ACCA

Paper F6 Taxation
Revision Mock Examination June 2011 Question Paper
ALL FIVE questions are compulsory and MUST be attempted. Rates of tax and tables are printed on pages 3-5. Time Allowed 15 minutes 3 hours RReading and planning Writing

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Tax rates and allowances to use in this exam

The following tax rates and allowances are to be used in answering these questions.

Income tax
2010/11 Basic rate Higher rate Additional rate 1 to 37,400 37,401 and above 150,000 and above Other % 20 40 50 Dividends % 10 32.5 42.5

A starting rate of 10% applies to savings income where it falls within the first 2,440 of taxable income.

Personal allowances
Personal allowance Personal allowance for those aged 65 to 74 Personal allowance for those aged 75 and over Income limit for age-related allowances Income limit for standard personal allowance

6,475 9,490 9,640 22,900 100,000

Cars benefit percentage

The base level of CO2 emissions is 130 grams per kilometre. % Petrol cars with a CO2 emission of 75 grams per kilometre or less Petrol cars with CO2 emissions of 76 - 120 grams per kilometre. 5 10

Car fuel benefit

The base level figure for calculating the car fuel benefit is 18,000.

Authorised mileage allowance payments (AMAP)

First 10,000 business miles Any miles in excess of 10,000 40p per mile 25p per mile

Pension scheme limits

Annual allowance Lifetime allowance 255,000 1,800,000

The maximum contribution that can qualify for tax relief without any earnings is 3,600.

Capital allowances
Plant and machinery Main pool writing down allowance Special rate pool writing down allowance Motor cars CO2 emissions up to 110g per kilometre CO2 emissions between 111 and 160g per kilometre CO2 emissions over 160g per kilometre Annual investment allowance Industrial buildings allowance Writing down allowance 1% 100% 20% 10% 100,000 20% 10%

Corporation tax
Financial year Small profits rate Main rate Lower limit () Upper limit () Marginal relief fraction 2007 20% 30% 300,000 1,500,000 1/40 2008 21% 28% 300,000 1,500,000 7/400 2009 21% 28% 300,000 1,500,000 7/400 2010 21% 28% 300,000 1,500,000 7/400

Marginal relief (U A) N/A Standard fraction

Value added tax

Standard rate of VAT Up to 3 January 2011 From 4 January 2011 Registration limit Deregistration limit 17.5% 20% 70,000 68,000

Capital gains tax

Annual exemption Rate of CGT Lower rate Higher rate Entrepreneurs relief Lifetime limit Rate of CGT 5,000,000 10% 18% 28% 10,100

Inheritance tax
1 - 325,000 Excess Death rate Lifetime rate Nil rate bands 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 and 2010/11 Taper relief rates Over 3 years up to 4 years Over 4 years up to 5 years Over 5 years up to 6 years Over 6 years up to 7 years Over 7 years 40% 20% 255,000 263,000 275,000 285,000 300,000 312,000 325,000 Percentage reduction 20% 40% 60% 80% 100% Nil

Rates of interest
Official rate of interest Interest on underpaid tax Interest on overpaid tax 4% 3% 0.5%

National Insurance (not contracted out rates)

Class 1 Employee 1 to 5,715 per year 5,716 to 43,875 per year 43,876 and above per year Class 1 Employer 1 to 5,715 per year 5,716 and above per year Class 1A Class 2 Class 4 1 to 5,715 per year 5,716 to 43,875 per year 43,876 and above per year Nil 8% 1% Nil 12.8% 12.8% 2.40 per week Nil 11% 1%

ALL FIVE questions are compulsory and MUST be attempted

QUESTION 1 - LUCY LAWLER
On 1 October 2009 Lucy Lawler, a 35 year old single lady, commenced in selfemployment running an interior design shop. Lucy's income statement for the 15 months to 31 December 2010 is as follows: Gross profit Depreciation Motor expenses (Note 1) Property expenses (Note 2) Other expenses (all allowable) 6,050 3,800 7,900 5,800 _____ (23,550) ______ 67,300 ______ 90,850

