Taxation Finance Act 2022

626 Pages·28·14.834 MB·English

Taxation
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Taxation
Finance Act 2022
Twenty-eighth edition
Alan Melville
FCA, BSc, Cert. Ed.
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PEARSON EDUCATION LIMITED
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First published 1995 (print)
Twenty-eighth edition published 2023 (print and electronic)
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NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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Contents

Preface ix Eligible interest payments 55
Acknowledgements x Annual payments 56
Summary of tax data xi Gifts of shares or property to charity 56
Payments which are tax reducers 57
Part 1 Income Tax and National Insurance Maintenance payments 57
Loans used to purchase a life annuity 58
1 Introduction to the UK tax system 3 Gifts of pre-eminent property to
UK taxes 3 the nation 58
Sources of tax law 4 Gift Aid 59
The tax year 6
5 Income from property 63
Structure of HM Revenue and Customs 6
Definition of property income 63
Administration of the tax system 7
Basis of assessment and allowable
Self Assessment 7
expenditure 64
Appeals 11
Capital expenditure 65
Tax evasion and tax avoidance 12
Losses 67
Making Tax Digital for income tax 14
Lease premiums 68
The HMRC Charter 15
"Rent-a-room" relief 70
2 Introduction to income tax 17 Furnished holiday lettings (FHL) 70
Taxable persons 17
6 Income from savings and investments 75
Classification of income 18
Interest received 75
Exempt income 19
Dividends received 77
Structure of an income tax computation 20
Tax-efficient investments 77
Married couples and civil partners 21
Individual Savings Accounts 78
Rates of income tax for 2022-23 21
Enterprise Investment Scheme 80
Income taxed at source 24
Venture Capital Trusts 81
Savings income 25
Child Trust Funds 82
Dividend income 32
Income from trusts and settlements 83
Allocation of the personal allowance 35
Miscellaneous income 86
3 Personal allowances 39
7 Income from employment (1) 89
Personal allowances for 2022-23 39
Employment and self-employment 89
The personal allowance (PA) 40
Basis of assessment 92
Blind person's allowance (BPA) 43
Employment income 92
Tax reducers 43
Non-taxable employment income 93
Married couple's allowance (MCA) 43
Deductible expenses 95
4 Payments and gifts eligible Termination payments 98
for tax relief 50 The PAYE system 100
Payments and gifts deductible from Construction industry scheme 104
total income 50 Employee incentive schemes 105
v
Contents
8 Income from employment (2) 110 Temporary extension of s64 relief 189
Benefits in kind 110 Early trade losses relief 190
Living accommodation 112 Terminal trade loss relief 192
Cars provided for private use 115 Post-cessation trade relief 194
Beneficial loans 119 Transfer of a business to a company 194
Salary sacrifice 121 Losses on shares in unlisted trading
companies 194
9 Income from self-employment:
Limit on income tax reliefs 195
Computation of income 123
The badges of trade 123 13 Income from self-employment:
The calculation of trading profits 125 Partnerships 198
Deductibility of expenditure 126 Principles of partnership taxation 198
Disallowed expenditure 126 Notional profits and losses 201
Allowable expenditure 129 Change in partnership composition 202
Adjustments relating to income 131 Non-trading income 204
Trading income allowance 132 Trading losses 205
Cash basis and simplified expenses 133
14 Pension contributions 210
10 Income from self-employment: Registered pension schemes 210
Basis periods 139 Tax relief for contributions
The current year basis 139 by scheme members 212
Commencement of trade 140 Tax relief for contributions
Cessation of trade 143 by employers 215
Change of accounting date 145 Annual allowance charge 217
Averaging of trading profits for Lifetime allowance charge 220
farmers and creative artists 150
15 Payment of income tax, interest
Basis period reform 153
and penalties 225
11 Income from self-employment: Payment of income tax 225
Capital allowances 160 Late payment penalties 228
Eligible expenditure 160 Interest on overdue income tax 229
Chargeable periods 160 Interest on overpaid income tax 230
Plant and machinery 161 Penalties 231
Capital allowances on plant and Reformed late filing and late
machinery 163 payment penalties 233
Writing down allowance (WDA) 164 16 National Insurance contributions 236
Annual investment allowance (AIA) 167 Class 1 236
First year allowance (FYA) 170 Class 1A and Class 1B 242
Balancing allowances and charges 172 Class 2 and Class 3 243
Non-pooled assets 172 Class 4 244
Allowances on cessation of trade 176 Annual maximum contributions 245
Structures and buildings allowances 177
Review questions (Set A) 249
Miscellaneous capital allowances 178
12 Income from self-employment: Part 2 Capital Gains Tax
Trading losses 183
Relief for trading losses 183 17 Introduction to capital gains tax 259
Carry-forward trade loss relief 184 Chargeable persons 259
Trade loss relief against total income 186 Chargeable assets 260
vi
Contents

