CASE STUDY

 You are a junior tax manager in the taxation department of Bean Counter & Co, a large regional accountancy practice based in Hull, East Yorkshire. The Tax Manager (who is your line manager and supervisor) is Mrs Angela Brown. She is self-isolating at home with her husband and children because one of her relations has tested positive for Covid-19. In her absence she has asked you to look at some client work and prepare detailed responses ready to discuss with her on her return to work. She has given you the following client files to work on whilst she is away. Summarised file contents are given below, together with details of the work you are required to complete:

 File 1 – Jackie White and her parents, Bill and Brenda White

(a) Jackie is employed as a sales manager by The Hull Cookie Company Ltd (THCC). Her salary is £38,000 per annum. The following information is also relevant:

· THCC provided Jackie with a Ford Focus Petrol 5-door hatchback car which she used for private purposes as well as business. The list price is £18,600 and the CO2 emissions are 110g/km. Jackie had the use of this car for the whole of the tax year.

· Jackie drove 15,000 business miles during 2019-20. She paid for all of the fuel herself and the company reimbursed her for her business mileage at the rate of 35p for every mile.

· Jackie was a member of the company’s private health insurance scheme throughout the year. The premium which THCC paid for her for 2019-20 was £850.

· In January 2019 THCC made Jackie a loan of £25,000 to fund the deposit when she purchased her own home. THCC charges her 2% interest per annum and the official rate of interest is 2.5%.

Angela requires you to do the following:

(i) Calculate the total value of Jackie’s Benefits in Kind for 2019-20. Show your calculations in detail. 7 marks

(ii) Calculate the amount which Jackie can deduct for tax purposes under the Approved Mileage Allowance Payment (AMAP) scheme. State the amount which Jackie has been over- or under- reimbursed by THCC.

3 marks Total marks for part 1(a) = 10

(b) Jackie’s parents, Bill and Brenda White, have been married for 60 years. Bill was born in 1930 and Brenda was born in 1936. Bill had the following income for 2019-20:

Brenda’s income consisted of the state pension only (£8,400 for 2019-20).

(File 1 is continued on the next page)

(File 1 continued)

Angela requires you to do the following for Bill:

Prepare Bill’s income tax computation for 2019-20 and calculate his tax liability.

Marks for part 1(b) = 10 Total marks for Scenario 1: 20

File 2 – Cottingham Trading Ltd

Cottingham Trading Ltd is located in East Hull has the following results for the four years ended 31st March:

31/03/2016 31/03/2017 31/03/2018 31/03/2019

£ £ £ £

Trading profits/

(losses) 3,900 (20,500) (20,300) 5,100

Angela requires you to do the following:

(a) Assuming that all possible claims are made to relieve the trading losses against total profits, at the earliest possible time, calculate the company’s taxable total profits (TTP) for each of the four years. Using loss memoranda, clearly show how each of the losses for the years ended 31st March 2017 and 2018 has been relieved, identifying any amounts which remain unrelieved. State whether there are any unrelieved charitable donations.

15 marks

(b) Briefly explain the reforms to s45 of the Corporation Tax Act 2010 introduced by the Finance Act 2017 and comment on the advantages or disadvantages of the amendments to the rules for relief of corporate losses.

5 marks

Total marks for Scenario 2: 20

File 3 – Boris Jackson

Boris is a married man aged 56. He is semi-retired but still works part-time as an accountant. For the 2019-20 tax year his income from all sources (after deduction of personal allowances) was £31,000. He had unrelieved capital losses brought forward from earlier years of £15,000. During the tax year 2019-20 he made the following capital transactions:

A. On 13th May 2019 Boris sold a buy-to-let house for £120,000, incurring agents’ and legal fees of £1,750. He acquired the house in 1992 for £45,000, and survey and legal fees cost £750. The house was “not fit for human habitation” and before it could be let to a tenant Boris spent £22,000 on a complete renovation (this expenditure qualifies as “enhancement expenditure”). This house was not his Principal Private Residence at any time.

B. On 21st July 2019 Boris gave a valuable portrait (market value £130,000) to the National Portrait Gallery. He inherited this painting from his uncle in 2002, when its probate value was £75,000. There were no incidental costs of either disposal or acquisition.

C. On 1st November 2019 Boris sold a second buy-to-let house to his brother Joe for

£50,000. The market value of the house at that date was £95,000. Legal costs for the sale were £800. Boris inherited this house in 1987 from his grandmother (probate value £40,000, no incidental costs of acquisition). The house was not his Principal Private Residence at any time.

D. On 12th December 2019 Boris sold an antique clock for £5,500 (no incidental costs of disposal). He had purchased the clock for £6,500 in 2017 from an antique shop (no incidental costs of acquisition).

