‘Taxation is an excellent text. Comprehensive in its coverage and set at just the right level – no competition comes close!’ Paul Collier, University of Exeter ‘Melville is always particularly well updated, with changed material fully integrated into the text, unlike some books that seem to bolt on new sections at random.’ Richard Teather, University of Bournemouth ‘I think this is a superb text … I can say without reservation this is a comprehensive and user-friendly text.’ Siobhan Goggin, University of Lincoln This book will be of value to both undergraduate and professional students of business and accounting, and will be particularly useful for students preparing for the following examinations: ICAEW Professional Stage, Principles of Taxation; Taxation; ACCA Fundamentals Level, Taxation; ACCA Technician Scheme, Preparing Taxation Computations; CIPFA Diploma Stage, Taxation; AAT Technician Stage, Preparing Personal and Business Tax Computations; ATT Certificates, Personal Taxation; Business Taxation and Accounting Principles; AIA Foundation Level, Auditing and Taxation; IFA Technician Level, Personal and Business Taxation. Alan Melville FCA BSc Cert. Ed. is a Senior Lecturer with many years’ experience of teaching taxation. Key features: ❒ Explanations are clear and supported by numerous worked examples. ❒ Each chapter ends with exercises that thoroughly test the reader's understanding of the topics introduced in the chapter. ❒ Contains four sets of review questions, one at the end of each part, drawn from past examination papers of the professional accounting bodies. ❒ Solutions to most of the exercises and review questions are included in the final part of the book. Remaining solutions are provided in an Instructor's Manual. New topics covered in this edition include: ❒ Aditional rate of income tax from 2010–11. ❒ Income-related restriction in the personal allowance from 2010–11. ❒ Repeal of the furnished holiday accommodation rules. ❒ Increases in the ISAs limits. ❒ Forthcoming changes to company car tax. ❒ Modernisation of tax relief for business expenditure on cars. ❒ Introduction of temporary first year allowances on plant and machinery. ❒ Extended carry-back of trading losses. ❒ The Corporation Tax Act 2009. ❒ Changes to the taxation of foreign profits. ❒ Changes to the VAT flat-rate scheme. ❒ New time limits for tax claims. Cover image: PA Photos ● 15th Annual Edition ● Class Tested ● Over 250 Worked Examples ● Over 250 Exercises and Questions ● On ACCA, CIPFA, AIA and IFA Reading Lists Finance Act 2009 Alan Melville Finance Act 2009 Melville www.pearson-books.com 15th Edition NOW IN ITS FIFTEENTH EDITION Taxation Taxation Taxation is the number one textbook on taxation in the UK. Now in its 15th annual edition, this excellent text has established itself as a reliable and comprehensive guide for students taking a first level course in the subject. This fifteenth edition brings the book completely up-to-date in accordance with the provisions of the Finance Act 2009. CVR_MELV0156_15_SE_CVR.indd 1 14/7/09 12:44:39 Taxation Supporting resources Visit www.pearsoned.co.uk/melville to find valuable online resources For instructors • Complete,downloadableInstructor’sManual FormoreinformationpleasecontactyourlocalPearsonEducationsalesrepresentative or visit www.pearsoned.co.uk/melville Weworkwithleadingauthorstodevelopthe strongesteducationalmaterialsinaccounting, bringingcutting-edgethinkingandbestlearning practicetoaglobalmarket. Underarangeofwell-knownimprints,including FinancialTimesPrenticeHall,wecrafthigh qualityprintandelectronicpublicationswhich helpreaderstounderstandandapplytheircontent, whetherstudyingoratwork. Tofindoutmoreaboutthecompleterangeofour publishingpleasevisitusontheWorldWideWebat: www.pearsoned.co.uk AlanMelville FCA,BSc,Cert.Ed. Taxation Finance Act 2009 Fifteenthedition Pearson Education Limited EdinburghGate Harlow EssexCM202JE England andAssociatedCompaniesthroughouttheworld Visit us on the World Wide Web at: www.pearsoned.co.uk Firstpublished1995 Fifteenth edition published 2010 ©PearsonProfessionalLimited1995,1996 ©FinancialTimesProfessionalLimited1997,1998 ©PearsonEducationLimited1999,2010 TherightofAlanMelvilletobeidentifiedasauthorofthisworkhasbeenasserted