ACCA P6 UK Advanced Taxation Mock Exam Friday 25th May, 2018

Transcription

1 Page 1 ACCA P6 UK Advanced Taxation Mock Exam Friday 25th May, 2018 Please attempt this mock exam under exam conditions in 3 hours and 15 minutes and send scanned answers to admin@accountancytube.com by deadline which is 24 hours after you receive this mock. You will receive your results within a week s time. Instructor Name: Faisal Farooq B.Sc., ACCA, FPA faisal@accountancytube.com

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the tax year 2017/18 and for the financial year to 31 March 2018 will continue to apply for the foreseeable future unless you are instructed otherwise. 2. Calculations and workings need only be made to the nearest. 3. All apportionments should be made to the nearest month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions. Income tax Normal rates Dividend rates Basic rate 1 33,500 20% 7 5% Higher rate 33,501 to 150,000 40% 32 5% Additional rate 150,001 and over 45% 38 1% Savings income nil rate band Basic rate taxpayers 1,000 Higher rate taxpayers 500 Dividend nil rate band 5,000 A starting rate of 0% applies to savings income where it falls within the first 5,000 of taxable income. Personal allowance 11,500 Transferable amount 1,150 Income limit 100,000 Personal allowance Residence status Days in UK Previously resident Not previously resident Less than 16 Automatically not resident Automatically not resident 16 to 45 Resident if 4 UK ties (or more) Automatically not resident 46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties 91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more) 121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more) 183 or more Automatically resident Automatically resident

3 Remittance basis charge UK resident for Seven out of the last nine years 30, out of the last 14 years 60, out of the last 20 years 90,000 Child benefit income tax charge Where income is between 50,000 and 60,000, the charge is 1% of the amount of child benefit received for every 100 of income over 50,000. Car benefit percentage The relevant base level of CO2 emissions is 95 grams per kilometer. The percentage rates applying to petrol cars with CO2 emissions up to this level are: 50 grams per kilometre or less 9% 51 grams to 75 grams per kilometer 13% 76 grams to 94 grams per kilometre 17% 95 grams per kilometre 18% Car fuel benefit The base figure for calculating the car fuel benefit is 22,600. (ISAs) The overall investment limit is 20,000. Individual savings accounts Property income Basic rate restriction applies to 25% of finance costs. Pension scheme limits Annual allowance 2014/15 to 2017/18 40, /14 50,000 Minimum allowance 10,000 Threshold income limit 110,000 Income limit 150,000 Lifetime allowance 1,000,000

4 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 45p 25p Capital allowances: rates of allowance Plant and machinery Main pool 18% Special rate pool 8% Motor cars New cars with CO2 emissions up to 75 grams per kilometre 100% CO2 emissions between 76 and 130 grams per kilometre 18% CO2 emissions over 130 grams per kilometre 8% Annual investment allowance Rate of allowance 100% Expenditure limit 200,000 Revenue limit 150,000 Cash basis Cap on income tax reliefs Unless otherwise restricted, reliefs are capped at the higher of 50,000 or 25% of income. Rate of tax Financial year % Financial year % Financial year % Profit threshold 1,500,000 CORPORATION TAX Patent box deduction from net patent profit Net patent profit x ((main rate 10%)/main rate)

5 Standard rate 20% Registration limit 85,000 Deregistration limit 83,000 Value added tax (VAT) Inheritance tax: nil rate bands and tax rates 6 April 2017 to 5 April ,000 6 April 2016 to 5 April ,000 6 April 2015 to 5 April ,000 6 April 2014 to 5 April ,000 6 April 2013 to 5 April ,000 6 April 2012 to 5 April ,000 6 April 2011 to 5 April ,000 6 April 2010 to 5 April ,000 6 April 2009 to 5 April ,000 6 April 2008 to 5 April ,000 6 April 2007 to 5 April ,000 6 April 2006 to 5 April ,000 6 April 2005 to 5 April ,000 6 April 2004 to 5 April ,000 6 April 2003 to 5 April ,000 Residence nil rate band 6 April 2017 to 5 April ,000 Rate of tax on excess over nil rate band Lifetime rate 20% Death rate 40%

