Advanced Taxation Northern Ireland nd Year Examination August 04 Exam Paper, Solutions & Examiner s Report
Advanced Taxation (NI) August 04 nd Year Paper NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 04 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 04.
Advanced Taxation (NI) August 04 nd Year Paper Accounting Technicians Ireland nd Year Examination: Autumn 04 Paper Paper: ADVANCED TAXATION (Northern Ireland) Thursday 4 th August 04.30 p.m. to 5.30 p.m. INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY For candidates answering in accordance with the law and practice of Northern Ireland. Candidates should answer the paper in accordance with the appropriate provisions up to and including the Finance Act, 03. The provisions of the Finance Act, 04 should be ignored. Allowances and rates of taxation, to be used by candidates, are set out in a separate booklet supplied with the examination paper. Answer ALL THREE QUESTIONS in Section A, and ANY TWO of the FOUR questions in Section B. If more than TWO questions are answered in Section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. s, units, etc. Answers should be illustrated with examples, where appropriate. Question begins on Page overleaf. The following insert is included with this paper. Tax Reference Material (NI) 3 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper SECTION A Answer QUESTION and QUESTION and QUESTION 3 (Compulsory) in this Section QUESTION (Compulsory) Down Duvets Ltd. operates a business supplying luxury bed linens to the hotel markets in the UK and Europe. The VAT return for the Q/E 3 March 04 is due for completion, but the new accounts assistant Kelly, who is preparing information for this return, has a number of issues that she is unsure how to deal with. ) Goods were sold in January 04 to a French customer with a net value of 800. The French customer has supplied Down Duvets Ltd. with a valid French VAT registration number. marks ) Goods were sold in February 04 to a Spanish customer at a net value of 960. This customer is not yet registered for VAT in Spain, so no registration number has been supplied. marks 3) A number of commercial samples have been given to customers in the quarter to launch a new product range for the coming Autumn. In the quarter 75 such samples have been given at a cost of 5 per sample. marks 4) Down Duvets Ltd. commonly operates a cash discount of 5% on sales made. In January 04 a further 5% discount has been offered on sales made. The first of these sales amounts to 700 (net) dated 3 January 04 but Kelly, the accounts assistant, is unsure how much VAT should be charged on the sale. 4 marks 5) Kelly has uncovered notes on file showing an order dated 3 March 04 that was dispatched on 30 March 04 but only invoiced on the April 04. She is unsure what constitutes the basic tax point and in which VAT quarter this sale should be accounted for. The net value of this sale is 475. 3 marks 6) Down Duvets Ltd. has two cars that are used by Directors Joe and Robert. Both vehicles have some element of private use but details are as follows: Vehicle : This vehicle was purchased in May 00, CO emissions of 77g/km. The company has always paid for all petrol used. Petrol invoices this quarter of 570 (gross) have been invoiced by the garage. Vehicle : This vehicle, with CO emissions of 0g/km, has been leased by the company at a cost of 385 pm (net). Additional fuel costs this quarter amount to 948 (gross). 5 marks 7) A new duvet range to be introduced this Autumn has been invoiced by DieZud a German supplier registered for VAT in Germany, amount to 5,000 net. marks Required: Explain how Down Duvets Ltd. should deal with each of the above issues, showing clearly how the relevant output/input Tax entries should be made. Total 0 Marks 4 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper QUESTION (Compulsory) (a) Gourmet Delights Ltd is a VAT registered company operated in Northern Ireland. It is putting together for the first time, a luxury hamper for the lucrative Christmas Market, but is unsure of how this item should be dealt with for VAT purposes. A standard hamper contains the following goods at cost: Goods @ Std. Rate 75 Goods @ Zero Rate 40 5 And will sell for 50 excluding VAT. Required: Calculate the output VAT to be charged on the sale and state the VAT inculsive selling price of the final product. 