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CHAPTER # 01 Basic Tax computation

INCOME TAX is paid by a taxable person on his taxable income in a tax year.
Taxable income: Income from all sources except exempt income, minus reliefs & personal
allowance.
Tax Year: income tax is calculated on income earned during the tax year which runs from 6th
April to 5th April. For examination concerned tax year 2020-21 is tested which runs from 6th
April 2020 to 5th April 2021
Taxable Person: All individuals including children are called taxable person and pay income tax
and National insurance on taxable income earned during tax year.
Resident Status
Purpose of determine the status of resident of UK
All persons who are UK resident pay income tax on their worldwide income. Non UK resident pay tax
only income which he earned in UK in tax year
Residence status under the SRT:
You should take the following steps to ascertain your residence status under the SRT:
Step 1: Automatic Oversea Test:-
Consider the three automatic nonresident tests. If you meet one of these you are not UK resident. If you
did not; consider second step
o A person stays in the UK for fewer than 16 days during the tax year. or
o A person stays in the UK for fewer than 46 days during the tax year, provided they have
not been resident for any of the previous three tax years. or
o A person carries out full-time work overseas and his stays in UK is less than 90 days
Step 2: Automatic Resident Test:-
Consider three automatic UK resident tests. If you meet one of these, you are UK resident. If you did not;
consider third step
o A person that stays in the UK for 183 days or more during the tax year. or
o A person whose only home is in the UK and have no overseas home or
o A person that carries out full-time work in UK
Step 3: Sufficient Ties Test:-
If the automatic residence tests are not met, then a person's residence status for a particular tax year is
determined according to the sufficient UK ties test
 For this test use the table and consider two points
- consider individual how many days individual stayed in UK
- whether individual was previously resident (leaver) or not previously resident
(joiner)

Above Two points determine the number ties required for becoming resident

-
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Days in UK Previously resident Not previously resident

Less than 16 Automatically not resident Automatically not resident

16 to 45 Resident if 4 UK ties (or more) Automatically not resident

46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties

91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)

121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)

183 or more Automatically resident Automatically resident

There are five potential UK ties:

1. Having a spouse, civil partner or minor children resident in the UK. But not include parents and
grandparents
2. Having accommodation in the UK that is made use of during the tax year. The definition of what
counts as accommodation is quite detailed, but it generally does not include owning a property
that is let out, short visits with relatives, and stays in hotels. The person has a place in UK
available to live in for 91 days or more during that tax year and stays there for:
- At least one night; or
- At least 16 nights (if it is the home of a close relative).
3. Doing substantive work in the UK. This is defined as working for 40 or more days during the tax
year (a working day is as per previously defined).
4. Spending more than 90 days in the UK in either or both of the two previous tax years.
5. Spending more time in the UK during the tax year than in any other single country

Income Tax per forma

Non Saving Saving Dividend Total
£ £ £ £

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Trading income Note-1 XXX XXX

Employment income Note-2 XXX XXX
Pension incomeand Royalty income XXX XXX
Property income CH # 02 XXX XXX
Exempt incomeNote-3 0 0 0 0
Joint income (spouse or civil partners) ×50% or actual
XXX
ratioNote-4
Interest from loan notes or GiltsNote-5.2 XXX XXX
Bank deposit interest XXX XXX
Building society interest XXX XXX
Other interest income (Received gross) XXX XXX
Dividend incomeNote-6 XXX XXX
Total income XXX XXX XXX XXX
Less Reliefs:
 Losses (subject to rule) (XXX) (XXX) (XXX) (XX)
 Qualifying interestsNote-7 (XXX) (XXX) (XXX) (XX)
1 2 3
Net income XXX XXX XXX XXX
Less: personal Allowance £12,500Note-8 (XXX) (XXX) (XXX) (XX)
1 2 3
Taxable Income XXX XXX XXX XXX
Calculation of tax liability
Note: Tax bandsare extended if taxpayer made Gift aid donation or Personal pension contribution
with gross amount for calculation of income tax liabilityNote -9
Non saving income
Basic Taxpayer £1------- £37,500 20% XXX
Higher Taxpayer £37,501-----£150,000 40% XXX
Additional Taxpayer Above £150,000 45% XXX
Saving income
Starting rate £1------£5,000Note-5.3 0% 0
(Apply only if saving income falls in first £5,000 taxable
income and if non saving >£5,000 starting rate does not
apply) 0% 0
NIL Rate Band Basic tax payer £1000 0% (N/A) 0
Higher Taxpayer £500
Additional Taxpayer (nil rate band is not applicable)
Normal rates
Basic Tax payer £5001------£37,500 20%
Higher Taxpayer £37,501----£150,000 40% XXX
Additional TaxpayerAbove £150,000 45% XXX
Important note: XXX
 First apply starting rate band
 Second apply Nil rate band
 Third apply Normal rate band
Dividend income
NIL Rate Band is available for all type of taxpayer is
£2,000 0% 0
Normal rate

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Basic Taxpayer £1------- £37,500 7.5% XXX

Higher Taxpayer £37,501------- £150,000 32.5% XXX
Additional Taxpayer Above £150,000 38.1% XXX
Important note:
 First Apply Nil rate band
 Second Apply Normal rate
Tax liability XXX
Add: Child benefitNote-10 XXX
Total tax liability XXX
Less: marriage Personal Allowance (1250×20%) (250)
Note-8.2
Less: (interest on loan of residential property ×20%) (XX)
Less: PAYE (XX)
Tax payable or (Refundable) X/(xx)

Trading Income Note – 1

£
Net profit as per accounts Xxx
Add:
 Disallowed expenditure including profit and loss account Xxx
 Allowable taxable income but not including profit and loss account Xxx
Less:
 Expenditure not charged in the accounts but allowable for taxation purposes
 Income included in the accounts that is not taxable as trading income (xxx)
 Capital allowances (XXX)
(xxx)
Total adjusted trading profit Xxx

Employment income Note -2 £

Salary Xxx
Bonus Xxx
Commission Xxx
Taxable Benefits Xxx
Less: allowable deductions as per tax rules (i.e. contribution to OPS) (xxx)
Taxable Employment Income Xxx

Exempt income Note-3

The following is exempt and must not be included in the format (just state that it is exempt)
o Premium bonds winnings and Gaming, lottery
o Income received from a individual savings account (ISA)

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o National saving and investment certificates interest

o Some social security benefits
o Scholarship income and state benefits paid in the event of accident, sickness or disability.

Jointly owned assets of a married couple or by a couple in a civil partnership Note-4

 Spouse and civil partners are taxed as two separate people. When it comes to tax planning for a
married couple, or a couple in a civil partnership the availability of the savings income nil rate
band means that transferring income from the partner paying tax at a higher rate to the partner
paying tax at a lower rate.
 When spouses/civil partners own income generating assets jointly, it is assumed that they are
entitled to equal shares of the income and it is split accordingly on a 50:50 basis between them.
 However they may make a joint election to HMRC to split the income according to their actual
ownership shares
 Note:
1. A joint bank account will always be taxed 50:50 regardless of who contributions what amount
2. If shares are owned, dividends are always divided according to the exact proportion to which
each is actually entitled, it is never assumed that it is in equal proportions.

Saving Income Note-5

5.1- Interest income received gross
The following income received without deduction of tax at source and gross:
o Bank interest and Building society interest
o Interest on debenture of unlisted unquoted companies (e.g. loan note interest)
o National saving and investment bank account interest (including income from NS&I investment
and NS&I direct investment)
o Interest on government securities (gilts),including Treasury Stock and Exchequer stock
o Interest on debentures of listed (quoted ) companies
(For F6 examination always assume all saving income are received gross)

5.2- Accrued Income Scheme

 it is applicable upon Government securities & debentures having value more than £5,000 at any
time during tax year.
 In this scheme interest is deemed to be accrued on daily basis (calculate on monthly basis in
exams) so the price of debenture is apportioned between interest & capital element.
 The interest is assessable to income tax
 The scheme does not apply if the securities are transferred on death.

EXAMPLE
On 1 July 2020, Peter purchased £100,000 (nominal value) of gilts which pay interest at the rate of 3% for
£120,000. Interest is paid half-yearly on 30 June and 31 December based on the nominal value. Peter sold
the gilts on 30 November 2020 to Petra for £121,250 (including accrued interest).
Peter/seller:- The accrued interest included in the sale proceeds figure is £1,250 (100,000 at 3% x
5/12).Peter will include the accrued interest as savings income for 2020–21, even though he has not
received any actual interest .Peter will use ( £121,250 - £1,250) = £120,000 for calculation of capital
gain purpose
Petra/Buyer:-Petra will receive interest of £1,500 (100,000 at 3% x 6/12) on 31 December 2020, but will

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only include £250 (£1,500 – £1,250) as savings income for 2020–21.

5.3-Starting rate Zero rate
o With this saving income nil rate band, saving income can also benefit from the staring rate of0%.
However, the starting rate only applies where saving income falls within the first £5,000 of
taxable income. If non saving income exceeds £5, 000, then the starting rate of 0% for saving
does not apply

Dividend income Note-6

o Dividends received from a company are charged to income tax in the tax year in which they are
received. The receipt date is taken as the date on the dividend voucher.Dividends income is received
gross
o The first £2,000 of dividend income for tax year 2020-21 benefits from a 0% rate. This £2,000 nil
rate band is available to all tax payers, regardless of whether they pay tax at basic, higher or
additional rate. However the dividend nil rate band counts towards the basic and higher rate
thresholds

Qualifying interest Note-7

If the loan is taken for the following purpose then the interest paid on such loan can be deducted from
total income in tax year in which the interest paid to calculate net income
Loan to Purchase of Interest is allowed for three years form the end of the tax year in which the
plant and machinery loan was taken for purchase plant and machinery which is used in
partnership business or employment. If plan or machinery is used partly for
private use , the allowable is apportioned
Loan to Purchase of The company must be an unquoted trading company resident in UK with at
shares of employee least 50% of the voting shares held by employees’
controlled company
Loan or invest in The investment may be contribution to the partnership capital or a loan to
partnership partnership. The individual must be a partner (other than limited partner).
Relief ceases when he cease to be a partner
Loan to invest in co The investment may be shares or a loan. the individual must spend the
operative society greater part of their time working for the co operative

Personal Allowance Note-8

Personal allowance is an amount on which income tax will not be charged.If an individual makes income
above this allowance amount, then income tax will be charged on that additional income
Personal allowance is deducted from individual’s net income to arrival taxable income For the tax year
2020/21 the personal allowance is £12,500

Definition of Adjusted Income

£
Total net income after deduction the reliefs XX
Less: Gross personal pension contribution Note -9 (X)
Less: Gross Gift Aid Donation Note -9 (X)
Adjusted Net Income XX

ANT < £100,000 Basic personal allowance available is £12,500 for tax year 2020-21
Adjusted Net Income  Reduced personal allowance if Adjusted net income exceeds£100,000

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more than £100,000  Where taxpayer’s ANT exceeds £100,000,the personal allowance is
reduced by (ANT - £100,000) × 50%
 Effective marginal rate of income tax is 60%,.Where taxpayer has an
adjusted net income of between £100,000 and £125,000
 This 60% effective rate is made up of: Higher rate of 40% on income
plus additional 20% as result of withdrawal of Personal allowance
 .In this situation, it may be beneficial to make additional personal pension
contributions or gift aid donation to reduced ANT below £100,000
Transfer of personal  It is now possible to elect to transfer a fixed amount of the personal allowance to
allowance/ marriage a spouse or registered civil partner.
allowance/ marriage  The transferable amount is £1,250 for the tax year 2020/21,
tax allowance  A transfer is not permitted if either spouse or civil partner is a higher or
additional rate taxpayer.
 The benefit is given to the recipient as reduction from their income tax liability at
the basic rate of tax rather than as an actual increase in their personal allowance.
The tax reduction is therefore £250 (£1,250 x 20%).
 If the recipient’s tax liability is less than £250, then the tax reduction is restricted
so that the recipient’s tax liability is not reduced below zero.
 Election made by Taxpayer:
 Before 6 April 2020 it will have effect for 2020-21 and subsequent tax
year unless it cancelled by transferor spouse / civil partner or
circumstance change
 After 6 April 2021, it must made within four years of end of tax year (i.e.
5 April 2025) and only be apply for tax year 2020-21

In summary, if adjusted net income is

- <£100,000 then 100% full basic personal allowance is available to taxpayer£12,500
- ≥£ 125,000 then personal allowance is reduced to zero (nil available )
- £100,000 between £125,000 then personal reduced to the excess amount to half (adjusted net
income-£100,000) ×50%

Gift Aid donation and Personal pension contributions Note-9

When tax payer pays charity under gift aid donation or make a personal pension contribution then the
taxpayer pays only 80% of the amount and remaining 20%is paid by HMRC. For example, if the
taxpayer wishes to pay £200 then he will only pay £160 and the remaining £40 will be paid by HMRC
If taxpayer pays donation under Gift Aid Donation scheme or personal pension scheme then tax benefit
will be given as following:-
Step # 1 This amount paid by taxpayer will be grossed up by (Net amount/80 ×100)

