Description:

Following pages contain information relevant to the financial year 2018 for a UK resident trading company, Zarif Ltd. You will complete the tasks given at the end using the information given here and tax rates and rules applicable for the tax year 2018/19. To complete the tasks, you need to consult the study materials provided by your teacher and/or information available online. You may consult with the teacher, if you find any information inconsistent to what you have studied in the classes but your teacher will not entertain any of your request for authenticating your answers before the submission. Individual written defense (5%) will be conducted in the week following submission of your reports.

Instructions:

1. You will work in the teams of minimum 2 and maximum 4 students.

2. Submit your answers in the form of report on or before 25 November 2019

3. Show all computations clearly and give explanations wherever required/possible. Try to demonstrate as much as possible, your knowledge and skills when computing figures or giving explanations of your answers/choices.

Zarif Ltd is a UK resident company. The company trades in high quality furniture items for domestic and commercial uses under the brand Chinioti through 5 company-operated stores and several affiliated traders in different cities of England and Wales and other European countries. Company prepares its accounts to 31 March each year. The detailed statement of profit or loss for the year ended 31 March 2019 is given below:

Net sales (Note 2) 9,207,030

Cost of sales (Note 3) (4,661,570)

Gross profit 4,545,460

Operating expenses:

Employee costs (Note 4) 1,350,000

Directors remuneration (Note 5) 90,000

Rent and rates (Note 6)456,600

Selling and marketing (Note 7)124,000

Depreciation 210,000

Legal, professional and trade fees (Note 8) 87,000

Impaired debts (Note 9) 19,310

General & administrative (Note 10)624,000

Repairs and renewals (Note 11) 34,500

Vehicles maintenance (Note 12)198,000

Capital losses (Note 13) 4,300

Leasing cost (Note 14) 3,500

(3,201,210)

Operating profit 1,344,250

Other income:

Income from property (Note 15) 42,000

Bank interest (Note 16) 8,460

Loan interest (Note 17) 8,400

Dividends (Note 18) 9,000 67,860

Finance costs

Interest expenses (Note 19) (67,200)

Profit before taxation 1,344,910

Notes:

1. Company

Zarif Ltd completely outsources manufacturing and assesmbling of furntiture items and buys the made-to-order furntiture items for sale under its label from two subcontarctors located in Greater Manchester Area. Subcontractors produce furniture items only for Zarif Ltd and are contractually obligated to meet all the demands of Zarif Ltds for specifications, quality and quantity. Zarif Ltd accepts the ex-factory delivery of goods and is responsible for transportation from the subcontractors premises to the warehouses, company-operated stores and affiliated traders display centers in England and Wales. However, delivery to European customers is made through another but unrelated freight managent company, Advanced Cargo Services Ltd. To ensure reliable and safe delivery of furntiture items, Zarif Limited maintains its own fleet of company-owned and leased trucks and employes full-time drivers and support staff. Over the years,Chinioti has become a popular brand in UK and overseas and is expected to reach other regions in coming years.

2. Sales

Monthly sales for the period ending on 31 March 2019 are given below. Sales in England & Wales are standard-rated but are zero-rated when made to VAT regsieterd traders in other European countries. Sales through company-operated stores are always made on cash. However, all sales to affiliated traders in England & Wales and other Euroean countries are made on credit of 30 days and 5% dicount is offered for the prompt payment except on sales (despatches) made to traders in other European countries. All affiliated traders in EU member states are VAT registered there and make payments within 30 days without availing prompt payment disount. Goods sold through company-operated stores are sold on free exchange within 7 days policy and not refunded once sold. However, goods sold to affiliated traders are returnable within 15 days of the sales. Monthly sales figures in given below table are already adjusted for sales return but not sales disount.

