PROFESSIONAL LEVEL EXAMINATION

SAMPLE PAPER
(2 hours)

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

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

2.

Answer each question in black ball point 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.

For the purposes of the sample paper, it is assumed that the exam is being attempted
in September 2013.
Assume that Finance Act 2012 rates and allowances will continue to apply in future
years unless you are specifically instructed otherwise.

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

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2012. All rights reserved.

ICAEW\SAMPLE

You MUST enter your candidate number in this

box.

1a. David Zehn, the financial controller of Cumbre Ltd, is keen for the company to make the
maximum possible claim for capital allowances in the corporation tax return for the year
ended 31 December 2012. David has amended some invoices for plant purchased in 2013 to
show earlier dates. He has sent the invoices to Frank Jones, the companys new chartered
accountant, for inclusion in the capital allowances computation for the year ended 31
December 2012.
Frank has challenged David regarding the amended invoices, but David has insisted that the
invoices be included in the corporation tax return as if the items were purchased during 2012.
Requirement
Define tax avoidance and tax evasion and explain which of these best describes David
Zehns inclusion of these invoices in the corporation tax return for 2012. Identify one of the
five fundamental principles which will be breached if Frank Jones does as requested.
(5 marks)
1b. Cumbre Ltd is an unquoted UK trading company, with no associated companies. Frank Jones
has begun to prepare the corporation tax computation for the year ended 31 December 2012.
So far he has calculated a draft tax-adjusted trading profit after deducting capital allowances
of 1,286,065. In arriving at this figure Frank has removed all non-trade income and added
back all disallowable expenditure. However, this is before deducting any amounts in respect
of the following:
Interest payable
Bank overdraft interest
Interest on a loan to purchase a rental property

240
1,630
1,870

Research and development

Cumbre Ltd has incurred various costs since starting a qualifying research and development
(R&D) project in July 2012. The company is a medium-sized enterprise for R&D purposes.

23,000
15,500
4,910
12,740
56,150

Cost of staff directly engaged in R&D

Laboratory equipment
Consumable materials
Computer software
Staff gym subscriptions

Cumbre Ltd paid gym subscriptions of 200 each for 20 employees, of whom 15 are basic
rate taxpayers and the remainder higher rate taxpayers. The company has entered into a
PAYE settlement agreement with HMRC in relation to the gym subscriptions.
Pension contributions
Cumbre Ltd paid pension contributions of 750,000 in the year ended 31 December 2012.
The preceding year, pension contributions paid totalled 200,000.

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Charitable contributions
Cumbre Ltd donated 1,000 to a UK-registered charity on 1 October 2012.
Other income
David has the following information on non-trading income for the year ended 31 December
2012, all of which he has eliminated in arriving at the draft tax-adjusted trading profit of
1,286,065. Cumbre Ltd received:

Bank interest of 13,550

A dividend of 4,770 from a minority shareholding in Eggs Ltd, a UK company
Rental income receivable of 40,400

Requirement
Calculate the corporation tax payable by Cumbre Ltd for the year ended 31 December 2012.
Assume that all dates and amounts given in this part are correctly stated.
(15 marks)
Note: Ignore VAT
1c.

During the year ending 31 December 2013, Cumbre Ltd began to expand its business. To
assist with funding the expansion programme, Cumbre Ltd sold 4,000 of its shares in Eggs
Ltd for 260,000 in June 2013. Eggs Ltd has 100,000 issued shares.
Cumbre Ltd had purchased the shares as follows:
Date

Number

1 January 1980
1 January 1990

1,000
2,000

Total Cost

2,000
10,000

Market value
31.3.1982

3,000
N/A

Eggs Ltd made a 1-for-2 bonus issue on 1 January 1985. Eggs Ltd made a 1-for-5 rights
issue at 6 per share on 1 January 1995. Cumbre Ltd took up all of its rights.
Requirement
Calculate the chargeable gains arising on the disposal of the shares in Eggs Ltd in June
2013. In answering this part, you should:
First calculate the number of shares held immediately prior to the disposal;
Secondly match the shares being sold to the shares held; and
Finally calculate any gains arising.
(10 marks)
Note: Assume an RPI for June 2013 of 251.1

PLEASE TURN OVER

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1d. Cumbre Ltd has registered for VAT in anticipation of increased sales of the standard-rated
goods it manufactures. As its expansion programme continues, the company will need
additional business premises. Cumbre Ltd has agreed to purchase the lease on a factory
from Blanca plc, a property development company.
The factory is currently under construction, with work expected to be completed in December
2013. A 25-year lease will commence in January 2014. Cumbre Ltd will pay a premium of
40,000 and annual rent of 8,000.
Blanca plc owns a number of other commercial properties which it rents to tenants. Blancas
standard policy is to opt to tax its buildings, however it has yet to decide whether to opt to tax
the new factory to be leased to Cumbre Ltd.
Requirement
In respect of the purchase of the lease by Cumbre Ltd from Blanca plc:
(i)

Explain the VAT implications for both companies.

