technical

relevant to CAT Scheme Paper 9 (GBR) and

Professional Scheme Papers 2.3 (GBR) and 3.2 (GBR)

finance act 2004

This article looks at the changes made
by the Finance Act 2004, and should be
The corporation tax relief table that will be given for the June and December 2005 sittings is as
follows:
read by those of you who are taking Paper
2.3 (GBR) at either the June or December Financial year 2002 2003 2004
2005 sittings. Candidates sitting CAT Paper
9 (GBR) and Professional Scheme Paper 3.2 Starting rate Nil Nil Nil
(GBR) should read this article making Small companies rate 19% 19% 19%
reference to the appendices on pages 41 and Full rate 30% 30% 30%
42. The aim of the article is to summarise Starting rate lower limit 10,000 10,000 10,000
the changes made by the Finance Act Starting rate upper limit 50,000 50,000 50,000
2004 and to look at the more important Small companies rate lower limit 300,000 300,000 300,000
changes in greater detail. The article also Small companies rate upper limit 1,500,000 1,500,000 1,500,000
includes details of legislation that was Taper relief fraction
enacted prior to the Finance Act 2004, but Starting rate 19/400 19/400 19/400
has only come into effect from Small companies rate 11/400 11/400 11/400
6 April 2004.
Please note that if you are sitting CAT
Scheme Paper 9 (GBR), Professional Scheme
Papers 2.3 (GBR) or 3.2 (GBR) in December
2004, you will be examined on the Finance EXAMPLE 1 c Corporation tax is £22,800 (120,000 at
Act 2003, which is the legislation as it For the year ended 31 March 2005 Easy Ltd 19%) as the profits of £122,000
relates to the tax year 2003-04. Therefore, has FII of £2,000 and profits chargeable to (120,000 + 2,000) are between
this article is not relevant to you, and you corporation tax of: £50,000 and £300,000.
should instead refer to the Finance Act 2003 a £6,000 d Marginal relief applies as the profits of
article on pages 38 to 45 of the September b £20,000 £602,000 (600,000 + 2,000) are
2003 issue of student accountant. c £120,000 between £300,000 and £1,500,000.
d £600,000 The company’s corporation tax liability is
CORPORATE BUSINESSES as follows:
Rates of corporation tax a Corporation tax is nil as the profits of £
The rates of corporation tax for the financial £8,000 (6,000 + 2,000) do not exceed 600,000 at 30% 180,000
year 2004 are unchanged at nil, 19% and £10,000. Marginal relief 11/400
30%, as are all the lower and upper limits. b Starting rate marginal relief applies as the (1,500,000 - 602,000) x
The corporation tax rates for the financial year profits of £22,000 (20,000 + 2,000) 600,000
2004 can therefore be summarised as are between £10,000 and £50,000. The 602,000 24,613
follows: company’s corporation tax liability is as Liability 155,387
follows:
Level of profits Effective £ Dividends
rate 20,000 at 19% 3,800 Until 31 March 2004 the payment of a
Up to £10,000 Nil Marginal relief dividend had no impact on the amount of
£10,001 to £50,000 23.75% 19/400 (50,000 - 22,000) x corporation tax paid by a company. However,
£50,001 to £300,000 19% 20,000 from 1 April 2004 profits paid out as a
£300,001 to £1,500,000 32.75% 22,000 1,209 dividend are now subject to a minimum rate
Over £1,500,000 30% Liability 2,591 of corporation tax of 19%. The reason for this

