ACCA P6

Advanced Taxation

Question Based Revision -

Answers

|ACCA P6 Mock 2 2

Question One

To Tax manager

From Tax assistant

Date 2/12/2015

Subject: Jeremy and Sarah Turner

This memo considers the transfer of investments form Sarah to Jeremy and various other matters.

(i)

Sarah

Employment income 50,000

Less PA (10,000)

Taxable income 40,000

Basic band (31,865)

Therefore no basic band remaining

Dividend income will be taxed at the higher rate

10,400 @32.5% 3,380

10,400 @ 10% (1,040)

2,340

Property income

18,900 @40% 7,560

Jeremy

Trading profit 29,000

Less PA (10,000)

Taxable income 19,000

Basic band (31,865)

Basic band remaining 12,865

Dividend income will be taxed at the basic rate

10,400 @ 10% 1,040

10,400 @ 10% (1,040)

NIL

|ACCA P6 Mock 2 3

Property income

12,865 @20% 2,573

6,035 @ 40% 2,414

4,987

Option 1

Dividends to Sarah 2,340

Investment property to Jeremy 4,987

7,327

Option 2

Dividends to Jeremy -

Investment property to Sarah 7,560

7,560

Conclusion

Option 1 is the most tax efficient option.

|ACCA P6 Mock 2 4

(ii) If Sarah owns all of the inherited assets the additional tax would be

Dividend income will be taxed at the higher rate

10,400 @32.5% 3,380

10,400 @ 10% (1,040)

2,340

Property income

18,900 @40% 7,560

9,900

Tax under Option 1 7,327

Tax saved 2,573

Capital gains tax

Transfer between husband and wife of assets creates a no gain no loss transfer, the base cost would be

£425,000.

Inheritance tax

Transfer between husband and wife is exempt.

Stamp duty

There is no stamp duty on gifts.

|ACCA P6 Mock 2 5

(b)

Advantages of operation of a partnership compared to a Limited company:

If employed under the company Sarah and Jeremy would be taxed at 40% of their Salary.

In addition employer and employee national insurance would be due. The national insurance would be an

allowable expense.

Partnership

In the first tax year they forecast a loss, therefore no taxable trading income, and even though they have

taken out £8,900 it is not deemed taxable salaries.

No class 4 to be paid as this is on taxable profits, however class 2 would have to be paid at £2.75 per

week.

Limited company losses can only be offset against profits within the company whereas partnerships can

relieve losses against the partners other income in the income tax computation.

If a limited company

Profit or loss (34,000)

Add back disallowable exp 46,000

Less Capital allowances

(46,000 AIA) (46,000)

Less salaries (8,900 x 2) (17,800)

Employers NI

(8,900 – 7956) x 13.8% x 2 (261)

Tax adjusted trading loss (52,061)

The options are to do current year relief against total income then any unused losses will be carried

forward against future trading profits of the same trade.

|ACCA P6 Mock 2 6

If a partnership

Profit or loss (34,000)

Add back disallowable exp 46,000

Less Capital allowances

(46,000 AIA) (46,000)

Tax adjusted trading loss (34,000)

Split 50/50

Sarah’s loss (17,000)

Jeremy’s loss (17,000)

Loss relief options

Current year 16/17 and or carry back 15/16 against total income, remaining losses can be carried forward

against future trading profits of the same trade 17/18.

Opening year loss relief is also available against 13/14, 14/15 and 15/16 taxable income on a first in first

out basis.

|ACCA P6 Mock 2 7

(c)

Your options to consider are, investing in venture capital trusts (VCTs), the Enterprise Investment Scheme

(EIS) and the SEED Enterprise Investment Scheme (SEIS). VCTs are quoted investment companies, which

hold investments in unquoted trading companies, thus spreading the risk over a portfolio of companies.

Your income tax liability would be reduced by 30% of the amount you invest in a VCT in any tax year up to

a maximum of 30% of £200,000. This relief would be withdrawn if you were to sell the shares within five

years.

There is no tax on the dividends received from a VCT and no taxable gains or allowable losses arise on the

sale of VCT shares.

With EIS you buy shares in an individual unquoted trading company, and therefore the investment is

perceived as higher risk.

Your income tax liability would be reduced by 30% of the amount you invest in a EIS in any tax year up to

a maximum of 30% of £1,000,000. This relief would be withdrawn if you were to sell the shares within

three years.

