset. This is rollover relief. A
claim cannot specify that only part of a gain is to be rolled over.
Conditions for Rollover relief:

 The old asset sold and the new asset bought are both used only in the trade
 The old asset and the new asset both fall within one (but not necessarily the same one)
of the following classes:
49
 Land and buildings (including parts of buildings) occupied as well as used only for
the purpose of the trade
 Fixed plant and machinery
 Goodwill
 Reinvestment of the proceeds received on the disposal of the old asset takes place in a
period beginning one year before and ending three years after the date of the disposal.
 The new asset is brought into use in the trade on its acquisition
Operation of relief:
A rolled over gain is deducted from the base cost of the replacement asset
acquired.
Non-business use:
Where the old asset has not been used in the trade for a fraction of its period of
ownership, the amount of the gain that can be rolled over is reduced by the same fraction.
Depreciating assets
Where the replacement asset is a depreciating asset, the gain is not rolled over by
reducing the cost of the replacement asset. Rather it is deferred until it crystallises on the
earliest of:
 The disposal of the replacement asset
 The date the replacement asset ceases to be used in the trade
 Ten years after the acquisition of the replacement asset (maximum)
Gift relief (holdover relief)

If an individual gives away a qualifying asset, the transferor and the transferee can
jointly claim within four years of the end of the tax year of the transfer, that the transferor's
gain be reduced to nil. The transferee is then deemed to acquire the asset for market value at
the date of transfer less the transferor's deferred gain.
Gift relief can be claimed on gifts or sales at undervalue on transfers of business assets.
50
PART 3
TAX ADMINISTRATION FOR

INDIVIDUALS
51
Chapter : 15
SELF ASSESSMENT AND PAYMENT OF TAX

BY INDIVIDUALS
Introduction
In this chapter we see how individuals (including partners) must 'self-assess'
their liability to income tax, capital gains tax and Classes 2 and 4 national insurance
contributions (NICs). The self-assessment system relies upon the taxpayer completing and filing
a tax return and paying the tax due. The system is enforced by a system of penalties for failure
to comply within the set time limits, and by interest for late payment of tax.
Notification of liability to income tax and CGT
Individuals who are chargeable to income tax or CGT for any tax year and who
have not received a notice to file a return are required to give notice of chargeability to an
Officer of the Revenue and Customs within six months from the end of the year i.e. by
5 October 2020 for 2019/20.
Tax returns and keeping records
Tax returns must usually be filed by

 31 October (paper) following the end of the tax year.
 31 January (electronic) following the end of the tax year.
Keeping records
Records must be retained until the later of:
 Five years after the 31 January following the tax year where the taxpayer
is in business (Trader)
 One year after the 31 January following the tax year otherwise
 The date any such compliance check enquiry has been completed.
Self-assessment
A self-assessment is a calculation of the amount of taxable income and gains after deducting
reliefs and allowances, a calculation of income tax and CGT payable after taking into account
tax deducted at source.
52
If the taxpayer is filing a paper return, they may make the tax calculation on their return or
ask HMRC to do so on their behalf.
If the taxpayer wishes HMRC to make the calculation for a Year, a paper return must be filed:
 On or before 31 October in the following tax Year ; or
 If the notice to file the tax return is issued after 31 August in the following tax year,
within two months of the notice
If the taxpayer is filing an electronic return, the calculation of tax liability is made
automatically when the return is made online.
Amending the self-assessment

The taxpayer may amend their return (including the tax calculation) for a Year within twelve
months after the filing date. For this purpose the filing date means:
 31 January in the following Year; or
 Where the notice to file a return was issued after 31 October in the following Year, the
last day of the three month period starting with the issue
The amendment does not restrict the scope of a compliance check enquiry into the return
If a taxpayer discovers that they have overpaid tax, for example because they have made an
error in their tax return, they can make a claim to have the overpaid tax repaid to them. The
claim must be made within four years of the end of the tax year to which the overpayment
relates.
Payment of income tax and capital gains tax
DATE PAYMENT TYPE OF INCOME

31 January in the tax year 1st payment on account Income tax, Class 4 NIC
31 July after the tax year 2nd payment on account Income tax, Class 4 NIC
31 January after the tax year Final payment to settle the Balancing payment of POA,
remaining liability CGT, Class 2 NIC,
Each PAYMENT ON ACCOUNT is calculated based on the previous year’s income tax and class
4 NIC, if a taxpayer expects their liability to be lower than this they may claim to reduce their
payments on account to a stated amount or Nil
The claim must state the reason why they believe their tax liability will be lower, or nil.
If the taxpayer's actual liability is higher than they estimated they will have reduced the
payments on account. Although the payments on account will not be adjusted, the taxpayer
will suffer an interest charge on late payment.
53
Starting compliance check enquiry

HMRC has powers to make compliance check enquiries into returns, claims or elections
which have already been submitted.
An officer of HMRC has a limited period within which to commence a compliance check enquiry
on a return or amendment. The officer must give written notice of their intention by:
 The first anniversary of the actual filing date, if the return was delivered on or before
the due filing date; or
 The quarter day following the first anniversary of the actual filing date, if the return is
filed after the due filing date. The quarter days are 31 January, 30 April, 31 July and 31
October.
In the course of the compliance check enquiry the officer may require the taxpayer to
produce documents, accounts or any other information required.
An officer must issue a notice that the compliance check enquiry is complete. The officer
cannot then make a further compliance check enquiry into that return.
Determinations
If notice has been served on a taxpayer to submit a return but the return is not submitted by
the due filing date, an officer of HMRC may make a determination of the amounts liable to
income tax and CGT and of the tax due.
If an officer of HMRC discovers that profits have been omitted from assessment, that any
assessment has become insufficient, or that any relief given is, or has become excessive, an
assessment may be raised to recover the tax lost.
HMRC can investigate whether there has been dishonest conduct by a tax agent
HMRC can issue a civil penalty of up to £50,000 where there has been dishonest conduct and
the tax agent fails to supply the information or documents that HMRC has requested.
Interest on late paid tax

Interest is chargeable on late payment of both payments on account and balancing payments.
Late payment interest is charged from the due date for payment until the day before the date
on which payment is made.
Assumed rate of interest on underpaid tax is 3.25%.
54
Penalties for errors

A common penalty regime for errors in tax returns for income tax, national insurance
contributions, corporation tax and value added tax.
A penalty may be imposed where a taxpayer makes an inaccurate return if they have:
 Been careless because they have not taken reasonable care in making the return or
discovers the error later but does not take reasonable steps to inform HMRC; or
 Made a deliberate error but does not make arrangements to conceal it; or
 Made a deliberate error and has attempted to conceal it (eg by submitting false
evidence in support of an inaccurate figure.)
A penalty for error may be reduced if the taxpayer tells HMRC about the error – this is called
a disclosure. The reduction depends on the circumstances of the disclosure and the help that
the taxpayer gives to HMRC in relation to the disclosure.
An unprompted disclosure is one made at a time when the taxpayer has no reason to believe
HMRC has discovered, or is about to discover, the error. Otherwise, the disclosure will be a
prompted disclosure.
Type of error Maximum penalty Prompted Unprompted

Deliberate and 100% 50% 30%
concealed
Deliberate not 70% 35% 20%
concealed
Careless 30% 15% 0
Penalties for late notification of chargeability

A common penalty regime also applies to certain taxes for failure to notify chargeability to tax
(or failure to register for value added tax) that results in a loss of tax. The taxes affected include
income tax, NICs, PAYE, CGT, corporation tax and VAT. Penalties are behaviour related,
increasing for more serious failures, and are based on the 'potential lost revenue'.
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Type of error Maximum Prompted Unprompted

penalty
Deliberate and 100% 50% 30%
concealed
Deliberate not 70% 35% 20%
concealed
≥12 ≤12 ≥12 ≤ 12
months months months months
Careless 30% 10% 0 20% 10%
Penalties for late filing of tax return
 There will be an initial penalty of £100 if the return is filed after the due date
 If a return is more than three months late then there will be a daily penalty of £10 per
day (for a maximum of 90 days)
 If a return is more than six months late a further penalty of 5% of the tax due on the
return will be charged (subject to a minimum of £300).
 If a return is more than twelve months late a further penalty of 5% of the tax due can
be charged, although a higher percentage will be charged if the failure to submit is
deliberate.
TYPE OF CONDUCT PENALTY

DELIEBERATE AND CONCEALED Higher of:
 100% of tax liability in tax return
 £300
DELIBERATE AND NOT CONCEALED Higher of:
 £300
CARELESS Higher of:
 £300
Penalty for late payment of tax

A penalty is chargeable where tax is paid after the penalty date. The penalty date is 30 days
after the due date for the tax. Therefore no penalty arises if the tax is paid within 30 days of
the due date.
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DATEOF PAYMENT PENALTY

Not more than five months after the penalty 5% of tax which is unpaid at the penalty date.
date
More than five months after the penalty date 5% of tax which is unpaid at the end of the
but not more than 11 months after the five month period. This is in addition to the
penalty date 5% penalty above.
More than 11 months after the penalty date 5% of tax which is unpaid at the end of the
11 month period. This is in addition to the
two 5% penalties above.
The maximum penalty for each failure to keep and retain records is £3,000 per tax
year/accounting period. This penalty can be reduced by HMRC.
Disputes and appeals
For direct taxes, appeals must first be made to HMRC. For indirect taxes, appeals must be
sent directly to the Tax Tribunal. At this stage the taxpayer may be offered, or may ask for, an
'internal review', which will be made by an objective HMRC review officer not previously
connected with the case. This is a less costly and more effective way to resolve disputes
informally, without the need for a Tribunal hearing.
The taxpayer must either accept the review offer, or notify an appeal to the Tax Tribunal
within 30 days of being offered the review; otherwise the appeal will be treated as settled.
HMRC must usually carry out the review within 45 days,
After the review conclusion is notified, the taxpayer has 30 days to appeal to the Tax Tribunal
If there is no internal review, or the taxpayer is unhappy with the result of an internal review,
the case may be heard by the Tax Tribunal
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PART 4
CORPORATION TAX
58
Chapter : 16
COMPUTING TAXABLE TOTAL PROFITS AND THE

