Acca - f6 - Taxation Fa 2017 - Cts

ACCA F6
Taxation (UK)
BPP LEARNING MEDIA

Key to icons
Syllabus Case study
Technical content Real world example
Question to consider Diagram
Answer Key model
Past exam question Tackling the exam
Answer to past exam Summary

question
BPP LEARNING MEDIA

Syllabus
A The UK tax system and its administration
B Income tax and NIC liabilities
C Chargeable gains for individuals
D Inheritance tax
E Corporation tax liabilities
F Value added tax
BPP LEARNING MEDIA

Exam format
Marks
Section A 15 two mark multiple choice questions 30
(MCQs) on any part of the syllabus
Section B Three 10 mark questions each of five 30
MCQs on any part of the syllabus
Section C One question on any part of the 10
syllabus
One question focusing on income tax 15
One question focusing on corporation 15
tax
Total 100
BPP LEARNING MEDIA

Chapter 1 • Purpose of taxation
• Types of tax
Introduction to the • Sources of revenue law and
UK tax system practice
• Tax years and financial years
• Tax avoidance and tax evasion
BPP LEARNING MEDIA

Syllabus learning outcomes 1
• Describe the purpose (economic, social etc) of taxation in

a modern economy.
• Explain the difference between direct and indirect taxation.
• Identify the different types of capital and revenue tax.
• Describe the overall structure of the UK tax system.
• State the different sources of revenue law.
• Describe the organisation of HM Revenue and Customs
(HMRC) and its terms of reference.
• Explain the difference between tax avoidance and tax
evasion and the purpose of the General Anti-Abuse Rule
(GAAR).
BPP LEARNING MEDIA

• Appreciate the interaction of the UK tax system with that of

other tax jurisdictions.
• Appreciate the need for double taxation agreements.
• Explain the need for an ethical and professional approach.
BPP LEARNING MEDIA

Chapter summary diagram
Purpose Type
of taxation of tax
Introduction to the
UK tax system
Sources of revenue law Tax avoidance/

and practice Tax years and evasion
financial years
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter may be examined as MCQs in

Section A or Section B or as part of a Section C question.
• You should ensure that you have a good knowledge of the
basic structure of the UK tax system.
• You need to understand the difference between tax
evasion and tax avoidance and the ethical aspects arising
from tax evasion.
BPP LEARNING MEDIA

Purpose of taxation
• Economic factors:
— Used to encourage and discourage certain types of
activity
• Social factors:
— Redistribution of income and wealth
• Environmental factors:
— To deal with environmental concerns like global
warming
BPP LEARNING MEDIA

Question: Tax policies
The UK Government uses tax policies to encourage certain

types of activity.
Required
Briefly explain how the UK Government’s tax policies
encourage:
(i) Individuals to save; (1 mark)
(ii) Individuals to support charities; (1 mark)
(iii) Entrepreneurs to build their own businesses and to
invest in plant and machinery. (2 marks)
BPP LEARNING MEDIA

Answer: Tax policies
Saving is encouraged by offering individuals tax incentives

such as income tax and capital gains tax exemptions on
individual savings accounts and income tax relief on pension
contributions.
Charitable support is encouraged by giving individuals
income tax relief on donations made through the gift aid
scheme or by payroll deduction.
Entrepreneurs are encouraged to build their own businesses
through various capital gains tax reliefs such as
entrepreneurs’ relief.
Investment in plant and machinery is encouraged through
capital allowances.
BPP LEARNING MEDIA

Types of tax 1
Tax Direct or Capital or Suffered by
indirect revenue
Income tax Direct Revenue Individuals

Partners
National insurance Direct Revenue Employers, employees

Self employed
Corporation tax Direct Both UK companies
Capital gains tax Direct Capital Individuals

Partners
Inheritance tax Direct Capital Individuals
Value added tax Indirect Both Businesses
BPP LEARNING MEDIA

Types of tax 2
Direct and indirect taxes

• Direct taxes are those charged on income, gains and
wealth.
• Income tax, national insurance, corporation tax, capital
gains tax and inheritance tax are direct taxes.
• Direct taxes are collected directly from the taxpayer.
• Indirect taxes are those paid by the consumer to the
supplier who then passes the tax to the Government.
• Value added tax is an indirect tax.
• Both direct and indirect taxes are under the care and
management of HM Revenue and Customs.
BPP LEARNING MEDIA

Types of tax 3
Revenue and capital taxes

• Revenue taxes are charged on income including profits
from business ventures.
• Capital taxes are charged on capital gains or wealth.
• Corporation tax is charged on both income and gains of
UK companies.
BPP LEARNING MEDIA

Sources of revenue law and practice 1
• HM Revenue and Customs is a part of HM Treasury and

has responsibility for the self-assessment regime and
collection of taxes.
• Revenue and Customs Prosecutions office provides legal
advice and institutes and conducts criminal prosecutions.
BPP LEARNING MEDIA

• Reviews and appeals:

― Internal review by HMRC officer.
― Appeal to Tax Tribunal.
• Tax Tribunal:
― First Tier Tribunal deals with most cases.
― Upper Tier deals with complex cases and appeals
against decisions of First Tier Tribunal.
BPP LEARNING MEDIA

Primary legislation
• Acts of Parliament eg Taxation of Capital Gains Tax Act
1992.
• Sets out principles and main details of law.
• Finance Act passed by Parliament each year to update the
various rules governing the calculation and collection of
tax for the current tax year and financial year (and
sometimes later tax years/financial years).
• Finance Act 2017 broadly governs the rules for the tax
year 2017/18 and for financial year 2017.
BPP LEARNING MEDIA

Secondary legislation
• Statutory instruments eg Income Tax (Pay As You Earn)
Regulations 2003.
• Sets out details of how law works in practice.
BPP LEARNING MEDIA

Case law
• Eg Hall v Lorimer 1994.
• Interprets and amplifies legislation in specific
circumstances.
• May also affect other taxpayers in similar circumstances if
creates precedent.
BPP LEARNING MEDIA

HMRC publications
• HMRC publications generally do not have legal force but
are advisory.
• Statements of Practice: how HMRC interprets law.
• Extra-Statutory Concessions: circumstances where HMRC
does not impose strict interpretation of law.
• Explanatory leaflets.
• Revenue and Customs Brief: HMRC's view on specific
points.
• Internal Guidance: HMRC manuals.
• Agent Update: for tax practitioners.
BPP LEARNING MEDIA

• Interaction with European Union:

―Value added tax is an EU-wide tax.
―Applies to UK until UK ceases EU membership.
―Exchange of information between EU Revenue
authorities.
BPP LEARNING MEDIA

• Double taxation treaties:

―Same income or gains taxable in UK and another
country.
―May provide that income/gains taxed in only one
country or credit given for tax paid in one country
against liability in other country.
―Exchange of information between treaty countries.
BPP LEARNING MEDIA

Tax years and financial years 1
Tax year
• Tax year, or fiscal year, or year of assessment runs from 6
April to 5 April following.
• Tax year 2017/18 runs from 6 April 2017 to 5 April 2018.
• Tax year is period for which individuals submit returns and
pay tax (eg Income tax, National insurance, Capital gains
tax).
BPP LEARNING MEDIA

Tax years and financial years 2
Financial year
• Financial year runs from 1 April to the following 31 March.
• Financial year 2017 runs from 1 April 2017 to 31 March
2018.
• Corporation tax rates set for financial years.
BPP LEARNING MEDIA

Tax avoidance and tax evasion 1
• Tax evasion:
― Misleading HMRC by suppressing information or
deliberately providing false information
― Illegal
BPP LEARNING MEDIA

• Tax avoidance:
― Using the legislation to reduce your tax burden
― Legal
― HMRC may challenge tax avoidance schemes which
are artificial through the courts
• General Anti-Abuse Rule (GAAR): enables HMRC to
counteract tax advantages from abusive tax
arrangements.
BPP LEARNING MEDIA

• If client makes material error or omission in tax return, or

fails to file tax return, and does not correct error, omission
or failure when advised, then accountant must:
― Cease to act for the client
― Inform HMRC of this cessation (but not details of why)
― Consider making money laundering report to firm's
money laundering reporting officer or the National
Crime Agency if the accountant is a sole practitioner
BPP LEARNING MEDIA

• Accountant who suspects or is aware of tax evasion by a

client may be committing an offence if does not report
suspicions.
• Accountant must not disclose to the client or a third party
that such a report has been made as such disclosure may
be a criminal offence ('tipping-off').
BPP LEARNING MEDIA

Question: Alec
Alec is a sole practitioner, who acts for L Ltd in relation to its

corporation tax affairs. The company has recently submitted
its corporation tax return for the accounting period ended 31
December 2017.
Yesterday, the managing director of the company mentioned,

in a meeting with Alec, that the company understated the
proceeds on the disposal of a plot of land in September
2017. The director indicated that he did not wish to disclose
the true proceeds to HM Revenue and Customs (HMRC).
BPP LEARNING MEDIA

Question: Alec – cont’d
Required
(a) Explain why the understatement is tax evasion, rather
than tax avoidance.
(b) Explain in brief how Alec should deal with the suggestion
from the director that the true proceeds should not be
disclosed to HMRC, from an ethical viewpoint.
BPP LEARNING MEDIA

Answer: Alec (a)
Tax evasion consists of seeking to pay too little tax by

deliberately misleading HMRC by either suppressing
information or providing deliberately false information.
Tax avoidance is, broadly, any legal method of reducing the
taxpayer’s tax burden such as taking advantage of a tax
shelter opportunity explicitly offered by tax legislation.
The understatement (by provision of false information) is
therefore tax evasion rather than tax avoidance.
BPP LEARNING MEDIA

Answer: Alec (b)
Alec should recommend that disclosure of the true proceeds

should be made to HMRC as soon as possible.
If the managing director, having had reasonable time to
reflect, does not correct the error, the company should be
notified in writing that it is no longer possible for Alec to act
for it.
BPP LEARNING MEDIA

Answer: Alec (b) – cont’d
Alec should notify HMRC that he no longer acts for the

company but should not provide details of the reason for
ceasing to act.
Alec, as a sole practitioner, should also make a money
laundering report to the National Crime Agency.
BPP LEARNING MEDIA

Question: Tax evasion
The following acts have been committed in the course of

business of one of your clients.
(1) A customer invoice was omitted from accounting
records in order to push it into the taxable profits of
the following tax year.
(2) The client decided to gift an asset to his spouse in
order to reduce a capital gains tax liability.
Which of these actions amounts to tax evasion?
BPP LEARNING MEDIA

Question: Tax evasion – cont’d
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
BPP LEARNING MEDIA

Answer: Tax evasion
A 1 only
Action 1 involves misleading HMRC to delay a legitimate
tax charge and so is tax evasion.
Action 2 is the result of legitimate tax planning so is tax
avoidance rather than tax evasion.
BPP LEARNING MEDIA

Question: Specimen exam question A2
You are a trainee Chartered Certified Accountant and your

firm has a client who has refused to disclose a chargeable
gain to HM Revenue and Customs (HMRC).
From an ethical viewpoint, which of the following actions
could be expected of your firm?
BPP LEARNING MEDIA

Question: Specimen exam question A2 – cont’d
(1) Reporting under the money laundering regulations

(2) Advising the client to make disclosure
(3) Informing HMRC of the non-disclosure
(4) Warning the client that your firm will be reporting the
non-disclosure
BPP LEARNING MEDIA

A 2 and 4 only
B 1 and 2 only
C 1 and 3 only
D 1, 2, 3 and 4 (2 marks)
BPP LEARNING MEDIA

Answer: Specimen exam question A2
B 1 and 2 only
Your firm should advise the client to make disclosure. If
the client does not agree to make disclosure, your firm
should cease to act for the client, make a report under the
money laundering regulations and notify HMRC that your
firm has ceased to act for the client.
You should not inform HMRC of the details of the non-
disclosure. Your firm also should not warn the client that it
will be reporting the non-disclosure as this might
constitute the criminal offence of ‘tipping-off’.
BPP LEARNING MEDIA

Summary 1
Purpose of tax
• Taxation can be used to encourage economic, social and
environmental behaviour.
Structure of UK tax system

• Taxes are administered by HM Revenue and Customs (HMRC).
• Appeals are heard by the Tax Tribunal.
• Interaction occurs between the UK and other EU countries and those
with whom the UK has double taxation treaties.
Types of tax
• Taxes may be direct/indirect, revenue/capital.
BPP LEARNING MEDIA

Summary 2
Sources of law and practice

• Tax is embodied within legislation which is updated each year by the
Finance Act.
• HMRC issues a number of publications setting out its practice.
Tax year and financial year

• The tax year runs from 6 April to 5 April.
• The financial year runs from 1 April to 31 March.
Tax avoidance and tax evasion

• Tax evasion is illegal.
• Tax avoidance is legal.
• GAAR enables HMRC to counteract tax advantages from abusive tax
arrangements.
BPP LEARNING MEDIA

Recent exam question
Nature of question Exam details

Tax evasion and tax avoidance Specimen A2
BPP LEARNING MEDIA

• Scope of income tax
Chapter 2
• Computing taxable income
• Types of income
The computation of
• Qualifying interest
taxable income and
• Personal allowance
the income tax
• Computing tax payable
liability
• Accrued income scheme
• Gift aid
• Child benefit income tax charge
• Transferable personal allowance
• Jointly held property
BPP LEARNING MEDIA

• Explain how the residence of an individual is determined.

• Compute the tax payable on savings and dividend income.
• Recognise the treatment of individual savings accounts
(ISAs) and other tax exempt investments.
• Understand how the accrued income scheme applies to
UK Government securities (gilts).
BPP LEARNING MEDIA

• Prepare a basic income tax computation involving different

types of income.
• Calculate the amount of personal allowance available.
• Understand the impact of the transferable amount of
personal allowance for spouses and civil partners.
• Compute the amount of income tax payable.
• Understand the treatment of interest paid for a qualifying
purpose.
BPP LEARNING MEDIA

• Understand the treatment of gift aid donations.

• Explain and compute the child benefit tax charge.
• Understand the treatment of property owned jointly by a
married couple, or by a couple in a civil partnership.
• Understand how a married couple or a couple in a civil
partnership can minimise their tax liabilities.
• Basic income tax planning.
BPP LEARNING MEDIA

Chapter overview diagram
The computation of
taxable income and
income tax liability
Scope of income
tax
Computing Personal
Qualifying interest
taxable income allowances
Non-savings Dividend
income income Gift aid
Savings Tax
income calculation
BPP LEARNING MEDIA

Tackling the exam
• Specific aspects of income tax may be tested in Section A

such as identification of different types of income or
calculation of the personal allowance.
• Section B questions may involve more than one aspect of
income tax.
• There will always be one Section C 15 mark question
focusing on income tax.
• Income tax may also be tested in the Section C 10 mark
question.
• You must be able to set out the pro forma income tax
computation for a Section C question.
BPP LEARNING MEDIA

Scope of income tax 1
• UK resident individuals are liable to UK income tax on their

UK and overseas income.
• Non UK resident individuals are liable to UK income tax on
UK income only.
BPP LEARNING MEDIA

Automatic overseas test

• Individual will automatically not be UK resident if:
―Present in the UK for less than 16 days in a tax year
―Present in the UK for less than 46 days in a tax year
and not resident during the previous three tax years
―Works overseas full-time and not present in the UK for
more than 90 days in a tax year
• To be present in the UK includes any days where an
individual is in the UK at midnight.
BPP LEARNING MEDIA

Automatic resident test

• Individual will automatically be UK resident if:
―Present in the UK for 183 days or more in a tax year
―Only home is in the UK
―Works full time in the UK
BPP LEARNING MEDIA

Sufficient ties test

• If an individual's residence cannot be determined by
automatic tests then status is found by:
―Ties in the UK
―Days present in the UK in a tax year
BPP LEARNING MEDIA

Sufficient ties test (cont'd)

• Five UK ties:
―Close family in the UK
―House in the UK which is used in the tax year
―Substantive work (at least 40 days in tax year) in the
UK
―Present in the UK for more than 90 days during either
of the two previous tax years
―Spending more time in the UK than any other country
in the tax year
BPP LEARNING MEDIA

Days in UK Previously resident Not previously resident

Less than 16 Automatically NOT resident Automatically NOT resident
16 to 45 Resident if 4 UK ties (or more) Automatically NOT resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties (or more)
91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK tie ( or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident
BPP LEARNING MEDIA

Question: Sally
In 2017/18 Sally spent 15 days in the UK.

Required
State, with reasons, if Sally would be UK resident in
2017/18.
BPP LEARNING MEDIA

Answer: Sally
Sally has spent less than 16 days in the UK in 2017/18.

Sally is therefore automatically not UK resident in 2017/18.
BPP LEARNING MEDIA

Question: Jimmy
Jimmy has lived in Tokyo all of his life where he owns a

house. He came to the UK on 1 May 2017 having sold his
house in Tokyo the month before. He decided to buy a flat in
London which he used as his only home.
Jimmy lived in the London property until 30 September 2017
and then went on a backpacking holiday for a year.
Required
State, with reasons, if Jimmy would be UK resident for
2017/18.
BPP LEARNING MEDIA

Answer: Jimmy
Jimmy fails the automatic overseas test because he is

present in the UK for 46 days or more in the tax year, having
not been UK resident during the previous three tax years.
Jimmy passes the automatic UK test because he has a UK
home and does not have a home overseas.
Jimmy is therefore UK resident in 2017/18.
BPP LEARNING MEDIA

Question: Andy
Andy was UK resident in 2015/16 but does not meet any of

the automatic overseas or UK tests in 2017/18.
He spends 48 days working in the UK where he was present
at midnight.
Andy's wife lives in the UK in their joint home.
Required
State, with reasons, if Andy would be UK resident in
2017/18.
BPP LEARNING MEDIA

Answer: Andy
Andy:
• Has been resident in the UK for at least one of the
previous three tax years.
• Has three UK ties (spouse, home and UK work).
• Was present in the UK for between 46 and 90 days (48
days) during the tax year.
Andy is therefore UK resident in 2017/18.
BPP LEARNING MEDIA

Nigel has not previously been resident in the UK, being in

the UK for less than 20 days each tax year. For the tax year
2017/18, he has three ties with the UK.
What is the maximum number of days that Nigel could spend
in the UK during the tax year 2017/18 without being treated
as UK resident for that year?
A 90 days
B 182 days
C 45 days
D 120 days (2 marks)
BPP LEARNING MEDIA

A 90 days
Nigel was not previously resident in the UK. He will be
UK resident for 2017/18 with three UK ties if he spends at
least 91 days in the UK during that tax year.
Therefore maximum number of days that Nigel could
spend in the UK during the tax year 2017/18 without
being treated as UK resident for that year is 90 days.
BPP LEARNING MEDIA

Computing taxable income
Non-savings Income Savings income Dividend income
£ £ £
Trading income X
Less: loss relief (X)
X
Employment income X
Property income X
UK dividends X
Bank/ building society interest X
Loan stock interest a X a
TOTAL INCOME X X X
Less: qualifying interest paid (X)
Less: loss relief (X) __ __
NET INCOME X X X
LESS: PERSONAL ALLOWANCE (X) __ __
TAXABLE INCOME X X X
BPP LEARNING MEDIA

Types of income 1
• Non-savings income:
― Trade income
― Employment income
― Pension income
― Property business income
BPP LEARNING MEDIA

Types of income 2
• Savings income is interest income.

• Includes:
― Bank interest
― Building society interest
― Company loan stock interest
― Government stocks (gilts) interest
― National Savings and Investments (NS&I) accounts
interest
BPP LEARNING MEDIA

Types of income 3
• Dividend income is dividends received from UK companies.
BPP LEARNING MEDIA

Types of income 4
• Exempt income is not subject to income tax.

• Includes:
― Income from NS&I Certificates
― Statutory redundancy money
― Winnings from betting or competitions
― Scholarships
― Interest on damages for personal injuries
― Local authority grants
― Income from investments made through individual
savings accounts (ISAs)
BPP LEARNING MEDIA

Types of income 5
Individual Savings Accounts (ISAs)

• Two types of ISA:
― Cash ISA (only cash component)
― Stocks and shares ISA (only stock and shares
component unless provider allows some cash held)
• Annual investment limit: £20,000.
• Can withdraw and replace funds in same tax year in Cash
ISA without using up any of the annual limit.
• Investments within ISAs are exempt from:
―Income tax
―Capital gains tax
BPP LEARNING MEDIA
Winston has already invested £8,000 into a cash individual

savings account (ISA) during the tax year 2017/18. He now
wants to invest into a stocks and shares ISA.
What is the maximum possible amount which Winston can
invest into a stocks and shares ISA for the tax year 2017/18?
A £15,000
B £12,000
C £0
D £7,000 (2 marks)
BPP LEARNING MEDIA

B £12,000
£(20,000 – 8,000) = £12,000
BPP LEARNING MEDIA

Qualifying interest
• Interest paid on the following can be deducted from Total

Income:
― Loan to buy plant and machinery for use in partnership
or employment
― Loan to invest in partnership
― Loan to buy interest in employee controlled company
― Loan to invest in a co-operative
BPP LEARNING MEDIA

Personal allowance 1
• Personal allowance (PA): £11,500.

• Deducted from net income to arrive at taxable income.
• Given to all individuals (subject to tapering – see next
slide), including children.
• For F6(UK) purposes, deducted from non-savings income
first, then savings income, then dividend income.
BPP LEARNING MEDIA

Personal allowance 2
• If an individual's 'adjusted net income' for 2017/18 exceeds

£100,000, the personal allowance is reduced by £1 for
every £2 excess income.
• Once an individual's 'adjusted net income' reaches
£123,000 or over it will be reduced to nil.
• 'Adjusted net income' is after deducting gross gift aid and
gross personal pension contributions (see later in this
chapter).
BPP LEARNING MEDIA

Question: Jesse
Jesse earns £105,000 a year in salary. This is his only

income.
Required
Calculate Jesse's personal allowance for 2017/18.
BPP LEARNING MEDIA

Answer: Jesse
£
Personal allowance 11,500
Less reduction
Income 105,000
Less limit (100,000)
5,000
×½ (2,500)
Adjusted personal allowance 9,000
BPP LEARNING MEDIA

Computing tax payable 1
• Tax liability: income tax on taxable income.

• Tax payable: tax liability less tax already deducted at
source (PAYE on employment income and pension
income).
BPP LEARNING MEDIA

45% 45% 38.1%
Additional Rate
150000
Higher Rate Band
40% 40% 32.5%
33500
Basic Rate Band 20% 20% 7.5%
5000 0%
Starting Rate Band
NSI SI DI
BPP LEARNING MEDIA
• Savings income starting rate applies to savings income

where it falls in the first £5,000 of taxable income.
• If non-savings income after the personal allowance is
greater than £5,000 then starting rate does not apply.
BPP LEARNING MEDIA

• Savings income nil rate band given in addition to the

starting rate for savings income.
• Covers first £1,000 of savings income for basic rate
taxpayers.
• Covers first £500 of savings income for higher rate
taxpayers.
• No savings nil rate band for additional rate payers.
BPP LEARNING MEDIA

Question: Holly
Holly received a salary of £14,100 and £8,000 of bank

deposit interest in 2017/18.
What is Holly’s tax payable for the tax year 2017/18?
A £7,500
B £1,440
C £2,000
D £6,500
BPP LEARNING MEDIA

Answer: Holly
B £1,440 Non-savings Savings

income income Total
£ £ £
Employment income 14,100
Bank interest 8,000
Net income 14,100 8,000 22,100
Less: PA (11,500) a a
Taxable income 2,600 8,000 10,600
BPP LEARNING MEDIA

Answer: Holly – cont'd
COMPUTATION OF INCOME TAX

£1
NON SAVING
INCOME
2600 X 20% 520
SAVING INCOME
2400(5000-2600) X 0% (SAVING STARTING
RATE) 0
1000 X 0% (SAVING INCOME NIL RATE
BAND) 0
4600 (8000-2400-1000) X
20% 920
1440
BPP LEARNING MEDIA

Question: Marella
Marella has property income of £12,000 and bank interest of

£15,000 in the tax year 2017/18.
What is Marella’s income tax liability for the tax year
2017/18?
A £3,200
B £2,100
C £3,000
D £2,000
BPP LEARNING MEDIA

Answer: Marella
D £2,000 Non-savings Savings

income income Total
£ £ £
Property income 12,000
Bank interest
15,000
Net income 12,000 15,000 27,000
Less: PA (11,500) a a
Taxable income 500 15,000 15,500
BPP LEARNING MEDIA

Answer: Marella – cont'd
£
Income tax thereon:
NS 500  20% 100
SI 4,500 (5,000 – 500)  0% 0
1,000  0% (NRB basic rate taxpayer) 0
9,500 (15,000 – 4,500 – 1,000)  20% 1,900
Tax liability 2,000
BPP LEARNING MEDIA

• Dividend nil rate band covers the first £5,000 of dividend

income for all taxpayers.
BPP LEARNING MEDIA

Question: Marvyn
Marvyn has the following income in the 2017/18 tax year:

Salary £11,600 (PAYE £120)
Building society interest £10,000
Dividends £4,500
Required
Calculate Marvyn's income tax payable.
BPP LEARNING MEDIA

Answer: Marvyn
Non-savings Savings Dividend

income income income
£ £ £
BSI 10,000
DI A a 4,500
Net income 11,600 10,000 4,500
Less: PA (11,500) a a
Taxable income 100 10,000 4,500
BPP LEARNING MEDIA

Answer: Marvyn – cont'd
£
NS 100  20% 20
SI 4,900 (5,000 – 100)  0% 0
1,000  0% (NRB basic rate taxpayer) 0
4,100 (10,000 – 4,900 – 1,000)  20% 820
DI 4,500  0% 0
Income tax liability 1,040

840
Less: PAYE (120)
Income tax payable 720
BPP LEARNING MEDIA

Question: Hamish
Hamish has trading income of £130,000 for the tax year

2017/18. He also received building society interest of £3,750
and dividends of £40,000.
Required
Calculate Hamish's income tax liability.
BPP LEARNING MEDIA

Answer: Hamish
Non-savings Savings
income income Dividends
£ £ £
Trading profit 130,000
BSI 3,750
DI 40,000
Less: PA (nil) *
Taxable income 130,000 3,750 40,000
* No personal allowance as Hamish's adjusted net income of £173,750

(130,000 + 3,750 + 40,000) exceeds £123,000.
BPP LEARNING MEDIA

Answer: Hamish – cont'd
Income tax
£
33,500  20% 6,700
96,500  40% 38,600
130,000
3,750  40% (no NRB for additional rate taxpayer) 1,500

5,000  0% 0
11,250  32.5% 3,656
150,000
23,750 (40,000 – 5,000 – 11,250)  38.1% 9,049

Tax liability 59,505
BPP LEARNING MEDIA

Accrued income scheme 1
• Gilts are securities issued by the government as a way of

borrowing money eg Treasury Stock.
• Interest is paid to the holder of the gilt (the investor) in
fixed amounts on fixed dates.
• As an interest payment approaches the price of the gilt will
start to increase.
• This is because purchaser of the gilt entitled to the next
interest payment, so nearer to the interest date the more
expensive the gilt becomes.
BPP LEARNING MEDIA

Accrued income scheme 2
• Usual income tax rules state that interest is taxable on

individuals when it is received.
• Accrued income scheme applies if individual holds
government gilts with a total nominal (face) value of more
than £5,000 and sells the gilts for a price which includes
interest.
• Amount of interest which has accrued since the last
interest payment up to the date of the sale is taxed as
savings income on the seller on the date of the next
interest payment.
• When interest is paid to new owner of the gilt, they are
given tax relief by deducting the old owner’s accrued
income from new owner’s receipt.
BPP LEARNING MEDIA
Question: Cate
On 1 August 2017 Cate bought £50,000 4% Treasury stock

from James. The gilts pay interest on 30 June and 31
December each year. She paid £52,000 (including interest)
on 1 August 2017 and sold them for £54,500 (including
interest) on 31 March 2018 to Terry.
How much interest is assessable on Cate in the tax year
2017/18 in relation to these gilts?
A £1,000
B £1,333
C £1,500
D £2,333
BPP LEARNING MEDIA

Answer: Cate
B £1,333
2017
2017
BPP LEARNING MEDIA

Gift aid 1
• One-off or regular charitable gifts qualify for tax relief

under the gift aid scheme.
• Payments are always made net of basic rate (20%) tax.
• Higher rate taxpayers are entitled to a further 20%
(40% – 20%) relief on their gross donation.
• Additional rate taxpayers are entitled to a further 25%
(45% – 20%) relief on their gross donation.
BPP LEARNING MEDIA

Gift aid 2
• These further reliefs are given by increasing the basic rate

limit and the higher rate limit by the gross donation:
―Basic rate limit:
£33,500 + (gift aid donation × 100/80)
―Higher rate limit:
£150,000 + (gift aid donation × 100/80)
• Gross gift aid donation also used to compute 'adjusted net
income' for tapering the personal allowance.
BPP LEARNING MEDIA

Martin is self-employed, and for the year ended 5 April 2018

his trading profit was £109,400. During the tax year 2017/18,
Martin made a gift aid donation of £800 (gross) to a national
charity.
What amount of personal allowance will Martin be entitled to
for the tax year 2017/18?
A £11,000
B £7,200
C £6,300
D £0 (2 marks)
BPP LEARNING MEDIA

B £7,200
£
Less ½ (108,600 – 100,000) (4,300)
7,200
W1 Adjusted net income
£
Net income 109,400
Less gross gift aid donation (800)
108,600
BPP LEARNING MEDIA

Question: Gloria
Gloria has employment income of £117,000 in 2017/18. She

made a gift aid donation of £7,200 (net) to a charity in
December 2017.
Required
Calculate Gloria’s income tax liability for 2017/18.
BPP LEARNING MEDIA

Answer: Gloria
£
Less: PA (W1) (7,500)
Taxable income 109,500
Increase BR & HR limits

33,500 + 9,000 = £42,500
150,000 + 9,000 = £159,000
Income tax liability:

42,500  20% 8,500
67,000  40% 26,800
110,000 35,300
(W1) Adjusted net income
£
Less: gift aid donation 7,200  10080 (9,000)
108,000
Less: limit (100,000)
8,000

Less ½  8,000 (4,000)
7,500
BPP LEARNING MEDIA

Child benefit income tax charge
• Individual or partner in a tax year:

―Receives child benefit
―Has adjusted net income between £50,000 and
£60,000
• Income tax charge of 1% of the amount of child benefit
received for every £100 of adjusted net income over
£50,000.
• If adjusted net income exceeds £60,000: income tax
charge is amount of child benefit received.
BPP LEARNING MEDIA

Question: Ralph
Ralph has a salary of £54,000 in 2017/18. This is his only

income. He received child benefit of £2,500 in 2017/18.
Required
Calculate Ralph’s child benefit income tax charge for
2017/18.
BPP LEARNING MEDIA

Answer: Ralph
The child benefit income tax charge is £1,000.

(£2,500  40% (54,000 – 50,000/100))
BPP LEARNING MEDIA

Transferable personal allowance 1
• Taxpayer may elect to transfer a part of the personal

allowance to their spouse or civil partner.
• Useful if where one spouse/partner is not making full use
of the personal allowance.
• Transferable amount is fixed at 10% of the personal
allowance.
• Transferee receives the allowance as a reduction in their
tax liability at 20% rather than an increase in their personal
allowance.
• Tax reducer is therefore 20% x £1,150 = £230 in the tax
year 2017/18.
BPP LEARNING MEDIA

Transferable personal allowance 2
• Transfer of personal allowance cannot result in a negative

income tax liability ie will not result in repayment of
income tax.
• Transfer of the personal allowance cannot be made if
either spouse/partner is a higher rate or additional rate
taxpayer.
BPP LEARNING MEDIA

Question: Ash and Den
Ash and Den are married. In the tax year 2017/18 Ash has
trading income of £9,240 and Den has employment income
of £42,700.
BPP LEARNING MEDIA

Question: Ash and Den (1)
(1) Which of the following statements about the

transferable personal allowance are correct?
A A transfer cannot be made because Den is a
higher rate taxpayer
B A transfer cannot be made because Ash is
using some of the personal allowance
C Ash transfers £1,150 of the personal
allowance to Den
D Den transfers £1,150 of the personal
allowance to Ash
BPP LEARNING MEDIA

Answer: Ash and Den (1)
C Ash transfers £1,150 of the personal allowance to Den

Den is not a higher rate taxpayer as after his personal
allowance his taxable income is £(42,700 – 11,500) =
£31,200.
Ash is using some of the personal allowance but that
does not prevent the transfer. It is still beneficial if some
of Ash’s personal allowance is unused.
The transfer would be from Ash to Den.
BPP LEARNING MEDIA

Question: Ash and Den (2)
(2) What is Den’s income tax liability for the tax year
2017/18?
A £0
B £220
C £6,010
D £6,340
BPP LEARNING MEDIA

Answer: Ash and Den (2)
C £6,010
£
Less: PA (11,500)
Income tax liability:

31,200  20% 6,240
Tax reducer 20% x £1,150 (230)
6,010
BPP LEARNING MEDIA

Jointly held property
• Income from jointly held property is split 50:50.

• Unless the couple make a joint declaration to HMRC
specifying the actual proportions they are each entitled to.
BPP LEARNING MEDIA

Summary 1
Scope of income tax

• UK resident individuals are liable to income tax on all income.
• Non UK resident individuals are liable to UK income tax on UK
income only.
• There is a statutory test of residence.
Computing taxable income
• Make sure you learn this pro forma.
Types of income
• Income is categorised into three sections – non savings, savings and
dividend income.
Qualifying interest
• Interest on certain loans can be deducted from total income.
BPP LEARNING MEDIA

Summary 2
Personal allowance
• Everyone receives a personal allowance.
• However if adjusted net income > £100,000 it is reduced by £1 for
every £2 excess income.
Computing tax payable
• Non-savings income is taxed at 20%/40%/45%.
• Savings income is taxed at 0%/20%/40%/45%.
• Dividend income is taxed at 0%/7.5%/32.5%/38.1%.
Accrued income scheme
• Seller taxed on accrued interest received on sale.
• Buyer given tax relief against interest received of amount taxed on
seller.
BPP LEARNING MEDIA

Summary 3
Gift aid
• Gift aid donations enable the taxpayer to save tax at their marginal
rate.
• For higher rate taxpayers this is achieved by increasing the basic
rate limit and higher rate limit by the gross donation.
Child benefit income tax charge
• If adjusted net income between £50,000 to £60,000 charge will be
1% of amount received for every £100 of income over £50,000.
Transferable personal allowance
• Transfer of £1,150 between spouses as 20% tax reducer.
Jointly held property
• Split 50 : 50, unless election made for actual entitlement.
BPP LEARNING MEDIA

Recent exam questions

Personal allowance restriction Specimen A3
Individual Savings Account Specimen A12
Residence test Specimen A15
Income tax payable Specimen C31
Taxable income computation Specimen C32
BPP LEARNING MEDIA

Chapter 3 • Employment vs self employment
• Types of income
Employment income • Basis
• Administration
• Allowable deductions
BPP LEARNING MEDIA

Syllabus learning outcomes
• Recognise the factors that determine whether an

engagement is treated as employment or self employment.
• Recognise the basis of assessment for employment
income.
• Recognise the income assessable.
• Recognise the allowable deductions, including travelling
expenses.
• Discuss the use of the statutory approved mileage
allowances.
• Understand the treatment of charitable giving.
BPP LEARNING MEDIA

Employment income
Employment vs Types of Basis of Allowable

self employment income assessment deductions
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter may be examined as part of a

Section C 15 mark income tax question.
• There may also be a Section C 10 mark question on the
distinction between employment and self employment.
• Specific aspects might be tested in Section A, such as
mileage allowance or various aspects in Section B.
• You should ensure that you know the distinction between
employment and self employment and the factors that
decide the status of a worker.
• You need to understand the basis of assessment for
taxation of employment income and the rules for allowable
deductions.
BPP LEARNING MEDIA

Employment vs self employment
• Employment: contract of service.