With SEIS you buy shares in an individual small start-up unquoted trading company, and therefore this is

also perceived as higher risk.

Your income tax liability would be reduced by 50% of the amount you invest in a SEIS in any tax year up to

a maximum of 50% of £100,000. This relief would be withdrawn if you were to sell the shares within three

years.

Investing in SEIS does carry more perceived risk, so the best investment is dependant of your risk

appetite.

Recommendation

Would be to invest in a VCT however make clear that under SEIS there is an income tax reducer of 50%.

|ACCA P6 Mock 2 8

(d)

This would come under the pre-owned asset anti-avoidance legislation.

Lisa must pay income tax on the benefit she receives.

Lisa must pay income tax on the annual rental value of the property (£7,200 x40%) each tax year that she

uses the house rent free.

The above can be avoided if Lisa pays the daughter full market rent while occupying the property.

IHT

A gift to an individual to another individual is a potentially exempt transfer, which means no inheritance

tax in lifetime, but may become chargeable to inheritance tax if Lisa dies within seven years of the gift.

The above could be avoided if the property is treated as a gift with reservation, if that was the case the

asset would be included in Lisa’s death estate.

|ACCA P6 Mock 2 9

(e) Responsibilities under self-assessment

The 14/15 tax return needs to be submitted by the 31/1/16 (electronically) and the 31/10/15 if paper

form.

A fixed penalty of £100 will be levied if the return is late.

Submission after 31/7/16 more than 6 months late) may lead to a penalty of 5% of the tax dues subject to

a minimum £300.

Interest charged could also be incurred.

|ACCA P6 Mock 2 10

Question Two

Notes for meeting (a) (i) Purchase of intellectual property Writing down allowances are available on intangible assets such as intellectual property. The allowance given is normally equivalent to the allowable amortisation charge to the accounts. However, in this case, Tay Ltd does not amortise its intellectual property, so this basis is not available.

Nevertheless, Tay Ltd can elect to claim allowances at the rate of 4% on a straight line basis for tax purposes. The

election is irrevocable and must be made within two years of the end of the accounting period in which the

expenditure was incurred.

Corporation tax payable – y/e 31 March 2015 On the basis that the election in (i) is made, the trading profits for Tay Ltd will be as follows: £ Taxable trading profit before allowances 250,000 Less: Intellectual property amortisation (W1) (10,000) ––––––– 240,000 Less: Group relief (W2) (40,000) ––––––– Taxable total profits 200,000 ––––––– Corporation tax at 21% 42,000 Less: Marginal relief (750,000 – 200,000) x 1/400 (1,375) ––––––– Corporation tax payable 40,625 ––––––– Workings (W1) WDA re intellectual property:

4% x £250,000

(W2) Losses of Trent Ltd prior to 1 September 2014 cannot be group relieved against the profits of Tay Ltd. Group relief is available for the period 1 September 2014 to 31 December 2014, and is restricted to the lower of the following: Profits of Tay Ltd £80,000 (4/12 x 240,000) Available losses of Trent Ltd £40,000 (4/12 x (120,000))

i.e. £40,000

|ACCA P6 Mock 2 11

(iii) Corporation tax implications of transferring work to Trent Ltd Trading losses may not be carried forward where, within a period of three years there is both a change in the ownership of a company and a major change in the nature or conduct of its trade. The transfer of work from Tay Ltd to Trent Ltd could possibly constitute a major change in the nature or conduct of the latter’s trade. As a consequence, any tax losses at the date of acquisition would be forfeited. Assuming losses were incurred uniformly in 2014, the tax losses at the date of acquisition were £380,000 (£300,000 + (8/12 x £120,000)). This is worth £79,800 assuming a corporation tax rate of 21%.

Thus, Tay Ltd should not consider transferring any trade to Trent Ltd until after the third anniversary of the date

of the change of ownership i.e. not before 1 September 2017. As the trades are similar, there should be little

problem in transferring work from that date onwards.

