You are to assume that you are working as a tax accountant, and one of your clients, Andrew Moore has recently sent in his books so that you can prepare his accounts and tax computation for 2012/13. From this information you have prepared his income statement which is as follows:
Andrew Moore. Income Statement for the year ended 31 December 2012.
Cost of Sales:
Opening Inventory 5,000
Less closing inventory (2,000)(35,000)
Gross Profit 35,000
Less: expenses:note 3
Light and Heat 1,000
Depreciationnote 4 2,700
Loss on disposal of equipment, note 4 300
Motor expensesnote 5 2,500
Bank overdraft interest 450
Sundry expenses (all allowable) 350(11,500)
Notes to the accounts:
1. Turnover Receivables b/f(7,000)
Receivables c/f 2,000 £70,000
2. PurchasesPayables b/f(1,000)
Payables c/f 7,000£32,000
3. For all the other expenses, other than those listed below, the difference between the accruals and cash accounting is minimal.
4. During the year Andrew purchased new equipment costing £5,000, and sold a machine for £600 (original cost £4,000). The balances brought forward for capital allowances on 1 January 2012 were as follows:
General pool £2,500
Car (agreed private use 50%) CO2 emissions 140g/km £6,500
5. Motor expenses:this cost relates to Andrew’s car and is the total running costs for the car. During the year Andrew drove 9,000 miles, 4,500 of which were for business.
Andrew has read that small businesses can now use a simplified method for preparing their Tax Returns and has asked if you will be preparing his accounts for tax purposes this year on the normal accruals basis, or whether you will be recommending the new “cash basis”.
When Andrew brought his books to you he kept you up to date with his recent business changes, which included:
1. He is planning to move to new business premises in the near future and has found that some landlords would prefer to receive a lease premium at the start of the lease period, followed by smaller monthly rents.
2. He had to sell his car in June 2013 for £500 as it had become very unreliable, and bought a replacement for £10,000. This car is six months old and has CO2 emissions of 130g/km. He estimates that it will be cheaper to run than his old car and should save about £300 per year.
3. He has had to increase his bank loan recently, but, as interest rates have remained low he estimates that the interest payable for 2013 should only increase to about £550.
4. He is looking to invest in some new equipment in the near future, and is considering buying under a hire purchase agreement.
5. He is worried about the current state of demand for his product, but hopes that demand will pick up in a couple of years’ time. However, he is not sure whether he will be able to avoid making a loss in at least one year in the near future.
6. Following on from point 5, he does not expect that his sales will increase dramatically for a few years, but does hope to expand significantly within the next 5-7 years.
1. To write a report to Andrew explaining when the new cash based accounts can be used for income tax purposes and the pros and cons of using this new system. You should pay particular attention to Andrew’s particular circumstances.
Calculation of Andrew’s Taxable profits for the year ended 31 December 2012 on the basis of the normal accruals accounting, and also a comparative calculation on the cash basis.20 marks
General explanation of the cash basis, including details of when it will be introduced, and whether there will need to be any adjustment to Andrew’s accounts. 15 marks
Comments on Andrew’s specific circumstances as outlined above.30 marks
Advice as to whether you think that the cash basis will be of advantage to him and whether you will be recommending it.20 marks
Presentation 5 marks
Referencing and bibliography10 marks
Total 100 marks
Hmrc. Simpler Income Tax: cash basis, available at: www.gov.uk/simpler-income-tax-cash-basis
Thexton, M. Complification Taxation 20 June 2013
Monteith, A. Getting a fix. Taxation 18 July 2013
Telford, B. Are you (your clients and prospective clients) ready? Tax Adviser March 2013.
Assignment guidance notes
The report should be between 1,300 and 1,800 words in total. You are required to reference this Report as if it were an academic article by using the Harvard method. Your sources must be correctly referenced, and if you use a direct quote (ie copying sentences or paragraphs from existing material) these must be placed in quotation marks.
Failure to reference is plagiarism and subject to the sanctions set out in the University’s policy on plagiarism.
Reports must be word-processed.
Completed assignments must be handed in by noon on TBA (end of week ?).
In addition, an electronic copy must be submitted via Blackboard for plagiarism checking. Paper copies will not be marked unless an electronic copy is also submitted by the due date and time. Please note that the University’s software checks against published sources as well as other assignments, submitted both to this University and to other Education Establishments.
You will be able to submit draft copies of your assignment from 2 weeks before the due date and view the “originality report” which will indicate the similarity your assignment has with other sources.
If the report indicates that your draft is not sufficiently original you will have the opportunity to re-draft it and view the revised report. You can do this as often as you like up to the due date. You will not, however, be able to submit through Blackboard after the due date. You must in any case submit your paper copy in the normal manner no later than the due date. The paper copy that you submit must be identical to your final version submitted electronically.
If you submit via Blackboard at the last minute, and your originality report indicates a high degree of similarity with other sources, you will have no opportunity to revise it and must therefore submit a paper version as it is. Obtaining a last minute originality report which indicates your assignment may be too similar to other sources will not be accepted as a reason for an extension or late submission. Where an electronic draft has been submitted on or shortly before the due date and no final paper version has been submitted on time the last electronic version may be taken as your final submission and where appropriate put through the University’s plagiarism procedures.
If, exceptionally, you have agreed an extension in advance for valid medical or other reasons and are submitting after the due date you must submit through in the normal manner and also ensure that an identical electronic copy reaches the module deliverer.
This assignment contributes 40% towards your total module mark.
Calculations should be enclosed as appendices to the report.
A bibliography must be included with the assignment
All the Learning Outcomes, as set out in the Module Study Guide, are covered by this assignment.
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