The Institute of Chartered Accountants in England and Wales

BUSINESS PLANNING:
TAXATION

For exams in 2020

Study Manual

www.icaew.com
 Business Planning: Taxation
The Institute of Chartered Accountants in England and Wales

ISBN: 978-1-5097-2735-3
Previous ISBN: 978-1-5097-2066-8

First edition 2013

Eighth edition 2019

All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system or transmitted in any form or by any means, graphic,
electronic or mechanical including photocopying, recording, scanning or
otherwise, without the prior written permission of the publisher.
The content of this publication is intended to prepare students for the
ICAEW examinations, and should not be used as professional advice.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Contains public sector information licensed under the Open Government
Licence v3.0.
Originally printed in the United Kingdom on paper obtained from
traceable, sustainable sources.

© ICAEW 2019

ii ICAEW 2020
 Welcome to ICAEW

I'd like to personally welcome you to ICAEW.

In a fast-changing and volatile world, the role of the accountancy profession has never been
more important.
As an ICAEW Chartered Accountant, you’ll make decisions that will define the future of global
business.
By choosing our world-leading chartered accountancy qualification, the ACA, you’ll acquire
world-leading knowledge and skills – with technology and ethics at the heart of your learning.
A focus on capabilities such as judgement and scepticism will enable you to make the right
decisions in diverse and often complex environments.
You’ll be equipped to flourish and to lead, to embrace technological change and to be
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We’ll create a world of strong economies, together.
I wish you the best of luck with your studies.

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Chief Executive
ICAEW

ICAEW 2020 Contents iii

iv Business Planning: Taxation ICAEW 2020
Contents
 Permitted texts viii
 Key resources ix
 Skills within the ACA xi
 Finance Act update – Finance Act 2019 xiv
1 Ethics 1
2 Income tax and NIC 45
3 Employee remuneration 77
4 Unincorporated businesses 109
5 Capital gains tax 137
6 Capital gains tax – reliefs 153
7 Inheritance tax 179
8 Personal tax – international aspects 217
9 The taxation of trusts 249
10 Corporation tax for a single company 279
11 Raising finance 315
12 Corporation tax losses 335
13 Anti-avoidance for owner-managed businesses 367
14 Groups and consortia 393
15 International expansion 435
16 Corporate anti-avoidance 473
17 Companies – special situations 507
18 VAT 531
19 Stamp taxes 557
20 Communication skills 581
21 Choice of business structure 617
22 Leases and property businesses 643
23 Transformation of owner-managed businesses 669
24 Corporate reorganisations 701
 Glossary of terms 747
 Index 773

The Business Planning: Taxation module enables you to apply technical knowledge and
professional skills to identify and resolve taxation issues that arise in the context of preparing
tax computations and to advise on tax-efficient strategies for businesses and individuals.
Questions within the Study Manual should be treated as preparation questions, providing you
with a firm foundation before you attempt the exam-standard questions. The exam-standard
questions are found in the Question Bank.

ICAEW 2020 Contents v

 Business Planning
The Business Planning modules provide students with the opportunity to gain subject- and
sector-specific knowledge while studying for the ACA. Students will sit one of the Business
Planning modules. There are three to choose from – Business Planning: Taxation, Business
Planning: Banking, and Business Planning: Insurance.

Business Planning: Taxation

Module aim
To enable students to apply technical knowledge and professional skills to identify and resolve
taxation issues that arise in the context of preparing tax computations and to advise on tax-
efficient strategies for businesses and individuals.
Students will be required to use technical knowledge and professional judgement to identify,
explain and evaluate alternative tax treatments and to determine the appropriate solutions to
taxation issues, giving due consideration to the needs of clients and the interaction between
taxes. The commercial context and impact of recommendations will need to be considered in
making such judgements, as will ethical and legal issues.

Prior knowledge
There are no regulations stipulating the order in which students must attempt this module.
However, students are strongly advised to complete both the Principles of Taxation module and
the Tax Compliance module before attempting this module, as the ability to prepare tax
computations is required to be successful at this module.
Although technical topics by necessity flow through the three tax exams, a technical topic will
not usually be retested in this module in a comprehensive computational question if it has
already been tested in detail in either of the other two tax exams.

Method of assessment
The Business Planning: Taxation module exam is 2.5 hours long. The exam will contain questions
requiring the use of communication, judgement and evaluation skills as well as an ability to
understand the interaction of different taxes.
The exam will consist of three questions. One question will be an integrated scenario of
approximately 40 marks, which will cover a range of taxes as well as including tax planning.
Ethics and law may be tested in any of the three questions.
The exam will be open book and will permit students to take any written or printed material into
the exam, subject to practical space restrictions. To see the recommended text(s) for this exam,
go to icaew.com/permittedtexts

Ethics and professional scepticism

It is imperative that ethical issues are prioritised in the planning of business taxation. Students
will be expected to apply the ICAEW Code of Ethics and the Professional Conduct in Relation to
Taxation across all of the questions in the exam. Students will be required to recognise and
explain key ethical issues, identify ethical dimensions of possible scenarios, make appropriate
judgements being mindful of professional scepticism and recommend in a sound and
trustworthy manner.

vi Business Planning: Taxation ICAEW 2020

 Specification grid
This grid provides a general guide as to the subject matter within this module and assessment
coverage over a period of time:

Syllabus area 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

ICAEW 2020 Business Planning vii

 Permitted texts
At the Professional and Advanced Levels there are specific texts that you are permitted to take
into your exams with you. All information for these texts, the editions that are recommended for
your examinations and where to order them from, is available on icaew.com/permittedtexts.

Professional Level exams Permitted text

Audit and Assurance 

Financial Accounting and Reporting 

Tax Compliance 

Business Strategy and Technology 

Financial Management 

Business Planning No restrictions

Advanced Level exams

Corporate Reporting No restrictions

Strategic Business Management No restrictions
Case Study No restrictions

The exams which have no restrictions include the following:

 Business Planning: Banking;
 Business Planning: Insurance;
 Business Planning: Taxation;
 Corporate Reporting;
 Strategic Business Management; and
 Case Study.
This means you can take any hard copy materials into these exams that you wish, subject to
practical space restrictions.
Although the examiners use the specific editions listed to set the exam (as listed on our website),
you may use a different edition of the text at your own risk.
This information, as well as what to expect and what is and is not permitted in each exam is
available in the Instructions to Candidates. You will be sent the instructions with your exam
admission details. They can also be viewed on our website at icaew.com/exams.

viii Business Planning: Taxation ICAEW 2020

Key resources
Whether you're studying the ACA qualification with an employer, at university, independently
(self-studying), or via an apprenticeship, we provide a wide range of resources and services to
help you in your studies. Here is a selection.
Take a look at the online exam resources available to you on icaew.com/examresources and
discover more resources and services at icaew.com/studentbenefits.
Syllabus, skills development and technical knowledge grids
This gives you the full breakdown of learning outcomes for each module, see how your skills
and technical knowledge will grow throughout the qualification.
Study guide
This guides you through your learning process, putting each chapter and topic of the Study
Manual into context and showing what learning outcomes are attached to them.
Exam webinars
The pre-recorded webinars focus on how to approach each exam, plus exam and study tips.
Past exams and mark plans
Each exam is available soon after it has been sat, with mark plans available once results have
been released. Remember that if you're accessing an exam from 2019, it may not reflect exams
for 2020. To access exam-standard questions that reflect the current syllabus, go to the Question
Bank.
Errata sheets
These are available on our website if we are made aware of a mistake within a Study Manual or
Question Bank once it has been published.
Exam software
You need to become familiar with the exam software before you take your exam. Access a
variety of resources, including exam guide, practice software, webinars and sample exams at
icaew.com/cbe.
Student support team
Our dedicated student support team is here to help and advise you throughout your training,
don't hesitate to get in touch. Email studentsupport@icaew.com or call +44 (0)1908 248 250 to
speak to an adviser.
Vital and Economia
Vital is our quarterly ACA student magazine. Each issue of Vital is packed with interesting articles
to help you with work, study and life. Read the latest copy at icaew.com/vital.
What's more, you'll receive our monthly member magazine, Economia. Read more at
icaew.com/economia.
Online student community
The online student community is the place where you can post your questions and share your
study tips. Join the conversation at icaew.com/studentcommunity.
Tuition
The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core
principles of quality course delivery. If you are not receiving structured tuition and are interested
in doing so, take a look at our recognised Partner in Learning tuition providers in your area at
icaew.com/dashboard.

ICAEW 2020 Permitted texts ix

 CABA
Access free, confidential support to help you take care of your wellbeing, at work and at home.
CABA's services are available to you, and your family, face-to-face, over the phone and online.
Find out more at caba.org.uk.
ICAEW Business and Finance Professional (BFP)
ICAEW Business and Finance Professional (BFP) is an internationally recognised designation and
professional status. It demonstrates your business knowledge, your commitment to
professionalism and that you meet the standards of a membership organisation. Once you have
completed the ICAEW CFAB qualification or the ACA Certificate Level, you are eligible to apply
towards gaining BFP status. Start your application at icaew.com/becomeabfp.

x Business Planning: Taxation ICAEW 2020

 Skills within the ACA
Professional skills are essential to accountancy and your development of them is embedded
throughout the ACA qualification.
The following shows the professional skills that you will develop in this particular module. To see
the full skills development grids, please go to icaew.com/examresources.
Assimilating and Using Information
Understand the situation and the requirements
 Demonstrate understanding of the business context
 Recognise new and complex ideas within a scenario
 Identify the needs of customers and clients
 Identify risks within a scenario
 Identify elements of uncertainty within a scenario
 Identify ethical issues including public interest and sustainability issues within a scenario
Identify and use relevant information
 Interpret information provided in various formats
 Evaluate the relevance of information provided
 Filter information provided to identify critical facts
Identify and prioritise key issues and stay on task
 Identify business and financial issues from a scenario
 Prioritise key issues
 Work effectively within time constraints
 Operate to a brief in a given scenario
How skills are assessed: students may be required to:
 assimilate information provided by internal and external sources;
 identify and evaluate inconsistencies in information provided from multiple sources; and
 recognise and explain key ethical issues for an accountant undertaking work in taxation.
Structuring problems and solutions
Structure data
 Structure information from various sources into suitable formats for analysis
 Identify any information gaps
 Frame questions to clarify information
 Use a range of data types and sources to inform analysis and decision-making
 Present analysis in accordance with instructions and criteria
Develop solutions
 Identify and apply relevant technical knowledge and skills to analyse a specific problem
 Use structured information to identify evidence-based solutions
 Identify creative and pragmatic solutions in a business environment
 Identify opportunities to add value
 Identify and anticipate problems that may result from a decision
 Identify a range of possible solutions based on analysis
 Identify ethical dimensions of possible solutions
 Select appropriate courses of action using an ethical framework
 Identify the solution which is the best fit with acceptance criteria and objectives
 Define objectives and acceptance criteria for solutions

