Important information

Please read this information carefully before

you begin your exam.

Starting the exam

Click on the right-hand arrow in the header to

begin the exam. The exam timer will begin to
PROFESSIONAL count down.

LEVEL Preparing your answers

Answer all questions.

TUESDAY 14 MARCH 2023 Respond directly to the exam question

requirements. Do not include any content of a
2.5 HOURS personal nature, such as your name.

Only your answer in the word processing

area will be marked. You must copy over any
BUSINESS data for marking from the spreadsheet area to
the word processing area.

PLANNING: Issues during the exam

TAXATION If you encounter any issues during the exam

you should tell the invigilator (centre) or online
This exam consists of three questions (100 chat support (RI) as they may be able to
marks). resolve the issue at the time. Neither the
invigilator nor the online chat support can
Marks breakdown advise you on how to use the software.

Question 1 40 marks Ending the exam

Question 2 30 marks
Question 3 30 marks When the exam timer reaches zero, the exam
will end. To end the exam earlier, go to the last
question and click the right-hand arrow button,
then click the Submit button to close the exam.
Assume the rules, rates and allowances as
set out in the Learning Materials for 2023
After the exam
exams apply in current and future years.
However, where a scenario requires
We will invite you to complete a student survey
consideration of future planning, any
after the exam.
potential changes which are published in
the BP:T Learning Materials should be
If you believe that your performance was
considered in your answer.
affected by issues which you raised during
the exam, you should submit a special
The link to the ICAEW bookshelf can be
consideration application to ICAEW, within
found in each question above the word
7 days of the exam, as per ICAEW’s
processing area. published policy. If you are sitting remotely
please refer to anything of note which
occurred and will have been recorded, for
use as evidence to support your case.

Copyright © ICAEW 2023. All rights reserved. Page 1 of 10

Question 1

The date is 14 March 2023.

Fitfood Ltd and its shareholders, Adam and Gemma Smith, are clients of the firm where you
work as an ICAEW Chartered Accountant. Your manager is meeting with Adam and Gemma
and has asked for your assistance in preparing for the meeting.

Background information

Adam and Gemma have been married for 40 years and have one adult child, Roger. Adam
and Gemma incorporated Fitfood Ltd in January 2005 and subscribed for the 100 shares at
par. They each hold 50 £1 ordinary shares in Fitfood Ltd, which operates a premium organic
food supply business across the UK. A team of chefs prepare calorie and protein-controlled
meals from an extensive menu, which are then delivered to clients in accordance with their
orders. Adam and Roger are directors of Fitfood Ltd. Gemma has never worked for the
company.

Fitfood Ltd has a 31 March year end and has always been profitable up to and including the
year ended 31 March 2022. However, recent trading conditions have been difficult as new
competition, offering budget alternatives to the Fitfood Ltd product, has entered the market.

As a result, Fitfood Ltd is expected to make a trading loss in the year ending 31 March 2023.
Adam’s health has recently deteriorated, and as he has just had his 60th birthday, he has
decided that he will retire on 31 March 2023. On that date, Gemma will also withdraw from
the business, so that she and Adam can spend their retirement together. There have been
two offers in respect of the sale of the business (Exhibit 1).

A valuation of Fitfood Ltd’s assets and liabilities took place on 31 January 2023 (Exhibit 2).

Adam and Gemma’s son, Roger, has also emailed you this morning (Exhibit 3).

Requirements

1. Using Exhibits 1 and 2 and the other information in the scenario above, prepare notes
for your manager for the meeting with Adam and Gemma. Your notes should include:

(a) An explanation of the tax consequences for Adam and Fitfood Ltd if Adam’s
director’s loan is written off on 1 April 2023 and a recommendation of whether the loan
should be written off as intended (Exhibit 1).

(b) An evaluation of the tax implications for Adam, Gemma and Fitfood Ltd of the two
offers received for the purchase of the business.

(c) A calculation of the net cash receivable by Adam and Gemma under each offer
together with a recommendation on which offer should be accepted.

For the purposes of requirement 1, assume the market values of the assets and
liabilities on 31 January 2023 will stay the same and ignore the information in Exhibit 3.

