Taxation and Tax Environment in the United Kingdom - Essay Example

Topic: taxation 1. Describe what a Tax Practitioner is and their main duties. The word ‘Tax Practitioner’ indicates a person who practises on the matter of tax. Actually they are the advisers who perform their activities on the basis of giving advices to the general people consistent with tax legislation in order to promote compliance In 2002, it is composed by the announcement of The Minister of Finance. They are the tax consultants and advisors in UK. The tax practitioner for striking a corporate income tax, will find at least some formulation of Tax Practitioner rules in the statutes and regulations of almost every state They have some duties to perform. Such as- (i) To find at least some formulation of Tax Practitioner rules in the statutes and regulations of almost every state. (ii) To encourage compliance and improved quality of advice to taxpayers. (iii) To attain this by signifying the person who is responsible for the quality of the advice which is given to the person who wants to pay tax. 2. Explain the UK tax environment. Demonstrate that you understand who is responsible for creating and administering tax rules and what the different types of taxes are. Who is HMRC and what is their role? If a person is tax resident and domiciled in the UK then he have no right to avoid taxation on the interest earned on deposits in bank accounts, and if he fails to pay tax, the HMRC can send a letter with in a few months down the line asking for back payment of taxes as per their calculations together with a fine. When a person is resident for tax purposes in the UK but he is foreign domicile, he is perhaps only liable for paying tax on the money which has been brought in to the UK.  So if a person offshore accounts in his own mother country, but he does not use that money in the UK, he has the chances to exempt from UK taxation but if in doubt he need to check with an accountant. Different types of taxes 1. Direct taxation 2. Indirect taxation 3. Deductible taxation 4. Non deductible taxation. 5. Taxable income 6. Non-taxable income Taxable incomes: earnings from employment earnings from self-employment most pensions income (State, company and personal pensions) interest on most savings income from shares (dividends) rental income income paid to you from a trust Non-taxable income There are some sorts of income on which tax is not binding. These include certain benefits, special pensions and income from tax exempt accounts. These are ignored as well as when working out how much Income Tax may be needed to taxpayer. HMRC HMRC is an association which is responsible for collecting the bulk of tax revenue, as well as paying Tax Credits and Child Benefits, and strengthening the UK's frontiers. It has a huge volume of information on these matter and are can get more as the individual banks are likely to follow suit. HMRC is also committed to targeting tax evasion. 3. Explain briefly what is meant by “self assessment” and difference between employed and self employed. "Self Assessment" is the matter of personal taxation which is used in UK regime. It is introduced in 1996/97. Self Assessment applies to such types of taxpayers whose are self-employed. Their tax affairs are so complicated that can not be fully dealt with under the normal system. For example we can say about the directors, higher rate taxpayers and those who have more than one source of income. The phrase "self assessment" is ambiguous because the tax will be calculated by the HM Revenue and Customs in certain circumstances or the taxpayer can use the services of an accountant to calculate the tax on his behalf. The regular income‑tax system involves filing of a return of income with the Income‑tax Department along with the statement of accounts maintained, if any, production and examination of books of accounts, determination of total income, issue of a demand notice for payment of tax and finally its payment. As the system was thought to be a dilatory and cumbersome one causing sufferings especially for assesses of low income groups, system known as self assessment system was introduced by the National tax authority. Difference between employed and self employed. When one person is engaged in business for himself then he is responsible for the success or failure of his own business, it is called self employed. On the other, when one person works for other person and the risks of running the business are not down to him, it is called Employed. It's the legal provision that if one is to be self-employed, must register within three months of starting his business. Otherwise he has to pay a penalty. 4. Identify what tax returns, P11d, P45 and P60 documents are. (For a distinction - Find sample forms from the internet and identify what information is required to complete the forms.) If a person is an employee, his employer must give him certain documents - forms thats are P45 and P60 concerning the tax. If that person receives benefits from his employer, sends a form P11D to HM Revenue & Customs (HMRC). P11D A person’s employer uses form P11D to tell HMRC about the value of any 'benefits in kind' they've given him during the tax year. This means benefits or expenses that effectively increase his income, like: a company car, private medical insurance , interest-free loans his employer will only declare them if he has earned at least £8,500 in the year, including the value of the benefits. They will work out how much each benefit is worth, record it on the form and send it to HMRC. They'll also give him a copy, which he will need for your records