ACCA P6

Advanced Taxation

Mock Examination 3

Mock Examination Submission Form

This front sheet should be attached to your submitted answers

Name:

Email address:

For HTFT Partnership to complete

Date received: Marker:

Date returned: Overall mark:

|ACCA P6 Mock 3 2

SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest £. 2. All apportionments should be made to the nearest month. 3. All workings should be shown. 4. You should assume that the tax rates and allowances for the tax year 2014/15 and for the financial year to 31 March 2015 will continue to apply for the foreseeable future unless you are instructed otherwise. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions.

Income tax Normal

Rates %

Dividend rates

% Basic rate £1 – £31,865 20 10 Higher rate £31,866 to £150,000 40 32.5 Additional rate £150,001 and over 45 37.5 A starting rate of 10% applies to savings income where it falls within the first £2,880 of taxable income.

Personal allowance Personal allowance Born on or after 6 April 1948

£10,000

Personal allowance Born between 6 April 1938 and 5 April 1948

£10,500

Personal allowance Born before 6 April 1938

£10,660

Income limit for age related allowances £27,000 Income limit for standard personal allowance £100,000

Residence Days in the UK Previously Resident Not previously resident Less than 16 Automatically not resident Automatically not resident 16 to 45 Resident if 4 UK ties (or more) Automatically not resident 46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties 91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more) 121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more) 183 or more Automatically resident Automatically resident

Child Benefit Income charge

Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit received for

every £100 of income over £50,000.

Car benefit percentage The base level of CO2 emissions is 95 grams per kilometre. % 75 grams per kilometre or less 5 76 grams to 94 grams per kilometre 11 95 grams per kilometre 12

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Car fuel benefit The base figure for calculating the car fuel benefit is £21,700.

New Individual savings accounts (NISAs)

The overall investment limit is £15,000.

Pension scheme limit Annual allowance - 2014-15 £40,000 Annual allowance - 2011-12 to 2013-14 £50,000 The maximum contribution that can qualify for tax relief without any earnings is £3,600 Lifetime allowance £1,250,000

Authorised mileage allowances: cars Up to 10,000 miles 45p Over 10,000 miles 25p

Cap on income tax reliefs

Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income

Capital allowances: rates of allowance % Plant and machinery Main pool 18 Special rate pool 8 Motor cars New cars with CO2 emissions up to 95 grams per kilometre 100 CO2 emissions between 96 and 130 grams per kilometre 18 CO2 emissions over 130 grams per kilometre 8 Annual investment allowance Rate of allowance 100%

Expenditure limit £500,000

Cap on income tax reliefs Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income.

Corporation tax

Financial year 2012 2013 2014 Small profits rate 20% 20% 20% Main rate 24% 23% 21% Lower limit 300,000 300,000 300,000 Upper limit 1,500,000 1,500,00 1,500,000 Standard fraction 1/100 3/400 1/400

Marginal relief Standard fraction x (U – A) x N/A

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Patent box – deduction from net patent profit

Net patent profit x ((main rate – 10%)/main rate)

Value added tax (VAT)

Standard rate 20% Registration limit £81,000 Deregistration limit £79,000

Inheritance tax Nil rate band 6 April 2009 to 5 April 2015 325,000 6 April 2008 to 5 April 2009 312,000 6 April 2007 to 5 April 2008 300,000 6 April 2006 to 5 April 2007 285,000 6 April 2005 to 5 April 2006 275,000 6 April 2004 to 5 April 2005 263,000 6 April 2003 to 5 April 2004 255,000 6 April 2002 to 5 April 2003 250,000 6 April 2001 to 5 April 2002 242,000 6 April 2000 to 5 April 2001 234,000 6 April 1999 to 5 April 2000 231,000 Inheritance tax: tax rates Excess – Death rate 40%

– Lifetime rate 20% Inheritance tax: taper relief Years before death Percentage

reduction %

Over 3 but less than 4 years 20 Over 4 but less than 5 years 40 Over 5 but less than 6 years 60 Over 6 but less than 7 years 80

