TX-UK Career Compass Complete Guide FA2021

Complete Guide For
ACCA UK Taxation (TX)
UK TAX
SIMPLI IED
C AREER Dipan Ghataliya

C O M PA S S
Index
Chapter No Chapter name Page No
1 UK Tax System 1
Income Tax
2 Income tax computation 5
3 Property Income 13
4 Employment Income 20
5 Pension 31
6 Income Tax Planning 37
7 Income from self employment 39
8 Capital allowance 50
9 Basis period 63
10 Partnership 65
11 Trading loss for Individuals 70
12 National Insurance Contribution 80
13 Self Assessment for individuals 83
Corporation Tax
14 Corporation Tax Intro 92
15 Calculation of Corporation Income 96
16 Corporation Tax Losses 103
17 Groups and Consortia 105
18 Self Assessment for Companies 113
Capital Gain Tax
19 CGT : Computation 119
20 CGT : Variations to computations 126
21 CGT : Shares & Securities for Individuals 133
22 CGT : Reliefs for Individuals 136
Inheritance Tax
23 An introduction to IHT 144
VAT
24 VAT Outline 155
25 Administration of VAT 173
C AREER
C O M PA S S
CHAPTER-01
ACCA
(FA20)
UK
TAX SYSTEM
MR. DIPAN GHATALIYA MO : (+91 ) 95122 35353

Purpose Of
Taxation
ECONOMIC FACTORS
Spending by the govt. & the taxation income impacts the economy
Taxation policies also impacts factors such as employment levels,

inflation and imports/exports
Taxation policies can affect the behavior like

a. They encourage individual saving habits (Individual Savings Accounts),
b. Gift to charity (Gift Aid Scheme).
Further they may discourage

a. Motoring (fuel duties)
b. Smoking & alcohol (duties and taxes)
c. Environmental pollution (landfill tax)
As government objectives change, taxation policies may be

altered accordingly.
SOCIAL JUSTICE
The taxation system accumulates and redistributes wealth within
a country.
1
Structure of
the UK tax System
Role & Responsibility
Chancellor of the Overall responsibility for the UK tax system and

Exchequer preparation of budget
Chancellor for the imposition and collection of

Treasury
taxation.
The Treasury appoint permanent civil servants,

the Commissioners .Their duties include:
Commissioners
Administering the UK tax system
Implementing tax law.
HM Revenue and Customs (HMRC) is a single

body that controls and administers all areas of
UK tax law.
District offices
The Commissioners appoint Officers of HMRC to
HMRC carry out the day to day work of managing the
tax system.
Accounts and payments offices
Accounts and payments offices deal with
the collection and payment of tax
2
Principles of Taxation
Progressive taxation
As income rises the proportion of taxation raised also rises.
(Ex. UK income tax)
Regressive taxation
As income raises the proportion of taxation paid falls,
(Ex. tax on cigarettes)
Proportional taxation
As income rises the proportion of tax remains constant.
(Ex. VAT)
Types of Taxes
Income Tax NIC Capital Gains Tax
Inheritance Tax Corporation Tax VAT
3
Direct & Indirect Taxation
Direct taxation
Taxes are paid directly to the Government, based on income and profit.
e.g. Income tax, Corporation tax, Capital gains tax, Inheritance tax.
Indirect taxation
Taxes are collected via an intermediary who passes them on to the
Govt. like VAT, where the consumer pays VAT to a supplier, who then
pays to the Govt.
Dishonest Conduct
There is a civil penalty of upto £50,000 for dishonest conduct of
tax agent. If penalty exceeds £50,000 then HMRC may publish
details of the penalized tax agent. HMRC may check the working
papers of a dishonest agent with the agreement of tax tribunal.
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C AREER
C O M PA S S
CHAPTER-02
ACCA
(FA20)
INCOME TAX
COMPUTATION

Conditions To Income Tax
Income Tax will be levied if all the below conditions are satisfied,
Tax Year = 6.4.21 – 5.4.22 (2021-22)
Taxable Income
Taxable Person
UK Resident = Pay Income tax on UK and overseas incomes
Non UK Resident = Pay UK Income tax on UK Income only.
Exempt Income Taxable Income
Int from NS&I Certificate Employment Income
Gaming, batting & Lottery Property Income
Premium bonds winning Dividend Income
Scholarship to Tax payer Trading Income
Income from ISAs Pension Income
State benefits (Accident) Saving Income
Int on repayment of tax Income from Trust
5
Performa for Income tax
Particulars Total NSI SI DI
Dividend Income x
Interest Income x
Pension Income x
Employment Income x
Trading Profit x
Property Income x
Trust Income x
Total Income x x x x
Less : Relief (1) (2) (3)
Net Income x x x x
Less : Personal Allowance (12,570) (1) (2) (3)
Taxable Income x x x x
NSI X Tax rate X
SI X Tax rate X
DI X Tax rate X
Less : PAYE (X)
Income Tax Liability X
6
Reliefs
Trading Loss.
Qualifying Interests :
Interest paid on qualifying loan is qualifying interest. Loan is
qualifying if,
To purchase plant and machinery by a partner.
To invest in partnership by a partner.
To purchase plant or machinery by employee for use in job.
To purchase shares in an e'ee controlled trading company

by fulltime employee.
Tax Rates
Income NSI SI DI
Starting Band Rate £ 1 – £ 5000 20% 0% 7.5%
Basic Rate Band £ 5001 – £ 37700 20% 20% 7.5%
Higher Rate Band £ 37701 – £ 150000 40% 40% 32.5%
Additional Rate Band £ 150001 & above 45% 45% 38.1%
First £ 2,000 of the dividend income will always be taxed @ 0% for

all tax payer.
Interest income will be taxed at 0% on amount of £ 1000 for basic
rate tax payer and £500 for higher rate tax payer. This relaxation
will be applied after utilizing starting rate band.
7
Personal Allowance
Total Net Income
< 100,000 > 100,000
PA = 12,570 Adjustment Net

Income
Total Net Income X
Less : Gross Gift aid donation* (X)
Less : Personal Pension Contribution* (X)
ANI X
ANI
< 100,000 > 1,25,140 100,000 - 125,140
Reduction in PA
PA = 12,570 PA = 0 50% X (ANI-100,000)
If you give donation of 80 then HMRC will add 20 and receiver will
get total 100 of donation
*Gross amount = Net X 100/80
8
Extension of Band
Extend Basic, Higher and Additional Rate Bands if taxpayer made
gift aid donation or personal pension contribution
Ex : Gross PPC = £ 10,000
Normal Rate Bands Extended Rate Bands
1-5000 = 5000 1 – 5000 = 5000
5001-37500 =- 32500 5001 – 47500 = 42500
37501 – 150000 = 112500 47501 – 160000 = 112500
Above – 150000 = Above 160000 and above = Above
In the case of Extension of Band, only effective amount of basic rate

band (32,500) will be extended by gross amount of gift aid donation
and personal pension contribution.
Marriage Allowance
If both spouses are BASIC rate tax payer then they can transfer
personal allowance of 1260 to each other which is called marriage
allowance.
The receiving spouse do not have an increased personal allowance

but they are entitled to tax reducer of £ 1250 x 20% = 252.
If income tax liability is less than 250 then it cannot create the
repayment.
9
Child Benefit
Income Tax Charge
It is a tax free payment from government for children of tax payer.
Now have to see that tax payer was poor or not in tax year.If tax
payer is not poor then have to refund child benefit to HMRC and that
is called child benefit Income tax charge. It will be added to income
tax liability and paid to HMRC with income tax.
Who is Poor?
Mother and father's adjusted Net Income is <50,000.
Who is Rich ?
Mother or father's adjusted Net Income is > 50,000.
Parent with higher ANI have to pay charge.
Poor's do not have to refund the child benefit. Rich have to refund it,
that is called child benefit income tax charge.
ANI Income Tax Charge
< 50,000 Nil
ANI - 50,000
50,000 - 60,000 =%
100
Tax charge = Child Benefit x %
> 60,000 Tax charge = 100% Child benefit
10
Residential Status
Step 1- Automatic Overseas Resident

A person will automatically be treated as overseas resident
(not resident in UK) if he is present in UK for:
Maximum 15 days in tax year.
Maximum 45 days in tax year and who has not been UK

resident in previous three tax year.
Maximum 90 days in a tax year and who works full time

overseas
Step 2- Automatic UK resident person

A person who is in the UK for 183 days or more during a tax
year.
A person whose only home is in UK.
A person who carries out full time work in UK.
Step 3- Sufficient ties test

If a person is not treated UK resident as per automatic tests,
then his status will be based on no of ties with the UK and
no of days they stay in the UK during a tax year
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UK TIES
Having close family (a spouse/civil partner or minor child) in the UK.
(family)
Having a house in the UK which is made use of during the tax year.
(accommodation)
Doing substantive work in the UK where 40 days or more is regarded

as substantive. (work)
Being in the UK for more than 90 days during either of the two
previous tax years. (Days in UK)
Spending more time in the UK than in any other country in the

tax year. (Country)
(Table will be available in the exam to determine residential status

through UK Ties test.)
Individual Savings account

ISA can be opened by individual aged ≥18 (16 for cash ISA) and
resident in UK. Income received is exempt from income tax and
gain on disposal of investment is exempt from CGT.
Types of Investment
Cash and cash like equity Products Stocks & Shares
Subscription limits
For the tax year 2020-21 a person can invest up to £20,000 in ISA.
The £20,000 limit is completely flexible, so a person can invest
£20,000 in a cash ISA, or they can invest £20,000 in a stocks and
shares ISA, or in any combination of the two. ISA limit of £20,000
will be extended by ISA deposit amount of deceased person.
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C AREER
C O M PA S S
CHAPTER-03
ACCA
(FA20)
PROPERTY
INCOME

Property Income
Property Income means Any return from property without disposing
the property.
Rental Income
Annual Rent
< 150,000 > 150,000
Cash Basis Accurual Basis
Rent Received X
Less : Expenses paid (XX)
Replacement Relief (XX)
Finance Cost NIL/XX

Property Income XX
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Finance Cost
Residential Property Basic rate tax reduction from Income tax
liability directly and no deduction from
Property Income.
Non Resi. Property Full deduction from property income

& FHL
Capital Expenditure
Under the cash basis there is no distinction between capital &
revenue expenditure – expenditure on plant and machinery
(except cars) e.g. maintenance tools, office equipment are
allowable expenditure.
This rule does not apply to :
Cars
Assets provided for use in a residential property e.g. TV,

furniture (Replacement domestic items relief given)
Capital expenditure on land and building
Repairs is allowable expenditure
Enhancements not allowable
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Cars
Option-1 Option-2
Capital allowances are available Alternatively, HMRC's approved
on the capital cost of the cars. mileage allowances can be
In this case the actual motoring claimed instead of capital
costs e.g. petrol, insurance are allowances and actual motoring
also deductible costs
Replacement Relief
The Replacement of domestic item relief is available when we have
an Residential property (which has been let out) with some furniture,
appliances & kitchenware with that and in the current tax year we
are replacing any of the item with the new one then the
replacement cost is allowed as an deduction from total property
income of that tax year.
The original cost of furniture is not available for relief. Net

replacement cost will be allowed. (Proceeds from selling of old
furniture should be deducted).
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Qualifying assets for Relief
Moveable Furniture = Sofas, Tables etc.

Furnishings = Curtains, carpets etc.
Household appliances = Refrigerator, AC, Washing machine etc.
Kitchen ware = Crockery, cutlery etc.
However, Fixtures are not part of Domestic items and do not qualify
for replacement relief. Example: Bathtub, Water heating system,
boiler, fitted furniture (Built in cupboard or wardrobe)
If New item is substantially of the same standard as the old item
Cost of New Iteam XX
Less : Proceeds of sale of old item (XX)
Add : Cost of disposing/installing old/new item XX
Available deduction XX
Any improvement cost is also not allowed.
Relief is not allowed for FHL or accommodation for which rent a

room relief has been claimed.
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Rent a Room Relief
Option-1 Option-2
Normal Rental Treatment Rent xx
Less : Rent a Room Relief (7500)

xx
If total rent is divided between husband and wife for the tax
planning purpose then rent a room relief will be given 50-50% to
both. Both party will get the 3750 relief.
Property Business Loss
Step-1
Set off against CY property income from other properties.
Step-2
Carry forward and deduct the first available property income
of future year. Carry forward indefinitely.
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Furnished Holiday Letting
FHL income is calculated on cash basis unless gross rental income
exceed £150,000.
Conditions to qualify as FHL

Property must be situated in UK or EEA (European Economic Area)
may qualify as FHL.
Must be furnished and let commercially to earn profit.
Available for letting to general public for >_ 210 days in a tax year.
_ 105 days in a tax year (Excluding long term letting).

Actually let for >
Not available for long term letting. If let on long term then total of
such letting should not exceed 155 days.
Benefits of FHL
Capital allowance will be available in respect of furniture and
equipment instead furniture replacement allowance.
FHL profit are considered as relevant earnings for personal pension

contributions.
BPR @ 100% is available in IHT.
CGT Rollover relief, Gift relief or BADR is available.
Finance Cost are 100% available for deduction.
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Real estate investment trust
It is a trust which is quoted/ listed in stock exchange and it holds
diversified portfolio of investment property to earn rentals & capital
appreciation.
Dividend received from REIT is net of 20% tax and not treated as
dividend income instead it will be treated as property income &
grossed up by 100/80.
Premium on Grant of
Short Lease(< 50 Years)
51-n
Taxable premium = Total premium x
50
Example,
Lease
Mr.A Mr.B
n = 40 years
p = 100,000
51-40
Taxable premium = 100,000 x
50
= 22,000
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C AREER
C O M PA S S
CHAPTER-04
ACCA
(FA20)
EMPLOYMENT
INCOME

Determining
Factors
Following factors are considered in order to determine whether a
person is employee or Self employed
Contract of service.
Obligation of work.
Place of work (Decided by employer)
Payment (Fix Monthly / Weekly)
Equipment (Provided by employer)
Insurance (Provided by employer)
Financial Risk (Employee have no financial risk)
Control (Employer decides work and time of work)
Calculation of Employment Income

