ACCA Paper F6 – Taxation (FA2007)

Taught Course
June 2008 Exams
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Pass Assurance
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• Submit both course exam 1 by 10th April 2008 and course
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Slide 6
next
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sitting
Syllabus
A The UK tax system
B Income tax liabilities
C Corporation tax liabilities
D Chargeable gains
E National insurance
F Value added tax
G Obligations of tax payers

Slide 7
Examiner & Format of the Exam
Examiner:
Examiner:David
DavidHarrowven
Harrowven
Format of the Exam Marks

Question 1 Income tax question involving self 25-30

employment and employment. Could
include VAT.
Question 2 Corporation tax question; groups and 25-30
overseas aspects will account for 1/3 of
marks. Could include VAT.
Question 3 Chargeable gains 20
Question 4 Will test the remainder of the syllabus 15
Question 5 Will test the remainder of the syllabus 10
Total 100

Slide 8
Key Dates for the June 2008 exam

Registered with ACCA by 31 December 2007

Exam entry by 15 April 2008

Exam date Monday 2 June 2008

Exam results 18 August 2008

Slide 9
Classroom Tuition and Home Study
• Classroom tuition
– Key areas of the syllabus
• Home study
– Home study is vital for this paper
– Question practice essential
– 2 course exams
– Guidance at the end of each day
• ACCA Forum – www.bpp.com/accaforum

• Helpline for queries

Slide 10
Paper F6 Taxation – Chapter 1

Introduction to the UK tax

system
Structure of the UK tax system
Governmen
t

Lord
HMRC
Chancellor

Receivable
General Special
Officers Management
Commissioners Commissioners
Officers

Slide 12
Paper F6 Taxation – Chapter 2

The computation of
taxable income and
income tax liability
Lecture example 1 – (solution 1)
Income tax computation 2007/08
NSI
£
Employment income 40,000           
Net Income 40,000
Less: PA   (5,225)
Taxable income 34,775

Slide 14
Lecture example 1 – (solution 2)
Income tax thereon: £

2,230  10% 223

32,370  22% 7,121
   175  40% 70
34,775
Tax liability 7,414
Less: tax suffered at source (7,414)
Tax payable Nil  

Slide 15
Lecture example 2 – (solution 1)
NSI SI Divs
£ £ £
Employ. inc. 38,000
BDI 3,750
Divis            1,250
Net Income 38,000 3,750 1,250
Less: PA (5,225)
Tax income 32,775 3,750 1,250

Slide 16
Lecture example 2 – (solution 2)
Income tax thereon: £
2,230  10% 223
30,545  22% 6,720
32,775
1,825  20% 365
34,600
1,925  40% (3,750 – 1,825) 770
1,250  32.5% 406
37,775 
Tax liability 8,484
Less: Tax suffered at source
(£1,250  10% + 3,750  20% + 7,203) (8,078)
Tax payable 406

Slide 17
Income tax rates

Higher
rate band
40% 40% 32.5%
£34,600

Basic rate 22% 20% 10%

band

£2,230
Lower rate 10% 10% 10%
band
NSI SI DI

Slide 18
Lecture example 3 – (solution 1)

£
PAA 7,690
Less ½(25,000 – 20,900) (2,050)
5,640

Slide 19
Lecture example 4– (solution 2)
(a)
Income tax computation 2007/08
NSI
£
Employment income 100,000       
Less: PA   (5,225)
Taxable income 94,775

Slide 20
Lecture example 4 – (solution 3)

Income tax thereon: £

2,230  10% 223
32,370  22% 7,121
34,600
60,175  40% 24,070
94,775 31,414

Slide 21
Lecture example 4 – (solution 3)
(b) Taxable income £94,775
Extended basic rate band (32,370 + 7,800 x 100/78)
= £42,370
Income tax thereon: £
2,230  10% 223
42,370  22% 9,321
44,600
50,175  40% 20,070
94,775 29,614
Tax saving = 31,414 – 29,614 = 1,800
1,800/10,000 = 18%

Slide 22
Paper F6 Taxation – Chapter 3

Employment income
Employment income

Salary X
Bonus X
Commission / tips X
Benefits X
X
Allowable deductions (X)
Employment income X

Slide 24
Travel expenses

Home

No allowable Allowable
deduction deduction

Permanent Temporary workplace

workplace < 40% or
 24 months

Slide 25
Lecture example 1 – (solution)
Actually paid 35p  11,000 miles 3,850
Allowed:
10,000  40p 4,000
 1,000  25p    250
11,000 (4,250)
Allowable deduction (400)

Slide 26
Paper F6 Taxation – Chapter 4

Taxable and exempt

benefits. The PAYE
system
Benefits – basic rule

Total Earnings

 £8,500 &
< £8,500
directors

Second Marginal
hand cost to
value employer
Slide 28
Lecture example 1 – (solution)
Accommodation
Annual value 3,000
Additional charge
[(175,000 - 75,000)  6.25%] 6,250
E’ee contribution (2,500)
Taxable benefit 6,750

Slide 29
Lecture example 2 – (solution)
Accommodation expenses: PIID employee
assessed on lower of:
(a) expenses 1,800
 
(b) 10% net earnings
= 10% (7,000 + 2,000) 900
 
... Taxable benefit = 900 (lower amount)

Slide 30
Lecture example 3 – (solution 1)

Use of asset:
£
2005/06 1,000  20%  6/12 = 100
2006/07 1,000  20% = 200
2007/08 1,000  20%  9/12 = 150
450

Slide 31
Lecture example 3 – (solution 2)
Gift of asset:
2007/08 higher of:
£
(1) MV at date of gift = 600
(2) MV when first provided less
values already assessed:
= 1,000 - 450 = 550
... Taxable benefit = £600

Slide 32
Company cars (P11D & directors only)
• Working
CO2 X
Less (140)
X
Divide by 5 X
Round DOWN X
Add 15%
X%
x list price X

Slide 33
Lecture example 4 – (solution 1)

Car benefit
  (a) Vauxhall Vectra g/km = 158
Less base line (140)
18  5 = 3.6
round down = 3%
 % = 15 + 3 = 18%
Benefit = 16,500  18% = £2,970

Slide 34
Lecture example 4 – (solution 2)
(b) If car were diesel
Benefit = 15% + 3% + 3% = 21%
21% x16,500 = 3,465
(c) Basic benefit (above) = £3,465
 6/12 = £1,733
  Less contribution (1,000)
733
Slide 35
Paper F6 Taxation – Chapter 5

Pensions
Lecture example 1 – (solution 1)

a) Adjusted basic rate band

= £32,370 + (£3,900 x 100/78)
= £37,370

Slide 37
Lecture example 1 – (solution 2)
b) Income Tax liability £
Employment income 60,000
Less: personal allowance (5,225)
Taxable income 54,775
Income Tax thereon:
2,230 @ 10% 223
37,370 @ 22% 8,221
15,175 @ 40% 6,070
54,775 14,514
Slide 38
Lecture example 2
£
Salary 50,000
Less pension contribution (5,000)
Benefits 8,000
53,000
NB: Employer’s contribution is tax free

Slide 39
Lecture example 3 – (solution 1)

Adjusted basic rate band

= £32,370 + (£187,200 x 100/78)
= £272,370
Taxable Income:
£
Employment income 350,000
Less: personal allowance (5,225)
Taxable income 344,775
Slide 40
Lecture example 2 – (solution 2)

Income Tax thereon: £

2,230 @ 10% 223
272,370 @ 22% 59,921
70,175 @ 40% 28,070
344,775 88,214

Additional tax on excess contributions:

(240,000 – 225,000) @ 40% 6,000
TAX LIABILITY 94,214

Slide 41
Paper F6 Taxation– Chapter 6

Property income
Lecture example 1 – (solution 1)

£
1,600 x 9/12 1,200
2,000 x 3/12 500
1,700

Slide 43
Property Income
£’000s
Rental income (accruals) X
Less: expenses (accruals)
Advertising X
Agent’s fees X
Repairs X
(X)
Property income profit / (loss) X / (X)
Slide 44
Lecture example 2 – (solution 1)
£
Rents 2,400
Less: agent’s commission (360)
mortgage interest (500)
wear and tear(10% x 2,400) (240)
Less: losses bfwd (500)
800

Slide 45
Premium on a short lease
Part of premium Rent =
= Property Property
income income

Landlord

Premium £ Grants < £ Rent

50 yr lease

Tenant

Slide 46
Lecture example 3 – (solution)
  £
Premium 60,000
Less 2%  (15 – 1)  60,000 (16,800)
43,200
Rent (9/12  8,000)   6,000
Property income assessment 49,200

Slide 47
Tenant is a trader? – Lecture example 4
Property income
= £43,200

Landlord

Premium
Grants 15 £60,000
yr lease

Tenant Trading
deduction
= 43,200 / 15
= £2,880pa
Slide 48
Paper F6 Taxation– Chapter 7

Computing trading
income
Badges of trade The
Badges
of
Trade
Buy & sell Profit

How is the profit taxed?

