Taxation

Task 1

Simon used a car of company. The car was a 2000cc petrol driven Audi with a CO2

emission rate of 189 grams per kilometer. The recommended list price was $38,000, but

Able plc paid £34,000 because of a company discount scheme. Accessories to the value

of £6,000 were added at the time that Simon took delivery of the vehicle, which was on 6

July 2006

Car benefit:

CO2 emission £189

Baseline figure (£140)

£49

Divide by 5 9.8

Starting percentage 15

Final percentage 24.8

List price (£38,000 + £6,000) = £44,000

→ Benefit: £44,000 * 24.8% * 9/12 = £8,184

Fuel benefit: 14,400 * 24.8% * 9/12 = £2,678 (approximately)

Loan

He received an interest – free loan of $6,000 and need only be repaid on his leaving the
company. The loan will be used to purchase various household items. The official rate of
interest is assumed to be 5% per annum

→ Benefit: 6,000*5%= £300

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Taxation
House benefit:

The house was used permanently by Simon and his family from 6 October 2006. The
house had been purchased by the company for $160,000 in May 1999 and had a market
value when Simon moved in of $180,000. The annual rateable value of the house was
$10,000 and Simon paid $800 a month to the company for the use of the property.

→ House benefit: £[10,000 + (180,000 - 75,000) * 5%] * 6/12 – 800 * 6 = £2,825

Trip: ∑ = £540

Simon received an amount of £6 a day for 50 days of business trips in the UK and $12 a
day for 20 days of business trips abroad. All of these trips required overnight stays away
from home and the amounts paid were used to cover the costs of incidental expenses
such as newspapers and telephone calls home.

→ Trips inside the UK: 6 * £50 = £300

Trip outside the UK: 12 * £20 = £240

Others:
He received luncheon voucher worth £5 per day, an amount equivalent to the normal
cost of the meals. The normal working year is 200 working days

→ Voucher benefit: (£5 - £0.15) * 200 = £970

He received bank interest $3,600 → Bank interest (gross up): 3600 * 100/80 = £4,500

He received dividends from UK companies ($1,350) and from shares held in a individual
Savings Account (£450). ISA dividend is exempt.

→ Dividend benefit (gross up): £1,350 * 100/90 = £1,500

Charity and fee:

Simon paid £312 (net) to a UK registered charity and a £210 annual fee to an HMRC
approved relevant professional body, require for his position in the company.

→ Charity (gross up) = £312 * 100/78 = £400 (gift aid donation)

Fee = £210

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Taxation
Income, expenses and allowances £
Salary 60,000
Bonus 15,000
Car benefit 8,184
Fuel benefit 2,678
Loan 300
House benefit 2,825
Trips £540
Voucher £970
Bank interest £4,500
Dividends from UK companies £1,500
Charity 400
Fee to an HMRC 210
Personal Allowance ( 55 years old) 5,035

Simon’s income tax payable for the tax year 2006 – 2007:

Total Non-Saving Saving Dividens

(£) (£) (£) (£)
Salary 60,000 60,000
Bonus 15,000 15,000
Car benefit 8,184 8,184
Fuel benefit 2,678 2,678
Loan 300 300
House benefit 2,825 2,825
Trips 540 540
Voucher 970 970
Bank interest £4,500 4,500
Dividends from UK companies £1,500 1,500
STI 96,497 90,497 4,500 1,500
Fee to HMRC (210) (210)
Less: Personal allowance(PA) (5035) (5035)
Taxable income 91,252 85,252 4,500 1,500

Income tax due

Starting rate band Non-saving £2,150 * 10% £ 215

Basic rate band Non-saving £31,150 * 22% £ 6,853
Gift aid donation £400 * 22% £ 88
Higher rate Non-saving £51,552 * 40% £ 20,621
Saving £4,500 * 40% £1,800
Dividend £1,500 * 32.5% £488

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Taxation
Tax borne £30,065

Less: tax credit on (£150)

dividends (£900)
Less: tax suffered on bank
interest
Tax payable £29,015

Advise Simon on how to change benefits he received in order to reduce his personal tax
liability

There are some ways in tax law can help Simon to reduce his personal tax liability that
described below:

• With car and fuel

Simon use a car that worth £44,000 and has CO2 emission rate of 189 grams per
kilometer. As the result of calculation above the applicable percentage for his car is
24.8% → he has to pay tax for the car benefit of £10,912 per annum. Therefore he
should use the car which has low level of emission release (for e.g.: the emission rate is
150g/km) → the applicable percentage is 17% → the car benefit is £7,480 per annum.
After that he will reduce £3,432 of car benefit → Tax liability will decrease

With fuel, the assessable fuel benefit is calculated by applying the same percentage as
is used in the car benefit calculation. Hence using car with low emission rate also help
Simon to reduce tax of assessable fuel benefit.

• With loan

There is no loan benefit if the total amount outstanding on all beneficial loans made to an
employee does not exceed £5,000 at any time during the tax year. Thus, Simon should
make a loan of £5,000 instead of £6,000. Therefore, he has not to pay the interest per
annum (5%) → He can save £6000 * 5% = £300 (per annum).

• With house

House benefit: £2,825 (in above). If Simon wants to decrease the tax of house benefit,
he needs to buy the house that has lower price and rateable value.

