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FINANCE ACT 2016

5

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FinanceAct2016
(F6(UK)article)
StudentAccountanthub

RelevanttoP6(UK)
ThisarticlelooksatthechangesmadebytheFinanceAct2016(whichisthelegislationasit
relatestothetaxyear2016/17)andshouldbereadbythoseofyouwhoaresittingP6(UK)inthe
yearfrom1April2017to31March2018.

PleasenotethatifyouaresittingP6(UK)intheperiod1September2016to31March2017,youwillbe
examinedontheFinanceAct2015andtheFinance(No2)Act2015,whichisthelegislationasitrelates
tothetaxyear2015/16.Accordingly,thisarticleisnotrelevanttoyou,andyoushouldinsteadrefertothe
FinanceAct2015articlepublishedontheACCAwebsite.

AllofthechangessetoutintheF6(UK)article(seeRelatedlinks)arerelevanttoP6(UK).Inaddition,
alloftheexclusionssetoutintheF6(UK)articleapplyequallytoP6(UK)unlesstheyarereferredto
below.

ThisarticlesummarisestheadditionalchangesintroducedbytheFinanceAct2016whichhaveaneffect
ontheP6(UK)syllabus.ItdoesnotrefertoanyamendmentstotheP6(UK)syllabuscoverageunless
theydirectlyrelatetolegislativechangesandcandidatesshouldthereforeconsulttheP6(UK)Syllabus
andStudyGuidefortheyear1April2017to31March2018fordetailsofsuchamendments.

THE UK TAX SYSTEM

TAXAVOIDANCEANDTAXEVASION
Candidatesshouldbeawarethattheregimesdesignedtopreventaggressivetaxavoidanceandto
penalisetaxevasioncontinuetobeaddedtoandstrengthened.

Apenaltyhasbeenintroducedtothegeneralantiabuserule(GAAR).ItapplieswheretheGAARhas
beenusedtocounteracttaxadvantagesarisingfromtaxarrangementsenteredintobythetaxpayer.The
penaltyis60%oftheamountofthetaxadvantagecounteractedbytheGAAR.

FinanceAct2015increasedthepenaltiesforfailuretonotifychargeabilitytotax,latefilinganderrorsin
respectofoffshorematters.Thelevelofthepenaltydependsonthecategorisationoftheoverseas
countryconcerned(asdeterminedbytheTreasury)andthebehaviourinvolved.

FinanceAct2016hasincreasedtheminimumpenaltyfortheseoffences,andintroducedfurtherpenalties
forboththetaxpayerandforthosewhohaveenabledtheoffencetobecarriedout.

Candidatesareexpectedtoknowthattheseregimesexistbutdonotneedtoknowthepreciseamounts
ofthepenaltiesthatmaybechargedorthecategorisationofparticularcountries.

INCOME TAX
THESCOPEOFINCOMETAX
Nonresidents
Thenewrulesrelatingtothetaxationoftheprofitsofnonresidentindividualsfromatradeofdealinginor
developinglandintheUKarenotexaminable.

PROPERTYANDINVESTMENTINCOME
Thetaxationofsavingsincomeanddividendincome
Thenewrulesrelatingtothetaxationofdividendsandsavingsincome,assetoutintheF6(UK)article,
areasrelevanttoP6(UK)astheyaretoF6(UK).

Candidatesshouldbeawarethat,althoughmostinterestisnowpaidgross,companiesarestillrequired
todeduct20%incometaxfrominterestpaidtoindividuals(unlesstheinterestisinrespectofaquoted
Eurobond).Interestpaidnetwillneedtobegrossedupby100/80forinclusionintheincometax
computationandtherewillthenbeataxcreditequaltothetaxdeducted.Thiscreditisdeductedfromthe
incometaxliability(togetherwithanyPAYE)inarrivingatincometaxpayable

Candidatesmustbeabletoidentifywhichtaxcomputationsarenecessaryinordertoadviseonparticular
alternativestrategiesandthentopreparethemquicklyandaccurately.Candidateswillbenefitfrom
workingpractisequestionsinordertoimprovetheirefficiencyandaccuracy.

