ANSWERS

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SECTION A ANSWERS

1 D

Tutorial note
Class 2 NICs are payable where a self-employed individual is aged between 16 and the state
pension age (i.e. currently age 65 for men).
No contributions are payable if the tax adjusted trading profits of the business in the tax
year are below the small profits threshold of £6,205.

2 D

Tutorial note
Statement 2 is false because the benefit is limited to 10% not 20%.
Statement 3 is false because directors are entitled to the job-related accommodation
exemption for reasons If necessary for proper performance or better performance of duties
provided they:
• have no material interest in the company (i.e. hold no more than 5% of the company’s
ordinary share capital), and
• are a full-time working director, or
the company is a non-profit making organisation.

3 A
£
Interest received 30 June 2018 (£150,000 × 2% × 6/12) 1,500
Interest accrued (1 July 2018 - 30 November 2018)
(£150,000 × 2% × 5/12) 1,250
––––––
Total interest income 2,750
––––––

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Tutorial note
Gilt interest is assessed like other interest income on the receipts basis. However, under the
accrued income scheme when gilts are sold interest is effectively allocated to the vendor
and purchaser on the accruals basis up to the date of sale.
Maciej did not receive any interest on 31 December 2018 but will be taxed on £1,250
representing the interest accruing in the period he owned the gilts.

4 C
£
Taxable gain 32,800
––––––
£
Capital gains tax: 22,470 × 10% (W) 2,247
10,330 × 20% 2,066
–––––– ––––––
32,800 4,313
–––––– ––––––
Working: Basic rate band remaining
£
Basic rate band 34,500
Less: Taxable income (12,030)
––––––
Remaining basic rate band 22,470
––––––

Tutorial note
Taxable gains on non-residential property which fall within the basic rate band are taxed at
10%. Those in excess of the basic rate band are taxed at 20%.

5 C

Tutorial note
Only businesses within regulated sectors must appoint an MLRO.
The MLRO will decide whether a transaction should be reported to the National Crime
Agency (NCA) rather than the police.
A report to the NCA does not remove the requirement to disclose the information to HMRC.

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6 B
Profit threshold = (£1,500,000 ÷ 3 × 7/12) = £291,667

Tutorial note
There are three 51% related companies (Metropolitan Ltd, Jubilee Ltd and Central Ltd), and
it is a seven month chargeable accounting period.
District Ltd is not included as a 51% related company as it is a dormant company.

7 A

Tutorial note
The final instalment of corporation tax is due to be paid by the fourteenth day of the fourth
month after the end of the chargeable accounting period.
Alternatively, provided you remember the due date for the first payment and that if possible
three months’ worth of tax must be paid each quarter, the due dates of payment can be
calculated as follows:
Amount Due date
1 (3/8 × £840,000) = £315,000 14.11.18 (14th of the 7th month after the start of the CAP)
2 (3/8 × £840,000) = £315,000 14.2.19 (3 months later paying 3 months’ tax)
3 (2/8 × £840,000) = £210,000 14.4.19 (2 months later paying 2 months’ tax)
In the third payment, there is only two months’ worth of tax left to be paid, and it will be
due two months after the previous pay date.
This will also be the fourteenth day of the fourth month after the end of the chargeable
accounting period.

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8 C

Tutorial note
The tax was due on 31 January 2020 and not actually paid until 10 March 2020.
Interest on late paid tax runs from the due date until the date of payment, therefore
statement (1) is true.
A 5% penalty is applied if the balancing payment is more than 30 days late (1 month for the
TX examination); therefore statement (2) is false.
HMRC have the discretion to reduce a penalty in special circumstances, for example if they
consider that the penalty would be inappropriate or disproportionate. However, the inability
to pay will not be classified as special circumstances therefore statement (3) is false.

9 C
£
Value of shares held before the transfer (10,000 × £584) 5,840,000
Value of shares held after the transfer (6,000 × £420) (2,520,000)
–––––––––
Transfer of value 3,320,000
Less: AE – 2018/19 (3,000)
– 2017/18 b/f (3,000)
–––––––––
Gross chargeable value of PET 3,314,000
–––––––––
10 C

Maximum group relief = lower of:

(i) Moon Ltd loss (£230,000 × 3/12) £57,500
(ii) Galaxy Ltd profit (£300,000 × 3/12) £75,000

Tutorial note
Moon Ltd and Galaxy Ltd are only in the same loss relief group from the date of purchase of
Galaxy Ltd (i.e. 1 January 2019).
Accordingly, group relief is only available in the three month corresponding accounting
period (1.1.19 to 31.3.19).

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11 D

Tutorial note
The antique statue is a non-wasting chattel which was bought and sold for less than £6,000.
This is therefore an exempt disposal.
A greyhound is a wasting chattel and is therefore also exempt from capital gains tax.
Vans are not treated like motor cars and are not exempt assets. A van is a wasting chattel,
but is eligible for capital allowances as it is used in a business and, as a result, the disposal is
chargeable. It is treated as a non-wasting chattel and is subject to the £6,000 rule.
The antique necklace is a non-wasting chattel. As it was bought and sold for more than
£6,000 it is chargeable to capital gains tax.

