TAXATION (Tax Law) exam

 

 

 

 

 

 

 

SCHOOL OF MANAGEMENT AND LANGUAGES

 

Accountancy and Finance

 

 

TAXATION (Tax Law)

 

Course Code: C39TA

 

 

 

2014/15 updated to 2019/20

 

 

Duration – THREE hours

 

INSTRUCTIONS

 

All questions are Compulsory

 

Section A:  Personal tax; Income Tax                          (30 marks)
Section B:  Miscellaneous shorter questions             (40 marks)
Section C:  Trading income and Corporation Tax     (30 marks)

 

Total: 100 marks

 

 

 

   

 

 

 

 

 

 

 

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SUMMARY OF TAX DATA 2019/20

 

Income Tax

 

 

 

   

 

 

 
Starting rate   0% Savings only  £5,000
Basic rate   20% Limit £37,500
Higher rate   40% Limit                  £150,000

Additional rate                                        45%

Dividend income taxed at 7.5% basic rate;  32.5%  higher rate;                                                                                                                                                 38.1                                                                             % additional rate                                                    

Personal allowance:                                                                                                       £12,500

 

Married couple’s allowance:                           

Born before 6 April 1935                                                            £8,915

Minimum amount                                                            £3,450

Income limit for age-related allowances                                                          £29,600

Marriage allowance                                                                                                     £1,250                                     

Property Income   – Rent-a-room relief                                                                                           £7,500                                                                               

Capital Gains Tax                                                                                                                                             

Annual Exemption                                                           £12,000

Standard rate                                                                10%

Higher rate (from 23 June 2010)                                                                20%

 

Approved mileage allowance payments                                                                 first 10,000                                               miles in

miles per tax                                            excess of

year                                                   10,000 miles

 

Motor cars and vans 45p 25p
Each additional passenger 5p 5p
Motor cycles 24p 24p
Bicycles 20p 20p
     
Car benefit              
Emission rating Taxable % of  
  list price  
1 to 50g/km 16%  
51 – 75 g/km 19%  
76 – 94 g/km 22%  
95 g/km 23%  
Each additional 5g/km                                   1%  
Maximum charge 37%  
     
Car fuel benefit              

Figure to which appropriate percentage is applied      £24,100

so as to calculate car fuel benefit                                                                                                                                               

 

Capital Allowances                                               

Writing down allowance (per annum):

  Current

 

   

 

       Main pool of P&M   18% RB    
       Special rate pool of P & M   6% RB    
Annual Investment Allowance   100%    
FYA on qualifying energy efficient Plant & Machinery                                                                                                   100%    
             
Class 1 National Insurance Contributions     weekly      
Primary threshold     £166      
Upper earnings limit (UEL) Employee contribution rates:     £962    

 

 
On earnings up to primary threshold     0%      
On earnings from primary threshold up to UEL     12%      
On earnings above the UEL Employer contribution rates:     2%    

 

 
Secondary threshold     £166      
On earnings up to secondary threshold     0%      
On earnings beyond secondary threshold     13.8%      
             
Class 1A National Insurance Contributions            
Employer contribution rate          13.8%    

 

 
Class 4 National Insurance Contributions            
Lower profits limit       £8,632  
Upper profits limit       £50,000  
Rate on profits between lower and upper limit     9%    
Rate on profits beyond upper limit          2%    
           
Corporation Tax                Financial  Financial  Financial
    Year Year Year
    2019 2018 2017
Main rate   19% 19% 19%
Small company rate        
Lower limit        
Upper limit        
Marginal relief fraction             
         
Value Added Tax        
Standard rate from 4 January 2011     20%  
Reduced Rate     5%  
Registration threshold (from 1 April 2017)     £85,000  
Deregistration threshold (from 1 April 2017)     £83,000  

Section A:  

 

