Taxation Northern Ireland

Sample Paper 2

Questions & Suggested Solutions

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

For candidates answering in accordance with the law and practice of the Northern

Ireland.

In this examination paper the £ symbol may be understood and used by candidates

in Northern Ireland to indicate the UK pound sterling.

Candidates should answer the paper in accordance with the appropriate provisions

up to and including the Finance Act 2013. The provisions of the Finance Act 2014

should be ignored.

Allowances and rates of taxation, to be used by candidates, are set out in a

separate booklet supplied with the examination paper.

Answer ALL THREE QUESTIONS in Section A, and ANY TWO of the THREE questions

in Section B. If any more than TWO questions are answered in Section B, then only

the first two questions, in the order filed, will be corrected.

Candidates should allocate their time carefully.

All workings should be shown.

All figures should be labeled as appropriate e.g. £s, units etc.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

The following inserts are enclosed with the paper:

• Tax Reference Material

Section A

Answer ALL THREE questions

QUESTION 1

Regina has been trading for many years selling specialist photographic equipment

and prepares her accounts to 31st December each year. Regina owns the building

from which she trades and lives in the flat above the shop. The following is a

summary of her profit and loss account for the year ended 31 December 2013.

Notes

£ £

Gross profit 112,863

Other income:

Interest received 294

Discount received 172

Rents received (1) 1,837

2,303

115,166

Expenses:

Wages and salaries (2) 60,235

Repairs (3) 2,690

Interest on unpaid Income Tax 1,165

Bad debts (4) 1,595

Bank interest (5) 3,680

Postage and stationery 1,005

Employers & Public Liability

insurance

995

Light and heat (6) 1,855

Telephone (7) 2,223

Motor expenses (8) 2,768

Leasing charges (9) 3,224

Depreciation 3,035

Subscriptions (10) 1,121

Legal fees (11) 2,506

88,097

Net profit 27,069

QUESTION 1 (Cont’d)

Notes

(1) Rent received:

Some years ago Regina rented out office space that was surplus to her

requirements. This is the net rental income after all expenses associated with

the rental business have been deducted.

(2) Wages and Salaries:

£

Wages to staff 36,110

Drawings taken by

Regina

24,125

60,235

(3) Repairs:

£

Painting of shop and flat

interior

980

Purchase of fax machine 530

Repairs to office equipment 1,180

2,690

On floor area the flat represents 1/6th of the premises excluding the surplus

office space rented.

(4) Bad debts

£

Specific bad debts

written off

1,770

Loan to customer written

off

315

Bad debts recovered (490)

1,595

QUESTION 1 (Cont’d)

(5) Bank Interest

£

Interest on business

overdraft

470

Interest on mortgage for

business premises (excluding

rental area but including flat)

3,210

3,680

(6) Light and heat:

Regina estimates that 15% of these costs are related to private use

(7) Telephone:

£

Land Line 1,685

Mobile 538

2,223

After reviewing her phone bills Regina has calculated that 90% of the landline

calls and 35% of her mobile calls are for business purposes.

(8) Motor Expenses

£

Maintenance and repairs 568

Insurance 572

Petrol 1,488

Parking fines 140

2,768

These expenses refer to the motor car used by Regina. It has been agreed

with HMRC that business use of the car is 30%

QUESTION 1 (Cont’d)

(9) Leasing Charges

£

Leasing of office

equipment

1,116

Leasing Regina’s car 2,108

3,224

Assume that relevant Co2 emissions are 175 gms/km and that the lease period

commenced in 2011.

(10) Subscriptions

£

Donation to national charity 291

Subscription to trade magazines 685

Donation to political party 145

1,121

(11) Legal Fees

£

Collection of trade debts 482

Unfair dismissal claim by former

employee

795

Purchase of second investment

property by Regina

1,229

2,506

Requirement

Compute Regina’s tax adjusted profit for the year ended 31st December 2013.

Total 20 Marks

QUESTION 2

(i) Henry is 46 years old, married and a higher rate tax payer. For 2013/14

he has taxable benefits (relating to a company vehicle) in the amount of

£2,300 and underpaid tax from 2012/13 of £750. Henry’s subscription to

his professional body is £300 per annum.

Required

Calculate Henry’s tax code for 2013/14.

