Strategic Professional – Options

ATX – UK
Advanced Taxation
– United Kingdom
(ATX – UK)
September/December 2020 –
Sample Questions

ATX UK ACCA EN

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Section A – BOTH questions are compulsory and MUST be attempted

Section B – BOTH questions are compulsory and MUST be attempted
Tax rates and allowances are on pages 2–5

Do NOT open this question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

The Association of
Chartered Certified
Accountants
SUPPLEMENTARY INSTRUCTIONS
1. You should assume that the tax rates and allowances for the tax year 2019/20 and for the financial year to 31 March
2020 will continue to apply for the foreseeable future unless you are instructed otherwise.
2. Calculations and workings need only be made to the nearest £.
3. All apportionments should be made to the nearest month.
4. All workings should be shown.

TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used in answering the questions.

Income tax
Normal Dividend
rates rates
Basic rate £1 − £37,500 20% 7·5%
Higher rate £37,501 − £150,000 40% 32·5%
Additional rate £150,001 and over 45% 38·1%
Savings income nil rate band – Basic rate taxpayers £1,000
Savings income nil rate band – Higher rate taxpayers £500
Dividend nil rate band £2,000
A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.

Personal allowance
Personal allowance £12,500
Transferable amount £1,250
Income limit £100,000
Where adjusted net income is £125,000 or more, the personal allowance is reduced to zero.

Residence status
Days in UK Previously resident Not previously resident
Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties (or more) Automatically not resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties
91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident

Remittance basis charge

UK resident for
Seven out of the last nine years £30,000
12 out of the last 14 years £60,000

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 Car benefit percentage
The relevant base level of CO2 emissions is 95 grams per kilometre.
The percentage rates applying to petrol cars (and diesel cars meeting the RDE2 standard) with CO2 emissions up to
this level are:
50 grams per kilometre or less 16%
51 grams to 75 grams per kilometre 19%
76 grams to 94 grams per kilometre 22%
95 grams per kilometre 23%

Car fuel benefit

The base figure for calculating the car fuel benefit is £24,100.

Individual savings accounts (ISAs)

The overall investment limit is £20,000.

Property income
Basic rate restriction applies to 75% of finance costs relating to residential properties.

Pension scheme limits

Annual allowance £40,000
Minimum allowance £10,000
Threshold income limit £110,000
Income limit £150,000
Lifetime allowance £1,055,000
The maximum contribution that can qualify for tax relief without any earnings is £3,600.

Approved mileage allowances: cars

Up to 10,000 miles 45p
Over 10,000 miles 25p

Capital allowances: rates of allowance

Plant and machinery
Main pool 18%
Special rate pool 6%
Motor cars
New cars with CO2 emissions up to 50 grams per kilometre 100%
CO2 emissions between 51 and 110 grams per kilometre 18%
CO2 emissions over 110 grams per kilometre 6%

Annual investment allowance

Rate of allowance 100%
Expenditure limit £1,000,000

3 [P.T.O.
 Cash basis accounting
Revenue limit £150,000

Cap on income tax reliefs

Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income.

Corporation tax
Rate of tax – Financial year 2019 19%
– Financial year 2018 19%
– Financial year 2017 19%
Profit threshold £1,500,000

Value added tax (VAT)

Standard rate 20%
Registration limit £85,000
Deregistration limit £83,000

Inheritance tax: nil rate bands and tax rates

Nil rate band
£
6 April 2019 to 5 April 2020 325,000
6 April 2018 to 5 April 2019 325,000
6 April 2017 to 5 April 2018 325,000
6 April 2016 to 5 April 2017 325,000
6 April 2015 to 5 April 2016 325,000
6 April 2014 to 5 April 2015 325,000
6 April 2013 to 5 April 2014 325,000
6 April 2012 to 5 April 2013 325,000
6 April 2011 to 5 April 2012 325,000
6 April 2010 to 5 April 2011 325,000
6 April 2009 to 5 April 2010 325,000
6 April 2008 to 5 April 2009 312,000
6 April 2007 to 5 April 2008 300,000
6 April 2006 to 5 April 2007 285,000
6 April 2005 to 5 April 2006 275,000
Residence nil rate band £150,000
Rate of tax on excess over nil rate band – Lifetime rate 20%
– Death rate 40%

