PROFESSIONAL LEVEL EXAMINATION
SAMPLE PAPER
(2½ hours)
BUSINESS PLANNING: TAXATION
This paper consists of THREE written test questions (100 marks).
1. Ensure your candidate details are on the front of your answer booklet.
2. Answer each question in black ball point pen only.
3. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.
4. The examiner will take account of the way in which answers are presented.
Assume that the Finance Act 2012 rates and allowances will continue to apply in future
years unless you are specifically instructed otherwise.
IMPORTANT
Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.
DO NOT TURN OVER UNTIL YOU
ARE INSTRUCTED TO BEGIN WORK
Copyright © ICAEW 2012. All rights reserved.
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1. Rossetti Ltd is a company that manufactures plastics for the aero-space industry.
Rossetti Ltd is based in Wales and is a client of your firm. The engagement includes a review
of the corporation tax computations prepared by the financial controller and advice on tax
issues, as requested by the client during June 2013. Your firm also acts for the directors of
Rossetti Ltd in respect of their personal tax affairs.
Background information on Rossetti Ltd
The shareholders and their holdings of £1 ordinary shares are as follows:
Notes £m
Bill Roscoe 1 0.55
Christina Stone 1 0.40
Tomaz Kinsella 2 0.30
Pebble plc 3 1.75
WB Inc 4 0.45
TSE Ltd 5 1.55
5.00
Notes:
1 Bill Roscoe and Christina Stone are directors of Rossetti Ltd.
2 Tomaz Kinsella was the only other director of the company. He was made redundant
on 1 February 2013 and received compensation for loss of office of £10,700. An
interest free loan of £5,100 was made to Tomaz on 1 January 2012. The loan was
written off in Rossetti Ltd’s income statement on 1 February 2013. Tomaz is a higher
rate taxpayer.
3 Pebble plc is a UK resident listed company. Three directors of Pebble plc each own
20% of the ordinary shares in the company and the remaining 40% of the ordinary
shares are publicly owned.
4 WB Inc is a US resident trading company.
5 TSE Ltd is a UK resident company whose ordinary share capital is owned equally by
three directors and has made taxable total profits of £42,000 for the year ended
31 March 2013.
Pebble plc and WB Inc both made taxable total profits in excess of £2 million for the year
ended 31 March 2013.
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Rossetti Ltd - Draft corporation tax computation for the year ended 31 March 2013 and
notes prepared by the financial controller
The financial controller of Rossetti Ltd has prepared a draft corporation tax computation for
the year ended 31 March 2013 and has identified two issues where he is unsure of the
correct tax treatment.
£
Profit before tax (Issues 1 and 2) 347,700
Add:
Disallowable expenses 82,900
Less:
Bank interest receivable (2,150)
Capital allowances (51,800)
Tax adjusted trading profit 376,650
Issue 1
The profit before tax of £347,700 includes a deduction for £443,900, which represents
revenue expenditure incurred by Rossetti Ltd, directly related to researching and
developing a new polymer which withstands extremely low temperatures. Rossetti Ltd
is an SME for research and development purposes.
Issue 2
Finance costs of £57,274, as described below, were deducted in arriving at the profit
before tax of £347,700.
£
Write off of loan to Tomaz 5,100
Interest on loan from Spanish bank 52,174
57,274
On 1 January 2013 Rossetti Ltd borrowed €2 million from a Spanish bank to fund the
polymer research. The loan is for two years at an interest rate of 12% pa and the
amount received was immediately converted to £ sterling at the exchange rate on
1 January 2013 of £1 = €1.30. The liability in respect of the loan was recognised in the
financial statements at the same exchange rate, but no adjustments have since been
made in respect of this liability.
The interest charge of £52,174 shown above is an accrual for interest of €60,000 for
the first three months, translated at the exchange rate on 31 March 2013 of
£1 = €1.15.
