Small Business Taxation - Assignment Example

Small Business Taxation Contents Question 3 Question 2 5 Question 3 7 References: 9 Question The key structural question that has been discussedin this chapter has been titled as Small Business Taxation is related to the establishment of relationship between corporate and personal tax rates and the relevance of tax design and tax system in determining the tax structure of the small business or corporation in UK. The importance of this structural question is that tax design plays an important role in determining the amount of tax that is required to be charged. The tax designing helps or assist in determining whether the business is managed and controlled by the owner and assessing the amount of tax that is to be levied which affects or impacts the nature of income and the choice in determining the payment made out of a corporation. The tax design is important in determining the differences in the treatment of taxes between the self employed, owner managers and self employed associates of the small business companies. The proper and well defined tax structure and tax system helps in determining the progressive income tax .The tax system determines and highlights on the key issues which reflects on the structural issues by which the small owner manages the businesses that are taxed. The small businesses that are mainly owner managed are charged with relatively effective rate of tax by differentiating properly between the labour income and the financial capital. The main problem or difficulty arises in charging tax to the small business is in distinguishing between the labour incomes and the financial capital which can be solved or handled by proposing or introducing a new system through which the capital income can be charged at a lower and reduced rate as compared to the rates charged on the basis of the income according to the needs and requirement of the labour (Daily, 2008). The profits that are earned by the small businesses are required to be retained by the company for safeguarding and protecting the businesses from the impact of the higher rate of tax that is charged and the profit earned is required to be reinvested in the business which will result in the generation and increase in the capital gain through the liquidation or sale of the company rather than the income tax that is charged at a higher rate. Corporate tax is charged on the owner managed small business and it is charged on the capital gain and profit that is charged by the company whereas in case of the employee and self employed business more focus is reflected on the income tax. But it has been observed through the analysis that reducing or minimizing the corporation tax in an efficient and effective way is providing support to the small and developing businesses. The corporation tax that is imposed on the small business is at the rate of 26 percent (Evans, Freedman and Krever, 2011). The improvement in the small businesses in UK can be observed from the decrease or reduction in the corporate tax rate below the income tax rate. Therefore in order to explain the impact of the corporate tax and the income tax rate in the small business it is required to estimate and determine the tax structure of the business and also the design the tax structure accordingly since the tax is to be charged on the basis of the various form of the business such as the self employed business, partnership business or the owner managed business. The effective tax structure provides the facility to the small businesses by offering them tax advantage for overcoming the market failure and designing the overall tax structure facilitates the small business to avoid the distortions which helps them in making decisions both effectively and efficiently. The small business in UK has adopted various methods of tax relief structure. Therefore from the above discussion it is evident that designing of the tax structure according to the size and requirements of the firm plays an important and vital role. Question 2 The tax implication in case of the differential tax treatment can be explained as the way or the process in which the small business that is carried out in UK is that the differential tax treatment provides an incentive to the self employed rather than the employee and it is mainly incorporated rather than self employed. The differential tax treatment is structured in such a way that it provides tax incentive providing the opportunities for converting the high labour income tax as compared to the less highly tax on the capital income (James, 2009). The differential tax treatment is to be structured in such a way that it provides a neutral choice of the legal activities. The tax differential has influence on the legal form and the differential tax treatment sometimes increases the cost that is associated with the revenue generation and the cost of the business. The approach of the differential tax treatment deals with the fact that the taxpayers often take or reap the advantage of the differential tax which in turn also increases the dissatisfaction among the taxpayers and the co operation of the tax payers in the payment of the tax is considered as important and critical. The approach is mainly concentrated on finding out the various ways or providing solution for creating and developing a structural neutral system. Differential tax rate deals with charging effective tax rates on income from the corporate and the non corporate sectors that is related with various forms and types of businesses. The man problem in assigning the tax in the small business is that it increases the burden of the small business as it imposes penalty on the tax payers who are engaged in utilizing the incentives that are included in the tax system. The differential rate of tax is required to be maintained between the tax rate that is imposed from capital and the tax rate that is charged on income from labour. The differential tax treatment always makes an attempt in converting or transforming the labour income into the income from capital. The approach mainly focuses on tackling the various issues that is associated with the alignment in the effective rate of taxes that is mainly legal form and is associated with current system. The companies or the small business who prefer or selects the financing method may also include obstacles or hurdles as a consequence of the differential rate of tax treatment due to the combination of the debt and equity for the purpose of tax and the interest that is paid