PROFESSIONAL LEVEL EXAMINATION

WEDNESDAY 15 MARCH 2017

(2½ hours)

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

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Your answers will be presented to the examiner as they appear on screen.

Assume that the Finance Acts 2015 rates and allowances will continue to apply in
future years unless you are specifically instructed otherwise.

Where required, the maximum annual investment allowance (AIA) is £500,000 pa for
expenditure incurred until 31 December 2015. From 1 January 2016, the AIA is
£200,000 pa.

Copyright © ICAEW 2017. All rights reserved. Page 1 of 10

1.1 Mita has been asked to take over as the money laundering reporting officer (MLRO) at her
firm of ICAEW Chartered Accountants. She is enquiring about the role before deciding
whether to accept.

Requirement

State the responsibilities of the MLRO with regard to reporting. (3 marks)

1.2 Ruth is an ICAEW Chartered Accountant employed by Sparks plc.

Sparks plc is preparing a database of employee qualifications and has asked Ruth to submit
her qualifications.

The database will be used to find suitable candidates for a new project team. All team
members will receive a 25% pay rise and a two-year secondment to the New York office.

Ruth wants to join the new project team but she does not have all of the qualifications
required. She has decided to submit false information about her qualifications to ensure she
gains a place on the new project team.

Sparks plc’s policy is to dismiss employees who misrepresent their qualifications.

Requirement

Explain two of the fundamental principles that are threatened when Ruth submits the false
information about her qualifications and identify the threat. (4 marks)

Total: 7 marks

Copyright © ICAEW 2017. All rights reserved. Page 2 of 10

2.1 Andy is a doctor in a private medical practice. Andy is VAT registered. He charges patients a
single fixed fee that pays for both the medical consultation (an exempt supply) and any
medicine provided (a standard-rated supply). The fee remains the same even if no medicine
is provided.

Requirement

Explain how Andy should determine the VAT due on his fees. (4 marks)

2.2 On 5 April 2016 Jim was granted a 30-year lease of a residential property in London. Jim
paid a premium of £261,500 and agreed to pay an annual rent of £4,500. This is Jim’s first
property purchase.

Requirement

Calculate Jim’s stamp duty land tax liability from the grant of the lease. (3 marks)

2.3 Lamb Ltd is a VAT-registered company which is partially exempt. For the year ended
31 March 2016, Lamb Ltd failed both Simplified Test One and Simplified Test Two. Lamb Ltd
needs to make an annual partial exemption adjustment calculation.

Lamb Ltd’s supplies of goods in the year ended 31 March 2016 were:

£
Standard-rated taxable supplies (excluding VAT) 562,562
Exempt supplies 68,821
631,383

Lamb Ltd’s input VAT for the year ended 31 March 2016 was:

£
Wholly attributable to standard-rated supplies 100,100
Wholly attributable to exempt supplies 12,600
Non-attributable 26,780
139,480

The input VAT recovered during the year ended 31 March 2016 was £125,532.

Requirement

Calculate any annual adjustment required to the input VAT recovered by Lamb Ltd for the
year ended 31 March 2016. (6 marks)

Total: 13 marks

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3.1 Clara is aged 55, lives in London and has always been resident and domiciled in the UK. In
February 2016 she:

 Realised a gain of £75,000 on the disposal of a painting.

 Sold her entire holding of shares in XYZ plc for £12,000. Clara purchased the shares for
£8,000 and held them in an ISA until their disposal.

 Sold some jewellery at auction. Clara paid the auctioneer 5% of the £23,000 proceeds.
Clara inherited the jewellery from her mother ten years ago when it was valued for
probate purposes at £16,000. Her mother paid £7,600 for the jewellery in 1983.

 Sold a lease with exactly 25 years left to run for £53,000. Clara purchased the lease
exactly 14 years before the sale for £33,000. The lease related to non-residential
property and was rented to an unconnected tenant.

At 6 April 2015 Clara had a capital loss brought forward of £8,450.

For 2015/16 Clara has rental income of £3,600 and trading income of £13,500 from her
business.

Clara’s business made a tax-adjusted trading loss of £34,500 for 2016/17. Clara will utilise
this 2016/17 loss as early as possible by offsetting it against her income and gains for
2015/16.

Requirements

(a) State the latest date by which Clara must submit a claim to offset her 2016/17 trading
loss against her 2015/16 income and capital gains. (1 mark)

(b) Calculate Clara’s capital gains tax liability for 2015/16. (10 marks)

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3.2 Simon is American domiciled and became tax resident in the UK in 1997/98 when he moved
to London.

During 2015/16 Simon made the following gifts of assets located in England:

 In May 2015 Simon gave £25,000 to his daughter.