November/December 2004 student accountant 35

change is to ensure that a minimum amount
of tax is paid regardless of how profits are
extracted from a company. The minimum tax
rate of 19% will be given to you in the tax
rates and allowances section of the
examination paper.
This minimum rate will only affect
companies with profits below £50,000, and
then only if they pay a dividend. Companies
with profits of £50,000 or more will already
be paying corporation tax at the rate of 19%
or higher, and so will not be subject to any
additional liability if a dividend is paid.
Calculation
It is first necessary to calculate the
corporation tax liability ignoring the dividend,
and then to work out an underlying rate of
corporation tax.
Those profits that are paid out as a
dividend are taxed at the minimum rate of
19%, while the remainder of the profits are
taxed at the underlying rate. The actual
corporation tax liability is then found by
adding the two figures together.
Restriction
Where a company pays a dividend that is
higher than the amount of profits chargeable
to corporation tax, then the corporation tax
liability is restricted to 19% of the profits.
However, the excess amount of dividend that
has not been subject to the minimum rate of
corporation tax of 19% is carried forward to
the following accounting period. This may
then be subject to the minimum rate of 19%
in the following year, depending on the level
of profits.
Due date
The corporation tax liability will include any
additional tax due as a result of paying a
dividend. Details are included on the
self-assessment corporation tax return, and
the corporation tax liability is then payable on
the normal due date nine months after the
end of the accounting period.
Special rules
There are special rules when an accounting
period spans 31 March 2004, where
36 student accountant November/December 2004
dividends are paid to corporate shareholders,
and for groups of companies. These rules are
not examinable.
EXAMPLE 2
a For the year ended 31 March 2005, Albert
Ltd has profits chargeable to corporation
tax of £10,000. During the year the
company paid a dividend of £8,000.
There would have been no corporation tax
liability if the dividend had not been paid,
so the underlying rate is nil. The profits of
£8,000 that are paid out as a dividend are
taxed at the minimum rate of 19%, so
Albert Ltd’s corporation tax liability for the
year ended 31 March 2005 is £1,520
(8,000 at 19%).
b For the year ended 31 March 2005, Basil
Ltd has profits chargeable to corporation
tax of £40,000. During the year the
company paid a dividend of £25,000.
The corporation tax liability ignoring the
dividend is as follows:
£ be set where the 100% first-year allowance
40,000 at 19% 7,600
Marginal relief
19/400 (50,000 - 40,000) 475
Liability 7,125
The underlying rate is 17.8125 (7,125/
40,000 x 100). The amount of
corporation tax on the profits paid out as
dividends is £4,750 (£25,000 at 19%).
The amount of corporation tax on the
remainder of the profits is £2,672
(£40,000 - £25,000 = £15,000 at
17.8125%). Basil Ltd’s corporation tax
liability for the year ended 31 March 2005
is therefore £7,422 (4,750 + 2,672).
c For the year ended 31 March 2005, Cherie
Ltd has profits chargeable to corporation tax
of £100,000. During the year the company
paid a dividend of £40,000. The
corporation tax liability ignoring the
dividend is £19,000 (100,000 at 19%).
Since the minimum rate of 19% is already
payable on all of the profits, there is no
additional liability as a result of paying the
dividend. Cherie Ltd’s corporation tax
liability for the year ended 31 March 2005
is therefore £19,000.
d For the year ended 31 March 2005,
Daisy Ltd has profits chargeable to
corporation tax of £5,000. During the
year the company paid a dividend of
£20,000. Although a dividend of
£20,000 has been paid, the additional
liability is restricted to £950 (5,000 at
19%), and this is Daisy Ltd’s corporation
tax liability for the year ended 31 March
2005. The excess amount of dividend of
£15,000 (20,000 - 5,000) that has not
been subject to the minimum rate of
corporation tax is carried forward to the
year ended 31 March 2006, and this
may result in further additional tax being
due in that year.
Capital allowances
Information and communications technology
The first-year allowance of 100% that applied
to expenditure by small businesses on
information and communications technology
equipment has ceased. A question could still
was available on expenditure incurred prior to
31 March 2004.
First-year allowance
For a period of one year only, the rate of
first-year allowance for small businesses has
been increased from 40% to 50%. For
companies, the rate of 50% will apply to
expenditure during the period from 1 April
2004 to 31 March 2005. For
unincorporated businesses the relevant
period is from 6 April 2004 to 5 April 2005.
Medium-sized businesses continue to qualify
for the first-year allowance of 40%.
Definition of small and medium-sized
The definitions of small and medium-sized
businesses have been made more lenient. To
be treated as small or medium-sized, a
business must now meet two out of the
following three requirements:
 technical
Small Medium- EXAMPLE 3
business sized Ming Ltd prepares accounts to 30 September. The tax written down value of its general pool at
business 1 October 2003 was £22,700. The following transactions took place during the year ended
Turnover must 30 September 2004:
not exceed £5.6m £22.8m
Assets must 10 October 2003 Purchased a computer for £2,400
not exceed £2.8m £11.4m 25 January 2004 Purchased machinery for £4,700
The number of 7 April 2004 Purchased a computer for £4,100
employees must 10 June 2004 Purchased a motor car for £11,200
not exceed 50 250 30 August 2004 Purchased machinery for £8,800

