VIFHE – Taxation (F6)

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This is the source of income for the Government.

HIS MAJESTY’s REVENUE AND CUSTOMS (HMRC) is the tax authority
Social Factors
Tax policies can be used for redistribution of wealth from rich towards poor and bring about social
equality, using the following types of taxes:
 Progressive taxes
 Regressive taxes
 Proportional taxes
Environmental factors
Taxes may be levied for environmental reasons, in order to protect the environment, using the following
techniques:
 Climate change levy: Higher rate of tax charged on businesses consuming more energy.
 Landfill tax: Businesses are encouraged to recycle the waste because if instead they store away toxic
wastes, they are then charged a higher rate of tax
Types of Taxes
Income tax charged over individuals and partners
Corporation tax: charged over companies
Capital gains tax: charged over gain generated on the disposal of fixed asset by Direct Tax
individual
Inheritance tax: charged over inheritance of property by individual
Value added tax: charged on the selling price of good/service, borne by consumer
(indirect tax)
The Tax System
HMRC is being controlled by Chancellor of Exchequer. A number of personnel work with him to
effectively manage the tax affairs of the country.
These include:
 Officers of revenue and customs
 Receivable management officers
 Revenue and customs prosecutions office
Appealing System
Appeals heard by:
 First tier tribunal
 Upper tribunal
Paper’ track, ’basic’ track and ‘standard’ track are allocated to first tier tribunal while
‘complex’ track is allocated to upper tier tribunal.

Paper track Includes simplest appeals i.e.an appeal against a fixed penalty. Decision is
normally taken out without a hearing.
Basic track Involves a hearing but exchange of documents beforehand is kept to minimum.
Standard track Involves formal hearing. It deals with the cases which leads to more detailed
management.
Complex track Includes complicated cases which requires specialized knowledge relating to

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either some important principle or a large financial sum.

Following tax publications are also issued to rewrite the tax in easier and user-friendly language:
 Statement of practice
 Extra-statutory concessions
 Explanatory leaflets
 Business economic notes
 Revenue and customs brief
 Internal guidance (HMRC manuals)

Tax Evasion
This is referred to reducing tax liability in an illegal manner.
Tax Avoidance
Tax avoidance includes a legal method of reducing tax liability by using tax shelters, or using schemes to
minimize tax
Code of Ethics and Conduct
ACCA members and affiliates are bound by the following principles:
Integrity: every task should be performed honestly
Objectivity: fair and unbiased decisions should be made
Professional competence and due care: care should be taken while performing a job and one must have
professional competence before accepting work
Confidentiality: any information obtained during the course of one’s work should not be disclosed to any
person unless written permission has been made on prior basis or there is a legal or professional
obligation to do so.
Professional behavior: professionalism should be maintained while performing tasks.
 Most taxpayers appoint accountants/ tax specialists, whose responsibilities are to prepare and
submit tax returns. While performing these tasks for any tax payer, client confidentiality should
be maintained as every accountant is bound by the ACCA code of ethics and conduct
 However, under certain circumstances it becomes the legal duty of the accountant to report a
client to an authority, i.e. if client is suspected to be involved in any illegal activity and if the
client is found in tax evasion activities then it’s an accountant’s professional duty to report this
matter to HMRC.

INCOME TAX COMPUTATION

UK Resident v/s non-resident person

UK resident individuals are liable to income tax on their taxable income according to the tax year.
Residence
A statutory test of residence has been introduced to determine a person’s residence status each tax year.
The following people will automatically be treated as not resident in the UK:
 A person who is in the UK for less than 16 days during a tax year.
 A person who is in the UK for less than 46 days during a tax year, and who has not been resident
during the three previous tax years.
 A person who works full-time overseas, subject to them not being in the UK for more than 90 days
during a tax year.
Subject to not meeting any of the automatic non–resident tests, the following people will automatically be
treated as resident in the UK:
 A person who is in the UK for 183 days or more during a tax year.
 A person whose only home is in the UK.

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 A person who carries out full time work in the UK.

Where a person’s residence status cannot be determined according to any of the automatic tests, then
his/her status will be based on how many ties they have with the UK and how many days they stay in
the UK during a tax year. There are five UK ties as follows:
 Having close family (a spouse/civil partner or minor child) in the UK.
 Having a house in the UK which is made use of during the tax year.
 Doing substantive work in the UK.
 Being in the UK for more than 90 days during either of the two previous tax years.
 Spending more time in the UK than in any other country in the tax year.

Days in UK Previously resident Not previously resident

Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties (or more) Automatically not resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties
91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident

The table will be given in the tax rates and allowances section of the examination paper.
Tax Year
Individuals are assessed according to the tax year. Tax year runs from 6 th April to 5th April.

Mr. / Ms.
Personal Tax Computation
2023-24
NON SAVINGS DIVIDEND TOTAL
SAVINGS
£ £ £ £
Employment Income X X
Profits from Trade/Profession X X
Rental Income X X
Income from FHL X x
Interest Received X X
Bank & Building Society Interest X X
UK Dividends X X
Pension x x
Total income X X X X
Less: Deductible Interest (X) (X)
Net income X X X X
Less: Personal allowance (x) (x)
Taxable Income X X X X
Types of Income
Chargeable/Taxable Income
The main types of income for individuals are:
 Profits of trade, profession and vocations
 Income from employment and pensions

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 Property income
 Saving and investment income, including interest and dividends
Exempt Income
 Premium bond prizes & lotto prizes
 Betting, gaming and winnings
 Returns on national saving certificates
 Income from individual savings accounts (ISAs)

Individual Savings Account

The individual savings account (ISA) investment limit for the tax year 2023–24 is £20,000. The £20,000
limit is completely flexible, so a person can invest £20,000 in a cash ISA, or they can invest £20,000 in a
stocks and shares ISA, or in any combination of the two

Deductible Interest: Interest paid on a QUALIFYING loan is termed as Deductible Interest.

Qualifying loans are those which are taken either:
 For purpose of making an investment in a partnership, or
 For purchase of plant and machinery for partnership (by partner) or employment (by employee)
 For the payment of inheritance tax
Personal Allowance
 The normal personal allowance of £12,570 is gradually reduced to nil where a person’s adjusted net
income exceeds £125,140.
 Adjusted net income is net income (total income less deductions for loss relief and interest payments)
less the gross amount of personal pension contributions and gross amount of gift aid donations.
 The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net income
exceeds £100,000. Therefore, a person with adjusted net income of £125,140 or more is not entitled
to any personal allowance ((125,140 – 100,000)/2 = £12,570).
Income Tax Rates
Normal Dividend
rates ( for rates
non-savings
and savings
income)
Basic rate £1 to £37,700 20% 8.75%
Higher rate £37,701 to £125,140 40% 33.75%
Additional rate £125,141 and over 45% 39.35%
Savings income nil rate band
- Basic rate taxpayers £1,000
- Higher rate taxpayers £500
Dividend income nil rate band £1,000

A starting rate of 0% applies to savings income where it falls within the first £ 5,000 of taxable income.

Income Tax Payable

Credit is given for the taxes that have been deducted at source against tax liability. Sources of income over
which tax has been deducted at source includes employment income in the form of PAYE.

Gift Aid Donation

The Gift Aid scheme gives tax relief for donations made to registered charities.

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Individuals are deemed to make Gift Aid donations net of 20% tax, which is recoverable by the charity
from HMRC. The additional relief provided to the taxpayer, is obtained by extending the basic rate
bands by the gross amount of the Gift Aid payment.
Child Benefit Income Tax Charge
Child benefit is a tax-free payment that can be claimed in respect of children if ANI is either equal to or
less than £50,000.
An income tax charge has been introduced where a person’s adjusted net income exceeds £50,000 and
they receive child benefit. The tax charge in effect removes the benefit for those on higher incomes.
Where adjusted net income is between £50,000 and £60,000, the income tax charge is 1% of the amount
of child benefit received for every £100 of income over £50,000.
For people whose adjusted net income exceeds £60,000, the amount of the income tax charge is
equivalent to the amount of child benefit received.
The child benefit income tax charge is collected through the self-assessment system.

TRANSFERABLE AMOUNT OF PERSONAL ALLOWANCE

Personal allowance can be transferable in between spouses, if both spouses are found to be in the basic
band. The transferable amount of personal allowance (also known as the marriage allowance or marriage
tax allowance) is £1,260 for the tax year 2023–24. So, the person who is transferring the personal
allowances will be left with the personal allowance of £11,310 (12,570-1260)
The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax, so
the tax reduction is therefore £252 (1,260 at 20%). If the recipient’s tax liability is less than £252, then the
tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.

Rental Income
Property income covers normal tenancy agreement and lease agreements for UK land & building.
 Calculation is done on either on accrual basis or cash basis.
 Rent is taken first according to the tax year and deduct all expenditures related to rental income in
order to arrive at taxable figure of rent.
 Expenditures are only deductible if following 3 conditions are satisfied:
 Expenses are borne by landlord.
 Expenses should be of revenue in nature.
 Expenses are either related to the period of actual occupation by tenants or is made available for
Letting purposes.

Lease agreement
Leases are assessed under income tax rules if they are short lease (life ≤ 50 years). Long leases are not
assessed to income tax.
 In the case of short lease, premium might have been received by the landlord. A portion of this
premium is assessable only in the year of RECEIPT. Taxable portion of premium is calculated by
applying the following formula

Premium = P – [P x (n – 1) x 2%]
Assessable

Premium No. of years

OR

Premium assessable= P * (51 – D)/50

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 Premium paid by TENANTS can be claimed as trading expenses if property is used for trading
purpose.

Deductible = Premium assessable

Amount per year No. of years
 If more than one property is rented out, their income expenses are pooled to get a single profits/ loss
which are assessed under non-saving income column.

Pro Forma
Rent xx
Less: Expenses

– Maintenance
– Repair
– Redecoration
– Insurance
– Advertisement
– Bad debt (x)
– Council tax (x)
– Water rates
– Agent’s fee
– replacement furniture relief (x)

(If property is furnished)

Income from property xx
 List of expenses mentioned above is not the complete list. There is a variety of expenditures related to
rental property.

*PROPERTY INCOME FINANCE COSTS

Tax relief for finance costs in respect of residential property, such as mortgage interest, is to be restricted
to the basic rate. For the tax year 2023–24, the finance cost acts as a tax reducer at the basic rate.
The restriction does not apply where finance costs relate to a furnished holiday letting or to non-
residential property such as an office or warehouse. The restriction only applies to individuals and not to
limited companies.
Replacement furniture relief
 Individuals and companies can deduct the actual cost of replacing furniture and furnishings
when calculating the property income from renting out a residential property.
 There is no relief for the initial cost of furniture and furnishings. There is only relief when
assets are replaced.
 The amount of relief is reduced by any proceeds from selling the old asset which has been
replaced. Also, relief is not given for any cost which represents an improvement.

Rental Loss
Loss of one property is netted off against profit of other property in a tax year.
Excess losses are carried forward against immediate available rental income of future tax years for
indefinite period.

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Rent a Room Relief

 If a landlord lets out a room/ rooms of his living accommodation then a special treatment may apply
 Landlord is allowed to choose the method which gives the most favorable picture.
Method 1
Rent - Allowable expense = property income
Method 2
Rent is taxable only if it is in excess of £ 7,500 (special exemption)
If rental income is being shared by spouses/ civil partners then this special exemption is halved between
them.

Furnished Holiday Letting (FHL)

There are certain conditions imposed by HMRC, which if followed by FHL, then FHL would be treated as
commercial letting i.e. the income from FHL is treated as profits received from commercial trade.
Conditions
 Availability conditions: it should be available for at least 210 days in a tax year.
 Letting condition: it should be actually occupied for at least 105 in a tax year.
 If it is let for periods of longer term occupation (more than 31 consecutive days) then total of longer
term period of occupation should not exceed 155 days during the tax year.
Advantages/ Differences
 Capital allowance will be available instead of replacement furniture relief.
 Income is considered as relevant earning for pension purposes.
 Assets of FHL are treated as business assets for CGT purpose.
Losses
Losses of FHL are carried forward against future income of FHL only.