Theincometaxcomputationhasbecomequiteinvolvedandcaremustbetakentoensurethatataxpayer
willpaytheleastpossibleamountoftax,particularlywheretheyhavematerialamountsofsavingsincome
and/ordividendincome.Takesometimetothinkaboutthefollowingpointsbeforeyoulookatthe
subsequentexamples.
Thetaxlegislationrequiresthepersonalallowancetobeoffsetagainstincomeinthemosttaxbeneficialmanner.

Thismayrequirethepersonalallowancetobeoffsetagainstdividendincomebeforeitisoffsetagainstsavings
income(seeexample1).

Thereisa0%startingrateforsavingsincomewhichfallswithinthefirst5,000oftaxableincome,and,possibly,a
savingsincomenilratebandofeither500or1,000.Thesemustbetakenadvantageofifatallpossible.

Accordingly,itwillnotbetaxefficientforsavingsincometoberelievedbythepersonalallowanceifitwouldotherwise
betaxableat0%.Thismayrequireconsiderationofwaysofincreasingnonsavingsincomeinordertomakefulluse
ofthepersonalallowance,forexamplebywithdrawinganincreasedamountfromapensionscheme(seeexample2)

Thefirst5,000ofdividendincomeistaxedat0%.

Individualswithsignificantamountsofinvestmentincomewillwishtoensurethattheytakeadvantageofthis,aswell
asthe0%startingrateforsavingsincome(wherepossible)andthesavingsincomenilrateband.

Theownersofownermanagedcompanieswillfindthatpensioncontributionsmadebythecompanyareattractivein
thatthecompanyobtainsacorporationtaxdeductionandthereneednotbeanyincometaxornationalinsurance
contributionsimplications.

Theywillalsofindthatadividendismoretaxefficientthanabonusduetoclass1nationalinsurancecontributions
(seeexample3).

Example1

Forthetaxyear201617,Ablehaspensionincomeof8,000,savingsincomeof4,500anddividend
incomeof9,000.Hisincometaxliabilityis:

Pensionincome 8,000

Savingsincome 4,500

Dividendincome 9,000

21,500

Personalallowance (11,000)

Taxableincome 10,500

Pensionincome:
8,000coveredbythepersonalallowance 0

Savingsincome:
4,500at0%(startingrate) 0

Dividendincome:
3,000coveredbythepersonalallowance 0
5,000at0%(dividendnilrateband) 0
1,000at7.5% 75


Incometaxliability 75

Youshouldnotethatthepersonalallowancehasbeenoffsetagainstthedividendincomeinprioritytothe
savingsincomeinordertomaximisethetaxsaved.Thisisnotduetotaxplanningoraclaimmadebythe
taxpayeritissimplythecorrectwaytooffsetthepersonalallowance.Ifthepersonalallowancehadbeen
offsetagainstthesavingsincome,therewouldhavebeenanadditional3,000ofdividendincomewhich
wouldhavebeensubjecttoincometaxat7.5%.

Example2

Forthetaxyear201617,Bondhaspensionincomeof7,000andsavingsincomeof6,500.Her
incometaxliabilityis:

Pensionincome 7,000

Savingsincome 6,500

13,500

Personalallowance (11,000)

Taxableincome 2,500

Pensionincome:
7,000coveredbythepersonalallowance 0

Savingsincome:
4,000coveredbythepersonalallowance 0
2,500at0%(startingrate) 0

Incometaxliability 0

Ifpossible,Bondshouldconsidertakingadditionalpensionincomeof3,500.Thisadditionalincome
wouldberelievedbyherpersonalallowance,suchthattherewouldbenoincreasetoBondsincometax
liability.Bondsincometaxliabilitywouldthenbecomputedasfollows.

