ACCA – TX

TAXATION

STUDY NOTES
 CONTENTS
Chapter # Chapter Name Page #

1 Introduction to Tax 01

2 Introduction to Income Tax 05

3 Income from Property 17

4 Employment Income 24

5 Trading Profit 37

6 Capital Allowance 44

7 Basic Period 55

8 Individual’s Trading Losses 59

9 Partnership 67

10 National Insurance Contributions 74

11 Pensions 79

12 Administration 87

13 Capital Gains Tax (Basics) 95

14 Capital Gains Tax (Special Rule) 100

15 Capital Gains Tax (Reliefs) 110

16 Inheritance Tax 122

17 Introduction to Corporate Tax 142

18 Trading Losses 156

19 Groups 160

20 Corporation Tax Administration 167

21 Value Added Tax 172

Specimen Paper Questions 187
Specimen Paper Answers 201
 IMPORTANT NOTE
The following notes have been updated to accommodate the changes in the tax legislation, as specified in the
ACCA Technical Article: Finance Act 2017.

Some of the extracts and examples have been directly copied from the stated article, which can be accessed via
the following link:
http://www.accaglobal.com/pk/en/student/exam‐support‐resources/fundamentals‐exams‐study
resources/f6/technical‐articles/finance‐act‐2017.html

EXAM FORMAT

Section Assessment Syllabus area examinable Marks Recommended Time

A 15 Objective Test Questions Entire 30 50 minutes

B 15 Objective Type Questions split Entire 30 50 minutes
equally between 3 Objective Test
Case Scenarios

C 3 Long Form Questions: Entire 40 80 minutes

 1 ‐ 10 mark question 2 questions of 15 marks each
 2 ‐ 15 mark questions will be from income tax and
corporation tax area

100 180 minutes

Excludes 10 minutes
preparation time

Assessment Types

Section A:
The technical concepts will be examined as Objective Test Questions, in the following possible formats:
 Multiple Choice Questions (MCQs)
 Multiple Response Questions (MRQs)
 Fill in the Blanks
 Drag and Drop
 Drop Down List
 Hot Spot
 Hot Area
These will be a mix of computational and narrative.

Section B:
3 case scenarios will be provided in this section. 5 Objective test questions (format – one of the above listed) will be
based around a common case scenario.

These will be a mix of computational and narrative.

For paper based exams Section A and Section B will only cover MCQs.

Section C:
This section will comprise of 3 long form questions (one worth 10 marks and the remaining worth 15 marks each) and
this will be predominantly computational.
 01

CHAPTER
Contents
1. Introduction
2. Types of Taxes
3. The Tax System
4. Appealing System
5. Tax Evasion
6. Tax Avoidance
7. Code of Ethics and Conduct

Introduction to Tax

Page 1
Introduction to Tax Chapter‐ 01

Introduction
Tax is the source of income for the Government.

The taxation affairs are being managed by the government in the United Kingdom

Her Majesty's Revenue and Customs (HMRC) is the tax authority which uses various tax policies to encourage and
discourage certain types of activities; trying to balance out certain Social, Environmental, economical etc. factors,
in the UK.

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 – tax charged increases with the increase in income
 Regressive taxes ‐‐ tax decreases with the increase in income. So tax applicable over one liter of diesel is same
for all customers
 Proportional taxes‐ regardless of level of income, tax proportion remains same.

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

Directly Taxes: Are charged directly on income and other profits of the tax payer and the tax payer is aware of the
amount he/ she has paid

Indirect Taxes: Are charged indirectly on the consumer (i.e. customer) via a supplier.

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.

Page 2
Introduction to Tax Chapter‐ 01

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

If a tax payer comes in dispute with the application of the tax law then appeal can directly be made to a Tax
Tribunal – a body, setup for resolving tax disputes.

Depending upon the technicality of the case, the case is either referred to the First Tier Tribunal or to the Upper
Tribunal. Appeals against the First Tier Tribunal can further be forwarded to the Upper Tribunal as well.

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 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 evasion consists of misleading HMRC by either
suppressing information, or providing deliberately misleading information.

Tax Avoidance
Tax avoidance includes a legal method of reducing tax liability by using tax shelters, or using schemes to minimize
tax e.g. making investment in ISA, making donations under gift aid scheme etc.

Page 3
Introduction to Tax Chapter‐ 01

Code of Ethics and Conduct

ACCA members and affiliates are bound by ACCA code of ethics and conduct, which covers the following principles:

Integrity: That is 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.

But it is recommended to take advice from ACCA before reporting the client simply on the basis of suspicion
because the client can sue the consultant/accountant for not maintaining confidentiality if there is an error at the
consultant’s end.

Page 4
 02

CHAPTER
Contents
1. Introduction
2. Residence
3. Tax Year
4. Types of Income
5. Income Taxed at Source
6. Interest Income
7. Deductible Interest
8. Personal Allowance
9. Income Tax Rates
10. Income Tax Payable
11. Gift Aid Donation
12. Child Benefit Income Tax Charge

Introduction to Income Tax

Page 5
Introduction to Income Tax Chapter ‐02

Introduction

UK resident individuals are liable to pay 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.
 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 times 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.

How the UK ties test is applied depends on whether a person has been resident in the UK for any of the previous
three tax years. A person who has been resident during any of the previous three tax years will typically be
someone that is leaving the UK, and for them all five UK ties are relevant.

A person who has not been resident during any of the previous three tax years will typically be someone that is
arriving in the UK, and for them the final ‘country’ tie is ignored.

A person’s residence status is found by comparing the number of days they are in the UK during a tax year against
how many UK ties they have:

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)

Page 5
Introduction to Income Tax Chapter ‐02

121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident

It is therefore more difficult for a person leaving the UK to become non‐resident than it is for a person arriving in
the UK to remain non‐resident.

A day in the UK is any day in which a person is present in the UK at midnight.

The table will be given in the tax rates and allowances section of the examination paper.

Example 1
James is in the UK for 40 days during the tax year 2017–18. He has not previously been resident in the UK.

Kate is in the UK for 60 days during the tax year 2017–18. Her only home is in the UK.

Maggie has always been resident in the UK, being in the UK for more than 300 days each tax year. On 6 April 2017
Maggie purchased an overseas apartment where she lived for most of the tax year 2017–18. She also has a house
in the UK where her husband and children live. During the tax year 2017–18 Maggie visited the UK for a total of 80
days, staying in her UK house.

Nigel has not previously been resident in the UK, being in the UK for less than 20 days each tax year. On 6 April
2017 he purchased a house in the UK, and during the tax year 2017–18 stayed in the UK for a total of 160 days.
Nigel also has an overseas house which was where he stayed for the remainder of the tax year 2017–18.

Solution

James
For 2017–18 James will automatically be treated as not resident in the UK. He has not been resident during the
three previous tax years, and has spent less than 46 days in the UK.

Kate
For 2017–18 Kate will automatically be treated as resident in the UK. She has spent too long in the UK to be
automatically treated as non‐resident, and her only home is in the UK.

Maggie
For 2017–18 Maggie has spent too long in the UK to be automatically treated as non‐resident, and will not
automatically be treated as resident because she does not meet the only home test.

Maggie has been resident in the UK during the three previous tax years, and was in the UK between 46 and 90
days. She is therefore resident in the UK for 2017–18 as a result of her three UK ties:
 Close family in the UK.
 A house in the UK which is made use of.
 In the UK for more than 90 days during the previous two tax years.

Page 6
Introduction to Income Tax Chapter ‐02

Nigel
For 2017–18 Nigel has spent too long in the UK to be automatically treated as non‐resident, and will not
automatically be treated as resident because he does not meet the only home test.

Nigel has not been resident in the UK during the three previous tax years, and was in the UK between 121 and 182
days. He is therefore not resident in the UK for 2017–18 as the only UK tie is the house in the UK which is made use
of.

Tax Year
Individuals are assessed according to the tax year. Tax year runs from 6th April to 5th April. So, the year 6th April
2017 to 5th April 2018 is referred as the tax year 17/18

Mr. / Ms.
Personal Tax Computation
2017 ‐18
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
 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

Page 7
Introduction to Income Tax Chapter ‐02

 Income from individual savings accounts (ISAs)

Individual Savings Account

The individual savings account (ISA) investment limit for the tax year 2017–18 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 – such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.

The income from ISAs is exempt from income tax, whilst a chargeable gain made within a stocks and shares ISA is
exempt from capital gains tax.

The availability of the savings income nil rate band for basic and higher rate taxpayers means that there is no tax
benefit to investing in cash ISAs for many individuals. However, cash ISAs are advantageous for additional rate
taxpayers and for other individuals where their savings income nil rate band is already utilized.

The availability of the dividend nil rate band means that there is no tax advantage to receiving dividend income
within a stocks and shares ISA for many individuals. However, chargeable gains made within a stocks and shares
ISA are exempt from capital gains tax. Stocks and shares ISAs are therefore advantageous where chargeable gains
are made in excess of the annual exempt amount.

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

Interest paid on these loans is eligible for tax relief and it is deducted from Total Income in the following order:
 Non‐savings income, then
 Savings income, then
 Dividend income

Personal Allowance

 The normal personal allowance of £11,500 is gradually reduced to nil where a person’s adjusted net income
exceeds £123,000.
 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 £123,000 or more is not entitled to any personal
allowance ((123,000 – 100,000)/2 = £11,500).

Page 8
Introduction to Income Tax Chapter ‐02

Income Tax Rates

Normal rates Dividend rates
(for non‐savings and
savings income)
Basic rate £1 to £33,500 20% 7.5%
Higher rate £33,501 to £150,000 40% 32.5%
Additional rate £150,001and over 45% 38.1%
Savings income nil rate band
‐ Basic rate taxpayers £1,000
‐ Higher rate taxpayers £500
Dividend income nil rate band £5,000

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

Example 2
For the tax year 2017–18 she has a salary of £37,000, building society interest of £1000 and dividends of £10,000.
Her income tax liability is as follows:
Non‐ saving saving dividend Total
£ £ £ £
Employment income 37,000 37,000
Building society interest 1,000 1,000
Dividends 10,000 10,000
48,000
Personal allowance (11,500) (11,500)

25,500 1,000 10,000 36,500

Taxable income

Income tax:
25,500 at 20% 5,100
500 at 0% 0
500 at 20% 100
5000 at 0% 0
2,000 at 7.5% 150
3,000 at 32.5% 975
6,325
Tax liability
______

Page 9
 Introduction to Income Tax Chapter ‐02

Example 3
Jane has trading profits for the tax year 2017–18 of £184,000. Her income tax liability is as follows:
Non Saving Total
£ £
Trading profit 184,000 184,000
Nil Nil
Personal allowance

184,000 184,000
Taxable income

Income tax liability:

6,700
33,500 at 20%
46,600
116,500 at 40%
15,300
34,000 at 45%

68,600
Tax liability

 No personal allowance is available as June’s adjusted net income (ANI) of £184,000 exceeds £123,000.

Gift Aid Donation

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

Individuals are deemed to make Gift Aid donations net of 20% tax, which is recoverable by the charity from HMRC.

E.g. If an individual makes a Gift Aid payment of, say, £1,600, the gift is treated as a gross gift of £2,000 (= £1,600 ×
100/80). The charity will receive £1,600 from the individual and a tax repayment of £400 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. This results in a lower rate of tax being applied on the taxable income.

Example 4
For the tax year 2017–18 May has a trading profit of £159,000. During the year May made net personal pension
contributions of £40,000 and a net gift aid donation of £1,600. Her income tax liability is as follows:
Non saving Total
£ £
Trading profit 159,000 159,000
(8,000) (8,000)
Personal allowance
______
151,000 151,000
Taxable income
______
Income tax:
85,500 at 20% 17,100
65,500 at 40% 26,200

Page 10
 Introduction to Income Tax Chapter ‐02

______
43,300
Tax liability
______

 The gross personal pension contributions are £50,000 (40,000 x 100/80) and the gross gift aid donation is
£2,000 (1,600 x 100/80).
 May’s adjusted net income is therefore £107,000 (159,000 – 50,000 – 2,000), so her personal allowance of
£11,500 is reduced to £8,000 (11,500 – 3,500 (107,000 – 100,000 = 7,000/2)).
 The basic and higher rate tax bands are extended to £85,500 (33,500 + 50,000 + 2,000) and £202,000 (150,000
+ 50,000 + 2,000) respectively.

Example 5

For the tax year 2017–18 Ali has pensions of £11,900 and bank interest of £7,000 .His income tax liability is as
follows:
Non – Saving Saving Total
£ £ £
11,900
11,900
Pensions
Bank interest 7,000 7,000
Total income 11,900 7,000 18,900
(11,500) (11,500)
Personal allowance
_______
400 7,000 7,400
Taxable income
_______
Income tax:
400 at 20% 80
4600 at 0% 0
1000 at 0% 0
1,400 at 20% 280
Tax liability 360

 As savings income fall in first 5,000 at the starting rate band where the rate of tax is 0%.
(£5,000 – £400 used by non ‐savings income) so, £4600 the savings income is taxed at the starting rate of 0%.
The remainder of the savings income is taxed at the basic rate of 20%.

Page 11
Introduction to Income Tax Chapter ‐02

Example 6
For the tax year 2017–18 Lorn has pensions of £24,000 and building society interest of £4,000. Her income tax
liability is as follows:
Non saving Saving Total
£ £ £

Pensions 24,000 24,000

Building society interest 4,000 4,000

Total income 24,000 4,000 28,000

(11,500) (11,500)
Personal allowance

12,500 4000 16,500

Taxable income

2,500
Income tax: 12,500 at 20%
800
4,000 at 20%

_______
Tax liability 3,300

Example 7
For the tax year 2017–18 Rich has a trading profit of £92,000 and pensions of £18,000. His income tax liability is as
follows:
Non saving Total
£ £
Trading profit 92,000 92,000
18,000 18,000
Pensions

110,000 110,000
(6,500) (6,500)
Personal allowance

103,500 103,500
Taxable income

Income tax:
33,500 at 20% 6,700
70,000 at 40% 28,000
______
34,700
Tax liability
______

Page 12
Introduction to Income Tax Chapter ‐02

 As the adjusted net income of £110,000 exceeds £100,000, the normal personal allowance is then reduced to
£6,500 (11,500 – 5,000 (110,000 – 100,000 = 10,000/2)).

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.

Example 8
Trevor For the tax year 2017–18 he has a gross Salary of £132,000, PAYE of £8,000 was deducted. building society
interest of £4,000 and dividends of £38,000. The income tax payable by Trevor is as follows:

Non ‐Savings Savings Dividend Total

£ £ £ £

132,000 132,000
Salary
4,000 4,000
Building society interest

Dividends 38,000 38,000

Total income 132,000 4,000 38,000 174,000
Personal allowance Nil Nil

Taxable income
132,000 4,000 38,000 174,000
Income tax: £
33,500 at 20% 6,700
98,500 at 40% 39,400
4,000 at 40% 1,600
5,000 at 0% 0
9,000 at 32.5% 2925
24,000 at 38.1% 9,144

Tax liability 59,769

Less: Tax deducted at source (8,000)
Tax payable 5,1769

Page 13
Introduction to Income Tax Chapter ‐02

Example 9

Sachin is an accountant and currently employed by a local accounting firm. Following data is related to tax year
2017‐2018
£
Employment income 90,000
Rental income 5,000
Interest from national saving certificate 7,000
Interest from bank 5,000
Prize bond winnings 1,000
Dividend from individual saving account 500
Dividend from company 20,000

Sachin donated 8,000 under gift aid scheme.

Income tax of 3,000 has been deducted under PAYE.

Required
Calculate income tax payable.

Solution
Non saving Saving income Dividend Total
income
£ £ £ £
Employment income 90,000 90,000
Rental income 5,000 5,000
Interest from national saving certificate Exempt
Interest from bank 5,000 5,000
Prize bond winnings Exempt
Dividend from ISA Exempt
Dividend from company 20,000 20,000
Total income 95,000 5,000 20,000 120,000
Less personal allowance w1 (6,500)
Taxable income 88,500 5,000 20,000 11,3500

Tax liability calculation £

43,500 x 20% = 8,700
[88,500 – 43,500] x 40% w2 18,000
(5,000 – 500 note) x 40% 1,800
5000 x 0% 0
15,000 x 32.5% 4,875
Tax liability 33,375
Less tax deducted at source
PAYE (3,000)

Page 14
Introduction to Income Tax Chapter ‐02

Tax payable 30,375

W1
Gross gift aid donation £8,000 x 100/80 £10,000
Adjusted net income £120,000 ‐£10,000 £110,000
Personal allowance will be reduced by [£110,000 ‐ £100,000] /2 £5,000
Adjusted personal allowance £11,500 – £5,000 £6,500

W2
Basic rate [33,500 + 10,000 (8000x100/80)] £1 – £43,500 = £43,500
Higher rate [150,000 + 10,000] £43,500 to £160,000 = 116,500

Note: Sachin is higher rate tax payer so saving NRB will be £500.

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.

Example 10
For the tax year 2017–18 Cecil has a salary of £64,000. He received child benefit of £1,056 during the year.

Cecil’s adjusted net income of £64,000 exceeds £60,000, so the child benefit income tax charge is £1,056, being
the amount of child benefit received.

Example 11
For the tax year 2017–18 Mavis has a trading profit of £56,000. She received child benefit of £1,752 during the
year.

Mavis’ adjusted net income of £56,000 is between £50,000 and £60,000. The child benefit income tax charge is
therefore £1,051 (1,752 x 60% ((56,000 – 50,000)/100)).

Page 15
Introduction to Income Tax Chapter ‐02

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 £1,150 for the tax year 2017–18. This is 10% of the actual personal allowance.

So, the person who is transferring the personal allowances will be left with the personal allowance of £10,350
(£11,500 ‐£1150)

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 £230 (£1,150 at 20%). If the recipient’s tax liability is less than £230, then the tax reduction
is restricted so that the recipient’s tax liability is not reduced below zero.

EXAMPLE 12
Paul and Rai are a married couple. For the tax year 2017–18, Rai has a salary of £35,000 and Paul has a trading
profit of £8,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Paul’s personal allowance is reduced to £10,350 (11,500 – 1,150), and because this is higher than his trading profit
of £8,000 he does not have any tax liability.

Rai’s income tax liability is:

Employment income 35,000

Personal allowance (11,500)

_______

23,500
Taxable income _______

Income tax:
23,500 at 20% 4,700
Personal allowance tax reduction (1,150 at 20%) (230)
_______

4,470
Tax liability _______

Page 16
 03

CHAPTER
Contents
1. Introduction
2. Steps to Calculate Rental Income
3. Pro Forma
4. Rental Loss
5. Rent a Room Relief
6. Furnished holiday letting

Income from Property

Page 17
Income from property Chapter ‐03

Introduction
Property income covers normal tenancy agreement and lease agreements for UK land & building.

Rental Income
 Calculation is done on accrual basis.
 Rent is taken on accrual basis according to the tax year.
 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

 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.

Page 18
Income from property Chapter ‐03

Pro Forma
Rent (accrual) xxx
Less: Expenses
- Maintenance x
- Repair x
- Redecoration x
- Insurance x
- Advertisement x
- Bad debt x
- council tax x
- Water rates x
- Agent’s fee x
- Interest on loan taken out for rental purposes* x
- Replacement furniture relief x
x (xx)

(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 2017–18 75% of the finance cost is deductible against rental income while only 25% of
finance costs acts as a tax reducer at the basic rate .

It makes no difference whether the finance was used to purchase the property or was used to pay for repairs.

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.

EXAMPLE 1
On 6 April 2017, Fang purchased a freehold house. The property was then let throughout the tax year 2017–18 at a
monthly rent of £1,000.

Fang partly financed the purchase of the property with a repayment mortgage, paying mortgage interest of £4,000
during the tax year 2017–18.

The other expenditure on the property for the tax year 2017–18 amounted to £1,300, and this is all allowable.
For the tax year 2017–18, Fang has a salary of £80,000.

Page 19
Income from property Chapter ‐03

Fang’s property income is:

Rent receivable (1,000 x 12) 12,000

Mortgage interest (4,000 x 75%) (3,000)

Other expenses (1,300)

______

Property income 7,700

______

His income tax liability is:

Employment income 80,000

Property income 7,700

______

87,700

Personal allowance (11,500)

______

Taxable income 76,200

______

Income tax:
33,500 at 20% 6,700
42,700 at 40% 17,080
______

23,780

Interest relief
(1,000 (4,000 x 25%) at 20%) (200)
______

Tax liability 23,580

______

Page 20
Income from property Chapter ‐03

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.
 The property does not need to be fully furnished for relief to be available.
 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.

Example 2

Adrian:
Adrian owns a commercial building, which has been let furnished to tenants for the last four years. The annual
rent payable in advance by equal monthly installments on the 6th of each month was £7,200 until December 2017
but was increased to £7,800 per year with effect from 6 January 2018. All amounts were received on time with the
exception of that due for 6 March 2018, which was not received until 2 May 2018.

Expenditure relating to the property was as follows:

Council tax £960
Water rates £380
Agent’s fees £780
Re‐decoration costs £1,250
New kitchen units £2,400
interest £2,500

All these amounts were paid in 2017/18 by Adrian with the exception of the council tax which was the
responsibility of the tenants.

The kitchen units were purchased to replace the existing out‐ dated units in an attempt to modernize the
property. The improvement element in the expenditure is costing £600

The interest was paid in respect of a £50,000 interest only loan at 5% per annum

Required:
Calculate the amount assessable under Income from land and property for the tax year 2017/18.

Solution
Income from Land and Property for the tax year 2017/18

Rent receivable (accruals basis):

April–December – 9/12 x £7,200 5,400
January–March – 3/12 x £7,800 1,950 7,350
––––––

Page 21
Income from property Chapter ‐03

Expenditure:
Water rates 380
Agent’s fees 780
Decoration 1,250
Interest 2,500
Replacement property relief
(£2,400 – £600) 1,800 –6,710
–––––– –––––––
Assessable amount £640

Improvement element of Kitchen units while replacing it is regarded as capital expenditure which is not allowed as
a deduction

Example 3
Leno, a trader, receives a premium of £18,000 from his tenant for the grant of a 10 year lease, in 2017‐18.

What is leno’s property income in respect of this premium?

Solution
premium assessable = P – P (2% x (n‐ 1)) = £18,000 – £18,000 (2% x (10 – 1)) = £14,760

Allowable expenditure for tenant

The tenant can claim this amount as deductible expanse from trading profit for 10 years provided tenant use this
building in trade. = P ‐ P (2% x (n –1))
number of years of lease

= £14,760 = £1,476 per year

10

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.

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)

Page 22
Income from property Chapter ‐03

If rental income is being shared by spouses/ civil partners then this special exemption is halved between them.

Example 4
Sara intends to let her spare room out to a lodger. She has agreed terms with a visiting builder to let the room to
him for £150 a week starting on 1 April 2017. It is anticipated that the builder will stay and use 10% of the total
household expenses, which are estimated to amount to £2,400 in total for 2017/2018.

You are required to calculate how much of the amounts paid to Sara will be assessed to tax under Income from
land and property in the year of assessment 2017/2018.
(4 marks)

Sara – Income from Land and Property assessment

£
Rent receivable: £150 x 52 weeks 7,800
less expenses: £2,400 x 10% –240
‐‐‐‐‐‐‐‐‐‐
7,560
‐‐‐‐‐‐‐‐‐‐
Rent receivable: £150 x 52 weeks 7,800
Rent a room relief –7,500
‐‐‐‐‐‐‐‐‐‐
300
‐‐‐‐‐‐‐‐‐‐
Lower of the two £300
‐‐‐‐‐‐‐‐‐‐‐

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.

Page 23
 04

CHAPTER
Contents
1. Introduction
2. Employed v/s Self Employed
3. Benefits Applicable on Employees
4. Exempt Benefit
5. Allowable Deduction

Employment Income

Page 24
Employment Income Chapter ‐04

Distinction between an employee and a self‐employed person is important as employees are assessed under
employment income rule s and self‐employed persons are assessed under trading profit rules.

Employment v/s Self Employment

An employee works under a contract of service and a self‐employed person under a contract for services.

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?
 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

Page 25
Employment Income Chapter ‐04

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.

This is calculated as: (Cost–£75,000) x 2.5% (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 for which benefit is to be computed.

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.

Example 1
During the tax year 2017–18 Prop plc provided three of its employees with living accommodation.

Alex has been provided with living accommodation since 1 January 2014. Prop plc had purchased the property in
2013 for £160,000, and it was valued at £185,000 on 1 January 2014. Improvements costing £13,000 were made to
the property during June 2015. The annual value of the property is £9,100.

Bess was provided with living accommodation from 1 January 2018 to 5 April 2018. The property is rented by Prop
plc at a cost of £2,250 per month, and it has an annual value of £10,400. On 1 January 2018 Prop plc purchased

Page 26
Employment Income Chapter ‐04

furniture for the property at a cost of £16,200. The company pays for the running costs relating to the property,
and for the period 1 January to 5 April 2018 these amounted to £1,900.

Chloe was provided with living accommodation on 6 April 2017, and she lived in the property throughout the tax
year 2017–18. The company had purchased the property in 2007 for £ 89,000, and it was valued at £144,000 on 6
April 2017. The annual value of the property is £4,600.

Solution:

Alex
 The basic benefit is the annual value of £9,100.
 The living accommodation cost in excess of £75,000 so there is an additional benefit. Since the property was
not purchased more than six years before first being provided to Alex, the benefit is based on the cost of the
property plus subsequent improvements. The additional benefit is therefore
£ 2,450 =£98,000 [(£160,000 + £13,000) ‐ £75,000] at 2.5%).

Bess
 The benefit is the rent paid of £6,750 (£2,250 x 3) since this is higher than the annual value of £2,600 (£10,400
x 3/12).
 The benefit in respect of the furniture is £810 (£16,200 x 20% x 3/12).
 The running costs of £1,900 are also taxed as a benefit.

Chloe
 The basic benefit is the annual value of £4,600.
 The living accommodation cost in excess of £75,000, so there is an additional benefit. Since the property was
purchased more than six years before first being provided, the benefit is based on the market value when first
provided.

The additional benefit is therefore

£ 1,725 = £69,000 [(£144,000 – £75,000) at 2.5%].

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 2.5%.

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:

Page 27
Employment Income Chapter ‐04

The average method:

The average is taken of the amount outstanding at the start of the tax year (or when the loan was made if later)
and at the end of the tax year (or when the loan was repaid if earlier). The ‘official rate of interest less interest rate
suffered’ is then applied to this average.

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.

Example 2
During the tax year 2017–18 Rest Ltd provided three of its employees with loans.

Kim was provided with an interest free loan of £12,000 on 1 June 2017 so that she could purchase a new motor
car.

