Taxation by HC111122204822

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									TAXATION

Diploma stage examination

December 2008


MARKING SCHEME




                            (Copyright)
Diploma Level – Marking Scheme                                               December 2008
TAXATION

Question 1

(a)

                                                            £               £
Pre-tax profit per accounts                                               477,970            ½
Add: Bonuses paid > 9 months after year end                                40,000            ½
       Accounting fees: capital related item                                6,600            ½
       Increase in general provision                                        5,200            ½
       Disallowable gifts                                                     960            ½
       Political donations                                                    400            ½
       Legal costs re new lease / sale of property                          7,300            1
       Depreciation                                                        32,562            ½
       Entertaining                                                        12,400            ½
       Loss on disposal of fixed assets                                     7,399            ½
       Repairs: new desk (capital)                                          1,830            ½
       Repairs: office partitions (capital)                                 6,920            ½
       Travel: flights (not purely trade related)                           1,650            ½
                                                                          601,191
Less: UK dividends received                                4,500                             ½
      Profit on sale of freehold property                132,700                             ½
      Interest receivable                                  8,700          145,900            ½
Schedule D Case I profit before capital allowances                        455,291            ½
                                                                                             (9)
(b)

    Tax Accounting            Pool         Alfa          Mercedes           Total
        Period:                           Romeo                         allowances
30 September 2007:
WDV b/f                        40,200      18,350          24,130                            ½
Additions                           -
Disposals                      23,200                                                        ½
                               17,000
WDA, 25%                        4,250                                       4,250            ½
WDA, restricted                              3,000              3,000       6,000            1
Additions         12,500                                                                     ½
FYA @ 40%          5,000        7,500                                       5,000            1

Additions         11,300                                                                     ½
FYA 100%          11,300            0                                      11,300            1
WDV c/f                        20,250      15,350          21,130          26,550            ½

31 March 2008:
Additions                           -
Disposals                           -      12,700                                            ½
                               20,250
WDA, 25% (6 months)             2,531                                       2,531            1
WDA, restricted                                                 1,500       1,500            ½
Balancing allowance                          2,650                          2,650            ½

Additions         97,150                                                                      ½
FYA @ 40%         38,860       58,290                                      38,860            1½
WDV c/f                        76,009                -     19,630          45,541             ½




TAXM8                                    Page 2 of 12                                            J
Diploma Level – Marking Scheme                                              December 2008
TAXATION

The additions of £97,150 comprise capital items in repairs (£1,830 + £6,920) together
with office equipment (£24,100) and medical equipment (£64,300).
                                                                                        (11)
(c)

 Disposal of office                                                      Cost
                                                                           £
 Disposal proceeds                                                       257,700            ½
 Less: disposal costs                                                      2,500            ½
 Less: acquisition / enhancement costs                                   125,000            1
                                                                         130,200

 Less: Indexation allowance:
      (208.9-103.7)/103.7 = 1.014 x 50,000                                50,700            1
      (208.9-149.8)/149.8 = 0.395 x 75,000                                29,625            1

 Chargeable gain                                                          49,875

                                                                                            (4)
(d)

                                         Total             Tax accounting period
                                                          30.09.07      31.03.08
Months                                    18                 12             6               ½
                                           £                  £             £
Schedule D Case 1                        455,291            303,527       151,764           1
Less: capital allowances                  72,091             26,550        45,541           1
Trading profit                           383,200            276,977       106,223
Interest receivable                        8,700              5,800         2,900           1
Chargeable gains                          49,875                  -        49,875
PCTCT                                    441,765            282,777       158,988
Franked Investment Income (FII)            5,000              5,000              -          ½
Profits                                  446,765            287,777       158,988

Lower limit                                                 300,000       150,000           ½
Upper limit                                               1,500,000       750,000           ½

Corporation tax @ 19%(½)                                    56,116         47,699           1
& 20% (½) / 30%
Less: marginal relief
(750,000 – 158,988) x 1/40                                       -         14,775           1
Corporation tax payable                                     56,116         32,924

                                                                                            (7)
(e)

As the company is not large, corporation tax will be payable 9 months and 1 day after the
end of the tax accounting period. As there are two tax accounting periods in the long period
of account, there are two tax payment dates.                                               1

The first payment date is 1 July 2008, when £56,116 is payable.                             ½
The second payment date is 1 January 2009, when £32,924 is payable.                         ½

                                                                                            (2)