  1. Jemma Fletcher is a self-employed baker. Her profit and loss account for the year ended 5 April 2020 is as follows:
           £              £
Gross Profit     165,000
Expenses:      
        Depreciation 10,600    
        Motor expenses (note 1) 20,420    
        Professional fees (note 2) 6,675    
        Repairs and renewals (note 3) 22,000    
        Travelling and entertainment (note 4) 32,350    
        Wages and salaries (note 5) 23,000    
        Other expenses (note 6) 18,650    

 

 

Net profit

 

Note 1 – Motor Expenses

Motor expenses consist of the total running costs for all vehicles including bakery delivery vehicles and Jemma’s own car, a Mercedes.  She uses the car for business purposes and personal use.  On average Jemma drives 25,000 miles per annum.  10,500 of these miles are for business purposes and 14,500 miles are incurred during personal use.

 

Note 2 – Professional Fees

The figure for professional fees consists of £2,675 for accountancy fees, £3,000 for business related allowable legal fees, and £1,000 for tax advice regarding Jemma’s personal investment portfolio.

 

Note 3 – Repairs and Renewals

The figure for repairs and renewals includes expenses of £8,000 for new ovens and £6,000 for various small repairs to numerous items.

 

Note 4 – Travelling and Entertainment

This represents travel and accommodation Jemma incurred whilst travelling for business purposes and personal holidays.  The split is 75/25 business.

 

Note 5 – Wages and Salaries

This figure includes a salary paid to Jemma of £15,000 and a salary paid to Jemma’s daughter of £8,000.  Both work in the business/personal.

 

Note 6 – Other Expenses

This includes £2,500 for Jemma’s annual leisure club memberships, £300 for a donation to a political party and a subscription of £225 for a trade journal.

 

 

 

Continued on next page \…

                         

Note 7 – Use of Office

Jemma uses one of the seven rooms in her private house as an office for administration and office work.  The total running costs of the house for the year ended 5 April 2020 were £10,000.

 

Note 8 – Private Telephone

Jemma uses her private telephone and broadband for business purposes.  The total cost of the phone and broadband for the year was £850.  The business use is 25%.  The cost of the phone and broadband have not been included in the accounts.

 

Note 9 – Plant and Machinery

The tax written down values for capital allowance purposes at 6 April 2019 were as follows:

General Pool                                    £10,000

Mercedes (emissions 158g/km)       £21,500

Special Rate Pool                              £5,500

During the year, Jemma sold an item of equipment for £2,000, which originally cost £1,200.  She also spent £10,500 on a new second hand truck for deliveries, which HMRC have agreed is 100% for business.

 

Other Information

During the tax year 2019/20 Jemma received £5,500 rental income, bank interest of £4,760, interest on an ISA of £800 and dividends from shares of £7,200. These were the actual cash amounts received.

 

During the year, on 30 August 2019, Jemma also sold some shares realising a capital gain of £15,000.   Jemma has capital losses brought forward from 2018/18 of £3,000.

 

 

Required:

 

  • Calculate Jemma’s capital allowances for the year ended 5 April 2020 assuming she claims the maximum possible.
    • marks)

 

  • Calculate Jemma’s tax adjusted trading profit for the year ended 5 April 2020, explaining any adjustments you make.
    • marks)

 

  • Calculate Jemma’s income tax liability for the tax year 2019/20

(12 marks)

 

  • Calculate Jemma’s capital gains tax liability for the tax year 2019/20.

(5 marks)

Total:  30 marks

 

 

 

 

Please note during 2019/20 section A can also be based on employment rather than self-employment.

 

 

 

Section B:

 

  1. James is considering a new opportunity but is unsure whether he will be classified as an employee or self employed for tax purposes. Identify and explain the criteria which may be used to determine whether or not an individual is employed or self-employed.  Your answer should identify key tests frequently used and examples of the differences. Your answer should reflect practical issues and commercial reality.

(10 marks)

 

  1. Employees often receive bonuses and benefits in kind as part of their employment package.

 

  1. Briefly explain what a ‘benefit in kind’ is, which employees are assessed to tax on benefits in kind, and why benefits are subject to tax.

