The Chartered Tax Adviser Examination

May 2016
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Taxation of Owner-Managed Businesses

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Advisory Paper
TIME ALLOWED 3 HOURS

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 folder. The Presiding Officer will inform you when
you can start writing. Calculators may not be used during this time.

You should answer all SIX questions.

Start each answer on a new sheet of paper and write on one side only. Do not write
in the margins.

All workings should be shown and made to the nearest month and pound unless
the question specifies otherwise.

Marks are specifically allocated for presentation.

Candidates who answer any law elements in this paper in accordance with Scots
law or Northern Ireland law should tick the appropriate box on the front of each
answer folder.

Unless otherwise indicated by the provision of additional table information, you may
assume that 2015/16 rates and allowances continue to apply for 2016/17 and
future years. Candidates referring to actual or pending rates and allowances for
2016/17 and future years will not be penalised.

1.

Your client Bill Harris is a sole trader in business as an electronics engineer. He

commenced to trade on 1 March 2014 and his first accounts were made up to 30 April
2015. For business reasons he decided that a year end of 30 September was more
convenient and so his second accounts will be made up to 30 September 2016.
Bills adjusted trading profits before capital allowances are as follows:

Period 1 March 2014 to 30 April 2015

Period 1 May 2015 to 30 September 2016

50,000
85,000 (estimated)

Bill introduced his own car (CO 2 emissions 110g/km) into the business on 1 March
2014 when it was valued at 10,000. He sold it on 31 August 2016 for 5,000 and on
the same day bought a new car for 20,000 (CO 2 emissions 150g/km). Private use for
both cars is estimated at 25%.
On 1 June 2014 Bill purchased computer equipment costing 5,000 for business
purposes but estimates that private use is 30% of the total use.
On 10 April 2015 Bill purchased a van from his brother who is a motor dealer at its
showroom price of 15,000. The van is not used privately.
You are required to calculate the adjusted trading profits assessable for the
years 2013/14 to 2016/17, including any reliefs available for offset or carry
forward.
You are NOT required to calculate Income Tax and National Insurance liabilities.
(10)
2.

Frank Sutton is a serial entrepreneur with experience in the leisure industry. He

recently set up Jumpers Ltd which operates a trampoline centre for fun and fitness
activity and he expects this to be very successful. Currently there are 100,000 1
ordinary shares in issue, all of which are held by Frank. To ensure growth, he wishes to
incentivise the full-time director, Duncan, by offering him 5,000 newly issued 1
ordinary shares. The shares are not subject to restrictions and their current market
value for tax purposes is estimated at 5 per share. Frank hopes to sell the company to
a leisure chain in about three years time when the shares may be worth 15 each.
Frank has discussed with you three alternatives:
1)

Duncan would be offered the shares immediately at a price of 2.50 per share
and the company would make a loan to Duncan to subscribe for the shares. The
loan would be interest-free and would be repayable when the shares are sold.

2)

Duncan would be granted an option to purchase the shares at 5 each. The

option would only be exercisable if there is to be a sale of the company. This
would be achieved by the option agreement providing that they could be
exercised either on an actual sale of the company, or by Board resolution
immediately before a sale if the Board believed that such a sale was likely to
take place.

3)

Duncan would be granted an option on the same terms as in 2) above, except

that it would be a qualifying Enterprise Management Incentives option.

Frank would like your advice on the tax implications of the alternative methods of
providing an incentive to Duncan. He does not require information on any Real Time
Information (RTI) aspects.
You are required to write a letter to Frank Sutton, advising on the tax
implications for the company and for Duncan of the alternative methods of
providing an incentive.
(20)

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3.

Sparks Ltd is a private limited company which manufactures car batteries. Its 10,000
ordinary shares of 1 each are held as follows:
Gary Morrison
Mrs Wendy Morrison (wife of Gary)
Peter Morrison (son of Gary and Wendy)

5,000
1,250
3,750
10,000

The Morrisons are all UK resident and are directors of the company.
When the company was formed in 1999, there was a fourth shareholder unrelated to
the family who held 250 shares. Gary acquired these shares on 1 July 2013 to bring his
holding up to 5,000 shares. Gary is aged 70, Wendy is aged 55 and Peter is aged 35.
In the past Gary has been the driving force behind the companys success, but is now
in poor health and wishes to retire so that his wife and son may succeed to the
business.
The company has accumulated profit and loss account reserves of 1 million and has
agreed to buy Garys 5,000 shares for 500,000. The companys articles of association
permit a company purchase of own shares. Gary would however prefer to retain a
small holding of shares for sentimental reasons but will resign as a director and will
take no further part in the business. It is proposed that the purchase price for Garys
shares should be paid in cash on completion of the buyback contract.
Gary and Peter have overdrawn loan accounts with the company of 5,000 and
10,000 respectively. Wendy has a balance due to her from the company of 30,000.
Your firm has already done a review of the availability of Entrepreneurs Relief and has
established that on a disposal of shares the relief would be available to Gary. The Tax
Partner, Dan Fletcher, has asked you to consider whether the purchase of own shares
will qualify for treatment as a capital disposal.
You are required to write a memorandum to the Tax Partner advising on the
availability of the capital treatment on the repurchase of Garys shares by the
company.
(20)

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4.

