UK Taxation: Legislation, Procedures, And Types Of Taxes Collected
- December 21, 2023/ Uncategorized
Purpose of taxation in the UK
Produce a response in the form of a set of brief, non-technical notes suitable for inclusion in a letter to the potential client. You do not have to produce the
letter. As a minimum your notes must include explanation of:
Describe the purpose of taxation levied in the UK, the legislation and procedure used to administer taxation in the UK, the main types of
taxation collected in the UK, distinguishing between direct taxes and,indirect taxes and the main ways in which taxation is assessed and
collected in the UK
Analyse the main roles and responsibilities of the tax practitioner in the UK
Explain the implication for the tax payer of non-payment of taxes includingmexamples of the penalties which may be incurred.
You are required, On behalf of Jay Cobb, to prepare the appropriate sections of the „employment‟ section of the UK Income Tax Return for year 6 April 2014 to 5
April 2015.
You are required to prepare a taxation computation for Jay for the year to 5 April 2015. 2.1 and 2.2 In order to complete task c) you will need to take account of the following rates
and allowances which will apply to Jay:
Personal Tax Allowance 2014/2015, = £10,000
Basic rate of tax, based on taxable income between £0 and £31,865, = 20% Higher rate of tax, based on taxable income between £31,865 and
£150,000, = 40%
Taxation is a system in which government mandatorily collects contributions from the tax payers. Basically tax is collected for three main purposes firstly, for the fulfillment of the fund required by the government in its operations. Secondly, for the control and monitor the economic factors of the country since taxes play a very significant role in economy and thirdly for the wealth redistribution to maintain equality in the nation. Since 1689, the legislation of the tax system is under the control of the Parliament. And yet since 1911, tax law is the only legislation controlled by Parliament which is not scrutinized in detailed by the House of Lords. However, the prospect of the rejection still lies with House of Lords. (government, 2013)
The main types of tax collected are Income tax, National Insurance, Value Added Tax (VAT), Corporation Tax, Council Tax, Business Rates, Excise duties and other taxes such as stamp duty, carbon tax, airport tax, inheritance tax, and capital gains. Most of the taxes are collected by the HM Revenue and Custom. The pie chart shown below depicts the volume of taxes collected by the government from different sources in the year 2011-12. (Pettinger, 2014)
Direct taxes are directly levied on the payers, whereas indirect taxes are collected from the service providers or the manufacturers of the goods but the burden of such tax ultimately falls on the consumers.
Self-assessment procedure is used by the HMRC. The payers involved in self- employment doing business etc need to file tax return whereas for the employees the tax is deducted automatically from wages, pension and savings. The last date of filing the return online is 31st January. Keeping records is necessary to fill in the tax return correctly. On the basis of the report submitted by the tax payer HMRC will automatically calculate what the payer owes as tax. (Self assessment tax returns, 2015) (Oratore)
Legislation and procedures for administering taxes
The roles and responsibilities of the tax practitioners are to provide their clients prompt resolution to tax uncertainty and legal compliances. They need to give a clear understanding of risk and opportunities which the clients are required to make amongst choices which are most suitable to them. Tax practitioners draw attention of its clients towards the impact of the tax consequences. It helps the large tax payers decide about the dealings with the foreign authorities as well. It is the responsibility of the practitioner to keep its client informed about new rules issued. This way client will be able to comply with all the rules required to be fulfilled by them. (Mayer, 2012)
The implications for non-payment of taxes are by the tax payer or its agent is penalty. The penalty can be imposed if the return or any tax document is inaccurate or tax has been unpaid, understated, over-claimed, and under assessed. Though the agent has been given responsibility to comply all the proceedings but still the liability for penalties for late payment, late filing or any error in the paper work lies with the tax payer itself. The penalty of £100 shall be imposed if the tax return is up to 3 months late however this may increase with the increasing delay period. If the tax payer has reasonable excuse for the delay he may appeal against the penalty imposed. (Self assessment tax returns, 2015)
The main purposes of the form are given as below: (PAYE Forms: P45, P60, P11D, 2015)
P60 – This form is a proof of the tax paid by the employee in a particular tax year. It is provided by the employer latest by 31st May in paper or electronically.
P45 – This form is provided by the employer to its employee at the end of its service to such employer. In case the employment is ceased in the mid of any tax year in that case this form is helpful for tax purpose since it depicts the amount of tax already paid by the employee for the particular tax year. This form is divided into four parts; part 1 is handed over by the employer to the HMRC and the rest to the employee. Employee retains part 1A for its own records and hand over the rest part 2 & 3 to the new employer.
