ACCA ATX Exam 1

(a) Accepting Kofi as a new client

Before we act, we must carry out client due diligence under the money laundering regulations: verify Kofi's identity and home address from original documents, and understand the nature of his business. Exhibit 1 gives two warning signs that need further work. First, the 45,000 of banknotes: we must establish the source of funds (for example bank records in Ghana, gift letters from family members and evidence of how the cash entered the UK) before we can be comfortable that it is not the proceeds of undeclared takings.

Second, the dispute with Linwood about cash takings. Professional etiquette requires us to write to Linwood, with Kofi's permission, asking for professional clearance, that is whether there is any professional reason why we should not accept the appointment. Kofi's request that we do not contact them is a concern: if he refuses permission, we should decline the appointment.

If the clearance reply or our own work suggests that cash takings have been left out of his returns, that would be tax evasion and the tax saved would be criminal property, so we must report our suspicion to the firm's money laundering reporting officer (MLRO) and must not tell Kofi that a report has been made.

Only when these checks are satisfactory should we accept, and we must issue a letter of engagement setting out the scope of our work, our fees and both parties' responsibilities before starting any work, despite Kofi's wish for us to begin immediately.

📋 Objective: 8.5 (Ethical and professional issues in tax advice (C5))

(b) Capital gains tax on moving the business into BCL

Gains arising. Goodwill 360,000 − nil = 360,000. Workshop 280,000 − 130,000 = 150,000. The machines are sold for less than cost, but they have qualified for capital allowances, so no loss is allowable; inventory and receivables are not chargeable assets. Total gains 360,000 + 150,000 = 510,000.

Option A — all assets for shares. Because the whole business is transferred as a going concern, with all its assets other than cash, wholly in exchange for shares, incorporation relief applies automatically. As all the consideration is shares, the whole 510,000 is deducted from the cost of the BCL shares, so no capital gains tax is payable now. Value of the shares = assets transferred 360,000 + 280,000 + 40,000 + 25,000 + 15,000 = 720,000; base cost of Kofi's shares 720,000 − 510,000 = 210,000. BCL acquires the workshop from a connected person, so stamp duty land tax is charged on its market value: 0% on 150,000 + 2% on 100,000 = 2,000 + 5% on 30,000 = 1,500, a total of 3,500, payable by BCL within 14 days.

Kofi could instead elect to disapply incorporation relief (by 31 January 2029). Business asset disposal relief would then cover the workshop gain, since he has owned the business for more than two years, but not the goodwill gain, because goodwill transferred to a close company in which he holds 5% or more of the shares (here 100%) is excluded from the relief. The workshop gain uses his basic rate band first, so the goodwill is taxed at 24%: 150,000 × 14% = 21,000 + (360,000 − 3,000) × 24% = 85,680, a total of 106,680 payable by 31 January 2027, in exchange for a full 720,000 base cost.

Option B — keep the workshop. Incorporation relief is not available because not all the assets are transferred. Instead, Kofi can make a gift holdover claim on the goodwill, which is a business asset used in his trade; as BCL is a company, only Kofi needs to sign the claim. The whole gain of 360,000 is held over, so BCL's base cost of the goodwill becomes 360,000 − 360,000 = nil and no tax is payable now. The machines, inventory and receivables sold for 80,000 produce no gain, and Kofi can draw the 80,000 from his loan account later without further tax. His shares cost only 100. If the workshop is sold later together with at least 5% of BCL, it could qualify as an associated disposal for business asset disposal relief, but the relief is restricted because BCL pays a market rent; the rent will also be taxable property income for Kofi.

Conclusion. Neither option creates tax now. Option A gives Kofi a share base cost of 210,000 but costs 3,500 of SDLT and puts the workshop inside BCL. Option B avoids SDLT, keeps the workshop outside BCL, where it is protected from BCL's creditors, and allows 80,000 to be drawn tax free, but leaves Kofi with a base cost of only 100. On balance Option B is recommended, subject to the loss relief point in task (c). The 360,000 goodwill figure is Kofi's own estimate; HMRC will challenge it if it is overstated, so an independent valuation should be obtained before either route is used.

Summary for Kofi: no capital gains tax arises under either option; Option B saves SDLT and keeps the workshop personal.

📋 Objective: 2.7 (Further reliefs (A2g))

(c) Relief for the 2025/26 trading loss of 38,000

Current year claim (2025/26). A claim against total income must be set against the whole of Kofi's income of 1,500, which is already covered by his personal allowance, so the allowance would be wasted and the claim saves no tax.

