VAT assignment questions Assignment:

1. SET LTD GROUP

Your manager has forwarded an email to you from Ms Driver, the acting finance director of Set Ltd.
Background information from your manager and the email from Ms Driver are set out in exhibits.

Background information from your manager- dated 7 June 2022

The finance director of the Set Ltd group of companies has become seriously ill and Ms Driver is
standing in for him. I attach an email from Ms Driver requesting explanations of a number of matters.

Set Ltd has three wholly owned subsidiaries, Ghost Ltd, Steam Ltd and Wagon Ltd, and also owns
shares in a number of other companies. Set Ltd and all of its wholly owned subsidiaries are resident
in the UK.

You should assume that all of the UK resident companies in the Set Ltd group, including Ghost Ltd,
pay corporation tax in instalments every year and will continue to do so, regardless of any loss relief
planning entered into.

Please provide the explanations requested by Ms Driver in her email.

Thank you

Tax manager

Email from Ms Driver- dated 7 June 2022

Ghost Ltd-corporation tax payments

I'm working on the corporation tax instalment payments which Ghost Ltd will be required to pay in
the period from now until 31 December 2022.

Set Ltd acquired the whole of the ordinary share capital of Ghost Ltd on 1 June 2022. Ghost Ltd had
always prepared accounts to 30 April but following its acquisition has changed its year end to 31
December in line with all of the other companies in the Set Ltd group.

The finalised corporation tax liability of Ghost Ltd for the year ended 30 April 2022 was £597,500. I
am now estimating the company's liability for the eight-month period ending 31 December 2022 so
that I can determine the instalment payments required. As part of this work, I need to know if the
company's corporation tax liability can be reduced in respect of the following:

• Steam Ltd will sell a building on 1 August 2022, which is expected to result in a loss

• Wagon Ltd has a trading loss brought forward as at 1 January 2022 of£31,500. It is expected
to make a further trading loss in the year ending 31 December 2022.

Please explain:

• how Ghost Ltd could make use of the losses of Steam Ltd and Wagon Ltd in the period ending
31 December 2022.

• the payments of corporation tax which will need to be made by Ghost Ltd in the period
starting today, 7 June 2022, and ending on 31 December 2022. For the purpose of this
explanation, please assume that Ghost Ltd's corporation tax liability for the eight-month
period ending 31 December 2022 is £460,000
b) Wagon Ltd- value added tax (VAT)

Wagon Ltd intends to purchase manufacturing components from Line Co. Line Co Is a company
resident in the country of Terminusa, which is not a member of the European Union. There is no VAT
in Terminusa.

Wagon Ltd is also planning to sell goods to Signal Co. Signal Co is resident in France, which is a
member of the European Union. Signal Co is a small company which is not required to be registered
for VAT in France.

Neither Line Co nor Signal Co has any links with the Set Ltd group.

Please explain the VAT implications of these transactions.

Email from Ms Driver- dated 7 June 2022 (continued)

(c) Dee Co and En Co -controlled foreign company (CFC) charge

Set Ltd owns shares in two CFCs: Dee Co and En Co. Both of these companies have chargeable profits
for the purposes of the CFC legislation. Estimates of the relevant financial information in respect of
the year ending 31 December 2022 are as follows:

Dee Co En Co

Percentage of ordinary share

21% 37%
capital owned by Set Ltd

£ £

Non-trading income nil 65,000

Operating expenditure 8,100,000 3,200,000

Accounting profit 1,100,000 280,000

Taxable total profit 1,300,000 350,000

I can see from my files that the only exemptions from a CFC charge requiring consideration are the
low profits exemption and the low profit margin exemption.

Please explain whether Set Ltd will be subject to a CFC charge in respect of either Dee Co or En Co.

(d) Steam Ltd- Project Whistle

Steam Ltd will commence Project Whistle in 2023. As part of the project, Steam Ltd will engage in
scientific research, some of which will qualify for the additional 130% tax deduction available in
respect of qualifying research and development expenditure. Due to the significant costs involved,
Steam Ltd is expected to make a trading loss in the year ending 31 December 2023.

Please explain:

• how any trading loss made by Steam Ltd in the year ending 31 December 2023 can be
relieved.

• the factors to consider when choosing between the available reliefs.