Capital gains tax Rates of tax – Lower rate 18%

– Higher rate 28% Annual exempt amount £11,000 Entrepreneurs’ relief – Lifetime limit £10,000,000

– Rate of tax 10%

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National insurance contributions

(Not contracted out rates) %

Class 1 Employee £1 – £7,956 per year Nil £7,957 – £41,865 per year 12·0 £41,866 and above per year 2·0

Class 1 Employer £1 – £7,956 per year Nil £7,957 and above per year 13·8

Class 1A 13·8 Class 2 £2·75 per week

Small earnings exemption £5,885

Class 4 £1 – £7,956 per year Nil £7,957 – £41,865 per year 9·0 £41,866 and above per year 2·0

Stamp Duty Land Tax Ad valorem duty Rate £150,000 or less (1) Nil £150,001 to £250,000 1% £250,001 to £500,000 3% £500,001 to £1,000,000(3) 4% £1,000,001 to 2,000,000 (2) 5% £2,000,001 or above (2) 7%

(1) For residential property, the nil rate is restricted to £125,000.

(2) The 5% and 7% rates apply to residential properties only.

(3) The 4% rate applies to all non-residential properties where the consideration is in excess of £500,000.

Stamp duty

Ad valorem duty Rate Shares 0.5%

Rates of interest (assumed) Official rate of interest 3·25% Rate of interest on underpaid tax 3·0% Rate of interest on overpaid tax 0·5%

|ACCA P6 Mock 3 6

Question One

Your manager has had a meeting with Mr Rabbit, a potential new client. The memorandum recording the matters discussed at the meeting and an extract from an e-mail from your manager detailing the tasks for you to perform are set out below.

Memorandum recording matters discussed at meeting with Mr Rabbit

To The files

From Tax Manager

Date 3 December 2014

Subject Mr Rabbit – Corporate matters

I had a meeting with Mr Rabbit on 2 December 2014. He wants us to advise him on the sale of Dog Ltd, one of his companies, and on the sale of a number of buildings.

Mr Rabbit owns the Horse Ltd group of companies and Cat Ltd as set out below. The dates in brackets are the dates on which the companies were purchased. Neither Mr Rabbit nor his companies are associated with any other companies. All five companies are UK resident trading companies with a 31 March year end. All of the companies, with the exception of Dog Ltd, are profitable.

i Sale of Dog Ltd

Dog Ltd has made trading losses for a number of years and, despite surrendering the maximum possible losses to group companies, it has trading losses to carry forward as at 31 March 2014 of £35,000. Dog Ltd is expected to make a further trading loss of £54,000 in the year ending 31 March 2015 and has no other sources of income.

Mr Rabbit is of the opinion that the company will only become profitable following significant financial investment, which the group cannot afford, together with fundamental changes to its commercial operations.

Accordingly, Horse Ltd entered into a contract on 1 November 2014 to sell the whole of the ordinary share capital of Dog Ltd to Fred (an independent third party) on 1 February 2015 for £270,000; an amount that is considerably less than the group paid for it.

Mr Rabbit

Horse Ltd

(1 May 2006)

Cat Ltd

(1 January 2002)

Swan Ltd

(1 March 2008)

Duck Ltd

(1 May 2014)

Dog Ltd

(1 March 2008)

100% 100%

100% 100% 100%

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ii Sales of buildings

The following buildings are to be sold during the year ending 31 March 2015. Rollover relief will not be claimed in respect of any of the gains arising.

Cow building Pig building Sheep building Hen building

Owned by: Dog Ltd Swan Ltd Duck Ltd Cat Ltd

Cost: £210,000 £240,000 £380,000 See below

Estimated indexation allowance factors:

0·350 0·250 0·070 0·480

Date of sale: 1 January 2015 1 February 2015 1 March 2015 1 February 2015

Purchaser: Horse Ltd Lamb plc Dove plc Mouse plc

Estimated proceeds: £370,000 £420,000 £290,000 £460,000

On 30 June 2004 Cat Ltd sold its original premises, the Rat building, for £270,000 resulting in a chargeable gain of £60,000. On 1 January 2005 it purchased the Hen building for £255,000 and claimed rollover relief in respect of the gain on the Rat building. The cost of the Sheep building was incurred before Duck Limited came into the group.

