ACCA ATX ^UK Syllabus A1. Income tax - Lump sum receipts - Past Papers ^{2 / 3}

Demeter has recently taken up a new employment and is seeking advice on the tax treatment of certain components of his remuneration package.

Demeter:
– Is UK resident and domiciled.

– Commenced employment with Poseidon Ltd on 1 December 2018.

– Will have no source of income, other than from Poseidon Ltd, in all relevant future tax years.

– Will be a higher rate taxpayer in all relevant future tax years.

– Has relocated to London, from Manchester, a city more than 150 miles north of London, to take up this employment.

Remuneration package from Poseidon Ltd:
– Demeter will receive an annual salary of £130,000.

– On 1 December 2018, Poseidon Ltd made a one-off lump sum payment of £20,000 to Demeter as an inducement to take up employment with the company.

– Poseidon Ltd paid Demeter £5,000 towards his costs of relocating to London. The company is also paying him £1,500 each month for four months from 1 December 2018 towards renting accommodation in London until he purchases a new house on 1 April 2019.

Relocation to London:
– Demeter incurred costs in relation to his relocation to London of £6,000. This amount includes estate agent fees of £2,800 in connection with the sale of his house in Manchester on 31 October 2018.

– Demeter signed a four-month lease for a flat in London from 1 December 2018 at a monthly rental of £1,700.

Required:
(a) Explain the extent to which the receipt of the £20,000 lump sum inducement payment, and the relocation package in relation to Demeter’s move to London, will give rise to taxable employment income for him.  (5 marks)

Your client, Jessica, has requested advice in relation to the tax liability arising on a redundancy payment.

Jessica:
– Is resident and domiciled in the UK.
– Was employed by Berens Ltd up to 31 March 2018, when she was made redundant.
– Will become a partner in the Langley Partnership on 1 July 2018.
– Has never made any disposals for capital gains tax (CGT) purposes.

Jessica – income from Berens Ltd:
– Jessica received an annual salary from Berens Ltd of £145,000 each year from the tax year 2015/16.
– From 6 April 2017, Jessica was provided with a new company laptop computer, which cost Berens Ltd £850.
Jessica had significant private use of this laptop computer.

Jessica – other income:
– Prior to the tax year 2017/18 Jessica had no other source of income.
– Starting from the tax year 2017/18, Jessica receives rental income of £6,000 each tax year.

Jessica – redundancy package from Berens Ltd:
– The package, received on 31 March 2018, included a statutory redundancy payment of £18,000 and an ex‐gratia payment of £32,000.
– As part of the package, Berens Ltd also allowed Jessica to keep the laptop computer, which had a market value of £540 on 31 March 2018.

Required:
(a) Explain, with supporting calculations, the taxable amount of the redundancy package received from Berens Ltd on 31 March 2018, and calculate the income tax payable on it by Jessica. (5 marks)

Jordi is a director and shareholder of Traiste Ltd. He has asked for your advice in connection with the forthcoming redundancy of an employee.

Traiste Ltd:
– Is a UK resident unquoted trading company.
– Has two shareholders, Jordi and Kat, who each own 50% of the 1,000 £1 shares in issue.

Traiste Ltd – proposed redundancy package for an employee:
– An employee, Esta, will be made redundant on 30 June 2017.
– Esta will receive statutory redundancy pay of £12,000 and an ex-gratia payment of £36,000 from Traiste Ltd.
– Traiste Ltd will continue to lease a motor car for Esta’s personal use until 31 December 2017, although she has no contractual entitlement to this.
– The monthly lease payments are £420.
– The motor car has CO2 emissions of 178 grams per kilometre and is petrol powered.
– The motor car is currently worth £10,300. Its list price when new was £18,400.

Required:
(a) (i) Explain briefly the income tax implications for Esta in respect of each of the three components of the proposed redundancy package.

(ii) Calculate the corporation tax deductions available to Traiste Ltd in respect of the redundancy package provided to Esta. (4 marks)

Bex has recently left employment and entered into a business partnership with Amy. Bex requires advice in respect of a loan to the partnership, the calculation of her share of profits and the tax treatment of her redundancy payment.

Bex:
– Is resident and domiciled in the UK.
– Received an annual salary of £120,000 from her former employer, Cape Ltd.
– Was made redundant by Cape Ltd on 30 September 2015.
– Joined Amy, a sole trader, to form a partnership on 1 January 2016.
– Has no other source of income.

Bex – redundancy package from Cape Ltd:
– The package comprised a £22,000 statutory redundancy payment and an additional ex-gratia payment of £48,000.
– Bex also received three months’ salary in lieu of notice, as specified in her contract of employment.

Required:
(b) Explain the income tax implications for Bex of the receipt of the redundancy package from Cape Ltd and calculate her total income tax liability for the tax year 2015/16. (6 marks)

Your firm has been asked to provide advice to Pita plc in respect of a redundancy package provided to an employee.

Issues – Pita plc:
– Has provided a redundancy package to Narn, an employee.

Redundancy package provided to Narn on 31 March 2014:
– Statutory redundancy of £8,100 paid on 31 March 2014.
– An additional payment of £26,000 made on 31 March 2014.
– Continued use of her company car until 30 September 2014.
– Pita plc paid £18,400 for Narn’s diesel powered car; it had a list price of £19,500.
– The car has CO2 emissions of 134 grams per kilometre.

Required:
(c) Explain, with supporting calculations, the taxable amounts arising in respect of the redundancy package provided to Narn. (5 marks)