Summary Notes

Question 1

What is tax avoidance?

Answer 1

• Organise tax affairs to minimise tax bill
• Legal
• e.g. efficient use of losses, investment in ISA, use of spouse exemption for IHT

Question 2

What is tax evasion?

Answer 2

• Understating income/gains
• Overstating expenses
• False claims for allowances
• Failure to disclose chargeability to tax
• Illegal

Question 3

What should you do if you discover an error made by HMRC?

Answer 3

• Accountants are advised to include in their letters of engagement authority to advise HMRC of errors
• Otherwise client consent is required
• If consent withheld consider:
  – Seeking legal advice
  – Ceasing to act for the client.

Question 4

What is professional conduct in relation to taxation standards (PCRT)?

Answer 4

• Client specific
• Lawful
• Disclosure and transparency
• Tax planning arrangements
• Professional judgement and appropriate documentation.

Question 5

What are the fundamental principles?

Answer 5

 Integrity
 Objectivity
 Competence and due care
 Confidentiality
 Professional behaviour

Question 6

What is your capacity as an agent?

Answer 6

 Acting on client’s behalf – client retains responsibility for accuracy so this is a low risk activity

 Submission of self-assessment returns

 Confidentiality:
– no disclosure unless authorised by taxpayer
– only overridden if:
 client suspected of money laundering
 HMRC exercises statutory powers to obtain information
 court order forces accountant to make disclosure.

 Conflict of interest:
– accountant aware that client not making full disclosure
– advise client of possible consequences
– if no action taken by client:
 cease to act for client
 inform client and HMRC of cessation.

Question 7

What is your capacity as principal?

Answer 7

 Provision of tax advice
 May be liable to the taxpayer if advice is incorrect or inappropriate so this is considered to be a high risk activity.

Question 8

What are some anti=money laundering procedures?

Answer 8

 Training
 Due diligence
 Reporting (internal/external).

Question 9

What are some defences against failing to report money laundering?

Answer 9

 Lack of training (but offence for employer)
 Privilege reporting exemption
 Reasonable excuse
 Outside UK and not illegal where occurring.

Question 10

What are the minimums of professional indemnity insurance?

Answer 10

 If gross fee income < £600,000: min = higher of 2.5 × gross fee income and £100,000
 Otherwise: min = £1.5m

Question 11

What do you deduct and add (after percentage calculations) from income tax to give the liability?

Answer 11

Less:
Marriage allowance @ (£1,260 × 20%) (X)
DTR (lower of overseas tax and UK tax) (X)
Relief for finance costs on residential property income (X)
Add:
Child benefit tax charge X

Question 12

What counts as exempt income?

Answer 12

NSC
- NSC
 ISA (interest and dividends)
 Lottery winnings/betting winnings/premium bond prizes
 Statutory redundancy pay
 Scholarships.

Question 13

What constitutes qualifying loan interest?

Answer 13

Interest paid on loan used to:
 Buy plant/machinery for use in partnership/employment
 Buy interest in a close company/employee controlled company/cooperative
 Invest in/make loan to a partnership
 Pay IHT

Question 14

How do you account for gift aid?

Answer 14

 Gross up amount paid by 100/80:
– BRTP – no adjustment in IT comp
– HRTP – extend basic rate band by gross donation
– ARTP – extend basic and higher rate bands by gross donation.

Question 15

How do you calculate the child benefit tax charge?

Answer 15

 Rate of child benefit: eldest child £21.15 per week, each other child £14 per week
 A tax charge may apply based on adjusted net income (ANI)
– ANI ≤ £50,000 = no charge
– ANI > £50,000 but ≤ £60,000 = charge at 1% benefit received per £100
income between £50k and £60k
– ANI > £60,000 = charge of full child benefit.

Question 16

How do you calculate property income and when must you use the accruals basis?

Answer 16

Working
£
Rents received in the tax year X
Less: Allowable expenses paid (X)
–––
Property income X
–––
 Allowable expenses deductible for period property let or available for let.
 If receipts exceed £150,000 the accruals basis must be used (otherwise cash basis used).
 Finance costs on residential property are not an allowable expense from property income. Instead they qualify for 20% basic rate relief at the bottom of the income tax computation.

Question 17

How do you account for the property allowance?

Answer 17

 Rent received ≤ £1,000 = exempt
 Rent received > £1,000 then tax the lower of:
– Normal rental income calculation
– Rent received less £1,000.
If you see an individual with property receipts > £1,000 and expenses
< £1,000 you need to be able to identify that it will be beneficial to claim the property allowance.

Question 18

When do you have rent-a-room relief?

Answer 18

 Rental income ≤ £7,500 = exempt
 Rental income > £7,500 then tax the lower of:
– Normal rental income calculation
– Rent received less £7,500.

Question 19

How do you deal with property losses?

Answer 19

 Net off profits and losses if there is more than one property.
 Net loss is put in the income tax computation as NIL and rolled forward against future property income ONLY.

Question 20

How do you treat pensions on retirement?

Answer 20

 Individuals can usually take up to 25% of their pension fund tax free (subject to the lifetime allowance).
 The drawdown of other income is taxed as NSI at the taxpayer’s marginal rate of tax.
 If the pension fund exceeds the lifetime allowance then there will be extra tax charges at retirement.

Question 21

What are some common benefits in kind? (key exemptions)

Answer 21

 Job-related accommodation
 Subsidised canteen available to all staff
 Car parking (at or near place of work)
 Insignificant private use of computer equipment
 Employer’s pension contributions
 Removal and relocation costs (up to £8,000)
 Annual social events (not more than £150 per head per year)
 Mobile phones (one per employee)
 Bicycles and safety equipment available to all employees
 Health-screening/checkup (one per tax year).
 Loans ≤ £10,000 p.a

Question 22

How do you tax cars/vans in the employment income working?

