Relevant to P6 (UK) for the September 2016, December 2016 and March 2017 exam sessions
This article looks at the changes made by the Finance Act 2015 and the Finance (No 2) Act 2015 (which is the legislation as it relates to the tax year 2015/16) and should be read by those of you who are sitting P6 (UK) in an exam in the period 1 September 2016 to 31 March 2017.
Please note that if you are sitting P6 (UK) in the period 1 April 2015 to 30 June 2016, you will be examined on the Finance Act 2014, which is the legislation as it relates to the tax year 2014/15. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2014 article published on the ACCA website.
All of the changes set out in the F6 (UK) article (see ‘Related links’) are relevant to P6 (UK). In addition, all of the exclusions set out in the F6 (UK) article apply equally to P6 (UK) unless they are referred to below.
This article summarises the additional changes introduced by the Finance Act 2015 and the Finance (No 2) Act 2015 that have an effect on the P6 (UK) syllabus. It does not refer to any amendments to the P6 (UK) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the P6 (UK) Syllabus and Study Guide for the period 1 September 2016 to 31 March 2017 for details of such amendments.
Individual savings accounts (ISAs)
An ISA is a fund that can be held in cash or invested in shares or insurance products. The fund is exempt from both income tax and capital gains tax.
The standard maximum investment into an ISA in the tax year 2015/16 has been increased to £15,240 (previously £15,000).
A further ISA allowance has been introduced in addition to the standard allowance of £15,240. This additional allowance is available to the surviving spouse or registered civil partner of a deceased person who held an ISA at the time of death. The additional allowance is equal to the value of ISAs which were held by the deceased spouse or partner at the date of death.
This additional allowance enables the surviving member of a couple to maintain an amount of tax free funds equal to that which had previously been held by the couple.
Remittance basis
A UK resident individual who is non-UK domiciled may be taxed on overseas income and capital gains on the remittance basis. Under the remittance basis, amounts are subject to tax in the UK only if brought into the UK.
An individual who claims the remittance basis (as opposed to where it is available automatically) may be liable to pay the remittance basis charge (RBC). The rules regarding the RBC for the tax year 2015/16 are as follows:
The following information will be provided in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017.
Remittance basis charge
| UK resident for: | Charge |
|---|---|
| 7 out of the last 9 years | £30,000 |
12 out of the last 14 years | £60,000 |
17 out of the last 20 years | £90,000 |
Enterprise investment scheme (EIS)
Individuals who subscribe for enterprise investment scheme (EIS) shares are able to claim a tax reducer of 30% of the amount subscribed for qualifying investments up to a maximum of their tax liability for the year. The following changes have been made to the EIS:
There are different rules for companies classified as knowledge-intensive companies. These rules are excluded from the P6 (UK) syllabus.
Venture capital trusts (VCTs)
Individuals who subscribe for venture capital trust (VCT) shares are able to claim a tax reducer of 30% of the amount subscribed for qualifying investments up to a maximum of their tax liability for the year.
A number of changes have been made to the rules governing the qualifying investments that can be made by a VCT. These changes are in line with the changes made to the EIS, as set out above.
The disposal of UK residential property by a non-resident
Capital gains tax applies where a UK resident person (ie an individual or a company) makes a disposal of a chargeable asset situated anywhere in the world. It does not normally apply to disposals by persons who are not resident in the UK, even if the asset is situated in the UK (unless the asset disposed of is used in a trade based in the UK).
However, following Finance Act 2015, a non-UK resident person will now be subject to UK capital gains tax where there has been a disposal of a residential property situated in the UK.
These rules apply to disposals by both individuals and companies. However, the disposal by a company of a residential property is excluded from the P6 (UK) syllabus).
Where the individual owned the property on 5 April 2015, the chargeable gain or allowable loss to which these rules apply can be determined in three different ways:
The annual exempt amount of £11,100 will be available to non-UK residents to offset against any gains on the disposal of residential property in the UK and capital gains tax will be payable at the relevant rate depending on the non-UK resident’s total UK income and gains.
Where the property is a business asset (for example, furnished holiday accommodation):
Principal private residence (PPR) relief
PPR provides an exemption from capital gains tax where an individual sells his only or main residence. The whole of the gain is exempt where the property has always been occupied by the individual as their only or main residence. A proportion of the gain may be chargeable where the individual has not lived in the property for a time during the period of ownership. Certain periods of absence, including the final 18 months of ownership, are deemed to be periods of occupation.
Finance Act 2015 has introduced the concept of tax years of non-occupation for UK and non-UK resident taxpayers with a property in a country other than that in which they or their spouse or civil partner is tax resident. Tax years of non-occupation will, of course, reduce the amount of principal private residence relief available and therefore increase the taxable gain on the disposal of the property.
However, where the taxpayer (or the taxpayer’s spouse or civil partner) has stayed overnight in the property at least 90 times in the tax year, the tax year will not be regarded as a tax year of non-occupation.
Where the property has only been owned for part of a tax year, the requirement to have stayed overnight at least 90 times is scaled down appropriately.
Entrepreneurs’ relief
Entrepreneurs’ relief is available to an individual on the disposal of an unincorporated business or shares in a trading company (provided certain conditions are satisfied). The effect of the relief is that the gains on the disposals are subject to capital gains tax at 10% rather than 18% or 28%.
Two changes have been made to the rules relating to this relief.
1. Restriction in respect of goodwill
Entrepreneurs’ relief is no longer available in respect of the disposal of goodwill where the goodwill is acquired by a close company and the individual and the company are related. The individual is related to the company if he is a shareholder in the company or an associate of a shareholder. This restriction does not apply where the individual is a retiring partner.
