A fee charged ("levied") by a government on a product, income, or activity is called tax. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax.
Purposes of Taxation in modern economy
Financing government spending:
The purpose of taxation is to finance government expenditure and activities that are necessary and beneficial to society. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.
Economic factors
In terms of economic analysis, government taxation represents a withdrawal from the UK economy while its expenditure acts as an injection into it. So the government's net position in terms of taxation and expenditure, together with its public sector borrowing policies, has an effect on the level of economic activity within the UK.
The government favors longer-term planning, currently publishing and then sticking to three year plans for expenditure. These show the proportion of the economy's overall resources which will be allocated by the government and how much will be left for the private sector.
This can have an effect on demand for particular types of goods, e.g. health and education on the one hand, which are predominately the result of public spending, and consumer goods on the other, which results from private spending. Changing demand levels will have an impact on employment levels within the different sectors, as well as on the profitability of different private sector suppliers.
Social factors
Social justice lies at the heart of politics, since what some think of as just are regarded by others as completely unjust.
Attitudes to the redistribution of wealth are a clear example. In a free market some individuals generate greater amounts of income and capital than others and once wealth has been acquired, it tends to grow through the reinvestment of investment income received. This can lead to the rich getting richer and the poor poorer, with economic power becoming concentrated in relatively few hands.
Some electors make the value judgment that these trends should be countered by taxation policies which redistribute income and wealth away from the rich towards the poor. This is one of the key arguments in favor of some sort of capital gains tax and inheritance tax, taxes which, relative to the revenue rose, cost a very great deal to collect.
Environmental factors
The taxation system is moving slowly to accommodate the environmental concerns which have come to the fore over the last twenty years or so, especially the concerns about renewable and non-renewable sources of energy and global warming.
Examples of tax changes which have been introduced for environmental reasons are:
(a) The climate change levy, raised on businesses in proportion to their consumption of energy. Its claimed purpose is to encourage reduced consumption
(b) The landfill tax levied on the operators of landfill sites on each tonne of rubbish/waste processed at the site. Its claimed purpose is to encourage recycling by taxing waste which has to be stored;
(c) The changes to rules on the lease or purchase of cars, and taxation of cars and private fuel provided for employees to be dependent on CO2 emissions. Its claimed purpose is to encourage the manufacture and purchase of low CO2 emission cars to reduce emissions into the atmosphere caused by driving. Only the last of these will be directly felt by individuals, even if the other taxes are passed on by being factored into a business's overheads.
Reference & bibliography: http://accastart.com/acca-start-paperf-6-list-chapter-1.html
Requirement: (b)
Identifying the different types of tax below
Different Types of Taxes in U.K are imposed on public or any other legal entity, which is the source of income of the U K's central Government. These are described below.
Income Taxes:
Income Tax is a tax on income. Not all income is taxable and people are only taxed on 'taxable income' above a certain level. Even then, there are other reliefs and allowances that can reduce Income Tax bill - and in some cases mean there is no tax to pay.
From the 2010-11 tax year the Personal Allowance reduces where the income is above £100, 000 - by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. These allowances reduce where the income is above the income limit for age-related allowances by £1 for every £2 of income above the limit. For the 2010-11 tax years the Personal Allowance for people aged 65 to 74 and 75 and over can be reduced below the basic Personal Allowance where the income is above £100,000.
Capital Gains Tax:
Capital gains are subject to tax at 18 or 28% (for individuals) or at the applicable marginal rate of corporation tax (for companies).
The basic principle is the same for individuals and companies - the tax applies only on the disposal of a capital asset, and the amount of the gain is calculated as the difference between the disposal proceeds and the "base cost", being the original purchase price plus allowable related expenditure. However, from 6 April 2008, the rate and reliefs applicable to the chargeable gain differ between individuals and companies. Companies apply "indexation relief" to the base cost, increasing it in accordance with the Retail Prices Index so that (broadly speaking) the gain is calculated on a post-inflation basis (with different rules apply for gains accrued prior to March 1982). The gain is then subject to tax at the applicable marginal rate of corporation tax.
