Finance Act 2021

This article looks at the changes made by the Finance Act 2021 (which is the legislation as it relates to the tax year 2021–22) and should be read by those of you who are taking TX-UK in an exam in the period 1 June 2022 to 31 March 2023.

The aim of the article is to summarise the changes made by the Finance Act 2021 and to look at the more important changes in greater detail. The article also includes details of legislation which was enacted prior to 31 May 2021, but has only come into effect from 6 April 2021.

The article does not refer to any amendments to the TX-UK syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the TX-UK Syllabus and Study Guide for the period 1 June 2022 to 31 March 2023 for details of such amendments.

Please note that if you are sitting TX-UK in the period 1 June 2021 to 31 March 2022, you will be examined on the Finance Act 2020, which is the legislation as it relates to the tax year 2020–21. Therefore this article is not relevant to you, and you should instead refer to the Finance Act 2020 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.

Covid-19 pandemic

Candidates are not expected to make any reference to Covid-19 or the global economic crisis as a result of the pandemic in their exams.  

Although the Government has implemented tax measures to combat the economic effect of the pandemic, given the largely temporary nature of these measures, for the foreseeable future they will not be examinable.  

The current syllabus and study guide for the TX-UK exam will not specifically reference these Covid-19 tax measures, unless their omission would fundamentally impact candidates’ understanding of what is and is not examinable. You should refer to the syllabus and study guide document to ensure that you understand what will be examined in your upcoming exam. 

The UK’s membership of the European Union

The UK officially left the EU on 31 January 2020 and the Brexit transition period came to an end on 31 December 2020. Therefore, in your TX-UK exam there will be no difference in the VAT treatment for transactions between the UK with the EU and between the UK with the rest of the world.

Income tax

Rates of income tax

The rates of income tax for the tax year 2021–22 are:

A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.

Personal allowance

The personal allowance for the tax year 2021–22 is £12,570.

This is gradually reduced to nil where a person’s adjusted net income exceeds £100,000. Adjusted net income is net income (total income less deductions for gross pension contributions to an employer’s occupational pension scheme, loss relief and deductible interest payments) less the gross amount of personal pension contributions and gift aid donations.

The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £125,140 or more is not entitled to any personal allowance ((125,140 – 100,000)/2 = £12,570). Where a person has adjusted net income of between £100,000 and £125,140, then the effective marginal rate of income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a result of the withdrawal of the personal allowance. In this situation, it may be beneficial to make additional personal pension contributions or gift aid donations.

EXAMPLE 1
For the tax year 2021–22, June has a trading profit of £184,000. Her income tax liability is:

No personal allowance is available because June’s adjusted net income of £184,000 exceeds £125,140.

EXAMPLE 2
For the tax year 2021–22, May has a trading profit of £159,000. During the year, May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is:

• May’s gross personal pension contributions are £40,000 (32,000 x 100/80) and her gross gift aid donation is £12,000 (9,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000), so her personal allowance of £12,570 is reduced to £9,070 (12,570 – 3,500 ((107,000 – 100,000)/2)).
• The basic and higher rate tax bands are both extended by £52,000 (40,000 + 12,000).

Savings income

Interest received from bank and building societies is paid gross without any tax being suffered at source. Certain types of savings income are paid net of basic rate tax, but these are not examinable. Therefore, as far as TX-UK is concerned, all savings income is treated as paid gross.

Savings income benefits from a 0% rate. For basic rate taxpayers, the savings income nil rate band for the tax year 2021–22 is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit from any savings income nil rate band. Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20% if it falls below the basic rate threshold of £37,700, at the higher rate of 40% if it falls between the basic rate threshold of £37,700 and the higher rate threshold of £150,000, and at the additional rate of 45% if it exceeds the higher rate threshold of £150,000.

EXAMPLE 3
For the tax year 2021–22, Ingrid has a salary of £52,500 and savings income of £1,800. Her income tax liability is:

Ingrid is a higher rate taxpayer, so her savings income nil rate band is £500.

The savings income nil rate band counts towards the basic rate and higher rate bands.

EXAMPLE 4
For the tax year 2021–22, Henri has a salary of £46,500 and savings income of £10,000. During the year, he made gross personal pension contributions of £4,000. His income tax liability is:

• Henri is a higher rate taxpayer, so his savings income nil rate band is £500.
• The savings income nil rate band of £500 counts towards the basic rate band of £37,700. This is then extended by £4,000.

Savings income can also benefit from the starting rate of 0%. However, the starting rate only applies where savings income falls within the first £5,000 of taxable income. If non-savings income exceeds £5,000, then the starting rate of 0% for savings does not apply.

EXAMPLE 5
For the tax year 2021–22, Ali has pension income of £14,200 and savings income of £6,000. His income tax liability is:

• Non-savings income is £1,630 (14,200 – 12,570), so £3,370 (5,000 – 1,630) of the savings income benefits from the starting rate of 0%.
• Ali is a basic rate taxpayer, so his savings income nil rate band is £1,000.

When it comes to tax planning for a married couple, or a couple in a civil partnership, the availability of the savings income nil rate band means that transferring income from the partner paying tax at a higher rate to the partner paying tax at a lower rate is not necessarily the most beneficial option.

EXAMPLE 6
Samuel and Samantha are a married couple. For the tax year 2021–22, Samuel will have a salary of £90,000. Samantha will have a salary of £30,000 and savings income of £1,500.

Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The remaining £500 of her savings income will be taxable at the rate of 20%. Samuel is a higher rate taxpayer, so his savings income nil rate band is £500. Transferring sufficient savings to Samuel so that he receives £500 of the savings income will therefore save income tax of £100 (500 at 20%) for 2021–22.

