Taxation finance act 2016 (22nd edition) by alan melville

NOW IN ITS TWENTY-SECOND EDITION TAXATION FINANCE ALAN ACT 2016 MELVILLE CHANmLOR OF tHS EXCHEQtTfi- ♦ ♦ 22ND ANNUAL EDITION OVER 250 WORKED EXAMPLES ALWAYS LEARNING ♦ ♦ OVER 250 EXERCISES AND QUESTIONS ♦ PEARSON Taxation Companion Website For open-access student resources specifically written to complement this textbook and support your learning, please visit www.pearsoned.co.uk/melville Lecturer Resources For password-protected online resources tailored to support the use of this textbook in teaching, please visit www.pearsoned.co.uk/melville PEARSON At Pearson, we have a simple mission: to help people make more of their lives through learning We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide - more than any other private enterprise Every day our work helps learning flourish, and wherever learning flourishes, so people To learn more, please visit us at www.pearson.com/uk Taxation Finance Act 2016 Twenty-second edition Alan Melville FCA, BSc, Cert Ed PEARSON Harlow, England • London * New York • Boston • San Francisco • Toronto • Sydney • Auckland • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 1995 (print) Twenty-second edition published 2017 (print and electronic) © Pearson Professional Limited 1995,1996 (print) © Financial Times Professional Limited 1997,1998 (print) © Pearson Education Limited 1999, 2010 (print) © Pearson Education Limited 2011, 2017 (print and electronic) The right of Alan Melville to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 The print publication is protected by copyright Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard's Inn, 86 Fetter Lane, London EC4A 1EN The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law Any unauthorised distribution or use of this text may be a direct infringement of the author's and the publishers' rights and those responsible may be liable in law accordingly All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners Contains public sector information licensed under the Open Government Licence (OGL) v3.0 http://www nationalarchives.gov.uk/doc/open-government-licence/version/3/ Pearson Education is not responsible for the content of third-party internet sites ISBN: 978-1-292-13910-4 (print) 978-1-292-13911-1 (PDF) 978-1-292-13913-5 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress 10 987654 21 20 19 18 17 16 Front cover image: © Getty Images Print edition printed and bound by Ashford Colour Press Ltd, Gosport NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION Contents Preface ix Annual payments 49 Acknowledgements x Gifts of shares or property to charity 49 Payments which are tax reducers 50 Maintenance payments 50 Loans used to purchase a life annuity 51 Summary of tax data xi Part INCOME TAX AND NATIONAL INSURANCE Introduction to the UK tax system Gifts of pre-eminent property to UK taxes Sources of tax law The tax year Structure of HM Revenue and Customs Administration of the tax system Self Assessment Appeals 11 Tax evasion 12 Tax avoidance 12 The HMRC Charter 13 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 Rales of income tax for 2016-17 19 Income taxed at source 21 Savings income 22 Dividend income 27 Personal allowances 32 Personal allowances for 2016-17 32 The personal allowance 33 Blind person's allowance 36 Tax reducers 36 Married couple's allowance 36 Payments and gifts eligible for tax relief Eligible interest payments 51 Gift Aid 52 Income from property 56 Definition of property income 56 Basis of assessment and allowable expenditure 57 Capital expenditure 58 Losses 59 Lease premiums 60 "Rent-a-room" relief 63 Furnished holiday lettings 63 Income from savings and investments 68 Interest received 68 Dividends received 70 Tax-efficient investments 71 Individual Savings Accounts 71 Enterprise Investment Scheme 73 Venture Capital Trusts 74 Child Trust Funds 75 Income from trusts and settlements 76 Miscellaneous income 79 Income from employment (1) 82 Employment and self-employment 82 Basis of assessment 85 Employment income 85 Non-taxable employment income 86 Deductible expenses 88 Payments made on tennination of 43 Payments and gifts deductible from total income the nation employment 91 The PAYE system 93 43 Construction industry scheme 97 48 Employee incentive schemes 98 v Contents Income from employment (2) 103 Post-cessation trade relief 183 Benefits in kind 103 Transfer of a business to a company 183 Living accommodation 105 Losses on shares in unlisted trading Cars provided for private use 108 Beneficial loans 112 Income from self-employment: companies Limit on income tax reliefs 13 Income from self-employment: 116 Partnerships 187 The badges of trade 116 Principles of partnership taxation 187 The calculation of trading profits 118 Notional profits and losses 190 Deductibility of expenditure 119 Change in partnership composition 191 Disallowed expenditure 119 Non-trading income 193 Allowable expenditure 122 Trading losses 194 Adjustments relating to income 124 Trading income allowance 125 Pension contributions 199 Registered pension schemes 199 expenses 14 Tax relief for contributions 126 by scheme members 10 Income from self-employment: 201 Tax relief for contributions Basis periods 132 The current year basis 132 Annual allowance charge 206 Commencement of trade 133 Lifetime allowance charge 209 Cessation of trade 136 Change of accounting date 138 Averaging of trading profits for farmers and creative artists 143 Income from self-employment: by employers 15 204 Payment of income