INSPECTION COPY. BUSINESS PLANNING: TAXATION Finance Acts Study Manual. The Institute of Chartered Accountants in England and Wales

Transcription

1 The Institute of Chartered Accountants in England and Wales BUSINESS PLANNING: TAXATION Finance Acts 2015 For exams in 2016 Study Manual

2 Business Planning: Taxation The Institute of Chartered Accountants in England and Wales ISBN: Previous ISBN: First edition 2013 Fourth edition 2015 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, graphic, electronic or mechanical including photocopying, recording, scanning or otherwise, without the prior written permission of the publisher. The content of this publication is intended to prepare students for the ICAEW examinations, and should not be used as professional advice. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Originally printed in the United Kingdom by Polestar Wheatons on paper obtained from traceable, sustainable sources. Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP The Institute of Chartered Accountants in England and Wales

3 Welcome to ICAEW I am delighted that you have chosen ICAEW to progress your journey towards joining the chartered accountancy profession. It is one of the best decisions I also made. The role of the accountancy profession in the world s economies has never been more important. People making financial decisions need knowledge and guidance based on the highest technical and ethical standards. ICAEW Chartered Accountants provide this better than anyone. They challenge people and organisations to think and act differently, to provide clarity and rigour, and so help create and sustain prosperity all over the world. As a world leader of the accountancy and finance profession, we are proud to promote, develop and support over 144,000 chartered accountants worldwide. Our members have the knowledge, skills and commitment to maintain the highest professional standards and integrity. They are part of something special, and now, so are you. It s with our support and dedication that our members and hopefully yourself, will realise career ambitions, maintain a professional edge and contribute to the profession. You are now on your journey towards joining the accountancy profession, and a highly rewarding career with endless opportunities. By choosing to study for our world-leading chartered accountancy qualification, the ACA, you too have made the first of many great decisions in your career. You are in good company, with a network of over 26,000 students around the world made up of likeminded people, you are all supported by ICAEW. We are here to support you as you progress through your studies and career; we will be with you every step of the way, visit page x to review the key resources available as you study. I wish you the best of luck with your studies and look forward to welcoming you to the profession in the future. Michael Izza Chief Executive ICAEW iii

4 iv

5 Contents Introduction vii Business Planning: Taxation viii Permitted Texts ix Key Resources x Finance Act 2015 update xi 1 Ethics 1 2 Income tax and NIC 39 3 Employee remuneration 65 4 Unincorporated businesses 91 5 Capital gains tax Capital gains tax reliefs Inheritance tax Personal tax international aspects The taxation of trusts Corporation tax for a single company Raising finance Corporation tax losses Anti-avoidance for owner-managed businesses Groups and consortia International expansion Corporate anti-avoidance Companies special situations VAT Stamp taxes Communication skills Choice of business structure Transformation of owner-managed businesses Corporate reorganisations 629 Index 673 v

6 vi

7 1 Introduction ACA qualification The ICAEW chartered accountancy qualification, the ACA, is a world-leading professional qualification in accountancy, finance and business. The ACA has integrated components that give you an in-depth understanding across accountancy, finance and business. Combined, they help build the technical knowledge, professional skills and practical experience needed to become an ICAEW Chartered Accountant. Each component is designed to complement each other, which means that you can put theory into practice and you can understand and apply what you learn to your day-to-day work. Progression through all the elements of the ACA simultaneously will enable you to be more successful in the workplace and exams. The components are: Professional development Ethics and professional scepticism 3-5 years practical work experience 15 accountancy, finance and business modules To find out more on the components of the ACA and what is involved in training, visit your dashboard at icaew.com/dashboard. Introduction vii

8 2 Business Planning: Taxation The full syllabus and technical knowledge grids can be found within the module study guide. Visit icaew.com/dashboard for this and more resources. 2.1 Module aim The aim of this paper is: To enable candidates to apply technical knowledge and professional skills to identify and resolve taxation issues that arise in the context of preparing tax computations and to advise on tax-efficient strategies for businesses and individuals. Candidates will be required to use technical knowledge and professional judgement to identify, explain and evaluate alternative tax treatments and to determine the appropriate solutions to taxation issues, giving due consideration to the needs of clients and the interaction between taxes. The commercial context and impact of recommendations will need to be considered in making such judgements, as will ethical and legal issues. The examiners have stated that in the examination all references to HMRC are to HM Revenue and Customs. 2.2 Method of assessment The Business Planning: Taxation module will be examined using traditional paper based assessments. The paper-based exam will be 2.5 hours in length. This exam will contain questions requiring the use of communication, judgement and evaluation skills as well as an ability to understand the interaction of different taxes. The exam will consist of three questions. One question will be an integrated scenario of approximately 40 marks which will cover a range of taxes as well as including tax planning. Ethics and law may be tested in any of the three questions. The exam will be open book and will permit candidates to take any written or printed material into the exam hall subject to practical space restrictions. 2.3 Specification grid This grid provides a general guide as to the subject matter within this module and assessment coverage over a period of time. Weighting (%) Ethics and law 5 10 Taxation of corporate entities Taxation of owner-managed businesses Personal taxation This grid provides guidance on the relative weighting between knowledge and skills: Weighting (%) Knowledge Skills viii Business Planning: Taxation