Apply Badges of Trade

Deem to be Non-trading
TRADING PROFIT (potential)CAPITAL GAIN

INCOME
INCOMETAX
TAX CGT
CGT(usually
(usuallypreferable)
preferable)

Slide 50
Adjustment of profits proforma

£
Net profit per accounts X
Add: Disallowed expenditure X
Less: Income not taxed as trading income (X)
Non- taxable income (X)
Capital allowances: P&M and IBAs (X)
Taxable trading profit X

Slide 51
End of day 1 - what to do now…
• Reinforce today’s learning
• Develop question skills

Course
CourseCompanion
Companion

Course notes Study text Question

review review practice

Slide 52
Paper F6 Taxation – Chapter 8

Capital allowances
Plant & machinery

Function vs Setting

‘with which’ ‘within which’

P&M Building

CAs no CAs
/poss IBAs
Slide 54
First Year Allowances (FYAs)

FYAs

50% Never time apportion 40%

FYAs
most assets most assets
(except cars) (except cars)

Small businesses – 2 Medium business

yrs from 1/4/06 and small bus from
1/4/07
Slide 55
Lecture example 1 - Foxtrot (solution)
FYA Pool Total
£ £ £
TWDV bf 28,000
Additions 30,000
Disposals (2,000)
26,000
WDA @ 25% (6,500) 6,500
FYA @ 50% (8,000) 8,000
FYA @ 100% (14,000) 14,000
8,000 28,500
Slide 56 27,500
WDAs for cars

Cars

£12,000 > £12,000

NB vans, trucks
etc are not cars
direct to separate column
general pool for each

25% no FYA max £3,000 pa

Slide 57
Lecture example 2 – (solution)
Pool Car Total
£ £ £
Y/e 31/12/07
TWDV bf 25,000 13,000
WDA @ 25% (6,250) (3,000) 9,250
18,750 10,000
Y/e 31.12.08
WDA @ 25% (4,688) (2,500) 7,188
TWDV cf 14,062 7,500

Slide 58
Lecture example 3 – (solution 1)
Privately Total
Used (80%)
Y/e 31.12.06
Additions 8,000
FYA 40% (3,200)x80% 2,560
Y/e 31.12.07 4,800
WDA 25% (1,200)x80% 960
TWDV cf 3,600

Slide 59
Balancing adjustments
Disposal

general pool expensive car

deduct proceeds deduct proceeds

(limited to cost) (limited to cost)

continue 25% WDA no further WDA

no bal allow unless bal allow or bal charge

cessation
Slide 60
Lecture example 4 – (solution)
Accounting period ending on 31/12/2007 £
(a) TWDV 4,500
Disposal (Proceeds ltd to cost) (14,000)
(Balancing charge) (9,500)

(b) TWDV 4,500

Disposal (Proceeds) (8,000)
(Balancing charge) (3,500)

(c) TWDV 4,500

Disposal (Proceeds) (3,000)
Balancing allowance 1,500

Slide 61
Lecture example 5 - solution
FYA GP CAR 80% SLA Total
TWDV bf 15,000 20,000 4,000
Additions 20,000
Disposals (9,800) (25,000) (800)
5,200 (5,000) 3,200
FYA 50% (1,500) 1,500
FYA 100% (17,000) 17,000
WDA 25% (1,300) 1,300
BC 5,000x80% (4,000)
BA (3,200) 3,200
1,500 _______ _____ 19,000
TWDV cf 5,400 NIL NIL
Slide 62
Lecture example 6 – (solution)
£
Allowable expenditure 500,000
Less land (100,000)
400,000

Offices qualify as <25% of £400,000

Slide 63
Lecture example 7 – (solution)
IBAs
Y/e 30/6/2005:
(WDA n/a as not in use by 30/6/05)
 
Y/e 30/6/2006 and Y/e 30/6/2007:
WDA 4%  100,000 = £4,000 p.a.

Slide 64
IBAs proforma – 1st user
£

Cost X
Y/e 31/12/05 WDA @ 4% (X)
Y/e 31/12/06 WDA @ 4% (X)
Y/e 31/12/07 WDA @ 4% (X)

Residue before sale X

Slide 65
Subsequent users
• IBA = Residue before sale
Spread over the remaining tax life (to the
nearest month)
• Tax life

Acquisition 1st used

25 years tax life expires

Slide 66
Lecture example 8 – (solution 1)
(i) IBAs with industrial use – Anna £

Y/e 31/12/03 100,000

WDA @ 4% (4,000)
96,000
Y/e 31/12/04 to Y/e 31/12/06
WDA @ 4% x 3 years (12,000)

TWDV @ disposal/RBS 84,000

Slide 67
Lecture example 8 – (solution 2)

(ii) New user – Beth

£84,000 / 21 = £4,000

Slide 68
Paper F6 Taxation – Chapter 9

Assessable trading
income
Current Year Basis (CYB)
• Problem
– Accounts prepared for A.Ps
– Income tax returns prepared for FISCAL YRS
(6th April – 5th April)

• Solution
– Tax the AP which ends in the fiscal yr

Slide 70
Lecture example (1a) – (solution)
• Y/e 31 March 2008

AP 1/4/07 31/3/08

FY 6/4/07 5/4/08

Slide 71
Lecture Example 1(b) – (solution)
• Y/e 30 April 2007

AP 1/5/06 30/4/07

FY 6/4/07 5/4/08

Slide 72
3 problems of CYB

May not be one 12m AP ending in the FY

COMMENCEMENT CESSATION CHANGE OF Y/E

Opening
Openingyryr Change
Changeofofa/c
a/cdate
date
rules
rules Closing
Closingyr
yrrules
rules rules
rules

Slide 73
Opening yr rules
1ST YEAR –
ACTUAL Is there an A.P
BASIS ending in the 2nd
FISCAL YEAR?

YES NO

How long is the Use actual

A.P? FISCAL YR
(6 April - 5 April)
<12m
<12m 12m
12m

Tax FIRST 12m Tax 12m to the a/c

from date
commencement

Slide 74
Overlap profits
• Some profits taxed twice

• Depends on choice of yr end:

– 30 April = 11 mths o/lap
– 31 March = 0 mths o/lap

• Relief available:
– on cessation
– change of a/c date

Slide 75
Lecture example 2 – (solution)
2005/06 Actual (1/1/06– 5/4/06) £
(3/6  10,000) 5,000
 
2006/07 AP  12 mths
First 12 mths (1/1/06 – 31/12/06)
1/1/06 – 30/6/06 10,000
1/7/06 – 31/12/06
(6/12  18,000) 9,000
19,000
 
2007/08 CYB (yr to 30/6/07) 18,00
 
2008/09 CYB (yr to 30/6/08) 26,000
O/lap profits:
O/lap profits:
1/1/06–
1/1/06–5/4/06
5/4/06 5,000
5,000
1/7/06–
1/7/06–31/12/06
31/12/06 9,000
9,000
14,000
14,000
Slide 76
Lecture example 3 – (solution)
2005/06 Actual (1/1/06– 5/4/06) £
(3/18  28,000) 4,667
2006/07 No AP ending in FY
Actual basis
6/4/06 to 5/4/07
(12/18  28,000) 18,667
2007/08 AP > 12m
12m to a/c date
(12/18  28,000) 18,66
 
2008/09 CYB (yr to 30/6/08) 26,000

O/lap
O/lapprofits:
profits:
1/7/06–
1/7/06–5.4.07
5.4.07 14,000
14,000
14,000
14,000
Slide 77
Lecture example 4 – (solution)

2006/07 Actual (1/7/06 – 5/4/07)  

(9/18  18,000) 9,000
 
  2007/08 AP > 12 mths
12 mths to 31.12.07 
(12/18  18,000) 12,000

2008/09 CYB (Y/E 31/12/08) 15,000

O/lap
O/lap profits:
profits: 1/1/07
1/1/07 –– 5/4/07
5/4/07
   (3/18  18,000)
(3/18 18,000) 3,000
3,000
Slide 78
Closing yr rules
Penultimate F.Y £
- Normal CYB X

Final F.Y
- Tax any profits missed
so far X
- Less: o/lap relief (X)
X

Slide 79
Lecture example 5 – (solution)

£
2006/07 CYB (y/e 31.12.06) 19,000
 
2007/08 Yr to 31.12.07 22,000
3mths to 31.3.08 12,000
Less: ‘o/lap’ relief (3,500)
30,500

