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Taxes are the act laying a tax, or of imposing taxes, as on the subjects of a state, by government, or on the members of a corporation or company, by the proper authority; the raising of revenue; also, a system of raising revenue. Taxes are important sources of government earning. The money that is earned by the government in the form of income tax, sales tax, property tax and other taxes is mainly spent for the development of the country. Thus the prime purpose of taxation is believed to be revenue. The money that is raised from various taxes is spent by the government for the construction of schools, roads, hospitals and also for other development causes. The national government also spends the earned revenue for the justice system and regulation. In assignment two of taxation we have to accomplish two tasks with task 1 is Corporation tax and task 2 is Capital Gains tax. The following are the detail of six outcomes.
Calculate chargeable profits and losses for a limited company together with available allowances
Calculate the tax liability of a limited company and advise on payment dates
Explain how income tax deductions are to be dealt with
Identify chargeable assets and disposal the tax year 2010/11
Calculate capital gains stock for the tax year 2010/11
Calculate tax payable in respect of capital gains
Corporation tax is the tax on profits paid by public or private limited companies. We not only learnt UK corporation tax but also Vietnamese corporation tax. Through that we known the different between them and also understand deeply of tax in general and corporation tax in particular. This task has two cases with section A is Industrial Ltd to apply for UK tax and section B to apply for Vietnamese tax. Section A required us understand all eight notes and then analyze and calculate based on knowledge teacher Jun give us. However we have to research more about the tax rate for 2010 - 2011 to fulfill section A because in our course book just has tax rate for 2003-2004. Section B is Vietnamese tax. It was quite simple than section A and with the guide of teacher and tutor we can finish it quickly.
Capital gains tax is a tax on the profit or gain you make when you sell or "dispose of" an asset. Individuals, companies and partnerships are all liable to capital gains tax. Section C is the case to apply for task 2. This case is for person whose possessions that may be liable to Capital gains tax when they sell or dispose of them include: jewellery, paintings, antiques, coins and stamps. Capital gains tax for individual is simpler than companies so we can accomplish the final task for assignment 2 quickly. The specific content of our assignment follow will show more detail what we done.
III. CORPORATE AND CAPITAL GAINS TAXATION
III.1. Section A
With a role of tax practitioner, we have to calculate chargeable profits / losses and the tax liability of Industrial Ltd. From that, we also advise on payment dates for them. As mentioned in the scenario, Industrial Ltd is a UK resident company that manufactures furniture, so they have to follow the rule which apply for resident company.
Trading Profits XX
Less: Capital Allowances
- On Factory (Working 1 - W1) XX
- On Plant and machinery (W2) XX (XX)
Trading Profit XX
Investment Income (W3) XX
Loan Interest Received (W3) XX
Property Business Income (W4) XX
Chargeable Gains (W5) XX
Total Profits XX
Less: Gift Aid Donation (W6) (XX)
Taxable Profits XX
Tax Liability XX
Capital allowances are available to give tax relief for certain capital expenditure. (ACCA Taxation, pg 86) Capital Allowances are available in respect of expenditure on Section A includes:
Industrial Buildings Allowances (Factory Allowances)
Plant and machinery
III.1.1. Working 1: On Factory - Industrial Buildings Allowance (IBAs)
Industrial buildings allowance (IBAs) can be claimed in respect of expenditure on buildings in industrial use such as factories. The table below will show more information detail for IBAs.
INDUSTRIAL BUILDINGS ALLOWANCE
Account Amount Adjustment under IBAs Reason
Land 130,000 Excluded Not qualify as expenditure on IBAs
Levelling the land 13,800 Included Eligible expenditure
Architects fees 36,450 Included Eligible expenditure
Heating system 62,800 Excluded Plant and machinery items
Fire alarm system 7,200 Excluded Plant and machinery items
Strengthened concrete floor to support machinery 24,750 Included Eligible expenditure
General Offices 93,750 Included It is less than 25% of the total IBAs expenditure (excluding land)
â†’ Allow for IBAs
Factory 281,250 Included Eligible expenditure
IBAs at the rate of 2% a year is given if a building is in industrial use on the last day of the period of account concerned. The allowance is calculated on a straight line basis (in contrast to WDAs on plant and machinery which are calculated on the reducing balance), starting when the building is brought into use. The WDA is 2% Ã- months/12 if the period concerned is not 12 months long (ACCA, pg 104). In Section A, Industrial Ltd has a new factory constructed that was brought into use on 30 September 2010 and the financial year ended 21 March 2011, the chargeable period is 6 months long so the rate of WDA is: 2% Ã- 6/12 = 1%
Levelling the land 13,800
Architects fees 36,450
Strengthened concrete floor to support machinery 24,750
General Offices 93,750
Eligible expenditure 450,000
Industrial Buildings Allowance y/e 31 March 2011
450,000 x 1% 4,500
In the table above, to calculate IBAs of Industrial Ltd, we have to calculate the total expenditure allowances which involve: leveling the land, architects fees, strengthened concrete floor to support machinery, general offices, factory and eligible expenditure. Then we have IBAs for a year ended 31 March 2011 is £4,500.
