# finance act 2010 A starting rate of 10% applies to savings income where it falls within the first 2,440 of taxable income.

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3 03 technical Example 5 For the tax year Ali, aged 67, has pensions of 10,800 and bank interest of 4,000 (net). Her income tax liability is as follows: Pensions 10,800 Bank interest (4,000 x 100/80) 5,000 15,800 Personal allowance (9,490) Taxable income 6,310 Income tax: 1,310 at 20% 262 1,130 at 10% 113 3,870 at 20% 774 Tax liability 1,149 Non-savings income is 1,310 (10,800-9,490), so 1,130 (2,440 1,310) of the savings income is taxed at the starting rate of 10%. The remainder of the savings income is taxed at the basic rate of 20%. Example 7 For the tax year , Rich, aged 78, has a trading profit of 90,000 and pensions of 18,000. His income tax liability is as follows: Trading profit 90,000 Pensions 18, ,000 Personal allowance (2,475) Taxable income 105,525 Income tax: 37,400 at 20% 7,480 68,125 at 40% 27,250 Tax liability 34,730 Rich s adjusted net income exceeds 22,900 to the extent that his personal allowance of 9,490 is initially reduced to the standard personal allowance of 6,475. As the adjusted net income of 108,000 exceeds 100,000, the standard personal allowance is then reduced to 2,475 (6,475-4,000 (108, ,000 = 8,000/2)). Example 6 For the tax year , Lorn, aged 80, has pensions of 22,000 and building society interest of 3,200 (net). Her income tax liability is as follows: Pensions 22,000 Building society interest (3,200 x 100/80) 4,000 26,000 Personal allowance (8,090) Taxable income 17,910 Income tax: 17,910 at 20% 3,582 Tax liability 3,582 Lorn s total income exceeds 22,900, so her personal allowance of 9,640 is reduced to 8,090 (9,640-1,550 (26,000-22,900 = 3,100/2)). Employment Income Company Car Benefit For the tax year , the base level of CO 2 emissions used to calculate company car benefits is reduced from 135 grams per kilometre to 130 grams per kilometre. The percentage used to calculate a car benefit ranges from 15% to 35%. For the tax year there are now two lower rates for company motor cars with low CO 2 emissions. For a motor car with a CO 2 emission rate of 75 grams per kilometre or less the percentage is 5%. For a motor car with a CO 2 emission rate of between 76 and 120 grams per kilometre the percentage is 10%. These lower rates are increased to 8% (5% + 3%) and 13% (10% + 3%) respectively for diesel cars. For the tax year there is no benefit where a company car has a zero CO 2 emissions figure. However, the provision of a zero emission company car is not examinable. For the tax year , the base level of CO2 emissions used to calculate company car benefits is reduced from 135 grams per kilometre to 130 grams per kilometre. The fuel benefit is calculated as a percentage of a base figure that is announced each year. For the tax year the base figure is increased from 16,900 to 18,000.

4 student accountant issue 18/ Example 8 During the tax year , Fashionable plc provided the following employees with company motor cars: Amanda was provided with a new diesel-powered company car on 6 August The motor car has a list price of 13,500 and an official CO 2 emission rate of 122 grams per kilometre. Betty was provided with a new petrol-powered company car throughout the tax year The motor car has a list price of 16,400 and an official CO 2 emission rate of 188 grams per kilometre. Charles was provided with a new petrol-powered company car throughout the tax year The motor car has a list price of 22,600 and an official CO 2 emission rate of 249 grams per kilometre. Charles paid Fashionable plc 1,200 during the tax year for the use of the motor car. Diana was provided with a new petrol-powered company car throughout the tax year The motor car has a list price of 12,400 and an official CO 2 emission rate of 70 grams per kilometre. Amanda The CO 2 emissions are below the base level figure of 130 grams per kilometre (but more than 120 grams per kilometre), so the relevant percentage is 18% (15% plus a 3% charge for a diesel car). The motor car was only available for eight months of the tax year , so the benefit is 1,620 (13,500 x 18% x 8/12). Betty The CO 2 emissions are above the base level figure of 130 grams per kilometre. The CO 2 emissions figure of 188 is rounded down to 185 so that it is divisible by five. The minimum percentage of 15% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 26% (15% + 11% ( = 55/5)). The motor car was available throughout the tax year so the benefit is 4,264 (16,400 x 26%). Charles The CO 2 emissions are above the base level figure of 130 grams per kilometre. The relevant percentage is 38% (15% + 23% ( = 115/5)), but this is restricted to the maximum of 35%. The motor car was available throughout the tax year so the benefit is 6,710 (22,600 x 35% = 7,910-1,200). The contributions by Charles towards the use of the motor car reduce the benefit. Diana The CO 2 emissions are below 75 grams per kilometre, so the lower rate of 5% applies. The motor car was available throughout the tax year , so the benefit is 620 (12,400 x 5%). Company Car Fuel Benefit The fuel benefit is calculated as a percentage of a base figure that is announced each year. For the tax year the base figure is increased from 16,900 to 18,000. The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit. Example 9 Continuing with Example 8 Amanda was provided with fuel for private use between 6 August 2010 and 5 April Betty was provided with fuel for private use between 6 April 2010 and 31 December Charles was provided with fuel for private use between 6 April 2010 and 5 April He paid Fashionable plc 600 during the tax year towards the cost of private fuel, although the actual cost of this fuel was 1,000. Diana was not provided with fuel for private use. Amanda The motor car was only available for eight months of the tax year , so the fuel benefit is 2,160 (18,000 x 18% x 8/12). Betty Fuel was only available for nine months of the tax year , so the fuel benefit is 3,510 (18,000 x 26% x 9/12). Charles The motor car was available throughout the tax year so the benefit is 6,300 (18,000 x 35%). There is no reduction for the contributions made since the cost of private fuel was not fully reimbursed. Diana Fuel was not provided for private use so there is no fuel benefit. Company Van Fuel Benefit The fuel benefit is based on a scale charge. For the tax year the scale charge is increased from 500 to 550. Official Rate of Interest The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the provision of living accommodation costing in excess of 75,000. For the June and December 2011 exam se the actual official rate of interest of 4.00% for the tax year will be used.