12 D

Tutorial note
Sarah is treated as automatically non-UK resident, as she has spent less than 16 days in the
UK in the tax year 2018/19.
Narun is treated as automatically resident in the UK as he has been in the UK for more than
183 days during the tax year 2018/19.

13 B
£
Company motor car 6,340
Beneficial loan 3,500
–––––––
Subject to class 1A 9,840
–––––––
Class 1A (£9,840 × 13.8%) 1,358
–––––––

Tutorial note
The shopping centre vouchers are subject to class 1 NICs, not class 1A NICs.
Class 1A NICs must be paid by 22 July (if paid electronically) following the end of the tax
year.

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14 D

Tutorial note
The gift to Luigi’s wife is exempt as the inter-spouse exemption applies.
A lifetime transfer up to £5,000 given from parent to child on the occasion of the child’s
marriage is exempt, so the gift of £2,000 to his daughter is exempt.
Luigi’s gift into the trust is a chargeable lifetime transfer and is therefore not exempt. This
gift also utilises both the current and prior year AE’s.
Luigi’s gift to his son is also potentially chargeable and not exempt as it is more than £250
and the small gifts exemption does not apply.

15 C

Tutorial note
It is not necessary for the business to have been owned for any particular length of time
prior to the transfer of a going concern. However the other conditions must all be met.
In addition, in order for the transfer of a business to be treated as a transfer of a going
concern for VAT purposes, the business must be a going concern at the time of the transfer.

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SECTION B ANSWERS

16 A
£ £
House 579,500
Less: Interest only mortgage (100,000)
–––––––– 479,500
Holiday cottage 300,000
Less: Endowment mortgage (Note) (0)
–––––––– 300,000
––––––––
Net value of properties 779,500
––––––––

Tutorial note
An endowment mortgage cannot be deducted as the endowment policy will automatically
repay the mortgage on the owner’s death.

17 C

Tutorial note
Funeral costs are specifically allowable against the death estate computation.
Outstanding legally enforceable debts are allowable.
However, a promise to pay university fees is not legally enforceable and therefore not
deductible.

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18 B
CLT – Gift to trust
3 June 2015
£ £
Gross chargeable transfer 150,000
NRB @ death 325,000
Less: Chargeable transfers ≤ 7 years of this gift
(3.6.08 to 3.6.15) (i.e. CLT on 10.4.15) (350,000)
––––––––
NRB available (0)
–––––––
Taxable amount 150,000
–––––––

£
IHT payable at 40% 60,000
Less: Taper relief (3.6.15 to 4.4.19)
(3 – 4 years) (20%) (12,000)
–––––––
48,000
Less: Lifetime tax paid (30,000)
–––––––
IHT payable on death 18,000
–––––––

Tutorial note
The nil rate band was fully utilised by the chargeable lifetime transfer on 10 April 2015.
Taper relief reduces IHT on gifts made more than 3 years prior to the donor’s death.
A deduction for any lifetime tax paid in relation to the gift is available, regardless of who
paid the tax.

19 B

Tutorial note
IHT due on death is due 6 months from the end of the month of death.
The IHT arising on the estate is paid by the executors.

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20 D
£
Bruce’s RNRB 125,000
Add: Brenda’s unused RNRB (100%) 125,000
Bruce’s NRB 325,000
Add: Brenda’s unused % (W) × current NRB
(60% × £325,000) 195,000
––––––––
770,000
––––––––
Working: Brenda’s unused NRB percentage
£
Brenda’s NRB at death – 2008/09 312,000
Less: Utilised on chargeable estate left to son, Gerald (124,800)
––––––––
Brenda’s unused NRB 187,200
––––––––
Unused % = (£187,200 ÷ £312,000) 60%
––––––––

Tutorial note
Be careful to transfer the unused percentage of the nil rate band, and apply it to the NRB in
force on the death of the second spouse.
The RNRB is available as Bruce left his home to his son i.e. a direct descendant. The amount
of RNRB available is £125,000 as this is lower than the value of the property.
Brenda’s RNRB is available in full as she died prior to its introduction on 6 April 2017.

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21 C
£
Insurance proceeds 290,000
Less: Indexed cost (242,000)
––––––––
48,000
Less: Gain deferred (balancing figure) (34,350)
––––––––
Chargeable gain (W) 13,650
––––––––
Working: Chargeable gain
£
Insurance proceeds 290,000
Less: Amount reinvested in replacement (276,350)
––––––––
Chargeable gain at time of receipt of proceeds 13,650
––––––––

Tutorial note
Earth Ltd reinvested part of the insurance proceeds in a replacement asset within
12 months, which enables it to defer part of the gain.
The amount of gain that is chargeable immediately is the lower of:
(i) All of the gain
(ii) Insurance proceeds not reinvested.
The balance is deferred by deducting it from the base cost of the replacement asset.

22 B
Base cost to Venus Ltd = (£110,000 + (£110,000 × 0.522)) = £167,420

Tutorial note
Disposals of assets between companies in a group for chargeable gains take place on a no
gain/no loss basis automatically.
Venus Ltd will take on Earth Ltd’s cost, plus indexation to 31 December 2017, as its base
cost for future disposal.
The roof repairs are not included as repairs are treated as revenue expenditure, not a
capital cost.

