Taxation Northern Ireland Sample Paper 3 Questions & Suggested Solutions
INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY For candidates answering in accordance with the law and practice of the Northern Ireland. In this examination paper the symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling. Candidates should answer the paper in accordance with the appropriate provisions up to and including the Finance Act 2017. The provisions of the Finance Act 2018 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 THREE questions in Section B. If any 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 1 begins on Page 2 overleaf. The following inserts are enclosed with the paper: Tax Reference Material
Section A Answer ALL THREE questions QUESTION 1 Corin runs a garden centre (registered for VAT purposes) and has been trading for many years. The following is a summary of his profit and loss account for the year ended 30 th September 2017. Notes Sales 367,012 Cost of sales 281,697 Gross profit 85,315 Other income: Interest receipts 368 Profit on sale of equipment 1,601 Overheads: Employee costs (1) 47,213 Premises costs (2) 6,993 Repairs (3) 6,441 General administrative costs (4) 2,948 Motor expenses (5) 6,039 Travel and subsistence (6) 2,086 Advertising, promotion and entertainment (7) 1,853 Legal and professional costs (8) 5,290 Bad debts (9) 2,718 Interest (10) 1,729 Other finance charges (11) 2,012 Depreciation 4,735 Other expenses (12) 5,205 Loss per accounts 1,969 87,284 95,262 (7,978)
QUESTION 1 (Cont d) Notes (1) Employee costs: Wages to Corin s wife 5,300 Staff wages 31,853 Drawings by Corin 10,060 47,213 Corin s wife is employed part-time in the business as a bookkeeper. (2) Premises costs: Heat and light 3,876 Rates and insurance 3,117 6,993 Heat and light includes utility bills for Corin s own home totaling 1,480. Corin believes 15% of this cost refers to his use of the house as an office. Insurance also includes premiums of 410 in respect of Keyman Insurance taken out by Corin. (3) Repairs: Constructing new fire escape 4,171 New till and scanner 1,993 Replacing broken windows 277 6,441 The new fire escape was required by law under the Health and Safety Act. (4) General administrative costs: Telephone 2,143 Trade subscription 78 Printing and stationery 727 2,948
QUESTION 1 (Cont d) The telephone payments include domestic telephone bills of 619. Corin estimates that 1/6 th of these relate to business use. (5) Motor expenses Corin s car 3,985 Business mileage paid to 1,914 employee Corin s Parking fines 140 6,039 It has been agreed with HMRC that 2/3rds of Corin s motor expenses relate to private use (6) Travel and subsistence: Corin s travel costs to a trade fair Training course fees for employee Season tickets provided to employee for home to work travel 1,112 446 528 2,086 (7) Advertising, promotion and entertainment: Gift to employee on 250 marriage Entertaining customers 973 Gifts to customers 630 1,853 The gifts to customers consisted of branded calendars advertising the business at a cost of 4.20 each.
QUESTION 1 (Cont d) (8) Legal and professional costs: Accountancy fees 850 Cost of pursuing bad 785 debts Cost of defending HMRC 3,655 enquiry 5,290 The enquiry costs relate to Corin s personal self assessment tax returns and undeclared income from another source. Corin has agreed a settlement figure with HMRC. (9) Bad debts The bad debts account is as follows: Loan to customer written off Loan to employee written off Increase in specific reserve 235 95 2,388 2,718 (10) Interest Interest is charged as follows: Business bank account overdraft interest 1,087 Interest on late payment of 449 PAYE Interest charged by supplier on late payment of invoice 193 1,729
QUESTION 1 (Cont d) (11) Other finance charges: Interest on Corin s credit card 781 Interest on loan to buy the car provided for the sales manager 748 Business bank charges 483 2,012 Corin estimates his credit card is used 70% for business purposes. (12) Other expenses: Goods taken by Corin for his 864 own use Accrual for VAT due 4,256 Donation to local community 85 centre 5,205 The retail value of the goods taken for own use were 1,031. The cost of these goods, 864, has not been included in sales. Requirement Compute Corin s tax adjusted profit for the year ended 30 th September 2017. Total 20Marks
QUESTION 2 Lauren, Fred and Charles are the sales staff in STARDUST LTD. Details of their cumulative earnings & deductions, inclusive of month 7 of the tax year 2017/2018 are as follows: Lauren Fred Charles Gross cumulative salary exclusive of all 925 27,985 17,973 deductions Charitable payroll deductions (25 per month) Childcare Vouchers (150 per month) Nil 175 Nil 1,050 Tax due to date 27.60 7,042.02 2,555.59 Tax code - K186 494L Company pension scheme contributions Nil 7% 7% Gross salary in month 8 1,370 4,105 2,690 Lauren joined the company in month 7. STARDUST Limited have been under instruction from HMRC to tax Lauren on a month 1 basis throughout months 7 and 8 of 2017/18. Requirement (i) (ii) Complete all relevant payroll calculations, relating to PAYE and NIC for Lauren, Fred and Charles for month 8 of 2017/2018. (15 Marks) Where employers do not operate RTI correctly and are not in adherence with submission and payment deadlines, penalties may apply. Briefly outline the penalty regime for late submission of PAYE returns and late payment. (5 Marks) N.B. Please show all workings clearly. Note: where relevant you may perform prorata calculations by reference to months rather days. Total 20 Marks
