becker f6

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STUDY QUESTION BANK

ACCAPaper F6 | TAXATION (UNITED KINGDOM)

2014 Edition

SAMPLE

®

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©2014 DeVry/Becker Educational Development Corp. All rights reserved. (i)

ACCA

PAPER F6

TAXATION (UNITED KINGDOM)

STUDY QUESTION BANK

For 2014 Examinations

® SAMPLE

(ii) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher.

This training material has been prepared and published by Becker Professional Development International Limited 16 Elmtree Road Teddington TW11 8ST United Kingdom. Copyright ©2014 DeVry/Becker Educational Development Corp. All rights reserved. The trademarks used herein are owned by DeVry/Becker Educational Development Corp. or their respective owners and may not be used without permission from the owner.

All rights reserved. No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system without express written permission. Request for permission or further information should be addressed to the Permissions Department, DeVry/Becker Educational Development Corp.

Acknowledgement

Past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants and have been reproduced by kind permission.

SAMPLE

STUDY QUESTION BANK – TAXATION (UNITED KINGDOM) (F6)

©2014 DeVry/Becker Educational Development Corp. All rights reserved. (iii)

CONTENTS

Question Page Answer Marks Date worked UK TAX SYSTEM

1 Tax status 1 1001 22 INCOME TAX COMPUTATIONS

2 Michael 1 1002 15 3 Long Life 2 1004 15 4 The Pike Family 2 1005 20 PROPERTY AND INVESTMENT INCOMES

5 Brigid Jones 3 1008 20 EMPLOYMENT INCOME

6 Endicott 4 1010 15 7 LA Raider 5 1012 20 UNINCORPORATED TRADER – ASSESSMENT AND PROFITS

8 Max 6 1014 20 9 Capone 7 1016 13 10 Michael and Rose 9 1018 35 CAPITAL ALLOWANCES

11 Julian 10 1021 20 12 Roberta 11 1024 20 13 Charlie Ceasing 12 1027 15 14 Richard 14 1028 25 UNINCORPORATED TRADER – TRADING LOSSES

15 Warren Street 16 1030 20 16 Newbold 17 1032 10 17 Sigmund 17 1033 25 18 Alan Waters 18 1035 15 UNINCORPORATED TRADER – OTHER MATTERS

19 Kruger, Brand and Shepstone 18 1037 10 20 Fox, Griffiths and Hall 19 1038 20 CAPITAL GAINS – BASIC PRINCIPLES 21 Abbot Ltd and James 19 1041 10

SAMPLE

TAXATION (UNITED KINGDOM) (F6) – STUDY QUESTION BANK

(iv) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question Page Answer Marks Date worked CAPITAL GAINS – CHATTELS, LAND AND BUILDINGS 22 Ian and Katrina 20 1042 20 23 Pearl 21 1044 15 24 Robin and Terence 21 1045 20 CAPITAL GAINS – SHARES 25 Ma Ltd, Olive and George 22 1047 20 CAPITAL GAINS – BUSINESS ASSET RELIEFS 26 Nixon and Drive Ltd 23 1050 18 27 Christine Philips 24 1052 12 CORPORATION TAX COMPUTATION 28 Springvale Ltd 25 1053 20 29 Nuts and Bolts Ltd 26 1055 15 30 Chinny Ltd 26 1056 20 31 Ring Ltd 27 1058 18 CORPORATION TAX – LOSS RELIEFS 32 Jorrocks Ltd 28 1059 15 33 Flounder Ltd 28 1060 10 CORPORATION TAX – GROUPS OF COMPANIES 34 Sand Ltd 29 1061 8 35 Lemond Ltd and Subsidiaries 29 1062 15 36 A Ltd and Subsidiaries 30 1063 8 INHERITANCE TAX 37 Graham 30 1064 25 NATIONAL INSURANCE CONTRIBUTIONS 38 Mr Forest 31 1066 12 TAX ADMINISTRATION 39 Adam and Mr Brown and Challis Ltd 32 1067 20 40 PAYE 33 1069 20 VALUE ADDED TAX 41 Mr Edwards 33 1071 15 42 Barrett Ltd 34 1072 7 43 Fred 34 1073 8 44 Sweet 35 1074 8 45 Subject survey – VAT 35 1074 55

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©2014 DeVry/Becker Educational Development Corp. All rights reserved. (v)

SUPPLEMENTARY INSTRUCTIONS

The following supplementary instructions will be included in the June 2014 and December 2014 exams:

calculations and workings need only be made to the nearest £; all apportionments should be made to the nearest month; all workings should be shown.

TAX RATES AND ALLOWANCES

Income tax

Normal Dividend rates rates % %

Basic rate £1 – £32,010 20 10 Higher rate £32,011 – £150,000 40 32.5 Additional rate £150,001 and over 45 37.5

A starting rate of 10% applies to savings income where it falls within the first £2,790 of taxable income.

Personal allowance

Personal allowance Born on or after 6 April 1948 £9,440 Born between 6 April 1938 and 5 April 1948 £10,500 Born before 6 April 1938 £10,660 Income limit Personal allowance £100,000 Personal allowance (born before 6 April 1948) £26,100

Residence status

Days in UK Previously resident Not previously resident

Less than 16 Automatically not resident Automatically not resident

16 to 45 Resident if 4 UK ties (or more) Automatically not resident

46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties

91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)

121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)

183 or more Automatically resident Automatically resident

Child benefit income tax charge

Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit received for every £100 of income over £50,000.

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(vi) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Car benefit percentage

The relevant base level of CO2 emissions is 95 grams per kilometre.

The percentage rates applying to petrol cars with CO2 emissions up to this level are:

75 grams per kilometre or less 5% 76 grams to 94 grams per kilometre 10% 95 grams per kilometre 11%

Car fuel benefit

The base figure for calculating the car fuel benefit is £21,100.

Individual savings accounts (ISAs)

The overall limit is £11,520, of which £5,760 can be invested in a cash ISA.

Pension scheme limit

Annual allowance £50,000

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

Authorised mileage allowances: cars

Up to 10,000 miles 45p Over 10,000 miles 25p

Capital allowances: rate of allowance

% Plant and machinery Main pool 18 Special rate pool 8 Motor cars New cars with CO2 emissions up to 95 grams per kilometre 100 CO2 emissions between 96 and 130 grams per kilometre 18 CO2 emissions over 130 grams per kilometre 8 Annual investment allowance First £250,000 of expenditure (since 1 January 2013) 100

Cap on income tax reliefs

Unless otherewise restricted, reliefs are capped at the higher of £50,000 or 25% of income. SAMPLE


©2014 DeVry/Becker Educational Development Corp. All rights reserved. (vii)

Corporation tax

Financial year 2011 2012 2013 Small profits rate 20% 20% 20% Main rate 26% 24% 23% Lower limit £300,000 £300,000 £300,000 Upper limit £1,500,000 £1,500,000 £1,500,000 Standard fraction 3/200 1/100 3/400

Marginal relief

Standard fraction × (U – A) N/A

Value added tax (VAT)

Standard rate 20% Registration limit £79,000 Deregistration limit £77,000

Inheritance tax: tax rates

£1 – 325,000 Nil Excess – Death rate 40% – Lifetime rate 20%

Commentary

Where the nil rate bands are required for previous years these will be given in the question.

Inheritance tax: taper relief

Years before death Percentage reduction Over 3 but less than 4 years 20% Over 4 but less than 5 years 40% Over 5 but less than 6 years 60% Over 6 but less than 7 years 80%

Capital gains tax

Rates of tax – lower rate 18% – higher rate 28% Annual exempt amount £10,900 Entrepreneurs’ relief – Lifetime limit £10,000,000 − Rate of tax 10% SAMPLE


(viii) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

National insurance contributions (Not contracted out rates)

% Class 1 Employee £1 to £7,755 per year Nil

£7,756 to £41,450 per year 12.0 £41,451 and above per year 2.0

Class 1 Employer £1 to £7,696 per year Nil

£7,697 and above per year 13.8 Class 1A 13.8 Class 2 £2.70 per week Small earnings exemption £5,725 Class 4 £1 to £7,755 per year Nil

£7,756 to £41,450 per year 9.0 £41,451 and above per year 2.0

Rates of interest (assumed)

Official rate of interest 4.0% Rate of interest on underpaid tax 3.0% Rate of interest on overpaid tax 0.5%

SAMPLE


©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1

Question 1 TAX STATUS

(a) An individual person is liable to UK income tax if that person is resident in the UK for tax purposes.

Required:

Explain the tests applied by Her Majesty’s Revenue & Customs to determine whether a person is resident in the UK for a tax year. (10 marks)

(b) A company is liable to UK corporation tax on its profits arising anywhere in the world in a chargeable accounting period if that company is resident in the UK for tax purposes in that same period.

Required:

Explain how Her Majesty’s Revenue & Customs determines whether a company is resident in the UK for a chargeable accounting period. (8 marks)

(c) A distinction is drawn for UK tax purposes between the terms “tax avoidance” and “tax evasion”.

Required:

Explain the meaning of these terms. (4 marks)

(22 marks)

Question 2 MICHAEL

Michael informs you of the following matters so that you can prepare his income tax computation:

(1) He received a gross salary of £108,000 from his employment as a solicitor, for the tax year 2013/14. His employer deducted £31,444 under PAYE for 2013/14.

(2) Michael is a member of his employer’s approved occupational pension scheme. In 2013/14, he made contributions into the scheme = 5% of his salary, whilst his employer contributed an amount = 8% of his salary.

(3) He received building society interest of £560 in the year to 5 April 2014.

(4) He received bank deposit interest of £632 in the year to 5 April 2014.

(5) He received dividends of £1,800 in the year to 5 April 2014.

(6) During the year ended 5 April 2014, he paid £780 to a recognised charity under the gift aid scheme.

Required:

Calculate the income tax payable for 2013/14. (15 marks)

SAMPLE


2 ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question 3 LONG LIFE

Long Life has been trading for many years as a partner in a barrel manufacturing business. His income and payments for 2013/14 were:

£ Adjusted trading profits 151,000 Dividends received 2,943 Qualifying loan interest paid 6,000 Personal pension contributions paid 40,000

Required:

Calculate the income tax liability of Long Life for 2013/14. (15 marks)

Question 4 THE PIKE FAMILY

(a) Mr and Mrs Pike are a married couple born in 1936 and 1943 respectively. In 2013/14 their incomes were as follows: Mr Pike Mrs Pike £ £ Pensions – state and private 26,200 10,960 National savings bank interest received 100 2,500 Building Society interest received 800 Dividends received 1,620 Mr Pike also paid £400 in total to several charities under the gift aid scheme.

Tax deducted at source under PAYE from the private pensions of Mr and Mrs Pike was respectively £2,978 and £92.

Required:

Calculate the income tax liabilities of Mr and Mrs Pike for 2013/14. (14 marks)

(b) Henry Pike, aged 50, who is self-employed, earned adjusted trading profits of £200,000 and paid personal pensions contributions of £36,000 in 2013/14.

His only other income is dividends received of £2,700.

Required:

Calculate Henry’s income tax payable for 2013/14. (6 marks)

(20 marks) SAMPLE



Question 5 BRIGID JONES

Brigid Jones, a widow born in 1947, owns several properties. One is her own home and the others are residential properties which she lets. She also lets two rooms in her own home to university students for thirty weeks a year.

