Kaplan Workbook - ICAEW Business Planning: Taxation PDF

ICAEW Professional Level Business Planning: Taxation Finance Act 2023 2024 Edition Integrated Workbook  Business Planning: Taxation © Kaplan Financial Limited, 2023 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular mat...

ICAEW Professional Level Business Planning: Taxation Finance Act 2023 2024 Edition Integrated Workbook  Business Planning: Taxation © Kaplan Financial Limited, 2023 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. ICAEW takes no responsibility for the content of any supplemental training materials supplied by the Partner in Learning. The Partner In Learning Logo, ACA and ICAEW CFAB are all registered trademarks of ICAEW and are used under licence by Kaplan. Materials in part or whole ICAEW Learning Materials © ICAEW 2023 All rights reserved. Reproduced by Kaplan with the permission of ICAEW. P.2 CONTENTS Page Paper Introduction P.4 L7 Knowledge, Skills and Behaviours 1 Chapter 1 Ethics 5 Chapter 2 Corporation tax for a single company 49 Chapter 3 Corporation tax losses 85 Chapter 4 Groups and consortia 115 Chapter 5 International expansion 165 Chapter 6 Corporate anti-avoidance 201 Chapter 7 Unincorporated businesses 239 Chapter 8 Choice of business structure 287 Chapter 9 Anti-avoidance for owner-managed businesses 307 Chapter 10 Capital gains tax and CGT reliefs 337 Chapter 11 Transformation of owner-managed businesses 393 Chapter 12 Raising finance 425 Chapter 13 Inheritance tax 465 Chapter 14 Income tax and NICs 513 Chapter 15 Employee remuneration 527 Chapter 16 Personal tax – additional aspects 567 Chapter 17 VAT 625 Chapter 18 Stamp taxes 651 Chapter 19 Property businesses 671 Chapter 20 Companies – special situations 693 Chapter 21 Corporate reorganisations 719 Chapter 22 Application: Exam style tasks 749 Chapter 23 Application: Exam style tasks answers 773 Summary notes 1 P.3  Business Planning: Taxation Paper Introduction Paper Background The aim of Business Planning: Taxation (BPT) is to enable students to apply technical knowledge and professional skills to identify and resolve tax issues that arise in the context of preparing tax computations and to advise on tax efficient strategies for business and individuals. On completion of this module, students will be able to:  use their technical knowledge and professional judgement to identify, explain and evaluate alternative tax treatments and determine appropriate solutions in the light of client needs and the interaction between taxes  make judgements and recommendations that take account of the wider commercial context and impact, as well as any underlying legal and ethical issues. Specification grid This grid shows the relative weightings of subjects within this module and should guide the relative study time spent on each: Weighting (%) Ethics and law 5 – 10 Taxation of corporate entities 35 – 45 Taxation of owner-managed businesses 20 – 30 Personal taxation 15 – 25 This grid provides guidance on the relative weighting between knowledge and skills. Weighting (%) Knowledge 25 – 35 Skills 65 – 75 P.4  Business Planning: Taxation BPT is skills based. This will involve:  assimilating information  drawing out facts from data and linking different facts together  applying knowledge to a novel scenario  considering interaction of taxes  offering advice, making recommendations, drawing conclusions  communication. Computer based assessment This module will be examined using a computer-based assessment. The assessment will be 2.5 hours in length and is a completely open book exam so any written or printed material may be taken into the exam room with you. You will have access to your digital library through Bibliu in the BPT exam, including any annotations you have added to this. The exam will involve 3 written test questions, one of which is likely to be for 40 marks. All three questions will be scenario based. Past exam papers can be found on the ICAEW website under the student section: www.icaew.com. P.5 Business Planning: Taxation INTEGRATED WORKBOOK ICONS Alternative approach/question style Assumed knowledge Definition Exam Technique Point Further reading Home study Illustration Key point Open book text P.6  Business Planning: Taxation Professional skills consideration Question British values Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details, or follow the link to the feedback form in MyKaplan. Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. P.7 Business Planning: Taxation P.8  Business Planning: Taxation L7 Knowledge, Skills and Behaviours As per the Level 7 Accountancy/Taxation Professional Apprenticeship standard, you will need to demonstrate that you have the necessary Knowledge, Skills and Behaviours. The list below shows the relevant knowledge, skills and behaviours that you will have demonstrated whilst studying for this subject. We have also linked these to relevant test your understanding examples in the Integrated Workbook. For qualification only students, it is also useful to understand which professional skills and behaviours you are developing throughout this unit. Knowledge An accountancy or taxation professional will be able to: Provide a degree of assurance that stakeholders can trust information (financial and non-financial) regarding the Assurance, risk organisation, as relevant to their role. In doing so, they will be and control able to exercise professional judgement and consider both risks and risk management approaches. Business Demonstrate knowledge of key business objectives and acumen measurements of success. Prepare, analyse and interpret an organisation's financial Financial information (both for internal and external purposes), as relevant information to their role. Understand, interpret and apply the legislation, standards and principles that apply to Standards and their role. This may Legislation include, but not be limited to, accounting standards, auditing Principles standards, taxation legislation, ethical codes and internal principles adopted by an organisation. Apply their judgement and make sustainable business decisions Strategic (including recommendations for good governance) using business financial and non-financial information. Support strategic management decision making with meaningful financial analysis and project and governance appraisal. Present a balanced conclusion, with supporting evidence, which includes internal and external factors. 1 Business Planning: Taxation Skills An accountancy or taxation professional will be able to: Build trusted and sustainable relationships with individuals and Building organisations. Consistently support individuals and collaborate relationships to achieve results as part of a team. Influence the impact of business decisions on relevant and Business insight affected communities based on an appreciation of different organisations and the environments in which they operate. Communicate in a clear, articulate and appropriate manner. Communication Adapt communications to suit different situations, individuals or teams. Identify ethical dilemmas, understand the implications and behave appropriately. Understand their legal responsibilities, Ethics and both within the letter and the spirit of the law, as well as be integrity aware of the procedures for reporting concerns over potentially unethical activities. Take ownership of allocated projects and effectively manage their own time and the time of others. Demonstrate good project Leadership management skills to deliver high quality work within the appropriate timeline. Act as a role model and motivate others to deliver results. Evaluate information quickly and draw accurate conclusions. Problem solving Assess a problem from multiple angles to ensure all relevant and decision issues are considered. Gather the appropriate facts and making evidence in order to make decisions effectively. 2  L7 Knowledge, Skills and Behaviours Behaviours An accountancy or taxation professional will be able to: Anticipate an individual’s organisations future needs and Adds Value requirements. Identify opportunities that can add value for the individual and organisation. Take responsibility for their own professional development by Continuous seeking out opportunities that enhance their knowledge, skills improvement and experience. Adapt approach to assist organisations and individuals to Flexibility manage their conflicting priorities as circumstances change. Apply a questioning mind to conditions which may indicate a Professional possible misstatement of financial information due to error or scepticism fraud. 3 Business Planning: Taxation 4  Chapter 1 Ethics Outcome By the end of this session you should be able to:  Identify and communicate ethical and professional issues in giving tax planning advice  Recognise and explain the relevance, importance and consequences of ethical and legal issues  Recommend and justify appropriate actions where ethical dilemmas arise in a given scenario  Design and evaluate appropriate ethical safeguards  Recognise the implications of the general anti-abuse rule (GAAR), and the Base Erosion and Profit Shifting Project (BEPS)  Recognise and advise when a tax-avoidance scheme is notifiable to HMRC and distinguish between planning, avoidance and evasion and their consequences and answer questions relating to these areas. MyKaplan resources This topic is covered on MyKaplan in the homework module Ethics. ICAEW resources The underpinning detail for this chapter can be found in Chapter 1 of the ICAEW Workbook. 