Ming was provided with an interest free loan of £120,000 on 1 May 2017 so that she could purchase a holiday
cottage. Ming repaid £50,000 of the loan on 31 July 2017, and repaid the balance of the loan of £70,000 on 31st
December 2017.

Newt was provided with a loan during 2015 so that she could purchase a yacht. The amount of loan outstanding at
6 April 2017 was £ 60,000, and Newt repaid £5,000 of the loan on 31 August 2017, and then repaid a further
£5,000 on 28 February 2018. Newt paid loan interest of £970 to Rest Ltd during the tax year 2017–18. The taxable
benefit in respect of this loan is calculated using the average method.

Kim
 The benefit is £250 (12,000 at 2.5% x 10/12).
 Since no repayments have been made during the 2017–18 tax year both methods will produce the same
result.

Ming
 The benefit calculated using the average method is £1,479 as follows:
[(£120,000 + 70,000)/2x 2.5%] x 8/12 =1,583

 The benefit using the strict method is£ 2,367 as follows:

£120,000 at 2.5% x 3/12 750
£70,000 at 2.5% x 5/12 729
1,479

Page 28
Employment Income Chapter ‐04

 Ming will therefore elect to have the taxable benefit calculated according to the strict method.

Newt
 Newt repaid £10,000 (5,000 + 5,000) of the loan during 2017–18, so the outstanding balance at 5 April 2018 is
£50,000 (60,000 –10,000).
 The benefit calculated using the average method is £405 as follows:
(£60,000 + £50,000)/2 x2.5% = 1,375
Interest paid = (970)
______
405
______

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 highest of 20% of MV and rent paid by employer.

Example 3
Mr. Alpha was provided with a CD player for private use on 6th October 2017 when market value of the CD player
was 12,000. Mr. Alpha contributes £50 for private use.

Solution
Benefit = £12,000 x 20% = £2400 x 6/12 = £1200 ‐ £50= £1,150

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

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.

Example 4
On 6th October 2017 Mr. Kavya purchased CD player from his employer for £3,000 when the market value of the
CD player was £9,000. Mr. Kavya was provided with CD player on 6th April 2016 for private use only when its MV
was £12,000.

Calculate taxable benefit for 17/18.

Page 29
Employment Income Chapter ‐04

Solution
£
Market value at the time of gift 9,000

Market value when cd player was first provided to Kavya 12,000

Less benefit already assessed 16/17 [12,000 x 20%] (2,400)
17/18 [12,000 x 20%] x6/12 (1,200)
8,400

Benefit = higher off 9,000

Less contribution by Kavya (3,000)
Benefit 6,000

Total benefit for 17‐18 (£6,000 + £1200) 7200

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*.

When an employee is provided with a company motor car, of which personal use is made, the taxable benefit is
calculated as a percentage of the motor car’s cost.

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

The percentage rates applying to petrol cars with CO2 emissions up to this level are:

50 grams per kilometer or less 9%

51 grams to 75 grams per kilometer 13%
76 grams to 94 grams per kilometer 17%
95 grams per kilometer 18%

The base percentage is 18%, and this applies where a motor car’s CO2 emissions are at a base level of 95 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 3% for diesel cars, but not beyond the maximum percentage
rate of 37%.

Reduction: The taxable benefit is proportionately reduced if a motor car is unavailable for part of the tax year.

Page 30
Employment Income Chapter ‐04

Contribution: Any contribution made by an employee towards the use of a company motor car will reduce the
taxable benefit.

Pool cars
The use of a pool car does not result in a company car benefit. A pool car is one that is used by more than one
employee and is used only for business journeys (private use is only permitted if it is merely incidental to a
business journey), and where the motor car is not normally kept at or near an employee’s home.

Example 5
During the tax year 2017–18 Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2017–18. The motor car
has a list price of £12,200 and an official CO₂ emission rate of 84 grams per kilometer.

Betty was provided with a new petrol powered company car throughout the tax year 2017–18. The motor car has
a list price of £16,400 and an official CO₂ emission rate of 109 grams per kilometer.

Charles was provided with a new diesel powered company car on 6 August 2017. The motor car has a list price of
£13,500 and an official CO₂ emission rate of 137 grams per kilometer.

Diana was provided with a new petrol powered company car throughout the tax year 2017–18. The motor car has
a list price of £84,600 and an official CO₂ emission rate of 233 grams per kilometer. Diana paid Fashionable plc
£1,200 during the tax year 2017–18 for the use of the motor car.

Solution

Amanda
The CO₂ emissions are between 76 grams and 94 grams per kilometer so the relevant percentage is 17%. The
motor car was available throughout 2017–18, so the benefit is £2,074 (12,200 x 17%).

Betty
The CO₂ emissions are above the base level figure of 95 grams per kilometer. The CO₂ emissions figure of 109 is
rounded down to 105 so that it is divisible by five. The minimum percentage of 18% is increased in 1% steps for
each five grams per kilometer above the base level, so the relevant percentage is 20% (18% + 2% (105 – 95 =
10/5)). The motor car was available throughout 2017–18 so the benefit is £3,280 (16,400 x 20%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometer. The relevant percentage is 29% (18%
+ 8% (135 – 95 = 40/5) = 26% plus a 3% charge for a diesel car). The motor car was only available for eight months
of 2017–18, so the benefit is £2,610 (13,500 x 29% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometer. The relevant percentage is 45% (18%
+ 27% (230 – 95 = 135/5)), but this is restricted to the maximum of 37%. The motor car was available throughout
2017–18 so the benefit is £30,102 (£84,600 x 37% = £31,302 – £1,200). The contribution by Diana towards the use
of the motor car reduces the benefit.

Page 31
Employment Income Chapter ‐04

Related benefits:
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 2017–18 the base figure is £22,600.

Percentage: The percentage used in the calculation is exactly the same as that used for calculating the related
company car benefit.

Reduction: The fuel benefit is proportionately reduced if a motor car is unavailable for part of the tax year.

Contribution: No reduction is made for contributions made by an employee towards the cost of private fuel unless
the entire cost is reimbursed. In this case there will be no fuel benefit.

Example 6
Continuing with previous example,
Amanda was provided with fuel for private use between 6 April 2017 and 5 April 2018.
Betty was provided with fuel for private use between 6 April 2017 and 31 December 2017.
Charles was provided with fuel for private use between 6 August 2017 and 5 April 2018.
Diana was provided with fuel for private use between 6 April 2017 and 5 April 2018. She paid Fashionable plc £600
during the tax year 2017–18 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Solution

Amanda
The motor car was available throughout 2017–18 so the benefit is £3,842 (22,600 x 17%).

Betty
Fuel was only available for nine months of 2017–18, so the fuel benefit is £3,390 (22,600 x 20% x 9/12).

Charles
The motor car was only available for eight months of 2017–18, so the fuel benefit is £4,369 (22,600 x 29% x 8/12).

Diana
The motor car was available throughout 2017–18 so the benefit is £8,362 (22,600 x 37%). There is no reduction for
the contributions made since the cost of private fuel was not fully reimbursed.

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
If van has been given for significant business use & insignificant private use of van (travel between home and
office) constitute exempt benefit

Page 32
Employment Income Chapter ‐04

Taxable benefit of van is £3,230 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 £610 is a taxable benefit if fuel is provided along with non‐ job related van

Reduction: The fuel benefit is proportionately reduced if a van is unavailable for part of the tax year.

Contribution: No reduction is made for contributions made by an employee towards the cost of private fuel unless
the entire cost is reimbursed. In this case there will be no fuel benefit.

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 does not give rise to a taxable benefit.
 The exemption for childcare vouchers is £55 per week where the employee is a basic rate taxpayer, £28 per
week for higher rate tax payer and £25 for additional rate taxpayer
 Recreational and sporting facilities are exempt
 The provision of meals in a staff canteen
 Payments for home working are exempt up to £4 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.
 Work place nurseries and workplace parking.
 Medical premium to cover treatment outside the UK
 Mobile phones‐restricted to one phone per employee
 Staff parties, provided the cost per staff member per year is £150 or less.
 Works buses and mini buses. A mini bus must have a seating capacity of 9 or more. A works bus must have a
seating capacity of 12 or more.

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.

Page 33
Employment Income Chapter ‐04

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
 Relief is available for expenses incurred by an employee working at a temporary location on a
secondment of 24 months or less.

4. Statutory Mileage allowance for 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.

Example 7
Rakesh Mehta:

Rakesh Mehta is a computer expert working for a UK resident company receiving an annual salary of £39,000.

During the tax year 2017–18 Rakesh received the following benefits:

– The use of a company owned apartment. This had cost the company £160,000 in May 2015 and has been
occupied by Rakesh since that date. The apartment has an annual rate able value of £4,100 and Rakesh pays
the company £2,500 per year for its use. The occupation of the apartment is not regarded as job‐related.

– Furniture, valued at £12,000, is provided for use in the apartment. During 2017–18 the company paid
decorating bills of £550 and wages to a cleaner amounting to £1,500.

– A 2∙0 litre diesel BMW car, with a CO 2 emission rate of 209 g per km and a recommended list price of
£26,500. This was first provided for Rakesh’s use in July 2015. Accessories amounting to £800 were added
when the car was first provided. Rakesh contributed £4,000 towards the capital cost of the car. The car is
used 20% for business use and 80% for private use. The company pays for all the fuel but Rakesh contributes
£40 per month towards this cost.

In addition to the above the company also paid £750 to the local golf club in respect of Rakesh’s 2017–18
membership and refunded £1,325 to Rakesh in respect of actual business expenses incurred whilst he was away
on official trips.

Rakesh had agreed with the company that it would deduct £20 a month during the whole of 2017–18 in respect
of charitable payments under the payroll deduction scheme.

Page 34
Employment Income Chapter ‐04

Rakesh paid £234 (net) per month to a private pension plan. In February 2018 he paid an additional lump sum of
£2,340 (net) to the same plan. In December 2017 he paid £180 fees to an HMRC approved professional body
related to his employment.

Rakesh paid tax of £7,808 under the PAYE system for 2017–18.

In addition to the above Rakesh received the following income during 2017–18:
– Bank interest of £300
– Building society interest of £240
– Dividends from shares held in UK companies amounting to £3000
– Dividends from investments held in an Individual Savings Account (ISA) amounting to £145.

Required:
Calculate the income tax payable by Rakesh for the tax year 2017–18.
(23 marks)

Solution
Rakesh Mehta:

Rakesh Mehta – Income tax for 2017‐18

Non Savings Savings Dividend Total

£ £ £ £
Salary 39,000
Benefits (w1) 25,428
64,428
Payroll giving scheme (£20 x 12) –240
Professional fees –180
Employment income 64,008 64,008
Bank interest 300 300
Building society interest 240 240
Dividends 3000 3000
ISA interest – tax free

Net income 64,008 540 3000 67,548

Personal Allowance (11,500) (11,500)
Taxable Income 52,508 540 3000 56,048

Basic rate band extension:

(£33,500) + (£234 x 100/80 x 12) + (£2,340 x 100/80) = £39,935
(150,000) + (£234 x 100/80 x 12) + (£2,340 x 100/80) =15,6435

Page 35
Employment Income Chapter ‐04

Income Tax Calculation: £ £

NSI:
39,935 x 20% 7,987
52,508 – 39,935 =12,573 x 40% 5,029
13,016
SI:
500 x 0% 0
40 x 40% 16

DI:
300 x 0% 0
Tax Liability: 13032
Less: Tax deducted at source
PAYE (7,808)
Tax Payable: 5,224

Workings:
Apartment £ £
Annual Rate 4,100
Additional: (£160,000 – 75,000) x 2.5% 2,125
6,225
Annual Contribution (2,500)
3,725
Furniture: £12,000 x 20% 2,400
Wages & Bills: £1,500 + £550 2,050

Car Percentage:[(205 – 95) / 5] + 18 + 3 =37%restricted

Car(£26,500 + £800 ‐ £4,000) 37% = £8,621‐(£40×12) £480 8,141

Fuel: £22,600 x 37% 8,362
Golf Fees: 750
Travel Expenses: ‐
Total Benefits: 25,428

Note: The treatment of contributions to Approved Personal Pension Schemes is exactly like Gift Aid Donations.

Page 36
 05

CHAPTER
Contents
1. Introduction
2. Badges of Trade
3. The Adjustment of Profit
4. Post Cessation Receipts and Expenses
5. Cash Basis for Small Businesses

Trading Profit

Page 37
Trading Profit Chapter ‐05

Introduction

Trading profits are chargeable to income tax if earned by UK resident trader.

When an individual disposes of assets, it is not always clear if transactions constitute a trade or not (i.e. capital
disposal).

Where there is doubt as to whether an activity constitutes a trade, a number of key factors have been identified
through judicial decisions, known as the badges of trade. 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
Any income which has not been added in arriving at accounting profit figure but is permissible for taxation
purposes. Following is the example of allowable income:
 If the owner withdraws stock, the drawing should be deemed as sales.

Page 38
Trading Profit Chapter ‐05

Treatment
 Add profit, if entry for drawing has been made.
 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.
 Bad debts and 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 130 g per Km.
 Wages and salaries not paid within 9 months after the end of an accounting period.

Page 39
Trading Profit Chapter ‐05

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 redundant Allowed
workers
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. bribes Disallowed
etc.
Contributions to approved pensions schemes Allowed

Post Cessation Receipts and Expenses

 Post cessation receipts are chargeable as miscellaneous income if they are received in the year of cessation or
the next six tax years
 An individual can claim post cessation expenses in respect of payments made within 7 years of cessation.

Example 1

Na Style
Na Style commenced self‐employment as a hairdresser on 1 January 2013. The following information is available
for the tax year 2017/18:

Trading profit for the year ended 30 June 2017

(1) Na’s income statement for the year ended 30 June 2017 is as follows:
Note £ £
Income 62,300
Expenses
Depreciation 1,300
Motor expenses 2 2,200
Professional fees 3 1,650
Property expenses 4 12,900
Purchases 5 4,700
Other expenses 6 16,550 (39,300)
Net profit 21,700

(2) Na charges all the running expenses for her motor car to the business. During the year ended 30 June 2017. Na
drove a total of 8,000 miles, of which 7,000 were for private journeys.
(3) The figure for professional fees consists of £390 for accountancy and £1,260 for legal fees in connection with
the grant of a new five‐year lease of parking spaces for customers’ motor cars.
(4) Na lives in a flat that is situated above her hairdressing studio, and one‐third of the total property expenses of

Page 40
Trading Profit Chapter ‐05

£12,900 relate to this flat.

(5) During the year ended 30 June 2017 Na took goods out of the hairdressing business for her personal use
without paying for them, and no entry has been made in the accounts to record this. The goods cost £250(an
amount that has been deducted under ‘purchases’) and had a selling price of £450.
(6) The figure for other expenses of £16,550 includes £400 for a fine in respect of health and safety regulations,
£80 for a donation to a political party and £160 for a trade subscription to the Guild of Small Hairdressers.
(7) Na uses her private telephone to make business telephone calls. The total cost of the private telephone for the
year ended 30 June 2017 was £1,200, and 20% of this related to business telephone calls. The cost of the
private telephone is not included in the income statement expenses of £39,300.
(8) Capital allowances for the year ended 30 June 2017 are £810.

Calculate tax adjusted trading profit.

Solution
Na Style tax adjusted trading profit for year ended 30 June 2017
£ £
Net profit 21,700
Add: depreciation 1,300
motor expenses – private use 7,000/8,000 ×£2,200 1,925
professional fees – accountancy 0
professional fees – lease 1,260
property expenses – private use 1/3×£12,900 4,300
purchases – goods taken for own use (selling price) 450
other expenses – fine 400
other expenses – political party donation 80
other expenses – trade subscription 0 9,715
31,415
Less: telephone – business use 20% ×£1,200 (240)
capital allowances (810) (1,050)
Tax adjusted trading profit 30,365

Note. Legal expenses relating to the grant of a short lease are not allowable.

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.

Page 41
Trading Profit Chapter ‐05

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) Xxxx

xxxx
Expense payments (including the purchase of equipment)
____
xxxx
Trading profit (or loss)
____

There is also a flat rate private use adjustment where business premises are used as a home – typically where the
business is a small hotel or guest house. The private use adjustment for food and light and heat can be calculated
on a flat rate basis according to the number of occupants. For example, with two occupants the private use
adjustment would be £6,000 per year (the relevant figure will be provided as part of an examination question). The
flat rate adjustment does not include other property expenses such as rent or mortgage (loan) interest.

Example 2
Winifred commenced self‐employment as a surveyor on 6 April 2017. The following information is available for the
year ended 5 April 2018:
1. Revenue was £62,600, of which £3,800 was owed as receivables at 5 April 2018.
2. On 6 April 2017 office equipment was purchased for £4,700.
3. On 10 April 2017 a motor car with CO₂ emissions of 110 grams per kilometer was purchased for £15,600. The
motor car is used by Winifred, and 60% of the mileage is for private journeys.
4. Motor expenses were £4,800. During the year ended 5 April 2018 Winifred drove 9,000 business miles.
5. Other expenses (all allowable) were £13,300, of which £700 was owed as payables at 5 April 2018.

Required
a) If Winifred uses the normal basis, then what will be her trading profit for the year ended 5 April 2018.
b) If Winifred uses cash basis, then what will be her trading profit for the year ended 5 April 2018.

Page 42
Trading Profit Chapter ‐05

Solution
a) Under normal/ accrual basis of adjustment:
£ £
Revenue 62,600
Expenses
Motor expenses
1,920
(4,800 x 40%)
Other expenses 13,300

Capital allowances
5,823
(4,700 + 1,123) (21,043)
______
_______
41,557
Trading profit
_______

1. The office equipment purchased for £4,700 qualifies for the annual investment allowance.
2. The motor car has CO₂ emissions between 96 and 130 grams per kilometer, and therefore qualifies for writing
down allowances at the rate of 18%. The allowance for the year ended 5 April 2018 is £1,123 (15,600 x 18% =
2,808 x 40%).

b) However, if Winifred uses the cash basis, her trading profit will be calculated as follows:
£ £
Revenue
(62,600 – 3,800) 58,800
Expenses
Office equipment 4,700
Motor expenses
4,050
(9,000 miles at 45p)
Other expenses 12,600 (21,350)
(13,300 – 700) ______ _______
37,450
Trading profit
_______

Page 43
 06

CHAPTER
Contents
1. Introduction
2. Capital Allowances
3. Plant and Machinery
4. Performa for Capital Allowances
5. General Pool
6. Written Down Values (WDVs)
7. Annual Investment Allowances (AIA)
8. Written Down Allowances (WDAs)
9. First Year Allowances (FYAs)
10. Disposals
11. Special Rate Pool
12. Non Pooled Assets
13. Balancing Adjustments
14. Small Pool WDA

Capital Allowance

Page 44
Capital Allowances Chapter ‐06

Capital Allowances
 Capital allowances are tax equivalent of depreciation.
 Capital allowances are calculated using taxation rules.
 Add back any depreciation shown in computing the accounting profit
 Deduct capital allowances from trading profits as they are allowable expenditure.
 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.

Statute
Law 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

 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.

Page 45
Capital Allowances Chapter ‐06

Performa for Capital Allowances

AIA General Special Short life Private Allowances
pool rate pool asset use asset

£ £ £ £ £ £
TWDV b/f X X X
Additions:
Not qualifying for AIA or FYA:
Cars (76‐130) gm/km) X
Cars (over 130) gm/km) X

Qualifying for AIA:

Special rate pool expenditure X
Less AIA (Max £200,000 in total) (X) X
Transfer balance to special rate X
pool
General Pool Expenditure X
Less: AIA (Max £200,000 in total ) (X) X
Short life expenditure X
Less : AIA (max £200,000 in total) (X)
Transfer balance to general poor
Disposals (lower of original cost or (X) (X)____ ‐‐‐‐‐‐‐‐‐‐‐ _____
sale proceeds)
X X X X
BA / (BC)
Small pools WDA
WDA at 18% (X) X
WDA at 8% (X) X
WDA at 8%/18% (depending on (X) (X) X
emissions)
Low emission cars (up to75 X
gm/km)
Less FYA at 100% (X) X
Nil _____ _____
TWDV c/f X X X _____
Total allowances X

Amount deducted from

Trading Profit

Page 46
Capital Allowances Chapter ‐06

Motor Car
 CO₂ emissions limit up to 75 g/km FYA@100%.
 CO₂ emissions limit 76 to 130 g/km. WDA@18%
 CO₂ emissions limit >130 g/km WDA@8%

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 from 76 g/km to 130g/km without private use.

Note: It includes all assets except for:

 Special rate pool assets
 Assets with private use by a sole trader
 Short life assets

Written Down Values (WDVs)

The remainder value of the asset after charging the Written down Allowances of previous years against it.

Annual Investment Allowances (AIA)

 All businesses are entitled to AIA of £200,000 per annum on all assets except for car
 £200,000 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.

Reduced WDAs can be claimed. This may be done to keep trading losses lower or to preserve personal allowance.

First Year Allowances (FYAs)

FYA of 100% is available for expenditure on cars with CO2 emission 75 g/km or less.
No pro‐rating/apportionment is required in short/long accounting periods.

Page 47
Capital Allowances Chapter ‐06

Disposals
No allowances can be claimed on assets being disposed off during the period of account. Hence assets disposed
are deducted from the relevant column in the pro‐forma.

The amount deducted is the lower of

 Disposal proceeds
 Original cost of the asset disposed

Question 1
Mr. A runs a small business and following data relate to y/e 31/3/2018.

WDV b/f general pool = £ 120,000

Additions:
Plant and machinery (1) 250,000
Plant and machinery (2) 100,000

Disposal
P&M 50,000 (cost = 70,000)
(i) Calculate capital allowances for the y/e 31/3/2018
(ii) Calculate capital allowance, assume Mr. A prepared him A/c for 9 months ended 31/12/2017

Solution
(i)
AIA General Total
Pool
WDV b/f = 120,000
+ additions qualifying
For AIA =
250000 + 10000 = 350,000
AIA ((200,000)) 200,000
150,000
( 150,000) 150,000

Disposal
(50,000)
270,000
WDA @ 18% (48,600) 48,600

WDV c/f 221,400

Total allowances 248,600

Page 48
Capital Allowances Chapter ‐06

(ii)
AIA General Total
Pool
WDV b/f = 120,000
+ additions qualifying
For AIA =
(250000 + 10000) 350,000
AIA x 9/12 = (150,000) 150,000
200,000
( 200,000) 200,000
Disposal (50,000)
270,000
WDA @ 18% x 9/12 (36,450) 36,450

WDV c/f 233,550

Total allowances 186,450

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
(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)
 Thermal insulation
 Cars with CO2 emissions over 130 g/km.
Treatment:
AIA of £200,000 is available on special rate pool (except for cars with CO2 emission of more than 130 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 @ 8% per annum on a reducing balance basis.

For cars, no AIA is available. They are just entitled to WDA @ 8% per annum.

Question 2
Mr. A runs a small business and following data is related to y/e 31/3/2018.

WDV b/f general pool = £ 120,000

WDV b/f special Rate pool = £ 500,000

Additions cost
Lift = £ 15000
P& M (1) = £ 250,000
P& M (2) = £ 70000

Page 49
Capital Allowances Chapter ‐06

CAR Co 2 = 125 g/km = 15000

CAR Co 2 = 150g/km = 17000

Disposal
CAR with Co2 emission of 115g/km was sold for 12000.It was purchased on 13th July 2015 for a cost of
£17000.Escalator was also sold for £17000 whose cost was £15000

Calculate capital allowance for ye y/e 31/3/2018.

Solution
AIA General Special Rate Total
Pool Pool
WDV 120,000 500,000
Addition qualifying
For AIA
Lift 15000
AIA (15000) 15000
P&M
250,000 + 70,000 320,000
AIA (185000) 185000
135000
(135000) 135000
+ Addition not qualifying
For AIA = CAR 125 g 15000
CAR 150g 17000

Disposal (12000) (15000)

258,000 502000
WDA @ 18% (46,440) 46,440
WDA @ 8% (40160) 40160
WDV c/f 211,560 461,840
Total allowances 286,600

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.

Page 50
Capital Allowances Chapter ‐06

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.

Question 3
Mr. A runs a small business and the following data is related to y/e 31/3/2018.

WDV b/f general pool = £ 120,000

WDV b/f short life asset (2) = £ 60000

Additions: cost £
Office equipment = 160,000
Short life asset (2) = 170,000
processing machine = 40,000
CAR Co2 = 122g/km = 15000

Disposal
P & M was sold for £15,000 on 31st December 2017. It was purchased for £12000 on 9th August 2009.

Calculate capital allowance for the y/e 31/3/2018.

Solution
AIA General Short life Short life Total
Pool Asset (1) Asset (2)
£ £ £ £ £
WDV b/f ‐ 120,000 60,000 ‐
+ Addition not qualifying
For AIA CAR 122 g 15000
+ Addition qualifying for
AIA
1600,000 + 40,000 = 200,000
AIA (200,000) 200,000
SLA (2) Addition 170,000
AIA

Disposal: (12000) ‐ ‐
123000 60,000
WDA @ 18% (22140) 22,140
WDA @ 18% (10,800) (30,600) 41,400

WDV c/f 100860 49,200 139,400

Total allowances 263,540

Page 51
Capital Allowances Chapter ‐06

Assets with private use

 Separate column has been allocated to those assets which are used privately by a proprietor (not an
employee).
 Every asset is treated separately.
 Balancing allowance/balancing charge appears on the disposal.
 However, only the business proportion of allowances can be claimed against the Trading profit.

Question 4
Mr. A runs a small business and following data related to y/e 31/3/2018,

1st April 2017 WDV b/f general pool = £ 405,000

1st April 2017 WDV b/f CAR (1) Co2 (105g/km) = £ 4000 (30% private use)

Additions during the year 31st March 2018: cost £

P & M (1) = 105,000
P & M (2) = 300,000 (40% private use)
CAR (2) Co2 125g/km = 15000

Disposal
CAR with CO2 emission of 112g/km was sold for £11,000 on 9th June 2017.

Calculate capital allowance for the y/e 31/03/2018.

Solution
AIA General pool CAR P&M Total
(1) (2)
WDV B/F ‐ 405,000 4000 ‐
+ Addition not qualifying
For AIA
CAR 15000
+ purchased qualifying
For AIA
P & M (1) 105,000
AIA 105,000 105,000
P&M2 300,000
AIA 60%× (95,000) 57,000

20,5000
(20,5000) 20,5000

Disposal (11000) ‐
409,000 4,000 20,5000
WDA @ 18% (73,620) 73,620
WDA @ 18% (720) 504

Page 52
Capital Allowances Chapter ‐06

x 70%
WDA @ 18% (36,900) 22,140
X 60%

WDV c/f 335380 3280 168,100

Total allowances 258,264

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.

Disposal treatments are applied over assets that have been purchased and sold during the same period.

