Finance Act 2015

This article looks at the changes made by the Finance Act 2015 and the Finance (No 2) Act 2015 (which is the legislation as it relates to the tax year 2015–16) and should be read by those of you who are taking F6 (UK) in an exam in the period 1 September 2016 to 31 March 2017. The aim of the article is to summarise the changes made by these two Finance Acts and to look at the more important changes in greater detail.

The article also includes details of legislation that was enacted prior to 31 July 2015, but has only come into effect from 6 April 2015. The article does not refer to any amendments to the F6 (UK) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the F6 (UK) Syllabus and Study Guide for the period 1 September 2016 to 31 March 2017 for details of such amendments.

Please note that if you are sitting F6 (UK) in the period 1 April 2015 to 30 June 2016, you will be examined on the Finance Act 2014, which is the legislation as it relates to the tax year 2014–15. Therefore, this article is not relevant to you, and you should instead refer to the Finance Act 2014 article published on the ACCA website (see 'Related links').

INCOME TAX

Rates of income tax

The rates of income tax for the tax year 2015–16 are as follows:

For the tax year 2015–16, the starting rate has been reduced from 10% to 0%. This rate applies to savings income where it falls within the first £5,000 of taxable income. If non-savings income exceeds £5,000, then the starting rate of 0% 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 £31,785, at the higher rate of 40% if it falls between the higher rate threshold of £31,785 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 allowance

The personal allowance for the tax year 2015–16 is £10,600.

This 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 by which a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £121,200 or more is not entitled to any personal allowance ((121,200 – 100,000)/2 = £10,600). Where a person has an adjusted net income of between £100,000 and £121,200, then 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 higher personal allowance for those born before 6 April 1938 is no longer examinable. Therefore, questions will no longer provide the taxpayer’s date of birth or age unless otherwise relevant to the question.

EXAMPLE 1
For the tax year 2015–16, Ingrid has a salary of £37,600, building society interest of £800 (net) and dividends of £9,000 (net). Her income tax liability is:

EXAMPLE 2
For the tax year 2015–16, June has a trading profit of £184,000. Her income tax liability is:

No personal allowance is available because June’s adjusted net income of £184,000 exceeds £121,200.

EXAMPLE 3
For the tax year 2015–16, Trevor 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:

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

EXAMPLE 4
For the tax year 2015–16, May 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:

• 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 £10,600 is reduced to £7,100 (10,600 – 3,500 ((107,000 – 100,000)/2)).
• The basic and higher rate tax bands are extended to £83,785 (31,785 + 40,000 + 12,000) and £202,000 (150,000 + 40,000 + 12,000) respectively.

EXAMPLE 5
For the tax year 2015–16, Ali has pension income of £12,000 and bank interest of £4,600 (net). His income tax repayable is:

• Non-savings income is £1,400 (12,000 – 10,600), so £3,600 (5,000 – 1,400) of the savings income benefits from the starting rate of 0%. The remainder of the savings income is taxed at the basic rate of 20%.

Transferable amount of personal allowance

It is now possible to elect to transfer a fixed amount of the personal allowance to a spouse or registered civil partner.

The transferable amount (also known as the marriage allowance or marriage tax allowance) is £1,060 for the tax year 2015–16, and in subsequent years will be 10% of the actual personal allowance. The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax rather than as an actual increase to their own personal allowance. The tax reduction is therefore £212 (1,060 at 20%). If the recipient’s tax liability is less than £212, then the tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.

A transfer is not permitted if either spouse or civil partner is a higher or additional rate taxpayer, and a transfer will generally only be beneficial where one spouse or civil partner is not making full use of their personal allowance.

If an election is made before the end of the tax year 2015–16, then it will remain in force for future tax years unless the election is withdrawn or the conditions for the tax reduction are not met. Alternatively, an election in respect of the tax year 2015–16 can be made before 5 April 2020 (four years after the end of the tax year), but in this case it will only apply for the tax year 2015–16.

The transferable amount of personal allowance will be given in the tax rates and allowances section of the exam.

