Finance Act 2014

This article looks at the changes made by the Finance Act 2014, and should be read by those of you who are taking Paper F6 (UK) in an exam in the period 1 April 2015 to 30 June 2016. The aim of the article is to summarise the changes made by the Finance Act 2014 and to look at the more important changes in greater detail. The article also includes details of legislation that was enacted prior to the Finance Act 2014, but has only come into effect from 6 April 2014. The article does not refer to any amendments to the Paper F6 (UK) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the Paper F6 (UK) Syllabus and Study Guide for the period 1 April 2015 to 30 June 2016 for details of such amendments.

INCOME TAX

Rates of income tax
The rates of income tax for the tax year 2014–15 are as follows:

A starting rate of 10% applies to savings income where it falls within the first £2,880 of taxable income. If non-savings income exceeds £2,880 the starting rate of 10% for savings does not apply. In this case savings income is taxed at the basic rate of 20% if it falls below the higher rate threshold of £31,865, at the higher rate of 40% if it falls between the higher rate threshold of £31,865 and the additional rate threshold of £150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of £150,000.

Personal allowances
Personal allowances for the tax year 2014–15 are as follows.

The normal personal allowance of £10,000 is gradually reduced to nil where a person’s adjusted net income exceeds £100,000. Adjusted net income is net income (total income less deductions for loss relief and interest payments) less the gross amount of personal pension contributions and gift aid donations.

The personal allowance is reduced by £1 for every £2 that a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £120,000 or more is not entitled to any personal allowance (120,000 – 100,000 = 20,000/2 = £10,000). Where a person has an adjusted net income of between £100,000 and £120,000, the effective marginal rate of income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a result of the withdrawal of the personal allowance. In this situation it may be beneficial to make additional personal pension contributions or gift aid donations.

The same reduction applies in respect of the higher personal allowances available to people born before 6 April 1948. Where a person’s adjusted net income exceeds £27,000, the higher personal allowances are reduced to a minimum of the normal personal allowance of £10,000. However, there will then be a further reduction if adjusted net income exceeds £100,000. This means that regardless of a person’s age, no personal allowance will be available where their adjusted net income is £120,000 or more.

EXAMPLE 1
Ingrid was born on 29 May 1974. For the tax year 2014–15 she has a salary of £37,000, building society interest of £800 (net) and dividends of £9,000 (net). Her income tax liability is as follows:

EXAMPLE 2
June was born on 3 August 1966. For the tax year 2014–15 she has a trading profit of £184,000. Her income tax liability is as follows:

• No personal allowance is available as June’s adjusted net income of £184,000 exceeds £120,000.

EXAMPLE 3
Trevor was born on 23 January 1984. For the tax year 2014–15 he has a trading profit of £132,000, building society interest of £3,200 (net) and dividends of £34,200 (net). The income tax payable by Trevor is as follows:

• The 10% tax credit on dividend income is available regardless of the rate of tax payable.

EXAMPLE 4
May was born on 19 December 1959. For the tax year 2014–15 she has a trading profit of £159,000. During the year May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is as follows:

• The gross personal pension contributions are £40,000 (32,000 x 100/80) and the gross gift aid donation is £12,000 (9,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000), so her personal allowance of £10,000 is reduced to £6,500 (10,000 – 3,500 (107,000 – 100,000 = 7,000/2)).
• The basic and higher rate tax bands are extended to £83,865 (31,865 + 40,000 + 12,000) and £202,000 (150,000 + 40,000 + 12,000) respectively.

EXAMPLE 5
Ali was born on 12 March 1947. For the tax year 2014–15 he has pension income of £11,900 and bank interest of £4,000 (net). His income tax liability is as follows:

• Ali qualifies for the higher personal allowance of £10,500 as he was born between 6 April 1938 and 5 April 1948.
• Non-savings income is £1,400 (11,900 – 10,500), so £1,480 (2,880 – 1,400) of the savings income is taxed at the starting rate of 10%. The remainder of the savings income is taxed at the basic rate of 20%.

EXAMPLE 6
Lorn was born on 14 July 1932. For the tax year 2014–15 she has pension income of £24,000 and building society interest of £3,200 (net). Her income tax liability is as follows:

• Lorn’s adjusted net income exceeds £27,000, so her higher personal allowance of £10,660 is reduced to £10,160 (10,660 – 500 (28,000 – 27,000 = 1,000/2)).