(iv) Capital gains tax implications – sale of Trent Ltd’s building Even though the factory was owned prior to the acquisition of Trent Ltd, as long as the capital loss is realised after 1 September 2014, when Trent Ltd joins the capital gains group, then it can be used against any gains arising from assets disposed of by Tay Ltd. The calculation of the allowable loss is as follows: £ Proceeds 250,000 Less: cost (400,000) ––––––– Allowable loss (150,000) –––––––

This loss can be reallocated to Tay Ltd and will reduce the gain of £75,000 to £nil.

|ACCA P6 Mock 2 12

(b) Corporation tax issues – acquiring shares or assets Memorandum to the management board of Tay Ltd. To: Management Board From: Tax advisers Date: 3 May 2015 Subject: Proposed overseas investment in Tagus LDA (1) Acquisition of shares Status The acquisition of shares in Tagus LDA will add another associated company to the group. This may have an adverse effect on the rates of corporation tax paid by the two existing group companies, particularly Tay Limited, as it will reduce the limits for deciding the relevant tax rate to be applied Taxation of profits Profits will be taxed in Portugal. If profits are remitted to the UK as dividends, they will not be taxed again in the UK, and there will be no double tax relief for the overseas tax suffered. They will not be treated as franked investment income ether, as Tagus LDA will be an associated company. However, any other amounts paid to Tay Ltd, for example rent or interest, will be taxable in the UK, but will attract double tax relief. Double tax relief will be available for any withholding tax deducted, not for the underlying tax on profits. Double tax relief is given as a tax credit at the lower rate of the UK tax and the foreign tax suffered. Losses

As Tagus LDA is a non-UK resident company, losses arising in Tagus LDA cannot normally be group relieved against

profits of the two UK companies. However as a non UK resident subsidiary in the European Economic Area, where

trading losses cannot be utilised in any other way, they can be relieved to the UK group. This rule is not extended

to UK trading losses which cannot be used against profits generated by Tagus LDA.

Gains

Tay Ltd will not be liable to UK corporation tax on any chargeable assets sold by Tagus LDA.

|ACCA P6 Mock 2 13

(2) Acquisition of assets Status The business of Tagus will be treated as a branch of Tay Limited i.e. an extension of the UK company’s activities. The number of associated companies will be unaffected. Taxation of profits Tay Limited will be treated as having a permanent establishment in Portugal. Profits attributable to the Tagus business will thus still be taxed in Portugal. In addition, the profits will be taxed in the UK as trading income, unless an election is made to exempt the branch profits. This election is irrevocable and will apply to all of Tay Limited’s branches, so careful consideration should be given before this decision is made. Should the branch profits be taxable in the UK, double tax relief will be available for the tax already suffered in Portugal at the lower of the two rates. Capital allowances will be available, should the election to exempt the branch profits not be made. As the assets in question will not previously have been subject to a claim for UK capital allowances, there will be no cost restriction and the consideration attributable to each asset will form the basis for the capital allowance claim. Losses The Tagus trade is part of Tay Limited’s trade. Any losses incurred by the Portuguese trade will automatically be offset against the trading profits of the UK trade, and vice versa. However, if the election to exempt the branch profits is made, the losses will not be available for offset against trading profits of the UK trade. Gains

Any disposals of chargeable assets by Tagus will be included in Tay Ltd’s taxable total profits and liable to UK

corporation tax, unless the branch exemption is made.

(c) Consequences of submitting an incorrect VAT return Default surcharge Although the VAT return was submitted on time (i.e. within one month of the end of the tax period), part of the quarterly VAT liability has not yet been paid. As a result this payment will be made late and a surcharge liability notice will be issued on the company. The surcharge period will run from the date of the notice until the anniversary of the end of the period for which the VAT was paid late (i.e. until 31 March 2016). During this period any further default will extend the surcharge period and any further late payments of VAT will attract a surcharge penalty of 2% on the first occasion, rising to 15% for successive late payments.

|ACCA P6 Mock 2 14

Standard penalty As the return understates the VAT payable, a potential penalty arises. The penalty is determined in the same way as penalties on incorrect income tax and corporation tax returns i.e. according to: – The amount of tax understated – The reason for the understatement – The extent of disclosure by the taxpayer

The level of the penalty is a percentage of the revenue lost as a result of the inaccuracy or under assessment and

depends on the behaviour of the taxpayer as follows:

Taxpayer behaviour Maximum penalty (% of revenue lost)

Genuine mistake No penalty Failure to take reasonable care 30% Deliberate but no concealment 70% Deliberate with concealment 100% The penalties may be reduced depending on the type of penalty and whether the taxpayer makes an unprompted disclosure.

