BigMoney PTC
Friday, May 1, 2009
FINANCE ACT 2008
Student Accountant
JUNe/JULY 2008
RELEVANT TO ACCA QUALIFICATION PAPERS F6 (UK)AND P6 (UK) AND CAT PAPER 9 (UK)
This article looks at the changes made by the Finance Act 2008, and should be read by students taking Paper F6 (UK) at either the June or December 2009 session. Students taking CAT Paper 9(UK) or Paper P6 (UK) in June or December 2009 should read this article together with the relevant appendix on pages 65 to 67. The article also includes details of legislation that was enacted prior to the Finance Act 2008, but which came into effect on 6 April 2008. Students sitting Papers F6 (UK),
P6 (UK), or CAT 9 (UK) in December 2008, will be examined on the Finance Act 2007, which is the legislation as it relates to the tax year 2007–08; these students should refer to the ‘Finance Act 2007’ article, available on the ACCA website.
INCOME TAX
£
RATEs Of INCOME TAX
Employment income 34,000
For the tax year 2008–09, the starting rate of 10% has been removed, and
Building society interest (800 x 100/80) 1,000
the basic rate has been reduced from 22% to 20%. The rates for the tax year
Dividends (9,000 x 100/90) 10,000
2008–09 are therefore as follows:
45,000
Personal allowance (6,035)
Basic rate £1 to £34,800 20%
Taxable income 38,965
Higher rate £34,801 and above 40%
Income tax: 28,965 at 20% 5,793
5,835 at 10% 583
Although the starting rate of 10% has been removed, a new starting rate of
4,165 at 32.5% 1,354
10% has been introduced for the first £2,320 of savings income. However,
Tax liability 7,730
this 10% rate only applies where savings income falls within the first £2,320
of taxable income. Income tax is charged first on non-savings income (income
The starting rate of 10% for savings income is not applicable because
from employment, self-employment, or property), then on savings income,
the non-savings income (£34,000 - £6,035 = £27,965) exceeds
and finally on dividend income. Therefore, if non-savings income exceeds
£2,320.
£2,320 the starting rate of 10% for savings will not apply. In this case,
savings income will be taxed at the basic rate of 20% if it falls below the
EXAMPLE 2
higher-rate threshold of £34,800, and at the higher rate of 40% if it exceeds
For the tax year 2008–09, Ali, aged 67, has pensions of £10,400 and bank
the threshold.
interest of £4,000 (net). Her income tax liability is as follows:
Dividends continue to be taxed at the lower rate of 10% if they fall below
the higher-rate threshold of £34,800, and at the higher rate of 32.5% where
£
they exceed the threshold.
Pensions 10,400
Bank interest (4,000 x 100/80) 5,000
Personal allowances
15,400
Personal allowances for the tax year 2008–09 are as follows:
Personal allowance (9,030)
Personal allowance Standard £6,035
Taxable income 6,370
Personal allowance 65–74 £9,030
Income tax: 1,370 at 20% 274
Personal allowance 75 and over £9,180
950 at 10% 95
Income limit for age-related allowances £21,800
4,050 at 20% 810
Tax liability 1,179
EXAMPLE 1
For the tax year 2008–09, Ingrid, aged 40, has a salary of £34,000, building
Non-savings income is £1,370 (10,400 - 9,030), so £950 (2,320 -
society interest of £800 (net), and dividends of £9,000 (net). Her income tax
1,370) of the savings income is taxed at the starting rate of 10%. The
liability is as follows:
remainder of the savings income is taxed at the basic rate of 20%.
technical
linked performance objectives
page 59
performaNce obJectives 19 aNd 20 are reLevaNt to paper f6
EXAMPLE 3
EMPLOYMENT INCOME
For the tax year 2008–09, Lorn, aged 80, has pensions of £21,000 and
Company car benefit
building society interest of £3,200 (net). Her income tax liability is as follows:
For the tax year 2008–09, the base level of CO
emissions used to calculate
2
company car benefits is reduced from 140 grams per kilometre to 135 grams
£
per kilometre.
Pensions 21,000
The percentage used to calculate a car benefit ranges from
Building society interest (3,200 x 100/80) 4,000
15% to 35%. However, a new l ower rate of 10% has been introduced
25,000
for motor cars with a CO
emission rate of exactly 120 grams per
2
Personal allowance (7,580)
kilometre or less. This lower rate is increased to 13% (10% + 3%) for
Taxable income 17,420
diesel cars.
Income tax: 17,420 at 20% 3,484
Tax liability 3,484
EXAMPLE 4
During the tax year 2008–09, Fashionable plc provided the following
Lorn’s total income exceeds £21,800, so her personal allowance of
employees with company motor cars: Amanda was provided with a new
£9,180 is reduced to £7,580 (9,180 - 1,600 (25,000 - 21,800 =
diesel-powered company car on 6 August 2008. The motor car has a
3,200/2)).
list price of £13,500 and an official CO
emission rate of 122 grams
2
The starting rate of 10% for savings income is not available because the
per kilometre.
non-savings income (£21,000 - £7,580 = £13,420) exceeds £2,320.
Betty was provided with a new petrol-powered company car throughout
the tax year 2008–09. The motor car has a list price of £16,400 and an
INDIVIDUAL sAVINGs ACCOUNTs (IsAs)
official CO
emission rate of 193 grams per kilometre.
2
The distinction between maxi and mini ISAs has been removed, and the
Charles was provided with a new petrol-powered company car throughout
annual investment limits have been increased.
the tax year 2008–09. The motor car has a list price of £22,600 and
An individual can now invest up to £3,600 per tax year in a cash ISA,
an official CO
emission rate of 254 grams per kilometre. Charles paid
2
and up to £7,200 per tax year in a stocks and shares ISA. This is subject to
Fashionable plc £1,200 during the tax year 2008–09 for the use of the
an overall annual investment limit of £7,200. Therefore, if £3,600 is invested
motor car.
in a cash ISA, only £3,600 can then be invested in a stocks and shares ISA.
Diana was provided with a new petrol-powered company car throughout
The income from ISAs is exempt from income tax, while a capital gain
the tax year 2008–09. The motor car has a list price of £12,400 and an
made within a stocks and shares ISA is exempt from capital gains tax.
official CO
emission rate of 118 grams per kilometre.
2
technical
student accountant
page 60
JUNe/JULY 2008
Amanda
Company car fuel benefit
The CO
emissions are below the base level figure of 135 grams per
The fuel benefit is calculated as a percentage of a base figure that is
2
kilometre, so the relevant percentage is 18% (15% plus a 3% charge for a
announced each year. For the tax year 2008–09, the base figure has been
diesel car). The motor car was only available for eight months of the tax year
increased from £14,400 to £16,900.
2008–09, so the benefit is £1,620 (13,500 x 18% x 8/12).
The percentage used in the calculation is exactly the same as that used
for calculating the related company car benefit.
Betty
The CO
emissions are above the base level figure of 135 grams per
EXAMPLE 5
2
kilometre. The CO
emissions figure of 193 is rounded down to 190 so that
Continuing with
Example 4
. Amanda was provided with fuel for private use
2
it is divisible by five. The minimum percentage of 15% is increased in 1%
between 6 August 2008 and 5 April 2009.
steps for each 5 grams per kilometre above the base level, so the relevant
Betty was provided with fuel for private use between 6 April 2008 and
percentage is 26% (15% + 11% (190 - 135 = 55/5)). The motor car
31 December 2008.
was available throughout the tax year 2008–09, so the benefit is £4,264
Charles was provided with fuel for private use between 6 April 2008
(16,400 x 26%).
and 5 April 2009. He paid Fashionable plc £600 during the tax year
2008–09 towards the cost of private fuel, although the actual cost of this fuel
Charles
was £1,000.
The CO
emissions are above the base level figure of 135 grams per
Diana was not provided with fuel for private use.
2
kilometre. The relevant percentage is 38% (15% + 23% (250 - 135 =
115/5)), but this is restricted to the maximum of 35%. The motor car
Amanda
was available throughout the tax year 2008–09, so the benefit is £6,710
The motor car was only available for eight months of the tax year 2008–09,
(22,600 x 35% = 7,910 - 1,200). The contributions made by Charles
so the fuel benefit is £2,028 (16,900 x 18% x 8/12).
towards the use of the motor car reduce the benefit.
Betty
Diana
Fuel was only available for nine months of the tax year 2008–09, so the fuel
The CO
emissions are below 120 grams per kilometre, so the lower rate of
benefit is £3,295 (16,900 x 26% x 9/12).
2
10% applies. The motor car was available throughout the tax year 2008–09,
so the benefit is £1,240 (12,400 x 10%).
Charles
The motor car was available throughout the tax year 2008–09, so the benefit
is £5,915 (16,900 x 35%). There is no reduction for the contributions made
since the cost of private fuel was not fully reimbursed.
Diana
Fuel was not provided for private use so there is no fuel benefit.
OffICIAL RATE Of INTEREsT
The official rate of interest is used when calculating the taxable benefit arising
from a beneficial loan or from the provision of living accommodation costing
in excess of £75,000.
The June and December 2009 exams will use the actual official rate of
interest for the tax year 2008–09 of 6.25%.
CAPITAL ALLOWANCEs
Plant and machinery
There have been a number of changes regarding the allowances available
in respect of expenditure on plant and machinery. The changes apply from
6 April 2008 (1 April 2008 for limited companies).
The rate of writing-down allowance (WDA) has been reduced from
25% to 20%. Where a period of account spans 6 April 2008 (1 April
2008 for limited companies), apportionment will be necessary in order to
determine the rate of WDA applicable. A question
will not be set
involving
apportionment as regards the rate of WDA.
First-year allowances (FYA) at the rate of 40% or 50% have been
abolished. Previously, expenditure by small businesses qualified for an FYA
of 50%, while expenditure by medium-sized businesses qualified for an FYA
of 40%.
From 6 April 2008 (1 April 2008 for limited companies), an annual
investment allowance (AIA) has been introduced. This is available to
all businesses, and provides an FYA of 100% for the first £50,000 of
expenditure on plant and machinery. Any expenditure in excess of the
£50,000 limit will qualify for WDAs as normal. The AIA applies to all
expenditure on plant and machinery with the exception of cars. If plant and
machinery qualifies for the AIA, the sale proceeds from any subsequent
disposal will be deducted as normal in the main plant and machinery pool.
technical
page 61
The £50,000 limit is proportionally reduced or increased where a period
Where the balance of unrelieved expenditure in the main plant and machinery
of account is shorter or longer than 12 months. For example, the AIA would
pool is less than £1,000, then it is now possible to write-off this unrelieved
be £37,500 (50,000 x 9/12) for a nine-month period of account.
expenditure immediately.
Where a period of account spans 6 April 2008 (1 April 2008 for limited
companies), then apportionment will be necessary in order to determine the
EXAMPLE 7
amount of AIA. A question
will not be set
involving apportionment as regards
Nin prepares accounts to 5 April. The tax written down value of her general
the amount of AIA.
pool at 6 April 2008 was £940.
There is no change in the treatment of motor cars. However, for cars
costing more than £12,000, the reduction in the rate of WDA to 20%
Nin’s capital allowance claim for the year ended 5 April 2009 is as follows:
means that the £3,000 WDA restriction now only applies where the cost, or
written-down value (WDV) brought forward, is more than £15,000 (15,000
Pool Allowances
x 20% = £3,000).