Copyright © ICAEW 2023. All rights reserved. Page 2 of 10

2. Identify and explain the ethical issues arising from Roger’s email (Exhibit 3) and specify
the actions both you and your firm should take.
Total: 40 marks

Exhibit 1: Offers for the sale of the business

Two offers have been received:

Offer 1: Purchase of Fitfood Ltd shares by Roger

Roger would purchase all of Adam and Gemma’s shares for a total of £2 million.
Consideration for the shares would be split as follows:

• On completion of the purchase, on 1 April 2023: £1,000,000 to Adam and £500,000 to

Gemma.
• On 1 April 2024: £500,000 to Gemma.

Offer 2: Purchase of Fitfood Ltd assets by Diners plc, an unconnected company

Diners plc would purchase all of Fitfood Ltd’s trade and assets for £2.4 million on 1 April
2023. Diners plc is not willing to buy the shares of Fitfood Ltd because they do not want
exposure to any liabilities arising from the company’s recent trading history. Fitfood Ltd would
therefore sell all its assets to Diners plc, and then settle its liabilities, before being liquidated.
Liquidation fees are estimated to be £8,000.

Exhibit 2: Valuation of Fitfood Ltd’s assets and liabilities on 31 January 2023

Market value at
Note Cost 31.1.23
£’000 £’000
Land and buildings: Kitchen premises (1) 350 970
Plant and machinery (2) 360 270
Goodwill (3) - 1,010
Director’s loan account (Adam) 120
s455 receivable 30
Bank loan (70)

2,330

Notes:

(1) The kitchen premises were purchased by Fitfood Ltd on 1 February 2005. The carrying
value in the financial statements at 31 March 2023 is expected to be £52,500. The indexation
factor from 1 February 2005 to 31 December 2017 is 0.467.

(2) The TWDV of plant and machinery is expected to be £210,000 on 31 March 2023. Each
item of plant and machinery cost less than £6,000 and no item is worth more than cost.

(3) The goodwill is internally generated and has never been recognised in the financial
statements.

Copyright © ICAEW 2023. All rights reserved. Page 3 of 10

Other information

Fitfood Ltd is registered for VAT. No election to opt to tax the kitchen premises has been
made.

Adam receives a salary of £30,000 pa from Fitfood Ltd.

Adam and Gemma both receive dividends of £50,000 pa from Fitfood Ltd and they each have
other investment income in excess of £100,000 pa.

Adam’s director’s loan account will be written off after the sale has been completed.

Exhibit 3: Email received from Roger

Subject: Potential purchase of my parents’ shares in Fitfood Ltd.

Although I have offered £2 million for the shares, of which £1 million is due to Adam on
completion, I intend to pay Adam only £880,000. This is due to the existence of the director’s
loan account balance, which the company will cancel following the sale on 1 April 2023.

I know that my parents have received an offer for the purchase of the business from a third
party. My parents are being ‘secretive’ about this offer and won’t tell me anything about it.
Can you send me an email setting out the details of the offer and the name of the interested
party? Surely I have a right to know in my capacity as a director of Fitfood Ltd?

Copyright © ICAEW 2023. All rights reserved. Page 4 of 10

Question 2

The date is 14 March 2023.

Vital Tech plc and one of its directors, Andreas Geng, are clients of the firm of ICAEW
Chartered Accountants where you work.

Vital Tech plc develops drones. It holds several investments in other companies around the
world.

The corporation tax position for Vital Tech plc for the year ended 31 December 2022 is in the
process of being finalised. You are provided with some draft figures and details of
outstanding issues (Exhibit 1). The financial controller has also written to you asking for
some further advice on Vital Tech plc’s expansion strategy (Exhibit 2).

Andreas has also sent an email requesting your advice about a personal tax matter (Exhibit
3).

Requirements

1. Calculate the corporation tax payable by Vital Tech plc for the year ended 31 December
2022 after making adjustments to tax-adjusted trading profits for the outstanding issues
identified in Exhibit 1. Include an explanation of the tax treatment of each issue,
identifying any beneficial claims, elections, or reliefs available.

2. Explain the tax implications of the two alternative strategies for expansion, considering
any relevant anti-avoidance provisions (Exhibit 2).

