Grace Cousins is 33 years old and is self-employed. Grace is a film, television and theatre services agent: she owns and manages a business that manages and represents performers, actors, writers and comedians in the United Kingdom.

The business is called Vertigo Talent. Grace is a sole trader: the business is not a limited company. Grace has owned and managed Vertigo Talent for many years and the business has always been profitable.

Vertigo Talents main source of income is from supplying performers, actors, writers and comedians to the film, television and theatre industry. Income is also generated from the letting of a portfolio of furnished residential property to tenants. The letting of residential property to tenants is not related to the businesss main trading activity.

Grace is married to Maria Cousins. Maria is 31 years old and had a taxable income of 33,590 in the tax year 2019/20. Grace and Maria married in 2017 and were both UK resident for income tax purposes throughout the tax year 2019/20.

Financial statements for Vertigo Talent are prepared to 31 March. Net profit per the financial statements for the year ended 31 March 2020 was 289,680. This figure was stated after the addition and deduction, respectively, of the following items of income and expenditure:

Item	()
Depreciation	40,130
Bank interest receivable	2,930
Provisions for irrecoverable debts (a)	38,070
Employee salaries (b)	85,000
Fines and penalties (c)	1,240
Entertainment (d)	89,500
Professional fees (e)	31,830
Donations to charity (f)	200

Capital allowances for 2019/20 were 63,240.

Notes

1. Provisions for irrecoverable debts

9,070 relates to an increase in Vertigo Talents general provision for doubtful debts. 29,000 relates to a specific provision for irrecoverable debts.

2. Employee salaries

Vertigo Talent employs Maria Cousins as a talent consultant. The business paid Maria a salary of 62,000 during the tax year 2019/20. Similar roles in other film, television and theatre services businesses attract a salary of 43,000. The business paid its other employee (an administrative assistant) a salary of 23,000.

3. Fines and penalties

Vertigo Talent has two employees: one of these employees (the administrative assistant referred to in note (b)) incurred a parking fine of 120 whilst undertaking work-related duties. Vertigo Talent failed to meet a deadline for the submission of a VAT return in 2019/20: a fine of 1,120 was incurred as a result of this breach.

4. Entertainment

600 relates to entertaining of employees. 23,100 relates to entertaining suppliers. 65,800 relates to entertaining customers.

5. Professional fees

During the tax year 2019/20, Grace was involved in a legal dispute with a neighbour. Vertigo Talent paid 2,200 for legal advice as a result of this dispute. The legal dispute relates to a boundary at Graces private residence. Vertigo Talent also paid 7,000 for accountancy fees arising from the preparation of the businesss financial statements, 20,630 for employment law advice and 2,000 regarding the acquisition of a vehicle for use in the business; this 2,000 has been included in the calculation of capital allowances.

6. Donations to charity

A donation of goods that cost 200 was made to a charity that supports retired performers in the film, television and theatre industry. The charity is considered to be both small and local.

Profit from the letting of furnished residential property to tenants for the year ended 31 March 2020 was 103,390. This figure was stated after the deduction of the following items of expenditure:

Item	()
Furniture and fittings (a)	49,400
Services provided to tenants (b)	43,900
Interest on loans to acquire residential property (c)	52,010
Repairs and maintenance (d)	81,890
Professional fees (e)	5,300

Notes

1. Furniture and fittings

All of kitchen appliances in the portfolio of residential property were replaced during 2019/20. All of the kitchen appliances were superior in design and quality to the items that they replaced. Had the new kitchen appliances been of a similar design and quality to the old kitchen appliances, they would have cost 27,400.

2. Services provided to tenants

20,390 relates to concierge services; 6,700 relates to gardening services; 16,810 relates to cleaning services.

3. Interest on loans to acquire residential property

All of this interest was incurred due to loans that were used to finance the acquisition of the portfolio of residential property.

4. Repairs and maintenance

60,120 relates to expenditure on the construction of an extension to one of the furnished residential properties. 2,000 relates to repairs to existing garage buildings. 19,770 relates to expenditure that did not materially improve the portfolio of furnished residential property.

5. Professional fees

During the tax year 2019/20, incidental costs of 1,100 were incurred on the raising of debt finance. 4,200 relates to fees for advice provided by a furnished residential property management consultant.

