This article should be read by those of you who are sitting Paper P6 (UK) at either the June or December 2014 sitting. Please note that if you are sitting the exam in December 2013, you will be examined on the Finance Act 2012, which is the legislation as it relates to the tax year 2012–13. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2012 article published on the ACCA website.
This article summarises the additional changes introduced by the Finance Act 2013 that have an effect on the Paper P6 (UK) syllabus.
All of the changes set out in the Paper F6 (UK) article (see 'Related links') are relevant to Paper P6 (UK). In addition, all of the exclusions set out in the Paper F6 (UK) article apply equally to Paper P6 (UK) unless they are referred to below.
THE UK TAX SYSTEM
General anti-abuse rule (GAAR)
As noted in the Paper F6 (UK) article, the new GAAR counteracts tax advantages arising from abusive tax arrangements. The meanings of the relevant terms are:
- ‘Tax advantages’ include increased tax deductions, reduced tax liabilities, deferral of tax payments and advancement of tax repayments.
- ‘Tax arrangements’ are arrangements with a main purpose of obtaining a tax advantage.
- Arrangements are 'abusive' where they cannot be regarded as a reasonable course of action, for example, where they include contrived steps or are intended to take advantage of shortcomings in the tax legislation.
Where the GAAR applies, HM Revenue & Customs may counteract the advantages arising by, for example, increasing the taxpayer’s liability by an appropriate amount.
The scope of income tax
The new statutory test of residence is explained above in the Paper F6 (UK) section. Under these rules, an individual is either UK resident or non-UK resident for the whole of the tax year.
The rules set out in the Paper F6 (UK) article have been expanded slightly for the purposes of Paper P6 (UK).
The following people are automatically treated as not resident in the UK.
- A person who is in the UK for less than 16 days during a tax year, and who has been UK resident for one or more of the previous three tax years.
- A person who is in the UK for less than 46 days during a tax year, and who has not been resident during the previous three tax years.
- A person who works full-time overseas, subject to them not being in the UK for more than 90 days during a tax year.
The following people are automatically treated as resident in the UK.
- A person who is in the UK for 183 days or more during a tax year.
- A person who is in the UK for 30 days in the tax year and whose only home is in the UK.
- A person who carries out full-time work in the UK during a 365-day period, some of which falls within the tax year.
Where a person’s residence status cannot be determined according to any of the automatic tests, their status will be based on the number of ties they have with the UK. For the purposes of Paper P6 (UK), the five ties are:
- Having close family (a spouse/civil partner or minor child) in the UK.
- Having a house in the UK which is available for at least 91 days in the tax year and is made use of during the tax year.
- Doing substantive work in the UK where 40 days or more is regarded as substantive.
- Being in the UK for more than 90 days during either of the two previous tax years.
- Spending more time in the UK than in any other country in the tax year.
The table indicating the number of relevant ties by reference to the number of days in the UK will be provided in the exam.
Additional rules, known as the split year treatment, apply in a year where an individual leaves the UK to live or work overseas or comes from overseas to live or work in the UK. The split year treatment can only apply in a year in which an individual is UK resident. An individual leaving the UK must also be UK resident in the previous year and non-UK resident in the following year. An individual coming to the UK must be non-UK resident in the year prior to the split year.
Under the split year treatment, the year is split into a UK part and an overseas part. The individual is taxed as a UK resident for the UK part and as a non-UK resident for the overseas part. This applies to both income tax and capital gains tax.
For individuals leaving the UK, the split year treatment applies in the following situations.
- The individual leaves the UK to begin full-time work overseas. The overseas part begins when the individual starts the overseas work.
- The individual’s partner (spouse, civil partner or someone with whom the individual lives) leaves the UK to begin full-time work overseas and the individual leaves the UK in order to continue living with them. The overseas part begins on the later of the partner starting work overseas and the individual joining the partner overseas.
- The individual leaves the UK in order to live abroad, sells their UK home, spends a minimal amount of time in the UK and establishes ties with the overseas country by, for example, becoming resident there. The overseas part begins when the individual ceases to have a home in the UK.
For individuals coming to the UK, the split year treatment applies in the following situations.
- The individual comes to the UK, acquires a home in the UK, and the individual does not have sufficient ties to the UK in order to be UK resident prior to obtaining the UK home. The UK part begins when the individual acquires the UK home.
- The individual comes to the UK to work full-time for a period of at least a year and the individual does not have sufficient ties to the UK in order to be UK resident prior to coming to the UK. The UK part begins when the individual starts the UK work.
- The individual returns to the UK following a period of working full-time overseas. The UK part begins when the individual stops working overseas.
- The individual returns to the UK following a period where the individual’s partner has worked full-time overseas. The UK part begins on the later of the partner stopping work overseas and the individual joining the partner in the UK.
The remittance basis
Qualifying individuals who choose to be taxed on the remittance basis are taxed on their overseas income and chargeable gains by reference to the amounts remitted to the UK. Following the abolition of the status of ordinary resident (as set out in the Paper F6 (UK) article) the remittance basis is available to individuals who are resident but not domiciled in the UK.
Cap on income tax reliefs
Cap on loss relief
In the Paper P6 (UK) exam the cap on income tax reliefs, as set out in the Paper F6 (UK) article, also applies in the following circumstances.
- The offset of qualifying loan interest against total income.
- The offset of losses arising in the first four tax years of a business against general income in the three preceding years.
- The offset of capital losses on the disposal of qualifying unquoted shares against general income.
Income from employment
The tax treatment of share option and share incentive schemes
There have been a number of changes to the rules for share option schemes and share incentive schemes. In particular:
- SAYE share option scheme
Shareholders owning more than 25% of the company are no longer excluded.
- Share incentive plan
Shareholders owning more than 25% of the company are no longer excluded.
The £1,500 annual limit in respect of dividend shares has been removed.
- Company share option plan
Shareholders owning more than 30% (formerly 25%) are excluded.
Taxable total profits
Research and development (R&D) expenditure
Where a large company incurs qualifying expenditure on R&D, it can claim a tax deduction of 130% of the costs incurred. A new, alternative relief has been introduced whereby, instead of the additional 30% tax deduction, the company can claim a tax credit equal to 10% of the costs incurred.
This 10% tax credit reduces the company’s corporation tax liability. Any excess can be paid to the company up to a maximum of the company’s PAYE/NIC liability in respect of those employees involved in R&D activities for the relevant accounting period. Any remaining credit balance can be carried forward and offset against the company’s corporation tax liability for the next accounting period or any other accounting period or in the case of a group company, surrendered to another member of the group.
The 10% tax credit is also treated as taxable income, such that it increases the company’s taxable income. For a company that has incurred R&D expenditure of £100,000, the overall effect of the rules is as follows: