November 2015 Examination PAPER 3 Business Compliance TIME ALLOWED 3 ¼ HOURS (for Part I and Part II) You are required to answer all questions in each part (both parts printed together). The first 15 minutes is designated as reading time. During this time you may read your question paper and legislation and annotate your question paper. You are not permitted to write in the answer folders. The Presiding Officer will inform you when you can start writing. Calculators may not be used during this time. You are provided with two answer folders (one for each part of the paper). You must put your candidate number on the front cover of both folders. You must write your answers on the paper provided. Please start each answer on a new sheet of paper and write on one side of the paper only. Put your candidate number at the top of each page and make sure you place your answers in the correct answer folder. All workings should be shown and made to the nearest month and pound unless the question requires otherwise.
Part I You must use the Part I answer folder. 1. Elise is VAT registered and for the quarter ended 31 December 2014 made the following transactions: Sales 390,000 Purchases 105,000 Client entertaining 9,840 All figures are VAT inclusive. Show the entries in the VAT control T account and calculate the VAT payable by Elise for the quarter ended 31 December 2014. (2) 2. Briefly explain how employee shareholder shares are treated for Income Tax and National Insurance Contributions purposes, assuming that the shares are readily convertible assets. (2) 3. Juice Ltd reimburses its employees for certain expenses incurred whilst travelling on business. It reimburses hotel expenses and pays employees business mileage for travel in their personal cars at 45p per mile. Where employees are travelling on business for long periods, an allowance of 250 per week is paid to cover subsistence expenses. Employees in receipt of the 250 weekly allowance are not required by Juice Ltd to keep receipts or record their expenditure. Juice Ltd decided to apply for a dispensation from HM Revenue & Customs in March 2015. 1) Briefly explain whether the expenses reimbursed by Juice Ltd are suitable for inclusion in a dispensation. 2) Explain how Juice Ltd may apply for a dispensation from HM Revenue & Customs and what HM Revenue and Customs will check before approving a dispensation. 3) Explain from what date Juice Ltd s dispensation may be effective. (4) 4. Sunny Ltd has 50 employees, all higher rate taxpayers. It has entered into a PAYE Settlement Agreement with HM Revenue & Customs in respect of staff entertaining and staff gifts. During 2014/15 it provided the following: (c) Five employees were each given a long service award of a 100 gift voucher to recognise 10 years of service with the company. A total of 5,000 was spent on quarterly drinks for employees. All employees were invited to, and attended, the annual Christmas party. 30 employees brought a guest. The total cost of the event was 8,000. 1) Briefly explain whether each of the above items could be included within the PAYE Settlement Agreement. 2) State which class of National Insurance Contributions is due under the PAYE Settlement Agreement and the due date for payment. 3) Calculate the National Insurance Contributions payable under the PAYE Settlement Agreement. (4) Page 2 of 8
5. Laila made the following supplies in the quarter ended 30 September 2014: Standard rated supplies (excluding VAT) 85,500 Exempt supplies 17,800 Laila s input tax for the period was: Wholly attributable to taxable supplies 6,650 Wholly attributable to exempt supplies 1,570 Non-attributable 1,750 9,970 Calculate the input tax recoverable by Laila for the quarter ended 30 September 2014, using the standard method for partial exemption. (4) 6. Lyndsey registered for VAT on 1 December 2014. She has carried out the following transactions: 31 October 2014 Purchase of stock which was still held on 1 December 2014. 25 November 2014 Payment to a solicitor for legal advice about her business. (c) 8 December 2014 Purchase of a car with 60% private use. State, with reasons, whether input tax is recoverable on the above transactions. (3) 7. Hank has just started in business and will be employing staff, paying them gross wages of 3,500 per month. Hank knows he will have to deduct Pay As You Earn and National Insurance Contributions from his employees wages. He will also be providing some of the employees with company cars. 1) Briefly explain how the deduction of Pay As You Earn and National Insurance Contributions is reported to HM Revenue & Customs and the due dates for payment. 2) State the reporting obligations and deadlines which Hank will need to comply with in respect of the company cars provided to employees. (3) 8. State three conditions which must be met in order for a trader to be eligible to join the cash accounting scheme for VAT. (3) 9. Bloom Ltd has recently started a graduate recruitment scheme. It has made offers of employment to two graduates and will pay them each a starting salary of 21,700. Each has an outstanding student loan. Briefly explain: 1) Whether Bloom Ltd is required to deduct student loan repayments from each of the graduates salaries. 2) How the student loan repayments will be made by Bloom Ltd. (2) Page 3 of 8