QUESTION 3 Ian works as a senior sales executive for a national car dealership. His annual salary is 130,700 and he has received bonuses of 8,000 and 7,000 on 6 th June 2017 and 6 th June 2018 respectively. These bonuses were paid in relation to the company s trading results for the years ending 31 st March 2017 and 31 st March 2018. In addition Ian received the following benefits in the tax year 2017/2018. - As Ian had only recently returned to Northern Ireland, the company provided for the use of one of their houses for him and his family. The company originally purchased the house on 3 rd September 2012 for 189,000. Ian first moved into the house on 1 October 2016 when it had a market value of 275,000. Ian has occupied the house throughout 2017/2018 paying rent to the company of 350 per month. The ratable value of the house is 3,750. The house is not job-related and Ian meets the cost of all other household expenses. - Ian was provided with a diesel-powered company car on 6 th May 2017. The car had a list price of 33,500 and has an official CO 2 emissions rate of 122 g/km. Ian paid the company 1,100 during tax year 2017/2018 for the use of the car and the company provided all fuel. - Free private medical insurance. This had cost the company 875 for the tax year 2017/2018, it would have cost Ian 1,050 if he had arranged the cover himself. - The use of a company owned computer. Ian has been provided with a computer to use at home for both business and private usage. Ian estimates that the private usage amounted to 30% and the business usage 70%. The computer was first provided in January 2017 when it had a market value of 1,850 and Ian has used it throughout the whole of the tax year 2017/2018. - Ian s company deducted 49,320 of income tax (PAYE) from his salary during the tax year 2017/2018. Ian s other income for the tax year 2017/2018 was: Bank interest 4,080 Dividends from UK companies 6,430 Building society interest 440
QUESTION 3 (Cont d) The bank interest is from an account held in joint names with his wife Helen and is the total amount due for both Ian and Helen. The building society interest is from an Individual Savings Account (ISA). All three amounts shown are the cash amounts received or credited to the accounts. Ian paid 248 (net) to a UK registered charity under the gift aid scheme and a fee of 240 to an HM Revenue & Customs (HMRC) approved relevant professional body, required for his position in the company. Both of these payments were made during January 2018. Requirement Calculate the income tax payable by Ian for the tax year 2017/2018. Total 20 Marks
SECTION B Answer ANY TWO of the Three Questions QUESTION 4 (i) It is permissible for certain businesses (dependent upon circumstances) to deregister for VAT. Required: Briefly outline the circumstances in which a business may deregister for VAT and the effect of this deregistration. (ii) Calvin, a VAT registered trader, introduces a prompt payment discount scheme for the November and December 2017 in an attempt to boost sales. The discount offered is 5% for sales invoices settled within 30 days. Required: One of Calvin s customers buys goods on October 20 th with a VAT exclusive sales value of 1,600 (excluding any discounts). Calculate the VAT chargeable on this supply on the assumption that the customer pays on November 29 th. (iii) Eimear is VAT registered and makes both taxable and non-taxable supplies. During quarter ended 31 st March 2018 the value of Eimear s taxable supplies was 78,159 (net of VAT) and the value of her VAT exempt supplies was 9,364. Input VAT on acquisitions attributable to taxable supplies was 6,357 and on acquisitions attributable to nontaxable (exempt) supplies was 758. The value of un-attributable input VAT was 1,786. Required: Using the standard method, calculate the amount of refundable input VAT for Eimear for quarter ended 31 st March 2018. (iv) It is permissible for VAT incurred prior to registration to be treated as input VAT and recovered from HMRC. Required: Briefly outline the circumstances in which VAT incurred prior to VAT registration can be recovered. (v) A VAT registered trader has had part of their private residence converted to a small office. Their home land-line serves as a work telephone and it is estimated that 40% of all calls are for a business purpose. During
quarter ended 31 st December 2017 the telephone bill was 756 (inclusive of VAT). Required: Using both permissible methods, calculate the relevant input and (where relevant) output VAT relating to this telephone bill. Total 20 Marks
QUESTION 5 In each of the following instances a trader commenced self-employment on 1 st February 2016. Their trading results for the opening years of business are as follows: (a) Year ended 31 st January 2017 25,200 Year ended 31 st January 2018 34,800 (b) 6 months ended 31 st July 2016.. 37,200 Year ended 31 st July 2017. 35,600 (c) 13 months ended 28 th February 2017 13,780 Year ended 29 th February 2018. 32,000 (d) 16 months ended 31 st May 2017 24,400 Year ended 31 st May 2018. 13,000 Requirement Calculate the assessable profit for the relevant tax years detailing the basis periods and show the overlap profits and overlap periods in each instance. Total 20 Marks NOTE: For the purposes of answering this question, all pro-rata calculations may be taken to the nearest month.