byhiminaccordancewiththeCopyright,DesignsandPatentsAct1988. Allrightsreserved.Nopartofthispublicationmaybereproduced,storedina retrievalsystem,ortransmittedinanyformorbyanymeans,electronic,mechanical, photocopying,recordingorotherwise,withouteitherthepriorwrittenpermission ofthepublisheroralicencepermittingrestrictedcopyingintheUnitedKingdom issuedbytheCopyrightLicensingAgencyLtd,SaffronHouse,6–10KirbyStreet, LondonEC1N8TS. Alltrademarksusedhereinarethepropertyoftheirrespectiveowners.Theuseof anytrademarkinthistextdoesnotvestintheauthororpublisheranytrademark ownershiprightsinsuchtrademarks,nordoestheuseofsuchtrademarksimplyany affiliationwithorendorsementofthisbookbysuchowners. CrownCopyrightmaterialisreproducedwiththepermissionoftheControllerof HMSOandtheQueen'sPrinterforScotland. ISBN:978-0-273-73015-6 British Library Cataloguing-in-Publication Data AcataloguerecordforthisbookisavailablefromtheBritishLibrary Library of Congress Cataloging-in-Publication Data AcatalogrecordforthisbookisavailablefromtheLibraryofCongress 10987654321 1312111009 PrintedandboundbyAshfordColourPressLtd,Gosport Website AwebsitetoaccompanythefifteentheditionofTaxationcanbefoundat www.pearsoned.co.uk/melville The publisher's policy is to use paper manufactured from sustainable forests. v Contents Preface ix Acknowledgements x Summary of tax data xi Part 1 INCOME TAX AND NATIONAL INSURANCE 1 Introduction to the UK tax system 3 UK taxes 3 Sources of tax law 4 The tax year 6 Structure of HM Revenue and Customs 6 Administration of the tax system 7 Self Assessment 7 Appeals 11 Tax evasion 13 Tax avoidance 13 2 Introduction to income tax 15 Taxable persons 15 Classification of income 16 Exempt income 17 Structure of an income tax computation 18 Married couples and civil partners 19 Rates of income tax for 2009-10 19 Income taxed at source 20 Savings income 22 Dividends from UK companies 26 Rates of income tax for 2010-11 28 3 Personal allowances 31 Personal allowances for 2009-10 31 The personal allowance 32 Blind person's allowance 33 Tax reducers 34 Married couple's allowance 34 Personal allowances for 2010-11 39 4 Payments and gifts eligible for tax relief 42 Payments and gifts deductible from total income 42 Eligible interest payments 48 Annual payments and patent royalties 48 Gifts of shares or property to charity 49 Payments which are tax reducers 49 Maintenance payments 50 Loans used to purchase a life annuity 50 Gift Aid 51 5 Income from property 55 Definition of property income 55 Basis of assessment and allowable expenditure 56 Capital expenditure 57 Losses 58 Lease premiums 59 "Rent-a-room" relief 62 Furnished holiday lettings 63 6 Income from savings and investments 67 Interest received 67 Dividends received 69 Tax-efficient investments 70 Individual Savings Accounts 70 Enterprise Investment Scheme 72 Venture Capital Trusts 73 Community investment tax credit 74 Child Trust Funds 75 Income from trusts and settlements 76 Miscellaneous income 79 7 Income from employment 82 Employment and self-employment 82 Basis of assessment 85 Employment income 85 Non-taxable employment income 86 Allowable expenses 88 Benefits in kind 91 Benefits assessable on all employees 92 Special rules for P11D employees 94 Payments made on termination of employment 102 CONTENT S vi The PAYE system 104 Construction industry scheme 108 Employee incentive schemes 109 8 Income from self-employment: Computation of income 115 The badges of trade 115 The calculation of trading profits 117 Deductibility of expenditure 118 Disallowed expenditure 118 Allowable expenditure 121 Trading income not in the accounts 124 Non-trading income in the accounts 124 Expenditure not in the accounts 124 Post-cessation receipts 125 9 Income from self-employment: Basis periods 130 The current year basis 130 Commencement of trade 131 Cessation of trade 134 Change of accounting date 136 Transitional overlap relief 140 Averaging of trading profits 141 10 Income from self-employment: Capital allowances 148 Eligible expenditure 148 Chargeable periods 148 Plant and machinery 149 Capital allowances on plant and machinery 151 Writing down allowance 152 Annual investment allowance 155 First year allowance 156 Balancing allowances and charges 160 Non-pooled assets 160 Allowances on cessation of trade 164 Industrial buildings allowances 165 Agricultural buildings allowances 