updated answers dec08-jun10

1

ACCA

ACCA

Paper F6

Taxation

The Last Four Exam Papers

December 2008 – June 2010

Answers – Finance Act 2009

2

© The Accountancy College Ltd June 2010

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of The Accountancy College Ltd.

3

ACCA F6

December 2008 Exam

answers

4

Answer 1 - Peter Chic

(a) Income tax payable 2009/10

Non-

savings

Savings

income

Dividends

income

Total Tax

credits

PAYE

£ £ £ £ £

Employment

income (W1)

80,905

15,558

(W1)

[8]

Property business

(W2)

3,660

(W2)

[6]

Interest income

(1,760 × 100/80)

2,200

440

[1]

Dividend income

(720 × 100/90)

800

80

[1]

Premium bond

prize is tax free

income

Nil ______

Nil _____

Nil ___

______

[1]

Total income 84,565 2,200 800 87,565

PA (6,475) ______

_____

___

(6,475) ______

[½]

Taxable income 78,090 ______

2,200 _____

800 ___

81,090 ______

Income tax £ Extend the basic rate band by

gross gift aid donations

Non-savings income

40,325 × 20% 8,065 37,400 + 2,915 =

40,325

37,765 × 40% ______

15,106 (2,340 × 100/80) [1]

78,090 ______

Savings income

2,200 × 40% 880

Dividend income

800 × 32.5% ______

260

81,090 ______

______ [2]

Income tax liability 24,311

Less:

Income tax deducted at source

- Notional tax credits on

dividend

(80) [½]

- Tax credits on interest (440) [½]

- PAYE (15,558) ______

[½]

Income tax payable 8,233 ______ 21 marks

5

(b) National insurance contributions 2009/10

Class 1 Primary NIC for 2009/10 paid by Peter:

£

Salary 45,600

Bonus (1) 4,300

Bonus (2) 3,600 ______

53,500 [1] ______

11% × (43,875 - 5,715) = 4,198

1% × (53,500 - 43,875) = 96 ______

4,294 [2] ______

Class 1 Secondary NIC for 2009/10 paid by

Haute-Couture Ltd:

12.8% × (53,500 - 5,715) = 6,116 [1]

Class 1A NIC for 2009/10 paid by Haute-Couture Ltd:

12.8% × (80,905 - 53,500) = 3,508 [1] _______

4 marks _______

W1 Employment income

2009/10 £

Salary 45,600 [½]

Bonus (1) 4,300 [½]

Bonus (2) 3,600 [½]

Benefits:

- Car benefit

%: 18% + (230 - 135) ÷ 5 = 37% 7,175 [1½]

35% × (22,500 - 2,000)

- Fuel benefit

35% × 16,900 5,915 [1]

- Accommodation benefit

Annual value 9,100 [½]

Additional charge (Note 1)

4.75% × (160,000 + 13,000 - 75,000) 4,655 [1½] ______

13,755 13,755 ______

- Use benefit for one mobile phone

20% × 250 (Note 2) 50 [1]

- Health club membership 510 [½]

- Overnight personal expenses 0 [½]

(if paid by an employer is a tax free

benefit up to £10 per night for overnight stays

overseas). ______

80,905 [½] ______ _______

6

8 marks _______

Tutorial note:

(1) When computing the accommodation benefit, it will be

necessary to calculate the additional charge as:

(i) the property is owned by the employer.

(ii) the property cost the employer > £75,000.

(2) If the employer provides the one mobile phone for personal

use, this is defined as a tax free benefit. In Peter's case the

provision of the second mobile phone is a taxable benefit

which is called a use benefit.

(W2) Property business profits

2009/10

Property Property

(1) (2)

(furnished) (unfurnished)

£ £

Rent receivable in 2009/10

Property (1)

6.4.09 - 31.8.09 (5m)

5 × 500 2,500 [1]

Property (2)

1.8.09 - 5.4.10 (8m)

8 × 820 6,560 [1]

Allowable expenses

Impaired debts 500 × 2 (1,000) [½]

Repairs to roof (600) [½]

Advertising (875) [½]

Interest payable on loan to buy property (1,800) [½]

Wear and tear of furniture allowance

10% × (2,500 - 1,000) (150) [1] _____ _____

750 3,885 _____ _____

Total (750 + 3,885) 4,635

Less insurance payable

660 × 3/12 + 1,080 × 9/12 (975) [1] _____

Property business profits 3,660 _____ _______

6 marks _______

7

Answer 2 - Jogger Ltd

(a) (i) Tax adjusted trading loss for the year ended 31 March

2010

- +

Loss per question 56,400 [½]

Depreciation 12,340 [½]

Less:

Capital allowances

Plant and machinery (W1) 4,180 [½]

Industrial building (W2) 4,400 [½] ______ _____

64,980 12,340 ______ ______

Tax adjusted trading loss

(64,980 - 12,340) £(52,640)

(W1) Capital allowances on plant and machinery

y/e 31.3.2010

General Expensive Expensive Special Capital pool car car rate allowances

(1) (2) pool £ £ £ £ £

TWDV b/f 21,600 8,800 16,000 - [½]

Add:

High CO2 car

Cost 14,800 [½]

Disposal

Lorry (8,600) [½]

Expensive car (1) (11,700) [½] ______ ______ ______ ______

13,000 16,000 14,800

Balancing

charge (2,900) (2,900) [½]

WDA

20% × 13,000 (2,600) 2,600 [½]

20% × 16,000

= 3,200 [½]

Restricted to £3,000 (3,000) 3,000 [½]

10% × 14,800 (1,480) 1,480 ______ ______ ______ ______

TWDV c/f 10,400 Nil 13,000 13,320 ______ ______ ______ ______ ______

Total capital allowances 4,180 ______

6 c/f

8

6 b/f

(W2) Capital allowances for the industrial building

y/e 31.3.2010

WDA = 2% × Qualifying cost

= 2% × 220,000 (320,000 – 100,000) [1]

= £4,400 __

7 __

(ii) Corporation tax liability

Year ended 31 March 2010

£

Property business profits (W3) 126,000 (W3) [2]

Bank interest 8,460 [½]

Loan interest 24,600 [½]

Chargeable gains 98,300 [½] _______

Total profits 257,360

S393A current (52,640) [1] _______

204,720

Add:

FII (Note 1) (45,000 × 100/90) 50,000 [1] _______

"Profits" 254,720 _______

12m

Upper limit ÷ 2 750,000 [1]

Lower limit ÷ 2 150,000

Medium

company

£

Corporation tax liability

FY 09

204,720 × 28% = 57,322 [1]

Less:

7/400 × (750,000 - 254,720) × 204,720 _______

254,720 (6,966) [1] ______

50,356 __

8 __

9

Note 1

The overseas dividend received is not treated as franked

investment income as Jogger Ltd is associated with Runner

Inc. The rules state that dividends received from associated

companies is called group income and not franked

investment income (FII).

(W3) Property business profits

y/e 31.3.2010 £

Rent receivable 44,000 [½]

Add: Premium received during the CAP 100,000 [½]

Less: Capital element

2% × (10 - 1) × 100,000 (18,000) [1] _______

Property business profits 126,000 _______ __

2 __

(iii) (1) Jogger Ltd's self-assessment tax return for the year

ended 31 March 2010 must be submitted by 31 March

2011. [1]

(2) If the company submits its self-assessment tax return

eight months late, then there will be an automatic fixed

penalty of £200, since the return is more than three

months late. [1]

(3) There will also be an additional corporation tax related

penalty of £5,036 (50,356 × 10%) being 10% of the

tax unpaid, since the self-assessment tax return is

more than six months late. [2] __

4 __

(b) (i) (1) The late submission of the VAT return for the quarter

ended 30 September 2008 will have resulted in HM

Revenue and Customs (HMRC) issuing a surcharge

liability notice specifying a surcharge period running to

30 September 2009. [1]

(2) The late payment of VAT for the quarter ended 31

March 2009 will have resulted in a surcharge of £778

(38,900 × 2%). [1]

(3) The surcharge period will also have been extended to

31 March 2010. [1]

(4) Although Jogger Ltd then submitted three consecutive

VAT returns during this surcharge period on time, this

was insufficient to revert to a clean default surcharge

record. [1]

(5) The late payment of VAT for the quarter ended 31

March 2010 will therefore have resulted in a surcharge

of £4,455 (89,100 × 5%). [1]

(6) The surcharge period will also have been extended to

31 March 2011. [1] __

6

10

__

(ii) (1) The reduced administration from only having to submit

one VAT return each year should mean that default

surcharges are avoided in respect of the late

submission of VAT returns. [2]

(2) In addition, making payments on account based on the

previous year's VAT liability will improve both budgeting

and possibly cash flow where a business is expanding. [1]

(3) Jogger Ltd can apply to use the annual accounting

scheme if its expected taxable turnover for the next 12

months does not exceed £1,350,000 exclusive of VAT. [1]

(4) In addition the company must be up to date with its

VAT returns. [1] __

5

11

Answer 3 - Hawk Ltd

(a) Corporation tax liability for the year ended 31 March 2010

£

Profits from trading 125,000 [½]

Chargeable gains (W1) 94,114 (W1) [½] _______

Total profits 219,114

Gift aid donations (Nil) _______

PCTCT 219,114 _______

Small company [1]

Corporation tax

219,114 × 21% = £46,014 [1]

(W1) Chargeable gains

Chargeable

gains

£ £ £

(1) Sale of freehold offices

Sale proceeds 260,000 [½]

Less: Allowable selling costs (3,840) [½]

Less: Cost (July 1990) 31,000

Acquisition costs 3,200 ______

84,200 (84,200) [1] ______

Less: Enhancement (May 2002) (43,000) _______

Unindexed gain 128,960

Less: IA (W2)

(1) 0.668 × 84,200 (cost) (56,246) [½]

(2) 0.200 × 43,000 (ext cost) (8,600) _______

Indexed gain 64,114 64,114 [½] _______

(W2) The indexation factor from July 1990 to April

2009 is 0.668 (211.5 - 126.8/126.8).

