(ii) Explain the income tax (IT), national insurance (NIC) and capital gains tax (CGT) implications arising on

the grant to and exercise by an employee of an option to buy shares in an unapproved share option

scheme and on the subsequent sale of these shares. State clearly how these would apply in Henry’s

case. (8 marks)

(ii) Calculate Paul’s tax liability if he exercises the share options in Memphis plc and subsequently sells the

shares in Memphis plc immediately, as proposed, and show how he may reduce this tax liability.

(4 marks)

(iii) assesses TSC in terms of financial performance, competitiveness, service quality, resource utilisation,

flexibility and innovation and discusses the interrelationships between these terms, incorporating

examples from within TSC; and (10 marks)

(c) Assuming that Joanne registers for value added tax (VAT) with effect from 1 April 2006:

(i) Calculate her income tax (IT) and capital gains tax (CGT) payable for the year of assessment 2005/06.

You are not required to calculate any national insurance liabilities in this sub-part. (6 marks)

3 Assume that today’s date is 10 May 2005.

You have recently been approached by Fred Flop. Fred is the managing director and 100% shareholder of Flop

Limited, a UK trading company with one wholly owned subsidiary. Both companies have a 31 March year-end.

Fred informs you that he is experiencing problems in dealing with aspects of his company tax returns. The company

accountant has been unable to keep up to date with matters, and Fred also believes that mistakes have been made

in the past. Fred needs assistance and tells you the following:

Year ended 31 March 2003

The corporation tax return for this period was not submitted until 2 November 2004, and corporation tax of ￡123,500

was paid at the same time. Profits chargeable to corporation tax were stated as ￡704,300.

A formal notice (CT203) requiring the company to file a self-assessment corporation tax return (dated 1 February

2004) had been received by the company on 4 February 2004.

A detailed examination of the accounts and tax computation has revealed the following.

– Computer equipment totalling ￡50,000 had been expensed in the accounts. No adjustment has been made in

the tax computation.

– A provision of ￡10,000 was made for repairs, but there is no evidence of supporting information.

– Legal and professional fees totalling ￡46,500 were allowed in full without any explanation. Fred has

subsequently produced the following analysis:

Analysis of legal & professional fees

￡

Legal fees on a failed attempt to secure a trading loan 15,000

Debt collection agency fees 12,800

Obtaining planning consent for building extension 15,700

Accountant’s fees for preparing accounts 14,000

Legal fees relating to a trade dispute 19,000

– No enquiry has yet been raised by the Inland Revenue.

– Flop Ltd was a large company in terms of the Companies Act definition for the year in question.

– Flop Ltd had taxable profits of ￡595,000 in the previous year.

Year ended 31 March 2004

The corporation tax return has not yet been submitted for this year. The accounts are late and nearing completion,

with only one change still to be made. A notice requiring the company to file a self-assessment corporation tax return

(CT203) dated 27 July 2004 was received on 1 August 2004. No corporation tax has yet been paid.

1 – The computation currently shows profits chargeable to corporation tax of ￡815,000 before accounting

adjustments, and any adjustments for prior years.

– A company owing Flop Ltd ￡50,000 (excluding VAT) has gone into liquidation, and it is unlikely that any of this

money will be paid. The money has been outstanding since 3 September 2003, and the bad debt will need to

be included in the accounts.

1 Fred also believes there are problems in relation to the company’s VAT administration. The VAT return for the quarter

ended 31 March 2005 was submitted on 5 May 2005, and VAT of ￡24,000 was paid at the same time. The previous

return to 31 December 2004 was also submitted late. In addition, no account has been made for the VAT on the bad

debt. The VAT return for 30 June 2005 may also be late. Fred estimates the VAT liability for that quarter to be ￡8,250.

Required:

(a) (i) Calculate the revised corporation tax (CT) payable for the accounting periods ending 31 March 2003

and 2004 respectively. Your answer should include an explanation of the adjustments made as a result

of the information which has now come to light. (7 marks)

(ii) State, giving reasons, the due payment date of the corporation tax (CT) and the filing date of the

corporation tax return for each period, and identify any interest and penalties which may have arisen to

date. (8 marks)

(a) Kayte operates in the shipping industry and owns vessels for transportation. In June 2014, Kayte acquired Ceemone whose assets were entirely investments in small companies. The small companies each owned and operated one or two shipping vessels. There were no employees in Ceemone or the small companies. At the acquisition date, there were only limited activities related to managing the small companies as most activities were outsourced. All the personnel in Ceemone were employed by a separate management company. The companies owning the vessels had an agreement with the management company concerning assistance with chartering, purchase and sale of vessels and any technical management. The management company used a shipbroker to assist with some of these tasks.

Kayte accounted for the investment in Ceemone as an asset acquisition. The consideration paid and related transaction costs were recognised as the acquisition price of the vessels. Kayte argued that the vessels were only passive investments and that Ceemone did not own a business consisting of processes, since all activities regarding commercial and technical management were outsourced to the management company. As a result, the acquisition was accounted for as if the vessels were acquired on a stand-alone basis.

Additionally, Kayte had borrowed heavily to purchase some vessels and was struggling to meet its debt obligations. Kayte had sold some of these vessels but in some cases, the bank did not wish Kayte to sell the vessel. In these cases, the vessel was transferred to a new entity, in which the bank retained a variable interest based upon the level of the indebtedness. Kayte’s directors felt that the entity was a subsidiary of the bank and are uncertain as to whether they have complied with the requirements of IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements as regards the above transactions. (12 marks)

(b) Kayte’s vessels constitute a material part of its total assets. The economic life of the vessels is estimated to be 30 years, but the useful life of some of the vessels is only 10 years because Kayte’s policy is to sell these vessels when they are 10 years old. Kayte estimated the residual value of these vessels at sale to be half of acquisition cost and this value was assumed to be constant during their useful life. Kayte argued that the estimates of residual value used were conservative in view of an immature market with a high degree of uncertainty and presented documentation which indicated some vessels were being sold for a price considerably above carrying value. Broker valuations of the residual value were considerably higher than those used by Kayte. Kayte argued against broker valuations on the grounds that it would result in greater volatility in reporting.

Kayte keeps some of the vessels for the whole 30 years and these vessels are required to undergo an engine overhaul in dry dock every 10 years to restore their service potential, hence the reason why some of the vessels are sold. The residual value of the vessels kept for 30 years is based upon the steel value of the vessel at the end of its economic life. At the time of purchase, the service potential which will be required to be restored by the engine overhaul is measured based on the cost as if it had been performed at the time of the purchase of the vessel. In the current period, one of the vessels had to have its engine totally replaced after only eight years. Normally, engines last for the 30-year economic life if overhauled every 10 years. Additionally, one type of vessel was having its funnels replaced after 15 years but the funnels had not been depreciated separately. (11 marks)

Required:

Discuss the accounting treatment of the above transactions in the financial statements of Kayte.

Note: The mark allocation is shown against each of the elements above.

Professional marks will be awarded in question 3 for clarity and quality of presentation. (2 marks)

6 Certain practices have developed that threaten to damage the integrity and objectivity of professional accountants and

the reputation of the accounting profession.

Required:

Explain the following practices and associated ethical risks and discuss whether current ethical guidance is

sufficient:

(a) ‘lowballing’; (5 marks)