income tax 7... · for tax purposes, trading profits are normally calculated in accordance with...
TRANSCRIPT
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Professional, Practical, Proven
Self-employed income computation
Income Tax 7
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Schedule
2
Week Monday Chapter Ref. Topic Areas
Wk/Lecture 1 23rd Sep 1 Introduction and review of Tax Administration Procedures
Wk/Lecture 2 30th Sep 6 Introduction to CGT/Scope
Wk/Lecture 3 7th Oct 6 Capital Gains Tax Computation
Wk/Lecture 4 14th Oct 6 Capital Gains Tax Computation
Wk/Lecture 5 21st Oct 6 Special CGT Rules
28th Oct – 3rd Nov Reading Week 1
Wk/Lecture 6 4th Nov 2 Income Tax - Introduction
Wk/Lecture 7 11th Nov 2 Income Tax - Computation
Wk/Lecture 8 18th Nov 2 Income Tax - Losses
Wk/Lecture 9 25th Nov 3 Employment Income
Wk/Lecture 10 2nd Dec 4 Benefits in Kind
Wk/Lecture 11 9th Dec 5 Rental Income
Wk/Lecture 12 16th Dec 7 Self-Employment
23rd Dec – 12th Jan 2020 Christmas Break
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Schedule
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Week Monday Chapter Ref. Topic Areas23rd Dec – 12th Jan 2020 Christmas Break
Wk/Lecture 13 13th Jan 8 Capital Allowances
Wk/Lecture 14 20th Jan 9 Basis Periods
Wk/Lecture 15 27th Jan 10 Corporation Tax – Introduction
Wk/Lecture 16 3rd Feb 10 Corporation Tax – Capital Allowances
Wk/Lecture 17 10th Feb 10 Losses
Wk/Lecture 18 17th Feb 11 Chargeable Gains
Wk/Lecture 19 24th Feb 11 Close companies and Self-Assessment2nd Mar – 8th Mar Reading Week 2
Wk/Lecture 20 9th Mar 12 VAT - Introduction
Wk/Lecture 21 16th Mar 13 VAT – Detailed computation
Wk/Lecture 22 23rd Mar 14 CIS & NIC
Wk/Lecture 23 30th Mar 6 Revision - CGT
Wk/Lecture 24 6th Apr N/A Revision - Income tax
Wk/Lecture 25 13th Apr N/A Revision - Corporation tax
Wk/Lecture 26 20th Apr N/A Revision – Admin and VAT
Week 27 27th Apr
Week 28 4th May
11th May Examinations
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Schedule
4
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5
1. Badges of trade (6)2. Adjustment of profit3. Disallowable expenditure
• Capital expenditure• Wholly and exclusively • Specifically disallowed (16)
4. Income not taxed as trading income5. Trading income not shown in the accounts6. Self-employment and national insurance
• Class 2 • Class 4
Self-employment
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The profits of a self-employed person are charged to income tax by the Income Tax (Trading and Other Income) Act 2005.A self-employed person may be conducting a trade or may be exercising a profession or vocation. However, the profits of trades, professions and vocations are all taxed in accordance with the same set of rules. Therefore, references to "trades" and "trading" should be assumed to include professions and vocations. Similarly, the terms "trader" and "sole trader" will be used to refer to any self-employed person, regardless of whether that person is actually conducting a trade or is in fact exercising a profession or vocation.
Introduction
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ITTOIA 2005 states that the trading profits of a person who is resident in the UK are chargeable to income tax wherever the trade is carried on. The trading profits of a non-UK resident are chargeable to income tax only if the trade is carried on wholly or partly in the UK. When deciding whether or not a person is trading it is necessary to make two important distinctions:a) the distinction between employment and self-employment b) for a taxpayer who sells goods or other assets, the distinction
between trading activities (which give rise to trading profits) and non-trading activities (which will usually fall within the scope of capital gains tax).
The Badges of Trade
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Section 989 of the Income Tax Act 2007 states that a "trade" includes "any venture in the nature of trade". This circular definition is of little real help and therefore it has been left largely to the courts to decide whether or not a given activity constitutes trading.The main criteria which have arisen from case law decisions and which may be used to distinguish between trading and non-trading activities are known as the "badges of trade". They are as follows:a) Frequency of transactionb) Subject matter of the transactionc) Length of period of ownershipd) Modification/Supplementary worke) Profit Motivef) Way asset was acquired
The Badges of Trade
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The more often that a taxpayer repeats a certain type of transaction, the more likely it is that the activity will be construed as trading. In Pickford v Quirke (1927), the taxpayer bought a cotton mill and sold off its assets at a profit. This was the fourth time that the taxpayer had carried out this particular type of transaction and therefore he was held to be trading.
1. Frequency of transaction
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If a taxpayer sells assets of a type which might normally be acquired for personal enjoyment or held as a source of income, this may suggest that any profit arising on their sale should be treated as a capital gain rather than a trading profit.But if the assets concerned do not provide personal enjoyment and do not yield income, it would seem that the only way in which they could be turned to advantage is by selling them. In these circumstances, any profit arising on their sale might be treated as a trading profit. In Martin v Lowry (1926), the taxpayer bought and sold a huge quantity of war surplus linen. In Rutledge v CIR (1929), the taxpayer bought and sold one million toilet rolls. In both of these cases, it was held that the subject matter of the transaction was such that the activity must be construed as trading.
2. Subject matter of the transaction
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Trading stocks are normally retained for only a short period before being sold, whereas assets acquired for personal use or as a source of income are generally retained for longer. Therefore, if assets are bought and sold within a short space of time it is more likely that any profit made will be treated as a trading profit.
3. Length of period of ownership
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A taxpayer who buys an asset, performs work on the asset so as to make it more saleable and then sells the asset is more likely to be regarded as trading than someone who simply buys and sells an asset without performing any supplementary work. In Cape Brandy Syndicate v CIR (1921), a group of individuals bought a large quantity of brandy which they first blended and then sold. They were held to be trading.
4. Modification/Supplementary work
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The presence of a profit motive in the mind of the taxpayer when acquiring an asset provides strong evidence of trading. In Wisdom v Chamberlain (1969), the taxpayer acquired silver bullion with the intention of selling it at a profit and eventually did so. He was held to be trading.However, this test is not always conclusive. After all, many investments are bought at least partially with a view to their long-term sale at a profit and yet such profits are generally treated as capital gains. This point emphasises the need to consider the evidence provided by all of the badges of trade (not just one) when trying to decide whether or not trading has occurred.
5. Profit Motive
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If goods are acquitted intentionally, i.e. purchased, they are likely to be considered trading.If goods are acquired unintentionally, i.e. through inheritance or gift, any sale is unlikely to be considered trading.As with the profit motive test this “badge” needs to be considered along with the evidence provided by all of the badges of trade (not just one) when trying to decide whether or not trading has occurred.
6. The Way the Asset was acquired
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Calculation of profit
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The computation of a self-employed person's trading profit begins with the net profit shown by that person's accounts. For tax purposes, trading profits are normally calculated in accordance with generally accepted accounting practice, which means that income and expenditure should be measured on the accruals basis.It is usually necessary to make a number of adjustments to the net profit shown by the accounts in order to arrive at the trading profit for tax purposes.