CORPORATION TAX LIABILITY
One of the 15 mark questions in Section C will focus on corporation tax.
Corporation tax may also be tested in 10 mark questions in Sections B or C. You should also
expect to see one or more questions on corporation tax in Section A.
Residence of companies
A company is UK resident if it is incorporated in the UK or if it is incorporated
overseas and its central management and control are exercised in the UK.
The scope of corporation tax

Companies must pay corporation tax on their taxable total profits for
each accounting period. Corporation tax is chargeable in respect of accounting periods.
Accounting periods
An accounting period cannot exceed 12 months in length so a long period of
account must be split into two accounting periods. If an accounting period is more than 12
months in length, the first 12 months of the accounting period is treated as the first accounting
period and the rest months will treat as second period of accounting.
Financial year
A financial year runs from 1 April to the following 31 March and is identified by
the calendar year in which it begins.
For example, the year ended 31 March 2020 is the Financial year 2019 (FY 2019).
The rates of corporation tax are fixed for financial years.
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Computation of Taxable total profits
Proforma computation:
Trading profits XX
Property business income XX
Interest income from non-trading loan relationships XX
Miscellaneous income XX
Chargeable gains XX
Total profits XX
Less losses deductible from total profits (X)
Less qualifying charitable donations (X)
Taxable total profits for an accounting period XX
Dividends received from other companies (UK resident and non-UK resident), for the
purposes of the Taxation (TX – UK) exam, are usually exempt and so not included in
taxable total profits.
Trading income
The adjustment of profits computation for companies broadly follows that for
computing business profits subject to income tax. There are, however, some minor differences.
£ £
Profit before taxation XX
Add expenditure not allowed for taxation purposes XX
XX
Less: income not taxable as trading income XX
Expenditure not charged in the accounts but allowable
for the purposes of taxation XX
Capital allowances XX
(XX)
Profit adjusted for tax purposes XXX
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TAX ADJUSTED TRADING PROFIT FOR COMPANIES

£ £
Net profit as per profit or loss A/c XXX
+ Disallowed expenditures:
 Expenses not related to trade XX
 Capital expenditures XX
 Depreciation/Amortisation/Impairment XX
 Fines or penalties – unless incurred by employees XX
 Increase in provision for receivables XX
 Elements of personal expense by owner XX
 Gift aid donation XX
 Loss on disposal of assets XX
 Entertainment of customers XX
 Donation to political parties and national charities XX
 15% of lease rent for motor cars emitting CO2 > 110g/km XX XXX
 Legal expenses in relation with grand of lease
(--) Allowed expenditure
 Any expenses related to trade XX
 Pre trading expenditures (Within 7 years from commencement XX
st
of trading – Treat as expense on the 1 day of trade)
 Revenue natured expenses XX
 Impaired debts XX
 Entertainment and gift for employees XX
 Donation to local charities for advertisements XX
 Gift to third parties provided <£50 per person per annum; not XX
food/drink or tobacco items and given for advertisement
purpose
 Gift of inventory as sample XX
 Capital allowances XX (XXX)
(--) Disallowed income
 Rental income XX
 Bank interest XX
 Dividend income XX
 Profit on disposal of assets XX
 Decrease in provision for receivables XX (XXX)
+ Allowed income
 Drawings of goods by owner XX
 Impaired debt recovered XX
 Revenue from sale of inventory XX XXX
TAX ADJUSTED TRADING PROFIT XXX
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Pre-trading expenditure
Pre-trading expenditure incurred by the company within the seven years before
trade commences is treated as an allowable expense incurred on the first day of trading.
Capital allowances
The calculation of capital allowances follows income tax principles.
For companies, however, there is never any reduction of allowances to take account of any
private use of an asset. The director or employee suffers a taxable benefit instead.
A company's accounting period can never exceed 12 months. If the period of account is longer
than 12 months it is divided into two. The capital allowances computation must be carried out
for each period separately.
Property business income

Companies must use the accruals basis to calculate their property business income. The
deductibility of property expenses generally follows income tax principles
Interest paid by a company on a loan to buy or improve property is not a property business
expense. The loan relationship rules apply instead (see below). The restriction for tax relief on
finance costs does not apply to companies.
INTEREST INCOME (Loan relationships)
If a company borrows or lends money, including issuing or investing in loan

stock or buying gilts, it has a loan relationship. This can be a creditor relationship (where the
company lends or invests money) or a debtor relationship (where the company borrows money
or issues securities).
Trading loan relationships

If the company is a party to a loan relationship for trade purposes, charged through its
accounts are allowed as a trading expense and are therefore deductible in computing trading
income.
Similarly if any credits – i.e. interest income or other debt returns – arise on a trading
loan these are treated as a trading receipt and are taxable as trading income.
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Treatment of non-trading loan relationships

If a loan relationship is not for trade purposes, any debits or credits (e.g. interest paid
or received) must be pooled. A net credit on the pool is chargeable as interest income.
Interest charged on underpaid tax is a debit and interest received on overpaid tax is a
credit under the rules for non-trading loan relationships.
You will not be expected to deal with net deficits (ie losses) on non-trading
loan relationships in your exam.
Miscellaneous income
Patent, Royalties, Commission received which do not relate to the trade are taxed as
miscellaneous income. Patent royalties which relate to the trade are included in trading income
normally on an accruals basis.
Qualifying charitable donations

Qualifying charitable donations are deductible from total profits when
computing taxable total profits. Almost all donations of money to charity by a company can be
qualifying charitable donations whether they are single donations or regular donations.
Long periods of account

If a company has a long period of account exceeding 12 months, it is split into two accounting
periods: the first 12 months and the remainder.
 Trading income before capital allowances and property income are apportioned on a
time basis.
 Capital allowances and balancing charges are calculated for each accounting period.
 Other income is allocated to the period to which it relates
 Chargeable gains and losses are allocated to the period in which they are realised.
 Qualifying charitable donations are deducted in the accounting period in which they
are paid.
Rate of corporation tax

For financial year 2019, there is a single rate of corporation tax (the main rate)
which is 19%. This rate is applied to the company's taxable total profits to compute the
corporation tax liability. The rates of corporation tax for financial year 2017 and financial year
2018 were also 19%.
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Accounting period in more than one financial year

An accounting period may fall within more than one financial year. If the rates
for corporation tax are the same in both financial years, tax can be computed for the
accounting period as if it fell within one financial year.
However, if the rates for corporation tax are different in the financial years, taxable total
profits are time apportioned between the financial years.
Choice of business medium

An individual can choose between trading as a sole trader or trading through a
company. Trading through a company may reduce the overall tax and national insurance
liability, in particular if profits are extracted in a tax-efficient manner.
Trading as a sole trader or through a company

An individual starting in business must decide whether to trade as a sole trader or as a
company.
A sole trader pays income tax on trading income and also Class 2 and Class 4 national
insurance contributions.
A company pays corporation tax on its taxable total profits. Any director's remuneration
(salary, bonus) and its associated Class 1 employer's national insurance contributions are
deducted in computing those profits. The employment allowance is not available if the
director is the only employee. the remaining profits after corporation tax can then be paid out
to shareholders as a dividend. The individual as a director pays income tax on employment
income and Class 1 employee's contributions on cash earnings.
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Chapter : 17
CHARGEABLE GAINS FOR COMPANIES
There will be a 15 mark question on corporation tax in Section C. This may include the
gains of a company so it is important that you can deal with the aspects covered in this chapter.
Corporation tax may also be tested in 10 mark questions in Sections B or C. A Section A
question may test a specific point such as computation of the indexation allowance.
Corporation tax on chargeable gains

Chargeable gains for companies are computed in broadly the same way as for individuals, but
indexation allowance applies and there is no annual exempt amount.
Companies do not pay capital gains tax. Instead their chargeable gains are included in the
calculation of taxable total profits.
 There is relief for inflation called the indexation allowance

 No annual exempt amount is available
 Different matching rules for shares apply if the shareholder is a company
Indexation allowance
The indexation allowance gives relief for the inflation element of a gain but is frozen at
December 2017. Companies are entitled to indexation allowance from the date of acquisition
of the asset until the earlier of the date of disposal of the asset and December 2017. It is
based on the movement in the Retail Price Index (RPI) between those two dates.
If an asset is acquired by a company on or after 1 January 2018 there will be no indexation
allowance on the disposal of the asset.
The indexation factor is:
RPI for month of disposal/December 2017 - RPI for month of acquisition

RPI for month of acquisition
The examining team will always give the indexation factor in the question. You will not have
to calculate the indexation factor using RPIs.
Indexation allowance is available on the allowable cost of the asset from the date of
acquisition. It is also available on enhancement expenditure from the month in which such
expenditure becomes due and payable. Indexation allowance is not available on the costs of
disposal.
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Indexation allowance cannot create or increase an allowable loss. If there is a gain before the
indexation allowance, the allowance can reduce that gain to zero but no further. If there is a
loss before the indexation allowance, there is no indexation allowance.
Disposal of shares by companies

