ACCA

Mock Examination

Paper P6 (March 2016 and June 2016 exams)

Advanced Taxation

Time allowed:

Reading and planning: 15 minutes

Writing: 3 hours

This paper is divided into two sections:

Section A Both questions are compulsory and MUST be attempted
Section B TWO questions ONLY to be attempted

During reading and planning time, only the question paper may be annotated.

We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past
examination questions and model answers.

First Intuition Publishing Ltd, 2016

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Tax tables
Supplementary instructions
1 You should assume that the tax rates and allowances for the tax year 2014/15 and for the
Financial Year to 31 March 2015 will continue to apply for the foreseeable future unless you are
instructed otherwise.
2 Calculations and workings need only be made to the nearest .
3 All apportionments should be made to the nearest month.
4 All workings should be shown.

Tax rates and allowances

The following tax rates and allowances are to be used in answering questions.
Income tax
Normal rates Dividend rates
% %
Basic rate 1 to 31,865 20 10
Higher rate 31,866 to 150,000 40 32.5
Additional rate 150,001 and over 45 37.5

A starting rate of 10% applies to savings income where it falls within the first 2,880 of taxable income.

Personal allowance
Personal allowance
Born on or after 6 April 1948 10,000
Born between 6 April 1938 and 5 April 1948 10,500
Born before 6 April 1938 10,660
Income limit
Personal allowance 100,000
Personal allowance (born before 6 April 1948) 27,000

Residence status
Days in the UK Previously resident Not previously resident
Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties or more Automatically not resident
46 to 90 Resident if 3 UK ties or more Resident if 4 UK ties
91 to 120 Resident if 2 UK ties or more Resident if 3 UK ties or more
121 to 182 Resident if 1 UK tie or more Resident if 2 UK ties or more
183 or more Automatically resident Automatically resident

Child benefit income tax charge

When income is between 50,000 and 60,000, the charge is 1% of the amount of child benefit
received for every 100 of income over 50,000.
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Car benefit percentage

The relevant base level of CO2 emissions is 95 grams per kilometre.
The percentage rates applying to petrol cars with CO2 emissions up to this level are:
75 grams per kilometre or less 5%
76 grams to 94 grams per kilometre 11%
95 grams per kilometre 12%

Car fuel benefit

The base figure for calculating the car fuel benefit is 21,700.

New Individual savings accounts (NISAs)

The overall investment limit is 15,000.

Pension scheme limit

Annual allowance
2014-15 40,000
2011-12 to 2013-14 50,000
Lifetime allowance 1,250,000

The maximum contribution that can qualify for tax relief without any earnings is 3,600.

Authorised mileage allowances: cars

Up to 10,000 miles 45p
Over 10,000 miles 25p

Capital allowances: rate of allowances

%
Plant and machinery
Main pool 18
Special rate pool 8

Motor cars
New cars with CO2 emissions up to 95 grams per kilometre 100
CO2 emissions between 96 and 130 grams per kilometre 18
CO2 emissions over 130 grams per kilometre 8

Annual investment allowance

Rate 100%
Qualifying expenditure 500,000

Cap on income tax reliefs

Unless otherwise restricted, reliefs are capped at the higher of 50,000 or 25% of income.
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Corporation tax
Financial year 2012 2013 2014
Small profits rate 20% 20% 20%
Main rate 24% 23% 21%
Lower limit 300,000 300,000 300,000
Upper limit 1,500,000 1,500,000 1,500,000
Standard fraction 1/100 3/400 1/400

Marginal relief
Standard fraction (U A) N/A

Patent box
10%
Net patent profit (
)

Value added tax (VAT)

Standard rate 20%
Registration limit 81,000
Deregistration limit 79,000

Inheritance tax: nil rate bands and tax rates

6 April 2014 5 April 2015 325,000
6 April 2013 5 April 2014 325,000
6 April 2012 5 April 2013 325,000
6 April 2011 5 April 2012 325,000
6 April 2010 5 April 2011 325,000
6 April 2009 5 April 2010 325,000
6 April 2008 5 April 2009 312,000
6 April 2007 5 April 2008 300,000
6 April 2006 5 April 2007 285,000
6 April 2005 5 April 2006 275,000
6 April 2004 5 April 2005 263,000
6 April 2003 5 April 2004 255,000
6 April 2002 5 April 2003 250,000
6 April 2001 5 April 2002 242,000
6 April 2000 5 April 2001 234,000

