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Tax Liability of Riviere Ltd.
Tax liability is the driving force of any given system. It is in place not only to keep the incomes in check and to generate revenue but are also there to serve a more important purpose which is of equitable distribution of wealth. That is why we see progressive taxation in which case people and organizations earning more pay more taxes while regressive taxes are in place to promote economic activity.
In this case we are looking at a small trading company with 4 partners including 3 active partners and their tax liability is different if we look at them in different business circumstances. For simplicity sake we are going to examine in 5 different scenarios.
The tax written down value of company's capital allowance pool determines the tax liability. If the pool was benchmarked with £100,000 then we would have to add on the additional input that we have. A capital expenditure which was undertaken of £25,000 will be added on and that might change the overall tax bracket. However it should have that major impact because the company has been identified on the basis of its size and really does not change its pool on the basis of these changes.
Thus the tax liability would be based on the overall takeaway income of the company at the end of 15 month period.
The first possible scenario when the accounting and financial year for the company is changed from 12 months to 15 months in order to make it coincide with the tax return submission dates that is with the first quarter of a new year. The taxable income is directly linked with the income which is generated after all the expenses, including salaries and all other direct and indirect expenses have been deducted.
The rule of thumb is that the income is clubbed before the taxes can be levied. In this case we do have the forecasted incomes for the all the 3 periods that is the first 2 halves and the preceding quarter. In case there is a provision for the taxation on a half yearly basis the taxes returns can be filed and this would save us some liability. Since it is a small trading company the tax bracket would be significantly low if these were to happen and taxes would be identified and specified for each period. However it is not possible and that was the simple reason why it was decided to change the financial year of the company. Thus we would be required to club the total income of the company to calculate the tax return
Since it is a small sized company as per the regulations the tax would be anything in the range 20-25%. On the whole the figure sounds substantial. But if we look deep down then what we have at hand is the trading profit. Once all the interest expenses and the salaries have been deducted this clubbed figure would fall significantly. Moreover since we work on the actualization and realization principle as well as on the principle of prudence income can be realized and recorded only and only when it occurs. Thus at the same time the expenses are also deducted at that point in time where they occur. So while we are deducting our expenses we are drawing ourselves closer to the overall incomes generated for the total period.
What we need to bear in mind is our capital expenditure which takes place in January 2006. That expense would have a built in tax liability which will be deducted at source while buy the said machinery. If the plant was to be set up under the promotion or tax exempted scheme it would serve the purpose. However it was not then the company would be liable to pay the taxes on this expense as well. Once that has been paid the overall expense would be deducted from the overall expense which would bring down the income and thus reduce the tax liability. Moreover we would be in a position to charge the depreciation charge as per the company's policy for the 3 months in question for the year 2006 which will bring about the income on which we are liable to pay taxes.
Thus in this case our tax liability would be:
Trading profit of all 3 period + any other Income that the company draws - Capital Expenditure = Overall income for the period.
It would be this income which would be subject to taxation.
The incomes generated by buying or selling are again clubbed to derive the taxable income which is subject to the taxation laws. In this case the company undertakes two actions which are of selling 2 properties. One of the deals yields a gain of £75,000 which will be added to the overall income. Another act of selling might appear as a low but in actuality it is not a loss. It has to be scrutinized further. If it was a property which was subject to depreciation and the book value would have to be calculated after the deductions have been made for the depreciation charges for 8 years and 3 months. However if this was simply a property which was bought for £160,000 and was sold for £120,000 then a loss of £40,000 will be recorded and shall be accounted for. Once the deduction has been made we shall arrive at the income which will be subject to the tax deduction.
To avoid the possibility of getting charged for the interest expense on making late payments it is ideal to record these tax returns on the transaction date so that they can be simply be presented and added on to the real picture at the end of the financial year in March 2006. If it is not taken care of initially then it is likely that the company might be penalized.
All the perk and perquisites and the interest free or for that matter even interest bearing loans are again subject to taxation. The payment made to buy cars would have been deducted earlier and were tax payable in itself. However the depreciation charge on these vehicles will provide a kind of a tax shield for the company. Since they are not paying any fuel charges there will be no deduction on that front but the amount Iris is paying for her personal usage will be subject to taxation both in company's book as it is an income for the company and Iris will also pay since this amount would be going out of her book towards consumption of a perquisite.
The interest free loans would only be forwarded once the deduction has been made for general taxes irrespective of the fact whether it is tax free or not. These installments will again form an income for the company and on the whole will be subject to deductions of tax. Similarly this would come as an expense for the partners and would appear for them as tax exempted but in actuality they are not. The tax will be charged and added on to the installments that the partners will be paying under the law of Tort for corporate tax liability. Thus they are advised not to evade it or might be exposed to some serious penalty.
The company is planning to offer stock options to the employees for its own retention based reasons and sounds like a good scheme because the investment is likely to double in a span of half a decade. However the employees have to be informed about the tax liability. Once they buy the shares and trade on them then that trading will be subject to tax fees as per the Securities Exchange Commission' regulations. As and when they decide to sell the share they will also be liable to bear the tax liability which will not be linked to their profit or loss on the share but will be linked to the value at which they sell the share. It is again like a fee to complete and post the transaction. After all they will be trading of their own free will. As for the dividend income that they may draw out of the shares that will be subject to the normal income tax and will be deducted at source before the disbursement of the share income. This will be subject to the ongoing tax rates. This taxed dividend income will be clubbed in their overall income before derivation of their overall tax liability.
Hannah will be a resident of UK while she will draw income from her sources and job in a US based investments and US based job as well. However she will be subject to a tax relief because her tax liability will be restricted to her earnings as far as her job in UK is concerned. Moreover any other expenses that she makes while residing in UK and based on her earnings in US she will not be liable for tax on her US income. However all expenses made by her in UK will be subject to taxation and thus on that front she will accounted for by the Sales Tax regime.
As for her investment and income coming from US will be liable to tax deduction in US only. As long as she is not making any investments in UK she will enjoy a tax relief but would be required to submit proper documentation pertaining to her tax liability in US, In case she is not submitting her taxes in US then she might be under pressure as all income has to be accounted for at all times.
Income from Riviere will be subject to normal Income Tax
Income from US company and investment will be tax exempt
Any expense made in UK will be subject to normal Sales Tax & GST
Any hint that she is not a tax payer in US while she is drawing income from US she might be subject to heavy penalty and would be liable for tax payment on her clubbed income in UK
Davis, Jon S. and Shaw, Wayne H. (1999) Advanced Taxation. West/South-Western College Publishing.
Mathieson, A. (1992) Advanced Taxation. Longman in co-operation with the Chartered Association of Certified Accountants.
Field, S (1996) Advance Corporation Tax. Milton Keynes (GB): Accountancy Books, Dec 1996.
Romano, Carlo (2002) Advance Tax Rulings and Principles of law: Towards a European Tax Rulings System. Amsterdam: International Bureau of Fiscal Documentation, 2002.