PROFESSIONAL LEVEL EXAMINATION

WEDNESDAY 6 DECEMBER 2017

(2½ HOURS)

TAX COMPLIANCE
This exam consists of five questions (100 marks).

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Copyright © ICAEW 2017. All rights reserved. Page 1 of 8

1. Sherazi LLP, a firm of ICAEW Chartered Accountants, recently tendered for tax compliance
and advisory work for Javadi Ltd, a marketing company.

Sherazi LLP has received notice that the tender was successful. The partners in the firm are
pleased as they already have another marketing company, Higgins Ltd, as a client and the
firm intends to become specialists in this business sector.

Requirements

1.1 Identify the fundamental principles that are threatened if Sherazi LLP accepts Javadi Ltd
as a client, and set out the safeguards that can be put in place to manage the threats to
those fundamental principles. (4 marks)

1.2 Assuming the threats are sufficiently reduced, explain any other steps Sherazi LLP
should take before accepting Javadi Ltd as a client. (3 marks)

Total: 7 marks

Copyright © ICAEW 2017. All rights reserved. Page 2 of 9

2. Virgil Ltd is a UK-resident, VAT-registered company manufacturing goods that are
standard-rated in the UK. For many years Peter owned all of the shares in the company.

Quarter ended 31 January 2017

Virgil Ltd had the following transactions in the quarter ended 31 January 2017. All amounts
are stated exclusive of VAT, where relevant:

£
Sales
Supplies to UK customers 258,000
Supplies to Italy (in the EU):
- To registered businesses 53,000
- To individuals 32,000
Supplies to USA (not in the EU):
- To registered businesses 74,000
- To individuals 25,000
442,000

Purchases and expenses

Purchases and expenses in UK – standard-rated 135,000
Rent paid in UK – exempt 25,000
Legal fees re trading contract – solicitor in Italy 8,400
Purchase of a car for private use by Peter 24,000
Purchase of machinery 12,000
204,400

Sale of shares and property

On 31 March 2017 Peter personally sold the following assets:

 shares in Virgil Ltd for £874,600 to Walden Ltd, an unconnected company.

 a commercial property in London for £400,000 to Sam, an unconnected individual. Peter

had purchased the property in June 1990. Peter made no option to tax the property.

Requirements

2.1 Explain Virgil Ltd’s VAT treatment of the legal fees. State the impact on this treatment if
the solicitor had been located in the USA. (3 marks)

2.2 Calculate the VAT liability for the quarter ended 31 January 2017. Show your treatment
of each item. (6 marks)

2.3 Calculate the amount of stamp duty and stamp duty land tax payable on the sale of the
shares and the property. State the due dates and by whom the amounts were payable.
(4 marks)

Total: 13 marks

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3. Carrie died on 20 March 2017. During her lifetime she made the following disposals:

June 2009 - Shares in Quinn Ltd, an unquoted investment company

Carrie gave shares in Quinn Ltd to a discretionary trust, when the shares were worth
£256,000.

May 2016 – Cash to her son Otto

Carrie gave £220,000 cash to Otto on the occasion of his marriage.

September 2016 - Shares in Brody plc, a quoted trading company

Carrie sold 100,000 £1 ordinary shares, a 6% holding, to her nephew for £150,000. At the
date of sale the shares were quoted at 308-316p with a marked bargain of 309p. Carrie paid
£80,000 for the shares in July 1990. Carrie never worked for Brody plc.

On her death Carrie had total assets of £1.3 million. These included a painting worth
£300,000 that she had inherited from her brother Simon in October 2015. At that time the
painting was worth £240,000 and Simon’s executors paid inheritance tax of £62,000 relating
to the painting.

Carrie, a higher rate taxpayer, had unpaid income tax of £20,000 at 20 March 2017 and her
funeral expenses were £9,500.

Carrie left £100,000 of her estate to a UK-registered charity and the remainder of her estate
to Otto.

Requirements

3.1 Calculate the capital gains tax payable as a result of the events in 2016/17. Show your
treatment of each event. (5 marks)

3.2 Calculate the inheritance tax payable as a result of Carrie’s death. (16 marks)

3.3 Calculate the after-tax net cash saving or net cash cost, if the charitable donation on
Carrie’s death had been £162,000 instead. Clearly state whether it is a net cash saving
or a net cash cost.
(4 marks)

Total: 25 marks

Copyright © ICAEW 2017. All rights reserved. Page 4 of 9

4.1 Mathison Ltd is a trading company with one wholly owned subsidiary, Galvez Ltd, an
investment company.

For the year ended 31 March 2017, Mathison Ltd had a tax-adjusted trading profit of
£980,000. In addition the company had interest receivable on debentures of £20,000 which
included £3,000 received on 3 April 2017.

On 1 November 2016 the company paid both a donation of £2,600 to a UK-political party and
a qualifying donation of £4,500 to a UK-registered charity.

At 1 April 2016 the company had a trading loss brought forward of £37,200.

Capital disposal

On 10 January 2017 Mathison Ltd sold the entire holding of shares in Galvez Ltd for
£400,000.

Mathison Ltd purchased the shares for £150,000 in August 2008.

The sale of the shares does not qualify for the substantial shareholding exemption.

At the date of the share sale, Galvez Ltd owned an investment property that it purchased
from Mathison Ltd in April 2014 for £200,000, when the market value of the property was
£340,000. Mathison Ltd purchased the property for £60,000 in June 1990.

Requirements

(a) Calculate the degrouping charge arising as a result of transactions relating to

Galvez Ltd. (2 marks)

(b) Calculate Mathison Ltd’s corporation tax payable for the year ended 31 March 2017.
(7 marks)

Notes: RPI for January 2017 is 265.5.

