Fundamentals Level Skills Module, Paper F6 (CYP)

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2 Fundamentals Level Skills Module, Paper F6 (CYP) Taxation (Cyprus) Section B June 206 Answers and Marking Scheme Marks Charalambos (a) Value added tax (VAT) return for the quarter ended 30 September 205 Output VAT Standard rated supplies in Cyprus ( 20,000 x 9/9 x 95%) 3,034 Exports to Russia (VAT at 0%) 0 Sale to an Italian VAT registered business EU dispatch (VAT at 0%) 0 3,034 Less: Input VAT Entertaining a major customer (blocked) 0 Repair of a machine ( 350 x 9/9) (56) Saloon car acquisition (blocked) 0 Staff bonding dinner (for staff only) ( 500 x 9/9) (80) Other expenses (all allowable for VAT) ( 4,550 x 9/9) (726) (862) VAT payable 2,72 7 (b) Deregistration Charalambos will be required to deregister for VAT when he ceases trading. He must notify the Tax Office within 60 days of cessation. At the date of his deregistration, a deemed supply of all items of inventory and assets on hand on which input VAT was reclaimed arises, on which output VAT is payable Rodoula (a) Chargeable gain on the exchange of the plot in Nicosia with a villa in Peyia Disposal proceeds 20 January 205 (market value of the plot at the exchange date) 600,000 Less: Acquisition cost Cost of the plot on 2 June 2005 (70,000) Add: Indexation allowance ( 70,000 x (5 77/99 85) 70,000) (27,05) (97,05) Capital gain 402,895 Less: Roll-over relief Market value of property received villa in Peyia 500,000 Less: Indexed cost of property given (as above) (97,05) Gain reinvested 302,895 Relief available (302,895) General lifetime exemption (not used in the past) (7,086) Chargeable gain 82,94 5 9

3 (b) Marks Chargeable gain on the exchange of the agricultural land in Nicosia with a villa in Peyia Disposal proceeds 20 January 205 (market value of the agricultural land at the exchange date) 500,000 Less: Acquisition cost Original cost of acquisition on 3 January 98 (30,000) Add: Indexation allowance ( 30,000 x (5 77/39 62) 30,000) (57,660) (87,660) Capital gain 42,340 Less: Roll-over relief Market value of property received villa in Peyia 500,000 Less: Indexed cost of property given (as above) (87,660) Gain reinvested 42,340 Relief available (42,340) General lifetime exemption (not used in the past) Chargeable gain (a) Trading goodwill Trading goodwill arises from the disposal of a business as a going concern, and may be subject to either income or corporation tax, depending upon the legal form of the taxable entity making the sale. Trading goodwill arises in the following instances: the whole of the business is sold; a branch of a business is sold; a share in a partnership is sold; a business carried on by an individual or partnership is converted into a limited company; or two or more businesses are merged. 3 (b) Pericles Total taxable income for the year 205 Trading goodwill (proceeds 25,000 cost of acquisition 00,000) 25,000 Tax adjusted profit Legal firm 70,000 Tax adjusted profit Ayia Napa shop 2,000 Less: Allowed expenses not included in the accounts six months to 30 June 205 Capital allowances (( 00,000 23,000) x 3% x 6/2) (,55) Loan interest paid ( 5,600 x 6/2) (2,800) 8,045 Rental income Ayia Napa shop (,600 x 6 months) 9,600 Less: Allowed expenses six months to 3 December % deduction ( 9,600 x 20%) (,920) Wear and tear (( 00,000 23,000) x 3% x 6/2) (,55) Loan interest paid ( 5,600 x 6/2) (2,800) 3,725 Total taxable income 06, Tutorial note: Interest on the loan is an allowable deduction for income tax purposes as a trading expense and also as a deduction from rental income. 20

