Finance Act 2013

This article looks at the changes made by the Finance Act 2013, and should be read by those of you who are taking Paper F6 (UK) at either the June or December 2014 sittings. The aim of the article is to summarise the changes made by the Finance Act 2013 and to look at the more important changes in greater detail. The article also includes details of legislation that was enacted prior to the Finance Act 2013, but has only come into effect from 6 April 2013. The article does not refer to any amendments to the Paper F6 (UK) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the June and December 2014 version of the Paper F6 (UK) Syllabus and Study Guide for details of such amendments.

Please note that if you are sitting Paper F6 (UK) 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. Therefore this article is not relevant to you, and you should instead refer to the Finance Act 2012 article published on the ACCA website (see 'Related links').

TAX SYSTEM

General anti-abuse rule
Previously, tax avoidance has been targeted with specific legislation. As a further deterrent, a general anti-abuse rule has been introduced.

This will counteract tax advantages (such as increasing a deduction or decreasing income) arising from tax arrangements that are abusive (those arrangements which cannot be regarded as a reasonable course of action).

INCOME TAX

Residence
A statutory test of residence has been introduced to determine a person’s residence status each tax year.

The following people will automatically be treated as not resident in the UK:

• A person who is in the UK for less than 16 days during a tax year.
• A person who is in the UK for less than 46 days during a tax year, and who has not been resident during the three previous 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.

Subject to not meeting any of the automatic non–resident tests, the following people will automatically be treated as resident in the UK:

• A person who is in the UK for 183 days or more during a tax year.
• A person whose only home is in the UK.
• A person who carries out full time work in the UK.

Where a person’s residence status cannot be determined according to any of the automatic tests, then his/her status will be based on how many ties they have with the UK and how many days they stay in the UK during a tax year. There are five UK ties as follows:

• Having close family (a spouse/civil partner or minor child) in the UK.
• Having a house in the UK which is made use of during the tax year.
• Doing substantive work in the UK.
• 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.

How the UK ties test is applied depends on whether a person has been resident in the UK for any of the previous three tax years. A person who has been resident during any of the previous three tax years will typically be someone that is leaving the UK, and for them all five UK ties are relevant. A person who has not been resident during any of the previous three tax years will typically be someone that is arriving in the UK, and for them the final ‘country’ tie is ignored. A person’s residence status is found by comparing the number of days they are in the UK during a tax year against how many UK ties they have:

It is therefore more difficult for a person leaving the UK to become non-resident than it is for a person arriving in the UK to remain non-resident.

A day in the UK is any day in which a person is present in the UK at midnight.

The table will be given in the tax rates and allowances section of the examination paper.

The detailed rules are quite complex, especially those in regard to work and having a home in the UK. These more complex aspects are not examinable at Paper F6 (UK).

EXAMPLE 1
James is in the UK for 40 days during the tax year 2013–14. He has not previously been resident in the UK.

Kate is in the UK for 60 days during the tax year 2013–14. Her only home is in the UK.

Maggie has always been resident in the UK, being in the UK for more than 300 days each tax year. On 6 April 2013 Maggie purchased an overseas apartment where she lived for most of the tax year 2013–14. She also has a house in the UK where her husband and children live. During the tax year 2013–14 Maggie visited the UK for a total of 80 days, staying in her UK house.

Nigel has not previously been resident in the UK, being in the UK for less than 20 days each tax year. On 6 April 2013 he purchased a house in the UK, and during the tax year 2013–14 stayed in the UK for a total of 160 days. Nigel also has an overseas house which was where he stayed for the remainder of the tax year 2013–14.

James
For 2013–14 James will automatically be treated as not resident in the UK. He has not been resident during the three previous tax years, and has spent less than 46 days in the UK.

Kate
For 2013–14 Kate will automatically be treated as resident in the UK. She has spent too long in the UK to be automatically treated as non-resident, and her only home is in the UK.

Maggie
For 2013–14 Maggie has spent too long in the UK to be automatically treated as non-resident, and will not automatically be treated as resident because she does not meet the only home test.

Maggie has been resident in the UK during the three previous tax years, and was in the UK between 46 and 90 days. She is therefore resident in the UK for 2013–14 as a result of her three UK ties:

• Close family in the UK.
• A house in the UK which is made use of.
• In the UK for more than 90 days during the previous two tax years.
  

Nigel
For 2013–14 Nigel has spent too long in the UK to be automatically treated as non-resident, and will not automatically be treated as resident because he does not meet the only home test.

Nigel has not been resident in the UK during the three previous tax years, and was in the UK between 121 and 182 days. He is therefore not resident in the UK for 2013–14 as the only UK tie is the house in the UK which is made use of.

