PROFESSIONAL LEVEL EXAMINATION

TUESDAY 9 JUNE 2015

(2½ hours)

TAX COMPLIANCE
This paper consists of FOUR questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Assume that the Finance Act 2014 rates and allowances will continue to apply in future
years unless you are specifically instructed otherwise.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright © ICAEW 2015. All rights reserved. Page 1 of 8

1. Sunil is 51 years old. Sunil was born in Jamaica in 1963 to a Welsh mother and her
Norwegian husband who were on holiday in Jamaica at the time. Sunil lived with his parents
in Norway until 1970 when they moved to New Zealand because of his father’s job. In 1973
Sunil and his parents emigrated to Australia permanently, becoming Australian citizens and
renouncing all ties with Norway. As soon as he was eighteen (1981) Sunil returned to Norway
with the intention of making it his permanent home and never returning to Australia. Sunil
remained in Norway until he came to the UK in 2005. Sunil has been UK resident since
2005/06.

Trading income
Sunil commenced to trade as a publisher in the UK on 1 January 2014 preparing accounts for
the fifteen months to 31 March 2015. Sunil calculated his profit for the fifteen months to
31 March 2015 as £144,957 after taking account of the following items:

Note £
Client entertaining 2,556
Staff costs (1) 14,950
Interest received on business bank account (2) 150
Property repairs for Sunil’s office (3) 15,400
Depreciation 5,500
Sunil’s car expenses (4) 24,850
Gift Aid donation in July 2014 to MSF, a charity 500
Gift of leather handbags to 12 key customers 8,340

Notes
(1) Staff costs comprise the following:
£
Gross salary for Marwan, the sole employee 12,500
Petrol for business miles in van provided to Marwan 2,000
Job-related training course for Marwan 450
14,950

From the date his employment commenced on 6 April 2014, Marwan was provided with
a van for both business and extensive private use. Sunil paid the list price of £8,500 for
the van which has CO2 emissions of 145g/km.

Sunil has lost the payroll paperwork and cannot remember the amounts of national
insurance contributions (NIC) paid for Marwan since he joined. As a result, no deduction
has been made for employer’s NIC in arriving at Sunil’s profit figure of £144,957. Sunil
does know that Marwan is not contracted out of S2P.

(2) Interest income of £10 is received monthly.

(3) Property repairs for Sunil’s office comprise the following:

£
New hot water heating system 1,500
Decoration of premises 3,400
Replacement of windows broken in January 2015 10,500
15,400

Copyright © ICAEW 2015. All rights reserved. Page 2 of 8

(4) Sunil’s car expenses figure is made up of £18,500 for the cost of a new car with CO2
emissions of 155g/km which he purchased on 1 January 2014, £3,000 for a three-year
car servicing and repairs plan paid for in advance, £2,000 for fuel and £1,350 for
running costs. Business use is 75%.

Other income and outgoings

Sunil owns a rental property in Norway which qualifies as a furnished holiday let under UK
rules. In 2014/15 Sunil received gross rents of £34,000 and incurred rental costs of £7,400. In
addition Sunil bought new furniture for the property at a cost of £6,250. Sunil paid taxes of
£500 in Norway on his rental income which he remitted in full to the UK.

Sunil received dividends from UK companies totalling £146,700 and UK bank deposit interest
of £14,284. Sunil also received £250,000 of dividend income from shares held in Switzerland,
none of which was remitted to the UK.

Sunil made a personal pension contribution of £30,000 in January 2015.

Requirements

(a) Explain Sunil’s domicile in 1963, 1970, 1973, 1981 and 2015. (5 marks)

(b) Calculate the employer’s and employee’s NIC due in respect of Marwan’s 2014/15
employment. Clearly show the amount due for each class of NIC. (4 marks)

(c) For the publishing business, calculate Sunil’s tax adjusted trading profits after capital
allowances for his fifteen month period ended 31 March 2015. (11 marks)

(d) Calculate Sunil’s income tax payable for 2014/15 assuming he is non-UK domiciled and
claims the remittance basis. (11 marks)

NOTE: Ignore VAT.

Total: 31 marks

Copyright © ICAEW 2015. All rights reserved. Page 3 of 8

2. Income

Jeff is 45 years old. During 2014/15 Jeff’s only income was the following remuneration
package from XYZ Ltd:

 Basic salary of £15,000 pa.

 For the last nine months of 2014/15 Jeff was provided with a company car with a list
price of £13,000 and CO2 emissions of 85g/km. Jeff made a £2,500 one-off contribution
towards the cost of the car. In addition Jeff paid his employer £50 per month towards
the private use of the car. Jeff paid for his own private petrol.

 XYZ Ltd made a contribution of 10% of Jeff’s basic annual salary to an occupational
pension scheme. Jeff made a further contribution of 5% of his basic annual salary.