Salary X
Bonus/Commission X
Benifits X
Reimbursed Exp. X
Cash Vouchers X
Other Taxable Benefits X
XX
Less : Allowable Deducation (X)
Add : Redundancy Payment X
Less : Exemption (X) X
Employment Income X
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Allowable Deduction
Qualifying Travel Allowance*.
Fees and subscription to prof. bodies.
Gift aid donation under payroll deduction scheme.=
Cost of any shares acquired in SIP
Contribution to occupational pension scheme.
Capital allowance in respect of equipment which is being used in

employment.
Approved Mileage allowance*.
Receipt Basis Rule

to calculate Earnings
For all employees For all directors
Earnings are deemed Earnings are deemed to be
to be received on earlier of received earlier of
Payment date Payment date
Entitlement date Entitlement date
When Amt recorded
as liability in company a/c
Later of,
Year end Date
determination date
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Approved Mileage Allowance
MA is paid by employer if employee used his own vehicle.
Amount upto AMA is exempt, Excess is taxable.
Car / Van - 10,000 miles £ 0.45
Above 10,000 miles £ 0.25
Motor Cycle £ 0.24
Cycle £ 0.20
Passenger Allowance 5 pence per mile
Example, If for car company gave
60 p per mile
then total miles x 15 P = Taxable benefit
(Difference of 0.45 – 0.60)
45 p per mile
Received = Allowed by HMRC (No taxable benefit)
30 p per mile
Employer gave you less allowance then stated by HMRC.
So you should get the benefit upto 45 p. So difference amount 15 p

can be added in allowable deduction.
Note : Any shortfall because of passenger allowance is not allowed

for allowable deduction. If paid more than 5 p, only excess benefit
because of passenger allowance is taxable.
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Important Exempt Benefits
Non cash trivial benefits costing upto £ 50.
Employer's contribution to a registered pension scheme.
Pension advice upto £ 500 per employee per tax year for
pension advice. The support must be available to all employees
or all employees of a certain category.
Provision for work buses, bicycle & subsidies for public transport.
One mobile phone per employee.(For Private Use)
Staff parties of upto £ 150 P.A. per employee.
Entertainment to employee by third party because of employment.
Gift received because of his employment from third party provided

cost from any one source does not exceed £ 250 in a tax year.
Job related accommodation.
Relocation and removal exp upto £ 8000.
Loans with a beneficial interest rate, provided the loan is

<
_ 10,000 throughout the year.
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Taxable Benefit
As a general rule cost of providing benefits is taxable to employees
unless they are specific statutory rules.
Also remember,
Where benefit is only available for part of the year,

the assessable amount is time apportioned.
Where employee contributes towards the benefit,

employee contribution is allowable deduction.
(Exception : Provision of private fuel)
Vouchers
All kinds of vouchers provided to employees are taxable
on the cost to employer.
Living Accommodation
Taxable Benefit
Annual Value X
Add : Additional benefits * X
(if cost of Accommodation is > 75,000)
Less : Reduction for unavailability (X)
Contribution by employee (X)
Taxable benefitx X
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Additional Benefit
If duration between purchase date and provision date is
Less than 6 years
Purchase price XX
Add : Capital improvement before 6th April, 2020 XX
Less : Fix amount (75,000)
Additional Benefit @ 2% XX
More than 6 years
Market value @ provision date XX
Add : Capital Improvement after provision date XX
but before 6 April, 2020 XX
Less : Fix amount (75,000)
Additional Benefit @ 2% XX
Note *
Accommodation provided is rented by employer
Taxable benefit will be higher of
Rent actually paid by employer
Annual value
No additional benefit in this case.
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Job related Accommodation
It is exempt accommodation if provided for
Proper performance of employee's duty.
Better performance of employee's duty.
Security arrangement for threat to employee's life.
(Directors can claim exemption under first two points).
Expenses connected with Living Accommodation
Expenses such as lighting and heating are taxable on the

employee if they are paid by employer.
If accommodation is job related, taxable limit is 10% of

employment income.
Use of Asset
Rule applicable to use of all assets except which has special rules
( e.g. car, van, accommodation)
Taxable benefit will be higher of
20% x Market value when provided

(Reduce if not used whole year)
Rent paid by employer.
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Car Benefit
Pool Car
No taxable benefit will arise if car provided is pool car.
Car is considered pool car if,
It is used by more than one employee.
Any private use is incidental.
normally not kept overnight or near the residence of employee
Not Pool Car

Taxable Benefit,
Adjusted list price x CO2 emission % X
Less : Non availability (X)
Less : Employee contribution for private use (X)
Adjusted List Price
List price (MV incl. taxes but ignoring the bulk discount) X
Plus : Cost to employer for additional accessories. X
Less : Any capital contribution made by employee (X)
(at the time of purchase but maximum of £ 5,000)
No extra benefit will arise for cost of insurance, maintenance,

repairs and running cost because it is included in car benefit.
Additional separate benefit will arise if chauffeur is also

provided for private use.
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Co2 emissions
The Tax exam will now only include the treatment of cars that were
registered from 6 April 2020 onwards to which the new rules apply.
In computing the assessable benefit for each car it is necessary to
know the level of CO2 emissions, if any, the electric range of a hybrid
car and the list price of the car. Depending on the category of the
car a percentage figure will then be applied to the list price to
compute the annual benefit for the tax year.
Electric cars with zero CO2 emissions
A 1% assessable beneft applies.
Hybrid
For hybrid-electric cars with CO2 emissions between 1 and 50 grams

per kilometre, the electric range will determine what percentage
rate to apply to the list price to compute the benefit.
These percentage rates for the electric range are provided in the exam
For any car with CO2 emissions exceeding 50 grams the percentage
rate to apply to the list price is as follows and is again provided for
your use in the exam:
51 – 54 grams per kilometre - 14%
55 grams per kilometre - 15%
For cars with CO2 emissions in excess of 55 grams this base
percentage rate of 15% is increased by 1% for every complete 5 grams
per kilometre, up to a maximum percentage rate of 37%.
These percentage rates apply to both petrol powered cars and also
diesel cars that meet the Real Driving Emissions 2 (RDE2) standard.
For diesel cars that do not meet the RDE2 standard the percentage
rate is increased by 4% BUT will not exceed 37%.
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Fuel Benefit
If employer provide fuel for private use of motor car then
fuel benefit will be calculated as,
Fuel benefit = £ 24,600 x CO2 %
If employee reimburses the full fuel cost to employer,

then no fuel benefit will arise.
However full fuel benefit will arise if employee reimburses partial
fuel cost to employer.
Fuel benefit will be reduced if not available for whole year.
Benefit will be divided equally if used by more than 1 employee.
Van Benefit
Van is provided for private use then taxable benefit = £ 3500 PA
If employer also provides fuel for the van then additional taxable
benefit of £ 669 P.A. will arise.
Benefit will be divided equally if used by more than 1 employee.
Gift of Asset
Gift of New Asset
Taxable benefit will be equal to cost to employer.
Gift of 2nd hand Asset

Taxable benefit = Market value when gifted.
1st asset was provided for use then subsequently

gifted to employee.
Higher of
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Option-1
M/V when gifted XX
Less : Price paid by employee (XX)
(X)
Option-2
M/V when 1st provided for use XX
Less : Benefits already taxed for use of assets (XX)
Less : Price paid by employee (XX)
Beneficial Loan
A beneficial loan is one made to an employee below the
official rate of interest of 2%.
Interest exp. as per HMRC X
Interest exp. actually paid (X)
Taxable benefit X
If amount of loan is <

_ 10,000 then this will be treated as
small loan and is exempt.
Qualifying loan is not taxable (Ch-1)
Amount of loan written off is taxable.
Interest expense as per HMRC lower of
There are two methods of calculating interest
Average Method
Precise Method
Taxable benefit should be calculated using both the method
in examination unless question states otherwise
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C AREER
C O M PA S S
CHAPTER-05
ACCA
(FA20)
PENSION

Benefits of Investing
in Pension
Investing in a registered pension scheme is a long term investment
and is very tax efficient for following reason.
Tax relief on the contributions made.
Where employer contributes into the scheme, tax relief for

employer contribution is available with no taxable benefit for
employee.
Registered pension scheme funds can grow tax free as the scheme
is exempt from income tax and capital gain tax.
Registered Pension Scheme
Occupation Pension Scheme Personal Pension Scheme
Applicable to all employee only Applicable to all individual
Amount of tax relief available for pension contribution is the same

regardless of weather the scheme is on occupational or
personal pension.
On retirement, part of the funds can be withdrawn as a tax free

lump sum.
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Tax Relief
Tax relief is available if,
Pension scheme is registered scheme.
Individual is resident in the UK and aged under 75.
Regardless of level of earnings, an individual may make pension

contributions of any amount.
However, tax relief is only available for maximum annual amount.
Maximum annual gross

contribution for which indivudual
can obtain tax relief
£3600 100% of Relevant earnings
Relevant earnings= Trading profit + Employment income + FHL
It do not include property income or investment income.
Note *
In case if contribution made is greater than the relevant earnings
then tax relief will be available on the basis of relevant earnings and
not on actual contribution made.
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Method of Obtaining
Tax Relief
Personal Pension Contribution
Basic Rate tax payer do not need do anything they have to pay
contribution at net of tax (80) and it will get credited @ 100 so
this is how they get 20% benefit.
For higher rate and additional rate tax payer, 40 or 45% tax relief is
given as follows :
20% at source (Just like basic rate tax payer).
20 or 25% through extending basic and higher rate bands

by gross payment
(so that more income is taxed at 20% and less @ 40/45%).
Occupational Pension Scheme Contribution
Employee's contribution is deductible from total salary income

and so tax benefit will arise.
Employer's contribution is an exempt benefit so don’t need to show

anywhere.
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Contribution in excess
of Annual Allowance
There is no limit on the amount of contributions that may be made
into pension scheme.
However, tax relief for pension contribution made by an individual is

restricted to maximum Annual Allowance of £ 40,000.
That means tax relief is available for the gross contribution made
upto £ 40,000. Above that, tax charge will arise.
Amount of Annual allowance can be increased by bringing forward

any unused annual allowances from previous tax years.
Unused amount can only be carried forward if the individual was a

member of registered pension scheme for that tax year.
Tax Charge on excess contribution above AA
Tax charge is calculated as if the excess is individual's top slice of

income (Taxed last after all source of income, including dividends)
but is taxed as non saving income.
The income does not count towards Adjusted net income.
The excess is therefore taxed at 20/40/45% and added to the

individual's total tax liability.
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Restriction of Annual
Allowance
(High Income Individuals)
Annual allowance is reduced for individuals with high income.
Restriction applies to individual with a threshold income exceeding,

£ 200,000 and adjusted income exceeding £ 240,000.
Annual Allowance = 40,000 – (Adjusted income – £ 240,000) x 50%
Maximum reduction to the annual allowance is £ 36,000, which

mean minimum annual allowance will be £ 4,000.
Threshold Income
Net Income XX
Less : Gross personal pension contribution (XX)
Threshold Income XX
If threshold income exceeds £ 240,000 then calculate individual's

adjusted income as follows :
Net Income X
Add : Employee's Occupational Pension Contribution X
Employer's contribution into any scheme X
Adjusted Income X
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Benefits of
Retirement
Benefits of Retirement
Tax free Lump sum Withdraw as income
Maximum = 25% x lower of

Value of the funds
life time allowance
(1,073,100 for text year 2021/22
If funds exceeds lifetime allowance Excess fund is taxed at
Lump sum withdrawal @ 55% Income withdrawal @ 25%
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C AREER
C O M PA S S
CHAPTER-06
ACCA
(FA20)
INCOME
TAX PLANNING

Mitigating
Income Tax Liabilities
Tax efficient Income Tax efficient Expenditure
The range of exempt source Personal / Occupational

of income. Pension Contribution
The range of exempt benefits Qualifying loan interest
Different tax rates on alternative FIS/SEIS

sources of taxable income.
Venture Capital Trust
Married couples &

civil partners
They should consider following techniques.
Equalising income and maximizing use of nil rate bands
Using tax free investment
Maximising pension contribution
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Spouses are taxed separately. They may choose to own assets in sole
ownership or jointly.
The income from jointly owned assets is taxed in equal shares.

Where an underlying ownership of the asset is not equal an election
can be made to apportion, the income using the proportion in which
the investment is owned, with the exception of joint bank account,
which are always taxed 50:50.
In addition, married couples can transfer income generating assets

between them at no tax cost, to minimise their joint tax liability
Pension Contributions
Spouses and civil partners should both be looking to make pension

contributions.Tax payer with income in excess of £ 100,000 may
consider making pension contributions to avoid the reduction of
the personal allowance
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C AREER
C O M PA S S
CHAPTER-07
ACCA
(FA20)
BASICS OF
INCOME FROM
SELF EMPLOYMENT

Trading Income
The profit of unincorporated trader arising from a trade, profession
or vocation are assessed as trading income.
Basis of Assessment
Profit of unincorporated business are assessed on a current year
basis (CYB).
This means the profit assessed in a tax year are those of the twelve
month period of account ending in that tax year.
Badges of Trade
In entering into a transaction, or series of transaction, it is not always
clear whether an individual is
Carrying on a trade and therefore assessed to income tax, or
Making a capital disposal which may be chargeable to capital gain

tax or is exempt.
Key Badges
Subject matter of the transaction.

Length of the period of ownership.
Frequency of similar transaction by same person.
Supplementary work, improvement and marketing.
Motive.
Reason responsible for realisation.
39
Tax Adjusted Trading
profit Computation
Net profit per accounts XX
Add back :
Non Trading expense (Disallowable expenditure) XX
Trading income not credited in the accounts XX
Deduct :
Non trading income (X)
Trading expenses not charged in the accounts (X)
Less : Capital allowance (X)
Tax adjusted trading profit X
Note
We are only calculating the taxable trading profit here.
If an item of expense/income is allowed for accounting, it is allowed

for tax unless there is a provision in tax law requiring an adjustment.
40
Disallowable Expenditure
Expenditure not incurred wholly & exclusively for trading purposes
Expenditure may be disallow because,

It is too remote.
It has more than one purpose and one of them is not trading.
Appropriations
Appropriations are withdrawal of funds from a business are

disallowed expense.
Interest paid to owner.
Salary / Drawings taken by sole trader/partner.
Any private element of expenditure relating to owner's motor
car, telephone etc.
Excessive salary paid to a sole trader's family
Business owners often employs their spouse & family members in

their business.
Any salary paid to family members is allowable provided it is not

excessive. Any excessive salary is disallowed.
41
Interest payable
Interest on borrowing such as business overdraft, credit cards is an

allowable trading expense calculated on an accrual basis.
For unincorporated businesses, late payment interest charged by

HMRC in respect of late paid income tax is never allowable & likewise
repayment interest paid by HMRC is not taxable.
Capital Expenditure
Expenditure on capital asset is not an allowable trading expense
Any expense in the form of depreciation, loss on sale of non current

assets or amortization of a lease is also disallowed.
Capital expenditure is disallowed but may qualify for capital

allowances.
Car leasing
Rentals and lease charges payable in respect of leased motor cars

are allowable where CO2 emission of the car are 110 g/km or less.
Where CO2 emission exceed 110 g/km 15% of the rental/lease charges
are disallowed.
42
Subscriptions and Donation
Trade or professional subscriptions are normally deductible.
Charitable Donation is allowable, but it must meet three below test.
Wholly and exclusive for trading purpose