10. Forget me Not Ltd runs an occupational pension scheme. The scheme requires employees to make contributions equal to 3% of salary into the scheme and Forget me Not Ltd will make contributions of 1.5% of salary. Forget me Not Ltd employs both basic rate and higher rate taxpayers. 1) Explain how tax relief for pension contributions is given for the employees contributions. 2) Explain what impact the employer s contributions have on the employees tax position. (2) 11. Abi was employed by Regan Ltd during 2014/15 and received the following benefits: From 6 October 2014, Abi was provided with a diesel car with CO2 emissions of 129g/km. The car has a list price of 20,000 and Regan Ltd paid for all of Abi s fuel, including fuel for private journeys. From 6 December 2014, Regan Ltd provided Abi with a digital telephone conferencing system which cost 8,000. Abi uses the system 80% of the time for employment purposes and 20% of the time privately. Calculate the value of the benefits in kind which Abi will be assessed on in 2014/15. (4) 12. Mark s employer operates a Share Incentive Plan. His employer is a quoted company. In 2014/15 Mark was awarded free shares with a value of 3,600. Explain the Income Tax and National Insurance consequences of the future withdrawal of shares from the Share Incentive Plan. (4) 13. The following organisations incur expenditure on construction operations: (c) Soundproof Ltd, a small property developer, spends 500,000 each year on building new houses. Paws, a registered charity, spends 1 million constructing new animal housing facilities and offices each year. Stuff Ltd, a fashion retailer, spends 1.5 million each year building and refurbishing shops which sell its own products. Explain whether each of the above organisations is required to register as a contractor under the Construction Industry Scheme. (3) Place your answers for Part I in the Part I answer folder. Page 4 of 8
Part II You must use the Part II answer folder. Marks are specifically allocated for appropriate presentation. 1. You have recently held a discussion with the newly appointed finance director of one of your clients, Dodgy Ltd. During the discussion, she raised the following matters: Construction Industry Scheme Dodgy Ltd is a contractor under the Construction Industry Scheme. The monthly contractor return CIS 300, due on 19 May 2014, was not filed until 1 June 2015 due to an administrative oversight. Deductions of 8,000 in respect of payments made to subcontractors were reported on the return and these were remitted to HM Revenue & Customs by the due date. PAYE During the 2014/15 tax year, payments of PAYE for the months of May and June 2014 were both paid three months late. The relevant returns due under Real Time Information were submitted to HM Revenue & Customs on time. Unusual transactions The finance director has explained, in confidence, that she has noted a number of unusual transactions in the accounting system which were authorised by the previous finance director just before he left Dodgy Ltd. She is carrying out further analysis regarding the nature of these transactions and will update you on her findings once this work is complete. Benefits The new finance director has been provided with a flat close to Dodgy Ltd s offices where she lives during the week, as she works at this location full-time and often works until late in the evening. The flat was first purchased by Dodgy Ltd in 1990 for 80,000 and was worth 150,000 on 6 October 2014 when the finance director moved in. The annual value of the flat is 500. The finance director pays 200 per month to Dodgy Ltd for the use of the flat. Dodgy Ltd meets the cost of Council Tax, which is 1,000 per annum. Dodgy Ltd also pays for the finance director s parking space at the office, at a cost of 1,600 per annum. You are required to: 1) Calculate, together with a brief explanation, the penalties due in respect of the late submission of the CIS 300 return due on 19 May 2014. (4) 2) Explain how penalties and interest will be calculated in respect of the late payments of PAYE due in respect of May and June 2014. (3) 3) Explain how and when an offence of failure to disclose to the authorities occurs under the Proceeds of Crime Act 2002. (3) 4) Calculate the total benefit in kind arising in 2014/15 on the benefits provided to the finance director. (5) Total (15) Page 5 of 8
2. You are a tax adviser working for Harmony Associates. Your manager is preparing for a meeting with Michael Pressler, a potential new client. Michael is a VAT registered trader who runs The one stop shop which sells a wide range of clothing (both adults and children s clothes) and also children s car seats. Business Michael s business has expanded rapidly in recent years and, in addition to selling goods from a number of shops which he operates in the UK, he has started to supply his goods internationally to both business and individual customers. In the quarter ended 31 December 2014, Michael had the following transactions: (c) Supply of 100 car seats to a trader in France (a country within the EU). The trader is not registered for VAT. Supply of 50 ladies dresses to a trader in Spain (a country within the EU). The trader is registered for VAT. Supply of 25 pairs of men s trousers to an individual customer in South Africa (a country outside of the EU). (d) Purchase of 150 pairs of children s shoes from a VAT registered trader in Germany (a country within the EU). Expansion plans Michael is considering setting up some shops in Europe and has asked Rachael