Step # 2 The basic rate band and higher rate band of the tax payer will be extended by the gross
amount e.g.
The tax payer paid 8000 (net of 20%)

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(8000/80×100) = 10,000 Original Tax Band Extended Tax Band

Child Benefit Income Tax Charge Note-10
Basic band Basic band
£1-------£37,500 £1-------£47,500
Child benefit is a tax free payment to parents of children irrespective of what level of taxpayer they may
be ADD (£37,500 + £10,000)= 47,500
ANI <£50,000 If taxpayer Adjusted net income is <£50,000 no tax is charged (exempt)
ANI between Higher
Where adjusted netband Higher
income falls between band and ￡60,000 the
￡50,000
£37,501----£150,000 £47,501----£160,000
£50,000 to £60,000 income tax charge would amount to 1% of the child benefit received for
every ￡100 of incomeADD in excess of ￡50,000.
(£150,000 +£ 10,000) = £160,000
Additional band
(ANT - £50,000 )/100 × 1% = tax charge Additional bandbenefit
rate × child
ANI >£60,000 £150,001-----and
Where Adjusted above
net income of £160,001-----and
individual above
is >£60,000 child benefit
amount is fully taxable
Tax application The income tax charge on child benefit is added in deriving the income
tax liability of the taxpayer.
Payment of tax If both partners have adjusted net income over￡50,000 the partner with
the higher income is liable for the charge.
Where the charge applies the tax payer must complete a tax return and
the charge is collected through the self-assessment system
Avoid tax charge To avoid child benefit tax charge, taxpayer can opt not to receive child
benefit at all so that the income tax charge does not apply

Individual Saving account

An ISA is a financial product available in the UK it is a tax efficient way of saving or investing. An ISA
investment will be free from UK income tax and capital gains tax
ISA component
ISA has two component
1. Cash ISAs:- This includes banks and building society accounts , as well as those National Saving
products where the income is not exempt from tax
2. Stocks and Shares ISAs:-Stocks and shares listed anywhere in the world
Annual Subscription limits
 ISAs have annual subscription limit for 2020-21 of £20,000 per person which can be invested in a
cash ISAs or stocks and shares ISAs

 There is no restriction on the proportion of the £20,000 limit that can be invested in either type of
account.
 Spouses and Civil partners each have their own limits
Investment in ISAs
Individual Investment
Aged between 16 and 18 Open the Cash ISAs but cannot investment in
UK resident Stock
Investment in cash ISAs and stocks and shares
Aged 18 and over
ISAs

Advantages of ISAs
The main advantages of ISAs are:
(a) Income is free of income tax
(b) Disposals of investments within an ISA are free from capital gains tax

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(c) No minimum holding period - withdrawals can be made at any time

Individual Saving account and Nil rate band

 The availability of the saving income nil rate band for basic and higher rate taxpayers means that
there is no tax benefit to investing in cash ISAs for many individuals. However cash ISAs are
advantageous for additional rate taxpayers and for other individuals where their savings income nil
rate band is already utilised
 The availability of the dividend nil bands means that there is no tax advantage to receiving dividend
income within stocks and shares ISA for many individuals. However, chargeable gains made within
stocks and shares ISA are exempt from capital gain tax. Stocks and shares ISAs are therefore
advantageous where chargeable gains are made in excess of the annual exempt amount

CHAPTER #02 Property income

Cash basis Accruals basis
The cash basis is now the default basis for 1. It is still possible to opt to use the accruals
calculating property income for individuals and basis, An election is made for the accruals basis
partnerships to apply (elect by 31 January 2023 for 2020/21
This gives automatic bad debt relief as rental tax year
income is not taxed unless it is received. 2. The accruals basis must be used if property
income receipts exceed £150,000.
Note:- 1- Limited companies continue to use the accruals basis.
2- Security deposits (these are returned to the tenant on the cessation of a letting, less the cost of making
good any damage, so they are therefore initially not treated as income).
The proforma computation shown below can be used to calculate the rental income assessment for an
individual.
UK property income
£ £
Rents received during the tax year(see Note 1 below) X
Part of premium received on short lease(see Note 2 below) X
XX
Less X
Allowable revenue expenses (see Notes 3 below) X
Pre letting expenditure (see Notes 4 below) X
Management expenses and agent’s fee X
Council tax, water rates (if paid by landlord) X
Gardener’s wages, cleaner’s wages X
Insurance for the property(see Notes 5 below) X
Repairs X
Painting and decorating X
Impair debts or Debts written off(see Note 6 below)
Motor car expenses (see Note 7 below) X

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Capital allowance (see Note 8 below)

Interest on a loan to acquire or improve a let non-residential property. X
100% allowable X
Interest on loans in relation to the residential property disallowable 0
but X
(see Note 9 below) (X)
Replacement furniture relief.(see Note 10 below) X
Property income assessment

Property income

1- Rent income Note-01

Cash basis: Under cash basis rent will be included Accruals basis:- Under accrual basis rent income
on a received basis (rather than a receivable basis), and expenses are included receivable and payable
with expenses (such as insurance) deducted on a basis during the tax year
paid basis (rather than a payable basis) during tax
year
In any examination question involving property income for individuals and partnerships, it should
be assumed that the cash basis is to be used unless specifically stated to the contrary
2- Premium on short lease Note-02
A premium is a lump sum amount received by the landlord at the start of the lease in return for giving the
tenant the exclusive right to use the property for the period of 50 or less than 50 years of the lease. When
the lease terminates, the property reverts back to the owner.
The amount to be assessed as property income equal to amount is:
Premium X
Less: Premium × 2% (n1) (X)
Premium X
n= number of years
Property Expenses
 Expenditure is allowable if the property is available for letting. Therefore expenses are allowable if
incurred while the property is empty (e.g. repairs carried out in between old tenants moving out and
new tenants moving in)under accrual basis
 Allowable expenses must be incurred wholly and exclusively for the purposes of the property
letting business
Owner occupied property
Expenses .However, if the owners occupy the property at any time, expenses are not
time proportionate allowable if incurred while the property is occupied by the owner. It may be
necessary to time apportion some expenses and only allow those incurred while the
property is available for letting.
Expenses not Some expenses are not time apportion even owner occupied the property because
time proportionate which relate wholly to letting would be fully deductible. For example:
Advertisement ,Agents fee and commission

Revenue expenditure Note-03

 Capital expenditure is NOT allowed, only revenue expenditure are allowable, and however capital
expenditure to improve the property is not allowed and repair of property is allowable
Pre letting expenditure Note-04
 Expenditure incurred in the seven years pre letting, provided the expenses would normally be
allowed if incurred whilst letting property.i,e advertisement , management expenses etc.

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Insurance expenses Note-05

 Under the cash basis the whole amount of insurance paid during tax year is allowable expenses.
 Under the accruals basis, insurance premium is accounted as insurance is payable for letting period
during tax year.i.e.IfMr. Ali paid an insurance of £600 on 1st July 2018 for a year and of £1200 in
paid 1st July 2019 for a year
insurance expenses = (£600/12 × 3= £150 + £1200/12 × 9 = £900) =1050
Impaired debts/Irrecoverable debts Note-06
 Outstanding rents which are no longer recoverable (for example, due to a tenant leaving with no
contact details and without paying) are an allowable deduction under accrual basis and
 No relief is available in cash basis accounting

Motor Car expenses Note-07

Motor expenses incurred the taxpayer may now use the HMRC approved mileage allowances which will
be at 45p per mile instead of computing actual motor expenses incurred
Capital Allowance Note-08
Capital allowances may be claimed for expenditure on plant and machinery used for the maintenance of
the property
Finance cost or interest expenses for loan taken purchase or improve the property Note-09
If a loan is taken out to either purchase or repair a residential property (including
Purpose of loan incidental costs of obtaining the loan finance and any bank overdraft interest in
running the property)
Finance cost on Finance cost purchase or repair of property is not allowable as property expense
loan for residential but 100% finance cost is restricted to the basic tax rate.
Property expense Restriction work in this way
(Interest expenses×20%) is deducted from the income tax liability as tax credit
Restriction on The restriction does not apply on
finance cost on (1) Companies (2) furnished holiday letting
residential property (3) Non residential/commercial property
does not apply Instead of 100% finance cost is allowable expenses against property income
Impact of restriction The restriction has no impact on basic rate taxpayers. but will increase the tax
on taxpayer liability of a higher rate or additional rate taxpayer.
Replacement of furniture and furnishing reliefs Note-10
 Furnishings include items such as beds, televisions, fridges and freezers, carpets and floor coverings,
curtains, and crockery and cutlery.
 If residential lettings are either partly or fully furnished, tax relief is usually given for the furniture
and furnishings by Replacement Furniture relief
 This relief is available for both individual and companies but not for furnished holiday letting because
the cost of furniture and furnishings in such properties qualifies for capital allowances.
 There is no relief for the initial cost of furniture and furnishings. But the relief is only available when
assets are replaced.
 Calculation of replacement furniture relief =
(Cost of replacement asset of same capacity – sale proceeds of old asset)
Aggregation of Expenses/Income if more than one property incomes:
When rent is generated from letting more than one property, all rents and expenses for all the properties
let out are pooled together and a simple amount is calculated.
Understand how Relief for Property Losses given:

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1. All property income and expenses are pooled to give an overall profit or loss figure for the year.
The losses from running of one property are automatically offset against other property income.
2. If overall losses on all properties, the property income assessment for tax year will be NIL
3. Any surplus losses are carried forwarded to next year.
4. Losses carried forward may only be offset against profit from the property rental business. It is
necessary that property business must continue i.e. if property business ceases to exist the carried
forward losses are not allowed against any other income.
5. Any unrelieved losses are carried forward indefinitely period of time and off set against the first
available future property business profit.
Furnished Holiday Letting (FHL)
The letting is treated as if it were a trade. This means that, although the income is taxed as income from a
UK property business some of, the provisions which apply to actual trades also apply to furnished holiday
lettings as follows:
 Capital allowances are claimed on the cost of furniture instead of claiming replacement furniture
relief if the accruals basis is used. If the cash basis is used then deduction is available for the capital
costs of the furniture when paid. - 100% mortgage interest is allowable
The profit or loss is computed for tax years on a cash basis, Therefore, profits of FHL are not pooled with
other UK property income treated as if profits of a separate trade. The cash basis is default basis for
furnished holiday letting.

All the following condition must be met for letting to qualify for furnished holiday accommodation.
Commercial basis The lettings must be of UK or European Economic Area furnishedaccommodation
made on a commercial basis with a view to the realisation of profit.
Available for The accommodation must be available for letting to public generally for at least
letting 210 days during the year.
Actually Occupied The accommodation must be let to public generally for at least 105 days during
letting period the year.
Pattern of No one person occupies the property for more than 31 consecutive days. If one or
occupation more persons does occupy the property for more than 31 consecutive days then
these periods of long letting must not exceed 155 days in the year
(Advantages /Differences from normal property)
Plant & machinery  Under cash basis a deduction is available on paid basis for plant and machinery
including furniture acquired including furniture and furnishing
and furnishing  Under accruals basis capital allowance are available in respect of plant and
machinery including furniture and furnishing
 Under both cash and accrual bases these deduction apply instead of replacement
of domestic items reliefs
Relevant earnings Relevant earnings when calculating the maximum amount that can be invested in a
for pension registered pension scheme includes income from a furnished holiday letting.
Rollover relief Rollover relief is available if the owner invests in another furnished holiday letting.
Gift relief Gift relief is available on the gift of a furnished holiday letting.
Entrepreneur’s Entrepreneur’s relief is available on the disposal of a furnished holiday letting
relief
Finance cost 100% of mortgage interest is allowable against FHL letting income

Losses of Furnished holiday letting

Losses of FHL are carried forward against future income of FHL only

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More than one properties are letting

If a tax pay has more than one letting of which some are FHL while some are not than draw up two
separate profit and loss account as if they are two separate property businesses. This is so that profit and
losses treated as trade profits can be identified.
Rent a Room Relief
Where an individual rents out furnished accommodation which is part of his main residence (e.g. rents
a furnished bedroom in his house or flat to a lodger), any rental income is assessed to income tax as
property income. Cash basis is defualt basis for calculation of rent a room.There are Two methods
under which the income from letting this room can beassessed.One of the two methods below can be
chosen
 Method 1:If an individual lets a room, furnished, in their main residence – the gross rent up
to£7,500 is exempt.(or £3,750 if other person is a joint owner and also receives rent)
 Method 2: In which Rent a room treated Noraml property
Gross rental income Property income assessment If a loss arises
(before expenses and
allowances):
£7,500 or less Claim exemption of £7,500 If loss, election are made treat the
(method 1) normal properly and ignored the
Under which property income is exemption The elections is made
Nil within 22 months end of tax year
and only valid for the tax year of that
loss

