Taxation: Finance Act 2017

626 Pages·2017·3.5 MB·English

by  Alan Melville

NOW IN ITS TWENTY-THIRD EDITION
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‘An extremely well written and comprehensive book which is not only an excellent fit with the
current learning outcomes in taxation but is very user friendly and well received by students.’ A TAXATION
Dr Justin Hof, University of Dundee
‘A highly comprehensive, well written book, full of helpful examples, and deservedly secure in its
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place as the UK’s leading tax textbook.’
Christopher Coles, University of Stirling
Reviews of the previous edition A FINANCE ACT 2017
Now in its 23rd annual edition, Melville’s Taxation continues to be the definitive market-leading text on UK T
ALAN MELVILLE
taxation. Featuring clean, uncluttered prose and a wealth of immensely practical examples, this text is a
comprehensive guide for students taking a first-level course in the subject.
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This edition brings the book completely up to date with the provisions of the Finance Act 2017, including:
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• Making Tax Digital (MTD) • The cash basis threshold
• Revised Budget timetable • Enabler penalties
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• Income tax in Scotland • Reform of corporate loss relief
• Cash basis for property businesses • Corporate interest expense restriction
• Employee shareholder status • IHT main residence nil-rate band
• Taxation of termination payments • Deemed domicile
This book will be of value to both undergraduate and professional students of business and accounting, TWENTY-
and will be particularly useful for students preparing for the following examinations: THIRD
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ICAEW Certificate Level, Principles of Taxation; ACCA Fundamentals Level, Taxation; ACCA Technician
Scheme, Foundations in Taxation; CIPFA Diploma Stage, Taxation; AAT Professional Diploma, Personal
Tax and Business Tax; ATT Certificates, Personal Taxation; Business Taxation and Accounting Principles;
AIA Foundation Level, Auditing and Taxation; IFA Level 4, Tax for SMEs.
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ALAN MELVILLE FCA BSc Cert Ed. is a best-selling author. Previously a Senior Lecturer at Nottingham E
Trent University, he has many years’ experience of teaching accounting and taxation. A
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Visit www.pearsoned.co.uk/melville for our suite of resources to accompany this textbook: L

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• For instructors: a complete solutions guide and PowerPoint slides for each chapter L
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◆ OVER 250 WORKED EXAMPLES ◆ OVER 250 EXERCISES AND QUESTIONS ◆
CVR_MELVI_23_00804.indd 1 06/07/2017 11:25
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Taxation
Finance Act 2017
Twenty-third edition
Alan Melville
FCA, BSc, Cert. Ed.
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First published 1995 (print)
Twenty-third edition published 2018 (print and electronic)
© Pearson Professional Limited 1995, 1996 (print)
© Financial Times Professional Limited 1997, 1998 (print)
© Pearson Education Limited 1999, 2010 (print)
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NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
Contents

