Principles of Taxation

This document provides study material and solved assignments on the principles of taxation. It covers topics such as employment income, tax calculations, capital allowances, tax liability, and more. Suitable for courses in taxation.

Principles of Taxation

TABLE OF CONTENT
SECTION A.....................................................................................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
SECTION B.....................................................................................................................................8
Question 3........................................................................................................................................8
Question 4......................................................................................................................................10
REFERENCES..............................................................................................................................13

SECTION A
Question 1
a) John’s employment income for the year ended 5th April 2020.
Computation of the employment income of John Usdaw
Salary 200000
Bonus 15000
Medical Insurance 3000
Insurance Premium Tax 6%
Insurance Premium Tax 180 3180
Motor Car
Cost 35000
taxable % 155gm/km 35%
taxable 12250
Personal use 40%
Taxable 4900
Used for 9 months 3675 3675
Living Accomodation
Annual Value 12000
Contribution of John 3000
Taxable benefit 9000 9000
Loan
Loan amount 12000
Interest rate 0.50%
Allowed rate 2.50%
Taxable interest @ 2% 240 240
Total Employment
income 231095
b) John Usdaw’s income tax calculation, including both tax liability and tax payable/repayable
for the year ended 5th April 2020.

Employment Income 227420
Bank Interest 550 0
ISA Saving interest 350 0
Dividend Received 2200
Exempt 2000 200
Assessable income 227620
Deductions
Blind person allowance -2450
Taxable Income 225170
Tax Liability 67864.45
PAYE deducted at
source 60500
Net Tax payable 7364.45
Computation of tax liability
Taxable income 225170
Slab tax rate
0 - 2000 0% 0
2000 - 37500 7.50% 2662.5
37501 - 150000 32.50% 36562.175
Over 150000 38.10% 28639.77
Total Tax liability 67864.44
Question 2
a) Capital allowance calculations for the year ended 30th April 2020.
Capital Allowance calculations
TWDV
1ST MAY 2019
Main pool 4500000
Special rate pool 1125000
Additions

Plant & Machinery 800000
Capital allowance 100% 800000
Motor Cars (emissions over
110g/kg) 135000
Main rate Capital allowance @
18% 24300
Warehouse Building 775000
Capital allowance 0
Total Capital allowance for the
year 824300
Disposals
Machinery
Cost 1450000
Proceeds 72000
NBV 150000
Loss on sale -78000
Disposals
Main pool 4500000
Disposals 1450000
Additions 800000
Total 3850000
Special pool 1125000
Additions 135000
Total 1260000
b) Correct treatment of item in additional information
Unison Chemicals Plc has received income from various sources so the way this
additional information needed to be treated is explained below:
Other income
Dividend income: It is type of income that company get by owning share of other company so it
can earn some dividend income without paying taxes each year that is personal allowance.

Company need not have to pay tax in case it receive money £2,000 as per 2020-21 as it is tax
free allowance. So the allowance in 2017-18 was cut for income £5,000 so it can be stated that
Unison chemical Plc need not have to deduct tax so it have to treat it as income (Arnold, Ault
and Cooper, 2019).
Interest received: Starting rates of saving is £5,000 at which individual need not have to pay tax
on saving amount and at the same time other incomes need not to be more than 17500.
Therefore, Unison Chemical Plc is a firm that have received interest of 2500 that is less than
5000 and its overall other income is not more than 17500 so no tax will be deducted for firm.
Rental income from property: It can be stated that less than basic rate threshold that is
£12,500, 0 % tax need to be paid by corporate business. Therefore, no tax need to be paid by
Unison chemical Plc as it have earned only £1450 that is less than is £12,500.
Legal and professional fees: Unisom chemical have to incur legal fee or charges such as it has
found guilty to pour toxic chemical in river therefore it was fined for £250000. Company needs
to pay Penalties and fines for breach of regulation that are made by government so Unisom have
not abided rules of government which have lead to legal complication or fines. It has paid fines
as punishment which is not tax deductible (Chari, Nicolini and Teles, 2019). Unisom was also
planning to raise more capital on stock exchanged so it has spent legal cost on advisors that is
treated as allowable revenue expenditure.
Entertainment and Gifts: It can be stated that expense that are made by corporate for
entertainment or gift is not allowed as deducted from profit of company. But in case the gift is
given to same individual within similar period of time that is not more than £50 that it should
have company logo, name and advertisements. Gift given by Unisom chemical includes total
cost more than £10000 and advertisement of name of firm so it is treated as allowable revenue
expenditure. Cost of staff entertainment is also allowed so Unisom chemical that have spend
money for staff entertainment are considered as allowable revenue expenditure of firm.
Loss on disposable of non-current assets: It is type of asset that is purchased to make use in
operation of business such as equipments or other intangible assets. Unisom chemical plc have
sold old machinery piece for £ 78000 and collect proceed less than actual book value of asset. At
the same time it is non cash expense because there is no actual inflow and outflow of cash
therefore it is accounted as investing cash flow (Long and Miller, 2017). It can also be termed as