Slide 80
Approach to sole trader questions

1 Adjust the profit for each AP (add back….deduct….)

2 Calculate CAs for each AP

Opening yrs / change of Closing yrs

A/C date

WDA
WDAxxn/12
n/12 BA
BA//BC
BC

3 Deduct 2 from 1

4 Apply opening / change of A/C date / closing yr rules

Slide 81
Lecture example 6 – (solution 1)

Pool Allow
1/3/07 – 31/7/08 £ £ £

Addns qual for FYA 21,000

FYA 50% x 21,000 (10,500) 10,500
  10,500 10,500
10,500

Slide 82
Lecture example 6 – (solution 2)
The profits of the first period of account are as
follows:
 
Period of a/c Working Profits
£

1/3/07 – 31/7/08 (42,000 – 10,500) 31,500

 
THEN APPLY OPENING YEAR RULES

Slide 83
Lecture example 6 – (solution 3)

Fiscal yr Basis Working Assessment

£

06/07 1/3/07 – 5/4/07 (31,500 x 1/17)  1,853

07/08 6/4/07 – 5/4/08 (31,500 x 12/17) 22,235
08/09   12m end 31/7/08 (31,500 x 12/17) 22,235

O/lap
O/lapprofits:
profits: 1.8.07
1.8.07--5.4.08
5.4.08
8/17
8/17xx 31,500
31,500== £14,823
£14,823

Slide 84
Change of accounting date
Impact on o/lap
Worst Best
30 April 31 March
M J J A S O N D J F

10 9 8 7 6 5 4 3 2 1
11m 0m

RELIEVE O/LAP
CREATE O/LAP

Slide 85
Approach to questions
• Identify the yr of change (YoC)
– Earliest of
• 1st FY A/Cs not made to old date
• 1st FY A/Cs are made to new date
• All yrs before YoC
– Tax 12m to the OLD date
• All yrs after YoC
– Tax 12m to the NEW date
• YoC = find the GAP!
– <12m – tax 12m to the end of gap (create o/lap)
– >12m – tax the whole gap (relieve ‘n’ mths o/lap)
Slide 86
Lecture example 7 -(solution)

Fiscal Yr Dates £
06/07 Y/e 30/9/06 20,000
07/08 Y/e 30/9/07 27,000
12 mths to 30.4.08
08/09 GAP <+12
19,000 mths
(5/12 YoC 30,250
(7mths) create 12mth
x 27,000) period

09/10 Y/e 30/4/09 32,000

Lecture example 8 – (solution)

Fiscal Yr Dates £
06/07 Y/e 31/12/06 42,000
07/08 Y/e 31/12/07 37,000
15 mths to 31.3.09 68,000
Less 3mth o/lap YoC
08/09 GAP > 12 mths (15mths) tax gap & claim 3mths o/lap relief
(5,000)
63,000
09/10 Y/e 31/3/10 49,000
Paper F6 Taxation – Chapter 10

Trading losses
Income tax losses

Net profit / (loss) in a/cs X / (X)

Add : disallowed expenses X
Less : income taxed elsewhere (X)
capital allowances (X)
Trading loss (X)

OPTIONS ?

Slide 90
Lecture example 1 – (solution 1)

Step 1 - Set out the proforma

Step 2 - Copy in numbers from qn.
Step 3 - Slot in the losses (using the rules)
Step 4 - Remember loss memo

Slide 91
Lecture example 1 – (solution 2)

Relief against income 2006/07 2007/08 2008/09

£ £ £
Trading income 2,000 - 6,000
Other income 8,000 8,000 8,000
10,000 8,000 14,000
Relief vs income 6,000
(i)(10,000) (ii)(2,000) 14,000
Net Income NIL

Loss memo: £
Year end 30.06.07 12,000
(i) Loss relief – 06/07 (10,000)
(ii) Loss relief – 07/08 (2,000)
NIL

Slide 92
Lecture example 2 – (solution 1)

2006/07 2007/08 2008/09 2009/10

£ £ £ £
Trading income 20,000 - - 10,000
Carry forward ______ ______ ______ (10,000)
______
20,000 Nil Nil Nil
Other income 2,000 2,000 2,000 2,000
22,000 2,000 2,000

Relief vs income (22,000)

_____ (2,000)
______ (2,000)
______ ______
Net Income Nil
______ Nil
______ Nil
______ Nil
______

Slide 93
Lecture example 2 – (solution 2)
Loss memo £ £
Y/end 31/12/07 30,000
(i) Loss relief- 2006/07 (22,000)
- 2007/08 (2,000
6,000

Carry forward 6,000

Slide 94
Lecture example 2 – (solution 3)
Loss memo £ £
Bfwd from y/end 31/12/07 6,000
Y/end 31/12/08 10,000
Loss relief - 2007/08/2008/09 (2,000)
8,000
Carry forward 8,000
14,000
(ii) Carry forward relief 09/10 (10,000)
4,000
Carry forward 4,000

Slide 95
Lecture example 3 – (solution 1)

Trading income £

2005/06 Actual (1/7/05 – 5/4/06) 9/12 x (40,000) = nil

2006/07 12m to A/C date (y/e 30/6/06) = nil
2007/08 CYB (y/e 30/6/07) 24,000
2008/09 CYB (y/e 30/6/08) 30,000
2009/10 CYB (y/e 30/6/09) 36,000

Slide 96
Lecture example 3 – (solution 2)

Loss relief Relief vs income/early year loss relief

£
2005/06 9/12 x 40,000 30,000
Loss relief vs NI - 2005/06
- 2004/05
Loss relief vs NI - 2002/03
- 2003/04
- 2004/05
2006/07 12m to A/C date 40,000
less used in 2005/06 (30,000)
10,000 Loss
relief – 2006/07 and/or 2005/06
Loss relief –2003/04, 2004/05 and 2005/06
Slide 97
Lecture example 3 – (solution 3)

Carry forward relief £

Loss 40,000
07/08 (24,000)
08/09 (16,000)
nil
Advice:
Take early year loss relief of £30,000 in 02/03 –
tax repayment and earliest relief
Also early year loss relief of £10,000 in 03/04.

Slide 98
Terminal loss relief
6/4
12m cessation
PENULTIMATE FY FINAL FY

Loss X Loss X
Profit (X) O/ lap X
(ignore if profit) X X

TERMINAL LOSS

Slide 99
Lecture example 4 – (solution 1)

Closing year rules proforma:

2005/06 2006/07 2007/08 2008/09

£ £ £ £
Trading 8,000 10,000 4,000 nil
TLR ______ ______ ______ ______
______ ______ ______ ______

Slide 100
Lecture example 4 – (solution 2)
Terminal loss calculation
Final FY 08/09 (6.4.08 – 30.6.08)
3/9 x (27,000) (9,000)

Penultimate FY 07/08 (1.7.07 – 5.4.08)

6/9 x (27,000) (18,000)
3/12 x 4,000 1,000
(17,000)
Loss available under TLR (26,000)

Slide 101
Lecture example 4 – (solution 3)

* Loss of £26,000 available

Closing year rules proforma b/fwd:
2005/06 2006/07 2007/08 2008/09
£ £ £ £
Trading 8,000 10,000 4,000 nil
TLR (8,000) (iii) ______
______ (10,000) (ii) ______
(4,000) (i) ______
Nil
______ Nil
______ Nil
______ Nil
______

* UNRELIEVED TLR = £4,000

Slide 102
Losses on incorporation

Company
Company

Business
Business Business
Business
Trading
loss TLR
available
Loss vs C/Fwd
income Incorporation relief
NOT
available c/fwd vs future
available
income from co.

Slide 103
Paper F6 Taxation – Chapter 11

Partnerships and limited

liability partnerships
Partnerships

Net profit of p/ship X

Add : disallowed expenses X
Less: income taxed elsewhere (X)
capital allowances (X)
Adjusted p/ship profits X

Split according to p/ship agreement

Treat as separate sole traders

Slide 105
Lecture example 1 – (solution)
R S Total
£ £ £
1.7.06 – 31.3.07
(£45,000 to allocate)

Salary (x 9/12) 3,750 - 3,750

Balance (3:2) 24,750
_____ 16,500
_____ 41,250
_____
28,500 16,500 45,000
1.4.07 – 30.6.07
(£15,000 to allocate)

Balance (1:1) 7,500

_____ 7,500
_____ 15,000
_____
_____
36,000 _____
24,000 60,000

Slide 106
Lecture example 2 – (solution)

J K Total
£ £ £
Salary 6,000 nil 6,000
Balance (3:2) (21,600)
_____ (14,400)
_____ (36,000)
_____
Trading loss (15,600)
_____ (14,400)
_____ (30,000)

Slide 107
Lecture example 3 – (solution 1)

Share of profits/losses:

A B Total

6m to 31.12.07 (3:1) 12,000 4,000 16,000

Y/end 31.12.08 (1:1) (10,000) (10,000) (20,000)

