ACCA Paper F6 (UK) : Notes

Notes
ACCA Paper F6 (UK)

Taxation (UK)
For exams in 2010
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ExPress Notes
ACCA F6 Taxation UK
Contents
About ExPress Notes 3
1. Introduction 7
2. Income tax – an introduction 9
3. Income Tax – Employment Income 12
4. Income Tax – Trading Income 16
5. Capital Allowances 19
6. Trading Income – Basis Assessment 23
7. Trading Losses (For Sole Traders) 25
8. Trading Income - Partnerships 28
9. Property Income 30
10. Investment Income 32
11. Pensions 34
12. National Insurance Contributions 36
13. Corporation Tax 38
14. Chargeable Gains (For Companies) 44
15. Corporate Groups and Overseas Tax Issues 46
16. Capital Gains Tax (CGT) 49
17. Value Added Tax (VAT) 54
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ExPress Notes
ACCA F6 Taxation UK
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ACCA F6 Taxation UK
Chapter 1
Introduction
START
The Big Picture
Paper F6 (UK) introduces candidates to the core principles of taxation in the UK. The paper
is mainly computational and there are 5 compulsory questions in the exam.
Taxation can get very complicated with a number of detailed calculations and lots of
intricate rules to remember. A successful candidate must have a good understanding of the
core areas of taxation. It is vital therefore that candidates understand the key areas and do
not get bogged down in the detail.
The main taxes are:
 Income tax – payable by individuals

 Corporation tax – payable by companies
 Capital Gains tax (CGT) – payable by individuals (companies pay corporation tax
on their capital gains)
 VAT – payable by both companies and unincorporated businesses
 National Insurance Contributions (NIC) – not strictly a tax but payable by
individuals and employers.
Question 1 in the exam will focus on income tax and question 2 will focus on corporation
tax.
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ACCA F6 Taxation UK
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Taxation legislation can change rapidly. These notes are designed to provide assistance for
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ACCA F6 Taxation UK
Chapter 2
Income Tax – An Introduction
START
The Big Picture
Income tax is a key area and will be examined.
KEY KNOWLEDGE
Income Tax – An Introduction
Individuals who are UK tax resident will be taxed on their worldwide income.
The period of assessment is the tax year. The tax year runs from 6 April to 5 April. For
example, the tax year 2009/10 runs from 6 April 2009 to 5 April 2010 (2008/09 runs from 6
April 2008 to 5 April 2009 and so on)
All of an individual’s income arising in the tax year will be assessed in the tax year.
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ACCA F6 Taxation UK
KEY KNOWLEDGE
Pro-forma Tax Computation – 2009/10
This is the base document for calculating an individual’s liability to income tax.
The pro-forma income tax computation is as follows:
INCOME TAX COMPUTATION – 2009/10
£
Employment income 10,000
Trading income 25,000
Property income 5,000
Bank interest (x 100/80) 1,000
UK dividends (x 100/90) 1,000
Total income 42,000
Less: reliefs (2,000)
Net income 40,000
Less: Personal allowance (PA) (6,475)
Taxable income 33,525
Certain income is exempt from income tax including:
 Income from certain National Savings Products

 Income from Individual Savings Accounts (ISA)
 Gambling or betting winnings
Personal Allowances (PA)
Every tax payer is entitled to a PA. For 2009/10 this amount is £6,475. It is an income tax
personal allowance and cannot be set against any other tax liability such as CGT.
The PA is deducted from an individual’s income to give taxable income.
Personal Age Allowances (PAA)
Individuals who are aged ≥ 65 years old are entitled to a PAA (in effect, a higher rate of
PA).
Individuals aged 65 – 74: 2009/10 PAA = £9,490
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Individuals aged ≥ 75: 2009/10 PAA = £9,640
The PAA is given in full in the year the individual becomes 65 or 75.
The PAA is aimed to protect elderly people with lower incomes. If however a person who is
entitled to a PAA has income above £22,900 (2009/10) the PAA is reduced by:
50% x (net income - £22,900)
Note that the PAA can never be reduced to less than the standard PA (£6,475)
Income Tax Liability and Income Tax Payable
Once the taxable income has been calculated, the income tax liability can be calculated.
Note that taxable income is after Personal Allowances.
The rate of income tax depends on the type of income.
Employment income, trading income, property income and bank interest (i.e. all income
except dividends) are taxed at the following rate for 2008/09:
Basic rate £1 to £37,400 20%
Higher rate £37,401 and above 40%
Income tax on Dividend income is either at 10% or 32.5%.
The summarised income tax rates are:
Other income Saving income * Dividend income
£1 to £37,400 20% 20% 10%
£37,401 and above 40% 40% 32.5%

(these rates will be provided in the exam)
* Note that special rates of tax may apply to savings income if it is in the first £2,440 of
income.
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ACCA F6 Taxation UK
Chapter 3
Income Tax – Employment Income
The Big Picture
Employment income represents all income and benefits an individual receives from his or
her employment.
KEY KNOWLEDGE
Income Tax – Employment Income
Earnings
Earnings are taxed on the receipts basis. i.e. the amount of earnings received in the tax
year. There are special rules for directors to prevent them manipulating the receipt date.
“Earnings” include salaries, wages, bonuses and benefits received by an individual.
As an example, if an individual receives a salary of £20,000 and benefits of £6,500 his total
employment income will be £26,500. This figure then goes to the income tax computation.
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ACCA F6 Taxation UK
Benefits
Benefits are regularly tested at Paper F6.
Exempt benefits include:
 One mobile phone.