Ordinary residence
The concept of ordinary residence has been abolished. Therefore, a person is now liable to capital gains tax on the disposal of assets during any tax year in which they are resident in the UK.

Rates of income tax
The additional rate of income tax has been reduced from 50% to 45%, with the rate for dividends reduced from 42.5% to 37.5%. The rates of income tax for the tax year 2013–14 are as follows:

A starting rate of 10% applies to savings income where it falls within the first £2,790 of taxable income. If non-savings income exceeds £2,790 the starting rate of 10% for savings does not apply. In this case savings income is taxed at the basic rate of 20% if it falls below the higher rate threshold of £32,010, at the higher rate of 40% if it falls between the higher rate threshold of £32,010 and the additional rate threshold of £150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of £150,000.

Personal allowances
The normal personal allowance for the tax year 2013–14 is £9,440, and this is given to people born on or after 6 April 1948. People born between 6 April 1938 and 5 April 1948 receive a higher personal allowance of £10,500, with a slightly higher allowance of £10,660 given to people born before 6 April 1938. Previously, the level of personal allowance depended on whether a person had reached the age of 65 or 75. Personal allowances for the tax year 2013–14 are as follows:

Personal allowance

Income limit

The normal personal allowance of £9,440 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 loss relief and interest payments) less the gross amount of personal pension contributions and gift aid donations.

The personal allowance is reduced by £1 for every £2 that a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £118,880 or more is not entitled to any personal allowance (118,880 – 100,000 = 18,880/2 = £9,440). Where a person has an adjusted net income of between £100,000 and £118,880, 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.

The same reduction applies in respect of the higher personal allowances available to people born before 6 April 1948. Where a person’s adjusted net income exceeds £26,100, the higher personal allowances are reduced to a minimum of the normal personal allowance of £9,440. However, there will then be a further reduction if adjusted net income exceeds £100,000. This means that regardless of a person’s age, no personal allowance will be available where their adjusted net income is £118,880 or more.

EXAMPLE 2
Ingrid was born on 29 May 1973. For the tax year 2013–14 she has a salary of £37,000, building society interest of £800 (net) and dividends of £9,000 (net). Her income tax liability is as follows:

EXAMPLE 3
June was born on 3 August 1965. For the tax year 2013–14 she has a trading profit of £184,000. Her income tax liability is as follows:

• No personal allowance is available as June’s adjusted net income of £184,000 exceeds £118,880.

EXAMPLE 4
Trevor was born on 23 January 1983. For the tax year 2013–14 he has a trading profit of £132,000, building society interest of £3,200 (net) and dividends of £34,200 (net). The income tax payable by Trevor is as follows:

• The 10% tax credit on dividend income is available regardless of the rate of tax payable.

EXAMPLE 5
May was born on 19 December 1958. For the tax year 2013–14 she has a trading profit of £159,000. During the year May made net personal pension contributions of £40,000 and a net gift aid donation of £1,600. Her income tax liability is as follows:

• The gross personal pension contributions are £50,000 (40,000 x 100/80) and the gross gift aid donation is £2,000 (1,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 50,000 – 2,000), so her personal allowance of £9,440 is reduced to £5,940 (9,440 – 3,500 (107,000 – 100,000 = 7,000/2)).
• The basic and higher rate tax bands are extended to £84,010 (32,010 + 50,000 + 2,000) and £202,000 (150,000 + 50,000 + 2,000) respectively.

EXAMPLE 6
Ali was born on 12 March 1947. For the tax year 2013–14 he has pensions of £11,900 and bank interest of £4,000 (net). His income tax liability is as follows:

• Ali qualifies for the higher personal allowance of £10,500 as he was born between 6 April 1938 and 5 April 1948.
• Non-savings income is £1,400 (11,900 – 10,500), so £1,390 (2,790 – 1,400) of the savings income is taxed at the starting rate of 10%. The remainder of the savings income is taxed at the basic rate of 20%.

EXAMPLE 7
Lorn was born on 14 July 1932. For the tax year 2013–14 she has pensions of £24,000 and building society interest of £3,200 (net). Her income tax liability is as follows:

• Lorn’s adjusted net income exceeds £26,100, so her higher personal allowance of £10,660 is reduced to £9,710 (10,660 – 950 (28,000 – 26,100 = 1,900/2)).