Corporation Tax:
People resided and as well as domiciled in the United Kingdom have to pay the corporation tax on their profit. For the companies, if they are situated in UK or their management is controlled from UK then, they will be treated as a resident of the UK. Therefore they will also be taken under the scope of the corporation tax.
However, certain tax reductions are also there for the small and middle level companies and a tax rebate is allowed on the cost of intangible assets, i.e. company's intellectual property, goodwill etc.
Value Added Tax:
The third largest source of government revenues is value added tax (VAT), charged at 20% on supplies of goods and services. It is therefore a tax on consumer expenditure.
Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate, such as domestic gas supplies) or 0% ("zero-rated", such as most food and children's clothing). Exemptions are intended to relieve the tax burden on essentials while placing the full tax on luxuries, but disputes based on fine distinctions arise, such as the notorious "Jaffa Cake Case" which hinged on whether Jaffa Cakes were classed as (zero-rated) cakes-as was eventually decided-or (fully taxed) chocolate-covered biscuits. Until 2001, VAT was charged at the full rate on sanitary towels.
Excise duties:
Excise duties are acted upon several things like alcoholic products, mineral oils, tobacco, motor vehicles etc.
Motor Tax:
It comprises the vehicle excise duty and fuel duty. Many other taxes like various statutory fees, London's congestion charge etc., are also included in motor tax.
Stamp Duty:
Stamp duty is charged on the transfer of shares and certain securities at a rate of 0.5%. Modernized versions of stamp duty, stamp duty land tax and stamp duty reserve tax, are charged respectively on the transfer of real property and shares and securities, at rates of up to 4% and 0.5% respectively
Inheritance Tax:
Inheritance tax is levied on "transfers of value", meaning: the estates of deceased persons; gifts made within seven years of death (known as Potentially Exempt Transfers or "PETs");
"Lifetime chargeable transfers" meaning transfers into certain types of trust.
National Insurance Contribution:
As well as paying income tax on income, people also have to pay National Insurance contributions. National Insurance contributions build up their entitlement to certain social security benefits, including the State Pension. The amount of National Insurance depends on how much is earning and whether people are employed or self-employed. They stop paying National Insurance contributions when they reach retirement age.
Reference & bibliography:
http://www.economywatch.com/tax/united-kingdom/different-types.html
http://en.wikipedia.org/wiki/Taxation_in_the_United_Kingdom
http://www.hmrc.gov.uk/incometax/basics.htm
Requirement-c
Tax avoidance
In a very broad sense, it could include any legal method of reducing your tax burden, eg taking advantage of tax shelter opportunities explicitly offered by tax legislation such as ISAs. However, the term is more commonly used in a more narrow sense, to denote ingenious arrangements designed to produce unintended tax advantages for the taxpayer.
The effectiveness of tax avoidance schemes has often been examined in the courts. Traditionally the tax rules were applied to the legal form of transactions, although this principle was qualified in later cases. It was held that the Courts could disregard transactions which were preordained and solely designed to avoid tax.
Traditionally, the response of HMRC has been to seek to mend the loopholes in the law as they come to their attention. In general, there is a presumption that the effect of such changes should not be backdated.
The Finance Act 2004 introduced new disclosure obligations on promoters of certain tax avoidance schemes, and on taxpayers, to provide details to HMRC of any such schemes used by the taxpayer. This enables HMRC to introduce anti avoidance measures at the earliest opportunity
Tax evasion
Tax evasion consists of seeking to pay too little tax by deliberately misleading HMRC by either:
(a) suppressing information to which they are entitled (eg failing to notify HMRC that you are liable to tax, understating income or gains or omitting to disclose a relevant fact, eg that business expenditure had a dual motive), or
(b) Providing them with deliberately false information (eg deducting expenses which have not been incurred or claiming capital allowances on plant that has not been purchased).
