2017 P6 Income Tax Flashcards Preview

OLD ACCA P6 > 2017 P6 Income Tax > Flashcards

Flashcards in 2017 P6 Income Tax Deck (118):
1

IT

General

In calculating the tax charge both the appropriate percentage rounded down to the nearest whole number

ORI% = 3%

Calcs should be performed to the nearest mth + £

2

IT

CH01

Exempt Income

RIBINGS

 

Redundancy payments

Income from Individual Savings Accounts (ISAs)

state Benefits paid in event of accident, sickness, disability, infirmity

Interest on repayment of tax

NS & I savings certificate interest

Gaming, lottery and premium bond winnings

Scholarship income

3

IT
CH01

Effcetive Dividend Rates

Additional tax payable on dividneds if more Divs recd net, after tax comp already done:

BR Taxpayer 0%

HR Taxpayer 25%

AR Taxpayer 30.555%

4

IT

CH01

Qualifying loan interest conditions

Partnerships

Relief given where loan interest at reasonable commercial rate

Qualifying purposes (4)

(1) Partnerships - Conts into partnership.  Loan made by a partner to buy P&M for use on partnership - year of purchase and next 3 years

(2) Close companies - Conditions: the individual (with associates) owns 5% ord share capital at time interest is paid; OR they own some Co shares @ time interest is paid +during the period from share purchase to pymt of i, they must have worked for the greater part of their time in the Co mgmt, or an ass Co

(3) Employee Controlled Companies (FT EEs for loans taken out to acquire ordinary shares in that Co if UK or EEA Res Co and Unquoted Trading Co)

(4) Personal representatives: IHT pymt on deceased personal estate. Relief for 1 yr only

5

IT

CH01

Royalties

Copyright - paid gross

Patent - 100/80

 

Patent and copyright royalties payable for trading purposes (calculated on an accruals basis) are an allowable deduction in calculating the adjusted trading profits of a business.

6

IT

CH01

PA

Children have a PA

Full PA if alive for part tax yr

Surplus lost; cannot be set against CGT nor trfd to another taxpayer.

Subject to conditions, max 10% of PA trf to spouse / civil partner

7

IT

PA

High income PA

ANI = Net income - gross gift aid - gross PPCs

Taxpayer's ANI >£100K, basic PA is reduced by

PA - [50% × (ANI – £100k)]

Might chose to make addtl gift aid / PPCs in order to reduce their ANI below £100K

 

8

IT

CH01

Clainming Marriage Allowance

For BR band Recipient Only

In advance

  • by 5 April 2016
  • Remain in force for future tax years, unless election is withdrawn, or conditions for relief no longer met

In arrears

  • by 5 April 2020 (i.e. within 4 yrs of end of tax year)
  • eg election will only apply to the tax year 2015/16 in isolation.

9

IT

CH01

Child Income

Income derived from a source set up by a parent (a parental disposition) is:

• assessed on the parent, not the child
• unless

– the gross income received in the tax year is £100 or less, and
– the child is under 18 (and unmarried).

Does not apply to a Child Trust Fund

10

IT CH01

Child Benefit

Tax-free payment BUT tax charge arises where:

  • Individual receives child benefit, AND
  • they, or the person they live with
  • have 'adjusted net income' (ANI) of ≥ £50,000

Tax charge:

  • Between £50,000 & £60,000: 1% of child benefit for each £100 of income over £50,000 (60K = 100% charge)

Collect through self-assessment system on the higher earning partner

11

IT

Employment Factors

FORCERS

Fixed hours

Obligation by both parties

Risk on employee/individual

Control of employee/individual

Equipment provided

Rights - employments legislation

Sources of income - usually 1

12

IT

CH02

Consequences of status

Self Employed or Employed

Income tax

  • SE: Trading profits: current year basis.  Expenses: 'wholly and exclusively'
  • EE: Employment income: receipts basis. Expenses: 'wholly exclusively and necessarily'

Payment of income tax

  • SE: Self-assessment;     EE: Monthly – PAYE

NICs

  • SE: Class 2 + Class 4: flat weekly rate based on π
  • EE: Class 1 primary based on cash earnings

Payment of NICs

  • SE: Class 2 and 4, with income tax under self-assessment
  • EE: Monthly – PAYE

Pensions

SE: Personal    EE: Occupational or Personal

VAT

SE: Register, Reclaim input VAT;     EE: Suffer input VAT

13

IT

CH02

State Benefits

The following state benefits are subject to income tax:

  • Statutory sick pay (SSP)
  • Statutory maternity pay (SMP)
  • Retirement pension + bereavement benefits

14

IT

CH02

Employed - receipts basis

Receipt is earlier of:

  • actual date of payment
  • date individual becomes entitled to pymt.

Dirs are deemed to receive earnings on the earliest of 4 dates:

  • actual date of pymt
  • date individual becomes entitled to pymt
  • when sums on a/c of earnings are credited in a/cs
  • where earnings are determined:

-before end of a period of a/c = end of that period

- after end of a period of a/c = date earnings determined

Bonuses: For Dirs + EE, liable to IT on date recd not determined. Same for divs

15

IT CH02

Exempt Benefits

SPORT

MEN

CHEWS

CLIT

 

 

-In-house Sports and recreational facilities

-Pensions advice up to £150 per EE per year

-Overnight expenses up to £5 per night in UK and £10 per night overseas

-Relocation and removal expenses up to £8,000

-Provision of work buses, bicycles, subsidies for public Transport

-Medical insurance & treatment while working abroad

-Eye care tests

-Workplace Nurseries

 

-Subsidised Canteen, unless part of a salary sacrifice scheme

-Contribution towards Home worker expenses up to £4 pw or £18 pm without documentation, more with documentation

-Entertainment from 3rd party to generate GW & gifts up to £250 from any one source in TY

-Welfare counselling

-Staff parties of up to £150 p.a. per EE

 

-Child care costs up to £55 pw (reduced to £28 for HR and £25 for AR)

-Long service awards up to £50 pa of service to mark employment of ≥ 20 years

-ER Liability insurance, DIS benefits & permanent health insurance

-Work related Training provided by ER

16

IT

 CH02

Benefits Assessable on All EEs

General rule for all EEs = Assessed on:

• Cash equivalent value of benefits

 

Specific valuation rules for some benefits:

• Non-cash vouchers - Cost to ER of providing voucher

• Credit cards - Cost charged to card for personal use

• Living accommodation - 2 key benefits to assess

  • Benefit only available for part yr; assessable amount pro rata
  • Where employee contributes towards benefit; cont is allowable deduction (exception = the provision of private fuel).