£ £
The definition of a low emission motor car has been changed to one
WDV brought forward 940
with CO
emissions of less than 110 grams per kilometre. This change is not
WDA (940) 940
2
particularly important, as in the exam, students will be told whether a motor
WDV carried forward -
-
car is low emission. The 100% FYA for low-emission motor cars is given in
addition to the £50,000 AIA.
Capital allowances 940
There i s also no change in the treatment of short-life assets.
However, expenditure on a short-life asset will qualify for the FYA of 100%
A special rate pool has been introduced from 6 April 2008 (1 April 2008
if it falls within the annual investment limit of £50,000. If outside this
for companies), with a rate of WDA of 10%. This special rate pool is for
limit, expenditure on a short-life asset will qualify for WDA at the rate
expenditure on long-life assets and on plant and machinery integral to a
of 20%.
building. Previously, long-life assets would have qualified for WDAs at the
rate of 6%, while plant and machinery integral to a building would have been
EXAMPLE 6
treated as normal plant and machinery.
Ming Ltd prepares accounts to 31 March. The tax written down value of
A number of items of plant and machinery are treated as being integral to
the company’s general pool at 1 April 2008 was £16,700. The following
a building, particularly:
transactions took place during the year ended 31 March 2009:
electrical and lighting systems
cold water systems
Cost/(Proceeds)
space or water heating systems
£
powered systems of ventilation, cooling, or air purification
12 May 2008 Purchased equipment 61,400
lifts and escalators.
8 June 2008 Purchased motor car (1) 14,200
2 August 2008 Purchased motor car (2) 10,900
The capital allowance tax rules that applied up to 5 April 2008 (1 April
19 October 2008 Purchased motor car (3) 13,800
2008 for limited companies)
are not examinable
from the June 2009
8 January 2009 Sold a lorry (7,600)
sitting onwards.
Motor car (3), purchased on 19 October 2008, is a low-emission car. The
INDUsTRIAL BUILDINGs ALLOWANCEs
lorry, sold on 8 January 2009 for £7,600, originally cost £24,400.
Capital allowances for industrial buildings are to be phased out. This is to be
achieved by an annual 25% reduction in the amount of allowance available
Ming Ltd’s capital allowance claim for the year ended 31 March 2009 is
over a four-year period. For the tax year 2008–09 (the financial year 2008
as follows:
for limited companies), the WDA is therefore reduced from 4% to 3% where
a new industrial building is acquired, or where an existing industrial building
Pool Motor Allowances
continues to be owned.
car
Where a limited company’s chargeable period falls into two financial
£ £ £ £
years, then apportionment will be necessary in order to determine the rate of
WDV brought forward 16,700
WDA applicable. A question will not be set involving apportionment.
Additions qualifying for AIA
From the June 2009 sitting onwards, questions
will not be set
involving
Equipment 61,400
WDAs on the purchase of a secondhand industrial building.
AIA – 100% (50,000) 50,000
11,400
EXAMPLE 8
Other additions
Scuba Ltd makes up its accounts to 31 March. The company purchased a
Motor car (1) 14,200
new factory from a builder on 1 July 2008 for £240,000 (excluding the cost
Motor car (2) 10,900
of land), and this was immediately brought into use.
39,000
For the year ended 31 March 2009, Scuba Ltd can claim a WDA of
Proceeds – Lorry (7,600)
£7,200 (240,000 at 3%).
31,400
WDA – 20% (6,280) 6,280
PENsION sCHEMEs
WDA – 20% (2,840) 2,840
Annual allowance
Addition qualifying for FYA
The annual allowance for the tax year 2008–09 has been increased to
Motor car (3) 13,800
£235,000.
FYA – 100% (13,800)
0
0
13,800
Although tax relief is available on pension contributions up to the amount
WDV carried forward 25,120 11,360
0
of earnings for a particular tax year, the annual allowance acts as an effective
Capital allowances 72,920
annual limit.
technical
student accountant
page 62
JUNe/JULY 2008
Any tax-relieved contributions in excess of the annual allowance are
corporation tax of £40,000 and FII of £10,000.
taxed at the rate of 40%, thus cancelling out the tax relief that will have
For the year ended 31 December 2008, Moderate Ltd has profits
been given.
chargeable to corporation tax of £40,000 and FII of £10,000.
For the year ended 31 March 2009, Difficult Ltd has profits chargeable
Lifetime allowance
to corporation tax of £600,000 and FII of £50,000.
The lifetime allowance for the tax year 2008–09 has been increased to
For the year ended 31 December 2008, Hard Ltd has profits chargeable
£1,650,000. The lifetime allowance applies to the total funds that can be
to corporation tax of £600,000 and FII of £50,000.
built up within a person’s pension schemes. Where the limit is exceeded there
will be an additional tax charge when that person subsequently withdraws the
Easy Ltd
funds in the form of a pension.
Corporation tax is £8,400 (40,000 at 21%) as the profits of £50,000
(40,000 + 10,000) are less than £300,000.
EXAMPLE 9
For the tax year 2008–09, Frank had trading profits of £350,000 and made
Moderate Ltd
gross personal pension contributions of £250,000.
The profits of £50,000 (40,000 + 10,000) are less than £300,000.
Frank has earnings of £350,000 for the tax year 2008–09. All of the
Because the company’s accounting period straddles 31 March, the
contributions of £250,000 therefore qualify for tax relief, and he will have
corporation tax liability is calculated as follows:
paid £200,000 (250,000 less 20%) to the personal pension company.
£
Higher-rate tax relief will be given by extending Frank’s basic rate tax band for
Financial year 2007
the tax year 2008–09 to £284,800 (34,800 + 250,000). However, there
40,000 x 3/12 = 10,000 at 20% 2,000
will be a tax charge at the rate of 40% on the excess of contributions above
Financial year 2008
the annual allowance of £235,000. His income tax liability for the tax year
40,000 x 9/12 = 30,000 at 21% 6,300
2008–09 is as follows:
Liability
8,300
£
Trading profit 350,000
Difficult Ltd
Personal allowance (6,035)
Marginal relief applies, as the profits of £650,000 (600,000 + 50,000) are
Taxable income 343,965
between £300,000 and £1,500,000. The company’s corporation tax liability
Income tax: 284,800 at 20% 56,960
is as follows:
59,165 at 40% 23,666
£
80,626
600,000 at 28% 168,000
Excess contribution charge
Marginal relief
15,000 (250,000 - 235,000) at 40% 6,000
7/400 (1,500,000 - 650,000) x 600,000/650,000 (13,731)
Tax liability 86,626
Liability
154,269
CORPORATION TAX
Hard Ltd
Rates of corporation tax
The profits of £650,000 (600,000 + 50,000) are between £300,000 and
For the financial year 2008, the small company rate of corporation tax
£1,500,000. Because the company’s accounting period straddles 31 March,
has increased from 20% to 21%, and the full rate of corporation tax has
the corporation tax liability is calculated as follows:
decreased from 30% to 28%. The lower and upper limits are unchanged.
£
Marginal relief eases the transition from the small company rate to
Financial year 2007
the full rate of corporation tax where profits fall between £300,000 and
600,000 x 3/12 = 150,000 at 30% 45,000
£1,500,000. The fraction used in the calculation of marginal relief for the
Marginal relief
financial year 2008 is 7/400th. The effective marginal rate of corporation tax
1/40 (1,500,000 - 650,000) x 600,000/650,000 x 3/12 (4,904)
on profits that fall between the £300,000 and £1,500,000 limits is reduced
Financial year 2008
from 32.5% to 29.75%. The corporation tax rates for the financial year 2008
600,000 x 9/12 = 450,000 at 28% 126,000
can therefore be summarised as follows:
Marginal relief
7/400 (1,500,000 - 650,000) x 600,000/650,000 x 9/12 (10,298)
Level of profits Effective rate
Liability
155,798
Up to £300,000 21%
£300,001 to £1,500,000 29.75%
Note that there are alternative ways of calculating the tax liability for Hard
Over £1,500,000 28%
Ltd, but this approach is the most straightforward as there is no need to
apportion any figures.
In the June and December 2009 exams, corporation tax information will be
given in the ‘Tax Rates and Allowances’ section of the paper, as follows:
CAPITAL GAINs TAX
Individual exemption limit
financial year 2006 2007 2008
The annual individual exemption limit for the tax year 2008–09 has
Small companies rate 19% 20% 21%
increased from £9,200 to £9,600.
Full rate 30% 30% 28%
Lower limit 300,000 300,000 300,000
Capital gains tax reform
Upper limit 1,500,000 1,500,000 1,500,000
There has been a major reform of capital gains tax with the aim of simplifying
Marginal relief fraction 11/400 1/40 7/400
the capital gains rules for individuals.
EXAMPLE 10
Tax rate
For the year ended 31 March 2009, Easy Ltd has profits chargeable to
Previously, capital gains were taxed as if they were savings income. For the
technical
page 63
tax year 2008–09, there is just a single rate of capital gains tax of 18%.
This rate is used regardless of the amount of taxable gains or taxable income.
The due date is unchanged, so a capital gains tax liability for the tax year
2008–09 will be payable on 31 January 2010.
Withdrawal of reliefs
The indexation allowance and taper relief have been withdrawn for disposals
of assets from 6 April 2008 onwards.
All other reliefs, such as rollover relief, holdover relief, and rollover relief
on the transfer of a business to a limited company, continue to be available.
EXAMPLE 11
Andy sold a factory on 15 February 2008 for £320,000. The factory was
purchased on 24 January 1990 for £164,000, and was extended at a cost of
£37,000 during March 2000.
Andy incurred legal fees of £3,600 in connection with the purchase of
the factory, and legal fees of £5,800 in connection with the disposal.
Andy’s capital gains tax liability for the tax year 2008–09 is as follows:
£ £
Disposal proceeds 320,000
Cost 164,000
Enhancement expenditure 37,000
Incidental costs (3,600 + 5,800) 9,400
(210,400)
109,600
The assets were all owned for more than one year prior to the date
Annual exemption (9,600)
of disposal. The warehouse had never been used by Michael for
100,000
business purposes.
Capital gains tax: 100,000 at 18% 18,000
On 25 January 2009, Michael sold a 30% shareholding in Green Ltd,
Andy’s capital gains tax liability will be due on 31 January 2010.
an unquoted trading company. The disposal resulted in a capital gain of
£450,000. Michael had owned the shares since 1 March 2003, and was
Entrepreneurs’ relief
an employee of the company from that date until the date of disposal.
To compensate for the withdrawal of taper relief, a new relief has been
introduced from 6 April 2008 that can be claimed when an individual disposes
Michael’s capital gains tax liability for the tax year 2008–09 is as follows:
of a business or part of a business. The relief covers the first £1m of qualifying
gains that a person makes during their lifetime, and reduces those gains by
£ £
a factor of 4/9ths. This gives an effective capital gains tax rate of 10% (18%
Goodwill 260,000
x 5/9ths) for gains covered by the relief. Gains in excess of the £1m limit are
Freehold office building 370,000
taxed as normal at the 18% rate. There is no age requirement in order to claim
630,000
the relief, but assets must have been owned for one year prior to the date of
Entrepreneurs’ relief (630,000 x 4/9ths)
(280,000)
disposal in order to qualify. Entrepreneurs’ relief is available for the following:
350,000
A disposal of the whole or part of a business run as a sole trader. Relief
Freehold warehouse 170,000
is only available in respect of capital gains arising from the disposal of
Shareholding in Green Ltd
assets in use for the purpose of the business. This will exclude capital
450,000
gains arising from investments.
