TAXATION – ACC 3013

Chapter 2: Computing taxable income and income tax liability

1. Q.10 John and Helen_Page # 399 (Completed in Class)

2. Q.11 Michael and Josie_Page # 400 (Completed in Class)

3. Additional practice question

Perry lives in England and works for Mahr Ltd. He also owns and runs a small trading business
as a sole trader. Following information relates to the tax year 2018/19:

£
Employment income (before deduction of PAYE tax) 75,000
Trading income (taxable) 33,500
Dividends 6,250
Building society interest 2,200
Qualifying interest paid 1,000
Contribution to personal pension plan (net) 6,500
Mahr Ltd. has deducted £28,000 PAYE tax from payments made to Perry. Perry has donated
£3,600 in gift aid to an approved local charity during the tax year 2018/19.
Required:
Calculate the taxable income and tax payable by Perry for the tax year 2018/19.
Answer: Perry – Taxable Income and Income Tax Liability 2018/2019.

Non-Savings Savings Dividend Total

Income Income Income ₤
₤ ₤ ₤
Employment income 75,000 75,000
Trading income 33,500 33,500
Dividends income 6,250 6,250
Building society interest 2,200 2,200
Total income 108,500 2,200 6,250 116,950
Minus qualifying interest (1,000) 0 0
Net income 107,500 2,200 6,250 115,950
Minus adjusted personal allowance (10,187) 0 0
Taxable income 97,313 2,200 6,250 105,763
Non savings income:
First 47,125 x 20% 9,425 9,425
Remaining 50,188 x 40% 20,075 20,075
Savings income:
First 500 x 0% 0 0
Remaining 1,700 x 40% 680 680
Dividends
First 2,000 x 0% nil rate 0 0
Remaining 4,250 x 32.5% 1,381 1,381
Total tax payable = 29,500 680 1,381 31,561
Less tax paid under PAYE (28,000)
Total tax due 1,500 680 1,381 3,561
• Adjusted net income is net income less the gross amounts of personal
pension contributions and gift aid donations (chapter 2, slide 17).
4. Additional practice question
Bilal and Sara, a married couple, live in England and have a daughter Aiza age 2.
Bilal is a civil engineer employed by DubTech Ltd and Sara runs a small business in
Birmingham. Sara also owns a property let out unfurnished since April 2018.
Following information relates to the tax year 2018/19:
Sara:
Trading income (taxable) £14,500
Property income (taxable) 9,500
Dividends 2,400
Bank interest 1,000
During the tax year 2018/19, Sara received £8,000 child benefit for her daughter Aiza.
Bilal:
Salary (before deduction of PAYE tax) £57,500
PAYE tax deducted 11,000
Personal pension contribution (net) 3,200
Required:
Calculate the income tax payable by both Sara and Bilal for the tax year 2018/19.
Answer:
Sarah Non-Savings Savings Dividend Total
Income Income Income ₤
₤ ₤ ₤
Trading income 14,500 14,500
Property income 9,500 9,500
Dividends 2,400 2,400
Bank interest 1,000 1,000
Total income 24,000 1,000 2,400 27,400
Less personal allowance (11,850) 0 0 (11,850)
Taxable income 12,150 1,000 2,400 15,550
Full 12,150 x 20% 2,430 2,430
Saving interest 1,000 x 0% 0 0
First 2,000 x 0% 0 0
Remaining 400 x 7.5% 30 30
Tax payable 2,430 0 30 2,460
Bilal Non-Savings Savings Dividend Total
Income Income Income ₤
₤ ₤ ₤
Employment income 57,500
Less personal allowance (11,850)
Taxable income 45,650 45,650

First 38,500 x 20% 7,700 7,700

Remaining 7,150 x 40% 2,860 2,860
Total taxable payable 10,560 10,560
Plus child benefit repayment 2,800 2,800
Total tax payable 13,360 13,360
Minus tax paid under PAYE (11,000) (11,000)
Tax due 2,360 2,360

