Jumbo Company Tax Computation for Mr. Jedward - Essay Example

? Mr. Jedward and Jumbo Company tax computation. birth - 12/01/1989. Question Salary computation for Mr. Jedward 12/01/1989. 890112/10 = ?89 011. Computation for Mr. Jedward’s income tax for the year 2011/2012 Salary ?89, 011 Less personal allowance ?7,475 Taxable Income ?81,536 Less tax (20% * 35000) = ?7,000 (40% of ?81536-35000) = ?18,614.4 ?25,614.4 NICs for directors at class 1 category letter A (12% (?42484 minus ?7228 = ?35256)) + {(?89, 011- ?42,484) *2%} ?5,161.26 Net income ?50,760.34 Salary - Tax - NIC Tax brackets Income 10% (starting rate for savings only) 0 - ?2,560 20% for basic rate 0 - ?35,000 40% for higher rate ?35,001 - ?150,000 50% for additional rate Over ?150,000 (HM revenue and Customs 480 (2011) The liability of income tax payable from the above computation is ?25,718.3. A deduction of personal allowance of 7,475 is made in the year 2011/2012 (Great Britain: Parliament: House of Commons: Treasury Committee, 2011,103). This figure was increased by ?1000 (Budget, 2011, pp.1).The National insurance Contributions (NICs) are calculated under the annual brackets for directors. This is payable by the employer – Jumbo Company under the PAYE system on the payroll. The NICs is ?6,027.7. This is computed under the annual rate of the Upper Earnings Limit (UEL) of 12% of ?42484 minus ?7228 = ?35256 and an addition of 2% of the amount exceeding this figure. The company is liable to pay this amount of ?6,027.7 to the tax authorities. Question 2 Value of taxable benefits in kind Car (see appendix) (10% * ?33,464.19) ?3,464.19 Fuel for car ?20,000 Accommodation (higher of 75,000 at the rate of 4.75%) (3,000,000- 75,000) * 4.75% (Malcolm, 2010, 435) ?138,937.5 House benefit ?15,000 Private health ?3,000 Use of furniture ?35,000 ?215,401.69 NICs Class 1A on benefits (13.8% * ?215,401.69) ?29, 725.4 Section 114, 149, 174 of HM revenue and customs in the United Kingdom explains that benefits in kind including cars for private use, incentives etc. given to directors are taxed at special rates. Although they do not qualify as individual employee’s salary, they are levied for tax purposes. They are levied for income tax at normal tax brackets rates and the deduction for NICs Class 1A is calculated at a higher rate of 13.8 % of the total value of benefits. Section 201(2) of HMRC gives a list of the benefits that are liable for tax purposes. House benefit is taken as the figure of rateable rent payable of that house or the annual amount given. A car bought by the company is deemed as benefit for the employer when it is used for part or full time use by the director. In our case, the car is for fulltime use. The Co2 emission is 119g/km hence it is liable for a benefit of 10% of its cost according to HMRC tax regulations i.e. it lies under the category of less than 12og/km Co2 emissions. Fuel benefit is taken for the portion used for private purposes. An assumption is made at a figure of ?20,000 fuel usage. The whole amount is a benefit in kind liable for tax computation purposes. If the employer purchases the director’s house, the only allowable amount not liable for tax is a purchase price below ?75,000. The provision of accommodation benefit is taken at a rate of 4.75% of the figure above ?75,000. The cost of this house is ?3,000,000. The only amount liable is ?2,925,000 as an extra charge for accommodation. The total benefit is therefore ?138, 937.5. Use of furniture is gift or an extra benefit from the employer. The whole amount is liable for tax computation under section 201 (2) HMRC. This is an extra expense borne by the employer – Jumbo Company for the director. Contribution by the employer to private medical schemes for the director is a benefit in kind liable for taxation. It is taken as the whole amount paid to the scheme for the director. (House of Commons – Spending Review Committee, 2010, pp. 1) Income tax payable by Mr. Jedward for year 2011/2012 Salary ?89, 011 Total benefits in kind ?215,401.69 Income ?304,412.69 Less tax (20% * 35000) = ?7,000 40% of (?150,000-35000) = ?46,000 50% of ( ?304,412.69-?150,000)= ?77,206.35 Total tax ?130,206.35 NICs for directors at class 1 category letter A (12% (?42484 minus ?7228 = ?35256)) + {(?89, 011- ?42,484) *2%} ?5,161.26 NICs Class 1A on benefits (13.8% * ?215,401.69) ?29, 725.4 Total NICs ?35, 753.1 Net income ?138, 453.24 (Ronald, 2010, 568). On adding the value of