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ACCA Paper P6 Advanced Taxation Revision Mock Examination June 2015 Answer Guide Health Warning! How to pass Attempt the mock examination under exam conditions BEFORE looking at these suggested answers. Then constructively compare your answer, identifying the points you made well and identifying those not so well made. If you got basics wrong then re-revise by re- writing them out until you get them correct. How to fail Simply read or audit the answers congratulating yourself that you would have answered the questions as per the suggested answers.

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Page 1: 6p Mock Exam Answers

ACCA

Paper P6

Advanced Taxation Revision Mock Examination

June 2015

Answer Guide

Health Warning!

How to pass Attempt the mock examination under exam

conditions BEFORE looking at these suggested

answers. Then constructively compare your answer, identifying the points you made well

and identifying those not so well made. If you got basics wrong then re-revise by re-

writing them out until you get them correct.

How to fail Simply read or audit the answers congratulating yourself that you would have

answered the questions as per the suggested answers.

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© Interactive World Wide Ltd, March 2015

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 or otherwise, without the prior written

permission of Interactive World Wide Ltd.

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Answer 1

Tutorial help and key points

This question is a really good example of a typical Section A challenging question.

Based on the tax affairs of an individual, the question includes elements of income

tax, national insurance, capital gains tax, VAT and corporation tax, including some

interaction between them.

Students should not be afraid to answer the different parts of the question out of

order and some parts are perhaps a little easier and certainly less time consuming

than others.

You need to be sure that you are strict with your timings as it would be easy to spend

too long on some parts, particularly part (iii).

Part (i) starts with a reasonably straight forward question regarding amounts

received on redundancy.

Part (ii) moves on to consider the badges of trade and the difference between a

disposal being taxed as trading profit or a capital gain.

Part (iii) is particularly time consuming and requires you to work at the margin

considering different ways of spreading the profits between Chippy and his wife. This

is likely to be a very challenging part of the question and can only be completed by

working methodically.

Part (iv). This final part of the question required a simple comparison between

taxation of profits of unincorporated and incorporated businesses. There was also a

good opportunity to show the examiner that you are up to date with your knowledge

regarding the Seed Enterprise Investment Scheme which has not be tested at P6 so

far, marks were awarded if you had the necessary facts at your fingertips.

The last part gave some easy marks for explaining the ACCA Code of Ethics.

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Tax Adviser Marks

1 High Street

Anytown

SW1 1TB

Mr Chippy Minton [2

2 Low Street marks

Anytown for

SW1 1AB letter

format]

3 July 2015

Dear Chippy

Tax issues

Further to our recent meeting, I set out below the answers to your queries.

(i) Redundancy package received by Chippy

The amount of finance that Chippy has available to invest in his new

business is £60,370 (see Appendix 1). This is the after tax income he

received when he was made redundant.

[Appendix 1: 3 marks]

Explanation of which items are taxable

The general employment income charging provision usually applies to

amounts received in return for the provision of past, present or future

services rendered. Lump sum payments received on the termination

of employment often fall outside the scope of this general provision.

However, case law and specific tax provisions exist which have the

effect of either fully charging or partially charging such termination

amounts received. [½]

£16,500 received in lieu of notice period

As this is a payment in lieu of notice and is made in accordance with

Chippy's contractual arrangement, it is taxable remuneration in the

tax year in which he receives it. It is subject to both income tax and

Class 1 primary NIC. [1]

Statutory redundancy of £5,000

Statutory redundancy up to £30,000 is exempt from income tax and

Class 1 primary NIC. [1]

Golden handcuff of £10,000

Any amounts received from an employer to restrict the trade of the

employee are specifically taxable in full. Therefore, the £10,000 he

received to prevent him commencing to work for a competing

company is specifically subject to income tax and Class 1 primary NIC

in the tax year in which it is received. [½]

6 c/f

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Marks

6 b/f

Ex-gratia payment of £50,000

Generally, providing such payments are not in return for services

rendered or contractual, genuine ex-gratia payments are not caught

by the general employment income charging provision. However,

they are caught by specific charging legislation and are subject to

income tax in the year of receipt to the extent that the total amount

including statutory redundancy exceeds £30,000. This means

£25,000 (50,000 – [30,000 – 5,000]) will be subject to income tax

but not class 1 primary NIC. [1] _____

Max 6 _____

(ii) Hobby collecting antique furniture

To decide the appropriate tax treatment for the profit on the table sold

in May 2015, it is necessary to determine whether the sale constitutes:

- a trading activity, giving rise to trading profits, which are

charged to income tax as trading income, or [½]

- a non-trading activity, giving rise to capital gains, which may be

chargeable to capital gains tax.

The 'badges of trade' are the main criteria used by HMRC to distinguish

between trading and non-trading activities. The key criteria relevant

to you are as follows. [½]

Frequency of transactions

From the facts given it appears that you are not involved with the

furniture trade and, if an isolated sale, the profit would be treated as

a capital gain.

However, repeated purchases and sales are likely to be treated as

trading income. [½]

Motive for purchase/financing of purchase

The table was acquired for personal use along with five other items

which you still own and use personally. [½]

Given the original motive for purchase and the nature of the asset,

HMRC are likely to treat the sale of the table as a non-trading activity.

[½]

However, the financing of the purchase using short-term finance is

typical of a trading activity. [½]

Length of ownership/supplementary work

Assets bought for personal use or as an investment are usually held

long-term, whereas inventory stock is retained for only short periods.

[½]

3½ c/f

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Marks

3½ b/f

You owned the table for approximately six months, of which four

months were spent on renovation and two months were for personal

use. The longer the asset is held the less likely the profit will be

treated as trading. [½]

The fact that modifications have been made to the table suggest a

trading activity. [½]

Reason for the sale/method of sale

The use of an auction is a typical business method of disposing of

assets. The immediate use of the proceeds to buy another table with

the intention of further sale if it does not suit requirements also

demonstrates a typical business pattern. [½]

Conclusion - likely treatment of profit from selling the large

table

Considering all factors, it is likely that the profit will be treated as a

non-trading activity which means that capital gains tax rules will

apply, since you are employed already; buying antiques is cited as a

'hobby' and the table was for your personal use in your home. [½]

The renovations were for your personal benefit and none of the other

items you purchased has been sold at auction. As an isolated sale,

this would be a capital gain. However, the fact that you are setting

up this new business could change this view in the future.