The matching rules For companies the matching of shares sold is in the following order.
 Shares acquired on the same day
 Shares acquired in the previous nine days, if more than one acquisition on a 'first in,
first out'(FIFO) basis
 Shares from the FA 1985 pool
The FA 1985 share pool

The FA 1985 pool comprises the following shares of the same class in the same company.
 Shares held by a company on 1 April 1985 and acquired by that company on or after
1 April 1982
 Shares acquired by that company on or after 1 April 1985
The FA 1985 pool consist the following information

 The number of shares
 The cost of the shares ignoring indexation
 The indexed cost of the shares
Legislation provides that indexation calculations within the FA 1985 pool are not
rounded to three decimal places. However, the examining team has stated that for the
purposes of the Taxation (TX – UK) exam you should use the indexation factor(s)
rounded to three decimal places provided in the question to compute indexed rises
within the share pool.
In the case of a disposal, following the calculation of the indexed rise to the earlier of the
date of disposal and December 2017, the cost and the indexed cost attributable to the shares
disposed of are deducted from the amounts within the FA 1985 pool. The proportions of the
cost and indexed cost to take out of the pool should be computed by using the proportion
that the shares disposed of bear to the total number of shares held.
Bonus and rights issues

When bonus issue shares are issued, all that happens is that the size of the original holding is
increased. Since bonus issue shares are issued at no cost there is no need to adjust the
original cost and there is no operative event for the FA 1985 pool (so no indexation allowance
needs to be calculated).
In the case of a rights issue, the new shares are paid for and this results in an
adjustment to the original cost. For the purpose of calculating the indexation allowance,
expenditure on a rights issue is taken as being incurred on the date of the issue and not the
date of the original holding.
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Reorganisation and takeovers

The rules on Reorganisation and takeovers apply in a similar way for company shareholders
as they do for individuals.
In the case of a Reorganisation, the new shares or securities take the place of the
original shares. The original cost and the indexed cost of the original shares is apportioned
between the different types of capital issued on the Reorganisation.
Where there is a takeover of shares which qualifies for the 'paper for paper'
treatment, the cost and indexed cost of the original holding is passed onto the new holding
which take the place of the original holding.
Relief for replacement of business assets (Rollover relief)

As for individuals, a gain may be deferred by a company where the proceeds on the
disposal of a business asset are spent on a replacement business asset under rollover relief.
The conditions for the relief to apply to company disposals are:

 The old assets sold and the new assets bought are both used only in the trade of the
company (apportionment into business and non-business parts available for buildings).
 The old asset and the new asset both fall within one (but not necessarily the same one)
of the following classes.
 Land and buildings (including parts of buildings) occupied as well as used only
for the purposes of the trade
 Fixed plant and machinery
 Reinvestment of the proceeds received on the disposal of the old asset takes place in a
period beginning one year before and ending three years after the date of the disposal.
 The new asset is brought into use in the trade on its acquisition.
 Goodwill is not a qualifying asset for the purposes of corporation tax.
Operation of relief
Deferral is obtained by deducting the indexed gain from the cost of the new
asset. For full relief, the whole of the proceeds must be reinvested. If only part is reinvested,
a gain equal to the amount not invested, or the full gain, if lower, will be chargeable to tax
immediately.
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Chapter : 18
TRADING LOSSES BY COMPANIES

The following reliefs are available for trading losses incurred by a company:
 Claim to deduct the loss from current period total profits (current period relief)
 Claim to deduct the loss from earlier period total profits (carry back relief)
 Claim to deduct the loss usually from future period total profits (carry forward relief)
Current period and carry back trading loss relief

A company may claim to deduct a trading loss incurred in an accounting period from its total
profits of the same accounting period. The company cannot choose the amount of loss to
relieve – current period loss relief must be taken to the fullest extent possible. This may make
qualifying charitable donations unrelieved.
After current period loss relief has been taken, any remaining loss may then
be carried back and deducted from total profits of an accounting period falling wholly or
partly within the 12 months prior to the start of the period in which the loss was incurred.
Again, the company cannot choose the amount of loss to relieve – if claimed, carry back loss
relief must be taken to the fullest extent possible.
Claims for current period and carry back loss relief must be made within two years of
the end of the accounting period in which the loss arose.
Where trading losses arise in the last 12 months of trading, they can be carried back
and deducted from total profits of the previous three years, later years first (LIFO basis)
Carry forward trading loss relief

A trading loss, which has not been relieved under a current period claim or carry
back claim is automatically carried forward to the next accounting period. Unlike current
period and carry back claims, under carry forward loss relief the company can restrict its
claim for the amount of the loss which is to be relieved so preventing qualifying charitable
donations becoming unrelieved.
If the loss is not completely relieved in the next accounting period, it is automatically
carried forward to the following accounting period and the company may make a further
claim to deduct the whole or part of the remaining loss from total profits.
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Capital losses
Capital losses can only be set against capital gains in the same or future accounting
periods, never against income. Capital losses must be set against the first available gains to
the fullest extent possible. Capital losses cannot be carried back.
Property business losses

A company must deduct a property business loss incurred in an accounting period from its
total profits of the same accounting period to the fullest extent possible. A property business
loss which has not been relieved in the current period is automatically carried forward to the
next accounting period.
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Chapter : 19
GROUPS
Group relief
Group relief is available where the existence of a group is established through companies
resident anywhere in the world. The group relief provisions enable companies within a 75%
group to transfer trading losses and certain other losses to other companies within the group.
75% group
For one company to be a 75% subsidiary of another, the holding company must have:
 At least 75% of the ordinary share capital of the subsidiary
 A right to at least 75% of the distributable income of the subsidiary
 A right to at least 75% of the net assets of the subsidiary were it to be wound up
Two companies are in a 75% group only if there is a 75% effective interest. Thus H has an 80%
subsidiary (T), T has an 80% subsidiary (S). S can’t be a member of the 75% group because the
effective interest of H in S is only 80% × 80% = 64%. However, S and T are in a 75% group and
can claim group relief from each other.
A 75% group may include non-UK resident companies. However, losses may generally only be
surrendered between UK resident companies.
X Ltd.
A Ltd. K Ltd. B Ltd. H Ltd.

100% By X 95% By X 70% By X 75% By X
Y Ltd. R Ltd. Z Ltd. E Ltd.

80% By A 80% By K 100% By B 80% By H
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Companies in 75% groups

 X Ltd.
 A Ltd. (100%)
 K Ltd. (95%)
 H Ltd. (75%)
 Y Ltd. 80% (100%*80%) (Effective interest)
 R Ltd. 76% (95%*80%) (Effective interest)
Current period group relief

A surrendering company can surrender any amount of its current period trading loss but a
claimant company can only claim an amount up to its available taxable total profits. A
company which has made a current period loss (the surrendering company) may transfer all or
part of this loss to another member of the 75% group (the claimant company).
Current period group relief is set against taxable total profits after all other reliefs for the
current period (for example property business losses, qualifying charitable donations) or
brought forward from earlier periods.
The surrendering company may surrender trading losses, excess property business income
losses and excess qualifying charitable donations to other group companies under current
period group relief.
A surrendering company may group relieve a current period trading loss before setting it
against its own total profits for the period of the loss.
The surrendering company may specify an amount less than the maximum amount to be
surrendered.
A company which has a loss carried forward (the surrendering company) may transfer all or
part of this loss to another member of the 75% group (the claimant company).
The claimant company must use its own losses to the fullest extent possible in working out
the available taxable total profits against which it may claim carry forward group relief.
Several alternative loss reliefs may be available, including group relief. In making a choice
consider:
 How quickly relief will be obtained
 The extent to which relief for qualifying charitable donations might be lost:
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Chargeable gains group

A chargeable gains group consists of the top company plus companies in which the top
company has a 50% effective interest, provided there is a 75% holding at each level.
Companies are in a chargeable gains group if:

 At first level, there is a 75% holding
 The top company has an effective interest of over 50% in the group companies
If A holds 75% of B, B holds 75% of C and C holds 75% of D, then A, B and C are in such a group,
but D is outside the group because A's interest in D is only 75% × 75% × 75% = 42.1875%.
Furthermore, D is not in a group with C, because the group must include the top company (A).
Companies in a chargeable gains group make intra-group transfers of chargeable assets

without a chargeable gain or an allowable loss arising. No election is needed, as this relief is
compulsory. The assets are deemed to be transferred at such a price as will give the transferor
no gain and no loss.FAST FORWARD
FAST FORWARD
Two members of a chargeable gains group can elect to transfer a chargeable gain or allowable
loss, or any part of a gain or loss, between them. This election must be made within two
years of the end of the accounting period in which the gain or loss accrues in the company
which is making the transfer.
If a member of a chargeable gains group disposes of an asset eligible for chargeable gains
rollover relief it may treat all of the group companies as a single unit for the purpose of
claiming such relief. Acquisitions by other group members within the qualifying period of one
year before the disposal to three years afterwards may therefore be matched with the
disposal.
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Chapter : 20
SELF-ASSESSMENT AND PAYMENT OF TAX BY

COMPANIES
The self-assessment system relies upon the company completing and filing a tax return and
paying the tax due. The system is enforced by a system of penalties for failure to comply within
the set time limits, and by interest for late payment of tax.
Notification of first accounting period

A company must notify HMRC of the beginning of its first accounting period (ie usually when
it starts to trade)
Notification of chargeability
A company that does not receive a notice requiring a return to be filed must, if it is chargeable
to tax, notify HMRC within twelve months of the end of the accounting period.
Returns
A company's tax return must be filed electronically and must include a self assessment of any
tax payable. Limited companies are also required to file electronically a copy of their accounts.
The filing of accounts must be done in inLine eXtensible Business Reporting Language (iXBRL).
A return is due on or before the filing date. This is normally the later of:
 12 months after the end of the period to which the return relates
 Three months from the date on which the notice requiring the return was made
Amending a return
A company may amend a return within 12 months of the filing date.
HMRC may amend a return to correct obvious errors, or anything else that an officer has
reason to believe is incorrect in the light of information available, within nine months of the
day the return was filed.
Records
Companies must keep records until the latest of:
 Six years from the end of the accounting period
 The date any compliance check enquiries are completed
 The date after which a compliance check enquiry may not be commenced
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Starting compliance check enquiry

HMRC has powers to make compliance check enquiries into returns, claims or elections
which have already been submitted.
An officer of HMRC has a limited period within which to commence a compliance check enquiry
on a return or amendment. The officer must give written notice of their intention by:
 The first anniversary of the actual filing date, if the return was delivered on or before
the due filing date; or
 The quarter day following the first anniversary of the actual filing date, if the return is
filed after the due filing date. The quarter days are 31 January, 30 April, 31 July and 31
October.
Corporation tax is due for payment by companies which are not large companies nine months
and one day after the end of the accounting period.
Large company
A large company is one whose profits exceed the profit threshold.( £1,500,000)
For this purpose profits are the taxable total profits of the company plus dividends received
from other companies.
The exception to this rule is that any dividends received from a 51% subsidiary company
The profit threshold is £1,500,000 for a 12 month accounting period.

