PTAX 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 finish The deadline for submitting a tax return Deadlines for paying tax What basis should be used to assess different types of income Income which is exempt from Income Tax How long records must be retained Responsibilities of a tax practitioner 3

Tax Year for Income Tax and CGT Tax year 2013/2014 starts on 6 th April Governed by Finance Act

Tax Return and Payment Form SA100 Supplementary pages Submit by 31/10/14 (paper) 31/1/15 (on line) Payment on account 31/1/14 31/7/14 Final (balancing) payment 31/1/15 5

Types of Income Type of IncomeBasis of Assessment Property Income (Rent)Accruals Trading IncomeAccounting year which ends in 2013/14 Employment/pension IncomeReceipts Savings and Investment IncomeReceipts 6

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: 31/1/16 Filing deadline + 1 year 31/1/20 if there is trading/property income Filing deadline + 5 years Sufficient to substantiate the information provided to HMRC 9

Duties and Responsibilities of a Tax Practitioner Put forward the best position in favour of a client or employer 10

ETHICS QUIZ 11

Q1 When is a tax practitioner allowed to disclose information about a client without their authority 12

Q2 If an accountant suspects money laundering, to whom should he/she report it 13

Q3 Describe the types of communication with which an accountant should not be associated 14

ANSWERS 15

Q1 If there is legal, regulatory or professional duty 16

Q2 Money Laundering Reporting Officer, Serious Organised Crime Agency 17

Q3 False, misleading, reckless, omitting/obscuring information 18

PTAX Personal Taxation Savings & Investments (Interest & dividends)

Objectives To be able to: Explain the basis on which investment income is taxed Identify income which is not taxed at source Identify income which is exempt from tax Gross-up income and calculate the tax due Explain record-keeping requirements 20

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 (£11,520 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

PTAX Personal Taxation Income From Property (Rental Income) Tax Returns

Objectives To be able to: Identify allowable expenses Calculate taxable property income Treat property losses correctly Make suitable elections for Rent-a-Room relief Calculate taxable income from furnished holiday lets Prepare tax return supplements for Employment Income Property Income 29

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)

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?

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 records cash books bank statements rental agreements invoices for expenses working papers copies of tax returns

PTAX Personal Taxation Employment (Salaries, Bonuses, Pensions)

Objectives To be able to: Decide whether a taxpayer is employed or self-employed Decide when employment income is taxable Assess the taxable amount on a variety of benefits in kind Identify expenses which are allowable in calculating taxable income Explain record-keeping requirements 45

Income received + benefits in kind - allowable deductions Employment Income

Taxation of Employment Income Receipts basis (not accrual) 47

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 48

Taxable Benefits 49

General Rule (P11D employees) Cash cost to employer 50

Employee contribution Reduces benefit (except fuel) 51

List price – employee contribution (max £5,000) x scale charge % - employee contribution to running cost Company Car Benefit

Below 95g/km: see data sheet 95g/km: 11% +1% per 5g/km Max 35% Diesel: +3% Scale Charge %

£21,100 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 56

Company Van No benefit if insignificant private use £3,000 for private use £564 for fuel for private use 57

Beneficial Loan Loan x (Official interest – Actual interest) No benefit if total loans <£5,000 If loan written off: Benefit = Amount of loan 58

Accomodation Annual value (or rent paid by employer if higher) +(Cost - £75,000) x Official interest + Cleaning etc + Assets x 20% Time apportioned 59

Accomodation Exempt for Representative occupier (Caretaker) Customary (Vicar) Security In these cases: Running expenses limited to 10% of earnings 60

Gift/Loan of Asset Gift Benefit = Market value Loan Benefit = 20% of value when first provided 61

Gift of asset previously loaned Higher of: market value when transferred market value when first provided less benefits already assessed (less employee contribution) 62

Tax-free benefits 63

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) £4/week for work at home 64

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) 65

Tax-free benefits Transport: use of bicycle company bus workplace parking Other: sports facilities counselling eye checks certain state benefits 66

Wholly, exclusively, necessarily in performance of duties Allowable deductions

Professional subscriptions Approved Mileage Allowance Payments Reimbursed subsistence and customer entertaining P60 pay shown after: Pension contributions Payroll giving 68

