Relevant to Paper P6 (UK) for the June, September, December 2015, March and June 2016 exam sessions
This article should be read by those of you who are sitting Paper P6 (UK) in an exam in the period 1 April 2015 to 30 June 2016.
This article summarises the additional changes introduced by the Finance Act 2014 that have an effect on the Paper P6 (UK) syllabus.
All of the changes set out in the Paper F6 (UK) article (see ‘Related links’) are relevant to Paper P6 (UK). In addition, all of the exclusions set out in the Paper F6 (UK) article apply equally to Paper P6 (UK) unless they are referred to below.
The comprehensive computation of taxable income and income tax liability
Interest paid for a qualifying purpose
Interest paid on a loan taken out for a qualifying purpose is deducted from an individual’s total income when calculating their income tax liability. One such qualifying purpose is the purchase of shares in a close company.
For the purposes of identifying qualifying interest, the meaning of the term ‘close company’ has been broadened by Finance Act 2014. This extended meaning now encompasses close companies and companies which are resident in the European Economic Area (EEA) and would be close companies if they were resident in the UK.
If you were not sure of the point being made by the previous paragraph, remind yourself of the fact that, for a company to be a close company, it must be resident in the UK. So this change to the rules is intended to provide equal treatment for all companies resident within the EEA.
Income from employment
The tax treatment of share option and share incentive schemes
There have been a number of changes to the rules for share option schemes and share incentive schemes. Some of these changes are purely administrative and include changes to the official names of the schemes as set out below.
Old name | New name |
---|---|
Approved share incentive plan | Schedule 2 share incentive plan |
Approved SAYE scheme | Schedule 3 SAYE option scheme |
Company share option plan | Schedule 4 company share option plan |
Other changes that have been made include:
SAYE share option scheme
Share incentive plan (‘SIP’)
Members of a SIP can acquire shares in four different ways:
The tax treatment of employee shareholder shares
The concept of employee shareholders was introduced by Finance Act 2013 and came into effect from 1 September 2013. An employee shareholder is an employee who has agreed to give up some of his employment rights, for example in relation to statutory redundancy pay in exchange for an award of shares in his employer or a parent company.
The employee must not pay anything for the shares; the only consideration is the change to the employee’s employment rights. The shares received must be worth at least £2,000.
There are both income tax and capital gains tax advantages to receiving employee shareholder shares.
Taxable total profits
Research and development (R&D) expenditure
Where a small or medium-sized company incurs qualifying expenditure on R&D, it can claim an additional tax deduction of 125% of the costs incurred, ie a total tax deduction of 225% of the costs incurred.
Where the company incurring the expenditure has made a trading loss, it can claim a tax payment equal to the lower of:
The advantage of claiming the tax payment is an improvement in the company’s cash flow position. The disadvantage is that relief for the trading loss is obtained at 14.5% only and the surrendered loss is, of course, no longer available for relief in the future. The alternative is that the company carries the loss forward, obtaining relief in the future at a rate of at least 20%. However, this would be dependent on the company making trading profits in the future, such that the loss can be relieved.
The use of exemptions and reliefs
Seed enterprise investment scheme (SEIS) reinvestment relief
The SEIS was introduced two years ago in order to provide a tax incentive to individuals to invest in small new start-up unquoted trading companies. The scheme provides the investor with relief from income tax and capital gains tax.
The relief from income tax has been in the syllabus since 2013.
The relief from capital gains tax is called SEIS reinvestment relief. Although it was introduced by the Finance Act 2012, it was originally excluded from the syllabus as it was initially intended to be available for two years only. However, the relief has now been extended to 2014/15 and future years and has therefore been added to the syllabus for exams in 2015 onwards.
SEIS reinvestment relief is an exemption from capital gains tax arising on the disposal of any asset. It is available where an individual has subscribed for qualifying SEIS shares such that he is eligible for SEIS relief from income tax. Therefore, SEIS reinvestment relief is subject to the maximum investment threshold of £100,000. The relief is the lower of:
Accordingly, the taxpayer can use the relief to reduce his chargeable gains to a particular chosen level in order to, for example, utilise the annual exempt amount or brought forward capital losses. This is similar to enterprise investment scheme (EIS) deferral relief.
A claim by an investor to have an investment in SEIS shares treated as having been made in the previous tax year for the purposes of SEIS income tax relief also has effect for the purposes of SEIS reinvestment relief. This means that, following such a claim, the relief would be available in respect of gains in the preceding tax year as opposed to the year in which the investment was made.
Capital gains tax SEIS reinvestment relief is withdrawn or reduced where the SEIS income tax relief relating to the shares is withdrawn or reduced. SEIS income tax relief is withdrawn or reduced where the shares are disposed of within three years of acquisition.
If the disposal is not at arm’s length, all of the SEIS income tax relief will be withdrawn and all of the capital gains tax SEIS reinvestment relief in respect of those shares will also be withdrawn.
If the disposal is at arm’s length, the amount of SEIS income tax relief withdrawn is restricted to a maximum of 50% of the consideration received and the same proportion of the capital gains tax SEIS reinvestment relief in respect of those shares will also be withdrawn.
This withdrawal or reduction in SEIS reinvestment relief will result in a chargeable gain equal to the amount by which the relief has been reduced.
Illustration
On 1 May 2014, Mark sold an antique vase, realising a chargeable gain of £45,000.
On 1 July 2014, Mark subscribed for £50,000 worth of shares in Startup Ltd, a qualifying SEIS company.
Mark claims SEIS income tax relief of £25,000 (£50,000 x 50%) against his income tax liability.
Mark has reinvested the whole of the chargeable gain in respect of the vase. Accordingly, he can also claim up to £22,500 (50% of the gain) of SEIS reinvestment relief in respect of this gain.
On 1 October 2015, Mark sells all of his shares in Startup Ltd for £30,000 in an arm’s length disposal. As the shares have not been held for three years, £15,000 (£30,000 x 50%) of the SEIS income tax relief is withdrawn. This is 60% of the original SEIS income tax relief given to Mark (£15,000/£25,000) and his reinvestment relief is reduced by the same proportion.
Therefore, a gain of £13,500 (£22,500 x 60%) becomes assessable on Mark.
The scope of stamp duty and stamp duty reserve tax
The property in respect of which stamp duty and stamp duty reserve tax is payable
Securities traded on AIM (formerly the Alternative Investment Market) are no longer chargeable securities for the purposes of stamp duty and stamp duty reserve tax. Accordingly, no stamp tax will be charged on transactions in such shares.
Further reading
The following articles will be published on the ACCA website later this year.
Written by a member of the Paper P6 (UK) examining team