170 Miscellaneous capital allowances 171 11 Income from self-employment: Trading losses 176 Relief for trading losses 176 Carry-forward trade loss relief 177 Trade loss relief against total income 179 Temporary extension of carry-back relief 182 Early trade losses relief 183 Terminal trade loss relief 185 Post-cessation trade relief 187 Transfer of a business to a company 187 Losses on shares in unlisted trading companies 188 12 Income from self-employment: Partnerships 191 Principles of partnership taxation 191 Notional profits and losses 194 Change in partnership composition 195 Non-trading income 197 Trading losses 198 13 Pension contributions 203 Registered pension schemes 203 Tax relief for contributions by members 205 Tax relief for contributions by employers 208 Annual allowance charge 210 Lifetime allowance charge 213 Tax relief on pension contributions as from 6 April 2011 214 14 Payment of income tax, surcharges, interest and penalties 217 Payment of income tax 217 Surcharges 219 Interest on income tax 220 Penalties 222 15 National Insurance contributions 225 Class 1 225 Class 1A 231 Class 1B 231 Class 2 232 Class 3 232 Class 4 233 Annual maximum contributions 234 Review questions (Set A) 238 Part 2 CAPITAL GAINS TAX 16 Introduction to capital gains tax 247 Chargeable persons 247 Chargeable assets 248 Chargeable disposals 249 CONTENT S vii Basis of assessment 250 Rate of CGT 251 Relief for capital losses 252 Relief for trading losses 255 Administration of CGT 257 17 Computation of gains and losses 261 Layout of a CGT computation 261 Disposal value 262 Allowable expenditure 262 Part disposals 264 Assets with negligible value 266 Assets held on 31 March 1982 267 18 Chattels and wasting assets 271 The chattels exemption 271 Chattels disposed of at a loss 273 Part disposals of chattels 273 Wasting chattels 276 Wasting assets 277 Leases 279 19 Shares and securities 288 The share matching rules 288 The Section 104 holding 290 Bonus issues 293 Rights issues 294 Capital distributions 296 Takeovers 298 Gilts and qualifying corporate bonds 300 20 Principal private residences 305 Principal private residence 305 Partial exemption 306 Deemed residence 307 Letting relief 309 Business use 311 21 CGT reliefs 314 Damaged assets 314 Destroyed assets 317 Replacement of business assets 318 Gift of business assets 321 Transfer of a business to a limited company 323 Entrepreneurs' relief 324 Reinvestment into EIS shares 327 Loans to traders 327 Review questions (Set B) 331 Part 3 CORPORATION TAX 22 Introduction to corporation tax 339 Scope of corporation tax 339 Accounting periods 340 Chargeable profits 341 Trading income 342 Income from property 349 Income from non-trading loans 349 Miscellaneous income 349 Franked investment income 351 Charges on income 351 Loan relationships 351 Long periods of account 356 23 Corporate chargeable gains 361 Chargeable disposals and chargeable assets 361 Basis of assessment 362 Computation of gains and losses 362 Indexation allowance 363 Assets held on 31 March 1982 366 The rebasing election 369 Assets acquired before 6 April 1965 369 Disposals of shares or securities 370 24 Computation and payment of the corporation tax liability 381 Corporation tax financial years 381 Rates of corporation tax 382 Marginal relief 385 Corporate Venturing Scheme 388 Due date of payment 388 Self Assessment 390 Interest on underpaid and overpaid corporation tax 392 Penalties 393 25 Income tax and advance corporation tax 397 Income received net of income tax 397 Payments made net of income tax 398 The quarterly accounting system 399 Tax suffered in excess of tax deducted 401 ACT before 6 April 1999 403 Abolition of ACT 406 Shadow ACT 406 26 Corporation tax losses 412 Relief for trading losses 412 CONTENT S viii Section 393(1) relief 413 Unrelieved charges on income 414 Section 393A(1) relief 416 Repayments of corporation tax 420 Anti-avoidance legislation 421 Choice of loss relief 422 Non-trading losses 422 27 Close companies and companies with investment business 426 Close companies 426 Definition of a close company 426 Exceptions 429 Consequences of close company status 430 Close investment-holding companies 433 Companies with investment business 433 Unincorporated business vs close company 434 Incorporation 439 28 Groups of companies