or if he complete a tax return. If anyone apply for a loan or mortgage, banks and building societies will accept form P11D as proof of extra income. P45 when any person stops working for his employer, he gets a P45 from his employer. It is treated as a record of his pay and the tax that's been deducted from it so far in the tax year. A P45 has four parts - Part 1, Part 1A, Part 2 and Part 3. Employer sends Part 1 to HMRC and gives him the other three. When he starts a new job, or claim Jobseeker's Allowance, he give Part 2 and Part 3 to his new employer . He keeps the remaining one (Part 1A) for his own records. P60 The employer of any person should give the employee a P60 to keep as a record at the end of every tax year. If his employer doesn't give him a P60 at the end of the tax year, ask for it – the employer is entitled to it by law if he are still working for the employer at 5 April. The elements: 1. to complete a tax return, if this applies to you 2to claim back any tax you've overpaid 3.to apply for tax credits it is also needed to keep it as proof of one’s income if he applies for a loan or a mortgage - so it's important to keep all P60s form of a person safely. 5. Briefly discuss the main Income tax rates and allowances and how they are used to calculate income tax. When is tax paid by the individual/s? Income tax rates and allowances Income Tax rates in 2007-2008 by tax band and type of income Capital gains tax rates Capital gains tax rates and bands are as follows: 2007/08   Taxed as top slice of savings income Annual  exemption - individual £9,200 - settlement(s) (spread over total number) £4,600 Transfers between husband and wife living together are exempt Chattels  exemption (proceeds per item or set) £6,000 Non-Business Assets Non-Business Assets No. of complete years held after 5 April 1998 % gain chargeable 1 100 2 100 3 95 4 90 5 85 6 80 7 75 8 70 9 65 10 or more 60 Business Assets Business Assets No of complete years held % of gain chargeable 0 100 1 50 2 or more Rates and Allowances -Corporation Tax Corporation Tax on profits - figures Rates limits and fractions for financial years starting 1 April 2007 Main rate of corporation tax 30% Small companies’ rate (SCR)* 20% SCR can be claimed by qualifying companies with profits at an annual rate not exceeding £300,000 Marginal small companies’ relief (MSCR) lower limit £300,000 MSCR upper limit £1,500,000 MSCR fraction 1/40 Special rate for unit trusts and open-ended investment companies 20% Income Tax Allowances table foe next year (2008-09) It is announced that the rates of allowances at the Pre-Budget Report which precedes the start of the tax year. Pre-Budget Report takes place in November or December. Income Tax Allowances table Income tax allowances 2008-09 (£) Personal allowance 5,435 Personal allowance for people aged 65-74 (1) 9,030 Personal allowance for people aged 75 and over (1) 9,180 Married couple's allowance (born before 6th April 1935 but aged under 75) (1) (2) 6,535 Married couple's allowance - aged 75 and over (1) (2) 6,625 Income limit for age-related allowances 21,800 Minimum amount of married couple's allowance 2,540 Blind person's allowance 1,800 When is tax paid by the individual/s If a person is an employee or receive a company pension If a person is an employee will deduct Income Tax from his wages throughout the year and send it to HMRC. If he receive a pension, his pension provider will deduct tax in the same way. This system of collecting Income Tax is known as Pay As You Earn (PAYE). If he has complex tax affairs he may also have to complete a Self Assessment tax return. If a person is self-employed If a person is employed he will need to complete a Self Assessment tax return and pay any Income Tax he owe in twice yearly instalments. If a person has complex tax affairs If a person has complex tax affairs for example if he earns money from rents or investments above a certain level, he may need to complete a tax return, even if he is already on PAYE. But if he is on PAYE HMRC may still be able to collect some or all of his Income Tax this way. 9. What is the main difference between taxation for sole-traders and partnerships? Taxation for sole-traders and partnerships Sole Trader Sole Trader When one person has complete control over his business and all profits after tax will go to him and the business of which structure comes without a security net, it is called Sole Trader. Partnership A partnership allows two or more people to join forces and set up a business together. The partners will share the risks and liabilities, the management and also the profits of the business. Difference between them. . 1. This is the simplest form of business because it can be established without legal formality. But more people are involved it is advisable to draw up a written agreement and for all partners to be attentive of the terms of the partnership. 2. The business of a sole trader is not distinguished from the proprietor's personal affairs. Again the business and personal affairs of the partners are not legally separate. 3. One will be personal accountable for any liabilities that his business incurs, i.e. any business debts will be your personal debts. This means that one could lose your house if his business fails People share the decision-making, risks, costs, and obligations of the business. Each partner is personally responsible for any debts of the business The Sole Trader owns and runs the business, uses their own personal capital to get started and has complete control of the business 4. The Sole Trader has fewer legal formalities and obligations associated with other types of businesses unlike a limited company, if one of the partners resigns dies or go bankrupt, the partnership must be dissolved. 