ACCA ATX — Advanced Taxation Practice Exam 3

SECTION A: STRATEGIC CASE STUDY

This question is worth 50 marks.

You are a tax manager in a firm of Chartered Certified Accountants. You have been asked to prepare a memorandum for the tax partner regarding a corporate client, Helios Renewables plc, and its Managing Director, Mr. Vance.

Helios Renewables plc is a UK-resident company specializing in solar panel manufacturing. The company is planning a major overseas expansion on 1 April 2027. It will acquire 100% of the ordinary share capital of Solaria Ltd, a company resident in Country Y, which has a headline corporate tax rate of 10%. Simultaneously, Helios will open an unincorporated branch in Country X, a non-EU jurisdiction with a corporate tax rate of 12%.

Mr. Vance will relocate to Country X on 6 April 2027 for a three-year secondment to manage the new branch. He will sell his UK home and purchase a property in Country X. He intends to sell a 5% shareholding in Helios Renewables plc in August 2028.

REQUIREMENTS:
Write a memorandum to the tax partner which addresses the following:

(a) Evaluate the UK corporation tax implications for Helios Renewables plc of operating via a foreign subsidiary (Solaria Ltd) compared to a foreign branch in Country X. Your evaluation must include the application of the Controlled Foreign Company (CFC) rules, Double Taxation Relief (DTR), and the foreign branch exemption election. (20 marks)

(b) Advise on the UK Value Added Tax (VAT) implications of management services that Helios Renewables plc will provide to Solaria Ltd, including the place of supply rules and any registration requirements in Country Y. (10 marks)

(c) Determine Mr. Vance's UK residence status for the tax year 2027/28 using the Statutory Residence Test, and advise on the UK Capital Gains Tax (CGT) implications of his planned share disposal in August 2028, assuming he returns to the UK in 2030. (15 marks)

(d) Professional marks will be awarded for the layout, logical flow, and clarity of the memorandum. (5 marks)

SECTION B: ADVISORY REPORT

This question is worth 25 marks.

You are a tax advisor preparing a report for Mrs. Thorne, aged 72, who owns 'Oakwood Farms', a large agricultural estate in the UK. She has operated the farm as a sole trader for 25 years.

Mrs. Thorne wishes to retire and transfer the entire farming business, including the farmhouse, agricultural land, and farm machinery, into a discretionary trust for the benefit of her three grandchildren. The transfer is scheduled for 1 May 2027.

The current market values are:

• Farmhouse (occupied by Mrs. Thorne for farming purposes): £850,000
• Agricultural land: £1,200,000
• Farm machinery: £300,000

Mrs. Thorne will move out of the farmhouse into a smaller town property and will not retain any benefit from the trust. She has made no previous lifetime gifts.

REQUIREMENTS:
Prepare a report for Mrs. Thorne advising on:

(a) The Inheritance Tax (IHT) implications of the transfer to the discretionary trust, specifically calculating the lifetime IHT payable (if any). You must explain the availability and application of Agricultural Property Relief (APR) and Business Property Relief (BPR) on the specific assets. (12 marks)

(b) The Capital Gains Tax (CGT) implications of the transfer, explaining how gift hold-over relief can be utilized to defer the CGT liability, and the interaction between this relief and the IHT treatment. (8 marks)

(c) The ongoing Income Tax treatment of the discretionary trust, including the rates of tax applicable to trust income and how distributions to the grandchildren will be taxed. (5 marks)

SECTION B: ADVISORY REPORT

This question is worth 25 marks.

You are a tax consultant advising Quantum AI Ltd, a UK-resident technology startup, and its founding director, Ms. Lin.

Quantum AI Ltd has spent £450,000 in the year ended 31 March 2027 on developing a new machine learning algorithm. Unfortunately, the project failed to achieve its technological objectives and was abandoned. £100,000 of this expenditure was paid to an unconnected UK subcontractor.

Ms. Lin owns 30% of the ordinary share capital of Quantum AI Ltd, having subscribed for the shares at incorporation five years ago. She plans to sell half of her shareholding (15%) to an angel investor for £2,000,000 in June 2027. She intends to immediately reinvest £500,000 of the proceeds into newly issued shares of another unquoted trading company, qualifying for the Enterprise Investment Scheme (EIS).

REQUIREMENTS:
Prepare a report addressing the following:

(a) Advise Quantum AI Ltd on whether the abandoned software project qualifies for Research and Development (R&D) tax relief under the SME scheme, and explain the specific tax treatment of the £100,000 subcontractor costs. (7 marks)

(b) Advise Ms. Lin on the availability of Business Asset Disposal Relief (BADR) on the sale of her 15% shareholding, and calculate the Capital Gains Tax (CGT) payable on the disposal, assuming she has her full annual exempt amount and basic rate band available. (8 marks)

(c) Explain the mechanics of EIS deferral relief regarding the £500,000 reinvestment, including the impact on her current CGT liability and the Income Tax relief available on the EIS subscription. (10 marks)