Taxation Assignment: United Kingdom Tax System

TAXATION ASSIGNMENT

TASK 1

UK Tax System.

The taxation structure which any country imposes has a direct impact on its accumulation and redistribution of wealth within its economy. The UK tax system is administered by Her Majesty Revenue and Custom (HMRC) and comprises of a number of taxes. Tax is collected directly or indirectly. Direct taxation is based on income and profits made by an individual. With the direct taxation, the taxpayer pays his tax directly to the government. Examples of direct taxes include income tax, corporation tax and capital gains tax. With indirect taxation, indirect taxes is collected from the taxpayer through intermediaries, say from an employer, the intermediary collects the tax and pays it over to the government. (Paper F6 – Taxation. Complete Text). A common example is the VAT where a consumer pays over VAT to the supplier who then pays it over to the government. The UK tax system comprises of the following:

Income Tax: This is tax payable by individuals who are employed or self employed.

Capital Gains Tax: It is tax payable by individuals on the disposal of capital assets such as buildings, paintings, antiques.

Corporation Tax: Tax payable by all companies on their income and gains.

Value Added Tax (VAT): This is tax which consumers pay on certain goods and services excluding food which is passed on from supplier to the government.

National Insurance Contributions (NIC): These contributions are paid by individuals who are employed or self employed and by companies and sole traders for their employees. (Melville,2007)

Roles and Responsibilities of the Tax advisor.

The role of the tax advisor is to provide advice and assistance in simple terms to its clients in preparing and submitting returns to the Inland Revenue. A tax advisor must also communicate this information clearly and in a simple manner as possible, the purpose and obligation of the filing and payment of various taxes it must pay and the implications that might accrue if these are not met. He has the duty of acting honestly and diligently when carrying out his duties, (Melville, 2007).

Methods of Tax Collection.

Tax can be collected through the PAYE and Payment on accounts system. The PAYE known as Pay As You Earn is a system of tax collection whereby an employee’s income tax liability is deducted from his salary at source and paid by his employer to the HMRC. (Paper F6 – Taxation. Complete Text)The tax collected is deducted using a code which all employees possess in order to satisfy that the right income of tax is deducted at source from the employees pay. The code number is made up of allowances and deductions which an individual is entitled to. PAYE is payable to HMRC on the 19th of every month. (hmrc.gov.uk). Companies whose number of employees exceeds 250 must make their payments electronically and must be made on the 22nd of each month. The Payment on Accounts refers are required from any individuals who was assessed on income tax in the previous year. This is relevant even where the tax assessment has not been made at the time of payments (hmrc.gov.uk)

Task 1-4

JANE SIMMONS

Income Tax Computation for Jane Simmons for the year ended 2007/2008

Other Income Savings Dividend Total

£ £ £ £

Employment Income 26,500 26,500

Dividend Income (2700 x 100/90) 3,000 3,000

Savings Income (2760 x 100/80) 3,450 3,450

Car Benefit (18,500 x 27%) 4,995 4,995

Fuel Benefit (14,400 x 27%) 3,888 3,888

Beneficial Loan 3,000 3,000

Golf Club Subscription 250 250

Total Income 38,633 3,450 3,000 45,083

Less Personal Allowance (5,225) 0 0 (5,225)

Taxable Income 33,408 3,450 3,000 39,858

Income tax £ £

Other Income – Starting Rate 2,230 x 10% 223

Other Income – Basic Rate 31,178 x 22% 6859

Savings Income – Basic Rate 1,192 x 20% 238

Savings Income – Higher Rate 2,258 x 40% 903

Dividend Income – Higher Rate 3,000 x 32.5% 975

Income Tax Liability 9,198

Less Tax suffered at source:

Tax credit on dividend (10% x 3,000) 300

Tax credit on interest (20% x 3,450) 690

PAYE 5,565

Income tax payable 2,643

TASK 5 - 6

CAPITAL GAINS TAX

House £ £

Disposal Proceeds 185,000

Less Cost of acquisition 45,000

Capital Gain 140,000

Painting

Disposal Proceeds (W8) 6,000

Less Cost of Acquisition 7,000

Allowable loss (1,000)

Land

Disposal Proceeds 60,000

Cost (W9) 18,857

Capital Gain 41,143

Net Capital Gains 180,143

Less: Annual Exemption (9,200)

Taxable Gains 170,943

James’s net income for the year is £6,900 hence he pays tax at the starting rate of 10%, therefore he pays capital gains tax at 10%. Therefore;

CGT Payable = 10% x £170,943

= £17,094

TASK 7

JAMES

Tax Adjusted Trading Profit for the year ended 31 March 2008

£ £

Net Profit 6,900

Add: Items debited in the P+L accounts, and

not allowed for tax purpose

Depreciation 3,550

Central Heating Repairs 875 2,475

Adjusted trading profit 4,425

Less: Capital allowances 3,610

Tax Adjusted trading Profit 815

TASK 8

a) James must submit his 2007/2008 tax return by the

i) 31st of October 2007 if he were to file a paper return;

ii) 31st January 2008 if he were to file an electronic return or

iii) He could submit his returns three months after the date of issue. (Paper F6 – Taxation. Complete Text)

b) The relevant payment dates for tax owing for 2007/2008 are:

He can make 2 equal payments on account, the first on the 31st of January in the tax year (that is on 31/01/08 for 2007/08)

Then he can make the second payment on the 31st of July after the tax year (that is on 31/07/08 for 2007/2008)

The balancing payment is due on 31st January after the tax year (that is on 31/01/09 for 2007/08)

Task 9 – 10

X Company

Corporation Tax Computation for the chargeable accounting period of 12 months ended 31 March 2008