7 marks (b) Mary Norris, a VAT registered trader, has recently registered for The Cash Accounting Scheme as she has been advised this will assist the cash flow in the business. Her return for Q/E 3 March 04 is now due and the information is as follows: SUPPLIES (all VAT exclusive) Standard Rated Supplies Sales invoices issued by May 00,000 (½ % discount has been offered to customers paying within 4 days) Cash received on Standard Rated supplies 94,000 Zero Rated supplies Invoices issued 50,000 Cash received on Zero Rated supplies 60,800 PURCHASES AND EXPENSES paid in the quarter (exc VAT) Motor Vehicle (note ) 6,500 Motor Expenses (note ) Fuel,35 Repairs 60 Lease Payments 900 Standard Rate Purchases 0,440 Standard Rate Expenses 8,860 Exempt Purchases 6,50 Notes:. Irrecoverable debts of 3,000 (exc VAT) were written off in March 04 in respect of 3 separate invoices of,000 each. These had been due for payment June 03, September 03 and December 03 respectively and have been written off in the books.. This vehicle was bought on February 04 and is used 60% for business use. The CO emissions amount to 00g/km. The motor expenses listed refer to this vehicle. Question continues overleaf 5 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper QUESTION (Cont d)) Required: (i) Calculate the VAT payable for Q/E 3 March 04. (ii) State when this amount will be payable to HMRC. marks marks Total 0 Marks QUESTION 3 (Compulsory) Following some dramatic downturn in other business interests, Phil has decided to dispose of a number of assets in 03/4 as follows: Date Sold Asset Proceeds Cost Date Purchased (i) 30/09/3 Warehouse 60,000 5,000 0/0/007 (ii) 30//3 Car 5,000 8,500 0//0 (iii) 5/0/4 Factory (note ) 30,000 (note ) 7/0/000 (iv) 6/03/4 Plot of Land (note ) 0,000,000 ( acres) ( acre) Phil incurred a loss of 0,000 during 0/ and had made a chargeable gain of 8,00 in 0/3. Her taxable income for 03/4 was 8,000. Notes:. The factory had been purchased in 000 for 95,000 and was extended at a cost of 55,000 in 003. During May 004 the roof of the factory was replaced at a cost of 4,000 following a fire. The building had not been insured at the time. Further costs associated with the sale were legal costs of 3,600 at the time of purchase and 5,800 at the time of sale. The factory has always been used for business purposes in his trade since purchase but it is considered to be a small and insignificant part of the business that she continues to operate.. The remaining acre of land was valued 5,000 at the time of sale. Required: Calculate Phil s CGT Liability for 03/4 assuming that the Annual Exemption for 03/4 applies throughout. Total 0 Marks 6 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper SECTION B QUESTION 4 Answer ANY TWO of the FOUR questions in Section B Niall has, for some years now, invested in and let out a furnished house in the centre of Belfast as a long term investment plan. Income and expenses in relation to this property in the year ended 5 April 04 have been as follows: Rent received (note ) 7,350 Less expenses Insurance (note ) 86 Rates,60 Agents management charge 79 Repairs to property (note 3),75 Depreciation furniture 680 Notes: (5,73),67. The property is let at a rate of 550 per calendar month. The property has been let fully since the start of the tax year. Rent received in the year includes 750 refundable deposit at the end of the lease.. Insurance premiums paid in the year cover the following: Buildings and contents insurance Y/E 3 Dec 03 336 Y/E 3 Dec 04 360 Insurance re irrecoverable rent Y/E 3 March 04 0 86 3. Repairs to the property are calculated as follows: Repairs to the central heating 50 Addition of front door porch,00 Replacement carpets 75,75 Additionally Niall has for some time been living in a house close to the university area in Jordanstown. In the last year he has let out a room in the six room house to Shane, a student at the university. The room is furnished and Shane pays 40 per week rental to include breakfast and evening meal. He estimates that the cost of heating the room in the year is 00 and that food bills estimate at a cost of 6 per week to provide. Question 4 continues overleaf 7 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper QUESTION 4 (Cont d) Required: (a) Calculate Niall s net