UNIVERSITY OF CENTRAL LANCASHIRE



UNIVERSITY OF CENTRAL LANCASHIRE

LANCASHIRE SCHOOL OF BUSINESS

DIVISION OF ACCOUNTING & FINANCE

2012-13

STUDENT No:

|MODULE CODE: |AC3600 |

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|MODULE TITLE: |Taxation: Theory and Practice |

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|MODULE TUTOR: |David Massey |

|Instructions to Candidates |

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|The Question in Section A is compulsory |

|Answer TWO Questions from Section B |

|Answer ONE Question from Section C |

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|Calculations and workings need only be made to the nearest £ |

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|All apportionments should be made to the nearest month |

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|You will require a copy of Bloomsbury’s Tax Rates and Tables 2012/13 –Finance Act Edition. Copies are available from the |

|invigilators. |

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|You may bring in your own copy. The pages of your book may be tabbed. The pages may contain notes, highlighting and underlining; |

|but this does NOT include anything not written directly on to those pages. |

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|Any machine (organiser, calculator, electronic dictionary, mobile phone, pager, etc) with a memory and/or communication |

|capabilities may not be used in this examination |

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|This examination paper must be handed in with your answer booklet |

|DATE: |Monday, 29 April 2013 |

|TIME: |12:50 pm to 4:00 pm |

|DURATION: |3 HOURS plus TEN minutes reading time |

|VENUE: |Vernon 011 |

SECTION A

The question in this Section is compulsory and must be attempted

Question 1 (Personal Tax)

Elizabeth and William Darcy are a married couple. They have three children, aged 8, 10 and 13.

William

William is 36 years old and has worked part-time as a barista at Megabucks Coffee for a number of years. Throughout 2012-13 he earned £300 a week. He is supplied with a uniform but he has to take it home to wash it. He has never claimed any expenses in respect of this. William is not a member of any pension schemes.

William takes primary responsibility for looking after the children. He receives Child Benefit of £20.30 a week for the eldest child and £13.40 for each of the younger children.

During 2012-13, William disposed of an antique painting that he had inherited from his grandmother many years ago. The painting was valued at £10,000 at the time his grandmother died. It was sold at auction for £30,000. The auctioneer’s fees were 10% of the sale price. He immediately gave half the proceeds to Elizabeth so she could buy new equipment for her business.

Elizabeth

Elizabeth is 34 years old has been self-employed for many years. She draws up her accounts to 30 April each year.

Her taxable profits for the two latest years are:

• 12 months to 30 April 2012 £57,000

• 12 months to 30 April 2013 £62,000

She makes net pension contributions of £240 a month (after deduction of tax) and has a standing order of £10 a month to the Royal National Lifeboat Institution (RNLI) which is a registered charity. Elizabeth makes these donations under the gift aid scheme. She made all these payments throughout 2012-13 and expects to do the same throughout 2013-14

REQUIRED

William

a) Calculate the weekly amount of Class 1 National Insurance Contributions payable in respect of William’s wages during 2012-13

i. by William himself, and

ii. by Megabucks Coffee

(4 marks)

b) State the amount of the deduction that William can claim for his laundry expenses and the earliest year for which he could claim this if he submitted his claim to HMRC to-day.

(2 marks)

c) Calculate William’s Income Tax liability for 2012-13 (4 marks)

d) Calculate William’s Capital Gains Tax liability for 2012-13 (4 marks)

e) Explain what William and Elizabeth could have done to avoid any Capital Gains Tax liability on the sale of the painting.

(2 marks)

Elizabeth

f) Calculate Elizabeth’s Income Tax and National Insurance liabilities for 2012-13

(6 marks)

g) High Income Child Benefit Charge (HICBC)

i. Explain why Elizabeth has to pay the HICBC even though William receives the Child Benefit

ii. Calculate the total Child Benefit that William will receive in 2013-14

iii. Estimate Elizabeth’s Adjusted Net Income for 2013-14

iv. Calculate the HICBC that Elizabeth will have to pay for 2013-14

v. List TWO other situations where you would need to calculate Adjusted Net Income

(8 marks)

(Total 30 marks)

SECTION B

Answer TWO questions from this section

Question 2 (Property Taxes)

This question is based on the Estate Agent’s particulars that you will find in a separate answer booklet on your desk. Please write your answer to this question in that booklet.

