UNITED KINGDOM (ATX-UK) - ADVANCED TAXATION

Read the mind of an ATX-UK marker

ADVANCED TAXATION – UNITED KINGDOM(ATX-UK)

READ THE MIND OF AN ATX-UK MARKER 2

Contents

INTRODUCTION 3

SECTION A Q1 (UPDATED TO FINANCE ACT 2020) 4

n Observations on the question and requirements 6

SUGGESTED SOLUTION (UPDATED TO FINANCE ACT 2020) 8

Q1 CANDIDATE 1 10

n Marks awarded 10

n Notes on candidate one’s answer to Q1 12

Q1 CANDIDATE 2 14

n Marks awarded 14

n Notes on candidate two’s answer to Q1 16


Introduction

This article is designed to give you, the candidate, an insight into the mind of a marker, so that you can better understand what a marker will be looking for when it comes to marking your Advanced Taxation – United Kingdom script.

Insight into a marker’s thinking – appreciating what we are trained to look for, what we award marks for, the reasons why marks may not be awarded – will help you fulfil your potential and gain the necessary marks to pass.

It will help you appreciate the points that will attract marks so that you can better assess your answers when practising questions.

This article uses two sets of candidates’ answers to Question 1 from the September/December 2020 sample exam (to which Finance Act 2019 applied). To help students preparing for exams from June 2021 to March 2022, the question, published answer, and candidate answers have been updated to Finance Act 2020. After the March 2022 exam Finance Act 2020 will no longer apply, however, the marking insights communicated in this article, showing how marks are awarded, will remain valid regardless of changes to tax rates and allowances.

The relevant question and published answer, updated to Finance Act 2020, have been included in this article. You may find it interesting to refer to the published answer, noting the differences and comparing the length and style to the candidates’ answers. It’s important to remember that you don’t need to replicate the published answer to achieve a pass.

The original September/December 2020 Sample exam questions and published answers, based on Finance Act 2019, are available on the ACCA website.

INSIGHT INTO A MARKER’S THINKING – APPRECIATING WHAT WE ARE TRAINED TO LOOK FOR, WHAT WE AWARD MARKS FOR, THE REASONS WHY MARKS MAY NOT BE AWARDED – WILL HELP YOU FULFIL YOUR POTENTIAL AND GAIN THE NECESSARY MARKS TO PASS.

https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p6.html


Section A Q1 (updated to Finance Act 2020)

Your manager has received an email from Lamar. Lamar is the managing director and majority shareholder in REP Ltd. Lamar and REP Ltd are clients of your firm. Your manager has forwarded the email to you together with an email detailing the work you are required to do.

Email extract from Lamar: dated 7 September 2021

Potential investment in JAY LtdWe are in discussion with the management of CRO Ltd regarding the establishment of a new company, JAY Ltd. If it proceeds, JAY Ltd will commence trading on 1 April 2022 and carry on its business activities in the country of Garia, where it will manufacture computer components.

CRO Ltd is proposing that REP Ltd would own 30% of the ordinary share capital of JAY Ltd with CRO Ltd owning the remaining 70%. However, we regard this potential investment as somewhat risky, such that if we decide to proceed, we may prefer to own just 20% of JAY Ltd rather than 30%.

JAY Ltd is expected to be profitable in the year ending 31 March 2023. However, there is the possibility that it will be loss making in either that year or in future years.

JAY Ltd’s tax adjusted trading profit for the year ending 31 March 2023 is budgeted to be £135,000, all of which will relate to its activities in Garia. JAY Ltd will have no other source of taxable income and will not make any chargeable gains during this year.

We have not been involved in a joint venture like this before and we have no experience of carrying on a business outside the UK. We would appreciate your advice on the following three extracts from the documentation provided to us by CRO Ltd:

(i) ‘It has not yet been determined whether JAY Ltd will be resident in the UK or in Garia. If JAY Ltd is resident in the UK, it will be considered to be carrying on its business through a permanent establishment in Garia.’

(ii) ‘If JAY Ltd is resident in the UK, we will consider making an election to exempt its overseas trading profits from UK tax.’

(iii) ‘We have been advised that if JAY Ltd is resident in Garia, this will not result in a charge under the controlled foreign company (CFC) rules.’

Purchase of investment propertyWe are considering the purchase by REP Ltd of a new, unused commercial building for £200,000 plus 20% value added tax (VAT). REP Ltd would then grant a 20-year lease of this building to a retailer. Will REP Ltd be able to recover the VAT charged by the vendor on the sale of this building?

Proposed gift of shares to trustI established a discretionary trust for the benefit of my nieces and nephews on 1 August 2011.

