Tax Melville Answers

Instructors Manual
Taxation:
Finance Act 2010
Sixteenth edition
Alan Melville
FCA, BSc, Cert. Ed
For further instructor material please visit:
www.pearsoned.co.uk/melville
ISBN: 978-0-273-74493-1
Pearson Education Limited 2011 Lecturers adopting the main text are permitted to download and photocopy the manual as required.
i Pearson Education Limited 2011
Melville: Taxation: Finance Act 2010, Instructors Manual, 16th ed. Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: http://www.pearsoned.co.uk Sixteenth edition published 2011 Pearson Education Limited 2011 The right of Alan Melville to be identied as author of this Work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. Pearson Education is not responsible for third part internet sites. ISBN: 978-0-273-74493-1 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd., Saffron House, 6-10 Kirby Street, London EC1N 8TS. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which is it is published, without the prior consent of the Publishers.
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Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.
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Contents
Preface Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Introduction to income tax Solutions 2.5 and 2.6 Personal allowances Solutions 3.8 and 3.9 Payments and gifts eligible for tax relief Solutions 4.8 and 4.9 Income from property Solutions 5.6 and 5.7 Income from savings and investments Solution 6.6 Income from employment Solutions 7.8 and 7.9 Income from self-employment: Computation of income Solutions 8.7 and 8.8 Income from self-employment: Basis periods Solutions 9.6, 9.7, 9.8 and 9.9 Income from self-employment: Capital allowances Solutions 10.7 and 10.8 Income from self-employment: Trading losses Solutions 11.5 and 11.6 Income from self-employment: Partnerships Solution 12.5 Pension contributions Solution 13.6 Payment of income tax, surcharges, interest and penalties Solution 14.4 National Insurance contributions Solutions 15.4 and 15.5 Review questions (Set A) Solutions A6, A7, A8 and A9 Chapter 16 Chapter 17 Chapter 18 Introduction to capital gains tax Solutions 16.8, 16.9 and 16.10 Computation of gains and losses Solutions 17.6 and 17.7 Chattels and wasting assets Solutions 18.8, 18.9 and 18.10
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v 1 2 3 5 6 7 8 9 11 13 14 16 17 17 18 22 23 24
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Chapter 19 Chapter 20 Chapter 21
Shares and securities Solution 19.8, 19.9, 19.10 and 19.11 Principal private residences Solution 20.5 CGT reliefs Solutions 21.5, 21.6, 21.7 and 21.8 Review questions (Set B) Solutions B6, B7, B8, B9 and B10
26 29 30 32 35 36 38 39 40 41 42 45 46 47 49 51
Chapter 22 Chapter 24 Chapter 25 Chapter 26 Chapter 27 Chapter 28
Introduction to corporation tax Solution 22.6 Computation and payment of the corporation tax liability Solutions 24.6 and 24.7 Income tax and advance corporation tax Solutions 25.5 and 25.6 Corporation tax losses Solution 26.6 Close companies and companies with investment business Solutions 27.4 and 27.5 Groups of companies and reconstructions Solution 28.6 Review questions (Set C) Solutions C6, C7, C8, C9 and C10 Value added tax (1) Solution 29.5 Value added tax (2) Solutions 30.5 and 30.6 Inheritance tax Solutions 31.6 and 31.7 Overseas aspects of taxation Solutions 32.7 and 32.8 Review questions (Set D) Solutions D5, D6, D7 and D8
Chapter 29 Chapter 30 Chapter 31 Chapter 32
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Preface
As indicated in the preface to Taxation, the main book does not contain solutions for those exercises and review questions which are marked with an asterisk (*). This provides lecturers who have adopted the textbook with a source of problems which may be used for tutorial work and revision. The purpose of this Instructor's Manual is to supply suggested solutions to those exercises and questions. I should like to remind the reader that, whilst the review questions are drawn from the past examination papers of the professional accounting bodies, the answers provided here to those questions are entirely my own responsibility. Alan Melville June 2010
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Chapter 2 Introduction to income tax

2.5
Employment income NSB interest Building society interest 9,360 ! 100/80 Total income Less: Personal allowance Taxable income Income tax due Non-savings income : Basic rate 1,365 Savings income : Starting rate 1,075 : Basic rate 10,685 13,125 Tax borne Less: Tax deducted at source Tax payable Total 7,840 60 11,700 19,600 6,475 13,125 @ 20% @ 10% @ 20% Non-savings 7,840 7,840 6,475 1,365 273.00 107.50 2,137.00 2,517.50 2,340.00 177.50 Savings 60 11,700 11,760 11,760
Notes: (a) The premium bond prize is exempt from income tax. (b) The NSB interest is received gross and so does not need to be grossed-up. (c) Ivan will also be given credit for any PAYE tax suffered on his salary.
2.6
Business profits Income from property UK dividends 109,890 + tax credit 12,210 Total income Less: Personal allowance Taxable income Income tax due Non-savings income : Basic rate Dividend income : Ordinary rate : Upper rate : Additional rate 35,430 1,970 112,600 7,530 157,530 Total 31,680 3,750 122,100 157,530 0 157,530 @ 20% @ 10% @ 32.5% @ 42.5% Non-savings 31,680 3,750 35,430 0 35,430 7,086.00 197.00 36,595.00 3,200.25 47,078.25 12,210.00 34,868.25
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Dividends
122,100 122,100 122,100
Tax borne Less: Tax credits on dividends Tax payable
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Chapter 3 Personal allowances

3.8
Retirement pension Less: Personal allowance Taxable income 1,230 @ 20% 7,185 @ 20% Less: MCA 6,965 @ 10% = 696.50 MCA transferred from husband Tax borne Husband 10,870 9,640 1,230 246.00 246.00 0.00 450.50 986.50 Wife 16,675 9,490 7,185 1,437.00
3.9
<------------- Bill --------------> Total Non-savings Dividends 45,930 45,930 5,200 5,200 51,130 6,475 44,655 45,930 6,475 39,455 5,200 5,200 <---------- Hazel ------------> Total Non-savings Savings
Business profits UK dividends 4,680 + 520 Employment income BSI 2,432 ! 100/80 Total income Less: Personal allowance Taxable income Bill Hazel 37,400 37,400 @ 20% 2,055 112,600 @ 40% 5,200 @ 32.5% 73,610 @ 50% 44,655 223,610 Tax borne and tax liability Less: Tax credits Tax deducted at source Tax payable
220,570 3,040 223,610 0 223,610
220,570 220,570 0 220,570 3,040 3,040 3,040
7,480.00 822.00 1,690.00
7,480.00 45,040.00 36,805.00
9,992.00 520.00 9,472.00
89,325.00 608.00 88,717.00
Note: Hazel will be given credit for tax already paid under the PAYE system.
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Chapter 4 Payments and gifts eligible for tax relief

4.8
<---------- Pauline -----------> Total Non-savings Savings 10,930 10,930 3,025 13,955 9,640 4,315 10,930 9,640 1,290 3,025 3,025 3,025 1,750 33,880 6,475 27,405 32,130 6,475 25,655 1,750 1,750 1,750 <---------- Adrian -------------> Total Non-savings Dividends 32,130 32,130
Retirement pension Business profits BSI 2,420 ! 100/80 UK dividends 1,575 + 175 Total income Less: Personal allowance Taxable income Pauline 1,290 1,150 1,875 Adrian
@ 20% @ 10% @ 20% 25,655 @ 20% 1,750 @ 10% 4,315 27,405 Less: Maintenance 2,670 @ 10% MCA 4,490 ! 6/12 @ 10% Tax borne and tax liability Less: Tax deducted at source Tax credits Tax payable
258.00 115.00 375.00 748.00 5,131.00 175.00 5,306.00 (267.00 ) (224.50 ) 4,814.50 175.00 4,639.50
748.00 605.00 143.00
Notes: (i) Pauline's non-savings income occupies only 1,290 of the basic rate band. This allows 1,150 of her savings income (2,440 1,290) to be taxed at the starting rate. The remainder of her savings income is taxed at the basic rate. (ii) Adrian's former wife was born before 6 April 1935, so maintenance relief is available. (iii) MCA is available since Pauline was born before 6 April 1935. Adrian is the higher-income partner and his income of 33,880 exceeds the income limit by 10,980. Therefore he must lose 5,490 in allowances. His own over-65 personal allowance is first reduced from 9,490 to 6,475 (a reduction of 3,015). The remaining 2,475 is subtracted from the MCA of 6,965, giving an MCA of 4,490. This is then further reduced since the marriage took place part-way through the tax year. (iv) Pauline will also be given credit for any PAYE tax suffered on her pension.
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4.9
Employment income UK dividends 3,780 + tax credit 420 Total income Less: Personal allowance Taxable income Income tax due Non-savings income : Basic rate : Higher rate Dividend income : Upper rate 46,400 66,625 4,200 117,225 Total 114,600 4,200 118,800 1,575 117,225 @ 20% @ 40% @ 32.5% Non-savings 114,600 114,600 1,575 113,025 9,280.00 26,650.00 1,365.00 37,295.00 420.00 36,875.00 Dividends 4,200 4,200 4,200
Tax liability Less: Tax credits on dividends Tax payable
Notes: (i) The grossed-up donation is 9,000 (7,200 ! 100/80). (ii) Adjusted net income is 109,800 (118,800 9,000). Therefore the personal allowance is reduced to 1,575 (6,475 1/2 ! 9,800). (iii) The basic rate limit is increased to 46,400 (37,400 + 9,000). (iv) Tax paid under PAYE would also be deducted.
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Chapter 5 Income from property

5.6
The income tax assessment on the landlord is 31,200 (40,000 22% of 40,000). Peter's income tax assessment is therefore: Premium received 14,000 Less: 2% ! 3 ! 14,000 840 13,160 4 Less: Premium paid 31,200 ! 10,400 12 Assessable premium 2,760
5.7
!
Total 6,300 11,284 12,100 29,684 6,300 23,384 9,248 14,136 @ 20% @ 10% @ 20% Non-savings 6,300 11,284 17,584 6,300 11,284 9,248 2,036 407.20 40.40 2,339.20 2,786.80 2,420.00 366.80 Savings
Property income (see notes) Retirement pension Building society interest 9,680 ! 100/80 Total income Less: Property losses b/f Net income Less: Personal allowance (see notes) Taxable income Income tax due Non-savings income : Basic rate 2,036 Savings income : Starting rate 404 : Basic rate 11,696 14,136 Tax borne Less: Tax deducted at source Tax payable
12,100 12,100 12,100 12,100
Notes: (i) Property income is 6,300 (10,400 4,100). Therefore losses brought forward of 6,300 can be relieved in 2010-11, leaving losses of 250 to carry forward to 2011-12. (ii) Melissa's income is over the income limit by 484 (23,384 22,900). Her personal allowance is therefore reduced to 9,248 (9,490 1/2 ! 484). (iii) Melissa will be given credit for any PAYE tax deducted from her pension.
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Chapter 6 Income from savings and investments

