SAMPLE ACCA STUDY QUESTION BANK. Paper F6 TAXATION (UNITED KINGDOM) 2014 Edition

Transcription

1 2014 Edition ACCA STUDY QUESTION BANK Paper F6 TAXATION (UNITED KINGDOM) ATC International became a part of Becker Professional Education in ATC International has 20 years of experience providing lectures and learning tools for ACCA Professional Qualifications. Together, Becker Professional Education and ATC International offer ACCA candidates high quality study materials to maximize their chances of success.

2 In 2011 Becker Professional Education, a global leader in professional education, acquired ATC International. ATC International has been developing study materials for ACCA for 20 years, and thousands of candidates studying for the ACCA Qualification have succeeded in their professional examinations through its Platinum and Gold ALP training centers in Central and Eastern Europe and Central Asia.* Becker Professional Education has also been awarded ACCA Approved Content Provider Status for materials for the Diploma in International Financial Reporting (DipIFR). Nearly half a million professionals have advanced their careers through Becker Professional Education's courses. Throughout its more than 50-year history, Becker has earned a strong track record of student success through world-class teaching, curriculum and learning tools. Together with ATC International, we provide a single destination for individuals and companies in need of global accounting certifications and continuing professional education. *Platinum Moscow, Russia and Kiev, Ukraine. Gold Almaty, Kazakhstan Becker Professional Education's ACCA Study Materials All of Becker s materials are authored by experienced ACCA lecturers and are used in the delivery of classroom courses. Study System: Gives complete coverage of the syllabus with a focus on learning outcomes. It is designed to be used both as a reference text and as part of integrated study. It also includes the ACCA Syllabus and Study Guide, exam advice and commentaries and a Study Question Bank containing practice questions relating to each topic covered. Revision Question Bank: Exam style and standard questions together with comprehensive answers to support and prepare students for their exams. The Revision Question Bank also includes past examination questions (updated where relevant), model answers and alternative solutions and tutorial notes. Revision Essentials*: A condensed, easy-to-use aid to revision containing essential technical content and exam guidance. *Revision Essentials are substantially derived from content reviewed by ACCA s examining team.

3 ACCA PAPER F6 TAXATION (UNITED KINGDOM) STUDY QUESTION BANK For 2014 Examinations 2014 DeVry/Becker Educational Development Corp. All rights reserved. (i)

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

5 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) CONTENTS Question Page Answer Marks Date worked UK TAX SYSTEM 1 Tax status INCOME TAX COMPUTATIONS 2 Michael Long Life The Pike Family PROPERTY AND INVESTMENT INCOMES 5 Brigid Jones EMPLOYMENT INCOME 6 Endicott LA Raider UNINCORPORATED TRADER ASSESSMENT AND PROFITS 8 Max Capone Michael and Rose CAPITAL ALLOWANCES 11 Julian Roberta Charlie Ceasing Richard UNINCORPORATED TRADER TRADING LOSSES 15 Warren Street Newbold Sigmund Alan Waters UNINCORPORATED TRADER OTHER MATTERS 19 Kruger, Brand and Shepstone Fox, Griffiths and Hall CAPITAL GAINS BASIC PRINCIPLES 21 Abbot Ltd and James DeVry/Becker Educational Development Corp. All rights reserved. (iii)

6 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK Question Page Answer Marks Date worked CAPITAL GAINS CHATTELS, LAND AND BUILDINGS 22 Ian and Katrina Pearl Robin and Terence CAPITAL GAINS SHARES 25 Ma Ltd, Olive and George CAPITAL GAINS BUSINESS ASSET RELIEFS 26 Nixon and Drive Ltd Christine Philips CORPORATION TAX COMPUTATION 28 Springvale Ltd Nuts and Bolts Ltd Chinny Ltd Ring Ltd CORPORATION TAX LOSS RELIEFS 32 Jorrocks Ltd Flounder Ltd CORPORATION TAX GROUPS OF COMPANIES 34 Sand Ltd Lemond Ltd and Subsidiaries A Ltd and Subsidiaries INHERITANCE TAX 37 Graham NATIONAL INSURANCE CONTRIBUTIONS 38 Mr Forest TAX ADMINISTRATION 39 Adam and Mr Brown and Challis Ltd PAYE VALUE ADDED TAX 41 Mr Edwards Barrett Ltd Fred Sweet Subject survey VAT (iv) 2014 DeVry/Becker Educational Development Corp. All rights reserved.

