Taxation

Taxation

Scenario
You work in the tax department of a firm of Chartered Accountants, Additup Partnership. You have
been requested to prepare some calculations for one of the firm¡¦s clients, Graham Robinson, setting
out the tax and national insurance consequences of two courses of action that he is considering.
Graham, aged 38, is employed as a chemical engineer and he has decided to leave his current
employer on 31 March 2013. He is considering two work opportunities and wants to know the
income tax and national insurance consequences of both as well as any other tax or financial issues
he should be aware of. The first opportunity is an employment option which he would start on 6
April 2013. The second opportunity is to be self-employed which he would start on 1 April 2013.
You should bear in mind throughout this assessment that you are employed by a reputable firm of
accountants with ethical standards. If you identify any issues of ethical uncertainty in your advice,
please explicitly state what these uncertainties are and what steps you suggest to resolve them.
Your assessment must be produced as a word processed document (printed) and submitted to the
Transactions Desk, Aldham Robarts Student Zone by 4 pm on Thursday, 21 February 2013. Hand
written assessments will not be marked.
In line with the policy for anonymous marking, your name and student number should not appear
on your submitted document. You should complete and attach a Coursework Cover Submission
sheet when you submit your coursework at the AR Student Zone.
First Opportunity – Employment
Graham has been offered another job in a different part of the country which he will start on 6 April
2013, on the following terms. In the tax year 2013-14 he will receive or pay:
„h Salary .87,000
„h Annual Christmas bonus . 5,000
„h A company car, to the value of .27,503 (list price), which will be diesel and have CO2
emissions of 196g/km. The employer will be able to purchase the car at a discount of 10%.
„h The employer will pay all the running costs of the car, including diesel for private use.
Graham will be required to contribute towards these costs in the amount of .70 per month
towards the car running costs, and .35 per month towards the cost of private fuel.
„h On 6 August 2012, the employer will give Graham a loan to help him purchase furniture for
the house he will move to. The loan will be .12,000 and interest will be charged at 1.5%.
„h Graham will receive a contribution towards his removal expenses of .14,000.
„h He will get the use of a mobile telephone with a contract value of .80 per month.
„h The company gives staff an annual staff party, the cost of which is usually about .200 per
head. Both Graham and his wife will attend.
„h The company will pay his annual subscription to the Institute of Chemical Engineering, a
recognised HMRC professional body, costing .375.
„h The company will loan him a computer for use at home. The computer will cost .1500 and
will be for his personal use.
„h The employer will pay a golf club membership subscription for him of .1,000 during
2013/14.
„h Graham will pay a pension contribution of .5,000, by way of deduction from his salary, into
the HMRC approved occupational pension scheme operated by his new employer.
Second Opportunity ¡V Self-employed
Alternatively Graham has the chance to establish a chemical engineering consultancy. He would be
his own boss, running the business as a sole trader. Graham has provided a projected Profit and Loss
Account for the first year of trading to 31 March 2014:
Graham Robinson – Marketing Consultant
Projected Profit & Loss Account for the Year Ended 31 March 2014
Sales – Consultancy fees 147500
Less: expenses
Entertaining 2000
Wages – wife (secretarial services) 8105
– daughter (at university) 6000
General expenses 1250
Rates and water rates 2500
Insurance – including insurance premium tax 1920
Printing, postage and stationery 2730
Heat and light 2100
Consumables – suits for business meetings 650
Motor expenses and fuel 3860
Other travel expenses 3250
Telephone and communications 2300
Bank interest and charges 5200
Depreciation of car and office furniture 9000
-50865
Net profit 96635
„h Graham will need to purchase a motor and office furniture during the year to 31 March
2014:
o The cost of the motor vehicle is .27,000 which is after a discount from list price of
.3,500. This petrol vehicle has CO2 emissions of 173g/km. He estimates he will use
the car for 40% private use.
o The cost of the office furniture is .22,500.
„h Graham will pay a contribution of .4,000 (NET) into a personal pension scheme.
„h Graham has found a suite of offices to use for his business. He will pay the landlord a lease
premium of .25,000 for a 6 year lease.