(3 marks)

(ii)

Explain the stamp duty land tax implications for Cumbre Ltd.

(2 marks)
(35 marks)

2.

Holly, aged 58, has lived in the UK since 1976. She has been a widow since her husband
Buddy died in December 1988. She is UK resident and ordinarily resident for tax purposes
but has retained her Australian domicile, and is preparing to return to Australia to retire.
Income
Holly has been employed by Cricket Ltd in the UK for 12 years. Her income and benefits from
employment during 2012/13 were as follows:

A salary of 20,000 pa, paid monthly.

A company car with CO2 emissions of 118g/km and a list price of 14,890. Cricket Ltd
pays for all Hollys petrol, including non-business travel. The car was unavailable for
the whole of October 2012 as it needed to be repaired.
While the company car was being repaired, Holly drove her own car and was paid a
business mileage allowance from Cricket Ltd of 52p per mile. During October 2012
Holly drove 2,800 business miles.

Holiday vouchers given each month, with a total value of 2,400, which cost Cricket
Ltd 1,800. Holly used these as part payment for a holiday to visit family in Australia.

Pension advice, which Cricket Ltd offers to all employees, and which cost the
company 140. Holly is not contracted out of the State Second Pension.

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Holly also received the following during 2012/13:

UK building society interest of 220 on 5 May 2012.

For many years Holly has owned a property in Australia, which she lets out
unfurnished at an annual rent equivalent to 14,400. The only expense which related
to the property in 2012/13 was a commission of 10% paid to the managing agent in
Australia. Holly transferred half of the net rental income into her UK building society
account, with the balance kept in an Australian bank account.

Capital transactions
During 2012/13 Holly made the following disposals:

Two acres of land were sold for 74,000 on 1 March 2013.

Holly bought a five-hectare plot of land in in Wales when she first moved to the UK in
1976, for 8,000. She sold two hectares in March 2013 for 74,000, before selling
costs of 3,000. The remaining three hectares were valued at 125,000 in March
2013. The whole plot had been valued at 22,000 on 31 March 1982.

2,500 shares in Lubbock Inc, listed on the Australian Securities Exchange, were sold
for an equivalent value of 85 per share on 17 March 2013.
Holly was given these shares by her husband Buddy on 1 January 1988 when they
were worth an equivalent value of 10 per share. Buddy originally bought the shares in
March 1986 at an equivalent value of 3 per share. The proceeds from the sale remain
in Hollys Australian bank account.

Hollys home in London was sold for 850,000 on 31 March 2013.

Holly paid 235,000 for her house on 1 April 1989 and moved in the same day. From
1 August 1995 the house was let to tenants while Holly was travelling. Holly moved
back in on 31 July 2000 and has lived there alone ever since. In January 2003, an
extension was added at a cost of 45,000.

Requirements
(a)

Calculate Hollys total income tax and capital gains tax liabilities for 2012/13, assuming
that she makes a remittance basis claim. Show your treatment of each item. (21 marks)

(b)

Calculate the employees and employers national insurance contributions payable for
each relevant class of national insurance for 2012/13.
(6 marks)
(27 marks)

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3a. Kim, Lien and Mai have been trading in partnership for many years, running a chain of
clothing shops. The partnership recorded an accounting profit for the year ended 30 June
2012 of 905,751 after accounting for the following items through the profit and loss account:
Note
1
2
3

Closing stock at 30 June 2012

Shop extension
Property costs
Overdraft interest payable
Legal fees

321,450
80,600
1,450,000
48,000
20,000

Notes:
1

The closing stock held at 30 June 2012 included in the balance sheet and deducted from
cost of sales in the profit and loss account was 321,450. This comprised the following
at cost:

Childrens clothes (market value 279,335)

Womens clothes (market value 108,750)
Mens clothes (market value 157,500)

Cost

121,450
125,000
75,000
321,450

During the year, Kim took some childrens clothes from stock for her personal use. The
clothes cost 450 and had a sales value of 1,035. The cost of 450 is included in the
cost of sales charged to the profit and loss account, but no other accounting
adjustments have been made to reflect this transaction.
2

In June 2012 the partnership expanded one of its shops by building an extension. The
cost of the extension included as an expense in the profit and loss account was as
follows:

39,820
34,130
6,650
80,600

Labour and materials

Plant and machinery
Professional fees

The partnership acquired a new leasehold shop in Bath on 1 January 2012 on a

15-year lease. On 1 January 2012 the partnership paid a years rental of 25,000 in
advance and a lease premium of 65,000. Both the rental of 25,000 and the 65,000
lease premium were included in the total property costs figure of 1,450,000 shown
above.