(4 Marks)

(ii) Frank used an employer provided company van (Co2 emissions 213

grams/km, list price £18,000) in order to carry out his maintenance

duties at various sites. Frank is permitted to take this van home in the

evenings and at weekends and does use it for private purposes. Frank’s

employer undertook all diesel expenses for the vehicle.

Required

Calculate Frank’s total benefit-in-kind with respect to his use of this

vehicle.

(3 Marks)

(iii) There are four conditions to be met in order for an expense to be

deductible against an employee’s salary.

Required

List the four conditions and briefly explain what they mean in practice.

(4 Marks)

(iv) Grantham commenced to trade on September 1st 2011, producing

accounts to 30th April 2012 (profit £13,200) and 30th April 2013 (profit

£22,740).

Required

Calculate Grantham’s assessable profits for the first three years of

assessment of his business and indicate if there are any overlap profits.

You may perform pro-rata calculations by reference to months rather

than days. Show your workings clearly.

(5 Marks)

(v) Sean commences to trade on December 1st 2012 selling luxury fine

furnishings. His monthly turnover for the first 14 months of trading is as

follows:

Month Turnover (£) Month Turnover (£)

December 2012 13,980 July 9,369

January 2013 13,870 August 9,562

February 12,687 September 10,956

March 12,765 October 11,654

April 14,489 November 13,952

May 13,975 December 16,953

June 11,962 January 2014 18,258

QUESTION 2 (Cont’d)

Required

Clearly identify by when Sean is obliged to register for VAT.

(4 Marks)

Total 20 Marks

QUESTION 3

Trevor and Simon are software designers working for TORRES LTD.

Cumulative details regarding pay and taxation up to and including month 8 of

2013/2014 may be summarised as follows:

Trevor Simon

£ £

Gross cumulative salary (exclusive

all deductions)

33,617 1,049.52

Tax paid to date 8,331.20 52.40

Tax code K255 -

Company pension scheme

contributions

5% Nil

Childcare Vouchers (per month) 243

Payroll giving (per month) 25

Pay in month 9 4,130 2,015

Trevor had instructed the payroll department of TORRES Ltd to make both childcare

deductions and the charitable (payroll giving) donations throughout 2013/14.

Trevor has been a member of the TORRES Ltd pension scheme for a number of

years.

Simon joined the firm during month 8 however to date you have not received copy

of his P45. TORRES Ltd have completed form P46 in respect of Simon. Simon

informed TORRES Ltd that he was not a member of his previous employer’s

occupational pension scheme and instead has continued to make contributions of

£75 per month to a personal pension scheme.

Requirement

(i) Complete all relevant payroll calculations, relating to PAYE and NIC for

Trevor and Simon for months 9.

(14 Marks)

(ii) Explain why form P46 is completed and why.

(6 Marks)

Total 20 Marks

Note: Please show all workings clearly. You may perform pro-rata calculations,

where relevant, by reference to months rather than days. You are NOT required to

complete a form P11 nor are you required to describe how you would have done so.

Section B

Answer ANY TWO of the Three Questions

QUESTION 4

You have been approached by a new client who has just recently registered as an

employer. He is looking for some further information on the HMRC forms he may

be required to prepare.

Write a brief memo outlining the content and purpose of each of the following

Revenue forms:

(i) P11 (WS)

(ii) P14

(iii) P35

(iv) P11D

(v) P9D

4 Marks each

Total 20 Marks

QUESTION 5

Christine works for CALLSIGN LTD, a large software company, and earns an annual

gross salary of £52,500. During the tax year 2013/2014 she received the following

benefits:

- A loan to help her purchase a new home. CALLSIGN LTD advanced her

£50,000 on 6th April 2012 and charged her interest at the rate of 2% per

annum. Christine repaid £16,000 of the loan on 6th August 2013, but the

remaining £34,000 remains outstanding.

- Christine had use of a house owned by CALLSIGN LTD as she tried to find a

home of her own. She first moved into the house on 3rd October 2011 when it

had a market value of £285,000. The company had originally purchased the

house on 16th May 2010 for £197,500. Christine occupied the house until 6th

June 2013 when she moved to her new home. The rateable value of the

house was £3,000. Christine paid £300 rent per month to the company and

had to meet all other household expenses. The house is not job-related

accommodation.

