5/6/22, 6:57 PM

Question Number 1 - VNL Limited

Meeting Notes

To, The Files

From, Tax Supervisor

Client: VNL Limited & Joe Unincorporated Business

Date: 1 June 2021

(a) Liquidation of VNL Ltd.

(i) Sale of intangible fixed assets

Brand After Tax

Goodwill
Name proceeds
Sale Proceeds 75,000 47,000 122,000
Cost (95,000)
Net Book Value (30,240)
Gain / Loss (20,000) 16,760

Corporation tax on gain

of brand name: 16,760 X (3,184)
19%
Corporation loss relief on
sale of goodwill. 20,000 3,800
X 19%
After tax proceeds 122,616

In case of Goodwill, cost will be deducted to calculate gain, as amortization on goodwill is not allowed by
tax department.

However in case of Brand Name gain will be calculated on Net book value as its amortization is allowed by
tax department. Cost is 36,000 less amortization of 5,760. Net book value will be 30,240.

Gain on Disposal of Brand name will be subject to corporation tax at 19%. It will be taxed as a trading
income.

Loss on dispoal of goodwill will be a non trading loss. It will be adjusted against total income of VNL
Limited. Tax relief will be available on loss at corporation tax rate of 19%.

(ii) Timing of payments to shareholders.

If the payment is made to shareholders of VNL Limited before appointment of liquidator, it will be treated
under Dividend income rules. It will be treated as dividend paid to them, and they have to pay income tax on
it. Shareholders will have to pay income tax at 0% on first 2,000 of dividend income. On later dividend
amount, tax rate will be 7.5% if they are basic rate tax payer and 32.5% if they are higher rate tax payer. If
any tax payer has already used 2,000 zero rate band against any other dividend income then 0% band will not
be available.

If the payment is made to shareholders of VNL Limited after appointment of Liquidator then it will be
treated as a Capital distribution. CGT will be assesed on gain on shares. Gain / Loss will be calculated by
deducting cost of shares from Disposal Proceeds. Annual Exemption of 12,300 will be deducted against the
gain if it is unused. Gain will be taxed at 10% if Business Asset Disposal relief is available. BADR will be
available if following conditions are satisfied:

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1. Shareholder was an employee of VNL Limited

2. Ownership period was atleast 2 years
3. VNL Limited was a trading company
4. Shareholder had 5% shares in VNL Limited atleast
5. VNL Limited should sell all of its assets within 3 years of ceasation.

If BADR is not available then rate of tax will be 10% for basic rate tax payers and 20% for higher rate tax
payers.

(b) Unincorporated business.

(i) Accounting date.

Joe’s taxable trading profits for his first two tax years of trading if he were to adopt an accounting date of 31
July.

Joe's accounting profits for first two years will be if he follows 31 July Year end:

1 November 2021 to 31 July 2022 -

9 months
1 November 2021 to 31 December
2 4,000 per month 8,000
2021
1 January 2022 to 31 March 2022 3 5,500 per month 16,500
1 April 2022 to 31 July 2022 4 7,500 per month 30,000
Total Profit 54,500

1 August 2022 to 31 July 2023 - 12

months 
In August 2022 1 7,500 per month 7,500
From 1 September 2022 to 31 July
11 8,500 per month 93,500
2023
Total Profit 101,000

1 November 2021 to 31 July 2022 (9 months) = 54,500

1 August 2022 to 31 July 2023 (12 months) = 101,000

Taxable profits for first two tax years will be:

First tax assesment will be from

1 November 2021 to 31 March
2022 (21/22) - 5 months
1 November 2021 to 31 October
2022 (22/23) - 12 months
54,500 / 9 months X 5 Months =
start of business (1 November
30,277
2021) to nearest 31 March.
As all months of first accounting
period are not covered in first tax
assesment, therefore second tax 9 months - 54,500 plus 3 months
assesment will be made. Second (101,000 / 12 X 3)
tax assesment will be made by
going forward 12 months from start Total will be 79,750
date as going back 12 months is not
possible from end date.