On 1 November 2021, I am planning to give 20,000 of my shares in REP Ltd to this trust. After I have made the gift, I will still own 60,000 shares (60% of the company). You have already advised me that these shares are not relevant business property for the purposes of business property relief, due to the investment activities of REP Ltd.

Accordingly, I am aware that the gift on 1 November 2021 may result in an inheritance tax (IHT) liability. If I decide to make the gift, I will pay any IHT due.

I have made the following gifts in the past: £

1 August 2011 Cash to trustees on the creation of the trust 120,000

1 February 2017 Cash to brother 35,000

1 May 2017 Additional cash to trustees 170,000

1 July 2021 Cash to sister 45,000

None of these gifts has resulted in an IHT liability.


Email extract from your manager: dated 8 September 2021.

Please prepare notes for use at a meeting with Lamar.I want you to lead the meeting. You should therefore set out the notes in a manner which will make it easy for you to refer to them during the meeting.

The notes should cover the following matters:

(a) Knowledge obtained from advising other clientsWe have a number of existing clients which trade from permanent establishments situated overseas, and a few years ago we had a client with a presence in the country of Garia.

Set out the points you will make in order to explain the extent to which REP Ltd can benefit from the knowledge we have gained from advising these other clients.

(b) Investment in JAY LtdAdditional Information

– REP Ltd and CRO Ltd are UK resident companies which prepare accounts to 31 March each year.

– Business profits generated in Garia are subject to 13% business tax in that country.

– There is no double tax treaty between the UK and Garia.

(i) Residency of JAY LtdExplanations of the relevance of the country of residency of JAY Ltd in relation to:

– the amount of corporation tax payable in the UK and Garia in respect of its profits; and

– the relief available to REP Ltd if JAY Ltd’s business in Garia were to make a trading loss.

Before you start, take some time to identify the different possibilities which need to be addressed, recognising that we do not yet know what percentage of JAY Ltd will be owned by REP Ltd.

(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax List the implications of JAY Ltd making this election.

(iii) Controlled foreign company (CFC) rulesI can confirm that a CFC charge will not arise if JAY Ltd is resident in Garia. However, I want to provide Lamar with an explanation of the purpose of the CFC rules and the charge which can be levied under them.

(c) Purchase of investment propertyExplain the matters which Lamar should be aware of in relation to REP Ltd recovering the value added tax (VAT) which would be incurred on the purchase of the investment property.

There is no need to consider partial exemption or the capital goods scheme.

(d) Proposed gift of shares to trust on 1 November 2021A calculation of the inheritance tax (IHT) which would be payable by Lamar if he were to give 20,000 shares in REP Ltd to the trust on 1 November 2021 as planned. Your calculation should indicate the availability or otherwise of all relevant annual exemptions.

Where relevant, you should use the following values for a single ordinary share in REP Ltd:

Shareholding Up to 25% 26% to 50% 51% to 74% 75% or moreValue per share £8 £11 £17 £24

Lamar currently owns 80% of the ordinary share capital of REP Ltd. The remaining shares in the company are owned by individuals who have no connection with Lamar.

Tax manager


Requirements:

Prepare the meeting notes as requested in the email from your manager. The following marks are available:

(a) Knowledge obtained from advising other clients. (5 marks)

(b) Investment in JAY Ltd.

(i) Residency of JAY Ltd. (9 marks)

(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax. (3 marks)

(iii) Controlled foreign company (CFC) rules. (3 marks)

(c) Purchase of investment property. (5 marks)

(d) Proposed gift of shares to trust on 1 November 2021. (6 marks)

Professional marks will be awarded for the approach taken to planning the content, the clarity of the explanations and calculations, the effectiveness with which the information is communicated, and the overall presentation and style of the notes. (4 marks)

35 MARKS

OBSERVATIONS ON THE QUESTION AND REQUIREMENTSAs is always the case in Section A questions, the detailed tasks which the candidate needs to perform are detailed within one of the documents, in this question it is the email from the manager. The guidance provided in these detailed tasks must be used alongside the information provided in the other document, in this case the email from the client. Marks are awarded only for satisfying the requirements and not for other information, even if it is technically correct. As such, candidates must read the detailed tasks carefully.

The requirements of each question are carefully worded in order to provide candidates with guidance as regards the style and content of their answers. It is very important to note the command words (calculate, explain, advise etc). Requirements to ‘explain’ or ‘advise’ require a written element to the answer, perhaps accompanied by supporting calculations, but calculations alone will not

suffice. However, an instruction to ‘calculate’ does not require anything more than clear labelling of the figures, or perhaps a brief note where, for example, a source of income is exempt, or a relief or allowance is restricted, or not available. Candidates should also pay attention to any matters which do not need to be covered, as inclusion of these will not gain marks.