EXAMPLE 8
Rich was born on 2 September 1935. For the tax year 2013–14 he has a trading profit of £92,000 and pensions of £18,000. His income tax liability is as follows:

• Rich’s adjusted net income exceeds £26,100 to the extent that his higher personal allowance of £10,660 is initially reduced to the normal personal allowance of £9,440.
• As the adjusted net income of £110,000 exceeds £100,000, the normal personal allowance is then reduced to £4,440 (9,440 – 5,000 (110,000 – 100,000 = 10,000/2)).

Child benefit income tax charge
An income tax charge has been introduced where a person’s adjusted net income exceeds £50,000 and they receive child benefit. Child benefit is a tax-free payment that can be claimed in respect of children, and the tax charge in effect removes the benefit for those on higher incomes.

Where adjusted net income is between £50,000 and £60,000, the income tax charge is 1% of the amount of child benefit received for every £100 of income over £50,000. For people whose adjusted net income exceeds £60,000, the amount of the income tax charge is equivalent to the amount of child benefit received.

The child benefit income tax charge is collected through the self-assessment system. This means that many more people than previously will have to complete a self-assessment tax return.

The following information will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings:

Child benefit income tax charge

Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit received for every £100 of income over £50,000.

EXAMPLE 9
For the tax year 2013–14 Cecil has a salary of £64,000. He received child benefit of £1,056 during the year.

Cecil’s adjusted net income of £64,000 exceeds £60,000, so the child benefit income tax charge is £1,056, being the amount of child benefit received.

EXAMPLE 10
For the tax year 2013–14 Mavis has a trading profit of £56,000. She received child benefit of £1,752 during the year.

Mavis’ adjusted net income of £56,000 is between £50,000 and £60,000. The child benefit income tax charge is therefore £1,051 (1,752 x 60% ((56,000 – 50,000)/100)).

Employment income

Company car benefit
For the tax year 2013–14 the base level of CO₂ emissions used to calculate company car benefits is reduced from 100 grams per kilometre to 95 grams per kilometre. The base percentage is unchanged at 11%. There are two lower rates for company motor cars with low CO₂ emissions. For a motor car with a CO₂ emission rate of 75 grams per kilometre or less the percentage is 5%. For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre the percentage is 10%.

The percentage rates (including the lower rates of 5% and 10%) are increased by 3% for diesel cars, but not beyond the maximum percentage rate of 35%.

The company car benefit information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

Car benefit percentage

The relevant base level of CO₂ emissions is 95 grams per kilometre.

The percentage rates applying to petrol cars with CO₂ emissions up to this level are:

EXAMPLE 11
During the tax year 2013–14 Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2013–14. The motor car has a list price of £12,200 and an official CO₂ emission rate of 84 grams per kilometre.

Betty was provided with a new petrol powered company car throughout the tax year 2013–14. The motor car has a list price of £16,400 and an official CO₂ emission rate of 109 grams per kilometre.

Charles was provided with a new diesel powered company car on 6 August 2013. The motor car has a list price of £13,500 and an official CO₂ emission rate of 137 grams per kilometre.

Diana was provided with a new petrol powered company car throughout the tax year 2013–14. The motor car has a list price of £84,600 and an official CO₂ emission rate of 233 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2013–14 for the use of the motor car.

Amanda
The CO₂ emissions are between 76 grams and 94 grams per kilometre so the relevant percentage is 10%. The motor car was available throughout 2013–14, so the benefit is £1,220 (12,200 x 10%).

Betty
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The CO₂ emissions figure of 109 is rounded down to 105 so that it is divisible by five. The minimum percentage of 11% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 13% (11% +  2% (105 – 95 = 10/5)). The motor car was available throughout 2013–14 so the benefit is £2,132 (16,400 x 13%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 22% (11% + 8% (135 – 95 = 40/5) = 19% plus a 3% charge for a diesel car). The motor car was only available for eight months of 2013–14, so the benefit is £1,980 (13,500 x 22% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 38% (11% + 27% (230 – 95 = 135/5)), but this is restricted to the maximum of 35%. The motor car was available throughout 2013–14 so the benefit is £28,410 (84,600 x 35% = 29,610 – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit.

Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure that is announced each year. For the tax year 2013–14 the base figure has been increased from £20,200 to £21,100.

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

EXAMPLE 12
Continuing with example 11.

Amanda was provided with fuel for private use between 6 April 2013 and 5 April 2014.

Betty was provided with fuel for private use between 6 April 2013 and 31 December 2013.

Charles was provided with fuel for private use between 6 August 2013 and 5 April 2014.

Diana was provided with fuel for private use between 6 April 2013 and 5 April 2014. She paid Fashionable plc £600 during the tax year 2013–14 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
The motor car was available throughout 2013–14 so the benefit is £2,110 (21,100 x 10%).

