Page 18 - CIMA OCS Workbook February 2019 - Day 2 Suggested Solutions

CIMA FEBRUARY 2019 – OPERATIONAL CASE STUDY

EXERCISE THREE (TAXATION)

To: Ping Bennett (Finance Director)
From: Finance Officer
Date: Today
Subject: Taxation issues

Hello Ping
Thank you for your email. I have prepared the following summary of information as requested.

Subsistence and entertaining.
Subsistence relates to meals and refreshments purchased by employees whilst they are away from
their normal place of work for performance of their work responsibilities. This could be, for example,
a member of the sales team out visiting a potential commercial customer, or a member of the
installation team working away from home on a contract.

It is reasonable that such expenses incurred by employees in the performance of their work are
reimbursed by the company, provided that they fall within the established expenses policy, such as
the maximum amount that can be claimed per meal.
Entertaining related to expenditure for meals and other refreshments purchased when dealing with
suppliers and customers. As with subsistence expenses, they can be reclaimed provided that they
have been incurred within the limits stated within the expenses policy.
However a critical distinction between the two forms of expenditure is that employee subsistence is a
tax-allowable expense, whereas entertaining of suppliers and customers is not. Therefore, employees
should clearly identify on the expense form which expenditure has been incurred for personal
subsistence and which expenditure relates to entertaining.
Analysis of VAT on the expense form

VAT on taxable inputs (i.e. charged by suppliers on goods and services we purchase) can be offset
against VAT on taxable outputs (i.e. charged on sales to our customers) , so that only the next amount
due to the tax authority is paid over each month. If Trigg Adventure is to reclaim VAT on inputs, all
expense forms must split the gross amount paid between the net cost and the VAT amount. If this is
not done, it potentially increases expenses in the statement of profit or loss, and results in larger than
necessary payments to the tax authority.

Importance of receipts to support expense claims
Receipts help to support the validity of any expense claims made by employees.

In addition, receipts help to confirm the correct accounting treatment for any expenses incurred. With
limited exceptions, receipts which include the VAT registration number of a business form the basis of
a legitimate claim for recovery of input tax. Note that a business registered to account for VAT is
obliged to include its VAT registration number on all sales invoices unless. Purchases of low value,
such as the purchase of goods from a vending machine whilst working away from home, do not need
to be supported by a VAT receipt.
Note that VAT cannot be reclaimed on goods and services provided by business that is not VAT-
registered.

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74 KAPLAN PUBLISHING