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23 A
£
Proceeds 130,000
Less: Disposal costs (2,500)
–––––––
127,500
Less: Indexed cost
£300,000 × £130,000/(£130,000 + £350,000) (81,250)
–––––––
Chargeable gain 46,250
–––––––

Tutorial note
When part of an asset is disposed of only part of the original cost is deducted in the
computation of the chargeable gain.
The proportion of cost deducted is based on the market value of the part disposed of as a
proportion of a value of the whole asset.

24 C

Tutorial note
The delivery van is movable plant and machinery and is therefore not a qualifying business
asset for rollover relief purposes.
Land and buildings used for the purposes of the trade and fixed plant and machinery are,
however, qualifying business assets for rollover relief purposes.

25 B

Tutorial note
A qualifying asset must be acquired within the period beginning one year before and ending
three years after the date of sale of the old asset i.e. before 30 November 2021 in this case.
A rollover relief claim must be submitted within four years of the later of the end of the
accounting period in which the disposal is made and the replacement asset is acquired i.e.
by 31 March 2024 in this case.

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26 D

Tutorial note
Companies can form a group for VAT purposes if they are under common control (i.e. > 50%
subsidiary).
Any member of the VAT group can be appointed as the representative member, and
although it is often the parent company this is not a requirement.
Companies making wholly exempt supplies cannot register as single companies but are
eligible to join a VAT group. It may not be advisable to include such companies, however it is
not forbidden.

27 D

Tutorial note
Supplies to VAT registered customers in the EU are zero rated. Therefore Fancy Furniture Ltd
will not charge any VAT on the sale.
However, the overseas company will account for VAT at 15% as output and input VAT on its
VAT return under the reverse charge system (i.e. the destination system applies).

28 B

Tutorial note
A simplified invoice can be raised when the VAT inclusive amount of the sale is ≤ £250.
The standard rated supply = (£220 × 120/100) = £264 inclusive of VAT.
Accordingly, a simplified invoice cannot be issued.
The mixed supply of goods = £100 + (£80 × 120/100) = £196 inclusive of VAT.
It is therefore possible to issue a simplified invoice.

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29 C

Tutorial note
None of the input tax is recoverable on the purchase of a car if there is an element of private
use.

30 A
£
Output tax on scale charge (£408 × 20/120) 68
Less: Input tax suffered on fuel (£800 × 20/120) (133)
–––––
Net VAT recoverable 65
–––––

Tutorial note
The input tax suffered on the cost of fuel can be recovered in full.
Output tax is accounted for on a scale charge, provided by HMRC, to adjust for the private
fuel.
The scale charge is based on the level of CO2 emissions and is quoted as a VAT inclusive
amount.

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31 C
£
Proceeds 48,000
Less: Cost (25,000)
––––––
Chargeable gain 23,000
––––––
Capital gains tax at 20% 4,600
––––––

Tutorial note
Be careful to note any relevant information given in the scenario prior to attempting the
questions. This scenario included a sentence stating that the annual exempt amount was
not available; therefore it cannot be deducted when calculating the tax on the share
disposal.
Entrepreneurs’ relief is not available as Radcliffe plc is not Jessica’s personal company,
i.e. she does not have ≥5% of the voting rights.
As Jessica is a higher rate tax payer, the basic rate band will be fully utilised by her taxable
income and the gain will be taxed at 20%.

32 C

Tutorial note
Both the donor and donee must make a joint claim for gift relief.
As the shares are in a quoted company, it must be the donor’s personal company, i.e. the
donor must have ≥5% of the voting rights.
There is no requirement to work at the company nor is there a minimum ownership period.
These conditions are relevant for entrepreneurs’ relief, not gift relief.

33 D
£
Gross deemed proceeds 6,000
Less: Selling expenses (300)
––––––
Net sale proceeds 5,700
Less: Cost (8,400)
––––––
Capital loss (2,700)
––––––

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Tutorial note
The painting is a non-wasting chattel, therefore the chattels rules must be applied to the
disposal.
The painting cost ˃£6,000 and the gross proceeds on disposal were ≤£6,000. The actual
gross proceeds of £3,500 must therefore be substituted with deemed gross proceeds of
£6,000 in order to restrict the loss.

34 B

Date Explanation Total Exempt Chargeable

months months months
1.6.09 to 31.12.12 Actual occupation 43 43
1.1.13 to 30.6.18 Empty 66 18 48
––––– ––––– –––––
109 61 48
––––– ––––– –––––

PPR relief = £89,000 × (61/109) = £49,807

Tutorial note
The last 18 months of ownership are exempt as the property has been Jessica’s main
residence at some point.
She is not entitled to the 4 years for working elsewhere in the UK exemption as she did not
re-occupy the property after her period of absence.

35 C

Tutorial note
Letting relief exempts part/all of the gain on an individual’s principal private residence
where the property has been let at arms’ length.
Letting relief exempts the lowest of:
– £40,000
– The amount of the gain exempted by the normal PPR rules
– The part of the gain still in charge after PPR relief attributable to the letting period.

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SECTION C ANSWERS

36 FINN PLUM

Key answer tips

A classic scenario of a self-employed individual with some investment and rental income.
The amount of information in the question can appear daunting at first, but the
requirements guide you through the steps needed to calculate the income tax liability for
Finn. It is important to remain calm and focus on one requirement at a time.
In part (a) the adjustment of profits is relatively straightforward.
Part (b) requires calculation of the income tax liability of Finn which tests your knowledge
of property and investment income. You must be careful to distinguish between the
different types of property income here.

