ciot - att-cta paper: att paper 2 business taxation

Exam Mode OPEN LAPTOP + NETWORKSection of 12

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CIOT - ATT-CTA

Paper: ATT Paper 2 Business Taxation

Part/Module: Part 1


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Answer-to-Question-_1_

As Mr Smith disagrees with HMRC's tax decision, he can appeal within 30 days of the deicision letter. If HMRC and Mr Smith fail to reach an agreement he can request a review and if they still don't reach the conclusion Mr Smith agrees with then he can appeal to a tribunal. During the appeal, Mr Smith should be able to ask HMRC to postpone part or all of the tax dispute until the appeal is settled.

Mr Smith could give a reasonable excuse when making an appeal to HMRC such as an HMRC error. Reasonable excuse is not defined in the legislation fully but the excuse is valid where there is an unforeseen and exceptional event beyond the taxpayers control - i.e. HMRC have made an error requiring additional tax due that Mr Smith disagrees with.

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2018/191 December 2018 to 5 April 2019. 4/5 * 5,000 = £4,000 profit

2019/20First 12 months.1 December 2018 to 30 November 2019.24,000 * 7/12 = £14,00014,000 + 5,000 = £19,000 profit

£4,000 overlap profit.

2020/211 December 2019 to 30 April 20205/12 * 24,000 = £10,000

1 May 2020 to 31 October 2020£6,000

Profit for period £16,000Less: overlap (£4,000)Profit for period £12,000

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A sole trader must keep records for 5 years from 31 January following the end of the tax year.

Reece will not have sufficient records as his records will only go back to the 2016/17 tax year, assuming he has the 2016/17 tax return filed in January 2018 but he should have records going back to the 2015/16 tax year which will have been filed on 31 January 2017 - 5 years to 31 January 2022.

The maximum penalty for each failure to keep proper records is £3,000.

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In order to be an allowable post-cessation expense the trade must have ceased and the expense would have been deductible in calculating the trading profits.

Debt collection expenses - allowable as debts would have been taken into account in computing the profits of the trade before discountinuance. Legal fees to defend a claim for faulty workmanship in 2018 - allowable as legal fees for defending defective work done.Private medical insurance premium - disallowable as this isessentially private expenditure by the owner/proprietor.

4 ways relief can be claimed for post-cessation expenses:

1. Dedcuted from post-cessation receipts (not applicablehere as no post-cessation income)2. Used as losses which can be set against total income(post-cessation trade relief)3. USed as losses which can be deducted from chargeablegains.4. Carried forward to be deducted against future post-cessation receipts from the same trade.

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Anja Ltd is an exisiting company so as they did not receive a CT603 they should notify HMRC within 12 months of the end of the accounting period. The penalty for failure to notify is charged as a percentage of the amount of corporation tax which is unpaid 12 months after the end of the accounting period as a result of the failure to notify.

If the action is deliberate and concealed then the maxumum penalty is 100% of unpaid tax. If there is an unprompted disclosure then this is reduced to 30% of unpaid tax but if the disclosure is prompted then this could still be 50% of unpaid tax.

If the action is deliberate but not concealed then the maximum penalty is 70% of unpaid tax. If there is an unprompted disclosure then this is reduced to 20% of unpaid tax but if the disclosure is prompted then this could still be 35% of unpaid tax.

In any other case the maximum penalty is 30% of unpaid tax. If there is an unprompted disclosure within 12 months from the date of the tax becoming due then this is reduced to nil. If the unprompted disclosure is more than 12 months of the tax becoming due then the penalty is 10%. If there is a prompted disclosure within 12 momths then the penalty is 10% and if it is after 12 months the penalty is 20%.

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The net non trading loan relationship deficit for 2019 is £15,000. This can first be set off against profits of any kind in the deficit period. So £2,900 of the deficit is offset against the trade profit in 2019 of £2,900.

Next, we look back at non-trading profits arising in the previous 12 months £3,100 + £2,500 = £5,600 and we can set off the deficit against these profits.