rental income on i) Belfast property marks and ii) Room let at Jordanstown 4 marks (b) Explain to Niall details of any election he may wish to make in respect of any Rental Income received outlining: i) Savings available from such election. ii) The date by which such an election must be made in respect of the 03/4 year. marks marks Total 0 Marks QUESTION 5 Dynamo Ltd. is a UK resident company with one associated company for tax purposes, that manufactures turbines. Its income statement for the Year ended 3 March 04 showed the following: Gross Profit 99,040 Operating expenses Office salaries (note ) 87,30 Rent, Rates and insurance,350 Lighting and heating 8,00 Motor Expenses 6,5 Repairs and Renewals (note ) 44,80 Professional fees (note 3),950 Travel and hotel expense (note 4) 9,50 Gifts and donations (note 5),850 Bad debts (note 6) 9,860 Depreciation 84,34 Other (all allowable) 37,37 (33,843) Operating profit 595,97 Income from Investments Dividends (note7) 38,500 Loan Interest (note 8) 4,000 Bank Interest (note 9) 5,600 68,00 663,97 Interest payable (note 0) (5,000) Profit before Tax 648,97 Question 5 continues overleaf 8 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper QUESTION 5 (Cont d) Notes:. Office salaries include director s remuneration of 34,000.. Repairs and renewals include 8,500 for replacing part of a wall that was knocked down by a lorry during loading and 4,700 for repairs necessary to a newly acquired office building. The building was not usable until the repairs were carried out. 3. Professional fees: Accountancy and Audit fee 8,950 Legal fees re renewal of 0 year lease,400 Legal Fees re issue of Debentures (see note 0) 600,950 4. Travel and hotel expenses include the hotel bill for the annual staff party for 4 employees, at a cost of 00 a head. 5. Gifts and Donation Donation to national charity,000 Donation to charity (free advertising received) 450 Gifts to customers (Hampers @ 40 each),400,850 6. Bad debts include: Bad debts written off 4,890 Loan to customer written off,750 Increase in provision for bad debts,0 9,860 7. The dividends were received net from other UK companies. 8. Loan Interest received gross is calculated as follows: Accrued at April 03 (7,500) Received 30 June 03,000 Received 3 December 03,000 Accrued at 3 March 04 7,500 4,000 The loan was made for nontrading purposes. 9. Bank interest was received on 3 March 04 in respect of deposits held for nontrading purposes. 0. On May 03 00,000 of debentures were issued by the company in order to raise funds for trading purposes. Interest of 7.5% per annum is payable. Interest of 7,500 was paid on October 03 and 7,500 was accrued at 3 March 04. Question 5 continues overleaf 9 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper QUESTION 5 (Cont d) Required:. Dynamo Ltd. has invested in its noncurrent assets for the accounting period as follows: Tax WDV B/F 3 March 03 46,500 Additions 35,000 4 April 03 New car for sales Director (omissions 70g/km) 45,000 August 03 This machinery was purchased under a HP agreement, being a deposit of,500 and 36 instalments of,00 per month. 6,00 4 December 03 New Fittings in Office buildings. Disposals 7 March 04 the company sold machinery for 33,00. This machinery had been bought only 4 months previously at 30,000. (a) Calculate Dynamo Ltd. s tax adjusted profits for year ending 3 March 04. 5 marks (b) Calculate the capital allowances available assuming all allowances are claimed as early as possible. 5 marks (c) Calculate the mainstream corporation tax that would be payable if all reliefs and allowances are claimed as early as possible. 0 marks QUESTION 6 Total 0 Marks Malcolm and Louise are shareholders of Loughton Ltd., a close trading company. Malcolm is also a director. Loughton Ltd. pays corporation tax at the small profits rate of 0% in its year ended 3 March 04. During the year Loughton Ltd. has provided the following:. Both Malcolm and Louise have been provided with a company car each. The list price was 0,000 and CO emissions of 6g/km. They each use their cars for private use although no petrol is paid for by the company.. On 30 November 0 Loughton Ltd. had lent 5,000 to Louise at an interest rate of 4% per annum. This loan has been written off in the current year. Both Malcolm and Louise are higher rate tax payers. Required: (a) Outline the tax