tax, interest and penalties 214 Payment of income tax 214 Late payment penalties 217 Interest on overdue income tax 218 Capital allowances 149 Interest on overpaid income tax 219 Eligible expenditure 149 Penalties 219 Chargeable periods 149 Plant and machinery 150 Capital allowances on plant and machinery 152 Writing down allowance 153 Annual investment allowance 156 First year allowance 15 Balancing allowances and charges 161 Non-pooled assets 161 Allowances on cessation of trade 166 Miscellaneous capital allowances 167 16 National Insurance contributions 223 Class 223 Class 1A 229 Class IB 229 Class 230 Class and 3A 230 Class 231 Annual maximum contributions 232 Review questions (Set A) 236 Part CAPITAL GAINS TAX 12 Income from self-employment: vi 184 Computation of income Cash basis and simplified 11 183 Trading losses 173 17 Introduction to capital gains tax 247 Relief for trading losses 173 Chargeable persons 247 Carry-forward trade loss relief 174 Chargeable assets 248 Trade loss relief against total income 176 Chargeable disposals 249 Early trade losses relief 179 Basis of assessment 250 Terminal trade loss relief 181 Rates of CGT 251 Contents 18 19 20 21 22 Relief for capital losses 253 Relief for trading losses 255 Administration of CGT 257 Computation of gains and losses Part CORPORATION TAX 23 Introduction to corporation tax 337 Scope of corporation tax 337 261 Accounting periods 338 Layout of a CGT computation 261 Taxable total profits 339 Disposal value 262 Trading income 340 Allowable expenditure 262 Income from property 345 Part disposals 264 Income from non-trading loan Assets with negligible value 266 Assets held on 31 March 1982 267 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 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 Principal private residence 304 Principal private residence 304 Partial exemption 305 Deemed residence 306 Letting relief 308 Business use 310 CGT reliefs 313 Damaged assets 313 at source 386 Destroyed assets 316 Shadow ACT 386 Replacement of business assets 317 Self Assessment 387 Gift of business assets 320 Interest on underpaid and overpaid relationships Dividends received 347 Relief for charitable donations 347 Loan relationships 348 Long periods of account 352 Research and development tax relief 24 354 Intangible fixed assets 355 Corporate chargeable gains 359 Chargeable disposals and chargeable assets 25 359 Basis of assessment 360 Computation of gains and losses 360 Indexation allowance 361 Assets held on 31 March 1982 364 The rebasing election 367 Assets acquired before April 1965 367 Disposals of shares or securities 368 Disincorporation relief 376 Computation and payment of the corporation tax liability 381 Corporation tax financial years 381 Rates of corporation tax 382 Due date of payment 383 Accounting for income lax deducted Transfer of a business to a limited company 345 corporation tax 388 322 Penalties 390 Entrepreneurs' relief 323 Corporation tax rates prior to FY2015 392 Reinvestment into EIS shares 326 Loans to traders 327 Corporation tax losses 398 Relief for trading losses 398 Carry forward of trade loss relief 399 Review questions (Set B) 330 26 vii Contents 27 28 Unrelieved charitable donations 400 30 Value added tax (2) 471 Trade loss relief against total profits 402 Accounting for VAT 471 Repayments of corporation tax 405 The tax point 472 Anti-avoidance legislation 407 Tax invoices 472 Choice of loss relief 407 Accounting records 473 Non-trading losses 408 Special schemes 474 Retail schemes 477 Bad debts 478 Non-deductible input tax 479 Partial exemption 481 Administration of VAT 483 Penalties, surcharges and interest 485 Inheritance tax 490 Close companies and investment companies 412 Close companies 412 Definition of a close company 412 Exceptions 415 Consequences of close company status 416 Close investment-holding companies 419 Companies with investment business 419 Chargeable transfers of value 490 Choice of business medium 420 Exempt transfers 492 Incorporation 425 Potentially exempt transfers 494 1HT payable on chargeable lifetime Groups of companies and reconstructions 428 Related 51% group companies 428 Transfer pricing 431 51% groups 431 75% groups 432 Group relief 433 transfers 496 IHT payable on death 498 Valuation 504 Business property relief 506 Agricultural property relief 507 Administration of IHT 507 Overseas aspects of taxation 511 436 Residence and domicile 511 Capital losses 438 Income tax - general rules 514 Consortia 439 Double taxation relief 515 Company reconstructions 441 Income from employment 516 32 Transfer of chargeable assets within a group Trading income 518 Income from property and investments 519 Capital gains tax - general rules 520 Inheritance tax - general rules 521 453 Corporation tax - general rules 521 The principle of VAT 453 Controlled foreign companies 524 Taxable persons 454 Double taxation relief for companies 525 Taxable supplies 454 Diverted profits tax 529 Exempt supplies 456 Reduced rate supplies 457 Zero rate supplies 457 The value of a supply 458 Imports and exports 461 Registration 463 Deregistration 468 Review questions (Set C) 444 Part MISCELLANEOUS 29 Value added tax (1) viii 31 Review questions (Set D) 532 Part ANSWERS Answers to exercises 541 593 Index 605 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 should be useful to anyone who is studying taxation as part of a university or college course in accounting, finance or business studies The book should also be of value to students who are preparing for the taxation examinations