Month

Cash Sales in England & Wales

Credit sales in England & Wales

Credit sales to

Total

Credit sales

traders in EU

Sales

discount availed

Apr-18

280,900

301,700

67,200

649,800

85,000

May-18

290,100

405,700

75,000

770,800

56,000

Jun-18

310,000

420,300

68,200

798,500

-

Jul-18

320,800

423,340

89,000

833,140

45,900

Aug-18

316,900

410,900

76,000

803,800

120,000

Sep-18

295,000

401,780

73,200

769,980

134,000

Oct-18

287,200

420,340

49,850

757,390

-

Nov-18

289,000

432,000

105,400

826,400

73,000

Dec-18

295,000

434,280

123,000

852,280

34,800

Jan-19

236,000

390,120

79,320

705,440

-

Feb-19

276,600

405,340

81,430

763,370

120,000

Mar-19

320,000

321,000

69,100

710,100

10,700

Total

3,517,500

4,766,800

956,700

9,241,000

679,400

Sales figure reported in the statement of profit or loss is the net of sales return and sales discounts and has been computed as follows:

Total cash sales net of sales return 3,517,500

Total credit sales net of sales return 5,723,500

Total sales net of sales return 9,241,000

Less: sales discount (679,400 x 0.05) (33,970)

Net sales after sales return and discounts 9,207,030

3. Cost of sales

Cost of sales includes the purchases of furniture items from the subcontractors and other costs associated with acquiring inventories. Zarif Ltd purchases goods on credit of 30 days and is not offered any dicount for prompt payments. Goods are returnable within 15 days and purchases are adjusted if goods are returned. All purchases and costs of acquiring goods are standard rated. Monthly purchases given below are already adjusted for purchases returns:

Month

Purchases

Other costs

of acquiring inventories

Apr-18

340,900

29,000

May-18

410,500

24,670

Jun-18

445,000

23,567

Jul-18

402,096

28,000

Aug-18

346,025

29,000

Sep-18

343,200

32,750

Oct-18

435,000

23,250

Nov-18

230,546

28,900

Dec-18

325,487

20,100

Jan-19

380,000

27,603

Feb-19

420,654

20,152

Mar-19

315,600

18,000

Total

4,395,008

304,992

Beginning inventories April 1, 2018 125,750

Cost of goods purchased 4,700,000

4,825,750

Ending inventories March 31, 2019 164,000

Cost of sales 4,661,750

Beginning and ending inventories include total cost of goods available in company stores for sales and/or goods in transit from subcontractors sites to company warehouses on first and the last day of the accounting period respectively.

4. Employee costs

Salaries and wages include salaries paid to permanent staff and part-time workers hired for transportation, marketing and sales activities. Employees include 3 family members of the managing director in sales department. Average monthly remuneration of a sales person with equivalent qualification and experience is 3,000, however, 3 members are paid 6,000 each. Ignore all NICs payable on salaries and wages earned for the purpose of this assignment.

Moreover, employee costs also include bonuses declared of 10,000. These will not be paid during 2019.

5. Directors remuneration

Directors remuneration includes the salaries and cost of benefits given to the managing director duirng the accounting period. Ignore NICs payable for the purpose of this assignment.

6. Rent and rates

Rent and rates include rent paid on warehouses and company-operated stores let in for the business purposes and rates paid on properties owned by the company.

7. Selling and marketing

Selling and marketing expenses include:

Advertising 70,800

Entertaining UK customers 13,000

Entertaining overseas customers 5,000

Staff parties (cost per head 200 per year) 9,200

Gifts to the customers (note books and pens bearing company names 12,000

costing 21 per donee)

Gifts to customers (vouchers exchangeable for companys products) 14,000

124,000

8. Legal, professional and trade fees

Fee paid for accounting and audit services 15,200

Legal fee in connection with the trade financing (Note 19) 2,200

Legal fee paid for defense in a dispute on ownership of a property 11,340

Annual trade and business license fees 14,500

Charges paid to debt collectors 15,000

Legal fee in connection with acquiring and registering new trucks12,760

HMRC penalties on late payments and filing 4,300

Legal fees in connection with renewing a 20-year lease 2,100

Legal fees in connection with a new 30-year lease 3,600

Legal fees in connection with road offense by company vehcicles 6,000

87,000

9. Impaired debts

On March 31, 2019, Zarif Ltd wrote off an impairment loss of 19,310 relating to the

following transactions:

Invoice#, Date

Trader/Customer

Amount

Date invoice was due

18 May 2018

Antionette, France

9,500

18 June 2018

10 November

Nasir Traders, Brimingham

9,810

10 December 2018

10. General and administartive

General and administartive expenses include:

Donations to approved charities (qualifying) 15,000

Donation to a charity (not qualifying) where Zarif Ltd received free 760

advertising in the charitys news letter

Political donations 1,500

Other general and administrative (all allowable) 606,740

624,000

11. Repairs and renewals:

Repairs and renewals are as follows:

Repainting the exterior of the companys office building 8,390

Extended the office building to create a new reception area 19,800

Amortization of a leasehold property 6,310 34,500

12. Vehciles maintenance

Include fuel cost and maintenance of companys delivery fleet and cars unders the

use of companye employees and managing director. All employees and managing director

use the cars for 20% private mileage.