5 05 technical International Accounting Standard Terminology From the June 2011 paper onwards, international accounting standard terminology will be used when presenting accounting information contained within an exam question. The most important change is that the term profit and loss account will no longer be used. Instead, the term income statement will be used, with income statements being presented in the international accounting standard format. The following terminology will also change: Previous terminology Sales Fixed assets Stock Debentures New terminology Sales revenue Non-current assets Inventory Loan notes The new international accounting standard terminology will also be used when presenting accounting information for sole traders and partnerships. As an example, the first part of Question 2 from the December 2007 paper would now be presented as follows: Sofa Ltd is a manufacturer of furniture. The company s summarised income statement for the year ended 31 March 2007 is as follows: Gross profit 272,300 Other income Profit on disposal of shares 4,300 Bank interest 8,400 Expenses Depreciation 87,100 Professional fees 19,900 Repairs and renewals 22,800 Other expenses 364,000 (493,800) Finance costs Interest payable (31,200) Loss before taxation (240,000) is shorter or longer than 12 months. For example, the annual investment allowance would be 75,000 (100,000 x 9/12) for a nine-month period of account. Where a period of account spans 6 April 2010 (1 April 2010 for limited companies) then apportionment will be necessary in order to determine the amount of annual investment allowance. A question will not be set involving apportionment as regards the amount of annual investment allowance. The capital allowances information that will be given in the tax rates and allowances section of the examination paper for the June and December 2011 sittings is as follows: Rates of allowance % Plant and machinery Main pool 20 Special rate pool 10 Motor cars (purchases since 6 April 2009 (1 April 2009 for limited companies)) CO 2 emissions up to 110 grams per kilometre 100 CO 2 emissions between 111 and 160 grams per kilometre 20 CO 2 emissions over 160 grams per kilometre 10 Annual investment allowance First 100,000 of expenditure 100 Unless there is private use, motor cars qualifying for writing down allowances at the rate of 20% are included in the general pool, while motor cars qualifying for writing down allowances at the rate of 10% are included in the special rate pool. Motor cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private use adjustment can be calculated. Motor cars already owned at 6 April 2009 (1 April 2009 for limited companies) that cost more than 12,000 or those with private use continue to be kept separately, and qualify for writing down allowances at the rate of 20% restricted to a maximum of 3,000. This is regardless of the motor car s CO 2 emissions. Capital Allowances Plant and Machinery A first-year allowance of 40% applied to expenditure during the period from 6 April 2009 to 5 April 2010 (1 April 2009 to 31 March 2010 for limited companies). From the June 2011 sitting onwards questions will not be set that involve the 40% first-year allowance. From 6 April 2010 (1 April 2010 for limited companies) the annual investment allowance (AIA) limit has been increased to 100,000. The annual investment allowance provides a first-year allowance of 100% for the first 100,000 of expenditure on plant and machinery. Any expenditure in excess of the 100,000 limit qualifies for writing-down allowances (WDA) as normal. The annual investment allowance applies to all expenditure on plant and machinery with the exception of motor cars. The 100,000 limit is proportionally reduced or increased where a period of account

