QUESTION 2 a) Mary Masuaku is self-employed and runs a business manufacturing musical instruments ('Masuaku Music"). Her income statement for the year ended 5 April 2021 is shown below: Gross profit 430,000 Less: Rent (for use of shop) 90,000 Depreciation 50.000 Motor expenses (note1) 18,000 Patent royalties (note 2) 7,000 Professional fees (note 3) 5,000 Other expenses (note 4) 60.000 230.000 Net profit (before tax) 200,000 NOTES: Note 1 During the year ended 5 April 2021 she drove a total of 25,000 miles, of which 5,000 miles were driven when she visited suppliers in Europe. The balance of the mileage is 25% for private joumeys and 75% for business journeys in the UK. Note 2 During the year ended 5 April 2021 she paid patent royalties of 7,000 (gross) in respect of specialised technology that she uses in manufacturing Note 3 The figure for professional fees consists of 2,000 for legal fees in connection with an action brought against a supplier for breach of contract and 3,000 for accountancy services. Included in the figure for accountancy is 900 in respect of personal capital gains tax advice for the tax year 2020/21. Note 4 The figure for other expenses' of 60,000 includes 1,100 for gifts to customers of food hampers costing 45 each and 800 for gifts to very loyal customers of gold- plated pens carrying an advertisement for "Masuaku Music' costing 70 each. Note 5 She uses one of the eight rooms in her private residence as an office when she works from home. The total running costs of the house for the year ended 5 April 2021 were 18,000. This cost is not included in the income statement's expenses of 230,000 (Question 2 continued on next page) Note 6 She uses her private telephone to make business telephone calls. The total cost of the private telephone for the year ended 5 April 2021 was 3,000 and 25% of this related to business telephone calls. The cost of the private telephone is not included in the income statement's expenses of 230,000. Note 7 During the year ended 5 April 2021 she took goods out of the business for her personal use without paying for them and no entry has been made in the accounts to record this. The goods cost 2,000 and had a selling price of 4,000. Note 8 She purchased a Ford Transit van for 35,000 and no calculation has yet been made for capital allowances. Required: Write a letter to Mary Masuaku (your client) explaining the tax planning points and the tax computation (please show the detailed computation by including it as an Appendix to the letter) in which you show the computation of Mary's tax adjusted profits for the year ended 5 April, 2021. In the computation ensure that you show your detailed workings with notes of explanation for adjustments as appropriate. (15 marks) b) Justin Jones is an architect who in his spare time restores old sports cars and sells them (sometimes for a very substantial profit). He regards this as a lucrative hobby as he drives many of the cars for a few weeks before selling them usually to wealthy people. Even so he is having doubts about whether this would be viewed as a "hobby' by HMRC. He has become rather nervous recently as he has now received correspondence from HMRC requiring that he submit a tax return. He has approached you as a tax adviser to see whether he might have to pay tax on his estimated 70,000 profits from the sale of ten cars in the tax year to 5 April 2021 (he started his car restoration activity in June 2020). Required: Write a letter to Justin Jones explaining what are the key issues that you need to discuss with him regarding his tax position - you should refer in particular to the 'badges of trade and ensure that you mention all of these emphasising the aspects that are most relevant in Justin Jones's case. (10 marks) (Total 25 marks) QUESTION 2 a) Mary Masuaku is self-employed and runs a business manufacturing musical instruments ('Masuaku Music"). Her income statement for the year ended 5 April 2021 is shown below: Gross profit 430,000 Less: Rent (for use of shop) 90,000 Depreciation 50.000 Motor expenses (note1) 18,000 Patent royalties (note 2) 7,000 Professional fees (note 3) 5,000 Other expenses (note 4) 60.000 230.000 Net profit (before tax) 200,000 NOTES: Note 1 During the year ended 5 April 2021 she drove a total of 25,000 miles, of which 5,000 miles were driven when she visited suppliers in Europe. The balance of the mileage is 25% for private joumeys and 75% for business journeys in the UK. Note 2 During the year ended 5 April 2021 she paid patent royalties of 7,000 (gross) in respect of specialised technology that she uses in manufacturing Note 3 The figure for professional fees consists of 2,000 for legal fees in connection with an action brought against a supplier for breach of contract and 3,000 for accountancy services. Included in the figure for accountancy is 900 in respect of personal capital gains tax advice for the tax year 2020/21. Note 4 The figure for other expenses' of 60,000 includes 1,100 for gifts to customers of food hampers costing 45 each and 800 for gifts to very loyal customers of gold- plated pens carrying an advertisement for "Masuaku Music' costing 70 each. Note 5 She uses one of the eight rooms in her private residence as an office when she works from home. The total running costs of the house for the year ended 5 April 2021 were 18,000. This cost is not included in the income statement's expenses of 230,000 (Question 2 continued on next page) Note 6 She uses her private telephone to make business telephone calls. The total cost of the private telephone for the year ended 5 April 2021 was 3,000 and 25% of this related to business telephone calls. The cost of the private telephone is not included in the income statement's expenses of 230,000. Note 7 During the year ended 5 April 2021 she took goods out of the business for her personal use without paying for them and no entry has been made in the accounts to record this. The goods cost 2,000 and had a selling price of 4,000. Note 8 She purchased a Ford Transit van for 35,000 and no calculation has yet been made for capital allowances. Required: Write a letter to Mary Masuaku (your client) explaining the tax planning points and the tax computation (please show the detailed computation by including it as an Appendix to the letter) in which you show the computation of Mary's tax adjusted profits for the year ended 5 April, 2021. In the computation ensure that you show your detailed workings with notes of explanation for adjustments as appropriate. (15 marks) b) Justin Jones is an architect who in his spare time restores old sports cars and sells them (sometimes for a very substantial profit). He regards this as a lucrative hobby as he drives many of the cars for a few weeks before selling them usually to wealthy people. Even so he is having doubts about whether this would be viewed as a "hobby' by HMRC. He has become rather nervous recently as he has now received correspondence from HMRC requiring that he submit a tax return. He has approached you as a tax adviser to see whether he might have to pay tax on his estimated 70,000 profits from the sale of ten cars in the tax year to 5 April 2021 (he started his car restoration activity in June 2020). Required: Write a letter to Justin Jones explaining what are the key issues that you need to discuss with him regarding his tax position - you should refer in particular to the 'badges of trade and ensure that you mention all of these emphasising the aspects that are most relevant in Justin Jones's case. (10 marks) (Total 25 marks)