Inheritance tax: taper relief

Years before death Percentage
reduction
More than 3 but less than 4 years 20%
More than 4 but less than 5 years 40%
More than 5 but less than 6 years 60%
More than 6 but less than 7 years 80%

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 Capital gains tax
Normal Residential
rates property
Lower rate 10% 18%
Higher rate 20% 28%
Annual exempt amount £12,000
Entrepreneurs’ relief and investors’ relief:
– Lifetime limit £10,000,000
– Rate of tax 10%

National insurance contributions

Class 1 Employee £1 − £8,632 per year Nil
£8,633 − £50,000 per year 12%
£50,001 and above per year 2%
Class 1 Employer £1 − £8,632 per year Nil
£8,633 and above per year 13·8%
Employment allowance £3,000
Class 1A 13·8%
Class 2 £3·00 per week
Small profits threshold £6,365
Class 4 £1 − £8,632 per year Nil
£8,633 − £50,000 per year 9%
£50,001 and above per year 2%

Rates of interest (assumed)

Official rate of interest 2·5%
Rate of interest on underpaid tax 3·25%
Rate of interest on overpaid tax 0·5%

Standard penalties for errors

Taxpayer behaviour Maximum Minimum penalty – Minimum penalty –
penalty unprompted disclosure prompted disclosure
Deliberate and concealed 100% 30% 50%
Deliberate but not concealed 70% 20% 35%
Careless 30% 0% 15%

Stamp duty land tax on non-residential properties

Up to £150,000 0%
£150,001 − £250,000 2%
£250,001 and above 5%

Stamp duty
Shares 0·5%

5 [P.T.O.
 This is a blank page.
Question 1 begins on page 7.

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Section A – BOTH questions are compulsory and MUST be attempted

1 Your manager has received an email from Lamar. Lamar is the managing director and majority shareholder in REP
Ltd. Lamar and REP Ltd are clients of your firm. Your manager has forwarded the email to you together with an email
detailing the work you are required to do.
Email extract from Lamar: dated 7 September 2020

Potential investment in JAY Ltd

We are in discussion with the management of CRO Ltd regarding the establishment of a new company, JAY Ltd. If
it proceeds, JAY Ltd will commence trading on 1 April 2021 and carry on its business activities in the country of
Garia, where it will manufacture computer components.
CRO Ltd is proposing that REP Ltd would own 30% of the ordinary share capital of JAY Ltd with CRO Ltd owning the
remaining 70%. However, we regard this potential investment as somewhat risky, such that if we decide to proceed,
we may prefer to own just 20% of JAY Ltd rather than 30%.
JAY Ltd is expected to be profitable in the year ending 31 March 2022. However, there is the possibility that it will
be loss making in either that year or in future years.
JAY Ltd’s tax adjusted trading profit for the year ending 31 March 2022 is budgeted to be £135,000, all of which
will relate to its activities in Garia. JAY Ltd will have no other source of taxable income and will not make any
chargeable gains during this year.
We have not been involved in a joint venture like this before and we have no experience of carrying on a business
outside the UK. We would appreciate your advice on the following three extracts from the documentation provided
to us by CRO Ltd:
(i) ‘It has not yet been determined whether JAY Ltd will be resident in the UK or in Garia. If JAY Ltd is resident in
the UK, it will be considered to be carrying on its business through a permanent establishment in Garia.’
(ii) ‘If JAY Ltd is resident in the UK, we will consider making an election to exempt its overseas trading profits from
UK tax.’
(iii) ‘We have been advised that if JAY Ltd is resident in Garia, this will not result in a charge under the controlled
foreign company (CFC) rules.’
Purchase of investment property
We are considering the purchase by REP Ltd of a new, unused commercial building for £200,000 plus 20% value
added tax (VAT). REP Ltd would then grant a 20-year lease of this building to a retailer. Will REP Ltd be able to
recover the VAT charged by the vendor on the sale of this building?
Proposed gift of shares to trust
I established a discretionary trust for the benefit of my nieces and nephews on 1 August 2010.
On 1 November 2020, I am planning to give 20,000 of my shares in REP Ltd to this trust. After I have made the
gift, I will still own 60,000 shares (60% of the company). You have already advised me that these shares are not
relevant business property for the purposes of business property relief, due to the investment activities of REP Ltd.
Accordingly, I am aware that the gift on 1 November 2020 may result in an inheritance tax (IHT) liability. If I decide
to make the gift, I will pay any IHT due.
I have made the following gifts in the past:
£
1 August 2010 Cash to trustees on the creation of the trust 120,000
1 February 2016 Cash to brother 35,000
1 May 2016 Additional cash to trustees 170,000
1 July 2020 Cash to sister 45,000
None of these gifts has resulted in an IHT liability.

