Taxation (TX-UK) FA2025 Review

Chapter 1: The UK Tax System

• The Overall Function and Purpose of Taxation

  • Economic Factors: Taxation policies influence key economic indicators such as employment levels, inflation, and imports/exports. They are also used to direct behavior, such as encouraging savings ($Individual Savings Accounts$, savings income, and dividend income nil rate bands) and charitable giving ($Gift Aid Scheme$). Conversely, the system discourages motoring ($fuel duties$), smoking and alcohol ($duties and taxes$), and environmental pollution ($landfill tax$).

  • Social Justice and Redistribution: The system accumulates and redistributes wealth according to different social principles:

    • Progressive Taxation: The proportion of tax raised increases as income rises (e.g., UK income tax).

    • Regressive Taxation: The proportion of tax paid falls as income rises (e.g., flat duties on cigarettes represent a higher percentage of total income for lower earners).

    • Proportional Taxation: The proportion of tax remains constant regardless of income level (e.g., income tax in Latvia/Lithuania).

    • Ad Valorem Principle: Tax calculated as a specific percentage of the item's value (e.g., $Value Added Tax$).

• Types and Structures of Taxes

  • Direct Taxation: Paid directly to the government based on income and profit (e.g., $Income Tax$, $Corporation Tax$, $Capital Gains Tax$, and $Inheritance Tax$).

  • Indirect Taxation: Collected via an intermediary (e.g., $VAT$, where a consumer pays a supplier who then remits it to the government).

  • Administrative Bodies: The $Treasury$ formally imposes and collects tax under the management of the $Chancellor of the Exchequer$. The administration and collection function is performed by $HM Revenue and Customs$ ($HMRC$).

• Sources of Tax Law and Guidance

  • Tax Legislation/Statutes: Mandatory adherence required; updated annually by the $Finance Act$. The government also issues detailed $Statutory Instruments$.

  • Case Law: Binding rulings from court decisions that provide guidance on interpreting legislation.

  • HMRC Guidance:

    • Statements of Practice: HMRC's interpretation and application of law.

    • Extra-statutory Concessions: Issued to relax legislation in cases of undue hardship or anomalies.

    • Internal Guidance Manuals: Working manuals for HMRC staff, available to the public.

    • Detailed Technical Guidance: Notices, Guidance Notes, and HMRC Briefs intended for tax agents and advisors.

• Tax Avoidance vs. Tax Evasion

  • Tax Evasion: Any illegal action taken to evade taxes, such as suppressing information (failing to declare income) or providing false information (claiming fictitious expenses). Penalties include fines and/or imprisonment.

  • Tax Avoidance: The legal reduction of tax burdens using allowances, exemptions, and reliefs (e.g., $ISAs$ or splitting asset ownership between spouses). Includes disclosure obligations under $Disclosure Of Tax Avoidance Schemes$ ($DOTAS$) and the $General Anti-Abuse Rule$ ($GAAR$), which targets abusive arrangements that are not reasonable.

• Professional and Ethical Standards

  • Accountants must uphold the standards of the $ACCA$, maintaining an objective outlook and professional service levels.

  • The $ACCA Code of Ethics and Conduct$ principles: Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behaviour.

  • Dealing with HMRC Errors: A member must explain the need for disclosure to the client. If the client refuses, the member must set out consequences in writing and potentially cease to act. If the member ceases to act, they must advise HMRC regarding the termination but not provide specific reasons.

  • Money Laundering Regulations: Acts such as concealing or transferring criminal property (including proceeds of tax evasion). Firms must appoint a $Money Laundering Reporting Officer$ ($MLRO$), and suspicions are reported to the $National Crime Agency$ ($NCA$). "Tipping off" a client that a report has been made is a statutory offense.

Chapter 2: The Income Tax Computation

• Introduction and Timing

  • Individuals are assessed for each tax year, which runs from $April 6$ to the following $April 5$. The current year $2025/26$ spans $April 6, 2025$ to $April 5, 2026$.

