Taxation Exam: Calculation of Tax Adjusted Profits, Capital Allowances, Income Tax Payable, CGT Liability, Corporation Tax Payable, VAT Payable, Landfill Tax and Gift Taxation

This exam covers various topics related to taxation such as allowable expenses, non-trading income, employees NIC, VAT consequences, landfill tax aims and consequences, and more. It includes calculations of tax adjusted profits, capital allowances, income tax payable, CGT liability, corporation tax payable, VAT payable, landfill tax and gift taxation. The exam also includes working notes and explanations for each calculation.

Online Exam (Taxation)

Table of Contents
QUESTION 1..................................................................................................................................3
a) Calculation of Mario's Tax adjusted Profits before capital allowance for the six month........3
b) Calculation of capital allowances for the six-month period....................................................4
c) Calculation of Mario's income tax payable.............................................................................5
d) Difference between expenses tax treatment in case of employee and self employeed...........5
e) Calculation of Mario's CGT liability for 2020/21...................................................................6
QUESTION 2..................................................................................................................................3
QUESTION 3..................................................................................................................................4
QUESTION 4..................................................................................................................................5
Question 5........................................................................................................................................6
REFERENCES................................................................................................................................8

QUESTION 1
a) Calculation of Mario's Tax adjusted Profits before capital allowance for the six month
Particulars Details Amounts (£)
Profit before tax 56920
Add Disallowed Expenses:
(Note1)
Entertaining suppliers 570
Staffs Entertaining 300
Employees parking expense 75
Wages to Mario 400 1345
Allowable expenses 58265
Less Non-trading income:
Donation to Norfolk wildlife
trust (Note8)
600
National Lottery (Note7) 1000
Interest received on ISA
(Note7)
102 -1702
Tax adjusted trading profit
before capital allowances
56563
Working notes:
Note 1: The entertaining expenses, staffs entertaining employees parking expenses and wages to
himself are disallowed expenses as per the UK income tax law. That's why do not considered as
expenses.
Note 2: The annual salary of £32500 was not considered as business income because it is related
to the time period of 6th April to 5th October 2020. In this time Mario is an employee of
Waterworks.

Note 3: The 18% car benefit is also not allowable to the Mario as an business expenses because it
is related to the employment not self employed.
Note 4: The canteen cost provided to the Mario by his employer during the period 6th April to 5th
October 2020 was not allowable for deductions as it has no relation with the business.
Note 5: The subscription payment to Chartered institute of plumbing with amount £250 and £120
cost on jacket are Mario personal expense and also such is used by him at work. That's why as
per the UK tax system any cost and expenses which is related to individual employment and
personal are not allowed as deductions.
Note 6: Mario has also received the society interest of £520 and dividend income of £14810
which was received by him from Water works. This means that this is an employment period
income which was not included in the above net income. That's why do not considered as non-
trading income.
Note 7: The national lottery of £1000 was won by Mario and also he receives the interest
income of £102 on his ISA. This income is an non-trading income because it is not related to the
business income and also income from Waterworks. So, as per the UK tax system, this income
will be deduct from the business income of Mario.
Note 8: Any donation made by the employer can be allowed as deduction in order to reduce their
taxable trading profit. That's why here donation of 600 is allowed as employed deductions under
the non-trading income section.
b) Calculation of capital allowances for the six-month period
Particulars Details Amounts (£)
Equipment 7200
Car (Note 1) 36000
Total Capital allowances 43200
Working Note:
Note 1: The capital allowances on car is available to the Mario at the full amount even he has
used it as privately half of the time. It is because as per the UK system capital allowances is

allowed on the purchase cost of the assets and in case if any expenses incurred by Mario is
considered half.
c) Calculation of Mario's income tax payable
Particulars Details Amounts (£)
Tax adjusted Trading profit
before tax allowances
56563
Less Capital allowances -43200
Taxable trading profit of
Mario
13363
Income Tax liability
Personal allowances £0 - £12500 0
Basic rate £12501 - £50000 = 20% 172.6
(13363 – 12500) * 20%
Income Tax liability of
Mario for the six month
period
172.6
d) Difference between expenses tax treatment in case of employee and self employeed
In case of self-employed, the individual is allowed to deduct some of the expenses called as
allowable expense from its turnover and self-employed income to reach to taxable profit. This
include:
 office cost such as stationery or phone bill.
 Travel cost such as fuel, parking, train and bus fares.
 Clothing expense such as uniforms.
 Staff costs such as salaries and subcontractors cost.
 Purchase of stock and raw material cost.
 Finance cost such as insurance and bank charges.