5 Chapter 1 Overview ETHICS Ethical conflict Answering ethics exam questions Tax Disclosure avoidance Irregularities POTAS Money DOTAS/ laundering DASVOIT Data GAAR protection 6  Ethics Professional standards, threats and safeguards 1.1 Fundamental ethical principles  Integrity  Objectivity  Professional competence and due care  Confidentiality  Professional behaviour 1.2 Threats to fundamental principles  Self-interest threats  Self-review threats  Advocacy threats  Familiarity threats  Intimidation threats The fundamental ethical principles and threats to the principles are assumed knowledge having been covered in both Principles of Tax and Tax Compliance. If you need to refresh your knowledge on this area, you should review the appendix to this chapter. In a scenario you may be provided with information on a client, or someone in your firm, who does not have the same ethical standards as yours. It would be good practice to think which of the ethical principles are impacted? And which of the threats have arisen? Remember, as a student or member of the ICAEW, you are bound by these principles. If you are dealing with someone who is not a member of the ICAEW or equivalent institute, they will not be. 7  Chapter 1 1.3 Safeguards to mitigate threats Once a threat has been identified, the next step is to look for potential safeguards that may eliminate or reduce the threat to an acceptable level. Safeguards to mitigate threats to fundamental principles are assumed knowledge having been covered in both Principles of Tax and Tax Compliance. If you need to refresh your knowledge on this area, you should review the appendix to this chapter. If you identify a threat to the ethical principles your first step should not be to resign. Instead, consider whether there are any safeguards you can suggest to reduce the threat to an acceptable level. Resignation may ultimately be the only answer, but this should be the last resort rather than the first suggested action. 8  Ethics 1.4 Standards for tax planning In addition to the Fundamental Principles listed in section 1.1, Professional Conduct in Relation to Taxation (PCRT) has developed five standards which professional accountants must observe when advising on tax planning.  Client specific  Lawful  Disclosure and transparency  Tax planning arrangements  Professional judgment and appropriate documentation. The standards for tax planning were covered in detail in Tax Compliance. If you need to refresh your knowledge on this area, you should review the appendix to this chapter. A common question in the BPT exam is one where you are asked to comment on a tax planning scheme suggested by another firm of accountants, or even someone else within your firm. One of the things you should consider is whether any of the standards for tax planning are impacted by the scheme. 9  Chapter 1 Conflicts of interest Conflicts of interest and related safeguards. Members must take reasonable steps to identify any conflicts of interest (and therefore threats to compliance with fundamental principles). Conflicts can arise between:  firm and client  two clients (managed by the same firm). If a conflict of interest arises, a member should consider whether safeguards can be put in place to reduce the risk of the conflict to an acceptable level. Conflicts of interest and associated safeguards are assumed knowledge having been covered in both Principles of Tax and Tax Compliance. If you need to refresh your knowledge on potential safeguards when a conflict of interest arises, you should review the appendix to this chapter. The examiners often comment that students are too quick to suggest resignation in a scenario where a conflict of interest arises. To score well on a question in this area you should always consider potential safeguards first, with resignation being considered as a last resort. 10  Ethics Ethical conflict resolution Conflict resolution process The ICAEW suggests a process for resolving an ethical conflict. The conflict resolution process is assumed knowledge from both Principles of Tax and Tax Compliance. The process is covered in the appendix to this chapter which you should review if you need a reminder This process, and the underlying factors which need to be considered, may sometimes provide you with a good approach when analysing and tackling an ethical issue with which you are presented in the exam. 11 Chapter 1 Disclosure of information and confidentiality 4.1 When to disclose  A professional accountant may disclose confidential information if – disclosure is permitted by law and is authorised by the client or the employer – disclosure is required by law, for example:  production of documents or other provision of evidence in the course of legal proceedings, or  disclosure to the appropriate public authorities of infringements of the law, e.g. under money laundering legislation.  There is a professional duty or right to disclose, when not prohibited by law – to comply with the quality review of a member body or professional body – to respond to an inquiry or investigation by a member body or regulatory body – to protect the professional interests of a professional accountant in legal proceedings – to comply with technical standards and ethics requirements. 12  Ethics Errors 5.1 Introduction  A professional accountant may discover an error made by HMRC or the client.  Errors should be disclosed to HMRC as soon as possible.  Accountants are advised to include in their letters of engagement authority to advise HMRC of errors, otherwise client consent is required.  If consent is withheld, consider – seeking legal advice – ceasing to act for the client. 5.2 Errors leading to overpayment of tax  If the error could lead to the overpayment of tax, the client should be advised as soon as possible as to the existence of the error and the possibility of a repayment claim. 5.3 HMRC errors leading to the underpayment of tax  If a client incurs additional costs correcting an error made by HMRC, in certain circumstances a claim may be able to be made for compensation for such expenses from HMRC. The procedure for dealing with errors made by HMRC and through self-assessment is assumed knowledge from TC and covered in the appendix to this chapter, which you should review if you need a reminder. You could then attempt the question that follows. 13 Chapter 1 Test your understanding 1 Shobna is a mechanic running a sole trader business which your firm represents. You have recently taken over completion of her income tax return from one of your colleagues. Shobna has sent you her records accompanied by an email. An extract from the email is below: “My sales are a lot higher this year because more of my customers are now paying online. In the past, a number paid me cash which I do not think was included in my accounts. I expect that, as a result, I will have to pay a lot more tax this year!” Explain the actions that you and your firm must take in response to the email from Shobna. In this example you have to consider what the ethical dilemma is, and then suggest your response to it. This allows you to develop the skill of problem solving and decision making. 14  Ethics Client acceptance and regulatory requirements 6.1 Practice management There are a number of important ethical considerations involved in running a practice including:  Whether the accountant is acting as principal or agent  The need for an engagement letter  Professional indemnity insurance  Data protection laws. These areas are assumed knowledge from your Tax Compliance studies. If you did not study Tax Compliance recently or you do not recall these, it is recommended that you review the content on these which can be found in the appendix to this chapter. 6.2 Accountability of Senior Accounting Officers (SAO)  Large UK companies (turnover > £200 million and/or balance sheet total > £2 billion in the previous financial year) must appoint a SAO to certify that the accounting systems are adequate for tax reporting purposes.  SAO is required to: – Certify annually the adequacy of the accounting systems for accurate tax reporting, or – Specify the nature of any inadequacies.  Penalties apply for non-compliance or the provision of erroneous information. In each case the penalty is £5,000 and is generally the personal liability of the SAO. The role of a SAO has been tested relatively often in the BPT exam. Being able to identify these points will help you pick up marks in the exam, but you must be able to apply the rules to the scenario in question. 15 Chapter 1 Money laundering Reporting money laundering offences enhances governance and assists in achieving sustainability goals. 16  Ethics Tax planning, tax avoidance and tax evasion 8.1 Introduction An individual may attempt to reduce his, her or their tax liability through methods which may be categorised as tax planning, tax avoidance or tax evasion. Although tax avoidance is not illegal, it is often looked at in a poor light by the public and can be seen as contrary to ESG sustainability goals. If we are involved in this, it can affect our reputation in terms of criticism from the media, other stakeholders and may reflect badly on the profession as a whole. It could also impact on our ability to obtain professional indemnity insurance. The distinction between tax planning, tax avoidance and tax evasion were first introduced in Principles of Tax. More detail can be found on this in the appendix to this chapter. 8.2 Measures to deter tax avoidance Various anti-avoidance measures have been introduced over the years, many of which you will encounter within the BPT syllabus. In addition, HMRC have wide- ranging powers in order to assist them to deter tax avoidance. By way of an example, under Finance Act 2022 they were given the power to:  publish information about tax avoidance schemes and to name the promoters of such schemes  secure or freeze a promoter’s assets where proceedings for a penalty have commenced under the DOTAS, POTAS or DASVOIT regime. This is to prevent promoters hiding or dissipating assets.  ask a court to close down an entity promoting or enabling avoidance schemes where it can be shown they are not in the public interest, and disqualify their directors as soon as possible. 17 Chapter 1 8.2.1 Large businesses – requirement to publish tax strategies  ‘Large’ businesses must publish on the internet their strategies in relation to UK taxation.  