• The Computation Proforma

  • Taxable Income is analyzed across three columns: Non-Savings Income (employment, trading, property, pensions), Savings Income (bank interest), and Dividend Income.

  • Order of Deductions: Allowances and reliefs are deducted first from Non-Savings, then Savings, then Dividend income.

  • Exempt Income: Examples include interest/bonuses on National Savings & Investment Certificates, results from gaming/lottery/premium bonds, and income within an $ISA$.

• Comprehensive Tax Rates for $2025/26$

  • Non-Savings Income Rates:

    • Basic Rate ($£1$ to $£37,700$): $20\%$

    • Higher Rate ($£37,701$ to $£125,140$): $40\%$

    • Additional Rate (Above $£125,141$): $45\%$

  • Savings Income Rates:

    • A Starting Rate of $0\%$ applies to the first $£5,000$ of taxable income, but only for savings where Non-Savings taxable income does not already exhaust that band.

    • Nil Rate Bands: $£1,000$ for basic rate taxpayers and $£500$ for higher rate taxpayers. Additional rate taxpayers receive no nil rate band.

    • Savings above these limits are taxed at $20\%$, $40\%$, or $45\%$ depending on which band the income falls into.

  • Dividend Income Rates:

    • The Dividend Nil Rate Band is $£500$ for all taxpayers.

    • Basic Rate: $8.75\%$

    • Higher Rate: $33.75\%$

    • Additional Rate: $39.35\%$

• Personal Allowance ($PA$)

  • The standard $PA$ for $2025/26$ is $£12,570$.

  • Tapering/Reduction: Where $Adjusted Net Income$ ($ANI$) exceeds $£100,000$, the allowance is reduced by $£1$ for every $£2$ of excess income.

  • $ANI$ Formula: $\text{Net Income} - \text{Gross Gift Aid Donations} - \text{Gross Personal Pension Contributions}$.

  • The $PA$ is reduced to zero when $ANI$ reaches $£125,140$.

  • Transferable Amount/Marriage Allowance: Partners can elect to transfer $£1,260$ of the $PA$. This gives the recipient a tax reducer of $£1,260 \times 20\% = £252$. Both parties must be either basic rate or non-taxpayers.

• Payments and Reliefs

  • Qualifying Interest Relief: Interest on loans for specific purposes (e.g., acquiring a partnership interest, purchasing plant/machinery for work, or interest in a close trading company) is deducted from $Total Income$.

  • Gift Aid: Contributions are treated as being paid net of $20\%$ basic rate tax. For higher and additional rate taxpayers, relief is achieved by extending the tax bands by the gross amount of the donation.

  • Child Benefit Income Tax Charge ($CBTC$): Applies if a partner's $ANI$ exceeds $£60,000$. The charge is $1\%$ of the benefit for every $£200$ of income over the threshold. It is effectively $100\%$ if income reaches $£80,000$.

• Residence Rules

  • UK residents pay tax on worldwide income; non-residents pay on UK-sourced income only.

  • Step 1: Automatic Overseas Tests (e.g., spent less than $16$ days in UK and resident in last $3$ years; or less than $46$ days if not previously resident).

  • Step 2: Automatic UK Tests (e.g., spent $183$ days or more in UK; or only home is in the UK).

  • Step 3: Sufficient Ties Test: Factors include spouse/children in UK, available accommodation, previous stays (> 90 days), or substantive UK work. The number of required ties decreases as the number of days spent in the UK increases.

Chapter 3: Property Income and Investments - Individuals

• Basis of Assessment

  • Default Method: The Cash Basis (receipts no more than $£150,000$ per annum). Taxpayers must use the accruals basis if receipts exceed this limit.

  • Scope: Includes rents and premiums received on short leases.

• Allowable Deductions and Reliefs

  • General Rule: Expenses must be incurred wholly and exclusively for the rental business (e.g., insurance, cleaning, repairs, agents' fees).

