ACCA 2017 BPP PASSCARD f6

2: Computing taxable income and the income tax liabilityTopic List Scope of income tax Computing taxable income Chargeable/Exempt income Deductible interest Computing income tax Gift aid

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For exams in September 2016,

December 2016 and March 2017

ACCA Passcards

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Fundamentals Paper F6 Taxation FAs 2015

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First edition 2007, Tenth edition February 2016

ISBN 9781 4727 4453 1

e ISBN 9781 4727 4680 1

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the

British Library

Your learning materials, published by BPP Learning

Media Ltd, are printed on paper obtained from traceable

Wells Place Merstham RH1 3LG

All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media.

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Page iii

Welcome to BPP Learning Media's ACCA Passcards forFundamentals Paper F6 Taxation (UK)

They save you time Important topics are summarised for you

They incorporate diagramsto kick start your memory

They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media'sACCA Passcards are not just a condensed book Each card has been separately designed for clearpresentation Topics are self contained and can be grasped visually

ACCAPasscards are still just the right size for pockets, briefcases and bags

ACCA Passcards focus on the examyou will be facing

Run through the complete set of Passcardsas often as you can during your final revision period The daybefore the exam, try to go through the Passcards again! You will then be well on your way to passing yourexams

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Preface

Page

1 Introduction to the UK tax system 1

2 Computing taxable income and the

4 Taxable and exempt benefits

12 National insurance contributions 67

14 Chattels and the principal private residence

17 Self-assessment and payment of tax by

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Contents Page v

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1: Introduction to the UK tax system

Topic List

The overall function and purpose of

taxation in a modern economy

Different types of taxes

Principal sources of revenue law and

practice

Tax avoidance and tax evasion

This chapter contains background knowledge whichunderpins the whole of your later studies of taxation

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Principal sources of revenue law and practice

Different types

of taxes

The overall function and purpose

of taxation in a modern economy

Tax policies can be used to redistribute wealth

Direct taxes – tax only those who have these resources

Indirect taxes – discourage spending

Progressive taxes – target those who can afford to pay

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Different types

of taxes

The overall function and purpose

of taxation in a modern economy

1: Introduction to the UK tax system Page 3

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HM Revenue and Customs

Structure of the UK Tax system

Principal sources of revenue law and practice

Different types

of taxes

Treasury

Officers of Revenue and Customs

Crown Prosecution ServiceAppeals heard by

First Tier Tribunal (most cases)

Upper Tribunal (complex cases)

Sources of revenue law and practice

StatuteStatutory instrument

Law Statements of practiceExtra-statutory concessions

Explanatory leafletsRevenue and Customs BriefInternal Guidance (HMRC manuals) Agent Update

Practice

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European Union Double taxation agreements

States may agree to enact Directives to provide

for common taxation

Value added tax (VAT) Directives oblige UK to

pass laws in accordance with EU legislation

Tax provisions which discriminate against EU

freedoms may be ineffective due to treaty direct

Non-discrimination provisions to protect foreignnationals

Exchange of information

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Tax avoidance and tax evasion

Different types

of taxes

Tax evasion consists of seeking to mislead HMRC

by either:

Suppressing information, or

Providing deliberately false information

Tax avoidance includes any legal method ofreducing your tax burden, eg:

Using tax shelters, or

Participating in schemes designed to minimisetax

Legal Illegal

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General Anti-Abuse Rule (GAAR)

HMRC can counteract tax advantages from abusive tax arrangements

Tax arrangements involve obtaining a tax advantage as (one of) their main

purpose(s)

Arrangements are abusive if they cannot be regarded as a reasonable course of

action andresult in eg significantly less income, profits or gains being taxable

Tax advantage includes relief or repayment of tax

HMRC may counteract tax advantages arising by eg increasing the taxpayer's

tax liability

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Tax avoidance and tax evasion

Different types

of taxes

Concerns whether client is honest with HMRC

Professional judgement of accountant

Must act honestly and objectively

Recommend disclosure to HMRC

If no disclosure, cease to act

Make money laundering report

Inform HMRC but not details of why

Avoid 'tipping-off' the client

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2: Computing taxable income and the income tax liability

Topic List

Scope of income tax

Computing taxable income

Chargeable/Exempt income

Deductible interest

Computing income tax

Gift aid

Child benefit income tax charge

Transferable personal allowance

Jointly held property

The computation of income tax is a key exam topic One

of the 15 mark questions in Section C will focus onincome tax Income tax will also be tested in Section Aand may also appear in the 10 mark questions inSection B This chapter deals with computing taxableincome which draws together all of the taxpayer'sincome You will also see how the income tax liability iscomputed on taxable income We also look at how giftaid donations are given tax relief, the computation of thechild benefit charge, the transferable personal allowancebetween spouses/civil partners and how jointly heldproperty is taxed

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Gift aid Computing

taxable income

Deductible interest

Scope of

Test 1st: Automatically not UK resident

In UK < 16 days in tax year

In UK < 46 days in tax year, not resident in

any of three previous tax years

Works full time overseas throughout tax

year, not in UK > 90 days in tax year

Test 2nd: Automatically UK resident

In UK > 183 days in tax year

Only home in UK

Works full time in UK in tax year

An individual who is UK resident is taxable on world-wide income.