 Relocation and removal expenses up to £8,000.
 Employer funded training.
 Staff canteen or restaurant (provided it’s made available to all employees)
The calculation of the taxable benefit is reduced proportionally if the benefit is provided for
only part of the tax year.
In most cases, contributions towards the provision of the benefit are deducted in the
calculation of the benefit.
Assessable benefit – Living Accommodation
An employee provided with living accommodation as a result of his employment and which
is not exempt job related accommodation would be assessed as follows:
Benefit
Higher of:
1. Annual value of the accommodation
All properties
(figure will be given in the exam).
2. The rent paid by the employer.
(Cost* minus £75,000) x official rate of
Additional charge for “expensive properties” interest (interest rate will be provided in the
exam).
* If the employer acquired the property more than 6 years before providing it to the
employee the market value when first provided to the employee should be used rather than
cost.
Assessable benefit – motor cars
This is one of the most common benefits provided to employees and is examined on a
regular basis.
Benefit:
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ACCA F6 Taxation UK
List price when new x “relevant %”.
Note the list price is the published brochure price when the car was first registered.
The relevant % depends on the CO2 emissions of the car with the broad concept being that
the more un-environmentally friendly the car is the higher the tax charge.
For petrol cars the % is calculated as follows:
CO2 emissions % (for petrol cars)

120 grams or less 10%
121 to 135 grams 15%
Add an additional 1% to the 15% up to a
Each complete 5 grams above 135 grams
maximum of 35%.
For diesel cars 3% is added to the figures above but the maximum is still 35%.
EXAMPLE 1
Petrol Car
John is provided with a petrol car with a list price of £22,000 and CO2 emissions of 147
grams. He makes a contribution of £100 per month for the use of the car.
Answer 1:
Percentage:
Base % 15%
Plus 1% for each complete 5 grams of CO2 above 135 grams (i.e. 2%
135 to 145 = 2%)
Relevant % 17%
% x list price = 17% x £22,000 £3,740

Less contributions (£100 x 12 months) (£1,200)
Taxable benefit £2,540
Note that the benefit present when a car is provided is inclusive of servicing and
maintenance costs but does not include any private fuel that is paid for by the employer.
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Assessable benefit – private fuel
Some employers may pay all or part of the private fuel bill of an employee. The provision of
fuel for private use is a separate benefit from the provision of a car.
The benefit is calculated as follows:
“Relevant %” as calculated for the car benefit x “base figure”.
For 2009/10 the base figure is £16,900 and will be given in the exam.
Using the previous example, if the individual had been provided with fuel for private use the
calculation of the benefit for the provision of private fuel would be:
(“Relevant %” as calculated for the car benefit x “base figure”) =
17% x £16,900 = £2,873
Assessable benefit – private use of vans
The benefit for the private use of a van is a flat rate scale of £3,000 pa.
Private use of employer’s assets
For private use of assets other than cars, vans and mobile phones (which have different
rules) the general rule is that the benefit is:
20% of an asset’s market value at the time it was first provided.
Gift of asset – no previous private use.
If an employer buys an asset and then it is given to an employee the benefit is the cost of
the asset to the employer.
Gift of asset – after previous private use
If an asset has been used by an employee and then given to him the benefit is calculated as
follows:
Higher of:
1. The market value of the asset when gifted.

2. The market value of the asset when first made available less the benefits assessed
on the individual during the time the individual used it but didn’t own it.
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ACCA F6 Taxation UK
Chapter 4
Income Tax – Trading Income
START
The Big Picture
Trading income is a very important part of the syllabus and is almost always examined in
one way or another.
KEY KNOWLEDGE
Income Tax – Trading Income
A person receives trading income if he has his own “business”. A person who receives
trading income is known as one of the following:
 a “sole trader”
 self employed
 independent consultant
A person who is employed by a company receives employment income and not trading
income.
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Note that a person can receive both employment income (e.g. he has a part time job) and
trading income (e.g. he has a part-time business whereby he trades by selling items on
eBay)
Badges of trade
This is the term which refers to various tests (or badges) to ascertain whether a particular
transaction that an individual undertakes is a capital item (and hence treated under CGT) or
a trading item (and hence treated under income tax).
Badges:
1. Subject matter – are the items that were transacted typically items that are used for
trading?
2. Frequency of transactions – the more often the transaction is undertaken the more
likely it is that the item will be trading.
3. Length of ownership – a shorter period of ownership is more likely to indicate

trading.
4. Profit motive – a clear indication to make a profit may indicate a trading item.
5. Supplementary work and marketing – additional work undertaken on the items to

make them more marketable may indicate trading.
6. Method of acquisition – an involuntary acquisition of the item (e.g. through

inheritance) may indicate capital.
Basis of assessment
An individual who is self employed must prepare accounts. These accounts can be for
whatever accounting period end that he chooses. The accounts are then adjusted for tax
purposes to get the trading income figure (see adjustment of accounting profit section
below).
The trading income figure is then assessed on the individual using the current year basis
rules. This is where the trading income assessed in a tax year is the amount in the 12 month
accounting period ending in that tax year.
For example, an individual that prepares accounts to 31 December and has adjusted trading
income of £35,000 for the year ended 31 December 2009 would have trading income of
£35,000 in the tax year 2009/10.
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ACCA F6 Taxation UK
Adjustment of the accounting profit
An individual’s accounts must be adjusted to obtain the tax adjusted trading profit.
Tax adjusted trading profit
Net profit per accounts 28,000
Add: Disallowed expenditure 5,000

Taxable trading income not included in accounts 4,250
9,250
37,250
Income included within the accounts but not taxable as
Less: 1,000
trading income
Expenditure not in the accounts but allowable as a
250
trading deduction
Capital allowances 3,000
(4,250)
Tax adjusted trading profit 33,000
Disallowable expenditure
General rule – Only expenditure incurred wholly and exclusively for the purposes of the
trade is allowable.
Some of the more common forms of disallowable expenditure include:
 Capital expenditure
 Depreciation or amortization charges
 Appropriations (withdrawals) of funds from the business by the sole trader
 Excessive salary paid to a sole trader’s family member
 3rd party entertaining (note that employee entertaining is allowable)
 The write off of a non-trade debt
 Subscriptions that are not related to the trade
 Gifts to customers are disallowable unless they satisfy all of the following:
o Cost less than £50 per recipient per year

o The gift is not food, drink or tobacco
o The gift carries the name, logo or advert for the business
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ACCA F6 Taxation UK
Chapter 5
Capital Allowances
START
The Big Picture
Depreciation is an accounting adjustment. There are various methods that a business can
use to calculate depreciation. For example, straight line method and reducing balance
method.
Chapter 4 told us that depreciation charged to the income statement is not an allowable
expense and instead is added back in the calculation of the tax adjusted trading profit.
KEY KNOWLEDGE
Capital Allowances
Capital allowances are tax allowable amounts that are calculated according to set specific
rules. In simple terms, capital allowances could be regarded as the tax equivalent of the
accounting depreciation charge.
There are two main categories of capital allowances:
1. Plant & Machinery.