Failure to do so leads to an initial penalty of £7,500 plus further penalties for continued non-compliance.  A business is classed as being ‘large’ if its turnover is more than £200million and/or its balance sheet total is more than £2 billion.  In addition, a “special measures” scheme exists to monitor large businesses which use aggressive tax planning or refuse to engage with HMRC in a collaborative way. 8.2.2 Large businesses – notification of uncertain tax treatments  ‘Large’ businesses (refer to 8.2.1 for definition of ‘large’) must notify HMRC on an annual basis where they have used an uncertain tax treatment. A tax treatment is classed as uncertain if either: – a provision is made in the accounts in relation to it, or – the tax treatment does not comply with HMRC’s known interpretation.  Notification is only required if the tax advantage is expected to be >£5 million for a 12-month period. 8.3 Penalties for offshore tax evasion  Enablers of offshore tax evasion will be issued with a penalty. This penalty will be the higher of: – 100% of the potential lost revenue; and – £3,000.  HMRC also have the power to publish information about the enabler if: – the potential lost revenue exceeds £25,000; or – there have been at least five penalties in a five-year period. 18  Ethics 8.3.1 Criminal Finances Act 2017 This Act establishes criminal liability for relevant bodies who fail to prevent the facilitation of tax evasion. The legislation applies to UK and overseas companies and partnerships (relevant bodies), but not to sole practitioners. For an action to be brought under this Act, three stages must be proved:  Criminal evasion of tax by someone, e.g. a client of the firm.  Facilitation of this evasion by an ‘associated person’ (e.g. an employee) of the relevant body.  Failure by the relevant body to prevent the facilitation, even if the evasion itself was unsuccessful. There is a statutory defence where, at the time of the offence, the relevant body had reasonable prevention procedures in place in order to prevent tax evasion facilitation offences. 8.3.2 Company directors – joint and several liability  HMRC can issue a joint liability notice to directors, shareholders and other persons connected to a company making that person jointly and severally liable for the company’s liabilities to tax and/or related penalties in certain circumstances. If the company no longer exists, the individual is fully liable.  A notice may only be issued where the company’s liabilities arise from one of the following: – tax avoidance/evasion – repeated insolvency – where a penalty for facilitating tax evasion/avoidance has been levied  In all of the above, the company must have also begun an insolvency procedure (such as liquidation, administration or striking off) or be expected to do so.  The rules apply in three cases: 1 The company has entered into tax avoidance arrangements or tax-evasive conduct and the director in question was responsible for this, or received a benefit arising from it. For a notice to be made here, there must be a resulting tax liability and a serious possibility that this will not be paid. 19 Chapter 1 2 A penalty has been levied on the company under certain tax avoidance provisions (i.e. DOTAS/DASVOIT, POTAS, enablers of offshore tax evasion) and the individual in question was a director at the time of the act/omission the penalty relates to. For HMRC to issue a notice here there must be a serious risk that this penalty is not paid. 3 The individual in question was a director of at least two other companies, both of which have become insolvent in the last 5 years. The rules only apply here if – at least one of the ‘old’ companies has an outstanding tax liability and – the total amount of tax liabilities exceeds £10,000 and is more than 50% of the unsecured liabilities of the companies. 8.4 Different roles of a tax adviser  The PCRT outlines the ways in which a professional accountant can be involved in tax planning arrangements. The following guidance is provided with respect to these. 8.4.1 Advising on a planning arrangement  The adviser should advise on the risks and implications of any planning scheme before giving advice.  They should consider the Promoters of Tax Avoidance Scheme (POTAS) rules.  They should also consider any financial/reputational risks in connection with the provision of the advice 8.4.2 Introducing another adviser’s planning arrangement  If paid a commission to introduce another adviser’s scheme this should be disclosed to the client and accounted for in line with the ICAEW Code of Ethics.  The accountant should determine whether this should be subject to a monitoring notice under POTAS. If it is subject to a notice, it is not usually appropriate to introduce it to a client.  The accountant should appraise the scheme and consider its effectiveness and risks (including reputational). 20  Ethics 8.4.3 Providing a second opinion  If asked to provide a second opinion on a third party’s planning arrangements, the accountant should not accept a commission to do so as it could affect his, her or their objectivity.  The accountant should only give the opinion if they have sufficient expertise to do so, or if they seek help from someone who has.  The accountant should consider whether the source of the arrangement is subject to a monitoring notice under POTAS. 8.4.4 Compliance services  If the client has received advice elsewhere on planning arrangements which the adviser has to enter on the tax return, this is classed as compliance services.  If doing so the accountant is not responsible for advising on the implications of the arrangements, however they should not include any arrangements which they do not believe are sustainable. If there is any doubt here, specialist help may need to be obtained. 21 Chapter 1 The General Anti-abuse rule (GAAR) and BEPS 9.1 General anti-abuse rule (GAAR)  Designed to counter tax advantages sought from complex planning schemes or deliberately contrived arrangements.  Applies for income tax, corporation tax, CGT, IHT, SDLT, the ATED (refer to stamp taxes chapter) and NICs.  Applies when one of the main purposes of entering into a transaction was obtaining a tax advantage and arrangements are abusive, e.g. profit/ income/gain less than economic one, or deduction/losses exceed economic cost.  When the GAAR applies, just and reasonable adjustments may be made to counter the tax advantages obtained.  In addition to the GAAR, planning schemes can also be attacked under the Ramsay doctrine whereby a purposive construction to the statutory provisions may be applied and transactions, or elements of transactions, with no commercial purpose or effect may be ignored.  The Ramsay doctrine states that when there is a tax avoidance scheme using a series of steps, the effect of the whole series should be looked at in their entirety rather than each individual step on its own. 22  Ethics 9.1.1 The GAAR advisory panel  If HMRC wishes to challenge an arrangement under the GAAR, they refer it to the independent Advisory Panel.  The panel then determines whether the arrangements are a ‘reasonable course of action’. If not, the promoter of the scheme will meet a threshold condition for the POTAS regime. If HMRC feel this is significant, they will issue a conduct notice to the promoter.  HMRC can issue a counteraction notice under the GAAR with regard to the transaction. If they do so, they may also issue an Accelerated Payment Notice. This may mean the taxpayer has to pay the disputed tax in advance.  If an arrangement is successfully challenged under the GAAR, it is an “occasion of non-compliance” for the Government’s Procurement Policy. This may affect the ability of the taxpayer to bid for certain Government Contracts. 23 Chapter 1 9.2 Advice to clients in the light of GAAR  Where the GAAR applies, clients should be advised that tax planning will be ineffective.  Accountancy practices may seek to put measures in place to deal with the GAAR including: – Training – Protocols to ensure quality and consistency of treatment – Raising awareness with clients – Use of caveat language to use in advice on the GAAR – Letters for returns may refer to the GAAR – Ensuring existing knowledge materials refer to the GAAR where appropriate – Reviewing any existing planning – Ongoing monitoring of decisions of GAAR panel. 9.3 The GAAR penalty  A penalty of 60% of the counteracted tax applies where: – A return or claim was submitted to HMRC – On the basis of a tax advantage arising from arrangements – All or part of the tax advantage is counteracted by the GAAR; and – The arrangements were entered into on, or after, Royal Assent to FA2016. 24  Ethics 9.4 Base erosion and profit shifting (BEPS)  The base erosion and profit shifting plan (BEPS) was drawn up by the Organisation for Economic Co-operation and Development (OECD) and the G20 countries. – The OECD is an inter-governmental organisation of 38 member countries which aims to stimulate economic development and world trade.  A number of the BEPS actions have already been covered by UK tax legislation for a number of years such as: – CFCs (Corporate anti-avoidance chapter) – Transfer pricing (Corporate anti-avoidance chapter) – Diverted Profits Tax (DPT) (Corporate anti-avoidance chapter) – Hybrid mismatch arrangements (Corporate anti-avoidance chapter).  