Dividends

The first £2,000 of dividend income for the tax year 2021–22 benefits from a 0% rate. This £2,000 nil rate band is available to all taxpayers, regardless of whether they pay tax at the basic, higher or additional rate. However, the dividend nil rate band counts towards the basic rate and higher rate bands.

Dividend income in excess of the £2,000 nil rate band is taxed at 7.5% if it falls below the basic rate threshold of £37,700, at 32.5% if it falls between the basic rate threshold of £37,700 and the higher rate threshold of £150,000, and at 38.1% if it exceeds the higher rate threshold of £150,000.

EXAMPLE 7
For the tax year 2021–22, Ezra has a salary of £62,500 and dividend income of £3,800. Her income tax liability is:

EXAMPLE 8
For the tax year 2021–22, Erica has a salary of £44,000 and dividend income of £8,500. Her income tax liability is:

The £2,000 dividend nil rate band counts towards the basic rate band of £37,700.

The order in which tax rates are applied to taxable income is firstly non-savings income, then savings income and finally dividend income. Deductible interest, trade losses and the personal allowance should initially be set against non-savings income and then savings income. 

EXAMPLE 9
For the tax year 2021–22, Joe has a salary of £46,700, savings income of £2,000 and dividend income of £6,000. During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted income tax of £6,826 under PAYE from his earnings. The income tax payable by Joe is:

• Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
• The dividend nil rate band uses up the remaining basic rate band of £1,870 (37,700 – 33,830 – 500 – 1,500).

The savings income and dividend nil rate bands will mean that many taxpayers do not have any tax liability in respect of savings and dividend income.

EXAMPLE 10
For the tax year 2021–22, Ming has property income of £26,700, savings income of £700 and dividend income of £1,200. Her income tax liability is:

Ming is a basic rate taxpayer, so her savings income nil rate band is £1,000. This is restricted to the actual savings income of £700.

The availability of the dividend nil rate band (together with the savings income nil rate band) may reduce overall tax for married couples and couples in civil partnerships.

EXAMPLE 11
Nigel and Nook are a married couple. For the tax year 2021–22, Nigel will have a salary of £160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £3,800.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2021–22.

Nook has fully utilised her dividend nil rate band of £2,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £1,800 of the dividend income will therefore save income tax of £585 (1,800 at 32.5%) for 2021–22.

Given the tax rates which apply to dividend income, incorporating the business of a sole trader or partnership will not necessarily result in a substantial tax saving. The rates also impact on the decision whether to extract profits from a company either as director’s remuneration or as dividends.

EXAMPLE 12
Sam is currently self-employed. If he continues to trade on a self-employed basis, his trading profit for the year ended 5 April 2022 is forecast to be £50,000. Based on this figure, Sam’s total income tax liability and national insurance contributions (NIC) for the tax year 2021–22 will be £11,284.

Sam is considering incorporating his business on 6 April 2021. The forecast taxable total profits of the new limited company for the year ended 5 April 2022 will be £50,000. After paying corporation tax of £9,500, Sam will withdraw all of the profits by paying himself dividends of £40,500 (50,000 – 9,500) during the tax year 2021–22.

Sam’s income tax liability will be:

The total tax cost if Sam incorporates his business is £11,445 (9,500 + 1,945). This is an overall cost of £161 (11,445 – 11,284) compared to continuing on a self-employed basis.

However, incorporation can provide other tax advantages. For example, the corporation tax rate on profits remaining undrawn within a company is just 19%. This compares to the higher and additional rates of 40% and 45% which can be payable by a sole trader or partners.

Transferable amount of personal allowance

The transferable amount of personal allowance (also known as the marriage allowance or marriage tax allowance) is £1,260 for the tax year 2021–22. This fixed amount can be transferred between spouses (or registered civil partners) provided neither is a higher rate or additional rate taxpayer.

The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax, so the tax reduction is therefore £252 (1,260 at 20%). If the recipient’s tax liability is less than £252, then the tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.

EXAMPLE 13
Paul and Rai are a married couple. For the tax year 2021–22, Rai has a salary of £38,000 and Paul has a trading profit of £10,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Paul’s personal allowance is reduced to £11,310 (12,570 – 1,260), and because this is higher than his trading profit of £10,000 he does not have any tax liability.

Rai’s income tax liability is:

Employment income

Company car benefit
There are two separate sets of company car percentages for the tax year 2021–22 – one for company cars registered up to 5 April 2020, and one for cars registered from 6 April 2020 onwards. However, only the percentages for company cars registered from 6 April 2020 onwards are examinable.

You should therefore assume that for any question involving company cars, the motor cars were registered from 6 April 2020 onwards.

• The percentage for electric-powered motor cars with zero CO₂ emissions is 1%.
• For hybrid-electric motor cars with CO₂ emissions between 1 and 50 grams per kilometre, the electric range of a motor car is relevant in determining the car benefit percentage, as follows:

• For a motor car with a CO₂ emission rate of between 51 and 54 grams per kilometre, the percentage is 14%.
• A 15% base percentage applies once CO₂ emissions reach a base level of 55 grams per kilometre.
• The base percentage of 15% rises in 1% steps for each 5 grams per kilometre above the base level of 55 grams per kilometre, up to a maximum of 37%.
• There is a 4% surcharge for diesel motor cars which do not meet the real driving emissions 2 (RDE2) standard. Company diesel motor cars meeting the RDE2 standard are treated as if they were petrol motor cars. The percentage rates (including the lower rate of 14%) are increased by 4% for diesel cars which do not meet the standard, but not beyond the maximum percentage rate of 37%.

The company car benefit information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

Car benefit percentage
The relevant base level of CO₂ emissions is 55 grams per kilometre. The percentage rates applying to petrol-powered motor cars (and diesel-powered motor cars meeting the RDE2 standard) with CO₂ emissions up to this level are:

The percentage for electric-powered motor cars with zero CO₂ emissions is 1%.

