This paper outline an overview of how UK taxation system are being performed, which summaries the basic assessment of how main tax work including taxes in the UK, revenue and capital taxes, other direct and indirect taxes. Therefore the aim of this report is to analyse and evaluate the tax implication and obligation of how Mr. Tan Boon Seng (an electronic engineer by profession) will face the consequence in UK as being a resident and treatment in relation to the computation of taxable profit.
UK income tax law applies on a uniform basis administered by HM Revenue and Customs, often known as the Inland Revenue, which the receipt of income under UK tax law creates obligations. A system of self assessment is supervised and responsible by HMRC staff introduced in the UK whose tax year is charge on the 6th April following the year 5th April and agreeing tax liabilities.
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The Revenue and Customs Prosecutions Office are considered in England and Wales which provides legal advice, institute and conduct of criminal prosecutions investigated by HMRC. Most taxpayer provides self assessment tax return prepared by their accountant (taxpayer's agent), which the return must be submitted by the taxpayer in year after or within 3 months notice of assessment, otherwise revenue will be grant an exemption from making the returns. (Lavelle Coleman, 2009)
3.0 UK RESIDENT TAXATION TREATMENT
Mr. Tan (Non-British), who has visited UK on an average of 100 days each year for five years on fiscal purpose is deemed to be a UK resident and liable for taxes purposes excluding days of arrival, departure and days spent in UK (Trowers and Hamlins, 2007)
3.2 Contract of service
In the case of option 1 which is a contract of service that exists between an employee and employer (taxpayer), Mr. Tan deem to be an employee under a contract of service whereas the work performed will be given to him by his employer. In the case of option 2, Mr. Tan is said to be a self-employed individual under a contract for service signed by him with Sprague Ltd, which the service-work will be honoured by him using his own tools and equipment, and will be paid at an expected amount of '80,000 annual net trading profit.
4.0 UK TAXATION SYSTEM
This system comprise number of diverse taxes including capital gain tax and income tax which are classified as direct taxes, which are taxes charged on profit and other income deducted at source, paid directly to the tax authorities and some of which are indirect taxes including valued added tax. (Alan Melville, 2010)
4.1 Income Tax
Income tax are tax chargeable on rental income at a basic rate of 20% limiting '37,400 or higher rate of 40% from '37,401 above for 2009/10 tax year, depending on the amount of taxable income received in the relevant tax year and deduction of annual personal allowance of '6,475 for 2009/10 tax year (Bart Peerless, 2009).
In the light of badges of trade, trading was concluded based on its circumstances whereas Mr. Tan recently purchase a house in Central London and selling off his property after three years making a profit of '150,000 as a Non UK Residence and earned '80,000 from his employment income, which his intention is to make a profit is therefore clearly trading. Mr. Tan will therefore be liable to pay a chargeable tax of '21,930 on employment earning inclusive of personal allowance which is based on receipt basis in the year of assessment. (Refers to appendix 1a)
4.2 Capital Gains Tax
This tax charge applies to a profit gain on sale of an asset by a residential owner, which might deemed to an income receipt being part of trade in buying and selling of property. In this case, Mr. Tan will be liable to pay a capital gain tax of '25,182 (Refers to appendix 1c), which he purchased a house property in Central London upon his first visit to UK and selling off his property after three years making a profit of '150,000, which he will be entitled to a capital gain at a flat rate of 18% and maybe able to offset annual exemption of '10,100 for 2009/10 tax year. Other tax issues are relevant when buying and selling property with the objective of making profit. (Bart Peerless, 2009)
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4.3 Value added tax (VAT)
Tax charged on purchase of goods and services registered in United Kingdom and goods imported goods from outside the European Union. A new residential property in UK is taxed at zero rated which remove the construction and development cost of residential property. Therefore VAT rates of 17.5% are subjected to new commercial and industrial property. (Lavelle Coleman, 2009)
5.0 NATIONAL INSURANCE CONTRIBUTION
A Scheme where workers make payment towards benefit administered by HMRC, such payment are national income contribution paid to make individual privilege to convinced state benefit and retirement pension. A self-employed and employed individual are liable to pay national insurance contribution depending on their personal conditions. (Neil Harries, 2010)
Mr. Tan will be liable to pay Class 1 NIC of '4,559 on employment earnings if he is employed by Sprague Ltd, depending on amount earned ('80,000), which will be deducted from his income paid by his employer through P.A.Y.E (Pay as you earn) system. Suppose he earn from '5,715 to '43,875 a year, 11% of the amount earned will be payable to Class 1 NIC and if earn more than '43,875, additional extra of 1% payable. (Refers to appendix 1b)
6.0 SELF EMPLOYED
Being an self-employed individual under the contract for service given by Sprague Ltd, tax charges are applied based on the national income contribution paid to the government (HMRC), which Mr. Tan will be liable to pay Class 2 NIC of '125 yearly, i.e. flat rate of '2.40 weekly if earning is above '5,075 which is based on accounting net profit and Class 4 NIC of '3,414 based on adjusted trading profit paid together with income tax benefits like state pension and maternity leave. (As refer to appendix 2c)
6.0 RECOMMENDATION AND CONCLUSION
Based on the report analyzed in evaluating and summarizing Mr. Tan's tax treatment within the UK; On a yearly basis, Mr. Tan will earn a total income of '28,329 from employment as being an employee, excluding charges on taxes and national contribution paid to the government which is based on accounting net profit deducted by his employer through P.A.Y.E system (as refers to appendix 1d) and classified as a PIID Employee, compared with being a self-employed earning income of '29,349 after deduction of taxes and Class 2 and 4 NIC, which is based on adjusted trading profit (Refers to appendix 2d).