The profit threshold is reduced in two circumstances:
 The company has a short accounting period. In this case the threshold is scaled down.
 The company has related 51% group companies at the end of the immediately
preceding accounting period. The threshold is divided by that number of related 51%
group companies, including the company itself.
Large companies must pay their corporation tax in installments
Due dates for installments

First installment is due on the 14th day of the seventh month. Provided that the accounting
period is 12 months long subsequent installments are due in the tenth month during the
accounting period and in the first and fourth months after the end of the accounting period.
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The amount of each installment is computed by:

 Working out 3×CT/n CT is the amount of the estimated corporation tax liability
payable and n is the number of months in the period
 Repeating the process for later installments until the amount allocated is equal to the
Corporation tax liability
A company is not required to pay installments in the first year that it is a large company,
unless its profits exceed £10 million.
Companies which do not pay by installments are charged interest if they pay their
corporation tax after the due date, and will receive interest if they overpay their tax or pay it
early.
Late filing penalties

There is a £100 penalty for a failure to submit a return on time, rising to £200 if the delay
exceeds three months. These penalties become £500 and £1,000 respectively when a return
was late (or never submitted) for each of the preceding two accounting periods.
An additional tax geared penalty is applied if a return is more than six months late. The
penalty is 10% of the tax unpaid six months after the return was due if the total delay is up to
12 months, and 20% of that tax if the return is over 12 months late.
Failure to keep records can lead to a penalty of up to £3,000 for each accounting period
affected.
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PART 5
INHERITANCE TAX
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The scope of Inheritance tax
IHT is paid on the value of a person’s estate when they die, but it also applies to certain lifetime
transfers of assets. If IHT did not apply to lifetime transfers it would be very easy for a person to
avoid tax by giving away all of their assets just before they died.
As far as TX-UK is concerned, the terms ‘transfer’ and ‘gift’ can be taken to mean the same
thing. The person making a transfer is known as the donor, whilst the person receiving the
transfer is known as the donee.
Unlike capital gains tax where, for example, a principal private residence is exempt, all of a
person’s estate is generally chargeable to IHT.
A person who is domiciled in the UK is liable to IHT in respect of their worldwide assets. As far
as TX-UK is concerned, people will always be domiciled in the UK.
For TX-UK, the only relevant chargeable person is an individual. A married couple (and a
registered civil partnership) is not a chargeable person because each spouse (or civil partner) is
taxed separately.
Transfers of value
During a person’s lifetime, IHT can only arise if a transfer of value is made. A transfer of value is
defined as ‘any gratuitous disposition made by a person which results in a diminution in value
of that person’s estate’. There are two important terms in this definition:
Gratuitous: Poor business deals, for example, are not normally transfers of value because there
is no gratuitous intent.
Diminution in value: There will normally be no difference between the diminution in value of
the donor’s estate and the increase in value of the donee’s estate. However, in some cases it
may be necessary to compare the value of the donor’s estate before the transfer and the value
after the transfer in order to compute the diminution in value. This will usually be the case
where unquoted shares are concerned. Shares forming part of a controlling shareholding will be
valued higher than shares forming part of a minority shareholding.
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EXAMPLE QUESTION
On 4 May 2019, Daniel made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an
unquoted investment company. Before the transfer, Daniel owned 60,000 shares out of ABC
Ltd’s issued share capital of 100,000 £1 ordinary shares. ABC Ltd’s shares are worth £18 each
for a holding of 60%, £10 each for a holding of 45% and £8 each for a holding of 15%.
Although Daniel’s son received a 15% shareholding valued at £120,000 (15,000 x £8), Daniel’s
transfer of value is calculated as follows:
£
Value of shares held before the transfer
1,080,000
60,000 x £18
Value of shares held after the transfer
450,000
45,000 x £10
Value transferred 630,000
In contrast, for capital gains tax purposes the valuation will be based on the market value of the
shares gifted, which is £120,000.
As far as TX-UK is concerned, a transfer of value will always be a gift of assets. A gift made
during a person’s lifetime may be either potentially exempt or chargeable.
Potentially exempt transfers
Any transfer which is made to another individual is a potentially exempt transfer (PET). A PET
only becomes chargeable if the donor dies within seven years of making the gift. If the donor
survives for seven years then the PET becomes exempt and can be completely ignored. Hence
such a transfer has the potential to be exempt.
If the donor dies within seven years of making a PET then it becomes chargeable. Tax will be
charged according to the rates and allowances applicable to the tax year in which the donor
dies. However, the value of a PET is fixed at the time that the gift is made.
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EXAMPLE QUESTION
Sophie died on 23 January 2020. She had made the following lifetime gifts:
 8 November 2012 – A gift of £450,000 to her son.

 12 August 2017 – A gift of a house valued at £610,000 to her daughter. By 23 January
2020, the value of the house had increased to £655,000.
The gift to Sophie’s son on 8 November 2012 is a PET for £450,000. Because the PET was made
more than seven years before the date of Sophie’s death it is exempt from IHT.
The gift to Sophie’s daughter on 12 August 2017 is a PET for £610,000 and is initially ignored. It
becomes chargeable as a result of Sophie dying within seven years of making the gift, and the
transfer of £610,000 will be charged to IHT based on the rates and allowances for 2019–20.
Chargeable lifetime transfers
Any transfer which is made to a trust is a chargeable lifetime transfer (CLT).
There is no legal definition of what a trust is, but essentially a trust arises where a person
transfers assets to people (the trustees) to hold for the benefit of other people (the
beneficiaries). For example, parents may not want to make an outright gift of assets to their
young children. Instead, assets can be put into a trust with the trust being controlled by
trustees until the children are older.
Unlike a PET, a CLT is immediately charged to IHT based on the rates and allowances
applicable to the tax year in which the CLT is made. An additional tax liability may then arise
if the donor dies within seven years of making the gift. Just as for a PET, the value of a CLT is
fixed at the time that the gift is made, but the additional tax liability is calculated using the rates
and allowances applicable to the tax year in which the donor dies.
EXAMPLE QUESTION
Lim died on 4 December 2019. She had made the following lifetime gifts:
 2 November 2012 – A gift of £420,000 to a trust.

 21 August 2017 – A gift of a house valued at £615,000 to a trust. By 4 December 2019,
the value of the house had increased to £650,000.
The gift to the trust on 2 November 2011 is a CLT for £420,000, and was immediately charged
to IHT based on the rates and allowances for 2012–13. There will be no additional tax liability in
2019–20 as the gift was made more than seven years before the date of Lim’s death.
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The gift to the trust on 21 August 2017 is a CLT for £615,000, and was immediately charged to
IHT based on the rates and allowances for 2017–18. Lim has died within seven years of making
the gift so an additional tax liability may arise based on the rates and allowances for 2019–20.
Rates of tax
IHT is payable once a person’s cumulative chargeable transfers over a seven year period exceed
a nil rate band. For the tax year 2019–20, the nil rate band is £325,000, and has been the same
amount since the tax year 2009–10.
The rate of IHT payable as a result of a person’s death is 40%. This is the rate which is charged
on a person’s estate at death, on PETs which become chargeable as a result of death within
seven years, and is also the rate used to see if any additional tax is payable on CLTs made within
seven years of death.
An additional nil rate band is available where a main residence is inherited on death by direct
descendants (children and grandchildren). For the tax year 2019–20, the residence nil rate
band is £150,000. The residence nil rate band is only relevant where an individual dies on or
after 6 April 2017, their estate exceeds the normal nil rate band of £325,000 and their estate
includes a main residence. Any other type of property, such as a property which has been let
out, does not qualify for the residence nil rate band.
This is the lifetime rate.
The tax rates information that will be given in the tax rates and allowances section of the exam
in the period 1 June 2020 to 31 March 2021 is:
Nil rate band £325,000

