THE CHARTERED INSTITUTE OF TAXATION
ADVANCED TECHNICAL
Taxation of Owner-Managed Businesses
May 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.
• You must type your answer in the space on the screen as indicated by the Exam4 guidance.
,1. Saratoga Ltd is a spring manufacturing company, which has recently moved to a much larger,
purpose built, factory.
Former factory
The company’s former factory was acquired in 2010, for a cost of £835,000. Of this, the company
allocated £85,000 to the fixtures installed within the building and claimed capital allowances
accordingly. Legal fees on acquisition were £2,500.
The company spent £150,000 in 2015 on an extension to the factory, containing fixtures costing
£10,000. Capital allowances were claimed on these fixtures.
The factory was sold to a third party on 31 December 2021 for £920,000. A fixtures election was
signed with the purchaser for £1 in relation to each of the main and special rate capital allowances
pools. Legal fees on disposal were £3,000.
New factory
Land was purchased from a local farmer in May 2021 for £550,000. Legal fees on acquisition were
£3,500. Planning permission was obtained by the company in June 2021 at a cost of £30,000 and
construction of the new factory began shortly thereafter.
The construction work undertaken by the building firm comprised:
£ Notes
Structural expenditure 650,000
Factory sign 5,000
Internal office fit out costs 16,000 1
Environmentally friendly heating system 55,000
Electric vehicle charging points 4,800
Other main pool expenditure 25,000
£755,800
The company also paid a removal company £2,000 to transport the company’s equipment from the
former factory, and a further £3,000 to install the equipment in the new factory.
The factory was completed on 31 October 2021 and the company began using it on 30 November
2021.
During the remainder of the year ended 31 March 2022 the company also incurred the following
expenditure on plant and machinery:
Date Expenditure Notes
£
New steel rolling machine January 2022 160,000 2
Deposit for spring forming machine March 2022 35,000 3
Notes
1) Internal office fit out costs consist of:
£
Decoration of offices 3,000
Kitchen installation 5,500
Suspended ceiling 2,500
Office furniture 3,000
Carpet tiles 2,000
£16,000
2) The steel rolling machine was purchased for £160,000. The company then received a
government development grant of £40,000 in respect of the purchase.
3) The company paid a deposit of £35,000 to secure production of a new spring forming
machine, costing £135,000. The machine will be completed on 31 May 2022 and the
company will take delivery on that date, paying the balance of the machinery in equal
instalments on the last day of July to October 2022.
The company also disposed of its previous steel rolling machine in February 2022. As this was a
specialised piece of machinery, they were able to dispose of it for £100,000, having originally paid
£80,000 for it.
At 1 April 2021, the tax written down values brought forward were:
,2. Esther commenced trading on 1 January 2021 as a clothes designer and manufacturer and
prepared her first accounts to 30 April 2022. Her draft profit and loss account for this period is as
follows.
Notes £ £
Turnover 1 324,650
Cost of sales 2 (48,700)
Gross profit 275,950
Expenses:
Payroll costs 48,600
Premises costs 3 35,250
Office and administration costs 7,800
Motor and travel expenses 4 12,000
Professional fees 5 3,500
Bad and doubtful debts 6 19,800
Depreciation 14,000
(140,950)
Net profit £135,000
Notes
1) Turnover
Turnover includes deposits received of £3,500 for wedding dresses to be made and
invoiced in May and June 2022.
2) Cost of sales
Cost of sales includes:
£
Cost of fabric taken by Esther to make a dress for herself 175
Cost of materials used in finished dress taken by Esther from stock 200
Esther’s gross profit margin is 85% on sales.
3) Premises costs
Premises costs includes a premium of £25,000 paid on 1 January 2021 for a 10 year lease
on a commercial property.
4) Motor and travel expenses
£
Van expenses 4,200
Esther’s car running expenses 2,400
Hire purchase payments 5,400
£12,000
Motor expenses includes six payments of £900 under a hire purchase agreement. The five
year agreement, dated 1 November 2021 was for a car costing £45,000. The car was
delivered on 5 November 2021. The car has CO2 emissions of 125 g/km and is used 75% for
business purposes.
5) Professional fees
Professional fees include legal fees of £2,000 for the arrangement of the 10 year commercial
property lease.
6) Bad and doubtful debts:
£
Loans written off:
- to Susy, a friend 4,500
- to Marie, an employee (including relevant National Insurance) 3,600
Provision of 10% against debt due from Quefit Ltd, a customer 6,000
Provision of 5% against all other customer debts based on 5,700
historical recoverability
£19,800
7) In preparation for trading, Esther spent £26,000 on equipment. On 10 January 2021 her
, 3. A113 Technology Ltd is a company which develops, licences and maintains virtual reality
technology for the theme park industry. The company is wholly owned by James Sullivan.
