ACCA Paper F6 (UK) : Notes

Chapter 1 to 5 extract from our ExPress notes for use with the current video.
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Notes
ACCA Paper F6 (UK)
Taxation (UK)
For exams in 2011
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ExPress Notes

ACCA F6 Taxation UK
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Introduction Income tax an introduction Income Tax Employment Income Income Tax Trading Income Capital Allowances Trading Income Basis Assessment Trading Losses (For Sole Traders) Trading Income - Partnerships Property Income Investment Income Pensions National Insurance Contributions Corporation Tax Chargeable Gains (For Companies) Corporate Groups and Overseas Tax Issues Capital Gains Tax (CGT) Inheritance Tax (IHT) Value Added Tax (VAT)
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7 9 12 16 19 23 25 28 30 32 34 36 38 44 46 49 54 59
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ACCA F6 Taxation UK
START About ExPress Notes

We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. Its a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.
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ExPress Notes
ACCA F6 Taxation UK
an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
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Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage.
At the start of the learning phase
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
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Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! ACCA online past exams ACCA F6 Taxation UK
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them.
Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
The night before the real exam
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
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ACCA F6 Taxation UK
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ExPress Notes
Chapter 1
ACCA F6 Taxation UK
Introduction
START The Big Picture

Paper F6 (UK) introduces candidates to the core principles of taxation in the UK. The paper is mainly computational and there are 5 compulsory questions in the exam. Taxation can get very complicated with a number of detailed calculations and lots of intricate rules to remember. A successful candidate must have a good understanding of the core areas of taxation. It is vital therefore that candidates understand the key areas and do not get bogged down in the detail. The main taxes are: Income tax payable by individuals Corporation tax payable by companies Capital Gains tax (CGT) payable by individuals (companies pay corporation tax on their capital gains) VAT payable by both companies and unincorporated businesses National Insurance Contributions (NIC) not strictly a tax but payable by individuals and employers.
Question 1 in the exam will focus on income tax and question 2 will focus on corporation tax.
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ExPress Notes
ACCA F6 Taxation UK
Paper F6 has a comprehensive syllabus. These ExPress notes are designed to provide guidance on the core areas of the syllabus. Whilst we believe that the items contained herein have a strong chance of being examined, no guarantee can be provided as to what will be examined. Taxation legislation can change rapidly. These notes are designed to provide assistance for students taking the F6 (UK) ACCA exam in 2011. These notes should not be used for any other purpose. The ExP Group explicitly denies liability for any action taken as a result of using these notes. The ExP Group does not warrant in any form that these notes represent the tax legislation as at the date of reading of these notes.
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ExPress Notes
Chapter 2
ACCA F6 Taxation UK
Income Tax An Introduction

Income tax is a key area and will be examined.
KEYKNOWLEDGE IncomeTaxAnIntroduction
Individuals who are UK tax resident will be taxed on their worldwide income. The period of assessment is the tax year. The tax year runs from 6 April to 5 April. For example, the tax year 2010/11 runs from 6 April 2010 to 5 April 2011 (2009/10 runs from 6 April 2009 to 5 April 2010 and so on) All of an individuals income arising in the tax year will be assessed in the tax year.
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ExPress Notes

