THE CHARTERED INSTITUTE OF TAXATION
ADVANCED TECHNICAL
Taxation of Owner-Managed Businesses
November 2022
TIME ALLOWED
3 HOURS 30 MINUTES
• All workings should be shown and made to the nearest month and pound unless the question specifies
otherwise.
• Candidates who answer any law elements in this paper in accordance with Scots law or Northern
Ireland law should indicate this where relevant.
• Scots law candidates may provide answers referring to Land and Buildings Transaction Tax rather
than Stamp Duty Land Tax.
• Unless otherwise indicated by the provision of additional information in the question, you may assume
that 2021/22 legislation (including rates and allowances) continues to apply for 2022/23 and future
years. Candidates answering by reference to more recently enacted legislation or tax cases will not
be penalised.
• Additional marks may be awarded for presentation.
• You must type your answer in the space on the screen as indicated by the Exam4 guidance.
,1. Birch Tree Holidays Ltd operates a caravan park on a 50 acre site. The site currently includes a
field for tents, three acres of grass pitches for 15 touring caravans, toilet facilities and a derelict
barn.
The grass pitches and the access road to the site have deteriorated, so the company is planning
to carry out work on the existing facilities and also upgrade the site to provide a shop, bar and an
area to house animals.
The schedule of work to be carried out is as follows:
Work on existing facilities
1) The grass pitches for touring caravans will be replaced by hardcore pitches.
2) The access road to the site will be resurfaced.
3) Five touring caravans will be bought. Four caravans will be let to holiday makers. The fifth
caravan will be fixed in place and used by a warden who will be employed to manage the site.
The warden will be required to be available on call at all times.
Upgrade and development work
1) Expenditure will be incurred on preliminary costs and professional fees for the overall site
development.
2) A shop will be built to sell food and other items to holiday makers. Costs will include:
(a) Advertising signs.
(b) A suspended ceiling to cover the air conditioning and electrical systems.
(c) Partition walls. Although the partitions will all be moveable, it is expected that approximately
half will be kept permanently in the same place.
3) The derelict barn will be converted into a bar and restaurant. Costs will include:
(a) Decorative items, such as paintings and sculptures.
(b) Tiling in toilet areas.
(c) A sloping tiled floor in the cold store.
4) Animals such as rabbits, llamas and sheep will be bought and a number of small buildings built
to house them as an attraction for children.
Requirement:
Explain, with reference to case law, any relief available on the above costs as either repairs
or plant and machinery allowances. You are NOT required to discuss structures and
buildings allowances. (10)
,2. Mike Stifle is a director and 50% shareholder of a small safety training company, Safety Ltd.
Mike is considering a potential acquisition of Besail Ltd.
Besail Ltd undertakes several activities:
1) Yacht timeshare – Besail Ltd assists with the acquisition of yachts for timeshare. Each yacht
has six timeshare owners with Besail Ltd using a booking system to allocate time on the yacht
to each client. It receives a commission for the acquisition and an annual management fee for
cleaning, maintenance and mooring of the yachts at a luxury yacht club.
2) Training – all clients need first aid and fire safety training to sail independently.
3) Social events – Besail Ltd organises events for clients including a summer party and an annual
ski trip. The summer party is paid for entirely by Besail Ltd, with clients attending free of charge.
Clients pay to attend the ski trip, but Besail Ltd obtains a significant group discount which it
does not pass on to the clients.
These activities are a single trade for Corporation Tax purposes.
Besail Ltd is loss making. Mike believes that the company can return to profitability within two years
of acquisition by:
1) Changing its focus from luxury yachts to more affordable ones, with more timeshare clients per
yacht, moorings in a cheaper area and less spending on social functions.
2) Outsourcing the training aspects of the business.
A review of the historical accounts and Company Tax Returns of Besail Ltd show that:
1) Besail Ltd has made significant losses for each of the previous 10 years.
2) All costs in relation to social functions have been expensed and no adjustment has been made
in any Company Tax Return in respect of them.
3) The largest asset held by Besail Ltd is the bespoke booking system. This was developed by a
friend of the owner of Besail Ltd. Besail Ltd did not pay for the development of the booking
system but instead gave the developer a free timeshare for a year. The owner of Besail Ltd
believed the booking system to be worth £100,000. He wanted this to be shown in the accounts
of Besail Ltd and so debited intangible fixed assets with £100,000. He was unsure of what to
credit and so credited the director’s loan account with the same amount.
4) The accounts contain a note regarding a contingent liability. Legal action has been taken
against Besail Ltd following the death of a client on a yacht. Besail Ltd’s solicitor has stated
that he expects the case against Besail Ltd to be unsuccessful, but the liability could be more
than £1million if it was successful. Besail Ltd does not have insurance to cover this.
The other shareholder in Safety Ltd does not want to be involved in the acquisition of Besail Ltd
and so Mike intends to purchase 100% of the shares in Besail Ltd in his own name for £250,000.
He will consider an alternative method of acquiring the business if there is an advantage to this.