Then we can carry forward the remaining £6,500 to 2020 to offset against future profits - this can be of any kind as the deficit arose after 1 April 2017. So we can offset £6,000 profits in 2020. This leaves £500 of the deficit unrelieved to carry forward.

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Profit for period ended 31 May 2019 = £18,0008/12 * £18,000 = £12,000 8 month period ( September 2018 to May 2019)

Profit for period ended 30 September 2019 = £6,500

Total profit for 12 months to 30 September 2019 = £18,500

Total profit for period ended 30 September 2020 = (£23,000) - current year offset against total profits in same period£36,000 loss set against £13,000 profits.

Next we carry back the loss of £23,000 to the previous 12 months and offset against the £18,500 profits.

This means £4,500 losses remain to be carried forward against future trade profits only.

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Painting - non-wasting chattelSold for £4,000Proceeds less than £6,000Cost greater than £6,000 Cost £8,600Deem gross proceeds to be £6,000

Proceeds £6,000Cost (£8,600)Gain/(Loss) (£2,600)

Gain on sale of asset £16,500Losses offset (£2,600)Net gains £13,900

CGT / corporation tax due £13,900 @ 19% = £2,641

Net proceeds available for reinvestment = £11,259

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VAT can be recovered in respect of the solicitor invoice as VAT was charged for the professional services and the supply was made to a taxable person at time of supply. Alphic also hold evidence in the invoice that the VAT was incurred.

VAT cannot be recovered on the stationary invoice as VAT has not been incurred - I assume the stationary retailer is not VAT registered due to being a small business.

However, they have included correctly 20% VAT on their invoice but haven't charged it.

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£350 @20% = £70 VAT

£600 / 1.2 = £500£100 VAT

£1,000 *10% = £100£1,000 - £100 = £900£900 *20% = £180 VAT

Total VAT = £350 to be claimed.

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The timing difference is adjusted in the future but permanent difference not not get adjusted in the future.

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Exam Mode OPEN LAPTOP + NETWORKSection Page 1 of 9

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CIOT - ATT-CTA

Paper: ATT Paper 2 Business Taxation

Part/Module: Part 2


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To: Tax ManagerFrom: Tax Advisor

Subject: RE: Mrs Pooch

Hi

Business or Hobby

Firstly, Mrs Pooch fits the grooming activies around school times and her part-time job which pays her a salary so HMRC may consider this to be a hobby. Although, as she is now making money from this activity then HMRC may consider it a business for tax purposes.

However, in determining whether Mrs Pooch's hobby is a business we need to consider the badges of trade.

Mrs Pooch first mentions that she has social media pages and adverts in her local newspaper which shows the existence of an organisation.

In addition, grooming 20 dogs per week consistently would certainly count as repetition/frequency given the number of similar transactions taking place.

As well, I think given the amount of time Mrs Pooch dedicates to performing grooming services and indeed her note around 'helping the family finances' I think this gives the flavour of a profit-seeking motive.

Turnover

Mrs Pooch grooms dogs for 40 weeks of the year, doing 20 dogs per week for £35 each. 40*20*35 = £28,000 turnover per year.


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Notifying HMRC

HMRC recommends that you notify them as soon as possible as a sole trader but the latest you can register is 5 October in your businesses second tax year.

Expenses Incurred

Given that Mrs Pooch's expenditure is fairly low - £550 on clippers and minimal amount on fuel etc. I think it is best for her to claim the £1,000 trading allowance which will mean she doesn't pay tax on the first £1,000 of her income from dog grooming.

National Insurance

Mrs Pooch is a sole trader and will therfore be subject to Class 2 (currently £3.05 per week) and Class 4 national insurance which is payable at 9% between profits of £9,500 and £50,000. This will be due on 31 January in tax year and 31 July after tax year with the balance on 31 January after the tax year end. The NIC payable by Mrs Pooch will be subject to the annual maxima as she has both employment income and self employment income.

Ethical Issues

Mrs Pooch ask's 'what do you think?' but we cannot express our opinion and need to consult the facts and badges of trade.