Inheritance tax: tax rates

Rate on excess over Nil band Lifetime rate 20%
Death rate 40%
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Inheritance tax: taper relief

Percentage reduction
Years before death %
Over 3 but less than 4 years 20
Over 4 but less than 5 years 40
Over 5 but less than 6 years 60
Over 6 but less than 7 years 80
Capital gains tax
Rates of tax Lower rate 18%
Higher rate 28%
Annual exempt amount 11,000
Entrepreneurs relief Lifetime limit 10,000,000
Rate of tax 10%
National insurance contributions (Not contracted out rates)
%
Class 1 Employee 1 7,956 per year Nil
7,957 41,865 per year 12.0
41,866 and above per year 2.0
Class 1 Employer 1 7,956 per year Nil
7,957 and above per year 13.8
Employment allowance 2,000
Class 1A 13.8
Class 2 2.75 per week
Small earnings exemption 5,885
Class 4 1 7,956 per year Nil
7,957 41,865 per year 9.0
41,866 and above per year 2.0
Rates of interest (assumed)
Official rate of interest 3.25%
Rate of interest on underpaid tax 3.0%
Rate of interest on overpaid tax 0.5%
Stamp duty land tax
%
150,000 or less (Note 1) Nil
150,001 - 250,000 1
250,001 - 500,000 3
500,001 - 1,000,000 4
1,000,001 - 2,000,000 5
2,000,001 or more (Note 2) 7
(1) For residential property, the Nil rate is restricted to 125,000.
(2) The 5% and 7% rate apply to residential property only. The 4% rate applies to all non-residential
properties where the consideration is in excess of 500,000.
Stamp duty
Shares 0.5%
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Section A
Both questions are compulsory and MUST be attempted

1 CHARLESTON DANCE
An extract from an e-mail from your manager following a meeting he has had with Charleston Dance is
set out below.

I attach a memorandum summarising the matters discussed in a meeting I had yesterday with
Charleston. I also attach a calculation of the inheritance tax due on his fathers death as prepared by
his friend, Lindy. I have not had the chance to look at this in detail but I can confirm that the annual
exemptions and the taper relief have been applied correctly and that there are no arithmetical errors;
please review it with care.
I want you to write a letter from me to Charleston covering the following issues.
(a) Inheritance tax
Brief explanations of any errors you find when you review Lindys calculation of the inheritance
tax due on Charlestons fathers death and the effect of correcting the errors on the total
inheritance tax due.
(b) Investments and pensions
The suitability of investing in venture capital trusts and a summary of the tax reliefs available in
respect of such an investment.
The maximum tax allowable pension contributions that can be made by Charleston and Betty
and the effect on this, if any, of purchasing further rental properties.
(c) Income tax planning
Calculations, with supporting explanations to show that the total tax payable would increase
(rather than decrease!) if he were to transfer all of the quoted shares and government stocks to
a company wholly owned by him. Use the income figures from Lindys inheritance tax
calculation for these purposes and assume that the whole of the new companys post-tax
income would be paid as a dividend to Charleston.
The income tax advantages of Charleston transferring investments to Betty or their children.
Note that I do not want you to consider the IHT or CGT consequences of either the transfer of
shares to a company or the transfer of investments to Betty or the children.
The points that Charleston needs to be aware of in connection with tax avoidance schemes and
the taxation of the Balboan properties.
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The memorandum prepared by your manager is as follows:

