Paper FTX (UK) Foundations in Taxation (United Kingdom) FOUNDATIONS IN ACCOUNTANCY. Pilot Paper. The Association of Chartered Certified Accountants

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1 FOUNDATIONS IN ACCOUNTANCY Foundations in Taxation (United Kingdom) Pilot Paper Time allowed: Writing: 2 hours This paper is divided into two sections: Section A ALL TEN questions are compulsory and MUST be attempted Section B ALL NINE questions are compulsory and MUST be attempted Tax rates and allowances are on pages 2 3 Paper FTX (UK) Do NOT open this paper until instructed by the supervisor. This question paper must not be removed from the examination hall. The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1 Calculations and workings need only be made to the nearest. 2 All apportionments should be made to the nearest month. 3 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 Dividend rates rates % % Basic rate 1 37, Higher rate 37,401 to 150, Additional rate 150,001 and over A starting rate of 10% applies to savings income where it falls within the first 2,440 of taxable income. Personal allowance Personal allowance standard 6,475 Income limit for standard personal allowance 100,000 Car benefit percentage The base level of CO 2 emissions is 130 grams per kilometre. A rate of 5% applies to petrol cars with CO 2 emissions of 75 grams per kilometre or less, and a rate of 10% applies to petrol cars with CO 2 emissions between 76 and 120 grams per kilometre. Car fuel benefit The base figure for calculating the car fuel benefit is 18,000. Pension scheme limit The maximum contribution that can qualify for tax relief without any earnings is 3,600. Authorised mileage allowances: cars Up to 10,000 miles Over 10,000 miles 40p 25p Capital allowances: rates of allowance % Plant and machinery Main pool 20 Special rate pool 10 Motor cars (purchases since 6 April 2009 (1 April 2009 for Ltd companies)) CO 2 emissions up to 110 grams per kilometre 100 CO 2 emissions between 111 and 160 grams per kilometre 20 CO 2 emissions over 160 grams per kilometre 10 2

3 Annual investment allowance % First 100,000 of expenditure 100 Industrial buildings Writing down allowance 1 Corporation tax Financial year Small profits rate 21% 21% 21% Main rate 28% 28% 28% Lower limit 300, , ,000 Upper limit 1,500,000 1,500,000 1,500,000 Standard fraction 7/400 7/400 7/400 Marginal relief Standard fraction x (U A) x N/A Value added tax Standard rate Up to 3 January % Standard rate From 4 January 2011 onwards 20.0% Registration limit 70,000 Deregistration limit 68,000 Capital gains tax Rate of tax Lower rate 18% Rate of tax Higher rate 28% Annual exempt amount: 10,100 Entrepreneurs relief Lifetime limit 5,000,000 Entrepreneurs relief Rate of tax 10% National insurance contributions (not contracted-out rates) % Class 1 employee 1-5,715 per year Nil 5,716-43,875 per year ,876 and above per year 1.0 Class 1 employer 1-5,715 per year Nil 5,716 and above per year 12.8 Class 1A 12.8 Class per week Small earnings limit 5,075 Class 4 1 5,715 per year Nil 5,716 43,875 per year ,876 and above per year 1.0 Where weekly or monthly calculations are required the Class 1 limits shown above should be divided by 52 (weekly) or 12 (monthly) as applicable. Official rate of interest (assumed) 4.0% 3

4 Section A ALL TEN questions are compulsory and must be attempted Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to each multiple choice question. 1 By which date should form P35 be submitted to HM Revenue and Customs (HMRC)? A 19 May following the relevant tax year B 31 May following the relevant tax year (1 mark) 2 James is a sole trader and uses his car for both business and private purposes. The car has a CO 2 emission rate of 190 grams per kilometre and had cost 18,000. The private mileage for James accounting period ended 31 March 2011 represented 20% of the total mileage for that year. What is the maximum amount of capital allowances that James can claim in respect of the car for the tax year ? A 3,600 B 2,880 C 1,440 D 1,800 (2 marks) 3 Bernie is an employee. His employer provided Bernie with the use of free accommodation for the whole of the tax year It was not deemed to be job related. The accommodation cost Bernie s employer 100,000 in February 2009 and has an annual value of 8,000. What is Bernie s total taxable benefit in respect of the accommodation for the tax year ? A 8,000 B 9,000 C 12,000 D 13,000 (3 marks) 4 Rosie is a sole trader and has 40,000 taxable trading profits for her accounting year ended 31 August What is the TOTAL amount of national insurance contributions (NIC) that Rosie has to pay for the tax year ? A 2,743 B 2,868 C 3,200 D 3,325 (3 marks) 5 A company prepares accounts to 31 December annually. By which date should the company file its tax return for the year ended 31 December 2010 to avoid incurring interest and penalties? A 31 December 2011 B 1 October 2011 (1 mark) 4