III.1.2. Working 2: On plant and machinery
Capital expenditure on plant and machinery qualifies for capital allowances if the plant or machinery is used for a qualifying activity, such as a trade. "Plant" is not fully defined by the legislation, although some specific exclusions and inclusions are given. The word "machinery" may be taken to have its normal everyday meaning. (ACCA, pg 87)
In the case of Industrial Ltd, capital expenditure on plant and machinery includes:
Special rate pool
Expensive motor car
Businesses are entitled to an Annual Investment Allowance (AIA) of £100,000 for a 12 month period of account in the year 2010-2011. A first year allowance (FYA) at the rate of 40% is available on the balance of expenditure on plant and machinery. It means that, Industrial Ltd is applied £100,000 and FYA at the rate of 40% for AIA/FYA because accounting period of company is 12 months from 1 April 2010 to 31 March 2011.
Writing down allowance (WDA) is given on main pool expenditure at the rate of 20% a year (on a reducing balance basis). The WDA is calculated on the tax written down value (TWDV) of pooled plant, after adding the current period's additions and taking out the current period's disposals.
The special rate pool contains expenditure on thermal insulation, long life assets, features integral to a building and cars with CO2 emissions over 160g/km. The AIA can be used against such expenditure except cars. The WDA is 10%. In the case of scenario, the company was purchased motor car with CO2 emissions 170g/km so the cost of £17,200 is added on special rate pool with WDA is 10%.
Balancing charges occur when the disposal value deducted exceeds the balance remaining in the pool. The charge equals the excess and is effectively a negative capital allowance, increasing profits. Most commonly this happens when the trade ceases and the remaining assets are sold. According to scenario, balancing charges will occur because the disposal value deducted for expensive motor car of £19,600 exceeds the balance remaining for it of £15,400.
AIA/FYA Main pool Special rate pool Expensive motor car Allowances
£ £ £ £ £
TWDV b/f 84,600 15,400
Addition qualifying for AIA/FYA
Heating system 62,800
Less: AIA (62,800) 62,800
Fire alarm system 7,200
General Plant 27,000
Less: AIA (balance) (37,200) 37,200
Transfer balance to pool 32,400 (32,400)
FYA @ 40%
32,400 x 40% (12,960) 12,960
Addition not qualifying for AIA/FYA
Motor car 17,200
Less: Disposal Proceeds (19,600)
Balancing allowances (4,200) (4,200)
WDA @ 10% (1,720) 1,720
WDA @ 20% (10,440) 10,440
Transfer balance to pool 19,440 19,440
TWDV c/f 61,200 15,480
Total Allowances 120,920
As you can see that, the total allowances for plant and machinery is £120,920 consists:
£100,000 from AIA
£12,960 from FYA with the rate of 40%
Loss £4,200 from balancing charges
£1,720 from special rate pool with the rate of 10%
£10,440 from main pool with the rate of 20%
III.1.3. Working 3: Schedule D case III
Schedule D case III is interest received without deduction of tax at source. For Industrial Ltd, schedule D case III include:
Bank interest received - Investment income £12,500
Loan interest received £36,000
III.1.4. Working 4: Property business income
Property business income or Schedule A is income from land and buildings in the UK, including caravans and houseboats which are not moved. (BPP, 2004, pg 657)
In the case of scenario, property business income includes:
Premiums on leases
For premium on leases, when a premium or similar consideration is received on the grant of a short lease, part of the premium is treated as rent received in the year of grant. A lease is considered to end on the date when it is most likely to terminate. The premium taxed under Schedule A is the whole premium, less 2% of the premium for each complete year of the lease, except the first year which following the formula:
P x 2% x (D - 1)
With: - P is premium
- D is number of year lease
For rental income, because Industrial Ltd has leased an office building since 1 January 2011 and financial year ended on 31 March 2011, accounting period for rental income has just 3 months so the rental income profit that the company received in the end of the accounting period is: £30,400 x 3/12 = £7,600.