E. On 3rd April 2020 Boris sold 1,000 shares in XYZ plc for £9.50 each. Ignore incidental costs, which were minimal. He acquired his shareholding over a period of time as follows:

1st August 2019 acquired 1000 shares for £1 per share 15th March 2020 acquired 100 shares for £8 per share 3rd April 2020 acquired 600 shares for £9 per share

Angela requires you to do the following for Boris:

(i) Compute the chargeable capital gain or loss on each of the above transactions.

10 marks

(ii) Calculate Boris’s Capital Gains Tax liability for 2019-20 and state the due date for payment. Allocate the annual exemption and losses in the most advantageous way. 10 marks

Total for Scenario 3: 20 marks

File 4 – Bill Black

Bill has been a tax client of Bean Counter & Co for many years. He is a retired Professor of Applied Physics. He frequently asks Angela challenging theoretical questions about the UK taxation system, and he likes to receive detailed written answers. Recently he spotted the following quotation on the internet:

“Taxes, like death, are unavoidable. But we can design our taxes. We are not bound to have a tax system as inefficient, complex, and unfair as our current one. To improve things, we need to see the system as a whole, we need to design the system with a clear understanding of the population and economy on which it operates, and we need to apply economic insights and evidence to the design. We also need a much more informed public debate and a much better set of political processes than the ones we currently have.”

Extract from the Introduction to Tax by Design (Mirlees, J. et al, Oxford University Press, 2011:20), more generally known as “The Mirlees Review”.

Angela requires you to do the following so that she can reply to Professor Black:

Prepare a written answer for Professor Black, critically evaluating the above statement. Comment on the factors which have resulted in the inefficiency, complexity and unfairness of the current system, and the criteria which are fundamental to a properly designed system of taxation. Support your arguments by reference to UK tax law, academic literature and theory, and any other sources which you consider to be relevant. (Limit your suggested answer to a maximum of 700 or 800 words.)

Marks for Scenario 4: 20 marks

File 5 – Elton Jack

Elton, aged 81, is considering his Inheritance Tax position. He estimates that if he were to die in the near future his assets would consist of the following:

£

*This is Elton’s own business and his interest in it satisfies all the conditions for Business Property Relief.

Elton’s civil partner Robert died on 31 March 2017. Robert’s estate was valued at

£200,000 and in his will he left it all to his brother Jack. Robert had not made any chargeable lifetime transfers.

(File 5 is continued on the next page)

(File 5 continued)

On 20 December 2013 Elton gave total cash (equally divided between the two of them) of £220,000 (net of all relevant exemptions) to his and Robert’s two legally adopted children. Elton has not made any other gifts which exceed the annual exemptions.

In his will Elton leaves £30,000 to a local museum (which is a registered charity) and everything else equally to the two children. An estimate of funeral expenses, professional fees and general creditors when Elton dies is £8,000.

Angela has asked you to carry out the following work for Elton:

a) Calculate the Inheritance Tax payable if Elton dies on (i) 30 November 2020 and

(ii) 31 December 2020. Note that the amount of the Residential Nil Rate Band for 2020-21 will be £175,000.

15 marks

b) Suggest ways in which Elton might reduce any IHT liability, both now and in the future. 5 marks

Marks for Scenario 5: 20 marks

END OF CASE STUDY AND ASSIGNMENT REQUIREMENTS

YOU SHOULD HAVE PREPARED ANSWERS TO ALL FIVE SCENARIOS

Starting rate limit for savings £5,000

Personal savings allowance (basic rate taxpayer) £1,000

Personal savings allowance (higher rate taxpayer) £500 Dividend allowance £2,000

Dividend ordinary rate 7.5%

Dividend upper rate 32.5%

Dividend additional rate 38.1%

Allowances

Income limit for age-related allowances 29,600

Corporation tax FINANCIAL YEARS

Note: The main rate for FY 2020 will be 17%

Tax rates 2019-20 (cont.)

Company car and fuel benefits

Diesel cars – add 4% (max 37%)

Diesel hybrid cars are exempt from this supplement

Approved mileage allowance payments (AMAP)

The statutory system of tax and NICs free mileage rates for 2019/20 are as follows:

Car and Vans

First 10,000 miles 45p per mile

Over 10,000 miles 25p per mile

Motorcycles 24p per mile

Bicycles 20p per mile

Value added tax

Standard rate 20% (1/6 x Gross)

Reduced rate 5%

Zero rate 0%

Registration limit £85,000 taxable turnover in cumulative 12 month period Deregistration limit £83,000

Capital allowances

Writing Down Allowance (WDA)

· Main pool 18%

· Special rate pool 6% (8% prior to 6 April 2019) Other

· Annual Investment Allowance (AIA) £200,000 per year from 1 January 2016

· AIA rate 100%

· First Year Allowance (FYA) 100%