Entrepreneurs’ relief (370,000 x 4/9ths) (164,444)
-
The disposal of shares in a trading company where an individual has a
285,556
5% shareholding in the company and is also an employee of the company.
805,556
Provided the company is a trading company, there is no restriction to the
Annual exemption (9,600)
amount of relief if it holds non-trading assets such as investments.
795,956
Capital gains tax: 795,956 at 18% 143,272
Relief can also be claimed where an associated disposal is made at the same
time as the main disposal. Associated disposals
are not examinable
.
Entrepreneurs’ relief of £630,000 is utilised on the disposal of Michael’s
sole tradership. Therefore, £370,000 (1,000,000 - 630,000) is
EXAMPLE 12
available when the shares in Green Ltd are disposed of.
Michael made the following disposals during the tax year 2008–09:
On 30 June 2008, Michael sold a business that he had run as a sole trader
Share identification rules
since 1 January 2002. The sale resulted in the following capital gains:
The withdrawal of the indexation allowance and taper relief has resulted in
£
the share identification rules being simplified. Disposals of shares from 6 April
Goodwill 260,000
2008 onwards, are matched with purchases in the following order:
Freehold office building 370,000
shares purchased on the same day as the disposal
Freehold warehouse 170,000
shares purchased within the following 30 days
800,000
shares in the share pool.
technical
student accountant
page 64
JUNe/JULY 2008
The share pool aggregates all purchases except for those made on the same
day as the disposal, or within the following 30 days.
EXAMPLE 13
Kim has had the following transactions in the shares of Long plc:
1 June 2001 Purchased 4,000 shares for £6,200
30 April 2006 Purchased 2,000 shares for £8,800
15 May 2008 Purchased 500 shares for £2,500
15 May 2008 Sold 4,500 shares for £27,000
Kim’s capital gain for the tax year 2008–09 is as follows:
£ £
Purchase 15 May 2008
Proceeds (£27,000 x 500/4,500) 3,000
Cost (2,500)
500
Share pool
Proceeds (£27,000 x 4,000/4,500) 24,000
Cost (10,000)
14,000
14,500
Share pool
Number Cost
£ £
Purchase 1 June 2001 4,000 6,200
EXAMPLE 14
Purchase 30 April 2006 2,000 8,800
Simone Ltd has one employee who is paid £50,000 per year, and was
6,000 15,000
provided with the following taxable benefits during the tax year 2008–09:
Disposal 15 May 2008 (15,000 x 4,000/6,000) (4,000) (10,000)
Balance carried forward 2,000 5,000
£
Company motor car 6,400
The disposal is first matched with the same day purchase and then
Car fuel
5,070
against the share pool.
Living accommodation 1,800
The capital gains tax rules that applied up to 5 April 2008
are not
The Class 1 and Class 1A NIC liabilities are as follows:
examinable
from the June 2009 sitting onwards.
£
Limited companies are not affected by these changes. In particular,
Employee Class 1 NIC
they continue to be entitled to the indexation allowance, and the share
40,040 - 5,435 = 34,605 at 11% 3,807
identification rules are unchanged.
50,000 - 40,040 = 9,960 at 1% 100
3,907
NATIONAL INsURANCE CONTRIBUTIONs
Employer’s Class 1 NIC
Class 1 and Class 1A National Insurance Contributions (NIC)
50,000 - 5,435 = 44,565 at 12.8% 5,704
For the tax year 2008–09, the rates of employee Class 1 NIC are unchanged
at 11% and 1%.
Employer’s Class 1A NIC
The rate of 11% is paid on earnings between £5,435 per year and
13,270 (6,400 + 5,070 + 1,800) at 12.8% 1,699
£40,040 per year, and the rate of 1% is paid on all earnings over £40,040
per year.
Class 2 and Class 4 NIC
The rate of employer’s Class 1 NIC is unchanged at 12.8%, and is paid
For the tax year 2008–09 the rate of Class 2 NIC has been increased to
on all earnings over £5,435 per year.
£2.30 per week.
The rate of Class 1A NIC that employers pay on taxable benefits provided
The rates of Class 4 NIC are unchanged at 8% and 1%. The rate of 8% is
to employees is also unchanged at 12.8%.
paid on profits between £5,435 and £40,040, and the rate of 1% is paid on
In the June and December 2009 exams, the Class 1 and Class 1A NIC
all profits over £40,040.
information will be given in the ‘Tax Rates and Allowances’ section of the
In the June and December 2009 exams, the Class 4 NIC information will
paper, as follows:
be given in the ‘Tax Rates and Allowances’ section of the paper as follows:
%
%
Class 1 Employee £1–£5,435 per year Nil
Class 4 £1–£5,435 per year Nil
£5,436–£40,040 per year 11.0
£5,436–£40,040 per year 8.0
£40,041 and above per year 1.0
£40,041 and above per year 1.0
Class 1 Employer £1–£5,435 per year Nil
£5,436 and above per year 12.8
EXAMPLE 15
Class 1A 12.8
Jimmy is a self-employed builder and Jenny is a self-employed consultant.
technical
page 65
Their trading profits for the tax year 2008–09 are respectively £25,000 and
force (for income tax purposes) at 6 April 2008. For the June and December
£50,000. Class 4 NIC liabilities for the tax year 2008–09 are as follows:
2009 exams, the assumed rate of interest on underpaid tax will therefore be
7.5%, and the assumed rate of interest on overpaid tax will be 3.0%.
£
Jimmy 25,000 - 5,435 = 19,565 at 8% 1,565
David Harrowven is examiner for Paper f6 (UK)
Jenny 40,040 - 5,435 = 34,605 at 8% 2,768
APPENDIX 1:
CAT PAPER 9 (UK)
50,000 - 40,040 = 9,960 at 1% 100
2,868
The starting threshold of £5,435 for Class 1 and Class 4 NIC is normally
This appendix outlines the effects of the changes made in the finance Act
aligned with the income tax personal allowance. However, this is not the case
2008 on the June and December 2009 sittings of CAT Paper 9,
Preparing
for the tax year 2008–09, as the personal allowance is £6,035.
Taxation Computations
(UK). The sub-headings refer to the headings given
in the main article on Paper f6 (UK).
VALUE ADDED TAX
Registration and deregistration limits
INCOME TAX
The limit of annual turnover above which VAT registration is compulsory has
Rates of income tax
been increased from £64,000 to £67,000, and the deregistration limit has
The revised thresholds and the rates of tax shown will be used in CAT Paper 9
been increased from £62,000 to £65,000.
(UK). No questions will be set using the old 10% starting rate for 2007–08.
The use of the 10% rate for savings income is examinable.
Errors in a VAT return
The application of the 20% rate to gift aid donations and personal
The limit for voluntarily disclosing net errors made in a VAT return has been
pension contributions is examinable.
increased from £2,000 to the higher of £10,000 or 1% of turnover for the
VAT period. A business can voluntarily disclose net errors below the limit
Personal allowance
by entering them on the next VAT return without this resulting in a serious
Only the personal allowance for people under 65 is examinable. Information
misdeclaration penalty or penalty interest.
on the higher allowances and the restriction limit will not be given on the CAT
Paper 9 (UK) ‘Allowances and Rates’ sheet.
Misdeclaration penalty
The amount of penalty that can be charged as a result of making a
IsAs
misdeclaration has been changed. Previously, the penalty was 15% of
This area is not in the CAT Paper 9 (UK) syllabus (with the exception of
the amount of understated VAT. The penalty that can now be charged is
knowing that ISA income is tax free).
determined according to the new penalty regime introduced for incorrect
returns, which is covered in the following section on tax management.
Employment income
All information relevant to car and fuel benefits will also apply to CAT Paper
TAX MANAGEMENT
9 (UK).
Enquiries into self-assessment corporation tax returns
Previously, HM Revenue & Customs (HMRC) normally had until 12 months
Official rate of interest
after the tax return filing deadline in which to notify a limited company that
The rate of 6.25% will be used.
they intended to enquire into its self-assessment corporation tax return. This
enquiry window has now been changed to 12 months from the date that a
BUsINEss TAX
corporation tax return is received by HMRC.
Capital allowances for plant and machinery
The new rate of 20% writing-down allowance (WDA) will apply to CAT Paper
Penalties for incorrect returns
9, but no questions will be set on the old rate of 25%, or on the ‘hybrid’ rate,
A single new penalty regime has been introduced for incorrect returns. As far
where accounting periods straddle 6 April 2008. The special rate pool is not
as Paper F6 (UK) is concerned, the new penalty regime applies to incorrect
in the CAT Paper 9 (UK) syllabus.
self-assessment tax returns, self-assessment corporation tax returns, and
where a misdeclaration has been made on a VAT return.
Annual investment allowance (AIA)
The amount of penalty is based on the amount of tax understated, but the
The new AIA will be examinable, but no questions will be set where an
actual penalty payable is linked to the taxpayer’s behaviour, as follows:
accounting period straddles 6 April 2008. As a result, no questions will
There will be no penalty where a taxpayer simply makes a mistake.
involve the old first-year allowances, apart from the 100% allowance
There will be a moderate penalty (up to 30% of the understated tax)
available to short-life assets where they fall within the annual investment limit
where a taxpayer fails to take reasonable care.
of £50,000.
There will be a higher penalty (up to 70% of the understated tax) if
the error is deliberate, and an even higher penalty (up to 100% of the
Industrial buildings allowance (IBA)
understated tax) where there is also concealment of the error.
The only rate of IBA to be used will be 3% (75% of the old 4% rate). No
questions will be set involving periods straddling tax years.
However, a penalty will be substantially reduced where a taxpayer makes
disclosure, especially when this is unprompted by HMRC. For example, if a
PENsION sCHEMEs
taxpayer makes an unprompted disclosure of an incorrect return following a
The revised annual allowance limit of £235,000, and the lifetime allowance
failure to take reasonable care, the penalty could be reduced to nil.
of £1,650,000, will apply to CAT Paper 9 (UK).
Interest on underpaid and overpaid tax
CORPORATION TAX
The assumed rates of interest on underpaid and overpaid income tax, Class
Rates of corporation tax
4 NIC, capital gains tax, and corporation tax are based on the actual rates in
These will affect CAT Paper 9 (UK) in exactly the same way as they affect
technical
student accountant
page 66
JUNe/JULY 2008
Paper F6 (UK). The same detail on rates will be supplied in the CAT Paper
Domicile and the remittance basis
9 exam. A question on a chargeable account period spanning two financial
An individual who is a UK resident is taxable on overseas income as well
years and involving a change of tax rate will not be set.
as UK income. Up to and including 2007–08, overseas income was taxed
on the remittance basis if the individual was either non-ordinary resident
CAPITAL GAINs TAX (CGT)
or non-domiciled in the UK. Chargeable gains realised on assets situated
The new flat rate, the new annual exemption, the abolition of indexation
overseas by UK residents or ordinarily resident individuals, who were not UK
allowance (IA), and taper relief for individuals are all in the CAT Paper 9 (UK)
domiciled, were also taxed on the remittance basis.
syllabus. No questions will be set requiring knowledge of IA (for individuals)
The remittance basis continues to be available in respect of both income
or taper relief.
and chargeable gains. However, from 2008–09, an individual who has been
UK resident for at least seven of the nine preceding tax years must now pay
Entrepreneurs’ relief
a tax charge on their unremitted income/gains of £30,000 in order to claim
This will be examinable. The examiner will clearly state if an asset is a
the remittance basis. This charge is payable in addition to the tax due on any
business asset. Associated disposals will not be examined.
amounts remitted to the UK.