Mike only has £50,000 cash available for the acquisition and so will borrow £100,000 from Safety
Ltd and £100,000 from a bank. Safety Ltd will not charge any interest but the bank will charge 7%
per annum interest. Safety Ltd will also lend £50,000 directly to Besail Ltd after the acquisition has
taken place. Interest will be charged on this loan at 0.5%.
Requirement:
1) Explain the Corporation Tax issues that could arise if the acquisition were to go ahead
and, where relevant, identify any potential alternative acquisition structures which
could limit the impact of these. (14)
2) Explain the tax issues that arise for Mike, Besail Ltd and Safety Ltd from the proposed
loans from Safety Ltd and the bank. (6)
You should ignore VAT and Stamp Duty.
Total (20)
, 3. On 1 February 2010, Ross and Abby commenced a trading partnership, preparing accounts to 31
January each year. It was agreed that profits would be shared between Ross and Abby in the ratio
3:1 respectively. Overlap profits arose on the commencement of the trade of £30,000 and £10,000
for Ross and Abby respectively.
From 1 February 2018, it was agreed profits would be shared between Ross and Abby in the ratio
3:2 respectively, after a salary to Abby of £24,000 per annum.
On 1 June 2021 Ross retired from the partnership and was replaced by Yousef. It was agreed that
profits would be shared equally between Abby and Yousef, after prior salaries of £21,000 and
£15,000 per annum to Abby and Yousef respectively.
It was also decided that the accounting date of the partnership would be changed to 31 May.
Accordingly, a set of accounts were prepared for the period from 1 February 2021 to 31 May 2022.
Tax-adjusted partnership profit figures were:
£
Year ended 31 January 2021 150,000
Period ended 31 May 2022 240,000
The partnership owns its own trading premises which cost £100,000 on 1 February 2017. These
were revalued in the accounts on 31 January 2018 at £150,000. When Ross retired, it was agreed
that Ross would dispose of his interest in the property to Abby and Yousef based on its market
value of £300,000. Abby and Yousef have agreed to continue to include the property at £300,000
in the partnership accounts. Capital profits are shared in line with the profit sharing ratio.
Ross made no other capital disposals in 2021/22 and this is the only business he has ever been
involved in.
Requirement:
1) Calculate, with explanations, the taxable profits for Ross, Abby and Yousef for 2021/22
and 2022/23, detailing any overlap relief carried forward. (13)
2) Calculate, with explanations, the Capital Gains Tax liability for Ross for 2021/22 and
the base cost of the property carried forward for Abby and Yousef. (7)
Total (20)
ADVANCED TECHNICAL
Taxation of Owner-Managed Businesses
November 2022
TIME ALLOWED
3 HOURS 30 MINUTES
• All workings should be shown and made to the nearest month and pound unless the question specifies
otherwise.
• Candidates who answer any law elements in this paper in accordance with Scots law or Northern
Ireland law should indicate this where relevant.
• Scots law candidates may provide answers referring to Land and Buildings Transaction Tax rather
than Stamp Duty Land Tax.
• Unless otherwise indicated by the provision of additional information in the question, you may assume
that 2021/22 legislation (including rates and allowances) continues to apply for 2022/23 and future
years. Candidates answering by reference to more recently enacted legislation or tax cases will not
be penalised.
• Additional marks may be awarded for presentation.
• You must type your answer in the space on the screen as indicated by the Exam4 guidance.
,1. Birch Tree Holidays Ltd operates a caravan park on a 50 acre site. The site currently includes a
field for tents, three acres of grass pitches for 15 touring caravans, toilet facilities and a derelict
barn.
The grass pitches and the access road to the site have deteriorated, so the company is planning
to carry out work on the existing facilities and also upgrade the site to provide a shop, bar and an
area to house animals.
The schedule of work to be carried out is as follows:
Work on existing facilities
1) The grass pitches for touring caravans will be replaced by hardcore pitches.
2) The access road to the site will be resurfaced.
3) Five touring caravans will be bought. Four caravans will be let to holiday makers. The fifth
caravan will be fixed in place and used by a warden who will be employed to manage the site.
The warden will be required to be available on call at all times.
Upgrade and development work
1) Expenditure will be incurred on preliminary costs and professional fees for the overall site
development.
2) A shop will be built to sell food and other items to holiday makers. Costs will include:
(a) Advertising signs.
(b) A suspended ceiling to cover the air conditioning and electrical systems.
(c) Partition walls. Although the partitions will all be moveable, it is expected that approximately
half will be kept permanently in the same place.
3) The derelict barn will be converted into a bar and restaurant. Costs will include:
(a) Decorative items, such as paintings and sculptures.
(b) Tiling in toilet areas.
(c) A sloping tiled floor in the cold store.
4) Animals such as rabbits, llamas and sheep will be bought and a number of small buildings built
to house them as an attraction for children.
Requirement:
Explain, with reference to case law, any relief available on the above costs as either repairs
or plant and machinery allowances. You are NOT required to discuss structures and
buildings allowances. (10)
,2. Mike Stifle is a director and 50% shareholder of a small safety training company, Safety Ltd.
