Accounting Auditing and Finance

COLLEGE OF BANKING AND FINANCIAL STUDIES DEPARTMENT OF UNDERGRADUATE PROGRAMME B.Sc. in Accounting, Auditing and Finance INDIVIDUAL ASSIGNMENT BRIEF Weightage: 20% Student Name & ST Number Semester 7 SEPT – DEC 2020 (Fall 2020/21) Assignment Title Income Tax computation, Rental and Employment and Selfemployment Income Module Taxation Accounting Assessor: CA.Sujatha Bhat Start Date: 18 October 2020 Internal Verifier Ms.Sujata Suresh Due Date: Formative: 8/11/2020 Summative 22/11/2020 Required Work, Format and Grading You must submit the following by the assignment due date: ▪ Completed answers to each task, making sure that you fully address each of the outcome criteria. ▪ ▪ Answer all questions separately. Assignments without TURNITIN report will not be accepted. Resources: You need to demonstrate a confident application of the theories to the assignment task. The theoretical underpinning of your observations and deliberations should also demonstrate a good understanding of the subject by the way that your analysis is structured. You can access the Internet to research about the topic. You should demonstrate good academic practice by the appropriate use of academic texts and journals that are properly referenced. Guidelines and further information about assignment: Assignment must be submitted with the “Turnitin” report. If the report generated indicates a similarity index percentage of 20% or more, a review of your assignment is necessary to ensure the same is reduced to less than 20%. 1 Student declaration: I certify that the work contained in this assignment was researched and prepared by me: Signature: ___________________________ Date: ___________________ The user ID and Password for submitting the soft copy of the report through TURNITIN is as follows: MORNING BATCH: Class ID: 26946720 Enrolment Password: TAX2020 EVENING BATCH Class ID: 26946752 Enrolment Password: TAX2020 Submission time and date You should submit the assignment by the time and date mentioned otherwise a ‘NA’ will be awarded. Fill in the form cover and staple it with your assignment. Make sure that all the relevant details are complete. Assignments must be submitted by the due date. You may include diagrams, figures etc without word penalty. Plagiarism Writing 1. Plagiarism occurs if you use somebody else’s work in an assignment or exam answer, but fail to state where you got the material from. You need to be also very careful about the amount of words you are using from somebody else’s work. 2. It can happen in any type of assessment where you are given the questions or tasks in advance. 3. If another student uses your work in his/her answer(s), both you and he/she will be punished when caught. 4. Punishments for committing plagiarism can be very severe. Details Plagiarism is a form of cheating in which students use the work of others and present it as their own. It may include all or any one of the following – 2 1. Copy extensively from the work of others (from sources such as books, magazines, journal, websites etc) and submit the work as your own. 2. Copy another students’ work and submit it for assessment under your own name. 3. Allow another student to copy your work and then submit it for assessment under their own name. What happens if you get caught? The examining body of CBFS may punish offending students in any manner that they deem fit. Typical punishments may range from reduction in grades, making students resit modules and even failing students on a module or an entire award. The college considers this form of cheating as a serious offence. Therefore be forewarned! Word count: not more than 1000 words 3 Task 1: a) Explain the meaning of taxation and various types of taxes and classification of taxation. You must consider the UK rule while explaining this question. (2 marks) b) “Taxation is very much required for the economic development of the country; to protect the environment and to reduce the gap between rich and poor” Using above, Illustrate and Critically evaluate the purpose of taxation. (2 marks) Task 2: Ms.Sabeena owns 2 furnished houses, both houses are let out for residential purposes. The details of each residential property for the tax year 2019/20 are as follows: 1st house: In 2018, She purchased the house by borrowing loan of £100,000, for which she pays interest at 8% per annum. The amount of loan is still outstanding during the tax year 2019/20. She let out this house for £24,000 per annum as rent, payable monthly in advance. The tenant was very regular in the payment of rent in the beginning of each month, but he failed to give rent in the beginning of July 2019. Ms.Sabeena was behind the tenant following the rent. But by the end of July 2019, the tenant vacated the property without informing Ms.Sabeena and she tried her best to find out the whereabouts of the tenant but later understood that the tenant left the country and he will not come back again. Then she started searching for new tenant and she was able to find new tenant from 1 October 2019 with Rent of £32,000 per annum payable monthly in arrears. New tenant has been paying the rent regularly without fail. During the tax year 2019/20, The details of expenses incurred and paid by Sabeena are as follows: 20/4/2019, She paid water tax of £500. But the council tax has been paid by the tenant £400. Also, on the same date, she spent £1000 to repair the property 4 1/7/2019, she paid insurance of £1,800 for the property, out of which £450 will be for tax year 2020/21 (for next year). 