Business Taxation - VAT Flat Rate Scheme - Essay Example

BUSINESS TAXATION Molly Tax computation For the tax year 15 Trading profit for the year £52,400 Add interest income (10%*1100) £110 Gross taxable revenue £52,510 Less car allowance (14,000/20,000) *10, 400 £7,280 Less personal allowance £10,000 Gross taxable amount £35,230 Tax ratetaxable income tax 20% £31,865 £6,373 40% £3,365 £1,346 Gross tax liability £7,719 Less relief on pension contribution ((20%*2,880) £576 Net tax payable £7,143 Florence Tax computation For the tax year 2014/15 Basic salary £26,400 Add interest income (10%*1200) £120 Gross receipts £26,520 Less personal allowance £10,000 Gross taxable revenue £16,520 Tax rate Amount tax 20% £16,520 £3,304 Tax payable £3,304 Less relief on pension contribution (20%*1,320) £264 Less PAYE £4,000 Net tax payable (refundable) £(960) Molly’s national insurance contributions computations First 7,748*12% £929.76 Rest (41,444-7,748) *2% £673. 92 Total £1,603.68 Florence’s national insurance contributions computations First 7,748*12% £929.76 Rest (26,400-7,748) £373.04 Total £1,302.8 Part 1b: Determination of Molly’s VAT Output VAT (sales) = £18,000*20/100% = £3,600 Less Input VAT Telephone £600*20/120*60% = £60 Motor vehicle £12,000*20/120% = £2,000 Motor vehicle repair £882*20/120 = £147 Equipment purchase - Expenses (£2,200-£600) *20/100% = £320 Total input VAT = £2,527 VAT payable £1,073 The VAT Flat Rate Scheme It is one of the few VAT schemes offered by the HM Revenue and Customs and were designed to make compliance easier (Caprica Online Ltd, 2014). According to the Easy Accountancy (2015), it was introduced for small businesses to simplify their taxes and also give them an avenue to earn extra revenue. The businesses charge the normal standard rate for their goods and services, but they do remit whole of it to the HM Revenue and Customs. Instead, a business remits the revenue at a lower rate based on the type of business run and its sector. The VAT-registered individual cannot, however, reclaim the VAT he or she paid on business purchases. This scheme is said to help in reducing the amount of paperwork as one need not necessarily keep track of all VAT expenditures. Eligibility for the VAT Flat Rate Scheme For one to register for the VAT Flat Rate Scheme, these conditions are worth noting. First, the estimated annual taxable turnover should be below £150,000 (SJD Accountancy Ltd, 2015). Secondly, if one already joined the scheme will continue staying in it until its turnover hits £230,000 per year. Third, the taxpayer will not be able to claim back most of the Vat paid on the purchase of goods and expenses. However, a VAT claim can be made to the HM Revenue and Customs on capital assets costing £2,000 and above. Fourth, a VAT Flat Rate Scheme registered business will be required to charge the full VAT rate on all goods and services and file a return every quarter (Easy Accountancy, 2015). When Molly registers as a VAT Flat Rate Scheme, she will benefit from this scheme by earning money from the VAT because she will charge her sales the normal standard VAT rate of 20% but pay the lower rate of 8.5%. Therefore, the extra revenue earned from this scheme will be: Total VAT charged = 20%*£18,000 = £3,600 VAT remitted to the HMRC = 8.5%*£18,000 = £1,530 Benefits received = £2,070 Part 2 Tax evasion, tax avoidance and the anti-abuse rule According to the HM Revenue and Customs (2015), tax evasions are an illegal act and are where an individual deliberately attempts not to pay the tax due. The corporations or individuals engaging in tax evasion misrepresent their incomes to the relevant tax administrating body. Such misrepresentations are in the form of inflating deductions, underreporting incomes and using offshore accounts to hide money and its interest (Cornell University, 2015). In simpler terms as put by Murray (2015) and the Taxpayers Australia (2014), tax evasion is the illegal act of failing to pay taxes by failing to report income, reporting disallowable expenses, or failing to pay the tax owed. On the other hand, tax avoidance is a legitimate way of minimising taxes by using the avenues approved by the tax authority (Murray, 2015). Business and individuals will always utilise all legitimate deductions and shelter income from taxes through all legal means. Milligan (2014) reports that tax avoidance is bending the available tax systems rules to gain a tax advantage. It helps people to minimise their tax bills. The general anti-abuse rule that was developed to manage the risk of tax avoidance (HM Revenue and Customs, 2015). It is aimed at strengthening the HM Revenue and Customs’ anti-avoidance strategy at help it to tackle abusive avoidance. This rule became in force from 17th July 2013. The taxes on which the general anti-abuse rules apply include the income tax, petroleum revenue tax, Annual tax on enveloped dwellings, Inheritance tax, Capital gains tax and the Corporation tax (Accountancy Live, 2015). These rules help in counteracting tax advantages that arise from a tax arrangement that are abusive. According to the Legislative. Gov. UK (2013), tax arrangements are those arrangements whose main purpose is to obtain tax advantages. These arrangements become abusive when they are entered into, and the reasonable course of action fails to be reasonable in relation to the relevant tax provisions. Ethical viewpoint in regard to Henrys suggestion As a taxpayer, Henry has a moral obligation to abide by his country’s taxation laws. The right and correct disclosure of all transactions that he engaged into in the fiscal year amounted to compliance. Such compliance goes a long way in saving the taxpayer from the fines and penalties imposed by the tax authority. In