• The charge is 1% of the child benefit amount for each £100 of adjusted
net income in excess of £50,000.
 Chapter 10: Trading losses
1. Question (Janet)_Page # 158 (Covered in Class)

2. Additional practice question

Graham has been a sole trader for many years preparing accounts to 31 March each year.
His recent results have been as follows:
Year ended March 31, 2018 profit £35,000
Year ended March 31, 2019 loss 61,800
Graham received property business income of £10,600 in 2017/18 and £11,800 in 2018/19.
Required:
a. Calculate the amounts of taxable income for 2017/18 and 2018/19 and the amount of
trading loss to carry forward to tax year 2019/20, if Graham wishes to claim loss relief
against the general income of the current and the preceding year (quickest claim).
b. Calculate the amounts of taxable income for 2017/18 and 2018/19 and the amount of
trading loss to carry forward to tax year 2019/20, if Graham makes the most
advantageous claim for loss relief.
Answer:
 (a) 2018/19
Quickest claim 2017/18
Trading income 35,000 0
Property business income 10,600 11,800
Total income 45,600 11,800
Less loss relief (45,600) (11,800)
Total income 0 0
Less personal allowance (11,850) (11,850)
Taxable income 0 0
Amount of loss b/f 61,800 – 45,600 – 11,800 =4,400

(b) Most advantages claim

Trading income 35,000 0
Property business income 10,600 11,800
Total income 45,600 11,800
less loss relief (45,600) 0
Total income = 0 11,800
Less personal allowance (11,850) (11,850)
Total income 0 0
Amount of loss b/f 61,800 – 45,600 –= 16,200
 Chapter 11: Partnership and
LLPs

1. Question (Steve and Tanya)_Page # 173 (Covered in Class)

2. Question (Ursula and Victor)_Page # 174 (Covered in Class)

3. Question (Sue and Tim)_Page # 175 (Covered in Class)

4. Additional practice question

Sara and William are partners in a business since 2014 preparing accounts to 31 March each
year. For the year ended 31 March 2019, taxable trading profits before allocation were £25,000.
Sara and William are allocated annual salaries of £3,500 and £5,500 and balance is shared in the
ratio of 2:1. However, on 30 June 2018 partners have agreed to new profit sharing ratio of 1:1
with no change in the amount of annual salaries for the partners.
Compute the missing amount in below given schedule of income distribution.
APR MAY JUNE 3 months

July to following 31 March 9 months

Total Sara William

Total profit before allocation 25,000

Profit (April – June 2018) 6,250 (25,000/12 x 3

Salaries (2,250) 875 1,375

Balance after salaries 4,000

Allocation of remaining profits ( 4,000 ) 2,667 1,333

Profit (July 18-March 2019) 18,750 (25,000/12 x9)

Salaries ( 6,750 ) 2,625 4,125

Balance after salaries 12,000 6,000

Allocation of remaining profits (12,000) ? _?__

Profit allocated to each partner
12,167 12,833

Answer:

Total Sara William

Total profit before allocation 25,000

Profit (April – June 2018) ?

Salaries ( ? ) ? 1,375

Balance after salaries ?

Allocation of remaining profits ( ? ) 2,667 ?

Profit (July 18-March 2019) 18,750

Salaries ( ? ) ? 4,125

Balance after salaries 12,000

Allocation of remaining profits (12,000) ? _?__

Profit allocated to each partner 12,167 12,833

 Chapter 19: Computing corporation tax liability

1. Question (Marlborough Ltd)_Page # 299 (Covered in Class)

2. Question 135 (Elderflower Ltd)_Page # 430 (Covered in Class)

3. Additional practice question

New Sky Ltd’s statement of profit or loss for the year ended 31 March is given below:
£
Gross profit 950,000
Operating expenses:
Depreciation 80,000
Legal and professional fees (Note 1) 24,000
Lease of motor car (CO2 95 g/km) 4,310
General & administrative (Note 2) 45,500
Employee costs (Note 3) 400,000
Repairs and renewals (Note 4) 42,000
(595,810)
Operating profit 354,190
Other income:
Income from property (Note 5) 12,500
Bank interest (Note 6) 2,460
Loan interest (Note 7) 3,400
Dividends (Note 8) 4,600 22,960
Finance costs
Interest expenses (Note 9) (17,000)
 Profit before
taxation 360,150

