Finance and Accounting for Taxation Cases - Essay Example

Finance and Accounting Taxation Cases Case Client A Under the given scenario, the profit that is generated from the property generated will be taxed after deducting the redecoration expenses of £2,500, cost of advertising for new tenant worth £450, and other property cost worth £550. The Inland Revenue authority provides that property owners have the right to deduct expenses they are entitled in determining the profit to be taxed (Everett, Hennig, & Nichols, 2009). Thus, the redecoration expenses, expenses of advertising for new tenants, other property operational cost will be deducted in determining the taxable income since they are entitled to the property owner for immediate deduction (James, 2009). However, the unrecovered rent of two months that the previous tenant totaling £1,000 will not be deducted in deriving the taxable profit since the amount is not an expense entitled to the property owner for immediate deduction under the Inland Revenue provisions (Lunt, 2009). Similarly, the £600 rent paid in advance has to be reflected in property income assessment. Under the Inland Revenue rules, rent advances have to be reflected in the year the financial year the rent income has been received (Segal, 2011). This implies that the 2013-2014 property income assessment that runs up to 30 June of 2014 has to cater for all rental income even if it is not meant for a month falling in the given financial year. Furthermore, the rent income that was collected from the previous tenant before defaulting has to be included in the property income assessment provided to the Inland Revenue authority (BLS.com, 2014). Consequently, client A’s profit that will be taxed by the Inland Revenue authority is the derived after deducting the three identified expenses from all rental income received within financial year of 2013-2014. Case 2 Client B case Undeclared property income has the consequence of imposing penalty charges on the property owner for defaulting to remit the tax returns for the given financial years (Gilbertson, 2009) (James, 2009). However, client B has the potential of saving the money charged by HMRC by reporting the undeclared property rental income. The opportunity is available to client B by registering for self-assessment in declaring income that has not been taxed for the last four years (Warren, Reeve, & Duchac, 2012). The tax return is filled in different tax return to cover for each of the undeclared tax. In addition, the HM Revenue and Customs provides that if one has registered for Self Assessment but has failed to declare all their income generated in previous years, he have potential of making return correction (Burman, Gale, & Orszag, 2008) (James, 2009). Consequently, the optimal decision for client B is to apply for a Self Assessment opportunity from HMRC to fill the undeclared income for the last three years and current year since they fall under the four years provision to reflect each of the year’s assessable property rental profit. This initiative will save client B heavy consequences if the HMRC realizes he has not been declaring income generated from the rental income in future without the informing the authority in advance. Case 3 Client C case Under the given scenario, the tax adjusted trading profit for the three years that Client C has been running the business will be spread across the three financial years (Nikolai, Bazley, & Jones, 2009). This implies that the £33,000 adjusted profit that has been generated by the business will be divided into three financial years to allocate each of the financial years its respective taxable income. Thus, each of the three adjusted trading period will be allocated a profit amount worth (£33,000/3 = £11,000). The allocation of each financial year its respective profit amount through the assumption that each year generated equal profit has potential of affecting tax liability of client C negatively (Deegan, 2014). This is because the taxation rate that will be applied in deriving the tax obligation on the three financial years is current prevailing tax rate (Everett, Hennig, & Nichols, 2009). Consequently, the last two years are likely to face higher tax rate if the prevailing tax rate is higher compared to tax rate in year one and year two. This will increase the tax obligation that the taxpayer will be required to remit to the HMRC (James, 2009). Case 4A and 4B (4a) Mr. D case (i) Capital gain = selling price – buying price (Warren, Reeve, & Duchac, 2012) (ii) Sold house capital gain = £63,250 – (£4,000 + £2,000 + £3,000) = £63,250 - £9000 = £54,250 (iii) Sold antique capital gain = £6,500 - £5,500 = £1,000 (iv) Racehorse share capital gain = £6,200 - £1,340 = £4,860 (v) Vintage sold capital gain = £76,500 - £17,400 = £59,100 (vi) The private home that Mr. D owns has to be taxed on income received from the tenants under part-rental arrangement (Segal, 2011). Even though Mr. D owns the house as a private property that is exempt from taxation, the extent of letting the private property to private tenants requires Mr. D to undertake property income assessment in presenting tax return (James, 2009). (v) Tenants occupying a property jointly are supposed to claim deduction of the total property deduction according to legal interest on the property occupied (Segal, 2011). Thus, since Mr. and Mrs. D are joint tenants in the property, each of them has to include half of total expenses and income in presenting tax returns (James, 2009). Even though Mr. and Mrs. May have come up with an agreement to divide the expenses and income in proportions different from their equal shares, the agreement does not affect income tax purposes (Everett, Hennig, & Nichols, 2009). The taxable income of Mr. D worth £42,000 will be taxed by HM Revenue and Custom after deducting the half of the expenses incurred from the property he jointly occupies with Mrs. D as provided in the illustration above (Gilbertson, 2009). This has the impact of reducing the taxable income that Mr. D will be taxed by the HMRC. (4b) Mrs. D case Sold antique capital gain = £6,300 - £5,600 = £800 Sold land capital gain = £15,000 – (£4,500/ 12 * 3) = £15,000 - £11,250 = £3,750 Land sold capital gain = £12,000 - £5,000 = £7,000 Under the given scenario that Mrs. D did not generate income during the financial year of 2013-14 but incurred capital losses worth £24,000, the capital loss should be carried forward to later financial year for offsetting the losses against future profits (Burman, Gale, & Orszag, 2008). This implies that Mrs. D has the opportunity of reducing the tax expense in future financial year by deducting the capital losses suffered in 2013-14 financial year to future declared profits. References BLS.com. (2014). Accountants and Auditors. Retrieved 2014, from http://www.bls.gov/ooh/business-and-financial/accountants-and-auditors.htm#tab-2 Burman, L. E., Gale, W. G., & Orszag, P. R. (2008). Tax Break: Thinking Through the Tax Options. Tax Notes , 1081-1099. Deegan, C. (2014). Financial Accounting Theory. Sydney: McGraw Hill Education. Everett, J. O., Hennig, C. J., & Nichols, N. B. (2009). Contemporary tax practice: Research, planning and strategies. Chicago, IL: CCH. Gilbertson, C. B. (2009). Fundamentals of Accounting. New York: Cengage Learning. James, M. (2009). The UK Tax System: An Introduction. London: Spiramus. Lunt, H. (2009). 2: Fundamentals of financial accounting. Oxford: CIMA. Nikolai, L., Bazley, J., & Jones, J. (2009). Intermediate Accounting Update. Boston: Cengage. Segal, M. A. (2011). Corporate Taxation Essentials. New York: REA. Warren, C. S., Reeve, J. M., & Duchac, J. E. (2012). Accounting. Mason, OH: South-Western Cengage Learning. Read More