Gullivan and Damien McKew, two of his employees, to travel to Europe to undertake some research into whether his ideas for expansion are practical. Rachael will go to Paris for three weeks in January 2015 and for a further 15 weeks from the beginning of March 2015. Rachael s daughter will travel to Paris to visit her on four separate occasions: one in January, two in March and one in May. Michael Pressler, as Rachael s employer, will reimburse the cost of all these journeys. Damien McKew is UK domiciled and has always been UK resident for tax purposes. Michael has asked Damien to leave the UK on 1 January 2015 to travel to Spain. Michael would like Damien to work full-time in Spain for the next 18 months to oversee the expansion of the business in Spain. Damien will be paid a salary of 60,000 per annum. From the date he leaves the UK, Damien will be classed as a non UK resident for tax purposes.. You are required to: 1) Explain the VAT treatment of each of the four transactions for the quarter ended 31 December 2014. (6) 2) Explain how the expenses of Rachael s daughter s travel to Paris will be treated for Income Tax purposes. (4) 3) Prepare a memorandum for your manager: Briefly explaining the difference between residence and domicile. Outlining Damien s liability to UK taxation in relation to the salary he will receive whilst employed in Spain. (5) 4) State the purpose of an engagement letter and four terms which the Association of Taxation Technicians guidelines recommend Harmony Associates should include in the engagement letter if they are to take Michael on as a new client. (3) Total (18) Page 6 of 8
3. You are a tax adviser and act for Wheelfitter Ltd. Wheelfitter Ltd is a nationwide car repair business employing 150 staff. Wheelfitter Ltd has turnover of 1.5 million per year and is VAT registered. Wheelfitter Ltd has been approached by a small car repair company, Enginetune Ltd, to take over Wheelfitter Ltd s existing business. Enginetune Ltd will buy 100% of the shares in Wheelfitter Ltd for 5 million. The terms of sale are that all parts of the car repair business, including Wheelfitter Ltd s staff, will be transferred to Enginetune Ltd as part of the sale. There will be no breaks in trading as a result of the transfer and all of Wheelfitter Ltd s current car repair garages will remain open during the transfer of ownership to Enginetune Ltd. Enginetune Ltd is not currently registered for VAT and, during negotiations, the managing director of Enginetune Ltd stated that it intends to take over Wheelfitter Ltd s VAT registration number, in order to keep matters simple. Enginetune Ltd is considering issuing new employment contracts to all of the Wheelfitter Ltd staff who are being transferred. In addition, Enginetune Ltd is considering implementing an Enterprise Management Incentives scheme. You are required to: 1) Explain the VAT liability of the transfer of Wheelfitter Ltd s business to Enginetune Ltd, including any conditions that must be met. (4) 2) Explain whether Enginetune Ltd will be allowed to take over Wheelfitter Ltd s existing VAT registration and the consequences of doing so. (2) 3) State six details which Enginetune Ltd needs to include in the written particulars of the new contracts of employment. (3) 4) Explain how Income Tax is calculated on the grant and exercise of options under an Enterprise Management Incentives scheme. (3) Total (12) Page 7 of 8
4. One of your clients, Fargo Ltd, has requested your assistance with calculations related to the following matters. Lorne Lorne was a senior employee earning 120,000 per annum. He had worked for Fargo Ltd for 12 years. He was considered UK tax resident in 2014/15, but had spent the previous eight years working in Fargo Ltd s overseas offices. Lorne was made redundant from Fargo Ltd in February 2015. Lorne had a six month contractual notice period and was entitled to payment in lieu of notice. He worked only two months of his notice period, for which he was paid via the payroll. His statutory redundancy entitlement was 5,000. Lorne signed a compromise agreement, in exchange for which he received a payment of 100,000. This payment was to cover his statutory redundancy pay and payment in lieu of notice, with the balance being described as ex gratia. In addition to the payment of 100,000, Fargo Ltd made a payment of 10,000 directly into Lorne s approved pension scheme. Fargo Ltd also made a payment of legal fees of 500 directly to Lorne s solicitor in connection with advice taken by Lorne on the termination. Molly Molly, a director, is paid 4,500 per month. In June 2014, in addition to her monthly salary, she received a bonus of 30,000. She is not contracted out for National Insurance Contributions purposes. Lester Lester s personal service company, Nygaard Ltd, is engaged by Fargo Ltd to provide consultancy services. Nygaard Ltd has been paid 80,000 per annum from Fargo Ltd for many years. Nygaard Ltd does not receive any other income or have any other employees. Nygaard Ltd pays Lester a salary of 30,000 per annum. You are required to: 1) Calculate Lorne s earnings assessable to Income Tax in connection with the termination of his employment. (5) 2) Calculate the National Insurance Contributions payable by Molly in April, May and June 2014. (6) 3) Calculate Lester s deemed employment income for 2014/15. (4) Total (15) Place your answers for Part II in the Part II answer folder. Page 8 of 8