Preface ix Eligible interest payments 52
Acknowledgements x Annual payments 53
Summary of tax data xi Gifts of shares or property to charity 53
Payments which are tax reducers 54
Maintenance payments 54
Part 1 Income Tax and National Insurance
Loans used to purchase a life annuity 55
1 Introduction to the UK tax system 3 Gifts of pre-eminent property to
UK taxes 3 the nation 55
Sources of tax law 4 Gift Aid 56
The tax year 6
5 Income from property 60
Structure of HM Revenue and Customs 6
Definition of property income 60
Administration of the tax system 7
Basis of assessment and allowable
Self Assessment 7
expenditure 61
Appeals 11
Capital expenditure 62
Tax evasion 12
Losses 64
Tax avoidance 12
Lease premiums 65
Making Tax Digital 14
"Rent-a-room" relief 67
The HMRC Charter 14
Furnished holiday lettings 67
2 Introduction to income tax 16
6 Income from savings and investments 72
Taxable persons 16
Interest received 72
Classification of income 17
Dividends received 74
Exempt income 18
Tax-efficient investments 74
Structure of an income tax computation 19
Individual Savings Accounts 75
Married couples and civil partners 20
Enterprise Investment Scheme 77
Rates of income tax for 2017-18 20
Venture Capital Trusts 78
Income taxed at source 22
Child Trust Funds 79
Savings income 23
Income from trusts and settlements 80
Dividend income 30
Miscellaneous income 83
3 Personal allowances 36
7 Income from employment (1) 86
Personal allowances for 2017-18 36
Employment and self-employment 86
The personal allowance 37
Basis of assessment 89
Blind person's allowance 40
Employment income 89
Tax reducers 40
Non-taxable employment income 90
Married couple's allowance 40
Deductible expenses 92
4 Payments and gifts eligible Payments made on termination of
for tax relief 47 employment 95
Payments and gifts deductible from The PAYE system 97
total income 47 Construction industry scheme 101
v
Contents
Employee incentive schemes 102 Early trade losses relief 183
Terminal trade loss relief 185
8 Income from employment (2) 107
Post-cessation trade relief 187
Benefits in kind 107
Transfer of a business to a company 187
Living accommodation 109
Losses on shares in unlisted trading
Cars provided for private use 112
companies 187
Beneficial loans 116
Limit on income tax reliefs 188
Salary sacrifice 118
13 Income from self-employment:
9 Income from self-employment:
Partnerships 191
Computation of income 120
Principles of partnership taxation 191
The badges of trade 120
Notional profits and losses 194
The calculation of trading profits 122
Change in partnership composition 195
Deductibility of expenditure 123
Non-trading income 197
Disallowed expenditure 123
Trading losses 198
Allowable expenditure 126
Adjustments relating to income 128 14 Pension contributions 203
Trading income allowance 129 Registered pension schemes 203
Cash basis and simplified Tax relief for contributions
expenses 130 by scheme members 205
Tax relief for contributions
10 Income from self-employment:
by employers 208
Basis periods 136
Annual allowance charge 210
The current year basis 136
Lifetime allowance charge 213
Commencement of trade 137
Cessation of trade 140 15 Payment of income tax, interest
Change of accounting date 142 and penalties 218
Averaging of trading profits for Payment of income tax 218
farmers and creative artists 147 Late payment penalties 221
Interest on overdue income tax 222
11 Income from self-employment:
Interest on overpaid income tax 223
Capital allowances 153
Penalties 223
Eligible expenditure 153
Chargeable periods 153 16 National Insurance contributions 227
Plant and machinery 154 Class 1 227
Capital allowances on plant and Class 1A 233
machinery 156 Class 1B 233
Writing down allowance 157 Class 2 234
Annual investment allowance 160 Class 3 234
First year allowance 163 Class 4 235
Balancing allowances and charges 165 Annual maximum contributions 236
Non-pooled assets 165
Review questions (Set A) 240
Allowances on cessation of trade 170
Miscellaneous capital allowances 171
Part 2 Capital Gains Tax
12 Income from self-employment:
Trading losses 177 17 Introduction to capital gains tax 251
Relief for trading losses 177 Chargeable persons 251
Carry-forward trade loss relief 178 Chargeable assets 252
Trade loss relief against total income 180 Chargeable disposals 253
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Contents