The property is 28 Market St, Preston, PR1 2AR. These are retail premises with planning consent to convert them to a café. The current owners of the property are seeking to lease it.

Megabucks (UK) PLC owns a chain of coffee shops and is looking to acquire a branch in Preston. These premises are ideal for its needs. It would cost the company £20,000 (exclusive of VAT) to convert the property for use as a café. It would incur legal fees of £2,000 (exclusive of VAT) if it were to lease the premises.

REQUIRED

a) Calculate the Business Rates that would have been payable by the occupier for the year 2012/13.

(2 marks)

b) Supplies of land (which includes property sales and rents) are normally exempt from VAT but the owner of the property has elected to waive the exemption (commonly known as “option-to-tax”).

REQUIRED

i. Explain why a property owner would exercise the option to tax when it means its tenants will have to pay a higher, VAT-inclusive, rent.

ii. Calculate the amount of VAT that Megabucks (UK) PLC would have to pay on each quarterly payment of rent, if it took the property on the terms advertised in the particulars.

iii. Explain why most of Megabucks (UK) PLC sales will be subject to VAT at the standard rate even though “Food” is the first Group of zero-rated supplies set out in Schedule 8, VATA 1994.

(6 marks)

c) Calculate the Stamp Duty Land Tax (SDLT) that Megabucks (UK) PLC would have to pay if, on 1 May 2013, it took a lease on the property for the term and at the rent advertised by the Estate Agents.

(The temporal discount rate set by the Treasury is 3.5%)

(7 marks)

d) Calculate the Chargeable Gain that will arise if Megabucks (UK) PLC assigns the lease for £30,000 on 30 April 2017, incurring legal fees of £1,000 (excluding VAT).

You should assume that the Retail Prices Index is 255.2 for May 2013 and 300.0 for April 2017; and that the property was converted into a café as soon as the lease was granted.

(10 marks)

(Total: 25 marks)

Question 3 (Groups of Companies)

Adelphi PLC is the parent company of a group of companies.

You have been newly appointed as the tax manager of Chandler Ltd, one of the subsidiary companies. You have just finalised Chandler Ltd’s Corporation Tax computations for the year to 31 December 2012. Its taxable profits for the year are £600,000.

You have been provided with the following information:

1) Adelphi PLC owns 75% of the ordinary share capital Brooke Ltd and 100% of the ordinary share capital of Greenbank Ltd

2) Brooke Ltd owns 80% of the ordinary share capital of Chandler Ltd

3) Chandler Ltd owns 75% of the ordinary share capital of Darwin Ltd

4) Darwin Ltd owns 75% of the ordinary share capital of Edward Ltd

5) On 1 June 2012 Brooke Ltd acquired 90% of the ordinary share capital of Foster Ltd.

6) All companies prepare accounts to 31 December each year.

7) Your predecessor has underestimated Chandler Ltd’s taxable profits for the year to 31 December 2012 and the company has paid 4 instalments of Corporation Tax of £25,000 each. It paid all the instalments on the due date.

8) Chandler Ltd has unrelieved capital losses of £30,000

REQUIRED

a) Define “ordinary share capital” for the purposes of the Taxes Acts and explain why this matters for the purposes of group relief.

(3 marks)

b) Draw a diagram of the group of companies headed by Adelphi PLC, incorporating all the information regarding the structure of the Group that would be relevant to you when considering the taxation of your company in relation to the Group. (2 marks)

c) Loss relief group

i. State which figures are missing from the definition of a loss relief group :

Section 152, CTA 2009

“Two companies are members of the same group of companies if—

(a) one is the _____________subsidiary of the other, or

(b) both are _____________ subsidiaries of a third company”

ii. List the companies which could surrender any losses to Chandler Ltd.

iii. What is the time limit for surrendering losses for the accounting period ending 31 December 2012

(6 marks)

d) i. Define a capital gains group

ii. List the companies which are in the same capital gains group as Chandler Ltd

iii. State the simplest way in which the Group can make use of the capital losses in Chandler Ltd if there are capital gains elsewhere in the Group

(5 marks)

e) Corporation Tax payments

i. Explain why Chandler Ltd has to pay Corporation Tax at the Main Rate and also pay that tax in instalments even though its profits are less than £1,500,000.

ii. Calculate Chandler Ltd’s Corporation Tax liability for the accounting period to 31 December 2012

iii. Calculate the interest that Chandler Ltd will have accrued if the company pays its outstanding liabilities on 30 April 2013. (You do not need to work this out on a daily basis; you may treat any part of a month as being ½ a month.)

iv. State which group companies could surrender any overpayments of Corporation Tax to Chandler Ltd and explain why this would be better for the Group than Chandler Ltd paying its own tax and the other company getting a repayment.

