2-3gbr_2006_jun_a

8/4/2019 2-3gbr_2006_jun_a

1/13

Answers

8/4/2019 2-3gbr_2006_jun_a

2/13

Part 2 Examination Paper 2.3 (GBR) June 2006 Answers

Business Taxation (UK Stream)

1 (a) Thai Curry Ltd Trading loss for the year ended 30 September 2005

Trading loss 32,800

Capital allowances P & M (working 1) 33,000

IBA (working 2) 13,800

46,80079,600

Working 1 Plant and machinery

Motor Short-life Motor

Pool car asset car Allowances

WDV brought forward 10,600 16,400 2,900

Additions Motor car 15,800

Proceeds (12,800) (9,700) (800)

Balancing charge 2,200 (2,200)Balancing allowances (6,700) (2,100) 8,800

WDA restricted (3,000) 3,000

Addition qualifying for FYA

Equipment 9,200

FYA 50% (4,600) 4,600 4,600

Motor car 9,700

FYA 100% (9,700) 9,700

Office building 22,750

FYA 40% (9,100) 9,100 13,650

WDV carried forward 18,250 12,800 33,000

(1) The cost of the equipment will have originally been added to the pool, so the disposal proceeds are now deducted.

(2) Although included as part of the cost of the office building, the 8,500 for the central heating system, the 7,200 for

the sprinkler equipment and fire alarm system, and the 7,050 for the ventilation system qualify as plant.

Working 2 Industrial buildings allowance

(1) The building was not in use for industrial purposes at the end of the years ended 31 March 2002 and 2003, so notional

allowances total 24,000 (300,000 4% = 12,000 2).

(2) Thai Curry Ltd can therefore only claim IBA based on 276,000 (300,000 24,000), being the original cost less

notional allowances.

(3) The allowance is based on the remaining 240 months (300 60) of the 25-year life of the factory. This runs from the

date that the building was first brought into industrial use.

(4) The WDA is therefore 13,800 (276,000 12/240).

17

8/4/2019 2-3gbr_2006_jun_a

3/13

(b) Thai Curry Ltd Corporation tax computation for the year ended 30 September 2005

Property income (working) 72,800

Loan interest (8,000 + 3,500) 11,500

Capital gain 155,300239,600

Loss relief s.393A (79,600)

Profits chargeable to coporation tax 160,000

Franked investment income (36,000 100/90) 40,000

Profit 200,000

Corporation tax (160,000 at 30%) 48,000

Marginal relief

11/400 (375,000 200,000) 160,000/200,000 (3,850)

44,150

Thai Curry Ltd has three associated companies, so the upper limit is reduced to 375,000 (1,500,000/4).

Working Property income

Premium received 60,000

Less: 60,000 2% (4 1) (3,600)

56,400

Rent receivable Warehouse 1 (2,200 8) 17,600

Warehouse 2 (18,000 8/12) 12,000

86,000

Bad debt (2,200 2) 4,400

Painting 8,800

(13,200)

72,800

(c) Self-assessment tax return

(1) Thai Curry Ltds self-assessment corporation tax return for the year ended 30 September 2005 must be submitted by

30 September 2006.

(2) If the company does not submit its self-assessment tax return until 31 May 2007, then there will be an automatic fixed

penalty of 200 since the return is more than three months late.

(3) There will also be an additional corporation tax related penalty of 4,415 (44,150 10%) being 10% of the tax unpaid,

since the self-assessment tax return is more than six months late.

Corporation tax liability

(1) Thai Curry Ltds corporation tax liability for the year ended 30 September 2005 must be paid by 1 July 2006.(2) If the company does not pay its corporation tax until 31 May 2007, then interest of 3,035 (44,150 at 75% = 3,311

11/12) will be charged by HM Revenue & Customs for the period 1 July 2006 to 31 May 2007.

18

8/4/2019 2-3gbr_2006_jun_a

4/13

2 (a) Tony Note Trading profit for the year ended 5 April 2006

Net profit 19,600

Depreciation 2,640

Motor expenses (9,800 30%) 2,940

Financial planning advice 620

Fees for planning permission 2,600

New printer 400

Entertaining suppliers 480Excessive salary (16,000 12,000) 4,000

Health club subscription 710

Donation to political party 60

Use of office (4,320 1/6) 720

Private telephone (680 25%) 170

Own consumption 950

Capital allowances 4,110 35,000 5,000

(5,000)

Trading profit 30,000

Working - Capital allowancesMotor

Pool car Allowances

WDV brought forward 7,400 16,200

WDA 25% (1,850) 1,850

WDA Restricted (3,000) 70% 2,100

5,550

Additions qualifying for FYA

Printer 400

FYA 40% (160) 160

240

WDV carried forward 5,790 13,200 4,110

(1) Of the 20,000 miles driven by Tony during the year ended 5 April 2006, 14,000 (20,000 2,500 = 17,500 80%)

were for business journeys. The business proportion is therefore 70% (14,000/20,000 100).

(2) The replacement hard drive is allowable since the whole computer is not being replaced. The new printer is not

allowable, being capital in nature.

(3) The only exception to the non-deductibility of entertainment expenditure is when it is in respect of employees.

(4) A salary to a family member must not be excessive. Since Tonys wife is paid 4,000 more than the other sales

assistants, this amount is not allowable.

(5) Goods for own consumption are valued at selling price.

Note that the above explanations are included for tutorial purposes only.

(b) Tony Note Income tax computation 200506

Trading income 30,000

Personal allowance (4,895)

Taxable income 25,105

Income tax

32,090 at 10% 209

23,015 at 22% 5,063

Income tax liability 5,272

(1) The sale proceeds from the disposal of the shop are not fully reinvested, and so 110,000 (320,000 210,000) of

the capital gain of 132,000 (320,000 188,000) cannot be rolled over.

19

8/4/2019 2-3gbr_2006_jun_a

5/13

(2) The chargeable gain after taking account of taper relief and the annual exemption is 19,000 (110,000 25% =

27,500 8,500).

(3) Tonys CGT liability for 200506 is therefore as follows:

17,295 (32,400 25,105) at 20% 1,459

11,705 (19,000 7,295) at 40% 4,6826,141

(c) (1) The business records for 200506 must be retained until 31 January 2012, being five years after the filing date of

31 January 2007.

(2) As Tony is in business during 2005-06, he must retain the records relating to the capital gain until the same date.

(3) A failure to retain records can result in a penalty of up to 3,000. However, the maximum penalty will only be charged

in serious cases.

3 (a) (1) Each payment on account of VAT will be 1,020 (10,200 10%), being 10% of the VAT payable for the previous year.

(2) Lithograph Ltd will have made nine payments on account, and these will have been paid for the months of April to

December 2005, being months 4 to 12 of the annual VAT return period.

(b) VAT payable for the year ended 31 December 2005

Output VAT

Sales (160,000 175%) 28,000

Motor car scale charge (1,175 175/1175) 175

Office equipment (8,000 175%) 1,40029,575

Input VAT

Purchases (38,000 175%) 6,650

Expenses (28,000 3,600 = 24,400 175%) 4,270

Machinery (24,000 175%) 4,200

Bad debt (4,800 175%) 840

(15,960)13,615

(1) Input VAT on business entertainment is not recoverable.

(2) Input VAT cannot be recovered in respect of the motor car as this is not exclusively for business purposes.

(3) Relief for the bad debt is available because the claim is made more than six months from the time that payment was

due, and the debt has been written off in the companys books.

Annual VAT return

(1) Lithograph Ltd made payments on account totalling 9,180 (1,020 9), so a balancing payment of

4,435 (13,615 9,180) would have been due with the annual VAT return.

(2) The annual VAT return, along with the balancing payment, would have been due by 28 February 2006, being two

months after the end of the annual VAT period.

(c) (1) The purpose of the control visit was to provide an opportunity for HM Revenue & Customs to check the accuracy of

Lithograph Ltds VAT returns.

(2) A serious misdeclaration penalty can be imposed if Lithograph Ltds VAT return is discovered to have a large

misdeclaration.

(3) A misdeclaration is large if it is 30% or more of the total output VAT and input VAT for the relevant VAT return.