These conditions can be met for either the Ming Ltd is a small company. Ming Ltd’s capital allowance claim for the year ended
current year or the previous year, see 30 September 2004 is as follows:
Example 3.
Pool Allowances
Interest on underpaid and overpaid £ £ £
corporation tax WDV b/f 22,700
The assumed rates of interest on underpaid Additions 11,200
and overpaid corporation tax are based on 33,900
the actual rates in force (for income tax WDA – 25% 8,475 8,475
purposes) at 6 April 2004. For the June 25,425
and December 2005 sittings the assumed Additions qualifying for FYA
rate of interest on underpaid corporation tax Computer 2,400
will therefore be 6.5%, and the assumed FYA 100% 2,400 2,400
rate of interest on overpaid corporation tax
will be 2.5%. Machinery 4,700
FYA 40% 1,880 1,880
Transfer pricing 2,820
From 1 April 2004 there are a number of Computer 4,100
changes to the transfer pricing rules. Machinery 8,800
Although the transfer pricing rules will now 12,900
generally only apply to larger companies, FYA 50% 6,450 6,450
the scope of the rules has been extended to 6,450
include transactions wholly within the UK. WDV c/f 34,695
Previously, the transfer pricing rules only Capital allowances 19,205
applied to transactions involving an
overseas company.
As far as Paper 2.3 is concerned, the
changes are not examinable. Any question
on transfer pricing will therefore continue to
involve an overseas company, and it should
be assumed that the companies are large
enough for the transfer rules to apply.

Value added tax

Registration and deregistration limits
The limit of annual turnover above which VAT
registration is compulsory has been increased
from £56,000 to £58,000, and the
deregistration limit has been increased from
£54,000 to £56,000.

