Taxation in the United Kingdom

Tax is a fee that is charged on individuals or organizations by the agency of the government or the government itself on a product, service or the income. Tax accounts for almost 30 and 50 percent in most countries that are developed. Tax is very crucial as it helps the government in the implementation of its development projects such as the provision of social services to the people, payment of civil servants and construction of schools.A tax is also levied with the aim of discouraging consumption of unwanted goods; an example is a tax on alcohol, higher tax makes its prices to be high for the consumers.

The United Kingdom has moved away from a system of worldwide taxation to a broadly territorial tax system, which focuses mainly on taxing profits earned in the United Kingdom.  The reforms have led to a competitive and comprehensive regime aimed at supporting the development of intellectual property (IP). The system greatly favors Multinational Corporations as they are exempted from paying tax for one year to allow them to restructure. There is a provision for eligible companies to claim an overall reduction of 225 percent on qualifying R &D expenditure (PWC, 2018).

The UK government also uses taxation as a way of protecting local industries hence making them more profitable. This is achieved by increasing tariffs on imports and charging lower taxes on products produced locally. What plays a great role in increasing the demand for locally produced goods as they will be affordable to the people? The UK government also imposes a tax on imports with the aim of correcting a balance of payment situation. What makes imports expensive leading to falling in their demand? The tax year commences on 6 April and ends on 5 April of the following year (PWC, 2018).

The main types of taxes administered in the UK are income tax, consumption tax, excise duty, stamp duty, national insurance contribution and corporation tax. Income tax is levied on the individuals’ income, and the basic rate is 20%. Excise duty is imposed on items, such as alcohol and tobacco, while stamp duty is administered when one is either buying house or shares. Corporation tax is a kind of tax imposed on the profits of the company. National insurance contribution is a type of income tax, which takes on a certain percentage of income, while consumption tax, which Is Value Added Tax (VAT), is taxed at 20%. The income tax, National insurance contribution, and VAT, however, are the largest sources of revenue for the UK government.

The United Kingdom has a self-assessment tax system. Majority of the people, therefore, settle their tax through the tax that is withheld on their salaries before they receive them. (PWC, 2018). The married couple settles their tax obligations independently. All outstanding tax has to be paid by 31 January following the end of the tax year. The UK tax system, however, is moving at being fully online. It is the role of the employers to notify HMRC of total benefits and expenses paid, and then an employee claims the allowable business expenses (PWC, 2018).

The above types of taxes can be categorized into direct and indirect taxes. Indirect tax is a tax on spending and is paid as part of the purchase price of the item. These are Value Added Tax, capital tax, real estate tax, transfer tax, customs and excise duties levied on alcohol, environmental tax, and stamp duty tax. Value Added Tax is chargeable by a registered person on the taxable supplies of goods and services made in the UK for the furtherance of the business. It is also chargeable on the importation of goods and services from countries that are outside European Union. The tax is imposed at each stage of production and distribution of goods and also on imports. Some supplies, however, are zero-rated while others are exempt.

A direct tax, on the other hand, is one that is directly paid to the government by the person or the organization to which the tax is imposed. Direct taxes are charged on incomes, profits or other gains. The main types are income tax, capital gains tax and inheritance tax. The three are payable by individuals. The one payable by companies is corporation tax. They are all administered by HM Revenue and Customs (HMRC). National Insurance contributions are administered by National insurance contributions office (NICO) of HMRC.

The duties of the tax practitioner are to implement all the laws relating to either direct or indirect tax and to advise the Chancellor of the Exchequer on matters taxation. The taxpayers, who find it hard to understand the complexity of tax requirements, seek the tax practitioners’ assistance hence. They influence the tax compliance process (Tan, 2014).

