ACFI212 - Tax Compliance

Question 1

Johnson, an ICAEW Chartered Accountant working as a sole practitioner, acts for Sue, completing her income tax returns. Johnson has recently seen information proving that, on her last two tax returns, Sue had neglected to report rent received on a property that she lets out to students. Johnson is unsure as to the action he should take in respect of this matter. The engagement letter between Johnson and his client Sue does not contain a general permission to disclose such matters to HMRC.

Requirements

1.1 Explain the respective responsibilities of Johnson and Sue when Johnson completes Sue's income tax return. (3 marks)

1.2 State what action Johnson should take in respect of the undeclared income.

(4 marks)

[Total: 7 marks]

Question 2

Daniel works for Osley Ltd, a VAT registered trading company making a mixture of taxable and exempt supplies.

Daniel will initially use the simplified partial exemption tests to determine whether the company will be able to recover all input tax for the quarter ended 31 August 2019.

Requirements

2.1 Determine whether Osley Ltd is able to recover all input tax for the quarter ended 31 August 2019 using the simplified partial exemption Test one; and/or the simplified partial exemption Test two. (7 marks)

2.2 Catex Ltd is expanding its activities and have recently secured a bank loan of £366,000 and applied the funds as follows:

(1) £201,000 to fund the purchase of a new factory on 1 December 2020 for use in its trade

(2) £55,000 to fund the purchase of shares in Cake Ltd on 1 December 2020

(3) £110,000 which was used to purchase a 99 year lease over a new property, Lido Place, on 1 December 2020

Requirement

Calculate the stamp duty and/or stamp duty land tax payable on the above transactions. State the payment dates and who is responsible for paying any tax due. (6 marks)

[Total: 13 marks]

Question 3

3.1 Your firm acts for Freya who is UK resident and UK domiciled. Freya has non-savings income for 2019/20 of £24,295. In addition, she has made the following disposals during the year:

· Sold 2,000 shares in Lillier plc, an investment company, to her brother for £7 each when the market value was £10.50 each. Freya had purchased 4,800 shares for £9,200 in June 2010. The shares were the subject of a one-for-four rights issue at £5.50 per share in March 2012. Freya took up all of her rights.

· Sold a painting for £25,900 which originally cost £5,100 in March 2005.

· Sold 2,000 shares in Stuck Ltd, an unquoted trading company, for their market value of £55,000. Freya had inherited the shares from her mother in March 2007 when their market value was £42,000. The shares had originally cost Freya's mother £39,000 in January 2000. Stuck Ltd has 30,000 issued shares. Freya has worked for Stuck Ltd full time since she inherited the shares.

Freya has a brought forward capital loss of £2,000 at 6 April 2019.

Requirement

Calculate the capital gains tax payable by Freya for 2019/20. (9 marks)

3.2 Your firm acts for Hugo and Skye. Hugo was married to Skye and they had two children, Matteo and Lucinda.

When Hugo died in January 2008, he left the whole of his estate to Skye. Hugo's only lifetime transfer was a gift of £55,000 to Matteo in January 2007 on the occasion of Matteo's marriage. The nil rate band in 2006/07 was £285,000 and in 2007/08 it was £300,000.

Skye died on 1 April 2020, leaving all her assets to Matteo and Lucinda. Skye's second husband Berni inherited nothing on Skye's death. Skye had made no lifetime transfers.

At the time of her death, Skye owned the following assets:

· A property in Liverpool worth £1.5 million on 1 April 2020. There was a mortgage of £300,000 outstanding on the property.

· A holding of 2,000 shares (less than 1% of the issued shares) in Turner plc, a trading company. On 1 April 2020 the shares were quoted at 630p to 646p and the marked bargains were 632p, 636p and 643p.

Matteo and Lucinda do not have sufficient savings to settle the inheritance tax liability. They are concerned that they will be unable to pay the inheritance tax liability on the estate on time, as most of Skye's assets are not readily convertible into cash.

Requirements

(a) Calculate the inheritance tax payable as a result of Skye's death. (11 marks)

(b) State the date by which Matteo and Lucinda should pay the inheritance tax due in order to avoid paying any interest. (1 mark)

[Total: 21 marks]

Question 4

4.1

Rabbit plc is a manufacturing company.

1 Research and development

The £32,500 was the amount of the research and development relief (wholly allowable) that Rabbit plc was entitled to following further research into new products.

2 Interest

The £4,500 represents interest payable of £1,000 on a bank overdraft, interest receivable from employees of £7,500 and interest payable of £2,000 on underpaid corporation tax.

3 Charitable donations

The £1,750 qualifying charitable donation includes a period end accrual of £750. There was no opening accrual.

