THE CHARTERED INSTITUTE OF TAXATION
APPLICATION AND PROFESSIONAL SKILLS
VAT and Other Indirect Taxes
November 2022
TIME ALLOWED
3 HOURS 30 MINUTES
• In order to secure a pass in this exam, you will be required to demonstrate competence in each of
three skills.
You will be assessed across your answer as a whole for Structure. A pass or fail grade will be
awarded.
You will be assessed for competence in a number of broad topics for the following skills:
➢ Identification and Application
➢ Relevant Advice and Substantiated Conclusions
For each topic for each of these two skills, a grade will be awarded. The grades for those topics will
be weighted and averaged to produce a final grade for each skill of 0, 1, 2, 3 or 4. A grade of 3 or 4
is required to demonstrate competence.
• 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.
,You are a Chartered Tax Adviser who has received a letter (EXHIBIT A) from long-standing clients of the
firm, Robin and Maureen Knight and Naomi Knight-Day. They are seeking advice in relation to the VAT
and other tax implications arising on the proposed rebuilding of a property, Marandellas House (“the
House”), which was extensively damaged by a fire on 26 December 2021.
The following exhibits are provided to assist you:
EXHIBIT A: Letter from Robin and Maureen Knight and Naomi Knight-Day
EXHIBIT B: Marandellas House – projected cost of rebuilding
EXHIBIT C: Lease Extract
EXHIBIT D: Pre-seen information
Requirement:
Write a letter to Robin, Maureen and Naomi providing them with advice and recommendations in
relation to the works on Marandellas House and the structure for its ownership.
Continued
Page 2 of 9 APS VAT
,Continuation
EXHIBIT A
Letter from Robin and Maureen Knight and Naomi Knight-Day
T Adviser
Owen, Laidlaw & Partners
The Counting House
100 Eastgate
Tolmach
TR2 4TT
1 November 2022
Dear Adviser
Marandellas House (“the House”)
Further to our discussion last week, we are writing as the leaseholders of the flats within the House to
seek your advice and recommendations on the proposed rebuilding project. As you are aware, the House
is a listed manor house situated at St Jude’s Bay, Loamshire comprising four self-contained flats (two flats
situated on each of the two floors).
In March 2005, for Inheritance Tax planning purposes, our parents (now deceased) created 125-year
leases in respect of each flat. The leases to flats 3 and 4 on the upper-floor were gifted to Naomi, with the
leases to flats 1 and 2 on the ground-floor gifted jointly to Robin and Maureen (hereafter we refer to the
lessees as “the family members”). For Capital Gains Tax, the value of the interests transferred was agreed
at £85,000 for each flat. The grant of the leases was exempted from VAT.
Also in March 2005, our parents incorporated JW Knight Ltd (“the Company”) and transferred their farming
and other business activities into it, in addition to the freehold of the House (including, for the avoidance
of doubt, its reversionary interests in the House’s common parts and grounds). Following their parents’
deaths, Naomi and Robin each now hold 35% of the Company’s issued share capital. The remaining
shares are held by the Managing Director, Raymond Reeve, and his fellow directors, who are not related
to the family members. The Company is VAT registered due to its farming and business activities.
Family members and their friends use the flats rent free for approximately 20% of the year. When not
reserved by family members, they are let as furnished holiday accommodation through an agent, with
each flat generating up to £1,000 (gross of associated costs) a week in peak periods.
The House was extensively damaged by fire in December 2021. The external walls of the House, along
with some internal walls, remain standing, albeit fire damaged. The planning authority has said that these
walls must be retained when reinstating the property. The pre-fire configuration of the House will be largely
retained. The planning authority has approved the proposed works, with no restriction on the use or
disposal of the reinstated flats.
The total cost of reinstating (including fitting-out the kitchens and bathrooms, fixtures and fittings, etc.) is
estimated at £5.7 million, inclusive of VAT at the standard rate. A breakdown of the estimated costs is
enclosed (EXHIBIT B).
Work is to be carried out in two Phases. Phase 1 will start in February 2023, with completion scheduled
for December 2023, comprising re-roofing the property, the replacement of beams to preserve the integrity
of the remaining internal and external walls, repairs to the external stonework and the replacement of
windows and doors. Phase 2 will commence in January 2024, with the works substantially concerned with
the internal works of reinstating and fitting out the flats and common parts, scheduled to be completed in
August 2025.
The agreed portion of the costs to be borne by the Company is £720,000, inclusive of VAT, of which
£480,000 relates to the Phase 1 works, with £240,000 allocated to reinstatement of the internal common
parts (Phase 2 works).
We are considering this may be an opportunity to reconfigure the flats by adding a bedroom to one of the
flats on each floor, with a corresponding reduction in the size of the adjacent flat. The planners are content
to vary the current consent. We have been advised that this would not materially affect the projected
costs’ estimate, but may afford some VAT relief?
