SECTION A
Candidates must answer any FOUR (4) questions in Section A.
QUESTION ONE
a) Explain the main differences between the primary and secondary Class 1 National Insurance Contributions (NICs).
(4 marks)
b) Mark is a company director. His monthly salary is £8,000. During the year 2020-21, he is provided with a petrol-engine car with an emission rating of 112g/km. The car had a list price when new of £28,000 and was registered on 5 February 2019. All fuel and other related costs are paid by the company. The company also provides each of its senior management staff with private insurance cover of £1,800 yearly. Calculate the NICs payable with regard to Mark for 2020-21.
(16 marks)
[TOTAL: 20 MARKS]
QUESTION TWO
Mary is an antique enthusiast. She is also in fulltime employment with a UK-based Software Development Company, where she works as the firm’s Legal Manager. On 1 February 2019 she took out a loan of £50,000 from her local bank at a fixed interest rate of 8%. On 28 February 2019 Mary spent £5,000 converting her house garage into a workshop. On 31 March 2019 Mary spent £35,000 on various antique restoration equipment and products, including a workbench and other workshop miscellany such as tools, paints and waxes, and other antique restoration supplies. On 15 April 2019, she bought a dilapidated horse-drawn carriage for £4,000 and spent a further £6,000 on spare parts that she used in restoring it. The restoration took six months to complete, as Mary only worked on the project during her pastime when she was free from work and family obligations. Regrettably, Mary’s employer went bankrupt on 31 October 2019 leaving her jobless. She was then forced to sell the restored horse-drawn carriage for £32,000 to make ends meet.
Unable to find another job, Mary went on to buy additional dilapidated antique items on various dates between 1 November 2019 and 31 December 2019, which she then sold as soon as their restoration work was completed. These vintage items included: Roper Twenty Drawer Chest (bought for £500, sold for £4,200), French Style Throne Chair (bought for £1,000, sold for £7,900), Westminster Chime Clock (bought for £1,675, sold for £7,500), Mahogany-Cased Upright Fortepiano (bought for £3,000, sold for £18,000). In addition, Mary paid £250 to a local gazette as advertisement fees for the period 1 November 2019 to January 2020 to quickly find clients for her restored antiques.
On 10 January 2020, Mary bought another Mahogany-Cased Upright Fortepiano for £4,700 and had hoped to complete restoration work by 15 February 2020 when it would have been ready for sale. However, she managed to get a job with an investment bank located in another city, and her employment commenced on 1 February 2020. But before she relocated to the new city, Mary sold her house and repaid the loan of £50,000. Mary took the remaining antique restoration equipment and products to the new city, including the unsold Mahogany-Cased Upright Fortepiano which had an estimated value of £16,100.
You are required to discuss the criteria which would be used by a court of law in deciding whether or not Mary, would be treated as carrying on a ‘trade’ for her antique collectable activities.
[TOTAL: 20 MARKS]
QUESTION THREE
Your aunt, Mrs Stacey Adams, is a well-known businessperson who lives in Ipswich. She has heard that you successfully passed Taxation module at the University of Essex. For this reason, she invited you to come to her house in Ipswich as she wanted you to help her calculate chargeable gain/allowable loss from the sale of each type of asset she sold during the tax year 2020-21. For this purpose, you were provided with the information below:
(i) On 14 June 2020, Mrs Adams sold a patent for £36,000. She acquired this patent on 14 June 2008 at a cost of £28,000 when it had an expected useful life of 30 years.
(ii) On 22 June 2020, Mrs Adams sold a piece of antique furniture for £11,000. This furniture was a gift from your mother in February 2013 and placed in Mrs Adams’ bedroom. The market value of the furniture in February 2013 was £9,000.
(iii)On 5 July 2020, Mrs Adams sold 1,200,000 £1 ordinary shares in Lakeside Limited, a private company, where she was also serving as a director since 1 May 2017. Mrs Adams received £6,000,000 from the sale of these shares. Mrs Adams had initially purchased 800,000 shares on 8 July 2011 for £4,000,000, before receiving a further 400,000 shares on 3 October 2012 through a 1 for 2 bonus issue.
(iv)On 25 July 2020, Mrs Adams sold a holiday cottage that she owned in Southend for £800,000. She purchased this cottage on 11 January 2004 after paying £500,000. In August 2010, she added a heated swimming pool at a cost of £100,000. In April 2020, Mrs Adams incurred £3,000 to repaint the cottage. Mrs Adams decided to sell this cottage after acquiring another one, in October 2019, in Windsor where she hoped to earn more income from Legoland visitors.
(v) On 1 August 2020, Mrs Adams sold an oil painting for £8,200. She bought this painting at an auction two years earlier for £6,500.
(i) On 5 September 2020, Mrs Adams sold a copyright for £60,000. The copyright had been valued at £51,600 on 5 September 1982. Mrs Adams had acquired the copyright on 5 September 1980 at a cost of £48,000, when it had an expected useful life of 45 years.
