ACCA F6 Taxation UK Exam Kit 2013

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  Publishing 2013 (UK) ACCA F6 Taxation FA12

   

  Paper EXAM K I T ACCA F6

   

  Taxation FA2012 (UK)

                                                             

  Publishing Publishing

     

    Sixth  edition published by   Emile  Woolf Publishing Limited  Crowthorne

   Enterprise Centre, Crowthorne Business Estate, Old Wokingham Road,   Crowthorne,

   Berkshire   RG45 6AW  Email:

   info@ewiglobal.com  www.emilewoolfpublishing.com     

    ©

   Emile Woolf Publishing Limited, January 2013   

  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, electronic, mechanical, photocopying,  recording,  scanning or otherwise, without the prior permission in writing of Emile Woolf  Publishing  Limited, or as expressly permitted by law, or under the terms agreed with the  appropriate

   reprographics rights organisation.   

  You  must not circulate this book in any other binding or cover and you must impose  the  same condition on any acquirer. 

     

  Notice  

  Emile  Woolf Publishing Limited has made every effort to ensure that at the time of  writing

   the contents of this study text are accurate, but neither Emile Woolf Publishing  Limited  nor its directors or employees shall be under any liability whatsoever for any  inaccurate  or misleading information this work could contain.     

  British  Library Cataloguing in Publications Data 

  A  catalogue record for this book is available from the British Library. 

     

  ISBN:  978‐1‐84843‐280‐2      Printed

   and bound in Great Britain.   

      Acknowledgements  

  The  syllabus, study guide, exam questions and answers (where indicated) are  reproduced

   by kind permission of the Association of Chartered Certified Accountants. 

          ii

  © Emile Woolf Publishing Limited

   

  Overseas  aspects of corporation tax  59  

  Inheritance  tax  33  

  Corporation  tax   

  35  

  Corporation  tax losses 

  43  

  Chargeable  gains 

  53  

  Groups  of companies  56  

  Value  added tax   63  

  Partnerships    20  

  Self  assessment  

  67  

  2    Answers to practice questions 

  71

   

  Income  tax   

  71  

  Income  tax losses  93  

  Capital  gains tax  26  

  Income  tax losses  17  

  © Emile Woolf Publishing Limited iii

  Syllabus  and exam format  ix  

  Paper F6 (UK)

  Taxation  FA2012

   c

       

  Contents

     

  Page  

  Questions  and answers index   v

  Exam  techniques  xxv

  1  

    Tax

   rates and allowances  xxvii

     

  Section

   

  1    Practice questions 

  1

   

  Income  tax   

  Partnerships    97  

   

  Overseas  aspects of corporation tax  148  

   

  169

  4     Answers to mock exam questions 

   

  163

  3     Mock exam questions 

  158  

  Self  assessment  

  153  

  Value  added tax  

  Groups  of companies  145  

  iv © Emile Woolf Publishing Limited

  Chargeable  gains  140  

  130  

  Corporation  tax losses 

  121  

  Corporation  tax   

  116  

  Inheritance  tax 

  Capital  gains tax  104  

  Page  

   

   

  Paper F6 (UK)

  15 Samantha  Fabrique 

  10 Vanessa  and Serene 

  12   86   ACCA  F6 Dec 2007 (amended) 

  11 Sam  and Kim White 

  13   88  

  ACCA  F6 June 2008 (amended) 

  12 Ann  Peach 

  15   90   ACCA  F6 Dec 2008 (amended) 

  13 Nui  Neu 

  16   92  

  ACCA  2.3 June 2005 (amended)  Income tax losses

  14 Dee  Zyne  

  17   93   ACCA  2.3 June 2005 (amended) 

  18   95  

  10   83  

  ACCA  F6 Dec 2007 (amended) 

  16 Goff  Green 

  19   96   ACCA  F6 Dec 2010 (amended) 

  Partnerships19

  17 Ae,

   Bee, Cae 

  20  

  97   ACCA  F6 Dec 2008 (amended) 

  18 Peter,  Quinton and Roger 

  21   99   ACCA  2.3 June 2002 (amended) 

  19 Auy

   Man and Bim Men  

  22  

  ACCA  F6 June 2009 (amended) 

  9 Domingo,  Erigo and Fargo  

  Taxation FA 2012

   Smith  

   i

       

  Questions and answers index Question page

  Answer page Exam

  Income tax

  1 Edmond

   Brick 

  1  

  71   ACCA  F6 Dec 2007 (amended) 

  2 Peter  Chic 

  2   72   ACCA  F6 Dec 2008 (amended) 

  3 Sammi

  4  

  9   81   ACCA  F6 Dec 2009 (amended) 

  74   ACCA  F6 Dec  2010 (amended) 

  4 Firstly  plc 

  4   75   ACCA  F6 Dec 2010 (amended) 

  5 William

   Wong  

  6  

  77   ACCA  2.3 Dec 2005 (amended) 

  6 Andrew  Zoom 

  7   79   ACCA  F6 June 2009 (amended) 

  7 Simon  House  

  8   80  

  ACCA  F6 Dec 2009 (amended) 

  8 Na  Style  

  100   ACCA  F6 June 2010 (amended)  Paper F6 (UK): Taxation FA2012 Question page

  Answer page Exam

  39 Jogger  Ltd 

  51  

   Ltd 

  41 Spacious

  ACCA  F6 Dec 2007 (amended) 

  48   136  

  40 Sofa  Ltd 

  46   134   ACCA  F6 Dec 2008 (amended) 

  ACCA  F6 June 2010 (amended) 

  Chargeable gains

  44   132  

  38 Mice  Ltd  

  43   130   ACCA  F6 Dec 2010 (amended) 

  37 Volatile  Ltd  

  Corporation tax losses

  41   128   ACCA  F6 Dec 2010 (amended) 

  36 Crash ‐Bash Ltd  

  126   ACCA  F6 June 2008 (amended) 

  138   ACCA  2.3 Dec 2003 (amended) 

  42 Problematic  Ltd  

   Ltd 

  46 Red  and White 

  58  

   plc  

  48 Music

  57   146   ACCA  2.3 June 2003 (amended) 

  47 Animal  Ltd  

  ACCA  2.3 Dec 2001 (amended) 

  56   145  

  Group of companies

  53   140  

  56   144   ACCA  2.3 June 2003 (amended) 

  45 Earth  Ltd 

  ACCA  F6 Dec 2008 (amended) 

  55   142  

  44 Hawk  Ltd 

  54   141   ACCA  2.3 Dec 2001 (amended) 

  43 Astute  Ltd 

  ACCA  F6 June 2009 (amended) 

  39  

  35 Wireless

  20 Xio, Yana and Zoe 

  28   107  

  26 Sophia Tang 

  ACCA  2.3 June 2005 (amended) 

  30   110  

  25 Michael  Chin  

  29   109   ACCA  F6 Dec 2009 (amended) 

  24 Amanda  Moon 

  ACCA  F6 June 2009 (amended) 

  23 Nim  and Mae Lom 

  27 Lim  Lam  

  27   105   ACCA  F6 June 2008 (amended) 

  22 Wilson  Biazma 

  ACCA  F6 Dec 2007 (amended) 

  26   104  

  21 David  and Angela Brook 

  Capital gains tax

  102   ACCA  2.3 Dec 2004 (amended) 

  24  

  31   112   ACCA  2.3 Dec 2005 (amended) 

  31   113  

  39   125   ACCA  2.3 June 2005 (amended) 

  Corporation tax

  34 Stretched  Ltd 

  123   ACCA  F6 June 2008 (amended) 

  38  

  ‐Not‐Panic Ltd 

  33 Do

  35   121   ACCA  F6 June 2009 (amended) 

  32 Gastron  Ltd 

  35   119   ACCA  3.2 Jun 2005 (amended) 

  ACCA  F6 Dec 2010 (amended) 

  31 Debbie  Morgan 

  34   118   ACCA  3.2 Dec 2003 (amended) 

  30 Henry  Major 

  33   116   ACCA  3.2 Pilot (amended) 

  29 Alex  Reader 

  Inheritance tax

  32   115   ACCA  2.3 June 2003 (amended) 

  28 Nui  Lee 

  147   ACCA  2.3 Dec 2005 (amended) 

  Index to questions and answers Question page

  158   ACCA  2.3 June 2005 (amended) 

  55 Sandy  Brick 

  66   157   ACCA  2.3 June 2004 (amended) 

  Self assessment

  56 Vera

   Old  

  67  

  57 Pi  Casso 

  65   156  

  68   159   ACCA  F6 June 2008 (amended) 

  58 Ernest

   Vader  

  69  

  160   ACCA  F6 June 2010 (amended) 

  59 Quagmire  plc  

  ACCA  2.3 Dec 2005 (amended) 

  54 Ram-Rom Ltd 

  Answer page Exam

  51 Neung  Ltd  

  Overseas aspects of corporation tax

  49 Wash  plc  

  59   148  

  ACCA  2.3 June 2002 (amended) 

  50 Sirius  Ltd 

  60   150   ACCA  2.3 Dec 2003 (amended) 

  60   151  

  64   155   ACCA  2.3 June 2003 (amended) 

  ACCA  F6 Dec 2010 (amended)  Value added tax

  52 Anne  Attire 

  63   153   ACCA  F6 June 2009 (amended) 

  52 Victor  Style  

  64   154  

  ACCA  2.3 Dec 2004 (amended) 

  53 Astute,  Bright and Clever 

  69   161   ACCA  F6 June 2010 (amended)  Paper F6 (UK): Taxation FA2012

  Paper F6 (UK)

  Taxation FA2012

  S Syllabus and study guide

   

  Aim

  To   develop  knowledge  and  skills  relating  to  the  tax  system  as  applicable  to  individuals,  single companies, and groups of companies. 

  Main capabilities

  On  successful completion of this paper candidates should be able to: 

  A   Explain the operation and scope of the tax system  B   Explain and compute the income tax liabilities of individuals  C   Explain and compute the corporation tax liabilities of individual companies and 

  groups  of companies 

  D   Explain  and  compute  the  chargeable  gains  arising  on  companies  and 

  individuals  

  E   Explain and compute the inheritance tax liabilities of individuals  F

    Explain  and  compute  the  effect  of  national  insurance  contributions  on 

  employees,  employers and the self employed 

  G   Explain  and  compute  the  effects  of  value  added  tax  on  incorporated  and 

  unincorporated  businesses 

  H   Identify and explain the obligations of tax payers and/or their agents and the 

  implications  of non‐compliance 

  Rationale

  The  syllabus for Paper F6, Taxation, introduces candidates to the subject of taxation  and  provides the core knowledge of the underlying principles and major technical  areas

   of taxation as they affect the activities of individuals and businesses.  Paper F6: Taxation FA2012 (UK)

  Candidates  are introduced to the rationale behind – and the functions of – the tax  system.

    The  syllabus  then  considers  the  separate  taxes  that  an  accountant  would  need   to  have  a  detailed  knowledge  of,  such  as  income  tax  from  self‐employment,  employment

   and investments, the corporation tax liability of individual companies  and  groups of companies, the inheritance tax liabilities of individuals, the national  insurance  contribution liabilities of both employed and self employed persons, the  value  added tax liability of businesses, the chargeable gains arising on disposals of  investments

   by both individuals and companies, and the inheritance tax liabilities  arising  on chargeable lifetime transfers and on death. 

    Having   covered  the  core  areas  of  the  basic  taxes,  candidates  should  be  able  to  compute   tax  liabilities,  explain  the  basis  of  their  calculations,  apply  tax  planning  techniques   for  individuals  and  companies  and  identify  the  compliance  issues  for  each

   major tax through a variety of business and personal scenarios and situations. 

  Syllabus A The UK tax system

  1 The overall function and purpose of taxation in a modern economy

  2 Different types of taxes

  3 Principal sources of revenue law and practice

  4 Tax avoidance and tax evasion

B. Income tax liabilities

  1 The scope of income tax

  3 Income from self-employment

  4 Property and investment income

  5 The comprehensive computation of taxable income and income tax liability

  6 The use of exemptions and reliefs in deferring and minimising income tax liabilities

  C Corporation tax liabilities

  1 The scope of corporation tax

  2 Taxable total profits

  3 The comprehensive computation of corporation tax liability

  4 The effect of a group corporate structure for corporation tax purposes

  5 The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

  2 Income from employment

  Syllabus and study guide D Chargeable gains

  1 The scope of national insurance

  3 The procedures relating to enquiries, appeals and disputes

  2 The time limits for the submission of information, claims and payment of tax, including payments on account

  1 The systems for self-assessment and the making of returns

  H The obligations of tax payers and/or their agents

  4 The effect of special schemes

  3 The computation of VAT liabilities

  2 The VAT registration requirements

  1 The scope of value added tax (VAT)

  G Value added tax

  3 Class 2 and Class 4 contributions for self-employed persons

  2 Class 1 and Class 1A contributions for employed persons

  F National insurance contributions

  1 The scope of the taxation of capital gains

  5 Payment of inheritance tax

  4 The use of exemptions in deferring and minimising inheritance tax liabilities

  3 The liabilities arising on chargeable lifetime transfers and on the death of an individual

  2 The basic principles of computing transfers of value

  1 The scope of inheritance tax

  E Inheritance tax

  6 The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

  5 The computation of the capital gains tax payable by individuals

  4 Gains and losses on the disposal of shares and securities

  3 Gains and losses on the disposal of movable and immovable property

  2 The basic principles of computing gains and losses

  4 Penalties for non-compliance Paper F6: Taxation FA2012 (UK) Approach to examining the syllabus The syllabus is assessed by a three-hour paper-based examination.

  The paper will be predominantly computational and will have five questions, all of which will be compulsory.

  „ Question one will focus on income tax and question two will focus on

  corporation tax. The two questions will be for a total of 55 marks, with one of the questions being for 30 marks and the other being for 25 of the marks.

  „ Question three will focus on chargeable gains (either personal or corporate) and will be for 15 marks. „ Questions four and five will be on any area of the syllabus, can cover more than one topic, and will be for 15 marks.

  There will always be a minimum of 10 marks on value added tax. These marks will normally be included within question one or question two, although there might be a separate question on value added tax. There will always be between 5 and 15 marks on inheritance tax. Inheritance tax can be included within questions three, four or five.

  National insurance contributions will not be examined as a separate question, but may be examined in any question involving income tax or corporation tax. Groups and overseas aspects may be examined in question two, question four or question five. A small element of chargeable gains may be included in questions other than question three. Any of the five questions might include the consideration of issues relating to the minimisation or deferral of tax liabilities.

  Study guide

  This  study guide provides more detailed guidance on the syllabus. You should use  this

   as the basis of your studies. 

  A THE UK TAX SYSTEM

  1 The overall function and purpose of taxation in a modern economy

  (a) Describe the purpose (economic, social etc) of taxation in a modern economy.

  2 Different types of taxes (a) Identify the different types of capital and revenue tax.

  (b) Explain the difference between direct and indirect taxation.

  3 Principal sources of revenue law and practice (a) Describe the overall structure of the UK tax system.

  (b) State the different sources of revenue law. (c) Appreciate the interaction of the UK tax system with that of other tax jurisdictions.

  Syllabus and study guide

4 Tax avoidance and tax evasion (a) Explain the difference between tax avoidance and tax evasion.

  (b) Explain the need for an ethical and professional approach.

  Excluded topics Anti-avoidance legislation. B

INCOME TAX LIABILITIES

  1 The scope of income tax (a) Explain how the residence of an individual is determined. Excluded topics The treatment of a person who comes to the UK to work or a person who leaves the UK to take up employment overseas.

Foreign income, non-residents and double taxation relief.

Income from trusts and settlements. Child benefit income tax charge.

  2 Income from employment

  (a) Recognise the factors that determine whether an engagement is treated as employment or self-employment. (b) Recognise the basis of assessment for employment income. (c) Compute the income assessable. (d) Recognise the allowable deductions, including travelling expenses. (e) Discuss the use of the statutory approved mileage allowances. (f) Explain the PAYE system. (g) Identify P11D employees. (h) Compute the amount of benefits assessable. (i) Explain the purpose of a dispensation from HM Revenue & Customs. (j) Explain how charitable giving can be made through a payroll deduction scheme.

  Excluded topics The calculation of a car benefit where emission figures are not available.

  The exemption for zero emission company motor cars. Share and share option incentive schemes for employees. Payments on the termination of employment, and other lump sums received by employees.

  3 Income from self-employment (a) Recognise the basis of assessment for self-employment income.

  (b) Describe and apply the badges of trade. Paper F6: Taxation FA2012 (UK)

  (c) Recognise the expenditure that is allowable in calculating the tax- adjusted trading profit. (d) Recognise the relief that can be obtained for pre-trading expenditure. (e) Compute the assessable profits on commencement and on cessation. (f) Change of accounting date

  (i) Recognise the factors that will influence the choice of accounting date. (ii) State the conditions that must be met for a change of accounting date to be valid. (iii) Compute the assessable profits on a change of accounting date. (g) Capital allowances (i) Define plant and machinery for capital allowances purposes.

  (ii) Compute writing down allowances, first year allowances and the annual investment allowance. (iii) Compute capital allowances for motor cars. (iv) Compute balancing allowances and balancing charges. (v) Recognise the treatment of short life assets. (vi) Explain the treatment of assets included in the special rate pool. (h) Relief for trading losses (i) Understand how trading losses can be carried forward.

  (ii) Explain how trading losses can be carried forward following the incorporation of a business. (iii) Understand how trading losses can be claimed against total income and chargeable gains.

  (iv) Explain and compute the relief for trading losses in the early years of a trade.

  (vi) Explain and compute terminal loss relief. (i) Partnerships and limited liability partnerships (i) Explain how a partnership is assessed to tax.

  (ii) Compute the assessable profits for each partner following a change in the profit sharing ratio. (iii) Compute the assessable profits for each partner following a change in the membership of the partnership. (iv) Describe the alternative loss relief claims that are available to partners. (v) Explain the loss relief restriction that applies to the partners of a limited liability partnership.

  Syllabus and study guide Excluded topics The 100% first-year allowance for expenditure on renovating business premises in disadvantaged areas, flats above shops and water technologies. Capital allowances for industrial buildings, agricultural buildings, patents, scientific research and know how. Capital allowances for motor cars already owned at 6 April 2009 (1 April 2009 for companies). Apportionment in order to determine the rate of writing down allowance or the amount of annual investment allowance where a period of account spans 6 April 2012 (1 April 2012 for companies). Enterprise zones. Investment income of a partnership. The allocation of notional profits and losses for a partnership. Farmers averaging of profits. The averaging of profits for authors and creative artists. Loss relief for shares in unquoted trading companies.

  4 Property and investment income (a) Compute property business profits.

  (b) Explain the treatment of furnished holiday lettings. (c) Describe rent-a-room relief. (d) Compute the amount assessable when a premium is received for the grant of a short lease.

  (e) Understand how relief for a property business loss is given. (f) Compute the tax payable on savings income. (g) Compute the tax payable on dividend income. (h) Explain the treatment of individual savings accounts (ISAs) and other tax exempt investments.

  Excluded topics The deduction for expenditure by landlords on energy-saving items.

  Premiums for granting subleases. Junior ISAs.

  5 The comprehensive computation of taxable income and income tax liability

  (a) Prepare a basic income tax computation involving different types of income. (b) Calculate the amount of personal allowance available generally, and for people aged 65 and above. (c) Compute the amount of income tax payable. (d) Explain the treatment of interest paid for a qualifying purpose. (e) Explain the treatment of gift aid donations. Paper F6: Taxation FA2012 (UK)

  (f) Explain the treatment of property owned jointly by a married couple, or by a couple in a civil partnership.

  Excluded topics The blind person’s allowance and the married couple’s allowance.

  Tax credits. Maintenance payments. The income of minor children.

  6 The use of exemptions and reliefs in deferring and minimising income tax liabilities

  (a) Explain and compute the relief given for contributions to personal pension schemes, using the rules applicable from 6 April 2011. (b) Describe the relief given for contributions to occupational pension schemes, using the rules applicable from 6 April 2011. (c) Explain how a married couple or couple in a civil partnership can minimise their tax liabilities.

  Excluded topics The conditions that must be met in order for a pension scheme to obtain approval from HM Revenue & Customs.

  The enterprise investment scheme and the seed enterprise investment scheme. Venture capital trusts. Tax reduction scheme for gifts of pre-eminent objects.

  C CORPORATION TAX LIABILITIES

  1 The scope of corporation tax

  (a) Define the terms ‘period of account’, ‘accounting period’, and ‘financial year’. (b) Recognise when an accounting period starts and when an accounting period finishes. (c) Explain how the residence of a company is determined.

  Excluded topics Investment companies.

  Close companies. Companies in receivership or liquidation. Reorganisations. The purchase by a company of its own shares. Personal service companies.

  2 Taxable total profits

  (a) Recognise the expenditure that is allowable in calculating the tax- adjusted profit.

  Syllabus and study guide

  (b) Explain how relief can be obtained for pre-trading expenditure. (c) Compute capital allowances (as for income tax). (d) Compute property business profits. (e) Explain the treatment of interest paid and received under the loan relationship rules.

  (f) Explain the treatment of qualifying charitable donations. (g) Understand how trading losses can be carried forward. (h) Understand how trading losses can be claimed against income of the current or previous accounting periods.

  (i) Recognise the factors that will influence the choice of loss relief claim. (j) Explain how relief for a property business loss is given. (k) Compute taxable total profits.

  Excluded topics Research and development expenditure.

  Non-trading deficits on loan relationships. Relief for intangible assets.

  3 The comprehensive computation of corporation tax liability (a) Compute the corporation tax liability and apply marginal relief.

  (b) Explain the implications of receiving franked investment income.

  4 The effect of a group corporate structure for corporation tax purposes

  (a) Define an associated company and recognise the effect of being an associated company for corporation tax purposes. (b) Define a 75% group, and recognise the reliefs that are available to members of such a group. (c) Define a 75% capital gains group, and recognise the reliefs that are available to members of such a group. (d) Compare the UK tax treatment of an overseas branch to an overseas subsidiary (e) Calculate double taxation relief. (f) Explain the election for the exemption of profits from overseas branches. (g) Explain the basic principles of the transfer pricing rules.

  Excluded topics

Relief for trading losses incurred by an overseas subsidiary.

  Consortia. Pre-entry gains and losses. Paper F6: Taxation FA2012 (UK) The anti-avoidance provisions where arrangements exist for a company to leave a group. The tax charge that applies where a company leaves a group within six years of receiving an asset by way of a no gain/no loss transfer. Controlled foreign companies. Foreign companies trading in the UK. Expense relief in respect of overseas tax.

  The set off of qualifying charitable donations and losses for the purpose of calculating double taxation relief..

  Transfer pricing transactions not involving an overseas company.

  5 The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

  (The   use  of  such  exemptions  and  reliefs  is  implicit  within  all  of  the  above

   sections 1 to 4 of part C of the syllabus, concerning corporation  tax)  

  D CHARGEABLE GAINS

  1 The scope of the taxation of capital gains (a) Describe the scope of capital gains tax.

  (b) Explain how the residence and ordinary residence of an individual is determined. (c) List those assets which are exempt.

  Excluded topics Assets situated overseas and double taxation relief.

  Partnership capital gains.

  2 The basic principles of computing gains and losses (a) Compute capital gains for both individuals and companies.

  (b) Calculate the indexation allowance available to companies. (c) Explain the treatment of capital losses for both individuals and companies.

  (d) Explain the treatment of transfers between a husband and wife or between a couple in a civil partnership. (e) Compute the amount of allowable expenditure for a part disposal. (f) Explain the treatment where an asset is damaged, lost or destroyed, and the implications of receiving insurance proceeds and reinvesting such proceeds.

  Excluded topics Small part disposals of land, and small capital sums received where an asset is damaged.

  Syllabus and study guide Losses in the year of death. Relief for losses incurred on loans made to traders. Negligible value claims.

  3 Gains and losses on the disposal of movable and immovable property (a) Identify when chattels and wasting assets are exempt.

  (b) Compute the chargeable gain when a chattel is disposed of. (c) Calculate the chargeable gain when a wasting asset is disposed of. (d) Compute the exemption when a principal private residence is disposed of.

  (e) Calculate the chargeable gain when a principal private residence has been used for business purposes. (f) Identify the amount of letting relief available when a principal private residence has been let out.

  Excluded topics The disposal of leases and the creation of sub-leases.

  4 Gains and losses on the disposal of shares and securities

  (a) Calculate the value of quoted shares where they are disposed of by way of a gift. (b) Explain and apply the identification rules as they apply to individuals and to companies, including the same day, nine day, and thirty day matching rules. (c) Explain the pooling provisions. (d) Explain the treatment of bonus issues, rights issues, takeovers and reorganisations. (e) Explain the exemption available for gilt-edged securities and qualifying corporate bonds.

  Excluded topics A detailed question on the pooling provisions for shares as they apply to limited companies.

  The small part disposal rules applicable to rights issues, takeovers and reorganisations. Substantial shareholdings. Gilt-edged securities and qualifying corporate bonds other than the fact that they are exempt.

  5 The computation of the capital gains tax payable by individuals (a) Compute the amount of capital gains tax payable. Paper F6: Taxation FA2012 (UK)

  6 The use of exemptions and reliefs in deferring and minimising tax

liabilities arising on the disposal of capital assets

(a) Explain and apply entrepreneurs’ relief as it applies to individuals.

  (b) Explain and apply rollover relief as it applies to individuals and companies. (c) Explain and apply holdover relief for the gift of business assets. (d) Explain and apply the incorporation relief that is available upon the transfer of a business to a company.

  Excluded topics Reinvestment relief.

  Entrepreneurs’ relief for associated disposals.

  E INHERITANCE TAX

  1 The scope of inheritance tax

  (a) Describe the scope of inheritance tax (b) Identify and explain the persons chargeable.

  Excluded topics Pre 18 March 1986 lifetime transfers.

  Transfers of value by close companies. Domicile, deemed domicile, and non-UK domiciled individuals. Trusts.

  2 The basic principles of computing transfers of value

  (a) State, explain and apply the meaning of transfer of value, chargeable transfer and potentially exempt transfer. (b) Demonstrate the diminution in value principle. (c) Demonstrate the seven year accumulation principle taking into account changes in the level of the nil rate band.

  Excluded topics Excluded property.

  Related property. The tax implications of the location of assets. Gifts with reservation of benefit. Associated operations.

  3 The liabilities arising on chargeable lifetime transfers and on the death of an individual

  (a) Understand the tax implications of chargeable lifetime transfers and compute the relevant liabilities. (b) Understand the tax implications of transfers within seven years of death and compute relevant liabilities.

  Syllabus and study guide

  (c) Compute the tax liability on a death estate. (d) Understand and apply the transfer of any unused nil rate band between spouses.

  Excluded topics Specific rules for the valuation of assets (values will be provided).

  Business property relief. Agricultural relief. Relief for the fall in value of lifetime gifts. Quick succession relief. Double tax relief. Variation of wills and disclaimers of legacies. Grossing up on death. Post mortem reliefs. Double charges legislation. The reduced rate of inheritance tax payable on death when a proportion of a person’s estate is bequeathed to charity.

  4 The use of exemptions in deferring and minimising inheritance tax liabilities

  (a) Understand and apply the following exemptions: (i) small gifts exemption

  (ii) annual exemption (iii) normal expenditure out of income (iv) gifts in consideration of marriage (v) gifts between spouses

  Excluded topics Gifts to charities.

  Gifts to political parties. Gifts for national purposes.

  5 Payment of inheritance tax (a) Identify who is responsible for the payment of inheritance tax.

  (b) Advise on the due date for payment of inheritance tax.

  Excluded topics

Administration of inheritance tax other than listed above.

  The instalment option for the payment of tax. Interest and penalties. Paper F6: Taxation FA2012 (UK) F NATIONAL

INSURANCE CONTRIBUTIONS

  1 The scope of national insurance (a) Describe the scope of national insurance.

  2 Class 1 and Class 1A contributions for employed persons (a) Compute Class 1 NIC.

  (b) Compute Class 1A NIC.

  Excluded topics The calculation of directors’ national insurance on a month by month basis.

  Contracted out contributions.

  3 Class 2 and Class 4 contributions for self-employed persons (a) Compute Class 2 NIC.

  (b) Compute Class 4 NIC.

  Excluded topics The offset of trading losses against non-trading income. G VALUE ADDED TAX

  1 The scope of value added tax (VAT) (a) Describe the scope of VAT.

  (b) List the principal zero-rated and exempt supplies.

  2 The VAT registration requirements

  (a) Recognise the circumstances in which a person must register for VAT. (b) Explain the advantages of voluntary VAT registration. (c) Explain the circumstances in which pre-registration input VAT can be recovered. (d) Explain how and when a person can deregister for VAT. (e) Explain the conditions that must be met for two or more companies to be treated as a group for VAT purposes, and the consequences of being so treated.

  3 The computation of VAT liabilities (a) Explain how VAT is accounted for and administered.

  (b) Recognise the tax point when goods or services are supplied. (c) List the information that must be given on a VAT invoice. (d) Explain and apply the principles regarding the valuation of supplies.

  (e) Recognise the circumstances in which input VAT is non- deductible.

  Syllabus and study guide

  (f) Compute the relief that is available for impairment losses on trade debts. (g) Explain the circumstances in which the default surcharge, a penalty for an incorrect VAT return, and default interest will be applied. (h) Explain the treatment of imports, exports and trade within the European Union.

  Excluded topics VAT periods where there is a change of VAT rate.

  Partial exemption. In respect of property and land: leases, do-it-yourself builders, and a landlord’s option to tax.

  Penalties apart from those listed in the study guide.

  4 The effect of special schemes

  (a) Describe the cash accounting scheme, and recognise when it will be advantageous to use the scheme. (b) Describe the annual accounting scheme, and recognise when it will be advantageous to use the scheme. (c) Describe the flat rate scheme, and recognise when it will be advantageous to use the scheme.

  Excluded topics The second-hand goods scheme.

  The capital goods scheme. The special schemes for retailers.

  H THE OBLIGATIONS OF TAX PAYERS AND/OR THEIR AGENTS

  

1 The systems for self-assessment and the making of returns

  (a) Explain and apply the features of the self-assessment system as it applies to individuals. (b) Explain and apply the features of the self-assessment system as it applies to companies, including the use of iXBRL.

  2 The time limits for the submission of information, claims and payment of tax, including payments on account

  (a) Recognise the time limits that apply to the filing of returns and the making of claims. (b) Recognise the due dates for the payment of tax under the self- assessment system. (c) Compute payments on account and balancing payments/repayments for individuals. (d) Explain how large companies are required to account for corporation tax on a quarterly basis. Paper F6: Taxation FA2012 (UK)

  (e) List the information and records that taxpayers need to retain for tax purposes.

  Excluded topics The payment of CGT by annual instalments.

  3 The procedures relating to compliance checks, appeals and disputes

  (a) Explain the circumstances in which HM Revenue & Customs can make a compliance check into a self-assessment tax return. (b) Explain the procedures for dealing with appeals and disputes.

  4 Penalties for non-compliance (a) Calculate late payment interest.

  (b) State the penalties that can be charged.

  Paper F6 (UK)

  Taxation FA2012

  e

       

  Exam techniques Five steps to exam success Know your subject

  1 It  sounds obvious, but you really need to know all topics in the syllabus – ACCA can 

  test  you on any area of the syllabus so even those topics you think might ‘never come  up’  could be on your next exam. Whatever the format, questions require that you have  learnt

    definitions,  know  key  words  and  their  meanings  and  understand  concepts,  theories  and rules. 

  Know your exam structure

  2 Do  you know how many questions you need to attempt? Do you know how long your 

  exam  is? What type of questions come up? Knowing this is essential!  The

   F6 exam is three hours long (plus an additional 15 minutes reading time).   The paper will be mainly computational and will have five questions, all of which will be compulsory.

  „ Question one will focus on income tax and question two will focus on

  corporation tax. The two questions will be for a total of 55 marks, with one of the questions being for 30 marks and the other being for 25 marks.

  „ Question three will be for 15 marks, and will focus on chargeable gains (either personal or corporate). „ Questions four and five will be on any area of the syllabus, can cover more than one topic, and will be for 15 marks.

  There  will always be a minimum of 10 marks on value added tax. These marks will  normally  be included within question one or question two, although there might be a  separate  question on value added tax.  Paper F6 (UK): Taxation FA2012

  There  will always be between 5 and 15 marks on inheritance tax. Inheritance tax can be  included  within questions three, four or five.  

  National  insurance contributions will not be examined as a separate question, but may  be

   examined in any question involving income tax or corporation tax.  Groups   and  overseas  aspects  may  be  examined  in  question  two,  question  four  or  question  five.  A  small element of chargeable gains may be included in questions other than question  three.

     Any

    of  the  five  questions  might  include  the  consideration  of  issues  relating  to  the  minimisation  or deferral of tax liabilities. 

  Practice makes perfect

  3 One  of the best ways to prepare for your actual exam is to try lots of past questions 

  under   timed  conditions.  As  actual  past  questions  are  based  on  out  of  date  rates and  regulations,  all of the questions in this kit have been updated to cover current rates and  allowances.

   They have also been amended to include legislation introduced since the  question   was  originally  set.  New  legislation  frequently  appears  in  examination  questions

    as  it  is  not  only  topical,  but  also  helps  to  provide  the  examiner  with  inspiration  for questions.     Attempt ALL of the questions in this exam kit and compare your answers with the suggested answers to see what you need to improve on and the areas you need to go back and revise! Go back and revise and then reattempt questions if you get any wrong.  

  Time yourself

  4 If

   you are sitting an exam worth 100 marks in three hours, you should aim to spend 1.8  minutes  on each mark. Make sure that you have double‐checked your strategy of how  you   are  going  to  allocate  your  time  before  you  go  into  the  exam  and  that  you  are  comfortable  answering five questions in three hours.  Since   you  don’t  need  to  attempt  the  questions  in  order,  a  good  strategy  could  be  to  attempt

    the  ‘easy’  questions  (such  as  those  you  either  know  or  you  don’t)  at  the  beginning  and save those that involve calculations or a bit more thought to the end.   

   

  5 Reading and planning time in the exam

  You  have been given an extra 15 minutes ‘reading and planning’ time in the exam. Use  it

   wisely! You are allowed to read the questions, begin to plan your answers and use  your   calculator  to  make  some  preliminary  numerical  calculations.  You’re  allowed  to  write  on your exam paper, so try going through and highlighting the key points and  requirements   in  the  questions,  or  jot  down  some  ideas  as  to  how  you  are  going  to  structure  your answers. Paper F6 (UK) Taxation FA2012

   t Tax rates and allowances Contents

  1 Tax rates and allowances

  2 Retail price indices Paper F6 (UK): Taxation FA2012

1 Tax rates and allowances

1.1 Tax rates and allowances given in the examination paper Income tax Normal Dividend rates rates % %

  Basic rate £0 – £34,370

  20

  10 Higher rate £34,371 to £150,000

  40

  32.5 Additional rate £150,001 and over

  50

  42.5 A  starting rate of 10% applies to savings income where it falls within the first £2,710  of

   taxable income. 

  Personal allowance

  £ Personal allowance Standard 8,105 Personal allowance 65 – 74 10,500 Personal allowance 75 and over 10,660 Income limit for age related allowances 25,400 Income limit for standard personal allowances 100,000

  Car benefit percentage

  The relevant base level of CO 2 emissions is 100 grams per kilometre. The percentage rates applying to petrol cars with CO

  2 emissions up to this level are:

  75 grams per kilometre or less 5% 76 and 99 grams per kilometre 10% 100 grams per kilometre 11%

  Car fuel benefit The base figure for calculating the car fuel benefit is £20,200. Individual savings accounts

  The overall investment limit is £11,280, of which £5,640 can be invested in a cash ISA.

  Tax rates and allowances Personal scheme limit

  Annual allowance £50,000 The maximum contribution that can qualify for tax relief without any earnings is £3,600.

  Authorised mileage allowances: cars

  Up to 10,000 miles 45p

  Over 10,000 miles 25p

  Capital allowances: rates of allowance % Plant and machinery

  Main pool

  18 Special rate pool

  8 Motor cars New cars with CO

  2 emissions up to 110 grams per kilometre 100

  CO

  2 emissions between 111 and 160 grams per kilometre 18

  CO

  2 emissions over 160 grams per kilometre 8 Annual investment allowance

  First £25,000 of expenditure 100

  Corporation tax Financial year 2010 2011 2012

  Small profits rate 21% 20% 20% Main rate 28% 26% 24% Lower limit 300,000 300,000 300,000 Upper limit 1,500,000 1,500,000 1,500,000 Marginal relief fraction 7/400 3/200 1/100

  Marginal relief

  Standard fraction x (U – A) x N/A

  Value added tax

  Standard rate 20%

  Registration limit 77,000

  Deregistration limit 75,000 Paper F6 (UK): Taxation FA2012 Inheritance tax Inheritance tax: tax rates

  £1 - £325,000 Nil

  Excess: - Death rate 40% 20%

  ‐ Lifetime rate

  Inheritance tax: taper relief Years before death Percentage reduction %

  Over 3 but less than 4 years

  20 Over 4 but less than 5 years

  40 Over 5 but less than 6 years

  60 Over 6 but less than 7 years

  80 Capital gains tax Rates of tax

  18% Lower rate

  ‐ 28%

  Higher rate ‐

  Annual exempt amount £10,600 Entrepreneurs’ relief £10,000,000

  Lifetime limit ‐

  10% ‐ Rate of tax

  National Insurance contributions (not contracted out rates) %

  Class 1 Employee £1 – £7,605 per year Nil £7,606 – £42,475 per year

  12.0 £42,476 and above per year

  2.0 Class 1 Employer £1 – £7,488 per year Nil £7, 489 and above per year

  13.8 Class 1A

  13.8 Class 2 £2.65 per week

  Small earnings exemption £5,595 Class 4 £1 – £7,605 per year Nil

  £7,606 – £42,475 per year

  9.0 £42,476 and above per year

  2.0 Rates of interest Official rate of interest: 4% Rate of late payment interest: 3% (assumed) Rate of repayment interest: 0.5% (assumed) Tax rates and allowances

2 Retail price indices

2.1 RPIs used for examples and questions in this text 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

  January – 82.61 86.84 91.20 96.25 100.0 103.3 111.0 119.5 130.2 135.6 February – 82.97 87.20 91.94 96.60 100.4 103.7 111.8 120.2 130.9 136.3 March 79.44 83.12 87.48 92.80 96.73 100.6 104.1 112.3 121.4 131.4 136.7 April 81.04 84.28 88.64 94.78 97.67 101.8 105.8 114.3 125.1 133.1 138.8 May 81.62 84.64 88.97 95.21 97.85 101.9 106.2 115.0 126.2 133.5 139.3 June 81.85 84.84 89.20 95.41 97.79 101.9 106.6 115.4 126.7 134.1 139.3 July 81.88 85.30 89.10 95.23 97.52 101.8 106.7 115.5 126.8 133.8 138.8 August 81.90 85.68 89.94 95.49 97.82 102.1 107.9 115.8 128.1 134.1 138.9 September 81.85 86.06 90.11 95.44 98.30 102.4 108.4 116.6 129.3 134.6 139.4 October 82.26 86.36 90.67 95.59 98.45 102.9 109.5 117.5 130.3 135.1 139.9 November 82.66 86.67 90.95 95.92 99.29 103.4 110.0 118.5 130.0 135.6 139.7 December 82.51 86.89 90.87 96.05 99.62 103.3 110.3 118.8 129.9 135.7 139.2

  1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

  January 137.9 141.3 146.0 150.2 154.4 159.5 163.4 166.6 171.1 173.3 178.4 February 138.8 142.1 146.9 150.9 155.0 160.3 163.7 167.5 172.0 173.8 179.3 March 139.3 142.5 147.5 151.5 155.4 160.8 164.1 168.4 172.2 174.5 179.9 April 140.6 144.2 149.0 152.6 156.3 162.6 165.2 170.1 173.1 175.7 181.2 May 141.1 144.7 149.6 152.9 156.9 163.5 165.6 170.7 174.2 176.2 181.5 June 141.0 144.7 149.8 153.0 157.5 163.4 165.6 171.1 174.4 176.2 181.3 July 140.7 144.0 149.1 152.4 157.5 163.0 165.1 170.5 173.3 175.9 181.3 August 141.3 144.7 149.9 153.1 158.5 163.7 165.5 170.5 174.0 176.4 181.6 September 141.9 145.0 150.6 153.8 159.3 164.4 166.2 171.7 174.6 177.6 182.5 October 141.8 145.2 149.8 153.8 159.5 164.5 166.5 171.6 174.3 177.9 182.6 November 141.6 145.3 149.8 153.9 159.6 164.4 166.7 172.1 173.6 178.2 182.7 December 141.9 146.0 150.7 154.4 160.0 164.4 167.3 172.2 173.4 178.5 183.5

  2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

  January 183.1 188.9 193.4 201.6 209.8 210.1 217.9 229.0 238.0 250.4 February 183.8 189.6 194.2 203.1 211.4 211.4 219.2 231.3 239.9 250.8 March 184.6 190.5 195.0 204.4 212.1 211.3 220.7 232.5 240.8 251.1 April 185.7 191.6 196.5 205.4 214.0 211.5 222.8 234.4 242.5 251.3 May 186.5 192.0 197.7 206.2 215.1 212.8 223.6 235.2 242.4 June 186.8 192.2 198.5 207.3 216.8 213.4 224.1 235.2 241.8 July

  186.8 192.2 198.5 206.1 216.5 213.4 223.6 234.7   242.1  August

  187.4 192.6 199.2 207.3 217.2 214.4 224.5 236.1   243.0  September 188.1 193.1 200.1 208.0 218.4 215.3 225.3 237.9   244.2  October 188.6 193.3 200.4 208.9 217.7 216.0 225.8 238.0

    244.4 

  November 189.0 193.6 200.1 209.7 216.0 216.6 226.8 238.5   244.7  December 189.9 194.1 202.7 210.9 212.9 218.0 228.4 239.4   250.0 

  Note: The figures in italics are estimated Paper F6 (UK): Taxation FA2012

  Paper F6 (UK)

  Taxation  FA2012

   

SECTION 1 & Q A Practice questions Income tax

1 Edmond Brick

  Edmond Brick owns four properties which are let out. The following information relates to the tax year 2012–13:

  Property one

  This is a freehold house that qualifies as a trade under the furnished holiday letting rules. The property was purchased on 6 April 2012. During the tax year 2012–13 the property was let for eighteen weeks at £370 per week. Edmond spent £5,700 on furniture and kitchen equipment during April 2012. Due to a serious flood £7,400 was spent on repairs during November 2012. The damage was not covered by insurance. The other expenditure on this property for the tax year 2012-13 amounted to £2,710, and this is all allowable.

  Property two

  This is a freehold house that is let out furnished. The property was let throughout the tax year 2012–13 at a monthly rent of £575, payable in advance. During the tax year 2012–13 Edmond paid council tax of £1,200 and insurance of £340 in respect of this property. He claims the wear and tear allowance for this property.

  Property three

  This is a freehold house that is let out unfurnished. The property was purchased on 6 April 2012, and it was empty until 30 June 2012. It was then let from 1 July 2012 to 31 January 2013 at a monthly rent of £710, payable in advance. On 31 January 2013 the tenant left owing three months rent which Edmond was unable to recover. The property was not re-let before 5 April 2013. During the tax year 2012–13 Edmond paid insurance of £290 for this property and spent £670 on advertising for tenants. He also paid loan interest of £6,700 in respect of a loan that was taken out to purchase this property.

  © Emile Woolf Publishing Limited

  1 Paper F6 (UK): Taxation FA2012 Property four

  This is a leasehold office building that is let out unfurnished. Edmond pays an annual rent of £6,800 for this property, but did not pay a premium when he acquired it. On 6 April 2012 the property was sub-let to a tenant, with Edmond receiving a premium of £15,000 for the grant of a five-year lease. He also received the annual rent of £4,600 which was payable in advance. During the tax year 2012–13 Edmond paid insurance of £360 in respect of this property.

  Furnished room

  During the tax year 2012–13 Edmond rented out one furnished room of his main residence. During the year he received rent of £5,040, and incurred allowable expenditure of £1,140 in respect of the room. Edmond always computes the taxable income for the furnished room on the most favourable basis.

  Required:

  (a) State the income tax advantages of property one being treated as a trade under

  (2 marks) the furnished holiday letting rules.

  (b) Calculate Edmond’s furnished holiday letting loss in respect of property one for

  (3 marks) the tax year 2012–13.

  (c) Explain how Edward’s furnished holiday letting loss for the tax year 2012-13 can be relieved. (1 mark) (d) Calculate Edmond’s property business profit in respect of the other three properties and the furnished room for the tax year 2012–13. (9 marks)

  (Total: 15 marks)

2 Peter Chic

  Peter Chic is employed by Haute-Couture Ltd as a fashion designer. The following information is available for the tax year 2012–13:

  Employment

  (1) During the tax year 2012-13 Peter was paid a gross annual salary of £95,600 by Haute-Couture Ltd. Income tax of £42,558 was deducted from this figure under PAYE.

  (2) In addition to his salary, Peter received two bonus payments from Haute- Couture Ltd during the tax year 2012–13. The first bonus of £14,300 was paid on

  30 April 2012 and was in respect of the year ended 31 December 2011. Peter became entitled to this first bonus on 10 April 2012. The second bonus of £13,600 was paid on 31 March 2013 and was in respect of the year ended 31 December 2012. Peter became entitled to this second bonus on 25 March 2013.

  (3) Throughout the tax year 2012–13 Haute-Couture Ltd provided Peter with a diesel powered motor car which has a list price of £22,500. The motor car cost Haute-Couture Ltd £21,200, and it has an official CO2 emission rate of 232 grams per kilometre. Peter made a capital contribution of £2,000 towards the cost of the motor car when it was first provided to him. Haute-Couture Ltd also provided Peter with fuel for private journeys.

  (4) Haute-Couture Ltd has provided Peter with living accommodation since 1 January 2011. The company had purchased the property in 2009 for £160,000, and it was valued at £185,000 on 1 January 2011. Improvements costing £13,000 were

  © Emile Woolf Publishing Limited 2  

Section 1: Practice questions

  made to the property during June 2011. The annual value of the property is £9,100. (5) Throughout the tax year 2012–13 Haute-Couture Ltd provided Peter with two mobile telephones. The telephones had each cost £250 when purchased by the company in January 2012. (6) On 5 January 2013 Haute-Couture Ltd paid a health club membership fee of £510 for the benefit of Peter. (7) During February 2013 Peter spent five nights overseas on company business.

  Haute-Couture Ltd paid Peter a daily allowance of £10 to cover the cost of personal expenses such as telephone calls to his family.

  Property income

  (1) Peter owns two properties, which are let out. Both properties are freehold houses, with the first property being let out furnished and the second property being let out unfurnished. (2) The first property was let from 6 April 2012 to 31 August 2012 at a monthly rent of £500, payable in advance. On 31 August 2012 the tenant left owing two months’ rent which Peter was unable to recover. The property was not re-let before 5 April 2013. During March 2013 Peter spent £600 repairing the roof of this property. (3) The second property was purchased on 1 July 2012, and was then let from 1 August 2012 to 5 April 2013 at a monthly rent of £820, payable in advance.

  During July 2012 Peter spent £875 on advertising for tenants. For the period 1 July 2012 to 5 April 2013 he paid loan interest of £1,800 in respect of a loan that was taken out to purchase this property.

  (4) Peter insured both of his rental properties at a total cost of £660 for the year ended 30 June 2012, and £1,080 for the year ended 30 June 2013. The insurance is payable annually in advance. (5) Where possible, Peter claims the wear and tear allowance.

  Other information

  (1) During the tax year 2012–13 Peter received building society interest of £1,760 and dividends of £720. These were the actual cash amounts received. (2) On 4 August 2012 Peter received a premium bond prize of £100. (3) During the tax year 2012–13 Peter made gift aid donations totalling £2,340 (net) to national charities.

  Required: (a) Calculate the income tax payable by Peter Chic for the tax year 2012–13.