The calculation of trading profits
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These adjustments can be summarised as follows:
The calculation of trading profits
Step Action £Step 1 Take the net profit per the accounts XStep 2 Add back disallowable expenditure XStep 3 Deduct income not taxed as trading income (X)Step 4 Add income that has not been included in the accounts XTax Adjusted Profit X
Addback
££7.2Adjustment of Profit
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2
xxx Step 3Deduct income not taxed as trading income(X)3
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4
but not shown in the accountsxxx Tax Adjusted ProfitX
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
NIC
Page 210 in the manual.
Tax adjusted profits56,000
Class 2£2.8052145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£56,000 - £43,000 = 13,000*2%260.00
Total Class 43,404.60
Total Class 2 and Class 4 NIC3,550.20
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.80*52145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£46,000 - £43,000 = 3,000*2%60.00
Total Class 43,204.60
Total Class 2 and Class 4 NIC3,350.20
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
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Generally expenses which are incurred “wholly and exclusively for the purposes of the trade” are deductible for tax purposes.Some expenses are specifically disallowable. If they are in the income statement (profit and loss account) of the trader they must be added back to the net profit to get the taxable profit.”Disallowable”, “non-deductible” and “not allowable” all mean the same thing, i.e. that the expenditure must be added back to the accounting profit to get the tax profit.The disallowable expenditure will be considered as follows:1. Capital expenditure2. Wholly and exclusively (16 examples)
Disallowable expenditure
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Capital expenditure is a disallowable expense for income tax purposes and therefore has to be added back if there is any in the profit and loss account.The distinction between capital and revenue expenditure is not always straight forward. The general rule is that:• Repairs are revenue expenditure and are deductible; and • Improvements are capital expenditure and are disallowable.Capital expenditure generally brings an enduring benefit to the business, whereas revenue expenditure simply remedies wear and tear on an asset. The phrase enduring benefit came from Atherton v British Insulated & Helsby Cables Ltd (1926).Capital allowances are normally available on capital expenditure to give some tax relief on capital expenditure.
Capital expenditure
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There are a number of specific cases of capital expenditure to be aware of:1) Depreciation/loss on sale/profit on sale – these are all accounting
measures designed to match the cost of using an asset over its useful life. Therefore depreciation and loss on sale should be added back to profit and a profit on sale should be deducted from profit.
2) Legal fees in acquiring an asset – these are part of the cost of the asset and should be added back if included in the profit and loss account
3) Cost of improving an asset – an improvement is capital expenditure and should be added back, although the replacement of single glazed windows with double glazed is treated as a repair.
Capital expenditure
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4) Cost of repairs to a newly acquired asset to make it usable – this is capital but if the asset is usable before it is acquired the cost of repairs is generally allowed. In the case of Odeon Associated Theatres Ltd v Jones (1971), repairs to cinemas which had been bought in a state of disrepair (but were nonetheless usable) were allowed as revenue expenditure.
Capital expenditure
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In general, expenditure is deductible (allowable) when computing trading profits only if it is incurred wholly and exclusively for the purposes of the trade. This rule is not as restrictive as the "wholly, exclusively and necessarily" rule applied to the expenses of an employee but it does have the following implications:1) Remoteness Test
Expenditure which has no connection with the trade is disallowed. In Strong & Co of Romsey Ltd v Woodifield (1906), damages paid by a brewery to a hotel guest injured by a falling chimney were disallowed. These damages were incurred by the brewery in its capacity as a property owner, not in its capacity as a trader, and therefore failed the remoteness test.
Wholly and exclusively
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2) Duality testExpenditure which serves both a business purpose and a private purpose cannot be allowed in full. If the expenditure can be apportioned with reasonable accuracy, then the private element is disallowed. However, in Mallalieu v Drummond (1983), the cost of black clothing worn in court by a lady barrister was wholly disallowed, since it was not possible to apportion the cost of the clothing between the part which satisfied professional standards of dress and the part which simply provided warmth and decency.
Even if expenditure passes both of these tests (remoteness and duality) it may still be disallowed by statute.
Deductibility of expenditure
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Disallowed expenditure
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Certain classes of expenditure are disallowed (either by statute or by case law) when computing trading profits. If any of these types of expenditure have been deducted in the accounts of a self-employed person, then the amount of the expenditure must be "added back" to the profit shown by the accounts in order to arrive at the trading profit for tax purposes.
Disallowed expenditure
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Appropriations of profit made by the owner of a business (whether these are described as drawings, owner's salary or anything else) are disallowed. The cost of salaries and/or bonuses paid to employees is allowed if paid within 9 months of the end of the period of account in which they are accrued. If not then they will be allowed in the period in which they are actually paid.The owner's personal income tax payments and personal National Insurance contributions are also disallowed.A salary paid to a family member is allowable only if there is a requirement to employ someone in that position. The payment to the connected person must be reasonable and not over and above the industry average for that position.Redundancy payments (a form of pay) are allowable if paid to employees who are working wholly within the trade.
1. Salaries/Drawings
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Patent royalties are allowable if paid for trade purposes. The cost of registering patent royalties and trade marks are allowable.
2. Patent royalties
Bank interest is an allowable expense if it relates to the business. However if the loan is non-business related (personal) then it is a private expense and it must be added back to the accounting profit.
3. Bank interest
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Generally HMRC allow taxpayers to apportion an expense between the private element and the business element. The private element of the expense is disallowable and added back to the net profit.
ExampleJane has motor running costs in her accounts of £3,000. However, she believes that 20% of her motoring is private and only 80% related to business use. She also has interest costs of £450 in her profit and loss account. £350 of this relates to overdraft interest on her business bank account and £100 relates to interest on her personal credit card.Her accounting profit for the year is £14,800.Calculate Jane’s tax adjusted profit.
4. Private element of expenses
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Solution
4. Private element of expenses
£3,000 x 20% = £600
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
NIC
Page 210 in the manual.
Tax adjusted profits56,000
Class 2£2.8052145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£56,000 - £43,000 = 13,000*2%260.00
Total Class 43,404.60
Total Class 2 and Class 4 NIC3,550.20
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.80*52145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£46,000 - £43,000 = 3,000*2%60.00
Total Class 43,204.60
Total Class 2 and Class 4 NIC3,350.20
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
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Staff entertaining costs are allowable but the employees concerned may incur an income tax liability if the amount involved exceeds specified limits.The cost of customer entertaining is disallowed.
5. Entertainment
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The cost of gifts made to customers is also disallowed, other than:a) Gifts to employees, if made wholly and exclusively for trade
purposes. The employee may be taxed on the BIK if the gift is considered to be excessive;
b) Gifts to customers costing no more than £50 per customer per year, displaying a conspicuous advertisement for the business and not consisting of food, drink or tobacco; and
c) Reasonably small gifts to local charities, if made wholly and exclusively for the purposes of the trade, i.e. the purpose is to attract favourable publicity and to enhance the image of the business.
6. Gifts
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Bad debts incurred in the course of trade are allowable. But loans written off are generally not allowable unless:a) the taxpayer is in the business of lending money and the loan concerned was made in the course of trade, orb) the loan was to an employee and was made by reason of the employment and for trade purposes; in this case, the amount of the written-off loan will usually be taxable on the employee as income from employment.Transfers to a specific bad debts provision (or allowance) are allowable but transfers to a general provision are usually disallowed, as stated earlier. Bad debts recovered and reductions in a specific bad debts provision are both treated as trading income.
