BPT FA2020 errata sheet 170920 PDF

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Business Planning: Taxation FA2020 Errata sheet WORKBOOK Errata and clarifications Chapter 4, P123, Section 1.1 The definition of cash basis is amended as follows: Certain small unincorporated businesses (turnover less than or equal to £150,000) may elect to use the cash basis rather than accrual accounting for the purposes of calculating their taxable trading income. Chapter 4, P124, Section 1.1 In the table of brought forward knowledge of adjustments to profits, the following amendment should be made. Employment payments and pensions

Generally allowable. However, on cessation of trade, payments in addition to statutory redundancy payments are only allowable up to 3 × statutory redundancy pay.

Chapter 7, P212 Section 1.9.1 In the table of relevant business property, the following amendment should be made. •

Shares transferred from a controlling holding in a quoted company

50%

Chapter 8, P259, Section 2.1.1 The diagram on this page has been duplicated in error. Chapter 10, P316, Section 1.3 The definition of a small company for exempt dividend provisions is missing the currency. The relevant conditions should read: - An annual turnover not exceeding €10 million; or - A balance sheet total not exceeding €10 million Chapter 10, P322, Section 2.4 The definition of a small or medium-size enterprise (SME) for R&D is missing the currency. The relevant conditions should read: - An annual turnover not exceeding €100 million; or - A balance sheet total not exceeding €86 million Chapter 11, P357, Section 3.2.1 The following clarification should be inserted after the third paragraph: Page 1 of 8

Any lease premiums and transaction costs paid will also be capitalised onto the balance sheet as part of the right of use asset. Any depreciation/amortisation in respect of these amounts is not deductible. In respect of lease premiums for short leases, a deduction may instead be taken for the deemed additional rent; see chapter 22 for further details on this calculation. Chapter 11, P365, Chapter summary The summary diagrams for leasing and equity v debt have been duplicated. Chapter 15, P498, Section 4.2.4 The definition of a small company is missing the currency. The relevant conditions should read: - An annual turnover not exceeding €10 million; or - A balance sheet total not exceeding €10 million Chapter 22, P714, Section 1.3 The following should be inserted as section 1.3.3 of chapter 22 as clarification: 1.3.3 Treatment of accounting entries The lease premium paid will be capitalised in the accounts of the lessee and amortised over the life of the lease. Any amortisation in the lessee’s accounts should be added back and a deduction taken for the deemed additional rent as detailed above.

QUESTION BANK Errata and clarifications Question 6, Bill Mickelson The final paragraph of Exhibit 2 should be updated as follows: On 1 May 2021 Wilma resigned from her position as marketing director for an international cycle manufacturer. Her gross salary for the period from 6 April 2021 to 1 May 2021 was £10,000. In 2020/21 her salary was £120,000. Wilma made no other capital disposals in 2020/21 2019/20 but she does have a capital loss brought forward at 6 April 2020 of £5,000. Question 7, Gooch Food The fifth paragraph of the answer to Section 7.1 should be amended as follows: There will be additional class 4 NIC to pay. Neeta will be liable for class 4 NIC on the excess over £9,500 ie, (£505,000 – 9,500) × 9% = £3,645. However, if Neeta had not been a partner, Shar would have only paid NIC at 2% ie, on the £50,000 since this falls above the upper annual profits limit. Overall additional class 4 NIC is payable. Question 8, Valese plc The second paragraph under Proposal 2 in Section 8.1 should be amended as follows: If the building is sold after the appointment of the liquidator as under Proposal 2, there are no losses profits available to set against the gain and therefore corporation tax of £57,000 (£300,000 × 19%) will be payable in respect of this gain.

