Taxation Dissertation Sample Document

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TABLE OF CONTENTSIntroduction.................................................................................................................................3Task 1............................................................................................................................................31.1 Description of UK tax environment........................................................................31.2 Analysis of roles and responsibilities of tax practitioner............................... 51.3 Explanation of tax obligations of tax payers and their agents along withthe implications of non-compliance...............................................................................52.1 Computation of relevant expenses and allowances........................................62.2 Computation of taxable amount and tax payable for employed and selfemployed along with the payment dates....................................................................72.3 Completion of relevant documentation and tax returns of theorganization............................................................................................................................9

Task 2......................................................................................................................................... 123.1 Computation of chargeable profits......................................................................123.2 Computation of corporate tax liabilities and computation of duepayment dates....................................................................................................................123.3 Provisions of income tax deductions...................................................................144.1 Identification of chargeable assets......................................................................154.2 Computation of capital gains and losses and tax payable on it ..............15

Conclusion.................................................................................................................................17References................................................................................................................................18




INDEX OF TABLESTable 1: Income statement of Mr. Jones..........................................................................7Table 2: Statement showing computation of taxable income.................................8Table 3: Data of Running Limited....................................................................................14Table 4: Financial facts and figures of Running Limited.........................................14Table 5: Operating profit of Fast and Forward Ltd....................................................14Table 6: Chargeable profit of Fast and Forward Ltd.................................................15Table 7: Taxable amount of Fast and Forward Ltd....................................................15




ILLUSTRATION INDEXIllustration 1: Income tax rates.........................................................................................10Illustration 2: Form P45........................................................................................................11Illustration 3: Form 11 D......................................................................................................12Illustration 4: Form P60........................................................................................................13




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INTRODUCTIONTaxation can be referred as act of taxing authority of levying of tax on

individuals on their earnings or benefits attained by them. This term isapplicable on all types forms of taxes such as income tax, capital tax andother indirect tax. Taxation in UK is governed by provisions of HM Revenue &customs (Xu and Xu, 2013). Individuals are required to comply guidelinesprovided by HMRC in order to satisfy their tax obligations in an appropriatemanner. Present project report is focused on the evaluation of provisions oftax liability of individual and commercial entities. For this aspect, descriptionwill be provided regarding relevant tax norms. This description will besupported by practical examples for better understanding.TASK 11.1 Description of UK tax environmentPurpose and types of taxation

Taxation is a system of compulsory contribution by public levied bygovernment. It is a primary source of revenue for government expenses andother public purposes. Tax is charged by government to make reductionbetween income in-similarities between population and to provide necessarygoods and services to the public. This revenue is raised from the direct andindirect taxes. For this aspect following types of taxes are collected by thegovernment of UK-

Income tax- Income tax is charged from individuals and trusts on theincome earned and unearned by them from course of employment,trading activities, pensions, dividend, rents, investment and profits(Income Tax rates and Personal Allowances, 2015). Basic rate ofincome tax is 20%. However, in situation where income exceed from




31785 then 40% tax is payable on additional income and if it exceedsfrom £150,000 then 45% is payable on additional income.Corporation tax- This tax is payable by corporate entities which haveseparate legal identity on the profits earned by them during particularaccounting period. In accordance with the HMRC, corporation tax isplaced on the taxable profits of limited companies and similar entitiessuch as association, unincorporated entities, clubs and societies(Henrekson and Sanandaji, 2011).Capital gains tax- Individual or business organization is liable to paycapital gain tax in situation they had earned benefit on transfer of non-current asset (Comprix, Mills and Schmidt, 2012). In accordance withthe provision of this tax, profit is taxable instead of receivable amount.Inheritance tax- This tax is chargeable on the transfer of propertyafter death. However, this tax is subjected to various reliefs andexemptions. Inheritance tax will also be levied in situation asset istransfer before 7 years of the death of party (Becker and Fuest, 2011).It is computed on the cumulative basis i.e. 20% is charged in respect oflifetime transfers while 40% (Inherent tax, 2015) is charged at theevent of death.

Different methods of tax collectionIn UK, tax is collected by HMRC on the behalf of government. Generally

it is collected through the scheme of PAYE although some individuals arerequired to pay their tax liability through self assessment tax return. PAYEtax is applicable if earning is attained through the course of employment(Alzahrani and Lasfer, 2012). In this scheme, tax will be automatically




deducted by employer side on the earning. However, in following situationindividual is required to pay through form of self assessment tax return:

➢ Individual is self employed (Working for yourself, 2015).➢ Rental or foreign income is received.➢ Untaxed income that cannot be collected through PAYE scheme.

