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(ii) analytical procedures, (6 marks)

might appropriately be used in the due diligence review of MCM.

6 Charles and Jane Miro, aged 31 and 34 years respectively, have been married for ten years and have two children

aged six and eight years. Charles is a teacher but for the last five years he has stayed at home to look after their

children. Jane works as a translator for Speak Write Ltd.

Speak Write Ltd was formed and began trading on 6 April 2006. It provides translation services to universities. Jane,

who ceased employment with Barnham University to found the company, owns 100% of its ordinary share capital

and is its only employee.

Speak Write Ltd has translated documents for four different universities since it began trading. Its biggest client is

Barnham University which represents 70% of the company’s gross income. It is estimated that the company’s gross

fee income for its first 12 months of trading will be ￡110,000. Speak Write Ltd usually agrees fixed fees in advance

with its clients although it charges for some projects by reference to the number of days taken to do the work. None

of the universities makes any payment to Speak Write Ltd in respect of Jane being on holiday or sick.

All of the universities insist that Jane does the work herself. Jane carries out the work for three of the universities in

her office at home using a computer and specialised software owned by Speak Write Ltd. The work she does for

Barnham University is done in the university’s library on one of its computers as the documents concerned are too

delicate to move.

The first set of accounts for Speak Write Ltd will be drawn up for the year ending 5 April 2007. It is estimated that

the company’s tax adjusted trading profit for this period will be ￡52,500. This figure is after deducting Jane’s salary

of ￡4,000 per month and the related national insurance contributions but before any adjustments required by the

application of the personal service companies (IR 35) legislation. The company has no other sources of income or

capital gains.

Jane has not entered into any communication with HM Revenue and Customs (HMRC) with respect to the company

and wants to know:

– When the corporation tax computation should be submitted and when the tax is due.

– When the corporation tax computation can be regarded as having been agreed by HMRC.

Charles and Jane have requested a meeting to discuss the family’s finances. In particular, they wish to consider the

shortfall in the family’s annual income and any other related issues if Jane were to die. Their mortgage is covered

by a term assurance policy but neither of them have made any pension contributions or carried out any other long

term financial planning.

Jane has estimated that her annual after tax income from Speak Write Ltd, on the assumption that she extracts all of

the company’s profits, will be ￡58,000. Charles owns two investment properties that together generate after tax

income of ￡8,500. He estimates that he could earn ￡28,000 after tax if he were to return to work.

The couple’s annual surplus income, after payment of all household expenditure including mortgage payments of

￡900 per month, is ￡21,000. Charles and Jane have no other sources of income.

Required:

(a) Write a letter to Jane setting out:

(i) the arguments that HMRC could put forward, based only on the facts set out above, in support of

applying the IR 35 legislation to Speak Write Ltd; and

(ii) the additional income tax and national insurance contributions that would be payable, together with

their due date of payment, if HMRC applied the IR 35 legislation to all of the company’s income in

2006/07. (11 marks)

4 Hogg Products Company (HPC), based in a developing country, was recently wholly acquired by American Overseas

Investments (AOI), a North American holding company. The new owners took the opportunity to completely review

HPC’s management, culture and systems. One of the first things that AOI questioned was HPC’s longstanding

corporate code of ethics.

The board of AOI said that it had a general code of ethics that HPC, as an AOI subsidiary, should adopt. Simon Hogg,

the chief executive of HPC, disagreed however, and explained why HPC should retain its existing code. He said that

HPC had adopted its code of ethics in its home country which was often criticised for its unethical business behaviour.

Some other companies in the country were criticised for their ‘sweat shop’ conditions. HPC’s adoption of its code of

ethics, however, meant that it could always obtain orders from European customers on the guarantee that products

were made ethically and in compliance with its own highly regarded code of ethics. Mr Hogg explained that HPC had

an outstanding ethical reputation both locally and internationally and that reputation could be threatened if it was

forced to replace its existing code of ethics with AOI’s more general code.

When Ed Tanner, a senior director from AOI’s head office, visited Mr Hogg after the acquisition, he was shown HPC’s

operation in action. Mr Hogg pointed out that unlike some other employers in the industry, HPC didn’t employ child

labour. Mr Hogg explained that although it was allowed by law in the country, it was forbidden by HPC’s code of

ethics. Mr Hogg also explained that in his view, employing child labour was always ethically wrong. Mr Tanner asked

whether the money that children earned by working in the relatively safe conditions at HPC was an important source

of income for their families. Mr Hogg said that the money was important to them but even so, it was still wrong to

employ children, as it was exploitative and interfered with their education. He also said that it would alienate the

European customers who bought from HPC partly on the basis of the terms of its code of ethics.

Required:

(a) Describe the purposes and typical contents of a corporate code of ethics. (9 marks)