P11D – This is the form sent by the employer to the HMRC in case the employee is receiving any benefits in kind. This form is applicable when the earnings of the employee including the worth of the benefit are at least £8,500 in a tax year. This form contains the worth of such benefit and it is the duty of the employer to inform employee what is mentioned in the form.
On behalf of Jay Cobb, we are preparing the information required to fill the tax return of the employment section. The following are the information required to be furnished in the tax return. (HMRC, 2015)
First of all the Name is to be given i.e. Jay Cobb, and then the Unique Tax Payer Number which is 9878912652.
Direct and indirect taxes and assessment and collection procedures
Pay from this employment – the total of P45 and P60 before the tax was taken off = £32,000
UK Tax took off in Box 1 – £5,000
Tips and other payments not on you P60 – Not Applicable
PAYE tax reference of the employer ( on P45/P60) – 321/XYZ/B
Employer’s Name – SPO Consultancy Ltd.
If were a company director – No ( Jay was neither a director nor the partner)
If were ceased being a director before the date of 6 April 2015, then mention the date on which the directorship was ceased – Not Applicable
Whether company was a close company – No
Whether Jay is a part-time teacher in England or Wales and are on the Repayment of Teacher’s Loans Scheme for this employment – No
Now the Benefits from the employment are to be disclosed in the relevant boxes. Information from Form P11D can be utilized here to fill the boxes.
Company Cars and Vans – Not Applicable
Fuel for company cars and Vans – NA
Private medical and Dental Insurance – £3,000
Voucher, credit cards and excess mileage allowance – NA
Goods and other assets provided by employer – NA
Accommodation by the employer – NA
Other benefits such as interest-free or low-interest loan – NA
Expenses payments received and balanced charges – NA
The Employment Expenses required to be furnished by Jay Cobb, are listed below with the relevant figures.
Business travel and Subsistence Expenses – NA
Fixed Deductions for Expenses – NA
Professional Fees and Subscriptions – £ 150
Other Expenses and Capital Allowances. – NA
Tax Computation of employed and self-employed is shown below:
Jay is 26 years old employee of SPO Consultants Ltd. with gross pay of £32,000. His tax deduction has been £5,000; therefore, net tax liability will be after deducting £5,000 from the tax liability amount. The payment date is 31st January. (Calculate PAYE on your Salary)
Gross Pay – £32,000.00
Tax-Free Allowance – £10,000.00
Total Taxable – £21,991.00
Tax paid – £4,398.20
National Insurance – £2,885.28
Student Loan – £0.00
Total Deductions – £7,283.48
Net Wage – £24,716.52
NI Employer – £3,318.07
Jay has sold some land in March ’15 which he has purchased as an investment at a purchase cost of £120,000. The sale price of the transaction was 140,000 with some disposal expenses involved such as estate agency cost and legal cost.
The chargeable assets are the business assets, shares other than NISA, ISA or PEP, property other than main home or main home if it’s used for business purpose, let out or very large and personal possessions worth £6,000 or more other than car. (Capital Gain Tax, 2015)
For an individual, the excess of the sale price to the acquisition cost will be the capital gain taxable.
Capital gain tax is computed after allowing the annual exemption being £11,000 for the tax year 2014-15. The rate is 18% for the basic tax payer and 28% for the higher tax payer. However here the Capital Gain tax computation of Jay Cobb is given as below: (CGTC, 2015)
- Asset Name – Land
- Disposal Date – March‘/2015
- Net Disposal Proceeds – £134,750
- Purchase Price – £120,000
- Other Acquisition Cost – £1,500
- Total Gain [3-4-5] – £13,250
- Annual Exempt – £11,000
- Net Gain [6-7] – £2,250
- Rate of Tax – 18%
- Capital Gain Tax [8*9] – £405
Roles and responsibilities of tax practitioners
It is a simple calculation of income tax and Class 4 NICs. It requires the Income, Expense, rent a room income (if any) details to compute the tax liability. (Tax Calculators) The self employed need to apply to local tax office and obtain the schedule D status. If the 80% of the income is not from a single client or customer than the officer is satisfied and allows such status. After obtaining this status proportion of the house cost can be claimed as cost in case the house is partly used for the business purpose. The tax liability is to be paid in two installments two months apart. However if the annual turnover exceeds £49,000 the person has to obtain VAT registration. As per the details given for the past two years in the question, Ben Jack needs not to take any VAT registration. Self Employed tax payers need to maintain full records for the period going back over 7 years. Schedule D is divided into four cases:
Case 1: tax in respect of trade other than mentioned in Schedule A
Case 2: tax in respect of loan relationship, annuity, etc.
