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PROFESSIONAL LEVEL EXAMINATION

TUESDAY 10 JUNE 2014


(2 hours)

TAX COMPLIANCE
This paper consists of FOUR written test questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet.

2.

Answer each question in black ball point pen only.

3.

Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

4.

The examiner will take account of the way in which answers are presented.

Assume that the Finance Act 2013 rates and allowances will continue to apply in future
years unless you are specifically instructed otherwise.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this


box.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2014. All rights reserved.

Page 1 of 8

1a. Clock Ltd was incorporated on 1 January 2011, deposited 500,000 in an interest bearing
bank account on 1 February 2011 and commenced trading on 1 April 2011.
Clock Ltd prepared its first set of accounts for the 15 months ended 31 March 2012 and its
second set of accounts for the nine months ended 31 December 2012.
In May 2012, Clock Ltd received notices from HMRC requiring it to file corporation tax returns
for the periods ending in the 15 months to 31 March 2012. However, the company has not
yet filed any corporation tax returns or made any payments of corporation tax.
Clock Ltd will pay corporation tax at the small profits rate for all accounting periods to
31 December 2012.
Requirements
(i)

In relation to corporation tax, state the dates of Clock Ltds accounting periods falling
between 1 January 2011 and 31 December 2012.
(2 marks)

(ii)

In relation to the 15 month period of account ended 31 March 2012, state the dates by
which Clock Ltd should have filed its corporation tax returns and explain what penalties
are due in relation to their late filing.
(4 marks)

(iii)

Explain when Clock Ltd should have paid its corporation tax liability for the nine months
ended 31 December 2012.
(2 marks)

1b. Clock Ltd is a trading company with no associated companies. Clock Ltds draft tax-adjusted
trading profits after deducting capital allowances for the year ended 31 December 2013 are
1,482,351. In arriving at this figure Clock Ltd has adjusted the accounting profit in
accordance with tax rules by removing all non-trade items and adding back all disallowable
expenditure.
However, further adjustments may be required in relation to the following two items:

Research and development expenditure


Clock Ltd has incurred the following costs since it began a qualifying research and
development (R&D) project in April 2013:

Staff directly engaged in R&D expenditure


99,500
Consumables
19,450
118,950
The 118,950 above has been deducted in arriving at the draft tax-adjusted trading
profit of 1,482,351. Clock Ltd also spent 72,000 on the construction of a new
laboratory (excluding land). Clock Ltd qualifies as a SME for R&D purposes.

Staff costs
On 1 December 2013, Clock Ltd finally paid its senior management bonus relating to
the nine months ended 31 December 2012. The total bonus paid was 213,000
(including employer NIC of 25,829).

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Page 2 of 8

For accounting purposes, the bonus was treated as an accrued expense in the
accounts for the nine months ended 31 December 2012.
No adjustments have been made to the draft tax-adjusted trading profit of 1,482,351 in
relation to these staff costs.
In addition, the following four items were not considered when calculating the accounting
profit figure as the bookkeeper was unsure of the correct treatment and no adjustments have
yet been made to the draft tax-adjusted trading profit.
1

Private use of company vans


Clock Ltd provides company vans to employees where necessary for an employees
job. Private fuel is not provided. In most cases no taxable benefit arises in respect of
private use of the van. However, in the case of five drivers only, a taxable benefit does
arise. All five of these employees are basic-rate taxpayers. Clock Ltd has entered into a
PAYE settlement agreement with HMRC in relation to the taxable benefit arising.

Net interest payable


Bank overdraft interest payable
Interest payable on loan to acquire a 5% holding in Watch Ltd
Interest received on loans to employees
Bank deposit interest received

(20,350)
(3,500)
4,350
17,500
(2,000)

Qualifying charitable donations


Clock Ltd made its first charitable donation in August 2013 for 42,000. As at 31
December 2013 it had promised to make a further payment of 8,000.

Capital disposals
Clock Ltd disposed of its entire 12% shareholding in Cuckoo Ltd in November 2013 for
142,000. Clock Ltd had purchased the shares in January 2012 for 100,000. Cuckoo
Ltd is a trading company.
Clock Ltd sold a building in November 2013 for 238,000. Clock Ltd purchased the
building in April 2011 for 156,000.

Requirement
Calculate Clock Ltds corporation tax liability for the year ended 31 December 2013.
(15 marks)
NOTE: The RPI for November 2013 was 253.2.
(23 marks)

Copyright ICAEW 2014. All rights reserved.

Page 3 of 8

2.