 In June 2015 Simon gave 20,000 shares in PQR Ltd, an unquoted trading company, to
the Cloud Discretionary Trust. Simon had owned the shares for ten years.

At the time of the gift Simon owned 60,000 of the 100,000 shares in issue and the shares
were valued at:

Shareholding Price per share

1% – 24% £18
25% – 50% £25
51% – 75% £36
76% – 100% £46

PQR Ltd had total assets less current liabilities worth £5.8 million. Included in total assets
was an investment property worth £600,000. PQR Ltd had a long-term bank loan of
£400,000 outstanding.

 In August 2015 Simon gave a farm to the Wind Discretionary Trust. Simon rented the
farm to tenants under a tenancy granted in January 2004. The farm’s total agricultural
value was £500,000. The farm’s open market value of £850,000 is much higher because
it takes account of planning permission attached to some of the land.

Simon’s previous lifetime gifts were:

 July 2003 – gross chargeable transfer value of £250,000.

 July 2008 – cash gift of £125,000 to the Rain Discretionary Trust.

Requirements

(a) For inheritance tax purposes, state and explain the date from which Simon began to be
treated as domiciled in the UK. (2 marks)

(b) Calculate the amount of any lifetime inheritance tax arising on each disposal in 2015/16.
Show the amount of any available reliefs and exemptions. (12 marks)

Total: 25 marks

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4.1 Cup Ltd owns 100% of Saucer Ltd, which owns 100% of Teaspoon Ltd. All three companies
are UK-resident trading companies.

Saucer Ltd’s draft accounting profit for its nine-month accounting period ended 31 December
2015 is £5,298,000. The items in Table 1 below have already been added or deducted in
arriving at the draft profit.

Table 1 Note £
Net intangible fixed assets expense (1) 25,000
Dividends received from Teaspoon Ltd 800,000
Profit on disposal of land (2) 145,000
Rental income (3) 72,000
Interest expense (4) 93,750

Notes

(1) The net intangible fixed assets expense figure comprises:

£
Profit on disposal of trade-related copyright (32,000)
Goodwill impairment expense 57,000
25,000

(2) On 1 August 2015 Saucer Ltd sold some land for £450,000. It purchased the land for
£305,000 in January 2000.

(3) Since 1 September 2015 Saucer Ltd has rented a commercial building to tenants. Prior
to 1 September 2015 the building was used for business purposes. The monthly rent is
£6,000. The tenants paid a full year’s rent in advance on 1 September 2015.

(4) The interest expense figure comprises:

£
Interest on loan to purchase shares in Teaspoon Ltd 75,750
Interest on loan to purchase commercial building (note 3) 18,000
93,750

Capital allowances

On 1 April 2015, Saucer Ltd had tax written down values of £648,500 for its main pool and
£256,000 for its special rate pool. On 1 June 2015 Saucer Ltd spent £525,000 on thermal
insulation for its office premises and £250,000 on new machinery. Saucer Ltd is the only
company in the group that purchases fixed assets.

Copyright © ICAEW 2017. All rights reserved. Page 6 of 10

 Requirements

(a) Calculate Saucer Ltd’s tax-adjusted trading income after capital allowances for the nine
months ended 31 December 2015. Start with the draft profit of £5,298,000 and show all
items given in Table 1 including the notes, using a zero for any item that requires no
adjustment. (8 marks)

(b) Calculate Saucer Ltd’s corporation tax liability for the nine months ended 31 December
2015. (4 marks)

Notes: Assume an RPI for August 2015 of 259.8.

Ignore VAT.

4.2 Cup Ltd owns 100% of Saucer Ltd. Saucer Ltd purchased 100% of Teaspoon Ltd on
1 October 2015. All three companies are UK-resident trading companies.

Teaspoon Ltd’s results are:

Year ended Taxable Total Profits Corporation Tax Liability

£ £
29 February 2016 1,855,000 372,546
28 February 2017 685,000 137,000

Requirement

State and explain the dates by which Teaspoon Ltd should pay its corporation tax liability for
the year ended 28 February 2017. (3 marks)

