ACCA TX UK Notes FA 2019 - Study material for year 20/21 PDF

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Study material for year 20/21...

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Taxation (TX-UK) FA2019

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ACCA Taxation (TX-UK) (FA2019)

ACCA Taxation (TX-UK)

CONTENTS 1

TX-UK Syllabus

iii

2

Tax rates and allowances

vii

3

The UK Tax System

1

4

Income tax computation

5

5

Property Income and Investments – Individuals

15

6

Tax Adjusted Trading Profit – Individuals

21

7

Capital Allowances

25

8

Trading Profit – Basis Periods

37

9

Tax Adjusted Trading Losses – Individuals

43

10

Partnerships

49

11

Employment Income

53

12

Pension Schemes

63

13

National Insurance Contributions (NIC)

67

14

Capital Gains Tax – Individuals

69

15

Capital Gains Tax – Individuals – Shares

77

16

Capital Gains Tax – Individuals – Reliefs

81

17

Self-Assessment and Payment of Tax for Individuals

91

18

Corporation tax

95

19

Long Period of Account

101

20

Tax Adjusted Losses – Companies

103

21

Chargeable Gains – Companies

107

22

Chargeable Gains – Companies – Further Aspects

111

23

Chargeable Gains – Companies – Reliefs

115

24

Corporation Tax – Groups

117

25

Self Assessment and Payment of Tax for Companies

123

26

Inheritance Tax

127

27

Value Added Tax – VAT

141

28

Tax Planning style questions

155

Answers to examples

163

Practice Questions

217

Practice Answers

237

ACCA Taxation (TX-UK) (FA2019)

Practice Questions and Answers index Question Answer Page No. Page No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

UK Tax System Kate Jessica Karl Mr & Mrs Mature Michael Peter Matthew Charlie John Carl Jason Stephen

Tax avoidance and tax evasion Income tax calculation Income tax calculation – restriction of personal allowance Income tax calculation – additional rate taxpayer Personal allowance Income tax calculation Property Business Profit Property Business Losses Rent a Room Relief Adjustment of trading profit Calculation of capital allowances Trading Income basis periods: opening years Trading Income basis periods: opening and closing years Trading Income basis periods: opening years with capital Grace allowances David Capital allowances: plant and machinery Max Trading losses – New Business Elliot Trading losses – Continuing business Anne and Betty Partnerships: change in partners, losses Renner Employment Income George Pension contributions Tony National Insurance Contributions Chorley Ltd Adjustment of profit Sail Ltd Calculation of corporation tax Swish Ltd Corporation tax losses Trunk Limited Chargeable Gains – Disposal of shares by a company Granger Limited Chargeable Gains – Part Disposal and Chattels – companies Westcroft Limited Chargeable Gains – Insurance proceeds on stolen asset Mighty Ltd Rollover relief Claude Gains and losses with CGT calculation – Individuals Cheryl Capital Gains Tax calculation Shamus Capital Gains Tax – Individuals (Damaged assets) Zoe Share matching – Individuals Michael Share matching with rights issue – Individuals Jenny Entrepreneurs’ relief Beth Rollover relief – Individuals Wendy Gift relief Amy Principal Private Residence and Letting relief Nathan Inheritance Tax VAT VAT – Registration and calculation of VAT Default surcharge, cash accounting scheme, annual Geewizz Ltd accounting scheme Factor Limited Overseas aspects of VAT Groups Group VAT registration Jim Payments on Account – Individuals Enquiries Self assessment – Individuals Cannock Limited Self assessment – Companies

217 217 217 217 218 218 218 219 219 220 222 222 222

237 237 238 239 240 241 242 242 243 244 245 246 246

223

247

223 224 224 225 226 227 227 228 229 229 230 230 230 230 231 231 231 231 232 232 232 232 233 233 234

248 249 250 251 252 254 255 255 256 256 257 258 259 259 260 260 261 262 262 263 263 264 264 265 266

234

267

235 235 235 235 235

268 268 268 269 269

ACCA Taxation (TX-UK) (FA2019)

TX-UK Syllabus

FA 2019

iii

FA 2019

TX-UK SYLLABUS

1

Aim

To develop knowledge and skills relating to the tax system as applicable to individuals, single companies, and groups of companies.