For hybrid-electric motor cars with CO₂ emissions between 1 and 50 grams per kilometre, the electric range of a motor car is relevant:

Electric range

EXAMPLE 14
During the tax year 2021–22, Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a hybrid-electric company car throughout the tax year 2021–22. The motor car has a list price of £32,200, an official CO₂ emission rate of 24 grams per kilometre and an electric range of 90 miles.

Betty was provided with a new diesel powered company car throughout the tax year 2021–22. The motor car has a list price of £16,400 and an official CO₂ emission rate of 104 grams per kilometre. The motor car meets the RDE2 standard.

Charles was provided with a new diesel powered company car on 6 August 2021. The motor car has a list price of £13,500 and an official CO₂ emission rate of 107 grams per kilometre. The motor car does not meet the RDE2 standard.

Diana was provided with a new petrol powered company car throughout the tax year 2021–22. The motor car has a list price of £84,600 and an official CO₂ emission rate of 183 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2021–22 for the use of the motor car.

Amanda
With CO₂ emissions between 1 and 50 grams per kilometre, the electric range of the motor car is relevant. This is between 70 and 129 miles, so the relevant percentage is 4%. The motor car was available throughout 2021–22, so the benefit is £1,288 (32,200 x 4%).

Betty
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The CO₂ emissions figure of 104 is rounded down to 100 so that it is divisible by five. The minimum percentage of 15% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 24% (15% +  9% ((100 – 55)/5)). The 4% surcharge for diesel cars is not applied because the RDE2 standard is met. The motor car was available throughout 2021–22, so the benefit is £3,936 (16,400 x 24%).

Charles
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 29% (15% + 10% ((105 – 55)/5) + 4% (charge for a diesel car not meeting the RDE2 standard)). The motor car was only available for eight months of 2021–22, so the benefit is £2,610 (13,500 x 29% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 40% (15% + 25% ((180 – 55)/5)), but this is restricted to the maximum of 37%. The motor car was available throughout 2021–22, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit.

Company van benefit
The annual scale charge used to calculate the benefit where an employee is provided with a company van has been increased from £3,490 to £3,500.

Vans producing zero CO₂ emissions (zero emission vans) have a zero benefit charge.

Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure which is announced each year. For the tax year 2021–22, the base figure has been increased from £24,500 to £24,600.

The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

EXAMPLE 15
Continuing with example 14.

Amanda was provided with fuel for private use between 6 April 2021 and 5 April 2022.

Betty was provided with fuel for private use between 6 April 2021 and 31 December 2021.

Charles was provided with fuel for private use between 6 August 2021 and 5 April 2022.

Diana was provided with fuel for private use between 6 April 2021 and 5 April 2022. She paid Fashionable plc £600 during the tax year 2021–22 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
Amanda was provided with fuel for private use throughout 2021–22, so the benefit is £984 (24,600 x 4%).

Betty
Betty was provided with fuel for private use for nine months of 2021–22, so the benefit is £4,428 (24,600 x 24% x 9/12).

Charles
Charles was provided with fuel for private use for eight months of 2021–22, so the benefit is £4,756 (24,600 x 29% x 8/12).

Diana
Diana was provided with fuel for private use throughout 2021–22, so the benefit is £9,102 (24,600 x 37%). There is no reduction for the contribution made by Diana because the cost of private fuel was not fully reimbursed.

Company van fuel benefit
The fuel benefit where private fuel is provided for a company van has been increased from £666 to £669.

There is no fuel benefit for a company van which produces zero CO₂ emissions (a zero emission van).

Approved mileage allowances
Approved mileage allowances rates are unchanged, with a rate of 45p per mile for the first 10,000 business miles, and 25p per mile for business mileage in excess of 10,000 miles.

Official rate of interest
The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the provision of living accommodation costing in excess of £75,000.

For exams in the period 1 June 2022 to 31 March 2023, the actual official rate of interest of 2% for the tax year 2021–22 will be used.

Capital allowances

Annual investment allowance
The current annual investment allowance (AIA) limit of £1,000,000 has been extended until 31 December 2021.It will be replaced by a rate of £200,000 from 1 January 2022.  However, for exams in the period 1 June 2022 to 31 March 2023, it will be assumed that the limit of £1,000,000 continues to apply. This will be the case regardless of the period covered by an exam question, so, for example, the AIA limit for the year ended 31 March 2022 will be £1,000,000.

The AIA provides an allowance of 100% for the first £1,000,000 of expenditure on plant and machinery in a 12 month period. Any expenditure in excess of the £1,000,000 limit qualifies for writing down allowances (WDA) as normal. The AIA applies to all expenditure on plant and machinery with the exception of motor cars. The £1,000,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, for the three-month period ended 31 December 2021, the AIA limit would be £250,000 (1,000,000 x 3/12).

Motor cars
The motor car CO₂ emission thresholds have been reduced:

• Only new electric-powered motor cars with zero CO₂ emissions now qualify for the 100% first-year allowance. Previously, new motor cars with CO₂ emissions below 50 grams per kilometre qualified.
• The CO₂ emissions limit to qualify for writing-down allowances at the rate of 18% has been reduced from 110 grams per kilometre to 50 grams per kilometre.

This means that writing-down allowances at the rate of 18% are available where a motor car’s CO₂ emissions are between 1 and 50 grams per kilometre, and at the rate of 6% where CO₂ emissions are over 50 grams per kilometre.

These changes apply from 6 April 2021 (1 April 2021 for limited companies), and a question will not be set involving the CO₂ emission thresholds that applied prior to this date.

Unless there is private use, motor cars qualifying for writing down allowances at the rate of 18% are included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 6% are included in the special rate pool. Motor cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private use adjustment can be calculated.         

