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Qualification - BA (Hons) Accounting and Finance
Unit Name - Advanced Personal Taxation
Unit Level - Level 6
Unit Number - BAF_6_APT
Assignment Title - Advanced Personal Taxation
Unit Credit - Credit 20
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SECTION A
Income Tax Calculation
It is early January 2020. Billy Bunter is a new client of yours. He set up a sole trade bakery business in Cardiff, Wales on 1 June 2018 drawing up his first set of accounts for the seven months to 31 December 2018 and using a 31 December accounting date from that point.
Billy is trying to complete his 2018/19 tax return (as it is due to be submitted online to HMRC by 31 January 2020). He has brought you a box full of relevant information to allow you to calculate his income tax liability and to tell him how much tax remains due.
You sift through the box and find the following information:
• Information on the bakery;
• Profit and loss accounts for the first two trading periods;
• A list of acquisitions and disposals of assets; and
• Details on other income Each of these is reproduced below.
Information on the bakery
• Sells to local shops;
• Sole trade business established on 1 June 2018;
• Billy has six employees, including his wife Bessie; and
• The business begins trading from rented premises.
Profit and loss accounts for the first two trading periods
|
|
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Seven-month period to
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Year to
|
|
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Notes
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31 Dec 2018
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31 Dec 2019
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|
|
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£
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£
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Sales
|
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299,935
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337,669
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Cost of sales
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1, 2
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(138,321)
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(119,978)
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Gross profit
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161,614
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217,691
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Wages
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3
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(61,500)
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(92,400)
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Depreciation
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(16,340)
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(31,890)
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Light and heat
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(4,163)
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(7,216)
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|
Bad debts
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4
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(1,960)
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(30)
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Motor costs
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5
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(4,320)
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(5,462)
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Entertaining
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6
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(2,640)
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(2,770)
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Repairs
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7
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(962)
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(1,385)
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Bank overdraft interest
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(2,750)
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(2,015)
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Sundry expenses
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(2,160)
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(2,845)
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Net profit
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|
64,819
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71,678
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Notes:
1. Included within cost of sales for the first period is £800 for a new dough mixer that Billy bought in August 2018. Given the relatively small cost, Billy decided just to expense this.
2. Cost of sales in the second period also includes £450 costs that relate to bakery products taken home by Billy to cater for a family Christmas party. You establish that Billy normally manages to mark up costs by 20% when selling to customers.
3. Included within wages are amounts of £200 per month which Billy takes as a salary and £100 per month paid to Billy's wife Bessie who tries to keep clerical records of the bakery's business.
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4. Bad debts in the two periods are made up as follows:
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Period to
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Year to
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31 Dec
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31 Dec
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2018
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2019
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£
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£
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Set up of specific provision
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750
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|
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Set up of general provision
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1,000
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|
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Movement in specific provision
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180
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Movement in general provision
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(220)
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Write off of bad debts
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210
|
95
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Recovery of bad debts previously written
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(25)
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off
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1,960
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30
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5 Within motor costs Billy has included the running costs of the Ford Focus used in the business. You find mileage records for the vehicle which show that in the first period it was used 20% privately and in the second period it was used 40% privately. The running costs amounted to £2,600 and £4,000 for the two periods. The car has CO2 emissions of 103g/km.
In addition, Billy leased an estate car (list price £20,000) to deliver products to customers. The lease commenced on 1 October 2019 and cost £370 per calendar month. There was 100% business use of the vehicle. The estate car has CO2 emissions of 174g/km.
6 Entertaining costs are made up as follows:
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Period to
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Year to
|
|
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31 Dec 2018
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31 Dec
2019
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|
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£
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£
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Client entertaining
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1,800
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2,100
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Staff parties
|
360
|
420
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Gifts to clients
|
480
|
250
|
|
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2,640
|
2,770
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The gifts to clients were made up as follows:
• In the first period, Billy gave his 20 best clients gifts of silver ornaments shaped like loaves, with the bakery name engraved on them; and
• In the second period, the gifts were for his ten best clients. Each one received a plain crystal vase.