Slide 108
Lecture example 3 – (solution 2)
Assessments A B
£ £
2007/08 Actual (1.7.07 – 5.4.08)
12,000 + 3/12 x (10,000) 9,500
4,000 + 3/12 x (10,000) 1,500

2008/09 CYB y/end 31.12.08

(10,000) (10,000)
less used in 07/08 2,500 2,500
Available loss (7,500) (7,500)

Trading assessment NIL NIL

Slide 109
Lecture example 3 – (solution 3)
Options for loss in 08/09
• Relief vs income vs net income:
• 2007/08
• 2008/09
• Early year loss relief vs net income:
• 2005/06
• 2006/07
• 2007/08
• Carry forward relief vs first available profits of
same trade

Slide 110
Lecture example 4 – (solution 1)

31.5.05 31.5.06 31.5.07

6m 6m

1/12/05
B joins
1:1 2:2:1

Slide 111
Lecture example 4 – (solution 2)

Sharing of Profits Total M G B

£ £ £ £
y/end 31.5.05 (1:1) 33,000 16,500 16,500 -

y/end 31.5.06
Up to 1.12.05 (1:1)
6/12 x £51,000 25,500 12,750 12,750 -
From 1.12.05 (2:2:1)
6/12 x £51,000 25,500 10,200 10,200 5,100
51,000 22,950 22,950 5,100

y/end 31.5.07 (2:2:1) 72,000 28,800 28,800 14,400

Slide 112
Lecture example 4 – (solution 3)

Assessments: M & G
M G
£ £
2005/06 (y/end 31/5/05) 16,500 16,500
2006/07 (y/end 31/5/06) 22,950 22,950
2007/08 (y/end 31/5/07) 28,800 28,800

Slide 113
Lecture example 4 – (solution 4)

B’s accounting periods:

1.12.05 – 31.5.06 (6m) £5,100
Y/end 31.5.07 £14,400

Slide 114
Lecture example 4 – (solution 5)
B’s assessments: £
2005/06 Actual (1.12.05 – 5.4.06)
5,100 x 4/6 3,400

2006/07 1st 12m (1.12.05 – 30.11.06)

5,100 + 6/12 x 14,400 12,300

2007/08 CYB (y/end 31.5.07) 14,400

O/lap profits:
1.12.05 – 5.4.06 3,400
1.6.06 – 30.11.06 6/12 x 14,400 7,200
10,600

Slide 115
End of day 2 - what to do now…
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Slide 116
Paper F6 - Taxation FA2007

Joe Bloggs
0207 123 4567
Joe@bpp.com
Paper F6 Taxation – Chapter 13

Computing chargeable
gains
Rates of CGT – table

NSI SI Div Gains

40% 40% 32.5% 40%
£34,600

22% 20% 10% 20%

£2,230
10% 10% 10% 10%

Slide 119
Illustration
£
Chargeable gain 16,700
Annual exemption (9,200)
Taxable gain 7,500
Basic rate band left 34,600 – 27,900 = 6,700
CGT payable
6,700 x 20% 1,340
800 x 40% 320
7,500 1,660

Slide 120
Capital gains tax
Paid by individuals

2007/08 5/10/08 31/01/09

Gain Inform CGT

HMRC due

Slide 121
Calculation of gain
£
Gross proceeds X
Less selling expenses (X)
Less cost (X)
Gain/(loss) X/(X)

Slide 122
Taper relief

6/4/98
IA Taper relief

Depends on

complete yrs of business vs

o/ship since non-business
6/4/98 asset

+ bonus yr for NBAs

Slide 123
Business assets

Definition of BA
Asset used in
Shares
trade

of a of a of an unquoted  5% employee
sole- partner employ
trader -ship ment
trading co

Slide 124
Lecture example 1 - solution
a) 6/4/98 – 5/4/07 = 9 years (+1 as NBA)
b) 12/5/99 – 12/5/07 = 8 years
c) 13/12/03 – 13/12/06 = 3 years

Slide 125
Lecture example 2 – (solution (a))
(a) £
Proceeds of sale 200,000
Less: cost (170,000)
Gain  30,000
 
Gain after taper relief
(10 Oct 1998 - 9 Oct 2006 = 9 years)
£30,000 x 25% 7,500
 

Slide 126
Lecture example 2– (solution (b))
(b) £
Proceeds of sale 200,000
Less: cost (170,000)
Gain  30,000
 
Gain after taper relief
(10 Oct 1998 - 9 Oct 2007 = 9 years)
£30,000 x 65% 19,500

Slide 127
Losses & taper relief
Asset 1 Asset 2 Asset 3 Total
(100%) (70%) (25%)
Indexed gain X X X
CY capital losses (X)1
X
Capital losses b/fwd (X)1 (X)2 __

nil X x 70% X x 25%

Chargeable gain X X X
Less AE (9,200)
Taxable gain X

Slide 128
Lecture example 3 – (solution)
  NBA NBA
Taper % 90% 100%
 
Gain per Q 45,000 10,000
CY loss (21,000) (10,000)
24,000 -

Gain after TR 90% 21,600

Less: AE (9,200)
Taxable gain 12,400

Slide 129
Lecture example 4 - solution
£
Gain 12,000
Less losses bfwd (12,000 – 9,200) (2,800)
9,200
Gain after taper relief 25% 2,300
Annual exemption (9,200)
NIL
Losses cfwd (12,000 – 2,800) = 9,200

Slide 130
Paper F6 Taxation – Chapter 14

Computing chargeable
gains – further aspects
Calculation of gain
£
Gross proceeds X
Less selling expenses (X)
Less cost (X)
Less Indexation allowances to 4/98
Rise in RPI x cost (X)
Indexed Gain/(loss) X/(X)

Slide 132
Indexation and losses
£ £
Proceeds 10,000 10,000
Less cost (7,000) (17,000)
Less IA (5,000) nil
Indexed gain/(loss) nil (7,000)

• NB IA CANNOT CREATE OR INCREASE A

LOSS

Slide 133
Lecture example 1 – solution 1
(1) Mr Dunstable £
Proceeds 27,000
Less selling expenses (1,500)
Less cost (15,000)
10,500
Less indexation allowance
0.752 x 15,000 (11,280)
NIL

Slide 134
Lecture example 1 – solution 2
(2) Sam £
Proceeds 140,000
Less cost (90,000)
Less indexation allowance
0.021 x 90,000 (1,890)
48,110
Gain after TR 60% 28,866

Slide 135
Lecture example 2 - solution
£
Proceeds 43,000
Less selling expenses (2,500)
Less Cost (15,000)
Less Enhancement (8,000)
17,500
Less IA 0.683 x 15,000 (10,245)
7,255
Gain after TR 25% 1,814

Slide 136
Part disposal

Set 10 warriors - value £1m

- cost £20,000

Sell – – for £100,000

Keep – – worth £400,000

Gain? - Proceeds = £100,000

Cost?
20,000 x 100,000/500,000 = £4,000
Slide 137
Lecture example 3 – (solution)
£
Proceeds 40,000
Less selling expenses (4,000)
40
Cost x 30,000 (16,000)
40 + 35 20,000
IA 0.339 x 16,000 (5,424)
14,576
After TR (9 + 1yrs) 60% = £8,746
Cost of remaining land
= 30,000 - 16,000 = 14,000

Slide 138
Lecture example 4 - solution
Transfer Julie to Joseph @ NG/NL £
i.e cost 8,000
Plus IA 8,000 x 0.470 3,760
Deemed proceeds 11,760
Disposal by Joseph
Proceeds 20,000
Less cost (11,760)
IA 11,760 x 0.213 (2,505)
5,735
Gain after TR 60% = £3,441

Slide 139
Compensation

Compensation = proceeds

Asset destroyed Asset damaged

Full disposal Part disposal

A
A+B

R/O if replaced
< 12m Restoration =
enhancement

Slide 140
Lecture example 5 – (solution 1)

Sept 1997 £
Compensation rec’d 33,000
Less cost 40,000 x 33K (16,923)
33K + 45K 16,077
IA 0.244 x 16,923 (4,129)
Gain in 97/98 11,948

Base cost of cottage 40,000 - 16,923 = 23,077

Slide 141
Lecture example 5 – (solution 2)

July 2007 £
Proceeds 95,000
Cost - cottage (23,077)
- restoration (33,000)
38,923
IA on cottage = 0.269 x 23,077 (6,208)
IA on restoration = 0.016 x 33,000 (528)
32,187
After TR @ 60% £19,312

Slide 142
Lecture example 6 – (solution 1)

£
Compensation rec’d 40,000
Less cost (30,000)
10,000
Taxable now (40,000-36,000) (4,000)
Deferred gain 6,000

Gain after taper relief 80% 3,200

Base cost of new asset 36,000 - 6,000 = 30,000

Slide 143
Paper F6 Taxation – Chapter 15

Chattels and Principal

Private Residence relief
Chattels

Tangible moveable property

Wasting Non wasting

Life < 50yrs Life > 50yrs
• P+M • Antiques
• Dogs • Elephants
• Racehorses

Slide 145
Chattel rules

Cost

Proceeds < 6,000 > 6,000

< 6,000 EXEMPT GP = £6,000

Restrict gain NORMAL CGT

> 6,000
5/3 (GP-6,000) RULES

Slide 146
Lecture example 1 – (solution 1)
a)
£
Proceeds 9,000
Comm 1,000
Cost (500)
IA 500 x 0.5 (250)

7,250
Compare to
5/3 (GP - £6,000)
= 5/3 (9,000 - 6,000)
= 5,000
Gain = £5,000
Slide 147
Lecture example 1 – (solution 2)

b)
£
Proceeds deemed 6,000
Cost (7,000)
Allow loss (1,000)

* No IA - cannot increase a loss

Slide 148
PPR

Occup. Deemed Occup.

before occup. after

• 3 yrs - any reason

• Any period - working abroad
• 4 yrs - working elsewhere in UK
* Last 36 mths always deemed occup.