EXAMPLE 16
Ling prepares accounts to 31 March. On 1 April 2021, the tax written down value of plant and machinery in her main pool is £16,700.

The following transactions took place during the year ended 31 March 2022:

• Motor car (1) purchased on 8 April 2021 has CO₂ emissions of 40 grams per kilometre. This motor car is used by Ling and 20% of the mileage is for private journeys.
• Motor car (2) purchased on 14 April 2021 and sold on 12 December 2021 has CO₂ emissions of 75 grams per kilometre.
• Motor car (3) purchased on 2 September 2021 has CO₂ emissions of 45 grams per kilometre.
• Motor car (4) purchased on 19 November 2021 is a new electric-powered motor car with zero CO₂ emissions.

Ling’s capital allowance claim for the year ended 31 March 2022 is:

• Motor car (1) is kept separately because there is private use by Ling. This motor car has CO₂ emissions between 1 and 50 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (2) had CO₂ emissions over 50 grams per kilometre and therefore qualifies for writing down allowances at the rate of 6%. Even though it is the only asset in the special rate pool, there is no balancing allowance on the disposal of this motor car because the expenditure is included in a pool.
• Motor car (3) has CO₂ emissions between 1 and 50 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18% in the main pool.
• Motor car (4) has zero CO₂ emissions and therefore qualifies for the 100% first year allowance.

Zero-emission motor cars
New motor cars with zero CO₂ emissions qualify for the 100% first year allowance, so the cost is effectively deducted as an expense in the year of purchase.

If provided as company cars and the 1% car benefit percentage is available, there are minimal income tax implications for the employee and only a very small amount of class 1A national insurance contributions (NICs) payable for the employer.

Providing low-emission motor cars as company cars is therefore very beneficial, especially for directors who are also 100% shareholders in their own companies.

Structures and buildings allowance
The annual straight-line allowance is unchanged at 3%, with relief being given over a 33⅓ year period (33 years and four months).

The structures and buildings allowance (SBA) is only available where a building (or structure) has been constructed on or after 29 October 2018 (the date of the 2018 Budget). However, a question will only be set where construction is on or after 6 April 2020 (1 April 2020 for limited companies).

EXAMPLE 17
Hipster Ltd prepares accounts to 31 March. On 1 July 2021, the company purchased a newly constructed factory from a builder for £470,000 (including land of £110,000). The factory was brought into use on 1 September 2021.

The qualifying expenditure for SBA is £360,000 (470,000 – 110,000). The factory was brought into use on 1 September 2021, so the SBA for the year ended 31 March 2022 is £6,300 (360,000 at 3% x 7/12).

An allowance of £10,800 (360,000 at 3%) will be given in subsequent years.

Relief is also given for the cost of subsequent improvements, or where a building is renovated or converted.

EXAMPLE 18
Ballpoint Ltd prepares accounts to 31 March. The company renovated a disused warehouse (originally purchased in 2011) at a cost of £82,000, with the warehouse subsequently brought into use on 1 January 2022.

The renovation expenditure qualifies for relief. As the warehouse was brought into use on 1 January 2022, the SBA for the year ended 31 March 2022 is £615 (82,000 at 3% x 3/12).

The original cost of the warehouse does not qualify for the SBA, being purchased prior to 29 October 2018. Even if it had qualified, the SBA for the renovation expenditure would have been kept entirely separate from the SBA on the original cost.

Unlike plant and machinery, there is no balancing charge or balancing allowance when a building (or structure) that has qualified for the SBA is sold. Instead, the purchaser simply continues to claim the 3% allowance for the remainder of the 33⅓ year period based on original cost.

However, on a disposal, the allowances that have been claimed are effectively clawed back by adding them to the sales proceeds in order to determine the chargeable gain or allowable loss arising.

EXAMPLE 19
Continuing with example 17.

Hipster Ltd sold its factory to Gentrified Ltd on 31 March 2022 for £500,000 (including land of £120,000). Gentrified Ltd also prepares accounts to 31 March.

The sale of the factory will not affect Hipster Ltd’s SBA claim for the year ended 31 March 2022. From the year ended 31 March 2023 onwards, Gentrified Ltd will claim £10,800 (360,000 at 3%) annually based on the original cost to Hipster Ltd. The SBA will run for the remaining 32 years and nine months of the 33⅓ year period that commenced on 1 September 2021.

Hipster Ltd’s sale proceeds of £500,000 will be increased by the allowance claimed of £6,300. The chargeable gain on the disposal will therefore be £36,300 (500,000 + 6,300 – 470,000).

You should assume that for any question involving the purchase (as opposed to a new construction) of a building, the SBA is not available unless stated otherwise.

Enhanced capital allowances for companies only, are covered in more detail in the corporation tax section of this article.

The capital allowances information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

Capital allowances: rates of allowance

Loss relief

An additional loss relief has been introduced which extends the carry back of losses incurred in the tax years 2020–21 and 2021–22.

This additional loss relief is not examinable.

Leased motor cars

From April 2021, the CO₂ emission threshold for leased motor cars has been reduced from 110 grams per kilometre to 50 grams per kilometre. This means that there is no adjustment where the CO₂ emissions of a leased motor car do not exceed 50 grams per kilometre. Where CO₂ emissions are more than 50 grams per kilometer, then 15% of the leasing costs are disallowed in calculating taxable profits.

EXAMPLE 20
Fabio makes up his accounts to 31 March. On 1 April 2021, the business commenced the lease of two motor cars. The first motor car has CO₂ emissions of 45 grams per kilometre and was leased at a cost of £4,800 during the year ended 31 March 2022. The second motor car has CO₂ emissions of 120 grams per kilometre and was leased at a cost of £6,000 during the year ended 31 March 2022.