and reconstructions 442 Associated companies 442 Transfer pricing 444 51% groups 444 75% groups 446 Group relief 447 Transfer of chargeable assets within a group 450 Capital losses 452 Consortia 454 Company reconstructions 456 Review questions (Set C) 459 Part 4 MISCELLANEOUS 29 Value added tax (1) 469 The principle of VAT 469 Taxable persons 470 Taxable supplies 470 Exempt supplies 472 Reduced rate supplies 473 Zero rate supplies 473 The value of a supply 474 Imports and exports 477 Reverse charge procedure in the UK 478 Registration 479 Deregistration 484 30 Value added tax (2) 486 Accounting for VAT 486 The tax point 487 Tax invoices 487 Accounting records 488 Special schemes 489 Bad debts 492 Non-deductible input tax 493 Partial exemption 495 Retail schemes 496 Administration of VAT 499 Penalties, surcharges and interest 501 31 Inheritance tax 506 Chargeable transfers of value 506 Exempt transfers 508 Potentially exempt transfers 510 IHT payable on chargeable lifetime transfers 512 IHT payable on death 514 Valuation 519 Business property relief 521 Agricultural property relief 522 Administration of IHT 523 32 Overseas aspects of taxation 526 Residence, ordinary residence and domicile 526 Income tax - general rules 529 Double taxation relief 530 Income from employment 531 Trading income 533 Income from property and investments 534 Capital gains tax - general rules 535 Inheritance tax - general rules 536 Corporation tax - general rules 536 Controlled foreign companies 539 Double taxation relief for companies 540 Review questions (Set D) 548 Part 5 ANSWERS Answers to exercises 557 Answers to review questions 609 Index 621 ix Preface The main aim of this book is to describe the UK taxation system in sufficient depth and with sufficient clarity to meet the needs of those undertaking a first course of study in taxation. The book has not been written with any specific syllabus in mind but will be useful to students who are preparing for any of the following examinations: Examining body Level Examination title(s) Institute of Chartered Accountants Professional Stage Principles of Taxation; Taxation in England and Wales Association of Chartered Certified Fundamentals Level Taxation Accountants Technician Scheme Preparing Taxation Computations Chartered Institute of Public Diploma Stage Taxation Finance and Accountancy Association of Taxation Certificates Personal Taxation; Business Taxation Technicians and Accounting Principles Association of Accounting Technician Stage Preparing Personal and Business Technicians Taxation Computations Association of International Foundation Level Auditing and Taxation Accountants Institute of Financial Accountants Technician Level Personal and Business Taxation The book will also be of value to those studying taxation as part of a university or college course in accounting, finance or business studies and may be used as an introductory text for a study of taxation at an advanced level. Every effort has been made to explain the tax system as clearly as possible. There are numerous worked examples and each chapter (except Chapter 1) concludes with a set of exercises which thoroughly test the reader's grasp of the new topics introduced in that chapter. The book also contains four sets of review questions which are drawn from the past examination papers of the professional accounting bodies. The solutions to most of these exercises and review questions are to be found at the back of the book but the solutions to the exercises and questions which are marked with an asterisk (*) are provided in a separate Instructor's Manual. This fifteenth edition incorporates the provisions of the Finance Act 2009. Alan Melville July 2009 [...]