EXAMPLE 6
Paul and Rai are a married couple. For the tax year 2015–16, Rai has a salary of £35,000 and Paul has a trading profit of £7,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Paul’s personal allowance is reduced to £9,540 (10,600 – 1,060), and because this is higher than his trading profit of £7,000 he does not have any tax liability.

Rai’s income tax liability is:

Employment income

Company car benefit
For the tax year 2015–16, 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 12% to 14% and the maximum percentage is now 37% instead of 35%. There are lower rates for company motor cars with low CO₂ emissions:

• For a motor car with a CO₂ emission rate of 50 grams per kilometre or less, the percentage is 5%.
• For a motor car with a CO₂ emission rate of between 51 and 75 grams per kilometre, the percentage is 9%.
• For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre, the percentage is 13%.

The percentage rates (including the lower rates of 5%, 9% and 13%) are increased by 3% for diesel cars, but not beyond the maximum percentage rate of 37%.

The company car benefit information which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

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 7
During the tax year 2015–16, Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2015–16. 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 2015–16. 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 2015. 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 2015–16. 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 2015–16 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 13%. The motor car was available throughout 2015–16, so the benefit is £1,586 (12,200 x 13%).

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 14% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 16% (14% +  2% ((105 – 95)/5)). The motor car was available throughout 2015–16, so the benefit is £2,624 (16,400 x 16%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 25% (14% + 8% ((135 – 95)/5) + 3% (charge for a diesel car)). The motor car was only available for eight months of 2015–16, so the benefit is £2,250 (13,500 x 25% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 40% (14% + 26% ((225 – 95)/5)), but this is restricted to the maximum of 37%. The motor car was available throughout 2015–16, so the benefit is £30,102 (31,302 (84,600 x 37%) – 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 £3,090 to £3,150.

Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure which is announced each year. For the tax year 2015–16, the base figure has been increased from £21,700 to £22,100.

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

EXAMPLE 8
Continuing with Example 7.

Amanda was provided with fuel for private use between 6 April 2015 and 5 April 2016.

Betty was provided with fuel for private use between 6 April 2015 and 31 December 2015.

Charles was provided with fuel for private use between 6 August 2015 and 5 April 2016.

Diana was provided with fuel for private use between 6 April 2015 and 5 April 2016. She paid Fashionable plc £600 during the tax year 2015–16 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
The motor car was available throughout 2015–16, so the benefit is £2,873 (22,100 x 13%).

Betty
Fuel was only available for nine months of 2015–16, so the fuel benefit is £2,652 (22,100 x 16% x 9/12).

Charles
The motor car was only available for eight months of 2015–16, so the fuel benefit is £3,683 (22,100 x 25% x 8/12).

Diana
The motor car was available throughout 2015–16, so the benefit is £8,177 (22,100 x 37%). There is no reduction for the contribution made by Diana 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 £581 to £594. 

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 annual £500 exemption per employee has been introduced where an employer pays for medical treatment. The exemption applies where medical treatment is provided to an employee to assist them to return to work after a period of absence due to ill-health or injury.

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 period 1 September 2016 to 31 March 2017 the actual official rate of interest of 3% for the tax year 2015–16 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 now imposed on a monthly basis if these submissions are made late. There is no penalty for the first month in a tax year for which submissions are late, but thereafter a monthly late filing penalty of between £100 and £400 is charged depending on the number of employees. An additional penalty of 5% of the tax and NIC due can be charged where a submission is more than three months late.

HM Revenue and Customs permits a three-day grace period before imposing a penalty, but this aspect is not examinable.
 

Capital allowances

Annual investment allowance
The current annual investment allowance (AIA) limit of £500,000 will expire on 31 December 2015 and be replaced by a rate of £200,000 from 1 January 2016. However, for exams in the period 1 September 2016 to 31 March 2017, it will be assumed that the limit of £500,000 continues to apply. This will be the case regardless of the period covered by an exam question, so, for example, the AIA limit for the year ended 31 March 2016 will be £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, for the three-month period ended 31 March 2016, the AIA limit would be £125,000 (500,000 x 3/12).

100% first year allowance
The 100% first year allowance for low emission cars is now only available where CO₂ emissions are 75 grams per kilometre or less. Previously, the limit was 95 grams per kilometre.

