ACCA P6 UK

Advanced Taxation Mock Exam Thursday 15th February, 2018

Please attempt this mock exam under exam conditions in 3

hours and 15 minutes and send scanned answers to

admin@accountancytube.com by deadline which is 24

hours after you receive this mock. You will receive your

results within a week’s time.

Instructor Name:

Faisal Farooq

B.Sc., ACCA, FPA

Email: faisal@accountancytube.com

mailto:faisal@accountancytube.com

SUPPLEMENTARY INSTRUCTIONS

1. You should assume that the tax rates and allowances for the tax year 2016/17 and for the financial

year to 31 March 2017 will continue to apply for the foreseeable future unless you are instructed

otherwise.

2. Calculations and workings need only be made to the nearest £.

3. All apportionments should be made to the nearest month.

4. All workings should be shown.

TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used in answering the questions.

Income tax

Normal rates Dividend rates

Basic rate £1 – £32,000 20% 7·5%

Higher rate £32,001 to £150,000 40% 32·5%

Additional rate £150,001 and over 45% 38·1%

Savings income nil rate band – Basic rate taxpayers £1,000

– Higher rate taxpayers £500

Dividend nil rate band £5,000

A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.

Personal allowance

Personal allowance £11,000

Transferable amount £1,100

Income limit £100,000

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

Remittance basis charge

UK resident for

Seven out of the last nine years £30,000

12 out of the last 14 years £60,000

17 out of the last 20 years £90,000

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.

Car benefit percentage

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

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

50 grams per kilometre or less 7%

51 grams to 75 grams per kilometer 11%

76 grams to 94 grams per kilometre 15%

95 grams per kilometre 16%

Car fuel benefit

The base figure for calculating the car fuel benefit is £22,200.

Individual savings accounts

(ISAs) The overall investment limit is £15,240.

Pension scheme limits

Annual allowance – 2014/15 to 2016/17 £40,000

– 2013/14 £50,000

Minimum allowance £10,000

Threshold income limit £110,000

Income limit £150,000

Lifetime allowance £1,000,000

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: rates of allowance

Plant and machinery

Main pool 18%

Special rate pool 8%

Motor cars

New cars with CO2 emissions up to 75 grams per kilometre 100%

CO2 emissions between 76 and 130 grams per kilometre 18%

CO2 emissions over 130 grams per kilometre 8%

Annual investment allowance

Rate of allowance 100%

Expenditure limit £200,000

Cap on income tax reliefs

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

Corporation tax

Rate of tax 20%

Profit threshold £1,500,000

Patent box – deduction from net patent profit

Net patent profit x ((main rate – 10%)/main rate)

Value added tax (VAT)

Standard rate 20%

Registration limit £83,000

Deregistration limit £81,000

Inheritance tax: nil rate bands and tax rates

6 April 2016 to 5 April 2017 325,000

6 April 2015 to 5 April 2016 325,000

6 April 2014 to 5 April 2015 325,000

6 April 2013 to 5 April 2014 325,000

6 April 2012 to 5 April 2013 325,000

6 April 2011 to 5 April 2012 325,000

6 April 2010 to 5 April 2011 325,000

6 April 2009 to 5 April 2010 325,000

6 April 2008 to 5 April 2009 312,000

6 April 2007 to 5 April 2008 300,000

6 April 2006 to 5 April 2007 285,000

6 April 2005 to 5 April 2006 275,000

6 April 2004 to 5 April 2005 263,000

6 April 2003 to 5 April 2004 255,000

6 April 2002 to 5 April 2003 250,000

Rate of tax on excess over nil rate band –Lifetime rate 20%

– Death rate 40%

Inheritance tax: taper relief

Years before death Percentage reduction

More than 3 but less than 4 years 20%

More than 4 but less than 5 years 40%

More than 5 but less than 6 years 60%

More than 6 but less than 7 years 80%

Capital Gains Tax

Normal rates Residential property Lower rate 10%

18% Higher rate 20% 28%

Annual exempt amount £11,100

Entrepreneurs’ relief – Lifetime limit £10,000,000

– Rate of tax 10%

National insurance contributions

Class 1 Employee £1 – £8,060 per year Nil

£8,061 – £43,000 per year 12%

£43,001 and above per year 12%

Class 1 Employer £1 – £8,112 per year Nil

£8,113 and above per year 13·8%

Employment allowance £3,000

Class 1A 13·8%

Class 2 £2·80 per week

Small profits threshold £5,965

Class 4 £1 – £8,060 per year Nil

£8,061 – £43,000 per year 9%

£43,001 and above per year 2%

Rates of interest (assumed)

Official rate of interest 3%

Rate of interest on underpaid tax 3%

Rate of interest on overpaid tax 0·5%

Stamp duty land tax

Non-residential properties

£150,000 or less 0%

£150,001 – £250,000 2%

£250,001 and above 5%

Residential properties (note)

£125,000 or less 0%

£125,001 – £250,000 2%

£250,001 – £925,000 5%

£925,001 – £1,500,000 10%

£1,500,001 and above 12%

Note: These rates are increased by 3% in certain circumstances including the purchase of second homes

and buy-to-let properties.