1/10/2019, when new tenant occupies the house, she replaced the old sofa set by paying £2,500. She sold the existing sofa set for £200. On the same date, she purchased new washing machine for £3,000, which was not in the house before. She also replaced the old 32” normal TV- with 55” smart TV costing £2000. The market value of similar type of old TV is £800. Also, she sold the old TV for £50. 2nd House: furnished house: On 1 May 2019, she purchased an old house (house no.2) for £50,000 and gave the house for rent from 1 July 2019 for a monthly rent of £800. Before giving for rent she spent £5000 to replace the front and back door. Before replacing, it had wooden doors with single key, but she replaced it with strong steel doors with double lock. She replaced the wash basin in washroom with similar standard by spending £500. For furnishing the house, she spent £2200 for curtain and carpet and purchased sofa set costing £1,500. She paid water tax and council tax totaling £600 for the year. On 20 March 2020, she incurred £1000 to repaint the entire building but she paid for the same on 1/5/2020. Other information: Ms.Sabeena has received £16,000 Interest on Debenture (Loan notes), £5,000 Interest from Government Bond, £300 from National Savings Certificate and £200,000 from winnings from Lottery. Sabeena received Dividend of £30,000 from UK Company. During the tax year Ms.Sabeena has contributed £1,600 to personal pension contribution and donation £2,000 for charity. a) b) You are required to calculate the tax liability and tax payable of Ms.Sabeena for the Tax year 2019/20 (8 marks) List out and explain the various incomes exempt from tax (2 marks) 5 c) Explain with example, the tax implication of Saving Nil Rate band and Dividend Nil Rate Band. How it affected the tax of Ms.Sabeena? (2 marks) Task 3: Amur started his own business in 2015. For the Accounting year ended 31/3/2020, he prepared Profit and Loss Account for his business. He had other incomes such as rental income, interest income, dividend income and profit on sale of fixed asset. He included all these incomes in his Profit and Loss Account. Also, he has deducted various expenses while calculating Net Profit in the Profit and loss Account. He is not sure how to calculate the adjusted trading profit for the purposes of taxation. Question: As you are dealing taxation issues in his office, prepare a report explaining clearly the various expenses, which are deductible, and which are not deductible and the treatment of various other incomes included in the Profit and loss account, while calculating the adjusted trading profit for tax purposes. (4 marks) _____________________________________ 6 COLLEGE OF BANKING AND FINANCIAL STUDIES B.Sc. Accounting, Auditing and Finance Specialization FALL 2020/21 Semester 7 TAXATION ACCOUNTING (FA 2019) Tute 1 WEEK 01 to 03 Meaning of Taxation CALCULATION OF TAXABLE INCOME AND CALCULATION OF TAX Lecturer: CA.Sujatha Bhat OFFICE: F17 (FIRST FLOOR) sujatha@cbfs.edu.om Page 1 Lecturer- Sujatha Bhat FALL 2020/21 Chapter 1: MEANING OF TAXATION: The fees charged by the government on a product, income or activity is known as taxation. If the tax is charged directly from the income of an individual or corporation, it is known as Direct tax but if the tax is charged on the price of goods or services, then it is called as Indirect tax. Tax is not a voluntary payment. It is to be paid based on the income of the assessee and the tax rate prescribed by the Act. UK is following Progressive taxation system for Direct Taxes. Progressive taxationas income of an individual rises the taxation also rises, so who is having more income pays more tax. Purpose of TaxationThere are various reasons for taxation in the modern society. They can be grouped into: 1. Economic factors: Government requires money for the economic development of the country, to maintain military services, medical facility, road transport, bridges, street light, cleaning, police forces, schools, and many economic works which require huge amount of investment. 