7 [P.T.O.
 Email extract from your manager: dated 8 September 2020.

Please prepare notes for use at a meeting with Lamar.

I want you to lead the meeting. You should therefore set out the notes in a manner which will make it easy for you
to refer to them during the meeting.
The notes should cover the following matters:
(a) Knowledge obtained from advising other clients
We have a number of existing clients which trade from permanent establishments situated overseas, and a few
years ago we had a client with a presence in the country of Garia.
Set out the points you will make in order to explain the extent to which REP Ltd can benefit from the knowledge
we have gained from advising these other clients.

(b) Investment in JAY Ltd

Additional Information
– REP Ltd and CRO Ltd are UK resident companies which prepare accounts to 31 March each year.
– Business profits generated in Garia are subject to 13% business tax in that country.
– There is no double tax treaty between the UK and Garia.
(i) Residency of JAY Ltd
Explanations of the relevance of the country of residency of JAY Ltd in relation to:
– the amount of corporation tax payable in the UK and Garia in respect of its profits; and
– the relief available to REP Ltd if JAY Ltd’s business in Garia were to make a trading loss.
Before you start, take some time to identify the different possibilities which need to be addressed,
recognising that we do not yet know what percentage of JAY Ltd will be owned by REP Ltd.
(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax
List the implications of JAY Ltd making this election.
(iii) Controlled foreign company (CFC) rules
I can confirm that a CFC charge will not arise if JAY Ltd is resident in Garia. However, I want to provide
Lamar with an explanation of the purpose of the CFC rules and the charge which can be levied under
them.

(c) Purchase of investment property

Explain the matters which Lamar should be aware of in relation to REP Ltd recovering the value added tax (VAT)
which would be incurred on the purchase of the investment property.
There is no need to consider partial exemption or the capital goods scheme.

(d) Proposed gift of shares to trust on 1 November 2020

A calculation of the inheritance tax (IHT) which would be payable by Lamar if he were to give 20,000 shares
in REP Ltd to the trust on 1 November 2020 as planned. Your calculation should indicate the availability or
otherwise of all relevant annual exemptions.
Where relevant, you should use the following values for a single ordinary share in REP Ltd:
Shareholding Up to 25% 26% to 50% 51% to 74% 75% or more
Value per share £8 £11 £17 £24
Lamar currently owns 80% of the ordinary share capital of REP Ltd. The remaining shares in the company are
owned by individuals who have no connection with Lamar.
Tax manager

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 Required:
Prepare the meeting notes as requested in the email from your manager. The following marks are available:
(a) Knowledge obtained from advising other clients. (5 marks)

(b) Investment in JAY Ltd.

