Taxation Northern Ireland

Sample Paper 2 Questions & Suggested Solutions

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

For candidates answering in accordance with the law and practice of the Northern

Ireland.

In this examination paper the £ symbol may be understood and used by candidates

in Northern Ireland to indicate the UK pound sterling.

Candidates should answer the paper in accordance with the appropriate provisions

up to and including the Finance Act 2016. The provisions of the Finance Act 2017

should be ignored.

Allowances and rates of taxation, to be used by candidates, are set out in a

separate booklet supplied with the examination paper.

Answer ALL THREE QUESTIONS in Section A, and ANY TWO of the THREE questions

in Section B. If any more than TWO questions are answered in Section B, then only

the first two questions, in the order filed, will be corrected.

Candidates should allocate their time carefully.

All workings should be shown.

All figures should be labeled as appropriate e.g. £s, units etc.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

The following inserts are enclosed with the paper:

Tax Reference Material

Section A

Answer ALL THREE questions

QUESTION 1

Regina has been trading for many years selling specialist photographic equipment

and prepares her accounts to 31st December each year. Regina owns the building

from which she trades and lives in the flat above the shop. The following is a

summary of her profit and loss account for the year ended 31 December 2016.

Notes

£ £

Gross profit 112,863

Other income:

Interest received 294

Discount received 172

Rents received (1) 1,837

2,303

115,166

Expenses:

Wages and salaries (2) 60,235

Repairs (3) 2,690

Interest on unpaid Income Tax 1,165

Bad debts (4) 1,595

Bank interest (5) 3,680

Postage and stationery 1,005

Employers & Public Liability

insurance

995

Light and heat (6) 1,855

Telephone (7) 2,223

Motor expenses (8) 2,768

Leasing charges (9) 3,224

Depreciation 3,035

Subscriptions (10) 1,121

Legal fees (11) 2,506

88,097

Net profit 27,069

QUESTION 1 (Cont’d)

Notes

(1) Rent received:

Some years ago Regina rented out office space that was surplus to her

requirements. This is the net rental income after all expenses associated with

the rental business have been deducted.

(2) Wages and Salaries:

£

Wages to staff 36,110

Drawings taken by

Regina

24,125

60,235

(3) Repairs:

£

Painting of shop and flat

interior

980

Purchase of fax machine 530

Repairs to office equipment 1,180

2,690

On floor area the flat represents 1/6th of the premises excluding the surplus

office space rented.

(4) Bad debts

£

Specific bad debts

written off

1,770

Loan to customer written

off

315

Bad debts recovered (490)

1,595

QUESTION 1 (Cont’d)

(5) Bank Interest

£

Interest on business

overdraft

470

Interest on mortgage for

business premises (excluding

rental area but including flat)

3,210

3,680

(6) Light and heat:

Regina estimates that 15% of these costs are related to private use

(7) Telephone:

£

Land Line 1,685

Mobile 538

2,223

After reviewing her phone bills Regina has calculated that 90% of the landline

calls and 35% of her mobile calls are for business purposes.

(8) Motor Expenses

£

Maintenance and repairs 568

Insurance 572

Petrol 1,488

Parking fines 140

2,768

These expenses refer to the motor car used by Regina. It has been agreed

with HMRC that business use of the car is 30%

QUESTION 1 (Cont’d)

(9) Leasing Charges

£

Leasing of office

equipment

1,116

Leasing Regina’s car 2,108

3,224

Assume that relevant CO2 emissions are 175 gms/km and that the lease period

commenced in 2012.

(10) Subscriptions

£

Donation to national charity 291

Subscription to trade magazines 685

Donation to political party 145

1,121

(11) Legal Fees

£

Collection of trade debts 482

Unfair dismissal claim by former

employee

795

Purchase of second investment

property by Regina

1,229

2,506

Requirement

Compute Regina’s tax adjusted profit for the year ended 31st December 2016.

Total 20 Marks

QUESTION 2

(i) Henry is 46 years old, married and a higher rate tax payer. For 2016/17

he has taxable benefits (relating to a company vehicle) in the amount of

£2,300 and underpaid tax from 2015/16 of £750. Henry’s subscription to

his professional body is £300 per annum.

