Reference no: EM132926270

Description:

You will find the information about operations of a UK resident trading company, Hi Spirit Limited, on the following pages. You are required to complete all the tasks given at the end of the case.

Instructions:

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.

Hi Spirit Limited is a UK resident company. The company trades in a wide range of musical instruments and all goods are taxable unless stated otherwise. Hi Spirit Limited buys instruments from a local manufacturer for sale in England & Wales. Hi Spirit Limited does not export their products overseas.

Hi Spirit Limited prepares its accounts to 31 March each year. The detailed statement of profit or loss for the year ended 31 March 2020 is given below:

                                                        £                                                                  £

                        Sales revenues, net (Note 2)                                                  13,647,000

Cost of goods sold (Note 3)                                                     (10,214,720)

Gross profit                                                                                  3,432,280

                        Operating expenses:

Rent expenses (Note 4)                                  115,000

                        Repairs and renewals (Note 5)                          68,610

                        General & administrative (Note 6)                  900,000

Depreciation                                                     250,000

                        Fees, fines and charges (Note 7)                        54,650

Gifts and donations (Note 8)                              60,230

                        Distribution costs (Note 9)                              792,300

                        Impaired trade debts (Note 10)                           39,500

                        Vehicles maintenance (Note 11)                     110,000

                        Leasing cost (Note 12)                                         13,500

                                                                                                                             (2,403,790)

                        Interest cost (Note 13)                                                                    (25,000)                      

                        Other income:

Property income (Note 14)                                     35,000                                           

                        Bank interest (Note 15)                                              8,500

                        Dividends (Note 16)                                                 21,000                       

 

Loan interest (Note 17)                                     8,300            

                                                                                                                72,800

                        Profit before taxation                                                              1,076,290

Notes:

Note#1. High Spirit Limited
Hi Spirit Limited distributes musical instruments through 8 stores located across the England and Wales, of those 6 stores are owned by the company and remaining 2 are rented premises. Company has recruited 83 employees for purchase, and sales of its products including those in its main office for administration.

Note#2. Sales revenues, net
Monthly sales for the year ending on 31 March 2020 are given below. All sales are standard-rated. Most of the sales are on cash except those made to its customers in entertainment industry. Credit sales offer 3% discount for a prompt payment (made within 15 days of the issuance of the invoices).

Sales figures in below given table are before any prompt payment discount.

Month	Sales discount	Sales discount	Total
	not taken	taken	Sales
Apr-19	1,134,500	214,000	1,348,500
May-19	1,166,590	60,000	1,226,590
Jun-19	1,090,654	331,500	1,422,154
Jul-19	1,076,500	445,500	1,522,000
Aug-19	1,076,200	55,300	1,131,500
Sep-19	1,110,100	0	1,110,100
Oct-19	990,400	195,000	1,185,400
Nov-19	782,230	66,230	848,460
Dec-19	1,104,000	205,430	1,309,430
Jan-20	890,000	0	890,000
Feb-20	786,230	93,596	879,826
Mar-20	716,337	110,000	826,337
Total	11,923,741	1,776,556	13,700,297

Sales revenues amount given in the statement of profit or loss is the net of discounts and has been computed as follows:

                                                                           £

Gross Sales revenues                                     13,700,297

Less: sales discount (1,776,556 x 0.03)                (53,297)

Sales revenues, net                                        13,647,000                            

Note#3. Cost of goods sold

Costs of goods sold includes payments to suppliers and other costs directly associated with procuring inventories. Hi Spirit Limited purchases goods on credit of 60 days and is offered a discount of 2% for payments made within 30 days.
All purchases and costs of acquiring goods are standard rated.

Quarter	Purchases	Purchases	Cost of	Total
	(discount not availed)	(discount availed)	acquiring inventories
Apr-19	910,300	30,500	45,515	986,315
May-19	801,900	0	40,095	841,995
Jun-19	1,205,400	12,000	60,270	1,277,670
Jul-19	1,700,200	8,800	84,600	1,793,600
Aug-19	784,000	21,600	39,200	844,800
Sep-19	750,120	0	37,506	787,626
Oct-19	502,346	0	25,117	527,463
Nov-19	623,654	0	31,183	654,837
Dec-19	815,000	32,600	40,750	888,350
Jan-19	612,400	6,700	30,620	649,720
Feb-19	590,000	14,320	29,500	633,820
Mar-19	712,880	0	35,644	748,524
Total	10,008,200	126,520	500,000	10,634,720

                                                                                                                      £ 

Inventories April 1, 2019                                                                    550,000

Add: Cost of goods purchased      

          Purchases                                                 10,634,720

          Purchase discount  (126,520 x 2%)                  (2,530)   

                                                                                                                 10,632,190

Ending inventories March 31, 2020                                                       (967,470)

Cost of goods sold                                                                                 10,214,720  

Note#4. Rent expenses

Rent was paid in respect of two stores rented for the business purposes. The rent amount reported in the statement of profit or loss relates to the year ended 31 March 2020.