ICAEW 2020 Skills within the ACA xi

 How skills are assessed: students may be required to:
 consider and calculate a range of appropriate tax treatments;
 provide descriptive analysis and explanations;
 integrate different taxes and jurisdictions;
 evaluate taxation impact of a transaction;
 integrate descriptions with calculations in a form appropriate for the user;
 apply technical knowledge to perform relevant, accurate calculations in a logically
structured way;
 identify further information or clarifying existing arrangements with a client;
 consider the impact of delaying or modifying future decisions; and
 identify and explain ethical and legal issues.
Applying judgement
Apply professional scepticism and critical thinking
 Recognise bias and varying quality in data and evidence
 Identify faults in arguments
 Identify gaps in evidence
 Identify inconsistencies and contradictory information
 Assess interaction of information from different sources
 Exercise ethical judgement
Relate issues to the environment
 Appreciate when more expert help is required
 Identify related issues in scenarios
 Assess different stakeholder perspectives when evaluating options
 Appraise the effects of alternative future scenarios
 Appraise ethical, public interest and regulatory issues
How skills are assessed: students may be required to:
 apply scepticism to the integrity of information provided in the scenario having regard to its
source;
 select between appropriate options;
 identify omissions in the information;
 evaluate inconsistencies in information;
 evaluate the effects of future events;
 identify key linkages between information provided in a scenario and possible tax
treatments;
 compare the effects of a range of estimates, outcomes or tax treatments; and
 exercise own ethical judgement in assessing the consequences of various courses of action.

xii Business Planning: Taxation ICAEW 2020

 Concluding, recommending and communicating
Conclusions
 Apply technical knowledge to support reasoning and conclusions
 Apply technical knowledge, professional experience and evidence to support reasoning
 Use valid and different technical skills to formulate opinions, advice, plans, solutions,
options and reservations.
Recommendations
 Present recommendations in accordance with instructions and defined criteria
 Make recommendations in situations where risks and uncertainty exist
 Formulate opinions, advice, recommendations, plans, solutions, options and reservations
based on valid evidence
 Make evidence-based recommendations which can be justified by reference to supporting
data and other information
 Develop recommendations which combine different technical skills in a practical situation
Communication
 Present a basic or routine memorandum or briefing note in writing in a clear and concise
style
 Present analysis and recommendations in accordance with instructions
 Communicate clearly to a specialist or non-specialist audience in a manner suitable for the
recipient
 Prepare the advice, report, or notes required in a clear and concise style
How skills are assessed: students may be required to:
 determine the tax implications of scenarios and proposals to provide alternative
recommendations to meet a given individual or corporate objective or goal;
 formulate and recommend a reasoned conclusion from structured calculations;
 justify a conclusion made using knowledge of the existing tax regime;
 advise on the ethical considerations;
 explain the limitations of conclusions or recommendations;
 present a report/memorandum in response to a specific technical or ethical issue and in
accordance with client requirements;
 present a review of advice or proposed tax strategies making recommendations supported
by calculations or analysis of tax issues identified; and
 present a justification of a specific recommended action when a variety of options are
available.

ICAEW 2020 Skills within the ACA xiii

 Finance Act 2019 update
This summary shows the examinable changes made from Finance Act 2019. It is recommend
that this is used alongside Hardman's Tax Rates and Tables. For the specific edition
recommended for Business Planning: Taxation exams, please visit icaew.com/permittedtexts
This summary also contains details of legislation previously enacted which comes into effect for
the tax year 2019/20.

PERSONAL TAX
1 Income tax allowances
The following are the new allowances for 2019/20:
£
Personal allowance 12,500
The blind person's allowance for 2019/20 is £2,450.

1.1 Marriage allowance

If a spouse/civil partner has no tax liability or is only a basic rate taxpayer they can elect to
transfer personal allowance of £1,250 for 2019/20 to their spouse/civil partner provided the
recipient is a basic rate taxpayer. This would benefit a couple where the transferor has unused
personal allowance or for example only dividend income (taxed at 0% or 7.5%), but the
transferee has income taxed at 20%.

2 Taxation of income
2.1 Rate bands
The starting rate for savings income remains at 0% for 2019/20, with the starting rate band at
£5,000. This is only available if the individual's non-savings income is below this amount. The
basic rate band is increased to £37,500 for 2019/20.
The savings income nil rate band remains at 0% for the first £1,000 (basic rate taxpayers) or £500
(higher rate taxpayers) of savings income above any savings income taxed at the starting rate.
This income still counts towards the usual basic and higher rate bands. Whether a taxpayer is
basic rate or higher rate for this purpose is determined before taking account of this nil rate
band. An additional rate taxpayer receives no savings income nil rate band.
The first £2,000 of dividend income (for all individual taxpayers – except trusts) is covered by the
dividend nil rate band ie, is taxed at 0%. This income still counts towards the usual basic and
higher rate bands.

3 Savings and investments

3.1 Individual Savings Accounts (ISAs)
The maximum amount that an individual can save in an ISA remains at £20,000 for 2019/20. The
investment can be in cash and cash-like equity products, stocks and shares, innovative finance or
a lifetime ISA, split in any proportion (Lifetime ISA restricted to £4,000). However, an individual
can pay into a maximum of one of each type of ISA each year.

3.2 Junior ISAs

The maximum amount that can be paid into a Junior ISA (JISA) each year is £4,368 for 2019/20.

xiv Business Planning: Taxation ICAEW 2020

 3.3 Property income
3.3.1 Finance costs for residential property letting
From 2017/18, where a landlord incurs finance cost (interest, arrangement fees etc) in relating to
dwelling-related loans the deduction against property income is restricted. In 2019/20 only 25%
of the cost is deductible (75% in 2017/18; 50% in 2018/19; 0% from 2020/21). The amount not
deducted (ie, 75% in 2019/20) gets tax relief at 20% as a tax reducer in Step 6 of the income tax
computation.
This restriction does not apply to finance costs of:
 a company
 letting commercial property
 letting furnished holiday accommodation
 a business dealing in property or developing it for resale (ie, 'flipping' property)
The effect of the restriction on finance costs is often to increase the effective rate of tax on
property income above the landlord's marginal rate of tax.

4 Employment income

4.1 Company cars and vans

4.1.1 2019/20
From 2019/20 the car benefit percentages for petrol cars are applicable as follows:

Emissions Car benefit percentage

0–50g/km 16%
51–75g/km 19%
76–94g/km 22%
95–164g/km 23% + 1% for every 5g/km in excess of 95g/km
165g/km or more 37%
Diesel supplement 4% (ignore if car meets the Real Driving Emission 2
(RDE2) standard)

From 6 April 2019 the car fuel benefit charge is based on an increased figure of £24,100
(£23,400 in 2018/19).
4.1.2 Company vans
The van benefit charge increases from £3,350 to £3,430 for 2019/20.
The van fuel benefit charge also increases from £633 to £655.
The benefit for zero emission vans is increased to 60% of the ordinary van benefit for 2019/20 ie,
£2,058 (unless there is insignificant private use).
If there is insignificant private use the benefit is nil.
The percentage is expected to increase in future years.

4.1.3 Vehicle-battery charging facilities

From 6 April 2019 the provision of vehicle-battery charging facilities for electric cars at or near
work is exempt provided it is made available to all employees.

ICAEW 2020 Finance Act 2019 update xv

 4.2 Termination payments
4.2.1 Payments in respect of notice periods
If employment is terminated part way through the notice period and at the point of termination
the employer makes a payment, it is split into two parts:
 post-employment notice pay (PENP); and
 the balance of the payment (non-PENP payment).
The PENP, which is effectively the basic salary that would have been earned if the notice period
had been worked, is taxable as general earnings and subject to NIC. The non-PENP payment is
treated as a termination payment; ie, subject to the £30,000 rules.
BP ×D
The PENP is –T
P
BP = basic pay for the pay period (week/ month) before the notice is given
D = number of days/months from the last day of employment to the date that the notice
period should have expired
P = number of days/months in the pay period before notice
T = amounts already taxed as earnings (excluding any bonus or holiday pay)
HMRC allows workings in days or months.

5 National insurance contributions

5.1 Class 1
For 2019/20 the Class 1 primary rate paid by employees remains at 12% and the additional rate
above the upper earnings limit remains at 2%.
The Class 1 secondary rate paid by employers remains at 13.8%.
The primary threshold (for employees) increases to £166 per week (£719 per month), and the
secondary threshold (for employers) also increases to £166 per week (£719 per month). They
were both £162 per week in 2018/19.
The upper earnings limit increases to £962 per week (£4,167 per month).
Employers only need to pay Class 1 secondary contributions in respect of employees aged
under 25 who are in an apprenticeship, and employees aged under 21, if their earnings exceed
the upper secondary threshold of £962 per week (£4,167 per month).
The employment allowance for 2019/20 remains at £3,000. It is not available for companies
where the director is the only employee or personal service companies.

5.2 Class 1A and 1B

Only employers pay Class 1A NICs (on employees' taxable benefits) and Class 1B (on amounts
included in PAYE Settlement Agreements (PSAs)). The rates for both remain at 13.8% for
2019/20.

5.3 Class 2
For 2019/20, the equivalent weekly contribution increases to £3.00 (2018/19: £2.95).
A small profits threshold applies where profits are below £6,365.

xvi Business Planning: Taxation ICAEW 2020

5.4 Class 3
For 2019/20, voluntary Class 3 contributions increases to £15.00 per week (2018/19: £14.65).

5.5 Class 4
For 2019/20, the annual lower profits limit increases to £8,632 and the annual upper profits limit
rises to £50,000.
The rates of Class 4 NICs remain at 9% between the lower and upper limits and 2% above the
upper limit.

Worked example: Class 4 NIC

Simon is self-employed and has taxable profits of £75,000 for 2019/20.
Requirement
Calculate Simon's total NIC liability for the year.

Solution
Class 2 £ £
£3.00 × 52 156
Class 4
£(50,000 – 8,632) @ 9% 3,723
£(75,000 – 50,000) @ 2% 500
4,223
Total NICs 4,379

CAPITAL TAXES

1 Capital gains tax

1.1 Annual exempt amount

The annual exempt amount (AEA) increases to £12,000 for 2019/20. The amount available to
trusts is £6,000.

2.2 Relief for brought forward losses

The order of relief between capital losses brought forward and the annual exempt amount has
been reversed. The order of relief is as follows:
£
Current year gains 40,000
Current year losses (10,000)
Net gains for the year 30,000
Annual exempt amount (12,000)
18,000
Less losses brought forward (5,000)
Taxable gains 13,000

If losses brought forward exceed the net gains after the annual exempt amount the excess is
carried forward.

ICAEW 2020 Finance Act 2019 update xvii

 2.2 Entrepreneurs' relief
2.2.1 Period of ownership
For disposals from 6 April 2019, the relevant business property must be owned for a period of
two years ending with the date of disposal.
On cessation of the business (from 29 October 2018) the qualifying period is the two years up to
cessation, and the assets must be disposed of within three years of the cessation.
For shares issued under an EMI option scheme the two-year holding period runs from the date
the option is granted, not from the date the shares are acquired.
Prior to these dates each two-year period mentioned above was only one year.

2.2.2 Personal company for a disposal of shares

On a disposal of shares, entrepreneurs' relief is only available if the shares are in the individuals'
personal trading company.
For disposals from 29 October 2018, a personal trading company is one where the individual
making the disposal:
 owns at least 5% of the ordinary share capital of the company;
 as a result is able to exercise at least 5% of the voting rights in that company; and
 is entitled to either
– 5% of the profits for distribution and 5% of the assets on a winding up; or
– at least 5% of the proceeds on a sale of the whole ordinary share capital.
For disposals prior to 29 October 2018 the requirement was only where the individual making
the disposal
 owned at least 5% of the ordinary share capital of the company; and
 as a result was able to exercise at least 5% of the voting rights in that company.

