QUESTION 1 [40 MARKS] 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 Travelling 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 Johns 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: Johns business travelling 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 150 10,750 Page 5 of 8 3. Irrecoverable Debts Trading debts written of 5,250 Increase in allowance against specific debtors 1,750 Non trading loan written of 200 A trade debt recovered which had been written of the previous year (450) 6,750 4. Motor car expenses Johns motor car expenses 3,300 Salesmans motor car expenses 1,200 4,500 Johns 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 chamber of commerce 25 A gift to a member of staff upon marriage 45 Johns 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 250 Accountancy 3,050 Debt collection 300 Legal fees in connection with an action by an employee for unfair dismissal 1,150 4,750 Included in Johns 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 Johns capital gains tax liability following the disposal of some shares that he had owned. Page 6 of 8 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 familys 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 Johns adjusted profit (before capital allowances) for the year ended 31 December 2019. [30 marks] (b) In addition to trading profit, during the same year ended 31 December 2019, John received property income of 5,000 but accidently 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.