ACCA Taxation (TX) Flashcards

Name the sources of income included in each category Non Savings Income is made up of Employment Income, Trading Income, Pensions and Property Income. Savings income is interest income and dividend income is of course dividends received from companies.

What is the basis of assessment for employment income Employment Income is assessed on the basis of actual amounts received, with the received date being taken as the earlier of the date when the taxpayer became entitled to the income or the date of actual receipt.

What is the basis of assessment for a continuing source of trading income Current Year Basis (CYB) where the adjusted trading profit of the business to be assessed in any tax year is that of the Accounting Year ended in the tax year of assessment. Note – the bases of assessment that apply in the opening years of a new business and the closing years of an old business ceasing to trade must also be learned.

What basis of assessment applies to interest income Actual amounts received in the tax year.

What basis of assessment applies to dividend income. Actual amounts received in the tax year.

What deductions are made from Total Income to compute Net Income Allowable loan interest payments and certain loss reliefs

What is the difference between Net Income and Taxable Income The Personal Allowance is deducted from Net Income to derive the figure of Taxable Income.

In what order are the deductions from both Total and Net Income deducted The deductions should be made in the following order – from Non Savings income, Savings income and finally Dividend income

What types of interest income are exempt from Income Tax Interest income from National Savings & Investment certificates and from an ISA

In what order are the categories of Taxable Income charged to Income Tax Non Savings Income, followed by Savings Income and then Dividend Income

What is the difference between Tax Liability and Tax Payable Income tax deducted under the PAYE system is deducted from Tax Liability to derive Tax Payable

How do you calculate the adjusted net income (ANI) of the taxpayer It is the Net Income of the taxpayer from the Income Tax computation reduced by the gross amount of both personal pension contributions and gift aid payments made by the taxpayer.

Why is ANI computed If ANI exceeds £100,000 then the PA of the taxpayer is reduced by 50% of the excess, such that when ANI exceeds £125,140 the PA is reduced to nil.

If a husband and wife jointly own a property that is let out, how is the net property income treated on the income tax computations of the spouses The 50/50 rule applies and the net property income is split equally between the computations of the spouses. A joint election may however be made by the spouses to split the income according to the actual ownership of the property.

What is the tax treatment of mortgage (loan) interest paid by a taxpayer on a let property There is no tax relief for the interest payments against property income. Tax relief is instead given as a tax credit / reduction taken at the 20% basic rate of tax in computing the Tax Liability of the taxpayer – hence a finance expense charge of £3,000 in the 2021/22 tax year will reduce the Tax Liability by £600 (20% x £3,000) 

Explain how the transferrable amount of the PA of £1,260, given in the Tax Rates and Allowances information provided by the examiner applies and the circumstances in which it is available An election may be made to transfer a fixed amount of £1,260 of the PA to a spouse or civil partner and is only available when both taxpayers are either just basic rate taxpayers or non taxpayers. The relief is not given as an increase in the PA of the transferee but as a tax credit to be deducted in deriving the Tax Liability of the transferee taxpayer and is taken at the basic rate of tax 20% - for 2021/22, computed as £1,260 x 20% = £252.  This amount can only reduce the tax liability, it cannot create a repayment.

In what circumstances would the election to transfer the transferrable amount of the PA be worthwhile and when must the election be made The election is only likely to be made when one spouse is a non taxpayer and has an amount of unused PA that would otherwise be wasted and the other spouse is a basic rate taxpayer. The election must be made within 4 years of the end of the tax year to which it should apply though if made within the tax year concerned the election will remain in force for future years until it is either withdrawn or the conditions are not met. 

Describe what tax relief would be available if a trader paid a premium when granted an 11 year lease on business premises. An annual deduction against trading income would be available in relation the premium paid, computed as the property income assessment on the lessor divided by the number of years of the lease. The rental payable in each accounting period would also be an allowable deduction against trading income.

Describe what capital allowances would be available if an unincorporated trader commenced trading and bought 2 cars in the opening accounting period of 9 months, one to be used by an employee of the business and the other to be used by the business owner with both cars having a mix of business and private use Depending on the CO2 emissions of the car used by the employee, it will be allocated to either the main pool or special rate pool and a WDA of either 18% pa or 6% pa will be available – as these allowances are per annum the annual figure will be time apportioned to 9/12 of the annual amount irrespective of the date within the period when it was purchased.  The car purchased for the business owner will have its own separate CA calculation with a WDA computed as above based on the CO2 emissions. The claim will then be limited to the level of business use.

How should the adjusted trading profit or loss of a partnership be divided between the partners of a partnership. According to the profit sharing agreement in force during the accounting period in which the trading profit or loss was made.

