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Sports Folks Ltd is a UK resident company. The company trades in sports goods and wears. All products are taxable unless stated otherwise.

                                                                               202010

ACC 3013 Taxation

Assessment 3: Written assessment (report writing)

Weight-35% (25% for report + 10% for individual written defense)

CLOs Assessed:

CLO 3: Compute the taxable income and tax liability of business entities 

CLO 4: Explain various issues related to value added tax (VAT)   

Submission Date(s):

Names of the students and IDs  1. ____________________________   2._____________________________   3._____________________________   4._____________________________  
Final marks/grade for the report 
Date of moderation 
Comments                       

Description:

Report writing activity involves applying the knowledge learnt from the course in a more practical and broader scenario than that given in the textbook and study materials. You are also expected to evaluate the information given in the case and recommend the viable solutions where required. The information about operations of a UK resident trading company Sports Folks Ltd is given on the following pages. You are required to complete all the tasks given at the end of the case.    

Individual written defense (10%) will be conducted in the week following submission of your reports.    

Instructions:

  1. You will work in the teams of minimum 2 and maximum 4 students.
  2. Submit your answers in the form of report on or before 22 November 2020
  3. Your instructor will conduct individual written defense through BBL
  4. Show all computations clearly and give explanations wherever required/possible. Try to demonstrate as much as possible, your knowledge and skills when computing figures or giving explanations of your answers/choices.           

Sports Folks Ltd is a UK resident company. The company trades in sports goods and wears. All products are taxable unless stated otherwise. Sports Folks Ltd buys goods from local manufacturers for distribution in England and some other European Countries. Company prepares its accounts to 31 March each year. The statement of profit or loss prepared in accordance with the international financial reporting standards (IFRS) for the year ended 31 March 2020 is given below: 

    £                           £

                        Net sales (N.2)                                                                                   17,500,800

Cost of goods sold (N.3)                                                         (13,450,000)

Gross margin                                                                              4,050,800

                        Operating expenses:

Impaired debts (N.4)                                         12,500

Selling costs (N. 5)                                          120,500

                        General & administrative (N.6)                      588,900

                        Legal, professional and trade fees (N.7)          92,800

Repairs and renewals (N.8)                              65,300

                        Vehicles maintenance (N.9)                           225,000

                        Leasing cost (N.10)                                          14,200

Depreciation                                                    310,000

Employee costs (N.11)                                   1,305,800

Rent & rates (N.12)                                         320,000

                                                                                                                          (3,055,000)

                        Operating profit                                                                            995,800

                        Other income:

                        Rental income (N.13)                                           56,350                                           

                        Bank interest received (N.14)                             32,000

                        Dividends received (N.15)                               141,650                 230,000   

                        Finance costs

Interest expenses (N. 16)                                                                        (67,500)

                        Profit before taxation                                                                 1,158,300

Notes:

1. Sports Folks Ltd

Sports Folks Ltd acquires products, stores in warehouses if needed and transport to retailers as per the orders received. Headquartered in Cardiff, Sports Folks Ltd employes 250 staff personnels for marketing, distribution and and administartion functions. Sports Folks Ltd maintains its own fleet of delivery trucks and hires full-time drivers.            

2.  Net sales

Quarterly sales for the year ending on 31 March 2020 are given below. All sales made within England are standard-rated but that made to VAT registered traders in other European countries are zero-rated. Sales made to the retailers within England are made on 45-day credit and 2% dicount is offered for the prompt payment. Sales made to traders in EU member states are made on credit of 20 days without any prompt payment discount. Goods sold are nonrefundable but exchangeable within 10 days. Sales figures in below given table are before any prompt payment discount. 

QuarterSales in EnglandSales in EnglandSales to EUTotal
 (discount not availed)(discount availed)tradersSales
April 19-June 192,890,500405,0001,120,000               4,415,500
July 19-Sep 195,320,000600,000950,600               6,870,600
Oct 19-Dec 192,205,500315,800666,816               3,188,116
Jan 20-Mar 202,312,4600740,540               3,053,000
Total12,728,4601,320,8003,477,956            17,527,216

Sales figure reported in the statement of profit or loss is the net of discounts and has been computed as follows:    

       £

Gross sales                                                                             17,527,216

Less: prompt payment discount (1,320,800 x 2%)                         (26,416)

Net sales after discounts                                                            17,500,800                         

3. Cost of goods sold

Cost of goods sold includes purchase price paid to the vendors (manufacturers) and other costs associated with acquiring inventories. Sports Folks Ltd purchases goods on credit of 45 days and is offered 5% dicount for prompt payments. Goods are exchangeable within 15 days of the delivery. All purchases and costs of acquiring goods are standard rated. 

QuarterPurchasesPurchasesOther costs ofTotal
 (discount not availed)(discount availed)acquiring inventories 
April 19-June 19                     3,350,000410,00089,500             3,849,500
July 19-Sep 19                     4,100,000296,50091,200             4,487,700
Oct 19-Dec 19                     2,430,89080,00064,000             2,574,890
Jan 20-Mar 20                     2,560,000120,00065,100             2,745,100
Total12,440,890906,500309,800          13,657,190

                                                                                                                  £   

Beginning inventories April 1, 2019                                                750,000

Cost of purchases, net of discount (906,500 x 5%)                      13,611,865

                                                                                                              14,361,865

Ending inventories March 31, 2020                                                   (911,865)

Cost of goods sold                                                                              13,450,000    

Beginning and ending inventories include total cost of goods available in company stores for sales and/or goods in transit from the manufactrers to company warehouses on first and the last day of the accounting period respectively.   