Tax Manager

E-mail from your manager

I have just had a further conversation with Mr Rabbit. He informed me that:

Duck Ltd acquired the Sheep building on 1 January 2012.

Lamb plc, Dove plc and Mouse plc are all unrelated to Mr Rabbit and his companies.

None of the companies will make any other chargeable gains or allowable losses in the year ending 31 March 2015.

Cat Ltd has identified a number of potential overseas customers and expects to begin selling its products to them in 2015. At the moment, all of Cat Ltd’s supplies are standard rated for the purposes of value added tax (VAT).

I want you to draft a report for Mr Rabbit dealing with the matters set out below.

i Sale of Dog Ltd

The alternative ways in which the company’s trading losses can be relieved. I want some precise detail here so please try to consider all of the possibilities and any anti-avoidance legislation that may restrict the use of the losses.

The tax treatment of the loss arising on the sale of Dog Ltd.

An explanation of the upper and lower limits for all of the companies for the purposes of calculating the rate of corporation tax for the year ending 31 March 2015.

ii Sales of buildings

On the assumption that all four buildings are sold as planned:

Calculations of the chargeable gain/allowable loss arising on the sale of each of the buildings.

The alternative ways in which any capital losses arising can be relieved. I need a detailed explanation of the options available together with any restrictions that will apply.

The need to charge VAT on the sales of the buildings.

The stamp duty land tax implications of the sales of the buildings.

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iii Potential sales by Cat Ltd to overseas customers

The VAT implications.

Tax Manager

Required:

(a) Prepare the report as set out in the e-mail from your manager. The following marks are available.

(i) Sale of Dog Ltd;

(10 marks)

(ii) Sales of buildings;

(14 marks)

(iii) Potential sales by Cat Ltd to overseas customers.

(4 marks)

Professional marks will be awarded in part (a) of question 1 for the appropriateness of the format of the report and the effectiveness with which the information is communicated.

(2 marks)

(b) Prepare a summary of the information required and any action that should be taken before the firm agrees to become tax advisers to Mr Rabbit and his companies.

(5 marks)

(35 marks)

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Question Two

Assume today’s date is 6 June 2015.

Howard, Leonard and Penny are three partners in The Bang Partnership, who shared the profits of the business

equally.

On 28 February 2015 the partners sold the business to MIT Ltd, in exchange for shares in MIT Ltd, with each

former partner owning one third of the new company.

The following information has been extracted from Client files and various telephone conversations with the

partners.

The Bang Partnership

– Recent tax adjusted trading profits are as follows:

£

Year ended 30 June 2014 107,124

1 July 2014 to 28 February 2015 96,795

– Estimated partnership’s tax adjusted trading profits for the period from 1 March 2015 to 30 April 2015

would have been £20,760.

Howard Cooper

– Aged 65 on 5 October 2014.

– Retired when the business was sold to MIT Ltd.

– Concerned that if the sale of the partnership, and his retirement, had been delayed until 30 April 2015,

his total tax liability would have been reduced.

– His only other income is gross pension income of £9,400 per year, which he began receiving in the tax

year 2013/14.

– Does not work for MIT Ltd and has not received any salary or dividends from the company.

– Overlap profits were £14,250 from when the partnership began trading.

MIT Ltd

– UK resident company that manufactures industrial cutting tools.

– On 1 July 2015, MIT Ltd will subscribe for the whole of the ordinary share capital of Science Inc, a

company newly incorporated in the country of Passadena.

– It is intended that Science Inc will purchase partly finished tools from MIT Ltd and customise them in

Passadena.

– It is anticipated that Science Inc’s annual taxable total profits will be approximately £120,000.