The indexation factor from May 2002 to

April 2009 9s 0.200 (211.5 - 176.2/176.2) ______

64,114

6 c/f

12

6 b/f

Chargeable gains b/f 64,114

(2) Sale of 5,000 shares in Albatross plc

£


Less: Cost (W3) (17,500) [½] ______

25,000

Less: Indexation allowance (Nil) ______

Indexed gain 25,000 25,000 [½] ______

(W3) No Cost Indexed

shares cost

£ £

1.8.09 Purchase 6,000 18,600 18,600

No indexation allowance - [2] _____ ______ ______

6,000 18,600 18,600

17.8.09 purchase 2,000 9,400 9,400 _____ ______ ______

8,000 28,000 28,000

29.8.09 sale (5,000) (17,500) (17,500)

28,000

× 5,000

8,000

= 17,500 _____ ______ ______

c/f 3,000 10,500 10,500 _____ _____ ______

(3) Sale of 10,000 preference shares in

Cuckoo plc £


Less: Cost (W4) (15,000) [½] ______

17,000

Less: Indexation allowance (Nil) ______

Indexed gain 17,000 17,000 [½] ______

(W4) Exchanged assets MV Cost

15,000 ordinary shares in £ £

Cuckoo plc

(15,000 × £4.50) 67,500 45,000

(W5)

10,000 preference shares

(10,000 × 2.25) 22,500 15,000 [2] ______ ______

90,000 60,000 ______ ______

Chargeable gains c/f 106,114

13 c/f

13

13 b/f

Chargeable gains b/f £106,114

(W5) Cost of 15,000 ordinary shares

67,500

× 60,000

90,000

= £45,000

(4) Sale of two acres of land

£


Less: Cost

203,500 × A

120,000 (132,000) [1]

120,000 + 65,000

A + B _______

Capital loss (12,000) Nil [1] _______

Tutorial note:

This is a part disposal of land.

The cost of the part sold (2 acres) must be computed

using the part disposal fraction.

A where A is the gross

A + B _______

Total chargeable gains 106,114

Less: Capital loss (12,000) _______

94,114 _______

Sale proceeds for the 2 acres sold and B is the

market value of the remaining land (1 acre)

which is given in the question. [½] ________

16 marks ________

(b) (i) The only disposal that qualifies for rollover relief is the sale of

the freehold office building.

The office building was sold for £260,000, and this is

therefore the amount that Hawk Ltd will have to reinvest in

order to claim the maximum possible amount of rollover

relief. [2]

(ii) The reinvestment will have to take place between 1 May

2008 and 30 April 2012, being one year before and three

years after the date of disposal. [1]

(iii) Corporation tax of £13,464 (64,114 × 21%) will be saved if

the maximum possible amount of rollover relief is claimed. [1]

14

Answer 4 – Ae, Bee, Cai, Dee and Eue

(a) Ae, Bee and Cae taxable trading profits of 2008/09,

2009/10 and 2010/11

STEP 1

Accounting date: 30 June

Ae Bee Cae

Start date 1.7.07 1.7.07 1.7.09

First tax year 2007/08 2007/08 2009/10

Accounting period 1 begins 1.7.07 1.7.07 1.7.09 [½]

STEP 2

The accounting profit - each of Ae and Bee

£

Year ended 30 June 2008 108,000



Allocate the profits between the partners.

Ae Bee Cae

£ £ £

y/e 30.6.08 54,000 54,000 -

y/e 30.6.09 66,000 66,000 - [1]

y/e 30.6.10 51,333 51,333 51,334

STEP 3

Convert the tax adjusted accounting profit into taxable

profits by applying the opening year rules

Each of Ae and Bee

Tax Tax Period of profits Taxable

year year assessable trading

profits

£

1 07/08 1.7.07 - 5.4.08 40,500 [1]

(9/12 × 54,000)

2 08/09 Q1 Does an accounting date

(30.6.08) fall in 08/09?

Yes

Q2 Which accounting date falls

in 08/09?

30.6.08

Underline the accounting period

ending on 30.6.08

What length if this accounting period?

≥ 12 months

Use normal basis = 12 months to

the accounting date ending in this

fiscal year 54,000 [1]

(Overlap profits = £40,500)

3½ c/f

15

3½ b/f



profits

£

3 09/10 Normal basis

(30.6.09) y/e 30.6.09 66,000 [½]

Cae



profits

£

1 09/10 1.7.09 - 5.4.10 38,500 [1]

(9/12 × 51,334) ___

5 ___

(b) (i) Dee

Taxable trading profits 2007/08, 2008/09 and 2009/10

STEP 1

Accounting date 1 5 April

New accounting date 31 July

Tax year of change 2008/09

STEP 2

Adjust the accounting profits.

STEP 3

Convert the accounting profits into taxable profits by

applying the change of accounting date rules.



profits

£

1 07/08 y/e 5 April 2008 40,750 [1]

2 08/09 12 months to the new

(tax year accounting date

of change) 1.8.07 - 31.7.08

1 Aug 2007 to 5 Apr 2008

£

8/12 × 40,750 27,167

6 Apr 08 to 31 Jul 08 15,320 ______

42,487 42,487 [2] ______

3 09/10 Normal basis

(31.7.09) y/e 31.7.09 62,600 [1] ___

4

16

(ii) In 2008/09 there are overlap profits of £27,167 in respect of the

eight month period 1 August 2007 to 5 April 2008. [1]

(c) Eue

STEP 1

Accounting date 30 June

Stop date 30 September 2009

Final tax year he has

taxable trading profit 2009/10

STEP 2

Compute the tax adjusted trading profits after capital allowances.

Profits Capital Adjusted

allowances accounting

profit


1.7.08 - 30.9.09 69,000 (6,800) 63,200 [1]

Capital allowances

1.7.08 - 30.9.09 General Capital

pool allowances

£ £

TWDV b/f 9,200

Additions (no AIA in final

accounting period) 3,800 [1½]

Disposal (6,200) _____

Balancing charge

Balancing allowance 6,800 6,800 _____

WDA - N/A in final accounting

period _____

Balancing allowance 6,800 _____

STEP 3

Convert the tax adjusted accounting profits into taxable trading

profits by applying the closing year rules.

Tax Period of profits assessable Taxable

year assessable

£

08/09 Year ended 30 June 2008 53,200 [½]

09/10 £

(final 1 July 2008 to 30 Sept 2009 63,200

tax year) Less: Overlap profits (17,200) ______

45,000 45,000 [1] ______ ___

4 ___

17

Answer 5 - Ann Peach, Basil Plum and Chloe Pear

Ann Peach - Income tax computation 2009/10

£

Trading profits 48,000 [½]

Personal allowance (6,475) [½] ______


41,525 × 20% 8,305 [½]

(1) Only £48,000 of Ann's pension contributions of £52,000 will have

qualified for tax relief, since relief is only available up to the

amount of her relevant earnings. [1]

(2) The pension contributions result in Ann's basic rate band being

extended to £85,400 (37,400 + 48,000). [½] ___

3 ___

Basil Plum - Income tax computation 2009/10

Employment income 330,000 [½]

Personal allowance (6,475) [½] _______

Taxable income 323,525 _______

Income tax

307,400 × 20% 61,480 [½]

16,125 × 40% 6,450 [½] _______ _______

323,525 67,930 _______

Excess contribution charge

25,000 (270,000 - 245,000) × 40% 10,000 [1] _______

Income tax liability 77,930 _______

(1) All of Basil's pension contribution of £270,000 will have qualified

for tax relief, although the excess contribution charge effectively

restricts relief to £245,000. [1]

(2) The pension contributions result in Basil's basic rate band being

extended to £307,400 (37,400 + 270,000). [1] ___

5 ___

Chloe Pear - Income tax computation 2009/10

Property business profits 24,750 [½]

Personal allowance (6,475) [½] _______

Taxable income 18,275 _______

Income tax

18,275 × 20% 3,655 [½]

Chloe has no relevant earnings in 2009/10, so only £3,600 of her

pension contribution of £6,750 will have qualified for tax relief. [½] ___

2

19

ACCA F6

June 2009 Exam

answers

20

Question 1 – Domingo, Erigo, Fargo and Gomez

1 (a) (i) Domingo Gomez – Income tax computation 2009/10

£

Pensions (4,500 + 2,300) 6,800

Building society interest (14,400 x 100/80) 18,000

Interest from savings certificate (exempt) -

______

24,800

Personal allowance (see note (2)) (8,540)

______

Taxable income 16,260

========

Dividends -

Savings (see note (3)) 16,260

Other (balancing figure) -

______

16,260

========

Income tax

£

2,440 at 10% 244

13,820 at 20% 2,764

______

16,260

======= ______


=======

Notes

(1) As the charitable donations were not made under the gift aid scheme, no

tax relief is available for them.