A new framework (BEPS 2.0) has now been approved that seeks to deal with the issues due to a global tax regime that was not developed to deal with an increasingly digital economy. BEPS 2.0 proposes a two-pillar approach for reforms to have effect from the start of 2024: – Pillar one looks at moving away from a country only being able to tax a company if it has a physical presence in that country. Large multinational profitable groups (with revenue of > €20 billion) will have a proportion of their profits reallocated from the country of presence to the company those profits are being generated in. – Pillar two subjects multinational groups with profits > €750 million to a global minimum tax of at least 15%. For companies paying a tax rate of less than this, a top-up tax will need to be calculated. In the UK this has been introduced by way of two new taxes – the Multinational top-up tax and the Domestic top-up tax which are applicable for accounting periods starting on, or after, 31 December 2023. The detail of these two new taxes is not contained within the BPT syllabus 9.4.1 E-commerce  Traditional rules have struggled to determine the country of residence of an e- commerce company and therefore in which country its profits should be subject to tax. This is because traditional rules focus on the idea of a ‘physical presence’ as discussed above. This is the approach of the OECD which looks for a physical location in a country to give residence.  E-commerce activities are carried out using a website and server which makes these rules difficult to apply. There is also some difference between the views of the UK and the OECD here. 25  Chapter 1  UK tax legislation states that profits arising from a PE should be taxed in the country in which the PE is based. UK tax legislation makes no reference to a ‘physical presence’.  This leads to complications when a business is carried on over the internet as the UK and OECD have differing views:  UK view – A website is not a PE. – A server is not a PE.  OECD view – A website is not a PE. – A server could be a PE – if it performs activities such as taking orders, processing payments and arranging delivery of goods. 9.4.2 Digital services tax  The digital services tax (DST) was introduced as an interim measure until an international response to the issue discussed above is determined.  Under this, a charge at 2% of revenue will apply to groups earning revenue from providing a social media service, search engine or an online marketplace to UK users. The charge is only made to groups where revenue exceeds a set limit. The detail of the DST is not examinable in BPT. 26  Ethics Disclosure of tax avoidance schemes (DOTAS and DASVOIT) The 'Disclosure of Tax Avoidance Schemes' (DOTAS) rules give HMRC early warning of aggressive tax planning schemes. They operate as follows. (1) A person (a 'scheme promoter') devises a tax avoidance scheme and sells that scheme to a client. (2) The scheme promoter is required to disclose full details of the scheme to HMRC generally within five days of making the scheme available (some schemes are subject to a longer disclosure time limit). (3) HMRC provide the promoter with a scheme reference number (SRN). (4) The promoter passes the SRN to each client who uses the scheme. The scheme promoter must provide HMRC with a list of those clients. This must be done on a quarterly basis and the client must provide the promoter with additional information (e.g. NI number or tax reference number) for inclusion in the quarterly return. (5) The client (the 'scheme user') must thereafter include the SRN on his/her tax return for the period(s) in which they use the tax avoidance scheme. The DASVOIT regime was introduced to supplement DOTAS. This provides for disclosure of tax avoidance schemes for VAT and other indirect taxes. Under DASVOIT, the time limit for disclosure by the promoter is generally within thirty-one days of the scheme being made available (although some schemes are, once again, subject to different time limits) 10.1 'Notifiable arrangements' A tax arrangement is only to be disclosed where:  it will, or might be expected to, enable any person to obtain a tax advantage  that tax advantage is, or might be expected to be, the main benefit, or one of the main benefits, of the arrangement  it is a tax arrangement that falls within one of the specified descriptions or 'hallmarks'. 27  Chapter 1 10.2 The 'hallmarks' If a scheme bears one of the following hallmarks it falls within the disclosure regime.  Confidentiality – where the promoter would want to keep it confidential from other promoters or HMRC.  Premium fee – the fee charged depends largely on the success of the scheme.  Standardisation – the product being sold can be adapted to the client without significant modification. Additional hallmarks for DOTAS only are:  Losses – the scheme involves manufacturing trading losses for wealthy individuals which can be offset against other tax liabilities.  A leasing arrangement is involved with a cost of at least £10 million for a period of at least two years. Additional hallmarks for DASVOIT only are:  Retail supplies – splitting and value shifting – the scheme involves arrangements to split a supply to a retail customer to benefit from different VAT treatment for the different elements.  Offshore supplies: insurance and finance – insurance and finance supplies involving offshore loops that would be exempt if made directly from UK to EU based customer  Offshore supplies: relevant business person – arrangements where supplies of services are routed offshore so that a UK customer does not suffer irrecoverable VAT.  Disapplication of the option to tax – arrangements which lead to the premature ending of the option to tax. The regime also applies to stamp duty land tax schemes although in this case different hallmarks apply. 28  Ethics 10.3 Definition of a promoter Subject to certain exceptions, a person is a 'promoter' if, in the course of a business which involves the provision to other persons of services relating to taxation, the individual (i) is to any extent responsible for the design, organisation or management of the proposed arrangements; or (ii) markets or designs such schemes which have been designed by someone else 10.4 HMRC’s information powers HMRC can  require an introducer to identify the person who provided them with information about the scheme and any person with whom they have made any marketing contact in relation to the scheme  enquire why a promoter has not disclosed a scheme  resolve disputes and, if necessary, enforce disclosure  request more information if disclosure is incomplete  require a promoter to provide information to identify a client if HMRC suspects that the reported parties are not the only parties to the scheme  request further information about notifiable proposals to be provided within 10 days. 29  Chapter 1 10.5 Penalties  Failure to comply with a disclosure requirement – £600 (max) per day and increasing to £5,000 (max) per day where a disclosure notice has been issued but not complied with within 10 days.  Penalties under DASVOIT include an initial penalty of £600 a day but a higher penalty of up to £1 million can be charged in some circumstances.  Failure to provide information – initial penalty of £5,000 then up to £600 per day.  User penalties – scheme user fails to report a SRN starting from £5,000 per scheme up to £10,000 per scheme depending on the number of successive failures.  Enabler penalties – applies to those who enable the use of abusive tax avoidance arrangements. Penalty is the consideration the enabler has received for his/her/their role in the arrangement. Penalties may be mitigated if there is a reasonable excuse. 30  Ethics Test your understanding 2 You work for an ICAEW firm. Provided below is an extract from an email received from one of your clients, Neil Pye. I have been contacted by a firm of tax advisors called LoTax who believe they have come up with a scheme which can save me some tax. Obviously this is music to my ears! The key points as I understand it are:  The scheme involves putting some extra steps in place to achieve a higher amount of trading losses that would usually arise  This will lead to my income tax being considerably lower than would otherwise be expected  I would pay LoTax a fee of 15% of the tax savings generated. LoTax have assured me that the scheme is fully legal, it just takes advantage of loopholes that exist in the law. Let me know your thoughts. Neil Set out the ethical issues arising from this scheme, paying particular attention to the GAAR and DOTAS regime. Here you will need to apply a questioning mind to the situation which is a good way of demonstrating professional scepticism. You will also be demonstrating that you can identify ethical dilemmas and understand the implications. This enables you to develop the skill of behaving appropriately. 31 Chapter 1 10.6 Further HMRC powers  Follower notices HMRC may issue a follower notice to a taxpayer with an open enquiry or appeal if tax arrangements have been shown in a relevant judicial ruling in another party’s case not to give the asserted tax advantage.  Accelerated payment notices Requires a taxpayer to pay the tax that is in dispute in four cases. (i) Issue of a follower notice. (ii) Tax arrangement disclosable under DOTAS. (iii) HMRC is taking counteraction under GAAR. (iv) A company utilises a tax advantage from an arrangement and then surrenders all or part of this to another group company as group relief.  Promoters of tax avoidance schemes (POTAS) Promoters who trigger certain threshold conditions can be issued with conduct notices for periods of up to two years. Breaches of conduct notices can lead to penalties of up to £1 million and provide HMRC with certain disclosure rights about the promoter. Clients of a monitored promoter are subject to an extended assessing period of 20 years, if any tax is lost, for failure to pass on the reference number of the promoter.  Confidentiality Information provided to HMRC in order to assist them to deal with any breach of DOTAS rules (e.g. by accountants or tax advisers) will not be considered to be a breach of the duty of client confidentiality. 32  Ethics Answering ethics exam questions 11.1 Issues to consider when answering ethics questions:  Who are you working for?  Who is the client?  What is your relationship with the client?  What are you being paid to do?  Who is providing you with the information? How reliable a source are they?  