You are a Tax Manager in a professional accountancy practice. You have received the
following letter from Paul Tees, the Finance Director of Optics Ltd, which is a medium
sized private company with a 31 August year end. The company is not part of a group
and there are no other companies under common control. The company is profitable
and has no brought forward capital losses.
Mr P Tees
Optics Ltd
Somewhere Else
XY12 3CD

Tax Manager
The Firm
Somewhere
AB12 3CD

1 May 2016
Dear Tax Manager
We are in the process of disposing of our existing business premises. The sale
consideration, net of costs will be 7.75 million. We anticipate exchanging contracts for
the sale in June 2016 and completing in July 2016. This property was acquired in
December 2005 at a cost of 4.85 million, and we spent 750,000 on major capital
improvements in June 2006. My records indicate that your firm identified qualifying
capital allowances expenditure of 1.2 million within the total expenditure above. The
property has always been used as our main production facility.
We have identified a suitable replacement freehold premises at a total cost of
8,562,500. The vendors have occupied the property for the last 10 years and they
have confirmed that they undertook an exercise to identify expenditure qualifying for
capital allowances on their purchase in 2006. No further expenditure which would have
qualified for capital allowances has been incurred on the property.
The replacement property is larger than we require at the moment and so the top floor,
which represents approximately 20% of the total, will be let to third parties for
approximately 12 months before we expand into this part of the building.
The directors have also been asked to consider the approval of the following fit-out
expenditure for the new premises which will take place in September and October
2016:

A new highly energy efficient boiler and ventilation system

300,000
External solar shading
20,000
General electrical and cold water systems
30,000
Solar panels
60,000
Free-standing office equipment, including desks, computers, telephone
400,000
system etc.
Given the expenditure on the new office, we dont expect to incur any further capital
expenditure in the year to 31 August 2017.
Can you advise me on the Corporation Tax implications of the above?
Yours sincerely
Paul Tees
Finance Director
You are required to write a letter advising Mr Tees on the Corporation Tax
implications of the matters set out in his letter.
(20)
Ignore indexation allowance.

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5.

Copes Funeral Directors is a successful partnership of four individuals which was

formed on 1 June 1999. They have always traded from a single freehold premises. The
partners prepare accounts to 30 September and they share income and capital profits
equally.
The partnership assets are summarised below:

Freehold
Plant and equipment
Stock
Debtors
Cash deposits
Creditors
Internally generated goodwill

Net book
value

1,200,000
75,000
60,000
85,000
175,000
(60,000)
0

Original cost

Market value

550,000
320,000
60,000

1,500,000
100,000
85,000

n/a

2,000,000

The tax written down value of the plant and equipment at 30 September 2015 was
40,000.
In June 2012 the partners realised a capital loss of 240,000 on the sale of land
adjacent to their premises. This had been acquired two years previously in order to
allow for the expansion of the business but planning permission was refused. The
resultant loss has not been used by any of the individual partners.
The partners are due to meet with your Tax Partner and wish to discuss the
possibilities of incorporating the business on 30 June 2016. The senior partner of
Copes Funeral Directors, Mr Speel, wishes to retire from the practice at the same time
and he will not become a shareholder of the company. The newly incorporated
company will acquire all of the assets of the partnership with the exception of the
freehold property which will remain in the hands of the existing partners.
The partners will make no other capital gains in the 2016/17 tax year.
You are required to prepare a briefing note for your Tax Partner summarising the
Income Tax and Capital Gains Tax considerations of the proposed incorporation.
Detailed computations are not required.
(20)

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6.

Florence is a freelance architect. She has operated profitably for a number of years but
has recently seen a substantial downturn in business and suffered a number of
significant bad debts in the two years to 31 March 2016.
She earns a small salary as a non-executive director and has built up a valuable rental
property portfolio.
Florences income for the last three tax years has been:

2013/14
2014/15
2015/16

Trading
profits/(losses)

300,000
(90,000)
(210,000)

Salary

10,000
10,000
10,000

Rental profits

170,000
210,000
30,000

The 2014/15 trading loss of 90,000 was carried back and offset against general
income in 2013/14.
Florence has made regular personal pension contributions of 9,600 net per annum for
the last four tax years.
In the 2014/15 tax year, Florence disposed of two of her three rental properties
realising a capital gain of 82,000 on one and a capital loss of 2,000 on the other. She
had carried forward capital losses of 38,000 at 6 April 2014.
You are required to explain the alternatives for using the 2015/16 trading loss,
recommend the most tax efficient option for Florence, and advise what losses
are available to carry forward at 5 April 2016.
(10)

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