PAGE 3 AIM To develop knowledge and understanding in the core areas of tax related to businesses and their employees. OBJECTIVES On completion of this paper candidates should be able to: • explain the operation of the UK tax system • prepare computations of the corporation tax liability for individual companies and groups of companies • prepare computations of the income tax liability for employees, sole traders and partnerships • prepare computations of the chargeable gains arising on incorporated and unincorporated businesses • explain and apply the principles and scope of Value Added Tax • explain the impact of National Insurance Contributions on employees, employers and the self-employed • explain the use of exemptions and reliefs in deferring or minimising tax liabilities • demonstrate the skills expected at Part 2. POSITION OF THE PAPER IN THE OVERALL SYLLABUS An understanding of the formats of accounts used for sole traders, partnerships and companies from Paper 1.1 Preparing Financial Statements is assumed. There is no substantial integration with other papers in Part 2. Paper 2.3 Business Taxation (United Kingdom) The coverage in Paper 2.3 will provide the grounding for the study of the optional Paper 3.2 Advanced Taxation. Paper 3.2 develops the topics by applying the tax knowledge to problems encountered in practice, by giving more emphasis to planning to minimise or defer tax and by examining the interaction of taxes. SYLLABUS CONTENT 1 Corporate businesses (a) Scope of corporation tax. (b) Residence. (c) Profits chargeable to corporation tax (i) schedule D case I (ii) capital allowances (iii) relief for trading losses (iv) schedule A (v) schedule D case III (vi)Charges on income. (d) Chargeable gains (i) principles and scope (ii) the basis of calculation (iii) the identification and application of relevant exemptions and reliefs. (e) Calculation of the corporation tax liability. (f) Overseas aspects (i) trading overseas via a subsidiary or a branch (ii) double taxation relief (iii) transfer pricing. (g) Groups of companies. (h) Self assessment system. (i) Value Added Tax. 2 Unincorporated businesses (a) Basic income tax computation. (b) Self assessment system. (c) Schedule D case I/II (i) badges of trade (ii) computation of assessable profit (iii) basis of assessment (iv)change of accounting date (v) capital allowances (vi)relief for trading losses (vii) partnerships and limited liability partnerships 3.2 Advanced Taxation 2.3 Business Taxation PAGE 4 Paper 2.3: Business Taxation (United Kingdom) (Continued) (viii) personal pensions. (d) Capital gains tax (i) principles and scope (restricted to business assets) (ii) the basis of calculation (iii) the identification and application of relevant exemptions and reliefs. (e) Value Added Tax. (f) Class 2 and Class 4 NIC. 3 Employees (a) Employment Income (i) basis of assessment (ii) allowable deductions (iii) PAYE system (iv)benefits. (b) Occupational pension schemes. (c) Class 1 and Class 1A NIC. 4 Tax planning (a) Employment v self-employment. (b) Remuneration packages. (c) Choice of business medium. (d) Incorporation of a business. (e) Disposal of a business. (f) Directors and shareholders. EXCLUDED TOPICS The following topics are specifically excluded from Paper 2.3: 1 Corporate businesses (a) Scope of corporation tax (i) investment companies (ii) close companies (iii) companies in receivership and liquidation (iv) anti-avoidance legislation (v) reorganisations (vi) purchase by a company of its own shares (vii) personal service companies. (c) Profits chargeable to corporation tax (i) research and development expenditure (ii) the 100% first-year allowance for flats above shops (iii) the 100% first-year allowance for water technologies (iv)capital allowances for agricultural buildings, patents, scientific research and know how (v) in respect of industrial buildings allowance: enterprise zones, initial allowances, and the sale of an industrial building at less than original cost following a period of non-industrial use (note that sales for more than original cost are examinable) (vi)furnished holiday lettings (vii) non-trading deficits on loan relationships (viii) trade charges on income (ix)relief for intangible assets (x) the corporate venturing scheme. (d) Chargeable gains (i) assets held at 31 March 1982 (ii) part disposals (iii) negligible value claims (iv)leases, chattels and wasting assets (v) a detailed question on the pooling provisions for shares (vi) the same day and nine day matching rules for shares and securities applicable to corporate businesses. (vii) substantial shareholdings (f) Overseas aspects (i) controlled foreign companies (ii) foreign companies trading in the UK (iii) expense relief in respect of overseas tax (iv)the restriction of double taxation relief for underlying tax to the full rate of corporation tax (v) the carry back and carry forward of unrelieved foreign tax. (g) Groups of companies (i) consortia (ii) 51% groups and group income elections (iii) pre-entry gains and losses (iv) the anti-avoidance provisions where arrangements exist for a company to leave a group (v) the tax charge that applies where a company leaves a group within six years of receiving an asset by way of a no gain/no loss transfer. (h) Self assessment system (i) form CT61 and quarterly accounting for income tax. (i) Value Added Tax (i) group registration (ii) imports, exports and trading within the European Community (iii) partial exemption (iv)second-hand goods scheme Business Taxation (United Kingdom) PAGE 5 Paper 2.3: Business Taxation (United Kingdom) (Continued) (v) the capital goods scheme (vi)in respect of property and land: leases, do-it-yourself builders, and the landlord's option to tax (vii) penalties apart from the default surcharge, serious misdeclarations (but not repeated misdeclarations) and default interest (viii) special schemes for retailers. 