2. Industrial Buildings Allowance (IBA).
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Plant and Machinery (P&M)
P&M includes a number of items. The most common ones found in the exams include:
 Machinery
 Vehicles (cars and lorries)
 Computers (hardware and software)
 Office furniture and equipment
 Moveable partitioning
Writing down allowance (WDA)
An annual WDA of 20% is given on a reducing balance basis.
Annual Investment Allowance (AIA)
The AIA is a 100% allowance for the first £50,000 spent on P&M by a business in its 12
month accounting period.
 Available to all businesses.

 Not available on cars.
 For accounting periods >12 months or <12 months (long or short accounting
periods), the £50,000 is pro-rated.
 If a business spends more than £50,000 in a 12 month period, the first £50,000 is
eligible for AIA and the balance is eligible for WDA.
First Year Allowances (FYA)
For plant and machinery additions between 6 April 2009 and 5 April 2010 a temporary FYA
of 40% is available on general pool items not covered by AIA.
Motor cars – purchased before 6 April 2009
AIAs are not available on cars.
Cars costing £12,000 or less:
These are included in the general pool.
Cars costing more that £12,000:
These are classified as “Expensive cars” and are kept outside of the general pool and
instead are shown in a separate column for each expensive car.
The maximum WDA for an expensive car is £3,000 pa.
Once the written down value of the car is below £15,000 the WDA is calculated as
20% of the balance.
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ACCA F6 Taxation UK
Note that the car always remains in the separate column even when the balance falls
below £12,000.
Cars do not qualify for AIA. However, any expenditure on a low emission car (it will state in
the exam if it is a low emission car) will qualify for a First Year Allowance of 100% instead of
the WDA.
Motor cars – purchased on or after 6 April 2009
Cars purchased on or after 6 April 2009 are treated according to their CO2 emissions.
CO2 Emissions Treatment

≤110g/km As pre April 2009 (i.e. 100% FYA)
111 – 160 g/km Include in general pool (no AIA or FYA)
≥160 g/km Eligible for 10% WDA (part of special rate pool)
Private use assets
If the sole trader uses an asset partly for business purposes and partly for private purposes,
the asset is kept in a separate column and only the business proportion of the asset is
eligible for capital allowances.
Note that private use assets are only present for individuals. Companies never have private
use assets in their calculation as companies never use assets privately!
Industrial Buildings Allowance (IBA)
IBAs are given on industrial buildings.
Qualifying buildings
The most common examples of industrial buildings include:
 Factories
 Warehouses
 Drawing office for preparing plans for manufacturing operations
The following are not industrial buildings and therefore do not qualify for IBAs or capital
allowances on plant & machinery:
 Private living accommodation such as houses and apartments.

 Shops, showrooms and offices
Non-industrial items can be included if they are part of an industrial building and the
proportion of the cost of the building that relates to non-industrial is 25% or less.
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ACCA F6 Taxation UK
Note that land does not qualify for IBAs. Any costs for preparing the land for building
however are eligible for IBAs.
IBA for industrial buildings
For 2009/10 the rate of IBA is 2% straight line basis. The IBA is given if the building is in
industrial use on the last day of the accounting period.
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ACCA F6 Taxation UK
Chapter 6
Trading Income – Basis Assessment
START
The Big Picture
Chapter 4 introduced the concept of the Current Year Basis (CYB) whereby the adjusted
trading profit in an accounting period is assessed in the tax year in which the accounting
period ends. There are a number of other rules which need to be looked at.
KEY KNOWLEDGE
Trading Income – Basis Assessment
Opening Year Rules
There are special rules for when a sole trader commences business:
Year 1. The profits assessed in year one are the “actual basis”. This is the adjusted profits
from the commencement of business until the following 5 April.
Year 2. If there is a 12 month period of account ending in the 2 nd tax year then use the CYB.
If there is not a 12 month accounting period then use one of the following:
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ACCA F6 Taxation UK
Period of Account Period Assessed

a) the period of account is less than 12 1st 12 months of trading.
months after commencement
b) the period of account is more than The 12 months ended on the

12 months after commencement accounting date.
c) there is no period of account ending The actual profits between 6th April
in the 2nd tax year and 5th April.
Year 3. Assess the 12 months ended on the accounting date in that year. This will normally
be the CYB.
As a result of the above rules there is a possibility that profits for certain periods will be
assessed in more than one year. These profits are known as “overlap profits”. These overlap
profits are carried forward and usually deducted from the assessment in the year the
business ceases.
Ongoing business rules
These rules have already been discussed and are the adjusted profits for an accounting
period that end in a particular tax year. This is known as the CYB.
Change of accounting date
There are special rules for when a sole trader changes accounting date.
Closing year rules
The broad idea here is that when a business ceases there will be no periods which have not
been taxed.
The calculation method is as follows:
1) Identify the tax year in which the business ceases.