Tax legislation

Taxation legislation in UK is mainly governed by provisions provided byHMRC. They are responsible for the collection of tax on the behalf ofgovernment. They provide guidelines to assesses and tax practitioners bywhich they can fulfill their tax obligations in an appropriate manner (Millerand Oats, 2012). In addition to this, they provide continuous amendments byconsidering economic environment in industry for the purpose of providingbetter and justified guidelines.

1.2 Analysis of roles and responsibilities of tax practitionerTax practitioner act as a mediator between assesse and government

authorities. They are well versed with the knowledge of taxation provisionsthus are required to guide tax payer in an appropriate manner. In this aspect,they have following roles and responsibilities-

Dealing with inland revenue- There main responsibility is to dealwith inland revenues. They fill the return on the behalf of the client.Further, they communicate amendments to the clients so they complytheir obligations in a proper manner (McGuire, 2013).




Providing appropriate advise- Tax practitioners provides advise tothe client regarding tax requirements by analyzing their tax situation ina proper manner. In addition to this, they also handle the cases of taxdispute with the government authorities.Computation of tax liability- By considering information of businessscenarios, tax practitioner also compute the liability of individuals(Dowell, 2013). Due to this aspect, they are mandated to havebackground education in the field of taxation.Respecting confidentiality of client- It is both ethical and legalresponsibility of tax practitioner. They must not disclose information ofclient to the third party in order to earn unjust benefits.

1.3 Explanation of tax obligations of tax payers and their agents along withthe implications of non-compliance

Obligation of tax payer

To provide fair and accurate information to the tax agent so they canfill their return appropriate.All material information should be disclosed without any windowdressing or manipulation (Cairncross, 2013).They should act in accordance with the standards described by HMRCwhile considering various aspects such as VAT, PAYE, corporation tax,etc.Further, they are required to maintain accounting data for reasonableperiod of time for the purpose of scrutiny.




Obligation of tax agent

They should act in accordance with the guidelines provided by HMRCThey should promote tax planning instead of tax evasionTax agent are required to provide true and fair information to clientwithout any misleading guidelines in order to earn high profit.

Implications of non-complianceBoth tax payer and their agents are liable to fulfill their obligations in a

proper manner. In situation where tax payer fails to act in accordance withthe provided guidelines by the legislation then they will be liable to providedamages of £3,000. On the other hand, there will be adverse impact on thebusiness activities (Terra and Wattèl, 2005). Further, license of tax agentscan be canceled if they act in contradiction with the guidelines given byHMRC.






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TASK2

2.1 Computation of relevant expenses and allowances

For employeeMary is employed in Chris and Cross Ltd. Stated company is engaged inproviding of ladders to the customers. For her service she gets payment onhourly basis i.e. £50 per hour. In a week she work for 20 hours as Saturdayand Sunday is off. In addition to this, she is entitled for the dearnessallowance of £10 per week.Computation of taxable income of Mary is as follows-=(Monthly Basic Pay + Overtime Pay + Holiday Pay + Night Differential)-

(Allowances provided to her as Income Tax Act)= (50*20)+40

=£1040 per monthFor self employed

Mr. Jones is running a digital store for the selling of computerappliances. Along with this, they are also providing services to the clients forthe repair of computer appliances. However, this business is not able togenerate sufficient returns. Income statement of their company isenumerated below-




Table 1: Income statement of Mr. JonesParticulars AmountStore of computer appliancesIncome from sales of computer appliances £400,000.00Cost of products £210,000.00Payment made to employees £10,000.00Rental charges £5,000.00Drawings £2,500.00Office expenditure £4,000.00Travel charges £500.00Paid for donation £400.00Bank charges £230.00Depreciation of office equipment £1,000.00Capital Allowance £580.00

Services provider of computer appliancesLosses on these services of computer appliances £1,300.00

Table 2: Statement showing computation of taxable incomeParticulars Amount (£)IncomesIncome from sales of computer appliances £400,000.00Less: Cost of products £210,000.00Operating profit £190,000.00ExpensesPayment made to employees £5,000.00Rental charges £5,000.00Drawings £2,500.00Office expenditure £4,000.00Travel charges £500.00Bank charges £230.00Depreciation of office equipment £1,000.00Total expenses £18,230.00Net profit £171,770.00Less: Capital allowance £580.00Less: Tax benefit of loss £1,300.00Taxable income £169,890.00