  • Capital Expenditure: Not allowable for deduction, but repairs are. Improvements are capital and disallowed.

  • Replacement of Domestic Items Relief: Available for replacing furniture/furnishings in residential lettings. Relief equals the cost of the replacement (capped at equivalent asset quality) less any proceeds from disposing of the old item.

  • Pre-trading Expenditure: Expenses incurred up to $7$ years prior to letting are treated as incurred on the first day of business.

  • Finance Expenses: Interest on loans to acquire or repair residential property is not deductible against property income. Relief is instead given as a $20\%$ tax reducer.

• Specific Reliefs and Rules

  • Rent a Room Relief: Up to $£7,500$ of gross rent is exempt if letting a room in a main residence. If rent is higher, the taxpayer can choose to be assessed on physical profit or (Gross Rent - $£7,500$).

  • Short Lease Premiums: If a lease is $50$ years or less, a portion of the premium is assessed as property income: $\text{Premium} \times \frac{51 - n}{50}$ (where $n$ is the duration of the lease).

  • Individual Savings Accounts ($ISAs$): Income is free of income tax and disposals of investments are free of $CGT$. The annual subscription limit is $£20,000$. Components include cash, and stocks and shares.

Chapter 4: Tax Adjusted Trading Profit - Individuals

• The Badges of Trade (MNEMONIC: $SOFIRM$)

  • Subject matter: Nature of the asset.

  • Ownership length: Brief ownership suggests trade.

  • Frequency of transactions: Rapid recurrence suggests trade.

  • Improvement and marketing: Work done to make item more sellable.

  • Reason for sale: Forced liquidity vs. profit intent.

  • Motive: Profit seeking.

• Financial Framework

  • Unincorporated businesses use the Cash Basis as reality from $2024/25$; they may elect the Accruals Basis. The Cash Basis simplified rules: include literal cash flow, including capital asset purchases/sales (except cars).

  • Companies must use the Accruals Basis.

• Adjusting Net Profit (Accruals Basis)

  • General Rule: Expenditure not wholly and exclusively for the trade is disallowed.

  • Disallowable Expenses (Add back to net profit):

    • Capital expenditure (depreciation, extensions, improvements).

    • Entertaining UK customers (employee entertaining is allowable).

    • Gifts to customers unless costing < £50, non-food/drink/tobacco, and carrying a conspicuous advertisement.

    • General charitable donations (unless small, local, and for trade promotion).

    • Fines and penalties (except certain parking fines for employees on business).

    • Owner's salary, drawings, and interest on owner's capital.

    • Salary paid to family above the commercial market rate.

  • Flat Rate Expenses: Traders can choose a mileage allowance ($45p$ for first $10,000$ miles, $25p$ after) for cars instead of actual costs. Private use adjustments for home-and-business premises (e.g., B&Bs) can use flat rates based on occupant count (e.g., $£500$ per month for two occupants).

Chapter 5: Capital Allowances

• Plant and Machinery (P&M)

  • Given in place of depreciation. Includes machinery, motor vehicles, computers, and furniture.

  • Annual Investment Allowance ($AIA$): $100\%$ relief on the first $£1,000,000$ of expenditure (pro-rata for short periods). Excludes cars.

  • Writing Down Allowance ($WDA$): Applied on a reducing balance basis.

    • Main Pool: $18\%$

    • Special Rate Pool ($SRP$): $6\%$. Includes integral features (lifts, lighting, heating), long-life assets (> 25 years life, cost > £100,000), and high-emission cars.

  • First Year Allowance ($FYA$): $100\%$ for new electric cars with zero emissions.

• Motor Cars Allowance Logic

  • New electric cars ($0\,\text{g/km}$): $100\%$ $FYA$.

  • Second-hand electric cars or cars $1-50\,\text{g/km}$: Allocate to Main Pool ($18\%$ $WDA$).

  • Cars > 50\,\text{g/km}: Allocate to Special Rate Pool ($6\%$ $WDA$).