EXAMPLE 7
Rich was born on 2 September 1935. For the tax year 2014–15 he has a trading profit of £94,000 and pension income of £18,000. His income tax liability is as follows:

• Rich’s adjusted net income exceeds £27,000 to the extent that his higher personal allowance of £10,660 is initially reduced to the normal personal allowance of £10,000.
• As the adjusted net income of £112,000 exceeds £100,000, the normal personal allowance is then reduced to £4,000 (10,000 – 6,000 (112,000 – 100,000 = 12,000/2)).

Employment income

Company car benefit
For the tax year 2014–15 the base level of CO₂ emissions used to calculate company car benefits is unchanged at 95 grams per kilometre. However, the base percentage has been increased from 11% to 12%. There are two lower rates for company motor cars with low CO₂ emissions. For a motor car with a CO₂ emission rate of 75 grams per kilometre or less the percentage is unchanged at 5%. For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre the percentage is 11% (increased from 10%).

The percentage rates (including the lower rates of 5% and 11%) are increased by 3% for diesel cars, but not beyond the maximum percentage rate of 35%.

The company car benefit information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

Car benefit percentage
The relevant base level of CO₂ emissions is 95 grams per kilometre.

The percentage rates applying to petrol cars with CO₂ emissions up to this level are:

EXAMPLE 8
During the tax year 2014–15 Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2014–15. The motor car has a list price of £12,200 and an official CO₂ emission rate of 84 grams per kilometre.

Betty was provided with a new petrol powered company car throughout the tax year 2014–15. The motor car has a list price of £16,400 and an official CO₂ emission rate of 109 grams per kilometre.

Charles was provided with a new diesel powered company car on 6 August 2014. The motor car has a list price of £13,500 and an official CO₂ emission rate of 137 grams per kilometre.

Diana was provided with a new petrol powered company car throughout the tax year 2014–15. The motor car has a list price of £84,600 and an official CO₂ emission rate of 228 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2014–15 for the use of the motor car.

Amanda
The CO₂ emissions are between 76 grams and 94 grams per kilometre so the relevant percentage is 11%. The motor car was available throughout 2014–15, so the benefit is £1,342 (12,200 x 11%).

Betty
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The CO₂ emissions figure of 109 is rounded down to 105 so that it is divisible by five. The minimum percentage of 12% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 14% (12% + 2% (105 – 95 = 10/5)). The motor car was available throughout 2014–15 so the benefit is £2,296 (16,400 x 14%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 23% (12% + 8% (135 – 95 = 40/5) = 20% plus a 3% charge for a diesel car). The motor car was only available for eight months of 2014–15, so the benefit is £2,070 (13,500 x 23% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 38% (12% + 26% (225 – 95 = 130/5)), but this is restricted to the maximum of 35%. The motor car was available throughout 2014–15 so the benefit is £28,410 (84,600 x 35% = 29,610 – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit.

Company van benefit
The annual scale charge used to calculate the benefit where an employee is provided with a company van has been increased from £3,000 to £3,090.

Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure that is announced each year. For the tax year 2014–15 the base figure has been increased from £21,100 to £21,700.

The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

EXAMPLE 9
Continuing with Example 8.

Amanda was provided with fuel for private use between 6 April 2014 and 5 April 2015.

Betty was provided with fuel for private use between 6 April 2014 and 31 December 2014.

Charles was provided with fuel for private use between 6 August 2014 and 5 April 2015.

Diana was provided with fuel for private use between 6 April 2014 and 5 April 2015. She paid Fashionable plc £600 during the tax year 2014–15 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
The motor car was available throughout 2014–15 so the benefit is £2,387 (21,700 x 11%).

Betty
Fuel was only available for nine months of 2014–15, so the fuel benefit is £2,278 (21,700 x 14% x 9/12).

Charles
The motor car was only available for eight months of 2014–15, so the fuel benefit is £3,327 (21,700 x 23% x 8/12).

Diana
The motor car was available throughout 2014–15 so the benefit is £7,595 (21,700 x 35%). There is no reduction for the contribution made since the cost of private fuel was not fully reimbursed.

Company van fuel benefit
The fuel benefit where private fuel is provided for a company van has been increased from £564 to £581.

Beneficial loans
The limit below which a beneficial loan to an employee is ignored has been increased from £5,000 to £10,000. There is no taxable benefit if the loan does not exceed the limit of £10,000 at anytime during the tax year.