7. Bad debts
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Fines or penalties incurred because of infringements of the law are not regarded as trading expenses and are disallowed. An exception occurs if an employer pays parking fines incurred by employees whilst on their employer’s business. Such payments are usually allowed when computing trading profits but may then be assessed on the employees as income from employment.
8. Fines and penalties
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Accountancy fees are generally allowable, however accountancy fees that relate to specialist consultancy taxation work are disallowable.Fees in relation to a HMRC enquiry are disallowable if the enquiry results in an additional tax liability.
9. Accountancy fees
10. Charitable donationsDonations made to local charities are allowable on the basis that the business will attract favourable publicity as a result of making the donation. Donations made to national charities are not allowable for tax purposes, however relief may be given on the personal tax return via gift aid rules.
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Political donations are allowable if they provide a benefit to the business; however this is unusual and most political donations are disallowable.In Morgan v Tate & Lyle Ltd (1954), the costs of a political campaign against nationalisation were allowed on the grounds that the campaign was waged for the survival of the trade.
11. Political donations
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12. Subscriptions
Trade subscriptions are generally deductible, examples include subscriptions to trade magazines, professional subscriptions etc.
13. Keyman insuranceKeyman insurance that relates specifically to the owner of the business is disallowable.
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Pension payments to registered pension schemes for employees are allowed in the period of account in which they are paid. Therefore any pension accrual included in the income statement is disallowed and allowed in the year it is paid. Pension contributions for the business owner are disallowed and tax relief is given in the income tax computation.
14. Pension contributions
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15. Car lease rental payments/Contract hire
Cars which have CO2 emissions exceeding 110g/km, will have 15% of their lease rental/contract hire payments added back when calculating the tax adjusted profits. There is a further restriction for personal use.
16. VAT accrualAny accrual in relation to a VAT liability is disallowable and allowable only when paid.
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Shane runs a consultancy business in Kilrea. These are his accounts for the year ending 5 April 2020:
Example - Shane
£Income 100,000Expenses:Wages 1 44,710Bank interest 2 1,120Telephone 3 840Repairs and maintenance 4 16,200Depreciation 1,490Loss on disposal of laptop 150Donation to Dogs Trust 400Hire charge for car 5 2,400Advertising 6 1,230
68,540
Net profit 31,460
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
Rodney
Rodney
£
Sales49,287
Expenses:
Wages to staff19,500
Drawings taken by owner17,500
Electricity1,770
Motor expenses1980
Advertising and entertainment2670
Depreciation865
Parking fine incurred by Rodney75
Bad debts3768
Interest41,050
43,178
Net profit6,109
Breakdown of expenses£
(1) Motor expenses
Rodney's expenses (20% is private related)65020%
Staff expenses330
980
(2) Advertising and entertainment
Leaflets printed370
Gifts of key rings with logo to 150 customers225
Dinner with customers75
670
(3) Bad debts
Increase in specific bad debt368
Increase in general bad detb100
Trade debts written off300
768
(4) Interest
Overdraft interest590
Interest on loan to son300
Personal credit card interest160
1,050
Tax adjusted profit for the year.
Net profit6,109
Add back:
Drawings taken by owner17,500
Motor expenses (1)130
Advertising and entertainment (2)75
Depreciation865
Parking fine incurred by Rodney75
Bad debts (3)100
Interest (4)460
19,205
25,314
Shauna
Shauna
£
Gross profit77,320
Expenses:
Wages144,990
Electricity25,829
Repairs and maintenance38,500
Depreciation1,490
Donation to Oxfam250
Hire charge for car42,750
Advertising51,175
64,984
Net profit12,336
Breakdown of expenses£
(1) Wages
Wages to staff21,710
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
44,990
(2) Electricity
Relating to flat15%
(3) Repairs and maintenance
Extension to dining area in restaurant7,500
Repainting whole of building1,00020%
8,500
(4) Hire charge for car2,750
(5) Advertising
Gifts of hampers to customers690
Adverts in local newspapers290
Membership of Food Circle195
1,175
Tax adjusted profit for the year.
Net profit12,336
Add back:
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
Electricity (15% x £5,829)874
Extension to dining area in restaurant7,500
Repainting part of building200
Hire charge for car x 15%413
Gifts of hampers to customers690
Depreciation1,490
Donation to Oxfam250
34,697
Tax adjusted profit47,033
Shane
Shane - my example for lecture.
£1Salaries/wages/drawingsü
Income100,0002Patent royaltiesû
Expenses:3Bank interest - privateü
Wages144,7104Private elementü
Bank interest21,1205Entertainmentü
Telephone38406Giftsü
Repairs and maintenance416,2007Bad debtsû
Depreciation1,4908Fines and penaltiesû
Loss on disposal of laptop1509Accountancy feesû
Donation to Dogs Trust40010Charitable donationsü
Hire charge for car52,40011Political donationsû
Advertising61,23012Subscriptionsû
68,54013Keymanû
14Pension contributionsû
Net profit31,46015Car lease rentalü
16VAT accrualû
Breakdown of expenses
(1) Wages£Repairsü
Wages to staff21,710
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
44,710
(2) Bank interest£
Overdraft interest900
Personal credit card interest220
1,120
(3) Telephone£
Business premises600
Home phone (40% personal use)24040%
840
(4) Repairs and maintenance£
New front porch to business premises15,000
Repainting whole of building1,200
16,200
(5) Hire charge for car£2,400
Emissions of car hired:135g/km
(All business use)
(6) Advertising£
Bottles of gin to customers for Xmas690
Advertising board at local football club540
1,230
Tax adjusted profit for the year.
£
Net profit31,460
Add back:
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
Personal credit card interest220
Home phone (40% x £240)96
New front porch to business premises15,000
Donation to Dogs Trust400
Hire charge for car x 15%360
Depreciation1,490
Loss on disposal of laptop150
Bottles of gin to customers for Xmas690
41,406
Tax adjusted profit72,866
Fergus
Fergus- my 2nd example for lecture.
£
Sales100,000
Less: Cost of sales(30,000)
Gross profit70,000
Other income:
Rental income6,000
Interest received50
6,050
76,050
Expenses:
Wages127,5001Salaries/wages/drawingsüû
Bad debts21,0202Patent royaltiesûû
General expenses34403Bank interest - privateüû
Accountancy45,0004Private elementüû
Depreciation1,8005Entertainmentüû
Travel expenses (all business)4006Giftsüü
Insurance52,7007Bad debtsûü
Advertising61,6808Fines and penaltiesûü
40,5409Accountancy feesûü
10Charitable donationsüû
Net profit35,51011Political donationsûû
12Subscriptionsûü
Breakdown of expenses13Keymanûü
(1) Wages£14Pension contributionsûü
Wages to staff24,00015Car lease rentalüû
Personal pension contribution by Fergus3,50016VAT accrualûû
27,500
Repairsüû
(2) Bad debts£
Specific bad debts written off220
Increase in general bad debt provision300
Loan to customer written off500"Loans written off are only allowable if:
1,020 taxpayer is a money lender, or
loan was to an employee (BIK for employee)
(3) General expenses£
Parking fine for Fergus100
Parking fine for van driver on delivery100
Subscription to local chamber of commerce240
440
(4) Accountancy£
Accounts preparation work2,000
Tax planning advice for inheritance tax3,000
5,000
(5) Insurance£
Business property insurance2,000
Keyman insurance on Fergus300
Holiday home insurance400
2,700
(6) Advertising£
Weekly advertisements in local press1,080
Calendars for customers with logo (£6 each)600
1,680
Goods taken for own use600
Tax adjusted profit for the year.
