QUESTION 1 Vardy Limited is changing its accounting dates, and to accommodate this it has produced a set of financial accounts over an extended period, from 1 December 2019 to 31 March 2021 Capital allowances have already been calculated for each of the two Chargeable Accounting Periods (CAPs) as follows: CAP 1 Dec 2019 to 30 Nov 2020 700,000 CAP 1 Dec 2020 to 31 March 2021 300,000 The income statement of Vardy Limited for the 16 months to 31 March 2021 is shown below: f Turnover 12,400,000 Cost of Sales 6,400,000 Gross profit 6,000,000 Other income 110,000 6,110,000 Less: Distribution costs 842,000 Administrative expenses 1,470,000 2 312,000 Profit for the year (before tax) 3,798,000 NOTES: Note 1 The items in 'Cost of Sales' are all tax deductible (allowable) for the purposes of the tax computation Note 2 The other income' of 110,000 consists of rents receivable of 80,000 and profit on disposal of office equipment of 30,000. Note 3 Distribution costs are as follows: Depreciation of distribution vans Loss on disposal of distribution van General distribution costs f 120,000 12,000 710,000 842,000 (QUESTION 1continued on next page) Note 4 Administrative costs are as follows: Depreciation of office equipment Loss on disposal of investments Trade debts written off Increase in general allowance for doubtful debts Customer entertaining Staff entertaining Gift Aid donations Legal fees re acquisition of new freehold offices Motor expenses (50% employees' private motoring) Patent royalties payable for trade purposes Embezzlement by director General administrative costs (all allowable) 70,000 105,000 52,000 88,000 25,000 20,000 30,000 17,000 333,000 50,000 280,000 400,000 1,470,000 Required: Write a letter to the Directors of Vardy Limited explaining how you have calculated the trading income assessment (referring to your detailed computation that should be cross referenced as an Appendix to the letter) with sections in the letter to cover each part below. a) Adjust the financial accounts for the 16-month period, before deduction of capital allowances. (6 marks) b) Time-apportion the adjusted profit figure into chargeable accounting periods (CAPs). (2 marks) c) Calculate the trading income assessment (taking account of capital allowances) for each CAP. (2 marks) d) Explain the motivation from the point of view of tax policy makers, for reducing the rates of Corporation Tax commenting (briefly) on the possible risks in such a policy of tax rate reduction and commenting why, in certain situations, policy makers prefer to introduce tax allowances rather than reduce tax rates. (15 marks) (Total 25 marks) RELIEFS AND ALLOWANCES - 2020/21 and 2019/20 (2018/19) Income Tax - Personal reliefs and allowances Personal Allowance 12,500 (11,850) Income Tax - Taxable bands are as follows:- Basic Rate 20% 0 - 37,500 (0 - 34,500) Higher Rate 40% 37,501 - 150,000 (34,501 - 150,000) Additional Rate 45% over 150,000 (over 150,000) Corporation Tax - rates and allowances Main rate of corporation tax 19% (19%) Capital Gains Tax - rates and allowances Standard rate (assets excluding residential property) 10% (18%) Standard rate (residential property) 18% (18%) Higher rate (assets excluding residential property) 20% (28%) Higher rate (residential property) 28% (28%) Business Asset Disposal relief rate 10% (10%) Business Asset Disposal relief lifetime limit (Note 1): 1,000,000 (10 mn) (10 m) Annual Exempt Amount (Note 1) 12,300 (12,000) (11,700) Note 1: this shows limit/amount for 2020/21 and previous two tax years Continued on next page (National Insurance Contributions and VAT) National Insurance Contributions 2020/21 (2019/20) (2018/19) (extracts) Employer Employee Class 1 Weekly earnings / Annual 0 - 169(166)(162)/8,788 (8,632)(8,424) Nil SEE BELOW 0 - 183(166)(162)9,500 (8,632)(8,424) SEE ABOVE Nil 169.01- 962(962x892)/50,000(46,350) 13.8%(13.8%) SEE BELOW 183.01- 962(962 (892)50,000(46,350) SEE ABOVE 12% (12%) Over 962(96224892)over 50,000 (46,350) 13.8% (13.8%) 2% (2%) Class 2 Small earnings exception Normal rate 6,475 (6,365) (6,205) 3.05 (3.00) (2.95) per week Class 3 See note below. Class 4 Profits 9,500(8,632) - 50.000..(8,424 - 46,350) 9% (9%) Profits over 50,000(50,000) (46,350) 2% (2%) Note: Class 3 contributions are voluntary contributions paid by people who wish to protect their entitlement to the State Pension and who do not pay enough National Insurance contributions in another class. VAT (NO CHANGE IN 2020/21 FROM 2019/20 or after 1 April 2020) After 1 April 2019 After 1 April 2018 Standard rate Annual Registration Limit De-registration Limit Cash Acc Scheme - max tlo to join Annual Acc Scheme -max tlo to join Optional Flat Rate Scheme - Max taxable turnover (to) (ex VAT) 20% 85,000 83,000 1,350,000 1,350,000 20% 85,000 83,000 1,350,000 1,350,000 150,000 150,000