PROFESSIONAL LEVEL EXAMINATION

TUESDAY 9 DECEMBER 2014

(2 hours)

TAX COMPLIANCE
This paper consists of FOUR questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet.

2.

Answer each question in black ballpoint pen only.

3.

Answers to each written test 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 2013 rates and allowances will continue to apply in future
years unless you are specifically instructed otherwise.
All references to HMRC are to HM Revenue and Customs.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this

box.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

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Page 1 of 8

1a. Flynn Oaken, aged 53, died suddenly on 6 January 2014. At the time of his death he had not
completed his tax return nor paid his outstanding income tax for 2013/14.
Until the time of his death he was the finance director of Bulda Ltd an unquoted investment
company. The details of his remuneration package were as follows:

Salary of 105,000 pa.

Employer contributions of 1,000 each month into a personal pension scheme.

Provision of a company car with a list price of 45,000 and CO2 emissions of 213g/km.
Bulda Ltd paid for all running costs including the provision of all of the petrol.

On 6 July 2013 Bulda Ltd gifted a laptop to Flynn which was worth 800. Flynn had
been using the laptop purely for private purposes since its purchase by Bulda Ltd for
1,100 on 6 April 2012.

In addition Flynn also incurred the following expenses during 2013/14, none of which was
reimbursed by Bulda Ltd:

Personal pension contributions of 720 per month.

Subscription of 1,500 to his golf club, paid on 10 June 2013. Flynn was a keen golfer
but sometimes took clients of Bulda Ltd to the golf club.

In June 2013 Flynn received bank deposit interest of 420 (of which 80 related to his ISA),
and dividends from Bulda Ltd of 15,714. The PAYE deducted from his salary during 2013/14
totalled 28,249.
Requirements
For 2013/14:
(i)

Calculate Flynns income tax payable;

(ii)

Flynn ceased to be a director of Bulda Ltd on his death. Explain how the earnings
period for his class 1 national insurance contributions is determined; and
(1 mark)

(iii)

Calculate the national insurance contributions payable by both Flynn and Bulda Ltd in
relation to Flynns employment. Ensure that you separately identify each class of
national insurance contribution.
(4 marks)

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(14 marks)

Page 2 of 8

1b. At his death on 6 January 2014 Flynns estate comprised:

His home in London worth 1,275,000.

5,000 shares in Sitron plc, a UK quoted company. On 6 January 2014 the shares were
quoted at 230 - 234p with marked bargains of 224p, 226p and 240p.

A painting worth 500,000. This was part of the estate inherited from his mother when
she died in June 2012. The value of her chargeable estate on death was 1.2 million
and she left the entire estate to Flynn. She had made no previous lifetime transfers.

Shares in Bulda Ltd, an unquoted investment company worth 115,000.

Cash and personal chattels of 180,000.

At his death Flynn had credit card debts totalling 2,500 and his funeral costs amounted to
7,400. Flynn left his entire estate to his brother Olaf.
Flynns only previous lifetime transfers were:

A gross chargeable transfer of 250,000 in January 2005.

A gift of an investment property worth 285,000 to a new discretionary trust in October

2011. The trustees agreed to pay any tax due.

Requirement
Calculate the inheritance tax payable as a result of Flynns death.

(14 marks)
Total: 33 marks

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Page 3 of 8

2a. Arendelle Ltd is a VAT-registered UK trading company manufacturing spare parts for the
motor industry. At 1 April 2013, the company held the following shareholdings in unquoted
trading companies:
Percentage holding
Cost
Date of purchase

Pabbie Ltd
80%
40,000
22 September 1998
Gerda Ltd
0.3%
15,200
25 January 2010
Kai Ltd
5%
23,800
29 April 2011
The companys accountant has calculated the draft tax-adjusted trading profits for the year
ended 31 March 2014 at 624,235. In arriving at this figure the accountant has adjusted the
accounting profit in accordance with tax rules by removing all non-trade items and adding
back all disallowable expenditure.
However, the accountant was unsure of the available reliefs and deductions for the following
expenditure incurred during the year, and has therefore made no deduction for these items in
calculating the draft tax-adjusted trading profits of 624,235:
(1)

