THE CHARTERED INSTITUTE OF TAXATION
ADVANCED TECHNICAL
Taxation of Owner-Managed Businesses
November 2021
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.
• Except as set out below or indicated by additional information in the question, you may assume that
2020/21 legislation (including rates and allowances) continues to apply for 2021/22 and future years.
1) You MUST assume that the UK remains within the European Union.
2) You MUST ignore all temporary Covid related legislation including furlough, grants, loans and the
reductions in VAT and SDLT rates.
Except in relation to points 1) and 2) above, 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. Gurprit Singh and Larson Yacht Consulting Ltd commenced trading in partnership as Elite Yacht
Services on 1 May 2020. The first accounts were prepared to 31 March 2021.
Larson Yacht Consulting Ltd is owned by Theo Larson and his wife Jane Larson. It has traded for
many years providing project management services to wealthy individuals on the build of their
yachts.
As a hobby, Gurprit has, over the past few years, created and patented a new battery capable of
holding more electricity than any other on the market. The battery enables yachts to be powered in
an environmentally friendly way. He purchased some machinery on 1 January 2018 at a cost of
£240,000 which he used to produce his prototypes and samples.
Theo and Jane were impressed with the product and Elite Yacht Services was established to make,
and sell, the product on a larger scale.
Initial production and trading commenced on 1 May 2020 from rented premises using Gurprit’s
machinery. He retained personal ownership of this machinery, which was valued at £200,000 when
it began to be used by the partnership. No charge is made for use of the machinery.
The partnership built and equipped a factory close to Southampton Quay as well as a luxury suite
nearby where the partnership could host client events.
The buildings were complete and equipped by 31 August 2020 and production commenced from
the new factory on 1 September 2020. The suite has been used for client drinks and dinner parties
as well as hosting champagne receptions every day during the Southampton Boat Show in
September 2020.
Full details of costs incurred by the partnership are:
Factory
Date Expenditure Notes
£
Land including Stamp Duty Land Tax May 2020 1,250,000
Planning permission costs May 2020 8,000
Architects and designer fees May 2020 45,000
Site preparation June 2020 200,000
Construction of factory July 2020 600,000
Air conditioning August 2020 80,000
Production machinery August 2020 800,000 1
Delivery and installation of machinery August 2020 50,000 2
Office equipment August 2020 130,000 3
Suite
Land including Stamp Duty Land Tax May 2020 200,000
Planning permission costs May 2020 2,000
Architects and designer fees May 2020 15,000
Construction of building July 2020 300,000
Equipment August 2020 200,000
Air conditioning August 2020 12,000
Other costs
Five electric vans September 2020 102,000 4
Electric vehicle charging point September 2020 1,200
Car for Gurprit December 2020 86,000 5
Car for Production Manager January 2021 24,500 6
Notes
1) Theo was able to negotiate a delayed payment programme. 50% of the cost was paid in
August 2020, 25% in February 2021 and the remaining 25% in August 2021.
2) This was all paid in August 2020.
3) The market value of this was £150,000 but Theo was able to negotiate a discount from the
supplier.
4) These were new electric vans, zero CO2 emissions, used 100% for business purposes.
5) This was a new electric car, zero CO2 emissions, used 80% for business purposes. VAT of
£17,200 was charged.
,2. Chailit Ltd manufactures and leases tipper trucks to customers. Leases can be either short-term
operating leases or finance leases of up to four years.
Accounts are prepared to 28 February each year. The draft accounts to 28 February 2021 show a
profit before tax of £675,000 and before any adjustment for the following:
1) The accounts include depreciation of £45,000, of which £18,000 relates to assets held on
finance leases.
2) Staff costs included in the accounts comprise:
£
Wages 1,350,000
Employer’s National Insurance contributions 145,000
Employer’s pension contributions 165,000
1,660,000
Due to a computer error, February wage payments totalling £4,650 were paid on 2 March
2021. Employer pension contributions of £13,770 were paid on 15 March 2021. Both costs
were accrued in the accounts.
3) On 1 February 2021, the company vacated a leased office. The following provisions are
included in the accounts under FRS 102:
£
Redecoration of the office 8,000
Removing partition walls 12,000
4) Equipment hire in the accounts includes:
£
Electric car for director 5,600
Employee car 3,600
The director’s car is used 50% for business purposes. The employee’s car has CO2
emissions of 195 g/km.
5) Travel and entertaining costs in the accounts include £500 for hotels and meals for five
customers to visit the company’s factory. Each customer was also given a leather-bound
notebook displaying the company’s logo at a total cost of £250 and a hamper of local produce
at a total cost of £300.
6) The accounts include a sponsorship payment of £10,000 to an equestrian business operated
by the wife of the Managing Director. She has one horse and competes in local show jumping
events.
7) During the year, an employee stole cash of £5,000 and a director stole cash of £15,000.
These amounts are included in the accounts within sundry expenses.