2) For the penultimate tax year, identify the CYB assessment.
3) Calculate the profits for the period from the date last assessed in 2) above until the
date of cessation and from this figure delete any overlap profits.
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ACCA F6 Taxation UK
Chapter 7
Trading Losses (For Sole Traders)
START
The Big Picture
When an individual has a tax adjusted trading amount which is negative, he has a trading
loss.
The trading profit figure is £nil.
A trading loss may be offset against certain other income in accordance with the rules
discussed in this chapter.
The main reliefs are:
 Carry forward of the trading loss against future trading profits.
 Offset the loss against total income in the year of the loss and / or the
preceding year.
 If a claim against total income has been made, there is an optional 3 year carry
back against trading profits. The loss that can be carried back to the preceding
year is unlimited. The loss that can be carried back a further 2 years is limited
to £50,000.
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ACCA F6 Taxation UK
 If a claim against total income has been made there is an optional claim against
chargeable gains in the tax year of the loss and / or the preceding tax year.
 Offset of opening year loss against total income
 Offset of terminal loss against previous trading profits
Carry forward of trading loss
The trading loss is carried forward and set against the first available profit from the same
trade.
The amount of the loss to be set off is as much as possible.
Offset of loss against total income
The loss can be offset against total income in the year of the loss and / or the preceding
year.
As an example, a loss in an accounting period ending 31 December 2009 arises in the tax
year 2009/10 (under CYB). The loss could therefore be offset against total income in either
2009/10 or 2008/09.
Loss relief under this method is optional and subject to a claim by the individual.
The loss relief is against total income. Total income is before the offset of Personal
Allowances (PA) and therefore there is a risk that utilising a loss under this method could
result in the PA being wasted.
Extended carry back against trading profit.
If a loss remains after a claim against total income a trading loss in 2009/10 can be carried
back against trading profits of 2008/09 followed by 2007/08 and then 2006/07.
Relieving trading losses against chargeable gains
If a loss remains after a claim against total income a trading loss in 2009/10 can be offset
against chargeable gains in 2009/10 and / or 2008/09.
Offset of opening year loss against total income
A trading loss incurred in the first 4 tax years of operation can be offset against total income
from the 3 years preceding the tax year of the loss. The loss is offset on a FIFO basis (i.e.
against the earliest year first)
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Offset of terminal loss against previous trading profits
Unrelieved trading losses of the last 12 months of a business’s activity can be relieved
against:
1) Trading profits in the year of cessation, and

2) Carried back and offset against trading profits for the 3 preceding years on a LIFO
basis.
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Chapter 8
Trading Income - Partnerships
START
The Big Picture
In simple terms, partnerships are collections of sole traders that are working together.
Profits from a partnership need to be allocated between the partners and then each partner
includes their share of the partnership profit as trading income within their own income tax
computation.
The profits for the partnership are firstly adjusted to obtain the tax adjusted trading profit
(as per the adjustments required for a sole trader mentioned at chapter 4).
The tax adjusted partnership profits are then allocated to each partner.
Calculation
The tax adjusted profits of the partnership are allocated to the partners in accordance with
their partnership profit sharing arrangements. Partners may be entitled to a fixed element
such as “salary” or interest on loans and these amounts are withdrawn first.
Example: Andrew and Barry are in partnership sharing profits equally after allocating a
salary of £10,000 to Andrew. In the year ended 31 December 2009, the adjusted trading
profits of the partnership were £50,000.
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Y/E 31/12/09 Total Andrew Barry

Salary £10,000 £10,000 -
Balance to allocate (1:1) £40,000 £20,000 £20,000
Trading profits £50,000 £30,000 £20,000
The accounts end on 31 December 2009. Therefore under the CYB the trading profits will be
assessed in 2009/10 with Andrew being assessed on £30,000 and Barry on £20,000.
Loss relief in partnerships
Trading losses are allocated between the partners in the same manner as trading profits
are. Each partner can decide how they obtain relief. For example, partner A could carry the
loss forward whilst partner B decides to offset against current year total income.
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Chapter 9
Property Income
START
The Big Picture
Property income represents income received by an individual from property.
Property business profits
This represents rental income received by a landlord.
The assessable property income on an individual is calculated as follows:
Rental income 12,000
Less: deductible expenses 2,500
Assessable property income 9,500
Income and expenses are treated according to the accruals concept and if the individual has
more than one property the income and expenses are combined together in the calculation.
The rules concerning whether expenses are deductible broadly follow the rules found within
trading income. Examples of deductible expenses include interest on a loan to acquire the
property, insurance, etc.
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Losses on property are offset against any property income in the year of the loss. If there
are any unrelieved property losses they are carried forward and offset against future
property income.
Furnished holiday lettings (FHL)
Property lettings which qualify as FHL have a number of taxation advantages.
There are various requirements for a letting to be able to qualify as FHL. Broadly speaking
the property must be being let out as a commercial business and requirements such as
being let furnished in the UK as holiday lettings for not less than 140 days a year must be
satisfied.
There are various advantages of being treated as a FHL. One of them being that the losses
are treated as though they are trading losses and therefore can be offset against other
income.
Premiums received on the grant of a short lease
A short lease is a lease for 50 years or less.
Part of the premium received will be treated as though it was property income received by
the landlord. The property income proportion of the premium received will be calculated as
follows:
The premium
Less: 2% x (length of lease – 1) x premium
Example: Premium: £20,000; Length of lease: 15 years
Premium received 20,000
Less: 2% x (length of lease – 1) x premium [2% x (15-1) x 20,000] (5,600)
Property business income 14,400
Rent a room relief
Gross annual rent of £4,250 and below received for the “rent of a room” in a person’s main
residence is exempt.
If an individual receives such rent in excess of £4,250, the individual can either:
1) Choose to pay tax on the excess of the rent over £4,250 or,
2) Be taxed in the normal way for property income (rent minus expenses).
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Chapter 10
Investment Income
Savings income - Bank and Building Society interest
Note that for the purposes of the exam; assume that a Bank and a Building Society is the
same thing.
Bank interest is received net of 20% tax by individuals. In other words, individuals receive
interest after tax of 20% has been withheld by the Bank and paid to HMRC on behalf of the
individual.
An individual must show the gross figure of any interest received in their tax computation.
The gross amount is the amount including the tax withheld by the bank.
Example:
An individual receives bank interest of £800.
The gross amount of interest shown in the income tax computation is:
£800 x 100/80 = £1,000
The tax withheld by the Bank is £200 (£1,000 - £800). Any tax withheld can be used by the
taxpayer to offset against his tax payable.
Rate of tax on savings income
Savings income is normally taxed at the same rates as “other income” (see Chapter 2).
However, a starting rate of tax of 10% will apply to the first £2,440 in certain circumstances.
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To ascertain whether this 10% rate applies, savings income goes “on top” of other income.
If the savings income is within the first £2,440 of taxable income then the 10% rate applies
to the savings income.
Dividend income
As with savings income, dividends are received net so will need to be grossed up.
Dividends are deemed to be received net of a notional tax credit of 10%. Dividend income
needs to be grossed up as follows:
Dividends received x 100/90
The tax credit of 10% can be set against the individual’s tax payable.
Rate of tax on dividend income.
Dividends are treated as being the top part of an individual’s income and “go on top” of
other income and savings income. Dividends are then taxed as follows:
Dividend income in the basic rate band (the first £37,400): 10%
Dividend income in the higher rate band (above £37,400): 32.5%
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Chapter 11
Pensions
START
The Big Picture
Pensions are in effect tax efficient retirement savings scheme.
KEY KNOWLEDGE
Pensions
There are two main types of pension schemes:
1. Occupational pension schemes (certain employees)

