ACCA F6 FA09 Study Text 2010

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Answers to practice questions

Rate of corporation tax decision: Tax rate = 21%

Corporation tax liability

Corporation tax liability (PCTCT × 21%) (£244,100 × 21%) 51,261

Note

Ignore dividends paid to shareholders.

Workings

(W1)

Interest income £

Debenture interest receivable 7,200

Minus: Interest on underpaid corporation tax (5,800)

–––––––––––––––––––––––––––––––––––

Interest income 1,400

–––––––––––––––––––––––––––––––––––

Notes

(1) The amount of debenture interest actually paid in the CAP is not relevant.

Interest income is assessed on an accruals basis.

(2) Loan stock interest payable which is incurred for trading purposes is treated as

an allowable deduction from trading income and is not deducted from interest

income. The question gives the adjusted trading profits, therefore no further

adjustment is required.

(W2)

UK property income – Premium received on the granting of a

short lease

Premium received 60,000

Minus 2% × £60,000 × 34 years

(40,800)

–––––––––––––––––––––––––––––––––––

Property income assessment

19,200

–––––––––––––––––––––––––––––––––––

28 Change of accounting date

IJ plc: Corporation tax computations

12 months

ending

31 March 2009

3 months

ending

30 June 2009

£ £

Adjusted profit before capital allowances

(£400,000 × 12/15 : £400,000 ×

)

320,000

80,000

Capital allowances

(67,640) (14,910)

–––––––––––––––––––––––––––––––––––

Trading income 252,360 65,090

Interest income

(£150,000 × 6% : £150,000 × 6% ×

)

9,000

2,250

UK property income

(£18,300 × 12/15 : £18,300 ×

)

14,640

3,660

Paper F6 (UK): Taxation FA2009

486 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

IJ plc: Corporation tax computations

12 months

ending

31 March 2009

3 months

ending

30 June 2009

Net chargeable gains

(Second CAP: £62,500 – £22,600)

15,100

39,900

–––––––––––––––––––––––––––––––––––

291,100 110,900

Gift Aid donation

(4,500) Nil

–––––––––––––––––––––––––––––––––––

PCTCT 286,600 110,900

–––––––––––––––––––––––––––––––––––

To determine the rate of corporation tax to

apply

12 months

ended

31 March 2009

3 months

ended

30 June 2009

PCTCT 286,600

110,900

FII (£4,950 × 100/90) Nil

5,500

Profits 286,600

116,400

Small companies rate

Upper limit (full limit : full limit × 3/12) 1,500,000

375,000

Lower limit (full limit : full limit × 3/12) 300,000

75,000

Decision : First CAP – Tax rate = 21%

Second CAP – Tax rate = 28% less marginal relief

Notes

(1) Bank deposit interest actually received is not relevant. Interest income is

assessed on an accruals basis.

(2) Debenture interest payable is an allowable deduction from trading profits and

will have already been deducted in the adjusted profits figure given in the

question.

12 months

ended

31 March 2009

3 months

ended

30 June 2009

Corporation tax liabilities

£ £

£286,600 × 21% 60,186

£110,900 × 28%

31,052

Minus Marginal relief

(375,000 – 116,400) × (£110,900/£116,400) × 7/400

(4,312)

–

–––––

–

–––––––––

–

–––––––––––––––

––––––––––––––––––––––––––––––––

Corporation tax liability 60,186 26,740

–

–––––

–

–––––––––––––––––––––––––

––––––––––––––––––––––––––––––––

Due dates for payment 1 Jan 2010 1 April 2010

Working: UK property income assessment for the 15-month

accounting period

Rents accrued: (£3,000 × 15 months) 45,000

Minus: Allowable expenses

Estate agent fees (£300 × 15 months) (4,500)

Answers to practice questions

Insurance (£100 × 15 months) (1,500)

Repairs (12,000)

Accountants’ fees (4,200)

–––––––––––––––––––––

–

–––––––––––

–

22,800

Minus: Wear and tear allowance - 10% × (£45,000 minus Nil) (4,500)

–––––––––––––––––––––––––––––––––

–

18,300

–––––––––––––––––––––––––––––––––

–

Notes

(1) The conservatory extension is capital expenditure and not an allowable

deduction from rental income.

(2) In a long period of account, UK property income is time-apportioned.