The financial controller has also provided information regarding the divestment of Shelly Ltd,
Rossetti Ltd’s 100% owned subsidiary. (Exhibit 1). Shelly Ltd sells medical equipment,
employs 25 staff and operates from premises in Wales. Rossetti Ltd has decided to sell its
interest in Shelly Ltd and initial consultations have taken place with Marvell plc, the potential
purchaser.
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Requirements
(a) Prepare a briefing paper that includes:
(i) For each of the two issues identified by the financial controller, a recommendation with
supporting calculations, of the appropriate tax treatment.
(ii) A revised corporation tax computation of the tax adjusted trading loss for Rossetti Ltd
for the year ended 31 March 2013. Include a calculation of how this loss may be
surrendered to the relevant consortium members and comment on whether payment
should be made for the losses.
(iii) A calculation of any tax credit which Rossetti Ltd could claim in respect of the research
and development expenditure incurred in the year ended 31 March 2013. Include a
reasoned recommendation on whether this claim should be made.
(iv) An explanation of the income tax and corporation tax treatment of the amounts
received by Tomaz.
(b) Explain, with supporting calculations, the tax consequences of each of the options for
the divestment of Shelly Ltd.
(c) Comment on any tax related factors which may influence the negotiation of the price of
the sale of either the shares in or the trade and assets of Shelly Ltd.
(40 marks)
Exhibit 1 - Divestment of Shelly Ltd
Due to significant capital expenditure and redundancy costs, Shelly Ltd is expected to
generate a trading loss of £120,800 for the year ended 31 March 2014, in addition to a
trading loss brought forward at 1 April 2013 of £284,700.
Following the acquisition, Marvell plc intends to re-focus Shelly Ltd’s business and sell its
products to the public health sector in the UK as well as retaining the existing private sector
customers. The key staff will move from Wales to London and the sales and marketing
functions in order to expand the business, including a new on-line sales strategy, will be
provided by Marvell plc.
Alternative options for structuring the sale of Shelly Ltd
Marvell plc and Rossetti Ltd have discussed two possible options for structuring the sale of
Shelly Ltd’s business. Marvell plc is prepared to acquire the business under either of the
following options. The proposed disposal date is 30 November 2013.
Option One
The entire share capital of Shelly Ltd would be sold to Marvell plc. The suggested cash
consideration for the shares is £750,000. Rossetti Ltd purchased 100% of the ordinary
shares in Shelly Ltd for £120,000 in January 2008.
Option Two
The trade and assets of Shelly Ltd would be sold to Marvell plc for approximately £600,000.
The only chargeable asset of significant value is the goodwill which has a nil base cost for tax
purposes and £590,000 will be allocated to the goodwill in the sale and purchase agreement.
Note: Ignore indexation allowance
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2. You work as a tax assistant for Galax and Co, a firm of chartered accountants. Medina Galen
and Andy Dromeda are new tax clients of Galax and Co. Medina and Andy trade as a
partnership called ‘Dromeda Solutions’, providing web-based marketing services and are
seeking tax advice regarding the proposed incorporation of their partnership. Both Medina
and Andy are higher rate tax-payers.
Proposed incorporation
On 6 April 2013 the assets of the Dromeda Solutions partnership will be transferred to a
newly-incorporated company, DS Ltd, in exchange for 100,000 ordinary £1 shares. The
shares will be issued in the same proportion as that governing profit sharing in the
partnership agreement of Dromeda Solutions. Under the terms of that agreement, Medina
receives 60% and Andy 40% of any profit or loss. Capital gains and losses are allocated in
the same proportion.
The projected assets and liabilities for Dromeda Solutions at 6 April 2013 are as follows:
Market value Cost
£ £
Antares House 950,000 431,000
Goodwill 320,000 Nil
Plant and machinery 19,000 31,000
Net current assets 28,000 10,000
Medina and Andy purchased a commercial property, Antares House (a newly constructed
building) for £431,000 (VAT exclusive) in May 2009. Dromeda Solutions operates its
business from Antares House. The option to tax was exercised at the time of purchase.