Relevant details for 2013/14 are as follows: Home Let Let property A property B £ £ £ Rent: Home – weekly rental (per room) of 80 Property A (unfurnished) Old lease – monthly rental to 30 June 2013 580 New lease – monthly rental from 1 October 2013 640 Property B (qualifying as furnished holiday accommodation) Weekly rental of 800 Expenses: Decoration and repairs – July 2013 600 1,800 – January 2014 2,100 Letting agents fees – September 2013 900 – whole year 1,500 Loan interest – whole year 3,400 1,600 Bad debt written off 1,200

During 2013/14, Property B was occupied by Brigid and members of her family for six weeks and let to paying guests for forty weeks. Brigid claimed capital allowances of £3,350 (adjusted for private use) in 2013/14 in respect of furniture and fittings in Property B. Brigid made a rent a room election in 2009/10 in relation to her home, and this is still in force. Brigid’s other income for 2013/14 is:

£ Pensions – State and private 10,000 Dividends received 720 Interest on a cash ISA 750

Required:

(a) State the conditions that must be met to allow Brigid to treat Property B as furnished holiday accommodation. (3 marks)

(b) Calculate the amounts to be included in Brigid’s income tax computation for 2013/14 as property business profits or losses. (9 marks)

(c) Calculate Brigid’s income tax liability for 2013/14. (8 marks)

(20 marks)

SAMPLE



Question 6 ENDICOTT

Mr Endicott is employed as a salesman in Southampton and during the year ended 5 April 2014 he earned a salary of £23,000 and paid £2,979 tax thereon under PAYE. His employers reimbursed the following expenses incurred by Mr Endicott in 2013/14:

Rail and taxi fares £226 (wholly for business) Entertaining expenses £544 (wholly for business) Home telephone cost £82 (of which private use agreed to be 50%)

Expenses at London training conference (3 nights): £ Accommodation and subsistence 380 Laundry, newspapers, etc 18 —– 398 —–

His employers also provided him with the following employment benefits:

(i) Use of a company car originally purchased in January 2011 for £13,650, the manufacturer’s list price. The company paid all the running costs of the car, excluding petrol for private purposes. CO2 emissions were 150 grams per kilometre.

(ii) Private medical insurance costing the company £550 in 2013/14.

(iii) Use of a mobile telephone which cost the company £200 in 2012. Telephone charges paid by the company for 2013/14 were £1,200, of which 85% were for business purposes.

In addition to his earned income Mr Endicott had the following other income for 2013/14:

£ UK dividends received 4,329 UK Bank deposit account interest received 104

Required:

Calculate the income tax payable by Mr Endicott for 2013/14. (15 marks)

SAMPLE



Question 7 LA RAIDER

LA Raider is an employee and shareholder of Coliseum Ltd, a small family company that prepares annual accounts to 30 November. He owns 20,000 £1 ordinary shares; the remaining 70% of the company’s shares are held by the other family members.

The company’s accounts show the following information for the three years ended 30 November 2014:

2012 2013 2014 £ £ £ Annual salary to Raider (paid at the end of each month) 28,000 30,000 33,000 Bonus to Raider (paid in the following February) 3,000 3,200 2,700 Total dividend declared (paid in the following May) 13,194 9,000 12,303

The following information is provided in respect of 2013/14:

(1) The senior employees have been able to use the company yacht moored on the south coast for two weeks each year since its purchase. Raider spent his fortnight on the boat along with his family. The yacht cost the company £42,000 in 2008 (current value £33,000) and running and maintenance expenses amounted to £6,000 during the year.

(2) Coliseum provides a company house for Raider and his family. The house was bought by the company in 2005 at a cost of £150,000. It was first occupied by Raider in 2009, when its market value was £180,000. The rateable value of the house is £1,200. During 2013/14 the company paid the following expenses relating to the property:

£ Re-decoration 2,400 Gas, electric and water charges 1,800 Council tax 800

Raider contributed £120 per month towards the provision of the house.

(3) Raider had the use of a diesel motor car. The manufacturer’s list price of the car was £24,100 when purchased in 2011. CO2 emissions were 210 grams per kilometre. The company paid all the running costs of the car, including fuel for private mileage.

(4) Raider took meals in the fully subsidised executive canteen, the cost for the year being £135. Another subsidised canteen was available for the other staff.

(5) Raider was paid a round sum expense allowance of £2,080 out of which he paid £800 on entertaining customers and £550 on business travel by air or train.

(6) He pays 3% of his basic salary into the company’s occupational pension scheme. His company contributes an amount equal to 7% of his salary.

(7) Raider is provided with a loan from his employer of £20,000 carrying an interest rate of 3%. The loan was granted three years ago to assist with the purchase of his holiday home in France. He repaid £5,000 on 5 January 2014. Interest paid in 2013/14 was £500.

Required:

Calculate Raider’s income tax liability for 2013/14. (20 marks)

SAMPLE



Question 8 MAX

Max started trading on 1 January 2010 and ceased trading on 31 December 2013. Assuming that accounts were prepared as follows:

(i) To 31 December 2010 and thereafter to 31 December annually

£ Adjusted profits Year ended 31.12.10 40,000 Year ended 31.12.11 50,000 Year ended 31.12.12 60,000 Year ended 31.12.13 56,000

(ii) To 31 March 2011 and thereafter to 31 March annually

£ Adjusted profits 15 months to 31.3.11 48,000 Year ended 31.3.12 56,000 Year ended 31.3.13 64,000 9 months to 31.12.13 36,000

(iii) To 30 September 2010 and thereafter to 30 September annually

£ Adjusted profits 9 months to 30.9.10 33,000 Year ended 30.9.11 42,000 Year ended 30.9.12 54,000 Year ended 30.9.13 46,000 3 months to 31.12.13 10,000

(iv) To 30 April 2011 and thereafter to 30 April annually

£ Adjusted profits 16 months to 30.4.11 54,000 Year ended 30.4.12 60,000 Year ended 30.4.13 70,000 8 months to 31.12.13 40,000

Required:

Calculate the trading income assessments for all tax years concerned. (20 marks) SAMPLE



Question 9 CAPONE

Capone commenced business as a wine merchant on 1 May 2012 preparing accounts to 30 June 2013 and annually thereafter. His profit and loss account for the period ended 30 June 2013 was as follows:

Profit and loss account

£

Rent and business rates 9,740 Light and heat 120 Office salaries 19,660 Repairs to premises (1) 2,620 Motor expenses 740 Depreciation Motor vans 2,800 Equipment 750 Loss on sale of equipment 40 Impairment of trade debts (2) 6,030 Professional charges (3) 375 Interest on bank overdraft (4) 240 Sundry expenses (5) 770 Amortisation of lease (6) 700 Salary Capone 14,000 Wife, as secretary 1,450 Net profit 8,474

–––––– 68,509

––––––

£

Gross profit 68,209 Bank deposit interest 160 Dividends (net) 140

––––––

68,509 ––––––

The following information is given:

(1) Repairs to premises £ Alterations to flooring in order to install new bottling machine 1,460 Decorations 475 Re-plastering walls damaged by damp 685 _____

2,620 _____

(2) Bad and doubtful debts account

£

Trade debts written off 1,300 Loan to employee written off 400 Impairment allowance for the trade debts c/f 4,330

––––––

6,030 ––––––

£

Profit and loss account 6,030

––––––

6,030 ––––––

SAMPLE



(3) Professional charges £ Accountancy 200 Cost of court action for failing to observe HMRC regulations 110 Legal costs of obtaining new lease (see note (6)) 20 Debt collection 45 ––– 375 –––

(4) Interest on bank overdraft

The overdraft was obtained in order to finance the purchase of trading stock.

(5) Sundry expenses £ Fine for breach of HMRC bonding regulations 250 Subscription to Wine Retail Trade Association 50 Donation to Police Welfare Fund 20 Entertaining customers 300 Calendars bearing firm’s name sent to 300 customers 120 Miscellaneous allowable expenses 30 ––– 770 –––

(6) Lease on premises

On 1 May 2012 Capone was granted a new twenty-one year lease on his business premises. He paid a premium of £12,600 to the landlord, and this has been charged to a leasehold property account and is being amortised against profits over the length of the lease.

(7) Goods for own use, etc

During the period Capone had withdrawn goods from stock for his own consumption. The cost of this stock was £455. The business makes a uniform gross profit of 35% on selling price. No entry had been made in the books in respect of the goods taken.

(8) Most mornings Capone telephoned his importing agent from home. The cost of these calls, extracted from his private telephone bills, was £290. No entry has been made in the accounts for this cost.

Required:

(a) Calculate Capone’s adjusted trading profit for tax purposes for the period ended 30 June 2013. (10 marks)

(b) Calculate the trading income assessments for 2012/13 and 2013/14. (3 marks)

Ignore capital allowances. (13 marks) SAMPLE



Question 10 MICHAEL AND ROSE

(a) Michael, born in 1937, and Rose, born in 1944, are a married couple. Their respective incomes for 2013/14 are as follows: Michael Rose £ £ State pensions 7,000 6,000 Private pension (tax of £2,868 deducted under PAYE) 18,000 – Dividends received – 2,700 Income from let properties See below See below Michael and Rose also had two investments in joint names from which the following incomes were received in 2013/14: £ Building society account 400 National Savings and Investments account 200 Michael owns a property which is rented out partly as a furnished apartment and partly as offices. Income and expenses for the year ended 5 April 2014 are:

Apartment Offices £ £ Income: Rent receivable per month: Apartment (let throughout the year) 500 Offices: Old lease to 30 June 2013 1,200 New lease from 1 January 2014 1,000 Lease premium on new 7 year lease received 28 December 2013 15,000 Expenses: Letting agency fees paid 14 January 2014 1,000 Decoration and repairs (paid 6 September 2013) including £2,000 for replacing a wooden floor with a tiled concrete floor 4,300 Insurance 120 150 Rose inherited a country cottage from her brother who died in March 2013. She decided to let the property as furnished holiday accommodation and carried out a major refurbishment of the property during April and May 2013. The property was advertised as being available for holiday lets from 6 June 2013 and actually let for 30 weeks up to 5 April 2014. Details of the income and expenditures for the period 6 June 2013 – 5 April 2014 are as follows:

£ £ Rent receivable 15,000 Expenses: Advertising and letting agency fees 2,000 Bad debts written off 1,000 Refurbishment costs: Decoration and repairs 2,000 New furnishings, kitchen and bathroom equipment 3,900 –––––– 5,900 Council tax and water rates 2,100

SAMPLE



Rose claimed maximum available capital allowances. She and Michael lived in the cottage for two months during the period 6 June 2013 – 5 April 2014.

Michael and Rose own their own home in equal shares. In 2013/14, they let two rooms to university students. This is the first year in which they have done this and the gross income was £5,200 with attributable allowable expenses of £400.

Michael and Rose have not made any joint declaration regarding their shared incomes, but will make any appropriate election regarding the taxation of the income from their own home.

Required:

(i) Calculate the property business profits of Michael and Rose for 2013/14. (15 marks)

(ii) Calculate the income tax liabilities of Michael and Rose for 2013/14. (15 marks)

(b) Michael is considering the transfer of half his interest in the property let as an apartment and offices to Rose in 2014/15.