Less: P x 2% x (D - 1)
80,000 x 2% x (10 - 1) (14,400)
Assessable Premium 65,600
£30,400 x 3/12 7,600
Property business income 73,200
According to the table above, property business income of Industrial Ltd is the total profits of Premium on leases and rental income which is £73,200
III.1.5. Working 5: Chargeable gains
Chargeable gains for companies are computed in broadly the same way as for individuals, but indexation allowance applies and there is no annual exemption. Chargeable gains are included in the profits chargeable to corporation tax. (ACCA, pg 240)
The indexation allowance gives relief for the inflation element of a gain. The purpose of having an indexation allowance is to remove the inflation element of a gain from taxation. Companies are entitled to indexation allowance from the date of acquisition until the date of disposal of an asset. For Industrial Ltd, the indexation allowance from April 2005 to January 2011 is £29,697.
Disposal Proceeds 238,419
Less: Allowable expenditure 135,800
Unindexed gain 102,619
Indexation Allowance (29,697)
Capital losses brought forward (10,800)
Chargeable gains 62,122
To calculate chargeable gains of the company, firstly, adding the profit of disposal on quoted shares is in respect of a shareholding that was sold on 15 January 2011 for £238,419. Secondly, deducting the cost of the shareholding when it was purchased on 1 April 2005 of £135,800 then we have the unindexed gain. Next, less indexation allowance of £29,697 and capital losses brought forward of £10,800. Lastly, we have the chargeable gains of Industrial Ltd is £62,122.
III.1.6. Working 6: Gift aid donation
Donation under gift and aid scheme should be deducted from total profits arrive at the profits chargeable to corporation tax. In the case of Industrial Ltd, gift aid donation is £1,500.
III.1.7. Chargeable profits/losses together with available allowances, tax liability of Industrial Ltd and advise on payment dates
Trading profits 1,810,000
Less: Capital Allowances
On Factory (W1) (4,500)
On Plant and machinery (W2) (120,920)
Trading profit 1,684,580
Investment income (W3) 12,500
Loan interest received (W3) 36,000
Property business income (W4) 73,200
Chargeable gains (W5) 62,122
Less: Gift aid donation (W6) (1,500)
Corporation tax liability
£1,866,902 x 28% 522,733
To calculate profits chargeable to corporation tax (PCTCT) of Industrial Ltd, the first step we need to add trading profit of £1,810,000. The second step, deducting the capital allowances which include: on factory of £4,500 and on plants machinery of £120,920. Then we have trading profits under schedule D case I is £1,684,580. The third step, adding investment income of £12,500 and loan interest received of £36,000 under schedule D case III. The fourth step, adding property business income of £73,200 under schedule A and also adding chargeable gains of £62,122. On step 5, deducting gift aid donation of £1,500 according to charges on income. So we have PCTCT is £1,866,902.
From 1 April 2010 onwards, the full rate of Corporation Tax applies when profits (including ring fence profits) exceed £1,500,000, or where there is no claim to another rate, or where another rate does not apply. The full rate of corporation tax for the year 2010-2011 is 28%. Therefore, the corporation tax liability of Industrial Ltd is £1,866,902 x 28% = £522,733
Advise on payment dates
The corporation tax liability is collected under the self-assessment system. If a company's profits for an accounting period are at the full rate (profits exceed £1,500,000 where there are no associated companies) they must normally pay Corporation Tax for that period in instalments. Instalments are due on the 14th day of the month, starting in the seventh month. Provided that the accounting period is 12 months long subsequent instalments are due in the tenth month during the accounting period and in the first and fourth months after the end of the accounting period. It means that Industrial Ltd must pay its liability in four equal instalments. These are due on:
1st time: 14 October 2010 (in the seventh month during the accounting period)
2nd time: 14 January 2011 (in the tenth month during the accounting period)
3rd time: 14 April 2011 (in the first month after the end of the accounting period)
4th time: 14 July 2011 (in the fourth month after the end of the accounting period)
III.2. Section B
Corporation income tax is a tax is levied directly on taxable income in a particular period of time (one year in common) (Textbook Vietnam Taxation, 2009, Publisher of financial, pg 165)
Tax payers: all organizations produce or/and sell goods and services, gain profit.
Vietnamese enterprises established legally
Representative of foreign enterprises in Vietnam
Corporation income tax computation in Vietnam:
Tax Payable = Taxable Income x Tax Rate of 25%
Taxable Income = Chargeable Income - Tax Exemption - Losses
Chargeable Income = Taxable Turnover (W1) - Deductible Expenses (W2) + Other Income (W3)
III.2.1. Working 1: Taxable Turnover
Turnover is the total amount of sales, services, regardless of whether or not collected.