2.2.3 A shareholding ceasing to be a personal company

Where on/after 6 April 2019, an individual's shareholding is diluted below 5% (ie, it is no longer
a personal company) due to a new share issue for cash, entrepreneurs' relief may still be
available. This can only happen if a disposal of the shares immediately before the new share
issue would have been eligible for entrepreneurs' relief.
By election a gain crystallises on a deemed disposal and reacquisition of the shares at the date
of the new share issue. The disposal proceeds are the market value (based on a whole company
valuation) immediately before the new share issue. The gain arising is then given entrepreneurs'
relief if the usual entrepreneurs' relief claim is made.
This election must be made by the first anniversary of the 31 January following the ta× year of
the deemed disposal.
A second election is also possible which defers the gain until a future disposal of the shares. The
deferred gain is in addition to any actual further gain which arises on the future disposal. On a
future disposal the deferred gain is still eligible for entrepreneurs' relief (despite not meeting
the personal company condition) if an entrepreneurs' relief claim is made by the first anniversary
of the 31 January following the tax year of the future disposal.
This election must be made within four years of the end of the tax year of the deemed disposal.

xviii Business Planning: Taxation ICAEW 2020

 Worked example: Shareholding ceasing to be a personal company
Tariq purchased a 6% shareholding in trading company Fabric Ltd in June 2010 for £30,000.
Tariq has been employed by Fabric Ltd through his period of ownership.
On 1 December 2019 one of the directors of Fabric Ltd exercised some share options and
Tariq's shareholding was reduced to 4.5%. Just before the exercise of the share options Tariq's
shares had been worth £58,000.
Tariq sold his shares on 1 May 2020 for £60,000. Tariq is a higher rate taxpayer and makes other
disposals that use his annual exempt amount each year.
Requirement
Calculate the capital gains tax payable by Tariq, assuming he wishes to pay as little tax as
possible and as late as possible.

Solution
2019/20 – December 2019
Tariq can elect for a deemed disposal at market value; ie, a gain of £28,000 (£58,000 – £30,000).
This is eligible for entrepreneurs' relief but Tariq can elect to defer the gain until future disposal.
2020/21 – May 2020
Tariq disposes of the shares and a gain is calculated using the market value at December 2019
as the deemed cost to give a gain of £2,000 (£60,000 – £58,000). In addition the deferred gain
crystallises.
Therefore Tariq's capital gains tax on the share disposal is £3,200 ((£28,000 × 10%) + (£2,000 ×
20%)), provided he makes an entrepreneurs' relief claim.

2 Inheritance tax

2.1 Nil rate band

As previously announced, the nil rate band will remain frozen at £325,000 for 2019/20.

2.2 Residence nil rate band

The residence nil rate band (RNRB) is available if:
 an individual dies on or after 6 April 2017;
 the individual's estate includes a residential property, or share of one that has been their
residence at some point in time; and
 it is bequeathed to direct descendants ie, children or grandchildren.
The RNRB is increased to £150,000 for 2019/20.

Worked example: Residence nil rate band

Alfred died on 1 December 2019 leaving a home worth £400,000 and other assets worth
£150,000 to his children. He had previously made a potentially exempt transfer in July 2016 of
£90,000 (after the deduction of annual exemptions).
Requirement
Compute the IHT payable as a result of Alfred's death.

ICAEW 2020 Finance Act 2019 update xix

 Solution
July 2016 PET
This PET becomes chargeable on Alfred's death as it is within seven years of death. However, its
value is below the £325,000 nil rate band available so no inheritance tax will be due.
December 2019 death estate
Alfred died after 6 April 2017 owning a home inherited by his direct descendants. He is
therefore entitled to a residence nil rate band of the lower of:
 the value of the home that's inherited by direct descendants (£400,000); and
 the maximum available for the estate at death (2019/20: £150,000).
This £150,000 residence nil rate band is deducted first from the value of Alfred's estate before
the remaining basic nil band available.
£
Chargeable estate 550,000
Less residence nil rate band (150,000)
Less remaining basic nil rate band 2019/20 (£325,000 – £90,000) (235,000)
Excess over nil rate band 165,000
IHT on £165,000 @ 40% 66,000

BUSINESS TAX

1 Capital allowances – plant and machinery

1.1 Special rate pool writing down allowance

From 6 April 2019 (1 April 2019 for companies) the writing down allowance (WDA) on the
special rate pool is 6% pa. Prior to that date the WDA was 8% pa. Where an accounting period
straddles 6 April 2019 a hybrid rate is calculated.

1.2 Annual investment allowance (AIA)

From 1 January 2019 the AIA is temporarily increased to £1 million for expenditure incurred in a
12-month period (previous limit: £200,000). Where the accounting period straddles 1 January 2019
the maximum is calculated on a pro rata basis. However, the maximum expenditure incurred in the
period before 1 January 2019 that can be covered by the AIA is £200,000 (for a 12-month
accounting period). The AIA will be £200,000 again from 1 January 2021.

Worked example: Capital allowances

Kamal is a sole trader and makes up accounts to 30 June each year. The tax written down value
(TWDV) of his main pool at 1 July 2018 was £75,000, and on his special rate pool was £30,000.
During the year ended 30 June 2019 Kamal made the following purchases:
1 October 2018 Air ventilation system – £320,000
25 January 2019 Machinery – £430,000

xx Business Planning: Taxation ICAEW 2020

 Requirement
Calculate the maximum capital allowances available to Kamal for the year ended 30 June 2019.
Ignore VAT.
Solution
Main Special
pool rate pool Allowances
Year ended 30 June 2019 £ £ £
TWDV b/f 75,000 30,000
Additions eligible for AIA
1 Oct 2018 Air ventilation system 320,000
25 Jan 2019 Machinery 430,000

AIA (Note 1) (400,000) (200,000) 600,000

105,000 150,000
WDA @ 18% (18,900) 18,900
@ 7.5% (Note 2) (11,250) 11,250
TWDV c/f 86,100 138,750
Total allowances 630,150
Notes
1 The maximum AIA for the year ended 30 June 2019 is £600,000 ((£200,000 × 6/12) +
(£1 million × 6/12)). However of this only £200,000 can be allocated to pre-1 January 2019
expenditure.
2 The special rate pool WDA is pro-rated at 6 April 2019 so is 7.5% ((8% × 9/12) + (6% × 3/12)).

2 Capital allowances – structures and buildings allowance (SBA)

SBA is a capital allowance for eligible construction costs, incurred due to contracts on/after
29 October 2018, on new non-residential structures and buildings used by a business for trade
purposes. This includes offices, retail and wholesale premises, factories, warehouses, walls,
tunnels etc, but not workplaces that are an integral part of a dwelling, such as a home-office.
The relief is calculated on a straight line basis for 50 years as:
Eligible construction costs × 2% pa
Eligible construction costs include expenditure on:
 the construction of a building (not including land)
 renovation or conversion of a building (including demolition costs and land alterations
necessary for construction)
 cost of a ready built structure purchased from a developer (excluding the cost of land)
The allowance can be claimed from when the qualifying asset first comes into use. If a structure
or building is renovated or converted a different 50-year period begins for the new expenditure.
The SBA is apportioned where:
 a chargeable period is less than or more than one year
 the business only qualifies for SBA for part of the period
 the structure/building is purchased/sold part way through the period
 the structure/building is used partly for trade and partly for non-trade purposes.
SBA expenditure does not qualify for the AIA.

ICAEW 2020 Finance Act 2019 update xxi

 If a qualifying asset falls into disuse the SBA continues to be available.
On sale of a qualifying asset there is no balancing adjustment. The purchaser takes over the
remaining allowances, over the rest of the 50-year period. Relief is apportioned in the period of
disposal. For chargeable gains purposes the SBA qualifying expenditure is an allowable
deduction in calculating the gain/loss, and the amount of the SBA given to the seller is added to
the sale proceeds. (If this gain is rolled over the SBA given to the seller is added to the sale
proceeds on the subsequent disposal).
On demolition of a qualifying asset, any unrelieved expenditure is a deduction in the capital
gains computation and no further capital allowances are claimed.

CORPORATION TAX

1 Corporation tax rates

Since 1 April 2015 all corporation tax profits have been taxed at the unified main rate.
For the financial year 2019 (FY2019) the rate of corporation tax remains at 19%. It is expected to
fall to 17% in FY2020.

2 Corporation tax instalments – very large companies

In addition to instalments for large companies, from 1 April 2019 similar rules apply for very
large companies.
A very large company is required to pay corporation tax in instalments. A very large company
has augmented profits exceeding £20 million. These limits are for a single company, with a
12-month accounting period. The limits are scaled down if:
 the accounting period is less than 12 months; and/or
 the company had 'related 51% group companies' at the end of the previous accounting
period (or, if there was no previous accounting period, on the commencement of this
accounting period).
A company is not treated as very large for the purpose of instalments if:
 it has a tax liability of less than £10,000 (for a 12-month period)
If the company has a 12-month accounting period, there are four equal instalments.
The first instalment is due by the 14th day of the 3rd month following the start of the accounting
period, for a very large company (ie, four months earlier than for a large company).
Subsequent instalments are due at three month intervals, with the final instalment due by the
14th day of the last month of the accounting period for a very large company (ie, four months
earlier than for a large company).
For a 12-month accounting period, this means that instalments are due by the 14th day of the
3rd, 6th, 9th and 12th months from the start of the accounting period for a very large company
(ie, all payable before the end of the accounting period).
If a new company is formed it cannot be large or very large in its first accounting period as it did
not exist/have an accounting period in the 12 months before the first accounting period. In
addition, if the first accounting period is less than 12 months long then the company cannot be
large or very large in the second accounting period, as there was a point in the 12 months
before that second accounting period that the company did not exist, or have an accounting
period.

xxii Business Planning: Taxation ICAEW 2020

 3 Leases
The accounting treatment of leases changed with the introduction of IFRS 16 Leases for
accounting periods beginning on/after 1 January 2019.

3.1 Tax treatment for lessees

The tax treatment for lessees (finance or operating leases) follows the accounting treatment.
The right-of-use asset and the lease liability are brought on to the balance sheet. These are
recognised at the present value of lease payments. Over the period of the lease the interest
expense and depreciation/amortisation are recognised in the income statement. This is a
convenient way of achieving a spread of the lessee's gross rentals which is consistent with the
accruals concept.
The interest expense and depreciation/amortisation costs are allowable expenses for tax
purposes. Therefore, for leases accounted for under international standards, there is no need to
make any adjustments in computing the trade profits of the lessee.
The amount of the interest expense will vary over the period of the lease, with more interest
expense in the early stages of the lease (ie, when a larger proportion of the liability is
outstanding).
Transitional arrangements apply for leases existing before the introduction of IFRS 16.
This treatment does not apply to short leases (less than 12 months) or low value lease (eg, lease
of a computer).

3.2 Tax treatment for lessors

3.2.1 Finance leases – lessor's tax treatment

The lessor will recognise the transaction as a financial asset, and the income statement records
interest income.
For tax purposes the lessor is taxed on the lease rentals but can claim capital allowances.
Therefore the lease rental payments are added, the interest income is deducted and capital
allowances are deducted.

3.2.2 Operating leases – lessor's tax treatment

For accounting purposes the lessor capitalises the asset, charges depreciation and recognises
the lease rentals as income.
For ta× purposes the lessor is taxed on the lease rentals but can claim capital allowances.
Therefore the depreciation is added back and capital allowances are deducted.