Interest Income
Interest
Usually it is taken on receipt basis
e.g.
#1) bank interest £700 on 3rd February 2022 will be assessed in the tax year 21/22.
#2) interest of £3,500 from building society received on 10 June 23, will be assessed in the tax
year 23/24.
#3) interest of £1,000 from individual received on 1 may 2022 will be assessed in the tax year
22/23
Exception: interest received on gilts is taken on the basis of accrued income scheme. Here the
purchase price/ disposal price is apportioned in between capital element and income element.
The income element ( interest ) is assessed on seller

EMPLOYMENT INCOME
Employment v/s Self Employment
There are number of factors indicating whether the contract is contract of service or contract for service:
 The degree of control exercised by the person doing work.
 Whether he should accept further work?
 Whether the other party must provide him/her with further work?
 Whether he provides his own equipment and whether he hires his own employees?

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 Degree of financial risk

 Degree of responsibility for investment and management
 Whether he can profit from sound management?
 Timings of work
 The wording used in any agreement between parties.

Employment income is calculated according to the tax year and it includes:

Salary
+ Bonus
+ Commission
+ Benefits
– Allowable deductions

Basis of assessment of earnings (i.e. salary +bonus +commission)

For employees
It is taken on the earlier of
 Date of receipt of earning &
 Date when employee becomes entitled to this payment
For directors
It is taken on the earliest of:
 The date that the earning has been received.
 The date of entitlement to the earning.
 The date when it is credited in the records of the company.
 The end of the period of accounts, if earning for that period is determined before the end of the period
of account.
 The date on which amount is determined, if it is determined after the end of company’s period of
accounts

Benefits assessment
Vouchers
Cash voucher: Subject to the face value of voucher
Non-cash voucher/ voucher exchangeable for good: Cost of provision by employer
Credit token (company credit card): value of goods and services bought for private use

Living Accommodation
The benefit for living accommodation is exempt if property has been provided for either of the following
purposes:
 Property has been provided for employee to perform his duty in a proper way
 Property has been provided for employee to perform his duty in a better way
 Property has been provided for the purpose of security of employee
If accommodation is provided for any reason apart from the above, it is treated as Non job related
accommodation and results in a Taxable Benefit on the employee provided with the accommodation.
 The basic benefit is the annual value/ rate able value of the property.
 If the property is rented then the basic benefit is the higher of the annual value and the
amount of rent paid by employer.

Additional benefit
There is an additional benefit if the property costs more than £75,000 and is only applicable if the
property is owned by the employer/ organization.

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This is calculated as: (Cost–£75,000) x 2.25% (the official rate of interest)

What is meant by COST?

If property has not been purchased either 6 or less than 6 years before the date of first provision to
employee then cost is equal to cost of the property plus improvements incurred before the start of the
current tax year
However, where the property was purchased more than six years before first being provided to the
employee, then the cost figure is replaced by the market value when first provided plus any subsequent
improvements from the date of provision to employee and before the start of particular tax year.

Ancillary benefit relevant to accommodation

 If the employer pays for the running costs relating to the property then the amount paid will be a
benefit. Running costs include heating & lighting and repairs & maintenance costs.
 If the employer has furnished the property, then the benefit for the use of the furniture is based on
20% of its cost
 If ancillary benefit has been provided along with job related accommodation then taxable benefit is
the lower of cost to employer and 10% of employee’s earning.

Beneficial Loans
Qualifying loans will never give rise to taxable benefits.
Non -qualifying loans of ≤£ 10,000 does not give rise to taxable benefit.
There is a taxable benefit where an employee is provided with loan of more than £10,000 for non -
qualifying purposes at interest rate payable which is below the official rate of interest of 2.25%.

Benefit / Interest saved= outstanding amount of loan × official rate of interest

There are two alternative methods of calculating the benefit If partial repayments/additions are made to
the amount of loan during the relevant tax year:

The average method:

Interest saved:
Opening balance of loan +closing balance of loan ×official rate of interest X
2

Less interest paid (X)

X

The strict method:

The official rate of interest is applied to the amount outstanding on a monthly basis.
The average method applies unless either the employee or HM Revenue and Customs (HMRC) elects for
the strict method, if the taxable benefit derived from both methods vary significantly.

Use of Assets
 Where an employee is provided with an asset for their personal use then the benefit is based on
20% of its MV at first time provision.
 In case of rented asset, taxable benefit is the higher of 20% of MV and rent paid by employer.

Transfer of asset
If the asset is subsequently sold or given to the employee, then there will be a further benefit
Asset is transferred either as first-hand asset or second-hand asset

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 1st hand asset: MV at the date of provision to employee at the date of transfer less payment made
by employee (if any)
 2nd hand asset, Greater of:
 Market value at the date the employee acquires the asset &
 MV at the date of first time provision less any amounts assessed as benefits for having the use of the
asset.
The provision of one mobile telephone for personal use does not give rise to a taxable benefit.

Provision of a Company Motor Car

No taxable benefit arises where employee is using car for business use only or the car is pool car*.
Cost of motor car
=list price plus cost of accessories fitted after the purchase of car less capital contribution
Any discounts given to the employer are ignored. The employee can reduce the figure on which his or her
company car benefit is calculated by making a capital contribution of up to £5,000.

Car benefit percentage

A 2% percentage applies to electric-powered motor cars with zero CO2 emissions.
For hybrid-electric motor cars with CO 2 emissions between 1 and 50 grams per kilo meter, the electric
range of a motor car is relevant in determining the car benefit percentage.

Electric Range
130 miles or more 2%
70 to 129 miles 5%
40 to 69 miles 8%
30 to 39 miles 12%
Less than 30 miles 14%
The percentage rates applying to petrol cars with CO₂ emissions up to this level are:
51 grams to 54 grams per kilometer 15%
55 grams per kilometer 16%

The base percentage is 16%, and this applies where a motor car’s CO2 emissions are at a base level of 55
grams per kilometer. The percentage is then increased in 1% for each five grams per kilometer above the
base level, subject to a maximum percentage of 37%.

Diesel cars: The percentage rates are increased by 4% for diesel cars (if they do not meet the RDE2
standard), but not beyond the maximum percentage rate of 37%.
If running cost is borne by employer along with the motor car such as insurance, repairs, maintenance
and road fund license, then it is said to be an exempt benefit (except for fuel).

If fuel is provided along with non-job-related car, then taxable benefit will arise.
Base figure: For the tax year 2023–24 the base figure is £27,800 and is multiplied by the %.
The fuel benefit is proportionately reduced if a motor car is unavailable for part of the tax year BUT no
reduction is made for partial contributions made by an employee towards the cost of private fuel

Provision of driver: The taxable benefit in case of provision of a chauffeur along with non-job related
car will be ‘the cost to employer’.

Van

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If van has been given for significant business use & insignificant private use of van (travel between home
and office) constitute exempt benefit
Taxable benefit of van is £3,960 per annum if van is used for significant private purposes.
Benefit is month apportioned if van is not available for the whole tax year.
Any contribution made by employee is deductible against the benefit figure
Running cost provided by employer in respect of van is exempt except for fuel and use of driver/chauffeur
if given along with van used for significant private use.

Use of driver/ chauffeur: cost of provision of driver is taxable benefit

Fuel: Benefit of £757 is a taxable benefit if fuel is provided along with non- job related van
No reduction is made for partial contributions made by an employee towards the cost of private fuel

Scholarship
If scholarships are given to members of an employee's family, the employee is taxable on the cost of
scholarship if they are more than 25% of allocated fund for scholarship.

Exempt Benefit
 Payments for private incidental expenses are exempt up to £10 per night when spent outside the UK,
so the allowance does not result in a taxable benefit. Note that the equivalent UK allowance is only £5
per night.
 Up to £8,000 of the relocation costs is exempt
 The provision of a place in a workplace nursery & workplace parking Recreational and sporting
facilities are exempt
 The provision of meals in a staff canteen
 Payments for home working are exempt up to £6 per week
 Entertainment and gifts provided by a third party for an employee by reason of his employment. The
cost of gifts from any one source must not exceed £250 per tax year.
 Long service awards of up to £50 per year of service. The award must be non-cash award and the
employee must have worked at least 20 years.
 Medical premium to cover treatment outside the UK
 Staff parties, provided the cost per staff member per year is £150 or less.
 Works buses and mini buses.

Allowable Deduction
The general rule for expenses to be deductible from earnings is when they are incurred wholly,
exclusively and necessarily in performing the duties of the employment.
Specific allowable deductions are as follows:
1. Insurance/payment made to cover directors’ and employees’ liabilities
2. Subscriptions/fees to relevant approved professional bodies or trade associations
3. Qualifying travel expenses – costs incurred in travelling for the performance of his duties or/and
travelling to or from a place attended in the performance of duties
 Normal commuting (travelling in between home and office) does not qualify.
 Expenses of travelling from home to client are only deductible if client’s office is not found in the
surroundings of employee’s office.
 Expenses incurred in travelling from office to client and vice versa is deductible

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 Relief is available for expenses incurred by an employee working at a temporary location on a

secondment of 24 months or less.
4. Approved Mileage allowance for passengers (AMAP) for the use of employee’s OWN car
for business purposes:
Up to 10,000 business miles @ 45p per mile
Miles over 10,000 @ 25p per mile
5. Contributions to a registered occupational pension scheme.
6. Payments to charity under a payroll deduction/payroll giving scheme.
Note: The treatment of contributions to Approved Personal Pension Schemes is exactly like
Gift Aid Donations.

TAX ADJUSTED TRADING PROFITS

Trading profits are chargeable to income tax if earned by UK resident trader.
The badges of trade give guidance about activities constituting trade or not.
Badges of Trade
 The subject matter
 The frequency of similar transactions
 The length of ownership
 The way in which the asset sold was acquired
 Supplementary work and marketing
 A profit motive

Trading Profit Adjustment

As accounting profit is calculated according to international accounting standards, So adjustment
according to taxation rule is needed

Accounting profit Xx

+Allowed income X
+Disallowed expenses X
-Allowed expenses (x)
-Disallowed income (x)
Tax adjusted trading profit Xx

Allowable Expenditure
Any expense which has not been deducted in arriving at accounting profit figure but is deductible for
taxation purposes. Following are the examples of allowable expenditure:

 Capital allowance

 Short lease premium payments

 Pre-trading expenditure incurred in the 7 years preceding the commencement of business and of
revenue nature.

Allowable Income
e.g. If the owner withdraws stock, the drawing should be deemed as sales.
Treatment
 Add profit, if entry for drawing has been made.

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 Add selling price, if entry for drawing has not been made

Disallowable Income
Any income which has been deducted in arriving at accounting profit figure but is not deductible for
taxation purposes. Following are the examples of disallowed income:
 Profit on disposal of assets
 Bank interest
 Rental income
 Dividend.
 Interest received on overpaid tax
 Capital insurance proceeds.

Disallowable Expenditure
Any expense which has been deducted in arriving at accounting profit figure but is not deductible for
taxation purposes. Following are the examples of disallowed expenditure:
 Expenditure not incurred wholly and exclusively for trade.
 Subscription to professional body and to trade associations are allowed.
 Donations to political parties are disallowed. It is allowed if made wholly and exclusively for
trade, is of reasonable size and must be made to local educational, religious, cultural etc.
organization.
 Capital expenditure, initial expenditure if enhancing the value of asset, depreciation, amortization
etc. are disallowed. Repairs are allowable expenditures.
 Entertainment and gifts to employees are allowable expenditure.
 Entertainment to customer/supplier is disallowed while gifts to customers/suppliers is allowed
provided they cost less than £50 per customer/supplier; are not food, drink, tobacco and voucher
exchangeable for goods and are carrying an eye-catching advertisement.
 Appropriation of profit i.e. drawing of funds and interest on capital (in case of partnership) is
disallowed.
 Legal and professional charges relating to trade is allowed while legal and professional charges
related to the acquisition of capital items are disallowed.
 Personal element in business expense is disallowed expenditure.
 Irrecoverable debts/trading provision are allowed while loan to employees written off is
disallowed.
 Gift aid donations are disallowed expense.
 Interest payable over trading loan is allowed. Fees and incidental cost in obtaining loan finance
for trading purposes is also allowed while interest paid on overdue tax is disallowed.
 Fines and penalties are disallowed unless car parking fine incurred by employees.
 NIC 2 & NIC 4 are disallowed expenditures.
 15% of leasing charges of car is disallowed if co2 emission of car is more than 50 g per km.
 Wages and salaries not paid within 9 months after the end of an accounting period.