£
Net profit35,510
Add back:
Personal pension contribution by Fergus3,500
Increase in general bad debt provision300
Loan to customer written off500
Parking fine for Fergus100
Tax planning advice for inheritance tax3,000
Keyman insurance on Fergus300
Holiday home insurance400
Depreciation1,800
Goods taken for own use600
10,500
Deduct:
Rental income6,000
Interest received50
6,050
Tax adjusted profit39,960
Kevin
KevinExercise 1 on page 209 of 17/18 manual
Solution on page 217
£
Net profit22,578
Expenses:
Car expenses2,900
Business miles19,000
Private miles13,75032,750
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Gifts to customers with logo costing £4.50 each
Drawings7,800
Wife's wages6,500
Keyman insurance for Kevin450
Depreciation725
Tax adjusted profit for the year.
£
Net profit22,578
Add back:
Car expenses (13,750/32,750 x £2,9001,218
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Drawings7,800
Keyman insurance for Kevin450
Depreciation725
13,443
Tax adjusted profit36,021
NIC
Page 210 in the manual. (214 17/18)
Tax adjusted profits56,000
Class 2£2.8552148.20
Class 4Profits between8,164and45,000
£45,000 - £8,164 = 36,836*9%3,315.24
Profits greater than45,000
£56,000 - £45,000 = 11,000*2%220.00
Total Class 43,535.24
Total Class 2 and Class 4 NIC3,683.44
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.85*52148.20
Class 4Profits between8,164and45,000
£45,000 - £8,164 = 36,836*9%3,315.24
Profits greater than45,000
£46,000 - £45,000 = 1,000*2%20.00
Total Class 43,335.24
Total Class 2 and Class 4 NIC3,483.44
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
-
40
Breakdown of expenses:
Example - Shane
(1) Wages £Wages to staff 21,710Drawings by Shane 19,500Provision for Shane 's income tax 3,500
44,710
(2) Bank interest £Overdraft interest 900Personal credit card interest 220
1,120
(3) Telephone £Business premises 600Home phone (40% personal use) 240
840
(4) Repairs and maintenance £New front porch to business premises 15,000Repainting whole of building 1,200
16,200
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
Rodney
Rodney
£
Sales49,287
Expenses:
Wages to staff19,500
Drawings taken by owner17,500
Electricity1,770
Motor expenses1980
Advertising and entertainment2670
Depreciation865
Parking fine incurred by Rodney75
Bad debts3768
Interest41,050
43,178
Net profit6,109
Breakdown of expenses£
(1) Motor expenses
Rodney's expenses (20% is private related)65020%
Staff expenses330
980
(2) Advertising and entertainment
Leaflets printed370
Gifts of key rings with logo to 150 customers225
Dinner with customers75
670
(3) Bad debts
Increase in specific bad debt368
Increase in general bad detb100
Trade debts written off300
768
(4) Interest
Overdraft interest590
Interest on loan to son300
Personal credit card interest160
1,050
Tax adjusted profit for the year.
Net profit6,109
Add back:
Drawings taken by owner17,500
Motor expenses (1)130
Advertising and entertainment (2)75
Depreciation865
Parking fine incurred by Rodney75
Bad debts (3)100
Interest (4)460
19,205
25,314
Shauna
Shauna
£
Gross profit77,320
Expenses:
Wages144,990
Electricity25,829
Repairs and maintenance38,500
Depreciation1,490
Donation to Oxfam250
Hire charge for car42,750
Advertising51,175
64,984
Net profit12,336
Breakdown of expenses£
(1) Wages
Wages to staff21,710
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
44,990
(2) Electricity
Relating to flat15%
(3) Repairs and maintenance
Extension to dining area in restaurant7,500
Repainting whole of building1,00020%
8,500
(4) Hire charge for car2,750
(5) Advertising
Gifts of hampers to customers690
Adverts in local newspapers290
Membership of Food Circle195
1,175
Tax adjusted profit for the year.
Net profit12,336
Add back:
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
Electricity (15% x £5,829)874
Extension to dining area in restaurant7,500
Repainting part of building200
Hire charge for car x 15%413
Gifts of hampers to customers690
Depreciation1,490
Donation to Oxfam250
34,697
Tax adjusted profit47,033
Sheet1
Shane - my example for lecture.
£1Salaries/wages/drawingsü
Income100,0002Patent royaltiesû
Expenses:3Bank interest - privateü
Wages144,7104Private elementü
Bank interest21,1205Entertainmentü
Telephone38406Giftsü
Repairs and maintenance416,2007Bad debtsü
Depreciation1,4908Fines and penaltiesü
Loss on disposal of laptop1509Accountancy feesü
Donation to Dogs Trust40010Charitable donationsü
Hire charge for car52,40011Political donationsü
Advertising61,23012Subscriptionsü
68,54013Keymanü
14Pension contributionsü
Net profit31,46015Car lease rentalü
16VAT accrualû
Breakdown of expenses
(1) Wages£Repairs
Wages to staff21,710
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
44,710
(2) Bank interest£
Overdraft interest900
Personal credit card interest220
1,120
(3) Telephone£
Business premises600
Home phone (40% personal use)24040%
840
(4) Repairs and maintenance£
New front porch to business premises15,000
Repainting whole of building1,200
16,200
(5) Hire charge for car£2,400
Emissions of car hired:135g/km
(All business use)
(6) Advertising£
Bottles of gin to customers for Xmas690
Advertising board at local football club300
Membership of Professional body240
1,230
Tax adjusted profit for the year.
£
Net profit31,460
Add back:
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
Personal credit card interest220
Home phone (40% x £240)96
New front porch to business premises15,000
Hire charge for car x 15%360
Bottles of gin to customers for Xmas690
Repairs and maintenance400
Depreciation1,490
Loss on disposal of laptop150
Bottles of gin to customers for Xmas690
42,096
Tax adjusted profit73,556
Kevin
KevinExercise 1 on page 209 of 17/18 manual
Solution on page 217
£
Net profit22,578
Expenses:
Car expenses2,900
Business miles19,000
Private miles13,75032,750
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Gifts to customers with logo costing £4.50 each
Drawings7,800
Wife's wages6,500
Keyman insurance for Kevin450
Depreciation725
Tax adjusted profit for the year.
£
Net profit22,578
Add back:
Car expenses (13,750/32,750 x £2,9001,218
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Drawings7,800
Keyman insurance for Kevin450
Depreciation725
13,443
Tax adjusted profit36,021
NIC
Page 210 in the manual.
Tax adjusted profits56,000
Class 2£2.8052145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£56,000 - £43,000 = 13,000*2%260.00
Total Class 43,404.60
Total Class 2 and Class 4 NIC3,550.20
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.80*52145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£46,000 - £43,000 = 3,000*2%60.00
Total Class 43,204.60
Total Class 2 and Class 4 NIC3,350.20
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
-
41
Breakdown of expenses (continued):
Required:Calculate Shane’s tax adjusted profit for this year.
