TX: Taxation:
1.
Mustafa Ahmed Mirchawala:
Page 1
TX: Taxation:
INDEX:
S.#
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1.
Topics
Tax table
Property Income
Income Tax Computation
Pensions
Employment Income
Trading Income
Capital Allowance
Partnership
Self Assessment
Capital Gain Tax(CGT)
Inheritance Tax(IHT)
Value Added Tax(VAT)
Residence
Corporation Tax
Miscellaneous Handouts
Mustafa Ahmed Mirchawala:
Page Number
3
8
15
19
24
48
57
69
74
82
109
121
137
140
153
Page 2
TX: Taxation:
Tax Tables
1.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
SUPPLEMENTARY INFORMATION:
1. Calculations and workings need only be made to the nearest £.
2. All apportionments may be made to the nearest month.
3. All workings should be shown in Section C.
Income tax
Basic rate
Higher rate
Additional rate
Savings income rate nil band
£1 – £37,700
£37,701 – £150,000
£150,001 and over
– Basic rate taxpayers
– Higher rate taxpayers
Dividend nil rate band
Normal rates
20%
40%
45%
Dividend rates
8.75%
33.75%
39.35%
£1,000
£500
£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
12,570
Transferable amount
1,260
Income limit
100,000
Where adjusted net income is £125,140 or more, the personal allowance is reduced to zero.
Residence status
Days in UK
Less than 16
16 to 45
46 to 90
91 to 120
121 to 182
183 or more
Previously resident
Automatically not resident
Resident if 4 UK ties (or more)
Resident if 3 UK ties (or more)
Resident if 2 UK ties (or more)
Resident if 1 UK tie (or more)
Automatically resident
Not previously resident
Automatically not resident
Automatically not resident
Resident if 4 UK ties
Resident if 3 UK ties (or more)
Resident if 2 UK ties (or more)
Automatically resident
Child benefit income tax charge
Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit
received for every £100 of income over £50,000.
1.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Car benefit percentage
The relevant base level of CO emissions is 55 grams per kilometer.
2
The percentage rates applying to petrol-powered motorcars (and diesel-powered motor cars meeting
the RDE2 standard) with CO2 emission up to this level are:
51 grams to 54 grams per kilometer
55 grams per kilometer
15%
16%
The percentage for electric-powered motor cars with zero CO2 emissions is 2%.
For hybrid-electric motor cars with CO2 emissions between 1 and 50 grams per kilometer, the electric
range of a motor car is relevant:
Electric range:
130 miles or more
70 to 129 miles
40 to 69 miles
30 to 39 miles
Less than 30 miles
2%
5%
8%
12%
14%
Car fuel benefit
The base figure for calculating the car fuel benefit is £25,300.
Company Van benefits
The company van benefit scale charge is £3,600 and the van fuel benefit is £688.
Vans producing zero emissions have a 0% benefit.
Individual savings accounts (ISAs)
The overall investment limit is £20,000.
Property income
Basic rate restriction applies to 100% of finance costs relating to residential properties.
Pension scheme limits
Annual allowance
£40,000
Minimum allowance
£4,000
Income limit
£240,000
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
1.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Capital allowances: rates of allowance
Plant and machinery
Main Pool
Special rate pool
18%
6%
Motor cars
New motor cars with zero CO2 emission
100%
CO2 emissions between 1 and 50 grams per kilometer
CO2 emissions over 50 grams per kilometer
Annual investment allowance
Rate of allowance
Expenditure limit
18%
6%
100%
£1,000,000
Commercial structures & buildings
Straight-line allowance
3%
Cash basis
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 2022
– Financial year 2021
– Financial year 2020
Profit threshold
19%
19%
19%
£1,500,000
Value added tax (VAT)
Standard rate
Registration limit
Deregistration limit
20%
£85,000
£83,000
Inheritance tax: (Nil rate bands
and tax rates)
Nil rate band
Residence nil rate band
Excess – Lifetime rate
– Death rate
Years before death
More than 3 but less than 4 years
More than 4 but less than 5 years
More than 5 but less than 6 years
More than 6 but less than 7 years
1.
Mustafa Ahmed Mirchawala:
£325,000
£175,000
20%
40%
Inheritance tax: taper relief
Percentage reduction
20%
40%
60%
80%
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TX: Taxation:
Capital gains tax
Normal rates
10%
20%
Rates of tax – Lower rate
– Higher rate
Annual exempt amount
Business asset disposal relief & investor’s relief
Lifetime limit – Business asset disposal relief
Investor’s relief
Rate of tax
Class 1
Employee
Class 1
Employer
Residential property
18%
28%
£12,300
£1,000,000
£10,000,000
10%
National insurance contributions
£1–£12,570 per year
£12,571–£50,270 per year
£50,271 and above per year
Nil
13.25%
3.25%
£1–£9,100 per year
£9,101 and above per year
Nil
15.05%
£5,000
Employment allowance
Class 1A
15.05%
Class 2
Small profits threshold
£3.15 per week
Class 4
£1–£12,570 per year
£12,571–£50,270 per year
£50,271 and above per year
£12,570
Nil
10.25%
3.25%
Rates of interest (assumed)
Official rate of interest
Rate of interest on underpaid tax
Rate of interest on overpaid tax
Taxpayer Behavior
2.00%
3.25%
0.50%
Standard Penalties for Errors
Maximum penalty
Minimum penalty
Minimum penalty
Unprompted disclosure prompted disclosure
Deliberate and Concealed
Deliberate but not Concealed
Careless
Mustafa Ahmed Mirchawala:
100%
70%
30%
30%
20%
0%
50%
35%
15%
Page 7
TX: Taxation:
Property Income:
th
5th APRIL 2023
6 APRIL 2022
Basis of assessment = Cash basis
Profit & Loss:
Rental Income
Less Allowed Expenses
Taxable property Business Income
xxx
(xxx)
xxx
Allowed Expenses:
Advertisement for tenant
Agency commission
Legal cost
Insurance building & contents
Council tax / water rates
Repairs, maintenance, renovations, Redecoration allowed if no improvement (improvement = capital
expenditure)
For unfurnished property = Replacement allowed if no improvement
Mustafa Ahmed Mirchawala:
Page 8
TX: Taxation:
Question#1:
Reality ltd in business providing property services to landlord. The company also lets out property which
it owns itself and during the year ended 31st March 2021 let out properties.
Property one:
This is a freehold house that is let out from 1 April 2020 to 31 December 2020 at a monthly rent if £750,
payable in advance. On 31 December 2020 the tenant left owing two month rent which really ltd was
unable to recover. The property was not re-let before 31 March 2021. During 2021 the company spent
£6,800 on repairing the roof of this property. During February and March 2021 £1,100 was spent on
advertising for new tenants.
Property two:
This is a free hold house that is let out furnished. The property was let out throughout the year ended 31
March 2021 at a monthly rent of £625, payable in advance. During July 2020 Realty Ltd. spent £480 on
replacement furniture. Proceeds from old furniture were 200.
Property three:
This is a freehold house that is let out unfurnished. This property was purchased on 1st October 2020 for
£180,000 and was empty until 31st December 2020 during this period Realty Ltd spent £3900 on
advertising the property. The property was let out from January 2021 to March 2021 at a monthly rent
of £800, payable in advance.
Insurance
Realty Ltd insured all of its rental properties at a cost of £5,040 for the year ended 31st December 2020
and £5,280 for the year ended 31st December 2021. The insurance is payable annual in advance.
Required:
Briefly explain the basis of assessment for property income. You are not expected list the allowable
deductions.
Calculate Realty Ltd’s property business profit for the year ended 31st March 2021.
Question#2:
James lets a furnished flat for £150 a week during 2020/2021. The flat was let for 40 weeks and was
occupied by James for 6 weeks. Although the flat was available for letting for the other 6 weeks of the
year it was occupied.
£
Advertising for tenants
190
Gardening
780
Cleaning
416
Calculate James schedule of income for 2020/2021
Question#3:
Alison rents out a furnished room in the house, receiving rent of £5,160 a year having expanses of £930
a year.
What is her minimum annual schedule of income?
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#4:
Shella own three properties which were rented out. Her assessable income and allowable expense for
the two years to 5 April 2021 were:
Property
1
2
3
Income
£
£
£
2019 – 20
1200 450
3150
2020– 21
800
1750 2550
Expenses
2019 – 20
1850 600
2800
2020– 21
900
950
2700
What are Shella’s property income assessment for 2019-2020 and 2020-2021?
Question#5:
A lease for 21 year is granted for a premium of £10,000 in 2020-21.
What is the amount of property income assessable for 2020-2021.
Question#6:
Adrian owns a house, which is not his main residence and which has been let furnished to tenants for
the four years.
The annual rent payable in advance, which is not his main residence and which has been furnished for
tenants for the last four years.
The annual rent payable in advance by equal monthly installments on the 6th of each month was
£720 until December 2020 but was increased to 780 per month with effect from 6th January 2021 all
amounts were received on time with the expectation of that due date for 6 March 2021 which was
not received until 2 May 2021.
Expenditure to the property was as follows:
Council tax
Water rates
Agent fees
Re-decoration
New Kitchen units
£960
£380
£780
£1,250
£2,400 (capital)
Scrap proceed for older unit=£400
The kitchen units were purchased to replace the existing outdated units in an attempt to modernize
the property.
Required:
Calculate Taxable property income for 2020-2021
Mustafa Ahmed Mirchawala:
Page 10
TX: Taxation:
Question#7:
Rafe on 1 May 2020, Rafe started to invest in rented properties. He bought three houses in the first
three months, as follows:
House 1:
Rafe bought house 1 for £62,000 on 1st May 2020. It needed a new roof before it was fit to be let out.
Rafe paid £5,000 for the work to be done in May. He then let it unfurnished for £600 a month from 1
June 2020 to 30 November 2020. The first tenant then left, and the house was empty throughout
December 2020. On 1st January 2021, a new tenant moved in. The house was again let unfurnished. The
rent was £6,000 a year, payable annually in advance.
Rafe paid water rates of £320 for the period from 1st may 2020 to 5th April 2021 and buildings
insurance premium of £480 for the period from 1st June 2020 to 31st may 2021.
House 2:
Rafe bought house 2 for £84,000 on 1st June 2020. He immediately bought furniture for£4,300, and let
the house fully furnished for £5,000 a year from 1st August 2020. The rent was payable quarterly in
arrears. Rafe paid water rates of £240 for the period from 1st June 2020 to 5th April 2021
House 3:
Rafe bought house 3 for £45,000 on 1st July 2020. He spent £1,200 on furniture in July, and let the
house fully furnished from 1st August 2020 for £7,800 a year, payable annually in advance. Rafe paid
water rates of £360 for the period from 1st July 2020 to 5th April 2021, a building insurance premium of
£440 for the period from 1st July 2020 to 30th June 2021 and a contents insurance premium of £180 for
the period from 1st August 2020 to 31st July 2021.
Required:
Compute Rafe’s property business income during 2020/2021
Question#8:
Mr. X bought following properties during 2020/2021:
Property A:
He bought property A on 1st May 2020 for £70,000. The main door was not working from the first day
so he changed door for £3,000. He then let it unfurnished from 1st July 2020 to 31st December 2020 at
an annual rental of £6,000 payable monthly in arrears. The first tenant then left owing one month’s rent
which Mr. X was unable to recover. He again let the property to second tenant from 1st Jan 2021 at an
annual rental of 7,200 payable annually in advance. He paid water rates of 3,000 for the period 1st May
2020 to 31 March 2021.
Property B:
Mr. X bought property B on 1st July 2020 for £50,000. He bought bed and dining table for £12,000. He
then let it furnished from 1st October 2020 at an annual rent of £8,400 payable annually in arrears. He
paid water rates 2,000 from 1st July 2020 to 5th April 2021.
Main Residence:
He let two furnished rooms of his main residence during 2020/2021. Rental income from room is 7000
and actual expenses were 5200.
Required:
Taxable property business profit for 2020-2021
Mustafa Ahmed Mirchawala:
Page 11
TX: Taxation:
Question#9:
Fang:
On 6 April 2020, Fang purchased a freehold house. The property was then let throughout the tax year
2020-2021 at a monthly rent of £800. During April 2020 Fang furnished the property with a cooker
costing £440, a washing machine costing £330 and floor coverings costing £2,200. The cooker was sold
during December 2020 for £ 110, and replaced with a similar model costing £460. The washing machine
was scrapped, with nil proceeds, during March 2021. It was replaced by a washer-dryer costing £670,
although the cost of a similar washing machine would have been £360
The other expenditure on the property for the tax year 2020-2021 amounted to £1,310, and this is all
allowable.
Required:
Fang’s property income
Question#10:
During the tax year 2020-2021, Edmound rented out a furnished room in his main residence. He
received rent of £8,540 and incurred allowable expenditure of £2,140 in respect of this room.
Question#11:
Petula:
Petula owns a freehold house which was let out furnished throughout the tax year 2020/21 The total
amount of rent received during the tax year was £12,000.
During August 2020, Petula purchased a new washer-dryer for the property at a cost of £730. This was a
replacement for an old washing machine which was scrapped, with nil proceeds. The cost of a similar
washing machine would have been £420.
During November 2020, Petula purchased a new dishwasher for the property at a cost of £580.The
property did not previously have a dishwasher.
The other expenditure on the property for the tax year 2020/21 amounted to £1,640, and all of this is
allowable.
During the tax year 2020/21, Petula rented out one furnished room of her main residence. During the
year, she received rent of £8,900 and incurred allowable expenditure of £2,890 in respect of the room.
Petula always uses the most favorable basis as regards the tax treatment of the furnished room.
Mustafa Ahmed Mirchawala:
Page 12
TX: Taxation:
Question#12:
Leticia:
Property Two:
This is a leasehold shop that is let out unfurnished. The property was acquired on 1 May 2020 and was
immediately let to a tenant, with Leticia receiving a premium of £45,000 for the grant of a five-year
lease. During the period 1 May 2020 to 5 April 2021 Leticia received four quarterly rental payment of
£2,160 per quarter, payable in advance.
Leticia pays a monthly rent of £1,360 for this property, but did not pay a premium when she acquired it.
Property Three:
This is a freehold house that is let out unfurnished. The property was let from 6 April 2020 to 31 January
2021 at a monthly rent of £580.On 31 January 2021 the tenant left, owing three months
rent. Leticia recovered two months of the outstanding rent by retaining the tenant security deposit but
was unable to recover the balance.
On 1 March 2021 a new tenant paid Leticia a security deposit of £1,200, being two months’ rent,
although the new tenancy did not commence until 15 April 2021.
Other Expenditures:
The other expenditure on properties two and three for the tax year 2020/21 amounted to £3,000
and this all allowable.
Furnished Room:
During the tax year 2020/21 Leticia rented out one furnished room of her main residence. During the
year she received rent of £3,170 and incurred allowable expenditure of £4,480 in respect of the room.
Leticia always uses the most favorable basis as regards the tax treatment of the furnished room.
Required:
Calculate Leticia stone’s property loss for the tax year 2020/21.
Question#13:
Furnished Room:
During the tax year 20/21 Kelvin rented out furnished room of his main residence. During the year he
receives rent of £2,000 and incurred allowable expenditure of £1,100 in respect of the room.
Property 1:
This is the freehold house that is let out unfurnished. The property was let from 1 May 2020 to 28 Feb
2021 at a monthly rent of £600. On 28 Feb 2021 the tenant left, owing the four month’s rent. Kelvin
recovered one month rent and was unable to recover the balance.
Property 2:
The property was acquired by Kelvin on 1 May 2020 and pays a monthly rent of £1,400 at the end of each
month for this property. Kelvin immediately let out this property to a tenant, receiving a premium of
£60,000 for the grant of 6 year lease.
During the period 1 May 2020 to 31 March 2021 Kelvin received four quarter rental payment of £2,210
per quarter, payable in advance.
Other Expenditures:
The other Expenditures for the tax year 20/21 amounted to £6,000. Kelvin always uses the most
favorable basis as regards the tax treatment.
Required:
Calculate Kelvin property income for the Tax year 20/21.
Mustafa Ahmed Mirchawala:
Page 13
TX: Taxation:
Question#14:
Leticia Stone (FHL):
This is a freehold house that qualifies as a trade under the furnished holiday letting rules. Leticia
purchased this property on 1 July 2020 for £282,000. The purchase price included £4,600 for furniture
and kitchen equipment. Leticia borrowed £220,000 to purchase this property. During the period 1 July
2020 to 5 April 2021 she made loan repayments totaling £14,300, of which £12,700 was in respect of
loan interest. The property was let for 22 weeks at £425 per week during the period 1 July 2020 to 5
April 2021. Due to a fire, £12,200 was spent on replacing the roof of the house during March 2021. Only
£10,900 of this was paid for by Leticia’s property insurance. During the tax year 2020/21 Leticia drove
1,170 miles in her motor car in respect of the furnished holiday letting business. She uses HM Revenue
and Customs’ authorized mileage rates to calculate her expense deduction.
The mileage was for the following purposes:
Miles
Purchase of property
160
Running the business on a weekly basis 880
Property repairs
130
The other expenditure on this property for the period 1 July 2020 to 5 April 2021 amounted to £3,770,
and this is all allowable.
Mustafa Ahmed Mirchawala:
Page 14
TX: Taxation:
Income Tax Computation:
(Tax year 2022-2023 (6th April 2022 to 5th April 2023)
Question#1:
Mr. Muhammad
Property income = $45,000
Interest received on 1-1-2023 = $28,000
Dividends received on 1-5-2022 = $54,000
Qualifying interest paid on 1-3-2023 = $15,000
Gift and donations = $19,000 (Net)
Child benefit received = 2000
Required: Income tax payable
Question#2:
Mr. Ali
Employment income = $20,000
Interest received on 1-7-2022 = $18,000
Dividends received on 1-6-2022 = $27,000
Qualifying interest paid on 1-1-2023 = $5,000
Gift and donations = $19,000 (Net)
Child benefit received
Required: Income tax payable
Question#3:
Mr. Mustafa
Property income = $55,000
Interest received on 1-5-2022 = $12,000
Dividends received on 1-1-2023 = $18,000
Qualifying interest paid on 1-7-2023 = $17000
Gift and donations = $5,000 (Net)
Required: Income tax payable
Question#4:
Mr. Kazim
Employment income = $60,000
Interest received on 1-5-2022 = $50,000
Dividends received on 1-2-2022 = $90,000
Gift and donations = $30,000 (Net)
Required: Income tax payable
Question#5:
Mr. Khan
Trading income = $27,000
Interest received on 15-12-2023 = $10,800
Dividends received on 15-4-2022 = $15,000
Qualifying interest paid on 1-5-2023 = $2,000
Gift and donations = $9,000 (Net)
Child benefit received = 2500
Required: Income tax payable
Mustafa Ahmed Mirchawala:
Page 15
TX: Taxation:
Question#6:
Mr. Khan
Interest received on 4-8-2022 = $64,000
Dividends received on 15-2-2023 = $63,000
Qualifying interest paid on 13-4-2022 = $20,000
Child benefit received = 2000
Gift and donations = $22,100 (Net)
Required: Income tax payable
Mustafa Ahmed Mirchawala:
Page 16
TX: Taxation:
Question#1:
Billy had a trading income of £26,000 and received bank deposit interest of £10,000 in 2022/23.
Calculate the income tax liability?
Question#2:
Recalculate Billy’s income tax liability, assuming the bank deposit interest is now £20,000.
Question#3:
Molly receives bank interest of £20,000 and no other income in 2022/23.
Calculate her income tax liability in 2022/23.
Question#4:
Polly has trading profit of £12,000 assessable in 2022/23 and bank interest of £18,000.
Calculate the income tax liability?
Question#5:
Daisy received a salary of £18,000(PAYE 1,400) received £10,000 bank interest and dividend income of
£2,000 in 2022/23.
Calculate his income tax liability?
Question#6:
Recalculate Daisy income tax payable assuming he received salary of £36,000 (PAYE £5,750) bank
deposit interest of £12,000 and dividend is £2,000?
Question#7:
Mike received gross employment income of £108,000 in 2022/23 of which £33,310 was deducted at
source under PAYE in 2022/23.
Calculate his income tax liability?
Question#8:
Mr. Smith has been working for many years and received a salary of £50,000 per annum in
2022/23(PAYE deducted in 2022/23 £9,000).He has no other source of taxable income.
Calculate the income tax payable by Mr. Smith for 2022/23.
Question#9:
Ken made trading income of £130,000, received bank interest of £40,000 and dividend income of
£36,000 in 2022/23.
Calculate Ken’s Income tax liability for 2022/23
Question#10:
James has a trading income assessment in 2022/23 of £102,000 and receives bank interest of £4,000.
Calculate the income tax liability of James for 2022/23.
Question#11:
David and Victoria are married and in 2022/23 David had trading income assessment of £8,000 and
Victoria received a salary of £30,000.
Calculate the tax liabilities of David and Victoria assuming that an election is made to transfer 10% of
David’s personal allowance to Victoria and state the date by which the election should be made.
Question#12:
Kathy has trading profit of £50,000 in 2022/23 and paid £1,000 interest on a loan to purchase plant and
machinery used in the business of her partnership.
Calculate Kathy’s income tax liability for 2022/23
Question#13:
Elliot has trading profit of £48,000 in 2022/23.He paid £1,600 to charity under the gift aid system.
Calculate Eliot’s income tax liability for 2022/23
Mustafa Ahmed Mirchawala:
Page 17
TX: Taxation:
Question#14:
Thomas earned £160,000 trading profit in 2022/23 in the tax year he paid £6,400 to charity under the
gift aid scheme.
Calculate Thomas’s income tax liability for 2022/23
Question#15:
Kerry made a trading profit of £98,000 in 2022/23 in addition she received bank interest of £4,000 and
dividend income of £6,000. She paid interest of £3,000 on a loan to contribute capital into a partnership
of which she is a partner. She made a payment of £4,800 to charity under the gift aid scheme.
Calculate Kerry’s income tax liability for 2022/23.
Question#16:
Elton is a higher rate tax payer (but with an adjusted net income of ≤100,000). This includes £20,000 of
rental income on a property owned entirely by Elton on which he pays tax at 40%, a tax liability
therefore of £8,000. David his civil partner has no other income.
Discuss how Elton and David could reduce their income tax liabilities.
Child Benefit:
Question#17:
Catherine received child benefit of £1,056 in 2022/23 and has ANI for the year of £54,000.
Calculate tax on child benefit?
Question#18:
Victoria receives child benefit of £3,147 in respect of her 4 children and has ANI of £77,000.
Calculate tax on child benefit?
Mustafa Ahmed Mirchawala:
Page 18
TX: Taxation:
Pensions:
The annual allowance for the tax year 2022-23 is £40,000
Carry forward
If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unusedallowance for
up to three years.
It is still possible to use brought forward unused annual allowances in the tax year 2022-23 if a tapered annual
allowance applies for this year. However, it is the tapered annual allowance for 2022-23 which isused to establish
whether any carried forward is available from this year to future tax years.
Carry forward is only possible if a person is a member of a pension scheme for a particular tax year. Therefore,
for any year in which a person is not a member of a pension scheme the annual allowance islost.
Pension scheme limits
Annual allowance
£40,000
Minimum allowance
£4,000
Income limit
£240,000
The maximum contribution which can qualify for tax relief without any earnings is £3,600.
Lifetime allowance
The lifetime allowance for the tax year 2022–23 is unchanged at £1,073,100.
The lifetime allowance applies to the total funds which can be built up within a person’s pensionschemes. Where
the limit is exceeded, there will be an additional tax charge when that person subsequently withdraws the funds
in the form of a pension.
Mustafa Ahmed Mirchawala:
Page 19
TX: Taxation:
Question#1:
Trading income=60,000.
EmploymentIncome =120,000.
Employer contribution in
occupational pension = 10,000
Qualifying interest paid=5000.
Personal pension contribution paid
Required: Income tax payable?
Question#2:
Trading income = 195000
QualifyingInterest paid=10,000
Required: How much Annual
allowance available this year?
Question#3:
Trading income =240,000
Qualifyinginterest paid= 22000
Required: How much annual
allowance available for current
year?
Question#4:
Trading income for 22/23= 190,000
Qualifyinginterest paid 22/23 = 15000
Personal pension contribution paid in 22/23=$ 16000 (net)
UnusedA.A
In 019/020=10,000
020/021=20,000
021/022=500
Required: Annual allowance be C/F
for 023/24=?
Question#5:
Salary =80,000.
Employer contribution in Occupation pension=20,000.
Personalpension contribution paid by Ee=£40,000(net).
Unused Annual Allowance b/f:
019/020 10,000.
020/021 22,000
021/022 18000
Required: Unused Annual allowance to be C/F for 023/024 fiscal year=?
Mustafa Ahmed Mirchawala:
Page 20
TX: Taxation:
Question#6:
Salary 140,000.
Employer contribution in occupation pension=30,000.Qualifying
interest paid =5000.
Personal pension contribution paid=44000. (Net)Unused
annual allowance b/f:
019/020=5000
020/021=3000
021/022=2000.
Required: Amount on which annual allowance charge is applied=?
Mustafa Ahmed Mirchawala:
Page 21
TX: Taxation:
Question#1:
Salary = £145,000
Ee’s contribution in occupational Pension scheme = £25,000
Ee’s contribution in Personal pension = £44,000 (Net)
Employer contribution in occupational Pension of Ee = £15,000Gift and
donation paid by Ee = £4,000 (Net)
Unused annual allowance limit b/f= 10,000
Required: I.T.P 022/023?
Question#2:
Salary = £190,000
Ee’s contribution in occupational Pension scheme = £15,000
Ee’scontribution in Personal pension = £48,000 (Net)
Er contribution in occupational Pension of Ee = £10,000
Gift and donation paid = £12,000 (Net)
Unused annual allowance limit b/f= 7,000
Qualifying inc paid during 2022/023 = 5,000
Required: I.P.T 022/023?
Question#3:
Salary = £130,000
Ee’s contribution in occupational Pension scheme = £20,000
Ee’s contribution in Personal pension = £40,000 (Net)
Employer contribution in occupational Pension of Ee = £20,000Gift and
donationpaid = £8,000 (Net)
Unused annual allowance limit b/f= 10,000
Required: Income Tax payable?
Question#4:
Salary = £139,000
Ee’s contribution in occupational Pension scheme = £14000
Ee’s contribution in Personal pension = £42000 (Net)
Employer contribution in occupational Pension of Ee = £15000
Gift and donationpaid = £12,000 (Net)
Unused annual allowance limit b/f= 11500
Required: Income Tax payable 2022– 2023?
Mustafa Ahmed Mirchawala:
Page 22
TX: Taxation:
Duke & Earl Upper Crust (ADAPTED):
Duke and Earl Upper-Crust, born on 29 August 1973, are twin brothers.
Duke is employed by the High-Brown Bank plc as a financial adviser. During the tax year 2021/22. Dukewas
paid a gross salary of £114,000. He also received a bonus of £40,000 on 15 March 2022.On 31 March 2022
Duke made a contribution of £35,000(gross) into a personal pension scheme. He is not the member of HighBrown Bank plc’s occupational pension scheme.
Earl is self-employed as a financial consultant. His trading profit for the year ended 5 April 2022 was
£34,000. During 2021/22Earl had made contributions of £40,000 (gross) into a personal pensionscheme.
Neither Duke nor Earl has any other income.
In previous years Duke and Earl Upper-Crust had the same level of income as in 2021/22, Duke paid
£40,000 (gross) into his pension scheme and Earl paid £10,000 (gross).
Required:
(a)
Calculate Duke and Earl’s income tax liabilities for the tax year 2021/22, together with the net
amounts that Duke and Earl will have paid to their personal pension companies.
(9 marks)
Explain the effect of the pension scheme annual allowance limit, and the tax implications if
contributions are made in excess of the limit.
(2 marks)
(b)
Advise Duke and Earl of the maximum additional amounts that they could have contributed into
personal pension schemes for the tax year 2021/22 for which they would get tax relief and which wouldnot
incur an annual allowance charge, and the date by which any qualifying contributions would have had to
have been paid.
(4 marks)
(Total: 15 marks)
(c)
Mustafa Ahmed Mirchawala:
Page 23
TX: Taxation:
Employment Income:
Classic Cars:
o 15 yrs old car as at 6th Apr 022
o Market value > 15,000
o Market value > cost of car
o Car benefit = market value x %Pool Cars:
These are exempt for car benefit.
o It is used by more than one employee.
o Private use merely incidental to business use.
o It is not normally kept overnight at or near the residence of an employee.
Job Related Accommodation:
Conditions:
o For the proper performance of duties e.g. caretaker.
o For the better performance and is customary to that profession e.g. Army, Police.
o For the security of employee.
Relief Given:
o No annual value benefit.
o No additional benefit
o Ancillary benefits restricted to 10% of-net earnings.
Allowable Deductions:
o Employee's contribution: in occupational pension scheme.
o Charitable donations under the payroll deduction scheme.
o Subscription to professional bodies E.g. ACCA.
o Insurance for third party liabilities.
o Marginal cost of working at home.
o Mileage allowance.
Home working
The weekly tax-free allowance that an employer can pay to an employee who works from home is £6. The
allowance covers the extra light and heat costs incurred due to home working, without any need toprovide
records of the actual expenses incurred.
Mileage allowance.
0 to 10,000 miles
45 pence/mile.
10,000 and above
25 pence/mile
Mustafa Ahmed Mirchawala:
Page 24
TX: Taxation:
Question#1:
Employer bought T.V on 1st. Feb 021 for £35000.
He gave it to Employee for private use on the same date on 1st Dec 022.
Employer sold this T.V to Employee for £10,000 when its market value was £13,000.
Required: Gift benefit & usage benefit for 22/23=?
