Question 1 (35 marks) (suggested timing: 63 minutes)
Income Tax and Capital Gains Tax
Gary is an electrician. He works as an employee of Electrical Solutions Ltd but in addition to this he started his own business on 1 December 2017. His adjusted trading profits for the six-month period ended 31 May 2018 were £8,700 and they were £16,800 for the year ended 31 May 2019.
The following information is available for the tax year 2020/21:
Gary’s statement of profit or loss for the year ended 31 May 2020 is as follows:
· During the year, Gary did some electrical work on his own home and took goods out of the business to do this. The goods cost £300 (selling price £450) and this has been included in purchases. Gary has not paid anything into the business for them and no other accounting entries have been made.
· Gary charges all the running expenses for his motor car to the business. During the year ended 31 May 2020 Gary drove a total of 12,000 miles, of which 8,000 were for business.
· Other expenses of £4,672 include a £100 parking fine incurred by Gary whilst working at a customer’s property and a £200 political donation.
· Gary uses his private telephone to make business calls. The total cost of the private telephone for the year ended 31 May 2020 was £1200 and 40% of this related to business calls. The cost of these calls has not been included in the expenses above of £19,097.
· Capital allowances for the year ended 31 May 2020 are £2,100.
Required:
a) Calculate the trading profit that will have been assessed on Gary for the tax years 2017/18, 2018/19 and 2019/20 respectively. [4 marks]
b) Gary thinks he has been taxed twice on some of his trading profits. Advise him as to why this might be the case and how he would be compensated for this. [4 marks]
c) Calculate Gary’s adjusted trading profit for the year ended 31 May 2020.
[5 marks]
Further information:
During the tax year 2020/21, Gary received a salary of £18,000 from Electrical Solutions Ltd. The company provided him with a mobile phone (cost to the company of £500) and use of a laptop which Gary uses half for private purposes. The laptop cost the company £1,200. Electrical Solutions Ltd also provide free nursery care for Gary’s two-year-old son, at a cost to the company of £2,000. PAYE for the year was £3,450.
During the tax year 2020/21 Gary received building society interest of £1,100 and dividends of £3,200. He paid £4000 into a private pension scheme.
Required:
d) Calculate Gary’s income tax liability for the tax year 2020/21. [9 marks]
Further information:
Gary bought a house in Norwich on 1 January 2007 for £120,000 and lived there until 30 June 2010. He decided to move in with his girlfriend, but they split up and he returned to his house at the end of December 2012. After living there for 15 months Gary was seconded to work in London and lived there for 5 years returning to his house on 1 April 2019. After living in the house for another 8 months, Gary left to go travelling around the world, and the house was eventually sold for £225,000 on 31 December 2020.
He also acquired additional shares when Books plc made a 1 for 5 rights issue at £4.50 per share on 2 February 2021.
Gary purchased 500 shares in Stationery Ltd at £14 per share on 30 June 2012. They have declined considerably in value since then and on 28 February 2021, Gary sold them all for £4 per share.
Gary has unused capital losses brought forward from earlier years of £7,500.
Required:
a) Calculate any chargeable gains and / or capital losses on the sales of Gary’s shares, providing full explanations. [ 6 marks]
b) Analyse which periods of ownership qualify for private residence relief (giving reasons why) and calculate Gary’s chargeable gain on disposal of the house.
[ 4 marks]
c) Calculate Gary’s chargeable gains overall for 2020/21, with explanations on how any losses are utilised, and compute the capital gains tax liability for 2020/21. [ 3 marks]
Total: 35 marks
Question 2 (35 marks) (suggested timing: 63 minutes)
Corporation Tax
Snowdrop Ltd makes quarterly instalment payments in respect of its corporation tax liability. For the year ended 31 December 2020, Snowdrop Ltd has taxable total profits of £740,000 and dividends from a non-group company of £60,000. The company had the same level of profits for the year ended 31 December 2019. Snowdrop Ltd has held 80% of the shares in Crystal Ltd for many years. (There are no other companies in the Snowdrop Group).
Note: You should assume that Snowdrop Ltd's profits accrued evenly throughout the year.
Required:
a) Explain whether Snowdrop Ltd is classified as a large company for the year ended 31 December 2020. [ 3 marks]
b) Calculate Snowdrop Ltd's corporation tax liability for the year ended 31 December 2020 and explain when this will have to be paid. [4 marks]
Further information:
Included in the taxable profits for the year ended 31 December 2020 is the following transaction:
On 21st October 2020 Snowdrop Ltd sold a freehold office building for £369,000. The freehold office building had cost £156,000 on 3rd January 1990. Snowdrop Ltd made a claim to rollover the gain on the freehold office building against the replacement cost of a new freehold office building. The new freehold office building was purchased on 14th November 2020 for £204,000. Both buildings are used entirely for business purposes. Indexation allowance is £22,500. Snowdrop Ltd made a claim for rollover relief on the building.