7 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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, Higher rate 32, , Additional rate 150,001 and over 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 ,440 Born between 6 April 1938 and 5 April ,500 Born before 6 April ,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, DeVry/Becker Educational Development Corp. All rights reserved. (v)

8 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK Car benefit percentage The relevant base level of CO 2 emissions is 95 grams per kilometre. The percentage rates applying to petrol cars with CO 2 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. Up to 10,000 miles Over 10,000 miles Authorised mileage allowances: cars Capital allowances: rate of allowance % Plant and machinery Main pool 18 Special rate pool 8 Motor cars New cars with CO 2 emissions up to 95 grams per kilometre 100 CO 2 emissions between 96 and 130 grams per kilometre 18 CO 2 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 45p 25p Unless otherewise restricted, reliefs are capped at the higher of 50,000 or 25% of income. (vi) 2014 DeVry/Becker Educational Development Corp. All rights reserved.

9 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) Commentary Corporation tax Financial year Small profits rate 20% 20% 20% Main rate 26% 24% 23% Lower limit 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% 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% 2014 DeVry/Becker Educational Development Corp. All rights reserved. (vii)

10 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK National insurance contributions (Not contracted out rates) % Class 1 Employee 1 to 7,755 per year Nil 7,756 to 41,450 per year ,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 per week Small earnings exemption 5,725 Class 4 1 to 7,755 per year Nil 7,756 to 41,450 per year ,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% (viii) 2014 DeVry/Becker Educational Development Corp. All rights reserved.

11 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) Question 1 TAX STATUS (a) (b) (c) 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) 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) A distinction is drawn for UK tax purposes between the terms tax avoidance and tax evasion. Required: Explain the meaning of these terms. Question 2 MICHAEL (4 marks) (22 marks) 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 (4) He received bank deposit interest of 632 in the year to 5 April (5) He received dividends of 1,800 in the year to 5 April (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) 2014 DeVry/Becker Educational Development Corp. All rights reserved. 1

12 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK 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: Required: Adjusted trading profits 151,000 Dividends received 2,943 Qualifying loan interest paid 6,000 Personal pension contributions paid 40,000 Calculate the income tax liability of Long Life for 2013/14. Question 4 THE PIKE FAMILY (a) (b) (15 marks) 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) 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) DeVry/Becker Educational Development Corp. All rights reserved.

13 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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 New lease monthly rental from 1 October Property B (qualifying as furnished holiday accommodation) Weekly rental of 800 Expenses: Decoration and repairs July ,800 January ,100 Letting agents fees September 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) (b) State the conditions that must be met to allow Brigid to treat Property B as furnished holiday accommodation. (3 marks) 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) 2014 DeVry/Becker Educational Development Corp. All rights reserved. 3

14 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK 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 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. CO 2 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 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: Required: UK dividends received 4,329 UK Bank deposit account interest received 104 Calculate the income tax payable by Mr Endicott for 2013/14. (15 marks) DeVry/Becker Educational Development Corp. All rights reserved.

15 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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: 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 CO 2 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 Interest paid in 2013/14 was 500. Required: Calculate Raider s income tax liability for 2013/14. (20 marks) 2014 DeVry/Becker Educational Development Corp. All rights reserved. 5

16 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK Question 8 MAX Max started trading on 1 January 2010 and ceased trading on 31 December Assuming that accounts were prepared as follows: (i) (ii) (iii) (iv) Required: To 31 December 2010 and thereafter to 31 December annually Adjusted profits Year ended ,000 Year ended ,000 Year ended ,000 Year ended ,000 To 31 March 2011 and thereafter to 31 March annually Adjusted profits 15 months to ,000 Year ended ,000 Year ended ,000 9 months to ,000 To 30 September 2010 and thereafter to 30 September annually Adjusted profits 9 months to ,000 Year ended ,000 Year ended ,000 Year ended ,000 3 months to ,000 To 30 April 2011 and thereafter to 30 April annually Adjusted profits 16 months to ,000 Year ended ,000 Year ended ,000 8 months to ,000 Calculate the trading income assessments for all tax years concerned. (20 marks) DeVry/Becker Educational Development Corp. All rights reserved.