Example - Shane
(5) Hire charge for car £2,400Emissions of car hired: 135 g/km(All business use)
(6) Advertising £Bottles of gin to customers for Xmas 690Advertising board at local football club 540
1,230
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
Rodney
Rodney
£
Sales49,287
Expenses:
Wages to staff19,500
Drawings taken by owner17,500
Electricity1,770
Motor expenses1980
Advertising and entertainment2670
Depreciation865
Parking fine incurred by Rodney75
Bad debts3768
Interest41,050
43,178
Net profit6,109
Breakdown of expenses£
(1) Motor expenses
Rodney's expenses (20% is private related)65020%
Staff expenses330
980
(2) Advertising and entertainment
Leaflets printed370
Gifts of key rings with logo to 150 customers225
Dinner with customers75
670
(3) Bad debts
Increase in specific bad debt368
Increase in general bad detb100
Trade debts written off300
768
(4) Interest
Overdraft interest590
Interest on loan to son300
Personal credit card interest160
1,050
Tax adjusted profit for the year.
Net profit6,109
Add back:
Drawings taken by owner17,500
Motor expenses (1)130
Advertising and entertainment (2)75
Depreciation865
Parking fine incurred by Rodney75
Bad debts (3)100
Interest (4)460
19,205
25,314
Shauna
Shauna
£
Gross profit77,320
Expenses:
Wages144,990
Electricity25,829
Repairs and maintenance38,500
Depreciation1,490
Donation to Oxfam250
Hire charge for car42,750
Advertising51,175
64,984
Net profit12,336
Breakdown of expenses£
(1) Wages
Wages to staff21,710
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
44,990
(2) Electricity
Relating to flat15%
(3) Repairs and maintenance
Extension to dining area in restaurant7,500
Repainting whole of building1,00020%
8,500
(4) Hire charge for car2,750
(5) Advertising
Gifts of hampers to customers690
Adverts in local newspapers290
Membership of Food Circle195
1,175
Tax adjusted profit for the year.
Net profit12,336
Add back:
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
Electricity (15% x £5,829)874
Extension to dining area in restaurant7,500
Repainting part of building200
Hire charge for car x 15%413
Gifts of hampers to customers690
Depreciation1,490
Donation to Oxfam250
34,697
Tax adjusted profit47,033
Shane
Shane - my example for lecture.
£1Salaries/wages/drawingsü
Income100,0002Patent royaltiesû
Expenses:3Bank interest - privateü
Wages144,7104Private elementü
Bank interest21,1205Entertainmentü
Telephone38406Giftsü
Repairs and maintenance416,2007Bad debtsû
Depreciation1,4908Fines and penaltiesû
Loss on disposal of laptop1509Accountancy feesû
Donation to Dogs Trust40010Charitable donationsü
Hire charge for car52,40011Political donationsû
Advertising61,23012Subscriptionsû
68,54013Keymanû
14Pension contributionsû
Net profit31,46015Car lease rentalü
16VAT accrualû
Breakdown of expenses
(1) Wages£Repairsü
Wages to staff21,710
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
44,710
(2) Bank interest£
Overdraft interest900
Personal credit card interest220
1,120
(3) Telephone£
Business premises600
Home phone (40% personal use)24040%
840
(4) Repairs and maintenance£
New front porch to business premises15,000
Repainting whole of building1,200
16,200
(5) Hire charge for car£2,400
Emissions of car hired:135g/km
(All business use)
(6) Advertising£
Bottles of gin to customers for Xmas690
Advertising board at local football club540
1,230
Tax adjusted profit for the year.
£
Net profit31,460
Add back:
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
Personal credit card interest220
Home phone (40% x £240)96
New front porch to business premises15,000
Donation to Dogs Trust400
Hire charge for car x 15%360
Depreciation1,490
Loss on disposal of laptop150
Bottles of gin to customers for Xmas690
41,406
Tax adjusted profit72,866
Fergus
Fergus- my 2nd example for lecture.
£
Sales100,000
Less: Cost of sales(30,000)
Gross profit70,000
Other income:
Rental income6,000
Interest received50
6,050
76,050
Expenses:
Wages127,5001Salaries/wages/drawingsüû
Bad debts21,0202Patent royaltiesûû
General expenses34403Bank interest - privateüû
Accountancy45,0004Private elementüû
Depreciation1,8005Entertainmentüû
Travel expenses (all business)4006Giftsüü
Insurance52,7007Bad debtsûü
Advertising61,6808Fines and penaltiesûü
40,5409Accountancy feesûü
10Charitable donationsüû
Net profit35,51011Political donationsûû
12Subscriptionsûû
Breakdown of expenses13Keymanûü
(1) Wages£14Pension contributionsûü
Wages to staff24,00015Car lease rentalüû
Personal pension contribution by Fergus3,50016VAT accrualûû
27,500
Repairsüû
(2) Bad debts£
Specific bad debts written off220
Increase in general bad debt provision300
Loan to customer written off500"Loans written off are only allowable if:
1,020 taxpayer is a money lender, or
loan was to an employee (BIK for employee)
(3) General expenses£
Parking fine for Fergus100
Parking fine for van driver on delivery100
Sundries240
440
(4) Accountancy£
Accounts preparation work2,000
Tax planning advice for inheritance tax3,000
5,000
(5) Insurance£
Business property insurance2,000
Keyman insurance on Fergus300
Holiday home insurance400
2,700
(6) Advertising£
Weekly advertisements in local press1,080
Calendars for customers with logo (£6 each)600
1,680
Goods taken for own use600
Tax adjusted profit for the year.
£
Net profit35,510
Add back:
Personal pension contribution by Fergus3,500
Increase in general bad debt provision300
Loan to customer written off500
Parking fine for Fergus100
Tax planning advice for inheritance tax3,000
Keyman insurance on Fergus300
Holiday home insurance400
Depreciation1,800
Goods taken for own use600
10,500
Deduct:
Rental income6,000
Interest received50
6,050
Tax adjusted profit39,960
Kevin
KevinExercise 1 on page 209 of 17/18 manual
Solution on page 217
£
Net profit22,578
Expenses:
Car expenses2,900
Business miles19,000
Private miles13,75032,750
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Gifts to customers with logo costing £4.50 each
Drawings7,800
Wife's wages6,500
Keyman insurance for Kevin450
Depreciation725
Tax adjusted profit for the year.