4 Intangible fixed assets and degrouping

From 7 November 2018 in line with capital gains degrouping charges, an IFA degrouping
charge does not arise on a disposal which is exempt as a result of the substantial shareholding
exemption. Where a company left the group prior to this date a degrouping charge arose.

ICAEW 2020 Finance Act 2019 update xxiii

 5 Group loss relief – deductions allowance for the holding
company
Where a company is a member of one group and an ultimate parent of another, it can only use a
share of the deductions allowance from the group of which it is a member. This rule stops
groups from buying companies to increase the amount of deductions allowance available.

6 Controlled foreign companies

From 1 January 2019 the definition of control for controlled foreign companies (CFCs) is
extended to include situations where a UK resident company (with any associated enterprises)
directly or indirectly has an investment of more than 50% in the company.
A person is an associated enterprise if:

 the person has a 25% investment in the UK company;

 the UK company has a 25% investment in the person; or
 another person has a 25% investment in each of the person and the UK company.

INTERNATIONAL TAX

1 Non-UK residents disposals of UK land

1.1 Income tax and corporation tax charge
For disposals from 6 April 2019 a non-UK resident individual and a non-UK resident company
are liable to tax on disposal of assets that are:
 interests in UK land; or
 UK property rich assets.
An individual pays capital gains tax and a company pays corporation tax on such gains.
1.1.1 UK property rich assets
UK property rich assets are assets (often shares) that derive at least 75% of their gross value from
UK land and the investing company has a substantial indirect interest in the land.
A non-UK resident has a substantial indirect interest if it has owned at least 25% of the shares in
the investee company at some point in the two years before the share disposal.
The whole gain on the disposal of the UK property rich asset is subject to tax. There is no
adjustment for the proportion of assets that are not UK land.
The 75% test is based on gross assets (excluding related party assets such as intra-group loans)
and does not take liabilities into account. The test uses the market value at the date of the share
disposal.
Where shares in a holding company are being disposed of, the 75% test is applied to the assets
of the whole group (as all companies are effectively being disposed of).
If the UK land held within the UK property rich company is being used for trade purposes (or it
was acquired for use in the trade) the gain is exempt. Letting of property is not a trade for this
purpose.

xxiv Business Planning: Taxation ICAEW 2020

1.1.2 Disposal of non-residential property or UK property rich assets
These assets were not subject to tax before 6 April 2019, so rebasing occurs; ie, the taxable gain
is the gain arising after 5 April 2019, with 'cost' based on the market value at that date.
Alternatively an election can be made to ignore rebasing at 5 April 2019 and calculate the total
gain or loss over the whole period of ownership based on original cost. If this election results in
a capital loss, it is not allowable on a disposal of a UK property rich asset (only on disposal of UK
non-residential property).

1.1.3 Disposal of residential property

The taxable gain is the gain arising after 5 April 2015, with 'cost' based on the market value at
that date (rebasing). This ensures that gains on residential property arising between 6 April 2015
and 5 April 2019 are still subject to UK tax.
There are two possible elections to change this method of calculation:
 The first election ignores rebasing at 5 April 2015 and calculates the gain or loss for the full
period of ownership, based on original cost.
 The second election can be made for the total gain over the whole period of ownership to
be time apportioned and only the post 5 April 2015 gain charged to tax.

1.1.4 Additional rules for non-UK resident individuals

Tax rates
Since 6 April 2015 non-UK resident individuals have been subject to capital gains tax on
disposals of UK residential property at 18% and 28%.
From 6 April 2019 this is extended so that gains on non-residential property and UK property
rich assets are subject to capital gains tax at 10% and 20%.
This provision includes disposals in the overseas part of a split year. It also takes precedence
over the temporary non-resident provisions.
Use of losses
The losses that can be set against such gains of non-UK residents are current year and brought
forward losses on disposals of UK land and UK property rich assets (ie, these are ring fenced).
Payment of capital gains tax
From 6 April 2019 non-UK resident individuals must make a return and a payment on account of
capital gains tax to HMRC within 30 days of completion of the contract on disposal of UK land
and UK property rich assets.
The payment on account takes into account unused losses and any annual exempt amount
and uses an estimate of the taxpayers' taxable income. The return can be amended within
the normal time period for amending returns but not after the actual or due filing date of the
self-assessment return which includes the disposal.
An individual who is not otherwise required to submit a self-assessment return does not need to
notify HMRC of the need for a standard self-assessment return provided the tax paid in line with
this special return is not less than the actual amount due.
From 6 April 2020 these provisions will extend to disposals by UK resident individuals but only
for disposals of UK residential property. In this case, no return is due if no capital gains tax arises
(eg, if full PPR is available).

ICAEW 2020 Finance Act 2019 update xxv

 INDIRECT TAXES

1 VAT
The eligibility criteria to be a member of a VAT group is due to change. At the time of
publication the date of the change is unknown. The new situation will mean that additionally a
VAT group can be formed between:
 an individual carrying on a business and one or more UK companies, where the individual
controls each company and the individual's business is established or has a fixed
establishment in the UK
 a partnership carrying on a business and one or more UK companies, where the partnership
controls each company and the partnership's business is established or has a fixed
establishment in the UK

2 Stamp taxes

2.1 Stamp duty land tax (SDLT)

2.1.1 Administration
For disposals from 1 March 2019, SDLT is payable by the purchaser together with the land
transaction from within 14 days of the transfer (previously 30 days).

2.1.2 First time buyer's relief

From 29 October 2018 first time buyer relief is extended to include shared ownership property
purchases. The first £300,000 of an initial share purchased has no SDLT with 5% on any excess.
There is no SDLT on the lease element. There is no relief if the property is valued in excess of
£500,000. Where SDLT was paid on such a property between 22 November 2017 and
29 October 2018 a repayment of SDLT can be claimed.

2.2 Stamp duty/stamp duty reserve tax (SDRT) – transfer of listed securities to
connected companies
From 29 October 2018 targeted anti-avoidance legislation applies so that, where listed shares or
securities are transferred to a connected company, the stamp duty/stamp duty reserve tax is
calculated on consideration of the higher of:
 the value of actual consideration; and
 the market value of the securities transferred.
In this situation connected means:
 two companies are connected if the same person(s) control them (including where one
individual controls one company and a connected person of theirs controls the other)
 an individual or individuals are connected to a company if they control the company
Control is when a person owns shares or voting rights, and as a result the company must act in
accordance with their wishes.

xxvi Business Planning: Taxation ICAEW 2020

CHAPTER 1

Ethics
Introduction
Examination context
TOPIC LIST
1 Fundamental principles, threats and safeguards and standards for tax
planning
2 Conflicts of interest
3 Ethical conflict resolution
4 Disclosure of information and confidentiality
5 Irregularities
6 Client acceptance and regulatory requirements
7 Anti-money laundering
8 Tax planning, tax avoidance and tax evasion
9 GAAR, the Ramsay doctrine and BEPS
10 Disclosure of tax avoidance schemes (DOTAS and DASVOIT)
11 Answering ethics exam questions
Summary and Self-test
Technical reference
Answers to Interactive questions
Answers to Self-test
Introduction

Learning outcomes Tick off

 Identify the role of data analytics in reducing the tax gap

 Give advice which is appropriate, technically correct, and within the law and the
ICAEW Code of Ethics as well as other relevant guidance, including the Professional
Conduct in Relation to Taxation (PCRT)
 Recognise the implications of double tax treaties, the OECD Model Tax
Convention, and the OECD BEPS Project
 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 and advise when a tax-avoidance scheme is notifiable to HMRC and
distinguish between planning, avoidance and evasion and their consequences

Specific syllabus references for this chapter are 1e, 1f, 1q, 2f, 3a, 3b, 3c and 3d.

Syllabus links
In Chapter 1 of your Principles of Taxation and Tax Compliance Study Manuals, which you
should review, you learned about ethical, legal and regulatory issues in relation to tax work. This
specifically included elements of the IESBA Code of Ethics for Professional Accountants and
ICAEW Code of Ethics as well as Professional Conduct in Relation to Taxation (PCRT) and CCAB
anti-money laundering guidance.
In this chapter we extend this knowledge and in particular your skills by giving consideration to
more complex scenarios. These require you to identify issues embedded in the information
given and to exercise professional scepticism.
The requirement for taxpayers (both individuals and corporations) to disclose their use of tax
avoidance schemes is one way to ensure that tax avoidance is highlighted to HMRC. The general
anti-abuse rule, and the approach adopted by the courts in relation to certain kinds of tax
planning, are also relevant to counteracting tax avoidance by all taxpayers.

Examination context
In the exam students may be required to do the following within the context of taxation:
 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 and advise when a tax-avoidance scheme is notifiable to HMRC and distinguish
between planning, avoidance and evasion and their consequences

2 Business Planning: Taxation ICAEW 2020

 In addition, the students might be required to:
C
 determine whether a scheme is within the scope of the DOTAS/DASVOIT regime H
 explain the types of advice that could lead to being designated as a promoter for A
P
DOTAS/ DASVOIT purposes, and the regulations for a failure to comply T
 explain the implications of a requirement to disclose a scheme within the DOTAS/DASVOIT E
R
regime
Where ethical dilemmas arise, students will be required to apply the five fundamental principles 1
and guidance in the IESBA and ICAEW Codes and the five standards for tax planning in PCRT to
recommend and justify appropriate, legal actions.

ICAEW 2020 Ethics 3

 1 Fundamental principles, threats and safeguards and
standards for tax planning

Section overview
• The IESBA and ICAEW Codes establishes the fundamental principles of professional ethics
for accountants. These are integrity, objectivity, professional competence and due care,
confidentiality and professional behaviour.
• Professional accountants need to identify, evaluate and respond to threats to compliance
with the five fundamental principles. Such threats may be self-interest threats, self-review
threats, advocacy threats, familiarity threats or intimidation threats.
• The professional accountant must then seek to apply safeguards to eliminate the threats or
reduce them to an acceptable level. If this is impossible, the professional accountant must
remove him- or herself from the situation.
• Professional accountants must follow the five PCRT standards for tax planning when
advising their clients.

1.1 Identifying fundamental principles and threats

Professional accountants have a responsibility to act in the public interest as well as considering
their client or employer. Their actions reflect on the accountancy profession as a whole.
Increasing public and media focus on taxation bring an increased scrutiny on the trustworthiness
of accountants working in taxation.
The Codes require professional accountants to comply with the five fundamental principles.
Identifying instances where threats arise to the fundamental principles is necessary if the
professional accountant is to handle ethical issues appropriately.

Interactive question 1: Fundamental principles

Jacob, a professional accountant, worked as a financial controller in business. He was asked by a
newly appointed director to transfer a substantial sum of money into an off-shore bank account.
Jacob asked for an explanation and was told by the director that it was a payment for work done.
However, the director was not able to provide any supporting documentation. Jacob later
received an email instructing that a payment be made and confirming that it related to
legitimate expenses. As a result the payment was made but Jacob informed the managing
director of his concerns. Shortly afterwards Jacob was made redundant. Three months later an
insolvency practitioner was appointed as administrator and contacted Jacob to seek details
relating to this transaction.
Requirement
Identify the fundamental principles that Jacob needs to consider prior to any discussion with the
administrator and outline any questions needed to establish whether these are threatened.
See Answer at the end of this chapter.