benefits in kind, the net income increases from ?50,760.34 to ?138, 453.24 i.e. by 173%. Benefits in kind are liable for tax levy. The National Insurance contributions are charged under two categories according to HMRC. The first category is as calculated in the income alone under class 1 and category letter A. The other category is for value in kind at 13.8%. These two are summed up and deducted from total earnings of the director. Note that the value in kind NICs payments liability rests with the employer. The employee should be only liable to compute the NICs for his earnings and not benefits. The whole amount is deducted under the PAYE system of the payroll. Taxation amount after including the benefits is as high as ?130,206.35 from a previous figure of ?25,614.4 (salary only exclusive of benefits). Benefits are not part of the salary hence they are not included in class 1 NICs. The capital expenditure of the house and the car are Jumbo Company’s asset portfolio of the company. These will be depreciated as per the company’s rates and this is an allowable expense for the company that will reduce the overall income before tax and the corporation tax in turn. Wear and tear is calculated as 10% of cost on the items in the house that qualify according to HMRC e.g. television, carpets, linen etc. The housing has no capital allowance according to HM Revenue and Custom for residential property. However, the wear and tear is factored in the computation of taxable profits for the company. The director’s car has capital allowance for up to 20% on annual basis on the reducing balance method. Note that this is applicable until March 2013. On sale of the car, it is important to note that there is no balancing charge applied. The rate of 20% has been adopted for cars with the Co2 emission of between 110-160g/km. The allowance is ?6,692.8. This amount will be deducted from the company’s profits therefore reducing the corporation tax of Jumbo Company. It is important to note that personal allowance of ?7,475 will not be deducted here since the tax system limits the income before tax up to ?100,000 to half of the allowance and for earnings above ? 112,950 to zero allowance. Your income is above this limit hence no personal allowances (William et al, 2010, 19) Question 3 Staff parties Under section 264 of the HMRC, annual staff parties are not taxable from the employer’s point of view up to a cost of ?150 per head including VAT on the aggregate number of parties. The higher of this amount is taxable. For Jumbo Company the Christmas party and the Trip to Box hill totals to ?32,240 i.e. ?260 per head. Thus the allowable amount is ?18,600 (150 * 124). This will reduce the income before tax and further the corporation tax. The extra is not an allowable expense for taxation purposes. The employer should include the cost of transport to the venue of the party as well as any accommodation costs incurred therefrom to the cost of the annual parties. Any extra guests e.g. family members to the staff members are also include in arriving at the number of heads at the party. The total cost of the annual party is then divided by the number of attendants to get the cost per head. It is important to note that other parties occasioned during the year are not allowable expanse for tax computation. On the employees’ point of view, the annual staff party’s expenses are non-taxable benefits. The expense is not deducted from the employees’ salary therefore it does not increase nor decrease the liability of tax therefrom. Annual staff parties are benefits in kind as per the HMRC guidelines and are not liable for tax from the employee. The director is excluded in the staff party hence he is not liable for tax nor is he counted in the number of heads as in employer’s aspect above. Question 4 Tax implications on: Purchase of new plant and machinery Jumbo company is making a purchase of plant and machinery from borrowings at a cost of ? 