Profit and tax computations

If treated as a capital gain, you would have a capital gain of £6,000

(Appendix 2). If you do not have any other chargeable gains in

2015/16 this chargeable gain will be covered by your annual exempt

amount of £11,000 which means that no CGT is payable at 28%. [1]

[Appendix 2]

If treated as trading income, you would have taxable trading profit of

£5,400 (Appendix 2). This profit would be added to your taxable

income and will be subject to income tax at 40% in 2015/16. [½]

______

Max 6 ______

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Marks

(iii) New business - tax savings employing Dora versus operating

in partnership with Dora as a partner

Operating as a sole trader from year 2

If you operate as a sole trader, with no income other than rental

income covering your personal allowance, you will be assessed on

£60,000 of taxable income (all non-savings), resulting in total tax and

NIC of £21,185 per annum. [1]

[Appendix 3]

Employing Dora

If you employ Dora at a gross salary of £20,000 pa, your total income

tax and NIC for both of you will be £18,099 per annum (Appendix 4),

saving you £3,086 (£21,185 - £18,099) as a couple. [4]

[Appendix 4]

Running the business in equal partnership with Dora

You will both be assessed on taxable income of £30,000, giving total

tax and NIC of £16,254 (Appendix 5), saving you £4,931 (£21,185 -

£16,254) as a couple. [2]

[Appendix 5]

Conclusion

The biggest tax savings can be achieved by entering into an equal

partnership with Dora, mainly because neither of you will be paying

any income tax at the higher rate. [1]

VAT implications

Types of supply

If you are selling furniture, this is defined as a standard rated supply

for VAT.

Registration for VAT

As a standard rated supplier, it is compulsory for you to register for

VAT once the taxable turnover exceeds £81,000. [½]

It is also possible to register for VAT if your sales revenue is < £81,000

and this is called voluntary registration for VAT.

If the sales revenue is £72,000 in the first 12 months, this is £6,000

per month from 1 April 2016 to 31 March 2017.

If the sales revenue is £121,200 in the second year, this is £10,100

per month, assuming the sales revenue accrues evenly over the year.

The sales revenue in the 12 months from 1 July 2016 to 30 June 2017

is £84,300 (appendix 6) (more than £81,000). You must register for

VAT within 30 days from the end of the month in which the limit is

exceeded by 30 July 2017. You must start accounting for VAT from

1 August 2017. Appendix 6 [2]

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Marks

Accounting for VAT

Normally VAT is accounted for every quarter. This means that the first

VAT return will cover the quarter 1 August 2017 to 31 October 2017.

Completing the first VAT return

Once the business is VAT registered, you will be issued with a VAT

registration number which you must include on all your sales invoices.

Output VAT at 20% must be added to the selling price of any items of

furniture you sell from the date of registration and this output VAT

must be paid to HMRC. [½]

Input VAT at 20% suffered on all standard rated purchases and

expenses can be reclaimed from the date of VAT registration. This

means that these expenses will cost the amount net of VAT. [½]

Pre-registration input VAT

On the first VAT return it is also possible to reclaim some input VAT

suffered prior to the date of registration, this is called pre-registration

input VAT. [½]

On services it is possible to reclaim input VAT suffered up to 6 months

prior to registration. [½]

On goods it is possible to reclaim input VAT suffered up to 4 years

prior to registration provided the goods are still owned at the date of

registration. [½]

Quarterly accounting for VAT and electronic filing

At the end of the three month period, you must account to HMRC for

all the output tax, less input tax on a form VAT 100 VAT Return. [½]

Electronic filing of VAT returns is compulsory all VAT registered

businesses.

The VAT return together with the payment must be submitted

electronically. The deadline for doing this is one month and seven

days from the end of the return period. For example for the return

period to 31 October 2017 you will have until 7 December 2017 to file

an on-line VAT return and pay any VAT due. [½]

You must keep records sufficient to allow for the completion of the

VAT return for at least 6 years.

______

Max 14 ______

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(iv) Expansion of the business Marks

Investment in unquoted shares by your brother

Reduction in income tax for your brother

It is possible for investors, including family members to subscribe for

ordinary shares in a small early stage trading company under the

Seed Enterprise Investment Scheme (SEIS) and reduce their income

tax by a tax reducer called SEIS relief, in the tax year in which the

investment is made

[1]

The reduction in income tax is evaluated as 50% × amount invested

during the tax year. The upper limit on the amount of the tax

reducer is £50,000 (50% x 100,000).

[1]

It is possible for an investor to make an election to treat all or part of

the investment as if it were made in the previous tax year which may

be useful if your brother has no income tax to pay in the tax year in

which the investment is made.

This would have the added benefit of generating an income tax

refund for your brother.

Conditions

1 Must keep the shares for ≥ 3 years. [½]

2 General rule: The investor must not be an employee when he

subscribes for the shares and (together with his associates) must

not hold more than 30% of the ordinary share capital of the

unquoted trading company. [1]

Exception: If an investor is a director relief is available.

The SEIS company must satisfy the following conditions

1. The company must be unquoted

2. The company must be a trading company

3. The company must be trading from a permanent establishment

in the UK.

4. The company must be in good financial health. [1]

5. The company’s gross assets must not exceed £200,000

immediately prior to the issue of the shares.

6. The company must have fewer than 25 full time employees.

Capital gains tax reinvestment relief

If your brother has any capital gains arising in the same year as he

makes the SEIS investment, he could claim reinvestment relief to

exempt some or all of that gain. The amount that can be exempted

by the relief is the lower of:- [1]

(1) 50% of the capital gain arising;

(2) 50% of the amount invested;

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(3) Some lower amount. [1]

Provided the shares are held for three years, this would give a capital

gains tax saving.

The ACCA professional code of ethics

It is our overall objective to ensure that you minimise your total tax

liability, however we are obliged to conduct any business in

accordance with the ACCA Professional Code of Ethics throughout. [½]

The ACCA Professional Code of Ethics sets out the standards of

professional conduct expected from the members of the Association

and sets out a framework of principles that should be applied. Failure

by any member could lead to disciplinary action.

- Professional competence and professional behaviour. [½]

This means any member must maintain their professional

knowledge. [½]

- Integrity.

This means any member should be straightforward and honest

in all their professional and business relationships. [½]

- Confidentiality.

This means that information should not be disclosed to other

parties (including HMRC) without client's permission. [½]

- Objectivity. [1]

Members do not allow a conflict of interest to affect their

business decisions.

We will therefore ensure that you minimise your total tax liability within the

law and within these ethical guidelines. [½]

I hope this answers your questions. Please telephone me if you require any

further information.

Yours sincerely

Tax Adviser _____

Max 7 _____

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Appendix 1 Marks

After tax income available to invest in the new business:

Cash inflow £

Salary in lieu of notice 16,500

Statutory redundancy 5,000 [½]

Golden handcuff 10,000

Ex-gratia payment 50,000

Cash outflow

Income tax (W1) (W2) (20,600) [½]

Class 1 primary NIC (2% × (16,500 + 10,000)) (530) [½] ______

After tax income 60,370 ______

Tutorial note: The redundancy is subject to income tax at 40% as Chippy's

employment income (W2) is £34,816 in 2015/16. Chippy's rental income

is £10,000 so the personal allowance is fully utilised.

(W1) Income tax

2015/16 £ £

Payment in lieu of notice 16,500

Golden handcuff 10,000

Statutory redundancy 5,000

Ex-gratia payment 50,000 ______

55,000

Less: Exemption for redundancy (30,000) [1] ______

25,000 25,000 ______ ______

51,500 ______

Income tax (W2) (51,500 x 40%) £20,600

(W2) Other income

Tutorial note: you did not actually need to calculate the car benefit

as the property income and salary combined use up all of the personal

allowance and basic rate tax band.