Medical treatment
An exemption is going to be introduced where an employer pays for medical treatment for employees. The exemption will not be introduced until autumn 2014, so for exams in the financial year 1 April 2015 to 31 March 2016 it will not be examined.

Official rate of interest
The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the provision of living accommodation costing in excess of £75,000.

For exams in the financial year 1 April 2015 to 31 March 2016 the actual official rate of interest of 3.25% for the tax year 2014–15 will be used.

PAYE – Real time reporting late filing penalty
With real time reporting, employers submit income tax and NIC information to HM Revenue and Customs electronically every time employees are paid. Penalties are going to be imposed on a monthly basis if these submissions are made late. The original intention was to introduce late filing penalties from 6 April 2014, but their introduction has been postponed until 6 October 2014 for employers with 50 or more employees, and 6 March 2015 for others. Late filing penalties will therefore not be examined in exams in the financial year 1 April 2015 to 31 March 2016

Capital allowances

Annual investment allowance
From 6 April 2014 (1 April 2014 for limited companies) the annual investment allowance (AIA) limit has been increased to £500,000. The AIA provides an allowance of 100% for the first £500,000 of expenditure on plant and machinery in a 12 month period. Any expenditure in excess of the £500,000 limit qualifies for writing down allowances as normal. The AIA applies to all expenditure on plant and machinery with the exception of motor cars. The £500,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, the AIA would be £375,000 (500,000 x 9/12) for a nine-month period of account.

Where a period of account spans 6 April 2014 (1 April 2014 for limited companies), then apportionment will be necessary in order to determine the amount of AIA. A question will not be set involving apportionment of the AIA as a result of the period of account spanning 6 April 2014.

The capital allowances information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

Rates of allowance

Unless there is private use, motor cars qualifying for writing down allowances at the rate of 18% are included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 8% are included in the special rate pool. Motor cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private use adjustment can be calculated.

EXAMPLE 10
Ming prepares accounts to 5 April. On 6 April 2014 the tax written down value of plant and machinery in her main pool was £16,700.

The following transactions took place during the year ended 5 April 2015:

Motor car (1) purchased on 8 April 2014 has CO₂ emissions of 120 grams per kilometre. This motor car is used by Ming, and 20% of the mileage is for private journeys. Motor car (2) purchased on 14 April 2014 and sold on 12 December 2014 has CO₂ emissions of 155 grams per kilometre. Motor car (3) purchased on 2 September 2014 has CO₂ emissions of 125 grams per kilometre. Motor car (4) purchased on 19 November 2014 has CO₂ emissions of 90 grams per kilometre.

Ming’s capital allowance claim for the year ended 5 April 2015 is as follows:

• Motor car (1) is kept separately because there is private use by Ming. This motor car has CO₂ emissions between 96 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (2) had CO₂ emissions over 130 grams per kilometre and therefore qualifies for writing down allowances at the rate of 8%. Even though it is the only asset in the special rate pool, there is no balancing allowance on the disposal of this motor car because the expenditure is included in a pool.
• Motor car (3) has CO₂ emissions between 96 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (4) has CO₂ emissions of less than 95 grams per kilometre and therefore qualifies for the 100% first year allowance.

New individual savings accounts

Individual savings accounts have been simplified so that there is now just one overall investment limit, which for the tax year 2014–15 is £15,000. The accounts have also been renamed as new individual savings accounts (NISAs). The £15,000 limit is completely flexible, so a person can invest £15,000 in a cash NISA, or they can invest £15,000 in a stocks and shares NISA, or in any combination of the two – such as £10,000 in a cash NISA and £5,000 in a stocks and shares NISA. It is even possible to have just one NISA holding both cash and stocks and shares, although most people will prefer to keep the two types of investment separate. This limit will be given in the tax rates and allowances section of the exam paper.

The income from NISAs is exempt from income tax, whilst a chargeable gain made within a stocks and shares NISA is exempt from capital gains tax.

The simplification only applies from 1 July 2014, but a question will not be set requiring knowledge of the old investment rules or limits.

Pension schemes

Annual allowance
The annual allowance for the tax year 2014–15 has been reduced from £50,000 to £40,000. If the annual allowance is not fully used in any tax year then it is possible to carry forward any unused allowance for up to three years. The carry forward from the tax years 2011–12, 2012–13 and 2013–14 is based on the annual allowance of £50,000 applicable to those years.

Carry forward is only possible if a person is a member of a pension scheme for a particular tax year. Therefore for any year in which a person is not a member of a pension scheme the annual allowance is lost.