  (22 marks)

  (b) Calculate the total amount of national insurance contributions that will have been paid by Peter Chic and Haute-Couture Ltd in respect of Peter’s earnings and benefits for the tax year 2012–13. (4 marks)

  (c) Outline the conditions that would have to be fulfilled for Peter Chic’s rental properties to be treated as furnished holiday lettings. (4 marks)

  (Total: 30 marks) © Emile Woolf Publishing Limited

  3 Paper F6 (UK): Taxation FA2012

  3 Sammi Smith You should assume that today’s date is 20 March 2012.

  Sammi Smith is a director of Smark Ltd. The company has given her the choice of being provided with a leased company motor car or alternatively being paid additional director’s remuneration and then privately leasing the same motor car herself.

  Company motor car

  The motor car will be provided throughout the tax year 2012–13, and will be leased by Smark Ltd at an annual cost of £26,540. The motor car will be petrol powered, will have a list price of £80,000, and will have an official CO2 emission rate of 228 grams per kilometre.

  The lease payments will cover all the costs of running the motor car except for fuel. Smark Ltd will not provide Sammi with any fuel for private journeys.

  Additional director’s remuneration

  As an alternative to having a company motor car, Sammi will be paid additional gross director’s remuneration of £26,000 during the tax year 2012–13. She will then privately lease the motor car at an annual cost of £26,540.

  Other information

  The amount of business journeys that will be driven by Sammi will be immaterial and can therefore be ignored. Sammi’s current annual director’s remuneration is £120,000. She has no other taxable income. Smark Ltd prepares its accounts to 5 April, and pays corporation tax at the full rate of 24%. The lease of the motor car will commence on 6 April 2012.

  Required:

  (a) Advise Sammi Smith of the income tax and national insurance contribution implications for the tax year 2012–13 if she (1) is provided with the company motor car, and (2) receives additional director’s remuneration of £26,000. (5 marks)

  (b) Advise Smark Ltd of the corporation tax and national insurance contribution implications for the year ended 5 April 2013 if the company (1) provides Sammi Smith with the company motor car, and (2) pays Sammi Smith additional director’s remuneration of £26,000.

  Note: you should ignore value added tax (VAT). (5 marks) (c) Determine which of the two alternatives is the most beneficial from each of the

  (5 marks) respective points of view of Sammi Smith and Smark Ltd. (Total: 15 marks)

  4 Firstly plc

  On 31 December 2012 Joe Jones resigned as an employee of Firstly plc, and on 1 January 2013 commenced employment with Secondly plc. Joe was employed by both companies as a financial analyst. The following information is available for the tax year 2012–13:

  Employment with Firstly plc

  (1) From 6 April 2012 to 31 December 2012 Joe was paid a salary of £11,400 per month. In addition to his salary, Joe was paid a bonus of £12,000 on 12 May 2012.

  He had become entitled to this bonus on 22 March 2012.

  © Emile Woolf Publishing Limited 4  

Section 1: Practice questions

  (2) Joe contributed 6% of his monthly gross salary of £11,400 into Firstly plc’s HM Revenue and Customs’ registered occupational pension scheme. (3) On 1 May 2012 Firstly plc provided Joe with an interest free loan of £120,000 so that he could purchase a holiday cottage. Joe repaid £50,000 of the loan on 31 July

  2012, and repaid the balance of the loan of £70,000 when he ceased employment with Firstly plc on 31 December 2012. (4) During the period from 6 April 2012 to 31 December 2012 Joe’s three-year-old daughter was provided with a place at Firstly plc’s workplace nursery. The total cost to the company of providing this nursery place was £11,400 (190 days at £60 per day). (5) During the period 6 April 2012 to 31 December 2012 Firstly plc paid gym membership fees of £1,050 for Joe. (6) Firstly plc provided Joe with a home entertainment system for his personal use costing £4,400 on 6 April 2012. The company gave the home entertainment system to Joe for free, when he left the company on 31 December 2012, although its market value at that time was £3,860.

  Employment with Secondly plc (1) From 1 January 2013 to 5 April 2013 Joe was paid a salary of £15,200 per month.

  (2) During the period 1 January 2013 to 5 April 2013 Joe contributed a total of £3,000 (gross) into a personal pension scheme. (3) From 1 January 2013 to 5 April 2013 Secondly plc provided Joe with living accommodation. The property has an annual value of £10,400 and is rented by

  Secondly plc at a cost of £2,250 per month. On 1 January 2013 Secondly plc purchased furniture for the property at a cost of £16,320. The company pays for all of the running costs relating to the property, and for the period 1 January 2013 to 5 April 2013 these amounted to £1,900.

  (4) During the period 1 January 2013 to 5 April 2013 Secondly plc provided Joe with 13 weeks of childcare vouchers costing £100 per week. Joe used the vouchers to provide childcare for his three-year-old daughter at a registered nursery near to his workplace.

  (5) During the period 1 January 2013 to 5 April 2013 Joe used Secondly plc’s company gym which is only open to employees of the company. The cost to Secondly plc of providing this benefit to Joe was £340. (6) During the period 1 January 2013 to 5 April 2013 Secondly plc provided Joe with a mobile telephone costing £560. The company paid for all of Joe’s business and private telephone calls.

  Required:

  (a) Calculate Joe Jones’ taxable income for the tax year 2012–13. (17 marks) (b) (i) Briefly explain the basis of calculating Joe Jones’ PAYE tax code for the tax

  (2 marks)

  year 2012–13, and the purpose of this code; (ii) For each of the PAYE forms P45, P60 and P11D, briefly describe the circumstances in which the form will be completed, state who will provide it, the information to be included, and the dates by which they should have been provided to Joe Jones for the tax year 2012–13. (6 marks)

  © Emile Woolf Publishing Limited

  5 Paper F6 (UK): Taxation FA2012

  Note: your answer to both sub-parts (i) and (ii) should be confined to the details that are relevant to Joe Jones.  (Total: 25 marks)

   

5 William Wong

  You are a trainee accountant and your manager has asked for your help regarding the following two taxpayers. (a) William Wong

  William Wong is the finance director of Glossy Ltd. The company runs a publishing business. The following information is available for the tax year 2012- 13: (1) William is paid director’s remuneration of £2,400 per month by Glossy Ltd.

  (2) In addition to his director’s remuneration, William received two bonus payments from Glossy Ltd during the tax year 2012-13. The first bonus of £22,000 was paid on 30 June 2012 and was in respect of the year ended 31 December 2011. William became entitled to this bonus on 15 March 2012. The second bonus of £37,000 was paid on 31 March 2013 and was in respect of the year ended 31 December 2012. William became entitled to this second bonus on 15 March 2013. (3) From 6 April 2012 until 31 December 2012 William used his private motor car for business purposes. During this period William drove 12,000 miles in the performance of his duties for Glossy Ltd, for which the company paid an allowance of 30 pence per mile. The relevant HM Revenue and Customs authorised mileage rates to be used as a basis of an expense claim are 45 pence per mile for the first 10,000 miles, and 25 pence per mile thereafter.

  (4) From 1 January 2013 to 5 April 2013 Glossy Ltd provided William with a diesel powered company motor car with a list price of £46,000. The motor car cost Glossy Ltd £44,500, and it has an official CO

  2 emission rate of 226

  grams per kilometre. Glossy Ltd also provided William with fuel for his private journeys. (5) William was unable to drive his motor car for two weeks during February 2013 because of an accident, so Glossy Ltd provided him with a chauffeur at a total cost of £1,800. (6) Throughout the tax year 2012-13 Glossy Ltd provided William with a television for his personal use that had originally cost £3,825. (7) Glossy Ltd has provided William with living accommodation since 1

  January 2011. The property was purchased in 1998 for £90,000, and was valued at £183,000 on 1 January 2011. It has an annual value of £10,400. (8) Glossy Ltd pays an annual insurance premium of £680 to cover William against any liabilities that might arise in relation to his directorship. (9) William pays an annual professional subscription of £450 to the Institute of

  Finance Directors, an HM Revenue and Customs approved professional body, and a membership fee of £800 to a golf club. He uses the golf club to entertain clients of Glossy Ltd.

   Required:

  (i) State the rules that determine when a bonus paid to a director is treated as

  (3 marks) being received for tax purposes.

  © Emile Woolf Publishing Limited 6  

Section 1: Practice questions

  (ii) Calculate William’s employment income for the tax year 2012-13. (13 marks) (b) Chai Trim

  Chai is paid an annual salary of £35,000 by Vigorous plc, which runs a health club. Vigorous plc needs to prepare a form P11D for Chai. The following information is relevant: (1) Chai was employed by Vigorous plc throughout 2012-13.

  (2) During 2012-13 Vigorous plc provided Chai with a two-year old company van (which was available for personal use), although the van was unavailable during the period 1 August to 30 September 2012. The company also paid for all of the private petrol.

  (3) Throughout 2012-13 Vigorous plc provided Chai with free membership of its health club. The normal annual cost of membership is £800. This figure is made up of direct costs of £150, fixed overhead costs of £400 and profit of £250. The budgeted membership for the year has been exceeded, but the health club has surplus capacity.

  Required:

  (i) Explain what is meant by the term ‘P11D employee’. (3 marks) (ii) Calculate the benefit figures that Vigorous plc will have to include on the form P11D for Chai for 2012-13. (3 marks) (iii) Explain how the income tax liability in respect of benefits is collected by

  (3 marks) HM Revenue & Customs. (Total: 25 marks)

6 Andrew Zoom

  Andrew Zoom is a cameraman who started working for Slick-Productions Ltd on 6 April 2012. The following information is available in respect of the year ended 5 April 2013: (1) Andrew received gross income of £50,000 from Slick-Productions Ltd. He works a set number of hours each week and is paid an hourly rate for the work that he does. When Andrew works more than the set number of hours he is paid overtime.

  (2) Andrew is under an obligation to accept the work offered to him by Slick- Productions Ltd, and the work is carried out under the control of the company’s production manager. He is obliged to do the work personally, and this is all performed at Slick-Productions Ltd’s premises.

  (3) All of the equipment that Andrew uses is provided by Slick-Productions Ltd. Andrew has several friends who are cameramen, and they are all treated as self- employed. He therefore considers that he should be treated as self-employed as well in relation to his work for Slick-Productions Ltd.

  Required:

  (a) List those factors that indicate that Andrew Zoom should be treated as an employee in relation to his work for Slick-Productions Ltd rather than as self- employed. Note: you should confine your answer to the information given in the question.

  (4 marks) © Emile Woolf Publishing Limited

  7 Paper F6 (UK): Taxation FA2012

  (b) Calculate Andrew Zoom’s income tax liability and national insurance contributions for the tax year 2012–13 if he is treated: (i) As an employee in respect of his work for Slick-Productions Ltd;

  Note: You are not required to calculate employers’ national insurance contributions.

  (3 marks) (ii) As self-employed in respect of his work for Slick-Productions Ltd. (3 marks)

  (c) Explain how Andrew can appeal against an HM Revenue & Customs amendment to his return. Your answer should include an outline of the four tracks to which appeals can be listed. (5 marks)

  (Total: 15 marks)

7 Simon House

    On 1 May 2012 Simon House purchased a derelict freehold house for £127,000. Legal fees of £1,800 were paid in respect of the purchase.

  Simon then renovated the house at a cost of £50,600, with the renovation being completed on 10 August 2012. He immediately put the house up for sale, and it was sold on 31 August 2012 for £260,000. Legal fees of £2,600 were paid in respect of the sale.

  Simon financed the transaction by a bank loan of £150,000 that was taken out on 1 May 2012 at an annual interest rate of 6%. The bank loan was repaid on 31 August 2012. Simon had no other income or capital gains for the tax year 2012–13 except as indicated above. Simon has been advised that whether or not he is treated as carrying on a trade will be determined according to the six following ‘badges of trade’: (1) Subject matter of the transaction. (2) Length of ownership. (3) Frequency of similar transactions. (4) Work done on the property. (5) Circumstances responsible for the realisation. (6) Motive.

  Required:

  (a) Briefly explain the meaning of each of the six ‘badges of trade’ listed in the question.

  Note: You are not expected to quote from decided cases. (3 marks) (b) Calculate Simon House’s income tax liability and his Class 2 and Class 4 national insurance contributions for the tax year 2012–13, if he is treated as carrying on a

  (8 marks) trade in respect of the disposal of the freehold house.

  (c) Calculate Simon House’s capital gains tax liability for the tax year 2012–13, if he is not treated as carrying on a trade in respect of the disposal of the freehold

  (4 marks) house. (Total: 15 marks)

  © Emile Woolf Publishing Limited 8  

Section 1: Practice questions

8 Na Style

  • ––––––– (39,300)
    • –––––––– Net profit
    • –––––––– (2) Na charges all the running expenses for her motor car to the business. During the year ended 30 June 2012 Na drove a total of 8,000 miles, of which 7,000 were for private journeys.

  © Emile Woolf Publishing Limited

  9

  Na Style commenced self-employment as a hairdresser on 1 January 2010. She had tax adjusted trading profits of £25,200 for the six-month period ended 30 June 2010, and £21,600 for the year ended 30 June 2011. The following information is available for the tax year 2012–13:

  Trading profit for the year ended 30 June 2012

  (1) Na’s statement of profit or loss for the year ended 30 June 2012 is as follows: Note £ £ Income

  61,300 Expenses Depreciation 1,300 Motor expenses 2 2,200 Professional fees 3 1,650 Property expenses 4 12,900 Purchases 5 4,700 Other expenses 6 16,550

  22,000

  (3) The figure for professional fees consists of £390 for accountancy and £1,260 for legal fees in connection with the grant of a new five-year lease of parking spaces for customers’ motor cars. (4) Na lives in a flat that is situated above her hairdressing studio, and one-third of the total property expenses of £12,900 relate to this flat.

  (5) During the year ended 30 June 2012 Na took goods out of the hairdressing business for her personal use without paying for them, and no entry has been made in the accounts to record this. The goods cost £250, and had a selling price of £450.

  (6) The figure for other expenses of £16,550 includes £400 for a fine in respect of health and safety regulations, £80 for a donation to a political party, and £160 for a trade subscription to the Guild of Small Hairdressers. (7) Na uses her private telephone to make business telephone calls. The total cost of the private telephone for the year ended 30 June 2012 was £1,200, and 20% of this related to business telephone calls. The cost of the private telephone is not included in the expenses figure of £39,300 shown in the above statement of profit or loss. (8) Capital allowances for the year ended 30 June 2012 are £810.

  Other information

  (1) During the tax year 2012–13 Na received dividends of £1,080, building society interest of £560, interest of £310 from an individual savings account (ISA), interest of £1,100 on the maturity of a savings certificate from the National Savings & Investments Bank, and interest of £370 from government stocks (gilts). These were the actual cash amounts received in each case.

  Paper F6 (UK): Taxation FA2012 10  

  (3 marks) (Total: 30 marks)

  (2) He is employed as a business journalist by Economical plc, a magazine publishing company. During the tax year 2012–13 Erigo was paid a gross annual salary of £36,000. (3) During the tax year 2012–13 Erigo used his private motor car for business purposes. He drove 18,000 miles in the performance of his duties for Economical plc, for which the company paid an allowance of 20 pence per mile.

  Erigo Gomez (1) Erigo is aged 56.

  (4) During the tax year 2012–13 Domingo made donations of £300 (gross) to local charities. These were not made under the gift aid scheme.

  £14,400 and interest of £600 on the maturity of a savings certificate from the National Savings and Investments Bank during the tax year 2012–13. These were the actual cash amounts received.

  (2) During the tax year 2012-13 he received the state pension of £5,500 and a private pension of £2,800. (3) In addition to his pension income Domingo received building society interest of

  Domingo Gomez (1) Domingo is aged 67.

  Domingo, Erigo and Fargo Gomez are three brothers. The following information is available for the tax year 2012–13:

  (e) Advise Na Style of the consequences of not making the balancing payment for the tax year 2012–13 until 31 May 2014. Note: your answer should include calculations as appropriate.

  © Emile Woolf Publishing Limited

  (3 marks)

  (ii) Calculate Na Style’s balancing payment for the tax year 2012–13 and her payments on account for the tax year 2013–14, stating the relevant due dates. Note: you should ignore national insurance contributions.

  (8 marks) (d) (i) Calculate the income tax payable by Na Style for the tax year 2012–13. (6 marks)

  Note: your computation should commence with the net profit figure of £22,000, and should list all of the items referred to in notes (1) to (8) indicating by the use of zero (0) any items that do not require adjustment.

  (a) Advise Na Style of the advantages and disadvantages of choosing 30 June as her accounting date, rather than 31 March. (5 marks) (b) Calculate the amount of trading profits that will have been assessed on Na Style for the tax years 2009–10, 2010–11 and 2011–12 respectively, clearly identifying the amount of any overlap profits. (5 marks) (c) Calculate Na Style’s tax adjusted trading profit for the year ended 30 June 2012.

  Required:

  (2) Na’s payments on account of income tax in respect of the tax year 2012–13 totalled £3,200.

9 Domingo, Erigo and Fargo

Section 1: Practice questions

  (4) During June 2012 Economical plc paid £11,400 towards the cost of Erigo’s relocation when he was required to move his place of employment. Erigo’s previous main residence was 140 miles from his new place of employment with the company. The £11,400 covered the cost of disposing of Erigo’s old property and of acquiring a new property. (5) Erigo contributed 6% of his gross salary of £36,000 into Economical plc’s HM Revenue and Customs’ registered occupational pension scheme.

  (6) During the tax year 2012–13 Erigo donated £100 (gross) per month to charity under the payroll deduction scheme.

  Fargo Gomez (1) Fargo is aged 53.

  (2) He commenced self-employment as a business consultant on 6 July 2012. Fargo’s tax adjusted trading profit based on his draft accounts for the nine-month period ended 5 April 2013 is £64,800. This figure is before making any adjustments required for: (i) Advertising expenditure of £2,600 incurred during May 2012. This expenditure has not been deducted in calculating the profit of £64,800.

  (ii) Capital allowances. (3) The only item of plant and machinery owned by Fargo is his motor car. This cost

  £11,000 on 6 July 2012 and had CO2 emissions of 143 g/km. During the nine- month period ended 5 April 2013 Fargo drove a total of 24,000 miles, of which 8,000 were for private journeys. (4) During the tax year 2012-13 Fargo contributed £5,200 (gross) into a personal pension scheme, and made gift aid donations totalling £2,400 (net) to national charities.

  Tax returns

  For the tax year 2012–13 Domingo wants to file a paper self-assessment tax return and have HM Revenue and Customs prepare a self-assessment on his behalf. Erigo also wants to file a paper tax return but will prepare his own self-assessment. Fargo wants to file his tax return online.

  Required:

  (a) Calculate the respective income tax liabilities for the tax year 2012–13 of: (i) Domingo Gomez;

  (6 marks) (6 marks)

  (ii) Erigo Gomez; (iii) Fargo Gomez.

  (7 marks)

  (b) Advise Domingo, Erigo and Fargo Gomez of the latest dates by which their respective self-assessment tax returns for the tax year 2012–13 will have to be

  (3 marks) submitted given their stated filing preferences.

  (c) Advise Domingo, Erigo and Fargo Gomez as to how long they must retain the records used in preparing their respective tax returns for the tax year 2012–13, and the potential consequences of not retaining the records for the required period.

  (3 marks) (Total: 25 marks) © Emile Woolf Publishing Limited

  11 Paper F6 (UK): Taxation FA2012

10 Vanessa and Serene (a) Vanessa Serve and Serene Volley, aged 32 and 35 years respectively, are sisters.

  The following information is available for the tax year 2012–13:

  Vanessa Serve

  (1) Vanessa is self-employed as a tennis coach. Her tax adjusted trading profit for the year ended 30 June 2012 is £52,400. However, this figure is before taking account of capital allowances. (2) The only item of plant and machinery owned by Vanessa is her motor car.

  This originally cost £16,400 and had CO2 emissions of 143 g/km, At 1 July 2011 it had a tax written down value of £10,400. During the year ended 30 June 2012 Vanessa drove a total of 20,000 miles, of which 6,000 were for private journeys. (Assume that the current rate of writing down allowance has applied throughout the period.)

  (3) Vanessa contributed £6,400 (gross) into a personal pension scheme during the tax year 2012-13. (4) In addition to her self-employed income, Vanessa received interest of

  £1,100 from an investment account at the National Savings & Investments Bank during the tax year 2012–13. This was the actual cash amount received.

  (5) Vanessa’s payments on account in respect of the tax year 2012–13 totalled £8,790.

  Serene Volley

  (1) Serene is employed as a sports journalist by Backhand plc, a newspaper publishing company. During the tax year 2012–13 she was paid a gross annual salary of £26,400. Income tax of £3,721 was deducted from this figure under PAYE.

  (2) Throughout the tax year 2012–13 Backhand plc provided Serene with a petrol powered motor car which has a list price of £16,400. The official CO2 emission rate for the motor car is 192 grams per kilometre. The company did not provide Serene with any fuel for private journeys.

  (3) Serene contributed 5% of her gross salary of £26,400 into Backhand plc’s HM Revenue and Customs’ registered occupational pension scheme. (4) In addition to her employment income, Serene received interest of £1,200 on the maturity of a savings certificate from the National Savings &

  Investments Bank during the tax year 2012–13. This was the actual cash amount received. (5) Serene did not make any payments on account in respect of the tax year 2012–13.

   Required:

  (i) Calculate the income tax payable by Vanessa and Serene respectively for the tax year 2012–13.

  (10 marks)

  (ii) Calculate the national insurance contributions payable by Vanessa and Serene respectively for the tax year 2012–13. (4 marks)

  © Emile Woolf Publishing Limited 12  

Section 1: Practice questions

  (iii) Calculate Vanessa and Serene’s respective balancing payments for the tax year 2012-13 and their payments on account, if any, for the tax year 2013–

  (6 marks) 14. You should state the relevant due dates.

  (b) Note that in answering this part of the question you are not expected to take account of any of the information provided in part (a) above.

  Unless stated otherwise all of the figures below are exclusive of VAT. Vanessa Serve is registered for value added tax (VAT), and is in the process of completing her VAT return for the quarter ended 31 March 2013. The following information is available: (1) Sales invoices totaling £18,000 were issued in respect of standard rated sales. All of Vanessa’s customers are members of the general public.

  (2) During the quarter ended 31 March 2013 Vanessa spent £600 on mobile telephone calls, of which 40% related to private calls. (3) On 3 January 2013 Vanessa purchased a motor car for £12,000. On 18 March 2013 £987 was spent on repairs to the motor car. The motor car is used by

  Vanessa in her business, although approximately 10% of the mileage is for private journeys. Both figures are inclusive of VAT at the standard rate. (4) On 29 March 2013 tennis coaching equipment was purchased for £1,760.

  Vanessa paid for the equipment on this date, but did not take delivery of the equipment or receive an invoice until 3 April 2013. This purchase was standard rated. (5) In addition to the above, Vanessa also had other standard rated expenses amounting to £2,200 in the quarter ended 31 March 2013. This figure includes £400 for entertaining UK customers and £600 for entertaining overseas customers.

   Required:

  (i) Calculate the amount of VAT payable by Vanessa for the quarter ended 31 March 2013.

  (5 marks)

  (ii) Advise Vanessa of the conditions that she must satisfy before being permitted to use the VAT flat rate scheme, and the advantages of joining the scheme. The relevant flat rate scheme percentage for Vanessa’s trade as notified by HM Revenue and Customs is 6%. Note: your answer should be supported by appropriate calculations of the amount of tax saving if Vanessa had used the flat rate scheme to calculate the amount of VAT payable for the quarter ended 31 March 2013. (5 marks)

  (Total: 30 marks)

11 Sam and Kim White

  Sam and Kim White are a married couple. Sam is aged 36 and Kim is aged 38. The following information is available for the tax year 2012–13:

  Sam White

  (1) Sam is self-employed running a retail clothing shop. His statement of profit or loss for the year ended 5 April 2013 is as follows:

  © Emile Woolf Publishing Limited

  13 Paper F6 (UK): Taxation FA2012 Note £ £

  Gross profit 140,300

  Depreciation 7,600 Motor expenses 2 8,800 Patent royalties 3 700 Professional fees 4 1,860 Other expenses 5 71,340

  • ––––––– (90,300)
  • ––––––– Net profit

  50,000

  • ––––––– (2) During the year ended 5 April 2013 Sam drove a total of 25,000 miles, of which

  5,000 miles were driven when he visited his suppliers in Europe. The balance of the mileage is 25% for private journeys and 75% for business journeys in the United Kingdom. (3) During the year ended 5 April 2013 Sam paid patent royalties of £700 (gross) in respect of specialized technology that he uses when altering clothes for customers. (4) The figure for professional fees consists of £1,050 for legal fees in connection with an action brought against a supplier for breach of contract and £810 for accountancy. Included in the figure for accountancy is £320 in respect of personal capital gains tax advice for the tax year 2012–13.

  (5) The figure for other expenses of £71,340 includes £560 for gifts to customers of food hampers costing £35 each and £420 for gifts to customers of pens carrying an advertisement for the clothing shop costing £60 each. (6) Sam uses one of the eight rooms in the couple’s private house as an office for when he works at home. The total running costs of the house for the year ended 5

  April 2013 were £5,120. This cost is not included in the expenses figure of £90,300 shown in the above statement of profit or loss. (7) Sam uses his private telephone to make business telephone calls. The total cost of the private telephone for the year ended 5 April 2013 was £1,600, and 25% of this related to business telephone calls. The cost of the private telephone is not included in the expenses figure of £90,300 shown in the above statement of profit or loss. (8) During the year ended 5 April 2013 Sam took goods out of the clothing shop for his personal use without paying for them and no entry has been made in the accounts to record this. The goods cost £820, and had a selling price of £1,480. (9) The tax written down values for capital allowance purposes at 6 April 2012 were as follows:

   £

  Main pool 14,800

  Motor car used by Sam (CO2 emissions 146 g/km) 20,200

  © Emile Woolf Publishing Limited 14  

Section 1: Practice questions

  © Emile Woolf Publishing Limited

  (b) Calculate Sam and Kim’s respective income tax liabilities for the tax year 2012– 13.

  You are a trainee accountant and your manager has asked for your help regarding four taxpayers who have all made personal pension contributions during the tax year 2012–13.

  (2 marks) (ii) transfer their joint building society deposit account into Kim’s sole name. (2 marks) (Total: 25 marks)

  (c) Explain to Sam and Kim how their overall income tax liability could be reduced if they were to either: (i) transfer their joint building society deposit account into individual savings accounts (ISAs); or

  (10 marks)

  Note: you should ignore any capital allowances that Kim might be entitled to.

  (11 marks)

  15 Kim White

  Required: (a) Calculate Sam’s tax adjusted trading profit for the year ended 5 April 2013.

  The couple have savings of £25,000 in a building society deposit account which is in their joint names. During the tax year 2012–13 Sam and Kim received building society interest totalling £1,200 from this joint account. This was the actual cash amount received.

  Joint income – Building society deposit account

  1,300 (4) During the tax year 2012–13 Kim paid interest of £140 (gross) on a personal loan taken out on 1 January 2012 to purchase a laptop computer for use in her employment with Sharp-Suit plc.

  Miles Normal daily travel between home and permanent workplace 3,400 Travel between permanent workplace and Sharp-Suit plc’s customers 11,200 Travel between home and a temporary workplace for a period of one month

  (3) During the period from 1 June 2012 to 5 April 2013 Kim used her private motor car for business and private purposes. She received no reimbursement from Sharp-Suit plc for any of the expenditure incurred. Kim’s mileage during this period included the following:

  (1) Kim is employed as a sales person by Sharp-Suit plc, a clothing manufacturing company. During the tax year 2012–13 she was paid a gross annual salary of £21,600. (2) On 1 June 2012 Sharp-Suit plc provided Kim with an interest free loan of £12,000 so that she could purchase a new motor car.

12 Ann Peach

  Paper F6 (UK): Taxation FA2012 Ann Peach

  Ann, aged 30, is self-employed as an estate agent. Her trading profit for the year ended 5 April 2013 was £48,000. Ann made contributions of £50,000 (gross) into a personal pension scheme during the tax year 2012–13.

  Basil Plum

  Basil, aged 42, is employed by the Banana Bank plc as a fund manager. During the tax year 2012–13 Basil was paid a gross salary of £320,000. Basil made contributions of £60,000 (gross) into a personal pension scheme during the tax year 2012–13. He is not a member of Banana Bank plc’s occupational pension scheme. He has paid the same amount into his personal pension scheme in each of the last five tax years.

  Chloe Pear

  Chloe, aged 54, lets out unfurnished property. For the tax year 2012–13 her property business profit was £23,900. Chloe made contributions of £8,200 (gross) into a personal pension scheme during the tax year 2012–13.

  David Pineapple

  David, aged 29, is self-employed as a television presenter. His trading profit for the year ended 5 April 2013 was £125,000. David made contributions of £70,000 (gross) into his personal pension scheme during the tax year 2012-13. David has been a member of the personal pension scheme for the past four years and has made the following contributions:

  £ 2008/09 20,000 2009/10 38,000 2010/11 43,000 2011/12 45,000 Neither Ann nor Basil nor Chloe nor David has any other income.

  Required:

  For each of the four taxpayers Ann Peach, Basil Plum, Chloe Pear and David Pineapple, state, giving reasons the amount of personal pension contributions that will have qualified for tax relief for the tax year 2012–13, and calculate their income tax liabilities for that year.

  Note: marks are allocated: Ann Peach 3 marks; Basil Plum 5 marks; Chloe Pear 2

  (15 marks) marks; and David Pineapple 5 marks.

13 Nui Neu For the purposes of this question you should assume that today’s date is 1 March 2012.

  Nui Neu is to commence in business on 6 April 2012 running a retail shop. She is unsure whether to run the new business as a sole trader or as a limited company.

  © Emile Woolf Publishing Limited 16  

Section 1: Practice questions

  Sole trader

  If Nui runs her new business as a sole trader then the tax adjusted trading profit for the year ended 5 April 2013 is expected to be £30,000. She will withdraw £25,000 of this profit as drawings.

  Limited company

  If Nui runs her business as a limited company she will make up accounts to 5 April, and the company’s trading profit for the year ended 5 April 2013 is also expected to be £30,000. This figure is before taking account of director’s remuneration and employer’s Class 1 national insurance contributions. Nui will personally withdraw £25,000 of the company’s profits, and this will be either as (1) director’s remuneration (the gross remuneration will be £25,000) or (2) as dividends (the figure actually withdrawn during 2012–13 will be £25,000).

  Nui has no other income for 2012–13.

  Required:

  (a) Calculate Nui’s income tax liability and national insurance contributions for 2012–13 if she runs her business (i) as a sole trader, (ii) as a limited company and withdraws gross director’s remuneration of £25,000, and (iii) as a limited company and withdraws net dividends of £25,000. (6 marks)

  (b) Calculate the corporation tax liability for the year ended 5 April 2013 if Nui runs her business as a limited company and (i) withdraws gross director’s remuneration of £25,000, or (ii) withdraws net dividends of £25,000. (6 marks)

  (c) Based on your calculations in parts (a) and (b), advise Nui whether it will be beneficial to run her business as a sole trader or whether she should run it as a limited company.

  (3 marks) (Total: 15 marks) Income tax losses

14 Dee Zyne

  On 5 July 2012 Dee Zyne resigned as an employee of Trendy-Wear plc. The company had employed her as a fashion designer since 2005. On 6 July 2012 Dee commenced self-employment running her own clothing business, preparing accounts to 5 April. The following information is available for 2012–13:

  Employment

  (1) During the period 6 April 2012 to 5 July 2012 Dee’s total gross salary from her employment with Trendy-Wear plc was £26,000. Income tax of £8,530 was deducted from this figure under PAYE. (2) During the period 6 April 2012 to 5 July 2012 Trendy-Wear plc provided Dee with a petrol powered company motor car with a list price of £17,500. The official CO 2 emission rate for the motor car was 204 grams per kilometre. Trendy-Wear plc also provided Dee with fuel for private journeys. Dee paid £100 per month to Trendy-Wear plc for the private use of the motor car, and she also made a capital contribution of £1,500 towards the cost of the motor car when it was first provided to her. The motor car was not available to Dee after 5 July 2012.

  © Emile Woolf Publishing Limited

  17 Paper F6 (UK): Taxation FA2012 18  

  © Emile Woolf Publishing Limited

  (2) purchased on 21 January 2013 is used by Dee, and 20% of the mileage is for private purposes. Its CO

  Samantha Fabrique has been a self-employed manufacturer of clothing since 1994. She has the following gross income and chargeable gains for the tax years 2009–10 to 2012– 13:

  (7 marks) (Total: 30 marks)

  (d) Describe the alternative ways in which Dee could have relieved her trading loss for 2012–13, and explain which of these claims would have been more beneficial than the actual claim made in (c) above. You should assume that the tax rates for 2012–13 apply throughout.

  (c) Assuming that Dee claims loss relief against her total income for 2012–13 (under s.64 ITA 2007) calculate the income tax repayable to her for 2012–13. (12 marks)

  (5 marks) (b) Calculate Dee’s trading loss for 2012–13. (6 marks)

  (a) Advise Dee of the date by which she should have notified HM Revenue & Customs of her new business and outline the penalties that may be incurred for late notification.

  Required:

  (1) During the period 6 April 2012 to 5 July 2012 Dee paid interest of £110 (gross) on a personal loan taken out on 1 August 2011 to purchase a computer for use in her employment with Trendy-Wear plc. (2) Dee’s total income for each of the years 2006–07 to 2011–12 was £80,000.

  Other information

  2 emissions are 143 g/km.

  2 emissions are 153 g/km. Motor car

  (3) On 1 January 2011 Trendy-Wear plc had provided Dee with an interest free loan of £60,000 so that she could purchase a yacht. Dee repaid £45,000 of the loan on 5 May 2012, and repaid the balance of the loan of £15,000 on 6 July 2012. (4) During the period from 6 April 2012 to 5 July 2012 Dee was provided with free meals in Trendy-Wear plc’s staff canteen. The total cost of these meals to the company was £350.

  Motor car (1) purchased on 13 November 2012 is used by an employee, and 15% of the mileage is for private purposes. Its CO

   

  21 January 2013 Motor car (2) 15,000

  13 November 2012 Motor car (1) 10,400

  16 August 2012 Office furniture 1,500

  10 July 2012 Computer 1,200

  £

  2013:

  (1) Dee’s tax adjusted trading income loss for the period 6 July 2012 to 5 April 2013 was £12,276. This figure is before taking account of capital allowances. (2) Dee purchased the following assets during the nine-month period ended 5 April

  Self-employment

15 Samantha Fabrique

Section 1: Practice questions

  2009–10 2010–11 2011–12 2012–13 £ £ £ £

  Trading profit/(loss) 10,100 51,600 (84,000) 12,200 Building society interest 2,100 3,800 1,500 – Chargeable gains/(loss) 18,800 23,300 (3,400) 12,200 The chargeable gains are stated before taking account of loss relief and the annual exempt amount.

  Required: (a) State the factors that will influence an individual’s choice of loss relief claims.

  (3 marks)

  (b) Calculate Samantha’s income tax and capital gains tax liabilities for each of the tax years 2009–10, 2010–11, 2011–12 and 2012–13 on the assumption that she relieves the trading loss of £84,000 for the tax year 2011–12 on the most favourable basis.

  You should assume that the tax allowances for the tax year 2012–13 apply throughout.

  (8 marks) (c) Briefly explain why you have rejected any other possible loss relief claim.

    (2 marks)  (d) State the dates by which the trading loss relief claims in (b) above must be made.

  (2 marks) (Total: 15 marks)

16 Goff Green

  Goff Green has been a self-employed manufacturer of golf equipment since 6 April 2003. He decided to cease trading on 5 April 2013 and made a trading loss of £75,000 for his final year of trading. Goff’s recent trading profits are as follows:

  £

  Year ended 5 April 2009 16,700 Year ended 5 April 2010 15,400 Year ended 5 April 2011 14,800 Year ended 5 April 2012 23,600 For each of the tax years from 2008–09 to 2012–13 Goff received gross building society interest of £3,800.

  On 16 June 2012 Goff disposed of an investment and this resulted in a chargeable gain of £19,700. He disposed of another investment on 19 January 2013 and this resulted in a capital loss of £4,800. Goff has overlap profits of £10,000.

  Required:

  (a) Calculate Goff Green’s taxable income and taxable gains for each of the tax years from 2008–09 to 2012–13 on the assumption that he claims the maximum possible relief for his trading loss. Your answer should clearly show the amount of the trading loss that is unrelieved.

  © Emile Woolf Publishing Limited

  19 Paper F6 (UK): Taxation FA2012

  Note: you should assume that the tax allowances for the tax year 2012–13 apply throughout.

  (7 marks)

  (b) Calculate the tax saved in 2011-12 and 2012-13 as a result of making the above loss relief claims.

  (3 marks)

  (c) Outline the alternative form of loss relief that would have been available to Goff if he had incorporated his business. Your answer should include the conditions that he would need to satisfy to claim this form of loss relief. (5 marks)

  (Total: 15 marks) Partnerships

17 Ae, Bee, Cae

  (a) Ae and Bee commenced in partnership on 1 July 2010 preparing accounts to 30 June. Cae joined as a partner on 1 July 2012. Profits have always been shared equally. The partnership’s trading profits since the commencement of trading have been as follows:

  £

  Year ended 30 June 2011 54,000 Year ended 30 June 2012 66,000 Year ended 30 June 2013 87,000

  Required:  

  Calculate the trading income assessments of Ae, Bee and Cae for each of the tax

  (5 marks) years 2010–11, 2011–12 and 2012–13.

  (b) Dee commenced in self-employment on 6 April 2009. She initially prepared accounts to 5 April, but changed her accounting date to 31 July by preparing accounts for the four-month period to 31 July 2011. Dee’s trading profits since she commenced trading have been as follows:

   £

  Year ended 5 April 2010 35,160 Year ended 5 April 2011 32,880 Four-month period ended 31 July 2011 16,240 Year ended 31 July 2012 54,120

  Required:  

  (i) Calculate the amount of trading profits that will have been assessed on Dee

  (4 marks)

  for each of the tax years 2010–11, 2011–12 and 2012–13; (ii) State the amount of Dee’s unrelieved overlap profits as at 5 April 2013.

  (1 mark) © Emile Woolf Publishing Limited

  20  

Section 1: Practice questions

18 Peter, Quinton and Roger

  Year ended 31 December 2010 40,000 Profit Year ended 31 December 2011 90,000 Profit Year ended 31 December 2012 (30,000) Loss

  (3 marks) (Total: 15 marks)

  (c) Explain how your answer to part (b) would differ if this was a limited liability partnership.

  (7 marks)

  (b) State the possible ways in which Peter, Quinton and Roger can relieve their share of the trading loss for 2012-13. Your answer should include a calculation of the amount of loss relief available to each partner.

  (5 marks)

  (a) Calculate the trading income assessments of Peter, Quinton and Roger for 2009- 10, 2010-11 and 2011-12.

  Required:

  All of the partners were in employment prior to becoming partners, and each of them has investment income. None of the partners has any capital gains.

  © Emile Woolf Publishing Limited

  21

  Peter and Quinton commenced in partnership on 1 January 2010. Roger joined as a partner on 1 January 2011 and Peter resigned as a partner on 31 December 2012. Profits and losses have always been shared equally. The partnership’s tax-adjusted trading profits and losses are as follows:

  (Total: 15 marks)

  Calculate the amount of trading profits that will have been assessed on Eue for each of the tax years 2011–12 and 2012–13, assuming that the current rates of writing down allowance have applied throughout. (5 marks)

  Required:  

  (3) Until the final period of trading Eue had always prepared accounts to 30 June. Her overlap profits for the period 1 July 2000 to 5 April 2001 were £19,800.

  (2) The tax written-down value of the capital allowances general pool at 1 July 2010 was £8,400. On 15 November 2011 Eue purchased office furniture for £2,400. All of the items included in the general pool were sold for £4,300 on 30 September 2012.

  Year ended 30 June 2011 61,200 Fifteen-month period ended 30 September 2012 72,000 Both these figures are before taking account of capital allowances.

  £

  (1) Eue’s trading profits for the final two periods of trading were as follows:

  (c) Eue ceased trading on 30 September 2012, having been self-employed since 1 July 2000.

  £ Paper F6 (UK): Taxation FA2012

19 Auy Man and Bim Men

  Auy Man and Bim Men have been in partnership since 6 April 2004 as management consultants. The following information is available for the tax year 2012–13:

  Personal information

  Auy is aged 32. During the tax year 2012–13 she spent 190 days in the United Kingdom. Bim is aged 56. During the tax year 2012–13 she spent 100 days in the United Kingdom. Bim has spent the same amount of time in the United Kingdom for each of the previous five tax years.

  Statement of profit or loss for the year ended 5 April 2013

  The partnership’s summarised statement of profit or loss for the year ended 5 April 2013 is as follows:

  Note £ £

  Sales 1 142,200 Expenses

  2 Depreciation 3,400

  Motor expenses 3 4,100 Other expenses 4 1,800 Wages and salaries 5 52,512

  • ––––––– 61,812
    • –––––––– Net profit

  80,388

  • –––––––– (1) The sales figure of £142,200 is exclusive of output value added tax (VAT) of £28,440.

  (2) The expenses figures are exclusive of recoverable input VAT of: Motor expenses £180 Other expenses £140 (3) The figure of £4,100 for motor expenses includes £2,600 in respect of the partners’ motor cars, with 30% of this amount being in respect of private journeys.

  (4) The figure of £1,800 for other expenses includes £720 for entertaining employees.

  The remaining expenses are all allowable. (5) The figure of £52,512 for wages and salaries includes the annual salary of £4,000 paid to Bim (see the profit sharing note below), and the annual salary of £15,000 paid to Auy’s husband, who works part-time for the partnership. Another part- time employee doing the same job is paid a salary of £10,000 per annum.

  Plant and machinery

  On 6 April 2012 the tax written down values of the partnership’s plant and machinery were as follows:

  £

  Main pool 3,100

  Motor car [1] 18,000

  Motor car [2] 14,000

  © Emile Woolf Publishing Limited 22  

Section 1: Practice questions

  The following transactions took place during the year ended 5 April 2013:

  Cost/ (Proceeds) £

  8 May 2012 Sold motor car [2] (13,100)

  8 May 2012 Purchased motor car [3] 11,600

  21 November 2012 Purchased motor car [4] 14,200

  14 January 2013 Purchased motor car [5] 8,700 Motor car [1] has a CO2 emission rate of 185 grams per kilometre. It is used by Auy, and 70% of the mileage is for business journeys.

  Motor car [2] had a CO2 emission rate of 145 grams per kilometre. It was used by Bim, and 70% of the mileage was for business journeys. Motor car [3] purchased on 8 May 2012 has a CO2 emission rate of 105 grams per kilometre. It is used by Bim, and 70% of the mileage is for business journeys. Motor car [4] purchased on 21 November 2012 has a CO2 emission rate of 135 grams per kilometre. Motor car [5] purchased on 14 January 2013 has a CO2 emission rate of 200 grams per kilometre. These two motor cars are used by employees of the business.

  Profit sharing

  Profits are shared 80% to Auy and 20% to Bim. This is after paying an annual salary of £4,000 to Bim, and interest at the rate of 5% on the partners’ capital account balances. The capital account balances are:

   £

  Auy Man 56,000

  Bim Men 34,000

  VAT

  The partnership has been registered for VAT since 6 April 2003. However, the partnership has recently started invoicing for its services on new payment terms, and the partners are concerned about output VAT being accounted for at the appropriate time.

  Required:

  (a) Explain why both Auy Man and Bim Men will each be treated for tax purposes as

  (2 marks) resident in the United Kingdom for the tax year 2012–13.

  (b) Calculate the partnership’s tax adjusted trading profit for the year ended 5 April 2013, and the trading income assessments of Auy Man and Bim Men for the tax year 2012–13.

  Note: Your computation should commence with the net profit figure of £80,388, and should also list all of the items referred to in notes (2) to (5) indicating by the use of zero (0) any items that do not require adjustment. (15 marks)

  (c) Calculate the class 4 national insurance contributions payable by Auy Man and

  (3 marks) Bim Men for the tax year 2012–13.

  (d) (i) Advise the partnership of the VAT rules that determine the tax point in respect of a supply of services; (3 marks) (ii) Calculate the amount of VAT paid by the partnership to HM Revenue &

  Customs throughout the year ended 5 April 2013; Note: you should ignore the output VAT scale charges due in respect of fuel for private journeys.

  (2 marks) © Emile Woolf Publishing Limited

  23 Paper F6 (UK): Taxation FA2012

  (iii) Advise the partnership of the conditions that it must satisfy in order to join and continue to use the VAT flat rate scheme, and calculate the tax saving if the partnership had used the flat rate scheme to calculate the amount of VAT payable throughout the year ended 5 April 2013.

  Note: you should assume that the relevant flat rate scheme percentage for

  (5 marks) the partnership’s trade is 11%. (Total: 30 marks)

20 Xio, Yana and Zoe

  Xio, Yana and Zoe have been in partnership since 6 April 2005 as marketing consultants. Until 30 June 2012 profits were shared 50% to Xio, 30% to Yana and 20% to Zoe. This was after paying an annual salary of £6,000 to Xio. On 30 June 2012 Zoe resigned as a partner, and from that date profits were shared equally between Xio and Yana. No salaries were paid after this date. The partnership’s statement of profit or loss for the year ended 5 April 2013 is as follows:

  £ £

  Gross profit 203,062

  Expenses Depreciation 16,600 Impairment losses (note 1) 6,800 Motor expenses (note 2) 19,000 Professional fees (note 3) 5,300 Repairs and renewals (note 4) 7,500 Other expenses (note 5) 113,400

  • –––––––– (168,600)
    • ––––––––– Net profit

  34,462

  • ––––––––– Note 1 – Impairment losses

  The figure for impairment losses consists of trade debts written off of £2,800, and an increase in the allowance for debtors of £4,000.

  Note 2 – Motor expenses

  The figure for motor expenses is in respect of mileage undertaken by the partners, of which 40% is for private purposes.

  Note 3 – Professional fees

  The figure for professional fees consists of £600 for accountancy, £2,600 for legal fees in connection with the defence of the partnership’s internet domain name, and £2,100 for legal fees in connection with the grant of a new five-year lease of parking spaces for employees’ motor cars.

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Section 1: Practice questions

  Note 4 – Repairs and renewals

  The figure for repairs and renewals consists of £2,800 for decorating the partnership offices, and £4,700 for constructing a new wall in order to split one large office room into two smaller rooms.

  Note 5 – Other expenses

  The figure of £113,400 for other expenses includes £1,060 for entertaining customers, £460 for entertaining employees, and £600 in respect of gifts to customers. The gifts were hampers of food costing £60 each. The remaining expenses are all allowable.

  Note 6 – Plant and machinery

  The tax written down values of the partnership’s assets for capital allowances purposes at 6 April 2012 were as follows:

   £

  Main pool 21,250

  Xio’s motor car (CO2 emissions 192 g/km) 16,500 Yana’s motor car (CO2 emissions 132 g/km) 8,750 Zoe’s motor car (CO2 emissions 172 g/km) 15,000

   

  The partners’ motor cars are all owned by the partnership, and in each case 40% of the mileage is for private purposes. Zoe retained her motor car when she resigned from the partnership on 30 June 2012. On that date her motor car was valued at £11,400.

  Other income

  (1) Xio received building society interest of £800 during 2012–13. This was the actual cash amount received. (2) Yana sold some investments during 2012-13, and this resulted in capital gains of £34,100. (3) Zoe was appointed as the sales director of Aardvark plc on 1 July 2012, and was paid director’s remuneration of £30,000 during 2012–13. She also received dividends of £10,800 during 2012–13. This was the actual cash amount received.

  Required:

  (a) Briefly explain the basis by which partners are assessed on their trading profits when one of them leaves a partnership. (2 marks) (b) Calculate the partnership’s tax adjusted trading profit for the year ended April 2013.

  (12 marks) (c) Calculate the trading income assessments of Xio, Yana and Zoe for 2012–13.