Pensionincome:
10,500coveredbythepersonalallowance 0

Savingsincome:
500coveredbythepersonalallowance 0
5,000at0%(startingrate) 0
1,000at0%(savingsnilrateband) 0

Incometaxliability 0

Example3

Forthetaxyear201617,Campionhasemploymentincomeof8,000anddividendincomeof15,000.
Heisconsideringwhethertoawardhimselfabonusoradividendof10,000.Itshouldbeassumedthat
thenationalinsurancecontributionsemploymentallowancehasalreadybeenused.

(i)10,000bonus

Employmentincome(8,000+10,000) 18,000

Dividendincome 15,000

33,000

Personalallowance (11,000)


Taxableincome 22,000

Employmentincome:
11,000coveredby
thepersonalallowance 0
7,000at20% 1,400

Dividendincome:
5,000at0%(dividendnilrateband) 0
10,000at7.5% 750

Incometaxliability 2,150

Employersnationalinsurancecontributions
(18,0008,112)x13.8%
1,365

Employeesnationalinsurancecontributions
(18,0008,060)at12%
1,193

Corporationtaxsavedinrespectofemploymentincome:
((18,000+1,365)x20%)
(3,873)

Totaltaxcost/(saving)ofprofitextraction 835

(ii)10,000dividend

Employmentincome 8,000

Dividendincome
(15,000+10,000) 25,000

33,000

Personalallowance (11,000)

Taxableincome 22,000

Employmentincome:
8,000coveredby
thepersonalallowance 0

Dividendincome:
3,000at0%
(personalallowance) 0
5,000at0%
(dividendnilrateband) 0
17,000at7.5% 1,275

Corporationtaxsavedinrespectof
employmentincome:
(8,000x20%)
(1,600)

Totaltaxcost/(saving)ofprofitextraction
325

(iii)3,000bonusand7,000dividend

Employmentincome
(8,000+3,000) 11,000

Dividendincome
(15,000+7,000) 22,000


33,000

Personalallowance (11,000)

Taxableincome 22,000

Employmentincome:
11,000coveredby
thepersonalallowance 0

Dividendincome:
5,000at0%
(dividendnilrateband) 0
17,000at7.5% 1,275

Employersnationalinsurance
contributions
(11,0008,112)
x13.8% 399

Employeesnationalinsurance
contributions
(11,0008,060)at12%
353

Corporationtaxsavedinrespectof
employmentincome:
((11,000+399)
x20%)
(2,280)

Totaltaxcost/(saving)ofprofitextraction
(253)

Strategy(iii)demonstratesthatwhilstitmaybebeneficialfromanincometaxperspectivetoreceive
additionalemploymentincomewhereitwillbecoveredbythepersonalallowance,thisadvantageis
negatedbytheadditionalnationalinsurancecosts.Thedifferencebetweenstrategy(ii)andstrategy(iii)
of72(253325)maybeanalysedasfollows:

Employersnationalinsurancecontributions(11,000
8,112)at13.8%
399

Employeesnationalinsurancecontributions(11,000
8,060)at12%
353

Corporationtaxsavedinrespectofthebonus
((3,000+399)x20%)
(680)

72

INCOMEFROMEMPLOYMENT
Thetaxtreatmentofemployeeshareholdershares
Anemployeeshareholderisanemployeewhohasagreedtogiveupsomeofhisemploymentrights,for
exampleinrelationtostatutoryredundancypay,inexchangeforanawardofsharesinhisemployerora
parentcompanyofhisemployer.

Theemployeeisdeemedtohavepaid2,000fortheshares.Theexcessofthevalueofthesharesover
2,000issubjecttoincometaxinthenormalway.Similarly,ifthesharesarereadilyconvertibleassets,
suchthattheyaresubjecttoClass1NationalInsuranceContributions(NICs),NICwillonlybepayableon
theexcessofthevalueofthesharesover2,000.

