This is an individual assignment. Students will be expected to return the completed assignment, as a word document, on-line by Monday 7 December 2015 at 12.00 pm. Answer all three question.Please note that correct answers will only be accepted for Finance ACT 2015.You must show all workings.

Total pages: 6

Maximum marks available: 100 Marks

Question 1 Splash Ltd is a small manufacturing company and has prepared the following income statement for the 12-month period to 30 September 2015:

Splash Ltd, Income Statement for year ended 30 September 2015£ £

Sales 981,045

Cost of sales (note i) (399,655)

581,390

Distribution costs (note ii) 13,124

Administrative expenses (note iii) 154,800

(167,924)

Operating profit 413,466

Profit on sale of car park land (note iv) 45,800

Interest payable on business overdraft (2,800)

Dividends from unconnected UK companies 18,000

Rent receivable on car park land (note v) 3,500

Profit before taxation 477,966

Corporation tax 95,593

Profit after tax 382,373

Notes to the income statement:

(i) Cost of sales includes depreciation of £7,800

(ii) Distribution costs includes a car leasing payment of £3,467 incurred on a 3 year

operating lease, taken out in January 2015, of a car emitting 175g CO2/km

(iii) Administration expenses include:

Depreciation of £4,000

A charitable donation of £750 to the UK central office of Oxfam

Legal fees of £800 relates to the sale of land in November 2014

(iv) The profit on sale of land recognised in the accounts related to a car park land that the

company had originally used for its own business. The company no longer required

this car park land so it was let until its sale. The company realised a chargeable gain

of £18,600.

(v) USM Ltd has a capital allowances written down value brought forward on 1 October

2014 of:

£General pool 15,600Special pool 9,300Short life asset (note a) 7,800

£The following assets were purchased during the year:A car with CO2 emission level of 70g/km 4,700A car with CO2 emission level of 150g/km 10,100A lorry 10,500A machine 2,200

note (a) the short life asset was purchased on 31 December 2007 and is still being used.

Task:

You are required to advise Splash Ltd of the corporation tax liability for the accounting

period 30 September 2015. You must show all workings towards this calculation and

any others that you think necessary in aiding you in explaining how you got to the final

figure.

(35 marks)

CORPORATE TAX RATE: 35%

BOOK/ GAAP TAX/ IRC

DIFFERENCE

Sales 981,045 981,045 -

COS 399,655 399,655 -

SG&A 167,924 167,924 -

Depreciation 11,800 12,000

(200)

INCOME BEFORE INCOME TAX 401,666 401,466

200

Income tax rate 35% 35% 35%

Income tax provision

140,513 70

NET INCOME need to know tax

provision N/A N/A

The depreciation difference will "reverse" over time, but we need to do something about it right now! Since this is a balance sheet approach, we first find the balance sheet amounts then solve for the tax expense to record. We are getting more of a deduction for dep. than we expense (this year) for GAAP. This creates a deferred tax liability because we will be recording more expense in the future. We compute the deferred tax asset as follows:

Book/Tax difference

200

Effective rate 35%

DEFERRED TAX ASSET 70

Relief 5,017

ENTRY:

Deferred tax liability 700 Income tax payable 140,513

Income tax provision

141,213

NOTE that the income tax expense of 140513 which was a plug for us, works out to be 35% of the GAAP income before income tax!! For those math folks out there, this is because the income tax rate used for computing the "deferreds" is 35% and is the same as that used in computing the tax amount owed (consequently ends up with the same effective tax rate).

Question 2Currently, Bridget works as full time consultant for Bogain Ltd. For the year ended 5 April

2016, she has provided you with the following information:

(i) Her basic salary was £49,000 (PAYE deducted £12,360)

(ii) She received a bonus of £3,978 for the year to 5 April 2016

(iii) She had the use of a 147g/km diesel-engine company car from 6 May 2015 (date of first

registration) to 6 April 2016. The list price of the car was £22,500 but the company

negotiated a 15% discount from the dealer. All the business and private fuel was paid

for by the company

(iv) Bridget had a company mobile phone, which she also used for making private calls. The

phone cost the company £360 for the year for rental and charges

(v) Bridget received an interest-free loan of £15,000 from the company on 6 June 2015,

which she repaid on 6 December 2015. (Assume that the official rate of interest is 3%)

(vi) Bridget paid £200 per month into the company occupational pension scheme by direct

deduction from her salary and the company contributed £60 per month.