Stamp duty

Shares 0·5%

Section A – BOTH questions are compulsory and MUST be attempted

.1 Your manager has sent you an email with two attachments in respect of a new client called Calisia. The first attachment is an extract from a letter from Calisia, in which she has asked the firm to consider how she can increase the income of her daughter, Farfisa, and to review her own inheritance tax position. The second attachment is a schedule setting out what your manager wants you to do in order to prepare for a meeting with Calisia. Attachment 1 – Extract from letter from Calisia Farfisa – Additional income

My daughter, Farfisa, will leave home and start her first job on 1 October 2017 in London. She will be working for Jelmini Ltd and will be paid a salary of £27,500 (before deduction of income tax under PAYE) per year. Jelmini Ltd will also provide Farfisa with an interest free loan of £2,700 in order for her to purchase suitable business clothing. The loan is to be repaid on 30 September 2019. We have estimated that Farfisa's expenses will be £2,500 per month (of which £550 will be rent)

so her salary after tax will be insufficient. At present Farfisa has no other income so I have

identified three possible transfers of capital that I could make to her in order to generate the

income she requires.

Gift of shares quoted on UK stock exchange

I would give Farfisa sufficient quoted shares to generate the additional income she requires. On

average the quoted shares would generate dividends equal to 4% of their current market value.

It can be assumed that, on average, the capital gain arising on the quoted shares will equal a

quarter of their market value. I do not hold more than 1% of the share capital of any quoted

company.

Sale of investment property followed by gift of proceeds

I own a two-bedroom investment property situated in London. I bought it in 2005 for £90,000 and

it is now worth £270,000. I have always rented it out to tourists such that it qualifies as

commercially let furnished holiday accommodation.

I would give Farfisa the net proceeds of the sale after paying any tax and other costs. Farfisa

would place the cash on bank deposit; I estimate that the deposit would earn interest at 3%

(gross). Farfisa would only spend the interest, not the capital, so I would then give Farfisa

quoted shares to generate the remainder of the additional income she requires as in (i) above.

Gift of investment property

Under this option, instead of selling the property, I would give it to Farfisa who would then

receive the annual rental income, after all allowable expenses, of £5,100. Again, I would then

give Farfisa quoted shares to generate the remainder of the additional income she requires as in

(i) above.

Calisia – Inheritance tax

I would like to discuss my inheritance tax position with you so that I can understand the amount

of tax that would be payable if I were to die now. I set out below the assets I own together with

their current market values. I have not included my home as I assume that it is not subject to

inheritance tax. I have never made any lifetime gifts and neither did my husband before he died.

I intend to leave £150,000 to the Fairness for All political party when I die and the rest of my

estate to Farfisa.

Investment property in London 260,000

Investment property in Sakura 380,000

Share (25%) in the ‘Therson Partnership’ 700,000

Building used by the ‘Therson Partnership’ 440,000

Shares quoted on the UK stock exchange 1,300,000

Art and antiques 200,000

Motor cars 100,000

Cash and other possessions 320,000

Attachment 2 – Schedule from your manager

Farfisa – Additional income

During the meeting I only want to focus on any immediate tax liabilities as opposed to liabilities that may

or may not arise in the future.

Prepare notes, with supporting calculations, showing Calisia's capital gains tax liability in respect of:

–Each of the three possibilities identified by her.

–A fourth possibility (which I expect to be more tax efficient) whereby Calisia gifts the property to Farfisa

who then lives in it. Any shortfall in income could then be satisfied by renting out the second

bedroom. You should include a calculation of the minimum monthly rent that would need to be

charged in order to provide sufficient income for Farfisa.

Start by calculating the excess of Farfisa's budgeted expenditure over her salary after all taxes for a 12-

month period. This will enable you to determine the value of shares she will need to be given under

each of the possibilities in order to provide her with the income she needs. Remember to take into

account any income tax due on the income received by Farfisa when calculating the income she will

retain in respect of the assets transferred.

Conclude with a summary, showing the capital gains tax payable in respect of each of the four alternatives.

Please include a note of the stamp duty or stamp duty land tax implications of each proposal.

You should assume the following:

–A sale or gift of the investment property will result in legal fees of £6,000. –There will be no disposal costs in relation to any gift of shares. –All claims and elections necessary to reduce immediate tax liabilities will be made.