When calculating his taxable profits for the year ended 31 March 2022, Fabio Ltd will have to disallow leasing costs of £900 (6,000 x 15%).                     

Individual savings accounts

The individual savings account (ISA) investment limit for the tax year 2021–22 is unchanged at £20,000. 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 – such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.

The availability of the savings income nil rate band for basic and higher rate taxpayers means that there is no tax benefit to investing in cash ISAs for many individuals. However, cash ISAs are advantageous for additional rate taxpayers and for other individuals where their savings income nil rate band is already utilised.

The availability of the dividend nil rate band means that there is no tax advantage to receiving dividend income within a stocks and shares ISA for individuals with dividend income of £2,000 or less. However, chargeable gains made within a stocks and shares ISA are exempt from capital gains tax. Stocks and shares ISAs are therefore advantageous where chargeable gains are made in excess of the annual exempt amount.

National insurance contributions (NIC)

Class 1 and class 1A NIC
For the tax year 2021–22, the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £9,568 per year and £50,270 per year, and the rate of 2% is paid on all earnings over £50,270 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8% and is paid on all earnings over £8,840 per year. Note that this limit is not aligned with the employee limit.

The rate of class 1A NIC which employers pay on taxable benefits provided to employees is also unchanged at 13.8%.

Employment allowance
The annual employment allowance for the tax year 2021–22 is unchanged at £4,000. This can be used by businesses to reduce the amount of employer’s class 1 NIC which is paid to HM Revenue and Customs (HMRC). For example, if a business’s total employer’s class 1 NIC for the tax year 2021–22 is £4,600, then only £600 (4,600 – 4,000) will be paid to HMRC. If total employer’s class 1 NIC is £4,000 or less, then the liability will be nil. The employment allowance is not available:

• To companies where a director is the sole employee; or
• Where employers’ contributions are £100,000 or more for the previous tax year.

The class 1 and class 1A NIC information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

National insurance contributions

EXAMPLE 21
Simone Ltd has three employees who are each paid £60,000 per year. One of the employees was provided with the following taxable benefits during the tax year 2021–22:

The class 1 and class 1A NIC liabilities are:

Class 2 NIC
For the tax year 2021–22, the rate of class 2 NIC is unchanged at £3.05 per week.

Class 2 NIC is payable where profits exceed a small profits threshold of £6,515.

Class 4 NIC
The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £9,568 and £50,270, and the rate of 2% is paid on all profits over £50,270.

The class 2 and 4 NIC information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

National insurance contributions

EXAMPLE 22
Jimmy and Jenny are both self-employed. Their trading profits for the tax year 2021–22 are respectively £25,000 and £60,000. The class 4 NIC liabilities are:

Pension schemes

Annual allowance
The annual allowance for the tax year 2021–22 is unchanged at £40,000.

For the tax year 2021–22, the annual allowance is reduced by £1 for every £2 by which a person’s adjusted income exceeds £240,000, down to a minimum tapered annual allowance of £4,000. Therefore, a person with adjusted income of £312,000 or more, will only be entitled to an annual allowance of £4,000 (40,000 – ((312,000 – 240,000)/2) = £4,000).

Tapering applies on a tax year basis, so a taxpayer with variable income might find themselves entitled to the full £40,000 annual allowance in some years, and a tapered annual allowance in other years.

The definition of adjusted income is net income plus any employee contributions to occupational pension schemes (these will have been deducted in calculating net income) plus any employer contributions to either occupational or personal pension schemes. For the self-employed, adjusted income will simply be net income.

EXAMPLE 23
For the tax year 2021–22, Juliet has a trading profit of £286,000. She has never previously been a member of a pension scheme.

Juliet’s tapered annual allowance for 2021–22 is £17,000 (40,000 – ((286,000 – 240,000)/2)).

Carry forward
If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years.

It is possible to use brought forward unused annual allowances in the tax year 2021–22 if a tapered annual allowance applies for this year. However, it is the tapered annual allowance for 2021–22 which is used to establish whether any carried forward is available from this year to future tax years.

Carry forward is only possible if a person is a member of a pension scheme for a particular tax year. Therefore, for any year in which a person is not a member of a pension scheme the annual allowance is lost.

EXAMPLE 24
Monica and Nicola have made the following gross personal pension contributions during the tax years 2018–19, 2019–20 and 2020–21:

Monica was not a member of a pension scheme for the tax year 2018–19. Nicola was a member of a pension scheme for all three tax years. Neither Monica nor Nicola have sufficient income for their annual allowances to be tapered.

Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2019–20 and £12,000 (40,000 – 28,000) from 2020–21, so, with the annual allowance of £40,000 for 2021–22, a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2021–22. She was not a member of a pension scheme for 2018–19, so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2019–20 and £40,000 from 2020–21, so, with the annual allowance of £40,000 for 2021–22, a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2021–22. The annual allowance for 2018–19 is fully utilised, but Nicola was a member of a pension scheme for 2020–21 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2021–22 is utilised first, then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 25
Perry has made the following gross personal pension contributions:

Perry does not have sufficient income for his annual allowance to be tapered.

The pension contribution of £48,000 for 2021–22 has used all of Perry’s annual allowance of £40,000 for 2021–22 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (40,000 – 22,000) from 2018–19. Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2019–20 and £21,000 (40,000 – 19,000) from 2020–21 to carry forward to 2022–23. The remaining unused allowance of £10,000 (18,000 – 8,000) from 2018–19 cannot be carried forward to 2022–23 because this is more than three years ago.

EXAMPLE 26
Chong has made the following gross personal pension contributions:

Chong’s adjusted income for the tax year 2021–22 is £340,000, but for previous tax years he did not have sufficient income for his annual allowance to be tapered.