November/December 2004 student accountant 37

technical

Cash accounting and annual accounting Personal pension schemes Business assets
schemes Contribution limits The definition of a business asset for taper
The turnover limits for the cash accounting The amount of contribution that an relief purposes has been extended in respect
and annual accounting schemes have been individual can make into a personal pension of disposals made after 5 April 2004. An
raised to £660,000. Previously, businesses scheme regardless of earnings is unchanged asset owned by an individual now qualifies as
could only use either scheme if their turnover at £3,600. a business asset where it is used for the
was below £600,000. The maximum amount of net relevant purposes of a trade carried on by another
earnings that can be used in the calculation individual or by a partnership.
UNINCORPORATED BUSINESSES of personal pension contributions qualifying
Rates of income tax for tax relief has increased from £99,000 EXAMPLE 5
The rates for 2004-05 are as follows: to £102,000 for 2004-05. On 15 December 2004 William disposed of
Starting rate £1 to £2,020 10% the following assets:
Basic rate £2,021 to £31,400 22% Pension simplification A 30% shareholding in Green Ltd, an
Higher rate £31,401 and above 40% The taxation of pensions is to be simplified by unquoted trading company. The shares
replacing the existing pension schemes with were acquired in June 2002, and their
Dividends continue to be taxed at the lower just one new scheme. The simplification will disposal resulted in a capital gain of
rate of 10% if they fall below the higher not take place until 6 April 2006, and this £42,000.
rate threshold of £31,400, and at the change will not be examinable at Paper 2.3 A 1% shareholding in Red plc, a quoted
higher rate of 32.5% where they exceed the until the June 2007 sitting. trading company. The shares were
threshold. acquired in July 1996, and their disposal
Savings income continues to be taxed at Capital gains tax resulted in a capital gain (after
the starting rate of 10% if it falls within the Individual exemption limit indexation) of £56,000.
first £2,020 of taxable income, and at the The annual exemption limit for 2004-05 has
lower rate of 20% if it falls between been increased from £7,900 to £8,200. William is not an employee of either Green
£2,021 and the higher rate threshold of Ltd or Red plc, and has taxable income of
£31,400. Taper relief for business assets £21,500 for 2004-05. His capital gains tax
The taper relief table that will be given for the liability for 2004-05 is as follows:
Personal allowance June and December 2005 sittings is as
The personal allowance for people aged under follows: £ £
65 for 2004-05 is at £4,745. Shareholding in
Complete years Gains on Gains on Green Ltd 42,000
EXAMPLE 4 after 5 April business non-business Taper relief x 25% 10,500
For 2004-05 Ingrid has a salary of £27,000, 1998 for which assets assets
building society interest of £800 (net) and asset held Shareholding in
dividends of £9,000 (net). Her income tax 1 50% 100% Red plc 56,000
liability is as follows: 2 25% 100%
£ 3 25% 95% Taper relief x 75% 42,000
Employment income 27,000 4 25% 90% 52,500
Building society interest 5 25% 85% Annual exemption 8,200
(800 x 100/80) 1,000 6 25% 80% 44,300
Dividends (9,000 x 100/90) 10,000 7 25% 75% Capital gains tax:
38,000 8 25% 70% 9,900 (31,400 - 21,500) at 20% 1,980
Personal allowance 4,745 9 25% 65% 34,400 (44,300 - 9,900) at 40% 13,760
Taxable income 33,255 10 25% 60% 15,740
Income tax:
2,020 at 10% 202 For disposals of non-business assets during Green Ltd is a qualifying company as it
20,235 at 22% 4,452 2004-05, taper relief will be based on is an unquoted trading company.
1,000 at 20% 200 seven complete years of ownership where Maximum taper relief is available as the
8,145 at 10% 814 the asset was owned prior to 17 March shares have been held for two complete
1,855 at 32.5% 603 1998. Only 75% of the gain will be years.
Tax liability 6,271 chargeable.