Prior year claim (2024/25) or terminal loss relief. Kofi can set the loss against his total income of 2024/25. Because the trade ceases on 31 March 2026, terminal loss relief would also allow the loss of the final 12 months to be carried back against trading profits of the final year and the three previous years, latest first; here both claims use the same 2024/25 trading profit, so the result is the same.

2024/25 income tax before the claim: 64,000 − 12,570 = 51,430; 37,700 × 20% = 7,540 + 13,730 × 40% = 5,492, total 13,032. After the claim: 64,000 − 38,000 = 26,000 − 12,570 = 13,430 × 20% = 2,686. Saving 13,032 − 2,686 = 10,346, repaid by HMRC once the claim is made (deadline 31 January 2028 for the prior year claim).

Carry forward against income from BCL. Because the business is transferred to a company wholly or mainly in exchange for shares (Option A), the loss can be carried forward and set against Kofi's income from BCL, first his salary and then his dividends, for as long as he keeps the shares. 2026/27 income tax without relief: salary 12,570 covered by the personal allowance; dividends 500 × 0% + 37,200 × 8.75% = 3,255 + 12,300 × 33.75% = 4,151, total 7,406. With relief: 38,000 is set against the salary 12,570 and dividends 25,430, leaving dividends of 24,570; after the personal allowance taxable dividends are 12,000: 500 × 0% + 11,500 × 8.75% = 1,006. Saving 7,406 − 1,006 = 6,400. This relief is not available under Option B, because the goodwill is given away and the other assets are paid for through a loan account, so the consideration is not mainly shares.

Conclusion. The prior year claim saves 10,346, which is 3,946 more than carrying the loss forward against BCL income (6,400), and gives a repayment more than a year earlier, which helps BCL's cash position at start-up. It also works under either incorporation option, so the choice in task (b) does not depend on the loss. The loss figure comes from draft accounts that are not yet finalised; the claim should be based on the final adjusted figure.

📋 Objective: 1.4 (Further self-employment income (A1d))

(d) VAT on the transfer to BCL

A sale of business assets is normally a taxable supply, but the transfer of a business as a going concern (TOGC) is outside the scope of VAT, so Kofi charges no VAT, provided that: the business is transferred as a going concern; BCL carries on the same kind of business with no significant break; and BCL is registered, or required to register, for VAT from the date of transfer.

The workshop needs extra care. Kofi opted to tax it, so it can only be included in the TOGC if BCL also exercises an option to tax the building and notifies HMRC before 31 March 2026, and confirms the option will not be disapplied. Otherwise VAT at 20% must be charged on the workshop.

VAT at stake if the conditions are missed. Chocolate bars and truffles are confectionery, so the inventory is standard-rated, not zero-rated food. Option A: (360,000 goodwill + 280,000 workshop + 40,000 machines + 25,000 inventory) × 20% = 141,000. Option B: the goodwill is given to BCL for no consideration. Goodwill is a supply of services, and services provided for no consideration are not a supply for VAT (the deemed supply rule for business gifts applies only to goods, and the goodwill is not put to private use), so no VAT would be due on it. VAT would be charged only on the machines and inventory sold for 65,000: (40,000 + 25,000) × 20% = 13,000. The receivables are not a taxable supply. Even though BCL could recover the VAT, it would have to find the cash first.

Registration. Kofi and BCL can apply on form VAT68 for BCL to take over Kofi's registration number; BCL then also takes on any past VAT errors and liabilities of the sole trade, so a separate registration for BCL is usually safer. Kofi must pass his VAT records to BCL in either case.

Option B — the retained workshop. The rent of 24,000 a year is standard-rated because of the option to tax, and BCL can recover the VAT. If Kofi cancelled his registration, he would have to account for output tax on the workshop he still owns, on which input tax was recovered: 280,000 × 20% = 56,000. Because he will still be making taxable supplies of rent, he can remain registered voluntarily and avoid this charge.

Cash flow. Getting the TOGC conditions right avoids BCL paying 141,000 or 13,000 of VAT up front and waiting for repayment. We should obtain written confirmation that BCL's registration and option to tax are in place before 31 March 2026.

Summary for Kofi: no VAT is due on the transfer if the TOGC conditions are met, and under Option B he should stay registered for the rent.

📋 Objective: 6.1 (Value added tax (A6a))

(a) Branch or subsidiary — corporation tax for the first two years

Year ending 31 March 2027 (Mombasa loss 30,000). Branch: the loss of a branch is part of KFL's own trading result, so it reduces KFL's profits: 160,000 − 30,000 = 130,000. KFL has no associated companies, so the limits are 50,000 and 250,000: corporation tax 130,000 × 25% = 32,500 − 3/200 × (250,000 − 130,000) = 1,800, giving 30,700. Subsidiary: KFK's loss stays in Kenya (a non-UK resident company cannot surrender losses to KFL), and KFK is an associated company of KFL even though it is not UK resident. The limits are divided by 2, to 25,000 and 125,000, so KFL's 160,000 is taxed at the main rate: 160,000 × 25% = 40,000.