UK resident individuals who satisfy the residency conditions but choose
share matching rules
not to pay this tax charge will be subject to UK tax on all of their overseas
The new rules will be examined.
income/gains, regardless of whether or not amounts are remitted to the UK
(subject to a de minimis of unremitted amounts of £2,000). Each year,
NATIONAL INsURANCE CONTRIBUTIONs
individuals will need to choose whether to pay the £30,000 charge and claim
The new rates and thresholds for NIC Classes 1, 1A, 2 and 4 will apply to
the remittance basis, or pay tax on their worldwide income and capital gains.
CAT Paper 9.
The term ‘remittance’ has always covered the use of overseas income to
settle debts overseas where the money was borrowed by the taxpayer in the
VALUE ADDED TAX
UK, or was borrowed overseas and brought into the UK, as well as simply
Registration and deregistration limits
bringing the overseas income directly to the UK. For 2008–09, untaxed
Both the revised limits for registration (£67,000) and deregistration
overseas income will be regarded as being remitted to the UK if it is used
(£65,000) will apply for the 2009 papers.
to purchase goods or services on or after 12 March 2008, and these goods
or services are subsequently brought into the UK. There are a number of
TAX MANAGEMENT
exemptions to this rule including personal items (clothes, shoes, jewellery and
Interest on underpaid and overpaid tax
watches), items imported for a short period of time or for repair, and items
The calculation of this remains outside the CAT Paper 9 (UK) syllabus.
costing less than £1,000.
For 2008–09, individuals who claim the remittance basis will no
Keith Molson is examiner for CAT Paper 9 (UK)
longer be entitled to income tax personal allowances or the capital gains tax
annual exemption.
APPENDIX 2 :
PAPER P6 (UK)
INCOME fROM EMPLOYMENT
Enterprise Management Incentives (EMI)
This appendix should be read by students taking Paper P6 (UK) at either
A qualifying company (broadly a trading company with gross assets not
the June or December 2009 sitting. All the changes relating to Paper
exceeding £30m) may grant share options under an Enterprise Management
f6 (UK) set out in the main article are relevant to Paper P6 (UK). This
Incentives scheme to eligible employees. There is usually no income tax
appendix summarises the additional changes that apply to the Paper P6
or National Insurance Contributions (NIC) on the grant or exercise of such
(UK) syllabus. All the exclusions set out in the Paper f6 (UK) article apply
options. For 2008–09, an additional condition must be satisfied in order
equally to Paper P6 (UK) unless they are referred to in this appendix.
for a company to qualify for the scheme: the company, together with its
Students sitting Paper P6 (UK) in December 2008 will be examined on
subsidiaries, must have fewer than 250 full-time employees at the time the
the Finance Act 2007, which is the legislation as it relates to the tax year
options are granted. In addition, the limit on the value of shares over which
2007–08. Accordingly, these students should refer to the Finance Act 2007
an employee can hold options granted via an EMI scheme has been increased
article published on the ACCA website.
to £120,000 (previously £100,000) at the date of grant.
INCOME TAX – sCOPE
EXEMPTIONs AND RELIEfs
Residence
Enterprise Investment scheme (EIs)
In order to determine whether or not an individual is resident or ordinarily
Individuals who invest in qualifying Enterprise Investment Scheme shares
resident in the UK, it may be necessary to count the number of days spent
are able to claim 20% income tax relief in respect of the amount invested,
in the UK in the tax year. Prior to the Finance Act 2008, days of arrival and
subject to an annual investment limit. For 2008–09, the annual investment
departure were not counted as days spent in the UK. This rule has been
limit has been increased to £500,000 (previously £400,000).
changed so that an individual is now regarded as being present in the UK
on any day when they are still in the UK at midnight at the end of the day
CAPITAL ALLOWANCEs
in question.
Plant and machinery
The changes made to plant and machinery capital allowances set out in the
foreign dividends
Paper F6 (UK) article, together with the related exclusions, also apply to
For 2008–09, UK resident individuals holding less than 10% of the shares
Paper P6 (UK). For the purposes of Paper P6 (UK), candidates also need to
of a non-UK resident company will be entitled to a 10% tax credit. The
be aware of the following additional points.
tax credit operates as it does in relation to dividends from a UK-resident
The annual investment allowance (AIA) may be split between related
company; the foreign dividend income is grossed up at 100/90, the gross
businesses or companies, or between group companies. Businesses or
income is taxed at 10%/32.5%, and there is a 10% tax credit. The tax credit
companies owned by the same individual(s) will be regarded as being related
is not repayable in cash.
if they are engaged in similar activities or share the same premises. In such
technical
linked performance objectives
page 67
performaNce obJectives 19 aNd 20 are reLevaNt to paper p6
circumstances, the owner of the businesses or companies can choose how
CAPITAL GAINs TAX
to allocate the single AIA between them. Unrelated businesses or companies
Capital gains tax reform
owned by the same individual(s) will each be entitled to the full AIA.
The changes made to capital gains tax set out in the Paper F6 (UK) article
A group of companies is entitled to a single AIA, and the group can choose
above also apply to Paper P6 (UK). The following additional rules introduced
how to allocate the AIA between its members. The company law definition
by the Finance Act 2008 apply to Paper P6 (UK) only.
of a group (essentially a majority shareholding) is used for these purposes.
Accordingly, companies in a group relief group or a capital gains group are
THE sCOPE Of CAPITAL GAINs TAX
also in a group for AIA purposes.
Domicile and the remittance basis
The 10% rate of writing-down allowances in respect of plant and
As noted above, from 2008–09, individuals who claim the remittance basis
machinery integral to a building applies to both initial and replacement
will no longer be entitled to the capital gains tax annual exemption.
expenditure. Replacement expenditure occurs where more than 50% of an
In the past, capital losses realised by non-UK domiciled individuals in
asset is replaced in a 12-month period. This prevents a tax deduction being
respect of assets situated overseas were not available for relief in the UK.
claimed for the repair of such assets where such repairs are substantial.
From 2008–09, such losses will be available for relief provided they have
arisen in a year where the individual is taxed on the arising basis. Individuals
Industrial buildings allowances
who have not claimed the remittance basis from 2008–09 will obtain relief
The changes made to industrial buildings allowances set out in the Paper F6
for such losses automatically; other individuals will be required to make an
(UK) article, together with the related exclusions, also apply to Paper P6 (UK).
election in order to claim relief.
CORPORATION TAX
Exemptions and reliefs
Capital allowances
Entrepreneurs’ relief
Enhanced capital allowances
Entrepreneurs’ relief provides an effective rate of capital gains tax of
Expenditure on energy-saving or environmentally-beneficial plant and
10% for the first £1m of quali fying gains. In addition to the qualifying
machinery qualifies for a 100% first-year allowance. Where a company has
disposals set out in the Paper F6 (UK) articl e, the rel ief is also available
made a loss, it may surrender that part of the loss relating to such allowances
on the disposal of a share in a partnership by a partner, and on associated
in exchange for a payment from HM Revenue & Customs (HMRC) equal
disposals. Associated disposals are disposals of assets owned by an
to 19% of the loss surrendered. Such a claim can only be made where the
individual but used by their personal trading company or a partnership in
company is unable to use the losses in the current accounting period against
which they are a partner, which take place at the same time as the sale
its own profits, or via group relief. The claim is made in the company’s
of the partnership or company. In order for ful l relief to be avail able for
corporation tax return.
associated disposals, the individual must not have charged rent to the
The maximum payment that a company can claim is the higher of
business for the use of the assets.
£250,000 and its total PAYE and NIC liabilities for the relevant accounting
period. Where any of the qualifying plant and machinery is sold within four
INHERITANCE TAX
years of the end of the relevant accounting period, there will be a claw-back of
The nil-rate band
an appropriate part of the payment made and a reinstatement of the losses.
The nil-rate band for 2008–09 is £312,000 (for 2007–08 it was
£300,000).
Research and development
A standard element of inheritance tax planning has always been to ensure
An additional tax deduction is available where companies incur revenue
that both spouses or civil partners make full use of their nil-rate bands. This
expenditure on research and development. The size of the additional
was achieved via a combination of interspouse transfers (in the situation
deduction depends on whether the company is a small or medium-sized
where one spouse had insufficient assets) and bequests made directly to
enterprise (SME) or a large enterprise. The definition of an SME is to change
children rather than to the surviving spouse.
from a date yet to be announced. Questions in the 2009 exam sittings will
The Finance Act 2008 has removed the need for much of this planning
state whether or not a company is an SME for the purposes of research and
by enabling any amount of the nil-rate band that has not been used at the
development.
time of a person’s death to be transferred to their spouse or civil partner
The additional tax deduction available to SMEs will increase to 75%
who dies on or after 9 October 2007. As a result of this, a spouse or civil
(previously 50%) from a date yet to be announced. Equal credit will be
partner can now leave the whole of their estate to the surviving spouse
given in the 2009 exams to candidates who give an additional tax deduction
or partner with no adverse inheritance tax consequences. The surviving
of either 75% or 50%. The additional tax deduction available to large
spouse or partner will receive the benefit of their own nil-rate band and any
companies increased to 30% (previously 25%) on 1 April 2008.
unused amount of their spouse’s nil-rate band when leaving their estate to
A limit has been introduced on the additional tax relief available to SMEs.
their children.
This limit is not within the Paper P6 (UK) syllabus.
Where an SME makes a trading loss, it may claim a repayment from
sTAMP DUTY AND sTAMP DUTY LAND TAX
HMRC up to a maximum of a percentage of its qualifying research and
The rates and limits for 2008–09 are the same as those in 2007–08.
development expenditure multiplied by 175%. The percentage that can
There are no examinable changes to these taxes in respect of the exams
be reclaimed is to be reduced from 16% to 14% from a date yet to be
in 2009.
announced. Equal credit will be given in the 2009 exams to candidates who
use either 16% or 14%.
fURTHER READING
The changes introduced by the Finance Act 2008 will be incorporated into
VALUE ADDED TAX (VAT)
the following articles scheduled for publication in future issues of
student
Land and buildings and the option to tax
accountant
: ‘international travellers’, ‘trusts, tax and financial planning’,
A trader can opt to tax the otherwise exempt supply of an ‘old’ (ie more
‘corporation tax’ and ‘capital taxes’. The articles will also be published on the
than three years) freehold commercial building or the grant of a lease. The
ACCA website.
legislation in this area has been rewritten and a number of minor changes
have been introduced. These changes will not be examined in 2009.
