Taxation In-Tray Exercise Calculations (Math Problem Sample)

Taxation "in-tray exercise”
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1 Case One
Client A
Property rented during the tax year 2013-14
Assumption: The tax year commenced on 1st July 2013 -31st June 2014
The tenant left the property owing a two month‘s rent of £1000, yet to be recovered. Client A would have been taxed the rental income during the months of occupation by the tenant only (5months). The unrecovered amount totalling to £1000 would be treated as bad debts, hence deducted from the gross rental income. The client must further prove to the revenue authority that the tenant is unable to pay the outstanding amount and should be considered as bad debts by the tax authority. NB Bad debts are treated as allowable expenses in the calculation of taxable rental income. Any amount spent on redecoration/repairs, and maintenance is also treated as deductible expenses. In this case, the cost of the £2500, £550 and £450 for redecoration, other property cost and looking for the new tenant respectively would be deducted from the gross rental income. The incomes from the new tenant's commencing from the 5th April 2014 added to the rental income during the tax year. (3months).
Other allowable expense includes:
* Commission and fees paid to property management agents
* Interest on a mortgage or loans to purchase or improve the propert
* The cost of structural alteration of the building provides rent does not increase with six months of incurring expenditure.
Computation of Client a Property income assessment
For the tax year ended June 2014

Rental income (old tenant) 500*5

£2500


Add: (new tenant) 600*3

£1800


Gross rental income


£4300

Less: Allowable expenses



Bad debts

£1000


Redecoration

£2500


Service fees

£450


Other expenses

£550


Total expenses


£4500

Taxable rental income


(£200)

NB: Losses from rental properties are carried forward to set the future profits
2 Case Two
Client B
Typically, failure to declare tax while generating profits may impose penalties or fines by the tax authority. Another circumstance may include:
* Giving an incorrect statement or return
* Failure to furnish a return in time
* Failure to inform chargeability to tax
* Maintain or prepare false books of accounts
* Intentional disregard for the law and adopt a deliberate cover up tactics
* Attitude of the taxpayer and type of the business
* Time span of the tax evasion
* Whether or not the declaration was voluntary by the taxpayer
* The level of cooperation received from the taxpayer in case of any investigation by the tax authority
I would advise client B to report his annual profits and records for the previous year and current year for tax assessment to the tax authority. It would help avoid fines at a later date in case the authority finds out his tax evasion. He should also offer a reliable reason or evidence why he has not been submitting his returns.
3 Case Three
Computation of Client C Tax adjusted trading profits Assessment
Computation of Client C Tax adjusted trading profits Assessment
For a period of two years

Adjusted trading profit for whole period

£33000

Adjusted trading tax profit: 22/24* £33000

£30250

Less: overlaps profits

£**

Double taxation relief

£**

The consequences of choosing the accounting date of 30 April 2014
The individual pays tax on the incomes for that tax year. Drawing accounts at the later date results in apportioning the earnings on the time basis to adapt the tax year. The existence of accounting date is straight forward during the year of trading unless the when the business commenced or ceased trading In case of such situation the choice of accounting is not straight forward. Business may prepare their accounts to 31 March or 5 April to avoid overlapping profits and avoid piling of large tax bill occurring during the final year of trading. In the case of overlap profits, the client is offered a relief due to double taxation against the tax assessment for the tax year.
4 Case Four
4a. Mr D
You make payment of capital tax when you sell or dispose of:
* Personal possessions worth £6000 apart from your car
* A primary home used for business or vast or let out
* Shares except on NISA, ISA or PEP
* Any inherited asset
* Any property not befitting your primary home
* Any business asset
N.B.: Depending on asset you may reduce may reduce taxable income by claiming a relief.
There is no payment of capital gains tax on any profits from:
* NISA, ISA. Or PEP
* UK government gifts and premium bonds
* Betting, lottery or pools winnings
* Gifts are given to spouses, partners or charity
The property is let to tenants since construction and selling at cost if £63250. The extension provided is later converted to a bedroom that is liable for capital gains tax as is a property that is used for business. Antique selling for £6500 is a personal asset that worth more than £6000 hence qualifies for capital gains tax. Shares sold at £6200 on the racehorse also qualify for capital gains tax. A cost of £76500 for a car does not qualify for capital gains tax. In the case Mr. and Mrs. D sell the vacant house as planned in 2015-2016, the house will be eligible for capital gains tax as it is a home to let out. The house owned by Mr. and Mrs. D does not qualify as it is the main home owned jointly.
Mr. D Total capital gain tax liabilities

House


£63250


Less; cost

4000



Extension

2000



Roof Space

3000

(£9000)


Capital gain