Residence nil rate band £150,000
Rates of tax on excess
– Lifetime rate 20%
– Death rate 40%
Where earlier nil rate bands may be relevant, they will be given to you within the question.
A question will make it clear if the residence nil rate band is available. Therefore, you should
assume that the residence nil rate band is not available if there is no mention of a main
residence.
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EXAMPLE QUESTION
Sophie died on 26 May 2019 leaving an estate valued at £825,000. Under the terms of her will,
Sophie’s estate was left to her children (the residence nil rate band is not available).
The IHT liability is:
Death estate
£
Chargeable estate 825,000
IHT liability
325,000 at nil% 0
500,000 at 40% 200,000
200,000
EXAMPLE QUESTION
Continuing with example 4, assume that Sophie’s estate included a main residence valued at
£300,000.
The IHT liability will then be:
Death estate
£
IHT liability
475,000 (325,000 + 150,000)
at nil% 0
350,000 at 40% 140,000
140,000
The residence nil rate band of £150,000 is available because Sophie’s estate included a main
residence and this was left to her direct descendants.
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EXAMPLE QUESTION
Tony died on 16 August 2019 leaving an estate valued at £750,000. Under the terms of his will,
Tony’s estate was left to his grandchildren. The estate included a main residence valued at
£410,000.
On 30 April 2017, Tony had made a potentially exempt transfer of £400,000 to his son.
IHT liabilities are:
Lifetime transfer – 30 April 2017
£
Potentially exempt transfer 400,000
Additional liability arising on death – 30 April 2017
£
IHT liability
325,000 at nil% 0
75,000 at 40% 30,000
30,000
Death estate
£
IHT liability
150,000 at nil% 0
600,000 at 40% 240,000
240,000
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Taper relief
It would be somewhat unfair if a donor did not quite live for seven years after making a gift
with the result that the gift was fully chargeable to IHT. Therefore, taper relief reduces the
amount of tax payable where a donor lives for more than three years, but less than seven
years, after making a gift. The reduction is as follows:
Years before death Percentage reduction %

Over three years but less than four years 20
Over four years but less than five years 40
Over five years but less than six years 60
Over six years but less than seven years 80
Although taper relief reduces the amount of tax payable, it does not reduce the value of a gift
for cumulation purposes.
The taper relief table will be given in the tax rates and allowances section of the exam.
EXAMPLE QUESTION
Winnie died on 9 January 2020. She had made the following lifetime gifts:
 2 February 2013 – A gift of £460,000 to a trust. The trust paid the IHT arising from this
gift.
 16 August 2016 – A gift of £320,000 to her son
These figures are after deducting available exemptions.
The nil rate band for the tax years 2012–13 and 2016–17 is £325,000.
Lifetime transfers £
2 February 2013
Chargeable transfer 460,000
IHT liability
325,000 at nil% 0
135,000 at 20% 27,000
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Lifetime transfers £
27,000
16 August 2016
Additional liabilities arising on death

2 February 2013
IHT liability
325,000 at nil% 0
135,000 at 40% 54,000
Taper relief reduction – 80% (43,200)
10,800
IHT already paid (27,000)
Additional liability 0
 The taper relief reduction is 80% because the gift to the trust was made between six and
seven years of the date of Winnie’s death.
 Although the final IHT liability of £10,800 is lower than the amount of IHT already paid
of £27,000, a refund is never made.
16 August 2016
£
IHT liability 320,000 at 40% 128,000
Taper relief reduction – 20% (25,600)
102,400
The taper relief reduction is 20% because the gift to the son was made between three and four
years of the date of Winnie’s death.
Transfer of a spouse’s unused nil rate bands
Any unused nil rate band on a person’s death can be transferred to their surviving spouse (or
registered civil partner). The nil rate band will often not be fully used on the death of the first
spouse because any assets left to the surviving spouse are exempt from IHT (see the following
section on transfers to spouses).
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A claim for the transfer of any unused nil rate band is made by the personal representatives
who are looking after the estate of the second spouse to die. The amount which can be claimed
is based on the proportion of the nil rate band not used when the first spouse died. Even
though the first spouse may have died several years ago when the nil rate band was much
lower, the amount which can be claimed on the death of the second spouse is calculated using
the current limit of £325,000.
EXAMPLE QUESTION
Nun died on 29 March 2020.
None of her husband’s nil rate band was used when he died on 5 May 2009.
When calculating the IHT on Nun’s estate a nil rate band of £650,000 (325,000 + 325,000) can
be used because a claim can be made to transfer 100% of her husband’s nil rate band.
Exemptions
Transfers to spouses
Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies
both to lifetime gifts and on death.
EXAMPLE QUESTION
Sophie died on 25 June 2019.
On 12 April 2015, she had made a gift of £400,000 to her husband.
Sophie’s estate on 25 June 2019 was valued at £900,000. Under the terms of her will, Sophie
divided her estate equally between her husband and her daughter (the residence nil rate band
is not available).
The nil rate band for the tax year 2015–16 is £325,000.
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Lifetime transfers
The gift on 12 April 2015 is exempt as it to Sophie’s husband.
Death estate
£
Value of estate 900,000
Spouse exemption (900,000/2) (450,000)
IHT liability
325,000 at nil% 0
125,000 at 40% 50,000
50,000
There are a number of other exemptions which only apply to lifetime gifts.
Small gifts exemption
Gifts up to £250 per person in any one tax year are exempt. If a gift is more than £250 then the
small gifts exemption cannot be used, although it is possible to use the exemption any number
of times by making gifts to different donees.
EXAMPLE QUESTION
During the tax year 2019–20, Peter made the following gifts:
 On 18 May 2019, he made a gift of £240 to his son.

 On 5 October 2019, he made a gift of £400 to his daughter.
 On 20 March 2020, he made a gift of £100 to a friend.
The gifts on 18 May 2019 and 20 March 2020 are both exempt because they do not exceed
£250. The gift on 5 October 2019 for £400 does not qualify for the small gifts exemption
because it is more than £250. It will instead be covered by Peter’s annual exemption for 2019–
20 (see the next section).
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Annual exemption
Each tax year a person has an annual exemption of £3,000. If the whole of the annual
exemption is not used in any tax year, then the balance is carried forward to the following tax
year. However, the exemption for the current tax year must be used first, and any unused
brought forward exemption cannot be carried forward a second time. Therefore, the maximum
amount of annual exemptions available in any tax year is £6,000 (£3,000 x 2).
EXAMPLE QUESTION
Simone made the following gifts:
 On 10 May 2018, she made a gift of £1,400 to her son.

 On 25 October 2019, she made a gift of £4,000 to her daughter.
The gift on 10 May 2018 utilises £1,400 of Simone’s annual exemption for 2018–19. The
balance of £1,600 (3,000 – 1,400) is carried forward to 2019–20.
The gift on 25 October 2019 utilises all of the £3,000 annual exemption for 2019–20 and £1,000
(4,000 – 3,000) of the balance brought forward of £1,600. Because the annual exemption for
2019–20 must be used first, the unused balance brought forward of £600 (1,600 – 1,000) is lost.
The annual exemption is applied on a strict chronological basis, and is therefore given against
PETs even when they do not become chargeable.
EXAMPLE QUESTION
Nigel made the following gifts:
 On 17 May 2018, he made a gift of £60,000 to his son.

 On 25 June 2019, he made a gift of £100,000 to a trust.
The gift on 17 May 2018 utilises Nigel’s annual exemptions for 2018–19 and 2017–18. The value
of the PET is £54,000 (60,000 – 3,000 – 3,000).
The gift on 25 June 2019 utilises Nigel’s annual exemption for 2019–20. The value of the CLT is
£97,000 (100,000 – 3,000). No lifetime IHT liability is payable because this is within the nil rate
band for 2019–20.
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Normal expenditure out of income
IHT is not intended to apply to gifts of income. Therefore, a gift is exempt if it is made as part of
a person’s normal expenditure, is made out of income and that person is left with sufficient
income to maintain their normal standard of living. To count as normal, gifts must be habitual.
Therefore, regular annual gifts of £2,500 made by a person with an annual income of £100,000
would probably be exempt. A one-off gift of £70,000 made by the same person would probably
not be, and would instead be a PET or a CLT.
Gifts in consideration of marriage
This exemption covers gifts made in consideration of a couple getting married or registering a
civil partnership. The amount of exemption depends on the relationship of the donor to the
donee (who must be one of the two persons getting married):
 £5,000 if the gift if made a by a parent.

 £2,500 if the gift is made by a grandparent or by one of the couple getting married to
the other.
 £1,000 if the gift is made by anyone else.
Grossing up
So far, in all of the examples concerning a CLT, the trust (the donee) has paid any lifetime IHT
which has arisen. The loss to the donor’s estate is therefore just the amount of the gift.
However, the donor is primarily responsible for any lifetime IHT which arises on a CLT. In this
case, the loss to the donor’s estate is both the amount of the gift and the related tax liability. To
correctly calculate the amount of IHT payable it is therefore necessary to gross up the net gift.
Any available annual exemptions are deducted prior to grossing up, and it is only necessary to
gross up the amount in excess of the nil rate band.
EXAMPLE QUESTION
On 17 June 2016, Annie made a gift of £406,000 to a trust. She paid the IHT arising from the
gift.
Annie has not made any other gifts since 6 April 2015.
The nil rate band for the tax year 2016–17 is £325,000.
The lifetime IHT liability is calculated as:
£ £
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£ £
Value transferred 406,000
Annual exemptions
2016–17 3,000
2015–16 3,000
(6,000)
Net chargeable transfer 400,000
IHT liability
325,000 at nil% 0
75,000 x 20/80 18,750
Gross chargeable transfer 418,750
The amount of lifetime IHT payable by Annie is £18,750. This figure can be checked by
calculating the IHT on the gross chargeable transfer of £418,750:
£
IHT liability
325,000 at nil% 0
93,750 at 20% 18,750
18,750
Once the gross chargeable transfer has been calculated, then this figure is used in all
subsequent calculations. CLTs are never re-grossed up on death, even if the nil rate band is
reallocated as a result of a PET becoming chargeable.
Seven year cumulation period
As far as TX-UK is concerned, the most difficult aspect to grasp is the seven year cumulation
period.
When calculating the IHT on a lifetime transfer (either a PET becoming chargeable or a CLT), it is
necessary to take account of any CLT made within the previous seven years despite this CLT
being made more than seven years before the date of the donor’s death. Only CLTs have to be
taken into account in this way, because PETs made more than seven years before the date of
death are completely exempt.
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EXAMPLE QUESTION
Nia died on 18 March 2020 leaving an estate valued at £450,000 (the residence nil rate band is
not available). She had made the following lifetime gifts:
 1 August 2011 – A gift of £200,000 to a trust.