9 3 Permitted Texts 3.1 At the Professional and Advanced Levels there are specific texts that you are permitted to take into your exams with you. All information for these texts, the editions that are recommended for your examinations and where to order them from, is available on Professional Level Examinations Permitted Text Audit and Assurance Financial Accounting and Reporting Tax Compliance Business Strategy Financial Management Business Planning: Banking/Insurance/Taxation Advanced Level Examinations Corporate Reporting Strategic Business Management Case Study No restrictions No restrictions No restrictions No restrictions Business Planning: Banking/Insurance/Taxation and the Advanced Level exams have no restrictions so you may take any hard copy materials in to these exams that you wish, subject to practical space restrictions. Although the examiners use the specific editions listed to set the assessment, you may use a different edition of the text at your own risk. If you use a different edition within your exams, you should note this inside your answer booklet, at the beginning of the question. This information, as well as what to expect and what is and is not permitted in your exams is available in the Instructions to Candidates. You will be sent this with your exam admission details and it is also available on our website; Business Planning: Taxation To ensure that you are up to date with the relevant content of Finance (No. 2) Act 2015, a supplement has been produced and will be dispatched with your Business Planning: Taxation Question Bank. The supplement will cover relevant examinable material introduced by the second Finance Act, and should be used in conjunction with the recommended edition of the permitted text. There are no restrictions within the Business Planning: Taxation exam and so we recommend that you take the supplement into your exam with you. Relevant examinable rates and allowances from Finance (No. 2) Act 2015 will also be included within the exam paper. Introduction ix

10 4 Key Resources Student support team Our student support team are here to help you as much as possible, providing full support throughout your studies. T +44 (0) F +44 (0) E studentsupport@icaew.com Student website The student area of our website provides the latest information, guidance and exclusive resources to help you progress through the ACA. Find everything you need (from sample paper to errata sheets) at icaew.com/dashboard. Online student community The online student community provides support and practical advice wherever you are, whenever you need it. With regular blogs covering a range of work, life and study topics as well as a forum where you can post your questions and share your own tips. Join the conversation at icaew.com/studentcommunity. Tuition The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core principles of quality course delivery. If you are receiving structured tuition with an ICAEW Partner in Learning, make sure you know how and when you can contact your tutors for extra help. If you are not receiving structured tuition and are interested in classroom, online or residential learning, take a look at our recognised Partner in Learning tuition providers in your area, on our website icaew.com/dashboard. Faculties and Special Interest Groups Faculties and special interest groups support and develop members and students in areas of work and industry sectors that are of particular interest. Our seven faculties provide knowledge, events and essential technical resources. Register to receive a complimentary e-magazine from one faculty of your choice each year throughout your studies. Our 12 special interest groups provide practical support, information and representation within a range of industry sectors. Register to receive free provisional membership of one group each year throughout your studies. Find out more about faculties and special interest groups at icaew.com/facultiesandsigs. Library & Information Service The Library & Information Service is ICAEW s world-leading accountancy and business library. The library provides access to thousands of resources online and a document delivery service, you ll be sure to find a useful ebook, relevant article or industry guide to help you. Find out more at icaew.com/library. x Business Planning: Taxation

11 Finance Act 2015 update This summary contains details of the Finance Act 2015, enacted on 26 March A supplement will be issued with the Question Bank detailing the examinable content of Finance (No. 2) Act. At the time of going to print Finance (No. 2) Act had not been enacted. This summary also contains details of legislation previously enacted which comes into effect for the tax year 2015/16. PERSONAL TAX 1 Income tax allowances The following are the new allowances for 2015/16: Personal allowance if born after 5 April ,600 Personal allowance if born before 6 April ,660 Income limit for personal allowances (if born before 6 April 1938) 27,700 The blind person s allowance for 2015/16 is 2,290. For married and civil partnership couples, the married couple s allowance is 8,355 if either spouse was born before 6 April 1935 (ie aged 81 or over at 5 April 2016). The married couple s allowance provides a tax reduction at the rate of 10%, so the maximum tax reduction is The income limit for personal allowances for 2015/16 for those born before 6 April 1938 is 27,700. If the individual s adjusted net income exceeds this amount, first the personal allowance is reduced by 1 for every 2 of excess adjusted net income. The personal allowance cannot be reduced below 10,600 (unless it is tapered as a result of having adjusted net income in excess of 100,000 (see below)). If there is any further excess income, a similar reduction is made against the married couple s allowance. The minimum amount of married couple s allowance for 2015/16 is 3,220. 'Adjusted net income' is after deducting trading losses, gross Gift Aid donations and gross personal pension contributions paid by the individual (rather than an employer). 1.1 Tapering of the personal allowance If an individual s adjusted net income for 2015/16 exceeds 100,000, the personal allowance is reduced by 1 for every 2 excess income. The personal allowance of an individual with adjusted net income of 121,200 in 2015/16 is reduced to nil. This gives a marginal rate of tax of 60% for adjusted net income between 100,000 and 121,200. In addition, if the income which takes a taxpayer over 100,000 is earned income then national insurance at 2% is also payable, making the marginal rate of tax 62%. Individuals who earn more than 100,000 pa continue to pay tax plus NI at 42% but for each extra 2 earned, lose 1 of personal allowance for income tax purposes only. So they pay 42% on the extra 2 earned and lose the nil rate of tax on 1, ie extra tax and NI of 0.84 on the 2 of additional income, and extra tax of 0.40 on the 1 no longer receiving a personal allowance for income tax purposes. This gives total extra tax and NI of 1.24 on 2 of income which, as a percentage, is 62%. Introduction xi