The capital allowances information which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

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 9
Ming prepares accounts to 5 April. On 6 April 2015, 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 2016:

Motor car (1) purchased on 8 April 2015 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 2015 and sold on 12 December 2015 has CO₂ emissions of 155 grams per kilometre. Motor car (3) purchased on 2 September 2015 has CO₂ emissions of 125 grams per kilometre. Motor car (4) purchased on 19 November 2015 has CO₂ emissions of 70 grams per kilometre.

Ming’s capital allowance claim for the year ended 5 April 2016 is:

• Motor car (1) is kept separately because there is private use by Ming. This motor car has CO₂ emissions between 76 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 76 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18% in the main pool.
• Motor car (4) has CO₂ emissions of less than 75 grams per kilometre and therefore qualifies for the 100% first year allowance.

Individual savings accounts

Despite the renaming of individual savings accounts (ISAs) as new individual savings accounts (NISAs) last year, the NISA name has generally not been used. Therefore, exams from September 2016 going forward will revert to the ISA name.

The ISA investment limit for the tax year 2015–16 has been increased from £15,000 to £15,240. The £15,240 limit is completely flexible, so a person can invest £15,240 in a cash ISA, or they can invest £15,240 in a stocks and shares ISA, or in any combination of the two – such as £10,000 in a cash ISA and £5,240 in a stocks and shares ISA.

An additional ISA allowance has been introduced for a surviving spouse or registered civil partner equivalent to the value of ISAs which were held by their deceased spouse or partner at the date of death. From 1 December 2015, a new help-to-buy ISA is to be introduced for first-time home buyers. Both the additional ISA allowance and the help-to-buy ISA are not examinable.
 

National insurance contributions (NIC)

Class 1 and class 1A NIC
For the tax year 2015–16, the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £8,061 per year and £42,385 per year, and the rate of 2% is paid on all earnings over £42,385 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8% and is paid on all earnings over £8,112 per year. Note that this limit is no longer aligned with the employee limit.

An exemption from employer’s class 1 NIC has been introduced for employees aged under 21. This exemption is not examinable.

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

Employment allowance
The annual employment allowance for the tax year 2015–16 is unchanged at £2,000. This can be used by businesses to reduce the amount of employer’s class 1 NIC which is paid to HM Revenue and Customs. For example, if a business’s total employer’s class 1 NIC for the tax year 2015–16 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 which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

EXAMPLE 10
Simone Ltd has only one employee who is paid £50,000 per year and was provided with the following taxable benefits during the tax year 2015–16:

Class 2 NIC
For the tax year 2015–16, the rate of class 2 NIC has been increased to £2.80 per week.

Class 2 NIC is payable where profits exceed a small profits threshold of £5,965. The profits used to establish whether or not the threshold has been exceeded are now the same as those used for class 4 NIC purposes, being the taxable profits for the tax year. 

Previously, class 2 NIC was either collected in two instalments or paid on a four-weekly basis by direct debit. Class 2 NIC is now payable under the self-assessment system and will be due on 31 January following the tax year. This is the same due date as for capital gains tax. Therefore, class 2 NIC for the tax year 2015–16 will be payable on 31 January 2017.

However, the actual amount of class 2 NIC is still based on the number of weeks of self-employment during a tax year.

EXAMPLE 11
Billy commenced self-employment on 5 October 2015. His trading profit for the period 5 October 2015 to 5 April 2016 is £22,800.

Billy’s class 2 NIC liability for 2015–16 is £73 (26 weeks x 2.80) and this is payable on 31 January 2017.

Class 4 NIC
The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £8,061 and £42,385, and the rate of 2% is paid on all profits over £42,385.