TAXM8                                      Page 3 of 12                                         J
Diploma Level – Marking Scheme                                              December 2008
TAXATION




(f)

                                               Tax accounting period
                                       30.09.07      31.3.08        31.3.09
                                           £            £              £
Schedule D Case I profit                276,977       106,223               -                    1
Interest receivable                        5,800        2,900         12,000
Capital gains                                  -       49,875               -
                                        282,777       158,998         12,000                    1½
Less: s393A(1)(a) relief                       -             -        12,000
Less: s393A(1)(b) relief                  29,002      158,998               -
                                        253,775              -              -

Corporation tax @ 19% (½)                  49,486               -                -               1
& 20% (½)

Loss memorandum

                                                            £
Loss in year ended 31 March 2009                          200,000
Less: s393A(1)(a) relief                                   12,000                                ½
                                                          188,000
Less: s393A(1)(a) relief                                  158,998                                ½
                                                           29,002
Less: s393A(1)(b) relief                                   29,002                                ½
Loss available for carry forward s393(1)                        -

The loss carried back is offset fully against the profits in the six months to 31 March 2008.    1

Only six months worth of profits in the tax accounting period to 30 September 2007
(£141,388) can be reduced by the losses carried back. There is sufficient availability of profits
to offset the losses against, and so the losses are used up in full.                            1

                                                                                                (7)

                                                                                           (40)




TAXM8                                      Page 4 of 12                                           J
Diploma Level – Marking Scheme                                        December 2008
TAXATION


Question 2


(a)

(i)     Emily's income tax computation 2007/08

                                                            £        £
        Salary: (£17,000 + 6/12 x £48,000)                         41,000             ½
        Car benefit:
        15% + 3% + 7% = 25% x 21,160 x 6/12                         2,645             1
        Asset bought at undervalue: £10,200 - £9,000                1,200             ½
        Mobile phone (exempt)                                           -             ½
        Total employment income                                    44,845
        Self-employment:                                           20,720             ½
                                                                   65,565
        UK dividends £2,430 + £270                                  2,700             ½
        NSB Ordinary a/c interest (first £70 exempt)                  350             ½
                                                                   68,615
        Personal allowance                                          5,225             ½
        Taxable income                                             63,390
        Income tax due:
        Non-savings income (£63,390 - £3,050)
          £2,230 @ 10%                                       223
          £32,370 @ 22%                                    7,121
          £25,740 @ 40%                                   10,296   17,640         1½
        Savings income
         £350 @ 40%                                                  140              ½
        Dividend income
          £2,700 @ 32.5%                                              878             ½
                                                                   18,658
        Less: Tax credits on dividends                                270             ½
                                                                   18,388
        Less: Tax deducted via PAYE                                 8,900             ½
        Income tax liability                                        9,488


                                                                                      (8)

(ii)    Emily's NICs

                                                                     £
         Primary Class 1 NICs:
           (£34,840 - £5,225) = £29,615 @ 11%                       3,257             1
           (£41,000 - £34,840) @ 1%                                   268             1
                                                                    3,525
         Secondary Class 1 NICs:
          (£41,000 - £5,225) = £35,775 @ 12.8%                      4,579             ½
         Class 1A NICs:
           (£2,645 + £1,200)= £3,845 @ 12.8%                         492              ½

                                                                                      (3)




TAXM8                                      Page 5 of 12                                   J
Diploma Level – Marking Scheme                                                  December 2008
TAXATION

(iii)        Employment income v self-employment

Employment represents a contract of service as opposed to a contract for services. In looking
at the status of an individual, HMRC will consider the following criteria:

            The degree of day to day control exercised
            The degree of exclusivity
            The mutuality of obligation between the two parties
            Whether the work done by the individual is an integral part of the business and not an
             accessory to it.
            The financial risk and reward
            The ability to employ his/her own resources.
            The individual‟s ability to decide where and when the work is done.

1 mark for each valid point up to a maximum of                                                     7

In Emily‟s case, she appears to be able to control her work, can work for others, has the
ability to profit from her own enterprise, and can work at home when she wants. Thus, she
would appear to satisfy the self employment test.