consequence of being a close company. (b) Explain using the example above the tax and NIC implications on: 4 marks (i) The company 6 marks (ii) Malcolm marks (iii) Louise 8 marks Total 0 Marks 0 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper QUESTION 7 Paul, aged 49, has recently been made redundant and is leaving on 6 th April 03 received an ex gratia lump sum payment of 80,000 in addition to his Statutory redundancy payment of 5,000. He luckily secured new and lucrative employment with Holywood Ltd. a building firm registered in the UK. He is paid an annual salary of 35,000 together with a generous benefits package that includes the following:. He is provided with a,00cc petrol powered motor car with a list price of 9,400 and CO omissions of 65g/km. Holywood Ltd. paid for all running costs of 6,00 in the year including petrol used for private journeys, although Paul contributes 50 per month for the use of the vehicle.. Holywood Ltd. has a number of investment properties held over a number of years. Paul is currently living in one of the properties since November 0. The property had been purchased by the company in 00 at a cost of 30,000. Costs of improvements since purchase amounted to 4,000 in late 00 and a further 8,000 in 03 after Paul moved in. The property was valued in November 0 at 70,000 and has an annual value of 7,000. Furniture in the property cost 6,000 and Paul personally pays the annual costs of the property which this year amounted to 4,50. 3. Throughout 03/4 Holywood Ltd. provided Paul with a mobile telephone costing 545. It is estimated that private calls made on the phone amount to 5 per month. 4. Holywood Ltd. operates an approved occupational pension scheme under which Paul pays 3% of his salary into the scheme each year. Holywood Ltd. as the employers make a further generous contribution of 8% of basic salary to the scheme. Details of Paul s other income and expenses for the year are as follows: 5. Allowable expenses of employment in the year amount to,875. 6. Other Pension contributions to a personal pension scheme plan in the year amount to,500 per month. 7. Investment income from other sources: Bank Interest received 50 Dividend Income,080 Interest from ISA 500 Paul and his wife Mary have a daughter Frances aged. Frances was given 5,000 of 3½ % of a War Loan on the 6 April 03 as a birthday present from Paul. Interest on this investment is received gross. 8. Paul and Mary jointly bought a property that has been let out as unfurnished accommodation. The assessable property income for 03/4 has been calculated as 4,00. 9. PAYE of 5,500 has been deducted from Paul s salary. Required: Calculate the income tax payable by Paul for 03/4. Total 0 Marks A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper nd Year Examination: August 04 Advanced Taxation NI Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No. 3 4 5 6 7 Average Mark (%) 9 7 0 8 9 6 Nos. Attempting 59 59 59 37 4 3 53 Statistical Analysis Overall Pass Rate 58% Average Mark 46% Range of Marks Nos. of Students 039 5 4049 0 5059 9 6069 5 70 and over 0 Total No. Sitting Exam 59 Total Absent 33 Total Approved Absent 3 Total No. Applied for Exam 95 General Comments: GENERAL COMMENTS ON THE PAPER AS A WHOLE This year has seen a drop in both the Pass Rate and the Average mark attained compared to the same sitting last year. This was largely as a consequence of the performance in two compulsory elements of Q and Q of the paper which were both questions on VAT and were in the main poorly answered. A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Examiner s Comments on Question One This was a comprehensive question covering a number of VAT scenarios and required students to EXPLAIN how they would deal with 7 separate VAT issues. Students must ensure they answer the requirements of the question which stated clearly they should show clearly how the relevant output/input Tax entries should be made. This was not done by a number of candidates. Solution One: Down Duvets Marks Allocated ) Sale to VAT registered French Customer will be treated as Zero Rated supply. OUTPUT TAX GROSS VAT NET Sale 800.00 800.00 ) Sale due to nonvat registered Spanish customer will be required to be charged at VAT Rate prevailing in country of sale. OUTPUT TAX GROSS VAT NET Sale 5.00 9.00 960.00 3) The taxable person