The class 4 NIC information which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

EXAMPLE 12
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for the tax year 2015–16 are respectively £25,000 and £50,000. The class 4 NIC liabilities are:

Pension schemes

Annual allowance
The annual allowance for the tax year 2015–16 is unchanged at £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 2012–13 and 2013–14 is based on the annual allowance of £50,000 which was 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 which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

Pension scheme limit

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

EXAMPLE 13
Monica and Nicola have made the following gross personal pension contributions during the tax years 2012–13, 2013–14 and 2014–15:

Monica
Monica has unused allowances of £8,000 (50,000 – 42,000) from 2013–14 and £12,000 (40,000 – 28,000) from 2014–15, so with the annual allowance of £40,000 for 2015–16 a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2015–16. She was not a member of a pension scheme for 2012–13 so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (50,000 – 29,000) from 2013–14 and £40,000 from 2014–15, so with the annual allowance of £40,000 for 2015–16 a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2015–16. The annual allowance for 2012–13 is fully utilised, but Nicola was a member of a pension scheme for 2014–15 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2015–16 is utilised first, then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 14
Perry has made the following gross personal pension contributions:

The pension contribution of £48,000 for 2015–16 has used all of Perry’s annual allowance of £40,000 for 2015–16 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (50,000 – 32,000) from 2012–13. Perry therefore has unused allowances of £9,000 (50,000 – 41,000) from 2013–14 and £21,000 (40,000 – 19,000) from 2014–15 to carry forward to 2016–17. The remaining unused allowance from 2012–13 cannot be carried forward to 2016–17 because 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 15
For the tax year 2015–16, 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:

• Frank has earnings of £210,000 for 2015–16. 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 2015–16.
• Frank’s adjusted net income clearly exceeds £121,200, 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 £91,785 (31,785 + 60,000) and £210,000 (150,000 + 60,000) respectively.

The amount of annual allowance for the tax year 2015–16 is subject to some complex transitional rules which mean that it could actually be more than £40,000. The transitional rules are not examinable, and you should assume that in any exam question involving pensions the timing of contributions means that only an annual allowance of £40,000 is available for the tax year 2015–16. Given the three-year carry forward, this assumption will continue to apply for future years.

Pension flexibility
Individuals with personal pension schemes now have complete flexibility as regards how they can access their pension fund upon reaching the minimum pension age of 55.

As previously, 25% of the pension fund can be withdrawn as a tax-free lump sum. The balance of the pension fund can be withdrawn as income whenever the individual wishes, with withdrawals treated as income and subject to the normal rates of income tax. Previously, individuals were generally restricted to using the balance of their pension fund to purchase a pension annuity.

To prevent abuse of the new flexibility, an anti-avoidance annual allowance limit of £10,000 has been introduced. This annual allowance limit is not examinable.

Lifetime allowance
The lifetime allowance for the tax year 2015–16 is unchanged at £1,250,000.

The lifetime allowance applies to the total funds which 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.

CAPITAL GAINS TAX

Annual exempt amount

The annual exempt amount for the tax year 2015–16 has been increased from £11,000 to £11,100.

Rates of capital gains tax

The lower rate and the higher rate of capital gains tax for the tax year 2015–16 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 £31,785, 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 16
For the tax year 2015–16, Adam has a salary of £40,600. During the year, he made net personal pension contributions of £4,400. On 15 June 2015, Adam sold an antique table and this resulted in a chargeable gain of £17,600.

For the tax year 2015–16, Bee has a trading profit of £60,000. On 20 August 2015, she sold an antique vase and this resulted in a chargeable gain of £19,100.

For the tax year 2015–16, Chester has a salary of £36,600. On 25 October 2015, he sold an antique writing bureau and this resulted in a chargeable gain of £23,900.

Adam
Adam’s taxable income is £30,000 (40,600 less the personal allowance of 10,600). His basic rate tax band is extended to £37,285 (31,785 + 5,500 (4,400 x 100/80)), of which £7,285 (37,285 – 30,000) is unused.

Adam’s taxable gain of £6,500 (17,600 less the annual exempt amount of 11,100) 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 £49,400 (60,000 – 10,600), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £8,000 (19,100 – 11,100) is therefore £2,240 (8,000 at 28%).

Chester
Chester’s taxable income is £26,000 (36,600 – 10,600), so £5,785 (31,785 – 26,000) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £12,800 (23,900 – 11,100) is therefore calculated as:

In each case, the capital gains tax liability will be due on 31 January 2017.
 

Entrepreneurs’ relief

Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2015–16, 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 17
On 25 January 2016, 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 2009 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 2015–16.