6 Inheritance tax: taper relief Years before death Percentage reduction More than 3 but less than 4 years 20% More than 4 but less than 5 years 40% More than 5 but less than 6 years 60% More than 6 but less than 7 years 80% CAPITAL GAINS TAX Normal rates Residential property Rates of tax Lower rate 10% 18% Higher rate 20% 28% Annual exempt amount 11,300 Entrepreneurs relief Lifetime limit 10,000,000 Rate of tax 10% National insurance contributions Class 1 Employee 1 8,164 per year Nil 8,165 45,000 per year 12% 45,001 and above per year 2% Class 1 Employer 1 8,164 per year Nil 8,165 and above per year 13 8% Employment allowance 3,000 Class 1A 13 8% Class per week Small profits threshold 6,020 Class 4 1 8,164 per year Nil 8,165 45,000 per year 9% 45,001 and above per year 2% Rates of interest (assumed) Official rate of interest 2.5% Rate of interest on underpaid tax 2.75% Rate of interest on overpaid tax 0 5%

7 Stamp duty land tax Non-residential properties 150,000 or less 0% 150, ,000 2% 250,001 and above 5% Residential properties (note) 125,000 or less 0% 125, ,000 2% 250, ,000 5% 925,001 1,500,000 10% 1,500,001 and above 12% Note: These rates are increased by 3% in certain circumstances including the purchase of second homes and buy-to-let properties. Stamp duty Shares 0 5%

8 Section A BOTH questions are compulsory and MUST be attempted.1 Your manager has sent you an , together with an attachment, in respect of a client called Mirtoon. The and the attachment are set out below. from your manager Mirtoon intends to leave the UK in January 2019 in order to live in the country of Koro. He has entered into a full time contract of employment for a fixed term of four years but he may stay in Koro for as long as ten years. He will buy a house in Koro and will not make any return trips to the UK whilst he is living in Koro. Mirtoon plans to sell his house in the UK and his UK business premises and cease his business prior to his departure. Details of these proposals, together with information regarding agricultural land owned by Mirtoon, are set out in the attached extract from his . Background information Mirtoon is 52 years old and divorced. He has always been resident and domiciled in the UK. He will continue to be UK domiciled whilst living in the country of Koro. He does not own any buildings other than his home and his business premises. He receives bank interest in respect of UK bank deposits of 28,250 per year. He will continue to hold these bank deposits whilst living in the country of Koro. Mirtoon has not made any disposals for the purposes of capital gains tax in the tax year 2018/19. He has capital losses brought forward as at 5 April 2018 of 2,900. Mirtoon is self employed. He has overlap profits brought forward in respect of his business of 7,600. He is registered for value added tax (VAT) and makes standard rated supplies only. He has never made any claims in respect of entrepreneurs relief. I want you to prepare the following: (a) Mirtoon s financial position Mirtoon wants to know how his plans to dispose of assets and his departure from the UK will affect his financial position. The details of his plans are in the following attachment. He has asked us to prepare a calculation of the total of the following amounts: The after tax proceeds from the sale of his home and business assets. The tax saving in respect of the offset of his trading losses. The trading losses should be offset against the total income of the tax year 2017/18; there is no need to consider any other loss reliefs. In order to accurately determine the tax effect of the relief available, you should prepare calculations of Mirtoon s income tax liability for 2017/18 both before and after the offset of the losses. Any other tax liabilities arising as a result of Mirtoon s plans to leave the UK. You should include explanatory notes where this is necessary to assist Mirtoon s understanding of the calculations. This may be particularly useful in relation to the availability of any reliefs and allowances and the tax relief available in respect of the offset of the trading losses. (b) A letter to be sent from me to Mirtoon that addresses the following matters (i) VAT: The VAT implications of the cessation of the business and the sale of the business assets. (ii) Income tax and capital gains tax: Whether or not Mirtoon will be liable to UK income tax and capital gains tax whilst he is living in the country of Koro by reference to his residence and domicile status. You should include specific reference to the capital gains tax implications of the proposed sale of the agricultural land in June Also comment on the implications of Mirtoon selling his UK home whilst he is in Koro rather than