• Self employment: contract for services.
BPP LEARNING MEDIA

Employment vs self employment 3
• Factors which lead to presumption of employment:

― Business provides any equipment necessary for the
work.
― Place of work, hours, method of working not chosen by
individual.
― Individual cannot decline work or sub-contract.
― Individual has integral position within organisation.
― Individual does not bear financial/personal risk.
― Individual has rights under employment legislation.
BPP LEARNING MEDIA

Question: Andrew
Andrew is a cameraman who started working for S Ltd on 6

April 2017. The following information is available in respect
of the year ended 5 April 2018:
(1) Andrew works a set number of hours each week and is
paid an hourly rate for the work that he does. When
Andrew works more than the set number of hours he is
paid overtime.
(2) Andrew is under an obligation to accept the work offered
to him by S Ltd, and the work is carried out under the
control of the company’s production manager. He is
obliged to do the work personally, and this is all
performed at S Ltd’s premises.
BPP LEARNING MEDIA

Question: Andrew – cont'd
(3) All of the equipment that Andrew uses is provided by S

Ltd.
Andrew has several friends who are cameramen, and they
are all treated as self-employed. He therefore considers that
he should be treated as self-employed as well in relation to
his work for S Ltd.
BPP LEARNING MEDIA

Question: Andrew – cont'd
Required
List those factors that indicate that Andrew should be treated
as an employee in relation to his work for S Ltd rather than
as self-employed.
Note: you should confine your answer to the information
given in the question. (4 marks)
BPP LEARNING MEDIA

Answer: Andrew
• Andrew is under the control of S Ltd.

• Andrew is not taking any financial risk.
• Andrew works a set number of hours, is paid by the hour
and is paid for overtime.
• Andrew cannot profit from sound management.
• Andrew is required to do the work personally.
• There is an obligation to accept work that is offered.
• Andrew does not provide his own equipment.
BPP LEARNING MEDIA

Types of income
Salary X
Bonus X
Commission / tips X
Benefits X
X
Allowable deductions (X)
Employment income X
BPP LEARNING MEDIA

Basis
• Amounts received in the current tax year.

• Treated as received on the earlier of:
― Cash receipt
― Employee becomes entitled to payment
• Special rules for directors earliest of:
― Earlier of the two alternatives above
― Amount credited in company's accounting records
― End of company's period of account (if amount
determined by then)
― Amount determined (if after end of company's period of
account)
BPP LEARNING MEDIA
Administration
• Tax on earnings from employment income is collected via

the PAYE system.
BPP LEARNING MEDIA

Allowable deductions 1
• General rule: incurred wholly, exclusively and

necessarily in the performance of duties.
• Specific allowable deductions:
― Contributions to a registered pension scheme
― Fees and subscriptions to relevant professional bodies
― Travelling expenses incurred in the performance of
duties
― Statutory approved mileage allowance
― Capital allowances on some plant and machinery
― Donations to charity under payroll deduction scheme
BPP LEARNING MEDIA

Travel expenses
Home
No allowable Allowable
deduction deduction
Site based
Permanent
Travelling appointment
workplace
Temporary workplace
BPP LEARNING MEDIA

• Permanent workplace:
― Spends at least 40% of working time at the workplace;
or
― Period expects to work at the workplace exceeds 24
months.
BPP LEARNING MEDIA

• Site based:
― No permanent workplace.
― Work at successive places spending a few days, weeks
or months at each place eg computer consultant.
• Travelling appointment:
― Travelling is an integral part of the job eg service
engineer.
― Duties commence on leaving home so deduction for
travelling expenses provided employee lives within
normal work area.
BPP LEARNING MEDIA

• Temporary workplace:
― If not permanent workplace eg period up to 24 months.
― If initially expects to spend up to 24 months at
workplace, but subsequently extended to more than 24
months, then travel expenses will not be allowed from
the time of the extension.
― Similarly, if originally expected to exceed 24 months but
subsequently reduced to up to 24 months, travel
expenses will be allowed from the time of the reduction.
BPP LEARNING MEDIA

• Statutory approved mileage allowance:

― Equal to limits given in the tables: tax free.
― If less than this is given, deduction for the shortfall may
be claimed.
― If greater than this is given, excess is taxable benefit.
BPP LEARNING MEDIA

Question: Fred
Fred owns a car and travels 11,000 business miles in the tax
year in the car. He is paid 35p per mile by his employer.
What is the impact on Fred’s assessable employment
income for the tax year?
A Deduction of £1,100
B Deduction of £900
C Increase of £900
D Increase of £1,100
BPP LEARNING MEDIA

Answer: Fred
B Deduction of £900 £
Actually paid 35p  11,000 miles 3,850
Statutory approved mileage allowance:
10,000  45p 4,500
1,000  25p 250
11,000 (4,750)
Allowable deduction (900)
BPP LEARNING MEDIA

• Payroll deduction scheme:

― Employee asks employer to deduct charitable donation
from gross earnings.
― Tax relief at source as deduction before PAYE
calculated.
BPP LEARNING MEDIA

Summary 1
Employment vs self employment

• Employment is a 'contract of service'. Self employment is a
'contract for services'.
Types of income
• Any amount received from an office or employment is assessed
under employment income.
Basis
• Basis of assessment is the amount received in tax year.
Administration
• Tax is collected via PAYE system.
Allowable deductions
• Deductions can be made but only if wholly, exclusively and
necessarily in the performance of duties.
BPP LEARNING MEDIA

Summary 2
Travel expenses
• Normal commuting costs are not deductible.
• Cost of getting to and from work is allowable if:
− Site based
− Travelling appointment
− Temporary workplace
BPP LEARNING MEDIA


Employment income Specimen C32
BPP LEARNING MEDIA

Chapter 4 • Taxable benefits
• Exempt benefits
Taxable and exempt • PAYE system
benefits. The PAYE
system
BPP LEARNING MEDIA

• Explain the PAYE system, how benefits can be payrolled,

and the purpose of form P11D.
• Explain and compute the amount of benefits assessable.
• Recognise the circumstances in which real time reporting
late filing penalties will be imposed on an employer and
the amount of penalty which is charged.
BPP LEARNING MEDIA

Benefits – Benefits –
general rules special rules
Taxable and Exempt benefits.

The PAYE system
Exempt benefits PAYE system
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter will usually be examined both in

Section A and Section C. They may also be examined in
Section B.
• In Section A, you may be asked to deal with a single
benefit such as car benefit.
• In the Section C 15 mark question, you may be asked to
compute the taxable amount of a number of benefits
and/or identify exempt benefits.
• In a Section C 10 mark question, you may be required to
undertake some simple tax planning by comparing
remuneration packages containing benefits.
BPP LEARNING MEDIA

Taxable benefits 1
• Certain non-cash benefits provided by employers are

taxable on employees.
• Valued using rules in Benefits Code.
• Included in taxpayers’ employment income in their income
tax computation for the tax year.
BPP LEARNING MEDIA

Taxable benefits 2
• Time apportion the benefit if it is only available for part of

the year by multiplying it by n/12 where n is the number of
months the benefit is available.
• Any contributions made to the employer by employees for
benefits provided by their employers are deductible from
the taxable benefit:
―Exception: fuel benefit where only full reimbursement
of private use fuel is deductible and reduces taxable
benefit to nil (see later).
BPP LEARNING MEDIA

Vouchers
• If an employee
 Receives cash vouchers(Vouchers exchangeable for cash)
 Uses a credit token (Such as credit card) to obtain money,
goods or services, or
 Receives exchangeable vouchers (such as book
tokens),also called non-cash vouchers
Employee is taxed on the cost to the employer of

providing the benefit, less any amount the employee pays
the employer for providing the benefit.
BPP LEARNING MEDIA

Taxable benefits 3
Accommodation
• Job related accommodation is not taxed under the benefit
rules.
• Job related accommodation is that which is:
― Provided for security reasons, or
― Necessary for the proper performance of duties, or
― Customary and ensures better performance of duties.
BPP LEARNING MEDIA

Taxable benefits 4
Accommodation
• Non job related accommodation is taxable benefit.
• Basic benefit is greater of:
― Annual value
― Rent paid by employer
• Additional benefit is (cost – 75,000)  official rate of
interest at start of tax year (2.5% for 2017/18).
BPP LEARNING MEDIA

Taxable benefits 5
Accommodation – cont’d
• Cost is cost of purchase plus any improvements to
property made before the start of tax year.
• If first made available to employee  six years after
employer purchased property, use market value (MV)
when made available, instead of cost.
BPP LEARNING MEDIA

Question: Ralph
Ralph has the use of a house belonging to his employer, for

which he pays a notional rent of £2,500. It is not job related
accommodation. The annual value is £8,000.
Ralph has lived in the house since October 2009. It had cost
the company £175,000 in October 2006.
Required
Calculate the taxable benefit for 2017/18.
BPP LEARNING MEDIA

Answer: Ralph
Accommodation
£
Annual value 8,000
Employee contribution (2,500)
5,500
Additional benefit:
[(175,000 – 75,000)  2.5%] 2,500
Taxable Benefit 8,000
BPP LEARNING MEDIA

Taxable benefits 6
Accommodation living expenses

• Benefit arises if living expenses are paid for by the
employer:
― Job related accommodation: cost to employer, cannot
exceed 10% of net earnings
― Not job related: cost to employer
BPP LEARNING MEDIA

Question: Maggie
Maggie lives in accommodation provided by her employer

and has a salary of £7,000 a year.
The accommodation was made available to her on 6 August
2017. It has an annual value of £8,000 and it cost her
employer £225,000 in 2007. Its market value in August 2017
was £375,000.
Household expenses of £1,800 are paid by her employer
and she has other benefits totalling £2,000.
BPP LEARNING MEDIA

Question: Maggie cont’d
Required
Calculate the assessable benefit for accommodation and the
living expenses assuming:
(1) The accommodation is job related; or
(2) The accommodation is not job related.
BPP LEARNING MEDIA

Answer: Maggie (1)
If the accommodation is job related there is no charge for the

accommodation.
Accommodation expenses lower of:

£
(a) Expenses 1,800
(b) 10% net earnings

= 10% (7,000 + 2,000) 900
... Taxable Benefit = 900 (lower amount)
BPP LEARNING MEDIA

Answer: Maggie (2)
Accommodation:
£
Annual value 8,000
Additional benefit:
[(375,000 (MV as more than 6 years since 7,500
property acquired) – 75,000)  2.5%]
Annual Benefit 15,500
Taxable Benefit ( 8/12) 10,333
BPP LEARNING MEDIA

Answer: Maggie (2) cont’d
Accommodation expenses: £1,800
Total benefit = 10,333 + 1,800 = £12,133
BPP LEARNING MEDIA

Taxable benefits 7
Use of employer's assets

• Employee provided with employer’s assets for private purposes
eg furniture in accommodation provided by employer.
• Employee will be assessed on higher of:
― 20% of the value when first made available to employee
― Rental paid by employer
• If the asset is subsequently given to the employee, assessed on
higher of:
― Market value when given
― Market value when first used less amounts assessed as
taxable benefits up to date of gift
BPP LEARNING MEDIA

Question: Gustav
Gustav was given the use of some video equipment on 6

October 2015 when it had a value of £1,000. On 1 January
2018 the company gave the equipment to Gustav, when its
market value was £600.
What is the assessable benefit for Gustav of the gift in
January 2018?
A £600
B £550
C £450
D £1,000
BPP LEARNING MEDIA

Answer: Gustav
A £600
Use of asset:
£
6
2015/16 1,000  20%  12 = 100
2016/17 1,000  20% = 200

9
2017/18 1,000  20%  12 = 150
450
BPP LEARNING MEDIA

Answer: Gustav – cont'd
Gift of asset:
2017/18 Higher of:

£
(1) MV of asset at date of gift = 600

(2) MV when first provided minus
the
values already assessed:
= 1,000 – 450 = 550
 600 (higher amount)
BPP LEARNING MEDIA

Taxable benefits 8
Car benefit
• Employees are assessed on company cars, but not a pool
car.
• Benefit is calculated as a % of the list price of the car.
• Percentage starts at 18% and builds up in 1% steps for
every 5g of carbon dioxide emitted per kilometre in excess
of 95g/km, to maximum 37%.
• Diesel cars have a supplement of 3%, to maximum 37%.
• If CO2 emissions 50g/km or less use 9%, if between
51g/km and 75g/km use 13%, if between 76g/km and
94g/km use 17%.
BPP LEARNING MEDIA

Taxable benefits 9
Car benefit
• List price is as published by manufacturer.
• Includes delivery charges, standard accessories, all
customs duties, VAT, car tax, list price of any additional
fitting costs of optional accessories.
• Capital contribution made by the director/employee
deducted from the list price up to a maximum of £5,000.
• Any contribution for the use of the car will be deducted
from the value of the benefit.
BPP LEARNING MEDIA

Question: Stuart
Stuart has the private use of a car with a petrol engine. The
car has a list price of £16,500 and an official CO2 emission
rate of 133g/km.
Required
(1) Calculate Stuart's assessable benefit for 2017/18.
(2) Calculate the benefit if the above car was a diesel rather
than petrol car.
BPP LEARNING MEDIA

Question: Stuart – cont'd
(3) How would your answer in (2) differ if he only had use of
the car from 6 October 2017 until the end of the tax year
and he contributed £1,000 to his company for use of the
car?
(4) If Stuart's car had an official emission rate of 69g/km,
was petrol and was available for the entire tax year, what
would the assessable benefit be for 2017/18?
BPP LEARNING MEDIA

Answer: Stuart
Car benefit
(1) Car g/km rounded down 130

Less base line (95)
35  5 = 7
Percentage: 18 (base) + 7 = 25%
Benefit: 16,500  25% = 4,125
BPP LEARNING MEDIA

Answer: Stuart – cont'd
(2) If car was diesel

Benefit: 18%(base) + 7% + 3% = 28% × 16,500 = 4,620
(3) Basic benefit (above) = £4,620
= 6 2,310
12
Less contribution (1,000)

1,310
(4) 16,500 × 13% = 2145
BPP LEARNING MEDIA

Taxable benefits 10
Car fuel for private motoring

• Taxable benefit is a percentage of a basic figure
(£22,600 for 2017/18).
• Percentage is the same as the percentage used to
calculate the car benefit.
• No reduction in assessable benefit for partial refunds
made for private cost of fuel by the employee.
• Charge is cancelled if full refunds are made.
BPP LEARNING MEDIA

Taxable benefits 11
Vans
• Standard benefit of £3,230 (2017/18) a year for private use
of a company van.
• No taxable benefit where an employee takes a van home
(ie uses the van for home to work travel) but is not allowed
any other private use.
• Additional charge of £610 (2017/18) for private fuel.
BPP LEARNING MEDIA

Taxable benefits 12
Free/subsidised canteen meals

• Not taxable if the same facilities are available to all
employees on broadly similar terms.
Medical insurance
• Taxable benefit is the cost of the insurance to the
employer.
Other benefits
• Credit cards: costs of goods/services obtained.
BPP LEARNING MEDIA

Taxable benefits 13
Beneficial loans
• Only loans greater than £10,000 give rise to a benefit.
• Assessable benefit is average loan  official rate of interest
less interest paid.
• Official rate of interest is 2.5% throughout 2017/18.
• Two methods of calculating 'average loan':
― Average method
― Strict method
• Average method automatically applies unless the taxpayer
or HMRC elect for strict method (HMRC will usually only
elect if average method deliberately exploited).
BPP LEARNING MEDIA

Question: Laura
Laura was provided with an interest free loan of £100,000 on

6 April 2017. She repaid £20,000 of the loan on 6 January
2018.
Required
Show Laura’s taxable benefit in respect of the loan for
2017/18.
BPP LEARNING MEDIA

Answer: Laura
Interest Free Loan
Average Method
100000 + 80000
= 90000
2
90000 X 2.5% 2250

Strict Method
100000 X 2.5% X 9/12 1875
80000 X 2.5% X 3/12 500 2375
Assessable Benefit : 2250
BPP LEARNING MEDIA

Taxable benefits 14
Reimbursed expenses
• Basic rule: taxable on employee but allowable deduction
as expense of employment.
• Automatic exemption if amount of the deduction is at least
equal to the amount of the expense.
• Automatic exemption applies to actual expenses incurred
and to flat rate payments such as allowances for travel or
meals.
BPP LEARNING MEDIA

Exempt benefits 1
• Reimbursed expenses.
• Canteen available to all staff.
• Qualifying removal expenses up to £8,000.
• Car parking spaces near place of work.
• Workplace nurseries (crèches).
• Up to £55 a week of childcare at approved child carer or
childcare vouchers, for basic rate taxpayers (£28 per week
for higher rate taxpayers, £25 per week for additional rate
taxpayers).
• Contributions by an employer to registered pension
scheme.
BPP LEARNING MEDIA

Exempt benefits 2
• Sport and recreational facilities available generally for the

staff.
• Outplacement counselling services to employees made
redundant who have been employed full-time for at least
two years.
• Workplace parking for bicycles plus a tax free cycling
allowance of 20p per business mile.
BPP LEARNING MEDIA

Exempt benefits 3
• Weekly tax free allowance of £4 paid by employer to

employee who works from home.
• Medical treatment up to £500 per employee per tax year if
provided to employee to assist them in their return to work
after ill-health or injury.
• Trivial benefits costing up to £50 per employee per tax
year which are not cash or cash vouchers.
BPP LEARNING MEDIA

Question: Josie
On 1 August 2017 Josie commenced employment with T plc

as a creative director.
(1) Josie is paid a salary of £15,100 per month by T plc. The
salary is paid on the last day of each calendar month.
(2) During August 2017 T plc paid £11,600 towards Josie’s
removal expenses when she permanently moved to take
up her new employment with the company as she did
not live within a reasonable commuting distance. The
£11,600 covered both her removal expenses and the
legal costs of acquiring a new main residence.
BPP LEARNING MEDIA

Question: Josie – cont’d
(3) On 1 September 2017 T plc provided Josie with an

interest free loan of £35,500 that she used to renovate
her new main residence. This loan was still outstanding
at 5 April 2018.
(4) During the period from 1 August 2017 to 5 April 2018,
Josie was provided with free meals in T plc’s staff
canteen. The total cost of these meals to the company
was £1,340. The canteen is available to all of the
company’s employees.
BPP LEARNING MEDIA

Question: Josie – cont’d
(5) During the period from 1 October 2017 to 5 April 2018,

T plc provided Josie with a diesel powered motor car
with an official CO2 emission rate of 114 grams per
kilometre. The motor car, which has a list price of
£14,400, cost T plc £13,900. T plc does not provide
Josie with any fuel for private journeys.
Required
Compute Josie’s employment income for 2017/18.
(6 ½ marks)
BPP LEARNING MEDIA

Tackling the exam: Josie
Use this guidance to help you answer the question:

• Create a summary pro-forma for employment income.
• Start with salary at the top.
• Add in a line for each benefit.
• Calculate each benefit, using a working underneath if
more than one line, and add the result to the summary.
• If there is an exempt benefit, put a zero, don’t just leave it
out!
• Cross off each benefit as you deal with it to ensure that
you don’t miss any out.
• Total employment income.
BPP LEARNING MEDIA

Answer: Josie
£
Salary £15,100  8 120,800
Removal expenses £(11,600 – 8,000) 3,600
Loan £35,500 @ 2.5 %  7/12 518
Staff canteen (exempt) 0
Car benefit (W) 1,728
BPP LEARNING MEDIA

Answer: Josie – cont’d
Working
Amount by which CO2 emissions exceed base level:
(110 (rounded down) – 95) = 15 ÷ 5 = 3.
Car benefit percentage is 3 + 18 + 3 (diesel supplement) = 24%.
Car available from 1 October 2016 to 5 April 2017 = 6 months
Car benefit is £14,400 (list price)  24%  6/12 = £1,728.
BPP LEARNING MEDIA

PAYE system 1
What is it?
• System for calculating and collecting income tax and
Class 1 NIC from payments made to employees.
• Employers must report their PAYE information in real time
(RTI).
BPP LEARNING MEDIA

PAYE system 2
How does it work?
• Every time an employee is paid employer must
electronically send ‘full payment submission’ (FPS) which
includes:
―Amount paid to each employee
―Deductions of income tax and national insurance
contributions
―Starter and leaver information
BPP LEARNING MEDIA

PAYE system 3
Employer's duties
• Deduct correct tax from employee's pay.
• Work out how much NIC needs to be deducted.
• Keep record of pay and deductions.
• Pay over tax/NIC on due date.
• Send relevant income tax and NIC information
electronically every time employees are paid.
BPP LEARNING MEDIA

PAYE system 4
What counts as pay

• Salaries, wages, overtime, bonuses
• Pensions
• Commissions
• Benefits if employer choses to include in payroll (otherwise
reported on Form P11D – see later)
• Statutory sick pay/maternity pay
• Tips
BPP LEARNING MEDIA

PAYE system 5
Employee tax codes

• Amount of tax free pay.
• Calculated as follows:
£ £
Allowances:
Personal allowances X
PPPs – higher rate relief X
Expense deductions X
X
Less deductions (reducing tax free pay):
Benefits X
Untaxed income X
 
Tax under payments b/f (grossed up) × 100 × 100  X
 20 40  (X)
Allowance to set against pay X
BPP LEARNING MEDIA

PAYE system 6
Employee tax codes

• To obtain code number: last figure removed and replaced
with letter
• L: code for personal allowance
• K: negative code (deductions exceed allowances)
• NT: no tax deducted
• In addition to the above, codes BR, DO and OT used
where there is a second source of income and all
allowances have been used in a tax code which is applied
to the main source of income
• BR: tax deducted at basic rate (no allowances)
BPP LEARNING MEDIA

Question: Fitz
Fitz earns £15,000. He has underpaid income tax of £50

from a previous tax year.
Fitz has a company car with a taxable benefit of £3,255.
What is Fitz's tax code for 2017/18?
Assume tax rates for 2017/18 apply throughout.
A 1400L
B 1450L
C 749L
D 799L
BPP LEARNING MEDIA

Answer: Fitz
C 799L £
PA 11,500
Car benefit (3,255)
Tax underpaid
 100  (250)
 50  
 20  7,995
Tax code 799L
BPP LEARNING MEDIA

PAYE system 7
• Changes to coding: employer must use the last code given

for existing employees until new written instructions are
sent by HMRC
• Year end procedures:
― By 19 May: Final real time submission
― By 31 May: P60 to employees showing total taxable
earnings for the tax year, tax deducted, code number
and NI number
― By 6 July: P11D (details of taxable benefits) to HMRC
and employees
• Leavers: given form P45
• Joiners: gives form P45 to new employer
BPP LEARNING MEDIA
Question: Joe (A) (a)
On 31 December 2017 Joe resigned as an employee of

F plc, and on 1 January 2018 commenced employment with
S plc. He received a salary and taxable benefits from both
F plc and S plc. Neither F plc nor S plc payroll employee
benefits.
Required
Briefly explain the basis of calculating Joe’s PAYE tax code
for the tax year 2017/18, and the purpose of this code.
(2 marks)
BPP LEARNING MEDIA

Answer: Joe (A) (a)
Joe’s tax code will have been calculated by starting with his
personal allowance of £11,500, and then reducing it by the
estimated value of the taxable benefits.
An employee’s tax code is used to adjust their salary when
calculating the amount of income tax that has to be paid
each week or month under the PAYE system.
BPP LEARNING MEDIA

Question: Joe (A) (b)
Required
For each of the PAYE forms P45, P60 and P11D, briefly
describe the circumstances in which the form will be
completed, state who will provide it, the information to be
included, and the dates by which they should have been
provided to Joe for the tax year 2017/18.
(6 marks)
BPP LEARNING MEDIA

Answer: Joe (A) (b)
Form P45 will be prepared by F plc when Joe’s employment

ceases. It will show his taxable earnings and income tax
deducted up to the date of leaving, together with his tax code
at the date of leaving.
F plc should have provided this form to Joe immediately
following his cessation of employment with the company.
BPP LEARNING MEDIA

Answer: Joe (A) (b) – cont’d
Form P60 will be prepared by S plc at the end of the tax

year. It will show Joe’s taxable earnings, income tax
deducted, final tax code, national insurance contributions,
and S plc’s name and address.
S plc should have provided this form to Joe by 31 May 2018.
BPP LEARNING MEDIA

Answer: Joe (A) (b) – cont’d
A separate form P11D will be prepared by both F plc and

S plc, detailing the cash equivalents of the benefits provided
to Joe.
Both companies should have provided a form to Joe by
6 July 2018.
BPP LEARNING MEDIA

PAYE system 8
• Interest charged on late payments of income tax and NICs

under PAYE.
• Late payment penalties charged on PAYE amounts not
paid in full and on time:
― No penalty on first late payment unless over six months
late.
― Subsequent penalties based on how much late each
time and number of times late in year up to maximum
4% of amount paid late.
― Where tax remains unpaid at six months, further
penalty 5% of tax unpaid, with further 5% if tax remains
unpaid at 12 months even if only one late payment.
BPP LEARNING MEDIA

PAYE system 9
• Penalties for making late returns under RTI:

― First late submission of the tax year ignored.
― Further late submissions attract penalties based on
number of employees, up to £400.
― If return more than three months late, an additional
penalty of 5% of the tax and NIC due.
BPP LEARNING MEDIA

Summary
Taxable benefits
• Make sure you learn these rules.
Exempt benefits
• Certain benefits are tax free. Make sure you know which ones.
PAYE system
• This system imposes the collection of tax of employees onto the
employer.
BPP LEARNING MEDIA


Removal expenses and living
accommodation benefit Specimen C32
BPP LEARNING MEDIA

Chapter 5 • Pension schemes
• Personal schemes
Pensions • Occupational schemes
• Methods of giving tax relief
• Annual allowance
• Receiving pension benefits
BPP LEARNING MEDIA

• Explain and compute the relief given for contributions to

personal pension schemes and to occupational pension
schemes.
BPP LEARNING MEDIA

Pensions
Types Tax relief Annual allowance
Receiving pension benefits
Occupational
Personal schemes
schemes
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter may be examined in Section A,

Section B and/or Section C.
• In Section A or Section B, you may be asked to deal with
specific aspect such as the available annual allowance.
• In a Section C 15 mark question, you may be asked to
deal with tax relief on a personal pension contribution or
under an occupational scheme.
• In a Section C 10 mark question, you may be asked to
work out the maximum pension contribution that could be
made in a tax year.
BPP LEARNING MEDIA

Pension schemes
• Individual may contribute to a number of different pension

schemes.
• Subject to an annual limit on contributions attracting tax
relief.
BPP LEARNING MEDIA

Personal schemes
• Individual can make any contribution to a personal pension

scheme.
• Maximum tax relievable contributions are the higher of:
― £3,600
― Individual's relevant earnings chargeable to income tax
in that year
• Relevant earnings are broadly employment income,
trading income, and income from furnished holiday
lettings.
BPP LEARNING MEDIA

Occupational schemes
• Defined benefit schemes:

― Benefits guaranteed by employer
― Pension and tax free lump sum based either on 'final
salary' or ‘career average salary’ and length of service
• Defined contribution (money purchase) schemes:
― No guarantee of benefits by employer: only funding
levels guaranteed
― Benefits dependent on level of contributions and growth
of fund
BPP LEARNING MEDIA

Methods of giving tax relief 1
Personal schemes
• Payments are made net of basic rate tax of 20%.
• Higher rate taxpayers obtain higher rate relief by making
claim to increase the basic rate limit by gross pension
contribution.
• Additional rate taxpayers obtain higher and additional rate
relief by making a claim to increase basic rate and higher
rate limits by gross pension contribution.
• Gross pension contribution also deducted to arrive at
‘adjusted net income’ for working out tapered personal
allowance.
BPP LEARNING MEDIA

Question: Jed
Jed has earnings of £60,000 in 2017/18. He pays a personal

pension contribution of £7,020 (net). He has no other taxable
income.
Required
Calculate Joe's tax liability for 2017/18.
BPP LEARNING MEDIA

Answer: Jed
£
Earnings 60,000
PA (11,500)
Increase BR limit = £33,500 + (7,020 × 100/80)
= £42,275
£42,275 × 20% 8,455
6,225 × 40% 2,490
49,000
10,945
BPP LEARNING MEDIA

Question: John
John earned £132,500 in 2017/18. He made a net personal

pension contribution of £20,000.
Required
Calculate John's income tax liability for 2017/18.
BPP LEARNING MEDIA

Answer: John
£
Earnings 132,500
Less: PA (W1) (7,750)
Increase BR & HR limits by gross pension contribution

BR limit 33,500 + 25,000 = 58,500
HR limit 150,000 + 25,000 = 175,000
Income tax:
58,500  20% 11,700
66,250  40% 26,500
124,750
Income tax liability 38,200
BPP LEARNING MEDIA

Answer: John – cont’d
(W1)
£
Adjusted net income 132,500
Less: pension contribution 20,000  10080 (25,000)
107,500
Less: limit (100,000)
Restriction 7,500

Less ½  7,500 (3,750)
7,750
BPP LEARNING MEDIA

Methods of giving tax relief 2
• Employee contributions get tax relief under 'net pay
arrangements': employer deducts the employee's gross
pension contribution before applying PAYE
• Employer contributions:
― Employee: tax free benefit
― Employer: tax deductible trading expense
• Maximum tax relievable contribution in tax year higher of:
― £3,600
― Relevant earnings for tax year
BPP LEARNING MEDIA

Question: Wendy (1)
Wendy is paid a salary of £50,000.

She pays 10% of this salary into her employer's occupational
pension scheme. The employer matches this contribution.
Wendy also receives benefits of £8,000 in the 2017/18 tax
year.
What is Wendy’s employment income for the tax year?
A £45,000
B £52,200
C £53,000
D £58,000
BPP LEARNING MEDIA

Answer: Wendy (1)
C £53,000
£
Salary 50,000
Less pension contribution (10%) (5,000)
Add benefits 8,000
53,000
NB Employer’s contribution is tax free benefit
BPP LEARNING MEDIA

Question: Wendy (2)
Wendy is paid a salary of £50,000.

She pays 10% of this salary into her employer's occupational
pension scheme. The employer matches this contribution.
Wendy also receives benefits of £8,000 in the 2017/18 tax
year.
What is Wendy’s basic rate limit for the tax year?
A £33,500
B £37,000
C £38,250
D £42,000
BPP LEARNING MEDIA

Answer: Wendy (2)
A £33,500
The basic rate limit is not adjusted for occupational pension
contributions.
BPP LEARNING MEDIA

Annual allowance 1
• Overriding limit called 'annual allowance' which

contributors may not exceed in a tax year.
• 2014/15, 2015/16, 2016/17and 2017/18 annual allowance:
£40,000.
• 2013/14 annual allowance: £50,000.
• Applies to both personal pension and occupational
pension schemes including any contributions made by an
employer.
BPP LEARNING MEDIA

Annual allowance 2
• If annual allowance not fully used in any tax year, can be

carried forward for up to three years, but only if individual
is a member of a pension scheme in those years.
• Annual allowance for 2017/18 is utilised first and then
earliest of the years brought forward.
BPP LEARNING MEDIA

Question: Jess
Jess made the following gross personal pension

contributions:
2014/15 £33,600
2015/16 NIL (Not a member of a pension scheme
in this year)
2016/17 £30,400
Required
Calculate Jess' annual allowance for 2017/18.
BPP LEARNING MEDIA

Answer: Jess
Unused allowance £
2014/15 40,000 – 33,600 = 6,400
2015/16 NIL
2016/17 40,000 – 30,400 = 9,600
16,000
2017/18 = 40,000
56,000
As Jess is not a member of a pension scheme in 2014/15
the annual allowance for that year is lost.
BPP LEARNING MEDIA

Annual allowance 3
• Individuals who have adjusted income in excess of

£150,000 have a reduced annual allowance.
• Annual allowance is reduced by £1 for every £2 that the
individual’s adjusted income exceeds £150,000, subject to
a minimum annual allowance of £10,000.
• Minimum annual allowance will apply where the individual
has adjusted income of £210,000 or more.
BPP LEARNING MEDIA

Annual allowance 4
• Self-employed: adjusted income = net income.

• Employed: adjusted income = net income plus any
employee contributions to occupational pension schemes
and any employer contributions to any pension schemes
for the employee.
BPP LEARNING MEDIA

Question: Peter and Catherine
Peter is a member of a partnership and his share of the

trading income is £175,000 in the tax year 2017/18.
During the tax year, Peter paid interest of £12,500 on a loan
to invest in the partnership.
Peter’s wife, Catherine, is employed by Peter’s partnership.
She is paid an annual salary of £190,000 in the tax year
2017/18.
She pays 10% of her salary into her employer’s occupational
pension scheme and her employer pays a further 5% into
the same scheme.
BPP LEARNING MEDIA

Question: Peter and Catherine – cont’d
Catherine also made a gross contribution into a personal

pension scheme in the tax year of £10,000.
The couple jointly own an investment property which is let
out to tenants and has generated profits of £67,000 in the
tax year 2017/18.
BPP LEARNING MEDIA

Question: Peter
What is Peter’s annual allowance for the tax year 2017/18?

A £10,000
B £10,750
C £17,000
D £33,750
BPP LEARNING MEDIA

Question: Catherine
What is Catherine’s annual allowance for the tax year

2017/18?
A £0
B £10,000
C £12,750
D £29,500
BPP LEARNING MEDIA

Answer: Peter and Catherine
BPP LEARNING MEDIA

Answer: Peter and Catherine – cont'd
BPP LEARNING MEDIA

Answer: Peter and Catherine – cont'd
BPP LEARNING MEDIA

Annual allowance 5
• If gross contributions exceed the annual allowance

(including any brought forward unused allowances),
annual allowance charge applies for the tax year in which
the contribution is paid.
• Charge is included in total income so subject to income tax
at the individual’s marginal rates.
BPP LEARNING MEDIA

Question: Cheryl
Cheryl has employment income of £126,000 for 2017/18 and

made a net personal pension contribution of £46,000. She
does not have any brought forward unused annual
allowance.
Required
Calculate Cheryl’s income tax liability for 2017/18.
BPP LEARNING MEDIA

Answer: Cheryl
Non-savings
income
£
Employment Income 126,000
Annual allowance charge (W1) 17,500
143,500
Personal allowance (W2) (11,500)
Taxable Income 132,000
Income Tax
91,000  20% (W3) 18,200
41,000  40% 16,400
132,000 34,600
BPP LEARNING MEDIA

Answer: Cheryl – cont'd
(W1)
Annual allowance charge
Gross pension contribution
46,000  100/80 57,500
Annual allowance (40,000)
17,500
(W2)
Adjusted net income
Less gross pension contribution (57,500)
68,500
Full personal allowance of £11,500.

(W3)
Increase BR limit
33,500 + 57,500 = 91,000
BPP LEARNING MEDIA

Receiving pension benefits 1
• After reaching minimum pension age of 55, individual can

start to receive pension benefits with complete flexibility to
access personal pension.
• Common method is Flexi Access Drawdown:
―Tax-free lump sum up to 25% of fund
―Rest of fund reinvested to provide taxable pension
income
BPP LEARNING MEDIA

Receiving pension benefits 2
Lifetime allowance
• Individual's pension fund cannot grow beyond a certain
value called the 'lifetime allowance'.
• Lifetime allowance is currently £1m.
• If fund grows beyond this point: additional tax charge when
withdrawal of funds in the form of pension benefits.
BPP LEARNING MEDIA

Summary 1
Pension schemes
• Individual may contribute to a number of different pension schemes
subject to an annual limit on contributions attracting tax relief.
Personal schemes
• Any amount can be invested.
• However tax relief is only given on £3,600 if no earnings or an
individual's relevant earnings for that tax year.
• There are two types of company schemes – defined benefit or
defined contribution.
BPP LEARNING MEDIA

Summary 2
Methods of giving tax relief

• Contributions to personal pension schemes are paid net of basic
rate tax.
• Higher rate relief is given by increasing the basic rate and higher
rate limits by the gross pension contribution.
• Contributions to occupational pension schemes are deducted from

gross salary before PAYE is applied.
BPP LEARNING MEDIA

Summary 3
Annual allowance
• £40,000 for 2017/18 but can be increased by unused annual
allowance for the three years prior to 2017/18.
• Reduced if adjusted income exceeds £150,000 (minimum £10,000).
• If pay more than this amount charged on excess at marginal rate.
Receiving pension benefits
• Individual can start to receive pension benefits from 55 with
complete flexibility to access personal pension.
• Pension fund cannot exceed lifetime allowance of £1m.
BPP LEARNING MEDIA


Personal pension contribution Specimen A1
BPP LEARNING MEDIA

Chapter 6 • Property income
• Furnished holiday lettings
Property income • Lease premiums

• Rent a room
BPP LEARNING MEDIA

• Compute property business profits.

• Explain the treatment of furnished holiday lettings.
• Understand rent-a-room relief.
• Compute the amount assessable when a premium is
received for the grant of a short lease.
• Understand how relief for a property business loss is given.
BPP LEARNING MEDIA

Property income
Furnished Holiday
Property income Lease premiums
Lettings
Rent a Room
Accruals basis Deductions Loss relief
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter may be examined in the context of

income tax or corporation tax.
• In Section A or Section B you may be asked to deal with
the taxable amount of a premium paid on the grant of a
short lease.
• In a 15 mark Section C question, you may be asked to
compute taxable property income as part of a larger tax
computation.
• In a 10 mark Section C question, you might be asked to
explain the effect of a letting being a furnished holiday
letting or the impact of the rent a room scheme.
• Don’t forget the rules about property losses!
BPP LEARNING MEDIA

Property income 1
• Scope of charge: rents receivable on lets in the UK.