ACCA F6 Taxation UK
KEYKNOWLEDGE ProformaTaxComputation2010/11
This is the base document for calculating an individuals liability to income tax. The pro-forma income tax computation is as follows: INCOME TAX COMPUTATION 2010/11 Employment income Trading income Property income Bank interest (x 100/80) UK dividends (x 100/90) Total income Less: reliefs Net income Less: Personal allowance (PA) Taxable income Certain income is exempt from income tax including: Income from certain National Savings Products Income from Individual Savings Accounts (ISA) Gambling or betting winnings 10,000 25,000 5,000 1,000 1,000 42,000 (2,000) 40,000 (6,475) 33,525
Personal Allowances (PA) Every tax payer is entitled to a PA. For 2010/11 this amount is 6,475. It is an income tax personal allowance and cannot be set against any other tax liability such as CGT. The PA is deducted from an individuals income to give taxable income. From 2010/11 the PA is reduced for individuals with income >100,000. The reduction is based on adjusted net income (ANI).
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ExPress Notes
Adjusted Net Income: Net income Less: gross gift aid donations Less: gross personal pension contributions ANI X X X X
ACCA F6 Taxation UK
If ANI is >100,000, the PA is reduced by 50% x (ANI - 100,000). Therefore, individuals with ANI >112,950 do not get a PA. Personal Age Allowances (PAA) Individuals who are aged 65 years old are entitled to a PAA (in effect, a higher rate of PA). Individuals aged 65 74: 2010/11 PAA = 9,490 Individuals aged 75: 2010/11 PAA = 9,640 The PAA is given in full in the year the individual becomes 65 or 75. The PAA is aimed to protect elderly people with lower incomes. If however a person who is entitled to a PAA has ANI above 22,900 (2010/11) the PAA is reduced by: 50% x (ANI - 22,900) The PAA can never be reduced to less than the standard PA (6,475) but note that if an individual has ANI > 100,000 there will be a reduction in the PA as mentioned above. Income Tax Liability and Income Tax Payable Once the taxable income has been calculated, the income tax liability can be calculated. Note that taxable income is after Personal Allowances. The rate of income tax depends on the type of income. Employment income, trading income, property income and bank interest (i.e. all income except dividends) are taxed at the following rate for 2010/11: Basic rate Higher rate Additional rate 1 to 37,400 37,401 to 150,000 150,001 and above 20% 40% 50%
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Income tax on Dividend income is either at 10%, 32.5% or 42.5%. The summarised income tax rates are: Other income 1 to 37,400 37,401 to 150,000 150,001 and above 20% 40% 50% Saving income * 20% 40% 50% Dividend income 10% 32.5% 42.5%
ACCA F6 Taxation UK
(these rates will be provided in the exam)
* Note that special rates of tax may apply to savings income if it is in the first 2,440 of income.
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ExPress Notes
Chapter 3
ACCA F6 Taxation UK
Income Tax Employment Income
The Big Picture

Employment income represents all income and benefits an individual receives from his or her employment.
Earnings
KEYKNOWLEDGE IncomeTaxEmploymentIncome
Earnings are taxed on the receipts basis. i.e. the amount of earnings received in the tax year. There are special rules for directors to prevent them manipulating the receipt date. Earnings include salaries, wages, bonuses and benefits received by an individual. As an example, if an individual receives a salary of 20,000 and benefits of 6,500 his total employment income will be 26,500. This figure then goes to the income tax computation.
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ExPress Notes
Benefits Benefits are regularly tested at Paper F6. Exempt benefits include: One mobile phone. Relocation and removal expenses up to 8,000. Employer funded training (if training relevant for the job). Staff canteen or restaurant (provided its made available to all employees)
ACCA F6 Taxation UK
The calculation of the taxable benefit is reduced proportionally if the benefit is provided for only part of the tax year. In most cases, contributions towards the provision of the benefit are deducted in the calculation of the benefit. Assessable benefit Living Accommodation An employee provided with living accommodation as a result of his employment and which is not exempt job related accommodation would be assessed as follows: Benefit Higher of: 1. Annual value of the accommodation (figure will be given in the exam). 2. The rent paid by the employer. (Cost* minus 75,000) x official rate of interest (interest rate will be provided in the exam).
All properties
Additional charge for expensive properties
* If the employer acquired the property more than 6 years before providing it to the employee the market value when first provided to the employee should be used rather than cost. Assessable benefit motor cars This is one of the most common benefits provided to employees and is examined on a regular basis.
Benefit:
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ExPress Notes
List price when new x relevant %. Note the list price is the published brochure price when the car was first registered. The relevant % depends on the CO2 emissions of the car with the broad concept being that the more un-environmentally friendly the car is the higher the tax charge. For petrol cars the % is calculated as follows: CO2 emissions 75 grams 76 - 120 grams 121 to 130 grams Each complete 5 grams above 130 grams % (for petrol cars) 5% 10% 15% Add an additional 1% to the 15% up to a maximum of 35%.
ACCA F6 Taxation UK
For diesel cars 3% is added to the figures above but the maximum is still 35%.
EXAMPLE1 PetrolCar
John is provided with a petrol car with a list price of 22,000 and CO2 emissions of 147 grams. He makes a contribution of 100 per month for the use of the car. Answer 1: Percentage: Base % Plus 1% for each complete 5 grams of CO2 above 130 grams (i.e. 130 to 145 = 3%) Relevant % % x list price = 18% x 22,000 Less contributions (100 x 12 months) Taxable benefit 15% 3% 18% 3,960 (1,200) 2,760
Note that the benefit present when a car is provided is inclusive of servicing and maintenance costs but does not include any private fuel that is paid for by the employer.
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ExPress Notes
Assessable benefit private fuel Some employers may pay all or part of the private fuel bill of an employee. The provision of fuel for private use is a separate benefit from the provision of a car. The benefit is calculated as follows: Relevant % as calculated for the car benefit x base figure. For 2010/11 the base figure is 18,000 and will be given in the exam. Using the previous example, if the individual had been provided with fuel for private use the calculation of the benefit for the provision of private fuel would be: (Relevant % as calculated for the car benefit x base figure) = 18% x 18,000 = 3,240. Assessable benefit private use of vans The benefit for the private use of a van is a flat rate scale of 3,000 pa. Private use of employers assets For private use of assets other than cars, vans and mobile phones (which have different rules) the general rule is that the benefit is: 20% of an assets market value at the time it was first provided. Gift of asset no previous private use. If an employer buys an asset and then it is given to an employee the benefit is the cost of the asset to the employer. Gift of asset after previous private use If an asset has been used by an employee and then given to him the benefit is calculated as follows: Higher of: 1. The market value of the asset when gifted. 2. The market value of the asset when first made available less the benefits assessed on the individual during the time the individual used it but didnt own it.
ACCA F6 Taxation UK
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ExPress Notes
Chapter 4
ACCA F6 Taxation UK
Income Tax Trading Income

