PTX Personal Taxation Introduction. Tax: 3 Rules of Thumb 1. If you increase your wealth, expect HMRC to tax it 2. Claim all possible tax deductions 3.

PTX Personal Taxation

Introduction

Tax: 3 Rules of Thumb

1. If you increase your wealth, expect HMRC to tax it

2. Claim all possible tax deductions

3. Disclose all taxable income (to avoid problems later)

2

Objectives

To be able to identify:When tax years start and finishThe deadline for submitting a tax returnDeadlines for paying taxWhat basis should be used to assess different types of incomeIncome which is exempt from Income TaxHow long records must be retainedResponsibilities of a tax practitioner

3

Tax Year for Income Tax and CGT

Tax year 2012/2013 starts on 6th April Governed by Finance Act 2012

4

Tax Return and Payment

Form SA100 Supplementary pages Submit by

31/10/13 (paper) 31/1/14 (on line)

Payment on account 31/1/13 31/7/13

Final (balancing) payment 31/1/14

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Types of Income

Type of Income Basis of Assessment

Property Income (Rent) Accruals

Trading Income Accounting year which ends in 2012/13

Employment/pension Income Receipts

Savings and Investment Income Receipts

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Tax Computation

See tax data and pro-forma Personal Allowance Tax Bands:

Non-savings (General) Savings Dividends

7

Exempt Income

ISAs NS&I Savings Certificates (not savings

accounts) Prizes (eg. Premium Bonds) Damages

8

Record-keeping

Keep to: 31/1/15

Filing deadline + 1 year 31/1/19 if there is trading/property income

Filing deadline + 5 years

Sufficient to substantiate the information provided to HMRC

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Duties and Responsibilities of a Tax Practitioner

Put forward the best position in favour of a client or employer

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ETHICS QUIZ

11

Q1

When is a tax practitioner allowed to disclose information about a client without their

authority

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Q2

If an accountant suspects money laundering, to whom should he/she report it

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Q3

Describe the types of communication with which an accountant should not be associated

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ANSWERS

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Q1

If there is legal, regulatory or professional duty

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Q2

Money Laundering Reporting Officer, Serious Organised Crime Agency

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Q3

False, misleading, reckless, omitting/obscuring information

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PTX Personal Taxation

Savings & Investments(Interest & dividends)

Objectives

To be able to:Explain the basis on which investment income is taxedIdentify income which is not taxed at sourceIdentify income which is exempt from taxGross-up income and calculate the tax dueExplain record-keeping requirements

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Taxation of Investment Income

Receipts basis (not accrual)

21

Tax at source

Most interest has tax deducted at source Basic rate Not

NS&I accounts and income bonds Gilts

Dividends are “deemed” to have tax deducted at source Not repayable

Gross (assessable) income: Questions

Net savings income = £160 20% tax already deducted Gross = ???

Net dividend income = £270 10% tax already deducted Gross = ???

Tax-free Income

These do not need to be reported on tax returns: ISAs (£11,280 per year) National Savings Certificates Premium Bonds

Record-keeping: Question

What records might you keep relating to investment income?

Gross (assessable) income: Answers

Net savings income = £160 20% tax already deducted Gross = £200

Net dividend income = £270 10% tax already deducted Gross = £300

Record-keeping: Answer

What records might you keep relating to investment income?

Tax deduction certificates Dividend vouchers Account details Working papers

PTX Personal Taxation

Employment(Salaries, Bonuses, Pensions)

Objectives

To be able to:Decide whether a taxpayer is employed or self-employedDecide when employment income is taxableAssess the taxable amount on a variety of benefits in kindIdentify expenses which are allowable in calculating taxable incomeExplain record-keeping requirements

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Income received + benefits in kind - allowable deductions

Employment Income

Taxation of Employment Income

Receipts basis (not accrual)

31

Indicators of Self-Employment (Contract for Services)

Can employ substitute decide how/when/where to work choose work hours financial risk provide own equipment work for several people/organisations

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Taxable Benefits

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General Rule (P11D employees)

Cash cost to employer

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Employee contribution

Reduces benefit (except fuel)

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List price – employee contribution x scale charge %- employee contribution

to running cost

Company Car Benefit

Below 100g/km: see data sheet100g/km: 11%

+1% per 5g/km

Max 35%Diesel: +3%

Scale Charge %

£20,200 x scale charge %

Ignore part contribution

Fuel Benefit

Car & fuel benefits are time-apportioned if the car is not available for the whole tax year

Timing

Pool Car

Not a benefit if: Private use is incidental Used by several employees Not normally kept at employee’s home

40

Company Van

No benefit if insignificant private use £3,000 for private use £550 for fuel for private use

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Beneficial Loan

Loan x (Official interest – Actual interest) No benefit if total loans <£5,000 If loan written off:

Benefit = Amount of loan

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Accomodation

Annual value (or rent paid by employer if higher)

+(Cost - £75,000) x Official interest + Cleaning etc + Assets x 20% Time apportioned

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Accomodation

Exempt for Representative occupier (Caretaker) Customary (Vicar) Security

In these cases: Running expenses limited to 10% of earnings

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Gift/Loan of Asset

Gift Benefit = Market value

Loan Benefit = 20% of value when first provided

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Gift of asset previously loaned

Higher of: market value when transferred market value when first provided

less benefits already assessed (less employee contribution)

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Tax-free benefits

47

Tax-free benefits

Money: First £30,000 redundancy (not strictly a benefit)

£8,000 relocation £5,000 suggestion scheme, long service

award (20yrs, £50/yr) £5 per night incidental expenses (£10

overseas) £2/week for work at home

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Tax-free benefits

employers pension contribution one mobile phone + calls Childcare:

workplace creche £55 approved childcare

Food: staff canteen 15p/day luncheon vouchers Staff entertainments (£150pa per person, events

above this disallowed)49

Tax-free benefits

Transport: use of bicycle company bus workplace parking

Other: sports facilities counselling eye checks certain state benefits

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Wholly, exclusively, necessarily in performance of duties

Allowable deductions

Allowable deductions

Professional subscriptions Approved Mileage Allowance Payments Reimbursed subsistence and customer

entertaining P60 pay shown after:

Pension contributions Payroll giving

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Home to normal workplace travel

Not Allowable

Dispensation

Reimbursed expenses not need to be entered on the tax return

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Records to keep

P60 P11D P45 Receipts Tax return

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PTX Personal Taxation

Exempt Income Personal Allowance Pensions, Gift Aid

Administration

Objectives

To be able to:Identify income which is exempt from Income TaxDetermine a taxpayer’s personal allowanceCompute Income Tax payable, making appropriate adjustments for:

Personal Pensions Gift Aid

Determine payments on accountDetermine penalties due for lateness and error

57

Tax-free Income

These do not need to be reported on tax returns: ISAs (£11,280 per year) National Savings Certificates Premium Bonds

Tax-free benefits

Money: First £30,000 redundancy (not strictly a benefit)

£8,000 relocation £5,000 suggestion scheme, long service

award (20yrs, £50/yr) £5 per night incidental expenses (£10

overseas) £2/week for work at home

59

Tax-free benefits

employers pension contribution one mobile phone + calls Childcare:

workplace creche £55 approved childcare

Food and entertainment: staff canteen 15p/day luncheon vouchers Staff entertainments (£150pa per person, events

above this disallowed)60

Tax-free benefits

Transport: use of bicycle company bus workplace parking

Other: sports facilities counselling eye checks certain state benefits

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Other Exempt Income

Income from scholarships Disability pensions Some social security benefits (eg. housing

benefit) Most commissions, discounts, cashbacks

received by retail customers Damages or compensation Home-generated electricity

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Personal Allowance (High Income)

• If If adjusted net incomeadjusted net income is above £100,000 is above £100,000• Reduce personal allowance byReduce personal allowance by• 50% of the difference• until the allowance = £0

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Adjusted net income

Income less: Gross gift aid and personal pension

contributions

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Personal Allowance (Age-related)

• Allowance:Allowance:• £10,500 65-74£10,500 65-74• £10,660 75+£10,660 75+

• If If adjusted net incomeadjusted net income is above: £25,400 is above: £25,400• Reduce personal allowance byReduce personal allowance by• 50% of the difference• until the allowance = Basic Allowance

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Basic rate taxpayer: No Action

Gift Aid & Pension Contributions

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Higher rate taxpayer:

Increase basic rate band by gross amount

Gift Aid & Pension Contributions

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50% x Previous year’s tax (less deducted at source)

31/Jan 31/July

Payments on Account

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Late Return

Penalties: £100 after 31/Jan £10/day after 3 months (max £900) +5% (min £300) after 6 months and again after 6 months

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Late Payment

1. InterestFrom due date to day before payment

2. Penalties:

5% of tax if >30 days

+ 5% on 31/July

+ 5% if 12 months late

Balancing payment only

Incorrect Returns

Tax due multiplied by: 0-30% Lack of reasonable care 20-70% Deliberate 30-100% Deliberate and concealed

Limited to half of maximum if unprompted

71

PTX Personal Taxation

Income From Property(Rental Income)

Tax Returns

Objectives

To be able to:Identify allowable expensesCalculate taxable property incomeTreat property losses correctlyMake suitable elections for Rent-a-Room reliefCalculate taxable income from furnished holiday letsPrepare tax return supplements for

Employment Income Property Income

73

Income & Expense

Expenses

The general rules for expenditure to be allowable:

1.Revenue, not capital. ie. Not improvements (central heating)