(for promoting business name)
Local and reasonable in amount.
Made to a registered charity.
If donation is disallowed but the payment was made to a charity,

the tax payer can instead claim relief under gift and provisions.
Subscriptions and donation to political parties are disallowed.
Entertaining and Gifts
Entertainment expenditure is disallowed.
The only exception is for expenditure relating to employees,

provided it is not incidental to the entertainment of others.
Gift to Employees
Gift to employee are allowable.
Gift may fall within benefit rules and be assessed on the employee
as employment income.
43
Gift to Customers
Gift to customers are only allowable if,
They cost less than £ 50 per recipient per year.
Gift is not of food, drink, tobacco or vouchers exchangeable

for goods.
Gift carries a conspicuous advertisement of business making

the gift.
If the total of gifts in the tax year exceeds £ 50, it is the full cost of
the item that is disallowable, not just the excess.
Gifts of business samples to advertise the goods to the public are

allowable.
Legal and Professional Charges
Where expenditure is incurred for the purpose of the trade, the

expenditure is allowable.
Ex : Legal fees chasing trading debts. OR Charges incurred in

defending the title to non current assets.
Where expenditure is of capital nature, it is disallowed.
Ex :Fees associated with acquiring new non current assets.
Followings are still exception even if in capital nature.
Fees and other cost of obtaining long term debt finance are
allowable for sole trader.
The cost of registering patents is allowable.
The expense of renewing a short lease is allowable.
44
Impairment losses and allowances for trade receivables
The followings are allowable items.
Write off of a trade debt.
Allowance for irrecoverability or impairment of trade receivables,

provided it is calculated in accordance with UK GAAP or IFRS.
Reduction in an allowance is taxable.
The followings are disallowed.
Write off of non trade debt (loan to customer)
Taxable Income
not included in P & L
This adjustment is normally only needed when a trader removes
goods from the business for their own use.
If the trader has accounted for the removal of goods at cost then
profit element of the transaction needs to be added.
If the trader has not yet accounted for removal of goods then full
selling price needs to be added.
Not Taxable Trading Income

but included in P & L
Capital Receipts.
Other forms of income (saving, property or dividend income).
Exempt Income.
45
Deductible Expenditure
not charged in P & L
Capital Allowance.
Business calls from private telephone of sole trader.
Business owner uses private residence partly for business purposes.
Expenses met from private funds of owner.
Short lease premiums
When a landlord receives a premium for the grant of a short lease a

proportion of the lease premium is charged to income tax as
property income.
Where a business pays a premium for a short lease, for premises

used in the business, a proportion of the amount assessable on the
landlord can be deducted in calculating the taxable trading profit.
This will not be reflected in the accounts.
The adjustments required for the lease are therefore as follows
Add back : the amortization charged in the statement of

profit or loss (Disallowed)
Deduct: allowable proportion of the lease premium.
46
Cash Basis for
small businesses
Cash basis means profit will be calculated on the basis of cash
received and expenses paid in the period of account.
Unincorporated businesses (i.e. sole traders and partnerships) having

revenue less or equal to £150,000) can choose to calculate
profits / losses on cash basis rather than the normal accruals basis.
The cash basis option is not available to companies, & limited liability
partnerships (LLPs)
If annual turnover exceeds £300,000 then business won’t be allowed

to use this scheme.
Under the cash Basis
A business can prepare its accounts to any date in the year on the
basis of cash receipts and payments.
there is no difference between capital and revenue expenditure on

plant & machinery for tax purposes
Purchases are allowable deductions when paid for,

(cost of motor cars & land and buildings is not deductible and
Proceeds are treated as taxable cash receipts if an asset is sold
A flat rate expense deduction for motor car expenses is

claimed instead of capital allowances.
47
Advantages of cash basis
Simpler accounting requirements as there is no need to account for

receivables, payables and inventory
Profit is not accounted for and taxed until it is realised so cash is

available to pay the associated tax liability.
Disadvantages of cash basis
Losses can only be carried forward to set against future trading

profits, whereas under the accruals basis many more options for loss
relief are available.
Flat rate expense deduction
The flat rate expense adjustments replace the calculation of actual

cost incurred in the following cases
Expense Flat rate expense adjustment
Motoring Allowable deduction = Approved millage allowance

Expense of 45p and 25p as in employment
Private use adjustment re household goods and

Private use
services, food and utilities = fixed amount based
of commercial
on the number of occupants
building
(will be given in exam question)
48
Note
It should be assumed in all questions involving sole traders &

partnerships that the cash basis does not apply unless it is
specifically referred to in the question.
Flat rate expenses will only be examined where the business has
chosen the cash basis, and
If the cash basis applies, the use of flat rate expenses should be
assumed to also apply.
Relief for Pre-trading

expenditure
Any revenue expenditure, incurred in the seven year before a
business commences to trade, is treated as an expense on the day
that the business starts trading.
49
Your Space
Your Space
C AREER
C O M PA S S
CHAPTER-08
ACCA
(FA20)
CAPITAL
ALLOWANCES

Capital
allowance
Capital allowances are provided to give business tax relief for capital
expenditure on qualifying asset.
Depreciation charged in the accounts is not allowable in computing

tax adjusted trading profit
Capital allowances are not available to unincorporated business

which use the cash basis.
Capital allowances are given on the original cost of a capital asset &
all subsequent qualifying expenditure of a capital nature
Plant and Machinery
Most common examples of plant and machinery are

EX :
Computers and software
Machinery
Cars & lorries
Office furnitures
movable partitions
AC
Alteration of buildings needed to install P & M.
Assets deemed not to be Plant
Land, Buildings & structures is not plant. There is separate allowance

available for that.
50
The Main Pool
(General Pool)
Most items of plant and machinery purchased are included within
main pool.
Some motor cars are also included in main pool.
New or second hand cars with CO2 emissions between

51 g/km and 110 g/km.
Second hand cars with emission of 50 g/km or below.
When asset is acquired, the purchase price increases the
value of the pool.
When asset is acquired, the purchase price increases the value of

the pool.
Certain items are not included in the main pool
New motor cars with CO2 emission below 51 g/km or above 110 g/km.
Second hand motor cars above 110 g/km CO2 emission.
Assets used partly for private purpose.
Expenditure incurred on short life assets where an election to

de-pool is made.
Expenditure incurred on items that form part of special rate pool.
51
Annual Investment
Allowance
AIA is 100% allowance for the first £ 1,000,000 of expenditure
incurred by a business in a 12 months period on P & M.
Available to all businesses.
Available on acquisition of P & M in the main pool and special rate

pool items.
Not available to cars.
Limited to maximum of £ 1,000,000 expenditure incurred in each

accounting period.
For long / short accounting period allowance is increased/decreased.
Not available on cessation year.
Expenditure above the £ 1,000,000 limit qualifies for written down

allowance.
Any unused AIA cannot be carried forward or carried back, the

benefit of allowance is just lost.
Tax payer does not have to claim all / any of the AIA if he does not
want to.
52
First Year
Allowances
AIA is not available on cars, however 100% first year allowance is
available on purchase of NEW low emission cars. (less than or
equal to 50 g/km).
In the period of acquisition, a 100% FYA is given instead of WDA.
Unlike AIA & WDA, FYA is never time apportioned.
If FYA is not claimed then WDA is available.
If FYA is partially claimed then balance amount is not entitled to any

allowance and will go to main pool.
FYA is not given in the final period of trading.
Written Down
Allowance
An annual WDA of 18% is given on reducing balance basis in the
main pool. It is given on,
The unrelieved expenditure in the main pool brought forward at the

beginning of the period of account, after considering additions
and disposals.
53
Length of Ownership
It is never restricted by reference to the length of ownership of an

asset.
WDA is available provided the asset is owned on the last day of the
period of account. The actual length of ownership of the asset during
the period of account is not relevant.
Sale of Asset
Disposal value is deducted from the total of
TWDV brought forward plus
Additions to the pool after deducting AIA & FYA
WDA for the year is then calculated on the remaining figure.
If sale proceed exceeds the original cost of the asset.
The sale proceed deducted from the pool are restricted to the
original cost.
Any excess of sale proceeds over original cost may then be
taxed as a chargeable gain.
Therefore, on a disposal, always deduct from the pool lower of
Sale proceeds and
Original Cost
54
Balancing Charge
Initially the asset is put into the pool at its original cost. If, on disposal
of an asset in the pool, sale proceeds exceeds the balance brought
forward.
Pool balance will become negative because too many allowances

have been claimed
Negative amount = the excess allowances previously given.
This will be recovered and charged to tax by means of a balancing

charge.
BC reduces the capital allowances claim for the period.
If there is an overall net BC, it is added to tax adjusted trading profit.
Cessation of Trade
When the business is permanently discontinued, the AIA, FYA and
WDA are not available in the final period of account.
Balancing Allowance
At cessation, if there is still a balance of unrelieved expenditure in
the pool, business can claim relief for the balance by way of balance
allowance.
This is the only time BA will arise in the main pool

(or special rate pool).
BA is the excess of the pool balance at the end of final period of

account over the sale proceeds on all disposal at cessation.
55
Motor Car
Treatment of motor cars depends on the CO2 emissions as follows
Co2 rate Description Treatment in capital allowance
If purchased new eligible for 100% FYA

< 50 Low emission If second hand treat as standard
emission car
Standard Included in main pool as an addition

51-110
emission qualifying for AIA or FYA
High Include in the special rate pool as an

>110
emission addition not qualifying for AIA or FYA
FYA/WDA percentages will be given in the exam.
AIA is not applicable on cars.
Van is not a motor car and, it will be the item of main pool.
AIA is also available on Van.
56
Assets with Private Use
By Owner
Where an asset is used by the owner of the business, partly for
business are partly for private use.
Only business proportion of the available capital allowance is

available as tax deduction.
AIA FYA or WDA on the asset is based on its full cost.
but only business proportion of any allowance is deductible.
It will therefore be most beneficial for the AIA to be allocated against

the main pool expenditure rather than any private use asset as only
the business proportion of any AIA available can be claimed.
In the exam, the assets most commonly used for private purpose are
cars, which are not eligible for AIA.
Note that these rules are only applicable if privately used by owner
but if privately used by employee then no effect on capital allowance.
Special Rate Pool

It is the pool of qualifying expenditure that operates in the same way
as the main pool except that
WDA is 6% for 12 month period for special rate pool items.
57
Qualifying Expenditure
Long life assets.
Integral features of building only business building / structure.
Thermal insulation of a building.
High emission cars (with CO2 emission of > 110 g/km).
AIA in special rate pool
AIA is available against all expenditure in this pool

(Except High emission cars).
Business can choose the expenditure against which the AIA is

allocated. Order of allocation of AIA.
Special Rate Pool
Main pool
Short life assets

Private use assets
Long Life Assets
It is defined as plant and machinery with
Expected useful life of 25 years or more.
Total cost of at least £ 100,000.

If any above conditions do not get fulfilled then it will be treated as
normal addition either in main pool or special rate pool.
Exception of Long life Assets
Motor car and P & M situated in building that is used as a retail shop,
showroom hotel or office.
58
Small Pool WDA
Where balance immediately before the calculation of the WDA.
On the main / special rate pool.
is £ 1000 or less.
The balance can be claimed as WDA and written off in that year.
£1000 limit is for 12 months period and so apply pro-rata for

short or long period of accounts.
59
Short Life Assets
Qualifying expenditure is:
All plant and machinery (with the exception of motor cars)

which would normally go in the main pool
Where it is the intention to sell or scrap the item within eight

years of the end of the period of account in which the asset is
acquired.
Cars can never be classified as short life asset.
The election (written notice to HMRC) must be made for short life
asset this is called de-pooling.
AIA and WDA are available on net value as normal.
Balancing allowance or charge arises on disposal within 8 years after

the accounting period of purchase.
If no disposal takes place within eight years after the accounting

period of purchase the remaining balance is transferred to the
general pool immediately.
It will be advantageous to make the election if it is anticipated that a

balancing allowance will arise within eight years following the period
of account of acquisition.
60
Structure & Building
Allowance
Annual straight line allowance of 3% is available on qualifying costs
for new nonresidential structures and buildings, or renovation or
extension to existing building on or after 29th October 2018.
Where Buildings are purchased and not newly constructed, then

assume that SBA will not be available unless and until stated
otherwise.
Qualifying Costs/Expenditures
Buildings Structure
Offices Roads
Retail or wholesale premises Walls
Factory Bridges
Warehouse Tunnels
Cost of subsequent improvements
Fees for design
Preparing the site for construction
61
Non qualifying Costs
You cannot claim on costs
for any residence or any structure located in the grounds of a

residence
which also qualify for AIA
you've already used to claim another allowance
such as land, integral features and fixtures
for planning permission
for financing, such as loans
for public enquiries or legal expenses
for which you received a grant or contribution
When unused building purchased from Developer or builder, then

the qualifying cost is the price paid less the value of land.
There is no pooling system for qualifying cost of SBA. So this costs

and allowance are totally separate from Capital allowance Performa.
AIA is not available to eligible assets
62
Your Space
Your Space
C AREER
C O M PA S S
CHAPTER-09
ACCA
(FA20)
BASIS
PERIOD

Ongoing Year Rule /
Current Year Basis Rule
The profit for a tax year are the tax adjusted trading profit for
12 months period of account ending in that tax year.
Opening Year Rule

1st Year Rule :
1st Basis period will be from starting of trade to following 5th April.
(Apportion total profit of first accounting period into above period).
2nd Year Rule
Closing date of 1st period of Account falls in 2nd tax year
Yes No
Length of 1st period account Basis period = 2nd Tax Year
> 12 months < 12 months
12 months back Next 12 month from

from closing date 1st start of trade
account period
63
3rd and Subsequent Year Rule
Basis period will be 12 months back from closing date of POA that
falls in that tax year.
Note
Some profits may fall into more than one basis period in the opening
years and are known as overlap profit.
Overlap relief will be available on cessation or sometimes, on change

of accounting date.
Closing Year Rule

Identify the last tax year from cessation date of trade.
Make B.P by using subsequent year rule except last tax year.
Last B.P will be addition of all period of accounts whose closing

dates fall in last tax year.
Choice of accounting date

Just after 5th April Just before 5th April
Maximum time for planning Less time to pay tax
Maximum time to pay tax No overlap Profit
Increased overlap profit Less time for planning
64
Your Space
C AREER
C O M PA S S
CHAPTER-10
ACCA
(FA20)
PARTNERSHIP

Taxability of Partners
Each partner is taxed individually & assessed on the share of profit as
if partner is sole trader.
To determine partner's share of profit
Calculate taxable adjusted profit of partnership as if the

partnership is sole trader/unincorporated business.
Allocate tax adjusted partnership trading profit to partners
Apply basis of assessment to each partner
Let's learn each above point in detail.
Computation of
profit & loss
The principles of computation of a partnership's tax adjusted trading
profits are the same as those for a sole trader.
Partners' salaries and interest on capital are not deductible expenses

in the adjustment of profits computation, since these are merely an
allocation of profit.
65
Allocation of
profit & loss
Firstly have to deduct any salary or interest on capital as decided by
partners.
And then remaining profit should be allocated to the partners on an

profit sharing ratio.
Taxable partnership profit should be total of salary, interest &

allocated profit.
Apply basis of
assessment
Check the previous chapter of basis period and apply basis period
rules to each partner separately.
Change in
Partnership structure
Where there is a change in membership, the commencement or
cessation, basis of assessment rules apply to the individual partner
who is joining or leaving the partnership only.
66
Changes in
profit sharing ratio
If a partnership changes its basis of profit sharing during a period of
account, then the period is split, with a different allocation of profits
in the different parts.
Commencement / Cessation
Commencement – New partner joins
Identify the start date of new partner & split the period of account &
then allocate the profit among old and new partners.
(If the partner joins at the start of the accounting period then
splitting is not needed.)
For the partner joining, they must apply the opening year rules,
as for the sole trader. A partner is treated as commencing when
he or she joins the partnership.
Each partner has his or her own overlap profits, available for overlap
relief.
67
Cessation – partner leaving
Split the period of account and allocate the profit accordingly

between old partner & new partners.
For the partners continuing, use the normal CYB basis of assessment
to determine the profits assessable for the tax year.
For the partner ceasing, use the closing year rules and deduct any
overlap profits they have available.
Partnership capital
allowance
Capital allowances are deducted as an expense in calculating trading
profit. If assets are used privately, the business proportion is included
in the partnership's capital allowances computation.
Partnership Investment
Income
Interest and dividend income is kept separate from trading profit
but are shared among partners according to their profit sharing ratio
68
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.
69
Your Space
Your Space
C AREER
C O M PA S S
CHAPTER-11
ACCA
(FA20)
TRADING LOSSES
FOR INDIVIDUALS

