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(ii) The UK value added tax (VAT) implications for Razor Ltd of selling tools to and purchasing tools from
Cutlass Inc; (2 marks)
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(ii) State, with reasons, whether Messier Ltd can provide Galileo with accommodation in the UK without
giving rise to a UK income tax liability. (2 marks)
(ii) Explain how the inclusion of rental income in Coral’s UK income tax computation could affect the
income tax due on her dividend income. (2 marks)
You are not required to prepare calculations for part (b) of this question.
Note: you should assume that the tax rates and allowances for the tax year 2006/07 and for the financial year to
31 March 2007 will continue to apply for the foreseeable future.
Maria:
– Is resident and domiciled in the UK.
– Is a higher rate taxpayer and will remain so in the future.
– Has already realised chargeable gains of ￡15,000 in the tax year 2015/16.
Shares in Granada Ltd:
– Maria subscribed for 10,000 ￡1 ordinary shares in Granada Ltd at par in June 2006.
– Maria is one of four equal shareholders and directors of Granada Ltd.
– Maria intends to sell either 2,700 or 3,200 shares back to the company on 31 March 2016 at their current market value of ￡12·80 per share.
– All of the conditions for capital treatment are satisfied, except for, potentially, the condition relating to the reduction in the level of shareholding.
Granada Ltd:
– Is a UK resident trading company which manufactures knitwear.
– Prepares accounts to 31 December each year.
– Is registered for VAT.
– Acquired the trade and assets of an unincorporated business, Starling Partners, on 1 January 2016.
Starling Partners:
– Had been trading as a partnership for many years as a wholesaler of handbags within the UK.
– Starling Partners’ main assets comprise a freehold commercial building and its ‘Starling’ brand, which were valued on acquisition by Granada Ltd at ￡105,000 and ￡40,000 respectively.
– Is registered for VAT.
– The transfer of its trade and assets to Granada Ltd qualified as a transfer of a going concern (TOGC) for VAT purposes.
– The business is forecast to make a trading loss of ￡130,000 in the year ended 31 December 2016.
Granada Ltd – results and proposed expansion:
– The knitwear business is expected to continue making a taxable trading profit of around ￡100,000 each year.
– Granada Ltd has no non-trading income but realised a chargeable gain of ￡10,000 on 1 March 2016.
– Granada Ltd is considering expanding the wholesale handbag trade acquired from Starling Partners into the export market from 1 January 2017.
– Granada Ltd anticipates that this expansion will result in the wholesale handbag trade returning a profit of ￡15,000 in the year ended 31 December 2017.
Required:
(a) (i) Explain, with the aid of calculations, why the capital treatment WILL NOT apply if Maria sells 2,700 of her shares back to Granada Ltd, but WILL apply if, alternatively, she sells back 3,200 shares. (4 marks)
(ii) Calculate Maria’s after-tax proceeds per share if she sells:
(1) 2,700 shares back to Granada Ltd; and alternatively
(2) 3,200 shares back to Granada Ltd. (4 marks)
(b) (i) Describe the corporation tax treatment of the acquisition of the ‘Starling’ brand by Granada Ltd, if no charge for amortisation was required in its statement of profit or loss. (3 marks)
(ii) Discuss how Granada Ltd could obtain relief for the trading loss expected to be incurred by the trade acquired from Starling Partners, if it does not wish to carry any of the loss back. (5 marks)
(c) Explain the value added tax (VAT) implications for Granada Ltd in respect of the acquisition of the business of Starling Partners, and the additional information needed in relation to the building to fully clarify the VAT position. (4 marks)
Assume that the corporation tax rates for the financial year 2004 apply throughout.
(b) Explain the corporation tax (CT) and value added tax (VAT) issues that Irroy should be aware of, if she
proceeds with her proposal for the Irish subsidiary, Green Limited. Your answer should clearly identify those
factors which will determine whether or not Green Limited is considered UK resident or Irish resident and
the tax implications of each alternative situation.
You need not repeat points that are common to each situation. (16 marks)
(ii) why the ‘fair value option’ was initially introduced and why it has caused such concern. (5 marks)
Section B – TWO questions ONLY to be attempted
Your client, Eric, requires advice on the capital gains tax implications arising from the receipt of insurance proceeds and the disposal of some shares, and the inheritance tax reliefs available in respect of assets in his estate at death. His son Zak requires advice regarding the application of the personal service company (IR35) legislation.
Eric:
– Is UK resident and domiciled.
– Is a higher rate taxpayer.
– Is in ill health and is expected to die within the next few months.
Capital transactions in the tax year 2014/15:
– Eric made no disposals for capital gains tax purposes in the tax year 2014/15 other than those detailed below.
– Eric received insurance proceeds of ￡10,000 following damage to a valuable painting.
– Eric sold half of his shareholding in Malaga plc for ￡11·50 per share.