5 6 Which of the following statements is true? A Business property losses of a company can only be used against business property income B Capital losses can always be used against capital gains of the previous year C Trade losses can be used against any income in future years D Debenture interest paid to UK resident individuals is paid net of 20% income tax (2 marks) 7 A company has the following expenses in its accounting period ended 31 March 2011: Legal expenses in respect of trade debt collecting 800 Depreciation of plant and machinery 1,200 Staff entertainment 900 Gifts of wine to clients 600 How much should the company add back to its accounting profit to arrive at its tax adjusted trading profit? A 2,700 B 2,600 C 1,800 D 2,100 (2 marks) 8 By what date must capital gains tax for the tax year be paid to avoid incurring interest and penalties? A 31 December 2011 B 31 January 2012 (1 mark) 9 Mary has two chargeable gains in the tax year : 10,000 amount qualifying for entrepreneurs relief 12,000 not qualifying for entrepreneurs relief Mary has taxable income of 11,000 in the tax year How much capital gains tax must Mary pay for the tax year ? A 3,160 B 1,532 C 2,142 D 1,342 (3 marks) 10 A sole trader sells inventory for 1,000 (exclusive of value added tax (VAT)) in March He offers a 10% discount if the invoice is settled within 14 days of the invoice date. The invoice is actually paid three weeks after the invoice date. How much VAT must the sole trader charge on the sale? A 167 B 150 C 180 D 200 (2 marks) 5

6 Section B ALL NINE questions are compulsory and MUST be attempted 1 Stella is an employee of a large brewery company. Stella received a salary of 189,940 for the tax year In May 2010 Stella received a bonus of 12,000 based on the company profits for the year ended 31 December Stella s employer has deducted 59,300 income tax (under PAYE) from Stella s income for the tax year During the tax year Stella also received the following amounts of other income: Dividends 900 National Savings Bank interest 600 Bank interest 1,600 During the tax year Stella contributed 40,000 to her personal pension plan. Calculate the income tax payable by Stella for the tax year (15 marks) 2 Lace Ltd prepared accounts annually to 31 March. During October 2010, Lace Ltd decided to change its accounting date to 31 December. As a consequence, Lace Ltd prepared it s most recent set of accounts for the nine months ended 31 December Lace Ltd had the following results for the nine-month chargeable accounting period to 31 December 2010: Adjusted trading profit (before capital allowances) 1,200,000 Non-trade investment income 45,000 Capital gain (22 May 2010) 195,000 Dividend received (9 October 2010) 9,000 Gift aid payment (2 December 2010) 14,000 The investment income was the full amount receivable for the nine-month period ended 31 December Lace Ltd had capital losses of 10,000 brought forward on 1 April The tax written down value on the main pool brought forward on 1 April 2010 was 190,000. Lace Ltd purchased a new machine for 120,000 on 14 June 2010 and sold an old machine, which had cost 50,000, for 20,000 on 4 December Lace Ltd has no associated companies. Calculate the corporation tax payable by Lace Ltd for the nine-month chargeable accounting period ended 31 December (15 marks) 6

7 3 Rebecca made the following disposals of capital assets in the tax year : 15 August 2010 Part of a field was sold for 24,000. This was part of a ten-acre field, which Rebecca had purchased in 2003 for 80,000. The remaining part of the field had a market value of 126,000 in August Expenses of sale amounted to 1, November 2010 A military medal was sold for 2,000. Rebecca had inherited the medal from her father (who had been awarded the medal in 1946) in 2006 when it had a market value of 1, January 2011 A building was sold for 295,000. Expenses of sale amounted to 15,000. The building had cost 190,000 in August 2001 and was extended at a cost of 20,000 in May None of the assets were business assets. Rebecca earns a salary of 120,000 per year. Calculate the capital gains tax payable by Rebecca for the tax year (10 marks) 4 Bud plc is registered for value added tax (VAT). During the three-month VAT period ended 31 March 2011, Bud plc made the following transactions: Sales: Standard rated sales 240,000 Zero rated sales 80,000 Purchases: Inventory (all standard rated) 110,000 A machine for use in the business 40,000 A car for both private and business use 25,000 Two debts were written off during the three-month period ended 31 March 2011: A debt which was due on 31 August ,000 A debt which was due on 30 November ,000 All figures are exclusive of VAT. Calculate the VAT that was payable to HM Revenue and Customs (HMRC) by Bud plc for the three-month period ended 31 March Note: you MUST state why any VAT is not calculated on any of the above figures. (10 marks) 5 Flower plc prepares accounts to 31 March each year. For the year ended 31 March 2011, Flower plc had total taxable profits amounting to 1,800,000. Flower plc had total taxable profits of 2,000,000 in the year ended 31 March State the due dates of payment in respect of Flower plc s year ended 31 March 2011, and the amount of corporation tax payable on each date. (6 marks) 7

