ICAEW Principles of Taxation (ICAEW) cheat sheet

Tax is a compulsory levy imposed by statute; the four canons are equity, certainty, convenience and efficiency (economy).

Direct taxes fall on the person intended to bear them (income tax, corporation tax, capital gains tax, inheritance tax); indirect taxes are collected by intermediaries (VAT, customs and excise duties).

Progressive tax takes a rising proportion of income as income rises; proportional takes a constant proportion; regressive takes a falling proportion relative to income.

Formal incidence is the legal liability to pay; effective incidence is who ultimately bears the economic burden after shifting (e.g. VAT passed to consumers).

Horizontal equity: equals are treated equally. Vertical equity: those with greater ability to pay bear more.

Tax base options: income, expenditure (consumption), capital/wealth, and transactions. The choice determines progressivity and neutrality.

Fiscal neutrality: a tax should not distort choices between alternatives (work vs leisure, saving vs spending, debt vs equity finance).

Taxable capacity is the maximum a government can raise before incentives, evasion and migration erode the base (Laffer effect).

Administrative principles: taxpayer certainty, low compliance cost, anti-avoidance rules, and simplicity of computation and collection.

Sources of UK tax law hierarchy: primary statute (Acts), secondary statute (statutory instruments), case law, then HMRC guidance and practice - guidance is persuasive, not binding.

Annual Finance Acts set rates and allowances; the tax year runs 6 April to 5 April for individuals and 1 April to 31 March for corporation tax.

Self assessment: filing deadline 31 January following the tax year for online returns; balancing payment also due 31 January, with payments on account 31 January and 31 July.

Penalties for late filing: £100 at day 1, then £10 per day after 3 months (max £900), then 5% of tax due or £300 if greater at 6 and 12 months.

Late payment interest and 5% surcharges apply to unpaid tax at 30 days, 6 months and 12 months.

HMRC compliance powers include discovery assessments, enquiries, information notices and penalties for careless or deliberate behaviour.

Statutory residence test: automatic overseas tests, automatic UK tests, then sufficient ties test; split-year treatment applies for arrivals and departures.

Tax avoidance is arranging affairs to reduce tax contrary to Parliament's intention (legal but counteracted); evasion is illegal misrepresentation or concealment.

General anti-abuse rule (GAAR) targets abusive arrangements; targeted anti-avoidance rules (TAARs) apply to specific transactions.

Income tax is charged on total income after allowable reliefs, then personal allowance is deducted, then tax is applied at the applicable rates by type of income.

Order of income: non-savings income first, then savings income, then dividend income; the personal allowance is allocated to income taxed at the highest rates first to minimise tax.

Personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000, giving nil allowance at £125,140.

Savings starting rate of 0% applies to the first £5,000 of savings income only where non-savings taxable income is below that amount.

Personal savings allowance: £1,000 for basic rate, £500 for higher rate, nil for additional rate taxpayers.

Dividend nil rate band £500 (2024/25); dividend rates 8.75% basic, 33.75% higher, 39.35% additional.

Class 1 primary NICs are employee contributions; Class 1 secondary are employer contributions; Class 2 and Class 4 apply to the self-employed based on profits.

Trading profit is computed by adjusting accounting profit: add back disallowable expenditure and non-trading income, deduct capital allowances and exempt income.

Capital allowances: annual investment allowance for plant and machinery, writing down allowances on pooling, and structures and buildings allowance on qualifying construction cost.

Corporation tax is charged on the taxable total profits of a company: trading profits, property income, non-trading loan relationship credits, chargeable gains less qualifying charitable donations.

Accounting period for corporation tax cannot exceed 12 months; a long period of account is split into two accounting periods.

Capital gains of a company are taxed as part of taxable total profits at the corporation tax rate, not at CGT rates; indexation allowance was frozen from January 2018.

Trading losses can be carried back one year against total profits of the same trade, carried forward against future total profits, or set against current-period total profits.

Group relief allows surrender of current-year trading losses between 75% group members; consortium relief requires at least 20% consortium ownership.

Transfer pricing rules apply to transactions between connected parties unless the company is small or medium sized.

Quarterly instalment payments apply to large companies (profits above the £1.5 million threshold, divided by the number of associated companies).

Close company rules attribute income and gains to participators and restrict relief for loans to participators.

Research and development relief: SME scheme gives an enhanced deduction or payable credit; RDEC gives an above-the-line credit for large companies.

Chargeable gain = disposal proceeds less allowable cost less incidental disposal costs less enhancement expenditure; base cost is acquisition cost plus incidental acquisition costs.