Required

Calculate Henry’s tax code for 2016/17.

(4 Marks)

(ii) Frank used an employer provided company van (Co2 emissions 213

grams/km, list price £18,000, weight less than 3,500kg) in order to

carry out his maintenance duties at various sites. Frank is permitted to

take this van home in the evenings and at weekends and does use it for

private purposes. Frank’s employer undertook all diesel expenses for the

vehicle.

Required

Calculate Frank’s total benefit-in-kind with respect to his use of this

vehicle.

(3 Marks)

(iii) There are four conditions to be met in order for an expense to be

deductible against an employee’s salary.

Required

List the four conditions and briefly explain what they mean in practice.

(4 Marks)

(iv) Grantham commenced to trade on September 1st 2014, producing

accounts to 30th April 2015 (profit £13,200) and 30th April 2016 (profit

£22,740).

Required

Calculate Grantham’s assessable profits for the first three years of

assessment of his business and indicate if there are any overlap profits.

You may perform pro-rata calculations by reference to months rather

than days. Show your workings clearly.

(5 Marks)

(v) Sean commences to trade on December 1st 2015 selling luxury fine

furnishings. His monthly turnover for the first 14 months of trading is as

follows:

Month Turnover (£) Month Turnover (£)

December 2015 13,980 July 9,369

January 2016 13,870 August 9,562

February 12,687 September 10,956

March 12,765 October 11,654

April 14,489 November 13,952

May 13,975 December 16,953

June 11,962 January 2017 18,258

QUESTION 2 (Cont’d)

Required

Clearly identify by when Sean is obliged to register for VAT.

(4 Marks)

Total 20 Marks

QUESTION 3

Rory Parks has run a successful building supply yard for many years. You are

preparing the VAT return for the quarter ended 30th June 2016 and have extracted

the following information from his records.

£

Sales (exclusive of VAT, where applicable):

Standard-rated 149,700

Purchases: (exclusive of VAT)

Goods for resale (all standard-rated) 76,550

Expenses (inclusive of VAT, where applicable):

Wages of staff 31,255

Electricity 3,874

Accountancy fees 1,645

Buildings insurance 1,280

Legal fees 2,174

Other 15,164

Analysis of the available invoices (inclusive of VAT, unless otherwise stated) reveals

the following:

(i) Restaurant bills amounting to £485 have been included in ‘other’

expenses. The meals were enjoyed exclusively by Rory’s existing

customers.

(ii) Postal services of £448 were also paid during the quarter and have been

included in ‘other’ expenses.

(iii) Rory purchased a new car for use in the business. He took delivery of

this car on 27th March 2016 however the invoice date was 1st April 2016.

The car cost £9,450 including VAT, it has a CO2 emissions factor of 163

g/km and the invoice has been included in ‘other’ expenses together with

the cost of all motor running expenses.

(iv) Legal fees include conveyancing fees of £1,200 (gross) in relation to a

property Rory has purchased as an investment.

(v) Review of goods purchases for resale uncovers that:

- an invoice has been received for goods totaling £1,350 (net) that

have not been delivered and the order was subsequently

cancelled.

- the only evidence supporting the delivery of a cement mixer

costing £1,480 (net) is a delivery docket however you have

verified that the mixer is on site.

QUESTION 3 (Cont’d)

Requirement

Calculate the amount of VAT payable by or refundable to Rory for the quarter

ended 30th June 2016.

Total 20 Marks

Section B

Answer ANY TWO of the Three Questions

QUESTION 4

(i) HMRC has significant powers with respect to both requesting

information in support of a tax return and physical inspection of

premises.

Required:

Briefly outline the limit and scope of HMRC powers to request

information from taxpayers (and others) and inspect premises.

(ii) For tax and NIC purposes, self-employment has some material

differences with employment.

Required:

Briefly outline any three factors which could be considered by HMRC

in determining if an individual was employed or self-employed.

(iii) Generally, employees are taxed on both the money paid to them by

their employer in the form of wages or salary and on other non-cash

benefits, with some exception.

Required:

List any three tax-free benefits which employees may receive by

virtue of their employment.