Comment on the possible effect on Joe’s income tax liabilities for the first two tax years of trading of
adopting a 31 July accounting date rather than one of 31 March

Tax Year 31 March 31 July

2021/22 24,500 30,277

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2022/23 97,000 79,750

Total 121,500 110,027

If Joe will follow a 31 July year end, his total income tax of first two trading years will be less as sum of his
taxable profits is lesser.

In first tax year of 2021/22, Joe will have to pay greater income tax in case of 31 July year end as taxable
profit is 30,277 in case of 31 July, whereas 24,500 in case of 31 March.

However in second tax year of 2022/23 he will pay lesser tax in case of 31 July year end as his taxable profit
is 79,750 as compared to 31 March profit of 97,000.

Two advantages, other than in relation to Joe’s income tax liabilities, of Joe adopting an accounting date of
31 July rather than 31 March.

First advantage will be, that in case of 31 July year end, first accounting period profits will be taxed twice.
This will improve his budgeting as his existing profit will be taxed again in second year.

Secondly as profits are in rising trend, therefore paying tax on old profits is beneficial. First period profits are
low and in case of 31 July year end, first period profits will be taxed again in second tax period also. This
will reduce his tax and other payments.

(ii) Costs already incurred and the business premises.

Consultancy services purchased since 1 October 2020 will be considered as pre incorporation expenses for
start of business done in November 2021. As these consultancy services were for business therefore they will
be an allowed expense in first year of business. Tax department allows pre incorporation expenses up till 7
years to be deducted from trading P&L in first year of business.

Computer purcahsed in May 2021 is also a pre incorporation purchase of asset, as business was commenced
in November 2021. This computer will be eligible for capital allowance from first year of business. Tax
department allows assets purchased in previous 7 years of start of business to be eligible for Capital
allowance in first year of business. Annual Investment allowance will be available in Capital allowance.

In relation to VAT, input tax of consultancy services purcahsed can be recovered for previous six months
only. This means six months prior to start of business from 1 November 2021. This will be available if
business is registered for VAT from start of business. If registeration is done later then less period will be
covered in six months rule.

For purchase of computer, VAT can be recovered if Business is registered for VAT within 4 years. VAT paid
on purchase of assets within 4 years prior to registration can be recovered if that asset exist on registration
date and it is used in business.

In relation to business premises, there will be no tax deduction in trading P&L normally. However if any part
of business premises is directly related to plant and machinery then capital allowance may be available on
that portion. Structure Building allowance will not be avaialble as building was constructed before October
2018.

In relation to VAT, this business premises is an exempt supply as 3 years have passed since its construction.
If opt to tax is done then it will convert to standard rated supply and in that case Input tax can be recovered.
Rules of Capital goods scheme will not apply as building cost is less than 250,000.

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Fiona

(a) Becoming Fiona’s tax advisers

We will consider about integrity of Fiona, as it is a requirement of professional code of ethics. In order to do
this we will consider any ongoing tax inquiries against Fiona. These may create concern on Fiona's integrity

Further as Fiona have overseas incomes also, therefore our firm should consider about there legimate sources
as there may be a concern of money laundering

Further our firm should take professional clearance from previous tax adviser of Fiona and should enquire
about reason of not doing current year tax engagement

Our firm should also evalaute its own compentence in relation to dealing with tax affairs of Fiona. As Fiona
also earns overseas income, therefore some conplex tax issues may be involved.

Lastly our firm should consider about availability of resources and deadline required by Fiona to complete
her tax engagement. If our firm lacks suffecient resources then disagreement will arise on completion of
work.

(b) Gifts to Elena and Hugo

(i) Inheritance tax (IHT) payable in respect of Fiona’s gift on 1 May 2020

Gift made by Fiona to Elena of £430,000 on 1 May 2020, was a Potentially Exempt Transfer (PET). There
was no lifetime tax on it. However as Fiona died on 30 April 2023, which is within 7 years of gift therefore
this PET will get chargeable to death tax.