• Basis of assessment: rent accruing in the current tax year.
BPP LEARNING MEDIA

Question: Len
Len owns a flat which he lets out unfurnished from

1 December 2016. Rent is payable quarterly in advance.
Payments are made by the tenant as follows.
PAYMENT DATE
1-Dec-2016 3000
1-Mar-2017 3000
1-Jun-2017 3000
1-Sep-2017 3000
1-Dec-2017 3500
1-Mar-2018 3500
BPP LEARNING MEDIA

Question: Len – cont’d
What is Len’s property business income for the tax year

2017/18?
A £12,000
B £12,500
C £12,667
D £13,000
BPP LEARNING MEDIA

Answer: Len
C £12,667 £
1.3.17 payment: 3,000  2/3 2,000
1.6.17 3,000
1.9.17 3,000
1.12.17 3,500
1.3.18 3,500  1/3 1,167
12,667
BPP LEARNING MEDIA

Property income 2
• Deduct all expenses incurred wholly and exclusively for

the purpose of the letting business.
• If landlord borrowed money to purchase property:
― Interest paid on loan deductible as expense against
property income
• No deduction is allowable for capital items (but relief for
the cost of replacing furniture and other domestic items is
available).
BPP LEARNING MEDIA

Finance costs for individuals
• A special rule is being introduced from 2017/18 relating to

Interest and other finance costs (including incidental costs
incurred in obtaining loans such as fees or commission
payments) for property business carried on by individuals.
• The rule applies to loans taken out for a residential
property business.
• Loan can be for the purchase of the property as well as
repairs
• In 2017/18, 75% of the finance cost are allowable in the
computation of property business income in the same way
as other expenses. The remaining 25%, multiplied by the
basic rate tax, is a tax reducer.
BPP LEARNING MEDIA

Property income 3
Replacement of furniture and other domestic items

• No relief is given for the initial cost of providing furniture in
a let property.
• Relief is given if domestic item is replaced instead.
• Domestic items include furniture, furnishings, household
appliances and kitchenware.
• Relief is expenditure on the new replacement asset less
any proceeds from selling the old asset.
• If new asset is not the same, or substantially the same, as
the old asset, only the cost of an equivalent asset is given
relief.
BPP LEARNING MEDIA

Property income 4
£
Rental income (accruals) X
Less expenses (accruals)
Advertising (X)
Agent's fees (X)
Repairs (X)
Property income profit/(loss) A
If A is a profit – taxable in the current year
If A is a loss – carry forward to deduct from property income
in the future.
BPP LEARNING MEDIA

Question: Fiona
Fiona owns a property that she lets furnished on a short term

basis. In the year ended 5 April 2018 she had accrued rental
income of £12,400 and incurred the following expenses:
£
Agent's commission 1,240
Council tax 1,392
Mortgage repayments (including interest of £5,000) 8,000
10,632
BPP LEARNING MEDIA

Question: Fiona – cont’d
During the year ended 5 April 2018 Fiona disposed of an old

washing machine for £25 and replaced it with a new washer-
dryer at a cost of £550.
The cost of a new washing machine equivalent to the one
she disposed of would have been £330.
She has losses brought forward of £1,296.
BPP LEARNING MEDIA

Question: Fiona – cont’d
How much is assessable on Fiona as property income in

2016/17?
A £167
B £3,387
C £4,463
D £3,167
BPP LEARNING MEDIA

Answer: Fiona
D £3,167 £
Rents 12,400
Less: Agent's commission (1,240)
Council tax (1,392)
Mortgage interest(5000X75%) (3,750)
Washer-dryer £(330 – 25) (305)
5,713
Less: Losses b/fwd (1,296)
4,417
BPP LEARNING MEDIA

Question: Phil
Phil received a house as a wedding gift from Pere, his father,

was has always been let out unfurnished until it was sold on
5 April 2017. The following income and outgoings relate to
the property for the tax year 2017/18:
£
Rent received 23,000
Sale proceeds 504,000
Cost of new boundary wall around the property (5,300)
(there was previously no boundary wall)
Cost of replacing the property’s chimney (2,800)
Legal fees paid in connection with the disposal (8,600)
Property insurance (2,300)
BPP LEARNING MEDIA

Question: Phil – cont’d
Phil has no other income or outgoings for the tax year

2017/18.
Required
Calculate Phil’s income tax liability for the tax year 2017/18.
(2 ½ marks)
BPP LEARNING MEDIA

Answer: Phil
£
Rent receivable 23,000
Less: repairs (2,800)
insurance (2,300)
Net income 17,900
Less: personal allowance (11,500)
Income tax on £6,400 @ 20% 1,280
BPP LEARNING MEDIA

Answer: Phil – cont’d
Tutorial note
The cost of replacing the property’s chimney is revenue
expenditure because the chimney is a subsidiary part of the
house (see Samuel Jones & Co v CIR 1951). The cost of
the new boundary wall is capital expenditure as the wall is
a separate, distinct, entity (see Brown v Burnley Football
and Athletic Club 1980).
BPP LEARNING MEDIA

Furnished holiday lettings 1
• Accommodation counts as furnished holiday letting (FHL)

if:
― Available for commercial letting to the public for not less
than 210 days each tax year, and
― Actually let for at least 105 days in each tax year, and
― Holiday tenants do not stay for a period of more than 31
days. However, the property can be let to the same
tenant for periods longer than this provided these long
lets do not take up more than 155 days per tax year.
― Located in the European Economic Area (EEA).
BPP LEARNING MEDIA

Furnished holiday lettings 2
• FHL income is taxable as property income but treated as a

business.
• Landlord needs to keep details of income and expenses
separate to other properties.
• Losses can only be offset against future profits from FHLs.
• Advantages of FHLs:
― Capital allowances are available on furniture.
― Relevant earnings for pension contributions.
― CGT reliefs available.
BPP LEARNING MEDIA

Question: FHL rules
Required
State the tax advantages of a rental property qualifying as a
trade under the furnished holiday letting rules.
(3 marks)
BPP LEARNING MEDIA

Answer: FHL rules
Furniture and equipment purchased for use in the furnished

holiday letting will qualify for capital allowances instead of
replacement furniture relief.
The profit from the furnished holiday letting will qualify as
relevant earnings for pension tax relief purposes.
Capital gains tax entrepreneurs’ relief, relief for replacement
of business assets and gift relief for business assets will
potentially be available on a disposal of the furnished holiday
letting.
BPP LEARNING MEDIA

Question: Josie
Josie owns two properties, which are let out. Property one
qualifies as a trade under the furnished holiday letting rules,
whilst property two is let out unfurnished. The income and
allowable expenditure for the two properties for the tax year
2017/18 are as follows:
Property one Property two
£ £
Income 6,600 7,200
Allowable expenditure 9,700 2,100
BPP LEARNING MEDIA

Question: Josie
Required
Compute Josie’s taxable property income for 2017/18.
(2 marks)
BPP LEARNING MEDIA

Answer: Josie
£
Property one
£(6,600 – 9,700) = £(3,100) loss c/f against
FHL income 0
Property two
£(7,200 – 2,100) 5,100
Property business income 2017/18 5,100
BPP LEARNING MEDIA

Lease premiums 1
• New tenant often pays both annual rental and one-off

premium.
• If lease granted is for 50 years or less, part of the premium
is treated as rent received in advance.
• Increases landlord’s property income assessment for year
in which premium falls due.
• Property income assessment:
― Premium (A) less
2%  (number of years (n) of lease less 1)  A
BPP LEARNING MEDIA

Question: Denise
Denise grants Timothy a lease to a shop on 30 June 2017.

Annual rental £8,000 due on 1 July 2017
Term 15 years
Premium £60,000
Required
Calculate the property income assessment on Denise for
2017/18.
BPP LEARNING MEDIA

Answer: Denise
£
Premium 60,000
Less: 2%  (15 – 1)  60,000 (16,800)
43,200
9  8,000)
Rent ( 12 6,000
Property income assessment 49,200
BPP LEARNING MEDIA

Lease premiums 2
Trading income deduction for traders

• Where a trader has paid a premium for the granting of a
short lease he may deduct the following amount against
his trading income, in addition to any rent paid:
Property income assessment on lessor pa

Life of lease
BPP LEARNING MEDIA

Question: Timothy
Required
Using the question Denise earlier, show the relief available
to Timothy for the premium paid.
BPP LEARNING MEDIA

Answer: Timothy
£43,200
Relief available = = £2,880 pa
15
BPP LEARNING MEDIA

Question: Sam
On 1 July 2017 Sam purchased a leasehold office building

for use in his business.
He paid a premium of £80,000 for the grant of a twenty year
lease in addition to an annual rent of £10,000 payable in
advance on 1 July 2017.
Required
Compute the Landlord’s property income for 2017/18 and
Sam’s trading deduction.
BPP LEARNING MEDIA

Answer: Sam
£
Premium 80,000
Less: 2% (20 – 1) × 80,000 (30,400)
49,600
Rent 10,000 × 9/12 7,500
57,100
Sam’s trading deduction is £49,600/20 = £2,480 pa
in addition to the monthly rental.
BPP LEARNING MEDIA

Rent a room
• First £7,500 in a tax year collected from tenant renting a

room in main residence is tax free.
• Taxpayer may claim to ignore the exemption, for example
to generate a loss by taking into account both rent and
expenses.
• If rent received exceeds £7,500, taxpayer would be
assessed on total rents received less normal rental
expenses.
• Can elect to be assessed on the excess rentals over
£7,500 but with no deduction for expenses.
BPP LEARNING MEDIA

Summary 1
Property income
• Income is assessed on an accruals basis.
• All incidental expenses are deductible including interest on money
borrowed to acquire property.
• Replacement furniture relief is available if the property is furnished.
Furnished holiday lettings
• FHLs are seen as a business activity so attract certain tax
advantages.
BPP LEARNING MEDIA

Summary 2
Lease premiums
• Lease premiums on the grant of a short lease lead to an element of
the premium being treated as rent received in advance.
Rent a room
• £7,500 collected from renting a room is tax free.
BPP LEARNING MEDIA


Furnished letting Specimen C32
BPP LEARNING MEDIA

Chapter 7 • Badges of trade
• Adjustment of profits
Computing trading • Pre trading expenditure
income • Cash basis for small

businesses
BPP LEARNING MEDIA

• Describe and apply the badges of trade.

• Recognise the expenditure that is allowable in calculating
the tax-adjusted trading profit.
• Explain and compute the assessable profits using the cash
basis for small businesses.
• Recognise the relief that can be obtained for pre-trading
expenditure.
BPP LEARNING MEDIA

Computing
trading income
Badges of trade Adjustment of profits
BPP LEARNING MEDIA

Tackling the exam
• Adjustment of profit may be examined in a Section C 15

mark income tax question.
• Specific aspects, such as treatment of the cost of a high
emission car, may be tested in Section A or Section B.
• The principles of adjustment of profit also apply to
companies and so may appear in a Section C 15 mark
corporation tax question.
• Badges of trade may appear in a Section C 10 mark
question.
BPP LEARNING MEDIA

Badges of trade 1
Buy & sell Profit The

Badges
of
Trade
How is the profit taxed?
Apply Badges of Trade
Deem to be Non-trading
TRADING PROFIT (potential) CAPITAL GAIN
INCOME TAX CGT (usually preferable)
BPP LEARNING MEDIA

Badges of trade 2
• Subject matter: type usually traded.

• Frequency of transactions: more frequent indicates trade.
• Length of ownership: short period of ownership indicates
trade.
• Profit motive: indicates trade.
• Supplementary work and marketing: indicates trade.
• Manner in which assets were acquired: if unintentional, eg
inheritance, when sold later unlikely to be trade.
BPP LEARNING MEDIA

Adjustment of profits 1
£
Net profit per accounts X
Add back: Expenditure not deductible for tax

(eg depreciation) X
Non trading expenditure X
X
Deduct: Items not taxed as trading income
– Income assessable under other categories X
– Non-taxable income X
(X)
Adjusted profits X
Less: Capital allowances (X)
Taxable trading profit X
BPP LEARNING MEDIA

Expenditure not deductible for tax

• Capital expenditure including:
―Depreciation
―Legal/professional fees on capital transactions
―Losses on disposal of non-current assets should be
added back and gains deducted
―Fees incurred in the renewal of short leases of land and
buildings are deductible
• Qualifying interest
• Adjustment to general provisions/allowances
BPP LEARNING MEDIA

Expenditure not deductible for tax – cont’d

• Third party entertaining
• Gifts to customers unless:
― Cost < £50 per recipient per annum
― Bear a conspicuous company logo
― Are not food, drink, tobacco or vouchers
BPP LEARNING MEDIA

Expenditure not deductible for tax – cont’d

• Private expenditure of the owner.
• Appropriations of the trade profit (eg owner’s salary,
drawings or tax/NIC).
• Charitable and political donations (unless small donations
to local charity).
• Tax appeals/other legal and professional expenses.
• Leased motor cars with C02 emissions exceeding 130
grams per kilometre:15% of leasing costs not deductible.
• Expenditure not wholly and exclusively for the purpose of
the trade.
BPP LEARNING MEDIA

Question: John
John's summarised statement of profit or loss for the year

ended 31 December 2017 is as follows:
£
Gross profit 30,000
Less: Depreciation (2,000)
Entertaining (note 1) (3,000)
Wages and salaries (note 2) (15,000)
Car expenses (note 3) (1,500)
Rent and rates (1,000)
Bank interest paid (800)
Plus: Bank interest received 500
Profit on sale of assets 700
Net profit 7,900
BPP LEARNING MEDIA

Question: John – cont’d
Notes
(1) Entertaining was as follows:
£
Customer entertaining 2,500
Staff entertaining 500
(2) Wages and salaries
This comprised salaries for:
John 10,000
John’s wife 5,000
John’s wife worked part time in her husband's business.
(3) Car expenses
John uses the car 20% privately.
BPP LEARNING MEDIA

Required
Calculate John's tax adjusted trading profit.
Your computation should commence with net profit and
should list all of the items referred to in the statement of
profit or loss indicating by the use of a zero any items that do
not require adjustment.
BPP LEARNING MEDIA

Answer: John
£
Net profit 7,900
Add: Depreciation 2,000
Customer entertaining 2,500
John's salary 10,000
Private expenses 20%  1,500 300
Rent and rates 0
Bank interest paid 0
Less: Bank interest received (500)
Profit on sale (700)
Adjusted trading profits 21,500
BPP LEARNING MEDIA

Question: Lulu
Lulu has the following expenses in her statement of profit or

loss.
(1) Legal fees in connection with the acquisition of a
freehold building
(2) Legal fees in connection with the renewal of a 15 year
lease on some land
(3) Motor insurance on a van used in her trade
(4) Gift of 25 identical pens bearing Lulu’s business
to clients (total cost = £1,375)
BPP LEARNING MEDIA

Question: Lulu – cont’d
Which of these expenses must be added back to work out

her tax-adjusted trading profits before capital allowances?
A 1 and 2 only
B 1 and 4 only
C 2, 3 and 4 only
D 1, 2, 3 and 4
BPP LEARNING MEDIA

Answer: Lulu
B 1 and 4 only
Legal fees in connection with the acquisition of a freehold

building
Gift of 25 identical pens bearing Lulu’s business to clients
(total cost = £1,375). The pens cost more than £50 each
(£1,375/25 = £55).
The renewal of a short lease in (2) is not treated as capital

and is therefore deductible. Insurance in (3) is a revenue
expense and the van is used wholly and exclusively in her
trade.
BPP LEARNING MEDIA
Pre trading expenditure
• Pre trading expenditure incurred within seven years prior

to commencement of trading.
• Treated as a trading expense incurred on the first day of
trading providing it would have been a deductible expense.
BPP LEARNING MEDIA

Cash basis for small businesses 1
• Unincorporated business with revenue does not exceed

£150,000 has option to compute trading profit using a cash
basis as opposed to the normal accruals basis.
• Business can continue to use this basis until their receipts
in the previous tax year exceeded twice the limit and
receipts for the current year exceed £150,000
BPP LEARNING MEDIA

• When using the cash basis for F6, certain expenses can
be computed on a flat rate basis:
―Approved mileage allowance to compute deduction for
business miles.
―If a business premises are used partly for private
purposes, private use adjustment can be made on
number of occupants.
BPP LEARNING MEDIA

• If cash basis produces a trading loss: only relief available

is to carry loss forward against future trading profits.
• In exam questions you will be told whether or not to use
the cash basis.
BPP LEARNING MEDIA

Question: Lexie
Lexie started trading on 6 April 2017 as a mobile hairdresser

and prepared her first set of accounts to 5 April 2018. She
has elected to use the cash basis.
BPP LEARNING MEDIA

Question: Lexie – cont’d
The following information is available for the year ended

5 April 2018.
Revenue was £35,000 of which £2,000 was owed as
receivables at 5 April 2018.
A motor car was acquired on 6 April 2017 for £13,000. Lexie
drove 10,000 miles in the car during the year to 5 April 2018
of which 2,000 miles were for private journeys. The fixed rate
mileage expense for motoring is 45p per mile for the first
10,000 miles, then 25p per mile after that.
BPP LEARNING MEDIA

Question: Lexie – cont’d
Hairdressing equipment was acquired on 6 April 2017 for

£3,000.
Other allowable expenses were £9,000 of which £1,500 was
owed as payables at 5 April 2018.
Required
Calculate Lexie’s taxable trading profit for the year ended
5 April 2018.
BPP LEARNING MEDIA

Answer: Lexie
£ £
Revenue received £(35,000 – 2,000) 33,000
Expenses
Fixed rate motoring 8,000  45p 3,600
Equipment 3,000
Other expenses £(9,000 – 1,500) 7,500 (14,100)
Taxable trading profit 18,900
BPP LEARNING MEDIA

Summary 1
Badges of trade
• There are six badges of trade which are used to determine if
someone is trading or not.
Adjustment of profits
• Net profit is adjusted for disallowable expenditure and income that is
not taxable or taxable elsewhere.
• Capital allowances are also deducted to arrive at trading income.
• Expenditure can only be deducted if it is incurred wholly and
exclusively for the purpose of the trade.
BPP LEARNING MEDIA

Summary 2
Pre trading expenditure

• If incurred within seven years of commencement of trade it is treated
as an expense incurred on first day of trading.
Cash basis for small businesses
• Unincorporated businesses can adopt a cash basis for computing
trading profits if their revenue is below £150,000.
BPP LEARNING MEDIA


Adjustment of profit (company) Specimen C33
BPP LEARNING MEDIA

Chapter 8 • Nature of capital allowances
• Plant and machinery
Capital allowances • Main pool

• Allowances on main pool
• Special rate pool
• Allowances on special rate
pool
• Balancing adjustments
• Cars
• Private use assets
• Short life assets
BPP LEARNING MEDIA

• Define plant and machinery for capital allowances

purposes.
• Compute writing down allowances, first year allowances
and the annual investment allowance.
• Compute capital allowances for motor cars.
• Compute balancing allowances and balancing charges.
• Recognise the treatment of short life assets.
• Recognise the treatment of assets included in the special
rate pool.
BPP LEARNING MEDIA

Chapter summary diagram 1
Capital allowances
Nature of capital Balancing

Main pool Special rate pool
allowances adjustments
Allowances Allowances
AIA FYA WDA AIA WDA
BPP LEARNING MEDIA

Tackling the exam
• Capital allowances may be examined in all Sections.

• Section A or Section B questions may test capital
allowances on a single asset such as a motor car.
• Capital allowances may be tested in a Section C 15 mark
question.
• Capital allowances also apply to companies and so may
appear in a Section C 15 mark corporation tax question.
• You need to be able to identify assets which might qualify
for capital allowances for a Section C 10 mark question.
• The rules on motor cars are likely to be frequently
examined.
BPP LEARNING MEDIA

Nature of capital allowances
• Allowances are given against adjusted trading profits in

respect of the fall in value, due to business use, of
qualifying assets.
• Replaces depreciation added back.
• Capital allowances treated as allowable trading expenses
and balancing charges as trading receipts, in arriving at
trading income.
BPP LEARNING MEDIA

Plant and machinery 1
Plant
• Exclusions include:
― Buildings
― Structures
― Land
BPP LEARNING MEDIA

Plant
• Inclusions (if satisfies function test) include:
― Electrical (including lighting), cold water, gas and
sewerage systems
― Space or water heating systems and powered systems
of ventilation
― Manufacturing and display equipment
― Expenditure on altering land for the purpose only of
installing machinery or plant
BPP LEARNING MEDIA

Function versus setting

• If asset fulfils a function with which trade carried on:
― Plant, so capital allowances available
• If asset part of setting in which trade carried on:
― Not plant, so no capital allowances available
BPP LEARNING MEDIA

Plant
• Inclusions include:
― Computer software
BPP LEARNING MEDIA

Machinery
• Normal everyday meaning.
BPP LEARNING MEDIA

Private
Special Short used
Main rate life asset
AIA FYA pool pool assets (40%) Allowances
£ £ £ £ £ £
TWDV b/fwd X X X
Additions X X X X X
Disposals (proceeds (X) (X)
limited to cost)
X X X X
AIA (X) X
Transfer to pool X X X
X X
FYA 100% (X) X
–
WDA 18%/8% (X) (X) (X) (X)  60% X
TWDV c/fwd X X X X X
BPP LEARNING MEDIA

Main pool
• Most expenditure on plant and machinery is put into the

main pool.
• Includes:
― Cars with CO2 emissions of 130g/km or less
• Include all additions and disposals occurring in the
relevant period of account.
• It does not matter at what point during the period the
additions and disposals are made.
BPP LEARNING MEDIA

Allowances on main pool 1
Annual investment allowance (AIA)

• Annual investment allowance available for the first
£200,000 of expenditure on plant and machinery per 12
month period of account.
• No AIA on purchase of cars.
• AIA is adjusted if the period of account is longer or shorter
than 12 months.
BPP LEARNING MEDIA

First year allowance (FYA)

• Low emission car has CO2 emissions of 75g/km or less.
• 100% first year allowance (FYA) is available for
expenditure incurred on new low emission motor cars.
• FYA not adjusted pro-rata in a short or long period of
account.
• If FYA not claimed in full, balance of expenditure
transferred to the main pool after WDA has been
calculated.
BPP LEARNING MEDIA

Writing down allowance (WDA)

• 18% on the tax written down value (TWDV) of the main
pool after adding the current period’s additions and taking
out the current period’s disposals.
• WDA is time apportioned if the period of account is longer
or shorter than 12 months.
BPP LEARNING MEDIA

Question: Foxtrot
Foxtrot draws up accounts to 31 December each year

and incurred the following transactions in year ended 31
December 2017.
28 April 2017 Bought factory equipment for
£155,000
1 May 2017 Sold machine (original cost £6,000)
for £2,000
1 August 2017 Bought some forklift trucks for
£70,000
The TWDV of the main pool at 1 January 2017 was
£28,000.
BPP LEARNING MEDIA

Question: Foxtrot – cont’d
Required
Calculate the allowances to be claimed for the year
ended 31 December 2017.
BPP LEARNING MEDIA

Answer: Foxtrot
AIA Main pool Allowances

£ £ £
Year ended 31 Dec 2017
TWDV b/fwd 28,000
Additions: 28.4.17 155,000
1.8.17 70,000
225,000
AIA (200,000) 200,000
Transferred to main pool 25,000 25,000
Disposal: 1.5.17 (2,000)
51,000
WDA 18% (9,180) 9,180
TWDVs c/fwd 41,820
Allowances 209,180
BPP LEARNING MEDIA

Small pool
• Balance of unrelieved expenditure on the main pool (after
additions and disposals) of £1,000 or less (pro-rated for
periods longer or shorter than 12 months).
• Balance can all be written off leaving pool with a nil
balance.
BPP LEARNING MEDIA

Special rate pool
• Expenditure on:
―Long life assets (≥ 25 years) if trader spends more than
£100,000 in period (pro-rated for periods longer or
shorter than 12 months)
―Solar panels
―Plant and machinery that is integral to a building such
as electrical and lighting systems, cold water systems,
space or water heating systems, powered systems of
ventilation, cooling or air purification lifts or escalators
―Cars with CO2 emissions of over 130 g/km
BPP LEARNING MEDIA

Allowances on special rate pool 1
Annual investment allowance (AIA)

• Use against special rate pool expenditure in priority to
main pool expenditure.
• No AIA on cars.
• AIA is adjusted if period is longer or shorter than 12
months.
BPP LEARNING MEDIA

Writing down allowance (WDA)

• 8% on the tax written down value (TWDV) of the special
rate pool.
• WDA time apportioned if period longer or shorter than 12
months.
BPP LEARNING MEDIA

Small pool
• Balance of unrelieved expenditure on the special rate pool
(after additions and disposals) of £1,000 or less (pro-rated
for periods longer or shorter than 12 months).
• Balance can all be written off leaving pool with a nil
balance.
BPP LEARNING MEDIA

Question: Enrique
The TWDV in Enrique's main pool on 1 April 2017 was

£80,000. In the year ended 31 March 2018 he spent
£220,000 on integral features and £5,800 on furniture.
Required
Calculate the capital allowances for the year ended
31 March 2018.
BPP LEARNING MEDIA

Answer: Enrique
Main Special rate

AIA pool pool Allowances
£ £ £ £
TWDV b/f 80,000
Additions:
Integral features 220,000
Furniture 5,800
85,800
AIA (200,000) 200,000
Transfer to special rate pool 20,000 20,000
20,000
WDA 18%/8% (15,444) (1,600) 17,044
TWDVs c/f 70,356 18,400 217,044
BPP LEARNING MEDIA

Balancing adjustments
• On disposal of asset, proceeds (limited to purchase cost)

deducted from TWDV of the pool.
• If proceeds from the disposal > TWDV of the pool,
balancing charge always arises.
• If proceeds from the disposal < TWDV of the pool,
balancing allowance arises only if disposal was on
cessation of trade.
BPP LEARNING MEDIA

Capital allowances
Private use Short life

Cars
asset asset
BPP LEARNING MEDIA

Cars
• Motor cars with CO2 emissions of 75 g/km or less

receive 100% FYA.
• Motor cars with CO2 emissions of between 76 and 130
g/km go into main pool and receive WDA of 18%.
• Motor cars with CO2 emissions of >130 g/km go into
special rate pool and receive WDA of 8%.
BPP LEARNING MEDIA

Question: Myles
Myles prepares accounts to 31 December each year and

incurred the following transactions for the two years ended
31 December 2018.
12.2.17 Bought car for £32,000 with C02 emissions of
150g/km
1.7.17 Bought car for £18,000, CO2 emissions of 120 g/km
1.10.18 Bought car for £8,000, CO2 emissions of 70 g/km
On 1 January 2017 the TWDV of the main pool of plant and
machinery was £25,000.
BPP LEARNING MEDIA

Question: Myles – cont’d
Required
Calculate the capital allowances for the year ended 31
December 2017 and the year ended 31 December 2018.
Assume tax rates for tax year 2017/18 apply throughout.
BPP LEARNING MEDIA

Answer: Myles
Main Special
FYA pool rate pool Allowances
£ £ £
Y/e 31.12.17
TWDV B/F 25,000 –
Additions 18,000 32,000
Disposals – –
43,000 32,000
WDA 18% and 8% (7,740) (2,560) 10,300
C/F 35,260 29,440
Y/e 31.12.18
TWDV B/F 35,260 29,440
Additions 8,000
FYA 100% (8,000) – – 8,000
– 35,260 29,440
WDA 18% (6,347) (2,355) 8,702
C/F 28,913 27,085 16,702
BPP LEARNING MEDIA

Private use assets
• Separate calculation for each asset.

• Reduce TWDV by full amount of WDA available.
• Only actually give the amount of WDA relevant to owner's
business use.
• Balancing adjustment on sale is business percentage only.
• Not relevant for employee's private use.
BPP LEARNING MEDIA

Question: Barry
Barry buys a car for his business for £18,000, CO2 emission
170 g/km, on 30 June 2017 which he uses privately 20% of
the time. His year end is 31 March. On 1 September 2018
the car was sold for £10,000.
Required
Calculate his capital allowances for the years ended 31
March 2018 and 31 March 2019.
Assume tax rates for tax year 2017/18 apply throughout.
BPP LEARNING MEDIA

Answer: Barry
Privately used
asset (80%) Allowances
Y/e 31.3.18 £ £
Addition 18,000
WDA 8% (1,440)  80% 1,152
16,560
Y/e 31.3.19
Disposal (10,000)
Balancing allowance 6,560  80% 5,248
BPP LEARNING MEDIA

Short life assets 1
• Beneficial treatment for assets which would normally

go in the main pool and have an expected life of less
than eight years.
• Balancing allowances cannot normally be claimed on
assets in the main pool.
• Cars cannot be short life assets.
BPP LEARNING MEDIA

Short life assets 2
• Calculate allowances in separate short life asset pool.

• If sold for less than TWDV: balancing allowance may
be claimed.
• Special treatment lost on eighth anniversary of end of
period of account in which asset was acquired: asset
automatically returns to main pool at TWDV.
BPP LEARNING MEDIA

Question: Guy
Guy prepares accounts to 31 March each year. At 1 April 2017 the TWDV
values of plant and machinery were as follows:
Main pool £15,000
Short life asset £4,000
The following transactions took place during the year ended 31 March
2018:
15.4.17 Purchased equipment £123,000
31.8.17 Purchased motor car, C02 emissions 69 g/km £17,000
31.8.17 Purchased motor car, C02 emissions 132 g/km £20,000
2.9.17 Sold a lorry (cost £9,800) £(12,000)
1.2.18 Sold short life asset (original cost £8,000) £(800)
BPP LEARNING MEDIA

Question: Guy – cont’d
Required
Calculate Guy's capital allowances for year ended 31 March 2018.
BPP LEARNING MEDIA

Answer: Guy
AIA FYA Pool SR pool SLA Allowances
£ £ £ £ £ £
Y/e 31.3.18
TWDVs @ 1.4.17 15,000 4,000
Addition – equipment 123,000
– car 17,000
– car 20,000
Disposal
– lorry (cost) (9,800)
– SLA (800)
5,200 3,200
123,000
AIA (123,000) 123,000
–
c/f 17,000 5,200 20,000 3,200 123,000
BPP LEARNING MEDIA

Answer: Guy – cont’d
AIA FYA Pool SR pool SLA Allowances
£ £ £ £ £ £
b/f 17,000 55,200 20,000 3,200 123,000
FYA @ 100% (17,000) 17,000

–
WDA @ 18%/8% (936) (1,600) 2,536
Balancing allowance (3,200) 3,200
TWDVs c/f 4,264 18,400 –

Allowances 145,736
BPP LEARNING MEDIA

Question: M Ltd
M Ltd has surplus funds of £300,000 which it is planning to

spend before 31 March 2018. The company will either
purchase new equipment for £300,000, or alternatively it will
purchase a new ventilation system for £300,000, which will
be installed as part of its factory.
Required
Explain the maximum amount of capital allowances that
M Ltd will be able to claim for the year ended 31 March 2018
in respect of each of the two alternative purchases of assets.
BPP LEARNING MEDIA

Answer: : M Ltd
Equipment
The first £200,000 of expenditure will qualify for the annual
investment allowance.
The remainder of the expenditure will be added to the main
pool and therefore will be eligible for writing down allowance
at the rate of 18%.
Capital allowances for the year ended 31 March 2018 will
therefore be £200,000 + (£100,000 × 18%) = £218,000.
BPP LEARNING MEDIA

Answer: : M Ltd – cont’d
Ventilation system
The annual investment allowance will be available as above.
The ventilation system will be integral to the factory, and so
the balance of expenditure will only qualify for writing down
allowances at the rate of 8%.
Capital allowances for the year ended 31 March 2018 will
therefore be £200,000 + (£100,000 × 8%) = £208,000.
BPP LEARNING MEDIA

Summary 1
Nature of capital allowances

• Deductible from trading income.
• Given to compensate for the wear and tear of qualifying assets.
Plant and machinery

• Plant does not include buildings, structures and land.
• Plant may include electrical systems, heating and ventilation
systems.
• Must satisfy function test.
• Machinery has normal everyday meaning.
BPP LEARNING MEDIA

Summary 2
Main pool
• Most plant and machinery.
• Cars with CO2 emissions of 130g/km or less.
Allowances on main pool

• Annual investment allowance of £200,000 (not on cars).
• First year allowance @ 100% on low emission cars.
• Writing down allowance @ 18%.
• Write off if balance is £1,000 or less (pro-rated for short/long period).
BPP LEARNING MEDIA

Summary 3
Special rate pool

• Long life assets.
• Assets integral to building.
• Cars with CO2 emissions of more than 130g/km.
Allowances on special rate pool

• Use AIA on special rate pool in priority to main pool.
• Writing down allowance @ 8%.
• Write off if balance is £1,000 or less (pro-rated for short/long period).
BPP LEARNING MEDIA

Summary 4
Balancing adjustments
• Deduct disposal proceeds (limited to purchase cost).
• Balancing charge if exceeds TWDV.
• Balancing allowance if less than TWDV on cessation.
Cars
• CO2 emissions 75 g/km or less: FYA @ 100%.
• CO2 emissions between 76 and 130 g/km: WDA @ 18%.
• CO2 emissions in excess of 130 g/km: WDA @ 8%.
BPP LEARNING MEDIA

Summary 5
Private use assets

• Separate calculation for each asset.
• Allowances given for business use only.
Short life assets

• Beneficial if expected life of less than eight years.
• Not cars.
• Deal with in short life asset pool.
• If no disposal within 8 periods of account, transfer balance to main
pool.
BPP LEARNING MEDIA


Capital allowances for company Specimen C33
BPP LEARNING MEDIA

Chapter 9 • Trading income basis periods
• Capital allowances for
individuals
Assessable trading
• Choice of accounting date
income
BPP LEARNING MEDIA

• Recognise the basis of assessment for self-employment

income.
• Compute the assessable profits on commencement and
on cessation.
• Recognise the factors that influence the choice of
accounting date.
BPP LEARNING MEDIA

Continuing trades Commencement
— CYB — Opening year rules
Assessable
trading income
Choice of Cessation
accounting date — Closing year rules
BPP LEARNING MEDIA

Tackling the exam
• The basis of assessment for trading income may be tested

in a Section C 15 mark income tax question.
• You may be asked to deal with a more complex situation
such as where a business starts or ceases.
• There could also be an element of tax planning with the
choice of an accounting date in a Section C 10 mark
question.
BPP LEARNING MEDIA

Trading income basis periods 1
• Trades are assessed on a current year basis (CYB), ie on

the period of account ending in the tax year.
• For example, if a trader prepares accounts to 31
December each year, he will be taxed in 2017/18 on the
profits for the year ending 31 December 2017.
BPP LEARNING MEDIA

Question: Kim
(a) Kim has been trading for many years and

has a year end of 31 March.
Recent adjusted profits are:
Year ended £
31 March 2017 22,000
31 March 2018 18,000
31 March 2019 30,000
Required
What profits will be assessed in 2017/18?
BPP LEARNING MEDIA

Question: Kim – cont'd
(b) Required
What profits would be assessed if instead the
year end was 30 April?
Year ended £
30 April 2017 22,000
30 April 2018 18,000
30 April 2019 30,000
BPP LEARNING MEDIA

Answer: Kim
(a) Profits assessed on a current year basis
∴ 2017/18 year ended 31 March 2018 £18,000
BPP LEARNING MEDIA

Answer: Kim – cont'd
(b) CYB 2017/18 year ended 30 April 2017 £22,000
BPP LEARNING MEDIA

Year
Tax
ACTUAL BASIS: Commencement to 5 April following

1
Is there an accounting period ending in the 2nd tax year?
YES NO
How long is the accounting period?

Tax Year 2
<12m 12m
Tax FIRST 12m Actual basis

Tax 12m to the a/c
from (6 April – 5 April)
date
commencement
Year 3
Tax
Tax 12m to the a/c date (CYB)
BPP LEARNING MEDIA

• On commencement, some profits may be taxed twice.