Gross rental income Property income assessment If a loss arises

(before expenses and
allowances)
More than £7,500 Lower of If loss arises, treat
Method -1 (rent a room relief) normal property
Rent received/receivable X
Less: Exemption £7,500or
£3750 join property (x)
x
Method-2 Normal property
Rent received/receivable X
Less revenue expenses (x)
Less: Replacement furniture relief (x)
Xxx
If method 1 is chosen then election is made, the
election must be made within 12 months after 31
January following the end of the tax year and is
binding untill revoked or gross rent is £7,500or
less

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CHAPTER # 03 Employment income , National

insurance contribution and PAYE System
Recognize the factors that determine whether an engagement is treated employed or self-employed

One important is to be applied in deciding whether a personal is employed or self employed is the nature
of contract between taxpayer and person who paying for the work done
Employment involve a contact of service where asself employed involves a contract for services
The factors that help to determine whether an engagement is treated as employment are self employed are
as below:
Basis of distinction Employee Self employed person

Control Employees are under the control They have a greater degree of freedom
of the employer to high degree. to decide and plan their work
They have to report the work on
specific date, given times and
have obey instruction of
employer

Financial risk Employees do not invest their They invest money in business and so
own capital in business. So there they to bear all losses and there
no financial risk for them financial risk is involved

Equipment Equipment are necessary to carry Self employed persons have to use their
out the work is provided to an own equipment
employee by the employer

Holidays Employee is entitled to paid Self employed persons do not get paid
annual leave annual leaves

Number of persons Normally employees work for a Self employed people generally deal
contracted with single employer company or firm with more than one company at a time

Employment An employee is protected under There is no employment protection for

protection the contract of service i.e. there is self employed person
a minimum period of notice

Mode of payment Employees are paid weekly or Self employed individuals are paid per
monthly contract

Obligation Employees are under an There is no obligation on self employed

obligation to accept the work individuals to accept every project
allotted to them by the employer offered to them

Substitution Employment contract is personal Generally self employed can allocate or

to that individual; they cannot delegate the work to their sub ordinate,
instruct someone else to perform although they remain responsible for
their services the work

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Employment income
£
Salary X
Bonus X
Taxable benefit (including use own car – surplus mileage allowance) X
Reimbursed expenses X
Amount paid by employee for benefit (X)
Allowable deductions
Expenses incurred wholly, exclusively and necessarily (X)
Contributions to employer's occupational pension scheme (X)
Subscriptions to professional bodies Charitable donations: payroll deduction (X)
scheme (X)
Travel and subsistence expenses (X)
Use of own car – deficit mileage allowance
Total employment income XX
Basis of Assessment
Employment income is assessed on a receipts basis. This means that the individual is taxed on the income
in the tax year (i.e. 5 April to 6 April) in which the cash or benefit is received, not necessarily when it is
earned.
Meaning of Earnings
The term ‘earnings’ includes not only cash wages or salary, but also bonuses, commission, round sum
allowances and benefits made available to the employee by the employer The word earning is used for
employment income
When are earnings received?
For Employee: The amount of bonus is taxed in the tax year according the earlier of the following
1. The date when payment is made
2. The date when an employee becomes entitled to payment
For directors:-
1. The date when payment is made
2. The date when an employee becomes entitled to payment
3. the date that the financial accounts are credited with an amount for the director on account of
earnings, and
4. where earnings are determined (for example, at a directors’ board meeting):
− before the end of the accounting period, the last date of the accounting period, or
− after the end of the accounting period, the date the amount of earnings for that period is
Determined
Employment Taxable Benefits
GENERAL  As a general rule cost of providing Benefits (mean Marginal or Additional cost) is
RULE taxable to employees unless they are specific statutory rules.
 Where in-house benefits are provided (free air travel for employees of a airline
company) the amount assessed is the marginal cost incurred by the employer
Vouchers All kinds of vouchers (e.g. cash vouchers, goods vouchers, lunch vouchers) provided to
employees are taxable on the cost to employer less any amount the employee pays the
employer for providing the benefit.

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Living Accommodation
(1) Job related
 No taxable benefits arises if the property is job related (exempt)
 Accommodation is job related if provided for:
(i) Proper performance of the employee’s duties
(ii) Better performance of the employee’s duties
(iii) Security arrangement for threat to employees’ life.
Note: * Directors can claim exemption under first two points.
(2) Not job related
Rented (letting) Owned
Cost of accommodation is less Cost of accommodation is Cost of accommodation is
or greater of £75,000 > £75,000 (owned) < £75,000 (owned)
Taxable amount is higher of: Taxable amount is higher of: Annual value+ (cost
 Annual value  Annual value accommodation or market
 Ret paid by the  Ret paid by the value + improvement
employer (if any) employer (if any) expenditure up to the start of
There is no concept of expensive or the tax year- £75,000) ×
inexpensive accommodation in this official rate of interest (2.25%)
case. If property rented
Notes relating to living Accommodation
Accommodation if accommodation was purchased six years before first being provided to
more than six year employee than market value of accommodation will be used in the formula in
place of cost of accommodation
Subsequent capital subsequent capital expenditure for improvements after purchase of
expenditure accommodation up to start of tax year shall be added in the cost or market value
Reduction benefit where property is used part of tax year, then this benefit will be reduced by
(months/12),
where employee paid to employer toward living accommodation benefit, then
benefit will be reduced amount contributed by employee

Expenses related to accommodation (e.g. heating, lighting, gardeners bills,

repairing, decorating etc.
Accommodation Lower of:
job related  Cost of heating, lighting, repair bills + 20% of market valued of furniture
 10% of net earnings of employee (net earning includes all earning from
employment exclude ancillary services and use of furniture less allowable
expenses
Accommodation
not job related Cost of heating, lighting, repair bills + 20% of market valued of furniture

Car benefits
Formula for £
calculation of car List of price + Accessories cost – capital contribution by employee x

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benefit (Maximum £5000) × CO2 emission appropriate % × months/12 (if car is

available for less than 12 months in tax year)
Less: employee paid to employer for the private use of car (x)
Taxable Car benefit X

CAR

Co2 emission <50 grams Co2 emission <50

per kilometre grams per kilometre

Petrol Diesel power

Hybrid electric motor car motor car
motor car

Meet RDE2 Not meet RDE2

Treated as petro Add 4% in Petrol

car Co2 emission

Hybrid electric Hybrid electrice motor care co2 emission between 1 and 50 grams per
motor car % kilometre
calculation Miles Range %

0
130 miles or more
3
70 to 129 miles
6
40 to 69 miles
10
30 to 39 miles
12
Less than 30 miles
Calculation of Cars which have Co2 emission more than 50 gram per kilometre
percentage of co2 CO2 % Petrol % Diesel Car %
emission rate 51 grams to 54 grams per Kilometre 13 17
55 grams per kilometre 14 18

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Each complete additional 5 grams An additional 1% is added to the 13%

emission above 55 grams Petrol car or 17% of diesel car ( not
meet RDE2) up to a maximum
percentage of 37%
Calculation of CO2 emission appropriate % =
(23% + co2 emissions of the car -55 g/km co2 )
5
4% surcharge for diesel car only applies if car do not meet the real driving
emission 2 (RDE2) standards. if car meet the (RDE2) standard then petrol %
apply.
List price Official List price will be taken; actual paid price should be ignored
Capital Capital contribution made by employee to purchase of car takes maximum up to
contribution £5000
More than one Where more than one motor car is made available to an employee, the benefit of
car benefit each motor car is simply based on its list price and CO2 emissions
Pool car  The car benefit will be exempt if the car is a pool car
 Pool car is car which is used by more than one employee. Such pool cars
must be used mainly for business purpose and private use is merely incidental.
Such car are not kept overnight near the residence of employee
100% business If car used for business purpose than no benefit is arises (exempt)
use
Driver/chauffeur If chauffeur is provided with the car count as additional benefits (fully taxable)
of car
Other Benefit Other benefits associated with the cars which are insurance, repairs, maintenance,
relating to car vehicle licence are exempt
Reduction of car  The car benefit is proportionately reduced if a motor car is unavailable for
benefit periods of at least 30 days of the tax year, and
 where the employee makes a contribution to the employer for the use of the
motor car

Fuel for cars

Calculation of fuel
benefit
Pro rated fuel benefit
Exempt fuel benefit
No reduction of fuel
benefit
£24,500 × % used for car × months/12
If fuel is not provided for the whole of tax year the benefit is pro-rated
No benefit arises if employee fully reimbursed or fuel is provided for
business use only
If employee does not fully reimbursed the cost of private fuel then fully
benefit is taxable

Vans and heavier commercial vehicles benefit and fuel of Van

Van benefit  Where private use is not insignificant the tax charge is £3,490 per annum this
benefit scale cover ancillary benefit such as insurance and services
 Where an employee uses an employer’s van for journeys between home and
work and other private use is insignificant there is no benefit.
Fuel of van benefit An additional charge is made for fuel provided for unrestricted private use equal

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to £666 per annum.

Time proportion Both benefits are time apportioned if the van is unavailable to the employee for 30
the benefit days or more during any part of the tax year.
Equally divided Both Van benefit & fuel benefit be divided equally if van is used by more than 1
employee.

Beneficial loans
This benefit arises when an employer gives an employee a loan at an interest rate that is cheaper
than the official interest rate (2.5% for 19/20) or free of interest
Both qualifying and non qualifying
Qualifying purpose Non qualifying purpose
purpose
1-Allowable deduction (1). If loan amount is less than If the loan taken is partly for qualifying
against total income as £10,000 then benefit is exempt purpose and partly for some other
qualifying interest (2.) If loan amount is greater purpose then the taxable benefit is
2- No taxable benefit is than £10,000 then taxable benefit calculated in normal on the whole loans
arises (exempt) is calculated. There are 2 ways to as described above but in the income tax
calculate the monetary value of the format the deductible interest will always
loan benefit. be calculated on official rate in the
1. Average method amount of loan taken for qualifying
2. Strict method purpose
1. Average Method
Bal. outstanding at start of tax year + Bal. outstanding at end of tax year/2
×months/12×offical rate% (2.25%) X
Less: interest actually paid (x)
Benefit X

2. Strict or Accurate Method

Balance outstanding in months ×months/12 × Official rate% (2.25%) X
Less: interest actually paid (x)
Benefit X
Note: 1- if no repayments have been made during the tax year, then both methods will produce the
same result
2- The average method applies automatically but the taxpayer or HMRC can elect for the strict
method if it is more beneficial for them eg the taxpayer will elect when the strict method produces a
smaller benefit figure and HMRC can elect of the strict method gives a MUCH higher benefit
figure.
any amount of loan write off by employer which is taken by employee from
Loan written off
employer is fully taxable benefit for employee

Example
Anna, who is single, has an annual salary of £30,000, and two loans from her employer.
(a) A season ticket loan of £8,300 at no interest
(b) A loan, 90% of which was used to buy a partnership interest, of £54,000 at 0.5% interest
What is Anna's tax liability for 2020/21?
£
Salary 30,000
Season ticket loan (non-qualifying): not over £10,000 0

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Loan to buy partnership interest (qualifying): £54,000 ×(2.25 -0.5 = 1.75.%) 945
Earnings/Total income 30,945
Less deductible interest deemed paid (£54,000 ×2.25 % × 90%) (1,093)
Net income 29,852
Less personal allowance (12,500)
Taxable income 17,352
Income tax
Tax liability £17,352× 20% £3,470.40
Use of Assets (i.e. furniture, computer, TV, stereo system, camera........etc.)
Use of assets rule Higher of
 Rent paid by employer
 Market value of asset when first provided × 20%
Time proportionate this benefit will be reduced by (months/12), if asset was provided for less
than 12 month
Exempt asset If employer give exempt asset to employee for use. The benefit of use asset is
also exempt.I.e. Bicycles provided for journeys to work, as well as being available
for private use, are exempt from the private use benefit rules.

Gift of Assets
Higher of

Cost of asset X Market value of asset when gift X

Less: benefit already assessed (x)
Less: employee contribution (x) Less: employee contribution (x)
X X
The above rule does not apply to the gift of a motor car or van and bicycle, where the benefit is simply the
market value of the asset when gifted – the price paid by employee.