Chong’s tapered annual allowance for 2021–22 is the minimum of £4,000 because his adjusted income exceeds £312,000. Chong therefore has unused allowances of £9,000 (40,000 – 31,000) from 2019–20, £21,000 (40,000 – 19,000) from 2020–21 and £1,000 (4,000 – 3,000) from 2021–22 to carry forward to 2022–23.

Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the annual allowance (including any brought forward unused allowances), then there will be an annual allowance charge. This charge is subject to income tax at a person’s marginal rates.

EXAMPLE 27
For the tax year 2021–22, Frank has a trading profit of £97,500 and made gross personal pension contributions of £45,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is:

• Frank has earnings of £97,500 for 2021–22. All of the pension contributions of £45,000 therefore qualify for tax relief.
• Frank’s adjusted income is clearly less than £240,000, so the full annual allowance of £40,000 is available for 2021–22.
• The annual allowance charge of £5,000 is the excess of the pension contributions over the annual allowance.
• Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
• Higher rate tax relief is given by extending the basic rate tax band to £82,700 (37,700 + 45,000).

Lifetime allowance
The lifetime allowance for the tax year 2021–22 is unchanged at £1,073,100.

The lifetime allowance applies to the total funds which can be built up within a person’s pension schemes. Where the limit is exceeded, there will be an additional tax charge when that person subsequently withdraws the funds in the form of a pension.

The pension scheme information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

Pension scheme limits

The maximum contribution which can qualify for tax relief without any earnings is £3,600.

Capital gains tax

Annual exempt amount

The annual exempt amount for the tax year 2021–22 is unchanged at £12,300.

Rates of capital gains tax

The lower rate and the higher rate of capital gains tax for the tax year 2021–22 are unchanged at 10% and 20%. The residential property rates are also unchanged at 18% and 28%. These apply where a gain arising from the disposal of residential property is not fully covered by private residence relief.

Chargeable gains are taxed at the lower rate of 10% (or 18%) where they fall within the basic rate band of £37,700, and at the higher rate of 20% (or 28%) where they exceed this threshold. The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.

EXAMPLE 28
For the tax year 2021–22, Adam has a salary of £44,000. During the year, he made net personal pension contributions of £4,400. On 15 June 2021, Adam sold an antique table and this resulted in a chargeable gain of £21,800.

For the tax year 2021–22, Bee has a trading profit of £60,000. On 20 August 2021, she sold an antique vase and this resulted in a chargeable gain of £20,100.

For the tax year 2021–22, Chester has a salary of £43,500. On 31 October 2021, he sold a residential property and this resulted in a chargeable gain of £47,300.

Adam
Adam’s taxable income is £31,430 (44,000 less the personal allowance of 12,570). His basic rate tax band is extended to £43,200 (37,700 + 5,500 (4,400 x 100/80)), of which £11,770 (43,200 – 31,430) is unused.

Adam’s taxable gain of £9,500 (21,800 less the annual exempt amount of 12,300) is fully within the unused basic rate tax band, so his capital gains tax liability is therefore £950 (9,500 at 10%). This will be due on 31 January 2023.

Bee
Bee’s taxable income is £47,430 (60,000 – 12,570), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £7,800 (20,100 – 12,300) is therefore £1,560 (7,800 at 20%). This will be due on 31 January 2023.

Chester
Chester’s taxable income is £30,930 (43,500 – 12,570), so £6,770 (37,700 – 30,930) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £35,000 (47,300 – 12,300) is therefore:

Assuming Chester’s income for the tax year 2021–22 was correctly estimated at the time of the residential property disposal, his capital gains tax liability of £9,123 will have been paid 30 days after the disposal (30 November 2021), with no adjustment necessary under the self-assessment system.

Where a person has both residential property gains and other gains, then the annual exempt amount and any capital losses should initially be deducted from the residential property gains. This approach will save capital gains tax at either 18% or 28%, compared to either 10% or 20% if used against the other gains.

However, how any unused basic rate tax band is allocated between chargeable gains does not make any difference to the overall capital gains tax liability (since the differential is 10% in both cases).

EXAMPLE 29
For the tax year 2021–22, Douglas does not have any income. On 15 June 2021, he sold an antique vase and this resulted in a chargeable gain of £19,000. On 28 August 2021, he sold a residential property and this resulted in a chargeable gain of £39,800.

Ignoring the payment on account in respect of the residential property gain, Douglas’ capital gains tax liability is:

• The annual exempt amount is set against the residential property gain.
• The capital gains tax liability could alternatively be calculated as:

Business asset disposal relief

Business asset disposal relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2021–22, the lifetime qualifying limit is unchanged at £1 million.

Gains qualifying for business asset disposal relief are taxed at a rate of 10% regardless of the level of a person’s taxable income.

EXAMPLE 30
On 25 January 2022, Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2015 and was an employee of the company from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2021–22.

Michael’s capital gains tax liability is:

Although chargeable gains which qualify for business asset disposal relief are always taxed at a rate of 10%, they must be taken into account when establishing the rate which applies to other chargeable gains. Chargeable gains qualifying for business asset disposal relief therefore reduce the amount of any unused basic rate tax band.

The annual exempt amount and any capital losses should initially be deducted from those chargeable gains which do not qualify for business asset disposal relief (giving preference to any residential property gains). This approach could save capital gains tax at 20% (18% or 28% if residential property gains are involved), compared to just 10% if used against chargeable gains which do qualify for relief.

There are several ways of presenting computations involving such a mix of chargeable gains, but the simplest approach is to keep chargeable gains qualifying for business asset disposal relief and other chargeable gains separate.

EXAMPLE 31
On 30 September 2021, Mika sold a business which she had run as a sole trader since 1 January 2015. The sale resulted in the following chargeable gains:

The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £8,000 for the tax year 2021–22. She has unused capital losses of £28,000 brought forward from the tax year 2020–21.