Trading Losses
Trading losses arises when the normal tax adjusted trading profit
computation gives a negative results.
Tax Adjusted Trading Profit / Loss XX / (XX)
Less : Capital Allowance (XX)
Trading loss (XX)
Loss Relief options

in Ongoing Years
Loss relief in ongoing years
Automatic
nal
tio if no claim made
Op
Remaining loss
Relief against total income Carry forward trading
losses
Optional
oss
in gL
ain
Rem
Relief against chargeable gains
70
Where a claim against total income is made, Any remaining loss is
automatically carried forward.
Unless the individual makes a claim to Set loss against

chargeable gains.
Note that claim against gains can only be made after a claim against
total income has been made.
Carry Forward of Trading Loss
Automatic Relief.
Carry forward against
First available
Trading profit
Of the same trade
Can carry forward indefinitely.
But must set off maximum amount possible each year, no partial
offset allowed.
For 2020-21 loss, the claim must be made by 5th April, 2025
(4 years from end of tax year of loss).
71
Loss Relief Against Total Income
Relief against total income is optional but if claimed it permits the

tax payer to relieve trading losses against the total income of the
Tax year of loss and/or
Previous tax year
If relief against total income is claimed the tax payer must set off the
maximum amount possible for a given year, partial claim is not
allowed.
Personal allowance is deducted from net income (Total income after

deducting reliefs). Therefore, claim for loss relief against total income
may result in the personal allowance being wasted.
Saving income nil rate band and dividend nil rate band could also be
wasted.
Loss Relief Against Chargeable Gains
If any loss remains after a claim against total income, tax payer can
make a claim against chargeable gain.
Relief against chargeable gains is optional but if claimed it permits

the tax payer to relieve trading losses against the chargeable gain
in the
tax year of loss and/or
Previous tax year
72
Trader is permitted to set unrelieved trading losses against
chargeable gains, provided the total income of the tax year in the
question has been reduced to zero by a claim to offset trading loss.
Chargeable gains XX
Less : Capital loss in same year (XX)
XX
Less :Trading loss relief (subject to maximum amount) (XX)
Net Chargeable gain before AEA XX
If claim is made against chargeable gains, the tax payer must set off
maximum amount possible for a given year.
Maximum amount is lower of
Remaining loss or
Chargeable gains in the tax year after deduction of current

year capital loss and brought forward capital loss.
Annual exemption amount is deducted after this relief, therefore it

may result in wasting the Annual Exempt Amount.
Relief against chargeable gains normally saves tax at 10% or 20%.
73
Relief for Trading
Loss in Opening Years
Loss relief in opening years
l Automatic if no
Optional
a
t ion specific claim made
Op
Special 3 year Relief against Carry forward

carry back relief total income relief
Optional
ss
g Lo
i n
ain
Rem
Special 3 year Carry Back Relief
Optional claim.
Applies to loss arising in any of the first 4 tax years of trading.
If claimed, set loss against
Total income.
In 3 tax year before tax year of loss.
On FIFO basis (earliest year first)
74
There is no need for the trade to have been carried on in the earlier
years.
On claim covers all 3 years (Ex : loss of (2020-21) will be set off in
2017 - 18
2018 - 19
2019 - 20
If claimed,
Must set off maximum amount possible.
Cannot restrict to preserve the PA
75
Terminal Loss Relief
Loss Relief in Closing Years
l Op
iona tio
Opt na
l
Terminal loss Relief Relief against total income

(Carry back against
Optional
trading profit)
Terminal Loss Relief Carry back against trading profit
Optional Claim
However will normally be claimed.
Otherwise the benefit of the loss may be lost.
Relief is to set off “terminal loss” against 'Trading Profit'.
Of the last tax year (if any) and then
Carry back three tax years
On LIFO basis
76
How to calculate Terminal Loss?
The terminal loss is the loss of the last 12 months of trading and is
calculated as follows:
6 April before cessation to the date of cessation
Actual trading loss in this period (ignore if a profit) X
Overlap profits not yet relieved X
12 months before cessation to 5 April before cessation
Actual trading loss in this period (ignore if a profit) X
Terminal Loss X
Note
It is not compulsory to make a claim against total income before

claiming terminal loss relief.
However, where losses included in the above terminal loss

calculation have already been relieved under another claim
(i.e. against total income or chargeable gains), the amount of the
terminal loss must be reduced.
77
Maximum deduction
from Total Income
There is a limit on the amount of relief that can be deducted when a
claim is made against total income.
The maximum deduction from total income is the greater of
50,000
25% of adjusted total income
Adjusted total income (ATI)
Total Income X
Less : Gross personal pension contributions (X)
Adjusted Total Income X
The limit applies to trading losses set against
Current year total income, and
The prior year if set against income other than profits of the
same trade.
It is possible that this restriction of the amount of the loss allowed to

be deducted could be beneficial and prevent the wastage of the
personal allowance.
78
Partnership Losses
Trading losses are allocated between partners in the same way as

trading profit.
Loss relief claims available
Claims available to partners are the same as those for sole traders.
A partner joining a partnership may be entitled to claim

opening year loss relief, where a loss is incurred in the first
four tax years of his membership of the partnership.
This relief would not be available to the existing partners.
A partner leaving the partnership may be entitled to claim for

terminal loss relief. Again, this relief would not be available to
the partners remaining in the partnership.
79
Your Space
C AREER
C O M PA S S
CHAPTER-12
ACCA
(FA20)
NATIONAL INSURANCE
CONTRIBUTION

CLASS 1 NIC
Class 1 contribution arises where an individual is employed in the UK
and is aged 16 or over and has earnings in excess of threshold limit.
Any employee who continues to work after attaining state pension

age has no liability for employee class 1 NIC contribution. However,
employer is still liable for full employer's class 1 NIC contributions.
Definition of Earnings
for class 1
Earnings for the purpose of class 1 NIC consist of
Any remuneration derived from the employment which is,
Paid in cash or assets which are readily convertible into cash.
Cash Employment Earnings :
Wages, salary, overtime pay, commission or bonuses.
Sick pay, including statutory sick pay.
Tips and Gratuities paid or allocated by employer.
Reimbursement of the cost of travel between home and work.
Vouchers (Exchangeable for cash or non-cash items, such as goods).
80
Class 1 Employee NIC :
(Paid by E’ee)
Cash Earnings %
£ 1 – 9568 P.A. Nil

£ 9568 – £ 50,270 P.A. 12%
Above £ 50,000 P.A. 2%
Contribution is not allowable deductions for employee.
Class 1 Employee NIC :

(Paid by E’er)
Cash Earnings %
£ 1 – £ 8788 P.A. Nil
above £ 8788 P.A. 13.8%
Class 1A NIC
It is payable by employer on taxable Non Cash Benefit @ 13.8%.
It is allowable deductions for employer and exempt benefit for

employee.
81
Employment Allowance
The amount of total class 1 employer NIC of all employees in excess
of £ 4000 is payable to HMRC.
Employment allowance is not available if director is sole employee.
it does not reduce the amt of class 1A Liab
Class 2 NIC
Paid £ 3.05 if trading profit of tax year exceed £ 6475.
It is not allowable deduction from trading profit.
Class 4 NIC
It is calculated on taxable trading profits after deduction of brought
forward trading loss if any.
Trading Profit %
£ 1 – £ 9500 P.A. Nil

£ 9500 – £ 50,000 P.A. 9%
Above £ 50,000 P.A. 2%
It is not allowable deduction from trading profit. Payable with

Income to under self assessment system.
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C AREER
C O M PA S S
CHAPTER-13
ACCA
(FA20)
SELF ASSESSMENT
FOR INDIVIDUALS

Notification of Liability
to Income Tax & CGT
Individuals who are chargeable to income tax or CGT shall receive a
notice to file a return from HMRC. An individual who does not
received a notice to file a return are required to give notice of
chargeability to an Officer of the Revenue and Customs within
six months from the end of the tax year i.e. by 5 October 2020 for
2019/20. However, notification is not necessary if there is no
actual tax liability.
Electronic Return Non-Electronic Return
Later of Later of
(a) 31 January after end of tax year (a) 31 October after end of tax year
(b) 3 months after the issue of (b) 3 months after the issue of
notice to file a return notice to file a return
NOTE: In case of electronic return NOTE: In case of paper return

income tax liability is calculated HMRC will calculate income tax
automatically through online liability on taxpayer's behalf if
process. return is submitted by the
31 October deadline which is
called self-assessment.
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Ammendments
In Tax Return
A return may be amended by HMRC to correct any obvious error or
omission within 9 months after the day on which the return was
actually filed.
The taxpayer may amend his return (including the tax calculation)
within 22 months after the end of tax year.
E.g. 31 January 2023 for 2020/21.
Determinations Of Tax
Due If No Return Is Filed
If tax return is not submitted by due filings date even If notice has
received from HMRC. An officer of HMRC may make a determination
of the amounts liable to income tax and CGT tax and there is no
appeal against it. Such a determination can be made within 3 years
of filling date and can be replaced with actual self-assessment.
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Payment Of Income Tax
Capital Gains Tax
Payment of tax on single Date: Payment of tax is made on a single
date (31 January after the end of the tax year) in following three
situations
a) If relevant amount (Income Tax payable + Class 4 NIC) of

previous year is less than £1000 or
b) Tax deducted at source of previous year is ≥80% of previous

year income tax liability or
c) Expected income tax liability of current year is nil.
Payment of tax = Current year

(Income tax payable + class 4 NIC + capital gain tax payable)
Payment of tax through Payment on Account
Payment on account is required if income tax payable in

previous year.
DATE PAYMENT
31 January in the tax year and 1st payment on account 2nd
31 July after the tax year payment on account
31 January after the tax year Final Balancing payment
Payment on Account =
(Previous year Income Tax payable + Previous year Class 4 NIC) X 50%
Final Balancing Amount =

Current year Income Tax payable + Current year Class 4 NIC +
Current year CGT – Both Payment on Accounts.
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Penalties On Late
Balancing Payment Of Tax
PAID Penalty
> 30 days but Within 6 months after the due date 5%
> 6 months but not > 12 months after due date 10%
> 12 months after the due date 15%
> = More than
Interest On Late Paid Tax

Interest is chargeable on late payment @3.25% of both payments on
account and balancing payments. Interest runs from due date till
actual date of payment. (Interest Rate will be given in exam)
Repayment Interest
Interest may be paid by HMRC @ 0.5% p.a on any overpayment of tax
It runs from due date of tax or the date HMRC actually

received the tax till
The date of repayment.
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Keeping Of Records
All records must be retained until 5 years after the 31 January
following the tax year where taxpayer is in business
(eg. a sole trader or partner or letting property).
For all other taxpayers (e.g. employees) records must be

retained until later of
1 year after the 31 January following tax year.
Date of completion of compliance check
The date on which start of compliance check becomes

impossible.Maximum penalty to each failure to keep &retain
records is £3,000 per tax year.
Discovery Assessments
If an officer of HMRC discovers an error an assessment may be
raised to recover the tax lost. The normal time limit for discovery
assessment is 4 years after the end of the tax year, but it may be
extended to 6 years in case of careless error and 20 years where tax
is lost due to deliberate understatement.
Discovery assessment may be appealed against.
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Penalties For Errors
Maximum Penalty Minimum Penalties: Unprompted disclosure

is one made at a time when HMRC has not
discovered, or is not about to discover error.
Types of Penalty Types of

Unprompted Prompted
error (% of PLR) error
Careless 30% Careless 0% 15%
Deliberate Deliberate
not 70% not 20% 35%
concealed concealed
Deliberate & 100% Deliberate & 30% 50%
concealed concealed
Penalties For
Late Notification
There is a common penalty regime for submission of incorrect
returns (of any tax) late notifications of chargeability of tax or
register for tax, including income tax, NICs, CGT, corporation tax &
VAT. Penalties may be reduced if a taxpayer makes unprompted
or prompted disclosure.
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Maximum
Minimum Penalties
Penalty
Types of Unprompted prompted

(% of PLR)
error (% of PLR) (% of PLR)
Careless 30% 0% 10% or 20%
Deliberate
not 70% 20% 35%
concealed
Deliberate & 100% 30% 50%

concealed
Note: Unprompted disclosure is one made at a time when HMRC

has not discovered, or is not about to discover error.
Penalties For Late

Filing Of Tax Return
Tax return Late upto 3 Months: Penalty is £ 100
Tax return Late by more than 3 Months but upto 6: £100 +

(£ 10 per day between 3 months to 6 months)
Tax return late by more than 6 months but upto 12 months:

Penalty is greater of: 5% of Tax Liability and £300
Tax return late by more than 12 months
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Type of Deliberate Deliberate
Careless
conduct not concealed and Concealed
Greater of
Greater of Greater of
- 5% of Tax
PENALTY - 70% of Tax Liability - 100% of Tax Liability
Liability
- £300 - £300
- £300
Compliance check
enquiries
Starting compliance check enquiry
HMRC have the right to enquire into the completeness and accuracy
of any selfassessment tax return under their compliance check
powers. HMRC do not have to state a reason for the enquiry and an
enquiry can be made even if HMRC calculated the taxpayer's
tax liability.
HMRC must give written notice before commencing an

enquiry.
The written notice must be issued within 12 months of the

date the return is filed with HMRC.
Compliance check can be started as a result of any of the following.
A suspicion that income is undeclared
Deductions being incorrectly claimed
Other information in HMRC's possession

Being part of a random review process.
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During the compliance check enquiry
HMRC can demand taxpayer to produce Documents, Accounts or

any other information required.
The information requested by HMRC should be limited to that

connected with the return.
An appeal can be made against the request.
Completion of compliance check enquiry
The enquiry ends when HMRC gives written notice that it has been
completed. The notice will state the outcome of the enquiry.
The closure notice must include either
Confirmation that no amendments are required
HMRC's amendments to the selfassessment.
The taxpayer has 30 days to appeal against any amendments by

HMRC. The appeal must be in writing.
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C AREER
C O M PA S S
CHAPTER-14
ACCA
(FA20)
CORPORATION TAX
COMPUTATIONS

Residential status
of Companies
Companies resident in UK pay corporation tax on worldwide
income and gain.
UK Resident companies are,
If it is incorporated in UK
or
Not incorporated in UK but centrally managed and controlled
from UK (Holds AGM in UK).
Period of Account
It is duration for which company prepares its accounts.
It is generally 12 months long but can be longer or shorter.
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Chargeable Accounting
Period
Period to which corporation tax is paid.
It can be < 12 months but never > 12 months.
When CAP start? When CAP end?
When company start trade 12 months after its start.
When previous CAP end The end of companies period

of account.
Company ceasing to be
resident in the UK.
When a company ceases to

trade, or when its profits
being liable to corporation
tax are ceased.
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Performa of Corporation
Tax Computation
£
Trading Profit XX
Interest Income XX
Income from foreign source XX
Rental Income XX
Chargeable capital gains XX