8) Interest payable in the accounts consists of:
£
Interest on finance leases 17,000
Interest on late paid PAYE 1,600
Mortgage interest for the company’s factory 14,000
Bank overdraft interest 4,500
37,100
9) Legal costs in the accounts comprise:
£
Debt collection 5,670
Renewal of lease 2,450
Investor agreement 12,600
20,720
Debt collection costs related to the company’s trade debtors. The lease of a storage site
used by the company was renewed for 25 years. In June 2020 an investor subscribed for
shares in the company. The legal fees for the agreement were paid by the company.
10) On 1 January 2021, 10 trucks valued at £100,000 were returned by a customer at the end of
, 3. AJ Clear Ltd is a trading company involved in the manufacture and sale of small air conditioning
units to the building trade. The company was incorporated in 2011 by Alan Jones, who is the sole
shareholder and one of the three directors of the company. The company has always been
profitable and until recently it was retaining cash with the intention of using it to buy larger trading
premises.
The company has an accounting date of 31 March and its balance sheet as at 31 March 2021 was
as follows:
2021 2020
£ £ £ £
Fixed assets 150,000 170,000
Current assets
Debtors 45,000 45,500
Stock 65,000 54,000
Cash at bank 150,000 100,000
260,000 199,500
Creditors
Amounts due within one year (44,000) (37,000)
Net current assets 216,000 162,500
Total assets less current liabilities 366,000 332,500
Provisions for liabilities (22,000) (21,000)
Net assets £344,000 £311,500
Capital and reserves
Share capital 100 100
Profit and loss 343,900 311,400
£344,000 £311,500
Due to recent economic events, on 30 June 2021 the directors resolved to no longer consider
buying larger premises and to instead use some of the cash they had retained to make the following
loans on 1 July 2021:
1) An interest free loan of £35,000 to a trading partnership in which the partners are Alan’s
daughter, Clara Flowers, her husband Carl Flowers and their friend John Elms. The
partnership used the money to repay an existing bank loan.
2) A £35,000 loan to Jones Cosmetics Ltd, a company wholly owned by Angela Jones, Alan’s
wife. Interest is payable on the loan at 10% per annum.
3) An interest free loan of £12,000 to Emily Hall, an employee who joined the company on 1
July 2021. Emily relocated to the area with her family and the loan was to help with the costs
of the move. The loan was repayable at £1,000 a month but after three repayments Alan
decided to release the remainder of the debt as a contribution towards the cost of the move.
As a result of recent events Alan has also decided to sell his shares in the company within the next
12 to 18 months.
Requirement:
1) Explain the tax consequences for the company of the loans. (12)
2) Explain any potential Capital Gains Tax issues for Alan of the loans. (3)
Calculations are not required.
Total (15)
ADVANCED TECHNICAL
Taxation of Owner-Managed Businesses
November 2021
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.
• Except as set out below or indicated by additional information in the question, you may assume that
2020/21 legislation (including rates and allowances) continues to apply for 2021/22 and future years.
1) You MUST assume that the UK remains within the European Union.
2) You MUST ignore all temporary Covid related legislation including furlough, grants, loans and the
reductions in VAT and SDLT rates.
Except in relation to points 1) and 2) above, 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. Gurprit Singh and Larson Yacht Consulting Ltd commenced trading in partnership as Elite Yacht
Services on 1 May 2020. The first accounts were prepared to 31 March 2021.
Larson Yacht Consulting Ltd is owned by Theo Larson and his wife Jane Larson. It has traded for
many years providing project management services to wealthy individuals on the build of their
yachts.
As a hobby, Gurprit has, over the past few years, created and patented a new battery capable of
holding more electricity than any other on the market. The battery enables yachts to be powered in
an environmentally friendly way. He purchased some machinery on 1 January 2018 at a cost of
£240,000 which he used to produce his prototypes and samples.
Theo and Jane were impressed with the product and Elite Yacht Services was established to make,
and sell, the product on a larger scale.
Initial production and trading commenced on 1 May 2020 from rented premises using Gurprit’s
machinery. He retained personal ownership of this machinery, which was valued at £200,000 when
it began to be used by the partnership. No charge is made for use of the machinery.
The partnership built and equipped a factory close to Southampton Quay as well as a luxury suite
nearby where the partnership could host client events.
The buildings were complete and equipped by 31 August 2020 and production commenced from
the new factory on 1 September 2020. The suite has been used for client drinks and dinner parties
as well as hosting champagne receptions every day during the Southampton Boat Show in
September 2020.
Full details of costs incurred by the partnership are:
Factory
Date Expenditure Notes
£
Land including Stamp Duty Land Tax May 2020 1,250,000
Planning permission costs May 2020 8,000
Architects and designer fees May 2020 45,000
Site preparation June 2020 200,000
Construction of factory July 2020 600,000
Air conditioning August 2020 80,000
Production machinery August 2020 800,000 1
Delivery and installation of machinery August 2020 50,000 2
Office equipment August 2020 130,000 3
Suite
Land including Stamp Duty Land Tax May 2020 200,000
Planning permission costs May 2020 2,000
Architects and designer fees May 2020 15,000
Construction of building July 2020 300,000
Equipment August 2020 200,000
Air conditioning August 2020 12,000
Other costs
Five electric vans September 2020 102,000 4
Electric vehicle charging point September 2020 1,200
Car for Gurprit December 2020 86,000 5
Car for Production Manager January 2021 24,500 6
Notes
1) Theo was able to negotiate a delayed payment programme. 50% of the cost was paid in
August 2020, 25% in February 2021 and the remaining 25% in August 2021.
