I'm currently a 2nd year student who studies accounting in a UK university. We started studying 'UK taxation' this term and I'm really struggling with it. There's a coursework due this Thursday for us and I'm stuck with one of the questions. I would really reallyy appreciate if some of you professionals can help me out or give me some advices here. The questions is as follow:
XXX Ltd is a trading company set up a number of years ago with 5,000 £1ordinary shares issued at par. In order to expand the production facilities it needs to raise a further £150,000.
There are two possibilities:
(1) The company will issue further £150,000 5% preference shares, which have a nominal value of £1and a market value of £1 each.
(2) £150,000 loan notes will be issued at par. This will carry interest of 5% payable annually.
Requirements:
I.Calculate the retained profit for the year ended 31 December 2011 on the assumption that:
-The shares or loan notes will be issued on 1 January 2011
-A full year's preference dividend will be paid in the year
-No dividend is paid on the ordinary shares in the year
-The profit before interest, tax and dividends is £210,000.
II.Calculate the net return for the investor on the assumption that :
-The investor is a company that pays tax at 26%
-The investor is an individual who is a higher rate taxpayer.
Would really appreciate if someone here can give me some instructions on how to tackle the question. Thx~
I'm currently a 2nd year student who studies accounting in a UK university. We started studying 'UK taxation' this term and I'm really struggling with it. There's a coursework due this Thursday for us and I'm stuck with one of the questions. I would really reallyy appreciate if some of you professionals can help me out or give me some advices here. The questions is as follow:
XXX Ltd is a trading company set up a number of years ago with 5,000 £1ordinary shares issued at par. In order to expand the production facilities it needs to raise a further £150,000.
There are two possibilities:
(1) The company will issue further £150,000 5% preference shares, which have a nominal value of £1and a market value of £1 each.
(2) £150,000 loan notes will be issued at par. This will carry interest of 5% payable annually.
Requirements:
I.Calculate the retained profit for the year ended 31 December 2011 on the assumption that:
-The shares or loan notes will be issued on 1 January 2011
-A full year's preference dividend will be paid in the year
-No dividend is paid on the ordinary shares in the year
-The profit before interest, tax and dividends is £210,000.
II.Calculate the net return for the investor on the assumption that :
-The investor is a company that pays tax at 26%
-The investor is an individual who is a higher rate taxpayer.
Would really appreciate if someone here can give me some instructions on how to tackle the question. Thx~
Courtney
I will show you how to calculate the net return for preference dividend going to the Higher Rate Tax Payer. You should be able to do the rest yourself.
Dividend: £150,000 Nominal Preference Shares x 5% = £7,500 (A)
Thanks so much for your work. It really helped me to start off in a better position.
For part II of the question, it asks me to calculate the return if the investor is a company that pays tax at 26%. Should I just do extactly the same like you showed me simply by substituting 32.5% with 26%? Or is there any form of tax allowances or relief for corporation investments? This is what I got using the method you showed me:
Gross dividend = £7500 × 10/9 = £8333
Tax due (£8333 @ 26%) £2167
Less: Tax credit £833
Tax payable £1334
Net dividend £7500
Less: Tax payable £1334
Net dividend receivable £6166
Return on investment:
ROI= £6166/£150000= 4.11%
And would you mind having a quick look for what I got for part I and point out any mistakes? I know I'm asking for too much...
Scenario 1 (Equity financing):
Gross profit = £210000 which falls into small profits rate
Gross profit £210000
Less: Tax liability £42000 (£210000 x 20%)
Less: Dividends £7500
Retained profit for the year £160500
Scenario 2:
Gross profit £210000
Less: Interest £7500 (£150000 x 5% annually)
Net profit before tax £202500
Less: Tax liability £40500
Retained profit for the year £162000 (Hence, better option!)
Conclusion:
In this scenario, debt financing is a better option since financing through loan would give the company a higher retained profit after tax. This happens because the interest repayments on a loan is tax-deductible, which would lower the companys tax liabilities.
Ok, thanks so much. It seems like I have a lot of studying and revision to catch up. lol
So, in this case, the XXX Ltd is an 'associated company' and the corporate investor has no tax liability at all?
Another question: Is gross profit taxed as a whole first before deducting dividends to get net profit for equity financing? And for debt financing, do I deduct the interest payment first before calculating tax??
