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ACCA Paper P6: Advanced Taxation (UK)
June 2012 Exam Commentary

General impression

The paper was in the same style and format as previous papers although Section B was harder.

Q1:   IHT on two potential lifetime gifts; CGT liability of these gifts; normal expenditure out of income exemption; ethical implications and consequences for client of undeclared income

Q2:   Group question covering trading losses and consortium relief; sale of asset outside capital gains group; capital goods scheme; sale of intangible asset; VAT implications of importing services; substantial shareholding exemption

Q3:   VAT implications on sale of business to company; whether a new lease should be entered into by individual or company and payment of travel expenses to family for an employee working overseas

Q4:  Redundancy payments; investment in VCT or pension contribution; Class 4 NIC on partnership income

Q5:   Payment of corporation tax; validity of compliance check enquiry from HMRC; advice on purchase of machinery and research and development

Question Review

Section A – 2 compulsory questions

The questions in this exam were fairly evenly weighted and made up 64% of the exam

Question 1 – 31 marks

The scenario presented was of an individual (Una) who was planning to gift her son either some UK farmland or an overseas villa.

Part a) for 21 marks required candidates to construct a memorandum for which three professional skills were also available.  There was no breakdown provided as to how many marks were on offer except the question told candidates that the calculations would be worth no more than half of these marks.

Part a) (i) required

-       the calculation of the potential reduction in IHT on Una’s death as a result of each gift to the son.  The question stated that the farmland would not get business property relief but might get agricultural property relief.

This part of the question was easy to do provided candidates compared the results if the assets were given in lifetime versus being passed on death.

The only odd part was to do with the villa where the question provided details of the tax treaty which had an exemption clause whereby the villa would only be taxed in the country it was based in and not also in the UK.

-        the calculation of the CGT liability of these two gifts which in view of the absence of any reliefs was surprisingly easy.

-       explanations for any calculations which were not self explanatory particularly in relation to the availability of reliefs and a note of any assumptions made

-       a concise summary of your calculations to assist Una in making her decision as to which asset to give her son

-       and any other tax and financial implications in respect of the gifts that Una should be made aware of

Part a) (ii) concerned the payment of the granddaughter’s rent

Candidates had to state the conditions that would need to be satisfied for the payment to be exempt for the purposes of IHT and was an easy test of the normal expenditure out of income exemption.

Part b) for 6 marks with one additional professional skills mark required the preparation of a letter concerning undeclared income in respect of renting a car to friends.

The letter needed to explain the implications for Una and ourselves of failing to declare this income to HMRC and the implications for Una of not having declared income.

Candidates should have scored well here.

Overall a nice question.

Question 2 – 33 marks

This question presented a group of companies and tested a mixture of topic areas.

What was particularly unusual was the absence of any professional skills marks for this question.  Candidates simply needed to work through the requirements and did not have to format their answers in any particular way.  The layout of this question was also very easy to find your way around which historically has not always been the case.

Part a) for 11 marks required candidates to

(i)            explain the alternative ways in which the parent company’s  trading loss could be relieved assuming it was not carried forward

(ii)          advise how the loss should be relieved in order to maximise the corporation tax saved.  In addition it was necessary to include a summary showing rate(s) of tax at which relief for the loss would be obtained.

To do well in this section it was necessary to spend time identifying who could belong to which corporation tax group.  In particular two of the subsidiaries had been acquired mid year and there was also a consortium owned company.

In addition the question did not give any indication how the 11 marks would be allocated between the two parts making it hard to judge the detail required.

Part b) focused on assets to be sold and candidates had to

(i)            explain how the chargeable gain on the disposal of P’s HQ would be calculated and state any further information required from the client to enable this calculation to be carried out for 5 marks.

Provided candidates had spent time sorting out their various groups then this was fairly straightforward as the disposal was outside of the capital gains group although the asset concerned had been received from an intra-group transfer.

(ii)          calculate the input tax recoverable/payable to HMRC in respect of the warehouse for the three years ending 31 March 2013 on the assumption that the sale of the warehouse goes ahead as planned for 4 marks.