12 Worked example: Tapering of the personal allowance Josephine, age 35, earns 85,000 a year (salary and benefits). She also receives 16,000 interest from her bank account and UK dividends of 11,700. She makes a donation of 800 to charity via Gift Aid and contributes 500 a month to her personal pension. Requirement What personal allowance is she entitled to for 2015/16? Solution Basic PA 10,600 Less reduction Total income (85, , ,000) 118,000 Less: Gift Aid donation /80 (1,000) Personal pension contribution /80 (7,500) Net adjusted income 109,500 Less limit (100,000) 9,500 ½ (4,750) Personal allowance 5, Marriage allowance From 2015/16 if a spouse/ civil partner has income below the level of the personal allowance they can elect to transfer unused personal allowance up to 1,060 (ie 10% of the basic personal allowance) to their spouse/ civil partner provided the recipient is a basic rate taxpayer. The marriage allowance is not available where either spouse/ civil partner is entitled to the married couples allowance. 2 Income tax rates and bands 2.1 Starting rate The starting rate for savings income is reduced to 0% from 2015/16 (previously 10%). The starting rate band is increased significantly to 5,000. This is only available if the individual's non-savings income is below this amount. 2.2 Basic rate The basic rate of tax is 20% for both non-savings income and savings income. Dividend income within the basic rate band is taxable at 10%. This liability is covered by the tax credit attaching to the dividend. The basic rate band limit has been reduced from 31,865 in 2014/15 to 31,785 in 2015/ Higher rate Between 31,785 and 150,000, the higher rate of tax is 40% for non-savings and saving income. The higher rate for dividend income is 32.5%. The effective tax rate for higher rate taxpayers is 25% of the amount actually received (ie the cash dividend). 2.4 Additional rate In 2015/16 for taxable income exceeding 150,000, dividends are taxable at the 'additional dividend rate' of 37.5%, while other income is taxable at the 'additional rate' of 45%. This gives an effective tax rate on dividends for additional rate taxpayers of 30.56%. xii Business Planning: Taxation

13 Worked example: Additional rate band During 2015/16 Andrea earns a salary of 170,000 and receives bank interest of 30,000 and dividend income of 18,000. Requirement What is Andrea s income tax payable for 2015/16? Solution Andrea s tax payable is: Non-savings Savings Dividends Employment income 170,000 Bank interest 30, /80 37,500 Dividends 18, /90 20,000 Less personal allowance* (Nil) Taxable income 170,000 37,500 20,000 Tax liability 20% 6,357 (150,000 31,785) = 40% 47,286 (170, ,000) = 45% 9,000 45% 16, % 7,500 Tax liability 87,018 Less tax deducted at source: Dividend tax credit (2,000) Interest (7,500) Tax payable 77,518 *Note Andrea's personal allowance is reduced to nil as her net adjusted income is above 121,200. The net tax payable on the dividend is 5,500, which is 30.56% of the 18,000 cash dividend received. 2.5 Application of tax rate bands There is no change to the order in which different types of income are taxed. Income is still taxed in the order of non-savings income, savings income then dividend income. However, remember that if an individual s non-savings income exceeds the starting rate limit, the starting rate for savings will not be available for savings income. Worked example: Application of tax rate bands James is 49. In 2014/15 he earns a salary of 850 from a part time job and receives bank interest of 6,400 and dividends of 166,500. Requirement What is James s income tax liability for 2015/16? Introduction xiii

14 Solution Non-savings income Savings income Dividends Employment income Bank interest 6, /80 8,000 8,000 Dividends 166, /90 185, ,000 Net income 850 8, , ,850 Less personal allowance (net income > 121,200) (Nil) (Nil) Taxable income 850 8, , ,850 Tax liability % 170 (5, ) = 4,150 0% (8,000 4,150) = 3,850 20% 770 (31,785 8, ) = 22,935 10% 2,294 (150,000 31,785) = 118, % 38,420 (185,000 22, ,215) = 43, % 16,444 Tax liability 58,098 3 Savings and investments 3.1 Individual Savings Accounts (ISAs) From 6 April 2015 the maximum amount that an individual can save in an ISA increases from 15,000 to 15,240. The investment can be in cash and cash like equity products and/ or stocks, shares and insurance products, split in any proportion. However, an individual can pay into a maximum of one cash ISA and one stocks and shares ISA each year. If an individual dies on/after 3 December 2014 a tax-free amount up to the value held in their ISA at death can be added to their surviving spouse s/civil partner s ISA - in addition to that spouse s own ISA allowance. 3.2 Junior ISAs The maximum amount that can be paid into a JISA or a CTF each year increases from 4,000 to 4,080 from 6 April Help to buy ISAs From Autumn 2015 a Help to Buy ISA is available to help first time buyers save for a new home. Individuals can save up to 12,000 and receive a 25% bonus when the home is purchased. Accounts will be limited to one per person rather than one per property, so those buying together can each receive a bonus. 3.4 Venture capital schemes Excluded activities From 6 April 2015 companies generating electricity from renewable sources carry on excluded activities for venture capital purposes Entrepreneurs relief on deferred gains An individual can claim entrepreneurs relief on a gain which has been deferred under the EIS rules, when the gain eventually becomes chargeable. Entrepreneurs relief is available on the deferred gain if it qualified for the relief at the time of the original disposal, the original disposal took place on/ after 3 December 2014 and the claim is made within one year of the 31 January following the tax year that the original gain accrued. Total xiv Business Planning: Taxation