38 student accountant November/December 2004


Red plc is not a qualifying company as
it is quoted, William is not an
employee, and the shareholding is less
than 5%. Taper relief is based on seven
complete years of ownership as the
shares were acquired before 17 March
1998.
Class 2 and Class 4 National Insurance
contributions
For 2004-05 Class 2 NIC has been increased
to £2.05 per week. The rates of Class 4 NIC
are unchanged at 8% and 1%. The rate of
8% is paid on profits between £4,745 and
£31,720, and the rate of 1% is paid on all
profits over £31,720.
The Class 4 NIC information that will
be given in the tax rates and allowances
section of the examination paper for the
June and December 2005 sittings is as
follows:
% figure of 145 grams per kilometre. The
Class 4 £1 to £4,745 per year Nil
£4,746 to £31,720 per year 8.0
£31,721 and above per year 1.0
EXAMPLE 6
Jimmy is a self-employed builder and Jenny
is a self-employed consultant. Their
Schedule D Case I profits for 2004-05 are
£25,000 and £50,000 respectively. Class 4
NIC liabilities for 2004-05 are as follows:
£ The motor car has a list price of £13,500
Jimmy 25,000 - 4,745 = 20,255
at 8% 1,620
Jenny 31,720 - 4,745 = 26,975
at 8% 2,158
50,000 - 31,720 = 18,280
at 1% 183
2,341
Interest on underpaid and overpaid tax
The assumed rates of interest on underpaid
and overpaid income tax, Class 4 NIC and
capital gains tax are based on the actual rates
in force at 6 April 2004. For the June and
December 2005 sittings the assumed rate of
interest on underpaid tax will therefore be
6.5%, and the assumed rate of interest on
overpaid tax will be 2.5%.
EMPLOYEES
Approved mileage allowances
For 2004-05 the approved mileage allowances
are unchanged at 40p per mile for the first
10,000 business miles, and then 25p per mile
thereafter.
EXAMPLE 7
Diane uses her own 1800cc motor car for
business travel. During 2004-05 she drove
12,000 miles in the performance of her
duties. Her employer pays her 30p per mile.
The mileage allowance of £3,600 (12,000 at
30p) received is tax free. Diane can make an
expense claim of £900 as follows:
£ = 55/5)). The motor car was available
10,000 miles at 40p 4,000
2,000 miles at 25p 500
4,500
Mileage allowance 3,600
Expense claim 900
Company car benefit
For 2004-05 the base level of CO2 emissions
used to calculate company car benefits has
been reduced from 155 grams per kilometre
to 145 grams per kilometre.
EXAMPLE 8
During 2004-05 Fashionable plc provided the
following employees with company motor cars:
Amanda was provided with a new diesel
powered company car on 6 August 2004.
and an official CO2 emission rate of 132
grams per kilometre.
Betty was provided with a new petrol
powered company car throughout
2004-05. The motor car has a list price
of £16,400 and an official CO2 emission
rate of 203 grams per kilometre.
Charles was provided with a new petrol
powered company car throughout
2004-05. The motor car has a list price
of £22,600 and an official CO2 emission
rate of 264 grams per kilometre. Charles
paid Fashionable plc £1,200 during
2004-05 for the use of the motor car.
Amanda
The CO2 emissions are below the base level
November/December 2004 student accountant 39
technical
figure of 145 grams per kilometre, so the
relevant percentage is 18% (15% plus a 3%
charge for a diesel car). The motor car was
only available for eight months of 2004-05, so
the benefit is £1,620 (13,500 x 18% x 8/12).
Betty
The CO2 emissions are above the base level
figure of 145 grams per kilometre. The CO2
emissions figure of 203 is rounded down to
200 so that it is divisible by five. The
minimum percentage of 15% is increased in
1% steps for each five grams per kilometre
above the base level, so the relevant
percentage is 26% (15% + 11% (200 - 145
throughout 2004-05 so the benefit is £4,264
(16,400 x 26%).
Charles
The CO2 emissions are above the base level
relevant percentage is 38% (15% + 23%
(260 - 145 = 115/5)), but this is restricted to
the maximum of 35%. The motor car was
available throughout 2004-05 so the benefit is
£6,710 (22,600 x 35% = 7,910 - 1,200).
The contributions by Charles towards the use
of the motor car reduce the benefit.
Company car fuel benefit
The fuel benefit is calculated as a percentage
of a base figure that is announced each year.
For 2004-05 the base figure is unchanged at
£14,400. 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 August 2004 and
5 April 2005.
Betty was provided with fuel for private use
between 6 April and 31 December 2004.
Charles was provided with fuel for private
use between 6 April 2004 and 5 April
2005. He paid Fashionable plc £600
during 2004-05 towards the cost of
private fuel, although the actual cost of
this fuel was £1,000.
 technical