It is an obligation of the UK taxpayer to self-assess themselves then file a tax return before a specific date by reporting their cumulative income and tax due for the previous year. Corporations have the responsibility for making their tax assessment and payments. The tax is charged on the profits of corporations. The employers have an obligation of keeping the records of their employees and the tax deductions made. Employees, on the other hand, must keep records of all the information needed in the process of filling tax returns (Rita, 2015).

In circumstances where there is tax evasion by corporations, the penalty will be imposed on firms and the firms will be deprived of the direct benefits derived due to the breach. The tax evaders are also prosecuted and subjected to custodial sentences. The penalty for deliberate tax evasion is between 20 percent and 70 percent of the extra tax due. Hi-tech data analysis tools are used to help identify high-risk cases of tax evasion. The highest penalty is up to 200% of undeclared tax. (PWC, 2018).

There is also an automatic penalty of 100 dollars for failure to fill the online self-assessment tax return by 31 January following the tax year.  There is also a behavioral penalty for inaccurate returns. If the tax is delayed by more than 30 days, a penalty is 5 per cent of the tax due.  Another 5% is charged in case the delay exceeds six months and again another 5% penalty if it now exceeds 12 months delay. The tax returns have to be submitted to HMRC on 31st October in case of a paper return, and this applies whether that the tax body HMRC should calculate the tax liability or not and on 31st January in case of an online return.

 For a person to manage to file a return online, one must be in possession of a Unique Taxpayer Reference (UTR), which is only issued by HMRC. One needs to have a statement of income and capital gains for the just-ended financial year. In the United Kingdom, both residents and non-residents are taxed at the same rates only that nonresidents may not enjoy UK personal allowances.

There is the system of withholding income tax known as PAYE. The cumulative income is calculate and the tax due on it is calculated and paid at source. There is Pay as You Earn (PAYE) forms P45, P60, and P11D. P60 shows the tax you have paid on your salary in the tax year. For each job that an individual engages in, there is a separate P60 form. Form P60 is required to prove the amount of tax that you have paid your salary. The form is needed when one needs to claim back the overpaid tax when a person needs to claim tax credits, and as a proof of one’s income in case a person wants to apply for a loan.

A P45 form is given to an employee by the employer when you stop working for him. The form contains details of the income tax, PRSI and the Universal Social Charge that was deducted by your employer and paid to the tax revenue. The form has four parts Part I send by the employer to HMRC, the employee is required to give Part 2 and 3 to the new employer and keep Part 1A to oneself. A P45 form has no replacement in case it gets lost.

Form 11D is given to an employee by the employer if the employer used to tell HMRC about your benefits in kind such as company cars or interest-free loans. The form is used by the employer to report the end of year expenses and the benefits of the employees and directors. Forms 11D must be given to both the employees and HMRC by 6th July following the end of the tax year. It can be given in either hard copy or an electronic submission format. The form comprises of 14 sections. Section A contains the asset that was transferred; section B contains payments that were made on behalf of the employees, section C contains credit cards and vouchers.  Section D has details of the living accommodation; section E contains allowances made on mileage, section F comprises on information about cars and car fuel, section G has information on all company vans.  Section H comprises of beneficial loans, section I contains details on medical health, section J contains qualifying relocation payments, the three last sections comprises of services supplied, assets placed at employee’s disposal and other items respectively.

 There are many sources of taxable income, and these include wages. Wage is a general term comprising of tips, payments from royalties, fringe benefits, and stock options. All wages that are earned are taxable. There is also the business income, and this refers to income that is derived from the selling of goods and services. Rental income included real estate and rental of either machinery or a vehicle. A scholarship that is issued to students is a taxable income and also unemployment benefits. The proceeds derived from gambling are also taxable at the prevailing tax rates.

Several theories have been developed by scholars to try and understand how the United Kingdom tax environment is. There is the theory of optimal taxation which argues that a good tax system should be able to maximize the social function subject to constraints. The theory was developed by Frank Ramsey (Gregory, 2018). Which means that the social welfare function is a function of utilities of the individual.

