Relevant to Advanced Taxation – United Kingdom (ATX–UK)
This article looks at the changes made by the Finance Act 2021 (which is the legislation as it relates to the tax year 2021/22).It also highlights some changes to terminology to be introduced with effect from the June 2022 exam.
It should be read by those of you who are sitting the ATX-UK exam in the period from 1 June 2022 to 31 March 2023.
Please note that if you are sitting ATX-UK in the period 1 June 2021 to 31 March 2022, you will be examined on the Finance Act 2020, which is the legislation as it relates to the tax year 2020/21. Accordingly, this article is not relevant to you, and you should instead refer to the Finance Act 2020 article published on the ACCA website.
All of the changes set out in the TX-UK article (see ‘Related links’) are also relevant to ATX-UK. In addition, all of the exclusions set out in the TX-UK article apply equally to ATX-UK unless they are referred to below.
This article does not refer to any amendments to the ATX-UK syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the ATX-UK Syllabus and Study Guide for the period 1 June 2022 to 31 March 2023 for details of such amendments.
Devolved taxes
You are reminded that none of the current or impending devolved taxes for Scotland, Wales, and Northern Ireland are, or will be, examinable.
Covid-19
Candidates are not expected to make any reference to Covid-19 or the global economic crisis as a result of the pandemic in their exams.
Although governments around the world have implemented tax measures to combat the economic effect of the pandemic, given the largely temporary nature of these measures, for the foreseeable future they will not be examinable.
The current syllabus and study guide for the ATX-UK exam will not specifically reference these measures, unless their omission would fundamentally impact candidates’ understanding of what is and is not examinable. You should refer to the syllabus and study guide document to ensure that you understand what will be examined in your upcoming exam.
Clarifications to terminology and related matters
These points apply from the June 2022 exam onwards.
Accounting reference date
The term ‘accounting reference date’ will be used when describing the date to which a company’s accounts have been prepared in place of ‘accounting date’.
Company with investment business
The term ‘company with investment business’ will be used in place of ‘investment company’.
Gift holdover relief
The term ‘gift holdover relief’ will be used in place of the various terms used in previous exams (eg ‘gift relief’, ‘holdover relief’ and ‘holdover relief (gift relief)’).
Inheritance tax – nil rate band
The tax rates and allowances which accompany the ATX-UK exam will list a single nil rate band of £325,000. If a scenario involves knowledge of the rate for an earlier tax year, when it was not £325,000, the relevant amount will be provided within the question itself.
Personal service companies
Changes have been made to the IR35 rules which relate to off payroll working. These rules may apply where workers provide their personal services to a client via an intermediary. In the ATX-UK exam, the intermediary will always be a personal service company (PSC).
As a result of the changes introduced by Finance Act 2021, the rules for off payroll working in the public sector (introduced in 2017) will now apply to workers in the private sector where the client is a medium or large sized organisation.
Accordingly, we now have two sets of rules in relation to private sector clients. The rules to apply depend on whether the client in receipt of the services is classified as a “small” or a “medium or large sized” organisation. ATX-UK questions involving the PSC rules will state the size of the client organisation.
Services provided via a PSC to a small organisation
In this situation, the PSC (ie the intermediary company) is required to determine whether or not the IR35 rules apply.
Where the rules do apply, the PSC is required to treat the income from relevant engagements as if it were a salary paid to the employee, and to account for income tax and class 1 national insurance contributions (NIC) on the deemed employment payment.
EXAMPLE 1
Hari has formed a limited company which is a PSC. Hari is the only employee of the PSC. During the year ending 31 March 2022, Hari will perform services via the PSC for a client which is classified as a small organisation for the purposes of the IR35 legislation. The budgeted fee income of the PSC for the year ending 31 March 2022 in respect of relevant engagements is £80,000. The PSC will pay Hari a gross salary of £35,000 for this period.
