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Introduction: This is the source of income for the Government.

The taxation affairs are being managed by the government in the United Kingdom
HIS MAJESTY’s REVENUE AND CUSTOMS (HMRC) is the tax authority which uses various tax policies to
encourage and discourage certain types of activities; trying to balance out certain Social, Environmental,
economic etc. factors, in the UK.
Social Factors: Tax policies can be used for redistribution of wealth from rich towards poor and bring
about social equality, using the following types of taxes:
• Progressive taxes – tax charged increases with the increase in income
• Regressive taxes- tax decreases with the increase in income. So tax applicable over one liter of diesel
is same for all customers
• Proportional taxes- regardless of level of income, tax proportion remains same.
Environmental factors: Taxes may be levied for environmental reasons, in order to protect the
environment, using the following techniques:
• Climate change levy: Higher rate of tax charged on businesses consuming more energy.
• Landfill tax: Businesses are encouraged to recycle the waste because if instead they store away toxic
wastes, they are then charged a higher rate of tax
Types of Taxes
Income tax charged over individuals and partners

Corporation tax: charged over companies

Capital gains tax: charged over gain generated on the disposal of fixed asset by Direct Tax
individual

Inheritance tax: charged over inheritance of property by individual

Value added tax: charged on the selling price of good/service, borne by consumer
(indirect tax)

Directly Taxes: Are charged directly on income and other profits of the tax payer and the tax payer is
aware of the amount he/ she has paid
Indirect Taxes: Are charged indirectly on the consumer (i.e. customer) via a supplier.
The Tax System: HMRC is being controlled by Chancellor of Exchequer. A number of personnel work with
him to effectively manage the tax affairs of the country.
These include:
• Officers of revenue and customs
• Receivable management officers
• Revenue and customs prosecutions office

Appealing System
Appeals heard by:
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• First tier tribunal

• Upper tribunal
If a tax payer comes in dispute with the application of the tax law then appeal can directly be made to a
Tax Tribunal – a body, setup for resolving tax disputes. Depending upon the technicality of the case, the
case is either referred to the First Tier Tribunal or to the Upper Tribunal. Appeals against the First Tier
Tribunal can further be forwarded to the Upper Tribunal as well. Paper’ track, ’basic’ track and ‘standard’
track are allocated to first tier tribunal while ‘complex’ track is allocated to upper tier tribunal.
Paper track Includes simplest appeals i.e.an appeal against a fixed penalty. Decision is
normally taken out without a hearing.
Basic track Involves a hearing but exchange of documents beforehand is kept to minimum.
Standard track Involves formal hearing. It deals with the cases which leads to more detailed
management.
Complex track Includes complicated cases which requires specialized knowledge relating to
either some important principle or a large financial sum.
Following tax publications are also issued to rewrite the tax in easier and user-friendly language:
• Statement of practice
• Extra-statutory concessions
• Explanatory leaflets
• Business economic notes
• Revenue and customs brief
• Internal guidance (HMRC manuals)

Tax Evasion
This is referred to reducing tax liability in an illegal manner. Tax evasion consists of misleading HMRC by
either suppressing information, or providing deliberately misleading information.
Tax Avoidance
Tax avoidance includes a legal method of reducing tax liability by using tax shelters, or using schemes to
minimize tax e.g. making investment in ISA, making donations under gift aid scheme etc.
Code of Ethics and Conduct
ACCA members and affiliates are bound by ACCA code of ethics and conduct, which covers the following
principles:
Integrity: every task should be performed honestly
Objectivity: fair and unbiased decisions should be made
Professional competence and due care: care should be taken while performing a job and one must have
professional competence before accepting work
Confidentiality: any information obtained during the course of one’s work should not be disclosed to any
person unless written permission has been made on prior basis or there is a legal or professional obligation
to do so.
Professional behavior: professionalism should be maintained while performing tasks. Most taxpayers
appoint accountants/ tax specialists, whose responsibilities are to prepare and submit tax returns.
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While performing these tasks for any tax payer, client confidentiality should be maintained as every
accountant is bound by the ACCA code of ethics and conduct. However, under certain circumstances it
becomes the legal duty of the accountant to report a client to an authority, i.e. if client is suspected to be
involved in any illegal activity and if the client is found in tax evasion activities then it’s an accountant’s
professional duty to report this matter to HMRC. But it is recommended to take advice from ACCA before
reporting the client simply on the basis of suspicion because the client can sue the consultant/accountant
for not maintaining confidentiality if there is an error at the consultant’s end.

Chapter 2: INCOME TAX COMPUTATION

UK resident v/s non-resident person: UK resident individuals are liable to income tax on their taxable
income according to the tax year.

Residence
A statutory test of residence has been introduced to determine a person’s residence status each tax year.
The following people will automatically be treated as not resident in the UK:
• A person who is in the UK for less than 16 days during a tax year.
• A person who is in the UK for less than 46 days during a tax year, and who has not been resident
during the three previous tax years.
• A person who works full-time overseas, subject to them not being in the UK for more than 90 days
during a tax year.
Subject to not meeting any of the automatic non–resident tests, the following people will automatically
be treated as resident in the UK:
• A person who is in the UK for 183 days or more during a tax year.
• A person whose only home is in the UK.
• A person who carries out full time work in the UK.
Where a person’s residence status cannot be determined according to any of the automatic tests, then
his/her status will be based on how many ties they have with the UK and how many days they stay in
the UK during a tax year. There are five UK ties as follows:
• Having close family (a spouse/civil partner or minor child) in the UK.
• Having a house in the UK which is made use of during the tax year.
• Doing substantive work in the UK.
• Being in the UK for more than 90 days during either of the two previous tax years.
• Spending more time in the UK than in any other country in the tax year.

How the UK ties test is applied depends on whether a person has been resident in the UK for any of the
previous three tax years. A person who has been resident during any of the previous three tax years will
typically be someone that is leaving the UK, and for them all five UK ties are relevant.
A person who has not been resident during any of the previous three tax years will typically be someone
that is arriving in the UK, and for them the final ‘country’ tie is ignored.
A person’s residence status is found by comparing the number of days they are in the UK during a tax year
against how many UK ties they have:
Days in UK Previously resident Not previously resident
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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
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
The table will be given in the tax rates and allowances section of the examination paper.

Income Tax Computation

Tax Year: Individuals are assessed according to the tax year. Tax year runs from 6th April to 5th April. So,
the year 6th April 2024 to 5th April 2025 is referred as the tax year 24/25
Mr. / Ms.
Personal Tax Computation
2024-25
NON SAVINGS SAVINGS DIVIDEND TOTAL
£ £ £ £
Employment Income X X
Profits from Trade/Profession X X
Rental Income X X
Income from FHL X x
Interest Received X X
Bank & Building Society Interest X X
UK Dividends X X
Pension x x
Total income X X X X
Less: Deductible Interest (X) (X)
Net income X X X X
Less: Personal allowance (x) (x)
Taxable Income X X X X

Types of Income
Chargeable/Taxable Income
The main types of income for individuals are:
• Profits of trade, profession and vocations
• Income from employment and pensions
• Property income
• Saving and investment income, including interest and dividends
Exempt Income
• Premium bond prizes & lotto prizes
• Betting, gaming and winnings
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• Returns on national saving certificates

• Income from individual savings accounts (ISAs)

Individual Savings Account: The individual savings account (ISA) investment limit for the tax year 2024-
25 is £20,000. The £20,000 limit is completely flexible, so a person can invest £20,000 in a cash ISA, or
they can invest £20,000 in a stocks and shares ISA, or in any combination of the two – such as £10,000 in
a cash ISA and £10,000 in a stocks and shares ISA. The income from ISAs is exempt from income tax, whilst
a chargeable gain made within a stocks and shares ISA is exempt from capital gains tax.
The availability of the savings income nil rate band for basic and higher rate taxpayers means that there
is no tax benefit to investing in cash ISAs for many individuals. However, cash ISAs are advantageous for
additional rate taxpayers and for other individuals where their savings income nil rate band is already
utilized. The availability of the dividend nil rate band means that there is no tax advantage to receiving
dividend income within a stocks and shares ISA for many individuals. However, chargeable gains made
within a stocks and shares ISA are exempt from capital gains tax. Stocks and shares ISAs are therefore
advantageous where chargeable gains are made in excess of the annual exempt amount.

Deductible Interest
Interest paid on a QUALIFYING loan is termed as Deductible Interest.
Qualifying loans are those which are taken either:
• For purpose of making an investment in a partnership, or
• For purchase of plant and machinery for partnership (by partner) or employment (by employee)
• For the payment of inheritance tax
Interest paid on these loans is eligible for tax relief and it is deducted from Total Income in the following
order:
• Non-savings income, then
• Savings income, then
• Dividend income

Personal Allowance
• The normal personal allowance of £12,570 is gradually reduced to nil where a person’s adjusted net
income exceeds £125,140.
• Adjusted net income is net income (total income less deductions for loss relief and interest payments)
less the gross amount of personal pension contributions and gross amount of gift aid donations.
• The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net income exceeds
£100,000. Therefore, a person with adjusted net income of £125,140 or more is not entitled to any
personal allowance ((125,140 – 100,000)/2 = £12,570).

Income Tax Rates

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Normal rates Dividend

( for non- rates
savings and
savings
income)

Basic rate £1 to £37,700 20% 8.75%

Higher rate £37,701 to £125,140 40% 33.75%

Additional rate > £125,140 45% 39.35%

Savings income nil rate band

- Basic rate taxpayers £1,000

- Higher rate taxpayers £500

Dividend income nil rate band £500

A starting rate of 0% applies to savings income where it falls within the first £ 5,000 of taxable income.

Income Tax Payable

Credit is given for the taxes that have been deducted at source against tax liability. Sources of income over
which tax has been deducted at source includes employment income in the form of PAYE, Marriage
Allowance, EIS/SEIS/VCT @30%/50%/30%, DTR etc.
Gift Aid Donation
The Gift Aid scheme gives tax relief for donations made to registered charities. Individuals are deemed to
make Gift Aid donations net of 20% tax, which is recoverable by the charity from HMRC. E.g. If an
individual makes a Gift Aid payment of, say, £1,600, the gift is treated as a gross gift of £2,000 (= £1,600 ×
100/80). The charity will receive £1,600 from the individual and a tax repayment of £400 from HMRC. The
additional relief provided to the taxpayer, is obtained by extending the basic rate bands by the gross
amount of the Gift Aid payment. This results in a lower rate of tax being applied on the taxable income.

Child Benefit Income Tax Charge

Child benefit is a tax-free payment that can be claimed in respect of children if ANI is either equal to or
less than £60,000. An income tax charge has been introduced where a person’s adjusted net income
exceeds £60,000 and they receive child benefit. The tax charge in effect removes the benefit for those on
higher incomes. Where adjusted net income is between £60,000 and £80,000, the income tax charge is
1% of the amount of child benefit received for every £200 of income over £60,000.
For people whose adjusted net income exceeds £80,000, the amount of the income tax charge is
equivalent to the amount of child benefit received. The child benefit income tax charge is collected
through the self-assessment system.
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TRANSFERABLE AMOUNT OF PERSONAL ALLOWANCE

Personal allowance can be transferable in between spouses, if both spouses are found to be in the basic
band. The transferable amount of personal allowance (also known as the marriage allowance or
marriage tax allowance) is £1,260 for the tax year 2024-25. This is 10% of the actual personal allowance.
So, the person who is transferring the personal allowances will be left with the personal allowance of
£11,310 (12,570-1260)
The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax,
so the tax reduction is therefore £252 (1,260 at 20%). If the recipient’s tax liability is less than £252, then
the tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.
ELECTION DATES

In advance In arrears

By the end of the current tax year Within 4 years after the end of the tax year

Will remain in force for four tax years Applicable on current tax year only

Unless election is withdrawn or conditions are no

longer fulfilled

Income of children

• Assessed on children
• Parents are liable to pay tax over income generated out the fund set up by parents ( provided
amount exceeds £100)

CHAPTER 3: Rental Income

Property income covers normal tenancy agreement and lease agreements for UK land & building.
• Calculation is done on either cash basis or accrual basis.
Cash Basis
• Rental income received during the tax year will be taken up.
• Deduct all expenditures paid related to rental income in order to arrive at taxable figure of rent.
• Expenditures are only deductible if following conditions are satisfied:
➢ Expenses are borne by landlord.
➢ Expenses are either related to the period of actual occupation by tenants or is made available for
letting purposes.
• Though all expenses whether capital or revenue are deductible but capital expenses related to land,
building and cars are not deductible.
Accrual Basis
• Rent is taken on accrual basis according to the tax year.
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• Deduct all expenditures related to rental income in order to arrive at taxable figure of rent.
• Expenditures are only deductible if following 3 conditions are satisfied:
➢ Expenses are borne by landlord.
➢ Expenses should be of revenue in nature.
➢ Expenses are either related to the period of actual occupation by tenants or is made available for
letting purposes.

Lease agreement: Leases are assessed under income tax rules if they are short lease (life ≤ 50 years). Long
leases are not assessed to income tax.

• In the case of short lease, premium might have been received by the landlord. A portion of this
premium is assessable only in the year of RECEIPT. Taxable portion of premium is calculated by
applying the following formula

Premium = P – [P x (n – 1) x 2%]
Assessable

Premium No. of years

OR

Premium assessable= P * (51 – D)/50

• Premium paid by TENANTS can be claimed as trading expenses if property is used for trading purpose.

Deductible = Premium assessable

Amount per year No. of years
• If more than one property is rented out, their income expenses are pooled to get a single profits/ loss
which are assessed under non-saving income column.

Pro Forma
Rent (accrual/cash) xx
Less: Expenses

– Maintenance
– Repair
– Redecoration
– Insurance
– Advertisement
– Bad debt (under accrual basis only) (x)
– Council tax (x)
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– Water rates
– Agent’s fee
– replacement furniture relief (x)

(If property is furnished)

Income from property xx
• List of expenses mentioned above is not the complete list. There is a variety of expenditures related
to rental property.

*PROPERTY INCOME FINANCE COSTS

Tax relief for finance costs in respect of residential property, such as mortgage interest, is to be
restricted to the basic rate. For the tax year 2024–25, the finance cost acts as a tax reducer at the basic
rate.
It makes no difference whether the finance was used to purchase the property or was used to pay for
repairs. The restriction does not apply where finance costs relate to a furnished holiday letting or to
non-residential property such as an office or warehouse. The restriction only applies to individuals and
not to limited companies.
Replacement furniture relief
• Individuals and companies can deduct the actual cost of replacing furniture and furnishings
when calculating the property income from renting out a residential property.
• The property does not need to be fully furnished for relief to be available.
• There is no relief for the initial cost of furniture and furnishings. There is only relief when
assets are replaced.
• The amount of relief is reduced by any proceeds from selling the old asset which has been
replaced.
• Also, relief is not given for any cost which represents an improvement.
Rental Loss
Loss of one property is netted off against profit of other property in a tax year. Excess losses are carried
forward against immediate available rental income of future tax years for indefinite period.

Rent a Room Relief

• If a landlord lets out a room/ rooms of his living accommodation then a special treatment may apply
• Landlord is allowed to choose the method which gives the most favorable picture.

Method 1
Rent - Allowable expense = property income
Method 2
Rent is taxable only if it is in excess of £ 7,500 (special exemption)
If rental income is being shared by spouses/ civil partners then this special exemption is halved between
them.

Furnished Holiday Letting (FHL)

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There are certain conditions imposed by HMRC, which if followed by FHL, then FHL would be treated as
commercial letting i.e. the income from FHL is treated as profits received from commercial trade.
Conditions
• Availability conditions: it should be available for at least 210 days in a tax year.
• Letting condition: it should be actually occupied for at least 105 in a tax year.
• If it is let for periods of longer term occupation (more than 31 consecutive days) then total of longer
term period of occupation should not exceed 155 days during the tax year.

Advantages/ Differences
• Capital allowance will be available instead of replacement furniture relief.
• Income is considered as relevant earning for pension purposes.
• Assets of FHL are treated as business assets for CGT purpose.

Losses
Losses of FHL are carried forward against future income of FHL only.
Interest Income
Usually it is taken on receipt basis: e.g.

#1) bank interest £700 on 3rd February 2024 will be assessed in the tax year 23/24.

#2) interest of £3,500 from building society received on 10 June 24, will be assessed in the tax year
24/25.

#3) interest of £1,000 from individual received on 1 March 2025 will be assessed in the tax year 24/25

Exception: interest received on gilts is taken on the basis of accrued income scheme. Here the
purchase price/ disposal price is apportioned in between capital element and income element.

The income element ( interest ) is assessed on seller

Accrued income scheme: This scheme is introduced to prevent the practice of bond washing. Interest is
normally paid on securities at regular intervals. As the interest payment date gets nearer, the capital
value of the securities increases as any purchaser is buying the accrued income in addition to the
underlying value

When the securities are sold they are exempt from CGT (e.g gilts and loan notes) purposes so this
element of growth relating to interest escapes tax.
How above scheme operates

• Under the scheme the interest is deemed to accrue on a daily basis or monthly basis.

• The scheme does not apply unless the total nominal value of securities held by an
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individual exceeds £5,000 at some time during the year of assessment.

• The scheme does not apply if security transferred at death.

Real Estate Investment Trust

• Investment in quoted property business set up as investment trust

• Dividends are received net of 20% tax

• Gross amount is included

• Treated as property income

Tax efficient Investments:

➢ Individual Savings Accounts (ISAs):

An ISA offers the following tax reliefs:

• Income received is exempt from income tax.

• Disposals of investments within an ISA are exempt from CGT.
• There is no minimum holding period, so withdrawals can be made from the account
at any time.
• Subscription limits/Total limit: £ 20,000 per year
– Any combination of cash and shares can be invested, up to the total of £20,000.
– A person can withdraw money from cash ISA and replace it in the same tax year
without this replacement counting towards their ISA investment limit. (NEW)
– Husbands and wives each have their own limits.

An ISA can be made up of either of the following components:

• Cash and cash-like equity products (banks).

16 and 17 years old may only invest cash ISAs.

• Stocks & Shares

Investment is allowed in shares and securities listed on a stock exchange anywhere in the
world. Due to dividend nil rate band investment in stock and shares is not beneficial for
those individuals whose dividend nil rate band is not utilized.
This is still beneficial for those individuals whose dividend nil rate band is fully utilized and
use CGT annual exempt amount each year.

• Transfer of ISA Allowance to spouse/civil partner on death

A further ISA allowance has been introduced in addition to the standard allowance of £20,000.
This additional allowance is available to the surviving spouse or registered civil partner of a
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deceased person who held an ISA at the time of death. The additional allowance is equal to
the value of ISAs which were held by the deceased spouse or partner at the date of death.
This additional allowance enables the surviving member of a couple to maintain an amount of
tax free funds equal to that which had previously been held by couple.

Enterprise Investment Scheme (EIS):

The EIS is intended to encourage investors to subscribe for new shares in unquoted trading
companies.

Income tax treatment:

• Income tax relief = 30% x amount subscribed for (not purchased)

✓ Maximum amount that can be subscribed for each tax year = £ 1 million p.a.
✓ Maximum tax reducer = £300,000.
✓ Deduct from the individual’s income tax liability.
✓ Can reduce liability to £Nil, but cannot create a tax repayment.
• An investor may elect to carry back the amount invested to the previous year (only
for 1 year), but cannot get relief on more than £ 1 million in any one tax year.
• Dividends received from an EIS investment are taxable in the normal way.
• The income tax relief is withdrawn if the shares are not held for a minimum period
of three years for EIS, if the investor sells the shares within three years of
acquisition date, he/she have to repay amount of income tax reducer to HMRC.
(Added in tax liability)
Capital Gains Tax treatment:

• Capital gains on the disposal of shares in qualifying companies are exempt provided
the shares have been held for three years, but capital losses are allowable.
• EIS deferral relief is available. (means, capital gains are deferred if sale proceeds from
any asset are invested in EIS)
• Election can be made for capital losses arising upon disposal of EIS to relieve against
Total Income. (for current year and carry back to one year only)
Inheritance tax treatment:

• Shares in an EIS scheme qualify for Business Property Relief (BPR) if held for two
years.
For the Investor:

• Must subscribe, in cash, for new ordinary shares.

• Must not be an employee or director of the company.
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• Must not have an interest of 30% or more in the company.

• An individual cannot claim EIS relief if they already hold non EIS/SEIS shares in the
company at the time that they make the investment.

Seed Enterprise Investment Scheme (SEIS):

The SEIS is a new scheme that is similar to EIS and is intended to encourage investment in
small early-stage companies.

Tax treatment:
The individuals who subscribe for SEIS get the following tax reliefs:

• The income tax relief available to an investor is a tax reducer of 50% of the
amount subscribed in cash for new ordinary shares for genuine commercial
reasons.
• The relief is subject to a maximum tax reducer of £100,000 (means
maximum investment £200,000).
• The investor may claim to treat the investment as if it had been made in the
previous tax year (carry back up to one year only).

Implications if sold within 3 years

Not at arm’s length At arm’s length
IT relief withdrawn Lower of:
All original IT relief given
(i.e. amount of IT that • Original IT relief given
becomes payable)
• 50% of Sale Proceeds received
for shares
CGT relief withdrawn A proportion of gains previously
All the gains previously exempted:
(i.e. previously exempted
exempted Gain exempted x Amount of IT relief
gain that becomes
chargeable) withdrawn / Original IT relief given

(For CGT and IHT treatment, EIS = SEIS)

Conditions for the Investor:

• Must subscribe, in cash, for new ordinary shares.

• The investor must not be an employee of the company. However, this condition
does not exclude directors.
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• The investor must not own more than 30% of the company’s ordinary share capital.

Venture Capital Trusts (VCT):

Relief for investment in VCTs was introduced to encourage individuals to provide capital for
unquoted companies. (VCT itself is a quoted company that invests in unquoted companies)

Income tax treatment:

• Income tax relief = 30% x the amount subscribed for

✓ Maximum amount that can be subscribed for each tax year = £200,000 p.a.
✓ Deduct from the individuals’ income tax liability
✓ Can reduce liability to NIL, but cannot create a tax repayment.
• No carry back facility
• Dividend income from a VCT = exempt from income tax
• The income tax relief is withdrawn if the shares are not held for a minimum period of
5 years.
• If the investor sells the VCT shares within 5 years of acquisition date, he/she have to
repay amount of income tax reducer to HMRC. (Where there is not an arm’s length
transaction). In case where transaction is taken place at an arm’s length, the amount
of income tax withdrawn is equal to the lower of Income tax relief originally given &
30% of sale proceeds.

Capital Gains Tax treatment:

• Capital gains on the disposal of shares in a VCT are exempt.

• There is no relief for capital losses. (so there is no requirement to calculate gain/loss)
• No deferral relief is available.

Inheritance Tax treatment: Shares in a VCT do not qualify for business property relief.

CHAPTER 4: EMPLOYMENT INCOME

Employment v/s Self Employment

An employee works under a contract of service and a self-employed person under a contract for services.
There are number of factors indicating whether the contract is contract of service or contract for service:
• The degree of control exercised by the person doing work.
• Whether he should accept further work?
• Whether the other party must provide him/her with further work?
• Whether he provides his own equipment and whether he hires his own employees?
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• Degree of financial risk

• Degree of responsibility for investment and management
• Whether he can profit from sound management?
• Timings of work
• The wording used in any agreement between parties.

Employment income is calculated according to the tax year and it includes:

Salary
+ Bonus
+ Commission
+ Benefits
– Allowable deductions

Basis of assessment of earnings (i.e. salary +bonus +commission)

For employees: It is taken on the earlier of

➢ Date of receipt of earning &

➢ Date when employee becomes entitled to this payment

For directors
It is taken on the earliest of:
➢ The date that the earning has been received.
➢ The date of entitlement to the earning.
➢ The date when it is credited in the records of the company.
➢ The end of the period of accounts, if earning for that period is determined before the end of the period
of account.
➢ The date on which amount is determined, if it is determined after the end of company’s period of
accounts

Benefits assessment

Vouchers
Cash voucher: Subject to the face value of voucher
Non-cash voucher/ voucher exchangeable for good: Cost of provision by employer
Credit token (company credit card): value of goods and services bought for private use

Living Accommodation
The benefit for living accommodation is exempt if property has been provided for either of the following
purposes:
➢ Property has been provided for employee to perform his duty in a proper way
➢ Property has been provided for employee to perform his duty in a better way
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➢ Property has been provided for the purpose of security of employee

If accommodation is provided for any reason apart from the above, it is treated as Non job related
accommodation and results in a Taxable Benefit on the employee provided with the accommodation.