2 Unincorporated businesses (a) Basic income tax computation (i) personal allowances other than the personal allowance for people aged under 65 (ii) tax credits (iii) non-trade charges on income (iv)joint property of husbands and wives, maintenance payments and minor children (v) schedule A (vi)schedules D cases III and VI (vii) individual savings accounts (viii) the enterprise investment scheme and venture capital trusts (ix)foreign income, non-residents and double taxation relief (x) income from trusts and settlements (xi)anti-avoidance legislation. (c) Schedule D case I/II (i) as for corporate businesses (ii) farmers averaging of profits (iii) the averaging of profits for authors and creative artists (iv) loss relief for shares in unquoted trading companies (v) investment income and charges of a partnership (vi)the allocation of notional profits and losses for a partnership. (d) Capital gains tax (i) as for corporate businesses (ii) calculation of the indexation allowance (iii) reinvestment relief (iv)principal private residence (v) partnership capital gains (vi) overseas aspects (vii) losses in the year of death (viii) the transfer of assets between a husband and wife (ix)the exemption of gilt edged securities and qualifying corporate bonds (x) the payment of CGT by annual instalments (xi)capital sums received in respect of the loss, destruction or damage of an asset. (xii) relief for losses incurred on loans made to traders. (e) Value Added Tax (i) as for corporate businesses. (f) Class 2 and Class 4 NIC (i) the offset of trading losses against non-trading income (for Class 4 NIC). 3 Employees (a) Employment Income (i) the calculation of a car benefit where emission figures are not available (ii) share and share option incentive schemes for employees (iii) payments on the termination of employment, and other lump sums received by employees. (b) Occupational pension schemes (i) a detailed knowledge of the conditions that must be met to obtain Inland Revenue approval for an occupation pension scheme (ii) the option for certain occupational pension schemes to apply to be subject to the personal pension scheme rules. (c) Class 1 and Class 1A NIC (i) the calculation of directors’ NIC on a month by month basis. KEY AREAS OF THE SYLLABUS The key topic areas, taken directly from the syllabus content list, are as follows: 1 Corporate businesses (a) Scope of corporation tax. (b) Profits chargeable to corporation tax. (c) Calculation of the corporation tax liability. (d) Self assessment system. Business Taxation (United Kingdom) PAGE 6 2 Unincorporated businesses (a) Basic income tax computation. (b) Self assessment system. (c) Schedule D case I/II. 3 Employees (a) Employment Income APPROACH TO EXAMINING THE SYLLABUS The examination is a three hour paper divided into two sections. Only core topics will be examined in Section A. A non-core topic may form part of a question (such as a chargeable gain in a corporation tax computation), but this will account for a maximum of ten marks. At least 40 of the 55 available marks in Section A will be of a computational nature. • Question 1 will be on a corporate business (for approximately 30 marks). • Question 2 will be on an unincorporated business and/or employees (for approximately 25 marks). The questions in Section B will be a mix of computational and written, and include the minimisation or deferral of tax liabilities by the identification and application of relevant exemptions and reliefs. • Question 3 will be on VAT (either for an incorporated business or an unincorporated business). • Question 4 will be on capital gains (either for an incorporated business or an unincorporated business). • Question 5 will be on either groups of companies or overseas aspects. • Question 6 will be on one of the six listed tax planning topics. • Question 7 will be on any area of the syllabus, but will typically deal with a core topic that has not been covered in Section A. Number of Marks Section A: 2 compulsory questions 55 Section B: Choice of 3 from 5 questions (15 marks each) 45 100 Tax rates, allowances and benefits will be given in the examination paper. ADDITIONAL INFORMATION The ACCA applies a six-month rule in that questions requiring an understanding of new legislation will not be set until at least six calendar months after the last day of the month in which the legislation received Royal Assent. The same rule applies to the effective date of the provisions of an Act introduced by Statutory Instrument. It would, however, be considered inappropriate to examine legislation it is proposed to repeal or substantially alter. Knowledge of section numbers will not be needed to understand questions in this paper, nor will students be expected to use them in their answers. If students wish to refer to section numbers in their answers they may do so and will not be penalised if old, or even incorrect, section numbers are used. Business Taxation (United Kingdom) Names of cases or a detailed knowledge of the judgement are not required but knowledge of the principles decided in leading cases is required. The Study