Net profit Note 1 - Motor expenses

During the 15 months to 31 December 2010, Lucy drove a total of 15,000 miles of which 6,000 were for private purposes. Note 2 - Property expenses Lucy purchased her interior design shop on 1 October 2009 for 250,000. She lives in a flat that is situated above the shop and one fifth of the total property expenses of 7,900 relate to the flat. Note 3 - Goods taken for own use During the 15 months to 31 December 2010, Lucy used materials from the interior design shop to decorate the flat without paying for them. The cost of these materials was 600 and they had a selling price of 750. Note 4 - Private telephone Lucy uses her private telephone to make business calls. The total cost of the private telephone for the 15 months to 31 December 2010 was 1,500, and 50% of this related to business telephone calls. The cost of the private telephone is not included in the income statement expenses. Note 5 - Plant and machinery Lucy purchased the following assets: Date 1 May 2010 1 July 2010 1 October 2010 1 November 2010 1 December 2010 Fixtures and fittings Delivery van Motor car (1) Computer Motor car (2) 10,000 8,000 15,000 2,000 8,000

Motor car (1) is driven by Lucy and has CO2 emissions of 185g/km. Motor car (2) has a CO2 emission of 105g/km and is driven by an employee.

Other information 1 Investment income On 6 June 2010, Lucy received 300 interest from a cash ISA held with the Trustee National Bank. On 31 October 2010, Lucy received 4,800 bank interest on a deposit account, and on 31 December 2010 she received 3,600 dividends. All of the above amounts are the cash amounts received. 2 Gift Aid donation On 1 May 2010, Lucy made a donation of 400 (net) to a national charity. This donation was made under the Gift Aid scheme. On 1 September 2010, Lucy made a donation to a national charity of 800 (net). This was not made under the Gift Aid scheme. 3 Payments on account Lucy has not made any payments on account of income tax to date. Required: (a) Calculate Lucy's tax adjusted accounting profit for the 15 months to 31 December 2010. (10 marks) Note: Your computation should commence with the net profit figure of 67,300, and should list all items referred to in Notes (1) to (4) indicating by the use of a zero (0) any items that do not require adjustment. (b) (c) Calculate Lucy's income tax payable for 2010/11. Calculate Lucy's NIC liability for 2010/11. (12 marks) (3 marks) (Total: 25 marks)

QUESTION 2 - TOOLS LTD

(a) Tools Ltd is a manufacturer of garden equipment. Tools Ltd has three subsidiary companies: Spade Ltd, Fork Ltd and Rake Ltd. The company's summarised income statement for the year ended 31 March 2011 is as follows: Gross profit Other income Profit on sale of shares (Note 1) Bank interest (Note 2) Expenses Depreciation Professional fees (Note 3) Lease premium (Note 4) Repairs and renewals (Note 5) Other expenses (Note 6) 89,200 23,200 50,000 18,500 488,700 _______ (699,600) _______ (232,965) (32,500) _______ (265,465) _______ 5,900 9,700 451,035

Operating loss Finance costs Interest payable (Note 7) Loss before taxation Note 1 - Profit on the sale of shares

The profit on the sale of shares arose from the disposal of shares in Bench plc, an unconnected company. The shareholding represented less than 1% of Bench plc's issued share capital. Note 2 - Bank interest The bank interest of 9,700 was received on 31 December 2010. A further 2,300 was accrued at 31 March 2011. The bank deposits were held for nontrading purposes. Note 3 - Professional fees Professional fees are as follows: Accountancy and audit Legal fees in connection with the issue of share capital Legal fees in connection with a new 10 year lease Legal fees in connection with the issue of debentures (Note 7) 4,200 8,400 3,300 7,300 ______ 23,200 ______

Note 4 - Lease premium On 1 July 2010, Tools Ltd paid a premium of 50,000 for the acquisition of a 10 year lease. The lease is used for trading purposes.