Fromthepointofviewofcapitalgainstax,anychargeablegainarisingonthefirst50,000invalueof
employeeshareholdersharesreceivedbyanemployeeinrespectofaparticularemploymentisexempt.
Thisexemptionisnowsubjecttoalifetimelimitof100,000ofchargeablegains.
PENSIONSCHEMES
Annualallowance
Thenewrulesrelatingtothetaperedannualallowance,assetoutintheF6(UK)article,areasrelevant
toP6(UK)astheyaretoF6(UK).

Inaddition,candidatessittingP6(UK)needtobeawarethattheannualallowancewillnotbetapered
unlessanindividualsthresholdincomeexceeds110,000.Accordingly,whenconsideringtheannual
allowance,thefirsttaskistodetermineanindividualsthresholdincome.Thisiscalculatedasfollows:

Netincomepertheincometaxcomputation X

Less:individualsgrosspersonalpensioncontributions
(X)

Thresholdincome X

Itisonlywherethethresholdincomeexceeds110,000thatyoushouldthengoontocalculatethe
individualsadjustedincome,assetoutintheF6(UK)article,inordertodeterminewhetherornotthere
isaneedtotapertheannualallowance.

CAPITAL GAINS TAX

THEUSEOFEXEMPTIONSANDRELIEFS
Entrepreneursrelief(ER)
ERisavailabletoanindividualonthedisposalofanunincorporatedbusinessorsharesinatrading
company(providedcertainconditionsaresatisfied).Theeffectofthereliefisthatthegainsonthe
disposalsaresubjecttocapitalgainstaxatamaximumof10%.

TheFinanceAct2015introducedarestrictionwherebyERwouldnolongerbeavailableinrespectofthe
disposalofgoodwillwherethegoodwillwassoldtoaclosecompanyandtheindividualandthecompany
wererelated.

Thisrestrictionhasnowbeeneased,suchthatERisavailableonthedisposalofgoodwilltoaclose
companywhereeither:
theindividualholdslessthan5%ofthecompanysordinarysharecapitalorvotingrights,or
theindividualholds5%ormoreofthecompanysordinarysharecapitalorvotingrights,butsellsthewhole
shareholdingtoanothercompany(companyA)within28days.Theindividualmustholdlessthan5%ofcompanyAs
ordinarysharecapitalorvotingrights.

ThesechangesensurethatERcontinuestobeavailable,forexample,whereanindividualincorporates
hisbusinessinordertofacilitateasubsequentsaleofthenewlyincorporatedcompany.

CORPORATION TAX
THESCOPEOFCORPORATIONTAX
Nonresidentcompanies
Thenewrulesrelatingtothetaxationoftheprofitsofnonresidentcompaniesfromatradeofdealingin
ordevelopinglandintheUKarenotexaminable.

Closecompanies
Whereaclosecompanymakesaloantoaparticipator(shareholder)itisrequiredtopayataxchargeto
HMRCequaltoapercentageoftheamountoftheloan.Thisisthenrepaidtothecompanywhentheloan
iseitherrepaidorwrittenoff.Thepercentagetaxchargehasbeenincreasedfrom25%to32.5%in
respectofloansmadeonorafter6April2016.Thisisinordertoensurethattherateoftaxchargedon
suchloansremainsalignedtothehigherrateoftaxondividends.

TAXABLETOTALPROFITS
Researchanddevelopment(R&D)expenditure
LargecompanieswhichhaveincurredqualifyingexpenditureonR&Dnolongerhaveachoiceoftwo
differentreliefs,astheadditional30%taxdeductionisnolongeravailable.

Theonlyreliefavailabletosuchcompaniesisthetaxcreditequalto11%ofthecostsincurred.Thistax
creditreducesthecompanyscorporationtaxliability.Anyexcesscanbepaidtothecompanyuptoa
maximumofthecompanysPAYE/NICliabilityinrespectofthoseemployeesinvolvedinR&Dactivitiesfor
therelevantaccountingperiod.Anyremainingcreditbalancecanbecarriedforwardandoffsetagainst
thecompanyscorporationtaxliabilityforthenextaccountingperiodoranyotheraccountingperiodor,in
thecaseofagroupcompany,surrenderedtoanothermemberofthegroup.