• These profits are called ‘overlap profits’.
• Overlap profits are relieved when the trade ceases.
BPP LEARNING MEDIA

Question: Jonathan
Jonathan commences business on 1 January 2016 and

prepares his first accounts to 30 June 2016 and then 30
June annually thereafter:
6 months to 30 June 2016 £10,000
Year to 30 June 2017 £18,000
Year to 30 June 2018 £26,000
Required
What are his assessments based on these profits and

what are his overlap profits?
BPP LEARNING MEDIA

Answer: Jonathan
2015/16 Actual (1.1.16 – 5.4.16) £
3
 10,000 5,000
6
2016/17 First 12 months (1.1.16 – 31.12.16)
1.1.16 – 30.6.16 10,000
6
1.7.16 – 31.12.16(  18,000) 9,000 19,000
12
2017/18 CYB (year to 30.6.17) 18,000
2018/19 CYB (year to 30.6.18) 26,000
Overlap profits: 1.1.16 – 5.4.16 5,000
1.7.16 – 31.12.16 9,000 14,000
BPP LEARNING MEDIA

Question: Peter
Peter begins trading on 1 July 2015. He decides on a

December year end but draws up his first accounts to
31 December 2016.
He made £18,000 profits in the 18 months to 31 December

2016 and £15,000 in the year ended 31 December 2017.
Required
What are his assessments based on these profits and what

are his overlap profits?
BPP LEARNING MEDIA

Answer: Peter
£
2015/16 Actual (1.7.15 – 5.4.16)
9  18,000 9,000
18
2016/17 12 months to 31.12.16

12  18,000 12,000
18
2017/18 CYB (y/e 31.12.16) 15,000
Overlap profits 1.1.16 – 5.4.16

3
18  18,000 3,000
BPP LEARNING MEDIA

Closing year rules

• Penultimate tax year: CYB.
• Final tax year: remaining untaxed profits less
overlap profits.
BPP LEARNING MEDIA

Question: Albert
Albert, who has been trading for some years preparing his
accounts to 31 December, ceases to trade on 31 March
2018 with profits as follows:
Adjusted
profits
£
Year to 31.12.16 19,000
Year to 31.12.17 22,000
3 months to 31.3.18 12,000
The overlap profits arising in the opening years of his trade

were £3,500.
BPP LEARNING MEDIA

Question: Albert – cont’d
Required
What are the assessments for 2016/17 and 2017/18?
BPP LEARNING MEDIA

Answer: Albert
£
2016/17 CYB (y/e 31.12.16) 19,000
2017/18 Year end 31.12.17 22,000

3 months to 31.3.18 12,000
Less: overlap relief (3,500)
30,500
BPP LEARNING MEDIA

Question: Andrea
Andrea commences trading on 1 July 2013. Her profits since

then are as follows.
£
16 months to 31.10.14 48,000
Year ended 31.10.15 30,000
Year ended 31.10.16 28,000
9 months to 31.07.17 18,000
She ceases trading on 31 July 2017.
BPP LEARNING MEDIA

Question: Andrea – cont’d
Required
Calculate the trading profit assessments for all relevant
years.
BPP LEARNING MEDIA

Answer: Andrea
£
13/14 1 July 13 – 5 April 14
/16  48,000
9 27,000
14/15 Long AP ending in 14/15
1.11.13 – 31.10.14
/16  48,000
12 36,000
15/16 y/e 31.10.15 30,000
16/17 y/e 31.10.16 28,000
17/18 9 months to 31.7.17 18,000
Less overlap profits (15,000)
3,000
Overlap profits
1.11.13 – 5.4.14 5/16  48,000 15,000
BPP LEARNING MEDIA

Capital allowances for individuals 1
Basis periods for capital allowances

• Same as for the period of account.
• Treated as an expense which is deductible from profits.
Opening years
• Calculated for the period of account.
• Deducted from profits before the opening year rules are
applied.
BPP LEARNING MEDIA

1 Adjust the profit for each period of account (add

back….deduct….).
2 Calculate CAs for each period of account.
Opening years Closing years
WDA x n/12 BA / BC
3 Deduct 2 from 1.
4 Apply opening/closing year rules.
BPP LEARNING MEDIA

Question: Walton
Walton starts a trade on 1 March 2017 and made up his first

set of accounts for the 17 month period to 31 July 2018. His
trading profit, before capital allowances, was £42,000.
The following assets were acquired:
Cost
Date £
1.3.17 Plant 13,000
1.12.17 Car, C02 emissions 120 g/km 9,300
BPP LEARNING MEDIA

Question: Walton – cont’d
Required
What are the trading income assessments for the first three
tax years and what are the overlap profits?
Assume 2017/18 rates continue to apply in the future.
BPP LEARNING MEDIA

Answer: Walton
First work out the capital allowances for periods of account:

AIA Pool Allowances
1.3.17– 31.7.18 £ £ £
Additions 13,000 9,300
AIA – 100% (max 200,000 x 17/12) (13,000) 13,000
WDA @ 18%  17/12 – (2,372) 2,372
6,928
TWDV c/fwd 15,372
The taxable trading profits of the period of account is as follows:

Profits
£
1.3.17– 31.7.18 (42,000 – 15,372) 26,628
BPP LEARNING MEDIA

Answer: Walton – cont'd
The assessments are as follows:
Year Basis period Working Assessment

£
1
2016/17 Actual (1.3.17 – 5.4.17) 26,628  17 1,566
12
2017/18 Actual (6.4.17 – 5.4.18) 26,628  17 18,796
12
2018/19 12 mths to a/c date (1.8.17 – 31.7.18) 26,628  17 18,796
Overlap profits: 1.8.17 – 5.4.18
 8 × 26,628 = £12,531
17
BPP LEARNING MEDIA

Question: Fang
Fang commenced self-employment on 1 August 2015. She

has a trading profit of £45,960 for the year ended 31 July
2016, and a trading profit of £39,360 for the year ended
31 July 2017.
Required
(a) Calculate the amount of trading profit which will have
been assessed on Fang for each of the tax years
2015/16, 2016/17 and 2017/18, and state the amount of
any overlap profit. (3 marks)
BPP LEARNING MEDIA

Question: Fang – cont’d
(b) Explain how Fang would have obtained relief for trading
expenditure incurred prior to 1 August 2015 and for
computer equipment which Fang already owned which
was brought into business use on 1 August 2015.
(2 marks)
BPP LEARNING MEDIA

Answer: Fang
(a) Assessments 2015/16, 2016/17 and 2017/18

Tax year Basis of assessment £
2015/16 Actual – 1 August 2015 to 5 April 2016
£45,960 × 8/12 30,640
2016/17 12 months to accounting date in tax year
y/e 31 July 2016 45,960
2017/18 Current year basis
y/e 31 July 2017 39,360
In 2015/16 there are overlap profits of £30,640 (the eight-month

period from 1 August 2015 to 5 April 2016).
BPP LEARNING MEDIA

Answer: Fang – cont’d
(b) The trading expenditure will be treated as incurred on

1 August 2015 provided it was incurred within the previous
seven years and would have been allowable if the trade
had already commenced.
The computer equipment which Fang already owned will
be an addition for capital allowances purposes based on
its market value at 1 August 2015.
BPP LEARNING MEDIA

Closing years
• When a business ceases to trade no WDAs are given in
the final period of account.
• Additions in the relevant period are brought in and then the
disposal proceeds (limited to cost) are deducted from the
balance of qualifying expenditure.
• If the proceeds exceed the TWDV at disposal then a
balancing charge arises.
• If proceeds are less than the TWDV at disposal, a
balancing allowance is given.
BPP LEARNING MEDIA

Choice of accounting date 1
• An accounting date of 31 March/5 April is more

straightforward on commencement and avoids overlap
profits.
• An accounting date of 31 March/5 April is easier to deal
with on cessation as there will be a final basis period of 12
months or less.
BPP LEARNING MEDIA

Choice of accounting date 2
• If profits are expected to rise, a date early in the tax year,

for example 30 April, will delay the time when those
increasing profits will be taxed.
• An accounting date of 30 April gives the greatest time
between earning the profits and paying the tax.
• Knowing profits well in advance of the end of the tax year
makes tax planning easier.
BPP LEARNING MEDIA

Question: Choice of accounting date
List the advantages and disadvantages for the partnership of

choosing 30 April as its accounting date rather than 5 April.
(4 marks)
BPP LEARNING MEDIA

Answer: Choice of accounting date
Advantages
• Interval between earning profits and paying related tax
liability 11 months longer. Particularly beneficial where
profits are rising.
• Possible to calculate taxable profits well in advance of the
end of the tax year, making tax planning easier eg pension
contributions.
Disadvantages
• Application of basis period rules more complicated.
• Amount of profit assessed in year of cessation potentially
quite high as basis period up to 23 months in length.
Although overlap profits are deductible, these might be
insignificant if opening years’ profits are low.
BPP LEARNING MEDIA

Summary 1
Trading income basis periods

• Trading income is assessed on a CYB, ie profits of an accounting
period ending in that tax year.
• When a trade starts special rules apply initially to get the trader
onto a CYB. Overlap profits will arise unless 31 March or 5 April
year end is selected.
• On cessation special rules apply to bring the trader off the CYB.
Any overlap profits are relieved in the final tax year.
BPP LEARNING MEDIA

Summary 2
Capital allowances for individuals

• Remember that capital allowances are calculated for the period of
account and deducted to compute trading income which is then
subject to the special rules for commencing and ceasing.
Choice of accounting date

• The choice of accounting date can affect when the tax is paid and
the amount of any overlap profits.
BPP LEARNING MEDIA

Chapter 10 • What to do with trading losses
• Continuing trade
Trading losses • Losses in opening years

• Terminal loss relief
BPP LEARNING MEDIA

• Understand how trading losses can be carried forward.

• Understand how trading losses can be claimed against
total income and chargeable gains, and the restriction that
can apply.
• Explain and compute the relief for trading losses in the
early years of trade.
• Explain and compute terminal loss relief.
• Recognise the factors that will influence the choice of loss
relief claim.
BPP LEARNING MEDIA

Trading losses
Loss relief Loss relief Carry forward

Early trade Terminal
against total against trade loss
loss relief loss relief
income gains relief
BPP LEARNING MEDIA

Tackling the exam
• Section A or Section B questions on trading losses may

focus on a single type of relief such as loss relief against
total income.
• Trading losses may be tested as part of a Section C 15
mark income tax question.
• Trading losses may also be tested in a Section C 10 mark
question, for example focusing on tax planning.
• You may need to use your knowledge of basis periods
from Chapter 9 to work out the trading loss if it occurs in
the early years of trading or in the year of cessation.
BPP LEARNING MEDIA

What to do with trading losses 1
Trading income assessment

• If a basis period has a loss, the trading income
assessment is nil.
• Never put in a negative assessment.
BPP LEARNING MEDIA

What to do with trading losses 2
Relieving the loss

• Taxpayer will be able to reduce income subject to tax by
deducting the loss against income.
BPP LEARNING MEDIA

Continuing trade 1
Loss relief against total income

• Loss available for relief is the loss in the basis period for
that tax year.
• Loss relief is against total income of:
― Tax year in which the loss was suffered, and/or
― Preceding tax year.
• Set off against non-savings income as far as possible,
then savings income and then dividend income.
• Maximum possible loss must be set off (ie personal
allowances cannot be saved).
BPP LEARNING MEDIA

Question: Donald
Donald runs a market stall.

Accounts for the year ended 30 June 2015 show a trading
profit of £23,000.
For the year ended 30 June 2016 Donald made a trading
loss of £34,000.
In the year ended 30 June 2017 he made a trading profit of
£6,000.
Donald’s only other income was property income of £8,000
per tax year.
BPP LEARNING MEDIA

Question: Donald – cont’d
Required
Show how the loss is relieved if Donald makes the earliest
claim to set trading loss against total income.
BPP LEARNING MEDIA

Answer: Donald
2015/16 2016/17 2017/18
£ £ £
Trading income 23,000 – 6,000
Other income 8,000 8,000 8,000
Total Income 31,000 8,000 14,000
Loss relief against income (31,000) (i) (3,000) (ii) –
Net income – 5,000 14,000
Loss memo:
£
Y/e 30.6.16 34,000
– 15/16 (31,000) (i)
– 16/17 (3,000) (ii)
–
BPP LEARNING MEDIA

Continuing trade 2
Cap on income tax relief

• If loss relief is claimed against total income, the maximum
that can be relieved is higher of:
―£50,000.
―25% of individual's adjusted total income (after
deducting gross personal pension contributions but not
gift aid donations).
• Restriction does not apply to loss relieved against profits
of same trade for preceding tax year.
BPP LEARNING MEDIA

Question: Paul
Paul has traded for many years. Recent results are as

follows:
Year ended £
30.6.16 40,000
30.6.17 (200,000)
He has other non-savings income of £100,000 per annum.
BPP LEARNING MEDIA

Question: Paul – cont’d
Required
Calculate Paul’s taxable income for 2016/17 and 2017/18
assuming the largest and earliest claim against total income
is made. Assume that the personal allowance is £11,500 for
both tax years.
BPP LEARNING MEDIA

Answer: Paul
2016/17 2017/18
£ £
Trading profit 40,000 –
Other income 100,000 100,000
140,000 100,000
Loss relief (90,000) (50,000)
50,000 50,000
Less PA (11,500) (11,500)
Taxable income 38,500 38,500
Loss memo:
£
Y/e 30.6.17 200,000
Loss relief – 16/17 (40,000 + 50,000) (N1) (90,000)
– 17/18 (N2) (50,000)
Loss remaining 60,000
BPP LEARNING MEDIA

Answer: Paul – cont’d
(N1) In 2016/17 the relief against trading income of £40,000 is not
capped. Relief against other income is capped at the higher of
£50,000 or 25%  140,000 = £35,000 ie £50,000.
So claim is £90,000 (40,000 + 50,000).
(N2) In 2017/18 loss relief is capped at the higher of £50,000 or

25%  100,000 = £25,000 ie £50,000.
BPP LEARNING MEDIA

Continuing trade 3
Trading losses relieved against capital gains

• If a claim is made against total income, the taxpayer can
make a further claim to offset any remaining loss against
the chargeable gains for the year.
• Offset must be made against total income in that year first.
BPP LEARNING MEDIA

Continuing trade 4
Carry forward loss relief

• If no claim made to set loss against total income or trading
income in prior years, or some of the loss is left after such
a claim, balance will be carried forward.
• Carried forward loss is relieved against the first available
future profits from the same trade.
• Set-off is automatic and compulsory.
BPP LEARNING MEDIA

Question: Bert
Bert has traded for many years. Recent results are as

follows:
Year ended £
31.12.15 20,000
31.12.16 (40,000)
31.12.17 (24,000)
31.12.18 8,000
He has other income of £10,000 per annum.
BPP LEARNING MEDIA

Question: Bert – cont’d
Required
Calculate net income for 2015/16 to 2018/19 assuming that

the largest and earliest possible claims against total income
are made, and show the losses to be carried forward against
future trading profits.
BPP LEARNING MEDIA

Answer: Bert
2015/16 2016/17 2017/18 2018/19

£ £ £ £
Trading income 20,000 – – 8,000
Carry forward relief – – – (8,000) (iv)
20,000 – – –
Other income 10,000 10,000 10,000 10,000
Total Income 30,000 10,000 10,000 10,000
Relief against TI (30,000) (i) (10,000) (ii) (10,000) (iii) –
Net income – – – 10,000
BPP LEARNING MEDIA

Answer: Bert – cont'd
Loss memo:
£ £
Y/e 31.12.16 40,000
Relief vs TI – 2015/16 (30,000) (i)
– 2016/17 (10,000) (ii)
–
Y/e 31.12.17 24,000
Relief vs TI – 2016/17 –
– 2017/18 (10,000) (iii)
C/fwd 14,000
14,000
2018/19 (8,000) (iv)
C/fwd 6,000
BPP LEARNING MEDIA

Continuing trade 5
Choice between loss reliefs

• To decide on whether a loss should be relieved in the
current year, carried back or carried forward will involve
consideration of:
― Rates of tax
― Timing of tax payments/repayments
― Allowances being wasted
BPP LEARNING MEDIA

Question: Marion
Marion started her trade on 1 June 1994. She has always prepared her
accounts to 31 January. Her recent trading results have been:
Y/e 31 January 2015 £25,280
Y/e 31 January 2016 £19,360
Y/e 31 January 2017 £(74,000)
Y/e 31 January 2018 £15,000
She also received the following property income:

14/15 £8,920
15/16 £4,560
16/17 £6,610
17/18 £7,980
BPP LEARNING MEDIA

Question: Marion – cont’d
Required
Compute Marion’s taxable income for 2014/15 to 2017/18 on
the assumption that she relieves her trading loss as early as
possible.
Assume rates for 2017/18 apply throughout.
BPP LEARNING MEDIA

Answer: Marion
2014/15 2015/16 2016/17 2017/18
£ £ £ £
Trading income 25,280 19,360 – 15,000
Carry forward loss relief (2) (15,000)
Property income 8,920 4,560 6,610 7,980
Total income 34,200 23,920 6,610 7,980
Loss relief vs total income (1) (23,920)
PA (11,500) (11,500) (11,500) (11,500)
Taxable income 22,700 – – –
BPP LEARNING MEDIA

Answer: Marion – cont’d
Loss Memo
y/e 31.1.17 74,000
Loss relief vs TI – 16/17 – *
– 15/16 (1) (23,920)
50,080
C/fwd vs 17/18 (2) (15,000)
35,080
* A loss relief claim against total income in 2016/17 would waste Marion’s personal allowance
for that year and would not save any tax as all income is covered by the personal allowance.
Carry back to 2015/16 wastes personal allowance but results in all tax paid being repaid.
BPP LEARNING MEDIA

Losses in opening years
• Relieving the loss: loss relief against total income, carry

forward relief, early trade loss relief.
• Early trade loss relief:
― Enables the loss to be carried back three tax years on a
first in, first out (FIFO) basis
― Loss is deducted from taxpayer's total income
• Measuring the loss:
― Loss that corresponds to the trading income basis
period for a particular tax year
― Relief is only given once where periods overlap
BPP LEARNING MEDIA

Question: Bob
Bob commenced trading on 1 July 2014. Results are as

follows:
Year ended £
30.6.15 Loss (40,000)
30.6.16 Profit 24,000
30.6.17 Profit 30,000
30.6.18 Profit 36,000
Bob's total income prior to 2014/15 was £68,000 for each

tax year.
BPP LEARNING MEDIA

Question: Bob – cont’d
Required
How could the loss be relieved?
BPP LEARNING MEDIA

Answer: Bob
Trading assessments £
2014/15 Actual (1.7.14 – 5.4.15) Nil

2015/16 12m to permanent accounting Nil
date (y/e 30.6.15)
2016/17 CY: (y/e 30.6.16) 24,000
2017/18 CYB (y/e 30.6.17) 30,000
2018/19 CYB (y/e 30.6.18) 36,000
BPP LEARNING MEDIA

Answer: Bob – cont'd
Relief against income/early trade loss relief
£
9
2014/15 12
 40,000 30,000
Relief available against TI of 2014/15 and/or
2012/13 or against TI of 2011/12, 2012/13,
2013/14
2015/16 12 months to permanent accounting date 40,000
Less: used in 2014/15 (30,000)
10,000
Reliefs available against TI of
2015/16 and/or 2014/15
or against TI of 2012/13, 2013/14 and 2014/15
BPP LEARNING MEDIA

Answer: Bob – cont'd
Loss carried forward and relieved against first available
trading income
£
Loss 40,000
16/17 (24,000)
17/18 (16,000)
–
Advice to Bob
Take early trade loss relief of £30,000 in 2011/12 as it will
result in a tax repayment and earliest possible relief.
Also early trade loss relief of £10,000 in 2012/13.
BPP LEARNING MEDIA

Terminal loss relief 1
• Terminal loss relief allows relief against trading profits of

the tax year of cessation and the three preceding years,
on a last in, first out (LIFO) basis.
• The loss of the last period of account is increased by any
overlap profits.
• Loss under terminal loss relief is the actual loss in last 12
months of trading (see next slide).
BPP LEARNING MEDIA

Terminal loss relief 2
6/4
12m cessation
PENULTIMATE FY FINAL FY
Loss X Loss X
Profit (X) O/ lap X
(ignore if profit) X X
TERMINAL LOSS
BPP LEARNING MEDIA

Question: Maura
Maura commenced trading on 1 May 2006 preparing

accounts to 30 September each year. She ceased trading
on 30 June 2017. The most recent results were:
Year 30 September 2013 £8,000 profit
Period to 30 June 2016 £27,000 loss
BPP LEARNING MEDIA

Question: Maura – cont’d
Required
Show how the loss will be relieved under terminal loss

relief (assume there were no overlap profits).
BPP LEARNING MEDIA

Answer: Maura
Calculation of the terminal loss: Final year 2016/17

Losses
£
(a) 6.4.16 – 30.6.16
3/9 × (27,000) (9,000)
(b) 1.7.15 – 5.4.16
1.10.15 – 5.4.16
6/9 × (27,000) (18,000)
1.7.15 – 30.9.16
3/12 × £4,000 profit 1,000
(17,000)
Total terminal loss (26,000)
BPP LEARNING MEDIA

Answer: Maura – cont'd
Since there is no assessment for 2016/17 the £26,000 will be
carried back and set against the assessments for:
£
Terminal loss 26,000
2015/16 (4,000)
2014/15 (10,000)
2013/14 (8,000)
Unrelieved terminal loss 4,000
This amount cannot be carried back any further and is lost.
BPP LEARNING MEDIA

Summary 1
What to do with trading losses

• Trading losses are computed in exactly the same way as trading
income.
• However, there are no overlap losses.
• It is then up to the taxpayer to decide how to relief the loss.
BPP LEARNING MEDIA

Summary 2
Continuing trade
• Trading losses can be relieved against total income (and then
subsequently gains) in the year of loss and/or preceding year.
• The amount is restricted to the higher of £50,000 or 25% of an

individual’s total income.
• Any remaining loss is then carried forward against future trading

income of the same trade.
BPP LEARNING MEDIA

Summary 3
Losses in opening years

• On commencement, an additional loss relief is available allowing
trading losses to be carried back against total income of preceding
three tax years.
Terminal loss relief

• On cessation, to compensate for no carry forward relief, traders can
use terminal loss relief to carry back trading losses against trading
income of three previous years.
BPP LEARNING MEDIA

Chapter 11 • Trading profits
• Losses
Partnerships and • Changes in partnership
limited liability personnel
partnerships • New partnership commencing
• Limited liability partnerships
BPP LEARNING MEDIA

• Explain and compute how a partnership is assessed to

tax.
• Explain and compute the assessable profits for each
partner following a change in the profit sharing ratio.
• Explain and compute the assessable profits for each
partner following a change in the membership of the
partnership.
• Describe the alternative loss relief claims that are available
to partners.
BPP LEARNING MEDIA

Partnerships and limited liability

partnerships
Assessment Change in personnel
Split profits using

PSR for AP New partners Remaining Old partners
partners
BPP LEARNING MEDIA

Tackling the exam
• Section A or Section B questions on partnerships may

include computing partnership income for a particular
partner.
• Partnerships may be tested as part of a Section C 15 mark
question.
• Partnerships may also be tested in a Section C 10 mark
question in a more complex scenario including partners
joining and leaving.
• Partnership questions often involve the basis of
assessment studied in Chapter 9, for example a partner
joining or leaving a partnership.
BPP LEARNING MEDIA

Trading profits
Net profit of p/ship X
Add : disallowed expenses X
Less: income taxed elsewhere (X)
capital allowances (X)
Partnership trading income X
Split according to p/ship agreement
Treat as separate sole traders
BPP LEARNING MEDIA

Question: Ron and Steve
Ron and Steve have been in partnership since 1 July 2002

sharing profits and losses as follows:
R S
Salary 5,000 Nil
Balance – profit share ratio 3 2
On 1 April 2017 the agreement was changed such that profits

and losses are shared equally, with no further salary
payments.
During the year ended 30 June 2017 the partnership made a
taxable trading profit of £60,000.
BPP LEARNING MEDIA

Question: Ron and Steve – cont’d
Required
Show how the taxable trading profit for the year ended
30 June 2017 is split between the partners.
BPP LEARNING MEDIA

Answer: Ron and Steve
R S Total
£ £ £
1.7.15 – 31.3.17
(£45,000 to allocate)
Salary ( 9/12) 3,750 – 3,750

Balance (3:2) 24,750 16,500 (bal) 41,250
28,500 16,500 45,000
1.4.16 – 30.6.17
(£15,000 to allocate)
Balance (1:1) 7,500 7,500 15,000

Assessments 36,000 24,000 60,000
Under CYB, these amounts are assessed in 2017/18.
BPP LEARNING MEDIA

Question: Ant and Dec
Ant and Dec are in partnership sharing profits in the ratio of

1:1 after providing Ant a salary of £12,000.
On 1 January 2017 the profit sharing arrangements were
changed such that no salary was paid and profits are to be
shared in the ratio of 3:1.
Taxable trading profits for the year to 30 June 2017 are
£40,000.
Required
Calculate Ant and Dec’s shares of taxable trading profits for
the year ended 30 June 2017.
BPP LEARNING MEDIA

Answer: Ant and Dec
Total A D
Y/e 30.6.17 £ £
1.7.16 – 31.12.16
Salary 6/12  12,000 6,000 6,000 –
Balance 1.1 14,000 7,000 7,000
6/12  40,000 20,000
1.1.16 – 30.6.17
6/12  40,000 (3:1) 20,000 15,000 5,000
Total 40,000 28,000 12,000
BPP LEARNING MEDIA

Losses
• Allocated using the same method as for profits.

• Each partner can then decide on how to use his share of
the loss.
BPP LEARNING MEDIA

Question: James and Keith
James and Keith have been in partnership since

1 September 2001, sharing profits and losses in the ratio 3:2,
after allocating a salary of £6,000 to James.
In year ended 31 August 2017, the partnership makes a loss
of £30,000.
Required
Show how this loss is allocated between the partners.
BPP LEARNING MEDIA

Answer: James and Keith
J K Total
£ £ £
Salary 6,000 Nil 6,000
Balance (3:2) (21,600) (14,400) (bal) (36,000)
Trading loss (15,600) (14,400) (30,000)
These are available for use against total income in 2017/18

and/or 2016/17. Alternatively, the loss can be carried
forward against first available profits in the same trade.
BPP LEARNING MEDIA

Changes in partnership personnel
• Outgoing partner: use cessation rules for evaluating his

share of profits.
• Existing partners: continue on CYB rules.
• New partner:
― Use opening year rules to evaluate his share of profits
― Deemed to commence from date of joining and then
preparing accounts to the partnership's year end
BPP LEARNING MEDIA

Question: Mark, Gregory and Ben
Mark and Gregory began a partnership on 1 June 2005,

sharing profits and losses equally. On 1 December 2015, Ben
joined them, the new arrangement being 2:2:1. Results have
been as follows:
Y/e 31.5.15 £33,000

Y/e 31.5.16 £51,000
Y/e 31.5.17 £72,000
Required
Show the assessments on the partners for the tax years

2015/16 to 2017/18. Compute any overlap profits.
BPP LEARNING MEDIA

Answer: Mark, Gregory and Ben
Sharing of profits
y/e 31.5.15 ie £33,000
Total M G B
(1:1) 33,000 16,500 16,500
y/e 31.5.16 ie £51,000
Total M G B
Up to 1.12.15 (1:1) 25,500 12,750 12,750
51,000 × 6/12
From 1.12.15 (2:2:1 each) 25,500 10,200 10,200 5,100

51,000 × 6/12
51,000 22,950 22,950 5,100
y/e 31.5.17 ie £72,000
M G B
(2:2:1) 72,000 28,800 28,800 14,400
BPP LEARNING MEDIA

Answer: Mark, Gregory and Ben – cont'd
New partner (Ben) : Trading Assessments
Started trading 1.12.15

6 months to 31.5.16 £5,100
Year ended 31.5.17 £14,400
2015/16 Actual 1.12.15 – 5.4.16

4
5,100  6 = £3,400
2016/17 (1st 12 months) ie 1.12.15 – 30.11.16

6
5,100 + 12
 14,400 = £12,300
2017/18 (y/e 31.5.17) ie £14,400
BPP LEARNING MEDIA

Answer: Mark, Gregory and Ben – cont'd
Ben’s overlap profits

1.12.15 – 5.4.16 3,400
1.6.16 – 30.11.16 (6/12 × 14,400) 7,200
£10,600
Existing Partners : Trading Assessments
Mark Gregory
£ £
2015/16 (y/e 31.5.15) 16,500 16,500
2016/17 (y/e 31.5.16) 22,950 22,950
2017/18 (y/e 31.5.17) 28,800 28,800
BPP LEARNING MEDIA

Question: Abraham, Martin and John
Abraham and Martin began a partnership on 1 May

2003, sharing profits and losses equally. On 1 August
2015 John joined them, the new arrangement being
2:2:1. Results have been as follows.
£
Year end 30.4. 2015 40,000
Year end 30.4. 2016 50,000
Year end 30.4. 2017 35,000
Required
Show the assessment on the partners for the tax years
2015/16 to 2017/18. Compute any overlap profits.
BPP LEARNING MEDIA

Answer: Abraham, Martin and John
Step 1 – Allocate profit
Total A M J
Y/e 30.4.15
1:1 40,000 20,000 20,000 –
Y/e 30.4.16
1.5.15 – 31.7.15
/12  50,000 1:1 –
3 12,500 6,250 6,250
1.8.15 – 30.4.16
/12  50,000 2:2:1
9 37,500 15,000 15,000 7,500
50,000 21,250 21,250 7,500
Y/e 30.4.17
2:2:1 35,000 14,000 14,000 7,000
BPP LEARNING MEDIA

Answer: Abraham, Martin and John – cont’d
Step 2 – Basis periods
Existing partners – CYB A M
2015/16 y/e 30.4.15 20,000 20,000
2016/17 y/e 30.4.16 21,250 21,250
2017/18 y/e 30.4.17 14,000 14,000
BPP LEARNING MEDIA

Answer: Abraham, Martin and John – cont’d
New partner – John
Started trade on 1.8.15
£
15/16 1.8.15 – 5.4.16
8 × 7,500
9
6,667
16/17 1st 12 months
7,500 + 3 × 7,000 9,250
12
17/18 y/e 30.4.17 7,000
Overlap profits for John

1.8.15 – 5.4.16 6,667
1.5.16 – 31.7.17 1,750
8,417
BPP LEARNING MEDIA

New partnership commencing
• Profits and losses allocated on the basis of the

arrangement in force for the accounting period when the
profit or loss arose.
• Profits: assessed under CYB rules.
• Losses:
― Tax year in which the period ended and/or the previous
tax year
― Carried back to the three tax years prior to the year
when the loss-making period ended under early trade
loss relief
― Set loss against first available future trading profits
BPP LEARNING MEDIA

Question: Amy and Bella
Amy and Bella commence in partnership on 1 July 2016.
They produce accounts to 31 December each year and
their early results are as follows:
Six months to 31 December 2016 – £16,000 profit

Year ended 31 December 2017 – £20,000 loss
Profits were allocated to Amy and Bella in the ratio 3:1

until 1 January 2017, from when they were split equally.
BPP LEARNING MEDIA

Question: Amy and Bella – cont’d
Required
Calculate the taxable trading profit for each partner for
2016/17 and calculate the trading loss for each partner for
2017/18. Show how the loss incurred can be relieved.
BPP LEARNING MEDIA

Answer: Amy and Bella
Total A B
Share of profits/losses:
6m to 31.12.16 (3:2) 16,000 12,000 4,000
Year ended 31.12.17 (1:1) (20,000) (10,000) (10,000)
BPP LEARNING MEDIA

Answer: Amy and Bella – cont'd
Amy
2016/17 Actual (1.7.16 – 5.4.17) £
Profit: 12,000 + 3/12 × (10,000) 9,500
2017/18 CYB (y/e 31.12.17) (10,000)
Less used in 16/17 2,500
Loss (7,500)
BPP LEARNING MEDIA

Bella
2016/17 Actual (1.7.16 – 5.4.17) £
Profit: 4,000 + 3/12 × (10,000) 1,500
2017/18 CYB (y/e 31.12.17) (10,000)
Less used in 17/18 2,500
Loss (7,500)
BPP LEARNING MEDIA

Options for loss relief for each partner:
(1) Set off against total income of 2017/18 and/or 2016/17.
(2) Set off against total income of 2014/15, then 2015/16,

then 2016/17 under early trade loss relief.
(3) Carry forward against future trading profit from the

same trade.
BPP LEARNING MEDIA

Limited liability partnerships
• These are taxed on virtually the same basis as normal

partnerships.
BPP LEARNING MEDIA

Summary 1
Trading profits
• Partners are treated as individual sole traders.
• The profit of the partnership is split amongst the individual partners
using the profit sharing agreement during the accounting period.
Losses
• Losses are allocated in the same way as profits.
• Partners however decide individually how to relieve their share of
the loss.
BPP LEARNING MEDIA

Summary 2
Changes in partnership personnel

• Commencement and cessation rules apply to partners individually
after they join or leave a partnership.
New partnership commencing

• Each partner is treated as commencing trade.
Limited liability partnerships

• For loss relief a restriction is imposed limiting set off against non-
partnership income.
BPP LEARNING MEDIA


New partnership Specimen C32
BPP LEARNING MEDIA

Chapter 12 • Employed earners
• Self employed earners
National insurance
contributions
BPP LEARNING MEDIA

• Explain and compute national insurance contributions

payable:
―Class 1 NIC and Class 1A NIC
―Class 2 NIC and Class 4 NIC
• Understand the annual employment allowance.
BPP LEARNING MEDIA

National insurance contributions
Employed Self employed
BPP LEARNING MEDIA

Tackling the exam
• Section A or Section B questions on national insurance

contributions may involve computing contributions payable
by an employee, an employer, or a self-employed person.
• National insurance contributions may also be tested in a
Section C 15 mark question which is focused on income
tax.
• National insurance contributions may also be tested in a
Section C 10 mark question as part of a tax planning
scenario such as deciding whether to trade as a sole
trader or through a company.
BPP LEARNING MEDIA

Employed earners 1
• Class 1 contributions primary: paid by employees on cash

earnings.
• Class 1 contributions secondary: paid by employers on
cash earnings.
• Class 1A: paid by employers on taxable employment
income benefits.
BPP LEARNING MEDIA

Question: Tye
Tye is employed by T plc.
£
Salary for 2017/18 48,000
Benefits per P11D 6,450
BPP LEARNING MEDIA

Question: Tye (1)
(1) What amount of national insurance contributions

does Tye suffer in the tax year?
A £4,193
B £4,480
C £4,362
D £5,091
BPP LEARNING MEDIA

Answer: Tye (1)
B £4,480
Tye suffers Class 1 primary contributions on his cash

earnings
Class 1 – primary
(45,000 – 8,164) @ 12% = 4,420
(48,000 – 45,000) @ 2% = 60
4,480
BPP LEARNING MEDIA

Question: Tye (2)
(2) What amount of national insurance contributions
does T plc pay in relation to Tye (before the
employment allowance – see later)?
A £4,782
B £5,091
C £6,387
D £7,100
BPP LEARNING MEDIA

Answer: Tye (2)
C £6,387
Class 1 – secondary
(48,000 – 8,164) @ 13.8% 5,497
Class 1A
6,450 @ 13.8% 890
Total 6,387
BPP LEARNING MEDIA

Employed earners 2
• Employer can make a claim to reduce total Class 1

secondary contributions by employment allowance.
• Maximum employment allowance: £3,000 per tax year.
• If secondary Class 1 contributions less than £3,000 then
the allowance reduces Class 1 secondary contributions to
nil.
• Employment allowance not available to company where
sole employee is also a director of company.
BPP LEARNING MEDIA

Question: S Ltd
S Ltd is a company which has two employees, one who

earns £28,000 per year and one who earns £15,000 per
year. Each employee is paid in equal monthly amounts.
How much Class 1 secondary contributions are payable by

S Ltd for 2017/18?
A £4,815
B £3,696
C £1,815
D £680
BPP LEARNING MEDIA

Answer: S Ltd
D £680
£
Employee 1: £(28,000 – 8,164) = 19,836  13.8% 2,737
Employee 2: £(15,000 – 8,164) = 6,836  13.8% 943
3,680
Less: employment allowance (maximum) (3,000)
Secondary contributions 680
BPP LEARNING MEDIA

Self-employed earners
• Class 2 contribution: flat rate contribution.

• Class 4 contribution: earnings related.
BPP LEARNING MEDIA

Question: Bill
Bill, a trader, has trading profits of £14,000 for 2017/18.
Required
(a) What will his Class 4 NI contributions be for 2017/18?