To The files
From Tax manager
Subject Charleston Dance
Date 29 May 2015
I met Charleston and his wife Betty on 28 May 2015. The couple has two children who are both at
university.
Charlestons father died on 1 April 2015 leaving Charleston the whole of his estate. Charleston and
Betty immediately resigned from their jobs and now have no income other than that generated from
Charlestons inherited investments.
Charleston agreed to send me a schedule of the assets he inherited from his father together with a
calculation that a friend of his, Lindy, has done of the inheritance tax due. The schedule will also
include details of gifts made by his father whilst he was alive and the income generated by the
inherited investments.
Charleston has asked me to comment on the following ideas.
Charlestons investment ideas
Charleston and Betty intend to make the maximum possible tax allowable personal pension
contributions. They have not previously been members of a pension scheme.
Charleston will sell his fathers home and invest much of the proceeds in further rental property
situated either in the UK or in the country of Balboa. Balboa is not in the EEA.
Charleston wants to invest in unquoted trading companies but does not want to invest in enterprise
investment scheme or seeded enterprise investment scheme shares due to the level of risk involved.
Charlestons tax planning ideas
Lindy has convinced him that he would save income tax if he formed a company and transferred the
quoted shares and government stocks inherited from his father into it. Charleston would own the
whole of the company.
A London based financial institution has sent Charleston details of a number of tax avoidance schemes
that they are promoting. Lindy has assured Charleston that there is no need to disclose the income
from the Balboan properties to HM Revenue and Customs (HMRC) because the income is taxed in the
country of Balboa. Charleston is concerned about the legality of the tax avoidance schemes and the
accuracy of Lindys suggestion
Our input
I told Charleston that I would suggest an alternative to enterprise investment scheme and seeded
enterprise investment scheme shares as well as other tax planning opportunities. I also suggested that
it may be possible to increase his tax allowable pension contributions depending on the property he
buys.
Charleston, Betty and the children are resident and domiciled in the UK. Charlestons father was also
resident and domiciled in the UK.

Tax Manager
Tax Manager
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Lindys calculation of the inheritance tax due and the income generated by the inherited investments
is set out below:
Inheritance tax computation
Fathers lifetime gifts
November 2005 Gift of cash to Charleston more than 7 years prior to death 200,000

1 July 2008 Gift of cash to Charleston 370,000
Annual exemptions (6,000)
364,000
Nil band 325,000
Gifts in last seven years(200,000 6,000 (Two AEs)) (194,000)
(131,000)
233,000

Inheritance tax at 40% 93,200
Taper relief (93,200 80%) (74,560)
18,640

Fathers death estate

Annual
income
received

UK assets:
Fathers home 1,300,000
UK quoted shares and related dividends 500,000 21,000
UK Government stocks and related interest 600,000 27,000
Bank accounts and related interest, furniture and paintings 410,000 8,000
Cars 34,000

Investment properties in the country of Balboa and
related rental income 800,000 72,000
Less: Balboan inheritance tax (160,000)
640,000
Chargeable estate 3,484,000
Inheritance tax at 40% (no nil band) 1,393,600
Total tax due (18,640 + 1,393,600) 1,412,240
Required:
Prepare the letter requested in the e-mail from your manager. Marks are available for the three
sections of the letter as follows:
(a) Inheritance tax (8 marks)
(b) Investments and pensions (9 marks)
(c) Income tax planning. (14 marks)
Professional marks will be awarded for the appropriateness of the format and presentation of the
letter and the effectiveness with which the information is communicated. (4 marks)

(Total: 35 marks)
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2 PETZOLD
Your manager has sent you an email concerning a client, Petzold. An extract from the email together
with two schedules of information from Petzold are set out below.
Email from your manager:
Petzold has owned 100% of the ordinary share capital of Glenz Ltd for many years. Glenz Ltd is a
profitable trading company that provides Petzold with the majority of his income. However, the
company is currently suffering from a short-term cash flow problem.
Petzold also owns 100% of the ordinary share capital of Clementi Ltd. Clementi Ltd has three wholly
owned trading subsidiaries but all of the companies in the group are very small. Petzold purchased
Clementi Ltd in December 2014.
Please carry out the following work in preparation for a meeting that I have with Petzold:

(a) Glenz Ltd Payments to the tax authorities

(i) Calculations of the payments that will be made by Glenz Ltd to the tax authorities in
respect of the three months ended 30 June 2015 and the equivalent figure for the three
months ended 30 September 2015 based on the companys budgeted figures as set out in
Schedule 1 from Petzold.
Petzold is only interested in those payments which affect the companys cash flow
position. Accordingly, as the annual salaries shown represent the gross salaries earned
there is no need to calculate the income tax or employees national insurance
contributions payable in respect of them.
Glenz Ltd is partially exempt for value added tax (VAT) and was unable to recover all of its
input tax in the year ending 31 March 2015. Please provide explanations of the amount
of input tax recoverable by Glenz Ltd for the two quarters you are looking at, but do not
include any other narrative.
(ii) Confirmation, or otherwise, of the accuracy of Petzolds calculation of the
companys corporation tax liability for the year ending 31 March 2015 (see Schedule
1) including an explanation of any difference and a reminder of when the tax is payable.
(b) Glenz Ltd Cash flow
The implications of the following suggestions to improve the companys cash flow position.
(i) Petzold suggested paying Glenz Ltds VAT liabilities for the quarters ending 30 June 2015
and 30 September 2015 late. Glenz Ltds previous four VAT returns have been submitted
on time with the exception of the return for the three months ended 30 June 2014.
(ii) I suggested to Petzold that Glenz Ltd could improve its cash flow position by selling its
warehouse and then renting it back. Please provide me with a summary of the
corporation tax implications of this proposal together with supporting calculations. The
summary should include a detailed explanation of how the chargeable gain arising on the
sale of the warehouse could be relieved via rollover relief.
You should assume that any sale of the warehouse will take place on 1 July 2015 and
that rent will be paid from that date. Base your calculations on the figures provided by
Petzold in Schedule 2. Do not address the VAT or the stamp duty land tax implications of
this proposal.

Tax manager
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Schedules provided by Petzold

Schedule 1: Glenz Ltd Budgeted figures
Three months to 30 June 30 Sept
2015 2015
Sales revenue Standard rated (excluding VAT) 360,000 365,000
Sales revenue Exempt 24,500 23,400

Input tax:
Attributable to taxable supplies 40,000 42,000
Attributable to exempt supplies 950 2,200
Non-attributable 800 1,500
Total 41,750 45,700

Total annual salaries for the companys eight full-time employees - 332,000
Corporation tax liability for the year ended 31 March 2015 16,700 (83,500 20%)

Schedule 2 - The warehouse

Cost (1 February 2005) 180,000
Current market value 330,000
Estimated commercial annual rent payable to new owner 22,000

Required:
Carry out the work required as requested in the e mail from your manager.
The following marks are available.
(a) Glenz Ltd Payments to the tax authorities. (12 marks)
(b) Glenz Ltd Cash flow. (13 marks)
Assume todays date is 6 June 2015
The following figures from the Retail Prices Index should be used.

February 2005 189.6

July 2015 258.6 (assumed)

(Total: 25 marks)
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Section B
TWO of the three questions must be attempted

3 THE ROBINSONS
You have received the following memorandum from your manager, Irwin Allen.
To Tax senior
From Irwin Allen
Subject The Robinsons
Date: 2nd June 2015
I had a meeting with John Robinson and his wife Maureen yesterday. John and Maureen have made a
number of errors in their income tax returns and Maureen requires advice in connection with her
business.
Errors in income tax returns
John inherited a portfolio of quoted shares, an investment property and a large sum of cash in May
2012. Whilst completing his tax return for 2012/13 he decided to give all of the income arising from
the shares, property and cash deposits to his wife for tax purposes. Accordingly, he omitted the
income from his own tax return and included it in that of his wife. He did the same thing in 2013/14.
John has since realised that such a gift has no effect for tax purposes and has decided to notify HM
Revenue and Customs (HMRC) of his mistake.
In January 2013, John gave the investment property to Maureen who sold it a week later. The gift to
Maureen was the subject of a legitimate legal conveyance but, after the sale, Maureen gave the sales
proceeds to John in accordance with an agreement they had made prior to the gift. Maureen declared
the capital gain of 13,770 in her 2012/13 income tax return.
John has asked us to calculate the additional tax payable as a result of his mistaken declarations to
HMRC. A schedule prepared by John summarising the familys income for the two tax years 2012/13
and 2013/14 together with details of the investment property is on your desk. The gain on the sale of
the investment property was the couples only capital gain in the last four years.
Maureens business
Maureen began trading as Robinson Mapping on 1 November 2012. She prepared her first accounts to
30 September 2013. A schedule prepared by Maureen summarising the results of the business is also
on your desk.
Please prepare a calculation of the additional taxes payable by John Robinson in respect of the tax
years 2012/13 and 2013/14 as a result of disclosing to HMRC the errors in his tax returns.
Theres quite a bit to do here; please ensure that your calculations are clear and logical so that they
are easy to follow.
Youll need to work out the extra tax payable by John on the investment income and compare it with
the tax paid by Maureen (probably a fairly small amount as most if not all of the income will have
fallen into her basic rate band).
Please do not address the issue of interest and penalties for the moment.
Thank you

