PROFESSIONAL LEVEL EXAMINATION

TUESDAY 8 DECEMBER 2015

(2½ hours)

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

1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Assume that the Finance Act 2014 rates and allowances will continue to apply in future
years unless you are specifically instructed otherwise.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU

ARE INSTRUCTED TO BEGIN WORK

Copyright © ICAEW 2015. All rights reserved. Page 1 of 7

1a. Pierre Roget who is 40 years old, came to the UK 10 years ago, having been born and
brought up in the country of Erehwon, where his family have lived for many generations.
Shortly after coming to the UK he met and married Elizabeth Gaskell. Pierre is treated as UK-
resident but not UK-domiciled for income tax purposes.

Requirement

Explain why Pierre is treated as non-UK domiciled, and state any actions that he must take to
become UK domiciled for income tax purposes. (2 marks)

1b. Pierre is employed by Rutherford Ltd as the sales and marketing director. His remuneration
arrangements are as follows:

(1) Salary of £27,000 pa

(2) Rutherford Ltd pays Pierre a bonus based on the results for each year ended
31 December:

Accounts to year ended Bonus Date approved at AGM Date received

£
31 December 2013 11,300 25 March 2014 28 April 2014
31 December 2014 9,100 24 March 2015 30 April 2015

(3) Pierre is not provided with a company car but he travelled 12,000 business miles in his
own car during 2014/15 and was paid 50p per mile for this.

(4) A specific entertaining allowance of £200 per month is paid to Pierre. He has
entertaining receipts totalling £2,365 for 2014/15.

(5) Pierre has had the use of a bicycle since 1 October 2013 as part of a scheme open to
all employees. The bicycle had been bought for £600 by Rutherford Ltd. On 1 July 2014
Pierre bought the bicycle from Rutherford Ltd for £40, when it was worth £130.

(6) Rutherford Ltd paid £410 in private medical insurance for Pierre. If Pierre had
purchased it himself it would have cost £520.

(7) Pierre’s PAYE deducted for 2014/15 totalled £5,000.

Other income and expenses

Pierre received dividends from Rutherford Ltd of £1,485 in January 2015.

He also had two sources of income relating to 2014/15 from Erehwon received after
deduction of tax at source at the rates shown below:

Received Overseas tax rate

£
Bank interest 3,444 30%
Property income 6,160 45%

The UK has no double tax treaty with Erehwon, where Pierre is domiciled, and Pierre decided
not to make a remittance basis election.

Pierre also contributed £2,560 into his personal pension scheme during 2014/15. He is not
contracted out of the state second pension.

Copyright © ICAEW 2015. All rights reserved. Page 2 of 7

 Requirements

For 2014/15, calculate Pierre’s:

(i) taxable employment income (7 marks)

(ii) class 1 primary national insurance contributions (4 marks)
(iii) income tax payable. (12 marks)

1c. Pierre’s wife Elizabeth died suddenly in December 2014. Elizabeth had always been UK
domiciled, unlike Pierre who has decided not to make an election to be treated as UK-
domiciled. During her life she made a number of substantial gifts, as detailed below:

10 August 2004
£254,000 gross chargeable transfer for the benefit of her nephews.

19 May 2008
80,000 shares in Turing plc, a UK quoted company into a discretionary trust for the benefit of
her sister. These shares represented a 1% shareholding. On 19 May 2008 the shares were
quoted at 165p – 173p, with marked bargains of 166p, 168p and 172p. The trustees agreed
to pay any lifetime tax due.

10 June 2012
200 shares in Sturgeon Ltd, a UK unquoted investment company to her brother, William.
Prior to the gift the shareholdings in Sturgeon Ltd were as follows:

Shareholder Percentage holding No. of shares

Elizabeth 45% 900
Pierre 30% 600
William 25% 500
2,000

The values of shareholdings in Sturgeon Ltd on 10 June 2012 were:

Price per share

£
Up to 25% 50
26 – 50% 60
51 – 74% 125
75 – 90% 150
91 – 100% 250

Elizabeth’s total assets on her death, including the remaining Sturgeon Ltd shares are valued
at £1.4 million. She also has allowable debts and funeral expenses of £100,000. She left her
entire estate to her husband, Pierre.