(a) Finn’s adjusted trading profits

Tutor’s top tips

The examining team requires adjustment of profits computations to be presented in two
columns, covering all items of expenditure in the order they appear in the question.
It is important to list ALL the items of expenditure in the question, showing a zero (0) for the
adjustment figure where the expenditure is allowable. This is because credit will be given for
showing no adjustment where none is needed. Listing the items in order makes answers
easier to mark.
It will rarely be necessary to add notes to show why you have or have not adjusted for an
item and lengthy explanations are never required as you have been asked to ‘calculate’ the
adjusted profits, rather than to explain them.
Always show your workings if you need to calculate the figure that you are adjusting for.

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Tax adjusted trading profit – year ended 31 December 2017

£ £
Net profit 70,459
Depreciation 15,000
Legal fees re unfair dismissal (Note 1) 0
Accountancy (Note 1) 0
Personal tax planning advice (Note 1) 150
Salary to Finn (Note 2) 15,000
Gifts to customers (£900 + £1,250) (Note 3) 2,150
Private telephone (£960 × 30%) 288
Own consumption (£580 – £240) (Note 4) 340
Capital allowances (W1) 2,025
––––––– ––––––
103,099 2,313
(2,313) ––––––
–––––––
Tax adjusted trading profit 100,786
–––––––

Tutorial note
1 The legal fees in respect of unfair dismissal and the accountancy costs are allowable
as they are incurred wholly and exclusively for the purposes of the trade. However,
the personal tax planning advice represents a private expense, which is disallowed.
2 Salaries paid to a sole trader are not allowable. This is merely an allocation of trading
profits and so needs to be added back to profit.
3 Gifts to customers are an allowable deduction if they:
– cost less than £50 per recipient per year, and
– are not of food, drink, tobacco or vouchers exchangeable for goods, and
– carry a conspicuous advertisement for the business making the gift.
4 Goods for own consumption must be treated as a sale at full market value. As the
cost of the goods as already been accounted for, only the profit element needs to be
adjusted for. If no entries had been made in the accounts the full sale proceeds would
need to be adjusted for.

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(b) Finn Plum

Income tax computation – 2018/19
Total Non- Savings Dividends
savings income
£ £ £ £
Trading profit (part (a)) 100,786 100,786
FHL income (W2) 4,070 4,070
Rent-a-room income (W3) 600 600
Interest received 1,250 1,250
Dividends 1,150 1,150
––––––– ––––––– ––––– –––––
Total income 107,856 105,456 1,250 1,150
Less: PA (W4) (8,072) (8,072)
––––––– ––––––– ––––– –––––
Taxable income 99,784 97,384 1,250 1,150
––––––– ––––––– ––––– –––––
Income tax:
On non-savings income (W5) 34,800 × 20% 6,960
On non-savings income 62,584 × 40% 25,034
––––––
97,384
On savings income (nrb) 500 × 0% 0
On savings income 750 × 40% 300
On dividends (nrb) 1,150 × 0% 0
–––––––
99,784
––––––– ––––––
Income tax liability 32,294
––––––

Tutorial note
As a higher rate taxpayer Finn as a savings nil rate band of £500. All taxpayers have a
dividend nil rate band of £2,000.

Workings
(W1) Capital allowances
Finn’s car is eligible for a writing down allowance at 18% as the CO2 emissions
are between 51 and 110 grams per kilometre.
The allowance should be adjusted for the business use of the car (75%).
Capital allowances are therefore = (£15,000 × 18% × 75%) = £2,025

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Tutorial note
Note that the date of purchase is not relevant.
The full WDA of 18% is available for a 12 month accounting period regardless of the date of
purchase of the item.

(W2) Furnished bungalow

This fulfils the criteria for treatment as furnished holiday accommodation.
£ £
Rent (£300 × 28) 8,400
Less: Expenses
Insurance (paid on 29 Dec 2018) 360
Electricity 580
Cleaning 420
––––
(1,360)
––––––
7,040
Less: New sofa allowable on a paid basis (2,970)
––––––
Furnished holiday accommodation income 4,070
––––––

Tutorial note
The bungalow qualifies as furnished holiday accommodation (FHA). It is available for letting
for at least 210 days, is actually let for at least 105 days and is let on a furnished basis on
lets which do not exceed 31 days.
The advantages of being classed as FHA are:
(i) the income is treated as relevant earnings for pension contributions, and
(ii) Cash basis – a deduction is available on a paid basis for plant and machinery
acquired.
(iii) Accruals basis – capital allowances are available in respect of plant and machinery
including furniture and furnishings.
(iv) capital gains reliefs for business assets, such as entrepreneurs’ relief, are available.
Note that replacement furniture relief does not apply to FHA, instead under the cash basis,
which is the default assumption in this question; a deduction is available on a paid basis for
new sofa acquired.
The restriction of tax relief on finance costs does not apply to FHA.

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(W3) Room in own flat

This will fall under the rent-a-room scheme.
£
Gross rents 8,100
Less: Deduction (7,500)
––––––
Property income 600
––––––

Tutorial note
The question says that all relevant elections are made.
The rent-a-room basis is more favourable than the normal property income calculation
which produces an assessment of:
= (£8,100 – £1,140 – £800) = £6,160
Replacement furniture relief is not available where the rent-a-room election is made.

(W4) Adjusted personal allowance

£ £
Personal allowance 11,850
Total income = Net income 107,856
Less: Gross personal pension contributions (0)
Gross gift aid (£20 × 12 × 100/80) (300)
–––––––
ANI 107,556
Less: Limit (100,000)
–––––––
Excess 7,556
–––––––
Restriction × 50% (3,778)
––––––
Adjusted PA 8,072
––––––

Tutorial note
Finn’s gift aid payments reduce his adjusted net income (ANI) which will affect his personal
allowance and his basic rate band.
As his ANI exceeds £100,000 the personal allowance must be reduced.

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(W5) Extended basic rate band

£
Basic rate threshold 34,500
Add: Gross gift aid payments (W4) 300
––––––
Revised threshold 34,800
––––––

Marking scheme
Marks
(a) Net profit 0.5
Depreciation 0.5
Legal fees re unfair dismissal 0.5
Personal tax planning advice 0.5
Salary 0.5
Gifts to customers (0.5 for each) 1.0
Private telephone 0.5
Own consumption 1.0
Capital allowances 1.0
––––
6.0
––––
(b) Income tax liability calculation
Furnished holiday accommodation
– Rent 0.5
– Insurance 1.0
– Other expenses 0.5
– Sofa 1.0
Rent-a-room 1.0
Trading profit 0.5
Bank interest & dividend income 0.5
Adjusted personal allowance 1.0
Extend basic rate band 0.5
Income tax 2.5
––––
9.0
––––
Total 15.0
––––

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37 POSH YACHTS LTD

Key answer tips

This is a typical question testing your knowledge of corporation tax. There is a great deal of
information to deal with and it is essential you have a methodical approach.
In part (a) first draw up the pro forma for the adjusted profit computation and insert the
profit figure. Include in your computation both the items that need adjustment, with the
relevant figure, and the items that do not need adjustment with a zero (0).
Before you can complete the adjusted profit computation you need to do workings to
calculate capital allowances.
Then you can compute the taxable total profits and the corporation tax liability in part (b).
Note carefully the information about 51% related companies and their impact on the profit
threshold.
Finally in part (c) there are a couple of marks for knowledge of the company residence
rules.

Tutor’s top tips

It is important when answering questions as long as this, that you have a good technique for
dealing with all the information.
You should read the question carefully and highlight key pieces of information as you go
through.
Part (a) is a standard adjustment of profits computation.
Remember that in the adjustment of profits calculation it is important to list all the major
items indicated in the question requirement, showing a zero (0) for expenditure that is
allowable. This is because credit will be given for showing no adjustment where none is
needed. List the adjustments in the order they appear in the question.
It will rarely be necessary to add notes to show why you have or have not adjusted for an
item and lengthy explanations are never required as you have been asked to ‘calculate’ the
adjusted profits, rather than to explain them.
Always show your workings if you need to calculate the figure you are adjusting for.

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(a) Tax adjusted trading profit – year ended 31 December 2018

£+ £–
Operating profit 450,000
Depreciation and amortisation of lease 46,000
Entertaining customers (Note) 8,000
Entertaining employees (Note) 0
Deduction for lease premium (W1) 2,160
Capital allowances (W2) 33,900
––––––– ––––––
504,000 36,060
(36,060) ––––––
–––––––
Tax adjusted trading profit 467,940
–––––––

Tutorial note
The only exception to the non-deductibility of entertainment expenditure is when it is in
respect of employees.

(b) Corporation tax computation – year ended 31 December 2018

Tutor’s top tips

Remember that dividend income is exempt for companies but it must be added to taxable
total profits when calculating the augmented profits. Posh Yachts Ltd was a large company
last year and its augmented profits exceed the threshold in the current year; corporation tax
is therefore payable by instalment.
Easier marks were available for the calculation of TTP including the deduction of a brought
forward trading loss from total profits.

£
Trading profit (part (a)) 467,940
Property income 16,310
–––––––
Total profits 484,250
Less: Trading loss b/f (2,640)
–––––––
Taxable total profits 481,610
–––––––
CT liability (481,610 × 19%) 91,506
–––––––
Due date £
1st instalment (£91,506 × 3/12) 14.07.18 22,877
2nd instalment 14.10.18 22,877
3rd instalment 14.01.19 22,876
4th instalment 14.04.19 22,876
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(c) Company residence rules

A company is resident in the UK if it is either:

(i) incorporated in the UK, or

(ii) incorporated overseas and centrally managed and controlled in the UK.

Boat Ltd is incorporated in the UK and therefore is UK resident.

Information regarding the place where board meetings are held and the residency
status of the directors is irrelevant.