Irwin
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The schedule summarising all of the familys income, with the exception of that relating to Maureens
business, is set out below.
Robinson Family Income received in tax years 2012/13 and 2013/14
Income arising on inherited assets: Notes 2012/13 2013/14

Dividend income received in respect of share portfolio 8,856 9,108
Rental income in respect of investment property 2,550
Bank interest income received in respect of cash deposits 2,424 2,576
John - Other income:
Salary 30,871 30,121
Company car 1
Trust income received 2 660 715
Maureen - Other income:
Unincorporated business 3

Notes
(1) I have had use of the car since 1 August 2012 for both business and private use. I also receive
free petrol in respect of all of my mileage. The car had a list price when new of 17,400 and has
a CO2 emission rate of 156 grams per kilometre.
(2) The trust is a discretionary trust established by my uncle.
The schedule relating to Maureens business is as follows:
Maureen Robinson Robinson Mapping
Maureen began trading on 1 November 2012
The results of Maureens business are:
Tax adjusted trading profits, after the deduction of capital allowances:
Period ended 30 September 2013 29,100
Year ended 30 September 2014 30,360

Required:
Prepare a calculation of the additional taxes payable by John and Maureen Robinson in respect of the
tax years 2012/13 and 2013/14 as a result of disclosing to HMRC the errors in their tax returns.
You will need to compare the additional tax payable by the husband with that already paid by the wife.
You should assume that the tax rates and allowances for the tax year 2014/15 apply throughout the
question.

(Total: 20 marks)

4 ANDREW
Andrew is aged 38 and is single. He is employed as a consultant by Bestadvice & Co and pays income
tax at the higher rate.
Andrew is an experienced investor and is considering investing in a new business. To provide funds for
this investment he has recently disposed of the following assets:
A short leasehold interest in a residential property. Andrew originally paid 50,000 for a 47-year
lease of the property in May 2003, and assigned the lease in May 2015 for 90,000.
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His holding of 10,000 7% Government Stock, on which interest is payable half-yearly on 20

April and 20 October. Andrew originally purchased this holding on 1 June 2006 for 9,980 and
he sold it for 11,250 on 14 March 2015.
Andrew intends to subscribe for ordinary shares in a new company, Scalar Limited, which will be a UK
based manufacturing company. Scalar Limited has begun advertising for staff. The company expects to
have around 50 full-time employees. Andrew will not be employed by the company.
Andrew has evaluated the level of risk involved in investing in this company and is happy with the risk
he will be assuming.
Three investors (including Andrew) have been identified, but a fourth investor may also be invited to
subscribe for shares. The investors are all unconnected, and would subscribe for shares in equal
measure.
The intention is for Scalar Limited to raise 750,000 in this manner. Andrew knows that he can take
advantage of some tax reliefs on his investment in Scalar Limited, but he cant remember the details of
these reliefs.
Required
(a) Calculate the capital gain arising on the assignment of the residential property lease in May
2015. (2 marks)
(b) State the tax implications arising from Andrews disposal of the 7% Government Stock, clearly
identifying the tax year in which any liability will arise and how it will be paid. (3 marks)
(c) State what income tax (IT) and capital gains tax (CGT) reliefs are available to Andrew on his
investment in the ordinary share capital of Scalar Limited, together with any conditions which
need to be satisfied.
Your answer should clearly identify any steps that should be taken by Andrew and the other
investors to obtain the maximum relief. (15 marks)
You should assume that the rates and allowances for the tax year 2014/15 apply throughout
this question. Relevant extracts from the leasehold depreciation tables are as follows:
35 years 91.981
47 years 98.902