1.2 Threat
Professional accountants are obliged to evaluate any threats as soon as they know, or should be
expected to know, of their existence.
Both qualitative and quantitative factors should be taken into account in considering the
significance of any threat.

4 Business Planning: Taxation ICAEW 2020

1.3 Safeguards
C
Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad H
A
categories:
P
 Safeguards created by the profession, legislation or regulation eg, education, continuing T
E
professional development requirements, professional monitoring and disciplinary procedures R

 Safeguards in the work environment 1

Certain safeguards may increase the likelihood of identifying or deterring unethical behaviour
eg, effective, well-publicised complaints systems which enable colleagues, employers and
members of the public to draw attention to unprofessional or unethical behaviour, and an
explicitly stated duty to report breaches of ethical requirements.
The nature of the safeguards to be applied will vary depending on the circumstances.
A professional accountant may encounter situations in which threats cannot be eliminated or
reduced to an acceptable level. In such situations, the professional accountant shall decline or
discontinue the specific professional service involved or, when necessary, resign from the
engagement or employment.

1.4 PCRT: Standards for tax planning

Professional Conduct in Relation to Taxation (PCRT) contains five 'standards for tax planning'
which are a supplement to (not a substitute for) the five fundamental principles. The standards
focus particularly on the fundamental principles of integrity, professional competence and due
care and professional behaviour. The standards are:
Client specific
Tax planning must be specific to a client's facts and circumstances. The client should be made
aware of wider issues relating to a situation.
Lawful
Professional accountants should act lawfully and with integrity. The same should be expected of
clients and tax planning should reflect this. Where there is material uncertainty in the law (eg,
HMRC takes a different view of the law) a client should be made aware of this. The professional
accountant should consider taking further advice in this situation (especially where litigation is
likely).
Disclosure and transparency
Any disclosure to HMRC must contain all possible relevant facts. The tax advice given cannot rely
on HMRC not being fully aware of all relevant facts.
Tax planning arrangements
Professional accountants should not be involved in tax planning arrangements that either:
 aim to achieve results that were clearly not intended by Parliament; or
 are highly artificial and seek to exploit loopholes in the legislation.
Professional judgement and appropriate documentation
Professional accountants should keep documentation on a timely basis of the rationale for
judgements exercised in the giving of tax planning advice.

ICAEW 2020 Ethics 5

 Worked example: Standards for tax planning
You have recently been engaged by Hamer Ltd to provide tax planning advice in relation to
share schemes and other benefits to be provided to employees of the company. Hamer Ltd had
a diverse set of employees earning differing amounts and including both UK and overseas
employees.
The advice provided to Hamer Ltd by their previous advisers was restricted to advice in relation
to UK employees who are higher rate taxpayers.
Requirement
Discuss the fundamental principles and relevant standard for tax planning in relation to the
advice given by the previous advisers.

Solution
The fundamental principles that may be at risk due to the previous advisers' advice relating to
employees are professional behaviour and professional competence and due care. However,
the terms of the previous engagement are not clear from the scenario. If they had only been
asked for advice on the single category of employee then there is no breach.
The standards for tax planning require the advice to be 'client specific'. As a minimum the
previous advisers should have highlighted with sufficient prominence that the advice given did
not relate to all categories of employee, and should have considered including in their advice
the potential impact of a change in assumptions or circumstances.

2 Conflicts of interest

Section overview
 The Code requires a professional accountant to take reasonable steps to avoid, identify
and resolve conflicts of interest. Both actual and perceived conflicts must be considered.
 Examples of situations in which a conflict may arise include conflicts between a client's
interests and those of the firm, financial involvements between the client and the firm,
acting for both a husband and wife in a divorce settlement or a company and for its
directors personally or two competing businesses, and secondment to HMRC.

2.1 The threat of a conflict of interest

The fundamental principle of objectivity requires professional accountants to ensure that bias,
conflict of interest or undue influence of others do not override professional or business
judgements. A professional accountant must take reasonable steps to identify circumstances
that could pose a conflict of interest.
A conflict may arise between the firm and the client or between two conflicting clients being
managed by the same firm.

2.2 Safeguards
Whatever the circumstances giving rise to the conflict, safeguards should ordinarily include the
professional accountant notifying all known relevant parties of the conflict.
Further steps will vary depending on the matter giving rise to the conflict.

6 Business Planning: Taxation ICAEW 2020

 Where a conflict of interest poses a threat to one or more of the fundamental principles that
cannot be eliminated or reduced to an acceptable level through the application of safeguards, C
H
the professional accountant should conclude that it is not appropriate to accept a specific A
engagement or that resignation from one or more conflicting engagements is required. P
T
3 Ethical conflict resolution E
R

1
Section overview
 A professional accountant may need to resolve a conflict in applying the fundamental
principles.
 When initiating either a formal or informal conflict resolution process, a professional
accountant should consider the relevant parties, ethical issues involved, fundamental
principles related to the matter in question, established internal procedures and
alternative courses of action.
 Having considered the six recommended factors, and followed the suggested steps, if the
conflict cannot be resolved the professional accountant should, where possible, refuse to
remain associated with the matter creating the conflict.

3.1 Conflict resolution process

If having considered the recommended factors, the matter remains unresolved, the professional
accountant should consult with other appropriate persons within the firm for help in obtaining
resolution. Where a matter involves a conflict with, or within, an organisation, a professional
accountant should also consider consulting with those charged with governance of the
organisation such as the board of directors.
It is advisable for the professional accountant to document the issue and details of any
discussions held or decisions taken concerning that issue.
If a significant conflict cannot be resolved, a professional accountant may wish to obtain
professional advice from the relevant professional body or legal advisers, and thereby obtain
guidance on ethical and legal issues without breaching confidentiality.
If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a
professional accountant should, where possible, refuse to remain associated with the matter
creating the conflict. The professional accountant may determine that, in the circumstances, it is
appropriate to withdraw from the engagement team or specific assignment, or to resign
altogether from the engagement or the firm.

Worked example: Factors in ethical conflict resolution

You are an ICAEW Chartered Accountant employed by a large accountancy firm but currently
on a six-month secondment to a client. You report to a relatively new financial controller named
Jo Soames (who has trained in tax but is not an accountant). She has drafted the corporation
tax returns of the group of companies, and included the effects of some new measures
implemented in the recent Finance Act. She has asked you to look at the tax returns to ascertain
whether the new measures proposed work in favour of the group.
Jo has asked the following in an email:

We need a report to the board of directors that shows how these new measures will work, as I
previously indicated to the board that they are likely to be favourable for the group. Are there
any particular companies within the group which would benefit? If we focus on these in the
report, that would be helpful.

ICAEW 2020 Ethics 7

 You may not have realised, but I'm not actually particularly knowledgeable about corporation
tax – when I joined I exaggerated my knowledge and experience to get the post. I'm therefore
hoping you'll write most of the report? – which we can then say we prepared together.

Requirement
Prepare notes which document any ethical implications for yourself arising from Jo Soames's
email and state the actions you should take.

Solution
I will need to consider the following points: the relevant facts and the ethical issues; the
fundamental principles related to the issue; the internal procedures available; and alternative
courses of action.
The relevant facts and identification of the ethical issue
1 Jo deceived her employer when applying for her post.
Jo has confessed to telling an untruth during her interview. The extent of corporation tax
knowledge needed in her role may be more than she has, however, this is not clear. It is
possible that this was not the deciding factor for her obtaining her post. Therefore in
respect of this comment, other than being careful when considering information that Jo
provides in the future, there is no ethical conflict for me to resolve.
2 Jo is prepared to take credit for work she has not done.
Jo is not a qualified chartered accountant therefore she is not bound by the fundamental
principles in the ICAEW Code of Ethics. However, I must consider my own position if I am
party to the deception and consider the ICAEW ethical principles as follows:
Objectivity – If I allow Jo to influence me in this matter, I may not be capable of acting
objectively in the future.
I am clearly facing a self-interest threat and an intimidation threat since Jo is ultimately my
immediate superior and I am on a temporary secondment. Should I not do as she asks, my
secondment may be terminated.
3 Jo is looking to complete a report which may not show the true picture.
Jo is not a qualified chartered accountant therefore she is not bound by the fundamental
principles in the ICAEW Code of Ethics. However, I must consider my own position if I am
party to the deception and consider the ICAEW ethical principles as follows:
Integrity – If I allow Jo to influence me and produce a report which does not show the true
picture and either omits or conceals facts and conclusions which would result from proper,
unbiased reporting on the whole group of companies, this would be a breach of integrity.
This is again a self-interest threat and a possible intimidation threat.
A sensible safeguard to put in place is that I insist on reporting fairly on all group
companies. If this was not established at the outset of the secondment, it should be now.
The parties involved
The group could incur extra tax costs and penalties if Jo acts beyond her capability in taxation
resulting in badly prepared computations, and/or reports to the board without giving proper and
accurate guidance on the implications of the new measures. My employer and I would also be
exposed to risk of being associated with work that was of insufficient quality or at worst, untruthful.
The internal procedures available, alternative courses of action
Initially I should inform Jo that I am not prepared to be part of her deception and that she should
not put her name to the work I have prepared. I should suggest she seek further training and
discuss the issue of her lack of corporate taxation knowledge with her line manager. If she refuses I
should seek to identify any internal procedures within the group for reporting my concerns.
I may also speak to my line manager at my employer firm. I should consider carefully whether I
wish to continue to work with Jo or whether I ask for the secondment to be cut short.

8 Business Planning: Taxation ICAEW 2020

 C
4 Disclosure of information and confidentiality H
A
P
T
Section overview E
R
 A professional accountant has a duty to respect the confidentiality of information acquired
as a result of professional and business relationships. 1

 In limited circumstances, a professional accountant may disclose client information to third

parties without the client's permission.

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 eg, under
anti-money laundering legislation (see section 7); or
 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;
and/or
– to comply with technical standards and ethics requirements.

4.2 Factors to consider regarding disclosure

In deciding whether to disclose confidential information, professional accountants should
consider the following:
 Whether the interests of all parties, including third parties whose interests may be affected,
could be harmed if the client or employer consents to the disclosure of information by the
professional accountant.
 Whether all the relevant information is known and substantiated, to the extent it is
practicable to do so. When the situation involves unsubstantiated facts, incomplete
information or unsubstantiated conclusions, professional judgement should be used in
determining the type of disclosure to be made, if any.
 The type of communication that is expected and to whom it is addressed; in particular,
professional accountants should be satisfied that the parties to whom the communication is
addressed are appropriate recipients.
 Whether the information is privileged, for example under legal professional privilege.
 The legal and regulatory obligations and the possible implications of disclosure for the
professional accountant.
 That all facts have been confirmed and recorded.

ICAEW 2020 Ethics 9

 5 Irregularities

Section overview
• PCRT Helpsheet C provides guidance on how to deal with errors in relation to a client's tax
affairs.
• Particular procedures should be followed where this results from HMRC error.

5.1 Irregularities in a client's tax affairs

Definition
Irregularities: All errors, whether made by the client, the member, HMRC or any other party in a
client's tax affairs ranging from the innocent to those that may amount to fraud.

5.2 Irregularities leading to overpayment of tax

A professional accountant may become aware of possible irregularities in the client's tax affairs.
The client should be informed as soon as possible. Where the irregularity has resulted in a tax
overpayment, the client should be advised about making a repayment claim and have regard to
any relevant time limits.