• The basic benefit is the annual value/ rate able value of the property.
• If the property is rented then the basic benefit is the higher of the annual value and the amount of
rent paid by employer.

Additional benefit
There is an additional benefit if the property costs more than £75,000 and is only applicable if the property
is owned by the employer/ organization. This is calculated as: (Cost–£75,000) x 2.25% (the official rate of
interest)

What is meant by COST?

If property has not been purchased either 6 or less than 6 years before the date of first provision to
employee then cost is equal to cost of the property plus improvements incurred before the start of the
current tax year.
However, where the property was purchased more than six years before first being provided to the
employee, then the cost figure is replaced by the market value when first provided plus any subsequent
improvements from the date of provision to employee and before the start of particular tax year for which
benefit is to be computed.

Ancillary benefit relevant to accommodation

• If the employer pays for the running costs relating to the property then the amount paid will be a
benefit.
• Running costs include heating & lighting and repairs & maintenance costs.
• If the employer has furnished the property, then the benefit for the use of the furniture is based on
20% of its cost
• If ancillary benefit has been provided along with job related accommodation then taxable benefit is
the lower of cost to employer and 10% of employee’s earning.

Beneficial Loans
Qualifying loans will never give rise to taxable benefits.
Non -qualifying loans of ≤£ 10,000 does not give rise to taxable benefit.
There is a taxable benefit where an employee is provided with loan of more than £10,000 for non -
qualifying purposes at interest rate payable which is below the official rate of interest of 2.25%.
Benefit / Interest saved= outstanding amount of loan × official rate of interest

There are two alternative methods of calculating the benefit If partial repayments/additions are made to
the amount of loan during the relevant tax year:
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The average method:

The average is taken of the amount outstanding at the start of the tax year (or when the loan was made
if later) and at the end of the tax year (or when the loan was repaid if earlier). The ‘official rate of interest
less interest rate suffered’ is then applied to this average.
Interest saved:
Opening balance of loan +closing balance of loan ×official rate of interest X
2

Less interest paid (X)

X

The strict method:

The official rate of interest is applied to the amount outstanding on a monthly basis.
The average method applies unless either the employee or HM Revenue and Customs (HMRC) elects for
the strict method, if the taxable benefit derived from both methods vary significantly.

Use of Assets
Where an employee is provided with an asset for their personal use then the benefit is based on 20% of
its MV at first time provision. In case of rented asset, taxable benefit is the higher of 20% of MV and rent
paid by employer. The provision of one mobile telephone for personal use does not give rise to a taxable
benefit.

Transfer of asset
If the asset is subsequently sold or given to the employee, then there will be a further benefit
Asset is transferred either as first-hand asset or second-hand asset

1st hand asset: MV at the date of provision to employee at the date of transfer less payment made by
employee (if any)

2nd hand asset:

Greater of:
• Market value at the date the employee acquires the asset &
• MV at the date of first time provision less any amounts assessed as benefits for having the use of the
asset.

Provision of a Company Motor Car

No taxable benefit arises where employee is using car for business use only or the car is pool car*.
When an employee is provided with a company motor car, of which personal use is made, the taxable
benefit is calculated as a percentage of the motor car’s cost.

Cost of motor car

=list price plus cost of accessories fitted after the purchase of car less capital contribution
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Any discounts given to the employer are ignored. The employee can reduce the figure on which his or her
company car benefit is calculated by making a capital contribution of up to £5,000.

Car benefit percentage

A 2% percentage applies to electric-powered motor cars with zero CO2 emissions.
For hybrid-electric motor cars with CO2 emissions between 1 and 50 grams per kilo meter, the electric
range of a motor car is relevant in determining the car benefit percentage.

Electric Range
130 miles or more 2%
70 to 129 miles 5%
40 to 69 miles 8%
30 to 39 miles 12%
Less than 30 miles 14%

The percentage rates applying to petrol cars with CO₂ emissions up to this level are:
51 grams to 54 grams per kilometer 15%

55 grams per kilometer 16%

The base percentage is 16%, and this applies where a motor car’s CO2 emissions are at a base level of 55
grams per kilometer. The percentage is then increased in 1% for each five grams per kilometer above the
base level, subject to a maximum percentage of 37%.
Diesel cars: The percentage rates are increased by 4% for diesel cars (if they do not meet the RDE2
standard), but not beyond the maximum percentage rate of 37%.
Reduction: The taxable benefit is proportionately reduced if a motor car is unavailable for part of the tax
year.
Contribution: Any contribution made by an employee towards the use of a company motor car will reduce
the taxable benefit.

Pool cars
The use of a pool car does not result in a company car benefit. A pool car is one that is used by more than
one employee and is used only for business journeys (private use is only permitted if it is merely incidental
to a business journey), and where the motor car is not normally kept at or near an employee’s home.

Related benefits:
If running cost is borne by employer along with the motor car such as insurance, repairs, maintenance and
road fund license, then it is said to be an exempt benefit (except for fuel).
If fuel is provided along with non-job-related car, then taxable benefit will arise.

Base figure: For the tax year 2024–25 the base figure is £27,800.
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Percentage: The percentage used in the calculation is exactly the same as that used for calculating the
related company car benefit.

Reduction: The fuel benefit is proportionately reduced if a motor car is unavailable for part of the tax
year.
Contribution: No reduction is made for contributions made by an employee towards the cost of private
fuel unless the entire cost is reimbursed. In this case there will be no fuel benefit.

Provision of driver

The taxable benefit in case of provision of a chauffeur along with non-job related car will be ‘the cost to
employer’.

Van
If van has been given for significant business use & insignificant private use of van (travel between home
and office) constitute exempt benefit. Taxable benefit of van is £3,960 per annum if van is used for
significant private purposes.
Benefit is month apportioned if van is not available for the whole tax year.
Any contribution made by employee is deductible against the benefit figure.
Running cost provided by employer in respect of van is exempt except for fuel and use of driver/chauffeur
if given along with van used for significant private use.

Use of driver/ chauffeur: cost of provision of driver is taxable benefit

Fuel:
Benefit of £757 is a taxable benefit if fuel is provided along with non- job related van
Reduction: The fuel benefit is proportionately reduced if a van is unavailable for part of the tax year.
Contribution: No reduction is made for contributions made by an employee towards the cost of private
fuel unless the entire cost is reimbursed. In this case there will be no fuel benefit.

Scholarship
If scholarships are given to members of an employee's family, the employee is taxable on the cost of
scholarship if they are more than 25% of allocated fund for scholarship.

Exempt Benefit
➢ Payments for private incidental expenses are exempt up to £10 per night when spent outside the UK,
so the allowance does not result in a taxable benefit. Note that the equivalent UK allowance is only
£5 per night.
➢ Up to £8,000 of the relocation costs is exempt
➢ The provision of a place in a workplace nursery does not give rise to a taxable benefit.
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➢ Recreational and sporting facilities are exempt

➢ The provision of meals in a staff canteen
➢ Payments for home working are exempt up to £6 per week
➢ Entertainment and gifts provided by a third party for an employee by reason of his employment. The
cost of gifts from any one source must not exceed £250 per tax year.
➢ Long service awards of up to £50 per year of service. The award must be non-cash award and the
employee must have worked at least 20 years.
➢ Workplace parking.
➢ Medical premium to cover treatment outside the UK
➢ Mobile phones-restricted to one phone per employee
➢ Staff parties, provided the cost per staff member per year is £150 or less.
➢ Works buses and mini buses. A mini bus must have a seating capacity of 9 or more. A works bus
must have a seating capacity of 12 or more.

Allowable Deduction

The general rule for expenses to be deductible from earnings is when they are incurred wholly, exclusively
and necessarily in performing the duties of the employment.
Specific allowable deductions are as follows:
1. Insurance/payment made to cover directors’ and employees’ liabilities
2. Subscriptions/fees to relevant approved professional bodies or trade associations
3. Qualifying travel expenses – costs incurred in travelling for the performance of his duties or/and
travelling to or from a place attended in the performance of duties
• Normal commuting (travelling in between home and office) does not qualify.
• Expenses of travelling from home to client are only deductible if client’s office is not found in the
surroundings of employee’s office.
• Expenses incurred in travelling from office to client and vice versa is deductible
• Relief is available for expenses incurred by an employee working at a temporary location on a
secondment of 24 months or less.
4. Approved Mileage allowance for passengers (AMAP) for the use of employee’s OWN car for
business purposes:
Up to 10,000 business miles @ 45p per mile
Miles over 10,000 @ 25p per mile
Passenger rate @5p per mile

Motorcycles @24p/mile

Bicycles @20p/mile

5. Contributions to a registered occupational pension scheme.

6. Payments to charity under a payroll deduction/payroll giving scheme.
Note: The treatment of contributions to Approved Personal Pension Schemes is exactly like Gift Aid
Donations.
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Payments on Termination, Resignation, Retirement, Redundancy:

Completely Exempt Partially Exempt Completely Taxable

- Statutory redundancy - Ex-Gratia payments are -Golden handshakes (if term

payments (SRP) exempt up to £30,000, of employment was not
but this limit is completed or in case of
-payments for injury, disability restricted with respect Restrictive Covenants)
or death to the amount already
paid under statutory -Payments in lieu of notice
Lump sum amounts received redundancy payment
from a registered pension (any contractual amount)
scheme - Genuine discretionary
payments

Payments on Termination, Resignation, Retirement, Redundancy:

• The £30,000 exemption which applies to certain (ex gratia) payments is not available in respect
of Payments In Lieu of Notice (PILONs). These payments will now be taxable in full if they are
included in contract.

• However, if the payment made exceeds the contractual (decided) payments, the excess will be
exempt under the £30,000 rule. This rule applies to PILONs only.

• Remember!! Ex gratia payments, which are not PILONs, remain eligible for the £30,000
exemption.

Genuine ex gratia payments include:

• Redundancy payments

• Compensation for the loss of office

• Non contractual payments

• Damages for the breach of contract

• Wrongful dismissal

Tax Treatment

• Assessed in the year of receipt

• Taxed after dividend

SHARE SCHEMES
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• Share incentives

Allocation of shares to employees

• Grant of share options

If a director or an employee is granted an option to acquire shares in future at a price set now, in such
case implications will be depending on whether option was approved/unapproved with HMRC’s

Approved SHARE OPTIONS schemes are as follows:

• SAYE

• CSOP

• EMI

Save As You Earn (SAYE) or Saving Related Share Option Plan:

• SAYE scheme allows employee to save regular monthly for a fixed period

• The contributed amount is used to take up options to buy shares which are free from income tax
and NIC.

• Alternatively they can simply take the cash saved.

Conditions
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• The price of shares is fixed at the date when option is granted and it should not be less
than 80% (i.e. discount will not be more than 20%) of the market value at the date of
grant.

• Employees can save a fixed monthly amount up to a maximum of £500. ( More

than£500 can only be saved in case of unapproved scheme)

• The investments are made for 3 or 5 years.

• This scheme must be available to all employees and full time directors, on the same
terms.

• A tax free return is added in the employees account by the way of either interest or
bonus.

• At the time of withdrawal, employee may take the money in cash or he may use it to
buy shares granted to him.

Save As You Earn (SAYE) or Saving Related Share Option Plan:

Tax treatment:

• It’s an approved scheme;

• No tax implications at Grant date.

• No tax implications at Exercise Date. (regardless of employee withdrawing the money in cash or
he using it to buy shares granted to him)

• The only tax charge may be the capital gain tax on the gain on these shares when they are finally
sold.

• The cost of setting up a SAYE scheme incurred by the company is a deductible trading expense
for employer.

COMPANY SHARE OPTION PLAN (CSOP)

CSOP differs from SAYE as:

• Company is allowed to grant options to selected group of employees (unlike SAYE scheme) as
participation in the scheme needs not to be extended to all employees.

• Value of Shares (@ grant date) which could be granted under CSOP is limited up to £60,000 per
employee.

Conditions are;

• Employees could be either full-time or part-time employees but

• Directors must be either full-time director or if not than should at least be working 25
hours a week for the company.
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• Employees already having more than 30% shareholding of the company could not
participate in the scheme.

• Option must be exercised within 3 to 10 years of grant.

COMPANY SHARE OPTION PLAN (CSOP)

Tax treatment:

• There is no income tax or NIC on the grant of CSOP option.

• There is no income tax or NIC on an exercise date.

• Only capital gain tax will apply to the gain/loss of the shares when they are finally sold.

• The cost of setting up a CSOP scheme incurred by the company is a deductible trading expense.

Enterprise Management Incentive (EMI):

EMI is the most flexible approved share option as it allows:

• Company may grant option to selected employee(s) and participation in the scheme (needs not
to be extend to all employees).

• Value of Shares (@ grant date) which is granted under EMI is up to £250,000 per employee.
(Subject to shares options already granted under CSOP).

• Total value of EMI, at any time, is subject to maximum of £3 million in total.

• Company must have less than 250 full time employees, with gross assets up to 30
million and should not be dealing in Property development business or any other
excluded activity.

• Employee must be working for at least 25 hours per week or if less than at least 75% of
his working time should be engaged with that company. (for e.g. if an employee works
20 hours in a week then at least 15 hours (i.e. 75%) are with that company in order to
qualify for the scheme)

• Option must be exercised within 10 years of grant.

• Option could be granted at either discount or premium.

Enterprise Management Incentive (EMI):

Tax treatment:

• No tax implication with respect to the grant date

• If the option was at premium (not at discount) with respect to market value at the date
of grant.

• If the option was granted at discount with respect to market value, then

Benefit in Kind at exercise date = MV at the grant date – Exercise Price

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(For income tax purposes)

Allowable cost will be MV at Grant Date. (For CGT purposes)

Capital Gain tax may apply to the profit on disposal of shares.

BADR implications for EMI Only

• BADR (Business Asset Disposal Relief) is always available on EMI shares regardless of
percentage of holding.

• Period of Ownership of two years is not considered from Date of exercise in case of EMI,
as for EMI it would be counted from the date of Grant of Option.

Share Incentives

These are of two types:

• Approved (e.g. SIP)

• Unapproved

Share Incentive Plan ( SIP)

• Under approved or SIP incentive scheme employer may provide each employee/year as
follows:-

Free shares:

Employer may give shares up to a value of £3,600/employee/tax year to their employees. These are
called Free Shares.

Partnership Shares:
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Employees may be allowed to buy Partnership Shares on maximum of:

• £1800

• Cost will be allowable deduction against employment income (up to maximum of 10% of salary)
in the tax year in which it is paid.

Free Matching Shares:

Employer may then choose to issue further free shares on 2:1 basis to the partnership shares purchased
by employees. These are referred as Free Matching shares.

• Dividend received can be reinvested tax free in further shares ➔ tax free

• No limit on the amount of reinvestment

Share Incentive Plan ( SIP)

Conditions are:

• Plan must be available to all employees of the company or group of company.

• Plan must have no arrangement for loans to employees.

• For tax free advantage plan shares must be held in the plan for at least 5 years.

CHAPTER 5: TRADING PROFITS

Trading profits are chargeable to income tax if earned by UK resident trader. When an individual disposes
of assets, it is not always clear if transactions constitute a trade or not (i.e. capital disposal).
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Where there is doubt as to whether an activity constitutes a trade, a number of key factors have been
identified through judicial decisions, known as the badges of trade. The badges of trade give guidance
about activities constituting trade or not.
Badges of Trade
▪ The subject matter
▪ The frequency of similar transactions
▪ The length of ownership
▪ The way in which the asset sold was acquired
▪ Supplementary work and marketing
▪ A profit motive

As accounting profit is calculated according to international accounting standards, So adjustment

according to taxation rule is needed. There are two ways through which profit is adjusted:
1) Accrual Basis
2) Cash Basis

Accounting profit Xx

+Allowed income X

+Disallowed expenses X

-Allowed expenses (x)

-Disallowed income (x)

Tax adjusted trading profit Xx

Allowable Expenditure: Any expense which has not been deducted in arriving at accounting profit figure
but is deductible for taxation purposes. Following are the examples of allowable expenditure:

• Capital allowance
• Short lease premium payments
• Pre-trading expenditure incurred in the 7 years preceding the commencement of business and of
revenue nature.

Allowable Income: Any income which has not been added in arriving at accounting profit figure but is
permissible for taxation purposes. Following is the example of allowable income:

• If the owner withdraws stock, the drawing should be deemed as sales.

Treatment:

• Add profit, if entry for drawing has been made.

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• Add selling price, if entry for drawing has not been made

Disallowable Income: Any income which has been deducted in arriving at accounting profit figure but is
not deductible for taxation purposes. Following are the examples of disallowed income:

• Profit on disposal of assets

• Bank interest
• Rental income
• Dividend.
• Interest received on overpaid tax
• Capital insurance proceeds.

Disallowable Expenditure: Any expense which has been deducted in arriving at accounting profit figure
but is not deductible for taxation purposes. Following are the examples of disallowed expenditure:

• Expenditure not incurred wholly and exclusively for trade.

• Subscription to professional body and to trade associations are allowed.
• Donations to political parties are disallowed. It is allowed if made wholly and exclusively for trade,
is of reasonable size and must be made to local educational, religious, cultural etc. organization.
• Capital expenditure, initial expenditure if enhancing the value of asset, depreciation, amortization
etc. are disallowed. Repairs are allowable expenditures.
• Entertainment and gifts to employees are allowable expenditure.

• Entertainment to customer/supplier is disallowed while gifts to customers/suppliers is allowed

provided they cost less than £50 per customer/supplier; are not food, drink, tobacco and voucher
exchangeable for goods and are carrying an eye-catching advertisement.
• Appropriation of profit i.e. drawing of funds and interest on capital (in case of partnership) is
disallowed.
• Legal and professional charges relating to trade is allowed while legal and professional charges
related to the acquisition of capital items are disallowed.
• Personal element in business expense is disallowed expenditure.
• Irrecoverable debts and trading provision are allowed while loan to employees written off is
disallowed.
• Gift aid donations are disallowed expense.
• Interest payable over trading loan is allowed. Fees and incidental cost in obtaining loan finance
for trading purposes is also allowed while interest paid on overdue tax is disallowed.
• Fines and penalties are disallowed unless car parking fine incurred by employees.
• NIC 4 is a disallowed expenditure.
• 15% of leasing charges of car is disallowed if co2 emission of car is more than 50 g per km.
• Wages and salaries not paid within 9 months after the end of an accounting period.
Cost of registering patents and trade mark is Allowed

Payment of patents and copyrights Allowed

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Cost of educational courses for Proprietor Allowed if related to update the existing knowledge

Cost of seconding employees Allowed if employee is sent to any charitable

organization or educational establishment

Removal expense to new business premises Allowed if not an expansionary move

Counseling services provided to local redundant Allowed

workers

Loss Due to theft by employee Allowed

Damages paid Allowed if not too remote from the purpose of trade

Payments constituting criminal offences e.g. bribes Disallowed

etc.

Contributions to approved pensions schemes Allowed

Cash Basis
There is a simplified cash basis of adjustment for calculating trading profit of sole traders and partnerships
(limited companies are excluded). This applies automatically unless individual elects for accruals basis.
With the cash basis, receivables, payables and inventory are ignored, and tax-deductible capital and
revenue expenditure will be treated the same – purchases of equipment are simply deducted as an
expense, whilst the proceeds from any disposals are included with receipts. Capital allowances on P&M
are not available as the whole cost is deductible for the assets in the year of purchase. Through the
capital cost of land, building and car are never deductible.
Exceptional case: Cars
Either
The actual running cost and capital allowances are claimable over the cost of car. (Though costs of owning
a motor car are ignored).
OR a business using the cash basis can claim the approved mileage allowances to calculate the deduction
for business mileage. The rate is 45p per mile for the first 10,000 miles, with a rate of 25p per mile
thereafter.

Trading profit (or loss) under the cash basis is therefore calculated as follows:
Receipts (including sale of equipment) xx
xx
Expense payments (including the purchase of equipment)
____
xx
Trading profit (or loss)
____
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There is also a flat rate private use adjustment where business premises are used as a home – typically
where the business is a small hotel or guest house. The private use adjustment for food and light and heat
can be calculated on a flat rate basis according to the number of occupants. For example, with two
occupants the private use adjustment would be £6,000 per year (the relevant figure will be provided as
part of an examination question). The flat rate adjustment does not include other property expenses such
as rent or mortgage (loan) interest.

CHAPTER 6: CAPITAL AALOWANCES

• Capital allowances are tax equivalent of depreciation.
• Capital allowances are calculated using taxation rules.
• Add back any depreciation shown in computing the accounting profit
• Deduct capital allowances from trading profits as they are allowable expenditure.
• However, capital allowances are only available for items qualifying, or treated, as ‘plant’ or machinery.

Plant and Machinery

It is an apparatus, tool or setting through which trade is conducted.
There are two sources of the rules on what qualifies as plant and is therefore eligible for capital
allowances.
Law includes
• computer software/ expenditure on software or data as plant
• moveable partition as they perform office function
Also ‘integral features’ are treated as ‘plant’, e.g.
▪ Cold water and water heating systems
▪ Air conditioning systems
▪ Lighting + electrical systems
▪ Lifts and escalators

The following items are excluded as plant by statute

▪ Building and parts of buildings
- However, utility systems provided to meet the particular requirements of the trade, lifts, alarm
systems and several other items can be plant
▪ Structures with some exceptions: dry docks and pipelines
▪ Land

Capital allowance is calculated according to the period of account for unregistered businesses with the
policy of full period charge in the period of purchase and none should be taken in the period of disposal.

Performa for Capital Allowances

AIA General Special Short life Private Allowances
pool rate pool asset use
asset
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£ £ £ £ £
£
TWDV b/f X X X
Additions:
Not qualifying for AIA or FYA:
Cars (1-50) gm/km) X
Cars (over 50) gm/km) X

Qualifying for AIA:

Special rate pool expenditure X
Less AIA (Max £1,000,000 in (X) X
total)
Transfer balance to special rate X
pool
General Pool Expenditure X
Less: AIA (Max £1,000,000 in (X) X
total ) X
Short life expenditure
Less : AIA (max £1,000,000 in (X)
total)
Transfer balance to general
poor
Disposals (lower of original cost (X) (X)____ ----------- _____
or sale proceeds)
X X X X
BA / (BC)
Small pools WDA
WDA at 18% (X) X
WDA at 6% (X) X
WDA at 6%/18% (depending on (X) (X) X
emissions)
Zero emission cars X

Less FYA at 100% (X) X

Nil _____ _____
TWDV c/f X X X _____
Total allowances X

Amount deducted from

Trading Profit
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Motor Car
• Zero CO₂ emissions FYA@100%.
• CO₂ emissions limit up to 50 g/km. WDA@18%
• CO₂ emissions limit >50 g/km WDA@6%

General Pool: The Written down Value of all the assets are added and displayed in a column known as the
General Pool/main pool. The standard Written down Allowance is then calculated on these assets after
applying AIA. Main pool includes cars with CO2 emission ranging up to 50 g/km without private use and
also those cars which are second hand with zero CO2 emission.
Note: It includes all assets except for:
➢ Special rate pool assets
➢ Assets with private use by a sole trader
➢ Short life assets

Written Down Values (WDVs)

The remainder value of the asset after charging the Written Down Allowances of previous years against
it.

Annual Investment Allowances (AIA)

▪ All businesses are entitled to AIA of £1,000,000 per annum on all assets except for car
▪ £1,000,000 is proportionately increased/ reduced if period of account is not 12 months
▪ Transfer balance after AIA to pool for getting WDAs in the same period
▪ AIA should be utilized against all assets purchased in the accounting period (except cars), in the
following order:
1. Special Rate Pool items
2. General Pool items
3. Short Life Assets
4. Assets with personal use (except for cars)

Written Down Allowances (WDAs)

18% per annum on reducing balance basis allowance is charged on assets in the main pool. The rate is
time apportioned if the Period of account of the individual is more than or less than 12 months.
WDA is given on pool balance after adding current period additions and deducting current period
disposals.
Reduced WDAs can be claimed. This may be done to keep trading losses lower or to preserve personal
allowance.