In conclusion, the United Kingdom tax environment is becoming favorable with each passing day. This will encourage the business people hence play a great role in promoting growth and development.

Task 1b)

Name

Jay Cobb

Unique Tax Reference (UTR)

9

8

7

8

9

1

2

6

5

2

Pay from this employment-the total from your P45 or P60-before tax was taken off

£

3

4

8

5

0

UK tax taken off pay

£

5

0

0

0

Tips and other payments not on your P60

Benefits in kind as per form P11D

£

3

0

0

0

PAYE tax reference of your employer (on your P45/P60)

3

2

1

/

X

Y

Z

/

B

Your Employers name

SPO Consultancy Ltd

Employment Expenses

Business travel and subsistence expenses

£

N

I

L

Fixed deductions for expenses

£

6

0

Professional fees and subscriptions

£

1

5

0

Charitable donations under the payroll deduction scheme

£

N

I

L

Income from UK Savings and Investments

Banks and Building Societies

Amount of tax deducted

£

2

9

8

5

0

Tax Deducted

£

5

0

0

0

Task 1c)

Chargeable disposal includes part disposal and gifts, which are in the form of an asset. In case an asset is transferred upon death then that is treated as exempt disposal. Capital Gains Tax (CGT) is charged when there is the chargeable disposal of assets that are chargeable by a chargeable person. (ACCA, 2015)

The transaction is of the capital nature because of the long duration of the possession of the land. The land had been bought for investment purposes.

Long-term Capital Gain= Full value of the consideration received – (indexed cost of acquisition+ indexed cost of improvement+ cost of transfer.

                           = £134750-121500

                            =£13250

Capital Gains Tax = 20.6% of £13250

= £2,729.5

Task 2

Ben Jack can use the net income of the previous years provided to know the possibility of the business surviving for the foreseeable future. Profitability ratios can be calculated from the information provided in the books of accounts. This will go a long way in helping Ben Jack to assess the financial health of a business. Examples of profitability ratios are net profit margin, which net income divided by net sales and return on equity which calculated by dividing net income by book value of Equity.

In the United Kingdom income falling into certain categories, previously known as schedules, was subjected to different rates. Profits are arising from trade, professions and vocations were subjected to tax under schedule D of the income and corporations tax act 1988. Schedule D deals with all the income that is taxable and do not fall under Schedule a while schedule a deals with income from all the United Kingdom land. The schedule will contain tax generated from a trade carried out in or out of the United Kingdom but not contained on Schedule A. Oversees income and tax resulting from any annual gains not falling under Schedule A.

Task 2b)

When determining adjusted profit for tax purposes, one has to know the allowable and the disallowable expenses are given. Allowable expenses are the ones used wholly or partly in the process of income generation, while disallowable expenses are the ones, which are not wholly or partly used in the process of income generation.

Net profit for the period

Add back disallowable expenses

Private items of expenditure included as business expenses

Disallowable expenses for tax purposes

Less allowable expenses

Car allowances( 8% of 20,000)

54600

4500

3500

8000

62600

(1600)

£61,000

Task 3

When working out the total taxable gains for capital gains tax purposes, firstly you need to work out the gain for the asset you have disposed of in the tax year, and then deduct all the allowable losses. The tax years runs from 6 April to 5 April the following year. The capital gains tax is then payable if it is above the allowance.

The following costs are deducted from the sale proceeds: The purchasing price of the item, the costs you incur in the process of buying the item, the costs you incurred when selling the item and any costs incurred in trying to improve the product.

Disposal proceeds

Less: incidental costs of disposal

Disposal costs

Net proceeds

Less: Acquisition costs

Less cost of enhancing the asset

£

£

900,000

(43,000)

857,000

(600,000)

(100,000)

Capital gains in the tax year

Less indexation allowance

Less indexation allowance for enhancement

Net capital gains

107,692.308

4545.455

157,000

112,237.763

44,762.237

Indexation allowance =Acquisition cost× (RD-RI)/RI

RD=Retail prices index for the month in which the asset was disposed

RI=Retail prices index for the month in which the asset was acquired.