„h Other travel expenses include attendance at a Chemical Engineering conference in Madrid.
Graham¡¦s wife will go with him to do some sight-seeing. The cost of hotel, food and travel
will be .950 each.
„h Telephone includes .840 for Graham¡¦s mobile phone contract. He will use the phone mainly
for business but estimates his private use will be 20%.
„h Graham will pay the cost of his home phone himself. The call charges will be .600 and he
estimates 60% of the calls will be business related.
„h General expenses include:
Subscription to Institute of Chemical Engineers 375
Donation to political party 395
Graham¡¦s parking fines 240
Miscellaneous allowable expenses 240
—–
.1,250
====
„h Bank interest and charges includes .2,400 of interest on a loan to purchase the car.
Assessment requirements
For this assessment you are required to:
1. Calculate the income tax and all of the national insurance consequences of the employment
opportunity. This will require you to:
a. Calculate the value of any benefits in kind and allowable deductions
b. If any benefits are not taxable, to explicitly state which and why not
2. Calculate the income tax and national insurance consequences of the self-employment
opportunity. This will require you to:
a. Adjust the projected net profit for non-deductible expenses, stating clearly why
these are not allowable for tax purposes.
b. Calculate capital allowances on the motor vehicle and furniture
c. Calculate the deduction available in respect of the lease premium payment
3. Prepare a memorandum offering advice to Graham based on your calculations. This should
include:
a. Any further tax considerations not included in your calculations
b. Any non-tax considerations that you consider to be relevant to Graham¡¦s decision
c. Consider and explain which of the two alternatives you consider to be financially
better, including a comparison of his net income taking account of his tax, Nic,
pension contributions and any other items that you consider should be adjusted in
making a reasonable comparison.
d. Any uncertainties in your advice, including a list of further information you feel you
require
e. The memorandum should not exceed 1500 words
¡§Today¡¦s¡¨ date is 28 January 2013. Even though you will be basing your calculations on what
Graham expects to earn in the 2013-14 tax year you should base all your tax calculations using the
current 2012-13 rates for income tax, national insurance, benefits in kind and capital allowances
etc. Certain income tax and national insurance rates for 2012-13 are attached. You will need to
obtain some other rates, as appropriate. Your work should clearly show all your calculations.
The breakdown of marks for this assessment is:
Assessment criterion 1 – Employment opportunity 30%
Assessment criterion 2 – Self-employment opportunity 30%
Assessment criterion 3 – Memorandum 25%
Assessment presentation, layout, and language 15%
Note: you are expected to reference any advice offered to relevant sources, if appropriate. Any
ethical issues should be referenced to appropriate professional ethical standards.
This is an INDIVIDUAL assessment. Any instances of COLLUSION or PLAGIARISM will be
penalised.
Tax Rates and Allowances
2012-13
Income tax rates
Basic rate 20% on first €34,370
Higher rate 40% on €34,371 to €150,000
Additional rate 50% on excess over €150,000
Dividend 10% / 32.5% / 42.5%
Personal allowance
Age 0 – 64 € 8,105
Official Rate
Loan interest 4.00%
Company cars ¡V Benefit in Kind based on car CO2 emissions
%
¡E 0 ¡V 75g/km 5
¡E 76 ¡V 99g/km 10
¡E 100g/km 11
¡E Each extra complete 5g/km 1
¡E Diesel (as above and) +3
¡E Maximum %age (petrol & diesel) 35
¡E Electric cars (until 2014-15) 0%
¡E Private fuel benefit based on €20,200
National Insurance Contributions
(these are annual limits unless indicated otherwise. The PAYE system uses weekly or
monthly limits which do not exactly match the annual limits when they are multiplied by 52 or
12 respectively. For this assessment use the annual limits)
¡E Class 1 ¡V on employment income (wages, salaries, bonuses etc)
¡V Primary ¡V employees
¡E 12% on annual earnings from €7,605 and €42,475
¡E 2% on higher levels
¡V Secondary ¡V employers
¡E 13.8% from €7,488
¡E Class 1A – On benefits in kind (eg company car, fuel for private use)
¡V Employers only
¡E 13.8%
¡E Class 1B ¡V on PAYE settlement agreements
¡V Employers only
¡E 13.8%
¡E Class 2 – On self ¡V employed income
¡E €2.65 per week, if earnings over €5,595
¡E Class 3 ¡V Voluntary
¡V to protect pension and benefit rights
¡E €13.25 per week
¡E Class 4 – on self-employed income
¡V based on taxable profit
¡E between €7,605 and €42,475 ¡V 9%
¡E Above €42,475 ¡V 2%

 
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