Taxation Assessment - Assignment Example

1 Question In order to calculate Richard’s Income Tax Liability for the following should be clearly d: Age of Richard = 76 years Salary (Gross) £ 42,000 (Tax deducted £ 9000) Dividends received £ 7,200 (Net of tax credit) National Savings Ordinary account Interest £ 70 National Savings higher account Interests £ 50 Bank Interest Received £ 1,720 (Net) Gift Aid Payment £ 960 (Net) The information about Richard’s benefits in kind is as follows: (i) Medical Insurance paid by the company £ 350 (ii) Loan from the company £ 10,000 at 2% p.a. Interest (Official rate 4.75%) (Average balance owning in year £ 7000) (iii) Loan of Company video equipment valued at £ 2000. 2 (iv) Company car—First registered in February 2009 with a list price of £ 24,000 of which Richard contributed £ 6000. Richard pays £ 520 p.a. towards the private use and £ 200 p.a. for part of the private petrol. The CO2 emission is 165kg per km. (v) Richard is provided with a company house. Details are as follows: Rateable value ………………… £ 8,000 Rent paid by Richard p.a. ……….. £ 1000 Market value of house………….£ 220, 000 The Company paid the following additional costs: Heating—lighting ……………£ 1,100 Other services………………...£ 2,200 Richard contributes £ 500 towards these additional costs each year. Answer 1: To calculate Richard Income tax liability for 2009/10, it is helpful to first of all separate the taxable income from non-taxable income. Taxable Income 1. Salary (Gross)…………………………………….. £ 42,000 2. National Savings Ordinary account Interest ……….£ 70 3. National Savings higher account Interests……… £ 50 4. Bank Interest Received………………………….. £ 1,720 5. Gift Aid Payment………………………………. £ 960 3 6. Loans from the company…………………….£ 9000 7. Company’s car………………………………£ 6720 ----------------------------------------------------------------------------------- Total £ 60520 Non-Taxable Income 1. Tax credits………………………………..£ 7200 2. Medical Insurance paid by the company… £ 350 3. Housing benefits…………………….........£ 12800 ………………………………………………………………………………………….. Total £ 20,000 ………………………………………………………………………………… Therefore, the total amount Richard will be expected to pay tax on = Taxable- Non-taxable = £ 60520- £ 20,000 = £ 40,520 Since, Richard Gross salary is £ 40,520, he will have to pay 20% of that, which equals 20/100 x £ 40,520 = £ 8104. Richard’s Income Tax liability for 2009/10 is £ 8104. 4 Question 2: Most accounting practices will have a partner who specializes on tax matters. Describe the main areas of work in which a tax practitioner could be involved. You are also required to describe the structure of HMRC showing how taxes are administered and giving mention to the statements and other documents produced which give guidance on the tax law. Your sources should be fully referenced. Answer 2: The main areas of work in which a tax practitioner will be useful in a traditional accounting firm include but not restricted to: (i) Compliance with tax laws: it is the sole duty of tax practitioner to make sure that the clients of the accounting firm comply with all the tax laws as they affect their income, benefits, savings, investments etc. This will prevent a situation whereby tax laws are intentionally or unintentionally broken by people. In the preparation of payroll in accounting process, it is important that tax matters must be ironed out to ensure compliance with tax laws (Gowthorpe and Blake, 1998) (ii) Tax evasion as a crime: The tax practitioner makes sure that people understand that tax evasion is a serious crime that is punishable by prison terms. Ordinary people do not understand this fact, hence it is the responsibility of the tax practitioner to sound the warning in the hearing of the people (Gowthorpe and Blake, 1998). 5 HMRC has an elaborate structure of management, which is explained below: Chairman/CEO of HMRC—HMRC Board members—Commissioners—Agents and Advisers—Businesses and Individuals. Most importantly, the agents and advisers are easily accessible to the businesses and individuals that want to settle their tax issues. They give tax advice and provide the following tax resources (forms, manuals and tax resources): (1) PAYE forms for employers; (2) Self Assessment Vat form; (3) Corporation Tax form; (4) Tax Credits Manuals; (5) Capital Gains tax form; (6) Tax and Trusts forms etc (HMRC, 2010). Question 3: There are various ways in which the Chancellor can regulate the spending power of individuals in his annual budget. Explain these measures and evaluate the impact on the net income after tax, of an individual aged under 65 with total income comprising earned income of £ 40,000, by comparing 2008/9 tax rates and allowances with those of 2009/10. Answer 3: The British Chancellor of Exchequer can control public spending by using two measures in his annual budget: (a) Reducing Taxes: when taxes (income, corporation, property etc) are reduced, this will encourage people to spend more. This entails that the tax rates are made lower comparable to that of the preceding or succeeding fiscal year (Weir & Beetham, 1999). 6 This action will encourage people to spend more money having saved some money from the taxes that had been cut down. (b) Increase Taxes: On the other hand, the public will reduce their spending capability if the taxes are hike. This makes the volume of money in circulation reduced, as spenders are wary of incurring more taxes as a result of their spending spree (Brittan, 1988). There is no change in the tax rates for 65 years old who earns income of 40,000 pounds in 2008/9 and 2009/10. The rate was 40% of the gross income, before tax. This reveals that those in that salary bracket cannot increase their spending ability in 2009/10 fiscal year, because there is no change in the tax rate. 7 References Brittan, S., 1988. A restatement of economic liberalism. 2nd ed. Michigan: University of Michigan Press. Gowthorpe, C., & Blake, J., 1998. Ethical issues in accounting. London: Routledge. Her Majesty Revenue & Customs. 2010. Tax agents and advisers. [Online]. Available at http://www.hmrc.gov.uk/agents/index.htm. Accessed 2 June 2010. Weir, S., & Beetham, D., 1999. Political power and democratic control in Britain: the democratic audit of the United Kingdom. London: Routledge. Read More