• Sales and Transitions

  • Disposal Value: The lower of sale proceeds and original cost. Deducted from the pool balance.

  • Balancing Charge ($BC$): Arises if the disposal value exceeds the pool balance; added to trading profit.

  • Balancing Allowance ($BA$): Only occurs on the cessation of trade for main/special pools; deducted from trading profit.

  • Small Pools $WDA$: If the pool balance is < £1,000, the entire balance is written off.

  • Private Use Assets (Owners): Assets used partly for private tasks by sole traders/partners have their own columns. Allowances are calculated on full cost but only the business percentage is claimed.

• Structures and Buildings Allowance ($SBA$)

  • Straight-line allowance of $3\%$ per annum on the qualifying cost of construction/purchase of new commercial buildings (excluding land).

Chapter 6: Tax Year Basis of Assessment

• Determining Assessment Periods

  • Trading assessment follows the tax year ($April 6$ - $April 5$). Working to the nearest month ($March 31$) is standard.

  • New Trades: Assess profits from commencement to the end of the first tax year (March 31). Profits are time-apportioned.

  • Continuing Trades: Assess a standard $12$-month period ending in that tax year (the "matching" rule).

  • Cessation: Assess profits from the previous period's end to the actual date of cessation in the final tax year.

Chapter 7: Trading Losses - Individuals

• Loss Relief Options

  • Carry Forward: Set against future profits from the same trade. Must be relieved in full against the first available profit. Can be carried forward indefinitely.

  • Against Total Income: Relieve against total income of the current year and/or preceding year. Subject to a cap: the higher of $£50,000$ or $25\%$ of adjusted total income.

  • Against Capital Gains: After total income relief, any remaining loss can be used against gains in the same year.

  • Early Years Relief: Losses in the first four years of trade can be carried back against total income of the previous three tax years ($FIFO$ basis).

  • Terminal Loss Relief: Final $12$ months of trading loss carried back against previous three tax years ($LIFO$ basis).

Chapter 8: Partnerships

• Principles of Partnership Taxation

  • A partnership is a single entity, but partners are taxed individually on their share of profits.

  • Profits are calculated once for the firm (adjusting for non-allowable items like partner salaries or capital interest), then allocated.

  • Allocation Method: Prior appropriations (salaries and interest on capital) are allocated first; the residual balance follows the $Profit Sharing Ratio$ ($PSR$).

  • If the $PSR$ or salary changes, profits must be time-apportioned before allocation.

Chapter 9: Employment Income

• Employment vs. Self-Employment (MNEMONIC: $HIS CHORE$)

  • Holiday/Sick pay, Integral part of business, Substituted worker (cannot send one), Control over work, Hours/Fixed times, Obligation to provide/accept work, Risk (financial risk and sound management reward), and Equipment provision.

• The Computation

  • Gross salary/wages + bonuses + benefits - allowable deductions (professional subs, travel, pension contributions).

  • Assessment Timing: Cash basis on the earlier of the date of entitlement or date of actual receipt.

• Benefits in Kind

  • General Rule: Taxed on the cost to the employer. In-house benefits (e.g., airline staff travel) taxed on marginal cost.

  • Living Accommodation:

    • Job-related (necessary, customary, security): Exempt.

    • Non-job-related: Benefit = higher of annual value or rent paid.

    • Expensive accommodation (cost > £75,000): Additional benefit = $(\text{Cost} - £75,000) \times \text{Official Rate of Interest} (3.75\%)$.

  • Use of Assets: $20\% \times \text{Market Value}$ when first provided to the employee.

  • Car Benefit: $\text{List Price} \text{ (capped at } £5,000 \text{ for employee capital contributions)} \times \text{CO}_2 \text{ emission } \%$.

    • Emissions Base ($55\,\text{g/km}$): $17\%$.

    • Hybrid range matters for cars with $1-50\,\text{g/km}$. Range > 130 miles = $3\%$.