Various expenses and their treatment

Cost of registering patents and trade mark is Allowed

Payment of patents and copyrights Allowed
Cost of educational courses for Proprietor Allowed if related to update the existing knowledge
Cost of seconding employees Allowed if employee is sent to any charitable
organization or educational establishment
Removal expense to new business premises Allowed if not an expansionary move
Counseling services provided to local Allowed
redundant workers

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Loss Due to theft by employee Allowed

Damages paid Allowed if not too remote from the purpose of trade
Payments constituting criminal offences e.g. Disallowed
bribes etc.
Contributions to approved pensions schemes Allowed

Cash Basis for Small Businesses

There is a voluntary simplified cash basis of adjustment for calculating trading profit of sole traders and
partnerships (limited companies are excluded). This is as an alternative to the normal accruals basis.
 The businesses where revenue is either equal to or less than £150,000 can join the cash basis of
adjustment. After joining the cash basis, the business may then continue to use the cash basis
until its revenue is twice the joining threshold – that is £300,000.
With the cash basis, receivables, payables and inventory are ignored, and tax-deductible capital
and revenue expenditure will be treated the same – purchases of equipment are simply deducted
as an expense, whilst the proceeds from any disposals are included with receipts.
 Capital allowances are not available as the whole cost is deductible for the assets in the year of
purchase.
 A business using the cash basis can use the approved mileage allowances to calculate the
deduction for business mileage. The rate is 45p per mile for the first 10,000 miles, with a rate of
25p per mile thereafter. The actual running and capital costs of owning a motor car are ignored.
 Where the use of the cash basis results in a trading loss, the only relief available is
to carry the loss forward against future trading profits. There is no relief against
total income.

Trading profit (or loss) under the cash basis is therefore calculated as follows:

Receipts (including sale of equipment) xx

xx
Expense payments (including the purchase of equipment)
____
xx
Trading profit (or loss)
____
There is also a flat rate private use adjustment where business premises are used as a home. The private
use adjustment for food and light and heat can be calculated on a flat rate basis according to the number
of occupants.

Capital Allowances
 Capital allowances are tax equivalent of depreciation using taxation rules. However, capital
allowances are only available for items qualifying, or treated, as ‘plant’ or machinery.
Plant and Machinery: It is an apparatus, tool or setting through which trade is conducted.
There are two sources of the rules on what qualifies as plant and is therefore eligible for capital
allowances.
It includes
 computer software/ expenditure on software or data as plant
 moveable partition as they perform office function
Also ‘integral features’ are treated as ‘plant’, e.g.
 Cold water and water heating systems, Air conditioning systems, Lighting + electrical systems & Lifts
and escalators
The following items are excluded as plant by statute

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- Building and parts of buildings: However, utility systems provided to meet the particular
requirements of the trade, lifts, alarm systems and several other items can be plant
 Structures with some exceptions: dry docks and pipelines
 Land
Capital allowance is calculated according to the period of account for unregistered
businesses with the policy of full period charge in the period of purchase and none should
be taken in the period of disposal.
Performa for Capital Allowances
AIA General Special Short Private Allowances
pool rate life use
pool asset asset
£ £ £
£ £ £
TWDV b/f X X X
Additions:
Not qualifying for AIA or FYA:
Cars (1-50) gm/km) X
Cars (over 50) gm/km) X

Qualifying for AIA:

Special rate pool expenditure X
Less AIA (Max £1,000,000 in (X) X
total)
Transfer balance to special rate X
pool
General Pool Expenditure X
Less: AIA (Max £1,000,000 in (X) X
total ) X
Short life expenditure
Less : AIA (max £1,000,000 in (X)
total)
Transfer balance to general
poor
Disposals (lower of original cost (X) (X)____ ----------- _____
or sale proceeds)
X X X X
BA / (BC)
Small pools WDA
WDA at 18% (X) X
WDA at 6% (X) X
WDA at 6%/18% (depending on (X) (X) X
emissions)
Zero emission cars X

Less FYA at 100% (X) X

Nil _____ _____
TWDV c/f X X X _____
Total allowances X

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Motor Car

 Zero CO₂ emissions FYA@100%.

 CO₂ emissions limit up to 50 g/km. WDA@18%
 CO₂ emissions limit >50 g/km WDA@6%

General Pool
The Written down Value of all the assets are added and displayed in a column known as the General
Pool/main pool. The standard Written down Allowance is then calculated on these assets after applying
AIA. Main pool includes cars with CO2 emission ranging up to 50g/km without private use and also those
cars which are second hand with zero CO2 emission.
Note: It includes all assets except for:
 Special rate pool assets
 Assets with private use by a sole trader
 Short life assets

Annual Investment Allowances (AIA)

 All businesses are entitled to AIA of £1,000,000 per annum on all assets except for car
 £1,000,000 is proportionately increased/ reduced if period of account is not 12 months
 Transfer balance after AIA to pool for getting WDAs in the same period
 AIA should be utilized against all assets purchased in the accounting period (except cars), in the
following order:
1. Special Rate Pool items
2. General Pool items
3. Short Life Assets
4. Assets with personal use (except for cars)

Written Down Allowances (WDAs)

18% per annum on reducing balance basis allowance is charged on assets in the main pool. The rate is
time apportioned if the Period of account of the individual is more than or less than 12 months.
WDA is given on pool balance after adding current period additions and deducting current period
disposals.

First Year Allowances (FYAs)

FYA of 100% is available for expenditure on new cars with Zero CO2 emission.
No pro-rating/apportionment is required in short/long accounting periods.

Disposals
No allowances can be claimed on assets being disposed of during the period of account. The amount
deducted is the lower of Disposal proceeds & Original cost of the asset disposed

Special Rate Pool

Special rate pool consists of
 Long life assets
(Long life assets are those assets who have expected useful life in the business of 25 years or more and the
trader has spent at least £100,000 on such assets in the year).
 Integral features

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(It includes electrical and lighting systems, cold water systems, space or water heating systems,
powered systems of ventilation, cooling or air conditioning, lifts and escalators)
 Cars with CO2 emissions over 50 g/km.
Treatment:
AIA of £ 1,000,000 is available on special rate pool (except for cars with CO2 emission of more than
50 g/km. AIA is proportionately increased or reduced according to the number of months present in a
period of account
Any amount excess of AIA will qualify for WDA @ 6% per annum on a reducing balance basis.
For cars, no AIA is available. They are just entitled to WDA @ 6% per annum.

Non- Pooled Assets

Short Life Assets (SLA)
 Those assets which have been purchased with an intention of being disposed of within 8 years of end
of the period of acquisition are called short life assets. An election should be made within two years of
the end of the accounting period of acquisition.
 Every SLA is treated separately.
 Cars can never be elected as SLAs.
 Balancing allowance/balancing charge appears on the disposal.
 If a SLA has not been sold within 8 years after the end of the period of acquisition, it is transferred
back to main pool.

From a planning point of view de-pooling is useful if balancing allowances are expected. Election should
be made for an asset to be de pooled.
Inversely, in general, assets should not be de-pooled if asset is likely to be sold within eight years for
more than their tax written down values.
Assets with private use
 Separate column has been allocated to those assets which are used privately by a proprietor (not an
employee).
 Balancing allowance/balancing charge appears on the disposal.
 However, only the business proportion of allowances can be claimed against the Trading profit.

Balancing Adjustments Arise

 After deducting disposal proceeds the positive balance left on pools qualify for WDA. Balancing
allowances do not usually arise on the main or special rate pools until the business ceases but
balancing charge may appear, though rarely but if disposal figure exceeds the aggregated value of
all assets held under general/special rate pool column
 When asset that has been kept outside the pool is sold, either positive balance (balancing
allowance) or negative balance (balancing charge) appears. This is either due to the understating
or overstating the allowances during the life of an asset. They are directly treated. Rate is not
applied over the balances as balance is appearing on those assets that have been sold.

Small Pool WDA

 Small balance (up to £1,000 for accounts having 12 months) on main pool and/or special rate pool
can be given WDA equal to balance.
 Small balance figure of £1,000 is proportionately increased or reduced according the number of
months present in a period of account

Structures and buildings allowance

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 Relief is given as an annual straight-line allowance of 3% over a 33⅓ year period (33 years and
four months), for newly constructed buildings (construction on or after 29th October 2018)
 Offices, retail and wholesale premises, factories and warehouses can all qualify for the SBA (as
can walls, bridges and tunnels).
 The value of land is excluded, as is any part of a building used as a dwelling house.
 Expenditure which qualifies as plant and machinery cannot also qualify for the SBA. Similarly,
expenditure which qualifies for the SBA cannot also qualify for the plant and machinery annual
investment allowance.
 Where an unused building is purchased from a builder or developer, then the qualifying
expenditure will be the price paid less the value of the land.
 The building (or structure) must be used for a qualifying activity such as a trade or property
letting.
 The SBA can only be claimed from when the building (or structure) is brought into qualifying use.
This means that the SBA will be time apportioned for the period when first brought into use,
unlike plant and machinery allowances which are always given in full for the period of purchase.
 A separate SBA is given for each building (or structure) qualifying for relief.
Once the profit is adjusted, then TATP is taken to the tax year for tax
assessment purposes

TAX ADJUSTED TRADING LOSSES

Regardless of whether the period of account totals to a profit amount or loss, it has to be adjusted
according to the tax rules.

Adjustment of Losses
1) Carry Forward
Losses should be carried forward against maximum immediate available profits of the same trade of
future tax years.
– For an indefinite period, losses are carried forward
– Claims should be made within 5 years after 31 st January following the tax year.
2) Current Tax Year
– Loss can be adjusted against total income less interest paid on qualifying loan of the tax year in which
loss arises.
– It is adjusted to the maximum possible extent.
– Losses can also be carried back against total income less interest paid of previous tax year, to the
maximum possible extent
– Current year or/ and previous year claims should be made within 1 year after 31 st January after the
end of tax year
– Losses are adjusted in current tax year and/ or previous tax year in any order. Excess losses are
carried forward against future trading profits. Option of carrying forward of loss can also be taken in
isolation.
3) Claim against Chargeable Gains
 After making adjustment in current year and/ or previous year, loss relief claim can be extended
against chargeable gains of that year
 If claims are made against chargeable gains, then claim is made to the maximum possible extent i.e.
to the extent of available net gains

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 So maximum trading loss to be adjusted against capital gains is lower of trading loss to be relieved
and available net gains (i.e. Current year capital gains less current year capital losses and brought
forward capital losses losses)
 If extended claim is made for current year and/ or previous year then it is compulsory to first adjust
the loss against total income less interest paid of that particular tax year, before relieving it against the
capital gains amount.
4) Losses in the Initial Year of Trade
 Losses incurred in the first 4 tax years of trade are called initial year losses.
 Losses can be carried back to previous 3 years against total income less interest paid taking earliest
year first. Partial claims cannot be made.

5) Losses on Cessation of Trade

 Loss incurred in the last 12 months of trade is called terminal loss.
 Though normal c/y and previous year adjustment may be applied by making adjustment against total
income less interest paid of current year and/or previous year.