½ mark for each valid point up to a maximum of                                                     2

                                                                                                 (9)
(iv) Gift Aid

Gift Aid donations are treated as if made net of basic rate income tax and the charity can
recover the amount of tax which is deemed to have been deducted at source. The gift is not
shown directly in the donor's income tax computation but the following rules apply:      1

(i)          The donor must pay tax equal to at least the amount of tax deemed to have been
             deducted from the gift. If this is not the case, the donor's entitlement to personal
             allowances is restricted to ensure that this amount of tax is in fact paid. Unless the
             Gift Aid donations are extremely large, this rule is unlikely to affect Emily.       1

(ii)         The donor's basic rate band is extended by the gross amount of the gift. This
             extension ensures that relief at the higher rate is automatically given to higher rate
             taxpayers. This will benefit Emily, assuming that her income stays at similar levels. 1

(iii)        When determining entitlement to age-related personal allowances, the donor's income
             is deemed (for this purpose) to be reduced by the gross amount of the gift. This rule is
             not relevant to Emily.                                                                 1

                                                                                                 (4)
(b)          Disposal of shares in Eldorado plc

For the purposes of indexation, there is no rounding of the indexation factor.                     ½

            Section 104 Holding                           No. of      Cost      Indexed
                                                          shares                  cost
                                                                          £            £
            Bought August 1984                             1,000      2,000        2,000         ½
            Bought December 1984                           6,000     18,000      18,000          ½
            Indexation: 94.8-90.0 / 90.0 x 2,000                                     107         ½
            Indexation: 94.8-90.9 / 90.9 x 18,000                                    772         ½
                                                           7,000     20,000      20,879
            Indexation to July 1986
               (97.5 - 94.8)/94.8 x £20,879                                          595         ½
                                                                                  21,474


TAXM8                                           Page 6 of 12                                         J
Diploma Level – Marking Scheme                                          December 2008
TAXATION

        Bought July 1986                              1,000    4,000      4,000         ½
        c/f                                           8,000   24,000     25,474



        S104 Holding
                                                     No. of   Cost      Indexed
                                                     shares               cost
                                                                   £           £
        b/f                                           8,000   24,000     25,474
        Indexation to December 2007
           (210.9 - 97.5)/97.5 x £25,474                                 29,628         ½
                                                      8,000   24,000     55,102
        Sold December 2007                            3,000    9,000     20,663          1
        c/f                                           5,000   15,000     34,439

    The shares were sold for £36,000 so the chargeable gain arising on the disposal of these
    shares is £15,337 (£36,000 - £20,663).                                                 1

                                                                                        (6)

                                                                                       (30)




TAXM8                                      Page 7 of 12                                      J
Diploma Level – Marking Scheme                                                December 2008
TAXATION


Question 3

(a)

The tax point of a supply is the date on which the supply is deemed to have occurred for VAT
purposes. The basic tax points are as follows:

         For a supply of goods - the date on which the goods are removed or made available to
          the customer.                                                                     ½
         For a supply of services - the date on which the services are completed.          ½

However, the tax point of a supply may differ from the basic tax point in the following
circumstances:

         If a tax invoice is issued or payment is received on a date which is earlier than the
          basic tax point, then that date becomes the tax point.                                ½
         Otherwise, if a tax invoice is issued within 14 days after the basic tax point, then the
          invoice date becomes the tax point.                                                   ½

If VAT rates change, the tax point of a supply determines the rate of tax which is applicable
to that supply. The tax point of a supply also determines the VAT period in which output tax
relating to the supply must be accounted for or the VAT period in which input tax relating to
the supply may be reclaimed.                                                                1

                                                                                               (3)
(b)

The input tax attributable to exempt supplies (£3,400) is not reclaimable.                      ½

While the input tax attributable to taxable supplies is fully recoverable, only an element of
the unattributed input VAT can be reclaimed. The applicable ratio is calculated as follows:

                  105,000 + 18,000
                                                            = 71.51% => 72%                   2½
          105,000 + 18,000 + 37,000 + 12,000

Note that the supply of insurance services is an exempt supply.                                ½

The VAT payable for the quarter is as follows:

                                                                        £           £
 Output tax:
 Standard rated supplies: £105,000 x 17.5%                                    18,375          ½
 Zero-rated supplies: £18,000 x 0%                                                 -          ½
                                                                              18,375
 Input tax:
 Attributed to taxable supplies:                                     5,260                    ½
 Additional input VAT: £2,115 x (17.5 / 117.5)                         315                    ½
 Staff salaries: Not VATable                                             -                    ½
 Unattributed: £4,000 x 72%                                          2,880                    ½
                                                                               8,455
 Payable to HMRC                                                              £9,920          ½

Input tax not attributed to taxable supplies is £1,120 (28% x £4,000) + £3,400 = £4,520
which exceeds the de minimis level and cannot therefore be reclaimed.                  1
                                                                                     (8)


