ACCA ATX ^UK Syllabus A1. Income tax - In the exam - Past Papers ^{1 / 1}

Your manager has had a meeting with Maia, a client of your firm. Extracts from the memorandum prepared by your manager following the meeting and an email from her detailing the work she requires you to do are set out below.

Extracts from the memorandum prepared by your manager – dated 3 June 2019

Maia
Maia is 63 years old and has significant personal wealth. She has taxable income of approximately £120,000 each year, much of which she is able to save. She uses her capital gains tax annual exempt amount and her inheritance tax annual exemption every year. She is resident and domiciled in the UK.

Maia has agreed to provide financial assistance to her nephew, Josh.

Josh – financial position
Josh recently left university and, on 6 April 2019, he started working for NL Ltd, an unquoted company. He earns an annual gross salary of £25,200. Since 6 April 2019, NL Ltd has provided Josh with the use of a mobile telephone (market value of £650) and a home cinema system (market value of £1,700).

On 1 June 2019, NL Ltd issued 200 £1 ordinary shares to Josh. This share issue was not made as part of an approved share scheme. Josh paid £300 for these shares, which had a market value of £2,100 at that time. The shares are not readily convertible assets and Josh is not permitted to sell them until 1 April 2023.

Josh currently receives dividend income of £420 each year. He is resident and domiciled in the UK.
Josh estimates that from 6 April 2019 he needs £2,500 per month to pay his rent and living expenses. Maia has asked us to calculate how much cash Josh will need for the tax years 2019/20 and 2020/21, over and above his post-tax income from all sources.

Providing financial assistance to Josh – alternative strategies
Maia is considering three alternative strategies to provide financial assistance to Josh.

(i) Gift of investment property on 1 July 2019
This investment property is currently worth £370,000.
Maia purchased the property for £130,000 on 1 July 2008. Since its acquisition, this property has been rented out for taxable net rental income of £1,100 per month. It is a residential building, but I do not know whether or not it has been rented out as furnished holiday accommodation.

Under this strategy, Josh would continue to rent out the property on the same basis from 1 July 2019 onwards.

(ii) Gift of shares in Far Ltd on 1 July 2019
These shares are worth £420,000. They represent the whole of Maia’s shareholding in the company and constitute 14% of the company’s issued ordinary share capital.
Maia’s father gave the shares to Maia on 1 November 2018 when they were worth £375,000. That gift resulted in a chargeable gain of £225,000 of which £140,000 was held over via a gift relief claim.

Far Ltd is an unquoted trading company. It owns chargeable non-business assets which represent 16% of its total chargeable assets.

(iii) Monthly cash gifts commencing on 1 July 2019
Maia would simply make a cash gift to Josh of £1,000 each month commencing on 1 July 2019.

Extract from the email from your manager – dated 4 June 2019

Please prepare a memorandum for the client files consisting of the work set out below.

(a) Josh – additional cash requirement
Calculate the total additional cash required by Josh, over and above his income from all sources, for the tax years 2019/20 and 2020/21, after deducting tax and national insurance contributions (NIC).

In order to prepare the calculations efficiently, you should think about how Josh’s taxable income in 2020/21 will differ from that in 2019/20. There is no need to provide any narrative explanation of your calculations.

Tax manager

Required: 
Prepare the memorandum as requested in the email from your manager. The following marks are available:

(a) Josh – additional cash requirement. (9 marks)

Dent Ltd requires advice on the after-tax cost of remuneration to be provided to a key employee.

Alina – design engineer:
– Alina will commence employment with Dent Ltd on 1 July 2019 to lead the R&D project.
– Alina’s annual salary of £80,000 is included in the budgeted staff costs figure above.
– On 1 July 2019, Dent Ltd will additionally provide Alina with the following, none of which are included in the budgeted staff costs figure above:
- a lump sum payment of £10,000 in recognition of her forthcoming employment;
- a new computer costing £1,000, of which Alina will have use, including significant private use, for the first nine months of her employment; and
- temporary living accommodation for the first six months of her employment (as detailed below).

