Taxation Exams: Answer Book Guidelines and Sample Questions

Guidelines for Answer Book

1.On each answer book write:

(a)Your full 7-digit student registration number – as on your student ID card.

(b) The title of the module and the module code

(c)The number of the questions answered

2.Do not write your name on the answer book, only your number.

3.SECTION A compulsory

4.SECTION B consists of three (3) questions, attempt only TWO (2).

You should assume that the tax rates and allowances for the tax year 2019/20 and for the financial year to 31 March 2020 will continue to apply for the foreseeable future unless you are instructed otherwise.

Question 1

You are a newly engaged Tax Consultant at Pee-Kay Limited, a UK resident company that has been in business for the last 19 years. Their main business is the construction of agricultural dams for small-scale farmers. The company's income statement for the year ended 31 March 2020 is as follows:

Operating expenses

Depreciation

End of year staff party and awards (Note 1)

Professional fees and services (Note 2)

Gifts and donations (Note 3)

Repairs and maintenance (Note 4)

Notes:

1.End of year staff party and awards (Note 1)

The end of year party and awards was organised for employees only. The cost per head was £100.

2.Professional fees and services

Pee-Kay Ltd. pays 5% of their profit before tax as ‘Accountancy and audit fee’. The remainder of the professional fees and services are distributed as follows: £9,210 for Legal fees for the renewal of a 10-year property lease and £20,000 for Legal fees in connection with the issue of loan notes (refer to note 9).

3.Gifts and donations

Donation to a local charity for the purchase of a photocopier

Donation to a national charity 15,000

Gifts to customers (food hampers costing £100 each)

4.Repairs and maintenance

Pee-Kay Ltd spent £50,200 for general repair works. This includes £20,000 for the painting and redecoration of the customer service meeting rooms.

The remainder of the cost was incurred on the initial repairs to an office building that was acquired during the year. The office building was not usable until the repairs were carried out.

5.Bad debts

Trade debts written-off 20,250

Increase in allowance for trade debtors 5,250

Loans to customers written-off 5,000

6.Dividends received

The dividend was received from a UK resident company that Pee-kay owns 75% interest.

7.Loan interest received

8.Bank interest received

The bank interest is received on each annual anniversary of the opening of the bank account.

9.Interest payable

During the year under consideration, Pee-Kay Ltd. raised funding from their bankers for trading purposes. Interest of £33,000 was paid on 31 January 2020.

10.Plant and machinery

On 1 April 2019 the tax written down value of the main pool of plant and machinery was £185,000. An additional equipment costing £77,000 was added to the non-current assets during the year. This equipment qualifies for a First Year Allowance.

Required:

a)Calculate Pee-Kay Ltd.'s tax adjusted trading profit for the year ended 31 March 2020.

b)Calculate the corporation tax payable by Pee-Kay Ltd. for the year ended 31 March 2020 if the tax adjusted trading profit was £1,734,500. Briefly explain how dividend

c)Write a short report to the Directors of Pee-Kay Ltd that briefly explain the impact of franked income and the treatment of the following transactions for tax purposes:

1.Loan to customers

2.Donation to local and national charities

3.Legal fees for the short-term lease renewal

4.Cost of the end of year staff party and awards

5.Initial repair costs on office building

6.Franked income

Question 3

Mubarak purchased a house in Manchester on 1 June 1994 for £200,200. He lived in the house until 31 December 1995 when he travelled to the Amazon region for environmental research.

After living in the Amazon rain forest and other forest reserves in East Africa for two (2) years, he returned to the UK to occupy the house again on 1 January 1998. Mubarak stayed in his house until 30 June 2014 before moving out to live with his ailing father in Cambridge. The house was sold on 31 December 2019 for £670,000.

Required:

a.Calculate Mubarak’s capital gains tax payable for 2019-20.

Note: Assume the only disposal made by Mubarak in the tax year is this building and that he is a higher rate taxpayer.

b.Briefly explain how the period Mubarak lived in his father’s house will be treated for tax purposes.