Note 5 - Repairs and renewals The figure of 18,500 for repairs and renewals includes 7,800 for constructing a new wall around the company's car park and 10,700 for repairing the roof of a factory after it had been damaged by high winds. Note 6 - Other expenses The figure of 488,700 for other expenses includes 4,500 for entertaining suppliers, 2,700 for entertaining customers, 2,800 for entertaining staff and 40,000 for the salary of an employee who was temporarily seconded to another group company. All remaining expenses are allowable. Note 7 - Interest payable Tools Ltd raised a debenture loan on 1 September 2010 and this was used for trading purposes. Interest of 23,200 was paid on 31 January 2011 and a further 9,300 was accrued at 31 March 2011. Note 8 - Plant and machinery On 1 April 2010 the tax written down values of plant and machinery were as follows: Main pool Motor car (1) 18,200 17,200 Cost/(proceeds) 11 April 2010 8 May 2010 8 May 2010 15 June 2010 3 January 2011 11 January 2011 Purchased equipment Sold motor car (1) Purchased motor car (2) Purchased motor car (3) Sold a lorry Purchased a second-hand office building 14,200 (8,800) 24,400 14,800 (8,400) 360,000

The following transactions took place during the year ended 31 March 2010:

Motor car (1) was originally purchased in June 2008 and the original cost was 23,200. Motor car (2) purchased on 8 May 2010 for 24,400 has CO2 emissions of 185g/km. Motor car (3) purchased on 15 June 2010 for 14,800 has CO2 emissions of 145g/km. The lorry sold on 3 January 2011 originally cost 7,800. The cost of the second-hand office building purchased on 11 January 2011 for 360,000 includes fixtures and fittings qualifying as plant and machinery (but not as integral features). These fixtures originally cost 101,200, and at the date of sale had a market value of 14,800 and a written down value of 10,200. Tools Ltd and the vendor of the office building have made a joint election regarding the sale price of the fixtures to enable Tools Ltd to claim the maximum possible amount of capital allowances in respect of the items based on the original cost. Note 9 - Purchase of factory On 1 October 2010, Tools Ltd purchased a new factory. The factory was constructed at a cost of 480,000 (including 80,000 for the land, 40,000 for general offices and 80,000 for a showroom). It was brought into use immediately.

Required: Calculate Tools Ltd's tax adjusted trading loss for the year ended 31 March 2011. (20 marks) Note: Your computation should commence with the loss before taxation figure of 265,465 and should also list all the items referred to in Notes (1) to (7) indicating by the use of a zero (0) any items that do not require adjustment. (b)Spade Ltd's sales since the commencement of trading on 1 October 2010 have been as follows: 2010 October November December 2011 January February March 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. Spade 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) Spade 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 Spade 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) Explain the circumstances in which Spade Ltd would have been allowed to recover input tax incurred on goods purchased and services incurred prior to the date of VAT registration. (4 marks) 9,700 18,200 21,100 14,800 23,300 24,600

(ii)

(iii) Explain why it would have been beneficial for Spade Ltd to have voluntarily registered for VAT from 1 October 2010. (3 marks) (iv) State the additional information that Spade Ltd must show on its sales invoices in order for them to be valid for VAT purposes. (3 marks) (Total: 30 marks)

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QUESTION 3 - TED LARKIN

Ted Larkin, aged 49, on 31 March 2011 transferred the following assets to his eldest son, Ned: 1 Quoted shares in Buds plc. Ted had built up his present shareholding in Buds plc as follows. He owns more than 5% of the issued ordinary share capital of Buds plc and is an employee of the company. Number of shares 1.8.97 30.4.07 1.9.07 31.3.11 2 Bought Bought (1 for 2 rights) Bought Sold to Ned at market value 600 1,000 800 2,100 Total amount 8,640 13,200 5,760 95,020

A freehold office building with a market value of 195,000. The office building was purchased on 1 September 2005 for 165,000 and has always been used by Ted for business purposes. Ned paid Ted 157,000 for the office building. A racehorse with a market value of 21,000. The racehorse was bought in December 2005 for 18,000.