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Question 15, Shandy Ltd The answer under option 1 in Section 15.1 may be clarified as follows: Initially, the unused trading losses of Shandy, at the date of the MBO, would be carried forward within the company. The trading losses of £109,500 from pre-1 April 2017 are carried forward for use against the first available trading profits of the same trade. Unused post-1 April 2017 losses of up to £250,000 (the loss of the current year ended 30 September 2021) are carried forward for use against total profits. The amount of the current year loss available to carry forward in Shandy at 1 October 2021 will be reduced by any group relief claimed by Pickle plc (Pickle) prior to the sale. Pickle plc (Pickle) is profitable and in a 75% group with Shandy up to the date of sale. Pickle could claim some of Shandy’s current year trading loss as group loss relief and so the loss available to be carried forward in Shandy at 1 October 2021 may be reduced by a group relief claim made by Pickle. Pickle will be able to claim group relief from Shandy up to the point there are If the shares in Shandy are to be sold, there will be a point at which group relief will be denied to Pickle, due to the existence of ‘arrangements’ for Shandy to leave the group. If the management team entering into negotiations is deemed to constitute arrangements, Pickle would be able to claim a maximum of £125,000 (250,000 × 6/12) of Shandy’s losses (being losses to 31 March 2021) leaving the remaining £125,000 carried forward. The loss carried forward is therefore likely to be between £109,500 (pre-1 April 2017 loss brought forward) if group relief is available until 30 September 2021, and £234,500 (£109,500 + £125,000 (250,000 × 6/12)) assuming group relief is available for six months to 31 March 2021. Question 19, ZD Holdings plc The second paragraph under Issue 1 in Exhibit 1 may be clarified as follows: The total interest and depreciation in respect of this asset charged to the statement of profit or loss for the year is £5.2 million of which £4.5 million relates to the capitalised annual rental payments and £0.7m to the capitalised lease premium/transaction costs. Question 26, Baluga Ltd The answer to part 26.2 should be amended as follows: The second paragraph under Corporation tax should be clarified as follows: There is a change in ownership and so any brought forward losses would not be available for group loss relief for five years from the end of the accounting period of the change ie, first relief against profits of the year ended 31 March 2028. Any trading losses would also be transferred with the trade. However, this may not be available as it seems there may also be a change in the nature of trade, given the management team’s plans for an intended return of the company to profitability. Therefore, the losses up to the date of change of ownership (31 October 2021) of the trading period to 30 September 2021 may not to be available to carry forward and set off either in future accounting periods of Maxxi Ltd or via group relief (if any additional group companies were acquired/set up). The paragraph under Finance should be amended as follows:

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As the managers are acquiring finance to fund the acquisition then there may be some income tax relief available for them, if Maxxi Ltd is a close company and the managers own at least 5% of the shares or and continue to work for the company. Question 32, Lyre Ltd The second paragraph of point 1 of the note to HED may be clarified as follows: 90% of these charges are assumed to relate to the annual rental payments and the remainder to capitalised leased premium/transaction costs. Question 42, 2B plc The date in the table in the Exhibit should be amended to 31 March 2021. Question 44, Frank and Hari The first sentence under that table at the start of Exhibit 1 should be amended as follows: DroneTx has made claims for the Annual Investment Allowance for the full cost of computer equipment and therefore The tax written down value of assets in the main pool will be £300,000 at 6 April 2021. As a consequence the third paragraph of the answer to 44.1 becomes: As the TWDV is £300,000, the balancing charge will be £50,000 (£350,000 - £300,000). Question 49, Foodpack Ltd The indexation allowance calculation in the answer to Section 49.1 should be amended as follows: (278.1 – 258.0)/258.0 = 0.078 × £24,923 The answer of £1,944 is correct for this updated calculation. Question 52, Aughton plc The Exhibit should be amended as follows: I can leave the UK for Malcan on either 1 January 2022 or 1 July 2022. Question 53, Mark Prescott The answer to this question is being discussed with the examiners. In the meantime, suggested amendments to the model solution are below: Because Mark is highly leveraged he is severely affected by the restrictions on deductibility of finance costs for his property business. Alternative 1: Incorporate property business: If he incorporates then on the transfer of property to a connected company, there will be gains based on the market value of the properties at the date of sale. However, where properties have been actively managed (and in this situation it looks like they have as Mark spends 25 hours per week managing his portfolio and in Ramsey v HMRC – over 20 hours involvement in the business was deemed to be active management) then incorporation relief should be available to defer the gains against the shares. This has the benefit of giving properties a tax free uplift to market value within the company.

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For individuals, finance costs on property are only deductible as a basic rate tax credit; therefore Mark is only receiving tax relief at 20% despite being an additional rate taxpayer. His net cash is therefore £53,507 (£193,250 - £84,725 - £55,018). Finance costs in companies are deducted gross as loan relationship deficits from total profits. The net cash received in the company would be £87,905 (0.81 × (£193,250 - £84,725)) ie an increase of £34,398 although it is noted there may be some additional tax costs based on how this is extracted from the company. However, there could be significant SDLT consequences as Mark will be transferring properties to a company and he is connected to the company. As several properties will be transferred at once, they will be linked and subject to SDLT at up to 15%. This can be reduced by either multiple dwellings relief or forming a partnership structure (as is the proposal under alternative 2). Multiple dwellings relief applies where six or more properties are transferred and suffer SDLT at up to 5% (commercial rates) rather than 15% (residential rates). Alternative 2: Partnership In transferring half of the ownership of the properties to his wife, there would be no capital gains tax – given the transfer between spouses would be at ‘no gain/no loss’. There would also be no SDLT payable where property being put into a partnership is effectively retained by the transferor-partner (or persons connected with them). However, income of partnerships is taxed on the partners so there could still be an issue in relation to the deductibility of finance costs. If Mark does set up a partnership and then incorporated as an LLP the rate of SDLT would be reduced to 0% irrespective of the value of the property. However, for this to be effective, a genuine partnership must exist merely than spouses being joint owners of the property. There is anti-avoidance legislation in place to avoid an individual running a partnership and then shortly after incorporating. Recommendation: In terms of the ongoing business, incorporation is recommended as gains could be deferred and the SDLT provisions are more generous. The fact that finance costs are unrestricted would also be beneficial. The main benefits of incorporation would be the tax free uplift to market value of the properties and the greater deductibility of finance costs. However, further information would be needed and modelling required to ascertain whether this would be offset by the additional SDLT cost of incorporation. With the following suggested changes (subject to examiner confirmation) to the marking grid.