(2) Domingo is age 67 and is therefore entitled to a higher personal allowance

of £9,490. However, as his net income exceeds £22,900, his personal

allowance is reduced as follows:

£

Personal allowance (age 67) 9,490

Less abatement/restriction ½(24,800 – 22,900) (950)

_____

8,540

=======

21

(1) The personal allowance first reduces the non-savings income to nil and then

the savings income to £16,260 (18,000 – (8,540 – 6,800)). The first £2,440

of savings income is taxed at the starting rate of 10%.

(ii) Erigo Gomez – Income tax computation 2009/10

£

Employment income

Salary 36,000

Occupational pension contributions (36,000 x 6%) (2,160)

Charitable payroll deductions (12 x 100) (1,200)

______

32,640

Relocation costs (11,400 – 8,000) 3,400

______

36,040

Mileage allowance shortfall (2,400)

______

33,640

Personal allowance (6,475)

______


=======

Income tax

£27,165 at 20% 5,433

_____


======

(1) Of the relocation costs of £11,400, the first £8,000 are exempt and the

excess is taxable.

(2) The mileage allowance received of 20 pence per mile is less than HMRC’s

authorised rates and therefore Erigo can make the following expense claim

for the shortfall:

£ £

Mileage allowance received

18,000 miles at 20p 3,600

HMRC authorised rates

10,000 miles at 40p 4,000

8,000 miles at 25p 2,000

_____

(6,000)

_____

The shortfall is tax deductible (2,400)

======

22

(iii) Fargo Gomez – Income tax computation 2009/10

£

Trading income 64,800

Less pre trading expenditure (see note (1)) (2,600)

Less capital allowances (see note (2)) (1,100)

______

61,100


______


=======

Income tax

£

45,600 at 20% (see note (3)) 9,120

9,025 at 40% 3,610

______

54,625

======= _____


======

Notes

(1) As the advertising expenditure incurred during May 2009 was incurred

within the seven years prior to the commencement of trade and is the type

of expense that would be allowable had trade already commenced, it

qualifies as allowable ‘pre-trading expenditure’ and as such is effectively

treated as incurred on 6 July 2009. As no adjustment has yet been made, it

is therefore deductible against trading profits of the nine-month period

ended 5 April 2010.

(2) The writing down allowance on Fargo’s car is 20 per cent per annum as the

CO2 emissions are greater than 110 g/km travelled but no more than 160

g/km. As Fargo’s period of account is nine months’ long this writing down

allowance is prorated as follows:

11,000 x 20% x 9/12 = 1,650

Fargo can only claim the business use proportion of this allowance. His total

mileage was 24,000 of which 8,000 were private, therefore his business

mileage is 16,000 (24,000 – 8,000) and the allowance claimed is as follows:

1,650 x 16,000/24,000 = 1,100.

(3) As Fargo has paid personal pension contributions of £5,200 (gross) and gift

aid donations of £2,400 (net) his basic rate tax band is extended by £8,200

(5,200 + (2,400 x 100/80)) from £37,400 to £45,600.

23

(b)

(1) The latest date that Domingo and Erigo can file paper self-assessment tax

returns for 2009/10 is 31 October 2010, unless the return is issued late, in

which case it is the later of:

- 31 October 2010

- two months after the issue of the return.

(2) If Domingo completes a paper tax return by 31 October 2010 then HM

Revenue and Customs will prepare a self-assessment tax computation on

his behalf.

(3) The latest date that Fargo can file a self-assessment tax return for 2009/10

online is 31 January 2011. A calculation of the tax is automatically done.

(c)

(1) Records must generally be retained until one year after the filing date. This

applies to employees and persons not in business. As Domingo and Erigo

were not in business during 2009/10, and the filing date for 2009/10 is 31

January 2011, their records must be retained until 31 January 2012.

(2) For persons who are in business, records (both business and non-business)

must be retained until five years after the filing date, which for 2009/10 is

31 January 2006. As Fargo was in business during 2009/10, this date

applies to him.

(3) Failure to retain records for the required period could result in a penalty of

up to £3,000 per tax year affected. However, the maximum penalty will

only be charged in serious cases.

24

Question 2 – Gastron Ltd

(a) Gastron Ltd – Trading profit for the year ended 31 March 2010

£ £

Profit before taxation 640,000

Add back

Depreciation 85,660

Amortisation of leasehold property 6,000

Gifts of pens to customers 1,200

Gifts of hampers to customers 1,100

Donation to local charity 0

Legal fees re renewal of lease 0

Legal fees re issue of debentures 0

Entertaining suppliers 1,300

Entertaining employees 0

Interest payable 0

______

95,260

Deduct

Deduction for lease premium (W1) 4,920

Income from property 20,600

Bank interest 12,400

Dividends 54,000

Profit on disposal of shares 80,700

______

(172,620)

Capital allowances (W2) (62,640)

_______

Trading profit 500,000

==========

Tutorial notes

(1) Gifts to customers are only an allowable deduction if they cost less than £50

per recipient per year, carry a conspicuous advertisement for the company

making the gift and are not of food, drink, tobacco, or vouchers for

exchangeable goods.

(2) The costs of renewing a short-lease (less than 50 years) and of obtaining

loan finance for a trading purpose are allowable.

(3) Entertainment expenditure is allowable only when it is in respect of

employees.

(4) Interest on a loan used for trading purposes is deductible in calculating the

trading profit on an accruals basis.

25

(b) Gastron Ltd – Corporation tax computation for the year ended 31

March 2010

£

Trading profit (from (a)) 500,000

Property business profit (W3) 12,800

Bank interest 12,400

Chargeable gain 74,800

_______

PCTCT 600,000

=========

Corporation tax £600,000 at 28% 168,000

Marginal relief 7/400 (750,000 – 640,000) x 600,000/640,000 (1,805)

_______

Corporation tax liability 166,195

=========

(c) (1) Small and marginal companies must pay their corporation tax liability

within 9 months and one day of the end of the chargeable accounting

period. As Gastron Ltd is a marginal company its corporation tax

liability for the year ended 31 March 2010 must be paid by 1 January

2011.

(1) If the company pays its corporation tax liability after the due date,

then HM Revenue and Customs will charge interest which runs from

the due date of payment to the actual date of payment. Therefore, if

Gastron Ltd does not pay its corporation tax until 31 August 2011,

interest will be charged for the period 1 January 2011 to 31 August

2011 and will be £2,216 (166,195 x 2% x 8/12).

(d) (1) Companies form a capital gains group if at each link in the group

structure there is a minimum 75% shareholding.

(2) In addition the parent company (or ‘principal member’) must have an

effective interest of more than 50% in each group company.

(e) (1) Gastron Ltd and Culinary Ltd must make the election within two years

of the end of the accounting period in which the disposal outside of the

group occurred; therefore by 31 March 2012.

(2) The election will be beneficial as it would result in Culinary Ltd’s

otherwise unused capital loss of £66,000 being set against Gastron

Ltd’s chargeable gain of £74,800, leaving only £8,800 of the gain

chargeable.

(3) As the election can be made in respect of part of an asset, the

remaining chargeable gain of £8,800 could arise in either Gastron Ltd

26

or Culinary Ltd. It would be beneficial for it to arise in Culinary Ltd as

it will only be taxed at the rate of 21%, instead of at the marginal rate

(29·75%) in Gastron Ltd.

Working 1 – Deduction for lease premium

(1) The office building has been used for business purposes, and so the

proportion of the lease premium assessed on the landlord can be deducted by

the tenant (Gastron Ltd), but must be spread over the life of the lease.

(2) The amount assessed on the landlord is £49,600 calculated as:

Premium received 60,000 x (51 – 10)/50 = £49,200

(3) The deduction for Gastron Ltd for the year ended 31 March 2010 is

therefore £4,920 (£49,200/10).