Don’t jump to immediate conclusions – be prepared to exercise professional scepticism but often the question doesn’t give the full facts and these would always need to be established first.  Remember that money laundering responsibilities are completely separate from any relationship with HMRC.  Think about where to include the ethics part of the answer. Should it go into the client letter or will that amount to tipping off?  Sometimes the situation in the question can impact on the underlying ethical issues – don’t always be tempted to divorce ethics from the rest of the question; dealing with ethics upfront is not necessarily the best approach because your answers to other parts of the question may have informed your assessment of the ethical situation. 33 Chapter 1 APPENDIX Fundamental ethical principles  Integrity – professional accountants shall be straightforward and honest in all professional and business relationships.  Objectivity – professional accountants shall not allow bias, conflicts of interest or the undue influence of others to override professional or business judgements.  Professional competence and due care – professional accountants have a continuing duty to – maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service based on current developments in practice, legislation and techniques; and – act diligently in accordance with applicable technical and professional standards when providing professional services.  Confidentiality – professional accountants shall – respect the confidentiality of information acquired as a result of professional and business relationships – refrain from disclosing such information without proper and specific authority unless there is a legal or professional right or duty to disclose; and – refrain from using such information for their personal advantage or the advantage of third parties.  Professional behaviour – professional accountants shall comply with relevant laws and regulations and avoid any action that discredits the profession. 34  Ethics Threats to fundamental ethical principles Professional accountants should evaluate any threats as soon as they are aware of them and identify the potential significance of the threat. Examples of threats that may arise are:  Self-interest threats – may occur because of the financial or other interests of a professional accountant, or of an immediate or close family member, in the client.  Self-review threats – may occur when a previous judgement needs to be re- evaluated by the professional accountant responsible for that judgement.  Advocacy threats – may occur when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised.  Familiarity threats – may occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others.  Intimidation threats – may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived. Safeguards to mitigate threats Safeguards created by the profession, legislation or regulation  Educational, training and experience requirements for entry into the profession.  Continuing professional development requirements.  Corporate governance regulations.  Professional standards.  Professional or regulatory monitoring and disciplinary procedures.  External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant. Safeguards in the work environment  Effective, well publicised complaints systems operated by the employing organisation, the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behaviour.  An explicitly stated duty to report breaches of ethical requirements. 35  Chapter 1 Standards for tax planning Professional Conduct in Relation to Taxation (‘PCRT’) was jointly produced by various accountancy and taxation bodies including the ICAEW. It includes practical advice about ethical and legal issues arising in the course of tax work and considers the relationship with both clients and HMRC. In addition to the Fundamental Principles listed above, PCRT has developed five standards which professional accountants must observe when advising on tax planning. Client specific: tax planning must be specific to a particular client’s facts and circumstances. Clients must be alerted to the wider risks and the implications of any courses of action. Lawful: at all times members must act lawfully and with integrity and expect the same from their clients.  Tax planning should be based on a realistic assessment of all of the facts, and on a credible view of the law.  Members should draw their clients’ attention to material legal uncertainties, e.g. if HMRC is known to view the law differently.  Members should consider taking further advice appropriate to the risks and circumstances of the particular case, for example where litigation is likely. Disclosure and transparency: tax advice must not rely for its effectiveness on HMRC having less than the relevant facts. Any disclosure must fairly represent all the relevant facts. Tax planning arrangements: members must not create, encourage or promote tax planning arrangements or structures that:  set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation.  are highly artificial or highly contrived and seek to exploit shortcomings or loopholes within the relevant legislation. Professional judgement and appropriate documentation: applying these requirements to particular client advisory situations requires members to exercise professional judgement on a number of matters. Members should keep notes on a timely basis of the rationale for the judgements exercised in seeking to adhere to these requirements. 36  Ethics Safeguards in case of a conflict of interest If a conflict of interest is identified, members should take the following steps:  Notify relevant parties of any actual/potential conflicts of interest.  Obtain consent of relevant parties to act.  If consent is refused, cease acting for one party involved in the conflict. If consent is given by all relevant clients for the firm to continue to act, the following safeguards should be implemented:  Use separate engagement teams.  Impose procedures to prevent access to information.  Issue guidelines to team members re: security and confidentiality.  Use confidentiality agreements for partners/employees.  Regularly review safeguards; this should be done by a senior individual not directly involved with that engagement.  If the conflict cannot be resolved or threats reduced to an acceptable level, the accountant or firm should conclude that it is appropriate to not accept one engagement, or resign from one or more conflicting engagements. Conflict resolution process When initiating an ethical conflict resolution process, a member should consider the following factors:  relevant facts  ethical issues involved  fundamental principles related to matter in question  the parties involved  established internal procedures  alternative courses of action. If the conflict remains unresolved:  seek advice within own firm and document advice given. If the conflict is with, or within, an organisation, consider consulting those charged with governance.  seek legal advice/advice from professional body or legal advisors.  consider withdrawing from engagement/conflict situation. 37  Chapter 1 Procedure for dealing with HMRC errors  discuss the matter with the client to either remove or confirm suspicion that an error has occurred  if an error has occurred, consider whether it is trivial. PCRT suggests that an isolated error resulting in a loss of tax of less than £200 might be considered to be de minimis and therefore not in need of disclosure. If a member discovers an HMRC error larger than this, the member should:  seek client authority to advise HMRC of the error (usually in engagement letter).  warn the client of possible legal consequences of not advising HMRC of the error.  advise that if consent is not given to contact HMRC, the member will cease to act for client.  keep written records of all correspondence and the actions taken. If the client continues to refuse to make the appropriate disclosure(s) about the error to HMRC the member must:  cease to act for the client.  inform HMRC in writing that the member no longer acts for the client but without disclosing why the member is ceasing to act.  consider withdrawing any reports signed (e.g. audit reports) if it is discovered that they may be misleading. The engagement letter should be checked to confirm if it contains authority to directly disclose to HMRC that the report may be misleading and, if no authority is found, the client’s consent should be requested to disclose.  consider whether a money laundering report should be made to the firm’s MLRO.  consider carefully and respond with caution to any professional enquiry letter. Procedure for dealing with errors under self-assessment If a member discovers an error made by the client, or the member’s firm, the member should:  seek client authority to amend the self-assessment return or, if the deadline for amendments has passed, to advise HMRC of the error.  warn the client of possible consequences of not advising HMRC of the error (interest/penalties).  keep written records of all correspondence and the actions taken. 38  Ethics Practice management Client and engagement acceptance Before accepting any new clients, the firm/accountant should consider:  Will acceptance create any threats to compliance with fundamental principles?  Is the firm competent to provide the services requested? Engagement letters Any services provided should be subject to an engagement letter. This is the contract between the accountant and client, which sets out each party’s responsibilities.  Should make it clear in what capacity the accountant is acting, i.e. as an agent for the client or as a principal.  Should cover the scope of the client’s and agent’s respective responsibilities.  There should be an engagement letter covering each separate contractual relationship (e.g. one per spouse or civil partner). Capacity as agent  Acting on client’s behalf – client retains responsibility for accuracy, so this is a low risk activity.  