Required:

Briefly advise Michael and Rose as to the tax consequences of Michael’s proposal. (5 marks)

(35 marks)

Question 11 JULIAN

Julian has been trading since 6 April 2013, running a TV repair business. He makes up accounts to 5 April each year. His adjusted trading results, before capital allowances, for the first three years have been as follows:

£ Year ended 5 April 2014 124,000 Year ended 5 April 2015 78,000 Year ended 5 April 2016 89,000

The following assets were purchased and sold during the three years ending 5 April 2016:

Date Cost Sale proceeds £ £ Year ended 5 April 2014 6 April 2013 Heating and electrical systems for the business premises 10,000 10 April 2013 Thermal insulation for the premises 20,000 20 April 2013 Office furnishings 28,000 21 April 2013 Equipment for workshop 36,000 26 April 2013 Delivery van 16,000 2 May 2013 Car (for use by Julian) with CO2 emissions of 180 grams/km 14,000 SAMPLE



Year ended 5 April 2015: 11 June 2014 Car (for use by office manager) with CO2 emissions of 95 grams/km 13,000 10 January 2015 Computers 20,000 Year ended 5 April 2016: 31 July 2015 Sold car purchased on 2 May 2013 12,000 1 August 2015 New car (for use by Julian) with CO2 emissions of 120 grams/km 22,000 17 December 2015 Sold workshop equipment (original cost £10,000) 5,000

It had been agreed with HMRC that private use by Julian of the two cars used by him is 40%, whilst the office manager’s private use is 80%.

Required:

(a) Calculate the capital allowances for the three years ending 5 April 2016. (14 marks)

(b) Calculate the final adjusted profits for the three years ending 5 April 2016. (3 marks)

(c) Calculate Julian’s assessable trading incomes for 2013/14, 2014/15 and 2015/16. (3 marks)

(20 marks)

Assume 2013/14 rates and allowances apply throughout.

Question 12 ROBERTA

Roberta commenced to trade as a dress and fabric manufacturer in London on 1 July 2013. Her first accounts were prepared to 31 December 2013 and thereafter to 31 December annually.

She made the following purchases and sales of fixed assets for use in the business:

Date Cost Sale proceeds £ £ Period ended 31 December 2013: 1 June New machinery 32,500 1 July Second hand weaving machine 10,000 10 July Car (for use by employee) with CO2 emissions of 130 grams/km 15,000 30 September Car (for use by Roberta) with CO2 emissions of 90 grams/km 16,000 Year ended 31 December 2014: 8 February Office equipment 8,000 1 May Van 15,000 Year ended 31 December 2015: 1 June New weaving machinery 40,000 20 June Sold second hand weaving machine 3,000

Roberta had elected to treat the second hand weaving machinery purchase on 1 July 2013 as a short life asset, but no such election will be made for the replacement machinery acquired on 1 June 2015.

SAMPLE



It has been agreed with HMRC that Roberta uses her car 25% for private purposes, whilst the employee’s private use is 30%.

Adjusted profits have been agreed as follows:

£ Period to 31 December 2013 90,000 Year ended 31 December 2014 160,000 Year ended 31 December 2015 150,000

Required:

(a) Calculate the capital allowances for the first three periods of account. (17 marks)

(b) Calculate Roberta’s trading income assessments for the first three years of assessment. (3 marks)

(20 marks)

Assume 2013/14 rates and allowances apply throughout.

Question 13 CHARLIE

Charlie Ceasing has been in the retail business since 1 May 2002, making up annual accounts to 30 April each year. Due to a sudden critical illness, Charlie was obliged to sell the business to an unconnected person on 30 June 2014.

Trading profits for the last three periods of account were:

£ Year ended 30 April 2013 120,000 Year ended 30 April 2014 186,000 Period from 1 May 2014 to 30 June 2014 18,000

The trading profit for the year ended 30 April 2013 is the tax adjusted amount after deducting capital allowances, whereas the amounts for the other two periods are the tax adjusted profits before taking into account capital allowances.

The tax written down values of the plant and machinery on 30 April 2013 were: £ Special rate pool 18,000 Main pool 6,000 Car with CO2 emissions of 110 grams/km (used 60% privately by Charlie) 16,000 SAMPLE



Additions and disposals since 1 May 2013 were: Date Cost Sale proceeds £ £ Year ended 30 April 2014: 30 June 2013 Powered cooling equipment for the premises 14,500 14 October 2013 Sold office equipment (original cost £19,000) 5,400 Period ended 30 June 2014: 1 May 2014 Van 17,000 30 June 2014 Sold (in all cases proceeds did not exceed cost): Special rate pool assets 24,000 Main pool assets 12,000 Car 9,000

No assets have been treated as short life assets. Charlie has £27,100 of overlap profits brought forward from commencement.

Required:

(a) Calculate the capital allowances for the last two periods of trading, assuming Charlie makes all appropriate elections except a short life asset election; (11 marks)

(b) Calculate Charlie’s trading income assessments for 2013/14 and 2014/15. (4 marks)

(15 marks)

SAMPLE



Question 14 RICHARD

Richard, who has carried on a small business since 2002, makes up accounts to 31 March year. The following is his detailed profit and loss account for the year ended 31 March 2014:

Profit and loss account

£

Salaries and wages 83,281 Rates and insurance 11,236 Light and heat 21,912 Repairs 2,026 Motor car expenses 10,350 Depreciation 23,855 Hire purchase interest 1,216 Impairment of trade debts 140 Loss on sale of car 130 Administration expenses 10,626 Patent royalties (gross) 3,000 Management salary – Richard 43,000 Net profit 91,049

––––––– 301,821

–––––––

£

Gross profit 299,571 Bank deposit interest 250 Dividends received 2,000

–––––––

301,821 –––––––

Repairs include £300 for the purchase of a new cash register on 1 April 2013.

£4,200 of the total motor expenses of £10,350 relate to the car used by Richard. It has been agreed with HMRC that Richard’s private motoring represents one-fifth of the total use of the car.

The bad and doubtful debts account is as follows:

Bad and doubtful debts account

£ £

Amounts written off Loan to former employee 70 Trade debts 83 ––– 153 Balance 31 March 2014 Impairment allowance for trade debts 344 ––– 497

–––

£

Balance 1 April 2013 Impairment allowance for trade debts 357 Profit and loss account 140 ––– 497

–––

SAMPLE



An analysis of administration expenses revealed the following information:

£ Printing, stationery and telephone 6,242 Legal costs Debt collection 48 Fees for obtaining mortgage on private house 353 Accountancy 2,300 Subscriptions Manufacturers Trade Association 30 British Red Cross 20 Entertainment expenses (see below) 1,633 –––––– 10,626 ––––––

Entertainment expenses consist of the following: £ Entertaining customers 1,381 Christmas gifts to UK customers (bottles of wine at £2.80 each) 252 –––––– 1,633 ––––––

On 30 September 2013 Richard purchased premises for a total cost of £400,000. This cost included the following capital expenditures classified as plant and machinery:

£ Integral features 20,000 Factory and office machinery and equipment 60,000 –––––– 80,000 ––––––

As at 1 April 2013 the written down values of plant and machinery carried forward for tax purposes were:

£24,400 in the main pool; £14,000 on Richard’s car (CO2 emissions of 150 grams/km).

During the year ended 31 March 2014 the following other acquisitions and disposals of plant and machinery were made:

14 April 2013 Sold plant for £4,000 which had been acquired for £8,500.

17 April 2013 Sold a lorry for £10,000 which had been acquired for £40,000; Purchased a delivery van for £24,000.

11 October 2013 Sold Richard’s car for £9,000

12 October 2013 Purchased two new cars: one for £25,000 for use by Richard (CO2 emissions of 200 grams/km); the other for £12,500 for use by Richard’s production manager who will use it at least 90% privately (CO2 emissions of 90 grams/km).

28 October 2013 Bought new computer equipment for the offices and factory for £22,000.

SAMPLE



Required:

(a) Calculate the adjusted trading profit before capital allowances for the year ended 31 March 2014. (10 marks)

(b) Calculate the capital allowances for plant and machinery for the year ended 31 March 2014. (12 marks)

(c) Calculate Richard’s trading income assessment for 2013/14. (3 marks)

(25 marks)

Question 15 WARREN STREET

Warren Street began trading on 1 July 2002 preparing accounts 30 June annually. His recent trading results are as follows:

Adjusted Capital trading allowances profit/(loss) £ £ Year ended 30 June 2011 24,000 5,000 Year ended 30 June 2012 (30,000) 3,800 Year ended 30 June 2013 12,000 2,600

The adjusted trading profits are the amounts after deducting capital allowances; the adjusted trading loss includes the capital allowances.

The other incomes of Warren are as follows:

2011/12 2012/13 2013/14 £ £ £ Dividends (including tax credit) 825 1,500 1,600 Bank deposit interest (including tax credit) 400 150 210 Required:

(a) Calculate the income tax liabilities of Mr Street for the three tax years 2011/12, 2012/2013 and 2013/14 before any relief claims in respect of the loss.

(b) Explain the reliefs available for the relief of the trading loss.

(c) Assuming that relief is taken for the maximum amount of the trading loss as soon as possible calculate the taxable incomes after loss relief for the three years 2011/12 to 2013/14, clearly showing how the loss is relieved.

(d) Analyse whether not claiming the capital allowances of the loss making accounting period is worthwhile.

(e) State by what dates any claims you consider appropriate should be made.

Use 2013/14 rates and allowances throughout. (20 marks) SAMPLE



Question 16 NEWBOLD

Newbold, a single man, has the following income, gains and losses:

2012/13 2013/14 £ £ Adjusted trading profit (year ended 31 December 2012) 5,000 Adjusted trading loss (year ended 31 December 2013) (20,000) Bank interest (gross) 9,000 13,000 Chargeable gain after indexation – 22,500 Allowable capital losses – (4,200)

Newbold has lodged a claim under section 64 ITA 2007 to relieve the 2013/14 trading loss against total income in the current tax year and has opted to extend that against capital gains of the same tax year under section 261 TCGA 1992.

Required:

Calculate Newbold’s taxable income and taxable amount of gains for 2013/14 illustrating relief for the losses. (10 marks)

Question 17 SIGMUND

Sigmund, a single man, began trading on 1 June 2011. He prepares accounts to 30 June annually with results as follows:

£ Period ended 30 June 2012 Loss (before capital allowances) (10,400) Year ended 30 June 2013 Profit (before capital allowances) 28,650

The following capital allowances on plant and machinery have been calculated: £ Period ended 30 June 2012 6,720 Year ended 30 June 2013 2,520

Details of the amounts of other income for the tax years 2008/09 to 2011/12 were as follows:

Salary from Dividends received employment (Gross) £ £ 2008/09 9,000 3,000 2009/10 10,000 3,400 2010/11 11,200 3,800 2011/12 3,800 600

From 2012/13 onwards the business is Sigmund’s only source of income. Sigmund wishes to obtain relief for the maximum amount of his trading loss.

Required:

(a) Calculate the trading income assessments and trading losses for 2011/12, 2012/13 and 2013/14.

(b) Explain, with the aid of appropriate computations, the alternative ways in which the losses calculated (a) above may be relieved.

(c) Explain which relief, or combination of reliefs, will be the most tax effective for Sigmund.

(25 marks)

SAMPLE



Question 18 ALAN WATERS

Alan Waters, a widower, has been in business as a sports retailer for many years and prepares accounts to 30 September each year. Due to a sustained deterioration in trading conditions, he decided to cease trading on 30 June 2013.

Trading income assessments for the three tax years ending with 2011/12 were:

£ 2009/10 (based on the year ended 30 September 2009) 58,500 2010/11 (based on the year ended 30 September 2010) 40,000 2011/12 (based on the year ended 30 September 2011) 31,200

Adjusted trading results for the last two periods of account were:

£ Year ended 30 September 2012 Profit 2,400 9 months to 30 June 2013 Loss (68,625)

Overlap profits brought forward from commencement of the business are £1,600. Waters has no other income.

Required:

(a) Calculate the trading income assessments for 2012/13 and 2013/14. (b) Calculate the terminal loss. (c) Calculate the relief for the terminal loss (s.89 ITA 2007).