The deemed employment payment will be calculated as follows:
| £ | ||
|---|---|---|
| Income in respect of relevant engagements | 80,000 | |
| Less: 5% deduction | (4,000) | |
| 76,000 | ||
| Less: salary | (35,000) | |
| employer’s NIC on salary ((£35,000 – £8,840) x 13.8%) | (3,610) | |
| 37,390 | ||
| Less: employer’s NIC on deemed payment (13.8/113.8 x £37,390) | (4,534) | |
| Deemed employment payment | 32,856 |
The PSC has the obligation to calculate and pay income tax and NIC on the deemed employment payment.
In order to prevent double taxation, dividends paid by the PSC to the worker out of this income, are exempt from income tax.
These are the rules which are already examinable in ATX-UK.
Services provided via a PSC to a medium or large sized organisation
In this situation it is the client, rather than the PSC, which is responsible for determining the status of the individual. The client will issue a Status Determination Statement to the individual.
Where it is determined that the IR35 rules apply, the client is then required to calculate and pay the income tax and NIC on the deemed direct payment (DDP). The DDP is calculated as follows:
| £ | |
|---|---|
| Payment in respect of services provided (net of VAT) | X |
| Less: direct cost of materials incurred by the PSC | (X) |
| Less: deductible employee expenses incurred by the PSC | (X) |
| DDP | X |
EXAMPLE 2
Chiara provides services via her PSC to a client which is classified as a medium or large sized organisation. The client has issued her with a Status Determination Statement stating that her services fall within the IR35 rules.
Chiara sends her client an invoice for £10,000 (net of VAT). The PSC incurred deductible expenses of £750 and the direct cost of materials in respect of the services provided was £500.
The DDP is therefore £8,750 (£10,000 – £750 – £500). This payment will be chargeable to tax and NICs (employee and employer) in the same way as if Chiara was a direct employee of the client.
In order to prevent double taxation, the DDP is deducted from any payment made by the PSC to the worker before calculating the tax and NICs due in respect of such payment.
Research and development (R&D) expenditure
Small or medium-sized companies which incur qualifying expenditure on R&D are entitled to an additional tax deduction equal to 130% of the costs incurred, resulting in a total tax deduction of 230% of the costs incurred.
Where this deduction results in a trading loss, the company may surrender the loss in return for a payment from HM Revenue and Customs (HMRC) equal to 14.5% of the amount surrendered.
A restriction has been introduced on the maximum payment which will be made under these rules. This restriction is not examinable.
Almost all of the changes introduced by the Finance Act 2021 are relevant to the TX-UK exam and are therefore described in the TX-UK article. Accordingly, it is vital that you read the TX-UK article in addition to this one.
Some of these changes are particularly important to the ATX-UK exam. In view of this, certain aspects of these changes are set out below in order to enable you to appreciate their importance and to emphasise the need for you to read the further detail in the TX-UK article.
Relief for trading losses of unincorporated businesses and companies
An additional loss relief has been introduced which extends the carry back of losses incurred by unincorporated traders in the tax years 2020-21 and 2021-22 and by companies in accounting periods ending between 1 April 2020 and 31 March 2022.
This additional loss relief is not examinable.
Annual investment allowance (AIA) for unincorporated businesses and companies
For exams in the period 1 June 2022 to 31 March 2023, it will be assumed that the AIA limit continues to be £1,000,000. This will be the case regardless of the trading period covered by an exam question.
Enhanced capital allowances – for companies only
As explained in detail in the TX-UK article, enhanced capital allowances are available in respect of the purchase by a company of new plant and machinery during the two years from 1 April 2021 to 31 March 2023.
A question will not be set involving additions qualifying for the 130% super deduction in an accounting period which spans 31 March 2023.
Disposals of assets which qualified for these enhanced capital allowances will not be examined in exams in the period June 2022 to March 2023.
The impact of the UK leaving the EU
As a result of the departure of the UK from the EU there is no longer any difference in the VAT treatment of transactions between the UK and the EU and those with the rest of the world.
Further reading
The following articles will be published on the ACCA website at a later date:
Written by a member of the Advanced Taxation – United Kingdom (ATX-UK) examining team