Exempt benefits
Reimbursed expenses
Mobile phone
 Where an employee is reimbursed expenses by employer, the amount
received is taxable income. However such reimbursed expense are
exempt if reimbursement is related allowable expenses under
employment income for example contribution to ops, subscription to
professional body, expenses incurred wholly and exclusively for
employment.
 Where an expense is partly allowable and partly disallowable, then
exemption can be applied to allowable part. For example employee’s
home telephone used both business and private
 Cost of up to one mobile phone is exempt.
 The cost of second and subsequent mobile phone is taxable as
market value of mobile phone when first provided ×20%
×months/12

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Running cost and top up Running costs and top up vouchers of exempt mobile is exempt while all
voucher for mobile the cost is taxable if incurred on second and subsequent mobile phones
phones
Noncash award for long Noncash award for long services xx
service (given for service Up to (£50 ×number of year of service) is exempt, (xx)
of 20 years or more) excess is taxable xxx
Staff parties: Cost per member per year is £150 or less than exempt, if exceed than whole
amount is taxable
Overnight expense on Up to a maximum £5 per day in UK is exempt, if exceeds than whole
business trip amount is taxable. Up to a maximum £10 per day in outside UK, if exceeds
than whole amount is taxable
Employee attending full Up to £15,480 is exempt if exceeds than whole amount is taxable
time course on employer
expense
Employer contribution Home work’s additional household expense of upto£4 per week or 18 per
for additional house hold month can be paid tax free without need nay supporting evidence, for
cost incurred by additional payment must have supporting documents as evidence expenses
employee working partly reimbursed by employer when employee is away from home
or wholly at home
Staff suggestion scheme Staff Suggestion Scheme first £5000 is exempt, excess is taxable
Removal expenses Up to first £8000 is exempt, excess is taxable
(Relocation expenses)

Trivial benefits An exemption has been introduced for trivial benefits which do not cost
more than £50 per employee provided these benefits are not cash or a
cash voucher.
Use of subsidised on site Use of subsidised on site restaurant or canteen facilities provided
restaurant or canteen they are available for all employees (exempt)
facilities
sporting and recreational sporting and recreational facilities provided to employees and not to
facilities general public (Exempt)
Child care allowance For basic rate tax payer up to (£55 × no. of weeks) is exempt, excess is
taxable
For higher rate tax payer up to (£28 × no. of weeks) is exempt, excess is
taxable
For additional rate tax payer up to (£25 × no. of weeks) is exempt, excess is
taxable
Work place nursery Work place nursery or play scheme (Exempt)

Recommended Medical An annual £500 exemption per employee has been introduced where an
Treatment employer pays for medical treatment. The exemption applies where medical
treatment is provided to an employee to assist them to return to work after a
period of absence due to ill-health or injury. If payment exceeds £500 in tax
year, they are whole taxable
Eye care tests Eye care tests and corrective glasses for VDU use at work place
(Exempt)
Medical insurance Private medical insurance premiums paid to cover treatment when the
employee is outside the UK in the performance of duties. Other medical

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premiums are taxable.

Bicycle Bicycle or cycling safety equipment provided to employee to get to and from work
or travel between one workplace and work place is exempt
Work place parking Exempt
Entertainment provided Entertainment provided by genuine third party (eg seats at
by third party sporting/cultural events),even if it is provided by giving the employee
voucher
Gift of goods from third Gift of goods or exchange goods voucher from third party is £250 or less
then, exempt ,if exceed then all amount is taxable
Assets provided for Assets provided for performance of duties by employer (exempt)
performance of duties
Cost of work buses and The cost of work buses and mini buses or subsidies to public bus
mini buses service bearded by employer is exempt
Work related training Exempt
Welfare counselling Exempt
Employer provided Employer provided uniform which employee must wear as part of
uniform their duties
Employer contribution to Exempt benefit
registered pension
scheme
Transport/overnight cost Late nights taxi and travel cost incurred where car sharing
where public transport is arrangements unavoidably breakdown.
disrupted by industrial
action
Employee insurance Exempt
liability related to work
Cheap loan The value of loan do not exceeds £10,000 at any time in the tax year
is exempt

Job related If accommodation is given due performance of duties or improve the

accommodation performance of duties is exempt
uniform Employer proved uniforms which employees must wear as part of
their duties
Workplace charging Worked charging points for electric or hybrid cars used by employee
point for hybrid car facilities must be made available to all employees
Residual charge/general rule (for the benefit for which no specific rule is
available) :-Taxable amount of benefit is the cost to the employer
Allowable deductions
Following expenses are paid by the employee himself then he can deduct them from his employment
income as allowable deduction:
Contribution to OPS Employee made a contribution to occupational pension scheme
Subscription to Employee mad e subscription to professional bodies (e.g. ACCA
professional bodies ,CIMA,ICAEW........etc)
Payment to charity Payment to charity made under payroll deduction scheme operated by employer
Deficit Statutory  When employee uses his own motor car for business purposes are
mileage normally paid a mileage allowance by their employer.

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allowance  Where the payment to employee < the AMAP then difference = allowable
deduction from employee’s employment income (See- Note_01)
Payment of Payment for liability incurred due to his employment or Payment of premium
employment liability for insurance to cover the liability to be incurred due to his employment
Travelling expenses Travel expenses incurred necessarily in the performance of the duties of
employment (See- Note_ 02)
Capital Allowance Capital allowances are available for plant and machinery provided by an
employee use plant and machinery performance of his duties
Cost of business Cost of business telephone calls on private telephone is deductible but no part of
telephone calls the line rent can be deductible.
General rule The general rule is that expenses must be incurred wholly, exclusively and
necessarily in the performance of the duties of employment
Note: If the above mentioned expenses paid by the employer than it will be exempted benefit for the
employee.

Statutory mileage allowance Note - 01

Employee who use their own motor car for business purposes are normally paid a mileage allowance by
their employer
Calculation of mileage Allowance First 10,000 Above 10,000
£ miles miles
Mileage Allowance paid by X Motor car 45 pence per 25 pence per mile
employer and vans mile
Approved mileage allowance (X) Motor cycle 24 pence per 24 pence per mile
mile
Taxable benefit /Allowable X/(X) Bicycle 20 pence per 20 pence per mile
deduction mile
Note: Employers may also pay employees up to 5p per mile tax-free for each passenger carried on a business
trip.

Do nothing Allowable deduction Taxable benefit

if mileage allowance paid by Where the payment to employee Where payments made to the
employer = AMAP then no < the AMAP then difference = employee > the AMAP then
benefit arises allowable deduction from excess = assessed on the
employee’s employment income employee as benefit

Qualifying travelling expenses Note-02

Allowable travelling cost
- Travel expenses for travel between home and
temporary place of work is deductible
- Temporary work place means where individual
continue stay is not more than 24 months
- Travel expenses for travel between normal
place of work and temporary place of work is
deductible
- Travel to visit different clients is allowable
deduction.
Disallowable travelling cost
Travel expense for travel between home and
normal place of work (normal commuting cost) is
not deductible
Travelling between two separate employments is
not deductible.
There is no relief for any cost related to the private
travel.

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Disallowable deduction from employment income to employee

 The cost of evening meals taken when
attending late meetings
 The expense of joining a club that was virtually
a condition of an employment was not
deductible
 The cost of clothes for work is not deductible,
except for certain trades requiring protective
clothing where there are annual deductions on a
set scale.
 As a condition of his employment, an
employee was required to attend evening
classes. The cost of his text books and travel
was not deductible
 Journalists could not claim a deduction for the
cost of buying newspapers which they read to
keep themselves informed, since they were
merely preparing themselves to perform their
duties.

NATIONAL INSURANCE CONTRIBUTIONS and Employee Individual

Classes of NIC Rules
Class 1 primary Class 1 primary is Payable by employees above 16 years until state pension age for men
or Class 1 65 years and women 60 years
employee It is payable on cash employment income paid by employer only which includes:
Employee’s cash earning are calculated as follow:
Cash earning for class 1 NIC £
Salary/wages/overtime/sick pay including statutory sick pay X
Bonus/commission X
Any other cash receipts and cash benefits X
(e.g. Excessive mileage allowance above 45p per mile subject to class X
1 NICs)
Tips or gratuities paid or allocated by employer
Cash and non cash voucher (excluding vouchers exempted under X
benefit rules
e.g. child care voucher up to £55 per week)
Receipts of marketable assets that can be converted into cash X
(e.g. gold bar fine wine shares diamond)
Cash earning for class 1 NIC X
Note cash earning is not same as the employment income assessment, as it is
calculated before any allowable deduction (e.g. occupation pension contribution,

24
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subscription to professional body)

Cash earnings also exclude the following:
Exempt benefit as per employment income rule
Non cash benefit (e.g. car benefit, living accommodation)
Business expenses reimbursed by employer
Tips directly received from customer
Redundancy payments
Employer payment to registered pension is not earnings but NIC is due on non
registered scheme
Contribution by employee is calculated as follows.
Cash earning Contribution rates
£9,500 per year Nil
£9,500------£50,000 per year 12%
above£50,000 per year 2%

• Contribution is not allowable deductions for employee from employment income.

• It is Employer’s responsibility to calculates NIC and deduct it from employee’s wages.
• Contributions are payable by 19th of each month while 22nd of each month in case of
electronic return.
Class 1 It is payable by employer for employee on same cash earnings calculated for class 1
secondary primary contribution.
Or class 1 • It is paid in respect of employees aged ≥16 until employee ceases employment.
employer • Class 1 secondary contribution is calculated as follows:
Cash earning Contribution rates
£8,788 per year Nil
Above £8,788 13.8%
Employment Allowance: No class 1 secondary NIC will be payable by employer if amount of
total class 1 secondary NIC of all employees is ≤4,000/annum. If class 1 secondary NIC
exceeds 4,000 then NIC above 3000 will be payable to HMRC.
The employment allowance is no longer available to companies where a director is the sole
employee. . The non-availability of the employment allowance will be particularly relevant in
certain tax planning scenarios. For example, when deciding whether a sole trader (with no
employees) should incorporate their business, or when making a decision whether to extract
profits from a company (where the director is the sole employee) either as director’s
remuneration or as dividends.
• Allowable deduction for employer against taxable trading profit
• Contributions are payable by 19th of each month while 22nd of each month in case of
electronic return.
Class 1 A It is payable by employer on taxable non-cash benefits (e.g. living accommodation
benefit, car benefit, fuel benefit, beneficial loan, use of asset, gift of asset etc.) provided
to P11D employee at the rate of 13.8%.
• It is allowable deduction for employer against it trading profit.
• It is paid by 22nd July, following the end of the tax year. 22nd July 2021 for 2020/21

Note:- If company provided to employee on which 0% car benefit is available then

there will be no income tax implications for the employee and no class 1A national
insurance contribution for the employer.

PAYE system PAYE stands for Pay As You Earn. It is the system for collecting income tax and

25
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NIC from employment earnings during the tax year. It means that the employer are
required to deducts the amount of income tax and NIC from the employee’s wages
or salary, and Pay the income tax and NIC to HMRC.
Parties in There are three parties involved in the PAYE process – HMRC, employer and
PAYE employee.
Application of  Salary/wages, bonuses/commissions
PAYE  Any other cash receipts and cash benefits (e.g. mileage allowances that exceed
the authorised mileage allowance rates)
 Cash and non-cash vouchers, excluding vouchers exempted under the benefit
rules (e.g. childcare vouchers up to £55 per week)
 Receipts of marketable assets that can be converted into cash (e.g. gold bars,
fine ,wines, shares, diamonds)
PAYE codes An employee is normally entitled to various allowance under PAYE system an
amount reflecting the of these allowance is set against their pay and determine the
amount to set against their pay the allowance are expressed in the form of a code
Allowance £ Deductions £
Personal Allowance X Benefits X
Allowable Expenses X Adjustments of overpaid tax X
>£3,000
Adjustment of overpaid tax X Other income X
Total Allowance XX Total deductions XX
(Total allowances less total deductions) × 1/10
To obtain the code number the last figure is removed and replaced with a letter An
I. L Tax code for people entitled to the full personal allowance
II. M Tax code for people who are receiving £1,150 of personal allowance from a
spouse or civil partner
How PAYE Under RTI, an employer is required to submit information to HMRC
works electronically. This can be done by: (a) Using commercial payroll software
(b) Using HMRC’s Basic PAYE Tools software (c) Using a payroll provider to do
the reporting on behalf of the employer
The employer reports payroll information electronically to HMRC, on or
before any day when the employer pays someone (i.e. in ‘real time’). This report
will normally be carried out by the payroll
software(or the payroll provider) at the same time that the payments are calculated
and is called a Full Payment Submission (FPS). The FPS includes include details
of:
I. The amounts paid to employees
II. Deductions made under PAYE such as income tax and national insurance
contributions
III. Details of employees who have started employment or left employment
since the last FPS
National insurance contributions are also calculated by the software in relation
to the earnings period
Payment  Under PAYE income tax and national insurance is paid employer over on the
due date – by the 19th of the month (22nd of the month if electronically paid)
under the
 Employers whose payments are, (on average), less than ￡1,500 per month are
PAYE system allowed to make payments quarterly rather than monthly. Payment are due by
the 22nd of the month following quarters ending 5 July, 5 October, 5 January, 5

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April
 Note that employers with 250 or more employees must make their monthly
PAYE payments electronically on the 22nd of the month.