(4) However, no penalty will be charged if Lithograph Ltd can satisfy HM Revenue & Customs that there is a reasonable

excuse for the incorrect classification of its supplies.

20

8/4/2019 2-3gbr_2006_jun_a

6/13

4 Parallel plc

1985 Pool Number Cost Indexed

cost

Purchase November 2001 22,000 101,200 101,200

Indexation to May 2005

101,200 (1920 1736)/1736 10,726

111,926

Disposal May 2005

Cost 4,000/22,000 (4,000) (18,400) (20,350)

Balance carried forward 18,000 82,800 91,576

Disposal Proceeds 46,500

Cost 18,40028,100

Indexation (20,350 18,400) 1,950

Chargeable gain 26,150

Rectangle plc


Cost (72,000 10,000/15,000) 48,000

Capital loss 10,000

(1) On the takeover Cube Ltd received ordinary shares valued at 67,500 (15,000 450) and preference shares valued at

22,500 (15,000 150).

(2) The cost attributable to the 15,000 ordinary shares in Rectangle plc is 72,000 (96,000 67,500/(67,500 + 22,500).

Square plc


Cost (30,000)

Capital loss 3,150

(1) Cube Ltd was issued with 4,000 (12,000 1/3) new shares under the bonus issue.

(2) The cost of the shares sold is therefore 30,000 (60,000 x 8,000/(12,000 + 4,000)).

Triangle plc


Cost 40,800

Chargeable gain 17,000

(1) Cube Ltd was issued with 8,000 new shares under the rights issue at a cost of 25,600 (8,000 320).

(2) The cost of the shares sold is therefore 40,800 (28,800 + 25,600 = 54,400 12,000/(8,000 + 8,000)).


(1) For the year ended 31 March 2006 Cube Ltd has net chargeable gains of 30,000 (26,150 + 17,000 10,000 3,150).

(2) The companys corporation tax liability for the year ended 31 March 2006 is therefore 22,800 (90,000 + 30,000 =

120,000 at 19%).

21

8/4/2019 2-3gbr_2006_jun_a

7/13

5 (a) (1) Relief is usually available in the UK for trading losses if incurred by an overseas branch, but no UK relief is available for

trading losses incurred by an overseas subsidiary.

(2) UK capital allowances are available in respect of plant and machinery purchased by an overseas branch.

(3) Unlike an overseas subsidiary, an overseas branch cannot be an associated company. The UK corporation tax limits will

therefore not be reduced.

(b) Local Ltd Corporation tax liability for the year ended 31 March 2006

Total UK Branch Dividend

Trading profits 420,000 355,000 65,000

Overseas income 80,000 80,000 500,000 355,000 65,000 80,000

Corporation tax at 30% 150,000

Marginal relief

11/400 (750,000 500,000) (6,875)143,125 101,619 18,606 22,900

Double taxation relief (34,006) (18,606) (15,400)

Corporation tax liability 109,119 101,619 7,500

(1) The full profits of the overseas branch are assessed in the year that they are made. Only the dividend received from

Foreign Inc is assessed to UK corporation tax.

(2) Relief for underlying tax is given where the UK holding company owns at least 10% of an overseas companys voting

power.

(3) The dividend from Foreign Inc must therefore be adjusted for the underlying tax suffered overseas.

Gross dividend (85,000 80%) 68,000

Underlying tax 68,000 22,500/127,500 12,000

Overseas income 80,000

(4) Foreign Inc. is an associated company, so the upper limit for corporation tax purposes is 750,000 (1,500,000/2).

(5) The UK corporation tax on the branch profits is 18,606 (143,125 65,000/500,000), and on the overseas dividend

it is 22,900 (143,125 80,000/500,000).

(6) Overseas corporation tax of 26,000 has been paid in respect of the branch profits, but double taxation relief is restricted

to the related UK corporation tax of 18,606.

(7) Withholding tax on the overseas dividend is 3,400 (4,250 80%) so the total overseas tax is 15,400 (3,400 +

12,000). This is lower than the related UK corporation tax of 22,900.

22

8/4/2019 2-3gbr_2006_jun_a

8/13

6 (a) Company motor car

(1) Naomi will be taxed on a car benefit of 3,600 (12,000 30% (15% + 15% (215 140 = 75/5)). There is no fuel

benefit since fuel is only provided for business travel.