2.2 Computation of taxable amount and tax payable for employed and selfemployed along with the payment datesTaxable amount and tax payable by employeeTaxable amount = Income of Mary * 12 - Deduction allowed by Income TaxAct of UK (Rates and thresholds for employers 2015 to 2016, 2015)

£12480 (1040 (monthly income of Mary)*12) – £10600 (yearly allowance)=£1880

Amount of tax payable= £1880 *20%=£376

By considering the above computation it can be said that after deduction ofyearly allowance of 10000, taxable income of Mary is £1880. This amount isless than 10000, thus they will be liable to provide tax on rate of 20% (Tae -Uk, 2009). Henceforth, tax liability during the assessment year of Mary is£376.Taxable amount and tax payable by self employed

Particulars Amount (£)Net profit £171,770.00Add- Disallowed expenses(a) Drawing £2,500.00(b) Depreciation £1,000.00 £3,500.00

Less- allowable expenses(a) Capital allowance £580.00(b) Charitable donation £400.00 £980.00Adjusted profit £167,290.00

Taxable amount =(Adjusted-tax losses)=£167,290.00-£1300.00

=£165990




Tax payable= (150000-42385)*.40 + (167290-150000)*.45=43046 + 7780.5

=50826.5

In accordance with the above calculation it can be said that, Jones isliable to pay tax obligation of 50826.5. Computation of this tax obligation isdone by considering following tax brackets-

Mary and Jones are required to submit their return prior to themidnight of 31st October 2015. In situation where they are filing online returnthen date for the submission of the return will be extended to the 31st

January 2016.

Illustration 1: Income tax rates(Source: Income Tax rates and Personal Allowances, 2015)




2.3 Completion of relevant documentation and tax returns of theorganization

Tax payer is required to complete documentation formalities with thesubmission of amount of tax payable by them on their earnings and benefits.These documents are required to be submitted by tax agent or tax paperwith relevant and reliable information. This submission is required to besupported by taxation regimes (Joo-suk, 2012). Description of varioustaxation documents is enumerated below-

1. P45- Tax payer is required to provide submission of this document ifthey are not willing to continue their operational activities of business.It is compulsory for the tax payer to fill this document in order toprovide information of their earnings in previous assessment year priorto the closing.

Illustration 2: Form P45(Source: Garrett and Mitchell, 2001)




2. P60- This taxation form is used by individuals who had earned incomefrom the course of employment. With this form, they are able toprovide description regarding actual tax liability in order to demandcompensation for the excessive tax deduction at source by theemployer.

3. P11D- This form is filled up by employer in order to provide descriptionof benefits provided in kind to the employees such HRA, dearnessallowance etc. This form is submitted to the HMRC.




Illustration 3: Form 11 D(Source: Blundell and et.al., 2009)




Illustration 4: Form P60(Source: Garrett and Mitchell, 2001)






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TASK 3Scenario

Fast and Forward Ltd is engaged in production of sports equipments. In2014, sales of the company was £950,000. In order to attain this revenue,management of the company had made incurred cost of production of£380,000 on purchases. In this aspect other trading expenses of thebusiness were £60,000 (40000 direct overhead and 20000 indirect overhead).In this financial year, company had also paid dividend to their shareholdersof amount £60,000. Along with this, interest charges on debt borrowed bythem was £60,000. Along with the sales company had received amount of£6,750 in form of dividend. As per accounting policies formed by them, thereis also charge of depreciation of £45,000. Company is entitled to take benefitof capital allowance of £23,000.Financial information of companyInformation of other income and losses is as follows-

Table 3: Data of Running LimitedParticulars Amount (£)Sales £950,000.00Purchase £380,000.00Direct overheads £40,000.00Indirect overheads £20,000.00Dividend paid £60,000.00Interest paid £60,000.00Dividend received (TDS on dividend 10%) £6,750.00Capital Allowance for the year £23,000.00Depreciation £45,000.00Capital gains £10,000.00Capital loss £2,500.00Income from letting out building £4,000.00Wear & Tear allowance £1,800.00