Regards

Ms Driver

Requirement

(b) Wagon Ltd - value added tax (VAT). (5 marks)

2. Your manager has sent you a schedule prepared by Claire Falkner concerning her company, Plad
Ltd, and a new company, Quil Ltd, which she intends to incorporate on 1 April 2024. The covering
email from your manager details the work he requires you to do.

The two documents are set out in exhibits.

Attachment: Schedule from Claire Falkner- 1 March 2024

Plad Ltd

I have owned the whole of the ordinary share capital of Plad Ltd since 2009. Plad Ltd trades mainly in
the UK and is a UK resident company. It purchases components from third parties to be assembled
into finished products. It also has a permanent establishment in the country of Chekka. The profits
realized in Chekka are subject to 14% Chekkan business tax. There is no double tax treaty between
the UK and the country of Chekka.

The budgeted taxable profits of Plad Ltd for the year ending 31 March 2025 are set out below. Plad
Ltd's profitability is very stable, so please assume that the figures for the following year will be the
same.

Trading profit in the

58,000
UK

Trading profit in the country of Chekka (before deduction of

270,000
14% Chekkan tax)

Taxable total profits 328,000

Quil Ltd

Quil Ltd will be incorporated, registered for value added tax (VAT) and commence trading on 1 April
2024. It will trade in the UK and be a UK resident company.

From a commercial standpoint, my intention was to own Quil Ltd personally. However, if there is a
sufficient tax advantage, I will consider establishing the company as a wholly owned subsidiary of
Plad Ltd.
The first two years of budgeted results of Quil Ltd are set out below. The trading profit/(loss) figures
are before the deduction of capital allowances, but have otherwise been adjusted for the purposes
of corporation tax. The chargeable gain will not qualify for rollover relief.

Year ending 31
March 2025- £(120,000)
trading loss

Year ending 31
Chargeable
March 2026- £162,000
gain £16,000
trading profit

On 1 April 2024, Quil Ltd will purchase the following capital assets:

Machinery and £160,000(excluding

equipment VAT)

Newly constructed building used £600,000

for manufacturing and storage (excluding VAT)

Construction of the building will begin on 1 April 2024. Quil Ltd will start using the building in its
trade from 1 January 2025.

The cost of the building includes £230,000 in respect of thermal insulation and air cooling equipment
in order to create the appropriate conditions for manufacturing. The cost also includes £150,000 in
respect of land.

Value added tax (VAT)

I would like the two companies to register as a group for VAT purposes (to avoid the need to charge
VAT on intra group supplies and to generally reduce administration) and for the group to continue to
use the annual accounting Scheme currently used by Plad Ltd. I appreciate this would mean that the
two companies would be jointly and severally liable for the group's VAT liability.

Plad Ltd - unreported chargeable gain

I have just discovered that a chargeable gain of £21,600 realized by Plad Ltd in the year ended 31
March 2020 was omitted from its corporation tax return. However, because the gain arose in respect
of the sale of land, it was reported for the purposes of stamp duty land tax. Accordingly, I assume we
do not need to do anything and that HM Revenue and Customs (HMRC) will contact us about this at
some point.

Requirement

Group registration for value added tax (VAT) purposes

Explain any additional matters of which Claire should be aware in relation to group registration for
VAT purposes. Note that Claire is not a sole trader.(3 marks)
3. ENID

Enid requires advice on the capital gains tax (CGT) and value added tax (VAT) implications of
transferring her unincorporated sole trader business to a newly incorporated company, Niche Ltd.
She also requires information on the tax implications of alternative ways of extracting profits from
the new company.

Scenario

Enid:

• Has been in business as an unincorporated sole trader for many years.

• Receives dividends from a portfolio of investments of £500 each year.

• Has no other source of income.

• Is a higher rate taxpayer for all relevant tax years.

• Will transfer all the assets and liabilities of her business to Niche Ltd on 1October 2024.

• will make no other disposals for CGT purposes in the tax year 2024/25.

• Will be the only director and shareholder of Niche Ltd.

Enid's unincorporated business:

• At 1 October 2023 Enid had trading losses brought forward of £51,000.

• In the year ending 30 September 2024, Enid's business will have a taxable trading profit of
£42,000, prior to the transfer to Niche Ltd.