(iv) It is occasionally necessary for an employee to incur and pay for an

employment/business related expense while performing their duties.

Required:

Briefly outline how such expenditure should be treated for tax

purposes if the employer reimburses the employee for such

expenditure.

(v) The tax treatment of rental income for furnished holiday lettings

(FHL) has some differences with other rental income (i.e. from

residential lettings).

Required:

Briefly outline the criteria used to determine if a FHL exists.

Total 20 Marks

QUESTION 5

Christine works for CALLSIGN LTD, a large software company, and earns an annual

gross salary of £52,500. During the tax year 2016/2017 she received the following

benefits:

- A loan to help her purchase a new home. CALLSIGN LTD advanced her

£50,000 on 6th April 2015 and charged her interest at the rate of 2% per

annum. Christine repaid £16,000 of the loan on 6th August 2016, but the

balance of £34,000 remains outstanding.

- Christine had use of a house owned by CALLSIGN LTD as she tried to find a

home of her own. She first moved into the house on 3rd October 2014 when it

had a market value of £285,000. The company had originally purchased the

house on 16th May 2013 for £197,500. Christine occupied the house until 6th

June 2016 when she moved to her new home. The rateable value of the

house was £3,000. Christine paid £300 rent per month to the company and

had to meet all other household expenses. The house is not job-related

accommodation.

- Use of a 1800 cc diesel Seat car, with a CO2 emission rate of 187 grams per

kilometre and a recommended list price of £15,000. The car was first

provided to Christine on 6th July 2016 for both her private and business use.

The private usage is 40% and the business usage 60%. The company pays

for all the running costs of the vehicle, which amounted to £1,950 for the

period to 5th April 2017. Christine was required to contribute £25 per month

towards the private use of the car and £15 per month towards the cost of

private fuel.

- CALLSIGN LTD provided workplace parking for Christine. This was calculated

as being worth £7.50 per day for each of the 240 days that Christine attended

work during the tax year 2016/2017.

- Use of a home entertainment system. This was first provided to Christine to

use at home on 6th June 2016, the date it was purchased by CALLSIGN LTD at

a cost of £3,500. The system was gifted to Christine outright on 5th April 2017

when it was worth £1,450.

- Occupational pension contributions amounting to £3,000 during 2016/2017.

These were paid by CALLSIGN LTD on Christine’s behalf.

Requirement

(a) Calculate the total value of benefits provided to Christine for the purposes of

income tax, for the tax year 2016/2017.

12 Marks

Question 5 is continued on the next page.

QUESTION 5 (Cont’d)

(b) You ascertain that Christine has made gift aid donations in 2016/17 amounting

to £560 and that she donates 5% of her gross salary to the company pension

scheme. Christine also received dividends of £5,215 and interest of £1,800 in

2016/17. Christine paid tax through PAYE in the amount of £10,822 during

2016/17. Calculate Christine’s income tax liability for 2016/17.

8 Marks

Total 20 Marks

QUESTION 6

Trevor and Simon are software designers working for TORRES LTD.

Cumulative details regarding pay and taxation up to and including month 8 of

2016/2017 may be summarised as follows:

Trevor Simon

£ £

Gross cumulative salary (exclusive

all deductions)

33,617 1,049.52

Tax paid to date 8,331.20 52.40

Tax code K255 -

Company pension scheme

contributions

5% Nil

Childcare Vouchers (per month) 243

Payroll giving (per month) 25

Pay in month 9 4,130 2,015

Trevor had instructed the payroll department of TORRES Ltd to make both childcare

deductions and the charitable (payroll giving) donations throughout 2016/17. These

childcare vouchers have been provided to Trevor (through the payroll) since the

inception of the CCV scheme. Trevor has been a member of the TORRES Ltd

pension scheme for a number of years.

Simon joined the firm during month 8 and TORRES Limited have been under

instruction to tax Simon on a month 1 basis using a basic single person’s tax code.

Simon informed TORRES Ltd that he was not a member of his previous employer’s

occupational pension scheme and instead has continued to make contributions of

£75 per month to a personal pension scheme.