Amanda Class 1A NIC non-core topic marks. Previously, the only

The motor car was only available for eight
months of 2004-05, so the fuel benefit is
£1,728 (14,400 x 18% x 8/12).
Betty
Fuel was only available for nine months of
2004-05, so the fuel benefit is £2,808
(14,400 x 26% x 9/12).
Charles
The motor car was available throughout
2004-05 so the benefit is £5,040 (14,400 x
35%). There is no reduction for the
contributions made since the cost of private
fuel was not fully reimbursed.
The rate of Class 1A NIC that employers pay
on taxable benefits provided to employees is
unchanged at 12.8%. From the June 2005
sitting onwards, the rate of Class 1A NIC will
be given to you in the tax rates and
allowances section of the examination paper.
EXAMPLE 10
Simone Ltd has one employee who is paid
£40,000 per year, and was provided with the
following taxable benefits during 2004-05:
£ emphasis on VAT and capital gains, as well
Company motor car 6,400
Car fuel 4,320
Living accommodation 1,800
aspect of groups of companies examinable in
the compulsory section was that the number
of associated companies might be given.
If not examined as a distinct question, tax
planning could form part of a question in
either the compulsory or optional sections of
the paper.
It would be perfectly possible for a paper
from June 2005 onwards to look exactly the
same as a paper set prior to then. However,
the changes are designed to give more
as allowing more flexibility regarding the
choice of topics that are examined at any
one sitting.

Official rate of interest
The official rate of interest is used when
calculating the benefit in kind arising from a
beneficial loan or from the provision of living
accommodation costing in excess of
£75,000. For the June and December 2005
sittings the actual official rate of interest of
5% for 2004-05 will be used.
National Insurance
Class 1 National Insurance contributions
For 2004-05 the rates of Employee Class 1 NIC
are unchanged at 11% and 1%. The rate of
11% is paid on earnings between £4,745 per
year and £31,720 per year, and the rate of 1%
is paid on all earnings over £31,720 per year.
The rate of Employer Class 1 NIC is
unchanged at 12.8%, and is paid on all
earnings over £4,745 per year.
The Class 1 NIC information that will be
given in the tax rates and allowances section
of the examination paper for the June and
December 2005 sittings is as follows:
% business.
Class 1 Employee £1 to £4,745
per year Nil
£4,746 to £31,720
per year 11.0
£31,721 and
above per year 1.0
Class 1 Employer £1 to £4,745
per year Nil
£4,746 and
above per year 12.8
The Class 1 and Class 1A NIC liabilities are David Harrowven is examiner for Paper
as follows: 2.3 (GBR)
£
Employee Class 1 NIC
31,720 - 4,745 = 26,975 at 11% 2,967
40,000 - 31,720 = 8,280 at 1% 83
3,050
Employer Class 1 NIC
40,000 - 4,745 = 35,255 at 12.8% 4,513
Employer Class 1A NIC
12,520 (6,400 + 4,320 + 1,800)
at 12.8% 1,603
SYLLABUS GUIDANCE
From the June 2005 sitting onwards there
will be less guidance given in the syllabus as
regards the optional section of the paper.
Questions 3 and 4 will continue to be on VAT
and capital gains respectively, and in both
cases the question may either be based on an
incorporated business or an unincorporated
Questions 5, 6 and 7 will now be on any
area of the syllabus. Questions will, however,
continue to be set on groups of companies,
overseas aspects and the six listed tax
planning topics on a regular basis.
Question 1 might include some aspect of
groups of companies if this topic is not
examined in the optional section. However,
any area examined will be very
straightforward, and will be part of the 10