Tax evasion is illegal. Minor cases of tax evasion have generally been settled out of court on the payment of penalties. However, there is now a statutory offence of evading income tax, which enables such matters as deliberate failure to operate PAYE to be dealt with in magistrates' courts.
Serious cases of tax evasion, particularly those involving fraud, will continue to be the subject of criminal prosecutions which may lead to fines and/or imprisonment on conviction.
Tax avoidance versus tax evasion:
The term of tax evasion summaries any action taken to evade taxes by illegal implication but Tax avoidance is using the taxation regime to one's own advantage by arranging your affairs to minimize your tax liability.
Tax evasion is an illegal activity and carries a risk of criminal prosecution but tax avoidance is legal and does not entail misleading HMRC.
Reference & bibliography: http://accastart.com/acca-start-paperf-6-list-chapter-1.html
Task-2
Requirement: (a)
Molten-Metal plc - Corporation tax computation for the year ended 31 March 2011
£
£
Trading profit
18,82,600
Loan stock interest payable (22,500+3,700-4,200)
22,000
Repairs to office building
0
Capital allowances - (working 1)
-
-IBM (working 2)
7,320
( )
Interest income (working 3)
8,700
Property business profit (working 4)
68,400
Chargeable gain (working 5)
1, 76,426
Taxable total profits
Corporate tax liability (at 26%)
Working 1 - Plant and machinery
Main Special rate pool
S R Pool
allowance
£
£
£
WDV brought forward
87,800
Addition qualifying for AIA
Office building
0
Ventilation system
32,000
Lift
46,000
78,000
AIA @ 100%
(78,000)
0
78,000
Machinery
81,600
Building alteration
7,700
22,900
112,200
AIA 100%
22,000
22,000
19,200
Motor cars (17,300Ã-2)
34,600
Working 2 - Industrial buildings allowance (IBA)
£
Eligible expenditure
IBA @ 1%
732,000
7320
Working 3 - Interest income:
£
Loan interest received (9,800+3,100)
Bank interest receivable
Interest payable
12,900
2,600
(6,800)
8,700
Working 4 - Property business profit
£
Premium received
Less: 68000Ã-2% (6-1)
Rent receivable (78,800-68,000)Ã-2/3
68,000
(680)
61,200
7,200
Property business profit
68,400
Working 5- chargeable gain:
£
£
Disposal proceeds
8,72,000
Incidental cost
(28,400)
8,43,600
Cost
396,200
Enhancement
146,000
(5,42,200)
301,400
Indexation allowance:
Cost (396,000Ã-.269)
106,578
Enhancement (146,000Ã-0.126)
18,396
(124,974)
Chargeable gain
176,426
Requirement: (b)
The fourth and final quarterly quarter installment payment will be for £151,800 (550,000-398,200)
This is due 14 July, 2011
Requirement: (c)
The factors influence a company's choice of loss relief claims are explaining below
Entrepreneur's relief
It is applied on the disposal of a business and some trading company shares. Fore relief, asset gains are taxed at 10%
Claiming state
In case of material disposal, entrepreneur's relief is available. A material disposal of business asset is-
A disposal of the total business which is owned by the single passion the one year ending period with a disposal date.
A disposal of the assets which is used in business purpose at one year or more, which the business ceases to be carried on, provided that.
A disposal of an individual personal company security shares, the company is either trading or holding company of trading group. These conditions are met with the individuals who are an officer or employee of the company.
That individual must claim the entrepreneur's relief which is not automatic. The claim deadline is the 1st anniversary of 31st January following the tax year end of disposal.
Rollovers relief
The business who reinvest in qualifying assets in the period starting one year before and ending 36 months after the disposal concerned, the rollovers relief is available there.
Claiming state
Where the disposal proceed received of a business asset that are spent on a replacement business asset there a gain may rollover.