Working 2 – Plant and machinery

FYA

100%

AIA Pool Car Claimed

TWDV bfwd 16,700 18,400

Additions

19 May – Equipment 21,600

12 July – Car 9,800

11 August – Car 16,200

5 October – Lorry 17,200

Disposals

5 March – Equipment (3,300)

––––––– ––––––– ––––––– –––––––

16,200 38,800 23,200 18,400

FYA/AIA (16,200) (38,800) 55,000

WDA 20% (4,640) 4,640

Restricted (3,000) 3,000

––––––– ––––––– ––––––– –––––––

TWDV c/fwd Nil Nil 18,560 15,400

======== ======== ======== ======== –––––––

Total allowances 62,640

========

27

Working 3 – Property business profit

£ £

Rent receivable – First tenant (1,800 x 9) 16,200

Rent receivable – Second tenant (1,950 x 2) 3,900

–––––––

20,100

Impairment loss (1,800 x 2) 3,600

Decorating 3,700

–––––––

(7,300)

–––––––

12,800

========

Working 4 – ‘Profits’

£

PCTCT 600,000

Franked investment income (36,000 x 100/90) 40,000

_______

‘Profits’ 640,000

=========

Lower limit = £300,000 ÷ 2 150,000

Upper limit = £1,500,000 ÷ 2 750,000

Therefore, marginal company

Notes

(1) Group dividends are not included as franked investment income.

(2) Gastron Ltd has one associated company, so the upper and lower limits are

divided by two.

28

Question 3 - Nim and Mae Lom

Nim Lom - CGT liability 2009/10

Chargeable

gains

£

(1) Gift of 10,000 shares in Kapook plc £

Sale proceeds (W1) (10,000 × 3.70) 37,000

[½]

Cost (W2) (23,400) ______

Capital gain 13,600

CGT reliefs (Nil) ______

Chargeable gain 13,600 ______

13,600

(W1) MV of quoted shares in Kapook plc

Average method = £3.70

3.60 + 3.80 __________

2

[1]

1/4 up method = £3.75

3.70 + 1/4 × (3.90 - 3.70)

The average method gives the lower value,

therefore the Kapook plc shares are valued at £3.70.

(W2) Cost of the 10,000 shares in Kapook

6.4.82 20.5.09 19.6.09

No of Cost No of Cost

Shares £ shares £

19.2.01 8,000 16,200 24.5.09 2,000 5,800

6.6.06 6,000 14,600 ______ ______

14,000 30,800

(30,800 × 8,000)

14,000 (8,000) (17,600) ______ ______

c/f 6,000 13,200 ______ ______

[1]

[1]

£

Total cost of 10,000 shares = 23,400

(5,800 + 17,600)

______


29

3½ c/f

3½ b/f

Chargeable

gains

£


(2) Disposal of 5,000 shares in Jooba Ltd to Mae

This is a disposal of a chargeable asset to a

connected person (Nim's wife) and takes place at no

gain and no loss.

Nil [1]

(3) Sale of antique table

Chattel rule states:

Cost < £6,000 [1]

Sale proceeds > £6,000

Method (1) - normal method £


Cost (5,200) _____

[½]

Capital gain 3,500 _____

Method (2) - formula method

5/3 × (8,700 - 6,000) = 4,500 [1]

Take the lower capital gain using Method (1) 3,500 [½]

(4) Sale of UK government securities

This is the disposal of an exempt asset for CGT and

takes place at no gain/no loss

Nil

______

[1]


Less: Capital loss brought forward (restrict to preserve

the annual exemption) (7,000) ______

[1]

10,100

Less: Annual exemption (10,100) ______

[½]

Taxable gain Nil ______

Capital gains tax Nil ______

[½]

11c/f

30

11 b/f

Capital gains tax liability for Mae Lom in 2009/10 Chargeable

gains

£

(1) Sale of 2,000 shares in Jooba Ltd

£


Cost (16,000/5,000 × 2,000) (6,400) ______

[1]

Capital gain 24,000

Less: Entrepreneurs’ relief (Nil) ______


24,000

(2) Sale of house


Cost (122,000) _______

[½]

Capital gain 64,000

PPR relief (64,000 × 7/8) (56,000) _______

[1]

Chargeable gain 8,000 _______

8,000

(3) (a) Sale of all sole trader chargeable assets

used in the business on 30.11.09

Goodwill Office Total

Building

£ £ £

Capital gains 80,000 136,000 216,000 [1]

Less: Entrepreneurs' relief

4/9 × 100,000 (Note 1) (44,444) _______

[2]

Chargeable gain 171,556 _______

171,556

Note 1

Mae has claimed entrepreneurs' relief in 2008/09.

The capital gains eligible for the relief were

£900,000. This means that £100,000 of future

capital gains are eligible for entrepreneurs' relief.

______


17½ c/f

31

Chargeable

gains

£

17½

b/f


(b) Chargeable asset not used for business

Investment property

Capital gain 34,000 [½]

(4) Sale of copyright


Less: Unwasted cost (10,000 × 15/20) (7,500) ______

[1]


2,100 _______

[½]


Less: Capital loss brought forward (8,500) _______

[½]

231,156

Less: Annual exemption (10,100) _______

[½]

Taxable gain 221,056 _______

Capital gains tax (221,056 × 18%) £39,790 [½] ___

20 ___

Capital losses carried forward

Brought Used in Carried

forward 2009/10 forward

to 2010/11

£ £ £

Nim Lom 16,700 (7,000) 9,700

Mae Lom 8,500 (8,500) Nil

32

Question 4 – Anne Attire

(a) VAT return – Quarter ended 30 November 2009

£ £

Output VAT

Cash sales (£28,000 x 15%) 4,200

Credit sales (£12,000 x 95% x 15%) (see note (1)) 1,710

Input VAT

Purchases and expenses (£11,200 x 15%) 1,680

Impairment loss (£800 x 95% x 15%) (see note (2)) 114

_____

(1,794)

______

VAT payable 4,116

=======

The VAT return for the quarter ended 30 November 2009 should have been

submitted within one month after the end of the VAT period, therefore by 31

December 2009.

Notes

(1) The calculation of output VAT on the credit sales is always on the discounted

amount, regardless of whether the customer actually takes up the discount.

(2) Relief for an impairment loss is not given until six months from the time

that payment is due. Therefore relief can only be claimed in respect of the

invoice due for payment on 10 April 2009. Relief is based on the amount of

output VAT that would originally have been paid taking into account the

discount for prompt payment.

(b)

(1) Anne can use the cash accounting scheme if she is up-to-date with her VAT

returns and VAT payments and her taxable turnover for the next 12 months

is not expected to exceed £1,350,000.

(2) The cash accounting scheme results in the tax point becoming the date that

cash actually changes hands. This means that for sales, the output VAT is

accounted for according to the date that payment is received from

customers and for purchases, the input VAT is accounted for according to

the date that payment is made to suppliers.

(4) This means that for Anne, output VAT on most credit sales will be accounted

for up to one month later than at present but the recovery of input VAT will

be delayed by two months.

(5) The scheme provides automatic bad debt relief should a credit sale

customer default on the payment of a debt.

33

(c) (i) Sale of assets on a piecemeal basis

(1) Upon the cessation of trading Anne will cease to make taxable supplies, so

her VAT registration will be cancelled on the date of cessation or an agreed

later date.

(2) Output VAT will be due in respect of the value of the fixed assets at the date

of deregistration on which VAT has been claimed (although output VAT is

not due if it totals less than £1,000).

(ii) Sale of business as a going concern

(1) Since the purchaser is already registered for VAT, Anne’s VAT registration

will be cancelled as above.

(2) A sale of a business as a going concern is to a VAT registered purchaser

who will carry on the same kind of business with no noticeable break in

trading pattern is outside the scope of VAT, and therefore output VAT will

not be due.

34

Question 5 - Andrew Zoom

(a) (1) Andrew is under the control of Slick-Productions Ltd.

(2) Andrew is not taking any financial risk.

(3) Andrew works a set number of hours, is paid by the hour and

is paid for overtime.

(4) Andrew cannot profit from sound management.

(5) Andrew is required to do the work personally.

(6) There is an obligation to accept work that is offered. [½ mark

(7) Andrew does not provide his own equipment. each point] ___________

4 marks max ___________

(b) (i) Treated as an employee

(1) Andrew's income tax liability for 2009/10 will be:

£

Employment income 50,000 [½]

Personal allowance (6,475) [½] ______


Income tax

£

37,400 at 20% 7,480 [½]

6,125 at 40% 2,450 [½] ______

43,525 ______ ______


(2) Class/Primary NIC 2009/10

£

11% × (43,875 - 5,715) 4,198 [½]

1% × (50,000 - 43,875) 61 [½] _____

4,259 4,259 _____ ______

Total tax payable by Andrew if he is treated as

an employee of Slick Productions Ltd 14,189 ______ __

3 __

35

(ii) Treated as self-employed

(1) Andrew's trading profits for 2009/10 will be £50,000.