Interest Daily interest is charged on late payment of income tax and national insurance by
taking account number of days late. HMRC make charge after the end of tax year.
Penalties  Penalties are charged on a monthly basis, where a RTI submission is made late
Monthly submission which are late Penalties
1st late transmission in the tax year Nil
2nd late transmission in the tax year Number of Monthly
Up to 3 months late employees penalty
1-------9 £100
10-----49 £200
50-----249 £300
250 or more £400

More than 3 months late An additional penalty of 5% of the tax and

NIC which should have been reported is
charged
PAYE PAYE settlement agreement are arrangement under which employer can make single
payments to settle their employees income tax liabilities on expenses payments and
settlement benefits which are minor, irregular or where it would be impractical to operate PAYE
agreement

PAYE Forms
Since information must be filed electronically, it is no longer possible to produce a payroll manually.
Employers must either run payroll software or use the services of a payroll provider.
The employer must send to HMRC the following:

Form Purpose Timing

P 11D P11D include summary of the full cash equivalent of
all taxable benefits (other than those which are pay
rolled),
Alternatively, from 6 April 2016, the employer can
apply to HMRC to tax the benefit through the PAYE Provided by 6 July following
system like other earnings. The employee will then tax year
pay tax on the benefit throughout the year and is not
required to report the benefit on his tax return.
Likewise, the employer is not required to include the
benefit on a P11D.
P 60 This shows total taxable earnings for the year, tax Provided to employee by 31
deducted, code number, NI number and the employer's May following tax year
name and address.
P 45 Provided to employee when leave the employment and Provided to employee when
shows the employee's code and details of his income leave the employment
and tax paid to date

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CHAPTER # 04 income from self employment,

National insurance contribution
Badges of trade
All trading profits of person who is UK resident are chargeable to income tax. When individual disposes
of assets, it is not always clear if those transactions constitute a trade or not. If an individual disposes of
an asset, should that transaction be treated as a capital gain or treated as trading income? The following
tests are used to establish if a series of transactions should be treated as a trade and taxed under tax adjusted
tradingprofit.
Subject matter of transaction:- There are three main reasons for purchasing an asset:
1. For personal use 2-As an investment 3-Resale at profit
The intentions of the purchaser at the time of purchase regarding the resale’s of the article are relevant.
If assets are held as an investment or for personal use, any profit on a later sale will be treated as a capital profit, if
the asset is held neither investment nor personal use the any profit on its sale will be treated as trading profit
Frequency of transactions:-The number of similar transactions and the frequency of those transactions suggest
that the activity constitutes trading. For example a taxpayer bought clothes at the local market each week, and sold
them at profit. The taxpayer is regularly performing the same transaction. This likely constitutes tradin g
Length of ownership:- Assets purchased for personal use or as an investment are normally held for a long period ,
where as asset purchased trading inventory are usually held for a shorter term so Where items purchased are sold
soon afterwards, the transactions are likely to be treated as a trade.
Profit motive:-The presence of a profit motive will be a strong indication that a person is trading.
Supplementary work and marketing:-When work is done to make an item more marketable, or attempts are made
to find purchasers, the transactions are more likely to be treated as a trade. For example if an individual bought a
number of old cars, and restored them prior to selling them. The activity is likely to constitute a trade

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Manner in which assets were acquired:-If acquired unintentionally (e.g. by inheritance) and then sold, it is
unlikely that trading has taken place.
The circumstance/Reason for sales:-The circumstance giving rise to the sale of the asset are also important
factors to decide if trading has occurred. If a person sold an asset due to personal financial problems. It is unlikely
to be regarded as a trade. For example an individual sells one of his three motor cars to raise funds to pay for his
mother’s healthcare is unlikely to be regarding as trading.
Trading Income Adjustments
£
Net profit as per accounts Xxx
Add:-"
 Expenditure not allowed for tax purposes Xxx
 Taxable trading profit not credited in the accounts Xxx
Less:
 Expenditure not charged in the accounts but allowable for taxation purposes (xxx)
 Income included in the accounts that is not taxable as trading (XXX)
 Capital allowances (xxx)
Total adjusted trading profit after capital allowance Xxx

Adjustment In trading profit and loss account.

1- Income included in the accounts that is not taxable as trading income: -

Capital Gains, Property Income, Interest Income and Dividend received. Interest received from overpaid tax

2- Allowable income under trading but not including in accounts:

Drawings by owner.

3- ALLOWED AND DISALLOWED EXPENSES

Capital Expenditure  Initial purchase price and improvement is capital expenditure are
and Revenue disallowed.
Expenditure  Replacement of an asset with extended capacity is disallowed.
 Repair to an asset is revenue expenditure and is allowable.
Rental expenses  Any rent paid for the purpose of trade is allowable.
 Leasing charge of car emitting 110 g/km Co2 or less is allowable.
 If CO2 emission of car exceeds 110g/km then 15% of Rental/leased
charges are disallowed.
Entertaining Entertaining is disallowed, unless entertaining employees
Gifts and gifts to  Gifts to employees are allowable
customer  Gifts to customers are only allowable if
• Their cost less than £50 per person per year, and
• Gift is not food, drink, tobacco or vouchers exchangeable
for goods and services
• Gift carries a conspicuous advertisement for the business.
 If cost exceeds £50 per year then whole amount of gift is disallowed.

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Subscriptions and  Trade or professional association subscriptions are allowable

Donations  Donation to a local charity is allowable and to National charity & political
parties is disallowed.
 Donations to other parties are allowable only if
•It must be wholly and exclusively for trading purposes.
•It must be reasonable in size in relation to the business.
• Charity must be working for educational, religious, cultural
etc. purpose.
If donation not above condition then claim as gift aid donation
Legal and Professional  Legal and professional charges are allowable if for trade and not capital.
Charges  Cost incurred for new issue of shares is disallowed.
 Cost incurred for purchase of new assets is disallowed.
 Costs of obtaining loan finance for trade, renewing a short lease (50 years or
less) or issuing debt finance is specifically allowed by statute
Lease premium  Premium paid on grant of short lease is allowable and is calculated as
follows:
Premium x
Less: Premium× 2%(n-1) (x)
x /n
n = number of years
Bad Debts/Allowance  Bad debts and allowance for receivables relevant to trade are allowable e.g.
For Receivables bad debts on credit sales.
 General provisions for bad debts are disallowed and specific provisions are
allowable.
 Non-trade bad debts are disallowed. (E.g. bad debt on loan given to
employees, customers and suppliers.)
Recovery of bad debts Recovery of bad debts is taxable income
Drawings and  Drawing by the owner in the form of salary, cash or goods are disallowed.
Appropriation of profit  Interest on capital is disallowed.
Family member salary  Excessive salary paid to owner’s family member is disallowed.
Interest Expenses  Qualifying (eligible) interest is disallowed.
 Interest paid on borrowings for trading purposes is allowable.
 Interest paid on overdue tax is not deductible
Fine, penalties and Fines, penalties and payment of damages are all disallowed unless car parking
damages fine paid on behalf of an employee.
Pre trading expenditure Pre-trading expenditure is allowable if it is incurred in the seven years before a
business start to trade
Depreciation Depreciation and amortisation is disallowed.
Proprietor expenditure Expenditure relating to proprietors car, telephone ------ etc is disallowed.
Redundancy, loss of Redundancy, loss of office and Removal expenses for employees allowable
office and removal
expenses
Insurance and royalty Insurance expense and Patent Royalties are allowable.
National insurance  Payment of class 1 (employee) NIC, Class 2 NIC, Class 4 NIC are
contribution paid by disallowed.
employer  Payment of class 1 (employer) NIC, and Class 1A NIC are allowable.
Employer contribution Employer contribution to pension scheme for employee is allowable
to pension scheme
Loss on capital assets Loss on sale of noncurrent assets (capital losses) are disallowed.
Capital allowance Capital allowances are allowable.

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General rule The general rule is that expenditure not wholly and exclusively for the purpose
of the trade is not allowable.

Cash basis option for small businesses

Cash basis option
available
Condition for cash basis
cash basis option is not
available
small unincorporated businesses (sole traders and partnerships) may elect to
use a cash basis option
If the business’ turnover does not exceed £150,000. The business may
continue to use the cash basis until the turnover exceeds £300,000.
Corporation and limited liability partnership

Trading profit (or loss) under the cash basis is therefore calculated as follow: £
Cash sales received in the tax year X
Cash sales of plant and machinery in the tax year (not car) X
Less: Cash purchase of inventories in the tax year (X)
Less: Cash allowable expenses in the tax year (X)
Less: Cash purchases of plant and machinery in the tax year(ignored the purchase of car (X)
but purchased of van is allowable)
Less: Authorised mileage allowance instead of actual Motor expenses (Note- 4) (X)
Add; Private use of part of a commercial building (Note-5) X
Tax adjusted trading profit XXX
Notes:-
1. The business accounts for cash receipts and payments in the period of accounts
2. Receivable, payable and inventory are ignored
3. Purchase of motor car should ignore.
4. Actual running Motor car expenses are not allowable and replace it authorized mileage
Allowance
Actual motor car expenses Flat rate expense adjustment
Allowable deduction is equal to use approved
mileage allowance for business mileage only
10,000 mileages = 45p
Above 10,000 mileages = 25p
5- Premises used as both home and business premises such as a small hotel, guest house, bed
and breakfast or public house can elect for a flat rate private use adjustment to apply under
the cash basis in respect of private use of the property for such expenses as food and heat and

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light rather than attempting to compute a business / private split of the expenditure. Note this is
an add back not a deduction
 The relevant flat rates will be provided in an examination question and are based on the number
of occupants
 The flat rate add back does not include other property expenses such rent or mortgage loan
interest or council tax and rates adjust them normally
Losses: (disadvantage of cash basis accounting)
A net cash deficit (i.e. a loss) can normally only be relieved against future cash surpluses (i.e. future
trading profits). Cash basis traders cannot offset a loss against other income or gains.

Basis of assessment
A trader using the cash basis can, like any other trader, prepare his accounts to any date in the
year. The basis of assessment rules which determine in which tax year the profits of an accounting period
are taxed apply in the same way for accruals accounting and cash basis traders
Advantages of cash basis Accounting
 Simpler accounting requirements as there is no need to account for receivables, payables and
inventory
 profit are not accounted for and taxed until it is realized and therefore cash is available to pay the
associated tax liability

National Insurance contribution andSelf employed individuals

Class of Basis of assessment Person Due date of

contribution liable to payment
pay
Class 2 Payable when individual is at age of 16 or over
If accounting profits of the business in the tax year Due
exceeds the small earnings exception of £6,475 Self Under self
Self-employed earners pay a flat rate contribution of employed Assessment
£3.05 per week 31-1-2022
Disallowable expenses when employer calculated tax
adjusted profit
Disallowable deduction when individual calculating
his personal tax liability
The contributions cease when the employee reaches
60 (women) and 65 (men) at the start of relevant tax
year
Class 4 The self employed also pay Class 4 contributions
which are based on trading profit after deducting Due
trading losses but before the personal allowances under self
The rate of Class 4 is 9% and is payable on trading Self- assessment
income between £9,500 and £50,000 employed 31-1-21
For trading income in excess of £50,000, a rate of 2% 31-7-21
is payable (Note:5) 31-1-22
Contributions begin if the self-employed is 16 at the

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start of the relevant tax year but contributions cease,

when the tax payer is older than 60 (women) or 65
(men) at the start of the relevant tax year
Disallowable expenses when employer calculated tax
adjusted profit
Disallowable deduction when individual calculating
his personal tax liability

Note: 5 Trading profit for class 4 NIC

The starting point for profit calculation is the trading income assessment for tax year in normal way (e.g.
applying current rule, opening year or closing year rules) this adjusted as shown below:
Calculate the profit for class 4 NIC Purposes
£
Trading income assessment for tax year X
Less: trading losses (X)
Profit for class 4 NIC X

For class 4 NIC calculation use tax adjusted trading profit that are assessed for income tax liability
after deducting trading losses (if any)
Note that profits for class 4 NIC are before deducting the individual’s personal allowance that is
available for income tax purpose

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Chapter # 05 Capital Allowance

Purpose of capital The purpose of capital allowances are provided to give business tax reliefs for
allowance: capital expenditure on qualifying assets
Who may claim capital Capital allowances are available to persons who buy qualifying assets for use
Allowance: in a trade or profession
Qualifying Capital allowances are available for expenditure on plant and machinery
expenditure
Plant and Machinery It includes not only the obvious items of plant and machinery, but also such
items as movable partitions, office furniture and carpets, heating systems,
motor vehicles, computers, lifts and escalators and any expenditure incurred
to enable the proper functioning of the item such as reinforced floors or air
conditioning systems for computers.Safes and burglar alarm systems,
Advertising hoardings, signs and displays, etc .Refrigeration/cooking, washing
machine, future and furnishings, equipment, washbasins, sinks, sanitary ware
and Display equipment, counters and checkouts Lifts ,decorated assets
provided for the enjoyment of the public in a hotel and Any expenditure on
altering buildings to accommodate plant or machinery qualifies as part of the
cost of the plant and machinery for capital allowances.
(Note: land and building and walls, floors ceilings, doors windows and stair
cannot be plant for capital allowance purposes)
Plant & Machinery Qualifying expenditure includes irrecoverable value added tax (VAT).
and value added tax  If the trader is VAT registered and can reclaim VAT on a purchase, only
(VAT) the expenditure net of VAT will be qualifying expenditure.
 Not all capital allowances questions will require you to consider VAT.
Take care, if the question mentions VAT inclusive or exclusive amounts or
states that the trader is VAT-registered, that you make the appropriate
VAT adjustments when performing capital allowances calculations. Cal
Basis periods for Capital allowances are calculated for a period of account. They are then
capital allowances treated as an expense, and deducted from the profits of that period. This tax
adjusted trading profit figure is then what is used to determine the
assessment for a relevant Tax Year.