6.6
Income from property 12,620 2,220 Bank deposit interest 992 ! 100/80 Gilt interest UK dividends 12,600 + tax credit 1,400 Income tax @ 20%, 20% or 10% Income after tax Administration expenses Income after tax and expenses Total 10,400 1,240 1,800 14,000 27,440 4,088 23,352 2,700 20,652 Non-savings 10,400 Savings 1,240 1,800 10,400 2,080 8,320 8,320 3,040 608 2,432 2,432 14,000 14,000 1,400 12,600 2,700 9,900 Dividends
(a) The trustees' tax liability for the year is 4,088. The tax deducted at source of 248 and the tax credits of 1,400 are deducted, leaving tax payable by the trustees of 2,440. (b) The income of each life tenant is: Gross 5,200 1,520 5,500 12,220 Tax deducted 1,040 304 1,344 Tax credits
Non-savings 8,320 ! 1/2 ! 100/80 Savings 2,432 ! 1/2 ! 100/80 Dividends 9,900 ! 1/2 + tax credit Total
550 550
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Chapter 7 Income from employment

7.8
The key points are: (a) Emma is a P11D employee and is taxed on the full cost of all assessable benefits provided by her employer. (b) Her bonus will be taxed on the receipts basis. (c) She will pay income tax (and NICs) under the PAYE system on her salary and bonus, computed using a tax code issued by HMRC. The tax code will reflect her entitlement to personal allowances but these will be set to some extent against her benefits. If the benefits exceed her personal allowances she may be issued a "K" code. (d) Her general expenses allowance will be treated as part of her earnings for the year and she may then claim a deduction for the expenses incurred. Entertaining expenses will not be allowable. (e) She will be assessed on a car benefit calculated at between 5% and 35% of the list price of her car, depending on the car's emission rating. She will also be assessed on a fuel benefit which will be equal (in 2010-11) to a percentage of 18,000. The applicable percentage is the same as that used in calculating her assessable car benefit. (f) The assessment on the beneficial loan will be calculated by applying the official rate of interest to the amount of the loan.
(g) The private medical insurance subscription is a taxable benefit.
7.9
(a) 9,750 + 4% of (250,000 75,000) + 2,300 + 20% of 8,500 = 20,750. (b) 15% + 10% = 25% of 45,000 = 11,250. Fuel benefit is 4,500 (25% of 18,000). (c) (4% 1.25%) ! 50,000 is 1,375. The total of Jim's assessable benefits is therefore 37,875 (20,750 + 11,250 + 4,500 + 1,375).
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Chapter 8 Income from self-employment: Computation of income

8.7
The figure of 174 charged to the income statement can be analysed as follows: Trade debts written off 638 Staff loan recovered (500) Decrease in general allowance (150 200) (50) Increase in specific allowance (317 231) 86 174 The amount allowable is 724 (638 + 86), so a further 550 should be deducted when calculating the trading profit.
8.8
Net profit for the year Add: Disallowed expenditure: Wages paid to Imran's son Personal income tax Personal NICs Private medical insurance Telephone (1/6th of 1,650) Repairs Loss on disposal of motor vehicle Speeding fine Motor expenses (1/10th of (1,165 + 2,815 + 610)) Business entertaining Political donation General allowance for bad debts Lease premium amortisation Depreciation Trading income not shown in the accounts: Own consumption (20/80th of 220) Less: Non-trading income: Interest receivable Surplus on sale of office equipment Allowable expenditure not shown in the accounts: Lease premium (1/10th of 82% of 7,000) Trading profit (before capital allowances) (9,142)
1,000 3,394 121 414 275 750 422 700 459 3,320 200 (100) 700 8,749
20,404 55 20,459 11,317
212 300
512 574 1,086 10,231
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Chapter 9 Income from self-employment: Basis periods

9.6
(a) Year 2007-08 2008-09 2009-10 2010-11 Basis Actual 12 months to a/c date in year 2 CYB CYB Basis period 1/1/08 to 5/4/08 y/e 31/12/08 y/e 31/12/09 y/e 31/12/10 Workings 7,200 ! 3/12 Trading income 1,800 7,200 5,010 4,570
(b) 2007-08 cannot be averaged (first tax year) 2008-09 can be averaged with 2009-10, since the difference between 7,200 and 5,010 exceeds 30% of 7,200. The revised income for each year is 6,105 (the average of 7,200 and 5,010). Marginal relief is available for 2009-10 and 2010-11, since the difference between 6,105 and 4,570 exceeds 25% of 6,105. Each figure is adjusted by 3 ! (6,105 4,570) 0.75 ! 6,105 = 26, revising the trading income to 6,079 for 2009-10 and 4,596 for 2010-11.
9.7
Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Basis period 1/10/05 to 5/4/06 1/10/05 to 30/9/06 y/e 30/4/07 y/e 30/4/08 y/e 30/4/09 1/5/09 to 31/1/11 Workings 3,500 ! 6/7 3,500 + 5/12 ! 6,480 Trading income 3,000 6,200 6,480 7,700 7,900 9,800 41,080
8,200 + 7,300 5,700
Note: Overlap periods are 1 October 2005 to 5 April 2006 (profits 3,000) and 1 May 2006 to 30 September 2006 (profits 6,480 ! 5/12 = 2,700). Therefore total overlap profits are 5,700.
9.8
The year of change is 2009-10 (the first year in which the old date was not used). The basis period for 2008-09 ended on 31 December 2008, so the relevant period is from 1 January 2009 to 31 May 2009. This is less than 12 months so the basis period for 2009-10 is the year to 31 May 2009. Trading income for 2005-06 to 2011-12 is as follows: Year 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Basis period 1/3/06 to 5/4/06 1/3/06 to 28/2/07 y/e 31/12/07 y/e 31/12/08 y/e 31/5/09 y/e 31/5/10 y/e 31/5/11 Workings 43,700 ! 1/10 43,700 + 2/12 ! 52,590 Trading income 4,370 52,465 52,590 54,300 52,575 50,160 68,200
54,300 ! 7/12 + 71,060 ! 5/17 71,060 ! 12/17
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Notes: (i) The first overlap period runs from 1 March 2006 to 5 April 2006 (1 month) with overlap profits of 4,370. (ii) The second overlap period runs from 1 January 2007 to 28 February 2007 (2 months) with overlap profits of 52,590 ! 2/12 = 8,765. (iii) The third overlap period runs from 1 June 2008 to 31 December 2008 (7 months) with overlap profits of 54,300 ! 7/12 = 31,675. (iv) Total overlap profits carried forward (10 months) are 44,810.
9.9
The year of change is 2007-08 (the first year in which the old date was not used and the new date was used). The basis period for 2006-07 ended on 30 April 2006, so the relevant period is from 1 May 2006 to 30 June 2007. This is not less than 12 months so the basis period for 2007-08 is the relevant period itself. Trading income is as follows: Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Notes: (i) There is an overlap period from 1 May 2004 to 5 April 2005 (11 months) with overlap profits of 33,920 ! 11/16 = 23,320. (ii) The length of the relevant period on the change of accounting date (14 months) exceeds 12 months by 2 months. Therefore overlap relief is available in 2007-08 of 23,320 ! 2/11 = 4,240. (iii) The remaining overlap profits (23,320 4,240 = 19,080) are relieved on the cessation of trade. Basis period 1/1/04 to 5/4/04 6/4/04 to 5/4/05 y/e 30/4/05 y/e 30/4/06 1/5/06 to 30/6/07 y/e 30/6/08 y/e 30/6/09 1/7/09 to 31/5/10 Workings 33,920 ! 3/16 33,920 ! 12/16 33,920 ! 12/16 33,300 overlap relief 4,240 Trading income 6,360 25,440 25,440 29,700 29,060 41,600 37,900 4,420
23,500 overlap relief 19,080
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Chapter 10 Income from self-employment: Capital allowances

10.7
(a) The building is bought by David during the year to 31 March 2002 and is sold during the year to 31 March 2009. WDAs would be calculated at 4% per annum for the years to 31 March 2002, 2003, 2004, 2005, 2006, 2007 and 2008, giving total WDAs of 7 ! 4% of 80,000 = 22,400. This leaves a residue of expenditure at 31 March 2008 of 57,600. However, the building is in non-industrial use on 31 March 2004, 2005 and 2006 so only notional WDAs are calculated for these three years. Actual WDAs would be given for the other years, totalling 4 ! 4% of 80,000 = 12,800. David cannot claim WDA for the year to 31 March 2009. (b) The residue of expenditure is 57,600. The tax life of the building ends on 30 June 2026, giving an unexpired life of 17 years and 5 months (17.417 years) on the date of the purchase by Diana. She is therefore entitled to an annual WDA of 57,600 divided by 17.417 = 3,307, multiplied by the appropriate percentage The period to 5 April 2009 is nine months long and is entirely contained within tax year 2008-09, so her WDA for that period is 3,307 ! 9/12 ! 75% = 1,860. WDA for the year to 5 April 2010 is 3,307 ! 50% = 1,654 and WDA for the year to 5 April 2011 is 3,307 ! 25% = 827. No further IBAs may be claimed by Diana since IBAs are abolished as from 6 April 2011.
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10.8
Main pool y/e 30/9/10 WDV b/f Additions (no AIA or FYA) Disposals 113,190 13,400 126,590 (5,310) 121,280 Special VW car BMW car rate pool (30% p.u.) (30% p.u.) 9,900 8,200 18,100 14,500 32,000 (17,200) (2,700) 1,810 97,024 75,000 75,000 19,600 7,840 11,760 108,784 6,400 ! 70% All'ces
Balancing charge WDA @ 20% WDA @ 10% WDA @ 20% Additions AIA @ 100% Additions FYA @ 40% WDV c/f Total allowances 1/10/10 - 31/3/11 Disposals Balancing charges Balancing charge Total allowances 24,256
! 70%
(1,890) 24,256 1,810 4,480
75,000 7,840 111,496
16,290
25,600
(110,000) (1,216)
(18,300) (2,010)
(29,000) (3,400) ! 70% (3,226) (2,380) (5,606)
Notes: (i) Maximum AIA for the year to 30 September 2010 is 75,000 (6/12 ! 50,000 + 6/12 ! 100,000). Capital allowances for the year are maximised by setting this AIA entirely against the expenditure on 12 May 2010 (which is not eligible for FYA). (ii) The car bought in July 2010 has emissions exceeding 160g/km and is therefore allocated to the special rate pool. (iii) The car sold for 3,000 in July 2010 must have been originally allocated to the main pool, since it was acquired before 6 April 2009 and was not expensive. (iv) Main pool disposals in the year to 30 September 2010 are 5,310 (1,310 + 3,000 + 1,000).
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Chapter 11 Income from self-employment: Trading losses