of the professional accounting bodies A list of relevant examinations is given on the back cover of the book 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, drawn mainly from the past examination papers of the professional accounting bodies The solutions to most of these exercises and questions are located at the back of the book but solutions to those exercises and questions marked with an asterisk (*) are provided in a separate Instructor's Manual This twenty-second edition incorporates the provisions of Finance Act 2016, which is based upon the March 2016 Budget proposals However, it is important to point out that the passage of this year's Finance Bill through Parliament has been delayed (because of the EU referendum) and, in consequence, the Finance Act may not receive Royal Assent until October Although it is unlikely that there will be major amendments to the Finance Bill before it is enacted, the situation is fluid and readers are advised to monitor the progress of the Bill on website http://services.parliament.uk/bills/2016-17/finance.html A further complication is the prospect of another Budget in the Autumn A summary of this Budget (should it occur) together with any significant amendments to the current Finance Bill will appear in the "updates" section of the website which accompanies this book The website address is www.pearsoned.co.uk/melville Alan Melville June 2016 ix PART 5: Answers Question A5 (i) Mr de Praet Trading income Income from property Total income Less: Trading losses relieved against total income Net income 2015-16 £ 20,000 17,500 2016-17 £ nil 17,500 37,500 37,500 17,500 17,500 nil nil The personal allowance is lost in both yearst Tax savings are achieved at basic rate If the loss had been carried forward, there would have been no loss of personal allowances and tax savings would have been achieved mainly at higher rate (assuming that the estimate of future trading profits is accurate) ^ But if Mr de Praet has a wife or a civil partner, it might be possible to transfer 10% of the personal allowance to that wife or partner (subject to conditions) (ii) An AIA of £9,360 (100% x £9,360) is available in the year to 30 June 2017 This increases the loss to £16,860 A claim to set this loss against total income for 2016-17 will leave net income of £2,140 (£19,000 - £16,860), so wasting personal allowances It would be better to restrict the capital allowances claim to £500 This reduces the trading loss claim to £8,000, leaving net income of £11,000 which exactly absorbs the 2016-17 personal allowance The unclaimed capital allowances increase the WDV carried forward and so result in higher capital allowances in future years Set B Question B1 (i) Sale proceeds Less: Auctioneer's commission (8%) £ 13,000 1,040 Less: Acquisition cost 11,960 1,000 Chargeable gain 10,960 The maximum gain is 5/3 x £7,000 = £11,667, so the chargeable gain remains at £10,960 00 Sale proceeds Less: Acquisition cost £ 900,000 566,700 Chargeable gain 333,300 £200,000 of the sale proceeds were not reinvested in the new factory Therefore £200,000 of the gain is immediately chargeable The rolled-over gain is £133,300 The base cost of the new factory is £566,700 (£700,000 - £133,300) 596 Answers to Review Questions Question B2 (a) The disposal is matched first with the 1,000 shares bought in the following 30 days These shares were sold for £4,600 (1,000/5,000 x £23,000) and were bought for £4,400, giving a chargeable gain of £200 The disposal is then matched with 4,000 of the shares in the Section 104 holding This holding is as follows: Number of Allowable shares expenditure f Bought 18 August 2004 Bought 19 September 2011 Sold 13 March 2017 (4/5ths) si04 holding c/f 3,000 2,000 6,000 5,000 5,000 (4,000) 11,000 (8,800) 1,000 2,200 These 4,000 shares were sold for £18,400 (4,000/5,000 x £23,000) so the chargeable gain on their disposal is £9,600 (£18,400 - £8,800) The total chargeable gain is £9,800 (£200 + £9,600) (b) Sally's net gains for 2016-17 are £31,000 Deducting losses brought forward of £11,500 leaves £19,500 Deducting the annual exemption of £11,100 leaves £8,400 The CGT payable is calculated as follows: (i) Unused basic rate band is £12,000 (£32,000 - £20,000) This exceeds £8,400 so CGT payable is (10% x £8,400) = £840 (ii) Unused basic rate band is £2,000 (£32,000 - £30,000) So the amount of CGT payable is (10% x £2,000) + (20% x £6,400) = £1,480 (hi) There is no unused basic rate band So CGT payable is (20% x £8,400) = £1,680 Question B3 (i) The si04 holding consists of 50,000 shares at a total cost of £107,000 Therefore the gain on the August 2016 disposal is as follows: £ Sale proceeds 160,000 Less: Acquisition cost (2/5ths of £ 107,000) 42,800 Chargeable gain (ii) 117,200 The gain is eligible for entrepreneurs' relief because it arises on a disposal of shares in a trading company which (throughout the previous 12 months) has been Samuel's personal company and of which he has been an officer or employee WQZ Ltd is his personal company because he owns at least 5% of its ordinary shares and has at least 5% of its voting rights (iii) Deducting the annual exemption of £11,100 leaves £106,100 The CGT liability is £10,610 (10% x £106,100) This is due for payment on 31 January 2018 597 PART 5: Answers Question B4 (a) Marlene has net gains of £4,000 These are covered by £4,000 of the annual exemption, leaving taxable gains of £nil The remaining £7,100 of the annual exemption is wasted There are no losses carried forward (b) Moira has net gains of £12,000 Losses