Charles has run his own unincorporated business, Ducal Traders, for many years. In
addition he has recently invested in a newly formed partnership, Princely Partners. Charles
also works one day a week for his wifes company, Cheval Ltd.
Ducal Traders
The draft accounts for the year ended 31 December 2013 show a net profit of 155,457 after
deducting the following expenses:
Notes

Depreciation
15,100
Patent royalty paid
1
2,400
Utility bills and rent for office premises
2
54,500
Shop premises
3
68,000
Entertaining
4
15,680
Sundry expenses
5
164,359
Notes
1

Charles paid a trade related patent royalty with cash of 2,400.

Charles lives on the top floor of his office premises. The living area equates to
approximately 20% of the buildings total floor space.

On 1 July 2013 Charles leased shop premises for use in the business. He paid a
premium of 44,000 for a 15 year lease and paid the first years rent of 24,000 in
advance.

Entertaining costs comprise the following:


Staff party at a cost of 250 per person
Entertaining UK customers
Entertaining overseas customers

1,500
10,180
4,000
15,680

Sundry expenses comprise the following:


Replacing windows in the business area of office premises
Charless salary
Various allowable expenses

6,450
45,000
112,909
164,359

The tax written down values of Ducal Traders plant and machinery at 1 January 2013 were:

Main pool
52,400
Special rate pool
14,500
Short life asset
3,300
Private use asset - computing equipment with 25% private use by Charles
5,100
Charles purchased new plant and machinery in May 2013 for 26,700. He sold the short life
asset in November 2013 for 5,000 (original cost 22,000 in 2010). On 1 December 2013
Charles purchased a car with CO2 emissions of 110g/km for 14,000. The car is used 100%
for business purposes.

Copyright ICAEW 2014. All rights reserved.

Page 4 of 8

Princely Partners
William, Harry and Charles commenced to trade in partnership on 1 June 2013. The
partnership agreement stated that Harry would receive an annual salary of 44,000 and all
partners would receive interest on capital invested at 7% pa. The balance of profits is
allocated to William, Harry and Charles in the ratio 3:3:4.
The partners invested capital as follows: William 100,000; Harry 200,000; and Charles
500,000.
For the year ended 31 May 2014 the partnership had a tax-adjusted trading profit of 55,000.
Cheval Ltd
Charles works as a business consultant for Cheval Ltd, earning a gross salary of 12,000 pa
before deduction of 4,500 income tax under PAYE. Charles received the following benefits
in 2013/14:

A company car with a list price of 31,000 and CO2 emissions of 265g/km. Cheval Ltd
also pays for all of Charless petrol for both business and private use. The company car
was unavailable for the whole of July and August 2013. For those two months, Charles
drove 5,000 business miles in his own car and received 0.50 per mile as payment
towards the cost of the petrol. Charles has not previously used his own car for business
travel.

Photographic equipment owned by Cheval Ltd has been used by Charles since 6 April
2012. At that date its market value was 10,000. Cheval Ltd gifted the equipment to
Charles on 6 October 2013 when it was worth 6,000.

An employer contribution of 1,500 pa to the company non-contributory occupational


pension scheme. Charles is not contracted out of the State Second Pension (S2P).

Other income and payments


In January 2014 Charles received dividends of 76,500 from his holding in Burmese Ltd.
Charles made Gift Aid donations in February 2014 of 30,000.
Requirements
(a)

Calculate the tax-adjusted trading profit after capital allowances for Ducal Traders for its
year ended 31 December 2013.
(12 marks)

(b)

Calculate Charless share of Princely Partners profit for its year ended 31 May 2014.
(4 marks)

(c)

Calculate Charless employment income for 2013/14. Clearly show your treatment of
each item.
(7 marks)

(d)

Calculate Charless income tax payable for 2013/14.

(e)

Calculate how much Charles will pay in NICs for 2013/14. Ignore the NIC annual
maxima rules.
(5 marks)

(7 marks)

NOTE: Ignore VAT.


(35 marks)

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3a. You work as a trainee at Piano, Cello & Co, a firm of ICAEW Chartered Accountants. Kisha is
a new client of your firm. Your assistant has prepared the following notes relating to Kisha:

Kisha is aged 30 and domiciled in South Africa. Kisha still owns a home in South Africa
which she expects to visit for at least one month each year.

Kisha and her husband were married on 15 January 2014. Kisha arrived in the UK for
the first time on 16 January 2014 (80 days before the end of the tax year) and moved
into her husbands house. Kishas husband is UK resident and UK domiciled.

Kisha was only present in the UK in 2013/14 for 58 days of which 42 days were spent
working. Kisha works six hours per day, five days per week.

We have completed further analysis to confirm that, Kisha does not satisfy any of the
automatic UK tests for 2013/14. She also does not satisfy any of the automatic
overseas tests.

On 1 January 2014 Kisha sold a diamond necklace in South Africa for 236,000. Kisha
originally purchased the necklace for 156,000 in January 2000. The gain was liable to
taxation of 25,000 in South Africa. All figures are the sterling equivalent.