Question 5
Mr. A run a small business and following data relates to y/e 31/3/2018.

1st April 2017 WDV b/f general pool = £ 400,000

1st April 2017 WDV b/f short life asset = £ 100,000
1st April 2017 WDV b/f asset wit personal use (70% business use) = £ 70,000

Additions:
P&M = 300,000

Disposal
Short life asset = 120,000 (cost 150,000)
Asset with personal (70% business use) = 50,000 (cost £115000)

Calculate capital allowances for the Y/E 31/03/2018.

AIA General Pool SLA AWPV Total

70%
WDV b/f 400,000 100,000 70000
+ Addition
Qualifying for AIA
P&M 300,000
AIA (200000) 200000
100,000
(100,000) 100,000

Page 53
Capital Allowances Chapter ‐06

Disposal ‐ (120,000) (50000)

500000 (20000) 20000

b/c 20000 (20000)
b/a (20000) 14000
X 70%

WDA @ 18% (90,000) 90,000

WDV c/f 410,000 nil nil
Total allowances 284,000

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

Acquisition on Hire Purchase and Leasing

In case of hire purchase, capital allowances are claimed as legal ownership of the asset has been transferred but
only the cash equivalent price qualifies for capital allowances.

Any amount paid in excess of cash equivalent figure is an interest figure which does not qualify for capital
allowances, rather it is an allowable expenditure for trading profit.

Leased assets do not attract capital allowances. Lease payments are trade allowable expenditures.

Page 54
 07

CHAPTER
Contents
1. Introduction
2. Opening year rule
3. Overlapping profits
4. Final year of trade

Basic Period

Page 55
Basis Period Chapter ‐07

Introduction
 Self‐employed is allowed to choose an accounting date of their own choice for which financial statements
are prepared. This is termed as the period of account.
 However, tax is calculated according to the tax year which runs from 6th April to 5th April.
 Therefore, the problem is to match the period of account to the tax year for the correct tax calculation.
 This gap has been bridged using the basis period rules, which connects the period of account and the tax
year.

Opening Year Rule

Year 1: Adjusted profit is taken from the date of start of business till following 5th April.

Year 2:
Does period of account end in
2nd tax year

Yes No

Either the period of account is less Basis period: Runs from

than 12 months 6th April to 5th April in 2nd
Or more than 12 months tax year

≤12 months >12 months

Basis period: Basis period:

Take first 12 months of 12 months till account ending
trade date in the 2nd tax year

Year 3:
Basic period will be of 12
months ending until
accounting date in the
Subsequent accounting period
year
Accounting period will be taken as it
is.

Page 56
Basis Period Chapter ‐07

Subsequent accounting period

Future accounting periods are taken as it is for the tax year.

Overlapping profits
 In applying basis period, profits might be assessed for more than one year. They are called overlapping
profits
 Overlapping profits are retrieved against assessable profits of final tax year.

Example 1

Tax Period of account Basis period Tax Taxable

adjusted year profit
trading
profit
£24000 1/1/2014‐ 31/12/2014 1/1/2014‐05/4/2014 13/14 £6000
1/1/2014‐ 31/12/2014 14/15 £24000
£25000 1/1/2015‐ 31/12/2015 1/1/2015‐ 31/12/2015 15/16 £25000
£30000 1/1/2016‐ 31/12/2016 1/1/2016‐ 31/12/2016 16/17 £30000
£40000 1/1/2017‐ 31/12/2017 1/1/2017‐ 31/12/2017 17/18 £40000

Overlapping profits £6,000 for 3 months

Example 2

Tax Period of account Basis period Tax Taxable

adjusted year profit
trading
profit
£12000 1/1/2014‐ 30/6/2014 1/1/2014‐5/4/2014 13/14 £6000
1/1/2014‐ 31/12/2014 14/15 £27000
(w)
£30000 1/7/2014‐ 30/6/2015 1/7/2014‐ 30/06/2015 15/16 £30000
£30000 1/7/2015‐ 30/6/2016 1/7/2015‐ 30/6/2016 16/17 £30000
£40000 1/7/2016‐ 30/6/2017 1/7/2016‐ 30/6/2017 17/18 £40000

Overlap profit =£6,000 for 3 months and ( £30,000 x 6/12) £15000 for 6 months, so total overlapping profits
are £21,000

Working
£27000 = £12000 + (£30000 x 6/12)

Page 57
Basis Period Chapter ‐07

Example 3

Tax adjusted Period of account Basis period Tax Taxable profit

trading profit year
£30000 1/1/2014‐ 31/3/2015 1/1/2014 ‐5/4/2014 13/14 £6000
1/4/2014 – 31/3/2015 14/15 £24000
£30000 1/4/2015‐ 31/3/2016 1/4/2015‐ 31/3/2016 15/16 £30000
£30000 1/4/2016‐ 31/3/2017 1/4/2016‐ 31/3/2017 16/17 £30000
£40000 1/4/2017‐ 31/3/2018 1/4/2017‐ 31/3/2018 17/18 £40000

No overlapped profits

Example 4

Tax Period of account Basis period Tax year Taxable

adjusted profit
trading
profit
£36000 1/1/2013‐ 30/6/2014 1/1/2013‐5/4/2013 12/13 £6000
6/4/2013‐ 5/4/2014 13/14 £24000 (w)
£24000
1/7/2013‐ 30/6/2014 14/15 (w)
£30000 1/7/2014‐ 31/6/2015 1/7/2014‐ 30/6/2015 15/16 £30000
£30000 1/7/2015‐ 31/6/2016 1/7/2015‐ 30 /6/2016 16/17 £30000
£40000 1/7/2016‐ 31/6/2017 1/7/2016‐ 30/6/2017 17/18 £40000

Overlapping profits 36,000 x 9/12= £18,000

Working £36,000 x 12/18 = £24,000

Final year of trade

If trade starts & ends If 2nd year is the If final year is the 3rd
in the same tax year, ending year then or later year, basis
the basis period for basis period runs period runs from the
that year is the from the second year previous year to the
whole period of till the date of date of cessation
trade cessation

Overlapping profits are adjusted/relieved against the trading profits of last tax year of trade.

Page 58
 08

CHAPTER
Contents
1. Introduction
2. Adjustment of Losses
3. Carry Forward
4. Current Tax Year
5. Claim against Chargeable Gains
6. Planning Point
7. Losses on Cessation of Trade
8. Cap on Income Tax Reliefs

Individual’s Trading Losses

Page 59
Individual’s Trading Losses Chapter ‐08

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

If there is an adjusted loss, then it has to be linked to a tax year through the basis period rule.

Exception
Note: losses, unlike profits, can never be over lapped.

Adjustment of Losses
Options available for the adjustments of losses are
– Cary forward:‐ against future trading profits
– Current tax year:‐ against total income less interest paid of current year ( i.e. loss making year).
– Carry back:‐ against total income less interest paid of previous tax year.
– Losses in the early years of trade
– Losses on the cessation of trade

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 31st January following the tax year.

Example 1
Mr. Abbas runs a bakery business and prepares account for year ended 31st march.

Following data is related for three tax year from 2015/2016 to 2017/2018.

For the tax year 15‐16 trading loss = (£50,000)

For the tax year 16‐17 trading profit = £35,000
For the tax year 17‐18 trading profit = £45,000

Mr. Abbas don’t have any source of income.

Required
Calculate taxable amount for the tax year 17‐18 if he choose to carry forward trading losses.

Solution
15‐16 16‐17 17‐18
£ £
Trading profit ‐ 35,000 45,000
Less trading loss (carry forward) (35,000) (15,000)
Revised profit ‐ ‐ 30,000
Less personal allowance ‐ ‐ (11,500)
Taxable income 18,500

Page 60
Individual’s Trading Losses Chapter ‐08

Loss memorandum
Trading loss (50,000)
Against 16‐17 35,000
Against 17‐18 15,000

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 31st 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.

Example 2
Mr. Sami is a tailor and runs his own shop.
Following data is related for tax year 15‐16 to 17‐18.
15‐16 16‐17 17‐18
£ £ £
Trading profit 10,000 (90,000) 1,500
Interest 40,000 35,000 90,000
Rental income 5,000 5,000 5,000

Required
Calculate Sami’s taxable income assuming Sami want to adjust trading loss in most efficient way.

Solution
15‐16 16‐17 17‐18
Trading profit 10,000 ‐ 1,500
Brought forward losses
Interest (gross) 40,000 35,000 90,000
Rental income 5,000 15,000 5,000
Net income 55,000 50,000 96,500
Current year loss (50,000)
Brought forward loss (40,000) ‐
15,000 ‐ 96,500
Less personal allowance (11,500) ‐ (11,500)
Taxable income 3,500 85,000

Page 61
Individual’s Trading Losses Chapter ‐08

Loss memorandum
Trading loss (90,000)
Current year 16‐17 50,000
Carry back 15‐16 40,000

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
 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.

Example 3

Royee is a designer and runs a small shop. She prepares account for the year ended 31st march.
Following data is related to tax year 16/17 to 18/19

2016‐2017 2017‐2018 2018‐2019

Trading profit/loss 10,000 (50,000) 15000
Rental income 5,000 25,000 20,000
Interest from bank 12,000 5,000 40,000

Royee sold two plant and machinery during the tax year 2017‐2018.
Gain on sale of Plant and machinery (1) 50,000
Loss on sale of Plant and machinery (2) (28,000)

Required
Calculate taxable income if Royee wants to adjust trading losses against her chargeable gains of 17/18.

Solution
2016‐2017 2017‐2018 2018‐2019
Trading profit/loss 10,000 ‐ 15000
Rental income 5,000 25,000 20,000
Interest from bank 12,000 5,000 40,000
Net income 27,000 30,000 75,000
Less loss (30,000)
Less personal allowance (11,500) ‐ (11,500)
Taxable income 15,500 ‐ 63,500

Page 62
Individual’s Trading Losses Chapter ‐08

Adjustment of losses against chargeable gain of 2016‐2017

Chargeable gain of 17/18 50,000
Less capital loss of 17/18 (28,000)
22,000
Less trading loss of 17/18 (at maximum) (20,000)
Remaining gain 2,000

Loss memorandum
Trading loss 17/18 (50,000)
Against net income 17/18 30,000
Against changeable gain 17/18 20,000
‐

Planning Point
Loss relief is to be planned in such a way that maximum tax should be saved

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

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
 Maximum adjustments are made.

Question 4

Mr. Peterson has started a new business of shoes on 1st July 2014 and prepares his account to 31st January 2015.
Before staring business he was doing full time job as a sales manager in alpha ltd.

His business result of four tax years are as follows

2014‐2015 (6,000)
2015‐2016 (24,000)
2016‐2017 (5,000)
2017‐2018 3000

Peterson’s salary was 12,000 per annum and Peterson earns gross interest of £5,000 every year before and after
starting business.

Required
Show how Peterson can adjust his losses in most efficient way.

Page 63
Individual’s Trading Losses Chapter ‐08

Solution
11‐12 12‐13 13‐14 14‐15 15‐16 16‐17 17‐18
Salary 12,000 12,000 12,000 9,000* ‐ ‐ ‐
Interest 5,000 5,000 5,000 5,000 5,000 5,000 5,000
trading profits ‐ ‐ ‐ 3,000
Total income 17,000 17,000 17,000 14,000 5,000 5,000 8,000
Less loss 14‐15 (6,000)
Less loss of 15‐16 (17,000) (7,000)
Less loss of 16‐17 (5,000)
Net income 11,000 Nil 5,000 14,000 5,000 5,000 8,000

Loss memorandum
2014‐2015 (6,000)
11‐12 6,000

2015‐2016 (24,000)
12‐13 17,000
13‐14 7,000

2016‐2017 (5,000)
13‐14 5,000
12000 x 9/12 = *9000

Note: Trade started at 14‐15 tax year and losses incurred in first four years of trade.

Losses on Cessation of Trade

 Loss incurred in the last 12 months of trade is called terminal loss.

Terminal loss is available by making adjustment against trading profits of last tax year and carrying back the excess
amount of loss against trading profits of last 3 tax years taking later year first.

But in order to claim terminal loss relief, first terminal loss figure needs to be calculated.

Loss relevant to xxx

the last tax year (1)

Loss in the last

12 months
Loss relevant to xxx
the penultimate tax year (2)

Overlapping profit xxx

Terminal loss xxx

Page 64
Individual’s Trading Losses Chapter ‐08

Ignore if profit appears in calculation (1) or (2).

 Though normal c/y and previous year adjustment may be applied by taking loss and overlapping profits, hence
making adjustment against total income less interest paid of current year and/or previous year.

Question 5
Mr. Aman started his shop of cloth on 1stjuly 1998 but now Aman has decided to rake rest, so he ceased his
trade on 30thSeptember 2018.

Results for the last four years of his shop are as follows.
£
9 months ended 30th September 2018 (40,000)
Year ended 31st December 2017 20,000
Year ended 31st December 2016 10,000
Year ended 31st December 2015 25,000
Aman has brought forward overlap profit of £6,000.

Required
Compute Aman’s terminal loss and show how terminal loss will be adjusted against trading profit.

Solution
2015‐2016 2016‐2017 2017‐2018
Trading profit 25,000 10,000 20,000
(11,000) (10,000) (20,000)

Revised profit 14,000 0 0

Terminal loss calculation

6th April 2018 – 30th September 2018 (40,000) x (6/9) 26,667

1st October 2017 ‐ 5th April 2018 [(40,000) x 3/9] + [20,000x3/12] 8,333
Add : overlap profit 6000
41,000

Loss memorandum
(41,000)
2017‐2018 20,000
2016‐2017 10,000
2015‐2016 11,000

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.

Page 65
Individual’s Trading Losses Chapter ‐08

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 from the same trade.

Example 6
For the year ended 5 April 2018 Gloria made a trading loss of £145,000, having made a trading profit of £30,000 for
the year ended 5 April 2017. She has employment income of £125,000 in each of the tax years 2016–17 and 2017–
18.

If Gloria claims relief for the trading loss against her total income for both 2016–17 and 2017–18, her taxable
income will be as follows:
2016–17 2017–18
£ £
Trading profit 30,000 0
125,000 125,000
Employment income
_______ _______
155,000 125,000
(80,000) (50,000)
Loss relief
________ _______
75,000 75,000
(11,500) (11,500)
Personal allowance
________ _______
63,500 63,500
Taxable income
________ _______

 Loss relief for 2017–18 is capped at £50,000 as this is higher than £31,250 (125,000 x 25%).
 For 2016–17, the loss relief claim against the trading profit of £30,000 is not capped. Relief against other
income is again capped at £50,000, so the total loss relief claim is £80,000 (30,000 + 50,000).
 The balance of the loss of £15,000 (145,000 – 50,000 – 80,000) will be carried forward against future profits
from the same trade.
 Somewhat strangely, the cap can actually be beneficial in some situations. In Gloria’s case, the application of
the cap has resulted in most of her loss being relieved against income otherwise taxable at the higher rate,
while her personal allowances have been preserved for both tax years.

Planning point: Capital Allowances

 It is possible not to claim full capital allowances
 That is why increased balance being carried forward to future accounting period and hence increasing higher
capital allowances in future accounting period
 It is an effective planning point where relief for capital allowance in future period is going to be greater than
the rate of tax relief for loss relief

Page 66
 09

CHAPTER
Contents
1. Introduction
2. Mechanism
3. Treatment of losses
4. Limited liability partnership

Partnership

Page 67
 Partnership Chapter ‐09

Introduction
 When an unregistered business is run by 2 0r more persons, it is called a partnership business.
 Partners in a partnership business are independently liable to pay income tax on their individual share of
profit.

Mechanism
 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, tax year is assigned to each partner’s overall profit share according to basis period assessment;
this is why every partner has his own overlapping profits.
 Opening year rules of basis period are applied if any partner is entered to partnership business later in the
period after the start of business.
 Similarly, closing year rules are applied on partners leaving partnership business and thus become able to
relive their brought forward overlapping profits.

Treatment of Losses
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.

Question 1

A, B & C:
A, B and C have been in partnership for several years’ accounts to 30 June annually. Profits have always been shared
equally after allocation of salaries of £10,000 and £8,000 to A and B respectively and interest on capital of 5% to each of
the three partners.

The partners have capital invested amounting to:

A £20,000
B £16,000
C £12,000

On 31 December 2017 C left the partnership and withdrew his capital to start his own business. The remaining two
partners continued with the same salaries and interest on capital, sharing any balance equally between them.

C had overlap profits of £8,000 available from the opening years of the partnership. The adjusted profit of the partnership
for tax purposes for the accounting year ending 30 June 2018 was £120,000.

Page 68
 Partnership Chapter ‐09

Required:
(i) Calculate the profit share attributable to each partner for the accounting period ending 30 June 2018.

(ii) Calculate C’s trading profit for his final year of assessment.

Solution
A, B & C

(i) Share of partnership profits

A B C Total
£ £ £ £
July–Dec 2017
Salary 5,000 4,000 9,000
Interest on capital 500 400 300 1,200
Profit share 16,600 16,600 16,600 49,800
–––––– –––––––– –––––––– ––––––
22,100 21,000 16,900 60,000
–––––– –––––––– –––––––– ––––––
Jan–June 2018
Salary 5,000 4,000 N/A 9,000
Interest on capital 500 400 N/A 900
Profit share 25,050 25,050 N/A 50,100
–––––––– –––––––– ––––––– ‐‐‐‐‐‐‐‐‐‐‐‐
30,550 29,450 0 60,000
–––––––– –––––––– –––––––– ––––––––––
Total £52,650 £50,450 £16,900 £120,000
–––––––– –––––––– ––––––– ––––––––––

(ii) C – Trading profits assessment (he ceased to trade on 31st December 2017)
2017–18 Balance of profit 16,900
Overlap profits –8,000
––––––––
£8,900
––––––––

Limited Liability Partnership

Difference between LLP & partnership is that in a LLP the liability of the partner is limited to the capital they had
contributed.

Though they are taxed on the same basis as applicable over partnership, however the amount of loss relief that a
partner can claim against total income less interest paid of current year and/or previous year, which is against non‐
partnership income, is restricted to the amount of capital contributed by them.

Page 69
Partnership Chapter ‐09

Question 2
Income from partnership ‐Xio, Yana and Zoe
Xio, Yana and Zoe have been in partnership since 6 April 2007 as marketing consultants.

Until 30 June 2017 profits were shared 50% to Xio, 30% to Yana and 20% to Zoe. This was after paying an annual
salary of £6,000 to Xio. On 30 June 2017 Zoe resigned as a partner, and from that date profits were shared equally
between Xio and Yana. No salaries were paid after this date.

The partnership's income statement for the year ended 5 April 2018 is as follows:

£ £
Gross profit 196,740
Expenses
Depreciation 15,540
Motor expenses (Note 1) 19,000
Professional fees (Note 2) 5,300
Repairs and renewals (Note 3) 7,500
Other expenses (Note 4) 113,400 (160,740)
Net profit before taxation 36,000

Notes:
1. Motor expenses
The figure for motor expenses is in respect of mileage undertaken by the partners, of which 40% is for private
purposes.

2. Professional fees
The figure for professional fees consists of £600 for accountancy, £2,600 for legal fees in connection with the
defense of the partnership's internet domain name, and £2,100 for legal fees in connection with the grant of a
new five‐year lease of parking spaces for employees' motor cars.

3. Repairs and renewals

The figure for repairs and renewals consists of £2,800 for decorating the partnership offices, and £4,700 for
constructing a new wall in order to split one large office room into two smaller rooms.

4. Other expenses
The figure of £113,400 for other expenses includes £1,060 for entertaining customers, £460 for entertaining
employees, and £600 in respect of gifts to customers. The gifts were hampers of food costing £60 each. The
remaining expenses are all allowable.

5. Plant and machinery

The tax written down values of the partnership's assets for capital allowances purposes at 6 April 2017 were
as follows:

Page 70
Partnership Chapter ‐09

£
General pool 17,000
Xio's motor car 1 16,500 Motor car 1 purchased for 16500 has Co2 emission 147 gm/km
Yana's motor car 2 7,000 Motor car 2 purchased for 7000 has Co2 emission 70 gm/km
Zoe's motor car 3 15,000 Motor car 3 purchased for 15000 has Co2 emission 119 gm/km

The partners' motor cars are all owned by the partnership, and in each case 40% of the mileage is for private
purposes.

Zoe retained her motor car when she resigned from the partnership on 30 June 2017 on that date her motor
car was valued at £12,400.

Other Income
1. Xio received building society Interest of £1,000 during 2017/18.
2. Zoe was appointed as the sales director of Aardvark Plc on 1 July 2017 and was paid director's
remuneration of £26,000 during 2017/18. She also received dividends of £12,000 during 2017/18.

Required:
(a) Calculate the tax adjusted trading profit for the partnership for the year ended 5 April 2018
(12 marks)

(b) Calculate the trading income assessments for Xio, Yana and Zoe for 2017/18
(4 marks)

(c) Calculate the income tax liabilities of Xio, Yana and Zoe for 2017/18
(9 marks)
(25 marks)

Tax Adjusted Trading Profits

£
Net Profit before taxation 36000
Add: Depreciation 15540
Add: Motor expense (1900o x 40%) 7600
Professional fees
Accountancy 0
Partnership’s Internet Domains Name 0
Add: Grant of a new five year lease 2100
Decorating the partnership offices 0
Add: Constructing a new wall 4700
Add: Entertaining customers 1060
Entertaining employees 0
Gift to customers 600
Less: Capital Allowances (9612)
57,988

Page 71
Partnership Chapter ‐09

Working 1
Capital Allowances
G. Pool Motor car 1 Motor car 2 Motor car 3 Capital
Xio’s car Yana’s car Zoe’s car Allowances

o/b 17000 16500 7000 15000

WDA (17000 x 18%) (3060) 3060
WDA (16500 x 8%) (1320)x60% 792
FYA(7000 x 100%) 7,000 x 60% 4,200
Disposed (12400)
2600
Balancing Allowances (2600) x 60% 1560
Total allowances 9612

(b) Trading income assessment for 2017/18

From 6 April 17 to 30 June 17

Xio Yana Zoe Total
57,988×3/12 14,497
Salary 6000x3/12 1500 ‐ ‐ (1500)
Balance 50:30:20 6499 3899 2599 12997

From 1 July 2017 to 5 April 18

57,988×9/12 21,746 21,745 43,491
29745 25644 2599

c) Income tax liabilities

XIO 17/18
NSI SI DIVIDEND TOTAL
Trading profits 29,745 29,745
BS interest 1000 1000
Net Income 29,745 1000 30,745
Personal Allowance (11,500) (11,500)
Taxable Income 18,245 1000 19,245

Tax Liability
NSI: 18,245×20%= 3,649
SI: 1,000×20%= 200
Total tax liability 3,849

YANA 17/18
NSI SI DIVIDEND TOTAL
Trading profits 25,644 25,644
Net Income 25,644 25,644
Personal Allowance (11,500) (11,500)

Page 72
Partnership Chapter ‐09

Taxable Income 14,144 14,144

Tax Liability
NSI: 14,144×20%= 2,829
Total tax liability 2,829

ZOE 17/18
NSI SI DIVIDEND TOTAL
Trading profits 2599 2599
Salary 26000 26000
Dividend 12000 12,000
Net Income 28599 12,000 40599
Personal Allowance (11,500) (11,500)
Taxable Income 17,099 12,000 29,099

Tax liability
NSI: 17,099×20%= 3,420
Dividend: 5000 x 0% 0
7,000×7.5%= 525
Total tax liability 3,945

Page 73
 10

CHAPTER
Contents
1. Introduction
2. Class 1 primary
3. Class 1 secondary
4. Class 2
5. Class 4

National Insurance Contributions

Page 74
National Insurance Contributions Chapter ‐10

Introduction
Employees, employers and self‐employed persons are liable to pay national insurance contribution. Here are the
types of NIC:

Types

Class 1 Class 1A Class 2 Class 4

Primary Secondary Payable by

payable by payable by employer Payable by self
employee employer employed

Applicable Class 4
Applicable over taxable Class 2 is applicable over
over earnings value of flat rate earnings
benefits
Earnings =
TATP

Earning includes salary. Rate for 1A Rate

Bonus, commissions,
wages, sick pay,
gratuity, cash and non‐
cash taxable voucher &
excess SMA received
over & above 45
pence/ mile

Rate of 1 Primary Rate of 1

Secondary

Page 75
National Insurance Contributions Chapter ‐10

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 ‐ £8,164 = 0%
 Earnings in between £8,165 ‐ £45,000 = 12%
 Earnings above £45,001 = 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 ‐ £8,164 = 0%
 Earnings above £8,165 = 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 £3,000 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.

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 £2.85 per week.
It is payable where profits exceed a small profit threshold of £6,025.
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.

Page 76
National Insurance Contributions Chapter ‐10

Class 4 NIC

Paid on taxable trade profits (TATP)

£1 ‐ £8,164 = 0%
£8,165 ‐ £45,000 = 9%
Above £45,001 = 2%

Paid with income tax under self‐assessment (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.

Example 1
Simone Ltd has one employee who is paid £50,000 per year, and was provided with the following taxable benefits
during the tax year 2017–18:

Company motor car 6,300

Car fuel 5,220

Living accommodation 1,800

The class 1 and class 1A NIC liabilities are as follows:

Employee class 1 NIC

8,164 @ nil ‐

45,000– 8,165 = 36,836 at 12% 4,420

50,000 – 45,000= 5,000 at 2% 100

4,520
_____

Employer’s class 1 NIC

5,773
£50,000 – £8,164 = £41,836 at 13.8% _____

Page 77
National Insurance Contributions Chapter ‐10

Employer’s class 1A NIC

1,838
£ 13,320 (£6,300 + £5,220 + £1,800) at 13.8% _____

Example 2
Jimmy is a self‐employed builder and Jenny is a self‐employed consultant. Their trading profits for the tax year
2017–18 are respectively £25,000 and £50,000.

Their class 4 NIC liabilities are as follows:

1,515
Jimmy 25,000 – 8,164 = 16,836 at 9% _____

45,000– 8,164 = 36,836 at 9% 3,315

Jenny 50,000 – 45,000= 5,000 at 2% s 100

3,415
_____

Page 78
 11

CHAPTER
Contents
1. Introduction
2. Personal Pension Scheme
3. Net Relevant Earnings
4. Annual Allowance
5. Tapering of annual allowance
6. Lifetime Allowance
7. Occupational Pension Scheme

Pensions

Page 79
Pensions Chapter ‐11

Introduction
An individual can save additional funds for their retirement by contributing to pension schemes. Tax relief is given
on contributions to a registered pension fund.

There are two types of pension schemes

 Personal pension scheme (available to all persons)
 Employer’s occupational pension scheme (available to employees only)

Occupational pension scheme can either be a ‘defined benefit ‘arrangement or ‘money purchase’ scheme while
personal pension can only be a ‘money purchase’ scheme.