29 Trading income statement

(a)

KL Ltd: Trading income assessment – year ended 31 March 2010

Profit before taxation

202,640

Add

Depreciation 109,880

Gift Aid donation 660

Donation to national charity not under Gift Aid 275

Gifts of champagne to customers 720

Gifts of decanters (cost in excess of £50 each) 880

Extension of workshop 53,100

Legal fees in relation to breaching health and safety

legislation

950

Legal fees in relation to renewal of long lease 1,450

Interest on overdue tax 3,600

Pollution fine 16,000

––––––

–

––––––––––––––––––––––––––

–

390,155

Minus

Loan interest receivable (13,560)

Profit on the disposal of a warehouse (85,910)

––––––

–

––––––––––––––––––––––––––

–

Adjusted profits before capital allowances 290,685

Minus

Capital allowances (45,035)

––––––

–

––––––––––––––––––––––––––

–

Trading income assessment 245,650

––––––

–

––––––––––––––––––––––––––

–

Notes

(1) The extension of the workshop is capital expenditure and not an

allowable deduction from trading income.

(2) Rebuilding the chimney will be an allowable trading expense provided

it replaces the existing chimney and there is no capital improvement.

(3) Legal fees relating to the 60 year lease are not allowable as this is not the

renewal of a short lease.

(4) Legal fees in relation to the raising of long-term finance are specifically

allowable against trading income.

Paper F6 (UK): Taxation FA2009

488 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

(5) All of the costs of providing the staff party is allowable for the company,

regardless of the cost per head. However, if the party costs more than

£150 a head, the employees will be assessed to income tax on the excess

as a benefit of their employment.

(b)

KL Ltd

Corporation tax computation – year ended 31 March 2010 £

Income

Trading income 245,650

Interest income (see working) 9,960

Capital gains

Chargeable gain 56,160

311,770

Gift Aid donation (660)

Proﬁts chargeable to corporation tax (PCTCT) 311,110

(c)

PCTCT 311,110

FII Nil

Profits 311,110

Small companies rate

Lower limit

300,000

Upper limit

1,500,000

Rate of corporation tax decision: Tax rate = 28% less marginal relief

Corporation tax liability £

Corporation tax liability (£311,110 × 28%)

87,111

Minus Marginal relief: (1,500,000 – 311,110) × 7/400 (20,806)

–––––––––––––––––––––––––––––––––

–

Corporation tax liability 66,305

–––––––––––––––––––––––––––––––––

–

Working: Interest income

Loan interest receivable 13,560

Minus: Interest on overdue tax (3,600)

––––––––––––––––––––––––––––––––

Interest income 9,960

––––––––––––––––––––––––––––––––

30 Adjustment of profit and PCTCT

MN Ltd: Trading income assessment – y/e 30 September 2009

£000

Profit before taxation

5,125

Add

Alteration to floor to install display stands 1,460

Depreciation – vans and equipment (£2,800 + £750) 3,550

Amortisation of lease 120

Answers to practice questions

MN Ltd: Trading income assessment – y/e 30 September 2009

£000

Loss on sale of equipment 40

Breach of Customs regulations and fine (£110 + £250) 360

Legal fees in relation to acquiring new lease 20

Donation to police welfare fund 20

Entertaining customers 300

––––––––––––––––––––––––––––––––

10,995

Minus

Bank deposit interest (160)

Dividends received (40)

Allowable deduction for short lease (see working) (90)

––––––––––––––––––––––––––––––––

Adjusted profits before capital allowances 10,705

Minus

Capital allowances (460)

––––––––––––––––––––––––––––––––

Trading income assessment 10,245

––––––––––––––––––––––––––––––––

Notes

(1) Decoration and re-plastering walls will be treated as revenue expenditure and

the cost is therefore allowable.

(2) Donation to the police welfare fund is not allowable as it is a donation to a

national association.

(3) The gifts to customers are allowable as they bear an advertisement for the firm

and cost less than £50 per customer.

(4) Royalties payable are treated as an allowable trading expense. Royalty income

is treated as trading income.

MN Ltd

PCTCT statement – year ended 30 September 2009

£000

Income

Trading income 10,245

Interest income 160

–––––––––––––––––––––––––––––––

Proﬁts chargeable to corporation tax (PCTCT) 10,405

–––––––––––––––––––––––––––––––

Working: Allowable deduction for short lease

£000

Property income assessment on Turin plc

Premium paid to Turin plc 12,600

Minus: 2% × £12,600,000 × 20 years (5,040)

–––––––––––––––––––––––––––––––

Property income assessment on Turin plc 7,560

–––––––––––––––––––––––––––––––

Annual allowable deduction against profit (£7,560,000 ÷ 21 years) 360

–––––––––––––––––––––––––––––––

Allowable deduction for year ended 30 September 2009: (leased for

three months of MN Ltd’s CAP) (£360,000 ×

)