First Year Allowances (FYAs)

FYA of 100% is available for expenditure on New cars with Zero CO2 emission.
No pro-rating/apportionment is required in short/long accounting periods.
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Disposals
No allowances can be claimed on assets being disposed of during the period of account. Hence assets
disposed are deducted from the relevant column in the pro-forma.
The amount deducted is the lower of
• Disposal proceeds
• Original cost of the asset disposed

Special Rate Pool

Special rate pool consists of
• Long life assets
(Long life assets are those assets who have expected useful life in the business of 25 years or more and
the trader has spent at least £100,000 on such assets in the year).
• Integral features
(It includes electrical and lighting systems, cold water systems, space or water heating systems,
powered systems of ventilation, cooling or air conditioning, lifts and escalators)
• Cars with CO2 emissions over 50 g/km.
Treatment:
AIA of £ 1,000,000 is available on special rate pool (except for cars with CO2 emission of more than
50 g/km. AIA is proportionately increased or reduced according to the number of months present in
a period of account.
Any amount excess of AIA will qualify for WDA @ 6% per annum on a reducing balance basis.
For cars, no AIA is available. They are just entitled to WDA @ 6% per annum.

Non- Pooled Assets

Short Life Assets (SLA)

▪ Those assets which have been purchased with an intention of being disposed of within 8 years of end
of the period of acquisition are called short life assets. An election should be made within two years
of the end of the accounting period of acquisition.
▪ Every SLA is treated separately.
▪ Cars can never be elected as SLAs.
▪ Balancing allowance/balancing charge appears on the disposal.
▪ If a SLA has not been sold within 8 years after the end of the period of acquisition, it is transferred
back to main pool.
From a planning point of view de-pooling is useful if balancing allowances are expected. Election should
be made for an asset to be de pooled.
Inversely, in general, assets should not be de-pooled if asset is likely to be sold within eight years for more
than their tax written down values.

Assets with private use

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▪ Separate column has been allocated to those assets which are used privately by a proprietor (not an
employee).
▪ Every asset is treated separately.
▪ Balancing allowance/balancing charge appears on the disposal.
▪ However, only the business proportion of allowances can be claimed against the Trading profit.

Balancing Adjustments Arise

After deducting disposal proceeds the positive balance left on pools qualify for WDA. Balancing allowances
do not usually arise on the main or special rate pools until the business ceases but balancing charge may
appear, though rarely but if disposal figure exceeds the aggregated value of all assets held under
general/special rate pool column.
When asset that has been kept outside the pool is sold, either positive balance (balancing allowance) or
negative balance (balancing charge) appears. This is either due to the understating or overstating the
allowances during the life of an asset. They are directly treated. Rate is not applied over the balances as
balance is appearing on those assets that have been sold.
Disposal treatments are applied over assets that have been purchased and sold during the same period.

Small Pool WDA

▪ Small balance (up to £1,000 for accounts having 12 months) on main pool and/or special rate pool can
be given WDA equal to balance.
▪ Small balance figure of £1,000 is proportionately increased or reduced according the number of
months present in a period of account

Acquisition on Hire Purchase and Leasing

In case of hire purchase, capital allowances are claimed as legal ownership of the asset has been
transferred but only the cash equivalent price qualifies for capital allowances.
Any amount paid in excess of cash equivalent figure is an interest figure which does not qualify for capital
allowances, rather it is an allowable expenditure for trading profit.
Leased assets do not attract capital allowances. Lease payments are trade allowable expenditures.

Vat inclusive/exclusive treatment: Assets are included in the computation at their VAT exclusive amounts
except for cars which are included at their VAT inclusive figures

Limit of AIA for related business:

• If an individual is running more than one business:

• And those businesses are related for e.g., restaurant & catering etc.

• Tax treatment: There will be one AIA limit of £1,000,000 for all related businesses.

• But if business is unrelated, separate AIA limit of £1,000,000 for every business.
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Structures and buildings allowance

• Relief is given as an annual straight-line allowance of 3% over a 33⅓ year period (33 years and
four months), for newly constructed buildings (construction on or after 29th October 2018)
• Offices, retail and wholesale premises, factories and warehouses can all qualify for the SBA (as
can walls, bridges and tunnels).
• The value of land is excluded, as is any part of a building used as a dwelling house.
• Expenditure which qualifies as plant and machinery cannot also qualify for the SBA. Similarly,
expenditure which qualifies for the SBA cannot also qualify for the plant and machinery annual
investment allowance.
• Where an unused building is purchased from a builder or developer, then the qualifying
expenditure will be the price paid less the value of the land.
• The building (or structure) must be used for a qualifying activity such as a trade or property letting.
• The SBA can only be claimed from when the building (or structure) is brought into qualifying use.
This means that the SBA will be time apportioned for the period when first brought into use, unlike
plant and machinery allowances which are always given in full for the period of purchase.
• A separate SBA is given for each building (or structure) qualifying for relief.

Capital Gains Treatment

• On disposal, the allowances that have been claimed are effectively clawed back by adding them
to the sales proceeds in order to determine the chargeable gain or allowable loss arising.

Basis of Assessment

• From the tax year 24/25 onwards, sole traders and partners are assessed on tax year basis

• So the situation is really easy for those self-employed persons who have got their accounts
ending on either 5th April or 31st of March.

• Trading profits are to be time apportioned if accounts do not end on either 5th April or 31st of
March.

• When a business changes its accounting period or tax year—for example, if it decides to adopt a
different fiscal year or moves from one tax reporting regime to another—there can be a period
where the rules need to be adjusted.

• As there has been a change in the basis of assessment, For the tax year 23/24, transition profits
are to be taken into account

• Transition profits are meant to account for any profits that are "lost" during the period of
change. To summarize: transition profit for a basis period represents adjustments made to a
business’s profit calculation during a transitional period between different tax periods, ensuring
that profits are fairly recognized and taxed without confusion or inconsistency.
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• The standard treatment is for one fifth of the transition profits to be taxed in the tax year 23/24
and then the next four tax years. In ATX UK exam, you will be provided with the amount of
transition profits arising in the tax year 23/24 and the amount already subject to income tax.

• An election to accelerate the taxation of the transition profits might be made.

• Where such an election is made, the amount of untaxed transition profit carried forward will be
spread evenly over the remaining years of five years

CHAPTER 7: TRADING LOSSES

Regardless of whether the period of account totals to a profit amount or loss, it has to be adjusted
according to the tax rules.
Adjustment of Losses
Options available for the adjustments of losses are
– Cary forward: - against future trading profits
– Current tax year: - against total income less interest paid of current year (i.e. loss making year).
– Carry back: - against total income less interest paid of previous tax year.
– Losses in the early years of trade
– Losses on the cessation of trade

Carry Forward
Losses should be carried forward against maximum immediate available profits of the same trade of
future tax years.
– For an indefinite period, losses are carried forward
– Claims should be made within 4 years after the end of the tax year.

Current Tax Year

– Loss can be adjusted against total income less interest paid on qualifying loan of the tax year in which
loss arises.
– It is adjusted to the maximum possible extent.
– Losses can also be carried back against total income less interest paid of previous tax year, to the
maximum possible extent
– Current year or/ and previous year claims should be made within 1 year after 31st January after the
end of tax year
– Losses are adjusted in current tax year and/ or previous tax year in any order. Excess losses are carried
forward against future trading profits. Option of carrying forward of loss can also be taken in isolation.

Claim against Chargeable Gains

• After making adjustment in current year and/ or previous year, loss relief claim can be extended
against chargeable gains of that year
• If claims are made against chargeable gains, then claim is made to the maximum possible extent i.e.
to the extent of available net gains
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• So maximum trading loss to be adjusted against capital gains is lower of trading loss to be relieved
and available net gains (i.e. Current year capital gains less current year capital losses and brought
forward capital losses losses)
• If extended claim is made for current year and/ or previous year then it is compulsory to first adjust
the loss against total income less interest paid of that particular tax year, before relieving it against
the capital gains amount.
Planning Point
Loss relief is to be planned in such a way that maximum tax should be saved

Preferable basis for the adjustments of losses

1. Losses should be saved in the tax year in which higher rates of taxes are imposed
2. Avoid wastage of personal allowance
3. Relief should be obtained on as soon as possible basis

Losses in the Initial Year of Trade

• Losses incurred in the first 4 tax years of trade are called initial year losses.
• Losses can be carried back to previous 3 years against total income less interest paid taking earliest
year first
• Maximum adjustments are made.
• Claim should be made within 1 year after 31st January after the end of tax year

Losses at the time of incorporation: If an unincorporated trade is incorporated into a company and
there were trading losses in the year of incorporation, then incorporation relief will be available.
But only if consideration received in respect of transfer of business asset to company was at least 80% in
form of shares. Under this option loss is carried forward to set off against first available incomes coming
from the company only.
The order of adjustment is first Non-Saving Income, Saving Income & then Dividends.
Losses should be carried forward indefinitely unless the loss is totally adjusted, or company ceases to
trade, or individual sells its shareholding in the company.

Losses on Cessation of Trade

• Loss incurred in the last 12 months of trade is called terminal loss.
• Though normal c/y and previous year adjustment may be applied by making adjustment against total
income less interest paid of current year and/or previous year.
• Though terminal loss relief can also be made

Terminal loss relief

• Terminal losses are first adjusted in the last tax year
• Excess losses are carried back for previous three tax years against trading profits on LIFO basis.

Cap on Income Tax Reliefs

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A cap has been introduced for losses that are offset against a person’s total income for the tax year in
which the loss arose and/or the preceding year. The cap is the higher of £50,000 or 25% of a person’s
adjusted total income. For this purpose, total income is after deducting the gross amount of personal
pension contributions.
The cap does not restrict the loss that can be claimed against profits of the same trade for the preceding
tax year, and any restricted loss can still be carried forward against future profits from the same trade.

CHAPTER 8: PARTNERSHIP
• When an unregistered business is run by 2 0r more persons, it is called a partnership business.
• Partners in a partnership business are independently liable to pay income tax on their individual share
of profit.

Mechanism
• First “partnership” business set its period of account not the individual partners.
• Accounting profit of partnership is adjusted according to same taxation rules which are applicable
over sole traders.
• If individual partners own an asset which is used in business their capital allowance is calculated on
the behalf of whole business and not for just a single partner.
• Then profit is apportioned among partners. In apportioning profit primary focus would be over
allocating salary and interest being derived by partners from partnership business. After allocating
salaries and interest among partners, leftover profit is apportioned according to the profit sharing
ratio.
• Profit sharing ratio, partner’s salary and interest figures may change during the period. Whenever any
one of the above situation happens apportionment is done accordingly to record the proper allocation
of profit
• Afterwards, each partner will be liable to pay tax on his share of profit for the tax year

Treatment of Losses: As each partner is treated as individual person liable to tax, so various loss relief
options are applicable on each partner similar to those applicable on sole traders.
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CHAPTER 9: NIC

Employees, employers and self-employed persons are liable to pay national insurance contribution. Here
are the types of NIC:
NIC

FOR EMPLOYEES SELF-EMPLOYED

CLASS 1 CLASS 1 CLASS 4

PRIMARY SECONDARY

BASED ON EARNINGS: BASED ON EARNINGS

CASH EARNINGS, CASH & NON CASH VOUCHERS TAX ADJUSTED TRADING PROFITS

&EXCESS AMAP RECEIVED OVER AND ABOVE

45p PER MILE

Class 1 primary

• Payable by employees on their gross cash earnings (see below)

• It is applicable over employees whose age is at least 16 till the retirement/ state pensionable
age.

Rates are as follows

• Earnings £1 - £12,570 = 0%
• Earnings in between £12,571 - £50,270 = 8%
• Earnings above £50,270 = 2%
• It is collected through PAYE system by the 22nd of each month

Class 1 secondary: It is payable by employer on the behalf of employees over employee’s gross cash
earnings (see below)
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Rates are as follows

• Earnings £1 - £9,100 = 0%
• Earnings above £9,101 = 13.8%
• Applicable over employees whose age is at least 16 years old n will continue till pensionable age.
• It is collected through PAYE system by 22nd of each month
• Employers are able to claim up to £5,000 relief p.a. from their total class 1 secondary NIC
payments.
• Employment allowance is not available to the companies where a director is the sole employee
or where employers’ contributions are £100,000 or more for the previous tax year

CASH EARNINGS: Cash earnings include:

• Wages, salary, overtime pay, commission, bonus
• Sick pay
• Gratuities
• vouchers exchangeable for cash or goods
• Reimbursement of cost of travel between home and work over 45 pence/mile for business
miles.

Class 1A NIC
• Payable by employer on the behalf of employee
• It is paid at the rate of 13.8% over assessable benefits
• Class 1A is payable for employees whose age is at least 16 years old n will continued till
pensionable age.
• It is payable by 22nd July following the end of tax year

Class 4 NIC
• Paid on taxable trade profits (TATP)
• £1 - £12,570 = 0%
• £12,571 - £50,270 = 6%
• Above £50,270 = 2%
• Paid with income tax under self-assessment (dealt later)
• Class 4 NIC is payable if age of a self-employed person is at least 16 years old and is payable till
state pensionable age.

CHAPTER 10: ETHICS

1. Prospective clients
When we will be engaging a new client then following factors should be considered before accepting the
potential client. The factors need to be considered as follows:

• We must obtain evidence of client’s identity.

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• The primary business address and registered office of each of the client.
• Proof of incorporation.
• Details of the directors and shareholders and the identities of those persons instructing the firm on
behalf of the client.
Moreover,

• We must consider the fundamental principles of professional ethics. This requires us to consider
whether becoming tax advisers to prospective client would create any threats to compliance with
these principles. Fundamental principles of professional ethics are:
- Objectivity
- Professional Behavior
- Professional Competence and Due Care
- Integrity
- Confidentiality

If any threats to these principles are identified, we should not accept the appointment unless the
threats can be reduced to an acceptable level via the implementation of safeguards.

• We should contact client’s existing tax adviser(s) in order to ensure that there has been no
action by client which would prevent the acceptance of the appointment on ethical grounds.
• We must carry out a review in order to satisfy ourselves that client is not carrying on any
activities which may be regarded as money laundering.

2. Conflicts of interest
Conflicts can occur in the following situations:

• Where a member acts for a client and is then asked to act for another party in a transaction
• Acting for both parties in a divorce
• Acting for the employer and their employees
• Where the advisor may benefit from the transaction.
It may be acceptable to act for both parties, as long as the following safeguards are put in place:

• The potential conflict should be pointed out to all of the relevant parties
• Consent should be obtained to act for them
• The firm must have clear guidelines in relation to confidentiality; and
• Should consider the need to use separate teams for each client.
• Alternatively, the firm may consider acting for just one party, or not acting for either party.

3. HMRC Errors or Tax irregularities

If a member becomes aware that the client has committed a tax irregularity:
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• They must discuss it with the client, and

• Ensure that proper disclosure is made.
Examples would include:

• Not declaring income that is taxable

• Claiming reliefs to which they are not entitled
• Not notifying HMRC where they have made a mistake giving rise to an underpayment of tax, or an
increased repayment.
Where a client has made an error, it will be necessary to decide whether it was a genuine error or a
deliberate or fraudulent act. Once an error has been discovered, the member should explain to the
client, the requirement to notify
HMRC as soon as possible, and the implications of their not doing so.

If the client still refuses to make a full disclosure, the member:

• should cease to act for the client

• must then also write to HMRC informing them that they have ceased to act for the client, but without
disclosing the reason why
• Must then consider their position under the Money Laundering Regulations.

4. Tax avoidance or Tax evasion

• Tax evasion is unlawful. A taxpayer who dishonestly withholds or falsifies information for tax evasion
purposes may be subject to criminal proceedings or suffer civil penalties.
• Tax avoidance is the use of legitimate means to reduce the incidence of tax. However, the courts are
wary of schemes or arrangements the sole purpose of which is to avoid tax.

5. Money laundering
• All businesses within regulated sectors must appoint a Money Laundering Reporting Officer (MLRO)
within the firm.
• Where a report is made the client should not be informed as this may amount to ‘tipping off’, which
is an offence

GAAR

• (GAAR) A General Anti-Abuse Rule are made by HMRC to combat tax advantages arising from ‘abusive
tax’ arrangements.
• Arrangements are 'abusive' where they cannot be regarded as a reasonable course of action, for
example, where they include artificial steps or are intended to take advantage of deficiencies in the
tax legislation.
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• If the GAAR applies, HMRC may respond by increasing the taxpayer’s liability, accelerate tax
payments or delay refunds and ignore artificial steps in an abusive scheme.
• A penalty of 60% of the tax advantage obtained through the GAAR can be charged.

CHAPTER 11: PENSIONS

An individual can save additional funds for their retirement by contributing to pension schemes. Tax relief
is given on contributions to a registered pension fund.

There are two types of pension schemes

▪ Personal pension scheme (available to all persons)
▪ Employer’s occupational pension scheme (available to employees only)

Occupational pension scheme can either be a ‘defined benefit ‘arrangement or ‘money purchase’ scheme
while personal pension can only be a ‘money purchase’ scheme.
Defined benefit scheme: guaranteed pension based on earnings and length of service.
Money purchase scheme: No guaranteed amount of pension based on investments which are used to
build up funds contribution.

Personal Pension Scheme

Personal pensions are generally offered by banks, insurance companies and financial institutions.
An individual can contribute any amount, regardless of their earnings, into a personal / private pension
fund/ funds whether they contribute into occupational pension scheme or not. The amount of tax relief
available for contribution is restricted under certain conditions.

Method of Giving Relief

Personal pension contributions are made net of basic rate tax of 20% by individual. The amount of tax
relief offered to the individuals (i.e. 20%) is then contributed by HMRC to the pension scheme.
Additional 20% (40% - 20%) relief is obtained by extending the basic rate band with the gross amount of
contribution.

Net Relevant Earnings

Tax relief is available for pension contributions up to the amount of an individual’s net relevant earnings.
Net relevant earnings=Employment income+ tax adjusted trading profit + income from furnished
holiday letting.
If net relevant earnings are nil then relief is available on gross contributions up to £3,600.

Hence, the maximum amount of gross pension contribution in a tax year on which an individual can get
tax relief is the higher of:
▪ an individual’s earnings for the tax year; and
▪ £3,600

Annual Allowance
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There is no limit over the amount of contribution in a pension scheme but there is a limit on the tax relief
on these contributions.
Annual allowance is £60,000 for the tax year 23/24 & 24/25
Annual allowance is £40,000 for the previous tax years

If the annual allowance limit is not fully used in any tax year then the unused allowance can be carried
forward for up to next three years. The carry forward of any unused limit is possible only if the person is
a member of a pension scheme for that particular tax year.
If the individual is an employee, their employer may make contributions into their personal pension fund
which is an exempt benefit but counts towards the overall limit for obtaining tax relief.
The annual allowance limit for the current year is utilized first and then any unused brought forward limit
from the previous 3 tax years are used on FIFO basis.
Any contribution which is in excess of the current year annual allowance as well as any unutilized
annual allowance of previous 3 tax years, subject to annual allowance charge.

Tapering of annual allowance

The annual allowance is reduced by £1 for every £2 by which a person’s adjusted income exceeds
£260,000, down to a minimum tapered annual allowance of £10,000. Therefore, a person with adjusted
income of £372,000 or more, will only be entitled to an annual allowance of £10,000 (60,000 – ((372,000
– 260,000)/2) = £4,000).
The definition of adjusted income is net income plus any employee contributions to occupational
pension schemes (these will have been deducted in calculating net income) plus any employer
contributions to either occupational or personal pension schemes. For the self-employed, adjusted
income will simply be net income.
Annual allowance charge: Although tax relief is available on pension contributions up to the amount of
earnings for a particular tax year, the annual allowance acts as an effective annual limit. Where tax
relieved contributions are paid in excess of the annual allowance (including any brought forward unused
allowances), then there will be an annual allowance charge. This charge is subject to income tax at a
person’s marginal rates.

Occupational Pension Scheme: An occupational pension scheme is one arranged by an employer for his
employees. The employer generally contributes to the scheme. Some schemes require the employee to
contribute, whereas some are non-contributory.

Method of obtaining relief

The amount contributed by employee is allowable deduction from employment income. If employee
contributes more than their relevant earnings, then relief (i.e. allowable deduction) is restricted up to the
level of earnings
The amount contributed by employer on the behalf of employee has no relevance to the amount of
employee’s earnings. So, any amount can be contributed by employer which is an exempt benefit for
employee.
The total amount of relief, by employee and employer, is subject to annual allowance.
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Annual allowance charge is applied if any relief has been made is in excess of current year as well as
unused brought forward annual allowance of last 3 years.
If an employee makes contribution to both occupational and personal pension scheme then total relief
will be subject to overall limit of annual allowance

Relief for employer

If employer makes contribution on the behalf of employee whether in occupational pension scheme or
personal pension scheme, then contribution is considered to be an allowable expenditure from trading
profits.

Spreading of employer’s contribution

Where there is found to be an increase in the level of contribution by employer over 210%, then the tax
relief is to be evenly spread over a number of years in the following manner
First 110% over the previous year Relieved in the current tax year

Excess of 110%

Less than £500,000 Relieved in the current tax year

Between £500,000 and £1,000,000 Spread evenly over two years

Between £1,000,000 and £2,000,000 Spread evenly over three years

£2,000,000 or more Spread evenly over four years

Pension accessibility
The funds accumulated in the pension scheme can be withdrawn by pensionable age
Earliest age of accessing pension is 55 years

Pensions in case of Death:

• If a person dies, the pension income and/or lump sums will be received by the spouse.
• If the person dies, and he/she has no spouse, it will be received by the children under age 23 till they
turn 23 years old.

CHAPTER 12: OVERSEAS ASPECTS OF INCOME TAX

Overseas Aspects of Income Tax

1. Non-Resident
2. Resident
3. Domiciled / Resident Domiciled
4. Not Resident Domiciled
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Note: Domiciled can be due to three reasons:

• By origin,
• By choice,
• By dependency

Deemed Domicile

Deemed Domicile Status – NEW!!

1. Under the new rule, individuals are deemed UK domiciled where they:

Have been resident in the UK for at least 15 out of the 20 tax years immediately preceding the relevant
tax year. However, residents will not be deemed domiciled if there is no tax year out of those 15 tax
years which is beginning after 5 April 2017.

This rule is announced in finance act 2017 and therefore, if an individual who would become deemed
domiciled due to 15-year rule, but has not been resident since 6 April 2017, will not actually become
deemed domicile unless they come back to UK and become UK resident again.

(As the rule was not announced in FA17, therefore application of this cannot be imposed until he
becomes UK Resident after April 2017)

Incomes

Earned From

UK Overseas

1. Taxable regardless of status of Non-resident: Exempt

individual
2. But personal allowance will be Resident (non-domiciled):
available if: ✓ Taxable on arising basis is automatic
✓ Individual is domiciled in: UK, ✓ But can claim for remittance basis
EEA, Ireland, Isle of Man,
Channel Island Resident Domiciled:
3. Personal allowance will be available if an
individual is resident in UK . ✓ Taxable on arising basis
✓ DTR may be available

Consequences of Being Resident and Non-UK domiciled

R but ND in UK
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UK Income Overseas Income

Always taxable, irrespective Taxable, depends on the amount of

the status of the individual unremitted overseas income
& gains
Arising Basis

< £2,000 ≥ £2,000

• Remittance basis will be • Arising basis will be automatic

available automatically. • Personal allowance will be available
• Personal allowance will be But;
available • Can elect for Remittance Basis
(decision is to be made every tax
year)
•
If elected:
•
• Personal allowance will not be available
• Possible application of remittance basis
charge (RBC) of £30,000/£60,000

If taxed on a remittance basis:

All overseas income = Always taxed as non-savings income (including

interest and dividends) (i.e. taxed at 20%/40%/45%)

DTR available

Remittance Basis Charge

RBC will apply if:

1. Individual is aged 18 years or above in current tax year.

2. Individual is resident but not domiciled.

3. Unremitted overseas incomes are more than £2,000.

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4. Has elected for remittance basis.

5. Individual was resident for 7 out of previous 9 tax years, in this case RBC will be £30,000 per tax
year.

6. If individual was resident for 12 out of 14 tax years, in this case RBC will be £60,000 per tax year.

7. RBC is considered as advance and final tax in respect of nominated unremitted income and so
whenever this nominated unremitted income will be remitted to UK it would be tax free.

8. RBC is paid in respect of every tax year in which such individual claims for remittance basis and
only RBC for that tax year will be paid.