Taxable Turnover includes:
Sales, services (income consist of VAT or not)
Installment sales, deferred sales
Rental of fixed assets
With the formula: Taxable Turnover = âˆ‘â-’Turnover - Deduction
In the case of section B, the total turnover is 20,000 million VND and sale rebate deduction of 1,000 million VND so we have:
Taxable Turnover = Turnover - Reduction on sales = 20,000 - 1,000 = 19,000 million VND (W1)
III.2.2. Working 2: Deductible Expenses
Expenditure is considered as deductible expenses if it satisfies the following two conditions:
Actual expenses incurred, related to business activities in the tax period.
Expenses in full invoices, legal valid documents
In a part below, we will consider each cost that incurred in the period is deductible expense or not.
Depreciation of fixed assets
A depreciation of fixed assets is considered as deductible expenses if it satisfies three conditions which consist:
Fixed assets used for business activities, is not fully depreciated.
Fixed assets have adequate documents to prove lawful ownership of the enterprise.
Fixed assets must be managed and monitored in accordance with current regulations
Because the enterprise has full invoices, legal documents and valid, and it used for business purpose, so the depreciation of fixed assets of 300 million VND is deductible expenses.
Expenses for purchase of materials
Only actual expenses incurred for purchase of materials are considered as deductible expenses. The company has 330 million VND in cost of raw materials but one third of them were used for production in fact. It means that:
Actual use: 330 x 1/3 = 110 million VND â†’ Deductible expenses
Not yet use: 330 - 110 = 220 million VND â†’ Non deductible expenses
The company has 500 million VND for Tet bonuses, however according to the scenario, it was not record in labor contract so it was break the second condition of regulation for deductible expenses â†’ it is not deductible expenses.
Salaries for worker
Following to the regulation, the enterprise will be deduct salaries, cost of shift meal, lunch, cost of uniforms, and compulsory insurance. Apply in the case of Section B, the company will be deduct salaries and compulsory insurance (no cost of shift meal, lunch and cost of uniforms) but the compulsory insurance payments were deducted from salaries as regulation so the deductible expenses for salaries are total of salaries and compulsory insurance, in which, compulsory insurance with the total funding level of 22% of basic salary (not including purchase of life insurance for employees) consist:
16% for social insurance
3% for health insurance
2% for union expenses
1% for unemployment insurance
â†’ Compulsory insurance = 22% x âˆ‘â-’ã€-basis salaryã€- = 22% x 4,000 = 880 million VND
So, the deductible expenses for salaries = 4,000 + 880 = 4,880 million VND
Interest for loan from other enterprise
Interest loans will be qualified as deductible expenses if they meet three conditions as following:
Borrowings from banks, credit institutions: the real interest rate based on loan agreements
Loans of other subjects: the real interest of the loan contract not exceed 150% of base rate announced by State Bank at the time of loan
Do not be deducted for payment of loan interest for charter capital contribution or loan corresponding to the charter capital deficit
As mentioned before, the interest for loan from other enterprise of 5,000 million VND with interest rate at contract is 28% per year while the interest rate announced by State Bank at the time of loan is 9% per year. Under the regulation for interest loan from other subjects, the real interest of the loan contract is not exceed 150% of base rate.
â†’ Maximum deductible interest loan rate = 9% x 150% = 13.5% < the real interest rate of 28%
So the enterprise only deducts 13.5% interest rate loan, not 28% under the contract.
Loan payment = 5,000/(28%) = 17,857.14 million VND
Because, charter capital of the enterprise has fully generated and it is for trading purpose so:
Deductible expenses of loan interest = 17,857.14 x 13.5% = 2,410.71 million VND
â†’ Non deductible expenses of loan interest = 5,000 - 2,410.71 = 2,589.29 million VND
Tax and administrative fee
The expenses will be deducted if it is one of them:
Export- Import Tax
Special consumption tax
The fees, the fines (not including administrative penalties)
In the case of scenario, fines for the breach of accounting law of 30 million are not deductible because it relates to administrative penalties.
Land hire payable
Cost of land hire payable for 55 million VND is deductible because it is for trading purpose and has full legal valid documents.
Through the above information, we can calculate total deductible expense as follow:
Depreciation of fixed assets 300
Expenses for purchase of materials 110
Salaries for worker 4,880
Interest loan from other enterprise 2,410.71
Land hire payable 55
Total deductible expenses (W2) 7,755.71
As the information was showed above, the total deductible expenses (W2) of this enterprise is 7,755.71 million VND.