Total Profit XX
Less : Qualifying Charitable Donation (XX)
Total Taxable Profit (TTP) XX
Corporation tax liability = TTP x 19% XX
Less : Double Taxation Relief (DTR) (X)
Corporation tax payable (XX)
Due Date = 9 months and 1 day after end of CAP

(Unless large company which pay in installments).
File Date = 12 months after the end of period of accounts.
If QCD paid exceeds the total profit of the company
No Relief for excess is given

(cannot be carried forward or carry back)
Unless the company is part of 75% group, in which case,

group relief may be available.
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Qualifying Charitable Donation
Donations are made gross by the company and deducted from

main proforma.It includes all donations to charity by a company.
Except those allowed as a trading expense and donation to political
party (if a small local donation).
Long Period of Accounts

If period of account > 12 months, it will split into two accounting
periods. 1st of 12 months and 2nd is of remaining months.
Following rules apply in the allocation of profits and charges

between the two chargeable accounting periods.
Income Method of Allocation

Trading profit (before Cap. All) Time apportioned
Capital Allowance Calculated for each period
Rental Income Accrual basis
Interest Receivables Accrual basis

Chargeable gains On the basis of Disposal dates
Financial Year
The year commencing 1st April, 2021 and ending on
31st March 2022 is the financial year 2020 (FY 2021).
Financial years should not be confused with tax years for personal
taxes which run from 6 April to the following 5 April.
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C AREER
C O M PA S S
CHAPTER-15
ACCA
(FA20)
CALCULATION OF
CORPORATION TAX

Trading Profit
As for sole trader, the net profit per the accounts must be adjusted
for tax purposes and capital allowances deducted Trading Profit are
always dealt with on an accruals basis for companies.
The key difference that apply to adjusting a company's profits are,
There are no private use adjustments

(including capital allowance computations).
Any interest receivable or payable for trading reasons is included in

trading profit.
If the interest is receivable or payable for a non trading purpose

then it is included in interest income.
Dividends payable are not an allowable trading expense.
Enhanced deductions are available for research and development

exp. if conditions are satisfied.
Adjustments may be required in respect of intangible assets,

transfer pricing and thin capitalization.
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Capital Allowance
Capital allowance apply to companies in the same way as
unincorporated business with the following additional points
to note.
AIA
AIA must be split between 'related companies'.
Group of companies (parent company and subsidiary company)

are related for this purpose and the group is only entitled to one AIA.
Group can choose how to allocate a single AIA between the group
companies.
If POA is >12 months there will be two CAP and capital allowances
will be calculated separately for each CAP.
Interest Income / Expense

Trade Purpose Interest Income / Exp
Amounts that are for trade purposes will be included as part of

trading profits in calculation of TTP.
Ex : Interest paid to loan taken out to purchase P & M for trade or

property used for trade purpose or to use for working capital.
Non Trade Purpose Interest Income / Exp
Amounts that are for non trade purpose will be included under the
interest income (Non trade relationships) heading in the calculation
of TTP.
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Loan Relationship Rule
Trading Interest Income X
Less : Trading Interest Ex (X)
Trading Int Surplus/Deficit X/(X)
Non Trading Interest Income X
Less : Non Trading Interest Exp. (X)
Non trade Int Surplus/Deficit X/(X)
Note that for individuals, interest received from HMRC is exempt

and interest pid to HMRC is not deductible for income tax.
Non trade interest deficit:
Option-1 Option-2
Set off against total profit Carry back against

before QCD of current interest income of
accounting period previous 12 months
(or 36 months if current
year is cessation year)
Option-3 Option-4
Carry forward & deducted Group Relief

from total profits of future
period
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Dividend Income
Dividend received from any company is totally exempt
Property Income
Property income is calculated in the same way as for individual
except
Company is always taxed on the accrual basis.
Company is assessed on income arising in the accounting period,

not the tax year.
Interest on a loan to buy let property is treated as a deduction from

interest income under the loan relationship rules and not under
property income.
Losses can be relieved against other profits, not just property

income.
Property loss must be deducted from total profits before QCD of

current period and any remaining loss will be deducted from future
total profits before QCD.
Companies cannot have rent a room relief nor furnished holiday

accommodation.
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Chargeable Gains
or Companies
Disposal Proceeds X
Less : Allowable acquisition cost (X)
Unindexed Gain X
Less : Indexation allowance (X)
Chargeable Gain/ Allowable Loss X/(X)
Chargeable gains are calculated in the same way as for individuals,

with the following key differences
Indexation Allowance
Indexation allowance is available to companies for assets acquired

prior to December 2017.
IA gives a company some allowance for the effects of inflation in

calculating a chargeable gain.
Indexation Allowance = Cost of the asset x Indexation Factor.
Indexation factor is the movement in the Retail Price Index (RPI)
From the month or purchase.
To the month of disposal or December 2017 w.e. earlier.
IA is calculated separately for each item of expenditure.
IA cannot create or increase loss.
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Roll Over Relief
Rollover relief (including reinvestment in depreciating assets) is the

only capital gains relief available for companies.
For company goodwill is not the qualifying asset for Rollover

relief.
Rollover relief is applied to the gain after deducting IA.
Capital Losses
All capital losses must be netted off against chargeable gains arising
in the same CAP.
Any net gain is chargeable as part of TTP.
Net capital losses are carried forward against the first

available future net gains.
Capital losses can not be offset against other types of income

nor can they be carried back and set off against income or
gains of prior CAP.
Annual Exempt Amount
There is no AEA available to companies.
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Shares and Securities
The matching rules for the disposal of shares is different for

companies.
Disposal should be matched as follows
Acquisitions on the same day as the disposal.
Acquisition during the nine days before the disposal

(FIFO basis).
Acquisition in the share pool.
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C AREER
C O M PA S S
CHAPTER-16
ACCA
(FA20)
CORPORATION
TAX LOSSES

Relief for Trading Losses
Relief for Trading Losses
Optional
Carry forward Current and Terminal Loss
Carry back
Carry forward First set off in current Carry back 36

against future profit period and then months against
before QCD carry back maximum 12 total profit before
months against QCDs on LIFO basis
total profit before QCDs
(Cary back on LIFO Basis)
Partial claims Partial claims NOT Partial claims not

are allowed allowed allowed
QCDs may be wasted
Tax loss Planning
Consider Tax Rates,Cash flows, Wasted QCDs
If there are trading losses remaining after a current year / carry back
claim, or carry back claim is not made, the loss is carried forward
indefinitely for relief.
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Non Trading Losses
Non trade Management

Capital Property
loan Relation
losses Business Loss Exp.
Deficit
Against Against Total Against total Against total
Current year chargeable profit before profit before profit before
gains only QCD QCD QCD
Partial
claims NOT allowed allowed NOT allowed
not allowed
Against
Carry back N/A N/A NTLR
profit only
Partial
claims allowed
Against Against Against Against

Carry future future future future
forward chargeable total profit total profit total profit
gains only before QCDs before QCDs before QCDs
Partial
claims allowed allowed allowed
not allowed
No but can
relocate Excess Excess
Group capital current Current year & current
losses within year & excess b/f year &
Relief losses
a gains b/f losses b/f expenses
group
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C AREER
C O M PA S S
CHAPTER-17
ACCA
(FA20)
GROUPS &
CONSORTIA

75% Groups
Group Relief Gains Group
Consist of Principal company &

When parent company its 75% subsidiaries plus their
75% subsidiaries
75% test applies to ordinary

Owns > 75% of ordinary shares
share capital only
Principal company must have an

Has right to receive > 75% of
effective interest of > 50% in all
distributable profit
group company
Has right to receive > 75% of the

net asset on winding up 50% test applies to shareholders.
(Direct and Indirect interest are Distributable profit and assets
included)
Company can be in more than one Company can only be in one

Group Relief Group gains group
Overseas company can be

Overseas CompaniesCan be included in the Groups But only
included in the groupsBut can not assets within the charge to UK
surrender or receive any loss relief corporation tax can benefit
benefit from the gains groups
provisions
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Group Relief
Members of a group relief group may surrender losses to profitable
group members to utilise against their own taxable total profits.
Losses surrendered must be set against the claimant company's

taxable total profits of a corresponding accounting period.
Surrendering company can Surrendering company can

transfer current year’s transfer brought forward
Trading losses (No need to claim

Trading losses
against its own profit first)
Non trading interest expense (No

need to claim against its own Non trading interest exps.
profit first)
Unused QCD
Unused property business loss Property loss
Unused management exps. Management exps.
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Maximum loss available for Group relief
Trading loss – current period XX
B/F Losses (Full amount) XX
Less : Current period total profit (XX) (XX)
XX
The above is on just example to show that any b/f amount can be
surrendered to the extent that the surrendering company is unable
to use the loss against its own total profit.
Although there is no requirement for the surrendering company to

actually claim the b/f loss against the own profit first. They can
partially claim it to preserve the amount for QCD deduction also.
Any loss can be surrendered to one or more companies within the

group.
Corresponding Accounting Periods
Losses surrendered by group relief, must be set against the

claimant company's profits of a corresponding accounting period.
Corresponding accounting period is any accounting period falling

wholly or partly within the surrendering company's accounting
period.
Where companies do not have the same year ends, the available
profits and losses must be time apportioned, to find the relevant
amounts falling within the corresponding accounting period.
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Maximum loss that claimant company can offset
Claimant Company's TTP XX
Less : Current year loss (X)
B/F Losses (Full Amount) (X)
QCDs (X)
Maximum loss that can be offset XX
Maximum loss that can be surrendered = lower of
Maximum available for group relief.
TTP in the claimant company for the corresponding

accounting period.
Claimant Company (To whom loss is surrendered)
Claimant company can offset loss against taxable total profits of its
corresponding accounting period but after offsetting its own b/f
trading loss.
Losses which arise before joining the group or after leaving the
group are not eligible for group relief.
Group relief restriction applies where there has been a change of

ownership of a company.
New company, A Ltd.'s pre acquisition losses carried forward cannot

be surrendered to companies in its new group for a period of five
years from the date of the change in ownership. This restriction
operates in one direction only. New group companies can transfer
losses to new entrant in the group.
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Losses of Overseas Company
Group relief is only allowed between UK resident group companies.
Planning Points
The following points should be considered when deciding how to

offset a trading loss which arises within 75% group relief group
company.
whether the loss should be surrendered.
order of surrender.
A group member with a loss has the choice of
Making a claim against its own profits and/or
Surrendering some/all of the loss to another group member.
Remember that
Unlike utilizing your own current year losses (which is all or nothing),
group relief is very flexible.
Surrendering company can specify the amount of loss to be

surrendered within a group – which can be any amount upto
maximum amount.
Surrendering company may surrender some of its losses using

group relief and rest against its own profits.
If it has paid any QCDs, it should ensure to allow QCDs to be

deducted in full without any corporation tax becoming due.
If it has paid any QCDs, it should ensure to allow QCDs to be

deducted in full without any corporation tax becoming due.
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If surrendering company was profitable in the previous years, it may
be beneficial to retain enough losses to make a carry back claim.
The carry back claim may save tax at higher rate and will generate a
refund of tax already paid. However, in order to make prior year
claim, an all or nothing current year claim must first be made, which
may waste QCDs in the current year.
As a current year claim against the company's own profit is All or

nothing' it is important that the optimum group relief surrender is
made first, leaving the desired amount of loss available against
company's own profits.
Capital Gains Group

When an asset is sold to another gains group member.
This is no gain / no loss transfer

(regardless of any actual price).
Base cost
Receiving company acquires the asset at a base cost equal to its

original cost plus indexation upto the point of transfer (or Dec. 2017)
This treatment is automatic, no election is needed.
No gains arises until either
Receiving company sells the asset outside the group.
Group company receiving the asset leaves the group
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Disposal of Asset Outside the Group
A normal capital gain or loss is calculated
Group company receiving the asset leaves the group
De Grouping Charge will arise.
It can arise if a 75% gain group member leaves the group, and still
holds an asset which it had received from another 75% group
member via no gain no loss transfer in previous 6 years.
Reallocation of Gains or Losses
Group companies can transfer only current year capital gains or

losses to other group members while b/f capital losses is not
allowed to transfer. Election must be made in 2 years from the end
of accounting period of disposal
Roll over Relief
Roll over relief is available on a group wide basis where
One company sells qualifying asset and
Another company buys a qualifying asset within qualifying

time period.Gains will be rolled over purchased asset of other
company.
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Pre-Entry Capital Losses
Capital losses of a company before joining 75% gain group can be

offset against gains
From disposal of asset before joining the group.
From disposal of assets which were owned before joining the

group and sold after joining group.
From disposal of asset which were acquired after joining the

group and sold to third party.
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C AREER
C O M PA S S
CHAPTER-18
ACCA
(FA20)
SELF ASSESSMENT
FOR COMPANIES

Notification Of
Chargeability
A company falling within the scope of corporation tax for the first
time must notify HMRC within 3 months of start ofthe accounting
period. Failure to notify chargeability to tax within 12 months of the
end of the accounting period willlead to a standard penalty based
on a percentage of the tax unpaid 12 months after end of the
accounting period.
Payment Of Tax
Normal
corporation tax is payable 9 months and one day after the

end of each accounting period.
Quarterly Installments
If augmented profit of company exceed corporation

threshold of £1,500,000.
Augmented Profit
Taxable total Profit + Dividend from non-Associated companies
Reduction of Corporation threshold of £1,500,000=
£1500,000 Month (if short POA)

X
No of Associated co. 12
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Short POA
If POA is less than 12 months corporation tax Threshold

(i.e £1,500,000) will be reduced.
Company Acquired During Accounting Period
If a company Acquires ≥51% in any accounting period. Such

acompany would not affect CT threshold limit in that
accounting period in which it's acquired, rather it wouldfrom
the next accounting period in which acquired.
Company Sold During Accounting Period
If a company becomes non-associated during any accounting

period it would still be included in connected companies and
will effect CT threshold limit in the accountingperiod in
which its been sold. But it won't from next accounting period.
Installments Date
In four quarterly installments from start of accounting period
By 14th of 7th month 3 Months tax

(Corporation tax X 3/CAP months)


By 14th of 16th month Remaining corporation tax
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Exceptions
Quarterly payments are not required if current profits ≤£10 million

and company was not large in previous year.
Quarterly payments are not required if company is large in current

year but corporation tax is ≤£10,000
Corporation Tax Return

Notification of chargeability
CO. receives a notice of chargeability to corporation tax after end of

Acc. Period andmust notify HMRC within 12months from end of
accounting period if does not receive a notice.
Return
Company's tax return must be filed within 12 months after the end
of the period of account.
Failure to submit the return on time will result in penalty as follows
Penalty (1st & 2nd Penalty (3nd &

Return late by
consecutive failure) consecutive failure)
Upto 3 months £100 £500
More than 3 upto