Splitting a tax year

✓ The split year basis (SYB) applies automatically if conditions are satisfied; means no claim is to
be made.
✓ It is not possible to dis-apply the SYB.
✓ If an individual is non-UK resident for the tax year under the automatic tests or sufficient ties
tests: then,
➢ The SYB cannot apply to that year.
➢ The individual is non-UK resident for the whole year.
Accordingly, for the SYB to apply, the individual must be UK resident in the tax year under the
automatic tests or the sufficient ties tests.
Leaving the UK

SYB applies in the current tax year if the individual:

• Is UK resident in previous year, and

• Is UK resident in the current tax year, and
• Is not UK resident in the following year, and
• Leaves the UK part way through the current tax year for one of three reasons below.

Individual leaves the UK and: Overseas part starts from:

1. Begins working abroad:

Date starts overseas work
- Full time overseas.
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2. Accompanies or later joins their partner abroad to

continue to live with them: Later of the Date

- As their partner leaves the UK and satisfies the full ✓ Partner starts overseas work, or
time working abroad situation 2 above in the current ✓ Joins partner
year or previous year

3. Ceases to have any UK home:

- And move abroad permanently.

Date ceases to have a UK home
Note: where the SYB can apply under more than one of
the above situations, priority is given in the order above
(i.e. situation 1, 2 and 3)
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Arriving in the UK

SYB applies in the current tax year if the individual:

• Is not UK resident in the previous year, and

• Is UK resident in the current tax year
• Arrives in the UK part way through the current tax year for one of the reasons below.

Individual arrives in the UK and: UK part starts from:

1. Acquires a UK home:

- Did not have sufficient ties in the UK to be UK Date acquires UK home

resident prior to acquiring a UK home

2. Begins working in the UK:

- Full time Date starts work in UK

- For ≥365 days continuous days.

3. Ceases work abroad and returns to UK:

- Is resident in the UK from the following tax Date individual stops working overseas
year

4. Accompanies or later joins their partner in

UK to continue to live with them:
Later of date
- The partner is spouse, civil partner or
person with whom they have lived as if ✓ Partner stops overseas work
married/civil partners at some point during
the current or previous tax year ✓ Joins partner in UK

- Is resident in UK from the following tax year

Note: where the SYB can apply under more than one of the above situations, priority is given to the
situation which results in the smallest ‘overseas part’.

Calculation of Overseas Income

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Source of Overseas Income Basis of Assessment

✓ Income grossed up for overseas tax suffered

Dividends, rental income and ✓ UK residents owing shares in an overseas company will treat the
interest grossed up overseas dividends just like UK dividends

✓ DTR may be available

✓ Calculate trading income as in the UK

✓ Special rules apply for travelling expenses

(For trading & employment income “) travelling cost of up to

two return trips for the family of an individual (either trading or
Trading Income from business
working abroad) gap of at least 60 days is allowed to be
wholly abroad
deducted from relevant income. i.e. allowable expense for
trading/ allowable deduction in employment.

✓ Income grossed up for overseas tax suffered

✓ DTR may be available

✓ Overseas Pension income is taxable.

Pensions (Non -saving) ✓ Income grossed up for overseas tax suffered.

✓ DTR may be available

✓ Assessment rules are basically the same as for other overseas

Employment Income income

Note: Income will be exempt if he becomes non-resident.

Taxation of Trust chapter-18

CHAPTER 13: INCOME TAX ADMINISTRATION

Introduction to self-Assessment: Self-assessment is the system of tax collection of tax payable (i.e. the tax
which has not been paid through tax at source deduction process)
Each individual is required to provide the information about his/her tax liability by completing tax return.

Filing of Return
Individual has to file his tax return whether he knows how to calculate tax liability or not. Though individual can compute
his own tax liability but HMRC can do so on the behalf of individual if he wishes them to do so. In case of online/ electronic
filing, the calculation of tax is done automatically as a part of online filing process

The deadline for filing of tax return is as follows

Online filing 31st January after the tax year. i.e. for tax year 24/25, due date will be 31st
January 2026.
Paper based filing 31st October after the end of the tax year. i.e. for the tax year 24/25, due
date will be 31st October 2025.

The tax return covers income tax, class 4 NIC and CGT liabilities for the tax year

Penalties on late filling of return:

Up to 3 months £ 100
3 – 6 months £100 + £ 10/day (max 90 days)
6 – 12 month above fixed penalties+ 5% of tax due (minimum 300)
>12 months above fixed penalties + 10% of tax due

Notification of Chargeability to Tax: Taxpayers who do not receive tax return are obliged to inform HMRC about
chargeability to tax
Notification should be made within 6 months after the end of the tax year.
That is 6th October 2025 for the tax year 24/25. Failure to do so will lead to standard penalty

Errors & Mistakes: Errors can be corrected by either individual or HMRC.

Individual:
Within 12 months after 31st January following tax year. i.e. by 31st January 2027 for the tax year 24/25.
HMRC:
Within 9 months after actual filling dates
Errors include arithmetical errors or errors of principle. Appeals against any amendment to error should be made to tribunal
within 30 days.

Claims: If an error is discovered later then taxpayer can make a claim for the recovery of overpaid tax. Claims should be
made within four years after the end of tax year. I.e. by 5th April 2029 for the tax year 24/25.
Claim should be made for relief, allowance or repayment through tax return

Determination: HMRC may issue determination if return is not filed by the due date. Determination is raised within 3 years
after 31st January following the tax year and is treated as self-assessment for individual.
Determination can only be replaced if actual tax return is filed by the individual

Compliance checks: HMRC has a right to enquire into return to verify the completeness and accuracy of return.
Taxation of Trust chapter-18

Enquiry: Reason for making inquiry can be of having suspicion about fraud or negligence resulting in under declaration of
result or on randomly basis etc.
Notice for enquiry should be raised within 12 months after the actual date of filing.

Discovery assessment: Discovery assessment can be raised at a later date if tax has been substantially reduced and HMRC
has got sufficient evidence about it. Discovery assessment should be raised within 4 years after the end of the tax year. For
careless error this limit is extended to 6 years and 20 years in case of deliberate error.

Records: Record includes all receipts and expenses, information about the purchase and sale of goods and the supporting
documents relevant to business transactions. Records should be kept for 5 years after 31st January following the tax year.
I.e. till 31st January 2031 for the tax year 24/25.
Failure to keep records will lead to the maximum penalty £ 3000/year

Standard Penalty
Standard penalty is charged on the filing of incorrect return or late notification of tax liability. Standard penalty depends on
tax payer’ behavior.
Behavior Maximum Minimum (with Minimum (with
unprompted prompted disclosure by
disclosure by taxpayer)
taxpayer)
Genuine mistake NIL NIL NIL
Failure to take reasonable care 30% NIL 15%
Deliberate error 70% 20% 35%
Deliberate error + concealment 100% 30% 50%

Payment of Tax
For taxpayers with business, payments on account are required.

Due dates of payment

31st January of the tax year
These are called payments on account
31st July after the tax year

31st January after the tax year balancing figure

Payments on account are based on 50% of last year’s tax payable and NIC 4.

Claim to Reduce POA’s

POA’s can be reduced if current year tax payable is lesser than previous years.
Then POA’s are based on 50% of projected result.

Claim to Avoid POA

POA’s can be avoided.
• If previous year tax payable and NIC 4 is ≤ 1000. OR
• If at least 80% of previous year’s tax liability has been paid through tax at source deduction process.
Taxation of Trust chapter-18

Interest and Penalties

➢ Interest is received at 4.25% on overpaid taxes. It runs from the date of payment till the date of
repayment/adjustment
➢ Interest is charged on overdue/underpaid taxes @ 7.75% (applied on POA & balancing figure). It runs from the due
date till the date of payment.
➢ Additional penalty is imposed on overdue balancing figures.
≤ 28 days 0
th
≥ 28 day — 6 months 5% of balance
th th
>6 — 12 month 10% of balance
≥ 12 months 15% of balance

Dishonest Conduct by Tax Agents

A single penalty regime has been introduced for dishonest conduct by tax agents. HM Revenue and Customs can investigate
dishonest conduct, and apply a penalty of up to £50,000 where there has been dishonest conduct and the tax agent fails to
supply the information or documents that HM Revenue and Customs has requested.

PAYE System: Mostly tax in respect of employment income is deducted under the PAYE system. The objective of the PAYE
system is to collect the correct amount of income tax and NIC class 1 primary for the year. Tax deducted under PAYE should
be deposited to HMRC by 22nd of the following month.

For employers whose average monthly collection under PAYE system is lesser than £1,500 are allowed to make quarterly
payments. These payments are due on 22nd July, 22nd October, 22nd January and 22nd April.

Real time reporting: Employers are required to send earnings, income tax and NIC information to HM Revenue and Customs
electronically either at or before the employees are paid (either weekly or monthly)
Employers are charged a penalty, on monthly basis, if their final real time submission for a tax year is made late.

PAYE forms:
FORMS Details No. of copies Due date of submission

P45 Applied when an employee 4 copies are produced. One copy Whenever employee
leaves any employment is given to previous employer, leaves.
one is sent to HMRC, one is
retained by employee and last
one is given to new employer

P60 Year-end details of Triplicate copies are made. 2 31st May following the
earnings and benefits given copies are given to HMRC and tax year.
to employees one copy is sent to employee.

P11D Summary of benefit 2 copies are produced.one copy 6th July following the tax
is sent to employee and other to year.
HMRC

CHAPTER 14: CGT

CGT is applicable when there is a
Taxation of Trust chapter-18

a) Chargeable disposal of a
b) Chargeable asset by a
c) Chargeable person.

a) A chargeable disposal includes:

• Complete disposal/transfer of ownership of asset
• Part disposals
• Destruction of asset
• The gift of assets/undervalued sales to connected person
However, the transfer of an asset between spouses (and registered civil partners) and transfers upon death are exempt
disposal.

b) All forms of property are chargeable assets unless exempted. The most important exempt assets are as follows:
• Certain chattels (see later)
• Motor cars
• UK Government securities (Gilts)
• Foreign currency disposal kept for personal use
• Decoration for velour
• ISA
• National saving certificates and qualifying corporate bonds

c) When disposals are made by UK resident individuals and companies then it is said to be made by chargeable person.

Basic Computation
For individuals the basic CGT computation is quite straightforward and is done according to the tax year.
Proforma

Disposal proceeds xxx

Less incidental cost of sale (xx)

Net proceeds xxx

Less : allowable deduction/expenditure

Purchase cost (xx)

Incidental cost of purchase (xx)

Capital expenditure (xx)

Gain Xx

Key Elements

Disposal proceeds: The amount of consideration received for the asset is the disposal proceeds. Unless asset has been sold
to a connected person below its market value, in that case market value is taken.
The date on which contract is made is taken as the date of disposal.
Taxation of Trust chapter-18

Incidental cost of disposal: The cost which is incurred for the sake of disposal is called incidental cost of disposal and it
includes:
• Fees and commissions for professional services
• Advertising costs
• Legal costs
• Estate agency fees etc.

Allowable expenditure
• The purchase cost/acquisition cost of the asset.
• If asset was acquired as a gift at an undervalued consideration between connected persons then market value at the
date of gift is taken as purchase price.
• If asset was acquired on death, then market value at the date of death (probate value) is taken as purchase price.
• Expenditure on enhancing the value of the asset and is being reflected in the state and nature of asset.
• Expenditure that has been incurred for the sake of purchase of asset is called incidental cost of purchase.
• E.g. expenditure incurred to establish, preserve or defend taxpayers’ title to the asset.
• Repairs, maintenance and insurance (i.e. revenue expenditures) are not allowable.

Determination of taxable gains

Total chargeable gains for the year x
Less: Current year losses (x)
Net chargeable gain x
Less: annual exemption (3,000)
Less: brought forward losses (x)
Taxable gain/nil X/nil

Administrative Aspect

Rates of CGT: The rate of CGT is dependent upon two factors:

▪ Level of a person’s taxable income

▪ Whether the gain is related to the disposal of residential property or not
Taxable gains are taxed at the lower rate of 18% where they fall within the basic rate tax band of £37,700, and at the
higher rate of 24% if the gain is arisen over the disposal of residential property. Taxable gains, other than those related to
residential property, are taxed at the lower rate of 10% where they fall within the basic rate tax band of £37,700, and at
the higher rate of 20% where they exceed this threshold. The basic rate band is extended if a person pays personal
pension contributions or makes a gift aid donation.
Due date for the payment of CGT: CGT is collected as part of the self-assessment system and is collected as lump sum
amount by 31 January following the tax year (unless residential property is sold). Therefore, a CGT liability for the tax year
2024-25 will be payable by 31 January 2026.

Capital Losses: Current year capital losses are set off against any chargeable gains arising in the same tax year to the
maximum extent, even if this results in the annual exempt amount being wasted. Any unrelieved capital losses are carried
forward, but in future years they are relieved after making an adjustment of annual exempt amount.

Transfer between Spouses: Transfers between spouses and registered civil partners do not give rise to any chargeable gain
or capital loss. The donee acquires the asset at the same cost (i.e. acquisition cost) for which asset was acquired by the
donor (spouse).
Taxation of Trust chapter-18

It is a good planning point if the recipient/donee of the asset is paying tax at lower rates or where donee has unused annual
exemption or any unused capital losses (either in the current tax year or brought forward tax year) which could lead to the
reduction of capital gains taxes.

SPECIAL RULES RELATED TO CAPITAL GAINS TAXES

Part Disposals
• When just part of an asset is disposed of then it is said to be a chargeable event related to the part that has been sold.
• The cost must be apportioned between the part disposed of by applying the following formula
Total cost × MV of the sold part
MV of the sold part + MV of the part retained

No apportionment is done if any cost relates entirely to the part that has been sold Small Part Disposal
Criteria for Small Part Disposal (land & building):
If proceeds received from part disposal are;
▪ Less than or equal to 20% of the market value of full asset AND
▪ Total proceeds received by individual during the tax year from sale of all land and building should not exceed
£20,000

• If elected as small
No Calculation of gain or loss is required at the Disposal Date.
Rather New Reduced cost will be calculated as Follows

Original Cost (Full asset) xxx

Less Proceeds (of Part Disposal) (xxx)
New Base Cost xxx

Chattels
A chattel is tangible moveable property (e.g. furniture, paintings, jewelry, sculptures, moveable P&M etc.) Wasting
chattels are exempt from CGT. A chattel is said to be wasting if its useful life is either equal to or less than 50 years. Special
rules apply to chattels if a chattel is not a wasting chattel i.e. having a life of more than 50 years.

Chattels

Personal Business
Taxation of Trust chapter-18

(Tangible, movable property) (Movable P&M)

Antiques, paintings Business Plant &

Machinery
& expensive decoration items
(Except for heavy,
immovable, industrial P
& Machinery)
Case 1 = Proceeds & Cost < £6000 Exempt Asset

❖ Sold at Gain:
Case 2 = Not Examinable Case 1 & Case 4
Case 3 = ❖ Sold at Loss:
Reduced to Nil
Case 4 = Proceeds & Cost > 6000 = Normal

Chattels with capital allowances

• No adjustment for loss is made if loss arises on the chattel over which capital allowances have been claimed, because
loss has already been adjusted against trading profits in terms of balancing allowance.
• Gains on such chattels are taxable in a normal way.

Other Wasting Assets

A wasting asset is one which has a remaining useful life of 50 years or less (e.g. copyrights, patents, license, immoveable
machines etc.). The cost of such an asset must be adjusted for the expected depreciation over the life of the asset.

Allowable Cost for Leases

Short lease Long Lease

Up to 50 years more than 50 years

Allowable Cost: Normal Calculation

Total Allowable Cost x % of Remaining useful life

% of Total useful life

* Percentage to be used from lease % table given in paper

Destroyed Assets
If an asset is lost or destroyed then it’s a chargeable event and anything which has been received against this asset is treated
as disposal proceeds.
Rollover relief can be claimed if insurance proceeds are used to purchase replacement asset within 12 months after the
receipt of insurance proceed.
Taxation of Trust chapter-18

If the asset is not insured, even then the loss/destruction of asset is a chargeable event. In this case disposal proceed will
obviously be nil, thus generating capital loss.

Damage of an Asset
• Whenever an asset gets damaged, chargeable event takes place only if insurance proceeds are received against it. To
determine cost related to the part against which insurance proceeds are received; part disposal formula is applied
Original Cost xxx
Insurance Proceeds (xxx)
Reinvestment xxx

Adjusted Allowable Cost xxx

Shares
As shares disposed of might have been purchased at different times for different cost, so it is difficult to identify exactly
which shares have been sold in order to determine the cost of sold shares and hence their gains/losses.
Disposals of shares are matched with purchases on the basis of following share matching rule:
• Shares purchased on the same day as the disposal.
• Shares purchased within the following 30 days on FIFO basis. (It is meant to prevent a practice known as bed and
breakfasting. A person might sell shares at the close of business one day and then buy them back at the opening of
business the next day).
• Shares in share pool.

How to determine MV of the sold share

Where the shares are disposed of by way of a gift rather than being sold then it is necessary to establish a market value
figure to be taken in place of disposal proceeds.
MV of a share can be determined by taking the average of quoted values (at the date of disposal) of the shares.
= highest quoted value + lowest quoted value
2
Bonus issue: No additional cost is involved when bonus shares are issued. The only thing that changes is the number of
shares held.

Right issue: The new shares are offered to the existing shareholders at a price which is less than the MV, which is why the
cost figure will also have to be adjusted along with the number of shares

Takeover / Reorganization

Reorganization: A reorganization involves the exchange of existing shares in a company for other shares of another class
in the same company.

Takeover: A takeover occurs when a company acquires shares in another by issuing:

• Shares
• Loan notes
• Cash

Consideration Received

▪ Shares Only
Taxation of Trust chapter-18

It would be qualifying share for share disposal. Cost of original shares will be equivalent to base cost of new shares (new
shares comes into the shoes of old shares)

▪ Cash & Shares

In this case we should consider whether the cash proceeds should be considered as small, by fulfilling any of the following,

If proceeds received are less than or equal to

• £3,000
Or
• 5% M.V of total consideration received

If above criteria are fulfilled, then new base cost will be calculated as follows:
No gain is calculated, rather the original cost of shares is adjusted.

Original cost (of original shares): xxx

Less: Cash Proceeds: (xxx)
New Base Cost xxx

Gain of cash proceeds will in this case be deferred till sale of other considerations (i.e. ordinary / preference/loan notes).

If criteria do not get fulfilled; then

Gain against cash proceeds will be immediately chargeable in the year of takeover.

▪ QCBs
An Individual may take QCBs instead of share.
If loan notes (QCB) are received in exchange of old shares, then on their ultimate disposal, gain on loan notes would be
exempt as they qualify as QCB.
But a deemed disposal will occur at the time of takeover and its gain will be frozen at that time but later on eventual
disposal of QCBs, that old gain will crystalize and hence chargeable
Securities

Qualifying Corporate Bond (QCB)

It is an exempt asset for CGT. Any security/loan note which fulfils following conditions will be considered as QCB;
1. It was issued by the company / acquired by the individual after 13th march 1984.
2. It was issued in £ sterling.
3. Will be redeemable in £ sterling only.
4. It must not be convertible into ordinary / preference shares.

Sale of Right Nil Paid

When an existing shareholder is offered further shares on the basis of existing shareholding at a price below market value
(Right Issue) but he sells his right without acquiring any further shares , that’s called sale of right nil paid.

Criteria for small part disposal of Right Nil Paid

If proceeds received from the sale of Right Nil Paid is either;
1. Less than or up to 5% of the market value of shares upon which right was issued
OR
2. Amount received was £3000 or less.
Taxation of Trust chapter-18

• Then it is considered to be a small disposal

• Where the disposal is not considered to be a chargeable disposal at the time of the sale of rights nil paid and sale
proceeds received are deducted from the cost of the original shares thus creating a new base cost of these shares.
• Where the disposal is not said to be small, then deemed part disposal of original shares held is said to take place by
using the following formula for determining the cost:

COST x A
A+B

Where,

A = Proceeds
B= MV of the shares after the right issue.

Negligible Value Claim

If value of an asset becomes negligible for whatever the reason and taxpayer want to realize the capital loss of such an asset
without selling it, in this case negligible value claim should be made.
Where such claim is made, tax purposes, asset would deem to be sold and reacquired at its market value thus realizing the
capital loss.

The deemed disposal could be treated to be occurring at either of:

1. Date on which claim was made.

2. Any of the previous two tax years but if value of asset was negligible at that time as well.

Capital gains tax reliefs: There are various reliefs available to individuals which are claimed to defer the gains to future tax
years (hence deferring the tax liabilities). On the other hand, there are various reliefs which either exempts the whole or
part gain.

Business asset disposal Relief

• A reduced CGT rate of 10% applies if a disposal qualifies for business asset disposal relief. This rate applies regardless
of the level of a person’s taxable income.
• It is applicable on the following situations:

➢ Disposal of the whole or substantial part of the business

➢ Disposal of individual asset which has been used as part of someone’s trade and that trade is now ceased.
➢ Shares in a personal trading company. A personal company is one where the shareholding is either equal to or
more than 5% and that shareholder had also been an employee/officer of that company
• Business/Assets/shares must have been owned for two years prior to the date of disposal in order to get business asset
disposal relief.
• Relief is only available in respect of chargeable gains arising from the disposal of assets used for the purpose of the
business. This will exclude chargeable gains arising from investments.
• The relief covers the first £1 m of qualifying net gains that a person makes during their lifetime.
• Net gains are taxed at the rate of 10%, regardless of any band
• Gains in excess of the £1m limit are taxed in a normal way.
Taxation of Trust chapter-18

• Associated disposal: BADR also applies to the assets sold by individuals which were being used either in their personal
trading company or partnership, provided no rent has been charged, in case where the individual sells all or part of the
partnership interest.
• Any available basic band will be utilized by gains qualifying for business asset disposal relief and then against gains none
qualifying for business asset disposal relief.
• The annual exempt amount and any capital losses should initially be deducted from those chargeable gains which do
not qualify for business asset disposal relief (giving preference to any residential property gains). This approach could
save capital gains tax at 20% (18% or 24% if residential property gains are involved), compared to just 10% if used against
chargeable gains which do qualify for relief.

Investor relief: This is the relief for external investors in trading companies which are not listed (unlisted) on a stock
exchange. The purpose of the relief is to cover those gains which are not covered under entrepreneur’s relief. This investors’
relief has its own separate £10 million lifetime limit, with qualifying gains being taxed at a rate of 10%.
To qualify for investors’ relief, shares must be:
• Newly issued shares acquired by subscription.
• Owned for at least three years after 6 April 2016.
• There is no minimum shareholding requirement

Rollover Relief: Where the disposal proceeds of the old asset are reinvested in a new asset, any chargeable gain that arises
can be deferred Rollover relief allows a chargeable gain to be deferred (rolled over).

Conditions for claiming rollover relief

• The old and new assets must be used for business purposes.
• The reinvestment must take place between one year before and three years after the date of disposal.
• All proceeds should be reinvested in order to get full rollover relief.
• Claims should be made within 4 years after the end of the tax year
To qualify for rollover relief both the old asset and the new asset must be qualifying assets. The most relevant types of
qualifying asset are:
• Land and buildings
• Fixed plant and machinery
• Goodwill

It is not necessary for the old asset and the new asset to be in the same category.
• Where the disposal proceeds of the old asset are not fully reinvested in the new asset, the amount not reinvested
reduces the amount of chargeable gain that can be rolled over. Therefore, if the amount not reinvested is greater than
the chargeable gain no rollover relief is available.

Holdover Relief
• Where the replacement asset is a depreciating business asset, then the gain does not reduce the cost of the new asset
but is instead held over.
• A depreciating asset is an asset with a predictable life of either equal to or less than 60 years.
• Conditions for claiming holdover relief are similar to those applicable over rollover relief.
• The only types of depreciating asset that you need to be aware of are fixed plant and machinery and short leaseholds.
• Base cost of asset will not be determined
• Gain would be chargeable on the earliest of:

1) Actual disposal of asset

2) Asset is used for non-business purposes
Taxation of Trust chapter-18

3)10 years after the purchase of replacement asset

• When the asset disposed of was not used entirely for business purposes then the proportion of the chargeable gain
relating to the non-business use does not qualify for either rollover relief or holdover relief.
• A person can elect for business asset disposal relief and display rollover/holdover relief if conditions related to
entrepreneur relief are satisfied.
• And it is also possible to apply business asset disposal relief if any gain has not been covered by rollover/holdover
relief.