11.5
Trading loss 6/4/10 to 31/5/10 Trading loss 1/6/09 to 5/4/10 Overlap relief Terminal loss The loss may be relieved as follows (later years first): 2007-08 39,190 20,000 59,190 (27,890) 31,300 2008-09 16,120 20,000 36,120 (16,120) 20,000 2009-10 0 20,000 20,000 20,000 2010-11 0 20,000 20,000 20,000 (36,300) ! 2/11 (6,840) ! 1/12 + (36,300) ! 9/11 (6,600) (30,270) (7,140) (44,010)
Trading income Investment income Total income Less: Terminal loss relief Net income
11.6
(a) Craig's trading income is: Year 2008-09 2009-10 2010-11 Basis period 1/8/08 to 5/4/09 y/e 31/7/09 y/e 31/7/10 Workings (5,460 1,140) ! 8/12 5,460 1,140 Trading income 2,880 4,320 nil
(b) The loss in 2010-11 is 29,320 (27,400 + 1,920). The choices are as follows: (i) Use early trade losses relief to relieve the loss against the total income of 2007-08, 2008-09 and 2009-10, in that order. These income figures are 4,940, 5,070 (2,190 + 2,880) and 5,830 (1,510 + 4,320) respectively. This claim would be pointless since total income in each of these years is fully covered by Craig's personal allowance.
(ii) Relieve the loss against the total income of 2010-11 and/or 2009-10. There is no income in 2010-11 and income of 5,830 in 2009-10 is covered by Craig's personal allowance. However, a claim to relieve losses against total income can be extended by a claim to set any unrelieved losses against capital gains. It may be worth sacrificing the 2009-10 personal allowance so as to be able to set the majority of the loss against the "large capital gain" of that year. (iii) Carry the loss forward against future trading profits. This assumes that future trading profits are to be expected and that Craig will accept the delay in obtaining loss relief. More information is needed about the size of the capital gain before a decision can be made. The option of claiming less than the full entitlement of capital allowances should be taken into account when making the final decision.
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Chapter 12 Income from self-employment: Partnerships

12.5
1/11/06 - 31/5/07 y/e 31/5/08 1/6/07 - 31/12/07 12,000 ! 7/12 1/1/08 - 31/5/08 12,000 ! 5/12 Cluppins 2,000 Raddle 4,000 Bardell Winkle Total 6,000
2,333 1,750 4,083
4,667 2,000 6,667 1,250 1,250
7,000 5,000 12,000
y/e 31/5/09 1/6/08 - 28/2/09 3,000 ! 9/12 1/3/09 - 31/5/09 3,000 ! 3/12
788 788
900 375 1,275 4,000
562 281 843 3,000 94 94 1,000 Trading income 1,429 3,701 1,741 Trading income 2,857 6,778 6,667 1,275 4,000
2,250 750 3,000 8,000
y/e 31/5/10 Cluppins Year 2006-07 2007-08 2008-09 Raddle Year 2006-07 2007-08 2008-09 2009-10 2010-11
Basis period 1/11/06 to 5/4/07 1/11/06 to 31/10/07 1/11/07 to 28/2/09
Workings 2,000 ! 5/7 2,000 + 5/12 ! 4,083 4,083 ! 7/12 + 788 overlap profits of 1,429 Workings 4,000 ! 5/7 4,000 + 5/12 ! 6,667
Basis period 1/11/06 to 5/4/07 1/11/06 to 31/10/07 y/e 31/5/08 y/e 31/5/09 y/e 31/5/10
There is one overlap period from 1 November 2006 to 5 April 2007 (profits 2,857) and another overlap period from 1 June 2007 to 31 October 2007 (profits 6,667 ! 5/12 = 2,778). So total overlap profits are 5,635.
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Bardell Year 2007-08 2008-09 2009-10 2010-11
Basis period 1/1/08 to 5/4/08 1/1/08 to 31/12/08 y/e 31/5/09 y/e 31/5/10
Workings 1,250 ! 3/5 1,250 + 7/12 ! 843
Trading income 750 1,742 843 3,000
There is one overlap period from 1 January 2008 to 5 April 2008 (profits 750) and another overlap period from 1 June 2008 to 31 December 2008 (profits 843 ! 7/12 = 492). Total overlap profits are 1,242. Winkle Year 2008-09 2009-10 2010-11 Basis period 1/3/09 to 5/4/09 1/3/09 to 28/2/10 y/e 31/5/10 Workings 94 ! 1/3 94 + 9/12 ! 1,000 Trading income 31 844 1,000
There is one overlap period from 1 March 2009 to 5 April 2009 (profits 31) and another overlap period from 1 June 2009 to 28 February 2010 (profits 1,000 ! 9/12 = 750). Total overlap profits are 781.
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Chapter 13 Pension contributions

13.6
(a) Total 27,490 34,010 61,500 6,475 55,025 21,015 23,885 10,125 55,025 @ 20% @ 20% @ 40% Non-savings 27,490 27,490 6,475 21,015 4,203.00 4,777.00 4,050.00 13,030.00 6,802.00 6,228.00 Savings 34,010 34,010 34,010
Trading income Bank interest (27,208 ! 100/80) Total income Less: Personal allowance Taxable income Income tax due Non-savings income : Basic rate Savings income : Basic rate : Higher rate
Tax borne Less: Tax deducted at source Tax payable
Note: The gross amount of the pension contributions is 7,500 (6,000 ! 100/80). Therefore the basic rate band has been extended to 44,900 (37,400 + 7,500).
(b) If Irma was born in 1942, she is over 65 throughout 2010-11 and so age-related personal allowances must be considered. Her adjusted net income is 54,000 (61,500 7,500). This greatly exceeds the 2010-11 income limit of 22,900 and so it is evident that she will claim only the basic personal allowance of 6,475. Her income tax liability will therefore be the same as in (a) above.
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Chapter 14 Payment of income tax, surcharges, interest and penalties

14.4
(i) The first POA is 15 days late. Surcharges do not apply to POAs but interest is due of 14.75 (12,000 ! 3% ! 15/366). (ii) The second POA is 45 days late. Interest is due of 44.26 (12,000 ! 3% ! 45/366). (iii) 14,000 of the balancing payment is 3 days late. This is not more than 28 days so there is no surcharge but interest is due of 3.44 (14,000 ! 3% ! 3/366). (iv) 4,000 of the balancing payment is 319 days late. Surcharges of 200 each (4,000 ! 5%) are levied on 29 February 2012 (payable 30 March 2012) and on 1 August 2012 (payable 31 August 2012). Interest due on the balancing payment is 104.59 (4,000 ! 3% ! 319/366). Interest due on the surcharges (paid 260 days late and 106 days late respectively) is 6.00 (200 ! 3% ! 260/366 + 200 ! 3% ! 106/366).
Chapter 15 National Insurance contributions

15.4
Brenda's Class 1 NICs are assessed on an annual basis, not month by month. Her salary in 2010-11 is 72,000 (12 ! 6,000), which is increased by the bonus to 92,000. Class 1 contributions are not payable in respect of the BUPA subscription or the car (not convertible into cash). Class 1A applies to these. Brenda's primary Class 1 contributions are 9.4% ! (40,040 5,715) + 11% ! (43,875 40,040) + 1% ! (92,000 43,875) = 4,129.65. The secondary Class 1 contributions payable by her employer are 9.1% ! (40,040 5,715) + 12.8% ! (92,000 40,040) = 9,774.45. The car's emission rating gives an applicable percentage of 37% (15% + 19% + 3%) restricted to 35%. The car benefit assessed on Brenda for income tax purposes is 9,100 (35% ! 26,000) and the assessable fuel benefit is 6,300 (35% ! 18,000). The Class 1A contribution payable by Brenda's employer is 2,067.20 (12.8% ! (9,100 + 6,300 + 750)).
15.5
Leonard will have paid NICs as follows: Class 1 (12 ! 11% ! (2,798 476)) Class 2 (53 @ 2.40) Class 4 (8% ! (10,500 5,715)) 3,065.04 127.20 382.80 3,575.04
His combined Class 1 and Class 2 contributions are within the allowed maximum for 2010-11 of 4,279.22 so there is no possibility of a Class 1 or Class 2 refund. But his combined Class 1, 2 and 4 contributions exceed the allowed maximum for 2010-11 of 3,180.00. Therefore Leonard is entitled to a refund of Class 4 contributions. Since he has paid only 382.80 in Class 4 contributions, the refund is restricted to 382.80, reduced by one-eighth to 334.95.
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Review questions (Set A)