Defined benefit scheme: guaranteed pension based on earnings and length of service.

Money purchase scheme: No guaranteed amount of pension based on investments which are used to build up
funds contribution.

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.

Page 80
Pensions Chapter ‐11

The annual allowance for the tax year 2017–18 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.

EXAMPLE 1
Monica and Nicola have made the following gross personal pension contributions during the tax years 2014–15,
2015–16 and 2016–17:

Nicola
Monica £
£

2014–15 Nil 46,000

2015–16 32,000 19,000

2016–17 28,000 Nil

Monica was not a member of a pension scheme for the tax year 2014‐15. Nicola was a member of a pension
scheme for all three tax years. Neither Monica nor Nicola’s adjusted income exceeds £150,000 for any tax year.

Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2015–16 and £12,000 (40,000 – 28,000) from
2016–17, so, with the annual allowance of £40,000 for 2017–18, a total of £60,000 (40,000 + 8,000 + 12,000) is
available for 2017–18. She was not a member of a pension scheme for 2014–15, so the annual allowance for that
year is lost.

Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2015–16 and £40,000 from 2016–17, so, with the
annual allowance of £40,000 for 2017–18, a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2017–18.
The annual allowance for 2014–15 is fully utilised, but Nicola was a member of a pension scheme for 2016–17 so
the annual allowance for that year is available in full.

The annual allowance for the tax year 2017–18 is utilised first, then any unused allowances from earlier years with
those from the earliest year used first.

Page 81
Pensions Chapter ‐11

EXAMPLE 2
Perry has made the following gross personal pension contributions:

2014–15 £22,000

2015–16 £31,000

2016–17 £19,000

2017–18 £48,000

Perry’s adjusted income does not exceed £150,000 for any tax year.

The pension contribution of £48,000 for 2017–18 has used all of Perry’s annual allowance of £40,000 for 2017–18
and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (40,000 – 22,000) from 2014–15. Perry therefore
has unused allowances of £9,000 (£40,000 – £31,000) from 2015–16 and £21,000 (£40,000 – £19,000) from 2016–
17 to carry forward to 2018–19. The remaining unused allowance from 2014–15 cannot be carried forward to
2018–19 because this is more than three years ago.

Tapering of annual allowance

The annual allowance is reduced by £1 for every £2 by which a person’s adjusted income exceeds £150,000, down
to a minimum tapered annual allowance of £10,000. Therefore, a person with adjusted income of £210,000 or
more, will only be entitled to an annual allowance of £10,000 (40,000 – ((£210,000 – £150,000)/2) = £10,000).

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.

EXAMPLE 3
For the tax year 2017–18, Juliet has a trading profit of £196,000. She has never previously been a member of a
pension scheme.

Juliet’s tapered annual allowance for 2017–18 is £17,000 (40,000 – ((196,000 – 150,000)/2)).

As discussed before, if the annual allowance is not fully used in any tax year, then it is possible to carry forward any
unused allowance for up to three years.

It is still possible to use brought forward unused annual allowances in the tax year 2017–18 if a tapered annual
allowance applies for this year. However, it is the tapered annual allowance for 2017–18 which is used to establish
whether any carried forward is available from this year to future tax years.

Page 82
Pensions Chapter ‐11

EXAMPLE 4
Chong has made the following gross personal pension contributions:

2014–15 32,000

2015–16 31,000

2016–17 19,000

2017–18 8,000

Chong’s adjusted income for the tax year 2017–18 is £250,000, but for previous tax years it did not exceed
£150,000.

Chong’s tapered annual allowance for 2017–18 is the minimum of £10,000 because his adjusted income exceeds
£210,000. Chong therefore has unused allowances of £9,000 (40,000 – 31,000) from 2015–16, £21,000 (40,000 –
19,000) from 2016–17 and £2,000 (£10,000 – £8,000) from 2017–18 to carry forward to 2018–19.

Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the
annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the
annual allowance (including any brought forward unused allowances), then there will be an annual allowance
charge. This charge is subject to income tax at a person’s marginal rates.

EXAMPLE 5
For the tax year 2017–18, Frank has a trading profit of £97,000 and made gross personal pension contributions of
£45,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is:

Trading profit 97,000

Personal allowance (11,500)

_______

Taxable income 85,500

_______

Income tax:
78,500 at 20% 15,700
7,000 at 40% 2,800

Annual allowance charge

5,000 (45,000 – 40,000) at 40% 2,000
______

Page 83
Pensions Chapter ‐11

Tax liability 20,500

_______

 Frank has earnings of £97,000 for 2017–18. All of the pension contributions of £45,000 therefore qualify for
tax relief.
 Frank’s adjusted income is clearly less than £150,000, so the full annual allowance of £40,000 is available for
2017–18.
 The annual allowance charge of £5,000 is the excess of the pension contributions over the annual allowance.
 Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
 Higher rate tax relief is given by extending the basic rate tax band to £78,500 (33,500 + 45,000).

Lifetime Allowance
The lifetime allowance for the tax year 2017–18 is £1,000,000.

The lifetime allowance applies to the total funds that can be built up within a person’s pension schemes. Where
the limit is exceeded there will be an additional tax charge when that person subsequently withdraws the funds in
the form of a pension.

Occupational Pension Scheme

An occupational pension scheme is one arranged by an employer for his employees. The employer generally
contributes to the scheme. Some schemes require the employee to contribute, whereas some are
noncontributory.

Method of obtaining relief

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. The
amount contributed by employer on the behalf of employee has no relevance to the amount of employee’s
earnings. So, 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.

Page 84
Pensions Chapter ‐11

Example 6
Jenna is chartered accountant and currently employed as internal auditor in famous food industries. Jenna receive
annual salary of £50,000 .and she contributes 20,000 in occupational pension scheme run by famous food
industries, company contribute 12000 in Jenna pension plan.
Calculate income tax liability of Jenna for the tax year 2017 ‐2018.

Solution
Non saving income
£
Salary 50,000
Less jenna’s contribution (20,000)
Employment income 30,000
Less personal allowance (11,500)
Taxable income 18,500

£
Tax liability calculation
18,500 x20% 37,00
Employer contribution of 12,000 is exempt benefit.

Example 7
Kavya is chartered accountant and currently employed as accountant in alpha ltd. Kavya receive annual salary of
£30,000 and she contributes £30,000 in occupational pension scheme run by alpha ltd, company contribute
£12,000 in Kavya pension plan. Kavya has rental income of £25,000

Calculate income tax liability of Kavya for the tax year 2017 ‐2018.she had been member of her employer’s
occupational pensiona scheme for the last 5 years and utilizes her annual allowance fully for each year.

Solution
Non saving income
£
Salary 30,000
Less Kavy’s contribution (30,000)
Employment income Nil
Rental income 25,000
Less personal allowance (11,500)
Taxable income 13,500

£
Tax liability calculation
13,500 x20% 2,700

Annual allowance charge =2000 x 20% 400

Total tax liability 3,100

Page 85
Pensions Chapter ‐11

Maximum allowable deduction can be claimed up to the figure of relevant earning which is 30,000.Employer
contribution of 12,000 is exempt benefit.

Overall tax relief=30,000+12,000=42,000

Annual allowance charge= 42,000‐40,000=2,000

No brought forward annual allowance is available

Page 86
 12

CHAPTER
Contents
1. Introduction to self-Assessment
2. Filing of Return
3. Notification of Chargeability to Tax
4. Errors & Mistakes
5. Claims
6. Determination
7. Compliance checks
8. Records
9. Standard Penalty
10. Payment of Tax
11. Claim to Avoid POA
12. Interest and Penalties
13. Dishonest Conduct
14. PAYE System

Administration

Page 87
Administration Chapter ‐12

Introduction to 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.

Filling of Return
Individual has to file his tax return whether he knows how to calculate tax liability or not. Though individual can
compute his own tax liability but HMRC can do so on the behalf of individual if he wishes them to do so. In case of
online/ electronic filing, the calculation of tax is done automatically as a part of online filing process

The deadline for filing of tax return is as follows

Online filling 31st January after the tax year. i.e. for tax year 17/18, due date will be 31st
January 2019.

Paper based filling 31st October after the end of the tax year. i.e. for the tax year 17/18, due date
will be 31st October 2018.

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) = £1,000
6 – 12 month above fixed penalties+ 5% of tax due (minimum 300)
>12 month above fixed penalties + 10% of tax due (minimum 600)

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 in which individual becomes chargeable.
That is 6th October 2018 for the tax year 17/18.
Failure to do so will lead to standard penalty

Errors & Mistakes

Errors can be corrected by either individual or HMRC.

Individual:
Within 12 months after 31stJanuary following tax year. i.e. by 31st January 2020 for the tax year 17/18.

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.

Page 88
Administration Chapter ‐12

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 2022 for the tax year 17/18.

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 and accuracy of return.

Enquiry:
Reason for making inquiry can be of having suspicion about fraud or negligence resulting in under declaration of
result or 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. Discovery assessment 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
Record includes all receipts and expenses, information about the purchase and sale of goods and the supporting
documents relevant to business transactions. Records should be kept for 5 years after 31st January following the
tax year. I.e. till 31st January 2024 for the tax year 17/18.

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 depend on tax payer’ behavior % age due

Genuine mistake NIL
Failure to take reasonable care 30%
Deliberate error 70%
Deliberate error + concealment 100%

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

Page 89
Administration Chapter ‐12

Due dates of payment

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.

E.g. 17/18 tax year

First payment on account: 31st January, 17

Second payment on account: 31stJuly, 17
Balancing figure: 31st January, 18

Example 1
17/18 £
Tax liability 21,000
₋ @ Source (3,000)
Tax payable 18,000
NIC Class 4 2,000

Estimation from last year 16/17

Tax payable 13,000
NIC 4 15,00
14,500

Payment of tax:
 1st POA 31st January,18 £14,500 × 50% = £7250
 2ndPOA 31st July ,18 £14,500 × 50% = £7250

 3rd Balancing figure 31st January,19 (£18,000 + £2,000)

£20,000 ‐ (£7,250×2) = £5,500
Example 2
17/18 £
Tax liability 20,000
₋ @ Source (2,000)
Tax payable 18,000
NIC Class 4 2,000
Estimation from last year
16/17
Tax payable 23,000
NIC 3,500
26,500

Page 90
Administration Chapter ‐12

Solution
Payment of tax:
 1st POA 31st January,18 26,500 × 50%= 13,250
 2ndPOA 31st July ,18 26,500 × 50%= 13,250

 Balancing figure 31st January,19 (18,000+2,000) 20,000₋(13,250×2)=(6500)

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 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 0.5% on overpaid taxes. It runs from the date of payment till the date of
repayment/adjustment
 Interest is charged on overdue/underpaid taxes @ 3% (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
th
≥ 28 day — 6 months 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
Mostly tax in respect of employment income is deducted under the 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.

Coding system
An employee's PAYE code is designed to ensure that allowances etc. are given evenly over the year.

Page 91
Administration Chapter ‐12

An employee's code may be any one of the following:

L tax code,
P tax code,
Y tax code.

Tax code is calculated by deducting ‘total deductions’ from ‘total allowances’.

Total allowances include personal allowance, allowable deductions for employment income purposes and
adjustment for overpaid taxes

While allowable deduction includes benefits, adjustment for underpaid taxes and other income. The tax code is
determined by multiplying 1/10 with ‘difference between total allowances and total deductions’.

Calculations are made on cumulative basis, whether they are calculated for a week or a month. I.e. the cumulative
taxes from the start till the relevant month are taken and then deduct the cumulative figure of tax till the last
month in order to arrive at the tax figure for that relevant month.

Real time reporting

Employers send income tax and NIC information to HM Revenue and Customs electronically every time employees
are paid (either weekly or monthly) rather than waiting until after the end of the tax year as was previously the
case.

Employers are charged a penalty if their final real time submission for a tax year is made late. The deadline is 19
May following the end of the tax year, and the penalty that can be imposed is £100 per month per 50 employees.
For the tax year 2017–18 there are no penalties if submissions made during the tax year are late.

Since information must be filed electronically, it is no longer possible to produce a payroll manually

PAYE forms:
FORMS Details No. of copies Due date of submission
P45 Applied when an employee 4 copies are produced. One copy is Whenever employee leaves.
leaves any employment given to previous employer, 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 tax
and benefits given to copies are given to HMRC and one year.
employees 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

Page 92
Administration Chapter ‐12

Example 3
Pi Casso has been a self‐employed artist since 1996, making up her accounts to 30 June. Pi’s tax liabilities for the
tax years 2015/16, 2016/17 and 2017/18 are as follows:

2015/16 2016/17 2017/18

£ £ £
Income tax liability 3,240 4,100 2,730
Class 2 national insurance contributions 125 125 130
Class 4 national insurance contributions 1,240 990 990
Capital gains tax liability – 4,880 –

No income tax has been deducted at source.

Required
(a) Prepare a schedule showing the payments on account and balancing payments that Pi will have made or will
have to make during the period from 1 July 2017 to 31 March 2019 if Pi makes any appropriate claims to
reduce her payments on account, clearly identifying the relevant due date of each payment.
(8 marks)

(b) State the implications if Pi had made a claim to reduce her payments on account for 2017/18 to nil.
(2 marks)

(c) Advise Pi of the latest submission date for her 2017/18 self‐assessment tax return.
(2 marks)

(d) State the date by which HMRC will have to notify Pi if they intend to make a compliance check into her self ‐
assessment tax return for 2017/18 and the possible reasons why such a compliance check would be made.

(3 marks)
(Total = 15 marks)
Solution
(a)
Due date Tax year Payment £
31 July 2017 2016/17 Second payment on account (N1) 2,240
31 January 2018 2016/17 Balancing payment (N2) 5,490
31 January 2018 2017/18 First payment on account (N3) 1,860
31 July 2018 2017/18 Second payment on account 1,860
31 January 2019 2017/18 Balancing payment (N4) 130
31 January 2019 2018/19 First payment on account (N5) 1,860

Notes
1) The second payment on account for 2016/17 is based on Pi’s income tax and Class 4 NIC liability
for2015/16. It is therefore £2,240 ((3,240 + 1,240 = 4,480) × 50%).
2) The balancing payment for 2016/17 is £5,490 (4,100 +125+ 990 + 4,880) = £10,095 less the payments on
account of £4,480 (£2,240 × 2)). £5,615 balancing payment

Page 93
Administration Chapter ‐12

3) Pi will make a claim to reduce her total payments on account for 2017/18 to £3,720 (2,730 + 990), so each
payment will be £1,860 (3,720 × 50%).
4) The balancing payment for 2017/18 is £130 (2,730 +130 + 990) less the payments on account of 3,720
(1,860 × 2)).
5) The first payment on account for 2018/19 is based on Pi’s income tax and Class 4 NIC liability for2017/18.
It is therefore £1,860 ((2,730 + 990 = 3,720) × 50%).

(b)
1) If Pi’s payments on account for 2017/18 were reduced to nil, then she would be charged interest on the
payments due of £1,860 from the relevant due date to the date of payment.
2) A penalty of the difference between the reduced payment on account and the correct payment on
account may be charged if the claim to reduce the payments on account to nil was made fraudulently or
negligently.

(c)
1) Pi can submit a paper based self‐assessment tax return for 2017/18 is 31 October 2018.
2) Alternatively, Pi has until 31 January 2019 to file her self‐assessment tax return for 2017/18 online.

(d)
1) If HMRC intend to make a compliance check on Pi’s 2017/18 tax return they will have to notify her within
twelve months of the actual filing date if the return was delivered on or before the due date.
2) HMRC have the right to make a compliance check into the completeness and accuracy of any return and
such a compliance check may be made on a completely random basis.
3) However, compliance checks are generally made because of a suspicion that income has been undeclared
or because deductions have been incorrectly claimed.

Page 94
 13

CHAPTER
Contents
1. Introduction
2. Basic Computation
3. Key Elements
4. Administrative Aspect
5. Capital Losses

Capital Gains Tax (Basics)

Page 95
Capital Gains Tax (Basics) Chapter ‐13

Introduction
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

However, 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 most important 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 the basic CGT computation is quite straightforward and is done according to the tax year.

Preforma
Disposal proceeds Xxx

Less incidental cost of sale (xx)

Net proceeds Xxx

Less : allowable deduction/expenditure

Purchase cost (xx)

Incidental cost of purchase (xx)

Capital expenditure (xx)

Gain Xx

Page 96
Capital Gains Tax (Basics) Chapter ‐13

Key Elements

Disposal proceeds
The amount of consideration received for the asset is the disposal proceeds. Unless asset has been sold 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 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 2017/18

Total chargeable gains for the year x

Less: Current year losses (x)
Net gains/loss x
Less: brought forward losses (x)
Net chargeable gain x
Less: annual exemption (11,300)
Taxable gain/nil X/nil

Example 1
Eric sold a factory on 15 February 2018 for £320,000. The factory was purchased on 24 January 1994 for
£164,000, and was extended at a cost of £37,000 during March 2004. During May 2006 the roof of the factory
was replaced at a cost of £24,000 following a fire. Eric incurred legal fees of £3,600 in connection with the
purchase of the factory, and legal fees of £5,800 in connection with the disposal.

Page 97
Capital Gains Tax (Basics) Chapter ‐13

Solution
Eric’s taxable gain for 2017–18 is as follows:
£ £
Disposal proceeds 320,000

(5,800)
Incidental cost of disposal
Net proceed
314,200
Cost 164,000
Enhancement expenditure 37,000
Incidental costs 3,600
_______ (204,600)
________
Chargeable gain 109,600
Annual exempt amount (11,300)
_______
Taxable gain 98,300
_______

 The factory extension is enhancement expenditure as it has added to the value of the factory.
 The replacement of the roof is not enhancement expenditure, being in the nature of a repair.
 Note that the standardized term ‘chargeable gain’ refers to the gain before deducting the annual exempt
amount, while the term ‘taxable gain’ refers to the gain after deducting the annual exempt amount.

Administrative Aspect

Rates of CGT

The rate of CGT is dependent upon two factors:

 Level of a person’s taxable income
 Whether the gain is related to the disposal of residential property or not

Taxable gains are taxed at the lower rate of 18% where they fall within the basic rate tax band of £33,500, 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 of £33,500, and at the higher rate of 20% where they exceed this threshold.
The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.

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. Therefore, a CGT liability for the tax year 2017–18 will be payable by 31 January 2019.

Page 98
Capital Gains Tax (Basics) Chapter ‐13

Example 2
Continuing with example 1, Calculate CGT liability of Eric for 17‐18 if taxable amount of Eric is £25,000.

Solution
£
(33,500 – 25,000)=8,500 × 10% 850
(98,300 – 8,500)=89,800 × 20% 17,960
18,810

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 only relieved to the extent that the annual exempt amount is
not wasted. Current year loss adjustment is to be done first and then unused brought forward losses are
adjusted.

Example 3
For the tax year 2017‐18 Lim has chargeable gains of £17,600. He has unused capital losses of £16,700 brought
forward from the tax year 2016–17 and current year losses of £600.

Calculate taxable gain

Solution
£

Chargeable gains
17,600
Current year losses
(600)
17,000
(57,00)
Capital losses brought forward
_______
Chargeable gains 11,300
Annual exempt amount (11,300)
_______
Taxable gains Nil
_______

 The set off of the brought forward capital losses is restricted to £5,700 (17,000 – 11,300) so that
chargeable gains are reduced to the amount of the annual exempt amount.
 Lim therefore has capital losses carried forward of £11,000 (16,700 – 5,700).

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).

Page 99
 14

CHAPTER
Contents
1. Introduction
2. Part Disposals
3. Chattels
4. Other Wasting Assets
5. Insurance Proceeds
6. Damage of an Asset
7. Shares

Capital Gains Tax (Special Rule)

Page 100
Capital Gains Tax (Special Rule) Chapter ‐14

Introduction
This chapter will cover the other aspects of disposal i.e. part disposal, chattels, wasting assets, damage/destruction
of asset and shares.

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

Example 1
On 20 February 2018 Mark sold an acre of land for £130,000. He had originally purchased four acres of land on 13
April 2001 for £210,000. During January 2014, Mark spent £22,800 clearing and leveling all four acres of land. The
market value of the unsold three acres of land as at 20 February 2018 was £350,000. Mark incurred legal fees of
£3,200 in connection with the disposal.

Mark’ chargeable gain for 2017‐18 is as follows:

£ £
Disposal proceeds 130,000
Incidental costs (3,200)
Cost(w1) 56,875
Enhancement expenditure (w2) 6,175

_______ (63,050)
_______
63,750
_______

 (w1) The cost relating to the acre of land sold is £56,875 (£210,000 x £130,000/£480,000 (£130,000 +
£350,000)).
 (w2) The cost of clearing and leveling the land is enhancement expenditure. The cost relating to the acre of
land sold is £6,175 (£22,800 x £130,000/£480,000).
 The incidental costs relate entirely to the acre of land sold, and so they are not apportioned.
 Cost of the part that has been retained is £ 153,125 (£210,000 ‐ £56875)

Page 101
Capital Gains Tax (Special Rule) Chapter ‐14

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

COST

More than £ Less than £

6,000 6,000

Disposal

Disposal Disposal
proceeds proceeds

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

6,000 6,000 6,000 6,000

Normal Disposals Exempt Lower of

rules are proceeds are Original gain &
applied replaced with
(Gross disposal
£6000
proceeds‐
6,000) × 5
3

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.

Page 102
Capital Gains Tax (Special Rule) Chapter ‐14

Example 2
On 18 August 2017 Elizabeth sold an antique table for £5,600 and an antique clock for £7,200. The antique table
had been purchased on 27 May 2011 for £3,200, and the antique clock had been purchased on 14 June 2011 for
£3,700.

Solution
 The antique table is exempt from CGT because the gross sale proceeds and cost were less than £6,000.
 The chargeable gain on the antique clock is restricted to £2,000 (7,200 – 6,000 = 1,200 x 5/3) as this is less
than the normal gain of £3,500 (7,200 – 3,700).

Example 3
Richard sold the following assets during the tax year 2017‐18:
On 3 February 2018 he sold an antique table for £4,700. The table had been purchased on 2 May 2002 for £10,200.
On 12 March 2018 he sold machinery for £22,600. The machinery had been purchased on 1 June 2009 for £34,000.
Richard claimed capital allowances totaling £11,400 in respect of this machinery.

Solution

Table
 The table has been sold for less than £6,000, so the proceeds are deemed to be £6,000 (rather than £4,700).
 The allowable capital loss is therefore £4,200 (6,000 – 10,200).

Machinery
 The cost of £34,000 is reduced by the capital allowances claimed of £11,400, giving an allowable cost of
£22,600.
 Since the proceeds are also £22,600, the disposal is on a no gain, no loss basis.
 Losses are exempt over those plant and machineries on which capital allowances have been claimed.

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.

Example 4

On 31 March 2018 William sold a copyright for £9,600. The copyright had been purchased on 1 April 2013 for
£10,000 when it had an unexpired life of 20 years.
The chargeable gain on the copyright is as follows:
£
Disposal proceeds 9,600
Cost (10,000 x 15/20) (7,500)
_______
2,100

Page 103
Capital Gains Tax (Special Rule) Chapter ‐14

 The cost of £10,000 is depreciated based on an unexpired life of 20 years at the date of acquisition and an
unexpired life of 15 years at the date of disposal.

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.

Example 5
On 20 October 2018 an antique table owned by Dick was destroyed in a fire. The table had been purchased on 23
November 2015 for £50,000. Dick received insurance proceeds of £74,000 on 6 December 2018 and on 18
December 2018 he paid £70,400 for a replacement table.
Required

Calculate gain and the base cost of replacement asset.

Solution
Disposal proceed 74,000
‐ Cost (50,000)
Gain 24,000

Rolled over gain (20,400)

Immediately chargeable gain (74000 – 70,400) 3,600

Base Cost
= 70,400 – 20,400 =£50,000

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

Example 6
Mr. Nile purchased an asset on 5 January 1993 for £30,000. On 1st June 2017, a part of asset got damaged for
which insurance of £17000 was received. MV of remaining part is £ 85,000
Calculate gain and base cost for remaining part of asset.

Page 104
Capital Gains Tax (Special Rule) Chapter ‐14

Solution
Disposal proceeds 17000
Cost

30,000 x 17000 (5,000)

17000 + 85000

Gain 12,000

If restoration cost is either equal to or more than insurance proceeds then either gain is chargeable or person
can elect to defer the gain

Example 7
Continuing last example, compute gain on the basis of whether election is made or not, £20,000 is used for
restoration purpose.

If no election is made

Disposal £17,000
‐cost (£30,000× £17,000 ) (£5000)
£17,000+85,000
Gain £12,000

Base cost of asset= £30,000 ‐ £5,000 + £20,000 = £45,000

If election is made to defer the gain

No gain is computed
Base cost of asset=original cost ‐ insurance proceed + restoration cost
=£30,000 ‐ £17,000 + £20,000 = £33,000
Shares
As shares disposed of might have been purchased at different times for different cost, so it is difficult to identify
exactly which shares have been sold in order to determine the cost of sold shares and hence their gains/losses.

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. (It is meant to prevent a practice known as bed
and breakfasting. A person might sell shares at the close of business one day and then buy them back at the
opening of business the next day).
 Shares in share pool.

Example 8
Harry has had the following transactions in the shares of Jingle plc:
1 June 2005 – Purchased 4,000 shares for £6,200.
30 April 2010 – Purchased 2,000 shares for £8,800
15 July 2017 – Purchased 300 shares for £1,500

Page 105
Capital Gains Tax (Special Rule) Chapter ‐14

15 July 2017 – Sold 4,500 shares for £27,000

20 July 2017 _ purchased 200 shares for £750
Harry’s chargeable gain for 2013–14 is as follows:
£ £
Purchase 15 July 2017

Disposal proceeds
1,800
(27,000 x 300/4,500)
Cost (1,500)
Chargeable gain 300

Purchased 20 July 2017

1,200
Disposal proceeds (750)
( 27,000 × 200/4,500)
Cost
Chargeable gain
450
Share pool
Disposal proceeds
24,000
(27,000 x 4,000/4,500) (w1)
Cost (10,000)
14,000

______
Total chargeable gain 14,750
______

Share pool (w1)

Cost
Number
£
Purchase 1 June 2005 4,000 6,200
Purchase 30 April 2010 2,000 8,800
_______ _______
6,000 15,000
Disposal 15 July 2017 (15,000 x 4,000/6,000) (4,000) (10,000)
_______ _______

Balance carried forward 2,000 5,000

_______ _______

Page 106
Capital Gains Tax (Special Rule) Chapter ‐14

 The disposal is first matched with the same day purchase, then purchases against following 30 days and then
against the share pool.

How to determine MV of the sold share

Where the shares are disposed of by way of a gift rather than being sold then it is necessary to establish a market
value figure to be taken in place of disposal proceeds.