(vii) Bridget had £240 credited to her bank account

Bridget is thinking of leaving the employment in July 2016 and become a self-employed

PR consultant. She plans to advertise her services widely, and has already identified

potential new clients.

Bridget also hopes to sell some of her self-employed services to Bogain Ltd after she

leaves their full-time employment. Her current manager is willing to offer her some short-

term tasks on ‘freelance’ basis, working with the existing teams she knows.

Task:a. You are required to advise Calculate Bridget’s of the income tax and the

National Insurance contribution liability for the tax year 2015/16. She also wants to know the national insurance contribution that Bogain Ltd will have to pay for her to HMRC. (20 marks)

b. You are required to advise Bridget whether it would be prudent to carry out her self-employed activities, including any services provided for a fee to Bogain Ltd, if she wishes to resist any suggestion from tax authority that she is still an employee of Bogain Ltd. (10 marks)

c. Explain how it would alter Bridget’s UK tax position if occasional work that she does for BOGAIN Ltd after she leaves the present employment were viewed as a return to employment and not as self-employment. (5marks)

(Total 35 marks)        COMPUTATION OF TOTAL INCOME AND TAX  STATUS : INDIVIDUAL     

 COMPUTATION OF TOTAL INCOME

Amount Taxable (Rs) Post Budget

Amount Taxable (Rs) Pre Budget

                SALARY AND ALLOWANCES           

  Base Salary 49,000

49,000

  Taxable House Rent Allowance 4,900 4,900

       

  GROSS SALARY 53,900

53,900

       Less Standard Deduction u/s 16 0 21560       

  NET TAXABLE SALARY 53,900

32,340

       

 INCOME UNDER THE HEAD HOUSE PROPERTY 0 0

       

 INCOME FROM OTHER SOURCES (Bank interest)

240

240

       

  GROSS TOTAL INCOME 54,140

32,580

         Deductions under Chapter VI-A    

  - u/s 80CCC   200

  - u/s 80D 10,000

10,000

  - u/s 80G    

  - u/s 80L   240

       

  NET TOTAL INCOME

44,140 2

2,140        

LessPre tax deduction on eligible savings (Proposed section 80C)

200 0

       

  TOTAL INCOME

43,940 2

2,140        

 TOTAL INCOME ROUNDED OFF U/S 288 A

43,940

22,140

       COMPUTATION OF TAX  

         INCOME TAX ON TOTAL INCOME -5,606 0       LESS REBATE u/s 88 0 0LESS REBATE u/s 88B 0 0LESS REBATE u/s 88C 0 0              

  TOTAL INCOME TAX PAYABLE (A)- 5,606

-

       

ADD SURCHARGE (@ 10% of A) (B) -

-

       

 TOTAL TAX AND SURCHARGE PAYABLE (C = A+B)

- 5,606

-

       

ADD EDUCATION CESS (@ 2% of C) - 112

-

       

  TOTAL TAX, SURCHARGE & CESS - 5,718

-

       

  Effective tax rate (Percentage)- 11.61

-

Assumptions

1Salary includes Base Salary and House Rent Allowance

2HRA is exempt from tax under Section 10(13A) of the Income tax Act, 1961 ('the Act') as per the calculation donebelow. Accommodation has been assumed to be situated in Delhi, Mumbai, Calcutta or Chennai

Calculation of HRA exemption under Section 10(13A) of the Act

(Amount in Rs.)