(b) How would your answer differ if his profits were £47,000?
BPP LEARNING MEDIA

Answer: Bill
(a) Class 4
9% (14,000 – 8,164) = 525
(b) Class 4
9% (45,000 – 8,164) = 3,315
2% (47,000 – 45,000) = 40
3,355
BPP LEARNING MEDIA

During the tax year 2017/18, William was paid a gross

annual salary of £82,700. During the tax year 2017/18,
William contributed £5,400 (gross) into a personal pension
scheme.
What amount of class 1 national insurance contributions

(NIC) will William pay for the tax year 2017/18?
BPP LEARNING MEDIA

A £4,987
B £4,664
C £4,069
D £3,831 (2 marks)
BPP LEARNING MEDIA

C £ 4,069
Class 4
45,000 – 8,164 @ 9% = 3,315
82,700 – 45,000 @ 2% = 754
4,069
Personal pension contribution does not affect Class 4
NICs.
BPP LEARNING MEDIA

Summary
Employed earners
• Class 1 is calculated on cash earnings and is paid by employees
(primary) and employers (secondary).
• Class 1A is on benefits and is payable by employers.
Self employed earners

• Self employed individuals pay Class 2 (weekly flat rate) and Class
4 (annual profit related).
BPP LEARNING MEDIA


Class 4 contributions Specimen A1
Class 1 contributions Specimen B31
BPP LEARNING MEDIA

Chapter 13 • Scope of CGT
• CGT payable by individuals
Computing chargeable • Year end computation
gains • Part disposals
• Transfers between
spouses/civil partners
• Compensation or insurance
monies
BPP LEARNING MEDIA

• Describe the scope of capital gains tax.

• Recognise those assets which are exempt.
• Compute and explain the treatment of capital gains.
• Compute and explain the treatment of capital losses.
• Understand the treatment of transfers between a husband
and wife or between a couple in a civil partnership.
BPP LEARNING MEDIA

• Understand the amount of allowable expenditure for a part

disposal.
• Recognise the treatment where an asset is damaged, lost
or destroyed, and the implications of receiving insurance
proceeds and reinvesting such proceeds.
• Compute the amount of capital gains tax payable.
• Basic capital gains tax planning.
BPP LEARNING MEDIA

Chargeable disposal
Chargeable
Scope of CGT
person
Chargeable asset
CGT payable Calculation of gain Losses
Damaged/
Spouses/ destroyed
Part disposal
civil partners assets
BPP LEARNING MEDIA

Tackling the exam
• Section A or Section B questions on the topics in this

chapter may include computation of a gain or loss, a part
disposal or a transfer between spouses/civil partners.
• Section C 10 mark questions will usually include a variety
of gains or losses on different types of disposal.
• Such questions may also involve tax planning aspects
such as comparing the tax consequences of disposing of
an asset in a trading transaction or as a chargeable gain.
BPP LEARNING MEDIA

Scope of CGT 1
Chargeable person
• Individual resident in the UK.
• Company resident in the UK (corporation tax).
BPP LEARNING MEDIA

Scope of CGT 2
Chargeable disposal
• Sale at market value.
• Gift or sale at less than market value:
―In lifetime: disposal at market value at date of gift/sale
―No chargeable disposal on gift at death but recipient
takes asset at date of death value (probate value)
• Loss or destruction of asset.
BPP LEARNING MEDIA

Scope of CGT 3
Chargeable asset
• All assets except those which are exempt.
BPP LEARNING MEDIA

Scope of CGT 4
Exempt assets
• Cars.
• UK government stocks.
• Qualifying corporate bonds (QCB).
• Wasting chattels (greyhounds, racehorses).
• Foreign currency bank accounts held by individuals.
• Medals awarded for valour or inherited
(not if purchased).
BPP LEARNING MEDIA

Scope of CGT 5
Exempt assets (cont'd)

• National Savings Certificates and premium bonds.
• Gambling winnings.
• Inventory and other current assets.
• Investments held in ISAs.
BPP LEARNING MEDIA

Which of the following assets will ALWAYS be exempt from

capital gains tax?
(1) A motor car suitable for private use
(2) A chattel
(3) A UK Government security (gilt)
(4) A house
BPP LEARNING MEDIA

A 1 and 3
B 2 and 3
C 2 and 4
D 1 and 4 (2 marks)
BPP LEARNING MEDIA

A 1 and 3
A motor car suitable for private use and a UK Government
security (gilt) are always exempt.
A wasting chattel is exempt, as is a chattel sold for gross
proceeds of £6,000 or less. Other chattels are chargeable
assets.
A house may be exempt if principal private residence relief
applies, but is otherwise a chargeable asset.
BPP LEARNING MEDIA

Scope of CGT 6
Basis
• Disposals in the current tax year.
BPP LEARNING MEDIA

CGT payable by individuals 1
• Individuals have an annual exempt amount of £11,300

(2017/18).
• Gains are usually taxed at 10% if they fall into any
remaining basic rate band.
• Gains are usually taxed 20% if they exceed the basic rate
limit.
• Same basic and higher rate limits used for capital gains
tax as for income tax.
• Adjust limits for gift aid donations and personal pension
contributions.
BPP LEARNING MEDIA

• Residential property gains are taxed at 18% if they fall into

basic rate band.
• Residential property gains are taxed 28% if they exceed
the basic rate limit.
• Annual exempt amount and losses should be used to
reduce gains on residential property in priority to other
gains.
• Tax can be calculated either on residential property gains
first and then other gains or on other gains first and then
residential property gains as both will result in the same
amount of tax.
BPP LEARNING MEDIA

Question: Thomas
In the tax year 2017/18, Thomas has net income of £24,000

and realises a chargeable gain of £23,000 on the disposal of
a painting and a gain of £55,000 on the disposal of a house
which he let out to tenants.
Required
Calculate the CGT payable by Thomas for 2017/18.
BPP LEARNING MEDIA

Answer: Thomas
£
Net income 24,000
Personal allowance (11,500)
BRB remaining = 33,500 – 12,500 = 21,000
Residential
property Painting
£ £
Chargeable gains 55,000 23,000
Annual exemption (11,300) (0)
Taxable gain 43,700 23,000
BPP LEARNING MEDIA

Answer: Thomas – cont’d
 CGT payable
21,000 × 18% 3,780
22,700 × 28% 6,356
43,700
23,000 × 20% 4,600
14,736
BPP LEARNING MEDIA

Answer: Thomas – cont’d
Alternatively
CGT Payable
21000 X 10% 2100
2000 X20% 400
23000
43700 X28% 12236
14736
BPP LEARNING MEDIA

Payment of CGT
2017/18 31/01/19
Gain CGT
due
BPP LEARNING MEDIA

£
Gross proceeds X
Less incidental costs of disposal (X)
Net proceeds X
Less cost (X)
Less enhancement expenditure (X)
Gain/(loss) X/(X)
BPP LEARNING MEDIA

Question: Andrea
Andrea sells an asset.
£
Asset purchased February 1987 15,000
Sale July 2017 43,000
Selling expenses July 2017 2,500
Enhancement August 2001 8,000
Required
What is Andrea’s chargeable gain?
BPP LEARNING MEDIA

Answer: Andrea
£
Gross sale proceeds 43,000
Less: Selling expenses (2,500)
Less: Cost (15,000)
Less: Enhancement (8,000)
Chargeable gain 17,500
BPP LEARNING MEDIA

Question: Ron
Ron acquired a freehold office building as an investment on

1 May 2001 for £140,000.
On 2 July 2007 the building was extended for a cost of
£55,800.
Ron sold the building for £305,000 on 1 September 2017.
Costs of £4,700 were incurred in connection with the
purchase and £7,900 in connection with the disposal.
Ron has taxable income of £28,135 for 2017/18.
BPP LEARNING MEDIA

Question: Ron – cont’d
Required
Calculate Ron's capital gains tax payable for 2017/18,
assuming this was the only disposal he made in the year,
and state the due date for payment.
BPP LEARNING MEDIA

Answer: Ron
£
Proceeds 305,000
Less selling expenses (7,900)
Less cost (140,000 + 4,700) (144,700)
Less enhancement (55,800)
Less annual exempt amount (11,300)
Taxable gain 85,500
(33,500 – 28,135) = 5,365  10% 537

(85,500 – 5,365) = 80,135  20% 16,027
CGT payable (due date 31 January 2018) 16,564
BPP LEARNING MEDIA

Year end computation 1
Current year losses

• Current year losses must be offset against current year
gains.
• Annual exempt amount then deducted from any remaining
gain.
BPP LEARNING MEDIA

Losses carried forward from earlier years

• Where current losses exceed current gains the net current
loss is carried forward to offset against future capital gains.
• Where losses are carried forward from earlier years, they
need only be used to the extent needed to bring the gains
down to the level of the annual exempt amount.
BPP LEARNING MEDIA

Question: Tara
Tara makes a gain in 2017/18 of £14,100. She makes no

other disposals in the tax year. Tara has capital losses
brought forward from last year of £12,000.
Required
Show how the gain is relieved by loss relief and the loss to
carry forward to 2018/19.
BPP LEARNING MEDIA

Answer: Tara
£
Gain 14,100
Less: Losses b/f (14,000 – 11,300) (2,800)
11,300
Gain 11,300
Annual exempt amount (11,300)
–
Losses c/fwd (12,000 – 2,800) 9,200
BPP LEARNING MEDIA

Question: Ted
In 2017/18 Ted makes a gain of £25,000 on the disposal of

some shares he held as an investment, a gain of £10,000 on
a residential property and a capital loss of £12,000 on another
residential property. He also has a capital loss brought
forward of £31,000.
BPP LEARNING MEDIA

Question: Ted – cont’d
Required
(a) What is Ted’s taxable gain for 2017/18 and what is the
amount of the capital loss carried forward to 2018/19?
(b) What would Ted’s taxable gain be for 2017/18 if the

£31,000 loss had been a current year loss and the loss
brought forward had been £12,000?
BPP LEARNING MEDIA

Answer: Ted
PROPERTY OTHER
Gain 10000 25000
Current year loss(must be deducted in full) -10000 -2000
Brought forward losses -11700
Gain 11300
Annual Exempt amount -11300
NIL
Capital loss brought forward 31000
Utilised in 2017/18 -11700
Capital loss carried forward 19300
BPP LEARNING MEDIA

Answer: Ted – cont’d
2017/18
BPP LEARNING MEDIA

Pro forma for capital loss relief
£
Current year gains X
Current year capital losses (X)1
Capital losses b/fwd (X)2
Net gains X
Less annual exempt amount (11,100)
11300
Taxable gain X
BPP LEARNING MEDIA

Part disposals
Set 10 warriors – value £1m

– cost £20,000
Sell – – for £100,000

Keep – – worth £400,000
Gain? – Proceeds = £100,000

Cost?
20,000  100,000/(100,000 + 400,000) = £4,000
BPP LEARNING MEDIA

Question: Fred
Fred sells two paintings for £40,000 on 7 September 2017

from a set of four that cost £30,000 in March 1991. He
suffers 10% auctioneer's fees. The market value of the
remaining two paintings is £35,000.
What is the chargeable gain arising on disposal of the two
paintings?
A £21,000
B £20,000
C £24,000
D £21,867
BPP LEARNING MEDIA

Answer: Fred
B £20,000 £
Proceeds 40,000
Less: Selling expenses (4,000)
36,000
Cost 30,000 × 40/(40+35) (16,000)

BPP LEARNING MEDIA

Transfers between spouses/civil partners
• Spouses and civil partners are taxed separately.

• Each has an individual annual exempt amount which
cannot be transferred to the other spouse/civil partner.
• Transfers of assets between spouses/civil partners are on
a no gain/no loss basis.
• Recipient spouse/civil partner is treated as if bought the
asset at the transfer date for a price equal to cost.
BPP LEARNING MEDIA

Question: Julie and Joseph
Julie bought an antique table for £8,000 in January 2006.

In August 2012 she transferred the table to her husband
Joseph.
Joseph subsequently sold the table at the end of October
2017 for £20,000.
Required
What is Joseph's chargeable gain?
BPP LEARNING MEDIA

Answer: Julie and Joseph
Transfer Julie to Joseph = NG/NL

ie cost = 8,000
Deemed proceeds
Disposal by Joseph £
Proceeds 20,000
Less: Cost (deemed proceeds above) (8,000)
BPP LEARNING MEDIA

Question: Renaldo
On 3 December 2017 Renaldo sold two acres of land at

auction for gross proceeds of £92,000. The auctioneers’
commission was 5% of the sale price.
Renaldo’s wife’s father had originally purchased three acres
of land on 4 August 2001 for £19,500. He died on 17 June
2008, and the land was inherited by Renaldo’s wife. On that
date the three acres of land were valued at £28,600.
Renaldo’s wife transferred the land to Renaldo on 14
November 2011. On that date the three acres of land were
valued at £39,000. The market value of the unsold acre of
land as at 3 December 2017 was £38,000.
BPP LEARNING MEDIA

Question: Renaldo – cont’d
Required
Compute Renaldo’s chargeable gain in respect of the
disposal on 3 December 2017. (3 marks)
BPP LEARNING MEDIA

Answer: Renaldo
Chargeable gain 3 December 2016

£
Proceeds 92,000
Less: auctioneer’s commission £92,000 × 5% (4,600)
92,000
Less: cost £28,600 (N) × 92,000 + 38,000 (20,240)
Gain 67,160
BPP LEARNING MEDIA

Answer: Renaldo – cont’d
Tutorial notes
1 The cost of the land is £28,600 which is the value when
Renaldo’s father-in-law died. Renaldo would have taken
over this cost when his wife transferred the land to him.
2 The gross proceeds of sale are used in the part disposal
fraction.
BPP LEARNING MEDIA

Compensation or insurance monies 1
Damaged asset
• Asset damaged and compensation or insurance money is
received: part disposal.
• A/A+B applies where:
A = compensation received
B = unrestored value of asset
• All of compensation applied in restoring asset: taxpayer
can elect to disregard the part disposal.
• If no part disposal: proceeds deducted from cost of asset.
BPP LEARNING MEDIA

Question: Arthur
Arthur bought a holiday cottage for £40,000 in August 1991.

In August 2001 the cottage was damaged in a fire.
An insurance claim was made and £33,000 was received in
September 2001. The cottage was valued at £45,000 after
the fire.
In December 2001 Arthur put £37,000 into restoring the
cottage. He then sold the cottage for £95,000 in December
2017.
BPP LEARNING MEDIA

Question: Arthur – cont’d
Required
(a) Calculate the gain arising assuming Arthur elects for
there to be no part disposal.
(b) How would your answer differ if no election were made?
BPP LEARNING MEDIA

Answer: Arthur
(a) As all of the compensation received has been used to

restore the asset Arthur can elect to disregard the part
disposal.
Base cost of restored property is
£40,000 – 33,000 + 37,000 = £44,000.
Dec 2017 £
Proceeds 95,000
Base cost (44,000)
BPP LEARNING MEDIA

Answer: Arthur – cont’d
(b) September 2001

£
Compensation received 33,000
Cost 40,000  33,000 (16,923)

33,000 + 45,000
16,077
BPP LEARNING MEDIA

Answer: Arthur – cont’d
December 2017
£
Proceeds 95,000
Cost (40,000 – 16,923) (23,077)
Restoration (37,000)
BPP LEARNING MEDIA

Compensation or insurance monies 2
Asset destroyed
• If asset completely destroyed, ‘full’ disposal and
compensation monies wholly charged to CGT.
• If the compensation receipts are reinvested in
replacement asset within 12 months, form of ‘roll over’
relief available.
• ‘Replacement’ asset must be within scope of CGT and of a
similar function and type to original asset.
BPP LEARNING MEDIA

Question: Jeff
Jeff bought a painting for £30,000 in October 2000. It was

completely destroyed on 25 August 2017.
Jeff received insurance proceeds of £40,000 in September
2017 and spent £36,000 on a replacement asset in
November 2017.
Required
Compute the chargeable gain and the base cost of the new
asset.
BPP LEARNING MEDIA

Answer: Jeff
September 2016 £
Proceeds 40,000
Cost (30,000)
10,000
Gain chargeable (40,000 – 36,000) (4,000)
Deduction from base cost 6,000
Base cost of replacement asset
(36,000 – 6,000) = £30,000
BPP LEARNING MEDIA

Summary 1
Scope of CGT
• Chargeable gains arise when there is a chargeable disposal of a
chargeable asset by a chargeable person.
CGT payable by individuals

• Individual is entitled to an annual exempt amount each tax year.
• Rates of tax usually depend on an individual's taxable income.
• Lower rate of 10% (18% if residential property) if gains fall into any
remaining basic rate band.
• Higher rate of 20% (28% if residential property) if gains above basic
rate limit.
BPP LEARNING MEDIA

Summary 2
Year end computation

• Losses are offset against gains.
• Brought forward capital losses can be restricted to preserve any
annual exempt amount.
Part disposals
• A/A + B is used to determine the cost when there is a part disposal.
BPP LEARNING MEDIA

Summary 3
Transfers between spouses/civil partners

• Transfers between spouses/civil partners are made at
no gain/no loss.
Compensation or insurance monies

• Damaged asset is treated as part disposal.
• When an asset is destroyed, a form of rollover relief is available if a
replacement asset is purchased within 12 months.
BPP LEARNING MEDIA


Exempt assets Specimen A11
CGT liability Specimen B16
Gift of cash Specimen B17
Computation of gain Specimen B18
Transfer between spouses Specimen B19
Delaying disposal Specimen B20
BPP LEARNING MEDIA

Chapter 14 • Chattels
• Wasting assets
Chattels and principal • Principal private residence
private residence relief
exemption
BPP LEARNING MEDIA

• Identify when chattels and wasting assets are exempt.

• Compute the chargeable gain when a chattel or a wasting
asset is disposed of.
• Calculate the chargeable gain when a principal private
residence is disposed of.
• Basic capital gains tax planning.
BPP LEARNING MEDIA

Chapter overview diagram 1
Chattels
Non wasting Wasting
Special rules Exempt
BPP LEARNING MEDIA

Tackling the exam
• Section A and Section B questions on chattels and wasting

assets may include the computation of a gain or loss on a
single asset.
• Section C 10 mark questions may include disposals of
chattels and wasting assets and the computation of gains
on principal private residences, with a computation of
capital gains tax.
• You may be asked to explain the rules on periods of
deemed occupation for principal private residence relief.
BPP LEARNING MEDIA

Chattels 1
• Chattels are tangible moveable property.

• Expected life of non-wasting chattels from date of disposal
> 50 years.
• Non wasting chattels chargeable to CGT in the normal
way, subject to exception/restrictions.
BPP LEARNING MEDIA

Chattels 2
Cost
Proceeds < 6,000 > 6,000
EXEMPT Gross proceeds (GP)

< 6,000
= £6,000
Restrict gain NORMAL CGT

> 6,000 5/3 (GP-6,000) RULES
BPP LEARNING MEDIA

Chattels 3
Original Gross Treatment Technique
cost proceeds
£ £
(i) <6,000 <6,000 Wholly exempt No need to
calculate any gain
(ii) <6,000 >6,000 Any gain restricted to Calculate gain,
5/3 (Gross proceeds compare to the
less £6,000) maximum, take the
lower figure
(iii) >6,000 <6,000 Gross proceeds Do normal
deemed to calculation but
be £6,000 always use £6,000
as proceeds figure
(iv) >6,000 >6,000 Normal disposal
BPP LEARNING MEDIA

Question
Adam purchased a Chippendale chair for £1,800. On 10th

October 2017 he sold the chair at auction for £6300(which
was net of the auctioneer‘s 10% commission). What is the
gain?
BPP LEARNING MEDIA

Answer
£
Proceeds(£6,300 X 100/90)
7,000
Less Incidental cost of sale 700
Net Proceeds 6300
Less cost 1800
Gain 4500
The maximum gain is 5/3 X £(7000-6000) =

£1,667.
Chargeable gain is the lower of £4,500 and £1,667, so

it is £1,667
BPP LEARNING MEDIA

Question: Orlando
Orlando purchased a rare manuscript for £500. He

sold it several years later for £9,000, before deducting
the auctioneer's commission of £1,000.
What is the chargeable gain arising on the disposal of
the manuscript?
A £5,000
B £7,500
C £4,500
D £4,000
BPP LEARNING MEDIA

Answer: Orlando
A £5,000 £
Proceeds 9,000
Less: Commission (1,000)
Cost (500)
7,500
5/3 (9,000 – 6,000) 5,000
 take lower gain 5,000
BPP LEARNING MEDIA

Question: Kerber
Kerber purchased an antique desk for £7,000 and sold

several years later for £3,000.
What is the capital loss arising on the disposal of the
desk?
A £(4,000)
B £(1,000)
C £(1,667)
D £0
BPP LEARNING MEDIA

Answer: Kerber
B £(1,000) £
Proceeds (deemed) 6,000

Cost (7,000)
Allowable loss (1,000)
BPP LEARNING MEDIA

Chattels 4
Wasting chattels
• Wasting chattels have an expected life on disposal of
≤ 50 years.
• Such assets are exempt from CGT.
• Exception: plant and machinery (P&M) qualifying for
capital allowances.
• P&M sold for loss: no capital loss as fall in value is given
through capital allowances.
• P&M sold for gain, follow non-wasting chattel rules.
BPP LEARNING MEDIA

On 26 November 2017 Alice sold an antique table for

£8,700. The antique table had been purchased on 16 May
2011 for £3,800.
What is Alice’s chargeable gain in respect of the disposal of
the antique table?
A £4,500
B £1,620
C £4,900
D £0 (2 marks)
BPP LEARNING MEDIA

A £4,500
£
Proceeds 8,700
Less: cost (3,800)
4,900
5/3 (8,700 – 6,000) 4,500
 take lower gain 4,500
BPP LEARNING MEDIA

Wasting assets
• Wasting asset is one which has an estimated remaining

useful life of 50 years or less and whose original value will
depreciate over time (eg copyrights).
• When calculating the gain the cost is written down on a
straight line basis.
BPP LEARNING MEDIA

Question: Nigel
On 31 March 2018 Nigel sold a copyright for £17,280.

It had been purchased on 1 April 2013 for £18,000 when it
had an unexpired life of 20 years.
What is Nigel’s chargeable gain in respect of the disposal of
the copyright?
A £0
B £12,780
C £3,780
D £720
BPP LEARNING MEDIA

Answer: Nigel
C £3,780 £
Proceeds 17,280
Cost 18,000 × 15 /20 (13,500)
Gain 3,780
BPP LEARNING MEDIA

PPR
Calculation Periods of occupation Letting relief
BPP LEARNING MEDIA

Principal private residence relief 1
• Gain arising on individual’s only or main residence,

including a garden of up to half a hectare, is reduced by
PPR relief.
• Gain  Period of occupation
Period of ownership
• Gains not covered by principal private residence relief

(and letting relief – see later) taxed at 18% and 28%
depending on whether taxpayer has any basic rate band
unused and subject to annual exempt amount and capital
losses.
BPP LEARNING MEDIA

Occupation Deemed Occupation

before occupation after
• Three years: any reason.

• Any period: employed overseas.
• Four years: working elsewhere in UK / self-employed
UK .
• Last 18 months always deemed occupation (no need for
occupation after!).
BPP LEARNING MEDIA

Part occupation
• If any part of residence is not occupied by the owner for
residence purposes, PPR relief will be proportionately
withdrawn.
• Application of last 18 month rule will depend on whether
the property has always been only part occupied or
whether it has at some point all been residential.
BPP LEARNING MEDIA

More than one residence

• Taxpayer may choose which home is to be his PPR,
provided that each has been occupied at some point.
• Job related accommodation: own home will be deemed to
be main residence, provided taxpayer intends to occupy it
at some point.
BPP LEARNING MEDIA

Question: Mark
On 31 December 2017 Mark sold a house for £396,000.

The house had been purchased on 1 April 2011 for
£206,460.
Mark occupied the house as his main residence from the
date of purchase until 31 December 2015.
The house was then unoccupied until it was sold on
31 December 2017.
BPP LEARNING MEDIA

Question: Mark – cont’d
Required
Compute Mark's chargeable gain.
BPP LEARNING MEDIA

Answer: Mark
£
Proceeds 396,000
Cost (206,460)
189,540
Less: PPR (W1) 75/81  189,540 (175,500)
Gain 14,040
(W1) Total ownership period 1.4.11 – 31.12.17 = 81 months

PPR period
Actual occupation 1.4.11 – 31.12.15 = 57 months
Last 18 months 18 months
75 months
BPP LEARNING MEDIA

The letting exemption

• If part of the main residence is let out, a gain may arise on
the part let out.
• For residential lets, this gain may be covered by letting
relief which is the lowest of:
― Gain arising in the letting period not covered by
PPR relief
― £40,000
― PPR relief already given
BPP LEARNING MEDIA

Question: Harry
Harry bought his house in London on 1 April 1993 and lived

in it until 1 April 1994.
From that date until 1 April 1999 Harry was required by his
employers to work overseas.
On returning, Harry moved back until 1 October 1999 when

he went to live with his mother. The house remained empty
until 1 April 2012 when it was rented out.
Harry sold his house on 30 September 2017 realising a

gain of £100,000.
BPP LEARNING MEDIA

Question: Harry – cont’d
Required
Calculate the gain on sale of Harry’s house.
BPP LEARNING MEDIA

Answer: Harry
PPR – periods of absence

Non-
Occupied occupied
1.4.93 – 31.3.94 (occupation) 12
1.4.94 – 31.3.99 (working overseas) 60
1.4.99 – 30.9.99 (occupation) 6
1.10.99 – 31.3.16 (no deemed occupation as not re-occupied) 198
1.4.16 – 30.9.17 (last 18 months) 18
96 198
BPP LEARNING MEDIA

Answer: Harry – cont'd
£
Gain 100,000
Less: PPR 96 ×100,000 (32,653)
294
67,347
Less: Letting relief lowest of:
(1) 1.4.12 – 31.3.16 48 ×100,000 =16,327
294
(2) 40,000
(3) 32,653 (16,327)
51,020
BPP LEARNING MEDIA

Summary 1
Chattels
• Chattels fall into two categories:
— Wasting: exempt
— Non-wasting: special rules/restrictions apply
Wasting assets
• Depreciate cost over its estimated useful life.
BPP LEARNING MEDIA

Summary 2
Principal private residence relief

• Selling your principal private residence exempts any gain providing
you have been in full occupation.
• Periods of non-occupation or business use may cause some of this

exemption to be withdrawn.
• Letting relief is available for residential lets up to a maximum of

£40,000 of gain.
BPP LEARNING MEDIA


Chattel gain Specimen A7
Gain with principal private residence relief Specimen B18
BPP LEARNING MEDIA

Chapter 15 • Entrepreneurs' relief
• Investors’ relief
Business reliefs • Gift relief

• Replacement of business
assets relief
BPP LEARNING MEDIA

• Explain and apply entrepreneurs' relief.

• Explain and apply capital gains tax reliefs:
―Rollover relief
―Holdover relief for the gift of business assets
• Capital gains tax planning.
BPP LEARNING MEDIA

Business reliefs
Entrepreneurs' relief
and Investors’ relief
Gift relief Rollover relief
Assets qualifying Assets qualifying Assets qualifying
Conditions Conditions Conditions
BPP LEARNING MEDIA

Tackling the exam
• Business reliefs are an important area of the F6 syllabus

and they are likely to be frequently examined.
• Section A and Section B questions may involve the
disposal of a single asset with one relief applicable.
• Section C 10 mark questions may involve more than one
asset and more than one relief.
• You need to be able to spot when one or more of these
reliefs is available and then deal with the taxation effects of
claiming the relief.
• You may also be asked to deal with some basic tax
planning using these reliefs such as delaying a disposal so
that entrepreneurs’ relief applies.
BPP LEARNING MEDIA

Entrepreneurs' relief 1
• Relief covers the first £10m of chargeable gains on the

disposal of:
― Whole or part of business: relief is only available in
respect of gains on the disposal of business assets, so
no relief on gains arising from investments
― Shares in trading company where individual has at
least 5% shareholding and is also an officer (eg
director) or employee of the company
• There is no restriction if company holds non-trading assets
such as investments.
• Conditions must usually be satisfied for at least one year
before disposal.
BPP LEARNING MEDIA

Entrepreneurs' relief 2
• Gains on assets qualifying for entrepreneurs' relief are

taxed at 10% regardless of an individual's taxable
income.
• Losses and annual exempt amount should initially be
deducted from gains that do not qualify for entrepreneurs'
relief (prioritising residential property gains as usual).
• Gains qualifying for entrepreneurs' relief reduce the
amount of any unused basic rate band despite being taxed
at a rate of 10%.
• Claim must be made by first anniversary of 31 January
following the tax year of disposal.
BPP LEARNING MEDIA

Question: Gerald
Gerald sold his sole trader business, which he had carried on for many
years, on 3 August 2017. Gains arose on chargeable assets as follows:
£
Offices 450,000
Goodwill 75,000
Investments 120,300
On 23 March 2018 Gerald sold a 15% shareholding in Puddle Ltd, a
trading company, which resulted in a chargeable gain of £600,000.
Gerald had acquired these shares on 1 June 2007 and had been an
employee of the company ever since.
Gerald has taxable income of £10,000 for 2017/18 and capital losses of
£15,000 brought forward.
BPP LEARNING MEDIA

Question: Gerald – cont’d
Required
Calculate Gerald's capital gains tax liability for 2017/18, assuming Gerald
has not previously claimed entrepreneurs' relief.
BPP LEARNING MEDIA

Answer: Gerald
Chargeable gains qualifying for entrepreneurs' relief
£
Offices 450,000
Goodwill 75,000
Shares 600,000
1,125,000
Other chargeable gains

£
Investments 120,300
Capital losses b/f (15,000)
94,000
BPP LEARNING MEDIA

Answer: Gerald – cont'd
CGT payable
£
1,125,000  10% = 112,500
(W1) 94,000  20% = 18,800
131,300
(W1) £33,500 – 10,000 = £23,500 basic rate band is unused but this
is set against gains qualifying for entrepreneurs' relief first.
BPP LEARNING MEDIA

Question: Ben
Ben made the following disposals in 2017/18. On 1 June

2017 Ben sold his sole trader business which he set up on
1 September 1982. The sale resulted in the following capital
gains.
£
Goodwill 390,000
Freehold office building 455,000
Freehold warehouse 136,300
981,100
BPP LEARNING MEDIA

Question: Ben – cont’d
The warehouse had been rented out to a neighbouring

business.
On 1 January 2018 Ben sold a 40% shareholding in Miraz
Ltd resulting in a gain of £360,000. Ben had owned and
been an employee of this trading company for the past five
years.
Ben's taxable income for 2017/18 is £38,000.
BPP LEARNING MEDIA

Question: Ben – cont’d
Required
Calculate Ben's capital gains tax payable for 2017/18.
BPP LEARNING MEDIA

Answer: Ben
Gains qualifying for entrepreneurs' relief

£
Goodwill 390,000
Freehold office building 455,000
Shareholding 360,000
1,205,000
@ 10% 120,500
BPP LEARNING MEDIA

Answer: Ben – cont’d
Gains not qualifying for entrepreneurs' relief
£
Freehold warehouse 136,300
125,000
@ 20% 25,000
Total CGT payable

(120,500 + 25,000) 145,500
BPP LEARNING MEDIA

Investors’ relief 1
• Investors’ relief is similar to entrepreneurs’ relief.

• Applies to gains on qualifying shares from 2019/20.
• Qualifying shares are new ordinary shares in unlisted
trading company subscribed for by individual making
disposal.
• Shares must have been issued by the company on or after
17 March 2016 and held continuously, usually for three
years between issue and disposal.
• Where shares issued between 17 March 2016 and 5 April
2016, three year period extended by period between the
issue of the shares and 5 April 2016.
• No minimum shareholding requirement.
BPP LEARNING MEDIA
Investors' relief 2
• Individual must not be an officer or employee of company.

• Rate of tax on investors’ relief gains will be 10%
regardless of income.
• £10 million lifetime limit of gains (separate from
entrepreneurs’ relief).
• Will not be tested computationally in your F6(UK) exam
but you are expected to be aware of relief and potential
impact on tax planning for individuals.
BPP LEARNING MEDIA

Gift relief 1
The relief
• Disposals by way of gift or sale at undervalue are
chargeable to CGT, with proceeds deemed to be market
value.
• Under certain circumstances a gift relief claim can be
made jointly by donor and recipient to hold over the gain.
BPP LEARNING MEDIA

Gift relief 2
Conditions
• Disposal is made to an individual who is UK resident.
• Disposal is of a business asset used in donor's trade, or
unquoted shares in a trading company, or quoted shares
in a personal trading company (≥ 5%).
BPP LEARNING MEDIA

Gift relief 3
Taxed now (sale at undervalue)

• Restriction on gift relief claim.
• Excess of actual proceeds received over original cost
taxed immediately.
• Rest of gain is held over into base cost for a subsequent
disposal of asset.
BPP LEARNING MEDIA

Question: Maxwell
Maxwell bought a workshop used in his trade several years

ago for £50,000. He sold it to his son on 1 January 2018 for
£95,000 (when its market value was £210,000).
The son then sold the workshop on 1 June 2018 for

£250,000.
Required
Calculate the chargeable gain on disposal of the workshop

by Maxwell and his son.
BPP LEARNING MEDIA

Answer: Maxwell
Cost
£
Deemed proceeds (open MV) 210,000
Cost (50,000)
Taxed now 160,000
(95,000 – 50,000) (45,000)
Held over 115,000
BPP LEARNING MEDIA

Answer: Maxwell – cont'd
Son acquires asset at:
£
Market value 210,000
Less: Gain held over (115,000)
95,000
Disposal by son
£
Proceeds 250,000
Cost (95,000)
155,000
BPP LEARNING MEDIA

Gift relief 4
Gift of qualifying shares

• Gain on gift of shares may not all be eligible for relief.
• Where personal company has investments in its net
assets.
• Gain eligible for relief will be:
Total gain × MV of CBA/MV of CA
― CBA = chargeable business assets (chargeable assets
except investments)
― CA = chargeable assets (assets not exempt from CGT)
BPP LEARNING MEDIA

Question: Conor and George
Conor gave 40% of his holding in C Ltd to his son, George, when its
market value was £200,000. The cost of the 40% holding was £100,000.
The assets of C Ltd comprised the following at the date of the gift:
£
Freehold property 270,000
Leasehold property 130,000
Inventory 30,000
Debtors 25,000
Investments 20,000
Plant (cost and proceeds < £6,000) 40,000
Creditors (8,000)
507,000
BPP LEARNING MEDIA

Question: Conor and George – cont’d
Required
What is the chargeable gain arising for Conor and the base cost of the
shares to George?
BPP LEARNING MEDIA

Answer: Conor and George
Gain for Conor

£
Deemed proceeds (open MV) 200,000
Cost (100,000)
Gain 100,000
Gain eligible for gift relief:
100,000  (270 + 130)/(270 + 130 + 20) (95,238)
Gain taxed now on Conor 4,762
BPP LEARNING MEDIA

Answer: Conor and George – cont’d
£
Base cost for George
MV 200,000
Less: Gain held over (95,238)
Base cost 104,762
BPP LEARNING MEDIA

Replacement of business assets relief 1
Qualifying assets
• Land and buildings.
• Fixed plant and machinery.
• Goodwill (for individuals only).
BPP LEARNING MEDIA

The relief
• Relief is available to both individuals and companies (see
later).
• Allows taxpayer to delay tax liability on chargeable gain to
extent that proceeds from sale of business asset are
reinvested in new business assets.
• Original and replacement asset must both be used in a
trade of the taxpayer.
BPP LEARNING MEDIA

Timing
• Purchase of replacement asset may be up to 12 months
before disposal of old asset and 36 months after disposal
of old asset.
BPP LEARNING MEDIA

Taxed now
• Any proceeds not reinvested in a qualifying asset are
deducted from the gain to be rolled over and are taxed
immediately.
BPP LEARNING MEDIA

Question: John
In June 1995 John bought some land for £140,000 for use
as a fixed asset in his trade. In August 2017 he sold it for
£250,000, immediately reinvesting £230,000 of the
proceeds in freehold property for use in his trade.
BPP LEARNING MEDIA

What is John’s chargeable gain in respect of the land and

the base cost of the new freehold property?
A Gain of £Nil, Base cost of £120,000

B Gain of £Nil, Base cost of £140,000
C Gain of £20,000, Base cost of £120,000
D Gain of £20,000, Base cost of £140,000
BPP LEARNING MEDIA

Answer: John
D Gain of £20,000, Base cost of £140,000
£
Proceeds 250,000
Cost (140,000)
110,000
Less: Rollover relief (90,000)
Tax now 20,000
Note:
Proceeds not reinvested = 250,000 – 230,000 = £20,000
∴will be taxed now.
Rest of gain = 110,000 – 20,000 = £90,000
can be deferred.
BPP LEARNING MEDIA

Answer: John – cont'd
Base cost of new asset:

£
Cost 230,000
Gain deferred (90,000)
140,000
BPP LEARNING MEDIA

Depreciating assets
• Definition: asset with expected life of a maximum 60 years
or fixed plant and machinery.
• Effect: gain deferred is not deducted from cost of new
asset but is deferred until the earliest of one of three
dates.
BPP LEARNING MEDIA

Deferred until:
earliest of
new cease ten years

asset using in
sold trade
BPP LEARNING MEDIA

Question: Neil
Neil bought a factory for use in his business in November

2000 for £75,000. The factory was sold for £125,000 on
10 August 2006. On 1 June 2007, Neil bought some fixed
plant and machinery for use in his business, costing
£160,000.
Neil sold the plant and machinery for £140,000 on