  Note: Your answer should start with the net profit of £291,072 and should indicate by the use of a zero (0) any items that do not require adjustment.

  (4 marks)

  (d) Calculate the income tax and capital gains tax liabilities of Xio, Yana and Zoe for 2012–13.

  (9 marks)

  (e) State the conditions that the partnership would have to fulfil in order for a

  (3 marks) change of accounting date to be valid for tax purposes. (Total: 30 marks)

  © Emile Woolf Publishing Limited

  25 Paper F6 (UK): Taxation FA2012 Capital Gains Tax

21 David and Angela Brook

  David and Angela Brook are a married couple. They disposed of the following assets during the tax year 2012-13:

  Jointly owned property (1) On 29 July 2012 David and Angela sold a classic Ferrari motor car for £34,400.

  The motor car had been purchased on 17 January 2006 for £27,200. (2) On 30 September 2012 David and Angela sold a house for £326,000. The house had been purchased on 1 October 1992 for £86,000.

  David and Angela occupied the house as their main residence from the date of purchase until 31 March 1996. The house was then unoccupied between 1 April 1996 and 31 December 1999 due to Angela being required by her employer to work elsewhere in the United Kingdom. From 1 January 2000 until 31 December 2006 David and Angela again occupied the house as their main residence. The house was then unoccupied until it was sold on 30 September 2012. Throughout the period 1 October 1992 to 30 September 2012 David and Angela did not have any other main residence.

  David Brook

  (1) On 18 April 2012 David sold an antique table for £5,600. The antique table had been purchased on 27 May 2004 for £3,200. (2) On 5 May 2012 David transferred his entire shareholding of 20,000 £1 ordinary shares in Bend Ltd, an unquoted trading company, to Angela. On that date the shares were valued at £64,000. David’s shareholding had been purchased on 21 June 2009 for £48,000. (3) On 14 February 2013 David made a gift of 15,000 £1 ordinary shares in Galatico plc to his son. On that date the shares were quoted on the Stock Exchange at

  £2·90 – £3·10. David had originally purchased 8,000 shares in Galatico plc on 15 June 2005 for £17,600, and he purchased a further 12,000 shares on 24 February 2013 for £21,600. David has never been employed by Galatico plc and his total shareholding was less than 1% of Galatico plc’s issued share capital.

  Angela Brook

  (1) On 5 May 2012 Angela sold an antique clock for £7,200. The antique clock had been purchased on 14 June 2004 for £3,700. (2) On 7 July 2012 Angela sold 15,000 of the 20,000 £1 ordinary shares in Bend Ltd that had been transferred to her from David. The sale proceeds were £62,400. Angela has taxable income of £40,000 for the tax year 2012-13. David does not have any taxable income.

  Required:

  Compute David and Angela’s respective capital gains tax liabilities for the tax year 2012–13.

  (15 marks) © Emile Woolf Publishing Limited

  26  

Section 1: Practice questions

22 Wilson Biazma

  Wilson Biazma is resident and ordinarily resident in the United Kingdom for tax purposes. He disposed of the following assets during the tax year 2012–13: (1) On 21 April 2012 Wilson sold a freehold office building for £246,000. The office building had been purchased on 3 January 1990 for £104,000. Wilson would like to make a claim to rollover the gain on the office building against the replacement cost of a new freehold office building that was purchased on 14 January 2012 for £100,000. Both office buildings have always been used entirely for business purposes in a wholesale business run by Wilson as a sole trader. (2) On 26 May 2012 Wilson incorporated a retail business that he had run as a sole trader since 1 June 2005. The market value of the business on 26 May 2012 was

  £200,000. All of the business assets were transferred to a new limited company, with the consideration consisting of 140,000 £1 ordinary shares valued at £140,000 and £60,000 in cash. The only chargeable asset of the business was goodwill and this was valued at £120,000 on 26 May 2012. The goodwill has a nil cost. Wilson took full advantage of the available incorporation relief. (3) On 17 August 2012 Wilson made a gift of his entire holding of 10,000 £1 ordinary shares (a 100% holding) in Gandua Ltd, an unquoted trading company, to his daughter. The market value of the shares on that date was £160,000. The shares had been purchased on 8 January 2007 for £112,000. On 17 August 2012 the market value of Gandua Ltd’s chargeable assets was £180,000, of which £150,000 was in respect of chargeable business assets. Wilson and his daughter have elected to hold over the gain on this gift of a business asset. (4) On 3 October 2012 an antique vase owned by Wilson was destroyed in a fire. The antique vase had been purchased on 7 November 2005 for £49,000. Wilson received insurance proceeds of £68,000 on 20 December 2012 and on 22 December 2012 he paid £69,500 for a replacement antique vase. Wilson has made a claim to defer the gain arising from the receipt of the insurance proceeds. (5) On 9 March 2013 Wilson sold ten acres of land for £85,000. He had originally purchased twenty acres of land on 29 June 1999 for £120,000. The market value of the unsold ten acres of land as at 9 March 2013 was £65,000. The land has never been used for business purposes.

  Required:

  (a) Briefly explain when a person will be treated as resident or ordinarily resident in the United Kingdom for a particular tax year and state how a person’s residence status establishes whether or not they are liable to capital gains tax. Note: you are not expected to explain the rules concerning people leaving or

  (4 marks) coming to the United Kingdom.

  (b) Calculate Wilson’s chargeable gains for the tax year 2012–13, clearly identifying the effects of the reliefs claimed in respect of disposals (1) to (4). (11 marks)

  (Total: 15 marks) © Emile Woolf Publishing Limited

  27 Paper F6 (UK): Taxation FA2012

23 Nim and Mae Lom

  Nim and Mae Lom are a married couple. They disposed of the following assets during the tax year 2012–13:

  Nim Lom

  (1) On 20 May 2012 Nim made a gift of 10,000 £1 ordinary shares in Kapook plc to his daughter. On that date the shares were quoted on the Stock Exchange at £3·70–£3·90, with recorded bargains of £3·60, £3·75 and £3·80. Nim has made the following purchases of shares in Kapook plc:

  19 February 2000 8,000 shares for £16,200

  6 June 2005 6,000 shares for £14,600

  24 May 2012 2,000 shares for £5,800 Nim’s total shareholding was less than 5% of Kapook plc, and so holdover relief is not available.

  (2) On 13 June 2012 Nim transferred his entire shareholding of 5,000 £1 ordinary shares in Jooba Ltd, an unquoted company, to his wife, Mae. On that date the shares were valued at £28,200. Nim’s shareholding had been purchased on 11 January 2006 for £16,000.

  (3) On 2 April 2013 Nim sold UK Government securities (Gilts) for £12,400. The securities had been purchased on 18 August 2007 for £10,100.

  Mae Lom

  (1) On 28 August 2012 Mae sold 2,000 of the 5,000 £1 ordinary shares in Jooba Ltd that had been transferred to her from Nim (see (2) above). The sale proceeds were £30,400. Entrepreneurs’ relief is not available in respect of this disposal. (2) On 30 September 2012 Mae sold a house for £186,000. The house had been purchased on 1 October 2002 for £122,000. Throughout the period of ownership the house was occupied by Nim and Mae as their main residence, but one of the house’s eight rooms was always used exclusively for business purposes by Mae.

  Entrepreneurs’ relief is not available in respect of this disposal. (3) On 30 November 2012 Mae sold a business that she had run as a sole trader since

  1 December 2000. The sale resulted in the following capital gains:

  £

  Goodwill 80,000 Freehold office building 136,000 Investment property 34,000 The assets were all owned for more than one year prior to the date of disposal.

  The investment property has always been rented out. Mae claimed entrepreneurs’ relief in respect of this disposal. (4) On 31 March 2013 Mae sold a copyright for £9,600. The copyright had been purchased on 1 April 2008 for £10,000 when it had an unexpired life of 20 years.

  Other information

  Nim does not have any taxable income for the tax year 2012–13. He has unused capital losses of £16,700 brought forward from the tax year 2011–12.

  © Emile Woolf Publishing Limited 28  

Section 1: Practice questions

  Mae has taxable income of £50,000 for the tax year 2012–13. She has unused capital losses of £8,500 brought forward from the tax year 2011–12.

  Required:

  Compute Nim and Mae Lom’s respective capital gains tax liabilities, if any, for the tax year 2012-13. In each case, the amount of unused capital losses carried forward to

  (15 marks) future tax years, if any, should be clearly identified.

24 Amanda Moon

  You are a trainee accountant and your manager has asked for your help regarding three taxpayers who have all disposed of assets during the tax year 2012–13. (a) Amanda Moon

  On 30 June 2012, Amanda incorporated a business. She had run the business as a sole trader since 1 July 2007. The market value of the business assets on 30 June 2012 was £300,000. This figure, along with the respective cost of each asset, is made up as follows:

  Market value Cost £ £

  Goodwill 90,000 Nil Freehold shop 165,000 120,000 Net current assets 45,000 45,000

  • –––––––– 300,000
  • –––––––– The freehold shop has always been used by Amanda for business purposes. All of the business assets were transferred to a new limited company, Ammoon Ltd, with the consideration consisting of 300,000 £1 ordinary shares valued at £300,000. Amanda took full advantage of the available incorporation relief.

  Required:

  (i) Calculate Amanda Moon’s chargeable gains, if any, for the tax year 2012– 13, and the base cost of her 300,000 £1 ordinary shares in Ammoon Ltd.

  (4 marks)

  (ii) Explain how your answer to (i) above would have differed if the consideration for the transfer of Amanda Moon’s business had instead consisted of 200,000 £1 ordinary shares and £100,000 in cash. (3 marks) Note: You should ignore entrepreneurs’ relief.

  (b) Charles Orion On 30 September 2012 Charles sold a house for £282,000. The house had been purchased on 1 October 2000 for £110,000.

  He occupied the house as his main residence from the date of purchase until 31 March 2002. The house was then unoccupied between 1 April 2002 and 31 December 2010 when Charles went to live with his parents due to his father’s illness. From 1 January 2011 until 30 September 2012 Charles again occupied the house as his main residence.

  Throughout the period 1 October 2000 to 30 September 2012 Charles did not have any other main residence.

  © Emile Woolf Publishing Limited

  29 Paper F6 (UK): Taxation FA2012 Required: (i) Calculate Charles Orion’s chargeable gain, if any, for the tax year 2012–13.

  (5 marks)

  (ii) Explain how your answer to (i) above would have differed if Charles Orion had rented out his house during the period 1 April 2002 to 31 December 2010.

  (3 marks) (Total: 15 marks)

25 Michael Chin

  Michael Chin made the following gifts of assets to his daughter, Mika, during 2012–13: (1) On 30 July 2012 Michael gave Mika a business that he had run as a sole trader since 1 January 2007. The market value of the business on 30 June 2012 was

  £250,000, made up as follows:

   £

  Goodwill 60,000 Freehold property

  150,000 Net current assets

  40,000

  • ––––––––– 250,000
    • –––––––––– The goodwill has been built up since 1 January 2007, and had a nil cost. The freehold property had cost £86,000 on 20 May 2009. Michael used 75% of this property for business purposes, but the other 25% has never been used for business purposes. Michael has elected to claim entrepreneurs’ relief in respect of this disposal.

   

  (2) On 8 December 2012 Michael gave Mika his entire holding of 50,000 50p ordinary shares (a 60% holding) in Minnow Ltd, an unquoted trading company.

  The market value of the shares on that date was £180,000. Michael had originally purchased the shares on 5 January 2010 for £87,500. He has never worked for the company. On 8 December 2012 the market value of Minnow Ltd’s chargeable assets was £250,000, of which £200,000 was in respect of chargeable business assets. Michael and Mika have elected to hold over the gain arising on this disposal.

  (3) On 15 February 2013 Michael gave Mika 18,000 £1 ordinary shares in Whale plc, a quoted trading company. On that date the shares were quoted at £6.36 – £6.52.

  Michael had originally purchased 15,000 shares in Whale plc on 7 December 2010 for £63,000, and he purchased a further 12,000 shares on 21 February 2013 for £26,400. The total shareholding was less than 1% of Whale plc’s issued share capital.

  Michael incurred a capital loss of £17,300 during 2010–11, and made a capital gain of £12,600 during 2011–12. His taxable income for 2012–13 is £6,635.

  Required:

  Calculate Michael’s capital gains tax liability for 2012–13. You should assume that the rate of annual exempt amount for 2012–13 applies throughout. (15 marks)

  © Emile Woolf Publishing Limited 30  

Section 1: Practice questions

  (ii) Explain the capital gains tax implications if Sophia had retained the properties until her death, with the assets then passing to Wong under the terms of Sophia’s will.

  Lim upon the death of her mother on 17 January 2006, when the land was valued at £182,000. Lim’s mother had originally purchased the land for £137,000. (2) On 13 August 2012 Lim made a gift of 5,000 £1 ordinary shares in Oily plc, a quoted trading company, to her sister. On that date the shares had a market value of £7.44 each. Lim had originally purchased 1,000 shares in Greasy plc on 8 July 2003 for £18,200. On 23 November 2006 Greasy plc was taken over by Oily plc. Lim received five £1 ordinary shares and two £1 preference shares in Oily plc for each

  Lim disposed of the following assets during the tax year 2012–13: (1) On 8 April 2012 Lim sold five acres of land to Mal-Mil Ltd for £260,000, which was the market value of the land on that date. The land had been inherited by

  Lim Lam

  Lim Lam is the controlling shareholder and managing director of Mal-Mil Ltd, an unquoted trading company that provides support services to the oil industry.

  27 Lim Lam

  (Total: 15 marks)

  (d) Explain the tax advantages of investing in an ISA. Your answer should include the maximum amount that Sophia could invest into each component. (3 marks)

  (2 marks)

  © Emile Woolf Publishing Limited

  31

  (c) (i) Explain why it would have been beneficial for capital gains tax purposes if Sophia had postponed the transfer of her properties until 6 April 2013.

  (5 marks)

  (a) Calculate Sophia’s income tax liability for the tax year 2012-13. (4 marks) (b) Calculate Sophia’s capital gains tax liability for the tax year 2012–13 assuming gift relief is claimed, where possible.

  Required:

  Sophia has total income of £26,600 which consists of £8,700 of trading income and £17,900 interest (gross). She wishes to invest the proceeds of her property disposals into an Individual Savings Account (ISA) but is uncertain as to what an ISA contains and how much she can invest.

  (2) A freehold warehouse with a market value of £225,000. The warehouse had been purchased on 1 April 1989 for £120,100, and has never been used by Sophia for business purposes. Wong paid Sophia £100,000 for the warehouse. Sophia made no other capital disposals in the tax year 2012–13. She is unable to claim entrepreneurs’ relief in respect of either of these disposals.

  On 31 March 2013 Sophia Tang, aged 78, transferred two properties to her daughter Wong: (1) A freehold shop with a market value of £260,000. The shop had been purchased on 1 July 2007 for £113,000, and has always been used by Sophia for business purposes. Wong paid Sophia £160,000 for the shop.

  26 Sophia Tang

  (1 mark) Paper F6 (UK): Taxation FA2012

  £1 ordinary share held in Greasy plc. Immediately after the takeover each £1 ordinary share in Oily plc was quoted at £3·50 and each £1 preference share was quoted at £1·25. Entrepreneurs’ relief and holdover relief are not available in respect of this disposal.

  (3) On 22 March 2013 Lim sold 40,000 £1 ordinary shares in Mal-Mil Ltd for £280,000. She had originally purchased 125,000 shares in the company on 8 June 2005 for £142,000, and had purchased a further 60,000 shares on 23 May 2007 for £117,000. Mal-Mil Ltd has a total share capital of 250,000 £1 ordinary shares. Lim has made no previous disposals eligible for entrepreneurs’ relief.

  Lim Lam has taxable income of £53,000 for the tax year 2012-13.

  Mal-Mil Ltd

  On 20 December 2012 Mal-Mil Ltd sold two of the five acres of land that had been purchased from Lim on 8 April 2012. The sale proceeds were £162,000 and legal fees of £3,800 were incurred in connection with the disposal. The market value of the unsold three acres of land as at 20 December 2012 was £254,000. During April 2012 Mal-Mil Ltd had spent £31,200 levelling the five acres of land. The indexation factor from April 2012 to December 2012 is 0.031.

  Mal-Mil Ltd’s only other income for the year ended 31 December 2012 was a trading profit of £163,000.

  Required:

  (a) Explain why Lim Lam’s disposal of 40,000 £1 ordinary shares in Mal-Mil Ltd on

  (2 marks) 22 March 2013 qualifies for entrepreneurs’ relief.

  (b) Calculate Lim Lam’s capital gains tax liability for the tax year 2012–13, and state by when this should be paid.

  (9 marks)

  (c) Calculate Mal-Mil Ltd’s corporation tax liability for the year ended 31 December 2012, and state by when this should be paid. (4 marks)

  (Total: 15 marks)

28 Nui Lee

  For the purposes of this question you should assume that today’s date is 15 March 2013. Nui Lee has been in business as a sole trader since 1 January 1994. On 5 April 2013 she is going to sell her business for £300,000 to an unconnected person. The following information is available: (1) Nui has tax adjusted trading profits of £65,800 for the year ended 31 December

  2012, and will have profits of £29,700 for the period from 1 January to 5 April 2013. These figures are before taking account of capital allowances. (You should assume that the current rates of writing down allowance have applied throughout.) (2) The tax written down value of the main pool at 1 January 2012 is £45,600.

  (3) Nui has unused overlap profits brought forward of £5,900.

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Section 1: Practice questions

  (4) The sale proceeds figure of £300,000 is made up as follows:

  £

  Goodwill 60,000 Freehold property 165,000 Plant and machinery 30,000 Net current assets 45,000

  • –––––––– 300,000
  • –––––––– The goodwill has been built up since 1 January 1994, and has a nil cost. The freehold property cost £110,000 on 10 August 2005. All items of plant and machinery have qualified for capital allowances, and are being sold for less than original cost.

  (5) Nui and the purchaser of her business are both registered for VAT. (6) Nui understands that it may be beneficial to postpone the sale of her business by one day until 6 April 2013. A postponement would not alter the sale proceeds figure of £300,000, and the tax adjusted trading profit of £29,700 would remain unchanged for the period from 1 January to 6 April 2013.

  Required:

  (a) Calculate Nui’s trading income assessment for 2012–13. You should prepare

  (5 marks) separate capital allowance computations for each period of account.

  (b) Calculate Nui’s capital gains tax liability for 2012–13. (4 marks)

  (3 marks) (c) Explain the VAT implications arising from the sale of Nui’s business.

  (d) Briefly advise Nui of the income tax and CGT implications of postponing the sale of her business until 6 April 2013. (3 marks)

  (Total: 15 marks) Inheritance tax

29 Alex Reader Assume today’s date is 20 August 2012.

  Alex Reader died on 5 August 2012, aged 85 years. His will leaves his assets split in equal shares to his son, Brian and his daughter, Beatrice. The assets comprised in Alex’s estate were as follows:

  Market Value

  5 August 2012 £

  Residence 475,000 Building society account 15,000 National Savings investment account 55,000 National Savings certificates 180,000 Various chattels 40,000 Shares in Vocational plc 128,800 Other quoted investments 115,000

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  33 Paper F6 (UK): Taxation FA2012

  Alex had made two lifetime gifts. The first was a flat in London. This was given to Brian in July 2007. The value at that time was £371,000. In addition, Alex transferred an equal amount into a trust in September 2007. Alex paid any inheritance tax due on both gifts. The nil rate band in 2007-08 was £300,000.

  Required: (4 marks) Calculate the inheritance tax payable during Alex’s lifetime.

  (a) (b) Calculate the additional inheritance tax payable as a result of Alex’s death, identify who is liable to pay the tax and state the due date. (10 marks)

  (1 mark) Quantify the inheritance (after tax) due to Brian and Beatrice.

  (c)

  (Total: 15 marks)

30 Henry Major

  Henry Major, aged 77, died on 5 October 2012 survived by his wife, Sally, also aged 77, and two children, Cecil and Ida. Sally is herself in a frail condition and not expected to live for much longer. Both Cecil and Ida have children of their own and are relatively wealthy in their own right. Henry owned the following assets: (1) 100,000 £1 ordinary shares in Peel plc, a quoted company with an issued share capital of 10,000,000 £1 ordinary shares valued at 202p each. (2) Government Stock valued at £19,900. (3) The following capital deposits both of which have been held for several years: £25,000 deposited with a building society.

  £18,000 invested in an ISA account. (4) A house valued on 5 October 2012 at £450,000. This property was his and Sally’s family home, but was owned outright by Henry.

  Under the terms of his will Henry has left £20,000 each to Cecil and Ida with the remainder of his estate left to his wife. Sally’s will currently leaves her estate equally to their two children. The only gifts made by Henry during his lifetime were cash gifts of £200,000 on 1 January 2003 and £145,000 on 1 January 2006 respectively. Both gifts were made to a trust for his grandchildren. Henry had agreed to pay any inheritance tax arising on these lifetime gifts. The nil rate band for 2002-03 was £250,000 and for 2005-06 £275,000.

  Required:

  (a) Calculate the Inheritance Tax liabilities arising: (i) from the lifetime gifts of cash to the trust; and (ii) as a consequence of Henry’s death on 5 October 2012;

  (13 marks) and state the due dates.

  (b) Calculate the nil rate band available to Sally assuming the nil rate band had

  (2 marks) increased to £350,000 by the date of her death. (Total: 15 marks)

  © Emile Woolf Publishing Limited 34  

Section 1: Practice questions

  31 Debbie Morgan Assume that today’s date is 8 June 2013.

  Debbie is 66 and still in good health. She has two children, Andrew and Allison. Andrew, aged 37, is single but is shortly to be married. Allison is 32, and lives with her husband and two children (aged 2 and 4) in a house gifted to her by Debbie in June 2009. The house was worth £202,000 at that time. The nil rate band in 2009-10 was £325,000.

  Debbie has the following assets:

   £

  Family home 550,000 Cash deposits 100,000 Paintings 18,300 Quoted shares in Don plc 150,000

  Additional information

  Debbie wishes to minimise her future inheritance tax liability. She understands that there are some exemptions that she can use and would like some further information about them.

  Required:

  (a) (i) Calculate the inheritance tax that will be payable if Debbie were to die today (8 June 2013).

  (5 marks)

  (ii) State when the inheritance tax calculated in (a)(i) would be payable and by

  (1 mark) whom.

  (b) Advise Debbie how she can minimise her future inheritance tax liability using: The small gifts exemption

  (i) (ii) The exemption for normal expenditure out of income

  (6 marks) (iii) The exemption for gifts in consideration of marriage.

  Explain why it is advisable for Debbie to make lifetime gifts even if no (c)

  (3 marks) exemptions are available to her.

  You should assume that the rates and allowances for 2012/13 apply throughout.

  (Total: 15 marks) Corporation tax

  32 Gastron Ltd

  Gastron Ltd, a United Kingdom resident company, is a luxury food manufacturer. The company’s summarised statement of profit or loss for the year ended 31 March 2013 is as follows:

  Note £ £

  861,720

  Gross profit Operating expenses

  Depreciation 70,880 Amortisation of leasehold 1 6,000 property

  © Emile Woolf Publishing Limited

  35 Paper F6 (UK): Taxation FA2012

Note £ £

  Gifts and donations 2 2,700 Professional fees 3 18,800 Other expenses 4 230,240

  • –––––––– (328,620)
  • –––––––– 533,100

  Operating profit Income from investments

  Income from property 5 20,600 Bank interest 6 12,400 Dividends 7 54,000

  • –––––––– 87,000

  Profit from sale of fixed assets

  Disposal of shares 8 80,700

  • –––––––– 700,800

  Interest payable

  9 (60,800)

  • –––––––– Profit before taxation

  640,000

  • –––––––– Note 1 – Leasehold property

  On 1 April 2012 Gastron Ltd acquired a leasehold office building, paying a premium of £60,000 for the grant of a new ten-year lease. The office building was used for business purposes by Gastron Ltd throughout the year ended 31 March 2013. No legal costs were incurred by Gastron Ltd in respect of this lease.

  Note 2 – Gifts and donations

  Gifts and donations are as follows:

  £

  Gifts to customers (pens costing £60 each and displaying Gastron Ltd’s 1,200 name)

  Gifts to customers (hampers of food costing £25 each) 1,100 Donation to local charity (Gastron Ltd received free advertising in the 400 charity’s magazine)

  • –––––– 2,700
  • –––––– Note 3 – Professional fees

  Professional fees are as follows:

  £

  Legal fees in connection with the renewal of a 45-year property lease in 3,600 respect of a warehouse

  Legal fees in connection with the issue of debentures (see note 9) 15,200

  • –––––– 18,800
  • –––––– Note 4 – Other expenses

  The figure of £230,240 for other expenses includes £1,300 for entertaining suppliers and £900 for entertaining employees.

  © Emile Woolf Publishing Limited 36  

Section 1: Practice questions

  Note 5 – Income from property

  Gastron Ltd lets out the whole of an unfurnished freehold office building that is surplus to requirements. The office building was let from 1 April 2012 to 31 December 2012 at a monthly rent of £1,800, payable in advance. On 31 December 2012 the tenant left owing two months’ rent which Gastron Ltd was unable to recover. During January 2013 the company spent £3,700 decorating the property. The office building was then re-let from 1 February 2013 at a monthly rent of £1,950, on which date the new tenant paid six months’ rent in advance.

  Note 6 – Bank interest received

  The bank interest was received on 31 March 2013. The bank deposits are held for non- trading purposes.

  Note 7 – Dividends received

  During the year ended 31 March 2013 Gastron Ltd received dividends of £36,000 from Tasteless plc, an unconnected UK company, and dividends of £18,000 from Culinary Ltd, a 100% UK subsidiary company (see note 11). Both figures are the actual cash amounts received.

  Note 8 – Profit on disposal of shares

  The profit on disposal of shares is in respect of a 1% shareholding that was sold on 14 October 2012. The disposal resulted in a chargeable gain of £74,800. This figure is after taking account of indexation.

  Note 9 – Interest payable

  The interest payable is in respect of the company’s 5% debenture loan stock that was issued on 1 April 2012. The proceeds of the issue were used to finance the company’s trading activities. Interest of £30,400 was paid on 30 September 2012 and again on 31 March 2013.

  Note 10 – Plant and machinery

  On 1 April 2012, the tax written down value of plant and machinery in the main pool was £16,700. The following transactions took place during the year ended 31 March 2013:

  Cost/ (Proceeds) £

  19 May 2012 Purchased equipment 21,600

  12 July 2012 Purchased motor car (1) 9,800

  11 August 2012 Purchased motor car (2) 16,200

  5 October 2012 Purchased a lorry 17,200

  5 March 2013 Sold equipment (3,300) Motor car (1), purchased on 12 July 2012 for £9,800, has CO2 emissions of 146 grams per kilometre. Motor car (2), purchased on 11 August 2012 for £16,200, is a low emission motor car (CO2 emission rate of less than 110 grams per kilometre). The equipment sold on 5 March 2013 for £3,300 was originally purchased in 2008 for £8,900.

  Note 11 – Subsidiary company

  Gastron Ltd owns 100% of the ordinary share capital of Culinary Ltd. On 13 February 2013 Culinary Ltd sold a freehold factory and this resulted in a capital loss of £66,000.

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  37 Paper F6 (UK): Taxation FA2012 38  

  © Emile Woolf Publishing Limited

  (d) Explain the group relationship that must exist in order for two or more companies to form a group for capital gains purposes. (2 marks) (e) State the time limit for Gastron Ltd and Culinary Ltd to make a joint election such that Culinary Ltd is treated as disposing of Gastron Ltd’s shares (see note 8), and explain why such an election will be beneficial. (3 marks)

  (3 marks)

  (b) State the date by which Do-Not-Panic Ltd’s self-assessment corporation tax return for the period ended 31 March 2013 should be submitted, and explain how the company can correct the return if it is subsequently found to contain an error or mistake.

  (8 marks)

  (a) Calculate Do-Not-Panic Ltd’s corporation tax liabilities in respect of the fifteen- month period ended 31 March 2013 and advise the company by when these should be paid.

  Required:

  The company commenced trading on 1 January 2012 and its results for the fifteen- month period ended 31 March 2013 are summarised as follows: (1) The trading profit as adjusted for tax purposes is £315,000. This figure is before taking account of capital allowances. (2) Do-Not-Panic Ltd purchased equipment for £12,000 on 20 February 2012. (3) On 21 December 2012 Do-Not-Panic Ltd disposed of some investments and this resulted in a capital loss of £5,000. On 28 March 2013 the company made a further disposal and this resulted in a chargeable gain of £42,000. (4) Franked investment income of £25,000 was received on 22 February 2013. Do-Not-Panic Ltd has no associated companies.

  (Total: 30 marks)

  (3 marks)

  For the year ended 31 March 2013 Culinary Ltd made no other disposals and paid corporation tax at the small company rate of 20%.

  31 March 2013 should be paid, and advise the company of the interest that will be due if the liability is not paid until 31 August 2014.

  (c) State the date by which Gastron Ltd’s corporation tax liability for the year ended

  (7 marks)

  (b) Calculate Gastron Ltd’s corporation tax liability for the year ended 31 March 2013, on the basis that no election is made between Gastron Ltd and Culinary Ltd in respect of capital gains.

  (15 marks)

  Note: your computation should commence with the profit before taxation figure of £640,000, and should list all of the items referred to in notes (1) to (9) indicating by the use of zero (0) any items that do not require adjustment.

  (a) Calculate Gastron Ltd’s tax adjusted trading profit for the year ended 31 March 2013, after deducting capital allowances.

  Required:

33 Do-Not-Panic Ltd Do-Not-Panic Ltd is a United Kingdom resident company that installs burglar alarms.

Section 1: Practice questions

  Required:

  The tax adjusted trading profit based on the draft accounts for the six-month period ended 31 March 2013 is £68,400. This figure is before making any adjustments required for: (1) Capital allowances.

  Trading profit

  (a) Wireless Ltd, a United Kingdom resident company, commenced trading on 1 October 2012 as a manufacturer of computer routers. The company prepared its first accounts for the six-month period ended 31 March 2013. The following information is available:

  35 Wireless Ltd

  (Total: 15 marks)

  (b) State the advantages for tax purposes of a company having an accounting date of 31 March instead of 31 December. (2 marks)

  (a) Calculate Stretched Ltd’s corporation tax liabilities in respect of the fifteen- month period ended 31 March 2013. Advise the company by when these liabilities should be paid. (13 marks)

  © Emile Woolf Publishing Limited

  39

  (2) On 1 January 2012 the tax written down value of plant and machinery was £40,000. Stretched Ltd purchased office equipment for £8,524 on 15 January 2013. (Assume that the current rate of writing down allowance has applied throughout the whole period.)

  Stretched Ltd has always made up its accounts to 31 December, but has decided to change its accounting date to 31 March. The company’s results for the fifteen-month period ended 31 March 2013 are as follows: (1) The trading profit as adjusted for taxation is £330,000. This figure is before taking account of capital allowances.

  34 Stretched Ltd

  (Total: 15 marks)

   

  (4 marks)

  (c) Outline the penalties that may apply to Do-Not-Panic Ltd if it makes an incorrect corporation tax return.  

  (3) There is a property business profit of £45,000 for the fifteen-month period ended 31 March 2013. (4) On 15 April 2012 the company disposed of some investments, and this resulted in a chargeable gain of £44,000. On 8 February 2013 the company made a further disposal, and this resulted in a capital loss of £6,700. (5) Franked investment income of £30,000 was received on 10 September 2012. (6) A qualifying charitable donation of £5,000 was made on 31 March 2013. As at 1 January 2012 Stretched Ltd had unused trading losses of £23,800, and unused capital losses of £3,000. Stretched Ltd has no associated companies. Paper F6 (UK): Taxation FA2012

  (2) Director’s remuneration of £23,000 paid to the managing director of Wireless Ltd, together with the related employer’s Class 1 national insurance contributions. The remuneration is in respect of the period ended

  31 March 2013 but was not paid until 5 April 2013. No accrual has been made for this remuneration in the draft accounts. The managing director received no other remuneration from Wireless Ltd during the tax year 2012–13.

  Plant and machinery

  Wireless Ltd purchased the following assets in respect of the six-month period ended 31 March 2013:

  £

  20 September 2012 Office equipment 3,400

  5 October 2012 Machinery 10,200

  11 October 2012 Building alterations necessary for the installation of the machinery 4,700

  18 February 2013 Motor car 10,600 The motor car purchased on 18 February 2013 has CO2 emissions of 152 g/km. It is used by the sales manager, and 15% of the mileage is for private journeys.

  Loan interest received

  Loan interest of £1,110 was received on 31 March 2013. The loan was made for non-trading purposes.

  Overseas dividend

  On 31 March 2013 Wireless Ltd received a dividend of £6,750 (net) from a 100% owned subsidiary company that is resident overseas. Withholding tax was withheld from the dividend at the rate of 10%.

  Donation A qualifying charitable donation of £1,800 was paid on 20 March 2013. Required:

  (i) Explain when an accounting period starts and when an accounting period

  (4 marks) finishes for corporation tax purposes.

  (ii) Calculate Wireless Ltd’s taxable total profits for the six-month period ended 31 March 2013.

  (7 marks)

  (b) Note that in answering this part of the question you are not expected to take account of any of the information provided in part (a) above. Wireless Ltd’s sales since the commencement of trading on 1 October 2012 have been as follows:

  £ 2012 October 9,700 November 18,200 December 21,100 2013 January 14,800 February 23,300 March 24,600 The above figures are stated exclusive of value added tax (VAT).

  The company’s sales are all standard rated and are made to VAT registered businesses.

  © Emile Woolf Publishing Limited 40  

Section 1: Practice questions

  Wireless Ltd only sells goods and since registering for VAT has been issuing sales invoices to customers that show (1) the invoice date and the tax point, (2) Wireless Ltd’s name and address, (3) the VAT-exclusive amount for each supply, (4) the total VAT-exclusive amount and (5) the amount of VAT payable. The company does not offer any discount for prompt payment.

   Required:

  (i) Explain from what date Wireless Ltd was required to compulsorily register for VAT and state what action the company then had to take as regards notifying HM Revenue and Customs (HMRC) of the registration. (4 marks)

  (ii) Explain the circumstances in which Wireless Ltd would have been allowed to recover input VAT incurred on goods purchased and services incurred

  (4 marks) prior to the date of VAT registration.

  (iii) Explain why it would have been beneficial for Wireless Ltd to have

  (3 marks) voluntarily registered for VAT from 1 October 2012.

  (iv) State the additional information that Wireless Ltd must show on its sales invoices in order for them to be valid for VAT purposes. (3 marks)

  (Total: 25 marks)

36 Crash–Bash Ltd

  (a) Crash–Bash Ltd commenced trading on 1 July 2012 as a manufacturer of motor cycle crash helmets in the United Kingdom. The company is incorporated overseas, although its directors are based in the United Kingdom and hold their board meetings in the United Kingdom.

  Crash–Bash Ltd prepared its first accounts for the nine-month period ended 31 March 2013. The following information is available:

   Trading profit

  The tax adjusted trading profit based on the draft accounts for the nine-month period ended 31 March 2013 is £410,210. This figure is before making any adjustments required for: (1) Capital allowances.

  (2) Advertising expenditure of £12,840 incurred during June 2012. This expenditure has not been deducted in arriving at the tax adjusted trading profit for the period ended 31 March 2013 of £410,210.

  Plant and machinery

  The accounts for the nine-month period ended 31 March 2013 showed the following additions and disposals of plant and machinery:

  Cost/ (Proceeds) £

  2 October 2012 Purchased machinery 62,500

  28 November 2012 Purchased a motor car 13,200

  12 February 2013 Sold machinery (3,600) The motor car purchased on 28 November 2012 for £13,200 is a new low emission motor car (CO2 emission rate of less than 110 grams per kilometre). The

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  41 Paper F6 (UK): Taxation FA2012

  machinery sold on 12 February 2013 for £3,600 originally cost £5,300, and is part of the machinery purchased on 2 October 2012 for £62,500.

  Overseas dividend

  On 31 March 2013 Crash–Bash Ltd received a dividend of £14,250 (net) from a 100% owned subsidiary company, Safety Inc, that is resident overseas. Withholding tax was withheld from the dividend at the rate of 5%.

  Dividends received

  During the period ended 31 March 2013 Crash–Bash Ltd received dividends of £36,000 from Flat-Out plc, an unconnected United Kingdom company. This figure was the actual cash amount received.

  Export of crash helmets to Safety Inc

  Safety Inc, Crash–Bash Ltd’s 100% owned overseas subsidiary company, sells crash helmets that have been manufactured by Crash–Bash Ltd. Crash–Bash Ltd is a large company for the purposes of transfer pricing legislation.

  Other information

  With the exception of Safety Inc, Crash–Bash Ltd does not have any associated companies.

  Required:

  (i) Explain why Crash–Bash Ltd is treated as being resident in the United

  (2 marks) Kingdom.

  (ii) Calculate Crash–Bash Ltd’s corporation tax liability for the nine-month period ended 31 March 2013. (9 marks) (iii) Explain the corporation tax implications if Crash–Bash Ltd were to invoice

  Safety Inc for the exported crash helmets at a price that was less than the market price.

  (4 marks)

  (b) Note that in answering this part of the question you are not expected to take account of any of the information provided in part (a) above. Crash–Bash Ltd’s outputs and inputs for the first two months of trading from 1

  July 2012 to 31 August 2012 were as follows:

   July August £ £

  Outputs Sales 13,200 18,800 Inputs Goods purchased 94,600 193,100 Services incurred 22,300 32,700 The above figures are stated exclusive of value added tax (VAT).

  On 1 September 2012 Crash–Bash Ltd realised that its sales for September 2012 were going to exceed £100,000, and therefore immediately registered for VAT. On that date the company held inventory that had cost £108,600 (exclusive of VAT).

  During February 2013 Crash–Bash Ltd discovered that a number of errors had been made when completing its VAT return for the quarter ended 30 November 2012. As a result of these errors the company will have to make an additional payment of VAT to HM Revenue and Customs (HMRC).

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Section 1: Practice questions

  Required:

  (i) Explain why Crash–Bash Ltd was required to compulsorily register for

  VAT from 1 September 2012, and state what action the company then had to take as regards notifying HM Revenue and Customs of the registration.

  (3 marks)

  (ii) Calculate the amount of input VAT that Crash–Bash Ltd was able to recover in respect of inputs incurred prior to registering for VAT on 1 September 2012. Your answer should include an explanation as to why the

  (4 marks) input VAT is recoverable.

  (iii) Explain how Crash–Bash Ltd could have voluntarily disclosed the errors relating to the VAT return for the quarter ended 30 November 2012, and state the circumstances in which default interest would have been due.

  (3 marks) (Total: 25 marks) Corporation tax losses

37 Volatile Ltd

  Volatile Ltd commenced trading on 1 July 2008. The company’s results for its first five periods of trading are as follows:

  Period Year Year Period Year ended ended ended ended ended

  31

  31

  31

  30

  30 December December December September September 2008 2009 2010 2011 2012 £ £ £ £ £

  Trading profit/(loss) 44,000 (73,800) 95,200 78,700 (146,800)

  • – – Property business profit 9,400 6,600 6,500
  • – – – Chargeable gains 5,100 9,700 Qualifying charitable (800) (1,000) – – (1,200) donations

  Required: (a) State the factors that will influence a company’s choice of loss relief claims.

  (3 marks) Note: You are not expected to consider group relief.

  (b) Assuming that Volatile Ltd claims relief for its trading losses as early as possible, calculate the company’s taxable total profits for the six-month period ended 31 December 2008, each of the years ended 31 December 2009 and 2010, and the nine-month period ended 30 September 2011. Your answer should also clearly identify the amount of any unrelieved trading losses as at 30 September 2012.

  (7 marks)

  (c) Briefly explain how your answer would have differed if Volatile Ltd had ceased trading on 30 September 2012. You are not required to recalculate the company’s

  (2 marks) taxable total profits.

  (d) State the dates by which the above loss relief claims must be made. (3 marks)

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  43 Paper F6 (UK): Taxation FA2012

38 Mice Ltd (a) You should assume that today’s date is 28 March 2013.

  Mice Ltd commenced trading on 1 July 2009 as a manufacturer of computer peripherals. The company prepares accounts to 31 March, and its results for the first three periods of trading were as follows:

  Period ended Year ended Year ended

31 March

  31 March

  31 March 2010 2011 2012 £ £ £

  Trading profit 83,200 24,700 51,200 Property business profit 2,800 7,100 12,200 Qualifying charitable (1,000) (1,500) – donations

  The following information is available in respect of the year ended 31 March 2013:

  Trading loss Mice Ltd expects to make a trading loss of £180,000. Business property income Mice Ltd lets out three office buildings that are surplus to requirements.

  The first office building is owned freehold. The property was let throughout the year ended 31 March 2013 at a quarterly rent of £3,200, payable in advance. Mice Ltd paid business rates of £2,200 and insurance of £460 in respect of this property for the year ended 31 March 2013. During June 2012 Mice Ltd repaired the existing car park for this property at a cost of £1,060, and then subsequently enlarged the car park at a cost of £2,640.

  The second office building is owned leasehold. Mice Ltd pays an annual rent of £7,800 for this property, but did not pay a premium when the lease was acquired. On 1 April 2012 the property was sub-let to a tenant, with Mice Ltd receiving a premium of £18,000 for the grant of an eight-year lease. The company also received the annual rent of £6,000 which was payable in advance. Mice Ltd paid insurance of £310 in respect of this property for the year ended 31 March 2013.

  The third office building is also owned freehold. Mice Ltd purchased the freehold of this building on 1 January 2013, and it will be empty until 31 March 2013. The building is to be let from 1 April 2013 at a monthly rent of £640, and on 15 March 2013 Mice Ltd received three months rent in advance. On 1 January 2013 Mice Ltd paid insurance of £480 in respect of this property for the year ended 31 December 2013, and during February 2013 spent £680 on advertising for tenants. Mice Ltd paid loan interest of £1,800 in respect of the period 1 January 2013 to 31 March 2013 on a loan that was taken out to purchase this property.

  Loan interest received

  On 1 July 2012 Mice Ltd made a loan for non-trading purposes. Loan interest of £6,400 was received on 31 December 2012, and £3,200 will be accrued at 31 March 2013.

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Section 1: Practice questions

  Overseas dividend

  On 15 October 2012 Mice Ltd received a dividend of £7,400 (net) from a 3% shareholding in USB Inc, a company that is resident overseas. Withholding tax was withheld from this dividend at the rate of 7·5%.

  Chargeable gain

  On 20 December 2012 Mice Ltd sold its 3% shareholding in USB Inc. The disposal resulted in a chargeable gain of £10,550, after taking account of indexation.

  Required:

  (i) Calculate Mice Ltd’s property business profit for the year ended 31 March 2013;

  (8 marks)

  (ii) Assuming that Mice Ltd claims relief for its trading loss as early as possible, calculate the company’s taxable total profits for the nine-month period ended 31 March 2010, and each of the years ended 31 March 2011,

  (7 marks) 2012 and 2013.

  (b) Mice Ltd has owned 100% of the ordinary share capital of Web-Cam Ltd since it began trading on 1 April 2012. For the three-month period ended 30 June 2012 Web-Cam Ltd made a trading profit of £28,000, and is expected to make a trading profit of £224,000 for the year ended 30 June 2013. Web-Cam Ltd has no other taxable profits or allowable losses.

  Required:

  Assuming that Mice Ltd does not make any loss relief claim against its own profits, advise Web-Cam Ltd as to the maximum amount of group relief that can be claimed from Mice Ltd in respect of the trading loss of £180,000 for the year ended 31 March 2013.

   (3 marks)

  (c) Mice Ltd has surplus funds of £75,000 which it is planning to spend before 31 March 2013. The company will either purchase new equipment for £75,000, or alternatively it will purchase a new ventilation system for £75,000, which will be installed as part of its factory.

  Mice Ltd has not made any other purchases of assets during the year ended 31 March 2013, and neither has its subsidiary company Web-Cam Ltd.

  Required:

  Explain the maximum amount of capital allowances that Mice Ltd will be able to claim for the year ended 31 March 2013 in respect of each of the two alternative purchases of assets. Note: You are not expected to recalculate Mice Ltd’s trading loss for the year ended 31 March 2013, or redo any of the calculations made in parts (a) and (b)

  (4 marks) above.

  (d) Mice Ltd is planning to pay its managing director a bonus of £40,000 on 31 March 2013. The managing director has already been paid gross director’s remuneration of £55,000 during the tax year 2012–13, and the bonus of £40,000 will be paid as additional director’s remuneration. The director has no other taxable income.

   Required:

  Advise the managing director as to the additional amount of income tax and national insurance contributions (both employee’s and employer’s) that will be payable as a result of the payment of the additional director’s remuneration of £40,000.

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  45 Paper F6 (UK): Taxation FA2012

  Note: You are not expected to recalculate Mice Ltd’s trading loss for the year ended 31 March 2013, or redo any of the calculations made in parts (a) and (b)

  (3 marks) above. (Total: 25 marks)

39 Jogger Ltd

  (a) Jogger Ltd is a manufacturer of running shoes. The company’s summarised statement of profit or loss for the year ended 31 March 2013 is as follows:

   Note £ £

  Operating loss 1 (56,400) Income from investments Bank interest 3 8,460 Loan interest 4 24,600 Income from property 5 144,000 Dividends 6 45,000

  • –––––––– 222,060

  Profit from sale of fixed assets Disposal of shares 7 102,340

  • –––––––– Profit before taxation

  268,000

  • –––––––– Note 1 – Operating profit

  Depreciation of £12,340 has been deducted in arriving at the operating loss of £56,400.

  Note 2 – Plant and machinery

  On 1 April 2012 the tax written down value of plant and machinery in the main pool was £21,600. The following transactions took place during the year ended 31 March 2013:

  Cost/(proceeds) £

  31 July 2012 Purchased motor car 11,800

  14 March 2013 Sold a lorry (8,600) The motor car purchased on 31 July 2012 for £11,800 has CO2 emissions of 137 g/km. The lorry sold on 14 March 2013 for £8,600 originally cost £16,600.

  Note 3 – Bank interest received

  The bank interest was received on 31 March 2013. The bank deposits are held for non-trading purposes.

  Note 4 – Loan interest receivable

  The loan was made for non-trading purposes on 1 July 2012. Loan interest of £16,400 was received on 31 December 2012, and interest of £8,200 was accrued at 31 March 2013.

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Section 1: Practice questions

  Note 5 – Income from property

  Jogger Ltd lets out an unfurnished freehold office building that is surplus to requirements. The office building was let throughout the year ended 31 March 2013. On 1 April 2012 Jogger Ltd received a premium of £100,000 for the grant of a ten-year lease, and the annual rent of £44,000 which is payable in advance.

  Note 6 – Dividends received

  During the year ended 31 March 2013 Jogger Ltd received dividends of £45,000 from Sprinter plc, an unconnected UK company. This figure was the actual cash amount received.

  Note 7 – Profit on disposal of shares

  The profit on disposal of shares is in respect of a shareholding that was sold on 5 December 2012. The disposal resulted in a chargeable gain of £89,464. This figure is after taking account of indexation.

  Note 8 – Other information Jogger Ltd has two associated companies. Required:

  (i) Calculate Jogger Ltd’s tax adjusted trading loss for the year ended 31 March 2013.

  Note: you should assume that the company claims the maximum available

  (4 marks) capital allowances.

  (ii) Assuming that Jogger Ltd claims relief for its trading loss against total profits (under s.37 CTA 2010), calculate the company’s corporation tax liability for the year ended 31 March 2013 and state the date it is due for payment.

  (9 marks)

  (iii) State the date by which Jogger Ltd’s self-assessment corporation tax return for the year ended 31 March 2013 should be submitted, and advise the company of the penalties that will be due if the return is submitted eight months late.

  Note: you should assume that the company pays its corporation tax liability at the same time that the self-assessment tax return is submitted.

  (4 marks)

  (b) Note: in answering this part of the question you are not expected to take account of any of the information provided in part (a) above.