III.2.3. Working 3: Other Income
The enterprise has income from business activities in Japan of 700 million VND with tax rate in Japan is 20%.
â†’ Income pre-tax in Japan (W3) = 700/(1-20%) = 875 million VND
III.2.4. Corporation income tax and advise payment dates
Vietnam is a country where is taxed by the state of residence. It means that, if an enterprise is confirmed as a resident in Vietnam, they will be taxed on all income from manufacturing operations, business, and services, wherever the income arises.
In the case of scenario, because this enterprise is resident in Vietnam so their income that received in Japan also will be taxed in Vietnam.
â†’ Income pre-tax in Japan = 700/(1-20%) = 875 million VND
However, to avoid duplication of tax, Vietnam Taxation allows businesses to deduct taxes paid abroad before calculating the tax payable in Vietnam. It means that, when the enterprise paid tax in Japan, they must determine income before tax in Japan to calculate corporate tax payable. In determining tax payable for a year in Vietnam, it will be deducted from tax payable paid in Japan, but the tax is deducted does not exceed the income tax calculated under the Law on Enterprise Income Tax for income received it.
â†’ Chargeable Income = Taxable Turnover (W1) - Deductible Expenses (W2) + Other Income (W3)
= 19,000 - 7,755.71 + 875 = 12,119.29 million VND
Because scenario is not mention to the tax exemption items and previous loss items from previous period switch to this period. So, chargeable income is taxable income.
â†’ Tax Payable = (Taxable Income x Tax Rate of 25%) - Tax Payable in Japan
= (Taxable Income x 25%) - (Income pre-tax in Japan x Tax Rate in Japan)
= (12,119.29 x 25%) - (875 x 20%)
= 3,029.8225 - 175 = 2,854.8225 million VND
Therefore, the corporation tax payable of this enterprise for a accounting period is 2,854.8225 million VND.
Advise payment dates
Settlement of enterprise income tax is calculated on a calendar year. As similar with UK Taxation, Vietnam Taxation is also paid tax in quarterly.
The extended period of corporation income tax for the provisional tax paid by each quarter in an accounting period as follows:
Quarter Tax payment time limit extension
Q1: from 1/1 to 31/3 Not too dated 30/4
Q2: from 1/4 to 30/6 Not too dated 30/7
Q3: from 1/7 to 30/9 Not too dated 30/10
Q4: from 1/10 to 31/12 Not too dated 31/3 of next accounting period
(Refer to Regulation 21/2011/QÄ-TTg of Vietnam Taxation Law)
Deadline for submission of tax settlement reports to tax offices directly managing them is 60 days from the end of the fiscal year. Business establishments shall pay the tax arrears in the tax settlement reports within 10 days after the specified date to pay the tax settlement reports to tax authorities. If after 10 days without payment in addition to full payment of tax arrears, late payment penalties have to pay.
Late payment penalties = Tax payable x 0.05% x number of late payment days due on 31/3 of next accounting period
â†’ Late tax payable = Tax payable + Late payment penalties
(Refer to Regulations for tax settlement of businesses for year 2011)
III.3. Income tax deductions are to be dealt with
Tax deduction is fixed amount or percentage permitted by taxation authorities that a tax payer can subtract from their adjusted gross income to arrive at the taxable income. (investorwords.com, accessed 2011) Corporations can deduct a variety of expenses from their taxable income. Deductions typically include allowances for travel, cars, planes, education, meals, costs of goods and other necessary expenses. The following are some deductions in corporation.
First of all is capital allowance. They include some items such as wear and tear of plant and machinery and expenditure on transmission capacity rights, computer software, energy efficient equipment including electric and alternative fuel vehicles, industrial buildings, expenditure on providing structures, expenditure on buying land and specified intangible assets. The allowance for wear and tear of plant and machinery is used for the purposes of a trade at the end of an accounting period. (ACCA, Capital allowances for corporate business, pg 29-49) The allowance is calculated by reference to the cost of the item (less any grants received) and the allowable expenditure may be written down at the rate of 12.5% on a straight line basis. In section A, there are two items of capital allowances, they are Industrial buildings and Plant and machinery. The annual rate of WDA in 2010 for the person who constructs an industrial building is 2%. In Section A, the chargeable period of Industrial Ltd is 6 months long so the rate of WDA is 1% or £ 4,500. The WDA of Plant and machinery is 10% and the allowances for it in section A is £120,920.