17

IT CH02

Benefits Assessable on P11D EEs

 

Assessed on cost to ER (marginal cost to ER if "in house" benefit)

Specific valuation rules for some benefits:-

- Expenses relating to living accommodation

- Use of gift of assets

- Cars, fuel and vans

- Beneficial loans, Scholarships

- Payment of a directors liability

18

IT

CH02

Formula to work out if EE if P11D

Total earnings test > £8500 per annum

ADD Cash Earnings

ADD All Benefits Assessable on all EE

ADD All Benefits Assessable on all P11D EE

LESS Conts to ERs Pension

LESS Donations - charity

TOTAL Earnings for P11D

19

IT

CH02

Recommended Medical Treatment

Exempt benefit of employment:

  • Expenditure incurred by ERs on medical treatment recommended by a health care professional
  • For EE assessed as unfit for work due to injury or ill health
  • After period of sickness absence of at least 28 consecutive days
  • For the purpose of assisting EE’s return to work.
  • Exempt benefit is max < £500 per EE per tax year.
  • Any amount incurred in excess assessed to income tax + NICs as a benefit of employment in the normal way.

20

IT CH02

Living Accommodation

Basic Charge: Higher of Annual value (Rateable) of property OR Rent paid by ER

Add'l charge: Applicable if property purchased + "cost" > £75K

Benefit (if living there)= [Cost or CURRENT MV - £75000] x ORI% (official rate of interest)

"Cost" = purchase price + cost of capex made BEFORE start of year

If property owned by ER > 6 years before providing it to EE then use MV of property when it was first provided, not purchase price. Otherwise use Purchase price + CAPEX

21

IT CH02

Living Accommodation - Expenses

Not JRA

P11D

Not JRA ...

Cost to ER

Use of Assets 20% rule

IF EE incurs expenses for business that are repaid, show in income and deduct from total income.

Council Tax is assessable of ALL EEs

22

IT CH02

Job Related Accommodation

No benefit

To qualify as JRA, property must be:

  1. necessary in performance of duties
  2. for better performance of EE duties
  3. where there is a special threat to the EEs security (Prime Minister)

A director can claim 1 of the 1st 2 exemptions if:

  • they have no material interest in the company and
  • they are FT working director or the company is a non-profit making org

23

IT CH02

Living Accommodation - Expenses

JRA

P11D

Ancillary benefits only taxable on P11D EEs (with exception of council tax which is assessed on all EEs)

Limited to 10% rule (except Council tax which is fully taxable)

[10% rule: 10% of net earning cap] total accommodation benefits assessed on a P11D EE for JRA is limited to 10% of ‘net earnings’

‘net earnings’ = employment income (including all assessable benefits other than the living accommodation ancillary benefits).

Applies to the following: heating, lighting, cleaning, repairing, maintaining,decorating premises, use of furniture/goods normal for domestic occupation.

24

IT CH02

USE OF ASSET 20% rule

(applies to additional mobiles)

EE uses ER owned asset:

PRO RATA YEAR -

20% open market value (usually cost)  when made available

Where ER rents asset to EE, higher of:

  • 20% open MV
  • rent paid by ER

25

IT CH02

Gift of Asset = used car / van / bicycle

Benefit = MV at date of transfer

LESS any payment made by the EE for the asset

Pro rata

26

IT CH02

Gift of Assets from ER

Outright gift ...cost to ER

Higher of: - MV of asset when gifted - MV of asset when 1st made available LESS benefits already assessed on EE for private use

If asset sold (not gifted) to EE

Higher of:

- MV when sold LESS purchase price

-Cost of asset when 1st made available LESS benefits already assessed on EE for private use LESS purchase price

27

IT CH02

Flat Rate Expense Deduction

Cars / Property

For Unincorporated Business

These flat rate must be used if cash basis used

Cars - 45p /25p allowed (instead of capital allowance) Passenger 5p Motorcycle 24p Bicycle 20p Temporary workplace (Passenger decifit cannot be reclaimed)

Property - cost cash paid not accrued LESS occupancy flat rate deduction (given in exam) (instead of accrued property expenses pro rata for business use)

Private use of part of a commercial building (e.g. private accommodation in a guest house or small hotel (e.g. a bed and breakfast)) - Private use adjustment re household goods and services, food and utilities
= fixed amount based on the number of occupants

28

IT CH02

Car & Fuel Benefit Calc % to use

For Petrol (Diesel add 3%)

≤ 50: 5%      51-75:  9%        76-94: 13%      95: 14%

Each complete additional 5 grams emission above 95 grams= An addnl 1% added to 14% / 17% up to a max % of 37%

 

Assessable Benefit = Appropriate % × List price of car when first registered Less: EE Conts for private use of car (max conts £5k)

29

IT CH02

Fuel benefit P11D

£22,100     x      % used in car benefit formula      x      pro rata for year

Personal conts to fuel make no difference unless EE pays for all private fuel, only for car

30

IT CH02

Van Benefit P11D

Flat rate charges £594 pa

Scale charge for fuel £3150 pa private use charge

Time apportioned if the van is unavailable to EE for 30 consecutive days or more during any part of the tax yr

Where EEs share the private use of the van, scale charge is divided between the EEs, on a just +reasonable basis (e.g. by reference to the amount of private use).

31

IT CH02

Beneficial Loans

P11D EEs

- Total balance of loan ≤10k in whole tax year, exempt

- Assessable Benefit = interest of loan at ORI% LESS int actually paid in tax year (Interest actually paid caluclated with Precise Method)

- Calc with Average and Precise Method

32

IT CH02

Beneficial Loans P11D

Average Method

ORI% x 0.5 x (opening capital balance ADD closing capital balance) pro rata for year

LESS

ACTUAL interest paid (from Precise method)

 

[Use this method by default]

33

IT CH02

Beneficial Loans P11D

Precise Method

For each change in capital balance add up as follows:

[ORI% x Capital Balance 1 x Pro rata]

+ [ORI% x Capital Balance 2 x Pro rata] + .....