Total: 15 marks

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5.1 Chitra Nehru is aged 50. Chitra runs a UK manufacturing business, Ergo Containers, as a
sole trader.
Ergo Containers
Chitra has calculated a draft accounting profit of £121,500 for her year ended 31 December
2015. However, this does not include the following items, as she was not sure how to treat
them:
 Chitra took out a loan many years ago to purchase a building which comprises her
business premises and the flat above. Interest of £14,000 pa is payable on this loan.
Chitra lives in the flat above the business premises with her husband, Rajiv. The flat
represents 15% of the building’s total floor space.
 Staff salaries:
£
Chitra 12,000
Chitra’s niece who works full time in the business as an accounts assistant 20,000
The draft profit figure already includes a deduction of £15,000 for the staff costs of the
other full-time accounts assistant.
 A fine of £3,500 for breach of Health & Safety regulations in the workplace.
 A gift to a local school of stock worth £2,300.
Chitra has yet to make any necessary adjustment to stock following a flood in October 2015
which damaged some containers. Chitra included the damaged containers in her closing
stock figure at their original cost of £15,600. The containers had a market value before the
flood of £20,800. After the flood their market value was £10,100.
Capital allowances have not yet been calculated. Tax written down values as at 1 January
2015 were:
£
Main pool 56,755
Special rate pool 895
Chitra’s car with 35% private use 21,000
The car was purchased in 2012 and has CO2 emissions of 125g/km

Other income and payments in 2015/16

Chitra won £6,500 from her holding of premium bonds. Chitra received building society
deposit interest of £2,400, loan interest from her daughter of £600 and dividends from EFG
plc of £8,496. Chitra gave £4,000 in cash to a registered charity as a Gift Aid donation.
Requirements
(a) Calculate Chitra’s tax-adjusted trading profit after capital allowances for Ergo
Containers for the year ended 31 December 2015. Show your treatment of each item.
Ignore VAT. (8 marks)

(b) Calculate Chitra’s income tax liability for 2015/16. (6 marks)

(c) Calculate Chitra’s liability to national insurance contributions on her business profits for
2015/16. (3 marks)

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5.2 Saina Nehru works as the finance director for BK Ltd, a fashion retailer. For 2015/16 Saina
has received the following remuneration package:

 Salary of £86,000.

 Use of a furnished company flat near the office. The flat has an annual value of
£18,000. It cost BK Ltd £200,000 in January 2000. The flat had a market value of
£425,000 in February 2010 when Saina first moved in. The flat was completely
refurbished in January 2015 at a cost of £68,000. The furniture in the flat cost £26,000.

 Use of a company car with a list price of £21,000 which only cost BK Ltd £18,750. The
car has CO2 emissions of 164g/km. In September 2015 BK Ltd spent £2,455 on
repairs to the car. Saina pays for her own petrol.

 Attendance at a training course on how to compose music which cost BK Ltd £2,400.

Alternative to company car

For 2017/18 BK Ltd has offered Saina an alternative to her existing company car scheme. If
she were to accept the alternative, Saina would return her company car on 5 April 2017 and
receive a car allowance of £1,000 (gross) per month instead. Saina would then lease a car
privately at a cost of £675 per month. Saina would also need to pay £1,750 per year for its
running costs, excluding petrol. Saina would continue to pay for her own petrol. The cost of
Saina’s fuel would be the same regardless of which alternative she chooses.

Saina will be an additional rate taxpayer in 2017/18.

Requirements

(a) Calculate Saina’s taxable employment income for 2015/16. Show your treatment of
each item. (6 marks)

(b) Calculate the after-tax cost to Saina of keeping her existing company car and the after-
tax cost of choosing the car allowance instead. Use 2015/16 rates and allowances.
(4 marks)

Note: Assume that the official rate of interest throughout 2015/16 was 3%.

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5.3 Arun Nehru has been in partnership with his father Rajiv and brother Braj for a number of
years. The partnership stopped trading on 30 November 2015. Arun’s share of the
partnership profits for the last two accounting periods is:

£
Year ended 31 May 2015 30,264
Six months ended 30 November 2015 7,156

The partnership started trading on 1 August 2000 and prepared its first set of accounts for the
22 months to 31 May 2002. Arun’s share of the partnership profits for this first accounting
period was £75,020.

Requirement

Calculate Arun’s assessable trading profits for 2015/16. (4 marks)

5.4 Rajiv Nehru is aged 53 and has made regular contributions to his personal pension scheme
since 2011/12. In 2015/16 Rajiv had total employment income of £62,000, partnership
income of £15,000, and rental income of £71,000.

Rajiv has made the following gross personal pension contributions:

£
2014/15 35,000
2013/14 52,000
2012/13 47,000
2011/12 50,000

Rajiv contributed the maximum possible tax relievable contribution to his personal pension
scheme for 2015/16. Rajiv is wondering how much tax he saved as a result.

Requirement

Calculate:

 the maximum possible tax relievable pension contribution Rajiv could have made in
2015/16, and
 how much Rajiv’s 2015/16 income tax liability was reduced by as a result of making the
personal pension contribution.
(9 marks)

Total: 40 marks

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