2. Personal pension schemes (employees, sole traders and unemployed)
Individuals can make contributions to a pension scheme of any amount but will only be
eligible for tax relief on contributions as follows:
The higher of:
1. £3,600, and
2. 100% of the individual’s “relevant earnings” (relevant earnings include
trading profits and employment income)
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Method of obtaining relief – occupational pension scheme
Payments to an occupational pension scheme obtain tax relief at source. The pension
payment made by the employee is deducted from the employment income and the employer
calculates PAYE on the net amount.
If an employer also makes contributions to the employee’s occupational scheme, those

deductions are tax deductible in calculating the employer’s trading income. The contributions
will not be treated as a benefit on the employee.
Method of obtaining relief – personal pension scheme
Basic rate tax relief – relief is given automatically as the contributions are made net of the
basic rate of income tax (20%).
Higher rate tax relief – relief is given by “extending the basic rate band”. If an individual
pays a contribution of £8,000 (net), the contribution is “grossed up” by 100/80 to obtain a
gross contribution of £10,000. The basic rate band of £37,400 is then extended by the gross
contribution of £10,000 to obtain a revised basic rate band of £47,400.
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Chapter 12
National Insurance Contributions
National Insurance Contributions (NIC) are not tax as such. Instead they are social security
contributions which are payable in addition to any taxes that may be due.
There are various classes of NIC:
Class Payable by
Class 1 primary Employee
Class 1 secondary Employer
Class 1A Employer
Class 2 Self employed
Class 4 Self employed

Class 1 primary and secondary NIC calculated as a % on gross earnings (in effect on cash
remuneration such as salary and bonuses but not on most benefits) over £5,435.
The percentages are
Class 1 Employee £1 - £5,715 per year Nil %

£5,716 - £43,875 per year 11.0 %
Above £43,876 1.0%
Class 1 Employer £1 - £5,715 per year Nil %

Above £5,715 12.8 %
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Class 1A NIC is payable at a rate of 12.8% by employers on most taxable benefits provided
to an employee.
Class 2 NIC is payable at a flat rate of £2.40 per week by self employed individuals.
Class 4 NIC is also paid by self employed individuals. Class 4 NIC is calculated according to
the percentages below on the individual’s taxable trading profits.
Class 4 £1 - £5,715 per year Nil %

£5,716 - £43,875 per year 8.0 %
Above £43,876 1.0%
NIC rates will be provided in the exam.
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Chapter 13
Corporation Tax
START
The Big Picture
Corporation tax is a key area of the syllabus and will be examined.
KEY KNOWLEDGE
Corporation Tax
A period of account is the period that the company prepares accounts for. A company can
generally prepare accounts that end on any date that the company chooses and whilst it is
normally 12 months long, it can be shorter or longer.
An accounting period is the period for which the charge to corporation tax is made. An
accounting period can never exceed 12 months.
Most of the time, the period of account and the accounting period are the same dates (i.e.
when the period of account is 12 months long)
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If a company has a period of account longer than 12 months the period of account is
divided with the maximum length of an accounting period being 12 months. For example, a
period of account of 18 months would have an accounting period of 12 months followed by
an accounting period of 6 months.
Corporation tax computation – year ended 31 March 2010
Trading profits 150,000

Property income 30,000
Interest income 5,000
Chargeable gains 50,000
Total profits 235,000

Less: Gift Aid (35,000)
Profits chargeable to corporation tax (PCTCT) 200,000
There are a number of similarities between how items are treated for corporation tax
purposes and how they are for income tax purposes. The main differences are:
1. Trading income – main differences for companies
There are no private use asset adjustments. Within income tax a self employed person
would need to make adjustments to the deductibility for private use. With companies, the
companies themselves clearly don’t use it privately. The private use is taxed on the
employees via the benefit on private use.
Similarly for capital allowances purposes there are no private use assets for a company.
2. Property income – main differences for companies
Property income is still assessed on the accruals basis but a company is assessed according
to the company’s accounting period whilst an individual is assessed according to the tax
year.
Interest on a loan acquired to purchase or improve an investment property is treated under