The new asset bought and the old asset sold is both used only in the traders carried on by the claiming person rollover relief. The non-trade part of a building is used for all or a particular part of the period of ownership, the building is treated as two separate assets. This separation cannot be made for other assets.
The old and new both assets fall within one of following classes-
Goodwill
Land and building occupied only for the purpose of trade
Fixed plant and machinery
Gift relief
People may be able to get Gifts Hold-Over Relief if they give away a business asset. They can postpone all or part of their gain until the asset is sold or disposed of by the person they gave it to.
People may qualify for Gifts Hold-Over Relief if they're sole trader or partner and they've given away a business asset. One may also qualify if he disposes of an asset for less than its full value.
Condition
One can claim the relief if he uses the asset in the trade or profession carried on by personal company.
Shares in trading companies also count as business assets for this relief if they're not listed on a recognized stock exchange.
If all of the gain qualifies for Gifts Hold-Over Relief, one will be able to 'hold-over' or postpone it. There'll be no tax to pay on the disposal at that time.
The person one gives the asset to will use the relief when they work out their gain. They replace the cost of the asset in their calculations with a lower amount. The lower amount is the market value of the asset at the time of the gift, less the 'held-over' or postponed gain.
Incorporation relief
If you incorporate your business by transferring the business and all the assets of the business to a new or existing company, you are treated as if you had disposed of the assets for their market value. This may give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost to you.
Incorporation Relief is given if:
The business together with the whole of its assets (or all its assets other than cash) is transferred, and
The business is transferred as a going concern, and
The business is transferred in exchange wholly or partly for shares in the transferee company.
The relief is given automatically and there is no need to make a claim.
The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.
Reference & bibliography:
http://www.hmrc.gov.uk/helpsheets/hs276.pdf
http://www.hmrc.gov.uk/cgt/businesses/reliefs.htm#1
Task-3
Requirement: (a)
(1) The group relief claim by Black Ltd is calculated after deducting brought forward trading losses and gift aid donations.
(2) The maximum potential claim by Black Ltd is therefore £355,600 (396,800 - 57,900 + 21,100 - 4,400).
(3) White Ltd's gift aid donations of £5,600 cannot be surrendered as they can be fully relieved against the company's property business profit of £26,700.
(4) It is not possible to surrender capital losses as part of a group relief claim.
(5) Only current year trading losses can be group relieved, so the maximum potential surrender by White Ltd is £351,300.
(6) The maximum group relief claim is therefore £351,300.
Requirement: (b)
Brown Ltd - Corporation tax liability for the year ended 31 March 2011
Total
UK
First
Second
£
£
£
£
Trading profits
212,000
12,000
160,000
40,000
Gift aid donations
(22,000)
(12,000)
_______
(10,000)
Taxable total profits
190,000
160,000
30,000
Corporation tax at 21%
39,900
33,600
6,300
Double taxation relief
(39,600)
(33,600)
(6000)
300
300
Tutorial notes:
(1) The balance of the gift aid donations of £10,000 are deducted from the profits of the second overseas branch since it has paid the lower rate of corporation tax of 15% (6,000/40,000 x 100). The first overseas branch has paid corporation tax at the rate of 30% (48,000/160,000 x 100).
(2) The first overseas branch has paid overseas corporation tax of £48,000, but double taxation relief is restricted to the related UK corporation tax of £33,600.
(3) The second overseas branch has paid overseas corporation tax of £6,000, and this is lower than the related UK corporation tax of £6,300.