15 4 Employment income 4.1 Company cars and vans /16 Cars that emit between 0 and 50g/km of CO 2 have a taxable benefit percentage of 5%. Cars that emit between 51 and 75g/km of CO 2 have a taxable benefit percentage of 9%. Cars that emit between 76 and 94g/km of CO 2 have a taxable benefit percentage of 13%. The basic car and fuel benefit percentage is 14% for cars with emissions between 95g/km and 210g/km, with a 1% increase for every 5g/km in excess of 95g/km. The maximum has increases to 37%. From 6 April 2015 the car fuel benefit charge is based on an increased figure of 22,100 ( 21,700 in 2014/15). To summarise, the car benefit percentages for petrol cars applicable for 2015/16 are as follows: Emissions 0 50g/km 5% 51 75g/km 9% 76 94g/km 13% Car benefit percentage g/km 14% + 1% for every 5g/km in excess of 95g/km 210g/km or more 37% Worked example: Changes in company car rules in 2015/16 John is provided with a fuel efficient Renault Clio by his employer for the 2015/16 tax year. The car has a list price of 19,600 and a CO 2 emissions figure of 84g/km. His employer pays for all private petrol. Jo s company car during 2015/16 is a 1 Series BMW which has a list price of 24,670 and CO 2 emissions of 150g/km. Her employer also pays for all of her private petrol. Both John and Jo are higher rate taxpayers. Requirement What is the additional tax payable by John and Jo in 2015/16 compared to 2014/15? Solution 2015/ /15 Extra tax in 2015/16 Car Fuel Car 40% John 19,600 13% = 22,100 13% = 19,600 11% = 21,700 11% = 2,548 2,873 2,156 2, Jo 24,670 25%* = 22,100 25% = 24,670 23%** 21,700 23% = 6,168 5,525 = 5,674 4, * ( = 11% + 14%) ** ( = 11% + 12%) /17 and later years From 6 April 2016 the basic car and fuel benefit percentage increases from 5% to 7% for cars emitting 50g/km or below, from 9% to 11% for cars emitting between 51 and 75g/km and 13% to 15% for cars emitting between 76 and 94g/km. In addition the 3% diesel supplement will be removed from that date. Introduction xv

16 4.1.3 Company vans The van benefit charge increases from 3,090 to 3,150 for 2015/16. The van fuel benefit charge also increases from 581 to 594. The exemption for zero emission vans is removed from 2015/16. If there is insignificant private use the benefit is nil, otherwise it is appropriate percentage cash equivalent For 2015/16 the appropriate percentage is 20% (40% 2016/17; 60% 2017/18; 80% 2018/19; 90% 2019/20), and the cash equivalent is 3, Official rate of interest The official rate of interest which applies, for example, when calculating the taxable benefit of a low interest loan from an employer, reduces to 3.00% (from 3.25%) for 2015/ Other benefits issues Abolition of 8,500 threshold From 6 April 2016 the 8,500 limit for benefits will be abolished. From that point all employees will be subject to tax and national insurance contributions on their benefits and expenses in the same way Exemption for reimbursed deductible expenses Currently if an employer pays or reimburses deductible expenses and benefits (eg professional subscriptions) they either apply for a dispensation or must include the expense on the employee s P11D. In the latter case the employee then claims a deduction via the tax return. From 2016/17 such expenses are exempt, thus simplifying the administration of such benefits and expenses Real time collection of tax on benefits From 2016/17 there will be an option for employers to deal with certain benefits, such as cars, medical insurance and gym membership, via the payroll rather than by completion of a P11D after the year end. 5 Pension schemes drawing a pension From 6 April 2015, individuals are able to draw their pensions however they wish once they reach the requisite age. This may include drawing the whole amount as a lump sum, or drawing the tax free amount as a lump sum and then buying an annuity (a regularly, usually monthly, income for life) or buying a flexible income drawdown product. In practice, the receipt of pension benefits under the new rules is complex, but in simplistic terms the following tax treatment applies. Apart from the tax free lump sum of up to 25% all other income taken from the pension is taxed as non-savings income at the individual s marginal rate of tax. Therefore, drawing the whole amount as a lump sum in one tax year may give rise to a large income tax liability if the taxpayer s income then extends beyond the basic or higher rate limits. 6 National insurance contributions 6.1 Class 1 For 2015/16 the Class 1 primary rate paid by employees remains at 12% and the additional rate above the upper earnings limit remains at 2%. The Class 1 secondary rate paid by employers remains 13.8%. The lower earnings limit increases to 112 per week ( 486 per month) and the upper earnings limit increases to 815 per week ( 3,532 per month) and the upper accruals point remains at 770 per week ( 3,337 per month). The primary earnings threshold (for employees) has been increased for 2015/16 to 155 per week ( 672 per month), and the and secondary earnings threshold (for employers) to 156 per week ( 676 per month). Both were 153 in 2014/15. xvi Business Planning: Taxation