17 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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: 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 The following information is given: Profit and loss account Gross profit 68,209 Bank deposit interest 160 Dividends (net) 140 (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) 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 68,509 2,620 Profit and loss account 6,030 6, DeVry/Becker Educational Development Corp. All rights reserved. 7

18 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK (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 (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 (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 (10 marks) (b) Calculate the trading income assessments for 2012/13 and 2013/14. (3 marks) Ignore capital allowances. (13 marks) DeVry/Becker Educational Development Corp. All rights reserved.

19 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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: Income: Apartment Offices Rent receivable per month: Apartment (let throughout the year) 500 Offices: Old lease to 30 June ,200 New lease from 1 January ,000 Lease premium on new 7 year lease received 28 December ,000 Expenses: Letting agency fees paid 14 January ,000 Decoration and repairs (paid 6 September 2013) including 2,000 for replacing a wooden floor with a tiled concrete floor 4,300 Insurance Rose inherited a country cottage from her brother who died in March She decided to let the property as furnished holiday accommodation and carried out a major refurbishment of the property during April and May The property was advertised as being available for holiday lets from 6 June 2013 and actually let for 30 weeks up to 5 April Details of the income and expenditures for the period 6 June 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, DeVry/Becker Educational Development Corp. All rights reserved. 9

20 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK (b) Rose claimed maximum available capital allowances. She and Michael lived in the cottage for two months during the period 6 June April 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) 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) Question 11 JULIAN (35 marks) 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 ,000 Year ended 5 April ,000 Year ended 5 April ,000 The following assets were purchased and sold during the three years ending 5 April 2016: Date Cost Sale proceeds Year ended 5 April April 2013 Heating and electrical systems for the business premises 10, April 2013 Thermal insulation for the premises 20, April 2013 Office furnishings 28, April 2013 Equipment for workshop 36, April 2013 Delivery van 16,000 2 May 2013 Car (for use by Julian) with CO 2 emissions of 180 grams/km 14, DeVry/Becker Educational Development Corp. All rights reserved.

21 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) Year ended 5 April 2015: 11 June 2014 Car (for use by office manager) with CO 2 emissions of 95 grams/km 13, January 2015 Computers 20,000 Year ended 5 April 2016: 31 July 2015 Sold car purchased on 2 May ,000 1 August 2015 New car (for use by Julian) with CO 2 emissions of 120 grams/km 22, 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 (14 marks) (b) Calculate the final adjusted profits for the three years ending 5 April (3 marks) (c) Calculate Julian s assessable trading incomes for 2013/14, 2014/15 and 2015/16. (3 marks) Assume 2013/14 rates and allowances apply throughout. Question 12 ROBERTA (20 marks) Roberta commenced to trade as a dress and fabric manufacturer in London on 1 July 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, July Car (for use by employee) with CO 2 emissions of 130 grams/km 15, September Car (for use by Roberta) with CO 2 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, 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 DeVry/Becker Educational Development Corp. All rights reserved. 11

22 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK 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: Required: Period to 31 December ,000 Year ended 31 December ,000 Year ended 31 December ,000 (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) Assume 2013/14 rates and allowances apply throughout. Question 13 CHARLIE (20 marks) 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 Trading profits for the last three periods of account were: Year ended 30 April ,000 Year ended 30 April ,000 Period from 1 May 2014 to 30 June ,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 CO 2 emissions of 110 grams/km (used 60% privately by Charlie) 16, DeVry/Becker Educational Development Corp. All rights reserved.

23 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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, October 2013 Sold office equipment (original cost 19,000) 5,400 Period ended 30 June 2014: 1 May 2014 Van 17, 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) 2014 DeVry/Becker Educational Development Corp. All rights reserved. 13

24 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK 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: 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, ,821 Profit and loss account Gross profit 299,571 Bank deposit interest 250 Dividends received 2,000 Repairs include 300 for the purchase of a new cash register on 1 April ,821 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: Amounts written off Loan to former employee 70 Trade debts Balance 31 March 2014 Impairment allowance for trade debts Bad and doubtful debts account Balance 1 April 2013 Impairment allowance for trade debts 357 Profit and loss account DeVry/Becker Educational Development Corp. All rights reserved.