A6
(a) Employment income is taxed on the receipts basis. (b) Income tax and NICs are deducted from remuneration under the PAYE system and must be paid over to HM Revenue and Customs within 14 days of the end of the tax month in which the remuneration is paid (17 days if payment is made by electronic means). (c) The date of receipt for tax purposes is the earliest of: (i) the date that the income is actually received by the employee (ii) the date that the employee becomes entitled to receive the income and, for a company director only: (iii) the date that the income is credited to the director in the company's records (iv) the end of a period of account, if the amount of the director's income for that period is determined before it ends (v) the date that the amount of the director's income for a period of account is determined, if this falls after the end of that period.
A7
(a) Adjusted profit for year to 30 June 2010 Net profit per accounts Less: Reduction in general inventory reserve Reduction in general bad debt allowance NSB interest Lease premium (6,000 ! 90%) ! 1/6th Add: Own consumption 500 ! (160,000/239,500) Wages 2,600 + 125 Repairs and renewals Political donation Claud's income tax Loan to former employee w/off Legal costs 250 + 200 + 190 Depreciation Car leasing charge (see note below) Loss on sale of office furniture Gift Aid donations Interest on overdue tax Speeding fine 1/3rd of remaining motor expenses Lease premium Relocation expenditure Less: Capital allowances Adjusted profit 8,000 150 160 900 334 2,725 3,107 100 17,549 250 640 850 3,640 60 200 130 65 645 6,000 2,395 36,000
9,210 26,790
38,690 65,480 480 65,000
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Note re leased car ("new" rules since leased on or after 6 April 2009): The leased car has emissions which exceed 160g/km and so 15% of the lease rental payments are disallowed. If the car were used entirely for business purposes, the allowable part of the leasing charge would be 7,140 (85% ! 8,400). But business mileage accounts for only 2/3rds of the car's use so the allowable part of the charge is 7,140 ! 2/3 = 4,760. The expenditure added back is 3,640 (8,400 4,760). (b) Class 4 NICs for 2010-11 8% ! (43,875 5,715) + 1% ! (65,000 43,875) = 3,264.05. (c) Income tax liability for 2010-11 Business profits NSB interest Less: Personal allowance Taxable income 50,000 @ 20% 8,595 @ 40% 58,595 Tax borne 65,000 70 65,070 6,475 58,595 10,000.00 3,438.00 13,438.00
Note: The basic rate band is extended by 250 (200 ! 100/80) for the Gift Aid donation and by 12,350 (9,880 ! 100/80) for the pension contributions, giving 50,000 (37,400 + 250 + 12,350).
A8
(i) Gifts and entertainment. As regards gifts, the schedule should list gifts to employees (which are allowable as a trading expense though possibly taxable on the employee) and gifts to others. Most gifts to others will not be allowable, but gifts costing no more than 50 per donee per annum are allowable so long as they carry a prominent advertisement for the business and are not food, drink or tobacco. Certain gifts made to charities, community amateur sports clubs or designated UK educational establishments are also allowable. As regards entertainment, the schedule should distinguish between staff entertaining (which is allowable) and customer entertaining (which is not allowable).
(ii) Major repairs. Sufficient information must be provided in order to distinguish between revenue expenditure (allowable) and capital expenditure (not allowable, though capital allowances may be available). The decisions in important cases such as Odeon Associated Theatres Ltd v Jones (1971) and Law Shipping Co Ltd v CIR (1923) should be used to differentiate between revenue and capital. (iii) Redundancy pay. Redundancy payments made by a continuing business for trade purposes are normally allowable. But when a trade ceases, allowable payments are restricted to no more than three times the amount of any statutory redundancy pay. The schedule must therefore distinguish between the two types of payment and, in the case of payments made on cessation of a trade, also provide information on the employees' entitlement to statutory redundancy pay.
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A9
(a) Capital allowances on plant and machinery: Main pool 1/10/08 - 31/12/09 Additions WDA 3,000 ! 15/12 Additions 6,000 AIA @ 100% 6,000 WDV c/f Total allowances y/e 31/12/10 Additions Disposals Balancing allowance WDA @ 10% WDV c/f Total allowances y/e 31/12/11 Disposals Balancing charge WDA @ 10% Additions AIA @ 100% WDV c/f Total allowances Adjusted profits (after deduction of capital allowances): Adjusted profit before CAs 37,000 24,000 42,000 CAs on P&M 9,000 2,200 1,336 IBAs 52 Adjusted profit after CAs 28,000 21,800 40,612 2,400 2,400 0 0 0 Car 1 (20% private) Car 2 (20% private) Allces
12,200 3,750 ! 80% 0 0 8,450
3,000 6,000 9,000 13,000
(7,000) 1,450 ! 80% 1,300 ! 80% 11,700
1,160 1,040 2,200
(2,000) (2,000) 1,170 ! 80% 10,530
(2,000) 936 2,400 1,336
1/10/08 to 31/12/09 y/e 31/12/10 y/e 31/12/11
Note: IBA is (1% ! 20,000 ! 95/365) = 52.
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Trading income: Year 2008-09 2009-10 2010-11 2011-12 Basis period 1/10/08 to 5/4/09 1/1/09 to 31/12/09 y/e 31/12/10 y/e 31/12/11 Workings 28,000 ! 6/15 28,000 ! 12/15 Trading income 11,200 22,400 21,800 40,612
Overlap profits (1/1/09 to 5/4/09) are 28,000 ! 3/15 = 5,600. (b) Sephora's income tax liability for 2010-11: Income from employment Salary Car benefit (25% ! 21,000, less 300 contribution) Fuel benefit (25% ! 18,000) Beneficial loan (90,000 @ 3%) Total Income Less: Personal allowance Taxable income 37,900 @ 20% 14,220 @ 40% 52,120 Tax liability 46,445 4,950 4,500 2,700 58,595 6,475 52,120 7,580.00 5,688.00 13,268.00
Note: The basic rate band has been extended by 500 (400 ! 100/80) from 37,400 to 37,900 because of the Gift Aid donation.
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Chapter 16 Introduction to capital gains tax

16.8
Capital gains Less: Allowable losses Net gains (losses) Less: Relief for losses b/f Less: Annual exemption CGT assessment Annual exemption lost Unrelieved losses c/f 2007-08 6,500 12,700 (6,200) nil (6,200) nil nil 9,200 6,200 2008-09 9,000 2,350 6,650 nil 6,650 6,650 nil 2,950 6,200 2009-10 12,900 nil 12,900 2,800 10,100 10,100 nil nil 3,400 2010-11 19,200 7,500 11,700 1,600 10,100 10,100 nil nil 1,800
16.9
Capital gains Less: Allowable losses Net gains Less: Relief for losses b/f Less: Annual exemption CGT assessment Unrelieved losses c/f 2009-10 12,800 nil 12,800 nil 12,800 10,100 2,700 3,750 2010-11 38,700 nil 38,700 2,000 36,700 10,100 26,600 1,750
The 3,750 loss can be relieved only against gains arising on subsequent disposals to Ahmed's father.
16.10
Net gains Less: Trading losses Less: Capital losses b/f Less: Annual exemption CGT assessment Unrelieved capital losses c/f (a) 24,900 24,900 13,700 11,200 10,100 1,100 nil (b) 24,900 11,200 13,700 3,600 10,100 10,100 nil 10,100
The trading losses claim must be for the lower of the eligible trading loss (18,500) and the maximum amount (11,200) i.e. 11,200.
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Chapter 17 Computation of gains and losses

17.6
(a) Sale proceeds Less: Market value 31 March 1982 Enhancement expenditure July 1995 Chargeable gain 58,500 14,000 185,000 72,500 112,500
Note: All costs incurred up to 31 March 1982 (including the enhancement expenditure in June 1981) are ignored in the calculation of the chargeable gain. (b) If the buyer of the asset is Jon's wife (who lives with him) the sale proceeds are replaced by a deemed disposal value of 72,500 so as to give a no-gain, no-loss result. Jon's wife's deemed acquisition cost is also 72,500. On a subsequent disposal of the asset by her, she will be treated as if she acquired the asset for 72,500, not 185,000.
17.7
Disposal of first flat, September 2008: Sale proceeds Less: Part market value 31 March 1982: 95,000 ! 42,000 95,000 + 105,000 Part enhancement November 1987: 95,000 ! 18,000 95,000 + 105,000 Chargeable gain 95,000 (19,950)
(8,550) 66,500 110,000 (22,050) (9,450) 78,500
! Disposal of second flat, January 2011:

Sale proceeds Less: Remainder of market value 31 March 1982: (42,000 19,950) Remainder of enhancement expenditure: (18,000 8,550) Chargeable gain
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Chapter 18 Chattels and wasting assets

18.8
(a) If James and Julia are unrelated (and are not connected in any way) then each of the two disposals is treated separately. The proceeds of the second disposal do not exceed 6,000 and therefore that disposal is exempt from CGT. The computation of the gain arising on the first disposal is as follows: Sale proceeds 6,750 Less: Part cost: 6,750 ! 4,000 2,160 6,750 + 5,750 Chargeable gain 4,590 (restricted to 1,250) ! The gain is restricted to 750 ! 5/3 = 1,250. (b) If James and Julia are connected persons then (since the assets concerned form a set) the two disposals are treated as one for CGT purposes. The gain arising is as follows: 12,550 4,000 Chargeable gain 8,550 The maximum gain is (12,550 6,000) ! 5/3 = 10,917. The actual gain is less than this and so the gain remains at 8,550. Sale proceeds (6,750 + 5,800) Less: Cost
18.9
Rebasing applies since the patent was acquired before 31 March 1982. When the patent was valued on 31 March 1982 it had a 33-year life. When it was sold there were four years remaining. Therefore the computation is as follows: Sale proceeds 13,000 Less: Unexpired portion of market value at 31 March 1982:
4 ! 20,000 33
Chargeable gain
!
2,424 10,576
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18.10
The computation of the chargeable gain is as follows: Sale proceeds Less: Proportion of cost 51.614 " 33.304 ! 35,000 72.770 Less: Property income assessment (8,375) 15,000 8,807 6,193 6,193 nil
! Chargeable gain
Notes: (i) P1 = 50.038 + 3.153 ! 6/12 = 51.614 (11.5 years) (ii) P2 = 31.195 + 4.219 ! 6/12 = 33.304 (6.5 years) (iii) P3 = 72.770 (20 years) (iv) The property income assessment is: Premium received Less: 15,000 ! (5 1) ! 2% Less: Relief for premium paid: 5 ! (35,000 35,000 ! (20 1) ! 2%) 20
15,000 1,200 13,800
5,425 8,375 (v) The relief given for the property income assessment is restricted to 6,193 so as not to create a loss. !
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Chapter 19 Shares and securities