... Inheritance Tax Act 1984 IHTA 1984 Corporation tax Income and Corporation Taxes Act 1988 Taxation of Chargeable Gains Act 1992 Capital Allowances Act 2001 Corporation Tax Act 2009 ICTA 1988 TCGA 1992 CAA 2001 CTA 2009 National Insurance Social Security Contributions & Benefits Act 1992 SSCBA 1992 Value Added Tax Act 1994 VATA 1994 Taxes Management Act 1970 Customs and Excise Management Act 1979 TMA 1970... or Acts of Parliament The main statutes currently in force for each tax are as follows: Tax Statute Abbreviation Income tax Income and Corporation Taxes Act 1988 Capital Allowances Act 2001 Income Tax (Earnings and Pensions) Act 2003 Income Tax (Trading and Other Income) Act 2005 Income Tax Act 2007 ICTA 1988 CAA 2001 ITEPA 2003 ITTOIA 2005 ITA 2007 Capital gains tax Taxation of Chargeable Gains Act. .. April to the following 5 April For instance, the tax year referred to as 2008-09 began on 6 April 2008 and ended on 5 April 2009 This book takes into account the provisions of the Finance Act 2009 (based on the April 2009 Budget proposals) and describes the UK tax system for tax year 2009- 10 It is worth noting that the tax year for corporation tax purposes is slightly different from the fiscal year A corporation... to be located in the Income and Corporation Taxes Act 1988, but this legislation has been rewritten in recent years and moved to new statutes Income tax legislation can now be found mainly in the Income Tax (Earnings and Pensions) Act 2003, the Income Tax (Trading and Other Income) Act 2005 and the Income Tax Act 2007, as amended by subsequent Finance Acts Taxable persons Individuals who are resident... documents produced by HM Revenue and Customs as a guide to the law on taxation are as follows: (a) Statements of Practice A Statement of Practice (SP) sets out the HMRC interpretation of tax legislation and clarifies the way in which the law will be applied in practice For example, SP 2/02 (the second SP issued in 2002) deals with the taxation treatment of exchange rate fluctuations (b) Extra-Statutory... clearer and easier to understand The project's output so far includes CAA 2001, ITEPA 2003, ITTOIA 2005, ITA 2007 and CTA 2009 Two further Acts are expected in 2010 The first of these will complete the rewrite of corporation tax The second Act will be concerned with international aspects of taxation 4 CHAP TER 1: IN TRODU CT ION TO THE U K TAX S YST E M European Union law Membership of the European Union... agricultural buildings (2009- 10) Annual Investment Allowance (AIA): AIA rate AIA annual limit First Year Allowance (FYA) on qualifying plant and machinery: Acquired 6 April 2009 to 5 April 2010† Very low emission cars Energy saving or water efficient technology † Dates are 1 April 2009 to 31 March 2010 for companies 20% 10% 2% 100% £50,000 40% 100% 100% National Insurance Contributions 2009- 10 2008-09 £110... individuals and disabled trusts - other trusts Chattels exemption 2009- 10 18% £10,100 £5,050 £6,000 2008-09 18% £9,600 £4,800 £6,000 Corporation Tax Financial Year FY2009 FY2008 FY2007 Main rate 28% 28% 30% Small companies rate (SCR) 21% 21% 20% SCR lower limit £300,000 £300,000 £300,000 SCR upper limit £1,500,000 £1,500,000 £1,500,000 Marginal relief fraction 7/400 7/400 1/40 Notes: (a) The main rate for FY2010... April 2008 to 5 April 2009 6 April 2009 to 5 April 2010 0% Band 0 - £250,000 0 - £255,000 0 - £263,000 0 - £275,000 0 - £285,000 0 - £300,000 0 - £312,000 0 - £325,000 Rate on chargeable lifetime transfers 20% 20% 20% 20% 20% 20% 20% 20% Rate on death 40% 40% 40% 40% 40% 40% 40% 40% Value Added Tax Standard rate† 17.5% (from 1 April 1991) Registration threshold £68,000 (from 1 May 2009) Deregistration... managed by the Chancellor of the Exchequer and has overall responsibility for the public finances of the UK The main duties of the Commissioners for Revenue and Customs are as follows: (a) to implement the law relating to direct and indirect taxation (b) to provide advice to the Chancellor of the Exchequer on taxation matters (c) to administer the many divisions and offices into which HMRC is organised . Melville Finance Act 2009 Melville www.pearson-books.com 15th Edition NOW IN ITS FIFTEENTH EDITION Taxation Taxation Taxation is the number one textbook on taxation. Weworkwithleadingauthorstodevelopthe strongesteducationalmaterialsinaccounting, bringingcutting-edgethinkingandbestlearning practicetoaglobalmarket. Underarangeofwell-knownimprints,including FinancialTimesPrenticeHall,wecrafthigh qualityprintandelectronicpublicationswhich helpreaderstounderstandandapplytheircontent, whetherstudyingoratwork. Tofindoutmoreaboutthecompleterangeofour publishingpleasevisitusontheWorldWideWebat: www.pearsoned.co.uk AlanMelville FCA,BSc,Cert.Ed. Taxation Finance Act 2009 Fifteenth edition Pearson Education Limited EdinburghGate Harlow EssexCM202JE England andAssociatedCompaniesthroughouttheworld Visit