Year ending 31 March 2028 (Mombasa profit 60,000). Branch: taxable total profits 160,000 + 60,000 = 220,000; corporation tax 220,000 × 25% = 55,000 − 3/200 × 30,000 = 450, giving 54,550. Double tax relief is the lower of the Kenyan tax (9,000) and the UK corporation tax on the branch profit at KFL's average rate: 54,550 × 60,000 / 220,000 = 14,877 (using the full 25% rate would overstate it at 15,000). Relief is 9,000, so UK corporation tax payable is 54,550 − 9,000 = 45,550. Subsidiary: KFL pays 40,000; KFK's profit is taxed only in Kenya and dividends from KFK are exempt in the UK.

Comparison over two years (UK and Kenyan tax): branch 30,700 + 45,550 + 9,000 = 85,250; subsidiary 40,000 + 40,000 + 9,000 = 89,000. The branch saves 3,750, because the first-year loss gets immediate UK relief and there is no associated company; from the second year the branch costs more each year because the UK taxes the branch profit with credit only for the lower Kenyan tax.

Conclusion: a branch is recommended at the start. KFK dividends could also suffer Kenyan withholding tax, which a branch avoids, and the legal, banking and licensing costs of a Kenyan company should be weighed as well.

📋 Objective: 4.4 (Overseas aspects and double tax relief (A4d))

(b) Taking the branch profits out of UK tax

KFL can make an election for its overseas branch profits to be exempt from UK corporation tax. The election is irrevocable once it takes effect, it applies to all of KFL's overseas permanent establishments (not just Mombasa), and it applies from the start of the accounting period after the one in which it is made, so to cover the year ending 31 March 2029 it must be made by 31 March 2028. Once it applies, branch losses no longer reduce KFL's UK profits. If the branches' results over the previous six years show a net loss, profits equal to that loss stay taxable before the exemption applies; here the net result for the six years is a profit of 60,000 − 30,000 = 30,000, so the exemption would apply in full.

Year ending 31 March 2029 without the election. Taxable total profits 160,000 + 200,000 = 360,000, all at 25% = 90,000. UK tax on the branch profit 200,000 × 25% = 50,000; Kenyan tax 60,000; double tax relief is the lower figure, 50,000, leaving 10,000 of Kenyan tax unrelieved. Corporation tax payable 90,000 − 50,000 = 40,000.

With the election. Only the UK profit of 160,000 is taxed, and a branch is not a company, so there is still no associated company: 160,000 × 25% = 40,000 − 3/200 × 90,000 = 1,350, giving 38,650.

The election saves 40,000 − 38,650 = 1,350 a year at these figures. The saving is small because Kenya's 30% rate is above the UK rate, so double tax relief already removes UK tax on the branch profit. Njeri's view that the branch is best in every year is therefore only partly right: the first-year loss relief would not have been available with the election, and any future losses in Mombasa or in any later overseas branch would be unrelieved in the UK.

📋 Objective: 4.5 (Groups and consortia (A4e))

(c) If KFK is used — residence and anti-avoidance

KFK is incorporated in Kenya, so it is not UK resident by incorporation. However, a company is also UK resident if its central management and control is exercised in the UK. Njeri plans to run KFK from Felixstowe and hold its board meetings there, so KFK could be UK resident, with all its profits taxed in the UK and Kenyan tax relieved only by double tax relief or the treaty tie-breaker. Board meetings and key decisions should be held in Mombasa by locally based directors.

If KFK is non-UK resident, it will be a controlled foreign company because it is controlled from the UK by KFL. A CFC charge arises only if its profits pass through the gateway (broadly profits from UK-managed activities, or diverted from the UK) and no exemption applies. KFK should be exempt: under the low profits exemption its accounting profits are below 500,000 (forecast at most 200,000), and under the tax exemption the Kenyan tax is at least 75% of the UK tax it would pay if UK resident: 200,000 × 25% = 50,000 × 75% = 37,500, compared with Kenyan tax of 60,000. A real trading operation in Mombasa run by local staff is also unlikely to pass the gateway.

If a charge did arise, the profits would be apportioned to KFL (which holds at least 25%) and taxed at 25%, with credit for the Kenyan tax.