Notes:
1. Legal and professional fees:
Fee paid for accounting and audit services £14,000
Charges paid to debt collectors 7,000
Legal fees in connection with the fine on company for violating EHS 3,000
24,000
2. General & administrative expenses:
General and administrative expenses include:
Donations to a local charity (received free advertising in charity’s magazine) £4,500
Political donations 2,500
Staff party (costing £180 per head) 10,000
Gifts to customers (100 pens cossting £70 each carrying name and logo
of New Sky Ltd)
7,000
Other general and administrative (all allowable) 21,500
45,500
3. Employee costs
Employee cost are as follows:
£
Counselling services provided to employees who were made redundant 8,500
Pension contributions paid on behalf of employees 15,000
Employer class 1 national insurance contributions (NICs) 14,000
Employee bonuses declared but will not be paid during 2019 12,500
Other expenditure (all allowable) 350,000
400,000
4. Repairs and renewals:
Cost of constructing a
new office for managing director £28,000
Repainting company premises 14,000
42,000

5. Income from property

Company let out an unfurnished freehold office building during the year that is surplus to
requirements. The rent of £18,500 has been received in respect of the year ended 31 March
2019. During the year New Sky Ltd spent £6,000 on maintenance which is an allowable
expense.
6. Bank interest
The bank interest was received on 31 March 2019. The bank deposits are held for non-
trading purposes.
7. Loan interest
On 1 July, 2018, Company made a loan as investment. Loan interest of £1,600 was received
on 31 December 2018, and interest of £1,800 was accrued at 31 March 2019.
8. Dividends
Dividends of £4,600 were received from another UK resident company.
9. The interest is payable is in respect of company’s loan stock. The loan stock was used to
finance the company’s trade activities. The interest amount given in the statement of profit and
loss has been paid and is the amount relevant to the accounting period ended 31 March 2019.
9. Plant and machinery:
The tax written down value at 1 April 2018 was £180,000.
In the year to 31 March 2019, following assets were purchased and disposed of:
1 August 2018 Machinery £90,000
10 March 2019 Lorry 37,500
Company disposed of plant on 15 December 2018 for £22,000 (original cost £20,000).
Required:
a. Compute tax adusted trading
profit using the information given in statement of profit or loss
and notes for New Sky Ltd for the accounting period ending 31 March 2019. Start with the
profit before taxation of £360,150 and list all of the items in the statement of profit and loss
and in notes indicating by the use of a zero (0) any items that do not require adjustment.
Assume that the company claims maximum available capital allowances.
b. Compute taxable total profits for the period ended 31 March 31, 2019.
c. Compute New Sky Ltd’s corporation tax liability for the period ended 31 March 2019.

₤ ₤
*Capital Allowances

AIA Main Pool Allowances

Private use of car by the employee is not relevant for capital allowance purposes.