£ £

Income tax liability 9,930 [½]

(2) Class 2 NIC for 2009/10

£2.40 × 52 125 [1]

(3) Class 4 NIC for 2009/10

8% × (43,875 - 5,715) = 3,053 [1]

1% × (50,000 - 43,875) = 61 [½] _____

3,114 3,114 _____

______

Total tax payable by Andrew if he is

treated as being self -employed with

regard to his income from Slick 13,169

Productions Ltd ______ __

3 __

37

ACCA F6

December 2009 Exam

answers

38

Question 1 – Na Style

(a)

Started trading 1 January 2007 (2006/07)

Length of first accounting period

1 January 2007 – 30 June 2007 = 6 months

£ £

2006/07 1 January 2007 to 5 April 2007

(= 3 months)

25,200 x 3/6 12,600

=======

2007/08 First 12 months of trade

1 January 2007 to 31 December 2007

1 January 2007 to 30 June 2007 25,200

1 July 2007 to 31 December 2007

21,600 x 6/12 10,800

______

36,000

=======

2008/09 Year ended 30 June 2008 21,600

=======

Notes

(1) The assessment for 2007/08 (the second tax year) is the first 12 months of

trading as the accounting date falling in that year is less than 12 months

from the commencement of trading.

(2) There are overlap profits of £12,600 in respect of the three- month period 1

January 2007 to 5 April 2007 which were assessed in both 2006/07 and

2007/08.

(3) There are overlap profits of £10,800 in respect of the six-month period 1

July 2007 to 31 December 2007 which were assessed in both 2007/08 and

2008/09.

39

(b) Na Style – Trading profit for the year ended 30 June 2009

£ £

Net profit 22,000

Add back

Depreciation 1,300

Motor expenses (2,200 x 7,000/8,000) 1,925

Accountancy 0

Legal fees in connection with grant of a new lease 1,260

Property expenses (12,900 x 1/3) 4,300

Good for own use (selling price) 450

Fine in respect of health and safety regulations 400

Donation to political party 80

Trade subscription 0

______

9,715

Less

Private telephone (1,200 x 20%) (240)

Capital allowances (810)

_____

Tax adjusted trading profit 30,665

======

(c) (i) Na Style – Income tax computation 2009/10

£


Building society interest (560 x 100/80) 700

Interest from individual savings account (exempt) -

Interest from savings certificate (exempt) -

Interest from government stocks 370

Dividends (1,080 x 100/90) 1,200

______

32,935


______


========

Dividends 1,200

Savings 1,070

Other (balancing figure) 24,190

______

26,460

========

40

Income tax

£

24,190 at 20% 4,838

1,070 at 20% 214

1,200 at 10% 120

______

26,460

======= ______


Less tax credits on dividends

(1,200 at 10%) (120)

Less tax suffered at source

Building society interest (700 at 20%) (140)

_____

Income tax payable 4,912

=======

(ii) Tax payments

(1) Na’s balancing payment for 2009/10 due on 31 January 2011 is £1,712

(4,912 – 3,200).

(2) Her payments on account for 2010/11 will be £2,456 (4,912 x 50%). These

will be due on 31 January 2011 and 31 July 2011.

(d)

(1) Interest is charged where a balancing payment is paid late. This will run

from the due date of payment (31 January 2011) to the actual date of

payment (31 May 2011).

(2) The interest charge will be £14 (1,712 x 2·5% x 4/12).

(3) In addition, a 5% surcharge of £86 (1,712 at 5%) will be imposed as the

balancing payment is not made within 28 days of the due date.

41

Question 2 – Crash-Bash Ltd

(a) (i)

(1) Companies are treated as resident in the United Kingdom if they are either

incorporated in the UK or, if incorporated overseas, their central

management and control is exercised in the UK.

(2) Since the directors are UK based and hold their board meetings in the UK,

this would indicate that Crash–Bash Ltd is managed and controlled from the

UK, and therefore will be treated as resident in the UK.

(ii) Crash–Bash Ltd – Corporation tax liability for the period ended 31

March 2010

£ £

Trading profit - UK 415,400

Advertising expenditure 12,840

Capital allowances - P&M (W1) 59,260

- IBA (W2) 3,300

______

(75,400)

_______

340,000

Trading profit - Overseas (15,000 x 100/75) 20,000

_______

Profits chargeable to corporation tax 360,000

========

Corporation tax (W3)

£360,000 at 28% 100,800

Marginal relief

7/400 (562,500 – 400,000) x 360,000/400,000

(2,559)

_______

98,241

Double taxation relief (W4) (5,000)

_______

Corporation tax payable 93,241

========

42

Note

As the advertising expenditure incurred during June 2009 was incurred within the

seven years prior to the commencement of trade and is the type of expense that

would be allowable had trade already commenced, it qualifies as allowable ‘pre-

trading expenditure’ and as such is effectively treated as incurred on 1 July 2009.

As no adjustment has yet been made, it is therefore deductible against trading

profits of the nine-month period ended 31 March 2010.

Working 1 – Plant and machinery

FYA AIA FYA Pool Claimed

£ £ £ £ £

Additions

Machinery 37,500 25,000

Motor car 13,200

Disposals (3,600)

______ ______ ______

13,200 37,500 21,400

FYA at 100% (13,200) 13,200

AIA (37,500) 37,500

FYA at 40% (8,560) 8,560

______

Total allowances 59,260

______ ______ ______ =======

Nil Nil 12,840

======= ======= =======

TWDV cfwd 12,840

=======

Note

The annual investment allowance is reduced to £37,500 (50,000 x 9/12) because

Crash–Bash Ltd’s accounting period is nine months long. However, first year

allowances are always given in full, regardless of the length of the accounting

period.

Working 2 – Industrial buildings allowance

(1) The cost of the land does not qualify, so the qualifying cost is £220,000

(320,000 – 100,000).

(2) The accounting period is nine months long, so the WDA is £3,300 (220,000

at 2% = 4,400 x 9/12).

43

Working 3 – ‘Profits’

£

Profits chargeable to corporation tax 360,000

Franked investment income (36,000 x 100/90) 40,000

_______

‘Profits’ 400,000

========

Lower limit (300,000 ÷ 2 x 9/12) 112,500

Upper limit (1,500,000 ÷ 2 x 9/12) 562,500

Therefore, marginal company

Note

Crash-Bash Ltd has an associated company (Safety Inc) therefore the upper and

lower limits are divided by two. As Crash-Bash Ltd’s accounting period is only

nine months long it is further reduced to x 9/12.

Working 4 – Double tax relief on the overseas branch profits

Double tax relief is the lower of: £

- Overseas tax (20,000 x 25%) 5,000

- UK tax at the effective rate

98,241/360,000 x 20,000 5,458

(iii)

(1) Invoicing for the exported crash helmets at less than the market price will

reduce UK trading profits and hence UK corporation tax.

(2) A true market price will therefore have to be substituted for the transfer

price.

(3) The true market price is the ‘arms length’ price that would be charged if the

parties to the transaction were independent of each other.

(4) Crash–Bash Ltd will be required to make the adjustment in its corporation

tax self-assessment tax return.

44

(b) (i)

(1) Under the ‘future test’ traders must register for VAT if at any time they

expect their taxable supplies for the following 30-day period to exceed

£68,000.

(2) Crash–Bash Ltd realised that its taxable supplies for September 2009 were

going to be at least £100,000. The company was therefore liable to register

from 1 September 2009, being the start of the 30-day period.

(3) Crash–Bash Ltd had to notify HMRC by 30 September 2009, being the end

of the 30-day period.

(ii)

(1) Pre registration input VAT can be recovered in certain circumstances.

(2) On goods (stock and capital assets) which have been acquired in the three

years prior to registration and which are still held at the date of registration

and on services supplied in the six months prior to registration.

(3) Therefore, input VAT of £16,290 (108,600 x 15%) can be recovered on the

stock of goods at 1 September 2009 and input VAT of £8,250 (22,300 +

32,700 = 55,000 x 15%) can be recovered on the services incurred from 1

July to 31 August 2009.

(4) The total input VAT recovery is therefore £24,540 (16,290 + 8,250).

(iii)

(1) If the net errors totalled less than the higher of £10,000 or 1% of the

turnover for the VAT period, then they could have been voluntarily disclosed

by simply entering them on the VAT return for the quarter ended 28

February 2010.

(2) If the net errors exceeded the limit, they could have been voluntarily

disclosed but disclosure would have been made separately to HMRC.

(3) Default interest would only have been charged where the limit was

exceeded and it was therefore necessary to make separate disclosure to

HMRC.