LESS

ACTUAL interest paid (replace ORI% with i%)

HMRC OR EE MAY ELECT FOR PRECISE

34

 

IT CH02

Scholarship

Taxable on individual not recipient

No taxable benefit arises where:

  • scholarship awarded from a separate trust scheme, and
  • person receiving it is in FT education at school, college or Uni, and  
  • ≤ 25% of payments made in the tax year from the scheme are made by reason of a person's employment.

35

IT CH02

Dispensations

= an agreement btn ER + HMRC not to report certain benefits provided to EEs.

Dispensation usually applies:

  • where all expenses paid to EE are ‘wholly, exclusively + necessarily’ incurred in the duties of the employment.
  • the employer has arranged to pay any tax due on assessable benefits by way of a PAYE settlement agreement (PSA).

If a dispensation has been granted, No report reqd of any benefits covered by the dispensation.  ERs may make a PSA with HMRC so that the ER pays the income tax + NIC arising on an EE’s assessable benefits.

ERs pay NICs on the EE's tax paid under the PSA at 13.8%.

36

IT CH02

Share schemes

 

Share incentives: allocation of Co shares to EE

Share options: grant of options to buy Co shares in the future.

Schemes that satisfy conditions have significant tax advantages (approved) and those that do not are not tax-advantaged (unapproved)

 

37

IT CH02

Share Options - Tax and NI

Grants of options to buy company shares in the future either approved (A) or unapproved (U)

Grant of option: no tax on U or A (If EE buys, this is tax deductible)

Exercise of option: IT on U, No tax on A

Disposal: CGT ob both.

  • U: Sales proceeds less mv @ ex date = gain
  • A: Sales proceeds less cost of option less cost of shares = gain

Quoted: Class 1 ER + EE Unquoted: Class 1A

38

IT CH02

Entrepreneurs Relief on Share Options

Available if all true:

  • trading company
  • EE owns ≥ 5% ord shares
  • EE owned shares for => 12 mths

If A EMI scheme, relief available but:

  • no requirement to hold ≥ 5% ord shares
  • 12 mths ownership period starts on grant date not acquired date

39

IT CH02

Share Incentives

= gift or discounted options

Value of shares less price paid = employment income

Quoted ⇒ ‘readily convertible’ ⇒ liable to class 1 NIC (ER and EE)

Unquoted ⇒ not ‘readily convertible’ ⇒ class 1A NIC will apply.

40

IT CH02

4 Types of Scheme

SECS

Approved share options schemes

  • SAYE Save as you earn scheme
  • EMI Enterprise Management Incentive Scheme
  • CSOP Company Share Option Plan
  • SIPS Share Incentive Plans

Costs of setting up scheme are allowable as trading exp for Co

41

IT CH02

SAYE Approved

 

Participation: All EEs

Max value: £500pm

Interest exempt from IT

Exercise period: 3 or 5 yrs

Issue price: not < 80% of MV

Base cost of shares for CGT: price paid

 

42

IT CH02

EMI Approved

  • Participation: Employer chooses (smaller companies)
  • Max value: £250K per EE. Scheme Max £3m, unlimited no of EEs
  • Exercise period: Up to 10 years
  • Issue price: Issue at MV to avoid IT or NIC charge.

Other: Property Dev Co excl. Gross assets ≤ £30m, < 250 FT EE. 

EE must work for ≥ 25 h/w, or ≥ 75% of his working time if less, and must not have a material interest in Co (i.e. > 30%).

ER period of ownership runs from date of grant, and no need to own > 5% of OSC.  Co must not be a 51% subs or otherwise controlled by another Co +persons connected with that Co.

43

IT CH02

CSOP Approved

Participation: Employer chooses (Eligible EEs = FT Dirs (i.e. work25/wk) or FT or PT EEs. Close Co Dirs with a material interest (> 30%) are ineligible)

Max value: £30K unexercised options per EE

Exercise period: 3-10 years

Issue price: Issue at MV

Base cost of shares for CGT: Price paid

Other: If own >30% of company = excluded from scheme

44

IT CH02

SIPS Approved

Scheme that allows ER to give shares to EEs, and EEs can buy further shares, without IT charge

Participation: All EEs.  Max value: Gifted free shares.. Max £3.6K pa

Matching shares: Purchase option of partnership shares (e.g. 2:1... EE buys 1 share, ER gifts another 2) Max purchase is lower of: (i) £1800 (ii) 10% salary. (purchase via salary sacrifice)

If free, partnership or matching shares are held in a plan for five years, there is no IT / NIC at time the plan shares are awarded. Dividend income used to acquire shares is tax free as long as shares are held in plan for 3 years.

Dividends - tax free if invested in further shares  Holding period: 5 yrs for full benefit

Base cost of shares: MV when removed from plan

If shares held for between 3 and 5 yrs, IT & NIC will be charged on the lower of: (i) initial value of shares (ii) value at date of withdrawal

Shares held for < 3 years, IT & NIC will be charged on value at date they cease to be held in the plan

Plan must have no arrangements for loans to EEs

45

IT CH02

Employee Shareholder Status

 

 

applies to EEs with an equity-linked employment contract, awarded shares (in exchange for giving up certain employment rights, eg statutory redundancy pay)

Conditions Value of shares awarded ≥  £2000 AND no consideration except exchange of rights

46

IT CH02

EE Shareholder Status

EE does not own a material interest (≤25%)

(Material Interest: The employee has a material interest if they own at least 25% of the voting rights in the company)

 

Income tax charge:
Employment income = Value of shares awarded Less Tax free amount (i.e. £2K, the excess over £2K in value of shares received) 

NIC charge: 
if shares readily convertible into cash (as for unapproved share options)

Capital gains tax

On disposal of 1st £50K value of shares awarded (value of shares awarded for purposes of £50K exemption is based on the value at  time of acqn (not disposal)):

Chargeable gains arising = exempt

Losses arising = not allowable

If EE owns both EE shareholder shares and other shares in the Co:

  • EE can decide the proportion of shares disposed of that is to be treated as EE shareholder shares

47

IT CH02

EE Shareholder Status

EE owns a material interest (>25%)

(Material Interest: The employee has a material interest if they own at least 25% of the voting rights in the company)

Income tax and NIC charges:

  • Full value of shares awarded = treated as employment income
  • Taxable in the normal way

 

Capital gains tax

  • no exemption available
  • disposal of shares taxed in the normal way

48

IT CH02

Lumps Sum Payments - Wholly Exempt

SPL

Statutory redundancy payment

Payment for accident, injury, disability or death

Lump sum from registered pension scheme

 

 

49

IT CH02

Lumps Sum Payments - Partially Exempt

Genuine discretionary (ex gratia) termination payments
–first £30,000 exempt

–limit reduced if statutory redundancy payments received EG

  • redundancy payments
  • compensation for loss of office
  • some payments made in lieu of notice
  • damages for breach of contract or wrongful dismissal.

