Advanced Personal Taxation
Section A
Part 1: Isabelle’s Tax Liability for the Tax Year 2019/2020.
Gross Profit = 8404 x 10 = 84,040
Add Rent income 10% of 84040 = 8404
Total Income = 92,444
Less:
Depreciation 8% of 84040 = 6723
Wages and Salaries 10% of 84040 = 8404
Rent and other expenses 30% of 84040 = 25212
Utility Cost 12% of 84040 = 10085
Printing and Stationery 5% of 84040 = 4202
Monitoring Expenses 7% of 84040 = 5883 = 60,509
Net Profit = 31,935
Less Necessary and ordinary expenses
Membership fee = 1,200
Motor Expenses =1,400 =2,600
Net Income 29,335
Taxable income by June 2019 29335 x 92.35% = 27,091
Additional Revenues in 2020
Dividends = 9,000
Interest accrued = 4,000
Rent Income Premium = 60,000
Taxable income for 2020 = 60,000 = 133,000
Total Taxable Income for 2019/2020 = 160,091
Social Security Tax Payable (12.4% of 132,900) =16,480
Less Prepaid social security (5000)
Net Social Security Tax Payable = 11,480
Medicare Tax Payable (2.9% of 160,091) = 4,643
Add late payment Interest 500
Total Tax Liability for 2019/2020 = 16,623
Less Employer Equivalent Deductions 50% of 16,623 = 8311.5
Payable Tax liability 8311.5
Part 2: Report on the Tax Calculations
To get the tax liability, the first step is to determine the taxable income for the given trading period. The tax liability is calculated as a percentage of the net income (commonly referred to as the net profit). The taxable income in this regard is the difference between the gross income/gross profit and the business expenses for the year under review. Thus, the initial step was meant to obtain the gross profit. The gross profit is then adjusted upwards with rent income since it is revenue to the business, which shall increase the business earnings. Once the gross profit is obtained, the business expenses are calculated, and they are total deducted from the gross profit to obtain the net income for the year (2019). The net profit is then adjusted downwards by multiplying it by 92.35 to obtain the taxable income. The downward adjustment is meant to take care of the deductions that an individual business person remits (Gough, 2018).
The taxable income is then multiplied by 15.3%, which is the tax rate for self-employed persons as provided by Internal Revenue Services which is mandated to regulate tax rates and other matters about revenue management and regulation. The 15.3% is made up of two parts: 12.4% which is the deductions for social security (social security tax) and the 2.9% that is taxed for Medicare. For 2019 accounting period, the SST would only apply for the first 132,900 pounds of the total net income (taxable income realised during that trading period). O the other hand, the Medicare tax shall be 2.9 per cent of the taxable income for that trading period.
It is imperative to note that in the trading period 2019/20, Isabella had a taxable income of 160,091. Therefore, the SST was calculated on the first 132,900 pounds as per the provisions of the IRS. The since she had been charged interest of £500 for late remittance of tax, this would be included in the total amount of tax payable to her for that trading period. However, being self-employed, Isabella is entitled to adjust her tax downwards by subtracting the employee equivalent deductions, which is one-half of the tax liability. It is in this respect that the total tax liability is multiplied by half to arrive at £8,311.5
It is also important to note that there are additional deductions that Isabella is allowed to make on her net income before subjecting it to tax in order to ensure that she pays as minimum tax as possible. IRS accepts that all expenses that are ordinary and necessary can be deducted from the gross profit to come up with the real amount that should be subjected to tax. According to IRS, an ordinary expense is one that is common and acceptable in the line of business one is engaged. For instance, for Isabella, the motor expense falls in the class of ordinary expenditure since it is common to virtually all sorts of businesses, but at the same time, it is important in helping Froggy Recruitment in reaching out to potential clients located in afar places from the business’ headquarters. On the other hand, the necessary expense is one that is advantageous or helpful and appropriate to the business. For example, in Isabella’s case, the move to register is helpful in so far as matters of legality are concerned. Therefore, such expenses are deducted from the net profit to get the real amount of income that should be subjected to tax.
It is imperative to note that the amount of income that is subjected to social security tax varies year after year, for instance, in 2020, the amount is pegged at 137,700 pounds. Furthermore, for individuals whose income exceeds 200,000 for individual filing and 250,000 pounds for those filing their taxes jointly, there is an additional 0.9 per cent calculated in the amount in excess of the amount to cater for Medicare needs. Therefore, as the business grows, Isabella should be aware that when it hits these figures, then additional charges shall be levied on the income to cater for the tax liability she owes the government.
Part 3: Implications for Failing to Notify HM Revenue and Customs for Chargeable Gains
When a client (Isabella for this matter) fails to inform HM Revenue and Customs for any changeable gains in their business assets and general undertakings, her business will be liable to a penalty of failure to notify. Such penalties are affected to the business when a business fails to notify HMRC that their business has increased in worth and makes considerably high amounts of profit and should, therefore, pay more taxes or when their business sells part of the assets and consequently realises more profits. The penalty may do business to suffer financial losses since it would be required to offset all the penalties. Besides, it also taints a negative image on the business since it will be perceived as being noncompliant that would ruin its PR.