Gift Holdover Relief: Gift of chargeable asset is a chargeable event and the burden to pay tax lies upon the donor. However,
Holdover relief allows a chargeable gain to be deferred (held over) when a gift is made of a qualifying business asset and
there is a mutual consensus in between donor and donee of the asset.
The deferral is achieved by deducting the chargeable gain of the donor who has made the gift from the coat of the donee
(i.e. MV) who has received the gift to arrive at the base cost for donee.
Base cost will be used as a ‘cost’ by donee at the time of subsequent disposal of asset by the done.
Holdover relief is also available when a sale is made at less than market value. In this case there will be an immediate charge
to capital gains tax (CGT) where the sale proceeds exceed the original cost of the asset.
Most relevant types of qualifying business asset are as follows:
• Assets used for trade purposes by a sole trader.
• Shares in a personal company (where the individual has at least a 5% shareholding).
• Shares in unquoted trading companies.

Gifts to Trust
If an individual makes a transfer to any trust gift relief will always be available,
- Regardless of asset being transferred is a business asset or not
- Further in case of quoted shares at least 5% shareholding is not required neither company is required to be trading.
- In this case claim would only be signed by donor.
Remember that the market value of an asset is used rather than the actual proceeds when a gift is made below the market
value to a connected person.

General points
• When the asset disposed of was not used entirely for business purposes then the proportion of the chargeable gain
relating to the non-business use does not qualify for gift relief.
• A person can elect for business asset disposal relief and display gift relief.
• And it is also possible to apply business asset disposal relief if any gain has not been covered by gift holdover relief.

Companies holding non business assets

If a gift of personal company shares is made (where shareholding is at least 5%) whether in a quoted company or unquoted
company, and that company is holding non business assets, then gift holdover relief is restricted by the following formula:

Gain × Chargeable business asset

Total chargeable asset

Condition for overseas aspects

To claim hold against gift relief, recipient must have to be resident in the tax year in which he is receiving gift and also
remain resident for the next 6 tax years after the tax year of transfer, otherwise gains which has been deferred would
become chargeable upon recipient at the day before Departure.
Taxation of Trust chapter-18

Exception to the rule: Above mentioned implication does not apply if:
• Individual restates his or her status back within 3 years AND
• He or she still owns the asset

Incorporation Relief
Will be available if;

1. All of the business assets of Un-incorporated trade are transferred to a company on going concern basis.
2. Cash should not be transferred to the newly incorporated company.
3. Incorporation relief is automatic and need not to be claimed, but if an individual do not want to claim incorporation
relief, it could be dis-applied within 2 years of 31st January following the tax year.eg by 31 January 2028 for an
incorporation that takes place in 2024/25.
4. All of the consideration should be received in the form of shares in order to defer the whole gain.
5. But where the proceeds are partly received in the form of shares and partly in the form of cash, incorporation relief
will be restricted. The amount that can be deferred under incorporation relief ca be determined as follows:

I.R = Gain x Share proceeds

Total proceeds

6. With effect from 6 April 2019, the period for which the individual owned the unincorporated business will also count
towards the two year qualifying time period for the sake of applying BADR.

7. This change is particularly interesting where a business is to be incorporated prior to sale. Business Asset Disposals’
relief may now be available on the sale of the shares, even though that sale occurs within two years of the
incorporation of the business.

Disposal of EIS shares/SEIS Shares: If an individual Disposes of EIS/SEIS shares results in

OR
Gain Loss
• Chargeable if sold within 3 years of
purchase It will always be allowable regardless of being
• Exempt if sold after 3 years of sold either within 3 years or not.
ownership.

EIS deferral- Relief

Taxation of Trust chapter-18

1. If an individual dispose any chargeable asset either business or non-business and proceeds were re-invested to
subscribe for qualifying EIS shares, gain could be deferred.
2. Maximum gain that could be deferred will be:

Lower of

Gain Amount reinvested into any lower

Qualifying EIS shares amount, of
Tax payer’s choice

3. EIS shares should have been subscribed not purchased from an existing shareholder.
4. The gain which will be deferred will be holdover till the disposal of EIS shares. (mechanism of rollover does not apply)
5. If shares are sold within 3 years all of the gain on EIS share would become chargeable long with the old ‘frozen/ held
over gain’, however if the shares are sold after three years, then EIS Gain will be exempt. Old Gain however will still
become chargeable.
6. Reinvestment must take place either within one year before or within three years after the disposal of asset.
7. Individual should be UK resident, both at the time of disposal and reinvestment.
8. Restriction of being resident is extended to 3 years after the gain being deferred and so if individual becomes non UK
resident within these 3 years, the gain will become chargeable.

Exception to the rule: If individual becomes non resident because of working abroad temporarily and still owns the shares
at the time of regaining resident status, in this case gain would not be chargeable.
9. Gains qualifying for BADR that are deferred via an investment in EIS shares will still qualify for BADR on becoming
chargeable.

SEIS Exemption
If an individual disposes any chargeable asset and proceeds were reinvested to subscribe for qualifying SEIS shares, in this
case some of the gain would be exempt.

Gain which could be exempted will be the

Lower of

Amount of gain x 50% Amount reinvested into SEIS

Shares (restricted to the maximum
of £200,000) x 50%

Reinvestment must take place either within one year before or within three years after the date of disposal of asset.
Special loss relief upon capital losses of EIS/SEIS shares
If there is any capital loss upon disposal of qualifying EIS shares;
This capital loss could be set off against gains for the tax year just like any other capital loss OR;
This loss could be set off against total incomes of that individual in respect of either same tax year and /or previous one tax
year
Taxation of Trust chapter-18

Above said relief would be available if:

1. EIS shares were sold at arm’s length OR;
2. Where loss arises due to winding up of the company OR;
3. Where loss arises due to making negligible value claims.

Principal Private Residence Relief

Whenever a main residence of individual is sold then any gain appearing on it can be exempt under PPR rules.
A gain on the disposal of a principal private residence is exempt where the owner has occupied the house throughout the
whole period of ownership.

The following periods of absence are also deemed to be periods of occupation:

• Period of up to 3 years for any reason
• Any periods where the owner is required to live abroad due to their employment.
• Period of up to four years where the owner is required to live elsewhere in the UK due to their work. (whether sole
trader or employee)

Deemed periods of occupation must normally be preceded and followed by actual periods of occupation. However, for the
last two points there is an extra-statutory concession which will allow the periods of absence while working overseas or in
the UK to be exempt even if the property is not reoccupied by the owner after the period of absence.
This concession applies only if the individual does not reoccupy the house because the terms of his employment prevent
him from being able to reoccupy it.
The final 9 months of ownership are always treated as a period of ownership.
The individual can elect his accommodation to be principal private residence within 2 years after the commencement of
ownership. Where part of a house is used exclusively for business use then the principal private residence exemption will
be restricted.

Letting Relief: Letting relief will extend the principal private residence exemption where a portion of the property is let out
while the remaining part is occupied by the owner.
It is calculated by taking lower of:
• Gain already exempt under PPR.
• Portion of gain relates to the period of letting which is not covered by PPR.
• £40,000 (maximum).

Payment of taxes where residential property is sold

A payment on account must now be made within 60 days where capital gains tax is payable in respect of a disposal of
residential property. A return must be submitted to HMRC at the same time. The calculation of the payment on account
takes into account the annual exempt amount, any capital losses incurred in the same tax year prior to the disposal of the
residential property, plus any brought forward capital losses. Any other chargeable gains and capital losses incurred
subsequent to the disposal of the residential property are ignored. It is necessary to make an estimate as to how much of
the taxpayer’s basic rate tax band will be available for the tax year.

The residential property gain is still included in the taxpayer’s self-assessment capital gains tax computation following the
end of the tax year, with the payment on account being deducted from the total capital gains tax liability. Any additional
tax is payable on 31 January following the tax year. If a repayment is due, then this will be claimed when the self-
assessment tax return for the tax year is submitted.

A payment on account of capital gains tax has nothing to do with the normal self-assessment payments on account due on
31 January in the tax year, and 31 July following the tax year.
Taxation of Trust chapter-18

Payments in instalments

Case 1 If consideration or proceeds received from the sale of an asset will be received in instalments of more than 18
months, in this case relevant CGT will be paid in shorter of:
1. Eight years.
2. Period during which instalments would be received.
Note: HMRC does not charge any interest because of instalment option.

Case 2: Upon gifts of:

1. Land and share in land
2. Shares of unquoted companies regardless of percentage holding of the donor.
3. Shares of such quoted company in which individual has control

In this case relevant CGT would be paid in ten equal instalments starting from the normal due date.

IHT Deduction against CGT

It will be available on the sale of asset by donee if both of the following conditions are fulfilled at the time of acquisition of
asset:
i. Gift relief was claimed in respect of the receipt of asset.
ii. IHT was paid in respect of the receipt of asset.

If above conditions are fulfilled, donee will be allowed to deduct amount of IHT from the gain on later disposal of the asset.

Capital Gains Tax on the Death of an Individual

CGT is a ‘lifetime tax’. Transfers on the death of an individual are therefore exempt disposals.
The CGT consequences of death are as follows:
• No capital gain or allowable loss arises as a result of the death
• The beneficiaries inherit the assets of the deceased and are deemed to acquire the assets:
o With a base cost equivalent to the market value of the asset at the date of death (i.e. at probate value)
o On the date of death, regardless of the date they actually receive the asset.

Non-UK Residents

Following assets will be chargeable to CGT even if the owner is non-UK resident:
• UK assets used in a trade based in the UK. Gain/loss is calculated normally under this scenario.
• From 6 April 2019, non-UK residents will be subject to CGT on the disposals of all UK land and buildings, and not just
residential properties.

Calculations are done in the following ways:

1. Residential Properties: Residential properties, the gain will be calculated in the normal way;

2. Commercial/Non-residential Properties

a. Non-residential properties acquired before 5 April 2019 and sold after 5th April 2019, the gain will be calculated

i. The gain/loss arrived at by deducting the market value of the property as at 5 April 2019 from the sale proceeds.
Or
Taxation of Trust chapter-18

ii. The whole of the gain/loss calculated in the normal way (by election);

b. Non-residential properties acquired/sold after 5 April 2019, the gain will be calculated in the normal way.

Implications of Reliefs

1. Where the UK land/building is used for business purposes, rollover relief may be available. However, the replacement
asset would have to be UK land/buildings (and not any immoveable plant and machinery).
2. Normally, gift relief is not available where the donee is not resident in the UK. However, where the asset disposed of
is subject to CGT despite the owner being non- UK resident, gift relief will be available regardless of the resident status
of the donee.

CHAPTER 15: STAMP DUTY LAND TAX

Stamp duty land tax: It is payable on;

• The transfer of UK land & property, lease premiums paid under leases in England & Northern Ireland
• Payable by the purchaser
• Based on the value of the property transferred & the type of the property
Non-Residential Property

Value Rate

£150,000 or less 0

£150,001 or £250,000 2%

£250,001 and above 5%

*SDLT applicable on the transfer of non-residential (commercial) transfer of land and building is examinable at ATX level

Exemption from stamp duty land tax

There is no SDLT payable in case of following transfers as they are exempt;

• Transaction not involving consideration i.e. gifts

• Divorce arrangements
• Variation of a will
• Transfer of assets in between members of 75% group of companies

STAMP DUTY TAX: It is payable on;

• The transfer of shares & securities

• Where transfer takes place through formal document, called stock transfer form
• It is levied on the date of transfer document
• Payable by the purchaser
• Charged @0.5% (rounded to nearest £ )
• Based on the consideration ( if greater than £1,000 )
Taxation of Trust chapter-18

STAMP DUTY RESERVE TAX: Applied where the shares or securities are transferred without the document (i.e.
electronically)

• Payable by the purchaser

• Levied on the date of agreement
• Charged @0.5% (rounded to nearest pence )
• Based on the consideration

EXEMPT SECURITIES: Stamp duty is exempt on the following transfer of securities;

• Government securities
• Most company loan stock (but not convertible loan stock )
• Unit trust
• Shares quoted on growth market ( e.g. AIM)

CHAPTER 16: OVERSEAS ASPECTS OF CAPITAL GAINS:

Less than £2,000 Equal to or More than £2,000

• Automatic remittance basis • Arising basis automatic

• Annual exemptions • Could elect for remittance If
available elected:
• Losses allowable - Annual exemption not available
- Gain taxable @ 24%/ 20%
- RBC may apply

Disposal of Overseas Assets

Non-Resident Resident Domiciled

• Exempt • Gain chargeable and

• See exceptions losses allowable
• DTR may be available

Resident Only
Unremitted proceeds
Taxation of Trust chapter-18

Disposal of UK Assets:

• Chargeable if UK resident only or resident & domiciled.

• If Non-UK resident, then exempt. (unless following exceptions apply).

Exceptions;

i) If a UK asset used in a trade based in the UK. Gain/loss is calculated normally

ii) From 6 April 2019, non-UK residents will be subject to CGT on disposals of all UK land and buildings, not just
residential properties. Calculations will be as follows:

a. Residential Properties

The gain will be calculated in the normal way;

b. Commercial/Nonresidential Properties

1. Non-residential properties acquired before 5 April 2019 and sold after 5th April 2019, the gain will be
calculated as either

▪ The gain/loss arrived at by deducting the market value of the property as at 5 April 2019 from
the sale proceeds.

Or

▪ The whole of the gain/loss calculated in the normal way (by election);

2. Non-residential properties acquired/sold after 5 April 2019; the gain will be calculated in the normal way.

3. This exception will apply if both of the following conditions are fulfilled:

• If an individual has been UK resident for 4 out of previous 7 tax years before departure.
&
• Has been Non-UK resident for up to or less than 5 years (temporary not residency)

In this case all the disposals while the period of non-residency of assets owned before departure would become
chargeable in the tax year of arrival (rule applies to both UK & overseas assets).But assets purchased & sold during
the period of being non-resident will still be exempt.

CHAPTER 17: INHERITANCE TAX

IHT is charged when
There is a chargeable person (individuals)
There is a chargeable estate (all assets are chargeable unlike CGT where transfer of certain assets are exempt)
Taxation of Trust chapter-18

And that estate is given away as a ‘gift’ (The terms ‘transfer’ and ‘gift’ can be taken to mean the same thing. The person
making a transfer is known as the donor, while the person receiving the transfer is known as the donee).

A UK domiciled person is liable to IHT in respect of their worldwide assets.

Assets can be gifted during lifetime (LIFETIME TRANSFER) and on death (DEATH ESTATE TRANSFER)

Lifetime Transfer: Lifetime transfer can either be

• PET (Potentially exempt transfers)
• CLT (Chargeable lifetime transfers)

Potentially Exempt Transfers

Any transfer that is made to another individual is a potentially exempt transfer (PET).
PET is exempt during lifetime.
A PET only becomes chargeable if the donor dies within seven years of making the gift. If the donor survives for seven years
then the PET becomes exempt and can be completely ignored. Hence, such a transfer has the potential to be exempt.

Chargeable Lifetime Transfers

Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).
There is no legal definition of what a trust is, but essentially a trust arises where a person transfers asset to people (the
trustees) to hold for the benefit of other people (the beneficiaries). For example, parents may not want to make an outright
gift of assets to their young children. Instead, assets can be put into a trust with the trust being controlled by trustees until
the children get older.

A CLT is immediately charged to IHT based on the rates and allowances applicable to the tax year in which the CLT is made.
An additional tax liability may then arise if the donor dies within seven years of making the gift.

Performa for the Calculation of Lifetime Transfer

Transfer of value x
Less: exemptions
Small gift exemption x
Marriage exemption x
Annual exemption x
Chargeable amount of gift X

Transfers of Value
During a person’s lifetime IHT can only arise if a transfer of value is made. A transfer of value is defined as ‘any gratuitous
disposition made by a person that result in a diminution in value of that person’s estate’. There are two important terms in
this definition:

• Diminution in value: Normally there will be no difference between the diminution in value of the donor’s estate and the
increase in value of the donee’s estate. However, in some cases it may be necessary to compare the value of the donor’s
estate before the transfer, and the value after the transfer in order to compute the diminution in value. This will usually
be the case where unquoted shares are concerned. Shares forming part of a controlling shareholding will be valued
higher than shares forming part of a minority shareholding.

So, transfer of value = Value of donor’s estate before gift

Taxation of Trust chapter-18

Less: Value of donor’s estate after gift

Exemptions
• Transfers to spouses: Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies both
to lifetime gifts and on death.

• Small gifts exemption: Gifts up to £250 per person in any one tax year are exempt. If a gift is more than £250 then the
small gifts exemption cannot be used.

• Gifts in consideration of marriage

This exemption covers gifts made in consideration of a couple getting married or registering a civil partnership. The
amount of exemption depends on the relationship of the donor to the donee (who must be one of the two persons
getting married):
➢ £5,000 by each parent
➢ £2,500 by each grandparent
➢ £2,500 by each of the couple getting married to the other.
➢ £1,000 each by anyone else.

• Annual exemption
Each tax year a person has an annual exemption of £3,000. If several gifts are made during the tax year then this
exemption is used in chronological order. If the whole of the annual exemption is not used in any tax year then the
balance is carried forward to one tax year ONLY. However, the exemption for the current year must be used first, and
any unused brought forward exemption cannot be carried forward a second time. Therefore, the maximum amount of
annual exemptions available in any tax year is £6,000 (£3,000 x 2).

• Normal expenditure out of income

A gift is exempt if it is made as part of a person’s normal expenditure out of income, provided the gift does not affect
that person’s standard of living. To count as normal, gifts must be habitual. Therefore, regular annual gifts of £2,500
made by a person with an annual income of £100,000 would probably be exempt. A one-off gift of £70,000 made by
the same person would probably not be

Nil Rate Band

It’s a limit within which if gift is made, that’s exempt
IHT is payable once a person’s cumulative chargeable transfers over a seven-year period exceed a nil rate band. For the tax
year 2024-25 nil rate band is £325,000, and for previous years it will be provided in exams.
*chargeable transfers: only CLT should be taken into account as it’s the only chargeable transfer during lifetime.

Rate of IHT
IHT is calculated on the chargeable amount of CLT if it exceeds Nil rate band of the year in which asset has been transferred.
If life time IHT is paid by donee then rate is 20%.
But if it has been paid by donor then rate is 25% as it is take as net gift which is reduced by the amount of tax (i.e. gift/80%
× 20%).

Grossing up
In case lifetime IHT has been paid by donor then in this case the loss to the donor’s estate is both the amount of the gift and
the related tax liability. To correctly calculate the amount of IHT payable is therefore necessary to gross up the net gift.
But that’s not the case if IHT has been paid by the donee of the asset. No grossing up is required as the loss suffered by the
donor is just the amount of gift.
Taxation of Trust chapter-18

Death IHT on Lifetime Transfer

All PETs and CLTs which have been made in 7 years prior to the date of death are chargeable to death IHT.

Steps to calculate death IHT on lifetime transfer

• Take gross chargeable amount of gift
• Deduct NIL rate band of the year of death after taking account of cumulative 7 years chargeable transfers before the
date of gift (here chargeable transfer means CLTs and those PETs which are appearing within 7 years before the date
of death. PETs are exempt during lifetime but they become chargeable if donor dies within 7 years of making the gift)
• Rate of 40% is applied on the excess of nil rate band figures.
• Apply taper relief * to reduce the amount of IHT.
• Deduct any tax which has been paid during lifetime (either paid by donor or donee) but this point is only applicable over
CLTs as IHT must have been paid over CLTs during lifetime. As a result IHT payable on death will be reduced. But refunds
are not made if deduction exceeds the amount of tax liability arisen on death.

Taper Relief *
It would be somewhat unfair if a donor did not live for seven years after making a gift with the result that the gift was fully
chargeable to IHT. Therefore, taper relief reduces the amount of tax payable where a donor lives for more than three years,
but less than seven years, after making a gift. The reduction is as follows:
Years after gift Percentage reduction %
Over three years but less than four years 20
Over four years but less than five years 40
Over five years but less than six years 60
Over six years but less than seven years 80

• The taper relief table will be given in the tax rates and allowances section of the exam.

Fall in Value Relief

1. If an individual makes a lifetime transfer (either PET or CLT) and after making transfer, value of asset decreases and
that transfer becomes chargeable upon death, fall in value relief becomes applicable while calculating death IHT on
lifetime transfers.
2. FIV relief will only be available if asset transferred was not a wasting or depreciating in nature.
3. If the asset is retained by donee till the death of donor, FIV relief will be difference in value at the date of transfer and
at the date of death.
4. But if the asset had been sold by the date of death of donor (at arm’s length) relief will still be available but it would be
calculated by taking the difference of value at the date of transfer and date of sale.
5. FIV relief would not have any impact on any other lifetime transfers of donor.

Business Property Relief

BPR will be available on both gifts during lifetime transfers as well as transfers on death i.e. death estate through will.
• BPR will be available upon worldwide property if;
1. Property is Relevant Business Property, and
2. Property was held for minimum period of ownership.

Relevant Business Property

• Upon Gift of unincorporated trade (i.e. sole trade or partnership)➔ in this case BPR will be 100%.
Taxation of Trust chapter-18

• Upon gift of an asset owned by individual but used by Unincorporated Partnership Trade or in a Company Controlled
By Donor and rent is not charged ➔ would attract 50% BPR.
• Upon transfer of shares of unquoted trading company ➔ 100% BPR will be available.
• Upon transfer of securities of unquoted companies, where donor has voting control of the company before transfer
➔there will be 100% BPR.
• Shares and securities of a quoted trading company, where donor has voting control of the company ➔would qualify
for 50% BPR.

Minimum Period of Ownership

A relevant business property will qualify for BPR if it has been held for at least two years preceding the date of transfer.
Exceptions to the minimum period of ownership;

1. Replacement Property: if the property transferred has not been held for two years before the date of transfer, still
BPR will be available if all of the following conditions are fulfilled;
1. Property being transferred was purchased as a replacement of previous relevant business property.
2. Combined period of ownership of both properties should be at least two out of five years preceding the date of
transfer.
3. If both of above conditions are fulfilled, BPR will be available upon lower of:
a. Value of current property
b. Value of previous relevant business property

2. Successive Transfer: if a property transferred was not held for two years before transfer but following conditions are
fulfilled, BPR will be available;
• The property being transferred was received not purchased.
• When transferred first donor qualified for BPR.
• Any of three:
o Either the property was transferred due to death of first donor or;
o Property is now chargeable due to death of second donor or;
o Death of both,

Partial Non-Trading Company

If shares gifted are of such a company which owns business assets as well as any non-business assets, BPR will be applied
upon the following:

Transfer of value x Business Assets of Company

Total assets of company

Withdrawal of BPR
Amount of BPR being calculated and deducted in lifetime calculations will be added back into GCA while performing death
calculations if:
1. The relevant business property is not used for business purposes by the date of death of donor.
2. Business property has been sold by donee by the date of death of donor and replacement business property was not
purchased.

Agricultural Property Relief

Unlike BPR, APR is only available in respect of gifts of agricultural properties situated in UK.
APR will be available if;
Taxation of Trust chapter-18

1. Property is relevant agricultural property.

2. It was held for minimum period of ownership.

Relevant Agricultural Property

• Any land & building which is used for cultivation or animals will be considered as relevant agricultural property,
including farmhouse & farm cottages.
• But APR would only be available in respect of agricultural value of agricultural property, regardless of tenanted or
self-farm.
• If an individual owns shares in a farming company upon transfer of such shares, APR would only be available if
individual has voting control of the farming company, regardless of being quoted or unquoted.

Minimum Period of Ownership

• Self-farm: two years before transfer, 100% APR
• Tenanted land: seven years before transfer, 100% APR
Note: Rate of APR for tenanted land will be reduced to 50% if:
1. Tenancy agreement started before 1st September, 1995.
2. At the date of transfer the owner does not have the right to obtain possession within the next two years.
Note: exceptions to minimum period of ownership are replacement property and successive transfer, same as for BPR, with
two out of five years’ time of combined ownership for self-farmed and seven out of ten for tenanted land.

Withdrawal of APR
Amount of APR calculated and deducted in the lifetime calculations will be added back into GCA in death calculations if:
1. Agricultural property is not used for agricultural purposes anymore.
2. Agricultural property has been sold by donee by the date of death of donor and has not purchased any replacement
agricultural property.