Bateau SA is incorporated overseas but can still be UK resident if it is centrally

managed and controlled in the UK.
This is not the case here as all the directors live overseas and hold the majority of
board meetings overseas. Bateau SA would therefore be treated as resident
overseas.
Workings
(W1) Deduction for lease premium
The office building is used for business purposes, and so a proportion of the
lease premium assessed on the landlord can be deducted.
Assessment on landlord:
£
Premium received 90,000
Less: 2% × £90,000 × (15 – 1) (25,200)
––––––
Assessment on landlord (Note) 64,800
––––––
This is deductible over the life of the lease, starting from 1 July 2018, so the
deduction for the year ended 31 December 2018:
= (£64,800 ÷ 15) × 6/12 = £2,160

Tutorial note
Alternative calculation of the assessment on the landlord:
Premium × (51 – n)/50 where n = number of years of the lease
= £90,000 × (51 – 15)/50 = £64,800

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(W2) Plant and machinery

Main Special Allowances
pool rate pool
£ £ £ £
TWDV b/f 50,000 21,000
Addition (no AIA) (Notes 1, 2 and 3):
Car (CO2 between 51 – 110 g/km) 10,000
Car (CO2 > 110 g/km) 16,000
Additions (with AIA):
Machinery 12,800
Computer 1,200
Machinery 8,300
––––––
22,300
Less: AIA (22,300) 22,300
–––––– 0
Less: Disposal proceeds – Lorry (12,000)
–––––– ––––––
48,000 37,000
Less: WDA (18%) (8,640) 8,640
Less: WDA (8%) (2,960) 2,960
–––––– ––––––
TWDV c/f 39,360 34,040
–––––– –––––– ––––––
Total allowances 33,900
––––––

Tutorial note
1 All cars with CO2 emissions of between 51 – 110 g/km and second hand cars with CO2
emissions of less than 51 g/km are put in the main pool, and are eligible for a WDA at
18%.
2 All cars with CO2 emissions above 110 g/km are put in the special rate pool, and are
eligible for a WDA at 8%.
3 The private use of the motor car by the factory manager is irrelevant, full allowances
are available. The manager will be assessed to income tax on the private use of the
car as an employment benefit.

(W3) Augmented profits

£
TTP 481,610
Plus: Dividends from non-group companies 50,000
–––––––
Augmented profits 531,610
–––––––

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Posh Yachts Ltd has two 51% related companies as it has two wholly-owned
subsidiary companies (overseas companies are included).
£
Profit threshold (£1,500,000 ÷ 3) 500,000
–––––––
Augmented profits of £531,610 exceed the profit threshold, therefore
corporation tax instalments are required for the year ended 31 December
2018.

The first instalment is due on the 14th day of the 7th month following the start
of the chargeable accounting period.

The remaining instalments are due quarterly thereafter.

Marking scheme
Marks
(a) Trading profit
Operating profit 0.5
Depreciation and amortisation 0.5
Entertaining (Staff 0.5 Customers 0.5) 1.0
Lease premium – Assessable amount 1.0
– Deduction 1.0
P & M – TWDVs 0.5
– Motor car – Main pool 0.5
– Motor car – Special rate pool 0.5
– AIA 1.0
– Disposal 0.5
– WDA at 18% 0.5
– WDA at 8% 0.5
––––
8.0
––––
(b) Corporation tax computation
Trading profit 0.5
Brought forward loss 0.5
Property income 0.5
51% related companies – adjusted threshold 1.0
Corporation tax liability computation 0.5
Augmented profits 0.5
Instalment dates 1.0
Instalment amounts 0.5
––––
5.0
––––
(c) Company residence
Incorporated in UK 0.5
Centrally managed and controlled in UK 0.5
Boat Ltd – UK resident 0.5
Bateau SA – resident overseas 0.5
––––
2.0
––––
Total 15.0
––––

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38 SARAH STYLE

Key answer tips

In recent examinations there has often been a question in this style requiring consideration
of the tax implications of alternative actions.
These questions are more challenging than the standard questions and show the examining
team those who really understand tax as opposed to those who learn pro formas and do
not think through the implications of the computations they prepare.

(a) Sole trader business

Tutor’s top tips

If Sarah continues her business as a sole trader, the profits of the trade will continue to be
assessed to income tax and class 4 NICs. In addition class 2 NICs continue to be payable.
Keep the computations simple. Bracketed workings are fine for this type of question, full
blown computations are not required and there will be insufficient time to produce them.

• Sarah’s taxable income is £28,750 (£40,600 – £11,850) so her income tax

liability for the tax year 2018/19 will be £5,750 (£28,750 at 20%).
• Class 2 NICs for the tax year 2018/19 will be £153 (52 × £2.95).
• Class 4 NICs for the tax year 2018/19 will be £2,896 ((£40,600 – £8,424) at 9%).

(b) Incorporates the business

Tutor’s top tips

If Sarah incorporates her business, the profits of the trade will be assessed to corporation
tax but in addition any extraction of funds from the company by Sarah will have further tax
consequences.
Make sure you explain the consequences and again, keep the computations simple. As with
part (a) bracketed workings are fine for this type of question, full blown computations are
not required and there will be insufficient time to produce them.
An employment allowance of £3,000 is available for employers to reduce their total class 1
NICs due. It is not necessary to deduct this from the NIC liability relating to Sarah’s salary as
it will already have been fully utilised by Jett’s salary.

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(i) Profits withdrawn as director’s remuneration

• Director’s remuneration will be net of employer’s class 1 NICs.

• The £40,600 of profit will be used partly to pay a salary to Sarah and partly to
pay employers’ NICs.

