Relevant to P6 (UK)
This article looks at the changes made by the Finance Act 2016 (which is the legislation as it relates to the tax year 2016/17) and should be read by those of you who are sitting P6 (UK) in the year from 1 April 2017 to 31 March 2018.
Please note that if you are sitting P6 (UK) in the period 1 September 2016 to 31 March 2017, you will be examined on the Finance Act 2015 and the Finance (No 2) Act 2015, which is the legislation as it relates to the tax year 2015/16. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2015 article published on the ACCA website.
All of the changes set out in the F6 (UK) article (see ‘Related links’) are relevant to P6 (UK). In addition, all of the exclusions set out in the F6 (UK) article apply equally to P6 (UK) unless they are referred to below.
This article summarises the additional changes introduced by the Finance Act 2016 which have an effect on the P6 (UK) syllabus. It does not refer to any amendments to the P6 (UK) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the P6 (UK) Syllabus and Study Guide for the year 1 April 2017 to 31 March 2018 for details of such amendments.
Candidates should be aware that the regimes designed to prevent aggressive tax avoidance and to penalise tax evasion continue to be added to and strengthened.
A penalty has been introduced to the general anti-abuse rule (GAAR). It applies where the GAAR has been used to counteract tax advantages arising from tax arrangements entered into by the taxpayer. The penalty is 60% of the amount of the tax advantage counteracted by the GAAR.
Finance Act 2015 increased the penalties for failure to notify chargeability to tax, late filing and errors in respect of offshore matters. The level of the penalty depends on the categorisation of the overseas country concerned (as determined by the Treasury) and the behaviour involved.
Finance Act 2016 has increased the minimum penalty for these offences, and introduced further penalties for both the taxpayer and for those who have enabled the offence to be carried out.
Candidates are expected to know that these regimes exist but do not need to know the precise amounts of the penalties that may be charged or the categorisation of particular countries.
Non-residents
The new rules relating to the taxation of the profits of non-resident individuals from a trade of dealing in or developing land in the UK are not examinable.
The taxation of savings income and dividend income
The new rules relating to the taxation of dividends and savings income, as set out in the F6 (UK) article, are as relevant to P6 (UK) as they are to F6 (UK).
Candidates should be aware that, although most interest is now paid gross, companies are still required to deduct 20% income tax from interest paid to individuals (unless the interest is in respect of a quoted Eurobond). Interest paid net will need to be grossed up by 100/80 for inclusion in the income tax computation and there will then be a tax credit equal to the tax deducted. This credit is deducted from the income tax liability (together with any PAYE) in arriving at income tax payable
Candidates must be able to identify which tax computations are necessary in order to advise on particular alternative strategies and then to prepare them quickly and accurately. Candidates will benefit from working practise questions in order to improve their efficiency and accuracy.
The income tax computation has become quite involved and care must be taken to ensure that a taxpayer will pay the least possible amount of tax, particularly where they have material amounts of savings income and/or dividend income. Take some time to think about the following points before you look at the subsequent examples.
Example 1
For the tax year 2016–17, Able has pension income of £8,000, savings income of £4,500 and dividend income of £9,000. His income tax liability is:
| £ | ||
|---|---|---|
| Pension income | 8,000 | |
| Savings income | 4,500 | |
| Dividend income | 9,000 | |
| 21,500 | ||
| Personal allowance | (11,000) | |
| Taxable income | 10,500 | |
| Pension income: £8,000 covered by the personal allowance | 0 | |
| Savings income: £4,500 at 0% (starting rate) | 0 | |
| Dividend income: £3,000 covered by the personal allowance £5,000 at 0% (dividend nil rate band) £1,000 at 7.5% | 0 0 75 | |
Income tax liability | 75 |
You should note that the personal allowance has been offset against the dividend income in priority to the savings income in order to maximise the tax saved. This is not due to tax planning or a claim made by the taxpayer; it is simply the correct way to offset the personal allowance. If the personal allowance had been offset against the savings income, there would have been an additional £3,000 of dividend income which would have been subject to income tax at 7.5%.