Requirement

(i) Complete all relevant payroll calculations, relating to PAYE and NIC for

Trevor and Simon for months 9.

(14 Marks)

(ii) Explain why an employee might have a ‘k’ code (for PAYE purposes) and

what restrictions (limits) apply with respect to such an individual’s

payroll deductions.

(6 Marks)

Total 20 Marks

Note: Please show all workings clearly. You may perform pro-rata calculations,

where relevant, by reference to months rather than days.

Taxation (Northern Ireland)

Sample Paper 2 – Suggested Solutions

ANSWER 1

Regina’s Income tax computation for the year ended 31

December 2016

£ £

Net profit per accounts 27,069

Less:

Interest 294

Rent 1,837

(2,131)

Add

Drawings 24,125

Painting – Flat (1/6 x 980) 163

Purchase of Fax 530

Interest on unpaid tax 1,165

Loan to customer 315

Interest on premises (1/6 x

3,210)

535

Light and heat (15% x 1,855) 278

Landline (10% x 1,685) 169

Mobile (65% x 538) 350

Parking fines 140

Motor (70% x (2,768 - 140) 1,840

Leasing MV (15% x

£2,108)+(£2,108 x 85% x

70%)

1,570

National Charity donations 291

Donation to political party 145

Legal fees re investment

property

1,229

Depreciation 3,035

35,880

60,818

ANSWER 2

(i) Henry’s tax code would be calculated as per:

Item £

Basic PA 11,000

Assessable benefits (2,300)

Underpaid tax (£750 / 0.4)* (1,875)

Professional subscription 300

Total 7,125

Henry’s tax code is likely to be 712L

*-As Henry is a higher rate taxpayer, reducing his tax code by £1,875

exposes a further £1,875 of his income to his highest marginal rate of

tax (40%). This would have the effect of collecting a further £1,875 x

40% = £750 in income tax thereby collecting the previously under-

collected income tax.

(ii) Since the van clearly emits Co2 and the restricted private use condition

is not met, Frank’s benefit in kind is made up of two flat rate amounts:

£3,170 in respect of the van & £598 in respect of fuel for a total

assessable benefit if £3,768. (Note that the usual rules applying to car &

fuel benefits are much simplified for company vans).

(iii) To be allowable/deductible expenses against employment income, the

four conditions to be met are that expenses must be incurred (i) wholly,

(ii) exclusively & (iii) necessarily (iv) in the performance of the

employee’s duties. In practice this implies that no duality of purpose

for the expense is permitted (for example, the employee may require

spectacles to perform their duties at work but, presumably they’d also

use their spectacles at home therefore there is duality of purpose and

the cost of spectacles would be disallowed). Further, the employee

should be able to demonstrate that they cannot otherwise perform their

duties without incurring the expense. Thus, in the context of the above

points, it is common to allow the cost of professional subscriptions,

protective clothing, tools, travel costs from the employees ‘base’

although this list is not exhaustive.

(iv) Grantham’s assessable profits would be as follows:

YOA Basis Period £

2014/15 1/9/14 – 5/4/15 7/8 x £13,200 11,550

2015/16 1/9/14 – 30/4/15

1/5/15 – 31/8/15

4/12 x £22,740

13,200

7,580

20,780

2016/17 y/e 30/4/16 22,740

Overlap Period 1/9/14 – 31/3/15

1/5/15 – 31/8/15

11,550

7,580

19,130

(v) As a seller of taxable goods, Sean is statutorily obliged to register for

VAT if the value of his turnover exceeds £83,000 in any 12 consecutive

months (or, at any point, if he believes that the value of his turnover will

exceed this limit in the next 30 days). Sean reaches the cumulative

threshold by the end of June 2016 when the cumulative value of his

turnover is £93,728 (7 months). Sean has 30 days (until the end of July)

in which to register for VAT with HMRC.