Alina – provision of temporary living accommodation:
– Dent Ltd will rent a flat for Alina’s use from 1 July 2019 to 31 December 2019.
– Dent Ltd will pay the rental cost of £660 per month.
– The market value of the flat is currently £225,000, and its annual value is £2,800.

Required:
(c) State the income tax implications of the receipt of the lump sum payment for Alina, and calculate the after-tax cost for Dent Ltd in respect of the lump sum payment and provision of the computer and the temporary living accommodation to Alina in its year ending 30 June 2020.

Note: You should ignore VAT in this part (c). (8 marks)

Your manager has had a meeting with Wanda, a client of your firm. Extracts from the memorandum prepared by your manager following the meeting, together with an email detailing the work he requires you to do, are set out below.

Extracts from the memorandum prepared by your manager – dated 3 December 2018

Wanda has not been employed since 31 December 2012 and has not received any taxable income since that date.

Roth is employed and earns a gross salary of £90,000 per year. This salary is his only source of income. Wanda and Roth have not made any chargeable disposals for the purposes of capital gains tax and will not make any in the tax year 2019/20.

Wanda’s inheritances and gift from her parents
On 1 February 2013, Wanda’s father, Pavel, died. He left £160,000 to Wanda and the residue of his estate to his wife, Lucy (Wanda’s mother). The residue of Pavel’s estate was valued at £720,000 and included the family home.

Pavel had not made any gifts during his life.
On 1 April 2013, Lucy gave Wanda £180,000 in cash. This was the only lifetime gift Lucy made.

On 1 November 2018, Lucy died. Wanda inherited the whole of Lucy’s estate, which was valued at £850,000. The estate consisted of the family home (valued at £340,000), together with furniture, cash and quoted shares (valued in total at £510,000).

Wanda’s new business – KS
Wanda intends to begin trading on 1 April 2019. The business will be operated either:
– by Wanda and Roth in partnership; or
– by a limited company owned 70% by Wanda and 30% by Roth.
The turnover of the business for the year ending 31 March 2020 is expected to be £48,000.

Budgeted profitability of KS
In its first year of trading the business will make either a small profit or, possibly, a loss (of no more than £20,000).

However, once the business is fully operational, it is budgeted to make a tax adjusted trading profit of £100,000 per year. This figure is before deducting any salaries paid to Wanda and Roth.

The manner in which the profits will be extracted from the business depends on whether the business is operated as a partnership or as a limited company. The two alternatives are summarised below.

In addition to advising her on the tax cost of the alternative business structures, Wanda has asked us to advise her on the relief available in respect of the possible trading loss in the first year of trading and on the choice of 31 March as the accounting date where the business is operated as a partnership.

Income tax refund
Wanda has received an unexpected refund of income tax from HM Revenue and Customs (HMRC) in respect of the tax year 2011/12.

Email from your manager – dated 4 December 2018

Please prepare the following notes and calculations for use in a meeting with Wanda.

(c) Choice of business structure

(i) Income tax and corporation tax payable

For a single tax year, calculate the income tax payable by Roth and any corporation tax payable:

– if the business is operated as a partnership; and
– if the business is operated as a company.

Prepare a summary of the total tax payable if Wanda’s income tax liabilities are:

Business operated: 
as a partnership    £14,940
as a company       £9,025

You should assume that:
– the business is fully operational and makes a tax adjusted trading profit of £100,000. This figure is before deducting any salaries paid to Wanda and Roth.

– profits are extracted from the business in accordance with the summary in my memorandum.

– Roth continues to earn his existing gross salary of £90,000 per year.

When carrying out this work, you should ignore any national insurance contribution liabilities and any relief available in respect of losses.

(ii) Other matters

– Compare the tax relief available to Wanda and Roth in respect of a trading loss arising in the first year of trading, depending on whether the business is operated as a partnership or as a company.

– On the assumption that the business is always profitable and is operated as a partnership, explain TWO tax advantages of having an accounting date of 30 June as opposed to 31 March.