brought forward of £900 are subtracted from these gains, leaving £11,100 This is covered by the annual exemption, leaving taxable gains of £nil Losses carried forward are £7,100 (£8,000 - £900) (c) Marina has net gains of £3,000 These are covered by £3,000 of the annual exemption, leaving taxable gains of £nil The remaining £8,100 of the annual exemption is wasted The losses brought forward of £8,000 are carried forward to next year (d) Melissa has net gains of £4,000 These are covered by £4,000 of the annual exemption, leaving taxable gains of £nil The remaining £7,100 of the annual exemption is wasted The losses brought forward of £4,000 are carried forward to next year Question B5 (a) Disposed of flat Sale proceeds Less: Incidental costs of disposal £ 142,000 4,000 138,000 Less: Part cost: £142,000 x £80,000 (41,765) x £32,000 (16,706) £142,000 + £130,000 Part conversion costs: £142,000 £142,000 + £130,000 Chargeable gain 79,529 Disposal of shares The chargeable gain is £38,300 (£150,000 - £111,700) Total gains are £117,829 (£79,529 + £38,300) The CGT liability is minimised if the 2016-17 annual exemption is deducted from the gain arising on the disposal of the flat, leaving £68,429 (£79,529 - £11,100) CGT payable is [(28% x £68,429) + (20% x £38,300)] = £26,820.12 (b) 598 Mr More might consider the transfer of assets to Mrs More (at no gain, no loss) She could then dispose of them and any gain arising would be taxed in her name For example, he could transfer the shares to her If she then disposed of them and realised the gain of £38,300, this would be entirely covered by her losses brought forward and her annual exemption, so saving CGT of £7,660 (20% x £38,300) Answers to Review Questions SetC Question C1 (a) The accounting periods concerned are the year to 31 March 2017 and the six months to 30 September 2017 (b) Trading profits (time apportioned) Less: Capital allowances: AIA £121,000 + WDA 18% x £25,000 y/e 31/3/17 £ 460,000 125,500 WDA 18% x £20,500 x 6/12 Trading income Income from property Income from non-trading loan relationships: £200+ £200+ £100 £1,200-£100+ £445 Chargeable gains months to 30/9/17 £ 230,000 1,845 334,500 20,000 228,155 10,000 500 1,545 8,300 Less: Qualifying charitable donations 355,000 5,000 248,000 5,000 Taxable total profits (TTP) 350,000 243,000 Corporation tax @ 20% Corporation tax @ 19% 70,000.00 46,170.00 Notes' (i) The AIA maximum for the year to 31 March 2017 is £200,000 (ii) The year to 31 March 2017 coincides with FY2016 Therefore corporation tax is payable at the FY2016 main rate of 20% (iii) The six months to 30 September 2017 are wholly contained within FY2017 Therefore corporation tax is payable at the FY2017 main rate of 19% (c) The due date of payment for the year to 31 March 2017 is January 2018 The due date of payment for the six months to 30 September 2017 is July 2018 In each case, the payment date is nine months and one day after the end of the accounting period (d) If trading profits were £3,690,000 for the 18 months (i.e £3m higher than originally stated) then TTP for the two accounting periods would be £2m higher and £lm higher respectively The revised tax liabilities would be £470,000 and £236,170 The company would be "large" for payment by instalments purposes in both accounting periods since profits would exceed £1,500,000 in the year to 31 March 2017 and £750,000 (6/12 x £1,500,000) in the six months to 30 September 2017 However, the company was not large in the 12 months before the year to 31 March 2017 so the corporation tax for this year would still fall due on January 2018 Corporation tax for the six months to 30 September 2017 would be payable in two instalments of £118,085 each on 14 October 2017 and 14 January 2018 599 PART 5: Answers Question C2 Trading income Income from non-trading loans Chargeable gains y/e 30/6/15 £ 2,050,000 51,600 - mths to 31/3/16 £ 260,000 39,000 - Less: Gift Aid donations 2,101,600 10,000 299,000 8,000 37,400 5,000 Taxable total profits (TTP) 2,091,600 291,000 32,400 Tax @21% Tax @ 20%/20%/20% 329,427 104,580 58,200 6,480 Corporation tax liability 434,007 58,200 6,480 (a) y/e 31/3/1: £ 28,700 8,700 Notes: (i) Capital losses carried forward at 30 June 2015 are £35,300 (£67,300 - £32,000) Therefore net chargeable gains for the year to 31 March 2017 are £8,700 (£47,000 - £35,300 - £3,000) (ii) The first nine months of the year to 30 June 2015 falls into FY2014 (main rate 21%) and the last three months fall into FY2015 (main rate 20%) (iii) The company's profits exceed £1,500,000 for the year to 30 June 2015, so corporation tax is payable at the FY2014 main rate for the first nine months of that year (b) Trading income Income from non-trading loans Chargeable gains y/e 30/6/15 £ 2,050,000 51,600 - mths to 31/3/16 £ 260,000 39,000 - Less: Trading losses 2,101,600 525,400 299,000 299,000 37,400 37,400 Less: Gift Aid donations 1,576,200 10,000 0 0 Taxable total profits (TTP) 1,566,200 0 324,986 0 Corporation tax liability @ 2l%/20% y/e 31/3/17 £ 28,700 8,700 Notes: (i) Only three months of the year to 30 June 2015 fall into the 12 months prior to the loss-making period Therefore loss relief in this year is restricted to £525,400 (£2,101,600 x 3/12) (ii) Trading losses c/f are £33,200 (£895,000 - £37,400 - £299,000 - £525,400) (c) The reduction in the liability for the year to 30 June 2015 is £109,021 (£434,007 - £324,986) so the total tax saved as a result of the loss relief claims is £173,701 (£109,021 + £58,200 + £6,480) 600 Answers to Review Questions Question C3 BB Ltd