£
Net profit22,578
Add back:
Car expenses (13,750/32,750 x £2,9001,218
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Drawings7,800
Keyman insurance for Kevin450
Depreciation725
13,443
Tax adjusted profit36,021
NIC
Page 210 in the manual. (214 17/18)
Tax adjusted profits56,000
Class 2£2.8552148.20
Class 4Profits between8,164and45,000
£45,000 - £8,164 = 36,836*9%3,315.24
Profits greater than45,000
£56,000 - £45,000 = 11,000*2%220.00
Total Class 43,535.24
Total Class 2 and Class 4 NIC3,683.44
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.85*52148.20
Class 4Profits between8,164and45,000
£45,000 - £8,164 = 36,836*9%3,315.24
Profits greater than45,000
£46,000 - £45,000 = 1,000*2%20.00
Total Class 43,335.24
Total Class 2 and Class 4 NIC3,483.44
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
-
42
Tax adjusted profit for the year:
Solution - Shane
Cars which have CO2 emissions exceeding 110g/km have 15% of rental cost added back:
£2,400 x 15% = £360
£Net profit 31,460Add back:Drawings by Shane 19,500Provision for Shane 's income tax 3,500Personal credit card interest 220Home phone (40% x £240) 96New front porch to business premises 15,000Depreciation 1,490Loss on disposal of laptop 150Donation to Dogs Trust 400Hire charge for car x 15% 360Bottles of gin to customers for Xmas 690
41,406
Tax adjusted profit 72,866
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
Rodney
Rodney
£
Sales49,287
Expenses:
Wages to staff19,500
Drawings taken by owner17,500
Electricity1,770
Motor expenses1980
Advertising and entertainment2670
Depreciation865
Parking fine incurred by Rodney75
Bad debts3768
Interest41,050
43,178
Net profit6,109
Breakdown of expenses£
(1) Motor expenses
Rodney's expenses (20% is private related)65020%
Staff expenses330
980
(2) Advertising and entertainment
Leaflets printed370
Gifts of key rings with logo to 150 customers225
Dinner with customers75
670
(3) Bad debts
Increase in specific bad debt368
Increase in general bad detb100
Trade debts written off300
768
(4) Interest
Overdraft interest590
Interest on loan to son300
Personal credit card interest160
1,050
Tax adjusted profit for the year.
Net profit6,109
Add back:
Drawings taken by owner17,500
Motor expenses (1)130
Advertising and entertainment (2)75
Depreciation865
Parking fine incurred by Rodney75
Bad debts (3)100
Interest (4)460
19,205
25,314
Shauna
Shauna
£
Gross profit77,320
Expenses:
Wages144,990
Electricity25,829
Repairs and maintenance38,500
Depreciation1,490
Donation to Oxfam250
Hire charge for car42,750
Advertising51,175
64,984
Net profit12,336
Breakdown of expenses£
(1) Wages
Wages to staff21,710
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
44,990
(2) Electricity
Relating to flat15%
(3) Repairs and maintenance
Extension to dining area in restaurant7,500
Repainting whole of building1,00020%
8,500
(4) Hire charge for car2,750
(5) Advertising
Gifts of hampers to customers690
Adverts in local newspapers290
Membership of Food Circle195
1,175
Tax adjusted profit for the year.
Net profit12,336
Add back:
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
Electricity (15% x £5,829)874
Extension to dining area in restaurant7,500
Repainting part of building200
Hire charge for car x 15%413
Gifts of hampers to customers690
Depreciation1,490
Donation to Oxfam250
34,697
Tax adjusted profit47,033
Shane
Shane - my example for lecture.
£1Salaries/wages/drawingsü
Income100,0002Patent royaltiesû
Expenses:3Bank interest - privateü
Wages144,7104Private elementü
Bank interest21,1205Entertainmentü
Telephone38406Giftsü
Repairs and maintenance416,2007Bad debtsû
Depreciation1,4908Fines and penaltiesû
Loss on disposal of laptop1509Accountancy feesû
Donation to Dogs Trust40010Charitable donationsü
Hire charge for car52,40011Political donationsû
Advertising61,23012Subscriptionsû
68,54013Keymanû
14Pension contributionsû
Net profit31,46015Car lease rentalü
16VAT accrualû
Breakdown of expenses
(1) Wages£Repairsü
Wages to staff21,710
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
44,710
(2) Bank interest£
Overdraft interest900
Personal credit card interest220
1,120
(3) Telephone£
Business premises600
Home phone (40% personal use)24040%
840
(4) Repairs and maintenance£
New front porch to business premises15,000
Repainting whole of building1,200
16,200
(5) Hire charge for car£2,400
Emissions of car hired:135g/km
(All business use)
(6) Advertising£
Bottles of gin to customers for Xmas690
Advertising board at local football club540
1,230
Tax adjusted profit for the year.
£
Net profit31,460
Add back:
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
Personal credit card interest220
Home phone (40% x £240)96
New front porch to business premises15,000
Depreciation1,490
Loss on disposal of laptop150
Donation to Dogs Trust400
Hire charge for car x 15%360
Bottles of gin to customers for Xmas690
41,406
Tax adjusted profit72,866
Fergus
Fergus- my 2nd example for lecture.
£
Sales100,000
Less: Cost of sales(30,000)
Gross profit70,000
Other income:
Rental income6,000
Interest received50
6,050
76,050
Expenses:
Wages127,5001Salaries/wages/drawingsüû
Bad debts21,0202Patent royaltiesûû
General expenses34403Bank interest - privateüû
Accountancy45,0004Private elementüû
Depreciation1,8005Entertainmentüû
Travel expenses (all business)4006Giftsüü
Insurance52,7007Bad debtsûü
Advertising61,6808Fines and penaltiesûü
40,5409Accountancy feesûü
10Charitable donationsüû
Net profit35,51011Political donationsûû
12Subscriptionsûü
Breakdown of expenses13Keymanûü
(1) Wages£14Pension contributionsûü
Wages to staff24,00015Car lease rentalüû
Personal pension contribution by Fergus3,50016VAT accrualûû
27,500
Repairsüû
(2) Bad debts£
Specific bad debts written off220
Increase in general bad debt provision300
Loan to customer written off500"Loans written off are only allowable if:
1,020 taxpayer is a money lender, or
loan was to an employee (BIK for employee)
(3) General expenses£
Parking fine for Fergus100
Parking fine for van driver on delivery100
Subscription to local chamber of commerce240
440
(4) Accountancy£
Accounts preparation work2,000
Tax planning advice for inheritance tax3,000
5,000
(5) Insurance£
Business property insurance2,000
Keyman insurance on Fergus300
Holiday home insurance400
2,700
(6) Advertising£
Weekly advertisements in local press1,080
Calendars for customers with logo (£6 each)600
1,680
Goods taken for own use600
Tax adjusted profit for the year.
£
Net profit35,510
Add back:
Personal pension contribution by Fergus3,500
Increase in general bad debt provision300
Loan to customer written off500
Parking fine for Fergus100
Tax planning advice for inheritance tax3,000
Keyman insurance on Fergus300
Holiday home insurance400
Depreciation1,800
Goods taken for own use600
10,500
Deduct:
Rental income6,000
Interest received50
6,050
Tax adjusted profit39,960
Kevin
KevinExercise 1 on page 209 of 17/18 manual
Solution on page 217
£
Net profit22,578
Expenses:
Car expenses2,900
Business miles19,000
Private miles13,75032,750
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Gifts to customers with logo costing £4.50 each
Drawings7,800
Wife's wages6,500
Keyman insurance for Kevin450
Depreciation725
Tax adjusted profit for the year.