Requirement

Calculate the inheritance tax payable as a result of Elizabeth’s death, showing the amount of
any exemptions. (14 marks)

Total: 39 marks

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2a. Mallory Ltd is a VAT-registered wholly-owned subsidiary of Ferriar Ltd. Both companies are
UK trading companies making standard-rated supplies, and both paid corporation tax at the
main rate in recent years.

Mallory Ltd has a draft tax-adjusted trading profit before capital allowances for the eight
months ended 31 March 2015 of £825,900. This is before adjustment for the issues
considered below.

Roscoe House
In August 2014 Mallory Ltd purchased a newly-constructed freehold factory for use in its
trade for £2.6 million, plus VAT at the standard rate. The stamp duty land tax paid has been
deducted in arriving at the draft tax-adjusted trading profit.

Research and development

The draft tax-adjusted trading profit includes a deduction of £50,430 in relation to a qualifying
research and development (R&D) project as shown below:

£
Staff costs 43,600
Consumables 5,630
Computer hardware 1,200
50,430

Of the staff costs £14,500 relates to the total payroll costs of a member of staff working on
the R&D project, who also spends 30% of her time working elsewhere in the company. All
amounts are stated exclusive of VAT. Mallory Ltd is a small/ medium sized entity for R&D
purposes.

Share disposals
Mallory Ltd made two disposals of shares in unquoted trading companies during September
2014:
 Sale of the company’s entire 2% shareholding in Lovell Ltd for £32,000. The
shares were purchased in July 2000 for £10,300.
 Sale of the company’s entire 17% shareholding in Crompton Ltd for £47,000. The
shares were purchased in February 2010 for £24,500.

The draft tax-adjusted trading profit includes a profit on disposal of the shares of £44,200.

Interest
The draft tax-adjusted trading profit includes bank interest receivable of £41,492, and interest
payable of £34,567 comprising interest on:
£
Loan to purchase Roscoe House 34,105
Loan to purchase shares in Crompton Ltd 462
34,567

Qualifying charitable donation

The draft tax-adjusted trading profit includes a deduction for a qualifying donation of £18,000
paid to a UK-registered charity in November 2014.

Copyright © ICAEW 2015. All rights reserved. Page 4 of 7

 Dividend income
Mallory Ltd received dividends of £612 from Crompton Ltd in August 2014. The dividends are
not included in the draft tax-adjusted trading profit.

Capital allowances
The tax written down value of the main pool at 1 August 2014 was £100,648. During the eight
months ended 31 March 2015 Mallory Ltd purchased various items of machinery for
£110,940, inclusive of VAT at the standard rate. There were no purchases of cars.

Requirements

(i) Calculate the stamp duty land tax paid on the purchase of Roscoe House.
(2 marks)
(ii) Calculate the corporation tax payable by Mallory Ltd for the eight months ended
31 March 2015. (14 marks)

(iii) State the due dates and the amounts of the payments of Mallory Ltd’s corporation tax in
respect of the eight months ended 31 March 2015. (3 marks)

NOTE: The RPI for September 2014 is 257.6.

2b. Mallory Ltd lost a large contract recently, but continues to manufacture goods that are
standard-rated supplies. It no longer needs to utilise all of the factory space in Roscoe
House, the new freehold factory acquired for £2.6 million plus VAT in August 2014.

The company intends to let 15% of the factory to a third party from 1 April 2016, for a rent of
£50,000 pa. Mallory Ltd has not opted to tax Roscoe House, and has a VAT year to
31 March.

Requirement

Explain the VAT implications for Mallory Ltd of letting out part of the factory, and how these
would differ if Mallory Ltd had opted to tax the factory. (4 marks)

2c. You work for Geiger LLP, a firm of ICAEW Chartered Accountants, which has been engaged
by Mallory Ltd for many years to perform accounting and corporation tax work. Geiger LLP
has also just agreed to perform all payroll functions for Mallory Ltd. In your review of Mallory
Ltd’s current payroll practices you have discovered that, on the instruction of the managing
director, the company has recently started incorrectly paying the directors as consultants
rather than employees. The amounts paid meet the definition of employment income. This
has resulted in PAYE being understated. Mallory Ltd is a valuable client of Geiger LLP, and
the engagement partner is a close friend of the managing director of Mallory Ltd.