Assuming the error was not deliberate, the maximum penalty for Trent Limited would be 30% of the £55,000 VAT

underpaid i.e. £16,500.

However, it would be advisable for Trent Limited to notify HMRC of the error immediately, in writing, as unprompted disclosure of ‘failure to take reasonable care’ could reduce the penalty to nil. Default interest Default interest is chargeable when an assessment to VAT arises for an amount that has been under declared in a previous period, whether as a result of voluntary disclosure or as identified by HMRC. Interest is charged on a daily basis from the date the under declaration should have been declared (i.e. 30 April 2015) to the date shown on the notice of assessment or notice of voluntary disclosure.

Given the size of the error the de minimis relief for voluntarily declared errors of less than £10,000 (or 1% of

turnover, if greater, subject to a maximum of £50,000) is not applicable, the only way for Trent Limited to

minimise the interest charge is by means of early disclosure and payment of the additional VAT due.

|ACCA P6 Mock 2 15

Question Three

(a) Taxable gain on sale of Plymouth House £

Sales proceeds (November 2014) 422,100 Less: Cost (May 2001) (probate value) (185,000) –––––––

237,100 Less: PPR exemption (W1) (122,187) Letting exemption (W2) (39,274) ––––––– Chargeable gain 75,639 Less: Capital losses b/f (29,500) ––––––– Net chargeable gain 46,139 Less: Annual exempt amount (11,000)

––––––– Taxable gain 35,139

–––––––

Workings (W1) PPR exemption The periods of occupation are as follows:

Total Months Months not Occupied occupied

1 May 2001 – 28 February 2002 10 10 (a) 1 March 2002 – 31 December 2005 46 36 (b) 10 1 January 2006 – 31 March 2008 27 27 1 April 2008 – 30 November 2009 20 20 (a) 1 December 2009 – 30 November 2014 60 18 (c) 42

––– ––– ––– 163 84 79 ––– ––– –––

(a) Periods of actual occupation are allowed. (b) The first 36 months of the period from 1 March 2002 to 31 March 2008 qualifies as a deemed occupation period as: – the property was elected as their PPR at that time, and – Stuart and Rebecca returned to occupy the property on 1 April 2008. The remainder of the period will be treated as a period of absence, although letting relief is available for part of the period (see below). (c) Note that the last 18 months count as deemed occupation even though it is not elected as their PPR at that time. As long as the house was Stuart’s principal private residence (PPR) at some point during his period of ownership, the last 18 months always count. The exempt element of the gain is the proportion during which the property was occupied, real or deemed.

PPR exemption = (84/163) × £237,100 = £122,187

|ACCA P6 Mock 2 16

(2) Letting exemption The chargeable gain is restricted for the period that the property was let out. This is restricted to the lowest of the following: (i) the gain not exempted under PPR but attributable to the letting period (27/163 × £237,100) = £39,274 (ii) £40,000 maximum (iii) the total exempt PPR gain = £122,187

Letting exemption is therefore £39,274

(b) Tax efficient alternative investments

As both companies are listed, the only difference in taxation will be in the availability of business property relief (BPR) for inheritance tax purposes. If Stuart and Rebecca jointly hold in excess of 50% of the share capital of a listed company, BPR will be available at the rate of 50%. Otherwise, no BPR is available. With the proceeds from the house, Stuart can buy 1,005,000 (£422,100/£0.42) shares in Omikron plc. This represents a shareholding of 2% (1,005,000/50,250,000). As the shares in Omikron plc are listed, a 2% holding will not qualify for BPR. At the moment, both Stuart and Rebecca own 2,400,000 shares in Omega plc. Their shareholdings are amalgamated for IHT purposes under the related property rules. With a joint holding of 48%, BPR is not available. Stuart will need to purchase a further 200,001 shares to attain a holding in excess of 50% and therefore qualify for BPR. Stuart has sufficient funds from the proceeds of the house to purchase 201,000 shares (£422,100/£2.10 (W)). Assuming Stuart and Rebecca can buy these shares, they must then hold their 50% interest in the company for the period of at least two years in order to ensure that BPR applies. On the basis that Stuart is expected to survive for two to three years, he should therefore buy further shares in Omega plc in order to take advantage of the BPR available. Working – Omega plc shares The shares in Omega plc are valued at the lower of: (i) Quarter up method = (208 + ¼ × (216 – 208)) = 210p (ii) Average of marked bargains = (207 + 215) × ½ = 211p i.e. 210p per share.

|ACCA P6 Mock 2 17

(c) Inheritance tax liability – Rebecca

As Stuart’s estate at death passes entirely to Rebecca, his spouse, it is an exempt transfer for inheritance tax (IHT)

purposes.