The11%taxcreditisalsotreatedastaxableincome,suchthatitincreasesthecompanystaxable
income.ForacompanythathasincurredR&Dexpenditureof100,000,theoveralleffectoftherulesis
asfollows:

Corporationtax
onadditionalincome
(100,000x11%x20%) 2,200

Taxcreditdeductedfromcorporationtaxliability
(100,000x11%)
(11,000)

Corporationtaxsaved
(8.8%oftheexpenditure) 8,800

THECOMPREHENSIVECALCULATIONOFTHECORPORATIONTAXLIABILITY
Controlledforeigncompanies(CFCs)
ACFCisanonUKresidentcompanythatiscontrolledbyUKresidentcompaniesand/orindividuals.
TherehasbeenachangetothemannerinwhichtheCFCchargeiscalculated.

TheCFCchargeisaUKcorporationtaxliabilityimposedontheownersofnonUKresidentcompanies
whereUKprofitshavebeenartificiallydivertedfromtheUK.

TheCFCchargeiscalculatedasfollows:
UKcorporationtaxontheproportionoftheCFCschargeableprofits(theprofitsartificiallydivertedfromtheUK)to
whichtheUKresidentcompanyisentitled
lessadeductionforanequivalentproportionofanycreditabletax.

Whencalculatingthischarge,itisnolongerpossibletooffsetUKlossesandsurplusexpensesof
management.

STAMP TAXES
THELIABILITYARISINGONTRANSFERS
Thestamptaxespayableontransfersofland
Stampdutylandtax(SDLT)ischargedonthetransferoflandandbuildingsatvariousratesdepending
onwhetherthepropertyisresidentialornonresidentialandthevalueoftheproperty.

TheFinanceAct2015changedthemannerinwhichthetaxiscalculatedinrespectofresidential
property,witheachsliceofthevalueofthepropertybeingtaxedattheappropriaterate,ratherthanthe
wholeofthepropertybeingchargedatasingleratebyreferencetothepropertysvalue.

ThismethodofcalculatingSDLThasbeenextendedtononresidentialpropertybyFinanceAct2016.

Inaddition,new,higherrateshavebeenintroducedinrespectoftheacquisitionofresidentialproperties
incertaincircumstances.Thesehigherratesapplywherearesidentialpropertyisacquiredby:
anindividualwhoalreadyownsaresidentialproperty(andwhoisnotsimplyintheprocessofreplacingamain
residence)and
anyothertaxableperson,forexample,acompany.

Thefollowinginformationwillbeprovidedinthetaxratesandallowancessectionoftheexaminationfor
examsintheyear1April2017to31March2018.

Stampdutylandtax

Nonresidentialproperties

150,000orless 0%

150,001250,000 2%

250,001andabove 5%

Residentialproperties(note)
 125,000orless 0%

125,001250,000 2%

250,001925,000 5%

925,0011,500,000 10%

1,500,001andabove 12%

Note:Theseratesareincreasedby3%incertaincircumstances.

LandandBuildingsTransactionTax(LBTT)inScotlandisexcludedfromtheP6(UK)syllabus.

Furtherreading

Thefollowingarticles(versionsrelevanttotheFinanceAct2016)willbepublishedontheACCAwebsite
nextyear.
Taxationoftheunincorporatedbusinessthenewbusiness
Taxationoftheunincorporatedbusinesstheexistingbusiness
Internationalaspectsofpersonaltaxation
Inheritancetaxandcapitalgainstax
Trustsandtax
Corporationtax
CorporationtaxGrouprelief
CorporationtaxGroupsandchargeablegains

WrittenbyamemberoftheP6(UK)examiningteam

Lastupdated:3Nov2016