Testing of the capital goods scheme has been seen a couple of times in this exam so this aspect was not unexpected.  It was nice to be given specific numbers and percentages so exact calculations could be undertaken.  Candidates also had to deal with the consequences of the asset being sold within the 10 VAT years which has not been examined before.

(iii)         explain with supporting calculations the corporation tax implications of the sale of the patent right for 3 marks

A straightforward calculation here, again first time an intangible asset has been examined.

c) Investment in Kupple Inc.

Candidates were required to

(i) explain the VAT implications for Janus plc of purchasing consultancy services from Kupple Inc for 2 marks

This was a straightforward test of importing from outside the EU.

(iii)         Explain the corporation tax treatment of any profit or loss on the sale of shares in Kupple Inc for 4 marks.

A fairly easy test of the substantial shareholding exemption.

d) Janus plc group senior accounting officer.

Candidates were required to explain briefly whether or not the client will be the senior accounting officer of the Janus plc group, the circumstances in which the rules relating to the groups’ tax accounting systems will apply to the Janus plc group and the statutory responsibilities of a senior accounting officer when the rules apply for 4 marks.

This particular aspect has been tested before so should have caused few problems.

Overall a fair question albeit harder than Question 1.

Section B – 2 from 3 questions

Question 3 – 18  marks

Part a) for 6 marks required candidates to explain the VAT implications of selling the sole trader business to Tricycle Ltd.

Provided candidates were knowledgeable about transfers of businesses as a going concern and also stated the obvious this part of the question should have gone well.

Part b) for 10 marks required candidates to prepare the calculations for a 12 month period showing the total tax cost for both Tricycle Ltd and Jerome of the car being leased by

(i)            Tricycle Ltd or

(ii)          Jerome

This part of the question was quite tricky and required very careful reading of the information and thinking about what aspects were relevant for both the company and the individual under both options

Part c) for 2 marks required candidates to state the conditions that must be satisfied for a deduction for travel costs paid by Tricycle Ltd to be given against the employees total employment income.

This question may not have been a popular choice with many.

Question 4 – 18 marks

Part a) for 3 marks required a brief explanation as to whether or not the redundancy payments would be subject to income tax.  Three payments were given – statutory redundancy, ex gratia and contractual.

Part b) for 7 marks required the calculation of the Class 4 NIC for 2012/13 in respect of an individual’s partnership trading income.

This concerned an individual joining the partnership mid year and required a careful step by step approach to arrive at the appropriate answer.  A topic area more often seen at F6 Taxation.

Part c) for 8 marks candidates had to compare the effect of two alternative investments on the individual’s income tax liability and identify any non tax matters relevant to the investment decision.

The two alterative investments were firstly investing £36,000 into a venture capital trust versus investing £36,000 into a personal pension plan.

Overall a reasonable question which many would have selected.

Question 5 – 18 marks

Part a) (i) for 7 marks required the explanation with supporting calculations of the payments required for the corporation tax liability for the 11 months to 30 September 2012 and the implications of the expected increase in the taxable total profits.

Provided candidates could remember how to deal with the quarterly instalments of a short accounting period this was relatively easy to do.  However many may have been surprised to see this topic at P6.

Part a) (ii) for 3 marks candidates had to explain whether the compliance check enquiry into the year ended 31 October 2009 was valid.

Again if this knowledge was known this was straightforward but again many may have lacked this information.

Part b) for 8 marks candidates had to explain the tax deductions and/or credits available in relation to the 8 month period ending 31 March 2012 in relation to expenditure on machinery and research and development and comment on any choices available to the company.

The question told candidates that the company had a trading loss although you were not told how much this was.  For the machinery expenditure a simple apportionment of the annual investment allowance was necessary however it was also expected that you realised this company was related to three other companies.

In respect of the research and development the question expected candidates to realise that a repayment could be made due to the company having a trading loss.  Again if you were knowledgeable of these rules then this was alright.