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
Example 9
Grace made a gift of her entire shareholding of 10,000 £1 ordinary shares in Nightingale plc to her daughter. On
the date of the gift the shares were quoted at £5.10 – £5.18.
The shares in Nightingale plc are valued at the average of the days highest and lowest quoted values ((£5.10 +
£5.18)/2 = £5.45).

 The deemed proceeds figure is therefore £54,500 (10,000 x 5.45).

Bonus issue
No additional cost is involved when bonus shares are issued. The only thing that changes is the number of shares
held.

Example 10
On 22 January 2018 Dexter sold 30,000 £1 ordinary shares in Pint plc for £140,000. Dexter had purchased 40,000
shares in Pint plc on 9 February 2015 for £96,000. On 3 April 2016 Pint plc made a 1 for 2 bonus issue.

Dexter’s chargeable gain for 2017‐18 is as follows:

£
Disposal proceeds 140,000
Cost (48,000)
_______
92,000
_______

 Dexter was issued with 20,000 (40,000 x 1/2) new ordinary shares as a result of the bonus issue.
 The cost of the shares sold is therefore £48,000 (96,000 x 30,000/ (40,000 + 20,000)).

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

Page 107
Capital Gains Tax (Special Rule) Chapter ‐14

Example 11

On 22 January 2018 Angela sold 30,000 £1 ordinary shares in Blonde plc for £140,000. Angela had purchased
40,000 shares in Blonde plc. On 9th February 2010 for £100,000.

On 3 May 2012 Blonde plc made a 1 for 2 rights issue. Angela took up her allocation under the rights issue in full,
paying £3.00 for each new share issued.

Angela’s chargeable gain for 2017‐18 is as follows:

£
Disposal proceeds 140,000
Cost (80,000)
_______
60,000
_______

 Angela was issued with 20,000 (40,000 x 1/2) new ordinary shares under the rights issue at a cost of £60,000
(20,000 x £3.00).
 The cost of the shares sold is therefore £80,000 (100,000 + 60,000 = 160,000 x 30,000/ (40,000 + 20,000).

Takeover and reorganization

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

Example 12
On 28 March 2018 Julie sold her entire holding of £1 ordinary shares in Sine plc for £55,000. Julie had originally
purchased 10,000 shares in Sine plc on 5 May 2010 for £14,000. On 7 August 2011 Sine plc had a reorganization
whereby each £1 ordinary share was exchanged for two new £1 ordinary shares and one £1 preference share.
Immediately after the reorganization each £1 ordinary share in Sine plc was quoted at £2.50 and each £1
preference share was quoted at £1.25.

Julie’s chargeable gain for 2017‐18 is as follows:

£
Disposal proceeds 55,000
Cost (w) (11,200)
_______
43,800
_______

Page 108
Capital Gains Tax (Special Rule) Chapter ‐14

 On the reorganization Julie received new ordinary shares valued at £50,000 (2 x 10,000 x £2.50) and
preference shares valued at £12,500 (10,000 x £1.25).
 The cost attributable to the ordinary shares is £11,200 (14,000 x 50,000/ (50,000 + 12,500).
 Where cash is received on a takeover then the normal disposal rules will apply.

Page 109
 15

CHAPTER
Contents
1. Introduction
2. Entrepreneurs’ Relief
3. Investor Relief
4. Rollover Relief
5. Holdover Relief
6. Gift Relief
7. Principal Private Residence Relief
8. Letting Relief

Capital Gains Tax (Reliefs)

Page 110
Capital Gains Tax (Reliefs) Chapter ‐15

Introduction
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.

Entrepreneurs’ Relief
 A reduced CGT rate of 10% applies if a disposal qualifies for entrepreneurs’ 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 one year prior to the date of disposal in order to get
entrepreneur’s 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 £10m 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 £10m limit are taxed in a normal way.
 Any available basic band will be utilized by gains qualifying for entrepreneur’s relief and then against gains
none qualifying for entrepreneur relief.
 The annual exempt amount and any capital losses should initially be deducted from those chargeable gains
which do not qualify for entrepreneurs’ 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.

Example 1
On 15 October 2017 four shareholders of Alphabet Ltd, an unquoted trading company, all sold their shares in the
company. Alphabet Ltd has a share capital of 100,000 £1 ordinary shares.

Ivy had been the managing director of Alphabet Ltd since the company’s incorporation on 1 January 2003. She had
held 60,000 shares since 1 January 2003.

Rose had been the sales director of Alphabet Ltd since 1 February 2017, having not previously been an employee
of the company. She had held 25,000 shares since 1 February 2017.

Mary had never been an employee or a director of Alphabet Ltd. She had held 12,000 shares since 27 July 2006.

Dee had been an employee of Alphabet Ltd since 1 May 2004. She had held 3,000 shares since 20 June 2005.
 Ivy’s disposal qualified for entrepreneurs’ relief because she was a director of Alphabet Ltd, had a
shareholding of 60% (60,000/100,000 x 100), and these qualifying conditions were met for one year prior to
the date of disposal.

Page 111
Capital Gains Tax (Reliefs) Chapter ‐15

 Rose’s disposal did not qualify for entrepreneurs’ relief because she only acquired her shareholding and
became a director on 1 February 2017. The qualifying conditions were therefore not met for one year prior to
the date of disposal.

 Mary’s disposal did not qualify for entrepreneurs’ relief because she was not an officer or an employee of
Alphabet Ltd.

 Laura’s disposal did not qualify for entrepreneurs’ relief because her shareholding of 3% (3,000/100,000 x 100)
was less than the minimum required holding of 5%.

Example 2
On 30 September 2017 Sara sold a business that she had run as a sole trader since 1 January 2007. The disposal
resulted in the following chargeable gains:
£
Goodwill 260,000
Freehold office building 375,000

P & M ( immoveable) (5,000)

Freehold warehouse 170,000
_______
800,000
_______

The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been
used by Sara for business purposes. She had worked there for the last 5 years. Sara has taxable income of £4,000
for the tax year 2017‐18. She has unused capital losses of £28,000 carried forward to the tax year 2017–18.

Sara’s CGT liability for 2017–18 is as follows:

£
Gains qualifying for entrepreneurs’ relief

Goodwill 260,000
Freehold office building 375,000

(5000)
P&M
630,000
_______
Other gains
Freehold warehouse 170,000
Capital losses brought forward (28,000)

Page 112
Capital Gains Tax (Reliefs) Chapter ‐15

£
_______
142,000
Annual exempt amount (11,300)
_______
130,700
_______
Capital gains tax: 630,000 at 10% =63,000
130,700 at 20% =26,140
_______
Tax liability 89,140
_______

 The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the
freehold warehouse as this does not qualify for entrepreneurs’ relief.
 £29,500 (£33,500 – £4,000) of Sara’s basic rate tax band is unused, but this is set against the gains qualifying
for entrepreneurs’ relief of £630,000 even though this has no effect on the 10% tax rate.

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 computational aspects of investor relief is not examinable
until 19/20.

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).

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

Page 113
Capital Gains Tax (Reliefs) Chapter ‐15

 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 entrepreneur’s relief and display rollover/holdover relief if conditions related to
entrepreneur relief are satisfied.
 And it is also possible to apply entrepreneur’s relief if any gain has not been covered by rollover/holdover
relief.

Example 3
Diana sold a factory on 15 August 2017 for £320,000 and this resulted in a chargeable gain of £85,000. She is
considering the following alternative ways of reinvesting the proceeds from the sale of her factory:
 A freehold warehouse can be purchased for £340,000.
 A freehold office building can be purchased for £275,000.
 A leasehold factory on a 40‐year lease can be acquired for a premium of £350,000.
 A freehold factory can be purchased for £230,000.

The reinvestment will take place during November 2017.

Solution
Freehold warehouse
 The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be rolled over.
 The base cost of the warehouse will be £255,000 (£340,000 – £85,000).

Freehold office building

 The sale proceeds are not fully reinvested, and so £45,000 (£320,000 – £275,000) of the chargeable gain
cannot be rolled over.

Page 114
Capital Gains Tax (Reliefs) Chapter ‐15

 The base cost of the office building will be £235,000 (£275,000 – (£85,000 – £45,000)).

Leasehold factory
 The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be held over.
 The factory is a depreciating asset, and so the base cost of the factory is not adjusted.
 The chargeable gain is held over until the earlier of November 2027 (10 years from the date of acquisition),
the date that the factory is sold, or the date that it ceases to be used in the business.

Freehold factory
 No rollover relief is available as the amount not reinvested of £90,000 (£320,000 – £230,000) exceeds the
chargeable gain.
 The base cost of the factory will remain at £230,000.

Example 4
Denzil sold a freehold factory on 8 November 2017 for £146,000, which was purchased for £72,000. The factory
was purchased on 15 January 2011. 75% of the factory had been used for business purposes by Denzil as a sole
trader, but the other 25% was never used for business purposes. Denzil purchased a new freehold factory on 10
November 2017 for £156,000.

Denzil’s chargeable gain for 2017‐18 is as follows:

75% business use 25% not business use
Disposal 146,000 109,500 36,500
‐cost (72,000)
Gain 74,000 (55,500) (18,500)
Rolled over gain (55,500) (55,500) ‐
Immediately chargeable 18,500 ‐ 18,500
gain

 The proportion of the chargeable gain relating to non‐business use is £18,500 (74,000 x 25%), and this amount
does not qualify for rollover relief.
 The sale proceeds related to business portion are fully reinvested, and so the balance of the gain can be rolled
over.
 The base cost of the new factory is £100,500 (£156,000 – £55,500).

Transfer between spouses

Transfer of an asset between spouses (and registered civil partners) are taken place at no gain no loss basis. The
recipient spouse acquires the asset at its original cost.

Gift Relief
Gift of noncurrent asset is a chargeable event and the burden to pay tax lies upon the donor. However, 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.

Page 115
Capital Gains Tax (Reliefs) Chapter ‐15

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.

Example 5
On 15 August 2017 Liz sold 10,000 £1 ordinary shares in Yukon Ltd, an unquoted trading company, to her daughter
for £75,000. The market value of the shares on that date was £110,000. The shareholding was purchased on 10
July 2016 for £38,000. Liz and her daughter have elected to hold over the gain as a gift of a business asset.

Liz’s chargeable gain for 2017‐18 is as follows:

£
Deemed proceeds 110,000
Cost (38,000)
_______
72,000
Holdover relief (72,000 – 37,000) 35,000
_______
Immediately chargeable gain 37,000
(75,000 – 38,000) _______

 Liz and her daughter are connected persons, and therefore the market value of the shares sold is used.
 The consideration paid for the shares exceeds the allowable cost by £37,000 (75,000 – 38,000). This amount is
immediately chargeable to CGT.
 The daughter’s base cost will be £75,000 (110,000 – 35,000).

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 entrepreneur’s relief and display gift relief.
 And it is also possible to apply entrepreneur’s relief if any gain has not been covered by gift relief.

Example 6
On 10 April 2017 Anglina made a gift of her entire holding of 60,000 £1 ordinary shares (a 60% shareholding) in
Zuper Ltd, an unquoted trading company, to her daughter, Rita. Anglina had purchased the shares on 1 June 2003

Page 116
Capital Gains Tax (Reliefs) Chapter ‐15

for £60,000, and was an employee of the company from that date until 10 April 2017 The market value of the
shares on 10 April 2017 was £260,000.

Rita sold the 60,000 £1 ordinary shares in Zuper Ltd on 28 March 2018 for £270,000. She has never been an
employee or a director of the company.

Both Anglina and Rita are higher rate taxpayers, and neither of them made any other chargeable gains during the
tax year 2017‐18.

No election for holdover relief

Anglina’s CGT liability for 2017–18 is as follows:

£
Deemed proceeds 260,000
Cost (60,000)
_______
200,000
Annual exempt amount (11,300)
_______
188,700
Capital gains tax: 188,700 at 10% 18,870
_______

Rita will not have a CGT liability for 2017‐18 as her chargeable gain of £10,000 (270,000 – 260,000) is less than the
annual exempt amount.

Election for holdover relief

Rita’s CGT liability for 2017‐18 is as follows:
£ £
Disposal proceeds 270,000
Cost 260,000
Held over again (200,000)
_______
(60,000)
_______
210,000
Annual exempt amount (11,300)
_______
198,700
_______

Page 117
Capital Gains Tax (Reliefs) Chapter ‐15

£ £
Capital gains tax: 39,740
198,700 at 20%
_______
Rita’s disposal does not qualify for entrepreneurs’ relief as she is not an officer or an employee of Zuper Ltd, and
she has not met the qualifying conditions for one year prior to the date of disposal. A claim for holdover relief will
result in an overall CGT liability of £39,740 compared to £18,870 if no claim is made. A claim is not therefore
beneficial. Where the disposal consists of shares in a personal company, holdover relief will be restricted if the
company has chargeable non‐business assets.

Companies holding non business assets

If a gift of personal company shares are 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 relief is restricted by the following
formula:

Gain × Chargeable business asset

Total chargeable asset

Example 7
On 5 October 2017 Zoe made a gift of her entire holding of 20,000 £1 ordinary shares in Apple Ltd, a personal
company, to her daughter. The market value of the shares on that date was £200,000. The shares had been
purchased on 1 January 2013 for £140,000. On 5 October 2017 the market value of Apple ltd’s chargeable assets
was £150,000, of which £120,000 was in respect of chargeable business assets. Zoe and her daughter have elected
to hold over the gain as a gift of a business asset.

Solution
Zoe’s chargeable gain for 2017‐18 is as follows:
£
Deemed proceeds 200,000
Cost (140,000)
________
Gain 60,000
Holdover relief(w1) (48,000)
________
12,000
Immediately chargeable gain ________

 (w1) Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), being the proportion of chargeable
business assets to chargeable assets.

Page 118
Capital Gains Tax (Reliefs) Chapter ‐15

Principal Private Residence Relief

Whenever a main residence of individual is sold then any gain appearing on it can be exempt under PPR rules.

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.
However, for the last two points there is an extra‐statutory concession which will allow the periods of absence
while working overseas or in the UK to be exempt even if the property is not reoccupied by the owner after the
period of absence.

This concession applies only if the individual does not reoccupy the house because the terms of his employment
prevent him from being able to reoccupy it.

The final 18 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.

Example 8
On 30 September 2017 Christina sold a house for £381,900. The house had been purchased on 1 October 1997 for
£141,900.

Christina occupied the house as her main residence from the date of purchase until 31 March 2001. The house was
then unoccupied between 1 April 2001 and 31 December 2004 due to Christina being required by her employer to
work elsewhere in the UK.

From 1 January 2005 until 31 December 2011 Christina again occupied the house as her main residence. The house
was then unoccupied until it was sold on 30 September 2017.

The chargeable gain on the house is as follows:

£
Disposal proceeds 381,900
Cost (141,900)
________
240,000
(207,000)

Page 119
Capital Gains Tax (Reliefs) Chapter ‐15

£
Principal private residence exemption
________
33,000
________
 The total period of ownership of the house is 240 months (207 + 33), of which 207 months qualify for
exemption as follows.

Exempt months Chargeable months

1 October 1997 to
42
31 March 2001 (occupied)
1 April 2001 to
31 December 2004 45
(working in UK)
1 January 2005 to
31 December 2011 84
(occupied)
1 January 2012 to
33
30 September 2014 (unoccupied)
1 October 2014 to
30 September 2017 36
(final 36 months)

___ ___
207 33

 The unoccupied period from 1 January 2012 to 30 September 2014 is not a period of deemed occupation as it
was not followed by a period of actual occupation.
 The exemption is therefore £207,000 (240,000 x 207/240).

Letting Relief
Letting relief will extend the principal private residence exemption where a property is let out during a period that
does not otherwise qualify for exemption.
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).

Page 120
Capital Gains Tax (Reliefs) Chapter ‐15

Example 9
Continuing with Example 8, assume that Christina let her house out during the periods that she did not occupy it.

The chargeable gain on the house will now be as follows:

£
Disposal proceeds 381,900
Cost (141,900)
________
Gain 240,000
Principal private residence exemption (207,000)
Letting relief exemption (33,000)
________
Immediately chargeable gain Nil
________

The letting relief exemption is the lowest of:

 £40,000
 £207,000 (the amount of the gain exempt under the principal private residence rules)
 £33,000 (the amount of the non‐exempt gain attributable to the period of letting (240,000 x 33/240))

Example 10
On 30 September 2017 Te sold a house for £186,000. The house had been purchased on 1 October 2006 for
£122,000. Throughout the period of ownership the house was occupied by Te as her main residence, but one of
the house’s eight rooms was always used exclusively for business purposes by Te.
The chargeable gain on the house is as follows:
£
Disposal proceeds 186,000
Cost (122,000)
________
Gain 64,000
Principal private residence exemption (56,000)
________
Immediately chargeable gain 8,000
________

 The principal private residence exemption is restricted to £56,000 (64,000 x 7/8).

Page 121
 16

CHAPTER
Contents
1. Introduction
2. Lifetime Transfer
3. Potentially Exempt Transfers
4. Chargeable Lifetime Transfers
5. Transfers of Value
6. Exemptions
7. Nil Rate Band
8. Rate of IHT
9. Death IHT on Lifetime Transfer
10. Taper Relief
11. Death estate
12. IHT planning aspects

Inheritance Tax

Page 122
Inheritance Tax Chapter ‐16

Introduction
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 done).

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 through (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. If the donor survives for
seven years then the PET becomes exempt and can be completely ignored. Hence, such a transfer has the potential
to be exempt.

Chargeable Lifetime Transfers

Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).

There is no legal definition of what a trust is, but essentially a trust arises where a person transfers asset to people
(the trustees) to hold for the benefit of other people (the beneficiaries). For example, parents may not want to
make an outright gift of assets to their young children. Instead, assets can be put into a trust with the trust being
controlled by trustees until the children get older.

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.

Page 123
Inheritance Tax Chapter ‐16

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:

 Diminution in value:
Normally there will be no difference between the diminution in value of the donor’s estate and the increase in
value of the donee’s estate. However, in some cases it may be necessary to compare the value of the donor’s
estate before the transfer, and the value after the transfer in order to compute the diminution in value. This
will usually be the case where unquoted shares are concerned. Shares forming part of a controlling
shareholding will be valued higher than shares forming part of a minority shareholding.

So, transfer of value = Value of donor’s estate before gift x

Less: Value of donor’s estate after gift (x)
Transfer of value x

Example 1
On 4 May 2017 Roger made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an unquoted investment
company. Before the transfer Roger owned 60,000 shares out of ABC Ltd’s issued share capital of 100,000 £1
ordinary shares.
ABC Ltd’s shares are worth as follows

At 15%, holding £8
At 45% holding £10
At 60%. holding £18

Although Roger’s son received a 15% shareholding valued at £120,000 (15,000 x £8), Roger’s transfer of value is
calculated as follows:

Page 124
Inheritance Tax Chapter ‐16

Solution
£
Value of shares held before the transfer
1,080,000
60,000 x £18
Value of shares held after the transfer
(450,000)
45,000 x £10
________
Value transferred 630,000
________

By contrast, for capital gains tax purposes the valuation will be based on the market value of the shares gifted,
which is £120,000.

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

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, and any unused brought forward exemption cannot be carried forward a second time. Therefore,
the maximum amount of annual exemptions available in any tax year is £6,000 (£3,000 x 2).

Page 125
Inheritance Tax Chapter ‐16

Example 2
During the tax year 2017–18, Bret made the following gifts:
 On 18 May 2017 he made a gift of £240 to his son.
 On 5 October 2017 he made a gift of £400 to his daughter.
 On 20 March 2018 he made a gift of £100 to a friend.

Calculate chargeable amount of gift?

Solution
18.05.17 5.10.17 20.04.18
PET PET PET
17/18 17/18 18/19
It will be exempt under It will be exempt under
small gift exemption small gift exemption
£
Transfer of value 400

Small gift exemption ‐

AE c/y (400)
b/f ‐
Chargeable amount of gift ‐

Note: Small gift exemption of £250 is available per person per tax year.

Example 3
On 19 September 2017 Winnie made a gift of £20,000 to his daughter when she got married. He has not made any
other gifts since 6 April 2016.

Calculate chargeable amount of gift

Solution
19.09.17 PET 2017/18
£
Transfer of value 20,000
Marriage exemption (5,000)
AE C/Y (3,000)
B/F (3,000)
Chargeable amount of gift 9,000

 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. Therefore, regular annual
gifts of £2,500 made by a person with an annual income of £100,000 would probably be exempt. A one‐off gift
of £70,000 made by the same person would probably not be

Page 126
Inheritance Tax Chapter ‐16

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 2017–18 the nil rate band is £325,000, and for previous years it has been as follows:

Nil rate bands

£
6 April 2017 to 5 April 2018 325,000
6 April 2016 to 5 April 2017 325,000
6 April 2015 to 5 April 2016 325,000
6 April 2014 to 5 April 2015 325,000
6 April 2013 to 5 April 2014 325,000
6 April 2012 to 5 April 2013 325,000
6 April 2011 to 5 April 2012 325,000
6 April 2010 to 5 April 2011 325,000
6 April 2009 to 5 April 2010 325,000
6 April 2008 to 5 April 2009 312,000
6 April 2007 to 5 April 2008 300,000
6 April 2006 to 5 April 2007 285,000
6 April 2005 to 5 April 2006 275,000
263,000
6 April 2004 to 5 April 2005 255,000
6 April 2003 to 5 April 2004 250,000
6 April 2002 to 5 April 2003

*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.

But that’s not the case if IHT has been paid by the donee of the asset. No grossing up is required as the loss
suffered by the donor is just the amount of gift.

Page 127
Inheritance Tax Chapter ‐16

Example 4
Anita died on 9 January 2018. She had made the following lifetime gifts:
 2 November 2011 – A gift of £320,000 to her son
 16 August 2013–. A gift of £460,000 to a trust. The trustees will pay the IHT arising from this gift
The nil rate band for the tax year 2011–12 and 2013‐2014 is £325,000.

Calculate lifetime IHT

Solution
PET CLT
2.11.11 16.8.13
11/12 13/14
Transfer of value 320,000 460,000
Small gift exemption ‐ ‐
Marriage exemption ‐ ‐
Annual exemption c/y (3,000) (3,000)
b/f (3,000) (3,000)
Chargeable amount of gift 314,000 454,000
Lifetime IHT exempt NRB 325,000
(17.8.06‐16.8.13) ‐
(325,000)
Taxable amount 129,000
Lifetime IHT=129,000×20% =25,800
GCA c/f =454,000

Example 5
Khan died on 3 March 2018. He had made the following lifetime gifts:
 1 August 2008 – A gift of £200,000 to a trust(donor has to pay tax)
 1 August 2014 – A gift of £360,000 to his son
 1 November 2014 – A gift of £280,000 to a trust (DONOR has to pay tax)
 21 November 2015 – A gift of £240,000 to a trust( donee has to pay tax)

The nil rate band for the tax years 2008‐09 is 312,000 and for both 2014–15 and 2015–16 is £325,000.

Calculate lifetime IHT

Solution
1.08.08 08/09 CLT
£
Transfer of value 200,000
Small gift exemption ‐
Marriage exemption ‐
AE c/y (3,000)
b/f (3,000)
Chargeable amount of gift 194,000

Page 128
Inheritance Tax Chapter ‐16

NRB 312000
(2.08.01‐1.08.08)
312,000 (194,000)
‐
Taxable amount
Lifetime IHT 0 covered by NRB
GCA =194,000

1.08.14 14/15 PET

£
Transfer of value 360,000
AE C/Y (3,000)
B/F (3,000)
Chargeable amount of gift 354,000
Lifetime IHT exempt

1.11.14 2014/15 CLT £

Transfer of value 280,000
Small gift exemption ‐
Marriage exemption ‐
AE c/y ‐
b/f ‐
Chargeable amount of gift 280,000
NRB 325,000
(2.11.07‐1.11.14)
Already used (194,000)
Available NRB 131,000 (131,000)
149,000
Lifetime IHT= £149,000×25%= £37,250
GCA= £280,000 + £37,250 = £317250

21.11.15 2015/16 CLT £

Transfer of value 240,000
Small gift exemption ‐
Marriage exemption ‐
AE c/y (3,000)
b/f ‐
Chargeable amount of gift 237,000
NRB 325,000
NRB already used (22.11.08‐21.11.15) (317,250)
Available NRB (7750)
229,250
Lifetime IHT= £229,250×20%= £45,850
GCA= £237,000

Page 129
Inheritance Tax Chapter ‐16

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.
 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 *
It would be somewhat unfair if a donor did not live for seven years after making a gift with the result that the gift
was fully chargeable to IHT. Therefore, taper relief reduces the amount of tax payable where a donor lives for
more than three years, but less than seven years, after making a gift. The reduction is as follows:
Years 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.

Example 6
Sara died on 18 March 2018. She had made the following lifetime gifts:
 1 August 2008 – A gift of £200,000 to a trust
 1 October 2011 _A gift of 190,000 to her son
 1 November 2014 – A gift of £280,000 to a trust

In each case the trust paid any IHT arising from the gift.

The nil rate band are as follows:

2008–09 £312,000
2010–11 £325,000.

Calculate IHT liabilities both for lifetime and upon death:

Page 130
Inheritance Tax Chapter ‐16

Solution
Life time calculations Death calculations
1.08.08 08/09 CLT £
Transfer of value 200,000
Small gift exemption ‐ 18 ‐03‐18
Marriage exemption ‐ Less
AE c/y (3,000) 7 years
b/f (3,000) 18‐03‐11
Chargeable amount of gift 194,000
NRB 312,000
(2.8.01‐1.8.08) ‐
312,000 (194,000) Exempt at death PET is very
old more
‐ Than 7 years
Lifetime IHT=0
GCA=194,000

Life time calculations

1.10.11 11/12 PET £
Transfer of value 190,000
Small gift exemption ‐
Marriage exemption ‐
AE c/y (3,000)
b/f (3,000)
Chargeable amount of gift 184,000
Lifetime IHT exempt

Death calculations
GCA 184,000
NRB 325,000
Already used (2.10.04‐1.10.11) (194,000)
(131,000)
Taxable amount 53,000
Death IHT 53,000×40% 21,200
Taper relief(>6 years) (‐80%) (16,960)
4,240

Life time calculations

1.11.14 14/15 CLT £
Transfer of value 280,000
Small gift exemption ‐
Marriage exemption ‐
AE c/y (3,000)

Page 131
Inheritance Tax Chapter ‐16

b/f (3,000)
Chargeable amount of gift 274,000
NRB 325,000
(2.11.07‐1.11.14)
(194,000)
Available (131,000)
143,000
Lifetime IHT=143,000×25%=35,750
GCA=274,000+35,750=309,750

Death calculations
GCA 309,750
NRB (325,000)
(2.11.03‐1.11.10) (194,000)
(184,000)
Taxable amount 309,750
Death IHT=309,750×40% 123,900
Taper relief >3 years (‐20%) (24,780)
IHT already paid (35,750)
Payable 63,370

Death Estate
A person’s estate includes the market value of every asset which they own at the date of death such as property,
shares, motor vehicles, cash, receivables and other investments including ISA as nothing is exempt for IHT.