1ST £30k exempt rule also applies to any benefits recd as part of the termination package (e.g. company car).

Taxable amounts are:

  • Assessed in year of receipt
  • Paid gross
  • Taxed as the top slice of the individual’s taxable income (after div income) at the individual’s highest marginal rate of IT.
  • Exempt from NICs (if a genuine ex-gratia payment), but liable to class 1 NICs if a wholly chargeable payment.

50

IT CH02

NIC

Employee - Class 1 primary

Employer (by 19th) - Class 1 Secondary and Class 1A by 22 July

Self Employed - Class 2 and Class 4

ERs are able to claim up to £2K relief p.a. from their class 1 secondary conts.  Note that the allowance:

  • cannot be used against any other classes of NICs (e.g. class 1A)
  • claimed through the real time information (RTI) PAYE system.

EE who continues to work after state pension age has no liability for primary class 1 conts. ER is still liable for full secondary contributions.

51

 

IT

CH02 Company Directors

Where a person is a company director, deemed to have an annual earnings' period.

Annual earnings thresholds + UEL therefore apply.

The rules prevent directors avoiding NICs by paying themselves a low monthly salary, and then taking a large bonus.

52

IT CH03

Rental income Allowable deductions

All rental income & Exp Accruals Basis, Tax as O

  • Agents fees
  • Expenditure incurred before let repairs interest on loan to acquire/improve irrecoverable debts
  • Interest on a loan to acquire or improve the property
  • Irrecoverable debts
  • Insurance
  • Utilities

53

IT CH03

Rental Income

Disallowable Expenses

  • Relating to when owner lived in property
  • Capex or furniture (wear + tear allowance only)
  • Normal capital allowances are not available for P&M in a dwelling house

Wear + tear allowance = ( Actual rent recd - irrecoverable rent  - council tax & water) x 10%

[Council tax & water rates only deduct if landlord pays it]

  • Losses aggregated for all properties, if ∑ = -ve, then property income assessment = 0
  • if rent charged is £250 p.a. but a commercial rent would be £1,000 p.a., only 25% of exps will be allowed

54

IT CH03

Furnished Holiday Letting (O)

Qualifying conditions

 

  • property situated in UK / EEA, furnished + let on commercial basis
  • available for commercial letting, to public, as holiday accommodation for > 210 days / yr
  • accommodation is actually let for ≥ 105 days a yr (excl periods of LT occupation)
  • Where taxpayer owns > 1 property, 105 days test is satisfied if the av no of days for which the properties are let in the yr is ≥ 105.
  • accommodation is normally not let for > 31 consecutive days to same person. BUT, if during 12m period there are periods of letting to same person > 31 consecutive days, aggregate of these long periods must ≤ 155 days in total.

55

IT CH03

Furnished Holiday Accommodation

Losses

  • Losses from FHA cannot be set against any other income, they can only be c/f + offset against πs from the same FHA business.
  • UK losses can only be set against future UK FHA income, and EEA losses can only be set against future EEA FHA income.

56

IT CH03

The advantages of FHA treatment

πs will be treated as earned income arising from a single trade carried on by the landlord.

  • πs treated as relevant earnings for pension relief purposes
  • normal capital allowances (e.g. AIA) are available on all P&M incl furniture provided, instead of wear + tear allowance
  • property treated as business asset for CGT purposes + consequently on disposal of FHA ∴ reliefs available:
  1. entrepreneurs' relief
  2. roll-over relief, and
  3. gift relief

Business property relief for IHT may be available but only if:

  • it is run as a business (eg caravan park or estate)
  • there is substantial involvement by owner, and
  • addnl services are provided (e.g. cleaning, laundry, TV, light + heat, activities).

57

IT CH03

Rent a room relief

- furnished room in main residence with full access to communal areas

- gross income ≤ 4250 exemption for yr, exempt / ignore exemption + elect for loss that yr

- gross income > 4250, assessed on lower of

  • normal rental income assessment (all rent) less exp less W&T allowance
  • rents less 4250

Married couple: can split rent and this relief 50:50 or opt for one spouse to use 100% of both; Limit of 4250 split between spouses

58

IT CH03

Property Losses

Profits and losses on all the properties are aggregated.

  • If there is an overall loss, the property income assessment for the year will be £nil.
  • The loss is carried forward and set against the first available future property business profits.

59

IT CH03

REIT

Real Estate Investment Trust trust that gives investors opportunity to invest in a Quoted Property Business set up as an investment trust

Tax payer receives div from this trust  (Tax as Other Income not Div)

Gross up 100/80 (tax credit)

60

IT CH03

Tax free investments

DIP II

The main types of investment giving tax free or exempt income are as follows:

  • dividends from shares held in a Venture Capital Trust (VCT)
  • income tax repayment supplement
  • Premium Bond, National Lottery and betting winnings
  • interest on NS & I Savings Certificates
  • income from New Individual Savings Accounts (NISAs)

61

IT CH03

Individual Savings Accounts (ISAs)

2 options

  1. Cash and cash-like equity products:  Incl bank + building society a/cs, as well as those NS&I products where income is not exempt from tax. 16 + 17 year olds may only invest cash ISAs.
  2. Stocks, shares + insurance products.  Investment is allowed in shares + securities listed on a stock exch anywhere in world.  Unlisted shares + shares traded on the Alternative Investment Market (AIM) do not qualify.

For tax year 2015/16 annual subscription limit + max amount that can be invested by an individual in a NISA is £15,240. Spouses + civil partners each have their own limits.

Any combination of cash + shares can be invested, up to the total of £15,240.  Savers have a choice of account providers.

 

62

IT CH03

Transfer of ISA allowance to spouse/civil partner on death

From 2015/16, in relation to deaths on/after 3 December 2014, an additional allowance can be claimed for the surviving spouse or civil partner.

Amount of allowance will be equal to the value of the deceased person’s ISA savings at the time of death.