TAXM8                                        Page 8 of 12                                         J
Diploma Level – Marking Scheme                                            December 2008
TAXATION


(c)

Bad debt relief for VAT purposes is available under the following circumstances:

(i)     The supply is for consideration in money                                      ½
(ii)    Output tax has already been accounted for                                     ½
(iii)   The value of the supply did not exceed market value                           ½
(iv)    The debt is written off in the company‟s accounts                             ½
(v)     More than six months have elapsed since BOTH the date of supply and the date
        payment was due.                                                              1
(vi)    A claim can be made within three years of bad debt relief becoming available. ½

Peel Services should make the bad debt claim on the VAT return to 30 November 2007.         ½

                                                                                            (4)
(d)

Although the VAT return was submitted on time, part of the quarterly VAT liability has not yet
been paid by the due date. As a result of the late payment, HM Revenue & Customs will issue
a surcharge liability notice on the company.                                                ½

The surcharge period will run from the date of notice until the anniversary of the end of the
period for which VAT was paid late (i.e. until 31 August 2008).                            ½

During this time, any further default will extend the surcharge period, and any further late
payments of VAT will attract a surcharge penalty of 2%, rising to 15% for successive late
payments.                                                                                 ½

The penalty will not be collected unless it exceeds £400.                                   ½

As the return understates the VAT payable, a misdeclaration penalty may apply. This is 15%
of the VAT which would have been lost if the return was accepted as correct.             1

However, this penalty applies only when the VAT otherwise lost exceeds the lower of:

(1)     £1,000,000, or
(2)     30% of the sum of the true input tax and output tax, known as the Gross Amount of
        Tax (GAT).                                                                     1

The true output tax is £18,000 (15,375 + 2,625) so 30% of GAT = 30% x (8,000 + 18,000)
i.e. £7,800.                                                                        ½

The under-declared VAT does not exceed 30% of GAT and thus the 15% penalty will not
apply.                                                                           ½

                                                                                            (5)
(e)

The cash accounting scheme is available to small traders. The scheme operates as follows:

A person who joins the cash accounting scheme accounts for output tax in the tax period      in
which payment is received from the customer and reclaims input tax in the tax period         in
which payment is made to the supplier. This allows the person to delay the payment           of
output tax to HMRC until the tax has actually been received from customers, which             is
beneficial if customers are given extended credit.                                            1




TAXM8                                     Page 9 of 12                                        J
Diploma Level – Marking Scheme                                            December 2008
TAXATION

The scheme also provides automatic relief for bad debts. On the other hand, input tax cannot
be reclaimed until that tax has actually been paid to suppliers.                          1

A registered person may not join the cash accounting scheme unless:

           taxable turnover (excluding sales of capital items) is not expected to exceed
            £1,350,000 in the next 12 months, and                                      ½

           the person's VAT returns are up to date, and                                     ½

           all amounts of VAT due to be paid to HMRC (including any penalties and interest)
            have in fact been paid, or the person has come to an arrangement for such
            payments to be made by instalments, and                                       ½

           within the previous 12 months, the person has not been convicted of a VAT offence
            or assessed to a penalty for VAT evasion involving dishonest conduct.          ½

As Peel has not fully paid all VAT due (the underpayment relating to the quarter ended 31
August 2008, it will not be able to apply for the cash accounting scheme until it has done so.
The company should also monitor carefully its sales, as the supplies in the most recent
quarter would suggest that the taxable turnover limit might be breached in future.           1

                                                                                           (5)
(f)

A regressive tax is one where the proportion of income or wealth paid in tax decreases as the
amount of the taxpayer's income or wealth increases.                                        1

It can be argued that VAT is regressive since a person with a low income will pay the same
amount of VAT on a given purchase as will a person on a high income. For an item costing,
say, £100 + VAT, an individual earning £10,000 per year spends a higher proportion of their
income on the VAT due than another individual earning £50,000 per year.                  1

On the other hand, it could be argued that wealthier individuals buy more goods and services
than those who are less wealthy, so that the total VAT paid in connection with the purchase
of goods and services might be fairly constant. If this were the case, VAT might be seen as
proportional rather than regressive. For instance, an individual on £10,000 per annum might
pay total VAT of £500 per year, whilst someone on £100,000 per annum (who can afford to
buy a greater amount of goods and services) might pay total VAT of £5,000 per year. In each
case, the VAT paid represents 5% of income.                                                1