Ignore any possibility of s.64 ITA 2007 loss relief. (15 marks)

Question 19 KRUGER, BRAND AND SHEPSTONE

Kruger, Brand and Shepstone have been trading in partnership as estate agents since 1 May 2012, preparing accounts to 31 December annually, profits and losses being shared equally. On 1 June 2013 they decided to share profits on the following basis:

Interest to be Balance Annual calculated at 5% per salary annum on fixed capitals of £ £ Kruger 16,000 10,000 1/2 Brand 8,000 5,000 1/3 Shepstone – 5,000 1/6

Adjusted trading profits have been agreed as follows:

£ Period ended 31 December 2012 72,000 Year ended 31 December 2013 64,200

Required:

(a) Calculate the shares of profits attributable to each partner for the two periods of account.

SAMPLE



(b) Calculate the trading income assessments for each partner for all relevant years, and the amounts of overlap profits carried forward.

(10 marks)

Question 20 FOX, GRIFFITHS AND HALL

Messrs Fox and Griffiths commenced business as equal partners in a firm of chartered surveyors, bearing that name, on 1 June 2008.

Hall joined the firm on 1 January 2011, with profits being shared from that date 40% (F); 40% (G); 20% (H). On 30 September 2012, Fox resigned. Thereafter Griffiths and Hall shared profits 60% (G): 40% (H) until 31 December 2013 when the firm was dissolved following its incorporation into Pacemen Ltd.

Accounts were prepared to 30 June annually. Profits and capital allowances were:

Adjusted Capital trading profits allowances before capital claimed allowances £ £ 13 months to 30 June 2009 92,950 11,050 12 months ended 30 June 2010 73,800 9,780 12 months ended 30 June 2011 81,000 9,000 12 months ended 30 June 2012 90,000 10,500 12 months ended 30 June 2013 110,000 15,000 6 months ended 31 December 2013 60,000 12,000

Required:

(a) Show the division of profits for all periods of account.

(b) Calculate the trading income assessments for each partner for all relevant years.

(20 marks)

Question 21 ABBOT LTD

(a) Abbot Ltd, made the following disposals of chargeable assets in the year ended 31 December 2013, its chargeable accounting period for corporation tax purposes:

1 May 2013: A freehold office sold for £180,000. It cost £60,000 on 8 January 1998.

15 July 2013: Shares in another quoted company sold for £40,000. These cost £45,000 on 19 October 2004.

11 October 2013: An apartment held for rental purposes. It was sold for £70,000 having cost £68,000 on 14 February 2009.

Abbot has unrelieved capital losses brought forward at 1 January 2013 of £10,000.

Increases in retail price index:

(January 1998 – May 2013) 0.567 (February 2009 – October 2013) 0.186

SAMPLE



Answer 1 TAX STATUS

(a) HMRC – tests applied for residency

From 6 April 2013 the determination of residence is achieved by application of a new statutory residence test. This test has three stages, each with a number of criteria, to establish if an individual is automatically treated as not resident, automatically UK resident, or (if neither automatic treatment apply), subject to a review of ties to the UK.

The automatic overseas tests, which result in the individual being treated as not UK resident, are:

(1) If previously UK resident (in at least one of the preceding three years), less than 16 days spent in the UK in the current tax year.

(2) If not previously UK resident in any of the three years, less than 46 days spent in the UK in the current tax year.

(3) Working full-time overseas with no significant breaks, less than 91 days spent in the UK and less than 31 working days in the UK.

The automatic UK tests, which result in the individual being treated as UK resident, are:

(1) Spending 183 days or more in the UK within the tax year.

(2) If the individual has a UK home, spending 30 or more days present in it, unless an overseas home is also owned and used.

(3) Working full-time in the UK for any period of at least 365 days, with no significant break and at least 75% of workdays being within the UK.

For individuals where neither overseas nor UK automatic tests are conclusive, residence is tested by considering a number of indicative ‘ties’ to the UK, together with the number of days spent in the UK. The more ties that apply, and the greater the number of days, the more likely a person is to be UK resident. The “ties” to be considered are:

(1) Family tie (UK resident spouse, partner or child under 18);

(2) Accommodation tie (a place available to live in the UK for at least 91 days, can include the home of a close relative, which is actually made use of);

(3) Work tie – 40 days’ work, or more, in the UK at any time in the tax year;

(4) 90 day tie – having spent more than 90 days in the UK in either or both of the previous two tax years;

(5) For persons UK resident in any of the three previous years, a country tie. This is the country in which the greatest number of days is spent (i.e. spending more days in the UK than any other country). This tie is not tested for “arrivers”. SAMPLE



(b) HMRC – UK resident company

A company may be resident in the UK if either:

(i) Central management and control of the company is exercised in the UK; or (ii) The company is incorporated in the UK.

Central management and control means the highest level of control of the company – normally, but not necessarily, the board of directors.

In many circumstances both tests will establish UK residence (i.e. the company will be both incorporated and managed in the UK).

However, in other circumstances a company can potentially be resident in two countries by being incorporated in one country but managed from another (e.g. where a UK parent company owns a subsidiary incorporated in another country). To overcome this problem central management and control is regarded as the primary test of residence. Thus, a foreign incorporated subsidiary of a UK resident parent company will be resident in the UK unless it can be established that the board of directors of the subsidiary actually exercises central management and control over the affairs of that company at meetings not held in the UK.

(c) Avoidance and evasion

Tax avoidance is the minimisation of tax liabilities achieved through the organisation of a taxpayer’s financial affairs within the limits of tax law. In large measure, tax avoidance is the utilisation of tax reliefs and exemptions and ensuring the lowest rate(s) of tax ultimately apply to taxable incomes, capital gains and transfers and taxable supplies for VAT purposes.

Although legal, if a tax avoidance arrangement become too costly for the government or is deemed to run contrary to the intention of the law, the tax advantages of the arrangement can be removed by changes to the tax law (i.e. anti-avoidance legislation).

Tax evasion is the illegal avoidance of tax achieved by negligence or fraud (i.e. non-disclosure of income, capital gains or transfers or other deliberate illegal actions).

Answer 2 MICHAEL

Income tax computation 2013/14 £ £ Earned income Employment income – salary 108,000 Less: Pension contributions (5% × 108,000) (Note 1) (5,400) 102,600 ––––––– Unearned income Building society interest (560 × 80

100 ) 700

Bank deposit interest (632 × 80100 ) 790

Dividend income (1,800 × 90

100 ) 2,000

––––––– 3,490 ––––––– Total income = Net income 106,090 Less: Personal allowance (W1) (6,883) ––––––– Taxable income 99,207 –––––––

SAMPLE



£ Analysis of taxable income Dividends 2,000 Savings income 1,490 Other income (> £2,790) 95,717 ––––––– 99,207 ––––––– Tax (W2) £ % £ Other basic rate 32,010 20 6,402 EBHR 975 20 195 –––––– 32,985 higher rate 62,732 40 25,093 –––––– 95,717 Savings income higher rate 1,490 40 596 –––––– 97,207 Dividends higher rate 2,000 32.5 650 –––––– 99,207 –––––– –––––– Income tax liability 32,936

Less: Tax deducted at source Deemed tax credit on dividends 200 Tax credits on savings income 298 PAYE 31,444 (31,942) –––––– –––––– Income tax payable 994 –––––– Note 1: The employer’s pension contributions are a benefit in kind for Michael, but they are exempt from income tax.

WORKINGS

(1) Personal allowance

£ Net income 106,090 Less: Gross amount of gift aid (£780 × 100/80) (975) ––––––– Adjusted net income 105,115 –––––––

As adjusted net income > £100,000 but < £118,880*, full basic PA is restricted to: £9,440 – ½ (105,115 – 100,000) = £6,883

* £100,000 + (2 × £9,440) = 118,880 = adjusted net income after which all personal allowance will be lost.

SAMPLE



(2) Extended basic and higher rate relief (EBHR)

As adjusted net income of £105,115 (W1) is > £32,010 but < 150,000, EBHR only applies for higher rate purposes:

£ Normal higher rate threshold 32,010 Add: Gross gift aid (W1) 975 ––––––– Revised threshold 32,985 –––––––

Answer 3 LONG LIFE

Income tax computation 2013/14 £ Earned income Trading profits 151,000 Unearned income Dividends £2,943 ×

90100 3,270

––––––– Total income 154,270 Less: Qualifying loan interest (6,000) ––––––– Net income 148,270 Less: Personal allowance (W1) (9,440) ––––––– Taxable income 138,830 ––––––– Analysis of income: £ Dividends 3,270 Other (> £2,790) 135,560 ––––––– 138,830 ––––––– Tax (W2) £ % £ Other income Basic rate 32,010 20 6,402 EBHR 50,000 20 10,000 ––––––– 82,010 Higher rate 53,550 40 21,420 ––––––– 135,560 Dividends Higher rate 3,270 32.5 1,063 ––––––– 138,830 ––––––– –––––– Income tax liability 38,885 –––––– SAMPLE



WORKINGS

(1) Personal allowance £ Net income 148,270 Less: Gross personal pension contributions (£40,000 × 100/80) (50,000) ––––––– Adjusted net income 98,270 ––––––– As adjusted net income < £100,000, full basic personal allowance is retained.

(2) EBHR

As adjusted net income of £98,270 (W1) is > £32,010 but < 150,000, EBHR only applies for higher rate purposes:

£ Normal higher rate threshold 32,010 Add: Gross pension contribution (W1) 50,000 ––––––– Revised higher rate threshold 82,010 ––––––– Answer 4 THE PIKE FAMILY

(a) Mr and Mrs Pike

Income tax computations 2013/14 Mr Pike Mrs Pike £ £ £ £ Pensions 26,200 10,960 NSB interest 100 2,500 Building society (800 × 100/80) 1,000 Dividends (1,620 × 100/90) 1,800 –––––– 1,100 –––––– 4,300 –––––– –––––– Total income = Net income 27,300 15,260 Personal allowance (W1) (10,310) (10,500) –––––– –––––– Taxable incomes 16,990 4,760 –––––– –––––– Analysis of income: £ £ Dividends – 1,800 Savings income 1,100 2,500 Other (Mrs P < £2,790) 15,890 460 –––––– –––––– 16,990 4,760 –––––– –––––– SAMPLE



Tax % £ £ £ £ Mr Pike: Other income 20 15,890 3,178 Savings income 20 1,100 220

Mrs Pike: Other income 20 460 92 Savings income 10 2,330 233 –––––– 2,790 Savings income 20 170 34 –––––– 2,960 Dividends 10 1,800 180 –––––– –––––– 16,990 4,760 –––––– –––––– –––––– –––––– Income tax liabilities 3,398 539

Less: Tax deducted @ source Dividends at 10% 180 Building society interest 200 PAYE 2,978 (3,178) 92 (272) –––––– –––––– –––––– –––––– Income tax payable 220 267 –––––– –––––– Tutorial note: As Mr Pike’s taxable income is ≤ £32,010, he is only entitled to basic rate relief on his gift aid, and consequently the payment is ignored in the income tax computation.

WORKINGS (1) Personal allowances As the net income (no adjustments required) of Mrs Pike is < £26,100, she is entitled to the full personal allowance for a person born between 6 April 1938 and 5 April 1948.