Note#5. Repairs and renewals

Repairs and renewals include:
Construction of new block for the staff in the main office £32,210
Repainting of the company owned stores 21,300
Repainting of the rented stores (amount was deducted from the rent
payable to the landlord as per arrangement with the landlord,
amount of rent exp. reported is the net of this deduction, See note# 4) 8,100

Annual heating maintenance charges for the company owned premises 7,000 68,610

Note#6. General and administartive expenses
General and administartive expenses include:
Employee salaries and compenstaion £790,000
Employer's national insurance contributions 14,000
Other general and administrative (all allowable) 96,000
900,000

Note#7. Fees, fines and charges
Accounting and audit fees £9,500
Fee paid for debt collection 5,000
Legal fee in connection with the trade financing (Note 13) 6,200
Legal fee in connection with the issue of new shares 7,400
Legal fee in connection with acquiring and registering new vans 5,600
Fee paid for professional counselling of terminated staff 3,000
Fee paid for employees training and professional development 2,500
Legal fees in connection with renewing a 25-year lease 3,100
Legal fees in connection with a new 50-year lease 5,550
HMRC penalties on late payments and filing 4,300
Legal fee in connection with a fine on noncompliance of COVID-19
Restrictions 2,500 54,650

Note#8. Gifts and donations

Qualifing charitable donations £11,080
Political donations 5,000
Donation to Rahim Welfare, a local approved charity
(Hi Spirit Limited received free advertisement in the charity's magazine) 12,000
Gifts to the customers (100 diaries bearing company name costing
£60 per donee) 6,000
Gifts to customers (wall clocks bearing company names and costing
£20 per donee) 5,350
Food vouchers gifted to loyal customers 2,000
Staff party, cost £150 per person 12,450
Gifts to high performing employees 6,350 60,230

Note#9. Distribution costs
Distribution costs include:
Advertising and promotions £475,000
Entertaining UK customers 4,300
Other distribution costs (all allowable) 313,000   792,300

Note#10. Impaired trade debts
By 31 March 2020, Hi Spirit Limited has written off impairment losses in respect of following two invoices:
1. Invoice originally due on 9 January 2020, issued to New Royal Troupe for £31,000
2. Invoice originally due on 10 August 2019, issued to Channel Entertainment Company for £8,500.

Note#11. Vehicle Maintenance
Hi Spirit Limited owns and maintains vehicles for transporartion of goods from premises of manufacturer to the stores and stores to clients if needed. Vehicle manintennace include fuel cost and other costs of maintaining company's vans.

Note#12. Leasing cost
The leasing cost of £13,500 was paid in respect of two motor cars under the use of company employees for business purposes:
1. Car which has CO2 emissions of 100 grams per kilometer, lease cost £7,500
2. Car which has CO2 emissions of 120 grams per kilometer, lease cost £6,000

Note#13. Interest cost
The interest cost is in respect of the company's 4% loan stock. The loan stock was used to finance the company's trade activities. The interest amount given in the statement of profit and loss has been paid and is the amount relevant to the accounting period ended 31 March 2020.

Note#14. Income from property
Hi Spirit Limited let out office space surplus to its requirements on 1 April 2019 to an unconnected firm. The tenant paid the rent in 4 equal payments between 1 April 2019 and 31 March 2020. The amount of rental income reported in the statement of profit or loss is the taxable rental income in this regard.

Note#15. Bank interest
The bank interest relates to the year ended 31 March 2020. The bank deposits are held for non-trading purposes.

Note#16. Dividends
Dividends of £21,000 were received from another UK resident company.

Note#17. Loan interest
Loan stocks are held for investment purposes. The amount of loan interest reported in the statement of profit or loss is the amount accrued on 31 March 2020 and related to the period ending on 31 March 2020.

Note#18. Plant and machinery
The tax written down value of Hi Spirit Limited's main pool assets on 1 April 2019 was £1,350,000. Following main pool items were purchased and disposed during the year to 31 March 2020:
15 July 2019 Purchased a van £75,000
9 Sept 2019 Purchased motor car CO2 emissions 100g/km 12,500
5 Dec 2019 Sold a repairing equipment (original cost £9,000) (10,000)
20 Feb 2020 Sold a van (original cost £31,800) (24,000)
All transactions of sales and purchases given in this note are subject to standard rate of VAT.

Note#19.
Company's VAT periods end on 30 June, 30 September, 31 December and 31 March every year. For the purpose of computing VAT liability, monthly data of taxable expenses and supplies included in the statement of profit or loss is as follows.

Quarter	Standard rated	zero rated	Total
	expenses & supplies	expenses & supplies
Apr-19	150,540	12,300	162,840
May-19	110,430	15,900	126,330
Jun-19	145,000	7,230	152,230
Jul-19	119,000	6,000	125,000
Aug-19	144,210	4,902	149,112
Sep-19	91,432	0	91,432
Oct-19	89,600	6,543	96,143
Nov-19	64,300	13,000	77,300
Dec-19	105,340	2,500	107,840
Jan-19	82,876	7,456	90,332
Feb-19	86,000	3,240	89,240
Mar-19	95,980	8,100	104,080
Total	1,284,708	87,171	1,371,879

Required:

a. Assess tax adusted trading profits using the information given in statement of profit or loss and notes for Hi Spirit Limited Ltd for the year ended 31 March 2020. Start with the profit before taxation of £1,076,290 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 the company claims maximum available capital allowances.

b. Assess taxable total profits for the period ended 31 March 2020.

c. Assess Hi Spirit Limited's corporation tax liability for the period ended 31 March 2020.

d. Assess Hi Spirit Limited's VAT liability for the quarters ended on 30 June 2019, 20 September 2019, 31 December 2019 and 31 March 2020. 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.

e. By when and how, should Hi Spirit Ltd file the corporate tax return and pay the tax payable for the period ended 31 March 2020 to avoid penalties and interests? Until when the accounting records relevant to the tax year 2019/20 must be kept by Hi Spirit Ltd? Explain in detail with reference to the tax rules and HMRC's directives.

Attachment:- Assessment Project.rar