ANSWER 3

Rory Parks

VAT for quarter ended 30th June 2016

Outputs Gross VAT Net

(£) (£) (£)

Standard-rated sales

(£149,700 x 1.2) 179,640.00 29,940.00 149,700.00

Deemed supply

- Legal Fees 1,200.00 200.00 1,000.00

Fuel scale charge 256.00 42.66 213.34

181,096.00 30,182.66 150,913.34

Purchases

(W1)

88,464.00 14,744.00 73,720.00

Goods – no invoice 1,480.00 1,480.00

Other expenses

(W2)

4,781.00 796.84 3,984.16

Entertainment 485.00 485.00

Postal services 448.00 448.00

Motor Vehicle 9,450.00 9,450.00

Electricity 3,874.00 645.67 3,228.33

Accountancy fees 1,645.00 274.17 1,370.83

Building Insurance 1,280.00 1,280.00

Legal Fees 2,174 362.33 1,811.67

114,081.00 16,823.01 97,257.99

VAT Due 13,359.65

Workings

(£)

(1) Purchases 76,550.00

Less - goods cancelled (1,350.00)

- goods no invoice (1,480.00)

Net purchases 73,720.00

VAT @ 20% 14,744.00

Gross Purchases 88,464.00

(2) Other expenses 15,164.00

Entertainment – blocked (485.00)

Postal Services – exempt (448.00)

Motor Vehicle – blocked (9,450.00)

Gross expenses 4,781.00

Less VAT @ 1/6 (796.84)

Net expenses 3,984.16

For the purposes of the solution, it has been assumed that the VAT fuel scale

charges in force from 1/5/16 were applicable throughout the period covered by this

VAT return.

ANSWER 4

(i) HMRC has the statutory power to request information from taxpayers

and third parties. They must give a written information notice and would

use this power in circumstances where taxpayers have not fully

cooperated with previous requests for information. Either the taxpayer or

a tribunal must give approval for third parties to be contacted. This

information would typically relate to financial records, diaries, notes or

contracts and, generally, requested documentation would give

information which would reasonably be required to check an individual’s

tax position. HMRC cannot ask tax advisors or accountants to give

information connected with their function (e.g working papers).

HMRC can enter the business premises of a taxpayer whose liability is

being checked for the purposes of checking the taxpayer’s tax position.

HMRC may not enter a private dwelling or any part of the business

premises used as a private dwelling.

(ii) Any three from:

Degree of control. Employees are managed or supervised, a self-employed

person decides when, where, how often, how long (and so forth) that they

work.

Provision of equipment. Whether someone provides their own equipment (or

not) can indicate if an individual is under a contract of service (i.e. self-

employed) or a contract for service (i.e. employed).

Hired help. The discretionary power to hire help or sub-contract can indicate

that an individual is self-employed.

Financial risk. Receiving a regular wage or salary obviously indicates

employment whereas the individual bearing the income risk associated with

varying levels of jobs/engagement would indicate self-employment.

Holiday/sick pay. Entitlement to pay under either of these categories would

indicate employment.

Exclusivity. When an individual works for only one person then a contract of

service (i.e. employment) is indicated.

(iii) In reality this could be a very long list but could include any three from

such items as:

Employer pension contributions;

Employer provision of a car parking space at or near the place of work;

Approved mileage allowance;

Annual Christmas (or other) party provided the total cost to the employer does

not exceed £150 per head;

Workplace child care facilities or up to £55 per week for a child-minder (if

workplace childcare is not provided);

Reasonable removal/relocation expenses (if required due to a new job or

relocation within an existing employment) up to £8,000.

(iv) If the employer reimburses the employee then the reimbursed amount

will form part of the employee’s income for tax purposes (even if the

original expenditure was business/employment related). If the expense

is an allowable expense, then the employee can deduct it from their

employment income. An allowable expense would, generally, be incurred

wholly, exclusively and necessarily in the performance of the employee’s

duties. This would include expenditures such as necessary travelling and

subsistence expenditure or subscriptions to a professional body.

(v) In order to qualify as FHL, the letting must be made on a commercial

basis with a view to the realisation of profit. Additionally, the FHL must

satisfy the following criterion:

210 day rule: the property must be available to let to the general public for at

least 210 days per annum.

105 day rule: the property must be actually let for 105 days per annum

(excluding any longer-term lets).

155 day rule: the total periods of longer term occupation (i.e. more than 31

consecutive days) must not exceed 155 days per annum.