2. Social factors: The type of taxation structure imposed has a direct impact on the accumulation and redistribution of wealth within a country. If there is no taxation in a country, it is known as FREE economy. In a Free economy, the rich becomes richer and the poor tends to remain poorer. In such cases, the taxation policies help to accumulate and redistribute income and wealth from the rich to the poor. 3. Environmental factors: The taxation system is slowly moving to accommodate the environmental concerns especially about renewable and non-renewable sources of energy and global warming. Example: More tax for the business if they use high emission motor car. Page 2 Lecturer- Sujatha Bhat FALL 2020/21 Types of Taxation There are a wide range of taxes in the UK tax system, which is administered by HM Revenue and Customs (HMRC). Central Government raises revenue through this wide range of taxes. Tax law is made by statute and as this can be difficult to understand; these have been written to make it simpler for the user to understand. The following Acts have resulted from the tax lawTax a) Income Tax Who is paying the tax Individuals and partners Payable on their earnings (e.g. self-employment and employment) and investment income. b) Corporation Companies on their income and gains Tax c) Capital Individuals, partners and companies. gains Tax Capital gains tax (CGT) was introduced in 1965 and is levied on gains arising from the disposal of assets by individuals and trustees. Capital gains made by companies are subject to corporation tax. d) Inheritance Tax Individuals and Trustees e) Value Added Tax Business (both incorporate and unincorporated) f) National Insurance Payable by individuals who are either employed or self-employed on their earnings. contributions (NIC) Also payable by businesses (e.g. sole trader, company) in relation to their employees. Payable by executors on the value of the estate of a deceased person. Also payable in respect of certain gifts during an individual’s lifetime. Payable on the supply of goods and services to the final consumer. Page 3 Lecturer- Sujatha Bhat FALL 2020/21 Classification of Taxes Taxes can also be classified as:- a. Direct Taxes and Indirect Taxes b. Revenue taxes and Capital Taxes Direct Tax is a tax which is directly paid to the government and is based on income and profit. There are four types of direct taxes:a. Income Tax b. Capital gains tax c. Corporation tax d. Inheritance tax Indirect tax is a tax which is collected through an intermediary and then passed on to the government. The best example is:Value Added Tax (VAT) – it is payable by the final consumer. It is paid by businesses both incorporated and unincorporated. Tax is collected by the seller at the time of sale and paid to the government on behalf of the purchaser. Revenue taxes are those charged on income. Example:a) Income tax b) Corporation Tax c) National Insurance Capital Taxes are those charged on capital gains or on wealth. Example:a) Capital Gains tax and b) Inheritance tax Page 4 Lecturer- Sujatha Bhat FALL 2020/21 Chapter 2: CALCULATION OF TAXABLE INCOME AND TAX AND CALCULATION Income tax is payable by a UK resident individual on their income for a tax year. Tax year runs from 6 April to 5 April. Ex: the tax year 2019/20 runs from 6 April 2019 to 5 April 2020. It is necessary to categorize the income under headings such as Non-saving income, Saving income and Dividend income for the purpose of calculation of tax. 1. Non-saving income: It includes Income from employment Income from trade & profession Rental Income 2. Savings income (excluding dividend income): It includes: Interest from Banks, Interest from building societies, Interest from gilts and debentures. 3. Dividend income: Dividend from UK company INCOME TAX COMPUTATION 2019/20 Nonsaving income Saving income Dividend Income Total Income from employment 30,000 – – 30,000 Rental Income 5,000 – – 5,000 Page 5 Lecturer- Sujatha Bhat FALL 2020/21 Business income Bank Interest Building Society interest UK dividends 20,000 – 1,000 2,000 – 1,000 20,000 1,000 2,000 1,000 TOTAL INCOME Less: Eligible Interest – Int payment 55,000 (5,000) 3,000 – 1,000 – 59,000 (5,000) 50,000 3,000 1,000 54,000 – – NET INCOME Less: Personal Allowance(fixed) Taxable Income (12,500) 37,500 3,000 1,000 (12,500) 41,500 Individual pays tax for Taxable Income. Calculate tax at appropriate rate of tax applicable, it is known as tax liability. Deduct ‘tax credit’ from tax liability, the balance figure is known as tax payable. 