Example: – Submission of self-assessment returns.  The accountant owes a duty of confidentiality to client – No disclosure unless authorised by taxpayer.  Duty only overridden if: – Client suspected of money laundering, or – HMRC exercises statutory powers to obtain information, or – Court order forces accountant to make disclosure. Capacity as principal  Provision of tax advice.  May be liable to the taxpayer if advice is incorrect or inappropriate so this is considered to be a high risk activity. 39  Chapter 1 Responsibility for tax returns  The client retains responsibility for the accuracy of a tax return. The accountant should draw the client’s attention to this.  The accountant should obtain written evidence of the client’s approval of the return.  At times the accountant may recommend fuller disclosure in a tax return than is strictly necessary, for example when significant tax planning is involved.  The client should be made aware of the potential issues and implications of doing this. Fuller disclosure should not be made unless the client gives his/her permission. Professional indemnity insurance  Adequate cover should be in place providing at least the minimum level of cover. For ICAEW firms this minimum level is as follows (subject to some exceptions which are beyond the BPT syllabus): – £1.5 million per claim, unless the firm’s gross annual fee income does not exceed £600,000 in which case it is: – Two and a half times the gross fee income per claim, subject to a minimum of £100,000.  Must continue to hold cover for at least two years after ceasing to practise, preferably six. Data protection Anyone who handles personal data, such as a firm of practising accountants, has an obligation to protect that data under the General Data Protection Regulation (GDPR) and to adhere to the Data Protection Act 2018. Compliance with GDPR is overseen by the Information Commissioner’s Office (ICO). Any person/business processing personal data must register with the ICO, failure to do so is a strict liability criminal offence. Most businesses must appoint a data protection officer. The ICO must be informed within 72 hours of a breach that affects the rights and freedoms of individuals. 40  Ethics Money laundering Offences Under the Proceeds of Crime Act (POCA) 2002 there are three main criminal offences of money laundering. These are:  Laundering itself – punishable by up to 14 years’ imprisonment.  Failure to report. Under POCA it is an offence for those working in a regulated sector, including accountancy firms, to not report a reasonable suspicion of money laundering. This offence is punishable by up to 5 years’ imprisonment.  Tipping off. If a report made under POCA is disclosed to the client or a third party, this is an offence punishable by up to 2 years’ imprisonment. Similar provisions exist in relation to terrorist financing offences. The guidance on this area refers to money laundering and terrorist financing as MLTF. Defences If a charge of failure to report is brought, an individual can claim the following defences:  That he, she or they did not know or suspect money laundering or terrorist financing, and had not been provided with the appropriate training by his/her employer.  That the individual is exempt as his, her or their knowledge or suspicion came about in privileged circumstances; for example, providing information for use in actual/pending litigation.  There is a reasonable excuse for not making a report; for example, the reporter is under duress.  The known, or suspected, money laundering is taking place in a country outside the UK where this is not a criminal offence. This defence cannot be used in relation to terrorist financing. Procedures Relevant businesses, including firms providing tax and accountancy services must comply with the Money Laundering Regulations 2017. These require the following procedures to be maintained:  Registration with an appropriate supervisory authority. The ICAEW is one of the approved supervisory authorities. Any accountancy firms not regulated by one of the approved bodies will be supervised by HMRC. 41 Chapter 1  Appointment of a Money Laundering Reporting Officer (MLRO) and implementation of internal reporting procedures.  Prepare and maintain a whole firm written MLTF risk assessment.  Train staff to ensure that they are aware of the relevant legislation; know how to recognise and deal with potential MLTF, how to report suspicions to the MLRO, and how to verify client identity.  Establishment of appropriate internal procedures relating to risk assessment and management to deter and prevent money laundering, and make relevant individuals aware of the procedures. Ongoing monitoring of such procedures.  Customer due diligence to be carried out on any new client and monitoring of existing clients to ensure the client is known and establish areas of risk.  Verification of the identity of new clients and maintain evidence of identification and records of any transactions undertaken for or with the client.  Reporting suspicions of MLTF to the National Crime Agency (NCA), using a suspicious activity report (SAR). Care must be taken not to tip off the suspect as this in itself can constitute an offence. An accountant in sole practice would make a SAR directly to the NCA. Types of disclosures  A “protected disclosure” permits an accountant to disclose confidential information without client consent if there is knowledge or suspicion, or reasonable grounds for knowledge or suspicion, that a person has committed a MLTF offence.  An “authorised disclosure” is when an accountant seeks the consent of the NCA to undertake an activity which the accountant suspects may constitute laundering. It may be made before, during or even after committing a prohibited act (provided, in the latter case, there was good reason for not reporting earlier) and is a valid defence against a MLTF offence. This will often be used when the authorities are trying to secure the money laundered assets or when disengaging immediately could amount to tipping off. 42  Ethics Tax planning  The government offers various tax-savings schemes to encourage investment, for example ISA accounts for individuals.  Professional Conduct in Relation to Taxation advises that tax planning is legal and taxpayers are entitled to enter into transactions that reduce tax.  HMRC may challenge interpretations of the law but only the courts can determine whether a piece of tax planning is legal or not. Tax evasion Tax evasion is illegal. It involves misleading HMRC by either:  Suppressing information to which HMRC is entitled, for example by – failing to notify HMRC of a liability to tax – understating income or gains, or – omitting to disclose a relevant fact (e.g. duality of a business expense). Or  Deliberately providing HMRC with false information, for example by – deducting expenses that have not been incurred, or – claiming capital allowances on plant that has not been purchased. Tax avoidance  Organising tax affairs to minimise a tax bill.  Legal.  Examples include efficient use of losses, investment in ISA, and use of spouse exemption for IHT.  Schemes must be disclosed to HMRC.  HMRC states tax payers should avoid schemes that are aggressive or abusive. These can be identified by signposts including: – Tax benefits out of proportion to any real economic activity – Artificial or contrived arrangements – Money going round in a circle back to where it started. 43  Chapter 1 The tax gap and data analytics The tax gap is the difference between the total amount of taxes owed to the government and the actual amount received by the government. Data analytics is the process of examining data sets to draw conclusions about the information contained, for example whether income is understated on a tax return. HMRC uses data sets drawn from a variety of sources to reduce the tax gap. For instance, Real Time Information (RTI) for PAYE has given HMRC more accurate information about a large number of taxpayers (e.g. current home, date, addresses), making it easier for HMRC to find taxpayers who have underpaid their income tax. The introduction of Making Tax Digital for Business (MTDfB) will lead to further data sets being made available from different sources. 44  Ethics You are now in a position to attempt additional questions on this topic area. Visit the homework checklist on MyKaplan for a list of recommended questions. For further reading, refer to Chapter 1 of the ICAEW Workbook and look on MyKaplan for a summary of the home study sections. 