(9 marks)

(Total 25 marks)

Question 4 (Capital Gains Tax and Inheritance Tax)

Miss Ruth Jones is 58 years old. She is a spinster and has never been married or in a civil partnership.

Miss Jones pays income tax at the additional rate.

Miss Jones owns 800 ordinary £1 shares in Greenbank Property Ltd, a property investment company. The company’s total issued share capital is 1,000 ordinary £1 shares. The other 200 shares are held by unconnected individuals.

Miss Jones acquired her shares at the following times and prices:

• May 1993 300 shares at a total cost of £ 200,000

• April 2000 500 shares at a total cost of £ 300,000

Miss Jones gave half of her holding of shares to her sister, Mrs Evans, as a birthday present on 31 December 2012.

You have received a report about the Company prepared by a professional valuer. The Report advises that, on 31 December 2012, the value of the net assets of the whole company was £2,000,000. The report also advises that, in valuing a shareholding in this Company, the following discounts from net assets are appropriate:

|Shareholding |Discount from net assets |

|Up to 10% |85% |

|10.1% to 25% |80% |

|25.1% to 49.9% |60% |

|50% |25% |

|50.1% to 74.9% |15% |

|75% to 99.9% |5% |

|100% |Nil |

REQUIRED

a) List FOUR tax reliefs you would have to consider if:

• Miss Jones had previously been married, or

• Greenbank Property Ltd had been a property construction company rather than an investment company

(2 marks)

b) Calculate the value of a share in Greenbank Property Ltd, where the share forms part of a:

i. 100% holding

ii. 80% holding

iii. 40% holding (4 marks)

c) Capital Gains Tax

i. Calculate the chargeable gain arising on the gift of 400 shares on 31 December 2012.

ii. Calculate the Capital Gains Tax that Miss Jones will have to pay on the gain.

(Assume that she made no other chargeable disposals in this year and has no losses to bring forward.)

iii. State the date by which the Capital Gains Tax must be paid.

(7 marks)

d) Inheritance Tax

i. Calculate the value of the Potentially Exempt Transfer made by Miss Jones when she gifted the shares to her sister.

ii. State how long Miss Jones must survive to ensure that this transfer does not become a Chargeable Transfer

iii. Calculate the Inheritance Tax payable in respect of the gift if Miss Jones were to die on 10 March 2017.

(Assume Miss Jones has made no other gifts and that all rates & thresholds remain as they were at the time of the original gift.)

iv. State the dates by which the:

• Inheritance Tax due on the gift should be paid

• relevant accounts must be delivered to HMRC

v. Calculate the interest that Mrs Evans would have to pay if she submitted the account to HMRC on the final due date and paid the Inheritance Tax at the same time.

(12 marks)

(Total 25 marks)

Question 5 (Cars)

Wayne Hawkins is the Managing Director of Megabucks (UK) PLC. He joined the company as CEO on 6 April 2012. Wayne has a salary of £200,000 a year. He has given in his notice and will leave the Company on 6 May 2013 to become the Vice-Chancellor of Lancashire’s leading university where he will be paid £270,000 a year.

Megabucks (UK) PLC has provided Wayne with a car throughout his employment with them. The car is a BMW 3 Series Convertible 335i. It has a petrol engine and has CO2 emissions of 205g per kilometre. The manufacturer’s list price for the standard car is £45,340. The car was fitted with an optional entertainment system which cost £2,000.

Megabucks (UK) PLC makes up its accounts to 5 April each year. It makes taxable profits of at least £3 million every year. The Company runs a chain of coffee shops. It does not make any supplies that are exempt from VAT.

The Company leases the car for £700 (plus VAT) a month. This covers all the costs of running the car, except for fuel which Wayne pays for in full himself.