Mika’s capital gains tax liability is:

• The annual exempt amount and the capital losses are set against the chargeable gain on the sale of the freehold warehouse because this does not qualify for business asset disposal relief.
• £29,700 (37,700 – 8,000) of Mika’s basic rate tax band is unused, but this is set against the gains qualifying for business asset disposal relief.

Where the £1 million lifetime limit is exceeded, gains in excess of the limit will be subject to the normal rates of capital gains tax.

EXAMPLE 32
On 10 December 2021, Raj sold a 45% shareholding in Splash Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £1,300,000 which qualifies for business asset disposal relief. Raj is a higher rate taxpayer and has not made any previous disposals qualifying for relief.

Raj’s capital gains tax liability is:

Investors' relief

Investors’ relief effectively extends business asset disposal relief to external investors in trading companies which are not listed (unquoted) on a stock exchange.

However, investors’ relief has its own separate £10 million lifetime limit (compared to the business asset disposal relief lifetime limit of £1 million). Qualifying gains are taxed at a rate of 10%. To qualify for investors’ relief, shares must be:

• Newly issued shares acquired by subscription after 17 March 2016, and
• Owned for at least three years after 6 April 2016.

With certain exceptions (such as being an unremunerated director) the investor must not be an employee or a director of the company whilst owning the shares.

EXAMPLE 33
On 20 June 2018, Winnie subscribed for 150,000 £1 ordinary shares (a 2% shareholding) in Unquote Ltd, an unquoted trading company, at their par value.

She has never been an employee or director of the company. Winnie sold the 150,000 shares in Unquote Ltd for £760,000 on 15 December 2021.

Winnie’s shareholding in Unquote Ltd does not qualify for business asset disposal relief because the 5% shareholding condition is not met and she was not an employee or director of the company. However, the conditions for investors’ relief are met, including the three-year holding period requirement.

Winnie’s capital gains tax liability is:

Gift holdover relief

From the June 2022 sitting onwards, the standardised term ‘gift holdover relief’ will be used instead of ‘gift relief’, ‘holdover relief’ or ‘holdover relief (gift relief)’.

The capital gains tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

Capital gains tax: tax rates

Capital gains tax: Business asset disposal relief and investors’ relief

Inheritance tax

Rates of inheritance tax

The nil rate band for the tax year 2021–22 is unchanged at £325,000.

A residence nil rate band applies where a main residence is inherited on death by direct descendants (children and grandchildren). For the tax year 2021–22, the residence nil rate band is £175,000.

The residence nil rate band is only relevant where an individual dies on or after 6 April 2017, their estate exceeds the normal nil rate band of £325,000 and their estate includes a main residence. Any other type of property, such as a property which has been let out, does not qualify for the residence nil rate band.

EXAMPLE 34
Sophie died on 26 May 2021 leaving an estate valued at £850,000. Under the terms of her will, Sophie’s estate was left to her children. The estate included a main residence valued at £325,000.

The inheritance tax (IHT) liability is:

The residence nil rate band of £175,000 is available because Sophie’s estate included a main residence and this was left to her direct descendants.

In the same way in which any unused normal nil rate band can be transferred to a surviving spouse (or registered civil partner), the residence nil rate band is also transferable. It does not matter when the first spouse died.

EXAMPLE 35
Timothy died on 19 June 2021 leaving an estate valued at £860,000. Under the terms of his will, Timothy’s estate was left to his children. The estate included a main residence valued at £450,000.

Timothy’s wife died on 5 May 2010. She used all of her nil rate band.

Timothy’s IHT liability is:

• Timothy’s personal representatives can claim his deceased wife’s unused residence nil rate band of £175,000.
• The amount of residence nil rate band is therefore £350,000 (175,000 + 175,000).

The value of the main residence is after deducting any repayment mortgage or interest-only mortgage secured on that property.

If a main residence is valued at less than the available residence nil rate band, then the residence nil rate band is reduced to the value of the residence.

EXAMPLE 36
Una died on 10 July 2021 leaving an estate valued at £625,000. Under the terms of her will, Una’s estate was left to her children. The estate included a main residence valued at £225,000 on which there was an outstanding interest-only mortgage of £130,000.

Una’s IHT liability is:

The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence nil rate band is restricted to this amount.

The residence nil rate band does not apply to lifetime transfers becoming chargeable as a result of the donor’s death within seven years.

EXAMPLE 37
Maud died on 22 April 2021 leaving an estate valued at £775,000. Under the terms of her will, Maud’s estate was left to her grandchildren. The estate included a main residence valued at £435,000.

On 30 April 2019, Maud had made a potentially exempt transfer of £400,000 (after the deduction of annual exemptions) to her son.

IHT liabilities are:

Given that the residence nil rate band is only available where inheritance is by direct descendants, rearranging the terms of a will can save IHT.

EXAMPLE 38
Victor has an estate valued at £1,400,000, including a main residence valued at £550,000. He has not made any lifetime gifts. Victor’s wife died on 17 May 2011 and all of her estate was left to Victor. Under the terms of his will, Victor has left his main residence to his brother, with the residue of the estate left to his children.

Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000). The residence nil rate band is not available because the main residence will not be inherited by a direct descendant.

Victor could amend the terms of his will so that his brother inherited £550,000 of other assets, with the main residence being included within the residue. A residence nil rate band of £350,000 (175,000 + 175,000) would then be available, saving IHT of £140,000 (350,000 at 40%).

There is no reason why Victor’s brother could not purchase the main residence from the children following Victor’s death.

A question will make it clear if the residence nil rate band is available. Therefore, you should assume that the residence nil rate band is not available if there is no mention of a main residence.

The inheritance tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

Where earlier nil rate bands may be relevant, they will be given to you within the question.