Mr Pike: £ £ Personal allowance (born before 6 April 1938) 10,660 Net income 27,300 Less: Gross gift aid £(400 × 100/80) (500) –––––– Adjusted net income 26,800 –––––– Restriction: ½ × (26,800 – 26,100) (350)

–––––– 10,310 –––––– SAMPLE



(b) Henry Pike

Income tax computation 2013/14 £ Earned income Trading profit 200,000 Unearned income Dividends £2,700 × 100/90 3,000 ––––––– Total = Net income 203,000 Less: Personal allowance (W1) 0 ––––––– Taxable income (= dividends £3,000 and other £200,000) 203,000 ___________

Tax (W2) £ % £ Other income Basic rate 32,010 20 6,402 EBHR 45,000 20 9,000 ––––––– 77,010 Higher rate 72,990 40 29,196 ––––––– 150,000 EBHR 45,000 40 18,000 ––––––– 195,000 Additional rate 5,000 45 2,250 ––––––– 200,000 Dividends Additional rate 3,000 37.5 1,125 ––––––– ––––––– 203,000 ––––––– Income tax liability 65,973 Less: Tax deducted at source: Dividend credits (£3,000 × 10%) (300) ––––––– Income tax payable 65,673 ––––––– WORKINGS (1) Personal allowance

£ Net income 203,000 Less: Gross personal pension contributions (£36,000 × 100/80) (45,000) ––––––– Adjusted net income 158,000 –––––––

As adjusted net income > £118,880, the basic personal allowance is entirely lost.

SAMPLE



(2) EBHR As adjusted net income of £158,000 (W1) is > £32,010 and > 150,000, EBHR applies for both higher and additional rate purposes: Higher rate Additional rate £ £ Normal higher and additional rate thresholds 32,010 150,000 Add: Gross personal pension (W1) 45,000 45,000 ––––––– ––––––– 77,010 195,000 ––––––– –––––––

Tutorial note: As total pension input of £45,000 is < £50,000, the pension annual allowance is not exceeded and no special tax charge arises.

Answer 5 BRIGID JONES

(a) Conditions for furnished holiday accommodation (FHA) status

The following conditions must all be met for the income from Property B to be treated as FHA for tax purposes:

(1) the property must be available for letting on a commercial basis as FHA for ≥ 210 days in a 12 month period; and

(2) the property must be actually let as FHA for ≥ 105 days in a period of 12 month; and

(3) long-term lettings must not exceed 155 days in a period of 12 months, where a long-term letting is a letting to the same person exceeding 31 consecutive days.

(b) Letting profits and losses – year ended 5 April 2014

(i) Rent a room in own home £ Gross rent receivable (£80 × 2 × 30) 4,800 Less: Allowable expenses (600) ––––– Net profit 4,200 ––––– Election basis £(4,800 – 4,250) 550 –––––

Election basis is more beneficial and election should continue in force for 2013/14. (ii) Property A £ £ Gross rent receivable: Old lease: (3 × £580) 1,740 New lease: (6 × £640) 3,840 ––––– 5,580 Less: Allowable expenses Decorating and repairs 1,800 Letting agents fees 900 Loan interest 3,400 ––––– (6,100) ––––– Net loss (520) –––––

SAMPLE



(iii) Property B £ £ £ Gross rent receivable (40 × £800) 32,000 Less: Allowable expenses: Decorating and repairs 2,100 Loan interest 1,600 –––––– Business proportion (46/52) 3,700 3,273 ––––––

Letting agents fees 1,500 Bad debt 1,200 Capital allowances 3,350 –––––– (9,323) –––––– Net profit 22,677 ––––––

(c) Income tax computation 2013/14

£ £ £ Earned income Pensions 10,000 FHA property business profit 22,677 Unearned income ISA interest – exempt 0 Property business profit – rent a room 550 Less: property business loss – property A (520) ––––– 30 Dividends (£720 × 100/90) 800 ––––– 830 ––––––

Total income = Net income 33,507 Less: Personal allowance (W1) (9,440) ––––––

Taxable income 24,067 ––––––

Analysis: Dividends 800 Savings income – Other income 23,267 ––––––

24,067 ––––––

Tax £ % £ Other income 23,267 20 4,653 Dividends 800 10 80 –––––– 24,067 –––––– –––––– Income tax liability 4,733 ––––––

SAMPLE



WORKING (1) Personal allowances

As the net income (no adjustments required) of £33,507 < £100,000, the full personal allowance entitlement is initially available, but because £33,507 is > £26,100, the full amount is restricted as follows:

£ PA (born 1947) 10,500 Restriction: ½ × (33,507 – 26,100) (3,703) –––––– 6,797 –––––– Minimum PA given (see tutorial note) 9,440 ––––––

Tutorial note: If adjusted net income for the purpose of calculating higher-aged PA is £28,220* or more, then the minimum basic PA will always apply and there is no need to calculate the higher personal allowance less the income restriction. * [(£10,500 – 9,440) 2) + 26,100 = 28,220]

Answer 6 ENDICOTT

Income tax computations 2013/14

Earned income £ £ £ Employment income: Salary 23,000 Reimbursed expenses Rail and taxi 226 Entertaining 544 Home telephone 82 Conference 398 –––––– 1,250 Less: Allowable expenses Rail and taxi (226) Entertaining (544) Home telephone – 50% (41) Conference – accommodation (Note) (380) (1,191) –––––– –––––– 59 Benefits Car £13,650 × 22% (W) 3,003 Fuel (none as no private fuel) – Private medical insurance 550 Mobile telephone – exempt – 3,553 –––––– –––––– 26,612 Unearned income Bank interest (104 × 80

100 ) 130

Dividends (4,329 × 90

100 ) 4,810 4,940

–––––– –––––– Total income = Net income 31,552 Less: Personal allowance (NI < £100,000) (9,440) –––––– Taxable income 22,112 ––––––

SAMPLE



Analysis of income £ Dividends 4,810 Savings income 130 Other (> £2,790) 17,172 –––––– 22,112 –––––– Tax £ % £ Other income 17,172 20 3,434 Savings income 130 20 26 Dividends 4,810 10 481 –––––– 22,112 –––––– –––––– 3,941 Less: Tax credit on dividends 481 Tax credit on savings income 26 PAYE 2,979 –––––– (3,486) –––––– Income tax payable 455 –––––– WORKING:

Car benefit % 95 grams 11 (150 – 95) ÷ 5 11 ––– 22 ––– Tutorial note: Reimbursed laundry and newspaper would be exempt if less than £15 (£5 per night).

SAMPLE



Answer 7 LA RAIDER

Income tax computation 2013/14 £ £ Earned income Salary (receipts) (8/12 × 30,000) + (4/12× 33,000) 31,000 Less: 3% superannuation contributions by employee (930) ––––––

30,070

Bonus (received February 2014) 3,200 Benefits: Use of yacht (W1) 554 Use of house (W2) 7,760 Use of company car (W3) 8,435 Fuel charge (W4) 7,385 Loan (W5) 200 –––––– 24,334

Expense allowance 2,080 Less: Allowable expenses (Note 1) (550) –––––– 1,530 Unearned income Dividends – paid May 2013 (30% × 13,194 × 100/90) 4,398 –––––– Total income = Net income 63,532 Less: Personal allowance (NI < £100,000) (9,440) –––––– Taxable income 54,092 –––––– Analysis of income £ Dividends 4,398 Other 49,694 –––––– 54,092 –––––– Tax £ % £ Other income 32,010 20 6,402 17,684 40 7,074 –––––– 49,694 Dividends 4,398 32.5 1,429 –––––– 54,092 –––––– –––––– Income tax liability 14,905 ––––––

Note 1 No relief is given to Raider for the entertaining expenses paid out of a round sum allowance because the employee, not the employer, has borne the cost.

Note 2 Use of canteen and employer’s pension contributions are tax exempt benefits. SAMPLE



WORKINGS

(1) Use of yacht £ Annual value = 20% × market value when first made available = 20% × 42,000 × 52

2 323

Running expenses = 6,000 × 522 231

–––––– 554 ––––––

(2) Use of home £ £ Annual value – higher of (i) gross rateable value 1,200 1,200 (ii) rent paid by employer 0

–––––– Additional charge (4% × £(150,000 – 75,000)) 3,000 Ancillary expenses Redecoration 2,400 Gas, etc 1,800 Council tax 800 5,000 –––––– –––––– 9,200 Less: Contributions (£120 × 12) (1,440) –––––– 7,760 –––––– (3) Company car £25,000 × 35% 8,750 –––––– CO2 %: % 95 grams 11 (210 – 95) ÷ 5 23 Diesel supplement 3 ––– 37 ––– Restricted to 35 ––– (4) Fuel £21,100 × 35% (as for car benefit) 7,385 –––––– SAMPLE



(5) Home loan (a) Average outstanding loan basis:

½ (20,000 + 15,000) × 4% 700 700 –––

(b) Day to day basis: £20,000 × 9/12 × 4% 600 £15,000 × 3/12 × 4% 150

___

750

___

Less: Interest paid (500) ––––– 200 –––––

Answer 8 MAX

Tutorial note: Starts in 2009/10; ceases in 2013/14 in all cases.

(i) 31 December

£ £ 2009/10: Actual: 1.1.10 – 5.4.10 3/12 × £40,000 10,000 2010/11: CYB year ended 31.12.10 40,000 (Note: Overlap profits c/f: 1.1.10 – 5.4.10 = £10,000) 2011/12: CYB year ended 31.12.11 50,000 2012/13: CYB year ended 31.12.12 60,000 2013/14: Last year basis year ended 31.12.13 56,000 Less: Overlap profit relief (10,000) 46,000 –––––– ––––––– Total assessments = total profits of the accounting periods 206,000 –––––––

(ii) 31 March £

2009/10: Actual: 1.1.10 – 5.4.10 (153 × £48,000) 9,600

2010/11: 12 months to accounting date: Year ended 31.3.11 (

1512 × £48,000) 38,400

(Note: Overlap profits: Nil as 31 March year end (assumed to be 5 April) 2011/12: CYB Year ended 31.3.12 56,000 2012/13: CYB Year ended 31.3.13 64,000 2013/14: Last year basis: 1.4.13 – 31.12.13 9 months to 31.12.13 36,000 –––––––

Total assessments = total profits of the accounting periods 204,000 –––––––

SAMPLE



(iii) 30 September £ £

2009/10: Actual: 1.1.10 – 5.4.10 ( 93 × £33,000) 11,000

2010/11: 1st 12 months: 1.1.10 – 31.12.10 9 months to 30.9.10 33,000 + 12

3 × £42,000 10,500

–––––– 43,500 (Note: Overlap profits c/f: 1.1.10 – 5.4.10 = 11,000) 2011/12: CYB Year ended 30.9.11 42,000 (Note: Overlap profits c/f: 1.10.10 – 31.12.10 12

3 × £42,000 = £10,500)

2012/13: CYB Year ended 30.9.12 54,000 2013/14: Last year basis: 1.10.12 – 31.12.13 Year ended 30.9.13 46,000 3 months to 31.12.13 10,000 –––––– 56,000 Less: Overlap profit b/f £(11,000 + 10,500) (21,500)

––––––

34,500

––––––– Total assessments = total profits of the accounting periods 185,000 –––––––

(iv) 30 April £ £

2009/10: Actual: 1.1.10 – 5.4.10 (163 × £54,000) 10,125

2010/11: Actual: 6.4.10 – 5.4.11 (1612 × £54,000) 40,500

2011/12 12 months to accounting date: Year ended 30.4.11 (

1612 × £54,000) 40,500

(Note: Overlap profits: 1.5.10 – 5.4.11 = 1611 × £54,000 = £37,125)

2012/13: CYB Year ended 30.4.12 60,000 2013/14: Last year basis: 1.5.12 – 31.12.13 Year ended 30.4.13 70,000 8 months to 31.12.13 40,000 ––––––– 110,000 Less: Overlap profits b/f (37,125)

–––––––

72,875

––––––– Total assessments = total profits of the accounting periods 224,000 ––––––– SAMPLE



Answer 9 CAPONE

(a) Adjustment of profits for 14 months ended 30 June 2013

– + £ £ Net profit 8,474 Rent and rates 0 Light and heat 0 Office salaries 0 Repairs – alterations to flooring 1,460 – other items 0 Motor expenses 0 Depreciation of vans and equipment 3,550 Loss on sale of equipment 40 Impairment of trade debts – non-trade debt written off 400 – other items 0 Professional charges – court action 110 – new lease 20 – other items 0 Bank overdraft interest 0 Sundry expenses – fine 250 – donation 20 – entertaining customers 300 – other items 0 Amortisation of lease 700 Annual deduction for lease premium (W1) 420 Salary – Capone 14,000 – wife 0 Bank deposit interest 160 Dividends 140

Goods for own use £455 65

100 700

Business phone calls from home 290 ——— ——– 1,010 30,024 (1,010) ——— Adjusted profit 29,014 ———

Tutorial note: The following notes set out the reasons for making the adjustments. These need not be given in the examination answer unless requested by the examiner. SAMPLE



(1) Expenditure charged but not allowable

Repairs to premises Reason Floor alterations 1,460 Capital cost Depreciation – vans and equipment 3,550 Provision Amortisation of lease 700 Provision Loss on sale of equipment 40 Capital loss Bad and doubtful debts Loan to employee written off 400 Not wholly and exclusively incurred Tutorial note: Increases (or decreases) in the impairment allowance for trade debts shown in the accounts are acceptable for tax purposes and no adjustment is required.