£200 £1000
6 months
More than 6 upto
£200 + 10% of tax £1000 + 10% of tax
12 months
More than 12 months £200 + 20% of tax £1000 + 20% of tax
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Claims
If a company believes it has made an error in a return, an error or
mistake claim may be made within four years fromthe end of the
accounting period. Other claims must be made within four years of
the end of the accounting periodunless a different time limit
specified.
Records
Companies must keep records until the latest of
Six years from the end of accounting period
Date any enquiries are completed
Date after which enquiries may not be commenced
Failure to keep records can lead to a penalty or up to £3,000 for

each accounting period.
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Determinations &
Discovery Assessments
If a return is not delivered by the filing date, HMRC may issue a
determination of the tax payable within 3 years of thefiling date.
There is no appeal against it.
Discovery assessment
HMRC can raise an assessment within 4 years from the end of the
accounting period; this isextended to 6 years if there is a careless
error or 20 years if there is a deliberate error or failure to notify
chargeabilityto tax.
Appeals & Disputes

The company can appeal against amendments to the corporation
tax return. The appeal must be normally be madewithin 30 days
of the amendment and must state the grounds for appeal.
The appeals procedure is as per VAT.
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Penalties For
Incorrect Returns
No penalty where a taxpayer simply makes a mistake
30% unpaid tax where a tax payer fails to take reasonable care.
70% unpaid tax if error is deliberate.
100% unpaid tax if deliberate failure with concealment.
Note
Penalty will be reduced where a taxpayer make a disclosure,

especially when this is unprompted by HMRC.
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C AREER
C O M PA S S
CHAPTER-19
ACCA
(FA20)
CGT : COMPUTATION
& STAMP DUTY

Chargeability to CGT
Capital gain tax is charged on gains arising from chargeable

disposals of chargeable assets by chargeable persons.
Chargeable Person
Chargeable person =
UK Resident Individual / Companies / business partners.
Chargeable disposal Exempt disposal
Sale or gift of whole or Disposal as a result of

part of the assets death
Exchange of an asset Gift to charities
Loss or total destruction

of an asset
Receipt of capital sum

derived from an asset
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Chargeable Assets Exempt Asset
All form of asset wherever Exempt assets include

situated are chargeable
asset
Freehold land & building Motor vehicle
Goodwill Main residence
Short lease Cash
Long lease Wasting Chattles
Unquoted shares Chattles bought &

sold < £ 6000
Quoted Shares
Inv. held within ISA
Unit Trust
Qualifying corporate
Chattels bought & bonds
sold > 6000 £
Gift edged security
National Savings
Certificate
Shares in VCT
Endowment Policy
proceeds
Foreign currency
Receivables
Inventory
Prices a batting winning
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Proforma for Capital Gain
Tax Computation
Calculation of Individual chargeable gain/loss
Consideration (M/V if gift or sold to connected person) X
Less : Incidental cost of sale (X)
Net disposal proceeds X
Less:Allowable expenditure
Acquisition cost (M/v if it was a gift or inherited) (X)
Incidental cost of Acquisition (X)
Enhancement expenditure (X)
Chargeable gain / (allowable loss) X / (X)
Total Net chargeable gains for tax year X
Less :Capital loss brought forward (X)
Less :Annual Exempt Amount. (12,300)
Taxable Gain X
CGT payable = Taxable gain x Appropriate rate.
If annual exempt amount is not utilised in any particular tax year,

then it is wasted.
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Allowable Incidental cost of sales and acquisition include
Legal expense
Valuation fee, estate agent fee, autioneer's fees
Advertisement cost
Stamp Duty
Capital Losses
Current year capital losses
Capital losses arising on assets in the current tax year are set off
against chargeable gains, arising in the same tax years.
to the maximum possible extent.
They cannot be restricted to avoid wasting annual exempt

amount.
Unrelieved capital losses are carried forward to offset against

gains in future years.
Brought Forward Losses
It will be restricted to preserve Annual exempt amount of £ 12300.
122
Capital losses in the year of death.
Losses in the tax year of death can be
Carried back three tax years.
On a LIFO basis
Set against net gains in those years.
Set off must be restricted to preserve the Annual Exempt Amount.
As a result of carrying back of losses repayment of CGT will be

obtained from HMRC.
AEA and losses should be offset against residential property gains
as they are taxable at higher rates than others.
Rates of CGT
Falling in Basic In excess of Basic
Rate Band Rate Band
Normal Rates 10% 20%
Residential property
18% 28%
rates
Payment of CGT
CGT is due on 31st January following the tax year
( 31st January 2022 for 2020/21).
123
Proforma for Capital Gain
Tax Computation
Stamp Duty
Stamp duty applies to paper transfer of shares and securities.

It is paid by purchaser at the rate of 0.5% of the consideration.
(rounded up to nearest £ 5)
Stamp Duty Reserve Tax
Where transfers made electronically, stamp duty reserve

tax applies – SDRT is charged at the same rate as stamp duty.
Stamp Duty Land Tax
SDLT is payable by purchaser on transaction of UK property.

The value of which SDLT is charged includes any VAT payable
on transaction.Tax rates of Stamp Duty land tax will be given in
the exam.
124
Exemption From
Stamp Duty
Gifts
Transfer Within Group
Miscellaneous
The following transfers are also exe4mpt.
Asset transferred as a part of divorce arrangements.
Property passing to a beneficiary under will or intestacy.
Variation of will within two years of death.
Reorganization and takeovers.
Unit trust and changes in trustees.
Government stock.
Securities traded at AIM (Alternative Investment Market).
Most company loan notes except convertible loan notes.
125
Your Space
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C AREER
C O M PA S S
CHAPTER-20
ACCA
(FA20)
CGT : VARIATIONS TO
COMPUTATIONS

Treatment of disposal
between connected person
Definition of connected persons
An individual is connected with their

Spouse or civil partner
Relatives (and their spouse or civil partner)
Spouse's or civil partner's relatives
Their business associates

A company they control
Definition of Relative
Brother and sister.

Parents, Grand parents and other ancestors.
Children, Grand children and other descendants.
Definition of Business Associate
Partners in business.
Business partner's spouse or civil partner
Relatives of business partner
126
Disposal to Connected Person (Except souse or civil partner)
Market value at the date of the

Consideration in the gain
disposal (Regardless of actual
computation
consideration)
Can only be set off against

Capital loss on disposal to current or future gain arising
connected person from disposal to same connected
person
Disposal to Spouse or
Civil Partner
Inter spouse transfers and transfers between civil partners are
treated no gain / no loss transfer.
The transferor is therefore deemed to have disposed of the asset at

its acquisition cost.
Tax Planning of CGT for Married couples
Couple can utilise the rule to ensure each spouse fully utilises any
brought forward capital loss or their Annual Exempt Amount.
Rule can be utilised to ensure that taxable in remains with the

spouse paying tax at lowest rate.
Assets can be sold piecemeal, selling them in tranches in different

tax years can allow the use of more than one AEA.
The couple should ensure that assets generating income are

owned by the spouse paying income tax at the lowest rate.
127
Part Disposal
If there is part disposal of an asset then gain or loss on
that asset can be calculated,
Disposal proceeds XX
A (XX)
Less : Cost x
A+B
XX
A = Market value of part disposed off.
B = Market value of remaining part.
Appropriate proportion formula is applied to enhancement

expenditure where enhancement applies equally to the whole asset.
If enhancement relates to,
Wholly to the part Disposed of – Deduct in full in the part

disposal computation.
Wholly to the part retained – Do not deduct any in the part

disposal computation.
128
Chattels
(Tangible Movable Property)
Non Wasting Chattels Wasting Chattels
Chattels with remaining life Chattels with remaining life of

of > 50 years are called _ 50 years are called wasting
<
Non wasting chattels chattels.
Ex. Antiques and Paintings Ex. Race horse, boat
These are exempt from CGT.
Exception : Plant & Machinery.
Apply rule of 6000

P&M sold at gain - Apply 6000 rule
P&M sold at loss then

loss will be ignored for CGT
Rule of 6000 :
Cost
_ 6000
< > 6000
_ 6000
Allowable loss but

Exempt
DP are deemed = 6000
> 6000 <
DP
Taxed on lower of:

1) Normal Calculation Normal CGT Computation
2) 5/3 X (DP - 6000)
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Other Wasting Asset
Not Chattels
It includes those wasting asset that are not tangible / movable.
Ex. Immovable plant and machinery, patent right copy right.
Disposal proceeds X
Less : WDV of asset (X)
(X)
Chargeable gain/loss X
130
Asset Lost or Destroyed
Asset Lost / Destroyed
No Insurance Insurance proceeds

proceeds received
DP Nil
Less : Cost (X)
Capital Loss (X)
No Full Partial
Reinvestment Reinvestment Reinvestment
IP X IP X Immediately
Less : Cost (X) Less : Cost (X) Chargeable gain,
Lower of,
Capital Gain X Capital Gain X
1) Total gain
Less : ROR (X) 2) Proceeds
Gain/Loss Nil not reinvested
Calculate base cost

of new asset
Original cost X
Less : ROR (X)
Base cost X
131
Asset Damaged
Asset damaged
No Insurance Insurance proceeds

proceeds received
No Chargeable
Normal part disposal CGT
disposal
computation
A
cost x
A+B
A = Insurance proceed
B = M.V. of Damaged Asset
Election available if :
1) Asset is non wasting

2) Insurance used to repair
the Asset
Used >_ 95% IP Used < 95% IP

to repair the asset to repair the asset
If election made,
1) No part disposal Not examinable
2) Deduct IP from for ACCA exams
original cost
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Your Space
Your Space
C AREER
C O M PA S S
CHAPTER-21
ACCA
(FA20)
SHARES & SECURITIES

FOR INDIVIDUALS

Exempt Shares
& Securities
All shares and securities disposed of by an individual are subject
to CGT except,
Listed government securities

(gift edged securities, Treasury stock)
Qualifying corporate bonds (company loan stock)
Shares held in an ISA.
Note that gift edged securities and QCB are exempt assets only
when disposed of by an individual or a trust.
Consideration in the
case of Sale of shares
Consideration = Actual sale proceed.
Life time gift of shares/transfer to connected person.
The market value must be used.
Quoted Shares Value Unquoted Shares Value

Mid price quoted on stock exchange Given in the exam
(Simply average of the lowest and
highest closing price of the day)
133
Matching rules on
the sale of shares
Shares sold will be matched in the following order
Shares purchased on the same day

Shares purchased on the following 30 days of sale.
Shares from share pool
Reorganisation
& Takeover
Exchange of existing shares in a company for other shares of
another class in the same company is called Re-organization.
When company acquires shares in another company either in

exchange for shares, cash or mixture of both is called take-over.
Consideration in Shares only
No CGT at the time of takeover or reorganization.
Cost of original shares becomes cost of new shares.
Where more than one type of shares is received then cost of

original shares is allocated to new shares by reference to market
value of new shares.
134
Consideration in Cash &Shares
If cash received is < 5% of M/V of total consideration received or

< 3000. No CGT implication. Deduct cash from original cost of shares.
Disposal Proceed (Cash) X
Less : Allowable cost

Cash (X)
Cost of original shares x
Cash + M.V. of new shares
X
135
Your Space
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C AREER
C O M PA S S
CHAPTER-22
ACCA
(FA20)
RELIEF FOR
INDIVIDUALS

Business Asset
Disposal Relief
Relief covers the first £ 1 M of qualifying gains that an individual
makes during their life time.
This gain qualifying is taxed at a lower capital gains tax rate of 10%
regardless of a person's taxable income.
Qualifying Business Disposals
Disposal of whole or part of the business (Sole trader/partnership).
Disposal of assets of sole trader/partnership trading business

within 3 years of cessation (winding up of business).
Disposal of shares if shares are in individual's personal trading

company and he is also an employee of company
(Full time or part time).
NOTE
Personal trading company is company in which individual owns >

5% of ordinary shares.
The asset must have been hold for 2 years prior to the date of
disposal.
Relief is not available on gains arising from disposal of

investment asset
The annual exemption amount and any capital loss should however
be deducted from gains that do not qualify for BADR as they are
taxed at a higher capital tax gains.
136
Investor Relief
Capital gain on disposal of unquoted shares will be taxed at 10% if:
Shares are subscribed not purchased on/after

17th March, 2016
Owned for 3 years after 6th April 2016.
by the person who is not an employee
Investor relief is available on capital gains of 10 million (lifetime limit)
Roll-Over Relief
Roll over relief is postponed or deferred gain.
The relief is available if a qualifying business asset is sold and

another qualifying business asset is purchased within the qualifying
time period.
Base cost of new asset is calculated by deducting the gain on old

asset against the cost of new asset.
An individual must claim the ROR it is not automatic.
Gains may be rolled over number of times provided a qualifying

replacement business asset is purchased, therefore tax liability will
only arise when there is a disposal without replacement.
Relief is 'all or nothing' in that if the claim is made, the maximum

gain possible must be deferred (cannot restricted to preserve AEA).
Base cost of the replacement is reduced for CGT purpose only.
137
Qualifying Business Asset
Land and Building (freehold and leasehold) occupied and used for
trading purpose.
Fixed Plant and Machinery (Not movable).
Goodwill (for unincorporated business only)
Qualifying Time Period
The replacement assets must be acquired within 4 year period

beginning 1 year before and ending 3 years after the date of
sale of the old asset.
Partial Reinvestment of Proceeds
If there is full reinvestment of net sale proceeds, roll over relief is

available on full gain.
If there is partial reinvestment of net proceed, then part of the gain

is taxable at the time of disposal.
Gain chargeable at the time of disposal is lower of,
Amount of proceeds not reinvested.
Full gain
Non Business Use
If there is private use of asset roll over relief is only available on

business portion.
138
Reinvestment in Depreciating Assets
An asset with an expected life of < 60 years is called depreciating

asset.
If replacement asset is a depreciating asset, then gain deferred is

not deducted from cost of new asset (No calculation of base cost).
Instead gain is postponed and will be taxable on earlier of
Disposal of new asset.
Date the new asset ceases to be used in trade.
10 years after new asset acquired.
The only depreciating assets for tax examination purpose are
Fixed plant & machinery
Leasehold property with <60 years remaining on the lease
Tax Planning
Unused annual exemption of current year and b/f capital loss is also
available then do not claim roll over relief.
If individual wants to retain some cash out of disposal proceeds

before reinvestment, then it should be equal to the b/f capital
loss and AEA.
If on the disposal of whole business, individual decides to reinvest

the disposal proceeds then rollover relief and BADR both will be
available. However, individual has to claim 1st rollover & then BADR.
139
Gift Relief
Gift relief is only available on gift of qualifying business assets
gifted or sold at under value by an individual.
Donor is treated as if he had disposed at Market value and donee

had received at Market value.
When gift relief is claimed, donor has no gain, the gain is deducted
from donee's cost (M/V).
Donor Donee
DP MV Original cost MV
Less : Cost (X) Less : GR (X)
Capital Gain X Base cost X
Less : GR (X)
Gain/Loss Nil
To claim the gift relief donee must be UK resident.
Gift relief is optional, if not claimed the donor has capital gain so he
can utilise his annual exemption or BADR.
Non Business Use
If asset has some private use then only business portion of the gain
is eligible for relief.
Sale at Undervalue
Proceeds received above original cost are chargeable to CGT

immediately and remaining gain can be deferred.
140
Qualifying Assets
Assets used in trade of donor or donor's personal trading company.
Unquoted shares and securities.
Quoted shares or securities of individual donor's personal trading

company.
Agricultural property provided agricultural property relief is

available in IHT.
Chargeable life time transfer (Gift to trust).
Shares in Personal Trading Company
Where the asset being gifted are shares; the gain eligible to be held
over is restricted if
The shares are in the donor's personal trading company