9 prior to his departure. There is no double tax treaty between the UK and the country of Koro. (iii) Inheritance tax: Mirtoon has asked me to discuss some ideas he has had in relation to reducing the potential inheritance tax liability on his death. To help me with this, please include a summary of the rules relating to associated operations. Tax manager Attachment Extract from an from Mirtoon Sale of house I plan to sell my house on 31 December 2018 for 730,000. I purchased the house for 540,000 on 1 July 2008 and I have lived there ever since that date. Sale of business assets My business made a tax adjusted profit in the year ended 30 June 2017 of 95,000. However, in the year ended 30 June 2018 it made a tax adjusted loss of 20,000. I have not been able to find a buyer for the business and will therefore cease trading on 31 December I will sell my business premises, a small office unit, for 120,000 on 31 December I purchased this office unit for 58,000 on 1 May I will then sell any remaining business assets. I expect to be able to sell the remaining business assets, consisting of machinery and inventory, for 14,000, with no asset being sold for more than cost. The business will make a tax adjusted loss of 17,000 in the six months ending 31 December 2018 after taking account of the sale of the business assets. Agricultural land In May 2014 my father gave me 230 acres of agricultural land situated in the UK. A capital gain of 72,000 arose in respect of this gift and my father and I submitted a joint claim for gift relief. I expect the value of the land to increase considerably in 2019 and I intend to sell it in Required: (a) The calculations showing how Mirtoon s disposal of assets and subsequent departure from the UK will affect his financial position as requested in the from your manager, assuming that the house is sold on 31 December Ignore national insurance contributions. (16 marks) (b) Prepare the letter to Mirtoon requested in the from your manager. The following marks are available. (i) Value added tax (VAT) (3 marks) (ii) Income tax and capital gains tax (10 marks) (iii) Inheritance tax. (2 marks) Professional marks will be awarded for the extent to which the calculations are approached in a logical manner in part (a) and the effectiveness with which the information is communicated in part (b). (4 marks) You should assume that today s date is 9 December (Total: 35 marks)

10 .2 You have received an with an attachment from your manager relating to a new client of your firm. The attachment is a memorandum prepared by the client, Mr Stone, who owns the whole of the ordinary share capital of Bond Ltd. The from your manager contains further information in relation to the Bond Ltd group of companies and sets out the work you are to perform. The attachment and the are set out below. Attachment Memorandum from Mr Stone Bond Ltd group of companies Formation of the group The Bond Ltd group consists of Bond Ltd, Ungar Ltd and Madison Ltd. 1 April 2016 I purchased the whole of the ordinary share capital of Bond Ltd. 1 December 2016 Bond Ltd purchased the whole of the ordinary share capital of Ungar Ltd. 1 October 2018 Madison Ltd was incorporated on 1 October Bond Ltd acquired 65% of the ordinary share capital of Madison Ltd on that date. Bond Ltd Results for the six months ended 30 September 2018 Notes Trading losses brought forward (20,000) 1 Tax adjusted trading income for the period 470,000 2, 3 Chargeable gain 180,000 4 Notes 1 On 31 March 2016, Bond Ltd had trading losses to carry forward of 170,000. The company s total taxable trading income for the two years ended 31 March 2018 was only 150,000, such that on 31 March 2018 it had trading losses to carry forward of 20, Bond Ltd s trade consists of baking and selling bread and other baked products. Up to 31 March 2018, its main product had always been low cost bread which was sold to schools, hospitals and prisons. In April 2018, Bond Ltd introduced a new range of high quality breads and cakes. This new range is sold to supermarkets and independent retailers and, for the six months ended 30 September 2018 represents 65% of the company s turnover and 90% of its profits. 3 In order to produce the new product range, Bond Ltd invested 135,000 in plant and machinery in April The tax adjusted trading income is after deducting capital allowances of 135,000 (i.e. 100% of the cost of the plant and machinery). The tax written down value brought forward on the company s main pool as at 1 April 2018 was zero and there were no other additions or disposals of plant and machinery in the period. 4 The chargeable gain arose on the sale of a plot of land on 1 May 2018 for proceeds of 350,000. The land had always been used in the company s business but was no longer required. Ungar Ltd The trade of Ungar Ltd consists of baking high quality cakes. Ungar Ltd trades from premises purchased on 1 July 2017 for 310,000. Ungar Ltd also develops new baking processes and techniques which it has patented. It