Answer 22

 Car benefit – list price × CO2 emissions %
 Fuel benefit re cars – £24,600 × CO2 emissions %
 Vans – £3,500 (£Nil if zero emissions)
 Fuel benefit re vans – £669

Question 23

Are vouchers for goods or services taxabe?

Answer 23

Yes, at the cost to the employer

Question 24

How do you tax living accomodation?

Answer 24

 Living accommodation:
£
Annual charge X
Expensive charge ([Value – £75,000] × 2%) X
–––
X
–––

Question 25

How do you tax the use of assets?

Answer 25

 Use of assets – 20% × market value when first provided - Time apportioned for usage

Question 26

How do you tax assets gifted by the employer?

Answer 26

 New asset gifted – cost to employer  Asset gifted after employee has had use of asset benefit is higher of: – MV when gifted – MV when first provided less previous private use benefits

Question 27

How do you tax beneficial loans? (those given at a lower rate of interest than the national rate)?

Answer 27

 Beneficial loans – loan amount (average/strict method) × 2% less interest paid (no benefit if total loans ≤ £10,000 throughout tax year)

Question 28

How do you tax the statutory mileage rate scheme?

Answer 28

Statutory mileage rates – approved mileage allowance payments for business use of privately owned car, van, motor cycle, or bicycle  Payments received higher than SMR, excess = taxable  Payments received lower than SMR, shortfall = tax deductible

Question 29

What are allowable deductions for employment income?

Answer 29

 Occupational pension scheme contributions  Contributions to a payroll giving scheme  Professional subscriptions

Question 30

How do you calculate trading income for an unincorporated business?

Answer 30

Approach Step 1 Tax adjusted profit for the accounting period X Step 2 Less: Capital allowances for the accounting period (X) ––– X ––– Step 3 Match tax adjusted profits after CA for accounting period to tax year using basis period rules

Question 31

How do you apply the cash basis for an unincorporated business?

Answer 31

 If the trader has claimed the cash basis calculate trading profit on cash receipts/payments rather than accruals  Adjust for tax as normal  Capital payments are claimed instead of capital allowances for plant and machinery (except cars).

Question 32

What do you ADD to the net profit per accounts to reach tax adjusted profit? (Sole trader/Ltd company)

Answer 32

Add: Disallowable expenditure Loss on disposal of NCA - Depreciation - Capital expenditure - Private element of expenditure by owner - Unreasonable payments to family members - Increase in general provision - Write-off of non-trade debt - Client entertaining - Gifts (unless cost ≤ £50, advertise business, not food drink or tobacco) - Gift aid donations - Non-trade subscriptions - Fines (unless parking fines incurred by employee) - Legal fees re capital items (unless registering patent or renewing short lease) - 15% x leased car payments if CO2 emissions > 50 g/km Interest on late payment of tax - Accrued pension contributions X Add: Taxable trading income not credited in accounts

Question 33

What do you DEDUCT from net profit per accounts to achieve tax adjusted trading profit?

Answer 33

Less: Income included in accounts not taxable as trading income - Profit on disposal of NCA - Decrease in general provision - Rental income - Interest received - Exempt income (X) - Less: Deductible expenditure not charged in accounts

Question 34

What goes in the main pool?

Answer 34

Any asset that doesn't belong in another pool

Question 35

What goes in the special rate pool?

Answer 35

 Long life assets – assets with expected working life of ≥ 25 years and total spend > £100,000 in a 12 month accounting period  Integral features  Thermal insulation  Solar panels  Cars with CO2 emissions > 50 g/km

Question 36

What goes in a single asset pool?

Answer 36

 Private use assets (by owner) – unincorporated businesses only  Short life assets – expected to be used for not more than 8 years

Question 37

Explain how to use FYA, AIA, and WDA?

Answer 37

FYA @100%  Qualifying assets  Never time apportion. AIA  £1,000,000 p.a  Time apportion for length of accounting period  Use against SRP then MP  Excess gets WDA. WDA  Main pool – 18%  SRP – 6%  Time apportion for length of accounting period.

Question 38

How do you account for disposals from main pool and special rate pool?

Answer 38

 Deduct lower of proceeds and original cost  If a positive balance remains, carry on giving WDA as normal  If a negative balance arises, eliminate with balancing charge.

Question 39

How do you account for disposals from single asset pools?

Answer 39

 Deduct lower of proceeds and original cost  If a positive balance remains, eliminate with balancing allowance  If a negative balance arises, eliminate with balancing charge.

Question 40

What do you do if the main pool/SRP TWDV before WDA is less than or equal to £1000?

Answer 40

 If main pool/SRP TWDV before WDA is  £1,000, write down to nil (time apportion the £1,000 for long/short accounting periods).

Question 41

How do you treat capital allowances if the trader is VAT registered?

Answer 41

If VAT registered, include all assets except cars net of VAT.

Question 42

Do you apply WDA/FYA/AIA when ceasing to trade?

Answer 42

If ceasing to trade, no WDA/FYA/AIA in final accounting period – just balancing adjustments

Question 43

What qualifies for SBA?

Answer 43

Look in Hardman's

Question 44

How much is SBA and when can it be claimed?

Answer 44

 An SBA of 3% is available on qualifying expenditure.  The SBA can only be claimed from when the asset is brought into use by the business

Question 45

Are there balancing adjustments on disposals qualifying for SBA?

Answer 45

 On disposal there is no balancing adjustment. The buyer takes over the remainder of the SBA period receiving the same 3% SBA as the original buyer.  For CGT purposes, on disposal the proceeds received by the seller are increased by the SBAs claimed to date.