GAAP measures as it is equal to actual cost at which company have purchased machinery minus
accumulated depreciation for years it have used. Therefore loss on disposable asset is recorded as
non operating loss in the income statement of firm.
c) Tax adjusted trading profits for the year ended 30th April 2020.
Tax adjusted trading profits
Operating Profit 15250000
Other income 7200000
Profit before tax 22450000
Adjustments
less
Dividend received 3250000 3250000
Add
Depreciation 1500000
Fines for toxic waste 250000
Suing fees 112000
Christmas party
add: 50 per head of 125 people 6250
Champaigne 10000
Staff attending (95000*10%) 9500 1887750
Tax adjusted trading profits 21087750
d) Taxable total profits, including any relevant deductions, for the year ended 30th April 2020.
Tax adjusted trading profits 21087750
less
Capital allowance 824300
Taxable profits 20263450
e) Tax liability for Unison Chemicals for the year ended 30th April 2020.
Tax liability for Unison Chemicals
Taxable profits 20263450
Corporation tax @ 19%
Tax liability 3850056

SECTION B
Question 3
a) Net chargeable gain/loss on disposal of the above assets.
Shares
Sale proceeds 55000
Cost of acquisition 35000
Indexation cost of
acquisition
Indexation factor
35000*(301/235.2
)
Base year 235.2
2021 301
Indexation cost 44792 44792
Capital Gain 10208
House
Sale proceeds 280000
Cost of acquisition 27000
Indexation cost of
acquisition
Indexation factor
27000*(301/82.26
)
Base year 82.26
2021 301
Indexation cost 98796 98796
Capital Gain 181204
sales
proceeds
Cost of
acquisition
Costs for
sale
CG/
CL
Motor Car 17000 9000 8000
Exemp
t
Lord painting 6000 5500 500
Exemp
t
Lady painting 6600 4300 700 1600
Exemp
t

Shares in Tesco 55000 35000 10208 taxable
House 280000 27000 181204 taxable
Chargeable
gain/loss 191412
b) CGT liability for Tessa Tuc for the year ended 5th April 2020.
Net capital Gain of Tessa Tuc 191412
Capital gain allowance 12300
Net capital gain 179112
tax on assets 10% 1021
tax on property 18% 30403
Total CGT liability for the
year 31423
c) Capital Gains Tax liability that will arise from the part disposal of this land.
Capital gain tax
liability
Part disposals
A/(A+B)
A = Gross disposal
proceeds
B = part retained
Sales proceeds 600000
Cost
A/(A+B)
800000/
(600000+825000)
0.56 336842
Capital Gain liability 263158
d) ‘rollover relief’ ensuring you address the following points:
 Tax relief is government policies that have been initiated to reduce amount of tax that
need to be paid by business or individuals. Such policies are mainly initiated by
government organisation to provide benefits to specific group of people or target

