Your manager has had a meeting with Wanda, a client of your firm. Extracts from the memorandum prepared by your manager following the meeting, together with an email detailing the work he requires you to do, are set out below.

Extracts from the memorandum prepared by your manager – dated 3 December 2018

Wanda has not been employed since 31 December 2012 and has not received any taxable income since that date.

Roth is employed and earns a gross salary of £90,000 per year. This salary is his only source of income. Wanda and Roth have not made any chargeable disposals for the purposes of capital gains tax and will not make any in the tax year 2019/20.

Wanda’s inheritances and gift from her parents
On 1 February 2013, Wanda’s father, Pavel, died. He left £160,000 to Wanda and the residue of his estate to his wife, Lucy (Wanda’s mother). The residue of Pavel’s estate was valued at £720,000 and included the family home.

Pavel had not made any gifts during his life.
On 1 April 2013, Lucy gave Wanda £180,000 in cash. This was the only lifetime gift Lucy made.

On 1 November 2018, Lucy died. Wanda inherited the whole of Lucy’s estate, which was valued at £850,000. The estate consisted of the family home (valued at £340,000), together with furniture, cash and quoted shares (valued in total at £510,000).

Wanda’s new business – KS
Wanda intends to begin trading on 1 April 2019. The business will be operated either:
– by Wanda and Roth in partnership; or
– by a limited company owned 70% by Wanda and 30% by Roth.
The turnover of the business for the year ending 31 March 2020 is expected to be £48,000.

Budgeted profitability of KS
In its first year of trading the business will make either a small profit or, possibly, a loss (of no more than £20,000).

However, once the business is fully operational, it is budgeted to make a tax adjusted trading profit of £100,000 per year. This figure is before deducting any salaries paid to Wanda and Roth.

The manner in which the profits will be extracted from the business depends on whether the business is operated as a partnership or as a limited company. The two alternatives are summarised below.

In addition to advising her on the tax cost of the alternative business structures, Wanda has asked us to advise her on the relief available in respect of the possible trading loss in the first year of trading and on the choice of 31 March as the accounting date where the business is operated as a partnership.

Income tax refund
Wanda has received an unexpected refund of income tax from HM Revenue and Customs (HMRC) in respect of the tax year 2011/12.

Email from your manager – dated 4 December 2018

Please prepare the following notes and calculations for use in a meeting with Wanda.

(c) Choice of business structure

(i) Income tax and corporation tax payable

For a single tax year, calculate the income tax payable by Roth and any corporation tax payable:

– if the business is operated as a partnership; and
– if the business is operated as a company.

Prepare a summary of the total tax payable if Wanda’s income tax liabilities are:

Business operated: 
as a partnership    £14,940
as a company       £9,025

You should assume that:
– the business is fully operational and makes a tax adjusted trading profit of £100,000. This figure is before deducting any salaries paid to Wanda and Roth.

– profits are extracted from the business in accordance with the summary in my memorandum.

– Roth continues to earn his existing gross salary of £90,000 per year.

When carrying out this work, you should ignore any national insurance contribution liabilities and any relief available in respect of losses.

(ii) Other matters

– Compare the tax relief available to Wanda and Roth in respect of a trading loss arising in the first year of trading, depending on whether the business is operated as a partnership or as a company.

– On the assumption that the business is always profitable and is operated as a partnership, explain TWO tax advantages of having an accounting date of 30 June as opposed to 31 March.

Tax manager

Required:
Prepare the notes for use in a meeting with Wanda as requested in the email from your manager. The following marks are available:

(ii) Other matters. (5 marks)