2) This was all paid in August 2020.
3) The market value of this was £150,000 but Theo was able to negotiate a discount from the
supplier.
4) These were new electric vans, zero CO2 emissions, used 100% for business purposes.
5) This was a new electric car, zero CO2 emissions, used 80% for business purposes. VAT of
£17,200 was charged.
,2. Chailit Ltd manufactures and leases tipper trucks to customers. Leases can be either short-term
operating leases or finance leases of up to four years.
Accounts are prepared to 28 February each year. The draft accounts to 28 February 2021 show a
profit before tax of £675,000 and before any adjustment for the following:
1) The accounts include depreciation of £45,000, of which £18,000 relates to assets held on
finance leases.
2) Staff costs included in the accounts comprise:
£
Wages 1,350,000
Employer’s National Insurance contributions 145,000
Employer’s pension contributions 165,000
1,660,000
Due to a computer error, February wage payments totalling £4,650 were paid on 2 March
2021. Employer pension contributions of £13,770 were paid on 15 March 2021. Both costs
were accrued in the accounts.
3) On 1 February 2021, the company vacated a leased office. The following provisions are
included in the accounts under FRS 102:
£
Redecoration of the office 8,000
Removing partition walls 12,000
4) Equipment hire in the accounts includes:
£
Electric car for director 5,600
Employee car 3,600
The director’s car is used 50% for business purposes. The employee’s car has CO2
emissions of 195 g/km.
5) Travel and entertaining costs in the accounts include £500 for hotels and meals for five
customers to visit the company’s factory. Each customer was also given a leather-bound
notebook displaying the company’s logo at a total cost of £250 and a hamper of local produce
at a total cost of £300.
6) The accounts include a sponsorship payment of £10,000 to an equestrian business operated
by the wife of the Managing Director. She has one horse and competes in local show jumping
events.
7) During the year, an employee stole cash of £5,000 and a director stole cash of £15,000.
These amounts are included in the accounts within sundry expenses.
8) Interest payable in the accounts consists of:
£
Interest on finance leases 17,000
Interest on late paid PAYE 1,600
Mortgage interest for the company’s factory 14,000
Bank overdraft interest 4,500
37,100
9) Legal costs in the accounts comprise:
£
Debt collection 5,670
Renewal of lease 2,450
Investor agreement 12,600
20,720
Debt collection costs related to the company’s trade debtors. The lease of a storage site
used by the company was renewed for 25 years. In June 2020 an investor subscribed for
shares in the company. The legal fees for the agreement were paid by the company.
10) On 1 January 2021, 10 trucks valued at £100,000 were returned by a customer at the end of
, 3. AJ Clear Ltd is a trading company involved in the manufacture and sale of small air conditioning
units to the building trade. The company was incorporated in 2011 by Alan Jones, who is the sole
shareholder and one of the three directors of the company. The company has always been
profitable and until recently it was retaining cash with the intention of using it to buy larger trading
premises.
The company has an accounting date of 31 March and its balance sheet as at 31 March 2021 was
as follows:
2021 2020
£ £ £ £
Fixed assets 150,000 170,000
Current assets
Debtors 45,000 45,500
Stock 65,000 54,000
Cash at bank 150,000 100,000
260,000 199,500
Creditors
Amounts due within one year (44,000) (37,000)
Net current assets 216,000 162,500
Total assets less current liabilities 366,000 332,500
Provisions for liabilities (22,000) (21,000)
Net assets £344,000 £311,500
Capital and reserves
Share capital 100 100
Profit and loss 343,900 311,400
£344,000 £311,500
Due to recent economic events, on 30 June 2021 the directors resolved to no longer consider
buying larger premises and to instead use some of the cash they had retained to make the following
loans on 1 July 2021:
1) An interest free loan of £35,000 to a trading partnership in which the partners are Alan’s
daughter, Clara Flowers, her husband Carl Flowers and their friend John Elms. The
partnership used the money to repay an existing bank loan.
2) A £35,000 loan to Jones Cosmetics Ltd, a company wholly owned by Angela Jones, Alan’s
wife. Interest is payable on the loan at 10% per annum.
3) An interest free loan of £12,000 to Emily Hall, an employee who joined the company on 1
July 2021. Emily relocated to the area with her family and the loan was to help with the costs
of the move. The loan was repayable at £1,000 a month but after three repayments Alan
decided to release the remainder of the debt as a contribution towards the cost of the move.
As a result of recent events Alan has also decided to sell his shares in the company within the next
12 to 18 months.
Requirement:
1) Explain the tax consequences for the company of the loans. (12)
2) Explain any potential Capital Gains Tax issues for Alan of the loans. (3)
Calculations are not required.
Total (15)
