问答题 Your manager has had a meeting with Pilar Mareno, a self-employed consultant, and has sent you a copy of the
following memorandum.
To The files
From Tax manager
Date 31 May 2012
Subject Pilar Mareno-Business expansion
Pilar Mareno (PM) has been offered a contract with DWM plc, initially for two years, which will result in fees of
￡80,000 plus VAT per annum.
In order to service this contract, PM would have to take on additional help in the form of either a part-time employee
for two days a week, or the services of a self-employed contractor for 100 days per year. She would also have to
acquire a van, which would be used wholly for business purposes. PM has decided that she will only enter into the
contract if it generates at least an additional ￡15,000 per annum, on average, for the family after all costs and taxes.
PM's annual profitability and the profit generated by the contract (before taking into account the costs of the part-
time employee/contractor and the van) are summarised below.
Existing New
business contract
￡ ￡
Sales 210,000 80,000
Less: Materials, wages and overheads (120,000) (35,000)
Profit per accounts and taxable profit 90,000 45,000
Supplies made under the contract will be 65% standard rated and 35% exempt for value added tax (VAT) purposes;
this is the same as for PM's existing business. ￡31,500 of the costs incurred in relation to the contract will be
subject to VAT at the standard rate. The equivalent figure for PM's existing business is ￡100,000.
PM has identified Max Wallen (MW) as a possible self-employed contractor. MW would charge ￡70 per day plus
VAT for a contract of 100 days per year, with a rate of ￡20 per day plus VAT in respect of any days when he is ill (up
to a maximum of eight days per year). PM has a spare copy of the specialist software that MW would need but MW
would use his own laptop computer.
Alternatively, PM could employ her husband, Alec (AM), paying him a gross annual salary of ￡7,600. AM would
have to give up his current full-time job, but would expect to do other part-time employed work earning a further
￡10,000 (gross) per annum.
PM estimates that a second hand van will cost ￡7,800 plus VAT or alternatively, a van could be leased for ￡300 plus
VAT per month. We can assume that if the van is purchased, it will be sold at the end of the two-year contract for
￡2,500 plus VAT.
Tax manager
An extract from an email from your manager is set out below.
Please prepare a memorandum for me, incorporating the following:
1 Calculations to demonstrate whether or not Pilar's desired annual after tax income from the new contract
will be achievable depending on:
· whether she leases or buys the van; and
· whether she employs Alec or uses Max Wallen.
You may find it easier to:
(i) work out the after tax cost of buying or leasing the van. (When calculating the annual cost of the van,
assume that the total cost can be averaged over the two years of the contract.)
and then to consider:
(ii) the after tax income depending on whether Alec is employed or the self-employed contractor, Max, is
used.
2 A rationale for the approach you have taken and a summary of your findings.
3 Any other issues we should be considering in respect of Pilar employing Alec, including any alternative to
employment.
4 It seems to me that HM Revenue and Customs may be able to successfully contend that Max Wallen would
be an employee, rather than a self-employed contractor. Prepare your figures on the basis that he is self-
employed but include a list of factors in your memorandum, based on the information we have, that would
indicate either employed or self-employed status.
Take some time to think about your approach to this before you start. Also, as always when working on Pilar's
affairs, watch out for the VAT as it can get quite tricky. I suspect the VAT will affect the costs incurred so you'll need
to address VAT first. Pilar's estimate of the profit on the contract will have ignored these complications.
Tax manager
You have extracted the following further information from Pilar Mareno's client file.
· None of Pilar's VAT inputs is directly attributable to either standard rated or exempt supplies.
· Alec has worked for a UK bank for many years and is currently paid an annual salary of ￡17,000.
· The couple have no sources of income other than those set out above.
Required
Prepare the memorandum requested by your manager.
Marks are available for the four components of the memorandum as follows:
(1) Relevant calculations.
(2) Rationale for the approach taken and summary of findings.
(3) Other issues in respect of Pilar employing Alec, together with any suggestions as to an alternative to
employment.
(4) The employment status of Max Wallen.
Appropriateness of the format and presentation of the memorandum and the effectiveness with which the
information is communicated.
You may assume that the rates and allowances for the tax year 2011/12 will continue to apply for the foreseeable
future.