25 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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 (CO 2 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, April 2013 Sold a lorry for 10,000 which had been acquired for 40,000; Purchased a delivery van for 24, October 2013 Sold Richard s car for 9, October 2013 Purchased two new cars: one for 25,000 for use by Richard (CO 2 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 (CO 2 emissions of 90 grams/km). 28 October 2013 Bought new computer equipment for the offices and factory for 22, DeVry/Becker Educational Development Corp. All rights reserved. 15

26 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK Required: (a) Calculate the adjusted trading profit before capital allowances for the year ended 31 March (10 marks) (b) Calculate the capital allowances for plant and machinery for the year ended 31 March (12 marks) (c) Calculate Richard s trading income assessment for 2013/14. (3 marks) Question 15 WARREN STREET (25 marks) 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 ,000 5,000 Year ended 30 June 2012 (30,000) 3,800 Year ended 30 June ,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/ / /14 Dividends (including tax credit) 825 1,500 1,600 Bank deposit interest (including tax credit) 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) (c) (d) (e) Explain the reliefs available for the relief of the trading loss. 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. Analyse whether not claiming the capital allowances of the loss making accounting period is worthwhile. State by what dates any claims you consider appropriate should be made. Use 2013/14 rates and allowances throughout. (20 marks) DeVry/Becker Educational Development Corp. All rights reserved.

27 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) Question 16 NEWBOLD Newbold, a single man, has the following income, gains and losses: 2012/ /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 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 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 ,720 Year ended 30 June ,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, /10 10,000 3, /11 11,200 3, /12 3, 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) (b) Calculate the trading income assessments and trading losses for 2011/12, 2012/13 and 2013/14. 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) 2014 DeVry/Becker Educational Development Corp. All rights reserved. 17

28 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK 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 Trading income assessments for the three tax years ending with 2011/12 were: 2009/10 (based on the year ended 30 September 2009) 58, /11 (based on the year ended 30 September 2010) 40, /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. Question 19 KRUGER, BRAND AND SHEPSTONE (15 marks) 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: Required: (a) Period ended 31 December ,000 Year ended 31 December ,200 account. Calculate the shares of profits attributable to each partner for the two periods of DeVry/Becker Educational Development Corp. All rights reserved.

29 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) (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 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: Required: (a) (b) Adjusted Capital trading profits allowances before capital claimed allowances 13 months to 30 June ,950 11, months ended 30 June ,800 9, months ended 30 June ,000 9, months ended 30 June ,000 10, months ended 30 June ,000 15,000 6 months ended 31 December ,000 12,000 Show the division of profits for all periods of account. Calculate the trading income assessments for each partner for all relevant years. Question 21 ABBOT LTD (a) (20 marks) 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 July 2013: Shares in another quoted company sold for 40,000. These cost 45,000 on 19 October October 2013: An apartment held for rental purposes. It was sold for 70,000 having cost 68,000 on 14 February Abbot has unrelieved capital losses brought forward at 1 January 2013 of 10,000. Increases in retail price index: (January 1998 May 2013) (February 2009 October 2013) DeVry/Becker Educational Development Corp. All rights reserved. 19

30 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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 DeVry/Becker Educational Development Corp. All rights reserved. 1001

31 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK (b) HMRC UK resident company (c) 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. 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. nondisclosure 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 ( ) 700 Bank deposit interest ( ) Dividend income (1, ) 2,000 3,490 Total income = Net income 106,090 Less: Personal allowance (W1) (6,883) Taxable income 99, DeVry/Becker Educational Development Corp. All rights reserved.

32 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) 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, ,402 EBHR ,985 higher rate 62, ,093 95,717 Savings income higher rate 1, ,207 Dividends higher rate 2, ,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 ( / 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, ,000) = 6,883 * 100,000 + (2 9,440) = 118,880 = adjusted net income after which all personal allowance will be lost DeVry/Becker Educational Development Corp. All rights reserved. 1003

33 TAXATION (UNITED KINGDOM) (F6) STUDY QUESTION BANK (2) Extended basic and higher rate relief (EBHR) Answer 3 LONG LIFE 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 Income tax computation 2013/14 Earned income Trading profits 151,000 Unearned income Dividends 2, ,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, ,830 Tax (W2) % Other income Basic rate 32, ,402 EBHR 50, ,000 82,010 Higher rate 53, , ,560 Dividends Higher rate 3, , ,830 Income tax liability 38, DeVry/Becker Educational Development Corp. All rights reserved.

34 STUDY QUESTION BANK TAXATION (UNITED KINGDOM) (F6) WORKINGS (1) Personal allowance Net income 148,270 Less: Gross personal pension contributions (40, / 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 ( / 80 ) 1,000 Dividends (1, / 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, ,990 4, DeVry/Becker Educational Development Corp. All rights reserved. 1005