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2: Computing taxable income and the income tax liability Page 11

In UK > 90 days in either of two previous tax years

Spends more time in UK than anywhere else in taxyear (if previously resident only)

Number of ties required

to be UK resident depends on number of daysspent in UK in tax year (see Tax Tables)

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A basic principle of income tax is the aggregation of

income All of an individual's income for a tax year is

added up in a personal tax computation as total income.

Taxable income

Net income minus personal allowance.

Adjusted net income

Net income less grossed up gift aid/personal pension

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2: Computing taxable income and the income tax liability Page 13

Personal allowance

£10,600 for 2015/16

Restrict if adjusted net income > £100,000

by £1 for each £2 excess (nil if > £121,200)

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Gift aid Computing

taxable income

Deductible interest

Types of income Income taxed at source

The main types of income for individuals are:

Profits of trades, professions and vocations

Income from employment and pensions

Premium bond prizes

Income from Individual Savings Accounts (ISAs)

Returns on National Savings Certificates

Leave exempt income out of personal tax computations.

This applies to bank and building society interest.

Tax credits on dividends can be offset to reduce

a tax bill but are never repaid to a taxpayer Tax credits on other taxed income can be repaid (002)ACF6PC13_CH02.qxp 1/21/2016 3:35 AM Page 14

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Gift aid Computing

taxable income

Deductible interest

For purchase of an interest in a partnership, or

For purchase of plant and machinery forpartnership (purchase must be by partner), or

For purchase of plant and machinery for use inemployment (purchase must be by employee)

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Deductible interest

Total non-savings, savings and dividend income separately

Deduct deductible interest, losses and the personal allowance

from non-savings income first, then savings income then

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Gift aid

Deductible interest

Gift aid donations are charitable gifts of money which qualify for tax relief

Donor must make a gift aid declaration to the charity

Basic rate

Basic rate tax relief given by treating

donation as net of basic rate tax

Higher and additional

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Jointly held property

Child benefit income tax chargeChild benefit charge

Child benefit is paid to individual who cares for at least one child

Usually paid to mother and exempt from tax

Charge reclaims child benefit received by taxpayer or partner

Adjusted net income

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Transferable personal allowance Jointly heldproperty

2:Computation of taxable income and the income tax liability Page 19

Between spouses/civil partners

Neither can be a higher rate or additional rate taxpayer

Relief given by tax reducer of 20% of transferable amount of £1,060 (2015/16)

Cannot lead to repayment of tax

Election made toHMRC online bytransferor spouse/civil partner

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Jointly held property

Spouses and civil partners often hold propertyjointly, sometimes in unequal proportions

For tax purposes treat the income received fromsuch property as shared equally

If the actual interests in the property are unequal,spouses/civil partners can declare this to HMRCand income is then shared in actual proportions

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You also need to be aware of the final two topics in thischapter: when employment income is assessed and thedeductions that you may be able to make in computingthe amount of assessable employment income.

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Allowable deductions

Employment and self-employment of assessmentBasis

Whether a contract is a contract of service or a

contract for services will depend on a number of

factors

Employed or self-employed

An employee works under a contract of service and

a self-employed person under a contract for services The degree of control exercised over the

person doing the work

Whether he must accept further work

Whether the other party must provide further work

Whether he provides his own equipment

Whether entitled to benefits eg pension

Whether he hires his own helpers

What degree of financial risk he takes

What degree of responsibility for investmentand management he has

Whether he can profit from sound management

Whether he can work when he chooses

The wording used in any agreement betweenparties

Factors

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Allowable deductions

Employment and self-employment

Basis

of assessment

3:Employment income Page 23

Earnings are taxed in the year in which they are

The general definition of the date of receipt is

the earlier of:

The time payment is made

The time entitlement to payment arises

Directors are deemed to receive earnings on the earliest

of the following:

The time given by the general rule

The time the amount is credited in the company'saccounting records

The end of the company's period of account (if theamount has been determined by then)

When the amount is determined (if after the end ofthe company's period of account)

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Allowable deductions

Employment and self-employment

Basis

of assessment

Expenses specifically deductible against earnings:

Insurancepremiums to cover directors' and employees'

liabilities (and payments to meet those liabilities)

Subscriptions to relevant professional bodies

Qualifying travel expenses – costs the employee incurs

travelling in the performance of his duties or/and travelling

to or from a place attended in the performance of duties

Contributions(within limits) to a registered occupational

The general rule is that expenses can only be deducted from

earnings if they are incurred wholly, exclusively and necessarily

in performing the duties of the employment.

Normal commuting does not qualify.

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

a secondment of 24 months or less.

If a mileage allowance is paid relief is available for any shortfall of allowance actually paid below statutory mileage allowance.