Question#2:
Employer bought furniture on 1st Nov 020 for 45,000. He gave it to Employee for private use on the same day.
On 6th April 022 -Employer sold this asset to Employee for £8000 when its market value was
£11,000.
Required: Gift benefit & usage benefit for 022/23?
Question#3:
Employer gave loan to Employee on 1, 1, 2021 of 70,000.Ee repaid 20,000 on 1.11.22 during 022/023.Ee paid
interest £1200 to Employee.
Required: loan benefit for 022/23?
Question#4:
Employer gave loan to Employee first time on 1st Sep 022 of £35000. Employee repaid £10,000 on1, 1,022.
Interest charged by Employer =1% annual.
Required: loan benefit for 022/023?
Question#5:
Cost of car = 30,000. Employee provided this car for the 9 month in 022/023 fiscal year. It’s a dieselcar.CO2
emission rate = 199gm/km. Employer also provided private fuel to Employee. Usage contribution by
Employee for the use of car = 700.
Required: Car and fuel benefit for 022/023?
Question#6:
Employer provided car to Employee for private use on 1st Aug 022. List price of car = 50000. Employerbought it
for 46000. Employee contributed 6000 as a capital contribution in this car. This car is a patrolcar. It has a CO2
emission rate of 65 gm/kg. Employer also provided private fuel to Employee but Employee repaid 60% of the
private fuel to Employer for good.
Required: Car benefit and fuel benefit for 022/023?
Question#7:
Employer provided car to Employee for private use during complete 022/023 fiscal year.
List price of car = 28,000.But Employer bought it for 26,000. Accessories of 5,000 were added when thecar was
fist purchased. This car is a diesel car with a CO2 emission rate of 238 gm/km. Employer also provided private
fuel to Employee. But Employee repaid 100% private fuel to Employer for good.
Required: Car and fuel benefit for 022/023?
Mustafa Ahmed Mirchawala:
Page 25
TX: Taxation:
Question#8:
Mr. Kelso:
Mr. Kelso is chairman and chief executive of Aardvark Ltd.
He receives a salary of £45,000 per annum and during the income tax year 2022/23 he is provided withthe
following benefits:
The company has provided him with the use of a 3000cc petrol engine Jaguar motor car costing
£26,000 from 6 April 2022. The distributor's list price was £26,700 at that time. The CO2 emissions of the car
are 202 grams per kilometer. While he had use of the Jaguar, he contributed £120 being 50% ofthe cost of his
private fuel.
On 31 July 2022 he was involved in a serious road accident and the car was written off. He was-chargedwith
dangerous driving and the company met his legal costs of £2,000.
When he resumed work on 1 October 2022, he was provided with a 2.8 liter Mercedes car costing
£30,000 (list price £30,450) and the use of a chauffeur. This car is used solely for business purposes, and,up to 5
April 2023, covered 8.000 miles. The CO2 emissions produced by this car are 247 grams per kilometer.
Throughout the year 022/023, his wife, who is not employed by the company, has been provided with the use
of 1800cc diesel engine BMW car costing £15,000, the list price. The CO2 emission level for thiscar is 171 grams
per kilometer. The company meets all running costs and fuel bills.
He occupies a house which had cost the company £80,000 when purchased in 1990 and on which expenditure
of £40,000 on improvements had been incurred prior to being first occupied by Mr. Kelso in2000 when its
market value was £140,000. Its annual value is agreed at £3,600 Mr. Kelso pays no rent but does meet all
running costs.
He is provided with the use of two suits which had been purchased by the company at a cost of £800 intotal.
Required:
(a) Compute the total amount of benefits assessable on Mr. Kelso for the income tax year 2022/23
(b)Compute any additional cost which will be borne by the company as a result of providing the abovebenefits.
Mustafa Ahmed Mirchawala:
Page 26
TX: Taxation:
Question#9:
Penny Donald:
o Penny Donald is 46 and works as a sales manager for Modern Fashions plc, a large UK resident
company. Penny's salary is £46,000 per annum.
During the tax year 2022/23 Modern Fashions plc provided Penny with the following benefits:
o The use of a company car. This was petrol driven 2000cc BMW with a CO2 emission level of ref 227
gm/km and a recommended list price of £21,000. The car was for Penny’s sole use and she drove a
total of 12,000 miles during 2022/23 of which 60% were on business related journeys. The company
paid for all the petrol used by Penny; however Penny contributed £40 per month towards the
overall cost of this.
o Workplace parking which cost the company £1,200 per year.
o Private medical insurance. This cost the company £800, but would have cost-Penny £960 if she had
arranged this herself.
o Nursery vouchers for Penny's two children. These cost the company £5,360 and were used by Penny
to help pay for the fees at Penny's local nursery school.
o A computer system with a recommended selling price of £2,300. This Penny used at home for
private purposes. The computer was first provided on 6 April 2022.
o Penny paid £350 per month to the company's occupational pension scheme, Penny paid tax of
£9,165 under the PAYE system for the year 2022/23 In addition to the above Penny received the
following investment income for 2022/23
Building society interest of £2,400
UK dividend income of £900
Interest of £350 from a new individual savings account (NISA)
The above amounts are stated as the cash amounts received. Penny also paid a cash amount of £400 in
December 2021 to the charity, Oxfam, under the Gift Aid scheme.
Required:
Calculate the income tax payable by Penny for the tax year2022/23.
Mustafa Ahmed Mirchawala:
Page 27
TX: Taxation:
Question#10:
Ravi Patel (Amended):
Ravi Patel is a computer expert working for a UK resident company receiving an annual salary of
£39,000.
During the tax year 2022/23 Ravi received the following benefits.
o The use of a company owned apartment. This had cost the company £143,000 in May 2021 and
has been occupied by Ravi since that date. The apartment has an annual retable value of £4,100
and Ravi pays the company £2,500 per year for its use.
o Furniture, valued at £12,000, is provided for use in the apartment. During 2022/23 the company
paid decorating bills of £550 and wages to a cleaner amounting to £1,500.
o A 2.0 Liter diesel BMW car with a CO2 emission rate of 204g per km and a recommended list price of
£26,500. This was first provided for Ravi's use in July 2020. Accessories amounting to £800 were
added when the car was first provided. Ravi contributed £4,000 towards the capital cost of the car.
The car is used 20% for business Use and 80% for private use. The company pays for all the fuel but
Ravi contributes £40 per month towards this cost.
o In addition to the above the company also paid £750 to the local golf club in respect of Ravi's
2022/23 membership and refunded £1,325 to Ravi in respect of actual business expenses incurred
whilst he was away on official trips. Ravi had agreed with the company that it would deduct £20 a
month during the whole of 2022/23 in respect of charitable payments under the payroll deduction
scheme. Ravi paid £240 (net) per month to a private pension plan. In February 2023 he paid an
additional lump sum of £1,920 (net) to the same plan. In December 2022 he paid £180 fees to an
HMRC approved professional body related to his employment. Ravi paid tax of £7,808 under the
PAYE system for 2022/23 in addition to the above.
Ravi received the following income during2022/23.
Bank interest of £240
Building society interest of £-190.
Dividends from shares held in UK companies amounting to £280
Dividends from investments held in an individual savings account (ISA) amounting to £145.
The above amounts are all stated at the cash amounts received.
Mustafa Ahmed Mirchawala:
Page 28
TX: Taxation:
Employment Income 2022/2023
Salary
XXXX
Bonus
XXXX
Car benefit
XXXX
Fuel benefit
XXXX
Accommodation
XXXX
Usage benefit
XXXX
Gift benefit
XXXX
Loan benefit
XXXX
Less: Allowable deduction:
Mileage allowance
(XXXX)
Employee’s contribution in pension (XXXX)
Qualifying travelling expense
(XXXX)
Net earnings/employment income
XXX
Non saving
Trading income
XXX
Employment income
XXX
Property income
XXX
Interest income
Interest
XXX
Dividend income
XXX
Total income
XXX
Less: interest paid
(XXX)
Net income
XXX
Less: Personal allowance
Taxable income
Total net income
Less: Gross Personal Pension Contribution
Less: Gross Gift Aid Donations
Adjusted Net income
Mustafa Ahmed Mirchawala:
Dividends
XXX
XXX
XXX
XXX
XXX
XXX
(12,570)
XXX
XXX
(XXX)
(XXX)
(XXX)
Page 29
TX: Taxation:
Employed
Self Employed
Difference B/W Employed & Self Employed:
Contract of services
Contract for services.
Factors:
1. Control: Employees are normally in control of Employer.
2. Timings: If timings fixed, then hint of employee.
3. Helpers: If helpers provided by employer, then hint of Employee.
4. Tools: If tools provided By Employer, Then hint of employee.
5. Financial risk: self Employed normally bears financial risk .Employees are normally risk free e.g. of Z
types of teachers.
6. What to do & How to do I? => For self Employed we just tell them what to do .But for employee we
tell both what to do and how to do.
7. Whether he accepts further work. Of accepts further work, then this is the hint of Employee.
8. Whether he gets benefit from sound management.
9. Wordings used in the contract.
Mustafa Ahmed Mirchawala:
Page 30
TX: Taxation:
Car Benefit:
o Car benefit is calculated when employer gives car to Employee for private use.
o Even if car is provided for 90% business and 10% private use, still we will calculate full car benefit.
o If employer has provided more than one car to employee for private use, than calculate separate car
benefit for each car.
Car benefit cost of car X %.
List price (before trade discount)
xxx
(Distributed list price)
Add import duty
xxx
Add delivery charges
xxx
Add all accessories
xxx
except: 1.Car phone 2. Accessories for disable people.
Less capital contribution by Employee (xxx)
Max limit for capital contribution = 5000.
Car benefit = cost of car x%
A 2% percentage applies to electric-powered motor cars with zero CO2 emissions.
For hybrid-electric motor cars with CO2 emissions between 1 and 50 grams per kilometer, the electric
range of a motor car is relevant in determining the car benefit percentage, as follows:
130 miles or more
70 to 129 miles
40 to 69 miles
30 to 39 miles
Less than 30 miles
2%
5%
8%
12%
14%
This % depends on Co2 emission rate of that car.
Gms/ km
51-54
55
o
o
o
o
o
o
o
Petrol
15%
16%
Diesel
19%
20%
After 55gms/km, for additional 5 gms/km 1 % will be added.
Maximum limit for this % is 37% for both petrol and diesel car.
If Co2 emission is not the multiple of 5, then always round down to nearest 5.
If employer has provided car to employee, for only few months in fiscal year, then apportion car
benefit.
If employee has paid some usage contribution to employer for the use of car, then deduct car
benefit with this amount.
If employer is paying for insurance, repairs, service maintenance, oil change of this car then these
benefit are “EXEMPT”
But provision of driver is full time taxable.
Mustafa Ahmed Mirchawala:
Page 31
TX: Taxation:
Example:
During the tax year 2022–23, Fashionable plc provided the following employees with company cars:
Amanda was provided with a hybrid-electric company car throughout the tax year 2022–23. The car has a list
price of £32,200, an official CO2 emission rate of 24 grams per kilometre and an electric range of 90 miles.
Betty was provided with a new diesel company car throughout the tax year 2022–23. The car has a list price of
£16,400 and an official CO2 emission rate of 99 grams per kilometre. The car meets the RDE2 standard.
Charles was provided with a new diesel company car on 6 August 2022. The car has a list price of £13,500 and
an official CO2 emission rate of 102 grams per kilometre. The car does not meet the RDE2 standard.
Diana was provided with a new petrol company car throughout the tax year 2022–23. The car has a list price of
£84,600 and an official CO2 emission rate of 178 grams per kilometre. Diana paid Fashionable plc £1,200
during the tax year 2022–23 for the use of the car.
Amanda
With CO2 emissions between 1 and 50 grams per kilometre, the electric range of the car is relevant. This is
between 70 and 129 miles, so the relevant percentage is 5%. The car was available throughout 2022–23, so the
benefit is £1,610 (32,200 x 5%).
Betty
The CO2 emissions are above the base level figure of 55 grams per kilometre. The CO2 emissions figure of 99 is
rounded down to 95 so that it is divisible by five. The minimum percentage of 16% is increased in 1% steps for
each five grams per kilometre above the base level, so the relevant percentage is 24% (16% + 8% ((95 –
55)/5)). The 4% surcharge for diesel cars is not applied because the RDE2 standard is met. The car was
available throughout 2022–23, so the benefit is £3,936 (16,400 x 24%).
Charles
The CO2 emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 29%
(16% + 9% ((100 – 55)/5) + 4% (charge for a diesel car not meeting the RDE2 standard)). The car was only
available for eight months of 2022–23, so the benefit is £2,610 (13,500 x 29% x 8/12).
Diana
The CO2 emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 40%
(16% + 24% ((175 – 55)/5)), but this is restricted to the maximum of 37%. The car was available throughout
2022–23, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the
car reduces the benefit.
Mustafa Ahmed Mirchawala:
Page 32
TX: Taxation:
EXAMPLE:
Continuing with the above example .
Amanda was provided with fuel for private use between 6 April 2022 and 5 April 2023.
Betty was provided with fuel for private use between 6 April 2022 and 31 December 2022.
Charles was provided with fuel for private use between 6 August 2022 and 5 April 2023.
Diana was provided with fuel for private use between 6 April 2022 and 5 April 2023. She paid Fashionable plc
£600 during the tax year 2022–23 towards the cost of private fuel, although the actual cost of this fuel was
£1,000.
Amanda
Amanda was provided with fuel for private use throughout 2022–23, so the benefit is £1,265 (25,300 x 5%).
Betty
Betty was provided with fuel for private use for nine months of 2022–23, so the benefit is £4,554 (25,300 x
24% x 9/12).
Charles
Charles was provided with fuel for private use for eight months of 2022–23, so the benefit is £4,891 (25,300 x
29% x 8/12).
Diana
Diana was provided with fuel for private use throughout 2022–23, so the benefit is £9,361 (25,300 x 37%).
There is no reduction for the contribution made by Diana because the cost of private fuel was not fully
reimbursed.
Company van benefit:
The annual scale charge used to calculate the benefit where an employee is provided with a company van has
been increased from £3,500 to £3,600.
Vans producing zero CO2 emissions (zero emission vans) have a zero benefit charge.
Company car fuel benefit:
The fuel benefit is calculated as a percentage of a base figure which is announced each year. For the tax year
2022–23, the base figure has been increased from £24,600 to £25,300.
The percentage used in the calculation is exactly the same as that used for calculating the related company
car benefit.
Company van fuel benefit:
The fuel benefit where private fuel is provided for a company van has been increased from £669 to £688.
There is no fuel benefit for a company van which produces zero CO2 emissions (a zero emission van).
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Approved mileage allowances:
Approved mileage allowances rates are unchanged, with a rate of 45p per mile for the first 10,000 business miles, and
25p per mile for business mileage in excess of 10,000 miles.
Official rate of interest:
The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the
provision of living accommodation costing in excess of £75,000.
For exams in the period 1 June 2023 to 31 March 2024, the actual official rate of interest of 2% for the tax year 2022–
23 will be used.
Mustafa Ahmed Mirchawala:
Page 34
TX: Taxation:
Exempt Benefits:
There are a number of exempt benefits including removal expenses sporting facilities, and workplace
parking.
Various benefits are exempt from tax.
These include:
a. Entertainment provided to employees by genuine third parties (e.g. seats at sporting/cultural events),
even if it is provided by giving the employee a voucher
b. Gifts of goods (or vouchers exchangeable for goods) from third parties (le not provided by the
employer or a person connected to the employer) if the total cost (Ind. VAT) of all gifts by the dame
donor to the same employee In the tax year is £250 or less, if the £250 limit is exceeded, the full amount
is taxable, not just the excess.
c. Non-cash awards for long service the period of service was at least 20 years, no similar award was
made to the employee in the past ten years and the cost Is not more than X50 per year of service
d. The first 8000 of removal expenses if:
1.
The employee does not already live within a reasonable daily travelling distance of his new place
of employment, but will do so after moving.
2.
The expenses are incurred or the benefits provided by the end of the tax year following the tax
year of the start of employment at the new location.
e. Some childcare (see earlier in this Chapter)
f. Spotting or recreational facilities available to employees generally and not to the, general, public,
unless they are provided on domestic premises, or they consist of an interest in or the use of any
mechanically propelled vehicle or any overnight accommodation. Vouchers only exchangeable for such
facilities are also exempt, but membership fees for sports clubs are taxable.
g. Assets or services used in performing the duties of employment provided any private use of the item
concerned is Insignificant. This exempts, for example, the benefit arising on the private use of employerprovided tools.
h. Welfare counseling and similar minor benefits if the benefit concerned is available to employees
generally
i. Bicycles or cycling safety equipment provided to enable employees to get to from work or to travel
between one 'workplace and another. The equipment must be available to the employer's employees
generally. Also, it must tot need manly for the aforementioned journeys.
j. Workplace parking
k. Up to £15,480 a year paid to an employee who Is on a full-time course lasting at least a year, with
average full-time attendance of at least 20 weeks a year. If the £15,480 limit is exceeded, the whole
amount is taxable.
l. Work related training and related costs. This includes the costs of training material and assets either
made during training or incorporated into something so made.
m. Air miles or car fuel coupons obtained as a result of business expenditure but used for private
purposes.
n. The cost of work buses and minibuses or subsidies to public bus services
A works bps must have a seating capacity of 12 or more and a works minibus a seating capacity of nine
or more but not more than 12 and be available generally to employees of the employer concerned. The
bus or minibus must mainly be used by employees for journeys to and from work and for journeys
between workplaces.
o. Transport/overnight costs where public transport is disrupted by industrial action, late night taxis and
travel costs incurred where car sharing arrangements unavoidably breakdown.
Mustafa Ahmed Mirchawala:
Page 35
TX: Taxation:
p. The private use of one mobile phone, which can be a Smartphone. Top up vouchers for exempt
mobile phones are also tax free. If more than one mobile phone is provided to an employee for private
use only and second or subsequent phone is a taxable benefit valued using the rates for assets made
available to employees.
q. Employer provided uniforms which employees must wear as part of their duties.
r. The cost of staff parties which are open to staff generally provided that the cost per head per year
(including VAT) is £150 limit may be split between several parties.
s. Private medical insurance premiums paid to cover treatment when the employee is outside the UK in
the performance of his duties. Other medical insurance premiums are taxable as is the cost of medical
diagnosis and treatment except for routine checkups. Eye tests and glasses for employees using VDUs
are exempt.
t. Cheap loans that do not exceed £10,000 at any time in the tax year (see above)
u. Job related accommodation (see above)
v. Employer contribution towards additional household costs incurred by an employee who works
wholly or partly at home. Payments up to £4 a week (£18 per month for monthly paid
Employees may be made without supporting evidence (see earlier in this text)
w. Personal incidental expenses (£10 per night for abroad and £5 per night within UK)
x. Recommended medical treatment (costing up to £500 per employee per tax year paid for by an
employer. The treatment must be recommended in writing by a health professional (e.g. doctor, nurse)
and the purpose of the treatment must be to assist the employee to return to work after period of injury
of ill-health lasting at least 28 days. If the payments exceed £500 in a tax year, they are wholly taxable.
y. In house benefits Marginal cost to Employer taxable
z. Insurance for 3rd party liabilities by employer Exempt benefit
Where a voucher is provided for a benefit which is exempt from income the provision of the voucher
itself is also exempt.
Mustafa Ahmed Mirchawala:
Page 36
TX: Taxation:
Deduction of source:
Form F60:
o Year end from
o Contain details of your taxable earning, NIC & PAYE dedication
o It’s a proof that you have paid PAYE.
o Must be provided to employee by 31st May 2023.
For P45:
o
o
o
At the time of leaving job.
Contains your tax code taxable earnings, NIC.
Its proof that you have paid tax in past.
Form P11D:
o Prepared by employer.
o For Non- cash taxable benefits
Mustafa Ahmed Mirchawala:
Page 37
TX: Taxation:
Question#11:
Peter Chic:
Peter Chic Is employed by Haute-Couture Ltd as a fashion designer. The following information Is
available for the tax year 2022/23:
Employment:
1. During the tax year 2022/23 Peter was paid a gross annual salary of £75,600 by Haute-Couture Ltd.
income tax of £42000 was deducted from this figure under PAYE.
2. In addition to his salary, Peter received two bonus payments from Haute Couture Ltd. During the tax
year 2022/23. The first bonus of £14,300 was paid on 30th April 2022 and was in respected of the year
ended 31 December 2021. Peter became entitled to, this first bonus on 10 April 2022. The second bonus
of £13,700 was paid on 31 March 2023 and was in respect of the year ended 31 December 2022. Peter
became entitled to this second bonus on 25 March 2023.
3. Throughout the tax year 2022/23 Haute-Couture Ltd provided Peter with a diesel powered motor car
which' has its: price of £22,500. The motor car cost. Haute-Couture Ltd £21,200, and it has are official
CO2 emission rate of 212 g/km. Peter made a capital contribution of £2,000 towards the cost of the
motor car when it was first provided to him.
4. Haute-Couture Ltd also provided Peter with fuel for private journeys. Haute-Couture Ltd has provided
Peter with living accommodation since 1 January 2019. The company had purchased the property in
2015 for €160,000, and It was valued at £185,000 on 1 January 2017. Improvements costing £13,000
were made to the property during June 2021. The annual value of the property is £9,645.
5. Throughout the tax year 2022/23 Haute-Couture Ltd provided Peter with two mobile telephones. The
telephones had each cost £250 when purchased by the company In January 2022 and are both used for
both private and business calls.
6. During February 2023 Peter spent five nights overseas on company business. Haute-Couture Ltd paid
Peter a daily allowance of £10 to cover the cost of personal expenses such as telephone call to his
family.
Property Income:
1. Peter owns two properties, which are let out. Both properties are free hold houses, with the first
property being let-out furnished and the second property being let out unfurnished.
2. The first property was let from 6 April 2021 to 31 August 2022 at a monthly rent of £500, payable in
advance. On 31 August 2022 the tenant left owing two months’ rent which Peter was unable to recover.
The property was out re-let before 5 April 2023. During March 2023 Peter spent £600 repairing the roof
of the property.
3. The second property was purchased on 1 July 2022, and was then let from 1 August 2022 to 5 April
2023 at a monthly rent of £2,820, payable in advance. During the year ended 5thApril 2023 he paid loan
interest of £7,800 in respect of a loan that was taken out to purchase this property.
4. Peter insured both of his rental properties at a total cost of £660 for the year ended 30 June 2022 and
£1080 for the year ended 30 June 2023. The insurance is payable annually in advance.
5. Where possible, Peter claims the war and tear allowance.
Other information
1. During the tax year 2022/23 Peter received building society interest of £4,760 and dividends of
£2,700. These were the actual cash amounts received.
2. On 4 August 2021 Peter received a premium bond prize of £100.
3. During the tax year 2022/23 Peter made Gift Aid donations totaling £2,340 (net) to national charities.
4. Peter received child benefit of £1,056-during2022/23.
Required: Calculate the income tax payable by Peter Chic for the tax year 2022/23
Mustafa Ahmed Mirchawala:
Page 38
TX: Taxation:
Question#12:
Vigorous Plc (ADAPTED):
Vigorous plc runs a health club. The company has three employees who received benefits during
2022/23 and it therefore needs to prepare forms P11D for them. Each of the three employees is paid an
annual salary of £60,000.
The following Information is relevant:
Andrea Lean:
1. Andrea was employed by Vigorous plc throughout 2022/23.
2. Throughout 2022/23 Vigorous plc provided Andrea with a petrol powered company motor car with
a list price of £19,400. The official CO2 emission rate for the motor car is 260 grams per kilometer.
Vigorous plc paid for all of the motor car's running costs of £6,200 during 2021/22. Including petrol
used for private journeys. Andrea pays £150 per month to Vigorous plc for the use of the motor car.
3. Vigorous plc .has provided Andrea with living accommodation since 1 November 2020. The property
was purchased on 1 January 2018 for £130,000. The company spent£14,000 improving the property
during March 2020, and a further £8,000 was spent on improvements during May 2022.' The value
of the property on 1 November 2020 was £170,000, and it has an annual value of £7,000. The
furniture in the property cost £6,000 during November 2020. Andrea personally pays for the annual
running costs of the property amounting to £4,000.
4. Throughout 2022/23 Vigorous plc provided Andrea with a mobile telephone costing £500. The
company paid for all business and private telephone calls.
Ben Slim:
1. Ben commenced employment with Vigorous plc on 1 July 2022.
2. On 1 July 2022 Vigorous plc provided Ben with an interest free loan of £120,000 so that he could
purchase a new main residence. He repaid £20,000 of the loan on 1 December 2022.
3. During 2022/23 Vigorous plc paid £9,300 towards the, cost of Ben's .relocation, His previous main
residence was 125 miles from his .place of employment with the company. The £9,300 covered the
cost of disposing of Ben's old property and of acquiring his new property
4. From 1 July 2022 Vigorous .plc provided Ben with a petrol powered second hand motorcar which
has a list price of £9,200. The official CO2emission rate for the motor car Is 90 gm/km. No fuel was
provided by the company; Ben just claimed fuel for his business mileage. Ben had the use of the car
until '30 September 2022 when his new company car arrived.
5. During the period from 1 October 2022 until 5 April 2023 Vigorous plc provided Ben with a new
diesel powered company motor car which has a list price of £11,200. The official CO2 emission rate
for the motor car is 119 g/km. Ben reimburses Vigorous plc for the fuel used for private journeys.
6. On 1 July 2022 Bee joined the company's childcare scheme which provides employees with childcare
vouchers of £60 per Week: to buy care from an approved child care. Ben received voucher to
provide care for 36 weeks in 2022/23
Mustafa Ahmed Mirchawala:
Page 39
TX: Taxation:
Chai Trim:
1. Chai was employed by Vigorous plc throughout 2022/23.
2. During 2022/23 Vigorous plc provided Chai with a two-year old company van, which was available
for private use. The van was unavailable during the period 1 August to 30 September 2022. Chai was
also provided with private fuel for the van.
3. Vigorous plc has provided Chai with a television for her personal use since 6 April 2020. The
television cost Vigorous plc £800 in April 2019. On 6 April 2022, the company sold the television to
Chai for £150, although its market value on that date was £250.
4. Throughout 2022/23 Vigorous plc provided Chai with free membership of its health club. The normal
annual cost of membership is £800. This figure is made up of direct costs of £150, fixed overhead
costs of £400 and profit of £250. The budgeted membership for the year has been exceeded, but the
health club has surplus capacity
5. On 1 January 2022 Vigorous plc provided Chai with a new computer costing £1,900. She uses the
computer at home for personal study purposes.
Mustafa Ahmed Mirchawala:
Page 40
TX: Taxation:
Question#13:
Olive Green
Olive Green is self-employed running a health food shop. Her statement of profit or loss for the year
ended 31 March 2023 is as follows:
£
Gross profit
Expenses:
Depreciation
Light and heat (Note 1)
Motor expenses (Note 2)
Rent and rates (Note 1)
Sundry expenses (Note 3)
Wages and salaries (Note 4)
Net Profit
£
130,750
2,350
1,980
9,700
5,920
2,230
78,520
(100,700)
30,050
Note 1 – Private accommodation
Olive lives in a flat that is situated above the health food shop. 30% of the expenditure included in the
statement of profit or loss for light, heat, rent and rates relates to the flat.
Note 2 – Motor expenses
Motor expenses include £ 4,700 for the running of Olive’s car during the year ended 31 March 2024
Olive drove a total of 20,000 miles, of which 8,000 were for business purposes.
The motor expenses also include £3,000 leasing costs. This relates to the lease of car with CO2 emissions
of 175 grams per kilometer which is used by the shop manager.
Note 3 – Sundry expenses
The figure of£2,230 for sundry Expenses includes £220 for a fine is respect of health and safety
regulations, £180 for the theft of cash by an employee, £100 for a donation to a political party, and £140
for a trade subscription to the health and Organic Association.
Note 4 - Wages and salaries
The figure of £78,520 for wages and salaries an annual salary of £14,000 paid to assistants doing the
same job are paid an annual of £10,500.
Note 5 – Goods for own use
Each week olive takes health food from the shop for personal use without paying for it.
The weekly cost of this food is £30, and it has a selling price of £45.
Note 6 – Plant and machinery
The only item of plant and machinery is Olive’s motor car which was purchase in October 2022 and has
CO2 emissions of 155 grams per kilometer. The tax written down value of this vehicle at 1 April 2022
was £15,800.
Note 7 - patent royalties
Olive pays a paten royalty £150 (gross) every quarter for the use of equipment that allows her to make
her own organic breakfast cereal. This has not been accounted for in arriving at the net profit of
£30,050.
Mustafa Ahmed Mirchawala:
Page 41
TX: Taxation:
Other income
1)
Olive has a part – time employment for which she was paid a gross salary of £6,000 during 2022/23
income tax of £1,195 has been detected from this figure under PAYE.
2)
During 2022/23 olive received building society interest of £1,440 and dividends of £1,080. These were
the actual cash amounts received.
3)
On 30 November 2022 Olive sold some investments, and this resulted in a chargeable gain of £12,800.
Other information
1)
During 2021/22 Olive paid interest of £220 (gross) on a loan taken out on 1 January 2022 to purchase
equipment for use in a part time employment.
2)
Olive contributed £2,600 (gross) into a personal pension scheme during 2021/22.
3)
Olive’s payments on account of income tax in respect of 2021/22 totaled £4,900.
Required:
Calculate olive’s tax adjusted trading profit for the year ended 31 March 2022. Your computation should
commence with the net profit figure of £30,050, and should list all of the items referred to inNotes (1) to (7)
indicating by the use of zero (0) any items that do not require adjustment. (8 marks)
b)(i)Calculate the income tax and capital gain tax payable by olive for 2022/23;
(11 marks)
Mustafa Ahmed Mirchawala:
Page 42
TX: Taxation:
Class 1 Ee NIC:
o
o
o
Burden on Employee
Computed on cash salary, bonus and mileage allowance received over 45 pence
Class I Ee NIC is not an allowance Expense from any P&L.