must account for the Output VAT except where the gift of goods is a sample of stock less than 50 (so long as not more than one sample of the same item is given) 4) VAT will be charged on the price net of discount regardless of whether or not the discount is taken up. Price net of discounts (x5%) 630.00 VAT Chargeable @ 0% 6.00 Shown on the return Gross 86 VAT 6 Net 700 5) The basic tax point is normally the date of dispatch. This will be amended to the actual tax point in the event of either the customer paying early or if the invoice has been sent within 4 days of the basic tax point. In this circumstance the basic tax point becomes /4/04 and output tax point will be dealt with in Q/E 30.6.04. 3 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Solution One (Cont d) 6) A scale charge will be made on the fuel provided for private use on both vehicles. Input VAT may be claimed on full fuel costs as follows: OUTPUT TAX GROSS VAT NET Scale charge Vehicle 4 00 70 7 350 83 Vehicle 573 00 95 50 477 50 Marks Allocated INPUT TAX GROSS VAT NET Lease Charge Vehicle 386 00 5 50 * 55 00 Fuel Costs Vehicle 570 00 95 00 475 00 Vehicle 948 00 58 00 790 00 *If the lease allows the private use of a vehicle they can only recover 50% of the input VAT on the lease charges they incur. 7) Goods acquired from within the EU are liable to UK VAT. The VAT is known as acquisition tax and can normally be reclaimed if the acquisition relates to taxable supplies. The trader must account for the acquisition tax (as OUTPUT VAT) on the return in which the supply occurs * GROSS VAT NET OUTPUT TAX 8000 00 3000 00 5000. 00 INPUT TAX 8000 00 3000 00 5000. 00 *The VAT rate is the same rate that would have been paid had the goods been supplied by a UK supplier. 0 Examiner s Comments on Question Two This question concentrated on specific VAT issues namely a) Treatment of VAT on Mixed Supplies and b) completion of a VAT return for an individual registered for Cash Accounting. A lot of candidates simply did not know how to calculate the VAT inclusive selling price of the final product for which 7 marks were awarded. Part b) was very pleasing insofar as candidates clearly understand the difference that it makes where a trader is registered for Cash Accounting. 4 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Solution Two Marks Allocated a) Gourmet Delights Standard Rated Goods Apportioned selling price 50 x 75 / 5 = 63.04 VAT inc selling price 63.04 x.0 = 95.65 Zero Rate Goods Apportioned selling price 50 x 40 / 5 = 86.96 No VAT will be charged as they are ZR Total VAT inc selling price 8.6 b) Mary Norris Vat Payable Q/E 3 March 04 OUTPUT TAX Cash received (94,000 x / 6 ) 3,333 Z/R sales cash received NIL Car fuel scale charge (84.33 x / 3 ) 56 3,389 INPUT TAX Motor Expenses : Fuel (35 x0.0) 65 Repairs (60 x 0.0) 5 Lease Payments (900x0.0x50%) 90 Standard Rated Purchases (0,440 x 0.0) 0,488 Standard Rated Expenses (8,860 x 0.0) 3,77 Exempt Purchases (4,667) Vat Payable 7,7 Due and payable date is 7 May 04 (filed and paid electronically) 0 Examiner s Comments on Question Three This question was reasonably well answered by a lot of candidates which was very pleasing. The rules for Part disposals and the treatment of Capital Losses were both well known and candidates were well versed on the rates and application of them for Capital Gains Tax purposes. 5 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Solution Three: Phil Disposals in year i) Warehouse Proceeds 60,000 Less Cost (5,000) Chargeable Gain 45,000 ii) Motor Car Exempt iii) Factory Proceeds 30,000 Less Incidental Cost of disposal (5800) Net Sale Proceeds 34,00 Less Cost (95,000) Incidental cost of Purchase (3,600) Enhancement expenditure (55,000) Chargeable Gain* 60,600 Marks Allocated Note : the expenditure incurred in replacing the roof is not allowable as it simply replaced the roof already there. As the factory is an insignificant part of the business it will not be eligible for ER. iv) Plot of Land (part disposal) Proceeds 0,000 Less Cost 0000 x000 (4,800) 0000 + 5000 Chargeable Gains 5,00 Net Chargeable Gains 0,800 Less Capital Losses B/F (w) (,800) Less Annual Exemption 03/4 (0,900) Taxable Gains 98,00 CGT Payable Basic Rate Band (3,00 8,000) = 4,00 x 8% =7 80 Higher Rate 94,090 x 8% = 6,345 0 9800 7,067 00 0 6 