- Use of a 1800 cc diesel Seat car, with a CO2 emission rate of 187 grams per

kilometre and a recommended list price of £15,000. The car was first

provided to Christine on 6th July 2013 for both her private and business use.

The private usage is 40% and the business usage 60%. The company pays

for all the running costs of the vehicle, which amounted to £1,950 for the

period to 5th April 2014. Christine was required to contribute £25 per month

towards the private use of the car and £15 per month towards the cost of

private fuel.

- CALLSIGN LTD provided workplace parking for Christine. This was calculated

as being worth £7.50 per day for each of the 240 days that Christine attended

work during the tax year 2013/2014.

- Use of a home entertainment system. This was first provided to Christine to

use at home on 6th June 2013, the date it was purchased by CALLSIGN LTD at

a cost of £3,500. The system was gifted to Christine outright on 5th April 2014

when it was worth £1,450.

- Occupational pension contributions amounting to £3,000 during 2013/2014.

These were paid by CALLSIGN LTD on Christine’s behalf.

Requirement

(a) Calculate the total value of benefits provided to Christine for the purposes of income tax, for the tax year 2013/2014.

12 Marks

Question 5 is continued on the next page.

QUESTION 5 (Cont’d)

(b) You ascertain that Christine has made gift aid donations in 2013/14 amounting

to £560 and that she donates 5% of her gross salary to the company pension

scheme. Christine also received dividends of £1,215 and interest of £1,800 in

2013/14. Christine paid tax through PAYE in the amount of £10,822 during

2013/14. Calculate Christine’s income tax liability for 2013/14.

8 Marks

Total 20 Marks

QUESTION 6

Rory Parks has run a successful building supply yard for many years. You are

preparing the VAT return for the quarter ended 30th June 2013 and have extracted

the following information from his records.

£

Sales (exclusive of VAT, where applicable):

Standard-rated 149,700

Purchases: (exclusive of VAT)

Goods for resale (all standard-rated) 76,550

Expenses (inclusive of VAT, where applicable):

Wages of staff 31,255

Electricity 3,874

Accountancy fees 1,645

Buildings insurance 1,280

Legal fees 2,174

Other 15,164

Analysis of the available invoices (inclusive of VAT, unless otherwise stated) reveals

the following:

(i) Restaurant bills amounting to £485 have been included in ‘other’

expenses. The meals were enjoyed exclusively by Rory’s existing

customers.

(ii) Postal services of £448 were also paid during the quarter and have been

included in ‘other’ expenses.

(iii) Rory purchased a new car for use in the business. He took delivery of

this car on 27th March 2013 however the invoice date was 1st April 2013.

The car cost £9,450 including VAT, it has a CO2 emissions factor of 163

g/km and the invoice has been included in ‘other’ expenses together with

the cost of all motor running expenses.

(iv) Legal fees include conveyancing fees of £1,200 (gross) in relation to a

property Rory has purchased as an investment.

(v) Review of goods purchases for resale uncovers that:

- an invoice has been received for goods totaling £1,350 (net) that

have not been delivered and the order was subsequently

cancelled.

- the only evidence supporting the delivery of a cement mixer

costing £1,480 (net) is a delivery docket however you have

verified that the mixer is on site.

QUESTION 6 (Cont’d)

Requirement

Calculate the amount of VAT payable by or refundable to Rory for the quarter

ended 30th June 2013.

Total 20 Marks

�

Taxation (Northern Ireland)

Sample Paper 2 – Suggested Solutions

ANSWER 1

Regina’s Income tax computation for the year ended 31

December 2013

£ £

Net profit per accounts 27,069

Less:

Interest 294

Rent 1,837

(2,131)

Add

Drawings 24,125

Painting – Flat (1/6 x 980) 163

Purchase of Fax 530

Interest on unpaid tax 1,165

Loan to customer 315

Interest on premises (1/6 x

3,210)

535

Light and heat (15% x 1,855) 278

Landline (10% x 1,685) 169

Mobile (65% x 538) 350

Parking fines 140

Motor (70% x (2,768 - 140) 1,840

Leasing MV (15% x

£2,108)+(£2,108 x 85% x

70%)