The pension scheme information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

Pension scheme limit

The maximum contribution that can qualify for tax relief without any earnings is £3,600.

EXAMPLE 11
Monica and Nicola have made the following gross personal pension contributions during the tax years 2011–12, 2012–13 and 2013–14:

Monica was not a member of a pension scheme for the tax year 2011–12. Nicola was a member of a pension scheme for all three tax years.

Monica
Monica has unused allowances of £8,000 (50,000 – 42,000) from 2012–13 and £12,000 (50,000 – 38,000) from 2013–14, so with the annual allowance of £40,000 for 2014–15 a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2014–15. She was not a member of a pension scheme for 2011–12 so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (50,000 – 29,000) from 2012–13 and £50,000 from 2013–14, so with the annual allowance of £40,000 for 2014–15 a total of £111,000 (40,000 + 21,000 + 50,000) is available for 2014–15. The annual allowance for 2011–12 is fully utilised, but Nicola was a member of a pension scheme for 2013–14 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2014–15 is utilised first, and then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 12
Perry has made the following gross personal pension contributions:

The pension contribution of £48,000 for 2014–15 has used all of Perry’s annual allowance of £40,000 for 2014–15, and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (50,000 – 32,000) from 2011–12. Perry therefore has unused allowances of £9,000 (50,000 – 41,000) from 2012–13 and £31,000 (50,000 – 19,000) from 2013–14 to carry forward to 2015-16. The remaining unused allowance from 2011–12 cannot be carried forward to 2015–16 as this is more than three years ago.

Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the annual allowance (including any brought forward unused allowances), then there will be an annual allowance charge. This charge is subject to income tax at a person’s marginal rates.

EXAMPLE 13
For the tax year 2014–15 Frank has a trading profit of £210,000, and made gross personal pension contributions of £60,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is as follows:

• Frank has earnings of £210,000 for 2014–15. All of the pension contributions of £60,000 therefore qualify for tax relief.
• The annual allowance charge is £20,000 (60,000 – 40,000) being the excess of the pension contributions over the annual allowance for 2014–15.
• Frank’s adjusted net income clearly exceeds £120,000, so no personal allowance is available.
• Frank will have paid £48,000 (60,000 less 20%) to the personal pension company.
• Higher and additional rate tax relief is given by extending the basic and higher rate tax bands to £91,865 (31,865 + 60,000) and £210,000 (150,000 + 60,000) respectively.

Lifetime allowance
The lifetime allowance for the tax year 2014–15 has been reduced from £1,500,000 to £1,250,000.

The lifetime allowance applies to the total funds that can be built up within a person’s pension schemes. Where the limit is exceeded there will be an additional tax charge when that person subsequently withdraws the funds in the form of a pension.

CORPORATION TAX

Rates of corporation tax
For the financial year 2014 the small profits rate of corporation tax is unchanged at 20%. The main rate of corporation tax has been reduced from 23% to 21%. The lower and upper limits are unchanged.

Marginal relief eases the transition from the small profits rate to the main rate of corporation tax where augmented profits fall between £300,000 and £1,500,000. The standard fraction used in the calculation of marginal relief for the financial year 2014 is 1/400th. The effective marginal rate of corporation tax on profits that fall between the £300,000 and £1,500,000 limits is reduced from 23.75% to 21.25%.

The corporation tax rates for the financial year 2014 can therefore be summarised as follows:

The corporation tax information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

EXAMPLE 14
For the year ended 31 March 2015 Easy Ltd has taxable total profits of £40,000 and franked investment income (FII) of £10,000.

For the year ended 31 December 2014 Moderate Ltd has taxable total profits of £1,400,000 and FII of £160,000.

For the year ended 31 March 2015 Difficult Ltd has taxable total profits of £600,000 and FII of £50,000.

For the year ended 31 December 2014 Hard Ltd has taxable total profits of £600,000 and FII of £50,000.

Easy Ltd
Corporation tax is £8,000 (40,000 at 20%) as the augmented profits of £50,000 (40,000 + 10,000) are less than £300,000.

Moderate Ltd
The augmented profits of £1,560,000 (1,400,000 + 160,000) are more than £1,500,000. Because the company’s accounting period straddles 31 March the corporation tax liability is calculated as follows:

Difficult Ltd
Marginal relief applies as the augmented profits of £650,000 (600,000 + 50,000) are between £300,000 and £1,500,000. The company’s corporation tax liability is as follows:

Hard Ltd
The augmented profits of £650,000 (600,000 + 50,000) are between £300,000 and £1,500,000. Because the company’s accounting period straddles 31 March the corporation tax liability is calculated as follows:

Note that there are alternative ways of calculating the tax liability for Hard Ltd, but this approach is the most straightforward since there is no need to apportion any figures.