QUESTION 6 Hedley owns four properties in Northern Ireland which, with the exception of house number 1, he rents out through a letting agent. The letting agent charges a fee of 15% of gross rentals for their service. Details of the four properties are as follows: Property Rental () Basis House 1 500 pcm Monthly in Arrears This is Hedley s neighbouring property and he manages this property himself. The house is let on a furnished basis and the tenant pays the annual rates on this property (1,200 p.a.). This property has been let on a long-term basis since 2015 and, with constant occupancy, provides stable income. The living room furniture had been replaced in October 2017 at a cost of 1,800. Property Rental () Basis House 2 750 pcm or Monthly/weekly in Advance 45/room/week This four bedroomed property is located in an area commonly used for student accommodation in Belfast and was let (per room) until the end of June 2017 on a weekly basis and with full occupancy. The property was let again from September 2017 to a group of students but on a monthly basis. The letting agent arranged for advertising in order to attract the new tenants. Two of the previous tenants did not pay any rent for June 2017. Hedley had this property repainted during the summer at a cost of 1,150. Hedley pays the annual rates of 1,500. Property Rental () Basis Apartment 1 450 pcm Quarterly in Advance This apartment over-looks the River near the heart of Belfast and was acquired with a view to it being let to young professionals. Hedley bought the apartment in May 2017 and had the apartment re-painted (750), decorated (500) and furnished (2,500) before the first tenants moved in on August 15 th. These tenants were required to pay the equivalent of two months rent as a deposit which the agent will hold against damages. The tenants of this property were responsible for the local council rates. Property Rental () Basis Apartment 2 525 pcm or 450 per week during July & August Monthly/weekly in Advance This three-bedroomed property is located on the north coast and is let to university students during time term and holiday makers during the summer. Hedley reserved the apartment for two weeks of personal use during the summer but it was otherwise fully let for the remaining 6 summer weeks. It was fully let to students outside the summer months. The student tenants are required to pay a refundable deposit of 500 to cover the cost of incidental damages.
This Question Continues on the Next Page QUESTION 6 (Cont d) When the student tenants left at the end of June 2017, they were only refunded 200 to cover the cost of damages to furniture. Hedley pays the annual rates for this property (1,750), electricity (852 in 2017/18), heating (1,800) and cable television subscription (324) Note: pcm refers to a letting rate per calendar month. Requirement (i) Calculate the assessable rent received from Hedley s rental properties for 2017/18. (15 Marks) (ii) Assume that Hedley had mortgages secured on the above properties and which had financed their acquisition. Briefly outline the tax relief available on the finance costs associated with these loans in 2017/18. (5 Marks) Total 20 Marks
Taxation I (Northern Ireland) Sample Paper 3 Suggested Solutions
ANSWER 1 Corin s tax adjusted profits for the period ending 30 th September 2017 Loss per accounts (7,978) Add Drawings 10,060 Heat & Light (85% x 1480) 1,258 Keyman Insurance 410 Fire Escape 4,171 New till and scanner 1,993 Telephone (5/6 x 619) 516 Motor (2/3 x 3,985) 2,657 Parking fines 140 Entertaining 973 HMRC enquiry 3,655 Write-off of loan to customer 235 Interest on PAYE 449 Credit card interest (30% x 234 781) Depreciation 4,735 VAT accrual 4,256 Goods for own use 1,031 Less Interest receipts 368 Profit on sale of equipment 1,601 36,773 (1,969) 26,826