Basis of assessment 254
Part 3 Corporation Tax
Rates of CGT 255
Relief for capital losses 257 23 Introduction to corporation tax 341
Relief for trading losses 259 Scope of corporation tax 341
Administration of CGT 261 Accounting periods 342
Taxable total profits 343
18 Computation of gains and losses 265
Trading income 344
Layout of a CGT computation 265
Income from property 349
Disposal value 266
Income from non-trading loan
Allowable expenditure 266
relationships 349
Part disposals 268
Dividends received 351
Assets with negligible value 270
Relief for charitable donations 351
Assets held on 31 March 1982 271
Loan relationships 352
19 Chattels and wasting assets 275 Long periods of account 356
The chattels exemption 275 Research and development tax
Chattels disposed of at a loss 277 relief 358
Part disposals of chattels 277 Intangible fixed assets 359
Wasting chattels 280
24 Corporate chargeable gains 363
Wasting assets 281
Chargeable disposals and chargeable
Leases 283
assets 363
20 Shares and securities 292 Basis of assessment 364
The share matching rules 292 Computation of gains and losses 364
The Section 104 holding 294 Indexation allowance 365
Bonus issues 296 Assets held on 31 March 1982 368
Rights issues 298 The rebasing election 371
Capital distributions 300 Assets acquired before 6 April 1965 371
Takeovers 302 Disposals of shares or securities 372
Gilts and qualifying corporate bonds 304 Disincorporation relief 380
21 Principal private residence 308 25 Computation and payment of
Principal private residence 308 the corporation tax liability 385
Partial exemption 309 Corporation tax financial years 385
Deemed residence 310 Rates of corporation tax 386
Letting relief 312 Due date of payment 387
Business use 314 Accounting for income tax deducted
at source 390
22 CGT reliefs 317
Shadow ACT 390
Damaged assets 317
Self Assessment 391
Destroyed assets 320
Interest on underpaid and overpaid
Replacement of business assets 321
corporation tax 392
Gift of business assets 324
Penalties 394
Transfer of a business to a limited
company 326 26 Corporation tax losses 398
Entrepreneurs' relief 327 Relief for trading losses (existing
Reinvestment into EIS shares 330 legislation) 398
Loans to traders 331 Carry forward of trade loss relief 399
Unrelieved charitable donations 400
Review questions (Set B) 334
vii
Contents
Trade loss relief against total profits 402 30 Value added tax (2) 471
Repayments of corporation tax 405 Accounting for VAT 471
Anti-avoidance legislation 407 The tax point 472
Choice of loss relief 407 Tax invoices 472
Proposed reforms to carry forward loss Accounting records 473
relief 408 Special schemes 474
Non-trading losses 409 Retail schemes 477
Bad debts 478
27 Close companies and investment
Non-deductible input tax 479
companies 412
Partial exemption 481
Close companies 412
Administration of VAT 483
Definition of a close company 412
Penalties, surcharges and interest 485
Exceptions 415
Consequences of close company status 416 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
IHT 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
51% groups 430
Business property relief 506
Transfer pricing 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
Proposed restriction on interest relief 441 Income from employment 516
Company reconstructions 441 Trading income 518
Income from property and investments 519
Review questions (Set C) 444
Capital gains tax - general rules 520
Inheritance tax - general rules 521
Part 4 Miscellaneous Corporation tax - general rules 521
Controlled foreign companies 524
29 Value added tax (1) 453
Double taxation relief for companies 525
The principle of VAT 453
Diverted profits tax 529
Taxable persons 454
Taxable supplies 454 Review questions (Set D) 532
Exempt supplies 456
Reduced rate supplies 457 Part 5 Answers
Zero rate supplies 457
The value of a supply 458 Answers to exercises 541
Imports and exports 460 Answers to review questions 593
Registration 463
Index 605
Deregistration 468

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 i n 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 w ith 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 sol utions 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-third edition includes the provisions of Finance Act 2017 , which is based
upon Finance (No. 2) Bill 2017. This Bill was fast -tracked through Parliament before the
June 2017 general election and omitted many of the proposals made in the March 2017
Budget. The remaining Budget proposals are explained in the relevant chapters of this
book, but it is made abundantly clear that these are merely proposals and have not yet been
enacted. Some of the more significant areas affected are:
• The timetable for the Making Tax Digital (MTD) project (Chapte r1)
• A planned reduction in the dividend allowance (Chapter 2)
• The property and trading income allowances (Chapters 5 and 9)
• T he cash basis for property income (Chapter 5)
• Corporation tax loss reliefs (Chapter 26)
• C orporate interest relief restrictions (Chapter 28)
• The deemed domicile rules (Chapter 32).
The Government has stated that there will be a Summer Finance Bill but (at the time of
writing) it is not known which measures will be included in this Bill and whether the
implementation date of any of them will be delayed. An analysis of the Summer Finance
Bill will be made available as soon as possible on the website which accompanies this
book. The website address is www.pearsoned.co.uk/melville.
Alan Melville
June 2017
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