• Is registered for the purposes of value added tax (VAT).

The assets and liabilities to be transferred to Niche Ltd:

Value at 1
Cost
October 2024

£ £

Goodwill 0 100,000

Workshop 55,000 122,000

Inventory 8,000 8,000

Liabilities N/A (10,000)

Consideration to be paid by Niche Ltd:

• 1,000 £1 ordinary shares in respect of 85% of the total value of the consideration for the
business.

• The remainder of the consideration will be left on loan account payable by Niche Ltd to Enid.
 • Enid will withdraw cash from the loan account to pay any CGT liability arising on the transfer
of the business.

Niche Ltd:

• Will pay Enid a salary of £75,000 per year, and dividends of £15,000 on 31 March each year

• Will not be regarded as a personal service company under the provisions of the IR35
legislation.

• Will have taxable total profits of approximately £200,000 each year

• will not receive any dividends.

Requirement

Advise Enid of her administrative obligations under the value added tax (VAT) legislation, arising
from the transfer of her business to Niche Ltd, and whether or not she is able to transfer the VAT
registration from her unincorporated business to Niche Ltd.

You should assume that the transfer of a going concern rules will apply for VAT purposes, but are
NOT required to discuss these rules. (3 marks)

4. HARROW TAN LTD

your manager has sent you a memorandum in relation to the Harrow Tan Ltd group. An extract from
the memorandum and a schedule of group information prepared by Corella, the group finance
director, are set out in exhibits

Memorandum from your manager -dated 7 September 2022

Background

• We are advising Corella, the group finance director, on a number of matters. I've attached a
schedule from Corella, which sets out much of the relevant information.

• Corella was only recently appointed the Harrow Tan Ltd group finance director. She has had
very little experience of practical tax since qualifying as an accountant in 1998. I have carried
out a brief review of Corella's schedule and concluded that it is mathematically correct but
that we cannot rely on its tax technical content.

• All five group companies are UK resident trading companies which prepare accounts to 31
December each year.

Sale of shares in Rocha Ltd

Harrow Tan Ltd acquired the whole of the ordinary share capital of Rocha Ltd (100,000 shares) on 1
December 2021 for £8,900,000.

On 1 January 2022, Seckel Ltd (owned 80% by Harrow Tan Ltd) sold a commercial building to Rocha
Ltd for £800,000, its market value on that date. The group claimed exemption from stamp duty land
tax in respect of this transaction. Seckel Ltd had purchased the building on 1 May 2003 at a cost of
£330,000.
However, the results of Rocha Ltd for the year ending 31 December 2022 are now expected to be
significantly worse than originally budgeted and an agreement was signed on 31 July 2022 for
Harrow Tan Ltd to sell 60,000 Rocha Ltd ordinary shares for £10,300,000. It is planned that the sale of
these shares will take place on 1 October 2022, although the sale could be delayed by up to three
months if necessary.

Tosca Ltd-promotion of new product

Tosca Ltd manufactures high quality glass bowls. It accounts for value added tax (VAT) using the
annual accounting scheme.

Tosca Ltd has developed a new product, which is expected to increase the company's annual
turnover from £1,200,000 to £2,000,000. The new product is to be marketed to the company's
customers, all of whom are UK based retailers, via promotional evenings in various parts of the UK.

At the promotional evenings the retailers will be provided with a meal. They will also be given a
sample of the new product costing approximately £90, and a pen costing £40.

Requirement

Tosca Ltd- promotion of new product (6 marks)

The VAT implications of:

• the expected increase in the turnover of Tosca Ltd, and

• the entertainment and gifts at the promotional evenings.

5. MEG AND LAURIE

Meg is an unincorporated sole trader. She requires advice regarding a planned change of accounting
date, bringing her husband into the business, either as an employee or as a partner, and the value
added tax (VAT) implications of purchasing services from an overseas supplier.

Scenario

Meg:

• Is 60 years old and is married to Laurie.

• Owns an unincorporated sole trader business, MT Travel.

• Has rental income of £8,600 each year in addition to any profits from MT Travel.

MT Travel:

• Was set up by Meg on in 2019.

• Has had accounts prepared to 31 March annually.

