f6 Questions d12

ACCA REVISION MOCK

Taxation (United Kingdom) December 2012

Time allowed

Reading and planning: 15 minutes

Writing: 3 hours

ALL FIVE questions are compulsory and MUST be attempted.

Rates of tax and tables are printed on pages 3 – 5.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.

This question paper must not be removed from the examination

Kaplan Publishing/Kaplan Financial

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PAPER F6 (UK) : TAXATION (FA2011)

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© Kaplan Financial Limited, 2012

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TAX RATES AND ALLOWANCES

KAPLAN PUBLISHING 3

TAX RATES AND ALLOWANCES SUPPLEMENTARY INSTRUCTIONS

1 Calculations and workings need only to be made to the nearest £.

2 All apportionments should be made to the nearest month.

3 All workings should be shown.

INCOME TAX

Normal rates

Dividend rates

% % Basic rate £1 – £35,000 20 10 Higher rate £35,001 – £150,000 40 32.5 Additional rate £150,001 and above 50 42.5 A starting rate of 10% applies to savings income where it falls within the first £2,560 of taxable income.

Personal allowances £ Personal allowance Standard 7,475 Personal allowance 65 – 74 9,940 Personal allowance 75 and over 10,090 Income limit for age related allowances 24,000 Income limit for standard personal allowance 100,000

Car benefit percentage The base level of CO2 emissions is 125 grams per kilometre. A rate of 5% applies to petrol cars with CO2 emissions of 75 grams per kilometre or less, and a rate of 10% applies where emissions are between 76 and 120 grams per kilometre.

Car fuel benefit The base figure for calculating the car fuel benefit is £18,800.

Individual Savings Accounts (ISAs)

The overall investment limit is £10,680, of which £5,340 can be invested in a cash ISA.

Pension scheme limits Annual allowance £50,000 The maximum contribution that can qualify for tax relief without evidence of earnings is £3,600.


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Authorised mileage allowances: cars

Capital allowances: rates of allowance Plant and machinery % Main pool 20 Special rate pool 10 Motor cars (purchases since 6 April 2009 (1 April 2009 for limited companies)) CO2 emissions up to 110 grams per kilometre 100 CO2 emissions between 111 and 160 grams per kilometre 20 CO2 emissions above 160 grams per kilometre 10 Annual investment allowance First £100,000 of expenditure 100

CORPORATION TAX

Financial year 2009 2010 2011 Small profits rate 21% 21% 20% Main rate 28% 28% 26% Lower limit £300,000 £300,000 £300,000 Upper limit £1,500,000 £1,500,000 £1,500,000 Standard fraction 7/400 7/400 3/200

Marginal relief Standard fraction × (U – A) × N/A

VALUE ADDED TAX

Standard rate of VAT 20.0% Registration limit £73,000 Deregistration limit £71,000

Up to 10,000 miles 45p Over 10,000 miles 25p

TAX RATES AND ALLOWANCES

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INHERITANCE TAX

Tax rates

£1 – £325,000 Nil Excess – Death rate 40% – Lifetime rate 20%

Taper relief Years before death

Percentage reduction

% Over 3 but less than 4 years 20 Over 4 but less than 5 years 40 Over 5 but less than 6 years 60 Over 6 but less than 7 years 80

CAPITAL GAINS TAX Rates of tax – Lower rate 18% – Higher rate 28% Annual exempt amount £10,600 Entrepreneurs’ relief – Lifetime limit £10,000,000 – Rate of tax 10%

NATIONAL INSURANCE CONTRIBUTIONS (not contracted out rates)

% Class 1 Employee £1 – £7,225 per year Nil £7,226 – £42,475 per year 12.0 £42,476 and above per year 2.0 Class 1 Employer £1 – £7,072 per year Nil £7,073 and above per year 13.8 Class 1A 13.8 Class 2 £2.50 per week Small earnings exception limit £5,315 Class 4 £1 – £7,225 per year Nil £7,226 – £42,475 per year 9.0 £42,476 and above per year 2.0

RATES OF INTEREST Official rate of interest: 4.0% Rate of interest on underpaid tax: 3.0% Rate of interest on overpaid tax: 0.5%


KAPLAN PUBLISHING 6

ALL FIVE questions are compulsory and MUST be attempted

1 Lucinda and Max are a married couple. Lucinda is employed by Cartoons Ltd as a graphic designer, and her husband Max has been a self employed professional photographer for a number of years.