Rebecca faces the following potential IHT liability on her estate: £ £

Residence (£450,000 + £450,000) 900,000 Shares in Omega plc (W1) 10,502,100 Less: BPR (W2) (50%) (5,251,050)

–––––––––– 5,251,050 Quoted investments 250,000 Cash deposits (£65,000 + £65,000) 130,000 Cash from life assurance policy 200,000

––––––––– Chargeable estate 6,731,050

–––––––––

As Rebecca has made no lifetime gifts, all of her nil rate band and Stuart’s unused nil rate band is available (see Tutorial note). IHT (£6,731,050 – £650,000) × 40% £2,432,420

–––––––––

Workings (W1) Omega plc shares The shares in Omega plc are valued as in part (b) at 210p per share. Value of total shareholding = ((£4,800,000 + £201,000) × £2.10) = £10,502,100 (W2) BPR As Rebecca inherited the new shares on Stuart’s death (her spouse) BPR is available as she is deemed to have owned the shares for the total period of ownership by the couple. (d) Inheritance tax planning Lifetime gifts

Alternatively, Stuart could make lifetime gifts and utilise some of his NRB if he wants to.

Given the expected dates of death, both Stuart and Rebecca are too late to benefit from the full exemption given to PETs made within 7 years of the date of death and from taper relief. Therefore, any lifetime gifts to Sam will be PETs and they will not be fully exempted and taper relief will not be available. The PETs will therefore become chargeable on the death of the donor. However, it may still be advantageous for Stuart to make some lifetime gifts. He must weigh up the fact that:

the value of the PET is fixed at the time of the gift, can utilise the annual exemption available and utilises some of the current NRB, but

|ACCA P6 Mock 2 18

if not gifted, the assets form part of his estate which will be taxed on Rebecca and will be matched against the NRB available on death, which could potentially be higher.

Care should be taken in determining which assets are to be gifted and/or left to Sam. The Omega plc shares should not be transferred to Sam as they currently attract 50% BPR. If transferred to Sam, Rebecca’s interest in the company falls below 50% and she will not be entitled to BPR on her death. It may be beneficial however to gift assets which are likely to significantly appreciate in value. Use of lifetime exemptions Both individuals should however make use of their annual exemptions (£3,000 per person per year). The annual exemptions not used up in the previous year can be used in this current year. This would give a saving of £2,400 each (£3,000 × 2 × 40%). Exemptions for items such as small gifts (£250 per donee per year) are also available.

Normal gifts out of income should also be considered. After making such gifts, the individual should be left with

sufficient income to maintain their usual standard of living.

To obtain the exemption, it is usually necessary to demonstrate general evidence of a prior commitment to make the gifts, or a settled pattern of expenditure. While there are no details of income, both Stuart and Rebecca are wealthy in their own right, and are likely to earn reasonable sums from their investments. They should therefore be able to satisfy the conditions on that basis. Insurance policies

If Rebecca were to make substantial lifetime gifts, the donees would be advised to consider taking out insurance

policies on Rebecca’s life to cover the potential tax liabilities that may arise on any PETs in the event of her early

death.

|ACCA P6 Mock 2 19

Question Four

(a) Sale of Classic Cars While Bob believes that the sums raised from selling cars are not taxable, there may be a risk of the car sales being treated as a trade, and therefore subject to income tax as trading income. To be sure, we need to refer to guidance in the form of a set of principles established by HMRC, known as the ‘badges of trade’. These help determine whether or not a trade exists, and need to be looked at in their entirety. The badges of trade are as follows: 1 The subject matter Some assets can be enjoyed by themselves, some purchased as an investment, while others (such as large amounts of aircraft linen) are clearly neither. Cars are frequently assets acquired as trading inventory, and therefore the resale may be a sign of trading. However, vintage and classic cars can also be purchased as an investment, or for enjoyment of the asset and so this test is not conclusive. 2 Frequency of transactions Where transactions are frequent (not one-offs), this suggests trading. Bob has sold several cars, which might suggest trading, although he has only done this for a short period in this tax year. 3 Length of ownership Where items are bought and sold soon afterwards, this indicates trading. Bob has acquired his cars over a significant time period and the length of time between acquisition and sale would not suggest trading. 4 Supplementary work and marketing Bob is actively marketing the cars on his internet website, which is an indication of trading. 5 Profit motive

A motive to make profit suggests trading activity. Bob sold the cars to raise funds for his property business, and

not to make a profit as such, which suggests that his motive was to raise cash, and not make profits.

