Question 1

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)

Accepted Answer

Address the company and the individual separately. For part (a), state clearly that failure does not disqualify R&D, and apply the 65% rule for unconnected subcontractors. For part (b), list the three BADR conditions (5%, employee/officer, 2 years) and calculate the tax, remembering the £1m lifetime limit. For part (c), explain that EIS deferral reduces the CGT payable now, and calculate the 30% income tax reducer.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often assume failed projects cannot claim R&D. In the CGT calculation, a common error is applying the 10% BADR rate to the entire £2m gain, forgetting the £1m lifetime limit. For EIS, students sometimes confuse deferral relief (which defers the gain) with disposal relief (which exempts the future gain on the EIS shares themselves).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA ATX — Advanced Taxation Practice Exam 3

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