Related Property Rule

For the calculation of transfer of value, ownership of all related parties should be considered. Following are the related
parties;
1. Donor’s spouse or civil partner.
2. Any exempt body that is charity or political party. If property is owned by them at;
a. Date of transfer or;
b. Even if the exempt body sold it, still it would be considered as related property for five years after the date of sale.
In such scenarios, value of estate will be calculated using following formula:
Value of Estate: Value of total related property x A
A+B
Where A = value of donor’s estate
B = value of other related party’s estate

In case of shares; A = number or % of donor’s shareholding

B = number or % of other related party’s shareholding
Note: If market value per share is given in the question then:

Value of Estate = MV per share of total related property x Number of donor shares

Death Estate
A person’s estate includes the market value of every asset which they own at the date of death such as property, shares,
motor vehicles, cash, receivables and other investments including ISA as nothing is exempt for IHT.
Taxation of Trust chapter-18

Exception: A person’s estate also includes the proceeds from life assurance policies even though these proceeds will not be
received until after the date of death. The actual market value of a life assurance policy at the date of death is irrelevant.
• Then if donor had owed money at the date of death, that is deductible from his assets value. Following deductions
are permitted:
1. Funeral expenses.
2. Mortgages on property. Repayment mortgages and interest-only mortgages are deductible. But endowment
mortgages are not deductible as these are repaid upon death by the life assurance element of the mortgage.
3. Payments made to personal representative are not deductible.

• Then deduct the value of any asset which has been transferred to exempt legacy i.e. spouse or civil partner
• Then deduct NIL rate band of the year of death after taking cumulative figure for last 7 years chargeable transfers back
from the date of death. Here chargeable transfers accommodate CLTs (because they are chargeable transfer whether
during lifetime only or during both lifetime and upon death) and all PETs because whatsoever has been transferred
within 7 years prior to the date of death is definitely chargeable.
• Apply the rate of 40% on excess of NIL rate band figures.
• The promise to pay the friend’s legal fee is not deductible as it is purely gratuitous (not made for valuable consideration).
• Unlike capital gains tax, there is no exemption for motor cars, individual savings accounts, saving certificates from the
National Savings & Investments Bank or for government stocks.

Death Estate Proforma

£ £
Freehold Property
x
Less: Mortgage (except endowment mortgage) (x) x
Foreign Property x
Less: Expenses (restricted to maximum 5% of property value) (x) x
Business owned by Sole Trader / Partnership (BPR may apply) x
Farm (APR may apply) x
Stocks and shares (including ISAs) x
Government securities x
Insurance policy proceeds x
Death in service policy x
Leasehold property x
Motor cars x
Personal chattels x
Debts due to the deceased x
Interest and rent due to the deceased x
Cash and Bank on deposit (including ISAs) x
x
Less: Debts due by the deceased (x)
Outstanding taxes (e.g. IT, CGT due) (x)
Funeral Expenses (x)
Free Estate x
Less: Exempt legacies (e.g. spouse, charity, political party) (x)
Net Free Estate (GCE in the absence of GWR and settled property) x

Add: Gift with reservation x

Settled property (interest in an IPDI trust) x

Gross Chargeable Estate x

Taxation of Trust chapter-18

Valuation of Assets for Death Estate

1. Quoted Shares/Securities
Lower of:
a) Lower quoted price + ¼ (Higher quoted price – Lower quoted price)
b) (Highest bargain + Lowest bargain) / 2

2. Jointly Held property

1. Joint Tenants;
• If one dies property would be pass on to the other owner, for example from husband or wife
• Value would be based upon % of ownership

2. Tenants in common;
• If one dies, share would pass in accordance with the terms of their will or in accordance with the rules of
intestacy to a third party.
• Value would be based upon % of ownership and then deduct further 10%

3. Units in Unit trusts

Value to be used will be lower quoted value.

4. Settled Property
• If an individual is life tenant of interest in possession trust (IIP) or immediate post death interest trust (IPDI)
• In such case whatever the value of assets IIP or IPDI holds would become settled property in the calculation of death
estate of life tenant
• Inheritance tax in respect of settled property would be paid by trustees of IPDI and would be suffered by remainder
man.

Single Grossing up
If the residue legatee is an exempt person following would be required: -
Net Chargeable Estate is to be calculated from will of a deceased person by adding the share of chargeable legatees. (NCE)
The value of NCE must be used for calculating IHT but using the following formula:

NCE (in excess of the nil band) x 40/60

Quick succession Relief

When the same asset becomes chargeable for second time because of the two deaths within five years, QSR will be
available on second death. Amount of QSR is treated as a tax credit and will be deducted from Inheritance tax of death
estate. Amount of QSR will be calculated using following formula:

Quick Succession Relief= IHT on first death % QSR

If Duration between both deaths is more than % of QSR

0–1 100
1–2 80
2–3 60
Taxation of Trust chapter-18

3–4 40
4–5 20
5 onwards Nil

Double Taxation Relief

DTR could be provided by any of the following;

1. Bi lateral treaty: in this case UK and overseas country has certain arrangements in place because of which tax payer
would not be suffering any double tax. Candidates in this case would be required to identify either of following
treatments to apply from exam question:
o Property would be either taxable for UK IHT only
o Property would not be taxable for UK IHT as it would only be taxable in the overseas country.

2. Unilateral treaty: In this case UK does not have any double taxation arrangement with overseas countries and so
overseas property of the tax payer would be taxed in both countries, in this case HMRC will allow DTR to be deducted
from IHT liability as a tax credit.
Amount of DTR will be the lower of:
o Overseas tax on overseas property, and
o UK tax on overseas property

Reduced rate of IHT for substantial legacies to charity

A reduced death rate of 36% will be applicable rather than 40% if an individual leaves 10% or more
of the “baseline amount” for qualifying charities.

Baseline is calculated as follows:

Gross Chargeable estate xxx
Less: nil rate band (not RNRB) (xxx)
Add: charitable legacies xxx
Baseline amount xxx

Gift with Reservation

If an individual makes a lifetime transfer and
1. Legal ownership of the asset has been transferred but
2. Donor retains some benefits in the asset transferred
Tax treatment:
1. If the reservation is still in place by the date of death of donor, in this case it would not be considered as lifetime
transfer rather it would be added into donor’s death estate as GWR. (M.V at the time of death will be taken)
2. If the reservation has been lifted before the death of donor in this case it would be deemed lifetime transfer on the
date when reservation was lifted (without annual exemption).

Example:
Taxation of Trust chapter-18

If a person gives his home to his child on condition that he can go on living in it until his death, this would count as a gift
with reservation.

Exception to the Rule

1. When circumstances of donor have been changed and it was not a foreseeable event at the date of transfer.
2. Where donor pays arm’s length consideration for reservation retained.

Deed of Variation
The will of a person could be changed even after death of that person by entering into deed of variation. Following
conditions must be fulfilled;
1. It must be in written form & signed by all beneficiaries of previous & new will
2. There has to be No consideration in return for change in will
3. Should be submitted within two years of death
4. It should state that change was for tax efficiency

Associated Operations: (Anti-Avoidance tax rule)

The associated operations rule may apply where there are two or more transactions which affect the same property and as
a result tax is avoided.
Where tax is avoided by making a series of transactions and the associated operations rule is applied. For example, if an
asset is transferred on piecemeal basis, so that the total value of the individual transactions is less than the value of the
whole asset.
If applied, series of transfers will be ignored for IHT purposes and it would be replaced with one life time transfer which will
deem to occur on the date when last transfer was made.
Exception to the rule; If the above said transfers were within spouses in that case associated operations does not apply.

For example,
Trustees might own some valuable paintings. They could give D, an individual, custody of the paintings for several years, on
normal commercial terms (so that there would be no gratuitous intent). The trustees' interest in the paintings would be
reduced in value, because someone else had custody of them. The trustees could then give an interest in the paintings to
D's son. The value of what was given to D's son would be lower than it would otherwise have been, saving tax. HMRC would,
however, retrieve the tax by treating the arrangement with D and the gift to his son as associated operations.

Transfer of a Spouse’s Unused Nil Rate Band

Any unused nil rate band on a person’s death can be transferred to their surviving spouse (or registered civil partner) and
is used by the other spouse on his/her death.
A claim for the transfer of any unused nil rate band should be made within 2 years after the death of first spouse and is
made by the personal representatives who are looking after the estate of the second spouse to die. The amount that can
be claimed is based on the proportion of the nil rate band not used when the first spouse died. Even though the first spouse
may have died several years ago when the nil rate band was much lower, the amount that can be claimed on the death of
the second spouse is calculated using the current limit of £325,000.

Advantages of Lifetime Transfers/ Planning Aspects

Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.
• The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make gifts of assets that are
expected to increase in value such as property or shares.
• A PET is exempt during lifetime and will eventually be completely exempt if donor dies after seven years.
Taxation of Trust chapter-18

• A CLT will not incur any additional IHT liability after seven years.
• Even if the donor does not survive for seven years, whether in case of PET or CLT, taper relief will reduce the amount of
IHT payable after three years.

Disadvantage:
From social perspective people might not be interested in transferring assets during lifetime and would want to enjoy assets
themselves at maximum.

Skipping of generation (Planning point): Another way of avoiding IHT is achieved by not transferring the estate to the next
generation (i.e. children, if they are independently wealthy) but by transferring the estate to the 3 rd generation. So when
2nd generation dies, no IHT is imposed as nothing has been transferred to them and IHT is delayed till the transfers, whether
lifetime or upon death, are made by 3rd generation.

Payment of Inheritance Tax

Chargeable lifetime transfers

The donor is primarily responsible for any IHT that has to be paid in respect of a CLT. However, a question may state that
the donee is to instead pay the IHT. The due date is the later of:
• 30 April following the end of the tax year in which the gift is made. (if gift is made in between 6th April to 30th September)
• Six months from the end of the month in which the gift is made. (if gift is made in between 1 st October to 5th April)
Obviously, donee is responsible to pay death IHT on lifetime transfer and the due date is six months after the end of the
month in which the donor died.

Death estate
The personal representatives of the deceased’s estate are responsible for any IHT that is payable but this IHT is suffered by
residue legatee
The due date is the earlier of
• six months after the end of the month of death
• The submission of account estate to HM Revenue and Customs.
Where part of the estate is left to a spouse then this part will be exempt and will not bear any of the IHT liability

Residence Nil Rate Band

The nil rate band for the tax year 2024-25 is £325,000.
However, an additional nil rate band has been introduced where a main residence is inherited on death by direct
descendants (children and grandchildren). For the tax year 2024-25, the residence nil rate band is £175,000.
Any other type of property, such as a property which has been let out, does not qualify for the residence nil rate band.
The value of the main residence is after deducting any repayment mortgage or interest-only mortgage secured on that
property. If a main residence is valued at less than the available residence nil rate band, then the residence nil rate band is
reduced to the value of the residence.
Tapered withdrawal of the RNRB
The RNRB will be withdrawn:
• From estates with a net value (before deducting APR, BPR and exemptions) exceeding £2 million
• At a rate of £1 for every £2 exceeding the threshold.

The RNRB will therefore be reduced to nil when the net estate is £2.35 million or more
Taxation of Trust chapter-18

Planning points
Lifetime transfers are considered better from taxation point of view. It is mainly because of the following treatments:

• Market value at the point of transfer is considered. As value gets locked with respect to the date of transfer, that’s
why lower amount of taxes is imposed
• Small gift exemption, marriage exemption and annual exemptions are available against lifetime transfers
• Taper relief is available while calculating death IHT on lifetime transfers where asset has been gifted at least 3
years ago

Will Planning:

If Nil Rate Band available, transfer to chargeable legacies up to amount of NRB available. Transfer to grandchildren when
children are wealthy to avoid IHT on one generation

Overseas aspects of IHT

An individual’s worldwide assets would be chargeable if individual is UK domiciled.
But if a person is non-UK domiciled, only UK property would be chargeable to IHT.

Deemed Domiciled (This concept is only for IHT)

Under the new rule, individuals are deemed UK domiciled where they:
1. have been resident in the UK for at least 15 out of the 20 tax years immediately preceding the relevant tax year
2. An individual who has been UK domiciled and moves abroad also changing its UK domicile, every such individual will
deem to be UK domiciled for three years after the cancellation of UK domicile.
3. Deemed Domiciled through Election
a. This election can be made during lifetime and in this case it could be effective from date of election or if tax payer
wants seven years before the date of election (but not before 6th April, 2014)
b. This election is also available upon death in which case it must be made within two years of the death
c. If an individual elects for deemed domicile, it is irrevocable although this deemed domicile status lapses
automatically if an individual remains non-resident in UK for consecutive four years.

CHAPTER 18: TAXATION OF TRUST

There are two types of Trust
IIP➔ Interest in possession trust
DT➔ Discretionary Trust

Dividend from IIP is received net of tax @8.75%. The amount received is grossed up by 100/91.25.
Interest from IIP is received net of tax @20%. The amount received is grossed up by 100/80
Income from DT is received net of tax @45%. The amount received is grossed up by 100/45
Taxation of Trust chapter-18

CGT

In life time At Death

Transferred within
i. Asset connected person but
No CGT for donor
Transferred gift relief always
available
To Probate value=costfor
donee
the trust

• Trust is a chargeable person.

• Annual exemption for trust is
ii. While the asset are
£1,500.
owned / heldin the
trust • CGT rate 20%/24% only (calculation
is out of course)

RPT

• Chargeable disposalby
iii. IPDI
trust.
Trust dissolved &asset • No CGT • Transfer within
implications connected person.
transferred because trust • Gift relief always available
to dissolved at because immediately
Remainder man death chargeable to IHT i.eExit
Charge IHT (calculation out
of
[Type here]

IHT

During lifetime At death

Asset • Death estate

Transferred implications
i. Chargeable life • No special
To time transfer implications

the trust

RPT

• Principal chargewill
ii.While asset are apply
• After every 10years
owned/ held into trust IPDI No Principal
• Up to maximum Of
Charge 6% of value of asset
held in trust
(Calculationout of
course)

iii. RPT exist Charge

applies
Trust dissolved & asset IPDI
transferred to • Up to maximum of6%
remainder men • Settled of value of asset held
property by trust (calculation out
In death estate oflife of course)
tenant
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CHAPTER 19: CORPORATION TAX

UK Resident Company has to Pay Corporation Tax according to an Accounting Period.

UK Resident Company
A company is UK resident if either:
Company is incorporated in the UK. OR
Its central management and control is exercised in the UK. (If at least 75% board meetings are conducted
in UK then a company is said to be centrally controlled and managed through UK)

Period of Account
It is the period for which financial statements are prepared. It can be of any length.

Accounting Period
The accounting period is the period for which corporation tax is charged. The accounting period is either
equal to or less than 12 months.

When does an accounting period start?

When
➢ Company starts to trade.
➢ Company’s profits become liable to corporation tax.
➢ When previous accounting period finishes.

When does an accounting period come to an end?

➢ After 12 months of its start
➢ On the completion of previous accounting period
➢ On the start of dissolution of company
➢ When a company ceased to be UK resident
➢ When company does not remain liable to corporation tax

Pro-forma for Calculating Taxable Total Profits

£
Trading profits X
Interest income X
Income from Land & buildings in the UK X
Chargeable gains X
Other income X
Total profits X
Less: qualifying charitable donations (X)
Taxable total profits X

Rates
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The corporation tax rates for three financial years are summarized as follows:
Financial year 2022 2023 2024

Small profits rate N/A 19% 19%

Main rate 19% 25% 25%

Lower limit N/A £ 50,000 £ 50,000

Upper limit N/A £ 250,000 £ 250,000

Standard fraction N/A 3/200 3/200

Marginal relief: (Upper limit – Augmented profits)* Taxable Total Profits/ Augmented
profits * standard fraction

Financial year runs from 1st April to 31st March.

Trading Profits
The computation of trading profits follows income tax principles.
£ £

Net profit per accounts (PBT) X

Add expenditure not allowed for tax purposes X

Deduct

Income not taxable as trading income X

Expenditure not charged in the accounts but allowable for tax X

(X)

Taxable trading profits X

Note:
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The adjustments are almost the same as applied in income tax. Some expenses, however, are explained
here:
There is no private use adjustment for self-employed person in case of companies. Full deduction is
available if something is being used by employee (i.e. car) on a personal level.
Interest received on overpaid taxes and interest paid on overdue taxes is not related to trade which is why
they are disallowed. But being non trading interest, companies are allowed to make their adjustment
against ‘interest income’.

Capital Allowance
Capital allowance is calculated according to the acquisitions and disposals with respect to an accounting
period
For period of account less than 12 months, allowances are apportioned accordingly
For a period of account of more than 12 months, capital allowance is calculated for each accounting period
separately. No column for asset with personal use need to be made, as employee’s use is not supposed
to be apportioned. The rest of the calculation is same as what we have learnt in self-employed case except
for the implication of enhanced relief.

Enhanced Relief for Capital Allowances

• Available to Companies only on the purchase of new plant and machinery (old P&M and cars do
not qualify). For expenditure which would fall into the main pool, there is a 100% first-year
allowance i.e. (full expensing)

• For expenditure which would fall into the special aid pool, there is a 50% first-year allowance.

• The disposal of these assets is treated differently from other assets. The proceeds on sale of
those assets on which the 100% first-year allowance had been claimed will result in a balancing
charge instead of going into the main pool. And for those assets where the 50% first-year
allowance had been claimed, the proceeds are split proportionately according to the amounts
originally claimed as 50% first-year allowance and AIA.

• The 100% AIA should initially be claimed against second-hand assets, those otherwise qualifying
for 6% WDA, and then those otherwise qualifying for 18% WDA.

• The 100% annual investment allowance should then be claimed on new assets falling into the
special rate pool, in preference to the 50% first-year allowance.

• Finally, any remaining annual investment allowance should be claimed against new assets falling
into the main pool. Although the amount of relief is initially exactly the same, the treatment of
subsequent disposal proceeds will normally be preferable when the annual investment
allowance has been claimed as proceeds deducted from the main pool rather than when the
100% first-year allowance is claimed, proceeds resulting in a balancing charge.

• However, the 50% and 100% first-year allowances have no upper limit, so they will come in play
after a company has exhausted the annual investment allowance.

Super deduction
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• Though the application of super deduction is NOT EXAMINABLE but its disposal implications are
EXAMINABLE. Previously when there had been a purchase of new plant & machinery acquired in
between 1 April 21 to 31 March 23, there was a 130% super deduction on the acquisition of
general pool items. (This deduction is preferable as opposed to 100% annual investment
allowance) while for special rate pool items, there was a 50% first year allowance.

• When General pool items are sold on which previously super deduction of 130% was claimed,
the disposal proceeds are not deducted from general pool. Instead, the amount of disposal
proceeds are treated as balancing charge

• When Special rate pool items are sold on which previously FYA of 50% was claimed, 50% of the
disposal proceeds are deducted from special rate pool while remaining disposal proceeds are
treated as balancing charge

AIA (Additional Points)

1. If an individual owns more than one company: then,
a) With unrelated business
In this case there will be separate AIA limit for every company owned.
b) With related business
There will be only one AIA limit available to all such companies.
2. If a company owns or controls other companies
In this case, regardless of business being related or unrelated, there will be always one AIA limit for
the whole group of companies.

Special Rate Pool Assets – Additional Points

Applicable to individuals and companies both:

If a company incurs expenses upon special rate pool assets which is either:
a) More than 50% of its replacement cost
OR
b) Where it was less than 50% but further spending on the same asset in next 12 months will make
it 50% or more in total of its replacement cost

For both of above cases, expenditure should be capitalized and will qualify for capital allowance (AIA)

FYA - Additional Points

Energy saving equipment qualifies for 100% FYA but if a company suffers losses due to FYA in respect of
energy saving equipment, these losses are relieved in such a way that it creates corporation tax refund.
This refund will be restricted to lower of:
i. 12.67%.
(This percentage has been reduced from 19% to two-thirds of the corporation tax rate – i.e.
12.67% (19% x 2/3).
Total amount of PAYE and NIC paid by company to HMRC (maximum up to £250,000)
[Type here]

Interest: (non-trading loan relationship)

• Calculation is made according to an accounting period.

It comprises:
Interest income x
(Any interest which has been received on investments held in bank, building society
Or company. Investments are always made for non-trading purposes. Interest should
Be taken on accrual basis and it is always received gross)
Add: interest received on overpaid tax x

Less: Interest paid on either overdue/underpaid tax (x)

Less: interest paid over non trading loan (interest paid on loan taken for non-trading purposes.
It is taken on accrual basis) (x)
Interest xx

Interest paid on loan taken for trading purpose is deductible against trading profits*
Interest Deficit
Could be relieved by using either or all of following options:
1) Against total profits before QCD of current accounting period, or
2) Carried back against interest income only for previous 12 months (36 months if cessation), or
3) Carried forward against Total Profits before QCD.

Partial claims can be made in either of the above three options.

Property Business Income

The computation of property business income follows income tax principles.

Exception:
Rental income is calculated according to an accounting period as opposed to income tax where calculation
is made according to the tax year. Interest on a loan taken out for buying property is dealt with under the
loan relationship rules, not as part of the property business.

Property business losses

They are set off against total profits before QCD of the company for the same accounting period, excess
is carried forward to future accounting period for indefinite time period and deduction is made against
total profits before QCD. Partial claims can be made when rental losses are being carried forward.

Other Income
It is calculated according to an accounting period on accrual basis.
[Type here]

Example:
Patent received for non-trading purposes.

Chargeable Gains
Although there are a lot of similarities in the way in which the chargeable gains of a limited company are
taxed, there are also some very important differences in comparison to individuals:
• A limited company’s chargeable gains form part of the taxable total profits. They are not taxed
separately.
• The annual exempt amount is not available.
• Indexation allowance is given (restricted to 31st December 2017) when calculating chargeable gains
for a limited company.
• Limited companies can only benefit from rollover/holdover relief, and this is applied after taking
account of any indexation allowance. They cannot benefit from business asset disposal relief,
holdover relief for the gift of business assets.

Basic computation
Disposal x

Incidental cost of disposal (x)

Net proceeds x

Less: allowable deductions

-purchase price (x)

-incidental cost of purchase (x)

-capital expenditure (x)

Un indexed gain x

Less: Indexation allowance (till Dec 17) (x)

Indexed gain x

Treatment of capital losses

When a limited company has a capital loss, it is first set off against any chargeable gains arising in the
same accounting period. Any remaining capital loss is then carried forward and set off against the first
available chargeable gains of future accounting periods. Although chargeable gains are included as part
of a company’s taxable total profits, capital losses are never set off against other income.

Shares
For limited companies, disposals of shares are matched with purchases in the following order:
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• Shares purchased on the same day as the disposal.

• Shares purchased during the nine days prior to the disposal.
• Shares in the 1985 pool.

Dividends: Dividend received is an exempt income

Qualifying charitable donation: Usually donations which are given wholly and exclusively for the purpose
of trade, they are of reasonable in size and are made to local organization are said to be allowable
expenditures for trading purpose. But if any of the given conditions is not said to be satisfied, is considered
as a QCD, the expense is disallowed expenditure for trading profit calculation purposes. Gift aid donation
is also an example of QCD.
However, donation to political party is disallowed expenditure for trading profit calculation purposes and
is not even taken as a qualifying charitable donation.

Long Period of Account

Whenever company makes accounts for more than 12 months, period of account needs to be split in
between 2 accounting periods. First accounting period will be of maximum duration i.e. 12 months and
remaining months are allocated to the next accounting period

Income is segregated between the accounting periods in the following manner:

• Trading income: time apportion the amount before capital allowances
• Capital allowances are calculated separately for each accounting period
• Property business income: Allocate to period in which it accrues
• Other income: Allocate to period in which it accrues
• Gains: Allocate to the period in which they are realized
• Qualifying charitable donations: Allocate to the period in which they are paid

Trading Losses
• Whether its accounting profit or loss, it needs to be first adjusted according to the taxation rules
according to an accounting period.
• Adjustment of profit is done on the basis of ‘accrual basis of adjustment’ only.
• If it results into adjusted loss then losses are utilized to reduce your income and hence tax liability
• Generally, losses can be received in 3 possible ways:

Losses

Carry Current Carry forward

Back accounting period of losses
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Carry Forward
Losses are carried forward against first available trading profits of future accounting period (for indefinite
period). Claim should be made within 4 years after the end of accounting period.
Partial clams can be made.