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Taxation
In tax law: ‘If the property was acquired by the employer more than six years before it
was made available to the employee, then the purchase price of the property may be
replaced for tax purposes by its market value on the date that it was first occupied by the
employee’. In addition, the company purchases the house more than 6 years before

→ The house price is the market price: £180,000

If Simon has the house that company purchased less than 6 years before

→ The house price will be the purchase price: £160,000.

So the house benefit = [10,000 + (160,000 - 75,000) * 5%] * 6/12 - 800*6 = 2,325

Thus, Simon can reduce the house benefit: £2,825 - £2,325 = £500

At last, he can reduce his tax liability on house benefit if he chooses the house that the
company purchased less than 6 years.

Task 2
1. Oliver’s tax adjusted trading income for the year ended 31 December
2006

Note 1: Private accommodation

Oliver lives in a flat that is situated above the health food shop. 40% of the expenditure
included in the profit and loss account for light, heat, rent and rates related to the flat.

Light and heat benefit: £1,980 x 40%= £792

Rent and rates benefit: £5,920 x 40% = £2,368

Note 2: Motor expenses

During the year ended 31 December 2006, Oliver drove a total 20,000 miles, of which
12,000 were for business purposes

Motor expenses = £4,700

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Taxation
Private purpose expense = (8,000/20,000)*4,700= £ 1,880

Business purpose expense = (12,000/20,000)*4,700= £ 2,820

Note 3: Wages and salaries:

The figure of ₤78,520 for wages and salaries includes an annual salary of ₤10,500 paid
to Oliver daughter. She works in the health shop food as a sales assistant. The other
sales assistants doing the same job are paid an annual salary of ₤10,000.

Disallowed expenses: 10,500 – 10,000 = ₤500 (the difference between annual salary
pay for Oliver daughter and other sales assistants when doing the same job).

Note 4: Repair and renewal

According to Melville, repairs may be disallowed if they relate to a newly acquired asset
and are required in order to put the asset into usable condition so the disallowable
expenses is install of new improved heating system = £390

Note 5: Sundry expenses

The cost of entertaining customers is disallowed so the business entertaining of £95 is

disallowable expenses

Note 6: Legal and professional expense include

No disallowable expenses

Note 7: Goods for own use

Selling price* the number of week in a year = 45* 52= ₤ 2,340

Net profit £25,485

Add: Disallowed expenses:

Depreciation 2,340

Light and heat (1,980 * 30%) 792

Rent and rates (5,920 * 30%) 2,368

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Taxation
Motor expenses (8,000/20,000 *4,700) 1,880

Wages and salaries (10,000 - 10,000) 500

Repair and renewal 390

Sundry expenses 95

Trading income not shown in the accounts

Goods for own use (45* 52 weeks) 2,340

10,705

Trading profit adjusted for tax purpose before deduction capital

allowance 36,190

Less: capital allowance 0

Trading profit after capital allowance 36,190

2. Income tax payable by Oliver for 2006/2007

Total (£) Non-savings (£) Savings (£) Dividend (£)

Trading profit 36,190 36,190

Part-time salary 5,000 5,000

Building society interest (1,440

* 100/80) 1,800 1,800

Dividends (900 * 100/90) 1,000 1,000

Less: charge on income

payment to a patent royalty (90
* 4 *100/78) (462) (462)

Charge on income payment to

loan (220) (220)

Statutory total income (STI) 43,308 40,508 1,800 1,000

Less: Personal allowance 5,035 5,035

Taxable income 38,273 35,473 1,800 1,000

Income tax

Starting rate: Non-savings 2,150 *10% 215

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Taxation
Basic rate: Non-savings 31,150 *22% 6,853

Higher rate: Non-savings 2,173 *40% 869

Savings 1,800 *40% 720

Dividends 1,000 *32.5% 325

Tax borne 8,982

Less: Tax deducted at source (360)

Tax credits on dividends (100)

Add: tax deducted from charge 102

Tax payable 8,624

3. Capital gain chargeable and capital gains tax payable by Oliver for
2006/07

Oliver has high income and the tax rate of her amounts to 40%. Therefore the whole of
her capital gains tax assessment is charged to capital gains tax at 40%.

→ The amount of capital gains tax payable is £ (15,800 – 5,000)* 40% = £4,320

Task 3
The corporation operating in UK has the accounting period end 31st March 2007

The accounting period: 1st April 2006  31st March 2007

(£)

Trading profit 180,000

Less capital allowances 25,000

Schedule D Case I 155,000

Schedule A 15,000

Capital gain 6,000

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Taxation
Less capital loss (1,600)

Total profit 174,400

Less charge on income 0

PCTCT 174,400

Gross dividend = £ 6000 * 100 / 90 = 6,667

To put the corporation operating in the right tax rate, term ‘profits’ is used. ‘Profits’
means profits chargeable to corporation tax plus the grossed-up amount of dividends
received from UK companies (or from unit trusts where treated like company dividends)

→ ‘profit’ = £ 181,067

→ applying the small companies rate (SCR): 19%

Tax liability = 19 % * PCTCT = 19% * £174,400 = £33,136

If the company is considering to make a gift aid donation of £20,000, the charge on
income = £20,000
→ PCTCT’ = £174,400 - £20,000 = £154,400

→ Tax liability = 19% * £154,400 = £29,336

The company will save £3,800 if making gift aid donation, however, the cost for
gift is £20,000 → The company shouldn’t do that activity.

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