 Luncheon vouchers with a total value of £2,225. The vouchers were exchangeable for
meals. The vouchers only actually cost his employer £2,069.

Jeff attended a number of social events paid for by his employer during 2014/15. Only
employees were allowed to attend the events. Jeff went to the annual year-end ball at a cost
to XYZ Ltd of £130 per person. He also attended the summer ball at a cost to XYZ Ltd of £60
per person and the firm’s annual barbecue at a cost to XYZ Ltd of £75 per person.

Disposals

During 2014/15 Jeff made the following disposals:

 Gift of a painting worth £100,000 to the Red Cross, a registered charity, on 1 July 2014.
Jeff had bought the painting for £60,000 in July 2008.

 Sale of an antique necklace worth £212,000 to his daughter for £76,500 on 1 August
2014. Jeff inherited the necklace from his mother on her death in July 2000 when it was
valued for probate purposes at £145,000. His mother originally paid £12,000 for the
necklace in 1966.

 Gift of 25,000 £1 ordinary shares in Sparks Ltd, an unquoted investment company, to

the Rainy Discretionary Trust on 1 September 2014. Jeff subscribed for the shares at
their par value of £1 per share in October 2000. Prior to this gift, the shares in Sparks
Ltd were held as follows:

No. of shares
Margot (who is Jeff’s wife) 50,000
Jeff 25,000
Matilda (who is Jeff and Margot’s daughter) 12,500
Bertie (who is Jeff and Margot’s son) 12,500
100,000

The values of the shareholdings in Sparks Ltd as at 1 September 2014 were as follows:

Price per share

1% – 24% £2
25% – 50% £3
51% – 74% £5
75% £8
76% – 100% £9

Copyright © ICAEW 2015. All rights reserved. Page 4 of 8

 Gift of 10,000 shares in Harps plc to the Sunshine Discretionary Trust on 1 March 2015.
On 1 March 2015 Harps plc shares were quoted at 1,031–1,043p with marked bargains
of 1,035p, 1,040p and 1,042p. Jeff paid £1.89 per share in January 1990.

Jeff made a lifetime transfer in October 2007 when he gifted £194,000 in cash to a
discretionary trust. His only previous lifetime transfer was in January 2001 when he made a
gift with a gross chargeable transfer value of £152,000.

Requirements

(a) Calculate Jeff’s total taxable income for 2014/15. (6 marks)

(b) Calculate Jeff’s capital gains tax liability for 2014/15. (8 marks)

(c) Calculate the amount of lifetime inheritance tax, if any, arising on each disposal in
2014/15. (10 marks)

Total: 24 marks

Copyright © ICAEW 2015. All rights reserved. Page 5 of 8

3a. Alphabet Group plc incorporated a new wholly owned subsidiary company, Z Ltd, on 1 April
2013. On 1 June 2013 Z Ltd opened an interest-bearing deposit account by placing £1 million
on deposit. On 1 August 2013 Z Ltd commenced to trade.

Z Ltd prepared accounts for the year ended 31 March 2014 and the year ended 31 March
2015.

Requirement

In relation to corporation tax, state the dates of Z Ltd’s accounting periods falling between
1 April 2013 and 31 March 2015. (2 marks)

3b. Alphabet Group plc also owns 100% of the shares in B Ltd. B Ltd is a VAT registered partially
exempt trading company which has an accounting year end and a VAT year end of
31 December.

Irrecoverable VAT
B Ltd deducted the following amount of irrecoverable VAT from its tax adjusted trading profits
for the year ended 31 December 2014. This input VAT was incurred in the making of taxable
supplies.
£
VAT relating to business entertaining of UK clients 16,755
VAT relating to a supply of cleaning services for which B Ltd does not have
a valid VAT invoice 5,000
21,755

Capital goods scheme

On 1 December 2014, B Ltd sold an item of computer equipment for £70,000 plus VAT. B Ltd
purchased the computer equipment for £300,000 plus VAT on 1 March 2011. Initially the
equipment was used 90% for taxable purposes. However, from 1 January 2013 to its
disposal on 1 December 2014 the taxable use was only 60%.

Requirements

(i) Explain the adjustment, if any, B Ltd should make to its tax adjusted trading profits in
respect of the irrecoverable VAT for its year ended 31 December 2014. Clearly show
your treatment of both amounts. (2 marks)

(ii) Explain, with supporting calculations, the VAT treatment of the computer equipment
under the capital goods scheme over the period of ownership by B Ltd. (6 marks)

3c. In addition to its 100% holdings in Z Ltd and B Ltd, Alphabet Group plc also owns 60% of the
shares in C Ltd which in turn owns 51% of the shares in D Ltd. All the companies including
Alphabet Group plc are UK trading companies.