Slide 149
Lecture example 2 – (solution 2)

1.4.83 1.4.84 1.4.89 1.10.89 1.04.02 30.9.04 30.9.07

Occupied Overseas Occupied Rented Last Sale

3 yrs

12 60 6 180 36

294

Slide 150
Lecture example 2 – (solution 2)

£
Gain 100,000
Less PPR
114/294 x 100,000 (38,776)
Less letting exemption
Lower: PPR claimed =38,776
De minimus = 40,000
Gain due to letting
30/294 x 100,000 = 10,204 (10,204)
51,020
After TR 60% 30,612

Slide 151
Paper F6 Taxation – Chapter 16

Business reliefs
Exam approach – gift relief
£
Deemed proceeds X
Less cost (X)
Less IA on cost (X)
Indexed gain X Step 1
Gift relief (balance) (X) Step 3
Actual proceeds less cost X Step 2

Slide 153
Effect on donee
• Base cost of asset
MV X
Gift relief (X)
X

• Taper relief clock starts again (ie lose TR

accrued by donor)

Slide 154
Lecture example 1 – (solution 1)
£
Deemed proceeds (MV) 210,000
Less cost (50,000)
Less IA (33,600)

Indexed gain 126,400 Step 1

Gift relief (81,400) Step 3
Actual proceeds less cost 45,000 Step 2
(95,000 – 50,000)

Slide 155
Lecture example 1 – (solution 2)

Actual proceeds less cost 45,000 Step 2

(95,000 – 50,000)
TR % 25%
Chargeable gain 11,250

Slide 156
Lecture example 1 – (solution 3)
Disposal by son £
Proceeds 250,000
Cost (210,000 - 81,400) (128,600)
121,400
No taper relief as owned for < 1 year

Slide 157
Lecture example 2 – (solution 1)
£
Deemed proceeds (MV) 200,000
Less cost (100,000)
Less IA (70,000)

Indexed gain 30,000 Step 1

Slide 158
Lecture example 2 – (solution 2)

Indexed gain 30,000 Step 1

Gift relief Step 3
270  130
30,000 x (28,571)
270  130  20
Actual proceeds less cost is NA Step 2
Gain taxed now 1,429

Slide 159
Lecture example 2 – (solution 3)

Gain taxed now 1,429

TR % 25%
Chargeable gain 357

Slide 160
Lecture example 2 – (solution 4)
Son acquires asset at
MV 200,000
Gift relief (28,571)
171,429

Slide 161
Rollover relief
Proceeds 80k
Cost (20k)
IA (20k)
Sell asset Gain 40k

12m 36m
Reinvest
50k 100k
Tax now All gain deferred
Proceeds not reinvested = 30k Base cost 100k
Gain = 40k Less (40k)
Less (30k) 60k
Defer 10k
Base cost 50k
Less (10k)
40k
Slide 162
Lecture example 3 – (solution 1)

Proceeds 250,000
Less cost (140,000)
IA: 0.277 x 140,000 (38,780)
Indexed gain 71,220
Tax now:
Proceeds not reinvested
(250K- 230K) (20,000)
Rollover relief 51,220
Slide 163
Lecture example 1 – (solution 2)

Base cost of new asset:

Cost 230,000
Gain rolled over (51,220)
Base cost 178,780

Slide 164
Depreciating assets
• Asset 2 life  60 years
– Lease  60 years
– Fixed plant & machinery

• SAME APPROACH AS ROR, BUT DON’T

DO STEP 4 (REDUCE BASE COST)

• Gain held over instead

Slide 165
Depreciating assets

Held over until:

earliest of

new stop 10 yrs

asset using in
sold trade

Slide 166
Lecture example 4 – (solution 1)
Proceeds 125,000
Less cost (75,000)
50,000

All proceeds reinvested

Holdover tapered gain of £25,000 (50% x
£50,000) until sale of plant on 7 December
2007.

Slide 167
Lecture example 4 – (solution 2)
Disposal of P&M
Proceeds 140,000
Less cost (160,000)
Loss (20,000)
NB. Capital Loss not available as relief given
through capital allowances

Slide 168
Incorporation

Shares
CO.
cash
Buys
L+B L+B
Gains Incorporation Relief
G/WILL G/WILL
Cessation
P+M P+M Transfer @ TWDV
B/C or B/A
Trade
STOCK profits
STOCK Transfer @ cost

Slide 169
Mixed consideration
• Relief restricted if mixed consideration
– Indexed gain x MV shares
Total consideration

• Taper relief on remaining gain

Slide 170
Base cost of shares
• Base cost of shares
MV X
Incorporation relief (X)
X

• Taper relief clock starts again (ie lose TR

accrued by donor)
– Not beneficial if likely to sell shares < 2yrs

Slide 171
Lecture example 5 – (solution 1)

Gains on chargeable assets 370,000

(100+120+70+80)
Incorporation relief
370,000 x 800 (296,000)
1000
Gain taxed now 74,000
TR % 25%
Chargeable gain 18,500

Slide 172
Lecture example 5 – (solution 2)
Base cost of shares for future disposal:
MV 800,000
Incorporation relief (296,000)
504,000

Slide 173
Paper F6 Taxation – Chapter 17

Shares and securities

Share matching for individuals

6/4/98 Disposal

4 3 1 2
FA1985 pool Post 4/98 acqns Same Next
day 30
days
Indexed to 4/98 NOT POOLED

Slide 175
Lecture example 1 – (solution)

Lower of:
(1) ¼ up = 165 + ¼(170-165) = 166.25
(2) Average of highest and lowest marked
bargains (164 + 171)/2 = 167.5
166.25 x 20,000 = £33,250

Slide 176
Lecture example 2 – (solution 1)

Matching of shares
Disposal 12,000
Same day nil
Next 30 days (FIFO) (6,000)
Post 5.4.98 (LIFO) (3,000)
FA85 Pool (3,000)
nil

Slide 177
Lecture example 2 – (solution 2)
(a) Acquisition in 30 days after disposal:

Proceeds
6,000/12,000 × £58,000 = 29,000
Cost (30,000)
Loss (1,000)

Slide 178
Lecture example 2 – (solution 3)
(b) Post 5.4.98 acqn – 7/10/03

Proceeds
3,000/12,000 × £58,000 = 14,500
Cost (12,000)
2,500
Note: no TR as o/ship is less than 3 yrs.