45

Question 3 – Amanda, Bo and Charles

(a) (i)

(1) Amanda has chargeable gains of £135,000 calculated as follows:

Goodwill Freehold shop Total

£ £ £

Proceeds 90,000 165,000

Cost (nil) (120,000)

_______ _______ _______

90,000 45,000 135,000

======== ======== ========

(2) The consideration from Ammoon Ltd is entirely in the form of shares, so all

of Amanda’s chargeable gains can be rolled over.

£

Total gains 135,000

Less incorporation relief (135,000)

_______

Chargeable gains Nil

========

(3) The base cost of the 300,000 £1 ordinary shares will be:

£

Market value of all assets transferred 300,000


_______

165,000

========

(a) (ii)

(1) If the consideration for the transfer had been part shares and part cash,

then the proportion of the gain relating to the consideration taken in cash

would be chargeable.

£

Total gains 135,000

Less incorporation relief (balancing figure) (90,000)

_______

Chargeable gains 45,000

========

46

(2) The chargeable gains figure is calculated as follows:

Total gains x cash/market value of all assets transferred

135,000 x 100,000/300,000 = £45,000

(3) The base cost of the 200,000 £1 ordinary shares will be:

£

Market value of all assets transferred 300,000

Less cash (100,000)

_______

Market value of shares 200,000


_______

110,000

========

Note

The number and nominal value of the shares is irrelevant.

(b) (i)

(1) As the shares are being gifted, the market value of the shares is used as

proceeds. Bo therefore has a chargeable gain as follows:

£

Proceeds (market value) 210,000

Less cost (94,000)

_______

Gain 116,000

========

(2) Since this is an outright gift (no consideration has been paid for the shares)

and Bo and his son have elected to hold over the gain, all of Bo’s chargeable

gain can be held over.

£

Gain 116,000

Less gift relief (116,000)

_______

Chargeable gain Nil

========

(3) The base cost of the son’s 50,000 £1 ordinary shares in Botune Ltd will be

as follows:

47

£

Market value of shares transferred 210,000


_______

94,000

========

(b) (ii)

(1) If the shares had instead been sold at an undervalue to Bo’s son (partial

consideration), then the gain is calculated on Bo using market value as

proceeds but some of the gain is (potentially) chargeable immediately.

£

Gain 116,000

Less gift relief (balancing figure) (50,000)

_______

Chargeable 66,000

========

(2) The amount chargeable is the excess of actual proceeds (£160,000) over

original cost (£94,000).

(3) The base cost of the son’s 50,000 £1 ordinary shares in Botune Ltd will be

as follows:

£

Market value of shares transferred 210,000


_______

160,000

========

(c) (i)

(1) Charles’ chargeable gain on the house is £64,500 calculated as follows:

£

Proceeds 282,000

Cost (110,000)

________

172,000

Principal private residence exemption (107,500)

________

64,500

=========

48

(2) The total period of ownership of the house is 144 months (90 + 54), of

which 90 months qualify for exemption as follows:

Exempt Chargeable Total

1 October 1997 – 31 March 1999

(occupied)

18 18

1 April 1999 – 30 September 2006

(unoccupied)

36 54 90

1 October 2006 – 30 September 2010 36 36

_____ _____ _____

90 54 144

====== ====== ======

(3) Of the period 1 April 1999 t0 30 September 2006, 36 months is deemed

occupation (three years any reason which is both preceded and followed by

actual occupation).

(4) The last three years of ownership is always deemed occupation provided

that the house has been the owner’s principal private residence for at least

some of the period of ownership.

(5) The principal private residence exemption is therefore £107,500 (£172,000

x 90/144).

(c) (ii)

(1) The letting relief exemption will be £40,000, as this is lower than both

£107,500 (the amount of the gain exempt under the principal private

residence rules) and £64,500 (the amount of the non-exempt gain

attributable to the period of letting (£172,000 x 54/144)).

(2) Charles’ chargeable gain will therefore be reduced to £24,500 (£64,500 –

40,000).

49

Question 4 – Simon House

(a) Badges of trade

Subject matter

Assets are normally acquired for one of three reasons;

1. For personal use

2. As investments

3. To sell on for a profit

Where the subject matter of a transaction is one that is clearly not for personal

use or as an investment asset, then any profit on resale will usually be treated as

a trading profit.

Length of ownership

A short period of ownership may indicate that the items was acquired with the

intention of selling it on for a profit and would therefore indicate trading.

Frequency of transactions

The more frequently similar transactions are carried out, the more likely it is that

the disposer will be treated as carrying on a trade. Transactions carried out in

isolation are more likely to be of a capital nature.

Work done

When work is carried out on an asset to improve it, to make it more marketable,

or steps are taken to find purchasers (for example, advertising), then this is likely

to indicate that a trade is being carried on.

Circumstances of realisation

A forced sale, for example to raise funds for an emergency, is not likely to be

treated as trading.

Motive

The presence of a profit motive is a strong indication that a person is trading,

however the absence of a profit motive may not necessarily mean that the profit

will not be assessed as a trading profit.

(b) Simon House – Income tax and NICs if trading

£ £

Income 260,000

Less costs incurred

House 127,000

Legal fees on acquisition 1,800

Renovation 50,600

Legal fees on sale 2,600

Loan interest (£150,000 x 6% x 4/12) 3,000

50

_______

(185,000)

_________

Trading/net income 75,000

PA (6,475)

_________


==========

Income tax

£37,400 at 20% 7,480

£31,125 at 40% 12,450

_______

19,930

========

Class 4 NICs

£5,715 at 0%

£38,160 at 8% 3,053

_______

£43,875

£31,125 at 1% 311

_______

£75,000 _______

========= 3,364

========

Class 2 NICs

£2.40 x 19 weeks (see note) 46

========

Note

Class 2 contributions are paid for complete weeks, running from midnight on

Sunday to the following midnight on Saturday, during which self employed

activity takes place for the whole or part of the week. In this case, the first week

starts at midnight on Sunday 26 April 2009 and the last week ends on Saturday 5

September 2009, which comprises 19 weeks.

Credit will be given by the examiner for any reasonable attempt at this calculation

(i.e. recognising that Class 2 NICs were only due during the period of trading, not

for the whole year 2009/10).

(c) Simon House – capital gains tax if not trading

£ £

Sale proceeds 260,000

Less legal fees on sale (2,600)

51

_________

Net proceeds of sale 257,400

Less:

Cost of house 127,000

Legal fees on acquisition 1,800

Renovation 50,600

Loan interest -

_______

(179,400)

_________


AE (10,100)

_________

Taxable gain 67,900

==========

Capital Gains Tax

£67,900 @ 18% 12,222

========

Note

The loan interest is a revenue expense and so is not allowable in computing the

chargeable gain.

52

Question 5 – Volatile Ltd

(a)

(1) The main consideration that will influence a company’s choice of loss relief

is the rate of corporation tax at which relief will be obtained. Companies

would prefer to relieve losses against profits that would normally be taxed

at the marginal rate of 29·75% or the full rate of 28%.

(2) Another consideration is the timing of the relief obtained and the Cashflow

implications. Companies would generally prefer to relieve losses as soon as

possible, and a claim against total profits (under s.393A ICTA 1988) would

result in earlier relief (and a cashflow benefit) than a claim (under s.393(1)

ICTA 1988) against future trading profits.

(3) Another consideration is the extent to which relief for gift aid donations will

be lost, as if these are not relieved in the accounting period of payment,

they cannot be carried forward or carried back.

(b)

Period ended Year ended Year ended Period

ended

31

December

31

December

31

December

30

September

2005 2006 2007 2008

£ £ £ £

Trading income 44,000 Nil 95,200 78,700

S393 cfwd (8,700)

______

86,500

Property income 9,400 6,600 6,500 -

Chargeable gains 5,100 - - 9,700

______ ______ ______ ______

58,500 6,600 93,000 88,400

S393 cy (6,600)

S393 cb (58,500) (23,250) (88,400)

Extended cb (50,000)

______ ______ ______ ______

Nil Nil 19,750 Nil

Gift aid donations (800) (1,000) (1,200) -

______ ______ ______ ______

PCTCT Nil Nil 18,550 Nil

======= ======= ======= =======

53

(1) The trading loss of £73,800 for the year ended 31 December 2006 is

relieved as follows:

£

Loss 73,800

Year ended 31 December 2006 (6,600)

Period ended 31 December 2005 (58,500)

Year ended 31 December 2007 (8,700)

______

-

=======

(2) The trading loss of £166,800 for the year ended 30 September 2009 is

relieved as follows:

£ £

Loss 166,800

Year ended 30 September 2009 -

Period ended 30 September 2008 (88,400)

Year ended 31 December 2007

3/12 x £93,000 23,250

Extended carry back

Year ended 31 December 2007 (max) 50,000

______

(73,250)

______

Loss to carry forward 5,150

=======

55

ACCA F6

June 2010 Exam

answers

56

Question 1 – Auy Man and Bim Men

(a) (1) Auy will be treated as resident in the United Kingdom for 2009/10 as

she was physically present in the United Kingdom for 183 days or

more in that tax year.