Indexation allowance= £600,000× 28/156

                                    = 107,692.308

The indexation allowance above however cannot create or increase a capital loss.

Total enhancement expenditure of asset=

R.P.I disposal date- R.P.I enhancement date/R.P.I enhancement date × enhancement expenditure

176-156/176×£ 100,000

8/176×100,000

4,545.455

Task 3a)

In the case where a loss is made the losses are reported to HM Revenue and Customs (HMRC) to reduce your total taxable gains. A loss that was incurred is subtracted from the gains that were made in the same financial year. If the total taxable year is still tax-free allowance one can deduct unused losses from the previous tax years.

The computation of corporation tax comprises a summary of profits from different sources that attract corporation tax.  Corporation tax is computed by adding trading income on profits from investments and also adding the total to chargeable gains to derive the total taxable profits (TTP). The total taxable profits are then taxed at the prevailing corporation rate tax.

The taxation year starts on 1 April to 31 March whereas an accounting period commences on 31 March. This leads to two different tax rates. The profits of the corporation are therefore apportioned between two financial years depending on the time that the accounting period covers (Hanison, 2015). Capital allowances charges apply instead of depreciation charges on items like machinery. Capital allowances are deducted from total taxable profits.

Adjusted profits before capital allowances

Fewer capital allowances

Less brought forward from previous years

Add capital gain

Net taxable profits

£

£

1,193,000

(215,000)

978,000

(200,000)

44,762.237

822,762.237

The amount that will be subject to corporation tax is £ 822,762.237.

In the year 2014, the tax rate was 21% the corporation tax therefore is:

                £172,780

The tax will be required to be paid to the HMRC 9 months and one day after the financial year.

Task 3B

Interest paid on loans is a deductible expense. The interest on the loan can only be deducted from profits if it was used exclusively for the furtherance of the business. This means that £64,000 will be part of profits to each corporation tax will be applied.

All the profits, which arise from the company’s loan relationships, are taxed as income either as trading or non-trading income. Interest on loan, which is applied when the machinery or plant is acquired results to trading deductions whereas the loan that was used to fund the acquisition of an asset gives rise to non-trading deductions. The debits and credits, which originate from non-trading loan relations, are then pooled together and can result in either a net deficit or a net credit. A net credit is added to the company’s total taxable profits. In our case 64,000 will form part of taxable profits.

In the United Kingdom it is required that the corporate or an individual making payments should make a deduction at source of 20 percent. This applies when United Kingdom source interest is paid to a non-resident of the UK. Payment of interest must be made after deduction of the 20% withholding tax. The income tax is then paid to HMRC. This must be made whether or not the corporation withheld tax. The corporation should make sure, that the lender is placed in the same financial position he was in, as if the withholding tax has not been made.

References

ACCA, 2015. chargeable gains part 1. [Online]

Available at: http://www.accaglobal.com/lk/en/student/exam-support-resources/fundamentals-exams-study-resources/f6/technical-articles/gains1-2015.html

[Accessed 31 01 2018].

Gregory, M., 2018. Optimal Taxation in Theory and Practice. Digital access to Scholarship at Havard, 01 01.

Hanison, T., 2015. Corporation Tac Statistics. HM Revenue and Customs, 29 05.

PWC, 2018. United Kingdom individual tax administarion. [Online]

Available at: axsummaries.pwc.com/ID/United-Kingdom-Individual-Tax-administration

[Accessed 31 01 2018].

Rita, P., 2015. Surcharges and penalties in UK tax law. Oxford university centre for business taxation, 07.

Tan, L. M., 2014. Understanding the tax practitioner-client relationship:Using a role theory framework. Procedia social and behavioural science, 18-19 08.