Candidates should not provide general explanations or long introductions. It is necessary to think before you write, then write whatever is necessary to satisfy the requirement. It is necessary to apply your knowledge to the facts by reference to the requirement, as providing every bit of information you know on a topic, even if it is irrelevant to the requirement, is not helpful, and will waste precious time in the exam. As such, before you start writing, you should think about the issues and identify all of the points you intend to address and/or any strategy you intend to adopt to satisfy the requirement.

The requirements at the end of the scenario provide detail on the marks that are available, so candidates can work out how much time to spend on each part. As the exam is 3 hours and 15 minutes, there is approximately 1.95 minutes available per mark in the exam. This equates to 68 minutes for the 35 marks in Question 1. If 5 minutes is set aside for reading the question and planning the answer, this leaves 63 minutes to answer the question, being 1.8 minutes per mark.

There will always be 5 marks in every exam on ethics, which happen to be in this question. If candidates are well prepared for ethics, and if they strive to do well on professional marks, they could achieve all 9 marks for ethics and professional marks combined, which would mean they will already have secured 25% of the marks for this question. To achieve all 4 professional marks, candidates must ensure that they take a clear, concise approach to calculations, communicate effectively and

THE REQUIREMENTS OF EACH QUESTION ARE CAREFULLY WORDED IN ORDER TO PROVIDE CANDIDATES WITH GUIDANCE AS REGARDS THE STYLE AND CONTENT OF THEIR ANSWERS.


ensure overall presentation is appropriate to the question requirement. An effective question plan can help ensure that an appropriate answer is produced.

This question related to a corporate client which required advice on various aspects of establishing a new company which will operate wholly overseas, the value added tax (VAT) implications of purchasing and leasing a new commercial building, and the inheritance tax (IHT) implications of a proposed gift by the managing director into a discretionary trust.

Part (a) is the 5 marks on ethics, on the area of using knowledge obtained from advising other clients, which has been examined before, so should not have presented any major difficulties for candidates. There are 9 minutes available for this part, and with the ethics being part (a), candidates should hopefully have been able to secure those marks by making the relevant concise points quickly at the start, before moving onto the more in-depth areas of the question.

Part (b) consists of 3 sub-parts, each of which related to specific aspects of establishing the new company. There were 15 marks available for part (b), so 27 minutes available, so a large proportion of the time for the question.

Part (b)(i) required candidates to consider the different UK and Garia tax implications of the new company being UK resident (and therefore operating through a permanent establishment overseas), or alternatively being an overseas resident company. Additionally, candidates had to consider the loss relief which would be available to the UK investing company in each of these situations. The guidance in the manager’s email also points out a reminder that it is still unknown what percentage of JAY Ltd will be owned by REP Ltd, which impacts the loss relief available. There are 4 marks available for the loss relief where JAY Ltd is UK resident, and this guidance should serve as a reminder to consider both situations where REP Ltd own 20% or 30% of JAY Ltd, to ensure maximum opportunity to pick up the available marks. There are several different situations to consider in this sub-part, so it is important to set answers out clearly with heading and sub-headings. With 9 marks available, 16 minutes of the 27 minutes for part (b) should be allocated to sub-part (i).

Part (b)(ii) required an explanation of the implications of making an election to exempt the profits of the overseas permanent establishment from UK tax. With 3 marks available, there were just over 5 minutes available for this sub-part.

Part (b)(iii) related to controlled foreign company (CFC) legislation. The client has been advised that there will not be a charge under the CFC rules. The manager has confirmed that there will not be a charge, but has specifically asked for an explanation of the purpose of the CFC rules, and the charge which can be levied under them, to be prepared for the client. Again, with 3 marks available, there were just over 5 minutes available for this sub-part.

Part (c) concerned the recovery of input VAT in respect of the purchase of a commercial building which is to be immediately leased to a trader. Lamar’s email asks whether the VAT is recoverable, however the manager’s email also instructs the candidate to explain the matters which Lamar should be aware of, which is wider than the original question asked by Lamar. The manager’s email also clearly states that there is no need to consider partial exemption or the capital goods scheme. This is stated to ensure that candidates do not spend any time considering these matters, as there will not be any marks available for them, so candidates must pay attention to guidance like this to avoid wasting any time. There were 5 marks available for this part, so 9 minutes.

Part (d) required a calculation of the immediate IHT payable by the managing director on a proposed gift of shares into a discretionary trust. Some candidates may have found it slightly unusual to have inheritance tax in a predominantly corporate tax question, however they simply needed to consider the managing director’s individual circumstances and transactions for inheritance tax, in the same way as they would any other individual, so this should not have caused any problems for candidates. The manager’s email states that a calculation of the IHT is required, and notes that the availability or otherwise of all relevant annual exemptions should be indicated. The value per share of the different shareholdings were provided, and should have served as a prompt to remind candidates that the IHT value is based on the diminution in value principle. Candidates also needed to consider the previous lifetime gifts made by the managing director, provided in the email from Lamar, and should have noted that Lamar advised that he will pay any IHT arising on the gift to the trust, as this impacts the rate of tax. 6 marks were available for this part, and so just over 10 minutes.