1- 12,570
Nil
12,571-50,270 13.25%
50,271-Above 3.25%
Points to Remember:
o It means all employees in UK must pay 2 taxes.
1. Income tax on employment income.
2. Class I Ee NIC.
CLASS 1 ER NIC:
o Burden on employer.
o Every Employer must pay this NIC for Employee.
o It is computed on cash salary, Bonus and Mileage allowance received over 45 pence.
o It’s an allowed expense from trading income P&L of employer.
Employment allowance:
If the total class 1 ER NIC paid by employer is less than £5000. Then ER no needs to pay class 1 ER NIC.
But if it is greater than £5000 then excess is payable.
E.g. if the total class 1 ER NIC paid by any employer = £5600. Then he needs to pay (5600-5000) = £600.
1-£9,100
9,101- Above
NIL
15.05%
If a company has only one employee i.e. director then this £5000 Employer Allowance not available for
that company.
Where employer’s contributions are £100,000 or more for the previous tax year.
Class 1 A NIC.
o Burden on employer
o If employer giving non cash taxable benefits to his employee, then employer must pay this NIC.
o It is computed on non cash taxable benefits.
o Flat rate = 15.05%
o It’s an allowed expense from trading income P & L of ER.
o No employer Allowance for class 1 A NIC.
o That mean employer pay maximum 2 NIC for his employees
1. Class 1 ER NIC
2. Class 1 A NIC
CLASS 2 NIC:
o £ 3.15/week.
o Paid by Self Employed
o Not an allowed expense from any P&L.
o Class 2 NIC is payable where trading profits exceed a small profits threshold of £6,515.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
CLASS 4 NIC:
o
o
o
Paid by self employed
Computed on tax adjusted trading profits
Not an allowed expense from any P & L.
1-12,570
Nil
12,571-50,270 10.25%
50,271-Above 3 . 2 5 %
Mustafa Ahmed Mirchawala:
Page 44
TX: Taxation:
Question#14:
Richard Tryer:
Richard Tryer is employed by Propel as a computer programmer.
Richard has tried to prepare his own income tax computation for the tax year2022/23, but he has foundit more
difficult than expected. Although the sections which Richard has completed are correct, there are a significant
number of omissions.
The omissions are marked as outstanding (0/S).
The partly completed income tax computation is as follows:Richard
Tryer Income tax computation — 2022/23
Employment income
Salary
Car benefit
Fuel benefit
Living accommodation
Property income
Building society interest
Dividends
Notes
£
1
1
2
41000
O/S
O/S
O/S
----
3
£
O/S
O/S
1260
O/S
O/S
(11850)
O/S
Personal allowance
Taxable income
£
31785 at 20%
O/S at 40%
O/S at 32.5%
6357
O/S
O/S
O/S
Income tax liability
Tax suffered at source
PAYE
Building society interest
Dividends
Income tax payable
Mustafa Ahmed Mirchawala:
O/S
9130
O/S
O/S
Page 45
TX: Taxation:
Note 1 — Car and fuel benefits:
Throughout the tax year 2022/23, Prog plc provided Richard with a petrol-powered motor car which has
a list price of £17,900. The motor car cost Prog plc £17,200, and it has a CO2 emission rate of 129 grams
per kilometer. During the tax year 2022/23, Richard made contributions of £1,200 to Prog plc forthe use
of the motor car.
During the period 1 July 2022 to 5 April 2023, Prog plc also provided Richard with fuel for private
journeys. The total cost of fuel during the period 1 July 2022 to 5 April 2023 was £4,200, of which 45%
was for private journeys. Richard did not make any contributions towards the cost of the fuel.
Note 2 — Living accommodation:
Throughout the tax year 2022/23, Prog plc provided Richard with living accommodation. The property
has been rented by Prog plc since 6 April 2022 at a cost of £1,100 per month. On 6 April 2022, the
market value of the property was £122,000, and it has an annual value of £8,600.
On 6 April 2022, Prog plc purchased furniture for the property at a cost of £12,100. The company pays
for the running costs relating to the property and for the tax year 2021/22 these amounted to £3,700.
Note 3 — Property income:
Richard owns a freehold shop which is let out unfurnished. The shop was purchased on 1 October 2022,
and during October 2022 Richard spent £8,400 replacing the building's roof. The shop was not usable
until this work was carried out, and this fact was represented by a reduced purchase price.
On 1 December 2022, the property was let to a tenant, with Richard receiving a premium of £12,000 for
the grant of a 30-year lease. The monthly rent is £830 payable in advance, and during the period 1
December 2022 to 5 April 2023 Richard received five rental payments.
Due to a fire, £8,600 was spent on repairing the roof of the shop during February 2023. Only £8,200 of
this was paid for by Richard's property insurance.
Richard paid insurance of £480 in respect of the property. This was paid on 1 October 2022 and is for the
year ended 30 September 2023.
Required:
Calculate the income tax payable by Richard try for the tax year 2022/23.
Mustafa Ahmed Mirchawala:
Page 46
TX: Taxation:
Question#15:
Ali Patel (ADAPTED):
You should assume that today's date is 15 March 2022
Ali Patel has been employed by Box plc since 1 January 2019 and is currently paid an annual salary of
£29,000.On 6 April 2022. Ali is to be temporarily relocated for a period of 12 months from Box plc's head
office to one of its branch offices. He has been offered two alternative remuneration packages: First
remuneration package
1. Ali will continue to live near Box plc's head office, and will commute on a daily basis to the branch
office using his private motor car.
2. He will be paid additional salary of £500 per month.
3. Box plc will pay Ali an allowance of 38 pence per mile for the 1,600 miles that Ali will drive each
month commuting to the branch office.
Ali’s additional cost of commuting for 2022/23 will be £1,800.
Second remuneration package:
1. Box plc will provide Ali with rent-free living accommodation near the branch office.
2. The property will be rented by Box plc at a cost of £800 per month. The annual value of the property
is £4600.
3. All will rent out his main residence near Box plc's head office, and this will result in property
business income of £6,000 for 2022/23.
Required:
1. Calculate Ali's income tax liability and Class I national insurance contributions for 2022/23, if he
a. Accepts the first remuneration package offered by Box plc,
b. Accepts the second remuneration package offered by Box plc.
Advise Ali as to which remuneration package is the most beneficial from a financial perspective.Your answer should be
supported by a calculation of the amount of income, net of all costs including income tax and Class I national insurance
contributions, which he would receive for 2022/23 under eachalternative.
Mustafa Ahmed Mirchawala:
Page 47
TX: Taxation:
Trading Income:
The Badges of Trade:
The badges of trade are used to decide whether or not a trade exists.
1. The subject matter
2. The frequency of transactions
3. The length of a ownership
4. Supplementary work and marketing
5. The way in which the asset sold was acquired and how that asset was sold
6. The source of finance used to acquire an asset
7. Explanation
Adjustment#1:
Add expenditures allowed in accounting but not allowed in tax as a trading income deductions:
1. Depreciation (not allowed)
2. General provision (not allowed)
3. Specific provision (allowed)
4. Impairment of trade receivables .OR Impairment losses.(Allowed)
5. Loan written off to employees & suppliers (N.A)
6. Capital expenditure (N.A)
7. Improvements (N.A)
8. The cost of restoration of an asset for instance, replacing a subsidiary part of the Asset is revenue
expenditure.(A)
9. The cost of initial repairs to improve an asset recently acquired to make it fit to earn profit is capital
expenditure. (N.A)
10. The cost of initial repairs to remedy normal wear & tear of recently acquired assets is allowable.
11. Cost of registering patents and trademarks are deductible.(Allowed)
12. Incidental cost of obtaining loan finance(Allowed)
13. Expenditures are deductible if they are wholly and exclusively for the purpose of trade .There must
be no duality.
Example:
a) Lady barrister black coat.(NA because of duality)
b) Carpenter working on a site.(You eat to live not eat work)
14. Payments contrary to public policy and illegal payments e.g. Fines, penalties, protection money paid
to terrorist, bribe and extortion money are not deductible
15. Entertainment and gifts to employees (allowed)
16. Entertainment to customers and suppliers (not allowed)
17. Gifts to customers allowed if:
1. Less than 50 per donee
2. Not food, tobacco, alcohol or voucher exchangeable for goods
3. They carry advertisement
18. Patents and copy rights, royalties paid in connection with individual’s trade are deductible as trading
expenses.
19. Employer's contribution towards national insurance of employee (allowed)
20. Penalties and interest on late payment of tax are not deductible
21. Appropriations salary or interest on capital paid to a trader is not deductible.
22. Excessive salary paid to family members of owner not allowed
Mustafa Ahmed Mirchawala:
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TX: Taxation:
23. The private portion of payments for motoring expenses, rent, and heat light and telephone expenses
of a trader is not deductible.
Subscription & Donations:
1. Trade subscription are generally deductible e.g. chamber of commerce
2. Political donations (not allowed )
3. Donation to national charity (not allowed)
4. Donation to local charity (allowed if they are small)
5. Gift aid donations (not allowed)
6. Special case. You donated $5000 to a charity and charity displayed your banner in annual function
(allowed because advertisement)
Legal & Professional Fees:
1. Legal and professional charges are deductible if they relate directly to trading
2. Legal charges incurred in defending the title of fixed assets (allowed)
3. Charges connected with an action of breach of contract (allowed)
4. Expenses of the renewal (not the original grant) of a lease for less than 50 year
5. Charges for trade debt collection (allowed)
6. Normal charges for preparing accounts and submission of tax (allowed)
7. Legal and professional charges relating to CAPITALAND NON TRADING ITEMS are not deductible.
8. Special tax advice fee (not allowed)
9. Interest paid by individual for borrowing for traded purposes is deductible as a trading expense on
accrual basis (allowed)
10. Education courses for staff (allowed)
11. Educational courses for trader allowed(if to update existing knowledge or skills
12. Removal expenses (to new business premises) allowed if not an expansionary move (allowed)
13. Counseling services for employee leaving employment ( allowed)
14. Employer’s contribution in any registered pension scheme of employee.
15. Leased cars with CO2 emission rate over 50 gms per km 15% of the lease rental not allowed.
16. Pre trading expenditure. Incurred before last 7 years of the beginning of trade (allowed as if it is
incurred on the first day of trade)
17. Theft and incidental losses (allowed)
Adjustment#2:
Add income taxable as trading income but excluded from accounts:
Example stock drawings
Cost= 100
Profit= 50
Selling Price=150
The trader should be treated for tax purposes as having made a sale to himself
If owner has received cost from family member then just add profit. If it is written those owners has
taken goods without paying anything then include selling price,
Adjustment#3:
Less income added by accountant, but not taxable trading income
Example: Interest, Dividends, Rental income, Capital gains.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Adjustment#4:
Less expense not allowed in accounting but allowed as a trading income deduction.
Example:
1. Capital allowance (tax deductible, depreciation)
2. Amortization of lease premium.
Question#1:
John Dodd:
Here is the statement of profit or loss of John Dodd a trader. Statement of profit or loss for year-ended
31 May 2021
£
£
Gross profit
31000
Other income
Bank interest receives
500
Expenses
Wages and salaries (N1)
7000
Rent and rates
2000
Depreciation
1500
Motor expenses- cars owned by business (N2)
5000
Motor expenses- cost of leased car CO2 emissions 170 g/km
2000
Entertainment expenses- customers
750
Office expenses
1350
(19600)
Finance costs
(1500)
Interest payable on overdraft
10400
Net profit
Salaries include £1000 paid to John Dodd’s wife works part time in the business. If John had employed
another person to do this work. John would have had to pay at least this amount.
Motor expenses on car owned by the business are £3000 for John Dodd’s car used 20% privately and
£2000 for his part time salesman’s car used 40% privately. No private use on the leased car. Capital
allowances are £860.
Required:
Compute the adjusted taxable trade profit for the year ended 31 May 2021. You should start with the
net profit figure of £10400 and indicate by the use of zero (0) any items which do not require
adjustment.
Mustafa Ahmed Mirchawala:
Page 50
TX: Taxation:
Adjustment of profits:
Question#2:
S Pring:
Here is the statement of profit or loss of S Pring, a trader.
£
£
Gross profit
30000
Other income:
Bank interest received
860
Expenses:
Wages and salaries
7000
Rent and rates
2000
Depreciation
1500
Impairment losses (trade)
150
Entertainment expenses for customers
750
Patent royalties paid
1200
Legal expenses on acquisition of new factory
250
Finance costs
(12850)
Bank interest paid
(300)
Net profit
17710
Salaries include £500 paid to Mrs. Pring who works full time in the business.
Required:
Compute the adjusted taxable trade profit. You should start with the net profit figure of £17710 and
indicate by the use of zero (0) any items which do not require adjustment.
Mustafa Ahmed Mirchawala:
Page 51
TX: Taxation:
Question#3:
A Trader:
A Trader's statement of profit or loss for the year to 31 March 2016 was as follows. '
£
Gross profit
Other income
Impairment trade losses recovered (previously written off)
Profit on sale of office
Building society interest
Expenses
General expenses
Repairs and renewals
Legal and accountancy charges
Subscriptions and donations
Impairment losses (trade)
Salaries and wages
Travel
Depreciation
Rent and rates
Net profit
£
246250
373
5265
1900
7538
73611
15000
1200
7000
500
30000
8000
15000
1500
151811
101977
Notes:
1. General expenses include the following:
Entertaining staff
Entertaining suppliers
2. Repairs and renewals include the following:
Redecorating existing premises
Renovations to new premises to remedy wear and tear of previous
Owner (the premises were usable before these renovations)
3. Legal and accountancy charges are made up as follows:
Debt collection service
Staff service agreements
Tax consultant’s fees for special advice
45 years lease on new premises
Audit and accountancy
4. Subscriptions and donations include the following:
Donations under the gift aid scheme
Donation to a political party
Sports facilities for staff
Subscription to trade association
5. Travel expenses include:
£
1000
600
300
500
200
50
30
100
820
1200
5200
500
600
100
A Trader’s motoring expenses of £2000 25% of his use of his car was for private purpose.
6. Capital allowances amounted to £2200.
Required: Compute A Trader’s taxable trading profit for the accounting period to 31 March 2020. You
should start with net profit figure of £101977 and you should indicate by the use of zero (0) any items
which do not require adjusted.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#4:
Tom & Mary (ADAPTED):
Tom aged 63, is Married to Mary, Date of Birth 1948. Tom is employed at an annual salary of
£40,000 — and a provided with a house which is owned by his employers. The house cost £120,000 and
had a gross ratable value of £2,000. Tom had been provided with furniture for the house, costing £3,000
on 6 April 2019. On 6 April 2021. Tom bought the furniture from his employers for. £2,000 when its
market value was £4,000. Tom paid no rent for the accommodation and there was no business use. Tom
was not required by his employers to occupy-the house.
Tom received bank interest of £840 from HSBC on 30 June 2020.
Tom also owns an investment' property which he rents out. The property is a furnished flat and was
rented out at £800 per month, payable monthly in advance for the whole of 2020/21. Tom paid council
tax of £1,500 and incurred interest charges of £800, on a loan he had taken out to acquire the property
during the year. He paid insurance premiums annually in advance of £500 on 1 May 2019 and £600 on 1
May 2020.
In the absence of a company pension scheme Tom had entered into a personal pension scheme with a
UK insurance company and paid pension contributions (gross) of £18,660 into the scheme in 2020/21.
In January 2020, Tom's employer paid for each of its employees to visit an independent Pensions
advisor, at a cost of £100 per employee in 2019/20 Mary has the following income and capital gains:
£
State retirement pension
4500
Property business income
5010
Dividends (amount received)
11655
In addition Tom and Mary had a joint building society account which was set up many years ago with
£4000 from Tom £2000 from Mary. Interest of £1500 was credited to the account during 2020/21
Mary won £500 on the Premium bonds during the year.
Required:
Calculate the 020/21 taxation payable/ repayable in respect of:
1. Tom
2. Mary
Mustafa Ahmed Mirchawala:
Page 53
TX: Taxation:
Question#5:
Tony Note:
Tony Note is self-employed running a music shop. His profit and loss account for the year ended 5 April
2021 is as follows:
£
£
Gross profit
197880
Expenses:
Depreciation
2640
Motor expense (note 1)
9800
Professional lees (note 2)
4680
Repairs and renewals (note 3)
670
Traveling and entertaining (note 4)
4630
Wages and salaries (note 5)
77200
Other expenses (note 6)
78780
178400
Net Profit
19430
Note 1- Motor expenses:
During the year ended 5 April 2021, Tony drove a total of 20,000 miles of which 2,500 were driven when
he went on holiday to Europe. The balance of the mileage is 20% for private journeys and 80% for
business journeys.
Note 2- Professional fees:
The figure for professional fees consists of 4920 for accountancy. 4620 for personal financial planning
advice, £540 for debt collection, and £2600 for lees in connection with an unsuccessful application for
planning permission to enlarge Toney’s freehold, music shop.
Note 3-Repairs and renewals:
The figure for repairs and renewals consists of £270 for a replacement hard drive for the shop's
computer, and £400 for a new printer for this computer.
Note 4 -Travelling and Entertaining:
The figure for travelling and entertaining consist of400 for entertaining employees and 300 for
entertaining customers…rest all allowed.
Note 5 – wages and salaries:
The figure for wages and salaries includes a salary of 16000 paid to Toney’s wife. She works in the music
shop as a sales assistant. The other sales assistants doing the same job are paid a salary of £12000 paid.
Note 6 – other expenses:
The figure for other expenses includes £75 in respect of a wedding present to an employee, £710 for
Tony’s health club subscription, £60 for a donation to a political party, and £180 theft by an employee.
Note 7- Use of office:
Tony uses one of the six rooms in his private house as an office for when he works at home. The total
running costs of the house for the year ended 5 April 2021 were £4140.
Note 8- private telephone:
Tony uses his private telephone to make business telephone calls. The total cost of the private
telephone for the year ended 5 April 2021 was £680, and 25% of this related to business telephone calls.
The cost of the private telephone is not included in the profit and loss account expenses of £178400.
Note 9 – Goods for own use:
During the year ended 5 April 2021 Tony took goods out of the music shop for his personal use without
paying for them, and no entry has been made in the accounts to record this. The goods cost £600, and
had a selling price of £950.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Note 10 – plant and machinery:
The tax written down values for capital allowances purposes at 6 April 2020 were:
General pool
£7400
Expensive motor car
£16200
The expensive motor car is used by Tony.
Question#6:
Dean:
Dean is a sole trader, carrying on a manufacturing trade. His profit and loss account for the year ended
30 June 2021 shows the following.
Note
£
£
Gross profit for year
1
168000
Add: interest receivable
3000
171000
Less:
Wages and NICs
2
61355
Rent and rates
29460
Repairs and renewals
3
3490
Miscellaneous expenses
4
1025
Dean’s income tax
15590
Bad debts
5
820
Legal/ professional expenses
6
2310
Depreciation
630
Lease rental on car
7
2400
Charitable donation
8
80
Transport costs
3250
Interest
9
990
Dean’s car expenses
10
5600
Lighting and heating
1250
Sundry expenses
11
3750
(132000)
Net profit
39,000
Notes:
1. Sales include £500 reimbursed by Dean for stock taken for personal use representing cost price. The
selling price of the stock would have been £625.
2. Included in wages are Dean’s drawings of £50 per week, his Class 2 NICs of £125, wages and NICs of
£11750 for his wife’s part time employment in the business (similar to wages which would have been
paid to any employee doing that work) and wages of £1000 for his son who did not in fact perform any
work.
3. Repairs and renewals are:
£
£
Decoration of premises
400
New heating system
Boiler maintenance fee
Mustafa Ahmed Mirchawala:
3000
90
3490
Page 55
TX: Taxation:
4. Miscellaneous expenses are:
Political donation to Green Party
Gifts of 20 T-shirts with Dean’s Log
Dean’s private medical insurance premium
5. Bad debts are:
Trade debt written off
Loan to employee written off
General provision for bad debts
Less: opening provision
250
201
564
1015
420
250
600
(450)
150
820
6. Legal and professional expenses are:
Defending action for alleged faulty goods
330
Fees relating to renewal of short lease
250
Fees relating to acquisition of machinery
200
Fees on defense against Dean’s motoring offence 190
Debt collection and accountancy fees
1340
2310
7. Lease car rental relates to the car provided to an employee which has a retail price of £30000 and CO2
emissions of 165 g/km. the lease contract was taken out on 1 May 2019.
8. Two charitable donations made: one of £50 to a local charity and one of £30 to Oxfam.
9. Interest consists of £860 bank overdraft interest and £130 interest on overdue tax.
10. Dean’s motor car expenses are:
£
Service and repairs
Fuel
Vehicle excise duty
Motoring offence: speeding fine
1560
3255
160
625
5600
The speeding fine was incurred when Dean was late for a business meeting. One third of Dean’s mileage
was for private purposes.
11. Sundry expenses are:
Entertaining customers
Staff party
Gift to employee on exam success
Subscription to trade association
Other expenses (all allowable)
850
120
100
310
2370
3750
Required:
Prepares a statement of taxable trading income (before capital allowances)
Mustafa Ahmed Mirchawala:
Page 56
TX: Taxation:
o
o
o
o
Capital Allowance:
Tax allowable depreciation
Depreciation is calculated on Reducing Balance.
Depreciation policy is yearly basis. Means full in the year of purchased and none in the year of sale.
Means if you have purchased machinery on the last date of accounting period. Still you will get full
capital allowance for this year.
o No capital allowance on land and building
o We compute capital allowance for accounting period not fiscal year.
There are two depreciation rates
18% on all general machinery
6% on special equipment
Normally tax department does not give capital allowance on single asset. They normally allow capital
allowance on group of asset that’s why we make pool for assets
There are 2 types of pool.
1. Main pool or general pool.
2. Special rate pool.
Annual investment allowance (AIA):
o
o
o
o
o
o
AIA is £1,000,000/Annual
It is available on first year of purchase
It is not available on cars.
The purpose is to motivate individuals and companies to buy more and more assets.
It is available on general as well as special plant.
This £1,000,000/annual is for 12 months A/C period. Accounting period is less than or more than 12
months then apportion.
Zero-emission motor cars:
New motor cars with CO2 emissions up to 50 grams per kilometer qualify for the 100% first year
allowance, so the cost is effectively deducted as an expense in the year of purchase.
Special Rate Pool:
Expenditure on Thermal Insulation, long life assets, integral features of building and cars with CO2
emission rate over 50 gms/km.
Long life assets > (life of 25 yrs or more)
Aggregate expenditure must be more than 100000 in one chargeable period.
Integral Features of Building:
Lifts or escalators.
Exhaust system
Powered system of cooling, heating or air conditioning.
Water cooling and heating system
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Structures and buildings allowance (SBA):
A new type of capital allowance has been introduced, known as the structures and buildings allowance
(SBA). Relief is given as an annual straight-line allowance of 3% over a 33⅓ year period (33 years and four
months).
The structures and buildings allowance (SBA) is only available where a building (or structure) has been
constructed on or after 29 October 2018 (the date of the 2018 Budget). However, a question will only be set
where construction is on or after 6 April 2020 (1 April 2020 for limited companies).
o
o
o
o
o
o
Offices, retail and wholesale premises, factories and warehouses can all qualify for the SBA (as can walls,
bridges and tunnels).
The value of land is excluded, as is any part of a building used as a dwelling house. Expenditure which
qualifies as plant and machinery cannot also qualify for the SBA. Similarly, expenditure which qualifies for
the SBA cannot also qualify for the plant and machinery annualinvestment allowance.
Where an unused building is purchased from a builder or developer, then the qualifying expenditure willbe
the price paid less the value of the land.
The building (or structure) must be used for a qualifying activity such as a trade or property letting.
The SBA can only be claimed from when the building (or structure) is brought into qualifying use. This
means that the SBA will be time apportioned for the period when first brought into use, unlike plant and
machinery allowances which are always given in full for the period of purchase.
A separate SBA is given for each building (or structure) qualifying for relief.
Plant and machinery:
Main pool
Special rate pool
18%
6%
Motor cars:
New cars with zero CO₂ emissions
CO₂ emissions between 1 and 50 grams per kilometer
CO₂ emissions over 50 grams per kilometer
100%
18%
6%
Annual investment allowance:
Rate of allowance
Expenditure limit
100%
£1,000,000
Commercial structures and buildings:
Straight-line allowance
Enhanced capital allowances for companies
Main pool super deduction
Special rate pool first year allowance
3%
130%
50%
Unless there is private use, motor cars qualifying for writing down allowances at the rate of 18% are
included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 6% are
included in the special rate pool. Motor cars with private use (by a sole trader or partner) are not
pooled, but are kept separate so that the private use adjustment can be calculated.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Balance adjustment:
For de pooled assets, balancing adjustment is done on the same date when asset is sold.
When an asset is sold from any pool, balancing adjustment is done but it is done over period of years. In
other words no immediate balancing adjustments on pool assets when they are sold.
But when business is ceased all pool assets are sold so immediate balancing ADJUSTMENT is done on
pool.
In the last year of business we don’t apply any 18% on pool. We just do balancing adjustments because
now we will get real depreciation of each and every asset through balancing adjustment. If a business is
going on but the owners has sold all assets of any pool. Now there are 2 cases. If positive balancing is
coming after selling all assets then business can’t claim balancing allowance immediately. But if negative
balance is coming after selling all assets immediate balancing adjustment is done for the complete
amount.
Mustafa Ahmed Mirchawala:
Page 59
TX: Taxation:
Question#1:
A/C period 1.4.021
(31, 3, 2022)
Main pool balance at 1.4.021 = 60000.
SRP Balance at 1.4.021 = 50000.
Addition during the year
Furniture = 300000 (1.05.2021)
Lifts = 400000 (1.7.2021)
Car 1 = £20000 CO2 = 45 gm/ (1.4.2021)
Car 2 = £30000 CO2 = 145 gm / (1.7.2021)
Car 3 = £20000 CO2=zero emission/km
(1.10.2021)
Required: Capital Allowances for YIE
Question#2:
A/C period 1.04.2021
31.12.2021
M.P Balance at 01 04.2021 = 70000
SRP Balance at 01 04.2021 = 90000
Addition during the year
Van = £120000 (01.05.2021)
Lifts = £220000 (01.07.2021)
Car 1 = 22000 CO2 = zero emission/km (01.08.2021)
Car 2 = 40000 CO2 = 150gm/ (01.09.2021)
Car 3 = 15000 CO2 = 42gm/ (01.06.2021)
Required: Cap allowances for this A/C period.
Question#3:
A/C period 01.04.2021
30.06.2022
M.P balance at 01 04.2021= 90000.
Additions/ purchases during this period.
Computes = £330000 (1.11.2021)
Lorry = £8000 (01.11.2021)
Lifts = 300000 (01.01.2022)
Car 1 = 20000 (01.06.2021) CO2 zero emission /km
Car 2 = 22000 (01.10.2021) CO2 48gm/km
Car 3 = 25000 (01.11.2021) CO2 148gm/km
Mr. X sold a van for 20000 during the year which he bought 4 year ago for 35000.
Required: Cap. Allowances for this A/C period.
Question#4:
A/C period 1.7.021
31.12.021
Balance M.P at 1 7.021 = 400000.
Purchased during the period.
Lorry = 400000 (1.8.021)
Lifts = 150000 (1.9.021)
Car 1 = 30000 (1.10.021) CO2 = zero emission
Car 2 = 40000 (1.11.021) CO2 = 121 gm/km
Mr. X disposed off a computer on 1.10.021 for 15000. He bought this computer 2 years ago for22000.
Required: Capital allowance=?
Mustafa Ahmed Mirchawala:
Page 60
TX: Taxation:
Question#5:
A/C period = 1stjan 2021
31st Dec 2021 business ceased on 31st Dec 2021.
M.P Balance at 1st Jan 2021 = 50000.
SRP Balance at 1st Jan 2021= 30000
Purchased during the year
Furniture = 30000 (1.5.021)
Water heating system = 20000 (1.7.021)
All assets of main pool were sold on 31st Dec 2021 for 60000. All assets of SRP were sold on 31.12.2021
for 55000.
Required: Capital Allowance=?
Question#6:
A/C period 1st Jan 021
30 Sep 021
Business ceased on 30th Sep 021
M.P balance at 1st Jan 021 = 45000
SRP Balance at 1st Jan 021 = 35000
Purchases during the year
Furniture = £20000 (1.2.021)
Car 1 = 30000 (1.5.021) CO2 49 gm/km
Car 2 = 20000 (1.6.021) CO2 140gms/km
All assets of main pool were sold on 30th Sep 020 for 45000. All assets of SRP were sold on 30th Sep 021
for 80000.
Required: Capital Allowance=?
Question#7:
A/C period 1st Apr 021
31st Dec 021 privately used assets
Bal M.P at 1st Apr2021 = 40000.Bal SRP at 1st Apr 2021 = 30000
Addition during the year =
Centralized cooling system = 600000 (01.05.021)
Van = 200000 (01.07.021)
Car 1 = 30000 CO2 = 135 gm/km (01.09.021)
Car 2 = 20000 CO2= 41 gm/km (01.10.021)
Car 2 is used by owner 40% private and 60% business.
Required: Capital Allowance?
Mustafa Ahmed Mirchawala:
Page 61
TX: Taxation:
Question#1:
Arable Ltd:
Plant and Machinery (Accounting Period) 1st April 2021 to December 2021
Arable Ltd purchased the following assets in respect of the nine‐month period ended
31 December 2021.
£
20 April 2021
Delivery Lorries
193,350
12 May 2021
Motor car (1)
11,200
14 May 2021
Motor car (2)
14,600
17 May 2021
Motor car (3)
13,000
Motor car (1) purchased on 12 May 2021 for £11,200 has a CO2 emission rate of 46 grams per
kilometer.
