ACCA ATX ^UK Syllabus A1. Income tax - Relief for trading losses - Past Papers ^{7 / 8}

Rod has requested advice in the potential income tax relief available in respect of his share of a trading loss of a partnership which he has recently joined.

Rod:
– Is resident and domiciled in the UK.
– Was employed for many years by Lumba plc, before taking early retirement on 30 June 2018.
– Joined the Thora Partnership on 1 December 2018.
– Made no disposals for capital gains tax in the tax year 2018/19, other than the sale of his shares in Lumba plc (as detailed below).

Rod's losses calculated in b(i) are as follows:
18/19 Loss:   (£9,667)
19/20 Loss:   (£19,333)

Required:
(ii) State how Rod is able to relieve the trading loss(es) calculated in (b)(i) above as early as possible, and explain, with supporting calculations, the total amount of income tax saved if Rod follows this strategy.

Note: You should assume the tax rates and allowances for the tax year 2018/19 apply to all tax years. (8 marks)

Your client, Jessica, has requested advice in the options available to relieve her share of a partnership trading loss.

Jessica:
– Is resident and domiciled in the UK.
– Was employed by Berens Ltd up to 31 March 2018, when she was made redundant.
– Will become a partner in the Langley Partnership on 1 July 2018.
– Has never made any disposals for capital gains tax (CGT) purposes.

Jessica – income from Berens Ltd:
– Jessica received an annual salary from Berens Ltd of £145,000 each year from the tax year 2015/16.
– From 6 April 2017, Jessica was provided with a new company laptop computer, which cost Berens Ltd £850.
Jessica had significant private use of this laptop computer.

Jessica – other income:
– Prior to the tax year 2017/18 Jessica had no other source of income.
– Starting from the tax year 2017/18, Jessica receives rental income of £6,000 each tax year.

Jessica – redundancy package from Berens Ltd:
– The package, received on 31 March 2018, included a statutory redundancy payment of £18,000 and an ex‐gratia payment of £32,000.
– As part of the package, Berens Ltd also allowed Jessica to keep the laptop computer, which had a market value of £540 on 31 March 2018. Note: In 17/18 use benefit :£170 and taxable redundancy payments of £20,680.

The Langley Partnership:
– Prior to 1 July 2018, there were two partners in the partnership – Issa and Finn.
– From 1 July 2018, the profit sharing ratio will be: Issa 20%, Finn 40%, and Jessica 40%.
– The budgeted tax-adjusted trading (loss)/profit of the partnership is:
– Year ending 31 March 2019 – (£160,000)

Required:
(b) (i)
Advise Jessica of the options available to her to relieve her share of the Langley Partnership loss for the year ending 31 March 2019, on the assumption that she does not wish to carry any of her share of the loss forward. (3 marks)

(b) (ii) Determine, by reference to the amount of income tax saved in each case, which of the available loss relief options (as identified in (i) above) will result in the highest overall income tax saving for Jessica.
(7 marks)

Meg is an unincorporated sole trader.

Meg:
– Is 60 years old and is married to Laurie.
– Owns an unincorporated sole trader business, MT Travel.
– Has rental income of £8,600 each year in addition to any profits from MT Travel.

MT Travel:
– Was set up by Meg on 1 January 2012.
– Has had accounts prepared to 31 December annually.
– Generated overlap profits of £7,400 on commencement.
– Meg will change its accounting date to 31 March by preparing accounts for the 15 months ending 31 March 2018.

MT Travel – recent and forecast tax-adjusted trading profits:

MT Travel – the future:
– From 1 April 2018, Meg’s husband, Laurie, will start to participate in the business.
– Meg will either:
(1) employ Laurie part-time, paying him an annual salary of £12,000, the commercial rate for the work he will
perform; or
(2) admit Laurie into the business as a partner, sharing profits and losses in the ratio 75% to Meg, and 25% to Laurie.
– The business is expected to generate a tax-adjusted trading loss in the tax year 2018/19 of £20,000, before making any payment to Laurie.
– The business is expected to become profitable again in the tax year 2019/20 and thereafter, but profits are not expected to exceed £30,000 per year for the foreseeable future.

Laurie:
– Is 63 years old.
– Was employed for many years by Hagg Ltd, earning gross annual remuneration of £60,000, until 31 March 2017.
– Has received annual dividends of £18,000 for many years. This is currently his only source of taxable income.