(i) Residency of JAY Ltd. (9 marks)
(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax. (3 marks)
(iii) Controlled foreign company (CFC) rules. (3 marks)

(c) Purchase of investment property. (5 marks)

(d) Proposed gift of shares to trust on 1 November 2020. (6 marks)

Professional marks will be awarded for the approach taken to planning the content, the clarity of the explanations
and calculations, the effectiveness with which the information is communicated, and the overall presentation and
style of the notes. (4 marks)

(35 marks)

9 [P.T.O.
2 Your manager has had a meeting with Freya, a client of your firm. She has sent you the memorandum she prepared
following the meeting and an email detailing the work you are required to do.
Memorandum extract from your manager: dated 7 September 2020.

Background
Freya has been domiciled and resident in the UK more than 30 years and has not spent any significant periods of
time overseas. She started trading as an unincorporated business in 2012 and has always prepared accounts to
31 May each year. Freya’s business is her only source of income.
Sale of Freya’s business
Freya has received an offer of £2,300,000 from an unconnected party for all of the assets of her business. If
the offer is accepted, her only chargeable assets for capital gains tax purposes will be goodwill and her business
premises. The aggregate chargeable gains arising in respect of these assets will be £850,000. However, once she
is no longer working full time, Freya intends to live in the country of Benida and has asked us to consider whether
she would save UK tax if she were to delay the sale of her business until after she has left the UK.
I agreed to advise Freya on the following strategy:
31 October 2020 Freya will sell all of the assets of her business to FIM Ltd, a UK resident limited company, in
exchange for ordinary shares worth £2,300,000. Freya will own the whole of the ordinary
share capital of FIM Ltd.
5 April 2021 Freya and her family will move to Benida.
30 April 2021 Freya will sell the whole of the ordinary share capital of FIM Ltd for cash proceeds.
Freya’s ideal scenario
Freya would like to live in Benida for no more than three years. She would buy a home there and would also retain
her home in the UK. Freya would stay in her UK home for 55 days in each tax year, of which 25 would be working
days. She would spend the rest of her time in Benida. Freya does not intend to carry out any work in Benida. Freya’s
husband and children would remain in Benida throughout the three-year period and would not be resident in the
UK.
Unincorporated business – financial information
– A single set of accounts will be prepared for the 17-month period ending 31 October 2020. The budgeted tax
adjusted profit for this period, before deduction of capital allowances, is £94,000.
– The tax written down values as at 31 May 2019 were: main pool – zero, car with private use – £8,700.
– On 1 September 2019, Freya purchased plant and machinery for use in her business costing £4,200.
– On 31 October 2020, the plant and machinery used in her business (excluding the motor car) will have a
market value on that date of £6,300. Every item will be sold for less than its cost.
– Freya will withdraw a motor car from the business on 30 September 2020. The car has always been used 65%
for business purposes and will have a market value of £11,100, which is less than the car’s original cost.
– Freya and FIM Ltd will submit a succession election to HM Revenue and Customs (HMRC).
– There are unrelieved overlap profits from the commencement of the business of £31,400.
Land in Benida
Freya’s father, Alvaro, moved to the UK (and became UK resident) on 6 April 2006. He is domiciled in Benida and
has owned a plot of land there for many years. He is considering giving this land to Freya within the next 12 months.
I agreed to advise Freya on whether or not such a gift could result in an inheritance tax (IHT) liability for her.
Alvaro is not well and is unlikely to live for a further seven years; we should therefore assume all future potentially
exempt transfers will become chargeable to IHT.
Because Alvaro makes regular, substantial lifetime gifts of assets situated in the UK, we should also assume there
will be no nil rate band or annual exemptions available in respect of a gift of this land.

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 Email extract from your manager: dated 8 September 2020.