Motor car (2) purchased on 14 May 2021 for £14,600 has a CO2 emission rate of 138 grams per
kilometer.
Motor car (3), purchased on 17 May 2021 for £13,000, is a new car and has zero CO2 emission.
The company will not make any short life asset elections.
Question#2:
Plant and Machinery (1st April 2020 to 31st December 2021)
The accounts for the nine‐month period ended 31 December 2020 showed the following additions and
disposals of plant and machinery:
Cost
£
2 May 2021
Purchased machinery
271,250
28 June 2021
Purchased a motor car
13,200
3 July 2021
Purchased machinery
110,000
The cost of the machinery purchased on 2 May 2021 includes £10,000 spent on strengthening the
factory floor to accommodate the new machinery.
The motor car purchased on 28 June 2021 for £13,200 was a new car and has a zero
CO2emission.
The machinery purchased on 3 July 2021 for £110,000 has an expected working life of
30 years.
Mustafa Ahmed Mirchawala:
Page 62
TX: Taxation:
Question#3:
Capital expenditure account (1st April 2021 to 31st March 2022)
The following items of expenditure have been debited to the capital expenditure account
during the year ended 31 March 2022:
1 May 2021
Purchase of a second‐hand freehold office building for £378,000. This
figure included £83,000 for a ventilation system and £10,000 for a lift.
Both the ventilation system and the lift are integral to the office building.
During May 2021 Molten‐Metal plc spent a further £97,400 on repairs.
The office building was not usable until these repairs were carried out,
and this fact was represented by a reduced purchase price.
26 June 2021
Purchase of machinery for £90,000. During June 2021 a further £7,000
was spent on building alterations that were necessary for the installation
of the machinery.
8 August 2021 A payment of £41,200 for the construction of a new decorative wall
around the company’s premises.
27 August 2021 Purchase of movable partition walls for £22,900. Molten‐Metal plc uses
these to divide up its open plan offices, and the partition walls are
moved around on a regular basis.
11 March 2022 Purchase of two motor cars each costing £17,300. Each motor car has a
CO2 emission rate of 45 grams per kilometer. One motor car is used by
the factory manager, and 60% of the mileage is for private journeys. The
other motor car is used as a pool car.
Written down value
On 1 April 2021 the tax written down value of plant and machinery in Molten‐Metal plc’s
main pool was £87,800.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#4:
(31st July 2022)
On 1 August 2021 the tax written down values of Heavy Ltd’s plant and machinery were as follows:
£
Main pool
900
Short life asset (1) – machine acquired May 2018
15,100
Short life asset (2) – plant acquired August 2018
13,200
Special rate pool
21,700
The following purchases and disposals of plant and machinery took place during the
year ended 31 July 2022:
Cost/(Proceeds)
£
23 March 2022
24 April 2022
1 June 2022
19 July 2022
28 July 2022
Purchased office equipment
Purchased new motor car
Purchased computers
Sold short life asset (2)
Sold all the items included in the special rate pool
22,400
16,000
25,000
(4,600)
(12,300)
The motor car purchased on 24 April 2022 has zero CO2 emissions and is used bythe managing director
of Heavy Ltd, and 60% of the mileage is for private journeys.
The cost of the computers acquired on 1 June 2022 includes software costs of £5,000.
Short life asset (2) sold on 19 July 2022 originally cost £19,631.
Question#5:
Capital allowances (1st April 2021 to 31st March 2022)
There are two issues here:
(1) E‐Commerce plc purchased four motor cars during the year ended 31 March 2022, and all four motor
cars have been included in the plant and machinery main pool. Details are as follows:
Cost
CO2 emission rate
£
Motor car [1]
20,300
50 grams per kilometer
Motor car [2]
24,900
47 grams per kilometer
Motor car [3]
62,100
245 grams per kilometer
Motor car [4]
19,800
Zero emission car
(2) Four years ago, E‐Commerce plc purchased computer equipment on which a short-life asset election
has been made. For the year ended 31 March 2022, the writing down allowance claimed on this
equipment was £1,512, calculated at the rate of 18%. However, the computer equipment was actually
scrapped, with nil proceeds, on 10 December 20201. Already computed C.A 200,000.
Mustafa Ahmed Mirchawala:
Page 64
TX: Taxation:
Question#6:
1st July 2021 to 31st march 2022:
Lucky Ltd purchased the following assets during the period 20 July 2019 to 31 March 2022:
£
19 August 2021
Computer
6,300
22 January 2022
Integral features
41,200
31 January 2022
Office equipment
32,900
17 March 2022
Motor car
12,800
The integral features of £41,200 are in respect of expenditure on electrical systems, a ventilation system
and lifts which are integral to a freehold office building owned by Lucky Ltd.
The motor car has a zero CO2 emission.
Question#7:
Plant and machinery (1st April 2021to 31st March 2022):
On 1 April 2021, the tax written down value of the plant and machinery main pool was £39,300.
The following vehicles were purchased during the year ended 31 March 2022:
CO2 emission rate
Date of purchase
Cost
£
Motor car (1)
8 June 2021
14,700
45 grams per kilometer
Delivery van
3 August 2021
28,300
162 grams per kilometer
Motor car (2)
19 October 2021
12,400
Zero emission car
Question#8:
Plant and machinery (1st April 2021 to 31st March 2022):
On 1 April 2021 the tax written down values of Neung Ltd’s plant and machinery were:
£
Main pool
4,800
Short life asset
22,800
Special rate pool
12,700
The company purchased the following assets during the year ended 31 March 2022:
19 July 2021
12 December 2021
20 December 2021
Motor car [1]
Motor car [2]
Ventilation system
£
15,400
28,600
262,000
The short life asset is a specialized piece of machinery which was purchased on 1 January 2022.
Motor car [1] purchased on 19 July 2022 has a CO2 emission rate of 212 grams per kilometer.
Motor car [2] purchased on 12 December 2021 has a CO2 emission rate of 49 grams per kilometer.
The ventilation system purchased on 20 December 2021 for £262,000 is integral to the freehold office
building in which it was installed.
Mustafa Ahmed Mirchawala:
Page 65
TX: Taxation:
Cost
WDA @ 18 % 1 year
WDA @ 18%
WDA @ 18%
WDA @ 18%
This balance will be added in main
WDA @ 18%
WDA @ 18%
WDA @ 18%
WDA @ 18%
SLA
20000
(3600) year of purchase + 8 years
16400
(2952)
13448
(2421)
11027
(1985)
NBR 4088
9042
@18% (736)
3352
(1627)
7415
(1334)
6081
(1094)
4986
(898)
4088
Question#9:
A/C Period = 1st April 2021
30 June 2022.
Balance. M.P at 1st Apr 021= 35000.
Additions during the year.
Lifts = 350000 (01.08.021)
Furniture = 450000 (01.09.021)
Car 1 = 450000 (01.09.021) CO2 = 150 gm/km
Car 2 = 35000 (01.10.021) CO2 = 49 gm/km
Car 1 is used by owner 20% private and 80% business.
Mr. X sold one old van doing the year which he bought 3 years ago.
Cost of van = 25000 and D.P = 20000.
Required: Capital allowance?
Mustafa Ahmed Mirchawala:
Page 66
TX: Taxation:
Basis Period Calculation:
Ongoing rule applies on all accounting periods expert first. Simple cheek the ending date lies in 021/022
fiscal year.
For opening years always stop on 31st Mar from the start of business.
Then cheek if any untaxed month left in first A/C period. Now 2 options left for un taxed months.
st
12 months back from the ending date of 1 Accounting
Period
12 months forward from the opening date of 1
Accounting period
st
Rule to Remember:
One you have accounted for 1st A/C period completely. Then just apply ongoing rule. In trading income
we start our journey from accounting profit and stop at tax adjusted trading profit. All these
adjustments including cap. Allowance is done for A/C period but individual pays tax for fiscal year. So
finally we align A/C periods with tax year. This adjustment/ alignment is called basis period calculation.
Question#1:
1.10.10
30.11.10 = 50000
1.12.10
30.11.11 = 25000.
Question#2:
1.11.10
31.12.11 = 28000.
1.1.12
31.12.012 = 20000.
Question#3:
1.7.10
31.12.11 = 45000.
1.1.11
30.12.012 = 50000
Question#4:
1.12.10
30.6.11 = 7000
1.7.011
30.6.012 = 24000.
Question#5:
1.2.10
31.12.10 = 22000
1.1.011
31.12.11 = 12000
Question#6:
1.7.09
30.9.09 = 50000
1.10.09
30.9.10 = 12000
Question#7:
1.11.10
31.1.11 = 10000
1.2.10
31.1.12 = 24000
Question#8:
1.1.09
30.06.10 = 18000
1.07.10
30.06.11 = 5000
Question#9:
1.11.08
31.05.10 = 34000
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#10:
Business started on 1st August 2009.
01.08.09 -31.05.10 =20000
01.06.10-31.05.11 =12000
01.06.11-31.05.12 =25000
01.06.12-31.03.13 =30000
Business closed on 31.03.2013
Question#11:
Business started on 1st October 2009
01.10.09-31.12.09 =12000
01.01.10-31.12.10 =24000
01.01.11-31.12.11 =30000
01.01.12-31.12.12 =50000
01.01.13-30.06.13 =60000
Business closed on 30.06.2013
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Partnership:
Question#1:
A & B started partnership on 01.02.2006 and decided to share profits in the ratio 1:1 on 1st July 2008
they decided to change profit sharing ratio to 2:1.
On 1st July 2009 they admitted ‘C’ as a partner and from that profit sharing ratio became 3.2.1.
01.02.06-31.12.06 =22000
01.01.07-31.12.07 =48000
01.01.08-31.12.08 =60000
01.01.09-31.12.09 =120000
01.01.10-31.12.10 =180000
Question#2:
Cadric Ding and Eli Fong commenced in partnership on 6 April 2013 preparing accounts to 5 April. Cedric
resigned as a partner on 31 December 2020 and Gordon Hassan joined as a partner on 1 January 2021.
The partnerships trading profit for the year ended 5 April 2021 is $90000.
Profits were shared were as follows:
1. Eli was paid an annual salary of $6000
2. Interest was paid at the rate of 10% on the partner’s capital accounts, the balances on which were:
$
Cedric
40000
Eli
70000
Gordon (from 1 January 2021
20000
Cedric’s capital account was repaid to him on 31 December 2020
3. The balance of profits was shared:
Cedric
Eli
Gordon
%
%
%
6 April 2020 to 31
60
40
December 2020
1 January 2021 to 5
70
30
April 2021
Required:
Calculate the trading income assessment of Cedric, Eli and Gordon for the tax year 2020/21.
Question#3:
A, B & C were in partnership since 2014. Preparing accounts for the Y/E 31 December. Profit sharing
ratio was 1:1:1. On 1 October 2021 C resigned as a partner and from that date profit sharing ratio
became 1:1 for A & B.
Annual salaries of partners
$
A
10000
B
20000
C
15000
No salaries were paid to A & B after 1 October 2020
Tax adjusted trading profit for the Y/E 31 December 2020
1st January 2020 ----- 31 December 2020 = $250000.
Required:
Trading income assessment for each partner for2020/21.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#4:
Accounting period of partnership firm 1 July ------ 30 June.
A & B ere in partnership since 2006 and sharing profit in the ratio of 1:1. On 1 October 2020 C joined as
a partner and from that date profit sharing ratio become 1:1:1. Salary of A was $10000/ annum and was
remain same after C admission. Salary of C was $5,000/ annum.
Tax adjusted trading profit of partnership firm for the Y/E 30 June 2021
July 2020 ------ 30 June 2021 = 150000
Required:
Trading income assessment for Partner C for 2020/21
Mustafa Ahmed Mirchawala:
Page 70
TX: Taxation:
Cash Basis for small Business:
A voluntary simplified cash basis of calculating trading profit has been introduced for sole traders and
partnerships (limited companies are included). This is as an alternative to the normal accruals basis. And
can be used where revenue is initially below the limit of £150000. A business may then continue to use
the cash basis until he revenue is twice the limit - that is £300,000.
With the cash basis receivables. Payables and inventory are ignored and tax deduction capital and
revenue expenditure will be treated the same-purchases of equipment are simply deducted as an
expense, whilst the proceeds from any disposals are included with receipts.
A business using the cash basis can use the approved mileage allowances to calculate the deduction for
business mileage. The rate is 45p per mile for the first 10000 miles with a rate of 25p par mile
thereafter. The actual running and capital costs of owning a motor car are ignored.
Where the use of the cash basis results in a trading loss the only relief available is to carry the loss
towards against future trading profits. There is no relief against total income. Trading profit (or loss)
under the cash basis is therefore calculated as follows:
Receipts (including the purchase of equipment)
Expense payment (including the purchase of equipment)
Trading profit (or loss)
Mustafa Ahmed Mirchawala:
XXX
(XXX)
XXX
Page 71
TX: Taxation:
Winifred:
Winifred commenced self-employment as a surveyor on 6 April 2021. The following information is
available for the year ended 5 April 2022:
1. Revenue was £62800 of which £3800 was owed as receivables at 5 April 2022.
2. One 6 April 2021 office equipment was purchased for £4700.
3. On 10 April 2021 a motor car with CO2 emissions of 49 grams per kilometer was purchased for
£15600. The motor car is used by Winifred and 60% of the mileage is for private journey.
4. Motor expenses were £4800. During the year ended 5 April 2022 Winifred drove 9000 business
miles
5. Other expenses (all allowable) were £13300, of which £700 was owed as payables at 5 April 2022.
If Winifred uses the normal basis her trading profit for the year ended 5 April 2022 will be £41557
calculated as follows.
£
£
62600
Revenue
Expenses
Motor expenses
(4800 x 40%)
1920
Other expenses
13300
Capital allowances
5823
(21043)
(4700 – 1123)
41557
Trading profit
1. The office equipment purchased for £4700 qualifies for the annual investment allowance
2. The motor car has CO2 emissions between 1 and 50 grams per kilometer and therefore qualifies for
writing down allowances at the rate of 18%.
The allowance for the year ended 5 April 2022 is £1123 (15600 x 18% = 2808 x 40%)
However if Winifred uses the cash basis her trading profit will be £37450 calculated as follows.
£
£
Revenue
58800
(62600 – 3800)
Expenses
Office equipment
4700
Motor expenses
(9000 miles at 45p)
4050
Other expenses (13300 – 700)
12600
(21350)
Trading profit
37450
There is also a flat rate private use adjustment where business are used as a home-typically where the
business is a small hotel or guest house. The private use adjustment for food and light and heat can be
calculated on a flat rate basis according to the number of occupants. For example with two occupants
the private use adjustment would be £ 6000 per year (the relevant figure will be provided as part of an
examination question). The flat rate adjustment does not include other property expenses such as rent
or mortgage (loan) interest.
Mustafa Ahmed Mirchawala:
Page 72
TX: Taxation:
Idris Williams:
Idris Williams has opened a small bed and breakfast and is considering whether to prepare his accounts to 5
April or 30 June.
Required:
Advise Idris of the advantages for tax purposes of choosing an accounting date of either 5 April or 30 June.
(4 marks)
(b) Idris commenced trade on 6 April 2021 and has decided to prepare his first set of accounts to 5 April 2022.
The following information is available regarding his statement of profit or loss for the first year of trading:
Notes
£
£
Revenue
(1)
49,910
Less: Food, utilities and other household goods
(2)
(17,660)
–––––––
Gross profit
32,250
Expenses:
Depreciation
(3)
1,250
Motor expenses
(4)
9,340
Other expenses
(5)
1,485
––––––
(12,075)
–––––––
Net profit
20,175
–––––––
Notes:
(1) Revenue includes £10,275 which is still receivable at 5 April 2022.
(2) Idris paid for 95% of his purchases of £17,660 by 5 April 2022 and the remainder in May 2020. There is no
closing inventory at 5 April 2022.
Idris is living in part of the bed and breakfast and £4,500 of the purchases paid for during the period relate to
Idris’s personal use.
(3) The depreciation charge relates to furniture bought in the period for £3,500 and a motor car purchased
on 6 April 2021 for £9,000. The motor car has CO2 emissions of 35 g/km.
(4) The motor expenses of £9,340 relate to Idris’ car and in the period he drove 13,000 business miles and
20,000 miles in total.
(5) The other expenses are all allowable for tax purposes. £400 of these expenses was unpaid at 5 April 2022.
The cash basis private use adjustment for one occupant in a business premises for a 12 month period is
£4,200.
Required:
(1) Calculate Idris’ tax adjusted trading profit for the year ended 5 April 2022, assuming he uses the normal
accruals basis.
(4 marks)
(2) State why Idris is entitled to use the cash basis and calculate Idris’ tax adjusted trading profit for the year
ended 5 April 2022, assuming he uses the cash basis.
(6 marks)
(3) State which basis would be more beneficial for Idris for the tax year 2021/22.
(1 mark)
(Total: 15 marks)
Mustafa Ahmed Mirchawala:
Page 73
TX: Taxation:
Self Assessment:
Compliance check: (also for companies)
o Routine enquiry
o Or any doubt on tax payers
o HMRC can do within 12m of actual filing date i.e. the date on which you submitted return
Discovery Assessment:
Later HMRC discover any under payment of tax
o Within 4 years from the end of tax year (without any reason)
o 6 years for careless understatement
o 20 years for deliberate
Amendment in Tax Return:
o For 22/23 tax years, you can amend your tax before 31 Jan 25
Determination (Average bill):
o
o
o
If tax dept send you notice and you don’t respond
Then they can determine your tax on the basis of past info.
Determination can be replaced by actual return
Maintaining Tax Record:
o
o
o
5 years from 31 Jan following the end of tax year
Means for 22/23 you must maintain record by 31 Jan 2029
Failure to produce record may lead to penalty of £3,000
Repayment/Recovery of tax in case of overpayment:
o In within 4 years from the end of the tax year in which you overpaid tax
Disputes:
o
o
o
o
o
o
o
For direct tax than appoint case worker
For indirect tax, you directly appeal to tribunals.
You can appeal against decisions of caseworker within 30 days
First Tier tribunals: for normal cases
Upper tribunals: for complex cases or famous personalities involved
If not satisfied with upper tribunals, then go to Court of Appeal.
If you are a tax lawyer & tax consultant and giving advice to your client of tax evasion, then
maximum penalty of £50,000.
Penalties for late filing of return :( 31 Jan 2023)
Mustafa Ahmed Mirchawala:
Page 74
TX: Taxation:
Self Assessment Individuals:
Question#1:
Tax liability
Class 2 NIC
Class 4 NIC
CGT
2019/20
5000
143
2000
4000
2020/21
8000
143
2000
2500
2021/22
9000
143
2500
5000
Required: Payment schedule for 2020/21 & 2021/22
Question#2:
Nicola:
Actual income tax liability for 2020/21 = 7500 so according her POA for 2021/22 should have been 3750.
But on 15th Dec 2021 Nicola claimed to reduce her POA to 2500. She paid her reduced POA on.
1st POA 31st Jan 2022
£2500
2nd POA 31st Oct 2022
£2500
In her actual income tax liability turned out to be 8000. She paid her balancing payment of 021/022 and
first POA of 2022/23 fiscal year on 31st May 2023.
Required: Can a person reduce his POA?
Answer. Yes, if a person expects that this year income will be less than last year fiscal year:
Tax payers can claim to reduce POA to Any amount Zero
However if actual liability is greater than the previous year, interest will be charged on under paid tax as
follows.
1st POA underpaid (1 year interest)
2nd POA underpaid (6 months interest)
Penalties on final balancing payment.
For late POA => only interest will be charged.
For late balancing payment (interest + penalty.)
Penalty:
0 to30 days= 0%
30 days to 6 months= 5% of unpaid tax.
Mustafa Ahmed Mirchawala:
Page 75
TX: Taxation:
Penalties:
Penalties for errors:
There is a common penalty regime for errors in tax returns including income tax NICs corporation tax
and CAT Penalties range from 30% to 100% of the Potential Lost avenue penalties may be reduced. A
common penalty regime for errors in tax returns for income tax, national insurance contributions,
corporation tax and value added tax.
A penalty may be imposed where a taxpayer makes an inaccurate return if he has:
o Been careless because he has not taken reasonable care in making the return or discovers the error
later but does not take reasonable steps to inform HMRC; or
o Made a deliberate error but does not make arrangements to conceal it; or
o Made a deliberate error and has attempted to conceal if e.g. by submitting false evidence in support
of an inaccurate figure.
Note that an error which is made where the taxpayer has taken reasonable care in making the return
and which he does not discover later, does not result in a penalty.
In order for a penalty to be charged, the inaccurate return must result in:
o An understatement of the taxpayer’s tax liability; or
o A false or increased loss for the taxpayer; or
o A false or increased repayment of tax to the taxpayer.
If a return contains more than one error, a penalty can be charged for each error.
The rules also extend to errors in claims for allowances and reliefs and in accounts submitted in relation
to a tax liability.
Penalties for error also apply where HMRC has issued an assessment estimating a person’s liability
where;
o A return has been issued that person and has not been returned, or
o The taxpayer was required to deliver a return to HMRC but has not delivered it.
The taxpayer will be charged a penalty where
o The assessment understates the taxpayer’s liability to income tax, capital gains tax, corporation tax
or VAT, and
o The tax payer falls to take reasonable steps within 30 days of the date of assessment to tell HMRC
that there is an under-assessment.
The amount of the penalty for error is based on the ‘Potential lost revenue’ (PLR) to HMRC as a result of
the error. For example, if there is an understatement of tax, this understatement will be the PLR.
The maximum amount of the penalty for error depends on the type of error:
Type of error
Maximum penalty payable
Careless
30% of PLR
Deliberate not concealed
70% of PLR
Deliberate and concealed
100% of PLR
Mustafa Ahmed Mirchawala:
Page 76
TX: Taxation:
Question:
Alex is a sole trader. He files his tax return for 2021/22 on 10 January 2022. The return shows his trading
income to be £60000. In fact, due to carelessness, his trading income should have been stated to be
£68000.
State the maximum penalty that could be charged by HMRC on Alex for his error.
Answer:
The potential lost revenue as a result of Alex’s error is:
£(68000-60000) = £8000 x [40% (income tax) + 3.25% (NICs)]
£3460
Alex’s error is careless so the maximum penalty for error is;
£1038
£3460 x 30%
A penalty for error may be reduced if the taxpayer tells HMRC about the error - this is called a
disclosure. The reduction depends on the circumstances of the disclosure and the help that the
taxpayer gives to HMRC in relation to the disclosure.
An unprompted disclosure is one made at a time when the taxpayer has no reason to believe HMRC
has discovered, or is about to discover, the error. Otherwise, the disclosure will be a prompted
disclosure. The minimum penalties that can be imposed are as follows:
Type of error
Careless
Deliberate not concealed
Deliberate and concealed
Unprompted
0% of PLR
20% of PLR
30% of PLR
Prompted
15% of PLR
35% of PLR
50% of PLR
Question:
Sue is a sole trader. She submitted her tax return for 2021/22 on 31 January 2023. The return shows a
loss for the year of £(80000), in fact. Sue has deliberately increased this loss by £(12000) and has
submitted false figures in support of her claim. HMRC initiate a review into Sue’s return and in reply Sue
then makes a disclosure of the error. Sue is a higher rate taxpayer due to her substantial investment
income and she has made a claim to set the loss against general income in 2021/22.
State the maximum and minimum penalties that could be charged by HMRC on Sue for her error.
Answer:
The potential lost revenue as a result of Sue’s error is:
£12000 x 40%
£4800
Sue’s error is deliberate and concealed so the maximum penalty for error is:
£4800 x 100%
£4800
Sue has made a prompt disclosure so the minimum penalty for error is
£4800 x 50%
£2400
The help that the taxpayer gives to HMRC relates to when, how and to what extent the taxpayer.
o Tells HMRC about the error, making full disclosure and explaining how the error was made;
o Gives reasonable help to HMRC to enable it to quantity the error; and
o Allow access to business and other records and other relevant documents.
A taxpayer can appeal to the first tier tax tribunal against:
o The penalty being charged;
o The amount of the penalty.
Mustafa Ahmed Mirchawala:
Page 77
TX: Taxation:
PI CASSO (ADAPTED)
(a) Pi Casso has been a self-employed artist since 2010, preparing her accounts to 30 June.
Pi’s tax liabilities for the tax years 2019/20, 2020/21 and 2021/22 are as follows:
2019/20
2020/21
2021/22
£
£
£
Income tax liability
3,240
4,100
2,730
Class 2 national insurance contributions
156
159
159
Class 4 national insurance contributions
1,240
1,480
990
Capital gains tax liability
0
4,880
0
Required:
(1) Prepare a schedule showing the payments on account and balancing payments that Pi will have made
or will have to make during the period from 1 July 2021 to 31 March 2023, assuming that Pi makes any
appropriate claims to reduce her payments on account.
Your answer should clearly identify the relevant due date of each payment.
(7 marks)
(2) State the implications if Pi had made a claim to reduce her payments on account for the tax year
2021/22 to £Nil.
(2 marks)
(3) State the latest date by which Pi must make a claim to reduce her payments on account for the tax
year 2021/22.
(1 mark)
Assume that the tax rules for the tax year 2021/22 apply to all tax years.
(b) Turner is married to Andrea. In the tax year 2021/22 Turner had trading income of £250,000 and
interest income of £5,000.
Andrea had employment income of £20,000 and dividend income of £23,000.
Required: Explain, with supporting calculations, the maximum joint tax saving that Turner and Andrea
could have made in the tax year 2021/22 by transferring investments between them. (5 marks)
(Total: 15 marks)
Mustafa Ahmed Mirchawala:
Page 78
TX: Taxation:
Penalties for late notification of chargeability:
A common penalty regime also applies to certain taxes for failures to notify chargeability to, or liability
to register for, tax that result in a loss of tax. The taxes affected include income tax, NICs, PAYE, CGT,
corporation tax and VAT. Penalties are behavior related, increasing for more serious failures and are
based on the ‘potential lost revenue.’
The minimum and maximum penalties as percentages of PLR are as follows:
Behavior
Deliberate and
Maximum
Minimum penalty with
Minimum penalty with
penalty
unprompted disclosure
prompted disclosure
100%
30%
50%
70%
20%
35%
Concealed
Deliberate and
Concealed
> 12m
Careless
30%
10%
< 12m
>
12m
< 12 m
0%
20%
10%
Note that there is no zero penalties for reasonable care (as there is for penalties for errors on return-see
above), although the penalty may be reduced to 0% if the failure is rectified within 12 months through
unprompted disclosure. The penalties may also be reduced at HMRC’s discretion in special
circumstances’. However, inability to pay the penalty is not a ‘special circumstance.’
The same penalties apply for failure to notify HMRC of a new taxable activity.
Where the taxpayer’s failure is not classed as deliberate, there is no penalty if he can show he has a
reasonable excuse;. Reasonable excuse does not include having insufficient money to pay the penalty.
Taxpayers have a right of appeal against penalty decisions to the First Tier Tribunal.
Penalties for late filling of tax return:
A penalty can be charged for late filling of a tax return based on now late the return is and how much
tax is payable.
An individual is liable to a penalty where a tax return is filled after the due filling date. The penalty
date is the date on which the return will be overdue (i.e. the date after the due filling date).
The initial penalty for late filling of the return is 100.
If the failure continues after the end of the period of 3 months starting with the penalty date, HMRC
may give the individual notice specifying that a daily penalty of £10 is payable for a maximum of 90 days.
The daily penalty runs from a date specified in the notice which may be earlier than the date of the
notice but cannot be earlier than the end of the 3 month period.
Mustafa Ahmed Mirchawala:
Page 79
TX: Taxation:
If the failure continues after the end of the period of 6 months starting with the penalty date, a further
penalty is payable. This penalty is the greater of:
o 5% of the tax liability which would have been shown in the return; and
o £300.
If the failure continues after the end of the period of 12 months starting with the penalty date, a further
penalty is payable, this penalty is determined in accordance with the taxpayer’s conduct in withholding
information which would enable or assist HMRC in assessing the taxpayer’s liability to tax.
The penalty is computed as follows:
Type of conduct
Penalty
Deliberate and concealed
Greater of:
• 100% of tax liability which would have been shown on
return; and
• £300
Deliberate Not concealed
Greater of
• 70% of tax liability which would have been shown on
return; and
• £300
Any other case (eg careless)
Greater of
• 5% of tax liability which would have been shown on
return; and
• £300
Penalty for late payment tax:
This penalty was dealt with in Section 4.2 earlier in this chapter.
Penalty for failure to keep records:
The maximum penalty for each failure to keep and retain records is £3000 per tax year/accounting
period. This penalty can be reduced by HMRC.
Mustafa Ahmed Mirchawala:
Page 80
TX: Taxation:
Appeals:
Disputes between tax payers and HMRC can be dealt with by an HMRC internal review or by a Tribunal
hearing.
Internal reviews:
For direct, appeals must first e made to HMRC, which will assign caseworker’
For indirect taxes, appeals must be sent directly to the Tax Tribunal, although the taxpayer can continue
to correspond with his caseworker where, for example, there is new information.
At this stage the taxpayer may be offered or may ask for an ‘Internal review’, which will be made by an
objective HMRC review officer not previously connected with the case. This is a less costly and more
effective way to resolve disputes informally, without the need for a Tribunal hearing. An appeal to the
Tax Tribunal cannot be made until any review has ended.
The taxpayer must either accept the review offer, or notify an appeal to the Tax Tribunal within 30 days
of being offered the review, otherwise the appeal with be treated as settled.