6 student accountant issue 18/ Example 10 Ming prepares accounts to 5 April. On 6 April 2010 the tax written down values of her plant and machinery were as follows: Main pool 16,700 Motor car (1) 18,800 Motor car (2) 15,600 The following transactions took place during the year ended 5 April 2011: Cost/(Proceeds) 12 May 2010 Purchased equipment 111,400 2 August 2010 Purchased motor car (3) 28, October 2010 Purchased motor car (4) 16,800 4 November 2010 Purchased motor car (5) 10,100 2 April 2011 Sold motor car (5) (8,300) Motor car (1) was purchased on 14 May 2008 and has CO 2 emissions of 180 grams per kilometre. Motor car (2) was purchased on 8 June 2009 and has CO 2 emissions of 140 grams per kilometre. This motor car is used by Ming, and 15% of the mileage is for private journeys. Motor car (3) purchased on 2 August 2010 has CO 2 emissions of 155 grams per kilometre. Motor car (4) purchased on 19 October 2010 has CO 2 emissions of 105 grams per kilometre. Motor car (5) purchased on 4 November 2010 and sold on 2 April 2011 has CO 2 emissions of 185 grams per kilometre. Ming s capital allowance claim for the year ended 5 April 2011 is as follows: Motor Motor Special Pool car (1) car (2) rate pool Allowances WDV brought forward 16,700 18,800 15,600 Addition qualifying for AIA Equipment 111,400 AIA 100% (100,000) 100,000 11,400 Other additions Motor car (3) 28,300 Motor car (5) 10,100 Proceeds Motor car (5) 28,300 (8,300) 56,400 1,800 WDA 20% (11,280) 11,280 WDA restricted (3,000) 3,000 WDA 20% (3,120) x 85% 2,652 WDA 10% (180) 180 8,300 45,120 Addition qualifying for FYA Motor car (4) 16,800 FYA 100% (16,800) 16,800 28,300 28,300 28,300 28,300 WDV carried forward 45,120 15,800 12,480 1,620 28,300 Total allowances 133,912 Motor car (1) was already owned at 6 April 2009 and is therefore kept separately. The writing down allowance is restricted to the maximum 3,000. Motor car (2) was purchased after 6 April 2009 but is kept separately because there is private use by Ming. This motor car has CO 2 emissions between 111 and 160 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 20%. Motor car (3) has CO 2 emissions between 111 and 160 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 20%. Motor car (4) has CO 2 emissions of less than 110 grams per kilometre and therefore qualifies for the 100% first year allowance. Motor car (5) had CO 2 emissions over 160 grams per kilometre and therefore qualifies for writing down allowances at the rate of 10%. There is no balancing allowance on the disposal of this motor car because the expenditure is included in a pool.

8 student accountant issue 18/ The terminology used in the marginal relief formula has also changed. The formula will now be shown as: Standard fraction x (U - A) x N/A U = Upper limit A = Augmented profits N = Taxable total profits From the June 2011 sitting onwards, only the new plain English terminology will be used. Although you are encouraged to use the new plain English terminology when answering exam questions, for the time being you will not be penalised if you correctly use the old terms such as profits chargeable to corporation tax and profits. As a result of incorporating the rules for corporation tax losses into the Corporation Tax Act 2010, the various loss relief section numbers have changed. The changes are as follows: Previous New section number section number Against total profits s.393a ICTA 1988 s.37 CTA 2010 Terminal loss relief s.393a ICTA 1988 s.39 CTA 2010 Carry forward against future trading profits s.393(1) ICTA 1988 s.45 CTA 2010 However, you are reminded that knowledge of section numbers is not needed to understand questions, nor are you expected to use them in your answers. If you wish to refer to section numbers you may do so and will not be penalised if old, or even incorrect, section numbers are used. Rates of Corporation Tax The small profits rate of corporation tax and the main rate of corporation tax for the financial year 2010 are unchanged at 21% and 28%, as are the lower and upper limits. The corporation tax rates for the financial year 2010 can therefore be summarised as follows: Level of profits Effective rate Up to 300,000 21% 300,001 to 1,500, % Over 1,500,000 28% The corporation tax information that will be given in the tax rates and allowances section of the exam paper for the June and December 2011 sessions is as follows: Financial year Small profits rate 21% 21% 21% Main rate 28% 28% 28% Lower limit 300, , ,000 Upper limit 1,500,000 1,500,000 1,500,000 Standard fraction 7/400 7/400 7/400 Example 12 For the year ended 31 March 2011, Easy Ltd has taxable total profits of 40,000 and FII of 10,000. For the year ended 31 March 2011, Difficult Ltd has taxable total profits of 600,000 and FII of 50,000. Easy Ltd Corporation tax is 8,400 (40,000 at 21%) as the augmented profits of 50,000 (40, ,000) are less than 300,000. Difficult Ltd Marginal relief applies as the augmented profits of 650,000 (600, ,000) are between 300,000 and 1,500,000. The company s corporation tax liability is as follows: 600,000 at 28% 168,000 Marginal relief 7/400 (1,500, ,000) x 600,000/650,000 (13,731) Liability 154,269 Loss Relief Extended loss relief applied in respect of loss-making accounting periods ending between 24 November 2008 and 23 November From the June 2011 sitting onwards questions will not be set that involve extended loss relief. CAPITAL GAINS TAX Annual Exemption Limit The annual exemption limit for the tax year is unchanged at 10,100. Rates of Capital Gains Tax For the tax year , a higher rate of capital gains tax of 28% has been introduced, with rates linked to the level of a person s taxable income. Capital gains are now taxed at the lower rate of 18% where they fall within the basic rate tax band of 37,400, and at the higher rate of 28% where they exceed this threshold. The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation. Limited companies are not affected by this change, and they continue to pay corporation tax on their chargeable gains. for the tax year , a higher rate of capital gains tax of 28% has been introduced, with rates linked to the level of a person s taxable income.