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Workings. Capital Losses B/F 0/ 0,000 0/3 Chargeable Gains 8,00 Losses b/f (8,00) Losses c/f 03/4,800 7 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Examiner s Comments on Question Four This question on the treatment of Rental Income was answered reasonably well for part a) calculating net rental income for properties. In part b0 however a lot of candidates lost 4 valuable marks by not answering the question asked, namely Explain any election that can be made, outline the savings from such an election and stating the date by which such election must be made. At this level candidates should not be throwing away a valuable marks by not knowing this.. Marks Allocated Solution Four: Niall a) Niall Taxable Rental Income 03/4 i) Belfast property: Income @ 550 per calendar month 6,600 Less expenses Building and contents insurance Y/E 3//03 336 x 9/ = 5 Y/E 3//04 360 x 3/ = 90 (34) ii) Insurance re irrecoverable rent (0) Rates (,60) Agents Management Charge (79) Repairs to central heating (50) New Porch (Nondeductible) Replacement carpets (Nondeductible) Depreciation Wear and tear (0% x (660060) (534) Room to Let : Private Residence 3,30 7 * = 7 Income @ 40 per week,480 Less heating (00) Food (@ 6 per week) (,35) Wear and tear allowance (0%) (,48) 9,680,98 8 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper b) As this room in the Jordanstown property is let in his own house, Niall can elect to be tax on the excess of gross rent over a 4,50 limit. Should he do so his income assessable on this property would simply be: Marks Allocated Income,480 less Rent a room relief (4,50) 8,30 Solution Four (Cont d) This would produce a saving,450. The election would be required to be made within twelve months of the due date of the income tax return to which the income tax relates ie. 03/4 return due 3//05 plus months. The election would be required to be made by 3//06. Examiner s Comments on Question Five 0 This was a fairly standard Corporation Tax question in 3 parts requiring candidates to a) calculate adjusted profits, b) calculate Capital Allowances and c) calculate the MCT that would be payable. This type of question has again this year been answered well by all of the well prepared candidates. Where some candidates struggle is in the final part pulling parts a) and b) together with other income to establish PCTCT and Profits figures. Solution Five: Dynamo LTD a) Tax adjusted Profits Y/E 3 March 04 Net profit per income statement 648,97 Add: Disallowable Expenses Repairs and Renewals replacing part of wall (allowable) newly acquired repairs to make usable 4,700 legal fees re renewal < 50 years (allowable) Re issue of debentures 600 Cost of staff partly allowable Donations,450 Gifts to customers Hampers,400 Bad Debts : Loan to customer,750 Increase in Provision,0 Depreciation 84,34 Interest Payable 5,000 8 *0.5= 4 9 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Less : Assessable Elsewhere Dividends Received 38,500 Loan Interest 4,000 Bank Interest 5,600,444 770,74 (68,00) 70m64 Less Capital Allowances ( (b) below) (74,970) Tax Adjusted Profits 67,67 Marks Allocated 0.5 0.5 5 Solution Five (Cont d) b) Capital Allowances Computation Y/E 3 March 04 Main Special Capital All Pool Pool Claim WDV B/F 46.500 Disposal at lower cost/proceeds (30.000) 6,500 Additions not qualifying for AIA Car 70g/km 35,000 Additions qualifying for AIA Machinery : HP 45,000 Office Fittings 6,00 5,00 AIA (5,00) 5,00 6,500 35,000 WDA @ 8% (0,970) 0,970 WDA @8% (,800),800 WDA C/F 95,530 3,00 74,970 5 0 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper c) Dynamo LTD Mainstream Corporation Tax Payable Y/E 3 March 04 Marks Allocated Trading Income 67,67 Interest Income : Loan Interest 4,000 Bank Interest 5,600 Interest Payable (5,000) 4,600 64,7 Qualifying charitable Donations (,450) PCTCT 640,8 Add F ( 38500 /0.90) 4,778 Profits 683,599 3 Corporation Tax Payable Limits 300,000 50,000,500,000 750,000 0.5 0.5 Solution Five (Cont d) Marginal Relief Applies Corporation Tax Payable 640,8 @ 3% 47,388.33 Less Marginal Relief (750,000 640,8) * 640,8/683,599 * 3/400 (767.60) MCT Payable 46,6.3 0 Payable..05 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Examiner s Comments on Question Six This was a theory question on the theory and consequences of operating as a Close