2.Wholly and exclusively for purpose of lettings

Allowable Expenses

Irrecoverable rent (NOT deducted from income)

Expenditure before a property is rented out But not renovation

Expenditure in void periods

Wear & Tear Allowance

Furnished lettings 10% (rent received - rates - council tax)

Or Renewals Basis

Non-allowable Expense

Depreciation

Property loss

Offset against:

1.Other properties in the same tax year

2.Future property income

Of same type

Rent a Room and Other Rules

Rent a Room Relief

£4,250 /year Example

If you rent out part of your own home for £5,000 a year, taxable income is:

£5,000 less expenses

OR £5,000 less £4,250 Rent a Room Relief

See p2.9

Rent a Room Relief: Question

If you rent out part of your own home for £6,000 a year, incurring expenses of £3,200, what is your taxable income?

Holiday Lets

Different rules:Capital allowances (furniture, equipment)Pensionable

Holiday Lets

View to making a profit Max 31 continuous days per tenant Actually let for 105 days Available for twice this (210 days)

Question

What records might you keep relating to property income?

Income Tax Returns

Employment Property

Rent a Room Relief: Answer

If you rent out part of your own home for £6,000 a year, incurring expenses of £3,200, what is your taxable income?

£6,000-£3,200 = £2,800 Or elect for rent a room relief

£6,000-£4,250=£1,750

Answer

What records might you keep relating to property income?Accounting recordscash booksbank statementsrental agreementsinvoices for expensesworking paperscopies of tax returns

PTX Personal Taxation

Capital Gains Tax

Objectives

To be able to:Identify chargeable persons, assets, disposalsCalculate gain on disposalCalculate CGT liabilityCalculate gains on

Part-disposalsChattelsShares

90

Objectives

To be able to:Identify exempt assetsCalculate PPR reliefComplete CGT pages of Tax ReturnExplain record-keeping requirements

91

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CHARGEABLE DISPOSALS

92

93

Chargeable Disposals of Assets

Sell Give away Lose Destroy

93

94

Exempt Gains

Death Spouse/civil partner

Transfer at original cost

95

Connected person

Transfer at no less than market value

Connected person

Ancestors Siblings lineal descendants

(self and spouse)

96

97

GAIN ON DISPOSAL

97

98

Calculate Gain

Proceeds

- Costs of disposal

=Net proceeds

- Original cost (+ incidental costs)

- Improvements

= Gain

99

CGT CALCULATION

99

100

Calculate CGT

Total gains for year

- Annual exemption

= Gains subject to CGT

Gains @ 18%

+ Gains @ 28%

= CGT

101

Calculate CGT with losses

Total gains for year

- Losses for year

- Annual exemption

- Losses b/f

= Gains subject to CGT

Gains @ 18%

+ Gains @ 28%

= CGT

CGT

Above income in the tax bands Payable 31 January

102

103

Capital losses

Set against gains for year May lose exempt amount

Then carry forward against future gains

104

PART DISPOSALS & CHATTELS

104

105

Part-disposal

Cost =

Whole cost x Proceeds

Proceeds + value of remainder

105

106

Chattels

Bought & sold for <£6,000Exempt

Bought for >£6,000 sold for <£6,000Proceeds assumed to be £6,000

OtherwiseGain limited to

5/3(Proceeds - £6,000)

Wasting Chattel

Exempt Expected life less than 50 years

107

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SHARES

108

109

Shares: match sale to purchase

1. Same day

2. Next 30 days

3. 1985 pool

Shares: question

Against which acquisitions will each disposal be matched?

 Date Number of shares

5 June 2010 acquisition 1,000

17 May 2011 acquisition 500

17 May 2011 disposal 800

9 June 2011 acquisition 200

13 March 2013 disposal 2,000

28 March 2013 acquisition 1,750 

110

Shares

Bonus Rights issue

111

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EXEMPT ASSETS, PPR

112

113

Exempt assets

Cars Gilts

PPR Wasting chattels Chattels bought and sold for £6,000 max

114

PPR Exempt Periods

Last 3 years PLUS (if PPR before and after):

Any time employed abroad 4 years due to UK employment 3 years for any other reason

115

Letting relief

Owner’s residence, let in part or for part of the time

Lower of Gain related to let % (after allowing for

deemed occupation) PPR exemption £40,000

116

CGT TAX RETURN & RECORDS

116

Records

Keep 1 year after online filing deadline

117

Records: Question

What records should you keep for capital gains

118

Shares: answer

119

Purchases Pool17/05/2011 13/03/2013

05/06/2010 1,000 1,00017/05/2011 500 (500) 0 Same day09/06/2011 200 (200) 0 Next 30 days28/03/2013 1,750 (1,750) 0 Next 30 days

Sales from Pool (100) (250) (350)(800) (2,000) 650

Sales

Records: Answer

purchase and sale documents Valuations schedules of purchase and disposal

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