NOW IN ITS TWENTY-SECOND EDITION TAXATION FINANCE ACT 2016 ALAN MELVILLE CHANmLOR OF tHS EXCHEQtTfi- ♦ 22ND ANNUAL EDITION ♦ ♦ OVER 250 WORKED EXAMPLES ♦ OVER 250 EXERCISES AND QUESTIONS ♦ ALWAYS LEARNING PEARSON Taxation Companion Website For open-access student resources specifically written to complement this textbook and support your learning, please visit www.pearsoned.co.uk/melville Lecturer Resources For password-protected online resources tailored to support the use of this textbook in teaching, please visit www.pearsoned.co.uk/melville PEARSON At Pearson, we have a simple mission: to help people make more of their lives through learning. We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning. 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PEARSON Harlow, England • London * New York • Boston • San Francisco • Toronto • Sydney • Auckland • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 1995 (print) Twenty-second edition published 2017 (print and electronic) © Pearson Professional Limited 1995,1996 (print) © Financial Times Professional Limited 1997,1998 (print) © Pearson Education Limited 1999, 2010 (print) © Pearson Education Limited 2011, 2017 (print and electronic) The right of Alan Melville to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. The print publication is protected by copyright. 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ISBN: 978-1-292-13910-4 (print) 978-1-292-13911-1 (PDF) 978-1-292-13913-5 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress 10 987654 3 21 20 19 18 17 16 Front cover image: © Getty Images Print edition printed and bound by Ashford Colour Press Ltd, Gosport NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION Contents Preface ix Annual payments 49 Acknowledgements x Gifts of shares or property to charity 49 Summary of tax data xi Payments which are tax reducers 50 Maintenance payments 50 Part 1 INCOME TAX AND NATIONAL Loans used to purchase a life annuity 51 INSURANCE Gifts of pre-eminent property to 1 Introduction to the UK tax system 3 the nation 51 UK taxes 3 Gift Aid 52 Sources of tax law 4 5 Income from property 56 The tax year 6 Definition of property income 56 Structure of HM Revenue and Customs 6 Basis of assessment and allowable Administration of the tax system 7 expenditure 57 Self Assessment 7 Capital expenditure 58 Appeals 11 Losses 59 Tax evasion 12 Lease premiums 60 Tax avoidance 12 "Rent-a-room" relief 63 The HMRC Charter 13 Furnished holiday lettings 63 2 Introduction to income tax 15 6 Income from savings and investments 68 Taxable persons 15 Interest received 68 Classification of income 16 Dividends received 70 Exempt income 17 Tax-efficient investments 71 Structure of an income tax computation 18 Individual Savings Accounts 71 Married couples and civil partners 19 Enterprise Investment Scheme 73 Rales of income tax for 2016-17 19 Venture Capital Trusts 74 Income taxed at source 21 Child Trust Funds 75 Savings income 22 Income from trusts and settlements 76 Dividend income 27 Miscellaneous income 79 3 Personal allowances 32 7 Income from employment (1) 82 Personal allowances for 2016-17 32 Employment and self-employment 82 The personal allowance 33 Basis of assessment 85 Blind person's allowance 36 Employment income 85 Tax reducers 36 Non-taxable employment income 86 Married couple's allowance 36 Deductible expenses 88 4 Payments and gifts eligible Payments made on tennination of for tax relief 43 employment 91 Payments and gifts deductible from The PAYE system 93 total income 43 Construction industry scheme 97 Eligible interest payments 48 Employee incentive schemes 98 v Contents 8 Income from employment (2) 103 Post-cessation trade relief 183 Benefits in kind 103 Transfer of a business to a company 183 Living accommodation 105 Losses on shares in unlisted trading Cars provided for private use 108 companies 183 Beneficial loans 112 Limit on income tax reliefs 184 9 Income from self-employment: 13 Income from self-employment: Computation of income 116 Partnerships 187 The badges of trade 116 Principles of partnership taxation 187 The calculation of trading profits 118 Notional profits and losses 190 Deductibility of expenditure 119 Change