PROFESSIONAL LEVEL EXAMINATION

TUESDAY 8 DECEMBER 2020

(2.5 HOURS)

TAX COMPLIANCE
This exam consists of five questions (100 marks).

Marks breakdown

Question 1 7 marks
Question 2 13 marks
Question 3 25 marks
Question 4 20 marks
Question 5 35 marks

1. Please read the instructions on this page carefully before you begin your exam. If you
have any questions, raise your hand and speak with the invigilator before you begin.

2. Please alert the invigilator immediately if you encounter any issues during the delivery
of the exam. The invigilator cannot advise you on how to use the software. If you
believe that your performance has been affected by any issues which occurred, you
must request and complete a candidate incident report form at the end of the exam.
This form must be submitted as part of any subsequent special consideration
application.

3. Click on the Start Test button to begin the exam. The exam timer will begin to count
down. A warning is given five minutes before the exam ends. When the exam timer
reaches zero, the exam will end. To end the exam early, press the Finish button.

4. You may use a pen and paper for draft workings. Any information you write on paper
will not be read or marked.

5. The examiner will take account of the way in which answers are structured. Respond
directly to the exam question requirements. Do not include any content or opinion of a
personal nature, this includes your name or any other identifying content. A student
survey is provided post-exam for feedback purposes.

6. You must make sure your answers are clearly visible when you submit your exam. Your
answers will be presented to the examiner exactly as they appear on screen: the
examiner will not be able to review your formulae, or expand rows or columns where
content is not visible.

Assume that the Finance Act 2019 rates and allowances as set out in the ICAEW
Learning Materials for exams in 2020 will continue to apply in 2019/20 and future years
unless you are specifically instructed otherwise.
Question 1

You are a trainee ICAEW Chartered Accountant working for Dooley LLP a firm of ICAEW
Chartered Accountants. Dooley LLP has recently appointed a new data protection officer
(DPO), Manoj. Manoj has identified a few occasions where client information has been sent
by members of staff in response to suspicious phishing emails claiming to be from HMRC. He
has dealt with this in accordance with the General Data Protection Regulations (GDPR) and
the ICAEW Code of Ethics.

Manoj is busy investigating other potential breaches of GDPR and has asked you to prepare
notes for him to present at the next partners’ meeting.

Requirements

1.1 Prepare notes that:

• Explain the action Manoj was required to take in relation to the identified breaches
of GDPR, and the possible penalties in relation to the breaches; and

• State the general precautions that the firm should take to prevent unauthorised
access to client data.
(5 marks)

1.2 Explain which fundamental principles should be addressed in the presentation to the
partners. (2 marks)

Total: 7 marks
Question 2.1

Dante Ltd is a VAT-registered company that develops and sells goods that incorporate
artificial intelligence to companies throughout the world.

The company operates from rented offices in the UK. Dante Ltd pays the landlord rent of
£4,200 every three months (inclusive of VAT). The landlord has opted to tax the property.

Dante Ltd’s supplies are standard-rated in the UK. The company had the following income
and additional costs for the quarter ended 31 March 2020 (all stated exclusive of VAT):

£
Income
Sales to UK customers 200,000
Sales to customers in India 130,000
Costs
Purchase of computer equipment from USA 60,000
Purchase of consultancy services from Canada 40,000
Purchase of other standard-rated goods and services
(excluding rent) 30,000

Requirements

(a) Explain the VAT treatment of the computer equipment purchased from the USA.
(2 marks)

(b) Calculate the VAT payable for the quarter ended 31 March 2020 that should have been
included on Dante Ltd’s VAT return. Show your treatment of each item. (4 marks)

Question 2.2

Ella has a VAT-registered business dealing in property. For VAT purposes 70% of her
business is exempt and 30% is taxable. Ella has been a client of your firm for many years.

She has sent you an email detailing three property transactions that will occur in the near
future. The following is an extract from her email:

“I am purchasing a new freehold office building from which to operate my business. The
builder and I have agreed a purchase price of £400,000. He seems to think that there will
be VAT to pay on top of this but I don’t usually pay VAT on office buildings.

My 22 year-old son is about to buy his first house. It was originally built in 1980. He has
agreed a purchase price of £200,000. I have already given him the money to buy the
property, and I want to check how much more I will need to give him to cover the cost of
any VAT and stamp taxes.