10. How are individual partners taxed on the partnership’s profits? Profits arising from partnership firm, whether registered or unregistered are taxed twice. The firm once pays Lax on its net income computed before partners' salary, commission, remuneration or interest credited to their capital accounts, if any. Again the profits, gross or net, when allocated to the partners, are taxed in the hands of respective partners along with their other income, if any The partners of an unregistered firm are not, however, taxed again when they or any of them does not have income other than share of partnership profit. In case he does have other income, his gross share of profit is added with those to find out his total income and after deduction of investment allowance, his taxable income and Lax thereon. But he would get a rebate at average rate of his part of the firm's tax. There is of course, no separate tax table for an unregistered firm. Both the firm and partners are applied individual's rates. The situation is slightly different in the case of a registered firm. It is taxed on its net income according to the separate tax rate applicable to registered firms and after taxation the profits are allocated amongst the partners and on it they are taxed again along with their other income, if any, even if all or any of them does not have other income i.e. agricultural, property or salary etc, still his share of once taxed profit would be taxed again for which he would get no rebate or credit whatsoever, in his assessment. It may, however, be mentioned here that both kinds of partnership shall enjoy investment allowances for firm's investment in accordance With Sixth Schedule, Part B of ITO 1984. A registered firm is said to enjoy certain advantages compared to an unregistered one which we would show through an example later on but let us now put down the rate of taxes for registered and unregistered firm. 11. Explain what non-deductible and deductible expenditure. Give examples and illustrate how you would adjust profits for tax purposes. Deductible and deductible expenditure Normally we know that deductible expenditures are those by which using a person can get relief from paying tax. Non-deductible expenditures are those by which using a person can not get relief from paying tax. The highest income tax authority HMRC allowed some expenditure as non-deductible. The main non-deductible items are: 1. Financing costs, for an example, interest; 2. The cost of acquiring land or interests in land; 3. Certain buildings, for an example administrative offices; deballasting; 4. Expenditure depending on the results of the field, for an example a royalty interest; 5. Payments to obtain interests in oil, for an example licence acquisitions from other licensees; 6. Expenditure met by subsidy.  There is another provision in the Imcome tax (earnings and pensions) act,2003.in this act section 252 said about the Exception for non-deductible travel expenses that is- (1) Where travel or subsistence is provided or the costs of travel or subsistence are paid or reimbursed, section 250 does not apply except to the extent that the travel meets condition A or B or the subsistence meets condition B. (2) Condition A is that, on the assumptions in subsection (4), mileage allowance relief under Chapter 2 of this Part would be available for the travel if no mileage allowance payments had been made. (3) Condition B is that, on those assumptions, the expenses of the travel or subsistence would be deductible under Part 5. (4) The assumptions are— (a) that the employee undertook the training as one of the duties of the employment, and (b) that the employee incurred and paid the expenses. (5) In this section— “mileage allowance payments” has the meaning given by section 229(2), and “subsistence” includes food, drink and temporary living accommodation1 Taxation on profits – The type and rate of taxation will depend on the form of business structure. However, the profit upon which the tax is payable will normally differs from the profit which is shown in the accounts because of definite expenses which are not allowed for tax purposes and the timing of some tax allowances. Profits and gains imply something in the nature of a credit and debit account in which the receipts appear on the one side and the costs and expenditure necessary for earning these receipts on the other side. Where a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains it ought to be allowed. Profits should be computed after deducting the expenses and losses incurred for the purpose of business or profession. Where mercantile system of accounting is followed expenditure incurred but not paid is also allowable in the computation of profits and gains. Where such expenditures as incurred but not paid or losses have been deducted to ascertain the profits and gains, such types of expenditures which are not subsequently paid and in cases of losses which are subsequently recouped, this sub‑section has provided for inclusion into profits and gains of business or profession such expenditures not paid and losses recouped in subsequent period. This provision is against the general law as an unascertained loss or expenditure may be adjusted later by re‑opening, the accounts of the year in which it is debited. But in case of ascertained loss or expenditure deduction of which has been made in a Year, recovery of such loss or expenditure in a subsequent year cannot be make it income in the subsequent year.2 Read More