 

  1. Please briefly explain how and why the car benefits and living accommodation benefits are calculated.

(8 marks)

 

  1. Martika has acquired a property she intends to start renting out to tenants. Martika understands she will need to pay tax on this rental income, but is unsure how to calculate it.  Briefly explain how rental income is assessed to tax, including identification of which period the income will be taxed in, three examples of allowable expenses, and how and when the tax is notified and paid to HMRC.

(6 marks)

 

  1. Keith is currently trading as a joiner and has been in business for several years. The business turnover is £76,000 and Keith is worried about reaching the VAT registration threshold and what this means for his business.  Keith is confused when he must register for VAT and whether he needs to increase his sales price.  The majority of his customers are domestic customers (individual persons) who are unable to reclaim any VAT costs.

 

Advise Keith whether he needs to register for VAT and outline the registration rules.   Are there any legitimate legal alternatives to remain non-VAT registered?

(6 marks)

 

  1. There are four classes of National Insurance, payable by different persons at differing rates. Advise who is liable to pay class 1 national insurance, the amounts payable, how payment may be made and detail any circumstances where a person within the class 1 category may obtain an exception or exemption from payment.

(4 marks)

 

 

  1. Briefly outline CGT Entrepreneurs Relief. Your answer should identify the eligibility criteria and any benefit of the scheme.

(6 marks)

 

Total:  40 marks

 

 

Continued on next page \…

 

Section C:

 

Bikes R Fun Ltd manufactures mountain and road bicycles.  They have one wholly owned UK resident subsidiary company who specialise in children’s’ bikes.  The following information is available for Bikes R Fun Ltd in respect of the year ended 31 March 2020.

 

Trading profits

The adjusted trading profit for tax purposes is £125,000.  This figure is after taking account of capital allowances.

 

Income from property

Bikes R Fun Ltd lets out three warehouses that are surplus to requirements.  The first warehouse has been let since 1 April 2018 at a monthly rent of £2,500.  The second warehouse was let from 1 April 2019 to 31 January 2020 at a monthly rent of £1,500.  On that date the tenant left, owing 2 months’ rent which Bike R Fun Ltd were not able to recover.

Another tenant was not found until August 2020.

The third warehouse was let for the whole year at a rent of £1,200 per month.

Insurance costs for the warehouses totalled £6,200.  Interest paid on loans secured on the warehouses totalled £5,500.

 

Loan interest received

Bikes R Fun Ltd received £3,500 of bank interest in the period.

 

Dividends received

During the year ended 31 March 2020, Bikes R Fun Ltd received dividends of £35,000 from shares in A.N.Other Co plc, an unconnected UK company.  This figure was the actual cash amount received.

 

Profit on disposal of shares

On 31 January 2020, Bikes R Fun Ltd sold its shares in A.N.Other Co plc, for £180,000, the shares had an indexed cost of £65,000 at the date of the disposal.  The unindexed cost was £45,000.

 

 

Other capital disposals

On 30 September 2019, Bikes R Fun Ltd sold a freehold factory for £450,000.  The indexed cost of the factory at that date was £225,000.  The unindexed cost was £90,000.

 

Losses brought forward

Bikes R Fun Ltd had capital losses brought forward of £30,000.

 

 

 

 

Requirements

 

  • Calculate Bikes R Fun Ltd’s net chargeable gains for the year.

(4 marks)

 

  • Calculate Bikes R Fun Ltd’s corporation tax liability for the year.

(13 marks)

 

  • When is Bikes R Fun Ltd required to pay its corporation tax liability and submit its

Corporation Tax return for this accounting period?

(4 marks)

 

  • Briefly explain the purpose of indexation allowance, how it is calculated and identify whether the indexed or unindexed cost should be used in calculations.

(5 marks)

 

  • Describe the main differences in how the trading profits are calculated for a limited company compared with an individual.

(4 marks)

 

Total: 30 marks

 

 

Please note Section C may be all one scenario or spilt into two unconnected sections C1 and C2 each with their own sub-tasks

 

 

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