  Jogger Ltd has been registered for value added tax (VAT) since 1 April 2005. From that date until 30 June 2011 the company’s VAT returns were all submitted on time. Since 1 July 2011 the company’s VAT returns have been submitted as follows:

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  47 Paper F6 (UK): Taxation FA2012 Quarter ended

  VAT paid Submitted £

  30 September 2011 42,700 One month late

  31 December 2011 41,200 On time

  31 March 2012 38,900 One month late

  30 June 2012 28,300 On time

  30 September 2012 49,100 On time

  31 December 2012 63,800 On time

  31 March 2013 89,100 Two months late Jogger Ltd always pays any VAT that is due at the same time as the related return is submitted.

   Required:

  (i) State, giving appropriate reasons, the default surcharge consequences arising from Jogger Ltd’s submission of its VAT returns for the quarter ended 30 September 2011 to the quarter ended 31 March 2013 inclusive, at the times stated.

  (6 marks)

  (ii) Advise Jogger Ltd why it might be beneficial to use the VAT annual accounting scheme, and state the conditions that it will have to satisfy before being permitted to do so. (5 marks)

  (iii) Assuming Jogger Ltd joins the annual accounting scheme, state the dates by which the annual VAT return and payments on account for the year ended 31 March 2014 will be due. (2 marks)

  (Total: 30 marks)

40 Sofa Ltd

  (a) Sofa Ltd is a manufacturer of furniture. The company’s summarised statement of profit or loss for the year ended 31 March 2013 is as follows:

  Note £ £

  Gross profit 272,300

  Operating expenses Depreciation

  67,828 Professional fees 1 19,900 Repairs and renewals 2 22,800 Other expenses 3 383,272

  • –––––––– (493,800)
    • ––––––––– Operating loss

  (221,500) Profit from sale of non-current assets Disposal of shares 4 4,300 Income from investments Bank interest 5 8,400

  • ––––––––– (208,800)

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Section 1: Practice questions

  Note £ £

  Interest payable 6 (31,200)

  • ––––––––– Loss before taxation

  (240,000)

  • ––––––––– Note 1 – Professional fees

  Professional fees are as follows:

  £

  Accountancy and audit fee 3,400

  Legal fees in connection with the issue of 7,800 share capital Legal fees in connection with the renewal of a 2,900 ten year property lease Legal fees in connection with the issue of 5,800 debentures (see note 6)

  • ––––––– 19,900
  • ––––––– Note 2 – Repairs and renewals

  The figure of £22,800 for repairs and renewals includes £9,700 for constructing a new wall around the company’s premises and £3,900 for repairing the wall of an office building after it was damaged by a lorry. The remaining expenses are all fully allowable.

  Note 3 – Other expenses

  The figure of £383,272 for other expenses includes £1,360 for entertaining suppliers; £700 for entertaining employees; £370 for counselling services provided to an employee who was made redundant; and a fine of £420 for infringing health and safety regulations. The remaining expenses are all fully allowable.

   Note 4 – Profit on disposal of shares

  The profit on the disposal of shares of £4,300 is in respect of a shareholding that was sold on 29 October 2012.

  Note 5 – Bank interest received

  The bank interest was received on 31 March 2013. The bank deposits are held for non-trading purposes.

   Note 6 – Interest payable

  Sofa Ltd raised a debenture loan on 1 July 2012, and this was used for trading purposes. Interest of £20,800 was paid on 31 December 2012, and £10,400 was accrued at 31 March 2013.

  Note 7 – Plant and machinery

  On 1 April 2012 the tax written down value of plant and machinery in the main pool was £16,700. The following transactions took place during the year ended 31 March 2013:

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  49 Paper F6 (UK): Taxation FA2012 Cost/ (Proceeds) £

  12 May 2012 Purchased equipment 11,400

  31 May 2012 Purchased fixtures qualifying as plant 44,800

  8 June 2012 Purchased motor car (1) 22,200

  2 August 2012 Purchased motor car (2) 10,900

  8 January 2013 Sold a lorry (7,600)

  18 January 2013 Sold motor car (2) (8,800) Motor car (1) purchased on 8 June 2012 for £22,200 has a CO2 emission rate of 185 grams per kilometre.

  Motor car (2) purchased on 2 August 2012 for £10,900 has a CO2 emission rate of 155 grams per kilometre. The lorry sold on 8 January 2013 for £7,600 originally cost £24,400.

   Required:

  Calculate Sofa Ltd’s tax adjusted trading loss for the year ended 31 March (i) 2013.

  Notes: Your answer should commence with the loss before taxation figure of 1. £240,000 and should also list all of the items referred to in notes (1) to (6) indicating by the use of zero (0) any items that do not require adjustment.

  You should assume that the company claims the maximum available 2.

  (14 marks) capital allowances.

  Explain how Sofa Ltd could relieve its loss assuming it does not want to

  (ii)

  surrender it to another group member. Your answer should include the

  (5 marks) time limit for any claims.

  (b) Sofa Ltd has three subsidiary companies:

  Settee Ltd

  Sofa Ltd owns 100% of the ordinary share capital of Settee Ltd. For the year ended 30 June 2012 Settee Ltd had taxable total profits of £240,000, and for the year ended 30 June 2013 will have taxable total profits of £90,000.

  Couch Ltd

  Sofa Ltd owns 60% of the ordinary share capital of Couch Ltd. For the year ended 31 March 2013 Couch Ltd had taxable total profits of £64,000.

  Futon Ltd

  Sofa Ltd owns 80% of the ordinary share capital of Futon Ltd. Futon Ltd commenced trading on 1 January 2013, and for the three-month period ended 31 March 2013 had taxable total profits of £60,000.

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Section 1: Practice questions

   Required:

  Advise Sofa Ltd as to the maximum amount of group relief that can potentially be claimed by each of its three subsidiary companies in respect of its trading loss for the year ended 31 March 2013. For the purposes of answering this part of the question, you should assume that Sofa Ltd’s tax adjusted trading loss for the year ended 31 March 2013 is £200,000.

  (6 marks) (Total: 25 marks)

41 Spacious Ltd

  Spacious Ltd is a UK resident company that commenced trading on 1 July 2011 as a manufacturer of engineering equipment. The company’s summarised statement of profit or loss for the year ended 31 March 2013 is as follows:

  £ £

  Gross profit 113,640

  Operating expenses Impaired trade receivables (note 1) 12,460 Depreciation 54,690 Patent royalties (note 2) 6,800 Professional fees (note 3) 22,500 Repairs and renewals (note 4) 27,700 Other expenses (note 5) 149,490

  • –––––––– (273,640)
  • –––––––– Operating loss

  (160,000) Profit from sale of non-current assets Disposal of office building (note 6) 54,400 Income from investments Bank interest (note 7)

  7,000

  • –––––––– (98,600)

  Interest payable (note 8) (24,440)

  • –––––––– Loss before taxation

  (123,040)

  • –––––––– Note 1 – Impaired trade receivables

  Impaired trade receivables are as follows: £

  Trade debts written off 8,490

  Increase in allowance for trade receivables 3,970

  • –––––––– 12,460
  • –––––––– Note 2 – Patent royalties

  Patent royalties of £2,900 were paid on 30 September 2012, with a further £3,900 being paid on 31 March 2013. These relate to the year ended 31 March 2013.

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  51 Paper F6 (UK): Taxation FA2012 Note 3 – Professional fees

  Professional fees are as follows:

  £

  Accountancy and audit fee 3,600

  Legal fees in connection with the issue of share capital 8,800 Legal fees in connection with the issue of loan notes (see note 8) 6,900 Legal fees in connection with the defence of the company’s internet domain name

  2,300 Legal fees in connection with a court action for not complying with health and safety legislation

  900

  • –––––– 22,500
  • –––––– Note 4 – Repairs and renewals

  The figure of £27,700 for repairs includes £9,700 for constructing a new wall around the company’s premises and £5,400 for replacing the roof of a warehouse because it was in a bad state of repair.

  Note 5 – Other expenses

  Other expenses include £1,800 for entertaining customers, £600 for entertaining employees and a donation of £1,000 made to a national charity.

  Note 6 – Disposal of office building

  The profit of £54,400 is in respect of a freehold office building that was sold on 30 June 2012 for £380,000. The indexed cost of the building on 30 June 2012 was £345,400. The building has always been used by Spacious Ltd for trading purposes. The company has claimed to roll over the gain arising on the office building against the cost of a new factory that was purchased on 1 July 2012 for £360,000. The new factory is used 100% for trading purposes by Spacious Ltd.

  Note 7 – Bank interest received

  The bank interest was received on 31 March 2013. The bank deposits are held for non- trading purposes.

  Note 8 – Interest payable

  Spacious Ltd issued a loan note on 1 October 2012. This loan was used for trading purposes. Interest of £23,000 in respect of the first six months of the loan was paid on

  31 March 2013.

  Note 9 – Long-life asset

  On 1 September 2012 Spacious Ltd installed a new overhead crane costing £110,000 in the new factory. The crane is a long-life asset.

  Note 10 – Plant and machinery

  On 1 April 2012 the tax written down value of plant and machinery in the main pool was £28,400.

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Section 1: Practice questions

  The following transactions took place during the year ended 31 March 2013:

   Cost/(Proceeds) £

  10 April 2012 Purchased equipment 28,000

  17 May 2012 Purchased a computer 3,100

  18 May 2012 Purchased computer software 800

  5 February 2013 Purchased a motor car 15,600 (CO

  2 emissions 173 g/km)

  20 March 2013 Sold a lorry (17,600)

  31 March 2013 Purchased a motor car 9,400 (CO

  2 emissions 134 g/km)

  The lorry sold on 20 March 2013 for £17,600 originally cost £18,200. The motor car purchased on 31 March 2013 for £9,400 is used by the sales manager, and 20% of the mileage is for private journeys.

  Note 11 – Other information Spacious Ltd has no associated companies.

  The company’s results for the nine-month period ended 31 March 2012 were as follows:

  £

  Trading profit 183,200

  Interest 5,200 Capital loss

  (4,900) Qualifying charitable donation (800)

  Spacious Ltd’s taxable total profits for the year ended 31 March 2014 are expected to be £475,000, of which £450,000 represents trading profit.

  Required:

  (a) Calculate Spacious Ltd’s trading loss for the year ended 31 March 2013. Your answer should commence with the loss before taxation figure of £123,040 and should indicate by the use of zero (0) any items that do not require adjustment. You should assume that the company claims the maximum available capital

  (15 marks) allowances.

  (b) Assuming that Spacious Ltd claims relief for its trading loss against total profits under s37 CTA 2010, calculate the company’s taxable total profits for the nine- month period ended 31 March 2012 and the year ended 31 March 2013. (7 marks)

  (c) Explain why it would probably have been beneficial for Spacious Ltd to have carried its trading loss forward under s45 CTA 2010, rather than making the

  (3 marks) claim against total profits under s37 CTA 2010. (Total: 25 marks)

  Chargeable gains

42 Problematic Ltd

  Problematic Ltd sold the following assets during the year ended 31 March 2013: (1) On 14 June 2012 16,000 £1 ordinary shares in Easy plc were sold for £54,400.

  Problematic Ltd had originally purchased 15,000 shares in Easy plc on 26 June

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  53 Paper F6 (UK): Taxation FA2012

  1994 for £12,600. On 28 September 2006 Easy plc made a 1 for 3 rights issue. Problematic Ltd took up its allocation under the rights issue in full, paying £2·20 for each new share issued. The relevant retail prices indexes (RPIs) are as follows:

  June 1994 144·7 September 2006 200·1 June 2012 241·8 (2) On 1 October 2012 an office building owned by Problematic Ltd was damaged by a fire. The indexed cost of the office building on that date was £169,000. The company received insurance proceeds of £36,000 on 10 October 2012, and spent a total of £41,000 during October 2012 on restoring the office building. Problematic Ltd has made a claim to defer the gain arising from the receipt of the insurance proceeds. The office building has never been used for business purposes.

  (3) On 28 January 2013 a freehold factory was sold for £171,000. The indexed cost of the factory on that date was £127,000. Problematic Ltd has made a claim to holdover the gain on the factory against the cost of a replacement leasehold factory under the rollover relief (replacement of business assets) rules. The leasehold factory has a lease period of 20 years, and was purchased on 10 December 2012 for £154,800. The two factory buildings have always been used entirely for business purposes.

  Problematic Ltd’s only other income for the year ended 31 March 2013 is a tax adjusted trading profit of £106,878.

  Required:

  (a) Calculate Problematic Ltd’s taxable total profits for the year ended 31 March 2013.

  (12 marks)

  (b) Advise Problematic Ltd of the carried forward indexed base costs for capital gains purposes of any assets included in (1) to (3) above that are still retained at 31 March 2013. (3 marks)

  (Total: 15 marks)

43 Astute Ltd

  Astute Ltd sold a factory on 15 February 2013 for £320,000. The factory was purchased on 24 October 2008 for £164,000, and was extended at a cost of £37,000 during March 2009. During May 2010 the roof of the factory was replaced at a cost of £24,000 following a fire. Astute Ltd incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £6,200 in connection with the disposal. Indexation factors are as follows:

  October 2008 to February 2013 0.165 March 2009 to February 2013 0.129 May 2010 to February 2013 0.089

  Astute Ltd is considering the following alternative ways of reinvesting the proceeds from the sale of its factory: (1) A freehold warehouse can be purchased for £340,000. (2) A freehold office building can be purchased for £275,000.

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Section 1: Practice questions

  (3) A leasehold factory on a 40-year lease can be acquired for a premium of £350,000. The reinvestment will take place during May 2013. All of the above buildings have been, or will be, used for business purposes.

  Required: (a) State the conditions that must be met in order that rollover relief can be claimed.

  You are not expected to list the categories of asset that qualify for rollover relief.

  (3 marks)

  (b) Before taking account of any available rollover relief, calculate Astute Ltd’s

  (5 marks) chargeable gain in respect of the disposal of the factory.

  (c) Advise Astute Ltd of the rollover relief that will be available in respect of each of the three alternative reinvestments. Your answer should include details of the base cost of the replacement asset for each alternative. (7 marks)

  (Total: 15 marks)

44 Hawk Ltd

  Hawk Ltd sold the following assets during the year ended 31 March 2013: (1) On 30 April 2012 a freehold office building was sold for £293,998. The office building had been purchased on 2 July 1990 for £81,000, and had been extended at a cost of £43,000 during May 2002. Hawk Ltd incurred legal fees of £3,200 in connection with the purchase of the office building, and legal fees of £3,840 in connection with the disposal. The office building has always been used by Hawk Ltd for business purposes.

  (2) On 29 August 2012 5,000 £1 ordinary shares in Albatross plc were sold for £42,500. Hawk Ltd had purchased 6,000 shares in Albatross plc on 1 August 2012 for £18,600, and purchased a further 2,000 shares on 17 August 2012 for £9,400.

  (3) On 27 October 2012 10,000 £1 preference shares in Cuckoo plc were sold for £32,000. Hawk Ltd had originally purchased 5,000 £1 ordinary shares in Cuckoo plc on 2 October 2012 for £60,000. On 18 October 2012 Cuckoo plc had a reorganisation whereby each £1 ordinary share was exchanged for three new £1 ordinary shares and two £1 preference shares. Immediately after the reorganisation each new £1 ordinary share was quoted at £4·50 and each £1 preference share was quoted at £2·25.

  (4) On 28 March 2013 two acres of land were sold for £120,000. Hawk Ltd had originally purchased three acres of land on 1 March 2013 for £203,500. The market value of the unsold acre of land as at 28 March 2013 was £65,000. The land has never been used by Hawk Ltd for business purposes.

  Hawk Ltd’s only other income for the year ended 31 March 2013 was a trading profit of £125,000.

  Hawk Ltd does not have any associated companies.

  Required:   Calculate Hawk Ltd’s corporation tax liability for the year ended 31 March 2013.

  (15 marks) © Emile Woolf Publishing Limited

  55 Paper F6 (UK): Taxation FA2012

  45 Earth Ltd

  Earth Ltd sold the following shareholdings during the year ended 31 March 2013: (a) On 20 November 2012 Earth Ltd sold 25,000 £1 ordinary shares in Venus plc for

  £115,000. Earth Ltd had originally purchased 40,000 shares in Venus plc on 19 June 1986 for £34,000. On 11 October 2002 Venus plc made a 1 for 4 bonus issue. (b) On 22 January 2013 Earth Ltd sold 30,000 £1 ordinary shares in Saturn plc for

  £52,500. Earth Ltd purchased 30,000 shares in Saturn plc on 9 February 2003 for £97,500. The indexed value of the pool on 3 January 2013 was £117,390. On 3 January 2013 Saturn plc made a 1 for 2 rights issue. Earth Ltd took up its allocation under the rights issue in full, paying £1.50 for each new share issued.

  (c) On 30 March 2013 Earth Ltd sold 5,000 £1 ordinary shares in Neptune plc for £62,500. Earth Ltd had originally purchased 9,000 shares in Neptune plc on 20 April 1990 for £18,000, and purchased a further 500 shares on 30 March 2013 for £6,500.

  Earth Ltd has always held less than 1% of the issued shares in the above companies.

  Required:

  Calculate the chargeable gain or capital loss arising from each of Earth Ltd’s disposals during the year ended 31 March 2013. Each of the three sections of this question carries equal marks (five marks each).

  (Total: 15 marks) Groups of companies

  46 Red and White (a) Red plc owns 100% of the ordinary share capital of Scarlet Ltd and Crimson Ltd.

  The results of each company for the year ended 31 March 2013 are as follows:

  Red plc Scarlet Ltd Crimson Ltd £ £ £

  Tax adjusted trading profit/(loss) 900,000 210,000 (140,000) Property income 10,000 30,000 –

  As at 31 March 2012, Scarlet Ltd and Crimson Ltd had unused trading losses of £15,000 and £20,000 respectively. Red plc has no other associated companies.

   Required:

  Assuming that reliefs are claimed in the most favourable manner, calculate the corporation tax liabilities of Red plc, Scarlet Ltd and Crimson Ltd for the year

  (7 marks) ended 31 March 2013.

  (b) White plc owns 100% of the ordinary share capital of Cream Ltd. For the year ended 31 March 2013, White plc pays corporation tax at the rate of 24% and Cream Ltd pays corporation tax at the rate of 20%. On 15 August 2012 White plc sold an office building, and this resulted in a capital gain of £110,000. On 20 February 2013 Cream Ltd sold a factory, and this resulted in a capital loss of £35,000. As at 31 March 2012 Cream Ltd has unused capital losses of £40,000.

  © Emile Woolf Publishing Limited 56  

Section 1: Practice questions

47 Animal Ltd

  Animal Ltd owned 100% of each subsidiary company’s ordinary share capital throughout the year ended 31 March 2013 with the following exceptions: (1) Animal Ltd only owned 90% of Bat Ltd’s ordinary share capital. (2) Animal Ltd’s shareholding in Cat Ltd was disposed of on 31 December 2012. The trading profit of £85,000 is for the year ended 31 March 2013. (3) Animal Ltd’s shareholding in Dog Ltd was acquired on 1 January 2013. The trading profit of £100,000 is for the year ended 31 March 2013. Elk Ltd was a dormant company throughout the year ended 31 March 2013.

  (Total: 15 marks)

  Ltd, Dog Ltd and Fox Ltd for the year ended 31 March 2013. (9 marks)

  (b) Explain why there are six associated companies in the Animal Ltd group of companies. Your answer should identify the six associated companies. (3 marks) (c) Assuming that relief is claimed for Gnu Ltd’s trading loss of £200,000 in the most favourable manner, calculate the taxable total profits of Animal Ltd, Bat Ltd, Cat

  (3 marks)

  (a) Explain the group relationship that must exist in order that group relief can be claimed.

  Required:

  © Emile Woolf Publishing Limited

  57 Required:

  Animal Ltd 450,000 5,000 20,000 Bat Ltd 65,000 15,000 – Cat Ltd 85,000 – – Dog Ltd 100,000 – – Elk Ltd – – – Fox Ltd 60,000 – 5,000 Gnu Ltd (200,000) – –

  Tax adjusted trading profit/(loss) Property income Franked investment income £ £ £

  Animal Ltd is the holding company for a group of companies. The results of each group company for the year ended 31 March 2013 are as follows:

  (2 marks) (ii) Briefly explain the consequences of being in a VAT group. (3 marks) (Total: 15 marks)

  (i) Outline the conditions that must be satisfied in order for Green plc and Brown Ltd to form a VAT group.

   Required:

  (3 marks) (c) Green plc owns 60% of the ordinary share capital of Brown Ltd.

  State the time limit for White plc and Cream Ltd to make a joint election to transfer White plc’s capital gain to Cream Ltd, and explain why such an election will be beneficial.

    Paper F6 (UK): Taxation FA2012

48 Music plc

  Music plc is the holding company for a group of companies. The group structure is as follows:

  

Music plc

80% 100% 100% 45% 100%

  Alto Ltd Bass Ltd Cello Ltd Drum Ltd Echo Inc.

  75% Flute Ltd

  80% Gong Ltd

  Music plc’s shareholding in Bass Ltd was disposed of on 31 December 2012, and the shareholding in Cello Ltd was acquired on 1 January 2013. The other shareholdings were all held throughout the year ended 31 March 2013. Echo Inc. is resident overseas. The other companies are all resident in the United Kingdom.

  For the year ended 31 March 2013 Music plc had trading income of £92,000. During the year Music plc received franked investment income of £15,000 from an unconnected company, and also received a dividend of £5,400 from Bass Ltd. As at 31 March 2012 Music plc had unused capital losses of £32,000. On 5 January 2013 the company sold a freehold office building, and this resulted in a further capital loss of £65,000. Alto Ltd sold a freehold warehouse on 10 March 2013, and this resulted in a capital gain of £120,000. A joint election has been made to transfer this capital gain to Music plc.

  Required:

  (a) State, giving appropriate reasons, which companies in the Music plc group of

  (5 marks) companies form a group for capital gains purposes.

  (b) Explain why Music plc has six associated companies. Your answer should identify the six associated companies. (4 marks) (c) Calculate Music plc’s corporation tax liability for the year ended 31 March 2013.

  (6 marks) (Total: 15 marks) © Emile Woolf Publishing Limited

  58  

Section 1: Practice questions

  Overseas aspects of corporation tax

49 Wash plc

  Wash plc is a UK resident company that manufactures kitchen equipment. The company’s trading profit for the year ended 31 March 2013 is £1,600,000. Wash plc has a 100% owned subsidiary, Dry Inc., that is resident overseas. Dry Inc. sells kitchen equipment that has been manufactured by Wash plc. The results of Dry Inc. for the year ended 31 March 2013 are as follows:

  £ £

  Trading profit 580,000

  Corporation tax (160,000)

  • –––––––– 420,000

  Dividend paid – Net 270,000 Dividend paid – Withholding tax 30,000

  • –––––––– (300,000)
  • –––––––– Retained profits

  120,000

  • –––––––– Dry Inc.’s dividend was paid during the year ended 31 March 2013. All of the above figures are in pounds Sterling. Wash plc also owns 5% of the ordinary share capital of Iron Ltd. Iron Ltd is incorporated overseas and its directors hold their board meetings overseas. Wash plc received a net dividend of £9,000 from Iron Ltd during the year ended 31 March 2013. This dividend was received net of withholding tax at the rate of 15%.

  Required:

  (a) Explain why Iron Ltd is treated as being resident overseas, and state what difference it would make if the directors held their board meetings in the UK.

  (3 marks) (b) Calculate Wash plc’s corporation tax liability for the year ended 31 March 2013.

  Your answer should clearly explain your treatment of the dividends received

  (4 marks) from Dry Inc. and Iron Ltd.

  (c) Show how your answer to part (c) above would have differed if the payment from Dry Inc. had been interest rather than a dividend. (3 marks) (d) Briefly explain the VAT implications for Wash plc of:

  (i) importing goods into the UK; (ii) exporting goods outside of the UK.

  (5 marks) Your answer should cover trading both within and outside the EU. (Total: 15 marks)

  © Emile Woolf Publishing Limited

  59 The operating profit does not include the results from either of Neung Ltd’s two overseas branches (see note (2) below).

  415,900

  (c) Calculate Sirius Ltd’s UK corporation tax liability for the year ended 31 March 2013 if the overseas operation is set up as: (i) a branch, without making the election to exempt the profits;

  Operating profit 1 & 2 324,100 Income from investments Loan interest 3 37,800 Dividends 4 54,000

   Note £

  (a) Neung Ltd is a UK resident company that runs a business providing financial services. The company’s business is mainly based in the UK, but Neung Ltd also has two overseas branches. The company’s summarised statement of profit or loss for the year ended 31 March 2013 is as follows:

  51 Neung Ltd

  (Total: 15 marks)

  (ii) a branch, with the election to exempt the profits; (2 marks) (iii) a 100% subsidiary company. (2 marks)

  (4 marks)

  (1 mark)

  (6 marks) (b) Explain what is meant by the term ‘withholding tax’.

  (a) Explain the taxation factors that should be considered when deciding whether to operate overseas through a branch or a 100% subsidiary. You are not expected to discuss double taxation relief.

  Required:

  The company’s UK tax adjusted trading profit for the year ended 31 March 2013 is expected to be £850,000. The company is planning to set up an overseas operation, but is unsure whether to operate overseas through a branch or a 100% subsidiary. A subsidiary would be resident overseas. Regardless of the type of business structure chosen, the overseas operation is expected to make a tax adjusted trading profit of £200,000 for the year ended 31 March 2013. The overseas corporation tax on these profits will be £40,000. If the overseas operation is set up as a branch then profits of £80,000 will be remitted to the UK during the year ended 31 March 2013. These remittances will not be subject to any withholding tax. If the overseas operation is set up as a 100% subsidiary then gross dividends of £80,000 will be paid to Sirius Ltd during the year ended 31 March 2013. These dividends will be subject to withholding tax at the rate of 15% in the overseas country. All of the above figures are in pounds Sterling.

  50 Sirius Ltd Sirius Ltd is a UK resident company which currently has no associated companies.

  • –––––––– Note 1 – Operating profit

  © Emile Woolf Publishing Limited

  Paper F6 (UK): Taxation FA2012 60  

  • –––––––– Profit before taxation

Section 1: Practice questions

  Depreciation of £11,830 and amortisation of leasehold property of £7,000 have been deducted in arriving at the operating profit of £324,100.

  Note 2 – Overseas branches

  Neung Ltd’s first overseas branch made a trading profit of £41,000 for the year ended 31 March 2013. No overseas corporation tax was paid on this profit. The second overseas branch made a trading loss of £15,700 for the year ended 31 March 2013.

  Note 3 – Loan interest receivable

  The loan was made for non-trading purposes on 1 July 2012. Loan interest of £25,200 was received on 31 December 2012, and interest of £12,600 was accrued at 31 March 2013.

  Note 4 – Dividends received

  Neung Ltd holds shares in four UK resident companies as follows:

  Percentage Shareholding Status

  Second Ltd 25% Trading Third Ltd 60% Trading Fourth Ltd 100% Dormant Fifth Ltd 100% Trading During the year ended 31 March 2013 Neung Ltd received a dividend of £37,800 from Second Ltd, and a dividend of £16,200 from Third Ltd. These figures were the actual cash amounts received.

  Additional information Leasehold property

  On 1 April 2012 Neung Ltd acquired a leasehold office building, paying a premium of £140,000 for the grant of a 20-year lease. The office building was used for business purposes by Neung Ltd throughout the year ended 31 March 2013.

  Plant and machinery

  On 1 April 2012 the tax written down values of Neung Ltd’s plant and machinery were as follows:

   £

  Main pool 4,800

  Special rate pool 12,700 The company purchased the following assets during the year ended 31 March 2013:

  £

  19 July 2012 Motor car [1] 15,400

  12 December 2012 Motor car [2] 28,600

  20 December 2012 Ventilation system 62,000 Motor car [1] purchased on 19 July 2012 has a CO2 emission rate of 242 grams per kilometre. Motor car [2] purchased on 12 December 2012 has a CO2 emission rate of 148 grams per kilometre.

  © Emile Woolf Publishing Limited

  61 Paper F6 (UK): Taxation FA2012

  The ventilation system purchased on 20 December 2012 for £62,000 is integral to the freehold office building in which it was installed.

  Required:

  (i) State, giving reasons, which companies will be treated as being associated with Neung Ltd for corporation tax purposes; (2 marks) (ii) Calculate Neung Ltd’s corporation tax liability for the year ended 31 March 2013 assuming no election has been made in respect of the overseas branches. Note: you should assume that the whole of the annual investment allowance is available to Neung Ltd, and that the company wishes to maximise its capital allowances claim. (15 marks)

  (iii) Advise Neung Ltd of the implications of making an election to exempt the profits of the overseas branches from UK corporation tax. (3 marks) (iv) Advise Neung Ltd of the taxation disadvantages of converting its two overseas branches (see note (2)) into 100% overseas subsidiary companies.

  (3 marks)

  (b) Note that in answering this part of the question you are not expected to take account of any of the information provided in part (a) above.

  The following information is available in respect of Neung Ltd’s value added tax (VAT) for the quarter ended 31 March 2013: (1) Invoices were issued for sales of £44,600 to VAT registered customers. Of this figure, £35,200 was in respect of exempt sales and the balance in respect of standard rated sales. The standard rated sales figure is exclusive of VAT.

  (2) In addition to the above, on 1 March 2013 Neung Ltd issued a VAT invoice for £8,000 plus VAT of £1,400 to a VAT registered customer. This was in respect of a contract for standard rated financial services that will be completed on 15 April 2013. The customer paid for the contracted services in two instalments of £4,700 on 31 March 2013 and 30 April 2013 respectively.

  (3) Invoices were issued for sales of £284,300 to non-VAT registered customers.

  Of this figure, £242,300 was in respect of exempt sales and the balance in respect of standard rated sales. The standard rated sales figure is inclusive of VAT. (4) The managing director of Neung Ltd is provided with free fuel for private mileage driven in her company motor car. During the quarter ended 31

  March 2013 this fuel cost Neung Ltd £260. The relevant quarterly scale charge is £378. Both these figures are inclusive of VAT. For the quarters ended 30 September 2011 and 30 June 2012 Neung Ltd was one month late in submitting its VAT returns and in paying the related VAT liabilities. All of the company’s other VAT returns have been submitted on time.

  Required:

  (i) Calculate the amount of output VAT payable by Neung Ltd for the quarter

  (4 marks)

  ended 31 March 2013;

  © Emile Woolf Publishing Limited 62  

Section 1: Practice questions

  (ii) Advise Neung Ltd of the default surcharge implications if it is one month late in submitting its VAT return for the quarter ended 31 March 2013 and

  (3 marks)

  in paying the related VAT liability;

  (Total: 30 marks ) Value Added Tax

52 Anne Attire

  Anne Attire runs a retail clothing shop. She is registered for value added tax (VAT), and is in the process of completing her VAT return for the quarter ended 30 November 2012. The following information is available (all figures are exclusive of VAT): (1) Cash sales amounted to £42,000, of which £28,000 was in respect of standard rated sales and £14,000 was in respect of zero-rated sales.

  (2) Sales invoices totalling £12,000 were issued in respect of credit sales. These sales were all standard rated. Anne offers all of her credit sale customers a 5% discount for payment within one month of the date of the sales invoice, and 90% of the customers pay within this period. The sales figure of £12,000 is stated before any deduction for the 5% discount. (3) Purchase and expense invoices totalling £19,200 were received from VAT registered suppliers. This figure is made up as follows:

  £

  Standard rated purchases and expenses 11,200 Zero rated purchases 6,000 Exempt expenses 2,000

  • ––––––– 19,200
  • ––––––– Anne pays all of her purchase and expense invoices two months after receiving the invoice.

  (4) On 30 November 2012 Anne wrote off two impairment losses (bad debts) that were in respect of standard rated credit sales. The first impairment loss was for £300, and was in respect of a sales invoice due for payment on 15 July 2012. The second impairment loss was for £800, and was in respect of a sales invoice due for payment on 10 April 2012. Anne does not use the cash accounting scheme. Anne will soon be 60 years old and is therefore considering retirement. On the cessation of trading Anne can either sell the non-current assets of her business on a piecemeal basis to individual VAT registered purchasers, or she can sell the entire business as a going concern to a single VAT registered purchaser.

  Required:

  (a) Calculate the amount of VAT payable by Anne Attire for the quarter ended 30 November 2012, and state the date by which the VAT return for this period was

  (6 marks) due for submission.

  © Emile Woolf Publishing Limited

  63 Paper F6 (UK): Taxation FA2012 64  

  © Emile Woolf Publishing Limited

  Required:

  54 Astute, Bright and Clever

  (5 marks) (Total: 15 marks)

  (d) Calculate the reduction in Victor’s net profit for the year ended 31 December 2013 as a consequence of the price increase and subsequent VAT registration.

  (3 marks)

  (c) Advise Victor why it would have been beneficial to have used the VAT flat rate scheme from 1 January 2013. Your answer should include a calculation of the amount of VAT that Victor would have saved for the year ended 31 December 2013 by joining the scheme. The flat rate scheme percentage for hairdressing is 13%.

  (b) Calculate the total amount of VAT payable by Victor during the year ended 31 December 2013. You should ignore pre-registration input VAT. (3 marks)

  (a) Explain why Victor was required to compulsorily register for VAT from 1 January 2013, and state what action he then had to take as regards notifying HM Revenue and Customs of the registration. (4 marks)

  VAT. Victor’s standard rated expenses are £400 per month. Where applicable, the above figures are inclusive of VAT.

  (b) State the conditions that Anne Attire must satisfy before she will be permitted to use the cash accounting scheme, and advise her of the implications of using the scheme.

  Victor Style has been a self-employed hairdresser since 1 January 2009. His sales from the date of commencement of the business to 30 September 2012 were £6,400 per month. On 1 October 2012 Victor increased the prices that he charged customers, and from that date his sales have been £6,800 per month. Victor’s sales are all standard rated. As a result of the price increase, Victor was required to register for value added tax (VAT) from 1 January 2013. Because all of his customers are members of the general public, it was not possible to increase prices any further as a result of registering for

  53 Victor Style

  (2 marks) (Total: 15 marks)

  (ii) Sells her entire business as a going concern to a single VAT registered purchaser.

  (2 marks)

  (c) Advise Anne Attire as to what will happen to her VAT registration, and whether output VAT will be due in respect of the fixed assets, if she ceases trading and then: (i) Sells her fixed assets on a piecemeal basis to individual VAT registered purchasers;

  (5 marks)

  (a) Astute Ltd registered for VAT on 1 July 2012. The company has annual standard rated sales of £350,000. This figure is inclusive of VAT. Because of bookkeeping problems Astute Ltd has been late in submitting its VAT returns to date.

Section 1: Practice questions

  Required:

  Advise Astute Ltd of the conditions that it must satisfy before being permitted to use the VAT annual accounting scheme, and the advantages of joining the scheme.

  (5 marks)

  (b) Bright Ltd registered for VAT on 1 March 2013. The company has annual standard rated sales of £100,000, and these are all made to the general public.

  The company has annual standard rated expenses of £10,000. Both figures are inclusive of VAT. The relevant flat rate scheme percentage for the company’s trade is 12%.

   Required:

  Advise Bright Ltd of the conditions that it must satisfy before being permitted to use the VAT flat rate scheme, and the advantages of joining the scheme. Your answer should be supported by appropriate calculations of the potential annual

  (5 marks) tax saving.

  (c) Clever Ltd registered for VAT on 1 June 2012. The company has annual standard rated sales of £250,000. This figure is inclusive of VAT. The company pays its expenses on a cash basis, but allows customers three months credit when paying for sales. Several of Clever Ltd’s customers have recently defaulted on the payment of their debts.

   Required:

  Advise Clever Ltd of the conditions that it must satisfy before being permitted to use the VAT cash accounting scheme, and the advantages of joining the scheme.

  (5 marks) (Total: 15 marks)

55 Ram-Rom Ltd

  Ram-Rom Ltd commenced trading as a manufacturer of computer equipment on 1 February 2012. The company registered for value added tax (VAT) on 1 October 2012. Its inputs for each of the months from February 2012 to September 2012 are as follows:

  Goods Services Non-current purchased incurred assets £ £ £ 2012 February 12,300 1,400 42,000

  March 11,200 5,100 – April 12,300 7,400 – May 16,400 6,300 14,400 June 14,500 8,500 – July 18,800 9,000 – August 18,500 9,200 – September 23,400 8,200 66,600

  During September 2012 Ram-Rom Ltd sold all of the non-current assets purchased during May 2012 for £12,000. On 1 October 2012 £92,000 of the goods purchased were still in stock.

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  65 Paper F6 (UK): Taxation FA2012

  The above figures are all exclusive of VAT. Ram-Rom Ltd’s sales are all standard rated. The following is a sample of the new sales invoice that Ram-Rom Ltd is going to issue to its customers:

SALES INVOICE

  Ram-Rom Ltd Customer:

  XYZ Computers plc 123 The High Street Address:

  99 The Low Road London WC1 2AB Glasgow G1 2CD Telephone 0207 100 1234 Invoice Date and Tax Point: 1 October 2012 Item Description Quantity Price

  £ Hard Drives 5 220.00 Motherboards 2 100.00 Total Amount Payable (Including VAT) 320.00

  Directors: Y Ram & Z Rom Company Number: 1234567

  Registered Office: 123 The High Street, London WC1 2AB Ram-Rom Ltd pays for all of its inputs one month after receiving the purchase invoice. However, many customers are not paying Ram-Rom Ltd until four months after the date of the sales invoice. In addition, several customers have recently defaulted on the payment of their debts. In order to encourage more prompt payment, Ram-Rom Ltd is considering offering all of its customers a 5% discount if they pay within one month of the date of the sales invoice. No discount is currently offered.

  Required:

  (a) Explain why Ram-Rom Ltd was able to recover input VAT totalling £49,840 in respect of inputs incurred prior to registering for VAT on 1 October 2012.(5 marks) (b) State what alterations Ram-Rom Ltd will have to make to its new sales invoices

  (3 marks) in order for them to be valid for VAT purposes.

  (c) Explain the VAT implications of Ram-Rom Ltd offering all of its customers a 5% discount for prompt payment. (2 marks) (d) Advise Ram-Rom Ltd of the conditions that it must satisfy before being permitted to use the VAT cash accounting scheme, and the advantages of joining the scheme.

  (5 marks) (Total: 15 marks)

56 Sandy Brick

  Sandy Brick has been a self-employed builder since 2004. He registered for value added tax (VAT) on 1 October 2012, and is in the process of completing his VAT return for the quarter ended 31 December 2012. The following information is relevant to the completion of this VAT return: (1) Sales invoices totalling £44,000 were issued to VAT registered customers in respect of standard rated sales. Sandy offers his VAT registered customers a 5% discount for prompt payment.

  © Emile Woolf Publishing Limited 66  

Section 1: Practice questions

  (3 marks)

  (b) State the circumstances in which Sandy is required to issue a VAT invoice, and the period during which such an invoice should be issued. (2 marks) (c) Calculate the amount of VAT payable by Sandy for the quarter ended 31 December 2012.

  (10 marks) (Total: 15 marks) Self Assessment

  (2) Sales invoices totalling £16,870 were issued to customers that were not registered for VAT. Of this figure, £5,170 was in respect of zero-rated sales with the balance being in respect of standard rated sales. These standard rated sales are inclusive of VAT.

  (3) On 10 October 2012 Sandy received a payment on account of £4,800 in respect of a contract that was completed on 28 January 2013. The total value of the contract is £10,000. Both of these figures are inclusive of VAT at the standard rate. (4) Standard rated materials amounted to £11,200, of which £800 were used in constructing Sandy’s private residence.

  (5) Since 1 October 2011 Sandy has paid £120 per month for the lease of office equipment. This expense is standard rated. (6) During the quarter ended 31 December 2012 £400 was spent on mobile telephone calls, of which 30% relates to private calls. This expense is standard rated. (7) On 20 November 2012 £920 was spent on repairs to a motor car. The motor car is used by Sandy in his business, although 20% of the mileage is for private journeys. This expense is standard rated. (8) On 15 December 2012, equipment was purchased for £6,000. The purchase was partly financed by a bank loan of £5,000. This purchase is standard rated. Unless stated otherwise all of the above figures are exclusive of VAT.

  Required:

  (a) State the VAT rules that determine the tax point in respect of a supply of services.

57 Vera Old

  • –––––––– –––––––– 9,090 5,360 Capital gains tax liability 1,820 700
  • –––––––– –––––––– 10,910 6,060
  • –––––––– ––––––––

  67

  Vera Old has been a self-employed antiques dealer since 2001. Her tax liabilities for 2011–12 and 2012–13 are as follows:

   2011–12 2012–13 £ £

  Income tax liability 8,240 4,770

  Tax suffered at source (810) (640)

  • –––––––– –––––––– Income tax payable

  7,430 4,130 Class 4 national insurance contributions 1,660 1,230

  © Emile Woolf Publishing Limited

  Paper F6 (UK): Taxation FA2012 68  

  Pi Casso has been a self-employed artist since 1990, making up her accounts to 30 June. Pi’s tax liabilities for the tax years 2010–11, 2011–12 and 2012–13 are as follows:

  (c) Advise Pi of the latest date by which her self-assessment tax return for the tax year 2012–13 should be submitted if she wants HM Revenue and Customs (HMRC) to prepare the self-assessment tax computation on her behalf. (3 marks)

  (2 marks)

  (b) State the implications if Pi had made a claim to reduce her payments on account for the tax year 2012–13 to nil.

  (7 marks)

  31 March 2014, assuming that Pi makes any appropriate claims to reduce her payments on account. Note: your answer should clearly identify the relevant due date of each payment.

  (a) Prepare a schedule showing the payments on account and balancing payments that Pi will have made or will have to make during the period from 1 July 2012 to

  Required:

  Income tax liability 3,240 4,100 2,730 Class 2 national insurance contributions 125 130 138 Class 4 national insurance contributions 1,240 1,480 990 Capital gains tax liability – 4,880 – No income tax has been deducted at source.

  2010–11 2011–12 2012–13 £ £ £

  (3 marks) (Total: 15 marks)

  © Emile Woolf Publishing Limited Required:

  (ii) State the circumstances in which HM Revenue and Customs would be entitled to raise a discovery assessment in respect of Vera’s self-assessment tax return for 2012–13, and the time limit for making such an assessment.

  (d) (i) Assuming that her self-assessment tax return for 2012–13 is submitted on time, state the date by which HM Revenue and Customs will have to notify Vera if they intend to make a compliance check into the return, and the possible reasons why such a compliance check would be made.(2 marks)

  (3 marks)

  (c) Advise Vera of the latest date by which her self-assessment tax return for 2012– 13 should be submitted, and the implications if it is submitted four months late.

  (2 marks)

  (ii) State the implications if Vera were to instead make a claim to reduce her payments on account for 2012–13 to nil.

  (2 marks)

  (b) (i) Advise Vera of the claim that she should make to reduce her payments on account for 2012–13.

  (3 marks)

  (a) Assuming that Vera does not make a claim to reduce the payments on account, prepare a schedule of her payments on account and balancing payment or repayment for 2012–13. Your answer should show the relevant due dates of each payment/repayment.

58 Pi Casso

Section 1: Practice questions

  (d) State the date by which HMRC will have to notify Pi if they intend to make a compliance check into her self-assessment tax return for the tax year 2012–13 and

  (3 marks) the possible reasons why such an enquiry would be made. (15 marks)

  59 Ernest Vader You should assume that today’s date is 30 June 2014.

  You are a trainee Chartered Certified Accountant and are dealing with the tax affairs of Ernest Vader. Ernest’s self-assessment tax return for the tax year 2012–13 was submitted to HM Revenue & Customs (HMRC) on 15 May 2013, and Ernest paid the resulting income tax liability by the due date of 31 January 2014. However, you have just discovered that during the tax year 2012–13 Ernest disposed of a freehold property, the details of which were omitted from his self-assessment tax return. The capital gains tax liability in respect of this disposal is £18,000, and this amount has not been paid. Ernest has suggested that since HMRC’s right to commence a compliance check into his self-assessment tax return for the tax year 2012–13 expired on 15 May 2014, no disclosure should be made to HMRC of the capital gain.

  Required:

  (a) Briefly explain the difference between tax evasion and tax avoidance, and how HMRC would view the situation if Ernest Vader does not disclose his capital gain.

  (3 marks)

  (b) Briefly explain from an ethical viewpoint how you, as a trainee Chartered Certified Accountant, should deal with the suggestion from Ernest Vader that no disclosure is made to HMRC of his capital gain. (3 marks)

  (c) State the action HMRC will take should they wish to obtain information from Ernest Vader regarding his capital gain. (1 mark)

  (d) Explain why, even though the right to make a compliance check has expired, HMRC will still be entitled to raise an assessment should they discover that Ernest Vader has not disclosed his capital gain. (2 marks)

  (e) Assuming that HMRC discover the capital gain and raise an assessment in respect of Ernest Vader’s capital gains tax liability of £18,000 for the tax year 2012–13, and that this amount is then paid on 31 July 2014: (i) Calculate the amount of interest that will be payable;

  Note: you should assume that the rates for the tax year 2012–13 continue to apply.

  (2 marks)

  (ii) Advise Ernest Vader as to the amount of penalty that is likely to be charged as a result of the failure to notify HMRC, and how this could have been reduced if the capital gain had been disclosed. (4 marks)

  (Total: 15 marks)

  60 Quagmire plc

  For the year ended 31 January 2013 Quagmire plc had taxable total profits of £1,200,000 and franked investment income of £200,000. For the year ended 31 January 2012 the

  © Emile Woolf Publishing Limited

  69 Paper F6 (UK): Taxation FA2012

  company had taxable total profits of £1,600,000 and franked investment income of £120,000. Quagmire plc’s profits accrue evenly throughout the year. Quagmire plc has one associated company.

  Required:

  (a) Explain why Quagmire plc will have been required to make quarterly instalment payments in respect of its corporation tax liability for the year ended 31 January 2013.

  (3 marks)

  (b) Calculate Quagmire plc’s corporation tax liability for the year ended 31 January 2013, and explain how and when this will have been paid. (4 marks)

  (c) Explain how your answer to part (b) above would differ if Quagmire plc did not have an associated company.

  Your answer should include a calculation of the revised corporation tax liability

  (6 marks) for the year ended 31 January 2013.

  (d) Briefly state what records Quagmire plc is required to keep to support its tax

  (2 marks) return. (Total: 15 marks)

  © Emile Woolf Publishing Limited 70  

  Paper F6 (UK)

  Taxation FA 2012

SECTION 2 & Q A Answers to practice questions Income tax

1 Edmond Brick

  (a) (1) Capital allowances are available on plant and machinery instead of the 10% wear and tear allowance.

  (2) The income qualifies as relevant earnings for pension tax relief purposes.

  Tutorial note

  The property also qualifies as a business asset for certain capital gains tax reliefs, however, the question is confined to income tax. (b) Edmond Brick – Furnished holiday letting loss 2012–13

   £ £

  Rent receivable (370 x 18) 6,660

  Repairs 7,400

  Other expenses: 2,710 Capital allowances (5,700 x 100%) 5,700

  • –––––– (15,810)
    • ––––––– Furnished holiday letting loss (9,150)
    • ––––––– (c) Losses on furnished holiday lettings can only be carried forward and set against income from the same FHL business.

  (d) Edmond Brick – Property business profit 2012–13

   £ £

  Premium received for sub-lease 15,000 Less: 15,000 x 2% x (5 – 1)

  (1,200)

  • ––––––– 13,800
Paper F6 (UK): Taxation FA2012 £ £

  Rent receivable – Property 2 (575 x 12) 6,900

  • – Property 3 (710 x 7)

  4,970

  • – Property 4

  4,600 Furnished room

  790

  • ––––––– 31,060

  Council tax 1,200

  Wear and tear allowance 570 Impairment losses (710 x 3) 2,130 Advertising

  670 Loan interest

  6,700 Rent paid

  6,800 Insurance (340 + 290 + 360) 990

  • –––––– (19,060)
    • ––––––– Property business profit

  12,000

  • ––––––– (1) The wear and tear allowance for property two is £570 (6,900 – 1,200 = 5,700 x 10%) as the rent receivable is reduced by the council tax paid by Edmond.