Suggested solution (updated to Finance Act 2020)TOTAL MARKS: 35/35

Published Answer updated to FA 2020 Marks

1(a) REP Ltd

Notes for meeting

Client REP Ltd and LamarPurpose Discussion of corporate and personal mattersPrepared by Tax seniorDate 8 September 2021

(a) Knowledge obtained from advising other clients – We have experience of advising clients trading from permanent establishments situated overseas. We have also advised on trading in the country of Garia. – We will be able to use this general experience and expertise for the benefit of REP Ltd. – However, we must not use any confidential information obtained as a result of our professional and

business relationships for the benefit of REP Ltd (or any other client). Confidentiality is one of the fundamental principles of ethics within ACCA’s Code of Ethics and Conduct. – This principle of confidentiality applies to confidential information obtained in respect of both ex-clients

and continuing clients.

Tutorial note: candidates who mentioned the fundamental principle of professional competence and due care were also awarded credit.

Professional marks for

the quality of the answer

and effective communication

Maximum 4

4/4

1 mark per relevant point

Maximum 5

5/5

(b) Investment in JAY Ltd(i) Residency of JAY Ltd

Taxation of profitsThe profits of the business will be generated in Garia regardless of where JAY Ltd is resident.Accordingly, the profits will always be subject to business tax at 13% in Garia.

If JAY Ltd is resident in the UKThe profits would be subject to UK corporation tax because the permanent establishment (PE) in Garia is not a separate legal entity and UK resident companies are subject to corporation tax on their worldwide profits.

However, double tax relief would be available in the UK: the amount payable in the UK would be 6% (19% – 13%) of the profits, as set out below: £UK corporation tax (£135,000 x 19%) 25,650Less: Unilateral double tax relief (£135,000 x 13%) (17,550)UK corporation tax payable 8,100

If JAY Ltd is resident in GariaThe profits will only be subject to tax in Garia at the rate of 13%, as noted above.JAY Ltd would not have a UK corporation tax liability in respect of these profits.Any dividends received by REP Ltd and CRO Ltd from JAY Ltd would be exempt from corporation tax.

Relief available in respect of trading loss

If JAY Ltd is resident in the UKIf REP Ltd owns 30% of JAY Ltd:– JAY Ltd would be a consortium company because at least 75% of JAY Ltd would be owned by companies,

each of which own at least 5%, and less than 75%, of the company.– In these circumstances, REP Ltd would be able to offset up to 30% of JAY Ltd’s trading loss against its taxable

total profits.

If REP Ltd owns 20% of JAY Ltd:– No relief would be available to REP Ltd in respect of any trading loss of JAY Ltd because CRO Ltd would own

more than 75% of JAY Ltd.

If JAY Ltd is resident in GariaNo relief would be available in the UK for REP Ltd in respect of any trading losses realised by JAY Ltd in Garia.

1

3

2

4

1

Available 11Maximum 9

9/9


Published Answer updated to FA 2020 Marks

(ii) Election to exempt the profits of JAY Ltd’s overseas PE from UK tax

This election is available to UK resident companies which generate profits from PEs situated overseas. If JAY Ltd were to make this election:– its profits in Garia would no longer be subject to corporation tax in the UK. If no election is made, UK

corporation tax would be payable on the profits in Garia at the rate of 6% (19% – 13%) after double tax relief;– no relief would be available in the UK in respect of any losses generated by the activities in Garia;– it would be irrevocable;– it would apply to all future overseas PEs of JAY Ltd.


Maximum 3

(iii) Controlled foreign company (CFC) rules

The UK tax system charges corporation tax on the worldwide profits of UK resident companies. However, it does not charge corporation tax on the profits earned overseas by a non-UK resident company.

A UK resident company could seek to exploit the latter rule by establishing a non-UK resident subsidiary in which to generate its overseas profits. The CFC legislation is designed to prevent overseas subsidiaries being used to avoid tax in this way.

Where the rules apply (and no exemption is available), UK resident companies owning at least 25% of a CFC are charged UK corporation tax on their proportionate share of the CFC’s chargeable profits.


Maximum 3

(c) Purchase of investment property

When REP Ltd grants a lease of the building to a tenant, it will be making an exempt supply.

REP Ltd will not be able to recover any value added tax (VAT) in relation to the purchase of the building unless it makes an election opting to tax it.