19.8
The 1,200 shares disposed of on 24 July 2010 are matched as follows: (a) The first match is against the 300 shares acquired on the same day as the disposal. These 300 shares were acquired for 1,400 and sold for 2,100 (300 ! 7), so the chargeable gain on these 300 shares is 700. (b) The next match is against the shares acquired within the next 30 days. These are: (i) 400 shares acquired on 10 August 2010 for 2,500. These were sold for 2,800 (400 ! 7), so the chargeable gain on these 400 shares is 300. (ii) 350 shares acquired on 20 August 2010 for 2,600. These were sold for 2,450 (350 ! 7), so the allowable loss on these 350 shares is 150. (c) The final match of 150 shares is against the s104 holding. The shares acquired before 31 March 1982 are added into this holding at their market value at that date. The s104 holding is as follows: Number of shares Acquired 2 October 1979 Acquired 10 January 1981 Acquired 5 December 2000 Acquired 8 November 2005 Sold 24 July 2010 (150/1,000ths) s104 holding c/f 200 150 400 250 1,000 (150) 850 Allowable expenditure 640 480 1,420 1,160 3,700 (555) 3,145
These 150 shares were acquired for 555 and were sold for 1,050 (150 ! 7), so the chargeable gain on these 150 shares is 495. The overall chargeable gain is 1,345 (700 + 300 150 + 495).
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19.9
The disposal in November 2010 must have come from the s104 holding. The shares acquired before 31 March 1982 are included at their market value at that date. The s104 holding is as follows: Number of shares Acquired 24 August 1975 Acquired 23 November 1980 Acquired 26 February 1995 Acquired 11 October 2004 Rights issue June 2010 Sold November 2010 (1,260/4,200ths) s104 holding c/f 800 1,200 1,600 400 4,000 200 4,200 (1,260) 2,940 Allowable expenditure 960 1,440 2,400 800 5,600 300 5,900 (1,770) 4,130
The 1,260 shares were acquired for 1,770 and were sold for 3,780 (1,260 ! 3), so the chargeable gain is 2,010.
19.10
Susan has received 5,280 and her shares have a residual value of 2,640. Therefore she has made a 2/3rds part disposal. The s104 holding is: Number of shares Acquired 11 January 2003 Acquired 20 January 2010 Distribution January 2011 (2/3rds) s104 holding c/f The allowable loss is 1,720 (7,000 5,280). 1,500 1,140 2,640 2,640 Allowable expenditure 4,800 5,700 10,500 (7,000) 3,500
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19.11
Steven received 5,000 shares in Concave plc, worth 20,000, plus 5,000 in cash i.e. a total of 25,000. The amount received in cash is 20% of the total. Therefore this does not rank as a small capital distribution and must be treated as a part disposal. The s104 holding is as follows: Number of shares Acquired 9 May 2003 Acquired 28 November 2008 Distribution February 2011 (20%) s104 holding after distribution s104 holding (Concave plc) c/f The chargeable gain is 2,900 (5,000 2,100). 2,000 500 2,500 2,500 5,000 Allowable expenditure 8,000 2,500 10,500 (2,100) 8,400 8,400
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Chapter 20 Principal private residences

20.5
Sale proceeds Less: Acquisition cost Chargeable gain (before PPR exemption) 190,000 65,000 125,000
Terry owned the property for 20 years (240 months). He was actually resident in the entire property for the first 60 months. He was then absent (not for a work-related reason) for the next 48 months, of which 36 months are exempt as absence for any reason, leaving 12 chargeable months. Finally, he was resident in three-quarters of the house for 132 months, using the other quarter for business purposes. The gain may be analysed as follows: Exempt as a PPR: 125,000 ! 96/240 125,000 ! 132/240 ! 3/4 Gain arising during 12 months absence: 125,000 ! 12/240 Gain arising during business use: 125,000 ! 132/240 ! 1/4 50,000 51,563 101,563 6,250 17,187 125,000 -
The 101,563 is exempt and the 6,250 is covered by letting relief of 6,250 (which is the lowest of 6,250, 101,563 and 40,000). This leaves a chargeable gain of 17,187.
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Chapter 21 CGT reliefs

21.5
The original building was acquired before 31 March 1982, so rebasing applies. The gain on this disposal is calculated as follows: Sale proceeds Less: Market value at 31 March 1982 Chargeable gain 875,000 125,000 750,000
Norman reinvested all of the sale proceeds in the new building except for 155,000. Therefore 155,000 of the gain is immediately chargeable and the remaining 595,000 is rolled-over. The gain on the disposal of the second building is calculated as follows: Sale proceeds Less: Allowable cost (720,000 595,000) Chargeable gain 730,000 125,000 605,000
21.6
In 2005-06, Ruth invested the entire sale proceeds of the building in a depreciating asset. Therefore the gain of 42,500 could be held-over (for a maximum of 10 years). In 2010-11, Ruth invested all but 15,000 of the sale proceeds of the original building in a new building. Therefore 27,500 (42,500 15,000) of the gain is now rolled-over against the new building. The remaining 15,000 continues to be held-over against the plant and will crystallise no later than June 2015.
21.7
(a) ER is 4/9ths of 351,000 = 156,000. This leaves a chargeable gain of 195,000. CGT is payable at 18%, giving a CGT liability of 35,100. (b) CGT payable is 570,000 (10% of 5,000,000 + 28% of 250,000). (c) Including the gain relating to the associated disposal, total gains are 171,000. CGT is payable is 10%, giving a CGT liability of 17,100.
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21.8
The gain arising on the gift is as follows: Disposal value Less: Acquisition cost Chargeable gain 500,000 140,000 360,000
Gift relief is available only insofar as the gain relates to chargeable business assets. The company's chargeable assets are the freehold (1,700,000), the goodwill (500,000) and the investments (100,000). Motor cars and current assets (e.g. stock, debtors, cash) are not chargeable assets. Of the chargeable assets, the freehold and the goodwill are also chargeable business assets. The held-over gain is therefore:
1,700,000 + 500,000 ! 360,000 = 344,348. 1,700,000 + 500,000 + 100,000

The remaining 15,652 of the gain is immediately chargeable to CGT. The friend's deemed acquisition cost is 155,652 (500,000 344,348). !
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Review questions (Set B)

B6
Sale proceeds Less: Incidental costs of disposal Less: Acquisition cost Enhancement expenditure Chargeable gain before PPR exemption Mrs Stapleton owned the house for 19 years (228 months), as follows: (i) (ii) (iii) (iv) (v) 1 June 1991 to 31 March 1992 1 April 1992 to 31 October 1992 1 November 1992 to 31 December 1993 1 January 1994 to 31 December 2005 1 January 2006 to 31 May 2010 Exempt 10 7 14 144 36 211 Liable Reason Actual residence For any reason Working abroad Actual residence Last 36 months 50,000 20,000 300,000 5,200 294,800 70,000 224,800
17 17
The PPR exemption is 208,039 (224,800 ! 211/228), leaving 16,761. Letting relief is available at the lowest of 208,039, 16,761 and 40,000 i.e. 16,761, so the chargeable gain is nil.
B7
(a) Section 104 holding Number of shares Bought 1 January 2001 Bought 19 June 2002 Bought 31 December 2008 1,000 700 1,200 2,900 Rights issue 31 May 2009 725 3,625 Bought 11 August 2010 400 4,025 Sold 31 January 2011 (4,025) s104 holding c/f nil The chargeable gain is 20,592 (38,000 - 17,408). Allowable expenditure 4,200 2,950 5,620 12,770 2,538 15,308 2,100 17,408 (17,408) nil
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(b) (i) (ii) (iii) (iv)
Capital gains are taxed at 18% or 28% (not at income tax rates of 20%, 40% or 50%). Capital gains accruing before 31 March 1982 are not taxable. Capital gains may attract roll-over relief, gift relief etc. Trading profits are earned income for the purpose of computing the maximum pension contributions in a tax year on which tax relief is available. (v) A wider range of expenditure is allowed against a trading profit than a capital gain. (vi) Trading losses enjoy a wider selection of loss reliefs than capital losses.
B8
(i) The lease was a 30-year lease originally (Schedule 8 percentage 87.330%) and had 15.5 years left to run when it was assigned (Schedule 8 percentage 61.617 + 6/12 ! 2.499 = 62.866%). The gain arising on the disposal is as follows: Sale proceeds 75,000 Less: Unexpired portion of cost 62.866 ! 20,000 14,397 87.330 Chargeable gain 60,603
(ii) Kay's disposal cannot be considered as a small part-disposal of land, since the disposal proceeds ! exceed 20% of the value of the land prior to the sale (20% ! 78,000 = 15,600). Therefore the gain arising on the disposal is as follows: Sale proceeds 18,000 Less: Part cost 18,000 ! 20,000 4,615 18,000 + 60,000 Chargeable gain 13,385
! (iii) Section 104 holding

Allowable expenditure Bought January 1981 4,000 32,000 Rights issue March 1994 1,000 7,000 Bought November 1996 3,000 24,000 8,000 63,000 Bonus issue January 2002 4,000 12,000 63,000 Sold March 2011 (7/12ths) (7,000) (36,750) s104 holding c/f 5,000 26,250 The shares were sold for 56,000. The chargeable gain is 19,250 (56,000 - 36,750). Number of shares
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B9
Gillian will receive the following in return for her 10,000 shares in Downtown plc: 2,000 ordinary shares in Upmarket plc 4,000 preference shares in Upmarket plc Cash 20,000 12,000 6,000 38,000
The cash of 6,000 is more than 5% of the total and exceeds 3,000, so this cannot be treated as a small capital distribution. The s104 holding is: Number of Allowable shares expenditure Bought January 2005 10,000 20,000 Distribution October 2010 (6/38ths) (3,158) s104 holding after distribution 10,000 16,842 The chargeable gain arising on this disposal is 2,842 (6,000 - 3,158). Note: The 10,000 shares in Downtown plc are now replaced by the 2,000 ordinary and 4,000 preference shares in Upmarket plc, with a total allowable expenditure of 16,842. This allowable expenditure is split between the ordinary and preference shares as follows: (i) The 2,000 ordinary shares have allowable expenditure of 10,526 (16,842 ! 20,000/32,000). (ii) The 4,000 preference shares have allowable expenditure of 6,316 (16,842 ! 12,000/32,000).
B10
The company's chargeable assets total 8,000,000, of which all but the listed shares (1,000,000) are chargeable business assets. So the held-over gain is 350,000 (400,000 ! 7,000,000/8,000,000). The remainder of the gain (50,000) is immediately chargeable.
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Chapter 22 Introduction to corporation tax