7 December 2017.
Required
Show Neil's chargeable gains position.
BPP LEARNING MEDIA

Answer: Neil
Gain deferred
£
Proceeds 125,000
Cost (75,000)
50,000
The gain of £50,000 is deferred until the sale of the plant
and machinery on 7 December 2017.
The fall in value on plant and machinery has been relieved
through capital allowances.
BPP LEARNING MEDIA

Depreciating assets
• Gain on disposal is deferred against a replacement
depreciating asset:
―Possible to transfer deferred gain to non-depreciating
asset
―Provided non-depreciating asset bought before
deferred gain has crystallised
BPP LEARNING MEDIA

Summary 1
Entrepreneurs' relief
• Entrepreneurs' relief has a lifetime limit of £10m.
• It applies to the disposal of a business or certain trading company
shares.
• Gains qualifying for entrepreneurs' relief are taxed at 10%.
Investors' relief
• Similar to entrepreneurs' relief.
• Gains on subscribed for unlisted trading company shares from
2019/20 will be taxed at 10% if minimum three year holding period
satisfied and not employee of company.
Gift relief
• Gift relief allows an individual to defer a gain arising on gifts of
business assets.
BPP LEARNING MEDIA

Summary 2
Replacement of business assets relief

• Rollover relief allows the gain on a qualifying asset to be deferred if
the proceeds are reinvested in a replacement qualifying asset
purchased between12 months before and 36 months after disposal.
• When the replacement asset is a depreciating asset, the gain on
the old asset is frozen rather than rolled over into the replacement
asset.
BPP LEARNING MEDIA


Gift relief Specimen B16
Entrepreneurs’ relief Specimen B17
BPP LEARNING MEDIA

Chapter 16 • Valuing quoted shares
• Matching rules for individuals
Shares and • Bonus and rights issues
securities • Takeovers
• Gilts and QCBs
BPP LEARNING MEDIA

• Recognise the value of quoted shares where they are

disposed of by way of a gift.
• Explain and apply the identification rules as they apply to
individuals including the same day and 30 day matching
rules.
• Explain and apply the pooling provisions.
• Explain and apply the treatment of bonus issues, rights
issues, takeovers and reorganisations.
• Identify the exemption available for gilt-edged securities
and qualifying corporate bonds.
BPP LEARNING MEDIA

Shares and securities
Matching rules for individuals Bonus/Rights issues Takeovers
Same day
Next 30 days
Share pool
Valuation
BPP LEARNING MEDIA

Tackling the exam
• Section A or Section B questions might typically involve

the valuation of a gift of quoted shares or identification of a
qualifying corporate bond.
• Section C 10 mark questions may involve a more complex
share pool including a takeover or reorganisation.
BPP LEARNING MEDIA

Valuing quoted shares
• Quoted shares and securities disposed of at market value

on gift or sale at undervalue.
• Market value is lower of the two prices shown in the Stock
Exchange Daily Official List plus one-half of the difference
between those two prices.
BPP LEARNING MEDIA

Question: Nadia
Nadia bought 20,000 shares in Y plc in 2005 for £5,000. In

the current tax year Nadia transferred all of the shares in Y
plc to her sister-in-law, Hilda who paid £20,000 for them. On
the day of the transfer the shares in Y plc were quoted at
£4.44 - £4.50.
BPP LEARNING MEDIA

Question: Nadia – cont’d
What is Nadia’s chargeable gain as a result of the transfer to

Hilda?
A £15,000
B £83,800
C £84,400
D £85,000
BPP LEARNING MEDIA

Answer: Nadia
C £84,400
£
Proceeds 20,000 × (£4.44 + ½ × (4.50 – 4.44)) 89,400
Cost (5,000)
Gain 84,400
BPP LEARNING MEDIA

Matching rules for individuals
Disposal
3 1 2
Share Pool Same Next
day 30
days
BPP LEARNING MEDIA

Question: Giles
Giles acquired the following shares in Rio Grande plc:
Date of acquisition No of shares Cost

10.12.99 10,000 25,000
07.10.08 3,000 12,000
12.08.17 6,000 30,000
Giles disposed of 12,000 of his shares on 7 August 2017 for

£58,000.
BPP LEARNING MEDIA

Question: Giles – cont’d
Required
Calculate the chargeable gains arising.
BPP LEARNING MEDIA

Answer: Giles
Matching of shares
(a) Acquisition in 30 days after disposal:

£
Proceeds
 6,000 × £58,000 =
  29,000
 12,000 
Cost (30,000)
Loss (1,000)
BPP LEARNING MEDIA

Answer: Giles – cont'd
(b) Share Pool
No Cost
£
10.12.99 10,000 25,000
7.10.08 3,000 12,000
13,000 37,000
(6,000) (17,077)
Disposal
7,000 19,923
BPP LEARNING MEDIA

Answer: Giles – cont'd
Proceeds
(6,000/12,000) × £58,000 = 29,000
Cost (17,077)
11,923
Total gain = £10,923 (loss offset against gain (b)).
BPP LEARNING MEDIA

Bonus and rights issues 1
Bonus issues
• Simply increases the number of shares held by the
taxpayer with no corresponding increase in cost.
• Bonus shares are treated as if acquired on the same date
as the original shares to which they relate.
BPP LEARNING MEDIA

Bonus and rights issues 2
Rights issues
• Issued for cash to existing shareholders in proportion to
their existing shareholdings.
• Rights issue shares must be allocated to the pool in the
same way as bonus shares but there will be an adjustment
to the cost of the pool.
BPP LEARNING MEDIA

Question: Ross
Ross had the following transactions in GH Ltd.
01.10.98 Bought 10,000 shares (10% holding) for

£15,000
11.09.02 Bought 2,000 shares for £5,000
01.02.03 Took up rights issue 1 for 2 at £2.75 per share
14.10.17 Sold 5,000 shares for £15,000
BPP LEARNING MEDIA

Question: Ross – cont’d
Required
Compute the gain arising in October 2017.
BPP LEARNING MEDIA

Answer: Ross
Share Pool
No. Cost
£
1.10.98 10,000 15,000
11.9.02 2,000 5,000
12,000 20,000
1.2.03 Rights issue 6,000 15,500
18,000 36,500
14.10.16 Sale (5,000) (10,139)
13,000 26,361
BPP LEARNING MEDIA

Answer: Ross – cont'd
Gain
£
Proceeds 15,000
Cost (10,139)
Gain 4,861
BPP LEARNING MEDIA

Question: Julia
Julia bought shares in XYZ plc as follows:
1 June 1995 3,000 shares for £9,000

1 June 2002 1,000 shares for £5,000
30 March 2018 500 shares for £2,000
On 1 August 1999 there was a 1:4 rights issue at £4 per

share which Julia took up in full.
Julia sold 2,000 shares on 15 March 2018 for £12,000.
BPP LEARNING MEDIA

Question: Julia – cont’d
Required
What is Julia's chargeable gain?
BPP LEARNING MEDIA

Answer: Julia
(1) Match with acquisition in next 30 days 30 March 2018

£
Proceeds 500/2000  12,000 3,000
Cost (2,000)
1,000
(2) Match with Share pool
£
Proceeds 1,500/2,000  12,000 9,000
Cost (W1) (5,368)
3,632
Total gains (1,000 + 3,632) 4,632
BPP LEARNING MEDIA

Answer: Julia – cont’d
(W1) Share pool

Shares Cost
£ £
1.6.95 3,000 9,000
1.8.99 Rights issue 750 3,000
3,750 12,000
1.6.02 1,000 5,000
4,750 17,000
Disposal (1,500) (5,368)
3,250 11,632
BPP LEARNING MEDIA

Takeovers
B Ltd shares
Mr A C Plc
C Plc shares 100%
Share for share exchange is not a disposal.

B Ltd
New shares have same cost and acquisition
date as old shares.
BPP LEARNING MEDIA

Question: Ursula
Ursula acquired 10,000 £1 shares in F plc in June 1986 for

£15,000. F plc was taken over by G plc in July 2017 and for
each £1 share in F plc Ursula received:
• 2 £1 ordinary shares in G plc valued at £1.10 each and
• 40p in cash
Ursula has never worked as an employee for F plc.
Required
Calculate the gain arising at takeover.
BPP LEARNING MEDIA

Answer: Ursula
Receipt of cash at takeover gives rise to a part disposal

Proceeds 40p  10,000 = 4,000
Cost (W1) (2,308)
1,692
(W1)
MV at
takeover
£ £
G plc ordinary shares
20,000  £1.10 22,000 12,692
Cash 4,000 2,308
26,000 15,000
BPP LEARNING MEDIA

Question: Benny
Benny acquired 10,000 £1 shares in F plc in April 2007 for

£5,000.
F plc was taken over by A plc in July 2012 and for each
share in F plc, Benny received:
• 2 £1 ordinary shares in A plc valued at £1.10 each
• £50,000 6% loan stock 2020 valued at £65,000
The shares in A plc were sold in January 2018 for £27,000.
BPP LEARNING MEDIA

Question: Benny – cont’d
Required
Calculate the gain arising on Benny’s disposal in January
2018.
BPP LEARNING MEDIA

Answer: Benny
Consideration received on takeover £

Ordinary shares 20,000  £1.10 22,000
Loan stock 65,000
87,000
Base cost
Shares 22,000  5,000 1,264

87,000
65,000
Loan stock 87,000  5,000 3,736
5,000
BPP LEARNING MEDIA

Answer: Benny – cont’d
Disposal of shares in A plc January 2018

£
Proceeds 27,000
Cost (1,264)
25,736
BPP LEARNING MEDIA

Gilts and QCBs
Gilts and qualifying corporate bonds

• Exempt from CGT for individuals.
BPP LEARNING MEDIA

Summary 1
Valuing quoted shares

• Shares are valued at the lower of the two prices shown in the Stock
Exchange Daily Official List plus one-half of the difference between
those two prices.
Matching rules for individuals
• There are special rules for matching shares sold with shares
purchased.
BPP LEARNING MEDIA

Summary 2
Bonus and rights issues

• Bonus and rights issues are attached to the holdings to which they
relate.
Takeovers
• On a takeover the new shares and securities are deemed to be
acquired on the same day and for the same amount as the original
holding.
• Only the receipt of cash will cause a gain to arise.
Gifts and QCBs
• Gilts and QCBs are exempt for individuals.
BPP LEARNING MEDIA

Chapter 17 • Returns
• Payment of tax
Self assessment and • Amendments and compliance
payment of tax by checks
individuals • Keeping records
• Interest on late payment of tax
• Penalties
BPP LEARNING MEDIA

• Explain and apply the features of the self-assessment

system as it applies to individuals.
• Recognise the time limits that apply to the filing of returns
and the making of claims.
• Recognise the due dates for the payment of tax under the
self-assessment system and compute payments on
account and balancing payments/repayments for
individuals.
• List the information and records that taxpayers need to
retain for tax purposes.
BPP LEARNING MEDIA

• Explain the circumstances in which HMRC can make a

compliance check into a self-assessment tax return.
• Explain the procedures for dealing with appeals and First
and Upper Tier Tribunals.
• Calculate late payment interest and state the penalties that
can be charged.
BPP LEARNING MEDIA

Self assessment
and payment
of tax by individuals
Penalties and
Returns
interest
Payment of tax
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter may be examined as part of a

Section C 15 mark question on income tax or as a whole
Section C 10 mark.
• You need to be able to explain the basic workings of the
self assessment process, including the appeals process.
• The due date for filing returns and making payments are
important and may be tested in Section A or Section B.
• Don’t forget the penalties that may be charged for the
three ‘late’ events (notification of liability, returns and
payment of tax).
BPP LEARNING MEDIA

Returns 1
Notification of liability to IT and CGT

• Individuals who do not receive a tax return must give
notice of tax within six months from end of tax year.
• 5 October 2018 for 2017/18.
• HMRC will then issue a notice for the taxpayer to make a
return.
BPP LEARNING MEDIA

Returns 2
• Notices to make a return sent out at the start of each tax

year to self assessment taxpayers.
• Taxpayers should file return within the following time scale:
― Paper returns by 31 October following tax year
― Electronically delivered returns by 31 January following
tax year
― Three months from HMRC issuing the taxpayer with a
notice to file a tax return if that is later than the
31 October/January deadlines above
BPP LEARNING MEDIA

Returns 3
• Return requires information relating to:

― Income and gains
― Personal allowance and reliefs
BPP LEARNING MEDIA

Question: Anna and Frank
HMRC issued a notice to file a tax return for the tax year
2017/18 to Anna on 31 May 2018.
A similar notice was issued to her husband Frank on 13
December 2018.
BPP LEARNING MEDIA

Question: Anna and Frank – cont’d
What are the deadlines for Anna and Frank’s tax returns for
2017/18 if they both submit electronically?
A Anna on 31 October 2018 and Frank on 31 January
2019
B Both returns on 31 January 2019
C Anna on 31 October 2018 and Frank on 13 March
2019
D Anna on 31 January 2019 and Frank on 13 March
2019
BPP LEARNING MEDIA

Answer: Anna and Frank
D Anna on 31 January 2019 and Frank on 13 March

2019
The later of 31 January 2019 for the electronic returns and

three months from the issue of a notice to file.
BPP LEARNING MEDIA

Payment of tax
• Income tax due dates:

― Two payments on account based on last year's tax bill:
first due 31 January during tax year, second due 31
July following tax year
― Final balancing payment due 31 January after tax year
• Payment of capital gains tax: 31 January after the end of
the tax year of disposal.
BPP LEARNING MEDIA

Returns and payment of tax
Paper Electronically
returns delivered
Returns: 31.10.18 31.1.19
2017/18
-------------------
Payments:
31.1.18 31.7.18 31.1.19
1st POA 2nd POA Balance
50%  16/17
liability
CGT – due on 31 January following end of tax year
BPP LEARNING MEDIA

Question: Carola
Carola is a part-time employee who also runs her own sole trade business.
She paid tax for 2016/17 as follows.
£
Total amount of income tax charged 10,600
This included: Tax deducted under PAYE 2,000
She also paid: Class 4 NIC 3,000
Capital gains tax 5,000
How much are the payments on account for 2017/18 and by what dates are
they due?
BPP LEARNING MEDIA

Answer: Carola
£
Income tax:
Total income tax charged for 2016/17 10,600
Less tax deducted for 2015/16 (2,000)
8,600
Class 4 NIC 3,000
‘Relevant amount’ 11,600
Payments on account for 2017/18:
31 January 2018 £11,600  50% 5,800
31 July 2018 £11,600  50% 5,800
BPP LEARNING MEDIA

Amendments and compliance checks
• HMRC may correct obvious errors within nine months of

actual filing date.
• Taxpayer may make amendments within 12 months after
due filing date.
• HMRC may start compliance check:
―Within 12 months from actual filing date, if it is filed on
or before the due date
―Within 12 months after quarter day following actual
filing date if filed late (quarter days are 31 January, 30
April, 31 July and 31 October)
BPP LEARNING MEDIA

Keeping records
• Records must be retained until the later of:

― Five years after 31 January following tax year where
taxpayer is in business
― One year after 31 January following tax year otherwise
BPP LEARNING MEDIA

Ming is self-employed. How long must she retain the

business and non-business records used in preparing her
self-assessment tax return for the tax year 2017/18?
Business records Non-business records
A 31 January 2020 31 January 2020
B 31 January 2020 31 January 2024
C 31 January 2024 31 January 2024
D 31 January 2024 31 January 2020 (2 marks)
BPP LEARNING MEDIA

C Business records 31 January 2024

Non-business records 31 January 2024
Records must be retained until five years after the
31 January following the tax year where the taxpayer is in
business. This applies to all of the records, not only the
business records.
BPP LEARNING MEDIA

Interest on late payment of tax
• Applies to payments on account and final payment.

• Runs from due date to day before payment.
• For exam purposes, work to nearest month.
BPP LEARNING MEDIA

Penalties 1
Late returns
• Up to three months late: £100.
• Between three and six months late: £100 (as above) + £10
per day (for a maximum of 90 days).
• More than six months late: penalties as before plus 5% of
tax due (minimum of £300).
BPP LEARNING MEDIA

Penalties 2
Late final payment

• Penalty is % of unpaid tax.
• Penalty date is 30 days after the due date for tax.
• Up to 5 months after penalty date: 5% of tax unpaid at the
penalty date.
• Between 5 and 11 months after penalty date: 5% penalty
as before plus 5% of tax unpaid at the end of the 5 month
period.
• More than 11 months after penalty date: two 5% penalties
as before plus 5% of tax unpaid at the end of the 11 month
period.
BPP LEARNING MEDIA

Penalties 3
Errors in returns
Type of error Max penalty Min penalty: Min penalty:
prompted unprompted
disclosure disclosure
Careless 30% of PLR 15% of PLR 0% of PLR
Deliberate not concealed 70% of PLR 35% of PLR 20% of PLR
Deliberate and concealed 100% of PLR 50% of PLR 30% of PLR
BPP LEARNING MEDIA

Penalties 4
Late notification
Type of error Max penalty Min penalty: Min penalty:
prompted unprompted
disclosure disclosure
12m <12m 12m <12m
Careless 30% of PLR 15% 10% 10% of 0% of
of PLR of PLR PLR PLR
Deliberate not concealed 70% of PLR 35% of PLR 20% of PLR
Deliberate and concealed 100% of PLR 50% of PLR 30% of PLR
BPP LEARNING MEDIA

Question: Donatella
Donatella is self-employed and submits her self-assessment

tax return for the tax year 2017/18 on 28 March 2019.
HMRC had issued a notice to file the return on 14 December
2018.
Donatella failed to include a sales invoice of £10,000 in the
calculation of her trading income because she had misfiled
an email with the invoice attached and she had not received
the cash from the customer by her year end. As a result her
trading income assessment should have been £135,000.
Donatella also has a part-time employment where she earns
£9,000 a year.
BPP LEARNING MEDIA

Question: Donatella (1)
(1) What is the latest date by which Donatella’s self-

assessment tax return can be amended?
A 28 December 2019 by HMRC and 13 March
2020 by Donatella
B 28 December 2019 by HMRC and 28 March
2020 by Donatella
C 14 September 2019 by HMRC and 13 March
2020 by Donatella
D 14 September 2019 by HMRC and 28 March
2020 by Donatella
BPP LEARNING MEDIA

Answer: Donatella (1)
A 28 December 2019 by HMRC and 13 March 2020 by

Donatella
The return was due on the later of 31 January 2019 and

13 March 2019, ie 13 March 2019. It was actually filed on
28 March so it was filed late.
The date for amendment is nine months from the actual

filing date for HMRC and 12 months from due filing date for
the taxpayer.
BPP LEARNING MEDIA

(2) What is the latest date HMRC can give notice of their
intention to commence a compliance check into
Donatella’s return?
A 31 January 2020
B 13 March 2020
C 28 March 2020
D 30 April 2020
BPP LEARNING MEDIA

D 30 April 2020
12 months from the quarter date following actual

submission because the return was late.
BPP LEARNING MEDIA

(3) What is the maximum penalty that can be charged in

relation to the understated profits in the return (ignore
interest and late payment penalties)?
A £1,260
B £1,200
C £2,940
D £4,200
BPP LEARNING MEDIA

A £1,260
£10,000  (40% + 2%)  30% = £1,260.
Income tax of 40%, Class 4 NIC of 2%, careless error.
BPP LEARNING MEDIA

(4) Until which dates must Donatella retain the records in

relation to her 2017/18 income tax liability?
A Employment records until 31 January 2020, all

other records until 31 January 2024
B Employment records until 13 March 2020, all
other records until 13 March 2024
C All records until 31 January 2020
D All records until 31 January 2024
BPP LEARNING MEDIA

D All records until 31 January 2024
Donatella is in business so all relevant records must be

kept for five years beyond the normal filing date.
BPP LEARNING MEDIA

(5) What penalty for late filing will be charged in

connection with the 2017/18 return?
A £0
B £100
C £900
D £1,000
BPP LEARNING MEDIA

B £100
The return is up to three months late.
BPP LEARNING MEDIA

Question: Ernest
You should assume that today’s date is 30 June 2018.

You are a trainee Chartered Certified Accountant and your
firm is dealing with the tax affairs of Ernest Vader.
Ernest’s self-assessment tax return for the tax year 2016/17
was submitted to HM Revenue & Customs (HMRC) on
15 May 2017 and Ernest paid the resulting income tax
liability by the due date of 31 January 2018.
BPP LEARNING MEDIA

Question: Ernest – cont’d
However, you have just discovered that during the tax year
2016/17 Ernest disposed of a freehold property, the details of
which were omitted from his self-assessment tax return. The
capital gains tax liability in respect of this disposal is £18,000
and this amount has not been paid.
BPP LEARNING MEDIA

Question: Ernest – cont’d
Required
Assuming that HMRC discover the capital gain and raise an
assessment in respect of Ernest’s capital gains tax liability of
£18,000 for the tax year 2016/17, advise Ernest as to the
amount of penalty that is likely to be charged as a result of
the failure to include the capital gain in his tax return and
how this could have been reduced if the capital gain had
subsequently been disclosed to HMRC. (4 marks)
BPP LEARNING MEDIA

Answer: Ernest
The amount of penalty is based on the tax due but unpaid as a

result of the error by omission on the tax return and the maximum
penalty is 100% of that tax due.
However, the actual penalty will be linked to Ernest’s behaviour.
Since Ernest would appear to have deliberately failed to include
his capital gain in his tax return, the actual penalty is likely to be
70% of the tax unpaid which is £18,000  70% = £12,600. This
assumes that there is no attempt at concealment.
The penalty would have been substantially reduced if Ernest had
disclosed the capital gain, especially if the disclosure had been
made, unprompted by HMRC, prior to discovery. The maximum
reduction would be to 20% of the tax unpaid.
BPP LEARNING MEDIA

Summary 1
Returns
• Notification of liability to IT and CGT within 6 months from end of
tax year.
• Paper returns filed by 31 October.
• Electronic returns filed by 31 January.
• Or 3 months from the issue of a notice to file if later.
Payment of tax
• Two payments on account on 31 January and 31 July based on last
year's tax bill.
• Balancing payment due 31 January after year of assessment.
BPP LEARNING MEDIA

Summary 2
Amendments and compliance checks

• Revenue may open a compliance check by:
— 12 months after actual filing date, if filed on time
— 12 months after quarter day following actual filing date if filed
late
Keeping records
• Five years after 31 January following the tax year where taxpayer is
in business.
• One year after 31 January following the tax year otherwise.
BPP LEARNING MEDIA

Summary 3
Interest
• Interest is charge for late payment of tax.
Penalties
• Penalties are charged for late returns, late payment of tax and late
notification.
• A penalty is also applied for errors in returns.
BPP LEARNING MEDIA

Nature of question
Exam details
Records Specimen A13
BPP LEARNING MEDIA

Chapter 18 • Scope of IHT
• Transfers of value
Inheritance tax: scope • Exemptions
and transfers of value • Types of lifetime transfers
• Calculation of tax on lifetime
transfers
• Tax payable on death
• Death estate
• Spouses and civil partners
• Payment of IHT
BPP LEARNING MEDIA

• Identify the persons chargeable.

• Understand and apply the meaning of transfer of value,
chargeable transfer and potentially exempt transfer.
• Demonstrate the diminution in value principle.
• Demonstrate the seven year accumulation principle taking
into account changes in the level of the nil rate band.
• Understand the tax implications of lifetime transfers and
compute the relevant liabilities.
BPP LEARNING MEDIA

• Understand and compute the tax liability on a death

estate.
• Understand and apply the transfer of any unused nil rate
band between spouses.
• Understand and apply the following exemptions: small gifts
exemption, annual exemption, normal expenditure out of
income, gifts in consideration of marriage, gifts between
spouses.
• Basic inheritance tax planning.
• Identify who is responsible for the payment of inheritance
tax and the due date for payment of inheritance tax.
BPP LEARNING MEDIA

Inheritance
Tax
Types of Calculating
Transfers of tax on
Scope of IHT Exemptions lifetime
value lifetime
transfers
transfers
BPP LEARNING MEDIA

Tackling the exam
• Section A or Section B questions on inheritance tax could

test a single transfer of value or a specific aspect such as
the diminution in value principle.
• Section C 10 mark questions are likely to include a
number of lifetime transfers and/or a death estate.
• Basic tax planning may be tested in a Section B or Section
C question such as ‘skipping’ a generation to make
transfers to grandchildren, instead of children.
• Don’t forget to learn the administrative aspects – the due
dates for payment are very examinable!
BPP LEARNING MEDIA

Scope of IHT
• When does a charge to IHT arise: lifetime transfers and

death estate.
• Who is liable to IHT: individuals.
BPP LEARNING MEDIA

Transfers of value
Diminution in value/loss to donor

• Value of asset transferred for IHT:
― Always measured as reduction in value of donor’s
wealth: 'loss to donor'
― Not the amount gained by the donee
BPP LEARNING MEDIA

Question: Ashwin
Ashwin owns 75% of H Ltd, an unquoted investment

company. He gives a 30% holding to his son.
Shareholdings on this date were valued at:
Shareholding £
75% 370,000
45% 200,000
30% 105,000
BPP LEARNING MEDIA

Question: Ashwin – cont’d
What is the value for inheritance tax (IHT) and capital gains
tax (CGT) purposes?
A IHT: £105,000; CGT: £105,000
B IHT: £105,000; CGT: £170,000
C IHT: £170,000; CGT: £105,000
D IHT: £170,000; CGT: £170,000
BPP LEARNING MEDIA

Answer: Ashwin
C IHT £170,000; CGT £105,000

IHT: £
Value before transfer 370,000
Value after transfer (200,000)
Transfer of value for IHT 170,000
CGT value (MV) £105,000
BPP LEARNING MEDIA

Exemptions
Exemptions applying to lifetime transfers and death

• Gifts between spouses/civil partners.
Exemptions applying to lifetime transfers only
• Gifts in consideration of marriage.
• Small gifts exemption.
• Normal expenditure out of income (habitual, made out of
income, must not result in a reduced standard of living of
donor).
• Annual exemption.
BPP LEARNING MEDIA

During the tax year 2017/18, Mildred made the following

cash gifts to her grandchildren:
(1) £400 to Alfred
(2) £140 to Minnie
(3) A further £280 to Minnie
(4) £175 to Winifred
BPP LEARNING MEDIA

A 1, 2, 3 and 4
B 2, 3 and 4 only
C 2 only
D 4 only (2 marks)
BPP LEARNING MEDIA

D 4 only
Outright gifts to individuals totalling £250 or less per donee
in any one tax year are exempt under the small gifts
exemption. The £400 gift to Alfred is therefore not exempt
under the small gifts exemption. If gifts total more than
£250 the whole amount is chargeable. Therefore neither of
the gifts to Minnie which total £(140 + 280) = £420 are
exempt under the small gifts exemption. The gift of £175 to
Winifred is exempt under the small gifts exemption.
BPP LEARNING MEDIA

Types of lifetime transfers
• Potentially exempt transfer (PET): gift between individuals.

• Chargeable lifetime transfers (CLT): any other lifetime
transfer eg gift to trust.
BPP LEARNING MEDIA

Calculation of tax on lifetime transfers
IHT payable during lifetime

• Ignore PETs.
• Value CLTs: diminution in value.
• Deduct reliefs and exemptions: eg marriage exemption,
annual exemption.
• Deduct available nil band: £325,000 for 2017/18
less any CLTs in previous seven years.
• Tax excess at 20% if trust pays or 20/80 (grossing up
fraction) if donor pays.
BPP LEARNING MEDIA

Question: Francis
Francis put £337,000 into a trust on 13 August 2017 having

already put £116,000 into a trust three years earlier (the
gross chargeable transfer was £110,000).
Required
Calculate the IHT payable when the trust is set up on
13 August 2017 assuming:
(i) The trust agrees to pay the tax.
(ii) Francis pays the tax.
BPP LEARNING MEDIA

Answer: Francis
(i)
£
Gift (CLT) 337,000
AE: 2017/18 (3,000)
2016/17 b/f (3,000)
Net gift after exemptions 331,000
Nil band left 325,000

Less GCTs in previous 7 years before gift (110,000) (215,000)
116,000
Tax at 20% 23,200
Gross chargeable transfer is £331,000.
BPP LEARNING MEDIA

Answer: Francis – cont'd
(ii)
£ £
Net gift after exemptions, as before 331,000
– Nil band left 325,000
Less: GCTs in 7 years before gift (110,000)
(215,000)
116,000
Tax at 20/80 29,000
Gross chargeable transfer is £360,000 (331,000 + 29,000).
BPP LEARNING MEDIA

Question: Adam
Adam put £343,000 into a trust on 13 August 2017 (trustees

agreeing to pay the tax) having given £50,000 to his
daughter on 15 March 2017. He gave £30,000 to his son on
19 August 2017.
Required
Show the IHT consequences of these transfers during

Adam’s lifetime.
BPP LEARNING MEDIA

Answer: Adam
Gift to daughter 15.3.17 £
Gift 50,000
AE: 2016/17 (3,000)
2015/16 b/f (3,000)
PET 44,000
No lifetime tax
Gift to trust 13.8.17:
Gift 343,000
AE: 2017/18 (3,000)
2016/17 already used –
Gross CLT 340,000
Less: nil band left (325,000)
15,000
Tax @ 20% 3,000
BPP LEARNING MEDIA

Answer: Adam – cont'd
Gift to son 19.8.17

Gift 30,000
AE: 2017/18 and 2016/17 already used –
PET 30,000
No lifetime tax
BPP LEARNING MEDIA

On 14 November 2017, Jane made a cash gift to a trust of

£800,000 (after deducting all available exemptions). Jane
paid the inheritance tax arising from this gift. Jane has not
made any other lifetime gifts.
What amount of lifetime inheritance tax would have been
payable in respect of Jane’s gift to the trust?
A £95,000
B £190,000
C £118,750
D £200,000 (2 marks)
BPP LEARNING MEDIA

C £118,750
£
Net chargeable transfer 800,000
Less: nil band left (325,000)
475,000
IHT £475,000  20/80 (donor paid tax) 118,750
BPP LEARNING MEDIA

Inheritance
Tax
Tax payable Spouses/civil Payment of

Death Estate Tax on estate IHT
on death partners
BPP LEARNING MEDIA

Tax payable on death 1
• IHT is charged on PETs and CLTs made within seven

years of death (ie where donor dies  seven years).
• Death tax is calculated at 40% and is payable by the
donee of the gift.
BPP LEARNING MEDIA

Working out the tax on death

• Delete all PETs more than seven years before death.
• Delete any exempt gifts within the question.
• Start with the earliest gift within seven years of death.
• Death tax will be charged on the value of the gift after
exemptions.
BPP LEARNING MEDIA

Working out the tax on death

• Deduct any available nil band (available nil band less
previous chargeable transfers in seven years prior to gift).
• Tax excess over nil band @ 40%.
• Deduct any taper relief.
• Deduct any life tax paid (only for CLTs).
BPP LEARNING MEDIA

Taper relief
• If gifts were made between three and seven years of
death only a percentage of IHT calculated will be
collected.
• Percentage depends on period between date of gift
(whether PETs or CLTs) and death.
• Taper relief table given in tax rates and allowances.
BPP LEARNING MEDIA

Question: Derek
Derek made the following gifts during his lifetime:
3 March 2010 Gift to nephew

£40,000
14 October 2014 Gift to granddaughter on her marriage
£158,000
23 November 2015 Gift to son
£210,000
He died on 13 September 2017.
BPP LEARNING MEDIA

Question: Derek – cont’d
Required
Calculate the IHT payable and state by whom it is payable.
BPP LEARNING MEDIA

Answer: Derek
Lifetime tax:
None as all transfers are PETs
Death tax:
(i) PET March 2010:
– More than 7 years before death  exempt
(ii) PET October 2014: £

Gift 158,000
– Marriage exemption (2,500)
– AE 14/15 (3,000)
– AE 13/14 b/f (3,000)
PET £149,500
 nil band (£325,000)  no tax due

GCT £149,500
BPP LEARNING MEDIA

Answer: Derek – cont'd
(iii) PET November 2015:

Gift 210,000
– AE 2015/16 (3,000)
PET 207,000
Less: Nil band left £325,000

Less: GCT’s in 7 years before gift (149,500)
(175,500)
31,500
Tax @ 40% £12,600
Payable by the son
(No taper relief as <3 years before
death)
BPP LEARNING MEDIA

Question: Frank
Frank made the following gifts during his lifetime:

13 May 2012 Gift to daughter £130,000
23 August 2012 Gift into a trust £334,000
Frank agreed to pay any lifetime IHT.
He died on 7 June 2017.
Required
Calculate any IHT payable during life and on death. The nil
rate band in 2012/13 was £325,000.
BPP LEARNING MEDIA

Answer: Frank
Lifetime tax:
(i) PET 13.5.12:
Gift 130,000
– AE 12/13 (3,000)
– AE 11/12 b/f (3,000)
PET 124,000
No lifetime tax due on PETs.
BPP LEARNING MEDIA

Answer: Frank – cont'd
(ii) CLT 23.8.12

Gift 334,000
– AEs (all used) Nil
CLT 334,000
Less: nil band at gift 325,000

Less: GCT’s in 7 years before gift ( –) (325,000)
9,000
Tax @ 20/80 £2,250
Gross chargeable transfer is £336,250 (334,000 + 2,250).
BPP LEARNING MEDIA

Answer: Frank – cont'd
£
Death tax:
(i) PET 13.5.12 124,000
 nil band at death (£325,000)  no death tax

GCT £124,000
(ii) CLT 23.8.12 336,250

Less: nil band left 325,000
Less: GCT’s in 7 years before gift (124,000) (201,000)
135,250
Tax @ 40% 54,100
Less taper relief (4–5 years) 40% (21,640)
Less: lifetime tax (2,250)

Additional tax on death £30,210
Payable by Trustees
BPP LEARNING MEDIA

Question: Marco
Marco made the following gifts during his lifetime:

15 September 2009 Gross chargeable transfer
£186,000
23 August 2012 Gift to daughter, Gina
£158,000
Marco has already used his annual exemption in 2011/12
and 2012/13. He died on 23 November 2017.
BPP LEARNING MEDIA

Question: Marco – cont’d
Required
Calculate any IHT payable by Gina as a result of Marco’s

death.
BPP LEARNING MEDIA

Answer: Marco
15.9.2009 – no further tax as donor survived 7

years
23.8.2012 Gift – PET becomes chargeable £158,000
Less:
Nil band remaining 325,000
Less: GCTs in 7 years before gift (186,000)
(139,000)
Tax @ 40% 19,000
£7,600
Less: Taper relief: 5–6 years: 60% (4,560)
IHT due £3,040
BPP LEARNING MEDIA

Death estate
• Tax on the death estate is computed using death rates at

the date of death (ie 40%), on the chargeable estate less
nil band.
• Transfers in the seven years prior to death are cumulated
to work out the remaining nil band.
BPP LEARNING MEDIA

Question: Rory
Rory died on 5 May 2017, leaving an estate comprising:
• 10,000 ABC plc shares, valued at £24,400

• House worth £350,000
• Summer cottage valued at £84,000
• 1,000 XYZ Investment Ltd shares valued at £68,000
Rory had an outstanding unsecured loan of £5,750 at the

time of his death.
BPP LEARNING MEDIA

Question: Rory – cont’d
Rory left a will directing that his son should take the
shares, the house should go to his wife and the rest of
his estate should go to his daughter.
He had made one gross chargeable transfer during his

lifetime in 2011 of £232,000.
Required
Show the IHT payable on Rory’s estate.
BPP LEARNING MEDIA

Answer: Rory
Death Estate
£ £
ABC plc shares 24,400
House 350,000
- exempt as left to spouse (350,000)
Summer cottage 84,000
XYZ Ltd shares 68,000
176,400
Less: liabilities (5,750)
Chargeable estate 170,650
Less: nil band remaining
Nil band at date of death 325,000
- used in 7 years before death (232,000)
(93,000)
77,650
Tax @ 40% £31,060
BPP LEARNING MEDIA

Spouses and civil partners
• Spouse or civil partner has already died, but did not use all
of nil band on death.
• Unused nil band can be transferred across to the other
spouse or civil partner.
BPP LEARNING MEDIA

Question: George and Mildred
George died on 1 June 2009 with an estate valued at

£400,000.
He left £250,000 of his estate to his wife Mildred and the

balance to his son.
The nil rate band on 1 June 2009 was £312,000.
Mildred dies on 1 September 2017.
BPP LEARNING MEDIA

Question: George and Mildred – cont’d
Required
Calculate the amount of the nil band that will be available

for Mildred on her death.
BPP LEARNING MEDIA

Answer: George and Mildred
£
Mildred's own nil band 325,000
Unused nil band of husband 162,000 × 325,000/312,000 168,750
493,750
(W1) George’s estate 400,000

Less exempt transfer (250,000)
Using up nil band 150,000
Nil rate band unused 312,000 – 150,000 = 162,000
BPP LEARNING MEDIA

Payment of IHT
Lifetime transfers
• If CLT made between 6 April and 30 September, tax due
30 April following.
• Otherwise tax due six months from end of month of
transfer.
Death tax
• On lifetime gifts: six months from end of month of death.
• On estate: six months from end of month of death or on
delivery of account if earlier.
BPP LEARNING MEDIA

Summary 1
Scope of IHT
• IHT is a tax on gifts or transfers of value.
• Individuals are liable to IHT.
Transfers of value
• IHT is charged on what the donor loses not what the donee gains.
Exemptions
• Gifts to spouses are exempt in lifetime and at death.
• Other exemptions (eg annual exemption) apply to lifetime gifts only.
BPP LEARNING MEDIA

Summary 2
Types of lifetime transfers

• PETs are gifts by individuals to individuals.
• CLTs are transfers to a trust.
Calculation of tax on lifetime transfers
• CLTs are chargeable to tax in lifetime. PETs are exempt. Take care
to determine who will pay the life tax.
Tax payable on death
• Death tax is paid on all gifts within seven years of death and the
death estate.
• Taper relief is available to reduce the death tax on gifts made within
three to seven years of death.
BPP LEARNING MEDIA

Summary 3
Death estate
• The death estate includes all assets that exist at death.
Spouses and civil partners
• Any unused nil rate band on first spouse's death can be transferred
to remaining spouse.
Payment of IHT
• Normally six months from end of month following gift or death.
BPP LEARNING MEDIA


Lifetime transfer Specimen A8
Exempt transfers Specimen A9
Valuation of death estate Specimen B21
Debts in death estate Specimen B22
Tax on death estate Specimen B23
Accumulation of transfers Specimen B24
Normal expenditure out of income Specimen B25
BPP LEARNING MEDIA

Chapter 19 • Scope of corporation tax
• Taxable total profits
Computing taxable • Loan relationships
total profits and the • Property income
corporation tax liability • Long period of account
• Corporation tax liability
BPP LEARNING MEDIA

• Define the terms 'period of account', 'accounting period'

and 'financial year'.
• Recognise when an accounting period starts and when an
accounting period finishes.
• Explain how the residence of a company is determined.
• Recognise the expenditure that is allowable in calculating
the tax-adjusted trading profit.
• Recognise the relief which can be obtained for pre-trading
expenditure.
• Compute capital allowances (as for income tax).
BPP LEARNING MEDIA

• Compute property business profits and understand how

relief for a property business loss is given.
• Recognise and apply the treatment of interest paid and
received under the loan relationship rules.
• Recognise and apply the treatment of qualifying charitable
donations.
• Compute taxable total profits.
• Compute the corporation tax liability.
BPP LEARNING MEDIA

Computing taxable total profits

and the corporation tax liability
Trading Investment Property Long period of Corporation

income income income account tax liability
BPP LEARNING MEDIA

Tackling the exam
• Corporation tax is a key topic in the F6 exam.