2015/16 (6.4.15 – 30.9.15) £ £

Salary (16,500/3 = 5,500 per month × 6) 33,000 [½]

Car benefit

CO2 emission > 94g/km (high emission)

12% + (115 – 95)/5 = 16%

16%× (29,200 - 5,000) × 6/12 1,936

Less: Amount pays his employer

towards the running costs (£20 × 6) (120)

______

1,816 1,816 ______ ______

34,816 ______ __

3 __

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Appendix 2 Marks

Tax treatment of sale of table

If treated as capital gain

£

Sale proceeds (£21,000 - £1,000) 20,000 [½]

Cost Acquisition (12,000)

Renovation (2,000) ______

Chargeable gain 6,000 ______

If treated as trading income

£

Sale proceeds (£21,000 - £1,000) 20,000

Cost Acquisition (12,000)

Renovation (2,000) [½]

Interest on bank loan (600) ______

Trading profit 5,400 ______ __

1 __

Appendix 3

Operating as a sole trader

Total income tax

and NIC

£ £ £

Income tax on profit of £60,000

Basic rate band (note) 31,865 x 20% 6,373

Higher rate band 28,135 x 40% 11,254 ______

60,000 ______ _____

Income tax liability 17,627 [½]

National insurance contributions

Class 2 (52 weeks x £2.75 per week) 143

Class 4 (£41,865 - £7,956) × 9% 3,052

(£60,000 - £41,865) × 2% 363 _____

3,415 [½] ______

Total tax and NIC liability 21,185 ______ ___

1 ___

Tutorial Note:

The property income for the year of £10,000 is covered by the personal

allowance available of £10,000.

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Appendix 4 Marks

Employing Dora at a gross salary of £20,000 pa

£ £

Employer's national insurance contributions

re Dora payable by you

Class 1 secondary contributions

(£20,000 - £7,956) × 13.8% 1,662 [½]

Less: Employment allowance (2,000)

Nil

Tax payable by you re your profits from

the business

Profits 60,000

Adjustment to profits

Dora's salary (20,000) [½]

Employer's secondary NICs (Nil) [½] ______

Tax adjusted profits 40,000 ______

The rental income is covered by your personal allowance

(all non-savings) as follows:

Income tax:

Basic rate band 31,865 x 20% 6,373

Higher rate band 8,135 x 40% 3,254 ______

40,000 ______ _____

Income tax liability 9,627 [½]

National insurance contributions

Class 2 As above 143 [½]

Class 4 (£40,000 - £7,956) × 9% 2,884 [½] ______

12,654

Tax payable by Dora re her salary

As rental income covers her personal allowance Dora will be assessed to tax

on £20,000 taxable income (all non-savings) as follows:

Income tax:

Basic rate band 20,000 x 20% 4,000 [½]

National insurance contributions

Class 1 Primary contributions

(£20,000 - £7,956) × 12% 1,445 [½] ______

Total tax and NIC liability 18,099 ______ __

4 __

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Appendix 5 Marks

Running the business in equal partnership with Dora

As rental income covers both of your personal allowances, you will both be

assessed to tax on £30,000 (£60,000 × 50%) taxable income (all non-

savings) as follows:

Total income tax

and NIC

£ £ £

Income tax on profit of £30,000

Basic rate band 30,000 x 20% 6,000 _____

Income tax liability

(£6,000 × 2) 12,000 [1]

National insurance contributions

Class 2 (52 weeks x £2.75 per week) × 2 286 [½]

Class 4 (£30,000 - £7,956) × 9% × 2 3,968 [½] ______

Total tax and NIC liability 16,254 ______ __

2 __

Appendix 6

VAT registration

Sales revenue

£

1.4.2016 - 31.3.2017 72,000

April 2016 (72,000/12) (6,000)

April 2017 (121,200/12) 10,100 ______

1.5.2016 - 30.4.2017 76,100

May 2016 (6,000)

May 2017 10,100 ______

1.6.2016 - 31.5.2017 80,200

June 2016 (6,000)

June 2017 10,100

--------

1.7.16 – 30.6.17 84,300 [2 marks]

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Answer 2

Tutorial help and key points

The corporate question on the paper is often one of the hardest for students to

approach as there are likely to be numerous companies involved and lots of group

relationships. This is a typical example of this style of question, involving associates,

loss groups, capital gains groups and even a consortium. There is also the added

complication of some overseas companies in the structure.

Students should always start this style of question with a group diagram, and try to

identify as many group relationships as possible. This will help you to score some

easier marks and also help to focus your own mind on the key topics.

Part (i) starts by asking you for a corporation tax liability calculation for just one

company in the group. It requires you to work methodically through the taxable

total profit proforma, considering any forms of relief which may be available as a

result of the group relationships you have identified. This part of the question is

likely to be very time consuming and covers some very difficult topics.

Part (ii) is a written question concerning the legislation allowing an election to be

made to exempt the profits of overseas branches from UK corporation tax. Some

theoretical knowledge will gain marks but a full answer requires that theory to be

applied to the details in the question.

Part (iii) again requires a written answer on the topic of research and development,

which is likely to be examined given the choice of how relief can be taken by large

enterprises (either above or below the line relief).

Part (iv) is based on some personal tax advice for a director, and covers some of

the overseas aspects of personal tax. Here the specific questions were on the income

tax position for a non-resident person, and the effect on any PPR for capital gains

purposes of a period of absence from a property.

The best overall approach to this question was to first use the time available for

parts (ii) and (iii) as this ensures you do not miss out on easy marks purely due to

poor time management.

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MEETING NOTES Marks

(i) Corporation tax computation for the year ended 31 March 2015

If Deep Inc. is treated as a controlled foreign company and none of

the exceptions apply to it, the corporation tax of Horizon Ltd must be

increased by a controlled foreign company charge. This charge is

calculated using the formula (60% x chargeable profits x 21% - the

foreign corporation tax suffered).

Corporation tax computation for Horizon Ltd for the year ended

31 March 2015

£

Trading profit 332,000 [½]

Chargeable gains (note 2) 0 [1] _______

332,000

Group relief (W1) (81,000) [½]

Consortium relief (W2) (16,800) [½] _______

Taxable total profits 234,200

FII

(6% × 360,000 × 93% × 100/90 + 9,900 × 100/90) 33,320

(dividends from Curve Ltd = 20% x 49,500 = 9,900) [1] _______

'Augmented profits' (see Appendix 1) 267,520 ______

Medium company

£

Corporation tax (21% x 234,200) 49,182 [½]

Less: Marginal relief

1/400 × (375,000 – 267,520) × 234,200/267,520 (235) [1] _______

48,947

Add: CFC charge

[(60% x 480,000 x 21%) - (48,000 x 60%)] 31,680 [2] _______

Corporation tax liability 80,627 _______

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Tutorial notes: Marks

(1) Dividends received from UK and foreign companies which are

defined as non-associated companies count as franked

investment income. The dividend from Arc Ltd, Bend Ltd and

Deep Inc. do not count as franked investment income as they

are all associated with Horizon Ltd (controlled by Horizon Ltd).