Research and development (R&D)

Cost of staff directly engaged in R&D
Consumable materials
Computer hardware
Computer software

52,000
4,800
13,700
9,200
79,700

The costs for R&D relate to a qualifying project. The staff cost of 52,000 includes
20,000 in relation to workers supplied by an unconnected company to take part in
R&D. Arendelle Ltd is a small or medium-sized enterprise for R&D purposes. All
amounts are stated exclusive of VAT where appropriate.
(2)

Interest payable
Bank overdraft interest
Interest on late paid corporation tax
Interest payable on a loan to purchase the companys
headquarters building, Duke House

1,130
250
2,380
3,760

Duke House, a five-storey building, was purchased in January 2002. Since that time the
top storey of the building has been let out to a third party.
(3)

Capital expenditure
In addition to the costs of the R&D project the company incurred expenditure on the
following items of plant and machinery (both amounts are stated inclusive of VAT).
None of this plant and machinery was used in the R&D project:
Car with CO2 emissions of 140g/km
Welding machine

27,100
55,800
82,900

At 1 April 2013 the tax written down value on the main pool was 41,820, and 5,200 on
the special rate pool.

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Page 4 of 8

Other income
During the year ended 31 March 2014 Arendelle Ltd received 12,000 of property income
from the letting of the top storey in Duke House. It also received bank interest of 1,390 and
dividends from Pabbie Ltd and Gerda Ltd of 6,930 and 432 respectively.
On 20 June 2013 Arendelle Ltd sold its remaining 5% shareholding in Kai Ltd, for 35,900.
Arendelle Ltd had originally purchased a 12% shareholding in April 2011, but sold a 7%
shareholding in September 2012.
Requirement
Calculate Arendelle Ltds corporation tax payable for the year ended 31 March 2014,
explaining your treatment of the sale of the Kai Ltd shareholding during the year. (16 marks)
Note: Assume a RPI for June 2013 of 249.7.

2b. The board of Arendelle Ltd intends to increase the manufacturing activities of the company,
and will require an additional building for this purpose. The directors expect to sign a
20-year lease on a building early in January 2015. They will pay a lease premium of 50,000
and rent of 9,000 pa. The lessor has not opted to tax the building.
At the beginning of January 2015, in order to fund the 50,000 lease premium, Arendelle Ltd
intends to sell its shareholding in Gerda Ltd for 40,000. However, after payment of
corporation tax this will create an additional shortfall. The total shortfall will be funded by a
bank loan with a rate of interest of 6% pa.
Requirements
(i)

Calculate the stamp duty land tax (SDLT) suffered by Arendelle Ltd, and explain the
SDLT administrative obligations and time limits for Arendelle Ltd in relation to notifying
HMRC of the lease.
(4 marks)

(ii)

Explain, with supporting calculations, the corporation tax consequences of these

transactions for the year ending 31 March 2015. Include a calculation of the amount of
loan required to fund the 50,000 lease premium.
(8 marks)

Note: Assume a RPI for January 2015 of 259.4.

Assume Arendelle Ltds corporation tax rate for the year ending 31 March 2015
is 20%.
Total: 28 marks

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Page 5 of 8

3.