–––––––––––––––––––––––––––––––

Paper F6 (UK): Taxation FA2009

490 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

31 OP Ltd

OP Ltd - Capital allowances

–y/e 31 March 2010

Main

pool

Special

rate pool

Total

allowances

£ £

TWDV b/f

12,000

Additions qualifying for AIAs

Plant: (2 April 2009)

6,000

Vans: (23 April 2009)

10,400

Computer equipment: (19 January 2010)

3,000

–

––––

–

––––––––––––––––––––––––––

–

19,400

AIA

(19,400)

19,400

–

––––

–

––––––––––––––––––––––

–

–––

–

Nil

Acquisitions not qualifying for AIAs

12,200 12,500

Disposals

(16,900)

–

–––––

–

––––––––––––––––––––––––––

–

7,300

Writing down allowance: 20%/10%

(1,460) (1,250) 2,710

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

5,840 11,250

Low emission car

14,500

FYA (100%)

(14,500)

14,500

–

–––––

–

––––––––––––––––––––––––––

–

Nil

–

–––––

–

––––––––––––––––––––––––––

–

–––––––––––––––––––––––––––––––––––

TWDV c/f

5,840 11,250

–

–––––

–

–––––––

–

––––––––––––––––––

–

– ––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––

–

Total allowances available

36,610

–––––––––––––––––––––––––––––––––

–

Note

Private use of the car by the company secretary is irrelevant.

32 RS plc

RS plc

Corporation tax computation £

Income

Trading income (working 1) 322,384

Interest income 700

Net chargeable gains 500

–––––––––––––––––––––––––––––––––

–

323,584

Gift Aid donations (1,000)

–––––––––––––––––––––––––––––––

PCTCT 322,584

–––––––––––––––––––––––––––––––

Rate of corporation tax £

PCTCT

322,584

FII: (question quotes dividend including tax credit)

12,000

–––––––––––––––––––––––––––––––––

–

Profits

334,584

–––––––––––––––––––––––––––––––––

–

Small companies rate

Lower limit

300,000

Upper limit

1,500,000

Answers to practice questions

Rate of corporation tax decision: Tax rate = 28% less marginal relief

Corporation tax liability £

Corporation tax liability (£322,584 × 28%)

90,324

Minus Marginal relief: (1,500,000 – 334,584) × 322,584 / 334,584 × 7/400

(19,663)

–––––––––––––––––––––––––––––––––

–

Corporation tax liability 70,661

–––––––––––––––––––––––––––––––––

–

Workings

Trading income assessment

Profit before taxation

345,885

Add

Legal fees in relation to rights issue of shares

3,150

Gift Aid payments (£500 + £500)

1,000

Depreciation

21,170

–––––––––––––––––––––––––––––––––––

371,205

Minus

Interest on War Loan

(700)

UK dividends received

(12,000)

Gain on sale of shares

(4,700)

–––––––––––––––––––––––––––––––––––

Adjusted profits before capital allowances

353,805

Minus

Capital allowances (working 2)

(31,421)

–––––––––––––––––––––––––––––––––––

Trading income assessment

322,384

–––––––––––––––––––––––––––––––––––

Notes

(1) Royalties payable are an allowable trading expense. Royalty income is taxable

trading income. Therefore no adjustment of profit is required in respect of

royalties.

(2) Debenture interest payable is an allowable trading expense.

(3) Dividends paid are not an allowable trading expense.

(W2) Capital allowances

Main pool

(TWDV)

Total

allowances

£ £ £

TWDV b/f

14,240

Acquisitions not qualifying for AIAs

Car

8,616

–

–––––

–

––––––––––––––––––––––––––––

22,856

Disposals (restrict to cost)

(750)

–

–––––

–

––––––––––––––––––––––––––––

22,106

Writing down allowance: (20%)

(4,421) 4,421

–

–––––

–

––––––––––––––––––––––––––––

17,685

Paper F6 (UK): Taxation FA2009

Main pool

(TWDV)

Total

allowances

Acquisitions qualifying for FYAs

Low emission car 27,000

FYA (100%)

(27,000)

27,000

–

–––––

–

––––––––––––––––––––––––––

–

Nil

–

–––––

–

––––––––––––––––––––––––––––

TWDV c/f

17,685

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Total allowances available

31,421

–––––––––––––––––––––––––––––––––

–

Note

Private use of low emission car by managing director is irrelevant.

