Business Tax Planning

Faculty of Management

2020/2021

RESIT Time Constrained Paper – Brief
Programme/s:  Accounting and Finance  Unit Name:  Business Tax Planning  
Paper set by:  Alan Kirkpatrick (Unit Leader)  Level:  5  Unit Weighting: 70%  

GENERAL INSTRUCTIONS TO CANDIDATES

  • The time constrained paper will be released at 12:00 noon on 18 August 2021 and should be submitted by 12:00 noon on 19 August 2021.
  • The time allowed for the paper should cover any eventualities relating to ALS, students residing overseas and slow connectivity to the internet.
  • If during the period of the time constrained paper you experience any technical issues you should contact BU IT services on 01202 965515 and report the issue immediately – if you are affected by an IT issue you will need to provide evidence of this.
  • All records of time mentioned here are based on current UK time.
  • Please read the instructions carefully and ensure you understand how many questions you need to answer.
  • The usual BU academic offences structure remains in place and in force.
  • This time constrained paper is now similar in structure to a typical individual assignment. All work should be your own and not completed in collaboration with others
  • You should use BU Harvard referencing if citing other people’s work. This will not form part of your word count.

SPECIFIC INSTRUCTIONS FOR THIS ASSESSMENT

  • Answer QUESTION 1 in SECTION A (COMPULSORY).
  • Answer THREE questions in SECTION B.
  • All questions carry equal marks.
  • Where questions are subdivided i.e. (a), (b), etc. you must answer all parts
  • The word limit for each question is 750 words for Question 1 (Section A) and again 750 words for each question in Section B with an overall word limit for this Time Constrained Paper of 3,000 words.   
  • Each question is worth 25 marks.  Where a question has several parts, the weighting of marks is shown next to each part of the question.
  • Use of a non-programmable calculator is permitted.
  • A summary of ‘reliefs and allowances’ can be found at the end of the paper.

The paper is to be electronically submitted via the Assignment Submission area in Brightspace by 12:00 noon on 19 August 2021.  Please allow sufficient time to upload files before the deadline and in a Word document format.

ASSESSMENT TASK

SECTION A

Answer QUESTION 1 in SECTION A (COMPULSORY)

QUESTION 1

Vardy Limited is changing its accounting dates, and to accommodate this it has produced a set of financial accounts over an extended period, from 1 December 2019 to 31 March 2021.

Capital allowances have already been calculated for each of the two Chargeable Accounting Periods (CAPs) as follows:

CAP 1 Dec 2019 to 30 Nov 2020              £700,000

CAP 1 Dec 2020 to 31 March 2021          £300,000

The income statement of Vardy Limited for the 16 months to 31 March 2021 is shown below:

                                                                                                                                       £      

Turnover                                                                                                     12,400,000

Cost of Sales                                                                                                            6,400,000

Gross profit                                                                                                    6,000,000

Other income                                                                                                   110,000

                                                                                                                        6,110,000

Less:

Distribution costs                                                                    842,000

Administrative expenses                                                    1,470,000      2,312,000

Profit for the year (before tax)                                                                   3,798,000

NOTES:

Note 1

The items in ‘Cost of Sales’ are all tax deductible (allowable) for the purposes of the tax computation.

Note 2

The ‘other income’ of £110,000 consists of rents receivable of £80,000 and profit on disposal of office equipment of £30,000.

Note 3

Distribution costs are as follows:

   £

Depreciation of distribution vans                                         120,000

Loss on disposal of distribution van                                      12,000

General distribution costs                                                     710,000

                                                                                                   842,000

(QUESTION 1continued on next page)

Note 4

Administrative costs are as follows:

   £

Depreciation of office equipment                                          70,000

Loss on disposal of investments                                          105,000

Trade debts written off                                                             52,000

Increase in general allowance for doubtful debts              88,000

Customer entertaining                                                             25,000

Staff entertaining                                                                      20,000

Gift Aid donations                                                                     30,000

Legal fees re acquisition of new freehold offices               17,000

Motor expenses (50% employees’ private motoring)        333,000

Patent royalties payable for trade purposes                         50,000

Embezzlement by director                                                     280,000

General administrative costs (all allowable)                      400,000

                                                                                                1,470,000

Required:  Write a letter to the Directors of Vardy Limited explaining how you have calculated the trading income assessment (referring to your detailed computation that should be cross referenced as an Appendix to the letter) with sections in the letter to cover each part below. 