Another point which suggests that VAT is not regressive is that many of the basics of life are
either zero-rated (food, water) or exempt (rent). This means that lower-paid individuals
(who may spend a large proportion of their income on the basics) will pay VAT on
proportionately less of their expenditure than wealthier people. This point applies to a lesser
degree to individuals who save part of their income and so have lower total expenditure.      1

                                                                                           (4)

                                                                                          (30)




TAXM8                                      Page 10 of 12
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Diploma Level – Marking Scheme                                              December 2008
TAXATION


Question 4

(a)

(i)     Jack's income tax computation 2007/08

                                                              £            £
        Pension income                                                    6,400              ½
        Building society interest (£1760 x 100/80)                        2,200              ½
        ISA interest (exempt)                                                 -              ½
                                                                          8,600
        Personal allowance (age related: >75)                             7,690               1
        Taxable income                                                      910
        Income tax due:
        Non-savings income                                                     -             ½
        Savings income
         £910 @ 10%                                                          91              ½
                                                                             91
        Less: Tax deducted at source                                        440              ½
        Income tax repayment due                                            349

Jack is entitled to claim the married couples‟ age allowance (MCAA) by virtue of his age, but
is unable to use it in full as the MCAA acts as a tax reducer against the income tax calculated
before taking into account tax deducted at source. He should instead elect to give the MCAA
to Margaret, who can use it against her tax liability to better effect.                       2

An election to transfer the allowance to the spouse with the higher net income should be
made before the start of the first tax year in which it is to have effect. In this case, Jack and
Margaret would have to make the claim prior to 6 April 2007.                                    1

Margaret's income tax computation 2007/08

                                                                          £
        Salary                                                          22,300               ½
                                                                        22,300
        Personal allowance                                               5,225               ½
        Taxable income                                                  17,075
        Income tax due:
        Non-savings income
         £2,230 @ 10%                                                       223              ½
         £14,845 @ 22%                                                    3,266              ½
                                                                          3,489
        Less: Tax deducted at source                                      3,450              ½
                                                                             39
        Less: MCAA:                                                         566              ½
        Income tax repayment                                                527

The MCAA is available at the full rate as Jack reached the age of 75 in the tax year. This can
be transferred to Margaret as detailed above.                                                1

However, as Margaret earned more than the earnings cap in the year, her entitlement to
MCAA is restricted by £700 (0.5 x (22,300 – 20,900)). Thus, the MCAA becomes £5,665 –
reducing her tax liability by £566.                                                  1

                                                                                            (12)


TAXM8                                      Page 11 of 12
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Diploma Level – Marking Scheme                                                    December 2008
TAXATION

(b)     Public goods

              Non-excludable and non-depletable
              “Free riders” problem understates demand
              Taxation may be used to charge for these services
              Examples of public goods might include defence.

        1 mark per relevant point, plus 1 mark for example up to a maximum of 4

        Externalities

              Costs/benefits accrue to those other than the direct consumer/purchaser
              Positive externalities under-produced/negative externalities over-produced as
               the sales price will not reflect the true cost
              Taxation may be used as means of changing behaviour
              Examples include training and pollution producing goods.

        1 mark per relevant point, plus 1 mark for example up to a maximum of 3

        Merit and demerit goods

              Non-optimum quantities consumed without intervention
              Merit goods under consumed eg education
              Demerit goods over consumed eg tobacco
              Taxation may be used to change behaviour
              Potential conflict between varying purposes of taxation

        1 mark per relevant point, plus 1 mark for example up to a maximum of 3

        Natural monopoly

              A natural monopoly exists where large barriers to entry act to limit the number
               of providers, for example utility companies and railway and train operators.
              Taxation may be used to fund regulation to ensure price and quality in the
               absence of competition.

        1 mark per relevant point, plus 1 mark for example up to a maximum of 2

                                                                                                  (12)
(c)      Equity
        Fairness in relation to both means (eg income tax) and benefits (eg community charge)
        Vertical/horizontal equity

        1 mark per relevant point, plus 1 mark for example up to a maximum of 3

        Efficiency
        Economic/administrative efficiency
        Incentive/disincentive effect of tax
        Tax is efficient – or fiscally neutral – to extent that it does not distort choices.
        Not always desirable or possible – some taxes intended to be „corrective‟.

        1 mark per relevant point, plus 1 mark for example up to a maximum of 3

                                                                                                  (6)

                                                                                               (30)


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