The UK tax environment and calculations of corporation tax liabilities

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Assignment 2

Tax practitioner and the UK tax environment and calculation corporation tax liabilities

Task 1: The UK tax environment

  1. Meaning and purpose of taxation

Taxation in the United Kingdommay include payments to a minimum of two different grades of government: thecentral government(Her Majesty's Revenue and Customs) andlocal government. Central government revenues come mainly from income tax,National Insurancecharity;value added tax,corporation taxandfuel tax. Local government revenues come mainly from donations from central government finances,business rates in England and Wales,Council Taxand ever more from costs and charges such as those fromon-street parking. In thefiscal year2007-08, total government revenue was 39.2 per cent ofGDP (Gross domestic product), with net taxes and National Insurance contributions remaining at 36.9 per cent of GDP —in the order of £600 billion (using 2008 nominal GDP expressed in dollars, and converting using 2009 conversion rate).

Taxation is a reality of life, which concerns everyone in several various aspects of substance. The purpose of taxation is to render central government capable to increase resources to pay for the continuous management of the country successfully, for example, the service of health, education and infrastructure.

In general, there are three major purposes for taxation:

  1. To lift revenues for public requirements so that persons can live in a elegant society.
  2. Government increases dues in order to steady prices and rouse better production.
  3. An implement of fiscal policy influences the direction and structure of money supply, credits, investment, interest rate, production, prices, inflation and in general, of the national economy.
  1. The different types of tax in the UK

There are many types of taxes in the UK and it is important to understand what each of them are, which is applicable to pay, and how they work.

First, why is the tax collected? Well the theory is that it is to pay for public services ... and therefore the government should be responsible for ourselves and what we want our money spent.

Types of taxes you could pay pleasures consist of the following:

  • Income tax: this is payable by individuals on their earned income, such as employment income, self-employment income pensions. Income tax is also payable by individuals on their earned income, such as bank interest, dividends and rental income.
  • Corporation tax: this is payable by businesses on all their profits and gains.
  • Capital gains tax: this is payable by individuals on the removal of chargeable resources.
  • Inheritance tax: this is a tax on capital fairly than income. It is charged when individual’s capital or assets is given away.
  • Stamp duty: this is payable on the sale of terrain and building and shares.
  • Value added tax: this is payable on most merchandise and services purchased by consumers.

The main tax that people know and payable according to their salary is the income tax, this beautiful small portion of the money that is deducted from each paycheck you get.

You pay this from your salary or corporate income for the self employed, and some profits have also detached income tax (as well state pensions and private pensions).

In addition, it is the national insurance to pay just to add to the fun.

  1. The collection of tax

Tax is charged in the name of the government by Her Majesty's Revenue & Customs (HMRC).

It is most of the time collected at source in the pay as you earn (PAYE) scheme, while some people have to pay by completing out aself-assessment tax return.

  1. PAYE tax

If youare working for an employeror receiving an employer's pension or personal pension, tax is habitually collected under the pay as you earn (PAYE) scheme.

This indicates the tax you pay is automatically deducted from your salary by your employer and sent toHMRC.National Insuranceis also collected this way.

  1. Self-assessment tax return

You'll need to complete a tax return if:

  • You receive rental income (but maybe not if it is less than £ 2,500 a year and you're on PAYE).
  • You receive other untaxed income and the tax due on it cannot be collected by PAYE.
  • You areself-employed, a business partner, director, fiduciary or if you correspond to someone who has died.
  • You have taxableforeign income.

When you can need to fill out a tax return

You might also have to fill out atax returnif you are an employee or more 65 and:

  • Your annual income is further than £100,000 or you get untaxed income of at least £2,500 a year
  • You have annualinvestment incomeof at least £10,000 or you claim £2,500 plus a year in expenses
  • You're allowed to someage-related personalormarried couple's allowancebut not the complete amount (except your affairs are very simple).
  1. Declaring untaxed income

If you get some income without tax deducted but you are subject for tax, you have to state the income to HM Revenue & Customs– your tax office will inform you how to do this. You pay the further tax either by a tax returnor via an adjustment to yourtax codeif you are a PAYE taxpayer.

You shouldtell your tax officeabout new untaxed income by 5 October subsequent the finish of the tax year in which you expected the income. therefore if you expected untaxed income during the 2013-14 tax years, you'll have to inform your tax office a propos this by 5 October 2014.

  1. Deadlines and penalties

There are particulardeadlines for deposit your tax return, paying your taxes and, in some situations, informing HMRC of new income.

If you produce your return or pay your taxes not on time (or fail to satisfy all other deadlines), you may need to pay a penalty. Interest is also accused where tax is compensated late.

Revised penalty regime

HMRC has now established a revised system (regime) of penalty which could signify that you strength include to pay a penalty if there is an error in your return which is moreover on purpose, or did you not exercise owed diligence in the training of return or support.

  1. Tax already deducted

Mostinvestments income, such as interest from bank and building societies, has tax deductedat the basic rate of 20% before you get it. You only have to pay any extra tax on it if you're a higher-rate taxpayer.

Non payers

If you are a non-taxpayer, you canstate back the essential rate taxthat has been deducted. If your non-savings profits is very small, you may be capable to claim back half the tax deducted from your savings profits, and pay only 10% on some or all of it.