Additional information in respect of the country of Benida

– There is no capital gains tax (CGT) in Benida.
– There is no double tax treaty between the UK and Benida.
Please carry out the following work:
(a) Sale of business
– Calculate the CGT which would be payable by Freya on the sale of her business if she does not incorporate
her business but simply sells all of her business assets for £2,300,000 on 31 October 2020 to an
unconnected purchaser. Explain the rate of CGT which would be charged.
The annual exempt amount WILL NOT be available to Freya, and she will be a higher rate taxpayer in the
tax year of sale.
– Explain the CGT implications of the proposed sale of Freya’s business to FIM Ltd in exchange for shares
worth £2,300,000. I can confirm that all of the conditions necessary for incorporation relief to apply to
this transaction will be satisfied and that no election will be made to disapply this relief.
– On the assumption Freya lives in Benida for three years from 5 April 2021 in accordance with her ideal
scenario, explain her UK residence status for those three tax years.
I have done some preliminary work on Freya’s residence status and can confirm that Freya will be neither
automatically non-UK resident nor automatically UK resident whilst she is living in Benida.
– On the assumption that Freya is non-UK resident for the tax year 2021/22, explain any changes which
would need to be made to Freya’s ideal scenario in respect of her time in Benida in order for there to be
no UK CGT on the sale of her shares in FIM Ltd.

(b) Liability to income tax and class 4 national insurance contributions (NIC)
On the assumption Freya sells her business to FIM Ltd on 31 October 2020, calculate her liability to income
tax and class 4 NIC for her final tax year of trading.
I can confirm that Freya will not receive any taxable income from FIM Ltd.

(c) Land in Benida

Explain whether or not a gift of the land by Alvaro to Freya at some time in the next 12 months could result in
a UK inheritance tax (IHT) liability.

Tax manager

Required:
Carry out the work required as requested in the email from your manager. The following marks are available:
(a) Sale of business. (13 marks)

(b) Liability to income tax and class 4 national insurance contributions (NIC). (8 marks)

(c) Land in Benida. (4 marks)

 (25 marks)

11 [P.T.O.
Section B – BOTH questions are compulsory and MUST be attempted

3 Amelia is a sole trader. She is seeking advice in respect of a loss incurred by her business, the tax implications of
replacing a warehouse, and deregistration for value added tax (VAT) purposes.
Amelia:
– Has owned her unincorporated business, AS Trading, for many years.
– Has savings income of £6,000 each year.
– Had rental income of £11,600 from a UK residential property in the tax year 2019/20.
– Has no rental income in the tax year 2020/21 as the letting ceased on 31 March 2020.
– Sold this property on 30 April 2020.
AS Trading – tax adjusted trading profit/(loss):
£
Year ended 31 December 2019 30,000
Year ending 31 December 2020 (forecast) (14,000 )
Amelia – recent capital disposals:
– Amelia’s capital disposals are as follows:
Asset Date of disposal (loss)/gain
£
Painting 1 June 2019 (11,000 )
UK rental property 30 April 2020 45,000
Shares in Swartz Ltd 16 August 2020 28,000
– All of these disposals were made to unconnected persons.
– Amelia had never lived in the UK rental property.
– Swartz Ltd is an unquoted trading company.
– Amelia sold the whole of her 3% shareholding in Swartz Ltd.
Proposed sale of Warehouse 1:
– Amelia acquired Warehouse 1 on 1 May 2014 for £86,000.
– Amelia will sell Warehouse 1 on 1 May 2021 for its expected market value at that date of £118,000.
– AS Trading occupies three out of the four floors of Warehouse 1.
– The remaining floor has been rented to tenants throughout Amelia’s ownership of the building.
Proposed purchase of Warehouse 2:
– Amelia will purchase this warehouse, and a forklift truck for use in the warehouse, on 1 March 2021.
– Amelia will pay £83,000 for Warehouse 2, and will pay £23,000 for the forklift truck.
– Amelia will start to use the whole of Warehouse 2 in her business from 1 May 2021.
AS Trading – taxable turnover for value added tax (VAT) purposes:
£
Year ended 31 December 2019 92,000
Year ending 31 December 2020 (forecast) 65,000
Year ending 31 December 2021 (forecast) 79,000
– Amelia expects that the taxable turnover of the business will continue to increase gradually in the next few years.
– AS Trading makes wholly standard-rated supplies.
– Amelia wishes to apply for voluntary deregistration for VAT purposes on 31 December 2020.