I am also negotiating the purchase of four identical new apartments and I intend to pay the
vendor a total of £640,000. This is the first time that I have bought several properties as a
linked purchase and I am not sure how the tax aspects work.”
Requirement

Explain, with supporting calculations, the VAT and stamp duty land tax implications, on
purchase, of each of the three transactions. Assume any relief available is claimed. You are
not required to consider the future tax implications. (7 marks)

Total: 13 marks
Question 3.1

Tamica is a sole trader. She has traded for many years as a manufacturer. Her business
operates from a factory and, until recently, she also had offices in her home from which her
finance team worked.

Recently Tamica has planned for her retirement. The plans involve selling her existing house
and moving to a smaller house and buying a new office building near the factory from which
the finance team could work.

On 8 December 2018, Tamica sold her house for £1 million. She purchased the house in
June 2005 for £400,000. She had always used 20% as office space whilst living in the
remainder of the house. On the same day she purchased another house for £450,000, and a
separate new office building for £190,000.

Disposals during 2019/20

• Sale of a painting
On 10 June 2019, Tamica sold a painting at auction for £7,200 less auction fees of £120.
The painting originally cost £3,400 in February 2005.

• Gift of shares to her son

In August 2019, Tamica gave 10,000 shares in Kamen plc, a quoted investment
company, to her son. The shares originally cost £9,300 in May 2012. At the date of the
gift the shares were quoted at 230 – 238p with marked bargains of 228p, 236p and 239p.

• Sale of business
On 6 March 2020, Tamica sold her business to a third party for £500,000. The assets
disposed of were as follows:

Sale Cost
proceeds
£ £
Office building – see above 210,000 190,000
Factory – used in the trade 105,000 118,000
Goodwill 88,000 -
Plant and machinery 41,000 59,000
Net current assets 56,000 56,000
500,000
Each item of plant and machinery originally cost, and was sold for, less than £6,000.

During 2019/20 Tamica had taxable income of £85,000.

Requirements

(a) Calculate the chargeable gain on disposal of Tamica’s home in December 2018, and
state the base cost of the new office. Show the amount of any reliefs claimed.
(5 marks)

(b) Calculate Tamica’s capital gains tax payable for 2019/20. (9 marks)

Note: Ignore VAT and stamp taxes.

Question 3.2

Dervla, who had always been UK resident and domiciled, died on 5 February 2020 leaving
her entire estate to her son Richard. Her estate comprised:

• Her home valued at £400,000. She lived in this house with her husband Jacob prior to
his death in May 2008.

• A holiday home in Utopia worth £200,000. Dervla’s executors incurred additional costs
of £12,000 in administering the overseas property. There are no death taxes in Utopia.

• Shares in Ezeudu Ltd, an unquoted trading company, worth £500,000. At 5 February

2020 the company had total assets valued at £2 million, including an investment
property valued at £150,000.

• Cash and other chattels of £230,000.

In June 2013 Dervla gave her brother £210,000 in cash. Her only other lifetime gift was a
gross chargeable transfer of £150,000 in August 2010.

On Jacob’s death in May 2008, he left his collection of artworks worth £265,200 to Richard
and the remainder of his £800,000 estate to Dervla. Jacob made no lifetime transfers.

Requirement

Calculate the inheritance tax payable as a result of Dervla’s death. (11 marks)

Note: Ignore stamp taxes.

Total: 25 marks
Question 4

Tripp Ltd manufactures robotic equipment for use in the automotive industry. The company
has changed its accounting date from 31 December to 31 March. The draft tax-adjusted
trading profits for the 15 months to 31 March 2020 are £700,000. This is before adjustment
for capital allowances and the issues considered below.

Profit on disposal of shares

On 10 February 2020, Tripp Ltd sold its entire 3% shareholding in Kirwen plc for £50,000.
The shares were purchased in August 2005 for £27,000. The profit on disposal of £23,000 is
included in the draft tax-adjusted trading profits.

Rental income
Tripp Ltd has surplus space in its factory, representing 15% of the floor space. The company
lets out the surplus space to a third party. Rental income of £30,000 is included in the draft
tax-adjusted trading profits.

Interest receivable
Tripp Ltd has interest receivable of £20,000 included in the draft tax-adjusted trading profits,
as follows:
£
Three months to 31 March 2019 4,000
Six months to 30 September 2019 7,000
Six months to 31 March 2020 9,000
20,000

Interest was earned evenly within each of the three time periods.

Interest payable
The draft tax-adjusted trading profits included a deduction for interest payable of £7,500 on a
loan to purchase the factory mentioned above. This amount was spread evenly over the
15-month period.