ANSWER 5

(a) Christine Benefits 2016/2017

1. Loan (£) (£)

(i) Average Method

£50,000 + £34,000/2 = £42,000

£42,000 x (3.00 – 2.00)% = 420 1,785

(ii) Strict Method

£50,000 x (3.00 – 2.00)% x 4/12 166.67

£34,000 x (3.00 – 2.00)% x 8/12 226.67

393.34

Christine would choose to be taxed on the lower ‘strict’ statutory method

2. Accommodation (£)

Rateable value 3,000

Additional

(£197,500 - £75,000) x 3.00% 3,675.00

6,675.00

Benefit = £6,675.00 x 2/12 1,112.50

Less contributions (300 x 2) (600) 512.50

3. Car (£)

Benefit £(15,000 x 37% x 9/12) 4,162.50

Less Contributions £(25 x 9) (225)

3,937.50

Fuel £(22,200 x 37% x 9/12) 6,160.50

5. Home Entertainment Systems

Use £3,500 x 20% x 10/12 583

Gift

Current Market Value (less price paid) 1,450

Original cost less use (less price paid)

(£3,500 – £583) 2,917

The higher amount is taken 2,917

6. Pension Contributions –

exempt (as is workplace

parking)

Total benefits 2016/2017 14,503.84

(b) Christine Income tax computation 2016/17

£ £ £ £

Gross Salary 52,500 52,500

Pension (5%) (2,625) (2,625)

BIK (from above) 14,503 14,503

Interest

£1,800 1,800 1,800

Dividends

£5,215 5,215 5,215

Personal Allowance (11,000) (11,000)

Taxable Income 53,378 1,800 5,215 60,393

32,000 @ 20% 6,400

Ex B/R 700 @ 20% 140

20,678 @ 40% 8,271.20

53,378

500 @ 0% NIL

1,300 @ 40% 520

1,800

5,000 @ 0% NIL

215 @ 32.5% 69.88

5,215

Tax Liability 15,401.08

Less: Tax Paid at Source

PAYE (10,822)

Outstanding tax liability 4,579.08

ANSWER 6

(i)

PAYE Trevor Simon

Income Tax (£) (£)

Gross salary to

date

33,617.00 N/A

Salary for month 4,130.00 2,015.00

37,747.00 2,015.00

Less superannuation @ 5%

CCV (£243 x 9)

GAYE (£25 x 9)

(1,887.35)

(2,187.00)

(225.00)

NIL

NIL

NIL

33,447.65 2,015.00

Additional/(Free)

pay

2,559 x 9/12 1,919.25

11,000 x 1/12 (916.67)

Net Taxable Pay 35,366.90 1,098.33

Taxed as per

£32,000 x 9/12 x 20% 4,800.00

£11,366.90 x

40%

4,546.76

1,098.33 x 20% 219.67

9,346.76 219.67

Less paid to

date

(8,331.20) N/A

Tax due in

month 9

1,015.56 219.67

NIC

Primary

£(3,584 – 672) x 12% 349.44

£(3,887 – 3,584) x 2% 6.06

£(2,015 – 672) x 12% 161.16

355.50

Secondary

£(3,887 – 676) x 13.8% 443.12

£(2,015 – 676) x 13.8% 184.78

798.62 345.94

(ii) When an individual has under-collected tax from previous years, or other

untaxed income, their weekly/monthly tax free allowance may be

reduced so as to effectively increase weekly/monthly taxable income and

so effect a collection of the resultant tax liability. When any under-

collected tax or taxable benefits exceed the basic personal allowance,

then the tax-free allowance becomes negative – i.e. it becomes

additional (not free) pay. To identify such a case, the tax code is given

the prefix ‘k’ (in contrast with the usual case where the letter is a suffix).

Obviously, for a large ‘k’ code (and/or someone with relatively small

salary/wages), the weekly/monthly deductions could be very large and

this may cause undue hardship for an individual. Subsequently, an upper

limit applies for weekly/monthly deductions and such deductions may

not be greater than an amount equal to 50% of the employee’s gross

pay (less pension contributions) for that pay period. Note that the

liability is still due to HMRC, it is just that it will not be collected through

payroll deductions.