(2) Horizon Ltd has a capital gain of £52,000. However, a claim for

rollover relief is possible because the reinvestment by Arc Ltd,

a 75% subsidiary, is to take place within three years of the sale

of the freehold office on 15 June 2014.

[1]

Full rollover relief is not possible as not all of the sale proceeds

have been reinvested in qualifying assets. Sale proceeds of

£32,000 (242,000 - 210,000) have not been invested. [1]

Therefore £32,000 of the gain will remain chargeable in the year

ended 31 March 2015. The remaining £20,000 of Horizon Ltd’s

capital gain will be deferred by claiming partial rollover relief.

Although Bend Ltd has also purchased a qualifying asset for

rollover relief, it is not in a gains group with Horizon Ltd as there

is only a 65% relationship between the companies, not the 75%

required.

Assumption made

It has been assumed that Arc Ltd will pay corporation tax on the

chargeable gain of £32,000 (W1) as Horizon Ltd and Arc Ltd are

members of the same 75% capital gains group. Assuming Arc Ltd has

no other taxable total profits, Arc Ltd will pay corporation tax at the

small profits rate of 20% on the chargeable gain of £32,000, whereas

Horizon Ltd is a medium company which means the chargeable gains

will be subject to corporation tax at the marginal rate of 21.25%. [1]

Options available for the trading losses of Arc Ltd and Bend Ltd

Group relief and consortium relief can be respectively claimed in

respect of the losses made by Arc Ltd (£81,000) and Bend Ltd

(£48,000 × 60% = £28,800). Horizon Ltd acquired the shares of Bend

Ltd on 1 September 2014, the amount of loss that is available for

consortium relief must be restricted to the loss realised in the post-

acquisition period. [1]

Curve Ltd is not a consortium company because it is a 75% subsidiary

of Zero Ltd.

Workings

(W1) Arc Ltd’s trading loss

The maximum group relief available is the lower of:

(i) available loss of Arc Ltd = £81,000; [1½]

and

(ii) available taxable total profits of Horizon Ltd = £332,000.

Therefore £81,000

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(W2) Bend Ltd’s trading loss Marks

The maximum consortium relief available is the lower of:

(i) available loss of Bend Ltd £16,800

(60% × £48,000 x 7 /12)

and

(ii) available taxable total profits of Horizon Ltd = £193,667. [1½]

(7/12 x 332,000)

Therefore the maximum total relief Horizon Ltd can receive is £97,800

(81,000 + 16,800).

(W3) Loss memos

Arc Ltd Bend Ltd

£ £

Trading losses 81,000 48,000

Group relief (81,000)

Consortium relief (16,800) ______ ______

Nil 31,200 ______ ______

______

Max 13 ______

Horizon Ltd – consortium member

1.4.14 31.3.15

a = 12 months

Acquired Bend Ltd on 1.9.14

[1½]

1.4.14 31.3.15

b = 12 months

Bend Ltd – consortium company

c = 7 months

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Marks

(ii) New overseas branch

(1) The possible tax treatment of the profits/losses made by

the overseas branch

Option 1 – General treatment

A UK company with an overseas branch would normally include the

profits of that branch in the UK Taxable Total Profit summary, such

that the total overseas profit is subject to UK corporation tax.

However, in the absence of any Double Tax Agreement between the

two companies, a claim for Double Tax Relief (DTR) would be possible.

[1]

This is given as a deduction against the corporation tax liability, but is

limited to the lower of the UK tax being charged on those overseas

profits and the tax already paid overseas. [1]

The overseas branch of Horizon Ltd will suffer tax overseas at a rate

of 28%. As this is higher than the maximum possible UK corporation

tax rate, the DTR credit will mean that there is effectively no UK tax

being paid on these overseas profits, despite their inclusion in the

Taxable total profits of Horizon Ltd. [1]

Option 2 – An election is made to exempt the profits of the

overseas branch from UK corporation tax

An election can made to exempt overseas branch profits from UK

corporation tax. Once made, the election is irrevocable and applies to

all branches. [1]

For Horizon Ltd, the effect of this election would be that the losses

which are expected to arise overseas in years 1 and 2 cannot be set-

off against any UK profits or gains. Without the election, Horizon Ltd

will set the overseas losses against the UK profits and gain corporation

tax relief at the relevant rate.

(2) Advice regarding whether the election should be made

It is recommended that the election to exempt the overseas branch

profits from UK corporation tax is not made in the first two years.

Once the branch becomes profitable in year 3, making the election

should be re-considered, the election is unlikely to be beneficial in

this case as no UK corporation tax will be paid on the overseas

branches profits due to double tax relief being available. [1] _____

Max 5 _____

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(iii) Research and Development Marks

Calculations showing the effect of the alternative treatments

on the corporation tax payable in the year ended 31 March

2016

The options available to a large company for relief on their research

costs are:

Option 1 An enhanced deduction from profits can be made for 130%

of the costs actually incurred, as Horizon Ltd is large for R&D purposes.

The effect for Horizon Ltd of this type of claim would be a

corporation tax liability for the year ended 31 March 2016 of

£12,200, as calculated below.

£

Trading profit before research costs 165,000

Enhanced R&D claim (130% x 80,000) (104,000) [1] ______

Taxable total profit 61,000 ______

Corporation tax at 20% 12,200 [1] ______

Option 2 “Above the line” relief can be claimed for the full costs

incurred plus a 10% credit. The 10% credit is added to profits

chargeable but is then deducted from the corporation liability for the

period. Where there is insufficient tax liability to set the 10% credit

against, a repayment can be claimed from HMRC but limited to the

total PAYE and national insurance that the employer has paid.

£

Trading profit before research costs 165,000

Actual research costs (80,000) [½]

Tax credit claim on research costs (80,000 x 10%) 8,000 [½] ______

Taxable total profit 93,000 ______

Corporation tax at 20% 18,600 [½]

Less: 10% R&D credit (8,000) [1] ______

Corporation tax payable 10,600 ______

Option 2 appears to give a larger saving of corporation tax so Horizon

Ltd should elect for this treatment instead of the enhanced deduction.