Professional charges Costs of court action 110 Not wholly and exclusively incurred Costs of new lease 20 Capital Sundry expenses Fine 250 Not wholly and exclusively incurred Donation 20 Not wholly and exclusively incurred Entertaining 300 Statutory prohibition Salary – Capone 14,000 Appropriation

(2) Income credited but not assessable as trading income

£ Reason Bank deposit interest 160 Investment income Dividends (net) 140 Investment income

(3) Expenditure not charged but allowable

£ Reason (i) Annual deduction for cost of lease premium 420 Statutory relief (ii) Business use of home 290 Wholly and exclusively incurred

(4) Income not credited but assessable

£ Reason Goods withdrawn for own use from business 700 Appropriation

(b) Trading income assessments

£ 2012/13 (1.5.12 – 5.4.13) (29,014 × 14

11 ) 22,797

––––––– 2013/14 (12 months to 30.6.13) (29,014 × 14

12 ) 24,869

––––––– There are overlap profits from 1.7.12 – 5.4.13 of

149 × £29,014 = £18,652.

SAMPLE



WORKINGS

(1) Lease premium £ Gross premium 12,600 Less: Capital element 2% × (21–1) (5,040) ––––––– Income element 7,560 ––––––– Trading expense:

21560,7 = £360 per annum

For 14 months to 30.6.13 = 1214 × 360 = £420

–––––––

Answer 10 MICHAEL AND ROSE

(a)(i) Property business profits, 2013/14

Michael Apartment Offices Total £ £ £ £ Rent accrued: £500 × 12 6,000 Old lease: £1,200 × 3 3,600 New lease: £1,000 × 3 3,000 Lease premium received: Gross amount 15,000 Less: 2% × £15,000 × (7 – 1) (1,800) –––––– 13,200 ––––––

19,800 Expenses accrued: Letting agency fees (1,000) Decoration and repairs 4,300 Less: capital cost (2,000) –––––– (2,300) Insurance (120) (150) Wear and tear allowance: 10% × £6,000 (600) –––––– ––––––

Net profits 5,280 16,350 21,630 –––––– ––––––

Rent-a-room: Gross rent 5,200 Less: Expenses (400) ––––––

Net profit 4,800 × ½ 2,400 –––––– ––––––

Election basis: £(5,200 – 4,250) × ½ 475 475 ––––––

Rent-a-room election should be made by Michael and Rose by 5 April 2016 ––––––

22,105 ––––––

SAMPLE



Rose Total £ £ £ Furnished holiday accommodation: Rent accrued: 15,000 Expenses accrued: Advertising and letting agency fees (2,000) Bad debts (1,000) Decoration and repairs 2,000 Capital allowances: AIA 100% × £3,900 3,900 Council tax and water rates 2,100 ––––––

Business use proportion (since 6.6.2012) 8,000 × 8/10 (6,400) –––––– ––––––

Net profit (= Earned income) 5,600 5,600 –––––– ––––––

Rent-a-room: As for Michael; election basis applies (= Unearned income) 475 ––––––

(ii) Income tax computations, 2013/14

Michael Rose £ £ £ £ Earned incomes State pensions 7,000 6,000 Private pensions 18,000 Property business profit – FHA 5,600 –––––– –––––– 25,000 11,600 Unearned incomes Dividends received £2,700 × 100/90 3,000 BS interest received £400 × 100/80 = £500 (50:50) 250 250 NS&I interest £200 (50:50) 100 100 Property business profit 22,105 475 –––––– 22,455 –––––– 3,825 –––––– –––––– Net income 47,455 15,425 Less: Personal allowance M – basic (as net income too large) (9,440) R – higher (as net income < £26,100) (10,500) –––––– –––––– Taxable incomes 38,015 4,925 –––––– –––––– Analysis: Dividends 0 3,000 Savings income 350 350 Other income (> £2,790) 37,665 (< £2,790) 1,575 –––––– –––––– 38,015 4,925 –––––– ––––––

SAMPLE



£ £ £ £ Tax – Michael: Other income 32,010 20% 6,402 5,655 40% 2,262 –––––– 37,665 Savings income 350 40% 140 –––––– 38,015 –––––– Tax – Rose: Other income 1,575 20% 315 Savings income 350 10% 35 Dividends 3,000 10% 300 –––––– 4,925 –––––– –––––– –––––– Income tax liabilities 8,804 650 –––––– ––––––

(b) Advice

The transfer of half interest in the let property £10,815 (½ × £21,630) will eliminate Michael’s higher rate tax liability, but because his net income will still be substantially above £25,400 he will still not benefit from any higher aged personal allowance.

Rose’s increased income will be taxed as other income at 20%, but because her higher level of other income will now exceed £2,790 she will lose the 10% rate on her savings income. Also, as her net income will now exceed £26,100, she will lose some of her higher aged personal allowance.

The overall effect for income tax is: £ Michael: 40% × £(350 + 5,655) 2,402 20% × £(10,815 – 6,005) 962 –––––– 3,364 Rose: 20% × 10,815 (2,163) 10% × 350 (35) 20% × 70 (W) (14) –––––– Tax saving 1,152 –––––– The transfer will not attract any capital gains tax as an inter-spouse transfer of any chargeable asset is a no gain: no loss disposal.

WORKING

Net income: £15,425 + 10,815 = 26,240 Loss of PA: ½ × (£26,240 – 26,100) = ½ × £140 = £70

SAMPLE



Answer 11 JULIAN

(a) Capital allowances 8% 18% Cars Allowances pool pool 1 2 (40% private) £ £ £ £ £ Year ended 5 April 2014 Additions (W1) 8% pool With AIA 30,000 Less: AIA (30,000) 30,000 ––––––– 0 High CO2 car 14,000 18% pool With AIA 80,000 Less: AIA (80,000) 80,000 ––––––– 0 WDA: 8% (1,120) ( 60%) 672 ––––––– ––––––– ––––––– ––––––– WDV c/f 0 0 12,880 Allowances 110,672 ––––––– Year ended 5 April 2015 Additions 18% pool With AIA 20,000 Less: AIA (20,000) 0 20,000 –––––––

WDA: 8% (1,030) (× 60%) 618 Additions –with FYA: Very low CO2 car (W1) 13,000 Less: 100% FYA (13,000) 0 13,000 –––––––

––––––– ––––––– ––––––– –––––––

WDV c/f 0 0 11,850 Allowances ––––––– ––––––– 33,618 –––––––

SAMPLE



18% Cars Allowances pool 1 2 (40% private) £ £ £ £ WDV b/f 11,850 Year ended 5 April 2016 Additions (W1) 18% pool: Low CO2 car (No AIA) 22,000 Disposals: Car (proceeds) (12,000) Equipment (proceeds) (5,000) –––––– –––––– (5,000) (150) Balancing charge 5,000 (5,000) Balancing charge 150 (× 60%) (90)

WDA: 18% (3,960) (×60%) 2,376 –––––– –––––– –––––– ––––––

WDV c/f 0 0 18,040 –––––– –––––– ––––––

Allowances (charge) (2,714) ––––––

WORKING Analysis of additions Total 8% pool 18% pool £ £ £ Year ended 5.4.14 Heating system, etc. 10,000 10,000 Thermal insulation 20,000 20,000 Office furnishings 28,000 28,000 Workshop equipment 36,000 36,000 Van 16,000 16,000 Car (High CO2) 14,000 14,000 (Private use) ––––––– ––––––– ––––––– 124,000 44,000 80,000 ––––––– ––––––– ––––––– Year ended 5.4.15 Car (Very low CO2) 13,000 13,000 (100% FYA) Computers 20,000 20,000 ––––––– ––––––– 33,000 33,000 ––––––– ––––––– Year ended 5.4.16 Car (Low CO2) 22,000 22,000 Private use ––––––– –––––––

SAMPLE



(b)(i) Taxable trading profits of accounting periods

Year ended 5 April 2014 2015 2016 £ £ £

Adjusted profits before capital allowances 124,000 78,000 89,000 Less: Capital allowances (part(a)) (110,672) (33,618) 2,714 ———– ——–— –——— 13,328 44,382 91,714 ———– ——–— –———

(ii) Trading income assessments

Trade started 6.4.13 in 2013/14

£ 2013/14 Actual (6.4.13 – 5.4.14) 13,328 2014/15 CY = actual (year ended 5.4.15) 44,382 2015/16 CY = actual (year ended 5.4.16) 91,714

SAMPLE



Answer 12 ROBERTA

(a) Capital allowances 18% pool SLA Claim

£ £ £ £ 6 months to 31 December 2013

Additions (W1) 18% pool: With AIA – machinery (Note 1) 32,500 Less: AIA (Note 2) (Max £125,000 Note 3) (32,500) 32,500 –––––– 0 SLA – with AIA 10,000 Less: AIA (Note 2) (10,000) 10,000 –––––– 0 Low CO2 car (no AIA or FYA) 15,000 ––––––

15,000 WDA: 18% × 6/12 (Note 3) (3,150) 3,150 Addition with 100% FYA: Very low CO2 car 16,000 Less 100% FYA (Note 3) (16,000) 0 (75%) 12,000 –––––– –––––– –––––– –––––– WDV c/f 11,850 0 Allowances 57,650 ––––––

Year ended 31 December 2014

Additions (W1) 18% pool With AIA – Van 15,000 Office equipment 8,000 ––––––

23,000 Less: AIA (23,000) 23,000 –––––– 0 –––––– 11,850 WDA – 18% (2,133) 2,133 –––––– ––––––

WDV c/f 9,717 0 –––––– Allowances 25,133 –––––– SAMPLE



18% pool SLA Claim £ £ £ £ WDV b/f 9,717 0 Year ended 31 December 2015

Additions (W1) 18% pool With AIA 40,000 Less: AIA (40,000) 40,000 –––––– 0 ––––––

9,717 Disposal – SLA (proceeds) (3,000) Balancing charge 3,000 (3,000) ––––––

WDA: 18% (1,749) 1,749 –––––– ––––––

WDV c/f 7,968 ––––––

Allowances 38,749 ––––––

Notes: (1) The machinery purchased before the start of trading is deemed acquired on the first

day of trading (1 July 2013)

(2) Short life assets, which are excluded from the 18% pool by election, attract AIA. It is usually more beneficial to allocate the AIA first to the pool additions as the SLA will qualify for a balancing allowance on disposal. In this case as AIA is available against the full cost the SLA election is of no benefit and actually results in a balancing charge on disposal in 2015.