5.3 Irregularities leading to underpayment of tax

A mistake made by HMRC may give rise to an underpayment of tax or an over-repayment of tax.
Correcting such mistakes made by HMRC may cause expense to a member and thereby to his
clients. In some circumstances, clients or accountants may be able to claim for additional
professional costs incurred and compensation from HMRC.
An accountant dealing with an irregularity must bear in mind the legislation on money laundering
and may need to consider whether the irregularity could give rise to a circumstance requiring
notification to the firm's professional indemnity insurers. In such a situation it may be acceptable
for a professional accountant to disclose the irregularity to the authorities without giving rise to a
breach of confidentiality.
Records should be kept of discussions and advice regarding irregularities.

Interactive question 2: Reporting irregularities

You have just received the following email from your client.

I am preparing the latest VAT return. I cannot see that there has been any adjustment to reflect a
change in use of the company's computer training building. Mark Charles, the finance director
has told me that it is unlikely that HMRC will pick up the change in use and to ignore it for now
but if notice of an inspection by HMRC is received we will pay the outstanding VAT on the next
return before the VAT inspector arrives. However, I am worried we will be open to penalties.
The amount of VAT is in the region of £80,000 – please could you advise me on how to report
this matter.

Requirement
Discuss the action you should take and the advice you should give to your client.
See Answer at the end of this chapter.

10 Business Planning: Taxation ICAEW 2020

 6 Client acceptance and regulatory requirements C
H
A
Section overview P
T
• Particular procedures are needed when taking on new clients including issuing an E
engagement letter. R

• ICAEW requires practising members to hold professional indemnity insurance. 1

• Professional accountants are subject to the General Data Protection Regulation (GDPR).
• Particular responsibilities are placed on anyone undertaking the role of Senior Accounting
Officer in a qualifying company.

6.1 Client and engagement acceptance

Before accepting a new client, a professional accountant in public practice shall determine
whether acceptance would create any threats to compliance with the fundamental principles.
Potential threats to integrity or professional behaviour may be created from, for example,
questionable issues associated with the client (its owners, management or activities). A
professional accountant in public practice shall evaluate the significance of any threats and
apply safeguards when necessary to eliminate them or reduce them to an acceptable level.
The fundamental principle of professional competence and due care imposes an obligation on a
professional accountant in public practice to provide only those services that the professional
accountant in public practice is competent to perform. Before accepting a specific client
engagement, a professional accountant in public practice shall determine whether acceptance
would create any threats to compliance with the fundamental principles. For example, a
self-interest threat to professional competence and due care is created if the engagement team
does not possess, and cannot acquire, the competencies necessary to properly carry out the
engagement.

6.2 Engagement letter

The contractual relationship should be governed by an appropriate letter of engagement in
order that the scope of both the client's and the professional accountant's responsibilities are
made clear.
The letter should explain the scope of the client's and the accountant's responsibilities in each
case, including limitations in or amendments to that role. In the Mehjoo (2014) case, based on
the engagement letter, the obligation to provide tax planning advice was limited. However, an
implied duty of care to provide tax planning advice had been created, as the professional
accountant had done so on prior occasions.
Every contractual relationship should be covered; if the member acts for a partnership and also
for one or more of the partners, then the partnership and each partner acted for are separate
clients for the purposes of these guidelines. Likewise, if the member acts for a husband and wife,
each is a separate client.
Authority to disclose information in certain circumstances should be considered for inclusion in
the engagement letter. For example when:
 an HMRC error has come to light, and HMRC need to be notified;
 disclosure is required by law; or
 there is a professional duty or right to disclose, when not prohibited by law.

ICAEW 2020 Ethics 11

6.3 Responsibility for tax returns
PCRT Helpsheet A reiterates that the client retains responsibility for the accuracy of a tax return.
The accountant is merely an agent when performing tax compliance work such as preparing and
submitting a tax return on behalf of a client. The client is required to sign the return prior to its
submission. The client's attention should be drawn to their responsibility for the accuracy and
completeness of the return.
The accountant should obtain written evidence of the client's approval of the return. This is
particularly relevant as an increasing number of returns are submitted online.
On occasions a professional accountant may sign tax returns for a client, for example when
acting as:
 liquidator, receiver, administrator, executor, director or attorney; or
 a VAT representative for a 'non-established taxable person' (NETP) or as VAT agent.
As a VAT agent the client retains responsibility for the returns and paying on time. As a VAT
representative for a NETP the accountant is jointly and severally liable for the VAT debts. The
accountant should consider whether this is sensible, and instead consider only being a VAT
agent.
At times a professional accountant may advise a client to make fuller disclosure in a tax return
than is strictly necessary. This is likely to be the case when significant tax planning or doubt is
involved.
The client should be made fully aware of the issues and the potential implications. Fuller
disclosure should not be given unless the client gives consent.
Where doubt is involved the additional information should be carefully considered, for example
where:
 the return relies on a valuation;
 there is inherent doubt, for example capital or revenue treatment of repairs; or
 an opposing view to HMRC's published interpretation is taken by the client.
Where a professional accountant is unsure whether to make a fuller disclosure, he should
consider taking further advice. A written record should be made of the decision taken, including
discussions with the client and discussions with other advisers. This could be used to avoid
HMRC imposing a penalty in future.

6.4 Professional indemnity insurance

Every qualified member of ICAEW who is in public practice and resident in the UK or Republic of
Ireland is required to have professional indemnity insurance (PII).
ICAEW's PII Regulations set the minimum amount of indemnity as follows:
 If the gross fee income of a firm is less than £600,000, the minimum limit of indemnity must
be equal to two and a half times its gross fee income, with a minimum of £100,000.
 Otherwise, the minimum is £1.5 million.
A different level of cover is required for firms conducting insurance distribution activities or
those that are accredited probate firms. This detail is beyond the scope of the Business
Planning: Taxation syllabus.

Employed members will normally be covered by their employer's insurance policy. The PII
regulations apply to individual members but in practical terms professional indemnity insurance
usually covers their practising entity, for example their partnership or their sole practice.

12 Business Planning: Taxation ICAEW 2020

 A member ceasing to be in public practice should ensure that cover remains in place for at least
two years. It is recommended that members consider maintaining cover for six years after they C
H
cease to practise. A
P
It is important that insurers are notified promptly when specific circumstances arise ie:
T
E
 when a claim is made, or there is a situation that may give rise to a claim; or
R
 possibly where there is an irregularity.
1
6.5 Data protection
Anyone who handles personal information has a number of legal obligations to protect that
information under the General Data Protection Regulation (GDPR). GDPR applies across the EU
and to any global company holding data on EU citizens.
Compliance with GDPR will be monitored by a Supervisory Authority (one in each EU country). In
the UK this is the Information Commissioner's Office (ICO). Most businesses that have large scale
monitoring of individuals or processing of data, and public authorities must have a data
protection officer. Any person/business that processes personal data must register with the
Information Commissioner's Office (ICO) unless they are exempt and be entered onto the ICO's
register of data controllers. Failure to notify is a strict liability criminal offence.
Individuals often have to opt in when data is collected and privacy notices must be clear. Data
must not be retained for longer than is necessary.

6.6 Accountability of senior accounting officers

Senior accounting officers of qualifying companies (generally large companies) are required to
take reasonable steps to establish and monitor accounting systems within their companies that
are adequate for the purposes of accurate tax reporting.
Qualifying companies are required to notify HMRC of the name of their senior accounting officer
(SAO). The SAO is required to:
 certify annually that the accounting systems in operation are adequate for the purposes of
accurate tax reporting; or
 specify the nature of any inadequacies.
A qualifying company is defined as a company with a turnover of greater than £200 million
and/or a balance sheet total of greater than £2 billion.
Penalties may be charged for failure to:
(a) establish and maintain appropriate tax accounting arrangements;
(b) provide an annual certificate to HMRC or for providing a certificate that contains a careless
or deliberate inaccuracy; and/or
(c) notify HMRC of the name of the SAO.
In each case the penalty is £5,000. In the case of (c) the penalty is payable by the company. In
the other cases the SAO is personally liable for the penalty.

Worked example: Senior Accounting Officer

You are a tax adviser working for a firm of ICAEW Chartered Accountants. You are experienced
in UK tax matters but have limited international tax knowledge at present.
Salvador Mica's 100% owned UK resident company, Noche Ltd, is a client of your firm and part
of your client portfolio. Salvador himself has lived for many years in the UK, but remains
domiciled in the non-EEA country of Somnambularia. Noche Ltd has a profitable UK trade with
profits of over £250 million in the last year, but over half its total income derives from dividends

ICAEW 2020 Ethics 13

 from Somnambularia-resident companies, although the dividend income remains in
Somnambularia.
Noche Ltd's new finance director (FD), Paolo Lunedi, has contacted your manager about some
concerns he has over the way in which the company is disclosing its UK-taxable profits (Exhibit 1).
Requirement
Provide a briefing note for your manager in reply to Paolo Lunedi's concerns (Exhibit 1), which
identifies the appropriate action to be taken.
Exhibit 1
Extract from a note of telephone conversation with Paolo Lunedi FD of Noche Ltd.
Paolo rang us about some concerns he is having over the tax affairs of Noche Ltd. He made the
following points:
As FD of Noche Ltd he is concerned about his accountability as the newly-nominated Senior
Accounting Officer (SAO) of the company.
He is worried that maybe the overseas dividends should be included in the UK CT return. He
asked the financial manager about this and was told there is a treaty between the UK and
Somnambularia which means these dividends are exempt from any tax. He wasn't satisfied with
this, but when he raised the issue with Salvador, Salvador instructed him to ignore it.

Solution
Briefing Note for your manager
Re: Paolo Lunedi's concerns
Given the concerns Paolo has raised with us, before taking any action, we need to identify:
 if there is a treaty which grants a relevant exemption;
 whether information relating to the overseas dividends should appear on the UK return;
 whether any voluntary disclosure might be advisable; and
 whether any change is needed to current or past returns.
If, on investigation, it appears that the non-taxation and non-disclosure treatment is correct,
documentation should be maintained to support this.
Otherwise, Paolo needs to discuss this matter with the board of directors of Noche and, if they
will not comply with the UK law, he will have to consider his position as FD and SAO. He may
wish to seek advice from the ICAEW confidential ethics helpline and/or take legal advice. If the
issue cannot be resolved he will need to consider resigning from his position with the company.
This will also be an ethical problem for us. Now we are aware of the issue we will have to ensure
that the corporation tax computations are prepared in line with the law and if not, we will have to
advise the client, in writing, of our concerns. If we do not reach a satisfactory conclusion on this
issue with the client we will have to consider resigning from the engagement.

14 Business Planning: Taxation ICAEW 2020

 7 Anti-money laundering C
H
A
Section overview P
T
• The ICAEW Members' Regulations and guidance includes anti-money laundering E
guidance. R

• This guidance has been prepared to assist professional accountants in complying with 1
their obligations in relation to the prevention, recognition and reporting of money
laundering.
• Failure to take account of the guidance could have serious legal, regulatory or
professional disciplinary consequences.