Home to normal workplace travel Not Allowable

Dispensation Reimbursed expenses not need to be entered on the tax return 70

Records to keep P60 P11D P45 Receipts Tax return 71

PTAX Personal Taxation Income Tax Computation (Pensions, Gift Aid, Personal Allowance)

Objectives To be able to: Identify income which is exempt from Income Tax Determine a taxpayer’s personal allowance Compute Income Tax payable, making appropriate adjustments for: Personal Pensions Gift Aid Determine payments on account Determine penalties due for lateness and error 73

EXEMPT INCOME

Tax-free Income These do not need to be reported on tax returns: ISAs (£11,520 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) £4/week for work at home 76

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) 77

Tax-free benefits Transport: use of bicycle company bus workplace parking Other: sports facilities counselling eye checks certain state benefits 78

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

INCOME TAX COMPUTATION Including: Personal allowances Personal pensions Gift aid 80

81 Personal Allowance (High Income) If adjusted net income is above £100,000If adjusted net income is above £100,000 Reduce personal allowance byReduce personal allowance by 50% of the difference until the allowance = £0

82 Adjusted net income Income less: Gross gift aid and personal pension contributions

83 Personal Allowance (Age-related) Allowance:Allowance: £10, £10, £10, £10, If adjusted net income is above: £26,100If adjusted net income is above: £26,100 Reduce personal allowance byReduce personal allowance by 50% of the difference until the allowance = Basic Allowance

84 Basic rate taxpayer: No Action Gift Aid & Pension Contributions

85 Higher rate taxpayer: Increase basic rate band by gross amount Gift Aid & Pension Contributions

PAYMENTS & PENALTIES 86

87 50% x Previous year’s tax (less deducted at source) 31/Jan 31/July Payments on Account

88 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

89 Late Payment 1. Interest From 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 %Deliberate and concealed Minimum = half of maximum if prompted 90

PTAX Personal Taxation Capital Gains Tax

Objectives To be able to: Identify chargeable persons, assets, disposals Calculate gain on disposal Calculate CGT liability Calculate gains on Part-disposals Chattels Shares 92

Objectives To be able to: Identify exempt assets Calculate PPR relief Explain record-keeping requirements 93

94 CHARGEABLE DISPOSALS 94

95 Chargeable Disposals of Assets Sell Give away Lose Destroy 95

96 Exempt Gains Death Spouse/civil partner Transfer at original cost

97 Connected person Transfer at no less than market value

Connected person Ancestors Siblings lineal descendants (self and spouse) 98

99 GAIN ON DISPOSAL 99

100 Calculate Gain Proceeds - Costs of disposal =Net proceeds - Original cost (+ incidental costs) - Improvements = Gain

101 CGT CALCULATION 101

102 Calculate CGT Total gains for year - Annual exemption = Gains subject to CGT 18% + 28% = CGT

103 Calculate CGT with losses Total gains for year - Losses for year - Annual exemption - Losses b/f = Gains subject to CGT 18% + 28% = CGT

CGT Above income in the tax bands Payable 31 January 104

105 Capital losses Set against gains for year May lose exempt amount Then carry forward against future gains

106 PART DISPOSALS & CHATTELS 106

107 Part-disposal Cost = Whole cost x Proceeds Proceeds + value of remainder 107

108 Chattels Bought & sold for <£6,000 Exempt Bought for >£6,000 sold for <£6,000 Proceeds assumed to be £6,000 Otherwise Gain limited to 5/3(Gross Proceeds - £6,000)

Wasting Chattel Exempt Expected life less than 50 years 109

110 SHARES 110

111 Shares: match sale to purchase 1. Same day 2. Next 30 days pool

Shares: question Against which acquisitions will each disposal be matched? DateNumber of shares 5 June 2011acquisition1, May 2012acquisition May 2012disposal800 9 June 2012acquisition March 2014 disposal2, March 2014 acquisition1,

Shares Bonus Rights issue 113

114 EXEMPT ASSETS, PPR 114

115 Exempt assets Cars Gilts PPR Wasting chattels Chattels bought and sold for £6,000 max

116 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

117 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

118 CGT TAX RETURN & RECORDS 118

Records Keep 1 year after online filing deadline 119

Records: Question What records should you keep for capital gains 120

Shares: answer 121

Records: Answer purchase and sale documents Valuations schedules of purchase and disposal 122