40 student accountant November/December 2004


APPENDIX 1: RELEVANT TO CAT PAPER 9
(GBR) – JUNE AND DECEMBER 2005
SITTINGS
This appendix outlines the effects of the
changes made in the Finance Act 2004 to
Paper 9, Preparing Taxation Computations
(GBR). The sub-headings refer to the
headings in the main article on Paper 2.3
(GBR), written by David Harrowven.
CORPORATE BUSINESSES
Rates of corporation tax
These will affect Paper 9 in exactly the same
way as Paper 2.3. The same detail on rates
will be given in the table attached to the
Paper 9 examination paper.
Dividends
The new minimum 19% tax rule will be
examined in Paper 9. It is envisaged that only
the basic rule of taxing dividends paid at 19%
and remaining profit at the underlying rate
will be tested. The restriction rule will not be
examined.
Due to the complications involved with
the introduction of this new legislation it has
been decided that this area will not be
examined in Paper 9 until the June 2006
session at the earliest. Any question involving
the starting rate or small company rate of tax
before then will not include dividend
payments in that question.
Capital allowances
The new rules outlined in the main article will
be examined in Paper 9. The first-year
allowance of 100% for communications
technology equipment, which ceased on
31 March 2004, may still be tested. For
instance, where an account period runs from
1 January to 31 December 2004.
The new rate of 50% first-year allowance
for small companies for the period 1 April
2004 to 31 March 2005 and for
unincorporated businesses from 6 April 2004
to 5 April 2005 is also required knowledge
for Paper 9. The more lenient definition of
small and medium-sized companies must
also be known for Paper 9.
Interest on underpaid and overpaid
corporation tax
The calculation of this remains
non-examinable for Paper 9. The treatment
of interest paid or received, ie as Schedule
D Case III, is however still part of the
syllabus.
Value added tax
Both registration and deregistration rules
along with the rules for cash accounting and
annual accounting are in the Paper 9
syllabus. Therefore, the revised limits for
these areas are all examinable in the 2005
papers.
UNINCORPORATED BUSINESSES
Rates of income tax
The revised thresholds are all examinable in
2005.
Personal allowance
The new rate of £4,745 for 2004-05 is
examinable. Candidates are reminded that
this is the only personal allowance
examinable in Paper 9 – the age-related
allowances are specifically excluded from the
syllabus.
Personal pension schemes
Both the maximum contribution level of
£3,600 regardless of earnings and the
maximum net relevant earnings figure of
£102,000 are required knowledge for the
2005 exams.
The new simplification rules will not be
tested as yet, and will be introduced no
earlier than 2007.
Capital gains tax
Individual exemption limit
The new annual exemption limit of £8,200
will be used for the 2005 exams.
Taper relief for business assets
The same table in exactly the same detail will
be given in Paper 9.
The extended definition of a business asset
to include assets owned by individuals and
used for trade purposes by another individual
or partnership will not be examined.
November/December 2004 student accountant 41
technical
Class 2 and Class 4 National Insurance
contributions
The rates of both Class 2 and Class 4 will be
given in Paper 9 in the same way as they are
for Paper 2.3. The revised Class 2 rate is
required knowledge. A calculation of both
Class 2 and Class 4 contributions may be
tested.
Interest on underpaid and overpaid tax
This is not part of the Paper 9 syllabus and
therefore will not be examined.
EMPLOYEES
Approved mileage allowances
The rates remain unchanged and will be given
in the rates and allowances table in the
Paper 9 exam.
Company car benefit
The new reduced base level of CO2 emissions
limit of 145 grams per kilometre is
examinable in the 2005 examinations but will
be given as part of the rates and allowances
table.
Company car fuel benefit
The unchanged base level figure of £14,400
will be examinable in the 2005 examinations
but will be given in the rates and allowances
table.
Official rate of interest
The rate to be used in Paper 9 remains at 5%.
National Insurance
The rates for 2003-04 are unchanged for
2004-05 and are therefore examinable in the
same way as before. The same detail as
shown for Paper 2.3 will be used in the rates
and allowances table for Paper 9.
Keith Molson is examiner for Paper 9 (GBR)
technical
APPENDIX 2: RELEVANT TO PAPER 3.2
(GBR) – JUNE AND DECEMBER 2005
SITTINGS
This appendix outlines the effects of the
changes made in the Finance Act 2004 on