Trading profits Income from non-trading loans Property income Chargeable gains AA Ltd £ 1,230,400 16,300 43,500 £ 167,800 5,000 - CC Ltd £ 852,500 15,000 37,300 Less: Gift Aid donations 1,290,200 5,200 172,800 1,000 904,800 4,800 Taxable total profits (TTP) 1,285,000 171,800 900,000 257,000 34,360 180,000 Corporation tax at 20% The corporation tax liabilities of BB Ltd and CC Ltd are both due for payment on January 2018 (i.e nine months and one day after the end of the accounting period) But AA Ltd has profits (including dividends received) of £1,525,000 and this figure exceeds £1,500,000 Therefore, unless the company was not large in the previous 12 months, AA Ltd must pay tax by instalments These instalments fall due on 14 October 2016, 14 January 2017, 14 April 2017 and 14 July 2017 Each instalment is (£257,000 x 1/4) = £64,250 However, if AA Ltd was not large in the previous 12 months, instalments are not required and the corporation tax liability of £257,000 is payable on January 2018 (b) If the accounting period is the year to 31 March 2018, the applicable rate of corporation tax is the FY2017 main rate of 19% The corporation tax liabilities of the three companies become £244,150, £32,642 and £171,000 respectively (c) If the accounting period is the year to 31 August 2017, the first seven months fall into FY2016 (main rate 20%) and the remaining five months fall into FY2017 (main rate 19%) The tax liability of AA Ltd becomes (£1,285,000 x 7/12 x 20%) + (£1,285,000 x 5/12 x 19%) = £251,646 Similarly, the tax liabilities of BB Ltd and CC Ltd become £33,644 and £176,250 Question C4 (a) The company has two alternatives One alternative is to carry the loss back and set it against the total profits (before donations) of the year to 31 March 2017 The other is to carry the loss forward and set it against the trading profits of the year to 30 September 2018 (b) The main deciding factor is the rate at which the company pays corporation tax for the period in which loss relief is given The year to 31 March 2017 coincides with FY2016 (main rate 20%) whilst the year to 30 September 2018 falls partly into FY2017 (main rate 19%) and partly into FY2018 (main rate also 19%) So the better alternative is to carry the loss back and save tax at 20% There will be sufficient profits left in the year to 31 March 2017 to cover the donations of £1,500 But the donations of £750 will be unrelieved whatever the company does Any claim to carry the loss back must be made by 30 September 2019 601 PART 5: Answers Question C5 (a) Trading profits (£173,000 -£32,000) Income from property Chargeable gains (£6,400 - £1,400) Qualifying charitable donations £ 141,000 46,000 5,000 (20,000) Taxable total profits (TTP) 172,000 Tax on (6/12 x £172,000) = £86,000 (a$ 20% 17,200 Tax on (6/12 x £172,000) = £86,000 (a$ 19% 16,340 Corporation tax liability payable July 2018 33,540 Note: The first six months of the accounting period fall into FY2016 (main rate 20%) The remaining six months fall into FY2017 (main rate 19%) (b) The corporation tax liability would be unaltered if the company had nine subsidiaries But the subsidiaries would rank as "related 51% group companies" and the £1,500,000 profits limit which is used to determine whether or not tax is payable by instalments would be divided by (9 + 1) = 10, giving a limit of £150,000 The profits figure for the year (including dividends received but ignoring dividends from subsidiaries) is £172,000 This exceeds £150,000 so the company would be "large" for the year to 30 September 2017 Unless the company was not also large in the previous 12 months, the corporation tax liability would be payable in four instalments of £8,385 (£33,540 x 1/4) These instalments would fall due on 14 April 2017, 14 July 2017, 14 October 2017 and 14 January 2018 Set D Question D1 (i) Accumulative turnover up to the end of November is £49,200 This becomes £65,200 by the end of December and £83,700 (exceeding the registration threshold of £83,000) by the end of January It will be necessary to notify HMRC within 30 days of the end of January 2017 and registration will probably take effect from March 2017 Delay is inadvisable since there are penalties for delaying registration beyond the due date (ii) The input tax relating to stock held (i.e not yet sold or consumed) on the date of registration may be reclaimed since it was supplied to Mr Deans within the four years prior to that date (iii) Input tax relating to the van is recoverable but not the input tax relating to the car The input tax relating to all motor expenses, including all petrol, is recoverable but Mr Deans will have to account for output tax in respect of the fuel provided for private use The amount of output tax due is calculated in accordance with scale charges which depend upon the car's emissions (iv) 602 Bad debt relief is available so long as Mr Deans has written off the debt in his books and at least six months have elapsed since the date of supply The cash accounting scheme would provide automatic bad debt relief Answers to Review Questions Question D2 The value of each lifetime gift after deduction of exemptions is as follows: 2010-11 2011-12 2013-14 2015-16 Daughter Son Grandson (£20,000 - £2,500) Gift to charity (exempt) Value before AE £ 60,000 60,000 17,500 - AE for current year £ 3,000 3,000 3,000 - AE for previous year £ 3,000 3,000 - Value after AE £ 54,000 57,000 11,500 - The first three gifts were PETs and the gift to the charity was an exempt transfer, so there was no lifetime tax liability in relation