Requirement

(i) Explain the types of threat to fundamental ethical principles faced by Geiger LLP and
identify which of the fundamental ethical principles are most threatened. (3 marks)

(ii) State the actions to be taken by Geiger LLP in relation to the issue you have
discovered. (3 marks)

Total: 29 marks

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3a. Emmeline and Richmal have been trading in partnership for many years, preparing tax
returns using the accruals basis. The partnership is not VAT-registered.
For the year ended 31 December 2014 the partnership had turnover of £73,156, and tax-
adjusted trading profits before deduction of capital allowances of £53,194.

At 1 January 2014 the tax written down value on the main pool was £2,490, and there was a
tax written down value of £1,524 in relation to a Ford car with CO2 emissions of 170g/km
used by Richmal 30% for business purposes. During the year ended 31 December 2014 the
partnership paid £1,560 for new machinery and £9,200 for a Nissan car with CO2 emissions
of 140g/km to be used 30% for business by Richmal. The Ford car used by Richmal, which
originally cost £10,450, was sold for £1,800.
Amounts are stated inclusive of VAT where appropriate.

Emmeline and Richmal originally shared profits equally. However Emmeline increased her
working hours and the profit-sharing arrangement changed from 1 October 2014 to be:

Emmeline Richmal
Salary (pa) £8,000 £Nil
Profit sharing ratio 55% 45%

Requirements

(i) Calculate the tax-adjusted trading profits after deduction of capital allowances for the
partnership for the year ended 31 December 2014. (5 marks)
(ii) Calculate the trading income assessment for each partner for 2014/15. (2 marks)
(iii) Calculate Emmeline’s national insurance contributions for 2014/15. (2 marks)

3b. Emmeline and Richmal intend to elect to use the cash basis to calculate the partnership’s
tax-adjusted trading income for the year ending 31 December 2015.

The accounts for the previous year to 31 December 2014 had included

(1) debtors totalling £598 for which the money was received in April 2015;
(2) accountancy fees of £860 accrued at the year-end but paid in May 2015

In September 2015 Emmeline and Richmal took goods from stock that had cost the
partnership £350, but would have been sold to customers for £670. In the same month the
partnership purchased a computer costing £430 and a car for use in the business costing
£10,000.
The partnership will voluntarily register for VAT from 1 January 2016.

Requirements

(i) State how the partnership will make the election for the cash basis to apply, and explain
the tax treatment of items (1) and (2) above on the change of basis. (3 marks)

(ii) Explain how the transactions in September 2015 are treated in calculating tax-adjusted
trading income using the cash basis, and whether their treatment would have differed
under the accruals basis. (3 marks)

(iii) State the basis which should be used by the partnership to account for VAT from
1 January 2016. (1 mark)
Total: 16 marks

Copyright © ICAEW 2015. All rights reserved. Page 6 of 7

4. John Dalton disposed of a number of assets during 2014/15:

Land
On 10 January 2015 John sold land that he had held for investment purposes to his sister
Margaret for £120,000 when it was worth £185,000. The land had cost John £80,000 in 1975
and was worth £100,000 on 31 March 1982.

As the consideration was only £120,000, John and Margaret did nothing in respect of stamp
duty land tax (SDLT) on the sale in January 2015. However they have recently been told by a
friend that HMRC should have been informed.

Donat Place
On 1 March 2005 John purchased a 30-year lease of Donat Place for £70,000. On 1 March
2015 he sub-let the property on a five-year lease to an unconnected company for a premium
of £15,000 plus annual rental of £3,000 payable quarterly in advance.

Painting
John bought a set of two paintings for £3,100 in February 1995. During March 2015 he sold
one of the paintings to his friend Ernest for £4,200, when the other painting was valued at
£4,500. John sold the second painting to Ernest’s wife Frances in July 2015 for £5,000.

In 2014/15 John’s other taxable income after deduction of the personal allowance totalled
£16,345.

Requirements

(a) Explain the consequences for SDLT administration of the land sale in January 2015.
(2 marks)

(b) Calculate John’s property income assessment and income tax payable for 2014/15 in
relation to Donat Place. (4 marks)

(c) Calculate John’s capital gains tax payable for 2014/15. (10 marks)

Total: 16 marks

NOTE: Ignore VAT

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