4. Impaired debts

On 31 March 2020, Sports Folks Ltd wrote off an impairment loss of £12,500 in respect of 

two invoices. First invoice of £7,000 in the name of Rex Traders Birmingham was due on 10 June 2019. Second invoice of £5,500 in the name of Nasir Traders London was due on 15 January 2020.   

5. Selling costs

    Selling costs include:           

            Gifts to the customers (wall clocks bearing company name costing

                                                       £70 per customer)                                                            £9,000

Advertising and promotions                                                                            £60,500

            Entertaining UK customers                                                                                 7,500

            Entertaining overseas customers                                                                       7,500

Gifts to suppliers                                                                                                        12,500

6. General and administartive

      General and administartive expenses include:

      Donations to B&B Foundation (an approved charity), Sports Folks received

      a free advertisement in the charity’s monthly magazine                                     £11,500                 

      Donations to approved charities (qualifying)                                                       10,000

      Political donations                                                                                                              8,500

      Fine for health and safety breach                                                                                  4,200

      Penalty on late payment of taxes to HMRC                                                                       800 

7. Legal, professional and trade fees

            Fee paid for accounting and audit services                                                   £18,000

            Annual subscription to business and trade association                                       2,000

            Legal fee in connection with the trade financing (Note 16)                            8,700

            Charges paid for debt collections                                                                   15,000

            Legal fee in connection with acquiring and registering new trucks              21,300

            Legal fees in connection with a new 40-year lease                                         7,500

             Professional fee paid to counsellor hired for terminated employees             20,300

                                                                                                                                         92,800      

8. Repairs and renewals:

       Annual heating maintenance contract charges for company owned

       premises (cover the period from 1 April 2019 to 30 March 2020)                          £35,000

       Repainting business premises                                                                                 13,500

       Built new offices for the staff                                                                                  16,800        

                                                                                                                                                   65,300

9. Vehciles maintenance

       Include fuel cost and the cost of maintaining company’s delivery trucks and motor cars

       under the use of company’s employees and directors. All motor cars are used for

       20% private mileage by the employees and directors.   

10. Leasing cost

The leasing cost of £14,200 is in respect of a motor car that has CO2 emissions of 125 grams per kilometer.   

11. Employee costs

       Employee costs include salaries and wages paid to staff and workers.

       Employee costs include:

       Sports Folks Ltd’s national insurance contributions                    £80,500

       Annual staff party                                                                        £21,300

       Gifts to the employees                                                                     7,000         

Ignore employees’ NICs payable on salaries and wages earned.

12. Rent and rates

        Include rent and rates paid on warehouses/stores let in for the business purposes.

13.  Rental income 

  Rental income is received in respect of an office space let out by Sports Folks Ltd to an  

  unconnected entity. The amount of rental income reported in the statement of profit or   

  loss is the amount taxable for the financial year 2019.    

14. Bank interest

The bank interest was received on 31 March 2020. The bank deposits are held for non-trading purposes.

15. Dividends

       Dividends reported in the statement of profit or loss were received from another UK      

       resident company.          

16. The interest payable is in respect of the company’s 3.25% loan stock. The loan stock was

        used to finance the company’s trade activities. The interest amount given in the statement 

        of profit or loss is the amount accrued on 31 March 2020.

17. The tax written down value of Sports Folks Ltd’s main pool assets on 1 April 2019 was £1,340,500. Following assets were acquired and disposed during the year to 31 March 2020:

Acquisitions:

5 May 2019                 Purchased delivery trucks                                             £342,000

10 July 2019                Purchased new motor car CO2 emissions 45g/km            7,500

14 Sep 2019                Purchased motor car CO2 emissions 100g/km                21,800

15 Dec 2019                Purchased equipment                                                           18,400

Disposals:

10 Jan  2020                Sold a motor car CO2 emissions 95 g/km                         4,000

15 March 2020            Sold equipment                                                               11,200        

Original costs of motor car and equipment sold are £8,400 and £9,000 respectively.

Assume, Sports Folks Ltd has no special rate pool item. All acquisitions and disposals are subject to standard rate of VAT.  

18. Company’s VAT periods end on 30 June, 30 September, 31 December and 31 March in an year. For the purpose of computing VAT liability, quarterly data of taxable expenses and supplies included in the statement of profit or loss is as follows. 

QuarterStandard ratedZero rated
 expenses & suppliesexpenses & supplies
April 19-June 19415,38012,300
July 19-Sep 19270,4008,900
Oct 19-Dec 19332,00014,000
Jan 20-Mar 20190,7005,200
Total1,208,48040,400

Tasks:

a.

Compute tax adusted trading profit using the information given in statement of profit or loss and notes for Sports Folks Ltd for the accounting period ending 31 March 2020. Start with the profit before taxation of £1,158,300 and list all of the items in the statement of profit and loss and in notes indicating by the use of a zero (0) any items that do not require adjustment. Assume that Sports Folks Ltd claims maximum available capital allowances.                 (10 marks)

b.

Compute taxable total profits for the period ended 31 March 31, 2020.                         (1.5 marks)

c.

Compute Sports Folks Ltd’s corporation tax liability for the period ended 31 March 2020.  

                                                                                                                                                       (0.5 marks)

d.

Compute Sports Folks Ltd’s VAT liability for each quarter. Take into account all the taxable sales, purchases, and expenses as well as adjustments when computing output and input VAT for each quarter. Show all computations and/or give explanation where possible.              (8 marks)

e.

HM Revenue & Customs have launched Making Tax Digital Rules (MTD) for VAT periods on or after 1 April 2019. Evaluate the benefits of MTD regime for the businesses and HMRC compared to the online submissions (some businesses can still submit VAT returns electronically).

                                                                                                                                                           (5 marks) 

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