Exam focus

If you have to decide whether an expense

is deductible, put yourself in HMRC'sposition and try to find an argumentagainst deducting it If you can find aspecific argument, the expense is probablynot deductible

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4: Taxable and exempt benefits.

The PAYE system

Topic List

Taxable benefits

Exempt benefits

The PAYE system

Benefits may be tested as part of a Section C question

or in Section A or B so it is vital that you are able tocalculate the taxable value of benefits provided toemployees You also need to be aware of the benefitsthat are exempt from tax

The deduction of tax from employment income throughthe PAYE system is also important

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Vouchers General business expenses

The PAYE system

Exempt benefits

Taxable benefits

Taxed on most employees

Except excluded employees (eg earn less than £8,500 p.a and not director) only taxable on certain benefits

'P11D employees' are employees who are not excluded employees.

Cash vouchers

Credit token

Non-cash vouchersTaxable on all employees (cost of providing benefit)

Reimbursed expenses taxable on

employees (not excluded employees)

May make deduction claim

Non-cash benefits

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Accommodation Living expenses

4:Taxable and exempt benefits The PAYE system Page 27

Annual value of accommodation is a

taxable benefit on all employees, unless

Excess multiplied by official rate of interest at the start of the tax year

to start of tax year Vans

£3,150 charge if available for privateuse (not home/work commuting)

£594 charge for private fuel

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Loans Cars

The PAYE system

Exempt benefits

Taxable benefits

Annual taxable benefit for the private use of a car is (price of car – capitalcontributions) × % related to CO2emissions

Cars emitting 0-50g/km = 5%

Cars emitting 95g/km = 14% Percentage increases

by 1% for each 5g/km (rounded down) up to 37%

Percentage increased by 3% for diesel engined cars (not above max37%)

Benefit scaled down on a time basis, if car not available all year.Benefit then reduced by any contribution by employee for private use

Fuel for private use is charged as percentage of base figure(£22,100, 2015/16) Same percentage as car benefit No reductionfor partial reimbursement by the employee

Loans of over £10,000 give rise

to taxable benefits equal to the

difference between the actual

interest and interest at the

official rate

A write-off of a loan gives rise

to a taxable benefit equal to the

amount written off

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Other benefits

In general, if an asset is made available for private use, the

annual taxable benefit is 20% of the market value when the

asset was first provided, less any employee contribution

If the asset is subsequently given

to the employee the taxablebenefit is the higher of:

(i) Original MV less amountsalready taxed

(ii) Market value at date of giftless any employee contribution

Taxable value of other benefits charged on

employees other than excluded employees

Excluded employees taxed only on secondhand

value as cash earnings

Cost of provision of benefit less any amount made good by employee

Not used if asset is bicycle

Private use of asset

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The PAYE system

Exempt benefits

Taxable benefits

Exempt benefits

Loans of up to £10,000

Entertainment and gifts provided by a third party for an employee

by reason of his employment

Long service awards of up to £50 per year of service

Job related accommodation

Workplace nurseries

Other childcare provided by employer

Recreational/sporting facilities available to employees generally

Works buses and mini-buses

Bicycles provided for cycling to work

Parking places at or near work

The cost of gifts from any one source must not exceed £250 per tax year

The award must be a non-cash award and the employee must have worked at least

20 years Limited to £55/£28/£25 per week for basic/higher/additional rate employee

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Removal expenses of up to £8,000

Personal incidental expenses

Medical premiums to cover treatment outside the UK

Mobile phones – restricted to one phone per employee

Mileage allowances of amounts up to the statutory mileage rates

Staff parties

Additional household costs for homeworkers

Recommended medical treatment

For use of the employee's own car for business purposes

Provided the cost per staff member per year is £150 or less

Up to £4 per week may be paid without supporting evidence

Up to £500 per employee per tax year

£5 per night for UK/£10 per night for overseas If exceeded, whole taxable, not just excess

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PAYE settlement agreements

The PAYE system

Exempt benefits

Taxable benefits

The PAYE system collects tax from employees each payday, with the intention that over a tax year, the correct total of tax due will be collected.

How PAYE works

Employer makes FPS to HMRC electronically on or

before date of payment ('Real Time Information')

Includes details of amounts paid to employees, income

tax and national insurance deducted, starting and

leaving employees

Calculations made using PAYE codes, usually on

cumulative basis

The employer must pay over the tax and NIC deducted

up to the 5th of each month by the 22nd of that month if

electronic payment (19th if by cheque) Penalties for late

payment (except first).

PAYE code numbers

Forms

Quarterly payment is allowed if the average

monthly total of tax and NICs is less than £1,500

PAYE settlement agreements are arrangements under which employers settle employees' income tax liabilities on certain benefits and expense payments.

L: Code with personal allowance M: Code if receiving £1,060 of personal allowance from spouse/civil partner

N: Code if giving £1,060 of personal allowance to spouse/civil partner

Form P60 – to employee by 31 May Forms P11D/P9D – to HMRC and employee by 6 July Form P45 – to employee when leaves employment

Payment

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5: Pensions

Topic List

Types of pension scheme

Contributions to pension schemes

Receiving benefits from pension

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