(c) Explain the capital gains tax (CGT) and income tax (IT) issues Paul and Sharon should consider in deciding

which form. of trust to set up for Gisella and Gavin. You are not required to consider inheritance tax (IHT) or

stamp duty land tax (SDLT) issues. (10 marks)

You should assume that the tax rates and allowances for the tax year 2005/06 apply throughout this question.

(ii) Analyse the effect of delaying the sale of the business of the Stiletto Partnership to Razor Ltd until

30 April 2007 on Clint’s income tax and national insurance position.

You are not required to prepare detailed calculations of his income tax or national insurance liabilities.

(4 marks)

(b) Peter, one of Linden Limited’s non-executive directors, having lived and worked in the UK for most of his adult

life, sold his home near London on 22 March 2006 and, together with his wife (a French citizen), moved to live

in a villa which she owns in the south of France. Peter is now demanding that the tax deducted from his director’s

fees, for the board meetings held on 18 April and 16 May 2006, be refunded, on the grounds that, as he is no

longer resident in the UK, he is no longer liable to UK income tax. All of the company’s board meetings are held

at its offices in Cambridge.

Despite Peter’s assurance that none of the other companies of which he is a director has disputed his change of

tax status, Damian is uncertain whether he should make the refunds requested. However, as Peter is a friend of

the company’s founder, Linden Limited’s managing director is urging him to do so, stating that if the tax does

have to be paid, then Linden Limited could always bear the cost.

Required:

Advise Damian whether Peter is correct in his assertion regarding his tax position and in the case that there

is a UK tax liability the implications of the managing director’s suggestion. You are not required to consider

national insurance (NIC) issues. (4 marks)

(c) For commercial reasons, Damian believes that it would be sensible to place a new holding company, Bold plc,

over the existing company, Linden Limited. Bold plc would also be unquoted and would acquire the existing

Linden Limited shares in exchange for the issue of its own shares.

If the new structure is implemented, Bold plc will provide management services to Linden Limited, but the

amount that will be charged for these services is yet to be determined.

Required:

(i) State the capital gains tax (CGT) issues that Damian should be aware of before disposing of his shares

in Linden Limited to Bold plc. Your answer should include details of any conditions that will need to be

satisfied if an immediate charge to tax is to be avoided. (4 marks)

(b) Draft a report as at today’s date advising Cutlass Inc on its proposed activities. The report should cover the

following issues:

(i) The rate at which the profits of Cutlass Inc will be taxed. This section of the report should explain:

– the company’s residency position and what Ben and Amy would have to do in order for the company

to be regarded as resident in the UK under the double tax treaty;

– the meaning of the term ‘permanent establishment’ and the implications of Cutlass Inc having a

permanent establishment in Sharpenia;

– the rate at which the profits of Cutlass Inc will be taxed on the assumption that it is resident in the

UK under the double tax treaty and either does or does not have a permanent establishment in

Sharpenia. (9 marks)

3 Damian is the finance director of Linden Limited, a medium sized, unquoted, UK trading company, with a 31 July

year end. Damian personally owns 10% of the ordinary issued share capital of Linden Limited, for which he paid

￡10,000 in June 1998. He estimates that the current market value of Linden Limited is ￡9 million and that the

company will make taxable profits of ￡1·4 million in the forthcoming year to 31 July 2007.

(a) Damian believes that Linden Limited should conduct its activities in a socially responsible manner and to this

end has proposed that in future all cars purchased by the company should be low emission vehicles. The sales

director has stated that several of his staff, who are the main recipients of company cars, other than the directors,

are extremely unhappy with this proposal, perceiving it as downgrading their value and status.

The cars currently provided to the sales staff have a list price of ￡19,600, on which Linden Limited receives a

bulk purchase discount of 6% from the dealer, and a CO2 emission rate of 168 grams/kilometre. The company

pays for up to ￡400 of accessories, of the salesmen’s own choice to be fitted to the cars and all of the running

costs, including private petrol. The cars are replaced every three years and the ‘old’ cars are sold at auction,

because they are high mileage vehicles.

The low emission cars it is proposed to purchase will have the same list price as the current cars, but the dealer

is only prepared to offer a bulk discount of 5% on these vehicles. Damian does not propose to make any other

changes to Linden Limited’s company car policy or practice.

Required:

(i) Explain the tax consequences of the proposed move to low emission vehicles for both the individual

salesmen and Linden Limited, illustrating your answer by means of relevant calculations of the tax and

national insurance (NIC) savings arising. (9 marks)

(ii) The UK value added tax (VAT) implications for Razor Ltd of selling tools to and purchasing tools from

Cutlass Inc; (2 marks)

(iii) The extent to which Amy will be subject to income tax in the UK on her earnings in respect of duties

performed for Cutlass Inc and the travel costs paid for by that company. (5 marks)

Appropriateness of format and presentation of the report and the effectiveness with which its advice is

communicated. (2 marks)

Note:

You should assume that the income tax rates and allowances for the tax year 2006/07 and the corporation tax

rates and allowances for the financial year 2006 apply throughout this questio

(d) Advise Trent Limited of the consequences arising from the submission of the incorrect value added tax (VAT)

return, assuming that the company has previously had a good compliance record with regard to accounting

for VAT. (6 marks)

(ii) Assuming the new structure is implemented with effect from 1 August 2006, calculate the level of

management charge that should be made by Bold plc to Linden Limited for the year ended 31 July

2007, so as to minimise the group’s overall corporation tax (CT) liability for that year. (2 marks)