the loan relationship rules unlike individuals who can treat it as a deduction from property
income.
3. Interest income – main differences for companies
Bank interest received by a company is received gross with no tax withheld (unlike
individuals that receive bank interest net of 20% tax).
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4. Dividends – main differences for companies
Dividends received BY companies are not included within PCTCT. Individuals however
include dividends received within their income tax computations.
5. Chargeable gains – main differences for companies
Companies include capital gains as chargeable gains within PCTCT and pay corporation tax
on them. Individuals pay Capital gains Tax on gains and not income tax.
6. Gift Aid – main differences for companies
Companies make gift aid payments gross and the amount paid is deducted within PCTCT.
Individuals “extend the basic rate band”.
To calculate the corporation tax liability we need to identify the “profits” of a company.
“Profits” = PCTCT + Franked Investment Income (FII)
FII = Gross dividends received from non associated companies.
In other words, FII = (dividends received from companies in which the company has a 50%
or less shareholding) x 100/90
“Profits” are used to identify the tax rate that will be used. Note that to identify the actual
tax charge we apply the tax rate to PCTCT and not to “Profits”.
The rate of corporation tax used depends on the financial year. The financial year runs from
1 April to the following 31 March.
For financial year 2009 (i.e. the period from 1 April 2009 to 31 March 2010) the rates are:
“Profits” below the lower limit of £300,000 21%
“Profits” between £300,000 and £1,500,000 Marginal Relief
“Profits” above the upper limit of £1,500,000 28%
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EXAMPLE 1
Profits below the lower limit
PCTCT = £200,000
FII = £15,000
Profits = £215,000. This is below the £300,000 limit so the lower rate of corporation tax of
21% applies (FY 2009).
Corporation tax = 21% x £200,000 = £42,000
EXAMPLE 2
Profits above the upper limit
PCTCT = £2,000,000
FII = £50,000
Profits = £2,050,000. This is above the £1,500,000 limit so the full rate of corporation tax of
28% applies (FY 2009).
Corporation tax = 28% x £2,000,000 = £560,000
EXAMPLE 3
Profits in the marginal relief band
If profits fall within the marginal relief band the following calculation is needed:
PCTCT@ full rate
Less: marginal relief
7/400 x (upper limit – profits) x PCTCT/Profits
Example:
PCTCT = £1,000,000
FII = £50,000
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Profits = £1,050,000. This is above the £300,000 limit and below the £1,500,000 limit so
marginal relief applies.
Corporation tax =
28% x £1,000,000 = £280,000
Less: 7/400 x (£1,500,000 - £1,050,000) x (£1,000,000/£1,500,000) (£5,250)
Corporation tax: £274,750
Short Accounting Periods
If an accounting period is less than 12 months the upper and lower limits are reduced
proportionally.
Example: A company has a 3 month accounting period ending 31 March 2009.
The upper limit is: £1,500,000 x 3/12 = £375,000
The lower limit is: £300,000 x 3/12 = £75,000
Associated companies
The upper and lower limits are divided by the number of associated companies
Example: Company A owns 100% of company B.
Associated companies = 2
Upper limit: £1,500,000/2 = £750,000
Lower limit: £300,000/2 = £150,000
Accounting Periods that straddle 31 March.
The corporation tax rates for the following years are:
Financial Year 2007 2008 2009

Small companies rate 20% 21% 21%
Full rate 30% 28% 28%
Lower limit 300,000 300,000 300,000
Upper limit 1,500,000 1,500,000 1,500,000
Marginal relief fraction 1/40 7/400 7/400
(Relevant details will be provided in the exam)
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When an accounting period covers 2 separate Financial Years and the rates or fractions are
different then separate calculations have to be made for each financial year. The corporation
tax payable will still be based on the accounting period but the calculation will be split into
two.
EXAMPLE
Company A
Company A has PCTCT of £2,000,000 for its year ended 31 December 2008. It did not
receive any FII.
The year ended 31 December 2008 is partly in FY 07 (1 January 2008 to 31 March 2008)
and partly in FY 08 (1 April 2008 to 31 December 2008)
The upper limit is £1,500,000 in both FY 07 and FY 08 so we know that the company will be
paying tax at the full rate:
FY07 £2,000,000 x 3/12 x 30%: £150,000
FY08 £2,000,000 x 9/12 x 28%: £420,000
Total tax payable for the y/e 31 December 2008 £570,000
Trading losses (for companies)
If the corporation tax computation shows a loss, PCTCT is nil.
The company can utilise the loss in the following ways:
 Carry forward the loss to offset against future trading income of the same trade
under s393(1) ICTA 1988
 Offset of current year trading loss against current year total profit (before deduction
of gift aid) (s393A ICTA 1988)
 If a current year loss offset has been made and there are losses remaining, unused
losses can be carried back and offset against total profits (before deduction of gift
aid) of the previous 12 months.
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Chapter 14
Chargeable Gains (For Companies)
START
The Big Picture
The taxation of capital gains on individuals is dealt with in depth at chapter 16.
KEY KNOWLEDGE
Chargeable Gains (For Companies)
The calculation of chargeable gains for companies is similar to that found for individuals
except for a number of major differences. The main ones being:
Companies Individuals
Pay corporation tax on chargeable gains (i.e. Pay Capital Gains tax (CGT) on the gains and
the gains are part of PCTCT). not income tax on the gains.
Companies do not receive an annual
Individuals do receive an annual exemption.
exemption.
Companies receive indexation allowance (IA). Individuals receive taper relief.
The share matching rules are different. The share matching rules are different.
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Chargeable gains Pro forma (for companies)
Disposal proceeds 100,000
Less: incidental costs of disposal (e.g. advertising or auction fees) (2,000)
Net Proceeds 98,000
Less: allowable expenditure (38,000)
Unindexed gain 60,000
Less: indexation allowance (see below) (15,000)
Chargeable gain / (loss) 45,000
Indexation allowance gives a company some relief for the effect of inflation during the
period of ownership of the asset.
IA= the cost of the asset x the movement in the Retail Price Index (RPI)
Share matching Rules (for companies)
When shares in a company are sold, the calculation needs to identify which shares were
sold. The shares sold are matched with the following purchases:
1. Shares acquired on the same day.

2. Shares acquired in the 9 days before the sale.
3. Shares in the share pool (or s104 pool or FA 85 pool)
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Chapter 15
Corporate Groups and Overseas Tax

Issues
CORPORATE GROUPS
The Big Picture
Corporate Groups
When a group of companies exist there are a number of relationships that you need to be
aware of. The 2 main ones being:
 Associated companies (>50% control)

 Group loss relief (75% control)
Associated Companies
Definition of associated companies.
Two companies are associated with each other if:
 One controls the other, or
 Both are controlled by another company or individual
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Implication of being associated:
1. The upper and lower limits used for determining the rate of corporation tax are
divided by the number of associated companies.
 Example: A Ltd owns 65% of B Ltd. The number of associated companies is