ISA savings can be trfd to the surviving spouse + retain their beneficial tax treatment.

Note that:

  • spouses will be entitled to allowance even if the ISA assets are left to someone else
  • a claim must be made for the additional allowance

63

IT CH03

Accrued Income Scheme

Introduced to prevent the practice of ‘bond washing’.

Interest normally paid on securities at regular intervals. As interest pymt date gets nearer, capital value of securities incs as any purchaser is buying accrued income in addition to underlying capital value.

When securities are sold they are usually exempt from CGT so this element of growth relating to the interest escapes tax.

64

IT CH03

Bond washing

  • Applies to marketable securities eg gilts + loan notes
  • Interest is paid to the registered holder on a certain date.
  • Price the vendor receives for selling is inflated to take a/c of the fact that the purchaser is due to receive next interest pymt
  • no income paid out, ⇒ no charge to IT in respect of the inc'd selling price.
  • Gilts + loan notes are exempt from CGT, any gain arising on disposal will also escape CGT. ∴ int due to be paid out + incl in selling price of security will escape tax.

65

IT

Bond Washing - How the scheme operates

  • Interest accrued on a daily basis (in exams likely calc on a monthly basis).
  • Purchase/disposal price of the security is apportioned btn the income and capital element.
  • Income element assessed as interest income.
  • Scheme does not apply unless total nominal value of securities held by an individual > £5K at some time during the year of assessment.
  • Scheme does not apply if securities are trfd on death.

66

IT

EIS Enterprise Investment Scheme

To qualify, Investor must:

  • investor subscribes, in cash, for new ord shares in qual Co
  • cannot already hold shares in Co at time of investment, unless shares are qualifying EIS or Seed EIS shares and cannot be EE / Dir of Co
  • have an interest of ≤ 30% Co ordinary share capital (OSC)

67

IT

CH03

EIS: Company qual conditions

Co, at date shares are issued, must:

  • be an unquoted trading Co with a permanent UK establishment
  • be no > 7 yrs old when 1st using the scheme or has raised qualifying funds in its 1st 7 yrs unless total investment represents > 50% of turnover averaged over the preceding 5 yrs

68

IT

CH03

EIS Rules

  • shares listed on the AIM count as unquoted for this purpose, although arrangements to obtain a quotation must not exist when the shares are issued
  • an effective 90% interest trading subs (i.e. through an indirect interest) will also qualify for relief
  • Co must be in sound financial health
    • have 250 FT EEs
    • have gross assets of:
    • < £15m before the share issue, and
    • ≤ £16m after the issue.
  • company must be carrying on a qualifying trade, or R&D intended to lead to such a trade, and
  • have no excluded activities.

69

IT

CH03

EIS: Excluded Investment

There are a number of investment activities which are excluded, and therefore do not constitute a qualifying trade. These activities include:

  • financial, legal and accountancy services, dealing in financial instruments eg commodities
  • property backed activities eg farming + market gardening + property dev
  • shipbuilding
  • coal + steel prdn

70

IT

CH03

EIS: Fund Rules

Funds must be used:

  • within 2 yrs of issue of the shares or, if later, 2 yrs from commencing qualifying activities
  • for the purposes of the qualifying trade
  • with the intention to grow + develop the business

Funds cannot be used to finance the purchase of another existing company or trade

Max invstmt that can be raised by an EIS company:

–          £5 million in any 12 month period, and  

–          £12 million lifetime total (from EIS, Seed EIS and VCT schemes).

71

IT

CH03

EIS: Tax Consequences

Income tax:   IT relief = 30% × (cost of shares subscribed for) 

  • Max investment = £1m / tax year ⇒ max tax reducer = £300K        
  • Deduct from individual’s IT liability, can reduce liability to £Nil, not create repayment.

Investor may elect to carry back amount invested to previous yr, but cannot get relief on > £1m in any 1 tax year.  Div recd from EIS taxable in normal way.

Capital gains tax: on disposal of shares in qualifying Co =exempt provided shares held for 3 yrs, but capital losses allowable.  Election can be made for capital losses to be relieved against total income in the same way as trading losses.  Possible to obtain EIS reinvestment relief in respect of EIS shares, which defers the gain where the proceeds from the disposal of an asset are reinvested.  Although the CGT on disposal is only deferred, initial relief is effectively 48% / 58% (30% IT on EIS investment, 18% / 28% CGT deferred).

Inheritance tax  Shares in an EIS scheme qualify for business property relief (BPR) as they are unquoted shares, provided they have been owned for 2 yrs

72

IT

CH03

SEIS: To qualify for the scheme

  • investor must subscribe, in cash, for new ord shares in a qual Co, not be a current EE (but can be Dir or ex EE), have an interest ≤ 30% Co's OSC
  • Co, at date shares are issued, must be an unquoted permanent UK, be carrying on qual trade that < 2yrs old, or it is preparing to carry on a qualifying trade, have no excluded activities (as for the EIS scheme), be in sound financial health, have < 25 FT EEs, have gross assets of ≤ £200K, not previously have used the EIS / VCT schemes
  • Funds must be used within 3 yrs of issue of the shares for the purposes of the qualifying trade with the intention to grow + develop the business
  • Co cannot raise more than £150K of investment through SEIS scheme in any 3 year period.

73

IT

CH03

SEIS: Tax consequences

 

Income tax Reliefs

= 50% × (cost of the shares subscribed for)

  • Max investment = £100,000 per tax year max tax reducer = £50K
  • Deduct from the individual’s IT liability; Can reduce liability to £Nil, not create repayment.
  • Investor may elect to carry back the amount invested to previous year, but cannot get relief on more than £100K in any one tax year.

Capital gains tax

Like the EIS scheme: gains on shares held for at least 3 years exempt, and election can be made for capital losses to be relieved against total income in same way as trading losses

Possible to obtain SEIS reinvestment relief in respect of SEIS shares, which exempts some of the gain where proceeds from the disposal of any asset are reinvested

Inheritance tax

Shares in an SEIS scheme qualify for business property relief as they are unquoted shares, provided they have been owned for two years

74

IT

CH03

VCT: Conditions

Relief introduced to encourage individuals to provide capital for unquoted trading companies.  VCT buys shares in EIS Co’s + so an individual is able to invest in a spread of unquoted companies, thus reducing their risk.