The second is donation to charities. Almost all donations of money to charity qualify as charges on income under gift aid scheme whether they are one off donations or are regular donations made. Gift aid donations are paid gross. They are deducted from total profits to arrive at the profit chargeable to corporation tax. (BPP, 2004, pg 730) Donations to charities which are incurred wholly and exclusively for the purpose of the trade are Schedule D case I deductions instead of under the gift aid scheme. Gift aid payments are treated as charges on income, and are deducted in calculating a company's profit chargeable to corporation tax. Corporation tax relief is also given for gifts of land or buildings made to a charity and for donation to non-UK charities of medical supplies and equipment for humanitarian. A corporation can deduct charitable contributions, as long as they do not exceed 10 percent of the corporation's taxable income and they were made to a qualifying charity. In section A, gift aid donation of Industrial Ltd is £1,500.
Third is chargeable gain. Corporation tax is charged in gains arising in chargeable disposals of chargeable assets by companies. (ACCA, Chargeable gains, pg 61-79) Deduction for chargeable gain can be certain expenses for buying, selling or improving the asset; Allowable losses and Indexation allowance. (hmrc.gov.uk, accessed 2011) If a company has spent extra money on buying, selling or improving the value of the asset, they may be able to deduct these costs from the amount received. Examples of what may be reasonably incurred and can be deducted are: money or money's worth given to acquire the asset, improvement costs to increase the value of the asset (it can't include normal maintenance or repair costs) and reflected in the asset at the time of disposal, fees or commission for professional advice or services - for example estate agent or advertising fees to find a seller or buyer and Stamp Duty Land Tax. Corporation may have an allowable loss if they dispose of an asset or receive a capital sum from your ownership of an asset and the allowable costs are greater than the disposal proceeds or capital sum, or an asset they own has become of negligible value. (netlawman.co.uk, accessed 2011) The allowable losses arising in the tax year from the total chargeable gains is deducted for the same year. You must deduct all the allowable losses for the year, even if this results in chargeable gains after losses below the level of the annual exempt amount. If the allowable losses arising in the tax year are greater than the total chargeable gains for the year, you can carry forward the excess losses to be deducted from chargeable gains in future years. Deduction for Indexation allowance can be from some expenditure as following: The cost of an asset; the incidental cost of acquiring asset and the cost of creating an asset if it was not acquired. (netlawman.co.uk, accessed 2011) In section A, Chargeable gain of Industrial Ltd is £62,122.
Fourth are schedule A, interest and charges. Most payments that a company makes are deductible against specific sources of income. The main source of income from property is rental income which is taxable under schedule A. (legislation.gov.uk, accessed 2011) For example, expenses incurred with let property are deducted in arriving at the schedule A profit. Certain other payment, however, are not deductible against a specific sources of income, but against total income. These are called charges on income (or sometimes just "charges"). Charges on income are deducted from total of profits from all sources to arrive at the profit chargeable to corporation tax. Only charges that have actually been paid can be deducted. Gift aid payments are treated as charges on income, and are deducted in calculating a company's profit chargeable to corporation tax. For Industrial Ltd, property business income is £73,200.
III.4. Chargeable assets and disposals for an individual
Capital Gains Tax is a tax on the gain or profit you make when you sell, give away or otherwise dispose of something. It applies to assets that you own, such as shares or property. There's a tax-free allowance and some additional reliefs that may reduce your Capital Gains Tax bill. Sometimes you may have no tax to pay. In the other words, for a chargeable gain to arise there must be: a chargeable person, a chargeable disposal, a chargeable asset.
You usually dispose of an asset when you cease to own it - for example if you: sell it; give it away as a gift; transfer it to someone else; exchange it for something else; receive compensation for it - for example you receive an insurance payout when an asset's been destroyed. It's the gain you make - not the amount of money you receive for the asset - that's taxed.
For example, you bought some shares for £2,500 in June 1990 after that you sell them for £12,500 in May 2010 and then you've made a gain of £10,000 (£12,500 less £2,500) (HRMC).
III.4.1. Chargeable person
Chargeable persons are charged on individuals, companies and partnership. Exempt persons include: charities using gains for charitable purposes; approved superannuation funds; local authorities; registered friendly societies; approved scientific research associations; authorized unit trusts and investment trusts; diplomatic representatives.
III.4.2. Chargeable disposals
An asset may be regarded as disposed of when its ownership changes. Consequently, both the sale and the gift of an asset are disposals. Chargeable disposal has four types: Sales of assets or part of assets (for example, when a company sell a truck), Gifts of assets or part of assets (for example, when parents give their son a new car), receipts of capital sums followings the surrender of rights to assets, the appropriation of assets as trading stock (BPP, 2004).