Opting to tax the building would have the following additional implications:– REP Ltd would be required to charge VAT on the monthly rental payments due from the tenant. This will not be a problem where the tenant is able to recover all of the VAT charged. However, any

irrecoverable VAT will represent an additional cost to a potential tenant.– Apart from an initial cooling-off period of six months, an option to tax a building cannot be withdrawn until

20 years have elapsed.– Whilst the option to tax remains in place, REP Ltd would be required to charge VAT on a sale of the building.

1

1

4


(d) Proposed gift of shares to trust on 1 November 2021

Inheritance tax (IHT) payable £ £Transfer of value (W) 900,000Annual exemptions for 2021/22 and 2020/21(used by PET on 1 July 2021) –

Chargeable amount 900,000

Nil rate band 325,000Less: chargeable transfer in the previous seven years1 May 2017 170,000Annual exemptions:2017/18 (3,000)2016/17 (used by PET on 1 February 2017) – (167,000)

158,000

Taxable amount (£900,000 – £158,000) 742,000

IHT payable (£742,000 x 25%) 185,500

WorkingTransfer of value £Value of shares held prior to the gift: (80,000 x £24 (80%)) 1,920,000Value of shares held after the gift: (60,000 x £17 (60%)) (1,020,000)

Transfer of value 900,000

2.5

1

2.5



Q1 Candidate 1TOTAL MARKS: 27.5/35

Candidate 1 AnswerMarks

awarded Notes

Professional marks awarded for: • the approach taken to planning the content, • the clarity of the explanations and calculations, • the effectiveness with which the information is communicated, and• the overall presentation and style of the notes.

1

1

1

0

3/4

1

Q1 REP LtdMeeting notes

Client: Lamar and REP LtdPrepared by: Tax seniorDate: 8 September 2021Subject: Investment in Jay Ltd, investment property and IHT issues

(a) Knowledge obtained from advising other clients We have a number of existing clients which trade from permanent establishments situated overseas, and a few years ago we had a client with a presence in the country of Garia, so we have advised on trading in Garia. We can use this experience to advise REP Ltd.

Confidentiality is a fundamental principle of ethics, so we cannot give any confidential details of our previous clients, but we can use our experience gained to advise REP Ltd.

11

3

5/5

2

(b) Investment in JAY Ltd(i) Residency of JAY Ltd

JAY Ltd profits will be taxable in Garia if JAY Ltd is resident in Garia, and also if JAY Ltd is resident in the UK, because the business activities are carried out in Garia. So business tax of 13% will be charged.

If JAY Ltd is resident in Garia there will be no further tax charge for UK corporation tax. No loss relief will be available.

If JAY Ltd is resident in the UK, then it is treated as having a permanent establishment in Garia. A permanent establishment includes:• A place of management• A branch• An office• A factory or workshop

A UK resident company that has a permanent establishment in an overseas country will normally:• Pay tax on the overseas profits• Pay UK corporation tax on those overseas profits• Get double tax relief

JAY Ltd could group relieve losses to CRO Ltd if it was UK resident, provided CRO Ltd hold more than 75% of the shares, but they can’t group relieve to REP Ltd if REP Ltd only own 20% or 30%.

1

11

0

1

1

1

6/9

3

45

6

6

6

7



awarded Notes

(ii) Election to exempt the profits of JAY Ltd’s overseas PE from UK taxJAY Ltd can make an election to exempt the overseas profits from UK corporation tax. The election is permanent and can’t be reversed. When the election is made, there will be no UK corporation tax on the Garia profits, but it also means there will be no loss relief possible on any losses in Garia either. It also means JAY LTD can’t claim capital allowances on any plant and machinery, and there is no capital gains tax in the UK on any disposals in Garia. It might not be beneficial for JAY Ltd to make the election if there are losses possible in Garia.

1

110

3/3

8

iii) CFC rulesIt is correct that if JAY Ltd is resident in Garia, then there will be no CFC charge. There is UK corporation tax on overseas profits of UK resident companies, but if JAY Ltd was resident in Garia, and so not resident in the UK, then UK corporation tax wouldn’t be charged via the CFC rules. CFC rules include anti-avoidance legislation to make it difficult for UK companies to divert profits to tax havens, by setting up the company in the tax haven. They might try to do this to avoid paying UK corporation tax, which would be due on overseas profits of a UK resident company. The CFC charge applies to chargeable profits if the UK company owns 25% of the CFC. The charge is calculated as:UK company share of CFC profits x UK CT rate (19%)Less DTR available if the CFC had been UK residentLess UK CT on CFC There is an exemption to the CFC charge if:• It is the first 12 months of the CFC • The CFC is in an excluded territory where tax is high enough not to be considered a tax haven• Profits are under £500,000• Tax paid in overseas country is over 75% of UK CT

1

1

1

0

0

3/3

9

(c) Purchase of investment property REP Ltd will be able to reclaim the VAT on the building, but only if it opts to tax the building. They can make an election to do this within 30 days, but once the election has been made then it applies for 20 years. By opting to tax the building, they need to charge VAT to the tenant.