 Business premises cost such as heating, lighting and business rates.
 Advertising or marketing such as website cost.
 Training cost etc.
While calculating and considering allowable expense only expenses to business proportion is
considerable. Allowable capital expenses are deductible from the self-employed income and this
are as follow:
 Equipment
 Machinery
 Business vehicles such as cars, vans and lorries.
While on the other hand, expenses related to the employee is only allowable to the
employees if it is paid and borne by the employer. The car being benefit is allowable to the
employees and also the other deductions. Capital allowances is not allowable to Mario if he is
treated as employee. Motor expense which is incurred by individual for travelling between home
to the premises of Net Computer Plc. Is allowable for deduction to the employees salary or
income. It is because if any employee buy their own motor car and incurred expenses to move
from home to office than that proportion of expenses will not be included in taxable income. The
personal allowances of £12500 is allowable to the both employees and self-employed
individuals.
e) Calculation of Mario's CGT liability for 2020/21
Capital gain on sale of Jewellery
Particulars Details Amounts (£)
Sales Proceed 9000
Less cost of sale -1000
Capital gain 8000

Capital gain on sale of Residential investment property
Particulars Details Amounts (£)
Sales Proceed 295000
Less cost of sale -150000
Capital gain 145000
Capital gain on sale of car

Capital gain on sale of Residential investment property
Particulars Details Amounts (£)
Sales Proceed 8000
Less cost of sale -12500
Capital loss -4500
Particulars Details Amounts (£)
Capital Gain on Jewellery 8000
Capital Gain on Shares 480000
Capital gain on residential
property
145000
Less Capital loss on car -4500
Less capital loss carrying
forward from previous year
-14000
Total Capital gain of current
year
614500
Less Deduction/ Allowances:
Entrepreneurs Relief 614500* 10% 61450
Annual exemption 12300
Chargeable gain 540750
Capital Gain tax rate (Note1) 20.00%
Capital gain tax liability of
Mario
540750 * 20% 108150

In order to charge tax on capital gain the Mario need to check this amount with the basic income
tax band in order to identify the normal rate and residential property capital gain tax rate.
Calculation of combined income of Mario is 13363 + 540750 = £554113

As here the combined income i.e., £554113 of the Mario is higher than the basic income tax
band of £37500 for the year ended 2020 and 2021. So, the Mario need to pay the tax on
capital gain @ 20%.
QUESTION 2
a) Corporation tax payable by Blast Ltd for the “existing scenario”
Gross profit after class 1 national insurance contributions (NIC) = 106514
Main tax rate = 19%
Tax amount = 106514 * 19% = 20237
b) Corporation tax payable by Blast Ltd, for the “alternative scenario”
Profit before any deduction = 120000
Less: Director’s remuneration = 8788
Less: Pension contribution = 40000
Gross profit (before tax) = 57726
Corporation tax @19% = 57726 * 19% = 10967.94
Thus, eth net profit after tax which is available for distribution as dividend =
46758.06
c) Taxation and employees NIC payable by Sally in the “existing scenario”
Annual income = 106514
Primary earnings threshold = 9500
Upper earnings limit (UEL): primary Class 1 contributions = 50000
Employee NIC contribution = 12% * (50000 - 9500) + 2% * (106514 -50000) =
5990.28
Gross pay = 106514
Tax free allowance = 9252
Total taxable = 97262
Tax payable
20% rate = 7500
40% rate = 23904.80
45% rate = 0
Total tax due = 31404.80
National insurance = 5990.28
Total deduction = 37395.08

Net income = 69118.92
d) Taxation and employees NIC payable by Sally in the “alternative scenario”
Gross pay = 106514
Less: director’s remuneration = 8788
Gross pay = 79926
Tax free allowance = 12579
Total taxable = 85147
Tax payable
20% rate = 7540
40% rate = 18978
45% rate = 0
Total tax due = 26518.80
National insurance = 5833.36
Total deduction = 32352.16
Net income = 32352.16
NIC are the taxes which are being paid by the British employees and the employers which
are being used for the purpose of funding the government benefits programs which also
incorporates stae pensions. These contributions are made through the payroll deduction.
e) Overall difference in tax and total NIC between the two scenarios
The overall difference in the taxation in both eth scenarios is due to the change in eth
amount pf gross pay as in eth existing scenario there is no deduction made in the
annual profit while in alternative scenario deduction are being made of pension fund.
f) Ethics of the two scenarios
From eth point of ethics, in existing scenario, right and ethical practices are not being
followed pertaining to the director’s remuneration while in eth alternative scenarios
all the relevant aspects are being accounted into.
QUESTION 3
a) Harry’s tax point

