Taxation

PRINCIPLES OF TAXATION ASSIGNMENT
HAND-IN DATE 10 APRIL 2015
MAGNUS BOMBAST
Magnus is a well-known, even notorious, figure in the music business.
His tax affairs, however, have always been a mystery, particularly to the tax authorities. He manages several bands including Half Man Half Biscuit, Spinal Tap, and Dog Breath. He also owns a record label, Version Records, which two years ago had signed a then totally unknown act called Ugly Rumour. To everyone’s surprise Ugly Rumour sold records by the shed-load and has recently had a massive hit with their new album “Mysterious Babies” They have just completed a tour of the UK. Their blend of heavy metal, rapping, and wistful folk music has proved to be irresistible, particularly to old people.
Magnus, aged 45, has been married for many years to the fragrant Lily Darlene, aged 44, but over the past few months’ relations have become strained. On 15 September Lily decided she had had enough after Magnus and some friends pushed her brand-new McLaren sports car into the swimming pool as a party joke.
She moved out in a towering rage to a friend’s house, taking their child, Moonie aged 4, with her. Lily believes that they now have irreconcilable differences and believes that she will be able to get her hands on Magnus’ substantial assets, rumoured to be in seven figures. She will be interested in tax-efficient investments. She certainly does not want to have to go out and work for a living.
None of Magnus’ activities are carried out through corporate bodies as he has a strong reluctance to make public any of his affairs; indeed until now no authority has been aware of the existence of Magnus’ empire. Magnus’ accountant and general dogsbody is Reg Bollard, who has just completed a draft profit and loss account of Version.
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Here is part of the profit and loss account that Reg had prepared:
TOP SECRET – FOR MAGNUS ONLY
Version Records – year ended 31 December 2014.
Income
Sales of records 2,340,000
Management of bands fees 1,500,000
Tour takings 750,000
Sales of merchandise 230,000
Sale of hats 1,200,000
Rent of cottage 960
Rent of land 26,000
Winnings at dog track 417,700
Protection money received 25,600
Dividends received 1,100
Total 4,151,361
Expenses
Artistes’ royalties 960,000
Tour costs 540,000
Entertaining 666,000
Acquisition of hats 300,000
Payroll costs 635,500
Consultants 345,000
Dog-food for guard dogs 2,600
Motor expenses 15,000
Electricity 4,300
Fine for noise nuisance 5,000
Stakes on dog-racing 12,000
Legal and professional 20,000
Depreciation of equipment 88,000
Miscellaneous 75,000
Christmas gifts to employees 1,200
Other allowable expenses 1,500,000
Total 5,169,600
Net loss (1,018,239)
Reg applies standard-rate VAT to his outputs as appropriate but has never registered for VAT and has never paid a penny to HMRC. It is believed that the above figures include VAT where appropriate.
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Version is based at Clampett Towers, a large house in the Kent countryside. Clampett Towers is also Magnus’s home. There are always at least six friends and hangers-on lurking about. Reg cannot be bothered differentiating business and private costs and so puts the whole lot in the accounts.
Version employs 36 full-time workers, including 3 office staff, one sales representative and 10 part-time staff. The payroll also includes Lily who received £55,000 in 2014/2015. Lily has never been known to do any work whatsoever.
The Bombasts’ nanny Eva Vestov is also on the payroll and was paid £5,400 in 2014/2015. Eva remains on the payroll even after Lily took Moonie away. Magnus helps himself to a wad of £500 in cash drawn out of the business account each day, except Saturdays, Sundays and bank holidays. These amounts have been included in payroll costs.
The warehouse workers are paid weekly in cash; office staff are paid monthly by cheque. Reg has never applied the PAYE scheme to anybody, as Magnus has wanted the whole operation to be kept secret. Part-time staff each receive £85 a week gross.
The sales representative drives a BMW car owned by Version and drives both business and private mileage. It is a top of the range model. There are also various “consultants” who are paid by the business on production of invoices for various services rendered.
Version also pays £18 a week to each of its full-time employees and £10 a week to each of its part-time employees as subsistence payments, intended to cover travel to work etc. the full-time staff have received them since 6 April 1996. Reg has been using his own car for business purposes, beings paid 350p per mile, until he got plastered and banned from driving in May 2015.
Magnus purchased recording equipment in 2014/2015 costing £352,000. There were no records of earlier purchases, which could be used as the basis for a claim.
The last time Magnus paid any income tax was when he was working as a kipper slitter aged 16 in a fish factory. There has always been a strong suspicion that sales of hats means handling stolen goods.
Magnus has just received a letter from HMRC stating that a PAYE compliance team will shortly be arriving at Version. It seems that the Revenue are acting on an anonymous tip-off from Lily. Magnus is beside himself with fury.
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REQUIRED for 100 MARKS
1. Write a professional letter to Magnus covering the following:
Taxable profits
Illegal profits
Penalties for not disclosing taxable profits
Taxation implications for employees
Proper running of the PAYE system
Penalties for getting PAYE numbers wrong
VAT penalties
And any other tax matters which affect Magnus
Work out how much tax and penalties and interest he might owe HMRC, stating where your numbers are based on facts, and where they are estimates. State assumptions used.
65 MARKS ARE ALLOCATED TO THIS LETTER
2. How would Magnus’ affairs be different if Version was incorporated, with Magnus owning the shares? Write this as an appendix to the letter in Part One.
15 MARKS ARE ALLOCATED TO THIS
3. Write a professional letter to Lily about her tax situation and explain which tax-efficient investments would be available if she became a very wealthy woman.
20 MARKS ARE ALLOCATED TO THIS LETTER
If you require further information from your client state clearly in your letters what you want and why.
Include income tax, NICs, CGT, and VAT in your workings and discussion. Ignore inheritance tax. I will expect numerical workings using Excel to support the points you make.
Remember that this is a PROFESSIONAL LETTER for which you will be charging your client Magnus a substantial fee. I only want the hard copy to be handed in so it should look good. I do not want electronic copies but make sure you back everything up before handing in.
Suggested word count 3,000 though I am relaxed about the exact total.