45 Chapter 1 Test your understanding answers Test your understanding 1 Shobna It appears that sales have been understated. However, this may not be the case. The first thing I need to do is investigate what has happened and confirm if there are sales that have been missed from Shobna’s tax return in previous years. If this is the case I should speak to Shobna and advise her that she should disclose this to HMRC as soon as possible. I would advise her that underpayment of tax can lead to interest and penalties, but that these would be less if she tells HMRC of the error rather than if they find this themselves. If Shobna refuses to disclose I would check the engagement letter for the work for Shobna and see if I have the authority to disclose myself. I should consider whether the lack of disclosure by Shobna is deliberate. If I feel it is, this could be tax evasion. In the case of suspected tax evasion, I will have a duty to report to my firm’s money laundering reporting officer. If I do make a report I must be careful to avoid tipping off. My firm should consider whether they want to be involved with a client who is involved in potential tax evasion. If we resign from the engagement, we should notify HMRC that we are no longer acting, without providing the reason why. 46  Ethics Test your understanding 2 It should be noted first of all that although LoTax state the scheme is legal, we cannot confirm this without further information. If it is legal it would be classed as tax avoidance and the following points should be considered. Disclosure of tax avoidance schemes (DOTAS) It is highly likely that this scheme falls within the DOTAS regime as it  has gaining a tax advantage as one of its key benefits; and  appears to bear a ‘hallmark’ of such a scheme by the charging of a premium fee. This means LoTax should have disclosed the scheme to HMRC. If they have, they will be able to provide Neil with a scheme registration number (SRN). If they cannot provide this, then Neil should not use the scheme. If a scheme has been notified and Neil fails to use the SRN he can be charged a user penalty of £5,000 this year. If the scheme has been disclosed to HMRC it is likely that steps will be taken to close this loophole so the advantages shown currently are unlikely to last long. General anti-abuse rule (GAAR) Although legal precedent on this area is still developing, it is also possible that this arrangement will fall under GAAR. These rules apply to arrangements where:  gaining a tax advantage was one of the main purposes; and  the arrangements are abusive. As there appear to be contrived/abnormal steps involved in this arrangement and LoTax states it aims to exploit a loophole in the law, it appears likely they will be held to be abusive. If the GAAR applies, HMRC may require a just and reasonable adjustment to Neil’s tax liability for the relevant years. In addition, a GAAR penalty of up to 60% of the counteracted tax may be levied if a tax return is submitted which claims a tax advantage using relevant arrangements. Bearing these points in mind we should recommend that Neil does not use the scheme. 47 Chapter 1 48  Chapter 2 Corporation tax for a single company Outcome By the end of this session you should be able to:  Determine a company’s corporation tax liability  Explain the impact on the corporation tax liability of various issues including R&D, intangibles and the substantial shareholding exemption (SSE)  Explain the liability to corporation tax of investment companies and answer questions relating to these areas. MyKaplan resources This topic is covered on MyKaplan in the module Corporation tax for a single company. ICAEW resources The underpinning detail for this chapter can be found in Chapters 9 and 10 of the ICAEW Workbook. 49 Chapter 2 Overview CORPORATION TAX FOR A SINGLE COMPANY Calculating Substantial corporation tax shareholding exemption R&D Intangibles 50  Corporation tax for a single company Corporation tax (revision) 1.1 Basics  UK CT is payable by UK resident companies.  Companies are assessed on their 'Taxable Total Profits' (TTP) for the ' accounting period' (AP).  The TTP brings together the company’s income and gains from all sources.  If an accounting period is more than 12 months long, then this needs to be split into two APs made up of: – The first 12 months, and – The balance. 1.2 Corporation tax computation Trading income X Adjusted trading profits less capital allowances (refer to Appendix) Property income X Income from UK and overseas let property Non-trading loan X Non-trade interest receivable less non- relationships trade interest payable Company distributions X Dividends from UK and overseas companies that are not exempt (covered in section 1.2.1) Chargeable gains X Chargeable gains less capital losses ––– Total income and gains X Less: Qualifying (X) National charity donations charitable donations ––– Taxable Total Profits X ––– 51 Chapter 2 1.2.1 Dividends received  The vast majority of dividends received from UK and overseas companies are exempt from UK corporation tax.  Dividends received by small companies are exempt if: – they are received from a UK company or a company resident in a country with which the UK has a double tax treaty, and – the dividend is not paid as part of a scheme that has the obtaining of a UK tax advantage as one of its main purposes.  Dividends received by companies that are not small are exempt if they fall under any one of five exempt categories: – Received from a company that is controlled by the recipient – Relate to non-redeemable ordinary shares – Received from a portfolio holding of the share class concerned (i.e. < 10% holding) – Relate to a transaction not designed to reduce UK tax, or – Relate to shares accounted for as liabilities.  A small company is defined as one that has: – fewer than 50 employees; and – either:  annual turnover ≤ €10m, or  balance sheet total ≤ €10m.  It is therefore extremely rare to encounter a dividend which is taxable. 52  Corporation tax for a single company 1.3 Calculation of corporation tax  The rate of tax depends on the financial year in which the accounting period falls.  From FY2017 to FY2022 the standard rate of corporation tax for all companies, irrespective of their level of profits, was 19%.  In FY2023 the rate of corporation tax depends on the augmented profits of the company. Augmented profits ≤ £50,000 >£50,000 but 40% of total expenditure) or for R&D incurred before 1 April 2023. If an accounting period straddles 1 April 2023 a time apportioned credit rate can be used. The tax credit is capped at:  £20,000 plus three times the total PAYE and NICs liability for the period (not just that related to workers engaged in R&D). The company is exempt from the cap if:  its employees are involved in creating, preparing to create or managing any intellectual property created, and  no more than 15% of its qualifying R&D spend is incurred on subcontracting R&D to connected parties. 58  Corporation tax for a single company Test your understanding 2 Super Ltd is a small company for R&D purposes. The company does not subcontract R&D and its staff manages the intellectual property created. The company has the following results for the year ended 31 March 2024: £ Trading income (before any R&D) 130,000 R&D (all incurred on 1 December 2023 and of which £20,000 is 220,000 capital expenditure on new plant and machinery) Non-trading loan relationships 25,000 Super Ltd is not an R&D intensive company. (a) What will the R&D tax credit be? (b) What will the R&D tax credit be if Super Ltd is an R&D intensive company? (c) What will the R&D tax credit be if Super Ltd is not an R&D intensive company with a year end of 31 December 2023? Being able to advise SMEs on the tax relief available for R&D expenditure shows the behaviour of adding value Note: The trading loss carried forward is then reduced by the amount of the loss surrendered to obtain the tax credit. 59  Chapter 2 2.2 Above the line R&D credits for large companies The above the line tax credit is the only relief available for large companies for R&D expenditure. SMEs who have carried out this work for large companies can also claim this relief. Under this scheme:  The company is entitled to a credit for any accounting periods in which it has qualifying R&D expenditure. The credit, known as the RDEC, is given at the rate of 20% of the qualifying R&D spend. – The RDEC was at 13% before April 2023. For accounting periods straddling, the correct rate according to the date of expenditure should be used.  This credit is referred to as being ‘above the line’. This means the amount of credit the company receives is treated as taxable income in the TTP computation. In a period where the RDEC is available: – R&D expenditure can be deducted from taxable profits, but – The RDEC must be added as taxable income.  The impact of the above is that (for accounting periods falling entirely after 1 April 2023) relief is claimed for 80% of R&D expenditure against taxable profits.  Relief for the other 20% of the qualifying spend is claimed against the corporation tax liability. The company uses the RDEC to pay the current year corporation tax liability.  If the RDEC exceeds the corporation tax liability for the period, the company can claim a repayment of the excess from HMRC. Any repayment is subject to two caps. This means the repayment will be the lowest of three figures: – the remaining RDEC – the full current year RDEC less notional corporation tax liability on that credit. – the amount of PAYE and NICs paid by the company in respect of its workers engaged in R&D.  Any remaining amounts of the RDEC that cannot be repaid due to the above caps can either be – carried forward by the company to offset against its own future corporation tax liabilities, or – surrendered to other group members. 60  Corporation tax for a single company Test your understanding 3 Rook Ltd is a large company with qualifying R&D expenditure of £630,000 in the year ended 31 March 2024. The company has made a trading profit of £350,000 in the year before any adjustments for R&D. Its only other taxable income for the year is a chargeable gain of £255,000. Its PAYE and NIC costs for employees involved in R&D activities amount to £72,100. (a) Compute the R&D credit that Rook Ltd can claim if it elects under the R&D tax credit regime and explain how the credit will be used. (b) What would have been the position if the company had had a year end of 31 December 2023 and £100,000 of the qualifying R&D expenditure had been incurred prior to 1 April 2023? Being able to advise large companies on the tax relief available for R&D expenditure shows the behaviour of adding value. 61 Chapter 2 Intangibles 3.1 Tax treatment Company acquires IFA (not goodwill) post April 2002 Ownership: deduction for On disposal: profit amortisation/ impairments or loss or, if an election is made, 4% straight line WDA  The rules distinguish between trade related assets and non-trade related assets and operate in a similar way to the loan relationship rules. The treatment of IFAs purchased pre April 2002 was different but pre April 2002 IFAs are not examinable in BPT. 3.1.1 Goodwill The treatment of goodwill depends on when the goodwill was purchased/created. Goodwill from 1 April 2002 to 31 March 2019  Goodwill purchased or internally generated on/after 1 April 2002 is treated as a trading asset.  