The following information is available for the tax year 2011/12:

Lucinda

(1) During the tax year Lucinda was paid a gross annual salary of £80,000 by Cartoons Ltd. Income tax of £43,760 was deducted from this figure under PAYE.

(2) In addition to her salary, Lucinda received two bonus payments from Cartoons Ltd during the tax year 2011/12. The first bonus of £15,000 was paid on 30 April 2011 and was in respect of the year ended 31 December 2010. Lucinda became entitled to this first bonus on 10 April 2011. The second bonus of £16,000 was paid on 31 March 2012 and was in respect of the year ended 31 December 2011. Lucinda became entitled to this second bonus on 25 March 2012.

(3) Lucinda is provided with a company motor car, with a diesel powered engine and a list price of £23,000. The motor car cost Cartoon Ltd £21,200, and it has an official CO2 emission rate of 222 g/km.

Cartoon Ltd also provides Lucinda with fuel for private journeys.

For the tax year 2012/13 Cartoon Ltd has offered Lucinda the choice of either continuing to have her company motor car, or receiving a cash payment of £1,000 per month to cover travel expenses.

Lucinda estimates that her commuting expenses for a full year would be £2,600 and she would have £5,200 of allowable business travel expenses to be funded out of the cash allowance.

(4) Cartoon Ltd has provided Lucinda with living accommodation in a company flat since 1 May 2010. The annual value of the flat is £10,450. The company purchased the flat in August 2009 for £150,000, and it was valued at £195,000 on 1 May 2010. A new kitchen costing £11,000 was put into the flat during October 2010.

For the tax year 2012/13 the company has offered Lucinda the opportunity to receive a cash payment of £2,000 a month so she can rent accommodation of her own choice rather than living in the company flat. The monthly rent she estimates she will have to pay for accommodation of a similar standard to the company flat will be £1,500 per month.

(5) Lucinda’s only other income received in 2011/12 was dividends of £10,800 received from a UK company on 23 March 2012.

Max

During the tax year 2011/12 Max’s business suffered. His tax adjusted trading profits after capital allowances were £5,000.

Fortunately Max had other sources of income during the tax year 2011/12 as follows:

(1) Max owns two properties, which are let out. Both properties are freehold houses, with the first property being let out furnished and the second property being let out unfurnished.

REVIS ION MOCK QUESTIONS

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The first property was let from 6 April 2011 to 30 September 2011 at a monthly rent of £300, payable in advance. On 30 September 2011 the tenant left owing three months’ rent which Max was unable to recover. The property was not re-let before 5 April 2012. During March 2012 Max spent £200 on maintenance of the property.

The second property was purchased on 1 May 2011, and was then let from 1 June 2011 to 5 April 2012 at a monthly rent of £500, payable in advance. For the period 1 May 2011 to 5 April 2012 Max paid loan interest of £1,000 in respect of a loan that was taken out to purchase this property, and spent £600 on advertising for tenants.

Max insured both of his rental properties at a total cost of £300 for the year ended 30 July 2011, and £400 for the year ended 30 July 2012. The insurance is payable annually in advance.

Where possible, Max claims the wear and tear allowance.

(2) Max received building society interest of £1,000 and dividends of £800. These were the actual cash amounts received.

(3) On 4 December 2011 Max won £130 on the National Lottery.

During the tax year 2011/12 Max made Gift Aid donations totalling £2,000 (gross) to Oxfam.

Required:

(a) Calculate the income tax and National Insurance contributions payable by Lucinda for the tax year 2011/12. (9 marks)

(b) Calculate the increase or decrease in Lucinda’s income tax payable for the tax year 2012/13 assuming she decides to accept the cash allowances for both the travelling and accommodation costs instead of keeping her company car and company flat.

Assume that in 2012/13 Lucinda’s salary, bonuses, tax paid under PAYE and dividends remain the same and the 2011/12 tax rates and allowances remain unchanged in 2012/13. (5 marks)

(c) Calculate which of the two options will be more beneficial for Lucinda based on her net disposable income

(i) keeping both the company car and company flat, or

(ii) taking both of the cash allowances. You should assume that taking both of the cash allowances will increase Lucinda’s annual National Insurance contributions by £616. (6 marks)

(d) Calculate the income tax payable by Max for the tax year 2011/12. (9 marks)

(e) Explain why it would be more beneficial for the couple if the Gift Aid donation had been paid by Lucinda rather than Max. (1 mark)

(Total: 30 marks)


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2 (a) Posh Yachts Ltd is a manufacturer of private yachts.

The following information is relevant for the year ended 31 December 2011:

Operating profit

The operating profit is £450,000.