HMRC must usually carry out the review within 45 days, or any longer time as agreed with the taxpayer.
The review officer may decide to uphold, vary or withdraw decisions.
After the review conclusion is notified, the taxpayer has 30 days to appeal to the Tax Tribunal.
Mustafa Ahmed Mirchawala:
Page 81
TX: Taxation:
Capital Gain Tax (CGT):
1. Capital gain arises on the disposal of chargeable assets.
2. For individuals, every year a fixed amount is allowed from total chargeable gains. This amount is
called Annual exemption and for 22/23 it is £12,300.
3. There are two types of gains:
4. RPG arises on the sale of property that can be used for residential purpose. All other gains are
normal gains.
5. For annual exemption always give first priority to RPG.
6. For tax computation, compute tax on
7. For the year capital loss will set off chargeable gains for the year, without are permission. There is
no planning of annual exemption in this regard.
8. For brought forward losses can only be used to the extent, that annual exemption not wasted.
9. For losses always setoff RPG first than normal gains
a) Non saving
b) Interest
c) Dividend
d) Gains in any order
Normal gain
Residential property
Question#1:
RPG=
Normal gain=
Cap. Loss for the year=
Cap. Loss b/f=
Required: Taxable gain?
Question#2:
RPG=
NG=
Cap. Loss for the year=
Cap. Loss b/f=
Required: Taxable gain?
Question#3:
RPG=
NG=
Cap. Loss for the year=
Cap. Loss b/f=
Required: Taxable gain?
Question#4:
RPG=
NG=
Cap. Loss for the year=
Cap. Loss b/f=
Required: Taxable Gain?
Mustafa Ahmed Mirchawala:
40, 000
20,000
10,000
5,000
20,000
10,000
5,000
25,000
30,000
150,000
12,000
14,000
40,000
8,000
25,000
9,000
Page 82
TX: Taxation:
Share & Securities (Individuals):
Question#1:
Mr. X bought 5,000 shares of A. Co on 1.1.07 for £30,000. A Co offered a right issue of 2 for 5 on 1.1.11
at an issue price of £2 per share. Mr X sold 3,500 shares on 1.1.2020 for £90,000
Required: Capital gain
Question#2:
Mr. X bought 6,000 shares of Y Co on 1.1.07 for £40,000.
On 1.1.12 Y Co offered a bonus issue of 1 for 10.
On 1.1.019 Mr. X sold 4,000 shares for £58,000.
Required: Capital gain?
Question#3:
Mr. X bought 10,000 ordinary shares of A Co. 3 years ago. On 1.1.020 A Co went in reorganization. A Co
issued 3 new ordinary of A. Co for every 1 ordinary share of A along with 1 preference share of A Co.
MP new ordinary shares of A Co. at the date of reorganization are £2/share.
MP/ pref. shares on the date of reorganization is £1/share.
Required: Base cost of share after reorganization?
Question#4:
Mr. X bought 10,000 ordinary shares of B. Co for £40,000 5 years ago. On 1.1.09 B. Co was taken over by
Y. Co . Mr. X received 3 ordinary shares for every one ordinary shares in B. Co plus £2 cash per share.
MP of Y Co at date of takeover £4/ share.
Required: CG in this transaction?
Base cost of 30,000 ordinary shares of Y. Co?
Difference between Rollover Holdover Reliefs:
Objective same reinvestment in business
Rollover:
1) If replacing assets is none depreciating than rollover.
2) In rollover working deferred gains deducted from base cost of replacement asset.
Holdover (Frozen Gain):
1) If replacing asset is depreciating asset then do holdover working.
2) In holdover we don’t deduct base cost of replacement asset. We just freeze that gain.
Examples of Depreciating Assets in TX:
1. Lease holds property with lease terms 60 years or less.
2 .Plant and machinery
Business Relief:
Business Asset Disposal relief:
Entrepreneurs’ relief has been renamed as Business asset disposal relief.
Business asset disposal relief can be claimed when an individual disposes of a business or a part of a
business. For the tax year 2022-23, the lifetime qualifying limit is £1million.
Gains qualifying for business asset disposal relief are taxed at a rate of 10% regardless of the level of a
person’s taxable income.
Mustafa Ahmed Mirchawala:
Page 83
TX: Taxation:
It is available for individuals on material disposal of business assets.
1. Sale of business or part of business on going concern + owned that business for last two year.
2. Business closed (in which your ownership for last two year)
3. Sale of Shares
a) Personal company in which holding at least 5%
b) Trading Co.
c) Individual doing job in that Co.
d) Holding for last two year
Investors' relief:
Investors’ relief effectively extends business asset disposal relief to external investors in trading
companies which are not listed (unquoted) on a stock exchange.
However, investors’ relief has its own separate £10 million lifetime limit (compared to the business asset
disposal relief lifetime limit of £1 million). Qualifying gains are taxed at a rate of 10%. To qualify for
investors’ relief, shares must be:
o Newly issued shares acquired by subscription.
o Owned for at least three years after 6 April 2017.
With certain exceptions (such as being an unremunerated director) the investor must not be an
employee or a director of the company whilst owning the shares.
Wasting Assets: (Intangible Assets)
1. Expected life less than 50 years
2. Whose value decreases with time?
3. e.g. copyright, trademarks
4. Depreciated historic cost will be used in computation of gain (NBV)
Question#1: Mr. A bought copyright for 20,000 for 20 years. He sold it after 4 years for 18,000. Req CG
Question#2: Mr. X bought copyright for 30,000 for 10 years. He sold it after 3 years for 24,500. Req CG
Question#3: Mr. Y bought copyright for 40,000 for 40 years. He sold it after 8 years for 35,000. Req CG
Damage to an Asset:
Question#1:
Cost of investment property= $90,000
Insurance proceeds= $30,000
Reinvestment= $40,000.
MV of remainder= $130,000
Mr. X elect to deafer gain
Required: Base cost of investment property.
Question#2:
Cost of asset= $130,000
Insurance proceeds received after damage= $45,000
Amount of reinvestment= $50,000
MV of remainder 150,000
Mr. A elected to deafer gain
Required: Base cost of asset=?
Mustafa Ahmed Mirchawala:
Page 84
TX: Taxation:
Shares & Securities Companies:
Question#1:
X bought following shares of Y Co.
1.1.04 3000 shares for £20,000
1.1.08 7000 shares for £30,000
1.1.17 X sold 5000 shares for £150,000
RPI's given
1.1.05 RPI 112
1.1.09 RPI 136
RPI 145
Required:
CG
Question
#2:
X Co. 6000 shares for $30,000 of y Co. on 1.1.03
On1.1.05 Y Co. made a right issue of 1 for 5 at an Issue Price of $4/share
On 1.1.09 Y Co. made bonus issue of 1 for 10
On 1.1.08 X sold 3960 shares for $100,000
RPIS:
1.1.03 111
1.1.05 128
1.1.09 138
1.1.10 150
Required: CG
Question#3:
A Co. bought 8000 shares of Y Co. for 40,000 on 1.1.04
On 1.1.06 Y Co. made bonus issue of 2 for 5.
On 1.1.011 Y Co. made a right issue of 1 for 5 at an IP of 5/share.
On 1.1.018 X Co. sold 6720 shares of X Co. for 120,000
RPIs
2004 107
2006 109
2011 121
2018 136
Required: CG
Question#4:
A Co. bought 10,000 shares of Y Co. for 40,000 on 1.1.06.
On 1.1.08 Y Co. made right issue for 1 for 10 at IP of 4/share
On 1.1.011 issued bonus 1 for 5
On 1.1.018 A Co. sold 6000 shares of Y Co. for 120,000
RPIS
2006 121
2008 130
2011 140
2018 150
Required: CG
Mustafa Ahmed Mirchawala:
Page 85
TX: Taxation:
Business reliefs:
1. Rollover relief / Frozen gains:
The following condition must be met:
a) The old asset sold and the new asset bought are both use only in the trades
b) The old asset and the new asset both fall within one of the following classes:
Land and building occupied as well as used only for the purpose of trade
Fixed (i.e. immovable) plant and machinery
Goodwill
c) Re-investment of the proceeds received on the disposal of the old asset takes place in a period
beginning one year before and ending three years after the date of the disposal.
One year
Three years
The new asset brought into use in the trade on its acquisition
Question#1:
Cost=10
D.P
Less: Cost
Gain
Less: Rollover Relief
DP=50
Cost=70
50
(10)
40
(40)
00
D.P
Less: Cost
Gain
Less: Rollover Relief 66.6%
50
(10)
40
(26.6)
13.3
Question#2:
John brought a factory for £150000 on 11 January 2010 for use in his business. From 11
January 2011 he let the factory out to a quoted company for a period of two years. He then
used the factory for his own business again until he sold it on 11 July 2014 for £225000. On 13
January 2015 he purchased another factory for use in his business. This second factory cost £100000.
Solution:
– 11.1.11 (Business use) = 12 Months
– 10.1.13 (Non Business use) = 24 Months
10.1.13 – 10.07.14 (Business use) = 18 Months
Mustafa Ahmed Mirchawala:
Page 86
TX: Taxation:
Holdover relief:
Gain is deferred until it crystallizes on the earliest of:
a) The disposal of the replacement asset.
b) The date the replacement asset ceases to be used in the trade
c) Ten years after the acquisition of the replacement asset.
Question#1:
Norma bought a freehold shop for use in her business in June 2011 for £125000. She sold it for £140000
on 1 August 2012 on 10 July 2012. Norma bought some fixed plant and machinery to use in her business
costing £150000. She then sells the plant and machinery for £167000 on 19 November 2014.
Show Norma’s CGT Position.
D.P
140000
Less: Cost
(125000)
Gain
15000
Less: Holdover (15000)
000
June 11
Cost=125,000
10.7.12
Cost=150,000
(new plant)
1.8.12
D.P=140,000
19.11.14
D.P=167,000
(new plant)
Principal private residence relief:
The final period of ownership of a main residence is always treated as a period of ownership. This period
of exemption has been reduced from 18 months to nine months.
Case 1:
1 1.05 Cost = 40000
8 years
1.1.013 D.P’ = 100000
Period of ownership = 8 years
Period of Occupation = 8 years
D.P
Cost
Gain
Less: PPR= gain x
= 60000 x8/8=
Mustafa Ahmed Mirchawala:
100000
(40000)
60000
(60000)
000
Page 87
TX: Taxation:
Case2:
1.1.05 Cost = 40000
Unoccupied
1.1.09
Occupied for 4 years
1.1.013 D.P = 100000
Period of ownership = 8 years
Period of occupation = 4 years
D.P
Cost
Gain
Less: PPR= gain x
= 60000 x4/8=
Chargeable gain
100000
(40000)
60000
( 30000)
30000
Deemed period occupation:
These periods of deemed occupations are:
o Any period (or periods taken together) of absence, for any reason, up to three years, and
o Any period during which the owner was required by his employment (i.e. employed taxpayer) to live
abroad, and
o Any period (or periods taken together) up to four years during which the owner was required to live
elsewhere due to his work (i.e. both employed and self employed taxpayer) so that he could not
occupy his private residence.
It does not matter if the residence is let during the absence.
The last 9 months are always exempt.
The deemed period of occupation becomes deemed when the period of absence was at sometime both
preceded and followed by a period of actual occupation.
Mustafa Ahmed Mirchawala:
Page 88
TX: Taxation:
Question#1:
Mr. A purchased a house on 1 April 1988 for £88200. He lived in the house until 30 June 1988. He then
worked abroad for two years before returning to the UK to live in the house again on 1 July 1990. He
stayed in the house until 31 December 2006 before retiring and moving out to live with friends in Spain
until the house was sold on 30 June 2012 for £150000.
Required: Calculate the gain arising.
3months APO
24months abroad
198 months APO
57 month chargeable
Last 9 months
Solution:
Proceeds
Less: Cost
Gain before PPR exemption
Chargeable gain
Working:
Period
i)
ii)
iii)
iv)
v)
1 April 88
30 June 88
30 June 90
31 Dec 06
30 Sep 11
30 June 12
150,000
(88,200)
61800
(49,695)
12,105
Total
Months
Exempt
months
Chargeable
months
April 1988 – June 1988 (occupied)
July 1988- June 1990 (working abroad)
July 1990- Dec 2006 (occupied)
Jan 2007-sep 2011 (see below)
Oct 2011 – 30 June 12 (last 9 months)
3
3
0
24
24
0
198
198
0
57
0
57
9
9
0
291
234
57
No part of the period from January 2007 to December 2010 can be covered by the exemption for three
years of absence for any reason because it is not followed at any time by actual occupation.
Mustafa Ahmed Mirchawala:
Page 89
TX: Taxation:
Business use:
Where part of a residence is used exclusively for business purposes throughout the period of ownership,
the gain attributable to use of the part is taxable. The last 09 months always exempt’ rule does not apply
to that part.
Question#1:
Mr. Smail purchased a property for £35000 on 31 May 2007 and began operating a dental practice from
that date in one quarter of the house. He closed the dental practice on 31 December 2018, selling the
house on that date for £130000.
Required: Compute the gain.
Proceeds
Less: Cost
Gain before PPR exemption
Less: PPR exemption 0.75 x £95000
Gain
130,000
(35,000)
95,000
(71250)
23,750
Exemption is lost on one quarter throughout the period of ownership (including the last 09 months)
because of the use of that fraction for business purpose.
Business use for Part of Ownership.
1.1.06
100% Private use
36 months
1.1.09
APO 39 months
25% Business use
75 % Private use
31.3.12
Last 09 months
25% Business use
75 % Private use
1.1.013
Mustafa Ahmed Mirchawala:
Page 90
TX: Taxation:
Period
a) 1.1.06 – 1.1.09 (100% private use)
b) 1.1.09 –31.3.12
c)31.3.12-1.1.013(last 36 months)
D.P
Less: cost
Gain before PPR
Less: PPR = 60000 x74.25/84
Chargeable gain
Total
Months
Exempt
months
36
39
09
84
36
29.25
09
74.255
Chargeable
Months
0
9.75
0
9.75
100000
(40000)
60000
(53055)
6965
Letting relief:
Absence
Deemed
chargeable
When the owner lets part of the property while still occupying the rest of it:
The letting relief is lowest of:
o The amount of the total gain which is already exempt under the PPR provisions.
o The gain accruing during the letting period (the letting part of the gain)
o £40000 (maximum)
Capital gains tax:
Tax rates
Lower rate
Higher rate
Normal rates
10%
20%
Residential property
18%
28%
Business asset disposal relief (formerly entrepreneurs’ relief) and investors’ relief
Lifetime limit
Business asset disposal relief
£1,000,000
Investors' relief
£10,000,000
Rate of tax
10%
Mustafa Ahmed Mirchawala:
Page 91
TX: Taxation:
Question#1:
Mr. Ovett purchased a house in Truro on 1st October 1999 and sold it on 5 April 2014 making a gain of
£290000.
On 5 January 2001 he had been sent to work in within country Edinburgh, and he did not return to his
own house until 6 July 2010. The property was let out during his absence and he lived in a flat provided
for him by his employer.
Required:
What is the gain?
15months APO
48months working elsewhere in UK
36 months without any reason
30 month chargeable
36 months APO
Last 9 months
Period
1 Oct 99
5 Jan 2001
5 Jan 05
5 Jan 08
6 Jul 10
1 july 13
5 April 014
Notes
5.10.98– 4.1.95 Actual occupation
5.1.2000-4.1.04 4 years absence working in the UK
5.1.03 – 4.1.07 3 years of absence for any reason
5.1.06 – 5.7.09 Absence – let
6.7.09- 5.4.013 Occupied (includes last 36 months)
Gain before PPR exemption
Less: PPR exemption (working) £290000 x144/174
Gain after PPR
Less: Letting exemption: Lowest of
a. Gain exemption under PPR rule: £240000
b. Gain attributable to letting
50000
c. £40000 (maximum)
Gain
Mustafa Ahmed Mirchawala:
Total
Ownership
Months
15
48
36
30
45
174
Exempt
Month
15
48
36
0
45
144
Chargeable
Months
0
0
0
30
0
30
290000
(240000)
50000
(40000)
10000
Page 92
TX: Taxation:
Destruction of an asset:
Cost=10
Within 12 months
Claim received=50
Cost=70
D.P
Less: Cost
Gain
Less: Rollover
50
(10)
40
(40)
00
Base cost of replacement asset
Cost
70
Less: rollover relief
(40)
Base cost
30
If all proceeds are applied for the replacement of the asset within 12 months, any gain can be deducted
from the cost of the replacement asset,
If any part of proceeds is used, the gain immediately chargeable can be limited to the amount not used.
The rest of the gain is then deducted from the cost of the replacement.
Damage to an asset:
If an asset is damaged then the receipt of any compensation or insurance monies received will normally
be treated as a part disposal.
If all the proceeds are applied in restoring the asset the taxpayer can elect to disregard the part disposal.
The proceeds will instead be deducted from the cost of the asset.
Mustafa Ahmed Mirchawala:
Page 93
TX: Taxation:
Question#1:
Frank bought an investment property of £100000 in May 2013. It was damaged two and a half months
later. Insurance proceeds of £20000 were received in November 2013, and Frank spent a total of £25000
on restoring the property.
Prior to restoration the property was worth £120000. Compute the chargeable gain immediately
chargeable, if any, and the base cost of the restored property assuming Frank elects for there to be no
per disposal.
Question#2:
Mr. x bought 4 acres land on 1.1.11 for $80,000. He sold 1 acre land for $60,000 on 1 January
Legal cost on the sale of 1 acre land $2000 M.V of reminder = $180,000
Required:
Chargeable gain on the disposal of 1 acre land?
Question#3:
Mr. X bought 6 acres land on 1.1.14 for $120,000. He sold 2 acres land on 31 Dec 19 for $90,000 he
made garden on 4 acres land which costed him $40,000. Market value of remaining 4 acres land on Dec
18 = $210,000.
Required: Chargeable gain
Question#4:
Mr. A bought a house in London for $60,000 1 January 10. He hired there for 2 years. On 1st Jan 012 he
want to abroad for 1 year for doing job. He come back on 1st Jan 013 and stayed in house again for next 6
months .He then went to Germany on 1st July 013 to live with friends for next 4 years . he come back on
1st July 017 from Germany and stayed in his home. He sold this house on 1st march 019 for £160,000.
Required: Chargeable again?
Question#5:
Mr. A. bought a warehouse for £ 50,000 on 1.1.09 He sold this ware house on 1.1.013 for 120,000. He
bought on office building for 110,000 on 1.5.013. He finally sold office building on 1.1.20 for £ 200,000.
Required: Final changeable gain of office building?
Question#6:
Mr. A bought a free hold shop on 1.1.10 for £ 60,000 he sold that shop on 1.1.014 for 150,000. He
bought another free hold building for use in his trade for 115,000 on 1.7.014. He finally sold that
freehold building for £ 195000 on 1.8.019.
Required: Final changeable gain?
Question#7:
Mr. A bought a freehold shop for £ 45000 on 1.1.08. Throughout the period of ownership he used this
shop 70% business purpose & 30% non-business purpose. He sold this free hold shop on 1.1.20 for £
140,000.He used these proceed to buy a replacement factory on 1.2.20 for £ 85000.
Required: Chargeable gain of free hold shop. And base cost of replacement factory?
Mustafa Ahmed Mirchawala:
Page 94
TX: Taxation:
Rollover relief:
Question#8:
Business Asset sold for £ 170,000. Cost was =>£ 45000. Disposal date 1.7.2019 .A new QBA was
purchased immediately
Required:
i: New QBA costed => 190,000.
ii: New2 QBA costed => 140,000.
iii: Asset sold used 60% for business, QBA purchased =. 110,000.
iv: Asset sold used 60% for business, QBA purchased => 90,000.
Holdover Relief:
Question#9:
A QBA sold for £ 100, 000, cost£20,000 in 2010 (November) proceeds were re-invested into a plant.
Required:
i: Plant was purchased for £ 100,000, sold in Dec 2019 for £150,000.
ii: Plant was purchased for 90,000, sold Plant in Dec 2019 for £ 150,000.
iii: QBA sold was used 80% in business, plant costed =>72000 and was sold in Dec 2019 for £ 130,000.
Gift Relief:
Father gifted daughter a warehouse (M.V= 100,000) Cost= 301000.
i: warehouse used 100% business, D paid.
ii: warehouse used 80% business paid
iii: warehouse used 80%, D paid = 40,000.
Mustafa Ahmed Mirchawala:
Page 95
TX: Taxation:
Question#10:
Shrewd Ltd (ADAPTED):
1. Shrewd Ltd. Sold a factory on 15 February 2019 for £320000. The factory was purchased on 24
October 2000 for £164000, and was extended at a cost of £37000 during March 2002. During May
2003 the roof of the factory was replaced at a cost of £24000 following a fire. Shrewd ltd incurred
legal lees of £3600 in connection with the purchase of the factory and legal lees of £6200 in
connection with the disposal.
2. Assume indexation factors are as follows:
October 2000 to February 2019
0.298
March 2002 to February 2019
0.268
March 2003 to February 2019
0.226
October 2000 to December 2017
0.265
March 2002 to December 2017
0.212
Shrewd Ltd is considering the following alternative ways of reinvesting the proceeds from the sale of the
factory:
1. A freehold warehouse can be purchased for £340000.
2. A freehold office building can be purchased for £280000.
3. A leasehold factory on a 10 year lease can be acquired for a premium of £350000.
The reinvestment will take place during May 2013.
All of the above building have been, or will be usedfor business purposes.
Required:
a) State the conditions that must be met in order that rollover relief can be claimed. You are not
expected to list the categories of asset that qualify for rollover relief.
b) Before taking account of any available rollover relief, calculate Shrewd Ltd’s chargeable gain in
respect of the disposal of the factory.
c) Advice Shrewd Ltd of the rollover relief that will be available in respect of each of the three
alternative reinvestments.
Mustafa Ahmed Mirchawala:
Page 96
TX: Taxation:
Question#12:
Mr. X bought 20,000 ordinary shares of A co @£3/ share. How much shares Mr. X should gift to his
daughter @ consideration of £15/share. If he wants to utilize his Annual Exemption.
Question#13:
Mr. A gifted 20000 ordinary shares of a quoted co to his son on 1.1.20.
10000 ordinary shares for £6000
1.1.013 20000 ordinary shares for £13000
1.1.20 3000 ordinary shares for £29800
Quoted price on 1.1.20 = (£9.6- £10.2)
Required:
Chargeable gain (Mr. A holding in this co only 2%)
Question#14:
Mr. X bought copy rights on 1.1.014 for £60000 for 30 years. He sold those rights on 1.1.20
for £25000.
Required: Chargeable gain?
Question#15:
Mr. A bought copy on 1.1.012 for £40000 for 40 years. He sold it on 1.1.019 for £38000.
Required: Chargeable gain?
Mustafa Ahmed Mirchawala:
Page 97
TX: Taxation:
Question#16:
Mr. A gifted complete 10% holding of X Co to his son on 1.1.20. M.V of these shares on 1.1.20= £80000.
He purchased these shares 10 years ago for £20000.
Total chargeable business assets of this co at 1.1.019 = £150000.
Total chargeable asset of this co at 1.1.019 = £250000
Required:
1. Chargeable gain for Mr. A =?
2. Base cost of these shares for son?
Question#17:
Mr. A gifted 6% holding of X co to his son on 1.2.20. M.V of these shares on 1.2.20=£150000.
He bought these shares 5 years ago for £50000.
Total chargeable business asset of this co= £180000
Total chargeable asset of this co = £200000
Required:
Chargeable gain for Mr. A=?
Question#18:
Mr. A sold 10000 shares of a un quoted co on 1.1.20 for £90000. He originally bought 20000 shares of
this co from his father 5 years ago for £60000, when market value of these shares was £80000. His
father bought these shares for £10000.
Required: Chargeable gain of these 10000 shares for Mr. A?
Question#19:
Katie:
In 2021/ 22 Katie sold her trading business which she set up in 2005 and realized the following gains and
losses:
Factory
275000
Goodwill
330000
Warehouse
100000
Investment property (non residential)
200000
All of the assets have been owned for many years.
Katie sold her shares in an unquoted trading company and realized a gain of £60000. She owned 25%
of the ordinary shares of the company which she purchased then years ago. She has worked for the
company on a part time basis for the last three years.
Ketti has not made any other capital disposals in 2021/22 but she has capital losses brought forward of
£9000.she has ne
ver claimed any Entrepreneurs’ relief in the past. She has
taxableincome of £30000.
Required: Calculate Katie’s capital gains tax payable for 2021/22.
Question#20:
Kevin disposed of a business in November 2021 realizing chargeable gains of £660,000. He had started
the business in January 2010 and has used all the chargeable assets for business use throughout the
period of ownership.
He has previously claimed Entrepreneurs relief for qualifying gains of £400,000.
He also disposed of a INVESTMENT PROPERTY non residential in February 2022, realizing a chargeable
gain £20000.The home had never been his principal private residence.
Kevin had taxable income of £40000 in 2021/22.
Required: Calculate Kevin’s capital gains tax payable for 2021/22.
Mustafa Ahmed Mirchawala:
Page 98
TX: Taxation:
Question#21:
Paul:
In 2021/22 Paul sold shares in Dubai Ltd an unquoted trading company and realized a gain of £430000.
Paul has worked for Dual Ltd for many years and has owned 10% of the ordinary shares of the company
for the last five years.
Paul set up a trading business in 2011 and in 2021/22 he sold a warehouse used in the business,
realizing a gain of £245000.
Paul’s taxable income was £28000 in2021/22.
In 2022/23 Paul sold the rest of the business and realized gains of:
Factory
£6495000
Goodwill
£130000
All of the assets in the business have been owned for many years.
Paul also sold an antique table and realized a gain of £5325.
His taxable income in 2022/23 was £38000, and prior to 2021/22 Paul has claimed Entrepreneurs relief
of £350,000.
Required:
Calculate Paul’s CGT payable for 2021/22 and 2022/23
Assume that the AEA and rates for 2021/22 continue in the future.
Mustafa Ahmed Mirchawala:
Page 99
TX: Taxation:
Capital Gain Tax:
Question#1:
Tina sold a painting on 1 July 2021 for £500,000. She purchased the painting in February 2001 for
£350,000.
She also disposed of a commercial investment property for £310,000 on 1 December 2021 and incurred
agency fees of £15,000 on the disposal. She had purchased the property in August 2002 for £200,000.
In addition she sold an antique vase for £10,000 in January 2022 which had cost her £15,000 in
September 2019.
Tina had capital losses brought forward from previous tax years of £12,000. Tina’s taxable income for
2021/22 is £50,000.
Required:
Calculate Tina’s Capital Gains Tax for 2021/22
Question#2:
Matthew has trading profit of £20,000 assessed in 2021/22 and sold an antique vase giving rise to a
capital gain of £18,000.
Required:
Calculate Matthew’s capital gains tax for 2021/22.
Question#3:
Katie has trading profit of £41,000 assessed in 2021/22. In addition she sold a commercial
investment property giving rise to a capital gain of £30,000.
Required:
Calculate Katie’s capital gains tax for 2021/22
Question#4:
Elliot has trading profit of £45,000 assessed in 2021/22. In addition he sold a painting giving rise to a
capital gain of £26,000.
He made a gift aid payment of £2,400 in 2021/22.
Required:
Calculate Elliot’s capital gains tax for 2021/22
Question#5:
Gaynor had a trading profit assessment of £21,000 in 2021/22 and no other taxable income. She sold
two assets during the tax year, a residential investment property giving rise to a chargeable gain of
£30,000 and a diamond ring yielding a chargeable gain of £8,000
Required:
Calculate Gaynor’s CGT liability for 2021/22.
Question#6:
Jenny gifted 1,000 shares in M plc when they were quoted at £4.00 - £4.08p
Required:
Calculate the value to be used for capital gains disposal proceeds
Mustafa Ahmed Mirchawala:
Page 100
TX: Taxation:
Question#7:
Fiona and Jane made capital gains and capital losses for the years 2020/21 and 2021/22 as set out
below:
Fiona
Jane
2020/21
Capital gains
15,000
7,000
Capital losses
10,000
10,000
2021/22
Capital gains
17,000
13,700
Capital losses
5,200
2,000
Required:
Calculate the taxable gains for Fiona and Jane for both 2020/21 and 2021/22 and the amount of any
losses carried forward at the end of 2021/22.
Question#8:
Gollum bought a ring in July 1997 for £12,000. He transferred it to his civil partner Frodo in December
2021 when its market value was £20,000. Frodo then sold the ring in January 2022 for net proceeds of
£20,000.
Required:
Calculate any capital gain for Gollum or Frodo in 2021/22.
Question#9:
ST owned 10 hectares of land which originally cost £26,000 in March 2018. ST sold 2 hectares of the land
in December 2021 for £16,000.
The remaining 8 hectares were valued at £34,000 in December 2021.
Required:
Calculate the chargeable gain on the disposal of the 2 hectares of land in December 2021
Question#10:
JM sold the following assets in December 2021
An antique table which had cost £3,000 in February 2015 and sold for £5,000
o A painting which had cost £2,000 in January 2018 and sold for £10,000
o An antique vase which had cost £8,000 in August 2006 and sold for £3,000
o A vintage car which had cost £7,000 in July 2003 and was sold for £9,000
Required:
Calculate the net chargeable gains or losses arising for JM in December 2021
Question#11:
On 1 December 2008 Z bought a copyright at a cost of £25,000. It had an estimated useful life of 30
years, and an estimated residual value of £1,000.
Z sold the asset for £38,000 on 1 December 2021.
Required:
Calculate the chargeable gain arising on the sale of the copyright in December 2021
Question#12:
Jane owns shares in ABC Ltd. She acquired 1,500 shares in the company on 31 May 2017 for £20,000,
and 500 shares on 30 June 2019 for £10,000. On 7 March 2022 Jane bought a further 200 shares in ABC
Ltd for £4,000.