10 student accountant issue 18/ Example September 2010, Mika sold a business that she had run as a sole trader since 1 January The sale resulted in the following capital gains: Goodwill 260,000 Freehold office building 370,000 Freehold warehouse 170, ,000 The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes. Mika has taxable income of 4,000 for the tax year She has unused capital losses of 28,000 brought forward from the tax year Mika s capital gains tax liability is as follows: Capital gains qualifying for entrepreneurs relief Goodwill 260,000 Freehold office building 370, ,000 Other capital gains Freehold warehouse 170,000 Capital losses brought forward (28,000) 142,000 Annual exemption (10,100) 131,900 Capital gains tax: 630,000 at 10% 63, ,900 at 28% 36,932 Tax liability 99,932 The capital losses and the annual exemption are set against the capital gain on the sale of the freehold warehouse as this does not qualify for entrepreneurs relief. 33,400 (37,400-4,000) of Mika s basic rate tax band is unused, but this is set against the gains qualifying for entrepreneurs relief of 630,000 even though this has no affect on the 10% tax rate. The capital gains tax information that will be given in the tax rates and allowances section of the exam paper for the June and December 2011 sittings is as follows: Capital gains tax Rates of tax Lower rate 18% Higher rate 28% Annual exemption 10,100 Entrepreneurs relief Lifetime limit 5,000,000 Rate of tax 10% The capital gains tax changes only apply to disposals made on or after 23 June 2010, but a question will not be set where an individual makes a disposal before 23 June A question will not be set involving the entrepreneurs relief qualifying limits that applied up to 22 June INHERITANCE TAX From the June 2011 sitting onwards, a basic understanding of inheritance tax has been added to the Paper F6 (UK) syllabus. You should refer to the separate inheritance tax article, which covers those aspects of inheritance tax that you will need to know. The inheritance tax information that will be given in the tax rates and allowances section of the exam paper for the June and December 2011 sittings is as follows: Inheritance tax: tax rates 1 325,000 Nil Excess Death rate 40% Lifetime rate 20% Inheritance tax: taper relief Years before death Percentage reduction % Over 3 but less than 4 years 20 Over 4 but less than 5 years 40 Over 5 but less than 6 years 60 Over 6 but less than 7 years 80 Where nil rate bands are required for previous years then these will be given to you within the question. NATIONAL INSURANCE CONTRIBUTIONS Class 1 and Class 1A National Insurance Contributions For the tax year , the rates of employee Class 1 NIC are unchanged at 11% and 1%. The rate of 11% is paid on earnings between 5,716 per year and 43,875 per year, and the rate of 1% is paid on all earnings over 43,875 per year. The rate of employer s Class 1 NIC is unchanged at 12.8%, and is paid on all earnings over 5,715 per year. The rate of Class 1A NIC that employers pay on taxable benefits provided to employees is also unchanged at 12.8%. The Class 1 and Class 1A NIC information that will be given in the tax rates and allowances section of the exam paper for the June and December 2011 sittings is as follows: % Class 1 Employee 1 to 5,715 per year Nil 5,716 to 43,875 per year ,876 and above per year 1.0 Class 1 Employer 1 to 5,715 per year Nil 5,716 and above per year 12.8 Class 1A 12.8

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