– Leonard and Penny will be the directors of Science Inc, although Leonard will not be involved in the

company’s business on a day-to-day basis.

Penny Wollowitz

– Currently resident and domiciled in the UK.

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– Intends to spend approximately 10 days each month in the country of Passadena looking after the

company’s affairs.

– The remainder of her time will be spent in the UK.

– She has employment contracts with both MIT Ltd and Science Inc and her duties for Science Inc will be

carried out wholly in Passadena.

– Science Inc will pay for Penny’s flights to and from Passadena and for her husband and baby to visit her

there twice a year.

The tax system in the country of Passadena

– The system of income tax and corporation tax in the country of Passadena is broadly similar to that in the

UK although the rate of corporation tax is 38% regardless of the level of profits

– There is a double tax treaty between the UK and Passadena based on the OECD model treaty

– The clause in the treaty dealing with company residency states that a company resident in both countries

under domestic law will be regarded under the treaty as being resident only in the country where it is

effectively managed and controlled

– Passadena is not a member of the European Union.

Required:

(a)

(i) Calculate Howard’s taxable trading profits for the tax years 2014/15 and 2015/16 for both of

the alternative retirement dates (28 February 2015 and 30 April 2015).

(3 marks)

(ii) Analyse the effect of delaying the sale of the business of the Bang Partnership to MIT Ltd until

30 April 2015 on Howard’s income tax and national insurance position.

You are not required to prepare detailed calculations of his income tax or national insurance

liabilities.

(4 marks)

(b) Draft a report as at today’s date advising Science Inc on its proposed activities.

The report should cover the following issues:

(i) The rate at which the profits of Science Inc will be taxed.

This section of the report should explain:

– the company’s residency position and what Leonard and Penny would have to do in

order for the company to be regarded as resident in the UK under the double tax treaty

– the meaning of the term ‘permanent establishment’ and the implications of Science Inc

having a permanent establishment in Passadena

– the rate at which the profits of Science Inc will be taxed on the assumption that it is

resident in the UK under the double tax treaty and either does or does not have a

permanent establishment in Passadena.

(9 marks)

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(ii) The UK value added tax (VAT) implications for MIT Ltd of selling tools to and purchasing tools

from Science Inc.

(2 marks)

(iii) The extent to which Penny will be subject to income tax in the UK on her earnings in respect of

duties performed for Science Inc and the travel costs paid for by that company.

(5 marks)

Appropriateness of format and presentation of the report and the effectiveness with which its advice is

communicated.

(2 marks)

You should assume that the income tax rates and allowances for the tax year 2014/15 and the corporation tax

rates and allowances for the Financial year 2014 apply throughout this question.

(Total: 25 marks)

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Question Three

Assume today’s date is 1 January 2015.

Your have recently held a meeting with Andy and Michael who are both UK resident. They each own 50% of the

issued ordinary share capital of AM Limited, an unquoted trading company which prepares its accounts to 31

March each year.

AM Limited is a close company and was formed on 1 May 2010 with 1,000 £1 ordinary shares being issued at par

value. Andy is both a director of and employed by AM Limited whereas Michael is neither employed nor a director

of this company. Both Andy and Michael are higher rate taxpayers with incomes of £45,000.

AM Limited has been reasonably successful and Andy now wishes to partially realise some of his investment in

the company either by a direct sale to Michael or via a company purchase of its own shares. He is, however,

currently undecided as to how many of his ordinary shares he will sell although this will be no less than 100 and

no more than 350.

Each AM Limited share currently has a market value of £500 which will be the price paid for each share in any

sale. It is anticipated that the share sale will occur on 31 March 2015 but it could be deferred until 31 May 2015.

Your further ascertain the following

(1) Throughout 2014/15 both Andy and Michael were provided with new cars by AM Limited. Both

cars use petrol and have a CO2 emission level of 133 grams per kilometre and a list price of

£20,000. In addition both Andy and Michael are provided with fuel for private purposes.