Continued
Page 3 of 9 APS VAT
, Continuation
The position in respect of the insurance of the property is set out in the enclosed extract of the Lease
(EXHIBIT C).
In relation to the damage caused by the fire, the Company’s insurers will cover the entirety of its costs.
Unfortunately, however, the family members’ interests were under-insured, and the insurer will only meet
£4 million of their costs (including irrecoverable VAT). This leaves a shortfall on estimated rebuilding costs
of £980,000. Naomi will bear one half, with Robin and Maureen meeting the balance jointly. The current
value of each leasehold flat in its damaged condition is £125,000, with its market value prior to the fire
being £650,000 (the properties were in desperate need of modernisation).
For practical reasons and to mitigate the cost of the works, the Company and the family members will
jointly engage the contractor and professional consultants for both Phase 1 and 2. On completion of the
works, the family members will continue to let the flats as furnished holiday accommodation.
The shortfall contributions required from family members are significant and need to be reduced.
Accordingly, we require your advice and recommendations on the tax and commercial implications of the
above and on a possible alternative structure set out below which would involve the Company undertaking
the works.
The alternative structure would involve family members surrendering the leasehold flats in their current
condition to the Company in exchange for shares. Accordingly, Naomi would receive 250,000 ordinary £1
shares, and Maureen and Robin would receive 125,000 ordinary £1 shares each (the Company will need
to issue new shares to accommodate this). The family members would assign the benefits of the
insurance moneys to the Company for the sole purpose of completing the reinstatement works. On
completion of the restoration, the Company would not grant new leases to the family members. Instead,
it would let the flats as furnished holiday accommodation, subject to offering the family members the use
of them free of charge for four weeks in July/August. This alternative structure would enable the Company
to undertake the works from its reserves together with the insurance receipts; and make the structure
simpler in that the freehold and leasehold interests would merge. Most importantly however, it would avoid
the family members having to fund the shortfall.
Your advice and recommendations should focus on the interests of the family members in their capacity
as leaseholders. The advice will be passed to the Company’s management team, which may
independently seek advice from your Corporation Tax colleagues. All parties are content that the firm’s
existing procedures will avoid a conflict of interest. We look forward to receiving your advice and
recommendations.
Yours sincerely
Robin Knight QC
Maureen Knight
Naomi Knight-Day
Continued
Page 4 of 9 APS VAT
APPLICATION AND PROFESSIONAL SKILLS
VAT and Other Indirect Taxes
November 2022
TIME ALLOWED
3 HOURS 30 MINUTES
• In order to secure a pass in this exam, you will be required to demonstrate competence in each of
three skills.
You will be assessed across your answer as a whole for Structure. A pass or fail grade will be
awarded.
You will be assessed for competence in a number of broad topics for the following skills:
➢ Identification and Application
➢ Relevant Advice and Substantiated Conclusions
For each topic for each of these two skills, a grade will be awarded. The grades for those topics will
be weighted and averaged to produce a final grade for each skill of 0, 1, 2, 3 or 4. A grade of 3 or 4
is required to demonstrate competence.
• 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.
,You are a Chartered Tax Adviser who has received a letter (EXHIBIT A) from long-standing clients of the
firm, Robin and Maureen Knight and Naomi Knight-Day. They are seeking advice in relation to the VAT
and other tax implications arising on the proposed rebuilding of a property, Marandellas House (“the
House”), which was extensively damaged by a fire on 26 December 2021.
The following exhibits are provided to assist you:
EXHIBIT A: Letter from Robin and Maureen Knight and Naomi Knight-Day
EXHIBIT B: Marandellas House – projected cost of rebuilding
EXHIBIT C: Lease Extract
EXHIBIT D: Pre-seen information
Requirement:
Write a letter to Robin, Maureen and Naomi providing them with advice and recommendations in
relation to the works on Marandellas House and the structure for its ownership.
Continued
Page 2 of 9 APS VAT
,Continuation
EXHIBIT A
Letter from Robin and Maureen Knight and Naomi Knight-Day
T Adviser
Owen, Laidlaw & Partners
The Counting House
100 Eastgate
Tolmach
TR2 4TT
1 November 2022
Dear Adviser
Marandellas House (“the House”)
Further to our discussion last week, we are writing as the leaseholders of the flats within the House to
seek your advice and recommendations on the proposed rebuilding project. As you are aware, the House
is a listed manor house situated at St Jude’s Bay, Loamshire comprising four self-contained flats (two flats
situated on each of the two floors).