• Generated taxable trading profits of £1,600 for the year ended 31 March 2025

• Currently has no employees

• MT Travel- the future:

• From 1 April 2025, Meg's husband, Laurie, will start to participate in the business.

• Meg will either:

1) employ Laurie part-time, paying him an annual salary of £12,000, the commercial rate for the work
he will perform, or

2) admit Laurie into the business as a partner, sharing profits and losses in the ratio 75% to Meg, and
25% to Laurie.

• The business is expected to generate a tax-adjusted trading loss in the tax year 2025/26 of
£20,000, before making any payment to Laurie.

• The business is expected to become profitable again in the tax year 2026/27 and thereafter,
but profits are not expected to exceed £30,000 per year for the foreseeable future.

Laurie:

• Is 63 years old.

• Was employed for many years by Hagg Ltd, earning gross annual remuneration of £60,000,
until 31 March 2024.

• Has received annual dividends of £18,000 for many years. This is currently his only source of
taxable income.

Hagg Ltd right issue:

Laurie acquired 3,000 of the 30,000 shares in issue in Hagg Ltd in August 2018 for
£60,000.

On 31 January 2024 there was a 1 for 3 rights issue at £25 per share. The market value
of the shares after the issue was £32.

Laurie did not take up the rights issue, but instead sold his rights nil paid on 4 February
2024 for £20,000.

MT Travel-VAT:

• MT Travel is registered for the purposes of VAT.

• MI Travel currently buys standard-rated marketing services from a UK supplier, who is VAT
registered.

• MT Travel can buy the same services from a supplier located in an overseas country, which is
not in the EU, where the rate of VAT is 12%.

Requirement

Explain the value added tax (VAT) effect of MT Travel purchasing the services from the overseas
supplier, rather than the UK supplier. (4 marks)

You should also assume that the UK remains a member of the European Union for the purpose of
this question.
6. MEG AND LAURIE

Meg is an unincorporated sole trader. She requires advice regarding a planned change of accounting
date, bringing her husband into the business, either as an employee or as a partner, and the value
added tax (VAT) implications of purchasing services from an overseas supplier.

Scenario

Meg:

• Is 60 years old and is married to Laurie.

• Owns an unincorporated sole trader business, MT Travel.

• Has rental income of £8,600 each year in addition to any profits from MT Travel.

MT Travel:

• Was set up by Meg on in 2019.

• Has had accounts prepared to 31 March annually.

• Generated taxable trading profits of £1,600 for the year ended 31 March 2025

• Currently has no employees

• MT Travel- the future:

• From 1 April 2025, Meg's husband, Laurie, will start to participate in the business.

• Meg will either:

1) employ Laurie part-time, paying him an annual salary of £12,000, the commercial rate for the work
he will perform, or

2) admit Laurie into the business as a partner, sharing profits and losses in the ratio 75% to Meg, and
25% to Laurie.

• The business is expected to generate a tax-adjusted trading loss in the tax year 2025/26 of
£20,000, before making any payment to Laurie.

• The business is expected to become profitable again in the tax year 2026/27 and thereafter,
but profits are not expected to exceed £30,000 per year for the foreseeable future.

Laurie:

• Is 63 years old.

• Was employed for many years by Hagg Ltd, earning gross annual remuneration of £60,000,
until 31 March 2024.

• Has received annual dividends of £18,000 for many years. This is currently his only source of
taxable income.

Hagg Ltd right issue:

Laurie acquired 3,000 of the 30,000 shares in issue in Hagg Ltd in August 2018 for
£60,000.
On 31 January 2024 there was a 1 for 3 rights issue at £25 per share. The market value
of the shares after the issue was £32.

Laurie did not take up the rights issue, but instead sold his rights nil paid on 4 February
2024 for £20,000.

MT Travel-VAT:

• MT Travel is registered for the purposes of VAT.

• MI Travel currently buys standard-rated marketing services from a UK supplier, who is VAT
registered.

• MT Travel can buy the same services from a supplier located in an overseas country, which is
not in the EU, where the rate of VAT is 12%.

Requirement

Explain the value added tax (VAT) effect of MT Travel purchasing the services from the overseas
supplier, rather than the UK supplier. (4 marks)

You should also assume that the UK remains a member of the European Union for the purpose of
this question.