Tax treatment from dividends

Dividends from UK sharesand distributions from some element trusts are compensated to you with a tax credit of 10%. Different tax on savings interest, non-taxpayers can't maintain this back.

Basic-rate taxpayers have no further tax to pay.

If you’re a higher-rate taxpayer you’ll pay a more 25% of the net dividend, either as your tax return or by means of your tax office, which will inform you how tax on dividends will be composed if you don't fill out a tax return (generally your PAYE rules will be adjusted). If you pay the supplementary 50% tax rate, your dividend profits will be taxed at 42.5%, leaving you a more 36.11% to pay.In 2013-14, extra rate income tax reduces to 45%, and top-rate dividend tax falls to 37.5%- leaving a more 27.5% payable.

  1. Avoiding tax

Tax avoidance, where you place your capital to pay as small tax as likely, is a authorized route of action.

Tax evasion, where you hide income or gains or falsely claim allowances or further deductions, is a criminal offence. You can be fined or still inside.

  1. UK Tax Laws and Tax System

UK Tax Rates 2013-2014

Individual Income Tax: The UK individual income tax rates for 2013-2014 are 10%-45%.

UK Personal annual tax rates 2013-2014

Income (£)

%

1-2,790

10

1-32,010

20

32,011-150,000

40

Over 150,000

45

Notes:

The 10% rate relates to saving income of up to £ 2.790.

Dividend income below £34.371 is taxed at 10%. Dividend income of £31.371 – £150.00 is taxed at 32.5%.

Dividend income exceeding £150.000 is taxed at 37.5%.

Corporate Tax: corporate tax rate in UK for 2013-2014 for income more than £1,500,000 is 23% compared to the preceding 24% rate.

For companies resident in UK with annual profits under £300,000 the rate is 20%.

From April 1, 2015 a 20% tax rate will concern to all companies.

Capital Gains: Capital gains of individuals are usually taxed at 18%. There is an annual exception of £10,900.

Capital gains for companies are usually taxed at the regular corporate tax rate.

There is a contribution exception for sale of shares, subject to certain conditions.

Residence

An individual in UK is resident during a stay in the UK for at least 183 days in a tax year, or when to have annual visits to the UK for 91 days in 4 directly years.

A company is UK resident if included in the UK, or when the organization is in the UK.

UK Tax Deductions

  • Losses are approved ahead indefinitely. Losses can be approved back for one year.
  • A company investment 75% in a supplementary can habitually file a strengthened tax return.
  • Depreciation is deduced using the reducing balance method.
  • The depreciation rate for machinery and equipment is 25%. Industrial buildings are amortized on a straight line method, 4% per year.
  • Companies interested in enterprise zones can claim 100% depreciation for commercial buildings.

UK Personal Credits and Deductions

For British residents, the first annual profit of £9,440 is tax excuse in 2013-14. The exception is imperfect to annual income below £100,000.

There are besides tax credits for taxpayers with age between 65 and 74, with £10,660 credit for those more than 75 years.

There is a regular deduction for each ward.

Deductions are also acceptable for allowance plans payments by an employee. There is a tax release for gifts given to UK charities.

Social Security in UK

National Insurance Contributions (NIC) in the UK. The contributions by the employer and the employee are matter to maximum defined by law. Employer: 13.8% on salary above £7,755. Employee: 12% on annual salary of £7,755- £41,450, with additional 2% for salary above £41,450. Self employed pay 9% for income of £7,755- £41,450 with additional 2% on income exceeding £41,450

Task 2: The tax practitioner

1- What Is a Tax Practitioner?

A tax practitioner is a person who offers tax advice, mainly in matters that need to be developed in a court of law. A tax practitioner cannot be an expert on criminal law, but should be informed of the government law that covers taxes.

2- Objectives

  • The main sources of UK tax legislation
  • The key reference sources for UK tax legislation
  • The organization of HM Revenue & Custom & its terms of reference including the appeals system
  • The appeals process
  • The classification of income & the aggregation of income which is then subject to income tax
  • The difference between income & capital profits/losses

3- Sources of tax law

  • There is no sole source of UK tax law
  • The essential rules are laid behind in Acts of Parliament but it is absent to the courts to take these Acts & to offer much of the feature of the tax system
  • In addition, HMRC issues a diversity of statements, notices & leaflet which explicate how the law is implemented in apply. These statements have no authorized backing but they explicate the tax authorities’ explanation of the law & will be adhered to except effectively challenged in the courts
  • Statute (i.e. Acts of Parliament). Statutes are modify every year via the annual Finance Act which is based ahead the Budget proposals.
  • Statutory Instruments is a article which is laid ahead of Parliament & then automatically becomes law inside a confirmed period but for any objections are raised to it
  • Statute is interpreted & improved by case law
  • Statements made by the tax authorities produced by HMRC

4- Her Majesty’s Revenue & Customs (HMRC)

  • Liable for the administration of the UK tax system
  • Issues:

a) Statement of practice

b) Extra-statutory concessions

c) Explanatory leaflets

d) Business economic notes

e) Tax Bulletin

f) Internal Guidance

5- The role of the tax practitioner

  • Taxpayer: responsible for submitting the return and for paying taxes
  • Accountant: acting as the taxpayer’s agent
  • Tax practitioner: dealing with the HMRC on behalf of the client

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