Example 2
For the tax year 2016–17, Bond has pension income of £7,000 and savings income of £6,500. Her income tax liability is:
| £ | ||
|---|---|---|
| Pension income | 7,000 | |
| Savings income | 6,500 | |
| 13,500 | ||
| Personal allowance | (11,000) | |
| Taxable income | 2,500 | |
| Pension income: £7,000 covered by the personal allowance | 0 | |
| Savings income: £4,000 covered by the personal allowance £2,500 at 0% (starting rate) | 0 0 | |
Income tax liability | 0 |
If possible, Bond should consider taking additional pension income of £3,500. This additional income would be relieved by her personal allowance, such that there would be no increase to Bond’s income tax liability. Bond’s income tax liability would then be computed as follows.
| £ | ||
|---|---|---|
| Pension income: £10,500 covered by the personal allowance | 0 | |
| Savings income: £500 covered by the personal allowance £5,000 at 0% (starting rate) £1,000 at 0% (savings nil rate band) | 0 0 0 | |
Income tax liability | 0 |
Example 3
For the tax year 2016–17, Campion has employment income of £8,000 and dividend income of £15,000. He is considering whether to award himself a bonus or a dividend of £10,000. It should be assumed that the national insurance contributions employment allowance has already been used.
(i) £10,000 bonus
| £ | ||
|---|---|---|
| Employment income (£8,000 + £10,000) | 18,000 | |
| Dividend income | 15,000 | |
| 33,000 | ||
| Personal allowance | (11,000) | |
| Taxable income | 22,000 | |
| Employment income: £11,000 covered by the personal allowance £7,000 at 20% | 0 1,400 | |
| Dividend income: £5,000 at 0% (dividend nil rate band) £10,000 at 7.5% | 0 750 | |
Income tax liability | 2,150 | |
| Employer’s national insurance contributions (£18,000 – £8,112) x 13.8% | 1,365 | |
| Employee’s national insurance contributions (£18,000 – £8,060) at 12% | 1,193 | |
| Corporation tax saved in respect of employment income: ((£18,000 + £1,365) x 20%) | (3,873) | |
| Total tax cost/(saving) of profit extraction | 835 |
(ii) £10,000 dividend
| £ | |||
|---|---|---|---|
| Employment income | 8,000 | ||
| Dividend income (£15,000 + £10,000) | 25,000 | ||
| 33,000 | |||
| Personal allowance | (11,000) | ||
| Taxable income | 22,000 | ||
| Employment income: £8,000 covered by the personal allowance | 0 | ||
| Dividend income: £3,000 at 0% (personal allowance) £5,000 at 0% (dividend nil rate band) £17,000 at 7.5% | 0 0 1,275 | ||
| Corporation tax saved in respect of employment income: (£8,000 x 20%) | (1,600) | ||
| Total tax cost/(saving) of profit extraction | 325 |
(iii) £3,000 bonus and £7,000 dividend
| £ | |||
|---|---|---|---|
| Employment income (£8,000 + £3,000) | 11,000 | ||
| Dividend income (£15,000 + £7,000) | 22,000 | ||
| 33,000 | |||
| Personal allowance | (11,000) | ||
| Taxable income | 22,000 | ||
| Employment income: £11,000 covered by the personal allowance | 0 | ||
| Dividend income: £5,000 at 0% (dividend nil rate band) £17,000 at 7.5% | 0 1,275 | ||
| Employer’s national insurance contributions (£11,000 – £8,112) x 13.8% | 399 | ||
| Employee’s national insurance contributions (£11,000 – £8,060) at 12% | 353 | ||
| Corporation tax saved in respect of employment income: ((£11,000 + £399) x 20%) | (2,280) | ||
| Total tax cost/(saving) of profit extraction | (253) |
Strategy (iii) demonstrates that whilst it may be beneficial from an income tax perspective to receive additional employment income where it will be covered by the personal allowance, this advantage is negated by the additional national insurance costs. The difference between strategy (ii) and strategy (iii) of £72 (£253 – £325) may be analysed as follows:
| £ | ||
|---|---|---|
| Employer’s national insurance contributions (£11,000 – £8,112) at 13.8% | 399 | |
| Employee’s national insurance contributions (£11,000 – £8,060) at 12% | 353 | |
| Corporation tax saved in respect of the bonus ((£3,000 + £399) x 20%) | (680) | |
| 72 |
The tax treatment of employee shareholder shares
An employee shareholder is an employee who has agreed to give up some of his employment rights, for example in relation to statutory redundancy pay, in exchange for an award of shares in his employer or a parent company of his employer.
The employee is deemed to have paid £2,000 for the shares. The excess of the value of the shares over £2,000 is subject to income tax in the normal way. Similarly, if the shares are readily convertible assets, such that they are subject to Class 1 National Insurance Contributions (NICs), NIC will only be payable on the excess of the value of the shares over £2,000.