Value of transfer £430,000 Gift made in May 2020 (20/21)

Annual Exemption - Current year
(£3,000)
20/21
Annual Exemption - previous year
(£0) Already used against gift made in September 2019
19/20
Potentially exempt transfer £427,000

No Lifetime tax on PET

Death Tax
Nil Rate Band of death year  £325,000 Death on 30 April 2023 (23/24)
(£74,000) Gift date is May 2020. Last 7 years chargeable
Last 7 years chargeable transfer transfers will include transfers between May 2020 to
(204,000) May 2013
Available NRB 47,000

Death Tax: £47,000 X 0% £0

£427,000 - £47,000 = £380,000 X

£152,000
40%

IHT  £152,000

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(ii) Proposed gift to Hugo.

Capital Gains tax implcations

Capital loss of Aber House will only be assesed in UK if Fiona is UK Resident, as capital loss of Aber house
is a loss on overseas asset. Fiona will become UK resident when she arrives in UK on 1 August 2021. So if
she gifts Aber house before coming to UK then there will be no Capital loss relief. However if she gifts Aber
House after coming to UK then Capital loss relief will be available.

Capital gain on Bleb house will be subject to UK CGT, irrespective of Fiona's UK residency status, as it is a
gain on asset located in UK. After 6 April 2015 all UK resiential properties are subject to UK CGT
irrespective of residency status of a tax payer. This means that Bleb house capital gain will be subject to UK
CGT irrespective of whether it is gifted before OR after arriving to UK.

Inheritance tax implications

Bleb house is located in UK. Its gift will be subject to UK IHT irrespective of Fiona's domicile status. This
means that whether she gifts it before OR after arriving to UK, this gift will be subject to UK IHT.

In relation to Aber House, UK IHT will only arise on its gift, if Fiona is UK domicile holder at time of its
gift, as it is an overseas asset. Fiona is not a UK actual domicile holder, as she holds domicile of Parella. For
deemed domicile status in IHT, it is necassary that a person is UK resident in current fiscal year AND in any
of previous two fiscal years. In case of Fiona she will not be a deemed domicile holder as she is not resident
in any previous tax years, when she arrives in UK in August 2021. This means that gift of Aber house  will
not be subject to UK IHT irrespective of gifted before arriving to UK OR after arriving to UK.

Advise

Fiona should gift Aber house to Hugo after arriving to UK. If she does this, then capital loss of Aber house
will get allowable in UK. There is no UK IHT on Aber House irrespective of gift before OR after arrival to
UK.

(c) Taxation of overseas income.

Fiona is UK resident and she is a UK domicile holder in 2022/23 for income tax and CGT purpose. This
means that Fiona cannot opt for remittance basis because she is UK resident and domicile holder. Remittance
basis can only be available to Fiona through automatic remittance basis.

Automatic remittance basis will be available to Fiona as her un remitted amount is only of Parellian bank
interest which is of £1,200. As unremitted amount is less than £2,000 therefore automatic remittance basis
will be available.

No remittance base charge will apply on Fiona as she is going for automatic remittance basis.

Income tax for 2022/23

Non
Incomes Saving Comments
Saving
UK Property Income 26,000 0
Parellian Property
31,000 0 Whole of the income is remitted to UK
Income
UK Bank interest 0 1,700
Parellian Bank This amount is not remitted to UK. It will not be taxed under
0 0
Interest automatic remittance basis
Total Income 57,000 1,700
Personal allowance will not be wasted as automatic remittance
Personal allowance (12,570)
basis is being used
Taxable Income 44,430 1,700 Total taxable income is 46,130. Fiona is a Higher rate tax payer
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therefore 0% band of interest income will be of 500.

Tax
Non saving income = 37,700 X
7,540
44,430 20%
44,430 - 37,700 = 6,730 X
2,692
6,730 40%
Saving income =
500 X 0% 0
1,700
1,200 X
1,700 - 500 = 1,200 480
40%
Tax liability 10,712
DTR will be available on Parellian Property income, as it was
subject to Parellian tax and UK tax. DTR will be lower of:

Double Taxation 1. Parellian tax = 18% X 31,000 = 5,580

(5,580)
relief 2. UK tax on parellian property income = 7,546
1. 6,730 X 40% = 2,692
2. (31,000 - 6,730) X 20% = 4,854

Tax Payable 5,132

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Nori

(a) Explain, with supporting calculations, the total additional taxes payable by Samphire Ltd:

(i) If Samphire Ltd gifts the computer to Nori (Alternative 1)

Samphire Limited is a close company as it is controlled by Single shareholder, Nori. Nori is also an
employee of Samphire Limited. Considering this gift of computer to Nori will be treated as an employment
benefit. Gift benefit will arise of £1,500. 