    • Diesel supplement: $4\%$ if RDE2 standard not met (overall max $37\%$\n - Fuel Benefit: Base figure of $£28,200 \times \text{Car Benefit } \%$. Only reduced to zero if the employee pays for all private fuel.

  • Beneficial Loans: Taxable if $> £10,000$. Benefit is interest at the official rate minus interest paid.

• $PAYE$ and Administration

  • Employer must deduct tax and $NIC$ and remit to $HMRC$ on the $22nd$ of each month. Submissions are made under $Real Time Information$ ($RTI$).

  • Forms: $P60$ (Year end summary to employee by May 31), $P11D$ (Benefits summary by July 6), $P45$ (Leaving summary).

Chapter 10: Pension Schemes

• Types of Schemes

  • Occupational: Set up by employer. Relief via "net pay arrangement" (deducted from salary before tax).

  • Personal: Relief at source. Basic rate relief added by $HMRC$. Higher/additional relief via band extension.

• Contribution Limits and Penalties

  • Relievable Contribution: Higher of $£3,600$ or $100\%$ of relevant earnings.

  • Annual Allowance ($AA$): Standard limit is $£60,000$. Unused $AA$ can be carried forward up to $3$ years ($FIFO$).

  • Tapered $AA$: For high earners (Adjusted Income > £260,000), $AA$ is reduced by $£1$ for every $£2$ of excess, down to a minimum of $£10,000$.

  • $AA$ Charge: Excess contributions are taxed at the individual's marginal rate.

Chapter 11: National Insurance Contributions ($NIC$)

• Classes of $NIC$

  • Class 1 (Employee): $8\%$ on earnings between $£12,570$ and $£50,270$, and $2\%$ above that threshold.

  • Class 1 (Employer): $15\%$ on all earnings above $£5,000$.

  • Class 1A (Employer): $15\%$ on the assessable value of taxable benefits.

  • Class 4 (Self-employed): $6\%$ on trading profits between $£12,571$ and $£50,270$, plus $2\%$ on the excess.

• Employment Allowance: $£10,500$ per year to reduce an employer's Class 1 liability. Not available to single-director companies.

Chapter 12-14: Capital Gains Tax ($CGT$) - Individuals

• Scope and Computation

  • Chargeable disposal of a chargeable asset by a chargeable person. Death is not a disposal.

  • Gains Calculation: $\text{Net Proceeds} - \text{Allowable Costs} = \text{Gain}$. Use Market Value for gifts to connected persons.

  • Annual Exempt Amount ($AEA$): $£3,000$ for $2025/26$.

  • Rates: Remaining basic rate band used at $18\%$. Excess gains used at $24\%$.

• Specific Asset Treatment

  • Shares Matching: (1) Same day, (2) Next $30$ days, (3) Share Pool (average cost).

  • Chattels (Moveable assets):

    • Wasting (life < 50 years): Generally exempt.

    • Non-Wasting: Gross proceeds and cost compared to $£6,000$. If proceeds > £6,000 but cost < £6,000, gain is restricted to $5/3 \times (\text{Gross Proceeds} - £6,000)$.

• Reliefs

  • Business Asset Disposal Relief ($BADR$): Lifetime limit of $£1,000,000$ qualifying gains taxed at $14\%$. Requires $2$-year ownership of a business or $5\%$ shareholding in a trading company plus employment.

  • Investors' Relief: $14\%$ tax on gains from unquoted trading company shares held for $3$ years (external investors only).

  • Rollover Relief: Defers gain if proceeds from a business asset (land, buildings, fixed P&M) are reinvested in new business assets within $12$ months before or $3$ years after disposal.

  • Gift Relief: Defers gain on the gift of business assets. Joint claim between donor and donee.

  • Private Residence Relief ($PRR$): Exempts gains on an individual's main home. Partial relief for periods of absence (e.g., last $9$ months, periods working abroad, or up to $3$ years for any reason).

Chapter 15: Self-Assessment and Payment for Individuals

• Key Dates

  • Filing: $October 31$ (paper) or $January 31$ (electronic).