From the point of view of capital gains tax, any chargeable gain arising on the first £50,000 in value of employee shareholder shares received by an employee in respect of a particular employment is exempt. This exemption is now subject to a lifetime limit of £100,000 of chargeable gains.
Annual allowance
The new rules relating to the tapered annual allowance, as set out in the F6 (UK) article, are as relevant to P6 (UK) as they are to F6 (UK).
In addition, candidates sitting P6 (UK) need to be aware that the annual allowance will not be tapered unless an individual’s threshold income exceeds £110,000. Accordingly, when considering the annual allowance, the first task is to determine an individual’s threshold income. This is calculated as follows:
| £ | |
|---|---|
| Net income per the income tax computation | X |
| Less: individual’s gross personal pension contributions | (X) |
| Threshold income | X |
It is only where the threshold income exceeds £110,000 that you should then go on to calculate the individual’s adjusted income, as set out in the F6 (UK) article, in order to determine whether or not there is a need to taper the annual allowance.
Entrepreneurs’ relief (ER)
ER is available to an individual on the disposal of an unincorporated business or shares in a trading company (provided certain conditions are satisfied). The effect of the relief is that the gains on the disposals are subject to capital gains tax at a maximum of 10%.
The Finance Act 2015 introduced a restriction whereby ER would no longer be available in respect of the disposal of goodwill where the goodwill was sold to a close company and the individual and the company were related.
This restriction has now been eased, such that ER is available on the disposal of goodwill to a close company where either:
These changes ensure that ER continues to be available, for example, where an individual incorporates his business in order to facilitate a subsequent sale of the newly incorporated company.
Non-resident companies
The new rules relating to the taxation of the profits of non-resident companies from a trade of dealing in or developing land in the UK are not examinable.
Close companies
Where a close company makes a loan to a participator (shareholder) it is required to pay a tax charge to HMRC equal to a percentage of the amount of the loan. This is then repaid to the company when the loan is either repaid or written off. The percentage tax charge has been increased from 25% to 32.5% in respect of loans made on or after 6 April 2016. This is in order to ensure that the rate of tax charged on such loans remains aligned to the higher rate of tax on dividends.
Research and development (R&D) expenditure
Large companies which have incurred qualifying expenditure on R&D no longer have a choice of two different reliefs, as the additional 30% tax deduction is no longer available.
The only relief available to such companies is the tax credit equal to 11% of the costs incurred. This 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 11% 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:
| £ | ||
|---|---|---|
| Corporation tax on additional income (£100,000 x 11% x 20%) | 2,200 | |
| Tax credit deducted from corporation tax liability (£100,000 x 11%) | (11,000) | |
| Corporation tax saved (8.8% of the expenditure) | 8,800 |
Controlled foreign companies (CFCs)
A CFC is a non-UK resident company that is controlled by UK resident companies and/or individuals. There has been a change to the manner in which the CFC charge is calculated.
The CFC charge is a UK corporation tax liability imposed on the owners of non-UK resident companies where UK profits have been artificially diverted from the UK.
The CFC charge is calculated as follows:
When calculating this charge, it is no longer possible to offset UK losses and surplus expenses of management.
The stamp taxes payable on transfers of land
Stamp duty land tax (SDLT) is charged on the transfer of land and buildings at various rates depending on whether the property is residential or non-residential and the value of the property.
The Finance Act 2015 changed the manner in which the tax is calculated in respect of residential property, with each slice of the value of the property being taxed at the appropriate rate, rather than the whole of the property being charged at a single rate by reference to the property’s value.
This method of calculating SDLT has been extended to non-residential property by Finance Act 2016.
In addition, new, higher rates have been introduced in respect of the acquisition of residential properties in certain circumstances. These higher rates apply where a residential property is acquired by:
The following information will be provided in the tax rates and allowances section of the examination for exams in the year 1 April 2017 to 31 March 2018.
Stamp duty land tax
Non-residential properties
| £150,000 or less | 0% | |
| £150,001 − £250,000 | 2% | |
| £250,001 and above | 5% |
Residential properties (note)
| £125,000 or less | 0% | ||
| £125,001 − £250,000 | 2% | ||
| £250,001 − £925,000 | 5% | ||
| £925,001− £1,500,000 | 10% | ||
| £1,500,001 and above | 12% |
Note: These rates are increased by 3% in certain circumstances.
Land and Buildings Transaction Tax (LBTT) in Scotland is excluded from the P6 (UK) syllabus.
Further reading
The following articles (versions relevant to the Finance Act 2016) will be published on the ACCA website next year.
Written by a member of the P6 (UK) examining team