Gross salary level

1,500,000    

Salary for the purpose of HRA 49,000

   Actual HRA received (A) 010 % of salary 4,90050 % of salary (B) 24,500Rent Paid 0Rent Paid over 10% of salary (C) -4,900   HRA exempt (Least of A, B & C) -4,900   Taxable HRA 4,900

Question 3

Part (A)

Rudolf and Roda are husband and wife. In the tax year2015/16, Roda is a higher rate taxpayer

and Rudolf’s taxable income for 2015/16 is £28,785. For the tax year 2015/16, both Roda and

Rudolf sold the following assets:

(i) In July 2015, Roda sold her fish and chips building for £260,000. Roda had bought

this building in May 2004 for £157,525. In July 2015, Roda bought another building

for use in her business, which cost her £240,000. Roda claims roll over relief, for

the July 2015 disposal.

(ii) Roda sold part of a plot of land in February 2016 for £40,000. The whole piece of

land cost £25,000 in November 1997. The value of the land remaining was valued at

£30,000 in February 2016.

(iii) Roda sold a sculpture for £10,000 in March 2016. The sculpture cost £18,500 in

January 1991, with an additional £1,500 of acquisition cost.

(iv) Rudolf sold 2,250 quoted ordinary shares of Nino plc for £23,000 in March 2016.

Before the sale, he owned 6,750 shares, of which 4,500 shares were purchased in

December 1988 for £4,599 and 2,250 were acquired in August 1992 following the

company’s rights issue of 1:2 shares at 160p per share.

(v) Rudolf sold 2,550 quoted shares of Lidy plc for £12,375 in June 2015. His previous

transactions in Lidy’s shares had been as follows:

no of shares cost£

Apr-88 Purchased 1500 3093Aug-90 Purchased 900 2700May-92 Bonus issue 1 for 2

Task

Draft brief notes that will form a basis of the letter that you will write to both Roda and

Rudolf explaining the final capital gains tax payable by each. (20 marks)

None of the above transactions qualifies for an entrepreneur relief.

Part B

Roda has asked for your advice for her friend Goodly.

Goodly needs to calculate the amount of the property income that must be shown on the

self-assessment form for the year 2015/16. For the year 2015/16, she has provided you

with the following information:

(a) Goodly lets out a furnished apartment at an annual rent of £3,600 payable monthly

in advance, on the first day of the month. During 2015/16, Goodly incurs the

following expenditure on the furnished apartment:

May 2015 - Replacement of one broken kitchen unit with a unit of similar

standard costing £275.

June 2015, Goodly paid insurance costs for the year from 5 July (previous year

£420) is £480

November 2015, Goodly paid for drainage clearance, which cost her £380

March 2016, Goodly had some redecoration work done, for which she paid £750.

The tenant had vacated the property during June 2015, without having paid the

rent during June. Goodly was unable to trace the defaulting tenant, but managed

to let the property to new tenant from 1 July 2015. She has asked if she should

claim any other expenses besides the one above.

(b) On 1 August 2007, Tyrone granted Goodly a lease to a warehouse for a period of 20

years. Goodly paid a premium of £20,000.

(c) On 1 August 2015, Goodly granted a sublease to Sally for a period of 5 years. Sally

paid a premium of £24,000.

(10 marks)

INCOME STATEMENT

Net surplus before tax 895,015 775,837 Tax expense 238,912 252,882 Net surplus after tax 656,103 522,955

Other comprehensive incomeAsset revaluation gain 648,700 0 Tax on revaluation (111,636) 0

BALANCE SHEET

Non-current assetsProperty, plant and equipment 5,466,565 5,382,833 Intangible assets 238,000 284,000

Current liabilitiesTax payable 121,948 39,045

Non-current liabilitiesDeferred tax liability 240,679 163,335

STATEMENT OF CASH FLOWS

Income tax paid (155,650) (170,000)Income tax refunded 0 0

NOTES TO THE FINANCIAL STATEMENTS

Depreciation and amortisation 1,090,868 1,063,380

DebtorsProvision for impairment 70,000 65,000

Intangible assetsComputer software 34,000 80,000 Goodwill 204,000 204,000

238,000 284,000

Employee entitlementsAnnual leave 390,000 350,600 Other leave 26,500 25,500