Question: Brandon is a non-Scottish taxpayer who is employed by Block Ltd. His monthly gross salary is £8,000. During the tax year 2021/22 £30,000 was deducted from his salary through PAYE

22 Oct 2022,11:00 PM

 

1. Brandon is a non-Scottish taxpayer who is employed by Block Ltd. His monthly gross salary is £8,000. During the tax year 2021/22 £30,000 was deducted from his salary through PAYE . He was also provided with a number of benefits from his employer as follows:

 

22. A diesel company car which Brandon used for both business and private purposes throughout the tax year 2021/22. Block Ltd acquired the car in February 2020 for £29,000. Brandon contributed £7,000 towards the cost of the car. The car has CO2 emissions of 197 g/km, does not meet the RDÉ2 standard and has a list price of £33,000. Block Ltd paid for both private and business diesel during the whole of the tax year 2020/21 costing a total of £960. Brandon contributed £200 towards the cost of the private fuel.
23. On the 6^th of October 2021 Brandon purchased a photocopier from Block Ltd for £60. Block Ltd had purchased the photocopier for £600 on the 6^th of April 2020 and Brandon had used it for personal purposes from that date. The market value of the photocopier on the 6^th of October 2021 was £400.
24. At Christmas time Brandon was given £200 of vouchers for a local store which cost Block Ltd £190.

 

During the tax year 2021/22 Brandon paid an annual professional subscription for £500 to his trade body. His employer did not reimburse him for this expense.

 

Also, during tax year 2021/22, Brandon disposed of a number of assets including his prize-winning greyhound, an antique vase and some shares.

 

Required:

 

• Calculate Brandon’s income tax liability and the NIC payable by Brandon and his employer for the year 2021/22. Explain whether Brandon will be required to pay HMRC additional tax or claim a refund of tax.

 

(20)

 

• Briefly explain the capital gains tax consequences of the disposals of Brandon’s assets.

 

 

2. Bethany, who lives in England, owns two properties that she rents out to tenants. Details of the rental income and expenses incurred for each of the properties for the tax year 2021/22 are as shown:

 

Property 1

 

A commercial property that has been rented out to tenants since 6 May 2021 at a monthly rent of £500. A lease premium of £14,000 was also paid to Bethany by the tenant for a 15-year lease on the property.

 

Property 2

 

A furnished flat rented out to a tenant for an annual rent of £9,480 which is payable monthly in advance. The tenant was late paying the rent for March 2022 and April 2022 which were not paid until July 2022.

 

Bethany incurred the following expenses in connection with the flat during 2021/22:

 

Council tax                         £1,170

Mortgage interest               £2,500

Landlord insurance                £700

Letting agent fees                 £600

Repairs to ceilings                 £350

Installation of fire doors         £800

 

Bethany had made a property loss in the previous tax year of £1,600 which has been carried forward to 2021/22.

 

As well as property income, Bethany also received the following income during 2021/22:

 

Dividends of £2,300 from UK companies

Bank interest of £200

 

Bethany has been considering using her property business skills and starting her own business supplying and fitting kitchens but is worried that she might breach the VAT registration threshold quite quickly.

 

• Calculate Bethany’s property income for the tax year 2021/22 and her total income tax payable for the year.

             (15)

 

• Explain how Bethany would know if she needed to become VAT registered and whether it would be beneficial to voluntarily register before that point.

 

3. Summit Ltd designs and manufactures specialist tents used in high altitude expeditions throughout the world. The outbreak of COVID19 had a big impact on the profits of Summit Ltd during 2020 and resulted in a trading loss of £95,000 for the 12-month period ending 30 August 2020.  Prior to this Summit Ltd had never made a loss.

 

To address this Summit Ltd changed its marketing strategy and also put a number of staff through intensive training courses to allow them to better cope with the changing business environment.  In addition, they decided to change their accounting date end to the 30 November.  The directors have been delighted to see that their efforts and change in strategy has been successful and the summarised statement of profit or loss for their most recent 15-month period, 1 September 2020 to 30 November 2021 is shown below:

 

     £      £

Gross Profit                                                                                                  245,780

 

Expenses:

Gift aid donations (note 3)                                        24,600

Depreciation                                                            132,000

Professional fees (note 4)                                        14,200

Other expenses (note 5)                                         32,000                           (202,800)

 

Other Income:

Profit on sale of machinery (note 6)                       87,450

Income from property (note 7)                               127,200

Bank interest received (note 8)                                42,000

Dividends received (note 9)                                     44,000                           300,650

 

Net Profit                                                                                                       343,630

 

Notes:

 

1. Disposal of office building

Summit Ltd decided to close one of its manufacturing premises and sold this building for £265,000 on 15 February 2021 (RPI 278.1).  This building was initially purchased during May 2007 (RPI 206.2) for a total cost of £113,000; it had been extended at a cost of £19,250 during February 2009 (RPI 211.4); and further enhanced in December 2019 (RPI 278.1) at a cost of £23,000.

