The Chartered Tax Adviser Examination May 2015 AWARENESS MODULE E TAXATION OF UNINCORPORATED BUSINESSES Suggested Solutions
Q1) 1. 2013/14 Year 1 1 July 2013 to 5 April 2014 9/15 x (45,000) (27,000) 1 2014/15 Year 2 AP>12 months 1 October 2013 30 September 2014 12/15 x (45,000) (36,000) Loss already allocated to 13/14 1 October 2013 to 5 April 2014 6/15 x (45,000) 18,000 Balance of loss (18,000) 1 2. The 2014/15 loss of 18,000 could be claimed against: 2014/15 net income and/or 2013/14 net income (either order) 1 2011/12, 2012/13, 2013/14 net income in that order 1 2015/16 carry forward against profits from the same trade 1 Q2) The badges of trade will be considered to determine Nadeem s status: 1 each/max 5 Subject matter Length of ownership Frequency Motive Improvements Manner in which acquired Cars are assets which could be sold on for profit but could also be required for personal use so do not give any conclusive evidence of trading. A business would generally keep its holding period for stock to a minimum. The recent renovations appear to have been completed much quicker, suggesting possible trading. The more frequently items are bought and sold, the more likely a trade exists. Nadeem is now buying and selling cars more frequently, suggesting a possible trade. There may be personal circumstances that have prompted the activity. In Nadeem s case, the redundancy has led to a need for another source of income suggesting this might be trading. The profit may arise because of works done, as would appear to be the case with these cars, again suggesting trading. If the item was inherited and then sold on, this does not suggest a trade. However, Nadeem appears to be buying cars with the intention of renovating them. Other relevant points will be awarded credit. 1
Q3) Salary to his sister for administrative duties 10,000 Only the market rate of 7,500 would be allowable for tax purposes. The 2,500 difference would be added back to profits. 1 A donation to a local children s group 100 As a local donation, and given that there is a clear benefit to the business from the advertisement, this would be an allowable deduction from profits. 1 Website set-up fees 4,000 The initial cost of setting up a website is capital in nature and so no deduction is allowed. 1 Pre trading expenditure 2* Pre trading expenditure incurred in the seven years prior to commencing to trade are allowable deductions, and treated as paid on the day trade commences. The full travel costs of 380 will therefore be deducted from the profit for the year ended 31 March 2015. *One mark for saying allowable and the second for being a deduction for year ended 31 March 2015 rather than any other year. Q4) Main pool Private use car Allowance TWDV b/f 13,700 Addition 11,000 Disposal (1,500) (no BA/BC) 1 12,200 11,000 WDA 18% (2,196) 2,196 1 WDA 8% (880) x 80% 704 2 FYA addition 8,500 100% FYA (8,500) 8,500 1 TWDV c/f 10,004 10,120 Total allowances 11,400 Q5) Proceeds 35,000 Incidental costs of sale (1,000) 1 Net proceeds 34,000 Base cost 90,000 x 35,000 (18,000) 2 35,000 + 140,000 16,000 Capital loss brought forward Restricted claim (5,000) 1 11,000 Annual exempt amount (11,000) 1 Taxable gains NIL 2
Q6) Sale of whole business Sale of premises only Premises (350,000 220,000) 130,000 (375,000 220,000) 155,000 Goodwill 50,000 Taxable gains 180,000 155,000 2 CGT @ 10% 18,000 @ 28% 43,400 2 Total proceeds 400,000 375,000 CGT payable (18,000) (43,400) After tax proceeds 382,000 331,600 1 Q7) Share of profit 36,000 (W) Class 2 National Insurance 26 weeks x 2.75 71 1 Class 4 National Insurance (36,000 7,956) x 9% 2,524 2* Working Tetiana Jagjit Profit for period 90,000 Salaries x 6/12 (25,000) 15,000 10,000 1 Balance 65,000 39,000 26,000 1 Share of profit 54,000 36,000 *This will be split as 1 mark for using the total share of profits calculated ( 36,000) and 1 for using class 4 rates Q8) Terminal loss Post April 2014 (6.4.14 30.9.14) 6/9 x (60,000) (40,000) 1 Overlap profits (45,000) (85,000) 1 Pre April 2014 (1.10.13 5.4.14) 3/9 x (60,000) (20,000) 3/12 x ye 31.12.13 14,000 (6,000) 1 Terminal loss (91,000) Terminal loss relief allows the loss to be carried back 3 tax years on a LIFO basis. 1 The terminal loss is set against trading income only of each year. 1 3
Q9) Gains on incorporation 480,000 Less incorporation relief (balance) (431,000) 1 Capital loss brought forward (38,000) 1 Annual exempt amount (11,000) 1 Gain - Incorporation relief = gains x MV received in shares MV of total business 431,000 = 480,000 x MV of shares/ 1million Rearrange to 431,000 x 1million = 897,917 value to be received in shares 1 480,000 Maximum cash to receive on sale (1,000,000 897,917) 102,083 1 Q10) Class 2 National Insurance These are required in two equal instalments, due on 31 January 2016 and 31 July 2016 for 2015/16 1 Income Tax/Class 4 National Insurance 1 These are both payable under self assessment. Payments on account will be payable on each of 31 January 2016 and 31 July 2016. 1 These will each be 50% x the total liability for 2014/15 i.e. 5,000 x 50% = 2,500 each time. 1 The balance of 13,000 for 2015/16 will be payable on 31 January 2017. 1 Q11) Hire purchase van The total cost of van ( 12,000) will qualify for the annual investment allowance. 1 Interest charged under the hire purchase agreement will also be an allowable deduction (4,440 (12,000/30) = 440 per year). 1 The running costs of 4,200 will be allowable deductions from profit. 1 Leased van The lease costs for the second vehicle will be allowable deductions from profit, rather than claiming capital allowances. 1 The running costs will be deducted with no adjustment being necessary for the private use by the employee. 1 Tutorial note Candidates may also consider the employment benefit arising on the employee van, and therefore the Class 1A National Insurance payable by Daisy but Class 1A is not on the syllabus for this module so no credit can be given for such a comment. 4
Q12) Warehouse 1 As both premises are used in Russell s trade, they are qualifying assets for rollover relief, and the proposed purchase date (1 June 2015) falls within the 48 month qualifying period (1 year before to 3 years after the date of disposal). 1 As the full proceeds have been reinvested, this relief will allow the total gain of 200,000 to be rolled over against the base cost of the new warehouse, meaning that no tax will be payable until the new warehouse is sold in the future. 1 Warehouse 2 As this property is a depreciating asset, this would only qualify for deferral relief (gain frozen) rather than rollover relief. 1 As not all of the proceeds on the sale of the original building are reinvested, only part of the 200,000 gain can be deferred, leaving 70,000 of the gain chargeable at 30 June 2015. 1 The relief defers the remaining gain of 130,000 until the earlier of: (i) The sale of the lease of the new warehouse (ii) The date on which the warehouse is no longer used in a trade (iii) The 10 year anniversary from purchase 1* *Any reasonable explanation that the manner of the deferral is limited will gain this mark. 5