This article should be read by those of you who are sitting Paper P6 (UK) at either the June or December 2014 sitting. Please note that if you are sitting the exam in December 2013, you will be examined on the Finance Act 2012, which is the legislation as it relates to the tax year 2012–13. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2012 article published on the ACCA website.
This article summarises the additional changes introduced by the Finance Act 2013 that have an effect on the Paper P6 (UK) syllabus.
All of the changes set out in the Paper F6 (UK) article (see 'Related links') are relevant to Paper P6 (UK). In addition, all of the exclusions set out in the Paper F6 (UK) article apply equally to Paper P6 (UK) unless they are referred to below.
General anti-abuse rule (GAAR)
As noted in the Paper F6 (UK) article, the new GAAR counteracts tax advantages arising from abusive tax arrangements. The meanings of the relevant terms are:
Where the GAAR applies, HM Revenue & Customs may counteract the advantages arising by, for example, increasing the taxpayer’s liability by an appropriate amount.
The scope of income tax
Residence
The new statutory test of residence is explained above in the Paper F6 (UK) section. Under these rules, an individual is either UK resident or non-UK resident for the whole of the tax year.
The rules set out in the Paper F6 (UK) article have been expanded slightly for the purposes of Paper P6 (UK).
The following people are automatically treated as not resident in the UK.
The following people are automatically treated as resident in the UK.
Where a person’s residence status cannot be determined according to any of the automatic tests, their status will be based on the number of ties they have with the UK. For the purposes of Paper P6 (UK), the five ties are:
The table indicating the number of relevant ties by reference to the number of days in the UK will be provided in the exam.
Additional rules, known as the split year treatment, apply in a year where an individual leaves the UK to live or work overseas or comes from overseas to live or work in the UK. The split year treatment can only apply in a year in which an individual is UK resident. An individual leaving the UK must also be UK resident in the previous year and non-UK resident in the following year. An individual coming to the UK must be non-UK resident in the year prior to the split year.
Under the split year treatment, the year is split into a UK part and an overseas part. The individual is taxed as a UK resident for the UK part and as a non-UK resident for the overseas part. This applies to both income tax and capital gains tax.
For individuals leaving the UK, the split year treatment applies in the following situations.
For individuals coming to the UK, the split year treatment applies in the following situations.
The remittance basis
Qualifying individuals who choose to be taxed on the remittance basis are taxed on their overseas income and chargeable gains by reference to the amounts remitted to the UK. Following the abolition of the status of ordinary resident (as set out in the Paper F6 (UK) article) the remittance basis is available to individuals who are resident but not domiciled in the UK.
Cap on income tax reliefs
Cap on loss relief
In the Paper P6 (UK) exam the cap on income tax reliefs, as set out in the Paper F6 (UK) article, also applies in the following circumstances.
Income from employment
The tax treatment of share option and share incentive schemes
There have been a number of changes to the rules for share option schemes and share incentive schemes. In particular:
Taxable total profits
Research and development (R&D) expenditure
Where a large company incurs qualifying expenditure on R&D, it can claim a tax deduction of 130% of the costs incurred. A new, alternative relief has been introduced whereby, instead of the additional 30% tax deduction, the company can claim a tax credit equal to 10% of the costs incurred.
This 10% tax credit reduces the company’s corporation tax liability. Any excess can be paid to the company up to a maximum of the company’s PAYE/NIC liability in respect of those employees involved in R&D activities for the relevant accounting period. Any remaining credit balance can be carried forward and offset against the company’s corporation tax liability for the next accounting period or any other accounting period or in the case of a group company, surrendered to another member of the group.
The 10% tax credit is also treated as taxable income, such that it increases the company’s taxable income. For a company that has incurred R&D expenditure of £100,000, the overall effect of the rules is as follows:
| £ | |
| Corporation tax on additional income (£100,000 x 10% x 23%) | 2,300 |
| Tax credit deducted from corporation tax liability (£100,000 x 10%) | (10,000) ______ |
| Corporation tax saved (7.7% of the expenditure) | 7,700 ______ |
This compares to a saving of £6,900 (£100,000 x 30% x 23%) where the additional 30% deduction is claimed.
Patent box
A new scheme has been introduced in relation to patent profits in order to encourage companies to develop and exploit patents. The broad effect of the scheme is to tax profits arising in respect of patents at a lower rate of corporation tax. This scheme is available to companies that carry on qualifying development in relation to a patent and is optional.
The scheme applies to all profits relating to the exploitation of patents and not just to royalty income arising directly from the patents. This means, for example, that it applies to a proportion of the profit on the sale of products where a patent has been exploited within the production process.
The first task is to determine the patent profit. This figure is then subject to a number of adjustments in order to arrive at the net patent profit. You will not be required to calculate the patent profit or to apply the necessary deductions: the net patent profit will be provided in the exam question.
The reduced rate of tax is arrived at by deducting an amount from the net patent profit, such that when the corporation tax rate is applied to the reduced figure, the effective rate is 10%. The scheme is being phased in over a number of years. In the year ending 31 March 2014 only 60% of the net patent profit is subject to the reduced rate.
For the year ending 31 March 2014, the deduction is calculated as follows:
Net patent profit x 60% x ((MR – 10%) / MR)
where MR is the main rate of corporation tax.
This formula will be provided in the tax rates and allowances section of the exam paper.