£
Net profit22,578
Add back:
Car expenses (13,750/32,750 x £2,9001,218
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Drawings7,800
Keyman insurance for Kevin450
Depreciation725
13,443
Tax adjusted profit36,021
NIC
Page 210 in the manual. (214 17/18)
Tax adjusted profits56,000
Class 2£2.8552148.20
Class 4Profits between8,164and45,000
£45,000 - £8,164 = 36,836*9%3,315.24
Profits greater than45,000
£56,000 - £45,000 = 11,000*2%220.00
Total Class 43,535.24
Total Class 2 and Class 4 NIC3,683.44
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.85*52148.20
Class 4Profits between8,164and45,000
£45,000 - £8,164 = 36,836*9%3,315.24
Profits greater than45,000
£46,000 - £45,000 = 1,000*2%20.00
Total Class 43,335.24
Total Class 2 and Class 4 NIC3,483.44
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
-
Income not taxed as trading income
-
44
Income that is not taxable as trading income should be deducted from the net profit:
The types of income that must be deducted are:1. Capital receipts2. Income taxed under another heading3. Income specifically exempt from tax.
Income not taxed as trading income
Step Action £Step 1 Take the net profit per the accounts XStep 2 Add back disallowable expenditure XStep 3 Deduct income not taxed as trading income (X)Step 4 Add income that has not been included in the accounts XTax Adjusted Profit X
Addback
££7.2Adjustment of Profit
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2
xxx Step 3Deduct income not taxed as trading income(X)3
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4
but not shown in the accountsxxx Tax Adjusted ProfitX
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
NIC
Page 210 in the manual.
Tax adjusted profits56,000
Class 2£2.8052145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£56,000 - £43,000 = 13,000*2%260.00
Total Class 43,404.60
Total Class 2 and Class 4 NIC3,550.20
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.80*52145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£46,000 - £43,000 = 3,000*2%60.00
Total Class 43,204.60
Total Class 2 and Class 4 NIC3,350.20
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
-
45
1. Capital receiptsThis refers to profits made on the disposal of a capital asset. This could be an “accounting profit” (as opposed to a loss on disposal) or a “capital gain”. These will be dealt with through capital allowances or capital gains tax.2. Income taxed under another heading.This refers to income in other parts of the income tax computation, e.g. rental income, dividends or interest received.3. Income specifically exempt from tax.This could include lottery wins etc (Income tax lecture 1, slide 10 –benefits etc).
Income not taxed as trading income
-
46
The most common example of trading income being omitted from the accounts of a business occurs when the owner of the business appropriates trading stock (or inventory) for his or her personal use. This is referred to as "own consumption".In this situation, generally accepted accounting practice (GAAP) suggests that the cost of the goods concerned, less any contribution made by the owner, should be credited to the income statement. However, ITTOIA 2005 requires that own consumption of trading stock is accounted for at market value. This means that the profit of the business for tax purposes should be increased by the selling price of the goods, less any contribution made by the owner.
Trading income not shown in the accounts
-
47
Expenditure incurred up to seven years before the business commences can be deducted as though it was incurred on the first day of trade. The expenditure must be an allowable type of expenditure.
Pre trading expenditure
-
48
Fergus runs a small trading business in Augher. These are his accounts for the year ending 5 April 2020:
Calculate his tax adjusted trading profit for the year.
Example - Fergus
£Sales 100,000Less: Cost of sales (30,000)Gross profit 70,000Other income:Rental income 6,000Interest received 50
6,05076,050
Expenses:Wages 1 27,500Bad debts 2 1,020General expenses 3 440Accountancy 4 5,000Depreciation 1,800Travel expenses (all business) 400Insurance 5 2,700Advertising 6 1,680
40,540
Net profit 35,510
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
Rodney
Rodney
£
Sales49,287
Expenses:
Wages to staff19,500
Drawings taken by owner17,500
Electricity1,770
Motor expenses1980
Advertising and entertainment2670
Depreciation865
Parking fine incurred by Rodney75
Bad debts3768
Interest41,050
43,178
Net profit6,109
Breakdown of expenses£
(1) Motor expenses
Rodney's expenses (20% is private related)65020%
Staff expenses330
980
(2) Advertising and entertainment
Leaflets printed370
Gifts of key rings with logo to 150 customers225
Dinner with customers75
670
(3) Bad debts
Increase in specific bad debt368
Increase in general bad detb100
Trade debts written off300
768
(4) Interest
Overdraft interest590
Interest on loan to son300
Personal credit card interest160
1,050
Tax adjusted profit for the year.
Net profit6,109
Add back:
Drawings taken by owner17,500
Motor expenses (1)130
Advertising and entertainment (2)75
Depreciation865
Parking fine incurred by Rodney75
Bad debts (3)100
Interest (4)460
19,205
25,314
Shauna
Shauna
£
Gross profit77,320
Expenses:
Wages144,990
Electricity25,829
Repairs and maintenance38,500
Depreciation1,490
Donation to Oxfam250
Hire charge for car42,750
Advertising51,175
64,984
Net profit12,336
Breakdown of expenses£
(1) Wages
Wages to staff21,710
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
44,990
(2) Electricity
Relating to flat15%
(3) Repairs and maintenance
Extension to dining area in restaurant7,500
Repainting whole of building1,00020%
8,500
(4) Hire charge for car2,750
(5) Advertising
Gifts of hampers to customers690
Adverts in local newspapers290
Membership of Food Circle195
1,175
Tax adjusted profit for the year.
Net profit12,336
Add back:
Drawings by Shauna19,500
Provision for Shauna's income tax3,780
Electricity (15% x £5,829)874
Extension to dining area in restaurant7,500
Repainting part of building200
Hire charge for car x 15%413
Gifts of hampers to customers690
Depreciation1,490
Donation to Oxfam250
34,697
Tax adjusted profit47,033
Shane
Shane - my example for lecture.
£1Salaries/wages/drawingsü
Income100,0002Patent royaltiesû
Expenses:3Bank interest - privateü
Wages144,7104Private elementü
Bank interest21,1205Entertainmentü
Telephone38406Giftsü
Repairs and maintenance416,2007Bad debtsû
Depreciation1,4908Fines and penaltiesû
Loss on disposal of laptop1509Accountancy feesû
Donation to Dogs Trust40010Charitable donationsü
Hire charge for car52,40011Political donationsû
Advertising61,23012Subscriptionsû
68,54013Keymanû
14Pension contributionsû
Net profit31,46015Car lease rentalü
16VAT accrualû
Breakdown of expenses
(1) Wages£Repairsü
Wages to staff21,710
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
44,710
(2) Bank interest£
Overdraft interest900
Personal credit card interest220
1,120
(3) Telephone£
Business premises600
Home phone (40% personal use)24040%
840
(4) Repairs and maintenance£
New front porch to business premises15,000
Repainting whole of building1,200
16,200
(5) Hire charge for car£2,400
Emissions of car hired:135g/km
(All business use)
(6) Advertising£
Bottles of gin to customers for Xmas690
Advertising board at local football club300
Membership of Professional body240
1,230
Tax adjusted profit for the year.
£
Net profit31,460
Add back:
Drawings by Shane 19,500
Provision for Shane 's income tax3,500
Personal credit card interest220
Home phone (40% x £240)96
New front porch to business premises15,000
Donation to Dogs Trust400
Hire charge for car x 15%360
Depreciation1,490
Loss on disposal of laptop150
Bottles of gin to customers for Xmas690
41,406
Tax adjusted profit72,866
Fergus
Fergus- my 2nd example for lecture.
