Lawfty Restore Hotel accounts year ended 5th April 2010
Following the concerns brought to my attention by the officer of the revenue in his letter dated 30th September 2010, I hereby seek to explain. After careful investigation and analysis of Lawfty Hotel accounts for the year ended 5th April, I found out that there were specific accounting errors and omissions that needed to be adjusted. Therefore, I have prepared the following report for your review and adjustment.
Mrs. M. intended to pay the full cost incurred by the hotel as a result of her brother’s stay in the hotel. However, due to family conflict between her and the brother, the payment was delayed and the accountant failed to make the necessary adjustment in time. On 15th October, Mrs. M paid to Lawfty Hotel an amount of $870 for the pending cost of her brother’s stay in the hotel but the accounts were not adjusted accordingly.
There are six garages attached to Lawfty Hotel. However, these garages are currently under new ownership. While one of the six garages has been set aside for use by the employees at Lawfty, the other five garages were sold out at $ 50000 each and are currently operated by an upcoming motor vehicle company (Tow Motors). Since Tow Motors has not gained much popularity in Cornwall, the company still utilizes Lawfty Hotel’s brand name in its marketing strategy.
In the financial year ending 5th April 2010, the number of drinks sold was recorded at 75000 units. The number of units that the company had bought from its suppliers in the same year was 100000 units. However, the stock of drinks brought forward to the financial year ending April 5th, 2011 was 15000 units. On 1st October, Mrs. M launched an investigation on the issue and found out that 15 members of the staff had been stealing drinks from the hotel. These workers were laid off immediately and were made to pay $500 each to Lawfty Hotel in compensation for the loss.
Several college and high school students work in Lawfty Hotel for monetary and in-kind compensation. These part-time employees are paid less than $ 20 per week and in some incidences, the hotel provides them with free food or accommodation in return for their services. 50 employees in Lawfty Hotel’s restaurant crew and bar attendants are part-time students earning less than twenty dollars a week and are not listed in the payroll.
Lawfty Hotel pays $ 100 as Mrs. M monthly membership fee to The Vampire Society. This decision was reached by Mrs. M who felt that the membership improved her skills in customer service which would improve business performance in the long run. Also, Rats-Hilda, Mrs. M’s nephew, who was earning an annual income of $ 40000, is the hotel’s operations manager and is 36 years old.
I have attached a summary of numeric adjustments to be made on the taxable profits. Please make the necessary adjustments to the Lawfty Hotel tax return schedule.
Numeric adjustment summary
Pre-tax profit year ended 5th April 2010 (Before adjustment): $ 436875.50
Brother’s family cost of staying in the hotel
Add 875.00
Income from the sale of garage 250000.00
Compensation for the loss by employees 7500.00
Mrs. M Vampire membership fee
Less 1200.00
Wages paid to part-time employees 12000.00
Pretax profits year ended 5th April 2010 (After adjustment): $ 682050.50
Implications of student employment at Lawfty Hotel
Lawfty hotel employs high school and college students as part-time employees and does not list them in the company’s payroll. Most of these students are teenagers aged below 18. Regulations of employment of minors are very precise and vary from state to state (Honthaner 2010). Depending on the age of the minor, they are required to work for a specific number of hours to create time for school and rest. Failure to comply with these regulations would land Lawfty Hotel into serious labor issues.
Lawfty hotel provides college part-time employees with less than minimum wage which is contrary to the labor rules and regulations. Since the labor laws require companies to provide fair wages to their employees and provide them with a safe working environment (Snell & Bohlander 2009), Lawfty Hotel goes against these regulations by underpaying its employees which further damages its image among the consumers.
Likely penalties to be imposed by HRMC on Lawfty Hotel as a result of the investigation
Preparation and submission of tax returns is a delicate process that should be handled with a lot of care. If tax evasion results from this process, severe penalties may be imposed by the state’s tax governing body. Failure to disclose key information and lack of accuracy as depicted by Lawfty Hotel in preparation for its final accounts is subject to penalties by HRMC. The fact that Mrs. M was supposed to cross-check the tax return statement prepared by the accountants before signing the statements renders the company responsible for any errors and omissions.
The tax law imposes an accuracy-related penalty of up to 20% of the applicable underpayment due to negligence of rules and regulations, substantial understatement of income tax, as well as substantial valuation overstatement which impacts the income tax (Altus-Buller & Whittenburg 2009). Lawfty Hotel’s statements failed to reveal the revenue from the sale of the garages. Also, Mrs. M’s reluctance to pay the brother’s cost of a stay, her children’s expenditure in the hotel, and membership fee to The Vampire Society amounts to negligence and resulted in a substantial understatement of the company’s pre-tax profits and is thus subject to above penalty.
HRMC may also impose a fraud penalty on the Lawfty Hotel which is equal to 75% of the amount of underpayment of taxes attributed to fraud. The intent to evade taxes by the Lawfty Hotel is demonstrated by intentional concealing of the income received from the sale of the five garages to Tow Motors which resulted in an understatement of the profits. However, if HRMC imposes the fraud penalty, the accuracy-related penalty cannot be imposed (Altus Buller & Whittenburg 2009).Besides; HRMC may impose a monetary fine on the company or file a case which may result in imprisonment of the person’s responsible for the tax evasion (Braithwaite, 2003).
Reference List
Braithwaite, A. V., 2003. Taxing Democracy: Understanding Tax Avoidance And Evasion. London, Ashgate publishing.
Honthaner, E. L. 2010. The Complete Film Production Handbook. Oxford, Focal Press.
Snell, S., & Bohlander, G. 2009. Managing Human Resources. New York, Cengage Learning.
Whittenburg, E. G., & Altus-Buller, M. 2008. Income Tax Fundamentals 2009. New York, Cengage learning.