  (2) Claiming rent-a-room relief in respect of the furnished room (5,040 – 4,250 = £790) is more beneficial than the normal basis of assessment (5,040 – 1,140 = £3,900).

2 Peter Chic

  (a) Peter Chic – Income tax computation 2012–13

   £ £

  Employment income Salary 95,600 Bonuses (14,300 + 13,600) 27,900

  • ––––––– 123,500

  Car benefit 7,175 Fuel benefit 7,070 Living accommodation – Annual value 9,100

  • – Additional benefit 3,920 Mobile telephone (250 x 20%)

  50 Health club membership 510

  • – Overseas allowance
    • ––––––– 27,825
    • ––––––– 151,325

  Property business profit 3,660 Building society interest (1,760 x 100/80) 2,200 Dividends (720 x 100/90) 800

  • ––––––– 157,985

Section 2: Answers to practice questions

   £ £

  Personal allowance (income exceeds £116,210) (Nil)

  • ––––––– Taxable income

  157,985

  • ––––––– Income tax 37,295 at 20%

  7,459 115,630 (152,925 – 37,295) at 40% 46,252

  4,260 (157,985 – 800 – 152,925) at 50% 2,130 800 at 42·5% 340

  • ––––––– 157,985
  • ––––––– ––––––– Income tax liability

  56,181 Tax suffered at source PAYE 42,558 Building society interest (2,200 at 20%) 440 Dividends (800 at 10%)

  80

  • ––––––– (43,078)
  • ––––––– Income tax payable

  13,103

  • ––––––– (1) The relevant percentage for the car benefit is 40% (11% + 26% (230 – 100 =

  130/5) + 3% charge for a diesel motor car), but this is restricted to the maximum of 35%. (2) The motor car was available throughout 2012–13 so the benefit is £7,175 (22,500 – 2,000 = 20,500 x 35%). (3) The fuel benefit is £7,070 (20,200 x 35%). (4) The living accommodation cost is in excess of £75,000 so there will be an additional benefit. Since the property was not purchased more than six years before first being provided to Peter, the benefit is based on the cost of the property plus subsequent improvements. (5) The additional benefit is therefore £3,920 (160,000 + 13,000 – 75,000 = 98,000 at 4%). (6) The exemption for mobile telephones does not apply to the second telephone. (7) Payments for private incidental expenses are exempt up to £10 per night when spent outside the UK. (8) The property business profit is calculated as follows:

  £ £

  Rent receivable – Property 1 (500 x 5) 2,500 Property 2 (820 x 8)

  6,560

  • ––––––– 9,060

  Irrecoverable rent (500 x 2) 1,000 Repairs 600 Advertising 875 Loan interest 1,800 Paper F6 (UK): Taxation FA2012 £ £

  Insurance 975 Wear and tear allowance (1,500 x 10%) 150

  • ––––––– (5,400)
  • ––––––– Property business profit 3,660
  • ––––––– (9) The wear and tear allowance can only be claimed in respect of the first property since the second property is not let out furnished. The allowance is based on the rents actually received of £1,500 (2,500 – 1,000).

  (10) The 2012–13 insurance cost is £975 ((660 x 3/12) + (1,080 x 9/12)). (11) Premium bond prizes are exempt from income tax. (12) Peter’s basic rate tax band is extended by £2,925 (2,340 x 100/80) to £37,295

  (34,370 + 2,925) as a result of making the gift aid donation. The additional rate tax band is extended to £152,925 (150,000 + 2,925). (b) (1) Employee Class 1 NIC for 2012–13 is £5,804 ((42,475 – 7,605 = 34,870 at 12%) + (123,500 – 42,475 = 81,025 at 2%)).

  (2) Employer’s Class 1 NIC for 2012–13 is £16,010 (123,500 – 7,488 = 116,012 at 13·8%). (3) Employer’s Class 1A NIC for 2012–13 is £3,840 (27,825 at 13·8%). (c) Furnished holiday lettings – conditions

  To be treated as a furnished holiday letting, the property must be situated in the European Economic Area and all of the following conditions must be satisfied:

  „ The  property must be available for letting for at least 210 days in the tax year,   

  and

  „  

  It  must actually be let for at least 105 days in the tax year, and

  „ It

   is not normally occupied for periods of longer‐term occupation (i.e. more  than  31 consecutive days to the same person) for periods exceeding 155 days  in  

   any 12 month period.

3 Sammi Smith

  (a) Sammi Smith – Company motor car (1) The relevant percentage is restricted to a maximum of 35% (11% + 25% (225 – 100 = 125/5) = 36%).

  (2) Sammi will therefore be taxed on a car benefit of £28,000 (80,000 x 35%). (3) Sammi’s marginal rate of income tax is 40%, so her additional income tax liability for 2012–13 will be £11,200 (28,000 at 40%).

  (4) There are no national insurance contribution implications for Sammi. Tutorial note: There is no fuel benefit as fuel is not provided for private journeys.

  Sammi Smith – Additional director’s remuneration

  (1) Sammi’s additional income tax liability for 2012–13 will be £10,400 (26,000 at 40%). (2) The additional employee’s Class 1 NIC liability will be £520 (26,000 at 2%).

Section 2: Answers to practice questions

  Tutorial note: Sammi’s director’s remuneration exceeds the upper earnings limit of £42,475, so her additional class 1 NIC liability is at the rate of 2%. (b) Smark Ltd – Company motor car

  (1) The employer’s class 1A NIC liability in respect of the car benefit will be £3,864 (28,000 at 13·8%). (2) The motor car has a CO2 emission rate in excess of 160 grams per kilometre, so only £22,559 (26,540 less 15%) of the leasing costs are allowed for corporation tax purposes. (3) Smark Ltd’s corporation tax liability will be reduced by £6,342 (22,559 + 3,864 = 26,423 at 24%).

  Smark Ltd – Additional director’s remuneration

  (1) The employer’s class 1 NIC liability in respect of the additional director’s remuneration will be £3,588 (26,000 at 13·8%). (2) Smark Ltd’s corporation tax liability will be reduced by £7,101 (26,000 + 3,588 = 29,588 at 24%). (c) Most beneficial alternative for Sammi Smith

  (1) Under the director’s remuneration alternative, Sammi will receive additional net of tax income of £15,080 (26,000 – 10,400 – 520). (2) However, she will have to lease the motor car at a cost of £26,540, so the overall result is additional expenditure of £11,460 (26,540 – 15,080). (3) If Sammi is provided with a company motor car then she will have an additional tax liability of £11,200, so she is better off by £260 (11,460 –

  11,200).

  Most beneficial alternative for Smark Ltd

  (1) The net of tax cost of paying additional director’s remuneration is £22,487 (26,000 + 3,588 – 7,101). (2) This is more beneficial than the alternative of providing a company motor car since this has a net of tax cost of £24,062 (26,540 + 3,864 – 6,342).

4 Firstly plc

  (a) Joe Jones – Taxable income 2012–13

  £

  Employment income Salary – Firstly plc (11,400 x 9)

  102,600 Pension contributions (102,600 x 6%) (6,156)

  • –––––––– 96,444
    • – Bonus Salary – Secondly plc (15,200 x 3) 45,600 Beneficial loan

  2,367

  • – Workplace nursery Gym membership

  1,050 Home entertainment system – Use 660

  • – Acquisition 3,860 Living accommodation

  6,750 Furniture

  816 Paper F6 (UK): Taxation FA2012 £

  Running costs 1,900

  Childcare vouchers 1,014

  Company gym

  • – Mobile telephone
  • – ––––––––

  160,461 Personal allowance (income exceeds £116,210) (-)

  • –––––––– Taxable income

  160,461

  • –––––––– Workings

  (1) The benefit of the beneficial loan using the average method is £2,533 ((120,000 + 70,000)/2 = 95,000 at 4% x 8/12). (2) Using the strict method the benefit is £2,367 ((120,000 at 4% x 3/12) + (70,000 at 4% x 5/12)). (3) Joe will therefore elect to have the taxable benefit calculated according to the strict method. (4) The benefit for the use of the home entertainment system is £660 (4,400 x 20% x 9/12). (5) The benefit for the acquisition of the home entertainment system is the market value of £3,860, as this is greater than £3,740 (4,400 – 660). (6) The benefit for the living accommodation is the higher of the annual value of £2,600 (10,400 x 3/12) and the rent paid of £6,750 (2,250 x 3). (7) The benefit for the use of the furniture is £816 (16,320 x 20% x 3/12). (8) Joe’s annual salary with Secondary plc is £182,400. This makes him an additional rate taxpayer. The exemption for childcare vouchers is therefore

  £22 per week. The benefit for the provision of the vouchers is therefore £1,014 (100 – 22 = 78 x 13).

  Notes:

  (1) The bonus of £12,000 will have been treated as being received during 2011– 12 as Joe became entitled to it during that tax year. (2) The personal pension contributions will extend Joe’s basic rate tax band, and are therefore irrelevant as regards the calculation of taxable income. (3) The provision of a place in a workplace nursery, the use of a company gym, and the provision of one mobile telephone do not give rise to a taxable benefit. (b) (i) (1) Joe’s tax code will have been calculated by starting with his personal allowance of £8,105, and then reducing it by the value of the taxable benefits. (2) An employee’s tax code is used to adjust their salary when calculating the amount of income tax that has to be paid each week or month under the PAYE system. (ii) Form P45

  (1) Form P45 will be prepared by Firstly plc when Joe’s employment ceases. It will show his taxable earnings and income tax deducted up to the date of leaving, together with his tax code at the date of leaving.

Section 2: Answers to practice questions

  (2) Firstly plc should have provided this form to Joe immediately following his cessation of employment with the company.

  Form P60 (1) Form P60 will be prepared by Secondly plc at the end of the tax year.

  It will show Joe’s taxable earnings, income tax deducted, final tax code, national insurance contributions, and Secondly plc’s name and address. (2) Secondly plc should have provided this form to Joe by 31 May 2013.

   Form P11D

  (1) A separate form P11D will be prepared by both Firstly plc and Secondly plc, detailing the cash equivalents of the benefits provided to Joe.

  (2) Both companies should have provided a form to Joe by 6 July 2013.

5 William Wong (a) William Wong

  (i) A bonus is treated as being received by a director on the earliest of: (1) The date that the bonus is paid.

  (2) The date that entitlement to the bonus arises. (3) The date when the bonus is credited in the company’s accounts. (4) The end of the period of account if the bonus relates to that period, and has been determined before the end of the period.

  (5) The date that the bonus is determined if the period of account it relates to has already ended. (ii) William: Employment income computation 2012-13

   £ £

  Director’s remuneration (2,400 × 12) 28,800 Bonus 37,000

  • ––––––– 65,800

  Benefits Car benefit

  4,025 Chauffeur 1,800 Fuel benefit

  1,767 Television (3,825 at 20%) 765 Living accommodation – Annual value 10,400

  • – Additional benefit 4,320
  • – Liability insurance
    • ––––––– 23,077
    • ––––––– 88,877
    Paper F6 (UK): Taxation FA2012 £ £

  Expenses Mileage allowance 1,400 Professional subscription 450

  • – Golf club membership

  (1,850)

  • ––––––– ––––––– Employment income

  87,027

  • ––––––– Workings

  (1) The relevant percentage for the car benefit is 39% (11% + 25% (225 – 100 = 125/5) + 3% charge for a diesel motor car), but this is restricted to the maximum of 35%.

  (2) The motor car was only available for three months of 2012-13 so the benefit is £4,025 (46,000 × 35% × 3/12). The list price must be used even though a lesser amount was actually paid. (3) The fuel benefit is £1,767 (20,200 × 35% × 3/12). (4) The living accommodation cost in excess of £75,000 so there will be an additional benefit. Since the property was purchased more then six years before first being provided to William, the benefit is based on the market value of £183,000. The additional benefit is therefore £4,320 (183,000 – 75,000 = 108,000 at 4%). (5) The mileage allowance received will be tax-free, and William can make the following expense claim:

  £

  10,000 miles at 45p 4,500

  2,000 miles at 25p 500

  • –––––– 5,000 Mileage allowance 12,000 at 30p (3,600)
  • –––––– 1,400
  • –––––– Tutorial notes

  (1) The first bonus of £22,000 will have been treated as being received during 2011-12. (2) The car benefit does not cover the cost of a chauffeur, so this is an additional benefit. (3) The provision of liability insurance does not give rise to a taxable benefit, nor does the payment of the overseas allowance since it is not above the de minimis limit of £10 per night. (4) The golf club membership is not an allowable deduction despite being used to entertain customers.

  (b) Chai Trim

  (i) Employees earning £8,500 a year or more, and most directors (irrespective of earnings), are P11D employees.

Section 2: Answers to practice questions

  Benefits must be included when calculating the figure of £8,500, and these are calculated as if they were received by a P11D employee. Full-time working directors are excluded if they earn less than £8,500 a year and do not own more than 5% of their company’s ordinary share capital. (ii) Benefits

   £

  Van benefit (W1) 2,500 Fuel benefit (W1) 458 Health club membership (W2) 150

  Workings

  (1) The van was only available for ten months of 2012-13 so the benefit is £2,500 (3,000 × 10/12). The fuel benefit is £458 (550 × 10/12). (2) In-house benefits are valued according to the marginal cost. The taxable benefit in relation to the health club membership is therefore the direct costs of £150. (iii) The income tax on recurring benefits, such as company motor cars, will normally be collected through the PAYE system by a reduction in the employee’s tax coding. Tax not collected on this basis will be due under the self-assessment system. However, tax of less than £3,000 can be collected by an adjustment to an employee’s tax coding for a subsequent tax year, whilst tax on minor benefits may be paid under an employer’s PAYE settlement agreement.

6 Andrew Zoom (a) (1) Andrew is under the control of Slick-Productions Ltd.

  (2) Andrew is not taking any financial risk. (3) Andrew works a set number of hours, is paid by the hour and is paid for overtime.

  (4) Andrew cannot profit from sound management. (5) Andrew is required to do the work personally. (6) There is an obligation to accept work that is offered. (7) Andrew does not provide his own equipment. (b) (i) Treated as an employee

  (1) Andrew’s income tax liability for 2012–13 will be:

   £

  Employment income 50,000 Personal allowance (8,105)

  • ––––––– Taxable income 41,895
  • –––––––
Paper F6 (UK): Taxation FA2012 £

  Income tax 34,370 at 20% 6,874

  7,525 at 40% 3,010

  • ––––––– 41,895
  • ––––––– ––––––– Income tax liability 9,884
  • ––––––– (2) Class 1 NIC for 2012–13 will be £4,334 ((42,475 – 7,605 = 34,870 at 12%) + (50,000 – 42,475 = 7,525 at 2%)).

  (ii) Treated as self-employed (1) Andrew’s trading profit for 2012–13 will be £50,000, so his income tax liability will be unchanged at £9,884.

  (2) Class 2 NIC for 2012–13 will be £138 (52 x 2·65). (3) Class 4 NIC for 2012–13 will be £3,288 ((42,475 – 7,605 = 34,870 at 9%) + (50,000 – 42,475 = 7,525 at 2%)).

  (c) An appeal against an amendment to a return must be made in writing within 30 days of the amendment and must state the grounds for the appeal.

  Appeals may initially be made to HMRC. An officer unconnected with the case will undertake a review. The taxpayer then has 30 days in which to appeal to the Tribunal. Tribunal cases are allocated to one of four tracks: ƒ The paper track hears simple appeals, e.g. appeals against the imposition of a  fixed   penalty.  This  is  the  default  track  and  cases  are  normally  decided  without  a hearing.  

  ƒ The  basic  track  involves  a  hearing  but  the  exchange  of  documents  beforehand  is kept to a minimum.   ƒ The  standard  track  involves  cases  that  are  subject  to  more  detailed  case  management

   and formality.   ƒ The  complex  track  is  for  long  or  complex  cases,  or  those  involving  an  important  principle or a large financial sum. 

7 Simon House

  (a) (1) Trading is indicated where the property (subject matter) does not yield an ongoing income or give personal enjoyment to its owner.

  (2) The sale of property within a short time of its acquisition is an indication of trading. (3) Trading is indicated by repeated transactions in the same subject matter. (4) A trading motive is indicated where work is carried out to the property to make it more marketable, or where steps are taken to find purchasers. (5) A forced sale to raise cash for an emergency is an indication that the transaction is not of a trading nature. (6) If a transaction is undertaken with the motive of realising a profit, this is a strong indication of trading.

Section 2: Answers to practice questions

  (b) Simon House – Income tax and national insurance liabilities for 2012–13

  £ £

  Income 260,000 Cost of property 127,000 Renovation costs 50,600 Loan interest (150,000 x 6% x 4/12) 3,000 Legal fees (1,800 + 2,600) 4,400

  • ––––––––– (185,000)
  • ––––––––– Trading profit

  75,000 Personal allowance

  (8,105)

  • ––––––––– Taxable income

  66,895

  • ––––––––– Income tax 34,370 at 20%

  6,874 32,525 at 40%

  13,010

  • ––––––––– 19,884
  • ––––––––– Class 2 NIC for 2012–13 will be £48 (18 x 2·65). Class 4 NIC for 2012–13 will be £3,788 ((42,475 – 7,605 = 34,870 at 9%) + (75,000 – 42,475 = 32,525 at 2%)).

  (c) Simon House – Capital gains tax liability for 2012–13

  £ £

  Proceeds 260,000

  Cost 127,000

  Enhancement expenditure 50,600 Loan interest

  • – Incidental costs (1,800 + 2,600) 4,400
    • ––––––––– (182,000)
    • ––––––––– 78,000

  Annual exempt amount (10,600)

  • ––––––––– 67,400
  • ––––––––– Capital gains tax 34,370 at 18% 6,187 £33,030 (67,400 – 34,370) at 28% 9,248
  • ––––––––– 15,435
  • ––––––––– Note: No relief is available for the interest on the loan used to finance the transaction as this is a revenue expense.

8 Na Style

  (a) Choice of accounting date A date early in the tax year, such as 30 June, has the advantage of maximising the gap between earning profits and paying the tax on them. However, it may result in the assessment of more than 12 months’ profits in the final year. A date late in the tax year, for example 31 March, will avoid the bunching of profits in the final tax year. Choosing 31 March as the accounting date would also Paper F6 (UK): Taxation FA2012

  avoid overlap profits under the commencement rules. In addition, it has the advantage of being easy for the taxpayer to understand. (b)

  2009–10 (1 January 2010 to 5 April 2010)

  £

  25,200 x 3/6 12,600

  • ––––––– 2010–11 (1 January 2010 to 31 December 2010)

  25,200 + 10,800 (21,600 x 6/12) 36,000

  • ––––––– 2011–12 (Year ended 30 June 2011) 21,600
  • ––––––– (1) In 2010–11 there are overlap profits of £12,600 in respect of the three-month period 1 January 2010 to 5 April 2010.

  (2) In 2011–12 there are overlap profits of £10,800 in respect of the six-month period 1 July 2010 to 31 December 2010.

  Note: The assessment for 2010–11 is the first 12 months of trading as the

  accounting date falling in that year is less than 12 months from the commencement of trading. (c) Na Style – Trading profit for the year ended 30 June 2012

   £ £

  Net profit 22,000

  Depreciation 1,300

  Motor expenses (2,200 x 7,000/8,000) 1,925 Accountancy Legal fees in connection with the grant of a new lease 1,260 Property expenses (12,900 x 1/3) 4,300 Own consumption

  450 Fine

  400 Donation to political party

  80 Trade subscription Private telephone (1,200 x 20%)

  240 Capital allowances

  810

  • –––––––– –––––––– 31,715 1,050
  • –––––––– (1,050)
  • –––––––– Trading profit

  30,665

  • –––––––– Notes: (1) The cost of the grant of a new lease is not allowable.

  (2) Goods for own consumption are valued at selling price. (d) (i) Na Style – Income tax computation 2012–13

   £ £

  Trading profit 30,665

  Building society interest (560 x 100/80) 700

  • – Interest from individual savings account (exempt)
  • – Interest from savings certificate (exempt) Interest from government stocks 370 Dividends (1,080 x 100/90) 1,200
    • ––––––– 32,935

Section 2: Answers to practice questions

   £ £

  Personal allowance (8,105)

  • ––––––– Taxable income

  24,830

  • ––––––– Income tax

  23,630 (24,830 – 1,200) at 20% 4,726 1,200 at 10%

  120

  • ––––––– 24,830
  • ––––––– –––––––

  Income tax liability 4,846

  Tax suffered at source Building society interest (700 at 20%) 140 Dividends (1,200 at 10%) 120

  • –––– (260)
    • ––––––– Income tax payable

  4,586

  • ––––––– (ii) Tax payments

  (1) Na’s balancing payment for 2012–13 due on 31 January 2014 is £1,386 (4,586 – 3,200). (2) Her payments on account for 2013–14 will be £2,293 (4,586 x 50%).

  These will be due on 31 January and 31 July 2014. (e) (1) Interest is charged where a balancing payment is paid late. This will run from 31 January 2014 to 31 May 2014.

  (2) The interest charge will be £14 (1,386 x 3% x 4/12). (3) In addition, a 5% penalty of £69 (1,386 at 5%) will be imposed as the balancing payment is not made within one month of the due date.

9 Domingo, Erigo and Fargo Gomez

  (a) (i) Domingo Gomez – Income tax computation 2012–13

  £

  Pensions (5,500 + 2,800) 8,300 Building society interest (14,400 x 100/80) 18,000 Interest from savings certificate (exempt)

  • – –––––––

  26,300 Personal allowance

  (10,050)

  • ––––––– Taxable income

  16,250

  • ––––––– Income tax

   £

  2,710 at 10% 271

  2,708 13,540 at 20%

  • ––––––– 16,250
  • ––––––– ––––––– Income tax liability

  2,979

  • –––––––
Paper F6 (UK): Taxation FA2012 Tutorial notes

  (1) No tax relief is available in respect of the donations as they were not made under the gift aid scheme. (2) Domingo’s total income exceeds £25,400, so his personal allowance of £10,500 is reduced to £10,050 (10,500 – 450 (26,300 – 25,400 = 900/2)). (3) The non-savings income is fully covered by the personal allowance, so the first £2,710 of savings income is taxed at the starting rate of

  10%. (ii) Erigo Gomez – Income tax computation 2012–13

  £

  Employment income Salary

  36,000 Pension contributions (36,000 x 6%) (2,160) Charitable payroll deductions (12 x 100) (1,200)

  • ––––––– 32,640 Relocation costs

  3,400

  • ––––––– 36,040 Mileage allowance

  (2,900)

  • ––––––– 33,140 Personal allowance

  (8,105)

  • ––––––– Taxable income

  25,035

  • ––––––– Income tax £25,035 at 20%

  5,007

  • ––––––– Income tax liability

  5,007

  • ––––––– Workings

  (1) Only £8,000 of relocation costs are exempt, and so the taxable benefit is £3,400 (11,400 – 8,000). (2) The mileage allowance received will be tax-free, and Erigo can make the following expense claim:

  £

  10,000 miles at 45p 4,500 8,000 miles at 25p 2,000

  • ––––––– 6,500 Mileage allowance 18,000 at 20p

  (3,600)

  • ––––––– 2,900
  • ––––––– (iii) Fargo Gomez – Income tax computation 2012–13

  £

  Trading profit (64,800 – 2,600) 62,200 Capital allowances

  (990)

  • ––––––– 61,210

Section 2: Answers to practice questions

  £

  Personal allowance (8,105)

  • ––––––– Taxable income

  53,105

  • ––––––– Income tax

  £ 42,570 at 20%

  8,514 4,214

  10,535 (53,105 – 42,570) at 40%

  • ––––––– 53,105
  • ––––––– ––––––– Income tax liability

  12,728

  • ––––––– Workings

  (1) Fargo’s period of account is nine months’ long so the capital allowances in respect of his motor car are £990 (11,000 x 18% x 9/12 = 1,485 x 16,000/24,000). (2) Fargo’s basic rate tax band is extended by £5,200 in respect of the personal pension contribution and £3,000 (2,400 x 100/80) in respect of the gift aid donations. (3) The revised basic rate band is therefore £42,570 (34,370 + 5,200 + 3,000).

  (4) The advertising expenditure incurred during May 2012 is pre- trading, and is treated as incurred on 6 July 2012. An adjustment is therefore required. (b) (1) Unless the return is issued late, the latest date that Domingo and Erigo can file paper self-assessment tax returns for 2012–13 is 31 October 2013.

  (2) If Domingo completes a paper tax return by 31 October 2013 then HM Revenue and Customs will prepare a self-assessment tax computation on his behalf.

  (3) Fargo has until 31 January 2014 to file his self-assessment tax return for 2012–13 online. (c) (1) Domingo and Erigo were not in business during 2012–13, so their records must be retained until one year after 31 January following the tax year, which is 31 January 2015. (2) Fargo was in business during 2012–13, so all of his records (both business and non-business) must be retained until five years after 31 January following the tax year, which is 31 January 2019. (3) A failure to retain records for 2012–13 could result in a penalty of up to

  £3,000. However, the maximum penalty will only be charged in serious cases. Paper F6 (UK): Taxation FA2012

10 Vanessa and Serene

  (a) (i) Vanessa Serve – Income tax computation 2012–13

  £

  Trading profit 52,400

  Capital allowances (10,400 x 18% = 1,872 x 14,000/20,000) (1,310)

  • ––––––– 51,090

  Interest from investment account at NS&I Bank 1,100

  • ––––––– 52,190

  Personal allowance (8,105)

  • ––––––– Taxable income

  44,085

  • ––––––– Income tax 40,770 at 20%

  8,154 3,315 at 40%

  1,326

  • ––––––– 44,085
  • ––––––– –––––––

  Income tax payable 9,480

  • ––––––– (1) Interest from investment accounts at the National Savings & Investments Bank is received gross.

  (2) The personal pension contribution results in Vanessa’s basic rate tax band being extended to £40,770 (34,370 + 6,400).

  Serene Volley – Income tax computation 2012–13 £

  Employment income Salary

  26,400 Pension contributions (26,400 x 5%) (1,320)

  • ––––––– 25,080

  Car benefit 4,756

  • – Interest from savings certificate
    • ––––––– 29,836

  Personal allowance (8,105)

  • ––––––– Taxable income

  21,731

  • ––––––– Income tax liability 21,731 at 20%

  4,346 Tax suffered at source – PAYE (3,721)

  • ––––––– Income tax payable

  625

  • ––––––– (1) The relevant percentage for the car benefit is 29% (11% + 18% (190 – 100 = 90/5)).

  (2) The motor car was available throughout 2012–13 so the benefit is £4,756 (16,400 x 29%).

Section 2: Answers to practice questions

  (3) Interest on savings certificates from the National Savings & Investments Bank is exempt from income tax. (ii) Vanessa Serve (1) Class 2 NIC for 2012–13 will be £138 (52 x 2·65).

  (2) Class 4 NIC for 2012–13 will be £3,310 ((42,475 – 7,605 = 34,870 at 9%) + (51,090 – 42,475 = 8,615 at 2%)).

  Serene Volley

  (1) Class 1 NIC for 2012–13 will be £2,255 (26,400 – 7,605 = 18,795 at 12%). (2) Pension contributions are ignored, and benefits are not subject to employee Class 1 NIC. (iii) Vanessa Serve

  (1) The balancing payment for 2012–13 due on 31 January 2014 is £4,000 (9,480 + 3,310 – 8,790). (2) The payments on account for 2013–14 will be £6,395 (9,480 + 3,310 = 12,790 x 50%). These will be due on 31 January 2014 and 31 July 2014.

  Serene Volley

  (1) No payments on account have been made, so the balancing payment for 2012–13 due on 31 January 2014 is £625. (2) Payments on account for 2013–14 are not required because Serene’s income tax payable for 2012–13 was less than £1,000. Also, more than

  80% of her income tax liability (4,346 x 80% = £3,477) was met by deduction at source. (b) (i)

  VAT Return – Quarter ended 31 March 2013 £ £

  Output VAT Sales (18,000 x 20%) 3,600 Input VAT Telephone (600 x 60% (100 – 40) x 20%)

  72

  • – Motor car Motor repairs (987 x 20/120) 164 Equipment (1,760 x 20%) 352 Other expenses (2,200 – 400 = 1,800 x 20%) 360
    • –––– (948)
      • –––––– VAT payable

  2,652

  • –––––– Tutorial notes

  (1) An apportionment is made where a service such as the use of a telephone is partly for business purposes and partly for private purposes. (2) Input VAT cannot be recovered in respect of the motor car as this was not exclusively for business purposes. Paper F6 (UK): Taxation FA2012

  (3) No apportionment is necessary for motor expenses provided there is some business use. (4) Vanessa can recover the input VAT in respect of the equipment in the quarter ended 31 March 2013 because the actual tax point was the date that the equipment was paid for. (5) Input VAT on entertaining UK customers is not recoverable. (ii) (1) Vanessa can use the flat rate scheme if her expected taxable turnover for the next 12 months does not exceed £150,000.

  (2) The main advantage of the scheme is the simplified VAT administration. Vanessa’s customers are not VAT registered, so there will be no need to issue VAT invoices. (3) If Vanessa had used the flat rate scheme for the quarter ended 31

  March 2013 then she would have paid VAT of £1,296 (18,000 + 3,600 = 21,600 x 6%) (4) This is a saving of £1,356 (2,652 – 1,296) for the quarter.

  (5) Note that a discount of 1% applies for the first year of VAT registration.

11 Sam and Kim White

  (a) Sam White – Trading profit for the year ended 5 April 2013

   £ £

  Net profit 50,000 Depreciation 7,600 Motor expenses (8,800 x 20%) 1,760

  • – Patent royalties Legal fees re breach of contract - Personal capital gains tax advice 320 Gifts to customers (560 + 420) 980 Use of office (5,120 x 1/8) 640 Private telephone (1,600 x 25%) 400

  Own consumption 1,480 Capital allowances

  5,573

  • ––––––– –––––––– 62,140 6,613
    • –––––––– (6,613)

  • ––––––– Trading profit 55,527
  • ––––––– Working – Capital allowances Sam’s Pool car Allowances £ £ £

  WDV brought forward 14,800 20,200 WDA – 18% (2,664) 2,664 WDA – 18% (3,636) x 80% 2,909

  • ––––––– –––––– ––––––– WDV carried forward 12,136 16,564 5,573
    • –––––– ––––––– –––––––

Section 2: Answers to practice questions

  Working – business mileage

  Of the 25,000 miles driven by Sam during the year ended 5 April 2013, 20,000 (5,000 + 15,000 (25,000 – 5,000 = 20,000 x 75%)) were for business journeys. The business proportion is therefore 80% (20,000/25,000 x 100).

  (b) Sam White – Income tax computation 2012–13

  £

  Trading profit 55,527

  Building society interest (1,200 x 100/80 = 1,500/2) 750

  • –––––––– 56,277

  Personal allowance (8,105)

  • –––––––– Taxable income

  48,172

  • –––––––– Income tax 34,370 at 20%

  6,874 13,802 (48,172 – 34,370) at 40% 5,521

  • –––––––– ––––––– 48,172
    • ––––––– Income tax liability

  12,395

  • –––––––– Kim White – Income tax computation 2012–13 £ £

  Employment income Salary 21,600 Beneficial loan 400

  • ––––––– 22,000 Expense claim (5,125)
  • ––––––– 16,875

  Building society interest 750

  • –––––––– 17,625

  Interest paid (140)

  • –––––––– 17,485

  Personal allowance (8,105)

  • –––––––– Taxable income

  9,380

  • –––––––– Income tax liability £9,380 at 20%

  1,876

  • –––––––– (1) The taxable benefit from the beneficial loan is £400 (12,000 at 4% x 10/12). (2) Ordinary commuting (travel between home and the permanent workplace) does not qualify for relief. The travel to a temporary workplace qualifies as it is for a period lasting less than 24 months.
Paper F6 (UK): Taxation FA2012

  (3) Kim can therefore make an expense claim based on 12,500 (11,200 + 1,300) miles as follows:

  £

  10,000 miles at 45p 4,500 2,500 miles at 25p

  625

  • –––––– 5,125
  • –––––– (4) The loan interest paid of £140 is eligible for relief since the loan was used by Kim to finance expenditure for a relevant purpose. It is paid gross.

  (c) Individual savings accounts (1) Both Sam and Kim can invest a maximum of £5,640 each tax year into the cash component of an ISA.

  (2) Interest received from ISAs is exempt from income tax, so Sam will save tax at the rate of 40% whilst Kim will save tax at the rate of 20% on gross interest of £338 (1,500 x 5,640/25,000).

  Transfer to Kim’s sole name

  (1) Sam pays income tax at the rate of 40%, whilst Kim’s basic rate tax band is not fully utilised. (2) Transferring the building society deposit account into Kim’s sole name would therefore save tax of £150 (750 x 20% (40% – 20%)).

12 Ann Peach Ann Peach – Income tax computation 2012–13 £

  Trading profit 48,000

  Personal allowance (8,105)

  • ––––––– Taxable income

  39,895

  • ––––––– Income tax liability 39,895 at 20%

  7,979 (1) Only £48,000 of Ann’s pension contributions of £50,000 will have qualified for tax relief, since relief is only available up to the amount of earnings.

  (2) The qualifying pension contributions result in Ann’s basic rate tax band being extended to £82,370 (34,370 + 48,000).

  Basil Plum – Income tax computation 2012–13 £

  Employment income 320,000

  Annual allowance charge (60,000 – 50,000) 10,000

  • –––––––– 330,000

  Personal allowance (Nil)

  • –––––––– Taxable income

  330,000

  • ––––––––

Section 2: Answers to practice questions

  £

  Income tax 94,370 at 20%

  18,874 115,630 (210,000 – 94,370) at 40% 46,252 120,000 (330,000 – 210,000) at 50% 60,000

  • –––––––– 330,000
  • –––––––– –––––––– Income tax liability

  125,126

  • –––––––– (1) All of Basil’s pension contributions of £60,000 will have qualified for tax relief, although the annual allowance charge effectively restricts relief to £50,000.

  (2) The pension contributions result in Basil’s basic rate tax band being extended to £94,370 (34,370 + 60,000). His additional rate band is extended to £210,000 (150,000 + 60,000).

  (3) Basil’s adjusted net income is £270,000 (330,000 – 60,000). As this exceeds £116,210 Basil is not entitled to a personal allowance.

  Chloe Pear – Income tax computation 2012–13 £

  Property business profit 23,900

  Personal allowance (8,105)

  • ––––––– Taxable income

  15,795

  • ––––––– Income tax liability 15,795 at 20%

  3,159 Chloe has no relevant earnings for 2012-13, so only £3,600 of her pension

  (1) contributions of £8,200 will have qualified for tax relief.

  Chloe will have received basic rate tax relief at source, so the pension (2) contribution is not deducted in calculating her taxable income.

  David Pineapple – Income tax computation 2012–13 £

  Trading profit 125,000

  Personal allowance (8,105)

  • ––––––– Taxable income

  116,895

  • ––––––– Income tax 104,370 at 20%

  20,874 12,525 at 40%

  5,010

  • ––––––– 116,895
  • ––––––– ––––––– Income tax liability

  25,884

  • ––––––– David has unused allowances of £12,000 (50,000 – 38,000) from 2009/10, £7,000

  (1) (50,000 – 43,000) from 2010/11 and £5,000 (50,000 – 45,000) from 2011/12, so a maximum contribution of £74,000 (50,000 + 12,000 + 7,000 + 5,000) is available for 2012/13. Paper F6 (UK): Taxation FA2012

  As David’s contribution of £70,000 is less than the maximum of £74,000, the full (2) contribution of £70,000 qualifies for relief. (David will carry forward an unused allowance of £4,000 that relates to 2011/12.) David’s adjusted net income is £55,000 (125,000 – 70,000) so he qualifies for a full

  (3) personal allowance. (2) The pension contributions result in David’s basic rate tax band being extended to £104,370 (34,370 + 70,000).

13 Nui Neu

  (a)

     Sole trader 

  Nui’s     taxable  income  is  £21,895  (30,000  –  8,105),  so  her  income  tax  liability  for 

  2012 ‐13 will be £4,379 (21,895 at 20%). 

    Class  2 NIC for 2012‐13 will be £138 (52 × 2.65).    Class  4 NIC for 2012‐13 will be £2,016 (30,000 – 7,605 = 22,395 at 9%).  

    Director’s    remuneration 

  Nui’s     taxable  income  is  £16,895  (25,000  –  8,105),  so  her  income  tax  liability  for 

  2012 ‐13 will be £3,379 (16,895 at 20%). 

    Nui’s  employee Class 1 NIC will be £2,087 (25,000 – 7,605 = 17,395 at 12%).    

  Dividends    

  Nui     will  not  have  to  pay  any  income  tax  for  2012‐13  as  the  gross  dividends  of 

  £27,778  (25,000 × 100/90) fall within the basic rate tax band.    There  will be no employee’s Class 1 NIC.    (b)

     Director’s remuneration 

  Employer’s    Class 1 NIC will be £2,417 (25,000 – 7,488 at 13.8%). 

  The    corporation tax liability for the year ended 5 April 2013 will be £517, as the    company’s  TTP of £2,583 (30,000 – 25,000 – 2,417) falls within the 20% rate band. 

  Dividends    

  The company’s TTP is £30,000, so the corporation tax liability ignoring the dividends is £6,000 (£30,000 at 20%).   (c) The total tax liability for 2012-13 if Nui runs her business as a sole trader is £6,533 (4,379 + 138 + 2,016).

  It is not beneficial for Nui to run her business as a limited company and to withdraw director’s remuneration of £25,000, since the total tax liability will increase to £8,400 (3,379 + 2,087 + 2,417 + 517). However, it is beneficial for Nui to run her business as a limited company and to withdraw dividends of £25,000, since the total tax liability is reduced to £6,000.

Section 2: Answers to practice questions

  Income tax losses

14 Dee Zyne

  (a) Notification of chargeability An individual who acquires a new source of income must notify HMRC of their chargeability to tax by 5 October following the end of the tax year in which the new source arose. As Dee’s business commenced in 2012-13, HMRC must be notified by 5 October 2013.

  The amount of penalty for late notification is based on the ‘potential lost revenue’.

  This is the amount of tax due but unpaid by 31 January following the tax year as a result of the late notification. The taxpayer’s behaviour also affects the amount of penalty payable:

  • There will be no penalty where a taxpayer has a reasonable excuse for the failure to notify.
  • There will be a penalty of 30% of the tax unpaid where there is non-deliberate failure to notify.
  • There will be a penalty of 70% of the tax unpaid where there is deliberate failure to notify, and this is increased to 100% where there is also concealment.

  A penalty will be substantially reduced where a taxpayer makes disclosure, especially where this is unprompted by HM Revenue & Customs. (b) Trading loss 2012-13

  £

  Trading loss 12,276 Capital allowances (working) 5,724

  • ––––––– 18,000
  • ––––––– Working – Capital allowances Pool Motor car Allowances £ £ £ £

  Additions (no AIA) 10,400 15,000 Additions qualifying for AIA Computer 1,200 Office furniture 1,500

  • –––––– 2,700 AIA (2,700) 2,700
  • >–––––– Nil WDA – 18% × 9/12 (1,404) 1,404 WDA – 18%× 9/12 (2,025) × 80% 1,620
  • –––––– ––––––– –––––– WDV carried forward 8,996 12,975 5,724
  • –––––– ––––––– ––––––
Paper F6 (UK): Taxation FA2012 Tutorial notes

  (1) WDAs are restricted to 9/12 because Dee’s period of account is nine month’s long. (2) The private use of the employee’s motor car does not affect the capital allowance claim, but will instead result in a benefit for the employee.

  (c)

  Dee Zyne – Income tax computation 2012-13 £ £

  Employment income Salary 26,000 Car benefit (W1)

  940 Fuel benefit (W2)

  1,565 Beneficial loan (W3)

  300

  • – Staff canteen (exempt)
    • –––––– 28,805

  Allowable interest (110)

  • –––––– 28,695

  Loss relief s.64 (18,000)

  • –––––– 10,695

  Personal allowance (8,105)

  • –––––– Taxable income

  2,590

  • –––––– Income tax liability 2,590 at 20%

  518 Tax suffered at source – PAYE (8,530)

  • –––––– Income tax repayable

  (8,012)

  • –––––– Workings

  (1) The relevant percentage for the car benefit is 31% (11% + 20% (200 – 100 = 100/5)). The contributions by Dee towards the use of the motor car of £300 (£100 × 3) will reduce the benefit. The motor car was only available for three months of 2012-13 so the benefit is £940 (17,500 – 1,500 = 16,000 × 31% × 3/12 = 1,240 – 300).

  (2) The fuel benefit is £1,565 (20,200 × 31% × 3/12). (3) The benefit of the beneficial loan using the average method is £375 ((60,000 + 15,000)/2 = 37,500 at 4% × 3/12).

  Using the strict method the benefit is £300 ((60,000 at 4% × 1/12 + (15,000 at 4% × 2/12)). Dee will therefore elect to have the taxable benefit calculated according to the strict method.

Section 2: Answers to practice questions

  (d) The loss could have been claimed against total income for 2011-12 (under s.64 ITA 2007).

  The loss is incurred within the first four years of trading, so a claim could have been made against total income for the three years 2009-10 to 2011-12, earliest first (under s.72 ITA 2007). By claiming loss relief against her total income for 2012-13 Dee has relieved the loss entirely at the basic rate of 20% and reduced her income tax liability by £3,600 (18,000 at 20%). Either of these alternative loss relief claims would have relieved the loss entirely at the higher rate of 40%, and resulted in an income tax refund of £7,200 (18,000 at 40%). Dee could also carry the loss forward against her trading income for 2013-14 (under s.83 ITA 2007). However, this would delay relief for her loss and is therefore not recommended.

  Note You are not expected to quote section numbers in your answer.

15 Samantha Fabrique

  (a) (1) The rate of income tax or capital gains tax at which relief will be obtained, with preference being given to income tax charged at the higher rate of 40%. (2) The timing of the relief obtained, with a claim against total income/capital gains of the current year or preceding year resulting in earlier relief than a claim against future trading profits. (3) The extent to which personal allowances and the capital gains annual exempt amount may be wasted.

  (b)

  2009–10 2010–11 2011–12 2012–13 £ £ £ £

  Trading income 10,100 51,600 – 12,200 Loss relief s.83 – – – (7,000)

  • ––––––– –––––––– –––––– –––––––

  10,100 51,600 – 5,200 Building society interest – 2,100 3,800 1,500

  • ––––––– –––––––– –––––– –––––––

  10,100 53,700 3,800 6,700 Loss relief s.64 – (53,700) – –

  • ––––––– –––––––– –––––– –––––––

  10,100 – 3,800 6,700 Personal allowance (8,105) – (3,800) (6,700)

  • ––––––– –––––––– –––––– ––––––– Taxable income 1,995 – – -
  • ––––––– –––––––– –––––– ––––––– Income tax at 20% 399 –----------------––––––
Paper F6 (UK): Taxation FA2012 2009–10 2010–11 2011–12 2012–13 £ £ £ £

  Capital gains 18,800 – 23,300 8,800

  • – – (23,300) – Loss relief s.261B
    • ––––––– –––––– –––––––– ––––––– 18,800 – 8,800 –

  Annual exempt amount – (8,800) – (10,600)

  • ––––––– –––––– –––––––– ––––––– Taxable gains 8,200 – – –
  • ––––––– ––––––– –––––– –––––––– CGT at 18% 1,476 ------------–––––––

  (1) Loss relief has been claimed against total income for 2010–11 under s.64

  ITA 2007, and then against the capital gains of the same year under s.261B TCGA 1992, since this gives relief at the earliest date and at the highest rates of tax.

  (2) The balance of the trading loss of £7,000 (84,000 – 53,700 – 23,300) is carried forward against future trading profits under s.83 ITA 2007. (3) The capital loss for 2011–12 is carried forward and set against the chargeable gains for 2012–13 (12,200 – 3,400 = £8,800). (c) A claim against total income for 2011-12 could have been made, but has been rejected as the income for that year is covered by the personal allowance. (d) The claim to set off against total income under s.64 ITA 2007 must be made within one year from 31 January after the end of the tax year in which the loss occurs, i.e. 31 January 2014. The claim to carry forward the trading loss under s.83 ITA 2007 must be made within four years from the end of the tax year in which the loss occurs, i.e. 5 April 2016.

16 Goff Green (a) Goff Green – Taxable income and gains 2008–09 to 2012–13 2008–09 2009–10 2010–11 2011–12 2012–13 £ £ £ £ £

  14,800 – Trading income 16,700 15,400 23,600

  • – Terminal loss relief – (15,400) (14,800) (23,600)
    • ––––––– ––––––– ––––––– ––––––– –––––––

  • – 16,700 – – – Building society interest 3,800 3,800 3,800 3,800 3,800
    • ––––––– ––––––– ––––––– ––––––– ––––––– 20,500 3,800 3,800 3,800 3,800

  • – – – – Loss relief (s.64 ITA 2007)

  (3,800)

  • ––––––– ––––––– ––––––– ––––––– ––––––– 20,500 3,800 3,800 – 3,800 Personal allowance (8,105) (3,800) (3,800) – (3,800)
  • ––––––– ––––––– ––––––– ––––––– –––––––
    • – – – – Taxable income 12,395

  • ––––––– ––––––– ––––––– ––––––– ––––––– As the loss has arisen in the final 12 months of trading, it can be increased

  (1) to £85,000 by the overlap profits of £10,000.

Section 2: Answers to practice questions

   company continues to carry on the business of the previous owner.  (4)

  The  previous owner of the business retains the shares throughout the tax  year  in which loss relief is being claimed. 

  Partnerships

  (2) The terminal loss can be carried back on a last in first out basis against Goff’s trading profits.

  (3) Provided Goff makes a claim against his total income for 2012-13, loss relief of £14,900 can also be claimed (under s.261B TCGA 1992) in 2012–13 against the chargeable gain of £19,700 after deducting the capital loss of £4,800. (4) The amount of trading loss unrelieved is £12,500 (85,000 – 3,800 – 23,600 – 14,800 – 15,400 – 14,900).

  (5) A claim against total income for 2011-12 has not been made as Goff’s building society interest is already covered by his personal allowance. (b) (1) The loss relief claim in 2011-12 will save income tax of £3,859 (23,600 + 3,800 – 8,105 = 19,295 x 20%).

  (2) It will also save class 4 national insurance of £1,440 (23,600 – 7,605 = 15,995 x 9%). (3) The loss relief claim in 2012-13 would save capital gains tax of £774 (19,700 - 4,800 - 10,600 = 4,300 x 18%). (c) Section 86 ITA 2007 allows the unrelieved trading losses to be carried forward indefinitely and set off against the first available income derived by Goff from the new company. This income may be salary, dividends and/or interest. For s86 relief to be available the following conditions must be satisfied: (1)

  The  business is ceasing because it is being transferred as a going concern to  a  company.  (2)

  The  consideration is wholly or mainly in the form of shares. Mainly in this  context

   is taken to mean at least 80% of the consideration is in the form of  shares.  

  (3) The

17 Ae, Bee, Cae

  (a)

  

Profits assessable on partners Ae Bee Cae

£ £ £

  2010–11

  1 July 2010 to 5 April 2011 54,000 x 9/12 x 1/2 20,250 20,250

  • ––––––– ––––––– 2011–12 Year ended 30 June 2011

  54,000 x 1/2 27,000 27,000

  • ––––––– ––––––– 2012–13 Year ended 30 June 2012

  66,000 x 1/2 33,000 33,000

  • ––––––– –––––––

  1 July 2012 to 5 April 2013 87,000 x 9/12 x 1/3 21,750

  • –––––––
Paper F6 (UK): Taxation FA2012

  (1) The commencement rules apply to Ae and Bee for 2010–11. (2) The commencement rules apply to Cae for 2012–13 since he joined as a partner on 1 July 2012.