4 Pension costs

The £15,000 of pension costs includes unpaid contributions of £1,500 at the year end.

5 Capital allowances

On 1 April 2020 the tax written down value of the main pool was £65,000 and that of the special rate pool was £19,000. In July 2020 Rabbit plc purchased a delivery van for £6,240 (inclusive of VAT). Rabbit plc also sold an Audi car for £18,200. The Audi car was used as a company car by an employee, originally cost £25,000 and has CO2 emissions of 165g/km.

In addition, electric charge-point equipment was purchased in January 2021 at a cost of £17,760 (inclusive of VAT).

6 Property income

Rabbit plc has rental income of £15,000 in respect of an office block that has been let out during the year ended 31 March 2021. Rabbit plc incurred allowable costs of £22,000 in relation to the rental in September 2020.

In January 2021 Rabbit plc sold another office block which it had used for some administrative functions, to an unrelated third party for £1,500,000. It originally cost £773,458 in January 2002. Substantial repairs were carried out in January 2006 at a cost of £75,000. In June 2021, Rabbit plc purchased an office block for £1,600,000 which it immediately rented out to an unrelated third party. The office block had been built in 1995.

Requirement

Calculate the corporation tax liability for Rabbit plc for the year ended 31 March 2021. (15 marks)

4.2 Flamingo Ltd sold a factory for £600,000 in January 2020 realising a chargeable gain of £160,000. In April 2021, they are planning to buy a new machine for £575,000.

Requirement

a) Explain how rollover relief operates and the conditions which much be fulfilled in order to claim it. (2 marks)

b) Calculate the amount of rollover relief Flamingo Ltd can claim. (2 marks)

Total [19 marks]

Question 5

5.1 Sienna Major is UK resident and UK domiciled. Sienna is an employee of Otto Ltd earning £41,900 pa as her salary. In addition she is provided with a number of benefits:

· Otto Ltd contributes 10% of Sienna's basic salary to an occupational pension scheme. Sienna contributes a further 5% of her basic salary.

· Exclusive use of a holiday cottage which Sienna uses most weekends. The holiday cottage was purchased by Otto Ltd in July 1993 for £64,000. Sienna first occupied it in May 1998 when its market value was £104,000. It was completely renovated in June 2004 at a total cost of £52,000. The annual value of the property is £4,500.

· Otto Ltd also pays for a cleaner to clean the cottage at a cost of £2,000 pa and all the utility bills at a total cost of £1,495 pa.

· Otto Ltd provided Sienna with an interest-free loan of £8,000 from 6 April 2019 and the full amount was outstanding at 5 April 2020.

Sienna paid £200 in December 2019 as her annual subscription for her professional institute, which is on the HMRC approved list.

Sienna suffered income tax via PAYE on her employment income of £8,500 in 2019/20.

During 2019/20 Sienna received interest on a bank deposit account of £5,00 and dividends from Sparks plc of £6,200.

Requirement

5.1 Calculate Sienna's income tax payable or repayable for 2019/20. (13 marks) Note. The official rate of interest is 2.5% pa.

5.2

Tony has carried on a manufacturing business as a sole trader for many years. His business has always been profitable. He has overlap profits of £14,700 and his tax adjusted trading profits for the year ended 31 December 2019 were £25,250.

Tony ceased to trade on 30 June 2020. His profit and loss account for the six months ended 30 June 2020 showed an accounting profit of £95,928. This figure is computed after deducting the following items.

On 1 July 2020 Tony began working as an employee of Staple Ltd, a manufacturing company, earning a salary of £55,000 pa and receiving various employment benefits. Tony was provided with the use of a company laptop which had a market value of £2,445 on 1 July 2020. He uses the laptop almost exclusively for business purposes. In addition, Staple Ltd paid £337 for private medical insurance for Tony. Tony had cash flow problems when he first started work with Staple Ltd, so the company made a £12,000 interest-free loan to Tony on 1 July 2020. He fully repaid the loan on 1 February 2021. Tony is paid 35p per mile for each business mile travelled in his own car. During 2020/21 he travelled 16,000 miles on business.

Staple Ltd contributes 5% of Tony's salary into a registered occupational pension scheme each year and Tony makes contributions of 6% of his salary each year into the scheme. The scheme operates net pay arrangements.

Requirements

a) Calculate the tax adjusted trading profits of Tony's business for the six months ended 30 June 2020. You are required to explain your treatment of items in the capital allowances computation. (8 marks)

b) Calculate Tony's income tax liability for 2020/21. (13 marks)

c) Calculate Tony's national insurance contributions for 2020/21 and the national insurance contributions payable by Staple Ltd in respect of Tony's employment in 2020/21. Ignore the rules regarding maxima. (6 marks)

Total [40 marks]