Calculating theCapital Allowances

General Pool or Main poolThe main includes following items of plant and machinery
Plant and Machinery  Computer  Bicycle  Any expenditure
 Equipment  movable partitions, on altering

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 Shelving  Table and chair buildings to

 Vans and lorries  Photocopier accommodate
 Advertising hoardings  burglar alarm systems plant or machinery
Second hand low Second hand cars with CO2 emissions of 50 g/km or below are included in main pool
emission car
Standard emission Both new and second hand Cars emitting CO2 between 51 g/km to 110 g/km are
Cars included in main pool.
Special rate pool: special rate pool includes the following items
Long life asset it includes P&M with a working life of ≥ 25 years or more and annual running cost of
≥£100,000.
High emission car Motor cars (both new & second hand) with co2 emissions > 110g/km
‘Integral features’ of a  Electrical & general  Cold water  Space or water
building lighting systems systems, heating systems,
 Powered systems of  cooling or air  Lifts and escalators
ventilation purification
Thermal insulation Thermal insulation of building
Private use of Assets
Private use asset by If owner uses an asset for private purposes, capital allowances are given only on
owners or partner business proportion. Every private use asset is kept in separate column.
Private use of asset Private use of an asset by an employee has no effect on capital allowances. It means full
by employee capital allowance is calculated
Balance charge or On disposal of asset, balancing charge (if profit) or a balancing allowance (if loss) will
allowance arise which is then reduced to business proportion.
Short Life assets
Definition of short  Plant& Machinery except cars which individual wishes to sell or scrap within 8 years
life asset of the end of the period of account in which asset is purchased are called short-life
assets. Every short life asset is kept in separate column.
 AIA and WDA are available as normal.
Election made for The election (written notice to HMRC) must be made for short life asset 22 months
short life asset after end of tax year in which period of account of expenditure ends
Balance charge or Balancing allowance or charge arises on disposal within 8 years after the accounting
allowance period of purchase.
Transfer to general If no disposal takes place within eight years after the accounting period of purchase the
pool remaining balance is transferred to the general pool immediately.
Length of ownership in the accounting period
 The WDA is never restricted by reference to the length of ownership of an asset within the accounting
period. If a business’s accounting period is for example, the year ended 5 April 2019 the same WDA is given
if an asset is purchased on 6 April 2018 or on 5 April 2019.
 But WDA is pro-rated according to the length of period of account
SALE OF PLANT AND MACHINERY
Lower of cost On disposal of Plant and Machinery deduct the lower of the sale proceeds and the original
or sale cost from the total of; TWDV brought forward on the pool plus Additions to the pool.
Balancing Allowance or balancing charge:-
 On the sale of a plant or machinery profit (Balancing charge) or loss (balancing allowance) will be
calculated.
 Normally profit (balance charge) or loss (balance allowance) will not be calculated for sale of asset in

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main the pool and special rate pool unless all the assets in the pool are sold when business ceases
Balancing charge when the tax written down value of an asset is < gross sales proceeds (profit)
Balance charge reduce the capital allowance claim for the period
Balancing allowance When the TWDV of the asset is > sales proceeds. (Loss)
balance allowance is added in capital allowance
Cessation of trade
No capital allowance Not FYA, AIA and WDA is available in last year of trade and Calculate balancing
allowance (if loss) or balancing charge (if profit) as appropriate.
Purchase and disposal Add addition and deduct disposals made in last period of account from the relevant
pool.

Capital Allowance
Annual  It is allowance of £1000, 000 p.a. on new purchased Plant and Machinery other than cars.
investment  Value of new purchased P&M which exceeds £1000,000 p.a. will be transferred to relevant
allowance pool and WDA of 18% or 6% may be claimed.
 £1000, 000limit is prorated for short and long period of accounts.
 No AIA is available in the year of cessation of trade.
 Taxpayer has the option to claim full or partial AIA or even no AIA if it does not want to.
However any unused AIA will be wasted.
 It is most beneficial to claim the AIA in the following order:
 a) Special rate pool b) General pool c) Short life assets d) Private use assets
Written  WDA is available on net value (TWDVb/fplus addition less disposal).
down  WDA of 18 % on reducing balance method is given each year on “Main Pool".
allowance  WDA of 6% on reducing balance method is given each year on “Special Rate Pool".
 Full WDA is given in year of purchase and no WDA is given in the year of disposal.
 WDA of 6% or 18% is prorated where a period of account is ≤ 12 or >12 months.
 WDA will be restricted to business proportion if there is a private use of the asset.
Small pool  If the Balance in the main pool or special rate pool remains less than £1000 than all amount
written in the pool is written off and transferred to allowance column.
down  £1000 limit is for 12 month period so it must be prorated for short and long period of
Allowance accounts.
First year  FYA of 100% is available in the year of purchase on Purchase of new low emission cars.
Allowance (50g/Km co2 or less).
 Taxpayer has the option to claim full FYA, partial FYA or even NO FYA. However if partial FYA
is claimed then remaining amount will go to main poll but no WDA will be given in that year.
 FYA is not time apportioned if accounting period is short or long than 12 months.
 No FYA is available in year of cessation of trade.
Note: Remember if Period of account exceeds 18 months then it must be split in two periods of account 1 st of 12
moths and 2nd of remaining months. Capital allowances are calculated for each period of account separately.

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Pro forma capital allowance computation---unincorporated businesse s

Capital Allowances for period of Account

General Special Asset with Short

pool Rate pool personal life Capital
use Assets Allowance
---30%
£ £ £ £ £ £
TWDV b/f XXX XXX XXX XXX
Additions
Not qualifying for AIA or FYA
Second hand car (up to 50g/km)
Car (50---110g/km) X
Car (over110g/km) (n-1) X X
Car with private use X
Qualifying for AIA or FYA
Special rate pool expenditure (n-2) X
Less: AIA(MAX £1000,000 in total) (X)
Transfer bal. to special rate pool X X
(n-3)
Plant and machinery X
Less: AIA(MAX £1000,000 in total) (X)
Transfer bal. to general pool X X

Disposal (lower of original cost or (X) (X) (X)

sales)
Balancing charge or Allowance(n-5) X X X X/(X) X/(X)
Small pool WDA ( n-4)
WDA at 18% (X) X
WDA at 6% (X) X
WDA at 6%/18%(depending on
emission) (X) × BU% X

Additions qualifying for FYAs:

(New Cars up to 50) X
Less: FYAs at 100% (n-1) (X) X

TDWV c/f X X X

Total Capital Allowances X

Notes to the pro forma capital allowance computation

1. Motor car
 New car with CO2 emissions up to 50 grams per kilometre 100% FYAs
 Car with CO2 between 51 and 110 grams per kilometre 18%
 Car CO2 emission over 110 grams per kilometre 6%

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 Car with private use are included in separate column regardless their CO 2 emissions and
only business proportion of allowance can be claimed but WDA is charged according to CO 2
emission of car
2. Allocate the AIA to the special rate pool expenditure in priority to general pool plan and
machinery assets as a WDA of only 6% is available on the special rate pool as opposed to
18% available on general pool
3. Expenditure qualifying for AIA in general pool which exceeds the level of AIA available is
eligible for a WDA of 18%
4. Small pools WDA can claim up to maximum balance before WDV of ≤ £ 1,000 on the general
pool and/or special rate pool only
5. Balancing charge: when the tax written down value of an asset is < gross sales
proceedsBalancing allowance: when the TWDV of the asset is > sales proceeds. This can
never be created on pools unless the business ceases

Structures and Buildings Allowance (SBA)

Introduction of SBA
 A Structures and Buildings Allowance (SBA) was introduced for qualifying expenditure
incurred on or after 29 October 2018.
 The allowance is 3% of cost from April 2020 on a straight-line basis for 33 1/3 years
 The building or structure must be used in a qualifying activity.
 The claimant must have an interest (freehold or leasehold) in the land where the asset is
constructed.
 The relief is available from when the structure or building is brought into use for the first
time for a qualifying activity.
 Where an accounting period is less than a year the allowance is reduced.
 There are no balancing adjustments on sale.
 As with other capital allowances a claim for the SBA must be made in the tax return.
What type of expenditure qualifies for the SBA?
 Capital expenditure on renovations or conversions of existing commercial structures or
buildings.
 Repairs incidental to the renovation or conversion of existing commercial structures or
buildings.
 Construction and associated costs and fees for new properties:
 Claims are restricted to the lower of:

o The actual amount of expenditure which must be evidenced.
o Market value.
What are qualifying activities?
SBA applies to capital expenditure on structures and buildings used for qualifying activities.  

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 A trade, profession or vocation.

 A UK or overseas property business that is not a Furnished Holiday let business. 
 Structures and buildings include:
 Offices, retail and wholesale premises.
 Walls, bridges and tunnels.
 Factories and warehouses.

Can I claim the SBA on expenditure on dwellings and land?

No. Expenditure on residential property and other buildings that function as dwellings will not
qualify:
What if my expenditure qualifies for other capital allowances?
 Qualifying expenditure can only be claimed once.
o Where parts of a structure or building qualify for allowances as Plant and machinery
or as Integral featuresand fixtures the expenditure is not allowed under the SBA.
How do I deal with qualifying expenditure which has multiple uses?
 Where a structure or building has multiple uses, an appropriate proportion of expenditure
will qualify for relief.
Do renovations and later additions to the property qualify?
 Capital expenditure after the date when the building enters into use qualifies for a separate
allowance with its own 33 1/3 years (this was 50 years prior to Finance Act 2020) period.
o Expenditure must be tracked per year to ensure the correct allowances are claimed.
What about changes in the use of the structure or building?
 Where a structure or building originally used for a qualifying activity has a change of use
and becomes a dwelling SBAs cease to be available for the period for which it is in use as a
dwelling.
What about when the building or structure is sold?
 Where an asset qualifying for relief is sold, the new owner can claim the allowance if it is
used for a qualifying activity. 
 There are no balancing adjustments on disposal.
 Where the SBAs are transferred to a new owner, the amount of the original expenditure
may need to be verified if SBA is not already being claimed (via an Allowance statement).
What is an Allowance statement?
 An allowance statement must be provided by the first owner and to all future owners to
enable them to claim the allowances or the qualifying expenditure will be treated as nil.
 An allowance statement is a written statement. 

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Chapter # 06 Basis Periods

Purpose of basis period
Individuals have to pay tax according to tax year which runs from 6 April to 5 April, but do not have
same period of accounts. Thus there must be a link between a period of account of a business and tax
year. Rules for matching tax adjusted profits of business with tax years are called basis period rules.

Opening year Basis period rule

Closing date of 1st period of account falls in tax year.
Ends before first 5 April
(same tax year or 1st Tax 2n tax Year 3rd tax year
year)
Year Basis of assessment
1st year 1st Basis period will be 1st Basis period will be from start of trade to 1st Basis period will be
from start of trade to following 5th April. from start of trade to
following 5th April. following 5th April.
2nd year Ongoing rule or current Check length of 1st period of account Basis period will be 2nd
basis rule ≥ 12 Months < 12 Months Tax Year
Basis Period will be Basis period will be Next 6 April to 5 April
12 month back from first 12 month of
closing date of 1st trade
period of account.
3rd year Ongoing basis or current Ongoing basis or current basis rule Basis period is 12 months
basis rule to end of period of
account
4th year Ongoing basis or current Ongoing basis or current basis rule Ongoing basis or current
basis rule basis rule

Current year or ongoing rule

In ongoing rule same period of account is basis period. Or basis period is the accounting year ending in the year
ofassessment (i.e. the tax year). For period of account ending 31 December 2019, profit will be taxable 2019-20

Closing year rules

If last two period of account end in the same tax year If the last period of account ends in separate tax year
 Basis period is combine the two period of account  The basis period is period of account itself and
and relieve the overlap profit relieve the overlap profit

Factors influencing the choice of accounting date

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The choice of accounting date is important for a sole trader for tax purposes as it affects the amount of
overlap profit s and the delay between earnings the profits and making the final tax payment (the
balancing payment is due 31 January after the end of the tax year)

31 March accounting date end

 No overlap profits on commencement
 Application of the basis period rules will be simplified
 Time between earning the profits and the balancing payment is minimised (10 months)
 The maximum period of assessment in the final tax year will be 12 months
30 April accounting date end
 Maximum period of overlap with no relief until cessation
 Time between earning the profits and the balancing payment is maximised (21 Months)
 The period of assessment in the final tax year could be up to 23 months long less any relief for
overlap profits