 1 November 2017 – A gift of £280,000 to a trust.
These figures are after deducting available exemptions. In each case, the trust paid any IHT
arising from the gift.
The nil rate band for the tax years 2011–12 and 2017–18 is £325,000.
Lifetime transfers
1 August 2011
£
No lifetime IHT is payable because the CLT is less than the nil rate band for 2011–12.
1 November 2017
£
IHT liability
125,000 at nil% 0
155,000 at 20% 31,000
31,000
The CLT made on 1 August 2011 is within seven years of 1 November 2017, so it utilises
£200,000 of the nil rate band for 2017–18.

1 August 2011
£
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There is no additional liability because this CLT was made more than seven years before the
date of Nia’s death on 18 March 2020.
1 November 2017
£
IHT liability
125,000 at nil% 0
155,000 at 40% 62,000
IHT already paid (31,000)
Additional liability 31,000
The CLT made on 1 August 2011 utilises £200,000 of the nil rate band for 2019–20 of £325,000.
Death estate
£
IHT liability
45,000 at nil% 0
405,000 at 40% 162,000
162,000
 The CLT made on 1 August 2011 is not relevant when calculating the IHT on the death
estate because it was made more than seven years before the date of Nia’s death on 18
March 2020.
 Therefore, only the CLT made on 1 November 2017 is taken into account, and this
utilises £280,000 of the nil rate band of £325,000.
EXAMPLE QUESTION
The same situation as in example 21, except that on 1 November 2017 Nia made a gift of
£280,000 to her daughter rather than to a trust.
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Lifetime transfers
£
1 August 2011
No lifetime IHT is payable because the CLT is less than the nil rate band for 2011–12.
1 November 2017
£
1 August 2011
1 November 2017
IHT liability
125,000 at nil% 0
155,000 at 40% 62,000
62,000
Death estate
IHT liability
45,000 at nil% 0
405,000 at 40% 162,000
162,000
Advantages of lifetime transfers
Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.
 A PET is completely exempt after seven years.
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 A CLT will not incur any additional IHT liability after seven years.
 Even if the donor does not survive for seven years, taper relief will reduce the amount
of IHT payable after three years.
 The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to
make gifts of assets which are expected to increase in value such as property or shares.
Tax liability on death estate
Until now, the examples have simply given a figure for the value of a person’s estate. However,
it may be necessary to calculate the value.
A person’s estate includes the value of everything which they own at the date of death such
as property, shares, motor vehicles, cash and other investments. A person’s estate also
includes the proceeds from life assurance policies even though the proceeds will not be
received until after the date of death. The actual market value of a life assurance policy at the
date of death is irrelevant.
Funds which have been invested in (and not withdrawn from) a pension fund are outside of a
person’s estate. Investing in a pension fund can therefore be a good approach to reducing a
person’s liability to IHT. However, it is possible to withdraw 25% of a pension fund as a tax-
free lump sum, and any such withdrawal will fall back into the estate.
The following deductions are permitted:
 Funeral expenses
 Debts due by the deceased provided they can be legally enforced. Therefore, gambling
debts cannot be deducted, nor can debts which are unenforceable because there is no
written evidence.
 Mortgages on property. This does not include endowment mortgages because these are
repaid upon death by the life assurance element of the mortgage. Repayment
mortgages and interest-only mortgages are deductible.
EXAMPLE QUESTION
Andy died on 31 December 2019. At the date of his death he owned the following assets:
 A main residence valued at £425,000. This had an outstanding interest-only mortgage of

£180,000.
 Motor cars valued at £63,000.
 Ordinary shares in Herbert plc valued at £54,000.
 Building society deposits of £25,000.
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 Investments in individual savings accounts valued at £22,000, savings certificates from

NS&I (National Savings and Investments) valued at £19,000 and government securities
(gilts) valued at £34,000.
 A life assurance policy on his own life. On 31 December 2019, the policy had an open
market value of £85,000 and proceeds of £100,000 were received following Andy’s
death.
During his lifetime, Andy had contributed into a personal pension scheme. The pension fund
was valued at £167,000 at the time of his death.
On 31 December 2019, Andy owed £700 in respect of credit card debts and he had also verbally
promised to pay the £800 legal fee of a friend. The cost of his funeral amounted to £4,300.
The residence nil rate band is not available.
Death estate
£
Property 425,000
Mortgage (180,000)
245,000
Motor cars 63,000
Ordinary shares in Herbert plc

54,000
Building society deposits 25,000
Other investments (22,000 + 19,000 + 34,000) 75,000
Proceeds of life assurance policy 100,000
Pension fund 0
562,000
Credit card debts (700)
Funeral expenses (4,300)
IHT liability
325,000 at nil% 0
232,000 at 40% 92,800
92,800
 The promise to pay the friend’s legal fee is not deductible because it is not legally
enforceable.
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 Unlike capital gains tax, there is no exemption for motor cars, individual savings
accounts, saving certificates from NS&I or for government securities.
 The IHT liability on the life assurance policy could have easily been avoided if the policy
had been written into trust for the beneficiaries of Andy’s estate. The proceeds would
have then been paid direct to the beneficiaries, and not formed part of Andy’s estate.
However, this aspect is not examinable at TX-UK.
 The pension fund of £167,000 is outside of Andy’s estate.
Residence nil rate band
For residence nil rate band purposes, the value of the main residence is after deducting any
repayment mortgage or interest-only mortgage secured on that 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.
EXAMPLE QUESTION
Una died on 10 July 2019 leaving an estate valued at £625,000. Under the terms of her will,
Una’s estate was left to her children. The estate included a main residence valued at £225,000
on which there was an outstanding interest-only mortgage of £130,000.
Death estate
£
IHT liability
420,000 (325,000 + 95,000)
at nil% 0
205,000 at 40% 82,000
82,000
The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence nil rate
band is restricted to this amount.
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PAYMENT OF INHERITANCE TAX
Chargeable lifetime transfers
The donor is primarily responsible for any IHT which has to be paid in respect of a CLT.
However, a question may state that the donee is to instead pay the IHT. Remember that
grossing up is only necessary where the donor pays the tax.
The due date is the later of:
 30 April following the end of the tax year in which the gift is made.
 Six months from the end of the month in which the gift is made.
Therefore, if a CLT is made between 6 April and 30 September in a tax year, then any IHT will be
due on the following 30 April. If a CLT is made between 1 October and 5 April in a tax year, then
any IHT will be due six months from the end of the month in which the gift is made.
The donee is always responsible for any additional IHT which becomes payable as a result of the
death of the donor within seven years of making a CLT. The due date is six months after the end
of the month in which the donor died.
Potentially exempt transfers
The donee is always responsible for any additional IHT which becomes payable as a result of the
death of the donor within seven years of making a PET. The due date is six months after the
end of the month in which the donor died.
Death estate
The personal representatives of the deceased’s estate are responsible for any IHT which is
payable. The due date is six months after the end of the month in which death occurred.
However, the personal representatives are required to pay the IHT when they deliver their
account of the estate assets to HM Revenue and Customs (HMRC), and this may be earlier than
the due date.
Where part of the estate is left to a spouse, then this part will be exempt and will not bear any
of the IHT liability. Where a specific gift is left to a beneficiary, then this gift will not normally
bear any IHT. The IHT is therefore usually paid out of the non-exempt residue of the estate.
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BASIC INHERITANCE TAX PLANNING
Make gifts early in life
Gifts should be made as early in life as possible so that there is a greater chance of the donor
surviving for seven years.
Gifts made just before death will be of little or no IHT benefit, and may result in a capital gains
tax liability (whereas transfers on death are exempt disposals).
Make use of the nil rate band
Gifts can be made to trusts up to the amount of the nil rate band every seven years without
incurring any immediate charge to IHT.
Gifts to trusts within seven years of each other will be subject to the seven year cumulation
period, whilst an immediate charge to IHT will arise if a gift exceeds the nil rate band.
However, as far as TX-UK is concerned, there is no advantage to making gifts to a trust on