Corporation tax

Rate of corporation tax

For the financial year 2021, the rate of corporation tax is unchanged at 19%. This rate applies regardless of the level of a company’s profits.

You may be aware of planned future increases to the rate of corporation tax. Please note that this will not apply for the tax year 2021–22, as it is due to commence from 1 April 2023. It is therefore not examinable for exams in the period 1 June 2022 to 31 March 2023.

EXAMPLE 39
For the year ended 31 March 2022, Simplified Ltd has taxable total profits of £600,000.

Simplified Ltd’s corporation tax liability is £114,000 (600,000 at 19%).

For clarification, we will use the term 'accounting reference date' (in place of 'accounting date') when describing the date to which a company’s accounts have been prepared.

The corporation tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2022 to 31 March 2023 is:

Corporation tax

Loss relief

A trading loss can normally be carried back and set against total profits of the preceding 12 months. For loss making accounting periods ending between 1 April 2020 and 31 March 2022, this relief is extended to 36 months. This additional loss relief is not examinable.

Enhanced capital allowances for companies only

For a two-year period from 1 April 2021 to 31 March 2023, companies can benefit from enhanced capital allowances when they purchase new plant and machinery:

• For expenditure which would fall into the main pool, there is a 130% super deduction. This means that for every £100 of expenditure, a first year allowance of £130 is available.
• For expenditure which would fall into the special rate pool, there is a 50% first year allowance.

For expenditure falling into the main pool, the 130% super deduction should be claimed rather than the 100% annual investment allowance. However, for expenditure falling into the special rate pool, the 100% annual investment allowance should be claimed in preference to the 50% first year allowance.

Enhanced capital allowances are not available to sole traders or partnerships. Only expenditure on new plant and machinery qualifies, not expenditure on second-hand assets. Motor cars do not qualify.

A question will not be set in exams in the period June 2022 to March 2023, involving the disposal of plant and machinery on which these enhanced capital allowances have been claimed, or where enhanced capital allowance expenditure is incurred in an accounting period spanning 31 March 2023.

EXAMPLE 40
Hance Ltd has an accounting reference date of 31 March each year. On 1 April 2021, the tax written down value of plant and machinery in the company’s main pool and special rate pool is £0.

During the year ended 31 March 2022, Hance Ltd purchased new equipment for £1,650,000, of which £350,000 is main pool expenditure and £1,300,000 is special rate pool expenditure.

Hance Ltd’s capital allowance claim for the year ended 31 March 2022 is:

Administration

Late payment interest and repayment interest

The assumed rates of late payment interest and repayment interest on underpaid and overpaid income tax, class 4 NIC, capital gains tax and corporation tax are based on the actual rates in force (for income tax purposes) at 6 April 2021. For exams in the period 1 June 2022 to 31 March 2023, the assumed rate of late payment interest will therefore be 2.6% and the assumed rate of repayment interest will be 0.5%. Note that the rate of late payment interest (2.6%) is not the same as the official rate of interest (2%).

Value added tax (VAT)

Registration and deregistration limits

The limit of annual turnover above which VAT registration is compulsory is unchanged at £85,000. The deregistration limit is also unchanged at £83,000.

Standard rate of VAT

The standard rate of VAT is unchanged at 20%.

EXAMPLE 41
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2022. The following information is available:

• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
• Standard rated materials amounted to £32,400.
• Standard rated expenses amounted to £24,800.
• On 15 February 2022, Gwen purchased machinery at a cost of £24,150. This figure is inclusive of VAT.

Unless stated otherwise, all of the above figures are exclusive of VAT.

The impact of the UK leaving the European Union (EU)

Imports and postponed VAT accounting
The same VAT treatment now applies to all imports of goods, whether these are from the EU or from outside the EU (so anywhere in the world).

A system of postponed accounting has been introduced so that VAT does not have to be paid at the time of importation. Instead, the import VAT is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT return. This reverse charge procedure is similar to the system which previously applied to acquisitions from the EU before the UK left the EU.

Import VAT is accounted for on the VAT return covering the date that the goods are imported.

Therefore, for most businesses, there is no VAT cost because the output VAT and corresponding input VAT are equal. The only time that there is a VAT cost is if a business makes exempt supplies, since an exempt business cannot reclaim any input VAT.

Postponed accounting does not have to be used, and there are some circumstances when it cannot be used. However, as far as TX-UK is concerned, it should be assumed that postponed accounting applies to all imports of goods.

Different rules apply for imported goods with a value below £135, but these rules are not examinable.

EXAMPLE 42
During the VAT quarter ended 31 March 2022, Yung Ltd imported goods costing £12,000 from a supplier situated outside the EU, and goods costing £4,000 from a supplier situated in the EU. Yung Ltd’s sales are all standard rated.

Yung Ltd will include output VAT and input VAT of £3,200 ((12,000 + 4,000) x 20%) on its VAT return for the quarter ended 31 March 2022.

An exam question will not specify if the goods are imported from within or outside the EU as this is no longer relevant. The example shown above illustrates that they are now both treated in the same way.

The previous deferred payment system for regular importers has ceased.

Exports
As far as TX-UK is concerned, when a UK VAT registered business exports goods to anywhere in the world, then the supply is zero-rated. This is the same treatment which applied prior to the UK leaving the EU.

International services
As far as TX-UK is concerned, there has been no change to the VAT treatment of services.

Services supplied to a VAT registered business are generally treated as being supplied in the country where the customer is situated. Therefore, where a UK VAT registered business receives international services, the place of supply will be the UK.

The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT as the place of supply will be outside the UK.

Freeports
The UK has created several freeports. Businesses located in freeports benefit from various tax breaks, including enhanced capital allowances. However, freeports are not examinable.

Written by a member of the TX–UK examining team