Capital allowances
At 1 January 2019, the tax written down values were £100,000 on the main pool, and
£24,000 on the special rate pool. During the 15 months ended 31 March 2020 the company
purchased the following assets:

• 29 April 2019, a car costing £31,000 with carbon dioxide emissions of 40g/km;

• 20 December 2019 new machinery costing £300,000, which qualifies as a long-life

asset;

• 5 February 2020, a car costing £15,000 with carbon dioxide emissions of 105g/km.
Requirements

4.1 Calculate Tripp Ltd’s corporation tax payable for the 15 months ended 31 March 2020.
(15 marks)

Note: Ignore VAT and stamp taxes.

4.2 Explain

• the effect on capital allowances if the purchase of the new machinery had been
delayed by two months, and why this would have resulted in a trading loss for Tripp
Ltd; and

• the options available to Tripp Ltd for relieving a trading loss.

No calculation of the adjusted trading loss is required.

(5 marks)

Total: 20 marks
Question 5.1

Kadiff, who is 35 years old, is employed by SmartMedia Ltd (SM Ltd), a social media
consulting company. For 2019/20 Kadiff received the following remuneration package:

• Salary of £60,000 pa, received evenly over the year.

• 50p per business mile paid by SM Ltd for Kadiff’s use of his own car for work. He
travelled 13,000 business miles during 2019/20. The running costs of the car were
£3,750 for the tax year.

• A loan of £20,000 with interest charged at 1% pa. Kadiff has had this loan for two years
and has not repaid any capital.

• A mobile phone which cost SM Ltd £480 during the tax year.

• An apartment for Kadiff to live in. SM Ltd pays rent of £9,600 pa for the apartment, which
has an annual value of £8,000. The company also provides furniture that originally cost
£4,700, and paid household bills of £1,200 during 2019/20. Kadiff contributes £300 per
month towards the cost of living in the apartment.

• A contribution by SM Ltd of 6% of Kadiff’s salary into SM Ltd’s occupational pension

scheme. Kadiff also contributed 8% of his salary into the pension scheme.

• Reimbursed expenses. SM Ltd reimbursed £1,530 to Kadiff that he had spent taking
potential clients out to lunch.

In addition to his remuneration package Kadiff had the following income and expenditure
during 2019/20:

• Lottery winnings of £140.

• Dividend income from his investments of £7,000, including £200 from an investment in an
individual savings account (ISA).

• Kadiff rents out a house, that he has never lived in, and in 2019/20 he received rental
income of £12,000. His costs for the tax year were mortgage interest of £4,200 and
allowable maintenance costs of £1,430.

• Kadiff made a charitable donation of £320 under Gift Aid.

Requirements

For 2019/20 calculate:

(a) Kadiff’s taxable employment income. Show your treatment of each item. (8 marks)

(b) The national insurance contributions payable by both Kadiff and SM Ltd on Kadiff’s
remuneration package. Identify who pays each type of contribution. (4 marks)

(c) Kadiff’s income tax liability. (8 marks)

(d) Kadiff’s net disposable income. (7 marks)

Notes: The official rate of interest is 2.5% pa.

Ignore the employment allowance.

Question 5.2

On 1 May 2019 Aurora set up in business as a sole trader, selling baby equipment online.
She prepared her first accounts for the year ended 30 April 2020, and these showed an
accounting profit of £93,000.

Expenses deducted in calculating the accounting profit include the following:

(1) Depreciation of £3,000 on office equipment purchased for £10,000 on 1 May 2019.

(2) Gifts of e-readers to six key customers costing £100 each. The e-readers were
personalised with the logo and contact details of Aurora’s business.

(3) Salary of £6,000 paid to Aurora’s wife Jemma. Jemma does some administrative work
for the business, but has another full-time job. The amount paid to Jemma is reasonable
for the work performed.

(4) Rent payable for Aurora’s office of £12,000 for the year ended 30 April 2020. Aurora
first rented the office on 1 March 2019, paying £1,000 per month in advance. However
she did not include the rent for March and April 2019 in calculating her accounting
profits as she had not yet started trading.

Aurora has not yet filed a tax return with HMRC that includes the new business and is still
wondering whether it should be run as a partnership with Jemma. If operating as a
partnership they would share profits equally.

Requirements

(a) Calculate Aurora’s tax-adjusted trading profit for the year ended 30 April 2020,
assuming that she operates as a sole trader. (3 marks)

(b) State the dates of the basis period for 2019/20, and calculate Aurora’s national
insurance contributions payable for 2019/20, assuming that she operates as a sole
trader.
(3 marks)

(c) Explain the impact on the class 2 and class 4 national insurance contributions payable if
the business is operated as a partnership by Aurora and Jemma. (2 marks)

Note: Ignore VAT

Total: 35 marks