Betty
Fuel was only available for nine months of 2013–14, so the fuel benefit is £2,057 (21,100 x 13% x 9/12).

Charles
The motor car was only available for eight months of 2013–14, so the fuel benefit is £3,095 (21,100 x 22% x 8/12).

Diana
The motor car was available throughout 2013–14 so the benefit is £7,385 (21,100 x 35%). There is no reduction for the contributions made since 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 £550 to £564.

Childcare
The exemption limit where childcare is provided by an employer has been adjusted for additional rate taxpayers. This is in line with the reduction of the additional rate of income tax from 50% to 45%.

The weekly limits are now £55 per week for basic rate taxpayers, £28 per week for higher rate taxpayers, and £25 per week for additional rate taxpayers. These limits mean that all taxpayers receive exactly the same amount of tax relief from the childcare exemption.

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 the June and December 2014 sittings the actual official rate of interest of 4.0% for the tax year 2013–14 will be used.

Luncheon vouchers
The exemption for the first 15p per day for luncheon vouchers has been abolished. Therefore the full cost of luncheon vouchers provided to employees is now a taxable benefit.

Cycle to work days
The exemption where meals or refreshments were provided to employees as part of a cycle to work day has been abolished.

PAYE – Real time reporting
The PAYE system has been modernised by the introduction of real time reporting. The fundamentals of PAYE itself are unchanged, so employees are still issued with tax codes, and the employer is still responsible for deducting tax and national insurance contributions (NIC). The due dates for paying income tax and NIC to HM Revenue and Customs remain unchanged. However, with real time reporting, employers send income tax and NIC information to HM Revenue and Customs electronically every time employees are paid (either weekly or monthly) rather than waiting until after the end of the tax year as was previously the case.

Forms P35 and P14 are no longer required, since end of year information is included with the final real time submission for the tax year. However, form P60 must still be provided to employees following the end of the tax year. Form P45 has also been retained, and this is provided to a leaving employee.

Employers are charged a penalty if their final real time submission for a tax year is made late. The deadline is 19 May following the end of the tax year, and the penalty that can be imposed is £100 per month per 50 employees. For the tax year 2013–14 there are no penalties if submissions made during the tax year are late.

Since information must be filed electronically, it is no longer possible to produce a payroll manually. Employers must either run payroll software or use the services of a payroll provider.

Capital allowances

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

• The CO₂ emissions limit to qualify for a 100% first-year allowance has been reduced from 110 grams per kilometre to 95 grams per kilometre.
• The CO₂ emissions limit to qualify for writing-down allowances at the rate of 18% has been reduced from 160 grams per kilometre to 130 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 96 and 130 grams per kilometre, and at the rate of 8% where CO₂ emissions are over 130 grams per kilometre.

These changes apply from 6 April 2013 (1 April 2013 for limited companies), and a question will not be set involving the CO₂ emission thresholds that applied prior to this date.

Annual investment allowance
From 1 January 2013 the annual investment allowance (AIA) limit has been increased from £25,000 to £250,000. The AIA provides an allowance of 100% for the first £250,000 of expenditure on plant and machinery in a 12-month period. Any expenditure in excess of the £250,000 limit qualifies for writing-down allowances as normal. The AIA applies to all expenditure on plant and machinery with the exception of motor cars. The £250,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, the AIA would be £187,500 (250,000 x 9/12) for a nine-month period of account.

Where a period of account spans 1 January 2013, then apportionment will be necessary in order to determine the amount of AIA. A question will not be set involving apportionment as regards the amount of AIA. However, there is no reason why a question could not involve a 31 December 2013 year end.

The capital allowances information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

Rates of allowance

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 8% 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 13
Ming prepares accounts to 31 December. On 1 January 2013 the tax written down value of plant and machinery in her main pool was £16,700.

The following transactions took place during the year ended 31 December 2013:

Motor car (1) purchased on 8 April 2013 has CO₂ emissions of 120 grams per kilometre. This motor car is used by Ming, and 20% of the mileage is for private journeys. Motor car (2) purchased on 14 April 2013 and sold on 12 December 2013 has CO₂ emissions of 155 grams per kilometre. Motor car (3) purchased on 2 September 2013 has CO₂ emissions of 125 grams per kilometre. Motor car (4) purchased on 19 November 2013 has CO₂ emissions of 90 grams per kilometre.

Ming’s capital allowance claim for the year ended 31 December 2013 is as follows:

• Motor car (1) is kept separately because there is private use by Ming. This motor car has CO₂ emissions between 96 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (2) has CO₂ emissions over 130 grams per kilometre and therefore qualifies for writing down allowances at the rate of 8%. 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 96 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (4) has CO₂ emissions of less than 95 grams per kilometre and therefore qualifies for the 100% first year allowance.