(2) Naomis marginal rate of income tax is 40%, so her additional income tax liability for 200506 will be 1,440 (3,600

at 40%).

(3) There are no Class 1 NIC implications for Naomi.

Additional salary(1) Naomi will receive additional salary of 14,400 (1,200 12), and she will be able to make an expense claim of

4,000 (10,000 miles at 40p) in respect of her business mileage.

(2) The additional income tax liability for 200506 will therefore be 4,160 (14,400 4,000 = 10,400 at 40%).

(3) The additional Class 1 NIC liability will be 144 (14,400 at 1%), since expenses are not deductible for NIC purposes.

Most beneficial alternative for Naomi

(1) Under the additional salary alternative, Naomi will receive additional net of tax income of 10,096 (14,400 4,160

144).

(2) Her additional outgoings will be 8,200 (7,200 (600 12) + 1,000), being the lease and business fuel costs, so the

overall result is additional income of 1,896 (10,096 8,200).

(3) This is more beneficial than the company motor car alternative which results in an additional outgoing of 1,440.

(b) Company motor car

(1) South Ltd will have a Class 1A NIC liability of 461 (3,600 at 128%) in respect of the car benefit.

(2) The company will also have to pay the lease and business fuel costs, so its corporation tax liability will be reduced by

2,598 (7,200 + 1,000 + 461 = 8,661 at 30%).

Additional salary

(1) South Ltd will have a Class 1 NIC liability of 1,843 (14,400 at 128%) in respect of Naomis additional salary.

(2) The companys corporation tax liability will be reduced by 4,873 (14,400 + 1,843 = 16,243 at 30%).

Most beneficial alternative for South Ltd

(1) The net of tax cost of providing a company motor car is 6,063 (8,661 2,598).

(2) This is more beneficial than the alternative of paying additional salary as this results in a net of tax cost of 11,370

(16,243 4,873).

23

8/4/2019 2-3gbr_2006_jun_a

9/13

7 (a)

200304 (1 August 2003 to 5 April 2004)

38,500 8/10 30,800

200405 (1 August 2003 to 31 July 2004)

38,500 + 8,800 (52,800 2/12) 47,300

200506 (Year ended 31 May 2005) 52,800

(1) The assessment for 200405 is the first twelve months of trading as the accounting date falling in that year is less than

twelve months from the commencement of trading.

(2) In 200405 there are overlap profits of 30,800 in respect of the eight-month period 1 August 2003 to 5 April 2004.

(3) In 200506 there are overlap profits of 8,800 in respect of the two-month period 1 June 2004 to 31 July 2004.

(b) Assessments 200506 Total Cedric Eli Gordon

Nine months to 31 December 2005

Salary (6,000 9/12) 4,500 4,500

Interest 8,250 3,000 5,250

Balance (60%/40%) 54,750 32,850 21,900

67,500 35,850 31,650

Three months to 5 April 2006

Salary (6,000 3/12) 1,500 1,500

Interest 2,250 1,750 500

Balance (70%/30%) 18,750 13,125 5,625

22,500 16,375 6,125

Total assessment 90,000 35,850 48,025 6,125

(1) For the nine-month period to 31 December 2005 interest on capital is 3,000 (40,000 10% 9/12) for Cedric and

5,250 (70,000 10% 9/12) for Eli.

(2) For the three-month period to 5 April 2006 interest on capital is 1,750 (70,000 10% 3/12) for Eli and 500(20,000 10% 3/12) for Gordon.

(c)

200304 (Year ended 30 September 2003) 36,000

200405 (1 July 2003 to 30 June 2004)

9,000 (36,000 3/12) + 23,400 32,400

200506 (1 July 2004 to 31 December 2005)

Year ended 30 June 2005 28,800

Period ended 31 December 2005 10,800

39,600

Relief for overlap profits

4,500 + 9,000 (13,500)

26,100

(1) The assessment for 200405 is the twelve months to the new accounting date of 30 June.

(2) In 200405 there are overlap profits of 9,000 in respect of the three-month period 1 July 2003 to 30 September

2003.