(Whether quoted or unquoted)
The company owns chargeable non business assets.
In this situation the gain eligible for GR is,
MV of chargeable business asset (CBA)

Total Gain X
MV of chargeable assets (CA)
Chargeable Assets
All the Capital assets that are chargeable. (Exclude exempt assets)
Chargeable Business Assets
These are defined as chargeable assets (as defined above) that

are used for the purposes of a trade.
141
Principal
Residence Relief
It applies when individual dispose off his only or main private
residence or dwelling house which he owned.
If individual has more than one residence, he can nominate one

residence as his principal residence by notifying HMRC in written.
Married couple / civil partners are entitled to only one residence

between them for the purpose of Principal Private
Residence exemption.
Calculating the Relief
If a person lives in PPR during the whole period of ownership the

whole gain is exempt.
Where there is period of absence from PPR the procedure is as

follows
Capital gain on disposal X
Less : PPR Relief (X)
) Gain X
Period of Occupation
Period of Ownership )
X
Period of occupation includes period of both Actual occupation

and deemed occupation.
142
Deemed occupations are
Last 9 months of ownership.
Any period spent working abroad.
Upto 3 years of absence for any reason.
Upto 4 years of absence while working in the UK

(because of work place).
Points 2, 3 and 4 will only apply if at some time before and after
period of absence there is a period of actual occupation by
the owner.
Reoccupying is not necessary for point 2 and 4 if prevented by
terms of employment.
Business Use
Gain related to the part of property used for business purpose

are not subject to relief.
Letting Relief
Letting relief is available where an individual's main residence is let
out for residential use. Letting should be for part of the property
while owner still occupying the remainder.
If owner has one PG Member and provides accommodation as well

as means then PPR will be available and no Letting relief.
Letting relief is lower of,
PPR relief given
£ 40,000
Gain related to letting period
) Total gain x
Letting Period
Ownership Period )
143
Your Space
C AREER
C O M PA S S
CHAPTER-23
ACCA
(FA20)
AN INTRODUCTION
TO IHT

Inheritance Tax
IHT is charged on transfer of value of chargeable property by
chargeable person.
Chargeable Property
Every asset to which the individual is beneficially entitled is called

chargeable asset.
Chargeable Person
An individual who is domiciled in UK will liable to IHT on transfer

of their worldwide assets and individual who is not domiciled in
UK will liable to IHT on transfer of their UK assets only.
Transfer of Value
Transfer of value is a gift of any asset which results in a reduction

in the value of the donor's ESTATE.
The loss to the donor is the difference between the value of the
donor's estate before and after the gift.
It is calculated by applying diminution in value rule.
Value of estate before transfer X
Value of estate after transfer (X)
Diminution in value / Transfer of value X
IHT Arise
On some life time gifts which are taxed at the date of gift.
On life time gifts where the donor dies within 7 years of date of gift.
On the death of an individual on their estate value.
144
Types of Gift
Types of Gift
Exempt Transfer Potentially Exempt Chargeable lifetime

Transfer transfer
Gifts that are Exempt on Chargeable on

specifically exempt Gift date gift date
No IHT in any Chargeable only if donor Also additional

case dies within 7 years of chargeable if donor
date of gift dies within 7 years
Gift to Spouse Gift by one individual to Gift to Trust

other individual& to (not charitable trust)
disabled Trust
145
PET
Transfer of Value (TOV) XX
Less : Reliefs (X)
Less : Exemptions (X)
Chargeable Amount / Gross chargeable amount (GCA) XX
CLT
Transfer of Value (TOV) XX
Less : Reliefs (X)
Less : Exemptions (X)
Chargeable Amount XX
Less : Unused Nil rate band
Total Nil rate band 325,000
Less : GCA of CLT in previous 7 years from the gift date (X) (X)
Taxable amount XX
Paid by Donor Paid by Trust
Inheritance tax 25% 20%
GCA of donor Chargeable amount + IHT Chargeable Amount
146
Exemptions
Gifts on Marriage
£ 5000 by parent.
£ 2500 if from remotes ancestor or grandparents
£ 2500 if from a party to marriage or civil partnership

(Ex. by husband to wife)
£ 1000 if from any other person.
Gifts between Spouse
Any transfer of value between spouses or civil partners are exempt

either on life time or on death.
There is no maximum limit to this exemption, unless,
Transferor is UK domiciled and

Transferee spouse is non UK domiciled
In this case maximum exemption limit is £ 325,000.
However, non UK domiciled individuals whose spouse is UK

domiciled can elect to be treated as UK domiciled through an
election to HMRC.
Annual Exemption
AE of £ 3000 is available for life time transfers and available on

both PET and CLT in chronological order.
That means AE firstly applied to first gift in the tax year and then
(if there is any left) the second gift and so on.
Unused AE can be carry forward for one year only. But AE of current
year must be used firstly and then any b/f AE.
It is beneficial to make CLT before PET.
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Normal Expenditure out of Income
IHT is levied on transfer of capital wealth

Therefore life time transfer will be exempt if it can be shown
that the gift
is made as part of a person's normal expenditure out of
income and
does not affect to donor's standard of living.
To be treated as a normal gifts must be habitual.
Ex. Payment of school fees, life insurance for child.
Small Gift Exemptions
Transfer of assets having value < 250 per recipient per tax year are
exempt if exceeds then whole amount is taxable.
Charity Exemptions
Gift to recognised UK charity are exempt whether they are during

individual's life time or on death.
There is no maximum limit to this exemption.
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IHT on life time gifts
@ Death Date
Arise only on those lifetime gifts which are in previous 7years from
death date.
It is the same format for both PET & CLT.
GCA XX
Less : F/V Relief (X)
Less:Unused Nil Rate Band (Tax Year of death) XX
Less:GCA of CLT in previous 7 year from gift date (X)
Less:GCA of PET for the period starting 7 year before
death, till gift date (X) (X)
Taxable Amount XX
IHT @ 40% XX
Less : Taper Relief (% will be given in the exam) (X)
Less : IHT paid @ gift date (X)
IHT payable XX
149
IHT on Death Estate
Add all Assets X
Less : Liabilities and funeral Exp. (X)
Less : Exempt Transfer as per will (Spouse, charity) (X)
Gross Charge Estate XX
Less : Residence Nil Rate Band * (X)
Less : Unused NRB
Total Nil Rate Band 325,000
Less : GCA of PET & CLT in last 7 year of before death (X) (X)
Taxable Estate XX
IHT @ 40% XX
Less : Double Tax Relief (XX)
IHT Payable XX
Residence Nil Rate Band
It is an additional £ 175,000 NRB only available on death where an

individual die on or after 6th April, 2017.It is available if death estate
of a deceased person includes main residence which is inherited by
direct descendants (children and Grand children).
Value of residence is calculated after deduction of repayment of

mortgage or interest only mortgage.
150
Due Date of
Payment of IHT
Death IHT on Death estate
Due Date = Within 6 months after end of month of death.
For IHT on CLT @ Gift date
If gift date is
In first 6 months In last 6 months

of tax year of tax year
6/4 to 30/9 1/10 to 5/4
Due Dae = 30/4 of next Due Date = 6 months

calendar year after end of month of gift
Ex :
Gift date : 1.5.10

Due Date : 30.4.11
Gift Date : 10.4.05

Due Date : 30.04.06
Gift Date = 1.12.13

Due Date : 30.06.14
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Transfer of unused nil
rate band (NRB)
Any amount of NRB that has not been utilised at the time of a
person's death can be transferred to their spouse or civil partner.
The surviving spouse or civil partner will have the benefit of
their own NRB, and
any unused proportion of their spouse's or civil partner's NRB
The amount of the NRB that can be claimed is based on the

proportion that was unused by the first spouse to die.
The unused proportion is applied to the NRB available on the

second spouse's death.
Transfer of Unused
Residence Nil Rate
Band (RNRB)
Work same as Normal NRB (As above)
152
Advantages of
lifetime gifts
Lifetime giving reduces the IHT payable on death as the assets
gifted will not be included in the donor's chargeable estate on
death. Therefore, an individual should maximise the use of:
exemptions available (e.g. marriage, small gifts, annual

exemptionand normal expenditure out of income)
nil rate band every 7 years
Even if a lifetime gift becomes taxable, IHT on lifetime gifts is likely

to be less than the IHT payable on the death estate because:
If the gift is a PET, no IHT will be payable if the donor
survives seven years.
If the gift is a CLT, the tax is calculated at 20% and no
additional IHT will be payable on death if the donor
survives 7 years.
If the donor does not survive seven years, taper relief will be
available after three years.
A lifetime gift is valued at the time of the gift and the value
is 'frozen'. This locks in the value of an appreciating asset,
so any increase in value up to the date of death will not be
taxed.
Exemptions such as normal gifts out of income, small gifts,
marriage and AEs may reduce or eliminate the value of a
lifetime gift.
153
Disadvantages of
lifetime giving
The donor loses the use of the asset and any income that can be
derived from the asset once given away.
The residence nil rate band is not available for a lifetime gift of the
main residence.
Capital gains tax:
may be payable on lifetime gifts of chargeable assets

(either immediately or later if deferred with a gift relief claim)
but is not payable on assets held at the date of death.
Therefore, individuals should be advised not to gift assets during

theirlifetime that give rise to large CGT liabilities.
154
Your Space
Your Space
C AREER
C O M PA S S
CHAPTER-24
ACCA
(FA20)
VAT
OUTLINE

VAT is an indirect tax which is borne by final consumer and VAT
non-registered business.
VAT is collected by VAT registered business and paid to HMRC.
There is three essentials needed before charging any VAT,
Taxable Person
A taxable person is one who is or should be registered for VAT,

because they make taxable supplies. It can be individual or any
legal person.
Taxable Supply
Taxable supply is everything which is not exempt or outside the

scope of VAT. It includes sales and purchases of most goods or
services.
For VAT to apply the taxable supply must be made in the course or
furtherance of a business carried on by a taxable person.
Business
Input VAT & Output VAT

Input VAT
VAT paid on purchases is called input VAT. Everybody pays input vat
whether registered for vat or not.
Output VAT
VAT received on sales. Only VAT registered business can charge

output VAT. It is calculated on sales after maximum prompt payment
discount if availed by customers.
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Types of Supply
Taxable Supply
Zero rated (0%) Low rated (5%) St. rated (20%)
Non luxury food Fuel for domestic On most goods &

(except in business purpose, energy Services supplied
e.g restaurants), saving materials
Books, newspaper, (Not for exam)

Sewerage & water
services, Children's
clothes & footwear,
Medicine, Exports
outside the EU.
Transport, gift to
charity
Exempt Supply Outside the scope of VAT
Financial service, Insurance, 1) goods or services you buy

Postal service, education, and use outside of the EU
health, sports and land
2) goods you sell as part of a
(Not buildings)
hobby - like stamps from a
collection
3) donations to a charity
4) Wages & Dividend
156
Taxable supplies
VAT is charged on taxable supplies but not on exempt supplies or
supplies which are outside the scope of VAT.
It is therefore important to be able to correctly classify supplies in

order to determine whether VAT should be charged.
If trader supplies the taxable goods/services then there will be below

three effects,
Trader can be registered
If registered then charge VAT on taxable supplies
And can also claim Input VAT credit
Difference between Zero

rated and Exempt supplies
Exempt supplies Zero rated supplies
Charge VAT on
No Yes at 0%
supplies
Can reclaim
No Yes
input VAT
Can register
No Yes
for VAT
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VAT Registration
Compulsory Registration (Historical Test)
Taxable supplies (VAT exclusive) in last 12 months

(or since business commenced if shorter) exceed £85,000.
(Suppose exceeded on 31st December)
HMRC must be informed within 30 days after the end of the month
in which taxable supplies exceed £85,000 by completing form VAT1
or using HMRC's online services. ( Inform by 30th January)
The trader will be registered for VAT from next day of 30 days
notification period. (Registered from 31st January)
VAT registration is not required if taxable supplies in the following 12

months will not exceed £83,000.
Compulsory Registration (Future Test)
Taxable supplies in next 30 days expected to exceed £85,000.

(Suppose 31st December)
Notify HMRC – before end of 30 days period. (Notify by 30th January)
Registration effective from – start of 30 days period.

(Effective from 1st January)
158
Voluntary Registration
A person making taxable supplies may apply for VAT registration on

voluntary basis by writing an application to HMRC even if taxable
supplies are below £85,000.
It will be considered VAT registered from date of application.
It is beneficial if beneficial is making zero-rated supplies or supplies

to VAT registered customer.
Advantages Disadvantages
Avoids penalties for late Must follow VAT

registration. administration rules
Can recover input VAT Administrative Burden
Can disguise the small Makes product prices

size of business more expensive
(vat inclusive prices)
Voluntary registration is therefore beneficial where the business is

making
zero rated supplies and has input VAT that it can recover, or
supplies to VAT registered customers
159
VAT Group Registration
Companies under common control may apply for group registration.
Group appoints a representative member who calculates all input
VAT and output VAT for the group.
Advantages of group registration
No VAT implication on intra-group transactions between members

of VAT group.
Group members will file single VAT return on group basis which will
save administration costs.
An application to create, terminate, add or remove a CO. from a VAT

group may be made at any time and there is no compulsion to
include every member into VAT group.
Disadvantages of group registration
All VAT group members are jointly and severely responsible for group
VAT liability.
Administrative difficulties for making single VAT return.
Output VAT Recovery

Normally based on price charged by supplier. Must deduct maximum
discount, except for Early Settlement or Cash discount, as it would
only be deducted if availed by the Customer.
Output VAT at Replacement Cost
Goods for own use (Drawings)
Gifts of inventory or noncurrent assets.
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No output VAT on
goods to the same person which cost the trader £50 or less in a
12-month period
Business samples, regardless of the number of same samples given

to the recipient
Gifts of services, whether to employees or customers, are not taxable

supplies.
Input VAT Recovery

Input VAT is recoverable by taxable persons on goods and services
which are supplied to them for business purposes. A VAT invoice is
needed to support the claim.
Recovery of Pre-Registration Input VAT on Goods
It will be recoverable if Goods were acquired in previous 4 years from

date of registration for business purpose and are still on hand upon
the date of registration.
Recovery of Pre-Registration Input VAT on Services
It will be recoverable if Services were acquired in previous 6 months

from date of registration for business purpose.
Capital vs revenue expenditure
There is no distinction between capital and revenue expenditure for