The expenses that have been deducted in calculating this figure include:

£ Depreciation and amortisation of lease

Entertaining customers Entertaining employees

46,000 8,000 3,500 Gifts to customers

(pens costing £25 each displaying Posh Yachts Ltd’s name) 2,350

Gifts to customers (food hampers costing £40 each) 2,200 Leasehold property

On 1 July 2011 Posh Yachts Ltd acquired a leasehold office building that is used for business purposes. The company paid a premium of £90,000 for the grant of a fifteen-year lease.

Plant and machinery On 1 January 2011 the tax written down values of plant and machinery were as

follows: £ General pool 50,000 Expensive motor car 21,000

The following transactions took place during the year ended 31 December 2011:

Cost/(Proceeds)£

3 January 2011 Purchased machinery 12,800 20 February 2011 Purchased a computer 1,200 4 June 2011 Purchased a motor car 10,000 1 September 2011 Purchased a motor car 16,000 18 November 2011 Purchased machinery 8,300 1 December 2011 Purchased a motor car 21,000 15 December 2011 Sold a lorry (12,000)

The motor car purchased on 4 June 2011 for £10,000 has CO2 emissions of 140 grams per kilometre, is used by the factory manager and 40% of the mileage is for private journeys.

The motor car purchased on 1 September 2011 for £16,000 has CO2 emissions of 170 grams per kilometre and has no private use.

The motor car purchased on 1 December 2011 for £21,000 has CO2 emissions of 105 grams per kilometre and has no private use.

The lorry sold on 15 December 2011 for £12,000 originally cost £19,000.

Chargeable gain

Posh Yachts Ltd disposed of a surplus warehouse on 14 July 2011 and realised a chargeable gain of £16,310. It has unutilised capital losses brought forward of £2,640.


KAPLAN PUBLISHING 9

Other information

Posh Yachts Ltd has 2 subsidiary companies, and the company has always had an accounting date of 31 December.

Required:

(i) Compute Posh Yachts Ltd’s tax adjusted trading profit for the year ended 31 December 2011.

Your computation should commence with the operating profit of £450,000, and should list all of the items referred to that are relevant to the adjustment of profits, indicating by the use of zero (0) any items that do not require adjustment.

You should ignore value added tax (VAT). (11 marks)

(ii) Compute Posh Yachts Ltd’s corporation tax liability for the year ended 31 December 2011. (5 marks)

(b) Posh Yachts Ltd registered for value added tax (VAT) on 1 January 2009.

The company’s VAT returns have been submitted as follows:

Quarter ended VAT paid/ (refunded)

£

Submitted

31 March 2009 15,000 One month late 30 June 2009 21,000 One month late 30 September 2009 31,000 On time 31 December 2009 29,000 Two months late 31 March 2010 (16,500) One month late 30 June 2010 45,000 On time 30 September 2010 (12,900) On time 31 December 2010 23,900 On time 31 March 2011 18,800 On time 30 June 2011 60,000 Two months late 30 September 2011 19,600 On time 31 December 2011 22,000 One month late

Posh Yacht Ltd always pays any VAT that is due at the same time that the related return is submitted.

During February 2012 Posh Yacht Ltd discovered that a number of errors had been made when completing its VAT return for the quarter ended 31 December 2011.

As a result of these errors the company will have to make an additional payment of VAT to HM Revenue & Customs.

Required:

(i) State, giving appropriate reasons, the default surcharge consequences arising from Posh Yacht Ltd’s submission of its VAT returns for the quarter ended 31 March 2009 to the quarter ended 31 December 2011 inclusive. (7 marks)

(ii) Explain how Posh Yachts Ltd can voluntarily disclose the errors relating to the VAT return for the quarter ended 31 December 2011. (2 marks)

(Total: 25 marks)


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3 (a) Sue disposed of the following assets during the tax year 2011/12:

(1) On 15 July 2011 Sue made a gift of her entire shareholding of 12,000 £1 ordinary shares in Puzzel plc to her daughter. On that date the shares were quoted on the Stock Exchange at £9.10 – £9.18, with recorded bargains of £9.00, £9.15 and £9.22. Sue’s shareholding had been purchased on 29 April 1995 for £12,000. The shareholding is less than 1% of Puzzel plc’s issued share capital, and Sue has never been employed by Puzzel plc.

(2) On 31 December 2011 Sue sold her consulting business for £9,000,000. The only chargeable asset of her business was goodwill. At the date of disposal, the market value of the goodwill was £8,200,000 and it had nil cost.