2

Objectives

On successful completion of this paper candidates should be able to: and the implications of non-compliance contributions (NIC) on employees, employers and the self-employed

3

Position of the paper in the overall syllabus

The syllabus for TX-UK introduces candidates to the subject of taxation and provides the core knowledge of the underlying principles and major technical areas of taxation as they affect the activities of individuals and businesses. Candidates are introduced to the rationale behind and the functions of the tax system. The syllabus then considers the separate taxes that an accountant would need to have a detailed knowledge of, such as income tax from self-employment, employment and investments, the corporation tax liability of individual companies and groups of companies, the national insurance contribution liabilities of both employed and self employed persons, the value added tax liability of businesses, the chargeable gains arising on disposals of investments by both individuals and companies, and the inheritance tax liabilities arising on chargeable lifetime transfers and on death.. Having covered the core areas of the basic taxes, candidates should be able to compute tax liabilities, explain the basis of their calculations, apply tax planning techniques for individuals and companies and identify the compliance issues for each major tax through a variety of business and personal scenarios and situations.

iv

ACCA Taxation (TX-UK) (FA2019)

TX-UK Syllabus

FA 2019

4

The syllabus

4.1

The UK tax system and its administration

(a) (b) (c) (d) (e) (f)

The overall function and purpose of taxation in a modern economy Principal sources of revenue law and practice The systems for self assessment and the making of returns The time limits for the submission of information, claims and payment of tax, including payments on account The procedures relating to compliance checks, appeals and disputes Penalties for non-compliance

4.2

Income tax and NIC liabilities

(a) (b) (c) (d) (e) (f) (g)

The scope of income tax Income from employment Income from self-employment Property and investment income The comprehensive computation of taxable income and income tax liability National Insurance contributions for employed and self employed persons The use of exemptions and reliefs in deferring and minimising income tax liabilities

4.3

Corporation tax liabilities

(a) (b) (c) (d) (e) (f)

The scope of corporation tax Taxable Total Profits Chargeable gains for companies The comprehensive computation of corporation tax liability The effect of a group corporate structure for corporation tax purposes The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

4.4

Chargeable gains

(a) (b) (c)

The scope of the taxation of capital gains The basic principles of computing gains and losses. Gains and losses on the disposal of movable and immovable property

(d) (e) (f)

Gains and losses on the disposal of shares and securities The computation of capital gains tax The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

4.5

Inheritance tax

(a) (b) (c) (d)

The basic principles of computing transfers of value The liabilities arising on chargeable lifetime transfers and on the death of an individual The use of exemptions in deferring and minimising inheritance tax liabilities Payment of inheritance tax

4.6

Value added tax

(a) (b) (c)

The VAT registration requirements The computation of VAT liabilities The effect of special schemes

ACCA Taxation (TX-UK) (FA2019)

TX-UK Syllabus

5

Approach to examining the syllabus

5.1

Assessment: Taxation (GBR)

FA 2019

v

The syllabus is assessed by a three hour computer based examination. The paper will contain both computational and discursive elements and all questions are compulsory. Some questions will adopt a scenario / case study approach. Section A of the examination comprises 15 objective test (OT) questions of 2 marks each. Section B of the examination comprises three questions, each of which includes five OT questions of 2 marks each. Section C of the examination comprises one 10 mark and two 15 mark “constructed response” (requiring written answers) questions. The two 15 mark questions will focus on income tax and corporation tax. The section A OT questions, section B OT case questions and the other constructed response question in section C can cover any area of the syllabus.

vi

ACCA Taxation (TX-UK) (FA2019)

TX-UK Syllabus

FA 2019

ACCA Taxation (TX-UK) (FA2019)

Tax rates and allowances

FA 2019

vii

FA 2019

TAX RATES AND ALLOWANCES The following tax rates and allowances will be reproduced in the examination paper for Paper (TX-UK). In addition, other specific information necessary for candidates to answer individual questions will be given as part of the question. For example, in the case of corporate chargeable gains the relevant indexation factors for particular dates will be given.

Income Tax Basic rate Higher rate Additional rate

Normal Dividend rates rates 20% 7.5% 40% 32.5% 45% 38.1%

£1 – £37,500 £37,501 – £150,000 £150,001 and over

The savings income nil rate bands are £1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer A starting rate of 0% applies to taxable savings income where it falls within the first £5,000 of taxable income The dividend income nil rate band is £2,000

Personal Allowance £ 12,500 1,250 100,000

Personal Allowance Transferable amount Income limit

Residence status Days in UK Less than 16 16 to 45 46 to 90 91 to 120 121 to 182 183 or more

Previously resident Automatically not resident Resident if 4 UK ties (or more) Resident if 3 UK ties (or more) Resident if 2 UK ties (or more) Resident if 1 UK tie (or more) Automatically resident

Not previously resident Automatically not resident Automatically not resident Resident if 4 UK ties Resident if 3 UK ties (or more) Resident if 2 UK ties (or more) Automatically resident

Child benefit income tax charge

Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit received for every £100 of income over £50,000.

Property Income 75% of property income finance costs are subject to basic rate restriction.

Car Benefit Percentage The base level of CO2 emissions is 95 grams per kilometre. The percentage rates applying to petrol cars (and diesel cars meeting the RDE2 standard) with CO2 emissions up to this level are: 50 grams per kilometre or less 16% 51 grams to 75 grams per kilometre 19% 76 grams to 94 grams per kilometre 22% 95 grams per kilometre 23%

Car Fuel The base figure for calculating the car fuel benefit is £24,100

viii

ACCA Taxation (TX-UK) (FA2019)

Tax rates and allowances

FA 2019

Individual savings accounts (ISAs) The overall investment limit is £20,000.