VAT. Output VAT and input VAT is calculated as normal if these
expenditures are incurred for trade.
161
Business entertaining
Input VAT on entertainment expenses incurred for employees and

overseas customers is recoverable. However Input VAT on
entertainment expenses incurred for suppliers and UK customers is
irrecoverable.
Private Use
input VAT cannot be claimed for goods or services that are not used
for business purpose except for the treatment of cars which is given
below.
Motor cars
Input VAT upon purchase of car is irrecoverable unless there is 100%

business use (Pool Car) in which case 100% recovery available.
In case of leased car 50% of input VAT is recoverable where the car
has some private use.
If input VAT cannot be recovered on the purchase of a motor car,

no output VAT will be due on its disposal
Motor Expenses
Input VAT upon fuel cost and repair & maintenance incurred for
employees is recoverable even if there is private use of car by
employee. If employee reimburses full fuel cost, then output VAT
will be payable upon reimbursed expenses. However If employee
reimburses partial fuel cost then output VAT will be payable but as
per HMRC scale charge. Note that VAT is not charged on the
insurance and road fund licence
Business and non-business expenses
Input VAT on business expenses is recoverable. VAT on non-

business items passed through the business accounts is
irrecoverable.
162
Relief for Bad Debts
Input VAT on bad debts is recoverable if
≥6 months elapsed from due date of payment and
Amount written off as bad debts in the seller's books.
Relief is obtained by adding the VAT element of the impaired debt

to the input tax claimed.
Claims for relief for impaired debts must be made within four years
and six months of the payment being due.
Important Note: For propose of Income Tax, Capital Gain Tax,

Corporation Tax, If VAT is recoverable than the cost must be VAT
exclusive (e.g. Plant & machinery cost for capital allowances) and If
the VAT is irrecoverable than the cost must be VAT inclusive
(e.g. Car with private use for capital allowances).
Deregistration
Compulsory Deregistration
Deregistration is compulsory if
Business is ceased or
Business is Sold or
Taxable sales are ceased
Individual should inform HMRC within 30 days and individual

would be considered as VAT deregistered right from date of
cessation or sale.
163
Voluntary Deregistration
If individual identifies that his taxable supplies will not exceed

£81,000 in the following 12 month then individual can apply for VAT
deregistration on voluntary basis by writing an application to HMRC.
Individual will be considered VAT deregistered from date of
application.
Consequences of Deregistration
Output VAT must be accounted for on replacement cost of inventory

and capital assets on hand at date of deregistration.
If it has less than £1000 it will be waived off.
164
Time of Supply
(The tax point)
Importance of tax point
VAT is normally accounted for to HMRC on a quarterly basis, so it is

important to know the time of a supply, to identify the quarter in
which it falls.
BASIC TAX POINT
GOODS SERVICES
When they are When they are

collected, performed
delivered
or made
available to
a customer
165
Importance of tax point
The Basic tax point is overridden by Actual tax point.
Actual tax point (ATP)
Step 1
Identify BTP (See above)
Step 2
On or before BTP, has
- a tax invoice been issued?, or
- a payment been received
Yes No
Decision made Step 3

Actual tax point Has a tax invoice been
= the earlier date issued within 14 days
= COMPULSORY ruling of the BTP?
Yes Yes
Decision made Decision made

ATP = BTP ATP = Invoice date
166
VAT on sale of business
Compulsory deregistration applies where a business is sold or
otherwise transferred as a going concern to new owners.
The sale may be treated in one of two ways
SALE OF BUSINESS
Normal taxable Transfer of a going

supply concern
Charge output VAT Not treated as a

on assets transferred supply for VAT if
conditions met
Conditions for transfer of business as a going concern
If certain conditions are satisfied, then the sale/transfer:
is not treated as a taxable supply
no output tax is therefore charged on the assets transferred

by the seller, and
no input tax is recoverable by the purchaser.
167
Conditions
The business is transferred as a going concern.
There is no significant break in the trading.
The same type of trade is carried on after the transfer.
The new owner is or is liable to be registered for VAT, immediately

after the transfer.
Note that all these conditions must be met.
Transfer of registration
On the sale of a business it is normally compulsory to deregister.

However, instead of doing so, both the transferor and the transferee
may make a joint election, for the transferor's registration to be
transferred to the transferee.
Where this is done, the transferee assumes all rights and obligations
in respect of the registration, including the liability to pay any
outstanding VAT. Therefore, this may not be a good commercial
decision.
168
Cash Accounting Scheme
VAT is accounted for on the basis of cash receipts and payments,
rather than on the basis of invoices issued and received
(therefore automatic relief for bad debts).
The tax point becomes the time of receipt or payment.
Conditions to be satisfied to join the scheme
Taxable turnover (exclusive of VAT) not exceeding £1,350,000

per annum.
VAT returns must be up-to-date and no convictions for VAT

offences or penalties in past.
If taxable turnover exceeds £1,600,000 trader will have to exit

the scheme.
Advantages Disadvantages
Businesses selling on credit Input tax cannot be

do not have to pay output claimed until the invoice
VAT to HMRC until they is paid. This delays
receive it from customers. recovery of input VAT.
This gives automatic relief Not suitable for

for impaired debts businesses with a lot of
cash sales or zero rated
supplies which would
simply suffer a delay in
the recovery of input VAT.
169
Annual Accounting Scheme
A single VAT return for a 12 month period (Normally accounting
period of the business) is filed within two months from end of the
period.
VAT is paid in nine equal installments each will be 10% of previous

year's VAT liability and one balancing payment. Installments are
payable at the end of month 4 to 12 of accounting period.
Balancing payment (or repayment) is made when the return is filed.
Conditions to join the scheme are same as cash accounting scheme.
Advantage
Only one VAT return each year so less occasions for VAT penalty and
Cash flows can be managed in a better manner.
Disadvantage
Have to ensure that supplies does not exceed turnover limit and
Timings of VAT payments may create problem for business.
Flat Rate Scheme

VAT = Sale (VAT inclusive) X Flat rate 16.5%
This scheme is available to small businesses. Under this scheme VAT

liability is calculated by simply applying a flat rate percentage (16.5%)
to total turnover including zero rate & exempt supplies.
No input VAT is recoverable with the exception of non-current assets

having cost more than £2,000.
170
Conditions to join the scheme
Taxable turnover (exclusive of VAT) not exceeding £150,000

per annum.
VAT returns must be up-to-date and no convictions for VAT offences

or penalties in past.
If the taxable turnover exceeds £230,000 the trader will have to

exit the scheme.
Overseas Aspects of VAT

VAT is a tax levied within the European Union (EU) only.
171
Trading with Non Trading with
European countries European countries
EXPORTS EXPORTS
Supply will treated as The supply will be treated

zero rated as zero rated if purchaser
is registered for VAT and
standard rate if the
purchaser is not VAT
registered.
IMPORTS IMPORTS
These are taxed at Standard These are taxed at

Rate or Zero Rate as it would Standard Rate or Zero
have been taxed as UK Rate as it would have
supplies. been taxed as UK supplies.
Supply of services from

non-European countries is
treated as above. BUT input
VAT is not paid to HMRC at
point of entry into the UK
(Not goods), the UK
customer will account for
UK VAT when the service is
performed.
172
Your Space
C AREER
C O M PA S S
CHAPTER-25
ACCA
(FA20)
ADMINISTRATION
OF VAT

VAT return &
payment procedures
Normal VAT accounting
VAT return periods are normally three months long, but traders who
regularly receiverepayments, can opt to havemonthly return
periods to receive their repayments earlier.
VAT returns show total output VAT and total input VAT for the
period.
All businesses must file their VAT return and pay VAT electronically.
The deadline for filing and payment online is One month and
seven days after the end of the quarter.
VAT refunds
VAT refunds are normally made within 21 days.
Where it is discovered that VAT has been overpaid in the past, the
time limit for claiming a refund is four years from the date by which
the return for the accounting period was due.
VAT Surcharge
If a taxable person submits a late VAT return, or submits a return on
time but makes late payment of VAT due,then the HMRC may issue
a 'surcharge Notice' which would specify the 'surcharge period' -
which lasts for next 12 months and no penalty arise. If within
'surcharge period' the taxable person concerned makes a further
default, adefault surcharge is also levied which is calculated as 'a
percentage' of tax paid late.
173
Default in the surcharge period Surcharge as a % of outstanding
VAT @ due date
1st default 2%
2nd default 5%
3rd default 10%
4lh or more default 15%
Note: Surcharges at 2% and 5% rates are not normally demanded

unless the amount due would be at least £400 BUT for surcharges
calculated using the 10% or 15% rates there is a minimum amount
£30 payable.
Surcharge period can only be eliminated if individual has 4
consecutive VAT returns on time.
VAT Records
The business should retain all record for 6 years. Record should
include record of all outputs, inputs, invoices, vataccount and any
supporting documents for claim of recovery of input VAT.
Normal VAT invoices

VAT invoice should be issued within 30 days of the date of
taxable supply.
A VAT invoice must be issued when a standard rated supply
is made to a VAT registered business.
No invoice is required if the supply is exempt, zerorated or to
a non-VAT registered customer
No invoice is required for payments of up to £25 including
VAT which are for telephone calls, or car park fees, ormade
through cash operated machines. In such cases, input tax
can be claimed without a VAT invoice.
174
VAT invoice must include following detail
The supplier's name, address and registration number
The date of issue, the tax point and an invoice number
The name and address of the customer

A description of the goods or services supplied, giving for each
description the quantity, the unit price, the rate ofVAT and the
VAT exclusive amount
The rate of any cash discount
The total invoice price excluding VAT

(with separate totals for zero-rated and exempt supplies)
Each VAT rate applicable and the total amount of VAT
If an invoice is issued, and a change in price then alters the VAT

due, a credit note or debit note to adjust the VAT mustbe issued.
The invoice can be sent electronically provided the customer agrees.
Less Detailed
VAT invoices
A less detailed VATinvoice may be issued by a taxable person
where the invoice is for a total including VAT of up to£250.
Such an invoice must show:
The supplier's name, address and registration number
The date of the supply
A description of the goods or services supplied
The rate of VAT chargeable
The total amount chargeable including VAT Zero-rated &

exempt supplies must not be included in less detailed
invoices.
175
Penalties & Interest
Failure To Notify HMRC About Registration
If a person who is exempted from registration, fails to notify liability

for registration or change in nature of suppliesthere will be a
standard penalty based on a percentage of the VAT lost during the
period from when the notificationshould have been made until it is
actually made. Actual penalty payable is linked to the taxpayer's
behaviour.
No penalty if reasonable excuse for failure to notify
30% unpaid tax if non-deliberate failure to notify
70% unpaid tax if deliberate failure to notify
100% unpaid tax if deliberate failure to notify with

concealment.
Note: Penalty will be reduced where a taxpayer makes a disclosure,
especially when this is unprompted by HMRC.
Errors in a VAT return

De-minimis level is the greater of: £10,000 and 1% × turnover
(maximum limit £50,000)
Interest
Error Disclosure Correction Penalty
charged
entering Errors
< De-minimis Voluntarily Possible No
in next VAT return
By Voluntarily by @ 3.25%
> De-minimis Possible
application application /Annum
Discovered by @ 3.25%
Apply
control visit /Annum
176
Interest on Unpaid VAT
Interest @ 3.25% is charged on VAT paid after due date & runs from
due date till payment date
Penalties for Errors in VAT Return
Amount of the penalty for error is based on the Potential Lost

Revenue (PLR)to HMRC as a result of the error. The maximum
amount of the penalty for error depends on the type of error
Maximum Penalty
Types of error Maximum penalty payable
(% of PLR)
Careless 30%
Deliberate not concealed 70%
Deliberate and concealed 100%
Minimum Penalties
Unprompted disclosure is one made at a timewhen HMRC has not d

iscovered, or is not about to discover error.
Unprompted Prompted
Types of error
(% of PLR) (% of PLR)
Careless 30% 15%
Deliberate not concealed 70% 35%
Deliberate and concealed 100% 50%
177
Your Space
About Author
Dipan is a qualified ACCA Affiliate and having
educational experience of 5 years. He is
Director at ACCA ALP - Career Compass
providing ACCA Coaching Face to face and
Online.
He believes the personal mentoring

of the students to get pass the ACCA Exams.
His compact and simplified way of teaching
is always loved by the students. He is not only
a faculty but a mentor also and his mentorship
is trusted blindly by the students.
He is a master in teaching UK Tax and

Management subjects at ACCA.
Mission
Provide world-class mentoring and coaching to
maximum students and prepare them to
achieve things in their lifetime career.
Contact us
(+91 ) 95122 35353
dipan@careercompass.co.in
www.careercompass.co.in

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Complete Guide For

ACCA UK Taxation (TX)

C AREER Dipan Ghataliya

MR. DIPAN GHATALIYA MO : (+91 ) 95122 35353

Taxation policies also impacts factors such as employment levels,

Taxation policies can affect the behavior like

Further they may discourage

As government objectives change, taxation policies may be

Role & Responsibility

Chancellor of the Overall responsibility for the UK tax system and

Chancellor for the imposition and collection of

The Treasury appoint permanent civil servants,

HM Revenue and Customs (HMRC) is a single

Income Tax NIC Capital Gains Tax

Inheritance Tax Corporation Tax VAT

MR. DIPAN GHATALIYA MO : (+91 ) 95122 35353

Tax Year = 6.4.21 – 5.4.22 (2021-22)

Exempt Income Taxable Income

Int from NS&I Certiﬁcate Employment Income

Gaming, batting & Lottery Property Income

Premium bonds winning Dividend Income

Scholarship to Tax payer Trading Income

Income from ISAs Pension Income

State beneﬁts (Accident) Saving Income

Int on repayment of tax Income from Trust

Less : Relief (1) (2) (3)

Less : Personal Allowance (12,570) (1) (2) (3)

NSI X Tax rate X

Less : PAYE (X)

Income Tax Liability X

To invest in partnership by a partner.

To purchase plant or machinery by employee for use in job.

To purchase shares in an e'ee controlled trading company

Starting Band Rate £ 1 – £ 5000 20% 0% 7.5%

Basic Rate Band £ 5001 – £ 37700 20% 20% 7.5%

Higher Rate Band £ 37701 – £ 150000 40% 40% 32.5%

Additional Rate Band £ 150001 & above 45% 45% 38.1%

First £ 2,000 of the dividend income will always be taxed @ 0% for

< 100,000 > 100,000

PA = 12,570 Adjustment Net

Total Net Income X

Less : Gross Gift aid donation* (X)

Less : Personal Pension Contribution* (X)

< 100,000 > 1,25,140 100,000 - 125,140

Ex : Gross PPC = £ 10,000

Normal Rate Bands Extended Rate Bands

1-5000 = 5000 1 – 5000 = 5000

5001-37500 =- 32500 5001 – 47500 = 42500

37501 – 150000 = 112500 47501 – 160000 = 112500

Above – 150000 = Above 160000 and above = Above

In the case of Extension of Band, only effective amount of basic rate

The receiving spouse do not have an increased personal allowance

ANI Income Tax Charge

< 50,000 Nil

Tax charge = Child Beneﬁt x %

> 60,000 Tax charge = 100% Child beneﬁt

Step 1- Automatic Overseas Resident

Maximum 15 days in tax year.

Maximum 45 days in tax year and who has not been UK

Maximum 90 days in a tax year and who works full time

Step 2- Automatic UK resident person

A person whose only home is in UK.

A person who carries out full time work in UK.

Step 3- Sufﬁcient ties test