What is job related accommodation Where the accommodation is necessary for the proper performance of the employee’s duties (e.g. a caretaker); or  It is for the better performance of the employee’s duties and (for that type of employment) it is customary for employers to provide living accommodation (e.g. hotel-worker); or  Where there is a special threat to the employee’s security and he resides in the accommodation as part of special security arrangements

If an employee is provided by an employer with the use of an asset for which no specific rule already applies (like the specific rules for the use of a car or van) then what generic rule is applied to determine the assessable benefit 20% × market value of the asset when first provided for the private use of an employee

What categories of NIC are payable by the self employed Class 2 and Class 4 NIC

What categories of NIC are suffered by an employee Class 1 Employee / Primary contributions

What categories of NIC are suffered by employers Class 1 Employer / Secondary contributions and Class 1A contributions

In what circumstances must a chargeable gain be computed A chargeable gain arises when a chargeable person makes a chargeable disposal of a chargeable asset.

What makes a company UK resident A company is UK resident if it is either, (a) Incorporated in UK or (b) Centrally managed and controlled from UK

What are the consequences of a company being treated as UK resident A UK resident company is chargeable to UK corporation tax on its worldwide income and gains

What is a company’s period of account The period for which the company prepares its financial statements. This is normally a period of 12 months but may be either shorter or longer than 12 months

What is a financial year in corporation tax and what is its purpose A Financial Year (FY) runs from 1 April to 31 March and is denoted by reference to the year in which it starts, hence FY 2020 runs from 1 April 2020 to 31 March 2021 and for which period the rate of corporation tax is set.

For what period is a corporation tax computation prepared A corporation tax computation is prepared for the Accounting Period of the company – this usually the same as the period of account but it cannot exceed 12 months, hence a long period of account (more than 12 months) must be split into two Accounting Periods, with corporation tax computations being prepared for firstly a 12 month period and then a second computation for the remaining period. Hence a 16 month period of account will require 2 corporation tax computations to be prepared, firstly for a 12 month period, followed by a separate computation for a 4 month period.

If a company is not large by when must it pay its corporation tax A company must pay its corporation tax within 9 months and one day of the end of the Accounting Period

How does a large company pay its corporation tax If a company was large in the previous Accounting Period (AP) and estimates that its “profits” will be large for the current period, then it is required to make quarterly instalment payments based on the estimated corporation tax liability of the period, the first such quarterly payment being made by the 14th day of the 7th month from the start of the AP

How do you determine if a company is large A large company is a company whose “profits” exceed £1.5M. “Profits” are defined as the TTP of the company plus dividends received (excluding dividends from related 51% group companies).   The limit of £1.5M is used for a single company with a 12 month AP. It is therefore divided by the number of related 51% group companies at the end of the immediately preceding accounting period and must also be time apportioned for an AP of less than 12 months.

When does an accounting period start An AP will normally start immediately after the end of the preceding AP. An AP will also start when a company commences to trade.

When does an accounting period end An AP will normally end twelve months after the beginning of the period or at the end of a company’s period of account. An AP will also end when a company ceases to trade.

What is the difference between “Total Profits” and “Taxable Total Profits” Qualifying charitable donations are deducted from Total Profits to derive Taxable Total Profits

If a company incurs a trading loss for an accounting period, in what order would it relieve that loss if it wished to claim relief at the earliest available opportunity The company must firstly claim relief against the Total Profits of the current period (the period of loss) and only then is it able to make a carry back claim against the Total Profits of the preceding 12 months of trading. Any remaining loss will be carried forward to set off against the future Total Profits of the company.

Can a company choose to use only part of a loss when making a claim No partial claims may be made against Total Profits in either a current period or carry back claim. Partial claims will however be available in respect of any carry forward claims.

Can a company ever carry back a loss for more than 12 months A loss sustained in the last 12 months of trading will benefit from terminal loss relief, which allows such a loss to be carried back for a period of 36 months from the beginning of the accounting period of loss. This relief is again deducted from Total Profits and is applied against the preceding periods on a LIFO basis.

How can a company use a capital loss Capital losses cannot be set off against income, so any net capital loss of an accounting period may only be carried forward to set off against future net gains of a period

A company has 2 subsidiary companies, one wholly owned and the other 60% owned. Explain the tax issues that arise if the parent company buys plant and machinery at a cost of £600,000 For capital allowance purposes all 3 companies are in the group which means that the AIA limit of £1m will be split between the group companies in any proportion it chooses. The parent company may decide therefore where to use the available AIA if such qualifying expenditure should exceed the £1m limit, so it may choose here to use £600,000 of the available AIA limit in the parent company to claim a full 100% allowance on the qualifying capital expenditure incurred.

If company A owns 80% of company V, which in turn owns 80% of company FC, then which companies may claim group relief For group relief purposes an effective 75% holding must exist between a parent company and both a direct and indirect subsidiary company, therefore company A can group relieve with company V and company FC can group relieve with company V, but company A and company FC cannot claim group relief between them as 80% of 80% does not give the required effective 75% holding.

If company A owns 75% of company V, which in turn owns 75% of company FC, then which companies are in the same chargeable gains group For chargeable gains group membership each direct holding must be at least 75% but the effective holding to an indirect subsidiary need only be 51%, therefore all companies are in the same chargeable gains group.