11 uses these processes and techniques itself and licenses the patents to other manufacturers. Madison Ltd Madison Ltd purchased a building for 400,000 (plus 20% value added tax (VAT)) and machinery for 300,000 (plus 20% VAT) and began to trade on 1 October Madison Ltd is partially exempt for the purposes of VAT. In the year ending 30 September 2019, its VAT recovery percentage is expected to be 80%. However, I expect this percentage to fall slightly in future years. from your manager Additional information Bond Ltd, Ungar Ltd and Madison Ltd are all resident in the UK. Bond Ltd and Ungar Ltd had always prepared accounts to 31 March. However, in 2018 it was decided to change the group s year end to 30 September and accounts have been prepared for the six months ended 30 September The original cost of the land sold by Bond Ltd on 1 May 2018 was 150,000. The chargeable gain of 180,000 is after the deduction of indexation allowance and is correct. Please carry out the following work: (a) Corporation tax liability of Bond Ltd Calculate the corporation tax liability of Bond Ltd for the six months ended 30 September 2018 based on the information provided by Mr Stone. You should review Mr Stone s capital allowances figure of 135,000 and assume the company will claim the maximum possible rollover relief. Include notes on the following matters. (i) The capital allowances available. (ii) The use of Bond Ltd s trading losses brought forward bearing in mind that Mr Stone only recently acquired the company. (iii) The availability of rollover relief in respect of the chargeable gain on the land. You should ignore VAT when carrying out this work. We will need to do further work in order to finalise this computation. In the meantime, make a note of any assumptions you have made in order to complete the computation as far as possible for now. (b) Ungar Ltd Patent box regime State, giving reasons, whether or not the patent box regime is available to Ungar Ltd and briefly describe the operation of the regime. (c) Madison Ltd Recovery of input tax Explain how much of the input tax in respect of the purchase of the building and machinery can be recovered by Madison Ltd in the year ending 30 September 2019 and how this may be adjusted in future years. Include an example of a possible adjustment in the year ending 30 September Tax manager

12 Required: Carry out the work required as requested in the from your manager. The following marks are available: (a) Corporation tax liability of Bond Ltd. For guidance, approximately two thirds of the available marks relate to the written notes. (17 marks) (b) Ungar Ltd Patent box regime. (4 marks) (c) Madison Ltd Recovery of input tax. (4 marks) (Total: 25 marks)

13 Section B Both questions must be attempted.3 The Loriod plc group intends to acquire an overseas business. It requires advice on the relief available in respect of any initial losses made by the business, the use of foreign tax credits and transfer pricing. The following information has been obtained from the management of the Loriod plc group. Loriod plc group: Loriod plc is a UK resident trading company. Loriod plc has a large number of wholly owned UK resident trading subsidiary companies. Elivar Ltd, one of the Loriod plc group subsidiaries, is to acquire the Frager business. The purchase of the Frager business will follow either Strategy A or Strategy B. Elivar Ltd: Makes qualifying charitable donations of 2,000 each year. Has taxable total profits of approximately 90,000 per year. The Frager business: Is carried on in the country of Kuwata and is owned by Syme Inc, a company resident in Kuwata. Manufactures components used by Elivar Ltd and other Loriod plc group companies. Carries on the same trade as Elivar Ltd. Is expected to make a loss in the year following its acquisition by Elivar Ltd. Is expected to have taxable profits of 130,000 per year following the year of acquisition. Strategy A: Elivar Ltd will purchase the trade and all of the assets of Syme Inc such that Elivar Ltd will be carrying on the Frager business through a permanent establishment in Kuwata. The permanent establishment will be controlled from the UK. Strategy B: Elivar Ltd will purchase the whole of the share capital of Syme Inc such that Syme Inc will be a subsidiary of Elivar Ltd resident in Kuwata. It has been determined that Syme Inc would not be a controlled foreign company. The tax system in the country of Kuwata: Is broadly the same as that in the UK with a corporation tax rate of 14%. Trading losses may only be utilised by companies resident in Kuwata. Kuwata is not a member of the European Union and there is no double tax treaty between the UK and Kuwata.