Preferable basis for the adjustments of losses

1. Losses should be saved in the tax year in which higher rates of taxes are imposed
2. Avoid wastage of personal allowance
3. Relief should be obtained on as soon as possible basis

Cap on Income Tax Reliefs

A cap has been introduced for losses that are offset against a person’s total income for the tax year in
which the loss arose and/or the preceding year. The cap is the higher of £50,000 or 25% of a person’s
adjusted total income. For this purpose, total income is after deducting the gross amount of personal
pension contributions. The cap does not restrict the loss that can be claimed against profits of the same
trade for the preceding tax year, and any restricted loss can still be carried forward against future profits

PARTNERSHIP
Partners in a partnership business are independently liable to pay income tax on their individual share of
profit.
 First “partnership” business set its period of account not the individual partners.
 Accounting profit of partnership is adjusted according to same taxation rules which are applicable
over sole traders.
 If individual partners own an asset which is used in business their capital allowance is calculated on
the behalf of whole business and not for just a single partner.
 Then profit is apportioned among partners. In apportioning profit primary focus would be over
allocating salary and interest being derived by partners from partnership business. After allocating
salaries and interest among partners, leftover profit is apportioned according to the profit sharing
ratio.
 Profit sharing ratio, partner’s salary and interest figures may change during the period. Whenever any
one of the above situation happens apportionment is done accordingly to record the proper allocation
of profit
 Afterwards, each partner will be liable to pay tax on his share of profit for the tax year

Treatment of Losses

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As each partner is treated as individual person liable to tax, so various loss relief options are applicable on
each partner similar to those applicable on sole traders.

NIC
There are multiple types of NIC

Class 1 primary: Payable by employees on their gross cash earnings (see below). It is applicable over
employees whose age is at least 16 till the retirement/ state pensionable age.Rates are as follows

 Earnings £1 - £12,570 = 0%
 Earnings in between £12,571 - £50,270 = 12%
 Earnings above £50,271 = 2%
 It is collected through PAYE system by the 22nd of each month

Class 1 secondary: It is payable by employer on the behalf of employees over employee’s gross cash
earnings (see below)

Rates are as follows

 Earnings £1 - £9,100 = 0%
 Earnings above £9,101 = 13.8%
 Applicable over employees whose age is at least 16 years old n will continue till pensionable age.
 It is collected through PAYE system by 22nd of each month
 Employers are able to claim up to £5,000 relief p.a. from their total class 1 secondary NIC
payments.
CASH EARNINGS
Cash earnings include:
 Wages, salary, overtime pay, commission, bonus
 Sick pay
 Gratuities
 vouchers exchangeable for cash or goods
 Reimbursement of cost of travel between home and work over 45 pence/mile for business miles.
Class 1A NIC
 Payable by employer on the behalf of employee
 It is paid at the rate of 13.8% over assessable benefits
 Class 1A is payable for employees whose age is at least 16 years old n will continued till
pensionable age.
 It is payable by 22nd July following the end of tax year
Class 2 NIC
It is calculated at a fixed rate of £3.45 per week.
It is payable where profits exceed a small profit threshold of £12,570.
It is paid under self- assessment system (dealt later)
Class 4 NIC is payable if age of a self -employed person is at least 16 years old and is payable till state
pensionable age.
Class 4 NIC
Paid on taxable trade profits (TATP)
£1 - £12,570 = 0%
£12,571 - £50,270 = 9%
Above £50,271 = 2%
Paid with income tax under self-assessment (dealt later)

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Class 4 NIC is payable if age of a self-employed person is at least 16 years old and is payable till state
pensionable age.

PENSIONS
There are two types of pension schemes
 Personal pension scheme (available to all persons)
 Employer’s occupational pension scheme (available to employees only)

Personal Pension Scheme

Personal pensions are generally offered by banks, insurance companies and financial institutions.
An individual can contribute any amount, regardless of their earnings, into a personal / private pension
fund/ funds whether they contribute into occupational pension scheme or not. The amount of tax relief
available for contribution is restricted under certain conditions.
Method of Giving Relief
Personal pension contributions are made net of basic rate tax of 20% by individual. The amount of tax
relief offered to the individuals (i.e. 20%) is then contributed by HMRC to the pension scheme.
Additional 20% (40% - 20%) relief is obtained by extending the basic rate band with the gross amount of
contribution.

Net Relevant Earnings

Tax relief is available for pension contributions up to the amount of an individual’s net relevant earnings.
Net relevant earnings=Employment income+ tax adjusted trading profit + income from
furnished holiday letting.

If net relevant earnings are nil then relief is available on gross contributions up to £3,600.
Hence, the maximum amount of gross pension contribution in a tax year on which an individual can get
tax relief is the higher of:
 an individual’s earnings for the tax year; and
 £3,600

Annual Allowance
There is no limit over the amount of contribution in a pension scheme but there is a limit on the tax relief
on these contributions. The annual allowance for the tax year 2023–24 is £40,000.
If the annual allowance limit of £40,000 is not fully used in any tax year then the unused allowance can
be carried forward for up to next three years. The carry forward of any unused limit is possible only if the
person is a member of a pension scheme for that particular tax year.
If the individual is an employee, their employer may make contributions into their personal pension fund
which is an exempt benefit but counts towards the overall limit for obtaining tax relief.
The annual allowance limit for the current year is utilized first and then any unused brought forward limit
from the previous 3 tax years are used on FIFO basis.
Any contribution which is in excess of the current year annual allowance as well as any unutilized annual
allowance of previous 3 tax years, subject to annual allowance charge.
This charge is subject to income tax at a person’s marginal rates.

Tapering of annual allowance

The annual allowance is reduced by £1 for every £2 by which a person’s adjusted income exceeds
£240,000, down to a minimum tapered annual allowance of £4,000. Therefore, a person with adjusted
income of £312,000 or more, will only be entitled to an annual allowance of £10,000 (40,000 – ((312,000

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– 240,000)/2) = £4,000).The definition of adjusted income is net income plus any employee
contributions to occupational pension schemes (these will have been deducted in calculating net income)
plus any employer contributions to either occupational or personal pension schemes. For the self-
employed, adjusted income will simply be net income.
Lifetime Allowance
The lifetime allowance for the tax year 2023–24 is £1,073,100.

Occupational Pension Scheme

An occupational pension scheme is one arranged by an employer for his employees.
The amount contributed by employee is allowable deduction from employment income. If employee
contributes more than their relevant earnings, then relief (i.e. allowable deduction) is restricted up to the
level of earnings
Any amount can be contributed by employer which is an exempt benefit for employee.
The total amount of relief, by employee and employer, is subject to annual allowance.
Annual allowance charge is applied if any relief has been made is in excess of current year as well as
unused brought forward annual allowance of last 3 years.
If an employee makes contribution to both occupational and personal pension scheme then total relief will
be subject to overall limit of annual allowance

Relief for employer

If employer makes contribution on the behalf of employee whether in occupational pension scheme or
personal pension scheme, then contribution is considered to be an allowable expenditure from trading
profits.

Self-Assessment
Self-assessment is the system of tax collection of tax payable (i.e. the tax which has not been paid through
tax at source deduction process)
Each individual is required to provide the information about his/her tax liability by completing tax return.
Filing of Return
The deadline for filing of tax return is as follows
Online filing 31st January after the tax year. i.e. for tax year 23/24, due date will be 31st
January 2025.

Paper based filing 31st October after the end of the tax year. i.e. for the tax year 23/24, due
date will be 31st October 2024.
The tax return covers income tax, class 4 NIC and CGT liabilities for the tax year

Penalties on late filling of return:

Up to 3 months £ 100
3 – 6 months £100 + £ 10/day (max 90 days)
6 – 12 month above fixed penalties+ 5% of tax due (minimum 300)
>12 months above fixed penalties + 10% of tax due

Notification of Chargeability to Tax

Taxpayers who do not receive tax return are obliged to inform HMRC about chargeability to tax
Notification should be made within 6 months after the end of the tax year.
That is 6th October 2024 for the tax year 23/24.Failure to do so will lead to standard penalty

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Errors & Mistakes: Errors can be corrected by either individual or HMRC.

Individual: Within 12 months after 31st January following tax year.
HMRC: Within 9 months after actual filling dates
Errors include arithmetical errors or errors of principle. Appeals against any amendment to error should
be made to tribunal within 30 days.

Claims
If an error is discovered later then taxpayer can make a claim for the recovery of overpaid tax. Claims
should be made within four years after the end of tax year. i.e. by 5th April 2028 for the tax year 23/24.
Claim should be made for relief, allowance or repayment through tax return

Determination
HMRC may issue determination if return is not filed by the due date. Determination is raised within 3
years after 31st January following the tax year and is treated as self-assessment for individual.
Determination can only be replaced if actual tax return is filed by the individual

Compliance checks
HMRC has a right to enquire into return to verify the completeness/accuracy of return. Reason for
making inquiry can be of having suspicion about fraud/negligence on randomly basis etc. Notice for
enquiry should be raised within 12 months after the actual date of filing.

Discovery assessment:
Discovery assessment can be raised at a later date if tax has been substantially reduced and HMRC has got
sufficient evidence about it. It should be raised within 4 years after the end of the tax year. For careless
error this limit is extended to 6 years and 20 years in case of deliberate error.

Records
Records should be kept for 5 years after 31st January following the tax year. Failure to keep records will
lead to the maximum penalty £ 3000/year

Standard Penalty: Standard penalty is charged on the filing of incorrect return or late notification
of tax liability. Standard penalty depends on tax payer’ behavior.
Behavior Maximum Minimum (with Minimum (with
unprompted prompted disclosure
disclosure by by taxpayer)
taxpayer)
Genuine mistake NIL NIL NIL
Failure to take reasonable care 30% NIL 15%
Deliberate error 70% 20% 35%
Deliberate error + concealment 100% 30% 50%

Payment of Tax
For taxpayers with business, payments on account are required.

Due dates of payment

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31st January of the tax year

These are called payments on account
31st July after the tax year
31st January after the tax year balancing figure
Payments on account are based on 50% of last year’s tax payable and NIC 4.
Claim to Reduce POA’s
POA’s can be reduced if current year tax payable is lesser than previous years.
Then POA’s are based on 50% of projected result.
Claim to Avoid POA
POA’s can be avoided.
 If previous year tax payable and NIC 4 is ≤ 1000. OR
 If at least 80% of previous year’s tax liability has been paid through tax at source deduction process.

Interest and Penalties

 Interest is received at 3% on overpaid taxes. It runs from the date of payment till the date of
repayment/adjustment
 Interest is charged on overdue/underpaid taxes @ 6.5% (applied on POA & balancing figure). It runs
from the due date till the date of payment.
 Additional penalty is imposed on overdue balancing figures.
≤ 28 days 0
≥ 28 day — 6 months
th 5% of balance
>6th— 12th month 10% of balance
≥ 12 months 15% of balance

Dishonest Conduct by Tax Agents

A single penalty regime has been introduced for dishonest conduct by tax agents. HM Revenue and
Customs can investigate dishonest conduct, and apply a penalty of up to £50,000 where there has been
dishonest conduct and the tax agent fails to supply the information or documents that HM Revenue and
Customs has requested.

PAYE System
The objective of the PAYE system is to collect the correct amount of income tax and NIC class 1 primary
for the year. Tax deducted under PAYE should be deposited to HMRC by 22nd of the following month.
For employers whose average monthly collection under PAYE system is lesser than £1,500 are allowed to
make quarterly payments. These payments are due on 22nd July, 22nd October, 22nd January and 22nd April.

Real time reporting

Employers are required to send earnings, income tax and NIC information to HM Revenue and Customs
electronically either at or before the employees are paid (either weekly or monthly)
Employers are charged a penalty, on monthly basis, if their final real time submission for a tax year is
made late.

PAYE forms:
FORMS Details No. of copies Due date of submission
P45 Applied when an employee 4 copies are produced. One copy Whenever employee

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leaves any employment is given to previous employer, leaves.

one is sent to HMRC, one is
retained by employee and last
one is given to new employer
P60 Year-end details of earnings Triplicate copies are made. 2 31st May following the
and benefits given to copies are given to HMRC and tax year.
employees one copy is sent to employee.
P11D Summary of benefit 2 copies are produced.one copy is 6th July following the tax
sent to employee and other to year.
HMRC

CGT

CGT is applicable when there is a

a) Chargeable disposal of a
b) Chargeable asset by a
c) Chargeable person.

a) A chargeable disposal includes:

 Complete disposal/transfer of ownership of asset
 Part disposals
 Destruction of asset
 The gift of assets/undervalued sales to connected person
The transfer of an asset between spouses (and registered civil partners) and transfers upon death are
exempt disposal.

b) All forms of property are chargeable assets unless exempted. The Exempt assets are as follows:
 Certain chattels (see later)
 Motor cars
 UK Government securities (Gilts)
 Foreign currency disposal kept for personal use
 Decoration for velour
 ISA
 National saving certificates and qualifying corporate bonds

c) When disposals are made by UK resident individuals and companies then it is said to be made
by chargeable person.