7. Your manager has had a meeting with Bryce, the managing director of Grand Ltd. Extracts from
the email prepared by your manager following the meeting together with a schedule of
information from Bryce, are set out in exhibits
Extract from the email from your manager- dated 3 September 2022

Grand Ltd group of companies

Grand Ltd has two wholly owned subsidiaries, Colca Ltd and Sautso Ltd, and also owns shares in a
number of other companies. All of the group companies are UK resident trading companies, which
prepare accounts to 31 March each year. All supplies made by the group are subject to value added
tax (VAT) at the standard rate. Sautso Ltd has been a member of the Grand Ltd group for many years.

Sale of Colca Ltd

Grand Ltd purchased the whole of the ordinary share capital of Colca Ltd for £800,000 on 1
November 2015. The value of Colca Ltd has fallen and the company is to be sold on 1 December
2022. Two separate offers have been received: offer A and offer B

Offer A - in respect of a sale of the company's shares

• The purchaser will pay £730,000 for the whole of the ordinary share capital of Colca Ltd. This
amount will be reduced by any tax liabilities payable by Colca Ltd arising as a result of the
company being sold.

Offer B- in respect of a sale of the company's trade and assets

• The purchaser will pay £695,000 for the trade and assets of Colca Ltd.

Colca Ltd- expected asset values on 1 December 2022

 £

Oribi building 410,000

Atuel building 230,000

Items of machinery 25,000

Net current assets

30,000
(at cost)

695,000

There is further information in respect of these assets in the attached schedule from Bryce.

The value of Colca Ltd's goodwill is negligible and should be ignored for the purposes of this work.

Schedule of information from Bryce- dated 3 September 2022

Schedule of information from Bryce- dated 3 September 2022

Colca Ltd- details of assets

Colca Ltd uses both the Oribi and Atuel buildings in its trade.

Oribi Atuel
Machinery
building building

1February 1 April
Date of purchase N/A
2016 2020

£320,000 £255,000
Purchase cost (note 3)
(note 1) (note 2)

Value added tax

option to tax No No N/A
made?

Notes

1.On 1 December 2015, Colca Ltd sold a machine for £74,000 resulting in a chargeable gain of
£17,000. This gain was rolled over against the purchase of the Orib i building.

2.Colca Ltd purchased the Atuel building from Sautso Ltd for £255,000, its market value at that time.
As Colca Ltd and Sautso Ltd are both 100% subsidiaries of Grand Ltd, the transfer of the building took
place at no gain, no loss.

Sautso Ltd had purchased the Atuel building, new and unused, for £340,000 on 1 January 2020.
Structures and buildings allowances have not been claimed by Sautso Ltd or Colca Ltd.

3. All of the items of machinery are moveable. The sale of the machinery will give rise to a balancing
charge of £12,100.
Most of the items of machinery are worth less than their original cost. However, small number of
items are particularly specialized, such that their current market value exceeds their original cost.

Requirement

offer B-value added tax (VAT)(7 marks)

In respect of offer B: an explanation as to whether or not Colca Ltd should charge VAT on the sale of
its buildings and/or its machinery.

8. WANDA

Your manager has had a meeting with Wanda, a client of your firm. Extracts from the memorandum
prepared by your manager following the meeting together with an email detailing the work he
requires you to do, are set out in exhibits.

Extracts from the memorandum prepared by your manager -dated 3 December 2021

Background

Wanda intends to start a new business, KS, selling children's clothes. This business will be partly
financed by an inheritance which Wanda will receive following the recent death of her mother.
Wanda's husband, Roth, will also be involved in the business.

Wanda has not been employed since 31 December 2015 and has not received any taxable income
since that date. Roth is employed and earns a gross salary of £92,000 per year. This salary is his only
source of income. Wanda and Roth have not made any chargeable disposals for the purposes of
capital gains tax and will not make any in the tax year 2022/23.

Wanda's inheritances and gift from her parents

On 1 February 2016, Wanda's father, Pavel, died. He left £160,000 to Wanda and the residue of his
estate to his wife, Lucy (Wanda's mother). The residue of Pavel's estate was valued at £720,000 and
included the family home. Pavel had not made any gifts during his life

On 1 April 2016, Lucy gave Wanda £180,000 in cash. This was the only lifetime gift Lucy made.