Amortisation is allowable on goodwill acquired before 3 December 2014.  No deduction is available for goodwill created on incorporation on/after 3 December 2014 or purchased from 8 July 2015 (although companies will be able to continue to claim relief for goodwill arising before this date). 62  Corporation tax for a single company Goodwill arising on or after 1 April 2019  When a company purchases goodwill from an unrelated party on/after 1 April 2019 a deduction is available.  This deduction is calculated at a fixed rate of 6.5% of qualifying costs (costs of purchasing the goodwill) but qualifying costs for relief are capped at six times the value of qualifying intellectual property (IP) assets purchased with the goodwill. Qualifying IP assets include patents, copyrights and registered designs. Illustration 2 – WDA on goodwill On 1 April 2023, Aardvark Ltd acquired goodwill at a cost of £800,000, along with copyrights costing £120,000, from an unrelated party. Explain the deduction against trading profit that is available on the purchase of goodwill by Aardvark in its year ended 31 March 2024. Any amortisation claimed in the accounts for the goodwill will be a disallowed expense and must be added back. However, as the goodwill was purchased from an unconnected party a taxable deduction at 6.5% of qualifying costs can be claimed. The maximum cost on which WDA can be claimed is six times qualifying intellectual property (IP), which here would be the cost of the copyrights purchased at the same time as the goodwill. This gives £720,000 (£120,000 × 6). The WDA available is 6.5% × £720,000 = £46,800 63  Chapter 2 3.2 Profit on disposal of IFAs To calculate the profit or loss on disposal of an IFA: Accounting treatment Tax writing down followed i.e. allowance claimed amortisation/impairment Calculation: Calculation: Proceeds X Proceeds X Less: Carrying amount (X) Less: TWDV (X) ––––– ––––– Profit/(loss) X/(X) Profit/(loss) X/(X) ––––– –––––  TWDV is calculated as cost less WDAs claimed to date.  If the asset sold is goodwill on which no deductions were available, the profit will be calculated as sales proceeds less cost. If this gives rise to a loss, this will be treated as a non-trade debit rather than a trading loss. 64  Corporation tax for a single company 3.3 Intangibles and Rollover Relief (ROR) Applies if a company makes a profit on the sale of an IFA and reinvests the proceeds in another IFA.  If a new intangible is acquired: – within 12 months before or up to 36 months after disposal of the original IFA – part of the taxable profit on disposal may be deferred. The full profit is not available for rollover because a deduction has already been received for any amortisation/writing down allowance of the asset.  Maximum deferral: £ Lower of: – Proceeds X – Amount reinvested Less: Cost of original intangible asset (X) ––– Amount deferred X –––  The amount deferred is deducted from the cost of the new intangible. Test your understanding 4 Remus Ltd sold an intangible asset for £22,000. The asset had an original cost of £20,000 and had a TWDV and carrying value of £15,000 at the time of sale. Remus Ltd then purchased another intangible asset a month later for £26,000. Calculate the taxable profit if intangibles rollover relief is claimed. 65 Chapter 2 66  Corporation tax for a single company Test your understanding 5 Trick Ltd sold an intangible fixed asset for £21,000 which had cost the company £10,000 and had a TWDV of £8,500. Three months later, the company purchased another intangible fixed asset for £13,000. Calculate the taxable profit if rollover relief is claimed. Advising on the claiming of appropriate tax reliefs is an example of the behaviour adding value. 67 Chapter 2 Companies with investment business  A company with investment business is any company whose business consists wholly or partly of making investments. 4.1 Tax implications  Corporation tax is charged on these companies in the normal way.  If the company has a trade, the trading profits will be calculated in the usual way.  Overhead expenses incurred in managing investments are deductible as management expenses.  Management expenses are deducted on the face of the CT comp (before qualifying charitable donations and losses) if they are general management expenses.  Excess general management expenses are carried forward and offset against future income and gains, or group relieved in the current AP. The offset against future profits is by way of a claim which can specify the amount being offset. 68  Corporation tax for a single company Substantial shareholding exemption 5.1 The rules If a company disposes of shares in another company, the gain or loss on disposal is automatically exempt if the substantial shareholding conditions are met. A substantial shareholding is one where the investing company owns at least 10% of the ordinary share capital. The substantial shareholding exemption (SSE) is automatic if the following conditions are met: (1) the selling company has held at least 10% of the shares in the company being disposed of for a continuous 12 month period during the last 6 years, and (2) the investee company is a trading company (or a holding company of a trading group). 5.2 SSE for groups  When members of a group hold shares in the same company (a group here means ˃ 50% holding), the holdings of group members may be added together to determine if the 10% requirement has been met. 69  Chapter 2 APPENDIX Additional first year allowances for companies Additions From 1 April 2021 companies (not sole traders or partnerships) could claim first year allowances on new assets. These allowances depend upon the date of purchase and which pool the asset would usually be allocated to. The first year allowances are not available on cars. For purchases made between 1 April 2021 to 31 March 2023 first year allowances were available at a rate of:  130% for main pool plant and machinery (this is also known as the super deduction).  50% for special rate pool assets For purchases made from 1 April 2023:  The super deduction is no longer available for main pool items. Instead full expensing can be claimed. This allows a 100% first year allowance but is not subject to a cap in the way the annual allowance is.  The rate of first year allowances remains at 50% for special rate pool items. If the accounting period straddles 1 April 2023 and the asset on which the super deduction could be claimed was purchased before this date, the super deduction rate of 130% is calculated on a time apportioned basis according to how much of the accounting period falls before 1 April 2023 (i.e. for the year ended 30 June 2023, the relevant rate would be 100% + 30% × 9/12 = 122.5%) These enhanced capital allowances are expected to be available until 31 March 2026. 70  Corporation tax for a single company Illustration 3 – Straddling of FYAs Tenrec Ltd started to trade on 1 January 2023, and on the first day of trade purchased:  an electrical system costing £120,000 and  plant and machinery costing £300,000. Explain the first year allowances that would have be available to Tenrec Ltd in the year ended 31 December 2023. The electrical system would be allocated to the special rate pool. First year allowances would have been available at 50% of the cost in the year ended 31 December 2023, giving an allowance of £60,000. The plant and machinery qualified for the super deduction, however the rate must be apportioned as only part of the period fell before 1 April 2023. The rate of available allowance is calculated as: 100% + (30% × 3/12) = 107.5%. The FYA available on the main pool additions is £322,500 71 Chapter 2 When purchasing assets where the AIA and first year allowances are both available, a company can choose in which order to claim the AIA and FYA. It will usually be beneficial to claim the maximum AIA first on special rate pool items (as this is at 100% of qualifying expenditure whereas the FYA on special rate pool items is at 50%). Illustration 4 – Interaction of AIA and FYA Shrew Ltd has a December year-end. In the year ended 31 December 2024, Shrew Ltd purchases an air conditioning system for £1,100,000 on 1 February 2024. It makes no other purchases in this period. Calculate the maximum capital allowances that Shrew Ltd could claim in the year ended 31 December 2024. Shrew Ltd should elect to claim the maximum AIA against the expenditure first. The first £1,000,000 of expenditure will be covered by this. FYAs could then be claimed on the remaining expenditure of £100,000. These are calculated as: £100,000 × 50% = £50,000. The expenditure on which FYAs is not claimed (£50,000) is allocated to the special rate pool and will qualify for 6% WDA in future periods. This is: £50,000 × 6% = £3,000 p.a. from year ended 31 December 2025. Total capital allowances for the year ended 31 December 2024 are: £1,000,000 + £50,000 = £1,050,000. 72  Corporation tax for a single company Disposals On disposal of assets on which the enhanced first year allowances were claimed a balancing adjustment may arise.  For main pool items this is calculated as: – sales proceeds × 1.3 if the accounting period ended before 1 April 2023 – sales proceeds if the accounting period starts on or after 1 April 2023. A hybrid charge is calculated if the period straddles 1 April 2023. For example, in the year ended 31 December 2023 the charge will be calculated using the factor 1.075 (1 + (0.3 × 3/12)). Illustration 5 – Disposal of FYA asset Mole Ltd has a November year-end. On 1 June 2021, Mole Ltd purchased plant for £1,400,000. It sells the plant for £800,000 in October 2023 Calculate the capital allowances/balancing charges that will arise on Mole Ltd. The plant will have qualified for the super deduction in the year ended 30 November 2021. The allowance available will have been calculated as: £1,400,000 × 130% = £1,820,000. In the year ended 30 November 2023, a balancing charge w