(b) Total Taxable Profits

₤ ₤
(c) Step 3 - Corporation Tax Payable for 2018/19

Chapter 23: Self-assessment and payment of tax by companies

Returns
• Due filing date is the later of:
 12 months after the end of the relevant period
 3 months from the date notice to file was made
_____________
Records keeping
• Companies must keep record until the latest of:
 6 years from the end of the accounting period
 The date compliance check enquiries are completed
 The date after which a compliance check enquiry may not be started.
______________
Payment of tax and interest
• Not large companies:
• Tax is due 9 months and 1 day after the end of accounting period.
• Large companies (profit exceeding £1,500,000 for a 12 month accounting period):
Tax is payable in 4 installments for 12 month long accounting period
_________________
Failure to keep records
Penalty of up to £3,000 for each accounting period affected.
__________________
 Chapter 24 & 25: VAT
Accounting for and administering VAT
• HMRC administers VAT, appeals are heard by tax tribunals in the same way as those for
income and corporation taxes.
• VAT period is usually three calendar months
• Most returns and payments are submitted electronically
• Time line for filing and payment is one month plus seven days after the end of a VAT
period.
_____________
Deduction of input tax
• For input tax to be deductible:
 Payer must be a taxable person,
 With supply being to him in the course of his business
 VAT invoice must be held (except for purchases of up to £25)
• Input VAT is deductible for both revenue and capital expenditure, with adjustment for
private use, if any.
• Input tax not deductible:
 VAT on motor cars not used wholly for business purposes
 VAT on business entertainment (except for entertaining overseas customers)
 VAT on expenses incurred on domestic accommodation for directors
 VAT on non-business items passed through the business account
 VAT not related to making of supplies by the buyer in the course of a business
Note: If VAT is not recoverable
on car, because it is not exclusively used for business purposes, VAT is not charged when it is
subsequently sold.

VAT invoices and record keeping

• Issued within 30 days of time of taxable supply by a taxable person to another VAT
registered trader.
• Not required if supply is exempt or buyer is not registered and for payments including
VAT up to £25. VAT registered traders must keep records for six (6) years.

1. Question 171 (Ongoing Ltd)_Page # 441

2. Question (Melissa)_Page # 375

3. Additional practice question

Minhas, a VAT registered trader, has the following transactions in the quarter ended 30 June
2018. All figures are exclusive of VAT, unless stated otherwise.

Sales:
Standard rated cash sales £325,000
Zero rated cash sales 35,000
Sales invoices of £25,500 (before 3% prompt payment discount) were issued in respect of credit
sales. These sales were all standard rated. Minhas offers all credit sales customers a 3%
discount for payment within 15 days of the date of the sales invoice. At 30 June 2018 the
discount had been taken up on invoices totaling £12,500.
Purchases & expenses:
Standard rated (including £900 spent on entertaining 185,000
overseas customers)
Zero rated 15,000
Exempt expenses 3,000
Other transactions
1. Purchased a motor car partly
used for private purposes 18,000
2. Purchased a printer for use in office 3,500
3. Sold a motor car 5,200
(partly used for private purposes, VAT was not recovered on purchase)
4. On 30 June 2018, Minhas wrote off an impairment loss in respect of a standard rated invoice
totaling £1,200 that was due on 15 October 2017.
Required:

Compute the amount of VAT liability of Minhas for the quarter ended 30 June 2018. Minhas
does not use cash accounting system. You should list all the items, using a zero (0) for any items
having nil input or output tax.
Answer:
Minhas ₤ ₤
4. Additional practice question

Macron, a VAT registered sole trader, has the following transactions in the quarter ended 31
December 2018. Unless stated otherwise, all sales and purchases are standard rated and all
figures are exclusive of VAT.

1. Purchased goods for trade amounting to £355,000 during the quarter.

2. Expenses: £14,000 (£2,000 is for entertaining UK customers).
3. Total domestic sales are £280,000 including goods sold for £12,000 to Sogo Traders. The
invoice issued to Sogo stated that there is a discount of 4% on sales if invoices are paid
within 15 days. The invoice was actually paid 10 days after the issuance.
4. Supplied goods amounting to £2,300 to a customer in Belgium who is VAT registered
there.
5. Goods costing £120 were taken out of inventory for private use. The replacement cost
of goods was £140.
Required:
Compute the VAT liability of Macron for the quarter ended 31 December 2018. You should list
all the items, using a zero (0) for any items having nil input or output tax.
Macron ₤ ₤
END OF PRACTICE MATERIAL