(2) On 6 July 2014 AM Limited paid some personal bills for Michael amounting to £20,000.

It is probable that this amount will be written off by AM Limited at some point in the future.

Required:

Write a letter to Andy and Michael which is supported by relevant calculations:

(a) Advising them of the tax and national insurance implications for both themselves individually

and for AM Limited arising from the provision of cars to Andy and Michael and the settling of

some of Michael’s personal bills by the company.

(10 marks)

(b) Advising them of the tax implications arising from the proposed sale of shares by Andy either

directly to Michael or via a company purchase of own shares.

(10 marks)

Marks will be awarded for presentation, structure and format.

(Total: 20 marks)

|ACCA P6 Mock 3 13

Question Four

You have received the following memorandum from your manager, Jane Mills.

To Tax senior

From Jane Mills

Date 8 June 2015

Subject John and Alison Clark

As you know, John Clark, a longstanding client of ours, died last month. His wife, Alison, is very concerned about her own mortality and has rung me to talk about inheritance tax planning.

I have had a long conversation with her and she is coming in to see me tomorrow to discuss her affairs further.

In preparation for this meeting please can you read the notes I have left on your desk this morning and prepare some notes for the meeting to include the following:

(a) Explain the IHT implications and calculate the IHT that will be payable as a result of John’s death.

Don’t forget to include calculations of any tax arising on any lifetime transfers he made and consider whether you think any reliefs will be available.

(b) Explain the IHT implications and calculate the IHT that would be payable if Alison were to die today (i.e. 8 June 2015).

At this stage we will have to assume that no tax planning measures have been taken and that there has been no change in the value of any of the assets since John’s death.

Also include the due dates of when the IHT would be payable and by whom.

(c) Assuming that Alison will survive until July 2019, list the key lifetime IHT planning measures that we could recommend to Alison and quantify the likely tax savings that can be made as a result.

As we don’t have a crystal ball, for simplicity, you can assume that the rates and allowances for 2014/15 continue to apply for the foreseeable future.

Please make sure that your notes are brief and clear to follow and leave them on my desk as I will be rushing back in at 6pm to pick them up to read tonight in advance of the meeting.

Many thanks

Jane Mills

The schedule left on your desk and referred to in the e-mail summarises the family’s history and financial affairs

as follows:

The Clark family

John Aged 72 Died May 2015

Alison Aged 66 In good health

Simon Aged 37 Son of John and Alison

Engaged to be married to Becky

Shareholder and Managing Director of Clark Ltd

Lisa Aged 32 Daughter of John and Alison

Married to Maurice

Two children aged 2 and 4

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Lives in Spain in a villa gifted to her by Alison in June 2013

Shareholder of Clark Ltd

Does not work for the company

Lifetime gifts by John

February 2008 Holiday cottage in the UK worth £70,000 to Simon

– The gift was on the condition that John was allowed to occupy the cottage for two months per year, which he did up to the date of his death.

– The value of the cottage is now £150,000.

June 2009 £333,000 into a discretionary trust

– John paid the IHT due.

February 2010 Shares in Clark Ltd to his children

– 20% interest to Simon

– 10% interest to Lisa

Lifetime gifts by Alison

June 2013 Villa in France worth £205,000

– Current value has fallen to £113,000 as a result of exchange rate movements.

Clark Limited

– Family trading company

– Set up by John and Alison in 1981

– Very successful business

– Currently worth £1,260,000 (unlikely to change in value in the foreseeable future)

– Shareholdings in May 2015:

Shares %

John 3,000 60

Alison 500 10

Simon 1,000 20

Lisa 500 10

– The value of shareholdings in Clark Limited on the relevant dates were as follows:

On gift

(Feb 2010)

£

At death

(May 2015)

£

100% holding 900,000 1,260,000

90% holding 730,000 1,022,000

70% holding 475,000 665,000

60% holding 405,000 567,000

30% holding 175,000 245,000

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20% holding 110,000 154,000

10% holding 50,000 70,000

The assets owned by John and Alison

– In addition to shares in Clark Ltd, the couple owned the following assets in May 2015 (i.e. at the date of John’s death):

John

£

Alison

£

Family home (jointly owned) 275,000 275,000

Cash deposits 60,000 40,000

Paintings 12,000 6,300

Death in Service policy 200,000 –

Quoted shares in Don plc

(a 6% holding for John and 1% for Alison)

125,000 25,000

– The wills of John and Alison currently leave all assets to the surviving spouse.

