The Chartered Tax Adviser Examination

November 2011

Module E Taxation of Unincorporated Businesses

Awareness Paper Answers without marks

Question 1
2009/10 1 January 2010 to 5 April 2010 3/7 21,000 (p/e 31 July 2010) 1 January 2010 to 31 December 2010 Period ended 31 July 2010 5/12 30,000 (y/e 31 July 2011) 9,000 2010/11

21,000 12,500 33,500 30,000 9,000 12,500 21,500

2011/12 Overlap profits

Year ended 31 July 2011 1 January 2010 5 April 2010 1 August 31 December 2010

Question 2
Profit for the year Personal allowance available Income tax @ 20% Class 4 National Insurance (34,0005,715) 8% Total due for year Payments on account already made = 7,000 Payable 31 January 2012 Balancing payment 2010/11 1st Payment on account 2011/12 5,505 34,000 (6,475) 27,525

2,263 7,768

768 3,884

Question 3
HM Revenue & Customs will refer to the badges of trade and so will consider: Subject matter Frequency Length of ownership Supplementary work and marketing Profit motive

Question 4
For 2010/11, Juliettes basis period (on cessation) will be Year ended 31 December 2010 Less Overlap profits Trading loss/terminal loss (5,000) (8,000) (13,000)

Juliette will be able to make a claim to set this loss against total income of 2010/11 and/or 2009/10, setting off in either order to maximize relief. In addition, as she has ceased trading, she will be able to make use of terminal loss relief. This would allow the loss to be carried back for 3 years on a LIFO basis and set against trading profit only of those years.

Question 5
Profit per the accounts Add: Motor expenses (6,000/30,000) 6,400 Excess salary to wife No adjustment ref daughter Less: Home telephone 30% calls only 450 Capital allowances 13,000 20% 24000/30000 Adjusted trading profit 29,000 1,280 6,000

(135) (2,080) 34,065

Question 6
Class 2 2009/10 Small Earning exemption available = nil payable Loss = nil payable 2010/11 2.40 52 weeks 125 19,000 8,000 (loss b/f) First 5,715 @ 0% = nil Balance @ 8% = 423

Class 4

Question 7
As the transfer is to a connected person (daughter), a gain is deemed to arise based on market value. Total gain arising of 400,000 will be split between Alan and Barbara equally. They will each be entitled to an annual exempt amount to set against their gain TWO possible forms of relief available would be: Gift relief allowing the gains to be deferred against the base cost for the daughter; and Entrepreneurs Relief allowing the gains to be taxed at a lower rate of 10%.

Question 8
The tax Return online filing deadline for 2009/10 was 31 January 2011. HM Revenue & Customs have twelve months from this date to open an enquiry therefore until 31 January 2012. There is no requirement for HM Revenue & Customs to give any reason as to why the enquiry is opened. Records should be maintained and produced to support all of the entries made on the tax return for the partnership. Typical examples of information which could be requested include: Purchase invoices to support expense claims Sales invoices to support sales records Copies of accounts Bank statements Business books and records either manual records or software back-ups But not private records unrelated to the business

Question 9
TWDV b/fwd AIA additions AIA claimed Non AIA addition WDA 20% WDA 20% WDA 10% TWDV c/fwd Total allowances General Pool 21,000 22,000 (22,000) 26,000 (4,200) (5,200) 70% 16,800 (1,800) 16,200 20,800 31,640 4,200 3,640 1,800 Special Rate Pool 18,000 Private use car Allowances

22,000

Question 10
Partnership profit per question Patent royalties payable Qualifying loan interest deduction 42,000 (1,500) 40,500 50% share Buy partnership share Home mortgage 20,250 (1,000) n/a 19,250 (6,475) 12,775 2,555

Personal allowance Income tax @ 20%

Question 11
General Pool AIA additions Special rate pool additions AIA claimed General pool additions Printing machine Photocopier etc Max AIA 100,000 17/12 = 141,667 Claimed on special rate = 50K WDA 20% 17/12 Tax written down value c/fwd Total allowances 50,000 (50,000) 95,000 25,000 120,000 Special rate pool Allowances

Nil

50,000

(91,667) 28,333 (8,028) 20,305

91,667 8,028 149,695

Question 12
Proceeds Original cost Chargeable gain Entrepreneurs relief available Already used Goodwill Building 3,200,000 4,600,000 NIL (2,400,000) 3,200,000 2,200,000 Total 5,400,000 5,000,000 (200,000) 4,800,000 @ 10% 600,000 @ 28% Fixtures Exempt assets

Total payable

480,000 168,000 648,000