by the companies or the small businesses on loans are not related with the corporate tax and dividends (Shome, 1995). The implication and modification in the differential tax treatment is that the tax is to be distributed equally on the basis of the income and the profit that is earned by the business in case of the owner managed businesses. The approach also focuses on the alignment of the effective tax rate in the business that is to be imposed on the small businesses in UK. The tax structure of United Kingdom is required to be maintained in such a way that it provides neutrality. The differential rate of tax system is required to be incorporated in all businesses. The most effective tax structure that is free from all issues and distortions is that there should not be any difference in the tax treatment where the objective of neutrality can be fulfilled. But the differential tax treatment arises in case of the self employed and the owner managed businesses. The combination of all the issues related to different forms of businesses results in worsening the situation. Therefore it is required to establish and develop the relationship between the self employed and also the employed for finding out a common solution for addressing the issues. The differential tax treatment is required to be designed in such a way that it minimizes the difference between the incorporated and unincorporated firms. The differential tax treatment in case of the small businesses in United Kingdom is to be designed on the basis of the various forms of business such as the limited liability partnership, limited liability companies and partnership (Phyllis, 2003). Question 3 In this chapter the advantages and the disadvantages of the presence of the differential rate of tax can be explained as follows. The arguments for the requirement of differential tax treatment can be observed from the fact that the small businesses mainly focuses or highlights on the obstacles or the difficulties that are created through the process of taxation by taxing the various legal forms of the business by adopting various ways it mainly includes the self employed business, partnership and the manager owned business and creating opportunities or options for the taxpayers in the minimization or reduction of the tax liability of the small businesses and improving their contribution towards the social security through the transformation or conversion of income that is derived from labour to income derived from capital (Thuronyi, 2003). The tax treatment provides benefit to the small businesses in such a way that the tax treatment in case of the owner managed businesses is required to be conducted in such a way that the incorporated firms of the business is required to be considered in terms of the unincorporated business for the various tax purposes. The most effective and important benefit of the differential tax rate treatment is alignment of efficient and effective tax rates across the various form of legal small business that is carried out in United Kingdom. It establishes the difference between the permanent and the full time employees of the small business that is required to adopt a differential rate of tax treatment in which the incorporated small business has large number of shareholders. The conflict that arises in designing tax structure can be minimized by treating the employees of the business in similar way by charging same rate and receipts. The limited liability companies are able to provide limited liability together with partnership in the context of tax treatment. The differential tax treatment provides an opportunity in reducing the tax liability and addressing the structural issues of the small businesses in the context of introduction, withdrawal and reduction of the tax rate. Therefore it is required that the differential tax treatment includes the various forms of business for reducing the differences (Lang, 1998). The arguments against the implication and adoption of the differential tax treatment can be discussed as the risk and entrepreneurship factor in the business are not easily quantifiable and therefore it is not defined clearly whether the tax is to be charged on the income that is generated from the reward factors as a labour income or as a return received from capital. Therefore the problems faced by the business in relation to the equity and also in creating the incentives which creates problem in determining the tax. The differential tax treatment that is made on the basis of the difference in various forms of business is not able to solve or mitigate the problem that is related to the boundary that exists between the various forms of business. The differential tax treatment possess problem in determining the appropriate tax rate as the receipt of income and the profit and reward that is received by the company varies. The tax structure is designed in such a way that different rate of tax is charged to different people or various forms of business which distorts the structure of tax (Crawford and Freedman, 2010). The differential tax treatment is required to determine the objective and the purpose of charging tax and therefore it is required that the differences between the incorporated and unincorporated boundary in the tax structure is to be clearly differentiated for charging a effective differential rate of tax. The differential tax treatment not considered as an ideal treatment of tax as it does not maintains neutrality in charging the tax. The differential tax treatment creates the problem in defining the parameters for charging tax. The problem of the differential tax treatment is mainly faced by the small businesses in United Kingdom. References: Crawford, C. and Freedman, J., 2010. Small business taxation. [pdf] Avaialable at: < http://www.ifs.org.uk/uploads/mirrleesreview/dimensions/ch11.pdf> [Aceessed 25 February 2015]. Daily, F.W., 2008. Tax savvy for small business. Canada: Nolo. Evans, C., Freedman, J. and Krever, R.E. 2011. Tax, Discretion and the Rule of Law. Netherlands: IBFD. James, M., 2009. The UK Tax System: An Introduction. London: Spiramus Press Ltd. Lang, M., 1998. Multilateral Tax Treaties: New Developments in International Tax Law. Canada: Kluwer Law International. Phyllis, L.M., 2003. Tax Avoidance and Anti-avoidance Measures in Major Developing Economies. New York: Greenwood Publishing Group. Shome, P., 1995. Tax Policy Handbook. New York: International Monetary Fund. Thuronyi, V., 2003. Comparative Tax Law. London: Kluwer Law International. Read More