The following information is also relevant for the tax year 2019/20:

1. During the tax year 2019/20, Grace received income in the form of interest on a fixed interest savings account of 2,300. This amount was received on 31 March 2020. Grace is considering withdrawing her deposit in this fixed interest savings account and investing in an Individual Savings Account.
2. An investment portfolio of shares and bonds in UK companies provided Grace with income of 34,050 during the tax year 2019/20. 24,050 relates to income in the form of dividends. 10,000 relates to income in the form of interest from corporate bonds.
3. Grace is a horse racing enthusiast and regularly places bets on the results of these races. During the tax year to 2019/20, Grace received net gambling winnings of 410.
4. During the tax year 2019/20, Grace made charitable donations of 12,820 under the Gift Aid scheme. Grace also made contributions of 33,000 to a personal pension scheme.
5. Grace paid income tax payments on account (i.e. advance payments of income tax) for the tax year 2019/20 of 172,680.

Grace is committed to meeting the needs of Vertigo Talents clients and to maximising profits from each of the business and the letting of furnished residential property to tenants. She is keen to take advantage of the simplified rules for the calculation of tax adjusted trading profits and profits from property letting activity, respectively.

Grace believes that the simplified rules will allow her to focus on managing the business and the portfolio of residential property; she has asked you, as her tax accountant, to apply the simplified rules for the tax year 2019/20.

Required:

1. Calculate tax adjusted trading profits for Vertigo Talent for the tax year 2019/20.

(29 marks)

2. Calculate income tax payable or repayable for Grace for the tax year ended 5 April 2020. Items that are non-taxable/exempt from UK income tax should be clearly indicated by the use of zero or noted as exempt where appropriate.

(43 marks)

3. Advise Grace on the characteristics of the simplified rules for the calculation of tax adjusted trading profits and profits from property letting activity, respectively. Your advice should include a statement as to whether these rules can be applied in the calculation of Graces income tax payable for the tax year 2019/20.

(23 marks)

4. Critically discuss the income tax effects of Graces plan to invest in an Individual Savings Account.

(5 marks)

INCOME TAX 20 Rates and bands (other than savings and dividend income) 2019/20 2018/19 Band Rate % Band Rate % 0 - 37,500 200 -34,500 37,501 - 150,000 40 34,501 - 150,000 40 Over 150,000 45 Over 150,000 45 Income tax rates in Scotland and Wales on income other than savings and dividend income have been devolved. Savings income 2019/20 and 2018/19 Savings allowance basic rate 1,000 Savings allowance higher rate 500 5,000 Dividend income Dividend allowance Dividend ordinary rate Dividend upper rate Dividend additional rate 2019/20 and 2018/19 2,000 7.5% 32.5% 38.1% INCOME TAX RELIEFS Personal allowance Personal allowance income limit Marriage allowance Married couple's allowance - minimum amount - income limit Blind person's allowance 2019/20 12,500 100,000 1,250 8,915 3,450 29,600 2,450 2018/19 11,850 100,000 1,190 8,695 3,360 28,900 2,390 INDIVIDUAL SAVINGS ACCOUNTS Overall investment limit Junior account investment limit 2019/20 20,000 4,368 2018/19 20,000 4,260 INCOME TAX 20 Rates and bands (other than savings and dividend income) 2019/20 2018/19 Band Rate % Band Rate % 0 - 37,500 200 -34,500 37,501 - 150,000 40 34,501 - 150,000 40 Over 150,000 45 Over 150,000 45 Income tax rates in Scotland and Wales on income other than savings and dividend income have been devolved. Savings income 2019/20 and 2018/19 Savings allowance basic rate 1,000 Savings allowance higher rate 500 5,000 Dividend income Dividend allowance Dividend ordinary rate Dividend upper rate Dividend additional rate 2019/20 and 2018/19 2,000 7.5% 32.5% 38.1% INCOME TAX RELIEFS Personal allowance Personal allowance income limit Marriage allowance Married couple's allowance - minimum amount - income limit Blind person's allowance 2019/20 12,500 100,000 1,250 8,915 3,450 29,600 2,450 2018/19 11,850 100,000 1,190 8,695 3,360 28,900 2,390 INDIVIDUAL SAVINGS ACCOUNTS Overall investment limit Junior account investment limit 2019/20 20,000 4,368 2018/19 20,000 4,260