Qualifying conditions for VCT are similar to conditions for the EIS.

  • VCT has to be quoted on a recognised stock exch in EEA.
  • ≥ 70% of the investments of a VCT have to be in unquoted trading Co’s, with ≤ 15% in 1 company.
  • ≥ 70% of investment must be in the form of new ord shares
  • Unquoted trading Co’s that are invested in must: have permanent UK establishment, incl Co quoted on AIM, incl an effective 90% interest trading subs(i.e. through an indirect interest), be < 7 years old when 1st using scheme or has raised qualifying funds in its 1st 7 years, not be carrying on an excl activity (as defined for EIS), be in sound financial health, have ≤ 250 FT EEs at time the investment made, have gross assets of < £15m before share issue, and ≤ £16m after issue.

Max investment that can be raised by a VCT:

  • £5m in any 12m period, and
  • £12m lifetime total (from EIS, Seed EIS and VCT schemes).

75

IT

CH03

VCT: Tax Consequences

Income tax Relief

  • = 30% × (cost of the shares subscribed for), Max investment = £200K / tax year max tax reducer = £60K, Deduct from individual’s IT liability, Can reduce liability to £Nil, not create repayment.
  • No carry back facility.
  • Div income from VCT = exempt from IT for investments up to £200K pa

Capital gains tax

  • On displ of shares in a VCT = exempt for invmts up to £200K pa
  • No relief for capital losses.
  • No deferral relief available.

          

Inheritance tax     Shares in a VCT do not qualify for business property relief.

76

IT

CH03

EIS, SEIS + VCT:

Withdrawal of tax relief

  • IT relief withdrawn if shares not held for min periods
  • Min periods: EIS (3) SEIS (3) VCT (5)
  • If investor sells b4 min periods, must repay IT relief to HMRC as:

IT relief withdrawn (i.e. amount of IT that becomes payable):

  1. Not at arm's length: All original IT relief given
  2. At arm's length: Lower of:
  • original IT relief given
  • (% relief × SP received for shares)

For SEIS scheme, if disposal within 3 years :

CGT relief withdrawn (i.e. previously exempted gain that becomes chargeable) is

  • Not at arm's length: All of the gain previously exempted
  • At arm's length: A proportion of the gain previously exempted

= Amount of IT relief withdrawn (above) / Original IT relief given

77

IT

CH04

Registered Pension Schemes

Tax relief available, Age < 75, Pension reg'd + individual UK res; Can cont any amount

Total max annual gross cont where individual can obtain tax relief is higher of

  • £3,600, and
  • 100% of individual’s ‘relevant earnings’, chargeable to IT in tax year.

Individual with no relevant earnings can obtain tax relief on gross conts of up to £3.6K p.a

Personal pension PPC: gross up amount paid to work out actual cont 100/80

Occupational pension: EE make conts into an occ PS, gross, +tax relief given via PAYE system by reducing earnings subject to tax (i.e. pymt is allowable deduction from employment income).

Contributions paid by ER into Reg PS are added to pension conts paid by EE on which tax relief is given to determine whether annual allowance has been exceeded + IT charge levied.

78

IT

CH04

Relief for Conts Made by Individual

PPCs :   Same for EE, SE or Unemployed

BR taxpayer: Relief automatically given by deduction at source when conts are paid ∴ payment is ignored in IT comp.

For HR + AR taxpayers, 40% / 45% tax relief given:

  • 20% at source.
  • 20% / 25% via IT comp, obtained by extending BR & HR bands by gross pymt (∴more income taxed @ 20% + less @ 40% / 45%).

OPCs:  EE conts:

  • Payments made gross, and
  • Tax relief given via PAYE by reducing earnings subject to tax (i.e. payment is an allowable deduction from employment income).

79

IT

CH04

Pensions Annual Allowance AA

A tax charge is levied on the individual if total cont (by individual, ER + 3rd parties) on which relief has been obtained > AA [2015/16 £40,000]

This can be increased by bringing forward any unused AA from the previous 3 tax years.
AA for 2014/15 was also £40,000, however for tax years up to and including 2013/14, AA was £50,000.

Unused amount can only be c/f if individual was a member of a Reg PS for that tax year

AA for current year used 1st, then unused AA from earlier years starting with the earliest tax year (i.e. on FIFO basis).

AA charge becomes part of the individual's total tax liability, and is either paid through the self-assessment system or, may be taken from individual's pension fund.

80

IT

CH04

Pension: Spreading Provisions ER Conts

If ER conts increase from 1 period to next > 210%, HMRC require tax relief to be spread evenly over a no of years.   1st 110% is relievable in current year.

Excess (over 110% of previous year)             Tax relief obtained

  • Less than £500,000                                          All in current year
  • Between £500,000 and £1,000,000               Spread evenly over 2 years
  • Between £1,000,000 and £2,000,000            Spread evenly over 3 years
  • £2,000,000 or more                                         Spread evenly over 4 years

Additional contributions for existing pensioners are deductible when made.

81

IT

CH04

Pensions: Lifetime allowance

Pensions paid out earliest at 55.

If the funds in the scheme exceed the lifetime allowance [2015/6 £1,250,000] when a benefit is taken there will be a tax charge on the excess.

If fund > £1,250,000 and excess used to fund a larger annuity, tax charge = 25% of the excess.

If taxpayer chooses to take excess in cash, tax charge = 55% of the excess.

82

IT

CH05

Married couples and civil partners

Married couples and civil partners should consider the following techniques:

  • equalising income
  • use tax-free investments
  • maximising pension contributions.

83

ET

CH16

Fundamental Principles for Accountants

POPIC

 

  • Professional behaviour - Comply with relevant laws and regulations
  • Objectivity - not allow bias
  • Professional competence and due care - CPD Maintain professional knowledge; diligent and act in accordance with applicable technical and professional standards when providing professional services
  • Integrity - straightforward and honest
  • Confidentiality - Not disclose info

84

IT

CH16

Dishonest conduct of tax agents

 

Civil penalty of up to £50,000 for dishonest conduct of tax agents.

IF penalty exceeds £5,000, HMRC may publish details of the penalised tax agent.

With agreement of the Tax tribunal, HMRC can access the working papers of a dishonest agent

85

ET

CH16

New clients

Considerations Before Taking On

  • Will acting for client pose any risk to the practice in terms of their integrity. Assessing potential client's personal + business circumstances, + attitude to disclosure +compliance with tax law
  • Have skills + competence to service client’s rqmts
  • Is client involved in any activity that could be considered money laundering.