This restriction will apply in the relatively common situation where an individual incorporates his business by transferring the trade and assets of the business to a limited company.
This restriction, together with the new rules preventing a company from claiming tax relief in respect of goodwill (referred to below), is intended to remove what might otherwise be an incentive to incorporate a business for tax, rather than commercial, reasons.
2. Deferred entrepreneurs’ relief on invested gains
The availability of entrepreneurs’ relief has been expanded to include a gain that would otherwise have qualified for entrepreneurs’ relief, but was deferred via an investment in enterprise investment scheme (EIS) shares. On a subsequent sale of the EIS shares, the deferred gain will be charged, but will only be taxed at 10% due to the availability of entrepreneurs’ relief.
In order for entrepreneurs’ relief to be available in these circumstances a claim must be made by the first anniversary of the 31 January following the tax year in which the gain eventually became chargeable.
The principles of valuation
The new rule for valuing quoted shares set out in the F6 (UK) part of this article do not apply for inheritance tax purposes . The valuation of quoted shares for the purposes of inheritance tax has not changed and continues to be the lower of:
Research and development (R&D) expenditure
The additional tax deduction available to a small or medium-sized company which has incurred qualifying expenditure on R&D has been increased from 125% to 130% of the costs incurred, so there is now a total tax deduction of 230% of the costs incurred.
The additional tax deduction available to large companies has not changed; it continues to be 30%, ie a total tax deduction of 130% of the costs incurred.
As an alternative to the additional tax deduction, large companies can claim a tax credit equal to a percentage of the costs incurred. This percentage has been increased to 11% (previously 10%). This tax credit reduces the company’s corporation tax liability.
Any excess can be paid to the company up to a maximum of the company’s PAYE/NIC liability in respect of those employees involved in R&D activities for the relevant accounting period. Any remaining credit balance can be carried forward and offset against the company’s corporation tax liability for the next accounting period or any other accounting period or in the case of a group company, surrendered to another member of the group.
The 11% tax credit is also treated as taxable income, such that it increases the company’s taxable income. For a company that has incurred R&D expenditure of £100,000, the overall effect of the rules is as follows.
| £ | ||
|---|---|---|
| Corporation tax on additional income (£100,000 x 11% x 20%) | 2,200 | |
| Tax credit deducted from corporation tax liability (£100,000 x 11%) | (11,000) _______ | |
| Corporation tax saved (8.8% of the expenditure) | 8,800 _______ |
This compares to a saving of £6,000 (£100,000 x 30% x 20%) where the additional 30% deduction is claimed.
Intangible assets
Where a company purchased goodwill prior to 8 July 2015, it could claim a tax deduction for any amortisation or impairment of the asset. Alternatively, it could claim an annual tax deduction of 4% of the cost incurred.
Changes have been introduced by both the Finance Act 2015 and the Finance (No 2) Act 2015. The changes introduced by the first Finance Act in 2015 are not examinable.
The Finance (No 2) Act 2015 has changed the rule for goodwill acquired on or after 8 July 2015. Under the new rules, no tax deduction will be available for any amortisation or impairment of the goodwill. Where there is a loss on the sale of the goodwill, the loss is calculated as proceeds less cost and is treated as a non-trading, as opposed to a trading, debit. This non-trading debit can be set against the total profits of the current year or group relieved or carried forward. Where there is a credit on the sale of the goodwill, this credit continues to be assessed to tax as trading income.
From 1 September 2016, in relation to goodwill, only the new rules will be examinable.
The changes only apply to goodwill and other customer related intangible assets. Other intangible assets such as patents continue to qualify for tax deductions in relation to amortisation or impairment.
The stamp taxes payable on transfers of land
Stamp duty land tax (SDLT) is charged on the transfer of land and buildings at various rates depending on whether the property is residential or non-residential and the value of the property.
The rates applicable to non-residential property have not changed. The rate is determined by the value of the property and that rate then applies to the whole of the consideration.
New rates have been introduced in respect of residential property. The rates of SDLT are determined by reference to the value of the property but, unlike non-residential property, each slice of the value of the property is taxed at the appropriate new rate.
The following information will be provided in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017.
Stamp duty land tax
| Non-residential properties | ||
|---|---|---|
| £150,000 or less | Nil | |
| £150,001 − £250,000 | 1% | |
| £250,001 − £500,000 | 3% | |
| £500,001 and above | 4% |
| Residential properties | ||
|---|---|---|
| £125,000 or less | 0% | |
| £125,001 − £250,000 | 2% | |
| £250,001 − £925,000 | 5% | |
| £925,001− £1,500,000 | 10% | |
| £1,500,001 and above | 12% |
Land and Buildings Transaction Tax (LBTT) in Scotland is excluded from the P6 (UK) syllabus.
The penalties for failure to notify chargeability to tax, late filing and errors may be increased where an offshore matter is involved. An offshore matter is one where the relevant income, assets or activity are situated outside the UK. The level of the increased penalty depends, in turn, on the categorisation of the overseas country concerned, as determined by the Treasury, and the behaviour involved.
The Finance Act 2015 has introduced a further penalty in respect of offshore matters. This new penalty applies where one of the penalties set out above has already been charged in respect of a deliberate failure, and there is a ‘relevant offshore asset move’. A relevant offshore asset move is deemed to take place where:
The new penalty only applies where one of the main purposes of the relevant offshore asset move was to prevent or delay HM Revenue and Customs from discovering that there has been a loss of tax revenue.
Candidates are expected to know that these additional penalties exist but do not need to know the precise amounts that may be charged or the categorisation of particular countries.
Further reading
The following articles will be published on the ACCA website later this year.
Written by a member of the P6 (UK) examining team