in partnership composition 191 Disallowed expenditure 119 Non-trading income 193 Allowable expenditure 122 Trading losses 194 Adjustments relating to income 124 14 Pension contributions 199 Trading income allowance 125 Registered pension schemes 199 Cash basis and simplified Tax relief for contributions expenses 126 by scheme members 201 10 Income from self-employment: Tax relief for contributions Basis periods 132 by employers 204 The current year basis 132 Annual allowance charge 206 Commencement of trade 133 Lifetime allowance charge 209 Cessation of trade 136 15 Payment of income tax, interest Change of accounting date 138 and penalties 214 Averaging of trading profits for Payment of income tax 214 farmers and creative artists 143 Late payment penalties 217 11 Income from self-employment: Interest on overdue income tax 218 Capital allowances 149 Interest on overpaid income tax 219 Eligible expenditure 149 Penalties 219 Chargeable periods 149 16 National Insurance contributions 223 Plant and machinery 150 Class 1 223 Capital allowances on plant and Class 1A 229 machinery 152 Class IB 229 Writing down allowance 153 Class 2 230 Annual investment allowance 156 Class 3 and 3A 230 First year allowance 15 8 Class 4 231 Balancing allowances and charges 161 Annual maximum contributions 232 Non-pooled assets 161 Allowances on cessation of trade 166 Review questions (Set A) 236 Miscellaneous capital allowances 167 Part 2 CAPITAL GAINS TAX 12 Income from self-employment: Trading losses 173 17 Introduction to capital gains tax 247 Relief for trading losses 173 Chargeable persons 247 Carry-forward trade loss relief 174 Chargeable assets 248 Trade loss relief against total income 176 Chargeable disposals 249 Early trade losses relief 179 Basis of assessment 250 Terminal trade loss relief 181 Rates of CGT 251 vi Contents Relief for capital losses 253 Part 3 CORPORATION TAX Relief for trading losses 255 23 Introduction to corporation tax 337 Administration of CGT 257 Scope of corporation tax 337 18 Computation of gains and losses 261 Accounting periods 338 Layout of a CGT computation 261 Taxable total profits 339 Disposal value 262 Trading income 340 Allowable expenditure 262 Income from property 345 Part disposals 264 Income from non-trading loan Assets with negligible value 266 relationships 345 Assets held on 31 March 1982 267 Dividends received 347 Relief for charitable donations 347 19 Chattels and wasting assets 271 Loan relationships 348 The chattels exemption 271 Long periods of account 352 Chattels disposed of at a loss 273 Research and development tax Part disposals of chattels 273 relief 354 Wasting chattels 276 Intangible fixed assets 355 Wasting assets 277 Leases 279 24 Corporate chargeable gains 359 Chargeable disposals and chargeable 20 Shares and securities 288 assets 359 The share matching rules 288 Basis of assessment 360 The Section 104 holding 290 Computation of gains and losses 360 Bonus issues 293 Indexation allowance 361 Rights issues 294 Assets held on 31 March 1982 364 Capital distributions 296 The rebasing election 367 Takeovers 298 Assets acquired before 6 April 1965 367 Gilts and qualifying corporate bonds 300 Disposals of shares or securities 368 21 Principal private residence 304 Disincorporation relief 376 Principal private residence 304 25 Computation and payment of Partial exemption 305 the corporation tax liability 381 Deemed residence 306 Corporation tax financial years 381 Letting relief 308 Rates of corporation tax 382 Business use 310 Due date of payment 383 22 CGT reliefs 313 Accounting for income lax deducted Damaged assets 313 at source 386 Destroyed assets 316 Shadow ACT 386 Replacement of business assets 317 Self Assessment 387 Gift of business assets 320 Interest on underpaid and overpaid Transfer of a business to a limited corporation tax 388 company 322 Penalties 390 Entrepreneurs' relief 323 Corporation tax rates prior to FY2015 392 Reinvestment into EIS shares 326 26 Corporation tax losses 398 Loans to traders 327 Relief for trading losses 398 Review questions (Set B) 330 Carry forward of trade loss relief 399 vii Contents Unrelieved charitable donations 400 30 Value added tax (2) 471 Trade loss