(2) Bim will be treated as resident in the United Kingdom for 2009/10 as

she has made frequent and substantial visits to the United Kingdom,

averaging 91 days or more over four consecutive tax years.

(b) Trading profit for the year ended 5 April 2010

£ £

Net profit 82,000

Add back

Depreciation 3,400

Input VAT 0

Motor expenses (2,600 x 30%) 780

Entertaining employees 0

Appropriation of profit 4,000

Excessive salary (15,000 – 10,000) 5,000

_______

13,180

Deduct

Capital allowances (working) (15,180)

_______


========

Notes

(1) No adjustment is required in respect of the input VAT as the expense figures

are already exclusive of VAT.

(2) Entertainment expenditure is only deductible against trading profits when it

is in respect of employees.

57

Working – Capital allowances

FYA Pool Motor

car (1)

BU = 70%

Motor car

(2) BU = 70%

Special

rate pool

Claimed

£ £ £ £ £ £

TWDV bfwd 3,100 18,000 14,000

Additions

Motor car (3) 11,600

Motor car (4) 14,200

Motor car (5) 8,700

Disposals

Motor car (2) (13,100)

_____ _____ _____ _____ _____

11,600 17,300 18,000 900 8,700

BA (900) 630

_____

Nil

======

FYA (11,600) 8,120

WDA 20% (3,460) 3,460

WDA (max) (3,000) 2,100

WDA 10% (870) 870

______

15,180

_____ ______ ______ _____ ======

TWDV cfwd Nil 13,840 15,000 7,830

====== ======= ======= ======

Notes

(1) Motor car (1) was owned at 6 April 2009 and therefore continues to qualify

for writing down allowance at the rate of 20% subject to a maximum of

£3,000 per annum.

(2) For motor cars purchased on or after 6 April 2009 the following rules apply:

CO2 emissions of:

No more than 110 g/km = 100% first year allowance (motor car (3))

111 – 160 g/km = 20% writing down allowance (motor car (4))

More than 160 g/km = 10% writing down allowance (motor car (5))

58

Trading income assessments 2009/10

Auy Man Bim Men Total

£ £ £

Salary 4,000 4,000

Interest on capital

(56,000/34,000 at 5%) 2,800 1,700 4,500

Balance shared 80:20 57,200 14,300 71,500

______ ______ ______

60,000 20,000 80,000

======= ======= =======

(c)

(1) Auy’s class 4 NIC for 2009/10 will be:

£ £

5,715 at 0% 0

38,160 at 8% 3,053

______

43,875

16,125 at 1% 161

______ ______

60,000 3,214

======= =======

(2) Bim’s class 4 NIC for 2009/10 will be:

£ £

5,715 at 0% 0

14,285 at 8% 1,143

______ ______

20,000 1,143

======= =======

(d)

(i) Tax point

(1) The basic tax point for services is the date of completion.

(2) However, if before the basic tax point either an invoice is issued or payment

is received, then this becomes the actual tax point. If both occur, then the

earlier is taken.

(3) The 14 day rule states that if an invoice is issued within 14 days after the

basic tax point, then the invoice date may be taken as the tax point. The

trader can elect not to apply the 14 day rule.

59

(ii) VAT paid for the year ended 5 April 2010

£

Output VAT 21,600

Input VAT (180 + 140) (320)

______

VAT paid to HMRC during the year 21,280

=======

(iii) Flat rate scheme

(1) The partnership can join the flat rate scheme if its taxable turnover

(excluding VAT) for the next 12 months is not expected to exceed

£150,000.

(2) The partnership can continue to use the scheme until its total turnover

(including VAT, but excluding sales of capital assets) for the previous year

exceeds £225,000.

(3) If the partnership had used the flat rate scheme throughout the year ended

5 April 2010 then it would have paid VAT as follows:

VAT inclusive turnover = £142,200 + 21,600 = £163,800

VAT flat rat percentage = 11%

Therefore, VAT paid to HMRC during the year = 163,800 x 11% = £18,018.

(4) This represents a VAT saving of £3,262 (21,280 – 18,018) for the year.

60

Question 2 – Mice Ltd

(a) (i) Mice Ltd – Property business profit for the year ended 31 March 2010

£ £

Rent receivable - Property 1 (3,200 x 4) 12,800

- Property 2 6,000

- Property 3 -

______

18,800

Proportion of premium received on grant of sub-lease

(51 – 8)/50 x 18,000 15,480

Expenses - Business rates 2,200

- Repairs 1,060

- Rent paid 7,800

- Advertising 680

- Insurance

(460 + 310 + (480 x 3/12)) 890

- Loan interest -

______

(12,630)

______

Property business profit 21,650

=======

Notes

(1) The enlargement of the car park is capital expenditure and therefore not

deductible in calculating the property business profit.

(2) Interest paid in respect of a loan used to purchase property is not an

allowable deduction against property income but is instead an allowable

deduction against interest income under the loan relationship rules.

61

(ii) Mice Ltd – Profits chargeable to corporation tax for the year ended

31 March 2010

£

Property business profit (as (i)) 21,650

Loan interest (6,400 + 3,200 – 1,800) 7,800

Overseas income -


______

40,000

Loss relief (s.393A) (40,000)

______

Profits chargeable to corporation tax -

=======

Note

The overseas dividend is exempt. However, it is treated as franked investment

income when calculating profits for corporation tax purposes.

Mice Ltd – Profits chargeable to corporation tax for the periods ended 31

March 2007, 2008 and 2009

Period ended Year ended Year ended

31 March 31 March 31 March

2007 2008 2009

£ £ £

Trading profit 83,200 24,700 51,200

Property business profit 2,800 7,100 12,200

______ ______ ______

86,000 31,800 63,400

Loss relief (s.393A) (18,200) (31,800) (63,400)

______ ______ ______

67,800 - -

Gift aid donations (1,000) - -

______ ______ ______

PCTCT 66,800 - -

======= ======= =======

Notes

(1) There is no restriction to the amount of loss relief that can be claimed for

the year ended 31 March 2009 as this is within the normal 12 month carry

back period.

(2) For losses carried back beyond the normal 12 month carry back period, the

amount is restricted to £50,000. Therefore for the year ended 31 March

2008 £31,800 of the loss is relieved, leaving a maximum of £18,200

(£50,000 - £31,800) to be carried back to the period ended 31 March 2007.

62

Loss memo

The trading loss of £180,000 for the year ended 31 March 2010 is relieved as

follows:

£ £

Loss 180,000

Year ended 31 March 2010 (40,000)

Year ended 31 March 2009 (63,400)

Year ended 31 March 2008 31,800

Period ended 31 March 2007 18,200

______

(50,000)

______

Unrelieved as at 31 March 2010 26,600

=======

(b)

Mice Ltd

Year ended 31 March 2010

Web-Cam Ltd

3 month period

ended 30 June 2009

Year ended 30 June 2010

(1) Group relief is available to qualifying group companies. Where the

companies do not have the same year end and/or have joined or left the

group part way through the accounting period, group relief is restricted to

‘corresponding accounting periods’; i.e. the extent to which the companies’

accounting periods overlap with each other.

(2) Loss relief is restricted to the lower of:

- the profit in the corresponding accounting period and

- the loss in the corresponding accounting period.

(3) Web-Cam Ltd’s three-month period ended 30 June 2009 overlaps with Mice

Ltd’s year ended 31 March 2010 by three months (1 April 2009 to 30 June

2009). Web-Cam Ltd’s year ended 30 June 2010 overlaps with Mice Ltd’s

year ended 31 March 2010 by nine months (1 July 2009 to 31 March 2010).

(4) The maximum loss that can be surrendered from Mice Ltd to Web-Cam Ltd

is therefore as follows:

63

In Web-Cam Ltd’s period ended: 30 June 2009

£

Lower of:

- Loss in corresponding period

3/12 x £180,000 45,000

- Profit in corresponding period 28,000

Therefore, £28,000

In Web-Cam Ltd’s year ended: 30 June 2010

£

Lower of:

- Loss in corresponding period

9/12 x £180,000 135,000

- Profit in corresponding period

9/12 x £224,000 168,000

Therefore, £135,000

(c)

Equipment

(1) The first £50,000 of expenditure on equipment will be covered by the

annual investment allowance and the balance of £25,000 will qualify for the

40% first year allowance as the expenditure will be incurred between the

qualifying dates of 1 April 2009 and 31 March 2010.

(2) Capital allowances will therefore be £60,000 (50,000 + (25,000 at 40%)).

Ventilation system

(1) The ventilation system is an integral feature. The first £50,000 of

expenditure will be covered by the annual investment allowance as above

but the balance of £25,000 will not qualify for the 40% first year allowance

as this is not available on integral features. It will instead go into the special

rate pool and qualify for the 10% writing down allowance.