86

ET

CH16

Info to Gather when taking on a Company Client

  • Proof of incorporation + primary address + reg office.
  • Structure, directors + shareholders
  • Identities of persons instructing the firm on behalf of Co + those persons that are authorised to do so.

87

ET

CH16

Info to Gather when taking on an Individual Client

  • Proof of identity and residential address
  • Any unincorporated business interests and details of nature and structure
  • those persons that are authorised to act on behalf of the business (e.g. partners in a partnership)

88

ET

CH16

After Deciding to Take on Client...

  • ask permission to contact previous advisors to request info necessary to decide whether they can act for the client (the old advisor should seek the client’s permission before they discuss their situation with the new advisor)
  • if the client does not give permission to contact the old advisors the member should give serious consideration as to whether they can act for them
  • issue letter of engagement setting out terms + conditions of arrangement, and other relevant items

 

89

ET

CH16

Dealing with Conflict of Interest

  • potential conflict pointed out to all relevant parties
  • consent obtained to act for them
  • firm must have clear guidelines in relation to confidentiality;
  • consider need to use separate teams for each client.

90

ET

CH16

Action to take when Client Refuses to make Full Disclosure

 

  • cease to act for the client
  • write to HMRC informing them that they have ceased to act for the client, but without disclosing the reason why
  • consider position under the Money Laundering Regulations.

91

ET

CH16

Dishonest conduct of tax agents

  • Civil penalty of < £50K for dishonest conduct
  • If penalty > £5K HMRC may publish details of penalised tax agent
  • With agreement of Tax tribunal, HMRC can access working papers of a dishonest agent.

92

PT

CH16

Amendments after filing date

 

 

  • 9m: HMRC corrects returns
  • 12m: taxpayer corrects return

 

Time limit for notifying HMRC of chargeability is 6m from end of tax year in which the liability arises (i.e. 5 October 2016 for the tax year 2015/16)

93

PT

CH16

POAs are not required where

 

  • relevant amount (i.e. income tax and Class 4 NIC liability less tax deducted at source) for the previous tax year is less than £1,000, or      
  • more than 80% of the income tax liability for the previous tax year was met by deduction of tax at source.

94

PT

CH16

Late Payment Interest

 

  • Interest is charged on a daily basis from date tax was due to be paid to date; payment rate 3% pa
  • Interest may be paid by HMRC on overpayment of tax; rate 0.5%; runs from the later of: date tax due, or date HMRC actually recd tax.

  • Penalties for late payments:

>1m late = 5% of tax due.    >6m late = 10%.     >1y = 15%

 

95

PT

CH16

Penalties - lost revenue

Penalties, % of lost revenue

Genuine mistake (for incorrect returns) No Penalty

Careless/Failure to take reasonable care 30%

Deliberate but no concealment 70%

Deliberate with concealment 100%

96

PT

CH16

Retention of records

Unincorporated Business: 5 yrs from 31 Jan after TY (for 15/16: 31/01/22)
Personal: Latest of:

  • 12m from 31 Jan after TY (31/1/18)
  • date on which compliance check of return is completed
  • date on which it becomes impossible for compliance check to be started

Companies: 6 yrs from end of chargeable actg period

Failure to retain records for all £3000 pa

97

PT

CH16

HMRC compliance checks

  • must give written notice within 12m of return filled
  • do not have to state a reason for the compliance check
  • Closure notice once check done must include either:

    •confirmation that no amendments required

    •HMRC’s amendments to self-assessment.

  • Discovery assessment can be raised at later date to prevent loss of tax.

  • Time limit for issuing a discovery assessment is:

Basic time limit 4 years  5 April 2020 

Careless error 6 years 5 April 2022 

Deliberate error 20 years 5 April 2036

98

PT

CH16

Penalties for late filing of returns

Return filed afer after due date:  £100 fixed penalty

3m late: Daily penalties of £10 per day (max90 days), in addition to £100 fixed penalty

6m late: 5% of tax due (min £300), plus above penalties

> 12m where withholding information was: (The above penalties plus)

–not deliberate Additional 5% of tax due (min £300)
–deliberate but no concealment 70% of tax due (min £300)
–deliberate with concealment  100% of tax due  (min £300)
 

99

PT

CH16

Penalties for offshore non-compliance

IT, CGT and IHT

Penalties

  • failures to notify liability or chargeability to tax, submit timely return, errors in return.

Penalties apply if:

  • HMRC discover that asset moved overseas, and
  • 1 of the above penalties applies, and
  • penalty for deliberate behaviour is due, and
  • asset move was a ‘relevant offshore asset move’ which took place in order to prevent or delay HMRC discovering about the asset.

There are 4 levels of penalty, the amount of which depends on:

  • overseas territory used (4 categories exist and have been defined by the Treasury), and
  • existence of, and degree of exchange of, info with HMRC.

Relevant asset move:

  • asset moved from a country that exchanges info with UK to 1 that does not, or
  • owner of asset has ceased to be resident in a country that exchs info with the UK + becomes res in a country that does not.

100

IT

CH17

Unicorp Business - Badges of Trade

SO FIRM FAST

  • subject matter of the transaction (S)
  • length of the period of ownership (O)
  • frequency or number of similar transactions by the same person (F)
  • supplementary work, improvements and marketing (I)
  • the circumstances responsible for the realisation (R)
  • the motive (M).
  • Finance (F)
  • Method of acquisition (A)
  • Existence of similar trading transactions (ST)

101

IT

CH17

SE: Profits

Net profit per accounts

Add back:

Non-trading expenses (disallowable expenditure)

Trading income not credited in the accounts

Deduct:

Non-trading income

Trading expenses not charged in the accounts

=Tax adjusted trading profits before capital allowances

Less: Capital allowances

=Tax adjusted trading profits after capital allowances

102

IT

CH17

SE Hiring and leasing a car

No adjustment where CO2 emissions of a leased motor car <= 130 g/km.

CO2 > 130 g/km, then 15% of leasing costs are disallowed in calculating taxable profits.

The motor car is the most common asset with private use by the owner.  In this case, a further adjustment is required to reflect the private use.