Samphire Limited will have to pay Class 1 A Employer NIC on this gift benefit of £1,500 X 13.8% = £207.
This Class 1 A Employer NIC will be an allowed expense from corporation tax return for Samphire Limited.
After tax cost will be £207 X (1-19%) = £168.

For Samphire Limited, in capital allowance pool there will be no adjustment as pool balance is currently zero
and sale proceed of computer for the purpose of capital allowance is also zero.  

In CGT, this computer will be exempt as its cost and Disposal proceed both are below £6,000.

(ii) If Samphire Ltd makes a loan of £1,500 to Nori, and then writes off the loan on 6 April 2024 (Alternative
2).

If Samphire Limited will give loan to Nori, it will be a loan by Close Company to its shareholder. It will give
rise to a notional tax at rate of 32.5% on amount of outstanding loan at year end. It will be payable by
Samphire Limited. As loan will be outstanding at year end, therefore a notional tax of £1,500 X 32.5% =
£488 will be payable.

Exemption of Notional tax will not apply as Nori's shareholding is more than 5%.

Loan is interest free therefore loan benefit may also arise. However it will be exempted as loan balance is
less than £10,000.

When Samphire Limited will write off loan on 6 April 2024, tax department will return the notional tax paid
of £488. Now this amount of £1,500 will be treated as a Dividend paid to Nori. On this dividend income tax
will be payable by Nori. For Samphire Limited paying dividend will not create any tax implications.

(b)(i) Calculate the chargeable gain for Kelp Ltd on the sale of the lease on Factory 1.

Disposal proceed 206,000 Disposal lease with 42 years remaining

Originally lease was purchased for 48 years. Cost will be adjusted. 
Adjusted Cost (160,520)
(165,000 / 99.289) X 96.593
Chargeable gain 45,480
Indexation Lease was purchased on 1 November 2015. Indexation allowance will be
(11,236)
allowance till December 2017. IA = 160,520 X 0.070 = 
Taxable gain 34,244

(b)(ii) Explain, with supporting calculations, the amount of the chargeable gain calculated in (b)(i) which
will remain liable to corporation tax (if any), if Kelp Ltd claims the maximum amount of rollover relief
available

In order to claim rollover relief on gain of disposal of lease, it is necassary to look at business use portion
and on reinvested amount in business use. 

Lease of the factory was owned for 6 years (1 November 2015 to 1 November 2021). In this ownership
period business use portion was 5.5 years (1 November 2015 to 30 April 2020). Rollover relief will only be
available on business use portion. Total gain on sale of lease is 34,244. Gain eligible for Rollover relief is
34,244 X 5.5 years / 6 years = 31,390.
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In order to defer this gain eligible for Rollover relief, Kelp Limited has to reinvest business use portion
proceeds in business use assets within 1 year before OR 3 years after date of disposal. Business use portion
proceeds of sale of lease was 206,000 / 6 years X 5.5 years = 188,833.

Kelp Limited has done reinvestment in Factory 2, which it purchased from Samphire Limited. Purchase of
Factory from Samphire Limited will be a normal purchase of asset, as Kelp Limited and Samphire Limtied
are not part of capital gains group because their shares are owned by an individual. Reinvestment in Factory
2 was done in May 2021, which lies in qualifying period of disposal of Factory 1 done in November 2021.
Factory 2 is entirely used for business purpose, so its reinvestment can be used to defer gain. Reinvested
amount is 138,000. This will cover requried reinvestment of 188,833 partially.

Kelp Limtied has also done another reinvestment in a warehouse in April 2022. This is also in qualifying
period of disposal made in November 2021. Amount reinvested for business purpose is 78,000 X 70% =
54,600.