22.6
The company's trading income is as follows: Net loss per accounts Add: Non-trading income: Dividends receivable Debenture interest receivable Bank interest receivable Income from property Profit on sale of investments Less: Disallowed expenses: Depreciation Less: Capital allowances Trading income The chargeable profits for the year are: Trading income Income from non-trading loan relationships Income from property Chargeable gain Chargeable profits 11,240 18,600 4,000 8,450 42,290 (15,270)
4,000 6,000 12,600 4,000 22,490
49,090 (64,360) 108,300 43,940 32,700 11,240
Notes: (i) Dividends receivable are FII and do not form part of the company's chargeable profits. (ii) Debenture interest receivable is assessed on the accruals basis. Therefore the amount assessable is 6,000, even though no interest was actually received during the accounting period. Bank interest of 12,600 is also assessed on the accruals basis. (iii) The company has accounted for rents receivable on the accruals basis which is the correct basis for tax purposes. (iv) The debenture interest and patent royalties payable (computed on the accruals basis and shown gross) are allowable trading expenses.
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Chapter 24 Computation and payment of the corporation tax liability

24.6
The chargeable profits for the year to 31 March 2011 are: Trading income Income from non-trading loan relationships Chargeable gains Less: Qualifying charitable donations Chargeable profits 360,282 12,957 295,327 668,566 24,600 643,966
Augmented profits for the year are 670,966 (643,966 + (24,300 + 2,700)). This is between the lower and upper limits for FY2010. Therefore the corporation tax liability for the year is as follows: Corporation tax on 643,966 @ 28% Less: Marginal relief: 643,966 7 ! (1,500,000 670,966) ! 670,966 400 Corporation tax liability 180,310.48 13,924.22 166,386.26
24.7
The 14 months to 31 December 2010 will be divided into two accounting periods i.e. the 12 months to 31 October 2010 and the 2 months to 31 December 2010. The chargeable profits, FII and augmented profits for each accounting period are as follows: 12 months to 2 months to 31/10/10 31/12/10 Adjusted trading profits (time apportioned) 1,211,578 201,930 Less: Capital allowances 222,650 37,210 Trading income 988,928 164,720 Chargeable gains 16,575 21,692 Building society interest: y/e 31/10/10 (3,500 + 4,000 3,000) 4,500 2 mths to 31/12/10 (4,300 4,000) 300 Chargeable profits 1,010,003 186,712 FII (3,150 + 350) 3,500 Augmented profits 1,013,503 186,712 Each accounting period should be considered separately:
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12 months to 31 October 2010 This accounting period falls partly into FY2009 and partly into FY2010. Augmented profits are between the lower and upper limits (which are the same in both FYs) so corporation tax is payable at the main rate less marginal relief. Chargeable profits and augmented profits are time-apportioned between the FYs and the computation is as follows: FY2009 (5 months) Corporation tax on 420,835 @ 28% Less: Marginal relief: 117,833.80 3,535.10 164,967.04 4,949.13 160,017.91 274,316.61
420,835 7 ! (625,000 422,293) ! 400 422,293

FY2010 (7 months) Corporation tax on 589,168 @ 28% ! ! Less: Marginal relief: 589,168 7 ! (875,000 591,210) ! 591,210 400 Corporation tax liability
114,298.70
! The upper limit used in each ! marginal relief calculation ("U") is 1,500,000, scaled down in accordance with the length of the period for which marginal relief is being calculated. For the five months which fall into FY2009, this limit is 625,000 (5/12ths of 1,500,000). For the seven months which fall into FY2010, the limit is 875,000 (7/12ths of 1,500,000).
Since corporation tax rates and limits did not change between FY2009 and FY2010, it was not strictly necessary to split the computation between the financial years.
2 months to 31 December 2010 This accounting period falls entirely into FY2010. For a 2-month period, the lower and upper limits are reduced to 50,000 (2/12ths of 300,000) and 250,000 (2/12ths of 1,500,000). Augmented profits of 186,712 lie between these limits. Therefore the computation is: FY2010 Corporation tax on 186,712 @ 28% Less: Marginal relief: 186,712 7 ! (250,000 186,712) ! 186,712 400 Corporation tax liability 52,279.36 1,107.54 51,171.82
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Chapter 25 Income tax and advance corporation tax

25.5
Net profit per the accounts Less: Non-trading income: Profit on sale of tangible fixed asset Other income Add: Disallowed expenses Depreciation Less: Capital allowances Trading income Non-trading income from intangible fixed assets Chargeable gain Chargeable profits 59,255
542 15,000
15,542 43,713 5,764 49,477 5,318 44,159 6,000 212 50,371
FII is 10,000 (9,000 + 1,000) so augmented profits are 60,371 (50,371 + 10,000). The chargeable profits are charged to tax at the FY2010 small profits rate of 21%. Corporation tax on 50,371 at 21% 10,577.91 Less: Income tax repayable: (20% ! 4,000) (20% ! 2,000) 400.00 Corporation tax payable 1 January 2012 10,177.91
25.6
Year to 30 September 2010 FII is 10,000 (9,000 + tax credit 1,000). Uplifted FII is 11,250 (10,000 ! 9/8). If ACT had not been abolished, franked payments would have been 37,500 (30,000 ! 100/80). Shadow ACT is 20% of 26,250 (37,500 11,250) = 5,250. The maximum ACT set-off is 20% of 32,000 = 6,400. Therefore surplus ACT of 1,150 (6,400 5,250) is relieved, leaving surplus ACT carried forward of 850.
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Chapter 26 Corporation tax losses

26.6
Before considering the claims to set the trading loss against total profits, the company's chargeable profits for each of the three years to 31 March 2009 were as follows: y/e 31/3/07 61,900 3,400 58,500 11,115 y/e 31/3/08 77,400 3,400 74,000 14,800 y/e 31/3/09 64,200 3,400 60,800 12,768
Trading income Less: Qualifying charitable donations Chargeable profits Corporation tax @ 19%/20%/21%
With the trading loss claims, the position is: y/e 31/3/07 61,900 61,900 61,900 61,900 3,400 58,500 y/e 31/3/08 77,400 77,400 77,400 50,000 27,400 3,400 24,000 y/e 31/3/09 64,200 64,200 64,200 64,200 0 0 3,400 y/e 31/3/10 5,200 5,200 5,200 0 0 0 53,100 3,400
Trading income Chargeable gains, less losses b/f Less: Trade loss relief (a) Less: Trade loss relief (b) Less: Qualifying charitable donations Chargeable profits Trade losses c/f Unrelieved charitable donations
The tax liability for the year to 31 March 2008 is now 4,800 (24,000 ! 20%) and the liability for the year to 31 March 2009 is now nil. The required repayment is 22,768 (10,000 + 12,768). Interest on the 10,000 repayment runs from 1 January 2011 (for 14 days). Interest on the 12,768 runs from 1 January 2010 (for 379 days). Therefore interest is due as follows: (10,000 ! 0.5% ! 14/365) + (12,768 ! 0.5% ! 379/365) = 68.21. The total repayment, including interest, is 22,836.21 (22,768 + 68.21). If the company ceased trading on 31 March 2010, the unrelieved trade losses 53,100 could be carried back and set first against the remaining profits of the year to 31 March 2008 and then against the profits of the year to 31 March 2007. This would generate further repayments. These would carry interest as from 1 January 2011.
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Chapter 27 Close companies and companies with investment business

27.4
If Siobhan had not repaid part of the loan, the company would have been required to pay tax of 25,000 (25% of 100,000) on 1 January 2011. As it is, the company must pay 11,250 (25% of 45,000) on that date. This sum is recovered on 1 January 2012. Siobhan is taxed in 2010-11 on income of 45,000 (net) which is grossed-up to 50,000. Some or all of this income may be taxed at the dividend upper rate of 32.5% or the dividend additional rate of 42.5%. The company is denied any tax relief in relation to the amount of the loan which has been written off.
27.5
(a) This is a close company whose income is mainly derived from letting property (presumably on a commercial basis to non-connected persons). The company is not a CIC and therefore the small profits rate is available. The tax due is 21% of 89,600 = 18,816. (b) It would make no difference if the property income were trading income instead. (c) If the property income were a net credit on non-trading loan relationships instead, the company would be a CIC and the small profits rate would not be available. Tax due would be 28% of 89,600 = 25,088.
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Chapter 28 Groups of companies and reconstructions

28.6
1/12/09 - 31/3/10 (4 months) T Ltd chargeable profit: 210,000 ! 4/12 138,000 ! 8/12 B Ltd loss of 174,000 Maximum group relief 70,000 58,000 58,000 92,000 116,000 92,000 1/4/10 - 30/11/10 (8 months)
Total group relief is 150,000, leaving 24,000 of the trading loss unrelieved. A claim could be made to set 3,000 of this loss against the chargeable gains of B Ltd for the year to 30 November 2010. This would save tax at 21% and pave the way for a further claim to set the remainder of the loss against the company's total profits for the previous year. Alternatively, the entire 24,000 could be carried forward for relief against future trading profits. Assuming that this is the chosen course of action, the corporation tax due would be as follows: B Ltd y/e 30/11/10 FY2009 Chargeable profits = 1,000 Lower limit (300,000 ! 1/2 ! 4/12) = 50,000 Corporation tax on 1,000 @ 21% = 210 FY2010 Chargeable profits = 2,000 Lower limit (300,000 ! 1/2 ! 8/12) = 100,000 Corporation tax on 2,000 @ 21% = 420 Total tax for the period = 630 T Ltd y/e 31/3/10 Chargeable profits = 152,000 (210,000 group relief 58,000). Lower limit (300,000 ! 1/2) = 150,000 Upper limit (1,500,000 ! 1/2) = 750,000 Corporation tax on 152,000 @ 28% Less: Marginal relief: 152,000 7 ! (750,000 152,000) ! 152,000 400 Corporation tax liability 42,560.00 10,465.00 32,095.00
! T Ltd y/e 31/3/11
Chargeable profits = 46,000 (138,000 group relief 92,000). Lower limit (300,000 ! 1/2) = 150,000. Corporation tax on 46,000 @ 21% = 9,660.00.
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Review questions (Set C)

C6
12 months to 30/11/10 600,000 (39,000) (13,889) (2,000) 545,111 400,000 145,111 8,500 8,400 162,011 16,000 146,011 30,000 176,011 300,000 1,500,000 30,662.31 4,500 125,896 125,896 20,000 145,896 75,000 375,000 35,250.88 3,459.70 30,662.31 31,791.18 3 months to 28/2/11 150,000 (26,000) (2,604) 121,396 121,396
Trading profits (time apportioned) Less: Capital allowances: Plant and machinery IBAs (Working 1): 2nd hand factory New factory Trading income Less: Losses b/f Bank interest receivable: 4,900 + 3,800 + 4,300 4,500 4,800 + 4,000 4,300 Building society interest receivable Chargeable gains (Working 2) Less: Qualifying charitable donations Chargeable profits FII (27,000 + 3,000) FII (18,000 + 2,000) Augmented profits Lower limit Upper limit Corporation tax @ 21% on 146,011 Corporation tax @ 28% on 125,896
125,896 Less: 7/400 ! (375,000 145,896) ! 145,896