ANSWER 2 (i) Stardust Ltd Lauren Fred Charles Month 8 () () () Gross salary to 27,985.00 17,973.00 date Salary month 8 1,370.00 4,105.00 2,690.00 Payroll Deduction (8 x 25) CCV (150 x 8) - (200.00) - (1,200.00) Pension contribution - (2,246.30) (1,446.41) Free Pay 11,500 x 1/12 (958.33) 4,949 x 8/12 (3,299.33) Additional Pay 1,869 x 8/12 1,246.00 Net Taxable 411.67 30,889.70 14,717.26 Taxed as per 411.67 @ 20% 82.33 14,717.26 @ 20% 2,943.45 22,333.33 @ 20% 4,466.67 8,556.37@ 40% 3,422.55 82.33 7,889.22 2,943.45 Less Cumulative to date N/A (7,042.02) (2,555.59) 82.33 847.20 387.86 NIC Primary (1,370 680) x 12% 82.80 (3,750 680) x 12% 368.40 (4,105 3,750) x 2% 7.10 (2,540 680) x 12% 223.20 Secondary (1,370 680) x 13.8% 95.22 (4,105 680) x 13.8% 472.65 (2,540-680) x 13.8% 256.68 178.02 848.15 479.88 (ii) If returns are not submitted by the filing deadline, penalties are imposed. These penalties are also imposed if an employers payment summary is not submitted or the full payment submission is not completed in full. Note that the employer will not be charged on the occasion of the first late payment although a penalty may be imposed on the occasion of subsequent late PAYE payments. The rate of subsequent penalty imposition is on a sliding scale, rising with the number of employees as per the following:
1-9 employees (100); 10-49 employees (200); 50-249 employees (300); 250 + employees (400). If failure to make the return persists in excess of three months (with notice) then a penalty is imposed equal to 5% of the tax/nic that should have been paid.
ANSWER 3 Ian s Income Tax Computation for the tax year 2017/18 NS S D Total () () () () Employment Income (WI) 154,375 154,375 Bank Interest 4,080 x 50% 2,040 2,040 Dividends 6,430 6,430 ISA Interest - exempt STI 154,375 2,040 6,430 162,845 Less PA (W2) NIL NIL Taxable Income 154,375 2,040 6,430 162,845 Extension of basic rate band 33,500 + (248 x 100/80) = 33,810 Tax payable () () 33,810 @ 20% 6,762 116,500 @ 40% 46,600 4,065 @ 45% 1,829 154,375 2,040 @ 45% 918 5,000 @ NIL% 0 1,430 @ 38.1% 544 6,430 56,653 Less tax deducted at source: PAYE (49,320) Tax Payable 7,333
ANSWER 3 (cont d) Workings W1 Income from Employment Salary 130,700 Bonus receipt basis 8,000 Accommodation Rateable Value 3,750 Additional (189,000-75,000) x 2.50% 2,850 6,600 Contribution (350 x 12) (4,200) 2,400 Co2 percentage 26% Benefit (33,500 x 26% x 11/12) 7,984 Contribution (1,100) 6,884 Fuel (22,600 x 26% x 11/12) 5,386 Medical Insurance cost to 875 company Computer (1,850 x 20%) 370 154,615 Less Expenses Professional subscription (240) Employment Income 154,375 W2 STI 162,845 Less: Gross Gift Aid (310) Adjusted Net Income 162,535 ANI far exceeds the threshold (100k) and so PA is reduced to Zero.
ANSWER 4 (i) A business may voluntarily deregister for VAT if the value of their supplies (excluding the disposal value of capital assets) will not exceed 83,000 in the next 12 months. The effect of deregistration is that VAT must be accounted for on all stock (or other assets) which are held at the point of deregistration and on which input VAT had originally been reclaimed. Note: if this VAT liability does not exceed 1,000 it would not have to be repaid. (ii) Sales value net of discount & VAT: 1,600 0% = 1,600 VAT: 1,600 x 20% = 320 Gross invoice value: 1,600 + 320 = 1,920 Since the customer does not pay within the (30 day) discount period, they may not claim the discount and the VAT is payable on the full invoice value. (iii) [ 78,159 / (78,159 + 9,364) ] x 100 = 90% (rounded up since residual input tax < 400k) Refundable un-attributable input VAT = 1,786 x 90% = 1,607.40 Total non-refundable input VAT = (1,786 1,607.40) + 758 = 936.60 Applying the original test - since this total is less than 625 per month and less than 50% of total input VAT, then all input VAT may be reclaimed by Eimear, i.e. (6,357 + 758 + 1,786) = 8,901. (iv) For input VAT acquired on goods prior to registration, the following conditions must be satisfied in order for this VAT to be reclaimed: The goods must have been purchased for the purposes of the business; The goods must not have been consumed or sold on before the date of registration; The related input VAT was incurred no more than four years prior to registration. For input VAT acquired on services prior to registration, the following conditions must be satisfied in order for this VAT to be reclaimed: The services must have been supplied for the purpose of the business; The services were supplied within six months of the date of registration. (v) Input VAT on telephone bill: 756 / 6 = 126 Either: Reclaim all VAT (126) as an input and treat the VAT on the private use (126 x 60% = 75.60) as a deemed supply, i.e. as output VAT.