Chargeable disposals 261
Part 3 Corporation Tax
Basis of assessment 262
Rates of CGT 263 23 Introduction to corporation tax 347
Relief for capital losses 265
Scope of corporation tax 347
Relief for trading losses 267
Accounting periods 348
Administration of CGT 269
Taxable total profits 349
18 Computation of gains and losses 273 Trading income 350
Layout of a CGT computation 273 Income from property 355
Disposal value 274 Income from non-trading loan
Allowable expenditure 274 relationships 355
Part disposals 276 Dividends received 357
Assets with negligible value 278 Relief for charitable donations 357
Assets held on 31 March 1982 279 Loan relationships 358
Long periods of account 362
19 Chattels and wasting assets 282 Research and development tax relief 364
The chattels exemption 282
Intangible fixed assets 365
Chattels disposed of at a loss 284
Part disposals of chattels 284 24 Corporate chargeable gains 369
Wasting chattels 287 Chargeable disposals and
Wasting assets 288 chargeable assets 369
Leases 289 Basis of assessment 370
Computation of gains and losses 370
20 Shares and securities 298
Indexation allowance 371
The share matching rules 298
Assets held on 31 March 1982 374
The Section 104 holding 300
Disposals of shares or securities 375
Bonus issues 302
Rights issues 304 25 Computation and payment of
Capital distributions 306 the corporation tax liability 386
Takeovers 308 Corporation tax financial years 386
Gilts and qualifying corporate bonds 310 Rates of corporation tax 387
Due date of payment 388
21 Principal private residence 314
Interest on underpaid and overpaid
Principal private residence 314
corporation tax 391
Partial exemption 315
Self Assessment 393
Deemed residence 316
Penalties 394
Letting relief 318
Rates of corporation tax as from
Business use 320
FY2023 395
22 CGT reliefs 323
26 Corporation tax losses 401
Damaged assets 323
Relief for trading losses 401
Destroyed assets 326
Carry forward of trade loss relief 402
Replacement of business assets 327
Unrelieved qualifying charitable
Gift of business assets 330
donations 404
Transfer of a business to a company 332
Trade loss relief against total profits 405
Business asset disposal relief 333
Temporary extension of trade loss
Reinvestment into EIS shares 336
relief against total profits 406
Loans to traders 337
Repayments of corporation tax 409
Review questions (Set B) 340 Anti-avoidance legislation 410
vii
Contents
Choice of loss relief 411 The tax point 474
Non-trading losses 411 Tax invoices 474
Restriction on deduction of Accounting records 475
carried-forward losses 412 Special schemes 476
Retail schemes 479
27 Close companies and investment
Bad debts 480
companies 415
Non-deductible input tax 481
Close companies 415
Partial exemption 483
Definition of a close company 415
Administration of VAT 485
Exceptions 418
Penalties, surcharges and interest 487
Consequences of close company status 419
Companies with investment business 422 31 Inheritance tax 492
Choice of business medium 423 Transfers of value 492
Incorporation 427 Exempt transfers 494
Potentially exempt transfers (PETs) 496
28 Groups of companies and
IHT payable on chargeable lifetime
reconstructions 430
transfers 498
Related 51% group companies 430
IHT payable on death 500
Group payment arrangements 433
Valuation 506
Transfer pricing 433
Business property relief 508
75% groups 434
Agricultural property relief 509
Group relief 435
Administration of IHT 509
Transfer of chargeable assets within
a group 438 32 Overseas aspects of taxation 513
Capital losses 440 Residence and domicile 513
Consortia 441 Income tax - general rules 516
Corporate interest restriction 443 Double taxation relief (DTR) 517
Company reconstructions 443 Income from employment 518
Trading income 520
Review questions (Set C) 446
Income from property and investments 521
Capital gains tax - general rules 521
Part 4 Miscellaneous
Inheritance tax - general rules 522
Corporation tax - general rules 523
29 Value added tax (1) 455
Controlled foreign companies (CFCs) 525
The principle of VAT 455
Transfer pricing 526
Taxable persons 456
Double taxation relief for companies 526
Taxable supplies 456
Diverted profits tax 529
Exempt supplies 458
Digital services tax 530
Reduced rate supplies 459
Zero rate supplies 459 Review questions (Set D) 533
The value of a supply 460
Imports and exports 462 Part 5 Answers
Registration 465
Deregistration 470 Answers to exercises 541
Answers to review questions 593
30 Value added tax (2) 473
Accounting for VAT 473 Index 605

viii
Preface

The main aim of this textbook 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-eighth edition is up-to-date in accordance with the provisions of Finance Act
2022, which is based upon the October 2021 Budget proposals. The book also takes into
account the Spring Statement which took place in March 2022.
Alan Melville
May 2022
ix