Case 3: tax on overseas income
Case 4: the tax on annual profit was not falling under any other category. (Tax for the self-employed person, 2001)
The tax rates for the year are mentioned below: (Income tax rates and allowances, 2015)
Year Adjusted Profit Tax Rate
2012-13 £36,000 20%
2013-14 £45,000 40%
The adjusted profit for tax purpose is computed in the following manner:
Net profit for the period – £54,600
Add: Private Items of Expenditure – £4,500
Add: Disallowed expenses for tax purpose – £3,500
Less: Writing Down Allowance of car (20,000*8%) – £1,600
Adjusted Profit – £61,000
By the corporate the corporation tax is paid on the difference between the sale price and the purchase price after deducting any expense on sale. To this resultant amount the amount calculated by multiplying the inflation index factor with the purchase cost, is deducted. This is called take away the indexation allowance from the profit. Now this indexation allowance is deducted from the indexation allowance of the expenses. The final figure computed is the gain to be taxable. (Corporation Tax when you sell a business asset, 2015)
The computation of Capital Gain is given below:
- Sale proceeds- £900,000
- Disposal Costs – £43,000
- Net sale proceeds [1-2] – £857,000
- Purchase Cost – £600,000
- Net of Sale proceed and purchase cost [3-4] – £257,000
- Enhancement Cost – £100,000
- Subtracting the enhancement cost [5-6] – £157,000
- Inflation factor when purchased – 156
- Indexation Allowance [4*8] – £93,600
- Deducting indexation allowance from profit [7-9] – £63,400
- Inflation factor for expense – 176
- Indexation Allowance [6*11] – £17,600
- Deducting indexation allowance [10-12] – £45,800
- Capital Gain = £45,800
The capital allowance to be claimed during the year amounts to £215,000 as per the details given in the question. These capital losses can be claimed by reporting it to the HMRC. These losses can be claimed on the chargeable assets to reduce the total taxable income. These losses used to reduce the taxable income are called as allowable losses. If the tax free allowance still exceeds the chargeable asset then the excess would be carried forward to the next tax year. The losses can be claimed only through tax return. It can be carried forward to the maximum of 4 years from the year of disposal of the asset. The asset which has become worthless or are of negligible value still the losses on such assets can be claimed. (Capital Gain Tax- if you make a loss, 2015)
Penalties for non-payment of taxes with examples
If a company’s financial year covers two corporation tax financial years then in that case the corporation tax will be assessed by proportionately dividing the profit in the no. of days falling in each of the tax year. As in the given question the financial year of the company is from 1st April 2014 to 31st March 2015 whereas the tax year is between 6th April 2014 & 5th April 2015. Thereof there is a difference of approximately 5 days. This difference can be handled by proportionately dividing the profit in the two tax years and apply the relevant rates of such years to the bifurcated profits. The profit given in the question is £1,193,000 and the losses are £200,000, therefore the net taxable income becomes £993,000 after deducting losses. The calculation of the amount which will be subject to corporation tax is shown below: (Corporation Tax Rates and Reliefs, 2015)
Tax year 13-14
Period 1/04/14 – 5/04/14
No. of Days 5
Adjusted Profit (993,000*5/365) £13,602.74
Tax year 14-15
Period 6/04/14 – 31/03/2015
No. of Days 360
Adjusted Profit (993,000*360/365) £979,397.26
The taxable income after deducting losses is £993,000. The applicable tax rate as per the tax year and the income comes to 21% (given). The marginal relief is to be computed on the excess of taxable income and £1.5 million. The last day to pay the corporation tax is the day when 9 months end after the end of the accounting period. In this question the accounting period ends on 31st march 2015, therefore in that case the dead to pay the corporation tax would be by the end of December 2015. The Corporation Tax computation of Glimmer Plc is shown below: (Pay Your Corporation Tax Bill, 2015)
|
Serial No. |
Particulars |
Details |
Amount (£) |
|
1. |
Adjusted Profit |
Given |
1,193,000 |
|
2. |
Losses |
Given |
200,000 |
|
3. |
Taxable Income |
[1-2] |
993,000 |
|
4. |
Corporation Tax Rate |