Required:
(b) (i) Calculate the allowable trading loss available to each of Meg and Laurie for the tax year 2018/19 if Laurie becomes an employee, or, alternatively, a partner in MT Travel on 1 April 2018. (3 marks)

(ii) Advise Meg and Laurie of the alternative ways in which their respective trading losses as calculated in (b)(i) could be used depending on whether Laurie is taken on as an employee or as a partner, and state the rate at which income tax would be saved in each case. (8 marks)

Your manager has received a letter from Jodie in connection with her proposed emigration from the UK. Extracts from the letter and from an email from your manager are set out below.

Extract from the letter from Jodie
My unincorporated business  

I prepared accounts to 31 December every year until 31 December 2014. I then ceased trading on 31 May 2015. I made a tax adjusted trading loss in my final period of trading of £18,000. I was unable to sell my business as a going concern due to the decline in its profitability. Accordingly, on 31 May 2015 I sold my business premises for £190,000. I paid £135,000 for these premises on 1 June 2002. I also sold various items of computer equipment, which I had used in my business, for a total of £2,000. This equipment cost me a total of £5,000. I retained the remaining inventory, valued at £3,500, for my own personal use. 
My taxable income for the last five tax years is set out below. There is no property income in the 2015/16 tax year because I sold my rental property in May 2014.

--- Jodie has overlap profits from the commencement of her business of £6,500.

Extract from an email from your manager 
Additional information

(b) Relief available in respect of the trading loss

Calculate the income tax relief which Jodie would obtain if she were to claim terminal loss relief in respect of her trading loss. You should not consider any other ways in which the loss could be relieved. There is no need to calculate Jodie's tax liabilities for each of the years concerned; just calculate the tax which will be saved due to the offset of the loss and explain how you have determined this figure. .

Tax manager

Required: Prepare the paragraphs for inclusion in a letter from your manager to Jodie as requested in the email from your manager.

The following marks are available: 
(b) Relief available in respect of the trading loss. (8 marks)

Spike requires advice on the loss relief available following the cessation of his business

Spike:
– Ceased to trade and sold his unincorporated business to an unrelated individual on 30 September 2012.

Spike’s unincorporated business:
– There are overlap profits from the commencement of the business of £8,300.
– The sale of the business resulted in net capital gains of £78,000.
– The tax adjusted profits/(loss) of the business have been:

Required:
(a) (i) Calculate the trading loss for the tax year 2012/13, and the terminal loss, on the cessation of Spike’s unincorporated business; (4 marks)

Spike requires advice on the loss relief available following the cessation of his business and on the tax implications
of share options and a relocation payment provided by his new employer.

Spike:
– Ceased to trade and sold his unincorporated business to an unrelated individual on 30 September 2012.
– Sold his house, ‘Sea View’, on 1 March 2013 for £125,000 more than he had paid for it.
– Began working for Set Ltd on 1 May 2013.
– Has no income or capital gains other than the amounts referred to in the information below.

Spike’s unincorporated business:
– There are overlap profits from the commencement of the business of £8,300.
– The sale of the business resulted in net capital gains of £78,000.
– The tax adjusted profits/(loss) of the business have been:

Remuneration from Set Ltd:
– Spike is being paid a salary of £65,000 per year.
– On 1 May 2013, Spike was granted an option to purchase ordinary shares in Set Ltd.
– On 1 July 2013, Set Ltd will pay Spike a relocation payment of £33,500.

The option to purchase ordinary shares in Set Ltd:
– Spike paid £3,500 for an option to purchase 7,000 ordinary shares, representing a 3·5% shareholding.
– The option is exercisable on 1 May 2017 at £4·00 per share.
– An ordinary share in Set Ltd was worth £5·00 on 1 May 2013 and is expected to be worth £8·00 on 1 May 2017.
– Set Ltd does not have any HM Revenue and Customs approved share option schemes.

The relocation payment of £33,500:
– Spike sold ‘Sea View’, and purchased a new house, in order to live near the premises of Set Ltd.
– £22,000 of the payment is to compensate Spike for having to sell his house at short notice at a low price.
– £11,500 of the payment is in respect of the costs incurred by Spike in relation to moving house.

Required:
(a) (ii) Explain the reliefs available in respect of the losses calculated in part (i) and quantify the potential tax savings for each of them. (10 marks)