1

11

3/5

10

(d) Gift of shares Drop in value80,000 x £24 1,920,00060,000 x £17 (1,020,000) 900,000

Value of gift 900,000Annual exemption2021/22 (3,000)2020/21 (3,000) 894,000NRB available2021/22 325,000Less: used in previous 7 yearsCash to sister – PET 0Cash to trustees (170,000)Cash to brother – PET 0 (155,000) 739,000IHT at 40% 295,600

2

00

0.5

1.5

0.50

4.5/6

11


NOTES ON CANDIDATE ONE’S ANSWER TO Q1

Note 1This candidate has been awarded 3 of the 4 available professional marks. They appear to have planned their answer, and the explanations and calculations are clear enough, and information communicated fairly clearly.

However, for meeting notes they would have been better presenting the information in more of a bullet point fashion, to ensure that points could be easily ticked off during discussion with the client. For example, in parts (a) and (b)(ii) in particular, there is a lot of points covered in one paragraph, where it would have been easy to miss some individual points in the meeting with the client, as you would not be reading full paragraphs of text, so bulleted points would have been more effective for this style of communication. Paragraphs would have been more suitable in a letter to the client.

Note 2Full marks have been awarded for 5 relevant points, although these points could have been made clearer as individual points for the sake of the meeting notes, as it could be easy to miss a point from a larger paragraph of notes.

Note 31 mark awarded for correctly identifying that JAY Ltd will be taxed in Garia regardless of where it is resident.

Note 4There were 2 marks available for JAY Ltd being resident in Garia, of which the candidate has been awarded 1 mark for stating that there will be no UK tax. To achieve the other mark, the candidate should have mentioned something about the treatment of dividends which could be received in the UK.

Note 5The candidate was awarded 1 mark for there being no loss relief available for REP Ltd if JAY Ltd is resident in Garia.

Note 6There were 3 marks available for when Jay Ltd is UK resident, of which this candidate picked up 2. 1 mark given for stating that UK tax is chargeable on a permanent establishment (although part of the information is written quite generally, and would have

been clearer if stated specifically for JAY Ltd, this mark has been awarded). Also the candidate has written more than necessary on what constitutes a permanent establishment, for which there are no marks available.

1 mark awarded for stating that DTR is available, although if they had provided a calculation of the DTR this would have achieved the third mark.

Note 7There were 4 marks available for loss relief when JAY Ltd is UK resident, of which this candidate was awarded 1 mark for recognising that there would be no group relief available to REP Ltd. However, they have missed the possibility of JAY Ltd being a consortium, so were not able to pick up any more marks in connection with the loss relief.

Note 8Each of the highlighted points is one relevant point, so this candidate gained full marks, even though they did not mention that the election would apply to all future overseas PEs of JAY Ltd, as per the suggested solution.

There are no marks available for the last point about whether the election is beneficial, which went beyond the requirement of listing the implications, although the candidate already has full marks for this sub-part anyway.

Note 9The candidate has gained full marks in this sub-part, with 1 mark for each relevant point. The point about the UK company being charged to corporation tax on its proportionate share of the CFC’s chargeable profits would also have earned a mark, had the candidate not already been on full marks at this stage. However, they have then gone on to spend time explaining when there is an exemption to the CFC charge, which was not required. The manager asked only for an explanation of the purpose of the rules and the charge that can be levied.

Although the candidate has received full marks for this part, they have wasted valuable time going further than was necessary to meet the requirement.

BACK TO ANSWER


Note 10There are 6 marks available for this sub-part, of which a maximum of 5 can be awarded. There are 2 marks available for the granting of the lease, 2 for the implications to the tenant and 2 for the implications for the future. This candidate has been awarded 1 mark under each of these. They have not mentioned that the option to tax is necessary on the grant of the lease, which would otherwise have been an exempt supply. They have also not provided enough on the managers request for more general matters of which Lamar should be aware, such as having to charge tax on a sale of the building, or how the charging of VAT on the tenant may put the tenant off if the VAT is irrecoverable for the tenant.

Note 11The 6 marks available are:Taxable amount of transfer - 2.5 Nil rate band – 2.5 IHT liability – 1

This candidate has been awarded 2 marks for the value of the transfer to the trust, as they correctly calculated the diminution in value principle, however they then used the annual exemption for the year, and the previous year, which have already been used on the cash gift to the sister.

The annual exemptions also caused problems in the nil rate band calculation, as the candidate correctly only included one gift to the trustees, but forgot to allocate the annual exemptions which would have been available against that gift. As such they were awarded 2 marks, 1.5 marks for only the correct gift being included, and 0.5 mark for the £325,000, and they missed 0.5 mark for the annual exemption.