Exception: A person’s estate also includes the proceeds from life assurance policies even though these proceeds
will not be received until after the date of death. The actual market value of a life assurance policy at the date of
death is irrelevant.

 Then if donor had owed money at the date of death, that is deductible from his assets value.
 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 as these are repaid upon death by the life assurance
element of the mortgage.
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.

Page 132
Inheritance Tax Chapter ‐16

Example 7
Bunny died on 31 December 2017. At the date of his death he owned the following assets:
 A main residence valued at £425,000. This had an outstanding interest‐only mortgage of £180,000.
 Motor cars valued at £63,000.
 Ordinary shares in Herbert plc valued at £54,000.
 Building society deposits of £25,000.
 Investments in individual savings accounts valued at £22,000, savings certificates from the National Savings &
Investments Bank valued at £19,000, and government stocks (gilts) valued at £34,000.
 A life assurance policy on his own life. On 31 December 2017 the policy had an open market value of £85,000,
and proceeds of £100,000 were received following Bunny’s death.

On 31 December 2017 Bunny owed £700 in respect of credit card debts, and he had also verbally promised to pay
the £800 legal fee of a friend. The cost of his funeral amounted to £4,300.

Under the terms of Bunny’s will his estate left to his children’s.

Calculate IHT on death state

Solution
£ £
Property 425,000
Mortgage interest (180,000)
_______
245,000
Motor cars 63,000
Ordinary shares in Herbert plc 54,000
Building society deposits 25,000
Other investments (22,000 + 19,000 + 34,000) 75,000
Proceeds of life assurance policy 100,000
_______

562,000
Credit card debts 700
Funeral expenses 4,300
_____
(5,000)
______
Chargeable estate 557,000

IHT liability
325,000 at nil%

Page 133
Inheritance Tax Chapter ‐16

£ £
100,000 at nil% Note
132,000 at 40% 52,800
IHT payable 52,800

 The promise to pay the friend’s legal fee is not deductible as it is purely gratuitous (not made for valuable
consideration).
 Unlike capital gains tax, there is no exemption for motor cars, individual savings accounts, saving certificates
from the National Savings & Investments Bank or for government stocks.
 Note: The residence nil rate band of £100,000 is available where an individual dies on or after 6 April 2017
where a main residence is inherited on death by direct descendants ( children / grandchildren’s)

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 who are looking after the estate of the second spouse to die. The
amount that can be claimed is based on the proportion of the nil rate band not used when the first spouse died.
Even though the first spouse may have died several years ago when the nil rate band was much lower, the amount
that can be claimed on the death of the second spouse is calculated using the current limit of £325,000.

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.
 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 3rd generation. So when 2nd generation dies, no
IHT is imposed as nothing has been transferred to them and IHT is delayed till the transfers, whether lifetime or
upon death, are made by 3rd generation.

Page 134
Inheritance Tax Chapter ‐16

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)

Obviously, 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.

Example 8
Winnie died on 21 January 2018. She had made the following lifetime gifts:
 3 March 2009 – A gift of £126,000 to a trust
 8 August 2011 – A gift of £206,000 to her son
 12 January 2012 – A gift of £40,000 to her husband
 10 May 2013 – A gift of £200 to a nephew
 23 June 2013 – A gift of £140,000 to her daughter when she got married

Winnie paid any IHT arising from the gifts to the trusts.

At the date of her death Winnie owned the following assets:

 A holiday cottage valued at £220,000. This had an outstanding endowment mortgage of £60,000.
 Units in the Global Trust, a unit trust, valued at £12,000.
 Cash deposits in individual savings accounts of £16,800.
 A motor car valued at £8,000.
 A life assurance policy on her own life. On 21 January 2018 the policy had an open market value of £45,000,
and proceeds of £50,000 were received following Winnie’s death.

On 21 January 2018 Winnie owed £3,600 in respect of a personal loan from a bank, and had gambling debts of
£600. The cost of her funeral amounted to £3,200.

Page 135
Inheritance Tax Chapter ‐16

Under the terms of her will Winnie left £100,000 to her husband, a specific legacy of £40,000 to her brother, and
the residue of the estate to her children.
Nil rate bands are as follows:
£

2008–09 312,000
2011–12 325,000
2013‐14 325,000

Calculate IHT over lifetime transfers and transfers made on death:

Solution
Lifetime transfers

3 March 2009
£ £

Value transferred 126,000

Annual exemptions
2007–08 3,000
2008–09 3,000
_____
(6,000)
_______
Gross chargeable amount 120,000
_______
 No lifetime IHT is payable as the CLT is less than the nil rate band for 2008–09.

8 August 2011
£ £

Value transferred 206,000

Annual exemptions
2010–11 3,000
2011–12 3,000
_____
(6,000)
_______
Chargeable amount of gift 200,000
_______

No life time tax as the gift is potentially exempt transfer (PET).

Page 136
Inheritance Tax Chapter ‐16

12 January 2012
Exempt as a transfer to spouse is not chargeable.

10 May 2013
Exempt as a small gift under £250.

23 June 2013
£ £
Value transferred 140,000
Marriage exemption 5,000
Annual exemptions
2012–13 3,000
2013–14 3,000
_____
(11,000)
_______
Chargeable amount of gift 129,000
_______
No life time tax as the gift is potentially exempt transfer.

Additional liabilities arising on death

3 March 2009
Exempt
This CLT was made more than seven years before the date of Winnie’s death on 21 January 2017.
(21‐1‐2017 – 7 years) 21‐1‐2010

8 August 2011 £
Potentially exempt transfer 200,000
NRB 325,000
Already used (120,000) (205,000)
Tax 0

 No IHT is payable as chargeable amount is covered by NRB.

23 June 2013 £
Potentially exempt transfer 129,000
______
NRB(325,000‐120,000 ‐ 200,000)
IHT liability
5,000 at nil%

Page 137
Inheritance Tax Chapter ‐16

23 June 2013 £
124,000 at 40% 49,600
Taper relief reduction – 40% (19840)
Tax payable 29760

 The due date for the IHT liability of £960 payable by Winnie’s daughter is 31 July 2018.

Death estate
£ £
Property 220,000
Units in Global Trust 12,000
Individual savings accounts 16,800
Motor car 8,000
Proceeds of life assurance policy 50,000
______
306,800
Bank loan 3,600
Funeral expenses 3,200
_____
(6,800)
______
Value of estate 300,000
Spouse exemption (100,000)
________
Chargeable estate 200,000

NRB (fully utilized)

IHT liability 200,000 at 40% 80,000
________

 The due date for the IHT liability of £80,000 payable by the personal representatives of Winnie’s estate is 31
July 2018.
 Winnie’s husband will inherit £100,000, her brother will inherit £40,000, and the children will inherit the
residue of £80,000 (£300,000 – £100,000 – £40,000 – £80,000).

ADDITIONAL NIL RATE BAND

The nil rate band for the tax year 2017–18 is £325,000.

However, 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 2017–18, the residence nil rate band is £100,000.

Page 138
 Inheritance Tax Chapter ‐16

The residence nil rate band is only relevant where an individual dies on or after 6 April 2017, their estate exceeds
the normal nil rate band of £325,000 and their estate includes a main residence. Any other type of property, such
as a property which has been let out, does not qualify for the residence nil rate band.

EXAMPLE 9
Sophie died on 26 May 2017 leaving an estate valued at £800,000. Under the terms of her will, Sophie’s estate was
left to her children. The estate included a main residence valued at £250,000.

The inheritance tax (IHT) liability is:

800,000
Chargeable estate _______

IHT liability 0
‐ 425,000 (325,000 + 100,000) at nil% 150,000
‐ 375,000 at 40% _______

150,000
_______

The residence nil rate band of £100,000 is available because Sophie’s estate included a main residence and this
was left to her direct descendants. In the same way in which any unused normal nil rate band can be transferred to
a surviving spouse (or registered civil partner), the residence nil rate band is also transferable. It does not matter
when the first spouse died.

EXAMPLE 10
Timothy died on 19 June 2017 leaving an estate valued at £700,000. Under the terms of his will, Timothy’s estate
was left to his children. The estate included a main residence valued at £300,000.

Timothy’s wife died on 5 May 2006. She used all of her nil rate band of £325,000.

Timothy’s IHT liability is:

700,000
Chargeable estate _______

IHT liability 0
‐ 525,000 (325,000 + 200,000) at nil% 70,000
‐ 175,000 at 40% _______

70,000
_______

Page 139
 Inheritance Tax Chapter ‐16

 Timothy’s personal representatives can claim the wife’s unused residence nil rate band of £100,000.
 The amount of residence nil rate band is therefore £200,000 (100,000 + 100,000).

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.

EXAMPLE 11
Una died on 10 July 2017 leaving an estate valued at £600,000. Under the terms of her will, Una’s estate was left to
her children. The estate included a main residence valued at £200,000 on which there was an outstanding interest‐
only mortgage of £130,000.
Una’s IHT liability is:

600,000
Chargeable estate _______

IHT liability 0
‐ 395,000 (325,000 + 70,000) at nil% 82,000
‐ 205,000 at 40% _______

82,000
_______

The value of Una’s main residence is £70,000 (200,000 – 130,000), so the residence nil rate band is restricted to
this amount.

The residence nil rate band does not apply to lifetime transfers becoming chargeable as a result of the donor’s
death within seven years.

EXAMPLE 12
Maud died on 22 April 2017 leaving an estate valued at £700,000. Under the terms of her will, Maud’s estate was
left to her grandchildren. The estate included a main residence valued at £360,000.

On 30 April 2015, Maud had made a potentially exempt transfer of £400,000 to her son.

IHT liabilities are:

400,000
Potentially exempt transfer _______

IHT liability

Page 140
 Inheritance Tax Chapter ‐16

‐ 325,000 at nil% 0
‐ 75,000 at 40% 30,000
_______

30,000
_______

Death estate

700,000
Chargeable estate _______

IHT liability 0
‐ 100,000 at nil% 240,000
‐ 600,000 at 40% _______

240,000
_______

Given that the residence nil rate band is only available where inheritance is by direct descendants, rearranging the
terms of a will can save IHT.

EXAMPLE 13
Victor has an estate valued at £1,200,000, including a main residence valued at £400,000. He has not made any
lifetime gifts. Victor’s wife died on 17 May 2007 and all of her estate was left to Victor. Under the terms of his will,
Victor has left his main residence to his brother, with the residue of the estate left to his children.

Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000). The residence nil rate
band is not available because the main residence will not be inherited by a direct descendant.

Victor could amend the terms of his will so that his brother inherited £400,000 of other assets, with the main
residence being included within the residue. A residence nil rate band of £200,000 (100,000 + 100,000) would then
be available, saving IHT of £80,000 (200,000 at 40%).

There is no reason why Victor’s brother could not purchase the main residence from the children following Victor’s
death.

A question will make it clear if the residence nil rate band is available. Therefore, you should assume that the
residence nil rate band is not available if there is no mention of a main residence.

Page 141
 17

CHAPTER
Contents
1. Introduction
2. UK Resident Company
3. Period of Account
4. Accounting Period
5. Pro-forma for Calculating Taxable Total Profits
6. Trading Profits
7. Capital Allowance
8. Interest; (non trading loan relationship)
9. Property Business Income
10. Miscellaneous Income
11. Chargeable Gains

Introduction to Corporate Tax

Page 142
Introduction to Corporate Tax Chapter ‐17

Introduction

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
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

Page 143
Introduction to Corporate Tax Chapter ‐17

Rates
The corporation tax rates for the financial year 2015 to 2017 are summarized as follows:

Rate of tax
‐ Financial year 2017 19%
‐ Financial year 2016 20%
‐ Financial year 2015 20%

Profit threshold £1,500,000

Where a company’s accounting period falls into two financial years then the corporation tax liability must be
calculated for each financial year.

Financial year runs from 1st April to 31st March.

Example 1
For the year ended 31 March 2018, Simplified Ltd has taxable total profits of £600,000.
For the year ended 31 December 2017, Moderate Ltd has taxable total profits of £900,000.

Simplified Ltd
Corporation tax is £114,000 (£600,000 at 19%).

Moderate Ltd
because the company’s accounting period straddles 31st March the corporation tax liability is calculated as:

Financial year 2016

£900,000 x 3/12 = £225,000 at 20% 45,000

Financial year 2017

£900,000 x 9/12 = £675,000 at 19% £128,250
_______

173,250
Tax liability _______

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

Page 144
Introduction to Corporate Tax Chapter ‐17

Taxable trading profits X

Note:
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.

Interest; (non‐trading loan relationship)

 Calculation is made according to an accounting period.

It comprises:
Interest income
(Any interest which has been received on investments held in bank, building society x
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)

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

Page 145
Introduction to Corporate Tax Chapter ‐17

Property Business Income

The computation of property business income follows income tax principles.

Exception:
Rental income is calculated according to an accounting period as opposed to income tax where calculation is made
according to the tax year. 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.

Other Income
It is calculated according to an accounting period on accrual basis.

Example:
Patent received for nontrading purposes.

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 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 entrepreneurs’ relief, holdover relief for the gift of
business assets.

Basic computation
Disposal X
Incidental cost of disposal (x)
Net proceed X
Less: allowable deductions
‐purchase price X
‐incidental cost of purchase X
‐capital expenditure X
(x)
Un indexed gain X
Less: Indexation allowance (x)
Indexed gain X

Page 146
Introduction to Corporate Tax Chapter ‐17

Example: 2
Even Ltd sold a warehouse on 15 January 2018 for £420,000. The factory was purchased on 24 October 1992 for
£250,000, and was extended at a cost of £37,000 during 15th March 2001.

Even Ltd incurred legal fees of £2,600 in connection with the purchase of the factory, and legal fees of £4,200 in
connection with the disposal.
Indexation factor are given below:

24.10.92‐15.1.18 0.234
15.3.01‐15.1.18 0.156

Solution:

£ £
Disposal 420,000
Incidental cost of disposal (4,200)
Net proceed 415,800
‐purchase price 250,000
‐incidental cost of purchase 2,600
‐capital expenditure 37,000
(289,600)
Un indexed gain 126,200
Indexation allowance
0.234 × 250,000 (58,500)
0.234 × 2,600 (608)
0.156 × 37,000 (5,772)
Indexed gain 61,320

Retail price indexation

The basic computation for a limited company is virtually the same as for an individual except for indexation
allowance. For that purpose indexation factor will be given in the exam. However, indexation allowance might
have to be computed in exams and for that purpose RPI (retail price index) will be given:

Indexation factor= RPI in the month of sale‐ RPI in the month of expenditure
RPI in the month of expenditure

 The indexation factor is given from the month of acquisition up to the month of disposal.
 The indexation factor is rounded to three decimal places when derived from RPI (except in share pool).
 The indexation allowance cannot be used to create or increase a capital loss.

Example 3
Delta Ltd sold a factory on 15 February 2018 for £360,000. The factory was purchased on 24 October 1995 for
£164,000, and was extended at a cost of £37,000 during March 1997.

Delta Ltd incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £6,200 in
connection with the disposal. Retail price indices (RPIs) are as follows:

Page 147
Introduction to Corporate Tax Chapter ‐17

October 1995 149.8

March 1997 155.4
February 2018 243.0
£ £
Disposal proceeds 360,000
Incidental costs of disposal (6,200)

Net proceeds 353,800

Cost price 164,000
Incidental costs of acquisition 3,600
167,600
Enhancement expenditure 37,000 (204,600)
149,200
Indexation
– Cost 167,600 x 0.622(w1) 104,247
– Enhancement 37,000 x 0.564 (w2)20,868
_______
(125,115)
Indexed gain 24,085

 (w1)The indexation factor for the cost is 0.622 (243.0 – 149.8)/149.8, and for the enhancement expenditure it
is 0.564 (243.0 – 155.4)/155.4.

Treatment of capital losses

When a limited company has a capital loss, 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.

Although chargeable gains are included as part of a company’s taxable total profits, capital losses are never set off
against other income.

Example 4
Even Ltd has the following results:
Year ended Year ended
31 March 2017 31 March 2018
£ £
Trading profit/(loss) 56,000 (17,000)
Property business profit 4,000 10,000
Chargeable gain/(capital loss) (8,000) 85,000

Page 148
Introduction to Corporate Tax Chapter ‐17

The corporation tax liability of Even Ltd for the years ended 31 March 2017 and 2018 is as follows:

Solution:
Year ended Year ended
31 March 2017 31 March 2018
£ £
Trading profit 56,000 –
Property business profit 4,000 10,000
Chargeable gain (85,000‐8000) – 77,000
_______ _______
60,000 87,000
Loss relief – (17,000)
_______ _______
Taxable total profits 60,000 70,000
_______ _______
Corporation tax at 20% 12,000
Corporation tax at 19% _______ 13300

 The capital loss for the year ended 31 March 2017 is carried forward, and so the chargeable gain for the year
ended 31 March 2018 is £77,000 (85,000 – 8,000).

Shares
For limited companies, disposals of shares are matched with purchases in the following order:
 Shares purchased on the same day as the disposal.
 Shares purchased during the nine days prior to the disposal.
 Shares in the 1985 pool.

When calculating indexation allowances for the 1985 pool, the indexation fraction is not rounded to three decimal
places.

Example 5
On 15 June 2017 Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £350,000. Fair Ltd had originally purchased
40,000 shares in Gong plc on 10 June 1995 for £110,000, and purchased a further 60,000 shares on 20 August 1999
for £180,000.

Retail price indices (RPIs) are as follows:

June 1995 149.8
August 1999 165.5
June 2017 241.8

Page 149
Introduction to Corporate Tax Chapter ‐17

Chargeable gain
£
Disposal proceeds 350,000
Cost (203,000)
________
Un indexed gain 147,000
Indexation allowance (308,379 – 203,000) (105,379)
________
Indexed gain 41,621
________

1985 Pool
Number Cost Index cost
£ £ £
Purchase June 1995 40,000 110,000 110,000
Indexation to August 1999
110,000 x (165.5 – 149.8)/149.8 11,529
______
121,529
Purchase August 1999 60,000 180,000 180,000
______ ______ ______
100,000 290,000 301,529
Indexation to June 2017
301,529 x (241.8 – 165.5)/165.5 139,013
_______
440,542
Disposal June 2017
Cost x 70,000/100,000 (70,000) (203,000) (308,379)
_______ ________ ________
Balance carried forward 30,000 87,000 132,163
_______ ________ ________
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

Page 150
Introduction to Corporate Tax Chapter ‐17

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

Example 6
Cucumber ltd starts trading on 1 January 2017 and makes up accounts for its first 15 month period to 31 March
2018. Tax adjusted trading profits are £368,750 (before capital allowances). The company paid a qualifying
charitable donation of £5,000 on 1 April 2017 and disposed off a plant and machinery for £27,500 on 1 February
2018, realizing a gain of £12,000. The company purchased plant and machinery for £152,500 on 1 January 2018.
Show cucumber ltd’s taxable total profits for each accounting period. WDV b/f on 1st January 2017 is £3,000

 Requirement: calculate corporation tax liability of Cucumber Ltd.

Solution:
Need to split the 15 month period into two:
1.1.17‐31.12.17 1.1.18‐31.3.18
£ 73,750
Trade profits (12:3) 295,000 (53,486)
Less: CAs (w1) (540) 12,000
Chargeable gain
Less: qualifying charitable donation (5000) 32,264
Taxable total profits 289,460 =32,264×19%
CT liability =55,721(w2) =£6,130

Page 151
Introduction to Corporate Tax Chapter ‐17

1.1.17‐31.12.17 1.1.18‐31.3.18
£ £
Trade profits (12:3) 295,000 73,750
Less: CAs (w1) (540) (53,486)
Chargeable gain ‐ 12,000
Less: qualifying charitable donation (5,000) 32,246
289,460 (w2) 32,264 x 19%

Working 1‐capital allowances 1‐1‐17 ‐‐‐ 31‐12‐17 1‐1‐18 ‐‐‐ 31‐3‐18

Y/E 31‐12‐17 = =£3,000 × 18% 540
WDV c/f=£ 3,000 – £540 £2,460

3 m/e 31.3.18 AIA Main pool Allowances

£ £ £
WDV b/f 2,460
Purchase 1.1.18 152,500
Less: AIA £200,000 x 3/12 (50,000) 50,000
Transfer to pool 102,500 102,500
Disposal (27,500)
77,460
WDA @ 18% x 3/12 (3,486) 3,486
c/f 62,037
Total allowances 53,486

(w2)
FY 2016 = £289,460 x 3/12 x 20% = £14,473
FY 2017= £289,460 × 9/12 × 19% = £41,248
£55,721

Example 7
Sofa Ltd is a manufacturer of furniture. The company’s summarized profit and loss account for the year ended 31
March 2018 is as follows:

Note £ £
Gross Profit 272,300
Operating expenses
Depreciation 87,100
Professional Fees 1 19,900
Repairs and Renewals 2 22,800
Other expenses 3 64,000 (193,800)

Page 152
Introduction to Corporate Tax Chapter ‐17

Operating loss 78,500

Profit from sale of fixed assets
Disposal of shares 4 4,300
Income from investments
Bank Interest 5 8,400
91,200
Interest payable 6 (31,200)
Profit before taxation 60,000

Note 1 – Professional fees

Professional fees are as follows:
£
Accountancy and audit fee 3,400
Legal fees in connection with the issue of share capital 7,800
Legal fees in connection with the renewal of a ten year property lease 2,900
Legal fees in connection with the issue of debentures (see note 6) 5,800
19,900
Note 2 – Repairs and renewals
The figure of £22,800 for repairs and renewals includes £9,700 for constructing a new wall around the
company’s premises and £3,900 for repairing the wall of an office building after it was damaged by a lorry. The
remaining expenses are all fully allowable.

Note 3 – Other expenses

The figure of £64,000 for other expenses includes £1,360 for entertaining suppliers; £700 for entertaining
employees; £370 for counseling services provided to an employee who was made redundant; and a fine of £420
for infringing health and safety regulations. The remaining expenses are all fully allowable.

Note 4 – Profit on disposal of shares

The profit on the disposal of shares of £4,300 is in respect of a shareholding that was sold on 29 October 2017.
Chargeable gain is £4,000 after taking indexation allowance.

Note 5 – Bank interest received

The bank interest was received on 31 March 2018. The bank deposits are held for non‐trading purposes.

Note 6 – Interest payable

Sofa Ltd raised a debenture loan on 1 July 2017, and this was used for trading purposes. Interest of £20,800 was
paid on 31 December 2017, and £10,400 was accrued at 31 March 2018.

Note 7 – Plant and machinery

On 1 April 2017 the tax written down values of plant and machinery were as follows:
£
General pool 16,700
Following transactions took place during the year ended 31 March 2018:
(Cost/Proceeds)
£

Page 153
Introduction to Corporate Tax Chapter ‐17

12 May 2017 Purchased equipment 10,900

8 June 2017 Purchased motor car (1) 11,400
2 August 2017 Purchased motor car (2) 22,200
8 January 2018 Sold a lorry (7,600)

The lorry sold on 8 January 2018 for £7,600 originally cost £24,400. CO2 emission of car 1 is 122 g/km and CO2
emission of car 2 is 136g/km.

Required:
(a) Calculate Sofa Ltd’s tax adjusted trading profit for the year ended 31 March 2018.

(b) Calculate corporation tax liability

Solution
Sofa Ltd – Trading loss for the year ended 31 March 2018
£ £
Profit before taxation 60,000
Depreciation 87,100
Accountancy and audit fee 0
Legal fees in connection with the issue of share capital 7,800
Renewal of lease 0
Legal fee in connection with the issue of debentures 0
Construction of new wall 9,700
Repairs 0
Entertaining suppliers 1,360
Entertaining employees 0
Counselling services 0
Health and safety fine 420
Profit on disposal of shares (4,300)
Bank interest received (8,400)
Interest payable ‐ ( 16,366)
106,380 106,380
Capital allowances – Plant and machinery (working 1)
137,314
Trading profit

Page 154
Introduction to Corporate Tax Chapter ‐17

Working 1 – Plant and machinery

AIA G. Pool special rate pool Allowances

£ £ £ £
WDV brought forward 16,700
Additions qualifying for AIA
12.5.2017 Equipment: cost 10,900
AIA @ 100% (10,900) (10,900)
Additions – Motor car (1) 11,400
8 June 2017
Motor car (2) 2‐8‐2017 22,200
Disposal proceeds 8‐1‐2018 (7,600)
20,500
WDA –18%,8% (3,690) (1,776) 5,466
WDV c/f 16,810 20,424 16,366

(b) Sofa ltd

y/e 31st MARCH 2018

Corporation tax liability

£
Trading profit 137,314
Interest 8,400
Chargeable gain 4,000
Augmented profit 149,714

Tax liability= 149,714×19% (FY 2017) = £28,446

 The cost of renewing a short‐lease (less than 50 years) is allowable as a trading expense.
 The cost of obtaining loan finance is allowable as a trading expense under the loan relationship rules as the
loan was used for trading purposes.
 The new wall is not allowable, being capital in nature.
 The only exception to the non‐deductibility of entertainment expenditure is when it is in respect of
employees.
 The costs of counselling services for redundant employees are allowable.
 Interest on a loan used for trading purposes is deductible in calculating the trading loss on an accruals basis.

Page 155
 18

CHAPTER
Contents
1. Introduction
2. Carry Forward
3. Carry Back
4. Terminal Loss Relief
5. Capital Losses
6. Losses on Rental Properties

Trading Losses

Page 156
Trading Losses Chapter ‐18

Introduction
 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.

Current Accounting Period Adjustments

Losses are adjusted against total profit before qualifying charitable donation in the period of loss.

Carry back against total profits

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.

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.

Example 1
Simons shore ltd has the following results:
Year ended 30th June 2015 2016 2017
£ £ £
Adjusted trading profit/ (loss) 42,000 (70,000) 19,000
Bank interest received 3,000 2,000 1,000
Chargeable gains 4,000 4,000 4,000
QCD 10,000 8,000

Calculate the taxable total profits, for all its accounting periods shown above, clearly indicating how you would
deal with the trading loss, to obtain relief as soon as possible.