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 Required:
(a) (i) State the reliefs available to Amelia in respect of her trading loss of the year ending 31 December 2020,
on the assumption that Amelia does not wish to carry forward any of the loss. (3 marks)
(ii) Explain, with supporting calculations, how much tax would be saved for each of the reliefs identified in
requirement (a)(i). (8 marks)

(b) Explain, with supporting calculations, the capital gains tax and income tax implications for Amelia of the
proposed sale of Warehouse 1, and the acquisition of Warehouse 2 and the forklift truck. (6 marks)

(c) Explain why Amelia can apply to voluntarily deregister for value added tax (VAT) purposes on 31 December
2020, from what date her VAT registration would be cancelled, and the immediate consequences for her of
deregistering. (3 marks)

 (20 marks)

13 [P.T.O.
4 You have been asked to provide advice to Dorian, the managing director of Taupe Ltd, in relation to Taupe Ltd’s status
as a close company, the company’s provision of employment benefits to Dorian, and the late filing of the company’s
corporation tax return.
Taupe Ltd:
– Is a UK resident trading company, and is also a close company.
– Has six directors, Dorian and five other, unrelated, individuals.
– Prepares accounts to 30 April each year.
– Always pays all amounts due to HM Revenue and Customs (HMRC) by the due date.
– Is not a large company for the purpose of being required to pay its corporation tax liability in instalments.
Taupe Ltd – shareholders:
– The shares in Taupe Ltd are held as follows:
Percentage of issued
ordinary shares
Dorian 5%
The other five directors (each holding 5%) 25%
Basil (Dorian’s father) 23%
Other, unrelated, shareholders (each holding less than 2%) 47%
––––––
100%
––––––
Dorian:
– Has an annual salary of £78,000 from Taupe Ltd.
– Was provided with an interest-free loan of £7,500 from Taupe Ltd on 6 April 2019. Notional tax was payable on
this loan by Taupe Ltd.
– Is due to repay this loan on 30 June 2022, but may repay it earlier, on 30 April 2022.
– Has no other income.
– Works full time at Taupe Ltd’s office in London.
Taupe Ltd – assistance with Dorian’s home to work travel costs:
– Taupe Ltd is considering two alternatives to assist Dorian with the costs of his daily travel from home to work for
the tax year 2021/22.
Alternative 1:
– On 6 April 2021, Taupe Ltd will make an interest-free loan to Dorian of £4,800, equal to the cost of his
annual travel season ticket.
– Taupe Ltd will write off this loan on 5 April 2022.
– Dorian will incur no additional travel costs under this alternative.
Alternative 2:
– Taupe Ltd will pay Dorian a mileage allowance for driving his own car to work, amounting to £3,600 for the
year ending 5 April 2022.
– Taupe Ltd will pay an unconnected company an annual fee of £1,200 for a car parking space for Dorian near
the company’s London office.
– Dorian has estimated that his current annual cost of driving from home to work is £5,220, including £1,320
for parking.
Taupe Ltd – late filing of corporation tax returns:
– Taupe Ltd filed its corporation tax return for the year ended 30 April 2019 on 29 August 2020.
– HMRC issued a notice requiring the filing of this return on 8 June 2019.
– Taupe Ltd had filed its corporation tax return for the year ended 30 April 2018 on 6 July 2019.
– All previous corporation tax returns had been filed on time.

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 Required:
(a) Explain why Taupe Ltd is classed as a close company. (4 marks)

(b) Explain, with supporting calculations, the tax implications for both Dorian and Taupe Ltd, if Dorian repays the
£7,500 loan on 30 April 2022 rather than on 30 June 2022. (5 marks)

(c) Explain, with supporting calculations, which of the two alternatives for providing assistance with travel costs,
will produce the lower overall cost for Dorian. (8 marks)

(d) State, with reasons, the due date for filing Taupe Ltd’s corporation tax return for the year ended 30 April
2019, and the implications for Taupe Ltd in respect of filing it late. (3 marks)

 (20 marks)

End of Question Paper

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