relief against total profits 402 Accounting for VAT 471 Repayments of corporation tax 405 The tax point 472 Anti-avoidance legislation 407 Tax invoices 472 Choice of loss relief 407 Accounting records 473 Non-trading losses 408 Special schemes 474 Retail schemes 477 27 Close companies and investment Bad debts 478 companies 412 Non-deductible input tax 479 Close companies 412 Partial exemption 481 Definition of a close company 412 Administration of VAT 483 Exceptions 415 Penalties, surcharges and interest 485 Consequences of close company status 416 Close investment-holding companies 419 31 Inheritance tax 490 Companies with investment business 419 Chargeable transfers of value 490 Choice of business medium 420 Exempt transfers 492 Incorporation 425 Potentially exempt transfers 494 1HT payable on chargeable lifetime 28 Groups of companies and transfers 496 reconstructions 428 IHT payable on death 498 Related 51% group companies 428 Valuation 504 Transfer pricing 431 Business property relief 506 51% groups 431 Agricultural property relief 507 75% groups 432 Administration of IHT 507 Group relief 433 Transfer of chargeable assets within 32 Overseas aspects of taxation 511 a group 436 Residence and domicile 511 Capital losses 438 Income tax - general rules 514 Consortia 439 Double taxation relief 515 Company reconstructions 441 Income from employment 516 Trading income 518 Review questions (Set C) 444 Income from property and investments 519 Capital gains tax - general rules 520 Part 4 MISCELLANEOUS Inheritance tax - general rules 521 29 Value added tax (1) 453 Corporation tax - general rules 521 The principle of VAT 453 Controlled foreign companies 524 Taxable persons 454 Double taxation relief for companies 525 Taxable supplies 454 Diverted profits tax 529 Exempt supplies 456 Review questions (Set D) 532 Reduced rate supplies 457 Zero rate supplies 457 Part 5 ANSWERS The value of a supply 458 Imports and exports 461 Answers to exercises 541 Registration 463 593 Deregistration 468 Index 605 viii Preface The main aim of this book is to describe the UK taxation system in sufficient depth and with sufficient clarity to meet the needs of those undertaking a first course of study in taxation. The book has not been written with any specific syllabus in mind but should be useful to anyone who is studying taxation as part of a university or college course in accounting, finance or business studies. The book should also be of value to students who are preparing for the taxation examinations of the professional accounting bodies. A list of relevant examinations is given on the back cover of the book. Every effort has been made to explain the tax system as clearly as possible. There are numerous worked examples and each chapter (except Chapter 1) concludes with a set of exercises which thoroughly test the reader's grasp of the new topics introduced in that chapter. The book also contains four sets of review questions, drawn mainly from the past examination papers of the professional accounting bodies. The solutions to most of these exercises and questions are located at the back of the book but solutions to those exercises and questions marked with an asterisk (*) are provided in a separate Instructor's Manual. This twenty-second edition incorporates the provisions of Finance Act 2016, which is based upon the March 2016 Budget proposals. However, it is important to point out that the passage of this year's Finance Bill through Parliament has been delayed (because of the EU referendum) and, in consequence, the Finance Act may not receive Royal Assent until October. Although it is unlikely that there will be major amendments to the Finance Bill before it is enacted, the situation is fluid and readers are advised to monitor the progress of the Bill on website http://services.parliament.uk/bills/2016-17/finance.html. A further complication is the prospect of another Budget in the Autumn. A summary of this Budget (should it occur) together with any significant amendments to the current Finance Bill will appear in the "updates" section of the website which accompanies this book. The website address is www.pearsoned.co.uk/melville. Alan Melville June 2016 ix