 

2. Disposal of shares

On 25 October 2021 (RPI 278.1) Summit Ltd decided to sell 6,250 shares in Blizzard plc, receiving £4.62 per share.  Summit Ltd had acquired 10,025 shares in Blizzard plc at £2.20 per share in April 2001 (RPI 173.1) and a further 3,550 shares for £3.10 per share in June 2014 (RPI 256.3).

 

3. Gift aid donations were paid as follows:

 

20 September 2020                £8,745

19 January 2021             £11,250

20 October 2021                     £4,605

 

Summit Ltd has agreed that a further £19,400 gift aid donation will be paid on 15 December 2021.

 

4. Professional fees

£12,450 of the professional fees is made up of accountancy and audit fees, while the remaining £1,750 relates to other allowable expenditure.

 

5. Other expenses

Included in other expenses is £26,450 that relates to the staff training costs and the remaining £5,550 was spent on entertaining customers.

6. Profit on sale of machinery

The machine was sold on 16 August 2021.  The chargeable gain on the machine has been calculated as £23,650.

 

7. Income from property

In November 2020, Summit Ltd agreed to rent out an unused warehouse for £10,600 per calendar month commencing 1 December 2020.  The rent is payable on the first of each calendar month.

 

8. Bank interest was received as follows:

20 November 2020        £19,600

19 May 2021                   £15,350

20 November 2021                 £7,050

 

Accrued interest was £6,500 on 30 August 2020; Nil on 30 August 2021 and £3,200 on 30 November 2021.

 

9. Dividends were received from UK companies as follows:

 

15 November 2020         £16,200

20 February 2021                    £5,650

26 June 2021                          £9,260

19 November 2021         £12,890

 

10. Summit Ltd had capital allowances on plant and machinery of £25,380, which is comprised of £12,650 relating to the 12 months to 30 August 2021 and a further £12,730 for the 3 months to 30 November 2021.

 

11. Summit Ltd had trading losses brought forward in 1 September 2020 of £95,000.

 

Required:

• Calculate any chargeable gains or losses that have arisen for each of the disposals in note (i) and (ii)

(8)

 

• Calculate Summit Ltd’s corporation tax liability for the period of account ending 30 November 2021, stating the date by which any liability should be paid.

(10)

 

• “In response to the increased losses caused by the coronavirus outbreak, Finance Act 2021 provides…”extended loss relief”…to trading losses incurred in accounting periods which end between 1 April 2020 and 31 March 2022”.

(Melville, 2021)

 

Required:

Discuss the loss relief options available to companies who have made substantial trading losses as a result of the coronavirus outbreak.  Your answer should provide full details and conditions surrounding all of the various choices available.

 

4. Todd decided to retire from his job as a stockbroker and has started his own business on 1 August 2019 trading as an animal trainer and behaviorist. In addition, he also sells a variety of pet products and toys through a small shop, which he obtained a 20-year lease on for a premium of £90,000 and has chosen his accounting year end to 31 December.

 

For the year ending 31 December 2021, the following information is available:

    £      £

Gross profit for the year                                                                                               168,750

Add:         Bank interest receivable                                                     12,450

Profit on sale of computer equipment             18,300                  30,750

199,500

 

Less:  Wages and salaries (note 1)                                        48,653

Motor expenses (note 2)                                              14,130

Repairs (note 3)                                                              1,680

Bad and doubtful debts (note 4)                                           18,000

Sundry expenses (note 5)                                            41,330

Legal costs (note 6)                                                      17,890

Lease premium amortisation                                              4,500

Administration and advertising costs                                    4,100

Bank charges for overdrawn account                                   175

Depreciation                                                                  14,475                (164,933)

Net Profit for the Year                                                                               34,567

 

Notes:

 

1. Wages and salaries include £26,650 that Mr Todd gave to his son to pay for the first 2 years of his PhD studies. Mr Todd’s son has never worked for the business.  An additional £14,900 is to pay for part-time staff that work in the shop.  The remaining amount of £7,103 is drawings that Mr Todd took for himself during the year.

 

2. Motor expenses include the following:

£

Fuel and servicing for delivery vehicles                              9,425

Fuel and servicing for Mr Todd’s personal car                       4,500

Speeding fines received by Mr Todd                                      205

 

All of the delivery vehicles are for 100% business use and it has been agreed that 40% of Mr Todd’s motor vehicles relates to personal use.

 

3. The £1,680 for repairs related to flood damage to the shop that was incurred when a water pipe burst during the year.

 

4. Trade debts written off during the year amount to £13,450 and the general provision for doubtful debts was increased by £4,550.

 

5. Sundry expenses include:                  £

Business entertaining                                                   20,175

Donation to a political party                                             3,750

Staff Christmas party                                                         800

Costs for Mr Todd travelling from home to his shop    7,650

Other allowable expenses                                              8,955

 

6. The legal costs include £6,750 for debt collection fees and accountancy costs for the business. A further £4,560 relates to legal cost for a dispute Mr. Todd had with his next-door neighbour at his home address over the boundary of his land.  The remaining £6,580 relates to legal fees for Mr. Todd’s recent divorce, which was finalised in February 2021.