Illustration
For the year ended 31 March 2014 Blu Ltd has taxable profits of £1,800,000, of which the net patent profit is £220,000. The corporation tax liability of Blu Ltd will be calculated as follows:
| £ | |
| Taxable profits | 1,800,000 |
| Deduction in respect of patent profit: (£220,000 x 60% x ((23% – 10%) / 23%)) | (74,609) ________ |
| Taxable total profits | 1,725,391 ________ |
| UK corporation tax at 23% | 396,840 ________ |
This represents:
| Net patent profit at 10%: £132,000 (£220,000 x 60%) at 10% | 13,200 |
| Balance of the taxable profit at 23%: £1,668,000 (£1,800,000 – £132,000) at 23% | 383,640 _______ |
| 396,840 _______ |
Groups
Group relief
The restriction on the availability of group relief in respect of the losses attributable to the UK permanent establishment of a company resident in the European Economic Area (EEA) has changed. Group relief is now available provided the losses have not been relieved in another country. Prior to the change, group relief was not available if it was merely possible to relieve the losses in another country. The old, stricter rule continues to apply to UK permanent establishments of companies resident outside the EEA.
The use of exemptions and reliefs
Disincorporation relief
A relief has been introduced to enable relatively small companies to transfer their assets to their shareholders without giving rise to taxable profits. This relief removes tax liabilities that would otherwise arise where the owners of an incorporated business wish to assume direct ownership of the business assets in order to trade as an unincorporated entity, ie as a sole trader or partnership.
All of the following conditions must be satisfied in order for the relief to be available.
The relief must be claimed within two years of the date on which the business was transferred. The claim must be made jointly by the company and all of the shareholders to whom the business was transferred.
The relief operates by deeming the sales proceeds received by the company, and the amount paid by the shareholders, to be equal to:
Controlled foreign companies (CFCs)
A new CFC regime has been introduced. This regime imposes a UK corporation tax liability, a ‘CFC charge’, on the owners of non-UK resident companies where UK profits have been artificially diverted from the UK.
For the purposes of the exam, a CFC is a non-UK resident company that is controlled by UK resident companies and/or individuals.
In determining whether or not there will be a CFC charge there are two matters to consider:
Chargeable profits are those income profits (not chargeable gains) of the CFC, calculated using UK tax rules, which have been artificially diverted from the UK.
Broadly, a CFC will be regarded as having no chargeable profits if any of the following conditions are satisfied.
There are further rules in relation to, among other things, finance companies and companies in the financial services industry. These rules are not examinable.
Even though a CFC may have chargeable profits, there is no CFC charge if one of the following exemptions applies.
Broadly, the new rules concerning the CFC charge are the same as the old rules. The CFC charge is levied on UK resident companies (not individuals) entitled to at least 25% of the CFC’s profits. The charge is calculated as follows:
Creditable tax consists of:
There is a clearance procedure whereby HMRC will confirm how the rules will apply in a company’s particular circumstances.
Illustration
Hul plc, a UK resident company, owns 80% of the ordinary share capital of Gra Co. Gra Co is non-UK resident such that it is a CFC.
For the year ended 31 March 2014 Gra Co has profits, calculated in accordance with UK tax rules, of £900,000, of which 70% are regarded as having been artificially diverted from the UK. None of the CFC exemptions is available to Gra Co.
Gra Co has suffered income tax in its country of residence of £40,000.
The CFC charge levied on Hul plc will be calculated as follows:
| £ | |
| Chargeable profits of Gra Co (£900,000 x 70%) | 630,000 ______ |
| Chargeable profits attributable to Hul plc (£630,000 x 80%) | 504,000 ______ |
| UK corporation tax (£504,000 x 23%) | 115,920 |
| Less creditable tax (£40,000 x 70% x 80%) | (22,400) ______ |
| CFC charge | 93,520 ______ |
The scope of the taxation of capital gains
Individuals coming to and leaving the UK
Temporary non-residents are taxed on chargeable gains realised whilst they are overseas where certain conditions are satisfied. A temporary non-resident is an individual who is overseas for a period of five years or less. Prior to the Finance Act 2013 the period in all situations was five tax years commencing from the start of the tax year when the individual became non-resident. Following the Finance Act 2013 this rule has been changed where the split year basis applies, such that the relevant period is the five years commencing with the date in the split year from when the overseas part starts.
The use of exemptions and reliefs
Entrepreneurs’ relief
Entrepreneurs’ relief is only available if the relevant conditions have been satisfied. These conditions have been relaxed where an individual disposes of shares acquired under an enterprise management incentive scheme.
There are two changes:
The scope of inheritance tax
Domicile
A rule has been introduced that enables a non-UK domiciled individual to elect to be treated as UK domiciled for the purposes of inheritance tax. This election is only available where the individual’s spouse or civil partner is, or was, domiciled in the UK. Where the individual’s spouse or civil partner is still alive, the election can specify that it should apply from a date up to seven years prior to the date of the election (but not prior to 6 April 2013).
An election can also be made following the death of the UK domiciled spouse or civil partner. In this situation, the election must be made within two years of the date of the spouse or civil partner’s death and can specify that it should apply from a date up to seven years prior to that date.
The advantage of such an election would be that there would no longer be an upper limit on the amount that could be transferred to the individual under the spouse exemption. The disadvantage, of course, would be that the individual’s overseas assets would be brought within the charge to UK inheritance tax.
This election does not apply to any taxes other than inheritance tax. It is irrevocable, although it will lapse where the individual is non-UK resident for four consecutive tax years.
The use of exemptions and reliefs
The spouse exemption
Transfers between spouses are exempt from inheritance tax provided the transferee spouse is domiciled in the UK. Where the transferee spouse is non-UK domiciled, there is a financial limit on the cumulative total of exempt transfers. This limit has been increased from £55,000 to an amount equal to the nil rate band, ie £325,000 for the tax year 2013–14.
Written by a member of the Paper P6 examining team
Further reading
The following articles are available on the Paper P6 technical articles web page.