Company. It was clearly a very unpopular question as it was only answered by 3 candidates which was a pity In truth it was not a difficult question if candidates had learnt the theory and in the context of the size and type of a lot of companies in NI details that candidates should be aware of. Solution Six: Loughton Ltd a) There are two main consequences of being a close company:. Benefits in kind provided by the company to participators (or associates) are treated as distributions ie: The company is deemed to have made a distribution to the participator. The cost to the company of providing the Benefit in Kind is added back in the tax computation. The participator receiving the benefit is taxed as if they have received a dividend rather than employment income.. Loans made to the participators or their associates are subject to 5% tax on the value of the loan. b) Malcolm : The provision of a company car to Malcolm who is director as well as shareholder leads to the following consequence.. Malcolm will be assessed on a BIK calculated at 0.000 x 35% = 7.000. As Malcolm is a HR taxpayer this will result in additional income tax of 800 (7000x40%). There will be no employees NIC payable on the benefit. Marks Allocated 4 Loughton LTD: ) The company will be able to claim a capital allowance at a rate of 8% (as CO emissions > 60g/km). Tax relief at 0% will mean that corporation Tax will be reduced by 30 (0,000 x 8% x 0.0). ) As this is provision of a Benefit in Kind Loughton Ltd will be subject to class A Nic on the value of the Benefit assessable. Louise : As above 800x3.8% = 386.40. Such a payment will be eligible for deduction from assessable profits. ) There will be no assessable B/K on Louise on the provision of the car as she is neither an employee nor director of the company. Instead Louise will be deemed to have received a dividend to the net value of the assessable benefits as follows: i) Car Benefit 0,000x 35% = 7,000 ii) Loan w/o 5.000 3.000 / 0.90 = 35.556 6 A04 Adv. Taxation (NI)
Marks Allocated Advanced Taxation (NI) August 04 nd Year Paper As she is a higher rate taxpayer then Louise must pay an additional.5% (3.5% 0%) on the distribution. Loughton LTD must make a payment of 5,000 x 5% = 6.50 to HMRC. This amount will be payable at the same time as the corporation tax for the accounting period. 8 Total 0 Examiner s Comments on Question Seven This was the most popular of the optional question with some 90% of students answering and very pleasing to note that it was the highest scoring question on the paper! It is very pleasing that candidates perform so well on this type of question that examines the fundamentals of the preparation of an Income Tax computation. Solution Scven: Paul Income Tax Computation 03/4 N/S S DIV Total Income from employment Redundancy (WI) 55,000 55,000 Salary : Holywood LTD 35,000 35,000 B/K (W) 3,335 3,335 Less allowable deductions Occupational Pension (,050) (,050) Allowable Expenses (,875) (,875) 0,40 0,40 Bank Interest ( 50 / 0.80 ) 650 650 Dividends received ( 080 / 0.90 ),00,00 War Loan Interest 75 75 Rental Income,050,050 Total Income,460 85,00 4,485 Less P/A (W3) (9,440) (9,440) Taxable Income 03,00 85,00 05,045 Basic Rate Band 3,00 Add Gross Pension,500 54,50 see below 4 see below 0.5 see below 3 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper Taxed Marks Allocated N/S 54,50 x 0% = 0,90 N/S 48,50 x 40% = 9,404 S 85 x 40% = 330 DIV 00 x 3.5%= 390 05,045 I.T Liability 3,06 4 * 0.5= Less Tax deducted at the source PAYE (5,500) Tax Credits Dividends (0) Bank Interest (30) o/s I.T Payable 5,76 3 * 0.5=.5 Total 0 marks Solution Seven (Cont d) Workings. Redundancy Payment Ex gratia Lump sum 80,000 Less Exempt amount 30,000 Less Statutory Redundancy (5,000) (5,000) Taxable amount 55,000 4 A04 Adv. Taxation (NI)
Advanced Taxation (NI) August 04 nd Year Paper. Benefits in kind i) Car : 9.400 x 35% 6,790 Less contribution by Paul (,800) 4,990 Marks Allocated ii) Fuel Benefit.00 x 35% 7,385 0.5 iii) iv) Accommodation Annual Value 7,000 Expensive Accommodation [ (30,000 +4,000) 75000] x 4% =,760 Use of Asset (Furniture) 6000 x 0%,00 3,335 0.5 4 3. Personal Allowance Net Income 4,485 Less Gross Personal Pension (500x) (,500) 0.8 Adjusted Net Income (ANI) 9,985 As adjusted Net Income < 00,000 no restriction made on P.A 5 A04 Adv. Taxation (NI)