14 Required: (a) Provide a detailed explanation of the relief available in respect of the expected loss to be made by the Frager business depending on whether the purchase follows Strategy A or Strategy B. (7 marks) (b) For this part of the question it should be assumed that the purchase has followed Strategy A and that the Frager business is now profitable. Explain, with supporting calculations, how to determine the maximum loss that can be surrendered to Elivar Ltd by the Loriod plc group companies if relief in respect of the tax suffered in Kuwata is not to be wasted. (5 marks) (c) For this part of the question it should be assumed that the purchase has followed Strategy B. Explain the effect of the prices charged by the subsidiary in Kuwata to other companies in the Loriod plc group on the total tax paid by the group and the implications of the transfer pricing legislation. (6 marks) (d) Capital loss is generally set off against capital gains. State the circumstances when the capital loss can be set off against general income (2 marks) (Total: 20 marks)

15 .4 Your firm has been asked to provide advice to Pita plc in respect of providing employees with financial assistance with childcare and encouraging them to work from home, the establishment of an enterprise management incentive scheme, and a redundancy package provided to an employee. Pita plc: Is a UK resident company which trades in the UK and is quoted on the UK stock exchange. Has an issued share capital of 10,000,000 irredeemable 1 ordinary shares. Has gross assets of 24,000,000 and 180 employees. Issues Pita plc: Intends to provide assistance with childcare to employees and to encourage them to work from home. Intends to establish an enterprise management incentive (EMI) scheme for nine key employees. Has provided a redundancy package to Narn, an employee. Financial assistance with childcare and encouraging working from home: Pita plc will provide employees with vouchers to purchase 42 of childcare per child per week. The vouchers will cost Pita plc 95 pence for each 1 of childcare purchased. Pita plc will pay employees an extra 3 per day when they work from home. The payments are intended to cover the additional household costs of working from home. The EMI scheme: The scheme would reward seven full time and two part time key employees. Each key employee will be granted an option to acquire 10,000 shares at 1.75 per share. The options will be exercised in six years time when the shares are expected to be worth 5 each. An ordinary share in Pita plc is expected to be worth 2 when the options are granted. Redundancy package provided to Narn on 31 March 2018: Statutory redundancy of 8,100 paid on 31 March An additional payment of 26,000 made on 31 March Continued use of her company car until 30 September Pita plc paid 18,400 for Narn s diesel powered car; it had a list price of 19,500. The car has CO2 emissions of 109 grams per kilometre. Required: (a) Explain whether or not the planned financial assistance with childcare and encouragement to work from home will give rise to taxable employment income

16 for the employees. (6 marks) (b) (i) Explain, with reference to the information provided, whether or not Pita plc is a qualifying company for the purpose of the enterprise management incentive (EMI) scheme and if it is able to make the scheme available to just the nine key employees. (4 marks) (ii) On the assumption that an EMI scheme is established, explain the income tax and capital gains tax implications for the employees in respect of the grant and exercise of the options and the sale of the shares, including the availability of entrepreneurs relief. (5 marks) (c) Explain, with supporting calculations, the taxable amounts arising in respect of the redundancy package provided to Narn. (5 marks) (Total: 20 marks) End of Question paper