You should assume that the National Insurance rates and thresholds are the same for 2013-14 as they were for 2012-13. For other taxes you can assume that the rates announced in last year’s Budget (as noted in the Bloomsbury Tax Rates and Tables) will apply.

REQUIRED

For both of the years to 5 April 2013 and 5 April 2014:

a) Calculate the income tax that Wayne will have to pay in respect of the car benefit.

(6 marks)

b) Calculate the amount of National Insurance Contributions that the company will have to pay in respect of the benefit and state the date(s) by which this must be paid.

(4 marks)

c) Calculate the net cost to the Company of providing the car, taking account of all of the following taxes and contributions:

• National Insurance contributions

• VAT payable

• Any input VAT recoverable

• Corporation Tax (10 marks)

d) Calculate the capital allowances that the Company could have claimed for the two accounting periods if, instead of leasing the car, it had bought it for £40,000 (inclusive of VAT) in April 2012 and sells it to a car dealer for £20,000 when Wayne leaves.

(5 marks)

(Total 25 Marks)

SECTION C

Answer ONE question from this section

Question 6 (Tax Compliance)

a) Revenue authorities often distinguish between “acceptable tax planning”, “tax avoidance” and “tax evasion”.

Describe the difference between each of these three concepts, and give one example of each.

(6 marks)

b) A friend comes to you and explains that he sold a property in 2010. He estimates that he made a profit of about £50,000. The property was registered under a false name and was located in Iraq. Iraq is a Category 3 territory.

He failed to include details of this disposal on his self-assessment tax return. The tax return did include details of share sales. He paid Capital Gains Tax at 28% on those gains.

HMRC have opened an enquiry into his most recent tax return and have started asking questions about his business profits. They have not asked about the property but he fears that they will find out about it once they see his records.

i. Estimate the range of penalties HMRC would seek to charge on any Capital Gains Tax that might be due in respect of the property disposal.

ii. Explain what action your friend can take to minimise any penalties

iii. List FOUR questions you could ask to obtain relevant information that might help you find ways of minimising his liabilities

(14 marks)

(Total 20 marks)

Question 7 (Employment and Self-Employment)

Megabucks (UK) PLC is considering exploiting its brand by setting up mobile coffee outlets similar to the Caffeine Rush TM vans which can be seen on Campus.

It wants these to outlets to be run by self-employed franchisees rather than employees.

a) List THREE advantages to Megabucks (UK) PLC of recruiting baristas on a self-employed basis rather than taking them on as employees

(6 marks)

b) Even if Megabucks (UK) PLC and the barista assert that there is no employment relationship between them, HMRC may still argue that the barista was in fact an employee.

Describe the sort of behaviour by either the barista or Megabucks (UK) PLC that might lead to HMRC being able to win that argument.

(6 marks)

c) Waiters and waitresses may receive tips from customers.

Explain the Income Tax, National Insurance, and VAT position in each of the following cases:

i. the employees take the tips direct from the customer and each employee keeps the tips they are given

ii. the employees pool their tips and the Head Waiter shares them out amongst all staff including those working in the kitchen.

iii. the employer introduces a service charge of 15% which customers pay along with the bill. Half of the service charge is kept by the employer and the other half is paid out to the staff every Sunday along with their normal wages. The amount they receive is based on the number of hours they have worked during that week.

(8 marks)

(Total 20 marks)

Question 8 (Accounting Profits and Taxable Profits)

The following page contains extracts from the notes to the accounts of Starbucks (UK) Ltd for the year to 2 October 2011.

Refer to these extracts when answering the questions below.

a) Leases

i. Explain why the notes are incorrect when they refer to “Premiums paid to former tenants”.

ii. Describe the circumstances in which a deduction can be claimed for payments made for the grant of a lease and explain how the relief is calculated

(6 marks)

b) Capital allowances

Explain why the adjustment for the “Effects of depreciation in excess of capital allowances” is so large.

(10 marks)

c) Expenses not deductible for tax purposes

List the non-allowable expenses that will have been incurred by Starbucks (UK) Ltd that are most likely to account for this substantial adjustment.

(4 marks)

(Total 20 marks)

Accounting Policies

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Tax charge/(credit) on loss on ordinary activities

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