(3) As the period of account is less than 12 months, AIA and WDA (but not FYA) are scaled down.

SAMPLE



WORKING Total Non-pool 18% pool £ £ £ Analysis of additions 6 months to 31.12.13 New machinery 32,500 32,500 Weaving equipment 10,000 10,000 (SLA) Car (low CO2 car) 15,000 15,000 Car (very low CO2 car) 16,000 16,000 (100% FYA) –––––– –––––– –––––– 73,500 26,000 47,500 –––––– –––––– –––––– Year ended 31.12.14 Office equipment 8,000 8,000 Van 15,000 15,000 –––––– –––––– 23,000 23,000 –––––– –––––– Year ended 31.12.15 Weaving equipment 40,000 40,000 –––––– ––––––


Trade started 1.7.13 in 2013/14 £ 2013/14 Actual (1.7.13 – 5.4.14) £32,350 (W) + (3/12 × £134,867 (W)) 66,067 2014/15 CY (Year ended 31.12.14) 134,867 (Note: Overlap profits c/f: 3/12 × £134,867 = £33,171) 2015/16 CY (Year ended 31.12.15) 111,251 WORKING

Taxable trading profits of accounting periods

6 months to Year ended Year ended 31.12.13 31.12.14 31.12.15 £ £ £

Adjusted profits before capital allowances 90,000 160,000 150,000 Less: Capital allowances (57,650) (25,133) (38,749) ——— ——— ——— 32,350 134,867 111,251 ——— ——— ———

SAMPLE



Answer 13 CHARLIE CEASING

(a) Capital allowances 8% pool 18% pool Car Claim (60% private) £ £ £ £ £

Year ended 30 April 2014 (Note 1)

WDV b/f 18,000 6,000 16,000 Additions 8% pool 14,500 Less: AIA (14,500) 0 14,500 –––––– Disposal: Office equipment – proceeds (5,400) ––––––

600 WDA: 8% (1,440) 1,440 Residue (election) (600) 600 18% (2,880) 1,152 (@40%) –––––– –––––– –––––– ––––––

WDV c/f 16,560 0 13,120 Allowances 17,692 ––––––

2 months to 30 June 2014 (Note 2)

Additions 18% pool 17,000 Disposals – on cessation of trade: Proceeds (24,000) (12,000) (9,000) –––––– –––––– ––––––

Balancing charge (7,440) (7,440) Balancing allowance 5,000 5,000 Balancing allowance 4,120 1,648 (@40%) –––––– –––––– –––––– ––––––

Net balancing charge (792) ––––––

Notes: (1) The car held on 1 May 2013 is kept separate from the main (18%) pool because it is

used privately by Charlie, the proprietor.

(2) No other allowances (AIA, FYA or WDA) are given in the final period of account ending with cessation.


Trade ceased 30 June 2014 in 2014/15 £ £

2013/14 CY (Year ended 30.4.13) 120,000 2014/15 Last year basis (W): Year ended 30.4.14 168,308 + 2 months to 30.6.14 18,792 ––––––– 187,100 Less: Overlap profits b/f (27,100) ––––––– 160,000

SAMPLE



WORKING

Taxable trading profits of accounting periods: Year ended 2 months to 30.4.14 30.6.14 £ £

Adjusted profits before capital allowances 186,000 18,000 Less: Capital allowances (17,692) Add: Net balancing charge 792 ——— ——— 168,308 18,792 ——— ———

Answer 14 RICHARD

(a) Adjustment of profit – Year ended 31 March 2014 – + £ £ Net profit 91,049 Bank deposit interest 250 Dividends received 2,000 Salaries and wages 0 Rates and insurance 0 Light and heat 0 Repairs – new cash register 300 – other 0 Motor car – Richard (20% 4,200) 840 – other 0 Depreciation 23,855 HP interest 0 Impairment of trade debts Loan to former employee 70 Other 0 Loss on sale of car 130 Administration expenses Legal fees re mortgage 353 Subscription to Red Cross 20 Entertaining customers 1,381 Gifts of alcoholic drinks 252 Other 0 Patent royalties 0 Management salary 43,000 –––––– ––––––– 2,250 161,250 –––––– (2,250) ––––––– Adjusted profit before capital allowances 159,000 ––––––– SAMPLE



(b) Plant and machinery capital allowances – Year ended 31 March 2014

Cars with 8% 18% 20% private use Claim pool pool 1 2 £ £ £ £ £ £ WDV b/f 24,400 14,000 Additions (W1) 8% pool With AIA 20,000 Less: AIA (20,000) 20,000 ––––––– 0 Car (no AIA) 25,000 18% pool With AIA 106,000 Less: AIA (106,000) 106,000 –––––– 0 0 –––––– –––––––

24,400 Disposals: Plant + lorry (14,000) Car (9,000) –––––– Balancing allowance 5,000 (80%) 4,000 –––––– –––––– 10,400 WDA – 18% (1,872) 1,872 8% (2,000) (80%) 1,600 Additions – with 100% FYA (W) Very low CO2 car 12,500 Less: 100% FYA (12,500) 0 12,500 ––––––– –––––– –––––– ––––––– –––––––

WDV c/f 0 8,528 23,000 –––––– –––––– –––––––

Allowances 145,972 __________

(c) Trading income assessment 2013/14

Year ended 31 March 2014 £

Adjusted profit before capital allowances 159,000 Less: Plant and machinery capital allowances (145,972) ––––––– Assessable in 2013/14 (CY basis) 13,028 ––––––– SAMPLE



WORKING

(1) Analysis of additions

Total 8% 18% £ £ £ Integral features 20,000 20,000 Factory/ office plant 60,000 60,000 Van 24,000 24,000 Car (High CO2) 25,000 25,000 Car (Very low CO2) 12,500 12,500 (100 FYA) Computers 22,000 22,000 ––––––– ––––––– ––––––– 163,500 45,000 118,500 ––––––– ––––––– ––––––– Answer 15 WARREN STREET

(a) Income tax computations (before loss relief)

2011/12 2012/13 2013/14 £ £ £ Trading income 24,000 0 12,000 Dividends 825 1,500 1,600 Interest 400 150 210 –––––– –––––– –––––– Total = Net income 25,225 1,650 13,810 Less: Personal allowance (9,440) (9,440) (9,440) –––––– –––––– –––––– Taxable income 15,785 0 4,370 –––––– –––––– ––––––

Analysis of income Dividends 825 – 1,600 Savings income 400 – 210 Other income 14,560 – 2,560 –––––– –––––– –––––– 15,785 0 4,370 –––––– –––––– –––––– Income tax liabilities (W1) 3,074 0 693 –––––– –––––– –––––– (b) Loss reliefs

The loss of 2012/13 (= loss of the year ended 30 June 2012 under CY rules), either inclusive of the capital allowances (£30,000) or without the capital allowances (£26,200) may be relieved under:

(i) s.64 – against total income of 2011/12 and/or 2012/13. Where both years used, relief may be taken in chronological or reverse order. Relief is limited in each year to the lower of total income or the loss.

(ii) s.83 – against first available trading profits of the same trade (i.e. those of 2013/14 and thereafter). This relief can be used for the whole loss or the loss remaining unrelieved after s.64 claims.

SAMPLE



(c) Relief of the maximum amount of loss

Maximum and earliest relief is consistent with claim(s) under s.64 followed by s.83 relief

2011/12 2012/13 2013/14 £ £ £

Trading profit 24,000 0 12,000 Less: s.83 relief (W2) – – (4,775)

–––––– –––––– –––––– 24,000 0 7,225

Dividends (gross) 825 1,500 1,600 Interest (gross) 400 150 210

–––––– –––––– –––––– Total income 25,225 1,650 9,035 Less: s.64 relief (W2) (25,225) – –

–––––– –––––– –––––– Net income 0 1,650 9,035 Less: Personal allowance (9,440) (9,440) (9,440)

–––––– –––––– –––––– Taxable income 0 0 0 –––––– –––––– ––––––

(d) Not claiming capital allowances for the year ended 30 June 2012

The solution in (c) above, based on claiming the maximum amount of loss, shows unused amounts of personal allowance for each of the three years. Reducing the capital allowance claim for the year ended 30 June 2012 would not change this situation for 2011/12 (as the loss could only be reduced to £26,200, still more than total income) nor 2012/13 where no loss relief is being claimed.

However the situation for 2013/14 is different: if the capital allowance claim is restricted to £3,395 (i.e. reduced by £405, being the wasted PA of £9,440 – £9,035), then the s.83 loss relief will be £4,370, taxable income will still be nil, but future capital allowances will be increased by £405.

(e) Time limits for claims

The time limit for making claims under s.64 is 31 January following the first anniversary of the end of the tax year of loss (2012/13) i.e. by 31 January 2015.

The time limit for establishing a loss for relief under s.83 relief is four years after the end of the tax year of loss (i.e. 5 April 2017). SAMPLE



WORKINGS

(1) Income tax liabilities £ % £ 2011/12: Other 14,560 20 2,912 Savings 400 20 80 Dividends 825 10 82 –––––– –––––– 15,785 3,074 –––––– ––––––

2013/14: Other (<2,790) 2,560 20 512 Savings 210 10 21 Dividends 1,600 10 160 –––––– –––––– 4,370 693 –––––– –––––– (2) Loss relief Loss £ £ Trading loss – 2012/13 (30,000) Relief: (1) 2012/13 (s.64) – pointless as total income < personal allowance –––––– (30,000) (2) 2011/12 (s.64) – total income 25,225 – relief (25,225) 25,225 –––––– 0 –––––– –––––– (4,775) (3) 2013/14 (s.83) – trading income 12,000 – relief (4,775) 4,775 –––––– –––––– 7,225 –––––– 0 ––––––

Answer 16 NEWBOLD

Income tax computation 2013/14

Earned income £ £ Trading income (Year ended 31 December 2013) 0 Unearned income Bank interest (gross) 13,000 ——— Total income 13,000 Loss of 2013/14 (Year ended 31 December 2013) (20,000) Less: s.64 relief against total income of current year (Note) 13,000 (13,000) ——— “Relevant amount” for s.261 relief (7,000) ——— ——— Taxable income (personal allowance wasted) 0 ———

SAMPLE



Computation of capital gains 2013/14 £ Gain – current year 22,500 Less: Capital loss – current year (4,200) –––––– 18,300 Less: s.261 relief (< net gains of £18,300) (7,000) –––––– 11,300 Less: Annual exemption (10,900) –––––– Taxable amount 400 –––––– Tutorial note: s.64 relief must be claimed if s.261 relief is to be used, even if the s.64 claim results in the wastage of personal allowance.