The company employs 80 people and its turnover for the year ended 31 December 2021 was £20
million.
During the year ended 31 December 2021, the company worked on two projects, which are detailed
below.
1) The development of wireless augmented reality headsets which would allow guests to
experience an artificially enhanced version of the real world for entertainment purposes,
whilst queuing for their chosen attraction.
2) The development of immersive virtual reality experiences which also allow the user to
move through a physical environment and simulate heat, contact etc.
Both projects represent substantial advancements in technology, and advance clearance has
been obtained from HMRC to confirm that they qualify for enhanced tax relief for expenditure on
research & development.
The company’s Finance Director has provided the following information relevant to both projects
above during the year ended 31 December 2021.
Staff costs
Name Role Salary Employer’s Company Benefits in
NIC pension kind
contributions
£ £ £ £
Fred McMurray Operations director 100,000 12,000 20,000 15,000
Ruth Thomson Technical designer 50,000 5,000 1,000 -
Ken Anderson Developer 40,000 4,000 - 1,000
Mary Jones Product technician 23,000 2,000 - 500
Tim Conway Product tester 23,000 2,000 - 250
The above costs were incurred evenly throughout the period.
Fred McMurray spent 40% of his time meeting with customers and visiting their sites to view the
company’s technology in operation. He also spent 15% of his time in board meetings discussing
the company’s financing of the projects. The balance of his time was spent on the projects.
Approximately 10% of the four other staff members’ time was spent receiving training on new
virtual reality software which they used in the projects. A further 10% was spent on non-project
administration work.
Software
£
Development and modelling software licence 10,000
Payroll software – research & development department 1,000
allocation
Property and other business costs
Allocation to research & development department of: £
Rent and rates 12,500
Heat, light and power 3,500
Telephone 500
Subcontractor payments
The company subcontracted testing of the software to Luxo Ltd, which is wholly owned by Richard
Sullivan, the son of James Sullivan, at a cost of £50,000. Of Richard’s salary from Luxo Ltd, £40,000
related to the testing work.
The company also subcontracted some of the hardware integration work to an unrelated third party
company based in the US, at a cost of £25,000.
Due to the development work, the company’s taxable profit for the year ended 31 December 2021,
before any enhanced deduction for the research & development expenditure was £225,000. In the
year ended 31 December 2020, the comparable figure was £735,000.
ADVANCED TECHNICAL
Taxation of Owner-Managed Businesses
May 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.
• You must type your answer in the space on the screen as indicated by the Exam4 guidance.
,1. Saratoga Ltd is a spring manufacturing company, which has recently moved to a much larger,
purpose built, factory.
Former factory
The company’s former factory was acquired in 2010, for a cost of £835,000. Of this, the company
allocated £85,000 to the fixtures installed within the building and claimed capital allowances
accordingly. Legal fees on acquisition were £2,500.
The company spent £150,000 in 2015 on an extension to the factory, containing fixtures costing
£10,000. Capital allowances were claimed on these fixtures.
The factory was sold to a third party on 31 December 2021 for £920,000. A fixtures election was
signed with the purchaser for £1 in relation to each of the main and special rate capital allowances
pools. Legal fees on disposal were £3,000.
New factory
Land was purchased from a local farmer in May 2021 for £550,000. Legal fees on acquisition were
£3,500. Planning permission was obtained by the company in June 2021 at a cost of £30,000 and
construction of the new factory began shortly thereafter.
The construction work undertaken by the building firm comprised:
£ Notes
Structural expenditure 650,000
Factory sign 5,000
Internal office fit out costs 16,000 1
Environmentally friendly heating system 55,000
Electric vehicle charging points 4,800
Other main pool expenditure 25,000
£755,800
The company also paid a removal company £2,000 to transport the company’s equipment from the
former factory, and a further £3,000 to install the equipment in the new factory.
The factory was completed on 31 October 2021 and the company began using it on 30 November
2021.
During the remainder of the year ended 31 March 2022 the company also incurred the following
expenditure on plant and machinery:
Date Expenditure Notes
£
New steel rolling machine January 2022 160,000 2
Deposit for spring forming machine March 2022 35,000 3
Notes
1) Internal office fit out costs consist of:
£
Decoration of offices 3,000
Kitchen installation 5,500
Suspended ceiling 2,500
Office furniture 3,000
Carpet tiles 2,000
£16,000
2) The steel rolling machine was purchased for £160,000. The company then received a
government development grant of £40,000 in respect of the purchase.
3) The company paid a deposit of £35,000 to secure production of a new spring forming
machine, costing £135,000. The machine will be completed on 31 May 2022 and the
company will take delivery on that date, paying the balance of the machinery in equal
instalments on the last day of July to October 2022.