  • Payment: $January 31$ following the tax year (balancing payment, $CGT$, and first $POA$). Second $POA$ on $July 31$.

  • Payments on Account ($POA$): Needed if previous year total liability was > £1,000 and < 80\% was deducted at source. Each $POA$ is $50\%$ of the previous year's tax and Class 4 $NIC$ liability.

• Penalties: Late filing ($£100$ initial). Late payment ($5\%$ after $30$ days, then again after $6$ and $12$ months). Interest on late payments at $8.5\%$

Chapter 16-22: Corporation Tax and Company Groups

• Taxable Total Profits ($TTP$)

  • Sum of trading profit, interest income ($NTLR$), property income, and chargeable gains, minus $Qualifying Charitable Donations$ ($QCDs$).

  • Dividends from other companies are generally exempt and excluded from $TTP$.

• Rates and Marginal Relief

  • Small Profits Rate: $19\%$ (for companies with augmented profits < £50,000).

  • Main Rate: $25\%$ (> £250,000).

  • Marginal Relief Formula: $(\text{Upper limit} - \text{Augmented profits}) \times \text{Standard Fraction } (3/200) \times \frac{\text{Taxable Total Profits}}{\text{Augmented profits}}$.

  • Limits are reduced for associated companies (controlled by the same person/company) and short accounting periods.

• Capital Gains for Companies

  • No $AEA$. Companies receive $Indexation Allowance$ on costs, but this was frozen in $December 2017$.

• Loss Relief and Groups

  • Current Year Loss: Can offset against any current total profits.

  • Carry Back: Allowed for $12$ months.

  • Group Relief ($75\%$ group): One company can surrender its trading loss or excess $QCDs/Property Losses$ to another member of the group.

  • Gains Group ($75\%$ group with > 50\% effective interest): Allows tax-free transfers of assets (no gain/no loss) and shared rollover relief.

Chapter 23: Inheritance Tax ($IHT$)

• Lifetime Transfers

  • Potentially Exempt Transfers ($PETs$): Gifts between individuals. No immediate tax. Become chargeable if donor dies within $7$ years.

  • Chargeable Lifetime Transfers ($CLTs$): Gifts into trusts. Immediate tax if above $Nil Rate Band$ ($NRB$). Rate is $20\%$ (if trustees pay) or $25\%$ (if donor pays).

• Exemptions: Spousal transfers, annual exemption of $£3,000$ (carried forward $1$ year), and marriage gifts ($£5,000$ for parents).

• The Death Estate

  • Includes all assets at probate value less debts and funeral costs.

  • Residence Nil Rate Band ($RNRB$): Additional allowance of $£175,000$ if a main residence is left to direct descendants.

  • Unused $NRB/RNRB$ from a deceased spouse can be transferred to the survivor (up to $100\%$

• Taper Relief: Reduces death tax on lifetime gifts given $3-7$ years before death ($3-4$ yrs: $20\%$, $4-5$ yrs: $40\%$, $5-6$ yrs: $60\%$, $6-7$ yrs: $80\%$

Chapter 24: Value Added Tax ($VAT$)

• Registration Thresholds

  • Compulsory: Taxable turnover in previous $12$ months exceeds $£90,000$.

  • Deregistration: Allowed if future turnover < £88,000.

• Financial Mechanics

  • Output VAT (on sales) minus Input VAT (on purchases) = VAT Payable/Repayable.

  • Tax Point: Basic tax point is delivery. Overridden by earlier payment or invoice, or invoice within $14$ days of delivery.

  • Cash Accounting Scheme: Account for VAT based on cash flow rather than tax points. Available if turnover < £1,350,000.

  • Flat Rate Scheme: Apply a fixed industry-specific percentage to VAT-inclusive turnover. Remove need for input tax records. Limit: $£150,000$ turnover.

  • Annual Accounting: One return per year with $POAs$. Limit: $£1,350,000$.