Jim set up a limited company; Show the Way Limited (The Company), along with his father in 1983. The company is incorporated in Scotland and has been registered for VAT since December 1983. It provides temporary traffic signs directing attendees to a range of sporting and other events. Jim now owns 100% of the company shares.
Jim is married to Jean, they are both UK resident and domiciled for tax purposes. They have a 20 year old daughter Liz, who is studying mechanical engineering at the University of Glasgow. Liz has no contractual relationship with the company.
The company makes up accounts to 31st March each year. The accounts for the year ended 31st March 2012 have been completed and the company secretary (a part qualified accountant) has produced a corporation tax computation which produces a profit chargeable to corporation tax of £1,400,000. You review his papers and conclude that he has not considered any of the taxation consequences of the following transactions: -
1 The company paid a parking fine of £60 incurred by Jim when he parked outside the local off-sales on his way home from work.
2 The company has a contract with a telecommunications supplier under which it rents 90 mobile telephones. These are made available to employees who can use them for both business and personal calls. One of the mobile telephones is used by Liz.
3 The company met the cost of re-furnishing Jim's holiday cottage on Skye at a cost of £40,000 plus any applicable VAT. There is a written agreement stating that the furniture remains the property of the company and will be sold by the company in 2025.
4 The company purchased 30 lap top computers at a total cost of £25,000 plus any applicable VAT. These computers were immediately donated to a charitable youth organisation for use in a programme to increase IT awareness in disadvantaged areas.
5 The company has claimed a deduction for corporation tax for a bonus of £500,000 payable to Jim as a reward for his work in achieving a record profit in the year ended 31st March 2012. Jim has told you that he does not intend to draw the bonus from the company until 2016 at the earliest.
Jim asks you for taxation advice on the following transactions which are likely to occur in the year ended 31st March 2013.
1 The company intends to entertain 50 of its major customers and 10 senior employees at the London Olympics. The company will purchase a hospitality package at a cost of £500 plus any applicable VAT for each participant. As part of the deal, the hospitality provider will arrange a banner advertising the company on the front of the hospitality suite, in full view of TV cameras at the men's 100 metre final.
2 The company has been awarded a contract to provide temporary traffic signage for an international tax conference in Cannes (France.) The conference is being organised by a major Paris (France) law firm.
Jean spends a much of her time at the holiday home in Skye. She started a business activity on 1st January 2011 to occupy her time. She has developed a process to encapsulate dead midges (she purchases these from a local caravan park) into acrylic paperweights which she sells through local tourist shops. Her sales amounted to £5,000 per month from January 2011 to June 2011 and then increased to £15,000 per month; they have remained at that level since July 2011. The acrylic moulding equipment cost £20,000 plus any applicable VAT. She works in the garage attached to the holiday home. Liz helped her during the summer and was paid £500 per week - Liz worked a 45 hour week. The paperweights are marketed at £20 each. A booklet about the history of the midge (which can be purchased separately for £2) is included with each paperweight. She has not taken any advice regarding the VAT and Income Tax aspects of this venture as she thinks it is a hobby.
Assume you are a tax lawyer who has been engaged to prepare a report commenting, by reference to all appropriate sources of tax law and practice, on all actual or potential tax implications arising from the specific information contained in the FACTS section outlined above. Your report should focus on:
1 Any actual or potential UK Value Added Tax implications for the company and Jean
2 Any actual or potential UK income tax implications for Jim, Jean and Liz.
3 Any actual or potential UK Corporation Tax implications for the company.
Please note that any Stamp Duty Land Tax, Capital Gains Tax and Inheritance Tax issues should be ignored as these will be examined as part of the Property Law course