 

 

7. During the year Mr Todd gifted a variety of dog toys and accessories to a close friend who’s Rhodesian Ridgeback was expecting its first litter of puppies. The total cost of the items was £650.  Mr Todd usually operates his business with a 56 per cent mark-up on cost price.  Mr Todd paid the cost price of £650 into his business and this is included in the sales figure for the year.

 

8. Todd’s capital allowances for the year ending 31 December 2021 were £17,780.

 

             Required

 

(a)         Calculate Mr Todd’s adjusted trading profit for the year ended 30 December 2021.

(10)

 

(b)         Mr Todd’s first accounting period was for 17 months from 1 August 2019 to 31 December 2021.  His tax adjusted profits for this first 17-month period were £76,500.

 

Using the results of his first 17-months trading and your adjusted trading profit figure for the year end 31 December 2021 (part a), calculate Mr Todd’s assessable profits for his first three tax years since commencing trading.  You should clearly identify any overlap periods and profits.

 

(c)         ‘In the Income Tax Acts, in the context of the calculation of the profits of a trade, references to receipts and expenses are to any items brought into account as credits or debits in calculating the profits’.

(Income Tax (Trading and Other Income) Act, 2005)

                          Required:

Using case law and examples to support your answer, discuss the rules surrounding allowable and disallowable expenditure when computing trading profits.

 

 

Tax rates and allowances 2021/22

 

Income tax rates

 

Non-savings income

 

Basic rate – taxable income up to £37,700  20%

Higher rate – between £37,701 and £150,000                                                        40%

Additional rate – above £150,000                 45%

 

 

Savings income

 

Starting rate band           (first £5,000 of taxable income)                                        0%

Basic rate band                                                                                                            20%

Higher rate band                                                                                                          40%

Additional rate                                                                                                            45%

 

Dividends

 

Nil rate band (first £2,000)                                                                                           0%

Basic rate band                                                                                                            7.5%

Higher rate band                                                                                                          32.5%

Additional rate                                                                                                              38.1%

 

Income tax allowances

 

Personal Allowance (PA)*                       £12,570

Married Couples Allowance (one spouse born before 6 April 1935)                                   £9,125

Minimum Married Couples                        £3,530

 

 

Income limit for age-related allowances (MCA)                                                       £30,400

 

*Income limit for PA                               £100,000

 

 

Capital allowances

 

Writing Down Allowance
Main pool	18%
Special Rate Pool	6%
Annual Investment Allowance from 1 January 2016 AIA Rate	£200,000 (1) 100%
First year allowance (FYA)
Low emission cars (0g/km)	100% (2) (3) (4)
Zero-emission goods vehicles	100%
Energy saving plant & equipment	100%

 

⁽¹⁾ The AIA Limit has been temporarily raised to £1m between 1 January 2019 and 31 December 2021

 

⁽²⁾ 0g/km for cars acquired on or after 1 April 2021

 

⁽³⁾ Expenditure on zero-emission goods vehicles eligible for 100% FYA as long as the expenditure is incurred on or before 5 April 2025.

 

⁽⁴⁾ Expenditure on charging points for electric vehicles incurred between 23 November 2016 and 5 April 2023 is also eligible for 100% FYA

 

Capital gains tax

 

CGT tax rate

Gains in the basic rate band                                                                                        10%⁽¹⁾

Gains above the basic rate band                                                                                 20%⁽¹⁾

Entrepreneurs’ relief rate                                                                                             10%

Entrepreneurs’ relief lifetime limit                                                                  £10,000,000

Annual exemption                                                                                                  £12,300

 

• Taxable gains on the disposal of residential property are taxed at 18% and 28%

 

 

 

Inheritance tax

 

0% band   £0 - £325,000                                                                                     0%

Rate on chargeable lifetime transfers                                                                20%

Rate on death                                                                                                    40%

(unless at least 10% of net estate given to charity then                                  (36%)

 

Main residence nil-rate band for 2021-22 is £175,000

 

Nil Rate Band

Tax year
2009/10 to 2021/22	£325,000
2008/09	£312,000
2007/08	£300,000
2006/07	£285,000

 

 

Taper relief

Period between transfer and death	%age tax reduction
0-3 years	0%
3-4 years	20%
4-5 years	40%
5-6 years	60%
6-7 years	80%

 

 

 

Corporation Tax

 

Financial year	FY2021	FY2020	FY2019	FY2018	FY2017
Main rate of corporation tax	19%	19%	19%	19%	19%
Patent box (effective rate)	10%	10%	10%	10%	10%
R&D SMEs Payable credit	14.5%	14.5%	14.5%	14.5%	14.5%
R&D expenditure credit1	13%	13%	12%	12%	11%

 

The main rate for FY2022 will be 19%