Your manager has correctly calculated C Ltd’s finalised tax adjusted trading profits before
capital allowances to be £845,795 for the year ended 31 December 2014. Your manager has
given you the following information so that you can calculate the capital allowances and the
chargeable gains figures in order to complete the corporation tax computation.

Capital allowances
On 1 January 2014 C Ltd’s tax written down values were: £423,000 for the main pool;
£245,600 for the special rate pool; and £111,250 for a short life asset.

Copyright © ICAEW 2015. All rights reserved. Page 6 of 8

 C Ltd undertook the following acquisitions and disposals of assets in the year:

Purchases Note £
1.1.14 Car (1) 18,800

Disposals Note £
1.1.14 Printing press (2) 55,000
1.3.14 Short life asset (3) 51,000

Notes:
(1) The car was purchased new and has CO2 emissions of 80g/km.

(2) The printing press originally cost £12,000 on 1 April 2000.

(3) The short life asset was purchased for £250,000 on 1 May 2011.

Share disposal
C Ltd held a 30% shareholding in the shares of Slab Ltd, an unquoted investment company,
until it disposed of half its shares on 1 June 2014 for £45 per share. C Ltd originally
purchased 10,000 shares in January 1995 for £10 per share. In January 2005 Slab Ltd made
a 1 for 5 bonus issue.

On 1 January 2014 C Ltd had brought forward capital losses of £25,000.

Requirement

Calculate C Ltd’s corporation tax liability for the year ended 31 December 2014. Ignore VAT.
(11 marks)

Note: Assume that the RPI for January 2014 was 252.6 and June 2014 was 256.3.

3d. D Ltd always pays corporation tax at the main rate. It prepared its most recent accounts for
the period 1 July 2014 to 31 January 2015. D Ltd originally estimated its corporation tax
liability for this seven month period to be £910,000 and paid the first instalment on its due
date on that basis.

D Ltd later revised its estimate of its corporation tax liability to £1,050,000. D Ltd paid its
second instalment accordingly along with the extra amount due in relation to the first
instalment, on the due date for the second instalment.

D Ltd finalised its actual corporation tax liability for the seven months ended 31 January 2015
as £1,610,000. D Ltd paid its third instalment accordingly along with the extra amount due in
relation to the first and second instalments, on the due date for the third instalment.

Requirement

For D Ltd’s seven month accounting period ended 31 January 2015, state the due date for
each instalment and calculate the amount of corporation tax actually paid on each date.
(5 marks)

Total: 26 marks

PLEASE TURN OVER

Copyright © ICAEW 2015. All rights reserved. Page 7 of 8

4a. You work as a trainee for PPA & Co, a firm of ICAEW Chartered Accountants. You have
been asked to review part of a new client’s file:

“I work for X plc as a director. A few years ago X plc set up a new payment scheme for the
members of the senior leadership team. The scheme involves a complicated series of
transactions designed to reduce our tax bills. Basically, the senior team are paid 75% less
than we were previously via PAYE. We then receive various non-UK loans in Romania’s
currency, the lei, which give rise to non-taxable gains. Initially I was a bit worried about the
whole non-taxable gains thing. However, the overall effect in cash terms for me is that I have
reduced my liability to income tax and NIC by at least £100,000 pa for the past ten years. I
was assured that each step in the scheme is in itself legal, so I’m happy that my tax returns
have been completed accurately.”

Requirements

(i) Explain the difference between tax evasion and tax avoidance. (2 marks)

(ii) Explain whether the legality of each step in such a ‘tax avoidance’ scheme would be
sufficient for the scheme to be held as valid by the courts. (2 marks)

(iii) If the scheme were held to be tax evasion, outline what the legal consequences for both
you and your client would be if the underpaid tax were not promptly disclosed and paid
to HMRC. (3 marks)

4b. On 1 January 2015 Tehira granted Jensen a 25 year lease of a commercial property located
in Manchester for a premium of £140,000 plus annual rent of £8,000. The rent is payable
annually in advance on 1 January each year. Tehira had purchased the freehold of the
property 15 years ago for £225,000. The value of the reversionary interest on 1 January 2015
was £283,000.

Jensen is a sole trader who uses the property exclusively for business use. Jensen’s
business has a May year-end. Jensen paid the stamp duty land tax (SDLT) due and filed his
land transaction form on 1 April 2015.

Requirements

(i) Calculate Tehira’s chargeable gain arising on the grant of the lease and her property
income assessment for 2014/15. (4 marks)

(ii) Calculate Jensen’s tax-allowable property cost for the year ended 31 May 2015.
(2 marks)

(iii) Calculate the amount of interest and maximum penalties payable by Jensen in relation
to the SDLT which was paid and the land transaction form that was filed on 1 April
2015. Assume the interest rate on overdue SDLT is 3%. Ignore VAT. (6 marks)

Total: 19 marks

Copyright © ICAEW 2015. All rights reserved. Page 8 of 8