Michael’s capital gains tax liability is:

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 which applies to other chargeable 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 which 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 which 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 18
On 30 September 2015, Mika sold a business which she had run as a sole trader since 1 January 2009. 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 2015–16. She has unused capital losses of £28,000 brought forward from the tax year 2014–15.

Mika’s capital gains tax liability is:

• The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the freehold warehouse because this does not qualify for entrepreneurs’ relief.
• £27,785 (31,785 – 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.

Valuing quoted shares

The basis of valuing quoted shares when they are disposed of by way of a gift has changed. The basis is now simply the mid-price based on the day’s quoted price. For example, if shares are quoted at £5.10 – £5.18, then the value per share to be used is £5.14 ((£5.10 + £5.18)/2). Previously, quoted shares were valued at the lower of the quarter up price and the average of the days highest and lowest bargains. Bargain prices no longer have any relevance for capital gains tax purposes.

The capital gains tax information which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

INHERITANCE TAX

Rates of inheritance tax

The nil rate band for the tax year 2015–16 is unchanged at £325,000.

The inheritance tax information which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

Where earlier nil rate bands may be relevant, they will be given to you within the question.

CORPORATION TAX

Rate of corporation tax

For the financial year 2015, there is just a single rate of corporation tax of 20% which applies regardless of the level of a company’s profits. The rates and limits applicable to previous financial years are no longer examinable.

If a question is set involving either an accounting period spanning 1 April 2015 or an accounting period ending prior to 1 April 2015, then the company’s level of profits will be such that only a corporation tax rate of 20% is applicable.

EXAMPLE 19
For the year ended 31 March 2016, Simplified Ltd has taxable total profits of £600,000.

Corporation tax is £120,000 (600,000 at 20%).
 

Loss relief and group relief

The rate of corporation tax is no longer a factor when it comes to the choice between loss reliefs or when considering group relief claims.

The only relevant factors are now the timing and cash flow in relation to the relief obtained (an earlier claim is generally preferable) and the extent to which relief for qualifying charitable donations will be lost.
 

Quarterly instalment payments

Despite the introduction of a single 20% rate of corporation tax, large companies still have to make quarterly instalment payments in respect of their corporation tax liability.

A large company is basically one whose profits are more than £1,500,000. However, profits include franked investment income, whilst the threshold of £1,500,000 is divided by the number of 51% group companies at the end of the immediately preceding accounting period. The £1,500,000 threshold is proportionately reduced where an accounting period is less than 12 months.

EXAMPLE 20
For the year ended 31 March 2016, Quarter Ltd has taxable total profits of £360,000 and franked investment income of £20,000. Quarter Ltd has had three 51% group companies for many years. The company had the same level of profits for the year ended 31 March 2015.

Quarter Ltd’s profits for the year ended 31 March 2016 are £380,000 (360,000 + 20,000). The company will therefore be required to make quarterly instalment payments in respect of its corporation tax liability because its profits exceed the profit threshold of £375,000 (1,500,000/4).

The corporation tax information which will be given in the tax rates and allowances section of the exam for exams in the period 1 September 2016 to 31 March 2017 is:

Administration

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 2015. For exams in the period 1 September 2016 to 31 March 2017, the assumed rate of late payment interest will therefore be 3% and the assumed rate of repayment interest will be 0.5%.

Value added tax (VAT)

Registration and deregistration limits

The limit of annual turnover above which VAT registration is compulsory has been increased from £81,000 to £82,000. The deregistration limit has been increased from £79,000 to £80,000.
 

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 2016. 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 2016, 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.

VAT Return – Quarter ended 31 March 2016

Discounts

Output VAT is now charged on the actual amount received if a discount is offered for prompt payment. Previously, output VAT was only chargeable on the net figure, regardless of whether payment was made within the specified time for the discount to be received.

For example, a sales invoice is issued for £1,000 plus VAT of £200. A 5% discount is offered for payment within seven days. If the discount is not taken, then the output VAT is simply £200. If the discount is taken, then the output VAT becomes £190 (950 (1,000 less 5%) x 20%).

It will be necessary for the supplier to either provide details of the potential discount on the sales invoice, or to issue a subsequent credit note for the discount.
 

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 period 1 September 2016 to 31 March 2017 the changes will not be examined.

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