(3) On 16 February 2012 Sue sold three acres of land for £10,000. She had originally purchased four acres of land on 17 July 2009 for £5,000. The market value of the unsold acre of land as at 16 February 2012 was £8,000. The land was never used for business purposes.

Sue has taxable income in 2011/12 of £25,000 and last year Sue sold a retail business she had owned for many years and made a capital gain of £2 million. She also made other disposals last year which utilised her annual exempt amount.

Required:

(i) List the qualifying assets and minimum ownership period for Entrepreneurs’ relief. (2 marks)

(ii) Compute Sue’s capital gains tax liability for 2011/12. (7 marks)

(iii) Calculate the reduction in capital gains tax assuming Sue had not sold her retail business last year. (1 mark)

(b) Sue is also the major shareholder of Sue Ltd a small company that offers legal advice. The following information is available for Sue Ltd for the year ended 31 March 2012:

(1) On 31 May 2011 Sue Ltd sold a freehold office for £300,000. The office had been purchased on 15 July 1992 for £158,000. The retail price index (RPI) for July 1992 was 138.8, and for May 2011 it was 234.8.

Sue Ltd purchased a replacement freehold office on 1 June 2011 for £200,000.

(2) The tax adjusted trading profits for the year ended 31 March 2012 generated by Sue Ltd were £ 180,000.

Required:

(i) State the minimum amount that must be invested in replacement qualifying business assets for the company to claim the maximum amount of rollover relief. (1 mark)

(ii) Calculate the chargeable gain arising from the disposal of the freehold office building. (3 marks)

(iii) Calculate the corporation tax liability that will be deferred if the maximum possible amount of rollover relief is claimed for the year ended 31 March 2012. (1 mark)

(Total: 15 marks)


KAPLAN PUBLISHING 11

4 Alison is a wealthy housewife and at the beginning of the tax year 2011/12 she decided to start her own business as a caterer for private parties.

In order to raise finance she decided to sell a few of antique paintings that she had collected over the past 20 years.

She advertised the sale of some of the paintings on the internet, and she sold the most precious ones through an auction house.

During 2011/12 she sold ten paintings via the internet making a total profit of £60,000 and two were sold through the auction house making a gross profit of £35,000 before deducting the auctioneer’s commission. The auction house charged 2% commission on their sales.

Alison’s only source of income or capital gains in 2011/12 is property rental income of £12,150.

Alison is unsure as to how the profits on her painting sales will be taxed. She has been told that HM Revenue and Customs could treat the profits as either trading profits or capital gains. She understands that whether or not she is treated as carrying on a trade will be determined according to the six following ‘badges of trade’:

(1) Subject matter of the transaction.

(2) Length of ownership.

(3) Frequency of similar transactions.

(4) Work done on the property.

(5) Circumstances responsible for the realisation.

(6) Motive.

Required:

(a) Briefly explain the meaning of each of the six ‘badges of trade’ listed in the question.

You are not expected to quote from decided cases. (3 marks)

(b) Explain the tax implications, if Alison is treated as carrying on a trade in respect of the disposal of the paintings.

Your answer should be supported by computations. (6 marks)

(c) Explain the tax implications if Alison is not treated as carrying on a trade in respect of the disposal of the paintings.

Your answer should be supported by computations (2 marks)

(d) State the due dates for the payment of tax assuming Alison is treated as carrying on a trade, and assuming she is not treated as carrying on a trade. (3 marks)

(e) State the due date for notifying HM Revenue and Customs of chargeability to tax on a new source of income. (1 mark)

(Total 15 marks)


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5 Mr Wealthy died in August 2011 leaving an estate worth £1,000,000. At the time of his death he had an outstanding income tax liability of £50,000, funeral expenses of £10,000 and executor’s fees of £9,500.

Mr Wealthy left his entire estate to his son Wealthy Junior, since his wife can live comfortably from her own assets and investments.

During his lifetime he made the following gifts:

January 2003: Gift to a trust for £350,000

May 2008: Gift to nephew for £100,000.

Mr Wealthy paid any IHT arising on the gift to the trust.

Required:

(a) Calculate the inheritance tax payable during Mr Wealthy’s lifetime and as a result of his death.

State the due dates of payment and who will pay the tax in each case. (11 marks)

(b) Explain the advantages of gifting assets to potential legatees during the donor’s lifetime rather than leaving assets to be distributed on death. (4 marks)

The nil rate bands for earlier years are as follows:

2002/03 £250,000

2008/09 £312,000 (15 marks)

f6 Questions d12

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