Slide 179
Lecture example 2 – (solution 4)
(c) FA85 Pool
  No Cost Indexed
Cost
At 5.4.98 10,000 25,000 40,271
Disp (3,000) (7,500) (12,081)
7,000 17,500 28,190 

Slide 180
Lecture example 2 – (solution 5)
(c) FA85 Pool
Proceeds 
3,000/12,000 × £58,000 = 14,500
Cost (7,500) 
Unindexed gain 7,000
I.A (12,081 – 7,500) (4,581)
Indexed gain 2,419
Taper relief
6.4.98 – 5.4.07 = 9 yrs
Plus 1 bonus yr = 10 yrs

Slide 181
Lecture example 2 – (solution 6)
Total gains
Post 5/4/98 FA85 Pool Total
TR % 100% 60%

Gain 2,500 2,419

Less CY loss (1,000)
Net gain 1,500 2,419
TR% x 100% x 60%
Chargeable gain 1,500 1,451 2,951

Slide 182
Bonus / rights issues

Bonus Rights
issue issue

Free shares Pay for new shares

Not an Indexing
indexing event event

Slide 183
Allocating bonus / rights issue shares
EXAMPLE: FA85 pool Post 5/4/98
May 1989 15,000
August 2000 5,000
July 2001 BI / RI
1 for 2 7,500 2,500
Total held 22,500 7,500

Prorate BI / RI to holdings held at time of issue

Slide 184
Lecture example 3 – (solution)

No Cost
June 1999 3,0003,000
BI1,500 -
4,500 3,000
Proceeds 10,000
Cost 3000/4500 x 3,000 (2,000)
8,000
Gain after taper relief (8 years) 70% x 8,000
= £5,600

Slide 185
Lecture example 4 – (solution 1)

Actual shares held

Bought RI Hold
FA1985 10,000 5,000 15,000
11.9.99 2,000 1,000 3,000
12,000 6,000 18,000

RI (1 for 2)
12,000/2

Slide 186
Lecture example 4 – (solution 2)

Matching of shares
Disposal 5,000
Same day (FIFO) nil
Next 30 days nil
Post 5.4.98 (LIFO) (3,000)
FA85 pool (2,000)
nil

Slide 187
Lecture example 4 – (solution 3)
(a) Post 5.4.98 acqn – on 11.9.99
 
No Cost
 
Shares acqd 11.9.99 2,000 5,000
Rights issue 1:2 @ £2.75 1,000 2,750
3,000 7,750

Slide 188
Lecture example 4 – (solution 4)

(a) Post 5.4.98 acqn – on 11.9.99

Proceeds
3,000/5,000 × £15,000 = 9,000
Cost (7,750)
1,250
Taper relief
11.9.99 – 10.9.07 = 8 yrs

Slide 189
Lecture example 4 – (solution 5)

(b) FA85 Pool

  No Cost Indexed cost
 
At 5.4.98 10,000 15,000 16,282
RI 5,000 13,750 13,750
15,000 28,750 30,032
Disp (2,000) (3,833) (4,004)
13,000 24,917 26,028 

Slide 190
Lecture example 4 – (solution 6)
(b) FA85 Pool
Proceeds 
2,000/5,000 × £15,000 = 6,000
Cost (3,833) 
2,167
I.A (4,004 – 3,833) (171)
Indexed gain 1,996
Taper relief
6.4.98 – 5.4.07 = 9 yrs

Slide 191
Lecture example 4 – (solution 7)

Total gains
Post 5.4.98 FA85 pool Total
TR % 25% 25%

Gain 1,250 1,996

TR% x 25% x 25%
Chargeable gain 313 499 812

Slide 192
Takeovers – share for share exchange

B Ltd shares

A Ltd C Plc

C Plc shares 100%

Not a disposal B Ltd

New shares have same cost
& acqn date as old shares
Slide 193
Lecture example 5 – (solution 1)
Millie Ltd swapped 30,000 shares in Bear plc for
Disney plc shares.
(Cost of Bear shares = £2 × 30,000 = £60,000)

Shares received in Disney plc

Ordinary shares
30,000/4 x 3 = £22,500
Preference shares
30,000/4 x 1 =£7,500

Slide 194
Lecture example 5 – (solution 2)
Total value at takeover
Ord. 22,500 × £5 112,500
Pref. 7,500 × 80p 6,000
118,500
Base cost

Ordinary shares: 112,500 x 60,000 56,962

118,500
6,000 x 60,000 3,038
Preference shares:
118,500 60,000

Slide 195
End of day 3 - what to do now…
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• Further develop question skills

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Slide 196
ACCA Paper F6 - Taxation FA2007

Joe Bloggs
0207 123 4567
Joe@bpp.com
Paper F6 Taxation – Chapter 19

Computing profits
chargeable to corporation
tax
Scope of corporation tax
UK company

Incorporated or Managed &

in UK controlled from UK

Chargeable to UK CT on
WORLDWIDE profits
Slide 199
Loan Relationships

Loan for trade?

Yes No
Forms part of Forms part of
trading income investment income

Slide 200
Chargeable gains – companies
Proceeds X
Less cost (X)
Unindexed gain X
Less IA
% increase in RPI to 3 d.p. x cost (X)
Indexed gain X

Slide 201
Lecture example 1 – (solution)
Proceeds (Dec 07) 40,000
Cost (May 84) (12,000)
Enhancement exp (Sept 86) (2,000)
Unindexed gain 26,000
Less: IA on cost:
202.7 – 89.0 = 1.278 x 12,000 (15,336)
89.00
Less: IA on enhancement:
202.7 – 98.3 = 1.062 x 2,000 (2,124)
98.30
Indexed gain 8,540

Slide 202
Year end position
£ £
Gains in yr X X
Losses in yr (X) (X)
OR
X (X)

include c/fwd vs
in CT future
comp gains

Slide 203
Lecture example 2 – solution 1
FA 85 pool No Cost Indexed cost
Aug 96 1,000 2,750 2,750
Index to Dec 96
154.4-153.1/153.1 x 2,750 23
Addition Dec 96 1,000 3,250 3,250
2,000 6,000 6,023
Index to July 97
157.5-154.4/154.4 x 6,023 121
Addition July 97 2,000 4,000 4,000
4,000 10,000 10,144

Slide 204
Lecture example 2 – solution 2
No Cost Indexed cost
4,000 10,000 10,144
Index to July 07
198.5-157.5/157.5 x 10,144 2,640
12,784
Disposal (3,000) (7,500) (9,588)
1,000 2,500 3,196

Slide 205
Lecture example 2 – (solution 3)

Proceeds 17,000
Cost (7,500)
Unindexed gain 9,500
IA (9,588 – 7,500) (2,088)
Indexed gain 7,412

Slide 206
Lecture example 3 – (solution 1)
12 mths to 4 mths to
31.8.07 31.12.07

Adjusted profit (12:4) 2,700,000 900,000

Less CA (working below)
Trading income
Property income (accruals)
Gain
Less: Gift aid (paid)

PCTCT

Slide 207
Lecture example 3 – (solution 2)
FYA General Allows
pool
Y/e 31/08/07 £ £ £
TWDV bfwd 30,000
WDA @ 25% (7,500) 7,500
22,500 7,500
P/e 31/12/07
Additions 17,500

17,500 22,500
WDA @ 25% x 4/12 (1,875) 1,875
FYA @ 50% (8,750) 8,750
8,750 10,625
29,375

Slide 208
Lecture example 3 – (solution 3)
12 mths to 4 mths to
31.8.07 31.12.07

Adjusted profit (12:4) 2,700,000 900,000

Less CA (working) (7,500) (10,625)
Trading income 2,692,500 889,375
Property income(accruals) 12,000 4,000
Gain 40,000
Less: Gift aid (paid) (20,000)

PCTCT 2,684,500 933,375

Slide 209
Paper F6 Taxation – Chapter 20

Computing the
corporation tax liability
Tax Calculation

PCTCT x CT %

determine ‘profits’
FYs
Limits
PCTCT + FII
FY07 =
1/4/07 – 31/3/08
CT Rates Graph

30 30%
(MR)
30%

20
20%

300k 1,500k ‘Profits’

Slide 212
Lecture example 1 – (solution (a))

Basic calculation

2,120,000 x 30% = £636,000

Slide 213
Lecture example 1 – (solution (b))

• ‘Profits’:
= PCTCT + FII
= 60,000 + 10,000
= 70,000 < £300,000
• SCR applies
• CT payable:
= 60,000 x 20% = £12,000
Slide 214
Marginal relief
Formula:
fraction x (upper limit – ‘profits’) x PCTCT
‘profits’

fraction upper limit

300k – 1.5m 1/40 1,500,000

Slide 215
 Lecture example 2 – (solution 1)
• ‘Profits’: = PCTCT + FII
= 400,000 + (9k *100/90)
= 410,000
• Full rate less MR
= 400,000 x 30% 120,000
Less MR
1/40 (1,500,000 – 410,000) x 400/410 (26,585)

GCT payable 93,415

Slide 216
Lecture example 3 – solution 1
£
PCTCT 200,000
FII (£9,000 x 100/90) 10,000
Profits 210,000
CT payable
FY06 £200,000 x 19% x 3/12 9,500
FY07 £200,000 x 20% X 9/12 30,000
39,500

Slide 217
Short chargeable accounting periods

• 1,500,000 where n is number of

X n/12 months in short AP

• 300,000

Slide 218
Lecture example 4 – (solution)
• ‘Profits’:
= PCTCT + FII
= 50,000+ (9,000 x 100/90)
= 60,000
• CAP < 12 months (4 mths)
• 1,500,000 x 4/12 = 500,000
• 300,000 x 4/12 = 100,000

• Small company rate applies

• 50,000 x 20% = £10,000

Slide 219
Associates

A Ltd A Ltd Mr A A Ltd

51% 51% 51% 51%
B Ltd
B Ltd B Ltd C Ltd 51%
2 Assocs 3 Assoc 2 Assocs C Ltd
3 Assocs
Associated companies – significance
Divide limits
– 1,500,000 Where n is no of
/n associated co.s
– 300,000