Answer 17 SIGMUND

(a) Adjusted loss and profit 13 months Year ended to 30.6.12 30.6.13 £ £ Loss/profit before capital allowances (10,400) 28,650 Capital allowances (6,720) (2,520) –––––– –––––– Adjusted loss (maximum)/profit (17,120) 26,130 –––––– ––––––

Trading income assessments and tax losses Loss Assessment £ £ 2011/12 Actual (1.6.11 – 5.4.12) (£17,120) ×

1310 (13,169) 0

–––––– 2012/13 12 months to account date (1.7.11 – 30.6.12) (£17,120) ×

1312 (15,803)

Less: Included in 2011/12 loss (1.7.11 – 5.4.12) (£17,120 ×

139 ) 11,852

–––––– (3,951) 0 –––––– 2013/14 CY (Year ended 30.6.13) Adjusted profits 26,130

(b) Alternative means of relieving the tax losses

The tax losses of 2011/12 and 2012/13 may be relieved as follows

(1) s.72 – against total income – earned before unearned – of the three preceding tax years to the year of the loss, on a FIFO basis, with relief limited to the lower of total income and the loss in each year i.e.:

2011/12 loss – relief in 2008/09, 2009/10 and 2010/11 2012/13 loss – relief in 2009/10, 2010/11 and 2011/12

SAMPLE



2008/09 2009/10 2010/11 2011/12 £ £ £ £ Earned income Trading income – – – 0 Employment income 9,000 10,000 11,200 3,800 Unearned income Dividends (gross) 3,000 3,400 3,800 600 –––––– –––––– –––––– –––––– Total income 12,000 13,400 15,000 4,400 Less s.72 relief 2011/12 loss (12,000) (1,169) – 2012/13 loss (3,951) – – –––––– –––––– –––––– –––––– Net income 0 8,280 15,000 4,400 –––––– –––––– –––––– ––––––

(2) s.64 – against total income of the tax year of the loss and/or preceding tax year. If

both years used, relief can be in either order. Again, relief against earned before unearned. Relief limited to the lower of the loss and total income i.e.:

2011/12 loss – relief in 2010/11 and/ or 2011/12 2012/13 loss – relief in 2011/12 and/ or 2012/13

2010/11 2011/12 2012/13 £ £ £ Earned income – Trading income – 0 0 – Employment income 11,200 3,800 – Unearned income – Dividends (gross) 3,800 600 – –––––– –––––– –––––– Total income 15,000 4,400 0 Less: s.64 relief 2011/12 loss – in 2010/11 (13,169) 2012/13 loss – in 2011/12 (3,951) (earliest relief in both cases) –––––– –––––– –––––– Net income (before PA) 1,831 449 0 –––––– –––––– ––––––

(3) s.83 – against future trading profits from the same trade. Full relief in 2013/14, as trading profits (£26,130) exceed the loss (£17,120) before s.64/s.72 claims.

If s.64/s.72 reliefs are taken up reductions or repayments of tax will be made for the tax years of each loss (i.e. 2011/12 and 2012/13). SAMPLE



(c) Best relief

Generally, loss relief should aim to save the greatest amount of tax as early as possible – s.72 before s.64 before s.83 reliefs – but without unnecessarily wasting personal allowances. In this case, s.72 relief in 2008/09 for the 2011/12 loss wastes more personal allowance than a claim under s.64 in 2010/11. Conversely, s.72 relief in 2009/10 for the 2012/13 loss does not waste personal allowance, whilst s.64 relief, in 2011/12, wastes most of the personal allowance. From a tax planning perspective, since all the alternative reliefs only save tax at 20%, a combination of reliefs (s.64 for the 2011/12 loss and s.72 for the 2012/13 loss) is the most tax efficient, and is permissible since each loss is a separate claim.

2008/09 2009/10 2010/11 2011/12 £ £ £ £ Total income 12,000 13,400 15,000 4,400 s.64: 2011/12 loss (13,169) s.72: 2012/13 loss (3,951) –––––– –––––– –––––– –––––– 12,000 9,449 1,831 4,400 –––––– –––––– –––––– ––––––

The waste of personal allowance can be further reduced by restricting the capital allowance claim in the loss-making period.

Answer 18 ALAN WATERS

Terminal loss relief assuming no other claims are made.

(a) Trading income assessments £ £

2012/13 CY (Year ended 30.9.12) 2,400 2013/14 Last year basis (1.10.12 – 30.6.13)

9 months to 30.6.13 Loss (68,625) Add: overlap profits b/f (1,600) –––––– (70,225) 0 ––––––

(b) Calculation of terminal loss

The last twelve months of trading are split between the relevant tax years (i.e. 1 July 2012 to 5 April 2013 and 6 April 2013 to 30 June 2013): £ £ 6.4.13 – 30.6.13 (three months of 2013/14) 3/9 × (68,625) (22,875) 1.7.12–5.4.13 (nine months of 2012/13): 6/9 × (68,625) (45,750) 3/12 × 2,400 600 –––––– (45,150) –––––– (68,025) Add: overlap profits b/f (1,600) –––––– (69,625) ––––––

SAMPLE



(c) Relief for the terminal loss

The terminal loss is relieved on a LIFO basis against the trading profits only of the same business for the tax year of cessation and the three tax years preceding that year.

2010/11 2011/12 2012/13 2013/14 £ £ £ £ Trading profits: Per question 40,000 31,200 2012/13 – per (a) 2,400 2013/14 – per (a) 0 Less: TLR (LIFO basis) 2013/14 0 – 2012/13 2,400 (2,400) 2011/12 31,200 (31,200) 2010/11 36,025 (36,025) –––––– –––––– –––––– –––––– –––––– 69,625 –––––– 3,975 0 0 0 –––––– –––––– –––––– ––––––

Tutorial notes:

(1) The income after TLR for 2010/11 will be reduced to nil by the personal allowance. Refunds of tax attributable to the earlier tax years will be given as an adjustment to the 2013/14 self-assessment.

(2) Interaction of s.64 and s.89 reliefs

The unrelieved loss of 2013/14 (£70,225 – 69,625 = 600) is eligible for s.64 relief in 2013/14 and/ or 2012/13, but as total income for 2013/14 is nil, relief can only be taken in 2012/13. If claimed, s.64 relief must be taken before TLR, and the effect would be as follows:

£ £ Loss of 2013/14 70,225 Less: s.64 relief in 2012/13 – lower of the loss and total income (2,400) –––––– Unrelieved loss (= reduced terminal loss) 67,825 Less: TLR in 2013/14 0 2012/13 (after s.64 relief) 0 2011/12 31,200 2010/11 36,625 –––––– (67,825) –––––– 0 ––––––

SAMPLE



Answer 19 KRUGER, BRAND AND SHEPSTONE

(a) Allocation of profits of periods of account

Total K B S £ £ £ £ £ 8 months to 31.12.12: (1:1:1) 72,000 24,000 24,000 24,000 –––––– –––––– –––––– –––––– Year ended 31.12.13 64,200 –––––– 1.1.13 – 31.5.13 (5m) Profit 5/12 × £64,200 Old PSA (1: 1: 1) 26,750 8,917 8,917 8,916 1.6.13 – 31.12.13 (7m) Profit 7/12 × £64,200 New PSA Salaries (7/12) 14,000 9,333 4,667 – Interest on capital (7/12) 584 292 146 146 Balance (3:2:1) 22,866 11,433 7,622 3,811 –––––– 37,450 –––––– –––––– –––––– –––––– 64,200 29,975 21,352 12,873 –––––– –––––– –––––– ––––––

(b) Assessments

Each partner is a separate taxable person who commenced business on 1.5.12 (in 2012/13)

K B S £ £ £ 2012/13: Actual 1.5.12 – 5.4.13 K: 24,000 + (

123 × 29,975) 31,494

B: 24,000 + (123 × 21,352) 29,338

S: 24,000 + (123 × 12,873) 27,218

2013/14: CY Year ended 31.12.13 29,975 21,352 12,873

Overlap profits c/f: (1.1.13 – 5.4.13) K:

123 × 29,975 = 7,494

B: 123 × 21,352 = 5,338

S: 123 × 12,873 = 3,218

Tutorial note: The assessment for 2013/14 is CY rather than first 12 months as the first, short accounting period ends in the first (as opposed to the second) year of assessment SAMPLE



Answer 20 FOX, GRIFFITHS AND HALL

(a) Division of profits

Total F G H (i) PSA: 1.6.08 – 31.12.10 50% 50% 1.1.11 – 30.9.12 40% 40% 20% 1.10.12 – 31.12.13 – 60% 40% (ii) Allocation: £ £ £ £ 13 months to 30.6.09 (50:50) £(92,950 – 11,050) 81,900 40,950 40,950 – –––––– –––––– –––––– Year ended 30.6.10 (50:50) £(73,800 – 9,780) 64,020 32,010 32,010 – –––––– –––––– –––––– Year ended 30.6.11 To 31.12.10 (50:50) £(81,000 – 9,000) × 6/12 36,000 18,000 18,000 – From 1.1.11 (40:40:20) £(81,000 – 9,000) × 6/12 36,000 14,400 14,400 7,200 –––––– –––––– –––––– –––––– 72,000 32,400 32,400 7,200 –––––– –––––– –––––– ––––––

£ £ £ £ Year ended 30.6.12 (40:40:20) £(90,000 – 10,500) 79,500 31,800 31,800 15,900 –––––– –––––– –––––– –––––– Year ended 30.6.13 To 30.9.12 (40:40:20) £(110,000 – 15,000) × 3/12 23,750 9,500 9,500 4,750 From 1.10.12 (60:40) £(110,000 – 15,000) × 9/12 71,250 – 42,750 28,500 –––––– –––––– –––––– –––––– 95,000 9,500 52,250 33,250 –––––– –––––– –––––– –––––– 6 months to 31.12.13 (60:40) £(60,000 – 12,000) 48,000 – 28,800 19,200 –––––– –––––– –––––– ––––––

(b) Assessments

Relevant years: F 2008/09 2012/13 (Starts 1.6.08) (Resigned 30.9.12) G 2008/09 2013/14 (Starts 1.6.08) (Ceased trading 31.12.13) H 2010/11 2013/14 (Starts 1.1.11) (Ceased trading 31.12.13)

SAMPLE



Fox 2008/09 2009/10 2010/11 2011/12 2012/13 £ £ £ £ £ 2008/09: Actual 1.6.08 – 5.4.09 10/13 × 40,950 31,500 2009/10: CY year ended 30.6.09 12/13 × 40,950 37,800 2010/11: CY year ended 30.6.10 32,010 2011/12: CY year ended 30.6.11 32,400 2012/13: Last year basis 1.7.11 – 30.9.12:

Year ended 30.6.12 31,800 3 months to 30.9.12 9,500 –––––– 41,300 Less: Overlap profits b/f 1.7.08 – 5.4.09 9/13 × £40,950 (28,350) –––––– 12,950 ––––––

Griffiths 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 £ £ £ £ £ £ 2008/09: Actual 1.6.08 – 5.4.09

10/13 × 40,950 31,500 2009/10: CY year ended 30.6.09

12/13 × 40,950 37,800 2010/11: CY year ended 30.6.10 32,010 2011/12: CY year ended 30.6.11 32,400 2012/13: CY year ended 30.6.12 31,800 2013/14: Last year basis

1.7.12 – 31.12.13: Year ended 30.6.13 52,250 6 months to 31.12.13 28,800 –––––– 81,050 Less: Overlap profits 9/13 × £40,950 (28,350) –––––– 52,700 –––––– SAMPLE



Hall 2010/11 2011/12 2012/13 2013/14 £ £ £ £ 2010/11: Actual 1.1.11 – 5.4.11

3/6 × 7,200 = 3,600 2011/12: First 12 months 1.1.11 – 31.12.11

£7,200 + (6/12 × 15,900) 15,150 2012/13: CY Year ended 30.6.12 15,900 2013/14: Last year basis

1.7.12 – 31.12.13: Year ended 30.6.13 33,250 6 months to 31.12.13 19,200 –––––– 52,450 Less: Overlap profits 1.1.11 – 5.4.11 (3,600) 1.7.11 – 31.12.11 (6/12 × 15,900) (7,950) –––––– 40,900 ––––––

SAMPLE

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