Requirement: (c)
Blu Reddy - Inheritance tax computation
£
Lifetime transfer 15 January 2011:
Volume of share held before transfer (300,000Ã-4)
1,200,000
Volume of share after transfer (100,000Ã-2)
(200,000)
Net chargeable transfer
100,000,000
IHT liability- 325,000 at nil%
0
675,000Ã-20/80
168,750
Gross chargeable transfer
1,168,750
IHT liability 325,000 at nil
0
843,750 at 40%
337,500
Taper relief reduction at 40%
(135,000)
202,500
IHT already paid
(168,750)
Additional liability
33,750
Task-4
Requirement: (a)
Aloi - Capital gains tax (CGT) liability 2010-11
Chargeable gain qualifying for entrepreneurs relief
£
Ordinary shares in Alphabet Ltd
360,000
Disposal proceeds (60,000Ã-£6)
(68,600)
Cost (50,000+18,6000)
291,400
Other chargeable gain:
Investment property
22,600
Annual exempt amount
(10,100)
12,500
CGT liability: 291,400 at 10%
29,140
12,500 at 28%
3,500
Chargeable gain
32,640
Tutorial note:
The annual exempt amount is set against the chargeable gain from the sale of the investment property as this saves CGT at the higher rate of 28%.
Ordinary shares in XYZ plc.
£
Deemed proceeds (10,000Ã-£7.12)
71,200
Cost
(36,880)
Annual exempt amount
34,320
(10,100)
CGT liability: 24,220 at 28%
24,220
6,782
(1) The shares in XYZ plc are valued at £7·12 (£7·10 + ¼(£7·10 - £7·18)). There is no average value as there were no recorded bargains for the date of the gift.
(2) Following the takeover Bon received 25,000 ordinary shares in XYZ plc. The cost of the original shareholding is passed on to the new shareholding, so the cost attributable to the 10,000 shares sold is £36,880 (92,200 x 10,000/25,000).
Cherry CGT liability:
Ordinary shares in Alphabet Ltd
£
Disposal proceeds (12,000Ã-£6)
72,000
Cost
23,900
48,100
Annual exempt amount
(10,100)
38,000
CGT liability: 9,800 at 8%
1,764
28,200 at 28%
7,896
9,660
(1) Cherry's basic rate tax band is extended to £40,800 (37,400 + 3,400), of which £9,800 (40,800 - 31,000) is unused.
Dinah
(1) There is no CGT liability on the sale of the XYZ plc shares as the gain of £5,000 (6,600 - (4,800 x 1,000/3,000)) is less than the annual exempt amount.
(2) The transfer of the XYZ plc shares on Dinah's death is an exempt disposal.
Requirement: (b)
(1) Bon only acquired her shareholding and became a director on 1 February 2010, so the qualifying conditions were not met for one year prior to the date of disposal.
(2) Cherry was not an officer or an employee of Alphabet Ltd.
(3) Dinah's shareholding of 3% (3,000/100,000 x 100) is less than the minimum required holding of 5%.
Task-5
Requirement: (a)
Bayle Defender - Trading profit for the year ended 30 September 2010
£
Net profit
172,400
Impairment loss
0
Gifts to customers- Bottles of champagne
2,480
Donations to political parties
2,900
Lease of motor car (10,360Ã-15%)
1,554
Personal tax advice
600
Property expenses (46,240Ã-2/5)
18,496
Parking fees
520
Golf club membership fee
960
Adjusted trading profit
199,910
Tutorial notes:
(1) The recovered impairment loss will have been allowed as a deduction when originally written off, so the recovery is now taxable.
(2) Gifts to customers are only an allowable deduction if they cost less than £50 per recipient per year, are not of food, drink, tobacco or vouchers for exchangeable goods and carry a conspicuous advertisement for the company making the gift.
(3) The motor car has a CO2 emission rate in excess of 160 grams per kilometer, so 15% of the leasing costs are not allowed.
Requirement: (b)
Bayle Defender - Income tax computation 2010-11
£
£
£
Trading profit (from (a) (i) above)
199,910
Employment income:
Director's remuneration
42,000
Bonus payment
6,000
48,000
Interest from saving certificate
3,600
Personal allowance
0
Dividends (9,900Ã-100/90)
11,000
62,600
Taxable income
262,510
Tutorial notes:
(1) The bonus payment of £6,000 that Bayle became entitled to on 10 March 2010 will have been treated as being received during 2009-10.