3. Respond to the email received from Andreas (Exhibit 3).

Total: 30 marks

Exhibit 1: Draft trading results for the year ended 31 December 2022 and outstanding
issues

The trading results for Vital Tech plc for the year ended 31 December 2022 before taking
account of the outstanding issues are:

£m
Tax-adjusted trading profits 17.25
Chargeable gain (Note 3) 1.50

Outstanding issues

1. On 1 April 2022 Vital Tech plc purchased a new office building in the UK from an
unconnected company for £8.3 million and brought it into use immediately. The seller
had purchased the building new on 31 May 2021, and then added fixtures and fittings
which qualified as integral features before selling the building to Vital Tech plc.

The following details were agreed between the seller and Vital Tech plc as follows:

Copyright © ICAEW 2023. All rights reserved. Page 5 of 10

 Purchase Original cost
price to seller
£m £m
Value of land 1.125 1.1
Value of fixtures and fittings 1.075 1.215
Value of rest of building 6.1 4.685
Total 8.3 7.0

No capital allowances have yet been calculated for Vital Tech plc. The group’s annual
investment allowance has already been used by another group company.

2. On 1 September 2021, Vital Tech plc borrowed $650,000 from a bank to finance the
purchase of a subsidiary. On 1 December 2022, it repaid the loan in full. No entries
have been made in the accounts since 31 December 2021 in respect of the loan.

Exchange rates are as follows:

1 September 2021 $2.0 = £1

31 December 2021 $1.7 = £1
1 December 2022 $2.2 = £1

3. On 1 November 2022, Vital Tech plc sold its 75% holding in Beta Ltd, a UK registered
trading company in which it has held shares since January 2010. The chargeable gain
on sale was £1.5 million which has been added to the tax-adjusted trading profit.

Vital Tech plc transferred a building with a market value of £400,000 to Beta Ltd in
February 2018. Vital Tech plc originally bought the building in October 2009 for
£125,000. On 1 November 2022, the market value of the building was £565,000.

The indexation allowance from October 2009 to December 2017 was £36,000.

4. On 1 January 2022, Vital Tech plc borrowed £1 million from a UK bank at an interest
rate of 4.5% pa to fund the purchase of plant and machinery costing £1.475 million. To
fund the shortfall, Vital Tech plc borrowed the remaining amount of £475,000 from
Wardle Inc, a company resident in Utopia. Vital Tech plc owns 78% of the shares in
Wardle Inc. The interest rate being paid to Wardle Inc is 10% pa and total interest paid
has already been deducted in calculating tax-adjusted trading profits. The maximum
amount the UK bank had been prepared to lend to Vital Tech plc was £1.25 million.

Exhibit 2: Notes from financial controller – Vital Tech plc expansion strategy

The board of directors discussed setting up a business in Rozland, a non-EEA country,

where the rate of corporation tax is 10% and taxable trading profits are calculated in a similar
way to the UK. The board believes that this would be beneficial and save tax because of the
low tax rates in Rozland.

Trade in Rozland will start in May 2023 and it is expected that, in the first two years of
trading, the business in Rozland will make trading losses, but will become profitable once it is
established.

Copyright © ICAEW 2023. All rights reserved. Page 6 of 10

Two alternative structures have been discussed:

Alternative 1 – The business in Rozland is set up as a permanent establishment of Vital

Tech plc, with all key decisions made from the UK.

Alternative 2 – Vital Tech plc incorporates a wholly owned, separate subsidiary, Roz Tech
Inc. Effectively, the company will be controlled from the UK, with all key decisions taken at
board meetings in the UK.

Exhibit 3: Extract from email from Andreas Geng

I have been resident in Utopia since 2001/02, working for one of Vital Tech plc’s subsidiaries.
I bought a residential property in the UK in April 2006 for £235,000. I sold the property for
£685,000 on 5 April 2022. The market value of the property was £425,000 on 5 April 2015. I
have never lived in the property nor rented it out to tenants. I am not sure if I need to pay UK
tax on the gain I have made. Please can you advise?

Copyright © ICAEW 2023. All rights reserved. Page 7 of 10

Question 3

The date is 14 March 2023.