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Chapter # 07 Partnership
Definition of A partnership is a single trading entity. Each individual partner is effectively
partnership treated as trading in his own right and is assessed on his/her share of the
adjusted trading profit of the partnership.
Calculate Tax Adjusted Partnership’s tax adjusted profits or loss for an accounting period is computed in
trading profit the same way as for a sole trader and Partners’ salaries & interest on capital are
not deductible: these are an allocation of profit.
Capital allowance  After calculation of tax adjusted trading profit calculated capital allowance
same way as sole trader
 Deduct the capital allowance from tax adjusted profit to arrive tax trading
profit after capital allowance is distributed among the partners
 If assets are used privately, the business proportion is included in the
partnership’s capital allowances computation.
Allocations of trading Tax adjusted Trading profit/trading loss after capital allowance for the accounting
profit/trading loss: period is divided between partners according to their profit sharing ratio but after
deduction of Partner’s salaries and interest on capital.
A change in the profit  If the profit sharing agreement is changed during a period of account, the
sharing agreement: profit must be time apportioned before change and after change sharing
arrangement
 Profit and loss should be distributed according to old and new arrangement
Basis period rules  The profit is allocated between the partners for accounting periods
and thenthe assessment rules are applied.
 Each partner is effectively taxed as a sole trader on his/her share of
theadjusted trading profit
 Rules of basis period are same as sole trader
•Continuing partners will be assessed using CYB
• When a new partner joins a partnership, he is treated as commencing
a newtrade and hence the opening years rules apply
•When an old partner leaves a partnership he is treated as ceasing a
tradeand hence the closing years rules apply
•Each partner has his own overlap profit available for relief
Change in members of Until there is at least one partner common to business before and after the change,
partnership partnership continues. Commencement or cessation rules apply to individual joining
or leaving partnership.
Trading loss Each partner reliefs same way as sole trader

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Chapter # 08 Trading losses

Definition of Trading losses

A trading loss arises when the normal tax adjusted trading profit computation gives a negative result.
A trading loss can occur in two situations, as follows:
£ £
Tax adjusted trading profit / (loss) before capital allowances X (X)
Less: capital Allowance (X) (X)
Trading losses (X) (X)

Tax year of loss

Step # 1 calculate trading losses as calculated in above heading definition of loss
Step # 2 Make basis period according to trade cycle as ongoing or closing or opening years
Step # 3 Make loss reliefs according to available possible option or as per requirements
If the basis period has a trading loss, the trading profit assessment to include in the income tax computation
is nil. Note: remember in basis period profit overlapped but trading loss can never be overlapped.
Loss relief options ongoing years
Ifan individual makes a trading loss in the ongoing years, they initially have to decide whether to claim relief
against total income or carry forward all of the loss

Loss relief in
ongoing years

Optional Automatic (if no claim made)

Relief against Carry forward

trading losses
Total income
Relief against

Relief against

Chargeable gain

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Carry forward of trading losses

Trading loss may be carry forward and set-off from first available future trading profits from same trade.
 Losses may carry forward for indefinite number of years until all the loss is relieved.
 Partial claim is not allowed.
 Claim must be made to carry forward trading losses within 4 years from the end of year of loss. E.g
until 5 April 2025 for losses arising in 2020/21.
 It is disadvantageous from perspective of cash flow, time value of money, uncertainty about future
profit and relief may take long time to materialise.
Loss relief against total net income
Trading Losses may be set-off from total net income of
( a) Current year only OR( b) Previous year only OR (c) Current year and then previous year OR d) Previous
year and then current year.
• Partial claim is not allowed.
• Remaining loss after claim against total income may be:
– Set off against capital gains
– Set off against future trading profit.
• CAP limit for Current Year: Maximum loss that can be deducted from current year is
higher of:
– £50,000
– 25% of total income less gross personal pension cont.
• CAP limit for previous Year: Maximum loss that can be deducted from previous year is previous year CAP
limit (as above) plus previous year trading profit.
Note: Above CAP rule is not apply on trading profit
Claim for loss relief must be made by 31 January which is 22 months after the end of tax year of loss. E.g until
31 January 2023 for losses arising in 2020/21.

Performa of trading loss reliefs

2018-19 2019-20 2020-21 2021-22
Trading profit X X NIL X
Less: Trading losses b/f reliefs (X)
Employment income X X X X
Property income X X X X
Interest incomes X X X X
Dividend income X X X X
Total income XX XX XX XX
Less. Trading loss reliefs current
Trading income (x) (X)
Higher
- £50,000 (x) (x)
– 25% of total income less gross personal
pension contribution
Net income X x x X
Personal allowance (X) (x) (x) (x)
Taxable Income X x x X
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Relief of trading losses against capital gains

• Under this section current year trading loss can be set off against the chargeable gains of:
a) Current year only OR b) Previous year only OR
c) Current year and then previous year OR
d) Previous year and then current year.
The trading loss is first set against total income of the year of the claim, and only any excess loss is set
against capital gains. The remaining unrelieved trading loss may be set off as a deemed capital loss
against the taxpayer’s gains for the year; after setting off current year capital losses against current
year capital gains. It takes precedence over both the annual exemption (a level of tax free gains and
currently £12,300) and any capital losses brought forward4
• Partial claim is not allowed.
Claim for loss must be made by 31 January which is 22 months after the end of tax year of loss. E.g until
31 January 2023 for losses arising in 2020/21

Performa of trading loss reliefs

Taxable Gain £
Chargeable gain in year X
Less: capital losses in year (X)
X
Less: trading losses
Lower of:
- Remaining losses or
- Chargeable gain in the year after deducting Current and brought forward capital losses (X)
Less: Annual exemption ( £12,300) (X)
Net chargeable gain before capital loss brought forward X
Less: capital gain brought forward (x)
Chargeable gain X

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Relief for trading losses in the opening years

Loss relief in
Automatic if no specific
Optional Opening years claim made
Optional
Special 3-years Carry forward
Relief against
carry back-relief Relief
Optional
Total income

Remaining loss
Relief against

Chargeable gain

The procedure to adopt for dealing with an opening year loss is as follows:
Step 1: Trading income assessments for each tax year
 The opening year basis of assessment rules are applied to both profits and losses in the normal way.
However, where an overall net loss arises (i.e. where the calculations give a negative figure), the
trading income assessment for that tax year is £Nil. Losses never overlap in basis period.
 A loss may only be relieved once. If, in the opening years, a loss has been taken into account in
computing the assessment of one tax year, it is treated as nil when calculating the next assessment
Step 2: The loss relief available, the tax year(s) to which the loss(es) relate and the
options available for loss relief
 If an individual makes trading losses in the opening years is calculated in Step 1,he has to decide
whether to claim normal relief against total income, special opening year loss relief or carry
forward
Step 3: Prepare the income tax computations and keep a record of the losses
 In answering an examination question, read the requirements carefully. Some questions require
losses to be claimed in a specified way; other questions require losses to be utilised in the most
tax-efficient manner. Tax planning is considered later.
Relief of trading losses incurred in early years of trade (opening years loss relief)
• Trading loss incurred in any of the first Four Tax years of trade then this loss may be set off against total
income of previous 3 years on FIFO basis. Relief is on a FIFO basis means(i.e. the earliest year must be
relieved first and then the next year and the year after that, in date order). i.e. opening loss of 2020-21 is
set off in this order: firstly 2017-18 Secondly 2018-19 and Thirdly 2019-20
• Early years trading loss can be relieved through:
a) Opening year loss relief OR b) Relief against total income OR c) From Capital gains OR d) From future
trading profit

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• Partial claim is not allowed.

• Claim for loss relief must be made by 31 January which is 22 months after the end of tax year of loss. E.g.
until 31 January 2023 for losses arising in 2020/21.

Terminal loss relief

Loss relief in closing year

Optional
Terminal loss relief Relief against total
carry back against income
trading profits
Optional

Relief against

Chargeable gain

If an individual makes a trading loss in the closing years, they have to decide whether to claim relief against
total income (and then possibly offset against gains) or claim terminal loss relief against trading profits.

Terminal loss: If trade ceases then Loss of last 12 month of trade may be set off against trading income of previous
3 years on LIFO basis. Relief is on a LIFO basis means The most recent year must be relieved first and then
the previous year, and so on, in reverse date order. i.e. terminal loss of 2020-21 relieved in the following
order :firstly 2019-20 secondly 2018-19 and 2017-18
The terminal loss is loss of the final 12 months of trade, calculated as follows:
£
6 April before cessation to the date of cessation
Actual trading loss in this period (ignore if a profit) X If profit Nil
Plus : Overlap profits not yet relieved X
Plus: 12 month before cessation to 5 April before cessation
Actual trading loss in this period (ignore if a profit) X If profit Nil
Terminal loss X
Note: that loss can only be relieved once. Therefore terminal loss cannot include the loss that have been
relieved under the another provision. In the other word loss relieved against the total income or capital gain,
if any must excluded
Claim must be made within 4 years from the end of year of loss. E.g. until 5 April 2024 for losses arising in
2019/20.
The procedure for closing year loss relief
The procedure to adopt for dealing with a closing year loss is as follows:
Step 1: Identify the last tax year. Work out the trading income assessments for
the final year and preceding three tax years
The closing year basis of assessment rules are applied to both profits and losses in the normal way.

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However, where an overall net loss arises from applying the rules (i.e. the calculations give a negative
figure), the trading income assessment for that tax year is £Nil.
Step 2: Work out the amount of loss relief available, the tax year(s) to which the loss(es)
relate, and the options available
If an overall net loss is calculated in Step 1, Consideration should be given as to whether to relief against
total income or relieves against total income and capital gain is desirable.
For a decision, look at the income tax computations set up and determine whether a higher rate of relief
is obtained by making a relieves against total income and possibly of capital gain claim, rather than
carrying back the loss under terminal loss reliefs
The terminal loss then needs to be calculated, taking account of total income and capital gain claims to be
made, if any. This calculation should be done in a separate working.
Step 3: Complete the income tax computations
Relieve the terminal loss on a LIFO basis, and keep a record of the utilisation of losses for all tax years
involved.
Partnership Losses:
1. Losses are allocated between partners in the same way as profits.
2. Loss relief claims available are the same as for sole traders.
3. A partner joining the partnership may claim under opening years loss relief, for losses in the first four tax
years of his membership of the partnership. This relief is not available to existing partners.
4. A partner leaving a partnership may claim under terminal loss relief. This relief isnot available to partners
remaining in the partnership.
Partnership investment income: Interest and dividend income is kept separate from trading profit but
are shared among partners according to their profit sharing ratio. After sharing income each partner is taxed
independently.
Limited Liability Partnership: If partnership is limited liability partnership then the partners share the
trading loss among themselves up to maximum of capital they have contributed in the partnership.
Chapter # 09 Pension
Pension meaning:-Pension of scheme is fund of asset set up with the intention of providing lump sum
benefits and regular income (pension) for members of scheme on their retirement and or benefits
dependants after their death
Type of pension:-
1- Occupational pension scheme:Occupation pension scheme is a scheme operated by employer
for solely the benefit of his employee. This scheme is only relate to employee.
Type of occupational pension schemes
I. Defined benefit scheme: the benefit obtained on retirement are linked to the level of earnings
of the employee
II. Money purchase scheme: the benefits obtained depend upon the performance of the invests
held by the pension fund
2- Personal pension schemes:-Personal pension scheme is a pension scheme managed by taxpayer
himself through some financial institutions like an insurance company
Personal pension plan do not relate to particular job, trade or profession they are personal to
individual taxpayer and are set up for the duration of life, regardless of his employment status
Tax consequence of pension
1 - Tax relief for contribution made by individual (both PPS and OPS)

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Lower of two
1- Higher of
 100% relevant earnings of the taxpayer, being mainly employment income and/or
trading profits plus any profits fromfurnished holiday lettings, and Note-1
 £3,600 of gross contribution
2- Total gross pension contribution paid

Relevant earnings NOTE -1

1. Net relevant earnings of an individual who is not working
Individual who are not working, he will not have no net relevant earning and therefore his maximum
(gross) contribution is £3,600
1- Net relevant earnings of working individuals
Where individual is working his net relevant earnings depend on whether he is employed or self-
employed and it is calculated as follow:
Employed individual Self-employed individual
£ £
Employment income (including benefit) X Trading income X
Profit form Furnished holiday letting X Less: trading losses (X)
Profit form Furnished holiday letting X
Net relevant earning X Net relevant earning X

2etoPersonal Pension scheme contribution

When an individual contributes into a personal pension scheme, so the tax relief is given as follows:
1. Basic rate tax relief is paying net of 20% – For example, if an individual want to make a personal
pension contribution of£1,000, he needs to pay 80% and HMRC will make the remaining
20%contribution on his behalf. Therefore, he will pay £800 and HMRC will pay £200 to the fund.
2. Higher rate and additional rate taxpayers achieve higher and additional rate relief by Increase the
basic and higher rate bands by the gross personal pension contribution.
3. Gross personal pension contributions are deducted from net income to arrive atadjusted net
income.ANI is used to determine the amount of personal allowanceavailable.
4. Any amount contributed by the employer for employee shall be exempt benefit
I. Occupation pension contribution:
1. Any amount contribution by the employee himself shall be deducted from his salary as Allowable
deduction
2. Any amount contributed by the employer for employee shall be exempt benefit
3. Any amount contributed by employer in OPS is allowable deduction from his trading profit
Annual Allowance
Annual  Individual can contribute any amount into pension scheme but relief is available on
Allowance maximum annual allowance. Annual limit is 40,000 for 2020-21
 If the total of all contributions (by the individual, their employer and third parties) on