Further information

Calisia and Farfisa are resident in the UK.

Calisia is a higher rate taxpayer who makes sufficient capital gains every year to utilise her annual

exempt amount.

Calisia has not made a claim for entrepreneurs' relief in the past. Calisia – Inheritance tax

Calisia is domiciled in the UK and has not made any lifetime gifts. I want you to prepare a comprehensive

explanation of how Calisia's inheritance tax liability would be calculated if she were to die today. Please

try to identify all of the issues that are relevant to Calisia's situation together with any matters that need to

be confirmed with her in order for reliefs and/or exemptions to be available. I do not want you to perform

any calculations as we do not have sufficient information at present.

Further information

Calisia's husband died in 2007. He had not made any lifetime gifts and he left the whole of his

estate, consisting principally of quoted shares and UK property, to Calisia.

Required Farfisa – Additional income Prepare the notes and supporting calculations as set out in the schedule from your manager. (21 marks) Calisia – Inheritance tax Prepare the explanation as set out in the schedule from your manager. (10 marks) Professional marks will be awarded in this question for the effectiveness with which the information is communicated and the extent to which the calculations are approached in a logical manner. (4 marks) (Total = 35 marks) You should assume that the tax rates and allowances of the tax year 2016/17 will continue to apply for the foreseeable future.

.2

Section B – TWO questions ONLY to be attempted

.3 Cuthbert requires advice on the tax implications of the payment of capital gains tax by instalments and an error

he has made in an income tax return. He has also requested calculations in respect of the inheritance tax

payable on the death of his uncle, Pugh. Cuthbert:

• Is resident and domiciled in the UK.• Intends to give a building to his brother on 1 March 2018.• Made an error in his income tax return for the tax year 2015/16.

Cuthbert – proposed gift of a building to his brother on 1 March 2018:

• The building is currently let to long-term tenants and has a market value of £460,000.Cuthbert – error in his income tax return for the tax year 2015/16:

• HM Revenue and Customs have written to Cuthbert in respect of his income tax return.• HM Revenue and Customs are claiming that Cuthbert has under-declared his UK property income.

Pugh – valuation of assets owned at death on 1 February 2016:

£

Home in the UK 720,000

Vintage motor cars located in the country of Camberia 490,000

Quoted shares (holdings of less than 1%) registered in Camberia 330,000

Cash held in bank accounts in the UK 45,000 Pugh – UK inheritance tax liability:

• Was calculated on the basis that Pugh was domiciled in the country of Camberia and that he had made

no lifetime gifts

• Was paid on time Pugh – information discovered after the payment of the UK inheritance tax:

• Pugh had been domiciled in the UK since 1 January 2007.• Pugh had made a gift of UK quoted shares (all holdings of less than 1%) to a trust on 10 March 2009.• The quoted shares were worth £322,400 and Pugh paid the UK inheritance tax due.

The system of inheritance tax in the country of Camberia: There is no nil rate band and the rate of inheritance tax is 25%.Inheritance tax is only charged on the value of land and buildings and quoted shares owned at the time of death and

located in Camberia.There is no double tax treaty between the UK and Camberia. Required Explain whether or not the capital gains tax due on the proposed gift of the building could be paid by

instalments and the matters that Cuthbert would need to be aware of in respect of this method of payment.

(6 marks) Explain how any penalty would be calculated if it is determined that Cuthbert made a careless error when completing his 2015/16 tax return. (4 marks) Calculate the UK inheritance tax liability in respect of Pugh's estate following the discovery of the additional information, together with the interest on overdue tax that will be payable if the inheritance tax is paid on 1 January 2018. (10 marks) (Total = 20 marks)

.4

Banger Ltd and Candle Ltd are two unrelated companies.

The management of Banger Ltd requires advice on the implications for one of the company's shareholders of the use of a

motor car owned by the company and the proposed liquidation of the company.

The management of Candle Ltd has asked for a calculation of the company's corporation tax liability. Candle Ltd

is an investment holding company. Banger Ltd:

• Banger Ltd is a UK resident trading company.• Sixty-five per cent of the company's share capital is owned by its managing director, Katherine.• The remaining shares are owned by a number of individuals who do not work for the company.• None of the shares has been acquired under the Enterprise Management Investment scheme.

Motor car provided to minority shareholder throughout the year ended 31 March 2017:

• Banger Ltd paid £17,400 for the motor car, which had a list price when new of £22,900.