As an alternative to transferring Antares House to DS Ltd, Clowde Ltd, a property company
with no connections to the partnership, has made an offer to purchase the property for
£890,000 (VAT exclusive) at the time of incorporation. Clowde Ltd would then lease six floors
of the building to DS Ltd under a 10-year lease. The remaining four floors would be leased to
Saturn Ltd, an insurance company, for use as its administrative centre.
Expansion plans
Following incorporation of their partnership as DS Ltd, Medina and Andy plan to reward and
motivate key employees. Medina and Andy have identified two potential new directors of
DS Ltd. Following their recruitment and a suitable probationary period, they would like to
grant options over shares to both of these individuals at an attractive discount. The aim is to
encourage the two individuals to stay with the company for at least five years, but they do not
wish to implement a company-wide scheme.
Medina’s future plans
In addition to the above information, your firm also received an email from Medina, outlining
her plans for the future, an extract of which is produced in Exhibit 1.
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Requirement
Your manager has asked you to produce a briefing note in preparation for a meeting with
Medina and Andy in which you:
Determine (with supporting calculations) the tax implications for Medina and Andy of
incorporating their partnership, Dromeda Solutions, as DS Ltd. Assume for this
purpose that all assets are transferred on incorporation.
Explain the tax implications of the offer by Clowde Ltd to purchase Antares House.
Advise on a suitable share incentive scheme that may be implemented following
incorporation.
Prepare a reply to the email from Medina. (30 marks)
Exhibit 1 – Email from Medina
“I should like independent advice on two issues regarding my own personal tax position.
1. After incorporation, I intend to remain as a director of DS Ltd for two years and then
withdraw from the business. I would like to give my shares in DS Ltd to my daughter
Andrea. I have discussed this with her and I would make the gift in either early 2014 or
2015. My daughter is currently working in New York but will be returning to the UK in
April 2014.
Please advise me of the tax implications of gifting my shares to my daughter.
2. Before appointing your firm, Andy prepared and submitted the partnership tax return.
Andy has told me that my unutilised share of the partnership tax loss is £81,700 as at
5 April 2013. I have been offsetting a trading loss from 5 April 2010 against
partnership income for the last three years and this is what remains. He has also told
me that I cannot use these losses in the future against my income.
I have attached a summary of my investment income for the current tax year and a
projection of my investment income and employment income from DS Ltd for the tax
years ending 5 April 2014 and 5 April 2015.
Please advise me on how I may utilise my partnership loss.”
Attachment to the email – Medina’s summary of investment income and projected
employment income from DS Ltd
2012/13 2013/14 2014/15
£ £ £
Dividends from UK shares 21,900 30,000 30,000
Dividends from DS Ltd - 26,000 26,000
Salary and bonus from DS Ltd - 90,000 90,000
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3. Svetlana Lucas is an entrepreneur with many business interests. She is a new personal tax
client of your firm and has provided you with some background information (Exhibit 1). Your
firm has already completed its client acceptance procedures in respect of Svetlana.
Svetlana prepared and filed her own tax return for the tax year ended 5 April 2013 and has
recently attended a meeting to discuss a number of tax issues. Your firm has agreed to
advise Svetlana with regard to her 2013/14 tax return.
Svetlana is also the finance director of Galileo Ltd, a corporate tax client of your firm.
Information concerning Galileo Ltd’s taxable profits is in Exhibit 2, together with the draft
estimated results for the nine months ending 31 December 2012. Galileo Ltd ceased trading
on 31 December 2012.
The tax partner has left some notes for you on your desk from the meeting with Svetlana,
prepared by a junior associate.
Notes from the meeting:
Business expansion plans for Newton Cards
Svetlana wishes to expand Newton Cards to include on-line sales and requires finance of
£25,000. On 1 December 2012 she ordered £25,000 of computer software and hardware.