Restriction on the use of carried forward losses

A restriction applies to the use of losses (both trading and Capital) carried forward against total profits in
excess of £5 million. A company’s profits after deduction of current year reliefs (including group relief)
and the carried forward losses can only be reduced by 50% using these losses.
Candidates are only required to just have an awareness of this restriction and will not be expected to
apply their knowledge to a particular situation.

Current Accounting Period Adjustments

Losses are adjusted against total profit before qualifying charitable donation in the period of loss.
Partial claims cannot be made.

Carry Back
In case of companies, losses must be adjusted in current accounting period before making adjustment in
previous 12 months. Losses are carried back for last 12 months against total profits before QCD.
Partial claims cannot be made.
If losses are left unrelieved, then excess losses are carried forward.
Claims for making adjustment in current accounting period and previous period should be made within 2
years after the end of an accounting period of loss.

Company’s trade becomes small or negligible

If a company’s trade becomes small or negligible in an accounting period in which it realizes trading loss,
then loss is carried forward against future trading profits of the same trade rather than against total
profits.
Restriction on Trading Losses
If:
• Ownership of a company changes (that is change hands) and more than 50% shares
• Within 5 years of change of ownership, there is a major change in either nature or conduct of trade

In this case company would not be allowed to:

➢ Carry forward its Pre-Acquisition losses against Post Acquisition Total Profits.
➢ Carry back its Post-Acquisition Losses against Pre-Acquisition Total Profits.

Terminal Loss Relief

• Loss in the last 12 months of trade is called terminal loss.
[Type here]

• First loss is adjusted against total profit before QCD of last accounting period. Excess losses are carried
lack for 36 months on LIFO basis against total profits before QCD.
• Losses can be surrendered in a group(dealt later)

Capital Losses
• They are first adjusted against current year capital gains.
• Excess losses are carried forward for indefinite period against capital gains of future accounting
period.
• They are never carried back

Property business losses

• First losses are adjusted against total profit before QCD of current accounting period.
• Excess losses are carried forward against total profit before QCD of future accounting period for
indefinite period.
• They can also be group relieved (dealt later).

Intangible Assets
They are of two types expenses related to intangible assets.
1) Revenue expenses, e.g. payment of patent royalties & cost of internally generated asset is
allowable.
2) Capital expenses e.g. acquisition of patent, copyright, goodwill etc.

Treatment of capital expenditure related to intangible asset: companies are allowed to take up any one
of the treatments, which they find beneficial

As according to financial • A company is allowed to write off its

intangible assets at 4% per annum (WDA)
accounting: or using straight-line basis over useful life
25 years.
• Other than goodwill all
such assets are
amortized on straight
line basis OR • Balancing adjustment is also required in
year of sale

Acquisition of Goodwill: Amortization or impairment losses relating to goodwill is not allowable for tax
purposes.
Disposals of Goodwill
• On the disposal of goodwill, the proceeds from sale of Goodwill are compared with cost.
• Where there is a loss on the sale of the goodwill, it will be set against the total profits of the current
year and/or carried forward (against total profit) and/or group relieved.
Where there is a Profit on the sale of the goodwill, the profit will be added into trading income of the
company.
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Transfer Pricing Legislation

(Applies to all heads of income)

Under transfer pricing legislation, whenever there is an undervalued transaction within connected
companies, the transaction should be adjusted at an arm’s length transaction.

This legislation is applicable upon all heads of income of a company.

Legislation applies in the following manner:

Size of Company

Large SME

Selling/Buying from
Any company

If a connected company Connected company is

reside in a country with either in UK (SME) or
whom HMRC (UK) did such a country with
not have any double which HMRC (UK) has
taxation treaty a double taxation
treaty

Transfer pricing
legislation applies
Transfer pricing legislation does
not apply

Research & Development Expenditure

• Applicable on all companies who are carrying out R&D expenditures

RDEC Scheme
• The RDEC scheme works by treating an amount equal to 20% of the company’s qualifying R&D
expenditure as,
• An additional amount of taxable trading income and
• Tax credit which reduces company’s corporation tax liability
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• For a company that has a qualifying R&D expenditure of £ 100,000, and pays corporation tax at
the main rate, the overall effect would be as follows
Additional income (100,000*20%) £20,000

Corporation tax additional income (20,000*25%) £5,000

Tax deducted from corporation tax liability £20,000

Corporation tax saved (20,000 – 5,000) £15,000

• The net corporation tax saving of £15,000 shows the provision of the subsidy of 15% given to
the company involved in carrying out R&D activity.
• Where the available tax credit exceeds the company’s corporation tax liability, the remaining
amount of credit can either be:
• Carried forward and offset against company's corporation tax liability of future accounting
periods: or
• In case of a group company, surrendered to another member of the group, or
• Paid to the company
Expenses eligible for enhanced relief include:
• All direct costs such as materials, fuel, power, water, and staff costs including employer class 1
NIC and pension contribution with the exception of benefits in kind.
• Software, whether purchased or developed, intended solely for R&D purposes.
• Externally provided workers (i.e. agency staff for R&D)
• The cost of renting property is not a qualifying expenditure for the purpose of RDEC scheme.
• In case of payments made to the unconnected workers/subcontractors, only 65% of the expense
qualifies.
• In case of payments made to the connected workers/subcontractors, the restriction of 65%
doesn’t apply. However, the qualifying R&D expenditure is restricted to the lower of;
• The payment made to the connected person, and
• The relevant expenditure incurred by the connected person
• Unconnected parties can make a joint election to be treated as connected and hence leads to
the removal of the restriction.
Two companies are classified as connected; if either
• They are controlled by the same person, or
• One of them controls the other

Thin Capitalization
If a company borrows a loan from any of its connected company and the amount of loan is above its
borrowing capacity,
in this case interest paid would be only allowable in respect of the amount of loan which was up to its
borrowing capacity.
Management Expenses of Non-Trading Companies
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If a company is either not involved in trading activities or if there are any, then the scale of activities is
quite negligible, such companies are considered as a non-trading or investment companies.

Treatment
1. All of the management expenses of such companies are deducted from total profits before QCD of
the company.
2. If there are any unrelieved expenses from the current accounting period they could be
carried forward against future total profits.

Rollover & Holdover relief:

➢ Not on Goodwill, Patent Rights & Copyrights because they will be treated in trading profits in case
of companies.
➢ In companies indexed gain will be deferred.

Substantial Shareholding Exemption

1) If a company holds a substantial shareholding, defined as 10% or more of another company, for at
least 12 months out of the previous 6 years from the date of disposal, then the rules related to
substantial shareholding apply.
2) When determining whether a shareholding is substantial or not, the shareholdings of the entire
group of companies should be taken into account.
3) In a share-for-share exchange, both old and new shares ownership period would be combined to
meet the 12-month ownership criteria.
4) If the shares being disposed are of a new company (which is at least 75% or more subsidiary) and
not held for qualifying period, SSE will still be available if
Trade & asset of that company have been transferred to it, from another 75% subsidiary.
And
That subsidiary has owned this trade & asset for at least 12 months.
Point 1: When ownership of a company is sold in such a way that remaining shareholding is not
substantial, SSE will still be applicable if that remaining holding is sold within 5 years.

Withdrawal of Investment from Company:

1) Sale of share
2) Share buy back
3) Liquidation
4) Winding up

1. Sale of Shares
• If an individual who is selling shares is also the employee of that company and holds at least
5% for 12 months.
• In case of company, SSE will apply.
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2. Share Buy Back:

In this case amount received by the shareholder from the company will be considered as either;
i. Income distribution (i.e. Dividends)
ii. Capital Proceeds

If the shareholder is a company it will be treated as Capital Proceeds (Substantial Shareholding

Exemption may apply).

For Individual: -
Consideration received will be Capital Proceeds if following conditions are fulfilled:
➢ The company must be an Unquoted Trading Company in the UK.
➢ The shareholder must be a resident in the UK.
➢ The shares must be owned for at least 5 years (or 3 years if inherited).
➢ Either all of the individual's shareholding must be repurchased or at least 25% of their
shareholding must be repurchased.
➢ After the buyback, the individual must not be able to exercise more than 30% control of the
company.
➢ The Share Buy Back must be conducted for the benefit of the company's trade.

If any of the above condition is not fulfilled, then the amount received by the individual will be
considered as dividend and calculated as follows:
Amount received – cost (subscription amount) = Dividend

Note: Combined/ joint period of ownership should be considered in case of spouse

3. Liquidation:
In the case of liquidation amount received from the company by the shareholder would be considered
as Dividend or Capital Proceeds depending upon which condition is fulfilled:

1) Dividend distribution, if amount was received before the appointment of Liquidator

Dividend is calculated in the following manner:
Amount Received – Cost (subscription amount) = dividend
2) Capital Proceeds, if received after the appointment of Liquidator

4. Winding Up:
Closure of company without appointment of liquidator (in case of small companies)
In this case consideration received will be considered as capital proceeds, if all of the following
conditions are fulfilled:
a) All Shareholders have been paid, when company has been wound up.
b) All of the liabilities have been agreed and paid.
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c) Total payment is not more than £25,000 (if the consideration is more than £25,000, de- Minimis
rule applies).
If any of the above condition is not fulfilled amount received would be considered as Dividend
Distribution.

GROUPS
i. Associated/Group companies
ii. 75% Loss Relief Group
iii. Consortia
iv. 75% Capital Gain Group
v. VAT Group
vi. Transfer of Trade within 75% Common Control Companies

Associated/Group companies
Companies are said to be associated if:
▪ one company is under the control of another, or
▪ Two or more companies are under the common control of another person, which could be another
company, an individual or a partnership.
▪ But excludes dormant companies and no trading holding companies.

Control means an interest of more than 50% in:

▪ The share capital, or
▪ The voting rights, or
▪ The rights to the distributable profits, or
▪ The net assets on a winding up of the company.
The corporation tax profit threshold is divided by the number of associated companies in a group, thus
affecting the rate of corporation tax.

Group Relief
• For group relief purposes, one company must be a 75% subsidiary of the other, or both companies
must be 75% subsidiaries of a third company.
• The parent company must have an effective interest of at least 75% of the subsidiary’s ordinary share
capital
• The company which surrenders the loss is called ‘surrendering company’ and the company which
adjusts the loss against their taxable total profit is called ‘claimant company’
• Trading losses, unrelieved property business losses and unrelieved qualifying charitable donations can
be surrendered by one company and adjusted against other company’s results if companies are within
75% group in the current period.
• Brought forward losses can be adjusted against claimant’s taxable total profit to the extent they
cannot be adjusted against surrendering company’s own total profits before QCD.
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• Group relief will be claimed against taxable total profits provided the claimant company is assumed
to use any current year or brought forward losses that it has, even if such a loss relief claim is not
actually made.
• The maximum figure of loss that can be surrendered is restricted to the amount of taxable total profits
of claimant company
• When the accounting periods of the claimant company and the surrendering company are not
coterminous, then group relief is restricted.
• There may also be a restriction where an accounting period is less than 12 months long.
• Unlike other loss relief claims, it is possible to specify the amount of group relief that is to be
surrendered.
• In fact, if surrendering company decides to surrender losses to multiple claimant companies, it’s
advisable to surrender the losses preferably to those companies which are paying tax over marginal
rates. If losses are surrendered in such a way that marginal portion of claimant company is relieved,
then it will save the maximum amount of loss.
• The loss making company may of course be able to relieve the loss itself. In this case consideration
will also have to be given to the timing of the relief obtained (an earlier claim is generally preferable),
and the extent to which relief for qualifying charitable donations will be lost.
• Under 75% Loss Relief Group, following losses can be surrendered

➢ Trading loss
➢ Property Business Loss
➢ Interest Deficits
➢ Un-relieved QCDs
➢ Un-relieved management expenses of non-trading or investment company.
➢ Losses carried forward can now also be relieved via both group relief and/or
consortium relief.

Change in Ownership (restriction)

If a group acquires a new member company that has pre-acquisition losses, those pre-acquisition losses
cannot be surrendered to any other group member for a duration of five years from the date of the
change in ownership.
However, there are no restrictions on the new member company surrendering its post-acquisition losses
to fellow group members. The restriction specifically pertains to pre-acquisition losses for the specified
period.

Loss Relief against Overseas Group Members

Though a non-UK resident is considered as group member but loss cannot be surrendered as a claim
from such member.
Unless it’s an overseas subsidiary suffering losses and resident in European Economic Area (EEA). In such
case this overseas subsidiary could surrender loss to UK parent only (not to and from any other
member).
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75% Gains Group

At least:
i) 75% holding at every level
And
ii) More than 50% effective holding is also required

Tax treatment
• The transfer of assets between the capital gains group will not give rise to any chargeable gain or
capital loss. Asset is transferred to claimant company’s books at an indexed cost i.e., cost plus
indexation allowance up to the date of transfer or 31st December 2017 whatever comes earlier.
• It is possible for two companies in a chargeable gains group to make a joint election which enables
them to transfer a chargeable gain or allowable loss, or any part of a gain or loss, between them.
• The matching is done on a notional basis. An asset does not actually have to be moved between
companies in order to match chargeable gains and capital losses.
• The election has to be made within two years of the end of the accounting period in which the asset
is disposed of outside the group and will specify which company in the group is treated for tax
purposes as making the disposal.
• By making joint election, chargeable gains and capital losses arise in the same company which will
result in the optimum use being made of capital losses.

Rollover relief/ Holdover relief

• If a member of a capital gains group disposes of an asset outside the group and hence eligible for
capital gains, rollover relief/holdover relief is available against acquisitions by other group members
within the qualifying period of one year before the disposal or three years afterwards.
De-Grouping Charge
(For Land and buildings)
De-grouping charge applies if:
• Group Members shareholding has been sold in such a way that it no longer remains Group Member
and
• Had received an asset at NGNL from another group member within 6 years of being de- grouped
and
• Asset is still owned at the date of De-grouping.

De-grouping charge is calculated as follows:

£
Proceeds (MV at the date of transfer) xxx
Less: Allowable Cost (xxx)
Less: Indexation Allowance (till date of transfer/ 31st Dec 2017) (xxx)
De-grouping charge (or Original Gain) xxx
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De-grouping charge will be added into the Sale Proceeds received in respect of sale of shares of the
company being de-grouped. (Chargeable on parent company)

Note:
For the recipient company,
• If De grouping charge has been applied, M.V will be the new base cost of that Asset
• Where De grouping charge has not been applied, indexed cost will be the cost.

Stamp Duty
If a company is de-grouping within 3 years of receiving NGNL transfer, stamp duty would also become
payable. (Payable by De- grouping company)

For Transfer of intangible assets

1. In a situation where intangible assets are transferred between members of a capital gains group
without incurring a tax liability (Tax Neutral Basis).
2. And the transferee company exits the group within six years of acquiring the asset,
3. While retaining ownership of the asset,
4. In such a scenario, a Balancing Allowance or Charge will apply to the company leaving the group.
This calculation is based on the assumption that the transfer would have been conducted at arm's
length, utilizing the market value at the date of the tax-neutral transfer.

Note that such a charge/allowance is not applicable where SSE applies on the sale of shareholding of
such member company

Pre entry capital losses

Pre entry capital losses are those losses which were realized upon the sale of assets before joining the
group. These losses could not be settled against gains arising in other group members through No Gain
No Loss transfer for a period of 5 years from joining the group, rather these losses will be deducted in
respect of gains arising upon disposal made by joining member of any of following:
i) Assets acquired before joining the group
ii) Assets sold before joining the group but in the accounting period in which the losses were
realized
iii) Acquired after joining the group but from third party not from any gain group member.

Consortia
Consortia will exist if:
1. When one company is owned by two or more companies and
2. Their combined holding is at least 75%. and
3. Each company must own at least 5% but not more than 74% individually.
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In this case investing company is called Consortium Member and Investee Company is called Consortium
Company (not for individual).

Surrendering downwards
If there are losses within a consortium member, these losses can be transferred downward to the
Consortium Company. However, there is a limitation on the amount that can be surrendered, and it is
typically restricted to a percentage that corresponds to the consortium member's ownership or holding
in the Consortium Company, relative to its taxable total profits.
Importantly, there is no requirement for the consortium member to offset these losses against its own
profits first; they can be directly transferred downward to the Consortium Company up to the specified
percentage.

Surrendering Upwards
If the Consortium Company incurs losses, these losses can be surrendered upward to offset against the
Taxable Total Profits of the consortium member. However, the maximum amount of loss that can be
surrendered to the consortium member is typically limited to a percentage corresponding to the
consortium member's ownership or holding in the Consortium Company. The percentage is applied to
the Consortium Company's figures when determining the maximum amount of loss that can be
transferred to the consortium member.
Importantly, it is typically required for the Consortium Company to first offset its losses against its own
total profits before any excess losses can be surrendered to the consortium member.

Note:
This relief is now available for losses carried forward and not just those losses incurred in a same
accounting period. But it is always available for the overlapping months of accounting period of both
companies. Same as for Loss Relief Group.

Sale of Trade & Assets without Change of Ownership (at least 75%)

In the following both cases, there is transfer of trade & assets from Y Ltd to Z Ltd:

Case I: Case 2:
Mr. A A Ltd

75% 75% 75% 75%

Y Ltd Z Ltd Y Ltd Z Ltd

For Capital Gains/Loss Purposes:

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For Case 1: For Case 2:

• Arm’s length • NGNL

• Resulting in gains/losses in Y • Gain Group
Ltd

For Stamp Duty

Case 1: Z Ltd would have to pay Case 2: As 75% Gain Groups, Z ltd
Stamp duties on acquisition of would not pay any stamp duties
assets upon acquisition of assets.

Special Rule

Trading Losses For Capital Allowances

both Case 1 & 2 For both Case 1 & 2
✓ Will be transferred (or ✓ P & M will be transferred at WDV
carried forward) against ✓ Thus no balancing charge/allowance on
future trading profits only disposing company
for 5 years of Z Ltd. ✓ And no FYA & AIA for acquiring
✓ Cannot be surrendered to company
any other group member. Note: Above treatment is applicable within
connected persons (individuals) & connected
companies even without this particular
situation.

Overseas Aspects of Companies

Overseas Dividends from

Connected Company Unconnected Company

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➢ CT payment Threshold limit will be ➢ CT Payment Threshold limit will not be

divided with overseas connected divided with such overseas subsidiary.
company as well.
➢ Connected dividends are not ➢ Un-connected /Non-Group overseas
included anywhere (even overseas) dividend will be added in TTP to find
augmented profits, in order to compare
with Threshold limit.

Overseas

Interest Rent Trading Profits

• Grossed up with actual tax deduction at overseas.

• Gross amount is then included in relevant UK income heads.
• DTR may be available.

Overseas Branch (Permanent

Overseas Subsidiary
Establishment)
Scope and basis of • Extension of UK operations
charge • All profits arising assessed on UK
• Overseas profits not assessed in
company
UK if left in overseas subsidiary
- Its trading profit is added to UK
• Profits remitted to UK parent
trading profit.
company may be chargeable
- And available for relief of trading when received:
losses.
- Dividends not assessable
- For the loss being carried
- Interest income from loan to
forward, the trade must be
overseas subsidiary is
same.
assessable
• DTR available
• Can elect for profits to be exempt
Trading loss Relief • Can relieve trading losses of overseas • UK trading loss:
PE against UK profits: - Cannot be surrendered to
- Unless the loss can be relieved in overseas subsidiary
the country in which it arose • Overseas loss from 75% subsidiary
• UK losses can be relieved against in EEA:
overseas PE profits - Can be surrendered to UK
• No relief is available if election for parent if no alternative relief
branch exemption is made in overseas country
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Capital Allowances • Available on overseas located assets

purchased and used by overseas
• Not available
branch, unless election for branch
exemption made
Chargeable Gains • Capital gains computed using UK
rules
• Rollover relief is available on
reinvestment
• Not assessed in UK
• Capital losses can be utilized
• No capital gains or utilization of
capital losses if branch exemption
election made

• As an associated company,
Impact on • None (as not a separate entity)
Thresh-hold limit will be divided.
Threshold limit

Election for Exemption of Overseas Branch(s)

1. If a UK resident company makes this election, its worldwide branches would become Exempt for
UK tax
2. Losses of overseas branches would not be allowed against UK income.

Note:
1. Once made, this election cannot be revoked.
2. You can make this election at any point, and it will take effect from the beginning of the accounting
period in which the election was made.

Controlled Foreign Company (CFC)

An overseas company will be considered as CFC if:
• It is controlled by UK resident Companies and (or) Individuals.
• Has been incorporated or taken over for diverting profits from UK.
In this case this overseas company will be considered as CFC and UK Company which owns its shares (at
least 25%) will be subject to CFC charge.
CFC charge is not applicable on individual shareholders of UK.

CFC charge which is applicable on UK Company and will be as follows:

✓ UK companies share of profit in CFC @ main rate
✓ DTR will be available

An Overseas Resident Company may not be classified as a Controlled Foreign Company (CFC) if any of
the following conditions are met:
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i. The overseas company does not possess any asset or engage in activities aimed at reducing UK tax
liability.
ii. It does not hold any assets or engage in activities that are managed within the UK.
iii. The company would continue its business even if the management of its assets in the UK were to
cease.

Exemption of CFC charge

A CFC may have chargeable profits: however, the CFC charge will in fact be rare because of the many
exemptions and restrictions on the profits apportioned.
The CFC charge is not applied if any one of the following exemptions applies:

1. Exempt Period:
The first 12 months of the overseas company coming under the control of UK residents will be
exempt from a CFC charge provided:
➢ They continue to be a CFC in the following accounting period, and
➢ Are not subject to a CFC charge.
This is intended to provide a period of time to companies to restructure to avoid the charge
applying.

2. Excluded Territories
HMRC provides a list of approved territories where rates of tax are sufficiently high to avoid a CFC
charge arising.
If the CFC is resident in an excluded territory, no CFC charge arises.

3. Low Profits
The CFC’s TTP are:
- £500,000or less
- Of which no more than £50,000 comprising over non-trading profits

4. Low Profit Margin

The CFC’s accounting profits are no more than 10% of relevant operating expenditure.

5. Tax Exemption
The tax paid in the overseas country is at least 75% of the UK corporation tax which would be due if
the CFC were a UK resident company.

Close Company
A close company is controlled by:
• Any number of directors, or
• 5 or fewer participators
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Control means holding of greater than 50% in issued share capital or voting power or right to receive
distributable profits or to receive the net assets in the event of winding up
To decide whether the group of individuals has control of the company, it is necessary to include the
share of their associates.
A company which is a subsidiary takes its status from the parent company.
• Shareholder Only:
If an individual is only shareholder and not director of the close company and he or she is provided
with benefits from its company (e.g. living accommodation, car) in this case amount taxable on the
shareholder will be calculated using rules of employment income;
AND
This amount will be considered as Dividend for the shareholder and Dividend Distribution for the
Close Company.
Example:
List price of Car x CO2 Emission %age = dividend

• Provision of Loans to (Shareholder & Director Shareholder):

When a company extends a loan to its shareholder, 33.75% of the loan amount should be remitted
to HMRC along with the subsequent Corporation Tax Liability by the close company.

This 33.75% payment would be repaid to the company on either of when:

i) Loan is repaid by shareholder to company. OR
ii) When loan is written off by the company in the favour of owner.

If the following conditions are met, an individual may be eligible to avoid repaying 33.75% of the
loan to HMRC:
i) The individual owns less than a 5% shareholding in the company.
ii) The individual is a full-time working director or employee of the company.
iii) The amount of the loan does not exceed £15,000.

Note: If any part of the loan is repaid before payment date then the tax charge is reduced accordingly.
Where the company doesn’t charge interest up to an official rate of interest @2.25%, which will give rise
to taxable benefits.