Rory fish is examiner for Paper P6 (UK)
JUNe/JULY 2008
RELEVANT TO ACCA QUALIFICATION PAPERS F6 (UK)AND P6 (UK) AND CAT PAPER 9 (UK)
This article looks at the changes made by the Finance Act 2008, and should be read by students taking Paper F6 (UK) at either the June or December 2009 session. Students taking CAT Paper 9(UK) or Paper P6 (UK) in June or December 2009 should read this article together with the relevant appendix on pages 65 to 67. The article also includes details of legislation that was enacted prior to the Finance Act 2008, but which came into effect on 6 April 2008. Students sitting Papers F6 (UK),
P6 (UK), or CAT 9 (UK) in December 2008, will be examined on the Finance Act 2007, which is the legislation as it relates to the tax year 2007–08; these students should refer to the ‘Finance Act 2007’ article, available on the ACCA website.
INCOME TAX
£
RATEs Of INCOME TAX
Employment income 34,000
For the tax year 2008–09, the starting rate of 10% has been removed, and
Building society interest (800 x 100/80) 1,000
the basic rate has been reduced from 22% to 20%. The rates for the tax year
Dividends (9,000 x 100/90) 10,000
2008–09 are therefore as follows:
45,000
Personal allowance (6,035)
Basic rate £1 to £34,800 20%
Taxable income 38,965
Higher rate £34,801 and above 40%
Income tax: 28,965 at 20% 5,793
5,835 at 10% 583
Although the starting rate of 10% has been removed, a new starting rate of
4,165 at 32.5% 1,354
10% has been introduced for the first £2,320 of savings income. However,
Tax liability 7,730
this 10% rate only applies where savings income falls within the first £2,320
of taxable income. Income tax is charged first on non-savings income (income
The starting rate of 10% for savings income is not applicable because
from employment, self-employment, or property), then on savings income,
the non-savings income (£34,000 - £6,035 = £27,965) exceeds
and finally on dividend income. Therefore, if non-savings income exceeds
£2,320.
£2,320 the starting rate of 10% for savings will not apply. In this case,
savings income will be taxed at the basic rate of 20% if it falls below the
EXAMPLE 2
higher-rate threshold of £34,800, and at the higher rate of 40% if it exceeds
For the tax year 2008–09, Ali, aged 67, has pensions of £10,400 and bank
the threshold.
interest of £4,000 (net). Her income tax liability is as follows:
Dividends continue to be taxed at the lower rate of 10% if they fall below
the higher-rate threshold of £34,800, and at the higher rate of 32.5% where
£
they exceed the threshold.
Pensions 10,400
Bank interest (4,000 x 100/80) 5,000
Personal allowances
15,400
Personal allowances for the tax year 2008–09 are as follows:
Personal allowance (9,030)
Personal allowance Standard £6,035
Taxable income 6,370
Personal allowance 65–74 £9,030
Income tax: 1,370 at 20% 274
Personal allowance 75 and over £9,180
950 at 10% 95
Income limit for age-related allowances £21,800
4,050 at 20% 810
Tax liability 1,179
EXAMPLE 1
For the tax year 2008–09, Ingrid, aged 40, has a salary of £34,000, building
Non-savings income is £1,370 (10,400 - 9,030), so £950 (2,320 -
society interest of £800 (net), and dividends of £9,000 (net). Her income tax
1,370) of the savings income is taxed at the starting rate of 10%. The
liability is as follows:
remainder of the savings income is taxed at the basic rate of 20%.
technical
linked performance objectives
page 59
performaNce obJectives 19 aNd 20 are reLevaNt to paper f6
EXAMPLE 3
EMPLOYMENT INCOME
For the tax year 2008–09, Lorn, aged 80, has pensions of £21,000 and
Company car benefit
building society interest of £3,200 (net). Her income tax liability is as follows:
For the tax year 2008–09, the base level of CO
emissions used to calculate
2
company car benefits is reduced from 140 grams per kilometre to 135 grams
£
per kilometre.
Pensions 21,000
The percentage used to calculate a car benefit ranges from
Building society interest (3,200 x 100/80) 4,000
15% to 35%. However, a new l ower rate of 10% has been introduced
25,000
for motor cars with a CO
emission rate of exactly 120 grams per
2
Personal allowance (7,580)
kilometre or less. This lower rate is increased to 13% (10% + 3%) for
Taxable income 17,420
diesel cars.
Income tax: 17,420 at 20% 3,484
Tax liability 3,484
EXAMPLE 4
During the tax year 2008–09, Fashionable plc provided the following
Lorn’s total income exceeds £21,800, so her personal allowance of
employees with company motor cars: Amanda was provided with a new
£9,180 is reduced to £7,580 (9,180 - 1,600 (25,000 - 21,800 =
diesel-powered company car on 6 August 2008. The motor car has a
3,200/2)).
list price of £13,500 and an official CO
emission rate of 122 grams
2
The starting rate of 10% for savings income is not available because the
per kilometre.
non-savings income (£21,000 - £7,580 = £13,420) exceeds £2,320.
Betty was provided with a new petrol-powered company car throughout
the tax year 2008–09. The motor car has a list price of £16,400 and an
INDIVIDUAL sAVINGs ACCOUNTs (IsAs)
official CO
emission rate of 193 grams per kilometre.
2
The distinction between maxi and mini ISAs has been removed, and the
Charles was provided with a new petrol-powered company car throughout
annual investment limits have been increased.
the tax year 2008–09. The motor car has a list price of £22,600 and
An individual can now invest up to £3,600 per tax year in a cash ISA,
an official CO
emission rate of 254 grams per kilometre. Charles paid
2
and up to £7,200 per tax year in a stocks and shares ISA. This is subject to
Fashionable plc £1,200 during the tax year 2008–09 for the use of the
an overall annual investment limit of £7,200. Therefore, if £3,600 is invested
motor car.
in a cash ISA, only £3,600 can then be invested in a stocks and shares ISA.
Diana was provided with a new petrol-powered company car throughout
The income from ISAs is exempt from income tax, while a capital gain
the tax year 2008–09. The motor car has a list price of £12,400 and an
made within a stocks and shares ISA is exempt from capital gains tax.
official CO
emission rate of 118 grams per kilometre.
2
technical
student accountant
page 60
JUNe/JULY 2008
Amanda
Company car fuel benefit
The CO
emissions are below the base level figure of 135 grams per
The fuel benefit is calculated as a percentage of a base figure that is
2
kilometre, so the relevant percentage is 18% (15% plus a 3% charge for a
announced each year. For the tax year 2008–09, the base figure has been
diesel car). The motor car was only available for eight months of the tax year
increased from £14,400 to £16,900.
2008–09, so the benefit is £1,620 (13,500 x 18% x 8/12).
The percentage used in the calculation is exactly the same as that used
for calculating the related company car benefit.
Betty
The CO
emissions are above the base level figure of 135 grams per
EXAMPLE 5
2
kilometre. The CO
emissions figure of 193 is rounded down to 190 so that
Continuing with
Example 4
. Amanda was provided with fuel for private use
2
it is divisible by five. The minimum percentage of 15% is increased in 1%
between 6 August 2008 and 5 April 2009.
steps for each 5 grams per kilometre above the base level, so the relevant
Betty was provided with fuel for private use between 6 April 2008 and
percentage is 26% (15% + 11% (190 - 135 = 55/5)). The motor car
31 December 2008.
was available throughout the tax year 2008–09, so the benefit is £4,264
Charles was provided with fuel for private use between 6 April 2008
(16,400 x 26%).
and 5 April 2009. He paid Fashionable plc £600 during the tax year
2008–09 towards the cost of private fuel, although the actual cost of this fuel
Charles
was £1,000.
The CO
emissions are above the base level figure of 135 grams per
Diana was not provided with fuel for private use.
2
kilometre. The relevant percentage is 38% (15% + 23% (250 - 135 =
115/5)), but this is restricted to the maximum of 35%. The motor car
Amanda
was available throughout the tax year 2008–09, so the benefit is £6,710
The motor car was only available for eight months of the tax year 2008–09,
(22,600 x 35% = 7,910 - 1,200). The contributions made by Charles
so the fuel benefit is £2,028 (16,900 x 18% x 8/12).
towards the use of the motor car reduce the benefit.
Betty
Diana
Fuel was only available for nine months of the tax year 2008–09, so the fuel
The CO
emissions are below 120 grams per kilometre, so the lower rate of
benefit is £3,295 (16,900 x 26% x 9/12).
2
10% applies. The motor car was available throughout the tax year 2008–09,
so the benefit is £1,240 (12,400 x 10%).
Charles
The motor car was available throughout the tax year 2008–09, so the benefit
is £5,915 (16,900 x 35%). There is no reduction for the contributions made
since the cost of private fuel was not fully reimbursed.
Diana
Fuel was not provided for private use so there is no fuel benefit.
OffICIAL RATE Of INTEREsT
The official rate of interest is used when calculating the taxable benefit arising
from a beneficial loan or from the provision of living accommodation costing
in excess of £75,000.
The June and December 2009 exams will use the actual official rate of
interest for the tax year 2008–09 of 6.25%.
CAPITAL ALLOWANCEs
Plant and machinery
There have been a number of changes regarding the allowances available
in respect of expenditure on plant and machinery. The changes apply from
6 April 2008 (1 April 2008 for limited companies).
The rate of writing-down allowance (WDA) has been reduced from
25% to 20%. Where a period of account spans 6 April 2008 (1 April
2008 for limited companies), apportionment will be necessary in order to
determine the rate of WDA applicable. A question
will not be set
involving
apportionment as regards the rate of WDA.
First-year allowances (FYA) at the rate of 40% or 50% have been
abolished. Previously, expenditure by small businesses qualified for an FYA
of 50%, while expenditure by medium-sized businesses qualified for an FYA
of 40%.
From 6 April 2008 (1 April 2008 for limited companies), an annual
investment allowance (AIA) has been introduced. This is available to
all businesses, and provides an FYA of 100% for the first £50,000 of
expenditure on plant and machinery. Any expenditure in excess of the
£50,000 limit will qualify for WDAs as normal. The AIA applies to all
expenditure on plant and machinery with the exception of cars. If plant and
machinery qualifies for the AIA, the sale proceeds from any subsequent
disposal will be deducted as normal in the main plant and machinery pool.
technical
page 61
The £50,000 limit is proportionally reduced or increased where a period
Where the balance of unrelieved expenditure in the main plant and machinery
of account is shorter or longer than 12 months. For example, the AIA would
pool is less than £1,000, then it is now possible to write-off this unrelieved
be £37,500 (50,000 x 9/12) for a nine-month period of account.
expenditure immediately.
Where a period of account spans 6 April 2008 (1 April 2008 for limited
companies), then apportionment will be necessary in order to determine the
EXAMPLE 7
amount of AIA. A question
will not be set
involving apportionment as regards
Nin prepares accounts to 5 April. The tax written down value of her general
the amount of AIA.
pool at 6 April 2008 was £940.
There is no change in the treatment of motor cars. However, for cars
costing more than £12,000, the reduction in the rate of WDA to 20%
Nin’s capital allowance claim for the year ended 5 April 2009 is as follows:
means that the £3,000 WDA restriction now only applies where the cost, or
written-down value (WDV) brought forward, is more than £15,000 (15,000
Pool Allowances
x 20% = £3,000).