(ii) Mrs Adams had a set of eight outdoor dining chairs which she bought five years earlier for £1,000. On 10 September 2020, Mrs Adams sold four of the chairs to her friend, Mr Chris Brown for £4,500. On 1 October 2020, Mrs Adams sold the remaining chairs to Mr. Andrew Parker, Mr Chris Brown’s brother, for £4,500.
(iii) On 10 October 2020, Mrs Adams sold some of her antique furniture that was occupying the living room in her house for £160,000. Mrs Adams had purchased these antiques together with others at an antique shop eleven months earlier, where she paid £320,000. The market value of the remaining antiques in the living room is estimated to be £640,000. All these antiques are a private collection and are kept at her family home.
(iv) On 11 January 2021, Mrs Adams transferred all her 50,000 50p ordinary shares in New Canterbury Limited to her son, Greg. New Canterbury Limited is a listed trading company whose shares were traded for £15 on 11 January 2021. Mrs Adams had purchased the shares for £450,000 on 8 January 2013. The total shares held by Mrs Adams constituted 4% of the total shares of New Canterbury Limited. Mrs Adams did not hold any position in the company.
Required: Calculate Mrs Adams’s chargeable gain/allowable loss from the sale of each type of asset sold during the tax year 2020-21. You should assume that no reliefs are applicable.
[TOTAL: 20 MARKS]
QUESTION FOUR
The following information pertains to Zhifang who is a UK resident for the tax year 2020/21:
· Zhifang was paid an annual salary of £52,000 by her employer, a private equity firm that invests in renewable energy companies within emerging markets. Her employer had also deducted income tax of £10,250 from Zhifang’s salary under the PAYE system.
· Zhifang received two bonus payments from her employer in recognition of her outstanding performance as follows:
First bonus payment amounted to £1,900 paid on 30 September 2020.
Second bonus payment of £2,100 was paid on 31 March 2021.
Zhifang was provided with a diesel-powered car with a list price of £32,000. Zhifang’s employer had however paid £30,000 for the car after obtaining a discount from the car dealership because of their continued custom. Zhifang also contributed £4,000 towards the cost of this car. The car had an official carbon dioxide emission rate of 120g/km. Zhifang used the car both for private and work use and all fuel was provided by her employer.
Zhifang was provided with accommodation by her employer since the beginning of her employment on 1 January 2017. Her employer had initially acquired this house on 1 November 2015 for £190,000. The market value of this property was estimated at £200,000 following a valuation conducted on 1 January 2017. The annual value of the property is £5,000.
Zhifang has a home theatre system provided by her employer for private enjoyment. This equipment had cost her employer £5,000 when it was acquired on 1 January 2017.
Zhifang’s employer also paid £500 to a local golf club so that she can enjoy her weekends when she is off work.
Zhifang also took three loans from her employer that were in existence during the entire tax year, as follows:
An interest-free loan of £20,000 which Zhifang used to purchase a vintage car.
A Loan of £3,000 to buy an annual ticket for Manchester United home games, taken at an interest rate of 1.5% p.a.
An interest-free loan of £3,000 to purchase an equipment she needed for her job.
Zhifang earned annual rental income of £4,800 from a property located in Liverpool, out of which she spent £700 to repair a section of the property’s roof that had been damaged by strong winds. Zhifang also paid £150 with respect to insurance for this property during the year.
Additional information:
Zhifang is a very philanthropic person and she donated £3,000 to a charity through her employer’s gift aid scheme on 31 January 2021.
Zhifang received a premium bond prize of £270 on 1 April 2021.
Zhifang received net interest of £2,000 from her savings account with a local bank, and gross dividends of £1,000. Both amounts were deposited into her bank account on 3 April 2021.
Required: Calculate the income tax payable by Zhifang for the tax year 2020/21 (Assume an official rate of interest of 2.25%).
[TOTAL: 20 MARKS]
QUESTION FIVE
Phil died on 10 November 2020. During his lifetime, he has made only the following transfers:
· 8 October 2016 Gift to relevant property trust £620,000
· 19 May 2017 Gift to his daughter on marriage £40,000
Required:
Calculate the inheritance tax payable during Phil’s lifetime (if any) regarding each of the above transfers, assuming that Phil paid this tax himself, and any further inheritance tax payable regarding these transfers on Phil’s death.
[TOTAL: 20 MARKS]
SECTION B
Candidates must answer ONE question in Section B
QUESTION SIX
An old acquaintance of yours who has recently secured a job with the UK civil service has heard that you are studying taxation, as part of your curriculum for the BSc Accounting/BSc Accounting and Finance degree. Following this, they have contacted you for assistance in explaining the difference between tax evasion and tax avoidance.
You should provide a detailed and critical discussion to them explaining the differences between tax evasion and avoidance. You should also explain to them the options available to the UK government in order to stay ahead of practices which might constitute tax evasion as well as tax avoidance.
[TOTAL: 20 MARKS]
QUESTION SEVEN
Value added tax (VAT) is an indirect tax which is charged on the supply of a wide variety of goods and services. In the UK, there are several special schemes which are intended to simplify the workings of the VAT system.
Critically evaluate the implications of various special schemes on payment of VAT and discuss the advantages of each scheme from the side of registered persons/businesses.
[TOTAL: 20 MARKS]
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