📋 Objective: 4.4 (Overseas aspects and double tax relief (A4d))

(a) Lifetime gifts if Chipo dies on 30 June 2029

Banda Creamery shares (10 July 2023). Unquoted trading company shares normally qualify for 100% business property relief, but Chipo owned these for only 16 months (March 2022 to July 2023), less than the two years required, so no relief is due. The potentially exempt transfer is 260,000 − 3,000 (2023/24) − 3,000 (2022/23) annual exemptions = 254,000. It becomes chargeable because Chipo dies within seven years, but it is covered by the nil rate band at death: Chipo's own 325,000 plus 100% of Mulenga's unused nil rate band, 325,000, a total of 650,000. No IHT is payable, but the gift uses 254,000, leaving 650,000 − 254,000 = 396,000.

Farm (1 March 2026). Agricultural property relief at 100% applies to the agricultural value, 900,000, because Chipo has occupied the land for agricultural purposes for at least two years. The rest of the value, 500,000 (the development hope value), does not qualify for agricultural relief, but the farm is part of Chipo's farming business, owned for more than two years, so business property relief at 100% covers the 500,000. The transfer of value is nil and no IHT arises in lifetime or on death, provided that Chanda still owns the farm at Chipo's death and it still qualifies.

If Chanda sells the farm in 2028. Both reliefs are withdrawn (clawback) on Chipo's death unless Chanda reinvests the whole proceeds in replacement qualifying property within three years. The gift would then be taxed as: 1,400,000 − 6,000 annual exemptions (2025/26 and 2024/25, not otherwise used) = 1,394,000 − 396,000 nil rate band = 998,000 × 40% = 399,200. Death is between three and four years after the gift, so taper relief of 20% applies: 399,200 × 80% = 319,360, payable by Chanda by 31 December 2029. This would also leave no nil rate band for Chipo's estate.

We need further information from Chanda about his plans and whether he would buy replacement farmland. Chipo could also consider a seven-year term life assurance policy, written in trust, to fund the potential liability.

📋 Objective: 3.3 (Valuation, BPR and APR (A3c))

(b) Inheritance tax on Chipo's estate at 30 June 2029

Estate: home 450,000 + quoted shares 1,900,000 + cash 250,000 = 2,600,000.

Residence nil rate band. The home passes to her grandchildren, who are direct descendants, so the residence nil rate band is available: her own 175,000 plus 100% of Mulenga's unused band, 175,000, total 350,000. Because the estate exceeds 2,000,000, it is tapered by 1 for every 2 of excess: (2,600,000 − 2,000,000) / 2 = 300,000. Residence nil rate band 350,000 − 300,000 = 50,000.

Nil rate band. Chipo's nil rate band including Mulenga's transferred band is 650,000, of which 254,000 has been used by the gift of shares to Mutale within seven years, leaving 396,000 (assuming Chanda still owns the farm).

Taxable estate 2,600,000 − 50,000 − 396,000 = 2,154,000; IHT 2,154,000 × 40% = 861,600, payable by the executors by 31 December 2029 (or on delivery of the account if earlier).

Planning. If Chipo reduced her estate to 2,000,000 or less, for example by lifetime gifts of 600,000 of quoted shares, the full 350,000 residence nil rate band would be restored: an extra 300,000 × 40% = 120,000 saving in the estate, before any IHT on the gifts themselves if she died within seven years. The calculation relies on today's values, so the values of the home and the shares should be confirmed regularly, because a rise in the share portfolio would increase the taper.

📋 Objective: 3.4 (Lifetime and death liabilities (A3d))

(c) Proposed gift of 600,000 of quoted shares to a discretionary trust on 1 May 2026

A gift into a discretionary trust is a chargeable lifetime transfer, so IHT may be due at the time of the gift, not just on death. Annual exemptions for 2026/27 and 2025/26 (unused, because the farm gift was fully covered by relief) reduce it: 600,000 − 6,000 = 594,000.

In lifetime, only Chipo's own nil rate band of 325,000 is available (Mulenga's transferred band can only be used on her death), and the earlier gifts to Mutale and Chanda are potentially exempt transfers, so they are ignored while Chipo is alive. Taxable 594,000 − 325,000 = 269,000.

If the trustees pay the tax: 269,000 × 20% = 53,800, and they can sell some of the shares to fund it. If Chipo pays, the gift must be grossed up: 269,000 × 20/80 = 67,250, making a gross chargeable transfer of 661,250. The tax is due by 30 April 2027, the later of 30 April after the end of the tax year and six months after the end of the month of the gift. If Chipo died within seven years, further tax at 40% would be due, less the lifetime tax paid.

📋 Objective: 3.1 (Inheritance tax brought forward from TX-UK (A3a))