This candidate also missed the 0.5 mark for the IHT calculation, as they have used the death rate of 40% rather than the lifetime rate of 20% grossed up to 25% given Lamar has stated he will pay any IHT due. However, they did receive 0.5 mark for the excess over the NRB being taxable on a follow-through basis. This is an example of the “own figure rule”; where a candidate’s answer will be awarded credit based on a correct technical understanding of the rules, even though the underpinning numbers are incorrect.

Overall mark for this candidate was 27.5 out of 35.

BACK TO ANSWER


Q1 Candidate 2TOTAL MARKS: 22/35


awarded Notes

Professional marks awarded for: • the approach taken to planning the content, • the clarity of the explanations and calculations, • the effectiveness with which the information is communicated, and• the overall presentation and style of the notes.

0

0

1

1

2/4

1

Meeting notesClient: REP LtdPrepared by: Tax seniorDate: 8 September 2021Subject: Investments and IHT issues

(a) Knowledge obtained from advising other clients Professional code of ethics covers confidentiality.Confidentiality must be respected, and information shouldn’t be disclosed to third parties without proper authority.Confidential information shouldn’t be used to benefit third parties.However, can used expertise gained from working with prior client.

11

11

4/5

2

(b) (i) Residency of JAY LtdIf JAY Ltd is resident in the UK:• Liable to UK corporation tax at 19% - £25650• Liable to Garia tax at 13% - £17,550• No double tax treaty between Garia and UK so no DTR

If JAY Ltd is owned 20% by REP Ltd and 80% by CRO Ltd;• JAY Ltd will be able to group relieve losses to CRO Ltd, but not to REP Ltd

If JAY Ltd is owned 30% by REP Ltd and 70% by CRO Ltd:• A consortium exists as two or more companies own 75% between them, and each company has

more than 5% but less than 75%• Consortium relief is available to REP Ltd for JAY Ltd’s losses• REP Ltd losses can be relieved to JAY Ltd as well• Losses restricted to profits of other consortium• Only a UK company can claim or surrender losses, so the claim will need to be done by REP Ltd• Claim must be made within 2 years of year end

If JAY Ltd is resident in Garia:• subject to 13% tax in Garia

If JAY Ltd is owned 20% by REP Ltd and 80% by CRO Ltd:• no loss relief in UK for JAY Ltd losses

If JAY Ltd is owned 30% by REP Ltd and 70% by CRO Ltd:• no loss relief in UK for JAY Ltd losses.

0.50.50

1

2

0.5

1

0

5.5/9

343

5

6

3 & 7

8



awarded Notes

(ii) Election to exempt the profits of JAY Ltd’s overseas PE from UK taxThere is an election available to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax.The implications of making this election include:• No UK corporation tax, Garia tax only• Irrevocable• Must be made within 30 days of setting up the permanent establishment

110

2/3

9

(iii) Controlled foreign company (CFC) rulesUK companies have to pay tax on their overseas profits, but if the overseas part is not UK resident then they won’t have to pay UK tax.

It is therefore desirable for companies to set up as resident in a tax haven to avoid UK tax.

The CFC rules are designed to avoid this happening, or to charge companies that try to avoid tax this way, by making them pay a CFC charge.

1

0

1

2/3

10

(c) Investment property JAY Ltd will need to opt to tax the building to be able to reclaim the VAT on the purchase.

They will then need to charge VAT on rent to the tenants.

This shouldn’t be a problem for the tenant if they are VAT registered, but may put them off the property if they can’t recover the VAT.

1

1

1

3/5

11

(d) GiftGift – 1 November 202120,000 x £24 480,00020,000 x £17 (340,000) 140,000 NRB 325,000Less: gifts in 7 years (45,000 – 3,000 – 3,000) (39,000)(170,000) (170,000)(35,000 – 3,000 – 3,000) (29,000) (238,000) (87,000) 53,000IHT at 20/80 13,250

No annual exemption available as already used 2020/21 and 2019/20 exemptions against the gift to sister.

1

0.5

0.5

1

0.5

3.5/6

12

13

14

12


NOTES ON CANDIDATE TWO’S ANSWER TO Q1

Note 1This candidate has been awarded 2 of the 4 available professional marks. Overall this answer lacks detail, which would indicate that they may not have planned their answer in advance. They have not been awarded the mark for clarity of the explanations and calculations, again as their answer lacked sufficient detail, and calculations were quite confused.

However, the answer was in an appropriate style for meeting notes, to enable them to effectively communicate their answer.

Note 2This candidate has made 4 relevant points regarding confidentiality, and so has been awarded 4 marks. To gain the fifth mark they could have clarified that this still applies to ex-clients, or could possibly have emphasised more that they already have experience of trading in the country of Garia, and experience of clients trading from permanent establishments. They just needed a little more detail to achieve full marks for this part.