Corporation tax payable 1/9/11 and 1/12/11
Working 1 (IBAs) ! (i) The residue of expenditure for the second-hand factory is 250,000 and there are six years remaining of the tax life, so UU Ltd can claim an annual WDA equal to the appropriate percentage of 41,667 (1/6th of 250,000). WDA for the year to 30/11/10 is 13,889 ((4/12 ! 41,667 ! 50%) + (8/12 ! 41,667 ! 25%)). WDA for the three months to 28/2/011 is 2,604 (3/12 ! 41,667 ! 25%). (ii) WDA for the new factory for the year to 30/11/10 is 2,000 ((2% ! 150,000 ! 4/12) + (1% ! 150,000 ! 8/12)). There is no balancing adjustment on the sale.
th
Working 2 (Capital gains) The indexation factor on the disposal of the factory is (226.8 188.9)/188.9 = 0.201, so that indexation allowance is 30,150 (150,000 ! 0.201) and the chargeable gain is 169,850 (350,000 150,000 30,150). All the proceeds of the sale were re-invested in the purchase of the factory in March 2010, so the entire gain is rolled-over. No gain is chargeable immediately so the capital losses brought forward are carried forward again to the next accounting period.
C7
(i) If S Ltd and T Ltd become subsidiaries, there will be three associated companies and the lower and upper limits will be divided equally between these companies. Each company's limits will become 100,000 and 500,000. The corporation tax due for the year to 31 March 2011 will be: R Ltd 220,000 @ 28% Less: 7/400 ! (500,000 220,000)
61,600 4,900 56,700 S Ltd 20,000 @ 21% 4,200 T Ltd 20,000 @ 21% 4,200 Total 65,100 (ii) If S Ltd and T Ltd are wound up, there will be only one company and the limits will be available in full. The combined profit for the year will be 260,000, with tax due of 21% ! 260,000 = 54,600. This is a saving of 10,500.
C8
(a) In the year to 31 March 2008, X Ltd will be assessed on rents of 13,333 (20,000 ! 8/12) plus the premium of 49,600 (80,000, less 19 ! 2%) totalling 62,933. Y Ltd will be able to deduct 8/12 ! 2,480 (49,600 ! 1/20) from its trading profits for the year i.e. 1,653. (b) Y Ltd's property income for the year to 31 March 2011 is: Rents receivable 28,000 Less: Rent payable 20,000 8,000 Premium received 45,000 Less: 4 ! 2% ! 45,000 3,600 41,400 Less: 5/20 ! 49,600 12,400 29,000 Income from property 37,000 (c) Assuming that X Ltd owns the property, the company has granted a short lease out of a freehold. This is treated as a part disposal. The disposal proceeds are 30,400 (80,000, less the property income assessment of 49,600). Y Ltd has granted a short sub-lease out of a short head-lease. The gain will be calculated using the Schedule 8 TCGA 1992 table of percentages and then reduced by the 29,000 property income assessment. This reduction cannot be used to create a loss.
th
C9
Main headings are: Basis of assessment and rates of tax; National Insurance contributions; Distribution of profits; Pension contributions; Due dates of payment of tax and NICs; Relief for trading losses; Chargeable gains on disposals of business assets. (See Chapter 27 for more detail).
C10
(a) HD Ltd (12 months) 890,000 6,000 2,000 898,000 4,000 894,000 68,000 826,000 SD Ltd (9 months) 4,000 8,000 20,000 32,000 32,000 32,000 5,000
Trading income Income from non-trading loan relationships Income from property Chargeable gains Less: Qualifying charitable donations Less: Group relief Trading loss relief against total profits Chargeable profits Unrelieved donations
The corresponding accounting period is the six months to 31 December 2010, so group relief is restricted to the lower of 894,000 ! 6/12 and 102,000 ! 6/9 = 68,000. HD Ltd has chargeable profits and augmented profits of 826,000 (the intra-group dividend is ignored when computing augmented profits). No marginal relief is available since the upper limit is halved to 750,000. The corporation tax payable is 826,000 ! 28% = 231,280. Corporation tax payable by SD Ltd is nil (assuming that a claim is made to set the trading loss against total profits of the loss-making period). If no such claim is made, the chargeable profits of SD Ltd will be 27,000 and corporation tax will be due at 21%, giving a tax liability of 5,670. With the 32,000 claim, trading losses remaining unrelieved are 2,000. These may be carried back against total profits of the previous 12 months or surrendered to HD Ltd in the year to 31 December 2011 or carried forward for relief against future trading profits. Without the claim, losses remaining unrelieved are 34,000. These may be surrendered to HD Ltd in the year to 31 December 2011 or carried forward for relief against future trading profits. (b) HD Ltd cannot surrender its capital losses to SD Ltd. However, if the assets disposed of by SD had first been transferred (on a no-gain, no-loss basis) to HD, the capital gain arising on their eventual disposal would have belonged to HD and HD's capital losses could then have been set against this gain. Alternatively, the two companies could jointly elect by 31 March 2013 that the gains of 20,000 realised by SD Ltd should be treated as if they had been realised by HD Ltd. This would have the same effect as an actual transfer.
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Chapter 29 Value added tax (1)

29.5
(a)/(b) A person should register for VAT as soon as the value of that person's taxable supplies for the year ended on the last day of any month exceeds the registration threshold (70,000 as from 1 April 2010). HM Revenue and Customs should be notified within 30 days of the end of the month in question. Registration will usually take effect as from the beginning of the next month but one. Registration is not required if HMRC is satisfied that taxable turnover during the next 12 months will not exceed the deregistration threshold (68,000 from 1 April 2010). Registration is also required if there are reasonable grounds for believing (at any time) that taxable turnover during the next 30 days alone will exceed the registration threshold. In this case, HMRC should be notified no later than at the end of the 30-day period and registration will take effect as from the beginning of that period. (c) One consequence of failing to register is that the person concerned becomes personally liable for the output tax which should have been charged to customers since the date on which registration should have occurred, and it may well be impossible to recover this VAT in retrospect from the customers. A further consequence is that the person will become liable to certain penalties (see Chapter 30). (d) Voluntary deregistration is allowed if HMRC is satisfied that the person's taxable turnover will not exceed the deregistration threshold (68,000 from 1 April 2010) in the next 12 months. Compulsory deregistration occurs when a registered person entirely ceases to make taxable supplies or when a change of legal status occurs. (e) A person whose taxable supplies do not exceed the registration threshold may register for VAT voluntarily. This means that output tax must be charged to customers but it enables the person concerned to recover input tax. If the person's supplies are all zero-rated or are made mainly to customers who are themselves taxable persons, the fact that output tax must be charged may not deter customers.
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Chapter 30 Value added tax (2)

30.5
Output tax Standard-rated supplies 319,600 ! 7/47 Zero-rated supplies 88,000 @ 0% Input tax Attributable to taxable supplies = 35% ! 118,000 Non-attributable: 272,000 + 88,000 272,000 + 88,000 + 440,000 = 45% ! 25% ! 118,000 Reclaimable from HMRC Notes: (i) The value of standard-rated supplies used in the calculation of non-attributable input tax which may be reclaimed is 319,600 ! 40/47 = 272,000. (ii) The simplified de minimis tests cannot be used because input tax exceeds 625 per month and exempt supplies are more than 50% of the value of all supplies. 47,600 0 47,600 41,300 13,275 54,575 6,975
30.6
Output tax Standard-rated supplies 39,400 @ 17.5% Fuel scale charge 326 ! 7/47 Input tax Standard-rated purchases Car repairs Standard-rated expenses Plant and machinery Motor van 25,800 120 9,700 8,000 12,000 55,620 @ 17.5% 6,895.00 48.55 6,943.55
Reclaimable from HMRC
9,733.50 2,789.95
Notes: (i) All of the exports are zero-rated. (ii) Input tax on car repairs may be reclaimed in full. (iii) Insurances are exempt. (iv) Input tax on entertaining expenses may not be reclaimed. (v) Input tax on a motor van may be reclaimed (unlike input tax on a motor car).
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Chapter 31 Inheritance tax

31.6
The value of the gift to Hazel's grandson is reduced by the annual exemptions for 2005-06 and 2004-05 to 294,000. The gift is a PET so no lifetime tax was payable. Previous gross chargeable transfers in the seven years to date (2 April 1999 to 1 April 2006) were 266,000. Tax due at the death rates applicable on 17 December 2010: 59,000 (325,000 266,000) @ 0% 0 235,000 @ 40% 94,000 94,000 Less: Taper relief (4-5 years) @ 40% 37,600 56,400 Less: Lifetime tax paid 0 IHT payable by 30 June 2011 56,400
31.7
The value of each gift after deduction of exemptions is as follows: Value AE for before current AE year 2002-03 Relevant property trust 100,000 3,000 2003-04 Gift to daughter 250,000 3,000 Gift to son 250,000 2007-08 Relevant property trust 450,000 3,000 Lifetime tax liability on transfers made in seven years to date of death The gift to the son was a PET, so no lifetime tax was payable. The gift to a trust made on 10 June 2007 was a chargeable lifetime transfer. Previous gross chargeable transfers in the seven years to date (11 June 2000 to 10 June 2007) were 94,000, so lifetime tax of 59,500 was due as follows: Net 206,000 238,000 444,000 Gross 206,000 297,500 503,500 Tax 0 59,500 59,500 AE for previous year 3,000 3,000 Value after AE 94,000 247,000 250,000 444,000
206,000 (300,000 94,000) grossed up @ 0% 238,000 grossed up @ 20% Totals
Tax liability on death: Lifetime transfers made in seven years to date of death The gift to the daughter was a PET made more than seven years before death and is exempt. A liability on death must be calculated for the gift to the son and the gift to the trust.
th
(i)
Gift to son on 1 August 2003 The gross value of this transfer is 250,000 and previous gross chargeable transfers in the seven years to date (2 August 1996 to 1 August 2003) were 94,000. Tax due at the death rates applicable on 11 July 2010 is as follows: 231,000 @ 0% 0 19,000 @ 40% 7,600 7,600 Less: Taper relief (6-7 years) @ 80% 6,080 1,520 Less: Lifetime tax paid 0 IHT payable by son on 31 January 2011 1,520
(ii) Gift to trust on 10 June 2007 The gross value of this transfer is 503,500 and previous gross chargeable transfers in the seven years to date (11 June 2000 to 10 June 2007) were 344,000 (94,000 + 250,000), absorbing the whole of the nil-rate band. Tax due at death rates applicable on 11 July 2010: 503,500 @ 40% Less: Taper relief (3-4 years) @ 20% Less: Lifetime tax paid IHT payable by trustees on 31 January 2011 Tax liability on death: Estate Chargeable transfers in the seven years to the date of death have absorbed the whole of the nil-rate band. Tax on the estate is therefore 200,000 (40% of 500,000), payable on 31 January 2011. 201,400 40,280 161,120 59,500 101,620
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Chapter 32 Overseas aspects of taxation