Interest on investment (TDS on investment 10%) £2,700.00




Table 4: Financial facts and figures of Running LimitedParticulars Amount

Capital gain £10,000.00Capital loss £2,500.00Rental income £4,000.00Wear & Tear allowance £1,800.00Interest on investment (TDS oninvestment 10%) £2,700.00

Table 5: Operating profit of Fast and Forward LtdParticulars Amount (£)Sales £950,000.00Less: Cost of purchase £380,000.00Less: Manufacturing expense £40,000.00Gross profit £530,000.00Less: Other expenditure £60,000.00Less: Interest paid £60,000.00Less: Depreciation £45,000.00Operating profit £365,000.00

3.1 Computation of chargeable profits

Scope of corporation taxCorporation tax is payable by corporate entities which have separate

legal identity on the profits earned by them during particular accountingperiod. In this aspect, resident companies are required to pay tax on bothdomestic and foreign income. However, non resident companies are requiredto pay tax only on domestic income (Citron, 2001).




Accounting periodGenerally duration of accounting period is of 12 months which is

started with the financial year of the company. In assessment year, tax ofprevious year is paid by company.

Chargeable profitsTax payable by company is computed on the amount of chargeable

profit. This amount is computed after making adjustment of non-allowedexpenses and income by the HMRC. On this amount further adjustmentregarding deduction provided by government authorities is made.Due dates

Action Date of submissionSubmission of File annualaccounts with Companies House

Prior to the 9 months from the date ofcompletion of financial year

Payment of Corporation TaxPrior to the 9 months from the date of 1 dayafter completion of financial year (Blundelland et.al., 2009).

Filing Company Tax Return Prior to the 12 months from the date ofcompletion of financial year

Adjusted profitsAdjusted profits are computed by making adjustment of disallowed

expenses and income from trading income or losses of the company. Byconsidering the amount of adjusted profit taxable amount is determined.

Treatment of lossesLosses are adjusted from the amount of adjusted profits. This amount

is reduced from the adjusted profit to determine net taxable income.




Corporation tax ratesCorporation tax rate for company is 24%. On this percentage company

is required to pay taxes on business income.

Capital expenditure and allowanceCapital expenditure allowance is a deduction provided to the company

for the usage of non current assets in the business. For this aspect two poolis prepared i.e. general pool and special rate pool.Treatment of income tax deductions

Provisions of tax deduction has been developed to make reduction inthe tax liability of the corporate entity. In this aspect, provisions ofexemptions such as marginal relief, charity and pension plan has beenintroduced (Alzahrani and Lasfer, 2012).

3.2 Computation of corporate tax liabilities and computation of due paymentdates

Step 1: Computation of chargeable adjusted profits by consideringallowable and non allowable income and expenses

Initially adjusted profits are computed by adding disallowed expensesand deducing allowances and other expenses. By considering this aspect, inpresent scenario depreciation will be added back and dividend & wearallowances will be reduced. In this amount other income such as dividendand rental will be added.




Table 6: Adjusted profits of Fast and Forward LtdParticulars Amount (£)Operating profit £365,000.00Add: Disallowed expensesDepreciation of asset £45,000.00Total disallowed expenses £45,000.00Allowances and other expensesLess: Dividend paid £60,000.00Less: Wear and tear allowances £1,800.00Total allowed expenses £84,800.00Trading profit £325,200.00Add:Income from letting out building 20000Interest and dividend income [7500*+3000**] £10,500.00Chargeable gain [12000-4500] £7,500.00Adjusted profits £386,200.00

Step 2: Computation of chargeable profits by capital allowancesIn second step chargeable profits are computed by reducing capital

allowances from the amount of adjusted profits.

Table 7: Computation of chargeable profitsTrading incomeAdjusted profits before capital allowances £386,200.00Less: capital allowances £230000.00Chargeable profits £363,000.00

Step 3: Computation of taxable amountIt is last step of tax computation. In this step final adjustments are

made regarding tax losses. By deducting this amount net profit will bedetermined and on this amount rate of corporation tax will be applied.




Table 8: Taxable amount of Fast and Forward Ltd by considering additionalitems

Particulars Amount (£)Taxable profit (a) £363,200.00Tax losses 0Corporation tax (24%) (b) £87,168.00Marginal relief (c) (Consider task 3.3) 21604Tax liabilities (d)=(a-b)+c £65,564.00Relief from double taxation (e) £1,050.00Taxable amount (f)= (d-e) £64,154.00

In the table 8, taxable profit is £363200. Due to absence of taxablelosses this amount will be considered for the computation of tax liability.Rate of corporation tax as per UK norms is 24%. From this taxable amountmarginal relief and amount linked to double taxable has been reduced andtax able amount is £64,154.00.