17 From 2015/16 employers only need to pay class 1 secondary contributions in respect of employees aged under 21 if their earnings exceed the upper secondary threshold of 815 per week ( 3,532 per month). Worked example: Primary & secondary Class 1 NIC An employer has the following four employees: 1. Employee 1: 70 per week 2. Employee 2: 455 per week 3. Employee 3: 500 per week 4. Employee 4: 1,000 per week Requirement Calculate the weekly primary and secondary Class 1 NIC due in 2015/16 and 2014/15 for the above non contracted out employees. All employees are over 21 years old except employee 3 who is 19 years old. Solution Employee contributions 2015/ /15 EE 1: Nil (below PT) Nil (below PT) EE 2: ( ) 12% = ( ) 12% = EE 3: ( ) 12% = ( ) 12% = EE 4: ( ) 12% = (1, ) 2% = 3.70 Employer contributions / /15 EE 1: Nil (below ST) Nil (below ST) ( ) 12% = (1, ) 2% = EE 2: ( ) 13.8% = ( ) 13.8% = EE 3: Nil (below 815 UST for under 21s) ( ) 13.8% = EE 4: (1, ) 13.8% = (1, ) 13.8% = Class 1A and 1B Only employers pay Class 1A NICs (on employees taxable benefits) and Class 1B (on amounts included in PAYE Settlement Agreements (PSAs)). The rates for both remain at 13.8% for 2015/ Class 2 For 2015/16, the equivalent weekly contribution increases to A small earnings exception applies where accounting profits are below 5,965. The method of paying class 2 contributions is changing. In 2015/16 the class 2 contributions are paid with the self-assessment balancing payment for the year ie by 31 January Class 3 For 2015/16, voluntary Class 3 contributions increase to per week. Introduction xvii

18 6.5 Class 4 For 2015/16, the annual lower profits limit increases to 8,060 and the annual upper profits limit rises to 42,385. The rates of Class 4 NICs remain at 9% between the lower and upper limits and 2% above the upper limit. Worked example: Class 4 NIC Simon is self employed and has taxable profits of 75,000 for 2015/16. Requirement Calculate Simon s total NIC liability for the year. Solution Class Class 4 (42,385 9% 3,089 (75,000 2% 652 3,741 Total NICs 3, NIC employment allowance For 2015/16 any business that pays Class 1 NICs on its employees or directors earnings can again claim the 2,000 'employment allowance' as part of the normal payroll process under Real Time Information (RTI). The claim reduces the employer Class 1 NICs due, as they arise during the tax year, by the lower of: The employer Class 1 NICs due, and Maximum of 2,000 per year. CAPITAL GAINS TAX 1 Annual exempt amount The annual exempt amount (AEA) increases from 11,000 to 11,100 in 2015/16. The amount available to trusts is 5, CGT rates For 2015/16 the CGT rates remain unchanged. An individual s capital gains falling within the basic rate band (if there is any remaining after taking the individual s taxable income into account) are taxed at 18%, while gains falling in the higher rate band or additional rate band are taxed at 28%. However, if a disposal by an individual qualifies for entrepreneurs relief (see below), the gains are taxed at 10%. Taxpayers may deduct capital losses and the AEA in a way that minimises their CGT liability (although see below for interaction with entrepreneurs relief). xviii Business Planning: Taxation

19 Worked example: CGT rates for 2015/16 Amos has taxable income of 27,000 in 2015/16. He realises a gain on the sale of an asset in January 2016 of 28,000, which does not qualify for entrepreneurs relief. Amos has no capital losses in 2015/16. Requirement What is Amos s CGT liability? Solution (28,000 11,100) = 16,900 (31,785 27,000) = 18% 861 (16,900 4,785) = 28% 3,392 Total CGT 4,253 Individuals who claim to use the remittance basis and are required to pay the remittance basis charge are usually taxed at a flat rate of 28%. 3 Entrepreneurs relief 3.1 Rates and limits There are no changes to the entrepreneurs' relief rates and limits in 2015/16. Where individuals or trustees make qualifying gains on or after 6 April 2011, the lifetime limit for entrepreneurs relief is 10 million. This gives a potential total lifetime tax saving of 1.8 million. If an individual or trustee made a qualifying disposal in excess of the previous limits before 6 April 2011, no additional relief is available for any excess gain above the old limit(s). However, if the individual or trustee makes further qualifying gains on or after 6 April 2011, he can claim relief on up to 10 million in total. When establishing an individual s CGT rate(s), gains qualifying for entrepreneurs relief are set against any unused basic rate band before non qualifying gains. Current and historic limits are as follows: Date Lifetime limit 6 April 2011 present 10 million 23 June April million 6 April June million 6 April April million 3.2 Entrepreneurs relief on deferred gains As mentioned above, entrepreneurs relief is available on gains deferred due to EIS where the original disposal was of a qualifying asset on/after 3 December Denying entrepreneurs relief on disposals of goodwill With effect from 3 December 2014, when a sole trader or a member of a partnership transfers their business to a close company, of which they are a related party, then internally-generated goodwill is not eligible for entrepreneurs relief. This is aimed to remove the unfair advantage afforded to a person who set up an unincorporated business compared to one who originally set up as a company. However it can be claimed by a retiring partner in a firm who does not hold any stake in the successor company. Introduction xix

