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‘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
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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
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