8 6 In the tax year Jennifer rented out a fully furnished property for an annual rent of 12,000. The full amount was received during the tax year, with the exception of 1,000 due for March 2011, which was received in May Jennifer paid the following expenses in connection with the property: Water rates 400 Insurance 300 Kitchen extension 3,000 Redecoration 500 A new table and chairs 750 Jennifer always claims the wear and tear allowance. Calculate Jennifer s property income for the tax year (6 marks) 7 Plant plc prepares accounts annually to 31 March. On 31 January 2011, Plant plc sold a factory, which it had used in its business for 840,000. The factory had originally cost Plant plc 410,000 in May In August 2011, Plant plc intends to purchase a plot of land, which will be used in its business, for 780,000. Plant plc always claims any reliefs that it is entitled to. Calculate Plant plc s chargeable gain for the year ended 31 March 2011 and state the revised base cost of the new plot of land. Note: the indexation factor for May 2003 to January 2011 is: (6 marks) 8 David commenced trading as a sole trader on 1 October David decided to prepare accounts to 30 April each year. David s results for his first two periods of account are as follows: Period to 30 April ,500 Year ended 30 April ,000 Calculate the assessable trading profits for the three tax years affected by the above accounting results, clearly stating the basis periods that apply. Note: You are not required to calculate overlap profits (6 marks) 8

9 9 Barry received the following amounts of investment income in the tax year : National Savings Bank interest 300 Building society interest 800 National Savings Certificate interest 200 Bank deposit interest 180 UK dividends 450 All the amounts shown are the actual amounts received or credited to the accounts. (a) Prepare a schedule of taxable investment income using the following format: Amount Tax Gross received deducted amount (4 marks) (b) Below is an extract from page 3 of a tax return (Form SA 100). Income Interest and dividends from UK banks, building societies etc 1 Taxed UK interest etc the net amount after tax has been taken off 4 Other dividends do not include the tax credit Untaxed UK interest etc amounts which have not been taxed 5 Foreign dividends (up to 300) the amount in sterling after foreign tax was taken off. Do not include this amount in the foreign pages Dividends from UK companies do not include the tax credit 6 Tax taken off foreign dividends the sterling equivalent In your answer booklet, state the amounts that would be entered in boxes 1, 2 and 3 only. Your answer should state any amounts that are not included on the tax return. (2 marks) (6 marks) End of Question Paper 9

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12 Pilot Paper FTX Foundations in Taxation (United Kingdom) Answers and marking scheme Section A 1 A Form P35 must accompany form P14 and be submitted to HM Revenue and Customs (HMRC) by 19 May following the relevant tax year. 2 C Cars are not entitled to the annual investment allowance. The car will be treated as a special rate item and will therefore be entitled to writing down allowance at 10%. The allowance will be restricted because of the private use. The total amount due is: 18,000 x 10% x 80% = 1, B Accommodation provided for private use by an employer is taxed on the annual value plus an additional amount if the accommodation cost the company more than 75,000. The correct calculation of the benefit is 8,000 + [( 100,000 75,000) x 4%] = 9, B Sole traders are liable to both class 2 and class 4 national insurance contributions (NIC). Class 2 contributions are 2.40 a week and therefore 125 ( 2.40 x 52 weeks) a year. Class 4 contributions are calculated at 8% of the amount of trading profits between the thresholds of 5,715 and 43,875 and therefore the amount due for the tax year is 2,743 [ 40,000 5,715) x 8%]. The total NIC for is therefore 2, A A company must submit its tax return within 12 months of the end of the chargeable accounting period. Therefore the due date is 31 December D Property losses can be used against total income of the same period before gift aid payments. Capital losses cannot be carried back to previous years. Trade losses can be carried forward against future trading profits of the same trade only. Therefore statements A, B and C are all untrue. Debenture interest paid by companies to UK resident individuals must be paid net of 20% income tax. Therefore statement D is true. 7 C Legal fees for debt collecting are trade expenses, staff entertainment is specifically allowed by statute (entertainment of clients would not be allowed), depreciation is disallowed and is replaced by capital allowances and gifts of alcohol are never allowable expenses. Therefore the amount to be added back to trading profits is 1,800 ( 1, ). 8 B Capital gains tax (CGT) is always due by 31 January following the relevant tax year. Therefore the CGT for the tax year is due on 31 January D Gains subject to entrepreneurs relief are taxed at 10%. Other gains will be reduced by the annual exemption and then taxed, in this case, at 18%, because Mary has total gains and income less than the upper limit of 37,400. The capital gains tax (CGT) payable is therefore 1,342 [( 10,000 x 10%) + (( 12,000 10,100) x 18%)]. 10 C Value added tax (VAT) is calculated on the discounted price even when the discount is not taken by the purchaser because of late payment. The VAT due is therefore 180 ( 1,000 x 90% x 20%). (20 marks) Section B 1 Stella Income tax payable for the tax year Marks Non-savings Savings Dividend income income income Total Salary 189, Bonus 12, Employment income 201,940 Bank interest 1,600 x 100/80 2, National Savings Bank interest Dividend 900 x 100/90 1, Net income 201,940 2,600 1, ,540 Personal allowance* Nil 1 Taxable income 201,940 2,600 1, ,540 * Net income above 112,950 12

