For the past five years, John has run a business importing electrical goods from the Far East

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Question:

For the past five years, John has run a business importing electrical goods from the Far East which he then sells to wholesalers in the UK. His statement of profit or loss for the year ended 31 December 2019 is as follows:

£ £

Sales 325,000

Cost of sales (172,500)

Gross profit 152,500

Rent received(Note 1) 9,500

162,000

Wages and salaries 50,200

Rent and rates (Note 1) 12,900

Light and heat (Note 1) 5,250

Depreciation of fixtures and fittings 1,500

Insurance 3,550

Traveling and entertaining (Note 2) 10,750

Irrecoverable debts (Note 3) 6,750

Depreciation of vehicles 7,500

Motor car expenses (Note 4) 4,500

Sundry expenses (Note 5) 750

Legal and professional charges (Note 6) 4,750

Interest on bank overdraft 1,500

Van expenses 9,300

Telephone 3,350

Repairs and renewals (Note 7) 3,500

126,050

Net profit 35,950

NOTES 1. Rent received is in respect of a fat above John’s business premises that is rented out. John estimates that a tenth of the rent and rates, and a seventh of the light and heat is in respect of this fat.

2. Travelling and entertaining expenses: £

John’s business traveling expenses 5,175

Christmas presents for staff 250

Entertaining UK customers 5,050

Gifts to customers that carry the business name:

Boxes of chocolate costing £5.00 each 125

Calendars costing £1.50 each for 150

10,750

3. Irrecoverable Debts £

Trading debts written of 5,250

Increase in allowance against specific debtors 1,750

Nontrading loan is written of 200

A trade debt recovered which had been written of the previous year (450)

6,750

4. Motor car expenses £

John’s motor car expenses 3,300

Salesman’s motor car expenses 1,200

4,500

John’s total mileage for the year was 12,000 miles. During the year he drove 2,000 miles on a touring holiday and estimates that the balance of his mileage is 20% private and 80% business.

5. Sundry expenses £

Donation to national charity 50

Donation to local political party 100

Subscription to the chamber of commerce 25

A gift to a member of staff upon marriage 45

John’s squash club subscription 250

Advertising in trade press 280

750

John often uses his squash club as a place to take customers since several of them are keen squash players.

6. Legal and professional charges £

The cost of renewing a 21-year lease in respect of the business premises is 250

Accountancy 3,050

Debt collection 300

Legal fees in connection with action by an employee for unfair dismissal are 1,150

4,750

Included in John’s accountancy fee is £950 for taxation services. Of this, £200 is for the normal taxation work involved in submitting accounts to the HMRC. The balance is in respect of calculating John’s capital gains tax liability following the disposal of some shares that he had owned.

7. Repairs and renewals £

Repairs to the office photocopier 175

A new printer for the office computer 650

The installation of new central heating for the office 2,200

Decorating the office 475

3,500

During the year ended 31 December, 2019 John took various electrical goods out of stock for his own and his family’s use without paying for them. These goods cost £450 and would have normally been sold at a mark-up of 30%.

John has a room in his private house that he uses as an office as he often works at home. The allowable amount for the use of the office is £250 and appears to be a fair estimate. Also, John makes business calls from his private telephone and he estimates the business use as two-fifths. The total of his private telephone calls for the year was £450.

REQUIRED

(a) Calculate John’s adjusted profit (before capital allowances) for the year ended 31 December 2019.

(b) In addition to trading profit, during the same year ended 31 December 2019, John received property income of £5,000 but accidentally entered the figure in his tax return as £500. He also received other taxable income of £7,000 and deliberately declares £5,000 in his tax return. Critically discuss the tax implications of these two scenarios.