• It will be the subject of a Section C 15 mark question.
• Corporation tax may also be tested in Sections A or B and
in Section C 10 mark questions.
• A vital aspect is the identification of a chargeable
accounting period for a company as this is the basis of the
corporation tax charge.
• You must be able to compute the amount of taxable total
profits for a company, including adjustment of trading
profits.
• You may also be asked to compute a company’s loss: this
computation is prepared in a similar way.
BPP LEARNING MEDIA

Scope of corporation tax
• Payable by: companies resident in the UK pay Corporation

Tax (CT) on their world-wide profits.
• Basis:
― CT assessments for a chargeable accounting period
― Normally based on a company’s accounting period
― Tax calculated with reference to financial years
― FY17 = 1 April 2017 to 31 March 2018
BPP LEARNING MEDIA

Taxable total profits 1
Corporation tax computation for the X months to.......
£ £
Trading income
Adjusted profits X
Less: capital allowances (X)
Trading income (accruals) X
Other income
Interest income from non-trade loan relationships X
(accruals)
Property income (accruals) X
Miscellaneous income (accruals) X
Net chargeable gains (receipts) X
Total profits X
Less: qualifying charitable donations (payments) (X)
Taxable total profits X
BPP LEARNING MEDIA

Points to note
• Never deduct dividends paid.
• Dividends received from other companies are never
included in arriving at taxable total profits.
• Include all figures gross in taxable total profits.
• Bank Deposit Interest and Building Society Interest are
assessed as interest income from non-trade loan
relationships.
• Companies pay corporation tax (not CGT) on chargeable
gains.
BPP LEARNING MEDIA

Points to note
• Interest income is interest receivable less interest payable
on loans for non-trading purposes.
• Qualifying charitable donations are paid gross by
companies.
BPP LEARNING MEDIA

Loan relationships
• Interest will arise as a consequence of any loan taken or

extended.
• Interest will be trading or investment depending on reason
for loan.
• Interest payable on trading loan will be trading expense.
• Net off interest receivable and interest payable on non-
trading loan.
• Write off of non-trading loans:
― Add back in adjustment of profits
― Non-trading loan relationship debit
BPP LEARNING MEDIA

Property income
• Generally follows income tax principles.

• Differences for companies:
― Property losses are relieved by setting against total
profits of the current period and carrying forward any
excess against total profits of future periods.
― Interest payable on a loan to acquire or improve
property is relieved under the loan relationship rules.
BPP LEARNING MEDIA

Question: A Ltd
Abel Ltd, a UK trading company produced the following results for the
year ended 31 March 2018.
£
Trading income 244,000
Rental income 15,000
Bank deposit interest received 4,000
Bank deposit interest accrued at 31 March 2017 1,000
Bank deposit interest accrued at 31 March 2018 2,000
Capital gains 42,000
Qualifying charitable donations 7,000
Dividends received from UK companies 15,000
There were capital losses of £8,000 brought forward at 1 April 2017.
BPP LEARNING MEDIA

Question: A Ltd (1)
(1) How much investment income (non-trade loan

relationship income) should be included in the
corporation tax computation?
A £4,000
B £5,000
C £6,000
D £7,000
BPP LEARNING MEDIA

Answer: A Ltd (1)
B £5,000
£
Investment income (4,000 + (2,000 - 1,000)) 5,000
BPP LEARNING MEDIA

Question: A Ltd (2)
(2) What are the taxable total profits?
A £305,000
B £291,000
C £299,000
D £306,000
BPP LEARNING MEDIA

Answer: A Ltd (2)
B £291,000
£
Trading income 244,000
Property income 15,000
Interest income 5,000
Chargeable gains (42,000 − 8,000) 34,000
Total profits 298,000
Less qualifying charitable donation (7,000)
Taxable total profits 291,000
Note: Dividends received are exempt from corporation tax.
BPP LEARNING MEDIA

Long period of account
• No accounting period (AP) can exceed 12 months for

corporation tax purposes.
• If a company has a 'period of account' longer than 12
months it must be split into two APs:
― First 12 months
― Remaining months
• Both tax returns must usually be submitted to HMRC by 12
months after the end of the period of account.
• Tax computed for each AP and payable on two separate
dates.
BPP LEARNING MEDIA

Corporation tax liability
• Corporation tax is charged at 19% of taxable total profits in

financial year 2017.
BPP LEARNING MEDIA

Question: D Ltd
D plc has a 16-month period of account to 31 December 2017. The

company has provided you with the following information for this 16-
month period:
£
Adjusted trading profit before capital allowances 3,600,000
Rental income – cash received 24,000
(equal amounts received 31 December each year)
Capital gain 40,000
(sale of asset on 13 October 2017)
Qualifying charitable donation 20,000
(paid annually on 31 July)
The tax written down value of plant and machinery qualifying for capital
allowances at 1 September 2016 was £30,000. The only capital
transaction during the 16-month period was the purchase of a new van
for £8,000 on 15 November 2017.
BPP LEARNING MEDIA

Question: D Ltd – cont’d
Required
Calculate taxable total profits and the corporation tax
liabilities for the accounting periods. Assume the rate of
corporation tax is 20% in financial year 2016 and 19%
financial year 2017.
BPP LEARNING MEDIA

Answer: D Ltd
12 months 4 months
to 31.8.17 to 31.12.17
£ £
Adjusted trading profit (12 : 4) 2,700,000 900,000
Less: CA (working) (5,400) (9,476)
Taxable trading income 2,694,600 890,524
Property income (accruals) 12,000 4,000
Gain – 40,000
Less Qualifying charitable donation (20,000) –
Taxable total profits 2,686,600 934,524
Corporation tax @ 526,126 177,560
1567183 X 20% = 313437

1119417 X 19% = 212689
BPP LEARNING MEDIA

Answer: D Ltd – cont'd
Working
AIA Main pool Allowances
£ £ £
1.9.16 – 31.8.17
Tax WDV @ 1.9.16 30,000
WDA 18% (5,400) 5,400
24,600
1.9.17 – 31.12.17
Addition qualifying for AIA 8,000
AIA 200,000  4/12 = 66,667 max (8,000) 8,000
WDA 18%  4/12 (1,476) 1,476
23,124 9,476
BPP LEARNING MEDIA

Summary 1
Scope of corporation tax

• UK resident companies pay corporation tax on worldwide profits.
• CT assessments are normally based on company's accounting
period.
Taxable total profits
• Make sure you can produce the pro forma computation.
Loan relationships
• If loan is for trading purposes interest is part of trading income.
• If loan is for non-trading purposes interest is part of interest income.
BPP LEARNING MEDIA

Summary 2
Property income
• As for individuals, except better loss relief and interest payable on
loans is relieved under investment income.
• A chargeable accounting period cannot exceed 12 months in length.
• A long period of account must be split into two accounting periods.
Corporation tax liability
• 19% of taxable total profits.
BPP LEARNING MEDIA


Taxable total profits Specimen B33
New limited company Specimen B31
BPP LEARNING MEDIA

Chapter 20 • Corporation tax on
chargeable gains
• Indexation allowance
Chargeable gains for
• Capital losses
companies
• Share matching rules for
companies
BPP LEARNING MEDIA

• Compute and explain the treatment of chargeable gains.

• Explain and compute the indexation allowance available.
• Explain and compute the treatment of capital losses.
• Understand the treatment of disposals of shares by
companies and apply the identification rules including the
same day and nine day matching rules.
BPP LEARNING MEDIA

• Explain and apply the pooling provisions.

• Explain and apply the treatment of bonus issues, rights
issues, takeovers and reorganisations.
• Explain and apply rollover relief.
• The use of exemptions and reliefs in deferring and
minimising corporation tax liabilities.
BPP LEARNING MEDIA

Chargeable gains
for companies
Computing chargeable gains Shares and securities Capital losses
Indexation allowance
BPP LEARNING MEDIA

Tackling the exam
• Chargeable gains for companies may be tested in any of

Section A, Section B or Section C.
• You must be able to compute the indexation allowance
(relief for inflationary part of gain).
• The share identification rules for companies are important
and you need to be able to construct a share pool and
deal with reorganisations.
BPP LEARNING MEDIA

Corporation tax on chargeable gains
• Gains are included in taxable total profits and

charged to corporation tax.
• Companies do not get an annual exempt amount.
• Calculation of the gain/loss is similar to that of an
individual except:
― Relief for inflation called indexation allowance
― Different matching rules apply for the disposal of shares
― Replacement of business asset relief only
BPP LEARNING MEDIA

RPI in month of sale  RPI in month of purchase

RPI in month of purchase
• Round to three decimal places.
• Multiply by cost.
• Cannot increase or create a loss.
BPP LEARNING MEDIA

Question: V plc
V plc acquires an asset on 10 May 2004 (RPI = 186.5) at a

cost of £12,000.
Enhancement expenditure of £2,000 is incurred on
1 September 2008 (RPI = 218.4).
The asset is sold for £18,000 on 20 December 2017 (RPI =
263.4).
BPP LEARNING MEDIA

Question: V plc – cont’d
What is the indexed gain or loss in respect of this disposal?
A £4,000 gain
B £1,356 loss
C £0 gain or loss
D £5,356 gain
BPP LEARNING MEDIA

Answer: V plc
C £0 gain or loss £
Proceeds 18,000
Cost (12,000)
Enhancement (2,000)
Unindexed gain 4,000
 263.4 – 186.5 
 = 0.412  12,000
Less: IA on cost  (4,944)
 186.5
 
IA – on enhancement  263.4 – 218.4  = 0.206  2,000

 
 218.4 
(412)
Indexed gain (indexation can not create or increase a loss) 0
BPP LEARNING MEDIA

Capital losses
• Net chargeable gains (gains less losses) for an accounting

period are included within the computation of taxable total
profits.
• Overall allowable loss in an accounting period is carried
forward to set against the first chargeable gains arising in
future accounting periods.
• Capital losses cannot be set against income.
BPP LEARNING MEDIA

Share matching rules for companies
• Acquisitions on the same day.

• Acquisition in 9 days prior to sale.
• FA85 Pool:
― Includes purchases from 1.4.82 to ten days prior to
sale.
― Do not round the indexation factor in the FA85 pool.
BPP LEARNING MEDIA

Question: A plc
A plc bought 1,000 shares in Z Ltd for £2,750 in August 1996

(RPI = 153.1) and another 1,000 shares for £3,250 in
December 1996 (RPI = 154.4). On 2 July 2017 A plc
purchased another 1,500 shares in Z Ltd for £4,000.
A plc sold 3,000 shares on 10 July 2017 for £17,000
(RPI = 261.5).
Required
Compute the gain and the value of the FA85 Pool following
the disposal.
BPP LEARNING MEDIA

Answer: A plc
Match with acquisition in previous 9 days £

Proceeds (1,500/3,000  £17,000) 8,500
Cost (4,000)
4,500
Match with 1985 pool
Proceeds (1,500/3,000  17,000) 8,500
Indexed cost (W1) (7,651)
849
Total gains (4,500 + 849) = £5,349
BPP LEARNING MEDIA

Answer: A plc – cont'd
(W1) Indexed
No Cost cost
£ £
Aug 96 1,000 2,750 2,750
Index to Dec 96

 154.4 – 153.1  2,750 23
 
 153.1 
2,773
Addition Dec 96 1,000 3,250 3,250
2,000 6,000 6,023
Index to July 2017
 261.5 – 154.4 
  6,023

 154.4 4,178
 
10,201
Disposal (1,500) (4,500) (7,651)
500 1,500 2,550
BPP LEARNING MEDIA

Summary
Corporation tax on chargeable gains

• Companies pay corporation tax on their gains. They do not get an
annual exempt amount.
• This is deducted from the gain calculation to remove the inflationary
effect. It runs from date of purchase to date of sale.
Capital losses
• These can be offset against current or future chargeable gains.
Share matching rules for companies
• For companies these are:
— Same day
— Previous nine days
— FA85 pool
BPP LEARNING MEDIA

Chapter 21 • Trading losses
• Terminal losses
Losses • Other losses
BPP LEARNING MEDIA

• Understand how trading losses can be carried forward.

• Understand how trading losses can be claimed against
income of the current or previous accounting periods.
• Recognise the factors that will influence the choice of loss
relief claim.
• Understand how relief for a property business loss is given.
• Explain and compute the treatment of capital losses.
BPP LEARNING MEDIA

Losses
Current year relief Carry back relief Carry forward relief
BPP LEARNING MEDIA

Tackling the exam
• Corporation tax losses may be examined in Section A or

Section B, for example loss relief against total profits.
• Corporation tax losses may also be examined as part of
the Section C 15 mark question or in a Section C 10 mark
question.
• The key point to remember about corporation tax losses is
that current period relief must be used before losses are
carried back.
• An important aspect of using losses is making sure that
they are relieved at the highest rate of corporation tax
possible.
• Don’t forget reliefs for property losses and capital losses!
BPP LEARNING MEDIA

Trading losses 1
£’000
Net profit/loss in accounts X / (X)
Add: expenditure not deductible for tax X

Less: items not taxed as trading income
— income assessable elsewhere (X)
— non-taxable income (X)
Less: Capital allowances
— plant and machinery (X)
Adjusted Trading Loss (X)

NIL
BPP LEARNING MEDIA
Trading losses 2
• Trading income assessment: for loss-making period is NIL.

• Current year relief: deducted from total profits before
qualifying charitable donations.
• Carry back of losses:
― Against total profits (before qualifying charitable
donations) of the preceding 12 months
― Current year claim must be made first
• Unrelieved qualifying charitable donations:
as a result of loss relief claims.
BPP LEARNING MEDIA

Question: J plc
J plc has the following results.

31.12.14 31.12.15 31.12.16 31.12.17
£ £ £ £
Trading income
20,000 30,000 (55,000) 15,000
Investment income
10,000 10,000 10,000 10,000
Qualifying
charitable (5,000) (5,000) (5,000) (5,000)
donations
BPP LEARNING MEDIA

Question: J plc – cont’d
Required
Calculate the taxable total profits for the above periods

assuming loss relief is claimed as quickly as possible.
BPP LEARNING MEDIA

Answer: J plc
31.12.14 31.12.15 31.12.16 31.12.17

£ £ £ £
Trading income 20,000 30,000 – 15,000
Carry forward loss relief – – – (5,000) (iii)
20,000 30,000 – 10,000
Investment income 10,000 10,000 10,000 10,000
30,000 40,000 10,000 20,000
Current period loss relief – – (10,000) (i) –
30,000 40,000 – 20,000
Carry back loss relief – (40,000) (ii) – –
30,000 – – 20,000
Qualifying charitable donation (5,000) (5,000) (5,000) (5,000)
Taxable total profits 25,000 – – 15,000
Unrelieved qualifying 5,000 5,000

charitable donations
BPP LEARNING MEDIA

Answer: J plc – cont'd
Loss memo £
Y/e 31.12.16 55,000
Current period (i) (10,000)
Carry back to y/e 31.12.15 (ii) (40,000)
5,000
Carry forward to y/e 31.12.17 (iii) (5,000)
–
BPP LEARNING MEDIA

Trading losses 3
2014 2015 2016 2017

Trading income X X nil X
CFR (X)
Other income and gains X X X X
X X X X
CYR (X)
CBR (X)
Less: Qualifying charitable (X) (X) (X) (X)
donations
Taxable total profits X X X X
BPP LEARNING MEDIA

Moon Ltd has had the following results:

Period Profit/(loss)
£
Year ended 31 December 2016 (105,000)
Four-month period ended 31 December 2015 43,000
Year ended 31 August 2015 96,000
The company does not have any other income.

How much of Moon Ltd’s trading loss for the year ended
31 December 2016 can be relieved against its total profits of
£96,000 for the year ended 31 August 2015?
BPP LEARNING MEDIA

A £64,000
B £96,000
C £70,000
D £62,000 (2 marks)
BPP LEARNING MEDIA

D £62,000
£
Loss incurred in y/e 31.12.16 105,000
p/e 31.12.15 (43,000)
Year ended 31 August 2015 62,000
y/e 31.8.15
Lower of £96,000  8/12 = £64,000 and unused loss (62,000)
C/f 0
Loss relief by deduction from total profits may be given by

deduction from current period profits and from the previous
12 months. Therefore relief can be given in the four month
period ended 31 December 2015 and for eight months of
the year ended 31 August 2015.
BPP LEARNING MEDIA

Trading losses 3
• Factors to consider when using loss relief:

― How quickly relief will be obtained
― Extent to which relief for qualifying charitable donations
might be lost
BPP LEARNING MEDIA

Terminal losses
Losses in the final 12 months of trading

• Carry forward no longer available.
• Carry back period is extended to 36 months.
• Losses can be carried back against total profits (before
qualifying charitable donations) of the preceding
36 months on LIFO basis.
BPP LEARNING MEDIA

Question: K Ltd
K Ltd ceased trading on 31 March 2017. It had the following results for
the five accounting periods to 31 March 2017.
6 months
Y/e to Y/e Y/e Y/e
30.9.13 31.3.14 31.3.15 31.3.16 31.3.17
£ £ £ £ £
Trading profit (loss) 3,000 9,000 16,000 12,000 (45,800)
Bank interest 500 – 600 600 600
Chargeable gains 1,000 – – – 5,000
Qualifying charitable 300 – 300 300 –
donations
BPP LEARNING MEDIA

Question: K Ltd – cont'd
Required
Show taxable total profits for all periods affected, assuming loss relief is
taken as soon as possible.
BPP LEARNING MEDIA

Answer: K Ltd
Y/e 6 months Y/e Y/e Y/e
30.9.13 31.3.14 31.3.15 31.3.16 31.3.17
£ £ £ £ £
Trading income 3,000 9,000 16,000 12,000 –
Interest income 500 – 600 600 600
Gain 1,000 – – – 5,000
4,500 9,000 16,600 12,600 5,600
C/yr (5,600) (i)
C/b (2,000)*(v) (9,000) (iv) (16,600) (iii) (12,600) (ii)
2,500 – – – –
Qualifying charitable (300) – – – –
donation
Taxable total profits 2,200 – – – –
Unrelieved 300 300

qualifying charitable
donation
* £4,500  6 (36m carry back) = £2,250 maximum set off

12
BPP LEARNING MEDIA

Answer: K Ltd – cont'd
Loss memorandum £
Y/e 31.3.17 45,800
Current (5,600) (i)
C/b y/e 31.3.16 (12,600) (ii)
C/b y/e 31.3.15 (16,600) (iii)
C/b 6m to 31.3.14 (9,000) (iv)
C/b y/e 30.9.13 (2,000) (v)
–
BPP LEARNING MEDIA

Other losses
Capital losses
• Relieved against current year gains.
• Excess carried forward against gains in future accounting
periods.
Property losses
• Relieved against total profits of the current period.
• Excess carried forward against future total profits.
BPP LEARNING MEDIA

Summary 1
Trading losses
• Relief is given against current period profits and against profits of
the previous 12 months.
• Trading losses carried forward can only be set against future
trading income from the same trade.
• Trading losses for companies are calculated in exactly the same
way as trading income.
• Make sure you know the loss relief pro forma as it identifies against
which item of income the loss is offset.
• Use a loss memorandum when answering questions.
BPP LEARNING MEDIA

Summary 2
Cessation of trading
• Trading losses in the last 12 months of trading can be carried back
36 months (LIFO).
Other losses
• Capital losses can only be relieved against current and future
chargeable gains.
• Property losses can be relieved against total profits of current and
future years.
BPP LEARNING MEDIA

Nature of question
Exam details
Trading loss relief Specimen A14
BPP LEARNING MEDIA

Chapter 22 • Group relief
• Chargeable gains groups
Groups
BPP LEARNING MEDIA

• Define a 75% group, and recognise the reliefs that are

available to members of such a group.
• Define a 75% chargeable gains group, and recognise the
reliefs that are available to members of such a group.
• The use of exemptions and reliefs in deferring and
minimising corporation tax liabilities.
BPP LEARNING MEDIA

Groups
75% group Chargeable gains

group
BPP LEARNING MEDIA

Tackling the exam
• Corporation tax groups may be tested in Section A,

Section B and Section C 15 mark and 10 mark questions.
• You need to be able to identify 75% group relief groups
and 75% chargeable gains groups.
• You then need to explain how to save corporation tax by
using 75% group relief groups and 75% chargeable gains
groups.
BPP LEARNING MEDIA

Group relief 1
Principle
• Allows companies in 75% group to transfer current year
trading losses and certain other losses to each other.
• Must be UK resident.
BPP LEARNING MEDIA

Group relief 2
75% group
• One company is 75% subsidiary of another, or both
companies are 75% subsidiaries of same parent.
• Parent: must own  75% of share capital and be entitled to
 75% of subsidiary’s assets on winding up and be entitled
to  75% of subsidiary’s income on a distribution.
• Sub-subsidiaries: only include if ultimate parent has  75%
effective interest.
BPP LEARNING MEDIA

Group relief 3
• Beware sub-subsidiaries.
• 75% effective interest (EI) needed:
A Ltd
75%
B Ltd EI = 75% × 75%
= 56.25%
75%
C Ltd
BPP LEARNING MEDIA

Question: A Ltd
A Ltd
90% 80%
B Ltd D Ltd
100% 90%
C Ltd E Ltd
BPP LEARNING MEDIA

Question: A Ltd – cont’d
Which companies are in the same loss relief group as A

Ltd?
A B Ltd, C Ltd and D Ltd only

B B Ltd and D Ltd only
C B Ltd and C Ltd only
D B Ltd, C Ltd, D Ltd and E Ltd
BPP LEARNING MEDIA

Answer: A Ltd
A Ltd
90% 80%
B Ltd D Ltd
100% 90%
E Ltd
C Ltd
BPP LEARNING MEDIA

Answer: A Ltd – cont'd
A B Ltd, C Ltd and D Ltd only
A Ltd does not have a 75% effective interest in E Ltd
BPP LEARNING MEDIA

Group relief 4
Surrendering company
• Can transfer current period available loss:
― Trade losses
― Excess qualifying charitable donations
― Excess property business losses
• Any amount of loss can be surrendered.
• 'Excess' means that amounts must first be used against
own income.
BPP LEARNING MEDIA

Group relief 5
Claimant company
• Sets loss against its taxable total profits of same period as
surrendering company’s loss making period.
• When computing taxable total profits, the claimant
company is assumed to use any current year losses (even
if such a loss relief claim is not made).
• Also, taxable total profits are after all other reliefs for the
current period (for example qualifying charitable
donations) or brought forward from earlier periods.
BPP LEARNING MEDIA

Question: V Ltd and W Ltd
V Ltd owns 100% of the share capital of W Ltd and several

other group companies.
Results for the year ended 31.3.17 are as follows:
V Ltd £
Trade loss (100,000)
Trade loss brought forward at 1 April 2016 (17,000)
Non-trade loan relationship income 10,000
Property business loss (15,000)
W Ltd
Trading loss (100,000)
Trading loss brought forward at 1 April 2016 (12,000)
BPP LEARNING MEDIA

Question: V Ltd and W Ltd (1)
(1) What is the maximum loss that V Ltd can

surrender to other group companies?
A £100,000
B £105,000
C £122,000
D £132,000
BPP LEARNING MEDIA

Answer: V Ltd and W Ltd (1)
B £105,000
V Ltd can surrender its current year trade loss of £100,000

and its excess property business loss (£15,000 less £10,000)
= £5,000, so £105,000 in total.
BPP LEARNING MEDIA

Question: V Ltd and W Ltd (2)
(2) What is the maximum claim for group relief that

W Ltd can make?
A £0
B £160,000
C £148,000
D £260,000
BPP LEARNING MEDIA

Answer: V Ltd and W Ltd (2)
B £160,000
W Ltd can claim an amount equal to its current year taxable

total profits.
Assume that it makes a current year claim for relief for its
trading so £260,000 less £100,000 = £160,000.
Losses brought forward from previous periods cannot be

surrendered or claimed via group relief.
BPP LEARNING MEDIA

Group relief 6
Non-coterminous accounting periods

• Both profits and loss must be time apportioned.
• Only the results of the corresponding period may be offset.
• In year of acquisition, group relief is only available after the
date of joining the group.
• In year of sale, can only group relieve until 'arrangements
in place' to sell the subsidiary.
BPP LEARNING MEDIA

Group relief 7
Loss (20k)
Y/e 31/12/16
H Ltd
Loss (20k) x 9/12
=(15k)
Lower of
Profit 30K x 9/12
=22.5k
S Ltd
Y/e 31/3/17
Profit 30K
BPP LEARNING MEDIA

Group relief 8
Y/e 31.12.16
H Ltd
S Ltd
S Ltd joins on 1.5.16
Group relief only available for period S Ltd is a 75% subsidiary

ie after 1.5.16
BPP LEARNING MEDIA

Group relief 9
Y/e 31.12.16
H Ltd
Loss (20k) x 9/12

=(15k)
S Ltd
arrangements S Ltd leaves on 1.5.16

for sale made
on 1.3.16
Group relief only available to date S Ltd leaves group, or to the

date that arrangements for sale come into effect, if earlier
ie 1.3.16.
BPP LEARNING MEDIA

Group relief 10
Claim
• Elect for group relief within two years of end of claimant
company’s profit making period.
• Claimant company can make a payment to the
surrendering company in return for the loss which is
ignored for corporation tax purposes as long as it does not
exceed the amount of loss surrendered.
BPP LEARNING MEDIA

For the year ended 31 March 2017, Halo Ltd made a trading
loss of £180,000.
Halo Ltd has owned 100% of the ordinary share capital of
Shallow Ltd since it began trading on 1 July 2016. For the
year ended 30 June 2017, Shallow Ltd will make a trading
profit of £224,000.
Neither company has any other taxable profits or allowable
losses.
What is the maximum amount of group relief which Shallow
Ltd can claim from Halo Ltd in respect of the trading loss of
£180,000 for the year ended 31 March 2017?
BPP LEARNING MEDIA

A £180,000
B £168,000
C £45,000
D £135,000 (2 marks)
BPP LEARNING MEDIA

D £135,000
£
The lower of:
Taxable total profits of Shallow Ltd for the corresponding

accounting period (1.7.16 – 31.3.17)
£224,000  9/12 168,000
Losses of Halo Ltd for the corresponding accounting period

£180,000  9/12 135,000
BPP LEARNING MEDIA

Chargeable gains groups 1
Definition
• UK companies where:
―Parent company owns  75% of subsidiary’s share
capital, or
―Two subsidiaries  75% owned by same parent.
BPP LEARNING MEDIA

Sub-subsidiaries
• Part of ultimate parent's group if:
― 75% owned by immediate holding company, and
―> 50% owned by ultimate parent.
BPP LEARNING MEDIA

Intra-group transfers
• Chargeable assets are automatically transferred between
group members at value which gives no gain/no loss.
BPP LEARNING MEDIA

Question: H Ltd
H Ltd owns 90% of G Ltd.
On 6 June 2016 (RPI = 261.2) H Ltd transferred a

building to G Ltd for £120,000.
On this date its market value was £275,000 and it had

cost H Ltd £140,000 on 30 April 1996 (RPI = 152.6).
BPP LEARNING MEDIA

Question: H Ltd – cont’d
Required
(a) What are the tax implications of this transfer?
(b) If G Ltd sells the building for £300,000 to a third

party in September 2016 (RPI = 265.1), what is the
chargeable gain arising?
BPP LEARNING MEDIA

Answer: H Ltd
(a) Building automatically transferred at no gain/no loss

ie cost + indexation to date of transfer
ie 140,000 + (261.2 – 152.6/152.6 = 0.712  140,000) =
£239,680
G Ltd has a base cost for the building of £239,680 for
future disposal.
BPP LEARNING MEDIA

Answer: H Ltd – cont'd
(b) Sale to third party in September 2016
£
Proceeds 300,000
Cost (from (a)) (239,680)
(265.1 – 261.2/261.2) = 0.015 × £239,680 (3,595)
Gain 56,725
BPP LEARNING MEDIA

Matching group gains and losses

• Election can be made to transfer a chargeable gain or
allowable loss (or any part of such a gain or loss) between
group companies.
• Elect within two years of end of accounting period.
BPP LEARNING MEDIA

Selling asset at gain

A Ltd
100% Transfers gain
B Ltd
Capital losses
Offsets gain against loss
BPP LEARNING MEDIA

Question: Q Ltd and P Ltd
Q Ltd owns 90% of the ordinary share capital of P Ltd.

On 21 June 2016, Q Ltd sold a building realising a
chargeable gain of £96,000.
On 8 September 2016, P Ltd sold a building realising a
capital loss of £28,000.
P Ltd also has unused capital losses brought forward of
£32,000.
BPP LEARNING MEDIA

Question: Q Ltd and P Ltd – cont’d
Required
Advice the group what action it should take in respect of
these chargeable disposals for the year ended 31 March
2017 and the deadline for such action.
BPP LEARNING MEDIA

Answer: Q Ltd and P Ltd
P Ltd’s unused capital loss of £28,000

P Ltd will show the balance of the gain of £68,000 (96,000 −
28,000) in its corporation tax computation.
The two companies need to make a joint election by
31 March 2019 to treat the gain of £96,000 as having arisen
in P Ltd.
BPP LEARNING MEDIA

Rollover relief
• Companies in a chargeable gains group are treated as
one unit for rollover relief.
• Advantages:
― Can make use of group’s capital losses.
― Get gains taxed at lowest marginal rate in group.
― More chance of roll-over relief being available.
BPP LEARNING MEDIA

Summary 1
Group relief
• Within a group relief group, current period trading losses, excess
property business losses and excess qualifying charitable
donations can be surrendered between UK companies.
• Surrendering company can surrender any amount of its loss.
• Claimant company can only offset against current period taxable
total profits.
• Objective is to save tax at highest marginal rate.
BPP LEARNING MEDIA

Summary 2
Chargeable gains groups

• Chargeable gains groups allow assets to be transferred within the
group at no gain/no loss.
• Election can be made to allocate a gain/loss to another group
member.
• Chargeable gains groups are treated as a single unit for rollover
purposes.
BPP LEARNING MEDIA

Nature of question
Exam details
Group relief Specimen A4
BPP LEARNING MEDIA

Chapter 23 • Self assessment for companies
• Penalties
Self assessment and • Quarterly instalments for

large companies
payment of tax by
companies
BPP LEARNING MEDIA

• Explain and apply the features of the self-assessment

system as it applies to companies, including the use of
iXBRL.
• Explain the circumstances in which HMRC can make a
compliance check into a self-assessment tax return.
• Explain the procedures for dealing with appeals and First
and Upper Tier Tribunals.
• Calculate late payment interest and state the penalties that
can be charged.
BPP LEARNING MEDIA

• Recognise the time limits that apply to the filing of returns

and the making of claims.
• Recognise the due dates for the payment of tax under the
self-assessment system.
• Explain how large companies are required to account for
corporation tax on a quarterly basis and compute the
quarterly instalment payments.
• List the information and records that taxpayers need to
retain for tax purposes.
BPP LEARNING MEDIA

Self assessment and

payment
of tax by companies
Non-large
Large company
company
BPP LEARNING MEDIA

Tackling the exam
• Topics in this chapter may be examined in Section A,

Section B or as part of a Section C 15 mark question or as
a Section C 10 mark question.
• You need to be able to explain the basic workings of the
self assessment process, including the appeals process.
• The due date for filing returns and making payments are
important!
• Quarterly instalments for large companies are highly
examinable.
• Some of the rules are the same for companies as for
individuals, for example penalties for errors.
BPP LEARNING MEDIA

Self assessment for companies 1
Notification of first accounting period

• Company must notify HMRC of the beginning of its first
accounting period (usually when it starts to trade).
• Notification within three months of the start of its first
accounting period.
BPP LEARNING MEDIA

Notice of chargeability to corporation tax

• HMRC will usually issue company with a notice to file
corporation tax return.
• If no such notice is issued to the company, then company
must notify HMRC within 12 months of the end of
accounting period of its chargeability to corporation tax.
BPP LEARNING MEDIA

Filing tax return

• All limited companies must file their return online and pay
their corporation tax electronically.
• Filing date is normally the later of:
―12 months after the end of the period to which the
return relates
―Three months from the date on which the notice
requiring the return was made
BPP LEARNING MEDIA

Filing tax return – cont’d

• Accounts and tax computations must be in iXBRL format
which uses tags which can be read by computers:
―HMRC software for small companies with simple
accounts
―Other software which automatically produces iXBRL
accounts and computations
―Tagging service which will apply the appropriate tags to
accounts and computations
―Software that enables the appropriate tags to be added
to accounts and computation
BPP LEARNING MEDIA

Question: Specimen exam question B33(b)
The managing director of Naive Ltd understands that the

company will have to file its self-assessment corporation tax
returns online, and that the supporting accounts and tax
computations will have to be filed using the inline eXtensible
Business Reporting Language (iXBRL). The managing
director is concerned with how the company will be able to
produce the documents in this format.
Required
Explain the options available to Naive Ltd regarding the
production of accounts and tax computations in the iXBRL
format. (3 marks)
BPP LEARNING MEDIA

Answer: Specimen exam question B33(b)
If Naive Ltd has straightforward accounts, it could use the

software provided by HM Revenue and Customs. This
automatically produces accounts and tax computations in
the iXBRL format.
Alternatively, other software which automatically produces
iXBRL accounts and computations could be used.
A tagging service could be used to apply the appropriate
tags to the accounts and tax computations, or Naive Ltd
could use software to tag documents itself.
BPP LEARNING MEDIA

Amending a return
• Company may amend return within 12 months of the due
filing date.
• HMRC may amend return within 9 months of the actual
filing date.
BPP LEARNING MEDIA

Records
• Companies must keep records until the latest of:
―Six years from the end of the accounting period
―Date any compliance check enquiries are completed
―Date after which a compliance check enquiry may not
be commenced
BPP LEARNING MEDIA

Compliance checks
• HMRC may give written notice to a company of its
intention to conduct a compliance check on a return.
• If the return was delivered on or before the due filing date,
the notice must be given by first anniversary of:
―Due filing date (for most group companies)
―Actual filing date (other companies)
• If the return was delivered after the due filing date, the
notice must be given by the quarter day following the first
anniversary of the actual filing date.
BPP LEARNING MEDIA

Assessment
• Tax return includes a self-assessment of corporation tax
payable for the period.
• If HMRC do not conduct a compliance check on the return
within 12 months of the filing date, it will be treated as
finalised.
BPP LEARNING MEDIA

Payment of tax
• Companies have to pay their estimated corporation tax
due nine months and one day after the end of the
chargeable accounting period (the due date), unless a
large company.
• For a long period of account, tax will be payable 9 months
and one day after each accounting period.
BPP LEARNING MEDIA

Interest to and from HMRC

• Interest to HMRC runs from the due date for tax.
• Rate of interest on tax paid late: 2.75%.
• Interest from HMRC runs from later of:
―Due date for tax
―Date tax originally paid
• Rate of interest on overpaid tax: 0.5%
• Interest on tax paid late is a deductible expense and
interest on overpaid tax is taxable under loan relationship
rules.
BPP LEARNING MEDIA

Question: M Ltd
M Ltd paid its corporation tax liability for the year ended
31 December 2016 on 31 August 2017.
The final accounts showed an overpayment of £12,000 tax
and HMRC paid the relevant interest to M Ltd on
31 October 2017.
BPP LEARNING MEDIA

Question: M Ltd – cont’d
How much interest is payable by HMRC to M Ltd?
A £0
B £5
C £10
D £30
BPP LEARNING MEDIA

Answer: M Ltd
B £5
Normal due date for year ended 31 December 2016 is

1 October 2017.
Original tax for year ended 31 December 2016 was paid on

31 August 2017.
Interest runs from the later of these two dates ie 1 October

2017 so is 0.5%  £12,000  1/12 = £5.
BPP LEARNING MEDIA

For the year ended 31 December 2016, Lateness Ltd had a

corporation tax liability of £60,000, which it did
not pay until 31 March 2018. Lateness Ltd is not a large
company.
How much interest will Lateness Ltd be charged by HM

Revenue and Customs (HMRC) in respect of the late
payment of its corporation tax liability for the year ended
31 December 2016?
BPP LEARNING MEDIA

A £825
B £2,250
C £300
D £450 (2 marks)
BPP LEARNING MEDIA

A £825
Interest runs from due date (1 October 2017) to the date of
payment (31 March 2017) which is six months.
£60,000  2.75%  6/12 £825
BPP LEARNING MEDIA

Penalties 1
Failure to notify first accounting period

• £300 plus £60 per day information is outstanding.
• Up to £3,000 for fraudulently or negligently giving incorrect
information.
Failure to notify chargeability
• Same behaviour-based penalty as applied to individuals.
BPP LEARNING MEDIA

Penalties 2
Late filing
• Automatic penalty:
―Up to 3 months late £100
―Up to 6 months late £200
―Up to 12 months late £200 + 10% unpaid tax
―Over 12 months late £200 + 20% unpaid tax
• If returns for each of previous accounting periods were
also late, then £100 and £200 penalties increased to £500
and £1,000.
BPP LEARNING MEDIA

Penalties 3
Failure to keep records

• Up to £3,000 per accounting period affected.
Errors in returns
• Same common penalty regime applies to companies as to
individuals.
BPP LEARNING MEDIA

Quarterly instalments for large companies 1
• Applies to large companies.