  1. Adjust the financial accounts for the 16-month period, before deduction of capital allowances.

(6 marks)

  • Time-apportion the adjusted profit figure into chargeable accounting periods (CAPs).

(2 marks)

  • Calculate the trading income assessment (taking account of capital allowances) for each CAP.

(2 marks)

  • Explain the motivation from the point of view of tax policy makers, for reducing the rates of Corporation Tax commenting (briefly) on the possible risks in such a policy of tax rate reduction and commenting why, in certain situations, policy makers prefer to introduce tax allowances rather than reduce tax rates. 

 (15 marks)

(Total 25 marks)

SECTION B

Answer any THREE questions in SECTION B

QUESTION 2

  1. Christine Creswell is self-employed and runs an engineering and design consultancy business.  Her income statement for the year ended 5 April 2021 is shown below:

                                                                                                                            £

Gross profit                                                                                          470,000

Less:

Rent (for use of office and workshop)                       77,000

Depreciation                                                                   45,000

Motor expenses (note1)                                               20,000

Patent royalties (note 2)                                                 8,000

Professional fees (note 3)                                             6,000

Other expenses (note 4)                                              55,000  

                                                                                                               211,000

Net profit (before tax)                                                                        259,000

NOTES:

Note 1

During the year ended 5 April 2021 Christine drove a total of 18,000 miles, of which 6,000 miles were driven when she visited suppliers in Europe. The balance of the mileage is 30% for private journeys and 70% for business journeys in the UK.

Note 2

During the year ended 5 April 2021 she paid patent royalties of £8,000 (gross) in respect of specialised technology that she uses for certain processes.

Note 3

The figure for professional fees consists of £2,300 for legal fees in connection with an action brought against a supplier for breach of contract and £3,700 for accountancy services. Included in the figure for accountancy is £1,000 in respect of personal capital gains tax advice for the tax year 2020/21.

Note 4

The figure for ‘other expenses’ of £55,000 includes £1,200 for gifts to customers of food hampers costing £50 each and £900 for gifts to very loyal customers of pens carrying an advertisement for the business and costing £80 each.

Note 5

Christine uses one of the eight rooms in her private residence as an office when she works from home.  The total running costs of the house for the year ended 5 April 2021 were £20,000. This cost is not included in the income statement’s expenses of £211,000.

(QUESTION 2 continued on next page)

Note 6

Christine uses her private telephone to make business telephone calls. The total cost of the private telephone for the year ended 5 April 2021 was £2,700 and 30% of this related to business telephone calls. The cost of the private telephone is not included in the income statement’s expenses of £211,000.

Note 7

During the year ended 5 April 2021 Christine took goods out of the business for her personal use without paying for them and no entry has been made in the accounts to record this. The goods cost £2,000 and had a selling price of £3,000.

Note 8

Christine purchased a Mercedes van for £40,000 and no calculation has yet been made for capital allowances.

Required:

Write a letter to Christine Creswell (your client) explaining the tax planning points and the tax computation (please show the detailed computation by including it as an Appendix to the letter) in which you show the computation of Christine’s tax adjusted profits for the year ended 5 April, 2021. In the computation ensure that you show your detailed workings with notes of explanation for adjustments as appropriate.

 (15 marks)

  • Oliver Ogbonna is an individual who is employed as a consultant to provide services to a company that is his former employer and those services are exactly the same as those performed when Oliver was a full time employee.  Oliver’s former employer is his only ‘customer’.   Write a letter to Oliver Ogbonna explaining the key issues that you need to discuss with him regarding his tax position and in particular:
  1. Explain why HMRC is likely to be interested in whether Oliver declares himself to be ‘self-employed’ or ‘employed’ and briefly summarise how Oliver’s tax status may have an impact on the amount of tax and national insurance payable by Oliver and his customer / former employer.