Exempt disposals include: transfers of assets on death (the heirs inherit assets as if they bought them at death for their then market values, but there is no capital gain or allowable loss on death); transfer of assets as security for a loan or mortgage; gifts to charities and national heritage bodies. Chargeable gains do not arise in respect of betting winnings or cash backs, for example on a new mortgages or cars.
III.4.3 Chargeable assets
All form of property wherever it is situated may be a chargeable asset. The most common assets include: stocks, shares and units in unit trust; land and buildings; business assets such as goodwill. Some assets are exempt from Capital Gain Tax but most of these exemptions are unlikely to apply to partnership assets. For example, assets are shares in a company; units in a trust; land and buildings; business assets, such as machinery and goodwill, assets which do not give rise to chargeable gains.
Exemption assets include motor vehicles suitable for private use; national savings certificates and premium bonds; foreign currency for private use; decorations for valour unless acquired by purchase; damages for personal or professional injury; life assurance policies (only exempt in the hands of the original beneficial owner); Works of art, Scientific collections and so on given for national purposes; Gilt-edged securities; Qualifying corporate bonds (QCBs) (although any gain deferred when a security changed status to a QCB remains taxable); Certain chattels; Debts (except debts on a security); Pension rights and annuity rights; Investments held in individual saving accounts.
According to the scenario, Peter Robinson' chargeable assets include a plot of land, a vase and investment property. And Peter Robinson has to pay taxable income so he is a chargeable person.
III.5. Section C
For this section, we have to calculate capital gains stock and tax payable for the tax year 2010/11 of individual person. The formula to calculate:
Investment Property (W1) XX
Land (W2) XX
Destroyed Assets (W3) XX
Less: Annual Exemption Amount (XX)
Taxable Gains XX
Peter Robinson CGT payable 2010/11
W1. Investment Property £
Less: Costs of disposal (1,280)
Net proceeds 148,720
Less: cost (79,500)
W2. Land £
Less: Costs of disposal (700)
Net proceeds 34,300
Less: Costs £(54,000 x (35,000)/(35,000+70,000)) (18,000)
W3. Destroyed Assets £
Less: Costs (12,000)
Gain immediately chargeable:
£20,000 - £17,000 3,000
Remainder rolled into base cost of new vase:
£8,000 - £3,000 5,000
Determination of rates of CGT £
Taxable income 33,000
Taxable gains 78,420
In general, a gain is computed by taking the proceeds and deducting the cost. Incidental costs of acquisition and disposal are deducted together with any enhancement expenditure reflected in the state and nature of the asset at the date of disposal. In the first disposal of investment property, the basic computation was used to calculate. That is a very basic one and the gain was £69,220.
The second is a part disposal. The disposal of part of a chargeable asset is a chargeable event. The chargeable gain (or allowable loss) is computed by deducting a fraction of the original cost of the whole asset from the disposal value. The balance of the cost is carried forward until the eventual disposal of the asset. The formula for fraction is as following.
Cost x A/(A+B)=(value of the part disposed of)/(value of the part disposed of market value of the remainder)
The last disposal is a compensation for the destruction of the vase. Mr. Robinson received £20,000 compensation, so he has gained £8,000 in comparison with cost of the destroyed vase. However, Mr. Robinson bought a new vase as a replacement for £17,000. Thus, he now gains only £3,000, and this is the gain that will be charged. The remainder of £5,000 is considered that roll into base cost of the new vase.
Investment property gain 69,220
Land gain 16,300
Destroyed asset 3,000
Less: Annual exemption (10,100)
Taxable gains 78,420
Capital gains tax payable
£(37,400 - 33,000) x 18% 792
£(78,420 - 4,400) x 28% 20,726
Capital gains tax 2010/11 21,518
There is an annual exempt amount for each tax year. For each individual for 2010/11 it is £10,100. The annual exempt amount is deducted from the chargeable gains.
According to HRMC, rates for Capital Gains Tax in 2010-11 and 2011-12:
For gains on or before 22 June 2010, Capital Gains Tax is charged at a flat rate of 18 per cent.
The following Capital Gains Tax rates apply to gains after this date:
18 per cent and 28 per cent tax rates for individuals (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first )
28 per cent for trustees or for personal representatives of someone who has died
10 per cent for gains qualifying for Entrepreneurs' Relief
Following to HRMC, working out Capital Gains Tax for 2010-11:
Gains before 23 June 2010
For gains on or before 22 June 2010, Capital Gains Tax is charged at a flat rate of 18 per cent.