death. This will not save any IHT.
Skip a generation
When making gifts either during lifetime or on death, it can be beneficial to skip a generation so
that gifts are made to grandchildren rather than children. This avoids a further charge to IHT
when the children die. Gifts will then only be taxed once before being inherited by the
grandchildren, rather than twice.
Of course such planning depends on the children already having sufficient assets for their
financial needs.
Residence nil rate band
Given that the residence nil rate band is only available where inheritance is by direct
descendants, rearranging the terms of a will can save IHT.
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PART 6
VALUE ADDED TAX
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Standard rated supplies
 Output VAT will be due, and input VAT will be recoverable.
Zero-rated supplies
 Output VAT will not be due, but input VAT will be recoverable.
Exempt supplies
 A taxpayer will not be required or permitted to register for VAT if they will not be
making taxable supplies.
 Output VAT will not be due and no input VAT will be recoverable.
Zero-rated supplies
The following are items on the zero-rated list.
 (a) Human and animal food
 (b) Sewerage services and water
 (c) Printed matter used for reading (eg books, newspapers)
 (d) Construction work on new homes or the sale of the freehold of new homes
by builders
 (e) Transport of goods and passengers
 (f) Drugs and medicines on prescription or provided in private hospitals
 (g) Clothing and footwear for young children and certain protective clothing eg
motor cyclists' crash
 Helmets
Exempt supplies
The following are items on the exempt list.
 (a) Financial services
 (b) Insurance
 (c) Public postal services provided by the Royal Mail under its duty to provide a
universal postal
 service (eg first and second class letters)
 (d) Betting and gaming
 (e) Certain education and vocational training
 (f) Health services
 (g) Burial and cremation services
 (h) Sale of freeholds of buildings (other than commercial buildings less than 3
years old) and
 leaseholds of land and buildings.
99
Standard rate of value added tax (VAT)
The standard rate of VAT is currently 20%.
EXAMPLE QUESTION
Zoe is in the process of completing her VAT return for the quarter ended 31 March 2020. The
following information is available:
 Sales invoices totalling £128,000 were issued in respect of standard rated sales.
 Standard rated expenses amounted to £24,800.
 On 15 February 2020, Zoe purchased machinery at a cost of £24,150. This figure is
inclusive of VAT.
Unless stated otherwise all of the above figures are exclusive of VAT.
VAT Return – Quarter ended 31 March 2020
£ £
Output VAT
Sales (128,000 x 20%) 25,600
Input VAT
Expenses
4,960
(24,800 x 20%)
Machinery
4,025
(24,150 x 20/120)
(8,985)
VAT payable 16,615
VAT registration
A business making taxable supplies must register for VAT if during the previous 12 months the
value of taxable supplies exceeds the VAT registration threshold, which is currently £85,000.
This figure is exclusive of VAT. Remember that both standard rated and zero-rated supplies are
taxable supplies.
100
EXAMPLE QUESTION
Albert commenced trading on 1 January 2019. His sales have been as follows:
Standard Zero-
rated £ rated £
2019
January 3,200 0
February 2,800 0
March 3,300 0
April 5,100 600
May 2,700 0
June 3,700 400
July 3,900 200
August 5,500 100
September 4,300 0
October 13,100 0
November 6,900 700
December 8,200 300
2020
January 8,800 900
February 16,500 1,200
 Albert will become liable to compulsory VAT registration when his taxable supplies
during any 12-month period exceed £85,000.
 This will happen on 29 February 2020 when taxable supplies will amount to £86,400
(3,300 + 5,700 + 2,700 + 4,100 + 4,100 + 5,600 + 4,300 + 13,100 + 7,600 + 8,500 + 9,700
+ 17,700).
 Albert will have to notify HM Revenue and Customs (HMRC) by 30 March 2020, being 30
days after the end of the month in which the limit is breached.
 Registration is required from the first day of the following month so Albert will be
registered from 1 April 2020 or from an agreed earlier date.
A business must also register for VAT if there are reasonable grounds to believe that taxable
supplies will exceed £85,000 during the following 30 days. Again the figure is exclusive of VAT.
101
EXAMPLE QUESTION
Bee commenced trading on 1 October 2019. Her sales have been as follows:
£
2019 October 4,600
November 5,400
December 23,900
2020 January 97,700
Bee’s sales are all standard rated.
 On 1 January 2020, Bee realised that her sales for January 2020 were going to exceed
£85,000, and therefore immediately registered for VAT.
 Businesses must register for VAT if at any time they expect their taxable supplies for the
following 30-day period to exceed £85,000.
 Bee realised that her taxable supplies for January 2020 were going to exceed £85,000.
She was therefore liable to register from 1 January 2020, being the start of the 30-day
period.
 Bee had to notify HMRC by 30 January 2020, being 30 days from the date that the
expectation arose.
If a business continues to trade after the date that it should have registered for VAT, then
output VAT will still be due from this date.
It is important that you appreciate the distinction between making standard rated supplies,
zero-rated supplies and exempt supplies. Only standard rated supplies and zero-rated supplies
are taxable supplies.
Voluntary VAT registration
A business may decide to voluntarily register for VAT where taxable supplies are below the
£85,000 registration limit, or where it is possible to apply for exemption. This will be beneficial
when:
 The business makes zero-rated supplies. As seen in earlier, output VAT will not be due
but input VAT will be recoverable.
 The business makes supplies to VAT registered customers. Input VAT will be reclaimed,
and it should be possible to charge output VAT on top of the pre-registration selling
price. This is because the output VAT will be recoverable by the customers.
102
However, it will probably not be beneficial to voluntarily register for VAT where customers are
members of the general public, since such customers cannot recover the output VAT charged. If
selling prices cannot be increased, the output VAT will become an additional cost for the
business.
Pre-registration input VAT
Input VAT incurred prior to registration can be recovered in certain circumstances.
EXAMPLE QUESTION
Elisa commenced trading on 1 January 2020 and registered for VAT on 1 April 2020. She had the
following inputs for the period 1 January to 31 March 2020:
January February March

£ £ £
Goods purchased 3,400 14,200 26,400
Advertising services 2,600 3,000 3,600
Non-current assets 0 0 64,000
On 1 April 2020, Elisa had an inventory of goods which had cost £13,800. The non-current
assets were not used until after Elisa registered for VAT on 1 April 2020.
The above figures are all exclusive of VAT.
 Input VAT of £2,760 (13,800 x 20%) can be recovered on the inventory at 1 April 2020.
 The inventory was not acquired more than four years prior to registration, nor was it
sold or consumed prior to registration. The goods must have been acquired for business
purposes.
 The same principle applies to non-current assets, so input VAT of £12,800 (64,000 x
20%) can be recovered on the non-current assets purchased during March 2020.
 Input VAT of £1,840 ((2,600 + 3,000 + 3,600) x 20%) can be recovered on the advertising
services incurred from 1 January to 31 March 2020.
 This is because the services were not supplied more than six months prior to
registration. The services must have been supplied for business purposes.
 The total input VAT recovery is £17,400 (2,760 + 12,800 + 1,840).
VAT deregistration
A business stops being liable to VAT registration when it ceases to make taxable supplies. HMRC
must be notified within 30 days, and the business will then be deregistered from the date of
cessation or from an agreed later date.
103
A business can also request to deregister from VAT if their taxable supplies fall below the VAT
deregistration threshold of £83,000 in the next 12 months.
There is a deemed supply of business assets such as plant, equipment and inventory when a
business ceases to be registered for VAT.
However, the transfer of a business as a going concern does not normally give rise to any VAT
implications.
Sale of business as a going concern
 If the purchaser is already registered for VAT, then Fang’s VAT registration will be
cancelled as above.
 If the purchaser is not registered for VAT, then they can take over Fang’s VAT
registration, though from a commercial point of view this may be inadvisable.
 A sale of a business as a going concern is not treated as a taxable supply, and therefore
output VAT is not due.
Group VAT registration
Two or more companies can register as a group for VAT purposes if they are under common
control (such as a parent company and its subsidiary companies) and each of them is resident in
the UK.
A VAT group is treated for VAT purposes as if it was a single company registered for VAT on its
own. Group VAT registration is made in the name of a representative member, and this
company is then responsible for completing and submitting a single VAT return and paying VAT
on behalf of the group. However, all the companies in the VAT group remain jointly and
severally liable for any VAT liabilities.
The tax point
It is very important to correctly identify the date of supply or tax point, as this determines when
output VAT will be due.
 The basic tax point for goods is the date that they are made available to the customer.
 The basic tax point for services is the date that they are completed.
 If an invoice is issued within 14 days of the basic tax point, the invoice date will usually
replace that given above.
 If an invoice is issued or payment received before the basic tax point, then this becomes
the actual tax point.
104
Output VAT and input VAT
There are several important points regarding output VAT and input VAT which should be
remembered:
 For VAT purposes there is no distinction between revenue and capital items as there is
for income tax and corporation tax.
 Output VAT is charged on the actual amount received where a discount is offered for
prompt payment. The supplier therefore has to either provide details of the potential
discount on the sales invoice, or to issue a subsequent credit note for the discount.
 Relief for an impairment loss is only available if the claim is made more than six months
from the time that payment was due and the debt has been written off in the business’s
books.
 Input VAT cannot be recovered in respect of business entertainment (unless it relates to
the cost of entertaining overseas customers) or the purchase of a motor car (unless the
car is used 100% for business purposes).
 Output VAT is charged where goods are taken from a business for non-business
purposes, and similarly where services are used by the taxable person for non-business
purposes.
 An apportionment is made where goods or services are used partly for business
purposes and partly for private purposes.
Refunds
The refund of VAT that has been overpaid is normally subject to a four-year time limit.
EXAMPLE QUESTION
Hedge Ltd is completing its VAT return for the quarter ended 31 March 2020. The company has
discovered that it has not been claiming for the input VAT of £35 that it has paid each quarter
for the rental of coffee machines since 1 January 2010.
 Claims for the refund of VAT are subject to a four-year time limit.
 In addition to the input VAT incurred during the quarter ended 31 March 2020, Hedge
Ltd can also claim for the input VAT incurred during the period 1 January 2016 to 31
December 2019.
 The total amount of input VAT refunded on the VAT return for the quarter ended 31
March 2020 will therefore be £595 (35 x 17).
Goods supplied free of charge
When goods are supplied free of charge, then output VAT must normally be accounted for on
the cost of the goods. However, there is an exemption for the gift of goods where the cost of
the gifts does not exceed £50 (excluding VAT) per customer over a 12-month period.
105
Free samples given to customers are not treated as a supply of goods for VAT purposes, so no
output VAT will be due.
Motor expenses
Provided there is some business use, the full amount of input VAT can be reclaimed in respect
of repairs.
Where fuel is provided, then all the input VAT (for both private and business mileage) can be
recovered, but the private use element is then normally accounted for by way of an output VAT
scale charge. This is based on the motor car’s CO₂ emissions, and will vary according to the
length of the VAT period. The scale charge can apply to sole traders, partners, employees or
directors. The scale charge will be given to you in the exam if required.
Value added tax (VAT) returns
VAT returns are normally completed on a quarterly basis. Each return shows the total output
VAT and total input VAT for the quarter to which it relates.
Most businesses have to use making tax digital software to directly submit their VAT returns to
HM Revenue and Customs (HMRC). They also have to keep digital records. The making tax
digital requirements currently do not apply to businesses with a turnover below the VAT
registration threshold of £85,000 but which are voluntarily registered for VAT.
VAT returns have to be submitted within one month and seven days of the end of the relevant
quarter. Any VAT payable is due at the same time, and must be paid electronically.
VAT invoices
A VAT registered business may have to issue VAT invoices in respect of standard rated
supplies. VAT invoices must contain
 The invoice date and invoice number