Mike is considering a potential acquisition of Besail Ltd.
Besail Ltd undertakes several activities:
1) Yacht timeshare – Besail Ltd assists with the acquisition of yachts for timeshare. Each yacht
has six timeshare owners with Besail Ltd using a booking system to allocate time on the yacht
to each client. It receives a commission for the acquisition and an annual management fee for
cleaning, maintenance and mooring of the yachts at a luxury yacht club.
2) Training – all clients need first aid and fire safety training to sail independently.
3) Social events – Besail Ltd organises events for clients including a summer party and an annual
ski trip. The summer party is paid for entirely by Besail Ltd, with clients attending free of charge.
Clients pay to attend the ski trip, but Besail Ltd obtains a significant group discount which it
does not pass on to the clients.
These activities are a single trade for Corporation Tax purposes.
Besail Ltd is loss making. Mike believes that the company can return to profitability within two years
of acquisition by:
1) Changing its focus from luxury yachts to more affordable ones, with more timeshare clients per
yacht, moorings in a cheaper area and less spending on social functions.
2) Outsourcing the training aspects of the business.
A review of the historical accounts and Company Tax Returns of Besail Ltd show that:
1) Besail Ltd has made significant losses for each of the previous 10 years.
2) All costs in relation to social functions have been expensed and no adjustment has been made
in any Company Tax Return in respect of them.
3) The largest asset held by Besail Ltd is the bespoke booking system. This was developed by a
friend of the owner of Besail Ltd. Besail Ltd did not pay for the development of the booking
system but instead gave the developer a free timeshare for a year. The owner of Besail Ltd
believed the booking system to be worth £100,000. He wanted this to be shown in the accounts
of Besail Ltd and so debited intangible fixed assets with £100,000. He was unsure of what to
credit and so credited the director’s loan account with the same amount.
4) The accounts contain a note regarding a contingent liability. Legal action has been taken
against Besail Ltd following the death of a client on a yacht. Besail Ltd’s solicitor has stated
that he expects the case against Besail Ltd to be unsuccessful, but the liability could be more
than £1million if it was successful. Besail Ltd does not have insurance to cover this.
The other shareholder in Safety Ltd does not want to be involved in the acquisition of Besail Ltd
and so Mike intends to purchase 100% of the shares in Besail Ltd in his own name for £250,000.
He will consider an alternative method of acquiring the business if there is an advantage to this.
Mike only has £50,000 cash available for the acquisition and so will borrow £100,000 from Safety
Ltd and £100,000 from a bank. Safety Ltd will not charge any interest but the bank will charge 7%
per annum interest. Safety Ltd will also lend £50,000 directly to Besail Ltd after the acquisition has
taken place. Interest will be charged on this loan at 0.5%.
Requirement:
1) Explain the Corporation Tax issues that could arise if the acquisition were to go ahead
and, where relevant, identify any potential alternative acquisition structures which
could limit the impact of these. (14)
2) Explain the tax issues that arise for Mike, Besail Ltd and Safety Ltd from the proposed
loans from Safety Ltd and the bank. (6)
You should ignore VAT and Stamp Duty.
Total (20)
, 3. On 1 February 2010, Ross and Abby commenced a trading partnership, preparing accounts to 31
January each year. It was agreed that profits would be shared between Ross and Abby in the ratio
3:1 respectively. Overlap profits arose on the commencement of the trade of £30,000 and £10,000
for Ross and Abby respectively.
From 1 February 2018, it was agreed profits would be shared between Ross and Abby in the ratio
3:2 respectively, after a salary to Abby of £24,000 per annum.
On 1 June 2021 Ross retired from the partnership and was replaced by Yousef. It was agreed that
profits would be shared equally between Abby and Yousef, after prior salaries of £21,000 and
£15,000 per annum to Abby and Yousef respectively.
It was also decided that the accounting date of the partnership would be changed to 31 May.
Accordingly, a set of accounts were prepared for the period from 1 February 2021 to 31 May 2022.
Tax-adjusted partnership profit figures were:
£
Year ended 31 January 2021 150,000
Period ended 31 May 2022 240,000
The partnership owns its own trading premises which cost £100,000 on 1 February 2017. These
were revalued in the accounts on 31 January 2018 at £150,000. When Ross retired, it was agreed
that Ross would dispose of his interest in the property to Abby and Yousef based on its market
value of £300,000. Abby and Yousef have agreed to continue to include the property at £300,000
in the partnership accounts. Capital profits are shared in line with the profit sharing ratio.
Ross made no other capital disposals in 2021/22 and this is the only business he has ever been
involved in.
Requirement:
1) Calculate, with explanations, the taxable profits for Ross, Abby and Yousef for 2021/22
and 2022/23, detailing any overlap relief carried forward. (13)
2) Calculate, with explanations, the Capital Gains Tax liability for Ross for 2021/22 and
the base cost of the property carried forward for Abby and Yousef. (7)
Total (20)