2. The upper and lower limits are £750,000 (£1,500,000/2) and £150,000
(£300,000/2) respectively for both A Ltd and B Ltd.
2. Any dividends between associated companies are not treated as FII for the purposes
of calculating a company’s “profits”.
3. Only one annual investment allowance of £50,000 is available for the group.
Group loss relief group
Definition of group relief group.
Two companies are part of a group relief group if:
 One owns 75% of the other, or
 Both are 75% subsidiaries of a 3rd company
For sub-subsidiaries to be included within a group relief group then top company should
own at least 75% of the sub-subsidiary.
Implications of being part of a group relief group:
The main implication is that any amount of the trading losses of one company may be
surrendered (“given”) to another group relief group company.
In order to maximise the tax saving, the loss should be surrendered in the following order:
1. To companies that are paying tax in the marginal relief band and who will be
suffering a marginal tax rate of 29.75% (FY 2008 and FY 2009) and 32.5% (FY
2007).
2. To companies that are paying tax at the full rate of 28% (FY 2008 and FY 2009) and
30% (FY 2007).
3. To companies that are paying tax at the small companies rate of 21% (FY 2008 and
FY 2009) and 20% (FY 2007)
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OVERSEAS ISSUES
The Big Picture
Overseas dividend income is exempt from UK corporation tax.
If a UK company receives foreign income such as overseas branch income it will be included
within PCTCT.
It will therefore be liable to both UK and foreign tax. The company will be eligible for double
tax relief.
Double Tax Relief (DTR)
Deduct from the UK tax liability the lower of:
1. UK on foreign income, and

2. Overseas tax suffered.
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Chapter 16
Capital Gains Tax (CGT)
START
The Big Picture
CGT is paid by individuals on chargeable disposals of chargeable assets. Companies do not

pay CGT but instead pay corporation tax on their chargeable gains. This chapter only deals
with individual issues.
Only individuals that are UK tax resident or UK ordinarily resident will pay CGT. The assets
disposed of can be located anywhere in the world.
Individuals have a CGT annual exemption (2009/10: £10,100). Gains up to this amount are
not taxed.
The rate of CGT is 18%.
If an individual is neither UK tax resident nor UK ordinarily resident then they will not be
liable to CGT even if the asset disposed of is located in the UK.
The majority of capital assets are chargeable to CGT. There are however a small number of
exempt assets which are outside the scope of CGT. These include:
 Principal private residence

 Cars (including antique or vintage cars)
 Certain “chattels”
 National Savings Certificates
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 Assets held within ISAs
Pro forma for computation of capital gains for individuals
Disposal proceeds 100,000
Less: incidental costs of disposal (e.g. advertising or auction fees) (2,000)
Net Proceeds 98,000
Less: allowable expenditure
- Cost of acquisition (28,000)
- Cost of enhancements (10,000)
Capital gain / (loss) 60,000
The gains and losses for an individual are then combined and taxed.
The calculation of CGT is as follows:
Capital gain on asset #1 10,000

Capital gain on asset #2 5,000
Capital loss on asset #3 20,000
Net gains for the tax year 35,000
Less: capital loss brought forward (4,900)
Net capital gain 30,100
Less: annual exemption (10,100)
Taxable gains 20,000
CGT @ 18% 3,600
Note that capital losses brought forward are only used to the extent of bringing the net
gains for the current year down to the level of the annual exemption.
Transfers between husband and wife (or civil partners)
Assets transferred between spouses are deemed to be transferred at such a value that
neither a gain nor a loss will be created.
The spouse transferring the asset is deemed to have transferred it at the original acquisition
cost. When the receiving spouse subsequently disposes of it they will have an acquisition
cost equal to the original acquisition cost.
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Part disposals
When an asset is part disposed of, we need to identify the proportion of the original cost
that relates to the part disposed of. The proportion of the original cost allocated to the
disposal is based on the value of the part disposed of and the value of the part retained.
Example:
John bought 5,000 m2 of land for £100,000 in January 2004.
He has just sold 3,000m2 for £80,000. The market value of the remaining 2,000m2 is
£30,000.
The “cost” of the land sold for inclusion within the disposal calculation is:
Cost x [A / (A+B)] where A is the MV of the part sold and B is the MV of the part retained.
Therefore, the cost for the part disposed in this example is £100,000 x [£80,000 / (£80,000
+ £30,000)] = £72,727
Chattels
Chattels are tangible, movable items. Examples include antiques such as vases or paintings.
There are special rules for chattels that were bought or sold for less than £6,000.
Bought for < £6,000 Bought for > £6,000
Sold for Sale proceeds deemed to be

Exempt from CGT
<£6,000 £6,000
Gain calculated as normal but
Sold for CGT computed in normal
gain limited to a maximum of
>£6,000 manner
5/3 x (gross proceeds - £6,000)
Share matching Rules (for individuals)
When an individual sells shares in a company, the calculation needs to identify which shares
were sold. The shares sold are matched with purchases in the following order:
1. Shares acquired on the same day.

2. Shares acquired in the next 30 days after the sale.
3. Shares in the share pool (or s104 pool or FA 85 pool)
The share pool contains details of the purchase and sale of shares in a particular company.
When shares are disposed of out of the share pool, the shares are disposed of at their
average cost.
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Reliefs – Principal Private Residence (PPR)
PPR relief is available when an individual sells a property that has been his main residence
at some stage.
The gain that is exempt is calculated as the gain x (period of occupation / total period of
ownership).
Occupation includes both actual occupation and deemed occupation.
“Deemed occupation” includes:
 The last 3 years of ownership (if it was actually occupied at some stage)
 Up to 3 years absence for any reason (if preceded and followed by actual occupation)
 Up to 4 years absence if working elsewhere in the UK (if preceded and followed by
actual occupation)
 Any period of absence if working abroad (if preceded and followed by actual
occupation)
Reliefs – Entrepreneurs’ Relief
Entrepreneurs’ relief reduces the CGT payable on certain qualifying business disposals.
The relief is:
 £1m of gains on qualifying business disposals will be reduced by 4/9.

 The balance (i.e. 5/9) will be taxed at the standard rate of 18%.
This means that the first £1m of gain is effectively taxed at 10% (5/9 x 18%)
 Any gains in excess of £1m are taxed at the normal rate of 18%.
Qualifying business disposals include:
 Businesses carried on by the individual (including partnership shares)

 Shares in an individual’s personal trading company (if the individual is an employee
of the company).
Reliefs – Rollover Relief
When a qualifying business asset is sold, any gain arising can be “rolled into” a replacement
qualifying asset. The gain is therefore deferred by reducing the base cost of the replacement
asset by the gain rolled over.
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Qualifying assets include:
 Land & buildings

 Goodwill
 Fixed plant & machinery
The replacement asset must be acquired between one year in advance of the disposal and 3
years after the disposal.
If the replacement asset is a “depreciating asset” (in effect, an asset with a life of ≤ 60
years) the gain cannot be rolled over. Instead, the gain will be deferred until the earlier of
the following:
 The date the replacement asset is sold.