Basic Computation: For individuals CGT computation is done according to the tax year.

Pro forma

Disposal proceeds xxx

Less incidental cost of sale (xx)

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Net proceeds xxx

Less : allowable deduction/expenditure

Purchase cost (xx)

Incidental cost of purchase (xx)

Capital expenditure (xx)

Gain Xx

Key Elements

Disposal proceeds
The amount of consideration received for the asset is the disposal proceeds. Unless asset has been sold to
a connected person below its market value, in that case market value is taken.
The date on which contract is made is taken as the date of disposal.

Incidental cost of disposal

The cost which is incurred for the sake of disposal is called incidental cost of disposal and it includes:
 Fees and commissions for professional services
 Advertising costs
 Legal costs
 Estate agency fees etc.

Allowable expenditure
 The purchase cost/acquisition cost of the asset.
 If asset was acquired as a gift at an undervalued consideration between connected persons then
market value at the date of gift is taken as purchase price.
 If asset was acquired on death, then market value at the date of death (probate value) is taken as
purchase price.
 Expenditure on enhancing the value of the asset and is being reflected in the state and nature of asset.
 Expenditure that has been incurred for the sake of purchase of asset is called incidental cost of
purchase. E.g. expenditure incurred to establish, preserve or defend taxpayers’ title to the asset.
 Repairs, maintenance and insurance (i.e. revenue expenditures) are not allowable.

Determination of taxable gains

Total chargeable gains for the year x
Less: Current year losses (x)
Net chargeable gain x
Less: annual exemption (6,000)
Less: brought forward losses (x)
Taxable gain/nil X/nil

Rates of CGT

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Taxable gains are taxed at the lower rate of 18% where they fall within the basic rate tax band of £37,700,
and at the higher rate of 28% if the gain is arisen over the disposal of residential property. Taxable gains,
other than those related to residential property, are taxed at the lower rate of 10% where they fall within
the basic rate tax band and at the higher rate of 20% where they exceed this threshold.
Due date for the payment of CGT: CGT is collected as part of the self-assessment system and is
collected as lump sum amount by 31 January following the tax year (unless residential property is sold).

Capital Losses: Current year capital losses are set off against any chargeable gains arising in the
same tax year to the maximum extent, even if this results in the annual exempt amount being wasted. Any
unrelieved capital losses are carried forward, but in future years they are relieved after making an
adjustment of annual exempt amount.

Transfer between Spouses: Transfers between spouses and registered civil partners do not give
rise to any chargeable gain or capital loss. The donee acquires the asset at the same cost (i.e. acquisition
cost) for which asset was acquired by the donor (spouse).

SPECIAL RULES RELATED TO CAPITAL GAINS TAXES

Part Disposals: When just part of an asset is disposed of then it is said to be a chargeable event
related to the part that has been sold. The cost must be apportioned between the part disposed of by
applying the following formula

Total cost × MV of the sold part

MV of the sold part + MV of the part retained
 No apportionment is done if any cost relates entirely to the part that has been sold

Chattels: A chattel is tangible moveable property (e.g. furniture, paintings, jewelry, sculptures,
moveable P&M etc.).Wasting chattels are exempt from CGT. A chattel is said to be wasting if its useful life
is either equal to or less than 50 years. Special rules apply to chattels if a chattel is not a wasting chattel
i.e. having a life of more than 50 years.
Cost

More than £ Less than £

6,000 6,000
COST

Disposal Disposal
proceeds proceeds

Disposal

More than £ Less than £ Less than £ More than £

6,000 6,000 6,000 6,000
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Chattels with capital allowances

 No adjustment for loss is made if loss arises on the chattel over which capital allowances have been
claimed, because loss has already been adjusted against trading profits in terms of balancing
allowance. Gains on such chattels are taxable in a normal way.

Other Wasting Assets

A wasting asset is one which has a remaining useful life of 50 years or less (e.g. copyrights, patents,
license, immoveable machines etc.). The cost of such an asset must be adjusted for the expected
depreciation over the life of the asset.

Insurance Proceeds: If an asset is lost or destroyed then it’s a chargeable event and anything
which has been received against this asset is treated as disposal proceeds.
Rollover relief can be claimed if insurance proceeds are used to purchase replacement asset within 12
months after the receipt of insurance proceed.
If the asset is not insured, even then the loss/destruction of asset is a chargeable event. In this case
disposal proceed will obviously be nil, thus generating capital loss.

Damage of an Asset: Whenever an asset gets damaged, chargeable event takes place only if
insurance proceeds are received against it. To determine cost related to the part against which insurance
proceeds are received; part disposal formula is applied

Shares: Disposals of shares are matched with purchases on the basis of following share matching
rule:
 Shares purchased on the same day as the disposal.
 Shares purchased within the following 30 days on FIFO basis.
 Shares in share pool.

How to determine MV of the sold share

MV of a share can be determined by taking the average of quoted values (at the date of disposal) of the
shares.
= highest quoted value + lowest quoted value
2
Bonus issue
No additional cost is involved when bonus shares are issued. The only thing that changes is the number of
shares held.
Right issue
The new shares are offered to the existing shareholders at a price which is less than the MV, which is why
the cost figure will also have to be adjusted along with the number of shares

Takeover and reorganization

 A paper for paper takeover or reorganization is not a chargeable disposal.

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 The new shares simply take the place of the original shares and are deemed to have been purchased at
the same time and for the same cost.
 Where more than one class of new share is acquired as a result of the takeover/reorganization, the
original cost is apportioned according to the market values of the new shares immediately after the
takeover/reorganization using part disposal formula for the distribution of cost.

Capital gains tax reliefs

There are various reliefs available to individuals which are claimed to defer the gains to future tax years
(hence deferring the tax liabilities). On the other hand, there are various reliefs which either exempts the
whole or part gain.

Business asset disposal Relief

 A reduced CGT rate of 10% applies if a disposal qualifies for business asset disposal relief. This rate
applies regardless of the level of a person’s taxable income.
 It is applicable on the following situations:
 Disposal of the whole or substantial part of the business
 Disposal of individual asset which has been used as part of someone’s trade and that trade is
now ceased.
 Shares in a personal trading company. A personal company is one where the shareholding is
either equal to or more than 5% and that shareholder had also been an employee/officer of
that company
 Business/Assets/shares must have been owned for two years prior to the date of disposal in order to
get business asset disposal relief.
 Relief is only available in respect of chargeable gains arising from the disposal of assets used for the
purpose of the business. This will exclude chargeable gains arising from investments.
 The relief covers the first £1 m of qualifying net gains that a person makes during their lifetime.
 Net gains are taxed at the rate of 10%, regardless of any band
 Gains in excess of the £1m limit are taxed in a normal way.
 Any available basic band will be utilized by gains qualifying for business asset disposal relief and then
against gains none qualifying for business asset disposal relief.
 The annual exempt amount and any capital losses should initially be deducted from those chargeable
gains which do not qualify for business asset disposal relief (giving preference to any residential
property gains). This approach could save capital gains tax at 20% (18% or 28% if residential property
gains are involved), compared to just 10% if used against chargeable gains which do qualify for relief.

Investor relief: This is the relief for external investors in trading companies which are not
listed (unlisted) on a stock exchange. The purpose of the relief is to cover those gains which are
not covered under entrepreneur’s relief. This investors’ relief has its own separate £10 million
lifetime limit, with qualifying gains being taxed at a rate of 10%.
To qualify for investors’ relief, shares must be:
• Newly issued shares acquired by subscription.
• Owned for at least three years after 6 April 2016.
• There is no minimum shareholding requirement

Rollover Relief
Where the disposal proceeds of the old asset are reinvested in a new asset, any chargeable gain that arises
can be deferred Rollover relief allows a chargeable gain to be deferred (rolled over).

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Conditions for claiming rollover relief

 The old and new assets must be used for business purposes.
 The reinvestment must take place between one year before and three years after the date of disposal.
 All proceeds should be reinvested in order to get full rollover relief.
 Claims should be made within 4 years after the end of the tax year
To qualify for rollover relief both the old asset and the new asset must be qualifying assets. The most
relevant types of qualifying asset are:
 Land and buildings
 Fixed plant and machinery
 Goodwill
It is not necessary for the old asset and the new asset to be in the same category.
 Where the disposal proceeds of the old asset are not fully reinvested in the new asset, the amount not
reinvested reduces the amount of chargeable gain that can be rolled over. Therefore, if the amount not
reinvested is greater than the chargeable gain no rollover relief is available.

Holdover Relief
 Where the replacement asset is a depreciating business asset, then the gain does not reduce the
cost of the new asset but is instead held over.
 A depreciating asset is an asset with a predictable life of either equal to or less than 60 years.
 Conditions for claiming holdover relief are similar to those applicable over rollover relief.
 The only types of depreciating asset that you need to be aware of are fixed plant and machinery and
short leaseholds. Base cost of asset will not be determined
 Gain would be chargeable on the earliest of
1) Actual disposal of asset
2) Asset is used for non-business purposes
3)10 years after the purchase of replacement asset
 When the asset disposed of was not used entirely for business purposes then the
proportion of the chargeable gain relating to the non-business use does not qualify for
either rollover relief or holdover relief.
 A person can elect for business asset disposal relief and display rollover/holdover
relief if conditions related to entrepreneur relief are satisfied.
 And it is also possible to apply business asset disposal relief if any gain has not been
covered by rollover/holdover relief.

Gift Holdover Relief: Gift Holdover relief allows a chargeable gain to be deferred (held over) when
a gift is made of a qualifying business asset and there is a mutual consensus in between donor and donee
of the asset.
The deferral is achieved by deducting the chargeable gain of the donor who has made the gift from the
coat of the donee (i.e. MV) who has received the gift to arrive at the base cost for donee.
Base cost will be used as a ‘cost’ by donee at the time of subsequent disposal of asset by the done.
Holdover relief is also available when a sale is made at less than market value. In this case there will be an
immediate charge to capital gains tax (CGT) where the sale proceeds exceed the original cost of the asset.
Most relevant types of qualifying business asset are as follows:
 Assets used for trade purposes by a sole trader.
 Shares in a personal company (where the individual has at least a 5% shareholding).
 Shares in unquoted trading companies.
Remember that the market value of an asset is used rather than the actual proceeds when a gift is made
below the market value to a connected person.

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General points
 When the asset disposed of was not used entirely for business purposes then the
proportion of the chargeable gain relating to the non-business use does not qualify for
gift relief.
 A person can elect for business asset disposal relief and display gift relief.
 And it is also possible to apply business asset disposal relief if any gain has not been
covered by gift holdover relief.

Companies holding non business assets

If a gift of personal company shares is made (where shareholding is at least 5%) whether in a quoted
company or unquoted company, and that company is holding non business assets, then gift holdover
relief is restricted by the following formula:
Gain × Chargeable business asset
Total chargeable asset

Principal Private Residence Relief

A gain on the disposal of a principal private residence is exempt where the owner has occupied the
house throughout the whole period of ownership.
The following periods of absence are also deemed to be periods of occupation:
 Period of up to 3 years for any reason
 Any periods where the owner is required to live abroad due to their employment.
 Period of up to four years where the owner is required to live elsewhere in the UK due to their work.
(whether sole trader or employee)
Deemed periods of occupation must normally be preceded and followed by actual periods of occupation.
The final 9 months of ownership are always treated as a period of ownership.
The individual can elect his accommodation to be principal private residence within 2 years after the
commencement of ownership. Where part of a house is used exclusively for business use then the
principal private residence exemption will be restricted.

Letting Relief: Letting relief will extend the principal private residence exemption where a portion of
the property is let out while the remaining part is occupied by the owner.
It is calculated by taking lower of:
 Gain already exempt under PPR.
 Portion of gain relates to the period of letting which is not covered by PPR.
 £40,000 (maximum).