Jane sold 1,000 shares in ABC Ltd on 28 February 2022 for £25,000. She is not an employee of ABC Ltd.
Required:
Calculate Jane’s capital gain on the disposal of the shares on 28 February 2022.
Mustafa Ahmed Mirchawala:
Page 101
TX: Taxation:
Question#13:
Graham had the following transactions in Aderholt Ltd shares:
February 2020
Purchased 7,000 shares for £15,000
June 2020
Purchased 1,000 shares for £4,000
July 2020
Bonus issue of one for five
October 2021
Sold 5,000 shares for £20,000
Required:
Calculate the capital gain arising on the disposal in October 2021.
Question#14:
Mark in an employee of Romsey Ltd. He had the following transactions in the company shares:
February 2020
Purchased 6,000 shares for £15,000
June 2020
Purchased 900 shares for £2,700
July 2020
Took up 1 for 3 rights issue for £3.00 per share
September 2021
Sold 6,000 shares for £24,000
Required:
Calculate the capital gain on the disposal in September 2021.
Question#15:
In May 2017 Mark purchased 4,000 ordinary shares in Silver Ltd for £12,000. In June 2021 Silver Ltd was
taken over by Gold Ltd and Mark received 2 ordinary shares and 1 preference share in Gold Ltd for each
ordinary share held in Silver Ltd.
Immediately after the takeover the ordinary shares in Gold Ltd were valued at £5 and the preference
shares in Gold Ltd were valued at £2.
In January 2022 Mark sold all his holding ordinary shares in Gold Ltd for £35,000.
Mark was not an employee of Silver Ltd or Gold Ltd.
Required:
Calculate the capital gain arising on the disposal in January 2022.
Mustafa Ahmed Mirchawala:
Page 102
TX: Taxation:
Exam Kit Questions:
Question#1:
DAVID AND ANGELA BROOK (ADAPTED)
David and Angela Brook is a married couple. They disposed of the following assets during the tax year
2021/22:
Jointly owned property
On 30 September 2021 David and Angela sold a house for £381,900. The house had been purchased on
1 October 2001 for £86,000.
David and Angela occupied the house as their main residence from the date of purchase until 31 March
2005. The house was then unoccupied between 1 April 2005 and 31 December 2008 due to Angela
being required by her employer to work elsewhere in the United Kingdom.
From 1 January 2009 until 31 December 2015 David and Angela again occupied the house as their main
residence. The house was then unoccupied until it was sold on 30 September 2021.
Throughout the period 1 October 2001 to 30 September 2021 David and Angela did not have any other
main residence
David Brook
On 5 May 2021 David transferred his entire shareholding of 20,000 £1 ordinary shares in Bend Ltd, an
unquoted trading company, to Angela. On that date the shares were valued at £64,000. David’s
shareholding had been purchased on 21 June 2018 for £48,000.
Angela Brook
On 7 July 2021 Angela sold 15,000 of the 20,000 £1 ordinary shares in Bend Ltd that had been
transferred to her from David. The sale proceeds were £62,400.
Neither David nor Angela has ever worked for Bent Ltd.
On 15 October 2021 Angela disposed of a small business she had been running part time for many years.
The only chargeable asset in the business was a warehouse and this resulted in a gain of £3,700.
Angela has taxable income of £27,145 for the tax year 2021/22. David does not have any taxable
income.
Required:
Compute David and Angela’s respective capital gains tax liabilities for the tax year 2021/22.
(10 marks)
Mustafa Ahmed Mirchawala:
Page 103
TX: Taxation:
Question#2:
BILL DING:
Bill Ding has run a construction company, High Rise Ltd since he purchased the entire shareholding for
£112,000 in 2003. He has worked for the company since purchase.
Bill has decided to retire and on 17 August 2021 Bill made a gift of his entire holding of High Rise Ltd
shares to his daughter, Belle, who also works for the company. The market value of the shares on that
date was £260,000.
On 17 August 2021 the market value of High Rise Ltd’s chargeable assets was £180,000, of which
£150,000 was in respect of chargeable business assets. Bill and his daughter have elected to hold over
the gain on this gift of a business asset.
Belle plans to sell the shares in High Rise Ltd on 31 March 2022, when they are expected to be worth
£265,000 in order to fund a new business venture.
Neither Bill nor Belle has made any previous disposals chargeable to capital gains tax, and both are
higher rate taxpayers.
Required:
(a) Calculate the gains arising and capital gains tax liabilities for Bill and Belle on the gift of High Rise Ltd
shares to Belle and the subsequent sale by Belle.
Assume that Bill and Belle make a joint claim for gift relief, and state the due date for this claim.
(5 marks)
(b) Recalculate the gains arising and capital gains tax liabilities for Bill and Belle, assuming a joint claim
for gift relief is not made.
(3 marks)
(c) Briefly conclude, including a calculation of the tax saving, on which route would be preferable for Bill
and Belle.
(2 marks)
(Total: 10 marks)
Question#3:
JEROME:
Jerome made the following gifts to family members during the tax year 2021/22:
(1) On 28 May 2021, Jerome made a gift of a house valued at £187,000 to his wife. Jerome’s uncle had
originally purchased the house on 14 July 2000 for £45,900. The uncle died on 12 June 2009, and the
house was inherited by Jerome. On that date, the house was valued at £112,800. Jerome has never
occupied the house as his main residence.
(2) On 24 June 2021, Jerome made a gift of his entire 12% holding of 12,000 £1 ordinary shares in
Reward Ltd, an unquoted trading company, to his son. The market value of the shares on that date was
£98,400. The shares had been purchased on 15 March 2011 for £39,000. On 24 June 2021, the market
value of Reward Ltd’s chargeable assets was £540,000, of which £460,000 was in respect of chargeable
business assets. Jerome and his son have elected to hold over the gain on this gift of a business asset.
(3) On 7 November 2021, Jerome made a gift of an antique bracelet valued at £12,200 to his
granddaughter. The antique bracelet had been purchased on 1 September 2006 for £2,100.
(4) On 29 January 2022, Jerome made a gift of nine acres of land valued at £78,400 to his brother. He
had originally purchased ten acres of land on 3 November 2010 for £37,800. The market value of the
unsold acre of land as at 29 January 2022 was £33,600. The land has never been used for business
purposes.
Required:
(a) Calculate Jerome’s chargeable gains for the tax year 2021/22.
Note: You should ignore inheritance tax.
(7 marks)
(b) For each of the four recipients of assets (1) to (4) gifted from Jerome, state their respective base cost
for capital gains tax purposes.
(3 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#4:
GINGER AND NIGEL (ADAPTED):
You should assume that today’s date is 1 March 2022.
(a) Ginger has a holding of 10,000 £1 ordinary shares in Nutmeg Ltd, an unquoted trading company,
which she had purchased on 13 February 2012 for £2.39 per share. The current market value of the
shares as agreed with HM Revenue and Customs is £6.40 per share, but Ginger intends to sell some of
the holding to her daughter at £4.00 per share during March 2022. Ginger and her daughter will elect to
hold over any gain as a gift of a business asset.
(b) For the tax year 2021/22, Ginger will not make any other disposals, and has therefore not utilized her
annual exempt amount.
Required:
Explain how many £1 ordinary shares in Nutmeg Ltd Ginger can sell to her daughter for £4.00 per share
during March 2022 without incurring any capital gains tax liability for the tax year 2021/22.
Your answer should be supported by appropriate calculations.
(4 marks)
Innocent and Nigel, a married couple, both have shareholdings in Cinnamon Ltd, an unquoted trading
company with a share capital of 100,000 £1 ordinary shares.
Innocent has been the managing director of Cinnamon Ltd since the company’s incorporation on 1 July
2012, and she currently holds 20,000 shares (with matching voting rights) in the company. These shares
were subscribed for on 1 July 2012 at their par value. Nigel has never been an employee or a director of
Cinnamon Ltd, and he currently holds 3,000 shares (with matching voting rights) in the company. These
shares were purchased on 23 April 2016 for £46,200.
Either Innocent or Nigel will sell 2,000 of their shares in Cinnamon Ltd during March 2022 for £65,000,
but they are not sure which of them should make the disposal. For the tax year 2021/22, both Innocent
and Nigel have already made disposals which will fully utilize their annual exempt amounts, and they will
each have taxable income of £80,000.
Required:
Calculate the capital gains tax saving if the disposal of 2,000 shares in Cinnamon Ltd during March 2022
is made by Innocent rather than Nigel.
(6 marks)
(Total: 10 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#5:
MICK STONE (ADAPTED)
Mick Stone disposed of the following assets during the tax year 2021/22:
(1) On 19 May 2021, Mick sold a freehold warehouse for £522,000. The warehouse was purchased on 6
August 2008 for £258,000. In January 2014, the floor of the warehouse was damaged by flooding and
had to be replaced at a cost of £63,000. The warehouse was sold because it was surplus to the
business’s requirements as a result of Mick purchasing a newly built warehouse during 2020. Both
warehouses have always been used for business purposes in a wholesale business run by Mick as a sole
trader.
(2) On 24 September 2021, Mick sold 700,000 £1 ordinary shares in Rolling Ltd, an unquoted trading
company, for £3,675,000. He had originally purchased 500,000 shares in Rolling Ltd on 2 June 2012 for
£960,000. On 1 December 2017, Rolling Ltd made a 3 for 2 bonus issue. Mick has been a director of
Rolling Ltd since 1 January 2012.
Required:
(a) Assuming that no reliefs are available, calculate the chargeable gain arising from each of Mick Stone’s
asset disposals during the tax year 2021/22.
You are not required to calculate the taxable gains or the amount of tax payable.
(4 marks)
(b)State which capital gains tax reliefs might be available to Mick Stone in respect of each of his
disposals during the tax year 2021/22, and what further information you would require in order to
establish if the reliefs are actually available and to establish any restrictions as regards the amount of
relief.
For this part of the question you are not expected to perform any calculations.
(6 marks)
(Total: 10 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#6:
RUBY (ADAPTED)
You should assume that today’s date is 1 March 2022.
(a) On 27 August 2021, Ruby disposed of a residential investment property, and this resulted in a
chargeable gain of £47,800.
At the point of the disposal, Ruby had not made any other disposals and expected to have a
remaining basic rate band of £14,185 for the tax year 2021/22.
Required:
Calculate Ruby’s capital gains tax liability in respect of the above disposal and state when the tax will be
paid.
(2 marks)
(b) In addition to the disposal already made on 27 August 2021, Ruby is going to make one further
disposal during the tax year 2021/22. This disposal will be of either Ruby’s holding of £1 ordinary
shares in Pola Ltd, or her holding of 50p ordinary shares in Aplo plc.
Shareholding in Pola Ltd:
Pola Ltd is an unquoted trading company, in which Ruby has a 10% shareholding. The shareholding was
purchased on 14 July 2012 and could be sold at a gain of £37,300. Ruby has been an employee of Pola
Ltd since 2010.
Shareholding in Aplo plc:
Aplo plc is a quoted trading company, in which Ruby has a shareholding of 40,000 50p ordinary shares.
Ruby received the shareholding as a gift from her father on 27 May 2015. On that date, the shares were
quoted on the stock exchange at £2.12– £2.24. The shareholding could be sold for £59,000.
No capital gain tax relief is available in respect of this disposal.
Required:
Calculate Ruby’s final capital gains tax payable or repayable for the tax year 2021/22 if, during March
2022, she also disposes of either (1) her shareholding in Pola Ltd, or alternatively (2) her shareholding in
Aplo plc.
Note ‐ the following mark allocation is provided as guidance for this requirement:
Pola Ltd (4.5 marks)
Aplo plc (3.5 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Question#7:
(8 marks)
DALJEET
Please assume today’s date is 5 April 2021.
Daljeet wishes to sell personal assets to generate funds to pay his daughter’s university fees and he has
selected two assets that he is willing to sell. He will sell one of the assets to a third party on 31
December 2021 and will make his decision based on the asset that will generate the highest amount of
net proceeds.
The assets Daljeet has identified as potential disposals are as follows:
1000 shares in ABC Ltd
Daljeet acquired 1,000 shares in ABC Ltd, a trading company, on 7 June 2016 for £60,000 when he
became an employee of the company. On 7 June 2017 ABC Ltd underwent a rights issue, offering
shareholders the opportunity to purchase 2 shares for every 5 shares already held for £50 per share.
Daljeet purchased the maximum amount of shares.
ABC Ltd has 20,000 shares in issue.
If Daljeet sells the ABC Ltd shares, he will sell 1,000 shares worth £100,600 on 31 December 2021.
Holiday cottage
The cottage is currently worth £110,000 and legal fees in respect of the disposal are expected to be
£1,000. Repairs costing £3,500 were made to the cottage roof in December 2020 following damage
caused by a storm.
Daljeet originally bought the cottage in May 2012 at a cost of £64,700. It has always been let out and
Daljeet has never occupied the property as his principal private residence.
Other information
Daljeet will be a higher rate taxpayer and will make no other disposals in the tax year 2021/22.
Required:
(a) Calculate which of the above asset disposals will result in the highest amount of proceeds, after
deducting tax and any costs of sale.
You should assume that Daljeet will claim any relevant reliefs where possible and has not previously
claimed any capital gains tax reliefs.
(8 marks)
(b) Briefly explain why the disposal of either the ABC Ltd shares or the holiday cottage will not be subject
to inheritance tax.
(2 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
1. For transfer of wealth
2. On death estate
3. Life time gifts
Inheritance Tax(IHT):
Difference between IHT & CGT:
1. CGT is chargeable on gain IHT is chargeable on wealth.
2. CGT is chargeable on allowed assets whereas IHT is chargeable on all assets.
IHT is computed on decrease in wealth of donor.
Potential Exempt Transfer (PET):
1. Gift to any individual
2. Right now no IHT
3. If donor died within 7 years then PET will be chargeable in the year of death.
4. Market value will be locked now.
Chargeable Life time transfer (CLT):
1. Gift to trust
2. Immediately chargeable in the year of gift.
3. If donor died within 7 years from the date of gift then additional IHT is payable in the year of death.
4. MV will be locked now.
Annual Exemption:
1. 3000/year
2. AE only available for PET and CLT
3. No AE for death estate
4. AE is always used left to right in a fiscal year.
5. Unused AE maybe c/f for only one year
6. Always use current year AE first and then last year AE.
Taper Relief:
1. Only available on PET and additional IHT on CLT
2. No T.R on death estate.
3. The T.R is always the gap b/w date of gift and date of death.
Marriage Exemption:
1. First 5000 from parents.
2. First 2500 from grandparents
3. First 1000 from others
Small Gift Exemption:
1.250/person/FY
2. If this 250 limit is crossed full amount is PET not just excess.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Gift out of Income:
1. From income
2. Habitual in nature
3. Does not affect donor's standard of living e.g. pocket money.
Spouse Exemption:
1. Any amount of gift b/w husband and wife.
2. In this life and after death through "will".
Planning Interaction between CGT & IHT:
1. IHT on all assets
2. CGT only on chargeable assets
3. For IHT purpose gifts during the life beneficial.
4. But for CGT purpose chargeable asset should be transferred at the time of death.
5. Difference in tax rate.
6. Exempt assets should be transferred in life.
7. Generation Gap
8. Do CLT after every 7 years to avoid life time IHT up to 325,000
9. If you’re total wealth is less than 325,000 then no need to do any life time gift.
10. If you are about to die don't transfer wealth to children directly now, first transfer gift to wife and
tell her to transfer these.
Question#1:
Mr. A holds 60,000 shares of X Co. Total issued shares of X Co. = 100,000.
Mr. A gifted 15,000 shares of X Co. to his son.
MP/share for 60% holding is 30/share
MP/share for 45% holding is 20/share
MP/share for 15% holding is 7/share
Required: Decrease in wealth of donor?
IHT:
Death estate
Chargeable estate
IHT liability 45000 at nil%
405000 at 40%
Mustafa Ahmed Mirchawala:
450000
162000
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TX: Taxation:
Advantages of lifetime transfers:
Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.
o A PET is completely exempt after seven years.
o A CLT will not incur any additional IHT liability after seven years.
o Even if the donor does not survive for seven years, taper relief will reduce the amount of IHT
payable after three years.
o The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make gifts of
assets that are expected to increase in value such as property of shares.
Tax liability on death estate:
Until now the examples have simply a figure for the value of a person’s estate. However, it may be
necessary to calculate it.
A person’s estate includes the value of everything which they own at the date of death such as property,
shares, motor vehicles, cash and other investments. A person’s estate also includes the proceeds from
life assurance policies even though these proceeds will not be received until after the date of death. The
actual market value of a life assurance policy at the date of death is irrelevant.
The following deductions are permitted:
o Funeral expenses
o Debts due by the deceased provided they were incurred for valuable consideration. Therefore,
gambling debts cannot be deducted.
Mortgage on property. This does not include endowment mortgages as these are repaid upon death by
the life assurance element of the mortgage. Repayment mortgages and interest only mortgages are
deductible.
o Executional fees not allowed
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Example :
Andy died on 31 December 2013. At the date of his death he owned the following assets.
November 2013:
o An investment property valued at £425000. This had an outstanding interest only mortgage of
£180000.
o Ordinary shares in Herbert plc valued at £54000.
o Building society deposits of £25000.
o A life insurance policy on his own life, On 31 December 2013 the policy had an open market value of
£85000, and proceeds of £100000 were received following Andy’s death.
On 31 December 2013 Andy owed £700 in respect of credit card debts and he had also verbally
promised to pay the £800 legal fee of a friend.
The cost of his funeral amounted to £4300.
Investment Property
Mortgage
£
425000
(180000)
Ordinary shares in Herbert plc
Building society deposits
Proceeds of life assurance policy
54000
25000
10000
£
245000
424000
Credit card debits
Funeral expenses
Chargeable estate
IHT liability 325000 at nil %
94000 at 40%
o
o
700
4300
(5000)
419000
37600
The promise to pay the friend’s legal fee is not deductible as it is purely gratuitous (not made for
valuable consideration).
Executional fees not allowed.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Chargeable lifetime transfers:
The donor is primarily responsible for any IHT that has to be paid in respect of a CLT. However, a
questionmay state that the done is to instead pay the IHT. Remember that grossing up is only necessary
where the donor pays the tax.
The due date is the later of:
30th April following the end of the tax year in which the gift is made.
Six months from the end of the month in which the gift is made.
Therefore, if a CLT is made between 6 April and 30 September in a tax year than any IHT will be due on
the following 30 April. If a CLT is made between 1 October and 5 April in a tax year than any IHT will be
due six months from the end of the month in which the gift is made.
The donee is always responsible for any additional IHT that becomes payable as a result of the death of
the donor within seven years of making a CLT. The due date is six months after the end of the month in
which the donor died.
Potentially exempt transfers:
The done is always responsible for any additional IHT that becomes payable as a result of the death of
the donor within seven years of making a PET. The due date is six months after the end of the month in
which the donor died.
Death estate:
The personal representatives of the deceased’s estate are responsible for any IHT that is payable. The
due date is six months after the end of the month in which death occurred. However, the personal
account of the estate assets to HM revenue and customs, and this may be earlier than the due date.
Where part of the estate is left to a spouse then this part will be exempt and will not bear any of the IHT
liability. Where a specific gift left to a beneficiary then this gift will not normally bear any IHT. The IHT is
therefore usually paid out of the non-exempt residue of the estate.
Example 1:
Alfred died on 15 December 2014. He made the following lifetime gifts.
20 November 2012
A gift of £420000 to a trust. Alfred paid the IHT arising from this gift
8 August 2013
A gift of £360000 to his son.
These figures are after deducting available exemptions.
Alfred’s estate at 15 December 2014 was valued at £850000. Under the terms of his will he left £250000
to his wife, a specific legacy of £50000 to his brother, and the residue of the estate to his children.
The nil rate band for the tax year 2012-13 is £312000, and for the tax year 2013-14 it is £325000.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Rates of IHT:
The nil rate band for the tax year 2022–23 is unchanged at £325,000.
Years before death
Over 3 but less than 4 years
Over 4 but less than 5 years
Over 5 but less than 6 years
Over 6 but less than 7 years
Percentage reduction %
20
40
60
80
Where earlier nil rate bands may be relevant, they will be given to you within the question.
A residence nil rate band applies where a main residence is inherited on death by direct descendants
(children and grandchildren). For the tax year 2022–23, the residence nil rate band is £175,000.
The residence nil rate band is only relevant where an individual dies on or after 6 April 2018, their estate
exceeds the normal nil rate band of £325,000 and their estate includes a main residence. Any other type
of property, such as a property which has been let out, does not qualify for the residence nil rate band.
Example 2:
Sophie died on 26 May 2020 leaving an estate valued at £850,000. Under the terms of her will, Sophie’s
estate was left to her children. The estate included a main residence valued at £325,000.
The inheritance tax (IHT) liability is:
£
Chargeable estate
850,000
IHT liability:
- 500,000 (325,000 + 175,000) at nil%
- 350,000 at 40%
0
140,000
The residence nil rate band of £175,000 is available because Sophie’s estate included a main residence
and this was left to her direct descendants.
In the same way in which any unused normal nil rate band can be transferred to a surviving spouse (or
registered civil partner), the residence nil rate band is also transferable. It does not matter when the
first spouse died.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Example 3:
Timothy died on 19 June 2020 leaving an estate valued at £850,000. Under the terms of his will,
Timothy’s estate was left to his children. The estate included a main residence valued at £450,000.
Timothy’s wife died on 5 May 2009. She used all of her nil rate band.
Timothy’s IHT liability is:
£
Chargeable estate
850,000
IHT liability
-675,000 (325,000 + 350,000) at nil%
- 175,000 at 40%
0
70,000
70,000
o
Timothy’s personal representatives can claim his deceased wife’s unused residence nil rate band of
£175,000.
o The amount of residence nil rate band is therefore £350,000 (175,000 + 175,000).
The value of the main residence is after deducting any repayment mortgage or interest-only mortgage
secured on that property.
If a main residence is valued at less than the available residence nil rate band, then the residence nil rate
band is reduced to the value of the residence.
Example 4:
Una died on 10 July 2020 leaving an estate valued at £625,000. Under the terms of her will, Una’s estate
was left to her children. The estate included a main residence valued at £225,000 on which there was an
outstanding interest-only mortgage of £130,000.
Una’s IHT liability is:
Chargeable estate
£
625,000
IHT liability
- 420,000 (325,000 + 95,000) at nil%
- 205,000 at 40%
0
82,000
82,000
The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence nil rate band is
restricted to this amount.
The residence nil rate band does not apply to lifetime transfers becoming chargeable as a result of the
donor’s death within seven years.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Example 5:
Maud died on 22 April 2020 leaving an estate valued at £775,000. Under the terms of her will, Maud’s
estate was left to her grandchildren. The estate included a main residence valued at £410,000.
On 30 April 2018, Maud had made a potentially exempt transfer of £435,000 (after the deduction of
annual exemptions) to her son.
IHT liabilities are:
Potentially exempt transfer
Potentially exempt transfer
IHT liability
- 325,000 at nil%
- 75,000 at 40%
£
400,000
0
30,000
30,000
Death estate
Chargeable estate
£
775,000
IHT liability
- 175,000 at nil%
- 600,000 at 40%
0
240,000
240,000
Given that the residence nil rate band is only available where inheritance is by direct descendants,
rearranging the terms of a will can save IHT.
Example 6:
Victor has an estate valued at £1,400,000, including a main residence valued at £550,000. He has not
made any lifetime gifts. Victor’s wife died on 17 May 2010 and all of her estate was left to Victor. Under
the terms of his will, Victor has left his main residence to his brother, with the residue of the estate left
to his children.
Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000). The
residence nil rate band is not available because the main residence will not be inherited by a direct
descendant.
Victor could amend the terms of his will so that his brother inherited £550,000 of other assets, with the
main residence being included within the residue. A residence nil rate band of £350,000 (175,000 +
175,000) would then be available, saving IHT of £140,000 (350,000 at 40%).
There is no reason why Victor’s brother could not purchase the main residence from the children
following Victor’s death.
A question will make it clear if the residence nil rate band is available. Therefore, you should assume
that the residence nil rate band is not available if there is no mention of a main residence.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
The inheritance tax information which will be given in the tax rates and allowances section of the
examination for exams in the period 1 June 2023 to 31 March 2024 is:
Inheritance tax: tax rates:
Nil rate band
Residence nil rate band
Rates of tax on excess
- Lifetime rate
- Death rate
£325,000
£175,000
20%
40%
Inheritance tax: taper relief:
Years before death
Percentage reduction
Over 3 but less than 4 years
20%
Over 4 but less than 5 years
40%
Over 5 but less than 6 years
60%
Over 6 but less than 7 years
80%
Where earlier nil rate bands may be relevant, they will be given to you within the question.
BLU (ADAPTED):
(a) Red Perry died on 6 November 2020, at which point his estate was valued at £800,000. The estate included a
main residence valued at £390,000.
Red’s wife had died on 11 May 2015, leaving her entire estate to Red. She made no gifts during her lifetime.
Red left his estate to his brother, Sonny.
Red’s only lifetime gift was a gift to his son of £211,000 (after exemptions) in January 2018.
Required:
(1) Calculate the inheritance tax payable in respect of Red’s estate.
(2) Explain how your answer would be different if, instead of leaving the estate to his brother, Red left his estate
to his son.
You are not required to do calculations for requirement (a)(2). (4 marks)
(b) On 15 January 2021 Blu Reddy made a gift of 200,000 £1 ordinary shares in Purple Ltd, an unquoted
investment company, to a trust. Blu paid the inheritance tax arising from this gift.
Before the transfer Blu owned 300,000 shares out of Purple Ltd’s issued share capital of 500,000 £1 ordinary
shares.
On 15 January 2021 Purple Ltd’s shares were worth £2 each for a holding of 20%, £3 each for a holding of 40%,
and £4 each for a holding of 60%.
Blu has not made any previous gifts.
Required:
Calculate the inheritance tax that will be payable as a result of Blu Reddy’s gift to the trust, and the additional
inheritance tax that would be payable if Blu were to die on 31 May 2025. You should ignore annual exemptions,
and should assume that the nil rate band for the tax year 2020/21 remains unchanged. (6 marks)
Total: 10 marks
Mustafa Ahmed Mirchawala:
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TX: Taxation:
JACK AND TOM (ADAPTED):
(a) On 3 October 2020 Jack Monkton sold his entire holding of shares in Corinthian Ltd, an unquoted trading
company, for £151,107. He had subscribed for the shares and paid in full in cash on 23 May 2017 for £13,119. Jack
has never worked for Corinthian Ltd and has made no other gains during the tax year 2020/21 but has a capital
loss of £1,572 from a less successful investment in Burn Ltd.
Required:
Explain why the disposal of the shares in Corinthian Ltd qualifies for investors' relief and calculate Jack's capital
gains tax liability for the tax year 2020/21.
(5 marks)
(b) Tom Tirith made a cash gift of £200,000 to his daughter on 20 December 2019. He is now going to make a cash
gift of £450,000 to a trust on 20 February 2021. The nil rate band for the tax year 2019/20 is £325,000.
Required:
(1) Calculate the lifetime inheritance tax that will be payable in respect of Tom Tirith's gift of £450,000 to a trust if:
(1) the trust pays the tax arising from the gift, or
(2) Tom pays the tax arising from the gift, and in the case of (2) only state the value of the gross chargeable
transfer. The total marks will be split equally between each part.
(3 marks)
(2) Explain how your answer would be different if, instead of making a cash gift to his daughter on 20 December
2019, Tom made the same gift to a trust. . You are not required to do calculations for requirement (b)(2).
(2 marks)
(Total: 10 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
PERE JONES (ADAPTED):
On 23 August 2015, Pere Jones made a gift of a house valued at £416,000 to his nephew, Phil Jones. This was a
wedding gift when Phil got married.
Pere Jones
Pere died on 20 March 2021 aged 76, at which time his estate was valued at £880,000. Under the terms of his will,
Pere divided his estate equally between his wife and his nephew, Phil. Pere had not made any gifts during his
lifetime except for the gift of the house to Phil.
The nil rate band for the tax year 2015/16 is £325,000.
Phil Jones
The house which Phil received as a wedding gift from Pere, his uncle, was always let out unfurnished until it was
sold on 5 April 2021.
The following income and outgoings relate to the property for the tax year 2020/21:
£
Sale proceeds
504,000
Cost of new boundary wall around the property (there was previously no boundary wall) (9,000)
Cost of replacing the property’s chimney
(2,800)
Legal fees paid in connection with the disposal
(8,100)
Property insurance
(2,300)
Phil has earnings from employment of £80,000 in the tax year 2020/21.
Required:
(a) Calculate the inheritance tax that will be payable as a result of Pere Jones’ death, (6 marks)
(c) Calculate Phil Jones’ capital gains tax liability for the tax year 2020/21.
(4 marks)
(Total: 10 marks)
KENDRA OLDER (ADAPTED):
You should assume that today’s date is 1 January 2020.
Kendra Older, aged 93, is unfortunately in poor health with just a few months left to live.
She has made the following gifts during her lifetime:
(1) On 20 June 2012, Kendra made a gift to a trust with a gross chargeable transfer value of £140,000. No
inheritance tax arose in respect of this gift.
(2) On 5 October 2018, Kendra made a cash gift of £253,000 to her children.
Kendra owns the following assets:
(1) A residential property valued at £970,000. The property is an investment property that has always been
rented out and never occupied by Kendra. If the property were disposed of during the tax year 2019/20 the
disposal would result in a chargeable gain of £174,000.
(2) A life assurance policy on her own life. The policy has an open market value of £210,000, and proceeds of
£225,000 will be received following Kendra’s death.