Tax manager

Required:
Prepare the notes for use in a meeting with Wanda as requested in the email from your manager. The following marks are available:

(ii) Other matters. (5 marks)

Jordi is a director and shareholder of Traiste Ltd. He has asked for your advice in the payment implications for Traiste Ltd of alternative ways for Jordi to extract profits from the company.

Traiste Ltd:
– Is a UK resident unquoted trading company.
– Has two shareholders, Jordi and Kat, who each own 50% of the 1,000 £1 shares in issue.

Kat:
– Is resident and domiciled in the UK.
– Is 58 years old.
– Is a director and shareholder of Traiste Ltd.
– Will receive employment income of £34,000 from Traiste Ltd and dividends from other UK companies of £4,000 in the tax year 2017/18.
– Has already used her annual exempt amount for capital gains tax purposes for the tax year 2017/18.

Kat – proposed sale of shares:
– Kat subscribed for her 500 shares in Traiste Ltd at par on the incorporation of the company on 1 March 2013.
– She wishes to sell all of her shares before the end of 2017, and retire from the company.
– Kat’s brother, Jordi, has offered to buy these shares for £47 each. He is not prepared to sign any tax election in
relation to this offer.
– Alternatively, Traiste Ltd will buy these shares for their market value of £52 each.

Jordi:
– Is resident and domiciled in the UK.
– Is 53 years old.
– Is a director and shareholder of Traiste Ltd.
– Is paid a gross annual salary of £45,000 by Traiste Ltd.
– Wishes to extract an additional cash sum of £30,000, net of all taxes, from Traiste Ltd, to be paid on 31 March 2018.
– The additional sum will be extracted as either a bonus or a dividend.
– Will not receive any other taxable income in the tax year 2017/18.

Required:
(c) Explain, with supporting calculations, the amount of any payments to be made by Traiste Ltd to HM Revenue and Customs (HMRC) in respect of each of the two ways for Jordi to extract the additional £30,000 cash from the company, and state the due date of any such tax payments. (5 marks)

Your manager has received schedules of information from Ray and Shanira in connection with their personal tax affairs. These schedules and an extract from an email from your manager are set out below.

Schedule of information from Ray — dated 8 June 2016
I was born in 1958. I am resident and domiciled in the UK. Shanira and I are getting married on 17 September 2016.

Ray — unincorporated business
I was employed part-time until 31 March 2016. The annual salary in respect of my part-time job was £15,000. I receive bank interest (net) of £3,000 and cash dividends of £3,420 each year. The whole of my income tax liability has always been settled via tax deducted at source. I began trading on 1 June 2016. I purchased a computer on 3 June 2016, which is used both in the business and personally. I am not registered for the purposes of value added tax (VAT). 
You have advised me that my taxable trading profits have been calculated using the accruals basis, rather than the cash basis, and the budgeted taxable trading profits of the business are:

You have already informed me that my taxable trading profit based on these budgeted profits, and my income tax liability in respect of all of my income will be:

What tax payments will I be required to make between 1 July 2016 and 30 September 2018?

Extract from an email from your manager — dated 9 June 2016 
Please prepare a memorandum for the client files which addresses the following issues:

(a) Ray — unincorporated business
(i) Calculations of the income tax and national insurance contribution payments to be made between 1 July 2016 and 30 September 2018 and the dates on which they will be payable. Ray has told me that he does not intend to withdraw all of the profits of the business. Instead, he will either increase his inventory levels or acquire additional equipment, and he has asked how this will affect his taxable income.

Tax manager

Required: Prepare the memorandum as requested in the email from your manager. The following marks are available: 
(a) Ray — unincorporated business. (i) Income tax and national insurance contribution payments, and the level of his taxable income. (11 marks)

Your manager has had a meeting with Jonny who is establishing a new business. An extract from an email from your manager, a schedule and a computation are set out below.

Extract from the email from your manager
Jonny was born in 1968. His new business will begin trading on 1 November 2015. Jonny will use an inheritance he received following the death of his mother to finance this new venture. We have been asked to advise Jonny on his business and his inheritance. Some of the work has already been done; I want you to complete it.