(2) Interest received on the maturity of savings certificates issued by National Savings & Investments is exempt.
(3) No personal allowance is available as Bayle's adjusted net income of £265,810 exceeds £112,950.
Tax payments
(1) Bayle's balancing payment for 2010-11 will be £31,100 (84,500 - 53,400).
(2) In addition, she will have to make the first payment on account for 2011-12 of £42,250 (84,500 x 50%), so the total amount payable on 31 January 2012 will be £73,350 (31,100 + 42,250).
Interest and penalties
(1) Interest is charged where payments are made late. This will run from 31 January 2012 to 31 August 2012.
(2) The interest charge will be £1,284 (73,350 x 3·0% x 7/12).
(3) Two penalties of £1,555 (31,100 at 5%) will be imposed on the balancing payment, one when it is one month late and the other when it is six months late.
Task-6
Requirement: (a)
(i)Philip Wind - Income tax computation 2010-11
Details
£
£
pension
9,600
Building Society interest (14880Ã-100/80)
18,600
28,200
Personal allowance
(7,990)
Taxable income
20,210
Income Tax (20,210Ã-20%)
4,042
(1) Philip's adjusted net income exceeds £22,900, so his personal allowance of £9,640 is reduced to £6,990 (9,640- 2,650 (28,200 - 22,900 = 5,300/2)).
Tutorial note: The non-savings income exceeds £2,440 (9,600 - 6,990 = 2,610), so the starting rate of 10% is not available.
(ii) Charles Wind - Income tax computation 2010-11
£
£
Employment income
109,400
Personal allowance (w-2)
(3,175)
Taxable income
106,225
Income tax liability (35,800 at 20% + 7,045 at 40%)
35,330
(1) Charles' adjusted net income of £108,600 (109,400 - 800) exceeds £100,000, so his personal allowance of £6,475 is reduced to £2,175 (6,475 - 4,300 (108,600 - 100,000 = 8,600/2)).
(2) The basic rate tax band is extended to £38,200 (37,400 + 800) in respect of the gift aid donation.
(iii) William Wind - Income tax computation 2010-11
£
£
Employment income
182,700
Pension contributions
(7,300)
175,400
Car benefit
23,200
Fuel benefit (18,000Ã-35%)
6,300
204,900
Personal allowance
0
Taxable income
204,900
Income tax
35,000 at 20%
7,000
115,000 at 40%
46,000
54,900 at 50%
27,450
Income tax liability
80,450
(1) The list price of the motor car is restricted to a maximum of £80,000.
(2) The relevant percentage for the car benefit is 36% (15% + 21% (235 - 130 = 105/5)), but this is restricted to the maximum of 35%.
(3) The motor car was available throughout 2010-11 so the benefit is £23,200 (80,000 x 35% = 28,000 - 4,800).
Tutorial notes:
(1) The fuel benefit is not reduced by the contributions made by William of £3,200 as the full cost of fuel for private journeys has not been reimbursed.
(2) No personal allowance is available as William's adjusted net income of £204,900 exceeds £112,950.
Requirement: (b)
(i) (1) Charles' adjusted net income will now be reduced to £100,000 (108,600 - 8,600), so his personal allowance will not be restricted.
(2) The personal pension scheme contribution will also further extend the basic rate tax band by £8,600.
(3) Charles' income tax liability for 2010-11 would therefore have been by reduced by £3,440 calculated as follows:
£
Personal allowance 4,300 at 40%
1,720
Basic rate band 8,600 at 20% (40% - 20%)
1,720
3,440
(ii) (1) William and Crown plc should have allocated £4,400 of the contributions towards the fuel for private use, as there will then be no fuel benefit.
(2) This will reduce the contributions for the use of the motor car by £1,200 (4,400 - 3,200).
(3) William's income tax liability for 2010-11 would therefore have been by reduced by £2,550 (6,300 - 1,200 =5,100 at 50%).