1. A receives the following income in 2019/20: £ Employment income (Salary) 10,000 Trading income 20,000 Page 6 Lecturer- Sujatha Bhat FALL 2020/21 Rental income 5,000 Interest received 2,000 Dividend received 1,000 Interest payment (deduction) 2,000 Income computation: Non-saving income Saving income Dividend Income Total Income from employment Rental Income Trading (Business) profit Bank Interest UK dividends TOTAL INCOME Less: Eligible Interest (Payment) NET INCOME Less: Personal Allowance Taxable Income 2. A receives the following income in 2019/20: £ Business Income 125,000 Income from House property 4,000 Page 7 Lecturer- Sujatha Bhat FALL 2020/21 Interest Income 3,000 Dividend income 2,000 Employment Income 6,000 Eligible Interest (payment) 1,000 Show the computation. Nonsaving income Saving income Dividend Income Total Income tax Rate: N.S. Other income Saving Income Dividend Page 8 Lecturer- Sujatha Bhat FALL 2020/21 £0 to £37,500 ( basic rate band) 20% 20% 7.5% £37,501 to £150,000 (higher rate band) 40% 40% 32.5% 45% 45% 38.1% above £150,000 (Additional rate) Saving Nil Rate is applicable to Saving income and First £2000 dividend income is taxable at 0% Each taxpayer (individual) is under an obligation to pay the tax to HMRC in 3 instalments. For the tax year 2019/20, the date of payment of tax is: 1st instalment: On account payment to be paid on 31 January 2020 2nd Instalment: On account payment: to be paid on 31 July 2020 3rd Instalment: A Balancing payment or repayment is done on 31 January 2021 1st 2 installments is to be paid based on the last year’s tax information. 3) An individual has total taxable income of £25,000 for 2019/20. All of his income is from employment income. Employer deducted tax from salary (PAYE) £1,000. What is the total income tax liability and payable? Page 9 Lecturer- Sujatha Bhat FALL 2020/21 4) An individual has total taxable income of £50,000 for 2019/20. All of his income is Non-saving income. What is the total income tax liability? (BPP) 5) An individual has total taxable income of £165,000 for 2019/20. All of his income is from employment income. Employer deducted tax from salary (PAYE) £8,000. What is the total income tax liability and payable? CHARITABLE DONATIONS: If an individual donate money for charitable purposes, then he can get tax benefits. Always individual pays 80% of the Donation and gets benefit for 100% of the donation. For Ex: if an individual donates 1000, it means that he donated 1000 X 100/80 = 1,250. Steps: 1. find out Gross donation 2. Expand Basic Rate Band. Page 10 Lecturer- Sujatha Bhat FALL 2020/21 3. Expand the higher rate Band (if the taxable income is more than £150,000) Contribution to Personal Pension Scheme: Always individual contributes only 80%. Gross it and add to the basic rate band before calculating tax (same like Donation). 6) Mr.P, who is single and has employment income £55,000, makes Gift Aid payments totalling £2,000 and contributed £2,400 to Personal Pension Fund Calculate his income tax liability. Income tax computation: Earnings 55,000 Net Income Less: PA 55,000 -12,500 Taxable Income 43,150 Expanding Basic Rate Band: 37,500 + Gross Donation + gross pension Income tax Calculation: 7) Mr.P, who is single and earns £160,000, makes Gift Aid payments totalling £2,000 and contributed £2,400 to Personal Pension Fund Mr.P is not eligible to claim PA. Calculate his income tax liability. Earnings (Employment income) 160,000 Net Income Less: PA 160,000 0 Taxable Income 160,000 Page 11 Lecturer- Sujatha Bhat FALL 2020/21 Expanding Basic Rate Band: 37,500 + Gross Donation + Gross Pension As the taxable income is more than £150,000, Expand Higher Rate Band also Expanding Higher Rate Band: 150,000 + Gross Donation + Gross Pension Personal Allowance: All persons under the age of 65 (including children) are entitled to personal allowance. The Personal Allowance is deducted from Net Income to get taxable income. It is £12,500 for 2019/20. The Personal Allowance is first deducted from Non-saving income, then from saving income, and then from dividend income. If the Adjusted Net Income (ANI) exceeds £100,000, then the Personal allowance of £12,500 is to be reduced by: 50% (ANI – £100,000) If the adjusted Net Income is equal or more than £125,000, then the personal allowance will become zero. Adjusted Net Income and Net Income is not one and the same. Page 12 Lecturer- Sujatha Bhat FALL 2020/21 Adjusted Net Income (ANI) = Net Income X Less: Gross gift aid donation (X) Less: Gross personal pension contribution (X) X If ANI is in excess of £125,000, then the PA is zero. If the Net Income is more than £100,000 : If the Net Income is 100,000 or less than 100,000 13) T has received gross salary of £59,000 and Rental Income of £5,000 in 2019/20. The eligible interest paid is 1,500. He gave donation of £4,800 to charity and contributed £1,600 to Pension. What is T’s income tax liability for 2019/20 assuming none of the income is interest and dividends? Mention the due dates for payment of tax. Non-Saving Page 13 Lecturer- Sujatha Bhat FALL 2020/21 Expand Basic Rate band: 14) An individual has Trading profit of £ 230,000 for 2019/20. He paid eligible interest of £2,000. He paid donation of £8,000. He had no other income. What is the total income tax liability? Non-saving Expand Basic Rate band: Expand Higher Rate Band: Page 14 Lecturer- Sujatha Bhat FALL 2020/21 15) An individual has got the following incomes: …