tax liability

Hi Vipin
As you rightly say if a taxpayer started to trade in January 2011 making 2010/11 the first tax year of trading the specialist opening years relief would allow that relief to be carried back against the total income (general income) of the preceding 3 tax years starting with the earliest year first, 2007/08. The income tax will of course have been paid for this tax year, by latest the following 31 January, 2009 and probably mostly through PAYE if the taxpayer had then been an employee. This relief will therefore allow for some or all of that tax to now be repaid to the taxpayer by HMRC. This cash flow advantage is the reason why HMRC introduced this relief hoping that it may therefore contribute towards the survival of that trade!
Hope this helps and you are now finding the course notes of use.

Hi Nayem
May I firstly recommend that you review the OT Course Notes Chapter 2 pages 5 – 7 and then work the examples that follow.

The tax credits that apply to the different sources of income are deducted from the taxpayer’s income tax liability to compute the income tax payable for the tax year. You will therefore only deduct them if the question asks you to calculate income tax payable!

They are made up of tax deducted at source by the payers of that income, for example the PAYE (pay as you earn) deducted by employers when they pay employees their salaries and wages – this figure if required will always be given to you in the question.

A tax credit that you are required to compute is usually on interest received net of 20% tax deducted at source by a bank or building society paying the interest to the taxpayer. Here you must of course have included the gross amount of that interest ( received x 100/80) within the total income on the computation. You must learn those sources of interest actually received net compared to those received gross (eg. NS & I bank interest) and are taxable, and those received gross which are exempt (eg. ISA’s)

In both of the above examples of tax credits income tax has actually been deducted at source by the payer and these are the tax credits you will see on non savings income (employment) and savings income (interest) respectively.

The other tax credit you will need to compute is the 10% tax credit which attaches to dividend income. The dividend received in the tax year must again be included gross (received x 100/90) within the total income of the taxpayer. Unlike the other tax credits NO actual tax has been deducted by the company paying the dividend and is therefore known as a “notional” tax credit. You do not need to know the origin of this tax credit merely to show the correct treatment! You will have read that this tax credit does not rank for repayment, clearly what has never been paid can never therefore be repaid! This also explains why we deduct the notional tax credit first before the other actual tax credits, which if they then exceed income tax liability will generate a repayment of income tax.

Hope this helps!
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Read the OT Course Notes and work the examples to ensure you can do the computation correctly and read answer above in relation to bank interest as to what type is received net and what is received gross. If question asks for tax payable then deduct the notional 10% tax credit on dividends first and then the 20% tax credit on interest received net.