Your manager has had a meeting with Wanda, a client of your firm. Extracts from the memorandum prepared by your manager following the meeting, together with an email detailing the work he requires you to do, are set out below.
Extracts from the memorandum prepared by your manager – dated 3 December 2018
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Background Wanda intends to start a new business, KS, selling children’s clothes. This business will be partly financed by an inheritance which Wanda will receive following the recent death of her mother. Wanda’s husband, Roth, will also be involved in the business. Wanda has not been employed since 31 December 2012 and has not received any taxable income since that date. Roth is employed and earns a gross salary of £90,000 per year. This salary is his only source of income. Wanda and Roth have not made any chargeable disposals for the purposes of capital gains tax and will not make any in the tax year 2019/20. Wanda’s inheritances and gift from her parents On 1 February 2013, Wanda’s father, Pavel, died. He left £160,000 to Wanda and the residue of his estate to his wife, Lucy (Wanda’s mother). The residue of Pavel’s estate was valued at £720,000 and included the family home. Pavel had not made any gifts during his life. On 1 April 2013, Lucy gave Wanda £180,000 in cash. This was the only lifetime gift Lucy made. On 1 November 2018, Lucy died. Wanda inherited the whole of Lucy’s estate, which was valued at £850,000. The estate consisted of the family home (valued at £340,000), together with furniture, cash and quoted shares (valued in total at £510,000). Wanda’s new business – KS Wanda intends to begin trading on 1 April 2019. The business will be operated either: – by Wanda and Roth in partnership; or – by a limited company owned 70% by Wanda and 30% by Roth. The turnover of the business for the year ending 31 March 2020 is expected to be £48,000. Budgeted profitability of KS In its first year of trading the business will make either a small profit or, possibly, a loss (of no more than £20,000). However, once the business is fully operational, it is budgeted to make a tax adjusted trading profit of £100,000 per year. This figure is before deducting any salaries paid to Wanda and Roth. The manner in which the profits will be extracted from the business depends on whether the business is operated as a partnership or as a limited company. The two alternatives are summarised below. Partnership Company Wanda Roth Wanda Roth Salary £14,000 £0 £42,000 £32,000 Profit share percentage 60% 40% N/A N/A Dividend N/A N/A £14,000 £6,000 In addition to advising her on the tax cost of the alternative business structures, Wanda has asked us to advise her on the relief available in respect of the possible trading loss in the first year of trading and on the choice of 31 March as the accounting date where the business is operated as a partnership. Income tax refund Wanda has received an unexpected refund of income tax from HM Revenue and Customs (HMRC) in respect of the tax year 2011/12. |
Email from your manager – dated 4 December 2018
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Please prepare the following notes and calculations for use in a meeting with Wanda. (a) Wanda’s post-tax inheritance from Lucy Calculate the amount which Wanda will inherit from Lucy after any inheritance tax has been paid. (b) Voluntary registration for value added tax (VAT) The sale of children’s clothes is a zero rated supply for the purposes of VAT. With this is mind, explain: – why the business would be permitted to register for VAT from 1 April 2019; and – the advantages and disadvantages of doing so. (c) Choice of business structure (i) Income tax and corporation tax payable For a single tax year, calculate the income tax payable by Roth and any corporation tax payable: – if the business is operated as a partnership; and – if the business is operated as a company Prepare a summary of the total tax payable if Wanda’s income tax liabilities are: Business operated: as a partnership £14,940 as a company £9,025 You should assume that: – the business is fully operational and makes a tax adjusted trading profit of £100,000. This figure is before deducting any salaries paid to Wanda and Roth. – profits are extracted from the business in accordance with the summary in my memorandum. – Roth continues to earn his existing gross salary of £90,000 per year. When carrying out this work, you should ignore any national insurance contribution liabilities and any relief available in respect of losses. (ii) Other matters – Compare the tax relief available to Wanda and Roth in respect of a trading loss arising in the first year of trading, depending on whether the business is operated as a partnership or as a company. – On the assumption that the business is always profitable and is operated as a partnership, explain TWO tax advantages of having an accounting date of 30 June as opposed to 31 March. (d) Income tax refund Prepare a summary of the actions which we should take, and the matters of which Wanda should be aware, in relation to the income tax refund. Tax manager |
Required:
Prepare the notes for use in a meeting with Wanda as requested in the email from your manager. The following marks are available:
Wanda’s post-tax inheritance from Lucy.
Wanda
Notes for use in a client meeting
Client Wanda
Subject Various matters
Prepared by Tax senior
Date 4 December 2018
Wanda’s post-tax inheritance from Lucy
Voluntary registration for value added tax (VAT).
Voluntary registration for value added tax (VAT)
Voluntary registration will be permitted because the business will be making taxable (zero rated) supplies.
Advantages of voluntary registration
– It would remove the need to monitor the turnover of the business with regard to the compulsory registration limit and avoid the possibility of any penalty for late registration.
– It would enable the business to recover any input tax incurred.
Disadvantages of voluntary registration
– There will be additional administration due to the need to record and report the VAT position of the business.
– There will be the possibility of interest and/or penalties if inaccurate figures are reported or reporting deadlines are not adhered to.
Tutorial note: Credit was also available for other relevant points.
Choice of business structure.
(i) Income tax and corporation tax payable.
(ii) Other matters.
Choice of business structure
(i) Income tax and corporation tax payable
Business operated as a partnership
Roth – income tax
Business operated as a company
Roth – income tax
Income tax refund.
Professional marks will be awarded for the approach taken to problem solving, the clarity of the explanations and calculations, the effectiveness with which the information is communicated, and the overall presentation and style of the notes.
Income tax refund
We should assist Wanda in investigating whether or not there was a valid reason for the refund of income tax.
If we are unable to identify a valid reason, we would have to conclude that the refund was made as a result of an error on the part of HM Revenue and Customs (HMRC). In these circumstances we should inform Wanda:
– that the amount should be repaid immediately;
– that failing to return the money may well be a civil and/or a criminal offence;
– that HMRC should be informed of their error as soon as possible in order to minimise any interest and penalties which may otherwise become payable.
If Wanda is unwilling to return the money, we would have to consider ceasing to act as her tax advisers. We would then have to notify the tax authorities that we no longer act for her, although we would not provide them with any reason for our action. We should also consider whether or not it is necessary to make a report under the money laundering rules.