For VAT purposes what types of supply may be made by a trader A trader may make taxable supplies, exempt supplies or some may be outside the scope of VAT. Taxable supplies may be either standard rated or zero rated

What is the difference between making zero rated supplies and exempt supplies? A trader making zero rated supplies may register for VAT and is therefore able to recover any input VAT incurred on purchases and expenses. If a trader only makes exempt supplies it cannot register for VAT and therefore cannot recover any input VAT on such costs.

Why might a trader voluntarily register for VAT A trader registering for VAT and then making taxable supplies is able to recover the input VAT incurred on its costs and will not suffer a loss in sales due to higher prices if either it makes zero rated sales or if its customers are themselves VAT registered. A trader may also choose to register for VAT if its sales are approaching the compulsory VAT registration limit so as to avoid any penalties that may arise if it were to miss the compulsory registration date. It may also be used by a small business to appear larger in order to attract more customers.

In what circumstances must a trader deregister  A trader must deregister if the business ceases to make taxable supplies. (A trader may choose to deregister if the level of taxable supplies in the next 12 months will fall below the deregistration limit of £83,000 (VAT exclusive))

What date will determine the tax point The basic tax point is the date goods are made available to the customer or a service completed.  If an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point. If an invoice is issued within 14 days of the basic tax point, the invoice date will usually become the actual tax point unless an earlier date applies according to the rules above.

For what periods of time may a VAT return be submitted VAT returns are usually submitted on a quarterly basis, but may be submitted on a monthly basis if the trader so chooses, or if eligible for the annual accounting scheme may be submitted on an annual basis

In what circumstances may a trader apply the cash accounting scheme A trader will be able to operate the cash accounting scheme provided its expected taxable turnover for the next 12 months does not exceed £1,350,000 and may stay in the scheme until annual taxable turnover reaches £1,600,000

In what circumstances may a trader apply the annual accounting scheme A trader can apply to use the annual accounting scheme provided its expected taxable turnover for the next 12 months does not exceed £1,350,000 and the company must be up-to-date with its VAT returns and payments. A trader may stay in the scheme until annual taxable turnover reaches £1,600,000

What is the VAT treatment of sales of goods made to customers resident overseas Sales made to customers resident anywhere outside the UK will be zero rated.

If an individual has a mix of both gains and losses arising in a tax year and also has unused capital losses brought forward from the previous tax year, show how the taxable gains for the current tax year would be computed. The gains and losses of the current tax year must be netted off, from which net gains the AEA will then firstly be deducted, followed by the deduction of the capital losses brought forward.

In what circumstances does a chargeable disposal arise for an individual A chargeable disposal arises on the sale of, the gift of, or the destruction or loss of a chargeable asset.

What tax rates may apply to an individuals’ taxable gains Assets qualifying for business asset disposal relief will always be taxed at 10% up to a maximum lifetime limit of £1m. Shares qualifying for investors’ relief will also be taxed at 10% but up to a maximum lifetime limit of £10m Residential property gains will be taxed at either 18% or 28% Gains on any other assets will be taxed at either 10% or 20%

How is the payment on account calculated In computing the payment on account the following deductions should be made from the gain:  • Any current tax year capital losses incurred prior to the property disposal  • The AEA of the tax year  • Any capital losses b/f at the start of the tax year  It will also require an estimate of how much, if any, of the taxpayer’s basic rate band will be available for the tax year – this information will be provided in the exam.

How is the gain deferred on a claim for rollover relief The gain is deferred by deducting it from the cost of the newly acquired replacement asset which results in a larger gain then arising on the eventual sale of the replacement asset.

In what circumstances will IHT become chargeable IHT will become chargeable in lifetime if an individual makes a chargeable lifetime transfer ie a transfer of value into a trust, and on death when lifetime transfers made within 7 years of the date of death become chargeable along with the chargeable estate.

How do you compute a transfer of value A transfer of value is a gift made by an individual and is calculated as the loss to the estate of the donor – the difference in the value of the estate before the transfer and after the transfer.

What rates of IHT may be chargeable on the death estate If the lifetime transfers made in the 7 years before the date of death do not exceed the nil rate band, then the remaining amount of the nil rate band will be available and may have been increased by any unused nil rate band transferred to the individual following the earlier death of a spouse or civil partner. The residence nil rate band is also available where a “main” residence is held within the death estate and is inherited by direct descendants (children / grandchildren). The remainder of the estate will be chargeable at a rate of 40%.

What other exemptions are available to fully exempt a lifetime transfer In addition to the spouse / civil partner exemption available against both lifetime transfers and transfers on death, the following specific exemptions will apply against lifetime transfers: • Small gifts • Gifts for family maintenance • Normal expenditure out of income

What are the IHT implications of the above transfer For IHT purposes the transfer will be a PET and computed as the difference in value between a 60% shareholding and a 30% shareholding. If the transferor dies within 7 years of this transfer it will become chargeable, but if the transferor lives for at least 3 years then any IHT chargeable will be reduced by the available taper relief