Gains on or after 23 June 2010
For gains on or after 23 June 2010, individuals need to work out their total taxable income before working out which Capital Gains Tax rate to use.
First work out your taxable income by deducting any tax-free allowances and reliefs that you are entitled to.
Next see how much of your basic rate band is already being used against your taxable income. The basic rate band for 2010-11 is £37,400.
Allocate any remaining basic rate band first against gains that qualify for Entrepreneurs' Relief - these are charged at 10 per cent.
Next allocate any remaining basic rate band against your other gains, these are charged at 18 per cent.
Any remaining gains above the basic rate band are charged at 28 per cent.
(Refer to HRMC - Capital Gains Tax rates and annual tax-free allowances)
Apply in the case of Section C, because Mr. Peter Robinson made the disposals of assets on 30 June 2010, 27 July 2010 and 1 September 2010, so we have to apply the rule for capital gains tax after 23 June 2010. It means that, the gains will be taxed at 18% up to the basic rate band limit and at 28% thereafter. The basic rate band limit is £37,400 for 2010/11. Mr. Robinson had taxable income of £33,000 in 2010/11. Applying the rule, he is taxed at 18% for his gain up to £37,400, which is £(37,400 - 33,000) = £4,400. The remainder of his gain, which is £(78,420 - 4,400) = £74,020 will be taxed at 28%, because it exceed the basis rate. Finally, he has to pay £21,518 capital gains tax 2010/11.â€ƒ
As tax practitioners in Amazing Group, we have worked hard together to help our three clients solve their problems. In the end, we have finished all the required tasks as well as give our clients some useful advices.
As for the Industrial Ltd (a UK resident company) and the Vietnamese resident company, we have calculated chargeable profits and losses together with available allowances and the tax liability of each company. The UK tax law is used for Industrial Ltd, and the Vietnamese tax law is used for the Vietnamese company. After that, we gave some advices on the payments dates and explained how income tax deductions are to be dealt with. By doing this, we think that we can help our clients to understand better about taxation in their country. It would be useful for them in future business.
Our third client is an individual - Mr. Peter Robinson. He was confusing to his responsibility with the UK capital gains tax. Therefore, we first explain to him about the chargeable assets and disposal according to changes in 2010/11. Mr. Robinson would have some basic understand about his responsibility after read our explanations. We then help him to calculate his capital gains stock for the tax year 2010/11. Finally, we calculated the capital gains tax that Mr. Robinson has to pay in tax year 2010/11. When calculating, we also explain some important part of the formula to help Mr. Robinson understand his liability.
Overall, after finishing all the tasks, we believe that we not only help our clients to deal with their tax liability, but also give them a better understanding about taxation that would be helpful in their future.
Finally, we want to give special thank to Mr. Jun Alejo Bathan and Ms. Giang for guiding us and willing to help us whenever we need, so that we can accomplish our job with the best results.
BPP Professional Education, 2004, Taxation
ACCA - Taxation, Paper 6, 2009, UK, BPP Learning Media Ltd
ACCA - Capital allowances for corporate business, paper 2.3 Business Taxaion, 2004, British Library cataloguing in Publication Data, Foulks lynch publications, pg 29-49
ACCA - Chargeable gains, paper 2.3 Business Taxaion, 2004, British Library cataloguing in Publication Data, Foulks lynch publications, pg 61-79
ACCA - Capital gain tax, paper 2.3 Business Taxaion, 2004, British Library cataloguing in Publication Data, Foulks lynch publications, pg 223-249
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HM Revenue & Customs, Introduction to Capital Gains Tax, Online, Available from: http://www.hmrc.gov.uk/cgt/intro/basics.htm [Accessed January 2012]
NetLawMan, CGT Allowable Losses, Online, Available from: http://www.netlawman.co.uk/info/allowable-losses.php [Accessed January 2012]
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Legislation of UK Government, Taxation of Chargeable Gains Act 1992, Online, Available from: http://www.legislation.gov.uk/ukpga/1992/12/contents/enacted [Accessed January 2012]
Best Tax Resources, 8 changes in Real Property Gains Tax (RPGT), Online, Available from: http://www.besttaxresources.com/8-changes-in-real-property-gains-tax-rpgt [Accessed January 2012]
Financial Spread Betting - A Trader's Guide, An introduction into Capital Gains Tax, Online, Available from: http://www.financial-spread-betting.com/UK-capital-gains-tax.html [Accessed January 2012]
Regulation 21/2011/QÄ-TTg of Vietnam Taxation Law
Regulations for tax settlement of businesses for year 2011
Textbook Vietnam Taxation, 2009, Publisher of financial, pg 165