On 1 February 2014 Kisha granted a 60 year lease on business premises located in


South Africa for 100,000. The proceeds were liable to taxation of 10% in South Africa.
The reversionary interest was valued at 85,000. The freehold of the premises originally
cost 56,000 in March 1990. All figures are the sterling equivalent.

On 1 March 2014 Kisha sold a painting realising a gain of 20,000. The painting
previously belonged to her husband and has always been held in the UK.

Kishas P60 shows that her salary paid in 2013/14 was 27,000. Kisha had no other
income in 2013/14.

Requirements
(i)

Discuss whether Kisha has sufficient UK ties to be treated as UK resident in 2013/14.


(5 marks)

(ii)

Assuming Kisha is not UK resident, calculate her liability to capital gains tax for
2013/14.
(1 mark)

(iii)

Assuming Kisha is UK resident but does not make a claim to use the remittance basis,
calculate her liability to capital gains tax for 2013/14.
(8 marks)

Copyright ICAEW 2014. All rights reserved.

Page 6 of 8

3b. Esme was also a client of Piano, Cello & Co until her death on 5 April 2014. Esme was UK
resident and domiciled. She made the following lifetime gifts:

On 1 April 2013 Esme gave 100,000 in cash to a discretionary trust for the benefit of
her grandchildren.

On 1 May 2013 Esme gave her son her share in the family holiday home which Esme
has not visited since. Esme owned 30% of the home with the other 70% owned by her
husband, Victor. The home was valued as follows at the time of the gift:

Entire home
945,000
70% share
500,000
30% share
300,000

On 1 June 2013 Esme gave a 10% holding in Bat Ltd, an unquoted investment
company, to her brother. Esme owned 60% of the shares in Bat Ltd. HMRC has agreed
valuations for the shares as follows:

60% holding
300,000
50% holding
221,000
10% holding
38,000

On 1 July 2013 Esme gave her daughter her 2,100 shares in Owl plc, an investment
company, on the occasion of her marriage. On 1 July 2013 the shares were quoted at
236-244p with marked bargains of 236p, 237p and 238p.

On 1 September 2013 Esme paid 21,000 to her grandchildrens school in respect of


fees for one school year. Esmes grandchildren had just started school having reached
school age. Esme intended to pay their school fees until they reached 18. Esme had
taxable income in excess of 100,000 pa.

Esmes death estate was worth 5 million. Esme gave 500,000 of her death estate to the
Mad Hatters Tea Party (MHTP). MHTP is a political party which, at the last general election,
had one MP elected to parliament and overall gained 300,000 votes.
Esme is survived by Victor to whom she left the remainder of her death estate. Victor has
been UK resident for ten years but remains domiciled in Canada.
Requirement
Calculate the inheritance tax payable as a result of Esmes death assuming all beneficial
elections are made.
(13 marks)

PLEASE TURN OVER

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3c.

Sunil is the managing director of Happy Ltd which has been a tax client of Piano, Cello & Co
for a number of years. Sunil has just sent your manager, an ICAEW Chartered Accountant
who is in charge of the Happy Ltd tax engagement, the following email:
I know that you dont normally act for me personally but Id really appreciate it if you could
find time to prepare my wifes USA tax return and disclosures to the US Internal Revenue
Service. The current accountants we use have been next to useless. They claim that
because my wife has American income her affairs are too complicated for them to deal with.
I have faith in Piano, Cello & Co and am sure you will be able to deal with it. If so, well be
able to negotiate a good fee as after all Im the person who decides how contracts are
awarded at Happy Ltd and yours is up for renewal next year.
Requirement
Explain the ethical issues your manager should consider before replying to this email.
(5 marks)
(32 marks)

4.

Arthur is a partially exempt VAT registered trader and sells only to UK customers. During the
year ended 31 May 2014 he made the following supplies:

Standard-rated taxable supplies (excluding VAT)


48,000
Exempt supplies
62,000
110,000
Arthurs input tax for the year is:
Wholly attributable to taxable supplies
Wholly attributable to exempt supplies
Non-attributable

16,000
25,000
12,450
53,450

In addition to the above, during the year ended 31 May 2014 Arthur:

Purchased a company car for an employee for 10,500.


Purchased a van for 6,000 for use only in the VAT-exempt part of the business.
Sold plant for 10,000 which had been used in the taxable part of the business.

Arthur was de minimis in the partial exemption year ending 31 May 2013. Therefore he has
been using the new annual partial exemption test and during the year ended 31 May 2014
Arthur recovered all of his input tax suffered. Arthur has correctly calculated that he does not
pass Simplified Test One for the year ended 31 May 2014.
All figures above are exclusive of any VAT.
Requirement
For the partial exemption year ended 31 May 2014, determine whether Arthur is de minimis;
and calculate the amount of input tax payable to HMRC as a result of the annual adjustment.
(10 marks)

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Appendix

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