Only reclaim the VAT relating to business calls as input VAT (126 x 40% = 50.40) negating any need to have a deemed supply on the output side. Note that the refundable VAT is identical with either method (126-75.60 = 50.40) and that the choice of method is down to the VAT registered trader.
ANSWER 5 (a) Year of Assessment Basis Period Assessable Profit () 4,200 2015/2016 01/02/16 to 05/04/16 (2/12 x 25,200) 2016/2017 Year ended 31 January 2017 25,200 2017/2018 Year ended 31 January 2018 34,800 Overlap period 01/02/16 to 05/04/16 Overlap profits 4,200 (b) Year of Basis Period Assessable Profit Assessment () 2015/2016 01/02/16 to 05/04/16 (2/6 x 12,400 37,200) 2016/2017 01/02/16 to 31/07/16 37,200 01/08/16 31/01/17 (6/12 x 35,600) 17,800 55,000 2017/2018 Year ended 31/07/17 35,600 Overlap period 01/02/16 05/04/16 01/08/16 31/01/17 Overlap profits 12,400 17,800 30,200 (c) Year of Basis Period Assessable Profit Assessment () 2015/2016 01/02/16 to 05/04/16 (2/13 x 2,120 13,780) 2016/2017 01/03/16 to 28/02/17 (12/13 12,720 x 13,780) 2017/2018 Year ended 29 February 2018 32,000 Overlap period 01/03/16 to 05/04/16 Overlap profits (1/13 x 1,060 13,780)
(d) Year of Basis Period Assessable Profit Assessment () 2015/2016 01/02/16 to 05/04/16 (2/16 x 3,050 24,400) 2016/2017 06/04/16 to 05/04/17 (12/16 18,300 x 24,400) 2017/2018 12 m/e 31/05/17 (12/16 x 18,300 24,400) 2018/2019 Year ended 31 May 2018 13,000 Overlap period 01/06/16 to 05/04/17 Overlap profits (10/16 x 15,250 24,400)
ANSWER 6 (i) Property Income Expenses Net () House #1 500 x 12 = 6,000 Furniture Renewal 1,800 4,200 House #2 (12 x 4 x 45) + (7 x 750) = 7,410 Repainting Rates Unpaid Rent Letting Agent Fee 1,150 1,500 4 x 2 x 45 = 360 7,410 x 15% = 1,111 3,289 Apt. #1 7.5 x 450 = 3,375 Painting Decorating Letting Agent 750 500 3,375 x 15% = 506 1,619 Apt. #2 (525 x 10) + (450 x 6) = 7,950 Rates Electricity Heating Cable TV 1,750 852 1,800 324 4,726 x 50/52 = 4,544 Letting Agent 7,950 x 15% = 1,192 2,214 Total 11,322 I have assumed that the painting & decorating with respect to apartment #1 represents an expense borne in making good wear and tear, as does repainting with respect to house #2, further, that the furniture being replaced (house #1) is being replaced by furniture of a similar standard. Since the furniture (Apartment #1) is not replacing anything (it is new) I have not allowed it. Assume that the period 6/4/17 end of June 2017 represents 12 weeks.
(ii) For 2017/18, Hedley may only claim 75% of interest payments on associated mortgage debt as a direct deduction against related property (rental) income. Hedley may claim further tax relief, capped at 20%, on a sum equal to the lower of: Finance costs for which a deduction was not possible (a sum equal to 25% of the finance costs/interest) PLUS any unused finance costs brought forward from previous years; Property business/rental profits in the tax year (after deduction of brought forward losses); Adjusted total income. This is income (after losses and reliefs and excluding savings/dividend income) in excess of the personal allowance.