£ £
The definition of a low emission motor car has been changed to one
WDV brought forward 940
with CO
emissions of less than 110 grams per kilometre. This change is not
WDA (940) 940
2
particularly important, as in the exam, students will be told whether a motor
WDV carried forward -
-
car is low emission. The 100% FYA for low-emission motor cars is given in
addition to the £50,000 AIA.
Capital allowances 940
There i s also no change in the treatment of short-life assets.
However, expenditure on a short-life asset will qualify for the FYA of 100%
A special rate pool has been introduced from 6 April 2008 (1 April 2008
if it falls within the annual investment limit of £50,000. If outside this
for companies), with a rate of WDA of 10%. This special rate pool is for
limit, expenditure on a short-life asset will qualify for WDA at the rate
expenditure on long-life assets and on plant and machinery integral to a
of 20%.
building. Previously, long-life assets would have qualified for WDAs at the
rate of 6%, while plant and machinery integral to a building would have been
EXAMPLE 6
treated as normal plant and machinery.
Ming Ltd prepares accounts to 31 March. The tax written down value of
A number of items of plant and machinery are treated as being integral to
the company’s general pool at 1 April 2008 was £16,700. The following
a building, particularly:
transactions took place during the year ended 31 March 2009:
electrical and lighting systems
cold water systems
Cost/(Proceeds)
space or water heating systems
£
powered systems of ventilation, cooling, or air purification
12 May 2008 Purchased equipment 61,400
lifts and escalators.
8 June 2008 Purchased motor car (1) 14,200
2 August 2008 Purchased motor car (2) 10,900
The capital allowance tax rules that applied up to 5 April 2008 (1 April
19 October 2008 Purchased motor car (3) 13,800
2008 for limited companies)
are not examinable
from the June 2009
8 January 2009 Sold a lorry (7,600)
sitting onwards.
Motor car (3), purchased on 19 October 2008, is a low-emission car. The
INDUsTRIAL BUILDINGs ALLOWANCEs
lorry, sold on 8 January 2009 for £7,600, originally cost £24,400.
Capital allowances for industrial buildings are to be phased out. This is to be
achieved by an annual 25% reduction in the amount of allowance available
Ming Ltd’s capital allowance claim for the year ended 31 March 2009 is
over a four-year period. For the tax year 2008–09 (the financial year 2008
as follows:
for limited companies), the WDA is therefore reduced from 4% to 3% where
a new industrial building is acquired, or where an existing industrial building
Pool Motor Allowances
continues to be owned.
car
Where a limited company’s chargeable period falls into two financial
£ £ £ £
years, then apportionment will be necessary in order to determine the rate of
WDV brought forward 16,700
WDA applicable. A question will not be set involving apportionment.
Additions qualifying for AIA
From the June 2009 sitting onwards, questions
will not be set
involving
Equipment 61,400
WDAs on the purchase of a secondhand industrial building.
AIA – 100% (50,000) 50,000
11,400
EXAMPLE 8
Other additions
Scuba Ltd makes up its accounts to 31 March. The company purchased a
Motor car (1) 14,200
new factory from a builder on 1 July 2008 for £240,000 (excluding the cost
Motor car (2) 10,900
of land), and this was immediately brought into use.
39,000
For the year ended 31 March 2009, Scuba Ltd can claim a WDA of
Proceeds – Lorry (7,600)
£7,200 (240,000 at 3%).
31,400
WDA – 20% (6,280) 6,280
PENsION sCHEMEs
WDA – 20% (2,840) 2,840
Annual allowance
Addition qualifying for FYA
The annual allowance for the tax year 2008–09 has been increased to
Motor car (3) 13,800
£235,000.
FYA – 100% (13,800)
0
0
13,800
Although tax relief is available on pension contributions up to the amount
WDV carried forward 25,120 11,360
0
of earnings for a particular tax year, the annual allowance acts as an effective
Capital allowances 72,920
annual limit.
technical
student accountant
page 62
JUNe/JULY 2008
Any tax-relieved contributions in excess of the annual allowance are
corporation tax of £40,000 and FII of £10,000.
taxed at the rate of 40%, thus cancelling out the tax relief that will have
For the year ended 31 December 2008, Moderate Ltd has profits
been given.
chargeable to corporation tax of £40,000 and FII of £10,000.
For the year ended 31 March 2009, Difficult Ltd has profits chargeable
Lifetime allowance
to corporation tax of £600,000 and FII of £50,000.
The lifetime allowance for the tax year 2008–09 has been increased to
For the year ended 31 December 2008, Hard Ltd has profits chargeable
£1,650,000. The lifetime allowance applies to the total funds that can be
to corporation tax of £600,000 and FII of £50,000.
built up within a person’s pension schemes. Where the limit is exceeded there
will be an additional tax charge when that person subsequently withdraws the
Easy Ltd
funds in the form of a pension.
Corporation tax is £8,400 (40,000 at 21%) as the profits of £50,000
(40,000 + 10,000) are less than £300,000.
EXAMPLE 9
For the tax year 2008–09, Frank had trading profits of £350,000 and made
Moderate Ltd
gross personal pension contributions of £250,000.
The profits of £50,000 (40,000 + 10,000) are less than £300,000.
Frank has earnings of £350,000 for the tax year 2008–09. All of the
Because the company’s accounting period straddles 31 March, the
contributions of £250,000 therefore qualify for tax relief, and he will have
corporation tax liability is calculated as follows:
paid £200,000 (250,000 less 20%) to the personal pension company.
£
Higher-rate tax relief will be given by extending Frank’s basic rate tax band for
Financial year 2007
the tax year 2008–09 to £284,800 (34,800 + 250,000). However, there
40,000 x 3/12 = 10,000 at 20% 2,000
will be a tax charge at the rate of 40% on the excess of contributions above
Financial year 2008
the annual allowance of £235,000. His income tax liability for the tax year
40,000 x 9/12 = 30,000 at 21% 6,300
2008–09 is as follows:
Liability
8,300
£
Trading profit 350,000
Difficult Ltd
Personal allowance (6,035)
Marginal relief applies, as the profits of £650,000 (600,000 + 50,000) are
Taxable income 343,965
between £300,000 and £1,500,000. The company’s corporation tax liability
Income tax: 284,800 at 20% 56,960
is as follows:
59,165 at 40% 23,666
£
80,626
600,000 at 28% 168,000
Excess contribution charge
Marginal relief
15,000 (250,000 - 235,000) at 40% 6,000
7/400 (1,500,000 - 650,000) x 600,000/650,000 (13,731)
Tax liability 86,626
Liability
154,269
CORPORATION TAX
Hard Ltd
Rates of corporation tax
The profits of £650,000 (600,000 + 50,000) are between £300,000 and
For the financial year 2008, the small company rate of corporation tax
£1,500,000. Because the company’s accounting period straddles 31 March,
has increased from 20% to 21%, and the full rate of corporation tax has
the corporation tax liability is calculated as follows:
decreased from 30% to 28%. The lower and upper limits are unchanged.
£
Marginal relief eases the transition from the small company rate to
Financial year 2007
the full rate of corporation tax where profits fall between £300,000 and
600,000 x 3/12 = 150,000 at 30% 45,000
£1,500,000. The fraction used in the calculation of marginal relief for the
Marginal relief
financial year 2008 is 7/400th. The effective marginal rate of corporation tax
1/40 (1,500,000 - 650,000) x 600,000/650,000 x 3/12 (4,904)
on profits that fall between the £300,000 and £1,500,000 limits is reduced
Financial year 2008
from 32.5% to 29.75%. The corporation tax rates for the financial year 2008
600,000 x 9/12 = 450,000 at 28% 126,000
can therefore be summarised as follows:
Marginal relief
7/400 (1,500,000 - 650,000) x 600,000/650,000 x 9/12 (10,298)
Level of profits Effective rate
Liability
155,798
Up to £300,000 21%
£300,001 to £1,500,000 29.75%
Note that there are alternative ways of calculating the tax liability for Hard
Over £1,500,000 28%
Ltd, but this approach is the most straightforward as there is no need to
apportion any figures.
In the June and December 2009 exams, corporation tax information will be
given in the ‘Tax Rates and Allowances’ section of the paper, as follows:
CAPITAL GAINs TAX
Individual exemption limit
financial year 2006 2007 2008
The annual individual exemption limit for the tax year 2008–09 has
Small companies rate 19% 20% 21%
increased from £9,200 to £9,600.
Full rate 30% 30% 28%
Lower limit 300,000 300,000 300,000
Capital gains tax reform
Upper limit 1,500,000 1,500,000 1,500,000
There has been a major reform of capital gains tax with the aim of simplifying
Marginal relief fraction 11/400 1/40 7/400
the capital gains rules for individuals.
EXAMPLE 10
Tax rate
For the year ended 31 March 2009, Easy Ltd has profits chargeable to
Previously, capital gains were taxed as if they were savings income. For the
technical
page 63
tax year 2008–09, there is just a single rate of capital gains tax of 18%.
This rate is used regardless of the amount of taxable gains or taxable income.
The due date is unchanged, so a capital gains tax liability for the tax year
2008–09 will be payable on 31 January 2010.
Withdrawal of reliefs
The indexation allowance and taper relief have been withdrawn for disposals
of assets from 6 April 2008 onwards.
All other reliefs, such as rollover relief, holdover relief, and rollover relief
on the transfer of a business to a limited company, continue to be available.
EXAMPLE 11
Andy sold a factory on 15 February 2008 for £320,000. The factory was
purchased on 24 January 1990 for £164,000, and was extended at a cost of
£37,000 during March 2000.
Andy incurred legal fees of £3,600 in connection with the purchase of
the factory, and legal fees of £5,800 in connection with the disposal.
Andy’s capital gains tax liability for the tax year 2008–09 is as follows:
£ £
Disposal proceeds 320,000
Cost 164,000
Enhancement expenditure 37,000
Incidental costs (3,600 + 5,800) 9,400
(210,400)
109,600
The assets were all owned for more than one year prior to the date
Annual exemption (9,600)
of disposal. The warehouse had never been used by Michael for
100,000
business purposes.
Capital gains tax: 100,000 at 18% 18,000
On 25 January 2009, Michael sold a 30% shareholding in Green Ltd,
Andy’s capital gains tax liability will be due on 31 January 2010.
an unquoted trading company. The disposal resulted in a capital gain of
£450,000. Michael had owned the shares since 1 March 2003, and was
Entrepreneurs’ relief
an employee of the company from that date until the date of disposal.
To compensate for the withdrawal of taper relief, a new relief has been
introduced from 6 April 2008 that can be claimed when an individual disposes
Michael’s capital gains tax liability for the tax year 2008–09 is as follows:
of a business or part of a business. The relief covers the first £1m of qualifying
gains that a person makes during their lifetime, and reduces those gains by
£ £
a factor of 4/9ths. This gives an effective capital gains tax rate of 10% (18%
Goodwill 260,000
x 5/9ths) for gains covered by the relief. Gains in excess of the £1m limit are
Freehold office building 370,000
taxed as normal at the 18% rate. There is no age requirement in order to claim
630,000
the relief, but assets must have been owned for one year prior to the date of
Entrepreneurs’ relief (630,000 x 4/9ths)
(280,000)
disposal in order to qualify. Entrepreneurs’ relief is available for the following:
350,000
A disposal of the whole or part of a business run as a sole trader. Relief
Freehold warehouse 170,000
is only available in respect of capital gains arising from the disposal of
Shareholding in Green Ltd
assets in use for the purpose of the business. This will exclude capital
450,000
gains arising from investments.