33 Net chargeable gain

VW plc: Net chargeable gains for y/e 31 March 2010 £

Investment building (W1)

35,913

Area of land (W2) 16,120

Managing director’s car (W3)

–––––––––––––––––––––––––––––––––

–

52,033

Minus: Allowable losses brought forward

(8,450)

–––––––––––––––––––––––––––––––––

–

Net chargeable gains 43,583

–––––––––––––––––––––––––––––––––

–

Workings

Working 1: Investment building

Gross sale proceeds (December 2009)

95,000

Minus: Incidental expenses (2,450)

–––––––––––––––––––––––––––––––––

–

Net sale proceeds 92,550

Minus: Allowable costs

July 1992 (£28,000 + £1,460 + £2,000)

(31,460)

August 1996

(5,600)

–––––––––––––––––––––––––––––––––

–

Unindexed gain 55,490

Minus: Indexation allowance

July 1992 to December 2009

[(215.2 – 138.8)/138.8] = 0.550 × £31,460

(17,303)

August 1996 to December 2009

[(215.2 – 153.1)/153.1)] = 0.406 × £5,600

(2,274)

–––––––––––––––––––––––––––––––––

–

Chargeable gain 35,913

–––––––––––––––––––––––––––––––––

–

Note

Redecorating costs are not capital expenditure and are therefore not an allowable

deduction in the capital gain computation.

Answers to practice questions

Working 2: Area of land £

Gross sale proceeds (February 2010)

75,000

Minus: Incidental expenses

(400)

–––––––––––––––––––––––––––––––––

–

Net sale proceeds

74,600

Minus: Cost (August 1988)

(25,000)

Enhancement (August 1990)

(5,000)

–––––––––––––––––––––––––––––––––

–

Unindexed gain

44,600

Minus: Indexation allowance

August 1988 to February 2010

[(216.0 – 107.9)/107.9] = 1.002 × £25,000

(25,050)

August 1990 to February 2010

[(216.0 – 128.1)/128.1] = 0.686 × £5,000

(3,430)

–––––––––––––––––––––––––––––––––

–

Chargeable gain

16,120

–––––––––––––––––––––––––––––––––

–

(3) Managing director’s car

Cars are exempt assets.

34 Replacement office building

(a)

XY Ltd: Chargeable gain on the disposal of the original

office building

Sale proceeds (August 2009)

600,000

Minus: Cost (July 1994)

(220,000)

–––––––––––––––––––––––––––––––––––

Unindexed gain

380,000

Minus: Indexation allowance

July 1994 to August 2009

[(214.4 – 144.0)/144.0] = 0.489 × £220,000

(107,580)

–––––––––––––––––––––––––––––––––––

Chargeable gain before rollover relief

272,420

Minus: Rollover relief (see working)

(212,420)

–––––––––––––––––––––––––––––––––––

Chargeable gain – y/e 31 August 2009

60,000

–––––––––––––––––––––––––––––––––––

The deferred gain of £212,420 becomes chargeable on the sale of the

replacement office block: (expected in 2027).

Base cost of the replacement office building

Cost of new office building

540,000

Minus: Rollover relief

(212,420)

–––––––––––––––––––––––––––––––––––

Base cost

327,580

–––––––––––––––––––––––––––––––––––

Paper F6 (UK): Taxation FA2009

Working

Is the asset a QBA for rollover relief purposes? Yes

Has it been replaced with a QBA? Yes

Has it been replaced in the four year qualifying period

(15 August 2008 to 15 August 2012)? Yes

Have all the sale proceeds been reinvested in a QBA? No

Chargeable gain arising in y/e 31 August 2009 – Lower of:

££

(1) All the gain

272,420

(2) Sale proceeds not reinvested in a QBA (£600,000 - £540,000)

60,000

Rollover relief = £272,420 - £60,000

212,420

(b) If XY Ltd was to purchase fixed plant and machinery instead of the smaller

office building:

 Fixed plant and machinery is a depreciating QBA.

 XY Ltd will still have a chargeable gain of £60,000 in the year ended 31

August 2009.

 £212,420 of the gain will be deferred, but not by deducting from the base

cost of the plant and machinery.

 The gain is held over (i.e. a separate record of the gain is kept) and

becomes chargeable on the earliest of:

(1) 10 years after the acquisition of the replacement asset (30 June 2019)

(2) the date the replacement asset ceases to be used in the business

(3) the date the replacement asset is sold.

 As XY Ltd does not expect to sell the asset until 2027, the deferred gain

will become chargeable on 30 June 2019.

35 Bonus issue and share disposal

Chargeable gain on the disposal of Y plc shares £

Gross sale proceeds

7,500

Minus: Cost (from pool working) (1,600)

–––––––––––––––––––––––––––––––––

–

Unindexed gain 5,900

Minus: Indexation allowance (from pool working)

(£2,111 – £1,600) (511)

–––––––––––––––––––––

–

–––––––––––

–

Chargeable gain 5,389

–––––––––––––––––––––––––––––––––

–