addition, the revenue authorities have to save time and costs involved in their tax audits. Henry should, therefore, report the capital gains he realised from the sale of the capital asset. Additional assessment by HM Revenue and Customs As a revenue authority, the HM Revenue and Customs have the right to ascertain the extent to which a taxpayer complies with the tax regulations. This could be after a suspicion at the pre-filling stage or where the taxpayer files different returns from what he files. Therefore, even after Henry filed his returns, the HM Revenue and Customs can conduct an additional assessment to ascertain that the self-assessment done by Henry was correct. The HM Revenue and Customs will need first to serve Henry with a notice that they intend to conduct a tax audit. Penalties to an agent which aids in tax evasion According to the HM Treasury (2015), the tax evaders and their professionals who aid them in evading taxes stand to face harsh new sanctions including criminal offences and higher penalties. The actions taken by the HM Revenue and Customs include publicly naming and shaming the evaders and agents, facing civil penalties, and increasing the financial penalties. Interest penalty According to the HM Revenue and Customs (2007), the percentage applied to determine the penalty to be charged for the failure to abide by the tax laws, especially the payment of tax owed depend on the nature of error or failure1. Since Henry deliberately failed to disclose all revenues in his returns, which translates to 100%. Therefore, he will be charged 100% on the tax owed of £18,000. Consequences of evasion In general, Henry committed an offence involving a wilful intent to evade the £18,000 capital gain taxes. These actions could make him and his agent who aided him in evading taxes to face prosecution and being jailed for seven years or fined up to £50,000. They can also be penalized up to 400% of tax unpaid. Even after failing to disclose and pay the right amount of taxes, Henry can go forward and voluntarily disclose his past actions of wilfully evading taxes. This act could see his penalty compounded at a reduced penalty. If Henry had complied with the prevailing tax guidelines, by disclosing the right amount and paying the right tax, there would be no penalty on him. References Accountancy Live, 2015. HMRC clarifies General Anti-Abuse Rule (GAAR) guidance. [Online] Available at: HYPERLINK "https://www.accountancylive.com/hmrc-clarifies-general-anti-abuse-rule-gaar-guidance" https://www.accountancylive.com/hmrc-clarifies-general-anti-abuse-rule-gaar-guidance [Accessed 23 March 2015]. Caprica Online Ltd, 2014. Save money with the VAT Flat Rate Scheme. [Online] Available at: HYPERLINK "http://www.capricaonline.co.uk/guides/benefits-of-vat-flat-rate-scheme/" http://www.capricaonline.co.uk/guides/benefits-of-vat-flat-rate-scheme/ [Accessed 23 March 2015]. Cornell University, 2015. Tax Evasion: An Overview. [Online] Available at: HYPERLINK "https://www.law.cornell.edu/wex/tax_evasion" https://www.law.cornell.edu/wex/tax_evasion [Accessed 23 March 2015]. Easy Accountancy, 2015. Flat Rate VAT Scheme Guide (FRS). [Online] Available at: HYPERLINK "http://www.easyaccountancy.co.uk/self-employed/self-employed-finances/flat-rate-vat-scheme-guide" http://www.easyaccountancy.co.uk/self-employed/self-employed-finances/flat-rate-vat-scheme-guide [Accessed 23 March 2015]. HM Revenue and Customs, 2007. Corporation Tax: penalties. [Online] Available at: HYPERLINK "https://www.gov.uk/corporation-tax-penalties" https://www.gov.uk/corporation-tax-penalties [Accessed 23 March 2015]. HM Revenue and Customs, 2015. Reducing tax evasion and avoidance. [Online] Available at: HYPERLINK "https://www.gov.uk/government/policies/reducing-tax-evasion-and-avoidance/supporting-pages/preventing-tax-evasion" https://www.gov.uk/government/policies/reducing-tax-evasion-and-avoidance/supporting-pages/preventing-tax-evasion [Accessed 23 March 2015]. HM Revenue and Customs, 2015. Tax avoidance: General Anti-Abuse Rule. [Online] Available at: HYPERLINK "https://www.gov.uk/government/publications/tax-avoidance-general-anti-abuse-rules" https://www.gov.uk/government/publications/tax-avoidance-general-anti-abuse-rules [Accessed 23 March 2015]. HM Treasury, 2015. New criminal offences in clampdown on tax evasion. [Online] Available at: HYPERLINK "https://www.gov.uk/government/news/new-criminal-offences-in-clampdown-on-tax-evasion" https://www.gov.uk/government/news/new-criminal-offences-in-clampdown-on-tax-evasion [Accessed 23 March 2015]. Legislation. Gov. UK, 2013. General anti-abuse rule. [Online] Available at: HYPERLINK "http://www.legislation.gov.uk/ukpga/2013/29/part/5/enacted" http://www.legislation.gov.uk/ukpga/2013/29/part/5/enacted [Accessed 23 March 2015]. Milligan, B., 2014. Tax avoidance: What are the rules? BBC Business News, 12 May. pp.http://www.bbc.com/news/business-27372841. Murray, J., 2015. What is the Difference Between Tax Avoidance and Tax Evasion? [Online] Available at: HYPERLINK "http://biztaxlaw.about.com/od/businesstaxes/f/taxavoidevade.htm" http://biztaxlaw.about.com/od/businesstaxes/f/taxavoidevade.htm [Accessed 23 March 2015]. SJD Accountancy Ltd, 2015. Flat Rate VAT Scheme Guide (FRS). [Online] Available at: HYPERLINK "http://www.sjdaccountancy.com/about/flat_rate_vat_scheme_guide.html" http://www.sjdaccountancy.com/about/flat_rate_vat_scheme_guide.html [Accessed 23 March 2015]. Taxpayers Australia, 2014. Tax avoidance and tax evasion. [Online] Available at: HYPERLINK "http://www.taxpayer.com.au/KnowledgeBase/10211/Small-Business-Tax-Super/Tax_evasion" http://www.taxpayer.com.au/KnowledgeBase/10211/Small-Business-Tax-Super/Tax_evasion [Accessed 23 March 2015]. Read More