Taxation for Business Assignment Solution - 2020/21, ARU London

This document presents a comprehensive solution to a Taxation for Business assignment, addressing various aspects of taxation. It includes detailed calculations of income tax liability for individuals, such as Greg and Martin Smythe, considering factors like pension contributions, building society interest, salary, car allowance, and relocation costs. The solution also explains the concept of annual allowance for pension schemes and its implications for tax relief, along with the annual investment allowance for plant and machinery purchases, demonstrating how losses can be carried forward. Furthermore, it covers VAT schemes, including registration thresholds, accounting schemes, and their advantages and disadvantages, providing insights into VAT returns and payment options for businesses. The assignment provides a detailed analysis of the provided scenarios, offering a complete understanding of taxation principles and their practical application.

TAXATION FOR BUSINESS

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
a)..................................................................................................................................................1
b) .................................................................................................................................................2
QUESTION 4...................................................................................................................................3
Client 1.........................................................................................................................................3
Client 2.........................................................................................................................................4

QUESTION 1
a)
Income tax liability of GREG for the year 2020/21
i)
Computation of Income Tax
Greg
Pension 16000
Building society interest 20000
Gross Income 36000
Deductions
Donations 500
Personal saving allowance 12500
Adjusted Net Income 23000
Tax Liability @20% 4600
Dividend 15750
Less: Dividend allowance 2000
Dividend Income 13750
Tax @ 7.5% 1031.25
Total tax liability 5631.25
ii) Martin Smythe
Income tax liability for Martin for year 2020/21
Income Tax Computation
Martin Smythe
Salary 38500
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Car allowance @ 18 pence 3510
Relocation costs 13400
Gross Income 55410
Deductions
Mileage allowance 3510
Relocation costs 8000
HMRC Pension contributions 2310
Donations Payroll scheme 110
Total Deductions 13930
Total Adjusted Income 41480
Tax liability @ 20% 8296
b)
Annual allowance is limit of total amount of the contribution which could be paid for the
defined contributions to the pension schemes and total amount of the benefits which could be
build in the defined benefit pensions scheme every year for the purpose of tax relief. Annual
allowance is capped currently at GBP 40000 if the pension is started accessing then lower limit is
4000. Annual allowance are applicable to all the schemes and not per scheme limits and also
includes contributions that is paid by individual or the employers.
If allowance exceeds annual allowances, tax relief will not be allowed over the limits
exceeded and will require annual allowance charges. Annual allowance charges are added to rest
of the taxable income for tax year while determining tax liability. Also if allowance charge are
more than 2000 than the charges could be paid from the benefits. Unless individual has MPAA
individual is allowed to bring the unused allowance forward for the previous 3 tax years for
reducing annual allowance charges completely. The pension provider or the scheme
administrator must be able to provide pension input amounts for the scheme. It refers to amount
of the contributions of the values of the accrued benefits in the duration of pension input. It is
allowed to be deducted from the remaining taxable income of the individual in the tax return.
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QUESTION 4
Client 1
a
Effects of purchasing the plant and machinery on her anticipated trading profit for the
year ended 31 December 2020.
Trading profit 60000
Rental Income 13000
Gross Income 73000
Plant and machinery 101000
Loss for the year 2020 -28000
b
Loss for the year 31/12/2020
Trading profit 60000
Rental Income 13000
Gross Income 73000
Less: Investment allowance
Plant and machinery 101000
Loss for the year 2020 -28000
On the basis of information given the Clients can claim the loss for the year on trading
due to purchase of the machinery. As per the annual allowance the claim or cost of plant and
machinery could be used for charging the capital expenditure that has been incurred by the client.
The expenditure under the annual allowance has to be claimed in the same year. The remaining
loss could be the client in next year.
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c
Computations showing how tax would be relieved each year by the client.
Trading profit 60000
Rental Income 13000
Gross Income 73000
Less: Investment allowance
Plant and machinery 101000
Loss for the year 2020 -28000
Carry Forward
Deduction in 2021 28000
The client can claim the annual investments allowance for availing the maximum benefits
for the capital expenditures. The gross limit of capital expenditure for the year 2020 is 1 million.
Client has purchased the machinery costing 101000 which is below the threshold limit therefore
it could claim the full amount under the annual investments allowance for deducting the trading
profits. The purchase has resulted in annual loss of 28000. This loss is allowed to be carried
forward by the client in next tax year. It is allowed to claim deduction for the loss of 28000 in
next year. The s83 also provides the same provisions for loss under the trading business by sole
proprietor. The use of that scheme will not provide any additional benefit to the client therefore it
would not be more advantageous option. It should use the annual investment allowance only and
claim the loss in next year.
Client 2
i).
As per the laws firm is required to be registered under the VAT scheme if the threshold
limit of turnover exceeds 85000 in a year. The standard rate for VAT is 20%. The business could
apply for the accounting schemes if the expected taxable supply in next twelve months are to
exceed 12350000. Businesses are required to be updated by the VAT returns and could not
register themselves as the group of corporates. Application for joining scheme is made in form
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600 that could be found on the official site of GOV UK. The VAT returns are to be paid with
annual nine instalments for 10% of previous year liability. Alternatively the business could also
choose for paying VAT at 3 quarterly instalments for 25% of previous liability which falls at
months 4,7 and 10.
Businesses that are not registered for the 12 months could also join scheme but every instalments
monthly or quarterly will be based over estimates of VAT liability.
Business could leave scheme voluntarily writing to HMRC at any time. Business could not be
under the scheme of turnover exceed 1600000
ii).
Advantages and disadvantages of the accounting scheme
Advantages
 Reduction in number of returns of VAT needed every year
 Liability which is to be paid every month is known previously and cash flow could be
managed easily
 There is extra month for completing VAT returns and paying outstanding tax
 It helps in simplifying the calculations where firms uses retail schemes or are partially
exempt
Disadvantages
 The interim payments could be higher than required as they are based over previous year.
They could be adjusted if differences are significant.
 Business is under obligation to notify the HMRC if VAT liability are significant lower or
higher than in previous year.
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