103

IT

CH17

SE Adjustments required for a short lease

Add: 

the amortisation charged in the accounts (capital)

Deduct:

(the property business income assessed on the landlord ÷ period of the lease)

104

IT

CH17

SE Capital Allowances

  • Cars pooled on CO2 into either main/general pool or SRP
  • New low emission cars receive 100% FYA.
  • Cars with private use de-pooled regardless of CO2 +only business % of allowances claimed. CO2 determines rate of WDA
  • Allocate AIA to SRP spend then main pool P&M as WDA of 8% available on SRP pool but 18% on main
  • Spend qualifying for AIA in main pool but > AIA available is eligible for a WDA of 18%.
  • Where β immediately before calc of WDA on main and/or SPR is ≤ £1K, β can be claimed as a WDA + w/o off in that year.

  • Small pools WDA: where β of main pool and/or SRP before calc of WDA is < £1K, all β can be claimed as a WDA.

  • pro-rated for long and short periods

 

105

IT

CH17

SE Annual Investment Allowance (AIA)

(excl VAT if VAT reg, except for cars)

100% allowance for 1st £500K (can pro rata over 12m) spent by a business on P&M. Rules:

  • available to all businesses on acqns of P&M + SRP items (not cars)
  • limited to max of £500K spent in each actg 12m period in length
  • not available in actg period in which trade ceases.

If spends > £500K on assets qualifying for AIA, use WDA on β

  • don't have to claim all/any of AIA
  • any unused AIA cannot be c/f or c/b

not qualifying for AIA will qualify for WDAs

106

IT

CH17

Capital Allowances - Cars

  • Low emission   CO2

new = FYA 100%     2nd hand = as for standard emission

  • Standard emission CO2 76 – 130 g/km

put in main pool;   WDA 18% for 12m period

  • High emission  CO2 > 130 g/km

put in special rate pool;   WDA 8% for 12m period

  • Private use cars

keep separate; WDA 18%/8% for 12m period depending on CO2

BA or BC will arise on disposal

A image thumb
107

IT

CH17

Special Rate Pool

Long life assets

  • integral features of a building or structure
  • thermal insulation of a building
  • high emission cars.

Qualifying expenditure includes

  • initial cost, and
  • replacement expenditure (> 50% of replacement cost either as a one off or in bits)

108

IT

CH17

Opening year rules

Opening Year rules:

1st tax year: start to 5 April

2nd tax yr: period of 12m exactly

3rd tax year: 12m to actg date

4th yr = CYB

An accounting date just after 5 April will result in increased overlap profits

no overlap profits with a 31 March accounting date

 

109

IT

CH17

Loss Relief Available

Opening, Ongoing, Closing

Relief against total income  OOC Available for any 3 TYs

Relief against chargeable gains   OOC Available for future 3 TYs

Carry forward of trading losses   OO Available for future 3 TYs

Opening year loss relief   O Available for 3 previous TYs chronologically

Terminal loss relief   C

Incorporation relief   C

110

IT

CH17

Maximum Relief Deduction from Total IncomeSave

limit per tax year applicable to trading losses and/or qualifying loan interest: Max deduction from total income is greater of:

£50,000, or 25% of adjusted total income

Adjusted total income (ATI) is calculated as follows:

Total income Less: Gross personal pension contributions

Note that the restriction will be £50,000 unless the individual's ATI > £200,000 (as £200,000 × 25% = £50,000).

Limit applies to trading losses set against:

  • Current yr total income, and
  • Earlier yrs if set against income other than πs of the same trade.

Any trade loss that cannot be set off against total income can be offset against chargeable gains of the same tax year in the usual way, or c/f against future trade πs from the same trade. 

As the reliefs against total income are 'all or nothing', it is possible that this restriction of the amount of the loss allowed to be deducted could be beneficial and prevent the wastage of personal allowances.

111

IT

CH17

Cash or Accruals Basis

Unincorporated businesses (i.e. sole traders and partnerships) can choose to calculate profits/losses on:

–a cash basis (i.e. on the basis of cash received and expenses paid in the period of account), rather than

–the normal accruals basis

provided they have turnover under the VAT registration threshold (£82,000 with effect from 1 April 2015)

Choice not available to Ltd or LLP

112

IT

CH18

Cessation & Trf of Business

Cessation

  • Capital allowances in the closing years - no need for any time apportionment
  • no WDAs, FYAs, or AIAs in the final period

Transfer

  • as a going concern
  • to a connected person
  • an election is available
  • to transfer the assets at their TWDV

113

IT

CH18

Rules for relief on incorporation

(incorporated business ceases)

  • consider relief against total income and against chargeable gains first
  • Relief available when UniCorp Co trf to Co 80% in exch for shares
  • Relief: c/f losses indefinitely provided owner retains shares throughout whole tax yr in which loss relief given and Co continues the trade of former business
  • Losses are set against 1st available income individual derives from Co eg divs,: can set off against any tyoe eg O S or D but not future π

114

IT

CH18

Incorporation

  •  on incorporation, trader (or partners) will own shares in  Co which continues the trade of Unicorp
  • Note: if new company set up with few shareholders (e.g. five or fewer shareholders), it is likely to be a close company

Capital allowances: incorporation is treated as an open market value disposal; no AIA or FYAs
 

115

IT

CH18

Incorporation & GW

Popular Method of incorporation: sell business to Co for full MV in return for cash or a loan account in the Co and to claim ER such that CGT would only be paid at 10% on gains arising. Generous double relief obtained on value of GW which was usually a significant value + difficult to quantify / substantiate. Due to this ER now not available on any gain arising in relation to GW where:

  • Co acquiring GW is close Co (i.e. has <=5 s/hders)
  • individual is /becomes shareholder (or associate of shareholder) in Co acquiring GWl
  • unless the individual is a retiring partner.

116

IT

CH18

Incorporation & Other Taxes

VAT

Company VAT Reg: trf of assets will be a transfer of a going concern, and so not a taxable supply.  Co may take over the trader’s VAT registration.

Stamp Duty

If property involved, SDLT payable by Co. Can be avoided by not trf propertybut gift to the company; claim made to defer the gain under the gift relief provisions.

117

IT

CH25

Weighing up Finance Options

  • Amount can raise
  • Returns
  • Who are the investors
  • What benefits are there for the investors

118

IT

CH25

Owning or Hiring Assets

  • AIA
  • VAT claim back
  • Capital allowances
  • Interest / Instalments