Entrepreneurs’ relief (370,000 x 4/9ths) (164,444)
-
The disposal of shares in a trading company where an individual has a
285,556
5% shareholding in the company and is also an employee of the company.
805,556
Provided the company is a trading company, there is no restriction to the
Annual exemption (9,600)
amount of relief if it holds non-trading assets such as investments.
795,956
Capital gains tax: 795,956 at 18% 143,272
Relief can also be claimed where an associated disposal is made at the same
time as the main disposal. Associated disposals
are not examinable
.
Entrepreneurs’ relief of £630,000 is utilised on the disposal of Michael’s
sole tradership. Therefore, £370,000 (1,000,000 - 630,000) is
EXAMPLE 12
available when the shares in Green Ltd are disposed of.
Michael made the following disposals during the tax year 2008–09:
On 30 June 2008, Michael sold a business that he had run as a sole trader
Share identification rules
since 1 January 2002. The sale resulted in the following capital gains:
The withdrawal of the indexation allowance and taper relief has resulted in
£
the share identification rules being simplified. Disposals of shares from 6 April
Goodwill 260,000
2008 onwards, are matched with purchases in the following order:
Freehold office building 370,000
shares purchased on the same day as the disposal
Freehold warehouse 170,000
shares purchased within the following 30 days
800,000
shares in the share pool.
technical
student accountant
page 64
JUNe/JULY 2008
The share pool aggregates all purchases except for those made on the same
day as the disposal, or within the following 30 days.
EXAMPLE 13
Kim has had the following transactions in the shares of Long plc:
1 June 2001 Purchased 4,000 shares for £6,200
30 April 2006 Purchased 2,000 shares for £8,800
15 May 2008 Purchased 500 shares for £2,500
15 May 2008 Sold 4,500 shares for £27,000
Kim’s capital gain for the tax year 2008–09 is as follows:
£ £
Purchase 15 May 2008
Proceeds (£27,000 x 500/4,500) 3,000
Cost (2,500)
500
Share pool
Proceeds (£27,000 x 4,000/4,500) 24,000
Cost (10,000)
14,000
14,500
Share pool
Number Cost
£ £
Purchase 1 June 2001 4,000 6,200
EXAMPLE 14
Purchase 30 April 2006 2,000 8,800
Simone Ltd has one employee who is paid £50,000 per year, and was
6,000 15,000
provided with the following taxable benefits during the tax year 2008–09:
Disposal 15 May 2008 (15,000 x 4,000/6,000) (4,000) (10,000)
Balance carried forward 2,000 5,000
£
Company motor car 6,400
The disposal is first matched with the same day purchase and then
Car fuel
5,070
against the share pool.
Living accommodation 1,800
The capital gains tax rules that applied up to 5 April 2008
are not
The Class 1 and Class 1A NIC liabilities are as follows:
examinable
from the June 2009 sitting onwards.
£
Limited companies are not affected by these changes. In particular,
Employee Class 1 NIC
they continue to be entitled to the indexation allowance, and the share
40,040 - 5,435 = 34,605 at 11% 3,807
identification rules are unchanged.
50,000 - 40,040 = 9,960 at 1% 100
3,907
NATIONAL INsURANCE CONTRIBUTIONs
Employer’s Class 1 NIC
Class 1 and Class 1A National Insurance Contributions (NIC)
50,000 - 5,435 = 44,565 at 12.8% 5,704
For the tax year 2008–09, the rates of employee Class 1 NIC are unchanged
at 11% and 1%.
Employer’s Class 1A NIC
The rate of 11% is paid on earnings between £5,435 per year and
13,270 (6,400 + 5,070 + 1,800) at 12.8% 1,699
£40,040 per year, and the rate of 1% is paid on all earnings over £40,040
per year.
Class 2 and Class 4 NIC
The rate of employer’s Class 1 NIC is unchanged at 12.8%, and is paid
For the tax year 2008–09 the rate of Class 2 NIC has been increased to
on all earnings over £5,435 per year.
£2.30 per week.
The rate of Class 1A NIC that employers pay on taxable benefits provided
The rates of Class 4 NIC are unchanged at 8% and 1%. The rate of 8% is
to employees is also unchanged at 12.8%.
paid on profits between £5,435 and £40,040, and the rate of 1% is paid on
In the June and December 2009 exams, the Class 1 and Class 1A NIC
all profits over £40,040.
information will be given in the ‘Tax Rates and Allowances’ section of the
In the June and December 2009 exams, the Class 4 NIC information will
paper, as follows:
be given in the ‘Tax Rates and Allowances’ section of the paper as follows:
%
%
Class 1 Employee £1–£5,435 per year Nil
Class 4 £1–£5,435 per year Nil
£5,436–£40,040 per year 11.0
£5,436–£40,040 per year 8.0
£40,041 and above per year 1.0
£40,041 and above per year 1.0
Class 1 Employer £1–£5,435 per year Nil
£5,436 and above per year 12.8
EXAMPLE 15
Class 1A 12.8
Jimmy is a self-employed builder and Jenny is a self-employed consultant.
technical
page 65
Their trading profits for the tax year 2008–09 are respectively £25,000 and
force (for income tax purposes) at 6 April 2008. For the June and December
£50,000. Class 4 NIC liabilities for the tax year 2008–09 are as follows:
2009 exams, the assumed rate of interest on underpaid tax will therefore be
7.5%, and the assumed rate of interest on overpaid tax will be 3.0%.
£
Jimmy 25,000 - 5,435 = 19,565 at 8% 1,565
David Harrowven is examiner for Paper f6 (UK)
Jenny 40,040 - 5,435 = 34,605 at 8% 2,768
APPENDIX 1:
CAT PAPER 9 (UK)
50,000 - 40,040 = 9,960 at 1% 100
2,868
The starting threshold of £5,435 for Class 1 and Class 4 NIC is normally
This appendix outlines the effects of the changes made in the finance Act
aligned with the income tax personal allowance. However, this is not the case
2008 on the June and December 2009 sittings of CAT Paper 9,
Preparing
for the tax year 2008–09, as the personal allowance is £6,035.
Taxation Computations
(UK). The sub-headings refer to the headings given
in the main article on Paper f6 (UK).
VALUE ADDED TAX
Registration and deregistration limits
INCOME TAX
The limit of annual turnover above which VAT registration is compulsory has
Rates of income tax
been increased from £64,000 to £67,000, and the deregistration limit has
The revised thresholds and the rates of tax shown will be used in CAT Paper 9
been increased from £62,000 to £65,000.
(UK). No questions will be set using the old 10% starting rate for 2007–08.
The use of the 10% rate for savings income is examinable.
Errors in a VAT return
The application of the 20% rate to gift aid donations and personal
The limit for voluntarily disclosing net errors made in a VAT return has been
pension contributions is examinable.
increased from £2,000 to the higher of £10,000 or 1% of turnover for the
VAT period. A business can voluntarily disclose net errors below the limit
Personal allowance
by entering them on the next VAT return without this resulting in a serious
Only the personal allowance for people under 65 is examinable. Information
misdeclaration penalty or penalty interest.
on the higher allowances and the restriction limit will not be given on the CAT
Paper 9 (UK) ‘Allowances and Rates’ sheet.
Misdeclaration penalty
The amount of penalty that can be charged as a result of making a
IsAs
misdeclaration has been changed. Previously, the penalty was 15% of
This area is not in the CAT Paper 9 (UK) syllabus (with the exception of
the amount of understated VAT. The penalty that can now be charged is
knowing that ISA income is tax free).
determined according to the new penalty regime introduced for incorrect
returns, which is covered in the following section on tax management.
Employment income
All information relevant to car and fuel benefits will also apply to CAT Paper
TAX MANAGEMENT
9 (UK).
Enquiries into self-assessment corporation tax returns
Previously, HM Revenue & Customs (HMRC) normally had until 12 months
Official rate of interest
after the tax return filing deadline in which to notify a limited company that
The rate of 6.25% will be used.
they intended to enquire into its self-assessment corporation tax return. This
enquiry window has now been changed to 12 months from the date that a
BUsINEss TAX
corporation tax return is received by HMRC.
Capital allowances for plant and machinery
The new rate of 20% writing-down allowance (WDA) will apply to CAT Paper
Penalties for incorrect returns
9, but no questions will be set on the old rate of 25%, or on the ‘hybrid’ rate,
A single new penalty regime has been introduced for incorrect returns. As far
where accounting periods straddle 6 April 2008. The special rate pool is not
as Paper F6 (UK) is concerned, the new penalty regime applies to incorrect
in the CAT Paper 9 (UK) syllabus.
self-assessment tax returns, self-assessment corporation tax returns, and
where a misdeclaration has been made on a VAT return.
Annual investment allowance (AIA)
The amount of penalty is based on the amount of tax understated, but the
The new AIA will be examinable, but no questions will be set where an
actual penalty payable is linked to the taxpayer’s behaviour, as follows:
accounting period straddles 6 April 2008. As a result, no questions will
There will be no penalty where a taxpayer simply makes a mistake.
involve the old first-year allowances, apart from the 100% allowance
There will be a moderate penalty (up to 30% of the understated tax)
available to short-life assets where they fall within the annual investment limit
where a taxpayer fails to take reasonable care.
of £50,000.
There will be a higher penalty (up to 70% of the understated tax) if
the error is deliberate, and an even higher penalty (up to 100% of the
Industrial buildings allowance (IBA)
understated tax) where there is also concealment of the error.
The only rate of IBA to be used will be 3% (75% of the old 4% rate). No
questions will be set involving periods straddling tax years.
However, a penalty will be substantially reduced where a taxpayer makes
disclosure, especially when this is unprompted by HMRC. For example, if a
PENsION sCHEMEs
taxpayer makes an unprompted disclosure of an incorrect return following a
The revised annual allowance limit of £235,000, and the lifetime allowance
failure to take reasonable care, the penalty could be reduced to nil.
of £1,650,000, will apply to CAT Paper 9 (UK).
Interest on underpaid and overpaid tax
CORPORATION TAX
The assumed rates of interest on underpaid and overpaid income tax, Class
Rates of corporation tax
4 NIC, capital gains tax, and corporation tax are based on the actual rates in
These will affect CAT Paper 9 (UK) in exactly the same way as they affect
technical
student accountant
page 66
JUNe/JULY 2008
Paper F6 (UK). The same detail on rates will be supplied in the CAT Paper
Domicile and the remittance basis
9 exam. A question on a chargeable account period spanning two financial
An individual who is a UK resident is taxable on overseas income as well
years and involving a change of tax rate will not be set.
as UK income. Up to and including 2007–08, overseas income was taxed
on the remittance basis if the individual was either non-ordinary resident
CAPITAL GAINs TAX (CGT)
or non-domiciled in the UK. Chargeable gains realised on assets situated
The new flat rate, the new annual exemption, the abolition of indexation
overseas by UK residents or ordinarily resident individuals, who were not UK
allowance (IA), and taper relief for individuals are all in the CAT Paper 9 (UK)
domiciled, were also taxed on the remittance basis.
syllabus. No questions will be set requiring knowledge of IA (for individuals)
The remittance basis continues to be available in respect of both income
or taper relief.
and chargeable gains. However, from 2008–09, an individual who has been
UK resident for at least seven of the nine preceding tax years must now pay
Entrepreneurs’ relief
a tax charge on their unremitted income/gains of £30,000 in order to claim
This will be examinable. The examiner will clearly state if an asset is a
the remittance basis. This charge is payable in addition to the tax due on any
business asset. Associated disposals will not be examined.
amounts remitted to the UK.