 The date the replacement asset ceases to be used.
 10 years from the date of acquisition of the replacement asset.
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ACCA F6 Taxation UK
Chapter 17
Value Added Tax (VAT)
START
The Big Picture
VAT is an indirect tax which is ultimately borne by the final customer.
VAT occurs when a taxable person makes a taxable supply.
Taxable person: an individual or company that is or should be registered for VAT.
Taxable supply: sales and purchases of goods or services which are not VAT exempt or
outside the scope of VAT.
Input VAT Taxable person Output VAT
Input VAT: A taxable person pays input VAT on its purchases of goods or services.
Output VAT: A taxable person charges output VAT on its sales of goods or services.
At the end of each tax period (normally a 3 month period) the input and output VAT is
netted off and an excess of output VAT is paid to HMRC whilst an excess of input VAT is
recovered from HMRC.
Standard rated supplies: 17.5% VAT rate (temporary 15% VAT rate to 31 December 2009).
Most goods and services are standard rated.
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ExPress Notes
ACCA F6 Taxation UK
Zero rated supplies: 0% VAT rate (but importantly still within the scope of VAT so can claim
input VAT).
Examples of zero rated include:
 Children’s clothes
 Books & newspapers
 Non luxury food
Exempt supplies: no VAT is charged and input VAT cannot be reclaimed.
Examples of exempt supplies include:
 Land
 Financial services
 Education
VAT Registration Requirements
Compulsory registration is required when either:
1. The taxable supplies over the previous 12 months (or since trade commencement
date) exceed the registration limit (currently £68,000). HMRC must be notified within
30 days of the end of the month in which the registration limit is exceeded.
Registration begins from the end of the month after the month in which the limit was
exceeded.
or
2. The taxable supplies over the next 30 days alone are anticipated to exceed the
registration limit (currently £68,000). HMRC should be informed prior to the end of
the 30 days. Registration begins at the start of the 30 days.
Voluntary registration is possible. Advantages include being able to recover relevant input
VAT as well as providing an impression of a business being bigger than it really is.
Disadvantages include the increased administrative burden.
Pre-registration expenses
Input VAT on goods acquired for business purposes can be recovered if they are still within
inventory at date of registration. Given that they are in stock when the business registers for
VAT, output VAT will be charged when the goods are sold so it is only fair that input VAT
can be claimed (goods acquired more than 3 years prior to registration are excluded).
Input VAT on services provided in the 6 months prior to registration can be recovered.
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ExPress Notes
ACCA F6 Taxation UK
Tax point
The tax point is the official date of supply for VAT purposes.
For goods, the basic tax point is when the goods are made available to the customer.
For services, the basic tax point is when the service is performed.
The basic tax point is amended in the following situations:
1. Before the basic tax point – if an invoice is issued or payment is received before the
basic tax point the date of the invoice or the payment becomes the tax point.
2. After the basic tax point – if an invoice is issued within 14 days of the basic tax point
the date of the invoice becomes the tax point.
VAT relief for bad debts
If a taxable person makes a sale, output VAT is chargeable and will be payable to HMRC. If
the debt subsequently becomes a bad debt, the taxable person can obtain VAT bad debt
relief by in effect claiming the VAT on the bad debt as input VAT.
In order to qualify for VAT bad debt relief the debt must be >6 months old and be written
off in the seller’s accounts.
(end of ExPress Notes)
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ACCA Paper F6 (UK) : Notes

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ACCA Paper F6 (UK)

2. Income tax – an introduction 9

3. Income Tax – Employment Income 12

4. Income Tax – Trading Income 16

6. Trading Income – Basis Assessment 23

7. Trading Losses (For Sole Traders) 25

8. Trading Income - Partnerships 28

10. Investment Income 32

12. National Insurance Contributions 36

13. Corporation Tax 38

14. Chargeable Gains (For Companies) 44

15. Corporate Groups and Overseas Tax Issues 46

16. Capital Gains Tax (CGT) 49

17. Value Added Tax (VAT) 54

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The main taxes are:

 Income tax – payable by individuals

Income Tax – An Introduction

Income tax is a key area and will be examined.

The pro-forma income tax computation is as follows:

INCOME TAX COMPUTATION – 2009/10

Certain income is exempt from income tax including:

 Income from certain National Savings Products

Personal Allowances (PA)

The PA is deducted from an individual’s income to give taxable income.

Personal Age Allowances (PAA)

Individuals aged 65 – 74: 2009/10 PAA = £9,490

Individuals aged ≥ 75: 2009/10 PAA = £9,640

50% x (net income - £22,900)

Income Tax Liability and Income Tax Payable

The rate of income tax depends on the type of income.

Basic rate £1 to £37,400 20%

Higher rate £37,401 and above 40%

Income tax on Dividend income is either at 10% or 32.5%.

The summarised income tax rates are:

Other income Saving income * Dividend income

£1 to £37,400 20% 20% 10%

£37,401 and above 40% 40% 32.5%

Income Tax – Employment Income

The Big Picture

“Earnings” include salaries, wages, bonuses and benefits received by an individual.

Benefits are regularly tested at Paper F6.

Exempt benefits include:

 One mobile phone.

Assessable benefit – Living Accommodation

Assessable benefit – motor cars

List price when new x “relevant %”.

For petrol cars the % is calculated as follows:

CO2 emissions % (for petrol cars)

% x list price = 17% x £22,000 £3,740

Assessable benefit – private fuel

The benefit is calculated as follows:

“Relevant %” as calculated for the car benefit x “base figure”.

(“Relevant %” as calculated for the car benefit x “base figure”) =

17% x £16,900 = £2,873