In March 2005, for Inheritance Tax planning purposes, our parents (now deceased) created 125-year
leases in respect of each flat. The leases to flats 3 and 4 on the upper-floor were gifted to Naomi, with the
leases to flats 1 and 2 on the ground-floor gifted jointly to Robin and Maureen (hereafter we refer to the
lessees as “the family members”). For Capital Gains Tax, the value of the interests transferred was agreed
at £85,000 for each flat. The grant of the leases was exempted from VAT.
Also in March 2005, our parents incorporated JW Knight Ltd (“the Company”) and transferred their farming
and other business activities into it, in addition to the freehold of the House (including, for the avoidance
of doubt, its reversionary interests in the House’s common parts and grounds). Following their parents’
deaths, Naomi and Robin each now hold 35% of the Company’s issued share capital. The remaining
shares are held by the Managing Director, Raymond Reeve, and his fellow directors, who are not related
to the family members. The Company is VAT registered due to its farming and business activities.
Family members and their friends use the flats rent free for approximately 20% of the year. When not
reserved by family members, they are let as furnished holiday accommodation through an agent, with
each flat generating up to £1,000 (gross of associated costs) a week in peak periods.
The House was extensively damaged by fire in December 2021. The external walls of the House, along
with some internal walls, remain standing, albeit fire damaged. The planning authority has said that these
walls must be retained when reinstating the property. The pre-fire configuration of the House will be largely
retained. The planning authority has approved the proposed works, with no restriction on the use or
disposal of the reinstated flats.
The total cost of reinstating (including fitting-out the kitchens and bathrooms, fixtures and fittings, etc.) is
estimated at £5.7 million, inclusive of VAT at the standard rate. A breakdown of the estimated costs is
enclosed (EXHIBIT B).
Work is to be carried out in two Phases. Phase 1 will start in February 2023, with completion scheduled
for December 2023, comprising re-roofing the property, the replacement of beams to preserve the integrity
of the remaining internal and external walls, repairs to the external stonework and the replacement of
windows and doors. Phase 2 will commence in January 2024, with the works substantially concerned with
the internal works of reinstating and fitting out the flats and common parts, scheduled to be completed in
August 2025.
The agreed portion of the costs to be borne by the Company is £720,000, inclusive of VAT, of which
£480,000 relates to the Phase 1 works, with £240,000 allocated to reinstatement of the internal common
parts (Phase 2 works).
We are considering this may be an opportunity to reconfigure the flats by adding a bedroom to one of the
flats on each floor, with a corresponding reduction in the size of the adjacent flat. The planners are content
to vary the current consent. We have been advised that this would not materially affect the projected
costs’ estimate, but may afford some VAT relief?
Continued
Page 3 of 9 APS VAT
, Continuation
The position in respect of the insurance of the property is set out in the enclosed extract of the Lease
(EXHIBIT C).
In relation to the damage caused by the fire, the Company’s insurers will cover the entirety of its costs.
Unfortunately, however, the family members’ interests were under-insured, and the insurer will only meet
£4 million of their costs (including irrecoverable VAT). This leaves a shortfall on estimated rebuilding costs
of £980,000. Naomi will bear one half, with Robin and Maureen meeting the balance jointly. The current
value of each leasehold flat in its damaged condition is £125,000, with its market value prior to the fire
being £650,000 (the properties were in desperate need of modernisation).
For practical reasons and to mitigate the cost of the works, the Company and the family members will
jointly engage the contractor and professional consultants for both Phase 1 and 2. On completion of the
works, the family members will continue to let the flats as furnished holiday accommodation.
The shortfall contributions required from family members are significant and need to be reduced.
Accordingly, we require your advice and recommendations on the tax and commercial implications of the
above and on a possible alternative structure set out below which would involve the Company undertaking
the works.
The alternative structure would involve family members surrendering the leasehold flats in their current
condition to the Company in exchange for shares. Accordingly, Naomi would receive 250,000 ordinary £1
shares, and Maureen and Robin would receive 125,000 ordinary £1 shares each (the Company will need
to issue new shares to accommodate this). The family members would assign the benefits of the
insurance moneys to the Company for the sole purpose of completing the reinstatement works. On
completion of the restoration, the Company would not grant new leases to the family members. Instead,
it would let the flats as furnished holiday accommodation, subject to offering the family members the use
of them free of charge for four weeks in July/August. This alternative structure would enable the Company
to undertake the works from its reserves together with the insurance receipts; and make the structure
simpler in that the freehold and leasehold interests would merge. Most importantly however, it would avoid
the family members having to fund the shortfall.
Your advice and recommendations should focus on the interests of the family members in their capacity
as leaseholders. The advice will be passed to the Company’s management team, which may
independently seek advice from your Corporation Tax colleagues. All parties are content that the firm’s
existing procedures will avoid a conflict of interest. We look forward to receiving your advice and
recommendations.
Yours sincerely
Robin Knight QC
Maureen Knight
Naomi Knight-Day
Continued
Page 4 of 9 APS VAT