You are an ICAEW Chartered Accountant working in practice as a tax adviser. You have an
online meeting scheduled with a long-standing client, Nur Farah. In preparation for the
meeting, Nur has sent you an email containing some information about actions she intends to
take over the next year. An extract from the email is in Exhibit 1. Nur has asked for advice
about how she should structure these actions to minimise any tax liabilities she might incur.
You have reviewed the online tax file for Nur to help you plan for the meeting.

Information from the online tax file for Nur Farah

• Nur Farah is 58 years old and is widowed, with one adult daughter, Ayisha.

• Ayisha has two young children, aged five and three.

• Nur has been UK resident and domiciled since birth.

• Nur owns her own unincorporated business, Fitness4U, selling online personal training
courses and videos. She started her business 10 years ago and has always prepared
accounts to 30 April.

• Details of recent tax-adjusted trading profits of the Fitness4U business and a recent
valuation of the business are in Exhibit 2.

• Nur has recently been diagnosed with a progressive terminal illness and it is estimated
that she has a further five years to live.

Requirements

In preparation for your online meeting with Nur Farah, prepare notes which:

1. Identify and explain the tax implications for Nur of transferring her unincorporated
business to her daughter Ayisha.

Your answer should include calculations of any tax arising and take account of any
opportunities to mitigate tax arising as a result of the transfer.

2. Identify and explain the tax consequences of Nur’s plans to set up a discretionary trust
for her grandchildren and to transfer her second home to her daughter Ayisha.

3. Advise Nur on the tax implications of her plans to move abroad on 1 February 2024.

Total: 30 marks

Exhibit 1: Extract from an email from Nur Farah

In preparation for our meeting next week, I want to tell you about my plans. As you know, I
have recently been diagnosed with a progressive terminal illness that means I have a
maximum of five years to live.

Copyright © ICAEW 2023. All rights reserved. Page 8 of 10

In the light of this diagnosis, my plans are as follows:

Fitness4U

On 1 April 2023, I will pass this business on to my daughter Ayisha. Ayisha will pay me
£100,000 for the office building I use for the business. This is all I expect her to pay me.

I know that you commissioned a valuation of the business recently and so I hope we have all
the information we need to understand the tax implications of this transaction.

Discretionary trust for my grandchildren

I read an article recently about passing assets on by ‘skipping a generation’ and therefore
skipping an inheritance tax charge. I thought that I would set up a trust for my two
grandchildren and transfer most of my cash savings (around £500,000) to the trust.

My solicitor has told me that this would be a discretionary trust, as this kind of trust gives the
trustees the opportunity to have some discretion about when funds are paid out to the
children and safeguards the capital until they are older.

Holiday home in Cornwall

I own a holiday home in Cornwall, which I bought for £85,000 in 2001. I had it valued by
some estate agents last week and they estimate that it is currently worth £325,000. I also
want to give this to Ayisha, as I am sure that she and the family will enjoy it more than I do
now. However, I would like to stay there on my own for at least three weeks every summer,
as I have always done.

Remaining assets

The only asset I intend to keep (apart from my new home on a Greek Island – see below) is
my own home in the UK (current market value is £750,000). I bought this with my husband
and inherited his half of the house when he died in 2018.

Moving abroad

I want to spend the last few years of my life somewhere a little sunnier than the UK. I intend
to buy a home on a small Greek island and return to the UK for 50 days every year – 21 days
to visit the holiday home in Cornwall and 29 days spent in my own home in the UK, which I
intend to keep, just in case I need to return to the UK if my health deteriorates severely. I
intend to move abroad on 1 February 2024.

Exhibit 2:

Fitness4U

Estimated tax-adjusted trading profits

£’000
Year ended 30 April 2022 (actual) 75
Year ending 30 April 2023 (estimated) 40

Copyright © ICAEW 2023. All rights reserved. Page 9 of 10

Nur has overlap profits of £15,000 brought forward from the opening years of her business.

Valuation of the Fitness4U business

Following a recent valuation, the trade and assets of Fitness4U were valued as follows:

Recent market
Cost valuation
£’000 £’000

Office building 85 200

Goodwill - 75
Office equipment 35 20

The office equipment is made up of desks, chairs, and computer equipment. All items were
bought for less than £6,000 and have depreciated in value since purchase.

Copyright © ICAEW 2023. All rights reserved. Page 10 of 10