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which tax relief has been obtained exceeds the annual allowance (AA), a tax charge is
levied on the individual exceeds amount know annual allowance charge
Tapered  If individual AI (Adjusted Income) is more than £240,000 then the CURRENT year
Annual Allowance is a tapered allowance
Allowance  It means that the normal annual allowance of £40,000 is reduced by £1 for every£2 by
which a person’s adjusted income exceeds £240,000, down to aminimum tapered
annual allowance of £4,000.
 Formula for Tapered Annual Allowance =(AI -£240,000)×50% but subject to minimum
allowance £4,000
 Definition of Adjusted income for pension
Employed individual Self-employed individual
£ £
Net income (after deduction of trading X Total income X
losses and qualifying interest)
Plus: Employee contribution to OPS X Less: trading losses (X)
Plus: Employer contributions to Less: qualifying interest (X)
occupational and /or personal pension
schemes
Adjusted total income X Adjusted Income/net income X
Calculation Annual is an allowance given to individuals every year. The individual can use the
of Annual allowance yearly, and the amount unused is carried forward for 3 years but only if they
Allowance are a member of registered pension scheme in those years. Therefore, at any particular
time, an individual can use their current year allowance plus 3 years’ b/f unused annual
allowances on a FIFO basis. The gross contributions are deducted from the annual
allowances first from current year and 16-17 onward
Calculation of annual allowance table
Annual Tapered annual allowance Used Annual Annual Allowance
Tax year Allowanc If ATI >£240,000 minimum tapered Allowance for tax year
e annual allowance of £4,000 previous year 2020-21
20/21 40,000 40,000 -(AI-240,000) × 50% = Not Applicable X first used
subject to minimum AA £4,000
17/18 40,000 40,000 -(AI-240,000) × 50% = (X) X second used
subject to minimum AA £4,000
18/19 40,000 40,000 -(AI-240,000) × 50% = (X) X third used
subject to minimum AA £4,000
19/20 40,000 40,000 -(AI-240,000) × 50% = (X) X 4th used
subject to minimum AA £4,000
Annual Allowance XXX
Remember: it is still possible to use brought forward unused annual allowance in the tax year
2020-21 if a tapered annual allowance applies for this year. However, it is the tapered annual
allowance for 2020-21 which is used to establish whether any carried forward is available
from this year to future tax years.

Annual Allowance - Annual allowance charge =

charge (Pension payment that qualifies for tax relief during the tax year --
Annual allowance available) × top slice/marginal rate of tax taxpayer pay

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- Additional amount is treated as non saving.

Payment of t annual - The AA charge becomes part of the individual's total tax liability and is
charge tax either paid through the self assessment system or, in some cases, may be
taken from the individual's pension fund.

Receiving benefits from pension arrangements

Access - Pension Benefit isreceived when an individual is aged 55 years or more. At eligible age
Individual can take tax free lump sum payment of lower of:
pension a) 25% of amount in fund b) 25% of Life time allowance
fund - Remainder 75% amount in fund is used to provide pension income and fund are taxed
as non-savings income in the tax year they are withdrawn at the normal rates of
tax (i.e. 20%, 40% or 45%). Pension can be claimed before this age if the individual is
incapacitated due to ill health.
Life Time An individual can contribute £1,055,000 during his life time. If contribution exceeds
£1,055,000 then There will be a tax charge of:
Allowance ● 55%Tax on excess, if the excess pension funds are taken lump sum. ● 25%Tax on
excess, if the excess pension funds are used to provide pension income.

ter # 10 Self Assessment of Individuals

Self Assessment:-The self assessment system relies upon individual completing and filing tax returnThe
return first part details income and capital gains for the tax year, the second part shows the calculation
of the income tax liability and paying tax due. The system is enforced by a system of penalties for failure
to comply with in set period of time limits and by the interest for late payment of tax.
File Return Amendments: correction of errors in the tax
Paper return: later of return
 31st October following the tax year or By HMRC: within 9 months of the actual filing
 3 months after issue of notice date
For example 2020-21 due date is 31st October 2021 By Individual: The taxpayer can give notice to an
Online Return: later of officer to amend his tax return within 12 months
 31 January following tax year or
st
of the 31 January filing date regardless of
 3 months after issue of notice whether the return is paper based or filed
st
For example 2020-21 due date is 31 January 2022 electronically.

Notification of chargeability:
 It is the responsibility of individual who
receives a source of income subject to
income tax or capital gains tax must notify
HMRC by 5th October following the end of

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the tax year the source arose

 Standard penalty is imposed in case non
compliance. standard penaltybased on a
percentage of tax unpaid on 31 January
following the end of the tax year
 Deadline: 6 months after tax year --- 5th
October of following tax year i.e. tax year
2020-21 5 October 2021
Penalty for late submission
Date return is filed Penalty
After due date £100 fixed penalty
>3 months late £10 per day for 90 days +£100 fixed penalty
> 6 months late 5% of tax due (minimum £300), + above penalties
>12 months late
•Additional 5% of tax due (minimum £300) + above
– not deliberate
penalties
– deliberate but no concealment • 70% of tax due (minimum £300) + above penalties
– deliberate with concealment • 100% of tax due (minimum £300) + above penalties
Determination of Tax due: where the tax return is not submitted on time, the HMRC can determine the
amount of tax liability on the behalf of the tax payer. They have 3 years from the filing date to do so and
the only way to get this removed is by submitting the actual return

Records:
(1) business or property letting records: Records must be retained until five years after the filing
date, which is 31 January 2027 for the year 2020/21 if the tax payer has a business or has properties to
let
Non business records: other tax payers keeps the records later of : 12 months after 31 January the
filling date or the date complete or impossible start of compliance check
Important Note: if a person is in business and has non business income then all records must be
maintained for the same 5 year period
Penalty: A failure to retain records can result in a penalty of up to £3,000. The maximum penalty will
only be charged in serious cases
Payment of Tax
Type of income Due date under Payment on account due date
normal return
Trading profit 31 January 2022 31/1/2021 1st POA 31/7/2021 2 nd POA
31/1/2022 Balancing payment
Property business 31 January 2022 31/1/2021 1st POA 31/7/2021 2 nd POA
31/1/2022 Balancing payment
NIC class 4 31 January 2022 31/1/2021 1st POA 31/7/2021 2 nd POA
31/1/2022 Balancing payment
NIC class 2 31 January 2022 No payment on account is required
Saving income 31 January 2022 Not applicable POA

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Dividend income 31 January 2022 Not applicable POA

Employment income PAYE payments made electronically on the 22nd of the month under the
Real Time Information reporting system. (self assessment is not applicable)
NIC class 1 employer PAYE payments made electronically on the 22nd of the month under the
Real Time Information reporting system. (self assessment is not applicable)
NIC class 1 employee PAYE payments made electronically on the 22nd of the month under the
Real Time Information reporting system. (self assessment is not applicable)
NIC Class 1 A Payable by 22nd July following the end of the tax yea for example tax year
2020-21 22nd July 2021

(1)Normal return:-Individual pay his income tax , class 2 NIC, class 4 NIC and Capital gain tax 31
January following end of tax year i.e. 31 January 2022 for tax year 2020-21
(2)Payment on account:- Individual pay tax POA with exceptions to this are if:
The relevant amount for the previous tax year is less than £1,000, ormore than 80% of the income tax
liability for the previous tax year was met by deduction of tax at source.
1st POA: 31st January 2021 (50% of relevant amount =( Income tax+ class4 NIC – tax deduct at source)
2nd POA: 31st July 2021 (50% of relevant amount =( Income tax+ class4 NIC – tax deduct at source)
3rd POA: 31 January 2022 (Balance of payment =
( Income tax+ class 2 NIC+class4 NIC+ capital gin – tax deduct at source - POA)

Reduce payments on Accounts:-The taxpayer can claim to reduce payments on account at any time
before 31 January following the tax year. This would be done if actual income tax and class 4 NIC is
expected to be less than the previous year. If the claim is incorrect, penalties and interest will be
charged. The maximum penalty is the difference between the amounts actually paid on account and
the amounts that should have been paid on account.
Interest (1)Late payment interest: Interest is charged on late payment of tax at a rate of 2.75%. For
2020/21 Payment on account: Interest runs from 31/1/2021 or 31/7/2021 Other payments: Interest
runs from 31/1/2022.Interest charged is not tax deductible for individuals
(2)Repayment interest: If tax is repaid, HMRC pay interest at a rate of 0.5% p.a. from 31 January, or if
later, the date of original payment. Interest received is not taxable for an individual.
Penalty/ surcharge for late Payment:where income tax, class 2 NIC, class 4 NIC or CGT is paid late.
Penalties do not apply to POAs.
1month late: 5% of unpaid amount
6 months late: Additional 5% of unpaid amount
12 months late: Additional 5% of unpaid amount
Standard penalty is imposed on failure to notify about chargeability, submission of incorrect tax
return, failure to notify HMRC of understatement and deliberately supplying wrong information
The maximum penalties can be reduced wherethe taxpayer informs HMRC of the error (i.e. makes a
disclosure), andco-operates with HMRC to establish the amount of tax unpaidwith larger reductions
given for unprompted disclosure. Unprompted disclosure is one made at a time when HMRC has not
discovered, or is not about to discover error.
Maximum penalty(% of Minimum penalty(% of
Taxpayer behaviour
revenue lost) revenue lost)
Genuine Mistake (incorrect return) No penalty Unprompted Prompted
Careless/Failure to take reasonable care 30% 0% of PRL 15% of PRL

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Deliberate but no concealment 70% 20% of PRL 35% of PRL

Deliberate with concealment 100% 30% of PRL 50% of PRL
Claims (a) All claims and elections which can be made in a tax return must be made in this manner if a
return has been issued.
(b) The time limit for making a claim is 4 years from the end of the tax year, unless a different limit is
specifically set..
Error or mistake claim The time limit is 4 years from the end of the tax year to correct errors in a
tax return when the tax would otherwise be overcharged, for 2020/21 this will be 5 April 2025
Compliance check Enquiry: HMRC can enquire into a return within 12 months of the actual filling date
to ensure the accuracy and completeness of return. The compliance check ends when HMRC gives
written notice that it hasbeen completed. The notice will state the outcome of the
enquiryeithertoconfirmation that no amendments are required or amendments to the self-
assessment.The taxpayer has 30 days to appeal against any amendments by HMRC. The appeal must be
written
Discovery Assessment: HMRC can normally carry out an enquiry within 12 months of the actual filing
date but can raise discovery assessment at a later date where fraud or negligence is suspected and full
disclosure has not been made
Basic time limit: 4 years from the end of the tax year or Accounting period
Careless Error: 6 years from the end of tax year and deliberate Error :20 years from the end of tax year
Taxpayers right of appealagainst an assessment30 days from the assessment appealin writing
Appeal: if the taxpayer is not satisfied with any of the decisions of HMRC. They file appeal against
decision (i) Implosion of a penalty and surcharge (ii) Appeal against a discovery assessment (iii)
Appeal against amendment made to self-assessment as a result of enquiry etc.
Appeal should be made in writing and must be made within the 30 days of relevant event. It must also
state ground of appeal. Initially appeal made to HMRC for internal review
Appeal to HMRC
Appeals are initially made to HMRC.An officer unconnected with case will undertake review ,the review
must normally be carried out within 45 days ,The taxpayer then has 30 days in which to appeal an
tribunal against internal review
Tax Tribunals
Tribunal system consist of First tier Tribunal, and Upper Tribunal.
The first tribunal deals all and less complex cases but upper tier tribunal deals with more
complex cases and appeal against first tier tribunal decision
Cases are allocated one of the four tasks this will depend on the issues and the amount of tax at
stake.
I. the “paper” track - will hear the simplest appeals, such as an appeal against a fixed
penalty and the case will be normally decided by the tribunal without a hearing
II. The “basic” track will involve a hearing but the exchange of documents beforehand will
be minimum.
III. The “standard” track will involve cases that are more detailed in case management and
formality.
IV. The “complex” track will be for long or complex cases or those that involve a
If decision of first tier tribunal is based on
I. A matter of fact the decision is binding and final
II. The point of law then case can be referred to upper tribunal but only with permission of
either first tier tribunal or upper tribunal

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Decision of upper tribunal can be referred to court of appeal. However, the grounds of appeal
must always relate to a point of law.
Income Tax Fraud There is a statutory offence of evading income tax. The penalty may be up to
seven years in prison or an unlimited fine or both

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