Page 157
Trading Losses Chapter ‐18

2015 2016 2017

£ £ £
Trading profit 42,000 Nil 19,000
c/f loss (15,000)
4,000
Interest 3,000 2,000 1000
Gains 4,000 4,000 4,000
Total profit 49,000 6,000 9,000
c/y loss (6,000)
c/b loss (49,000)
‐QCD ‐ ‐ (8,000)
Taxable total profits ‐ ‐ 1,000

QCD of 10,000 for y/e 30.6.15 has gone waste

Loss memorandum
Loss for y/e 30th June 2016 (70,000)
Current period losses 6,000
(64,000)
Brought back loss 49,000
15,000
Brought forward loss (15,000)
Unrelieved 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)

Example 2
Burberry ltd has been trading for many years. The company prepared its annual accounts to 31 March, each year,
but changed its accounting date to 31 December in 2015. The company ceased trading on 31 October 2017.

Period ended y/e y/e 9m/e y/e 10m/e

31.03.14 31.03.15 31.12.15 31.12.16 31.10.17
£ £ £ £ £
Trading profit 450,000 87,000 240,000 45,000 Nil
Bank interest 9,000 3,000 6,000 1,500 1,500
Chargeable gain 7,500 nil nil nil Nil
Qualifying charitable
Donations 30,000 30,000 30,000 30,000 30,000

In the year ended 31 October 2017, Burberry ltd made a tax adjusted trading loss of £525,000.

Page 158
Trading Losses Chapter ‐18

Calculate Burberry ltd’s taxable total profits, for all of the above accounting periods, assuming terminal loss
relief are claimed for the trading loss in the period ended 31 October 2017.

Solution:
y/e 31.3.14 y/e 31.3.15 p/e 31.12.15 y/e 31.12.16 p/e 31.10.17
£ £ £ £ £
Trading profit 450,000 87,000 240,000 45,000 Nil
Interest 9,000 3,000 6,000 1,500 1,500
Chargeable gain 7,500
Total profits 466,500 90,000 246,000 46,500 1,500
c/y losses (1,500)
Bought back losses (116,625) (90,000) (246,000) (46,500)
349,875
‐QCD (30,000) ‐ ‐ ‐ ‐
Taxable total profits 319,875 ‐ ‐ ‐ ‐

Qualifying charitable donation for Y/E 31.3.2015, Y/E 31.3.2016, P/E 31.12.16 and 31.10.17 have gone waste.

Loss memorandum £
p/e 31.10.17 (525,000)
c/y loss 1,500
(523,500)
y/e 31.12.16 46,500
(477,000)
p/e 31.12.15 246,000
( 231,000)
y/e 31.3.2015 (90,000)
141,000
y/e 31.3.2014 lower off (116,625)
466,500 x 3/12 = 116,625
525,000 x 3/12 =131,250
Unrelieved loss 24,375

Capital Losses
 They are first adjusted against current year capital gains.
 Excess losses are carried forward for indefinite period against capital gains of future accounting period.
 They are never carried back

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).

Page 159
 19

CHAPTER
Contents
1. Introduction
2. Group Relief
3. Chargeable Gains

Groups

Page 160
Groups Chapter ‐19

Introduction
Companies are said to be related (i.e. 51% related company) 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.

Example 1
Maple plc has the following shareholdings:
Shareholding
Elbow Ltd 25%
Bruise Ltd 60%
Cell Ltd 100%
Derma Ltd 100%
Ear Inc 100%
Flow Ltd 100%

Maple plc’s shareholding in Cell Ltd was disposed of on 31 December 2017, and the shareholding in Derma Ltd was
acquired on 1 January 2018. The other shareholdings were all held throughout the year ended 31 March 2018.

Ear Inc is resident overseas. The other companies are all resident in the UK.

All the companies are trading companies except for Flow Ltd which is dormant.

Solution
 Elbow Ltd and Flow Ltd are not 51% related group members as Maple Ltd has a shareholding of less than 50%
in Elbow Ltd, and Flow Ltd is dormant.
 Bruise Ltd, Cell Ltd, Derma Ltd and Ear Inc are 51% related group members as Maple Ltd has a shareholding of
over 50% in each case, and they are all trading companies
 For related company purposes, it does not matter where a company is resident. Ear Inc is therefore included
despite being resident overseas.
 Companies that are only related for part of an accounting period, such as Cell Ltd and Derma Ltd, count as
associated companies for the whole of the period.
 Including Maple Ltd there are five related companies, so Maple Ltd’s lower and upper corporation tax limits
are reduced to £60,000 (300,000/5) and £300,000 (1,500,000/5) respectively

Page 161
Groups Chapter ‐19

Group Relief
 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
 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.
 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’
 Only current year losses can be group relieved, so no relief is available for losses brought forward from
previous years.
 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

Example 2
For the year ended 31 March 2018 Pinpoint Ltd has a trading profit of £510,000, a chargeable gain of £32,000, and
paid qualifying charitable donations of £2,000.

Pinpoint Ltd has a 100% subsidiary company, and for the year ended 31 March 2018 claimed group relief of
£40,000 from this company.

During the year ended 31 March 2018 Pinpoint Ltd received dividends of £27,000 from an unconnected UK
company, and dividends of £18,000 from its 100% subsidiary company. Both figures are the actual cash amounts
received.

Solution
The corporation tax liability of Pinpoint Ltd for the year ended 31 March 2018 is as follows:
£
Trading profit 510,000
Chargeable gain 32,000
Total profits 542,000
Group loss relief (40,000)
Qualifying charitable donations (2,000)
Taxable total profits 500,000

95,000
Corporation tax at (500,000 at 19%)

Page 162
Groups Chapter ‐19

Example 3
Chair Ltd owns 100% of the ordinary share capital of both Table Ltd and Couch Ltd. For the year ended 31 March
2018 Chair Ltd had a trading loss of £200,000.

For the year ended 30 June 2017 Table Ltd had taxable total profits of £240,000, and for the year ended 30 June
2018 will have taxable total profits of £90,000.

Couch Ltd commenced trading on 1 January 2018, and for the three‐month period ended 31 March 2018 had
taxable total profits of £60,000.
Show in each case that how much loss can be surrendered at maximum to Table ltd and Couch ltd.

Solution
 The accounting periods of Table Ltd and Chair Ltd are not coterminous. Therefore, Table Ltd’s taxable total
profits and Chair Ltd.’s trading loss must be apportioned on a time basis.
 For the year ended 30 June 2017 group relief is restricted to a maximum of £50,000, being the lower of
£60,000 (240,000 x 3/12) and £50,000 (200,000 x 3/12).
 For the year ended 30 June 2018 group relief is restricted to a maximum of £67,500, being the lower of
£67,500 (90,000 x 9/12) and £150,000 (200,000 x 9/12).
 Couch Ltd did not commence trading until 1 January 2018, so group relief is restricted to a maximum of
£50,000, being the lower of £60,000 and £50,000 (200,000 x 3/12).

 When the accounting periods of the claimant company and the surrendering company are not coterminous,
then group relief may be restricted.

For example: An ltd’s shareholding is 82% in B ltd. A ltd’s period of account is 12 months ended 31st January 2018
while B ltd’s period of account is 12 months ended 30th June 2018. They have got 7 months overlapped from July
2017 to January 2018.Group relief is restricted up to 7 months only.

 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.
 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.

Example 4
Lunar Ltd owns 100% of the ordinary share capital of Moon Ltd. The results of each company for the year ended 31
March 2018 are as follows:
Lunar Ltd Moon Ltd
£ £
Trading loss (18,100) (11,200)
Property business profit/(loss) (26,700) 60,900
Loan interest received 1,600 3,300
Capital loss (19,200) 0
Qualifying charitable donations (4,800) (3,200)

Page 163
Groups Chapter ‐19

All the loan interest received is in respect of loans that were made for non‐trading purposes.

Calculate the maximum amount of loss that can be surrendered by Lunar ltd and hence claimed by Moon ltd.

Solution
Maximum claim by Moon Ltd
 The group relief claim by Moon Ltd is calculated after deducting qualifying charitable donations, and on the
assumption that a claim is made for the current year trading loss.
 The maximum amount of group relief that can be claimed by Moon Ltd is therefore £49,800 (60,900 + 3,300 –
3,200 – 11,200).

Maximum surrendering amount by Lunar Ltd

 The property business loss and the qualifying charitable donations can be surrendered to the extent that they
are unrelieved, so £29,900 of these can be surrendered (26,700 + 4,800 – 1,600).
 It is not possible to surrender capital losses as part of a group relief claim.
 The maximum potential surrender by Lunar Ltd is £48,000 (18,100 + 29,900).
 The maximum group relief claim is therefore £48,000.

The loss making company may of course be able to relieve the loss itself.

Example 5
Ring Ltd owns 100% of the ordinary share capital of both Bring Ltd and String Ltd. The results of each company for
the year ended 31 March 2018 are as follows:

Ring Ltd Bring Ltd String Ltd

£ £ £
Trading profit/(loss) (135,000) 650,000 130,000
Property business profit 120,000 0 0

Ring Ltd had dividend income of £10,000.

Ring ltd has decided to surrender loss of 75,000 to Bring ltd and 30,000 to String ltd. Rest of the loss will be
adjusted against Ring ltd.’s own results.

Solution
The corporation tax liability of each of the group companies for the year ended 31 March 2018 is as follows:
Ring Ltd Bring Ltd String Ltd
£ £ £
Trading profit 0 650,000 130,000
Property business profit 120,000
Loss relief (30,000)
Group relief (75,000) (30,000)
_______ _______ _______
Taxable total profits 90,000 575,000 100,000

Page 164
Groups Chapter ‐19

Corporation tax at 19% 17,100 109,250 19000

Chargeable Gains
 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 more than 50% of the subsidiary’s ordinary share
capital.

Example 6
Bloom Ltd is the parent company for a group of companies. The group structure is as follows:
Bloom
|
100%
|
Blast Ltd
|
80%
|
Blossom Ltd
|
80%
|
Blush Ltd

For the year ended 31 March 2018 Bloom Ltd has an unrelieved trading loss.

Solution
There is a shareholding of 75% at each level in a group and bloom ltd has got effective shareholding of 80% (100 ×
80%) in blossom ltd and 64%(80 × 80%) in blush ltd.

Bloom Ltd, Blast Ltd, Blossom Ltd and Blush Ltd therefore form a chargeable gains group

Tax treatment
 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.
 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.

Page 165
Groups Chapter ‐19

 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.

Example 7
Hit Ltd owns 100% of the ordinary share capital of Stroke Ltd. For the year ended 31 March 2018.Hit Ltd is a large
company while Stroke Ltd is a small company.

On 15 August 2017 Hit Ltd sold an office building, and this resulted in a chargeable gain of £120,000. On 20
February 2018 Stroke Ltd sold a factory and this resulted in a capital loss of £35,000.

As at 1 April 2017 Stroke Ltd had unused capital losses of £40,000.

Solution
 Hit Ltd and Stroke Ltd must make a joint election by 31 March 2020, being two years after the end of the
accounting period in which the disposal outside of the group occurred.
 Stroke ltd’s unused capital loss of £35,000 and brought forward capital losses of £40,000 can be set against
the chargeable gain of £120,000.

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

Page 166
 20

CHAPTER
Contents
1. Introduction
2. Notification of Chargeability to Tax
3. Filing of Return
4. Determination
5. Amendment of Error/Mistake
6. Claims
7. Enquiry
8. Discovery Assessment
9. Records
10. Due Date for Payment
11. Overpaid/Underpaid Interest

Corporation Tax Administration

Page 167
Corporation Tax Administration Chapter ‐20

Introduction
This chapter covers the administrative aspects of corporation tax.

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

&
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 3rd 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.

Page 168
Corporation Tax Administration Chapter ‐20

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
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.

Page 169
Corporation Tax Administration Chapter ‐20

* Profit threshold / augmented profit =taxable total profit plus amount of dividend received from companies which
are not a part of 51% related group.

Example 1
Alpha ltd. has made accounts for the 9 months ended 30th September 2017. Alpha ltd has one 51% related
company.

Show the profit threshold, upon achieving that, Alpha ltd will be considered as a large company

Solution:
1500, 000×9/12= 1125,000 /2= £562,500

The due date of small and medium sized companies is nine months and one day after the end of an accounting
period. For example, if a company has an accounting period ending on 31 December 2017, the corporation tax for
the period is payable on 1 October 2018.

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.

Example 2
A large company has CT liability of £1,350,000 for year ended 31st march 2018.calculate due dates for payment

Solution
14th October 2017 =£1350, 000 × 25% = £337,500
14th January 2018 =£1350, 000 × 25% = £337,500
14th April 2018 =£1350, 000 × 25% = £337,500
14th July 2018 =£1350, 000 × 25% = £337,500

The position is slightly more complicated if the company has an accounting period of less than 12 months, as is
shown in the following question, where installments are figured out by using the following equation:

Installment= 3 x CT/n where CT is the amount of the estimated corporation tax liability payable in installments for
the period and n is the number of months in the period.

Example 3
Alsatian ltd is a large company has a corporation tax liability of £900,000 for the eight‐month period to 30th
September 2017. Accounts had previously always been prepared to 31 January. Alsatian ltd was a large company in
the previous accounting period.

Page 170
Corporation Tax Administration Chapter ‐20

Required: Show the due dates for payment.

Solution
£900,000 must be paid in installments.
The amount of each installment is 3 x £900,000 = = £337,500
8
The due dates are:
£
14 August 2017 337,500
14 November 2017 337,500
14 January 2018 225,000 (balance) (900,000‐ 337,500 – 337,500)

A company is not required to pay installments in the first year that it is 'large', unless its augmented profits exceed
£10 million. The £10 million limit is reduced proportionately if the company is a member of 51% related group.

Overpaid/Underpaid Interest
Interest is charged on overdue/underpaid tax and it runs from the due date till it is paid @2.75%.

Interest is received on overpaid taxes and it runs from the date of payment till the date of repayment/adjustment
@0.5%.

Page 171
 21

CHAPTER
Contents
1. Introduction
2. Types of supply
3. VAT Registration
4. Group Registration
5. How VAT Operates
6. Tax Point
7. VAT Equation
8. Treatment for VAT
9. Deregistration
10. Small business schemes
11. Overseas aspects of VAT
12. VAT administration

Value Added Tax

Page 172
Value Added Tax Chapter ‐21

Introduction
 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

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
1/6 (i.e. 20/120) of the VAT inclusive (or gross) price

Zero rated supplies

The zero‐rate generally applies to supplies of goods and services that are considered to be essential requirements.
The main zero‐rated supplies are:
 Food except for food supplied in the course of catering or is considered as luxury food
 Books and printed material
 Construction of new residential buildings or those used for charitable purposes
 Transport services provided the vehicle carries more than 11 passengers (e.g. trips in buses, coaches, ships,
trains, airplanes but not taxis)

Page 173
Value Added Tax Chapter ‐21

 Prescription drugs and medicines to help disabled

 Gifts to charities
 Children’s clothing and footwear

VAT Registration
As stated before that taxable person is one who is registered for vat or is required to be registered for vat.
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.

Example 1
Robert commenced trading on 1 January 2017. His sales have been as follows:
Standard Zero‐
rated £ rated £
2017
January 3,200 0
February 2,800 0
March 3,300 0
April 5,100 600
May 2,700 0
June 3,700 400
July 3,900 200
August 5,500 100
September 4,300 0
October 12,100 0
November 6,900 700

Page 174
 Value Added Tax Chapter ‐21

December 8,200 300

2018
January 8,800 900
February 16,500 1,200

Solution
 Robert will become liable to compulsory VAT registration when his taxable supplies during any 12‐month
period exceed £85,000.
 This will happen on 28 February 2014 when taxable supplies will amount to £85,400 (3,300 + 5,700 + 2,700 +
4,100 + 4,100 + 5,600 + 4,300 + 12,100 + 7,600 + 8,500 + 9,700 + 17,700).
 Robert will have to notify HM Revenue & Customs by 30 March 2018, being 30 days after the end of the
period.
 Registration is required from the end of the month following the month in which the limit is exceeded, so
Robert will be registered from 1 April 2018 or from an agreed earlier date.

Failure to register for VAT is an offence. Standard penalty will be imposed on late notification of chargeability to
tax.

Future test
The future test rules are as follows:

 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. Deregistration will be dealt later)

Advantage of exemption from registration is that the business does not have to incur the administrative burden
and costs of accounting for VAT. However, the disadvantage is that it will be unable to recover any input VAT
suffered.

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 to be 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%.

Page 175
Value Added Tax Chapter ‐21

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.

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

Page 176
Value Added Tax Chapter ‐21

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.

Large businesses with an annual liability of more than £2 million must pay VAT by making payments of account. 1st
payment on account and 2nd payment on account is made At the end of the second month in a quarter and At the
end of the last month in a quarter respectively and each of them is equal to 1/24th of the total VAT liability for the
previous year while balance is paid At the end of the first month in next 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.

Page 177
Value Added Tax Chapter ‐21

 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.

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

Example 2
Serena is in the process of completing her VAT return for the quarter ended 31 March 2018. The following
information is available:
 Cash sales amounted to £50,400, of which £46,200 was in respect of standard rated sales and £4,200 was in
respect of zero‐rated sales. All of these sales were to non‐VAT registered customers.
 Sales invoices totaling £128,000 were issued in respect of credit sales to VAT registered customers. These
sales were all standard rated. Serena gives her customers a 3% discount for payment within 30 days of the
date of the sales invoice, and 80% of the customers pay within this period.
 Standard rated materials amounted to £32,400, of which £600 were taken by Serena for her personal use.
 Standard rated expenses amounted to £24,800. This includes £1,200 for entertaining UK customers.
 On 15 March 2018 Serena sold a motor car for £9,600 and purchased a new motor car on the same date at a
cost of £16,800. Both motor cars were used for business and private mileage. One of the cars has been given
to employee along with fuel for private mileage. The relevant quarterly scale charge for fuel is £500. These
figures are inclusive of VAT where applicable.
 On 28 March 2018 Serena sold machinery for £3,600 and purchased new machinery at a cost of £21,600. She
paid for the new machinery on this date but did not take delivery or receive an invoice until 6 April 2018.
These figures are inclusive of VAT where applicable.
 On 31 March 2018 Serena wrote off impairment losses in respect of three invoices that were due for payment
on 15 August 2017, 15 September 2017 and 15 October 2017 respectively. The amount of output VAT
originally paid in respect of each invoice was £340.
 During the quarter ended 31 March 2018 £600 was spent on mobile telephone calls, of which 40% relates to
private calls.

Unless stated otherwise all of the above figures are exclusive of VAT.

Page 178
Value Added Tax Chapter ‐21

Solution
VAT return – quarter ended 31 March 2018

£ £
Output VAT
Cash sales (46,200 x 20%) 9,240
Credit sales (128,000 x 97% (100 – 3) x 20% x 80%) and 24,986
Credit sales with no discount (128,000 x 20% x 20%
0
Motor car
Machinery (3,600 x 20/120) 600
Fuel (500/120 ×20) 83
34,909
Input VAT
Materials (32,400 – 600 = 31,800 x 20%) 6,360
Expenses (24,800 – 1,200 = 23,600 x 20%) 4,720
Motor car 0
Machinery (21,600 x 20/120) 3,600
Impairment losses (340 + 340) 680
Telephone (600 x 60% (100 – 40) x 20%) 72
_____ (15,432)
_______
19,477
_______

 The calculation of output VAT on sales must take into account the discount for prompt payment for those
customers who actually avails it.
 Input VAT would not have been recovered in respect of the motor car sold as it was not used exclusively for
business purposes. Therefore, output VAT is not due on the disposal. Similarly, input VAT cannot be recovered
in respect of purchase of the new motor car.
 Input VAT cannot be claimed in respect of the materials taken by Serena for her personal use since the goods
are not used for business purposes.
 Input VAT on business entertainment is not recoverable unless it relates to the cost of entertaining overseas
customers.
 Serena can recover the input VAT in respect of the new machinery purchased in the quarter ended 31 March
2018 because the actual tax point was the date that the machinery was paid for.
 Relief for an impairment loss is not given until six months from the time that payment is due. Therefore relief
can only be claimed in respect of the invoices due for payment on 15 August 2017 and 15 September 2017.
 An apportionment is made where a service such as the use of a telephone is partly for business purposes and
partly for private purposes

Page 179
Value Added Tax Chapter ‐21

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 deregistration

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 above 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
3) there should be no significant gap in the start of other business
4) Nature of the trade would not change

Page 180
Value Added Tax Chapter ‐21

Example 3
Martin is registered for VAT but intends to cease trading on 31 March 2018. On the cessation of trading Martin can
either sell his noncurrent assets and inventory on a piecemeal basis to individual purchasers, or he can sell his
entire business as a going concern to a single purchaser.

Solution
Sale of assets on a piecemeal basis
 Upon the cessation of trading Martin will cease to make taxable supplies, so his VAT registration will be
cancelled on 31 March 2018 or an agreed later date.
 He will have to notify HM revenue and Customs by 30 April 2018, being 30 days after the date of cessation.
 Output VAT will be due in respect of non‐current assets and inventory on hand at 31 March 2018 on which
input VAT has been claimed (although output VAT is not due if it totals less than £1,000).

Sale of business as a going concern

 If the purchaser is already registered for VAT then Martin’s VAT registration will be cancelled as above.
 If the purchaser is not registered for VAT then it can take over Martin’s VAT registration, though from a
commercial point of view this may be inadvisable.
 A sale of a business as a going concern is outside the scope of VAT, and therefore output VAT is not due.

Small Business Schemes

There are three optional schemes available to help small businesses to account for VAT in order to simplify VAT
accounting, reduce administration and help cash flow.

Cash Accounting Scheme

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.

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.

Page 181
Value Added Tax Chapter ‐21

 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)
Dis –advantage
This VAT scheme is not really beneficial to those that claim back VAT on regular basis. This is mainly
because the business owner can only claim repayments once a year.

Flat Rate Scheme

A flat rate of 16.5% has been introduced for those businesses which have no, or only a limited amount of,
purchases of goods. Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate
percentage to total turnover. You will not be expected to establish whether the flat rate of 16.5% is applicable, but
a question could be set where this rate applies. If a business has much input VAT, then the flat rate scheme will not
be beneficial if the 16.5% rate applies.

EXAMPLE 4
Omah registered for VAT on 1 January 2015 and uses the flat rate scheme to calculate his VAT liability. For the year
ended 5 April 2018, he has annual standard rated sales of £100,000, and these are all made to the general public.
Omah has annual standard rated expenses of £16,000. Both figures are exclusive of VAT. The relevant flat rate
scheme percentage for Omah’s trade is 16.5%.

If Omah continues to use the flat rate scheme, then he will pay VAT of £19,800 ((100,000 + 20,000 (output VAT of
100,000 x 20%)) x 16.5%).

Using the normal basis of calculating the VAT liability, Omah would have to pay annual VAT of £16,800 ((100,000 –
16,000) x 20%), which is an annual saving of £3,000 (19,800 – 16,800).

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 exempts sales) should not exceed £230,000

Page 182
Value Added Tax Chapter ‐21

Overseas Aspects of VAT

Purchases from outside the European Union

 UK VAT is charged on goods imported from outside the European Union (EU)

At the point of entry into the UK and

At the same rate applicable to goods purchased within the UK.

Any UK VAT paid by the importer is treated as input tax and is recoverable on the next VAT return in the usual way.

Regular importers can account for VAT on monthly basis by setting up a defer payment with HMRC if bank
guarantee is given.

The same treatment generally applies for services from outside the EU.

Sales outside the European Union

Exports of goods to non‐EU countries are zero‐rated provided evidence is available.

Exports of services to non‐EU countries are outside the scope of VAT.

Purchases from European Union

The purchaser must account for UK VAT on the earlier of

 The date that the invoice is issued
 The 15th of the month following the month in which the goods are acquired.

The UK VAT paid can then be recovered as input tax on the same return in the usual way.

Sales to European Union

The treatment of supplies depends on the status of the customer:
 The supply is zero rated provided the customer's VAT number is quoted on the invoice. (If customer is
registered in their own country)
 If the customer is not registered for VAT in their own country VAT is charged at the same rate as applicable to
a UK customer. (If customer is not registered in their own country)

Supplies of services within the EU are generally subject to the same VAT treatment as supplies of goods.

VAT Administration

VAT return
VAT return periods are usually quarterly

Returns must be filed electronically within one month and 7 days after the end of the VAT return period.

Payment is due within the same period.

Page 183
Value Added Tax Chapter ‐21

VAT records
A taxable person is required to keep detailed records and evidences of all transactions to support VAT returns
(unless it is a member of the flat rate scheme).
Records must be kept for at least six years.

The records that must be retained include:

 Sales and purchase invoices
 Sales and purchase day books
 Cash book, bank statements, vouchers
 VAT accounts and returns
 Statement of comprehensive income/profit and loss account and statement of financial position /balance
sheet

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.

Page 184
Value Added Tax Chapter ‐21

Penalties
Default surcharge
A default surcharge may be levied where a VAT return is submitted late or the payment of VAT is late.
 A surcharge liability notice is issued when the return or payment is made late and the notice period spans 12
months after the end of quarter
 If within the default notice period another default occurs (i.e. either another return is submitted late or
payment is made late), default surcharge period is extended and
a) A default surcharge is levied (for late payments only) at the following rates:

NUMBER OF DEFAULTS SURCHARGE = APPROPRIATE % OF TAX PAID LATE

1 2% Payable if value ≥
2 5% £400

Higher of
3 10%
4 15% Actual amount of VAT
surcharge

£30 is payable

Example 5
Alice has submitted her VAT returns as follows:
VAT paid
Quarter ended Submitted
£
30 September 2016 6,200 Two months late
31 December 2016 28,600 One month late
31 March 2017 4,300 On time
30 June 2017 7,600 On time
30 September 2017 1,900 On time
31 December 2017 3,200 On time
31 March 2018 6,900 Two months late

Solution
Alice always pays any VAT that is due at the same time that the related VAT return is submitted.
 The late submission of the VAT return for the quarter ended 30 September 2016 will have resulted in HM
Revenue and Customs issuing a surcharge liability notice specifying a surcharge period running to 30
September 2017.
 The late payment of VAT for the quarter ended 31 December 2016 will result in a surcharge of £572 (28,600 x
2%).
 In addition, the surcharge period will have been extended to 31 December 2017.
 Alice then submitted four VAT returns on time.

Page 185
Value Added Tax Chapter ‐21

 The late submission of the VAT return for the quarter ended 31 March 2018 will therefore only result in a
surcharge liability notice (specifying a surcharge period running to 31 March 2019).

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 misdeclaration 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. 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.

Page 186
SPECIMEN PAPER

QUESTIONS

Page 187
Section 11
SPECIMEN PAPER QUESTIONS

SECTION A ‐ OBJECTIVE TEST (OT) QUESTIONS

ALL 15 QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED

Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen
answer to each multiple‐choice question.

Each question is worth 2 marks.

1. William is self‐employed, and his tax adjusted trading profit for the year ended 5 April 2018 was £82,700.
During the tax year 2017/18, William contributed £5,400 (gross) into a personal pension scheme.