1,570

National Charity donations 291

Donation to political party 145

Legal fees re investment

property

1,229

Depreciation 3,035

35,880

60,818

ANSWER 2

(i) Henry’s tax code would be calculated as per:

Item £

Basic PA (born after 5/4/48) 9,440

Assessable benefits (2,300)

Underpaid tax (£750 / 0.4)* (1,875)

Professional subscription 300

Total 5,565

Henry’s tax code is likely to be 556L

*-As Henry is a higher rate taxpayer, reducing his tax code by £1,875

exposes a further £1,875 of his income to his highest marginal rate of

tax (40%). This would have the effect of collecting a further £1,875 x

40% = £750 in income tax thereby collecting the previously under-

collected income tax.

(ii) Since the van clearly emits Co2 and the restricted private use condition

is not met, Frank’s benefit in kind is made up of two flat rate amounts:

£3,000 in respect of the van & £564 in respect of fuel for a total

assessable benefit if £3,564. (Note that the usual rules applying to car &

fuel benefits are much simplified for company vans).

(iii) To be allowable/deductible expenses against employment income, the

four conditions to be met are that expenses must be incurred (i) wholly,

(ii) exclusively & (iii) necessarily (iv) in the performance of the

employee’s duties. In practice this implies that no duality of purpose

for the expense is permitted (ie. the employee may require spectacles to

perform their duties at work but, presumably they’d also use their

spectacles at home therefore there is duality of purpose and the cost of

spectacles would be disallowed). Further, the employee should be able to

demonstrate that they cannot otherwise perform their duties without

incurring the expense. Thus, in the context of the above points, it is

common to allow the cost of professional subscriptions, protective

clothing, tools, travel costs from the employees ‘base’ although this list

is not exhaustive.

(iv) Grantham’s assessable profits would be as follows:

YOA Basis Period £

2011/12 1/9/11 – 31/3/12 7/8 x £13,200 11,550

2012/13 1/9/11 – 30/4/12

1/5/12 – 31/8/12

4/12 x £22,740

13,200

7,580

20,780

2013/14 y/e 30/4/13 22,740

Overlap Period 1/9/11 – 31/3/12

1/5/12 – 31/8/12

11,550

7,580

19,130

(v) As a seller of taxable goods, Sean is statutorily obliged to register for

VAT if the value of his turnover exceeds £79,000 in any 12 consecutive

months (or, at any point, if he believes that the value of his turnover will

exceed this limit in the next 30 days). Sean reaches the cumulative

threshold by the end of May 2013 when the cumulative value of his

turnover is £81,766 (6 months). Sean has 30 days (until the end of

June) in which to register for VAT with HMRC.

ANSWER 3

(i)

PAYE Trevor Simon

Income Tax (£) (£)

Gross salary to

date

33,617.00 N/A

Salary for month 4,130.00 2,015.00

37,747.00 2,015.00

Less superannuation @ 5%

CCV (£243 x 9)

GAYE (£25 x 9)

(1,887.35)

(2,187.00)

(225.00)

NIL

NIL

NIL

33,447.65 2,015.00

Additional/(Free)

pay

2,559x 9/12 1,919.25

9,449 x 1/12 (787.42)

Net Taxable Pay 35,366.90 1,227.58

Taxed as per

£32,010 x 9/12 x 20% 4,801.50

£11,359.40 x

40%

4,543.76

1,227.58 x 20% 245.51

9,345.26 245.51

Less paid to

date

(8,331.20) N/A

Tax due in

month 9

1,014.06 245.51

NIC

Primary

£(3,454 – 646) x 12% 336.96

£(3,887 – 3,454) x 2% 8.66

£(2,015 – 646) x 12% 164.28

345.62

Secondary

£(3,887 – 641) x 13.8% 447.94

£(2,015 – 641) x 13.8% 189.61

793.56 353.89

(ii) Form P46 is completed when an employee joins a company and they

cannot immediately provide their new employer with a P45. Form P46

enables the new employer to decide how to tax the new employee. The

new employee completes one part of form P46. On this part they declare

either if their new job is their first since the start of the tax year and

they have not been in receipt of certain benefits OR their new job is their

only job presently but they have had another job since the start of the

tax year or have been in receipt of certain benefits. Alternatively, and

finally, the employee could declare that they currently have another job

or are in receipt of a pension. The employer completes the second part

of form P46 on which they will make certain declarations about the

employee’s job. Part of these employer declarations will be the tax code

which they are going to use for the employee which, itself, could be an

emergency code on a cumulative basis or month 1/week 1 basis OR a

basic rate code on a cumulative basis.