Payment of taxes where residential property is sold

A payment on account must now be made within 60 days where capital gains tax is payable in respect of a
disposal of residential property. A return must be submitted to HMRC at the same time.

The calculation of the payment on account takes into account the annual exempt amount, any capital
losses incurred in the same tax year prior to the disposal of the residential property, plus any brought
forward capital losses.

Taxpayer’s basic rate tax band will be estimated for the tax year. The residential property gain is still
included in the taxpayer’s self-assessment capital gains tax computation following the end of the tax year,
with the payment on account being deducted from the total capital gains tax liability. Any additional tax is
payable on 31 January following the tax year. If a repayment is due, then this will be claimed when the
self-assessment tax return for the tax year is submitted.

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INHERITANCE TAX

IHT is charged when

There is a chargeable person (individuals)
There is a chargeable estate (all assets are chargeable unlike CGT where transfer of certain assets are
exempt)
And that estate is given away as a ‘gift’ (The terms ‘transfer’ and ‘gift’ can be taken to mean the same
thing. The person making a transfer is known as the donor, while the person receiving the transfer is
known as the donee).
A UK domiciled person is liable to IHT in respect of their worldwide assets.

Assets can be gifted during lifetime (LIFETIME TRANSFER) and on death (DEATH ESTATE
TRANSFER)

Lifetime Transfer
Lifetime transfer can either be
 PET (Potentially exempt transfers)
 CLT (Chargeable lifetime transfers)

Potentially Exempt Transfers

Any transfer that is made to another individual is a potentially exempt transfer (PET).
PET is exempt during lifetime.
A PET only becomes chargeable if the donor dies within seven years of making the gift. Chargeable
Lifetime Transfers
Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).
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.

Performa for the Calculation of Lifetime Transfer

Transfer of value x
Less: exemptions
Small gift exemption x
Marriage exemption x
Annual exemption x
Chargeable amount of gift X

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 that result in a diminution in value of that person’s
estate’. There are two important terms in this definition:
Transfer of value = Value of donor’s estate before gift
Less: Value of donor’s estate after gift
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.
 Small gifts exemption

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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.
 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 by each parent
 £2,500 by each grandparent
 £2,500 by each of the couple getting married to the other.
 £1,000 each by anyone else.
 Annual exemption
Each tax year a person has an annual exemption of £3,000. If several gifts are made during the tax
year then this exemption is used in chronological order. If the whole of the annual exemption is not
used in any tax year then the balance is carried forward to one tax year ONLY. However, the
exemption for the current year must be used first
 Normal expenditure out of income
A gift is exempt if it is made as part of a person’s normal expenditure out of income, provided the gift
does not affect that person’s standard of living. To count as normal, gifts must be habitual.

Nil Rate Band

It’s a limit within which if gift is made, that’s exempt. IHT is payable once a person’s cumulative
chargeable transfers over a seven-year period exceed a nil rate band. For the tax year 2023-24 nil rate
band is £325,000, and for previous years it will be provided in exams.
*chargeable transfers: only CLT should be taken into account as it’s the only chargeable transfer during
lifetime.

Rate of IHT
IHT is calculated on the chargeable amount of CLT if it exceeds Nil rate band of the year in which asset
has been transferred.
If life time IHT is paid by donee then rate is 20%.
But if it has been paid by donor then rate is 25% as it is take as net gift which is reduced by the amount of
tax (i.e. gift/80% × 20%).

Grossing up
In case lifetime IHT has been paid by donor then 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 is
therefore necessary to gross up the net gift.

Death IHT on Lifetime Transfer

All PETs and CLTs which have been made in 7 years prior to the date of death are chargeable to death
IHT.
Steps to calculate death IHT on lifetime transfer
 Take gross chargeable amount of gift
 Deduct NIL rate band of the year of death after taking account of cumulative 7 years chargeable
transfers before the date of gift (here chargeable transfer means CLTs and those PETs which are
appearing within 7 years before the date of death. PETs are exempt during lifetime but they become
chargeable if donor dies within 7 years of making the gift)
 Rate of 40% is applied on the excess of nil rate band figures.

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 Apply taper relief * to reduce the amount of IHT.

 Deduct any tax which has been paid during lifetime (either paid by donor or donee) but this point is
only applicable over CLTs as IHT must have been paid over CLTs during lifetime. As a result IHT
payable on death will be reduced. But refunds are not made if deduction exceeds the amount of tax
liability arisen on death.

Taper Relief *
Taper relief reduces the amount of tax payable where a donor lives for more than three years. The
reduction is as follows:
Years after gift 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
 The taper relief table will be given in the tax rates and allowances section of the exam.

Death Estate
A person’s estate includes the market value of every asset which they own at the date of death
Exception: A person’s estate also includes the proceeds from life assurance policies. The actual market
value of a life assurance policy at the date of death is irrelevant.
 Following deductions are permitted:
1. Funeral expenses.
2. Mortgages on property. Repayment mortgages and interest-only mortgages are deductible. But
endowment mortgages are not deductible
3. Payments made to personal representative are not deductible.
 Then deduct the value of any asset which has been transferred to exempt legacy i.e. spouse or civil
partner
 Then deduct NIL rate band of the year of death after taking cumulative figure for last 7 years
chargeable transfers back from the date of death. Here chargeable transfers accommodate CLTs
(because they are chargeable transfer whether during lifetime only or during both lifetime and upon
death) and all PETs because whatsoever has been transferred within 7 years prior to the date of death
is definitely chargeable.
 Apply the rate of 40% on excess of NIL rate band figures.

Transfer of a Spouse’s Unused Nil Rate Band

Any unused nil rate band on a person’s death can be transferred to their surviving spouse (or registered
civil partner) and is used by the other spouse on his/her death.
A claim for the transfer of any unused nil rate band should be made within 2 years after the death of first
spouse and is made by the personal representatives

Advantages of Lifetime Transfers/ Planning Aspects

Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.
 The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make gifts of
assets that are expected to increase in value such as property or shares.
 A PET is exempt during lifetime and will eventually be completely exempt if donor dies 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, whether in case of PET or CLT, taper relief will
reduce the amount of IHT payable after three years.

Disadvantage:
From social perspective people might not be interested in transferring assets during lifetime and would
want to enjoy assets themselves at maximum.
Skipping of generation (Planning point):
Another way of avoiding IHT is achieved by not transferring the estate to the next generation (i.e.
children, if they are independently wealthy) but by transferring the estate to the 3 rd generation.
Payment of Inheritance Tax
Chargeable lifetime transfers
The donor is primarily responsible for any IHT that has to be paid in respect of a CLT. However, a
question may state that the donee is to instead pay the IHT. The due date is the later of:
 30 April following the end of the tax year in which the gift is made. (if gift is made in between 6th April
to 30th September)
 Six months from the end of the month in which the gift is made. (if gift is made in between 1st October
to 5th April)
 Donee is responsible to pay death IHT on lifetime transfer and 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 that is payable but this
IHT is suffered by residue legatee
The due date is the earlier of
 six months after the end of the month of death
 The submission of account estate to HM Revenue and Customs.
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

Residence Nil Rate Band

An additional nil rate band has been introduced where a main residence is inherited on death by direct
descendants (children and grandchildren). For the tax year 2023-24, the residence nil rate band is
£175,000.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.

Will Planning:
If Nil Rate Band available, transfer to chargeable legacies up to amount of NRB available

Transfer to grandchildren when children are wealthy to avoid IHT on one generation

Corporation Tax
UK Resident Company has to Pay Corporation Tax according to an Accounting Period.

UK Resident Company
A company is UK resident if either:
Company is incorporated in the UK OR

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Its central management and control is exercised in the UK. (If at least 75% board meetings are conducted
in UK then a company is said to be centrally controlled and managed through UK)

Period of Account
It is the period for which financial statements are prepared. It can be of any length.

Accounting Period
The accounting period is the period for which corporation tax is charged. The accounting period is either
equal to or less than 12 months.

When does an accounting period start?

When
 Company starts to trade.
 Company’s profits become liable to corporation tax.
 When previous accounting period finishes.

When does an accounting period come to an end?

 After 12 months of its start
 On the completion of previous accounting period
 On the start of dissolution of company
 When a company ceased to be UK resident
 When company does not remain liable to corporation tax

Pro-forma for Calculating Taxable Total Profits

£
Trading profits X
Interest income X
Income from Land & buildings in the UK X
Chargeable gains X
Other income X
Total profits X
Less: qualifying charitable donations (X)
Taxable total profits X

Rates
Financial year 2021 2022 2023
Small profits rate N/A N/A 19%
Main rate 19% 19% 25%
Lower limit N/A N/A £ 50,000
Upper limit N/A N/A £ 250,000
Standard fraction N/A N/A 3/200
Marginal relief
(Upper limit – Augmented profits)* Taxable Total Profits/ Augmented profits * standard fraction
Financial year runs from 1st April to 31st March.

Trading Profits
The computation of trading profits follows income tax principles.

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£ £
Net profit per accounts (PBT) X
Add expenditure not allowed for tax purposes X
X
Deduct
Income not taxable as trading income X
Expenditure not charged in the accounts but allowable for tax X

(X)
Taxable trading profits X

 The adjustments are almost the same as applied in income tax. Some expenses, however, are
explained here:
 There is no private use adjustment for self-employed person in case of companies. Full deduction
is available if something is being used by employee (i.e. car) on a personal level.
 Interest received on overpaid taxes and interest paid on overdue taxes is not related to trade
which is why they are disallowed. But being non trading interest, companies are allowed to make
their adjustment against ‘interest income’.

Capital Allowance
Capital allowance is calculated according to the acquisitions and disposals with respect to an accounting
period.
For period of account less than 12 months, allowances are apportioned accordingly
For a period of account of more than 12 months, capital allowance is calculated for each accounting period
separately.
No column for asset with personal use need to be made, as employee’s use is not supposed to be
apportioned.

Enhanced Relief for Capital Allowances

• Though the application of enhanced capital allowances is NOT EXAMINABLE but it’s disposal
implications are EXAMINABLE.

• When General pool items are sold on which previously super deduction of 130% was claimed, the
disposal proceeds are not deducted from general pool. Instead, the amount of disposal proceeds
are treated as balancing charge

• When Special rate pool items are sold on which previously FYA of 50% was claimed, 50% of the
disposal proceeds are deducted from special rate pool while remaining disposal proceeds are
treated as balancing charge

Interest: (non-trading loan relationship): Calculation is made according to an accounting

period.
Interest income x
(Any interest which has been received on investments held in bank, building society
Or company. Investments are always made for non-trading purposes. Interest should
Be taken on accrual basis and it is always received gross)
Add: interest received on overpaid tax x
Less: Interest paid on either overdue/underpaid tax (x)

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Less: interest paid over non trading loan (interest paid on loan taken for non-trading purposes.
It is taken on accrual basis) (x)
Interest xx
Interest paid on loan taken for trading purpose is deductible against trading profits*

Property Business Income

The computation of property business income follows income tax principles.
*Interest on a loan taken out for buying property is dealt with under the loan
relationship rules, not as part of the property business.
Property business losses
They are set off against total profits before QCD of the company for the same accounting period, excess is
carried forward to future accounting period for indefinite time period and deduction is made against total
profits before QCD. Partial claims can be made when rental losses are being carried forward.

Chargeable Gains
Although there are a lot of similarities in the way in which the chargeable gains of a limited company are
taxed, there are also some very important differences in comparison to individuals:
 A limited company’s chargeable gains form part of the taxable total profits. They are not taxed
separately.
 The annual exempt amount is not available.
 Indexation allowance is given (restricted to 31st December 2017) when calculating chargeable gains for
a limited company.
 Limited companies can only benefit from rollover/holdover relief, and this is applied after taking
account of any indexation allowance. They cannot benefit from business asset disposal relief, holdover
relief for the gift of business assets.