Kind Regards,

Tax Advisor

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Profit before tax 390,000Add back:Depreciation 50,000Repairs (capital works) 34,500Interest cost 6,000Less: Profit on disposal FA (5,000)Tax adjusted profits before CA 475,500Less: capital allowances (331,480)Trade profit 144,020

Trade profit 144,020

Other incomeInterest cost (6,000)Disposal of FA 5,000

Taxable total profits 143,020

Corporation tax liability £143,020 @19% = £27,174

working a)Capital allowances

100% FYA AIA General pool Special rate CAsTax WDV b/f 25,000 6,000Additions New plant 50,000Air purifying 250,000Car 25,000

FYA 100% (25,000) 25,000AIA 100% (300,000) 300,000


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WDA 18% * 16/12 (6,000) 6,000WDA 6% * 16/12 (480) 480

Tax WDV c/f - - 19,000 5,520

CA claim 331,480

working b) + c)

b) Repairs costs included capital expediture - preparing newfactory floor, building work for new paved area andextending cold water supply. These totalled £34,500 so wereadded back.

c) Adding back interest costs of £6,000 as for non-tradingpurposes.

2)Corporation tax due 9 months and 1 day after the end of the accounting period. 31 October 2020 end of accounting period so tax due 1 August 2021.

3)The articles of association sets out the company name, purpose of the company, the allocation of share capital, the organisation of the company and provisions on shareholder meetings. To make a change to the articles of association you must hold a meeting of the directors and pass a special resolution. The signed resolution should be return to companies house with the amended articles of association. The articles can then be changed by companies house.

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1)Proceeds 320,000Cost of sale (15,000)Net sale proceeds 305,000Purchase cost (180,000)Cost of purchase (12,500)Capital works (52,000)Gain 60,500

Less: Rollover relief (60,500)Gain after relief nil

WorkingGain 60,500Less: RR (60,500) Gain (sale proceeds less reinvestment) 0 (-120,000)

2)EIS reinvestment relief - you can invest into a qualifying company 12 months before or 36 months after disposal. The claim must be made 5 years from 31 January following the tax year in which the shares are isssued. This will freeze the gain until EIS shares are sold/relief is withdrawn.

Gift relief - if you buy unquoted trading company shares, as asset used in a business for trsde or shares in a personal trading company then you can rollover the gain against base cost of asset for the donee. It is a joint claim and must be made 4 years from end of tax year of disposal. Restrictions apply if sale at undervalue.

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1)

2017/18 total Alf Bob Dan

Profit 360,000

PSR 1:1:1 (360,000) 120,000 120,000 120,000

Dan £120,000 - £11,667 =£108,333 profit


Profit 300,000Less: Salary (50,000) 15,000 15,000 20,000

250,000PSR 1:1:1 (250,000) 83,333 83,333 83,333

0 98,333 98,333 103,333

Dan £103,333 - losses = £0


Profit 140,000Less: Salary (50,000) 15,000 15,000 20,000

90,000 PSR 1:1:1 (90,000) 30,000 30,000 30,000

0 45,000 45,000 50,000


Loss (400,000)Less: Salary (50,000) 15,000 15,000 20,000

(450,000) PSR 1:1:1 450,000 (150,000) (150,000)


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(150,000) (135,000) (135,000)

(130,000)

2019/20 Dan

Profit from partnerships 50,000Less: Overlap profits (35,000)

15,000Less: Losses (15,000)Profit £0

2)Losses are allocated to partners in exactly the same way as profits. Each partner then has the normal range of options for relieving their share of the loss. Their claims are all independent - they are not bound by what the other partnersdo.

Losses can be used against net income from the current and or previous teax year. Any unrelieved losses can be carried forward against future profits of the same trade.

Certain loss relief claims can be restricted and are limited to the greater of £50,000 and 25% of the individuals adjusted total income. However, this only applies to non-trading income not where losses are set against profits from the same trade.

ciot - att-cta paper: att paper 2 business taxation

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