On 1 November 2021, Lucy died. Wanda Inherited the whole of Lucy's estate, which was valued at
£850,000. The estate consisted of the family home (valued at £340,000), together with furniture,
cash and quoted shares (valued in total at £510,000).

Wanda's new business-KS

Wanda intends to begin trading on 1 April 2022. The business will be operated either:

• by Wanda and Roth in partnership; or

• by a limited company owned 70% by Wanda and 30% by Roth.

The turnover of the business for the year ending 31 March 2023 is expected to be £48,000.

Budgeted profitability of KS

In its first year of trading the business will make either a small profit or, possibly, a loss (of no more
than £20,000). However, once the business is fully operational, it is budgeted to make a tax adjusted
trading profit of £100,000 per year. This figure is before deducting any salaries paid to Wanda and
Roth.
The manner in which the profits will be extracted from the business depends on whether the
business is operated as a partnership or as a limited company. The two alternatives are summarised
below.

Partnership

Wanda Roth

Salary £14,000 £0

Profit share
60% 40%
percentage

Dividend N/A N/A

Company

Wanda Roth

Salary £42,000 £32,000

Profit share
N/A N/A
percentage

Dividend £14,000 £6,000

In addition to advising her on the tax cost of the alternative business structures, Wanda has asked us
to advise her on the relief available in respect of the possible trading loss in the first year of trading
and on the choice of 31 March as the accounting date where the business is operated as a
partnership.

Income tax refund

Wanda has received an unexpected refund of income tax from HM Revenue and Customs

Requirement

Voluntary registration for value added tax (VAT)(4 marks)

The sale of children's clothes is a zero-rated supply for the purposes of VAT. With this is mind,
explain:

• why the business would be permitted to register for VAT from 1 April 2022; and

• the advantages and disadvantages of doing so.

9. Your manager has sent you an email, with two attachments, concerning the EEt Ltd group. The
attachment consists of extracts from the group's files and a schedule of information from the
group finance director. The email details the work your manager requires you to do.

Attachment 1: Eet Ltd group-extracts from the group's files

All seven companies are UK resident trading companies.

Fip Ltd was incorporated and began trading on 1 December 2022. There have been no other changes
to the ownership of the group for many years.

Attachment 2: Schedule of information from the group finance director- dated 3 December 2022

Budgeted results for the year ending 31 March 2022 (as at 3 December 2022)

Eet Fip Gos Han Ide Jek Kid

Ltd Ltd Ltd Ltd Ltd Ltd Ltd

£000 £000 £000 £000 £000 £000 £000

Trading
430 240 440 410 395 530 340
profit

Chargeable
gain(notes 1 0 110 130 0 85 90 220
and 2)

Taxable
430 350 570 410 480 620 560
totalprofits

Corporation
tax paid to 19 0 31 23 18 32 24
date

Notes:

1) On 2 December 2022, Han Ltd sold the Po building. This sale resulted in a capital loss of £80,000.
This loss is not reflected in the figures above.

2) Rollover relief will not be claimed in respect of any of the group companies chargeable gains.

Loj Co
Eet Ltd is planning to purchase 60% of the ordinary share capital of Loj Co in April 2023.

Loj Co has been a wholly-owned subsidiary of Typ Co since 1 January 2012. Both Loj Co and Typ Co
are, and will continue to be, resident in the country of Shalia.

Jek Ltd - sale of the Mar building

Jek Ltd purchased the Mar building on 1 June 2016 for £450,000 plus value added tax (VAT) of
£90,000. In the year ended 31 March 2017, and in all subsequent years, 72% of this building was
used to make taxable supplies and 28% was used to make exempt supplies. The capital goods
scheme applies to the Mar building.

Jek Ltd will sell the Mar building during the year ending 31 March 2024 for £700,000.

Requirement

Jek Ltd- value added tax (VAT) on the sale of the Mar building (6 marks)

The group finance director is considering whether or not to opt to tax the Mar building. In respect of
the two alternatives:

• explain whether or not VAT should be charged on the sale of the building in March 2024

• calculate the final VAT adjustment (i.e. only the sale adjustment) which will be made under
the capital goods scheme.