Note 3Part (b)(i) is also lacking some detail. Of the 3 marks available for JAY Ltd being resident in the UK, 0.5 mark has been awarded. The candidate has stated JAY will be liable to UK corporation tax at 19% and has been awarded 0.5 mark of 1.5 marks available. To obtain full marks, they should have included some detail that the reason for this was because UK resident companies are liable to tax on worldwide profits, or explained that a permanent establishment is not a separate legal entity.

The candidate has incorrectly stated that no DTR will be available due to there being no double tax treaty, so no marks have been awarded for DTR, which had 2 marks available for stating that it was available and for calculating the DTR.

Note 41 mark awarded for stating that Garia tax at 13% is payable whether UK resident or not (by stating this under both situations separately, so shown as 2 x 0.5 marks).

Note 5The candidate has correctly considered both shareholdings separately, and correctly stated that there will be no relief for losses where JAY Ltd is UK resident and REP owns only 20%, so 1 mark awarded.

Note 6The candidate has also spotted the consortium possibility if REP Ltd own 30%, for 1 mark, and correctly explained why this is a consortium, for another 1 mark. However, they did not pick up the 3rd mark available for consortium relief, as despite going into quite a lot of detail about consortiums, they have omitted to mention that relief will only be in the proportion of the shareholding, i.e. 30%.

Note 7The candidate has correctly stated that JAY Ltd will be liable to Garia tax when resident in Garia, as mentioned above the 0.5 mark is awarded here, so 1 mark in total awarded for this. However, they have not achieved the 2 marks available for clearly stating that no UK tax will be payable when resident in Garia, or how any dividends will be treated.

Note 81 mark awarded for stating that there is no UK loss relief possible when resident in Garia.

Overall, the answer to this part (b)(i) is too brief. Although in a good clear format for meeting notes, it lacks sufficient detail. Although the candidate has managed to secure 5.5 out of the 9 marks available.

Note 9The answer to this sub-part is also lacking in detail, however the candidate has managed to pick up 2 marks for correctly pointing out that there will be no UK tax and that the election is irrevocable. The election can be made at any time, so no marks have been awarded for the point about making the election within 30 days.

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Note 10The candidate has achieved 2 marks here. Again, the answer to this part is lacking in detail. The candidate has picked up on the fact that there is UK tax unless the overseas profits are in a separate non-UK resident company, for 1 mark, and that there is anti-avoidance legislation to address this, for 1 mark. Although they have mentioned the CFC charge, this is stated in the question, and they have not provided any detail on the charge itself or how it is calculated, so no mark has been awarded here.

Note 11The candidate has correctly identified the need to opt to tax the building to reclaim the VAT for 1 mark, and the implications of charging VAT to the tenant for 1 mark, along with noting the impact on the tenant for a further 1 mark.

Once again not enough detail in the answer to this sub-part, to achieve the other 2 available marks, the candidate would need to have picked up on the fact that the grant of the lease would otherwise be an exempt supply, or noted that the exemption applies for 20 years, or that REP Ltd would need to charge VAT on any sale of the building, or any other relevant implications.

Note 12There are 2.5 marks available for the taxable amount of the transfer to the trust, of which this candidate picked up 1.5 marks. 0.5 mark was for correctly not offsetting the 2 annual exemptions which were already used on the previous gift to the sister, as they have noted at the

end of their calculation. They have attempted to use the diminution in value principle, however have made quite a confused attempt at this, by only considering the 20,000 shares sold, and not looking at the value of the holding beforehand and afterwards, but correctly using the value of shares that apply to each of the relevant shareholdings. As such, they have been awarded 1 mark for their attempt at the diminution in value principle, which has come out vastly different from the correct answer.

Note 13The nil rate band (NRB) calculation is also very confused, with the candidate incorrectly bringing in the potentially exempt transfers (PETs) within the prior 7 years, as well at the chargeable lifetime transfers (CLTs). 0.5 mark has been awarded for the correct use of the £325,000, and 0.5 mark for including the CLT, so 1 mark in total of the 2.5 marks available. By including the PETs, they have also incorrectly offset the annual exemptions against them, meaning none were left to set against the CLT, so they have missed the 0.5 mark available for correct use of the annual exemptions against the CLT.

Note 140.5 mark awarded for the excess over the NRB being taxable and 0.5 for correctly grossing up the lifetime tax for Lamar paying the IHT.

This candidate has achieved 3.5 out of 6 marks on part (d), despite their calculation being quite confused.

Overall mark for this candidate was 22 out of 35.

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UNITED KINGDOM (ATX-UK) - ADVANCED TAXATION

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