Required:
a) Calculate the chargeable gain included in Snowdrop Ltd’s corporation tax liability for the year ended 31 December 2020 and the amount of corporation tax that is attributable to the capital gain. [4 marks]
b) Calculate the amount of gain arising from the building sale that is rolled over and describe the qualifying criteria for a successful roll-over relief claim.
[4 marks]
Further information: Snowdrop Ltd has prepared its accounts for the three-month period 1 January 2021 to 31 March 2021. These accounts currently show a trade profit before taxation of £423,000.
Chargeable gain
During January 2021, Snowdrop Ltd sold its only investment property for £800,000. The property had cost £300,000 in November 2011. A further £30,000 was spent on legal fees in November 2011 to acquire the property.
In error, legal fees in relation to the disposal were not capitalised in Snowdrop Ltd’s accounts and instead they were included in legal and professional fees in the company’s statement of profit or loss (see note 2).
During October 2015, Snowdrop Ltd spent £150,000 adding an extension to the property.
Capital allowances
The tax written down value of the capital allowances main pool as of 31 December 2020 was £50,000. On 1st January 2021, Snowdrop Ltd purchased two new motor cars. Motor car (1) cost £75,000 and had CO2 emissions of 115 grams per kilometre and is diesel. Motor car (2) cost £35,000 and is fully electric.
On 10 February 2021, Cop Ltd purchased machinery costing £90,000.
National insurance on employee benefits
Both the Motor Cars were immediately provided for the exclusive use of two Directors. The employer’s national insurance arising on this benefit in kind should be accrued in the accounts before arriving at taxable profits. You are aware of the benefit in kind rate for the fully electric Motor Car and look up the benefit in kind rate for Motor Car (2) and find that it is 29%. The Directors paid for any fuel relating to their private usage.
Subsidiary losses
Crystal Ltd the 80% owned subsidiary, has completed its accounts and corporation tax return for the six months ended 31 March 2021. It has taxable losses of £60,000. The Financial Director has decided to transfer the maximum amount available from Crystal Ltd’s loss to Snowdrop Ltd’s chargeable accounting period ending 31 March 2021.
Required:
a) Calculate Snowdrop Ltd's taxable total profits for the three-month period ended 31 March 2021. [20 marks]
Notes:
1. Your computation should commence with the trade profit before taxation of £423,000 and should also list all the items referred to in notes (1) to (3), indicating by the use of zero (0) any items which do not require adjustment.
2. You should assume that Snowdrop Ltd claims the maximum available capital allowances.
Total: 35 marks
Question 3 (10 marks) (suggested timing: 18 minutes)
Value Added Tax (VAT)
Cassie began trading on 1 July 2020. For the 7 months to 31 January 2021, she made potentially taxable supplies (standard rated) totalling £56,500, and zero-rated supplies amounting to £20,000. Over the next 2 months she made the following supplies:
Required:
a) On what date did Cassie’s turnover exceed the VAT Registration limit? Provide your workings and an explanation. [3 marks]
b) By what date should Cassie notify HMRC? [1 mark]
c) From what date will she be registered? [ 1 mark]
d) VAT is generally regarded as a regressive tax. Explain, with examples, what is meant by the term ‘regressive’ with reference to VAT in the UK. [ 5 marks]
Total: 10 marks
Question 4 (10 marks) (suggested timing: 18 minutes)
Overseas Income and Ethical Issues
Carlos is 30 years old. He was born in Spain and both his parents are Spanish. Carlos moved to the UK in 2015. He works in Norwich as a self-employed translator and Spanish teacher, and he receives dividend income from a Spanish company.
Carlos tells you he has a sum of money given to him by his grandfather. This money is in a UK bank account. He thinks it is earning some interest, but he has not bothered declaring it to HMRC.
Required:
a) Analyse the difference between tax domicile and residence. [4 marks]
b) Discuss Carlos’s tax status and advise how his self-employed income and dividends would be assessed to UK income tax. [3 marks]
c) Advise Carlos concerning disclosure of the bank interest. [3 marks]
Total: 10 marks
Question 5 (10 marks) (suggested timing: 18 minutes)
Inheritance Tax (IHT)
Helen died on 14 June 2020. On that date, she had the following assets:
Helen’s home £495,000
Quoted shares £175,000
ISA investments £95,000
Cash at bank £43,000
Car £6,000
Helen’s funeral cost £5,000.
Helen’s husband Frank died two years earlier, leaving a legacy to their daughter and the balance of his estate to Helen including his share of the family home. (Frank’s Residence Nil Rate Band (RNRB) was not utilised at his death).
Franks’ estate utilised 60% of his Nil Rate Band (NRB).
Helen’s estate has been left in her will to her daughter.
Helen did not make any lifetime gifts.
The executors of Helen’s estate have not yet completed an IHT Return.
Required:
Calculate the IHT liability arising on Helen’s death, explaining your computations and state the date by which any IHT due should be paid to HMRC. [10 marks]
Total: 10 marks
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