  (b) (i) Profits assessable on change of accounting date

  £

  2010–11 Year ended 5 April 2011 32,880

  • ––––––– 2011–12

  1 August 2010 to 31 July 2011 21,920 (32,880 x 8/12) + 16,240 38,160

  • ––––––– 2012–13 Year ended 31 July 2012 54,120
  • ––––––– Note: The assessment for 2011–12 is for the 12 months to the new accounting date of 31 July. (ii) As at 5 April 2013 there are overlap profits of £21,920 in respect of the eight-month period 1 August 2010 to 5 April 2011.

  (c) Profits assessable on cessation

  £

  2011–12 Year ended 30 June 2011 61,200 Capital allowances (working) (1,512)

  • ––––––– 59,688
  • ––––––– 2012–13 Period ended 30 September 2012 72,000

  Balancing allowance (working) (4,988)

  • ––––––– 67,012

  Relief for overlap profits (19,800)

  • ––––––– 47,212
  • ––––––– Working – Capital allowances Pool Allowances £ £

  Year ended 30 June 2011 WDV brought forward 8,400 WDA – 18% (1,512) 1,512

  • –––––– –––––– WDV carried forward 6,888 Period ended 30 September 2012 Addition

  2,400

  • –––––– 9,288 Disposal

  (4,300)

  • –––––– Balancing allowance 4,988 4,988
  • –––––– ––––––

Section 2: Answers to practice questions

18 Peter, Quinton and Roger

  (a) Trading income assessments

   Peter Quinton Roger £ £ £

  2009-10 (1 January to 5 April 2010) 40,000 × 1/2 × 3/12 5,000 5,000

  • ––––––– ––––––– 2010-11 Peter and Quinton 40,000 × 1/2 20,000 20,000
  • ––––––– ––––––– Roger (1 January to 5 April 2011) 90,000 × 1/3 × 3/12

  7,500

  • ––––––– 2011-12 90,000 × 1/3 30,000 30,000 30,000
  • ––––––– ––––––– –––––––

  Tutorial notes The commencement rules apply to Peter and Quinton for 2009-10.

  The commencement rules apply to Roger for 2010-11 since he joined as a partner on 1 January 2011. (b) Peter, Quinton and Roger each have a tax-adjusted trading loss of £10,000 (30,000 × 1/3) for 2012-13.

  Peter resigned as a partner on 31 December 2012. His unrelieved overlap profits of £5,000 (1 January to 5 April 2010) will therefore increase his loss to £15,000 (10,000 + 5,000). Section 83 ITA 2007: Quinton and Roger can carry the loss forward against the first future trading profits arising in the same trade.

  Section 64 ITA 2007: Peter, Quinton and Roger can claim against total income for 2012-13 and/or 2011-12. Section 72 ITA 2007: Peter, Quinton and Roger can claim against total income for 2009-10 to 2011-12 on a first in first out basis. Section 89 ITA 2007: Peter can make a terminal loss relief claim against his trading profits for 2011-12. He has insufficient losses to claim in respect of 2009- 10 and 2010-11. (c) In a limited liability partnership the amount of loss that can be relieved against non-partnership income is restricted to the total contribution to the business by that partner by the end of the tax year against which a claim for loss relief is being made. The total contribution of a partner is the total capital introduced to the business by him plus his share of any profits earned while he has been a partner less any drawings by him. However, the restriction does not affect the ability to carry forward relief under s83 against future partnership income, nor does it affect a s89 terminal loss relief carry-back claim against the trading income from the partnership. Paper F6 (UK): Taxation FA2012

19 Auy Man and Bim Men

  (a) (1) Auy will be treated as resident in the United Kingdom for 2012–13 as she was present in the United Kingdom for 183 days or more.

  (2) Bim will be treated as resident in the United Kingdom for 2012–13 as she has made substantial visits to the United Kingdom. Her visits have averaged 91 days or more over four consecutive years. (b) Trading profit for the year ended 5 April 2013

  £ £

  Net profit 80,388

  Depreciation 3,400

  Input VAT Motor expenses (2,600 x 30%) 780 Entertaining employees Appropriation of profit 4,000 Excessive salary (15,000 – 10,000) 5,000 Capital allowances (working)

  13,568

  • ––––––– ––––––– 93,568 13,568
  • ––––––– (13,568)
  • ––––––– Trading profit

  80,000

  • ––––––– Tutorial notes

  (1) No adjustment is required in respect of the input VAT as the expense figures are already exclusive of VAT. (2) The only exception to the non-deductibility of entertainment expenditure is when it is in respect of employees.

  Working – Capital allowances Main Motor Motor Special pool car [1] car [2] rate Allowances pool £ £ £ £ £ £

  WDV b/f 3,100 18,000 14,000 Additions Motor car [4] 14,200 Motor car [5]

  8,700

  • ––––––– 17,300

  Proceeds – Motor car [2] (13,100)

  • ––––––– Balancing

  (900) x 630 allowance

  70%

  • ––––––– WDA – 18% (3,114) 3,114 WDA – 8% (1,440) x

  (696) 1,704 70%

  • ––––––– 14,186

Section 2: Answers to practice questions

  Main Motor Motor Special pool car [1] car [2] rate Allowances pool £ £ £ £ £ £

  Addition qualifying for FYA Motor car [3] 11,600 FYA – 100% (11,600) x

  8,120 70%

  • ––––––– –––––– ––––––– –––––––

  WDV c/f 14,186 16,560 8,004

  • ––––––– –––––– ––––––– ––––––– Total

  13,568

  • ––––––– Tutorial notes

  (1) Motor car [3] has CO2 emissions of less than 110 grams per kilometre and therefore qualifies for the 100% first year allowance. (2) Motor car [4] has CO2 emissions between 111 and 160 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%. (3) Motor car [5] has CO2 emissions over 160 grams per kilometre and therefore qualifies for writing down allowances at the rate of 8%.

  Trading income assessments 2012–13 Total Auy Bim Man Men £ £ £

  Salary 4,000 4,000 Interest (56,000/34,000 at 5%) 4,500 2,800 1,700 Balance (80%/20%) 71,500 57,200 14,300

  • ––––––– ––––––– ––––––– 80,000 60,000 20,000
  • ––––––– ––––––– ––––––– (c) (1) Auy’s class 4 NIC for 2012–13 will be £3,488 ((42,475 – 7,605 = 34,870 at 9%) + (60,000 – 42,475 = 17,525 at 2%)).

  (2) Bim’s class 4 NIC for 2012–13 will be £1,116 (20,000 – 7,605 = 12,395 at 9%). (d) (i) Tax point (1) The basic tax point is the date when services are completed.

  (2) If an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point. (3) If an invoice is issued within 14 days of the basic tax point, the invoice date will usually replace that in (1). (ii)

  VAT paid for the year ended 5 April 2013

  (1) The partnership’s output VAT is £28,440 and its total input VAT is £320 (180 + 140). (2) Therefore VAT of £28,120 (28,440 – 320) will have been paid to HM Revenue & Customs during the year ended 5 April 2013. Paper F6 (UK): Taxation FA2012

  (iii) Flat rate scheme (1) The partnership can join the flat rate scheme if its expected taxable turnover (excluding VAT) for the next 12 months does not exceed

  £150,000. (2) The partnership can continue to use the scheme until its total turnover (including VAT, but excluding sales of capital assets) for the previous year exceeds £230,000. (3) If the partnership had used the flat rate scheme throughout the year ended 5 April 2013 then it would have paid VAT of £18,770 (142,200 +

  28,440 = 170,640 x 11%). (4) This is a saving of £9,350 (28,120 – 18,770) for the year.

20 Xio, Yana and Zoe (a) Each partner is treated as a sole trader running a business.

  The cessation rules therefore apply to a partner who leaves the partnership, with relief for overlap profits being given against the final year’s assessment. The remaining partners continue to be assessed using the current year basis. (b) Xio, Yana and Zoe – Trading profit for the year ended 5 April 2013

  £ £

  Net profit 34,462

  Depreciation 16,600 Impairment losses Motor expenses (19,000 × 40%) 7,600 Legal fees for accountancy Legal fees regarding defence of domain name Legal fees in connection with the grant of a new lease 2,100 Decorating the partnership offices Construction of new wall 4,700 Entertaining customers 1,060 Entertaining employees Gifts to customers

  600 Capital allowances Pool (21,250 × 18%)

  3,825 Xio’s motor car (16,500 × 8% x 60%) 792 Yana’s motor car (8,750 × 18% × 60%) 945 Zoe’s motor car (15,000 – 12,400 = 2,600 × 60%) 1,560

  • ––––––– ––––––– 67,122 7,122
  • ––––––– (7,122)
  • ––––––– Trading profit

  60,000

  • –––––––

Section 2: Answers to practice questions

  (c) Assessments 2012-13

   Total Xio Yana Zoe £ £ £ £ Three months to 30 June 2012

  Salary (6,000 × 3/12) 1,500 1,500 Balance (50%/30%/20%) 13,500 6,750 4,050 2,700

  • ––––––– ––––––– ––––––– ––––––– 15,000 8,250 4,050 2,700
  • ––––––– ––––––– ––––––– –––––––

  Nine months to 5 April 2013

  Balance (50%/50%) 45,000 22,500 22,500

  • ––––––– ––––––– ––––––– ––––––– Total assessment 60,000 30,750 26,550 2,700
  • ––––––– ––––––– ––––––– –––––––   (d) Income tax computations 2012-13

  Xio Yana Zoe £ £ £

  Trading income 30,750 26,550 2,700 Director’s remuneration 30,000 Building society interest (800 × 100/80) 1,000 Dividends (10,800 × 100/90) 12,000

  • ––––––– ––––––– ––––––– 31,750 26,550 44,700

  Personal allowance (8,105) (8,105) (8,105)

  • ––––––– ––––––– ––––––– Taxable income 23,645 18,445 36,595
  • ––––––– ––––––– ––––––– Income tax 23,645 at 20% 4,729 18,445 at 20%

  3,689 24,595 (32,700 – 8,105) at 20% 4,919 9,775 (34,370 – 24,595) at 10% 977 . 2,225 (12,000 – 9,775) at 32 5% 723

  • ––––––– ––––––– ––––––– 4,729 3,689 6,619
  • ––––––– ––––––– –––––––

  Capital gains tax

  Yana will be taxed on capital gains of £23,500 (34,100 –10,600) after deducting the annual exempt amount. Her CGT liability for 2012-13 is therefore:

  £

  (34,370 – 18,445) = 15,925 at 18% 2,866 (23,500 – 15,925) = 7,575 at 28% 2,121

  • ––––––– 4,987
  • ––––––– (e) For a change of accounting date to be valid for tax purposes, the following conditions must be satisfied:

  „ The first accounting period to the new accounting end date must not exceed 18 months in length. Paper F6 (UK): Taxation FA2012 „ The business must not have changed its accounting date in the previous

  five years or, if it has, it must have justifiable commercial reasons for making a further change in the five year period.

  „ HMRC must be notified of the change by 31 January following the tax year in which the first accounting period to the new date ends.

  Capital gains tax

21 David and Angela Brook

  Jointly owned property (1) Motor cars are exempt from CGT. (2) The chargeable gain on the house is calculated as follows:

  £

  Disposal proceeds 326,000

  Cost (86,000)

  • ––––––––– 240,000

  Principal private residence exemption (207,000)

  • ––––––––– 33,000
  • ––––––––– (3) David and Angela will each be assessed on £16,500 (33,000 x 50%) of the chargeable gain.

  (4) The total period of ownership of the house is 240 months (207 + 33), of which 207 months qualify for exemption as follows:

   Exempt Chargeable months months

  1 October 1992 to 31 March 1996 (occupied)

  42

  1 April 1996 to 31 December 1999 (working in UK)

  45

  1 January 2000 to 31 December 2006 (occupied)

  84

  1 January 2007 to 30 September 2009 (unoccupied)

  33

  1 October 2009 to 30 September 2012 (final 36 months)

  36

  • ––– –––– 207

  33

  • ––– –––– (5) The exemption is, therefore, £207,000 (240,000 x 207/240).

  David Brook – CGT liability 2012–13 £ £

  House 16,500

  Ordinary shares in Galatico plc February 2012 acquisition Deemed proceeds (12,000 x £2·95) 35,400 Cost

  (21,600)

  • –––––––– 13,800

Section 2: Answers to practice questions

  £ £

  June 2005 acquisition Deemed proceeds (3,000 x £2·95) 8,850 Cost (17,600 x 3,000/8,000) (6,600)

  • –––––– 2,250
    • ––––––– Chargeable gains

  32,550 Annual exempt amount

  (10,600)

  • ––––––– Taxable gains

  21,950

  • ––––––– Capital gains tax 21,950 at 18%

  3,951

  • ––––––– (1) The antique table is a non-wasting chattel, but is exempt from CGT because the gross sale proceeds were less than £6,000.

  (2) The transfer of the 20,000 £1 ordinary shares in Bend Ltd to Angela does not give rise to any gain or loss, because it is a transfer between spouses. (3) The shares in Galatico plc are valued at £2·95 (£2·90 + ¼ (£3·10 – £2·90)). (4) The disposal is first matched against the purchase on 24 February 2013, and then against the purchase on 15 June 2005.

  Angela Brook – CGT liability 2012–13 £ £

  House 16,500

  Antique clock 2,000

  Ordinary shares in Bend Ltd Disposal proceeds 62,400 Cost (48,000 x 15,000/20,000) (36,000)

  • –––––––– 26,400
    • ––––––– Chargeable gains

  44,900 Annual exempt amount

  (10,600)

  • ––––––– Taxable gains

  34,300

  • ––––––– Capital gains tax 34,300 at 28% 9,604
  • ––––––– (1) The antique clock is a non-wasting chattel. The gain is restricted to £2,000 (7,200 – 6,000 = 1,200 x 5/3) as this is less than £3,500 (7,200 – 3,700).

  (2) David’s original cost is used in calculating the capital gain on the disposal of the shares in Bend Ltd.

22 Wilson Biazma

  (a) (1) A person will be resident in the UK during a tax year if they are present in the UK for 183 days or more. Paper F6 (UK): Taxation FA2012

  (2) A person will also be treated as resident if they visit the UK regularly, with visits averaging 91 days or more a tax year over a period of four or more consecutive tax years. (3) Ordinary residence is not precisely defined, but a person will normally be ordinarily resident in the UK if this is where they habitually reside.

  (4) A person is liable to capital gains tax (CGT) on the disposal of assets during any tax year in which they are either resident or ordinarily resident in the UK. (b) Wilson Biazma – Chargeable gains 2012–13

  £

  Office building 142,000

  Goodwill 36,000

  Ordinary shares in Gandua Ltd 8,000

  • – Antique vase Land

  17,000

  • ––––––– Chargeable gains

  203,000

  • ––––––– Office building

  £

  Disposal proceeds 246,000

  Cost (104,000)

  • –––––––– 142,000
  • –––––––– Rollover relief is not available because the amount not reinvested of £146,000 (246,000 – 100,000) is greater than the capital gain of £142,000.

  Goodwill £

  Disposal proceeds 120,000

  Cost Nil

  • –––––––– 120,000

  Rollover relief (120,000 – 36,000) (84,000)

  • –––––––– 36,000
  • –––––––– The proportion of the gain relating to the cash consideration cannot be rolled over, so £36,000 (120,000 x 60,000/200,000) of the gain is immediately chargeable to CGT.

  Ordinary shares in Gandua Ltd £

  Deemed proceeds 160,000

  Cost (112,000)

  • –––––––– 48,000

  Gift relief (40,000)

  • –––––––– Chargeable gain

  8,000

  • ––––––––

Section 2: Answers to practice questions

  Gift relief is restricted to £40,000 (48,000 x 150,000/180,000), being the proportion of chargeable assets to chargeable business assets.

  Antique vase

  The insurance proceeds of £68,000 received by Wilson have been fully reinvested in a replacement antique vase. The disposal is therefore on a no gain no loss basis, with the capital gain of £19,000 (insurance proceeds of £68,000 less original cost of £49,000) being set against the cost of the replacement antique vase.

  Land £

  Disposal proceeds 85,000

  Cost (68,000)

  • –––––––– 17,000
  • –––––––– The cost relating to the ten acres of land sold is £68,000 (120,000 x 85,000/150,000 (85,000 + 65,000)).

23 Nim and Mae Lom Nim Lom – CGT liability 2012–13 £ £

  Ordinary shares in Kapook plc Deemed proceeds (10,000 x £3·70) 37,000 Cost

  (23,400)

  • ––––––– 13,600
    • – Ordinary shares in Jooba Ltd (no gain, no loss) UK Government securities (exempt)
    • – –––––––

  13,600 Capital losses brought forward

  (3,000)

  • ––––––– Chargeable gains

  10,600 Annual exempt amount

  (10,600)

  • ––––––– Taxable gains

  Nil

  • ––––––– Workings

  (1) The shares in Kapook plc are valued at £3·70 ((£3·60 + £3·80)/2) as this is lower than £3·75 (£3·70 + 1/4(£3·90 – £3·70)). (2) The disposal is first matched against the purchase on 24 May 2012 (this is within the following 30 days), and then against the shares in the share pool. The cost of the shares disposed of is, therefore, £23,400 (5,800 + 17,600).

  Share pool

Number Cost

£ £

  Purchase 19 February 2000 8,000 16,200 Purchase 6 June 2005

  6,000 14,600

  • ––––––– ––––––– 14,000 30,800
Paper F6 (UK): Taxation FA2012 Number Cost £ £

  Disposal 20 May 2012 (30,800 x 8,000/14,000) (8,000) (17,600)

  • ––––––– ––––––– Balance carried forward 6,000 13,200
  • ––––––– ––––––– (3) The set off of the brought forward capital losses is restricted to £3,000 (13,600 –

  10,600) so that chargeable gains are reduced to the amount of the annual exempt amount. (4) Nim therefore has capital losses carried forward of £13,700 (16,700 – 3,000).

  Notes

  (1) The transfer of the 5,000 £1 ordinary shares in Jooba Ltd to Mae does not give rise to any gain or loss, because it is a transfer between spouses. (2) The disposal of UK Government securities is exempt from CGT.

  Mae Lom – CGT liability 2012–13 Assets not qualifying for entrepreneurs’ relief £ £

  Ordinary shares in Jooba Ltd Disposal proceeds

  30,400 Cost (16,000 x 2,000/5,000) (6,400)

  • ––––––––– 24,000

  House Disposal proceeds

  186,000 Cost

  (122,000)

  • ––––––––– 64,000 Principal private residence exemption (W) (56,000)
  • ––––––––– 8,000

  Investment property 34,000

  Copyright Disposal proceeds

  9,600 Cost (10,000 x 15/20)

  (7,500)

  • ––––––––– 2,100
    • –––––––– 68,100

  Capital losses brought forward (8,500)

  • –––––––– Chargeable gains

  59,600 Annual exempt amount

  (10,600)

  • –––––––– 49,000
  • –––––––– Capital gains tax £49,000 at 28%

  13,720

Section 2: Answers to practice questions

   £ £ Assets qualifying for entrepreneurs’ relief

  Goodwill 80,000

  Freehold office building 136,000

  • –––––––– 216,000
  • –––––––– Capital gains tax £216,000 at 10%

  21,600

  • –––––––– Total capital gains tax liability

  35,320

  • –––––––– Working

  One of the eight rooms in Mae’s house was always used exclusively for business purposes, so the principal private residence exemption is restricted to £56,000 (64,000 x 7/8).

  Tutorial notes

  (1) Nim’s original cost is used in calculating the capital gain on the disposal of the shares in Jooba Ltd. (2) The investment property does not qualify for entrepreneurs’ relief because it was never used for business purposes. (3) The copyright is a wasting asset. The cost of £10,000 must therefore be depreciated based on an unexpired life of 20 years at the date of acquisition and an unexpired life of 15 years at the date of disposal. (4) The capital losses and annual exempt amount have been set against the gains that do not qualify for entrepreneurs’ relief as this is more beneficial for the taxpayer.

24 Amanda Moon

  (a) (i) (1) Amanda has chargeable gains of £135,000 calculated as follows:

  £

  Goodwill (90,000 – Nil) 90,000 Freehold shop (165,000 – 120,000) 45,000

  • –––––––– 135,000
  • –––––––– (2) The consideration from Ammoon Ltd is entirely in the form of shares, so all of Amanda’s chargeable gains can be rolled over.

  (3) The base cost of the 300,000 £1 ordinary shares will be £165,000 (300,000 – 135,000). (ii) (1) The proportion of the gain relating to the consideration taken in the form of cash would not have been rolled over.

  (2) Therefore £45,000 (135,000 x 100,000/300,000) of the gain would have still been chargeable to CGT during 2012–13. (3) The cost of the 200,000 £1 ordinary shares in Ammoon Ltd is £200,000

  (300,000 – 100,000), so the base cost will be £110,000 (200,000 – (135,000 – 45,000)). Paper F6 (UK): Taxation FA2012

  (b) (i) (1) Charles’ chargeable gain on the house is £64,500 calculated as follows:

   £

  Disposal proceeds 282,000 Cost (110,000)

  • ––––––––– 172,000 Principal private residence exemption (107,500)
  • ––––––––– 64,500
  • ––––––––– (2) The total period of ownership of the house is 144 months (90 + 54), of which 90 months qualify for exemption as follows:

   Exempt Chargeable months months

  1 October 2000 to 31 March 2002 (occupied)

  18

  1 April 2002 to 30 September 2009 (unoccupied)

  36

  54

  1 October 2009 to 30 September 2012

  36 (final 36 months)

  • ––– –––

  90

  54

  • ––– ––– (3) The principal private residence exemption is, therefore, £107,500 (172,000 x 90/144).

  Note: The first 36 months of the unoccupied period is a period of deemed

  occupation (absence for any reason preceded and followed by a period of actual occupation), as is the whole of the period which falls within the final 36 months of ownership. (ii) (1) The letting relief exemption will be £40,000, as this is lower than both

  £107,500 (the amount of the gain exempt under the principal private residence rules) and £64,500 (the amount of the non-exempt gain attributable to the period of letting (172,000 x 54/144)). (2) Charles’ chargeable gain will therefore be reduced to £24,500 (64,500 – 40,000).

25 Michael Chin

  (a) Michael Chin – Capital gains tax liability 2012-13

  Gains Non- qualifying qualifying for ER gains £ £ Goodwill

  Deemed proceeds 60,000 Cost Nil

  • ––––––– 60,000

  Freehold property

  Deemed proceeds 150,000 Cost (86,000)

  • ––––––– 64,000 48,000 16,000

Section 2: Answers to practice questions

  Gains Non- qualifying qualifying for ER gains £ £ Ordinary shares in Minnow Ltd

  Deemed proceeds 180,000 Cost (87,500)

  • ––––––– 92,500 Gift relief (74,000)

  18,500 –––––––

  Ordinary shares in Whale plc

  Deemed proceeds (18,000 × £6.40) 115,200 Cost (51,600)

  • ––––––– 63,600
  • ––––––– ––––––– 108,000 98,100

  Capital loss brought forward (15,300) -

  • ––––––– ––––––– 108,000 82,800

  Annual exempt amount (10,600) -

  • ––––––– ––––––– 108,000 72,200
  • ––––––– ––––––– Capital gains tax at 10% 10,800 Capital gains tax at 28%

  20,216

  • –––––– –––––– Total CGT due: 10,800 + 20,216 31,016
  • –––––– Workings

  (1) The proportion of the freehold property gain relating to non-business use is £16,000 (64,000 × 25%), and this amount does not qualify for entrepreneurs’ relief.

  (2) The net current assets are not chargeable to capital gains tax. (3) The gift relief in respect of the ordinary shares in Minnow Ltd is restricted to £74,000 (92,500 × 200,000/250,000), being the proportion of chargeable assets to chargeable business assets. (4) The shares in Whale plc are valued at £6.40 (£6.36 + ¼ (£6.52 – £6.36)). (5) The disposal is first matched against the purchase on 21 February 2013, and then against the purchase on 7 December 2010. The cost of the shares disposed of is therefore £51,600 (26,400 + (63,000 × 6,000/15,000). (6) Only £2,000 (12,600 – 10,600) of the capital loss is used in 2011-12, so £15,300 (17,300 – 2,000) of it is brought forward to 2012-13.

  (7) Capital losses and the annual exempt amount have been set against the gains that do not qualify for entrepreneurs’ relief. This approach is the most beneficial for the taxpayer as it saves tax at the rate of 28% rather than 10%. (8) Gains qualifying for entrepreneurs’ relief are deemed to use the remainder of the basic rate band in priority to non-qualifying gains. Paper F6 (UK): Taxation FA2012

26 Sophia Tang

  (a) Sophia Tang – Income tax liability 2012-13

  £ £

  Trading income 8,700

  Interest income 17,900

  • ––––––– Total income

  26,600 PAA PAA (age 78) 10,660 Less (26,600 – 25,400) x ½ (600)

  • ––––––– (10,060)
  • ––––––– Taxable income

  16,540

  • ––––––– Income tax liability £2,710 x 10%

  271 £13,830 x 20%

  2,766

  • ––––––– 3,037
  • ––––––– Tutorial note

  The 10% band applies because all of Sophia’s taxable income consists of savings income. (b) Sophia Tang – CGT liability 2012-13 with gift relief

  £ £ Freehold shop

  Deemed proceeds 260,000 Cost (113,000)

  • ––––––– 147,000 Gift relief (147,000 – 47,000) (100,000)
  • ––––––– Gain (W2)

  47,000

  Freehold warehouse

  Deemed proceeds 225,000 Cost (120,100)

  • ––––––– 104,900
  • ––––––– 151,900

  Annual exempt amount (10,600)

  • ––––––– 141,300
  • ––––––– Capital gains tax (34,370 – 16,540) = 17,830 at 18% 3,209 (141,300 – 17,830) = 123,470 at 28% 34,572
  • ––––––– 37,781
  • ––––––– Workings

  (1) Sophia and her daughter are connected persons, and therefore the market values of the assets sold are used.

Section 2: Answers to practice questions

27 Lim Lam

  Land Disposal proceeds

  99,275

  (15,925)

  Ordinary shares in Oily plc Deemed proceeds (5,000 x £7·44) 37,200 Cost

  (182,000)

  260,000 Cost

  Assets not qualifying for entrepreneurs’ relief £ £

  (2) The consideration paid for the shop exceeds the allowable cost by £47,000 (160,000 – 113,000). This amount is immediately chargeable to CGT. (3) The warehouse is not a business asset, and therefore does not qualify for holdover relief.

  (b) Lim Lam – Capital gains tax liability 2012–13

  (2) Mal-Mil Ltd is a trading company. (3) Lim’s shareholding in Mal-Mil Ltd is more than 5%, and she is also a director of the company.

  (a) (1) Lim has owned the shares in Mal-Mil Ltd throughout one year ending with the date of disposal.

  The cash component of an ISA includes cash deposits in bank and building society accounts. Sophia can invest a maximum of £5,640 in the cash component. The shares component of an ISA includes qualifying stocks and shares and insurance products. Sophia can invest a maximum of £11,280 in the shares component. However, the maximum total investment (i.e. both cash and shares) cannot exceed £11,280.

  (d) All income within an ISA is exempt from income tax. All capital disposals within an ISA are exempt from capital gains tax.

  (ii) Retention until death The transfer of assets on death is an exempt disposal so there would not have been any CGT liability. The assets would have been included in Sophia’s estate for inheritance tax purposes. Wong would have inherited the shop and warehouse with base costs of £260,000 and £225,000 respectively.

  (c) (i) Postponement until 6 April 2013 The gains would have been assessed in 2013–14, so the payment of the CGT liability would have been due on 31 January 2015 instead of 31 January 2014.

  • –––––––– 78,000
  • –––––––– 21,275
  • –––––––– Chargeable gains
Paper F6 (UK): Taxation FA2012 £ £

  Annual exempt amount (10,600)

  • –––––––– 88,675
  • –––––––– Capital gains tax 88,675 at 28%

  24,829

  Assets qualifying for entrepreneurs’ relief

  Ordinary shares in Mal-Mil Ltd Disposal proceeds

  280,000 Cost (56,000)

  • –––––––– ––––––––-----------------

  224,000 Capital gains tax at 10%

  22,400

  • –––––––– ––––––––-----------------

  Total capital gains tax 47,229 Lim’s capital gains tax liability will be due on 31 January 2014.

  (1) On the takeover Lim received ordinary shares valued at £17,500 (1,000 x 5 = 5,000 x £3·50) and preference shares valued at £2,500 (1,000 x 2 = 2,000 x £1·25).

  (2) The cost attributable to the 5,000 ordinary shares in Oily plc is £15,925 (18,200 x 17,500/20,000 (17,500 + 2,500)). (3) The disposal of shares in Mal-Mil Ltd is matched entirely against the shares in the share pool.

  Share pool Number Cost £ £

  Purchase 8 June 2005 125,000 142,000 Purchase 23 May 2007 60,000 117,000

  • –––––––– –––––––– 185,000 259,000 Disposal 22 March 2013 (259,000 x 40,000/185,000) (40,000) (56,000)
  • –––––––– –––––––– Balance carried forward 145,000 203,000
  • –––––––– –––––––– (c) Mal-Mil Ltd – Chargeable gain on the disposal of the land

  £ £

  Disposal proceeds 162,000

  Incidental costs of disposal (3,800)

  • –––––––– 158,200

  Cost 101,250

  Enhancement expenditure 12,150

  • –––––––– (113,400)

  Indexation (113,400 x 0.031) (3,515)

  • –––––––– Chargeable gain

  41,285

  • –––––––– (1) The cost relating to the two acres of land sold is £101,250 (260,000 x 162,000/416,000 (162,000 + 254,000)).

Section 2: Answers to practice questions

  (2) The levelling of the land is enhancement expenditure. The cost relating to the two acres of land sold is £12,150 (31,200 x 162,000/416,000).

  Corporation tax liability

  (1) Mal-Mil Ltd’s corporation tax liability for the year ended 31 December 2012 is £40,857 (163,000 + 41,285 = 204,285 at 20%). (2) This is due on 1 October 2013.

28 Nui Lee

  (a) Trading income assessment 2012-13

   £ £

  Year ended 31 December 2012 Trading income 65,800 Capital allowances (working) (8,208)

  • ––––––– 57,592

  Period ended 5 April 2013 Trading income 29,700 Balancing allowance (working) (7,392)

  • ––––––– 22,308
  • ––––––– 79,900

  Relief for overlap profits (5,900)

  • ––––––– 74,000
  • ––––––– Working - Capital allowances £

  Year ended 31 December 2012 WDV brought forward

  45,600 WDA - 18%

  (8,208)

  • ––––––– WDV carried forward

  37,392 Period ended 5 April 2013 Disposal (30,000)

  • ––––––– Balancing allowance

  7,392

  • ––––––– (b)

   Goodwill Property £ £

  Proceeds 60,000 165,000 Cost Nil (110,000)

  • ––––––– ––––––– Chargeable gains 60,000 55,000
  • ––––––– ––––––– Total gains (60,000 + 55,000) 115,000
Paper F6 (UK): Taxation FA2012 Goodwill Property £ £

  Annual exempt amount (10,600)

  • ––––––– Taxable gains 104,400
  • ––––––– CGT at 10% 10,440
  • –––––––  

  Tutorial note

  The loss on the plant and machinery is dealt with through the capital allowances system. The net current assets are not chargeable to capital gains tax. As Nui is disposing of the whole of her sole trader business, which she has owned for more than one year, the disposal will qualify for entrepreneurs’ relief. (c) Nui will cease making taxable supplies so her VAT registration will be cancelled on 5 April 2013 or an agreed later date. She will have to notify HM Revenue &

  Customs by 5 May 2013, being 30 days after the date of cessation. When a business is sold as a going concern to a taxable person, output VAT is not due in respect of inventory and non-current assets on which VAT has been claimed. (d) Nui’s trading income assessment for 2012-13 will become £57,592, with £16,408

  (22,308 – 5,900) now assessed in 2013-14. This will delay the payment of some of the liability, and may (depending on the level of Nui’s other income) reduce the overall income tax liability. The gains will now be assessed in 2013-14, so the payment of the CGT liability will be due on 31 January 2015 instead of 31 January 2014.

  Inheritance Tax

29 Alex Reader (a) Calculation of inheritance tax liability during Alex’s lifetime

  The gift in July 2007 was a potentially exempt transfer (PET) and was thus ignored for lifetime purposes. The transfer into the discretionary trust in September 2007 was a chargeable lifetime transfer (CLT).

  Lifetime tax

  The value of the CLT was £371,000. No annual exemptions were available, as these would have been used by the PET. The lifetime tax was as follows:

   £ £

  300,000 × 0% 71,000 × 20/80 17,750

  • –-––– ––--––– 371,000 Total 17,750
    • ––--––– –-––– The grossed up transfer was therefore £388,750 (371,000 + 17,750).

Section 2: Answers to practice questions

  Tutorial note: The tax rate used of 20/80 (or 25%) is the rate used to gross up the gift, where the donor suffers any lifetime tax due. (b) Additional tax at death

  The PET becomes chargeable on death, as Alex died within seven years of making the gift. As there are no lifetime transfers in the previous seven years, the full nil rate band is available.

  £

  PET 371,000 Less: Annual exemptions: 2007-08 (3,000) 2006-07 (3,000)

  • ––––––– 365,000
  • ––––––– £

  325,000 × 0% 40,000 × 40% 16,000

  • ––––––– 365,000
  • ––––––– Less: Taper relief (5-6 years) 60% (9,600)
  • ––––––– Tax due

  6,400

  • ––––––– Brian will pay this tax as donee. The PET has used up the nil rate band, so the CLT is fully taxable.

  £

  £388,750 × 40% 155,500 Less: Taper relief (4-5 years) 40% (62,200)

  • –––––– 93,300 Less: Tax paid during lifetime (17,750)
  • –––––– Tax due

  75,550

  • –––––– The trustees will pay this tax.

  Estate at death £

  Vocational plc shares 128,800 Building society account 15,000 NS investment account 55,000 National Savings certificates 180,000 Chattels 40,000 Other quoted investments 115,000 Residence 475,000

  • –––––––– 1,008,800
  • >–––––––– IHT at 40% 403,520
  • ––––––––
Paper F6 (UK): Taxation FA2012

  The personal representatives will pay the tax due on the death estate. All of the tax arising as a result of death is payable on 28 February 2013. (c) The inheritance due to each of Brian and Beatrice is therefore £(1,008,800 – 403,520) / 2 = £302,640.

30 Henry Major Cash

   (a)  (i)   gifts made to a trust  These

   are chargeable lifetime transfers. Because Henry agreed to pay any 

  IHT  arising, these will be regarded as ‘net’ gifts and would have resulted in  the  following IHT liabilities: 

  Net

  IHT Notes Gross £ £ £ £

  1 January 2003 Gift 200,000

  Less: Annual exemptions (6,000)

  2002-03 & 2001-02

  • –––––– 194,000 (1) 194,000 -
    • ––––––– –––––– –––––––

  1 January 2006 Gift 145,000

  Less: Annual exemptions (6,000)

  2005-06 & 2004-05

  • ––––––– 139,000 14,500 153,500
  • ––––––– –––––– ––––––– 333,000 14,500 (2) 347,500
  • ––––––– –––––– ––––––– The £14,500 IHT payable by Henry as a result of the second transfer is due on 31 July 2006.

  Notes: (1) 194,000 < 250,000 (nil band) – therefore no IHT payable.

  (2) 333,000 – 275,000 = 58,000 × 20/80 = £14,500.

  (ii) Additional IHT arising on CLTs on death of Henry

  1 January 2003 As this gift was made more than seven years from death, no additional IHT is payable. However, as the gift was made within seven years of the January 2006 transfer, it is taken into account in determining the nil rate band remaining available for that transfer.

  1 January 2006

Section 2: Answers to practice questions

  There is no additional IHT payable as the amount due is covered by the lifetime IHT paid:

  £

  Gross CLT 153,500

  Nil rate band (325,000 – 194,000) (131,000)

  • ––––––– Chargeable

  22,500

  • ––––––– IHT at 40%

  9,000 Less: Taper relief 80% (6-7 years) (7,200)

  Lifetime tax paid (14,500)

  • ––––––– Additional tax payable Nil –––––––

  IHT on death estate

  Henry’s estate at death comprises:

  £

  Shares – Peel plc 100,000 x 2.02 202,000 Government stock 19,900 Cash (25,000 + 18,000) 43,000 Home 450,000

  • ––––––– 714,900

  Less: exempt transfer to spouse (674,900)

  • ––––––– Chargeable 40,000    
  • ––––––– IHT £ £

  Gross value of CLTs within seven years of death 153,500 Nil Chargeable estate value 40,000 Nil

  • –––––– –––––– 193,500 Nil –––––– –––––– As a consequence no IHT is payable on the estate at death.

  (b) Nil rate band available to Sally £131,500 (325,000 – 193,500) of Henry’s nil rate band is unused. This equates to 40.46% (131,500/325,000).

  The nil rate band applicable at the date of Sally’s death is therefore increased by this amount. If the nil rate band had increased to £350,000 by the date of her death, Sally would be entitled to an additional £141,610 giving her a total of £491,610.

31 Debbie Morgan

  (a) (i) Debbie’s death in June 2013

  Lifetime transfers

  Debbie gifted the house in June 2009. There was originally no IHT liability on this gift as it was a PET (potentially exempt transfer). However, it would Paper F6 (UK): Taxation FA2012

  be chargeable on Debbie’s death in June 2013 as the transfer was within seven years.

  £

  Transfer 202,000

  Less:: Annual exemption 2009-10 (3,000)

  Annual exemption 2008-09 (3,000)

  • ––––––– 196,000
  • ––––––– Debbie will still have £129,000 (£325,000 – £196,000) of her nil rate band left at death.

  Estate at death

  Debbie’s estate will be as follows:

  £

  Cash deposits 100,000

  Paintings 18,300 Quoted shares

  150,000 Residence 550,000

  • ––––––––– 818,300

  Less: balance of nil rate band (129,000)

  • ––––––––– Chargeable estate 689,300
  • ––––––––– IHT thereon at 40% 275,720
  • ––––––––– (ii) Inheritance tax administration The tax on Debbie’s estate would be paid by the personal representatives. Inheritance tax is due six months from the end of the month in which death occurred (31 December 2013) or the date on which the personal representatives deliver their account to HMRC (if earlier). Gifts to individuals of £250 or less per recipient per tax year are exempt.

  (b) (i) Gifts in excess of this amount are chargeable in full.

  (ii) IHT is a tax on capital therefore gifts made out of income are not chargeable. HMRC would expect the expenditure to be regular payments that do not affect the donor’s standard of living, for example Christmas and birthday presents.

  (iii) Wedding gifts are exempt depending on the donor’s relationship to the couple: ƒ Parent £5,000 ƒ Grandparent £2,500 ƒ One of the couple to the other £2,500.

  ƒ Anyone else £1,000. It is advisable for Debbie to make lifetime transfers even if no exemptions are

  (c) available to her because: A PET will be completely exempt if Debbie survives more than seven years. (i)

Section 2: Answers to practice questions

  (ii) Even if Debbie dies within seven years, the value of the PET will be fixed at the date of transfer. This means that any increase in value between the date of transfer and the date of death will escape IHT. (iii) Taper relief will reduce the amount of IHT payable on a PET if Debbie survives for at least three years.

  Corporation Tax

32 Gastron Ltd

  (a) Gastron Ltd – Trading profit for the year ended 31 March 2013

   £ £

  Profit before taxation 640,000 Depreciation

  70,880 Amortisation of leasehold property 6,000 Deduction for lease premium (working 1) 4,920 Gifts of pens to customers 1,200 Gifts of hampers to customers 1,100 Donation Legal fees re renewal of lease Legal fees re issue of debentures Entertaining suppliers 1,300 Entertaining employees Income from property

  20,600 Bank interest

  12,400 Dividends

  54,000 Profit on disposal of shares

  80,700 Interest payable Capital allowances (working 2) 47,860

  • –––––––– –––––––– 720,480 220,480
  • –––––––– (220,480)
  • –––––––– Trading profit

  500,000

  • –––––––– Working

  1 – Deduction for lease premium

  (1) The office building has been used for business purposes, and so the proportion of the lease premium assessed on the landlord can be deducted, spread over the life of the lease. (2) The amount assessed on the landlord is £49,600 calculated as follows:

   £

  Premium received 60,000

  Less: 60,000 x 2% x (10 – 1) (10,800)

  • ––––––– 49,200
  • ––––––– (3) This is deductible over the life of the lease, so the deduction for the year ended 31 March 2013 is £4,920 (49,200/10).
Paper F6 (UK): Taxation FA2012 Working 2 – Plant and machinery Pool Allowances £ £ £

  WDV brought forward 16,700 Additions qualifying for AIA Equipment 21,600 Lorry 17,200

  • –––––––– 38,800 AIA – 100% 13,800 25,000

  (25,000)

  • –––––––– Other additions Motor car

  9,800

  • –––––––– 40,300

  Proceeds – equipment (3,300)

  • –––––––– 37,000

  WDA – 18% (6,660) 6,660

  • –––––––– 30,340

  Addition qualifying for FYA Motor car 16,200 FYA – 100%

  16,200 (16,200)

  • –––––––– –––––––– WDV carried forward

  30,340

  • –––––––– –––––––– Total allowances

  47,860

  • –––––––– Tutorial notes

  (1) Gifts to customers are only an allowable deduction if they cost less than £50 per recipient per year, are not of food, drink, tobacco, or vouchers for exchangeable goods, and carry a conspicuous advertisement for the company making the gift.

  (2) The costs of renewing a short-lease (less than 50 years) and of obtaining loan finance are allowable. (3) The only exception to the non-deductibility of entertainment expenditure is when it is in respect of employees. (4) Interest on a loan used for trading purposes is deductible in calculating the trading loss on an accruals basis. (5) The cost of the equipment sold will have originally been added to the pool, so the disposal proceeds of £3,300 are deducted from the pool. (b) Gastron Ltd – Corporation tax computation for the year ended 31 March 2013

  £

  Trading profit 500,000

  Property business profit (W1) 12,800

  Bank interest 12,400

  Chargeable gain 74,800

  • –––––––– Taxable total profits

  600,000 Franked investment income (36,000 x 100/90) 40,000

  • ––––––––

Section 2: Answers to practice questions

  £

  Augmented profit 640,000

  • –––––––– Corporation tax £600,000 at 24% 144,000 Marginal relief 1/100 (750,000 – 640,000) x 600,000/640,000 (1,031)
  • –––––––– 142,969
  • –––––––– Workings

  (1) The property business profit is £12,800 calculated as follows:

  £ £

  Rent receivable – First tenant (1,800 x 9) 16,200

  • – Second tenant (1,950 x 2) 3,900
    • ––––––– 20,100

  Impairment loss (1,800 x 2) 3,600 Decorating

  3,700

  • ––––––– (7,300)
  • ––––––– 12,800
  • ––––––– (2) Gastron Ltd has one associated company, so the upper limit is reduced to £750,000 (1,500,000/2).

  Note: Group dividends are not included as franked investment income.

  (c) (1) Gastron Ltd’s corporation tax liability for the year ended 31 March 2013 must be paid by 1 January 2014.

  (2) If the company does not pay its corporation tax until 31 August 2014, then interest of £2,859 (142,969 at 3% = 4,289 x 8/12) will be charged by HM Revenue and Customs for the period 1 January 2014 to 31 August 2014. (d) (1) Companies form a capital gains group if at each level in the group structure there is a 75% shareholding.

  (2) However, the parent company must also have an effective interest of over 50% in each group company. (e) (1) Gastron Ltd and Culinary Ltd must make the election by 31 March 2015

  (within two years of the end of the accounting period in which the disposal outside of the group occurred). (2) Culinary Ltd’s otherwise unused capital loss of £66,000 can be set against Gastron Ltd’s chargeable gain of £74,800. (3) It is beneficial for the balance of the chargeable gain of £8,800 (74,800 –

  66,000) to arise in Culinary Ltd as it will only be taxed at the rate of 20%, instead of at the marginal rate (25%) in Gastron Ltd.

33 Do-Not-Panic Ltd Corporation tax liabilities for the fifteen-month period ended 31 March 2013

  (a)

  Year ended Period ended

  31 December 2012

  31 March 2013 £ £

  Trading profit 252,000 63,000 Capital allowances (12,000) (-)

  • ––––––––– –––––––– 240,000 63,000
Paper F6 (UK): Taxation FA2012 Year ended Period ended

  31 December 2012

  31 March 2013 £ £

  37,000 – Capital gains (42,000 – 5,000)

  • –––––––– ––––––––– Taxable total profits 240,000 100,000 Franked investment income 25,000 –
  • –––––––– ––––––––– Augmented profits 240,000 125,000
  • –––––––– ––––––––– Corporation tax FY 2011 and 2012 240,000 at 20% 48,000 FY 2012 100,000 at 24%

  24,000 Marginal relief 1/100 (375,000 – 125,000) x 100,000/125,000 (2,000)

  • ––––––––– –––––––– 48,000 22,000
    • –––––––– ––––––––– Due dates

  1 October 2013

  1 January 2014 (1) Trading profits are allocated on a time basis: £252,000 (315,000 x 12/15) to the year ended 31 December 2012 and £63,000 (315,000 x 3/15) to the period ended

  31 March 2013. (2) Separate capital allowance computations are prepared for each accounting period as follows:

  Year ended 31 December 2012 Pool Allowances £ £

  Equipment 12,000

  AIA (12,000) 12,000

  • ––––––– - WDV carried forward
  • ––––––– (3) The capital loss of £5,000 for the year ended 31 December 2012 is carried forward. (4) Although the taxable total profits for the year ended 31 December 2012 straddle the financial years 2011 and 2012, they have not been apportioned because the small profits rate of tax is the same for both years.

  (5) The period ended 31 March 2013 is three months long so the relevant lower and upper limits are £75,000 (300,000 x 3/12) and £375,000 (1,500,000 x 3/12) respectively. (b) (1) Do-Not-Panic Ltd’s self-assessment corporation tax return for the period ended 31 March 2013 must be submitted by 31 March 2014.

  (2) It will be possible for Do-Not-Panic Ltd to amend its return at any time before 31 March 2015, being twelve months after the filing date. (3) If an error or mistake in a return is subsequently discovered, then Do-Not-

  Panic Ltd can make a claim for relief before 31 March 2017, being four years from the end of the period of account.

Section 2: Answers to practice questions

  (c) Any penalty will be based on the amount of tax understated and the taxpayer’s behaviour. The penalty will be:

  „ nil where a taxpayer simply makes a mistake „ up to 30% of the understated tax where a taxpayer fails to take reasonable care „ up to 70% of the understated tax if the error is deliberate, and „ up to 100% of the understated tax where there is concealment of a deliberate

  error.

34 Stretched Ltd Corporation tax liabilities for the fifteen-month period ended 31 March 2013

  (a)

  Year Period ended ended

  31.12.12

  31.3.13 £ £

  Trading income 264,000 66,000

  Capital allowances (7,200) (10,000)

  • ––––––– ––––––– 256,800 56,000

  (23,800) – Loss relief s45

  • ––––––– ––––––– 233,000 56,000 Property income

  36,000 9,000 Capital gains (44,000 – 3,000)

  • – 41,000
    • ––––––– ––––––– 310,000 65,000

  • – Qualifying charitable donation

  (5,000)

  • ––––––– ––––––– Taxable total profits 310,000 60,000
    • – Franked investment income 30,000

  • ––––––– ––––––– Augmented profits 340,000 60,000
  • ––––––– ––––––– Corporation tax FY11 (310,000 x 3/12 at 26%) 20,150 3/200 (1,500,000 – 340,000) x 310,000/340,000 x 3/12 (3,966) FY12 (310,000 x 9/12 at 24%) 55,800 1/100 (1,500,000 – 340,000) x 310,000/340,000 x 9/12 (7,932)

  Corporation tax (60,000 at 20%) 12,000

  • ––––––– ––––––– 64,052 12,000
  • ––––––– ––––––– Due dates

  1 October

  1 January 2013 2014 (1) Trading profits are allocated on a time basis: £264,000 (330,000 × 12/15) to the year ended 31 December 2012 and £66,000 (330,000 × 3/15) to the period ended

  31 March 2013. Paper F6 (UK): Taxation FA2012

  (2) Separate capital allowance computations are prepared for each accounting period as follows:

  Pool Allowances £ £ £ Year ended 31 December 2012

  WDV brought forward 40,000 WDA – 18%

  (7,200) 7,200

  • ––––––– ––––––– WDV carried forward 32,800

  Period ended 31 March 2013

  WDA – 18% x 3/12 (1,476) 1,476

  • ––––––– 31,324

  Office equipment 8,524 AIA (8,524) 8,524

  • ––––––– -
  • ––––––– ––––––– WDV carried forward 31,324 10,000
  • ––––––– ––––––– (3) Property income profits are allocated on a time basis: £36,000 (45,000 × 12/15) to the year ended 31 December 2012 and £9,000 (45,000 × 3/15) to the period ended 31 March 2013.