None of the above valuations are expected to change in the near future.
Under the terms of her will, Kendra has left her entire estate to her children.
The nil rate band of Kendra’s husband was fully utilised when he died ten years ago.
The nil rate band for the tax years 2012/13 and 2018/19 is £325,000.
For the tax year 2019/20, Kendra will pay income tax at the higher rate.
Required:
(a) Calculate the inheritance tax which would be payable if Kendra Older were to die on 31 March 2020.
(7 marks)
(b) Advise Kendra Older why it would not be beneficial to make an immediate lifetime gift of the property
valued at £970,000 to her children.
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Notes:
(1) Your answer should take account of both the capital gains tax and the inheritance tax implications of
making the gift.
(2) For this part of the question you should ignore the capital gains tax annual exempt amount and
inheritance tax annual exemptions.
(3 marks)
Total: 10 marks
JAMES (ADAPTED)
James died on 22 January 2020. He had made the following gifts during his lifetime:
(1) On 9 October 2012, a cash gift of £35,000 to a trust. No lifetime inheritance tax was payable in respect of this
gift.
(2) On 14 May 2018, a cash gift of £420,000 to his daughter.
(3) On 2 August 2018, a gift of a property valued at £260,000 to a trust. No lifetime inheritance tax was payable in
respect of this gift because it was covered by the nil rate band. By the time of James’ death on 22 January 2020,
the property had increased in value to £310,000.
On 22 January 2020, James’ estate was valued at £870,000. Under the terms of his will, James left his entire estate
to his brother as his children already have considerable assets. James believes his nephew will benefit from his
estate in the future.
The nil rate band of James’ wife was fully utilised when she died ten years ago.
The nil rate band for the tax years 2012/13 and 2018/19 is £325,000.
Required:
(a) Calculate the inheritance tax which will be payable as a result of James’ death, and state who will be
responsible for paying the tax.
(6 marks)
(b) Explain why it might have been beneficial for inheritance tax purposes if James had left a portion of his estate
to his nephew rather than to his brother.
(2 marks)
(c) Explain why it might be advantageous for inheritance tax purposes for a person to make lifetime gifts even
when such gifts are made within seven years of death.
Notes:
(1) Your answer should include a calculation of James’ inheritance tax saving from making the gift of property to
the trust on 2 August 2018 rather than retaining the property until his death.
(2) You are not expected to consider lifetime exemptions in this part of the question.
(2 marks)
(Total: 10 marks)
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Value Added Tax(VAT):
Standard rated supplies:
We can claim input VAT on expenses incurred to make standard rated supplies and when we sell
standard rated goods we charge proper 20% output VAT from customers.
Zero rated supplies:
We can claim input vat on expenses incurred to make zero rated goods but no output is charged on the
sale of zero rated goods.
Exempt supplies:
We cannot claim input VAT on expenses incurred to make exempt goods and when we sell exempt we
don’t charge any % of output VAT.
Registration:
o Only registered suppliers can charge output VAT on sales.
o Only registered suppliers can claim input VAT.
Compulsory Registration:
History Test:
If in any month trader gets to know that is last 12 months taxable supplies excluding VAT exceeded
£85000. Then trader has 30 days -time from the end of this month to inform HMRC. And HMRC will
make him register from the very next day of these 30 days.
Future Test:
If in any month traders taxable supplies is expected to cross £85000 just for this one month only then
trader must inform HMRC before the end of this month and HMRC will register him from the beginning
of this same month.
Voluntary Registration:
o
o
o
o
If you are dealing in zero rated goods then you must register
Impression in market.
Administrative burden of registration
Status of customers
if your customers are unregistered then registration not beneficial for you.
Surcharge Period:
1st surcharge
2nd surcharge
3rd surcharge
4th surcharge
o
o
2%
5%
10%
15%
1st and 2nd surcharge will not be payable if less than £400 (individually)
For 3rd and 4th surcharge and a minimum amount of £30 is payable in any case.
If in case in any period there is a net vat receivable and you received Vat late in that period. Then there
is no monetary penalty. But for the same period you submitted late vat return than your surcharge
period will be extended.
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Question#1:
Victor Style:
Victor Style has been a self-employed hairdresser since 1 January 2014.
His sales from the date of commencement of the business to 31 December 2020 were £5800 per month.
On 1 January 2021 Victor increased the prices that he charged customers, and from that date his sales
have been £9500 per month. Victor’s sales are all standard rated.
Concerned about the registration thresholds, victor voluntarily registered for VAT on 1 January 2021.
As all of his customers are members of the general public it was not possible to increase prices any
further as a result of registering for VAT.
Victor’s standard rated expenses are £400 per month. Where applicable, the above figures are inclusive
of VAT. Required:
Required:
o Calculate the told amount of VAT payable by Victor during the year ended 31 December 2021.
o Advice victor why it would have been beneficial to have used the VAT flat rate scheme from 1
January 2021.
Your answer should include a calculation of the amount of VAT that Victor would have saved for the
year ended 31 December 2021 by joining the scheme.
The flat rate scheme percentage for hairdressing for Victor in the year ended is 9%.
o Calculate the effect on Victor’s net profit for the year ended 31 December 2021 as a consequence of
the price increase on 1 January 2021 and subsequent VAT registration.
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Question#2:
Timed question with online tutor be brief
Candy Apple:
Candy apple began a trading business on 1 April 2019. Her sales since the commencement of trading
have been as follows:
April to July 2019
£10500 per month
August to November 2019
£14000 per month
December 2019 to March 2020 £21500 per month
These figures are stated exclusive of value added tax (VAT). Candy’s sales are all standard rated and
arise evenly over the month.
As her accountant you have advised Candy in writing that she should be registered for VAT but she has
refused to register because she thinks her net profit is insufficient to cover the additional cost which
would be incurred.
Sugar Plum:
Sugar plum began trading on 1 April 2019 and registered for VAT on 1 May 2019 to avoid late
registration penalties.
The following information is available in respect of Sugar Plum’s VAT for the quarter ended 31 July 2019:
o Invoices were issued for standard rated and zero rated sales of £53700 and £23100 respectively.
These figures are exclusive of VAT.
o Sugar uses a room at her home as her office. The house has seven main rooms and the electricity bill
for the whole house for the quarter is estimated as £450 inclusive of VAT. During the quarter, Sugar
also purchased several items of furniture for her office of a total of £1500 exclusive of VAT. A 5%
discount was applied to this amount as Sugar had purchased two items or more.
o Prior to starting business, sugar engaged a consultancy firm to undertake some market research.
Sugar paid the consultancy firm £250 on 1 August 2018 and £375 on 1 January 2019. Sugar also
purchased £2500 worth of inventory on 1 January 2019, of which £1000 was unsold by 1 May 2019.
These figures are exclusive of VAT.
1.
A.
B.
C.
D.
2.
1.
2.
3.
A.
B.
C.
D.
From what date was Candy Apple compulsorily required to charge VAT on her taxable supplies?
1 December 2019
1 November 2019
31 October 2019
1 January 2020
Which of the following is/are a consequence of late VAT registration?
A default surcharge penalty will be charged for late registration
Candy must account to HM revenue and customs for output tax at 20/120 of the value of sales from
the date that she should have been registered from.
Candy must issue VAT invoices charging her customers the VAT that she should have charged on
sales from the date she should have been registered by
1 only
1 and 3
2 only
2 and 3
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3. What is the amount of output VAT payable by sugar plum in respect of her sales for the quarter
ended 31 July 2019?
A. £15360
B. £10740
C. £4620
D. £8950
4. What is the amount of input VAT claimable by Sugar in respect of the electricity and furniture
costs for the quarter ended 31 July 2019?
A. £296
B. £360
C. £251
D. £311
5. What is the amount of input VAT claimable by sugar in respect of the consultancy fees and
inventory costs incurred prior to the commencement of trade?
A. £625
B. £200
C. £325
D. £275
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Question#3:
Lithograph Ltd:
Lithograph Ltd runs a printing business, and is registered for VAT. Because its annual taxable turnover is
only £250000, the company uses the annual accounting scheme so that it only has to prepare on VAT
return each year. The annual VAT period is the year ended 31 March. Unless stated otherwise all of the
figures below are exclusive of VAT.
Year ended 31 March 2019:
The results for the year ended 31 March 2019 included the following.
o Standards rated expenses of £28000. This includes £3600 for entertaining overseas customers.
o On 1 May 2018 Lithograph Ltd purchased a motor car costing £18400 for the use of its managing
director. The manager director is provided with free petrol for private mileage, and the cost of this
petrol is included in the standard rated expenses in note 1. The car has CO2 emissions of 200 g/km
and the relevant annual scale charge is £1608. Both figures are inclusive of VAT.
o During the year ended 31 March 2019 Lithograph Ltd purchased machinery for £24000, and sold
office equipment for £8000. Input VAT had been claimed when the office equipment was originally
purchased.
Year ended 31 March 2020:
In the year ended 31 March 2020 Lithograph Ltd wrote off two debts which were due from customers.
The first debt of £4800 was in respect of an invoice that was due for payment on 31 August 2019. The
second debt of £6400 was in respect of an invoice that was due for payment on 12 October 2019. Both
these figures are VAT inclusive.
1. How many payments on account (POA) of VAT would Lithograph Ltd have been required to pay in
respect of the year ended 31 March 2019 and in which months would they have been payable?
Number of POAs
Months payable
A.
9
April 2017 to December 2018
B.
4
April, July and October 2018 and January 2019
C.
9
July 2018 to March 2019
D.
4
July, August and November 2018, February 2019
2. By reference to which VAT liability were the payments on account for the year ended 31 March
2019 calculated and by when must the annual VAT return for the year ended 31 March 2019 be
submitted to HM revenue and customs?
Vat liability
Due date for return
A. Estimated for year 31 March 2019
7 May2019
B. Actual for year ended 31 March 2018
30 May 2019
C. Estimated for year ended 31 March 2019
30 May 2019
D. Actual for year ended 31 March 2018
7 May 2019
3. How much output tax is payable by Lithograph ltd in respect of the item 1 – 3 included in the
results for the year ended 31 March 2019?
A. £1868
B. £322
C. £1922
D. £268
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4. How much input tax is reclaimable by Lithograph Ltd in respect of the items 1 – 3 included in the
results for the year ended 31 March 2019?
A. £10400
B. £13360
C. £9680
D. £5600
5. How much VAT reclaimable by Lithograph ltd in the VAT year to 31 March 2020 in respect of the
two impaired debts written off?
A. £1867
B. £2240
C. £960
D. £800
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Question#4:
Anne Attire:
Anne Attire runs a clothing manufacturing business. She is registered for VAT and is in the process of
completing her VAT return for the quarter ended 31 May 2020.
Recently, she has had problems with customers taking a long time to pay. In order to improve cash flow
she decided from 1 March 2020 to offer a discount of 5% for payment within 21 days of the invoice date.
The following information is available in respect of the quarter ended 31 May 2020 (all figures are
exclusive of VAT):
o
Sales invoices totaling £100000 were issued in respect of credit sales. These sales were all standard
rated. During the quarter sales invoices totaling £40000 were paid within the 21 day period. The
invoice figures of £100000 and £40000 are stated before any deduction for the 5% discount.
o
Included in purchase and expense invoices were the following which were received from VAT
registered suppliers:
£
11200
6000
2000
19200
Anne pays all of her purchase and expense invoices two months after receiving the invoice.
Legal fees re dispute over land boundary
Purchase of delivery van – partly used privately by employee
Car leasing- car partly used privately by employee
o
On 31 May 2020 Anne wrote off two impairment losses (bad debts) that were in respect of standard
rated credit sales. The first impairment loss was for £300, and was in respect of a sales invoice due
for payment on 15 April 2020. The second impairment loss was for £800, and was in respect of a
sales invoice due for payment on 10 November 2019. Prompt payment discounts had not been
offered in respect of these debts.
Anne does not use the cash accounting scheme.
Anne will soon be 60 years old and is therefore considering retirement. On the cassation of trading Anne
can either sell the assets of her business on a piecemeal basis to individual VAT registered purchasers, or
she can sell the entire business as a going concern to a single VAT registered purchaser. Anne expects
that at the date of cessation the value of the assets on hand will be £12500 for non-current assets
(which includes £6000 for a car which has been used partly for private purposes) and £6100 for
inventory. All figures are exclusive of VAT.
1.
A.
B.
C.
D.
2.
A.
B.
C.
D.
What output VAT figure will Anne include on the VAT return for the quarter ended 31 May 2020?
£20000
£19000
£7600
£19600
How much input tax, if any, is recoverable in respect of the purchase invoices set out in note 2?
£1200
£1400
£3640
£2240
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3. How much VAT can Anne reclaim in respect of impaired debts in the return for the quarter to
May 2020?
A. £160
B. £133
C. £183
D. £220
4. Assuming that Anne ceases trading and then sells the assets of her business on a piecemeal basis
to individual VAT registered purchasers, how much VAT must be accounted for to HM revenue
and customs by Anne on the cessation of trade?
A. £2520
B. £1220
C. £3720
D. £2100
5. Which of the following must apply for the sale of the entire business to be treated as a transfer of
a going concern for VAT purposes, such that the transfer is not a taxable supply?
1. All of the assets and liabilities of the business must be transferred
2. The new owner must use the assets transferred in the same type of business as the seller.
3. The new owner must be an established VAT registered trader before the transfer
4. There must be no significant break in the normal trading pattern of the business.
A. 1 and 2
B. 2 and 4
C. 1 and 3
D. 3 and 4
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SILVERSTONE LTD (ADAPTED)
Silverstone Ltd is registered for value added tax (VAT), but currently does not use any of the special VAT
schemes. The company has annual standard rated sales of £1,200,000 and annual standard rated expenses of
£550,000. Both these figures are exclusive of VAT and are likely to remain the same for the foreseeable
future.
Silverstone Ltd is up to date with all of its tax returns, including those for corporation tax, PAYE and VAT. It is
also up to date with its corporation tax, PAYE and VAT payments. However, the company often incurs
considerable overtime costs due to its employees working late in order to meet tax return filing deadlines.
Silverstone Ltd pays its expenses on a cash basis, but allows customers two months credit when paying for
sales. The company does not have any impairment losses.
Silverstone Ltd is planning to purchase some new machinery at a cost of £22,000 (exclusive of VAT). The
machinery can either be purchased from an overseas supplier situated outside the European Union, or from a
VAT registered supplier situated in the European Union. Silverstone Ltd is not a regular importer and so is
unsure of the VAT treatment for this purchase.
Required: (a) Explain why Silverstone Ltd is entitled to use both the VAT cash accounting scheme and the VAT
annual accounting scheme, and why it will probably be beneficial for the company to use both schemes. (6
marks)
(b) Explain when and how Silverstone Ltd will have to account for VAT in respect of the new machinery if it is
purchased from:
(1) a supplier situated outside the European Union, or
(2) a VAT registered supplier situated elsewhere within the European Union. (4 marks) (Total: 10 marks)
The Tax Point:
The tax point is deemed date of supply. The basic tax is point is the date on which goods are removed or
made available to the customer, or the date on which services are completed, if VAT invoice is issued or
payment is received before the basic Tax point, the earlier of these dates becomes the tax point if the
earlier date rule does not apply, and the VAT invoice is issued within 14 days of the basic tax point the
invoice date becomes the actual tax point.
Miscellaneous Points:
Goods supplied on sale or return are treated as supplied on the earlier of adoption by the customer or
12 months after dispatch.
Input Tax Recovery:
For input tax to be deductible, the payer must be a taxable person, with the supply being to him in the
course of his business. In addition a VAT invoice must be held.
Input tax recovery and be denied to any business that does not hold a valid VAT invoice and cannot
provide alternative evidence to prove the supply took place.
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Non-Deductible Input Tax:
The following input tax is non-deductible even for a taxable person with taxable outputs.
o VAT on motor cars not used wholly for business purposes, VAT on cars is never reclaimable unless
the car is acquired new for resale or is acquired for use in on leasing to a taxi business, a self-drive
car hire business or a driving school (see further below).
o VAT on business entertaining where the cost of entertaining is not a tax deductible trading expense.
If the items bought are used partly for such entertaining and partly for other purposes, the
proportion of the VAT relating to entertainment is non-deductible.
o VAT on expense incurred on domestic accommodation for directors.
o VAT on non-business items passed through the business accounts. However, when goods are bought
partly for business accounts. However, when goods are bought partly for business use, the
purchaser may:
1. Deduct all the input tax, and accounts for output tax in respect of the private use, or
2. Deduct only the business proportion of the input tax.
Relief for Impairment Losses (Bad Debts):
Relief for VAT on impairment losses (bad debts) is available if the debt is over six months old (measured
from when the payment is due) and has been written off in the trader’s accounts.
When a supplier of goods or services has accounted for VAT on the supply and the customer; does not
pay, the supplier may claim a refund of VAT on the amount unpaid. Relief is available for VAT on
impairment losses (bad debts) if the debt is over six months old (measured from when payment is due)
and has been written off in the creditor’s accounts.
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VAT Invoices:
A taxable person making taxable supply to another registered person must supply a VAT invoice within
30 days.
A taxable person making a taxable supply to another person registered for VAT must supply a VAT.
Invoice with 30 days of the time of supply and must keep a copy.
The invoice must show:
o The supplier’s name, address and registration number
o The date of issue, the tax point and an invoice number
o The name and address of the customer
o A description of the goods or service supplied, giving for each description the quantity the unit price,
the rate of VAT and the VAT exclusive amount.
o The rate of any cash discount
o The total invoice price excluding VAT (with separate totals for zero rated and exempts supplies)
o Each VAT rate applicable and the total amount of VAT.
Records:
Every VAT registered trade must keep a record for six years.
The cash accounting scheme:
The cash accounting scheme enables businesses of account for VAT on the basis of cash paid and
received. That is, the date of payment or receipts determines impairment loss relief (bad debt relief)
because VA is not due on a supply until payment has been received.
The scheme can only be used by a trader whose annual taxable turnover (exclusive of VAT) not exceeds
£1350000.
If the value of taxable supplies exceeds £1600000 in the 12 months to the end of a VAT period a trader
must leave the cash accounting scheme within 6 months?
The Annual Accounting Scheme:
The annual accounting scheme is only available to traders who regularly pay VAT to HMRC, not to
traders who normally receive repayments. It is available for traders whose taxable turnover (exclusive of
VAT) for the 12 months starting on their application to join the scheme is not expected to exceed
£1350000. If we enter in scheme and before ending 12 months if sales touch £1600000 then he will be
out of scheme immediately.
Under the annual accounting scheme traders file annual VAT returns but throughout the year they must
make payments on account of their VAT liability by direct debit. The year for which each return is made
may end at the end of any calendar month. Under HMRC agree otherwise the trader must pay 90% of
the previous year’s net VAT liability during the year by means of nine monthly payments connecting at
the end of the fourth month of the year. The balance of the year’s VAT is then paid with the annual
return.
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An annual VAT return must be submitted to HMRC along with any balancing payment due within due
two months of end of the year.
Advantages of annual accounting:
o
o
o
Only one VAT return each year so fewer occasions to trigger a default surcharge
Ability to manage cash flows more accurately
Avoids need for quarterly calculations for input tax recovery
Disadvantages of annual accounting:
o Need to monitor future taxable supplies to ensure turnover limit not exceed
o Payment based on previous year’s turnover may not reflect current year turnover which may be a
problem if the scale of activities has reduced
Flat Rate Scheme:
The optional flat rate scheme enables business to calculate VAT due to simply by applying a flat rate
percentage to their turnover.
Under the scheme business calculate VAT by applying a fixed percentage to their tax inclusive turnover
i.e. the total turnover including all reduced rate zero rather and exempt income.
Business using the scheme must issue VAT invoices to their VAT registered customers but they do not
have to record all the details of the invoices issued or purchase invoices received to calculate VAT due
invoices issued will show VAT at the normal rate rather than flat rate.
A business may join flat rate scheme if its expected turnover for the next 12 months is not expected to
exceed £150000.
The business must leave the scheme at once if its turnover for previous year exceed £
.
Flat Rate Scheme:
Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate
percentage to total turnover. A flat rate of 16.5% has been introduced for those businesses which have
no, or only a limited amount of, purchases of goods.
You will not be expected to establish whether the flat rate of 16.5% is applicable, but a question could
be set where this rate applies.
There is very little advantage to using the flat rate scheme if the 16.5% rate applies because it is
equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of 20%. If a business
has much input VAT, then the flat rate scheme will not be beneficial if the 16.5% rate applies.
Example:
Omah registered for VAT on 1 January 2018 and uses the flat rate scheme to calculate his VAT liability.
For the year ended 5 April 2021, he has annual standard rated sales of £100,000, and these are all made
to the general public. Omah has annual standard rated expenses of £ 16,000. Both figures are exclusive
of VAT. The relevant flat rate scheme percentage for Omah’s trade is 16.5%.
o If Omah continues to use the flat rate scheme, then he will pay VAT of £19,800 ((100,000 + 20,000
(output VAT of 100,000 x 20%)) x 16.5%).
o Using the normal basis of calculating the VAT liability, Omaha would have to pay annual VAT of
£16,800 ((100,000 – 16,000) x 20%), which is an annual saving of £3,000 (19,800 – 16,800).
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Warner has stated that there will be a minimum of 10 marks on VAT in the exam.
These marks will normally be in question one or two, and past exam questions where this has
been some are included in the kit under the heading of the primary tax being examined.
Warner, the examiner has said that there might be a separate question on VAT. These stand
alone on VAT are all 15 marks, so slightly longer than questions anticipated in the exam now,
they are included to give extra practice on VAT topics.
Question#5:
Vector Ltd:
Vector Ltd is registered for VAT, and is in the process of completing its VAT return for the quarter ended
31 March 2021. The following information is available.
o Sales invoices totaling £128000 were issued in respect of standard rated sales. Vector Ltd offer its
customers a 2.5% discount for prompt payment.
o On 15 March 2021 Vector Ltd received an advance deposit of £4500 in respect of a contract that is
due to be completed during April 2021. The total value of the contract is £10000. Both figures are
inclusive of VAT.
o Standard rated expenses amounted to £74800. This includes £4200 for entertaining UK customers.
o On 31 March 2021 Vector Ltd wrote off £12000 due from a customer as a bad debt. The debt was in
respect of three invoices, each of £4000, that were due for payment on 15 August, 15 September
and 15 October 2020 respectively.
o On 1 January 2021 the company purchased a motor car costing £9800 for the use of its sales
manager. The sales manager is provided with free petrol for private mileage. The car has CO2
emissions of 205 g/km and the relevant quarterly scale charge is £400. Both figures are inclusive of
VAT.
Unless stated otherwise all of the above figures are exclusive of VAT.
For the quarter ended 31 December 2020 Vector Ltd was one month late in submitting its VAT return
and in paying the related VAT liability.
Required:
Calculate the amount of VAT payable by Vector Ltd for the quarter ended 31 March 2021
Explain the implications if for the quarter ended 31 March 2021 Vector Ltd is one month late in
submitting its VAT return and in paying the related VAT liability.
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Question#6:
Rocking Horse Ltd (ADAPTED):
Rocking-Horse Ltd commenced trading Asia manufacturer of children’s toys on 1 August 2012. Its
outputs and inputs for each of the month from August to November 2012 are as follows:
August
September
October
November
£
£
£
£
Outputs
Sale
4,500
5,800
24,800
91,000
Inputs
Goods purchased
3,600
13,200
28,400
32,400
Services incurred
2,400
2,800
3,400
4,600
Fixed assets
62,000
The above figures are all exclusive of VAT.
Rocking-Horse Ltd’s sales are all standard rated, and are made to VAT registered businesses. The inputs
are all standard rated. The company has not disposed of any fixed assets.
On 1 November 2012 Rocking-Horse Ltd realized that its sales for November 2012 were going to be at
least 70,000 and therefore immediately registered for VAT. On that date the company had a stock of
goods that had cost £ 13,600 (exclusive of VAT)
Required:
1. Explain why Rocking-Horse Ltd was required to compulsorily register for VAT from 1 November
2012, and state what action the company then had to take.
(3 marks)
2. Explain why Rocking-Horse Ltd was able to recover input VAT totaling 14,735 in respect of inputs
incurred prior to registering for VAT on 1 November 2012.
(5 marks)
3. Explain why it would have been beneficial for Rocking-Horse Ltd to have voluntarily registered for
VAT from 1 August 2012.
(5 marks)
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Question#7:
Sandy Brick:
Sandy Brick has been self-employed builder since 2006. He registered for value added tax (VAT) on 1January
2021, and is in the process of completing his VAT return for the quarter ended 31 March 2021.The following
information is relevant to the completion of this VAT return:
1. Sales invoices totaling £44,000 (excluding VAT) were issued to VAT registered customers in respectof
standard rated sales. Sandy offers his VAT registered customers a 5% discount for prompt payment, 100%
customer’s availed cash discount.
2. Sales invoices totaling £16,920 were issued to customers that were not registered for VAT. Of thisfigure,
£5170 was in respect of zero-rated sales with the balance being in respect of standard ratedsales.
Standard rated sales are inclusive of VAT.
3. On 10 January 2021 Sandy received a payment on account of £5,000 in respect of a contract that was
completed on 28 April 2021. The total value of the contract is £10,000. Both of these figuresareinclusive
of VAT at the standard rate.
4. Standard rated materials amounted to £11,200 of which £800 were used in constructing Sandy’sprivate
residence.
5. Since 1 December 2019 Sandy has paid £120 per month for the lease of office equipment. Thisexpense
is standard rated.
6. During the quarter ended as March 2021 400 was paid for mobile of which 30% relates to privatecalls.
This expense is standard rated.
7. On 20 February 2021 £920 was spent on repairs to a motor car. The motor car is used by Sandy inhis
business, although 20% of the mileage is for private journeys. This expense is standard rated.
8. On 15 March 2021 equipment was purchased for £6,000. The purchase was partly financed by abank
loan of £5,000. This purchase is standard rated
Unless stated otherwise all of the above figures are exclusive of VAT.
DENZIL DYER
Denzil Dyer has been a self-employed printer since 2008. He has recently registered for value added tax (VAT).
Denzil’s sales consist of printed leaflets, some of which are standard rated and some of which are zero rated. He sells
to both VAT registered customers and to non-VAT registered customers.
Customers making an order of more than £500 are given a discount of 5% from the normal selling price. Denzil also
offers a discount of 2.5% of the amount payable to those customers that pay within one month of the date of the
sales invoice.
All of Denzil’s printing supplies are purchased from a VAT registered supplier. He pays by credit card and receives a
VAT invoice. However, Denzil also purchases various office supplies by cash without receiving any invoices. Denzil
does not use the annual accounting scheme, the cash accounting scheme or the flat rate scheme.
Required:
(a) Explain why it is important for Denzil to correctly identify whether a sale is standard rated or whether it is zero
rated.
(2 marks)
(b) Explain the VAT implications of the two types of discount that Denzil gives or offers to his customers. (2 marks)
(c) Advise Denzil of the conditions that will have to be met in order for him to recover input VAT. You are not
expected to list those goods and services for which input VAT is nonrecoverable.
(3 marks)
(d) State the circumstances in which Denzil is and is not required to issue a VAT invoice, and the period during which
such an invoice should be issued.
(3 marks)
(Total: 10 marks)
Mustafa Ahmed Mirchawala:
Page 135
TX: Taxation:
Supply of services:
1. The basic tax point for services is the date that they are completed.
2. If an invoice is issued or payment received before the basic tax point, then this becomes the actual
tax point.
3. If an invoice is issued within 14 days of the basic tax point. The invoice date will usually replace the
basic tax point date and becomes the actual tax point.
VAT invoices:
1. A VAT invoice must be issued when a standard rated supply is made to a VAT registered person.
2. A VAT invoice should be issued within 30 days of the date that the taxable supply of services is
treated as being made.
VAT Return-Quarter ended 31 March 2021:
Output VAT:
Sales to VAT registered customers (Note 1)
(£44,000 x 95% x 20%)
Sales to non-VAT registered customers
(£16,920 - £5,170 = £11,750 x20/120)
Advance payment (£5,000 x 20/120)
Input VAT:
Materials (Note 2) (£11,200 - £800 = £10,400 x 20%)
Office equipment (Note 5) (£120 x 9 = £1,080 x 20%)
Telephone (Note 4) (£400 x 70% x 20%)
Motor repairs (Note 5) (£920 x 20%)
Equipment (£6,000 x 20%)
£
£
8360
£
1,958
833
11151
£
2080
216
56
184
1,200
(3736)
7415
Note:
The calculation of output VAT on sales must take into account the discount for prompt payment even if
customers do not take it VAT is therefore calculated on 95% (100%-5%) of the sales value.
Input VAT cannot be claimed in respect of the materials used in constructing Sandy’s private residence
since the goods are not used for business purposes.
Input VAT can be recovered on services supplied in the six months prior to registration, so the office
equipment claim can be back dated to July 2021.
The question says assume that the rate of 20% applies throughout.
Mustafa Ahmed Mirchawala:
Page 136
TX: Taxation:
Residency Issues:
A statutory test of residence has been introduced to determine a person’s residence status each tax
year.
The following people will automatically be treated as not resident in the UK.
o A person who is in the UK for less than 16 days during a tax year.
o A person who is in the UK for less than 46 days during a tax year, and who has not been resident
during the three previous tax years.
o A person who works full-time overseas, subject to them not being in the UK for more than 90 days
during a tax year.
Subject to not meeting any of the automatic non-resident tests, the following people will automatically
be treated as resident in the UK:
o
o
o
A person who is in the UK for 183 days or more during a tax year.
A person whose only home is in the UK
A person who carries out full time work in the UK.