7.1 Offences and penalties

The term 'money laundering' is used for a number of offences involving the proceeds of crime
or terrorist funds. It includes possessing, or in any way dealing with, or concealing, the proceeds
of any crime.
Where a professional accountant suspects that a client is involved in money laundering he
should report this to his Money Laundering Reporting Officer (MLRO) on an internal report or
directly to the National Crime Agency (NCA) in the form of a suspicious activity report (SAR).
Penalties for money-laundering offences include an unlimited fine and/or:
 up to 14 years for the main money laundering offences
 up to 5 years for failure to disclose
 up to 2 years for tipping off or for contravention of the systems requirements of the
Regulations

7.2 Defences
There are several possible defences against a charge of failure to report:
 The individual does not actually know or suspect money laundering has occurred and has
not been provided by his employer with the training required, although this is then an
offence on the part of the employer.
 The privilege reporting exemption ie, where the professional accountant is exempt from
making a report where his knowledge or suspicion came in privileged circumstances. This
may be when asked to give tax advice on the interpretation or application of specific tax
law, or where a confidential communication takes place between the client the accountant
and the client's solicitor predominantly for use with actual or pending litigation.
 There is reasonable excuse for not making a report.
 It is known, or reasonably believed that the money laundering is occurring outside the UK,
and is not unlawful under the criminal law of the country where it is occurring.

ICAEW 2020 Ethics 15

 7.3 Anti-money laundering procedures
All 'relevant' businesses, including those providing accounting and tax services, need to
maintain the following procedures:
 Register with an appropriate supervisory authority (see below).
 Appoint a Money Laundering Reporting Officer (MLRO) and implement internal reporting
procedures. If the MLRO is not sufficiently senior (board of directors/senior management),
another more senior person must be nominated to be officer responsible for compliance
with money laundering regulations. In this situation the MLRO must report to senior
management at least annually.
 Prepare and maintain a whole firm written risk assessment, taking into account information
from the supervisory authority on risk factors in the sector, the firm's clients, geographical
areas of operation, products and services, transactions and delivery channels.
 Train and assess staff to ensure that they are aware of the relevant legislation, know how to
recognise and deal with potential money laundering, how to report suspicions to the
MLRO, and how to identify clients.
 Establish effective internal procedures relating to risk management systems and controls to
deter and prevent money laundering, and make relevant individuals aware of the
procedures. These must be approved by senior management. Monitoring should be part of
the ongoing process.
 Carry out customer due diligence on any new client and monitor existing clients to ensure
the client is known and establish areas of risk. The amount of due diligence is based on the
principle of 'Know your client' (KYC). In higher risk cases the depth of due diligence should
be increased, for example using internet searches and possibly subscribing to certain
databases. It may lead to enhanced procedures in high risk cases, for example politically
exposed persons.
 Verify the identity of new clients and maintain evidence of identification and records of any
transactions undertaken for or with the client.
 Report suspicions of money laundering to the NCA, using a SAR.

7.4 Reporting
7.4.1 Protected disclosure
The money laundering legislation requires an accountant to disclose confidential information
without client consent in certain circumstances. In order to disclose confidential information, the
accountant must have knowledge or suspicion, or reasonable grounds for knowledge or
suspicion, that a person has committed a money-laundering offence. Disclosure without
reasonable grounds for knowledge or suspicion will increase the risk of a business or an
individual being open to an action for breach of confidentiality.
A professional accountant with knowledge or suspicion of money laundering must make a
report. If the accountant works for a firm with a MLRO, then an internal report must be made
direct to the MLRO.
The MLRO is then responsible for deciding whether the information contained in an internal
report needs to be relayed to NCA in the form of an external report, a SAR, and if so, for
compiling and despatching the SAR. There are specific offences applying to MLROs failing to
make a report where one is needed.
An accountant in sole practice needing to make a report would be required to submit a SAR
direct to NCA.

16 Business Planning: Taxation ICAEW 2020

7.4.2 Authorised disclosure
C
An accountant has a defence against a money laundering offence by seeking the consent of the H
NCA to undertake an activity which the accountant suspects may constitute a money laundering A
P
offence. This is done by submitting an 'authorised disclosure'. T
An authorised disclosure may be made: E
R
 before the prohibited act has been carried out;
1
 while doing the prohibited act – provided when the accountant started the act the
accountant did not know or suspect it related to money laundering; or
 after committing the act – provided there was good reason for not reporting earlier and the
report was made of the accountant's own initiative as soon as possible.
The authorised disclosure method can be a good way of the authorities securing the money
laundered assets.

7.5 Supervisory bodies

The 2017 Regulations require all relevant businesses including those providing tax and
accountancy services to be supervised by an appropriate anti-money laundering supervisory
authority.
ICAEW is one of the approved supervisory authorities for the accountancy sector. Accountants
not regulated by one of the approved bodies will be supervised by HMRC.
ICAEW conducts monitoring visits to firms overseen. This is typically once every eight years for
small firms or annually for large or high-risk firms.
After the first monitoring visit to a firm, and provided ICAEW is satisfied that the firm has
addressed any matters identified as unsatisfactory, the firm will receive written confirmation that
it may use the legend 'A member of the ICAEW Practice Assurance scheme'.

Worked example: Irregularity and money laundering

Sribani Paintal is an employer with a growing business. She is a new tax client of your firm, which
has already completed its client acceptance procedures.
Sribani handled the payroll herself for the last two tax years and has recently attended a meeting
to discuss handing this over to you. It is 6 April, and your firm has agreed to advise Sribani from
the current tax year onwards.
You now become aware that Sribani regularly hands out cash bonuses to employees as a reward
for hard work. These have been ignored in the past for payroll purposes, although they appear
as a deduction in the business accounts as 'miscellaneous staff expenses'.
Sribani says she thought it was acceptable to do this as long as the payments were in cash. You
have pointed out that this is incorrect. Sribani is willing to have these amounts declared going
forward, but is not willing to contact HMRC regarding prior years' undeclared payments. She
cannot understand why you are concerned about these given that you are not responsible for
previous years.
Requirement
Comment on the ethical considerations raised by the handover of Sribani's payroll to your firm.

Solution
By omitting to declare taxable employee income for PAYE, Sribani is paying too little income tax
and national insurance which is illegal. She should be informed of the need to amend previous
payroll information and payments, in writing. She should also be informed of the possible

ICAEW 2020 Ethics 17

 interest payment on underpaid tax and also penalties, which are influenced by her behaviour.
This may possibly have been careless omission at the time, but now that she has been informed
a correction is needed, continuing delay becomes deliberate.
The fact that this related to years for which your firm is not responsible does not make it
acceptable to ignore the omissions.
If Sribani continues to refuse to deal with the omissions, the engagement letter should be
checked for any agreed conditions under which the firm may disclose information to HMRC.
Consideration should also be given as to whether the firm should give notice that it is ceasing to
act for Sribani. HMRC should then be informed of the decision not to act, without reasons.
Continued failure to make good the underpaid tax and NICs would be tax evasion, the
underpayments being proceeds of crime for money laundering purposes. A report should be
made to the MLRO for consideration as to whether a SAR should be submitted.

8 Tax planning, tax avoidance and tax evasion

Section overview
• Tax evasion is illegal and tax avoidance is legal.
• Tax evasion could lead to prosecution for both the client and his accountant.
• Tax avoidance is liable to be countered by specific anti-avoidance rules included in
particular pieces of legislation, by the GAAR, and by the application of the Ramsay
doctrine in the courts.
• The role of data analytics in closing the tax gap.
• Professional accountants may be involved in tax planning arrangements in many ways.

8.1 Tax planning

Taxpayers may try to minimise their tax in various ways. These range from an individual with
several capital gains using the annual exempt amount in the most beneficial way, to a
multinational group of companies locating its headquarters in a country with a low rate of
corporation tax.
Some tax planning is uncontroversial. HMRC should not question a large pension contribution
made to reduce a taxpayer's liability, provided this is within the limits set out. The Government
offers various tax-saving incentives to encourage investment, including ISA accounts for
individuals and Research and Development relief for companies.
PCRT Helpsheet B advises that tax planning is legal and taxpayers are entitled to enter into
transactions that reduce tax. It states that taxpayers are entitled to take interpretations of
legislation that HMRC may not agree with. HMRC may challenge this and issue assessments
accordingly. The taxpayer can appeal against HMRC's decision through the tax tribunal and
possibly the courts. The tax adviser should advise the client of any potential reputational issues
that may arise.
Certain tax planning measures could lead to issues such as criticism from the media and other
stakeholders or difficulties in obtaining professional indemnity insurance. For professional
accountants this could lead to a negative public perception of the profession.

18 Business Planning: Taxation ICAEW 2020

8.2 Tax avoidance
C
There is no single definition of tax avoidance. The meaning has been constantly changing in H
recent years, but tax avoidance includes only legal methods of reducing the tax burden. It A
P
includes structuring taxpayers' affairs to make use of available reliefs. However, it also includes T
taking advantage of unintended loopholes in the legislation. E
R
The term tax avoidance is often interchangeable with tax planning, including structuring
taxpayers' affairs to make use of available reliefs as they are intended. Examples might include: 1

 use of posthumous deed of variation to reduce inheritance tax by amending a taxpayer's

will after their death; and
 a group of companies shifting profits to a country with a low rate of corporation tax.
The first of these may be called either tax planning or tax avoidance, while the current trend
would be to call the latter tax avoidance.
HMRCs position on the distinction between tax planning and avoidance is:
Tax avoidance involves bending the rules of the tax system to gain a tax advantage that
Parliament never intended. It often involves contrived, artificial transactions that serve little
or no purpose other than to produce this advantage. It involves operating within the letter –
but not the spirit of the law.
Tax planning involves using tax reliefs for the purpose for which they were intended, for
example, claiming tax relief on capital investment, or saving via ISAs or for retirement by
making contributions to a pension scheme. However, tax reliefs can be used excessively or
aggressively, by others than those intended to benefit from them or in ways that clearly go
beyond the intention of Parliament. (HM Treasury and HMRC, Tackling tax evasion and
avoidance, March 2015)
Others do not agree with this distinction, as these terms are not defined in law. Instead they
make only the distinction between legal tax planning and avoidance, and illegal tax evasion.
Professional Conduct in Relation to Taxation uses the term tax planning for a large range of legal
mitigation activities, which are within the law. Therefore, when giving tax advice, a professional
accountant should both understand HMRC's position and consider the extensive guidance given
in Professional Conduct in Relation to Taxation in this area (including that described in
section 1.4 above).
In the past HMRC has responded to major tax avoidance schemes by changing legislation as the
scheme has come to its attention. However, there is a general presumption that the effect of the
changes cannot be backdated.
The courts can take a purposive approach to deny the tax benefits sought from some planning
transactions by applying the Ramsay doctrine. In addition, the general anti-abuse rule (or GAAR
– see next section) can apply to deny tax benefits sought from abusive transactions.
In recent years there has also been a requirement for promoters of certain tax avoidance
schemes to disclose their schemes to HMRC, and for taxpayers to disclose details of which
schemes they have used. This may enable HMRC to take action more rapidly to close the
loopholes.
HMRC's guidance on tax avoidance indicates signposts that should warn tax payers away from
abusive or aggressive tax avoidance schemes. These include the following:
 If it sounds too good to be true it probably is.
 Payment is in the form of loans – relating to schemes for contractors where the loan will not
be paid back.
 Huge benefits arise that are out of proportion to the money generated.
 Artificial or contrived arrangements, or circular money flow exist.