• Company is large if augmented profits exceed profits
threshold (given in tax tables).
• Augmented profits = taxable total profits + dividends from
unrelated companies.
• Profits threshold adjusted for:
―Related 51% group companies
―Short accounting periods
BPP LEARNING MEDIA

• 51% subsidiary:
―Company B is 51% subsidiary of company A if more
than 50% of company B’s ordinary shares are owned
directly or indirectly by company A.
BPP LEARNING MEDIA

• Related 51% group companies:

―Company B is related 51% group company of Company
A if Company A is 51% subsidiary of Company B or
Company B is 51% subsidiary of Company A or both
Company A and Company B are 51% subsidiaries of
another company.
―Non-UK resident company may be included as related
51% group companies.
―Companies which do not carry on a trade (dormant
companies) are not related 51% group companies.
BPP LEARNING MEDIA

―Instalments are based on expected current year's liability.

―Four quarterly instalments will be made in months 7, 10,
13 and 16 following the start of the accounting period
which is 12 months long.
―Due on the 14th of the month.
―Does not apply if augmented profits  £10m and not large
in previous year.
BPP LEARNING MEDIA

Question: A plc
A plc has taxable total profits (TTP) of £480,000 for the year ended 31 March
2017. In the year ended 31 March 2016 it has TTP of £600,000.
For many years A plc has had investments in three other companies. The profits
of those companies and the dividends paid to A plc in the year ended 31 March
2017 are as follows.
Company % holding TTP Dividends paid to A plc

B Ltd 55% £475,000 £10,000
C Ltd 75% £600,000 £50,000
D Ltd 40% £62,000 £25,000
All companies have a 31 March year end and none of them have any other
related companies. D Ltd has received a dividend of £5,000 from another
unrelated company but there have been no other receipts by any of the
companies named above.
BPP LEARNING MEDIA

Question: A plc (1)
(1) What are the augmented profits of A plc in the year

ended 31 March 2017 for the purposes of quarterly
instalments of corporation tax?
A £510,000
B £502,500
C £505,000
D £550,000
BPP LEARNING MEDIA

Answer: A plc (1)
(1) C £505,000
Augmented profits = Taxable total + dividends received from

unrelated companies
£480,000 + £25,000 = £505,000
BPP LEARNING MEDIA

Question: A plc (2)
(2) Which of the following companies are large in the year

ended 31 March 2017 for the purposes of quarterly
instalments?
A A plc and C Ltd only
B A plc, B Ltd and C Ltd
C C Ltd only
D None of these companies is large
BPP LEARNING MEDIA

Answer: A plc (2)
(2) A A plc and C Ltd only
The profits limit is £1,500,000 ÷ 3 = £500,000.

This is because there are 3 related 51% group companies:
A plc, B Ltd and C Ltd.
A plc and C Ltd have augmented profits of more than
£500,000 and so are large in the year ended 31 March 2017
for the purposes of quarterly instalments.
BPP LEARNING MEDIA

Question: A plc (3)
(3) When must the first corporation tax payments be made

by A plc and B Ltd in respect of their liabilities for the year
ended 31 March 2017?
A A plc on 14 October 2016 and B Ltd on 1 January
2018
B A plc on 14 October 2017 and B Ltd on 1 January
2017
C A plc on 1 January 2018 and B Ltd on 1 January 2018
D A plc on 14 October 2016 and B Ltd on 1 January
2017
BPP LEARNING MEDIA

Answer: A plc (3)
(3) A A plc on 14 October 2016 and B Ltd on 1 January

2018
A plc is large for at least the second year running so must

make its first payment on the 14th day of 7th month of the
accounting period to which the liability relates.
B Ltd is not large so pays all of its liability 9 months and one
day after the accounting period ends.
BPP LEARNING MEDIA

• Each instalment = 3  corporation tax/n (n = no. of months

in accounting period) in short accounting period
• Final instalment always due by 14th of the 4th month
following end of accounting period regardless of the length
of the period.
BPP LEARNING MEDIA

Question: B plc
B plc has a ten-month accounting period to 31 October

2016.
Required
When will the corporation tax be due if the liability is

expected to be £4,000,000?
BPP LEARNING MEDIA

Answer: B plc
Each instalment = 3  £4m = £1.2m

10
£m
14.7.16 1.2
14.10.16 1.2
14.1.17 1.2
3.6
14.2.17 0.4 (4th month after AP end)
4.0
BPP LEARNING MEDIA

For the year ended 31 March 2016, Sizeable Ltd had taxable
total profits of £820,000, and for the year ended 31 March
2017 had taxable total profits of £970,000. The profits accrue
evenly throughout the year.
Sizeable Ltd has had one 51% group company for many
years.
BPP LEARNING MEDIA

How will Sizeable Ltd pay its corporation tax liability for the
year ended 31 March 2017?
A Nine instalments of £16,400 and a balancing payment of

£46,400
B Four instalments of £48,500
C Four instalments of £41,000 and a balancing payment of
£30,000
D One payment of £194,000
(2 marks)
BPP LEARNING MEDIA

B Four instalments of £48,500

Profits threshold £1,500,000/2 (related 51% company) £750,000
Sizeable Ltd was therefore a large company in both years.
Each instalment for the year to 31 March 2017 is
£(970,000 @ 20%) = 194,000/4 £48,500
BPP LEARNING MEDIA

Summary 1
Self assessment for companies

• Company must notify HMRC of chargeability to corporation tax
within three months of start of accounting period.
• Company must notify HMRC if has not received notice to file tax
return within 12 month of end of accounting period.
• Company must usually submit its corporation tax return within 12
months of the end of the period of account.
• Company and/or HMRC may amend return.
• Company must keep records usually for six years from end of
accounting period.
• HMRC may conduct compliance check on return.
BPP LEARNING MEDIA

Summary 2
Self assessment for companies – cont’d

• Companies which are not large must pay corporation tax within
nine months and one day of end of accounting period.
• Interest paid to or received from HMRC dealt with under loan
relationship rules.
Penalties
• Failure to notify HMRC of first accounting period/chargeability
• Late filing
• Failure to keep records
• Errors in returns
BPP LEARNING MEDIA

Summary 3
Quarterly instalments for large companies

• Applies to large companies in relation to augmented profits and
profits threshold.
• Profits threshold adjusted for related 51% group companies and
short accounting periods.
• Four quarterly instalments are made in months 7, 10, 13 and 16
following start of the accounting period for 12 month accounting
period.
• Instalments are 3  corporation tax/n for short accounting periods
and final instalment always in 4th month following end of
accounting period.
BPP LEARNING MEDIA

Nature of question
Exam details
Payment of corporation tax by instalments Specimen A5
Interest for late payment Specimen A6
iXBRL format Specimen B33
BPP LEARNING MEDIA

Chapter 24 • Scope and rates
• Registration
An introduction to • VAT periods
VAT • Valuation of supply

• Recovery of input tax
BPP LEARNING MEDIA

• Recognise the circumstances in which a person must

register or deregister for VAT (compulsory) and when a
person may register or deregister for VAT (voluntary).
• Recognise the circumstances in which pre-registration
input VAT can be recovered.
• Explain the conditions that must be met for two or more
companies to be treated as a group for VAT purposes, and
the consequences of being so treated.
• Calculate the amount of VAT payable/recoverable.
• Understand how VAT is accounted for and administered.
BPP LEARNING MEDIA

• Recognise the tax point when goods or services are

supplied.
• Explain and apply the principles regarding the valuation of
supplies.
• Recognise the principal zero rated and exempt supplies.
• Recognise the circumstances in which input VAT is non-
deductible.
• Recognise the relief that is available for impairment losses
on trade debts.
BPP LEARNING MEDIA

Value Added Tax
Scope Valuation Recovery of

and rates Registration VAT periods
of supply input tax
Standard Compulsory
20%
Reduced 5% Voluntary
Zero 0% De-registration
Exempt Group
BPP LEARNING MEDIA

Tackling the exam
• You should expect to see value added tax tested in both

Section A and Section B.
• Value added tax may also be tested in Section C.
• Registration is a key topic: you may be asked when a
person should register for VAT and the implications of
registration.
• The tax point is highly examinable, as are discounts and
the relief for impairment losses on trade debts.
BPP LEARNING MEDIA

Scope and rates
• What is VAT charged on: taxable supplies of goods and

services in UK by taxable persons in course of business.
• VAT rates charged:
― Standard rated (20%): most goods/services eg luxury
food, adult clothing and footwear, non-domestic
electricity/gas
― Reduced rated (5%): eg domestic electricity/gas
― Zero rated (0%): eg non luxury food, books, children's
clothes and footwear
― Exempt: eg burial/cremation services, postal/health
services, non profit-making education
BPP LEARNING MEDIA

Registration 1
Supplies
TAXABLE EXEMPT
std/reduced zero rated

rated 0%
register with HMRC cannot register
recover INPUT VAT cannot recover

INPUT VAT
BPP LEARNING MEDIA

Registration 2
• Registration is compulsory if:

― At the end of any month taxable supplies over the
previous 12 months have exceeded £85,000
(historic test)
― In the next 30 days, taxable supplies are expected to
exceed £85,000 (future test)
• Requirement may be waived if can satisfy HMRC that
taxable supplies in the following 12-month period will be
less than £83,000.
• Taxable supplies is VAT exclusive value of all zero rated
and standard rated supplies.
BPP LEARNING MEDIA

Registration 3
• 30 days to notify HMRC.

• Registration effective from:
― End of month following the end of the 12 month period
(historic test)
― Start of 30 days period (future test)
BPP LEARNING MEDIA

Registration 4
Historic test
End of each
month
Previous 12 months
Taxable supplies > £85k
• eg exceed limit on 30 November.

• Notify HMRC within next 30 days (by 30 December).
• Registered at midnight at end of month following end of
12 month period (31 December).
• Must charge VAT from start of next month (1 January).
BPP LEARNING MEDIA

Registration 5
Forward looking (future) test
Today
30 days
Taxable supplies > £85k
• Thirty days to notify HMRC.

• Registered from start of the 30 day period.
BPP LEARNING MEDIA

Question: Jack
Jack commenced trading on 1 January 2017. His quarterly

turnover (spread evenly over the quarter) is as follows:
Quarter ended Turnover
£
31 March 2017 7,500
30 June 2017 13,500
30 September 2017 18,000
31 December 2017 21,000
31 March 2018 33,000
30 June 2018 39,000
BPP LEARNING MEDIA

Question: Jack – cont’d
Required
By what date is Jack required to notify HMRC that he is
liable to register for VAT? When will Jack be registered for
VAT and from what date must he charge his customers VAT?
BPP LEARNING MEDIA

Answer: Jack
Annual turnover does not exceed £85,000 until 31 March

2018 (on a month by month basis – £85,500) therefore Jack
does not become liable to register until then.
He must then notify the HMRC within 30 days ie by 30 April
2018.
He will then be registered from midnight on 30 April 2018
(or an earlier date by mutual agreement) and, if registered
from 30 April 2018, must charge his customers VAT from
1 May 2018.
BPP LEARNING MEDIA

Question: Jill
Jill commenced trading on 1 January 2016 with monthly

sales as follows:
Goods Turnover
per
month
£
Goods ABC (standard rated) 8,000
Goods DEF (zero-rated) 7,000
Service GHJ (exempt) 10,000
BPP LEARNING MEDIA

Question: Jill – cont’d
On 14 April 2017 Jill signed a contract to provide £30,000 of

Goods ABC on 2 May 2017 and £47,000 of Goods DEF in
addition to the monthly supplies detailed above.
By what date is Jill required to notify HMRC that she is liable
to register for VAT? And from which date must she be
registered?
A Notify 30 July 2017 and register from 1 August 2017
B Notify 30 May 2017 and register from 1 June 2017
C Notify 14 April 2017 and register from 14 April 2017
D Notify 13 May 2017 and register from 14 April 2017
BPP LEARNING MEDIA

Answer: Jill
D Notify 13 May 2017 and register from 14 April 2017
The historical test would be breached on 30 June 2017.

Taxable supplies in the first six months amount to 6 
(£8,000 + £7,000) = £90,000.
The future test is breached on 14 April 2017 because on that
date Jill knows her taxable supplies will exceed the
registration threshold as £8,000 + £7,000 + £30,000 +
£47,000 = £92,000. Notification is required 30 days from the
test (count 14 April as day 1) and registration takes effect on
14 April.
BPP LEARNING MEDIA

Registration 6
Deregistration
• If business ceases to make taxable supplies, it must
deregister.
• If in the next year VAT exclusive taxable supplies will be
below £83,000, the business may deregister.
• Deemed supply of business assets (such as plant,
equipment or trading inventory) when a business ceases
to be VAT registered.
• If the transfer is of a going concern, it is outside the scope
of VAT.
BPP LEARNING MEDIA

Registration 7
Voluntary registration
• Advantages:
― Able to reclaim input VAT
― Imposes discipline on the business to keep accurate
records
― Lends credibility to a business
• Disadvantages:
― Adds to administrative costs
― Reduces the competitive edge and deters business if
the customers are not VAT registered
BPP LEARNING MEDIA

Registration 8
Implications of registration
• Traders making standard or zero rated supplies must
charge VAT on all taxable supplies using tax invoices.
• These traders can recover related input tax suffered.
• Input tax is not recoverable on: cars (unless involved in
motor trade), UK customer entertaining, non-business
purchases.
• Exempt traders (eg insurance company): cannot register
(as they make no taxable supplies), cannot recover input
VAT suffered.
BPP LEARNING MEDIA

Question: C Ltd
C Ltd, which is registered for VAT, incurred the following

expenditure (including VAT) during the quarter ended
31 December 2017.
£
New car for salesman (private use) 14,500
3 new motor vans 28,200
Second-hand container lorry 29,370
Entertaining – UK customers 4,935
– employees 5,250
BPP LEARNING MEDIA

Question: C Ltd – cont’d
Required
How much VAT can be reclaimed in respect of the above
and on what amount will C Ltd be entitled to claim capital
allowances?
BPP LEARNING MEDIA

Answer: C Ltd
Input tax reclaimed

£
Vans (28,200  1/6) 4,700
Lorry (29,370  1/6) 4,895
Entertaining employees (5,250  1/6) 875
10,470
Capital allowance values

Cars 14,500
Vans (28,200 – 4,700) = 23,500
Lorry (29,370 – 4,895) = 24,475
BPP LEARNING MEDIA

Registration 9
Group registration
• Effect of group registration:
― Allows group companies to nominate one company in
the group to prepare one VAT return for the companies
in the group the ('representative member').
― Intra-group transactions are disregarded for VAT
purposes.
― Administratively much easier.
― All members of group registration are jointly and
severally liable for VAT liability.
BPP LEARNING MEDIA

Registration 10
Group registration
• Who can form a VAT group:
― Holding company must control subsidiaries
(ie voting power).
― Each company must be resident in the UK.
BPP LEARNING MEDIA

Registration 11
Pre-registration expenses: recovery of input tax

• Input tax is recoverable in the first return period.
• Input tax recoverable for:
― Fixed assets bought four years prior to registration but
in use post registration
― Services supplied within the six months prior to
registration
― Purchases still held as inventory at date of registration
BPP LEARNING MEDIA

Question: B Ltd
B Ltd commenced trading on 1 August 2016 and applied to

register for VAT with effect from 1 October 2017. Prior to
registration, it had incurred VAT on the following VAT
exclusive amounts:
£
Accountancy fees – invoice dated 10 March 5,000
2017
Van purchased new on 23 June 2017 8,000
Inventory of spare parts as on 30 September
2017 12,000
BPP LEARNING MEDIA

Question: B Ltd – cont’d
Required
What input VAT can B Ltd claim in respect of these items
assuming the van and inventory are still held on
1 October 2017?
BPP LEARNING MEDIA

Answer: B Ltd
£
Van – in use post registration 1,600
Inventory – still held at date of registration 2,400
VAT on accountancy fees are not recoverable

as more than six months prior to registration.
BPP LEARNING MEDIA

VAT periods 1
• Quarterly: usually.
• Monthly: repayment traders.
• Annual: optional if taxable supplies below £1,350,000 pa.
BPP LEARNING MEDIA

VAT periods 2
• Taxable persons whose annual liability exceeds

£2,300,000 must make monthly payments on account of
their liability:
―1/24th of the previous year’s liability.
―Made at the end of months two and three of each VAT
quarter.
―Treated as credits against that quarter’s liability.
―Balancing payment one month after the end of the
quarter (no extra seven days for payment).
• Filing of VAT returns online and payment made
electronically, by one month and seven days after end of
period.
BPP LEARNING MEDIA
VAT periods 3
Example – sale on credit
Order Goods Invoice Cash

rec’d despatched issued rec’d
Qtr1 Qtr2 Qtr3 Qtr4
Which VAT return is the sale recorded in?

Depends on the tax point.
BPP LEARNING MEDIA

VAT periods 4
Tax point
• Each tax invoice is assigned to a return period according
to its tax point.
• Basic tax point: when goods are made available, or when
services completed.
• If invoice is issued or payment received before basic tax
point: earlier date becomes the tax point.
• If the earlier date rule does not apply and the invoice is
issued within 14 days after the basic tax point: invoice date
becomes the tax point.
BPP LEARNING MEDIA

Question: J Ltd
On 31 May 2017 J Ltd ordered a new printing machine and

on 16 June 2016 paid a deposit of £6,000. The machine was
despatched to J Ltd on 30 June 2017. On 18 July 2017 an
invoice was issued to J Ltd for the balance due of £54,000.
This was paid on 23 July 2017.
Required
(a) What is the tax point for the £6,000 deposit?
(b) What is the tax point for the balance of £54,000?
BPP LEARNING MEDIA

Answer: J Ltd
(a) 16 June 2017

(b) 30 June 2017
BPP LEARNING MEDIA

VAT periods 5
Bad debts (impairment losses)

• Can claim refund of output tax previously paid:
― Sale of goods originally supplied
― Unpaid six months from the time that payment is due
― Written off in the taxpayer's books
• Issuing a credit note purely to reverse output tax on a bad
debt is not effective for VAT purposes.
BPP LEARNING MEDIA

Valuation of supply 1
Discounts
• Basic rule: output VAT charged on the actual amount
received by the trader.
• If prompt payment discount offered by the trader: VAT
initially calculated on the undiscounted amount.
• If discount subsequently taken up, customer pays VAT at
the appropriate rate of VAT on the discounted amount.
BPP LEARNING MEDIA

Valuation of supply 2
Discounts – cont’d
• Trader must either:
―Issue credit note for the discount; or
―Include words on invoice that the customer’s input VAT
must only be reclaimed to the extent paid to the trader.
BPP LEARNING MEDIA

Recovery of input tax 1
• Not recoverable on:

―Cars unless involved in motor trade
―UK customer entertaining
―Non business purchases
BPP LEARNING MEDIA

Recovery of input tax 2
Private fuel
• Input tax on all road fuel purchased by the business can
be reclaimed.
• When a taxable person supplies fuel for private motoring
to an individual, output tax must be accounted for either
using:
―Actual cost of private fuel, or
―Scale charge (usually in F6 and rates will be given),
unless all private fuel paid for by individual.
BPP LEARNING MEDIA

Question: T Ltd
John is an employee of T Ltd. He has the use of a car which

is used for both business and private mileage for the quarter
ended 31 March 2018.
T Ltd pays all the petrol costs in respect of the car, totalling
£1,200 of which 20% is for private mileage.
The relevant quarterly scale charge is £338.
Both figures are inclusive of VAT.
BPP LEARNING MEDIA

Question: T Ltd – cont’d
Required
What is the VAT effect of the above on T Ltd?
What would be the effect of T Ltd charging John for the
private fuel?
BPP LEARNING MEDIA

Answer: T Ltd
If John is not charged for the private fuel then T Ltd can
reclaim input VAT of £200 (1,200 × 20/120) and will have to
account for output VAT of £56 (338 × 20/120) based on the
scale charge.
If John is charged £240 (1,200 × 20%) for the private fuel
then T Ltd will reclaim input VAT of £200 and will have to
account for output VAT of £40 (240 × 20/120) based on the
charge to John.
BPP LEARNING MEDIA

Summary 1
Scope and rates

• VAT is charged on taxable supplies made by taxable persons in the
course of their trade.
• Some supplies are taxable. Others are exempt. Make sure you
understand the difference.
BPP LEARNING MEDIA

Summary 2
Registration
• A trader becomes liable to register for VAT if taxable supplies over
a 12-month period exceeds £85,000 or in the next 30 days taxable
supplies will exceed £85,000.
• A trader may also register voluntarily.
• Group registration allows only one VAT return to be prepared for
the group as a whole.
• Some pre-registration input VAT is recoverable.
BPP LEARNING MEDIA

Summary 3
VAT periods
• Usually quarterly, but can be monthly or annually.
• Filing of VAT returns online and payment made electronically, by
one month and seven days after end of period.
• Basic tax point is date goods are made available or service
completed.
• Earlier tax point: if invoice issued or payment made before basic
tax point.
• Later tax point: if earlier tax point does not apply and invoice issued
within 14 days after the basic tax point.
• Bad debt relief available for debts over six months old.
BPP LEARNING MEDIA

Summary 4
Valuation of supply
• VAT is calculated on actual amount paid if discount offered for
prompt payment.
Recovery of input tax

• Not all input VAT is deductible.
• In particular VAT on most cars, business entertaining and non-
business purchases is not recoverable.
• Input VAT on private fuel can be recovered but output VAT is
chargeable using actual cost or scale charge.
BPP LEARNING MEDIA

Nature of question
Exam details
VAT liability Specimen B26
VAT on fuel Specimen B27
BPP LEARNING MEDIA

Chapter 25 • Tax invoice
• Administration and penalties
Further aspects of • Imports, exports, acquisitions

and dispatches
VAT
• Special schemes
BPP LEARNING MEDIA

• List the information that must be given on a VAT invoice.

• Understand when the default surcharge, a penalty for an
incorrect VAT return, and default interest will be applied.
• Understand the treatment of imports, exports and trade
within the European Union.
BPP LEARNING MEDIA

• Understand the operation of, and when it will be

advantageous to use, the VAT special schemes:
―Cash accounting scheme
―Annual accounting scheme
―Flat rate scheme
BPP LEARNING MEDIA

Further aspects
of VAT
Special
Tax invoice Penalties Imports/Exports schemes
Default Common
Default interest
surcharge penalty
Annual Cash
Flat rate
accounting accounting
BPP LEARNING MEDIA

Tackling the exam
• You should expect to see value added tax tested in both

Section A and Section B.
• VAT may also be tested in Section C.
• You must be able to explain the rules on supplies within
the European Union and outside it.
• The three special schemes are important: learn the
conditions and how each of the schemes operate.
BPP LEARNING MEDIA

Tax invoice 1
• Taxable person making a taxable supply to another VAT

registered trader must supply tax invoice within 30 days of
the time of supply.
• No requirement to supply tax invoice if supply is exempt or
to a non-VAT registered customer.
• Tax invoice must show certain information.
• Less detailed tax invoice is needed if total is less than
£250.
BPP LEARNING MEDIA

Tax invoice 2
Full tax invoice contents

• Supplier's name, address and registration number.
• Date of issue, the tax point and an invoice number.
• Name and address of the customer.
• Description of the goods or services supplied, giving for
each description the quantity, the unit price, the rate of VAT
and the VAT exclusive amount.
• Rate of any cash discount.
• Total invoice price excluding VAT (with separate totals for
zero-rated and exempt supplies).
BPP LEARNING MEDIA

Tax invoice 3
Full tax invoice contents – cont’d

• Rate of any cash discount.
• Total invoice price excluding VAT (with separate totals for
zero-rated and exempt supplies).
• Each VAT rate applicable and the total amount of VAT.
BPP LEARNING MEDIA

Tax invoice 4
Less detailed tax invoice contents

• Supplier's name, address and registration number.
• Date of the supply.
• Description of the goods or services supplied.
• Rate of VAT chargeable.
• Total amount chargeable including VAT.
BPP LEARNING MEDIA

Administration and penalties 1
• Appeals: to Tax Tribunal.

• Records: should be kept for 6 years.
• Assessment by HMRC: up to 20 years if due to fraud.
• Refunds of VAT: if overpaid, normally subject to a four year
time limit.
BPP LEARNING MEDIA

Default surcharge
• If taxable person submits a late return, or submits a return
on time but makes late payment of the VAT due.
• Written notification of a default (surcharge liability notice)
will be given to a taxpayer after the first default (ie first late
payment/return).
• Once issued it remains in force until the taxpayer has not
been in default for 12 months.
BPP LEARNING MEDIA

Default surcharge – cont’d

• While notice is in force, taxpayer liable to surcharge each
time defaults by late payment of tax.
• No penalty for submission of late return provided tax paid
on time, but late return extends notice period.
BPP LEARNING MEDIA

Default surcharge – cont’d

• Default surcharge is percentage of tax paid.
1st default 2%
No surcharge if < £400
2nd default 5%
3rd default 10% (but not less than £30)
4th and subsequent defaults 15% (but not less than £30)
BPP LEARNING MEDIA

Q1 Q2 Q3 Q4
VAT
PAID LATE LATE ON TIME LATE
RETURN
SUBMITTED LATE LATE ON TIME LATE
RESULT SLN Issued 2% penalty – 5% penalty

(reset SLN) (reset SLN)
SLN removed after 4 consecutive ‘clean returns’
BPP LEARNING MEDIA

Penalties for errors

• Common penalty regime applies.
• Errors on a VAT return may be corrected on next return if
not exceeding the greater of:
―£10,000; or
―1%  turnover for return period (maximum £50,000).
BPP LEARNING MEDIA

Default interest
• Default interest is charged on unpaid VAT if:
―HMRC raise an assessment of VAT
―Trader makes a voluntary payment before assessment
is raised
• Runs from the date the VAT should have been paid to the
actual date of payment.
• Cannot run for more than three years before the
assessment or voluntary payment.
BPP LEARNING MEDIA

Imports, exports, acquisitions and dispatches 1
• Goods outside EU:

― Export: zero rated
― Import: input VAT paid, deductible on next VAT return
BPP LEARNING MEDIA

• Dispatches of goods within EU:

― If UK supplier has VAT number of EU recipient:
zero rated
― If UK supplier does not have VAT number of EU
recipient: charge local VAT rate
• Acquisition of goods within EU:
― UK trader accounts for output VAT
― Treated as VAT input tax (provided tax invoice issued
by supplier)
― Usually VAT neutral
BPP LEARNING MEDIA

• Supply of services to UK business customer:

― Place of supply in UK
― UK trader accounts for output VAT
― Treated as VAT input tax
― Usually VAT neutral
• Supply of services by UK trader to non-UK business
customer:
― Place of supply outside UK
― Not within scope of UK VAT
BPP LEARNING MEDIA

Special schemes 1
Cash accounting scheme

• Taxable turnover (exclusive of VAT) for the 12 months
starting on their application to join the scheme is not
expected to exceed £1,350,000.
• VAT on cash paid and received.
• Gives automatic bad debt relief.
• Must cease using the cash accounting scheme as soon as
taxable turnover exceeds £1,600,000.
BPP LEARNING MEDIA

Special schemes 2
Annual accounting scheme

• Taxable turnover (exclusive of VAT) for the 12 months
starting on their application to join the scheme is not
expected to exceed £1,350,000.
• Only one return required: file within two months of end of
year.
• Payments on account: 90%  total estimated annual
liability.
• Balancing payment: with return.
• Must cease using the annual accounting scheme as soon
as taxable turnover exceeds £1,600,000.
BPP LEARNING MEDIA

Special schemes 3
Flat rate scheme

• Tax exclusive taxable turnover for the next 12 months
does not exceed £150,000.
• Apply a flat rate percentage to total (tax inclusive) income.
• 1% reduction if joins flat rate scheme in first year of VAT
registration.
• No input tax is recovered.
• VAT invoice must still be issued.
• Business must leave the scheme if total (tax inclusive)
annual income >£230,000.
BPP LEARNING MEDIA

Question: K Ltd
K Ltd has annual turnover of £84,900. Eighty-five per cent of

the sales are standard rated and 15% are zero rated.
Standard rated expenses are £14,100.
All figures are exclusive of VAT.
The relevant percentage for K Ltd’s trade is 11%.
BPP LEARNING MEDIA

Question: K Ltd (1)
(1) What is the VAT liability if K Ltd does not use the flat
rate scheme?
A £11,800
B £14,160
C £11,613
D £14,443
BPP LEARNING MEDIA

Answer: K Ltd (1)
C £11,613
Output VAT £
84,900  85%  20% = 14,433
Input VAT
14,100  20% = (2,820)
VAT payable 11,613
BPP LEARNING MEDIA

Question: K Ltd (2)
(2) What is the VAT liability if K Ltd does use the flat rate
scheme?
A £9,339
B £11,207
C £10,927
D £8,107
BPP LEARNING MEDIA

Answer: K Ltd (2)
C £10,927
Using the flat rate scheme
(84,900  85%  1.20) + (84,900  15%)  11% = 10,927
BPP LEARNING MEDIA

For the quarter ended 31 March 2017, Zim had standard

rated sales of £49,750 and standard rated expenses
of £22,750. Both figures are exclusive of value added tax
(VAT).
Zim uses the flat rate scheme to calculate the amount of VAT
payable, with the relevant scheme percentage for her trade
being 12%. The percentage reduction for the first year of
VAT registration is not available.
BPP LEARNING MEDIA

How much VAT will Zim have to pay to HM Revenue and

Customs (HMRC) for the quarter ended 31 March 2017?
A £5,970
B £3,888
C £5,400
D £7,164 (2 marks)
BPP LEARNING MEDIA

D £7,164
£(49,750  120/100) = 59,700  12% £7,164
Under the flat rate scheme, a business calculates VAT by

applying a fixed percentage to its tax inclusive turnover.
However, the business cannot reclaim any input tax
suffered.
BPP LEARNING MEDIA

Summary 1
Tax invoice
• There are various items of information that must be shown on a tax
invoice which is used to charge VAT.
Administration and penalties
• Default surcharge regime applies if taxable person submits late
return or submits return on time but makes late payment of the VAT
due.
• Errors may be corrected in next return if within limits.
• Default interest charged on unpaid VAT.
BPP LEARNING MEDIA

Summary 2
Imports, exports, acquisitions and dispatches

• Imports from outside the EU are subject to VAT and exports outside
the EU are zero rated.
• Taxable acquisitions from EU states are treated as a sale and a
purchase by the UK business.
• Dispatches to EU states are zero rated.
BPP LEARNING MEDIA

Summary 3
Special schemes
• Special schemes exist to aid businesses.
• Cash accounting protects against bad debts.
• Annual accounting simplifies the submission of VAT returns.
• Flat rate scheme makes the calculation of the VAT liability easier.
BPP LEARNING MEDIA

Nature of question
Exam details
Flat rate scheme Specimen A10
Default surcharge percentage Specimen B28
Surcharge notice period Specimen B29
Issue of VAT invoice Specimen B30
BPP LEARNING MEDIA

Copyright notice
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 Ltd.
The contents of this book are intended as a guide and not professional
advice. Although every effort has been made to ensure that the contents
of this book are correct at the time of going to press, BPP Learning
Media makes no warranty that the information in this book is accurate or
complete and accepts no liability for any loss or damage suffered by any
person acting or refraining from acting as a result of the material in this
book.
BPP LEARNING MEDIA

Acca - f6 - Taxation Fa 2017 - Cts

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Acca - f6 - Taxation Fa 2017 - Cts

Enviado por

Direitos autorais:

Formatos disponíveis

ACCA F6

BPP LEARNING MEDIA

Syllabus Case study

Technical content Real world example

Question to consider Diagram

Answer Key model

Past exam question Tackling the exam

Answer to past exam Summary

BPP LEARNING MEDIA

A The UK tax system and its administration

B Income tax and NIC liabilities

C Chargeable gains for individuals

E Corporation tax liabilities

F Value added tax

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

• Describe the purpose (economic, social etc) of taxation in

BPP LEARNING MEDIA

• Appreciate the interaction of the UK tax system with that of

BPP LEARNING MEDIA

Sources of revenue law Tax avoidance/

BPP LEARNING MEDIA

• Topics in this chapter may be examined as MCQs in

BPP LEARNING MEDIA

BPP LEARNING MEDIA

The UK Government uses tax policies to encourage certain

BPP LEARNING MEDIA

Saving is encouraged by offering individuals tax incentives

BPP LEARNING MEDIA

Income tax Direct Revenue Individuals

National insurance Direct Revenue Employers, employees

Capital gains tax Direct Capital Individuals

Inheritance tax Direct Capital Individuals

Value added tax Indirect Both Businesses

BPP LEARNING MEDIA

Direct and indirect taxes

BPP LEARNING MEDIA

Revenue and capital taxes

BPP LEARNING MEDIA

• HM Revenue and Customs is a part of HM Treasury and

BPP LEARNING MEDIA

• Reviews and appeals:

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

• Interaction with European Union:

BPP LEARNING MEDIA

• Double taxation treaties:

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

BPP LEARNING MEDIA

• If client makes material error or omission in tax return, or

BPP LEARNING MEDIA

• Accountant who suspects or is aware of tax evasion by a

BPP LEARNING MEDIA

Alec is a sole practitioner, who acts for L Ltd in relation to its

Yesterday, the managing director of the company mentioned,

BPP LEARNING MEDIA