24

8/4/2019 2-3gbr_2006_jun_a

10/13

Part 2 Examination Paper 2.3 (GBR) June 2006 Marking Scheme

Business Taxation (UK Stream)

This marking scheme is given as a guide to markers in the context of the suggested answer. Scope is given to markers to award marks

for alternative approaches to a question, including relevant comment, and where well reasoned conclusions are provided. This is

particularly the case for essay based questions where there will often be more than one definitive solution.

Marks

1 (a) Trading loss 1/2P & M Pool 11/2

Expensive motor car sold 11/2

Short-life asset 11/2

Expensive motor car acquired 1

50% FYA 1

100% FYA 1

40% FYA 21/2

IBA Notional allowances 1

Basis of claim 1

Balance of 25-year life 1

WDA 1/2

14

(b) Schedule A Premium assessable 2

Rent receivable 1

Bad debt 1

Painting 1/2

Loan interest 1

Capital gain 1/2

Loss relief 1

Franked investment income 1

Corporation tax 2

10

(c) Self-assessment tax return

Due date 1

Fixed penalty 1

Corporation tax related penalty 1


Due date 1

Interest 2

6

30

25

8/4/2019 2-3gbr_2006_jun_a

11/13

26

Marks

2 (a) Net profit 1/2Depreciation 1/2Motor expenses 11/

2

Professional fees 2

Repairs and renewals 1

Travelling and entertaining 1

Excessive salary 1

Other expenses 2Use of office 1

Private telephone 1

Own consumption 1

Capital allowances Pool 1

Motor car 11/2 FYA 1

16

(b) Trading profit 1/2Personal allowance 1/

2

Income tax 1

Capital gain Proceeds not reinvested 1

Taper relief 1

Annual exemption 1/2 CGT liability 11/

2

6

(c) Business records 1

Other records 1

Penalty 1

3

25

3 (a) Payments on account 1

Months due 2

3

(b) VAT payable

Sales 1/2

Scale charge 1

Office equipment 1/2

Purchases 1/2Expenses 1

Motor car 1

Machinery 1/2Bad debt 1

Annual VAT return

Balancing payment 1

Due date 1

8

(c) Control visit 1

Large misdeclaration 1

Definition 1

Reasonable excuse 1

4

15

8/4/2019 2-3gbr_2006_jun_a

12/13

Marks

4 Parallel plc

1985 pool Purchase 1/2 Indexation 1

Proceeds 1/2

Cost 1

Indexed cost 1

Rectangle plcProceeds 1/2

Value of shares 11/2Cost 11/

2

Square plc

Proceeds 1/2

Cost 2

Triangle plc

Proceeds 1/2

Rights issue 1

Cost 2


Net chargeable gains1

/2Calculation 1

15

5 (a) Trading losses 1

Capital allowances 1

Not an associated company 1

3

(b) UK trading profits 1/2

Overseas branch trading profits 1Underlying tax 2

Overseas income 1

Associated company 1

Corporation tax 11/2

Allocation of corporation tax 11/2

Double taxation relief Branch profits 11/2 Dividend 2

12

15

27

8/4/2019 2-3gbr_2006_jun_a

13/13

Marks

6 (a) Company motor car

Car benefit 2

Income tax 1/2

No Class 1 NIC implications 1/2

Additional salary

Expense claim 1

Income tax 1Class 1 NIC 1

Most beneficial alternative

Salary alternative Income 1

Outgoings 1

More beneficial than company motor car alternative 1

9

(b) Company motor car

Class 1A NIC 1

Corporation tax saving 1

Additional salary

Class 1 NIC 1Corporation tax saving 1

Most beneficial alternative

Company motor car 1

More beneficial than additional

salary alternative 1

6

15

7 (a) 200304 1200405 Assessment 11/2

Overlap profits 1

200506 Assessment 1/2

Overlap profits 1

5

(b) Salary 1

Interest on capital 2

Balance of profits 11/2

Total assessment 1/2

5

(c) 200304 1/2

200405 Assessment 11/2

Overlap profits 1

200506 Assessment 1

Relief for overlap profits 1

5

15

28

2-3gbr_2006_jun_a

Documents

Transcript of 2-3gbr_2006_jun_a