Relevant to Advanced Taxation – United Kingdom (ATX – UK)
This article looks at the changes made by the Finance Act 2020 (which is the legislation as it relates to the tax year 2020/21) and should be read by those of you who are sitting the ATX-UK exam in the period from 1 June 2021 to 31 March 2022.
All of the changes set out in the TX-UK article (see ‘Related links’) are also relevant to ATX-UK. In addition, all of the exclusions set out in the TX-UK article apply equally to ATX-UK unless they are referred to below.
This article does not refer to any amendments to the ATX-UK syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the ATX-UK Syllabus and Study Guide for the period 1 June 2021 to 31 March 2022 for details of such amendments.
Please note that if you are sitting ATX-UK in the period 1 June 2020 to 31 March 2021, you will be examined on the Finance Act 2019, which is the legislation as it relates to the tax year 2019/20. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2019 article published on the ACCA website (see 'Related links').
You are reminded that none of the current or impending devolved taxes for Scotland, Wales, and Ireland are, or will be, examinable.
With effect from the June 2021 exam, a date assumption will be stated at the beginning of each question in the ATX-UK exam.
You should assume that today’s date is 1 March 2021.
Candidates should pay careful attention to this date and the timeline of events and transactions in relation to it within the question scenario.
Income from employment
Lump sum termination payments and payments in lieu of notice
The first £30,000 of certain qualifying discretionary (ex gratia) lump sum payments is exempt from both income tax and national insurance contributions (NICs). Where the qualifying amount exceeds £30,000, this excess is subject to income tax and, from 6 April 2020, class 1A NIC. You should note that the charging of class 1A NIC gives rise to an NIC liability for the employer only, and not for the employee.
Payments in lieu of notice (PILONs) do not normally qualify for the £30,000 exemption regardless of whether they are contractual or non-contractual. Accordingly, most PILONs are subject to income tax and class 1 national insurance contributions (NICs).
However, PILONs which are neither contractual nor the usual custom of the employer need to be thought of as having two parts:
(i) An amount equal to the pay which the employee would have received if he/she had been allowed to work their notice period
This is subject to income tax and class 1 NIC.
(ii) Any amount remaining
This qualifies to be exempt from both income tax and NIC under the £30,000 rule.
Any part of this amount which does not fall within the £30,000 exemption is subject to both income tax and class 1A NIC (note, NOT class 1).
Taxable total profits
Research and development (R&D) expenditure
Where a large company incurs qualifying expenditure on R&D, it can claim an above the line R&D expenditure credit. As a result of making such a claim:
The relevant percentage for these purposes has been increased from 12% to 13%.
For a company that has incurred R&D expenditure of £100,000, the overall effect of the rules is as follows:
|Tax credit deducted from corporation tax liability (£100,000 x 13%)||13,000|
|Corporation tax on additional income (£100,000 x 13% x 19%)||(2,470)|
|Additional corporation tax saved (10.53% of the expenditure)||10,530|
Carry forward of capital losses
The restriction on the offset of trading losses brought forward against total profits was introduced in 2017. This restricts the offset in an accounting period to a maximum of £5 million (the deduction allowance) plus 50% of any excess of total profits over that allowance.
Finance Act 2020 has extended these rules in order to restrict the use of capital losses brought forward in addition to trading losses. A single £5 million deduction allowance now applies to both trading losses and capital losses brought forward. A company must choose how this deduction allowance will be allocated between trading losses and capital losses brought forward.
As a result, the amount of capital losses brought forward for offset against chargeable gains is now restricted to a maximum of the whole/part of the £5 million deduction allowance plus 50% of the excess of the chargeable gains for the period over that amount.
A group of companies is only entitled to one deduction allowance of £5 million (which now has to cover the offset of both trading losses and capital losses brought forward) and can allocate this to any company or companies in the group. For these purposes a group of companies means two or more companies where one company is the ultimate parent of each of the other companies and there is a 75% relationship between the ultimate parent and its subsidiaries.
These rules are complicated, and only apply where the potential loss offset is significant. As a result, you need only have an awareness of these restrictions in the ATX-UK exam. You will not be expected to apply them to a particular scenario.
Almost all of the changes introduced by the Finance Act 2020 are relevant to the TX-UK exam and are therefore described in the TX-UK article. Accordingly, it is vital that you read the TX-UK article in addition to this one. Some of these changes are particularly important to the ATX-UK exam. In view of this, certain aspects of these changes are set out below in order to enable you to appreciate their importance and to emphasise the need for you to read the further detail in the TX-UK article.
Annual investment allowance (AIA)
The current AIA limit of £1,000,000 expires on 31 December 2020. The limit will then be reduced to £200,000 from 1 January 2021.
However, for exams in the period 1 June 2021 to 31 March 2022, it will be assumed that the AIA limit continues to be £1,000,000. This will be the case regardless of the trading period covered by an exam question.
Structures and buildings allowances (SBAs)
This new capital allowance provides an annual tax deduction of 3% of the capital cost (excluding land) of structures and buildings used for the purposes of a trade or for property letting. This is a significant change: prior to the introduction of these rules, such costs have been wholly disallowed for the purposes of calculating taxable trading profits.
The SBA cannot be claimed until the building or structure has been brought into qualifying use. Accordingly, it will be time apportioned for the period in which the building is first brought into use.
It should be remembered that parts of a building are likely to qualify as plant and machinery such that part of the building’s cost will qualify for the more generous plant and machinery capital allowances. SBAs can then be claimed in respect of the balance of the cost of the building. Unsurprisingly, it is not possible to claim both plant and machinery capital allowances and SBAs in respect of the same item of expenditure.
On the sale of the building or structure:
Entrepreneurs’ relief is now called ‘business asset disposal relief’
There have been two significant changes made to entrepreneurs’ relief:
Private residence relief (formerly principal private residence relief) and letting relief
The final period of ownership of a main private residence is always treated as a period of ownership. This period has been reduced from 18 months to nine months.
Letting relief extends private residence relief where a property has been let out during a period which did not otherwise qualify for relief. This relief is now only available where the property owner is in shared occupancy with the tenant. This means that there is no longer any relief where the whole property is let out.
The impact of the UK leaving the European Union (EU)
The UK officially left the EU on 31 January 2020. However, for exams in the period 1 June 2021 to 31 March 2022, it will be assumed that the EU acquisition rules continue to apply.
Commonly controlled entities are permitted to register as a single entity for the purposes of VAT. Once the group registration is in place, there is no need to account for VAT on supplies between group members.
Until 31 October 2019, the controller of the group of companies could not be a member of the VAT group unless it was also a company. This rule has been changed.
Under the new rules, the controller of a group of companies can be a member of the VAT group if it is:
The controlling entity must carry on a trade in the UK (as before). ‘Control’ requires the ownership of more than 50% of a company’s ordinary share capital (as before).
The following articles will be published on the ACCA website at a later date:
Written by a member of the Advanced Taxation – United Kingdom (ATX-UK) examining team