Trading income is a very important part of the syllabus and is almost always examined in one way or another.
KEYKNOWLEDGE IncomeTaxTradingIncome
A person receives trading income if he has his own business. A person who receives trading income is known as one of the following: a sole trader self employed independent consultant
A person who is employed by a company receives employment income and not trading income.
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ExPress Notes
ACCA F6 Taxation UK
Note that a person can receive both employment income (e.g. he has a part time job) and trading income (e.g. he has a part-time business whereby he trades by selling items on eBay) Badges of trade This is the term which refers to various tests (or badges) to ascertain whether a particular transaction that an individual undertakes is a capital item (and hence treated under CGT) or a trading item (and hence treated under income tax). Badges: 1. Subject matter are the items that were transacted typically items that are used for trading? 2. Frequency of transactions the more often the transaction is undertaken the more likely it is that the item will be trading. 3. Length of ownership a shorter period of ownership is more likely to indicate trading. 4. Profit motive a clear indication to make a profit may indicate a trading item. 5. Supplementary work and marketing additional work undertaken on the items to make them more marketable may indicate trading. 6. Method of acquisition an involuntary acquisition of the item (e.g. through inheritance) may indicate capital. Basis of assessment An individual who is self employed must prepare accounts. These accounts can be for whatever accounting period end that he chooses. The accounts are then adjusted for tax purposes to get the trading income figure (see adjustment of accounting profit section below). The trading income figure is then assessed on the individual using the current year basis rules. This is where the trading income assessed in a tax year is the amount in the 12 month accounting period ending in that tax year. For example, an individual that prepares accounts to 31 December and has adjusted trading income of 35,000 for the year ended 31 December 2010 would have trading income of 35,000 in the tax year 2010/11.
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ExPress Notes
Adjustment of the accounting profit An individuals accounts must be adjusted to obtain the tax adjusted trading profit. Tax adjusted trading profit Net profit per accounts Add: Disallowed expenditure Taxable trading income not included in accounts Income included within the accounts but not taxable as trading income Expenditure not in the accounts but allowable as a trading deduction Capital allowances 5,000 4,250 9,250 37,250 Less: 1,000 250 3,000 (4,250) 33,000 28,000
ACCA F6 Taxation UK
Tax adjusted trading profit Disallowable expenditure
General rule Only expenditure incurred wholly and exclusively for the purposes of the trade is allowable. Some of the more common forms of disallowable expenditure include: Capital expenditure Depreciation or amortization charges Appropriations (withdrawals) of funds from the business by the sole trader Excessive salary paid to a sole traders family member 3rd party entertaining (note that employee entertaining is allowable) The write off of a non-trade debt Subscriptions that are not related to the trade Gifts to customers are disallowable unless they satisfy all of the following: o o o Cost less than 50 per recipient per year The gift is not food, drink or tobacco The gift carries the name, logo or advert for the business
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ExPress Notes
Chapter 5
ACCA F6 Taxation UK
Capital Allowances