Leased motor cars
The CO₂ emission threshold for leased motor cars has been reduced from 160 grams per kilometre to 130 grams per kilometre. This means that there is no adjustment where the CO₂ emissions of a leased motor car do not exceed 130 grams per kilometre. Where CO₂ emissions are more than 130 grams per kilometre then 15% of the leasing costs are disallowed in calculating taxable profits.

EXAMPLE 14
Fabio Ltd makes up its accounts to 31 March. On 1 April 2013 the company commenced the lease of two motor cars. The first motor car has CO₂ emissions of 115 grams per kilometre and was leased at a cost of £4,800 during the year ended 31 March 2014. The second motor car has CO₂ emissions of 150 grams per kilometre and was leased at a cost of £6,000 during the year ended 31 March 2014.

When calculating its taxable profits for the year ended 31 March 2014 Fabio Ltd will have to disallow leasing costs of £900 (6,000 x 15%).

Cap on income tax reliefs

A cap has been introduced for those reliefs that are offset against a person’s total income and which are otherwise not capped. The cap is the higher of £50,000 or 25% of a person’s total income. For this purpose, total income is after deducting the gross amount of personal pension contributions.

As far as Paper F6 (UK) is concerned, the only aspect of the cap that will be examined is where loss relief is claimed against total income for the tax year in which the loss arose and/or the preceding year. The cap does not restrict the loss that can be claimed against profits of the same trade for the preceding tax year, and any restricted loss can still be carried forward against future profits from the same trade.

EXAMPLE 15
For the year ended 5 April 2014 Gloria made a trading loss of £145,000, having made a trading profit of £30,000 for the year ended 5 April 2013. She has employment income of £125,000 in each of the tax years 2012–13 and 2013–14.

If Gloria claims relief for the trading loss against her total income for both 2012–13 and 2013–14, her taxable income will be as follows:

• Loss relief for 2013–14 is capped at £50,000 as this is higher than £31,250 (125,000 x 25%).
• For 2012–13, the loss relief claim against the trading profit of £30,000 is not capped. Relief against other income is again capped at £50,000, so the total loss relief claim is £80,000 (30,000 + 50,000).
• The balance of the loss of £15,000 (145,000 – 50,000 – 80,000) will be carried forward against future profits from the same trade.
• Somewhat strangely, the cap can actually be beneficial in some situations. In Gloria’s case, the application of the cap has resulted in most of her loss being relieved against income otherwise taxable at the higher rate, while her personal allowances have been preserved for both tax years.

Cash basis for small businesses

A voluntary simplified cash basis of calculating trading profit has been introduced for sole traders and partnerships (limited companies are excluded). This is as an alternative to the normal accruals basis, and can be used where revenue is initially below the VAT registration threshold of £79,000. A business may then continue to use the cash basis until its revenue is twice the VAT registration threshold – that is £158,000.

With the cash basis, receivables, payables and inventory are ignored, and tax deductible capital and revenue expenditure will be treated the same – purchases of equipment are simply deducted as an expense, whilst the proceeds from any disposals are included with receipts.

A business using the cash basis can use the approved mileage allowances to calculate the deduction for business mileage. The rate is 45p per mile for the first 10,000 miles, with a rate of 25p per mile thereafter. The actual running and capital costs of owning a motor car are ignored.

Where the use of the cash basis results in a trading loss, the only relief available is to carry the loss forward against future trading profits. There is no relief against total income.

Trading profit (or loss) under the cash basis is therefore calculated as follows:

EXAMPLE 16
Winifred commenced self-employment as a surveyor on 6 April 2013. The following information is available for the year ended 5 April 2014:

1. Revenue was £62,600, of which £3,800 was owed as receivables at 5 April 2014.
2. On 6 April 2013 office equipment was purchased for £4,700.
3. On 10 April 2013 a motor car with CO₂ emissions of 110 grams per kilometre was purchased for £15,600. The motor car is used by Winifred, and 60% of the mileage is for private journeys.
4. Motor expenses were £4,800. During the year ended 5 April 2014 Winifred drove 9,000 business miles.
5. Other expenses (all allowable) were £13,300, of which £700 was owed as payables at 5 April 2014.

If Winifred uses the normal basis, her trading profit for the year ended 5 April 2014 will be £41,557 calculated as follows:

1. The office equipment purchased for £4,700 qualifies for the annual investment allowance.
2. The motor car has CO₂ emissions between 96 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%. The allowance for the year ended 5 April 2014 is £1,123 (15,600 x 18% = 2,808 x 40%).