[½]

Tutorial note: As profits are below the lower limit, we can assume

the company will pay tax at 20%, subject to a review of the dividends

received from non-associated companies during the year (currently

none are anticipated). _______

5 marks _______

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(iv) Relocation of director Marks

Once Rob moves to Slozobia, he will be considered non UK resident for tax

purposes as he will be working full time overseas. He will therefore be liable

to income tax in the UK only on UK sources of income. [1]

Income tax implications

If he were to rent the UK house out whilst overseas, he would need to

declare this income, net of any allowable expenses, and would be liable to

income tax at the relevant rate. He would however be entitled to a full

personal allowance which may mean that a large part of the income is tax-

free. [1]

Capital gains tax implications

For capital gains tax purposes, a non UK resident individual is not liable to

UK capital gains tax, so if the house were sold whilst he is living in Slozobia,

no charge would arise. [1]

Temporarily not UK resident

However, if Rob was not UK resident for less than five complete tax years

he would be subject to the temporary absence rules, such that any gain on

a sale of the house whilst overseas would become chargeable in the tax

year in which he resumes UK residence. In 2015/16 Rob will be treated as

UK resident as he satisfies one of the automatic UK resident tests, he spends

a long time in the UK during 2015/16 (at least 183 days in the UK in that

tax year). In order to be exempt from capital gains tax on the disposal of

the house he must be non UK resident for five complete tax years, this will

be satisfied if he is not UK resident in the following tax years - 2016/17,

20/17/18, 2018/19, 2019/10 and 2020/21. [1]

Principal private residence relief

For the purposes of the PPR relief, any periods of absence from the property

as a result of working overseas is still covered by the relief, provided you

return to live in the property afterwards. Even if you do not return to the

property, this deemed occupation period may be available if the reason for

not returning is ongoing employment overseas restricting you from doing

so. [1]

_______

Max 4 marks _______

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Appendix 1 Marks

Step 1 - Draw the group structure

Step 2 - Analyse the group

(i) Associated companies = 4

(ii) Upper limit = 1,500,000/4 = £375,000

Lower limit = 300,000/4 = £75,000

(iii) 75% loss groups = 2

Member of group 1 = H Ltd, A Ltd

Members of group 2 = Z Ltd, C Ltd

(iv) Consortium

Consortium company = B Ltd

Consortium members = H Ltd, Z Ltd

(v) 75% gains groups = 2

Members of group 1 = H Ltd, A Ltd

Members of group 2 = Z Ltd, C Ltd

D Inc.

Z Ltd

E Inc. H Ltd

Z Ltd

C Ltd

B Ltd A Ltd

6% 60%

20% 80%

80%

40%

60%

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Answer 3

Tutorial help and key points

This is a fairly typical Section B question concentrating here on the capital taxes

Part (a)

This part concerns inheritance tax in respect of a gift of some quoted shares to

Roselea. The first task is to establish the available nil rate band which includes the

unused nil rate band transferred from Rose’s husband. The second task is to

determine the value of the PET using the ¼ up method and the average method.

Part (b)

(i) This second part of the question relates to capital gains tax and includes the

tax implications of a takeover and the purchase of shares in a Seed Enterprise

Investment Scheme.

(ii) This part was testing knowledge about the conditions to claim SEIS

reinvestment relief, which is a CGT relief which exempts gains on disposals of

chargeable assets provided the necessary conditions apply.

Part (c)

Tested the rules relating to gift with reservation, giving lots of easy marks for

knowing the theory.

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(a) Marks

The inheritance tax payable in respect of Rose’s gift of shares as a

result of Rose’s death

Rose’s available nil rate band.

£

Paul’s unused nil rate band 152,750 [1½]

47% (W1) × £325,000

Rose’s nil rate band 325,000 [½] _______

477,750 _______

The IHT payable by Roselea is £51,300 calculated using computation (2).

Description Gross IHT

£ £ £

Rose dies 1.10.14

NRB 2014/15 477,750 [½]

_______

1.2.10 PET 697,500 [1]

1.86 × 375,000

Less: AE2009/10 (3,000) [½]

Less: AE2008/09 (3,000) [½] _______

691,500 691,600 85,500 100% [1] _______

IHT

(691,500 – 477,750) × 40%

Less: Taper relief 4-5 years (34,200) (40%) [½] ______

51,300 ______ ___

7 ___

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(b) Marks

(i) Capital gains tax liability in 2014/15

Disposal of 1,000,000 shares in Chromatic plc Chargeable

gains

(no ER)

£

Sale proceeds 445,000 [½]

Less: Cost (W3) (269,565) [3] _______

175,435

Less: SEIS reinvestment relief (40,000)

50% x 80,000 [1] _______

Chargeable gain 135,435 135,435 _______

Less: Annual exempt amount (11,000) [½] _______

Taxable gain 124,435 _______

Capital gains tax

28% × 124,435 £34,842 [½] _______

Tutorial note:

Roselea has sold shares in a quoted company and realised a capital

gain of £175,435. She has reinvested £80,000 in seed enterprise

investment scheme shares and can exempt some of her capital gain

by SEIS reinvestment relief. The maximum amount of gain that can

be exempted is the lower of (1) 50% of the capital gain £87,717

(175,435 x 50%) (2) 50% x cost of the SEIS shares £40,000 (50% x

80,000 [upper limit £100,000]). ___

6 ___

Workings

(W1) Paul’s unused nil rate band

£

Nil rate band 2007/08 = 300,000 [½]

Used (£80,000 + £80,000) (160,000) [½] _______

Unused nil rate band 140,000 _______

% Unused = 140,000/300,000 × 100

= 47% [½]

(W2) Legacy to Roselea’s brother

Farm 135,000 [½]

Less: APR100% x 55,000 (55,000) [½] _______

80,000 _______

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(W2) Market value of the PET to Roselea Marks

Method 1 – ¼ up Method Method 2 - Average method

184 + ¼ × (196 – 184) [½] 180 + 192/2 [½]

=> £1.87 => £1.86

=> Take the lower value = £1.86 per share.

(W3) Cost of Roselea’s shares in Chromatic plc

Description MV at Cost

Exchange

£ £

750,000 ordinary shares Chromatic 750,000 606,522 [2]

Cash 30p × 375,000 112,500 _______ _______

862,500 697,500 _______ _______

(W4) Shares in Chromatic plc

No Cost

£

Takeover (W3) 750,000 606,522 [2]

Bonus issue 2/1 1,500,000 Nil [½] ________ _______

2,250,000 606,522

Sale (1,000,000) (269,565) [½] ________ _______

606,522/2,250,000 1,000,000 1,250,000 336,957 ________ _______ ___

3 ___

(ii) The capital gains tax implications of Roselea selling the SEIS

shares in the future

Cost of the SEIS shares = £80,000

Option 1

If the shares are sold within three years, any capital gain arising will

be chargeable and any capital loss will be allowable. [1]

Also the capital gain of £40,000 which was exempted under the SEIS

reinvestment relief rules will now be chargeable

Option 2

If the shares are sold after three years, any capital gain arising will be

exempt. If a capital loss is realised it will be allowable but will be

reduced by the SEIS income tax relief obtained in respect of the

shares.

The exempted gain of £40,000 will not be chargeable as the shares

were kept for at least 3 years. ___

3 ___

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(c) Marks

IHT implications on Roselea’s gift of a UK property

The gift of a property will be a potentially exempt transfer (PET). The value

of this PET will be the market value of the property at the time of the gift.

[1]

The amount which will be subject to inheritance tax in respect of this gift

with reservation depends on whether or not the reservation of benefit is

lifted, i.e. Roselea stops using the property rent-free before she dies. [1]

(i) If the reservation of benefit is lifted prior to Roseleas’s death, there

will be a further PET equal to the value of the property at that time.