What amount of class 4 national insurance contributions (NIC) will William pay for the tax year 2017/18?
A. £3,961
B. £6,708
C. £4,069
D. £3,315

2. You are a trainee Chartered Certified Accountant and your firm has a client who has refused to disclose a
chargeable gain to HM Revenue and Customs (HMRC).

From an ethical viewpoint, which of the following actions could be expected of your firm?
1. Reporting under the money laundering regulations.
2. Advising the client to make disclosure.
3. Informing HMRC of the non‐disclosure.
4. Warning the client that your firm will be reporting the non‐disclosure.

A. 2 and 4 only
B. 1 and 2 only
C. 1 and 3 only
D. 1, 2, 3 and 4

3. Martin is self‐employed, and for the year ended 5 April 2018 his trading profit was £110,400. During the tax year 2017/18,
Martin made a gift aid donation of £800 (gross) to a national charity.

What amount of personal allowance will Martin be entitled to for the tax year 2017/18?
A. £11,500
B. £6,700
C. £6,300
D. £0

Page 188
4. For the year ended 31 March 2018, Halo Ltd made a trading loss of £180,000.

Halo Ltd has owned 100% of the ordinary share capital of Shallow Ltd since it began trading on 1 July 2017. For the year ended
30 June 2018, Shallow Ltd will make a trading profit of £224,000.

Neither company has any other taxable profits or allowable losses.

What is the maximum amount of group relief which Shallow Ltd can claim from Halo Ltd in respect of the
trading loss of £180,000 for the year ended 31 March 2018?
A. £180,000
B. £168,000
C. £45,000
D. £135,000

5. For the year ended 31 March 2017, Sizeable Ltd had taxable total profits of £820,000, and for the year ended 31 March 2018
had taxable total profits of £970,000. The profits accrue evenly throughout the year.

Sizeable Ltd has had one 51%‐group company for many years.

How will Sizeable Ltd pay its corporation tax liability for the year ended 31 March 2018?
A. Nine instalments of £18,222 and a balancing payment of £20,300
B. Four instalments of £46,075
C. Four instalments of £41,000 and a balancing payment of £20,300
D. One payment of £184,300

6. For the year ended 31 December 2017, Lateness Ltd had a corporation tax liability of £60,000, which it did not pay until 31
March 2019. Lateness Ltd is not a large company.

How much interest will Lateness Ltd be charged by HM Revenue and Customs (HMRC) in respect of the late
payment of its corporation tax liability for the year ended 31 December 2017?
A. £825
B. £1,650
C. £275
D. £412

7. On 26 November 2017, Alice sold an antique table for £8,700. The antique table had been purchased on 16
May 2013 for £3,800.

What is Alice's chargeable gain in respect of the disposal of the antique table?
A. £4,500
B. £1,620
C. £4,900
D. £0

Page 189
8. On 14 November 2017, Jane made a cash gift to a trust of £800,000 (after deducting all available exemptions).
Jane paid the inheritance tax arising from this gift. Jane has not made any other lifetime gifts.

What amount of lifetime inheritance tax would have been payable in respect of Jane's gift to the trust?
A. £95,000
B. £190,000
C. £118,750
D. £200,000

9. During the tax year 2017/18, Mildred made the following cash gifts to her grandchildren:
1. £400 to Alfred.
2. £140 to Minnie.
3. A further £280 to Minnie.
4. £175 to Winifred.

Which of the gifts will be exempt from inheritance tax under the small gifts exemption?
A. (1), (2), (3) and (4).
B. (2), (3) and (4) only
C. (2) only
D. (4) only

10. For the quarter ended 31 March 2018, Zim had standard rated sales of £49,750 and standard rated expenses
of £22,750. Both figures are exclusive of value added tax (VAT).

Zim uses the flat rate scheme to calculate the amount of VAT payable, with the relevant scheme percentage
for her trade being 12%. The percentage reduction for the first year of VAT registration is not available.

How much VAT will Zim have to pay to HM Revenue and Customs (HMRC) for the quarter ended 31 March
2018?
A. £5,970
B. £3,888
C. £5,400
D. £7,164

11. Which of the following assets will ALWAYS be exempt from capital gains tax?
1. A motor car suitable for private use.
2. A chattel.
3. A UK Government security (gilt).
4. A house.

A. (1) and (3)

B. (2) and (3)
C. (2) and (4)
D. (1) and (4)

Page 190
12. Winston has already invested £8,000 into a cash individual savings account (ISA) during the tax year 2017/18.
He now wants to invest into a stocks and shares ISA.

What is the maximum possible amount which Winston can invest into a stocks and shares ISA for the tax
year 2017/18?
A. £20,000
B. £12,000
C. £0
D. £7,240

13. Ming is self‐employed.

How long must she retain the business and non‐business records used in preparing her self‐assessment tax
return for the tax year 2017/18?

Business records Non business records

A. 31 January 2020 31 January 2020
B. 31 January 2020 31 January 2024
C. 31 January 2024 31 January 2024
D. 31 January 2024 31 January 2020

14. Moon Ltd has had the following results:

Period Profit/ (loss)

£
Year ended 31 December 2017 (105,000)
Four‐month period ended 31 December 2016 43,000
Year ended 31 August 2016 96,000

The company does not have any other income;

How much‐of Moon Ltd's trading loss for the year ended 31 December 2017 can be relieved against its total
profits of £96,000 for the year ended 31 August 2016?
A. £64,000
B. £96,000
C. £70,000
D. £62,000

15. Nigel has not previously been resident in the UK, being in the UK for less than 20 days each tax year. For the
tax year 2017/18, he has three ties with the UK.

What is the maximum number of days which Nigel could spend in the UK during the tax year 2017/18
without being treated as resident in the UK for that year?
A. 90 days
B. 182 days
C. 45 days
D. 120 days

Page 191
SECTION B ‐ O T CASES

ALL THREE QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED

The following scenario relates to questions 16‐20. Delroy and Grant

On 10 January 2018, Delroy made a gift of 25,000 £1 ordinary shares in Dub Ltd, an unquoted trading company; to
his son, Grant. The market value of the shares on that date was £240,000. Delroy had subscribed for the 25,000
shares in Dub Ltd at par on 1 July 2007. Delroy and Grant have elected to hold over the gain as a gift of a business
asset.

Grant sold the 25,000 shares in Dub Ltd on 18 March 2018 for £240,000.

Dub Ltd has a share capital of 100,000 £1 ordinary shares. Delroy was the sales director of the company from its
incorporation on 1 July 2007 until 10 January 2018. Grant has never been an employee or a director of Dub Ltd.

For the tax year 2017/18, Delroy and Grant are both higher rate taxpayers. They have each made other disposals of
assets during the tax year 2017/18, and therefore they have both already utilised their annual exempt amount for
this year.

Marlon and Alvita

On 28 March 2018, Marlon sold a house for £497,000, which he had owned individually. The house had been
purchased on 22 October 2002 for £152,600.

Throughout the period of ownership, the house was occupied by Marlon and his wife, Alvita, as their main
residence. One‐third of the house was always used exclusively for business purposes by the couple. Entrepreneurs'
relief is not available in respect of this disposal.

For the tax year 2017/18, Marlon is a higher rate taxpayer, but Alvita did not have any taxable income. This will
remain the case for the tax year 2018/19. Neither of them has made any other disposals of assets during the year.

16. What is Grant's capital gains tax (CGT) liability for the tax year 2017/18 in respect of the disposal of the
shares in Dub Ltd?
A. £43,000
B. £21,500
C. £0
D. £40,740

17. What would the CGT implications have been if Delroy had instead sold the 25,000 shares in Dub Ltd himself for £240,000
on 10 January 2018, and then gifted the cash proceeds to Grant?

1. Entrepreneurs' relief would have been available.

2. The CGT liability would have been paid later.
3. The cash gift would not have been a chargeable disposal.
4. The cash gift would have qualified for holdover relief.

Page 192
 A. (1) and (3)
B. (2) and (3)
C. (2) and (4)
D. (1) and (4)

18. What is Marlon's chargeable gain for the tax year 2017/18?
A. £229,600
B. £0
C. £114,800
D. £344,400

19. What is the amount of CGT which could have been saved if Marlon had transferred 50% ownership of the house to Alvita
prior to its disposal?
A. £3,164
B. £6,514
C. £3,350
D. £12,544

20. Why would it have been beneficial if Marlon had delayed the sale of the house until 6 April 2018?
A. A lower rate of CGT would have been applicable
B. Two annual exempt amounts would have been available
C. Principal private residence relief would have been greater
D. The CGT liability would have been paid later

Page 193
The following scenario relates to questions 21 — 25.

You should assume that today's date is 15 March 2018.

Opal is aged 71, and has a chargeable estate for inheritance tax (IHT) purposes valued at £950,000.

She owns two properties, respectively valued at £374,000 and £442,000. The first property has an outstanding
repayment mortgage of £160,000, and the second property has an outstanding endowment mortgage of £92,000.
Opal has lived in both properties at some stage.

Opal owes £22,400 in respect of a personal loan from a bank, and she has also verbally promised to pay legal fees
of £4,600 incurred by her nephew. Opal expects the cost of her funeral to be £5,200, and this cost will be covered
by the £6,000 which she has invested in an individual savings account (ISA).

Under the terms of her will, Opal has left all of her estate to her children. Opal's husband is still alive.

On 14 August 2007, Opal had made a gift of £100,000 to her daughter, and on 7 November 2017, she made a gift
of £220,000 to her son. Both these figures are after deducting all available exemptions.

The nil rate bands for the tax year 2007/08 is £300,000.

You should assume that both the value of Opal's estate and the nil rate band will remain unchanged for future
years.

21. What is the net value for the two properties, and related mortgages, which will have been included in the
calculation of Opal's chargeable estate of £950,000?
A. £816,000
B. £564,000
C. £656,000
D. £724,000

22. What is the total amount of deductions (ignoring mortgage debts) which will have been permitted in
calculating Opal's chargeable estate of £950,000?
A. £26,200
B. £22,400
C. £32,200
D. £27,600

23. What amount of IHT will be payable in respect of Opal's chargeable estate valued at £950,000 were she to
die on 20 March 2018?
A. £210,000
B. £298,000
C. £338,000
D. £295,600

Page 194
24. By how much would the IHT payable on Opal's death be reduced if she were to live for another seven years
until 20 March 2025, compared to if she were to die on 20 March 2018?
A. £88,000
B. £40,000
C. £128,000
D. £0

25. Which of the following conditions must be met if Opal wants to make gifts out of her income, so that these
gifts are exempt from IHT?
1. The gifts cannot exceed 10% of income.
2. The gifts must be habitual.
3. Opal must have enough remaining income to maintain her normal standard of living.
4. Opal must make the gifts monthly or quarterly.

A. (3) and (4)

B. (1) and (4)
C. (2) and (3)
D. (1) and (2)

Page 195
The following scenario relates to questions 26 ‐ 30.
The following information is available in respect of Glacier Ltd's value added tax (VAT) for the quarter ended 31 March 2018:
1. Invoices were issued for sales of £44,600 to VAT registered customers. Of this figure, £35,200 was in respect of exempt
sales and the balance in respect of standard rated sales. The standard rated sales figure is exclusive of VAT.
2. In addition to the above, on 1 March 2018 Glacier Ltd issued a VAT invoice for £8,000 plus VAT of £1,600 to a VAT
registered customer in respect of a contract which will be completed on 15 April 2018. The customer paid for the contract
in two instalments of £4,800 on 31 March 2018 and 30 April 2018.
3. The managing director of Glacier Ltd is provided with free fuel for private mileage driven in her company motor car. During
the quarter ended 31 March 2018, the total cost of fuel for business and private mileage was £720, of which £270 was for
private mileage. The relevant quarterly scale charge is £492. All of these figures are inclusive of VAT.

For the quarters ended 30 September 2016 and 30 June 2017, Glacier Ltd was one month late in submitting its VAT returns and in
paying the related VAT liabilities. All of the company's other VAT returns have been submitted on time.

26. What is the amount of output VAT payable by Glacier Ltd in respect of its sales for the quarter ended 31
March 2018?
A. £2,680
B. £3,480
C. £10,520
D. £1,880

27. What output VAT and input VAT entries will Glacier Ltd include on its VAT return for the quarter ended 31 March 2018 in
respect of the managing director's company motor car?
A. Output VAT of £82 and input VAT of £75
B. Output VAT of £0 and input VAT of £75
C. Output VAT of £0 and input VAT of £120
D. Output VAT of £82 and input VAT of £120

28. What surcharge penalty could Glacier Ltd be charged if the company is one month late in paying its VAT liability for the
quarter ended 31 March 2018?
A. 5% of the VAT liability
B. 2% of the VAT liability
C. There will be no penalty
D. 10% of the VAT liability

29. What is the minimum requirement which Glacier Ltd needs to meet in order to revert to a clean default surcharge record?
A. Submit four consecutive VAT returns on time
B. Submit any four VAT returns on time and also pay the related VAT liabilities on time
C. Pay four consecutive VAT liabilities on time
D. Submit four consecutive VAT returns on time and also pay the related VAT liabilities on time

30. In which circumstances will Glacier Ltd be required to issue a VAT invoice?
A. When a standard rated supply is made to any customer
B. When any type of supply is made to any customer
C. When a standard rated supply is made to a VAT registered customer
D. When any type of supply is made to a VAT registered customer

Page 196
SECTION C ‐ CONSTRUCTED RESPONSE (LONG QUESTIONS)

ALL THREE QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED

Question 1

You should assume that today's date is 1 March 2017.

Sarah is currently self‐employed. If she continues to trade on a self‐employed basis, her total income tax liability
and national insurance contributions (NIC) for the tax year 2017/18 will be £12,263.

However, Sarah is considering incorporating her business on 6 April 2017. The forecast taxable total profits of the
new limited company for the year ended 5 April 2018 will be £50,000 (before taking account of any director's
remuneration). Sarah will pay herself gross director's remuneration of £30,000 and dividends of £10,000. The
balance of the profits will remain undrawn within the new company.

Required:
Determine whether or not there will be an overall saving of tax and national insurance contributions (NIC) for
the year ended 5 April 2018 if Sarah incorporates her business on 6 April 2017.

Notes:
1. You are expected to calculate the income tax payable by Sarah, the class 1 NIC payable by Sarah and the
new limited company, and the corporation tax liability of the new limited company for the year ended 5
April 2018.

2. You should assume that the rates of corporation tax remain unchanged.

(10 marks)

Page 197
Question 2
On 6 April 2017, Simon commenced employment with Echo Ltd. On 1 January 2018, he commenced in partnership
with Art running a small music venue, preparing accounts to 30 April. The following information is available for the
tax year 2017/18:

Employment
1. During the tax year 2017/18, Simon was paid a gross annual salary of £23,700.
2. Throughout the tax year 2017/18, Echo Ltd provided Simon with living accommodation. The company had
purchased the property in 2007 for £89,000, and it was valued at £143,000 on 6 April 2017. The annual value
of the property is £4,600. The property was furnished by Echo Ltd during March 2017 at a cost of £9,400. The
living accommodation is not job related.
3. On 1 December 2017, Echo Ltd provided Simon with an interest‐free loan of £84,000, which he used to
purchase a holiday cottage.

Partnership
1. The partnership's tax adjusted trading profit for the four‐month period ended 30 April 2018 is £29,700. This
figure is before taking account of capital allowances.
2. The only item of plant and machinery owned by the partnership is a motor car which cost £18,750 on 1
February 2018. The motor car has a C02 emission rate of 155 grams per kilometer. It is used by Art, and 40% of
the mileage is for private journeys.
3. Profits are shared 40% to Simon and 60% to Art. This is after paying an annual salary of £6,000 to Art.

Property income
1. Simon owns a freehold house which is let out furnished. The property was let throughout the tax year
2017/18 at a monthly rent of £660.
2. During the tax year 2017/18, Simon paid council tax of £1,320 in respect of the property, and also spent
£660 on replacement carpets.

Required:
(a) Calculate Simon's taxable income for the tax year 2017/18.
(13 marks)

(b) State TWO advantages for the partnership of choosing 30 April as its accounting date rather than 5 April.
(2 marks)

(Total: 15 marks)

Page 198
Question 3
(a) You are a trainee accountant and your manager has asked you to correct a corporation tax computation which
has been prepared by the managing director of Naive Ltd. The corporation tax computation is for the year
ended 31 March 2018 and contains a significant number of errors:

Naive Ltd ‐ Corporation tax computation for the year ended 31 March 2018
£
Trading profit (W1) 372,900
Loan interest received (W2) 32,100

405,000

Corporation tax (£405,000 at 19%) 76,950

Workings
(W1) Trading profit
£
Profit before taxation 274,530
Depreciation 15,740
Donations to political parties 400
Qualifying charitable donations 900
Accountancy 2,300
Legal fees in connection with the issue of loan notes (the
loan was used to finance the company's trading activities) 5,700
Entertaining suppliers 3,600
Entertaining employees 1,700
Gifts to customers (pens costing £40 each and displaying
Naive Ltd's name) 920
Gifts to customers (food hampers costing £45 each and
displaying Naive Ltd's name) 1,650
Capital allowances (W3) 65,460

Trading profit 372,900

(W2) Loan interest received

£
Loan interest receivable 32,800
Accrued at 1 April 2017 10,600
Accrued at 31 March 2018 (11,300)

Loan interest received 32,100

The loan was made for non‐trading purposes.

Page 199
 (W3) Capital allowances
Main pool Motor car Special rate Allowances
pool
£ £ £ £
Tax written down value (TWDV)
brought forward 12,400 13,600
Additions
Machinery 42,300
Motor car [1], 13,800
Motor car [2] 14,000
68,500
Annual investment allowance (AIA) (68,500) 68,500
Disposal proceeds (9,300)

4,300 (4,300)
Balancing allowance (4,300)

Writing down allowance (WDA) ‐18% (2,520) x 50% 1,260

TWDV carried forward 0 11,480

Total allowances 65,460

1. Motor car [1] has a C02 emission rate of 110 grams per kilometre.
2. Motor car [2] has a C02 emission rate of 155 grams per kilometre. This motor car is used by the sales manager
and 50% of the mileage is for private journeys.
3. All of the items Included in the special rate pool at 1 April 2017 were sold for £9,300 during the year ended 31
March 2018. The original cost of these items was £16,200.

Required:
Prepare a revised version of Naive Ltd's corporation tax computation for the year ended 31 March 2018.

Note: Your calculations should commence with the profit before taxation figure of £274,530, and you should
indicate by the use of zero (0) any items in the computation of the trading profit for which no adjustment is
required.
(12 marks)

(b) The managing director of Naive Ltd understands that the company will have to file its self‐assessment
corporation tax returns online, and that the supporting accounts and tax computations will have to be filed
using the inline extensible Business Reporting Language (iXBRL). The managing director is concerned about
how the company will be able to produce documents in this format.

Required:
Explain the options available to Naive Ltd regarding the production of accounts and tax computations in the
iXBRL format. (3 marks)
(Total: 15 marks)

Page 200
 ANSWERS TO

SPECIMEN PAPER

QUESTIONS

Page 201
SECTION A
1. C

Class 4 £
£36,836 (£45,000 ‐ £8,164) x 9% 3,315
£37,700 (£82,700‐£ 45,000) x 2% 754
4,069
2. B

3. B
£
Personal allowance 11,500
Restriction (£110,400‐ £800 ‐£100,000 = £9,600/2) (4,800)
Restricted personal allowance 6,700

4. D
Maximum loss relief = Lower of: £
(£180,000 x 9/12) 135,000
(£224,000 x 9/12) 168,000
Maximum loss relief 135,000

5. B
(£970,000 x 19%)/4 = £46,075

6. A
£60,000 x 2.75% x 6/12 = £825 (period 1 October 2018 to 31 March 2019)

7. A
£2,700 (£8,700 ‐ £6,000) x 5/3 = £4,500
This is less than £4,900 (£8,700‐£3,800).

8. C
£
Gross chargeable amount 800,000
Nil rate band available at the date of the gift (2017/18) (325,000)
Taxable amount 475,000
IHT payable at 25% 118,750

9. D

10. D
£49,750 x 120/100 at 12% = £7,164

Page 202
11. A

12. B
£20,000 ‐ £8,000 = £12,000

13. C

14. D
The maximum loss relief is the lower of:
 Remaining loss: £62,000 (£105,000 ‐ £43,000)
 Profits for 8 months ended 31.8.16: £64,000 (£96,000 x 8/12)

15. A

Page 203
SECTION B
16. A
£215,000 (£240,000 ‐ £25,000) at 20% = £43,000

17. A

18. C
£344,400 (£497,000‐£152,600) x 1/3 = £114,800

19. B
(£11,300 at 28%) + (£33,500 at 10% (28% ‐ 18%)) = £6,514

20. D

21. C
£374,000 + £442,000 ‐ £160,000 = £656,000

22. D
£22,400 + £5,200 = £27,600

23. B
£ £
Gross chargeable estate 950,000
Nil rate band at death (2017/18) 325,000
Gross chargeable transfers £ 7 years (220,000)
(20.3.2011‐20.3.18) (105,000)
Residence NRB (100,000)

Taxable amount 745,000

IHT payable at 40% 298,000

24. A
£220,000 at 40% = £88,000

Page 204
25. C

26. B
(£9,400 (£44,600 ‐£35,200) x 20%) + £1,600 = £3,480

27. D
Output VAT £492 x 20/120 = £82
Input VAT £720 x 20/120 = £120

28. A
Second default during surcharge period.

29. D

30. C

Page 205
SECTION C

SARAH
(1) Sarah's income tax payable 2017/18:
£
Director's remuneration 30,000
Dividends 10,000

40,000

Personal allowance (11,500)

Taxable Income 28,500

Income tax £

£
18,500 x 20% 3,700
5,000 x 0% 0
5,000 x 7.5% 375

28,500

Income tax payable 4,075

(2) National insurance contributions (NIC) 2017/18:

£
Employee class 1 (£21,836 (£30,000 ‐ £8,164) x 12% ) 2,620

Employer's class 1 (£21,836 (£30,000 ‐ £8,164) x 13.8%) 3,013

(3) Corporation tax liability of the new limited company for the year ended 5 April 2018:
£
Trading profit 50,000
Director's remuneration (30,000)
Employer's class 1 NIC (3,013)

Taxable total profits 16,987

Corporation tax (£16,987 x 19%) 3,228

Page 206
(4) The total tax and NIC cost if Sarah incorporates her business is £12,936 (£4,075 + £2,620+ £3,013+£3,228).

(5) Therefore, if Sarah incorporated her, business there would be an overall increase in tax and NIC of £673
(12,936 ‐ 12,263) compared to continuing on a self‐employed basis.

ACCA marking scheme

Marks
Sarah's income tax payable 3.5
National insurance contributions 3.0
Corporation tax liability 2.0
Total tax and NIC cost 1.0
Increase 0.5
Total 10.0
‐‐‐

Page 207
SIMON
(a) Simon ‐ Taxable income 2017/18
£
Employment income
Salary 23,700
Living accommodation ‐Annual value 4,600
‐ Additional benefit (W1) 1,700
‐ Furniture (£9,400 x 20%) 1,880
Beneficial loan (£84,000 x 4/12 x 2.5%) 700

32,580

Trading profit (W2) 8,220

Property income (W4) 5,940

Total income 46,740

Personal allowance (11,500)

Taxable income 35,240

Workings

(W1) Living accommodation additional benefit

(1) The benefit is based on the market value when first provided.
£
Market value 143,000
Limit (75,000)
68,000

(2) The additional benefit is therefore £1,700 (£68,000 at 2.5%).

(W2) Trading profit

(1) Simon's share of the partnership's trading profit for the period ended 30 April 2018 is £10,960 calculated
as follows:
£
Trading profit 29,700
Capital allowances (W3) (300)

29,400

Salary paid to Art (£6,000 x 4/12) (2,000)

27,400

Page 208
 Profit share (£27,400 x 40%) 10,960

(2) Simon's trading income assessment for 2017/18 is £8,220 (£10,960 x 3/4).

(W3) Capital allowances

Motor car Allowances
£ £
Addition 18,750
WDA ‐ 8% x 4/12 (500) x 60% 300

WDV carried forward 18,250

(W4) Property income

£ £
Rent receivable (£660 x 12) 7,920
Council tax 1,320
Replacement carpets 660

(1,980)

Property income 5,940

(b)
(1) The interval between earning profits and paying the related tax liability will be 11 months longer. This can
be particularly beneficial where profits are rising.
(2) It will be possible to calculate taxable profits well in advance of the end of the tax year, making it much
easier to implement tax planning and make pension contributions.

Marking scheme
Marks
(a) Calculate Simon's taxable income
Employment income 5.0
Trading profit 5.0
Property income 2.5
Personal allowance 0.5
13.0

(b) Advantages of accounting date

Two advantages 2.0
Total 15.0
‐‐‐

Page 209
NAIVE LTD
(a) Naive Ltd ‐ Corporation tax computation for the year ended 31 March 2018
£
Trading profit (W1) 248,340
Loan interest receivable 32,800

Total profits 281,140

Qualifying charitable donations (900)

Taxable total profits 280,240

Corporation tax (£280,240 x 19%) 53,246

Workings
(W1) Trading profit for the year ended 31 March 2018
£ £
Profit before taxation 274,530
Depreciation 15,740
Donations to political parties 400
Qualifying charitable donations 900
Accountancy 0
Legal fees 0
Entertaining suppliers 3,600
Entertaining employees 0
Gifts to customers ‐ pens 0
Gifts to customers ‐food hampers 1,650
Capital allowances (W2) 48,480

296,820 48,480

(48,480)

Trading profit 248,340

Page 210
 (W2) Capital allowances
Main pool Special rate pool Allowances
£
£ £ 13,600 £
TWDV brought forward 12,400
Additions qualifying for AIA
Machinery 42,300
AIA‐100% (42,300) 0 42,300

Other additions
Motor car [1] 13,800
Motor car [2] 14,000
Proceeds (9,300)
26,200 18,300
WDA‐18% (4,716) 4,716
WDA‐8% (1,464) 1,464

TWDV carried forward 21,484 16,836

Total allowances 48,480

(b)
(1) If Naive Ltd has straightforward accounts, it could use the software provided by HM Revenue and
Customs. This automatically produces accounts and tax computations in the iXBRL format.
(2) Alternatively, other software which automatically produces iXBRL accounts and computations could be
used.
(3) A tagging service could be used to apply the appropriate tags to the accounts and tax computations, or
Naive Ltd could use software to tag documents itself.

ACCA marking scheme

Marks
(a) Corporation tax computation
Trading profit 5.0
Capital allowances 5.0
Loan interest 1.0
Qualifying charitable donations 0.5
Corporation tax 0.5
12.0

(b) iXBRL
HMRC software 1.0
Other software 1.0

Page 211
 Tagging service 1.0
3.0

Total 15.0

Page 212