individuals. Therefore it can be stated that tax credit is type of tax relief allowed by
government for certain business so that they can grow and expand.
 Business relief is provided to assets that in trading so it can be stated that relief is not
provided for assets that are non- trading in nature (Brooks and et.al., 2016). At the same
time the asset which are not used for purpose of business are disallowed relief and In case
business, assets or share ceased to qualify within 6 months than relief will be withdraw.
 Company in order to get relief must have less than 100 employees and limited scale of
operation, products and services in which industry it operates. Non profit organisation are
also allowed some amount of relief as they are mainly operated to provide social services
to customers or people for their better living.
 Holdover relief allow postponing any gain held over on the bases of market value of the
day gift was given to recipients. So it is market value at which asset might be reasonably
available in open market. It helps in reducing overall base cost of asset which is in hand
of recipients. Whereas in case of tax relief government provide cut tax of specific
individual or business to provide them financial support. Thus, individual needs not have
to pay capital gain tax in case of recipients of gifts.
Question 4
a) Company needs to compulsory register itself for VAT when it have turnover more than
£85,000 over period of 30 day or taxable turnover more than £85,000 during 12 months. Such
as company was started in January 2020 so as per estimation Turnover firm can get registered for
VAT in February 2022. Company have to get compulsory registered within 30 days of the end of
month after went to threshold.
b) Mcluskey and O’Grady need to notify HMRC about that they are subject to VAT by three
month period from tax accounting period. Company can notify HMRC by online registration
services and various detailed needs to be included in letter such as name of firm, registration
number and date company accounting period started or principle place of business (Mattozzi and
Snowberg, 2018). It should also include sign of directors or company secretary in order to
declare that the published information is correct as per their knowledge.
c) The effective date of registration for VAT is August 1 when it realised sales will exceed
threshold limit of 85000

d) Output VAT payable to HMRC
Output VAT for 1st
VAT quarter
sales till june 48300
July 20000
August 20500
September 16400
Total 105200
Threshold 85000
Taxable 20200
Output VAT @20% 4040
d)
4 items in VAT invoice
1. VAT registration number
2. Unique identification
number
3. Time of supply of goods
4. Total amount of VAT
e) MOG may have wanted to register for VAT prior to date as it is vitally important for
businesses entering into new businesses to program out their requirements before they develop
their services and establish wider functional requirements within company productivity metrics.
Registration for VAT is essential for new companies within business as it profoundly establishes
efficiency levels within business world and for working with new working paradigms where
there are major factors to be taken care of. The VAT prior also enables for gaining new
functional requirements developing metrics onto what are the essential factors highly important
for business establishment.
(G) The purpose and conditions to join Flat rate scheme within business as it applies to VAT can
be understood from the fact that it enables business to pay or claim back from HM revenue and
customers where usually difference between VAT charged by business to customers and the Vat
business pays on their own have to be factorised. Under this you are able to pay fixed rate of

VAT to HMRC and keep difference what you charge your customers ate pay to HRMC highly
under functional control for gaining stronger working efficiency. There is also one more factor
where person cannot reclaim VAT on purchases except for certain capital assets over 2000
pounds. The flat rate scheme also develops new working efficiency goals for operations among
business in companies for technical long term advancement and for fuelling growth with new
synergy of goals. The system also will make sure that MOG business are able to reach onto new
heights with stronger cost management fundamentals and avenues where company is
productively focusing onto all parameters of taxation, legal proceedings and also for bringing on
new relative cost benefits which wil;l potentially enhance their goals within future avenues
(Cano, 2020)

REFERENCES
Books and Journals
Arnold, B. J., Ault, H. J. and Cooper, G. eds., 2019. Comparative income taxation: a structural
analysis. Kluwer Law International BV.
Brooks, C., Godfrey, C., Hillenbrand, C. and Money, K., 2016. Do investors care about corporate
taxes?. Journal of Corporate Finance, 38. pp.218-248.
Cano, M.C., 2020. UK budget breaks with EU VAT rules for financial services. International
Tax Review.
Chari, V. V., Nicolini, J. P. and Teles, P., 2019. Optimal capital taxation revisited. Journal of
Monetary Economics.
Long, C. and Miller, M., 2017. Taxation and the Sustainable Development Goals. Lööf, Hans,
Gustav Martinsson, Ali Mohammadi & others.
Mattozzi, A. and Snowberg, E., 2018. The right type of legislator: A theory of taxation and
representation. Journal of public economics, 159. pp.54-65.