Paper 3.2, Advanced Taxation (GBR). All
comments made in the main article will apply
to Paper 3.2. In addition, students should be
aware of the following issues.
CORPORATE BUSINESSES
Transfer pricing
Prior to the 2004 Act, transfer pricing only
applied to cross-border transactions. The aim
of the legislation was to ensure that all such
transactions between connected parties were
made at an ‘arms length’ open market value.
From 1 April 2004, UK companies will have
to adopt this approach when dealing with
connected parties resident in the UK. Note
that small and medium-sized companies will be
exempted from the regulations insofar as they
apply within the UK.
This topic will be examinable in Paper
3.2. Please note that the rules on thin
capitalisation remain outside the scope of the
paper, and will not be examined.
Capital allowances
The new rules outlined in the main article will
be examined in Paper 3.2. The first-year
allowance of 100% for communications
technology equipment, which ceased on 31
March 2004, may still be tested. The new
rate of 50% first-year allowance is also
required knowledge for Paper 3.2. The more
lenient definition of small and medium-sized
companies must also be known for Paper 3.2.
PERSONAL TAXES
Rates of income tax
The revised thresholds are all examinable in
2005.
Venture Capital Trusts (VCTs) and Enterprise
Investment Schemes (EIS)
Subscriptions for shares in qualifying VCTs
during the fiscal years 2004-05 and
2005-06 will attract income tax relief at
40%, and not the usual 20%. The amount
that an individual can invest will double to
42 student accountant November/December 2004
£200,000 per annum from 6 April 2004.
Capital gains deferral relief will be abolished
for chargeable gains reinvested in VCT
shares issued from 6 April 2004. As with
VCTs, individuals can obtain income tax
relief on investments in EIS shares of up to
£200,000 per annum from 6 April 2004.
However, the tax relief remains at 20%.
Taxation of trusts
From 6 April 2004, the rate of tax on
chargeable gains of trustees, and on the
income of accumulation and discretionary
trusts, is to be increased from 34% to 40%.
Dividend income, until now taxable at 25%,
will be charged at 32.5% from the same date.
Inheritance tax: pre-owned assets
From 6 April 2005 the Inland Revenue will
impose an income tax charge on deemed
benefits received by a former owner of
property. The result is similar to a benefit in
kind on an asset used by an employee. The
charge applies to the use of land, chattels
and certain types of intangible property.
Several exemptions from the charge are
available. This topic will be examinable in
Paper 3.2 from December 2005 onwards.
Taper relief for business assets
The same table in exactly the same detail will
be given in Paper 3.2. The extended
definition of a business asset to include
assets owned by individuals and used for
trade purposes by another individual or
partnership will be examinable.
This relief effectively extends the benefits
of business taper relief, and makes it more
attractive for investors to hold commercial
property. However, students should be aware
that the taper relief treatment of the
asset-holder is dependent on the business
status of the tenant.
National Insurance
The rates of both Class 2 and Class 4 will be
given in Paper 3.2 in the same way as that
for Paper 2.3. The revised Class 2 rate is
required knowledge. A calculation of both
Class 2 and Class 4 contributions may be
required in the examination.
EMPLOYEES
Approved mileage allowances
The rates remain unchanged and will be given
in the rates and allowances table in the Paper
3.2 exam.
Company car benefit
The new reduced base level of CO2 emissions
limit of 145 grams per kilometre is examinable
in the 2005 examinations and will be given as
part of the rates and allowances table.
Company car fuel benefit
The unchanged base level figure of £14,400
will be examinable in the 2005 examinations
and will be given in the rates and allowances
table.
Benefits in kind – vans
The provision of vans is treated as a benefit in
kind where there is an element of private use.
From 6 April 2005, no benefit will be charged
if the only permitted private use is for the
employee to drive the van to his home.
From 6 April 2007, the scale charge for all
other private use of vans is to increase to
£3,000 per year regardless of the age of the
van, and that if the employer also provides fuel
for private motoring, an additional fuel charge
of £500 will also apply. Under current rules,
fuel can be provided free from income tax. This
will not be examinable until June 2007.
Ray Abercromby is examiner for Paper
3.2 (GBR)