Given |
21% |
|
5. |
Tax on Income |
[3*4] |
208,530 |
|
6. |
Marginal Relief |
(1500000-993000)*1/400 |
1,268 |
|
7. |
Net Tax Liability |
[5-6] |
207,262 |
As per UK taxation policies and guidelines if any interest, royalty or wage is paid certain amount will be withheld from the total amount and the balance will be paid to the recipient. This retention is known as withholding tax. It is the tax deducted at source by the payer and submitted to the Her Majesty’s Revenue and Customs. This withholding tax is deducted at a certain fixed percentage i.e. 20%. It is the payer’s responsibility to deduct the tax, account for it to the HMRC, and pay it to HMRC within the specified time. Any default in compliance will lead to fine and penalties to the payer. In UK withholding tax is applied only to the income of revenue nature, no tax shall be paid for income of capital nature. (Witholding Tax – Overview, 2014)
Here in the mentioned case Glimmer Plc has paid interest on loan to its debenture holders amounting £300,000 on which it has deducted 20% withholding tax amounting to £64,000 since the mentioned interest amount is of income nature and not of capital nature.. The balance amount £256,000 is paid to the recipient i.e. debenture holders. This amount of £64,000 is to be paid by Glimmers Plc to HMRC within the specified time limit otherwise it will amount to penalty and interest. (UK Corporate – Witholding Taxes, 2015)
References
Calculate PAYE on your Salary. (n.d.). Retrieved 2015, from Income tax calculator: https://www.incometaxcalculator.org.uk/index.php?yr=2015&age=0&time=1&ingr=32000
Capital Gain Tax. (2015, April 09). Retrieved June 2015, from Gov.UK: https://www.gov.uk/capital-gains-tax/work-out-your-capital-gains-tax-rate
Capital Gain Tax- if you make a loss. (2015, April 09). Retrieved June 2015, from Gov.UK: https://www.gov.uk/capital-gains-tax/losses
CGTC. (2015). Retrieved 2015, from UK tax Calculators: https://www.uktaxcalculators.co.uk/capital-gains-tax-calculator.php
Corporation Tax Rates and Reliefs. (2015, April 01). Retrieved June 2015, from Gov.UK: https://www.gov.uk/corporation-tax-rates
Corporation Tax when you sell a business asset. (2015, April 06). Retrieved June 2015, from gov.UK: https://www.gov.uk/tax-when-your-company-sells-assets/work-out-a-chargeable-gain
Government, H. (2013). A guide to UK Taxation. UK Trade & Investment.
HMRC. (2015). Retrieved 2015, from Gov.UK: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/419579/sa102-2015.pdf
Income tax rates and allowances. (2015, April 06). Retrieved June 2015, from gov.UK: https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past
Mayer, B. H. (2012, May 25). The new role of the Tax Practitioner. Retrieved June 2015, from Lexology: https://www.lexology.com/library/detail.aspx?g=af3cb9aa-24e5-4960-bc1f-d91b984565bc
Oratore, V. (n.d.). Making Of Tax Law. Retrieved 2015, from The Barrister Magazine: https://www.barristermagazine.com/archive-articles/issue-46/making-of-tax-law-:-tax-legislation-has-a-peculiar-status-in-the-uk.html
Pay Your Corporation Tax Bill. (2015, June 05). Retrieved June 2015, from Gov.Uk: https://www.gov.uk/pay-corporation-tax
PAYE Forms: P45, P60, P11D. (2015, May 21). Retrieved June 2015, from Gov.UK: https://www.gov.uk/paye-forms-p45-p60-p11d/p60
Pettinger, T. (2014, November 17). Tax Revenue Sources in UK. Retrieved June 2015, from Economics help: https://www.economicshelp.org/blog/4001/economics/tax-revenue-sources-in-uk/
Self-assessment tax returns. (2015, June 12). Retrieved June 2015, from Gov.UK: https://www.gov.uk/self-assessment-tax-returns/overview
Self-assessment tax returns. (2015, June 12). Retrieved June 2015, from Gov.UK: https://www.gov.uk/self-assessment-tax-returns/deadlines
Tax Calculators. (n.d.). Retrieved 2015, from The Tax Donut: https://www.taxdonut.co.uk/tax/business-tax-planning/tax-calculators
Tax for the self-employed person. (2001, August 15). Retrieved 2015, from the Guardian: https://www.theguardian.com/money/2001/aug/15/careersadvice.tax
UK Corporate – Withholding Taxes. (2015, May 01). Retrieved June 2015, from PWC: https://taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/United-Kingdom-Corporate-Withholding-taxes
Withholding Tax – Overview. (2014). Retrieved June 2015, from LexisPSL Tax: https://www.lexisnexis.com/uk/lexispsl/tax/document/393773/55KG-S061-F18C-V2WS-00000-00/Withholding%20tax%E2%80%94overview