However, if Winifred uses the cash basis, her trading profit will be £37,450 calculated as follows:

There is also a flat rate private use adjustment where business premises are used as a home – typically where the business is a small hotel or guest house. The private use adjustment for food and light and heat can be calculated on a flat rate basis according to the number of occupants. For example, with two occupants the private use adjustment would be £6,000 per year (the relevant figure will be provided as part of an examination question). The flat rate adjustment does not include other property expenses such as rent or mortgage (loan) interest.

EXAMPLE 17
Claude and Claire, a married couple, run a guest house. For the year ended 5 April 2014 the trading profit is £42,000, but this is before any private use adjustment. The total cost of food was £31,300, and the total light and heat cost was £6,200.

Rather than calculating the actual private use for food and light and heat, Claude and Claire can simply use the flat rate private use adjustment of £6,000, so their trading profit is £48,000 (42,000 + 6,000).

Although the use of flat rate expenses is optional, in any examination question involving the cash basis it should be assumed that where relevant, expenses are claimed on this basis. The option of claiming expenses on a flat rate basis is also available to unincorporated businesses generally, but it will only be examined within the context of the cash basis.

The detailed cash basis rules are quite complex. These more complex aspects are not examinable at Paper F6 (UK). In any examination question involving an unincorporated business, it should be assumed that the cash basis is not relevant unless it is specifically mentioned.

Individual savings accounts (ISAs)

For the tax year 2013-14 a person can invest up to £5,760 in a cash ISA, and up to £11,520 in a stocks and shares ISA. This is subject to an overall investment limit of £11,520. Therefore if £5,760 is invested in a cash ISA only £5,760 can be invested in a stocks and shares ISA. These limits will be given in the tax rates and allowances section of the examination paper.

The income from ISAs is exempt from income tax, whilst a chargeable gain made within a stocks and shares ISA is exempt from capital gains tax.

Pension schemes

Annual allowance
The annual allowance for the tax year 2013–14 is unchanged at £50,000.

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. However, 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 18
Monica and Nicola have made the following gross personal pension contributions during the tax years 2010–11, 2011–12 and 2012–13:

Monica was not a member of a pension scheme for the tax year 2010–11. Nicola was a member of a pension scheme for all three tax years.

Monica
Monica has unused allowances of £8,000 (50,000 – 42,000) from 2011–12 and £12,000 (50,000 – 38,000) from 2012–13, so a total of £70,000 (50,000 + 8,000 + 12,000) is available for 2013–14. She was not a member of a pension scheme for 2010–11 so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (50,000 – 29,000) from 2011–12 and £50,000 from 2012–13, so a total of £121,000 (50,000 + 21,000 + 50,000) is available for 2013–14. The annual allowance for 2010–11 is fully utilised, but Nicola was a member of a pension scheme for 2012–13 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2013–14 is utilised first, and then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 19
Perry has made the following gross personal pension contributions:

The pension contribution of £58,000 for 2013–14 has used all of Perry’s annual allowance of £50,000 for 2013–14, and £8,000 (58,000 – 50,000) of the unused allowance of £18,000 (50,000 – 32,000) from 2010–11. Perry therefore has unused allowances of £9,000 (50,000 – 41,000) from 2011–12 and £31,000 (50,000 – 19,000) from 2012–13 to carry forward to 2014–15. The remaining unused allowance from 2010–11 cannot be carried forward to 2014–15 as this is more than three years ago.

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 20
For the tax year 2013–14 Frank has a trading profit of £220,000, and made gross personal pension contributions of £70,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is as follows:

• Frank has earnings of £220,000 for 2013–14. All of the pension contributions of £70,000 therefore qualify for tax relief.
• The annual allowance charge is £20,000 (70,000 – 50,000) being the excess of the pension contributions over the annual allowance for 2013–14.
• Frank’s adjusted net income clearly exceeds £118,880, so no personal allowance is available.
• Frank will have paid £56,000 (70,000 less 20%) to the personal pension company.
• Higher and additional rate tax relief is given by extending the basic and higher rate tax bands to £102,010 (32,010 + 70,000) and £220,000 (150,000 + 70,000) respectively.

Lifetime allowance
The lifetime allowance for the tax year 2013–14 is unchanged at £1,500,000.

The lifetime allowance applies to the total funds that 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.

CORPORATION TAX

Rates of corporation tax
For the financial year 2013 the small profits rate of corporation tax is unchanged at 20%. The main rate of corporation tax has been reduced from 24% to 23%. The lower and upper limits are unchanged.