You should assume that wherever possible Ted and Ned have elected to holdover any gains arising and Ted has elected to claim entrepreneurs relief whenever possible. Ted also made the following disposals to unconnected individuals in 2010/11: 4 5 In May 2010, an antique vase was sold for 8,450 net of expenses of sale amounting to 550. The vase had cost 3,200 in June 2002. On 30 June 2010, Ted sold a house for 350,000. The house had been acquired on 1 July 1987 for 35,000. Ted used the house as his main residence until 30 June 1991 when he went to work overseas until 30 June 1993, from the overseas location he went travelling for two years until 30 June 1995. Ted then returned to the house for one year before moving into a house he inherited from his mother. The property was let from 1 July 1996 up to the date of sale. The remainder of the time it was empty.

He has unused capital losses of 6,500 brought forward from 2009/10. Required: (a) Calculate Ted Larkin's capital gains tax liability for 2010/11 and advise him by when this should be paid and the due date for making the necessary elections. (14 marks) You should assume he claims entrepreneurs relief on all qualifying disposals. (b) Advise Ted of the carried forward base cost for capital gains purposes of any assets included in (1) to (4) above. (1 mark) (Total: 15 marks)

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QUESTION 4 - BRUCE LEE

Bruce died on 10 February 2011. He had made the following lifetime gifts: 31 March 2003 12 January 2006 10 May 2007 23 June 2007 2 September 2007 A gift of 126,000 to a trust. A gift of 40,000 to his wife. A gift of 200 to his son. A gift of 240,000 to his daughter. A gift of 300,000 to a trust.

Bruce paid any IHT arising from the gifts to the trusts. Nil rate bands are as follows: 2002-03 2005-06 2007-08 2010/11 Required: (a) (b) State the advantages for inheritance tax purposes of making lifetime gifts of assets. (3 marks) Calculate the inheritance tax that will be payable as a result of Bruce's death. (12 marks) (Total: 15 marks) 250,000 275,000 300,000 325,000

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QUESTION 5 - LAE LTD, MON LTD AND NOK LTD

Lae Ltd owns 100% of the ordinary share capital of both Mon Ltd and Nok Ltd. Lae Ltd The results of Lae Ltd for the year ended 31 March 2011 are as follows: Trading loss Property business loss Capital loss Loan interest received Gift Aid donation paid (218,100) (26,700) (19,200) 1,600 (4,800)

The loan interest received is in respect of a loan that was made for non-trading purposes. Mon Ltd The results of Mon Ltd for the year ended 31 March 2011 are as follows: Trading loss Property business income Loan interest received Gift Aid donation paid (11,200) 60,900 3,300 (3,200)

The loan interest is also in respect of a loan that was made for non-trading purposes. Nok Ltd Nok Ltd commenced trading on 1 July 2010. For the nine-month period ended 31 March 2011, the company had a trading profit of 192,300. Nok Ltd has no other taxable profits or allowable losses. Required: (a) (b) Explain the group relationship that must exist between companies in order for them to claim group relief. (3 marks) Advise Lae Ltd as to the maximum amount of its losses that, potentially, could be surrendered as group relief for the year ended 31 March 2011. (4 marks) Advise Mon Ltd and Nok Ltd as to the maximum amount of group relief that they can actually claim from Lae Ltd in respect of its losses for the year ended 31 March 2011. (4 marks) Describe the alternative ways, apart from group relief, in which Lae Ltd could relieve its trading loss of 218,100 and its property business loss of 26,700 for the year ended 31 March 2011. (4 marks) (Total: 15 marks)

(c)

(d)

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