This will only be chargeable if Roselea dies within the subsequent

seven years. [1]

(ii) If the reservation of benefit is still in place when Roselea dies, the

value of the property at the time of her death will be included in her

death estate. [1]

Where Roselea dies within seven years of the original PET, such that it is

chargeable to inheritance tax, and either (i) or (ii) applies, the original PET

or (i)/(ii) will be taxed, whichever results in the higher tax liability. ___

4 ___

Tutorial note:

Roselea would be advised to stop using the property (or to start paying a

market rent) if she wishes the gift to be advantageous from the point of

view of inheritance tax.

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Answer 4

Tutorial help and key points

Part (a)

This question starts with the topic of disincorporation relief. As a written question,

this should not have been too difficult to score well on.

Part (b)

The question then continues to look at an often examined topic of how trading losses

can be relieved. The questions asks to you consider the possible ways of relieving

the loss initially, but then only asks for a calculation of the tax saving available

assuming the most favourable manner is adopted. You need to think carefully about

what is likely to give the most favourable relief so that you do not have to complete

too many income tax calculations in order to determine the savings achieved.

Part (c)

Finally the question turns to relief available for personal pension contributions. Whilst

this is not a particularly difficult topic, there was the interaction with the effect on

the personal allowance available and the savers starting rate of tax to take into

account.

Overall, a large number of marks on this question are for calculations and typically

this will require you to work quickly to score well.

Marks

(a) Availability of disincorporation relief, the effect of making the

necessary claim and the time limit for making the claim.

(1) Disincorporation relief is available in this case because all

the following conditions are met

- The business is being transferred as a going concern. [½]

- All the assets of the business must be transferred to the

shareholders (except for any cash). [½]

- The total value of any land and buildings and the goodwill

must not exceed £100,000. This condition is also met as

for Scoot Ltd, there is no property so we only need consider

the goodwill which is valued at £85,000. [½]

- The shareholder (in this case Neil) has owned the shares

for at least 12 months prior to the transfer. [½]

2 c/f

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Marks

2 b/f

(2) The effect of making a claim for disincorporation relief is

- The goodwill will be treated as being transferred to Neil at

its original cost (nil) as this goodwill does not fall within

the intangible asset regime, as Scoot Ltd did not purchase

it but generated it internally instead. The relief ensures

that there is no gain/profit on which to charge corporation

tax. [1]

- The plant and machinery owned by Scoot Ltd are exempt

assets for capital gains purposes and so are unaffected by

disincorporation relief. An election should be made for the

items to be transferred at their tax written down value such

that no balancing adjustments arise on the transfer. [1]

(3) The time limit of the claim for disincorporation relief

Within two years of the date on which the business is transferred

in this case by 31 March 2017. [1] _______

4 marks _______

(b) (i) The possible ways of relieving the trading loss assuming

the disincorporation relief takes place as planned

From 1 April 2015, Neil will be a sole trader, with the loss for the

year ended 31 March 2016 arising at the beginning of his trading

cycle, year 1 of his trade.

The loss will amount to £66,000 (W1) as Neil will claim a small

pool write off for the £800 tax written down value on the main

pool (65,200 +800 (W2)). [1]

Option 1 – S.64 current

Neil could relieve the loss against his total income for 2015/16.

A claim here can be made in any order but cannot be restricted

in any way. [1]

The amount of loss which can be relieved will be subject to the

cap, which does not limit the amount of loss which can be set

against trade profits but limits the offset against other income

to the greater of £50,000 and 25% of total income. [1]

Option 2 – S.64 carry back

Neil could relieve the loss against his total income of 2014/15. [1]

The amount of loss which can be relieved will be subject to the

cap introduced by FA 2013.

4 c/f

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Marks

4 b/f

Option 3 – S.83 carry forward

Neil could also make use of a carry forward claim which allows

him to use the loss in future tax years by setting it against profits

from the same trade only as they arise.

Option 4 – S.72 extended carry back

As this is the first year of trading, Neil could make use of the

early years form of relief which will allow him to take his losses

back 3 tax years and set them against total income. A claim for

this form of relief is against the earliest year first (FIFO basis)

and is again subject to the cap of the greater of £50,000 and

25% of total income for each year. [1] _______

4 marks _______

Workings

(W1) Evaluation of the trading loss

Year ended 31 March 2016 - +

£ £

Loss per question 65,200

Capital allowances (W2) 800 ______ ___

66,000 Nil ______ ___

Tax adjusted trading loss (66,000)

(W2) Capital allowances

Assuming the election has been made to transfer the plant and

machinery at tax written down value.

Main Capital

pool allowances

£ £

TWDV b/f 800

Small balance relief (800) 800 ___

TWDV c/f Nil ___ ___

Total capital allowances 800 ___

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Marks

(ii) The maximum tax saving that Neil can achieve

The option to carry forward should not be taken as this will delay

the relief. This leaves Neil with the current/prior year options

and early years relief but since his income is the same each year,

there is no difference in the saving achieved regardless of which

year the losses are relieved in. The amount of loss which can be

relieved will be subject to the cap introduced by FA 2013, which

does not limit the amount of loss which can be set against trade

profits but limits the offset against other income to the greater

of £50,000 and 25% of total income.

However, the claims to set losses against other income in any

year will be subject to a cap, which will limit the loss available

for offset to £50,000 (the greater of (i) £50,000 and (ii) 25% x

£55,000). [1]

The maximum saving can be achieved by way of a current year

claim for £50,000 of the loss to be offset against 2015/16

income, saving £8,955, and the remainder of the loss of £16,000

to be offset against 2014/15 income, saving £6,443 (8,955 –

2,512). This achieves a total saving of £15,398 [½]

It is advisable for Neil to claim under the extended carry back

rules as this will give him the greatest tax saving and will result

in an income tax refund of £15,398.

Summary of the tax savings from each option

2015/16

(66,000)

Option (1) Option (2)

S.64

current

2015/16

+

S.64

c/back

2014/15

S.72

Extended

carry back

2012/13, 2013/14,

2014/15

Tax savings £8,955 £6,443 £15,398

Total saving £15,398 £15,398

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Marks

Tax saving under Option 1- S.64 current in 2015/16

Before After

2015/16 2015/16

£ £

Rental income 25,000 25,000

Dividend income

(13,500 x 100/90) 15,000 15,000

Interest income

(24,000 x 50% x 100/80) 15,000 15,000 ______ ______

Total income 55,000 55,000

S.64 current year claim (50,000) [1] ______ ______

55,000 5,000

Less: Personal allowance (10,000) (10,000) ______ ______

45,000 NIL ______ ______

20% × 15,000 (25,000 – 10,000) 3,000 [½]

20% × 15,000 3,000 [½]

10% x 1,865 186 [½] ______

31,865

32.5% x 13,135 4,269 [½] ______ ______

45,000 ______

Income tax liability 10,455 [½]

Less: Dividend tax credit (non-repayable) (1,500) ______

Repayable income tax liability 8,955 ______

The remaining loss will be carried back to the previous year:

Before After

2014/15 2014/15

£ £

Rental income 25,000 25,000

Dividend income

(13,500 x 100/90) 15,000 15,000

Interest income

(24,000 x 50% x 100/80) 15,000 15,000 ______ ______

Total income 55,000 55,000

Less: S.64 carry back year claim (16,000) [1] ______ ______

55,000 39,000

Less: Personal allowance (10,000) (10,000) ______ ______

45,000 29,000 ______ ______

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Marks

Income tax before claiming loss relief

Non-savings income

20% × 15,000 (25,000 – 10,000)