Total reinvestment made for business purpose is 138,000 + 54,600 = 192,600. This will cover enire business
use proceed of 188,833 of sale of lease of factory 1. Business use portion gain of 31,390 will get rolled over.
Remaining gain which is related to non business use will continue to be chargeable for corporation tax
purpose, 34,244 - 31,390 = 2,854.

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5/7/22, 8:16 PM

Yacon Limited and Daikon

(a) Explain whether or not (1) a company share option scheme (CSOP) and (2) a share incentive plan (SIP)
will satisfy Yacon Ltd’s criteria for a tax advantaged share incentive scheme, and the income tax implications
for the employees of acquiring the shares in each case.

Company Share option plan

CSOP allows selected employees to be included in share plan. This means that if Yacon Limited uses CSOP,
then it can give share options to selected employees.

CSOP allows share options up till worth of £30,000 per employee. Yacon Limited can issue share options
worth £3,000 under CSOP. 

CSOP allows excercise period of 3 years to 10 years. Yacon Limited can use its desired criteria of 5 years in
CSOP, as it is within approved limit.

In CSOP, employees will be taxed in following manner:

1. On grant date of shares, there will be no tax

2. On excercise date of shares, there will be no tax
3. On disposal date of shares, Capital gains tax will be payable.

Share Incentive plan

In SIP it is necassary to give share options to all employees. This means that Yacon Limited will not be able
to give share options to selected employees only. However it is permitted to keep an employment condition
of  uptill 18 months for employees to whom share options will be granted.

In SIP free shares uptill worth of £3,600 per year can be given to each employee. Yacon Limited can give
shares up till value of £3,000 per employee per year.

In SIP shares can be extracted from plan after 5 years. This means that Yacon Limited desired criteria of 5
years is as per approved SIP.

In SIP, employees will be taxed in following manner:

1. On grant date of shares, there will be no tax

2. On disposal date of shares, there will be no tax.

(b) Calculate, with brief explanations, the private residence relief (PRR), and letting relief (if any), which are
available to reduce the chargeable gain on Daikon’s sale of his house.

Chargeable gain on sale of

£145,000
house
Principal Private residence
(£119,412) Working 1
Relief
Letting relief (£17,059) Working 2
Chargeable gain £8,529

Working 1

Number of
Periods Exempt Chargeable Comments
months
Deemed period of occupation will not be
1 July 2013 to 1 January
6 0 6 available as there was no actual occupation
2014
before this period
1 January 2014 to 1 July 18 18 0 Actual period of occupation
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2015
Deemed period of occupation will be
1 July 2015 to 31 available, as employed overseas and this
18 18 0
December 2016 period is supported with actual period of
occupation before and after.
1 January 2017 to 1 April
3  3 0 Actual period of occupation
2017
1 April 2017 to 1 April 25% let out and 75% actual period of
48  36 12
2021 occupation.
1 April 2021 to 31 9 months before disposal are always deemed
9 9 0
December 2021 period of occupation.
Total 102 84 18

PPR = £145,000 / 102 months X 84 months = £119,412

Working 2

Letting relief is lower of:

1. Gain attributable to chargeable letting months = £145,000 / 102 moths X 12 months = £17,059
2. £40,000
3. PPR = £119,412

(c) Explain the inheritance tax implications of Jicama’s gift of the apartment to Daikon on 5 June 2019, if
Jicama were to die in December 2024.

Jicama's gift of apartment on 5 June 2019 will be regarded as a gift with reservation at time of gift. Jicama
gifted it with a condition that she will continue to use it. It will not be regarded as a lifetime gift at that time.
IHT on this gift will be assesed on the date Jicama removed condition of her continued use.

Jicama removed condition of living in the apartment on 12 March 2021, therefore it will be treated as a
lifetime gift from that date. As this gift was to an individual therefore there will be no lifetime tax on it.

Death tax will be assesed on Jicama's death in December 2024. As gift date of 12 March 2021 lies within 7
years of death. IHT will be assesed at 40% after adjustment of Nil rate band.

Taper relief will be available at 20%, as gap between gift date and death date is of 3 to 4 years (12 March
2021 to December 2024). 

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