Guide provides more detailed guidance on the syllabus. RELEVANT TEXTS There are a number of sources from which you can obtain a series of materials written for the ACCA examinations. These are listed below: Foulks Lynch – ACCA's official publisher Contact number: +44 (0)20 8831 9990. Website: www.foulkslynch.com Accountancy Tuition Centre (ATC) International Contact number: +44 (0)141 880 6469. Website: www.ptc-global.com BPP Contact number: +44 (0)20 8740 2211. Website: www.bpp.com The Financial Training Company Contact number: +44 (0)174 785 4302. Website: www.financial-company.com Candidates may also find the following texts useful: A Homer and R Burrows Tolley’s Tax Guide Tolley Publishing ISBN 1860128319 A Melville Taxation Prentice Hall ISBN 0 273 655522–1 PAGE 7 STUDY SESSIONS 1 Corporate businesses (a) Scope of corporation tax (i) Define the terms ‘period of account’, ‘accounting period’, and ‘financial year’ (ii) Explain when an accounting period starts and finishes (b) Residence (i) Explain how the residence of a company is determined (c) Profits chargeable to corporation tax (i) Schedule D case I – State the expenditure that is allowable in calculating the tax-adjusted profit – Explain how relief can be obtained for pre-trading expenditure (ii) Capital allowances – Define plant and machinery for capital allowances purposes – Calculate writing down allowances and first year allowances – Explain the treatment of motor cars – Compute balancing allowances and charges – Explain the treatment of short life assets and long life assets – Define an industrial building for industrial buildings allowance purposes – Calculate industrial buildings allowance for new and second-hand buildings – Compute the balancing adjustment on the disposal of an industrial building (iii) Relief for trading losses – Explain how trading losses can be carried forward – Explain how trading losses can be claimed against income of the current or previous accounting periods – State the factors that will influence the choice of loss relief claim (iv)Schedule A – Compute the Schedule A profit – Explain the treatment of a premium received for the grant of a short lease – Explain how relief for a Schedule A loss is given (v) Schedule D case III – Explain how profits from loan relationships and interest received are assessed under Schedule D case III (vi)Charges on income – Explain the treatment of charges on income (d) Chargeable gains (i) Principles and scope – Prepare a basic capital gains computation – State the allowable deductions – Calculate the indexation allowance (ii) The basis of calculation – Explain the treatment of capital losses – Explain the identification rules for disposals of shares and securities – Apply the pooling provisions for shares and securities – Explain the treatment following a bonus issue, rights issue or takeover (as a result of the chargeable gain part disposal rules not being examinable, any question on the takeover of shares or securities will involve a paper for paper transaction. Reorganisations are not mentioned in the Study Guide. This is because all the relevant rules can be examined by way of a takeover (for example, where shareholders receive two different classes of share in exchange for their existing shareholding)) (iii) The identification and application of relevant exemptions and reliefs – Explain and apply rollover relief Business Taxation (United Kingdom) Wider reading is also available especially regular study of the relevant articles in ACCA's student accountant. PAGE 8 (e) Calculation of the corporation tax liability (i) Prepare a basic corporation tax computation (ii) Explain the implications of receiving franked investment income (iii) Calculate the corporation tax liability at the starting rate, small company rate and full rate, and apply tapering relief (f) Overseas aspects (i) Trading overseas via a subsidiary or a branch – Compare the UK tax treatment of an overseas branch to an overseas subsidiary (ii) Double taxation relief – Calculate double taxation relief for withholding tax and underlying tax (iii) Transfer pricing – Explain and apply the transfer pricing rules (g) Groups of companies (i) Define an associated company (ii) Define a 75% group (iii) Explain and apply the reliefs available to members of a 75% group (iv)Define a 75% capital gains group (v) Explain and apply the reliefs available to members of a 75% capital gains group (h) Self assessment system (i) Describe the features of self- assessment (ii) Explain how the Inland Revenue can enquire into a self- assessment return (iii) Calculate interest on overdue tax (iv) Explain how large companies are required to account for corporation tax on a quarterly basis. (i) Value Added Tax (i) Describe the scope of VAT (ii) State the circumstances in which a person must register for VAT, and explain the advantages of voluntary VAT registration (iii) State the circumstances in which pre-registration input VAT can be recovered (iv) Explain how a person can deregister for VAT (v) Explain how VAT is accounted for and administered (vi) Explain how the tax point is determined (vii) List the information that must be given on a VAT invoice (viii) Describe the principles that apply to the valuation of supplies (ix)State the circumstances in which input VAT is non-deductible (x) Describe the relief that is available for bad debts (xi) List the principal zero-rated and exempt supplies (xii) Describe the cash accounting, the annual accounting and flat rate schemes (xiii) State the circumstances in which the default surcharge, a serious misdeclaration penalty, and default interest will be applied 2 Unincorporated businesses (a) Basic income tax computation (i) Prepare a basic income tax computation (ii) Explain the treatment of savings income and dividends (iii) Explain the treatment of trade charges on income (b) Self assessment system (i) Describe the features of self- assessment (ii) Calculate payments on account and balancing payments/ repayments (iii) Calculate interest on overdue tax and state the penalties that can be charged (iv) Explain how the Inland Revenue can enquire into a self- assessment return (c) Schedule D case I/II (i) Badges of trade – Describe and apply the badges of trade (ii) Computation of assessable profit – As for corporate businesses Business Taxation (United Kingdom) PAGE 9 (iii) Basis of assessment – Explain the basis of assessment – Compute the assessable profits on commencement and cessation (iv)Change of accounting date – State the factors that will influence the choice of accounting date – State the conditions that must be met for a change of accounting date to be valid – Compute the assessable profits on a change of accounting date (v) Capital allowances – As for corporate businesses (vi)Relief for trading losses – Explain how trading losses can be carried forward (although only trade charges are examinable, the impact of non-trade charges where trade charges are carried forward is examinable. In any examination question on this area, a figure for non-trade charges will simply be given. The carry forward of losses on incorporation is examinable) – Explain how trading losses can be claimed against total income and chargeable gains – Explain the relief for trading losses in the early years of a trade – Explain terminal loss relief (vii) Partnerships and limited liability partnerships – Explain how a partnership is assessed to tax – Allocate assessable profits between the partners following a change in the profit sharing ratio or a change in the members of the partnership – Describe the alternative loss relief claims that are available to partners – Explain the loss relief restriction that applies to the partners of a limited liability partnership (viii) Personal pensions – Explain the relief given for contributions to a personal pension scheme (d) Capital gains tax (i) Principles and scope (restricted to business assets) – As for corporate businesses – Define a business asset for the purposes of taper relief. – Compute taper relief (including non-business assets) (ii) The basis of calculation – As for corporate businesses (quoted shares and securities (including the valuation rules) are examinable since certain quoted shareholdings will qualify for business asset Business Taxation (United Kingdom) taper relief. The indexation allowance is not examinable for individual taxpayers. Therefore, any question involving shares and securities will simply give a figure for the value of the 1985 pool as at 5 April 1998) (iii) The identification and application of relevant exemptions and reliefs – As for corporate businesses – Explain and apply holdover relief for the gift of business assets – Explain and apply the relief available when a business is transferred to a limited company. (e) Value Added Tax (i) As for corporate businesses (f) Class 2 and Class 4 NIC (i) Calculate class 2 NIC (ii) Calculate class 4 NIC 3 Employees (a) Employment Income (i) Basis of assessment – State the factors that determine whether an engagement is treated as employment or self- employment – Explain the basis of assessment – Describe the income assessable (ii) Allowable deductions – List the allowable deductions, including travelling expenses PAGE 10 Business Taxation (United Kingdom) – Explain the use of the statutory approved mileage allowances (iii) PAYE system – Explain the PAYE system (iv)Benefits – Identify P11D employees – Explain how benefits are assessed (b) Occupational pension schemes (i) State the main features of an occupational pension scheme (ii) Explain the significance of an occupational pension scheme being approved by the Inland Revenue. (c) Class 1 and Class 1A NIC (i) Calculate class 1 NIC (ii) Calculate class 1A NIC 4 Tax planning (a) Employment v self-employment (i) Compare the tax implications of employment as compared to self- employment (b) Remuneration packages (i) Compare alternative remuneration packages (c) Choice of business medium (i) Compare the tax position of a director/shareholder with that of a sole trader (d) Incorporation of a business (i) Explain the factors that must be considered when incorporating a business (e) Disposal of a business (i) Explain the tax implications arising on the disposal of a business (f) Directors and shareholders (i) Compute whether remuneration or a dividend is the most tax efficient way to extract profit from a company. . Advanced Taxation 2.3 Business Taxation PAGE 4 Paper 2.3: Business Taxation (United Kingdom) (Continued) (viii) personal pensions. (d) Capital gains tax (i) principles and scope (restricted to business. European Community (iii) partial exemption (iv)second-hand goods scheme Business Taxation (United Kingdom) PAGE 5 Paper 2.3: Business Taxation (United Kingdom) (Continued) (v) the capital goods scheme (vi)in. (either for an incorporated business or an unincorporated business) . • Question 4 will be on capital gains (either for an incorporated business or an unincorporated business) . • Question 5 will