CAPITAL GAINS TAX

Annual exempt amount
The annual exempt amount for the tax year 2014–15 has been increased from £10,900 to £11,000.

Rates of capital gains tax
The lower rate and the higher rate of capital gains tax for the tax year 2014–15 are unchanged at 18% and 28%.

Chargeable gains are taxed at the lower rate of 18% where they fall within the basic rate tax band of £31,865, and at the higher rate of 28% where they exceed this threshold. The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.

EXAMPLE 15
For the tax year 2014–15 Adam has a salary of £40,000, and during the year he made net personal pension contributions of £4,400. On 15 June 2014 Adam sold an antique table and this resulted in a chargeable gain of £17,500.

For the tax year 2014–15 Bee has a trading profit of £60,000. On 20 August 2014 she sold an antique vase and this resulted in a chargeable gain of £19,000.

For the tax year 2014–15 Chester has a salary of £36,000. On 25 October 2014 he sold an antique clock and this resulted in a chargeable gain of £23,900.

Adam
Adam’s taxable income is £30,000 (40,000 less the personal allowance of 10,000). His basic rate tax band is extended to £37,365 (31,865 + 5,500 (4,400 x 100/80)), of which £7,365 (37,365 – 30,000) is unused.

Adam’s taxable gain of £6,500 (17,500 less the annual exempt amount of 11,000) is fully within the unused basic rate tax band, so his capital gains tax liability is therefore £1,170 (6,500 at 18%).

Bee
Bee’s taxable income is £50,000 (60,000 - 10,000), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £8,000 (19,000 – 11,000) is therefore £2,240 (8,000 at 28%).

Chester
Chester’s taxable income is £26,000 (36,000 – 10,000), so £5,865 (31,865 – 26,000) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £12,900 (23,900 – 11,000) is therefore calculated as follows:

In each case, the capital gains tax liability will be due on 31 January 2016.

Entrepreneurs’ relief
Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2014–15 the lifetime qualifying limit is unchanged at £10 million.

Gains qualifying for entrepreneurs’ relief are taxed at a rate of 10% regardless of the level of a person’s taxable income.

EXAMPLE 16
On 25 January 2015 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2008, and was an employee of the company from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2014–15.

Michael’s capital gains tax liability is as follows:

Although chargeable gains that qualify for entrepreneurs’ relief are always taxed at a rate of 10%, they must be taken into account when establishing the rate that applies to other capital gains. Chargeable gains qualifying for entrepreneurs’ relief therefore reduce the amount of any unused basic rate tax band.

The annual exempt amount and any capital losses should be initially deducted from those chargeable gains that do not qualify for entrepreneurs’ relief. This approach will save capital gains tax at either 18% or 28%, compared to just 10% if used against chargeable gains that do qualify for relief.

There are several ways of presenting computations involving such a mix of chargeable gains, but the simplest approach is to keep chargeable gains qualifying for entrepreneurs’ relief and other chargeable gains separate.

EXAMPLE 17
On 30 September 2014 Mika sold a business that she had run as a sole trader since 1 January 2008. The sale resulted in the following chargeable gains:

The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £4,000 for the tax year 2014–15. She has unused capital losses of £28,000 brought forward from the tax year 2013–14.

Mika’s capital gains tax liability is as follows:

• The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the freehold warehouse as this does not qualify for entrepreneurs’ relief.
• £27,865 (31,865 – 4,000) of Mika’s basic rate tax band is unused, but this is set against the gains qualifying for entrepreneurs’ relief of £630,000 even though this has no affect on the 10% tax rate.

The capital gains tax information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

Principal private residences
The final period of ownership of a principal private residence is always treated as a period of ownership. This period of exemption has been reduced from 36 months to 18 months. There are no changes to any of the other periods of deemed occupation.

EXAMPLE 18
On 30 September 2014 Hue sold a house for £381,900. The house had been purchased on 1 October 1994 for £141,900.

Hue occupied the house as her main residence from the date of purchase until 31 March 1998. The house was then unoccupied between 1 April 1998 and 31 December 2001 due to Hue being required by her employer to work elsewhere in the UK.