4 4 Farmers Ltd Marks Special defence contribution (SDC) liability on deemed dividends as at 3 December 207 Accounting profit (per question) before corporation tax and items () to (4) 25,000 Add/(Less): Additional profits/(losses) arising from transactions () to (4) () Profit on disposal of offices (W) 90,000 (2) Profit on disposal of a plot of land ( 30,000 3,000 5,600),400 (3) Loss on disposal of shares of Hellenic Bank ( 500 3,200) (2,700) (4) Profit on disposal of an antique car ( 5,000 5,000) 0, ,700 Less: Corporation tax Corporation tax paid for the year 205 ( 27,904 x 2 5%) (5,988) Capital gains tax paid in 205 (2,560) Accounting profit subject to deemed distribution provisions 95,52 Deemed distribution on 3 December 207 (70% x 95,52) 36,606 Less: Dividend paid out of the year 205 profits on 3 December 206 (20,000) 6,606 SDC liability: Cyprus tax resident shareholders ( 6,606 x 7%) 9,823 (W) Disposal of offices Disposal proceeds ( 50,000,200) 48,800 Less: Carrying value of offices Cost of land (/3 x 90,000) 30,000 Cost of building (2/3 x 90,000) 60,000 90,000 Less: Accumulated depreciation (2002 to 204) ( 60,000/25 years) x 3 years (3,200) (58,800) Profit on disposal 90, (a) Capital allowances will be granted only provided the following requirements are fulfilled: the expenditure must have been incurred in respect of a fixed asset; the asset must be a qualifying fixed asset; the qualifying asset must belong to the person claiming the capital allowances; the qualifying asset must be used in the person s business; the qualifying asset must be in existence and used in the business on the last day of the accounting period. 3 (b) Provided a qualifying asset is in use in the business at the end of an accounting period (year) of 2 months, a wear and tear allowance will be granted in full it does not matter when in the year the asset was acquired. However, where the period of account is of less than 2 months, e.g. in the first period of trading, then the wear and tear allowance is restricted proportionately to the length of the actual period of account. Tutorial note: If an asset has been sold or ceased to be used in the business before the end of the year, no wear and tear allowance is granted. Instead a balancing statement should be prepared. 3 2

5 Marks (c) Christoforos Assessable profits for the tax years 204 and 205 Tax year 204 Tax adjusted profit before capital allowances 37,30 Less: Capital allowances Motor car not eligible 0 Plant and machinery (acquired in 204) (3/2 x 0,600 x 20%) 530 Truck (acquired in 204) (3/2 x 3,500 x 20%) 675 (,205) 35,925 Tax year 205 Tax adjusted profit before capital allowances 45,600 Less: Capital allowances Motor car not eligible 0 Plant and machinery (acquired in 204) (sold no wear and tear) 0 Truck (acquired in 204) ( 3,500 x 20%) 2,700 Office building (acquired in 205) ( 22,500 36,200) x 3% 2,589 Computer hardware (acquired in 205) (,500 x 20%) 2,300 Motor van (acquired in 205) ( 4,000 x 20%) 2,800 Balancing allowance (W),470 (,859) 33,74 Working Balancing adjustment plant and machinery sold in 205 Cost 0,600 Less: Accumulated capital allowances (204: as calculated) (530) Tax written down value (TWDV) 0,070 Disposal proceeds 8,600 Less: TWDV (0,070) Balancing allowance (,470)

6 Marks 6 (a) Innovative Business Solutions Ltd Corporation tax liability for the year 205 Profit before taxation 399,575 Add back: Disallowed expenses Depreciation (note ) 45,560 Patent royalties paid (note 2) 0 Office rent 0 Irrecoverable receivables (note 3) Trade receivables written off 0 Increase in general allowance for irrecoverable debts 6,500 Gifts and donations (note 4) Gifts to customers (coffee cups costing 5 each and displaying the company s name) 0 Donation to a local football club 65 Donation to an approved charity 0 Professional fees (note 5) Legal fees in connection with the issue of share capital 5,550 Legal consultants annual retainer fee 0 Accountancy and audit fees and expenses 0 Finance cost (note 6) Interest paid in respect of a debenture loan 0 67,675 Deduct: Allowed expenses/charges not included in the financial statements Capital allowances for tax year 205 (35,850) Taxable income 43,400 Corporation tax liability at 2 5% 53,925 7 (b) Onesilos Limited (i) Group members for the year 205 Salamina Limited is a group member for the year 205 as: a direct shareholding of at least 75% is held; it was member of the group for the whole of the year 205; and it was a Cyprus tax resident in Tefkros Limited does not qualify as a group member as it was a non-cyprus tax resident company in 205. Bees Limited does not qualify as a group member in 205 as it was not part of the group for the whole of the year 205 (but it will qualify as a group member for the year 206). 4 (ii) Taxable profit and tax payable for the year 205 Tax adjusted profit (as given) 250,000 Less: Group loss relief (loss of Salamina Limited only) (60,000) Less: Tax loss brought forward (loss of 2009 five year restriction applies) 0 Taxable profit 90,000 Corporation tax liability at 2 5% 23,750 Less: Temporary tax paid (3,000) Corporation tax liability balance 0,750 Add: 0% Additional tax (estimate lower than 75%),075 Corporation tax payable,