Style-It Ltd’s employer’s class 1 NICs are therefore £3,902 ((£40,600 – £8,424)
× 13.8/113.8).

• Sarah’s gross director’s remuneration is £36,698 (£40,600 – £3,902).

• There will be no corporation tax liability as all of the company’s profits have
been paid out as director’s remuneration and employer’s class 1 NICs, which
are deductible expenses for corporation tax purposes.

• Sarah’s taxable income is £24,848 (£36,698 – £11,850) so her income tax

liability for the tax year 2018/19 will be £4,970 (£24,848 at 20%).

• Sarah’s employee class 1 NICs will be £3,393 ((£36,698 – £8,424) at 12%).

(ii) Profits withdrawn as director’s remuneration and dividends

• There will be no employee primary or employer’s secondary class 1 NICs as

Sarah’s director’s remuneration of £5,500 is less than the earnings thresholds.

In addition, there is no NIC liability on dividend income.

• The corporation tax liability of Style-It Ltd for the year ended 5 April 2019 will
be:
£
Trading profit 40,600
Director’s remuneration (5,500)
–––––––
Taxable total profits 35,100
–––––––
Corporation tax (at 19%) 6,669
–––––––
• Sarah’s income tax liability for the tax year 2018/19:

– The director’s remuneration is below the personal allowance.

– Dividend income is £28,431 (£35,100 – £6,669). After offsetting the

balance of the personal allowance of £6,350 (£11,850 – £5,500) taxable
dividend income is £22,081 (£28,431 – £6,350).

– There is no tax liability on the first £2,000 of dividend income as it falls

within the dividend nil rate band. The remaining dividends of £20,081
(£22,081 – £2,000) are taxed at the dividend basic rate of 7.5%.

– Sarah’s income tax liability for 2018/19 is £1,506 (£20,081 at 7.5%).

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Marking scheme
Marks
(a) Income tax liability 1.0
Class 2 NIC 0.5
Class 4 NIC 0.5
––––
2.0
––––
(b) Director’s remuneration
Employer’s class 1 NICs 1.5
Director’s remuneration 0.5
No corporation tax liability 0.5
Income tax liability 1.0
Employee class 1 NICs 1.0

Director’s remuneration and dividends

No class 1 NIC liability 0.5
Corporation tax – taxable total profits 0.5
– liability 0.5
Income tax liability 2.0
––––
8.0
––––
Total 10.0
––––

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39 JANE STURGEON

Key answer tips

This question tests the loss relief options available to an individual. It specifies which reliefs
to claim, so it is important that you read the requirement carefully and don’t waste time
considering other reliefs. The cap limiting relief against total income must also be
considered.
The second part of the requirement asks for an explanation; calculations were not required
for this section.
In a losses question you should show the application of the losses in the pro forma, and also
record the use of the losses in a loss memorandum to make it easier to mark.

Taxable income and gains after loss relief

Tutor’s top tips

When approaching a loss question it is important to use the standard pro forma. It is easier
to enter all the income first (thus ensuring you will get the easier marks), leaving gaps for
the loss reliefs and only entering these at the end.
As you decide how the losses should be used you should also enter the reliefs into the loss
memorandum to keep track of the remaining loss.

(a)
2016/17 2017/18 2018/19 2019/20
£ £ £ £
Trading income 37,320 42,350 0 24,640
Property income 51,460 80,250 70,400 75,230
–––––– –––––– –––––– ––––––
Total income 88,780 122,600 70,400 99,870
Less: Loss relief
Current year (W) (50,000)
Previous year
– against trading income (42,350)
– against other income (W) (50,000)
–––––– –––––– –––––– ––––––
88,780 30,250 20,400 99,870
Less: PA (11,850) (11,850) (11,850) (11,850)
–––––– –––––– –––––– ––––––
Taxable income 76,390 18,400 8,550 88,020
–––––– –––––– ––––– ––––––

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2017/18
£
Chargeable gains 36,000
Less: Trading loss (18,150)
–––––––
17,850
Less: Annual exempt amount (11,700)
–––––––
Taxable gains 6,150
–––––––

Loss memorandum £
Loss in 2018/19 160,500
Less: Relief against total income
2018/19 (max £50,000) (W1) (50,000)
2017/18
– against trading income (42,350)
– against other income (max £50,000) (W1) (50,000)
–––––––
18,150
2017/18 – Relief against chargeable gains (18,150)
–––––––
Loss carried forward to 2019/20 0
–––––––

Tutorial note
A claim against total income must be made before relief against capital gains can be
considered.
All of these reliefs are ‘all or nothing’ reliefs. That means that they are optional and do not
have to be claimed, but if they are claimed, the maximum amount of loss must be offset
under the rules of that relief.

Workings:
(W1) Maximum deduction from total income
The maximum deduction for loss relief against total income is the greater of:
(i) £50,000, and
(ii) 25% of adjusted total income.
The maximum restriction applies to:
• the current year offset, and
• prior year offset – but not to the extent the trading loss is set against profits
from the same trade.