Basic computation
Disposal x
Incidental cost of disposal (x)
Net proceeds x

Less: allowable deductions

-purchase price (x)
-incidental cost of purchase (x)
-capital expenditure (x)
Un indexed gain x
Less: Indexation allowance (till Dec 17) (x)
Indexed gain x

Treatment of capital losses

It is first set off against any chargeable gains arising in the same accounting period. Any remaining capital
loss is then carried forward and set off against the first available chargeable gains of future accounting
periods.
Shares
For limited companies, disposals of shares are matched with purchases in the following order:
 Shares purchased on the same day as the disposal.

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 Shares purchased during the nine days prior to the disposal.

 Shares in the 1985 pool.

Dividends: Dividend received is an exempt income

Qualifying charitable donation

Usually donations which are given wholly and exclusively for the purpose of trade, they are of reasonable
in size and are made to local organization are said to be allowable expenditures for trading purpose. But if
any of the given conditions is not said to be satisfied, is considered as a QCD, the expense is disallowed
expenditure for trading profit calculation purposes.
Gift aid donation is also an example of QCD. However, donation to political party is disallowed
expenditure for trading profit calculation purposes and is not even taken as a qualifying charitable
donation.

Long Period of Account

Whenever company makes accounts for more than 12 months, period of account needs to be split in
between 2 accounting periods
First accounting period will be of maximum duration i.e. 12 months and remaining months are allocated
to the next accounting period
Income is segregated between the accounting periods in the following manner:
 Trading income: time apportion the amount before capital allowances
 Capital allowances are calculated separately for each accounting period
 Property business income: Allocate to period in which it accrues
 Other income: Allocate to period in which it accrues
 Gains: Allocate to the period in which they are realized
 Qualifying charitable donations: Allocate to the period in which they are paid

Trading Losses
 Whether its accounting profit or loss, it needs to be first adjusted according to the taxation rules
according to an accounting period.
 Adjustment of profit is done on the basis of ‘accrual basis of adjustment’ only.
 If it results into adjusted loss then losses are utilized to reduce your income and hence tax liability
 Generally, losses can be received in 3 possible ways:

Losses

Carry Current Carry forward

Back accounting period of losses

Carry Forward
Losses are carried forward against first available trading profits of future accounting period for indefinite
period. Claim should be made within 4 years after the end of accounting period. Partial clams can be
made.

Current Accounting Period Adjustments

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Losses are adjusted against total profit before qualifying charitable donation in the period of loss.
Partial claims cannot be made.

Carry Back
In case of companies, losses must be adjusted in current accounting period before making adjustment in
previous 12 months. Losses are carried back for last 12 months against total profits before QCD. Partial
claims cannot be made. If losses are left unrelieved, then excess losses are carried forward.
Claims for making adjustment in current accounting period and previous period should be made within 2
years after the end of an accounting period of loss.

Terminal Loss Relief

 Loss in the last 12 months of trade is called terminal loss.
 First loss is adjusted against total profit before QCD of last accounting period. Excess losses are
carried lack for 36 months on LIFO basis against total profits before QCD.
 Losses can be surrendered in a group(dealt later)

Property business losses

 First losses are adjusted against total profit before QCD of current accounting period.
 Excess losses are carried forward against total profit before QCD of future accounting period for
indefinite period.
 They can also be group relieved (dealt later).

ASSOCIATED GROUPS
Companies are said to be associated if:
 one company is under the control of another, or
 Two or more companies are under the common control of another person, which could be another
company, an individual or a partnership.
 But excludes dormant companies and no trading holding companies.
Control means an interest of more than 50% in:
 The share capital, or
 The voting rights, or
 The rights to the distributable profits, or
 The net assets on a winding up of the company.
The corporation tax profit threshold is divided by the number of associated companies in a group, thus
affecting the rate of corporation tax.

Group Relief (75%,75%)

 For group relief purposes, one company must be a 75% subsidiary of the other, or both companies
must be 75% subsidiaries of a third company.
 The parent company must have an effective interest of at least 75% of the subsidiary’s ordinary share
capital
 The company which surrenders the loss is called ‘surrendering company’ and the company which
adjusts the loss against their taxable total profit is called ‘claimant company’
 Trading losses, unrelieved property business losses and unrelieved qualifying charitable donations
can be surrendered by one company and adjusted against other company’s results if companies are
within 75% group in the current period.

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 Brought forward losses can be adjusted against claimant’s taxable total profit to the extent they
cannot be adjusted against surrendering company’s own total profits before QCD.
 Group relief will be claimed against taxable total profits provided the claimant company is assumed to
use any current year or brought forward losses that it has, even if such a loss relief claim is not
actually made.
 The maximum figure of loss that can be surrendered is restricted to the amount of taxable total profits
of claimant company
 When the accounting periods of the claimant company and the surrendering company are not
coterminous, then group relief is restricted.
 There may also be a restriction where an accounting period is less than 12 months long.
 Unlike other loss relief claims, it is possible to specify the amount of group relief that is to be
surrendered.
 In fact, if surrendering company decides to surrender losses to multiple claimant companies, it’s
advisable to surrender the losses preferably to those companies which are paying tax over marginal
rates. If losses are surrendered in such a way that marginal portion of Claimant Company is relieved,
then it will save the maximum amount of loss.
 The loss making company may of course be able to relieve the loss itself. In this case consideration
will also have to be given to the timing of the relief obtained (an earlier claim is generally preferable),
and the extent to which relief for qualifying charitable donations will be lost.

Capital Gains Group (75%,>50% )

The transfer of assets between the capital gains group will not give rise to any chargeable gain or capital
loss. Asset is transferred to claimant company’s books at an indexed cost i.e., cost plus indexation
allowance up to the date of transfer or 31st December 2017 whatever comes earlier.
 It is possible for two companies in a chargeable gains group to make a joint election which enables
them to transfer a chargeable gain or allowable loss, or any part of a gain or loss,
between them.
 The matching is done on a notional basis. An asset does not actually have to be moved between
companies in order to match chargeable gains and capital losses.
 The election has to be made within two years of the end of the accounting period in which the asset is
disposed of outside the group and will specify which company in the group is treated for tax purposes
as making the disposal.
 By making joint election, chargeable gains and capital losses arise in the same company which will
result in the optimum use being made of capital losses.

Rollover relief/ Holdover relief

 If a member of a capital gains group disposes of an asset outside the group and hence eligible for
capital gains, rollover relief/holdover relief is available against acquisitions by other group members
within the qualifying period of one year before the disposal or three years afterwards.

CORPORATION TAX ADMINISTRATION

Notification of Chargeability to Tax
A company must notify HMRC of the commencement of its trade within three months of the
commencement of operations otherwise standard penalties are imposed (discussed earlier)

Filing of Return (CT 600)

A company has to file return electronically on the earlier of:
Twelve months after the end of the accounting period

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&
3 months after the issuance of return (if issued later)

Late filing of return

Up to 3 months £100 (would increase to £500 if late for persistently 3rd time)

3 – 6 months £ 200 (would increase to £1,000 if late for persistently 3 rd time)

6 -12 months £ 200 + 10% of unpaid tax

>12 months £200 +20% of unpaid tax

iXBRL
The filing of accounts must be done in Line Extensible Business Reporting Language (iXBRL). iXBRL is
a standard for reporting business information in an electronic form which uses tags that
can be read by computers.
HMRC supplies software which can be used by small companies with simple accounts. This software
automatically produces accounts and tax computations in the correct format.
Other companies can use:
a) Other software that automatically produces iXBRL accounts and computations; or
b) A tagging service which will apply the appropriate tags to accounts and computations; or
c) Software that enables the appropriate tags to be added to accounts and computations.

Determination
If a return is not delivered by the filing date, HMRC may issue a determination of the tax payable within
the four years from the filing date.
This is treated as a self-assessment and there is no appeal against it.
However, it is automatically replaced by any self-assessment made by the company

Amendment of Error/Mistake
A company may amend a return within twelve months after the due filing date.
HMRC may amend a return to correct obvious errors/mistakes within nine months after the actual filing
date. Standard penalties are applied in case of making error. (Discussed earlier)

Claims
Claim (for overpayments, loss reliefs or for any error which couldn’t have been rectified within the normal
time period etc.) should be made within four years from the end of an accounting period.
An appeal against a decision on such a claim must be made within 30 days.

Enquiry
Enquiry should be raised within 12 months after actual filing date by HMRC.
Possible reasons on raising enquiry can be fraud, negligence, officer wishes to clarify a technical point,
return is found to be incomplete or randomly basis. In the course of enquiry, revenue demands certain
documents or would require detailed justification of particular question/questions.
Appeal can be made against the request of provision of documents and records.

Discovery Assessment

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Normally enquiry is made within 12 months but afterwards discovery assessment can only be made if
either:
a) the loss of tax is due to deliberate or careless understatement
b) And there is a sufficient evidence against it
The normal time limit for raising a discovery assessment is four years from the end of the accounting
period but this is extended to 6 years if there has been careless understatement and 20 years if there has
been deliberate understatement. The company may appeal against a discovery assessment within 30 days
of issue.

Records :Companies must keep records until the later of:

a) six years after the end of an accounting period;
b) the date any compliance checks are completed;
Failure to keep records can lead to a penalty of up to £3,000 for each accounting period affected.

Due Date for Payment

The due date of corporation tax is dependent on the size of the company.
The size of the company is determined on the basis of profit threshold of a company which is
£15, 00,000*. Profit threshold is affected in two cases:
1) Either the company’s accounting period is less than 12 months AND/OR
2) The company is found to be a member of 51% related companies.
* Augmented profit =taxable total profit plus amount of dividend received from companies which are not
a part of associated group.
The due date of small and medium sized companies is nine months and one day after the end of an
accounting period.

Large companies must pay their corporation tax in installments. Installments are due on the 14th day of
seventh month of an accounting period, then 10th month of an accounting period, then 1 month after the
end of the year (i.e.13th month) and 4th month after the end of an accounting period (i.e.16th month)
Installments are based on the estimated corporation tax liability for the current period (not the previous
period). It is extremely important for companies to forecast their tax liabilities accurately.
Otherwise significant interest charges are imposed on every installment. The amount of each installment
is computed by multiplying 25% with estimated CT.

Overpaid/Underpaid Interest: Interest is charged on overdue/underpaid tax and it runs from

the due date till it is paid @ 6.5%.
Interest is received on overpaid taxes and it runs from the date of payment till the date of
repayment/adjustment @ 3%.

VAT
 Value Added Tax (VAT) is an indirect tax imposed on goods and services supplied in the UK and its
burden falls on the final consumers (or end consumers).
 VAT is charged on the taxable supply of goods and services in the UK by a taxable person
(includes individuals, partnership, companies, club, association or charity) in the course or
furtherance of a business carried on by the person.
 A taxable person is a person who is registered for VAT (or who is required to be registered for
VAT).

Types of supply

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There are two types of supplies

1. Exempt supplies
2. Taxable supplies
 Standard rated supplies
 Reduced rated supplies
 Zero rated supplies
Exempt supply
The following supplies are the main examples of supplies that are exempt from VAT:
 Land and buildings
 Insurance premiums
 Postal services
 Finance services
 Education services
 Health services

NO VAT is charged on exempt supplies.

Taxable supplies
A taxable supply is any supply of goods or services made in the UK on which VAT liability can be charged.
 Standard rated supplies
The standard rate of VAT is calculated as:
 20% of the VAT exclusive (or net) price, or 20/120 of the VAT inclusive (or gross) price
 Zero rated supplies
The zero-rated generally applies to supplies of goods and services that are considered to be essential
requirements.

Vat Registration
Registration for vat can be done in following ways:
 Compulsory registration
 Voluntary registration

i) compulsory registration

Historic test future test

Historical test
The historical test rules are as follows:
 A person must register for VAT if, at the end of any month, the taxable turnover for the last
12 months has crossed the limit of £85,000.
 For checking the limit, Taxable supplies includes all standard-rated, zero-rated and reduced
rate supplies, but excludes supplies of capital items (e.g., sales of non-current assets of the
business).
 HMRC must be notified within 30 days of the end of the month in which the threshold is
exceeded and the newly-registered business/person must charge VAT from the first day after the
end of the month in which notification to HMRC is required, or an earlier agreed date.
Failure to register for VAT is an offence. Standard penalty will be imposed on late notification
of chargeability to tax.