(7 marks)

  1. Explain how the ‘contract of service’ that Oliver Ogbonna has with his former employer is critical in determining the self-employment or employment status by indicating six possible parts of the contract that may help to determine whether Oliver is genuinely self-employed.

(3 marks)

(25 marks)

QUESTION 3

Schmeichel Limited has a twelve month chargeable accounting period (‘CAP’) running from 1 April 2020 to 31 March 2021. 

The adjusted trading profit for this CAP has already been calculated at £2,000,000 before deduction of capital allowances for plant and machinery.  The capital allowance computation for the last CAP closed with written down values as follows:

  • Main Pool                                                                    £120,000
  • Special rate pool*                                                       £80,000
  • Short life single asset pool**                                                £30,000

*   The special rate pool balance relates to a Range Rover car (emission 199g/km) bought in April 2018. 

**  Machine bought to use for short term contract of 18 months

During the CAP the following assets were acquired or disposed of:

  • 30 April 2020:  5 Volvo Viking articulated trucks were bought for £900,000
  • 30 June 2020: a new BMW i3  (zero emissions) was bought for £27,000
  • 30 June 2020: a new Audi A6 (emission 152g/km) was bought for £35,000
  • 31 July 2020: a manufacturing system was bought for £200,000
  • 31 October 2020: the machine in the short life pool was sold for £16,000
  • 31 December 2020 a machine in the main pool was sold for £18,000
  • 28 February 2021: a Mercedes van was bought for £27,000 

All disposal proceeds were less than the original cost.

Required: write a letter to the directors of Schmeichel Limited (you are their tax advisor) outlining the UK tax policy motivation for capital allowances and their importance in tax planning and then providing an explanation of the detailed tax computation (marks will be allocated as follows):

  1. Outline of the UK tax policy motivation for capital allowances and the calculation of the allowances for the CAP y/e 31 March 2021 (in order to do this please use a plant and machinery capital allowances computation table that you should include as the Appendix 1 to the letter).

(20 marks)

  • Calculation of the assessable trading income for the CAP and the Corporation Tax payable on the assumption that the company had no further profits chargeable to Corporation Tax for the y/e 31 March 2021 – this should be referred to in the letter and the detailed computation may be shown as Appendix 2 to the letter.

(5 marks)

(Total 25 marks)

QUESTION 4

Eleanor Evans had a cosmetics manufacturing business in Poole, Dorset.  Eleanor bought a factory for £1,700,000 in February 2009 and sold it for £2,700,000 in October 2019.  She bought a new factory to replace the first factory in November 2019 for £2,300,000. Both factories were clearly used in Eleanor Evans’s trade of cosmetics manufacture.  She sold the factory in July 2020 for £3,100,000.  Eleanor’s trading income for tax purposes in the year to 5 April 2020 and the year to 5 April 2021 is calculated as £300,000 and £400,000 respectively.

Required (as the tax advisor) write a letter to Eleanor Evans who has asked you to clarify and explain to her how the tax is calculated, what reliefs are available to her and the best way to use those reliefs.  In particular, your answer should include the following items (please indicate these using headings in your letter and cross referencing to detailed computations in an Appendix):

  1. Calculate the chargeable gain and Capital Gains Tax payable in respect of the sale of the first factory assuming that rollover relief is claimed. Please show and explain your workings clearly.

(8 marks)

  • Calculate the chargeable gain and Capital Gains Tax payable in respect of the sale of the second factory in July 2020.  Please show and explain your workings clearly.

(7 marks)

  • Distinguish between ‘Rollover Relief’ and ‘Holdover Relief’ and briefly explain whether it is appropriate from the point of view of tax policy to have the two different tax treatments.