to any of these gifts The tax liability on death is as follows: (i) Gift to daughter Chargeable transfers in the previous seven years were £275,000, so the nilrate band available is £50,000 IHT (before taper relief) is (£4,000 x 40%) = £1,600 Taper relief (5-6 years) at 60% is £960, so IHT due is £640 (ii) Gift to son Chargeable transfers in the previous seven years were (£275,000 + £54,000) = £329,000, so the nil-rate band available is £nil IHT (before taper relief) is (£57,000 x 40%) = £22,800 Taper relief (4-5 years) at 40% is £9,120, so IHT due is £13,680 (iii) Gift to grandson Chargeable transfers in the previous seven years were (£275,000 + £54,000 + £57,000) = £386,000, so the nil-rate band available is £nil IHT (before taper relief) is (£11,500 x 40%) = £4,600 Taper relief (3-4 years) at 20% is £920, so IHT due is £3,680 (iv) Estate Chargeable transfers in the previous seven years were (£54,000 + £57,000 + £11,500) = £122,500, so nil-rate band available is £202,500 IHT due is (£97,500 x 40%) = £39,000 Question D3 UK income Income net of of 15% tax £ Income net of 25% tax £ 6,000 8,500 6,000 8,500 Less; Gift Aid donations 180,000 7,500 194,500 7,500 Taxable total profits (TTP) 172,500 6,000 8,500 187,000 Corporation tax at 20% Less: DTR 34,500 1,200 900 1,700 1,700 37,400 2,600 Corporation tax liability 34,500 300 34,800 Trading income Chargeable gains Overseas property income £ 175,000 5,000 Total £ 175,000 5,000 14,500 Note\ There is unrelieved foreign tax of [(£8,500 x 25%) - £1,700] = £425 603 PART 5: Answers Question D4 A Ltd controls 75% or more of B Ltd (85%) and D Ltd (85% x 90% = 76.5%) so these three companies form a 75% group C Ltd is a consortium company owned by A Ltd and E Ltd The trading loss incurred by C Ltd may be surrendered to A Ltd and E Ltd in proportion to their shareholdings in C Ltd The trading loss incurred by D Ltd may be surrendered to A Ltd or B Ltd Since both of these companies pay corporation tax at 20% for the year, the tax saving would be the same in both cases It is assumed here that the loss is surrendered to A Ltd The corporation tax liability of each company is as follows: Trading income Loan interest Overseas property income: £8,200 x100/82 Less: Gift Aid donations Less: Consortium relief: 60% x £30,000 40% x £30,000 A Ltd £ 240,000 5,000 BLtd £ 45,000 2,500 C Ltd D Ltd E Ltd £ £ £ 80,000 - 10,000 245,000 1,000 57,500 500 - - 80,000 1,000 244,000 57,000 - - 79,000 18,000 12,000 Less: Group relief 226,000 25,000 57,000 67,000 Taxable total profits (TTP) 201,000 57,000 0 67,000 Tax @20% Less: DTR 40,200 - 11,400 1,800 0 13,400 Corporation tax liability 40,200 9,600 0 13,400 Notes: (i) UK dividends received not form part of the receiving company's taxable profits (ii) DTR is the lower of the foreign tax suffered (£1,800) and the UK tax on the foreign income (£10,000 x 20% = £2,000), which is £1,800 In general, Gift Aid donations are set against UK income so as to maximise DTR However, in this case, even if the Gift Aid donations were set against the foreign income, this would still leave a UK tax liability on that income of £1,900 (£9,500 x 20%) so DTR of £1,800 would still be available (iii) If the D Ltd trading loss of £25,000 were surrendered to B Ltd (instead of A Ltd) this would be set against the UK income Otherwise, DTR of £1,800 would be lost 604 Index 1982 holding, 372 Above the line tax credit, 354 Accommodation, 105 Accounting periods, 338 Accrued income scheme, 70 Acquisitions, 461 Additional rate of income tax, 19 Adjudicator, 14 Adjusted net income, 33 Adjusted profits, 118 Administration, capital gains tax, 257 corporation tax, 387 income tax, inheritance tax, 507 value added tax, 483 Agency workers, 84 Agricultural flat-rate scheme, 476 Agricultural property relief, 507 Annual accounting scheme, 475 Annual allowance charge, 206 Annual exemption, 250, 493 Annual investment allowance, 156, 341 Annuities, 21, 22, 51 Appeals, corporation tax, 388 income tax and CGT, 11 inheritance tax, 508 value added tax, 484 Approved mileage rates, 87 Assessments, corporation tax, 387 income tax and CGT, inheritance tax, 508 value added tax, 484 Assets held on April 1965, 367 Assets held on 31 March 1982, 267, 364 Assets loaned to employees, 107 Associated companies, 430 Associates, 413 Augmented profits, 392 Averaging of profits, 143 Bad debts, income tax, 121 value added tax, 478 Badges of trade, 116 Balancing allowances, 161 Balancing charges, 161 Balancing payments, 9, 215 Basic rate of income tax, 19 Basis periods, 132 on cessation of trade, 136 on change of accounting date, 138 on commencement of trade, 133 partnerships, 193 Bed and breakfasting, 288 Beneficial loans, 112 Benefits-in-kind, 103,417 Bicycles, 86, 87 Blind person's allowance, 36 Blocked input tax, 479 Bonus issues, 293, 373 Business investment relief, 514, 520 Business property relief, 506 Business splitting, 464 Capital allowances, 149, 341 Capital distributions, 296 Capital gains group, 436 Capital gains tax, 247-329 overseas aspects, 520 Capital losses, 253 companies, 360, 409 pre-entry, 439 605 Index Cars, benefits in kind, 108 leased, 124 National Insurance contributions, 229 sharing schemes, 86 value added tax, 479 Carry-forward trade loss relief, 174, 399 Case law, Cash accounting scheme, 474 Cash basis, 126 Cessation of trade, 136, 166, 183 Chancellor of the Exchequer, Change of accounting date, 138 Chargeable assets, 248, 359 Chargeable business assets, 320 Chargeable disposals, 249, 359 Chargeable lifetime transfers, 496 Chargeable overseas