Ignore VAT and stamp taxes.

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4.2 Lockhart Ltd prepared accounts for the seven months ended 31 October 2017, having
previously prepared annual accounts to 31 March. For many years, the company has had a
wholly-owned subsidiary, Beren Ltd, and a 5% shareholding in another company, Sonny Ltd.

Lockhart Ltd had the following sources of income for the seven months ended 31 October
2017:

£
Tax adjusted trading profit 775,000
Dividend received from Sonny Ltd 12,000

In the year ended 31 March 2017 Lockhart Ltd had a taxable total profit of £1.1 million.

Requirements

(a) Explain, with supporting calculations, why Lockhart Ltd is required to pay corporation
tax in instalments for the seven months ended 31 October 2017. (3 marks)

(b) State the due dates for payment of the instalments and the amount payable at each
date. (3 marks)

Total: 15 marks

Copyright © ICAEW 2017. All rights reserved. Page 6 of 9

5.1 Saul is UK-resident and UK-domiciled. He is employed by Faisel Ltd as a researcher at the
head office of a pharmaceutical company. His employment package for 2016/17 was:

 Annual salary of £25,000.

 Bonus of £790 received on 26 March 2017, relating to Faisel Ltd results for the year
ended 31 December 2016. Saul received a bonus of £800 relating to the company results
for the year ended 31 December 2015 on 29 April 2016.

 Reimbursement of entertaining expenditure of £250. Saul kept receipts to support all of

the entertaining expenditure, which relates to taking suppliers out for meals.

 Payment of 52p per mile for 12,000 business miles in Saul’s own car when travelling to
other offices of his employer. Saul also takes a colleague on each of the business
journeys and receives 6p per mile from Faisel Ltd for doing so.

 Faisel Ltd contributed the equivalent of 5% of Saul’s basic salary into the company
occupational pension scheme. Saul also contributed 2% of his basic salary into the
scheme.

 An interest-free loan of £1,500 made to Saul several years ago was written off on
5 October 2016.

Saul paid subscriptions of £320 to the Medical Research Society, an HMRC approved
professional body.

In addition to his employment income for 2016/17, Saul also received interest on his NS&I
Direct Saver account of £1,400 and dividend income from UK quoted companies of £6,000.

Saul owns a house in Erehwon, an overseas country. The house was let out to a local family
for gross rent of £12,000 during 2016/17. Saul’s expenditure on the property during the year
was:

£
Repairs and insurance 1,100
Cleaning 450
New dining room furniture – see below 1,200

The new dining room furniture is made out of excellent quality oak. It replaces poor quality
plastic furniture that lasted for only two years and was scrapped. Similar plastic furniture
would have cost £300. Saul paid tax in Erehwon of £1,900 on the property income.

Requirements

(a) Calculate Saul’s taxable employment income, showing your treatment of each item.
(8 marks)

(b) Calculate Saul’s income tax liability for 2016/17. Show full workings for double taxation
relief. (11 marks)

Note. There is no double tax treaty between the UK and Erehwon.

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5.2 On 1 January 2017 David, Mike and Nicholas started trading in partnership as DMN
Marketing (DMN). David and Mike work at least 35 hours per week for DMN, but Nicholas
kept his job at a publishing company and works for the partnership only one day each week
ie around eight hours.

For the six months ended 30 June 2017 DMN’s draft tax-adjusted trading profit before
deduction of capital allowances was £22,000. The partners were not sure how to deal with
the following three items so no deduction has been made in respect of these in arriving at the
figure of £22,000.

(1) In December 2016, prior to starting the business the partners incurred the following
expenditure:
£
Legal advice regarding standard contracts for clients 20,000
Legal advice on the lease of business premises 2,500
22,500

(2) On 1 January 2017 DMN took out a six-year lease on business premises. In addition to
the rent payable of £6,000 per annum, the business paid a lease premium on 1 January
2017 of £15,000.

(3) In January 2017 on the launch of their business DMN sent gifts of mobile phone
chargers to 100 potential clients. The chargers had the DMN logo and phone number
printed on them and they cost the company a total of £1,000.

Capital allowances

During the six months to 30 June 2017 DMN made the following purchases:

£
January 2017 Specialist computer equipment 170,000
January 2017 Air conditioning and ventilation system for the offices 35,000
February 2017 New car for use by David: 25,400
10% business use, CO2 emissions 163g/km
February 2017 New car for use by Mike: 17,000
20% business use, CO2 emissions 74g/km

David, Mike and Nicholas share profits in the ratio 20:40:40 respectively, after allocating a
salary to David of £90,000 per annum and £10,000 per annum to Mike.

DMN won a major client contract in August 2017 and after allocating profits to each partner,
Mike is expected to have tax-adjusted trading profits of £140,000 for the year ending 30 June
2018.

Copyright © ICAEW 2017. All rights reserved. Page 8 of 9

Requirements

(a) Calculate DMN’s tax-adjusted trading profit/(loss) after deduction of capital allowances
for the six months ended 30 June 2017. (11 marks)

(b) Calculate the tax-adjusted trading profit/(loss) for each partner for the six months ended
30 June 2017. (3 marks)

(c) Calculate Mike’s assessable trading profits for 2016/17 and 2017/18. (3 marks)

(d) Calculate Mike’s liability to Class 4 national insurance contributions for 2016/17 and
2017/18. (2 marks)

(e) Explain the restriction on the use of trading losses by Nicholas, assuming he has other
income of £35,000 each tax year. (2 marks)

Total: 40 marks

Note. Ignore VAT and stamp taxes.

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