(5 marks)

  • In what circumstances would Eleanor Evans be eligible for Business Asset Disposal Relief?  Briefly comment on the purpose and likely effectiveness of Business Asset Relief (and Entrepreneur’s Relief that it replaced) from the point of view of the UK tax policy makers.

(5 marks)

(25 marks)

QUESTION 5

You are the accountant and tax adviser to Hilary Haller who owns a business comprising four shops specialising in selling a wide range of organic fruit, vegetables and cereals as well as some processed foods and confectionary.  Hilary Haller has asked you to advise her on her VAT position.  She tells you that she has not registered for VAT yet as her standard rated supplies are significantly below the annual VAT limit of £85,000.

The information for the four shops is shown below.  It is important to note that in your discussion with Hilary Haller you discover that the figures recorded for sales (and shown below) do not include any VAT – even on the standard rated items.  Hilary Haller confirmed in answer to your question that customers were charged for the VAT on the standard rated items.  By contrast the figures shown for purchases do include the VAT (gross of VAT figures are shown below therefore).

Sales
Excluding VATTotalShop AShop BShop CShop D
Zero rated foods100,00023,00027,00018,00032,000
Standard Rated Items70,00030,00012,00015,00013,000
Total170,000
Purchases
Goods for resale
Zero rated foods50,000
Standard Rated Items18,000
Other purchases
Delivery Van30,000

Required:

Write a letter to your client, Hilary Haller.  In your letter you should advise Hilary Haller of the following:

  1. The overall VAT position including an explanation of the relevant VAT rules, how Hilary Haller should account for VAT on zero rated and standard rated items and how to communicate with HMRC in the future.

(15 marks)

  • Calculate the VAT payable or recoverable as the case may be – ensure that you show a clear summary with detailed workings included in an appendix to your letter.  Remember that marks will be awarded for style and presentation.

(10 marks)

(25 marks)

QUESTION 6

You are tax adviser to a UK company, Thomas Plc that manufactures advanced medical equipment for export to the major markets in the EU, USA, Japan and China.  The newly installed Finance Director of Thomas Plc has contacted you as she has some concerns about certain current intra-group trading arrangements within the group.  Thomas Plc has a wholly owned subsidiary, Tuohy Limited that is located in the Republic of Ireland.  Thomas Plc has been exporting goods to Tuohy Limited at prices that are lower than the market prices and this results in lower tax liabilities – the UK has a Corporation Tax Rate of 19% in 2020/21 and this is significantly higher than the company income tax rate in the Republic of Ireland.  The Finance Director has also asked for your opinion on a possible relocation plan of the group that would involve establishing a new holding company called Thomas Holdings Plc to be incorporated and head-officed in Dublin in the Republic of Ireland to take over Thomas Plc currently based and head-officed in London.  Thomas Holdings Plc’s board would comprise the same directors as Thomas Plc and you are asked what would be the position if six of the eight directors who currently sit on the board of Thomas Plc continued to live in the UK and the board meetings of the new Thomas Holdings Plc continued to take place in London.

Required:

Write a letter to the Board of Thomas Plc outlining the UK and wider tax position relating to the following:

  1. The intra-group trading and pricing arrangements outlined above.

(14 marks)

  • The possible re-establishment and relocation of the holding company as outlined above.

(11 marks)

(25 marks)


RELIEFS AND ALLOWANCES – 2020/21 and 2019/20 (and also 2018/19)

These are shown on the next two pages.

RELIEFS AND ALLOWANCES – 2020/21 and 2019/20 (2018/19)

Income Tax – Personal reliefs and allowances

Personal Allowance                                                              £12,500  (£11,850)

Income Tax – Taxable bands are as follows:-

Basic Rate     20%                                                    £0 – £37,500  (£0 – £34,500)

Higher Rate   40%                             £37,501 – £150,000  (£34,501 – £150,000) 

Additional Rate   45%                           over £150,000   (over £150,000)

Corporation Tax – rates and allowances

Main rate of corporation tax                                               19% (19%)

Capital Gains Tax – rates and allowances

Standard rate (assets excluding residential property)   10% (18%)