earnings, 517 Chargeable period, 149,341 Chargeable person, capital gains tax, 247 inheritance tax, 491 Chargeable property, 491 Charitable donations, 347, 400 Chattels, 271,276 Child benefit, 17, 92 Child trust funds, 16, 75, 248 Civil partners, 19, 36, 50, 249, 262, 492 Close companies, 412 Close investment-holding companies, 419 Commencement of trade, 133, 179 Community investment tax credits, 71 Company share option plans, 100 Company with investment business, 419 Compensation payments, 91 Composite supplies, 460 Consortium company, 439 Consortium member, 439 Construction industry, 97 Contribution period, 224 Controlled foreign companies, 524 Corporation tax, 337-443 overseas aspects, 521 Creative artists, 143 Current year basis, 132 Damaged assets, 313 606 Date of payment, capital gains tax, 258 corporation tax, 383 income tax, 214 inheritance tax, 508 Default surcharge, 486 Degrouping charge, 437 De-pooling election, 163 Depreciating assets, 318 Deregistration, 468 Destroyed assets, 316 Determinations, 9, 388 Digital tax accounts, 7, 216 Direct recovery of tax debts, 216 Direct taxation, Directors, 413 basis of assessment, 85 National Insurance contributions, 228 Disclosure of tax avoidance schemes, 12 Discounts, 459 Discovery assessment, 10, 388 Discretionary trust, 78, 495 Disincorporation relief 376 Disposition, 490 Diverted profits tax, 529 Dividends, 27, 70, 347 Dividend additional rate, 27 Dividend allowance, 27 Dividend nil rate, 27 Dividend ordinary rate, 27 Dividend trust rate, 78 Dividend upper rate, 27 Domicile, 491, 513, 521 Double taxation relief, treaty, 515, 525 underlying, 526 unilateral, 515, 525, 527 Early trade losses relief, 179 Employee ownership trusts, 87, 249, 492 Employee shareholder status, 101, 248 Employment, 82, 516 Employment allowance, 227 Enhancement expenditure, 262 Enquiries, 10, 388 Enterprise investment scheme, 73, 326 Enterprise management incentives, 100, 323 Index Enterprise zones, 341 Entertaining, 90, 120, 479 Entrepreneurs' relief, 251, 323 European Economic Area, 33, 522 European law, Exempt income, 17 Exempt supplies, 456 Exemptions, inheritance tax, 492 Expenses, employment, 88 self-employment, 119 Exports, 461 Extra-statutory concessions, Farmers, 143 Filing date, Financial year, 381 First year allowance, 158,341 First year tax credit, 341 Fiscal year, Fixed rate deduction scheme, 127 Flat-rate scheme for farmers, 476 Flat-rate scheme for small businesses, 475 Foreign dividends, 519, 521 Foreign earnings, 516 Franked investment income, 347, 392 Fuel, income tax, 111 value added tax, 480 Furnished holiday lettings, 63 General anti-abuse rule, 13 Gift Aid scheme, 52, 347 Gifts, income tax, 120 of business assets, 320, 458 of listed shares or property, 49, 347 of pre-eminent property, 51, 249, 383, 492 with reservation, 503 Gilt-edged securities, 21, 300, 359 Grossing-up, 21, 496 Groups, 428 group payment arrangements, 431 group registration, 467 group relief, 433, 440 transfer of chargeable assets, 436 High income child benefit charge, 17, 92 Higher rate of capital gains tax, 251 Higher rate of income tax, 19 HM Revenue and Customs, HMRC Charter, 13 Hold-over relief, 318, 320, 322 Holiday accommodation, 63 Imports, 461 Incentive schemes, 98 Income, from employment, 82, 516 from property, 56, 345, 519 from self-employment, 116, 518 Income tax, 15-222 overseas aspects, 514 Incorporation, 425 Incorporation relief, 322 Indexation allowance, 361 Indirect taxation, Individual savings accounts, 71, 248 Inheritance tax, 490-510 overseas aspects, 521 Input tax, 453 Instalments, capital gains tax, 258 corporation tax, 384 Intangible fixed assets, 355 losses, 408 Integral features, 152 Interest, paid, 48, 57, 122, 348 received, 68, 348 Interest in possession trust, 76, 495 Interest on overpaid tax, capital gains tax, 258 corporation tax, 348, 388 income tax, 219 value added tax, 487 Interest on underpaid tax, capital gains tax, 258 corporation tax, 348, 388 income tax, 218 inheritance tax, 508 value added tax, 487 IR35, 84 ISAs, 71 248 607 Index Job-related accommodation, 106, 305 Job seeker's allowance, 85 Junior ISAs, 16, 72 Know-how, 168 Land, small part disposals, 265 Landlords, 56 Late payment penalties, 217 Lease premiums, 60, 123, 124 Leased cars, 124 Leases, 279 Lennartz method, 479 Letting relief, 308 Lifetime allowance charge, 209 Limit on income tax reliefs, 48, 184 Living accommodation, 105 Loan relationships, 348, 408 Loans, beneficial, 112 to participators, 417 to traders, 327 Long-life assets, 152 Losses, capital, 253, 409, 438 intangible fixed assets, 408 non-trading loan relationships, 408 partnerships, 194 pre-entry capital, 439 property, 59, 345, 408 shares in unlisted trading companies, 183 trading, 173,255,398 transfer of business to a company, 183 Lower rate of inheritance tax, 500 Low value consignment relief, 461 Main pool, 152 Main residence nil-rate band, 502 Maintenance payments, 50 Managed service company, 84 Marginal rate of tax, 43, 395 Marginal relief, chattels, 271 corporation tax, 393 Margin scheme, 476 Marriage allowance, 34 Married couples, 19, 36, 50, 249, 262, 492 608 Married couple's allowance, 36 Migration, 523 Miscellaneous income, 79 Missing trader fraud, 462 Mixed supplies, 460 Mobile telephones, 87, 108 National Insurance contributions, Class 1,223 Class 1A, 229 Class IB, 229 Class 2, 230 Class 3, 230 Class 3A, 230 Class 4, 231 Directors, 228 Negligible value, assets with, 266 Net income, 18, 21 Nil-rate band, 496, 498, 501 NISAs, 72 Non-active trader, 179, 196 Non-pooled assets, 161 