ANSWER 4

Memo

To: New Client

From: A Technician

Subject: PAYE Forms

As discussed please find below further details regarding common Revenue PAYE

Forms.

(i) HM Revenue & Customs (HMRC) provides the Forms P11 (WS) (tax

deduction card) for employers for the purpose of manual payroll computation.

The form records details of

o The name of the employer and tax reference number

o The name of the employee, National Insurance number and date of birth.

The form is divided into weekly and monthly sections and the employer enters

details of the gross weekly or monthly pay in the appropriate column relating

to that payday.

PAYE income tax is then calculated using the code number provided by HMRC

and this is recorded in the appropriate column.

In addition to showing PAYE, the form also discloses details of both Primary

and Secondary Class 1 NIC.

Statutory Sick Pay and Statutory Maternity Pay are also shown on the form.

(ii) The Form P14 is a three-part document that provides a summary of an

employee’s pay and tax details for a particular tax year.

The name, address, national insurance number and date of birth of the

employee are disclosed on the form as are the employer’s name address and

tax reference.

The pay and tax will show the total for the year and a split between the

current and previous employment.

Details of Primary and Secondary Class 1 NIC are also recorded on the form.

Parts 1 & 2 of the form are for the HMRC and Department of Social Services

and are submitted with the end of year documents HMRC.

The remaining part of the Form P60 which is given to each employee in that

particular employment as at 5 April.

(iii) The Form P35 is an end of year summary on which the employer records

details of PAYE income tax and Primary & Secondary Class 1 due in a tax

year.

The name of each employee who was employed at any time during the course

of the year is disclosed on the reverse of the form. Continuation pages are

available for larger employers.

The amounts of deductions from employees and employer’s Secondary Class 1

NIC contributions are recorded against the relevant name and then totaled.

Payments already made to the Collector of Taxes are deducted from the

amounts due and any outstanding balance is payable immediately to the

HMRC.

Details of Statutory Sick Pay and Statutory Maternity Pay are also disclosed.

The form carries a statutory declaration and must be submitted to HMRC by

19 May following the end of a particular tax year. There are automatic

penalties for late submission of the form.

(iv) Form P11D is a form you must use at the end of the tax year to report to

HMRC any expenses and benefits you have provided to your employees.

If you provide expenses or benefits to an employee (or to members of their

family or household), you must complete a form P11D if the employee earns

at a rate of £8,500 per year or more.

The £8,500 threshold doesn’t only cover regular payments such as salary or

wages. It also includes the value of the expenses and benefits that you’ve

provided to the employee (or members of their family or household) during

the tax year.

You should use form P11D to record the expenses and benefits you provide to

almost all company directors. You must use form P11D to report the value of

any expenses and benefits you have provided to an employee during the tax

year.

You must also tell HMRC whether any amounts have been made good by the

employee, and whether tax has already been deducted on any of them

through your payroll.

You do not need to include on form P11D any items that are covered either by

a dispensation or a PAYE Settlement Agreement (PSA).

In general, the value of an expense or benefit to report on form P11D is the

cost to you (including VAT) of providing it to the employee. But there are

exceptions and with some items – such as car benefits and beneficial loans –

where there are a number of steps involved in working out the cash

equivalent to report to HMRC.

You must send your completed form P11Ds to reach HMRC by 6 July following

the end of the tax year. You must also provide copy of the information on the

form by the same date to the employee the form relates to.

(vi) Form P9D is another form you must use at the end of the tax year to report

to HMRC any expenses and benefits you have provided to your employees.

You must complete a form P9D for any employees who earn at a rate of less

than £8,500 per year if you provide any expenses or benefits to them (or to

members of the family or household).

Form P11D is used for most directors, but you must use form P9D for

directors who earn at a rate of less than £8,500 if they also fall into either of

the following two categories:

o Full-time working directors with no material interest in the company.

o Directors of charities or non-profit organizations

The £8,500 threshold doesn’t only cover regular payments such as salary or

wages. It also includes the value of the expenses and benefits that you’ve

provided to the employee (or members of their family or household) during

the tax year.