Marginal relief eases the transition from the small profits rate to the main rate of corporation tax where augmented profits fall between £300,000 and £1,500,000. The standard fraction used in the calculation of marginal relief for the financial year 2013 is 3/400th. The effective marginal rate of corporation tax on profits that fall between the £300,000 and £1,500,000 limits is reduced from 25% to 23.75%.

The corporation tax rates for the financial year 2013 can therefore be summarised as follows:

The corporation tax information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

EXAMPLE 21
For the year ended 31 March 2014 Easy Ltd has taxable total profits of £40,000 and franked investment income (FII) of £10,000.

For the year ended 31 December 2013 Moderate Ltd has taxable total profits of £1,400,000 and FII of £160,000.

For the year ended 31 March 2014 Difficult Ltd has taxable total profits of £600,000 and FII of £50,000.

For the year ended 31 December 2013 Hard Ltd has taxable total profits of £600,000 and FII of £50,000.

Easy Ltd
Corporation tax is £8,000 (40,000 at 20%) as the augmented profits of £50,000 (40,000 + 10,000) are less than £300,000.

Moderate Ltd
The augmented profits of £1,560,000 (1,400,000 + 160,000) are more than £1,500,000. Because the company’s accounting period straddles 31 March the corporation tax liability is calculated as follows:

Difficult Ltd
Marginal relief applies as the augmented profits of £650,000 (600,000 + 50,000) are between £300,000 and £1,500,000. The company’s corporation tax liability is as follows:

Hard Ltd
The augmented profits of £650,000 (600,000 + 50,000) are between £300,000 and £1,500,000. Because the company’s accounting period straddles 31 March the corporation tax liability is calculated as follows:

Note that there are alternative ways of calculating the tax liability for Hard Ltd, but this approach is the most straightforward since there is no need to apportion any figures.

CAPITAL GAINS TAX

Annual exempt amount
The annual exempt amount for the tax year 2013–14 has been increased from £10,600 to £10,900.

Rates of capital gains tax
The lower rate and the higher rate of capital gains tax for the tax year 2013–14 are unchanged at 18% and 28%.

Chargeable gains are taxed at the lower rate of 18% where they fall within the basic rate tax band of £32,010, and at the higher rate of 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 22
For the tax year 2013–14 Adam has a salary of £39,440, and during the year he made net personal pension contributions of £4,400. On 15 June 2013 Adam sold an antique table and this resulted in a chargeable gain of £17,400.

For the tax year 2013–14 Bee has a trading profit of £59,440. On 20 August 2013 she sold an antique vase and this resulted in a chargeable gain of £18,900.

For the tax year 2013–14 Chester has a salary of £35,440. On 25 October 2013 he sold an antique clock and this resulted in a chargeable gain of £23,800.

Adam
Adam’s taxable income is £30,000 (39,440 less the personal allowance of 9,440). His basic rate tax band is extended to £37,510 (32,010 + 5,500 (4,400 x 100/80)), of which £7,510 (37,510 – 30,000) is unused.

Adam’s taxable gain of £6,500 (17,400 less the annual exempt amount of 10,900) is fully within the unused basic rate tax band, so his capital gains tax liability is therefore £1,170 (6,500 at 18%).

Bee
Bee’s taxable income is £50,000 (59,440 – 9,440), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £8,000 (18,900 – 10,900) is therefore £2,240 (8,000 at 28%).

Chester
Chester’s taxable income is £26,000 (35,440 – 9,440), so £6,010 (32,010 – 26,000) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £12,900 (23,800 – 10,900) is therefore calculated as follows:

In each case, the capital gains tax liability will be due on 31 January 2015.

Entrepreneurs’ relief
Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2013–14 the lifetime qualifying limit is unchanged at £10 million.

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

EXAMPLE 23
On 25 January 2014 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 2007, and was an employee of the company from that date until the date of disposal.

He has taxable income of £28,000 for the tax year 2013–14.

Michael’s capital gains tax liability is as follows:

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

The annual exempt amount and any capital losses should be initially deducted from those chargeable gains that do not qualify for entrepreneurs’ relief. This approach will save capital gains tax at either 18% or 28%, compared to just 10% if used against chargeable gains that 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 entrepreneurs’ relief and other chargeable gains separate.

EXAMPLE 24
On 30 September 2013 Mika sold a business that she had run as a sole trader since 1 January 2007. The sale resulted in the following chargeable gains:

The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £4,000 for the tax year 2013–14. She has unused capital losses of £28,000 brought forward from the tax year 2012–13.