7 Included in repairs you find the following items:
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Period t
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o Year to
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31.12.201
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8 31.12.2019
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|
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£ £
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Repair oven (purchased in first period and not in working order) 5
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0
|
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Replace broken bakery shutters with more secure electric ones
|
320
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Acquisitions and disposals of assets
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Purchases
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£
|
|
10.5.18
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Kitchen equipment
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8,000
|
|
15.5.18
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Billy's Ford Focus (see note 5 above)
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15,500
|
|
16.7.18
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Purchase of oven (see note 7 above)
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18,000
|
|
20.7.18
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Energy-saving equipment
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3,000
|
|
21.4.19
|
Boiler *
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12,000
|
|
30.6.19
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Employee Prius (CO2 = 105g/km)
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25,000
|
|
11.11.19
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Replacement oven
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19,680
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|
Disposals
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|
|
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18.11.19
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Sale of original oven
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15,000
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1.12.19
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Disposal of kitchen equipment (original cost £3,500)
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1,200
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Details of other income
From the information Billy provides, you establish that he had the following other income for 2018/19:
• Bank interest received of £75 from Halifax savings account;
• NS&I bank interest received of £27;
• Employment income (Billy is an occasional employee of an outdoor catering company) of £11,690. From this, PAYE of £38 has been deducted; and
• Dividend receipts of £6,200.
Required:
Calculate Billy's income tax liability for 2018/19 and state what amount remains due/will be repaid.
Instructions:
1. Remember this question relates to previous tax years so you will need to research the relevant tax and other rates in those tax years.
2. To solve this question, you will need to calculate the following;
a. Trading income for period to 31 December 2018 and year to 31 December 2019
b. Capital allowances for year to 31 December 2018 and year to 31 December 2019 using relevant rates
c. Income tax including business income, employment income and income from other sources.
d. You will also need to provide explanatory notes to explain your adjustments to trading profits.
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SECTION B
PART 1 - Impact of taxes and tax planning - Finance Act 2020
A partner of your accountancy firm has requested you to prepare detailed notes on the impact of redundancy pay. During this brief meeting with you, the partner said the following, "When the employment of an employee ends prematurely (i.e. before reaching the retirement age or by resignation of the employee), it is called termination of the employment. Ordinarily this type of termination is initiated by the employer, therefore, breaching the employment contract between themselves and the employee. As a result, employers usually offer the employee some benefits at the time of termination to settle the breach of employment contract."
The partner required you prepare a note that discusses the taxation of various benefits provided to the employees when their employment contract is terminated. Specifically, the following benefits must be separately discussed among any other benefits that you may come across in your research.
• Gardening leave
• Payment in lieu of notice (PILON)
• Redundancy pay
The discussion should also include how to determine whether benefits are being paid as ‘services rendered under employment' or ‘as compensation for breach of the employment contract'.
References to the relevant sections of the legislation (section 62 & sections 401- 416 ITEPA 2003) will enable you to secure higher marks.
REQUIRED:
Present your detailed notes in a report format. (Calculations are not required for this question)
Your summary should be detailed enough to be a basis for the partner to explain the matter to his clients. It may contain examples if that will improve the clarity of your report.
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PART 2 - The importance of overseas workday relief - Finance Act 2020
Overseas workday relief is a special relief provided to individuals working in the UK with some days working overseas.
The manager of your accounting firm has asked you to prepare a detailed report on the conditions required to be met in order to qualify for overseas workday relief.
REQUIRED:
Write a report as requested by the Manager. (Calculations are not required for this part of the question).
Your report should address the following issues:
- What is overseas workday relief?
- What conditions need to be met to claim overseas workday relief?
- What planning an employee who wishes to claim overseas workday relief in the future should do when starting a work assignment, which allows him to claim overseas workday relief?
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