Standard rate (residential property)                                  18% (18%)

Higher rate (assets excluding residential property)       20% (28%)

Higher rate (residential property)                                      28% (28%)

Business Asset Disposal relief rate                                  10% (10%)

Business Asset Disposal relief lifetime limit (Note 1):               £1,000,000 (10 mn) (10 mn)

Annual Exempt Amount (Note 1)                          £12,300 (12,000) (11,700)

Note 1: this shows limit/amount for 2020/21 and previous two tax years

Continued on next page (National Insurance Contributions and VAT) …………

National Insurance Contributions         2020/21 (2019/20) (2018/19)  (extracts)

                                                                                    Employer                  Employee

Class 1

Weekly earnings / Annual

£0 – £169(166)(162)/£8,788 (£8,632)(£8,424)     Nil                   SEE BELOW

£0 – £183(166)(162)/£9,500(£8,632)(£8,424)      SEE ABOVE             Nil

£169.01- £962(962)(892)/£50,000(£46,350)       13.8%(13.8%) SEE BELOW

£183.01- £962(962)(892)/£50,000(£46,350)       SEE ABOVE 12% (12%)

Over £962(962)(892)over £50,000 (£46,350)      13.8% (13.8%)          2% (2%)

Class 2

Small earnings exception                                      £6,475 (6,365) (6,205)

Normal rate                                                               £3.05 (3.00) (2.95) per week

Class 3

See note below.

Class 4

Profits £9,500(8,632) – £50,000  (£8,424 – £46,350)       9% (9%)

Profits over £50,000 (50,000) (£46,350)                           2% (2%)

Note: Class 3 contributions are voluntary contributions paid by people who wish to protect their entitlement to the State Pension and who do not pay enough National Insurance contributions in another class.

VAT (NO CHANGE IN 2020/21 FROM 2019/20 or after 1 April 2020)

After 1 April 2019     After 1 April 2018

Standard rate                                              20%                            20%

Annual Registration Limit                          £85,000                      £85,000 

De-registration Limit                                               £83,000                       £83,000 

Cash Acc Scheme – max t/o to join          £1,350,000                £1,350,000

Annual Acc Scheme –max t/o to join       £1,350,000                £1,350,000

Optional Flat Rate Scheme –

Max taxable turnover (t/o) (ex VAT)          £150,000                   £150,000

Please note that as per the Standard Assessment Regulations any work submitted after the deadline will be capped at 0% as this time constrained paper is replacing an exam. The submission box will therefore close at the set time and late submissions cannot be accepted.

You must keep a copy of your paper – the university will not take responsibility for lost submissions.

If you are unable to submit on time due to medical or other circumstances you MUST obtain an approved postponement PRIOR to the submission deadline.  Extension/Postponement Request Forms are available from the university website. Follow the link below which takes you to Important Information and Exceptional Circumstances. Select the form you need under ‘How do I let my faculty know about my circumstances?’.

https://www.bournemouth.ac.uk/students/help-advice/looking-support/exceptional-circumstances

Plagiarism

Plagiarism is the act of copying the work or ideas of others without proper acknowledgement of this work.

Plagiarism also includes self-plagiarism or duplication: the inclusion in coursework/exam, or a dissertation, or project, of any material which is identical or substantially similar to material which has already been submitted for any other individual assessment within the University or elsewhere.

Avoiding plagiarism is best achieved through the use of proper academic referencing and minimising direct quotations (i.e. re-write others’ ideas in your own words, but still provide the reference of where these ideas came from).

Collusion

BU defines ‘collusion’ as the ‘representation of a piece of unauthorised group work as the work of a single student’. This means working with your fellow students to complete an assessment when you are supposed to complete the work on your own. You are therefore reminded that you should not work with other students on a piece of assessed work where it is stated as being an individual assessment.

Further information can be found here:

https://www.bournemouth.ac.uk/students/library/using-library/how-guides/how-avoid-plagiarism

and

https://www.bournemouth.ac.uk/students/library/using-library/how-guides/how-avoid-academic-offences

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