3,000 [½]

Savings income

20% × 15,000 3,000 [½] ______

30,000

Dividends

10% x 1,865 186 ______

31,865

32.5% x 13,135 4,269 [½] ______

45,000 ______

Income tax after claiming loss relief

Savings income

10% × 2,880 288 [½]

20% × 11,120 2,224 [½] ______

14,000

Dividend income

10% x 15,000 1,500 [½] ______

29,000 ______

______ ______

Income tax liability 10,455 4,012

Less: Dividend tax credit

(non-repayable) (1,500) (1,500) [½] ______ ______

Income tax payable 8,955 2,512 ______ ______

_______

7 marks _______

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Marks

(c) Explanation of the tax relief available to Jenny if she invests

£75,000 in a personal pension plan in 2014/15

Relief on contributions is initially limited to contributions up to the

greater of £3,600 and 100% of relevant earnings. For Jenny this

would allow her to take relief on contributions of up to £95,000 based

on her annual salary. The entire £75,000 contribution would be made

net of basic rate tax, such that Jenny would make a cash payment of

just £60,000(75,000 x 80%). [1]

The basic and higher rate tax bands would then be extended from

their normal positions of £31,865 and £150,000 by the gross

contributions amount of £75,000 to £106,865 and £225,000 allowing

more of her taxable income to be taxed at the basic rather than the

higher rate, to ensure that she gains relief for the contribution at her

marginal rate of tax. [1]

However, it is then necessary to consider the impact of the annual

allowance. Jenny will have an annual allowance for 2014/15 of

£40,000 but can make use of any unused annual allowance from the

previous three years, provided she was a member of a scheme. As

Jenny has made annual contributions of £25,000 she has unused

annual allowances from each previous tax year of £25,000. [1]

She will therefore make use of the 2014/15 annual allowance in full

and then use up the remaining annual allowance of £25,000 from

2011/12 and a further £10,000 of the remaining annual allowance

from 2012/13. [1]

Additionally, without the contribution, Jenny has adjusted net income

exceeding £100,000 such that her personal allowance is abated.

Making the contribution will reduce her adjusted net income below the

income limit and allow her to claim the full personal allowance. [1]

The total tax saving

Income tax saved at source 15,000

Income tax saved at the end of the tax year (W1) 15,627 ______

Total income tax saving 30,627 ______

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Workings

(W1) Pension contribution that gets tax relief in 2014/15

Step 1

Maximum pension that gets tax relief at source

Greater of:

(1) The basic amount £3,600

(2) 100% × relevant earnings £95,000

Amount invested in the pension scheme

in 2014/15 was £75,000 (which is less

than the maximum) £75,000

X1

Step 2

Consider the available annual allowance

Tax year Available

AA

£

Current year 40,000

Unused AA b/f

Tax year AA Used

£ £

2011/12 50,000 25,000 25,000

2012/13 50,000 25,000 25,000

2013/14 50,000 25,000 25,000 _______

115,000 115,000

X2 _______

Tax relief on the lower of X1 and X2 £75,000

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(W2) Income tax saved at the end of the tax year

Before After

pension pension

£ £

Salary 95,000 95,000

Interest

24,000 × 100/80 × ½ 15,000 15,000 _______ _______

110,000 110,000

Personal allowance 10,000 (10,000)

Less: ½ ×

(110,000 – 100,000) (5,000) _____

5,000 (5,000) _______ _______

Taxable income 105,000 100,000 _______ _______

£ £

Income tax before pension

31,865 × 20% 6,373

73,135× 40% 29,254 _______

105,000 _______

Extend

basic band £

100,000 × 20% 20,000 Basic 31,865 ______ ______

35,627 20,000 Add: ______ ______

Pension 75,000 _______

106,865 _______

Income tax saved

(35,627 – 20,000) £15,627

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Answer 5

Tutorial help and key points

Part (a)

This question starts with the company paying £240,000 to buy a 20 year lease (short

lease). This tests knowledge regarding these rules.

Part (b)

The main part of the question is concentrating on the restructuring of the group. The

companies are all members of a 75% capital gains group which plays an important

part in the answer. Companies in a 75% capital gains group are connected and can

transfer chargeable assets at no gain and no loss. When the examiner asks you to

explain the tax implications you must first decide which taxes are relevant and then

explain each relevant tax separately using a heading to show which tax you are

dealing with.

Part (c)

This is a very popular requirement of your examiner asking you to explain the effect

on the corporation tax as a result of the restructuring. The easiest way to deal with

these questions is to calculate the corporation tax if they don’t restructure. Under

this option you have a group of companies and each company will pay corporation

tax separately depending on their size the companies are all associated so that will

affect your limits. Then recalculate the corporation tax if they do restructure. Under

this option you only calculate corporation tax for Zeta Ltd as all the trade and assets

are being transferred to this company. The other companies will be treated as

dormant and can be ignored. The final stage is to compare the corporation tax under

each alternative to see whether it has increased, decreased or the same.

Part (d)

This part is dealing with VAT as a result of the restructuring. If the group restructures

it is important to realise that Zeta Ltd will become a partially exempt supplier. As a

written question, this should not have been too difficult to score well on.

Part (e)

This is very popular topic with the examiner and is always tested, on the approved

share option scheme called the Schedule 5 EMI share option scheme. Very easy

marks if you learn the theory. You need to learn the conditions that the company

must satisfy to get approval from HMRC and the tax implications on the grant and

exercise of the share options and the capital gains tax implications when the shares

acquired under the scheme are disposed of.

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(a) Marks

The tax implications of the acquisition of the lease on the business

premises

VAT implications

Zeta Ltd is registered for VAT and makes standard rated supplies. It will

therefore be able to claim the VAT on the premium and rentals as deductible

input tax.

(1) VAT on the premium paid

The input tax on the premium is £240,000 x 1/6 = £40,000. [½]

The premium paid excluding VAT is £200,000 (240,000 – 40,000). [½]

(2) The VAT on the rent payable

The VAT on the annual rent is £19,200 x 1/6 = £3,200, and the net

rent is £16,000. [½]

Corporation tax implications

Zeta Ltd will be able to claim a deduction in its computation of its taxable

trading profits for the rent paid and for a proportion of the lease premium

paid. The deduction will be:

£

Total premium paid 200,000 [½]

Capital element 2% (20 - 1) x £200,000 (76,000) [½] _______

Revenue element 124,000 _______

Spread over 20 year life £6,200

per annum [½]

In the year ended 31 July 2015

The total deduction each year will be for the rentals of £16,000 and the

£6,200 for the premium.

For the year ended 31 July 2014, the deduction will be for 2 months only as

the lease was acquired two months before the year end.