6 The way in which the asset sold was acquired Selling assets which were acquired by way of gift/inheritance is not usually seen as trading, whereas selling assets that were purchased could be viewed as trading. In this case some of the cars were acquired through inheritance and others purchased for personal pleasure over a significant period. Both of these facts would not suggest that there is a trading activity. HMRC will look at all of the factors and decide no one factor is conclusive. By applying all of these tests, it should be possible to argue that Bob was not trading, merely selling some assets in order to generate short-term cash for his business. However, he should be aware of the degree of ambiguity in this.

|ACCA P6 Mock 2 20

If they are not treated as trading, the asset disposals will be taxed under the capital gain tax rules, but as they are

cars, they will be exempt from capital gains tax.

(b) Calculation of taxable income and gains The trading income assessments are based on the rules relating to the commencement of trade, and are as follows (before loss utilisation); Tax adjusted trading profit/loss Trading income

assessment

£ £ £ 2011/12 (basis period 1.10.11 – 5.4.12) £3,500 × 6/7 Profit 3,000 3,000 2012/13 (basis period: first 12 months) £3,500 × 7/7 Profit 3,500 (£18,000) × 5/12 Loss (7,500) (4,000) Nil –––––– 2013/14 (basis period: year to 30 April 2013) Loss Less 5/12 × (£18,000) utilised in 2012/13

(18,000) 7,500

(10,500) Nil

–––––– 2014/15 (basis period: year to 30 April 2014)

41,040 41,040

Bob has two losses available for relief: £4,000 in 2012/13 and £10,500 in 2013/14. Loss relief options The loss relief options available are as follows: Losses can be relieved against total income of the year of loss and/or the total income of the prior year. Unused losses can be carried forward against the first available future trading profits from the same trade.

A loss relief claim against total income can also be extended to include set-off against capital gains in either the year of loss or the previous year. However, Bob has no chargeable gains until 2014/15, which is after the years of the loss.

As this is a new business, relief is also available against income in the three years prior to the year of the loss, but Bob has not earned any income in the three years prior to the start of his business, and his 2011/12 trading profits are covered by his personal allowance.

|ACCA P6 Mock 2 21

Conclusion The most beneficial way for Bob to use the losses incurred is to carry them forward to 2014/15 as this will relieve tax at the highest rate and will not result in wasted use of personal allowances. Bob’s marginal rate of income tax is 40%, but not all £14,500 of loss is relieved at 40%. The income tax saving will be £5,293 ((£11,965 (W) × 40%) + (£2,535 (W) × 20%)). There will also be a capital gains tax saving, since some of the taxable gains will now fall in the basic rate band. The saving is the difference between the higher and basic rates of capital gains tax on the remaining basic rate band after loss relief, i.e. £254 (£2,535 × 10% (28% – 18%)). His taxable income and gains for the years in question will therefore be as follows: Taxable income and gains

2011/12 2012/13 2013/14 2014/15

£ £ £ £ Trading income 3,000 Nil Nil 41,040 Less: Relief for losses b/f Nil Nil Nil (14,500) –––––– –––––– –––––– –––––– 3,000 Nil Nil 26,540 Employment income Nil 3,197 12,790 12,790 –––––– –––––– –––––– –––––– Net income 3,000 3,197 12,790 39,330 Less: Personal allowance (10,000) (10,000) (10,000) (10,000) –––––– –––––– –––––– –––––– Taxable income Nil Nil 2,790 29,330 –––––– –––––– –––––– –––––– Taxable gains (£24,120 – £11,000) 13,120 ––––––

Loss memorandum 2012/13 2013/14 2014/15 £ £ £ Losses brought forward Nil 4,000 14,500 Utilised - (14,500) Losses arising in the year 4,000 10,500 –––––– –––––– –––––– Losses carried forward 4,000 14,500 Nil –––––– –––––– ––––––

|ACCA P6 Mock 2 22

Working: Tax saving £ Taxable income with no loss relief (£41,040 + £12,790 - £10,000)