20 3.4 Associated disposals The conditions for an asset to be an associated disposal are: The individual is disposing of the whole or part of his interest in a partnership, or the disposal of shares in a company (ie there is a material disposal); The disposal is made as part of the individual's withdrawal from the business of the partnership or company; and The assets being sold have been used for the purpose of the business for one year prior to the date of the material disposal of business assets or the cessation of the business of the partnership or company. From 18 March 2015 material, for the first of these conditions is defined as at least a 5% shareholding or at least a 5% share in the assets of the partnership. 4 Valuation of quoted shares From 6 April 2015 the valuation of quoted shares and securities for capital gains tax purposes is changed to a half-up basis ie at the end of the date of disposal the lower of the two prices on the stock exchange daily official list plus half of the difference between the two prices. Note, the valuation of quoted shares and securities for inheritance tax purposes remains at the lower of quarter-up and mid bargain. INHERITANCE TAX 1 Nil rate band As previously announced, the nil rate band will remain frozen at 325,000 until 2017/18. 2 Exemptions decorations and medals From 3 December 2014 the exemption for awards is extended to include those received by any member of the armed services from overseas. PERSONAL TAX OVERSEAS MATTERS 1 Remittance basis for overseas earnings From 2015/16, the remittance basis charge (RBC) remains at 30,000 where an individual has been UK resident for seven out of the last nine years, but has increased from 50,000 to 60,000 for those resident for 12 of the last 14 years. In addition there is a new RBC of 90,000 for an individual who has been resident for 17 out of the last 20 years. 2 Non-UK residents and UK residential property From 6 April 2015 a capital gains tax charge arises on the disposal of UK residential property by non-uk resident persons. This applies to non-uk resident: individuals (plus the personal representatives of a non-uk resident individual) trusts, and companies controlled by five or fewer persons. The taxable gain is that part of the gain arising after 5 April 2015, based on the market value at that date. Alternatively an election can be made for the total gain over the whole period of ownership to be time apportioned and only the post 5 April 2015 gain charged to tax. The rate of capital gains tax applying to a non-uk resident company in 2015/16 is 20%. xx Business Planning: Taxation

21 The gain may be subject to principal private relief if qualifying conditions are met. These broadly require the non-uk resident individual to spend a minimum of 90 nights in the property over the year. This also applies to disposals in the overseas part of a split year. BUSINESS TAX 1 Capital allowances for plant and machinery 1.1 The annual investment allowance The annual investment allowance (AIA) is 200,000 per 12 month period for expenditure from 1 January 2016 (as amended by the Summer budget). This follows the temporary increase to 500,000 from 6 April 2014 (1 April 2014 for companies) until 31 December Levels of AIA which are examinable in 2016 are: Dates 6 April April 2012 (1 April March 2012 for companies) 100,000 pa 6 April 31 December 2012 (1 April 31 December 2012 for companies) 25,000 pa 1 January March ,000 pa 1 April December ,000 pa From 1 January 2016 AIA 200,000 pa Where an accounting period straddles a date on which the limit changes, the maximum AIA is calculated using the pro rated amounts for each part of the accounting period. However the maximum which can be claimed in respect of expenditure incurred after 31 December 2015 is n/12 200,000, where n is the number of months in the accounting period after 31 December The AIA was 500,000 per annum prior to 1 January 2016 so for a nine month period of account ending on 31 March 2016, the maximum AIA that could be allocated to expenditure incurred in March 2016 would be 50,000. Worked example: AIA where AP straddles 31 December 2015 Nigel prepares accounts for the year to 31 March In June 2015 he acquired machinery for 320,000 and in February 2016, he acquired machinery for 105,000. What is the maximum annual investment allowance available to Nigel for the year ended 31 March 2016, how is it allocated to the acquisitions made in the year, and what is the balance of expenditure (if any) eligible for writing down allowance? Solution The AIA must be time apportioned around 31 December Period to : 9/12 500, ,000 Period to : 3/12 200,000 50,000 Maximum AIA for year ended ,000 Acquisition June ,000 Less AIA (maximum 425,000 no other restriction) (320,000) Balance transferred to main pool Acquisition February ,000 Less AIA (not exceeding 50,000) (50,000) Balance eligible for WDA (transferred to main pool) 55,000 Introduction xxi

22 1.2 First year allowances The 100% first year allowance for new low CO 2 emission and electrically propelled cars has been extended to 31 March From April 2015 the emissions threshold below which vehicles are eligible for the FYA is reduced from 95g/km to 75g/km. 1.3 Interaction of capital allowances Consideration must be given to the most efficient way of using the AIA available. Certain expenditure may qualify for more than one type of allowance. The AIA gives relief for 100% of the expenditure in the year of acquisition but is limited to a maximum annual amount of 200,000 ( 500,000 prior to January 2016) which is lost if it is not claimed in full. In order to maximise the allowances available the AIA should be allocated against assets in the following order: (1) Assets which would otherwise only qualify for WDA at 8% (special rate expenditure) (2) Assets which would otherwise only qualify for WDA at 18%. Worked example: Comprehensive capital allowances computation Cactus Ltd has TWDVs b/f on 1 January 2015 as follows: Main pool 324,400 Special rate pool 127,500 During its accounting period for the three months ended 31 March 2015, Cactus Ltd made the following acquisitions and disposals: Items relating to the special rate pool 88,000 (purchased ) Plant and machinery which is qualifying energy saving technology 6,000 (purchased ) Plant and machinery 49,000 (purchased ) In its year ended 31 March 2016, Cactus Ltd made the following acquisitions and disposals: Computer equipment 272,000 (purchased ) Office equipment 75,750 (purchased ) Car with CO 2 emissions of 120g/km 26,000 Car with CO 2 emissions of 73g/km 14,000 Car with CO 2 emissions of 180g/km 38,000 Requirement Calculate Cactus Ltd s maximum entitlement to capital allowances for each accounting period. Solution AIA Three months ended 31 March 2015 Cactus Ltd is entitled to an AIA for its three month period ended 31 March 2015 of 500,000 3/12 = 125,000. The AIA should always be offset against the special rate pool in priority to the main pool. The first 88,000 of the AIA should therefore be set against the 88,000 special rate pool expenditure. The energy saving technology is eligible for a first year allowance of 100% and therefore should receive no AIA. The remaining 37,000 should therefore be set against the 49,000 of main pool expenditure incurred on 1 March Year ended 31 March 2016 Cactus Ltd is entitled to an AIA for its year ended 31 March 2016 of: 1 April December 2015: 500,000 9/12 = 375,000 1 January March 2016: 200,000 3/12 = 50,000 Total AIA for the year 425,000 xxii Business Planning: Taxation