ICAEW 2020 Ethics 19

  The arrangement has a scheme registration number (SRN) assigned under DOTAS.
 HMRC has provided examples of schemes of concern.
The signposts were evident in the case of Next Brand Ltd v HMRC (2015), which was successfully
challenged by HMRC at the First-tier Tribunal. This involved a 'rate-booster' scheme, where Next
Brand Ltd used artificial steps to inflate tax relief when repatriating profits from Hong Kong.
Moneys were artificially moved around the group.
HMRC's director general of business tax stated: "HMRC expects all businesses to steer well clear
of such schemes". At the time of the decision another 20 rate-booster cases were awaiting
decisions with around £130 million in tax at stake (Jim Harra, HMRC Director General of Business
Tax, HMRC press release, 19 May 2015).
The Ramsay doctrine and the disclosure of tax avoidance scheme rules are considered later in this
chapter.

8.3 Tax evasion

Tax evasion is illegal. It consists of seeking to mislead 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 (eg, duality of a business expense).
or
 providing HMRC with deliberately false information, for example by:
– deducting expenses that have not been incurred; or
– claiming capital allowances on plant that has not been purchased.
Minor cases of tax evasion are generally settled out of court via the payment of penalties.
However, there is a statutory offence of evading income tax that can be dealt with in a
magistrates court.
Serious cases of tax evasion, particularly those involving fraud, continue to be the subject of
criminal prosecutions which may lead to fines and/or imprisonment on conviction.
Furthermore, tax evasion offences will fall within the definition of money laundering and in
certain cases individuals may be prosecuted under one of the money laundering offences.
This includes both the under-declaring of income and the over-claiming of expenses.
Thus where an accountant is aware of or suspects that a client has committed tax evasion, the
accountant him- or herself may commit an offence under money laundering legislation if they
have in any way facilitated the evasion. Even if the accountant was not involved in the tax evasion
itself, failure to report such a suspicion is also an offence.

8.4 Distinguishing tax evasion from tax avoidance

The distinction between tax evasion and avoidance should be obvious, as a taxpayer engaged in
avoidance has no intention of misleading HMRC. However, the distinction between acceptable
avoidance, unacceptable avoidance and evasion has become rather blurred in recent years.
The accountant should take particular care in situations where a client believes that a tax
avoidance measure has been successful and so does not submit a tax return, or does submit a
return but without disclosing a particular transaction.
Note that the fact that a taxpayer is not acting illegally does not mean that steps taken to
minimise tax will necessarily be acceptable to HMRC.

20 Business Planning: Taxation ICAEW 2020

 Interactive question 3: Tax avoidance scheme
C
You have received the following query from your HR manager. H
A
P
From: HR manager Pontbau T
To: Financial controller E
R
We are putting together a fact sheet for employees who are going to be asked to work in Rania.
1
I have heard from a friend who works in Rania that some non-Ranian workers minimise their
Ranian tax liability by arranging for their salary to be paid into an overseas bank account. This
apparently avoids the attention of the Ranian tax authorities. Although I am told this is not strictly
illegal, it does not sound very ethical to me. However, I have a duty to provide our employees
with appropriate advice when they are sent to work in Rania.
Should the fact sheet include advice on this method of minimising Ranian tax? Please give me
explanations for your answer since we do not seem to have a policy for this particular issue and I
want to update the firm's Human Resources manual.

Requirement
Prepare a response to this email.
See Answer at the end of this chapter.

8.5 Measures to deter tax avoidance and evasion

Increasingly further regulation/self-regulation is introduced to deter tax avoidance measures
and prevent tax evasion. Anti-avoidance measures appear throughout the text such as rules
relating to a major change in nature or conduct of a trade, controlled foreign companies (CFCs)
and the corporate interest restriction rules. Each Finance Act typically introduces additional
anti-avoidance measures, often arising as a result of disclosures.

8.5.1 Large businesses – requirement to publish tax strategies

'Large' UK companies must publish on the internet their tax strategies in relation to UK taxation.
The initial penalty for non-compliance is £7,500, with additional penalties for continued
non-compliance.
In addition a 'special measures' process is set up to tackle the small number of large businesses
that persistently engage in aggressive tax planning and/or refuse to engage with HMRC in an
open and collaborative way. This includes a system of warning notices and special measures
notices.
A company is 'large' for these purposes if its turnover is more than £200 million and/or its
balance sheet total is more than £2 billion.

8.5.2 Penalties for offshore evasion

There is a commitment to tackle offshore tax evasion in the current climate.
Enablers of offshore tax evasion will be issued with a penalty. 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.
The penalty relates to evasion of income tax , capital gains tax and inheritance tax. The usual
penalty is the higher of:
 100% of the potential lost revenue; and
 £3,000.

ICAEW 2020 Ethics 21

8.5.3 Criminal Finances Act 2017 – failure to prevent facilitation of tax evasion
This section is new.

The Criminal Finances Act 2017 makes companies or partnerships (relevant bodies) criminally
liable for failing to prevent facilitation of tax evasion. This therefore applies to accountancy firms
although it does not apply to sole practitioners. An offence is committed under this Act if the
relevant body failed to prevent one of its associated persons (eg, employees) from facilitating
tax evasion by another person (eg, a client), even if the evasion was unsuccessful.
The relevant body should put procedures in place that take into account the size of the
organisation and the nature of the work. A risk assessment should consider the motive and
means of the associated persons involved in the work, to facilitate tax evasion offences.
Associated persons include employees, partners or other agents.
A failure to have adequate procedures in place means that the relevant body may be criminally
liable for failure to prevent associated persons from facilitating tax evasion. For an offence to
have been committed there must be:
 an attempt at fraudulent tax evasion by someone, eg, a client of the firm;
 criminal facilitation with the attempted tax evasion by the associated person, eg, an
employee of the firm; and
 failure by the relevant body (the firm) to prevent the associated person from criminally
facilitating the evasion.

8.6 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. The tax gap is created mainly as a result of tax
evasion and aggressive tax avoidance ie, taxpayers understating their income and/or overstating
deductions. It is also increased by late payment of tax. The UK has one of the lowest tax gaps in
the world and this has decreased further in recent years. In 2005/06 the tax gap was 8.3% and
was reduced to 5.7% in 2016/17.
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 are increasingly using data analytics in tax compliance to improve the quality of taxpayer
data. HMRC uses a variety of data sets drawn from different sources to reduce the tax gap:
 VAT – the change from paper VAT returns to VAT online reduced the VAT tax gap to its
lowest level ever in 2016/17 (£11.7 billion).
 Real time information for PAYE – in addition to more accurate recording of information on
payroll taxes, this has also led to HMRC having more accurate information about a large
number of taxpayers (eg, up to date addresses). This makes it easier for HMRC to find
taxpayers who owe additional tax/penalties.
 Making tax digital for business (MTDfB) – HMRC is continuing to introduce MTDfB leading
to further data sets being made available. Information from banks and other sources will be
used to pre-populate an individual's tax return.

22 Business Planning: Taxation ICAEW 2020

 8.7 Different roles of a tax adviser
C
PCRT Helpsheet B: Tax advice gives many indications of how a professional accountant may be H
A
involved in tax planning arrangements. These include: P
T
 advising on a planning arrangement E
 introducing another adviser's planning arrangement R
 providing a second opinion on a third party's planning arrangements
1
 compliance services in relation to a return which includes a planning arrangement

8.7.1 Advising on a planning arrangement

As the primary adviser, the accountant should advise on risks and implications, and only
recommend planning to a client based on a balanced view and taking into account any
potential risks such as the strength of legal interpretation relied upon and requirements
such as DOTAS disclosure.
Consideration should be given to the Promoters of Tax Avoidance Schemes (POTAS) regime
and the financial/reputational risks of providing the advice.

8.7.2 Introducing another adviser's planning arrangement

A professional accountant may be invited to introduce another source's arrangement. A
commission will often be paid for such an introduction. This must be disclosed to the client and
accounted for in line with the ICAEW Code of Ethics.
The accountant should determine whether the source is subject to a monitoring notice under
POTAS, as these carry significant consequences (see section 10). If the source is subject to a
notice it is not usually appropriate to introduce the arrangement.
Assuming the accountant has sufficient expertise to assess the arrangement and advise the
client he or she should appraise the arrangement and consider its effectiveness and the risks
(including reputational) involved.

8.7.3 Providing a second opinion on a third party's planning arrangements

No commissions should be accepted in this situation as it would undermine the objectivity of the
professional accountant.
The accountant should consider whether he is appropriately qualified to express an opinion on
the technical and reputational risks and rewards. If not, the accountant should either seek help
from another source or advise the client to seek help elsewhere. This should be documented.
In assessing the arrangements, the accountant should determine whether the source is subject
to a monitoring notice under POTAS (as above).
Where appropriate the accountant should suggest amendments to the arrangement, taking into
account the change to risks and tax implications including the position under DOTAS (see
section 10).

8.7.4 Compliance services in relation to a return which includes a planning arrangement

A client may have taken advice elsewhere relating to a tax planning arrangement. The
professional accountant may then be asked to enter the arrangement onto a tax return (merely
compliance-based work). The accountant is not responsible for advising on the implications of
the arrangement. However, the accountant may wish to advise on the risk of challenge.
The accountant should not include an arrangement which he considers has no sustainable basis.
If there is inadequate information from the client a request for further information should be
made. The accountant may need to obtain specialist help to determine whether an arrangement
is sustainable.

ICAEW 2020 Ethics 23

 9 GAAR, the Ramsay doctrine and BEPS

Section overview
• The GAAR applies for income tax, corporation tax, capital gains tax, IHT, SDLT and the
annual tax on enveloped dwellings.
• Applies if it is reasonable to conclude that tax avoidance was one of the main purposes of
a transaction, and it was not a reasonable course of action in response to the relevant tax
provisions.
• Includes cases where the effect of the transaction is inconsistent with the principles on
which the tax provisions are based, cases where there are contrived or abnormal steps,
and transactions intended to exploit shortcomings in the legislation.
• Just and reasonable adjustments are to be made to counteract the benefit of the planning.
• In addition to the GAAR, the courts have developed a purposive approach to interpreting
tax legislation (the Ramsay doctrine) which makes some tax planning schemes ineffective.
• The OECD and G20 countries have devised an action plan to tackle international tax
avoidance, the base erosion and profit shifting (BEPS) plan.

9.1 General anti-abuse rule (GAAR)

9.1.1 Overview
The general anti-abuse rule (GAAR) applies to arrangements entered into on or after
17 July 2013.
It is intended to counter the tax advantages sought from the most aggressive tax avoidance
arrangements, and can therefore be relevant to almost all taxpayers. It is intended to act as a
deterrent to discourage taxpayers from using such arrangements.
It applies on a self-assessment basis for income tax, corporation tax, capital gains tax, IHT, SDLT
and the annual tax on enveloped dwellings. National insurance contributions are now also
included under different tax provisions. An accountant should consider whether GAAR applies
when completing a tax return. If this is unclear then specialist help or a second opinion should
be sought.
9.1.2 When the GAAR applies
The GAAR is based on the 'double reasonableness test' such that it applies to arrangements if:
 it is reasonable to conclude that obtaining a tax advantage was one of the main purposes of
the arrangements; and
 the arrangements are abusive.
Arrangements are abusive if they cannot reasonably be regarded as a reasonable course of
action in relation to the relevant tax provisions. Whether they are reasonable is determined
having regard to whether:
 the results of the arrangements are consistent with the principles and objectives on which
the relevant tax provisions are based;
 there are contrived or abnormal steps; and
 the arrangements are intended to exploit shortcomings in the tax legislation.

24 Business Planning: Taxation ICAEW 2020