£
Sales100,000
Less: Cost of sales(30,000)
Gross profit70,000
Other income:
Rental income6,000
Interest received50
6,050
76,050
Expenses:
Wages127,5001Salaries/wages/drawingsüû
Bad debts21,0202Patent royaltiesûû
General expenses34403Bank interest - privateüû
Accountancy45,0004Private elementüû
Depreciation1,8005Entertainmentüû
Travel expenses (all business)4006Giftsüü
Insurance52,7007Bad debtsûü
Advertising61,6808Fines and penaltiesûü
40,5409Accountancy feesûü
10Charitable donationsüû
Net profit35,51011Political donationsûû
12Subscriptionsûû
Breakdown of expenses13Keymanûü
(1) Wages£14Pension contributionsûü
Wages to staff24,00015Car lease rentalüû
Personal pension contribution by Fergus3,50016VAT accrualûû
27,500
Repairsüû
(2) Bad debts£
Specific bad debts written off220
Increase in general bad debt provision300
Loan to customer written off500"Loans written off are only allowable if:
1,020 taxpayer is a money lender, or
loan was to an employee (BIK for employee)
(3) General expenses£
Parking fine for Fergus100
Parking fine for van driver on delivery100
Sundries240
440
(4) Accountancy£
Accounts preparation work2,000
Tax planning advice for inheritance tax3,000
5,000
(5) Insurance£
Business property insurance2,000
Keyman insurance on Fergus300
Holiday home insurance400
2,700
(6) Advertising£
Weekly advertisements in local press1,080
Calendars for customers with logo (£6 each)600
1,680
Goods taken for own use600
Tax adjusted profit for the year.
£
Net profit35,510
Add back:
Personal pension contribution by Fergus3,500
Increase in general bad debt provision300
Loan to customer written off500
Parking fine for Fergus100
Tax planning advice for inheritance tax3,000
Keyman insurance on Fergus300
Holiday home insurance400
Depreciation1,800
Goods taken for own use600
10,500
Deduct:
Rental income6,000
Interest received50
6,050
Tax adjusted profit39,960
Kevin
KevinExercise 1 on page 209 of 17/18 manual
Solution on page 217
£
Net profit22,578
Expenses:
Car expenses2,900
Business miles19,000
Private miles13,75032,750
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Gifts to customers with logo costing £4.50 each
Drawings7,800
Wife's wages6,500
Keyman insurance for Kevin450
Depreciation725
Tax adjusted profit for the year.
£
Net profit22,578
Add back:
Car expenses (13,750/32,750 x £2,9001,218
Fine for polluting local river1,000
Specialist tax consultancy work2,250
Drawings7,800
Keyman insurance for Kevin450
Depreciation725
13,443
Tax adjusted profit36,021
NIC
Page 210 in the manual.
Tax adjusted profits56,000
Class 2£2.8052145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£56,000 - £43,000 = 13,000*2%260.00
Total Class 43,404.60
Total Class 2 and Class 4 NIC3,550.20
Page 210 in the manual. - VARIATION
Tax adjusted profits46,000
Class 2£2.80*52145.60
Class 4Profits between8,060and43,000
£43,000 - £8,060 = 34,940*9%3,144.60
Profits greater than43,000
£46,000 - £43,000 = 3,000*2%60.00
Total Class 43,204.60
Total Class 2 and Class 4 NIC3,350.20
Genna & Wayne
Kaplan F6 kit 16-17 Q5 Page 2 (48)Answer on page 196 (242)
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Property income40,000
Personal allowance
Basic 15/1610,600
Genna's fixed amount1,060(11,660)
Taxable income28,340
20%
Tax liability5,668
Their solution (it is a tax reducer)
Property income40,000
Personal allowance
Basic 15/16(10,600)
29,400
Income tax liabilityAll left of gennna4,760
Income at basic rate29,40020%5,880Ignore5,880
Less: Marriage allowance1,06020%(212)Add6,092
Income tax liability5,668Correct5,668
Mock Exam 2017
Gennasalary5,000
Wayneproperty income40,000
Election to transfer the fixed amount of personal allowance from Genna to Wayne
What is Wayne's income tax liability for the tax year 2015/16?
Their solution (it is a tax reducer)
£
Property income40,000
Personal allowance
Basic 16/17(11,000)
29,000
Income tax liabilityAll left of gennna4,600
Income at basic rate29,00020%5,800Ignore5,800
Less: Marriage allowance1,10020%(220)Add6,020
Income tax liability5,580Correct5,580
Katie
Kaplan F6 kit 16-17 Q21 Page 7 (53)Answer on page 203 (249)
Annual salary55,000
Business miles14,50010,0004,500
Employer's rate0.43
Employer paid6,235
HMRC rates
Up to 10,000 miles0.454,500
Over 10,000 miles0.251,125
5,625
Excess mileage allowance610
Assessable employment income55,610
-
49
Breakdown of expenses:
Example - Fergus
(1) Wages £Wages to staff 24,000Personal pension contribution by Fergus 3,500
27,500
(2) Bad debts £Specific bad debts written off 220Increase in general bad debt provision 300Loan to customer written off 500
1,020
(3) General expenses £Parking fine for Fergus 100Parking fine for van driver on delivery 100Subscription to local chamber of commerce 240
440
(4) Accountancy £Accounts preparation work 2,000Tax planning advice for inheritance tax 3,000
5,000
Addback
££7.2Adjustment of ProfitJane - example in lecture.
Net profit shown by the accountsxxx
Add:Expenditure shown in the accounts but notStepAction£StepAction£
deductible for tax purposesxxx Step 1Take the net profit per the accountsX1Step 1Take the net profit per the accounts14,8001
Trading income not shown in the accountsxxx xxx Step 2Add back disallowable expenditureX2Step 2Add back disallowable expenditure2
xxx Step 3Deduct income not taxed as trading income(X)3Motor expenses - 20% private element60020%3,000
Less:Expenditure deductible for tax purposesStep 4Add income that has not been included in the accountsX4Interest expense - private credit card interest100100
but not shown in the accountsxxx Tax Adjusted ProfitXTax Adjusted Profit15,500
Non-trading income shown in the accountsxxx xxx
Trading profit adjusted for tax purposesxxx
Rodney
Rodney
£
Sales49,287
Expenses:
Wages to staff19,500
Drawings taken by owner17,500
Electricity1,770
Motor expenses1980
Advertising and entertainment2670
Depreciation865
Parking fine incurred by Rodney75
Bad debts3768
Interest41,050
43,178
Net profit6,109
Breakdown of expenses£
(1) Motor expenses
Rodney's expenses (20% is private related)65020%
Staff expenses330
980
(2) Advertising and entertainment
Leaflets printed370
Gifts of key rings with logo to 150 customers225
Dinner with customers75
670
(3) Bad debts
Increase in specific bad debt368
Increase in general bad detb100
Trade debts written off300
768
(4) Interest
Overdraft interest590
Interest on loan to son300
Personal credit card interest160
1,050
Tax adjusted profit for the year.
Net profit6,109
Add back:
Drawings taken by owner17,500
Motor expenses (1)130
Advertising and entertainment (2)75
Depreciation865
Parking fine incurred by Rodney75
Bad debts (3)100
Interest (4)460
19,205
25,314
Shauna
Shauna
£
Gross profit77,320
Expenses:
Wages144,990
Electricity25,829
Repairs and maintenance3