  (4) The capital loss of £6,700 for the period ended 31 March 2013 is carried forward. (5) The year ended 31 December 2012 straddles two financial years (2011 and 2012). (6) The period ended 31 March 2013 is three months long so the small profits rate limit is reduced to £75,000 (300,000 × 3/12).

  (b) Being aligned with the financial year makes it easier for a company to calculate its corporation tax liability, since the same rates, reliefs and legislation will apply throughout the accounting period. For owner-managed companies, alignment with the income tax year (the odd five days can be ignored) makes it easier as regards calculating the most tax efficient method of extracting profits from the company.

35 Wireless Ltd

  (a) (i) (1) An accounting period will normally start immediately after the end of the preceding accounting period.

  (2) An accounting period will also start when a company commences to trade or when its profits otherwise become liable to corporation tax. (3) An accounting period will finish at the end of the company’s period of account or 12 months after it starts, if sooner. (4) An accounting period will also finish on the commencement of winding up, when a company ceases to trade or when it ceases to be liable to corporation tax.

Section 2: Answers to practice questions

  (ii) Wireless Ltd – Taxable total profits for the period ended 31 March 2013

   £ £

  Trading profit 68,400

  Director’s remuneration (23,000 + 2,141) 25,141 Capital allowances – P & M (working) 13,976

  • –––––––– (39,117)
  • –––––––– 29,283

  Loan interest 1,110

  • –––––––– 30,393

  Qualifying charitable donation (1,800)

  • –––––––– Taxable total profits 28,593
  • –––––––– (1) The director’s remuneration can be deducted as it was paid within nine months of the end of the period of account.

  (2) The employer’s Class 1 NIC will be £2,141 (23,000 – 7,488 = 15,512 at 13.8%). (3) The dividend from the overseas subsidiary is classed as group income and is therefore ignored.

  Working – Plant and machinery Pool Allowances £ £ £

  Additions qualifying for AIA Office equipment 3,400 Machinery 10,200 Alterations 4,700

  • ––––––– 18,300 AIA – 25,000 x 6/12 (12,500) 12,500
  • ––––––– 5,800

  Additions not qualifying for AIA 10,600

  • ––––––– 16,400

  WDA – 18% x 6/12 (1,476) 1,476

  • ––––––– WDV carried forward 14,924
  • ––––––– ––––––– Total allowances

  13,976

  • ––––––– (1) WDAs are restricted to 6/12 because Wireless Ltd’s accounting period is six months long.

  (2) The private use of the motor car is irrelevant, since such usage will be assessed on the employee as a benefit. (3) The office equipment purchased on 20 September 2012 is pre-trading and is treated as incurred on 1 October 2012. Paper F6 (UK): Taxation FA2012

  (b) (i) (1) Wireless Ltd would have been liable to compulsory VAT registration when its taxable supplies during any 12-month period exceeded £77,000. (2) This happened on 29 February 2013 when taxable supplies amounted to £87,100 (9,700 + 18,200 + 21,100 + 14,800 + 23,300).

  (3) Wireless Ltd would have had to notify HMRC by 30 March 2013, being 30 days after the end of the period. (4) The company will have been registered from 1 April 2013 or from an agreed earlier date. (ii) Input VAT on goods purchased prior to registration

  (1) The goods must have been acquired for business purposes and not be sold or consumed prior to registration. (2) The goods were acquired in the four years prior to VAT registration.

  Input VAT on services supplied prior to registration (1) The services must have been supplied for business purposes.

  (2) The services were supplied in the six months prior to VAT registration. (iii) (1) Wireless Ltd’s sales are all to VAT registered businesses, so output VAT can be passed on to customers.

  (2) The company’s revenue would therefore not have altered if it had registered for VAT on 1 October 2012. (3) However, registering for VAT on 1 October 2012 would have allowed all input VAT incurred from that date to be recovered. (iv) The following additional information is required: (1) An identifying number (invoice number).

  (2) Wireless Ltd’s VAT registration number. (3) The name and address of the customer. (4) The type of supply. (5) The rate of VAT for each supply. (6) The quantity and a description of the goods supplied.

36 Crash–Bash Ltd

  (a) (i) (1) Companies that are incorporated overseas are only treated as being resident in the UK if their central management and control is exercised in the UK. (2) Since the directors are UK based and hold their board meetings in the

  UK, this would indicate that Crash–Bash Ltd is managed and controlled from the UK, and therefore it is resident in the UK.

Section 2: Answers to practice questions

  (ii) Crash–Bash Ltd –

  Corporation tax liability for the period ended 31 March 2013 £ £

  Trading profit 410,210

  Advertising expenditure 12,840 Capital allowances – P & M (working 1) 37,370

  • ––––––– (50,210)
    • –––––––– Taxable total profits

  360,000 Franked investment income (36,000 x 100/90) 40,000

  • –––––––– Augmented profit

  400,000

  • –––––––– Corporation tax (360,000 at 24%) 86,400 Marginal relief 1/100 (562,500 – 400,000) x 360,000/400,000 (1,463)
  • –––––––– 84,937
  • –––––––– Workings

  (1)

  Pool Allowances Capital allowances £ £ £

  Additions qualifying for AIA Machinery 62,500 AIA – 100% (18,750) 18,750

  • –––––––– 43,750

  Proceeds – Machinery (3,600)

  • –––––––– 40,150

  WDA – 18% x 9/12 (5,420) 5,420 Additions qualifying for FYA Motor car 13,200

  • – FYA 100% (13,200) 13,200
    • –––––––– –––––––– WDV carried forward 34,730
      • ––––––– –––––––– Total allowances 37,370
      • ––––––– (2) The annual investment allowance is reduced to £18,750 (25,000 x

  9/12) because Crash–Bash Ltd’s accounting period is nine months long. The writing down allowance is similarly restricted to 9/12. (3) The accounting period is nine months long so the upper limit is reduced to £1,125,000 (1,500,000 x 9/12). (4) This is then further reduced to £562,500 (1,125,000/2) as Crash–Bash Ltd has one associated company. (5) The advertising expenditure incurred during June 2012 is pre- trading, and is treated as incurred on 1 July 2012. It is therefore deductible and an adjustment is required. (6) As Safety Inc is a wholly owned subsidiary, its dividend is classed as group income and is ignored in calculating Crash-Bang Ltd’s augmented profits. Paper F6 (UK): Taxation FA2012

  (iii) (1) Invoicing for the exported crash helmets at less than the market price will reduce UK trading profits and hence UK corporation tax.

  (2) A true market price will therefore have to be substituted for the transfer price. (3) The true market price is the ‘arm’s length’ price that would be charged if the parties to the transaction were independent of each other. (4) Crash–Bash Ltd will be required to make the adjustment in its corporation tax self-assessment tax return.

  (b) (i) (1) Traders must register for VAT if at any time they expect their taxable supplies for the following 30-day period to exceed £77,000.

  (2) Crash–Bash Ltd realised that its taxable supplies for September 2012 were going to be at least £100,000. The company was therefore liable to register from 1 September 2012, being the start of the 30-day period.

  (3) Crash–Bash Ltd had to notify HMRC by 30 September 2012, being the end of the 30-day period. (ii) (1) Input VAT of £21,720 (108,600 x 20%) can be recovered on the inventory held at 1 September 2012.

  (2) The inventory was not acquired more than four years prior to registration, nor was it sold or consumed prior to registration. (3) Input VAT of £11,000 (22,300 + 32,700 = 55,000 x 20%) can be recovered on the services incurred from 1 July to 31 August 2012. (4) This is because the services were not supplied more than six months prior to registration. (5) The total input VAT recovery is therefore £32,720 (21,720 + 11,000). (iii) (1) If the net errors totalled less than the higher of £10,000 or 1% of the turnover for the VAT period, then they could have been voluntarily disclosed by simply entering them on the VAT return for the quarter ended 28 February 2013. (2) If the net errors exceeded the limit, they could have been voluntarily disclosed but disclosure would have been made separately to HMRC. (3) Default interest would only have been charged where the limit was exceeded and it was therefore necessary to make separate disclosure to HMRC.

  Corporation tax losses

37 Volatile Ltd

  (a) (1) The rate of corporation tax at which relief will be obtained, with preference being given to profits charged at the marginal rate of 25% or the full rate of 24%.

Section 2: Answers to practice questions

  (2) The timing of the relief obtained, with a claim against total profits (under s.37 CTA 2010) resulting in earlier relief than a claim (under s.45 CTA 2010) against future trading profits.

  (3) The extent to which relief for qualifying charitable donations will be lost, since these cannot be carried forward. (b)

  Period ended Year ended Year ended Period ended

31 December

  31 December

  31 December

  30 September 2008 2009 2010 2011 £ £ £ £

  Trading profit 44,000 – 95,200 78,700 Loss relief (s.45) – – (8,700) –

  • ––––––– ––––––– ––––––– –––––––
  • ––––––– ––––––– ––––––– –––––––
  • ––––––– ––––––– ––––––– –––––––
    • – – 69,750 – Qualifying charitable donations
    • – – (1,200) –

  • ––––––– ––––––– ––––––– ––––––– Taxable total profits – – 68,550 –
  • ––––––– ––––––– ––––––– ––––––– (1) The trading loss of £73,800 for the year ended 31 December 2009 is relieved as follows:
    • –––––––– –
    • –––––––– (2) The trading loss of £146,800 for the year ended 30 September 2012 is relieved as follows:
    • –––––––– Unrelieved as at 31 December 2012 35,150
    • –––––––– (1)
    Paper F6 (UK): Taxation FA2012

  58,500 6,600 93,000 88,400 Loss relief (s.37) (58,500) (6,600) (23,250) (88,400)

   £

  Loss 73,800

  Year ended 31 December 2009 (6,600) Period ended 31 December 2008 (58,500) Year ended 31 December 2010 (8,700)

   £

  Loss 146,800 Period ended 30 September 2011 (88,400) Year ended 31 December 2010 (23,250)

  For the year ended 31 December 2010 loss relief is restricted to £23,250 (93,000 x 3/12). (c) If Volatile Ltd had ceased trading on 30 September 2012, the loss for the final 12 months of trading could have been carried back for 36 months instead of the normal 12 months. There would have been no unrelieved loss as the figure of £35,150 shown above could have been relieved against the profits of the year ended 31 December 2010.

  44,000 – 86,500 78,700 Property business profit

  9,400 6,600 6,500 – Chargeable gains 5,100 – – 9,700

  (d) A claim to offset the loss against total profits must be made within two years of the end of the loss making accounting period, therefore:

  • the loss for the year ended 31 December 2009 must be claimed by 31 December 2011 and
  • the loss for the year ended 30 September 2012 must be claimed by 30 September 2014.

  No claim is required to carry a loss forward. Unrelieved amounts are carried forward automatically.

38 Mice Ltd

  (a) (i) Mice Ltd – Property business profit for the year ended 31 March 2013

  £ £

  Premium received for sub-lease 18,000 Less: 18,000 x 2% x (8 – 1) (2,520)

  • ––––––– 15,480

  Rent receivable – Property 1 (3,200 x 4) 12,800

  • – Property 2 6,000
  • – – Property 3
    • ––––––– 34,280

  Business rates 2,200 Repairs

  1,060 Rent paid

  7,800 Advertising

  680 Insurance (460 + 310 + (480 x 3/12)) 890 Loan interest

  • – ––––––

  (12,630)

  • ––––––– Property business profit 21,650
  • ––––––– Notes

  (1) The enlargement of the car park is capital expenditure which cannot be deducted when calculating the property business profit. (2) Interest paid in respect of a loan used to purchase property is set off under the loan relationship rules. (ii) Mice Ltd – Taxable total profits for the year ended 31 March 2013

  £

  Property business profit 21,650

  Loan interest (6,400 + 3,200 – 1,800) 7,800 Chargeable gain

  10,550

  • ––––––– 40,000 Loss relief (s.37)

  (40,000)

  • ––––––– – Taxable total profits
  • ––––––– Note: The overseas dividend is exempt. However, it is treated as franked investment income when calculating the applicable rate of corporation tax.

Section 2: Answers to practice questions

  Mice Ltd – Taxable total profits for the periods ended 31 March 2010, 2011 and 2012 Period Year Year ended ended ended

  31 March

  31 March

  31 March 2010 2011 2012 £ £ £

  Trading profit 83,200 24,700 51,200 Property business profit 2,800 7,100 12,200

  • –––––––– –––––––– –––––––– 86,000 31,800 63,400
    • Loss relief (s.37)

  (63,400)

  • –––––––– –––––––– –––––––– 86,000 31,800 –

  Qualifying charitable donations (1,000) – (1,500)

  • –––––––– –––––––– ––––––––
    • – Taxable total profits 85,000 30,300

  • –––––––– –––––––– ––––––––

  Working

  The trading loss of £180,000 for the year ended 31 March 2013 is relieved as follows:

   £

  Loss 180,000

  Year ended 31 March 2013 (40,000) Year ended 31 March 2012 (63,400)

  • –––––––– Unrelieved as at 31 March 2013 76,600
  • –––––––– (b) (1) For the three-month period ended 30 June 2012 group relief is restricted to the profit of £28,000, as this is lower than the loss of £45,000 (180,000 x 3/12) for the corresponding period.

  (2) For the year ended 30 June 2013 group relief is restricted to the loss of £135,000 (180,000 x 9/12) for the corresponding period, as this is lower than the corresponding profit of £168,000 (224,000 x 9/12).

  (c) Equipment (1) The first £25,000 of expenditure will qualify for the annual investment allowance at the rate of 100%, whilst the balance of expenditure will qualify for the writing down allowance at the rate of 18%. (2) Capital allowances will therefore be £34,000 (25,000 + (50,000 at 18%)).

  Ventilation system

  (1) The annual investment allowance will be available as above. The ventilation system will be integral to the factory, and so the balance of expenditure will only qualify for writing down allowances at the rate of 8%.

  (2) Capital allowances will therefore be £29,000 (25,000 + (50,000 at 8%)). (d) (1) The managing director’s additional income tax liability for 2012–13 will be £16,000 (40,000 at 40%).

  (2) The additional employee’s Class 1 NIC will be £800 (40,000 at 2%). (3) The additional employer’s Class 1 NIC will be £5,520 (40,000 at 13·8%). Paper F6 (UK): Taxation FA2012

39 Jogger Ltd

  (i) Jogger Ltd – Trading loss for the year ended 31 March 2013 (a)

  £

  Operating loss (56,400)

  Depreciation 12,340

  Capital allowances – P & M (working) (4,464)

  • ––––––– (48,524)
  • ––––––– Working – Plant and machinery Pool Allowances £ £

  WDV brought forward 21,600 Addition 11,800

  • ––––––– 33,400

  Proceeds (8,600)

  • ––––––– 24,800

  WDA – 18% (4,464) 4,464

  • ––––––– WDV carried forward 20,336
  • ––––––– ––––––– Total allowances

  4,464

  • ––––––– (ii) Jogger Ltd –

  Corporation tax computation for the year ended 31 March 2013 £ £

  Property business profit 126,000 Bank interest

  8,460 Loan interest (16,400 + 8,200) 24,600 Chargeable gain

  89,464

  • –––––––– 248,524

  Loss relief (s.37) (48,524)

  • –––––––– Taxable total profits

  200,000 Franked investment income (45,000 x 100/90) 50,000

  • –––––––– Augmented profits

  250,000

  • –––––––– Corporation tax (200,000 at 24%) 48,000 Marginal relief 1/100 (500,000 – 250,000) x 200,000/250,000 (2,000)
  • –––––––– 46,000
  • –––––––– Due date of payment is 1 January 2014.

Section 2: Answers to practice questions

  (1) The property business profit is calculated as follows:

   £

  Premium received 100,000 Less: 100,000 x 2% x (10 – 1) (18,000)

  • –––––––– 82,000 Rent receivable 44,000
  • –––––––– 126,000
  • –––––––– (2) Jogger Ltd has two associated companies, so the lower and upper limits are reduced to £100,000 (300,000/3) and £500,000 (1,500,000/3) respectively.

  (iii) (1) Jogger Ltd’s self-assessment tax return for the year ended 31 March 2013 must be submitted by 31 March 2014.

  (2) If the company submits its self-assessment tax return eight months late, then there will be an automatic fixed penalty of £200, since the return is more than three months late. (3) There will also be an additional corporation tax related penalty of

  £4,600 (46,000 x 10%) being 10% of the tax unpaid, since the self- assessment tax return is more than six months late. (b) (i) (1) The late submission of the VAT return for the quarter ended 30

  September 2011 will have resulted in HM Revenue and Customs (HMRC) issuing a surcharge liability notice specifying a surcharge period running to 30 September 2012.

  (2) The late payment of VAT for the quarter ended 31 March 2012 will have resulted in a surcharge of £778 (38,900 x 2%). (3) The surcharge period will also have been extended to 31 March 2013. (4) Although Jogger Ltd then submitted three consecutive VAT returns during this surcharge period on time, this was insufficient to revert to a clean default surcharge record. (5) The late payment of VAT for the quarter ended 31 March 2013 will therefore have resulted in a surcharge of £4,455 (89,100 x 5%). (6) The surcharge period will also have been extended to 31 March 2014. (ii) (1) The reduced administration from only having to submit one VAT return each year should mean that default surcharges are avoided in respect of the late submission of VAT returns. (2) In addition, making payments on account based on the previous year’s VAT liability will improve both budgeting and possibly cash flow where a business is expanding. (3) Jogger Ltd can apply to use the annual accounting scheme if its expected taxable turnover for the next 12 months does not exceed

  £1,350,000 exclusive of VAT. (4) In addition the company must be up to date with its VAT returns. (iii) The annual VAT return for the year ended 31 March 2014 will be due on 31

  May 2014 (i.e. two months after the year end). Payments on account will be Paper F6 (UK): Taxation FA2012

  due at the end of months four to twelve of the year, i.e. monthly from 31 July 2013 until 31 March 2014.

40 Sofa Ltd

  (a) (i) Sofa Ltd – Trading loss for the year ended 31 March 2013

   £ £

  Loss before taxation 240,000

  Depreciation 67,828

  Accountancy and audit fee Legal fees - issue of share capital 7,800 Legal fees – lease renewal Legal fees – issue of debentures Construction of new wall 9,700 Wall repairs Entertaining suppliers 1,360 Entertaining employees Counselling services Health and safety fine 420 Profit on disposal of shares

  4,300 Bank interest received

  8,400 Interest payable Capital allowances – Plant and machinery (working) 34,408

  • ––––––– ––––––– 87,108 287,108
  • ––––––– (287,108)
  • ––––––– Trading loss (200,000)
  • ––––––– Working – Plant and machinery Motor

    Pool car Allowances

    £ £ £ £

  WDV brought forward 16,700 Addition qualifying for AIA Equipment 11,400 Fixtures 44,800

  • ––––––– 56,200 AIA (25,000) 25,000
  • ––––––– 31,200

  Additions – Motor car (1) 22,200

  • – Motor car (2) 10,900
    • ––––––– 58,800

Section 2: Answers to practice questions

  Motor Pool car Allowances £ £ £ £

  Proceeds – Expensive motor car

  • – Lorry (7,600)
  • – Motor car (2) (8,800)
    • ––––––– 42,400

  WDA – 18% (7,632) 7,632 WDA – 8%

  (1,776) 1,776

  • –––––– –––––– WDV carried forward 34,768 20,424
  • –––––– ––––––– ––––––– Total allowances

  34,408

  • ––––––– (ii) Sofa Ltd could set off its loss against its other income and gains of the same accounting period under s37 CTA 2010. Assuming a claim is made against current profits, the balance of the loss can be carried back against total profits (before qualifying charitable donations) of the previous 12 months. Alternatively, or after the above claims, the loss can be carried forward against future trading profits under s45 CTA 2010. A claim under s37 must be made within two years of the end of the loss making accounting period, i.e. 31 March 2015. No specific claim is required under s45. Any unrelieved losses are automatically

  carried forward and set off in this way. (b) (1) The accounting periods of Settee Ltd and Sofa Ltd are not coterminous.

  Therefore, Settee Ltd’s taxable total profits and Sofa Ltd’s trading loss must be apportioned on a time basis. (2) For the year ended 30 June 2012 group relief is restricted to £50,000, being the lower of £60,000 (240,000 x 3/12) and £50,000 (200,000 x 3/12). (3) For the year ended 30 June 2013 group relief is restricted to £67,500, being the lower of £67,500 (90,000 x 9/12) and £150,000 (200,000 x 9/12). (4) Couch Ltd is not a 75% subsidiary of Sofa Ltd, so no group relief claim is possible. (5) Futon Ltd did not commence trading until 1 January 2013, so group relief is restricted to £50,000, being the lower of £60,000 and £50,000 (200,000 x

  3/12). Paper F6 (UK): Taxation FA2012

41 Spacious Ltd

  (a) Trading loss for the year ended 31 March 2013

   £ £

  Loss before taxation 123,040

  Impaired trade receivables Depreciation 54,690 Patent royalties Accountancy and audit fee Legal fees in connection with the issue of share capital 8,800 Legal fees in connection with the issue of loan notes Legal fees in connection with internet domain name Legal fees in connection with the court action 900 Construction of new wall 9,700 Replacement roof Entertaining customers

  1,800 Entertaining employees Qualifying charitable donation 1,000 Disposal of office building

  54,400 Bank interest received

  7,000 Interest payable Capital allowances – P & M (W)

  42,426

  • ––––––– ––––––– 76,890 226,866
  • ––––––– (76,890)
  • ––––––– Adjusted trading loss

  149,976

  • ––––––– Workings Capital allowances - Plant and machinery Main Special Allowances pool rate pool £ £ £ £

  WDV b/f 28,400 Additions qualifying for AIA Overhead crane 110,000 AIA (25,000) 25,000

  • –––––– 85,000 Equipment 28,000 Computer 3,100 Software 800
  • –––––– 31,900
    • AIA (used above)

  • –––––– 31,900

  Additions – non-AIA Cars 9,400 15,600

  • ––––––-- –––––– 69,700 100,600

Section 2: Answers to practice questions

  

Main Special Allowances

pool rate pool £ £ £ £

  Proceeds (17,600)

  • –––––– 52,100

  WDA – 18% (9,378) 9,378 WDA – 8% (8,048) 8,048

  • –––––– –––––– –––––– WDV carried forward 42,722 92,552 42,426
  • –––––– –––––– ––––––

  Tutorial  note  

  The  AIA has been allocated to the overhead crane as this gives the biggest tax  saving.   

  The  private use of the motor car purchased on 31 March 2013 is irrelevant, since  such  usage will be assessed on the employee as a benefit.  (b)

   

  Period ended Year ended

  31 March 2012

  31 March 2013 £ £

  Trading profit

  • – 183,200 Interest income 5,200 7,000
  • – Capital gain

  15,100

  • –––––– ––––––– Total profits 188,400 22,100 Loss relief s37

  (22,100) (127,876)

  • –––––– ––––––– 60,524 – Qualifying charitable donation (800) –
    • ––––––– –––––– TTP 59,724 –

  • –––––– –––––––

   Workings

  (1) The sale proceeds from the disposal of the office building are not fully reinvested, and so £20,000 (380,000 – 360,000) of the capital gain of £34,600 (380,000 – 345,400) cannot be rolled over. (2) The capital loss for the period ended 31 March 2012 is carried forward, and so the capital gain for the year ended 31 March 2013 is £15,100 (20,000 –

  4,900). (3) Loss £149,976 less £22,100 relieved in year ended 31 March 2013 leaves £127,876 to carry back.

  (c) (1) For the year ended 31 March 2013 Spacious Ltd has obtained relief at the small profits rate of 20%.

  (2) For the period ended 31 March 2012 Spacious Ltd has obtained relief at the small profits rate of 20%. (3) If the trading loss had instead been carried forward under s45 CTA 2010 then relief would have been obtained entirely at the marginal rate of 25%. Paper F6 (UK): Taxation FA2012 Chargeable gains

42 Problematic Ltd

  (a) Easy plc 1985 Pool Number Cost Indexed

  cost £ £

  Purchase June 1994 15,000 12,600 12,600 Indexation to September 2006 12,600 x (200·1 – 144·7)/144·7

  4,824 Rights issue September 2006 15,000 x 1/3 = 5,000 x £2·20 5,000 11,000 11,000

  • ––––––– ––––––– ––––––– 20,000 23,600 28,424

  Indexation to June 2012 28,424 x (241·8 – 200·1)/200·1

  5,923

  • ––––––– 34,347

  Disposal June 2012 Cost x 16,000/20,000 (16,000) (18,880) (27,478)

  • ––––––– ––––––– ––––––– Balance carried forward 4,000 4,720 6,869
  • ––––––– ––––––– –––––––

  £

  Disposal proceeds 54,400

  Cost (18,880)

  • ––––––– 35,520

  Indexation (27,478 – 18,880) (8,598)

  • ––––––– Chargeable gain

  26,922

  • ––––––– Office building

  (1) The insurance proceeds of £36,000 received by Problematic Ltd have been fully applied in restoring the office building. (2) There is therefore no disposal on the receipt of the insurance proceeds.

  Freehold factory £

  Disposal proceeds 171,000

  Indexed cost (127,000)

  • –––––––– 44,000

  Rollover relief (44,000 – 16,200) (27,800)

  • –––––––– Chargeable gain

  16,200

  • –––––––– (1) The sale proceeds are not fully reinvested, and so £16,200 (171,000 – 154,800) of the capital gain cannot be held over.

  Taxable total profits

  (1) For the year ended 31 March 2013 Problematic Ltd has chargeable gains of £43,122 (26,922 + 16,200).

Section 2: Answers to practice questions

  (2) The company’s taxable total profits are therefore £150,000 (106,878 + 43,122). (b) (1) The 4,000 £1 ordinary shares in Easy plc have an indexed base cost of £6,869.

  (2) The indexed base cost of the office building is £174,000 (169,000 – 36,000 + 41,000). (3) The leasehold factory is a depreciating asset, and so there is no adjustment to the base cost of £154,800.

  Tutorial note: When a replacement asset is a depreciating asset then the gain is

  not rolled over by reducing the cost of the replacement asset. Instead, the gain is deferred until it crystallises on the earliest of: The disposal of the replacement asset. – The date the replacement asset is no longer used in the business. – Ten years after the acquisition of the replacement asset, which in this case is – 10 December 2022.

43 Astute Ltd

  (a) The reinvestment must take place between one year before and three years after the date of disposal.

  The old and new assets must both be qualifying assets and be used for business purposes. The new asset must be brought into business use at the time that it is acquired. (b)

   £ £

  Disposal proceeds 320,000

  Incidental costs of disposal (6,200)

  • ––––––– 313,800

  Cost 164,000 Incidental costs of acquisition 3,600

  • ––––––– 167,600 Enhancement expenditure 37,000
  • ––––––– (204,600)
  • ––––––– 109,200

  27,654 Indexation – Cost (167,600 × 0.165)

  • – Enhancement (37,000 × 0.129) 4,773
    • ––––––– (32,427)
    • ––––––– Chargeable gain

  76,773

  • ––––––– Tutorial notes

  (1) The factory extension is enhancement expenditure as it has added to the value of the factory. Paper F6 (UK): Taxation FA2012

  (2) The replacement of the roof is not enhancement expenditure, being in the nature of a repair. (c) Freehold warehouse

  The sale proceeds are fully reinvested, and so the whole of the gain can be rolled over. The base cost of the freehold office building will be £263,227 (340,000 – 76,773).

  Freehold office building

  The sale proceeds are not fully reinvested, and so £45,000 (320,000 – 275,000) of the capital gain cannot be rolled over. The base cost of the office building will be £243,227 (275,000 – (76,773 – 45,000)).

   Leasehold factory

  The sale proceeds are fully reinvested, and so the whole of the gain can be rolled over. The factory is a depreciating asset, and so the base cost of the factory is not adjusted. The gain is held over until the earlier of ten years from the date of acquisition or the date the leasehold factory is disposed of. (Note: In practice HM Revenue & Customs will accept the net sale proceeds of £313,800 as the figure for re-investment.)

44 Hawk Ltd Office building £ £

  Disposal proceeds 293,998

  Incidental costs of disposal (3,840)

  • –––––––– 290,158

  Cost 81,000 Incidental costs of acquisition 3,200

  • ––––––– 84,200 Enhancement expenditure 43,000
  • ––––––– (127,200)
    • –––––––– 162,958

  Indexation – Cost 84,200 x 0.912 76,790

  • – Enhancement 43,000 x 0.376 16,168
    • ––––––– (92,958)
      • –––––––– Chargeable gain

  70,000

  • –––––––– Working

  The indexation factor for the cost is 0.912 (242.5 – 126.8)/126.8, and for the enhancement expenditure it is 0.376 (242.5 – 176.2)/176.2.

Section 2: Answers to practice questions

  Albatross plc £

  Disposal proceeds 42,500

  Cost (17,500)

  • ––––––– Chargeable gain

  25,000

  • ––––––– Workings

  (1) Hawk Ltd has purchased 8,000 (6,000 + 2,000) shares in Albatross plc for a total cost of £28,000 (18,600 + 9,400). (2) The cost of the 5,000 shares sold is therefore £17,500 (28,000 x 5,000/8,000). (3) There is no indexation as the shares were bought and sold within the same month.

  Cuckoo plc £

  Disposal proceeds 32,000

  Cost (15,000)

  • ––––––– Chargeable gain

  17,000

  • ––––––– Workings

  (1) On the reorganisation Hawk Ltd received new ordinary shares valued at £67,500 (3 x 5,000 x £4.50) and preference shares valued at £22,500 (2 x 5,000 x £2.25).

  (2) The cost attributable to the 10,000 preference shares in Cuckoo plc is £15,000 (60,000 x 22,500/(67,500 + 22,500)).

  Land £

  Disposal proceeds 120,000

  Cost (132,000)

  • ––––––– Capital loss

  (12,000)

  • ––––––– Working

  The cost relating to the two acres of land sold is £132,000 (203,500 x 120,000/185,000 (120,000 + 65,000)).

  Corporation tax liability

  (1) For the year ended 31 March 2013 Hawk Ltd has net chargeable gains of £100,000 (70,000 + 25,000 + 17,000 – 12,000). (2) The company’s corporation tax liability for the year ended 31 March 2013 is therefore £45,000 (125,000 + 100,000 = 225,000 at 20%). Paper F6 (UK): Taxation FA2012

45 Earth

  (a)

  Venus plc

Pool Number Cost Indexed

cost

  £ £

  Purchase June 1986 40,000 34,000 34,000 Bonus issue October 2002 40,000 × 1/4 10,000

  • –––––– 50,000

  Indexation to November 2012 51,078

  34,000 × (244.7 – 97.79)/97.79

  • –––––– 85,078

  Disposal November 2012 Cost × 25,000/50,000 25,000 17,000 42,539

  • –––––– –––––– –––––– Balance carried forward 25,000 17,000 42,539
  • –––––– –––––– ––––––

  £

  Disposal proceeds 115,000 Cost (17,000)

  • –––––– 98,000 Indexation (42,539 – 17,000) (25,539)
  • –––––– Chargeable gain 72,461
  • –––––– (b) Saturn plc

  £

  Disposal proceeds 52,500 Cost (80,000)

  • –––––– Capital loss 27,500
  • –––––– (1) Earth Ltd was issued with 15,000 (30,000 × 1/2) new shares under the rights issue at a cost of £22,500 (15,000 × £1.50).

  (2) The cost of the shares sold is therefore £80,000 (97,500 + 22,500 = 120,000 × 30,000/(30,000 + 15,000)). (3) Indexation cannot be used to increase a capital loss.

  (c) Neptune plc

  (1) The disposal is first matched against the purchase on the same day. This results in a capital loss of £250 (62,500 × 500/5,000 = 6,250 – 6,500). (2) The disposal is then matched against the shares in the pool:

  £

  Disposal proceeds (62,500 × 4,500/5,000) 56,250 Cost (9,000)

  • ––––––– 47,250

Section 2: Answers to practice questions

  £

  Indexation (18,065 – 9,000) (9,065)

  • ––––––– Chargeable gain 38,185
  • ––––––– (3) The total gain from the Neptune plc shares is therefore £37,935 (38,185 – 250).

   Pool Number Cost Indexed cost £ £

  Purchase April 1990 9,000 18,000 18,000 Indexation to March 2013 18,000 × (251.1 – 125.1)/125.1 18,129

  • –––––– 36,129
  • –––––– –––––– –––––– Balance carried forward 4,500 9,000 18,064
  • –––––– –––––– ––––––

  Disposal March 2013 Cost × 4,500/9,000 (4,500) (9,000) (18,065)

  Groups of companies

46 Red and White

  (a)

  Red plc Scarlet Ltd Crimson Ltd

£ £ £

  Trading profit 900,000 210,000 Loss relief s45 (15,000) Property income 10,000 30,000

  • ––––––– ––––––– ––––––– 900,000 205,000 30,000 Group relief (35,000) (105,000)
  • ––––––– ––––––– ––––––– TTP 865,000 100,000 30,000
  • ––––––– ––––––– ––––––– Corporation tax at 20% 20,000 6,000 Corporation tax at 24% 207,600
  • ––––––– ––––––– ––––––– (1) Red plc has two associated companies, so the relevant lower and upper limits for corporation tax purposes are £100,000 (300,000/3) and £500,000 (1,500,000/3) respectively.
Paper F6 (UK): Taxation FA2012

  (2) Crimson Ltd’s trading loss is initially surrendered to Scarlet Ltd as this company is subject to the marginal rate of corporation tax. Profits are reduced down to the small profits rate limit of £100,000. (3) The balance of the loss is surrendered to Red plc as this company is subject to the main rate of corporation tax.

  (4) Crimson Ltd’s brought forward trading loss of £20,000 can only be set against its own trading profits. As it has no trading profits this year, the loss must be carried forward.

  (b) (1) White plc and Cream Ltd must make the election by 31 March 2015.

  (2) Cream Ltd’s otherwise unused capital loss of £35,000 and brought forward capital losses of £40,000 can be set against the capital gain of £110,000. (3) It is beneficial for the balance of the gain of £35,000 (110,000 – 35,000 – 40,000) to arise in Cream Ltd as it will only be taxed at the rate of 20%.

  (c) (i) Green plc and Brown Ltd can register as a group for VAT purposes if one of them controls the other and both of them are resident or have a fixed place of business in the UK. (As Green plc owns over 50% of the share capital of Brown Ltd, this first requirement is clearly met.)

  (ii) A VAT group is treated as if it were a single company registered for VAT on its own.

  Registration is made in the name of the representative member, and this company is responsible for completing and submitting a single VAT return on behalf of the group. All group members remain jointly and severally liable for any VAT liabilities. Supplies between group members are ignored.

47 Animal Ltd

  (a) In order for a group to exist, one company must be a 75% subsidiary of the other, or both companies must be 75% subsidiaries of a third company.

  The holding company must have an effective interest of at least 75% of the subsidiary’s ordinary share capital. The holding company must have the right to receive at least 75% of the subsidiary’s distributable profits and net assets on a winding up.

  (b) Bat Ltd, Cat Ltd, Dog Ltd, Fox Ltd and Gnu Ltd are all under the common control (shareholding of over 50%) of Animal Ltd, and are therefore associated companies.

  Where a company such as Elk Ltd has been dormant throughout the accounting period, it does not count as an associated company. Companies that are only associated for part of the accounting period, such as Cat Ltd and Dog Ltd, count as associated companies for the whole of the period. (c)

   Animal Bat Cat Dog Fox £ £ £ £ £

  Trading income 450,000 65,000 85,000 100,000 60,000 Property income 5,000 15,000 - - -

  • ––––––– ––––––– ––––––– ––––––– ––––––– 455,000 80,000 85,000 100,000 60,000

Section 2: Answers to practice questions

   Animal Bat Cat Dog Fox £ £ £ £ £

  Loss relief (95,000) (30,000) (35,000) (25,000) (15,000)

  • ––––––– ––––––– ––––––– ––––––– ––––––– TTP 360,000 50,000 50,000 75,000 45,000 FII 20,000 - - - 5,000
  • ––––––– ––––––– ––––––– ––––––– ––––––– Augmented profits 380,000 50,000 50,000 75,000 50,000

   Workings

  (1) The relevant lower and upper limits for corporation tax purposes are £50,000 (300,000/6) and £250,000 (1,500,000/6) respectively.

  Note that it has been assumed that neither Cat Ltd nor Dog Ltd have any further associated companies arising from the periods when they were not part of the Animal Ltd group of companies. (2) Gnu Ltd’s trading loss is most effectively relieved so as to bring the profits of Bat Ltd, Cat Ltd, Dog Ltd and Fox Ltd down to the small profits rate limit. This saves corporation tax at the highest marginal rate of 25%. (3) For Dog Ltd, group relief is restricted to 3/12 of its TTP (100,000 × 3/12 =

  £25,000). A similar restriction is needed for Cat Ltd as it has left the group (85,000 x 9/12 = 63,750); however, the available profits are less than the amount of loss needed to bring profits down to the lower limit.

  (4) The balance of Gnu Ltd’s trading loss of £95,000 (200,000 – 30,000 – 35,000 – 25,000 – 15,000) is surrendered to Animal Ltd. This saves corporation tax at the main rate of 24%.

  Note

  It is the figure of augmented profits that determines the rate of tax payable, therefore the amount of franked investment income must be taken into account in determining how much loss should be allocated to Fox Ltd.

48 Music plc

  (a) Companies form a capital gains group if at each level in the group structure there is a 75% shareholding, provided the parent company has an effective interest of at least 50%. Alto Ltd, Bass Ltd, Cello Ltd, Echo Inc. and Flute Ltd are all 75% subsidiaries, and Music plc has an effective interest of 60% (80% × 75%) in Flute Ltd.

  However, Bass Ltd and Cello Ltd will only be included in respect of assets acquired or disposed of whilst they were members of the group. Drum Ltd and Gong Ltd are not included since Drum Ltd is not a 75% subsidiary, and Music plc’s effective interest in Gong Ltd is only 48% (80% × 75% × 80%). Although Echo Inc. is included, companies that are resident overseas are not able to take advantage of the provisions applicable to a capital gains group.

  (b) Alto Ltd, Bass Ltd, Cello Ltd, Echo Inc., Flute Ltd and Gong Ltd are all under the common control of Music plc, and are therefore associated companies. (Gong Ltd Paper F6 (UK): Taxation FA2012

  is under the common control of Music plc (despite the effective interest being less than 50%) because Music plc controls Flute Ltd which in turn controls Gong Ltd.) For associated company purposes, it does not matter where a company is resident. Echo Inc. is therefore included despite being resident overseas. Companies that are only associated for part of the accounting period, such as Bass Ltd and Cello Ltd, count as associated companies for the whole of the period. Drum Ltd is not included as an associated company since Music plc’s effective interest in this company is only 45%.

  (c)

   £ £

  Trading income 92,000

  Capital gains (120,000 – 65,000) 55,000 Capital losses brought forward (32,000)

  • –––––– 23,000
  • –––––– TTP 115,000 Franked investment income 15,000
  • –––––– Augmented profits

  130,000

  • –––––– Corporation tax (115,000 at 24%) 27,600 Marginal relief 1/100 x (214,286 – 130,000) × 115,000/130,000 (746)
  • –––––– 26,854
  • –––––– Working

  Music plc has six associated companies, so the relevant lower and upper limits for corporation tax purposes are therefore £42,857 (300,000/7) and £214,286 (1,500,000/7) respectively.

  Tutorial notes

  (1) The capital gain of £120,000 is included in Music plc’s taxable total profits since an appropriate election has been made with Alto Ltd. (2) Group dividends are not included as franked investment income.

  Overseas aspects of corporation tax

49 Wash plc

  (a) Companies that are incorporated overseas are only treated as being resident in the UK if their central management and control is exercised in the UK.

  Since the directors hold their board meetings overseas, this would indicate that Iron Ltd is managed and controlled outside the UK, and therefore it is resident overseas.

Section 2: Answers to practice questions

  If the directors were to hold their board meetings in the UK, Iron Ltd would probably be treated as resident in the UK since this would then be the place where central management and control was exercised. (b) The corporation tax payable by Wash plc is £384,000 (£1,600,000 x 24%).

  As Dry Inc. is a subsidiary, its dividend is classed as group income and ignored. The dividend received from Iron Ltd is treated as franked investment income as Wash plc’s shareholding in Iron Ltd is less than 50%. The dividend is grossed up in the same way as UK dividends, i.e. £9,000 x 100/90. However, as Wash plc is already chargeable at the main rate of corporation tax, its franked investment income makes no difference to the rate of corporation tax payable.

  (c) Wash plc – Corporation tax liability for the year ended 31 March 2013

  £

  Trading income 1,600,000 Overseas income (gross) 300,000

  • –––––––– 1,900,000
  • –––––––– Corporation tax at 24% 456,000 Double taxation relief (W) (30,000)
    • ––––––– Corporation tax liability 426,000
    • –––––––  

  Working

  Double taxation relief is restricted to the lower of: (1) The overseas tax suffered: £30,000. (2) The amount of UK corporation tax on the interest from Dry Inc.

  (300,000 at 24% = £72,000). (d) Importing goods into the UK

  When a UK VAT registered business imports goods into the UK from outside the EU, VAT has to be paid at the time of importation. The VAT is then reclaimed as input tax.

  Exporting goods outside of the UK Exports of goods outside of the EU are zero-rated. Trading within the EU

  When a UK VAT registered business imports goods into the UK from within the EU, VAT has to be accounted for according to the date of acquisition. This is the

  th

  earlier of the date that a VAT invoice was issued or the 15 day of the month following the month in which the goods come into the UK. The VAT can be reclaimed as input tax on the same VAT return. The supply of goods to a VAT registered business within another EU member state is zero-rated.

  Paper F6 (UK): Taxation FA2012

50 Sirius Ltd

  (a) If Sirius Ltd operates through a non-UK resident subsidiary it will not be assessed to UK corporation tax in respect of dividends remitted to the UK. These dividends will be classed as group income and will have no UK corporation tax implications.

  The full profits of an overseas branch are normally assessed in the year that they are made, regardless of whether they are remitted to the UK. However, it is possible to make an election to exempt the profits of an overseas branch from UK corporation tax.

  Relief is usually available in the UK for trading losses if incurred by an overseas branch, unless an election is made to exempt the profits. No UK relief is available for trading losses incurred by an overseas subsidiary. UK capital allowances are available in respect of plant and machinery purchased by an overseas branch, unless an election is made to exempt the profits. UK capital allowances are not available in respect of plant and machinery purchased by an overseas subsidiary.

  A wholly owned overseas subsidiary will be an associated company, and so the UK corporation tax limits are reduced accordingly. (b) Withholding tax is the term used for any overseas tax deducted at source from overseas income.

  (c) (i) Overseas operation set up as a branch, without election

  £

  Trading profits – UK 850,000 Trading profits – Branch 200,000

  • –––––––– 1,050,000
  • –––––––– Corporation tax at 24% 252,000 Marginal relief 1/100 x (1,500,000 – 1,050,000) (4,500)
  • –––––––– 247,500 Double taxation relief (W) (40,000)
  • –––––––– Corporation tax liability 207,500
    • ––––––– Working Double taxation relief is £40,000 being the amount of overseas tax paid.

  • –––––––– Corporation tax at 24% 204,000 Marginal relief 1/100 x (1,500,000 – 850,000) (6,500)
  • –––––––– 197,500
    • –––––––

  This is lower than the UK corporation tax on the branch profits of £47,143 (247,500 × 200,000/1,050,000). (ii) Overseas operation set up as a branch, with the election

  £

  Trading profits – UK 850,000

Section 2: Answers to practice questions

  Note

  There is no double taxation relief as none of the overseas income is liable to UK corporation tax. (iii)

  Overseas operation set up as a 100% subsidiary £

  Trading profits 850,000

  • ––––––– Corporation tax at 24% 204,000
  • ––––––– Workings

  (1) Sirius Ltd now has one associated company so the upper limit for corporation tax purposes is £750,000 (1,500,000/2). (2) There is no double taxation relief as none of the overseas income is liable to UK corporation tax.

51 Neung Ltd

  (a) (i) (1) Second Ltd and Fourth Ltd are not associated companies as Neung Ltd has a shareholding of less than 50% in Second Ltd, and Fourth Ltd is dormant.

  (2) Third Ltd and Fifth Ltd are associated companies as Neung Ltd has a shareholding of over 50% in each case, and both are trading companies. (ii) Neung Ltd –

  Corporation tax computation for the year ended 31 March 2013 £

  Operating profit 324,100

  Depreciation 11,830

  Amortisation 7,000

  Deduction for lease premium (working 1) (4,340) Capital allowances (working 2) (36,220)

  • –––––––– 302,370 First overseas branch

  41,000 Second overseas branch

  (15,700)

  • –––––––– Trading profit

  327,670 Loan interest (25,200 + 12,600) 37,800

  • –––––––– Taxable total profits

  365,470 Franked investment income (37,800 x 100/90) 42,000

  • –––––––– Augmented profit

  407,470

  • –––––––– Corporation tax (365,470 at 24%) 87,713 Marginal relief 1/100 (500,000 – 407,470) x 365,470/407,470 (830)
  • >–––––––– 86,883
  • ––––––––
Paper F6 (UK): Taxation FA2012 Workings

  (1) The amount assessed on the landlord is £86,800 calculated as follows:

  £

  Premium received 140,000

  Less: 140,000 x 2% x (20 – 1) (53,200)

  • –––––––– 86,800
  • –––––––– This is deductible over the life of the lease, so the deduction for the year ended 31 March 2013 is £4,340 (86,800/20).

  (2)

  

Capital allowances Special

Pool rate Allowances pool £ £ £ £

  WDV brought forward 4,800 12,700 Additions qualifying for AIA Ventilation system 62,000

  AIA – 100% (25,000) 25,000

  • ––––––– 37,000

  Other additions Motor car [1] 15,400 Motor car [2] 28,600

  • ––––––– ––––––
    • – 33,400 65,100

  WDA – 18% (6,012) 6,012 WDA – 8% (5,208) 5,208

  • ––––––– ––––––– WDV carried forward 27,388 59,892
  • ––––––– ––––––– ––––––– Total allowances

  36,220

  • ––––––– (3) Neung Ltd has two associated companies, so the upper limit is reduced to £500,000 (1,500,000/3).

  (4) The dividend of £16,200 from Third Ltd is not included as franked investment income as it is a group dividend. (iii) (1) An election to exempt the profits of the overseas branches would apply to all of Neung Ltd’s branches and is irrevocable.

  (2) Neung Ltd would be unable to claim relief for the loss incurred by the second overseas branch. (3) If the election had been in force, Neung Ltd’s taxable total profits would have been reduced by £25,300 (41,000 – 15,700) giving a corporation tax saving of £6,325 (25,300 x 25%). (vi) (1) UK relief is not usually available for trading losses incurred by an overseas subsidiary company, whereas relief is available for trading losses incurred by an overseas branch unless an election has been made to exempt the branch profits from UK corporation tax. (2) UK capital allowances will be available for capital expenditure incurred by an overseas branch, unless an election has been made to

Section 2: Answers to practice questions

  exempt the branch profits. For expenditure incurred by an overseas subsidiary company relief is not available in the UK, and may not be available overseas. (3) An overseas subsidiary company will be an associated company, and so the UK corporation tax limits will be reduced accordingly. An overseas branch cannot be an associated company. (b) (i)

  Neung Ltd – Output VAT for the quarter ended 31 March 2013 £

  Sales

  VAT registered customers (44,600 – 35,200 = 9,400 x 20%) 1,880 Additional contract

  1,400 Non-VAT registered customers (284,300 – 242,300 = 7,000 42,000 x 1/6)

  Fuel scale charge (378 x 1/6)

  63

  • ––––––– 10,343
  • ––––––– Note: The basic tax point for a supply of services is the date that they are

  completed, but if a VAT invoice is issued or payment received before the basic tax point, then this becomes the actual tax point. Therefore the tax point for the contract is when the VAT invoice was issued on 1 March 2013. (ii) (1) Neung Ltd was late in submitting VAT returns and paying the related VAT liability for two previous quarters. The company has not managed to revert to a clean default surcharge record by submitting four consecutive VAT returns on time.