43,830

Income falling above the basic rate band and taxable at 40% (£43,830 - £31,865)

11,965

Amount of loss relieved against income in the basic rate band (£14,500 - £11,965), or alternatively (£31,865 - £29,330)

2,535

|ACCA P6 Mock 2 23

Question Five

(a) Disposal 31 March 2015 (i) Trading income assessment for 2014/15 Closing year rules apply: Year of cessation 2014/15 Penultimate year 2013/14 Accounts assessed in penultimate year (CYB) = y/e 31 August 2013 Therefore year of cessation, 2014/15, will assess all profits not yet assessed less overlap relief as follows: £

£ £

Year ended 31 August 2014 77,200 Period ended 31 March 2015 58,500 Balancing charge (W) 95,000 –––––– 153,500 ––––––– 230,700 Relief for overlap profits (24,200) ––––––– Trading income assessment 206,500 –––––––

Delia’s total income will be £206,500 meaning no personal allowance will be available, and £56,500 (£206,500 –

£150,000) will be taxed at 45% in 2014/15.

Working: Capital allowances The disposal of the fixtures and fittings will result in a balancing charge of £95,000 as follows: £ TWDV b/f at 31 August 2014 114,000 Additions – December 2014 31,000 –––––––– 145,000 Disposal proceeds (240,000) –––––––– Balancing charge (95,000) ––––––––

Delia and Fastfood Ltd are not connected persons, and so they cannot elect to transfer the fixtures and fittings at

their written down value.

|ACCA P6 Mock 2 24

(ii) Capital gains tax liability for 2014/15 Delia’s disposal of her business on 31 March 2015 will result in a CGT liability as follows: Gains qualifying for Entrepreneurs’ relief £ Goodwill (£125,000 - Nil cost) 125,000 Freehold property (A) (£462,000 - £230,000) 232,000 Freehold property (B) (£118,000 - £94,000) 24,000 –––––––– 381,000 Less: Capital losses b/f (12,400) –––––––– Net chargeable gains 368,600 Less: Annual exempt amount (11,000) –––––––– Taxable gains 357,600 –––––––– Capital gains tax (£357,600 × 10%) 35,760 ––––––––

(iii) Value added tax implications of sale Output VAT will not have to be charged on the value of inventory and other assets on which VAT has been claimed, since Delia’s business is being transferred as a going concern.

Delia will have to inform HMRC by 30 April 2015 that she has ceased to make taxable supplies. They will then

cancel her VAT registration as from 31 March 2015.

(b) (i) Disposal on 30 April 2015 Income tax implications Year of cessation now becomes 2015/16, and penultimate year becomes 2014/15, which assesses the accounts for the year ended 31 August 2014. Delia’s trading income assessments will therefore be as follows: 2014/15 Year ended 31 August

2014 77,200

2015/16 Period ended 30 April 2015

(58,500 +9,000) 67,500 Balancing charge 95,000 162,500 Less overlap profits (24,200) 138,300

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The balancing payment of the related income tax liability will be due on 31 January 2017 rather than on 31 January 2016, although payments on account will be required on 31 January and 31 July 2016 based on the 2014/15 assessment. The personal allowance will be reduced to £Nil for 2015/16, as the adjusted net income will be greater than £120,000 in that year. The income for 2014/15 will be taxed at 20% and 40%. In 2015/16 only £33,300 (£138,300 + £45,000 – £150,000) will be taxed at 45%. Therefore the overall liability will be lower if the cessation occurs in 2015/16 rather than 2014/15. National insurance implications Delia will have to pay the higher rate (9%) of Class 4 NIC contributions on profits between £7,956 and £41,865 for 2014/15 and 2015/16 rather than just for 2014/15. However, she will also save £7,956 at 2% as the primary threshold of £7,956 will be available again in 2015/16. This is an additional cost of £2,374 ((£41,865 – £7,956) at 7% (9% – 2%)). Delia will also be liable to another 4 weeks of Class 2 NICs. Capital gains tax implications There would be no difference in the CGT payable. The CGT liability will be due on 31 January 2017 rather than on 31 January 2016. Conclusion A disposal date of 30 April 2015 is likely overall to be beneficial because of the postponement of the payment of a substantial proportion of the tax by one year.