Future test

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 A person must register for VAT if at any time trader believes that the taxable turnover in the next 30
days in isolation will exceed £85,000. HMRC must be notified within the 30-day period in which it is
thought that the threshold will be exceeded.
 The newly-registered business/person must charge VAT from the first day of the 30 day period ( in which
it is estimated that the threshold will be exceeded) or an earlier agreed date.

Exception to this rule:

A person is not required to register for VAT in these circumstances if the taxable turnover in the next 12
months is not expected to exceed the deregistration threshold of £83,000.
Voluntary Registration
A person who makes taxable supplies below the VAT threshold is not required to register for VAT.
However, they can have an option to register voluntarily.

Advantages of Registration
 Input VAT on purchases and expenses is recoverable (thus managing cash flow issues).
 Business is considered involved in conducting their activities on substantial level.
It is particularly advantageous to register if the business is zero-rated, as it can recover input VAT but
does not have to pay output VAT as it is charged at 0%.

Disadvantages of Registration
 Administrative burden is increased
 By adding VAT to the selling price of good might demotivate non VAT registered customers(e.g.
members of general public) due to the increased selling price for good for which they are not entitled
to recover VAT. The problem of losing customer can be avoided if business keeps its original selling
price as it is, reduce it with the figure of VAT and thus lowering the profit margin.
However, this is not a disadvantage if:
 The business is zero-rated (and so does not charge any VAT), or
 All customers are VAT-registered and so can recover the VAT charged (as their input VAT).

Group Registration
Two or more companies can elect for group registration provided that:
 One of them controls the others, or they are under the common control of same person
 Each company must be UK resident.
 It is not necessary for all eligible companies to be members of a VAT group. e.g., companies making
zero-rated supplies as advised not to be a part of VAT group as their refund of VAT would be used to
offset any VAT payable by the group.
 The group appoints a representative member to be responsible for submitting VAT returns and paying
VAT on behalf of the group. However, all group members are jointly and severally liable for any VAT
due. Supplies between group members are ignored.
 Only one VAT return is submitted for the whole group. This reduces administrative burden. However,
collating the information from the various group members may become problematic.
 Disadvantage: Various limits, such as those for the cash and annual accounting schemes (see later),
apply to the group as a whole rather than to each individual member.

How VAT Operates

Every registered business is liable to charge VAT on its supplies, such as its sales. This is known as
output VAT. It must pay the output VAT to HMRC, usually on a quarterly basis.

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Registered businesses can recover any VAT that it has paid to its suppliers on its raw material purchases
and other expenses. These VAT payments are known as input VAT.
A VAT-registered business therefore only pays HMRC the difference between its output and input VAT.

Tax Point
The tax point is the date for which VAT liability is recorded in order to identify the VAT period to which
the transaction relates.

 Basic tax point

Goods - The date at which goods are delivered
Services - The date at which service is performed
Exception: Tax point is amended in two situations:
-If tax invoice is issued or payment is received before the basic tax point.
-If invoice is issued within 14 days of basic tax point.
 Sale or return basis
If goods are delivered on sale or return basis, tax point is the date which is earlier of
 12 months after the date of dispatch of good.
 The goods are actually sold.
 Continuous supplies
Earlier of cash received and invoice issued.

VAT Equation
NET+VAT=GROSS
So, if VAT is to be determined over VAT exclusive amount then rate should applied over net figure.
And if VAT is to be determined over VAT inclusive amount then gross figure should be put into equation.
i.e. VAT=GROSS AMOUNT/GROSS % × VAT%

Treatment for VAT

For each return period, every business liable to charge VAT:
 Charges output VAT on its taxable supplies.
 Recovers input VAT on purchases and other expenses.
 Completes a quarterly VAT return and submits it to HMRC.
 Accounts to HMRC for any VAT payable if there is excess output VAT (if output VAT exceeds input
VAT) for the return period.
 Claims a repayment of excess input VAT (if input VAT exceeds output VAT) for the return period
within 4 years after the end of the quarter.
The VAT return must be completed and submitted to HMRC along with VAT payable, electronically,
within 1 month and 7 days after the end of quarter.

Output VAT
 Output VAT is charged on taxable supplies of goods and services and even on the sale of capital items.
 Gifts of business assets/samples (excluding gifts to the same person that total no more than £50
excluding VAT in any 12-month period and gifts of trade samples)
 Goods withdrawn from the business by the owner or an employee.
 Private fuel: when fuel is supplied to an employee or free or less than the cost of fuel borne by the
business then business must account for OUTPUT VAT for which Scale charges are set by HMRC.
Fuel scale charge will be provided in exams.

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Alternatively, the output VAT charge can be avoided if no claim is made for the input VAT on the
fuel provided.
 Discounts: Output VAT is calculated on the selling price net of discounts, if discount has actually
been availed.
 Relief for impairment losses:If vat is charged on transfer of goods and customer does not pay for
a supply, then business can claim bad debt relief if the following conditions are satisfied:
 More than 6 months have been elapsed from the due date of payment
 Bad debt has been written off in books

Treatment of VAT for Capital Allowance Purposes

 Capital allowance is calculated on VAT exclusive figure over all noncurrent assets except for car with
personal use (registered business)
 Capital allowance is calculated over VAT inclusive figures over all noncurrent assets (unregistered
business)

Deregistration
 Compulsory registration
A person is required to deregister on compulsory basis for VAT when either of the following situations is
fulfilled
 Either ceases to make taxable supplies.
 business is ceased
 Business changes its location from UK
 Legal structure of the business is changed
If any of the above said condition is fulfilled then the notification for deregistration should be made within
30 days. Deregistration will be effective from the date the condition is fulfilled.
 Voluntary registration
Voluntary deregistration is allowed if at any time:
 If it is estimated that taxable supplies in the next 12 months will not exceed the threshold of
£83,000, and is not a temporary reduction.
In this situation, deregistration will be effective from the date on which the request for deregistration is
made or an agreed later date.

Consequences of deregistration
On the last day of registration, it is assumed that there is a deemed supply of all of the business assets
held by the business. VAT is therefore charged on the non-current assets (except cars) and trading stock
owned by the business on which input VAT has been recovered in previous VAT returns.
Output VAT is charged on this deemed supply at the standard rate unless the amount payable is less than
£1,000, in which case it is ignored.
Exception to the rule: No VAT is charged where
1) a business is transferred /sold as a going concern
2) provided the transferee business is already VAT-registered or will become registered immediately
after the transfer and so they will be held responsible to charge output VAT on the subsequent sale of
goods

Small Business Scheme

1) Cash Accounting Scheme

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Small businesses account will account for VAT when cash is paid and received, rather than on the tax
point dates.
 The business does not have to pay VAT until it has received the cash from its customers’ cash flow
issues are managed.
 It therefore receives automatic bad debt relief if a customer does not pay.
A business can only join the cash accounting scheme if:
 its taxable supplies in the next 12 months are not expected to exceed £1,350,000 (excluding VAT)
 will have to leave the scheme if taxable turnover exceeds £1600,000 (excluding VAT)
 its VAT returns are up to date and has paid all outstanding VAT liabilities
 It has not committed any VAT offences in the last 12 months.

2) Annual accounting scheme

 Small businesses submit only one VAT return each year and spread their payments of VAT evenly
throughout the year.
 Administrative burden is reduced as only single return is prepared.
 Assists in making cash budget.
Payment schedule is given as follows:
 HMRC estimate the total VAT liability for the year, based on the previous year.
 10% of this estimate is paid in nine equal monthly installments (payments on accounts) and they are
paid on the last day of every month starting in the 4th month and finishing on the last day of the 12th
month.
 Balancing payment along with annual VAT return is submitted to HMRC within two months of the
end of the year.
A business can only join the annual accounting scheme if:
 its taxable supplies in the next 12 months are not expected to exceed £1,350,000 (excluding VAT)
 will have to leave the scheme if taxable turnover exceeds £1600,000 (excluding VAT)

3) Flat Rate Scheme

Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate
percentage to total turnover. Small businesses account for VAT at a flat rate percentage of VAT-inclusive
turnover. The appropriate flat rate percentage will be given in the examination.
 The flat rate scheme simplifies the preparation of the VAT return.
 The scheme therefore reduces the administrative burden
The mechanics of the flat rate scheme are as follows:
 The business issues VAT invoices to VAT registered customers and to charge all customers for VAT at
the normal rates (e.g. standard, reduced or zero-rated)
 However, at the end of the return period, the taxable person pays to HMRC the amounts calculated by
appropriate flat rate × VAT inclusive turnover
A business can only join the flat rate scheme if its taxable supplies (excluding VAT) in the next 12 months
are not expected to exceed £150,000 and total turnover (including exempt sales) should not exceed
£230,000

Overseas Aspects of VAT

EXPORTS: When a UK VAT registered business exports goods then the supply is zero rated. Supplies of
services outside of the European Union are outside the scope of VAT

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IMPORTS: When a UK VAT registered business acquires goods from overseas supplier then the VAT
does not have to be paid at the time of importation.
The import VAT is declared on the VAT return as output VAT
This VAT can then be reclaimed as input VAT on the same VAT return.
Therefore, for most businesses there is no VAT cost as the VAT charge and the corresponding input VAT
contra each other

Overseas Aspects for services

Supplying services to overseas business customer Outside the scope of VAT
Receives services from overseas businesses UK is the place of service
Reverse charge procedure applies

Tax point for cross border supplies

Earlier of
 The date at which services are supplied, &
 The date at which payment is made

VAT records: A taxable person is required to keep detailed records and evidences of all transactions to
support VAT returns. Records must be kept for at least six years. Otherwise the penalty for not keeping
the record is £3,000/year.

VAT invoice: A VAT invoice must be issued within 30 days of the supply of the goods or services
whenever a taxable person makes a taxable supply to another taxable person, However, VAT invoice is not
required when the supply is made to a person who is not registered for VAT or the supply is zero-rated.
 To be valid, a VAT invoice must contain the following information:
1) Invoice date and invoice number
2) Type of supply
3) Date of supply
4) Quantity and description of the goods supplied
5) Name and address of the supplier
6) NAME and address of the customer
7) details of any discounts offered
8) VAT registration number
9) Tax point
10) Rate of VAT for each supply
11) VAT-exclusive amount for each supply
12) Total VAT-exclusive amount
13) Amount of VAT payable.
 Less detailed VAT invoices is issued if the taxable supply is no more than £250 (including VAT).
But it must contain the following information:
1) name and address of the retailer
2) VAT registration number
3) tax point
4) quantity and description of the goods supplied
5) rate of VAT for each supply
6) consideration for the supply
7) Rate of VAT applicable.
Penalties for late filing and late VAT payment
• There are separate penalties for late filing and late payment of VAT.

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• Every time when VAT return is filed late, the tax payer receives one penalty point
• When tax payer receives 4 penalty points, then penalty of £200 is charged
• £200 penalty is charged further on every subsequent late filing of return
• Where tax payer is below the penalty point threshold, each penalty point expires after two years
• But once the threshold is reached, penalty points do not increase, rather it requires tax payer to
submit all four quarterly VAT returns on time
Penalties for late payment of VAT Days late Penalty (% of VAT payable)
Up to 15 days None
16 to 30 days 2%
More than 30 days 4% plus 4% daily

Default interest
Default interest is charged on any unpaid amount from the date the VAT should have been paid to the
date of payment.

Errors on VAT return

If an error is made on the vat return and is discovered by the tax payer itself, then it should be established
whether the error is significant or not.
DEMINIMIS TEST is applied in case of error or mis-declaration on VAT return in order to judge whether
the error is significant or not and is done by taking the Higher of
 £10,000 or
 1% of the turnover for the VAT period (up to a maximum turnover of £50,000),
 If error is below the limit, it is said to insignificant and the mistake is voluntarily disclosed in next
VAT return. Default interest will be due but No separate disclosure is required.
 But if the error is greater than the limit then separate disclosure to HMRC is required as it is said
to be a significant error. In this situation default interest will be due for underpayment of taxes.
However standard penalty is imposed in both scenarios.
If an error is revealed by HMRC then both default interest and standard penalties are imposed on under
declared amount of VAT.

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