(Total: 20 marks)
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5 BAND PLC GROUP

The management of Band plc intend to acquire Trumpet Ltd. They require advice on the post-tax
profits of Trumpet Ltd, a company which will receive dividends from two subsidiaries, one of which is
non-UK resident, and is also paying interest to Trumpet Ltd. They are also considering whether to use a
branch or a subsidiary in order to establish a trading operation overseas.
The following information has been obtained from telephone conversations with the management of
Band plc and from client files.
Band plcs plans:
Band plc will acquire the whole of the Trumpet Ltd Group on 1 August 2015.
Band plc intends to establish a trading operation in the country of Swingerra.
Trumpet Ltd:
Is a UK resident company with budgeted taxable trading profits for the year ending 31 July 2016
of 40,000.
Will have a deficit in respect of non-trading loan relationships of 174,000 to carry forward as at
31 July 2015.
Has two wholly owned subsidiaries; Clarinet Ltd and Flugel Inc.
Will pay a dividend to Band plc equal to its taxable trading profit plus the dividends and interest
received from Clarinet Ltd and Flugel Inc less its corporation tax liability.
It can be assumed that Trumpet Ltd and Clarinet Ltd will pay corporation tax at the main rate
due to the number of companies in the Band plc group.
Clarinet Ltd:
Is a UK resident company with budgeted taxable trading profits for the year ending 31 July 2016
of 107,000.
Will have a trading loss for tax purposes of 32,000 to carry forward as at 31 July 2015.
Will pay a dividend to Trumpet Ltd equal to its taxable trading profit of 107,000 less its
corporation tax liability.
Flugel Inc:
Is resident in the country of Jazzerra.
Is not a controlled foreign company.
Has budgeted taxable trading profits for the year ending 31 July 2016 of 182,500.
Pays interest on a loan of 3,000,000 from Trumpet Ltd at 6% per annum (this is approximately
the market rate). Withholding tax is deducted from this interest at 20%. The money was
borrowed for trading purposes and the interest payable has been deducted correctly in
calculating the trading profit figure of 182,500.
Will pay a dividend to Trumpet Ltd equal to its current year taxable trading profit less its
corporation tax liability.
The rate of corporation tax in the country of Jazzerra is 20%.
Jazzerra levies withholding tax at 8% on dividends paid overseas.
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Planned trading operation in the country of Swingerra:

Will be operated via a branch of Band plc or via a new subsidiary incorporated and resident in
Swingerra.
Is expected to make a loss in its first year of trading of 90,000.
Is expected to make profits in excess of 125,000 per year in future years.
The tax system in the country of Swingerra:
Is broadly the same as that in the UK.
The rate of corporation tax is 34%.
Trading losses may only be utilised by companies resident in Swingerra.
Swingerra is not a member of the European Union and there is no double tax treaty between
the UK and Swingerra.
Required:
(a) Explain precisely the ways in which the brought forward trading loss in Clarinet Ltd and the
brought forward non-trading loan relationships deficit in Trumpet Ltd can be relieved (3 marks)
(b) On the assumption that Trumpet Ltd, Clarinet Ltd and Flugel Inc pay dividends as set out above,
and that the non-trading loan relationships deficit is used in the most tax efficient manner,
calculate the dividend that will be paid by Trumpet Ltd to Band plc in respect of the year ending
31 July 2016. (9 marks)
(c) Provide a detailed explanation of the relief available in respect of the anticipated loss to be
made by the planned trading operation in the country of Swingerra depending on whether a
branch or a subsidiary company is used and advise the management of Band plc on the choice
available to them. (8 marks)

(Total: 20 marks)
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