Pension Contribution Limits The maximum contribution that can be made without evidence of earnings is £3,600. Annual allowance £40,000 Minimum allowance £10,000 Income limit £150,000 The maximum contribution that can qualify for tax relief without any earnings is £3,600. Authorised mileage allowances All cars up to 10,000 miles over 10,000 miles

45p 25p

Cash basis Revenue limit

£150,000

Capital Allowances Plant and machinery Main pool Special rate pool Motor cars New cars with CO2 emissions up to 50 grams per kilometre CO2 emissions between 51 and 110 grams per kilometre CO2 emissions over 110 grams per kilometre Annual investment allowance Rate of allowance Expenditure limit

18% 6% 100% 18% 6% 100% £1,000,000

Cap on income tax reliefs Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income.

Corporation Tax Rate of tax FY 2019 Rate of tax FY 2018 Rate of tax for FY 2017 Profit threshold

19% 19% 19% £1,500,000

ACCA Taxation (TX-UK) (FA2019)

Tax rates and allowances

FA 2019

ix

Value Added Tax Standard rate Registration limit Deregistration limit

20% £85,000 £83,000

Inheritance Tax: Tax Rates: Nil rate band Residence nil rate band Excess – Death rate – Lifetime rate

£325,000 £150,000 40% 20%

Inheritance Tax: Taper relief Percentage reduction 20% 40% 60% 80%

Years before death Over 3 but less than 4 years Over 4 but less than 5 years Over 5 but less than 6 years Over 6 but less than 7 years

Rates of Interest Official rate of interest: Rate of interest on underpaid tax: Rate of interest on overpaid tax:

2.5% 3.25% 0.5%

Capital Gains Tax - Individuals Annual Exempt Amount Rates of tax Normal rates Residential Property rates Entrepreneurs’ /Investors’ Relief

£12,000 10% 20% 18% 28% £10,000,000 10%

– lower rate – higer rate – lower rate – higher rate – lifetime limit – Rate of tax

National Insurance (not contracted out rates) Annual Class 1

Employee

£1 - £8,632 £8,633 – £50,000 £50,001 and above

@ @ @

0% 12% 2%

Class 1

Employer

£1 - £8,632 £8,633 and above Employment allowance

@ @

0% 13.8% £3,000 13.8%

Class 1A Class 2

Class 4

£3 per week Small earnings exemption limit £1 - £8,632 per year £8,633 – £50,000 per year £50,001 and above per year

£6,365 @ @ @

1. Calculations and workings need only be made to the nearest £. 2. All apportionments should be made to the nearest month. 3. All workings should be shown in Section C

0% 9% 2%

x

ACCA Taxation (TX-UK) (FA2019)

Tax rates and allowances

FA 2019

Standard penalties for errors Maximum penalty

Minimum penalty unprompted disclosure

Minimum penalty prompted disclosure

Deliberate and concealed

100%

30%

50%

Deliberate but not concealed

70%

20%

35%

Careless

30%

0%

15%

Taxpayer behaviour

ACCA Taxation (TX-UK) (FA2019)

The UK Tax System

Chapter 1

1

Chapter 1

THE UK TAX SYSTEM

1

The overall function and purpose of taxation in a modern society

1.1

Economic factors

Spending by the government and the system of taxation impacts on the economy of a country. Taxation policies have been used to influence economic factors such as employment levels, inflation and imports/exports Taxation policies are also used to direct economic behaviours of individuals and businesses. For example they encourage individual saving habits (Individual Savings Accounts, savings income and dividend income nil rate bands) and giving to charity (Gift Aid Scheme). Further they may discourage motoring (fuel duties), smoking & alcohol (duties and taxes) and environmental pollution (landfill tax). As government objectives change, taxation policies may be altered accordingly. 1.2

Social justice

The taxation system accumulates and redistributes wealth within a country. Different taxes have different social effects. (a) Progressive taxation: As income rises the proportion of taxation raised also rises, for example UK income tax (b)

Regressive taxation As income rises the proportion of taxation paid falls, for example, tax on cigarettes is the same regardless of the level of income of the purchaser, so as income rises it represents a lower proportion of income.

(c)

Proportional taxation As income rises the proportion of tax remains constant, for example Latvian/Lithuanian income tax

(d)

Ad Valorem principle A tax calculated as a percentage of the value of the item, for example Value Added Tax

2

Types of taxes

Income Tax

Payable by individuals on most income

National Insurance Contributions Payable by individuals who are employed or self employed and businesses in relation to their employees Capital Gains Tax

Payable by individuals on the disposal of capital assets

Inheritance Tax

Payable by individuals on lifetime and death transfers of assets.

Corporation Tax

Payable by companies on income and chargea...