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2017/18 2018/19
£ £
Total income before loss relief 122,600 70,400
Less: Gross personal pension contributions 0 (5,000)
––––––– –––––––
Adjusted total income (ATI) 122,600 65,400
––––––– –––––––
25% × ATI 30,650 16,350
––––––– –––––––
Maximum claim against non-trade income 50,000 50,000
––––––– –––––––

Tutorial note
Note that the loss relief restriction will be £50,000 unless the individual’s adjusted total
income exceeds £200,000 (£200,000 × 25% = £50,000).
Where this is clearly the case, as in this question, it will be more time efficient to just state in
one sentence your reasoning for using the £50,000 restriction (i.e. as Jane’s adjusted total
income is less than £200,000, the maximum deduction is £50,000), rather than showing the
computational proof detailed above.

(b) Opening years relief would have been available if Jane commenced trading in the tax year
2016/17 as the loss would arise in one of her first four tax years of trade.

A claim to relieve the loss using this relief would result in the loss being carried back
against total income in the previous three tax years on a FIFO basis.

Marking scheme
Marks
Trading income 0.5
Property income 0.5
Consideration of restriction against total income 1.0
Calculation of ATI 1.0
Loss relief against total income – 2018/19 1.0
Loss relief against total income – 2017/18 – trading income 1.0
Loss relief against – 2017/18 – non trade income 1.0
Loss relief against chargeable gain – 2017/18 1.0
Personal allowance 0.5
AEA 0.5
––––
8.0
––––
Identification of opening years relief 0.5
Explanation e.g. first 4 years, 3 year carry back, total income (0.5 per point) 1.5
––––
2.0
––––
Total 10.0
––––

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40 WARM HOUSES LTD

Key answer tips

This question deals with the corporation tax rules for a 15 month period.
However, rather than simply preparing accounts for the long accounting period, the
requirement in the question specifies that financial accounts will be prepared by the
company for the first three months and then for the remaining 12 months. This therefore
determines the chargeable accounting periods to be used, and the special long period of
account rules for corporation tax do not apply to this question.
For this type of question it is quicker and easier to use a two column format to allocate the
different sources of taxable profit. Don’t forget to pick up the easy marks by stating the
due dates for payment and submission of the returns.

(a) Corporation tax liabilities – two separate chargeable accounting periods

p/e y/e
31 Mar 2018 31 Mar 2019
£ £
Trading profit (3/15 : 12/15) 67,500 270,000
Less: Capital allowances (W1) (0) (26,080)
––––––– –––––––
67,500 243,920
Net chargeable gains (£42,000 – £4,250) (Note) 0 37,750
––––––– –––––––
Taxable total profits 67,500 281,670
––––––– –––––––
Corporation tax (at 19%) 12,825 53,517
––––––– –––––––

Tutorial note
The capital loss arises in the period ended 31 March 2018 and is carried forward and then
offset against the chargeable gain arising in the year ended 31 March 2019.

(b) Due dates

p/e 31 March 2018 y/e 31 March 2019
CT payment due date (W2) 1 January 2019 1 January 2020
Submission of CT return due date 31 March 2019 31 March 2020

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(c) Time limits for amending corporation tax returns

• Warm Houses Ltd may amend its corporation tax return for the year ended
31 March 2019 at any time up to 31 March 2021 (i.e. 12 months after the filing
date of 31 March 2020).
• HMRC may amend Warm Houses Ltd corporation tax return for the year ended
31 March 2019 at any time up to 9 months after the actual date that Warm
Houses Ltd files its corporation tax return.

Workings
(W1) Capital allowances
Main Special
pool rate pool Allowances
£ £ £ £
Period ended 31 March 2018
No additions in the period 0
––––––
Year ended 31 March 2019
Additions no AIA
Car (Note) 26,000
Additions (with AIA)
Equipment 24,000
Less: AIA (24,000) 24,000
–––––– 0
–––––– ––––––
0 26,000
Less: WDA 8% (2,080) 2,080
–––––– ––––––
TWDV c/f 0 23,920
–––––– –––––– ––––––
Total allowances 26,080
––––––

Tutorial note
The car is included in the special rate pool as the emissions level is ˃ 110 g/km. Private use
by the director is ignored and the company can claim full allowances.
The individual director will be assessed on his private use of the car as a benefit in his
personal income tax computation.

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(W2) Due dates of payment

To determine the due date, the augmented profits are compared to the profit
threshold.
p/e y/e
31 Mar 2018 31 Mar 2019
£ £
Taxable total profits 67,500 281,670
Plus: Dividends from non-group
companies 0 25,000
––––––– –––––––
Augmented profits 67,500 306,670
––––––– –––––––
Profits threshold
(£1,500,000 × 3/12) / full year threshold 375,000 1,500,000
––––––– –––––––––
In both periods the company is not large, therefore the normal due date for
corporation tax applies (i.e. nine months and one day after the end of the
chargeable accounting period).

Marking scheme
Marks
(a) Trading profit 1.0
Capital allowances – Period ended 31 March 2018 0.5
– Year ended 31 March 2019 2.5
Chargeable gains 1.0
Corporation tax − Period ended 31 March 2018 0.5
− Year ended 31 March 2019 0.5
––––
6.0
––––
(b) Augmented profits compared to threshold 1.0
Due dates (0.5 for each correct date) 2.0
––––
3.0
––––
(c) Time limits (0.5 for each correct time limit) 1.0
––––
Total 10.0
––––

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