Mika’s capital gains tax liability is as follows:

• The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the freehold warehouse as this does not qualify for entrepreneurs’ relief.
• £28,010 (32,010 – 4,000) of Mika’s basic rate tax band is unused, but this is set against the gains qualifying for entrepreneurs’ relief of £630,000 even though this has no affect on the 10% tax rate.

The capital gains tax information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

Employee shareholders
Employee shareholder is a new type of employment status. Such employees receive shares in their employer company, with the shares being exempt from capital gains tax. This exemption is not examinable in Paper F6 (UK).

Inheritance tax

Rates of inheritance tax
The nil rate band for the tax year 2013–14 is unchanged at £325,000.

The inheritance tax information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

Where nil rate bands are required for previous years then these will be given to you within the question.

NATIONAL INSURANCE CONTRIBUTIONS

Class 1 and class 1A national insurance contributions
For the tax year 2013–14 the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £7,756 per year and £41,450 per year, and the rate of 2% is paid on all earnings over £41,450 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8%, and is paid on all earnings over £7,696 per year.

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

The class 1 and class 1A NIC information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

EXAMPLE 25
Simone Ltd has one employee who is paid £50,000 per year, and was provided with the following taxable benefits during the tax year 2013–14:

The class 1 and class 1A NIC liabilities are as follows:

Class 2 and class 4 national insurance contributions
For the tax year 2013-14 the rate of class 2 NIC has been increased to £2.70 per week.

The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £7,756 and £41,450, and the rate of 2% is paid on all profits over £41,450.

The class 4 NIC information that will be given in the tax rates and allowances section of the examination paper for the June and December 2014 sittings is as follows:

EXAMPLE 26
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for the tax year 2013–14 are respectively £25,000 and £50,000. Their class 4 NIC liabilities are as follows:



VALUE ADDED TAX (VAT)

Registration and deregistration limits

The limit of annual turnover above which VAT registration is compulsory has been increased from £77,000 to £79,000, and the deregistration limit has been increased from £75,000 to £77,000.

Standard rate of VAT

The standard rate of VAT is unchanged at 20%.

EXAMPLE 27
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2014 The following information is available:

• Sales invoices totaling £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 2014 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.

VAT Return – Quarter ended 31 March 2014

Fuel provided for private mileage
Where fuel is provided for private mileage, output VAT is normally calculated according to a scale charge based on the motor car’s level of CO₂ emissions. UK legislation has now been brought in line with European Union legislation, but as far as Paper F6 (UK) is concerned there is effectively no change to the previous treatment. This means that a business has the following options when providing fuel for private mileage:

• Claim all of the input VAT with output VAT calculated according to a scale charge.
• Charging the employee for the full cost of the fuel provided. All of the input VAT can then be claimed, with output VAT calculated on the charge to the employee.

EXAMPLE 28
Ivy Ltd provides one of its directors with a company motor car which is used for both business and private mileage. The company pays for all of the running costs of the motor car, including petrol. The total cost of petrol each quarter is £720, of which 30% is for private mileage. The relevant quarterly scale charge is £506. Both figures are inclusive of VAT.

If the director is not charged for the private fuel, then Ivy Ltd will claim input VAT of £120 (720 x 20/120) and will have to account for output VAT of £84 (506 x 20/120) based on the scale charge.

If the director is charged £216 (720 x 30%) for the private fuel, then Ivy Ltd will claim input VAT of £120 and will have to account for output VAT of £36 (216 x 20/120) based on the charge to the director.

Simplified VAT invoices
A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the invoice is less than £250. Previously, only retailers could issue simplified VAT invoices, but they can now be issued by any VAT registered business.

TAX MANAGEMENT

Penalties for late filing of VAT returns and late payment of VAT
New penalties for the late filing of returns and for late payment of tax are being introduced over a number of years.

Although legislation has been introduced regarding the late filing of VAT returns and the late payment of VAT, HM Revenue and Customs have yet to introduce the changes. Therefore, for the June and December 2014 sittings the changes will not be examined.

Dishonest conduct by tax agents
A single penalty regime has been introduced for dishonest conduct by tax agents. HM Revenue and Customs can investigate dishonest conduct, and apply a penalty of up to £50,000 where there has been dishonest conduct and the tax agent fails to supply the information or documents that HM Revenue and Customs has requested.

Alternative dispute resolution
HM Revenue and Customs has introduced an alternative dispute resolution scheme for people involved in tax disputes. This scheme is not examinable.

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 2013. For the June and December 2014 sittings the assumed rate of late payment interest will therefore be 3.0%, and the assumed rate of repayment interest will be 0.5%.

Written by a member of the Paper F6 (UK) examining team