32.7
Trading income Income from property 2,200 ! 100/55 Bank interest 1,600 ! 100/80 Total income Less: Personal allowance Taxable income Income tax Basic rate band : Non-savings income : Savings income Higher rate : Savings income 35,700 @ 20% 1,700 @ 20% 300 @ 40% 37,700 38,175 4,000 2,000 44,175 6,475 37,700 7,140.00 340.00 120.00 7,600.00
Less: Double tax relief, lower of: (a) foreign tax = 1,800 (b) UK tax on foreign income = 860 (see note) Less: Tax suffered by deduction from bank interest Tax payable
860.00 6,740.00 400.00 6,340.00
Note: If the foreign income of 4,000 is ignored, Donald has taxable income of 33,700. The income tax due on this would be 33,700 @ 20% = 6,740.00. Therefore the tax due on the foreign income is 860 (7,600.00 6,740.00). 940 of foreign tax is unrelieved.
32.8
UK Trading income Chargeable gains Foreign dividend Less: Qualifying charitable donations Chargeable profits Corporation tax @ 28% Less: Unilateral DTR Corporation tax liability Maximum ACT set-off 720,000 120,000 840,000 80,000 760,000 212,800 212,800 152,000 Overseas Total 720,000 120,000 18,000 858,000 80,000 778,000 217,840 (5,040) 212,800 152,000
18,000 18,000 18,000 5,040 (5,040)
th
Notes: (i) The grossed-up foreign dividend is 8,400 ! 100/70 = 12,000. (ii) Underlying tax is 12,000/50,000 ! 25,000 = 6,000. The taxable dividend is 18,000 (12,000 + 6,000) and foreign tax suffered totals 9,600 (iii) The upper limit is 1,500,000 divided by 20 = 75,000, so corporation tax is due at 28%. (iv) DTR is limited to the UK tax due on the overseas income. Foreign tax paid of 4,560 remains unrelieved. (v) Maximum ACT set-off against tax on UK income is 152,000 (20% of 760,000). For the overseas income the maximum set-off is nil.
th
Review questions (Set D)

D5
(i) Accumulative turnover up to the end of November is 42,200. This becomes 55,200 by the end of December and 70,700 (exceeding the registration threshold of 70,000) by the end of January. It will be necessary to notify HMRC within 30 days of the end of January 2011 and registration will probably take effect from 1 March 2011. Delay is inadvisable since there are penalties for delaying registration beyond the due date. (ii) The input tax relating to stock held on the date of registration may be reclaimed. (iii) The input tax relating to the van is recoverable but not the input tax relating to the car. The input tax relating to all motor expenses, including all petrol, is recoverable but Mr Deans will have to account for output tax in respect of the fuel provided for private use. The amount of output tax due is calculated in accordance with set scale charges which depend upon the car's emissions. (iv) Bad debt relief is available so long as at least six months have elapsed since the date of supply and Mr Deans has written off the debt in his books. The cash accounting scheme would provide automatic bad debt relief.
D6
(a) Output tax is 7/47 ! 30,652 = 4,565. Input tax is 7/47 ! 10,830 (4,087 + 6,130 + 613) = 1,613. VAT payable to HMRC is therefore 2,952. (b) Profit to 28 February 2010 Add: 3 months to 31 May 2010: UK sales 30,652 ! 40/47 Exports Materials 4,087 ! 40/47 + 2,800 General expenses 6,130 ! 40/47 Wages Hire of machinery 613 ! 40/47 Bank charges 6,278 5,217 7,000 522 500 46,500
26,087 8,000 34,087
19,517
14,570 61,070
13,375 Adjusted profit for year to 31 May 2010 74,445 (c) The basis period for 2010-11 (the year of cessation) runs from the end of the basis period for tax year 2009-10 up to the date of the cessation. The basis period for 2009-10 would have been the year to 31 May 2009, so the basis period for 2010-11 is the year to 31 May 2010. Transitional overlap relief is available in relation to the profits earned between the end of the basis period for 1996-97 and 5 April 1997. The 1996-97 basis period would have been the 24 months to 31 May 1996, so transitional overlap relief is available in relation to the profits of the period from 1 June 1996 to 5 April 1997. The 2010-11 trading income is: Adjusted profits of y/e 31 May 2010 74,445 Transitional overlap relief 45,000 ! 10/12 37,500 36,945
Add: Balancing charges: Plant 12,625 (25,000 12,375) + Car 750 (6,000 5,250)
th
(d) Disposal proceeds Less: Cost Chargeable gain
Shop 200,000 30,000 170,000
Workshop 130,000 21,000 109,000
Goodwill 180,000 180,000
The total gain (before entrepreneurs' relief) is 459,000. Entrepreneurs' relief is 4/9ths of 459,000 = 204,000, leaving a chargeable gain of 255,000.
D7
(a) A Ltd controls B Ltd, C Ltd, D Ltd, O Inc and E Ltd, so these six companies are associated companies. The upper limit for each company is 250,000 (1,500,000 ! 1/6th) and the lower limit is 50,000 (300,000 ! 1/6th). (b) A Ltd, C Ltd, D Ltd and E Ltd form a 75% group. B Ltd is owned by a consortium consisting of X Ltd and A Ltd. (c) As regards the consortium of X Ltd, A Ltd and B Ltd, losses of 9,000 (15% of 60,000) may be surrendered by X Ltd to B Ltd. As regards the group of A Ltd, C Ltd, D Ltd and E Ltd, the losses of C Ltd and E Ltd (72,000 in total) may be surrendered to A Ltd or D Ltd. At least 53,000 should be surrendered to A Ltd so as to bring the chargeable profits of that company down to 50,000. This will save tax at the marginal rate of 29.75%. The remaining 19,000 could be surrendered to either A Ltd or D Ltd, saving tax at 21% in both cases. The simplest approach is to surrender the whole 72,000 to A Ltd. The corporation tax liability of each UK resident company is as follows: X Ltd B Ltd 60,000 9,000 51,000 14,280 3,483 10,797 A Ltd 103,000 72,000 31,000 6,510 6,510 C Ltd D Ltd 35,000 35,000 7,350 7,350 E Ltd
Trading profits Group relief Chargeable profits Tax @ 21% Tax @ 28% Marginal relief Corporation tax due
Note: Marginal relief for B Ltd is (250,000 51,000) ! 7/400 = 3,483. (d) A Ltd owns only 65% of B Ltd, so B Ltd is not a member of the group headed by A Ltd and group relief cannot pass between B Ltd and the members of that group. Group relief would be available if A Ltd increased its stake in B Ltd to 75%.
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D8
The report should make the following main points: (a) The group may elect for a VAT group registration. This has the following effects: (i) The input tax suffered by the group as a whole is set against the output tax charged by the group as a whole. (ii) One of the companies in the group is nominated as the "representative member" and this company takes responsibility for submitting VAT returns and accounting for VAT on behalf of the entire group. (iii) Supplies between group members are not regarded as taxable supplies and are ignored for VAT purposes. (b) It is not necessary to include all the group companies in the VAT group or to have only one VAT group. It may be wise to bring together all the companies which make largely zero-rated supplies (and which therefore receive regular repayments of VAT) into one VAT group and choose to make monthly returns for this group, so improving the cash flow position. Companies which make standard-rated supplies could form another VAT group, making quarterly returns. (c) If one company has a mixture of taxable supplies and exempt supplies it may be prudent to exclude this company from the VAT group, since the existence of the exempt supplies would make the group as a whole partially exempt and this may restrict the amount of input tax which the group can recover. (d) Exports are generally zero-rated. Therefore companies whose supplies consist mostly of exports will probably receive regular VAT repayments (see above). (e) VAT is charged on the import of goods and is usually payable at the point of entry. This VAT is then treated as input tax in the usual way.

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Instructors Manual

i Pearson Education Limited 2011

ii Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 19 Chapter 20 Chapter 21

Chapter 22 Chapter 24 Chapter 25 Chapter 26 Chapter 27 Chapter 28

Chapter 29 Chapter 30 Chapter 31 Chapter 32

iv Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

v Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 2 Introduction to income tax

122,100 122,100 122,100

Tax borne Less: Tax credits on dividends Tax payable

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 3 Personal allowances

220,570 3,040 223,610 0 223,610

220,570 220,570 0 220,570 3,040 3,040 3,040

7,480.00 822.00 1,690.00

7,480.00 45,040.00 36,805.00

9,992.00 520.00 9,472.00

89,325.00 608.00 88,717.00

2 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 4 Payments and gifts eligible for tax relief

748.00 605.00 143.00

3 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Tax liability Less: Tax credits on dividends Tax payable

4 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 5 Income from property

12,100 12,100 12,100 12,100

5 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 6 Income from savings and investments

6 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 7 Income from employment

(g) The private medical insurance subscription is a taxable benefit.

7 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 8 Income from self-employment: Computation of income

20,404 55 20,459 11,317

512 574 1,086 10,231

8 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 9 Income from self-employment: Basis periods

8,200 + 7,300 5,700

54,300 ! 7/12 + 71,060 ! 5/17 71,060 ! 12/17

9 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

23,500 overlap relief 19,080

10 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

Chapter 10 Income from self-employment: Capital allowances

11 Pearson Education Limited 2011

Melville: Taxation: Finance Act 2010, Instructor's Manual, 16 ed.

(1,890) 24,256 1,810 4,480

75,000 7,840 111,496

(29,000) (3,400) ! 70% (3,226) (2,380) (5,606)