13. Capital loss

Capital loss of 4,300 is in respect of sale of few delivery trucks on 15 May 2018 (see note

19)

14. Leasing cost

The leasing costs of 3,500 are in respect of a motor car lease which commenced on 1 April

2018. The leased car has CO2 emissions of 125 grams per kilometer.

15. Income from property

On 1 April 2018, Zarif Ltd lets out an unfurnished freehold office building that is surplus to

requirements at annual rent of 42,000 payable in advance.

16. Bank interest

The bank interest was received on 31 March 2019. The bank deposits are held for non-trading purposes.

17. Loan interest

The loan was made for non-trading purposes on 1 July 2018. Loan interest of 5,600 was received on 31 December 2018, and interest of 2,800 was accrued at 31 March 2019.

18. Dividends

Dividends of 9,000 were received from another UK resident company.

19. The interest payable is in respect of the companys 3.5% loan stock. The loan stock was used to finance the companys trade activities. The interest amount given in the statement of profit and loss has been paid and is the amount relevant to the accounting period ended 31 March 2019.

20. The tax written down value of companys main pool assets on 1 April 2018 was 1,850,000. Following main pool assets were acquired and disposed during the year to 31 March 2019:

15 May 2018 Sold few delivery trucks (original cost 98,000)65,500

10 August Bought 3 new delivery trucks180,500

5 November Purchased computer system for use in business 12,500

1 December Purchased a new motor car CO2 emissions 45g/km 9,000

15 January Purchased a used motor car CO2 emissions 45g/km 6,000

Assume, Zarif Ltd has no special rate pool item of plant and machinery. All transactions of sales and purchases are subject to standard rate of VAT.

21. Companys VAT periods end on 30 June, 30 September, 31 December and 31 March in an year. For the purpose of computing VAT liability for each quarter, monthwise data of expenses and supplies subject to VAT included in the statement of profit or loss is as follows.

Important note: Amounts given below dont include cost of purchasing and acquiring inventories given in the Note 3: Cost of sales.

Month

Standard-rated

Zero-rated

expenses

expenses

Apr-18

74,640

2,000

May-18

81,500

2,130

Jun-18

65,250

-

Jul-18

73,300

-

Aug-18

61,000

3,500

Sep-18

82,220

4,239

Oct-18

54,800

7,000

Nov-18

73,000

-

Dec-18

68,260

1,200

Jan-19

59,600

4,520

Feb-19

73,500

6,300

Mar-19

51,890

5,500

Total

818,960

36,389

Required:

a.

Compute tax adusted trading profit using the information given in statement of profit or loss and notes for zarif Ltd for the accounting period ending 31 March 2019. Start with the profit before taxation of 1,344,910 and list all of the items in the statement of profit and loss and in notes indicating by the use of a zero (0) any items that do not require adjustment. Assume that the company claims maximum available capital allowances. (13 marks)

b.

Compute taxable total profits for the period ended 31 March 31, 2019. (1.5 marks)

c.

Compute Zarif Ltds corporation tax liability for the period ended 31 March 2019. (0.5 marks)

d.

Compute the VAT liability of Zarif Ltd for each VAT period. Take into account all the taxable sales, purchases, and expenses as well as adjustments when computing output and input VAT for each quarter. Show all computations and/or give explanation where possible. (11 marks)

e.

By when and how, should Zarif Ltd file the corporate tax return and pay the tax payable for the period ended 31 March 2019 to avoid penalties and interests? Until when the accounting records relevant to the tax year 2018/19 must be kept by Zarif Ltd? Explain in detail with reference to the tax rules and HMRCs directives. (1.5 marks) f.

By when and how, should Zarif Ltd file VAT returns for each quarter and pay taxes to avoid

penalties and interests? Until when the records relevant to each VAT period must be kept by Zarif Ltd? Explain in detail with reference to the tax rules and HMRCs directives. (2.5 marks)

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