‘Profits’ = PCTCT + FII

Ignore divis from

associated co.s

Slide 221
Lecture example 5 – (solution)

• Lower limit:
300,000/4 x 9/12 = 56,250
• Upper limit:
1,500,000/4 x 9/12 = 281,250
• ‘Profits’ = 230,000 + 30,000
= 260,000
• CT payable:
230,000 @ 30% 69,000
Less 1/40(281,250-260,000)x230/260 (470)
68,530

Slide 222
Paper F6 Taxation – Chapter 21

Losses
Corporation tax losses
£’000s
Net profit / loss in accounts X / (X)

Add: expenditure not deductible for tax X

Less: items not taxed as trading income
- income assessable elsewhere (X)
- non-taxable income (X)
Less: Capital allowances
- Plant and machinery (X)
- Industrial buildings (X)
Adjusted Trading Loss (X)


Slide 224
NIL
 Loss relief proforma
2006 2007 2008
Trading income X nil X
C/fd relief (X)3
Other inc/gains X X X
CYR (X)1
CBR (X)2
Charges (X) (X) (X)
PCTCT X X X

Slide 225
Lecture example 1 – (solution 1)
Year ended 31 July

2006 2007

£ £

Trading income 10,000 nil

Investment income 50,000 50,000

Total profits 60,000 50,000

CYR (50,000)1
(50,000)2
CBR ______
10,000 nil
PCTCT

Slide 226
Lecture example 1 – (solution 2)
Loss memo:

Y/e 31/07/07 100,000

1) cy (50,000)

2) c/b (50,000)

loss remaining nil

Slide 227
 Lecture example 2 – (solution 1)
30/6/04 30/6/05 30/6/06 30/6/07
Trading 20,000 30,000 nil 15,000
C/f (5,000)3
Investment 10,000 10,000 10,000 10,000
Cy (10,000)1
C/b (40,000)2
Charges (5,000) (5,000) (5,000) (5,000)
PCTCT 25,000 nil nil 15,000
URNTC
5,000 5,000

Slide 228
Lecture example 2 – (solution 2)
Loss memo:

Y/e 30/6/06 55,000

1) CY (10,000)

2) CB y/e 30/6/05 (40,000)

3) CF y/e 30/6/07 (5,000)

loss remaining Nil

Slide 229
Lecture example 3 – (solution 1)
30/9/04 6 months 31/3/06 31/3/07 31/3/08
to 31/3/05
Trading 3,000 9,000 16,000 12,000 nil
Investment 500 - 600 600 600
Gains 1,000 - - - 5,000
CY (9,000)4 (16,600)3 (12,600)2 (5,600)1
CB
Gift aid (300) - (300) (300) -
PCTCT NB carry back 36 mths, but how
much to y/e 30/9/04?
Slide 230
Lecture example 3 – (solution 2)
Loss memo:

Y/e 31/3/08 45,800

1) Current (5,600)

2) C/b y/e 31.3.07 (12,600)

3) C/b y/e 31.3.06 (16,600)

4) C/b 6m to 31.3.05 (9,000)

2,000

Max offset = £4,500 x 6/12 = £2,250

Max loss available to c/back is £2,000

Slide 231
Lecture example 3 – (solution 3)
30/9/04 6 months 31/3/06 31/3/07 31/3/08
to 31/3/05
Trading 3,000 9,000 16,000 12,000
Investment 500 - 600 600 600
Gains 1,000 - - - 5,000
CY (5,600)1
(2,000)5 (9,000)4 (16,600)3 (12,600)2
CB
Gift aid (300) - (300) (300) -
PCTCT
2,200 nil nil nil nil
URNTC 300 300

Slide 232
Paper F6 Taxation – Chapter 22

Groups
Associated companies – significance
Divide limits
– 1,500,000 Where n is no of
/n
– 300,000 associated co.s

‘Profits’ = PCTCT + FII

Ignore divis from

associated co.s

Slide 234
Lecture example 1 – (solution 1)
A
Butter Ltd
100% 40%
60% 60% 80%
Worth Ltd Willan’s Ltd
Tolley’s Ltd
acq’d 31/3/07
dormant
A CCH Inc Budget Ltd
A sold 31/10/07
A

Slide 235
Lecture example 1 – (solution 2)

Revised limits

1,500,000  4 = 375,000
300,000 4 = 75,000

Slide 236
Losses group – definition
• Beware sub-subsidiaries

• 75% effective interest (EI) needed:

A Ltd
75%
EI = 75% x 75%
B Ltd
= 56.25%
75%
C Ltd

Slide 237
Lecture example 2 – solution 1

A Ltd
90% 80%

B Ltd How many associated co.s? D Ltd

5
100% How many loss groups? 90%
2
C Ltd E Ltd

Slide 238
Example of a group via foreign parent

A Inc
90% 80%

B Ltd C Ltd

3 associates
loss group = B & C

Slide 239
Group relief planning

Minimise the group’s tax liability

‘Profits’
30% 2nd
£1,500,000 / n
Take ‘P’
32.5% 1st down to
20% level

£300,000 / n
20% 3rd

Slide 240
Illustration of marginal rates
Dash Ltd has PCTCT of £2m for year end 31.3.08.
GCT = £2m x 30% = £600,000

£
300,000 @ 20% 60,000
300,000
1,200,000 @ 32.5% 390,000
1,500,000
500,000 @ 30% 150,000
2,000,000 600,000

Slide 241
Lecture example 3 – (solution 1)

Working: revised limits

1,500,000 / 2 750,000
300,000 / 2 150,000

Gordon Ltd is paying tax @ 32.5%

Tony Ltd is paying tax @20%

Slide 242
Lecture example 3 – (solution 2)

Tony Ltd should surrender the whole of its

loss to Gordon Ltd
Gordon Ltd BeforeAfter
PCTCT 500,000400,000

Tax @ 30% 150,000120,000

1/40 (750k – 500k) (6,250)
1/40 (750K – 400k) (8,750)
143,750 111,250
Tax saving £32,500 ie. 32.5%
Slide 243
Lecture example 4 – (solution 1)

First, find the revised limits:

1,500,000 / 3 500,000
300,000 / 3 100,000

Slide 244
Lecture example 4 – (solution 2)
Rates before relief:
H Ltd S Ltd B Ltd
Trading inc.
Other 825 nil 105
180 30 5
PCTCT 1,005 30 110
(pre-relief)

Tax rate 30% 20% 32.5%

Slide 245
Lecture example 4 – (solution 3)
Optimum use?
H Ltd S Ltd B Ltd

Tax rate 32.5%

30% 20%
Loss relief (20) (20) (20)
or or
(10k x 32.5% + (10k
20 x 30% (20 x 20%) = £4k
Potential tax x 20%) = 5.25K
= 6K
saving
OR could GR £10k to each of H and B – saves £10k x
32.5% + £10k x 30% = £6,250
Slide 246
Non-coterminous year ends

Loss (20k)
Y/e 31/12/07
H Ltd Loss (20k) x 9/12
=(15k)
Lower of
Profit 30K x 9/12
=22.5K S Ltd Y/e 31/3/08
Profit 30K

Slide 247
Implications
• Assets transferred at no gain, no loss
(NG/NL)

• Elect for deemed NG/NL transfers

• One unit for rollover relief

Slide 248
Lecture example 5 – (solution)

Building transferred at NG/NL

= cost + IA to date of transfer.

ie: 140,000 + (0.53  140,000) = 214,200

Glove Ltd has a base cost for the building of

£214,200 for a future disposal.