Svetlana has negotiated an instalment payment plan with the computer supplier such that
she will spread the cost of the equipment over 18 months, with the first payment due six
months after successful delivery and operation of the on-line sales system. Additional
payments will be made in monthly instalments. The hardware is due to be delivered on 1 July
2013 and the supplier has guaranteed that the system will be operating from 1 August 2013.
Svetlana claimed 100% capital allowances on the equipment from the date that she placed
the order and is not willing to revise her income tax return for the year ending 5 April 2013.
In order to raise the £25,000 required to implement her plans, Svetlana will sell shares in
Kepler Ltd. Another shareholder in Kepler Ltd is willing to purchase 5,000 of her shares for £6
per share, provided the sale occurs by September 2013. Other than the existing
shareholders, there is no real market for Svetlana’s Kepler Ltd shares. Should there be any
shortfall in funding, Svetlana will use her overdraft facility.
IT support required by Newton Cards
Svetlana recently announced her expansion plans to the employees of Newton Cards.
Freda Hoyle works part-time for Newton Cards, but was head of IT solutions for a small
on-line trading company until she took voluntary redundancy in October 2011. Freda has told
Svetlana that she would be willing to provide the required on-going IT support for the
expansion of the business.
Svetlana would like to compare the total tax cost of employing Freda at a higher salary or
using an independent IT consultant based on the following assumptions:
Fee to be paid for IT consultancy services : £1,000 per month (VAT exclusive)
The IT consultant would be based in the EU and would be liable for all UK and
overseas income tax and national insurance as a result of the engagement
Extra salary for Freda: £10,000 pa
Freda currently earns an annual salary of £14,000 from Newton Cards.
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Requirement
Prepare notes for the tax partner which address the following issues:
For Galileo Ltd:
Determine, using appropriate calculations, how the trading loss for the nine months
ending 31 December 2012 could be utilised by Galileo Ltd to obtain a repayment of
corporation tax. You are not required to calculate the tax repayment.
For Svetlana:
Explain the tax implications of Svetlana’s business expansion plans for Newton Cards.
Include comments on any ethical implications for your firm.
Using the assumptions provided by Svetlana, compare the annual total after tax cost
of employing Freda at a higher salary or using an independent IT consultant.
(30 marks)
Exhibit 1 – Background information on Svetlana Lucas
Personal information: Born 3 May 1964
UK resident, ordinarily resident and domicile and a higher rate taxpayer.
Kepler Ltd: UK resident graphic design company.
Svetlana subscribed for 20,000 ordinary shares in December 2011 for
£86,000. This represented a 20% shareholding. Svetlana does not work
for Kepler Ltd. Svetlana claimed EIS income tax relief in respect of the
purchase of these shares in the tax year ended 5 April 2012.
EIS reinvestment relief was also claimed to defer a chargeable gain of
£76,000 in the tax year ended 5 April 2012.
Newton Cards: An unincorporated business set up by Svetlana in 1999 producing hand-
made greetings cards and stationery. The business is registered for VAT
and has four employees.
Capital transactions: Svetlana had a capital loss brought forward of £8,400 at 6 April 2012
and has made no disposals of chargeable assets during 2012/13.
Exhibit 2 – Information concerning Galileo Ltd - Actual and estimated tax adjusted
results for Galileo Ltd
Year ended Year ended Year ended Nine months
31 March 31 March 31 March ending 31 Dec
2010 2011 2012 2012
£ £ £ £
Trading profits/(losses) 243,900 171,600 41,300 (78,000)
Overseas permanent - 4,200 6,950 9,300
establishment profits (gross)
Property income 13,200 15,100 5,450 2,200
Galileo Ltd has an overseas permanent establishment in a jurisdiction where the tax rate on
trading profits of permanent establishments is 18%. The permanent establishment was
established in February 2011 and is controlled from the UK by Galileo Ltd. There is no tax
treaty between the UK and the overseas jurisdiction and no election has been made to
exempt the profits of the permanent establishment.
Galileo Ltd has two associated companies and ceased trading on 31 December 2012.
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