Legal fees comprised:

Acquisition of leasehold property in Bath acquired on 1 January 2012
Preparation of supplier contracts
Renewal of a 20-year lease on shop premises in Bristol
Preparation of employee contracts

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4,150
9,335
2,995
3,520
20,000

Capital allowances
The tax written down value of the main pool of plant and machinery at 1 July 2011 was
312,115 and the tax written down value of the special rate pool at 1 July 2011 was 92,478.
The partnership undertook the following transactions during the year:
Acquisitions:
10 April 2012
1 May 2012
1 June 2012
10 June 2012

Machinery
New car with CO2 emissions of 100g/km
New car with CO2 emissions of 200g/km
Electrical system (comprising air conditioning and heating)

Disposal:
10 June 2012

A delivery van originally purchased for 8,000

64,000
11,400
28,450
18,370

1,400

Requirement
Calculate the tax-adjusted profit for the partnership for the year ended 30 June 2012.
(13 marks)
Note: Ignore VAT

3b. Kim, Lien and Mai have divided the trading profits of the partnership in the same way for
many years. Kim draws a salary of 64,000 pa. Interest on capital is payable at 6.5% pa. The
balance of any profits is allocated in accordance with the profit sharing ratio as follows: 20%
to Kim and 40% each to Lien and Mai.
The partners originally invested the following amounts of capital:

Kim
Lien
Mai

500,000
750,000
1,000,000

Requirement
Using the information above and your answer to part (a), allocate the trading profits of the
partnership for the year ended 30 June 2012 to each partner.
(3 marks)

PLEASE TURN OVER

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3c.

On 1 September 2013 Kim, Lien and Mai incorporated their partnership, transferring all the
partnership assets and liabilities to a newly formed company, Felice Ltd. The partners
therefore ceased to trade for income tax purposes on 31 August 2013. The partnership drew
up its final set of accounts for the two months to 31 August 2013. Kims share of the
tax-adjusted profit for the last two accounting periods is:
Year ended 30 June 2013
Two months ended 31 August 2013

247,465
42,532

Kim has not kept a record of her overlap profits from commencement. However, the
partnership commenced on 1 January 2000 and the partners drew up the first set of accounts
to 30 June 2001. Kims share of the partnership profit for this first eighteen-month accounting
period was 37,440.
Requirement
Using the information above and your answer to part (b), calculate the taxable trading income
for Kim for 2012/13 and 2013/14.
(4 marks)

3d. Felice Ltd is VAT registered, makes both taxable and exempt supplies, and has a VAT return
year to 31 March.
Felice Ltd will purchase a building for 300,000 plus VAT of 45,000 on 1 April 2014, which
falls in the VAT quarter to 30 June 2014. Initially, the whole building is to be used in relation
to exempt supplies.
On 1 April 2016, as part of a planned expansion, Felice Ltd will move the exempt part of the
business to different premises and will begin using 100% of the building for taxable supplies.
In 2018, the business will move to new premises. Felice Ltd will therefore sell the building
during March 2018.
Requirement
Explain, with the aid of calculations, the VAT treatment of the building under the capital
goods scheme over the period of ownership by Felice Ltd.
(5 marks)
(25 marks)

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4.

Jasmine and Adam have been married for a number of years and have five children together.
Jasmine has recently been diagnosed with a terminal illness and is not expected to live
beyond December 2013.
Jasmine owns the following assets:

A house worth 700,000 with a mortgage secured on it of 200,000.

A life assurance policy on her own life written into trust for the benefit of her children. In
the event of her death the children will receive 90,000 each.

A flat in London worth 230,000. This was inherited from her uncle when he died in May
2009. The value of his chargeable estate on death was 442,000 and he left the entire
estate to Jasmine. He had made one lifetime transfer of 51,000 in cash to his son in
January 2004.

60,000 shares held in Toast plc, a quoted trading company with 200,000 issued shares.
The shares are quoted at 210-215p with marked bargains of 210p, 214p and 216p.
Jasmine purchased the shares in January 2001.

2,000 shares in Beansprout Ltd, an unquoted investment company with 50,000 issued
shares. Jasmine purchased the shares in January 2012. Adam owns 3,000 shares in
Beansprout Ltd. As at today, a holding of less than 5% of the shares is valued at 4.50
per share whereas a holding of 5-10% is valued at 5.10 per share.

Cash, chattels and other personal effects worth 715,000.

Jasmines only previous lifetime transfer was the gift of 106,000 in cash to a discretionary
trust set up in September 2009 for the benefit of her grandchildren.
Under the terms of Jasmines will, Adam inherits 1 million, with the balance of the estate left
to the children.
Requirement
Calculate the inheritance tax that would be due as a result of Jasmines death if she were to
die in December 2013. Assume that the values given above are unchanged by December
2013 and show your treatment of each item.
(13 marks)

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