(2) Capital allowances will therefore be £52,500 (50,000 + (25,000 at 10%)).

64

(d)

(1) The managing director existing remuneration is £80,000 for 2009/10 which

means that any additional remuneration will be taxed at his marginal rate of

40% and additional cash remuneration will be subject to employee’s Class 1

Primary NIC at his marginal rate of 1%.

(2) His additional income tax liability will therefore be £16,000 (40,000 at 40%)

and his additional Class 1 Primary NIC will be £400 (40,000 at 1%).

(3) His employer will be liable to additional Class 1 Secondary NIC at the rate of

12.8%; therefore £5,120 (40,000 at 12·8%).

65

Question 3 – Problematic Ltd

(a) Profits chargeable to corporation tax for the year ended 31 March 2010

£ £

Trading profits 108,055

Chargeable gains

- Easy plc shares (working 1) 30,195

- Insurance proceeds (working 2) -

- Freehold factory (working 3) 16,200

- Land (working 4)

______

91,945

______

PCTCT 200,000

=======

Working 1 – Easy plc 1985 Pool

Number Cost Indexed cost

£ £

Purchase June 1994 15,000 12,600 12,600

Indexation to September 2006

12,600 x (200·1 – 144·7)/144·7 4,824

Rights issue September 2006

15,000 x 1/3 = 5,000 x £2·20 5,000 11,000 11,000

______ ______ ______

20,000 23,600 28,424

Indexation to June 2009

28,424 x (213·0 – 200·1)/200·1 1,832

______

30,256

Disposal June 2009 (16,000)

Cost x 16,000/20,000 (18,880)

Indexed cost x 16,000/20,000 (24,205)

______ ______ ______

4,000 4,720 6,051

Balance carried forward ======= ======= =======

£

Disposal proceeds 54,400

Cost (18,800)

66

______

35,250

Indexation (24,205 – 18,880) (5,325)

______


=======

Working 2 – Office building

(1) The receipt of insurance proceeds could lead to a part disposal calculation

and therefore a chargeable gain. However as the full amount received has

been used in restoring the office building and Problematic Ltd has made a

claim to defer the gain arising, a form of rollover relief is available which

means that no gain arises.

(2) The proceeds received are deducted from the cost of the building for a

future disposal.

Working 3 – Freehold factory

£


Indexed cost (127,000)

______

44,000

Rollover relief (balancing figure) (27,800)

______


=======

(1) Where there is only partial reinvestment of the sale proceeds, then some

(or all) of the gain is chargeable.

(2) The amount chargeable is the lower of:

- the full gain of £44,000

- the proceeds not reinvested, i.e. 171,000 – 154,800 = £16,200.

(3) The balance of the gain (44,000 – 16,200 = 27,800) can be rolled over.

Working 4 – Land

£


Incidental costs of disposal (3,200)

______

126,800

Indexed cost

300,000 x 130,000/(130,000 + 350,000) (81,250)

67

______


=======

(b)

(1) The indexed base costs to be carried forward are as follows:

£ £

4,000 shares in Easy plc 6,051

======

Office building

Original indexed cost 169,000

Less insurance proceeds received (36,000)

Plus enhancement expenditure (restoration costs) 41,000

_______

174,000

========

Leasehold factory (see note) 154,800

========

Remaining three acres of land

Indexed cost of original four acres 300,000

Less proportion of cost used in part disposal (81,250)

_______

218,750

========

Note

The leasehold factory is a depreciating asset, as the lease is for twenty years.

This means that it has an expected life of no more than 50 years (or will become

one within 10 years).

When a replacement asset is a depreciating asset then the gain is not rolled over

by reducing the cost of the replacement asset. Instead, the gain is deferred until

it crystallises on the earliest of:

– The disposal of the replacement asset.

– The date the replacement asset is no longer used in the business.

– Ten years after the acquisition of the replacement asset, which in this case

is 10 December 2019.

68

Question 4 – Ernest Vader

(a)

(1) Tax evasion is illegal and entails breaking the law to achieve a tax

advantage, for example by not providing information to HMRC such as not

declaring taxable income or by providing HMRC with deliberately false

information, such as understating income or overstating expenses.

(2) Tax avoidance covers most situations where a tax advantage is achieved by

lawful means, such as investing in registered pension schemes or ISAs or

simply having regard to the advantageous timing of a transaction. However

in recent years HMRC have required certain tax avoidance schemes to be

disclosed.

(3) If Ernest does not disclose his capital gain then this will be tax evasion as

he is deliberately withholding information from HMRC which will result in his

tax liability for 2009/10 being understated by £18,000.

(b)

(1) A trainee Chartered Certified Accountant is expected to act honestly and

with integrity with regard to their own affairs and those of clients.

(2) Ernest should be strongly advised to disclose details of the capital gain to

HMRC. The Chartered Certified Accountant’s duty of confidentially means

that the disclosure could not be made by you, unless you have Ernest’s

permission to disclose on his behalf or there is a statutory duty to do so (for

example, under the money laundering regulations).

(2) If he refuses to disclose or prevaricates, then you should:

- Consider ceasing to act for him, and if you decide to do this, then

- Notify HMRC that you no longer act for Ernest, although a reason

should not be given.

- Report the tax evasion under the money laundering regulations.

(c)

(1) HMRC can request information from Ernest by issuing a written information

notice.

(d)

(1) Discovery assessments can be made where it is believed that there has

been careless or deliberate understatement by the taxpayer or HMRC did

not have information to be aware of the loss of tax

(2) The normal time limit for making a discovery assessment is four years after

the end of the tax year, but this time limit is extended to 20 years where

tax is lost due to deliberate understatement.

(3) A discovery assessment can therefore be raised because Ernest’s self-

assessment tax return contained a deliberate understatement (i.e. the non

69

declaration of the gain) and HMRC did not have sufficient information to be

aware of the capital gain.

(e) (i)

(1) Interest will run from the due date for payment of 31 January 2011 to the

actual date of payment of 31 July 2011.

(2) The interest charge will be £225 (18,000 x 2·5% x 6/12).

(ii)

(1) The amount of penalty is based on the potential lost revenue to HMRC (i.e.

tax due but unpaid) as a result of the failure to notify, but it is also linked to

the taxpayer’s behaviour. The maximum penalty is 100% of the potential

lost revenue (i.e. the CGT liability of £18,000).

(2) It appears that although Ernest has deliberately failed to notify HMRC of his

capital gain, there has been no attempt at concealment, therefore the

penalty is likely to be 70% of the tax unpaid which is £12,600 (18,000 x

70%). This is in addition to the tax itself.

(3) The penalty would be substantially reduced if Ernest had disclosed the

capital gain, especially if the disclosure had been unprompted by HMRC

prior to discovery. The maximum reduction would be to 20% of the tax

unpaid.

70

Question 5 – Quagmire plc

(a)

(1) Large companies (those paying corporation tax at the full rate) must make

quarterly instalment payments in respect of their corporation tax liability.

(2) One exception to this applies in the accounting period that the company

becomes large, that provided profits do not exceed £10 million.

(3) In the year ended 31 January 2010 Quagmire plc’s profits are £1,400,000

(PCTCT of £1,200,000 plus franked investment income of £200,000). Its

lower and upper limits are £150,000 and £750,000 respectively as it has

one associated company which means that Quagmire plc is large and

therefore paying corporation tax at the full rate.

(4) Quagmire plc was also a large company for the year ended 31 January

2009, so the exception outlined above does not apply.

(5) Therefore, quarterly instalment payments are due as Quagmire plc is large

this year and was large last year.

(b)

(1) Quagmire plc’s corporation tax liability for the year ended 31 January 2010

is £336,000 (£1,200,000 at 28%).

(2) The four quarterly instalment payments would therefore have been £84,000

each (336,000/4).

(3) The due date for payment of the instalments will have been as follows:

First instalment

6 months and 14 days from the start of the period: 14 August 2009

Second instalment

9 months and 14 days from the start of the period: 14 November 2009

Third instalment

14 days from the end of the period: 14 February 2010

Fourth instalment

3 months and 14 days from the end of the period: 14 May 2010

(c)

(1) If Quagmire plc did not have an associated company, its lower and upper

limits would be £300,000 and £1,500,000 respectively. As its ‘profits’ for

the year ended 31 January 2010 are £1,400,000 and therefore between the

limits, the company would be marginal.

71

(2) The corporation tax liability would be calculated as follows:

£

Corporation tax

1,200,000 at 28% 336,000

Marginal relief

7/400 (1,500,000 – 1,400,000) x 1,200,000/1,400,000 (1,500)

_______

334,500

========

(3) This will be payable in one lump sum within nine months and one day after

the end of the accounting period, i.e. on 1 November 2010.

updated answers dec08-jun10

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