If an item needs to be reported on form P9D, the value to use is generally the

cost to you of providing the expense or benefit, including VAT. There are

exceptions, however, including the following:

o Childcare vouchers – only report any amounts above a threshold of £55

per week

o Relocation expenses – only report amounts in excess of £8,000 for a single

move.

Items that must be reported on form P9D are free of tax and NICs, so you

have nothing to pay HMRC on them. This differs from the procedures for form

P11D – many of the items included on form P11D attract a Class 1A NICs

liability for employers.

I hope this summary of the PAYE forms has been helpful.

Regards.

A Technician

ANSWER 5

(a) Christine Benefits 2013/2014

1. Loan (£) (£)

(i) Average Method

£50,000 + £34,000/2 = £42,000

£42,000 x (4.00 – 2.00) % = 840

(ii) Strict Method

£50,000 x (4.00 – 2) % x 4/12 333

£34,000 x (4.00 – 2) % x 8/12 453

786

Christine would choose to be taxed on the lower ‘strict’

statutory method

2. Accommodation (£)

Rateable value 3,000

Additional

(£197,500 - £75,000) x 4.00% 4,900

7,900

Benefit = £7,900 x 2/12 1,317

Less contributions (300 x 2) (600) 717

3. Car (£)

Benefit £(15,000 x 32% x 9/12) 3,600

Less Contributions £(25 x 9) (225)

3,375

Fuel £(21,100 x 32% x 9/12) 5,064

5. Home Entertainment Systems

Use £3,500 x 20% x 10/12 583

Gift

Current Market Value (less price paid) 1,450

Original cost less use (less price paid)

(£3,500 – £583) 2,917

The higher amount is taken 2,917

6. Pension Contributions -

exempt

Total benefits 2013/2014 13,442

(b) Christine Income tax computation 2013/14

£ £ £

Gross Salary 52,500

Pension (5%) (2,625)

BIK (from above) 13,442

Interest

£1,800 x 100/80 2,250

Dividends

£1,215 x 100/90 1,350

Personal Allowance (9,440)

Taxable Income 53,877 2,250 1,350

32,010 @ 20% 6,402

Ex B/R 700@ 20% 140

21,167 @ 40% 8,466.80

53,877

2,250 @ 40% 900

1,350 @ 32.5% 438.75

16,347.55

Less: Tax Credit (135)

Tax Liability

Less: Tax Paid at Source

PAYE (10,822)

Interest (450)

Outstanding tax liability 4,940.55

ANSWER 6

Rory Parks

VAT for quarter ended 30th June 2013

Outputs Gross VAT Net

(£) (£) (£)

Standard-rated sales

(£149,700 x 1.2) 179,640.00 29,940.00 149,700.00

Deemed supply

- Legal Fees 1,200.00 200.00 1,000.00

Fuel scale charge 371.00 61.83 309.17

181,211.00 30,201.83 151,009.17

Purchases

(W1)

88,464.00 14,744.00 73,720.00

Goods – no invoice 1,480.00 1,480.00

Other expenses

(W2)

4,781.00 796.84 3,984.16

Entertainment 485.00 485.00

Postal services 448.00 448.00

Motor Vehicle 9,450.00 9,450.00

Electricity 3,874.00 645.67 3,228.33

Accountancy fees 1,645.00 274.17 1,370.83

Building Insurance 1,280.00 1,280.00

Legal Fees 2,174 362.33 1,811.67

114,081.00 16,823.01 97,257.99

VAT Due 13,378.82

Workings

(£)

(1) Purchases 76,550.00

Less - goods cancelled (1,350.00)

- goods no invoice (1,480.00)

Net purchases 73,720.00

VAT @ 20% 14,744.00

Gross Purchases 88,464.00

(2) Other expenses 15,164.00

Entertainment – blocked (485.00)

Postal Services – exempt (448.00)

Motor Vehicle – blocked (9,450.00)

Gross expenses 4,781.00

Less VAT @ 1/6 (796.84)

Net expenses 3,984.16

For the purposes of the solution, it has been assumed that the VAT fuel scale

charges in force from 1/5/13 were applicable throughout the period covered by this

VAT return.