2,000,000. The tax system allows for capital allowance should the company buy the asset directly or through the hire purchase mode. The HMRC allows for an annual investment allowance of 100% for the first ?100,000 (James, 2009, 467). This figure will be reduced to ?25,000 from April next year. The asset cost should cover any maintenance and repairs incurred therefrom. If the business chooses to sell the existing plant and machinery, it is wise to use this money for replacing the asset since borrowing has different tax computation methods. The allowance is deducted from the profits before tax of Jumbo Company. This will reduce corporation tax by ?35000 (35% of 100,000) in the year when the investment expenditure is made. This allowance is for qualifying individuals who include sole traders, partnership and companies under the regulatory act. The asset so acquired may disqualify for capital allowance if it is use for lease purpose. In this case the intended use is to replace the existing machinery due to obsolescence hence it is for continued operations of the business. The amount of ?35,000 is a capital allowance for Jumbo Company. The company should deducted wear and tear at 10% on cost on a reducing balance method. This rate is adopted assuming the useful life or the machinery is more than 25 years. Considerations should be made on the useful life of the asset. This is because the rate changes to 20% on cost on reducing balance method for plant and machinery that have a useful life of less than 25 years. Purchase of cars Company cars are not entitled for capital allowances not unless they are used by the director of the company (See section 67(1) of HMRC for the person included as directors). The cars will however qualify for wear and deductions of 10% on reducing balance method. A car tax is charged on the vehicles per annum i.e. road tax as per the Co2 emission rate. The employees who are entitled to use the cars are liable to pay tax on a combination of the price of the car, the benefits in kind rate plus their income tax brackets. The car is deemed as a benefit for tax purposes. For Jumbo Company, the purchase price of the vehicles will qualify for payment of NICs under class 1 i.e. at 13.8% which should be deducted together with the PAYE of the senior employees. To reduce the overall charge on the cars, lower Co2 emitting cars should be adopted by the company. If the company adopts electrical brand new cars with a Co2 emission of less than 110g/km, they can write down the whole 100% amount as an allowance in the first year (David, 2011, 16) Borrowing funds for investment Borrowing funds for investments allows the company to treat the interest on the loan as an allowable expense. This reduces the profits before tax of the company and in turn the corporation tax as well. The loan taken should be used solely for the business purposes to qualify a tax deductible expense (Ronald,2010, 25). It is advisable to sell the old machinery to reduce the borrowings for the new machinery. The electrical cars should be purchased as they attract a capital allowance of 100% in the first year. Appendix Car details Make BMW Model X5 List price (1 USD= 0.6435 (GBP)) ?33,464.19 (52000 USD) Type of engine 3.0-liter displacement and 300 horsepower output gasoline engine Co2 emission 119 g/km Website reference (http://www.leftlanenews.com/new-car-buying/bmw/x5/#) (http://www.nextgreencar.com/search_database/index.php?filters) Car qualifying rate- 10% low-emission car qualifying amount i.e. CO2 emissions of less than 120g/km Assumption – there are no capital gains realized on purchase of the house by Jumbo Co. (Malcolm, 2011, 259) Bibliography BMW car model http://www.leftlanenews.com/new-car-buying/bmw/x5/# retrieved on28/11/2011 Budget 2011: tenth report of session 2010-11, report, together with formal minutes, oral and written evidence Great Britain: Parliament: House of Commons: Treasury Committee, 2011. House of Commons papers, London, The Stationery Office. Co2 Emission for BMW http://www.nextgreencar.com/search_database/index.php?filters retrieved on28/11/2011 David, R. (2011). Towards Ecological Taxation: The Efficacy of Emissions-Related Motor Taxation, Corporate Social Responsibility, United Kingdom, Gower Publishing, Ltd. 16 HM revenue and Customs 480 (2011) expense and benefits: a tax guide: UK House of Commons – Spending Review Committee (2010): Spending Review 2010 United Kingdom. the Stationery Office. James, M. (2009).Tax by Design: United Kingdom. Oxford University Press. Malcolm, F., (2010) Wealth Management Planning: The UK Tax .United Kingdom, John Wiley and Sons. Malcolm. J., (2011) Taxation of Small Businesses: 4th Ed. London. Spiramus Press Ltd. Ronald, S. (2010). Taxation, Volumes 153-154. UK. Taxation Pub. Co. William, H., James E., Eugene W., Steven, C. (2010) Individual income taxes WEST FEDERAL TAXATION INDIVIDUAL INCOME TAXES. United Kingdom, Cengage Learning. Read More