Annual exempt amount for individuals is £3,000 (2024/25); gains are added to taxable income to determine the applicable CGT rate.

Residential property and carried interest gains are taxed at 18% (basic) and 24% (higher/additional) from 6 April 2024; other gains at 10% and 20%.

Business asset disposal relief taxes qualifying gains at an effective 10% up to a £1 million lifetime limit.

Principal private residence relief exempts the main home; lettings relief is now restricted to periods of shared occupancy.

Holdover relief defers gain where business assets or certain gifts are transferred; entrepreneurs' relief is now business asset disposal relief.

Gifts to spouses and civil partners are at no gain/no loss; transfers to charities are exempt.

Losses must be claimed within four years of the end of the tax year of disposal to be set against gains of that year.

Inheritance tax is charged at 40% on the value of a chargeable estate above the nil rate band of £325,000; lifetime transfers within seven years of death are cumulated.

Residence nil rate band is £175,000 where the main home passes to direct descendants, tapered by £1 for every £2 of estate above £2 million.

Transfers between spouses are exempt; the unused nil rate band and residence nil rate band are transferable to a surviving spouse.

Potentially exempt transfers become exempt if the transferor survives seven years; taper relief reduces tax on the excess over the nil rate band at 3-7 years.

Annual exemption is £3,000 per donor, plus £250 small gifts per donee and normal expenditure out of income.

Chargeable lifetime transfers into trusts are taxed at 20% on the excess over the nil rate band, with further tax if the donor dies within seven years.

Business property relief and agricultural property relief give 100% relief on qualifying trading business or agricultural property held for two years.

Gifts with reservation of benefit remain in the estate where the donor retains a benefit in the gifted asset.

VAT is charged on taxable supplies of goods and services made in the UK by a taxable person in the course or furtherance of business.

Standard rate is 20%; reduced rate 5% on certain supplies (domestic fuel, children's car seats); zero rate on food, books, children's clothing and exports.

Registration threshold is £90,000 of taxable turnover in any rolling 12 months (2024/25); deregistration threshold is £88,000.

Compulsory registration takes effect from the end of the month following the month the threshold is exceeded, unless the threshold was exceeded in a 12-month period ending in a month, in which case it is from the start of the following month.

Output tax less input tax equals VAT payable; input tax is recoverable on business purchases supported by valid VAT invoices.

VAT return periods are usually quarterly; a return and payment are due one month and seven days after the end of the period.

Place of supply rules determine where VAT is due; reverse charge shifts liability to the business customer for imported services.

Partial exemption restricts input tax recovery where a business makes both taxable and exempt supplies.

Option to tax allows a business to charge VAT on previously exempt property to recover input tax.

Pension contributions receive tax relief at the marginal rate; annual allowance is £60,000, tapered for high earners by £1 for every £2 of adjusted income above £260,000 down to a £10,000 minimum.

Annual allowance charge applies to excess contributions; carry forward of unused allowance is available for three years.

Employer pension contributions are deductible for the employer and not taxable on the employee, subject to annual allowance limits.

Employment income is taxed on earnings from office or employment, including salary, bonuses, benefits and termination payments above the £30,000 threshold.

Benefits in kind are taxed on cash equivalent value; company cars use CO2-based percentages of list price; fuel benefit uses a fixed multiplier.

Employer's Class 1A NICs are payable on most benefits in kind at the secondary rate.

Individual savings accounts (ISAs) are exempt from income tax and CGT; annual subscription limit is £20,000.

Rent-a-room relief exempts up to £7,500 of rental income from letting furnished accommodation in the taxpayer's main home.

Trading and property allowances give £1,000 each of tax-free income from miscellaneous and property sources.

Tax planning is legitimate arrangement within the letter and spirit of the law; tax avoidance uses the letter against the spirit; evasion is illegal.

Professional ethics require integrity, objectivity, confidentiality, competence, and compliance with the law; ICAEW members must not assist in evasion.

Domicile and residence determine liability: UK resident and domiciled individuals are taxed on worldwide income; remittance basis may apply to non-domiciled residents.

Double taxation relief is available by credit or exemption under treaties; the UK has an extensive network of double tax agreements.

Transfer pricing and diverted profits tax counter profit shifting by multinational groups.

Controlled foreign company rules attribute profits of low-taxed overseas subsidiaries to UK parents.

Permanent establishment determines whether a non-resident has taxable presence in a jurisdiction.

Tax avoidance disclosure regimes require promoters to notify HMRC of schemes meeting hallmarks.

Statutory record-keeping: individuals must keep records for at least 22 months after the end of the tax year; companies for six years.