The company also disposed of its previous steel rolling machine in February 2022. As this was a
specialised piece of machinery, they were able to dispose of it for £100,000, having originally paid
£80,000 for it.
At 1 April 2021, the tax written down values brought forward were:
,2. Esther commenced trading on 1 January 2021 as a clothes designer and manufacturer and
prepared her first accounts to 30 April 2022. Her draft profit and loss account for this period is as
follows.
Notes £ £
Turnover 1 324,650
Cost of sales 2 (48,700)
Gross profit 275,950
Expenses:
Payroll costs 48,600
Premises costs 3 35,250
Office and administration costs 7,800
Motor and travel expenses 4 12,000
Professional fees 5 3,500
Bad and doubtful debts 6 19,800
Depreciation 14,000
(140,950)
Net profit £135,000
Notes
1) Turnover
Turnover includes deposits received of £3,500 for wedding dresses to be made and
invoiced in May and June 2022.
2) Cost of sales
Cost of sales includes:
£
Cost of fabric taken by Esther to make a dress for herself 175
Cost of materials used in finished dress taken by Esther from stock 200
Esther’s gross profit margin is 85% on sales.
3) Premises costs
Premises costs includes a premium of £25,000 paid on 1 January 2021 for a 10 year lease
on a commercial property.
4) Motor and travel expenses
£
Van expenses 4,200
Esther’s car running expenses 2,400
Hire purchase payments 5,400
£12,000
Motor expenses includes six payments of £900 under a hire purchase agreement. The five
year agreement, dated 1 November 2021 was for a car costing £45,000. The car was
delivered on 5 November 2021. The car has CO2 emissions of 125 g/km and is used 75% for
business purposes.
5) Professional fees
Professional fees include legal fees of £2,000 for the arrangement of the 10 year commercial
property lease.
6) Bad and doubtful debts:
£
Loans written off:
- to Susy, a friend 4,500
- to Marie, an employee (including relevant National Insurance) 3,600
Provision of 10% against debt due from Quefit Ltd, a customer 6,000
Provision of 5% against all other customer debts based on 5,700
historical recoverability
£19,800
7) In preparation for trading, Esther spent £26,000 on equipment. On 10 January 2021 her
, 3. A113 Technology Ltd is a company which develops, licences and maintains virtual reality
technology for the theme park industry. The company is wholly owned by James Sullivan.
The company employs 80 people and its turnover for the year ended 31 December 2021 was £20
million.
During the year ended 31 December 2021, the company worked on two projects, which are detailed
below.
1) The development of wireless augmented reality headsets which would allow guests to
experience an artificially enhanced version of the real world for entertainment purposes,
whilst queuing for their chosen attraction.
2) The development of immersive virtual reality experiences which also allow the user to
move through a physical environment and simulate heat, contact etc.
Both projects represent substantial advancements in technology, and advance clearance has
been obtained from HMRC to confirm that they qualify for enhanced tax relief for expenditure on
research & development.
The company’s Finance Director has provided the following information relevant to both projects
above during the year ended 31 December 2021.
Staff costs
Name Role Salary Employer’s Company Benefits in
NIC pension kind
contributions
£ £ £ £
Fred McMurray Operations director 100,000 12,000 20,000 15,000
Ruth Thomson Technical designer 50,000 5,000 1,000 -
Ken Anderson Developer 40,000 4,000 - 1,000
Mary Jones Product technician 23,000 2,000 - 500
Tim Conway Product tester 23,000 2,000 - 250
The above costs were incurred evenly throughout the period.
Fred McMurray spent 40% of his time meeting with customers and visiting their sites to view the
company’s technology in operation. He also spent 15% of his time in board meetings discussing
the company’s financing of the projects. The balance of his time was spent on the projects.
Approximately 10% of the four other staff members’ time was spent receiving training on new
virtual reality software which they used in the projects. A further 10% was spent on non-project
administration work.
Software
£
Development and modelling software licence 10,000
Payroll software – research & development department 1,000
allocation
Property and other business costs
Allocation to research & development department of: £
Rent and rates 12,500
Heat, light and power 3,500
Telephone 500
Subcontractor payments
The company subcontracted testing of the software to Luxo Ltd, which is wholly owned by Richard
Sullivan, the son of James Sullivan, at a cost of £50,000. Of Richard’s salary from Luxo Ltd, £40,000
related to the testing work.
The company also subcontracted some of the hardware integration work to an unrelated third party
company based in the US, at a cost of £25,000.
Due to the development work, the company’s taxable profit for the year ended 31 December 2021,
before any enhanced deduction for the research & development expenditure was £225,000. In the
year ended 31 December 2020, the comparable figure was £735,000.