Under the given circumstances, Harry received an advance payment before the invoice was
issued, thus, as per eth law, the point of tax when the payment is received or a VAT invoice is
issued in advance of the supply being made, the tax point will be the earlier of either the date
payment is received or the invoice date. The point of tax will be 25th September and thus, it
will be included in the quarter ended to 30 September 2020.
b) Harry’s VAT payable / (repayable) for the quarter to 30 September 2020 and the VAT due
date
In respect to eth given case, the standard rate of VAT has increased to 20% on 2011 from
17.5%. there are certain things which are being exempted from VAT are postage stamps,
financial and property transactions.
Output VAT
Supply of goods to multiple customers = 45000
Sold to Mrs Stevens = 36000
Total amount = 81000
VAT amount = 81000 * 20% = 16200
Input VAT
Purchases = 25800 * 20% = 5160
New computer = 2340 *20/120 = 390
Total Input VAT = 5550
VAT payable = Output VAT – Input VAT = 16200 – 5550 = 10650
c) Potential VAT consequences on the planned new car purchase for the VAT quarter to
31/3/2021
The purchasing of new car will result into affecting the VAT a sit will result into
increasing the input VAT by 30000 * 30% * 20% = 1800. Thus, the VAT amount payable
will be 16200 – 7350 = 8850, a decline.
QUESTION 4
a) Landfill tax

It is the tax which is being charged on the material disposed of at a landfill site or at
any other unauthorised site.
b) Aims of landfill tax
It is aims at encouraging the efforts to minimise the amount of material produced
along with eth use or non-landfill waste management practices or eth options which
incorporates the recycling, composting and recovery.
c) Consequences from Landfill tax since it was first introduced
The landfill tax was introduced in 1996 with an explicit environmental purpose. It was
aimed at reducing the overall level of waste produced along with this sending less
waste to landfill (Changes to Landfill Tax rates from 1 April 2021. 2021). This tax has
helped in meeting with its overall objective in terms of reducing eth waste sent to
landfills. In 2001-02, 50 million tonnes of waste was sent annually which reduced to
12 million tonnes in the 2015-16.
Question 5
Date Particulars Amount
amount of gift after year
allowed exemnption
28/11/18
Christmas present to
her friend 250 -
05/07/19
Wedding present to
her son 16000 11000
20/09/19 Gift to her niece 15000 12000
28/05/20 Transfer to a trust 335000 332000
15/06/20
Gift of quoted shares
to her husband 500000 500000
Total amount of give
given 866250 856000
Inherent tax
rate@40% 342400

Chargeable amount of
Annabelle 512600
 From the above calculation it can be identified that the reason behind selecting these
amount as the taxable under inherent tax is that UK governments allows the yearly
exemption of 3000 which has been taken into consideration.
 In case of giving gift as a Christmas present to friend is exempted from this tax list so
it has been excluded from the chargeable amount (Adam and Miller, 20210. Giving
gift to son for his wedding is allowed unto 5000 but here is given 16000 so only
11000 will be taken into consideration. Gift to niece will be deduced from the 3000
as there is allowance to give family member gift for weeding and other purposes
together. These are the reason behind exempting and including shown amount for
taxable amount.512600 is amount chargeable in case of Annabel
 In the 2020 ther is transfer to trust & gift to husband so sum of 30000 has been
deducted from it.
b)
If the Annabelle dies on the 5th June 2027 it is the case of 7 year rule in which all the part fo
gifts given by her will be counted as inherent tax chargeable (Adam and Miller, 2021). In
such cases the all amount be subject to inherent tax.

REFERENCES
Books and Journals
Adam, S. and Miller, H., 2021. Taxing work and investment across legal forms: Pathways to
welldesigned taxes (No. R184). IFS Report.
Dwyer, P. J. and et.al., 2019. The impact of conditionality on the welfare rights of EU
migrants in the UK. Policy & Politics. 47(1). pp.133-150.
Online
Changes to Landfill Tax rates from 1 April 2021. 2021. [Online]. Available Through:<
https://www.gov.uk/government/publications/changes-to-landfill-tax-rates-from-1-
april-2021/changes-to-landfill-tax-rates-from-1-april-2021 >.