Where a person’s resident status cannot be determined according to any of the automatic tests, then
his/her status will be based on how many ties they have with the UK and how many days they stay in
the UK during a tax year. There are five UK ties as follow:
o
o
o
o
o
Having close family (a spouse/civil partner or minor child) in the UK
Having a house in the UK which is made use of during the tax year.
Doing substantive work in the UK.
Being in the UK for more than 90 days during either of the two previous tax years.
Spending more time in the UK than in any other country in the tax year.
How the UK ties test is applied depends on whether a person has been resident in the UK for any of the
previous three tax years. A person who has been resident during any of the previous three tax years will
typically be someone that is leaving the UK, and for them all five UK ties are relevant. A person who has
not been resident during any of the previous three tax years will typically someone that is arriving in the
UK, and for them the final country tie is ignored.
A person’s residence status is found by comparing the number of days they are in the UK during a tax
year against how many UK ties they have:
Days in UK
Less than 16
16 to 45
46 to 90
91 to 120
121 to 182
183 or more
Mustafa Ahmed Mirchawala:
Previously resident
Automatically not resident
Resident if 4 UK ties (or more)
Resident if 3 UK ties (or more)
Resident if 2 UK ties (or more)
Resident if 1 UK tie (or more)
Automatically resident
Not previously resident
Automatically not resident
Automatically not resident
Resident if 4 UK ties
Resident if 3 UK ties (or more)
Resident if 2 UK ties (or more)
Automatically resident
Page 137
TX: Taxation:
Example 1:
For 2013-14 Nigel has spent too long in the UK to be automatically treated as non-resident, and will not
automatically be treated as resident because he does not meet the only home test
Nigel has not been resident in the UK during the three previous tax years, and was in the UK between
121 and 182 days. He is therefore not resident in the UK for 2013-14 as the only UK tie is the house in
the UK which is made use of.
It is therefore more difficult for a person leaving the UK to become non-resident then it is for a person
arriving in the UK to remain non-resident.
A day in the UK is any day in which a person is present in the UK at midnight.
The table will be given in the tax rates and allowances section of the examination paper.
The detailed rules are quite complex, especially those in regard to work and having a home in the UK.
These more complex aspects are not examinable at Paper TX (UK)
Example 2:
James is in the UK for 40 days during the tax year 2014-15. He has not previously been resident in the
UK.
Kate is in the UK for 60 days during the tax year 2014-15. Her only home is in the UK.
Maggie has always been resident in the UK, being in the UK for more than 300 days each tax year. On 6
April 2014 Maggie purchased an overseas apartment where she lived for most of the tax year 2014-15.
She also has a house in the UK where her husband and children live. During the tax year 2014-15 Maggie
visited the UK for a total of 80 days, staying in her UK house.
Nigel has not previously been resident in the UK. Being in the UK for less than 20 days each tax year. On
6 April 2014 he purchased a house in the UK and during the tax year 2014-15 stayed in the UK for a total
of 160 days. Nigel also has an overseas house which was where he stayed for the remainder of the tax
year 2014-15.
James:
For 2014-15 James will automatically be treated as not resident in the UK. He has not been resident
during the three previous tax years, and has spent less than 46 days in the UK.
Kate:
For 2013 -14 Kate will automatically be treated as resident in the UK. She has spent too long in the UK to
be automatically treated as non-resident, and her only home is in the UK
Mustafa Ahmed Mirchawala:
Page 138
TX: Taxation:
Maggie:
For 2013-14 Maggie has spent too long in the UK to be automatically treated as non-resident and will
not automatically be treated as resident because she does not meet the only home test.
Maggie has been resident in the UK during the three previous tax years, and was in the UK between 46
and 90 days. She is therefore resident in the UK for 2013-14 as a result of her three UK ties:
o Close family in the UK
o A house in the UK which is made use of.
o In the UK for more than 90 days during the previous two tax years
Mustafa Ahmed Mirchawala:
Page 139
TX: Taxation:
Corporation Tax:
Trading Profit
Property Income
Capital Gains
Interest Income
Total Profit
Less: (qualifying charitable donations)
Taxable Profits
A/C Profits
Add/Less Adjustments:
Capital Allowance
Tax adjusted trading Profit
Rental income
Less allowed expenses:
Advertisement expense
For tenants
Property income
D.P
Less: Cost
UN indexation gain
Less: Indexation allowance
Chargeable gains
xxx
(xxx)
xxx
xxx
(xxx)
xxx
xxx
(xxx)
xxx
(xxx)
xxx
Interest Income/ Loan Relationship
Interest income from non Trading activities
xxx
Less: Interest expense on loan for non-Trading Activities (xxx)
Less: interest on loan to buy property for letting
(xxx)
Interest income (always positive)
xxx
Mustafa Ahmed Mirchawala:
Page 140
TX: Taxation:
1.1.020
1, 1,021
First 12 month
12m 31, 12,021
Tax adjusted trading profit (before CA)
Less cap allowances
Trading Profit
Property Income (Accrual Basis)
Capital Gain (Disposal Date)
Inter income (Accrual)
Total Profit
Less QCD (Payment Date)
Taxable Profit
Add FII (Receipt Date)
Augmented Profit
o
o
o
Long period of Accounts:
15m
31.3.021
Remaining 3 month
1, 1,022 3m 31, 3,022
XXX
(XXX)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Separate tax will be computed for first 12 month and last 3 month.
Capital allowance for first 12 month & last 3 months will be computed separately
ACCOUNTANT PREPARES ACCOUNTS FOR PERIOD OF ACCOUNT… AND PERIOD OF ACCOUNT MAY BE
MORE THAN OR LESS THAN 12 MONTHS. BUT COMPANY PAYS TAX FOR ACCOUTING PERIOD. AND
ACCOUNTING PERIOD CANNOT BE GREATER THAN 12 MONTHS BY LAW. SO IF IN QUESTION YOU
ARE PROVIDED A PERIOD OF ACCOUNT OF MORE THAN 12 MONTHS… THEN SPLIT IT INTO 2
ACCOUTING PERIODS… FIRST 12 MONTHS AND REMAINING MONTHS.
Mustafa Ahmed Mirchawala:
Page 141
TX: Taxation:
75% Group or Group Relief Group:
Conditions for making Group:
1. Direct holding > 75%
2. Effective holding > 75%
Points to remember for group relief group:
1. Surrendering Co can surrender(Trading loss for the year, Excess property loss and Excess QCD)
2. Claimant company can use this loss to set off its T.T.P
3. Claimant Company first use its own loss and then group loss
4. Claimant co must use group loss in the same period. Claimant co cant carried forward other co’s loss
5. Surrendering co is a co which is surrendering (giving ) loss
6. Claimant co is a co which is claiming (receiving ) loss
7. Remember surrendering co can only transfer current year trading loss
8. Overseas foreign companies may become part of 75% group , but losses can’t be exchanged
9. DORMANT companies are never included in any groups (75% group or 51% group)
10. Make sure accounting dates of group members are aligned
Question#1:
A co holds 80% shares of B, 60% shares of C and 80% shares of D
Acc period of A co 1st Apr 09 - 31st mar 2010 = (200000)
A/C Period of B. Co:
1st July 08-30 June 09= 300000
1st July 09-30 June 10 = 120000
A/C period of D co
1st Jan 10-31st mar 10 = 70000
Required: How much maximum loss can be surrendered by A. Co to these companies
Capital Gains Group:
Conditions:
Direct Holding > 75%
Effective Holding> 50%
Reliefs:
1. Physical transfer of chargeable assets between group companies ( NO gain , no loss) ,( just like
married couples)
2. Notional transfer of gains / losses ( one member can transfer its chargeable gains / loss partially or
completely to other group member
3. Rollover relief: same as we studied before with one difference , Sold chargeable asset by one
member and reinvestment by other member of group
Mustafa Ahmed Mirchawala:
Page 142
TX: Taxation:
Question#2:
ACO
BCO
Trading profit
(60000)
50000
CAP gains/loss
128000
(20000)
A CO sold its warehouse for 400000 during the year.
C co bought replacement office building for 372000
Required:
Corporation tax liabilities for all companies?
Mustafa Ahmed Mirchawala:
C CO
30000
Page 143
TX: Taxation:
Exam Kit Questions:
Question#1:
Mountain Ltd owns 100% of the share capital of a number of profitable UK resident companies. All
companies prepare accounts to 31 March.
Mountain Ltd's results for the year ended 31 March 2020 are as follows:
£
Trading loss
(130,000)
Interest income
2,300
Property business loss
(15,000)
Qualifying charitable donations
(4,000)
Capital loss
(12,000)
In addition Mountain Lid has unrelieved trading losses brought forward at 1 April 2020 of £50,000.
Required:
What is the maximum amount of loss that Mountain Lid can surrender to its 100% subsidiaries, using
group relief, for the year to 31 March 2021?
Question#2:
Red ltd has trading losses for the year to 31 December 2020,of £65,000. It has brought forward trading
losses of £12,000. Red ltd has no other income or gains in the current or prior year.
Red ltd owns 85% of Pink ltd.
Pink ltd has tax adjusted trading profits of £85,000, for the year to 31 December 2020. It has brought
forward trading losses of £35,000 and brought forward capital losses of £5,000.
Required:
Show the maximum amount of group relief available in the year to 31 December 2020 and state the
amount of any unrelieved losses.
Question#3:
Cup ltd is a wholly owned subsidiary of sugar Ltd.
Sugar ltd incurs a trading loss of £27,000 in its nine month accounting period to 31 March 2021.
The taxable total profit of cup ltd is£24,000 and £38,000 for the 12 month accounting periods to 30
September 2020 and 2021 respectively
Required:
State the maximum amount of group relief which Cup ltd can claim from sugar ltd, in each of the two
accounting periods to 30 September 2021.
Question#4:
White Ltd and black ltd are in a group relief group and had the following recent results:
£
White ltd-trading loss for the y/e 30 June 2021
(24,000)
Black ltd- taxable total profits:
Y/e 30 September 2020
36,000
Y/e 30 September 2021
20,000
Required:
Explain the amount of group relief black ltd can claim from White ltd, for each of the two accounting
periods ended September 2021.
Mustafa Ahmed Mirchawala:
Page 144
TX: Taxation:
Question#5:
A Ltd has two wholly owned subsidiaries, B Ltd and C Ltd
The group companies have the following results for the year ended 31 March 2021.
A Ltd
B Ltd
C Ltd
£
£
£
Trading profit/loss
(100,000)
20,000
83,000
Interest income
10,000
2,000
5,000
Qualifying charitable
0
(22,000)
(3,000)
Donations
A ltd is not expected to return its trading operations to profitability until the year ended 31 March 2022.
A Ltd does not expect significant gains or other income in the near future. A ltd’s total profit for the year
ended 31 March 2019 were £20,000 before deduction of a QCD of £5,000 and tax was paid at a rate of
20% on these profits.
Required:
Calculate the corporation tax payable by each of these companies for the year ended 31 March 2020:
1. If no elections are made to utilize A ltd’s loss
2. If elections are made to utilize A lts’s loss in the most beneficial manner
Question#6:
Green Lid acquired a building on 1 April 1997, for £100,000. The building was transferred to Jade Ltd, a
wholly owned subsidiary, on 1 October 2008, for £120,000, when it was worth £180,000.
On 1 December 2020, Jade Ltd sold the building outside of the group for £350,000.
Required:
Calculate the chargeable gain, if any arising on the transfer of the building in October 2008 and the sale
of the building in December 2020.
Question#7:
Orange Ltd acquired a factory on 1 June 2000, for £80,000. The factory was transferred to Amber Ltd, a
wholly owned subsidiary, on
1 September 2012, for £115,000, when It was worth £160,000.
On 21 November 2020, Amber Ltd sold the factory outside the group for £385,000.
Required:
Calculate the chargeable gain, If any, arising In September 2012 and November 2020
Question#8:
Red Ltd has brought forward capital losses of £60,000.
Its 100% subsidiary Blue Ltd, disposed of an asset on 15 June 2020, that resulted in chargeable gain of
£55,000.
Both companies prepare accounts to 31 March.
Required:
Explain how Red ltd and Blue ltd can make an election to minimize the tax payable for the y/e 31 March
2021.
Mustafa Ahmed Mirchawala:
Page 145
TX: Taxation:
Question#1:
HALF‐LIFE LTD:
Half‐Life Ltd commenced trading on 1 April 2016 and ceased trading on 30 June 2020. The company’s
results for all its periods of trading are as follows:
Tax adjusted profit/(loss)
Property income
Chargeable gains
Qualifying charitable
y/e
31.3.17
£
224,000
8,200
0
(1,200)
y/e
31.3.18
£
67,400
12,200
0
(1,000)
y/e
31.3.19
£
38,200
6,500
5,600
0
p/e
y/e
30.6.19 30.6.20
£
£
(61,700) (308,800)
4,400
0
0
23,700
0
(700)
Required:
(a) Assuming that Half‐Life Ltd claims the maximum possible relief for its trading losses, calculate the
company’s taxable total profits for the years ended 31March
2017, 2018 and 2019, the period ended 30 June 2019, and the year ended 30 June 2020.Your answer
should clearly identify the amounts of any losses and qualifying
charitable donations that are unrelieved.
(9 marks)
(b)State the dates by which Half‐Life Ltd must make the loss relief claims in part (a).
(2marks)
(c)Calculate the amount of corporation tax that will be repaid to Half‐Life Ltd as a result of making the
loss relief claims in part(a).
Assume that the corporation tax rate for FY 2019 applies throughout.
(4 marks)
(Total: 15 marks)
Mustafa Ahmed Mirchawala:
Page 146
TX: Taxation:
Question#2:
DO‐NOT‐PANIC LTD:
Do‐Not‐Panic Ltd is a United Kingdom resident company that installs burglar alarms.
The company commenced trading on 1 January 2021 and its results for the fifteen‐month period ended
31 March 2022 are summarized as follows:
(1) The trading profit as adjusted for tax purposes is £250,500. This figure is before taking account of
capital allowances.
(2) Do‐Not‐Panic Ltd purchased a new car (CO2 emission of 70g/km) for £18,000 on 1 December 2021
and equipment for £24,000 on 20 February 2022.
(3) On 21 December 2021 Do‐Not‐Panic Ltd disposed of some investments and this resulted in a capital
loss of £4,250. On 28 March 2022 the company made a further disposal and this resulted in a chargeable
gain of £42,000.
(4) The company opened a bank deposit account on 1 April 2021. Interest income of £25,000 was
credited to the account on 31 March 2022. Interest accrued as at 31 December 2021 was £18,000.
(5)On 1 March 2022 the company took out a non‐trade related bank loan to acquire a minority
shareholding in a supplier company. Interest payable as at 31 March 2022 was £6,000. Do‐Not‐Panic Ltd
has no related 51% group companies.
Required:
Calculate Do‐Not‐Panic Ltd’s corporation tax liabilities in respect of the fifteen‐month period ended 31
March 2022 and advise the company by when these should be paid and the date that the tax return(s)
should be filed. Ignore VAT.
(10 marks)
Mustafa Ahmed Mirchawala:
Page 147
TX: Taxation:
Question#3:
Molten Metal plc:
Molten‐Metal plc is a manufacturer of machine tools. The following information is available for the year
ended 31 March 2020:
Trading profit:
The tax adjusted trading profit for the year ended 31 March 2020 is £2,090,086. This figure is before
making any deductions required for:
(1)
Interest payable.
(2)
Capital allowances.
(3)
Any revenue expenditure that may have been debited to the company’s capital expenditure
account in error.
Interest payable:
During the year ended 31 March 2020 Molten‐Metal plc paid loan stock interest of £22,500. Loan stock
interest of £3,700 was accrued at 31 March 2020, with the corresponding accrual at 1 April 2020 being
£4,200. The loan is used for trading purposes.
The company also incurred a loan interest expense of £6,800 in respect of a loan that is used for
non‐trading purposes.
Capital expenditure account
The following items of expenditure have been debited to the capital expenditure account during the
year ended 31 March 2020:
1 May 2019:
Purchase of a second‐hand freehold office building for £378,000. This figure included £83,000 for a
ventilation system and £10,000 for a lift. Both the ventilation system and the lift are integral to the
office building. During May 2019 Molten‐Metal plc spent a further £97,400 on repairs.
The office building was not usable until these repairs were carried out, and this fact was represented by
a reduced purchase price.
26 June 2019:
Purchase of machinery for £90,000. During June 2019 a further £7,000 was spent on building alterations
that were necessary for the installation of the machinery.
8 August 2019:
A payment of £41,200 for the construction of a new decorative wall around the company’s premises.
27 August 2019:
Purchase of movable partition walls for £22,900. Molten‐Metal plc uses these to divide up its open plan
offices, and the partition walls are moved around on a regular basis.
11 March 2020:
Purchase of two motor cars each costing £17,300. Each motor car has a CO2 emission rate of 120 grams
per kilometer.
One motor car is used by the factory manager, and 60% of the mileage is for private journeys. The other
motor car is used as a pool car.
Written down value
On 1 April 2019 the tax written down value of plant and machinery in Molten‐Metal plc’s main pool was
£87,800.
Interest receivable
Molten‐Metal plc made a loan for non‐trading purposes on 1 August 2019. Loan interest of
£9,800 was received on 31 January 2020, and £3,100 was accrued at 31 March 2020.
The company also received bank interest of £2,600 during the year ended 31 March 2020. The bank
deposits are held for non‐trading purposes.
Mustafa Ahmed Mirchawala:
Page 148
TX: Taxation:
Quarterly installment payments
Molten‐Metal plc makes quarterly installment payments in respect of its corporation tax
liability. The first three installment payments for the year ended 31 March 2020 totaled £298,200.
Required:
(a)Calculate Molten‐Metal plc’s corporation tax liability for the year ended 31 March 2020. (13 marks)
(b)Calculate the final quarterly installment payment that will have to be made by Molten‐Metal plc for
the year ended 31 March 2020, and state when this will be due.
(2 marks)
(Total: 15 marks)
Mustafa Ahmed Mirchawala:
Page 149
TX: Taxation:
Question#4:
NEUNG LTD:
Neung Ltd is a UK resident company that runs a business providing financial services. The company’s
summarized statement of profit or loss for the year ended 31 March 2022 is:
Notes
£
Operating profit
1
727,300
Income from investments
Loan interest
2
37,800
Dividends
3
54,000
Profit before taxation
819,100
Note 1 – Operating profit
Depreciationof £11,830 and amortization of leasehold property of £7,000 have been deducted in
arriving at the operating profit of £727,300.
Note 2 – Loan interest receivable
The loan was made for non‐trading purposes on 1 July 2021. Loan interest of £25,200 was received on
31 December 2021, and interest of £12,600 was accrued at 31 March 2022.
Note 3 – Dividends received
Neung Ltd has held shares in four UK resident companies for a number of years as follows:
Percentage shareholding
Status
Second Ltd
25%
Trading
Third Ltd
60%
Trading
Fourth Ltd
100%
Dormant
Fifth Ltd
100%
Trading
During the year ended 31 March 2022 Neung Ltd received a dividend of £42,000 from Second Ltd, and a
dividend of £12,000 from Third Ltd.
Fifth Ltd made a trading loss of £15,700 for the year ended 31 March 2022.
Additional information
Leasehold property
On 1 April 2021 Neung Ltd acquired a leasehold office building, paying a premium of £140,000 for the
grant of
a 20‐year lease. The office building was used for business purposes by Neung Ltd throughout the year
ended 31 March 2022.
Plant and machinery
On 1 April 2021 the tax written down values of Neung Ltd’s plant and machinery were:
£
Main pool
4,800
Short life asset
22,800
Special rate pool
12,700
The company purchased the following assets during the year ended 31 March 2022:
£
19 July 2021
Motor car [1]
15,400
12 December 2021
Motor car [2]
28,600
20 December 2021
Ventilation system
262,000
The short life asset is a specialized piece of machinery which was purchased on 1 January 2021.
Motor car [1] purchased on 19 July 2021 has a CO2 emission rate of 212 grams per kilometer.
Motor car [2] purchased on 12 December 2021 has a CO2 emission rate of 118 grams per kilometer.
Mustafa Ahmed Mirchawala:
Page 150
TX: Taxation:
The ventilation system purchased on 20 December 2021 for £262,000 is integral to the freehold office
building in which it was installed.
Year ended 31 March 2021
For the year ended 31 March 2021 Neung Ltd had taxable total profits of £600,000.
Required:
(a) Calculate Neung Ltd’s corporation tax liability for the year ended 31 March 2022. You should assume
that the whole of the annual investment allowance is available to Neung Ltd, that the company wishes
to maximize its capital allowances claim, and that any favorable claims are made in respect of group
losses.
(11 marks)
(b) Explain, with supporting date(s) and amount(s), when Neung Ltd will be required to pay its
corporation tax liability for the year ended 31 March 2022.
(4 marks)
(Total: 15 marks)
Mustafa Ahmed Mirchawala:
Page 151
TX: Taxation:
Question#5:
ARABLE LTD
Arable Ltd commenced trading on 1 April 2019 as a manufacturer of farm equipment, preparing its first
accounts for the nine‐month period ended 31 December 2019.
The following information is available:
Trading profit
The tax adjusted trading profit is £376,611. This figure is before taking account of capital allowances
and any deduction arising from the premium paid in respect of leasehold property.
Plant and machinery
Arable Ltd purchased the following assets in respect of the nine‐month period ended 31 December
2019.
£
20 April 2019 Delivery lorries
193,350
12May 2019
Motor car (1)
11,200
14 May 219
Motor car (2)
14,600
17 May 2019 Motor car (3)
13,000
Motor car (1) purchased on 12 May 2019 for £11,200 has a CO2 emission rate of 106 grams per
kilometer. Motor car (2) purchased on 14 May 2019 for £14,600 has a CO2 emission rate of 138 grams
per kilometer.
Motor car (3), purchased on 17 May 2019 for £13,000, is a new car and has CO2 emissions of 69 grams
per kilometer. The company will not make any short life asset elections.
Leasehold property
On 1 April 2019 Arable Ltd acquired a leasehold office building. A premium of £75,000 was paid for the
grant of a 15‐year lease. The office building was used for business purposes by Arable Ltd throughout
the period ended 31 December 2019.
Freehold property
On 1 August 2019 Arable Ltd acquired the freehold of a second office building. This office building was
empty until 30 September 2019, and was then let to a tenant. On that date Arable Ltd received a
premium of £50,000 for the grant of a five‐year lease, and annual rent of £14,800 which was payable in
advance.
Loan interest received
Loan interest of £6,000 was received on 30 September 2019, and £3,000 was accrued at 31 December
2019. The loan was made for non‐trading purposes.
Dividends received
During the period ended 31 December 2019 Arable Ltd received dividends of £20,000 from Ranch plc,
an unrelated UK company.
Other information:
Arable Ltd has two related 51% group companies
Required:
(a) Calculate Arable Ltd’s corporation tax liability for the nine‐month period ended 31 December 2019.
(12 marks)
(b) Explain, with supporting calculations, whether Arable Ltd is defined as a large company, for the
purposes of determining the due date for payment of tax, for the nine‐month period ended 31
December 2019.
(3 marks)
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Miscellaneous Handouts:
Structures and building allowance
(SBA):
Example#1:
Hipster Ltd prepares accounts to 31 March. On 1 July 2021 the company purchased a newly constructed
factory from a builder for £470,000 (including land of £110,000). The factory was brought into use on 1
September 2021.
The qualifying expenditure for SBA is £360,000 (470,000 – 110,000). The factory was brought into use on1
September 2021, so the SBA for the year ended 31 March 2022 is £6,300 (360,000 at 3% x 7/12).
An allowance of£10,800 (360,000 at 3%) will be given in subsequent years.
Relief is also given for the cost of subsequent improvements, or where a building is renovated orconverted.
Example#2:
Ballpoint Ltd prepares accounts to 31 March. The company renovated a disused warehouse (originally
purchased in 2011) at a cost of £82,000, with the warehouse subsequently brought into use on 1 January
2022.
The renovation expenditure qualifies for relief. As the warehouse was brought into use on 1 January2022, the
SBA for the year ended 31 March 2022 is £615 (82,000 at 3% x 3/12).
The original cost of the warehouse does not qualify for the SBA, being purchased prior to 29 October 2018.
Even if it had qualified, the SBA for the renovation expenditure would have been kept entirely separate
from the SBA on the original cost.
Unlike plant and machinery, there is no balancing charge or balancing allowance when a building (or structure)
that has qualified for the SBA is sold. Instead, the purchaser simply continues to claim the 3%allowance for the
remainder of the 33⅓ year period based on original cost.
However, on a disposal, the allowances that have been claimed are effectively clawed back by adding
them to the sales proceeds in order to determine the chargeable gain or allowable loss arising.
Example#3:
Continuing with example 17.
Hipster Ltd sold its factory to Gentrified Ltd on 31 March 2022 for £500,000 (including land of £120,000).
Gentrified Ltd also prepares accounts to 31 March.
The sale of the factory will not affect Hipster Ltd’s SBA claim for the year ended 31 March 2022. From the
year ended 31 March 2023 onwards, Gentrified Ltd will claim £10,800 (360,000 at 3%) annually based on the
original cost to Hipster Ltd. The SBA will run for the remaining 32 years and nine months ofthe 33⅓ year
period that commenced on 1 September 2021.
Hipster Ltd’s sale proceeds of £500,000 will be increased by the allowance claimed of £6,300. Thechargeable
gain on the disposal will therefore be £36,300 (500,000 + 6,300 – 470,000).
You should assume that for any question involving the purchase (as opposed to a new construction) of a
building, the SBA is not available unless stated otherwise.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
ADJUSTING THE ACCOUNTING PROFIT:
Pro forma - Tax adjusted trading profit
Net Profit Per Accounts
Add: Expenditure Not Allowed For Taxation Purposes
- Depreciation
- Excessive salary to owner's family member
- Entertainment to Customers & Suppliers
- General Provision
- Loan Written off to Employee/Supplier
- Capital Expenditure
- Improvements
- Restoration Cost (not Useable Assets)
- Gift of Foods items.
- Gift - Business Advertisement > 50 GBP
- Penalties & Late Payment of Tax
- Political/ National Donation
- Gift Aid Donation
- Special Tax Advice Fee
- Removal Expenses (Expansion)
- Leases Car CO2 > 50 (15%)
Add: Income Taxable as Trading Income but Excluded from Account
- Stock Drawing Cost to Cost (Add Profit)
- Stock Drawing Free of Cost (Add Selling Price)
XXX
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
XXX
X
X
XXX
Less: Income Added in Accounts, but not Trading Income
- Interest Income
- Dividend Income - Property Income
- Capital Gain
- Expenses not recorded by the Accountant
(X)
(X)
(X)
(X)
(XXX)
Less: Expenses not Allowed in Accounting, but allowed in Taxation:
- Capital Allowance
- Amortization of Leases Premium for tenant
Tax Adjusted Trading Profit
Mustafa Ahmed Mirchawala:
(X)
(X)
(XXX)
XXX
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TX: Taxation:
Solo Ltd:
Solo Ltd.’s results for the previous two periods of trading are:
Year Ended
31 December 2019
£
Trading Profit
35,900
Property Business Income
12,100
Chargeable Gains/(Capital Losses)
(3,300)
Qualifying Charitable Donations
(1,200)
Three Month Period Ended
31 March 2020
£
12,300
4,200
(2,100)
(1,600)
The following information is available in respect of the year ended 31 March 2021:
Trading loss
The draft tax adjusted trading loss for the year ended 31 March 2021 is £151,300. This figure is before making
any adjustments required for:
1 A premium paid to acquire a leasehold office building on an eight-year lease.
2 Capital allowances
Premium Paid to Acquire Leasehold Office Building
On 1 April 2020, Solo Ltd acquired a leasehold office building, paying a premium of £20,000 for the grant of an
eight-year lease. The office building was used for business purposes by Solo Ltd throughout the year ended 31
March 2021.
Plant and Machinery
The tax written down value of plant and machinery main pool as at 1 April 2020 was £0. During the year ended
31 March 2021, Solo Ltd sold equipment for £4,300. The equipment was originally purchased during the year
ended 31 March 2016 for £22,400, with this expenditure qualifying for the 100% annual investment allowance.
Property Business Income
Solo Ltd lets out a warehouse which is surplus to requirements. The building was empty from 1 April to 31 July
2020, but was let from 1 August 2020 onwards. The following income and expenditure was received or incurred
during the year ended 31 March 2021:
Date received/paid
£
1 April 2020
Insurance for the year ended 31 March 2021
(920)
1 August 2020
Rent for the six months ended 31 January 2021
7,800
1 August 2020
Security deposit equal to two months’ rent
2,600
1 March 2021
Rent for the six months ended 31 July 2021
7,800
Disposal of Shareholding in Multiple Plc
On 12 December 2020, Solo Ltd. sold 6,500 £1 ordinary shares in Multiple plc for £31,200. Solo Ltd had originally
purchased 20,000 shares (less than 1% shareholding) in Multiple plc on 18 June 2007 from £27,000, and
purchased a further 1,000 shares on 8 December 2020 for £4,600. Indexation factors are:
June2007to December 2017
0.342
June 2007 to December 2020
0.444
Required:
(a) Calculate Solo Ltd.’s revised tax adjusted training loss for the year ended 31 March 2021.
Note: You should assume that the company claims the maximum available capital allowances.
(b) On the basis that Solo Ltd claims relief for its trading loss against its total profits for the year ended 31
March 2021, prepare a corporation tax computation for this year showing taxable total profits.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
(c) On the basis that Solo Ltd. claims relief for the remainder of its trading loss as early as possible, calculate the
company’s taxable profits for the year ended 31 December 2019and the three month period ended 31 March
2020.
Mustafa Ahmed Mirchawala:
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TX: Taxation:
Mustafa Ahmed Mirchawala:
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