UK resident individuals who satisfy the residency conditions but choose
share matching rules
not to pay this tax charge will be subject to UK tax on all of their overseas
The new rules will be examined.
income/gains, regardless of whether or not amounts are remitted to the UK
(subject to a de minimis of unremitted amounts of £2,000). Each year,
NATIONAL INsURANCE CONTRIBUTIONs
individuals will need to choose whether to pay the £30,000 charge and claim
The new rates and thresholds for NIC Classes 1, 1A, 2 and 4 will apply to
the remittance basis, or pay tax on their worldwide income and capital gains.
CAT Paper 9.
The term ‘remittance’ has always covered the use of overseas income to
settle debts overseas where the money was borrowed by the taxpayer in the
VALUE ADDED TAX
UK, or was borrowed overseas and brought into the UK, as well as simply
Registration and deregistration limits
bringing the overseas income directly to the UK. For 2008–09, untaxed
Both the revised limits for registration (£67,000) and deregistration
overseas income will be regarded as being remitted to the UK if it is used
(£65,000) will apply for the 2009 papers.
to purchase goods or services on or after 12 March 2008, and these goods
or services are subsequently brought into the UK. There are a number of
TAX MANAGEMENT
exemptions to this rule including personal items (clothes, shoes, jewellery and
Interest on underpaid and overpaid tax
watches), items imported for a short period of time or for repair, and items
The calculation of this remains outside the CAT Paper 9 (UK) syllabus.
costing less than £1,000.
For 2008–09, individuals who claim the remittance basis will no
Keith Molson is examiner for CAT Paper 9 (UK)
longer be entitled to income tax personal allowances or the capital gains tax
annual exemption.
APPENDIX 2 :
PAPER P6 (UK)
INCOME fROM EMPLOYMENT
Enterprise Management Incentives (EMI)
This appendix should be read by students taking Paper P6 (UK) at either
A qualifying company (broadly a trading company with gross assets not
the June or December 2009 sitting. All the changes relating to Paper
exceeding £30m) may grant share options under an Enterprise Management
f6 (UK) set out in the main article are relevant to Paper P6 (UK). This
Incentives scheme to eligible employees. There is usually no income tax
appendix summarises the additional changes that apply to the Paper P6
or National Insurance Contributions (NIC) on the grant or exercise of such
(UK) syllabus. All the exclusions set out in the Paper f6 (UK) article apply
options. For 2008–09, an additional condition must be satisfied in order
equally to Paper P6 (UK) unless they are referred to in this appendix.
for a company to qualify for the scheme: the company, together with its
Students sitting Paper P6 (UK) in December 2008 will be examined on
subsidiaries, must have fewer than 250 full-time employees at the time the
the Finance Act 2007, which is the legislation as it relates to the tax year
options are granted. In addition, the limit on the value of shares over which
2007–08. Accordingly, these students should refer to the Finance Act 2007
an employee can hold options granted via an EMI scheme has been increased
article published on the ACCA website.
to £120,000 (previously £100,000) at the date of grant.
INCOME TAX – sCOPE
EXEMPTIONs AND RELIEfs
Residence
Enterprise Investment scheme (EIs)
In order to determine whether or not an individual is resident or ordinarily
Individuals who invest in qualifying Enterprise Investment Scheme shares
resident in the UK, it may be necessary to count the number of days spent
are able to claim 20% income tax relief in respect of the amount invested,
in the UK in the tax year. Prior to the Finance Act 2008, days of arrival and
subject to an annual investment limit. For 2008–09, the annual investment
departure were not counted as days spent in the UK. This rule has been
limit has been increased to £500,000 (previously £400,000).
changed so that an individual is now regarded as being present in the UK
on any day when they are still in the UK at midnight at the end of the day
CAPITAL ALLOWANCEs
in question.
Plant and machinery
The changes made to plant and machinery capital allowances set out in the
foreign dividends
Paper F6 (UK) article, together with the related exclusions, also apply to
For 2008–09, UK resident individuals holding less than 10% of the shares
Paper P6 (UK). For the purposes of Paper P6 (UK), candidates also need to
of a non-UK resident company will be entitled to a 10% tax credit. The
be aware of the following additional points.
tax credit operates as it does in relation to dividends from a UK-resident
The annual investment allowance (AIA) may be split between related
company; the foreign dividend income is grossed up at 100/90, the gross
businesses or companies, or between group companies. Businesses or
income is taxed at 10%/32.5%, and there is a 10% tax credit. The tax credit
companies owned by the same individual(s) will be regarded as being related
is not repayable in cash.
if they are engaged in similar activities or share the same premises. In such
technical
linked performance objectives
page 67
performaNce obJectives 19 aNd 20 are reLevaNt to paper p6
circumstances, the owner of the businesses or companies can choose how
CAPITAL GAINs TAX
to allocate the single AIA between them. Unrelated businesses or companies
Capital gains tax reform
owned by the same individual(s) will each be entitled to the full AIA.
The changes made to capital gains tax set out in the Paper F6 (UK) article
A group of companies is entitled to a single AIA, and the group can choose
above also apply to Paper P6 (UK). The following additional rules introduced
how to allocate the AIA between its members. The company law definition
by the Finance Act 2008 apply to Paper P6 (UK) only.
of a group (essentially a majority shareholding) is used for these purposes.
Accordingly, companies in a group relief group or a capital gains group are
THE sCOPE Of CAPITAL GAINs TAX
also in a group for AIA purposes.
Domicile and the remittance basis
The 10% rate of writing-down allowances in respect of plant and
As noted above, from 2008–09, individuals who claim the remittance basis
machinery integral to a building applies to both initial and replacement
will no longer be entitled to the capital gains tax annual exemption.
expenditure. Replacement expenditure occurs where more than 50% of an
In the past, capital losses realised by non-UK domiciled individuals in
asset is replaced in a 12-month period. This prevents a tax deduction being
respect of assets situated overseas were not available for relief in the UK.
claimed for the repair of such assets where such repairs are substantial.
From 2008–09, such losses will be available for relief provided they have
arisen in a year where the individual is taxed on the arising basis. Individuals
Industrial buildings allowances
who have not claimed the remittance basis from 2008–09 will obtain relief
The changes made to industrial buildings allowances set out in the Paper F6
for such losses automatically; other individuals will be required to make an
(UK) article, together with the related exclusions, also apply to Paper P6 (UK).
election in order to claim relief.
CORPORATION TAX
Exemptions and reliefs
Capital allowances
Entrepreneurs’ relief
Enhanced capital allowances
Entrepreneurs’ relief provides an effective rate of capital gains tax of
Expenditure on energy-saving or environmentally-beneficial plant and
10% for the first £1m of quali fying gains. In addition to the qualifying
machinery qualifies for a 100% first-year allowance. Where a company has
disposals set out in the Paper F6 (UK) articl e, the rel ief is also available
made a loss, it may surrender that part of the loss relating to such allowances
on the disposal of a share in a partnership by a partner, and on associated
in exchange for a payment from HM Revenue & Customs (HMRC) equal
disposals. Associated disposals are disposals of assets owned by an
to 19% of the loss surrendered. Such a claim can only be made where the
individual but used by their personal trading company or a partnership in
company is unable to use the losses in the current accounting period against
which they are a partner, which take place at the same time as the sale
its own profits, or via group relief. The claim is made in the company’s
of the partnership or company. In order for ful l relief to be avail able for
corporation tax return.
associated disposals, the individual must not have charged rent to the
The maximum payment that a company can claim is the higher of
business for the use of the assets.
£250,000 and its total PAYE and NIC liabilities for the relevant accounting
period. Where any of the qualifying plant and machinery is sold within four
INHERITANCE TAX
years of the end of the relevant accounting period, there will be a claw-back of
The nil-rate band
an appropriate part of the payment made and a reinstatement of the losses.
The nil-rate band for 2008–09 is £312,000 (for 2007–08 it was
£300,000).
Research and development
A standard element of inheritance tax planning has always been to ensure
An additional tax deduction is available where companies incur revenue
that both spouses or civil partners make full use of their nil-rate bands. This
expenditure on research and development. The size of the additional
was achieved via a combination of interspouse transfers (in the situation
deduction depends on whether the company is a small or medium-sized
where one spouse had insufficient assets) and bequests made directly to
enterprise (SME) or a large enterprise. The definition of an SME is to change
children rather than to the surviving spouse.
from a date yet to be announced. Questions in the 2009 exam sittings will
The Finance Act 2008 has removed the need for much of this planning
state whether or not a company is an SME for the purposes of research and
by enabling any amount of the nil-rate band that has not been used at the
development.
time of a person’s death to be transferred to their spouse or civil partner
The additional tax deduction available to SMEs will increase to 75%
who dies on or after 9 October 2007. As a result of this, a spouse or civil
(previously 50%) from a date yet to be announced. Equal credit will be
partner can now leave the whole of their estate to the surviving spouse
given in the 2009 exams to candidates who give an additional tax deduction
or partner with no adverse inheritance tax consequences. The surviving
of either 75% or 50%. The additional tax deduction available to large
spouse or partner will receive the benefit of their own nil-rate band and any
companies increased to 30% (previously 25%) on 1 April 2008.
unused amount of their spouse’s nil-rate band when leaving their estate to
A limit has been introduced on the additional tax relief available to SMEs.
their children.
This limit is not within the Paper P6 (UK) syllabus.
Where an SME makes a trading loss, it may claim a repayment from
sTAMP DUTY AND sTAMP DUTY LAND TAX
HMRC up to a maximum of a percentage of its qualifying research and
The rates and limits for 2008–09 are the same as those in 2007–08.
development expenditure multiplied by 175%. The percentage that can
There are no examinable changes to these taxes in respect of the exams
be reclaimed is to be reduced from 16% to 14% from a date yet to be
in 2009.
announced. Equal credit will be given in the 2009 exams to candidates who
use either 16% or 14%.
fURTHER READING
The changes introduced by the Finance Act 2008 will be incorporated into
VALUE ADDED TAX (VAT)
the following articles scheduled for publication in future issues of
student
Land and buildings and the option to tax
accountant
: ‘international travellers’, ‘trusts, tax and financial planning’,
A trader can opt to tax the otherwise exempt supply of an ‘old’ (ie more
‘corporation tax’ and ‘capital taxes’. The articles will also be published on the
than three years) freehold commercial building or the grant of a lease. The
ACCA website.
legislation in this area has been rewritten and a number of minor changes
have been introduced. These changes will not be examined in 2009.
Rory fish is examiner for Paper P6 (UK)
Subscribe to:
Posts (Atom)