  (2) The late payment of VAT for the quarter ended 31 March 2013 will therefore result in a surcharge of 5% of the VAT liability for that period, although this will not be collected if it is less than £400. (3) In addition, the surcharge period will be extended to 31 March 2014.

  Value Added Tax

52 Anne Attire

  (a) VAT return – Quarter ended 30 November 2012

   £ £

  Output VAT Cash sales (28,000 x 20%)

  5,600 Credit sales (12,000 x 95% x 20%) 2,280 Input VAT Purchases and expenses (11,200 x 20%) 2,240 Impairment loss (800 x 95% x 20%) 152

  • –––––– (2,392)
  • –––––– VAT payable

  5,488

  • ––––––
Paper F6 (UK): Taxation FA2012

  The VAT return for the quarter ended 30 November 2012 should have been submitted by 7 January 2013, being one month and seven days after the end of the VAT period.

  Tutorial notes

  (1) The calculation of output VAT on the credit sales takes into account the discount for prompt payment, even for those 10% of customers that did not take it. (2) Relief for an impairment loss is not given until six months from the time that payment is due. Therefore relief can only be claimed in respect of the invoice due for payment on 10 April 2012. Relief is based on the amount of output VAT that would originally have been paid taking into account the discount for prompt payment. (b) (1) Anne can use the cash accounting scheme if her expected taxable turnover for the next 12 months does not exceed £1,350,000.

  (2) In addition, Anne must be up-to-date with her VAT returns and VAT payments. (3) Output VAT on most credit sales will be accounted for up to one month later than at present since the scheme will result in the tax point becoming the date that payment is received from customers. (4) However, the recovery of input VAT will be delayed by two months. (5) The scheme will provide automatic bad debt relief should a credit sale customer default on the payment of a debt. (c) (i) Sale of assets on a piecemeal basis

  (1) Upon the cessation of trading Anne will cease to make taxable supplies, so her VAT registration will be cancelled on the date of cessation or an agreed later date. (2) Output VAT will be due in respect of the value of the non-current assets at the date of deregistration on which VAT has been claimed

  (although output VAT is not due if it totals less than £1,000). (ii) Sale of business as a going concern

  (1) Since the purchaser is already registered for VAT, Anne’s VAT registration will be cancelled as above. (2) A sale of a business as a going concern is outside the scope of VAT, and therefore output VAT will not be due.

53 Victor Style

  (a) A trader must register for VAT when taxable supplies during any 12-month period exceed £77,000.

  This will have happened on 30 November 2012 when taxable supplies amounted to £77,600 ((6,400 × 10) + (6,800 × 2)) for the previous twelve months. Victor was therefore liable to register from 1 January 2013, being the end of the month following the month in which the limit was exceeded. He had to notify HM Revenue and Customs by 30 December 2012, being 30 days after the end of the 12-month period.

Section 2: Answers to practice questions

  (b) Output VAT will be £13,600 (6,800 × 12 = 81,600 × 20/120) since Victor must absorb this himself rather than pass it on to his customers.

  Input VAT will be £800 (400 × 12 = 4,800 × 20/120). The total VAT payable by Victor during the year ended 31 December 2013 is therefore £12,800 (13,600 – 800).

  (c) The main advantage of the flat rate scheme is the simplified VAT administration.

  Victor’s customers are not registered for VAT, so there will be no need to issue VAT invoices. If Victor had used the flat rate scheme from 1 January 2013, then he would have paid VAT of £10,608 (81,600 × 13%) during the year ended 31 December 2013. This is a saving of £2,192 (12,800 – 10,608) for the year. (d) If Victor had not increased his prices, his net profit for the year ended 31

  December 2013 based on the information given would have been £72,000 (6,400 – 400 = 6,000 × 12).

  As a result of increasing his prices, Victor’s net profit will be as follows:

   £

  68,000 Sales revenue (81,600 – 13,600) Expenses (4,800 – 800) (4,000)

  • –––––– Net profit 64,000
  • –––––– This is a decrease in net profit of £8,000 (72,000 – 64,000). This decrease would be reduced to £5,808 (8,000 – 2,192) if the flat rate scheme had been used from 1 January 2013.

  Tutorial note

  In the first year of VAT registration, Victor would have benefited from a reduction of 1% in the flat rate percentage.

54 Astute, Bright and Clever

  (a) Astute Ltd can apply to use the annual accounting scheme if its expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.

  In addition the company must be up to date with its VAT returns. The company is required to make only one VAT return a year. The return and the final balancing payment are due two months after the end of the year.

  The reduced administration from only having to submit one VAT return each year should mean that default surcharges are avoided in respect of the late submission of VAT returns. In addition, making payments on account (usually based on the previous year’s

  VAT liability) will improve both budgeting and possibly cash flow where a business is expanding. (b) Bright Ltd can use the flat rate scheme if its expected taxable turnover for the next 12 months does not exceed £150,000.

  The main advantage of the scheme is the simplified VAT administration. Bright Ltd’s customers are not VAT registered, so there will be no need to issue VAT invoices. Paper F6 (UK): Taxation FA2012

  Using the normal basis of calculating the VAT liability, Bright Ltd will have to pay annual VAT of £15,000 (100,000 – 10,000 = 90,000 × 20/120). If Bright Ltd uses the flat rate scheme then it will pay VAT of £12,000 (100,000 × 12%), which is an annual saving of £3,000 (15,000 – 12,000)

  (c) Clever Ltd can use the cash accounting scheme if its expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.

  In addition, the company must be up to date with its VAT returns and VAT payments. Output VAT will be accounted for three months later than at present since the scheme will result in the tax point becoming the date that payment is received from customers. The recovery of input VAT on expenses will not be affected as these are paid in cash. The scheme will also provide automatic bad debt relief should a customer default on the payment of a debt.

55 Ram-Rom Ltd

  (a) Input VAT of £18,400 (92,000 × 20%) can be recovered on the inventory of goods held at 1 October 2012.

  The inventory was not acquired more than four years prior to registration, nor was it sold or consumed prior to registration. The same principle applies to non-current assets, so input VAT of £21,720 (42,000

  • 66,600 = 108,600 × 20%) can be recovered on the non-current assets that have not been sold. Input VAT of £9,720 (7,400 + 6,300 + 8,500 + 9,000 + 9,200 + 8,200 = 48,600 × 20%) can be recovered on the services incurred from 1 April 2012 to 30 September 2012. This is because these services were not supplied more than six months prior to registration. The total input VAT recovery is therefore £49,840 (18,400 + 21,720 + 9,720).

  (b) The following additional information is required: (1) A sequential number that uniquely identifies the invoice (i.e. an invoice number).

  (2) Ram-Rom Ltd’s VAT registration number.

  (3) The rate of VAT for each supply. (4) The VAT-exclusive amount for each supply. (5) The total VAT-exclusive amount. (6) The amount of VAT payable. (c) Where a discount is offered for prompt payment then output VAT is calculated on the selling price less the amount of discount offered.

  There is no amendment to the amount of output VAT charged if the customer does not take the discount but instead pays the full selling price.

Section 2: Answers to practice questions

  (d) Ram-Rom Ltd can use the cash accounting scheme if its expected taxable turnover for the next 12 months does not exceed £1,350,000 exclusive of VAT.

  In addition, the company must be up to date with its VAT returns and VAT payments. Output VAT will be payable to HMRC up to four months later than at present since the scheme will result in the tax point becoming the date that payment is received from customers. The recovery of input VAT will only be delayed by one month. The scheme will also provide automatic relief for impairment losses should a customer default on the payment of a debt.

56 Sandy Brick (a) The basic tax point for services is the date that they are completed.

  If an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point. If an invoice is issued within 14 days of the basic tax point, the invoice date will usually replace the basic tax point. (b) A VAT invoice must be issued when a standard rated supply is made to a VAT registered person.

  A VAT invoice should be issued within 30 days of the date that the taxable supply of services is treated as being made. (c)

  VAT Return – Quarter ended 31 December 2012 £ £ Output VAT

  Sales to VAT registered customers (44,000 × 95% (100 – 5) × 20%) 8,360 Sales to non-VAT registered customers (16,870 – 5,170 = 11,700 × 1/6) 1,950

  800 Advance payment (4,800 × 1/6)

  • ––––– 11,110

  Input VAT

  Materials (11,200 – 800 = 10,400 × 20%) 2,080 Office equipment (120 × 9 = 1,080 × 20%) 216

  56 Telephone (400 × 70% (100 – 30) × 20%) 184

  Motor repairs (920 × 20%) 1,200

  Equipment (6,000 × 20%)

  • ––––– (3,736)
  • ––––– 7,374
  • ––––– Tutorial  notes  

  (1) The calculation of output VAT on sales must take into account the discount for prompt payment, even if customers do not take it. Paper F6 (UK): Taxation FA2012

  (2) Input VAT cannot be claimed in respect of the materials used in constructing Sandy’s private residence since the goods are not used for business purposes. (3) Input VAT can be recovered on services supplied in the six months prior to registration, so the office equipment claim can be backdated to 1 April 2012.

  (4) An apportionment is made where a service such as the use of a telephone is partly for business purposes and partly for private purposes. (5) However, no apportionment is necessary for motor expenses provided there is some business use.

  Self assessment

57 Vera Old

  (a) Vera’s payments on account for 2012-13 are based on her 2011-12 income tax and Class 4 NIC liability of £9,090, so each payment on account will be for £4,545 (9,090 × 50%).

  The balancing repayment for 2012-13 will be £3,030 (9,090 – 6,060). The due dates for the payments on account are 31 January and 31 July 2013, and the due date for the balancing repayment is 31 January 2014.

  (b) Claim to reduce payments on account Vera can ignore the CGT liability when claiming to reduce payments on account.

  She should therefore claim to reduce her total payments on account to £5,360. This will mean that £2,680 (5,360 × 50%) is paid on 31 January and 31 July 2013, with the CGT liability of £700 due on 31 January 2014.

  Incorrect claim

  If Vera’s payments on account were reduced to nil, then she would be charged interest on the payments due of £2,680 from the relevant due date to the date of payment. A penalty of up to £5,360 will be charged if the claim to reduce the payments on account to nil was made fraudulently or negligently.

  (c) Vera’s self-assessment tax return for 2012-13 should be submitted by 31 October 2013 if it is a traditional paper return. If she completes an on-line return it should be submitted by 31 January 2014. The initial fixed penalty for not filing the return by 31 January 2014 is £100. As the return is more than three months late, there will also be a daily penalty of £10 per day commencing three months after the issue of the fixed penalty notice.

  (d)

     HM Revenue and Customs compliance check 

  HM Revenue and Customs will have to notify Vera within twelve months of the date her 2012-13 return is filed, if they intend to make a compliance check into it. HM Revenue and Customs have the right to make compliance checks into the completeness and accuracy of any return, and such a check may be made on a completely random basis. However, compliance checks are generally made because of a suspicion that income has been undeclared or because deductions have been incorrectly claimed.

Section 2: Answers to practice questions

  Discovery    assessment 

  It will only be possible to raise a discovery assessment if there is not full disclosure in Vera’s 2012-13 return. The normal time limit for HMRC to raise a discovery assessment is 5 April 2017, being four years after the end of the 2012-13 tax year. This is increased to six years where there is a careless omission and 20 years where there is a deliberate omission.

58 Pi Casso Tutorial notes

  The question asks you for a schedule of payments for a period commencing on 1 July 2012. The following information should help you to get started:

  Self-assessment payments are made on 31 January and 31 July, so the first (1) payment date within the period given is 31 July 2012.

  The payment due on 31 July is always the second payment on account for the (2) preceding tax year, so the payment due on 31 July 2012 is in respect of the 2011-

  12 liability. Payments on account are usually based on the previous year’s liability, so a

  (3) payment on account of the 2011-12 liability is calculated using the taxpayer’s 2010-11 liability. Class 2 national insurance is not collected through the self-assessment system, so

  (4) you can ignore it. (The due dates for class 2 national insurance have now been aligned with the self-assessment system; however, it is paid separately.)

  (a)

  Due date Tax year Payment £

  31 July 2012 2011–12 Second payment on account 2,240

  31 January 2013 2011–12 Balancing payment 5,980

  31 January 2013 2012–13 First payment on account 1,860

  31 July 2013 2012–13 Second payment on account 1,860

  31 January 2014 2012–13 Balancing payment Nil

  31 January 2014 2013–14 First payment on account 1,860 (1) The second payment on account for 2011–12 is based on Pi’s income tax and Class 4 NIC liability for 2010–11. It is therefore £2,240 (3,240 + 1,240 =

  4,480 x 50%). (2) The balancing payment for 2011–12 is £5,980 (4,100 + 1,480 + 4,880 = 10,460 less the payments on account of 4,480 (2,240 x 2)).

  (3) As Pi’s 2012-13 income is lower than her income for 2011-12, Pi will make a claim to reduce her total payments on account for 2012–13 to the amount of her expected liability. This is £3,720 (2,730 + 990), so each payment will be £1,860 (3,720 x 50%).

  (4) The balancing payment for 2012–13 is £Nil (3,720 less the payments on account of 3,720 (1,860 x 2)). Paper F6 (UK): Taxation FA2012

  (5) The first payment on account for 2013–14 is based on Pi’s income tax and Class 4 NIC liability for 2012–13. It is therefore £1,860 (2,730 + 990 = 3,720 x 50%).

  (b) (1) If Pi’s payments on account for 2012–13 were reduced to nil, then she would be charged interest on the payments due of £1,860 from the relevant due dates to the date of payment. (2) A penalty of up to £3,720 will be charged if the claim to reduce the payments on account to nil was made fraudulently or negligently.

  (c) (1) Unless the return is issued late, the latest date that Pi can submit a paper based self-assessment tax return for 2012–13 is 31 October 2013.

  (2) If Pi completes a paper based tax return by 31 October 2013 then HMRC will prepare a self-assessment tax computation on her behalf. (3) Alternatively, Pi has until 31 January 2014 to file her self-assessment tax return for 2012–13 online. A self-assessment tax computation is then automatically provided as part of the filing process. (d) (1) If HMRC intend to make a compliance check into Pi’s 2012–13 tax return they will have to notify her within twelve months of the date that they receive the return. (2) HMRC have the right to enquire into the completeness and accuracy of any return and such a compliance check may be made on a completely random basis. (3) However, compliance checks are generally made because of a suspicion that income has been undeclared or because deductions have been incorrectly claimed.

59 Ernest Vader

  (a) (1) Tax evasion is illegal and involves the reduction of tax liabilities by not providing information to which HMRC is entitled, or providing HMRC with deliberately false information. (2) In contrast, tax avoidance involves the minimisation of tax liabilities by the use of any lawful means. However, certain tax avoidance schemes must be disclosed to HMRC. (3) If Ernest makes no disclosure of the capital gain then this will be viewed as tax evasion as his tax liability for 2012–13 will be understated by £18,000.

  (b) (1) The matter is one of professional judgement, and a trainee Chartered Certified Accountant would be expected to act honestly and with integrity.

  (2) Ernest should therefore be advised to disclose details of the capital gain to HMRC. (3) If such disclosure is not made you would be obliged to report under the money laundering regulations, and you should also consider ceasing to act for Ernest. In these circumstances you would be advised to notify HMRC that you no longer act for him although you would not need to provide any reason for this. (c) (1) HMRC can request information from Ernest by issuing a written information notice.

Section 2: Answers to practice questions

  (d) (1) A discovery assessment can be raised because Ernest’s self-assessment tax return did not contain sufficient information to make HMRC aware of the capital gain. (2) The normal time limit for making a discovery assessment is four years after the end of the tax year, but this is extended to 20 years where tax is lost due to deliberate behaviour. (e) (i) (1) Interest will run from the due date of 31 January 2014 to the payment date of 31 July 2014.

  (2) The interest charge will therefore be £270 (18,000 x 3% x 6/12). (ii) (1) The amount of penalty is based on the tax due but unpaid as a result of the failure to notify. The maximum penalty is therefore the CGT liability of £18,000. (2) However, the actual penalty payable will be linked to Ernest’s behaviour.

  (3) Since Ernest would appear to have deliberately failed to notify HMRC of his capital gain, the actual penalty is likely to be 70% of the tax unpaid which is £12,600 (18,000 x 70%). This assumes that there is no attempt at concealment.

  (4) The penalty would have been substantially reduced if Ernest had disclosed the capital gain, especially if the disclosure had been unprompted by HMRC prior to discovery. The maximum reduction would be to 20% of the tax unpaid.

60 Quagmire plc

  (a) (1) Large companies have to make quarterly instalment payments in respect of their corporation tax liability. A large company is one paying corporation tax at the main rate. (2) Quagmire plc has one associated company, so the upper limit is reduced to

  £750,000 (1,500,000/2). Corporation tax will therefore be at the main rate for the year ended 31 January 2013. (3) There is an exception for the first year that a company is large, provided profits do not exceed £10 million. No exception applies because Quagmire plc was also a large company for the year ended 31 January 2012. (b) (1) Quagmire plc’s corporation tax liability for the year ended 31 January 2013 is £292,000.

  Corporation tax £

  FY11 (1,200,000 x 2/12 at 26%) 52,000 FY12 (1,200,000 x 10/12 at 24%) 240,000

  • –––––––– 292,000
  • –––––––– (2) The company will have paid this in four quarterly instalments of £73,000 (292,000/4).

  (3) The instalments will have been due on the 14th of August 2012, November 2012, February 2013 and May 2013. (c) (1) Quagmire plc’s augmented profit for the year ended 31 January 2013 is £1,400,000 (1,200,000 plus franked investment income of £200,000). Paper F6 (UK): Taxation FA2012

  (2) Quagmire plc is no longer a large company since its profits are below the upper limit of £1,500,000. The corporation tax liability will therefore be due in one amount on 1 November 2013. (3) The corporation tax liability will be £291,072 calculated as follows:

  Corporation tax £

  FY11 (1,200,000 x 2/12 at 26%) 52,000 Marginal relief 3/200 (1,500,000 – 1,400,000) x 1,200,000/1,400,000 x 2/12 (214)

  • –––––––– 51,786 FY12 (1,200,000 x 10/12 at 24%) 240,000 Marginal relief 1/100 (1,500,000 – 1,400,000) x 1,200,000/1,400,000 x 10/12 (714)
  • –––––––– 291,072
  • –––––––– (d) (1) Quagmire plc is required to keep records of all receipts and expenses, sales and purchases, supporting documents including accounts, books, contracts, vouchers and receipts.

  (2) The obligation to preserve records may be satisfied by preserving the information contained in the records rather than the actual records themselves.

SECTION 3 Q & A

1 On 31 December 2012 Mark Kett ceased trading as a marketing consultant. He had

  Self-employment

  (1) Mark is paid a salary of £3,250 (gross) per month by Sleep-Easy plc, from which income tax of £620 per month has been deducted under PAYE.

  Employment

  (3) On 15 June 2012 Mark had purchased office furniture for £1,900. All of the items included in the main pool were sold for £18,800 on 31 December 2012. On the cessation of trading Mark personally retained the motor car. Its value on 31 December 2012 was £11,800.

  Main pool 13,800 Motor car 14,600 The motor car was used by Mark, and 40% of the mileage was for private purposes.

   £

  (1) Mark’s tax adjusted trading profit for the nine-month period ended 31 December 2012 is £21,800. This figure is before taking account of capital allowances. (2) The tax written down values for capital allowances purposes at 6 April 2012 were as follows:

  © Emile Woolf Publishing Limited 163

  Paper F6 (UK)

  ALL FIVE questions are compulsory and MUST be attempted

   

  

This mock exam is based on the ACCA pilot paper for the F6 syllabus and is © The Association of Chartered Certified

Accountants. It has been updated to Finance Act 2012 in order to be suitable for students sitting the 2013 examinations.

Please note that from June 2011, questions 3, 4 and 5 have each been worth 15 marks and the paper has therefore been

amended to reflect this.

   

  Mock exam questions

       

   

  Taxation  FA2012

  been self-employed since 6 April 2005, and had always made his accounts up to 5 April. On 1 January 2013 Mark commenced employment as the marketing manager of Sleep-Easy plc. The company runs a hotel. The following information is available for the tax year 2012–13: Paper F6 (UK): Taxation FA2012

    (2) During the period from 1 January 2013 to 5 April 2013 Mark used his private motor car for business purposes. He drove 2,500 miles in the performance of his duties for Sleep-Easy plc, for which the company paid an allowance of 16 pence per mile. The relevant HM Revenue & Customs authorised mileage rate to be used as the basis of an expense claim is 45 pence per mile. (3) On 1 January 2013 Sleep-Easy plc provided Mark with an interest free loan of £125,000 so that he could purchase a new main residence.

  (4) During the period from 1 January 2013 to 5 April 2013 Mark was provided with free meals in Sleep-Easy plc’s staff canteen. The total cost of these meals to the company was £400.

  Property income

  (1) Mark let out a furnished property throughout the tax year 2012-13. He received gross rents of £8,600, 5% of which was paid to a letting agency. During December 2012 Mark spent £540 on replacing dilapidated furniture and furnishings. (2) From 6 April 2012 to 31 December 2012 Mark let out a spare room in his main residence, receiving rent of £350 per month.

  Investment income

  (1) During the tax year 2012-13 Mark received dividends of £2,880, interest from government stocks (gilts) of £1,900, and interest of £430 from an individual savings account (ISA). These were the actual cash amounts received. (2) On 3 May 2012 Mark received a premium bond prize of £100.

  Other information

  (1) On 15 December 2012 Mark made a gift aid donation of £800 (net) to a national charity. (2) Mark’s payments on account of income tax in respect of the tax year 2012-13 totalled £11,381.

  Required:

  (a) Compute the income tax payable by Mark for the tax year 2012-13, and the

   (22 marks) balancing payment or repayment that will be due for the year.

  (b) Advise Mark as to how long he must retain the records used in preparing his tax return for the tax year 2012-13, and the potential consequences of not retaining

  (3 marks) the records for the required period. (Total: 25 marks)

  2 (a) Scuba Ltd is a manufacturer of diving equipment. The following information is

  relevant for the year ended 31 December 2012:

   Operating profit

  The operating profit is £168,860. The expenses that have been deducted in calculating this figure include the following:

   £

  Depreciation and amortisation of lease 45,200 Entertaining customers

  7,050

  © Emile Woolf Publishing Limited 164  

Section 3: Mock exam questions

   £

  Entertaining employees 2,470

  Gifts to customers (diaries costing £25 each displaying Scuba Ltd’s name) 1,350 Gifts to customers (food hampers costing £80 each) 1,600

  Leasehold property

  On 1 April 2012 Scuba Ltd acquired a leasehold office building that is used for business purposes. The company paid a premium of £80,000 for the grant of a twenty-year lease.

  Plant and machinery

  On 1 January 2012 the tax written down value of plant and machinery in the main pool was £47,200. The following transactions took place during the year ended 31 December 2012:

  Cost/(Proceeds) £

  3 January 2012 Purchased machinery 22,800

  29 February 2012 Purchased a computer 1,100

  4 May 2012 Purchased a motor car 10,400

  18 August 2012 Purchased machinery 7,300

  15 November 2012 Sold a lorry (12,400) The company wishes to treat the computer as a short-life asset. The motor car purchased on 4 May 2012 for £10,400 has CO

  2 emissions of 143

  g/km. It is used by the factory manager, and 40% of the mileage is for private journeys. The lorry sold on 15 November 2012 for £12,400 originally cost £19,800.

  Property income

  Scuba Ltd lets a retail shop that is surplus to requirements. The shop was let until 31 December 2011 but was then empty from 1 January 2012 to 30 April 2012. During this period Scuba Ltd spent £6,200 on decorating the shop, and £1,430 on advertising for new tenants. The shop was let from 1 May 2012 to 31 December 2012 at a quarterly rent of £7,200, payable in advance.

   Interest received

  Interest of £430 was received from HM Revenue & Customs on 31 October 2012 in respect of the overpayment of corporation tax for the year ended 31 December 2011.

   Other information

  Scuba Ltd has no associated companies, and the company has always had an accounting date of 31 December.

   Required:

  (i) Compute Scuba Ltd’s tax adjusted trading profit for the year ended 31

  (11 marks) December 2012. You should ignore value added tax (VAT).

  © Emile Woolf Publishing Limited 165

  Paper F6 (UK): Taxation FA2012

    (ii) Compute Scuba Ltd’s corporation tax liability for the year ended 31

   (5 marks) December 2012.

  (iii)   State  the  date  by  which  Scuba  Ltd  must  make  a  claim  to  treat  the  new 

  (1 mark)

  computer  as a short‐life asset.    

  (iv)   Advise  Scuba  Ltd  of  the  documents  that  must  be  submitted  with  its  corporation

   tax return and the form that these documents must take.  

  (2 marks)

       

  (b) Scuba Ltd registered for value added tax (VAT) on 1 April 2010. The company’s

  VAT returns have been submitted as follows:

  Quarter ended

  VAT paid/(refunded) Submitted £

  30 June 2010 18,600 One month late

  30 September 2010 32,200 One month late

  31 December 2010 8,800 On time

  31 March 2011 3,400 Two months late

  30 June 2011 (6,500) One month late

  30 September 2011 42,100 On time

  31 December 2011 (2,900) On time

  31 March 2012 3,900 On time

  30 June 2012 18,800 On time

  30 September 2012 57,300 Two months late

  31 December 2012 9,600 On time Scuba Ltd always pays any VAT that is due at the same time that the related return is submitted.

  During February 2013 Scuba Ltd discovered that a number of errors had been made when completing its VAT return for the quarter ended 31 December 2012. As a result of these errors the company will have to make an additional payment of VAT to HM Revenue & Customs.

   Required:

  (i) State, giving appropriate reasons, the default surcharge consequences arising from Scuba Ltd’s submission of its VAT returns for the quarter ended 30 June 2010 to the quarter ended 30 September 2012 inclusive.

  (8 marks)

  (ii) Explain how Scuba Ltd can voluntarily disclose the errors relating to the

  VAT return for the quarter ended 31 December 2012, and state whether default interest will be due, if (1) the net errors in total are less than £10,000,

  (3 marks) and (2) the net errors in total are more than £10,000. (Total: 30 marks)

3 Paul Opus disposed of the following assets during the tax year 2012-13:

  (1) On 10 April 2012 Paul sold 10,000 £1 ordinary shares in Symphony Ltd, an unquoted trading company, for £47,200. He had originally purchased 40,000 shares in the company on 23 August 2011 for £110,400. He purchased a further 5,000 on 25 April 2012 for £20,000. The shareholding is less than 2% of Symphony Ltd’s issued share capital, and Paul has never been employed by Symphony Ltd.

  © Emile Woolf Publishing Limited 166  

Section 3: Mock exam questions

4 Li Fung commenced in self-employment on 1 October 2008. She initially prepared

  (a) State the qualifying conditions that must be met for a change of accounting date to be valid.

  31 March 2011, the year ended 31 March 2012 and the year ended 31 March 2013 are as follows:

  (3 marks) (Total: 15 marks) 5 (a) Loser Ltd’s results for the year ended 30 June 2010, the nine month period ended

  (c) Advise Li of the advantages and disadvantages for tax purposes of changing her accounting date from 30 June to 31 March.

  (9 marks)

  (b) Compute Li’s trading income assessments for each of the five tax years 2008–09, 2009–10, 2010-11, 2011-12 and 2012-13.

  (3 marks)

  © Emile Woolf Publishing Limited 167

  (2) On 15 July 2012 Paul made a gift of his entire shareholding of 10,000 £1 ordinary shares in Concerto plc to his daughter. On that date the shares were quoted on the Stock Exchange at £5.10–£5.18, with recorded bargains of £5.00, £5.15 and £5.22. Paul’s shareholding had been purchased on 29 April 1996 for £14,000. The shareholding is less than 1% of Concerto plc’s issued share capital, and Paul has never been employed by Concerto plc. (3) On 31 December 2012 Paul sold a house for £220,000. The house had been purchased on 1 April 2006 for £114,700. Paul occupied the house as his main residence from the date of purchase until 30 June 2009. The house was then unoccupied until it was sold on 31 December 2012.

  Nine-month period ended 30 June 2009 18,600 Year ended 30 June 2010 24,900 Year ended 30 June 2011 22,200 Nine-month period ended 31 March 2012 16,800 Year ended 31 March 2013 26,400

   £

  accounts to 30 June, but changed her accounting date to 31 March by preparing accounts for the nine-month period to 31 March 2012. Li’s trading profits since she commenced self-employment have been as follows:

  (15 marks)

  Compute Paul’s capital gains tax liability for the tax year 2012-13, and advise him by when this should be paid.

  Required:

  Paul’s taxable income for the tax year 2012-13 is £15,800.

  (4) On 16 February 2013 Paul sold three acres of land for £285,000. He had originally purchased four acres of land on 17 July 2009 for £220,000. The market value of the unsold acre of land as at 16 February 2013 was £90,000. (5) On 5 March 2013 Paul sold a freehold holiday cottage for £125,000. The cottage had originally been purchased on 28 July 2010 for £101,600 by Paul’s wife. She transferred the cottage to Paul on 16 November 2012 when it was valued at £114,800.

  Required: Paper F6 (UK): Taxation FA2012

   

  Year ended Period ended Year ended Year ended

30 June

  31 March

  31 March

  31 March 2010 2011 2012 2013 £ £ £ £

  Trading profit/(loss) 86,600 (25,700) 7,300 (78,300)

  • – Property business 4,500 8,100 5,600 profit Qualifying charitable (1,400) (800) (1,200) (1,100) donations Loser Ltd does not have any associated companies.

  Required: (i) State the factors that will influence a company’s choice of loss relief claims.

  You are not expected to consider group relief. (3 marks) (ii) Assuming that Loser Ltd claims relief for its losses as early as possible, compute the company’s taxable total profits for the year ended 30 June

  2010, the nine month period ended 31 March 2011, the year ended 31 March 2012 and the year ended 31 March 2013. Your answer should clearly identify the amount of any losses that are unrelieved. (5 marks)

  (iii) Explain how your answer to (ii) above would have differed if Loser Ltd

  (2 marks) had ceased trading on 31 March 2013.

  (b)   On  3  February  2013,  Lucy  Lucky  made  a  gift  of  1,000  £1  ordinary  shares  in 

  Luctastic   Ltd,  an  unquoted  investment  company,  to  a  trust.  Lucy  paid  the  inheritance  tax arising from this gift.  

    Before  the transfer Lucy owned 3,000 out of Luctastic Ltd’s issued share capital of  5,000

   £1 ordinary shares. On 3 February 2013, Luctastic Ltd’s shares were worth:   

  

Shareholding Value

   per share 

  £200 ‐20%    21 £300

  ‐40%    41 £400 ‐60%    61 ‐80%  £500  

  81 ‐100%  £600   Lucy  has not made any previous gifts.  

  Required:  

  Calculate  the inheritance tax payable as a result of Lucy’s gift to the trust and the  additional

    inheritance  tax  that  would  be  payable  if  Lucy  were  to  die  on  30  January

   2016.   Note:  You should ignore annual exemptions and should assume that the nil rate 

  (5 marks)  

  band  for the tax year 2012‐13 remains unchanged.  

  (Total: 15 marks) © Emile Woolf Publishing Limited

  168  

  Paper F6 (UK)

  Taxation  FA2012

   

       

SECTION 4 & Q A

  Answers to mock exam questions

     

  1

  (a) Mark Kett – Income tax computation 2012-13

   £ £

  Trading profit 21,800

  Capital allowances (balancing charge) 1,420 ‒‒‒‒‒‒‒

  23,220 Employment income Salary (3,250 x 3) 9,750 Beneficial loan 1,250 Staff canteen –

  ‒‒‒‒‒‒‒ 11,000 Mileage claim (725)

  ‒‒‒‒‒‒‒ 10,275

  Property business profit 7,310 Interest from government stocks 1,900 Dividends (2,880 × 100/90) 3,200 Individual savings account interest – Premium bond prize

  • – ‒‒‒‒‒‒‒

  45,905 Personal allowance (8,105)

  ‒‒‒‒‒‒‒ Taxable income

  37,800 ‒‒‒‒‒‒‒

   Income tax

  34,600 (37,800 – 3,200) at 20% 6,920 770 (35,370 – 34,600) at 10%

  77 2,430 (3,200 – 770) at 32.5% 790

  • –––––– Income tax liability 7,787
Paper F6 (UK): Taxation FA2012

   

   £ £

  Tax suffered at source PAYE (620 × 3) 1,860 Dividends (3,200 at 10%) 320

  • –––––– (2,180)
  • –––––– Income tax payable 5,607
  • –––––– (1) A balancing repayment of £5,774 (11,381 – 5,607) will be due for 2012-13. (2) Capital allowances are as follows:

   Pool Motor car Allowances £ £ £

  WDV brought forward 13,800 14,600 Addition 1,900

  • –––––– 15,700

  Disposals (18,800) (11,800)

  • –––––– –––––– Balancing charge (3,100) (3,100) Balancing allowance 2,800 × 1,680

  60%

  • –––––– –––––– ––––––

  (1,420)

  • –––––– (3) The taxable benefit from the beneficial loan is £1,250 (125,000 at 4% x 3/12). (4) The provision of meals in a staff canteen does not give rise to a taxable benefit.

  (5) The mileage allowance received will be tax-free. (6) Mark can make the following claim for tax relief in respect of his mileage:

   £

  2,500 miles at 45p 1,125 Mileage allowance 2,500 at 16p (400)

  • –––––– 725
  • –––––– (7) The property business profit is calculated as follows:

   £ £

  Rent receivable 8,600 Agency fees (8,600 at 5%) 430 Wear and tear allowance (8,600 at 10%) 860 (1,290)

  • –––––– –––––– Property business profit 7,310
  • –––––– (8) No deduction is available for furniture and furnishings where the wear and tear is claimed.

  (9) Mark’s property income from the rent of his spare room is less than £4,250 (350 x 9 = £3,150), and it is therefore exempt under the rent-a-room scheme.

Section 4: Answers to mock exam questions

  (10) Interest from individual savings accounts and premium bond prizes are exempt from income tax. (11) Mark’s basic rate tax band is extended by £1,000 (800 x 100/80) to £35,370 (34,370 + 1,000) as a result of making the gift aid donation. (b) (1) The business records relating to self-employment and property income must be retained until five years after the filing date, which is 31 January

  2019. (2) As Mark is in business during 2012-13, all of his other records relating to employment and investment income must also be retained until the same date. (3) A failure to retain records for 2012-13 can result in a penalty of up to £3,000.

  However, the maximum penalty will only be charged in serious cases.

  2

  (a) (i) Scuba Ltd – Trading profit for the year ended 31 December 2012

   £ £

  Operating profit 168,860 Depreciation and amortisation of lease 45,200 Entertaining customers 7,050 Entertaining employees Gifts to customers (diaries) Gifts to customers (hampers) 1,600 Deduction for lease premium (working 1) 1,860 Capital allowances – P & M (working 2) 34,252

  ‒‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒‒ 222,710 36,112

  ‒‒‒‒‒‒‒‒ (36,112)

  ‒‒‒‒‒‒‒‒ Trading profit 186,598

  ‒‒‒‒‒‒‒‒

  Working 1 – Deduction for lease premium

  The office building is used for business purposes, and so a proportion of the lease premium assessed on the landlord can be deducted. The amount assessed on the landlord is £49,600 calculated as follows:

  

£

  Premium received 80,000 Less: 80,000 × 2% × (20 – 1) (30,400)

  • ––––––– 49,600
  • ––––––– This is deductible over the life of the lease, starting from 1 April 2012, so the deduction for the year ended 31 December 2012 is £1,860 (49,600/20 = 2,480 × 9/12).
Paper F6 (UK): Taxation FA2012

   

   Working 2 – Plant and machinery Pool Short-life Allowances

asset

£ £ £ £

  WDV brought forward 47,200 Additions qualifying for AIA Machinery 22,800 Computer 1,100 Machinery 7,300

  • ––––––– 31,200 AIA (25,000) 25,000

  5,100 1,100 ––––––– Addition – motor car 10,400

  • ––––––– 62,700

  Proceeds (12,400)

  • ––––––– 50,300

  WDA – 18% (9,054) (198) 9,252

  • ––––––– ––––––– ––––––– WDV carried forward 41,246 902 34,252
  • ––––––– ––––––– –––––––

  Tutorial notes

  (1) The cost of the lorry will have originally been added to the pool, so the disposal proceeds are now deducted. (2) The private use of the motor car purchased on 4 May 2012 is irrelevant, since such usage will be assessed on the employee as a benefit. As it is not a low emission car, it does not qualify for a FYA. (3) As the computer is being treated as a short life asset, it has not been allocated any of the AIA.

  (ii) Corporation tax computation for the year ended 31 December 2012

  £

  Trading profit 186,598

  Property business profit (working) 11,570 Interest 430

  • ––––––– TTP 198,598
  • ––––––– Corporation tax –––––––--------------

  £198,598 x 20% 39,720

  Tutorial note

  The accounting period straddles two financial years, but the small profits rate of tax is the same for both years.

Section 4: Answers to mock exam questions

   Working – Property business profit £ £

  19,200 Rent receivable (7,200/3 = 2,400 × 8) Decorating 6,200 Advertisements 1,430

  • –––––– (7,630)
    • ––––––– Property business profit 11,570
    • ––––––– (iii)   An  election to treat the new computer as a short‐life asset must be made  within  two years of the end of the accounting period, i.e. by 31 December  2014.

     (iv) Scuba

      Ltd  must  submit  supporting  tax  computations  and  a  copy  of  its  accounts   with  its  corporation  tax  return.  These  must  be  submitted  online  using  inline eXtensible Business Reporting Language (iXBRL). 

  (b) Default surcharge (1) The late submission of the VAT return for the quarter ended 30 June 2010 will have resulted in HM Revenue & Customs issuing a surcharge liability notice specifying a surcharge period running to 30 June 2011. (2) The late payment of VAT for the quarter ended 30 September 2010 will have resulted in a surcharge of £644 (32,200 × 2%).

  (3) The late payment of VAT for the quarter ended 31 March 2011 will have resulted in a surcharge of £170 (3,400 × 5%), but this will not have been collected as it was less than £400. (4) Although the VAT return for the quarter ended 30 June 2011 was submitted late, this will not have resulted in a surcharge as Scuba Ltd was due a refund for this period. (5) The continued late submission of VAT returns will have resulted in the surcharge period being extended to 30 September 2011, then to 31 March

  2012, and finally to 30 June 2012. (6) Scuba Ltd then submitted the four consecutive VAT returns during the surcharge period running to 30 June 2012 on time, and so will have reverted to a clean default surcharge record. (7) The late submission of the VAT return for the quarter ended 30 September 2012 will therefore simply have resulted in a surcharge liability notice specifying a surcharge period running to 30 September 2013.

  Errors on VAT return

  (1) If the net errors total less than £10,000 then they can be voluntarily disclosed by simply entering them on the VAT return for the quarter ended

  31 March 2013. (2) If the net errors total more than £10,000 then they can be voluntarily disclosed, but disclosure must be made separately to HM Revenue &

  Customs. Paper F6 (UK): Taxation FA2012

    (3) Default interest will be charged if the net errors total more than £10,000, but will not usually be charged if they are less than £10,000.

  (Note that the figure of 1% of turnover for the VAT period, up to a maximum of £50,000, is substituted for £10,000 if higher.)

3 Paul Opus – CGT liability 2012-13 £ £ Ordinary shares in Symphony Ltd (W1)

  Shares acquired on 25 April 2012 Disposal proceeds (47,200 x 5,000/10,000) 23,600 Cost

  (20,000) ‒‒‒‒‒‒‒‒‒

  3,600 Shares acquired on 23 August 2011 Disposal proceeds (47,200 x 5,000/10,000) 23,600 Cost (110,400 × 5,000/40,000) (13,800)

  ‒‒‒‒‒‒‒‒‒ 9,800

  Ordinary shares Concerto plc

  51,100 Deemed proceeds (10,000 × £5.11) (W2) Cost

  (14,000) ‒‒‒‒‒‒‒‒‒

  37,100

  

House

  Disposal proceeds 220,000 Cost

  (114,700) ‒‒‒‒‒‒‒‒‒

  105,300 Principal private residence exemption (W3) (97,500)

  ‒‒‒‒‒‒‒‒‒ 7,800

  Land

  Disposal proceeds 285,000 Cost (W4)

  (167,200) ‒‒‒‒‒‒‒‒‒

  117,800

  Holiday cottage

  Disposal proceeds 125,000 Cost

  (101,600) ‒‒‒‒‒‒‒‒‒

  23,400 ‒‒‒‒‒‒‒‒

  Chargeable gains 199,500

  Annual exempt amount (10,600)

  ‒‒‒‒‒‒‒‒ Taxable gains

  188,900 ‒‒‒‒‒‒‒‒

  Capital gains tax (34,370 – 15,800) = 18,570 at 18% 3,343 (188,900 – 18,570) = 170,330 at 28% 47,692

  ‒‒‒‒‒‒‒ 51,035

  ‒‒‒‒‒‒‒

Section 4: Answers to mock exam questions

  Due date 31 January 2014

  Workings

  (1) The disposal is firstly matched against the shares acquired in the following 30 days. (2) The shares in Concerto plc are valued at the lower of £5.12 (£5.10 + ¼ (£5.18 – £5.10)) and £5.11 ((£5.00 + £5.22)/2). (3) The total period of ownership of the house is 81 months, of which a total of 75 months (period of occupation plus final 36 months) qualify for principal private residence relief. The relief is therefore £97,500 (105,300 × 75/81). (4) The cost relating to the three acres of land sold is £167,200 (220,000 × 285,000/375,000 (285,000 + 90,000)). (5) The transfer of the holiday cottage between Paul and his wife is effectively ignored for CGT purposes, so the wife’s original cost is used in calculating

  Paul’s capital gain.

  4

  (a) (1) The change of accounting date must be notified to HM Revenue & Customs by the 31 January following the tax year in which the change is made.

  (2) The first accounts to the new accounting date must not exceed 18 months in length. (3) There must not have been a change of accounting date within the preceding five tax years, although this does not apply if the present change is made for genuine commercial reasons. (b)

  £

  2008-09 12,400

  (1 October 2008 to 5 April 2009) 18,600 × 6/9 ‒‒‒‒‒‒‒

  2009-10 (1 October 2008 to 30 September 2009) 18,600 + 6,225 (24,900 × 3/12) 24,825

  ‒‒‒‒‒‒‒ 2010-11 (Year ended 30 June 2010) 24,900

  ‒‒‒‒‒‒‒ 2011-12 (1 July 2010 to 31 March 2012)

  Year ended 30 June 2011 22,200 Period ended 31 March 2012 16,800

  ‒‒‒‒‒‒‒ 39,000

  Relief for overlap profits 12,400 + 6,225 (18,625) ‒‒‒‒‒‒‒

  20,375 ‒‒‒‒‒‒‒

  2012-13 (Year ended 31 March 2013) 26,400 ‒‒‒‒‒‒‒

  Tutorial notes

  (1) The assessment for 2009-10 is the first twelve months of trading as the accounting date falling in that year is less than twelve months from the commencement of trading. (2) In 2009-10 there are overlap profits of £12,400 in respect of the six-month period 1 October 2008 to 5 April 2009. Paper F6 (UK): Taxation FA2012

    (3) In 2010-11 there are overlap profits of £6,225 in respect of the three-month period 1 July 2009 to 30 September 2009.

  (4) The basis period for 2011-12 is 21 months long. Therefore all nine months of overlap profits are relieved so that only twelve months worth of profits are assessed in this year. (c) If Li changes her accounting date from 30 June to 31 March the application of the basis period rules will be simplified. The maximum assessment in the year of cessation will be for twelve months. Li’s existing overlap profits are fully utilised as a result of the change. Otherwise, these overlap profits would not be relieved until the cessation of trading.

  The disadvantage is that the interval between earning profits and paying the related tax liability will be nine months shorter with an accounting date of 31 March.

  5

  (a) (i) (1) The rate of corporation tax at which relief will be obtained, with preference being given to profits charged at the marginal rate and then the main rate.

  (2) The timing of the relief obtained, with a claim against total profits under s37 CTA 2010 resulting in earlier relief than a claim under s45 CTA 2010 against future trading profits. (3) The extent to which relief for the qualifying charitable donations will be lost, since these cannot be carried forward. (ii)

  Year ended Period ended Year ended Year ended

30 June

  31 March

  31 March

  31 March 2010 2011 2012 2013 £ £ £ £

  • – Trading profit 86,600 7,300 – Property business profit 4,500 8,100 5,600 –

  ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ Total Profits 86,600 4,500 15,400 5,600

  Loss relief s37 (W1) (21,200) (4,500) Loss relief s37 (W2) (15,400) (5,600)

  ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒

  • – – – 65,400 Qualifying charitable donation
  • – – – (1,400) ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒
  • – – – TTP 64,000 ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒ ‒‒‒‒‒‒‒

  (1) The balance of the trading loss for the period ended 31 March 2011 (25,700 – 4,500 = £21,200) is carried back to the year ended 30 June 2010. (2) The trading loss for the year ended 31 March 2013 is set off against total profits of the same accounting period and then carried back to the year ended 31 March 2012. This leaves unrelieved losses of £57,300 (78,300 – 5,600 – 15,400). (3) The qualifying charitable donations for the period ended 31 March 2011 and the years ended 31 March 2012 and 31 March 2013 are wasted.

Section 4: Answers to mock exam questions

  (iii) (1) The trading loss for the final twelve months of trading can be relieved against total profits for the previous 36 months under s39 CTA 2010.

  (2) Therefore the unrelieved losses of £57,300 could have been carried back and fully set off in the year ended 30 June 2010. (b)

  Lifetime transfer £

  Value before transfer (3,000/5,000 = 60%) 3,000 x £400

  1,200,000 Value after transfer (2,000/5,000 = 40%) 2,000 x £300

  (600,000) ‒‒‒‒‒‒‒‒

  600,000 Nil rate band

  (325,000) ‒‒‒‒‒‒‒‒

  Chargeable 275,000

  ‒‒‒‒‒‒‒‒

  IHT due £275,000 x 20/80 = £68,750 Gross chargeable transfer carried forward £668,750 (600,000 + 68,750).

  Additional liability on death £

  Gross chargeable transfer 668,750 Nil rate band

  (325,000) ‒‒‒‒‒‒‒‒

  Chargeable 343,750

  ‒‒‒‒‒‒‒‒

  IHT due £343,750 x 40% 137,500 Less paid during lifetime (68,750)

  ‒‒‒‒‒‒‒‒ 68,750

  ‒‒‒‒‒‒‒‒ No taper relief is due as Lucy will have survived for less than three years. Paper F6 (UK): Taxation FA2012

   

  2013

(UK)

  ACCA F6 Taxation FA12 A well-written and focused text, which will prepare you for the examination and which does not contain unnecessary information. • Comprehensive but concise coverage of the examination syllabus • Simple English with clear and attractive layout • A large bank of practice questions which test knowledge and application for each chapter • A full index • The text is written by Emile Woolf International’s Publishing division (EWIP). The only publishing company focused purely on the ACCA examinations. • EWIP’s highly experienced tutors / writers produce study materials for the professional examinations of the ACCA. • EWIP’s books are reliable and up-to-date with a user-friendly style and focused on what students need to know to pass the ACCA examinations. • EWIP’s association with the world renowned Emile Woolf Colleges means it has incorporated student feedback from around the world including China, Russia and the UK.

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