23 Cars are not eligible for the AIA. A maximum of 425,000 (being the pro rata amount of the AIA) may be offset against expenditure incurred prior to 31 December A maximum of 50,000 may be offset against expenditure incurred on or after 1 January Therefore the maximum AIA which can be claimed is 272,000 on the expenditure incurred on 1 May 2015 of 272,000 and 50,000 on the expenditure incurred on 1 February 2016, giving a total AIA claimed of 322,000 despite actual expenditure on qualifying main pool assets being 347,750. The total capital allowances available to Cactus Ltd for each accounting period will be as follows: Main pool Special Total rate pool allowances 3m to 31 March 2015 Bal b/f 324, ,500 Main pool eligible for ECA 6, % (Note) (6,000) 6,000 Eligible for AIA Special rate pool 88,000 Main pool not eligible for ECA 49,000 AIA (37,000) (88,000) 125, , ,500 WDA 18% 3/12 / 8% 3/12 (15,138) (2,550) 17,688 WDV c/f 321, , ,688 Year to 31 March 2016 Additions eligible for 100% 14,000 New low emission car (14,000) 14,000 Eligible for AIA computer equipment 272,000 AIA (Max 425,000) (272,000) 272,000 Eligible for AIA office equipment 75,750 AIA (Max 50,000) (50,000) 50,000 Additions not eligible for AIA cars 26,000 38, , ,950 WDA 18% / 8% (67,142) (13,036) 80,178 WDV c/f 305, , ,178 Note In the three months to 31 March 2015 the AIA and the WDA are prorated, but the ECA is not. CORPORATION TAX AND DIVERTED PROFITS TAX 1 Corporation tax rates The following table summarises the corporation tax rates for the current and previous financial years, which you may need for computational purposes or for tax planning questions: Financial year Main rate Small profits rate Standard fraction Marginal rate % N/A N/A N/A % 20% 1/ % % 20% 3/ % % 20% 1/ % % 20% 3/ % % 21% 7/ % % 21% 7/ % Introduction xxiii

24 From 1 April 2015 all corporation tax profits are taxed at the main rate of 20%, irrespective of the size of company. Worked example: Corporation tax rates Enjo Ltd has a year end of 31 December Calculate the company s corporation tax liability assuming it has no FII and its taxable total profits are: (a) 230,000 (b) 600,000 (c) 2.3 million Solution For FY 2014 the upper and lower corporation tax limits are 1.5 million and 300,000 respectively. (a) Enjo Ltd is a small profits company in FY 2014 and its tax liability is calculated as follows: FY 2014: 230,000 3/12 20% 11,500 FY 2015: 230,000 9/12 20% 34,500 CT liability 46,000 As there is no change in the rate of tax charged this can be calculated as: 230,000 20% 46,000 (b) Enjo Ltd is a marginal relief company in FY 2014 and its tax liability is calculated as follows: FY 2014: 600,000 3/12 21% 31,500 Less: 1/400 (1,500, ,000) 3/12 (563) FY 2015: 600,000 9/12 20% 90,000 CT liability 120,937 (c) Enjo Ltd is a main rate company and its tax liability is calculated as follows: FY 2014: 2.3m 3/12 21% 120,750 FY 2015: 2.3m 9/12 20% 345,000 CT liability 465,750 When determining the optimum use of losses, companies should consider that a prior year claim to FY 2014 where relief will be at the marginal rate (21.25%) or the main rate (21%) will give more relief than a current year claim in FY 2015 at the unified main rate (20%). Worked example: Corporation tax rates and use of losses XY Ltd owns 100% of Z Ltd. XY Ltd s recent results are as follows: Y/e Y/e Trading profits 500,000 Nil Other income and gains 200,000 20,000 Taxable total profits 700,000 20,000 XY Ltd has a tax adjusted trading loss for the year ended 31 March 2016 of 600,000. Z Ltd s recent results are as follows: Y/e Y/e Trading profits 1,800, ,000 Other income and gains 200, ,000 Taxable total profits 2,000, ,000 Requirement Explain the optimum use of XY Ltd s losses. xxiv Business Planning: Taxation