Depreciation is an accounting adjustment. There are various methods that a business can use to calculate depreciation. For example, straight line method and reducing balance method. Chapter 4 told us that depreciation charged to the income statement is not an allowable expense and instead is added back in the calculation of the tax adjusted trading profit.
KEYKNOWLEDGE CapitalAllowances
Capital allowances are tax allowable amounts that are calculated according to set specific rules. In simple terms, capital allowances could be regarded as the tax equivalent of the accounting depreciation charge. There are two main categories of capital allowances: 1. Plant & Machinery. 2. Industrial Buildings Allowance (IBA).
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ExPress Notes
Plant and Machinery (P&M) P&M includes a number of items. The most common ones found in the exams include: Machinery Vehicles (cars and lorries) Computers (hardware and software) Office furniture and equipment Moveable partitioning
ACCA F6 Taxation UK
Writing down allowance (WDA) An annual WDA of 20% is given on a reducing balance basis. Annual Investment Allowance (AIA) The AIA is a 100% allowance for the first 100,000 spent on P&M by a business in its 12 month accounting period. Available to all businesses. Not available on cars. For accounting periods >12 months or <12 months (long or short accounting periods), the 100,000 is pro-rated. If a business spends more than 100,000 in a 12 month period, the first 100,000 is eligible for AIA and the balance is eligible for WDA.
Motor cars purchased on or after 6 April 2009 Cars purchased on or after 6 April 2009 are treated according to their CO2 emissions. Cars do not qualify for AIA. However, any expenditure on a low emission car (i.e. CO2 110g/km) will qualify for a First Year Allowance of 100% instead of the WDA. CO2 Emissions 110g/km 111 160 g/km 160 g/km Treatment 100% FYA Include in general pool (no AIA or FYA) Eligible for 10% WDA (part of special rate pool)
Motor cars purchased before 6 April 2009 Cars purchased before 6 April 2009 are treated according to their cost. AIAs are not available on cars.
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ExPress Notes
Cars costing 12,000 or less: These are included in the general pool. Cars costing more that 12,000: These are classified as Expensive cars and are kept outside of the general pool and instead are shown in a separate column for each expensive car. The maximum WDA for an expensive car is 3,000 pa. Once the written down value of the car is below 15,000 the WDA is calculated as 20% of the balance. Note that the car always remains in the separate column even when the balance falls below 12,000. Private use assets If the sole trader uses an asset partly for business purposes and partly for private purposes, the asset is kept in a separate column and only the business proportion of the asset is eligible for capital allowances. Note that private use assets are only present for individuals. Companies never have private use assets in their calculation as companies never use assets privately! Industrial Buildings Allowance (IBA) IBAs are given on industrial buildings. Qualifying buildings The most common examples of industrial buildings include: Factories Warehouses Drawing office for preparing plans for manufacturing operations
ACCA F6 Taxation UK
The following are not industrial buildings and therefore do not qualify for IBAs or capital allowances on plant & machinery: Private living accommodation such as houses and apartments. Shops, showrooms and offices
Non-industrial items can be included if they are part of an industrial building and the proportion of the cost of the building that relates to non-industrial is 25% or less.
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ExPress Notes
ACCA F6 Taxation UK
Note that land does not qualify for IBAs. Any costs for preparing the land for building however are eligible for IBAs. IBA for industrial buildings For 2010/11 the rate of IBA is 1% straight line basis. The IBA is given if the building is in industrial use on the last day of the accounting period.
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Chapter 1 to 5 extract from our ExPress notes for use with the current video.

A full set of ExPress notes can be downloaded free of charge at www.theexpgroup.com.

START About ExPress Notes

At the start of the learning phase

The night before the real exam

At the door of the exam room before you go in.

START About The ExP Group

START The Big Picture

Income Tax An Introduction

START The Big Picture

(these rates will be provided in the exam)

Income Tax Employment Income

The Big Picture

Additional charge for expensive properties

Income Tax Trading Income

START The Big Picture

Tax adjusted trading profit Disallowable expenditure

START The Big Picture

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