Damaged painting:
– Eric purchased the painting for ￡46,000 in July 2012.
– The painting was damaged in October 2014 such that immediately afterwards its value fell to ￡38,000.
– The insurance proceeds of ￡10,000 were received by Eric on 1 December 2014.
– Eric has not had the painting repaired.
Malaga plc shares:
– Malaga plc is a quoted trading company with 200,000 issued shares.
– 80% of Malaga plc’s chargeable assets have always been chargeable business assets.
– Eric was given 12,000 shares in Malaga plc by his sister on 1 April 2010, when they were valued at ￡126,000.
– Eric’s sister had purchased the shares for ￡96,000 on 1 March 2009.
– Gift relief was claimed in respect of the gift of the shares to Eric on 1 April 2010.
– Eric paid the inheritance tax arising in respect of this gift following his sister’s death on 1 September 2011.
– Eric has never worked for Malaga plc.
– Eric sold 6,000 shares in Malaga plc on 1 March 2015.
Assets owned by Eric and a previous lifetime gift:
– Eric owns farmland in the UK, which has been leased to a tenant farmer for the last ten years.
– The farmland has a market value of ￡420,000 and an agricultural value of ￡340,000.
– Eric’s other assets, excluding the remaining Malaga plc shares, are valued at ￡408,000.
– Eric has made only one previous lifetime gift, of ￡60,000 cash to his son Zak on 1 July 2009.
Zak:
– Is the sole shareholder, director and employee of Yoyo Ltd, a company which provides consultancy services.
– In the year ended 31 March 2016, Yoyo Ltd’s gross fee income from relevant engagements performed by Zak will be ￡110,000.
– In the tax year 2015/16, Zak will draw a salary of ￡24,000 and dividends of ￡50,000 from Yoyo Ltd.
– Neither Yoyo Ltd nor Zak has any other source of income.
Required:
(a) Calculate Eric’s total after-tax proceeds in respect of the two capital gains tax disposals in the tax year 2014/15. (6 marks)
(b) (i) On the assumption that Eric dies on 31 March 2016, advise on the availability and effect (if any), of agricultural property relief, business property relief and quick succession relief in respect of the farmland and the retained shares in Malaga plc.
Note: You are not required to prepare calculations for this part of the question. (6 marks)
(ii) Explain, with the aid of calculations, the impact on the inheritance tax liability arising on Eric’s death if Eric does not die until 1 August 2016. (3 marks)
(c) Calculate Zak’s taxable income for the tax year 2015/16 if the personal service company (IR35) legislation were to apply to the fee income received by Yoyo Ltd. (5 marks)
4 Assume today’s date is 5 February 2006.
Joanne is 37, she was born and until 2005 had lived all her life in Germany. She recently married Fraser, aged 38,
who is a UK resident, but who worked briefly in Germany. They have no children.
The couple moved to the UK to live permanently on 9 October 2005. Joanne was employed by an American company
in Germany, and she continued to work for them in the UK until the end of November 2005. Her earnings from the
American company were ￡5,000 per month. Joanne has not remitted any of the income she earned in Germany prior
to her arrival in the UK.
Joanne resigned from her job at the end of November 2005. The company did not hold her to the three months notice
stipulated in her contract, but still paid her for that period. In total, Joanne paid ￡4,200 in UK income tax under PAYE
for the tax tear 2005/06.
Joanne also wishes to sell the shares she holds in a German listed company. The shareholding cost the equivalent of
￡3,500 in September 1986, and its current value is ￡21,500. She intends to sell the shares in March 2006 and to
invest the proceeds from the sale in the UK. Joanne has made no other capital disposals in the year.
Prior to her leaving employment, Joanne investigated the possibility of starting her own business providing a German
translation service for UK companies, and took some advice on the matter. She paid consultancy fees of ￡5,000
(excluding value added tax (VAT)) and bought a computer for ￡2,000 (excluding VAT), both on 23 October 2005.
Joanne started trading on 1 December 2005. She made sales of ￡2,000 in December, and estimates that her sales
will rise by ￡1,000 every month to a maximum of ￡7,000 per month. Joanne believes that her monthly expenses of
￡400 (excluding VAT) will remain constant. Her year end will be 31 March, and the first accounts will be drawn up
to 31 March 2006.
Although Joanne has registered her business for tax purposes with the Revenue, she has not registered for VAT and
is unsure what is required of her in this respect.
Required:
(a) State, giving reasons, whether Joanne will be treated as resident or non-resident in the UK for the year of
assessment 2005/06, together with the basis on which her income and gains of that year will be subject to
UK taxation. (3 marks)
(ii) The sales director has suggested to Damian, that to encourage the salesmen to accept the new arrangement,
the company should increase the value of the accessories of their own choice that can be fitted to the low
emission cars.
State, giving reasons, whether or not Damian should implement the sales director’s suggestion.
(2 marks)