 The type of supply
 The quantity and a description of the goods supplied
 The name and address of the customer
 Supplier’s VAT registration number.
 The date of supply (the tax point).
 The rate of VAT for each supply.
 The VAT-exclusive amount for each supply.
 The total VAT-exclusive amount.
 The amount of VAT payable.
106
Simplified VAT invoices
A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the
invoice is less than £250.A simplified invoice should be issued when a customer requests a VAT
invoice. This must show the following information:
 Supplier’s name and address.

 Supplier’s VAT registration number.
 The date of supply (the tax point).
 A description of the goods or services supplied.
 The VAT inclusive total.
 The rate of VAT.
The default surcharge
A default occurs if a VAT return is not submitted on time or if VAT is paid late. If the default
involves the late payment of VAT then a surcharge may be incurred.
EXAMPLE QUESTION
Li has submitted her VAT returns as follows:
VAT paid
Quarter ended Submitted
£
30 September 2018 6,200 Two months late
31 December 2018 28,600 One month late
31 March 2019 4,300 On time
30 June 2019 7,600 On time
30 September 2019 1,900 On time
31 December 2019 3,200 On time
31 March 2020 6,900 Two months late
Li always pays any VAT which is due at the same time that the related VAT return is submitted.
 The late submission of the VAT return for the quarter ended 30 September 2018 will
have resulted in HMRC issuing a surcharge liability notice specifying a surcharge
period running to 30 September 2019.
 The late payment of VAT for the quarter ended 31 December 2018 will result in a
surcharge of £572 (28,600 x 2%).
 In addition, the surcharge period will have been extended to 31 December 2019.
 Li then submitted four VAT returns on time.
107
 The late submission of the VAT return for the quarter ended 31 March 2020 will
therefore only result in a surcharge liability notice (specifying a surcharge period
running to 31 March 2021).
Errors in a VAT return
A VAT registered business that makes an error in a VAT return which results in the
underpayment of VAT, can be subject to both a penalty for an incorrect return and penalty
interest.
Imports and exports
When a UK VAT registered business imports goods into the UK from outside the European
Union, then VAT has to be paid at the time of importation. This VAT can then be reclaimed as
input VAT on the VAT return for the period during which the goods were imported.
Trading within the European Union
When a UK VAT registered business acquires goods from within the European Union, then VAT
has to be accounted for according to the date of acquisition. The date of acquisition is the
earlier of the date that a VAT invoice is issued or the 15th day of the month following the
month in which the goods come into the UK.
This VAT charge is declared on the VAT return as output VAT, but can be reclaimed as input VAT
on the same VAT return. Therefore for most businesses, there is no VAT cost because the
output VAT and corresponding input VAT contra out. The only time that there is a VAT cost is if
a business makes exempt supplies, since an exempt business cannot reclaim any input VAT.
International services
Services supplied to a VAT registered business are generally treated as being supplied in the
country where the customer is situated. Therefore, where a UK VAT registered business
receives international services the place of supply will be the UK.
EXAMPLE QUESTION
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated
services from VAT registered businesses situated elsewhere within the European Union. As
business to business services, these are treated as being supplied in the UK.
 VAT will be accounted for on the earlier of the date that the service is completed or the
date it is paid for.
108
 The VAT charged at the UK VAT rate should be declared on Wing Ltd’s VAT return as
output VAT, but will then be reclaimed as input VAT on the same VAT return (this is
known as the reverse charge procedure).
The supply of international services by a UK VAT registered business will generally be outside
the scope of UK VAT as the place of supply will be outside the UK.
The cash accounting, annual accounting and flat rate scheme
Small businesses
These schemes are available only for small businesses whose taxable turnover (exclusive of
VAT) for the 12 months starting on their application to join the scheme is not expected to
exceed £1,350,000.
Cash accounting scheme

The cash accounting, annual accounting and flat rate schemes are all available to small
businesses. Be careful that the schemes are not confused, as they are completely different
from each other.
The cash accounting scheme enables a business to account for VAT on a cash basis. The
scheme will normally be beneficial where a period of credit is given to customers. It also results
in automatic relief for impairment losses. The disadvantage is that input VAT will only be
recovered when purchases and expenses are paid for.
Annual accounting scheme

Under the annual accounting scheme traders file annual VAT returns but throughout the year
they must make payments on account of their VAT liability by direct debit. The year for which
each return is made may end at the end of any calendar month. Unless HMRC agree otherwise,
the trader must pay 90% of the previous year's net VAT liability during the year by means of
nine monthly payments commencing at the end of the fourth month of the year. The balance
of the year's VAT is then paid with the annual return. There is an option for businesses to pay
three larger interim installments. Late payment of installments is not a default for the
purposes of the default surcharge.
Flat rate scheme

The optional flat rate scheme enables businesses to calculate VAT due simply by applying a
flat rate percentage to their turnover.
Under the scheme, businesses calculate VAT by applying a fixed percentage to their tax
inclusive turnover, ie the total turnover, including all reduced rate, zero-rated and exempt
income. However, the businesses cannot reclaim any input tax suffered.
The percentage usually depends upon the trade sector into which a business falls.
109
EXAMPLE QUESTION
Ming is registered for VAT. She has annual standard rated sales of £800,000. This figure is
inclusive of VAT. Ming pays her expenses on a cash basis, but allows customers three months
credit when paying for sales. Several of her customers have recently defaulted on the payment
of their debts.
 Ming can use the cash accounting scheme if her expected taxable turnover for the next
12 months does not exceed £1,350,000 exclusive of VAT.
 In addition, she must be up to date with her VAT returns and VAT payments.
 Output VAT will be accounted for three months later than at present since the scheme
will result in the tax point becoming the date that payment is received from customers.
 The recovery of input VAT on expenses will not be affected as these are paid in cash.
 The scheme will provide automatic relief for an impairment loss should a customer
default on the payment of a debt.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a
business only has to submit one VAT return each year.
REFERENCES
TECHNICHAL ARTICLES BY ACCA EXAMINING TEAM
TX-Uk BPP Text book
110

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Taxation (TX-UK)

Tax year in UK runs from 6th April to 5th April

Different taxes have different social effects:

The taxation system accommodates environmental concerns to a certain extent, especially

Revenue and capital taxes

TAX RATES AND ALLOWANCES

Basic rate £1 – £37,500 20% 7.5%

Higher rate £37,501 – £150,000 40% 32.5%

Additional rate £150,001 and above 45% 38.1%

Savings income NIL RATE BAND:

Basic Rate - £1,000

Higher Rate - £500

Additional Rate – Not available

Dividend income NIL RATE BAND - £2,000

Personal Allowance 12,500

Transferable amount 1,250

Income limit 100,000

INCOME TAX COMPUTATION

In computing Taxable Income UK taxpayers may be entitled to a deduction of a Personal

Computation of Taxable Income

Proforma –TAXABLE INCOME

Non-savings Savings Dividends Total

Building society interests XX XX

Total income XXX XXX XXX XXX

Qualifying interests (XX) (XX) (XX) (XX)

Trading losses (XX) (XX) (XX) (XX)

Net income XXX XXX XXX XXX

Personal allowance (XX) (XX) (XX) (XX)

Taxable income XXX XXX XXX XXX

 Interest or bonuses on National Savings & Investment Certificates

Qualifying interests are:

 On a loan to purchase an interest in a partnership or a contribution to the partnership of

Tax liability and Tax Payable

(a) Tax liability = income tax on taxable income

Transferable amount of Personal allowance (Marriage allowencce)

for 2019/20, computed as 1,250 x 20% = 250.

Basic rate taxpayers

Higher rate tax payer

For higher rate taxpayers, 40% tax relief is given as follows:

 20% at source (as noted above), and

Additional rate tax payer

For additional rate taxpayers, 45% tax relief is given as follows:

 20% at source (as noted above) and

Child Benefit Income Tax Charge

If a person’s ANI exceeds £60,000 the benefit fully taxable.

If there is no contract of service, the following suggest employment.

 The employer controls the manner and method of the work.

Statutory approved mileage allowances:

The following expenditures can deduct in calculating employment income:

NON JOB JOB

Taxable benefit Taxable benefit

Higher of Annual value XX

If the employer bought the accommodation more than six years

Expenses connected with living accommodation

Percentages for the tax year 2019-2020

The fuel benefit is proportionately reduced

Vans and heavier commercial vehicles

𝒐𝒑𝒆𝒏𝒊𝒏𝒈 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈+𝒄𝒍𝒐𝒔𝒊𝒏𝒈 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈

Outstanding amount × o/s months/12 = XX