13 Extension of basic rate band 37,400 + ( 40,000 x 100/80) = 87,400 2 Extension of higher rate limit 150,000 + ( 40,000 x 100/80) = 200,000 2 Tax payable: First 87,400 x 20% 17, Next 112,600 x 40% 45, ,000 Next 1,940 x 50% Savings 2,600 x 50% 1,300 1 Dividend 1,000 x 42.5% ,215 Less: Tax deducted at source Dividend credit 1,000 x 10% (100) 0.5 Bank credit 2,000 x 20% (400) 0.5 PAYE (59,300) 0.5 Tax payable 5,415 Marks 15 2 Lace Ltd Corporation tax for the nine-month chargeable accounting period ended 31 December 2010 Adjusted trading profit 1,200, Capital allowances (see working) (107,250) Trading income 1,092,750 Investment income 45,000 1 Capital gain 195,000 1 Capital loss brought forward (10,000) 185, ,322,750 Gift aid payment (14,000) 1 Total taxable profits 1,308,750 Franked investment income: ( 9,000 x 100/90) 10, Augmented profits 1,318,750 Thresholds: 1,500,000 x 9/12 1,125, ,000 x 9/12 225,000 1 Tax payable: 1,308,750 x 28% 366,450 1 Working capital allowances Annual Investment Main Capital Allowance pool allowances 1 April 2010 to 31 December 2010: Balance brought forward 190,000 Purchase 14 June ,000 45, , ,000 Disposal 4 December 2010 (20,000) 1 75, ,000 Annual investment allowance 100% (75,000) 75, ( 100,000 x 9/12) Writing down allowance 20% x 9/12 (32,250) 32,250 2 Balances carried forward Nil 182, ,

14 Marks 3 Rebecca Capital gains tax for the tax year August 2010: Proceeds 24, Expenses of sale (1,500) ,500 Cost 80,000 x 24,000 (12,800) , , November 2010 Medal exempt 1 2 January 2011 Proceeds 295, Expenses of sale (15,000) 0.5 9, ,000 Cost (190,000) 1 Extension (20,000) 1 70,000 Total gains: 9, ,000 79, Annual exempt amount (10,100) 1 69,600 Tax payable: 69,600 x 28% 19, Bud plc Value added tax (VAT) return for the three months ended 31 March 2011 Output tax: Sales Standard rated 240,000 x 20% 48, Zero rated nil 1 48,000 Input tax: Purchases Inventory 110,000 x 20% 22, Machine 40,000 x 20% 8, Car VAT not recoverable 1 Bad debts 31 August ,000 x 17.5% November 2010 < 6 month old Nil (30,525) 1.5 VAT payable 17, Flower plc Corporation tax payments Corporation tax for the year ended 31 March 2011: 1,800,000 x 28% 504,000 1 Instalment amount: 504, , Payment dates: 14 October , January , April , July ,

15 6 Jennifer Property income for the tax year Rent accrued amount 12, Expenses water rates (400) 0.5 Expenses insurance (300) 0.5 Expenses redecoration (500) ,800 Wear and tear allowance: 10% x ( 12, ) (1,160) 2 9,640 No deduction for the new kitchen table and chairs or the extension Plant plc Chargeable capital gain for the year ended 31 March 2011 Gain: Proceeds 840,000 Cost (410,000) 430,000 1 Indexation allowance: x 410,000 (79,950) 1 350,050 Amount rolled over (290,050) 1 Gain chargeable now ( 840, ,000) 60,000 2 Base cost of new land: Actual cost 780,000 Amount rolled over (290,050) 489, David Opening year tax assessments Actual October 2009 to 5 April /7 x 10,500 9, First 12 months of trading October September ,500 + ( 36,000 x 5/12) 25, Current year basis 0.5 Year to 30 April ,

16 9 (a) Barry Schedule of investment income Amount Tax Gross received deducted amount National Savings Bank interest 300 nil Building society interest ,000 1 Bank deposit interest UK dividends , ,025 Marks 4 (b) Barry Self-assessment tax return entries Box Box Box Note: National Savings Certificate interest is exempt