Alternative 1 Incorporation Finance cost

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Technical

Skills

1 1

2 1

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SDLT Alternative 2 Partnership Finance costs SDLT Recommendation

1

1.5

0.5

1 0.5 1 1

0.5

Question 54, Draco Ltd The following changes should be made to Section 54.1 of the answer. The distribution will be £6 million less the subscription price of £20 (40% × £50) and this will be charged to income tax at Edward’s marginal rate of tax for dividends. Assuming that Edward has yet to pay tax on any dividends, he would pay tax at 0% on the first £2,000 of dividends and at 38.1% on the remainder of the dividend. This would give rise to income tax of £2,285,230 – at an overall tax rate of 38%. The net increase in cash in Edward’s estate would be £3,714,770. As Edward’s estate was worth £18 million, before he inherited an additional £4 million from his wife Joanna in June 2021, any additional value would be subject to IHT at 40% on his death. The £6 million before the buyback was invested in shares in a company, in respect of which Edward would have been able to claim BPR at 100%. Now that part of that investment has been converted to cash, this cash will increase the amount of the chargeable IHT estate. Emily should consider that the net amount of the £6 million of shares proceeds that she might receive on her father’s death would be £3,714,770 x 60% = 2,228,862 Therefore, income tax and IHT at an effective rate of 63% would have been levied. The penultimate paragraph of the answer to Section 54.2 should read: SEIS reinvestment relief could apply to exempt defer gains of up to 50% of the amount invested under SEIS (therefore a maximum of £50,000 of gains). Again, under Plan 2, Edward would have gains requiring mitigation. Question 57, MB plc The following changes should be made to Section 57.1 of the answer. The final paragraph under Chargeable gain on sale of debentures should read: Therefore, the chargeable gain on the sale of the debentures is £1.3 million calculated as follows: £m Proceeds

3.3

Cost

(1.8)

Indexation allowance 0.135* × £1.8m

(0.2) 1.3

* 255.7 - 225.3/225.3 = 0.135

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This should reference to tutorial note 2. The section under Sale of 540,000 shares in Analytics plc should read: The capital loss should be offset against the chargeable gain on the debentures £1.3 million leaving a net gain of £1.2 million. * *See Tutorial note (1) at the end of this answer This gain could be treated as arising in another group company. However, as MB plc has a capital loss brought forward of £7 million, it should use the loss against the chargeable gain. As the disposal has taken place after 1 April 2020 and the deductions allowance has been allocated against trading profits, the relevant maximum which may be offset is 50% x £1.2m i.e. £0.6m. This leaves a gain of £0.6m chargeable to corporation tax and capital losses carried forward of £ 6.4m.

£m Capital loss at 1 April 2020

(7.0)

Use against 50% of net gain in year

0.6

Capital loss carried forward at 1 April 2022

6.4

The Revised corporation tax computation for MB plc should be amended as follows: MB plc 31 March 2021 £m Trading income

46.0

NTLR profits (£4m + £0.6m)***

4.6

Chargeable gain

1.2

Less b/f capital losses

(0.6) 0.6

PE trading income Taxable profits

51.2

The following changes should be made to Section 57.3 of the answer: The relevant maximum for MB plc in respect of the pre 1 April losses is: Trading income £5m + (46m - £5m) x 50% = £25.5m Non-trading profits (£4.6m + £1.2m) x 50% = £2.9m The relevant maximum is £28.4m. The maximum chargeable gain of £0.6m has been offset by capital losses brought forward and so the remaining non-trading profits which can be relieved are £2.9m - £0.6m = £2.3m. Therefore, the pre 1 April trading loss of £24m and the pre 1 April 2017 NTLR of £2m are within the relevant maximum for trading income and that remaining for non-trading profits respectively. MB plc must first relieve its own profits first as far as possible.

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£m Trading income

46.0

Less: Pre 1 April 2017 trading loss

(24.0) 22.0

Chargeable gain after b/f capital loss

0.6

NTLR profits

4.6

Less: Pre 1 April 2017 NTLR loss

(2.0) 3.2 25.2

Less: remaining relevant maximum (£28.4m - £24.0m £0.6m -£2.0m)

(1.8) 23.4

Question 1, Josh Reynolds In Exhibit 2, the notes should be numbered as (1) to (7). In the version on Bibliu the notes run from (1) to (4), then (1) to (3). This is an error, and these should still be read as notes (1) to (7).

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