The rules related to provision of benefit would apply

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Personal Service Company (IR35 legislation):

In the absence of a close company structure, a shareholder or owner of the company may be subject to
evaluation under the distinction between employment and self-employment rules.
"Notional Salary" needs to be computed, and it would be subject to taxation for the shareholder. This
taxation would include both income tax and National Insurance Contributions (NICs) for the shareholder.
The aim is to ensure that individuals who work as employees but use a company structure to reduce
their tax liability are subject to the appropriate tax treatment.
It is the responsibility of all medium and large private sector clients (and all public sector clients) to
determine whether the worker is deemed to be an employee, and therefore is caught by PSC legislation

But it is the responsibility of the PSC to determine this and apply the rules if the services are provided to
a small client.
Amount of Notional Salary is calculated as follows: (chargeable to IT & NIC)
£
Total fee received by PSC (Sales) xxx
Less:
Statutory deduction (5%of total fee) (xxx)
Actual Salary (xxx)
NIC Secondary on actual salary (xxx)
Pension contribution by PSC on behalf of individual (xxx)
Any Allowable deduction in the absence of PSC (xxx)
Notional/Deemed Salary (gross of NIC) xxx

Secondary NIC: Deemed salary x 13.8/113.8 (xxx)

Notional/Deemed Salary xxx

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For Owner of PSC

Deemed salary would be considered as additional salary resulting in additional income tax and primary
NIC
For PSC
Deemed salary and related secondary NIC would become allowable expense and so will be
deducted from PSC’s TATP.

CHAPTER 20: CT ADMINISTRATION

This chapter covers the administrative aspects of corporation tax.
Notification of Chargeability to Tax
A company must notify HMRC of the commencement of its trade within three months of the
commencement of operations otherwise standard penalties are imposed (discussed earlier)

Filing of Return (CT 600)

A company has to file return electronically on the later of

Twelve months after the end of the accounting period

&
3 months after the issuance of return (if issued later)

Late filing of return

Up to 3 months £100 (would increase to £500 if late for persistently 3rd time)

3 – 6 months £ 200 (would increase to £1,000 if late for persistently 3rd time)

6 -12 months £ 200 + 10% of unpaid tax

>12 months £200 +20% of unpaid tax

iXBRL
The filing of accounts must be done in Line Extensible Business Reporting Language (iXBRL). iXBRL is a
standard for reporting business information in an electronic form which uses tags that can be read by
computers.
HMRC supplies software which can be used by small companies with simple accounts. This software
automatically produces accounts and tax computations in the correct format.
Other companies can use:
a) Other software that automatically produces iXBRL accounts and computations; or
b) A tagging service which will apply the appropriate tags to accounts and computations; or
c) Software that enables the appropriate tags to be added to accounts and computations.
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Determination: If a return is not delivered by the filing date, HMRC may issue a determination of the tax
payable within the four years from the filing date.
This is treated as a self-assessment and there is no appeal against it.
However, it is automatically replaced by any self-assessment made by the company

Amendment of Error/Mistake: A company may amend a return within twelve months after the due filing
date.
HMRC may amend a return to correct obvious errors/mistakes within nine months after the actual filing
date.
Standard penalties are applied in case of making error. (Discussed earlier)

Claims
Claim (for overpayments, loss reliefs or for any error which couldn’t have been rectified within the normal
time period etc.) should be made within four years from the end of an accounting period.
An appeal against a decision on such a claim must be made within 30 days.

Enquiry: Enquiry should be raised within 12 months after actual filing date by HMRC.
Possible reasons on raising enquiry can be fraud, negligence, officer wishes to clarify a technical point,
return is found to be incomplete or randomly basis. In the course of enquiry, revenue demands certain
documents or would require detailed justification of particular question/questions.
Appeal can be made against the request of provision of documents and records.

Discovery Assessment
Normally enquiry is made within 12 months but afterwards discovery assessment can only be made if
either:
a) the loss of tax is due to deliberate or careless understatement
b) And there is a sufficient evidence against it
The normal time limit for raising a discovery assessment is four years from the end of the accounting
period but this is extended to 6 years if there has been careless understatement and 20 years if there has
been deliberate understatement. The company may appeal against a discovery assessment within 30 days
of issue.

Records
Companies must keep records until the later of:
a) six years after the end of an accounting period;
b) the date any compliance checks are completed;
Failure to keep records can lead to a penalty of up to £3,000 for each accounting period affected.

Due Date for Payment: The due date of corporation tax is dependent on the size of the company.
The size of the company is determined on the basis of profit threshold of a company which is
£15, 00,000*. Profit threshold is affected in two cases:
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1) Either the company’s accounting period is less than 12 months AND/OR

2) The company is found to be a member of 51% related companies.

* Profit threshold / augmented profit =taxable total profit plus amount of dividend received from
companies which are not a part of 51% related group.

Overpaid/Underpaid Interest
Interest is charged on overdue/underpaid tax and it runs from the due date till it is paid @ 7.75%.

Interest is received on overpaid taxes and it runs from the date of payment till the date of
repayment/adjustment @ 4.25%.

CHAPTER 21: VAT

• Value Added Tax (VAT) is an indirect tax imposed on goods and services supplied in the UK and its
burden falls on the final consumers (or end consumers).
• VAT is charged on the taxable supply of goods and services in the UK by a taxable person (includes
individuals, partnership, companies, club, association or charity) in the course or furtherance of a
business carried on by the person.
• A taxable person is a person who is registered for VAT (or who is required to be registered for VAT).

Types of supply
There are two types of supplies
1. Exempt supplies
2. Taxable supplies
▪ Standard rated supplies
▪ Reduced rated supplies
▪ Zero rated supplies

Exempt supply
The following supplies are the main examples of supplies that are exempt from VAT:
▪ Land and buildings
▪ Insurance premiums
▪ Postal services
▪ Finance services
▪ Education services
▪ Health services
NO VAT is charged on exempt supplies.

Taxable supplies
A taxable supply is any supply of goods or services made in the UK on which VAT liability can be charged.
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Standard rated supplies

The standard rate of VAT is calculated as:
▪ 20% of the VAT exclusive (or net) price, or
1/6 (i.e. 20/120) of the VAT inclusive (or gross) price

Zero rated supplies

The zero-rate generally applies to supplies of goods and services that are considered to be essential
requirements. The main zero-rated supplies are:
▪ Food except for food supplied in the course of catering or is considered as luxury food
▪ Books and printed material
▪ Construction of new residential buildings or those used for charitable purposes
▪ Transport services provided the vehicle carries more than 11 passengers (e.g. trips in buses, coaches,
ships, trains, airplanes but not taxis)
▪ Prescription drugs and medicines to help disabled
▪ Gifts to charities
▪ Children’s clothing and footwear
Land and Buildings

Zero Rated Standard Rated Exempt

✓ Lease rental of ✓ Commercial buildings ✓ Lease of up to 21

more than 21 (new) (i.e. one sold years if it’s
years. within 3 years of residential &
completion of charitable building
✓ Sale of: construction).
✓ Commercial building
- Residential after 3 years (if not
building ✓ Commercial building
opted to tax).
after 3 years if opted to
- Charitable tax.
building

• For all other supplies of COMMERCIAL LAND & BUILDING, the taxpayer has two options.
Option 1: Exempt
Option 2: Opt to tax / waiving the tax exemption.

Opting to tax (waive the tax exemption)

Conditions
• Election must be filed within 30 days of signing.
• Can be withdrawn within initial 6-month cooling-off period or after 20 years, otherwise irrevocable.
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• Election cannot be made for a part of a building, although the election can be made separately for
each property owned.

Tax implications/ Impacts

• Supply of land & building will become taxable
• If building is rented then rent received from building will become liable to VAT at the standard rate
of 20%.
• Land lord can recover any input tax on the purchase and running cost of the building.
• The new owner (purchaser) has once again both options i.e. either to exempt or option to tax

It's worth noting that opting to tax is especially advantageous for landlords who lease commercial
properties that would typically fall under the category of exempt supplies.

Vat Registration
As stated before that taxable person is one who is registered for vat or is required to be registered for vat.
Registration for vat can be done in following ways:
▪ Compulsory registration
▪ Voluntary registration

i) compulsory registration

Historic test future test

Historical test: The historical test rules are as follows:

• A person must register for VAT if, at the end of any month, the taxable turnover for the last 12
months has crossed the limit of £90,000.
• For checking the limit, Taxable supplies includes all standard-rated, zero-rated and reduced rate
supplies, but excludes supplies of capital items (e.g., sales of non-current assets of the business).
• HMRC must be notified within 30 days of the end of the month in which the threshold is exceeded
and the newly-registered business/person must charge VAT from the first day after the end of the
month in which notification to HMRC is required, or an earlier agreed date.
Failure to register for VAT is an offence. Standard penalty will be imposed on late notification of
chargeability to tax.

Future test
The future test rules are as follows:
• A person must register for VAT if at any time trader believes that the taxable turnover in the next 30 days
in isolation will exceed £90,000. HMRC must be notified within the 30-day period in which it is thought
that the threshold will be exceeded.
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• The newly-registered business/person must charge VAT from the first day of the 30 day period ( in which
it is estimated that the threshold will be exceeded) or an earlier agreed date.

Exception to this rule:

A person is not required to register for VAT in these circumstances if the taxable turnover in the
next 12 months is not expected to exceed the deregistration threshold of £88,000. Deregistration
will be dealt later)
Advantage of exemption from registration is that the business does not have to incur the
administrative burden and costs of accounting for VAT. However, the disadvantage is that it will
be unable to recover any input VAT suffered.

Voluntary Registration
A person who makes taxable supplies below the VAT threshold is not required to register for VAT.
However, they can have an option to register voluntarily.

Advantages of Registration
• Input VAT on purchases and expenses is recoverable (thus managing cash flow issues).
• Business is considered involved in conducting their activities on substantial level.
It is particularly advantageous to register if the business is zero-rated, as it can recover input VAT but
does not have to pay output VAT as it is charged at 0%.

Disadvantages of Registration
• Administrative burden is increased
• By adding VAT to the selling price of good might demotivate non VAT registered customers(e.g.
members of general public) due to the increased selling price for good for which they are not entitled
to recover VAT. The problem of losing customer can be avoided if business keeps its original selling
price as it is, reduce it with the figure of VAT and thus lowering the profit margin.
However, this is not a disadvantage if:
▪ The business is zero-rated (and so does not charge any VAT), or
▪ All customers are VAT-registered and so can recover the VAT charged (as their input VAT).

Group Registration
Two or more companies can elect for group registration provided that:
• One of them controls the others, or they are under the common control of same person
• Each company must be UK resident.
• It is not necessary for all eligible companies to be members of a VAT group. e.g., companies making
zero-rated supplies as advised not to be a part of VAT group as their refund of VAT would be used to
offset any VAT payable by the group.
• The group appoints a representative member to be responsible for submitting VAT returns and paying
VAT on behalf of the group.
• However, all group members are jointly and severally liable for any VAT due.
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• Supplies between group members are ignored.

• Only one VAT return is submitted for the whole group. This reduces administrative burden. However,
collating the information from the various group members may become problematic.
• Disadvantage: Various limits, such as those for the cash and annual accounting schemes (see later),
apply to the group as a whole rather than to each individual member.

How VAT Operates

Every registered business is liable to charge VAT on its supplies, such as its sales. This is known as output
VAT. It must pay the output VAT to HMRC, usually on a quarterly basis.
Registered businesses can recover any VAT that it has paid to its suppliers on its raw material purchases
and other expenses. These VAT payments are known as input VAT.
A VAT-registered business therefore only pays HMRC the difference between its output and input VAT.

Tax Point
The tax point is the date for which VAT liability is recorded in order to identify the VAT period to which
the transaction relates.

Basic tax point

Goods - The date at which goods are delivered
Services - The date at which service is performed
Exception: Tax point is amended in two situations:

-If tax invoice is issued or payment is received before the basic tax point.
-If invoice is issued within 14 days of basic tax point.

Sale or return basis

If goods are delivered on sale or return basis, tax point is the date which is earlier of
▪ 12 months after the date of dispatch of good.
▪ The goods are actually sold.

Continuous supplies
Earlier of cash received and invoice issued.

VAT Equation

NET+VAT=GROSS
So, if VAT is to be determined over VAT exclusive amount then rate should applied over net figure.
And if VAT is to be determined over VAT inclusive amount then gross figure should be put into equation.
i.e. VAT=GROSS AMOUNT/GROSS % × VAT%

Treatment for VAT

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For each return period, every business liable to charge VAT:

▪ Charges output VAT on its taxable supplies.
▪ Recovers input VAT on purchases and other expenses.
▪ Completes a quarterly VAT return and submits it to HMRC.
▪ Accounts to HMRC for any VAT payable if there is excess output VAT (if output VAT exceeds input
VAT) for the return period.
▪ Claims a repayment of excess input VAT (if input VAT exceeds output VAT) for the return period within
4 years after the end of the quarter.
The VAT return must be completed and submitted to HMRC along with VAT payable, electronically, within
1 month and 7 days after the end of quarter.

Output VAT
• Output VAT is charged on taxable supplies of goods and services and even on the sale of capital items.
• Gifts of business assets/samples (excluding gifts to the same person that total no more than £50
excluding VAT in any 12-month period and gifts of trade samples)
• Goods withdrawn from the business by the owner or an employee.

• Private fuel: when fuel is supplied to an employee or free or less than the cost of fuel borne by the
business then business must account for OUTPUT VAT for which Scale charges are set by HMRC. Fuel
scale charge will be provided in exams.
Alternatively, the output VAT charge can be avoided if no claim is made for the input VAT on the fuel
provided.

• Discounts: Output VAT is calculated on the selling price net of discounts, if discount has actually been
availed.

• Relief for impairment losses

If vat is charged on transfer of goods and customer does not pay for a supply, then business can claim
bad debt relief if the following conditions are satisfied:
• More than 6 months have been elapsed from the due date of payment
• Bad debt has been written off in books

Treatment of VAT for Capital Allowance Purposes

▪ Capital allowance is calculated on VAT exclusive figure over all noncurrent assets except for car with
personal use (registered business)
▪ Capital allowance is calculated over VAT inclusive figures over all noncurrent assets (unregistered
business)

Deregistration
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Compulsory registration: A person is required to deregister on compulsory basis for VAT when either of
the following situations is fulfilled
• Either ceases to make taxable supplies.
• business is ceased
• Business changes its location from UK
• Legal structure of the business is changed

If any of the above said condition is fulfilled then the notification for deregistration should be made within
30 days.
Deregistration will be effective from the date the condition is fulfilled.

Voluntary registration: Voluntary deregistration is allowed if at any time:

▪ If it is estimated that taxable supplies in the next 12 months will not exceed the threshold of £88,000,
and is not a temporary reduction.
In this situation, deregistration will be effective from the date on which the request for deregistration is
made or an agreed later date.

Consequences of deregistration
On the last day of registration, it is assumed that there is a deemed supply of all of the business assets
held by the business. VAT is therefore charged on the non-current assets (except cars) and trading stock
owned by the business on which input VAT has been recovered in previous VAT returns.
Output VAT is charged on this deemed supply at the standard rate unless the amount payable is less than
£1,000, in which case it is ignored.

Exception to the above rule

No VAT is charged where
1) a business is transferred /sold as a going concern
2) provided the transferee business is already VAT-registered or will become registered immediately
after the transfer and so they will be held responsible to charge output VAT on the subsequent sale
of goods

Partially Exempt Business

For businesses dealing with both taxable and exempt supplies, the treatment of input VAT varies based
on its attribution to different types of supplies:

1. Input VAT Directly/Indirectly Attributable to Taxable Supplies: Input VAT that can be directly or
indirectly traced back to taxable supplies is fully recoverable. This means the business can claim a full
refund or recovery of this VAT.

2. Input VAT Directly Attributable to Exempt Supplies: Input VAT that is directly linked to exempt
supplies is entirely irrecoverable. The business cannot reclaim or recover this VAT.
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3. Input VAT Indirectly Attributable to All Supplies (e.g., Overheads): Input VAT that cannot be directly
tied to either taxable or exempt supplies, such as overhead costs, is only partially recoverable. The
proportion of recoverable input VAT is determined based on a specified calculation method.

Proportion of recoverable input VAT is as follows:

Round up%
Taxable Sales / Total Sales x 100 =

Table for working of Claimable & Non-claimable VAT:

Directly attributable Claimable Non-claimable Total

Standard Rated xxx xxx

Zero Rated xxx xxx
Exempt xxx
xxx

xxx *b xxx xxx

Overheads (Un attributable) xxx xxx xxx

xxx xxx*c xxx*a

De-minimis Limits
Non-claimable input VAT in the above table, will become claimable if following conditions are fulfilled:
1. Exempt supplies are ≤ 50% of the total sales
AND
Any of the following condition satisfied;
a) Total input VAT (*a) is ≤ £625 per month on average, or
b) Total input VAT (*a) – input VAT directly attributable to taxable supplies (*b) is ≤ £625 per month
on average
2. Total non-claimable input VAT (*c) is ≤ £625 per month on average and is ≤ 50% of total input VAT
(*a)
Capital goods Scheme
It is available for partially exempt business upon purchase of:

Value Adjustment Period

Land & Building £ 250,000 or Above 10 years

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Computer & Computer Equipment £ 50,000 or Above 5 years

For Adjustment Period

Total Input VAT x ( %age in Year 1 - %age in Current Year) x 1/10

Deduction of Input VAT

In year of purchase Input VAT recoverable= ( VAT exclusive purchase cost

x 20%) x ( % use in Year 1 )

In subsequent Years Input VAT (recoverable) or payable =

(VAT exclusive purchase cost x 20%) x ( % use in Year 1 -
% use in current year ) x ( 1/10)

In the year of Input VAT recoverable or payable =

Opt to tax
disposal (100% - % use in Year 1) x (no. of remaining years/10)

Not opt to Input VAT recoverable or payable =

tax (0% - % use in Year 1) x (no. of remaining years/10)

Small Business Scheme

There are three optional schemes available to help small businesses to account for VAT in order to simplify
VAT accounting, reduce administration and help cash flow.

Cash Accounting Scheme

Small businesses account will account for VAT when cash is paid and received, rather than on the tax point
dates.
• The business does not have to pay VAT until it has received the cash from its customers’ cash flow
issues are managed.
• It therefore receives automatic bad debt relief if a customer does not pay.

A business can only join the cash accounting scheme if:

▪ its taxable supplies in the next 12 months are not expected to exceed £1,350,000 (excluding VAT)
▪ will have to leave the scheme if taxable turnover exceeds £1600,000 (excluding VAT)
▪ its VAT returns are up to date and has paid all outstanding VAT liabilities
▪ It has not committed any VAT offences in the last 12 months.

Annual accounting scheme

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• Small businesses submit only one VAT return each year and spread their payments of VAT evenly
throughout the year.
• Administrative burden is reduced as only single return is prepared.
• Assists in making cash budget.

Payment schedule is given as follows:

• HMRC estimate the total VAT liability for the year, based on the previous year.
• 10% of this estimate is paid in nine equal monthly installments (payments on accounts) and they are
paid on the last day of every month starting in the 4th month and finishing on the last day of the 12th
month.
• Balancing payment along with annual VAT return is submitted to HMRC within two months of the end
of the year.

A business can only join the annual accounting scheme if:

• its taxable supplies in the next 12 months are not expected to exceed £1,350,000 (excluding VAT)
• will have to leave the scheme if taxable turnover exceeds £1600,000 (excluding VAT)

Flat Rate Scheme

Small businesses account for VAT at a flat rate percentage of VAT-inclusive turnover. The appropriate flat
rate percentage will be given in the examination.
• The flat rate scheme simplifies the preparation of the VAT return.
• The scheme therefore reduces the administrative burden
The mechanics of the flat rate scheme are as follows:
• The business issues VAT invoices to VAT registered customers and to charge all customers for VAT at
the normal rates (e.g. standard, reduced or zero-rated)
• However, at the end of the return period, the taxable person pays to HMRC the amounts calculated
by appropriate flat rate × VAT inclusive turnover

A business can only join the flat rate scheme if its taxable supplies (excluding VAT) in the next 12 months
are not expected to exceed £150,000 and total turnover (including exempt sales) should not exceed
£230,000
A flat rate of 16.5% has been introduced for those businesses which have no, or only a limited amount of,
purchases of goods. Under the flat rate scheme, a business calculates its VAT liability by simply applying a
flat rate percentage to total turnover. You will not be expected to establish whether the flat rate of 16.5%
is applicable, but a question could be set where this rate applies. If a business has much input VAT, then
the flat rate scheme will not be beneficial if the 16.5% rate applies.

Overseas Aspects of VAT

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Zero Rated
Sales / Exports • Input VAT is claimable
• Output VAT is zero
1. The overseas supplier does not include output VAT
in their accounting, as the supply is zero-rated.
2. The customer is responsible for recording the VAT
due, which is calculated as a percentage of their
purchases (typically 20% in the UK), on their VAT
return at the prevailing rate in the customer's own
country.
3. Then this VAT suffered by customer will be
Purchases / Imports considered as Input VAT (Re-claimable), as it’s VAT
on purchases, depending upon whether purchases
were for
• Taxable or
• Exempt or
• Both types of supplies.
Note That,
This procedure of Recognizing Output and then Input VAT
on same return is called “Reverse charge procedure”.

Services outside UK
UK Business Accounting for VAT
Supplies services to Overseas business • Place of supply is overseas
customer (B2B) • Outside the scope of UK VAT
Overseas non- business • Place of supply is UK
customer • Output VAT charged at standard UK rate
Receives services from Overseas Business (B2B) • Place of supply is UK
• Reverse charge procedure applies, where:
- The UK business reports the due VAT as "output
VAT" on its VAT return at the standard UK rate.
- The ability to recover this VAT as "input VAT"
depends on the nature of the business's
supplies, similar to how it works for goods
purchased from within the EU.
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Tax point for cross border supplies

Earlier of
• The date at which services are supplied, &
• The date at which payment is made

VAT Administration

VAT return
VAT return periods are usually quarterly
Returns must be filed electronically within one month and 7 days after the end of the VAT return period.
Payment is due within the same period.

VAT records
A taxable person is required to keep detailed records and evidences of all transactions to support VAT
returns (unless it is a member of the flat rate scheme).
Records must be kept for at least six years. Otherwise the penalty for not keeping the record is
£3,000/year.

The records that must be retained include:

▪ Sales and purchase invoices
▪ Sales and purchase day books
▪ Cash book, bank statements, vouchers
▪ VAT accounts and returns
▪ Statement of comprehensive income/profit and loss account and statement of financial position
/balance sheet

VAT invoice
A VAT invoice must be issued within 30 days of the supply of the goods or services whenever a taxable
person makes a taxable supply to another taxable person, However, VAT invoice is not required when the
supply is made to a person who is not registered for VAT or the supply is zero-rated.
To be valid, a VAT invoice must contain the following information:
1) Invoice date and invoice number
2) Type of supply
3) Date of supply
4) Quantity and description of the goods supplied
5) Name and address of the supplier
6) NAME and address of the customer
7) details of any discounts offered
8) VAT registration number
9) Tax point
10) Rate of VAT for each supply
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11) VAT-exclusive amount for each supply

12) Total VAT-exclusive amount
13) Amount of VAT payable.

Less detailed VAT invoices is issued if the taxable supply is no more than £250 (including VAT).
But it must contain the following information:
1) name and address of the retailer
2) VAT registration number
3) tax point
4) quantity and description of the goods supplied
5) rate of VAT for each supply
6) consideration for the supply
7) Rate of VAT applicable.

Penalties for late filing and late VAT payment

• There are separate penalties for late filing and late payment of VAT.
• Every time when VAT return is filed late, the tax payer receives one penalty point
• When tax payer receives 4 penalty points, then penalty of £200 is charged
• £200 penalty is charged further on every subsequent late filing of return
• Where tax payer is below the penalty point threshold, each penalty point expires after two years
• But once the threshold is reached, penalty points do not increase, rather it requires tax payer to
submit all four quarterly VAT returns on time

Penalties for late payment of VAT

Days late Penalty (% of VAT payable)

Up to 15 days None
16 to 30 days 2%
More than 30 days 4% plus 4% daily

Default interest
Default interest is charged on any unpaid amount from the date the VAT should have been paid to the
date of payment.

Errors on VAT return

If an error is made on the vat return and is discovered by the tax payer itself, then it should be established
whether the error is significant or not.
DEMINIMIS TEST is applied in case of error or misdeclaration on VAT return in order to judge whether the
error is significant or not and is done by taking the Higher of
▪ £10,000 or
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▪ 1% of the turnover for the VAT period (up to a maximum turnover of £50,000),
➢ If error is below the limit, it is said to insignificant and the mistake is voluntarily disclosed in next
VAT return. Default interest will be due but No separate disclosure is required.
➢ But if the error is greater than the limit then separate disclosure to HMRC is required as it is said
to be a significant error. In this situation default interest will be due for underpayment of taxes.
However standard penalty is imposed in both scenarios.
If an error is revealed by HMRC then both default interest and standard penalties are imposed on under
declared amount of VAT.