Please prepare a memorandum for Jonny's client file addressing the following issues: 
(a) Unincorporated business
I attach a schedule which sets out Jonny's recent employment income and his plans for the new business. I think you will find it useful to read the schedule before you go through the rest of this email.

You should assume that Jonny does not have any other sources of income or any taxable gains in any of the relevant tax years.
(i) Jonny's post-tax income
Jonny has asked for an approximation of his post-tax income position for the first two trading periods. I want you to prepare calculations in order to complete the following table, assuming that any available trading loss reliefs will be claimed in the most beneficial manner. 
You should include explanations of the options available to relieve the loss, clearly identifying the method which will maximise the tax saved (you do not need to consider carrying the loss forward).

Table to be completed

Include a brief explanation as to why these calculations are only an approximation of Jonny's budgeted post-tax income.

Tax manager

Schedule — Employment income and plans for the new business 
Jonny's income

Jonny worked full-time for many years until 30 June 2013 earning a salary of £6,000 per calendar month. From 1 July 2013, he worked part-time earning a salary of £2,000 per calendar month until he ceased employment on 31 March 2015. 
Two budgets have been prepared for Jonny's business based on customer demand being either strong or weak. You should assume that no tax adjustments are required to Jonny's budgeted profit/loss figures for the first two trading periods. 
For strong demand, the taxable trading profit for the first two tax years has been computed; these figures are correct and you do not need to check them. You will, however, need to calculate the equivalent figures for weak demand.

Required: Prepare the memorandum as requested in the email from your manager. The following marks are available:
 (a) Unincorporated business:
 (i) Jonny's post-tax income. (15 marks)

Charlotte is the owner of Bamburg Ltd. She requires advice on the alternative methods by which she can extract additional funds from the company.

Charlotte:
– Is UK resident and UK domiciled.
– Owns 100% of the ordinary share capital of Bamburg Ltd.
– Earns an annual salary from Bamburg Ltd of £63,000 and has no other income.
– Has two ideas to generate additional cash in Bamburg Ltd.
– Wants to receive an additional £14,000 (after the payment of all personal taxes) from Bamburg Ltd on 30 June 2014.

Alternative methods of extracting an additional £14,000 from Bamburg Ltd:
– Bamburg Ltd to pay Charlotte a bonus.
– Bamburg Ltd to pay Charlotte a dividend.

Required:
(i) Prepare calculations to determine whether it would be cheaper for Bamburg Ltd to pay Charlotte a bonus or a dividend, such that she would receive £14,000 after the payment of all personal taxes. (5 marks)

Your firm has been asked to advise two unrelated clients, Monisha and Horner. The advice relates to furnished holiday accommodation, tax planning for a married couple, and the personal service company (IR 35) rules.

(a) Monisha:
– Is married to Asmat.
– Earns a salary of £80,000 per year and realises chargeable gains of £6,000 per year.
– Owns a UK investment property, which is let to short-term tenants.

Asmat:
– Looks after the couple’s children and has no income or chargeable gains.
– Expects to return to work on 6 April 2019 on an annual salary of £18,000.

The UK investment property owned by Monisha:
– The property cost £270,000 and is currently worth £300,000.
– The letting does not qualify as a commercial letting of furnished holiday accommodation.
– Annual income and expenditure

– Monisha claims the wear and tear allowance in respect of this property.
– The property will be sold on 5 April 2020 and is expected to create a chargeable gain of £100,000.

Proposals to reduce the couple’s total tax liability:
– Monisha will give a 20% interest in the investment property to Asmat on 1 April 2014.
– The couple will ensure that, from 6 April 2014, the letting of the investment property will qualify as a commercial letting of furnished holiday accommodation.
– From the tax year 2014/15 onwards, Monisha will claim annual capital allowances equal to the current annual wear and tear allowance.

Required:
(ii) Calculate the total tax saving in the six tax years 2014/15 to 2019/20 if ALL of the proposals to reduce the couple’s tax liabilities are carried out. In respect of the second proposal, you should assume that the letting will qualify as a commercial letting of furnished holiday accommodation for the whole of the period of joint ownership and that all beneficial reliefs are claimed.

Note: You should ignore inheritance tax. (10 marks)