£

Rent payable (2/12 x 16,000) 2,667

Premium paid allowable deduction 2/12 x 6,200 1,033 [1] _______

3,700 _______ _____

Max 3 _____

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(b) Marks

(i) Immediate tax implications of the restructuring

Corporation tax implications

(1) As the Zeta Ltd group is a capital gains group, any assets such as

business premises and plant and machinery, which are chargeable

assets for capital gains purposes will be transferred at no gain/no loss.

[½]

(2) Any goodwill would normally be dealt with under the intangible asset

regime and result in a profit/loss on sale, which will be included as

part of trading profits of the company making the transfer. However,

under the succession of trade rules this will not be charged in this

case. [½]

(3) The trading loss brought forward in Omicron Ltd will be transferred to

Zeta Ltd under the succession of trade rules as both companies are

substantially in the same ownership. However, the losses can only be

set against future profits of the same trade. [½]

(4) There will be no balancing allowances/charges on the capital allowance

items transferred as the companies can make an election for them to

be transferred at their tax written down values under the succession

of trade rules. [½]

VAT implications

(1) Gamma Ltd will cease to make taxable supplies following the transfer

and must notify HMRC within 30 days that they need to deregister. [1]

(2) The transfers of the trades will be treated as transfers of going

concerns for VAT purposes and no VAT will be chargeable.

The conditions are:

(a) Same type of trade is being carried on after the sale of the

business.

(b) No significant break in trading.

(c) Owner 2 will become VAT registered.

(d) Going concern is being transferred. [1] _____

Max 4 _____

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(c) Marks

The effect on the total corporation tax paid by the group as a result

of the restructuring

The first stage is to calculate the total corporation tax paid by the group if

the restructuring does not take place.

If the restructuring does not take place

The group structure includes a total of 4 associated companies (W1).

The corporation tax liability of the group for the year will be as follows for

the year ended 31 July 2015.

Zeta Omicron Gamma Mu Total

Ltd Ltd Ltd Ltd

£ £ £ £ £

Trading profits 216,000 26,000 70,000 1,160,000 [½]

Trading loss b/f (26,000) [½] _______ ______ ______ ________

Taxable total

profits 216,000 Nil 70,000 1,160,000 _______ ______ ______ ________

Size of Medium Small Large

company (W2)

CT @ 21% 45,360 243,600 [½]

CT @ 20% 14,000 [½]

Less: Marginal

relief [½]

1/400 × (375,000

– 216,000) (398) _______ ______ ______ ________

44,962 Nil 14,000 243,600 302,562 _______ ______ ______ ________ _______

The total corporation tax payable by the group is £302,562

(44,962 + 14,000 + 243,600)

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Workings Marks

(W1) The group structure [½]

(W2) Analyse the group

(1) Associated companies = 4

(2) Limits

Upper limit 1,500,000/4 = £375,000 [1]

Lower limit 300,000/4 = £75,000

(3) 75% loss group and 75% gains group

Members of the group = Zeta Ltd, Gamma Ltd and Mu Ltd

Tutorial note:

The remaining losses of Omicron Ltd will be carried forward again to set

against future trade profits

The second stage is to calculate the total corporation tax if the restructuring

does take place

If the restructuring does take place

If the restructuring does take place (W3), then Zeta Ltd will be carrying out

four separate trades and the profits from each will be computed separately.

The loss brought forward of Omicron Ltd can again be utilised but only

against the profits from that trade. The dormant companies will not count

as associates and so Zeta Ltd now has use of the full upper and lower limits.

The corporation tax liability of Zeta Ltd will now be:

Zeta Ltd

£

Trading profits of Zeta Ltd (W3)

P1 – Zeta 216,000

P2 – Omicron (26,000 – 26,000) 0 [1]

P3 – Gamma 70,000

P4 – Mu 1,160,000 ________

Taxable total profits 1,446,000 ________

Size of company Medium company [½]

Corporation tax

1,556,000 × 21% 303,660 [½]

Less: Marginal relief

1/400 × (1,500,000 – 1,446,000) × 1 (135) [½] ________

303,525 ________

Zeta Ltd

Omicron Ltd

Gamma Ltd

Mu Ltd

100% 100% 100%

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Alternatively the corporation tax can be calculated: Marks

£

300,000 × 20% 60,000

1,146,000 × 21.25% 243,525 ________

303,525 ________

Conclusion

The proposed restructuring would therefore increase the total corporation

tax liability by £963 (£303,525 – 302,562). [½] _____

Max 5 _____

Workings

(W3) Diagram of Zeta Ltd buying the trades from the subsidiary

companies

Once the trades have been transferred to Zeta Ltd, the three subsidiaries

will become dormant companies.

(W4) Analyse the group

Associated companies = None

Upper limit = £1,500,000

Lower limit = £300,000

Tutorial note:

Dormant companies do not count as associated.

Zeta Ltd P1

P2 P3 P4

Omicron Ltd

P2

Gamma Ltd

P3

Mu Ltd

P4

Trade 3 Trade 4 Trade 2

Zeta Ltd buys the

trades from

Omicron Ltd, Gamma Ltd, Mu Ltd

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(d) Marks

The effect on the recoverability of input VAT if the restructuring

goes ahead as planned

If the restructuring does not take place then Zeta and Gamma, both

companies making standard rated supplies, will recover all of their input

VAT. Omicron Ltd and Mu Ltd make exempt supplies and so cannot register

for VAT, meaning that they cannot recover any input VAT on their supplies.

[½]

If the restructuring takes place then Zeta Ltd will make both taxable and

exempt supplies and so will be partially exempt. It will be able to recover

any input tax which is directly related to its taxable supplies. [½]

Input tax which cannot be attributed directly to either taxable or exempt

supplies is apportioned between them in the ratio of the taxable to exempt

supplies made. This is called the non-attributable input tax. The proportion

attributable to taxable supplies is expressed as a percentage, rounded up

to the nearest whole number. [1]

The input tax apportioned to taxable supplies is recoverable. There are then

de-minimis limits which mean that the whole of the residual input tax may

be recovered. Given the level if Mu Ltd’s profits it seems likely that the

partial exemption limits will be exceeded and some input tax will be

irrecoverable. [1] ___

3 ___

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(e) Marks

The tax implications of the grant and exercise of the share options.

Grant of the Schedule 5 EMI share option scheme

Income tax

No income tax implications when the share options are granted [1]

Exercise of the Schedule 5 EMI share option scheme

Income tax

Income tax implications when the share options are exercised on the

difference between the market value of the shares when the options were

granted and the exercise price. [1]

£

MV of the shares when options are granted 3.00

Less: Exercise price for the shares (1.75) ________

1.25 ________

Each employee must pay income tax on £12,500 (10,000 x 1.25) [1]

Capital gains tax

No capital gains tax when the share options are exercised. [1]

On the disposal of the shares acquired via the Schedule 5 EMI share option

scheme a capital gain will be realised

£

Sale proceeds (10,000 x £7) 70,000

Less: Cost of the share (10,000 x £3) (30,000) ________

Capital gain 40,000 ________

Relief available on the disposal of the shares

Entrepreneurs’ relief is available on the disposal of the shares. It is not

necessary for the employee to own 5% of the shares. The one year

ownership period counts from the date the options were granted. [1] ___

5 ___