£

Tax adjusted trading profit 46,575

Property Business Income 13,500

Capital Gains 19,110

Total Profits 79,185

S393A current year relief 6,565

72,620

Less charge paid (2,455)

PCTCT 70,165

FII (W13) (7,000)

Profits 63,165

As profits are less than £150,000, PCTCT is taxed at 20%

Therefore, Corporation tax liability (£70,165 x 20%) = £14,033

TASK 11

The corporation tax liability is due for payment 9 months and one day at the of the chargeable accounting period

Notes

(W1) Dividend Income:

Any dividends received must be grossed up by 100/90 to arrive at dividends income which is included in the income tax computation because, dividends are deemed to be received net of a notional tax credit of 10%. (Melville, 2007)

(W2) Savings Income:

An individual is taxed on the actual income received in a tax year. This amount suffers tax at a lower rate of 20% therefore interest received from building society is multiplied by 100/80 in order to get the savings income which is included in the income tax computation. (Melville, 2007)

(W3) Car Benefit

Basic % for petrol car 15%

Plus (200 – 140) x 1/5 12%

Percentage used 27%

The car benefit charge is derived from the product of a fixed percentage and the car’s list price as calculated above.

For calculation purposes, the CO2 emissions are rounded down to the nearest whole figure.

ii) Fuel Benefit:

Fuel benefit is calculated as a percentage (same CO2 percentage used in calculating the car benefit) of a base figure which is set each year. The base figure for 2007/2008 is £14,400

(W4) Golf Club Subscription:

The annual subscription of £250 which Jane paid to her local golf club is a disallowed expenditure because the subscription is not wholly and exclusively for the purposes of trade. Hence this amount must be added back to the accounting profit to arrive at the tax adjusted profit.

(W5) Income tax Computation:

Tax is computed separately for all incomes earned, that is, other income, savings and dividend income. Different tax rates apply to different bands of these various incomes. For the tax year 2007/2008 tax is computed as follows:

Other Income Savings Income Dividend Income

The starting rate, (the first £2,230) 10% 10% 10%

Basic Rate band (the next £32,370) 22% 20% 10%

The Higher rate (above £34,600) 40% 40% 40%

(W6) Personal Allowance:

The Personal allowance for tax year 2007/2008 is 5,225. This is a tax free amount deducted from the total income of all individuals before tax is applied at the various levels.

(W7) Income Tax of 5565 was deducted from Jane’s gross salary at source through the PAYE system; therefore to avoid double payment of tax, this amount must be deducted from the tax liability in order to derive the correct amount of tax payable.

(W8) Beneficial Loans:

Beneficial loans are described as loans which a company offers to its employees at a rate below the official rate. It is assumed that 6.25% applies throughout 2007/2008. Employees who benefit from such loans at lower interest rates are liable to a benefit charge. There are two methods to compute this charge. The simple method (also known as the average method) and the accurate method (also known as the precise method). The taxpayer or HMRC has the choice to decide which method to use.

The Precise method calculates the benefit on the outstanding balance day by day.

The Average Method uses the average balance of the loan outstanding during the year. It is calculated as follows:

(Balance Outstanding at beginning of tax year + Balance outstanding at the end of the year)/2

(£20,000 + £20,000)/2 x 6.25% x 4yrs 5,000

Less: Interest Paid

6.4.04 -31.03.08: £20,000 x 2.5% x 4yrs (2,000)

Benefit 3,000

(W9) The painting is a non- wasting chattel, for non-wasting chattels sold at a loss, the disposal is not exempt but treated as an allowable loss and the sales or disposal proceeds for are deemed to be £6,000

(W10) The allowable expenditure for the part of the land disposed is calculated using the formula below:

Cost x A/(A + B)

Where A = Vale of the part of the asset disposed

B = the market value of the remainder of the part disposal

Therefore the Cost of the part disposed is

£60,000 x £55,000/(£55,000 + £120,000) = £18,857

(W11) £1,365 spent on entertaining customers is an allowable expenditure for tax purposes

The repair to central heating was carried out at James’ premises (private use) hence it is a disallowable expenditure, therefore must be added back to the net profit for tax purposes.

W12) As per the question it is not known whether the dividends received is from a UK company or not.

We will assume in our computation that the dividend received is from a UK company.

Dividends received from UK companies are ignored when calculating PCTCT

(W13) The trading loss for X Limited will be offset under the current year relief (Section 393A ICTA 1988. Under s393A, the whole amount of loss is set off against total profits of the same year before gift aid donations are deducted.

(W14) Franked Investment Income (FII) have an impact on the rate of corporation tax which a company pays. It is derived from the product of dividends received from UK companies and a 10% tax credit.

FII = £6,300 x 100/90)

= £7,000

(W15) The profit derived determines the rate of corporation tax applicable to a company but the corporation tax is calculated on the PCTCT. For the year ended 2008, for corporation tax rates of profits less than and up to £300,000, the small rate for companies of 20% applies.

(W16) Associated Companies:

For associated companies, in order to determine the rate of corporation tax, the upper and lower limits are divided by the number of associated companies. As X has one associated company, including X itself we therefore have 2 associated companies hence the upper and lower limits will be divisible by 2.

Therefore the upper limits become £1500, 000 /2 = £750,000

And lower limits £300,000/2 = 150,000

REFERENCES

ACCA Paper F6 Complete Text (2008), Kaplan Publishing

HMRC website available at http://www.hmrc.gov.uk/manuals/salfmanual/SALF303.htm

Melville, A (2007) Finance Act 2008, 14th Edition

References: ACCA Paper F6 Complete Text (2008), Kaplan Publishing HMRC website available at http://www.hmrc.gov.uk/manuals/salfmanual/SALF303.htm Melville, A (2007) Finance Act 2008, 14th Edition