25 Solution For FY 2014 the upper and lower corporation tax limits are 750,000 and 150,000 respectively (as there are two associated companies). The two companies pay corporation tax at the following rates for each accounting period: XY Ltd Z Ltd Y/e Y/e Y/e Y/e Trading profits 500,000 Nil 1,800, ,000 Other income and gains 200,000 20, , ,000 Taxable total profits 700,000 20,000 2,000, ,000 FY FY 2014 FY 2015 FY 2014 FY 2015 CT rate 21.25% 20% N/A 20% then 20% The optimum use of the loss would be to carry back as much as possible to the prior year such that XY Ltd s taxable total profits are reduced to the adjusted lower limit of 150,000. However, a company may not make a carry back claim until it has made a current year claim. Once 550,000 of losses are offset in XY Ltd s prior year, tax will then only be saved at 20%. The balance of 30,000 of losses can then either be surrendered to Z Ltd or relieved in XY Ltd in the year ended 31 March Group relief can only be offset against profits arising in a corresponding accounting period and therefore cannot be carried back to Z Ltd s profits for the year ended 31 March 2015 even though this would save tax at a higher rate. Assume that a decision is made to relieve some losses in Z Ltd (although this produces the same amount of tax relief as a carry back claim). As a current year/prior year claim is all or nothing, to prevent the whole loss from being offset against XY Ltd s prior year profits, a group relief claim should be made first. Therefore 30,000 can be offset against Z Ltd s profits for the year ending 31 March 2016, then 20,000 of the loss should be offset in XY Ltd against its current year profits, and finally 550,000 of the loss should be offset against its profits in the prior year. The total tax saved is: 20% = 6,000 20% = 4, % = 116,875 Total tax saved is 126,875 This saves more tax than a surrender of the whole loss to Z Ltd which would have saved tax at just 20%. 2 Research and development 2.1 Consumable materials From 1 April 2015 relief for consumable materials is restricted if the consumable is incorporated into an item which becomes part of normal production. For the purposes of the exam it is assumed that all consumables are qualifying expenditure, unless stated otherwise. 2.2 Additional deduction for SMEs The rate of additional deduction for small to medium sized enterprises (SME s) has increased to 130%, up from 125%, resulting in a total deduction of 230% of qualifying expenditure. This rate applies to qualifying expenditure incurred on or after 1 April Above the line R&D tax credits for large companies The amount of the above the line credit for large companies has increased from 10% to 11% for expenditure incurred on/ after 1 April Introduction xxv

26 3 Intangible fixed assets A package of measures to act as a disincentive to incorporate for tax purposes have been taken to align the treatment of incorporated businesses with those that do not incorporate, or those that initially set up as a company. One of these measures relates to the treatment of internally-generated goodwill on incorporation. Neither the unincorporated business nor that initially set up as a company can get relief for internallygenerated goodwill, whereas relief has been available after incorporation. For incorporations on or after 3 December 2014 relief is generally restricted to nil for internallygenerated goodwill where there is continuing economic ownership (eg on incorporation). 4 Diverted profits tax (DPT) 4.1 Relevant scenarios Google tax or DPT is introduced, from 1 April 2015, to tackle artificial/ contrived arrangements. DPT was developed in response to a number of high profile multinational entities who have avoided UK tax. DPT applies in either of the following situations, unless both parties are SMEs: Arrangements avoiding a UK permanent establishment (PE). A person ( the avoided PE ) is carrying on activity in the UK in connection with supplies of goods and services by a non-uk resident company to customers in the UK, and the detailed conditions are met ( the first rule ); or Transactions with a lack of economic substance. Where a company which is taxable in the UK creates a tax advantage using certain arrangements which lack economic substance, and the detailed conditions are met ( the second rule ). The DPT is calculated as 25% of taxable diverted profits. 4.2 Arrangements avoiding a UK PE This rule applies where all of the following conditions are met: There is a non-uk resident company carrying on a trade; A person ( the avoided PE ) is carrying on an activity in the UK in connection with supplies of services, goods or other property by the non-uk resident company; It is reasonable to assume that the activity of the avoided PE is designed to ensure the non-uk resident company does not carry on a trade in the UK for corporation tax purposes; and The mismatch condition or the tax avoidance condition is met. The mismatch condition broadly means that as a result of an increase in expenses the reduction in tax by one connected party is significantly larger than the increase in liability of the other connected party, and the arrangement was designed for tax purposes. The tax avoidance condition applies if the arrangements are in place with a main purpose of avoiding/ reducing the charge to corporation tax. 4.3 Transactions with a lack of economic substance This rule applies where all of the following conditions are met: There is a UK resident company or a UK PE of a non-uk resident company carrying on a trade; The company has an arrangement by way of a transaction or series of transactions with another person; The two parties are connected (defined as for transfer pricing); The mismatch condition is met. The other party to the arrangements will usually be a non-uk resident person although it equally applies if they are UK resident. xxvi Business Planning: Taxation

27 VALUE ADDED TAX 1 Registration and deregistration limits The following changes have been made: The registration limit from 1 April 2015 is 82,000. The deregistration limit from 1 April 2015 is 80,000. The registration and deregistration threshold for relevant acquisitions from other EU Member States from 1 April 2015 is 82, Changes in VAT rate The standard rate of VAT has fluctuated over the past few years: 1 April 1991 to 30 November % 1 December 2008 to 31 December % 1 January 2010 to 3 January % 4 January % For the purposes of the exams you should use the correct rate of VAT based on the date of the transaction. STAMP TAXES 1 Stamp duty land tax (SDLT) The rates of SDLT for residential property changed on 4 December Stamp duty land tax on the purchase price, lease premium or transfer value is calculated as a percentage of chargeable consideration according to the following table: % Residential % Non-residential 0 Nil 125,000 0 Nil 150, , , , , , , , , ,001 1,500, ,001 or more ,500,001 and over Note: 1 Prior to 4 December 2014the rates and limits for residential property were as for non- residential property, except that the first threshold was 125,000 (rather than 150,000) and additional rates of 5% and 7% applied to residential property in excess of 1m and 2m respectively. Prior to 4 December 2014 once the rate of SDLT was determined, the rate then applied to the whole of the consideration, not just the amount over the relevant threshold. From 4 December 2014 there is no change for non-residential property. However for residential property SDLT applies to consideration at the relevant rate for each threshold. From 1 April 2015 SDLT is replaced by Land and Buildings Transaction Tax (LBTT) in Scotland. This will not be tested in the Business Planning: Taxation exam. Introduction xxvii