Occupational pension schemes, 89, 200 Older taxpayers, 36, 50 Online filing, 8, 96, 471 Options, 99 Option to tax, 457 Output tax, 453 Overlap profits, 134, 140 Overlap relief, 135, 140 Overseas branch, 521 Overseas income, 514 Overseas subsidiary, 522 Own consumption, 125 Part disposals, 264 Partial exemption, 481 Participators, 413 Partnerships, 187 changes in membership, 191 changes in agreement, 188 losses, 194 non-trading income, 193 notional profits and losses, 190 Patent box, 355 Patent rights, 167 Index Patent royalties, 49, 124, 355 Pay As You Earn, 93 PA YE settlement agreements, 229 Payments on account, 9, 214, 471 Payroll giving scheme, 90 Penalties, capital gains tax, 258 corporation tax, 390 income tax, 219 value added tax, 485 Pension contributions, 89, 123, 199 Pension input amount, 206 Pension schemes, 199 Period of account, 338 Permanent establishment, 337, 521, 522 Personal allowances, 32 Personal company, 320, 323 Personal savings allowance, 22 Personal service company, 84 Place of supply, 462 Plant and machinery, 150 Pool cars, 111 Post-cessation expenditure, 183 Post-cessation receipts, 125 Potentially exempt transfers, 494 Pre-entry capital losses, 439 Premiums on short leases, 60, 123, 124 Pre-registration input tax, 467 Pre-trading expenditure, 124 Primary threshold, 225 Principal private residence, 304 Private use of business assets, 162 Profession, 116 Profits averaging, 143 Prompt payment discounts, 459 Property income, 56, 345, 519 Property income allowance, 58 Qualifying corporate bonds, 300, 359 Quick succession relief, 503 Rates of tax, capital gains tax, 251 corporation tax, 382 income tax, 19 inheritance tax, 496, 498, 500 value added tax, 454 Real estate investment trusts, 27, 57, 345 Real time information, 96 Rebasing, 267, 364, 367 Reconstructions, 441 Reduced rate of value added tax, 457 Redundancy pay, 91 Registered pension scheme, 199 Registration, 463 Related 51% group companies, 428 Related property, 505 Relevant foreign income, 514 Relevant property trust, 495 Remittance basis, 514 Rent-a-room relief, 63 Repayment supplement, income tax, 219 value added tax, 487 Replacement domestic items relief, 58 Replacement of business assets, 317 Research and development, 168, 354 Residence, 511 Retail schemes, 477 Retirement annuity contract, 203 Reverse charge procedure, 462 Reverse premiums, 62 Reversionary interest, 495 Rights issues, 294, 373 Roll-over relief, 317, 436 Royalties, 49, 124,355 Sale of rights nil paid, 296 Samples, 455 Savings income, 22 Savings nil rate, 22 Savings-related share option scheme, 99 Scottish taxpayers, 20, 94 Secondary threshold, 226 Second-hand goods, 476 Section 104 holding, 290, 368 Seed enterprise investment scheme, 74, 327 Self assessment, 7, 214, 387 Self-employment, 82, 116, 518 Self-supply, 455 Sets of chattels, 275 Settlements, 76, 495 Shadow advance corporation tax, 386 Share incentive plans, 98 609 Index Share matching rules, 288, 368 Share option schemes, 99 Shares and securities, 288, 368 acquired before April 1965, 375 valuation, 262, 504 Short lease premiums, 60, 123, 124 Short-life assets, 163 Sideways relief, 176, 179, 196 Simple assessment, Simplified expenses, 127 Small capital distributions, 297 Small profits rate, corporation tax, 392 Small profits threshold, 230 Social investment tax relief, 71, 327 Social security benefits, 85 Special rate pool, 152 Standard rate of capital gains tax, 251 Standard rate of value added tax, 454 Starting rate for savings, 22 Statements of practice, Statute law, Statutory instruments, Subcontractors, 97 Substantial shareholdings, 375 Supply, of goods, 455 of services, 455 Surrender of losses, 433 Takeovers, 298 Taper relief, inheritance tax, 498 Tax avoidance, 12, 484 Tax codes, 93 Tax evasion, 12 Tax invoice, 472 Tax point, 472 Tax reducers, 36, 50 Tax returns, 7, 387 Tax year, Taxable gains, 250 Taxable persons, 15,454 Taxable supplies, 454 610 Taxable total profits, 339 Terminal trade loss relief, 181 Termination payments, 91 Trade, 116 Trade loss relief against total income, 176 Trade loss relief against total profits, 402 Trading income allowance, 125 Trading losses, 173, 194, 255, 398 Transfer of business to a company, 183, 322 Transfer of value, 490 Transfer pricing, 431, 523 Transitional overlap relief, 142 Tribunals, 11 Trivial benefits in kind, 104 Trust rate, 78 Trusts, 76, 495 Underlying double taxation relief, 526 Unilateral double taxation relief, 515, 525 Unlisted trading companies, losses on shares in, 183 Unrelieved foreign tax, 525 Upper earnings limit, 225 Upper secondary threshold, 227 Valuation, inheritance tax, 504 listed shares, 262, 504 Value added tax, 453-489 Vans, 112 Venture capital trusts, 74, 248 Vocation, 116 Voluntary registration, value added tax, 466 Vouchers, 105 Wasting assets, 277 Wasting chattels, 276 Withholding tax, 515 Writing down allowance, 153, 341 Year of assessment, Year of change, 138 Zero rate supplies, 457 ... ended on 31 March 2016 This book takes into account the provisions of Finance Act 2016 (which is based on the March 2016 Budget) and describes the UK taxation system for fiscal year 2016- 17 and corporation... tax Taxation of Chargeable Gains Act 1992 TCGA 1992 Inheritance tax Inheritance Tax Act 1984 IHTA 1984 Corporation tax Taxation of Chargeable Gains Act 1992 TCGA 1992 Capital Allowances Act 2001... flourishes, so people To learn more, please visit us at www.pearson.com/uk Taxation Finance Act 2016 Twenty-second edition Alan Melville FCA, BSc, Cert Ed PEARSON Harlow, England • London * New York