Slide 249
Utilise losses

Selling asset at gain

A Ltd

100% Trfrs asset

B Ltd
Capital losses

Sells asset & offsets gain

Manipulate tax by NG/NL transfer

Slide 250
Implications

Selling asset at gain

A Ltd
32.5%
100% Trfrs asset

B Ltd
20%

Reduce tax liability by NG/NL transfer

Slide 251
Capital losses
• Actual transfer of asset not necessary

• Elect to treat asset as transferred

• Election within 2yrs of end of AP

Slide 252
Paper F6 Taxation – Chapter 23

Overseas matters for

companies
UK resident company
A Ltd

Incorporated Managed &

in UK controlled from UK
or
Chargeable to UK CT on WORLDWIDE
profits

Foreign income will be taxed overseas too

= Double taxation
Slide 254
Non-resident company
A Inc

Incorporated Managed &

overseas controlled overseas
and

Only subject to UK CT on UK trading

profits / gains

Always tax at 30%

Slide 255
Overseas expansion
Profit/loss incl Dividend incl
A Ltd
in A’s trade in A’s foreign
income income

Overseas Overseas
branch subsidiary
- UK CAs - No group relief
- Not an associate - Associate

Slide 256
Double Tax Relief – (DTR)
• DTR lower of:
– Actual foreign tax

– UK tax on foreign income

GCT x foreign income
Total PCTCT

Slide 257
Double Tax Relief – (DTR)
• WHT
– When dividend paid
– Rate always given

• ULT (overseas subsidiaries only)

– Must own  10% votes
– Formula:
Gross divi x tax actually paid
PAT

Slide 258
Impact of WHT & ULT
Net dividend received in
80
the UK
WHT -20
Dividend declared by
100
foreign company
ULT -50
What dividend would have 150
been if no foreign CT tax

Slide 259
Lecture example 1 – (solution 1)

Bradley Limited : y/e 30.6.07

Total UK Foreign
Trading income 850,000 850,000
Foreign income (W1)
------------- ------------
---------PCTCT
-------------- ------------
---------

Slide 260
Lecture example 1 – (solution 2)
WHT Foreign income Foreign tax
Cash dividend 100,000
WHT 100k x 20 / 80 25,000 25,000
Gross dividend 125,000
Taxable foreign income 125,000

Total foreign tax 25,000

Slide 261
Lecture example 1 – (solution 3)
Bradley Limited : y/e 30.6.07

Total UK Foreign
Trading income 850,000 850,000
Foreign income (W1) 125,000 125,000
------------- ------------
---------PCTCT 975,000 850,000
125,000 -------------
------------ ---------

Slide 262
Lecture example 1 – (solution 4)
PCTCT £975,000

GCT @ 30% 292,500

Less MR:
1/40 x (1,500,000 – 975,000) (13,125)

Total GCT tax liability 279,375

Slide 263
Lecture example 1 – (solution 5)
DTR

Average rate UK tax:

Total tax 279,375

------------ x 100 -------------- x 100 = 28.654%
PCTCT 975,000

Slide 264
Lecture example 1 – (solution 6)
• DTR Lower of:
– UK tax on foreign dividend
= Foreign income x average UK
rate
= 125,000 x 28.654%
= 35,817

– Actual foreign tax paid

= 25,000

Slide 265
Lecture example 1 – (solution 7)
DTR offset

Total tax liability 279,375

Less DTR (25,000)

------------
Tax payable 254,375
------------

Slide 266
Lecture example 2 – (solution 1)
Total UK Foreign

Trading 1,600,000 1,600,000

Foreign (W1&2)
Charges (50,000) (50,000)

PCTCT

Slide 267
Lecture example 2 – (solution 2)
W1 Foreign o/s tax

Cash div 300,000

WHT: 20/80 x 300K 75,000 75,000
375,000
ULT:
375/800 x 220 103,125 103,125
Foreign income 478,125 178,125

Slide 268
Lecture example 2 – (solution 3)
Total UK Foreign
Trading 1,600,000 1,600,000

Foreign 478,125 478,125

Charges (50,000) (50,000)

PCTCT 2,028,125 1,550,000 478,125

Slide 269
Lecture example 2 – (solution 4)
Divide limits:

1.5m / 2 = 750K

300k / 2 = 150K

Slide 270
Lecture example 2 – (solution 5)
PCTCT 2,028,125

GCT @ 30% 608,437

DTR

Average rate UK tax: 30%

Slide 271
Lecture example 2 – (solution 6)
• DTR Lower of:
– UK tax
= 478,125 x 30%
= £143,437

– foreign tax
= £178,125

Slide 272
Lecture example 2 – (solution 7)
DTR offset

Total tax liability 608,437

Less DTR (143,437)

------------
Tax payable 465,000
------------

Slide 273
Transfer pricing

> 50 %
A Ltd B Inc
Sells goods Sell to B for £600k
MV = £1m
Profit now
UK tax advantage overseas

Self-assess PCTCT
& adj by £400k

Slide 274
Paper F6 Taxation – Chapter 25

An introduction to value
added tax
Taxable & exempt supplies (sales)
Supplies

TAXABLE EXEMPT

std rated zero rated

17.5% (& 5%) 0%

register with HMCE cannot register

recover INPUT VAT cannot recover

INPUT VAT
Slide 276
Compulsory registration
Two registration tests exist:
Historic test
End of each
month
Previous 12 months
Taxable supplies > £64k

- e.g. exceed limit on 30 November

- Notify HMCE within next 30 days (by 30th December)
- Registered from start of next month (1st January)

Slide 277
Compulsory registration
Forward looking (future) test
Today
30 Days
Taxable supplies > £64k

- 30 Days to notify HMCE

- Registered from start of the 30 day period

Slide 278
Lecture example 1 (solution)

Annual turnover does not exceed £64,000

until 31 March 2008 (on month by month basis)

Jack does not become liable until then. He must

notify HMRC within 30 days i.e by 30 April 2008
He will then be registered from 1 May 2008.

Slide 279
 Voluntary registration
- Must be making TAXABLE supplies

Advantages Disadvantages

• Recover input VAT • Administration burden

• Kudos • Risk of penalties on errors

• Discipline • Prices go up for non-VAT

registered customers
• Avoid late registration (need to look at customer status)
penalty

Slide 280
Lecture example 2 (solution)
Reclaimable VAT
£
Vans (28,200 x 7/47) 4,200
Lorry (29,375 x 7/47) 4,375
Entertaining employees (5,875 x 7/47) 875
9,450

Capital Allowances £
Cars (25% WDA) 14,335
Vans (28,200 - 4,200) 24,000 (FYA?)
Lorry (29,375 - 4,375) 25,000 (FYA?)

Slide 281
Lecture example 3 (solution)

£
Van ‑ in use post registration 1,400
Stock ‑ still held at date of registration 2,100
 
NB: VAT on accountancy fees are not recoverable
as > 6 months prior to registration.

Slide 282
Tax point
Example – sale on credit

Order Goods Invoice Cash

rec’d despatched issued rec’d

Qtr1 Qtr2 Qtr3 Qtr4

• Which VAT return is the sale recorded in?

Slide 283
Tax point
• Earliest of:

• Goods despatched / service completed

• Invoice issued *
• Cash received

* If invoice is within 14 days of despatch, or

provision of the service, this will be the TP

Slide 284
Lecture example 4 – (solution)

(a) 16 June 2007

(b) 30 June 2007

Slide 285
VAT on private fuel
• Can reclaim!
• But extra output tax (ie additional sale)
– scale charge
• VAT return
Output tax £
Scale charge X
Input tax
VAT paid on all fuel (X)

Slide 286
Lecture example 5 – (solution)
Value for the quarter (FROM RATES & TABLES)
Car 1 £
£243 × 1/3 81

Car 2
£317 × 2/3211.33
292.33

Output tax £
7 / 47 × 292.33 43.54
Input tax
7/ 47 × £300 (44.68)

Slide 287
Paper F6 Taxation – Chapter 26

Further aspects of VAT

Administration
SERIOUS MISDECLARATION PENALTY

Error in OR Accept
return under-assessment

Serious? Serious?

> £1m or > £1m or

30% X GAT 30% X TAT

Penalty
Penalty==15%
15%xx‘error’
‘error’

Slide 289
Lecture example 1 – (solution)
• >£1m?
– Error 94,000 × 17.5% = £16,450

• > 30% * GAT?

– GAT = 33,000 + 16,450 + 16,000 = 65,450 ×
30% = 19,635

Error < 30% GAT  no penalty

Slide 290
Default surcharge

Q1 Q2 Q3 Q4
VAT
PAID LATE LATE ON TIME LATE

RETURN
SUBMITTED LATE LATE ON TIME LATE

RESULT SLN Issued 2% penalty - 5% penalty

(reset SLN) (reset SLN)

SLN
SLNremoved
removedafter
after44consecutive
consecutive‘clean
‘cleanreturns’
returns’
Slide 291
Annual accounting
• Normal filing = quarterly within 1m of end of quarter
• Option for small businesses = annual returns
• “Small” = Taxable supplies < £1,350,000

10% 10%
31/7/05 Y/e 31/3/06 31/5/06

1 x VAT return
90% x Estimated liability
(month 4 – 12)

Slide 292
Lecture example 6 – (solution)

(a) Output VAT

95,000  85%  7/47 = 12,027

Input VAT
15,800  7/47 = (2,354)
VAT payable £9,673
 
(b) Using the flat rate scheme
Can
Canweigh
weighthe
the£777
£777
  additional
additionalVAT
VATagainst
against
95,000  11% = £10,450 easier
easieradministration
administration

Slide 293
End of day 4 - what to do now…
• Reinforce today’s learning
• Further develop question skills
• BPP Learn Online (bulletin boards, FAQs)

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Course notes Study text Question

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by88May
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Slide 294
End of day 4 - Three Steps to Success

Step 2
Step 1 Step 3
Practise &
Learning Final rehearsal
revise

Revision
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Slide 295