From 1 January 2002 until 31 December 2008 Hue again occupied the house as her main residence. The house was then unoccupied until it was sold on 30 September 2014.

The chargeable gain on the house is as follows:

• The total period of ownership of the house is 240 months (189 + 51), of which 189 months qualify for exemption as follows:

The unoccupied period from 1 January 2009 to 31 March 2013 is not a period of deemed occupation as it was not followed by a period of actual occupation.

The exemption is therefore £189,000 (240,000 x 189/240).

INHERITANCE TAX

Rates of inheritance tax
The nil rate band for the tax year 2014–15 is unchanged at £325,000.

The inheritance tax information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

Where nil rate bands are required for previous years then these will be given to you within the question.

NATIONAL INSURANCE CONTRIBUTIONS

Class 1 and class 1A national insurance contributions
For the tax year 2014–15 the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £7,957 per year and £41,865 per year, and the rate of 2% is paid on all earnings over £41,865 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8%, and is paid on all earnings over £7,956 per year. Note that this limit is now aligned with the employee limit.

The rate of class 1A NIC that employers pay on taxable benefits provided to employees is also unchanged at 13.8%.

Employment allowance
An annual employment allowance has been introduced which all businesses can use to reduce the amount of employer’s class 1 NIC that is paid to HM Revenue and Customs. The allowance is £2,000 per year per employer, and does not affect the amount of class 1A or employee class 1 NIC that is payable. For example, if a business’s total employer’s class 1 NIC for the tax year 2014–15 is £4,600, then only £2,600 (4,600 – 2,000) will be paid to HM Revenue and Customs. If total employer’s class 1 NIC is £2,000 or less, then the liability will be nil.

The class 1 and class 1A NIC information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

EXAMPLE 19
Simone Ltd has one employee who is paid £50,000 per year, and was provided with the following taxable benefits during the tax year 2014–15:

The class 1 and class 1A NIC liabilities are as follows:

Class 2 and class 4 national insurance contributions
For the tax year 2014–15 the rate of class 2 NIC has been increased to £2.75 per week.

The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £7,957 and £41,865, and the rate of 2% is paid on all profits over £41,865.

Collection of class 2 national insurance contributions
HM Revenue and Customs can now collect unpaid class 2 NICs by including the unpaid amount in a person’s PAYE tax code.

The class 4 NIC information that will be given in the tax rates and allowances section of the exam paper for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:

EXAMPLE 20
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for the tax year 2014–15 are respectively £25,000 and £50,000. The class 4 NIC liabilities are as follows:

VALUE ADDED TAX (VAT)

Registration and deregistration limits
The limit of annual turnover above which VAT registration is compulsory has been increased from £79,000 to £81,000, and the deregistration limit has been increased from £77,000 to £79,000.

Standard rate of VAT
The standard rate of VAT is unchanged at 20%.

EXAMPLE 21
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2015. The following information is available:

• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
• Standard rated materials amounted to £32,400.
• Standard rated expenses amounted to £24,800.
• On 15 February 2015 Gwen purchased machinery at a cost of £24,150. This figure is inclusive of VAT.

Unless stated otherwise all of the above figures are exclusive of VAT.

Discounts
Output VAT is only chargeable on the net amount where a discount is offered for prompt payment, regardless of whether payment is made within the specified time for the discount to be received.

This treatment is currently being phased out so that output VAT will instead be charged on the actual amount received if a prompt payment discount is not taken. However, there will be no change as regards the majority of supplies until 1 April 2015 onwards, so the current rules will continue to be examined in exams in the financial year 1 April 2015 to 31 March 2016.

TAX MANAGEMENT

Penalties for late filing of VAT returns and late payment of VAT
New penalties for the late filing of returns and for late payment of tax are being introduced over a number of years.

Although legislation has been introduced regarding the late filing of VAT returns and the late payment of VAT, HM Revenue and Customs have yet to introduce the changes. Therefore, for exams in the financial year 1 April 2015 to 31 March 2016 the changes will not be examined.

Late payment interest and repayment interest
The assumed rates of late payment interest and repayment interest on underpaid and overpaid income tax, Class 4 NIC, capital gains tax and corporation tax are based on the actual rates in force (for income tax purposes) at 6 April 2014. For exams in the financial year 1 April 2015 to 31 March 2016 the assumed rate of late payment interest will therefore be 3%, and the assumed rate of repayment interest will be 0.5%.

Written by a member of the Paper F6 (UK) examining team