– On the death of the second spouse, all assets are to pass to the children in equal proportions.

Required:

Prepare the notes requested by your manager.

Marks are available for the components of the Notes for the Meeting as follows:

(a) Explanation of the IHT implications and calculation of the IHT that will be payable as a result of

John’s death.

(12 marks)

(b) Explanation of the IHT implications, calculation of the IHT that would be payable if Alison were

to die on 8 June 2015 and statement of the due dates for payment and who is to pay the tax.

(6 marks)

(c) List of lifetime inheritance tax (IHT) planning measures that could be recommended to Alison

with quantification of the tax savings that can be made.

(2marks)

(Total: 20 marks)

|ACCA P6 Mock 3 16

Question Five

The following has been extracted from client files and from meeting with Anchi Yao.

Anchi

Anchi Yao is a managing director of Innovation Limited, an unquoted trading company. He owns all the shares in

the company. Anchi has asked your advice regarding tax planning measures that both he and Innovations Limited

should take during the next six months.

Innovation Limited is forecast to have trading profits of £285,000 for the year ended 30 April 2015. This is after

taking in to account Anchi’s remuneration of £50,000 per annum. Innovations Limited has not paid any dividends

during the year ended 30 April 2015.

At some point in the next six months, Anchi would like to draw an additional amount from Innovations Limited,

either by way of director’s remuneration or as a dividend, sufficient to leave him with additional post tax income

of £30,000.

On a separate point Sally intends to give some of the shares to her daughter, Mary. Sally purchased the shares in

Jaffa Limited a trading company on the 1 October 2012. Sally purchased 12,000 out of the 24,000 shareholding for

£154,000.

Sally:

– Was born in the UK, but moved to Toronto on 1 April 2010 with her daughter, Mary.

– Has not visited the UK since leaving for Toronto, but will return to the UK permanently in December 2019.

– Is employed in Toronto with an annual salary equivalent to £70,000.

Gift of shares by Sally:

– Sally will gift 4,000 shares in Jaffa Ltd to her daughter, Mary, on either 1 August

2014 or 1 June 2015.

– She will delay the gift until 1 June 2015 (Mary’s wedding day) if this reduces the total tax due.

– The tax due in Toronto will be the same regardless of the date of the gift.

– She has made no previous transfers of value for UK inheritance tax purposes.

– For the purposes of this gift, you should assume that Sally will die on 31 December 2018.

Market values of shares in Jaffa Ltd on all relevant dates are to be taken as:

Size of shareholding Market value per share

% £

< 25 10.20

25 – 35 14.40

> 35 38.60

Market values of the assets of Jaffa Ltd on all relevant dates are to be taken as:

£

Land and buildings used within the trade 1,400,000

Three machines of equal value used within the trade 15,000

Motor cars used by employees 45,000

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Quoted shares 42,000

Inventory, trade receivables and cash 145,000

Required:

(a) Advise both Anchi and Innovations Limited of the tax implications of Anchi receiving additional salary

or dividend. Include an explanation of the timing of any tax planning advise you have recommended

and which is most tax efficient from both Anchi and Innovations Limited point of view.

(10 marks)

(b) Advise Sally on the UK tax consequences of gifting the shares to Mary and prepare computations to

determine on which of the two dates the gift should be made, if the total UK tax due on the gift is to be

minimised.

Your answer should consider all relevant taxes.

(10 marks)

You may assume that the rates and allowances for the tax year 2014/15 will continue to apply for the

foreseeable future.

(Total: 20 marks)