• The car has a petrol engine and has CO2 emissions of 107 grams per kilometre.Liquidation of Banger Ltd: It is intended that a liquidator will be appointed on 31 January 2018 to wind up the company.Distributions of company assets to shareholders being considered by Banger Ltd: A total distribution of £280,000 in cash to the shareholders prior to 31 January 2018The distribution of a commercial building with a market value of £720,000 to Katherine after 31 January 2018

Required Explain, with supporting calculations, the amount of the minority shareholder's taxable income in respect of the use of the motor car. (3 marks) Explain in detail the tax implications for Banger Ltd, the minority shareholders and Katherine of the distributions that the company is considering. (7 marks) Candle Ltd:

Is a UK resident investment holding company

The results of Candle Ltd for the year ended 31 March 2017:

£

Interest receivable 41,100

Chargeable gains realised in the country of Sisaria, net of 18% Sisarian tax 15,580

Chargeable gains realised in the UK, excluding the sale of shares in Rockette plc 83,700

Fees charged by a financial institution in respect of an issue of loan stock 14,000

Interest payable on loan stock 52,900

General expenses of management 38,300 Sale of shares in Rockette plc on 1 January 2017: Candle Ltd purchased a 2.2% holding of the shares in Rockette plc for £31,400 in 2003.Piro plc acquired 100% of the ordinary share capital of Rockette plc on 1 January 2017.Candle Ltd received shares in Piro plc worth £147,100 and cash of £7,200 in exchange for its shares in Rockette plc.Piro plc's acquisition of Rockette plc was a commercial transaction and was not part of a scheme to avoid tax.The relevant indexation factor is 0.477. Required Calculate the corporation tax liability of Candle Ltd for the year ended 31 March 2017, giving explanations of

your treatment of the disposal of the shares in Rockette plc. You should assume that Candle Ltd will claim all

reliefs available to reduce its tax liability and you should state any further assumptions you consider necessary

(10 marks)

(Total = 20 marks)

.5

Nocturne Ltd, a partially exempt company for the purposes of value added tax (VAT), requires advice on the

corporation tax implications of providing an asset to one of its shareholders; the income tax implications for

another shareholder of making a loan to the company; and simplifying the way in which it accounts for VAT. Nocturne Ltd: Is a UK resident trading company.Prepares accounts to 31 March annually.Has four shareholders, each of whom owns 25% of the company's ordinary share capital.Owns a laptop computer, which it purchased in October 2014 for £1,200, and which has a current market value of

£150.Has purchased no other plant and machinery for several years and the tax written down value of its main pool at 31

March 2017 was £nil. Provision of a laptop computer to one of Nocturne Ltd's shareholders: Nocturne Ltd is considering two alternative ways of providing a laptop computer in the year ending 31 March 2018

for the personal use of one of its shareholders, Jed.Jed is neither a director nor an employee of Nocturne Ltd.Option 1: Nocturne Ltd will buy a new laptop computer for £1,800 and give it immediately to Jed.Option 2: Nocturne Ltd will gift its existing laptop to Jed and will purchase a replacement for use in the company for

£1,800. Loan from Siglio: Siglio will loan £60,000 to Nocturne Ltd on 1 October 2017 to facilitate the purchase of new equipment.Siglio is both a shareholder of Nocturne Ltd and the company's managing director.Nocturne Ltd will pay interest at a commercial rate on the loan from Siglio.Siglio will borrow the full amount of the loan from his bank on normal commercial terms.

VAT – partial exemption:

Nocturne Ltd is partially exempt for the purposes of VAT.Nocturne Ltd's turnover for the year ended 31 March 2017 was £240,000 (VAT exclusive).

Nocturne Ltd's turnover for the year as a whole for VAT purposes comprised 86% taxable supplies and 14%

exempt supplies.The input VAT suffered by Nocturne Ltd on expenditure during the year ended 31 March 2017 was:

£

Wholly attributable to taxable supplies 7,920

Wholly attributable to exempt supplies 1,062

Unattributable 4,150 Nocturne Ltd expects its turnover and expenditure figures to increase by approximately 25% next year.Siglio has heard about an annual test for computing the amount of recoverable input VAT during an

accounting period and would like more information about this. Required Explain, with the aid of supporting calculations, which of the two proposed methods of providing the laptop

computer to Jed would result in the lower after-tax cost for Nocturne Ltd.

Note. You should ignore value added tax (VAT) for part (a) of this question. (7 marks)

(b) Explain the income tax implications for Siglio of providing the loan to Nocturne Ltd.

(4 marks)

Page | 1

(i)Determine, by reference to the de minimis tests 1 and 2, Nocturne Ltd's recoverable input VAT for the year ended 31 March 2017. (4marks) Advise Siglio of Nocturne Ltd's eligibility for the annual test for computing the amount of recoverable input

VAT for the year ending 31 March 2018 and the potential benefits to be gained from its use.

(5 marks)

(Total = 20 marks)