Kristoff Rider moved to the UK from Utopia in June 2003, becoming UK resident in 2003/04.
Two years later he met and married Anna, and has continued to live in the UK since that
time. However it is his intention to return to Utopia, where he was born and where he
considers he is domiciled, on his retirement in five years time.
Kristoff runs his own business Kristoffs Antiques, which has been trading since 2005.
Kristoff has three months of unrelieved overlap profits totalling 10,300. He has always
prepared accounts to 31 December and his most recent tax-adjusted trading profits are:

Year ended 31 December 2011

Year ended 31 December 2012

56,420
58,930

Due to other commitments the December year end is not convenient for Kristoff, so he
decided to change his accounting date to 30 June. The tax-adjusted trading profits for the six
months ended 30 June 2013 were 38,260. He estimates that the trading profits for the year
ended 30 June 2014 were approximately 60,000.
In addition to his trading income Kristoff has the following UK and overseas income in
2013/14:

Dividends from shareholdings in various UK quoted companies

Property income investment property in Utopia
(amount received net of withholding tax at 25%)
Interest on a savings account held in Utopia (amount received
net of withholding tax at 45%)

2,241
8,025
2,695

All of the overseas property income was remitted to the UK during the year, but Kristoff
allows the interest to accumulate in the Utopian savings account.
In addition Kristoff has made several capital disposals during 2013/14, as set out below:

May 2013 - Sale of a painting, located in the UK, for 6,600.

Anna had given the painting to Kristoff in 2008 when it was worth 6,200. She had
originally purchased it for 4,000 in 2001.

August 2013 - Sale of 10,000 shares in Weselton plc for 41,600.

Weselton plc is listed on the London Stock Exchange and Kristoff bought 9,000 shares
in the company for 17,000 in June 2010. In August 2012 he took up his full entitlement
of a 1 for 3 rights issue at 2.80 per share.

February 2014 - Sale of the Utopian investment property for 425,000.

Kristoff purchased the property for 250,000 in October 1979, and it was worth
290,000 at 31 March 1982 (all prices quoted are sterling equivalents). Kristoff has kept
all of the proceeds of the sale in his Utopian savings account. The Utopian tax paid on
this disposal was 24,800.

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Page 6 of 8

Requirements
(a)

(b)

For 2013/14:
(i)

Calculate Kristoffs taxable trading income, state the basis period and determine
the total amount of the unrelieved overlap profits after the change in accounting
date.
(3 marks)

(ii)

Calculate the national insurance contributions payable by Kristoff.

(2 marks)

Calculate the total income tax and capital gains tax payable by Kristoff for 2013/14,
under each of the following alternative assumptions:

He does not make a remittance basis claim (No RB); or

He does make a remittance basis claim (RB).

You must show a summary of total tax payable, in columnar format, with the headings
No RB and RB.
(22 marks)
Total: 27 marks

PLEASE TURN OVER

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Page 7 of 8

4.

You work as a trainee ICAEW Chartered Accountant for Bishop & Co, where you are
currently working on the VAT affairs of Gothi Ltd.
Gothi Ltd is a VAT-registered partially exempt trader, and is expecting a VAT control visit
within the next couple of weeks. The company has a VAT year to 31 March.
You have been asked to help with preparation for the control visit. The work has progressed
well and it has been suggested by the companys financial controller, Elsa King, that a job
may be available for you at Gothi Ltd once you qualify.
At lunchtime you were chatting with Elsa. She told you that the company purchased a
freehold building in February 2010 for 1 million plus VAT of 175,000. From purchase until
31 March 2011, 75% of the building was used for taxable purposes. Since 1 April 2011, due
to a change within the business, only 50% of the building has been used for taxable
purposes.
Elsa admitted to you that she had completely forgotten about the VAT implications until now.
To avoid getting into trouble, it is her intention to tell HMRC at the control visit that the
changes in use have only just occurred.
Requirements
(a)

Show, using calculations, the correct VAT treatment of the building under the capital
goods scheme over the period of ownership to 31 March 2014. Identify the total
amount of VAT under or overpaid by Gothi Ltd up to 31 March 2014.
(5 marks)

(b)

Identify which of the fundamental ethical principles are threatened in this situation and
explain the category of threat the situation causes.
(2 marks)

(c)

Explain whether Elsas intentions amount to tax avoidance or tax evasion, and explain
the actions that both Bishop & Co and you should take as a result of Elsas disclosure.
(5 marks)
Total: 12 marks

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Page 8 of 8