3.3 Provisions of income tax deductions

Income tax deduction are reduced from the taxable amount of thecompany in order to reduce its obligation. These deductions are provided onthe several transactions such as charity, allowances, marginal relief.Computation of marginal relief by considering above described scenario is asfollows-




Marginal relief= Standard Fraction x (U – A) x N / A

In this formula:

U Upper profit limit

A ProfitsN Total profitsStandard Fraction (7/400)

Marginal relief = ((7/400)*(1500000-300000)*(250200/243200))=21604

Working note:Total profits = Total profits + the grossed-up dividends received

= 243200 + (6750*100/90)=243200+7000

=250200





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TASK4

4.1 Identification of chargeable assets

Chargeable personsChargeable person can be defined as a tax payer who is obliged to pay

statutory charges on the benefit earned on the disposal of assets (Dowell,2013).Assets and disposals

For the computation of capital gain tax, those assets are covered whichare capital in nature. On certain assets, exemption is provided bygovernment such as government securities, car, investment in personalequity plan etc (McGuire, 2013). Further, liability for capital gain tax ispayable if value of disposal asset is more than equal to £6,000. In thistransfer of shares other NISA, PEP or ISA and business assets are alsotaxable.Payment dates

Tax payer is required to pay tax charges on 5th April after the end ofaccounting year. Further, general due date of capital gain tax liability is 31st

January after the taxation year (Preshaw, 2015).




4.2 Computation of capital gains and losses and tax payable on itCase situation 1

James is running a furniture outlet. He had acquired paintings someyear ago and now he is planning for the sale of the paintings to the Janet.Financial information of this transaction is enumerated below:

Particulars Amount (£)

Trading Profit 5000

Cost of acquisition of paintings (purchased on1st September 2012)

4500

Above assets was sold on 31st March 2014 5000

Exemption on Capital gains tax 790

Computation of capital gain tax or loss for transfer of disposal assetsthrough indexation method is as follows-Step 1: Determination of Income from transfer of property (A). In second stepcost of acquisition is deducted from the income. In step three capital gain isdetermined. In fourth step indexation benefit is determined. Indexationbenefit is applicable in present case as asset is purchased in later date. Inlast step net capital or gain is determined by considering other capitallosses and gains.





Step 1: Income from transfer ofproperty (A)

5000

Step 2: Cost of acquisition (B) 4500

Step 3: Capital gain (A-B) 500

Step 4:Indexation benefit 0

Step 5: Net capital loss (500-790)

-290

By considering above calculation it can be said that capital gain tax willbe payable on amount 710. This amount is computed after consideringexemption on capital gain tax.Computation of capital gain tax or loss for transfer of disposal assets throughtaper relief method is as follows-


Step 1: Income from transfer ofproperty (A)

5000

Step 2: Cost of acquisition (B) 4500

Step 3: Capital gain (A-B) 500

Step 4: Taper relief (30%) 150

Step 5: Net capital loss (500-790) -640




This aspect shows that method of taper relief is more appropriate forclient because they are not able to take benefit of indexation because assetis purchased after 1998.4.3 Computation of liability for capital gain tax

In accordance with the above computation company will not be liableto pay capital gain tax because there is situation of net loss. Benefit of thisloss can be taken by organization in next accounting year. In situation ofgain, James will be liable to pay tax at the rate of 18%. In the above describeexample, if there will be capital gain be of amount to 500 then computationof capital gain tax will be as follows-

=500*18%=90

*28% rate has not been considered because trading profit is less than thebasic limit of the James.






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CONCLUSIONIn accordance with the present study, it can be concluded that taxation

is imposed by government in order to generate revenue for the publicexpenditure and to provide necessary service and products. Tax payers andtax agents are required to comply their obligations in an appropriate mannerby considering provisions described by HMRC. In situation where they tocomply these provisions, then they will be liable to provide damages orpenalty charges described by legislation.




REFERENCESBooks and journals

● Alzahrani, M. and Lasfer, M., 2012. Investor protection, taxation, anddividends. Journal of Corporate Finance.

● Becker, J. and Fuest, C., 2011. The taxation of foreign profits—The oldview, the new view and a pragmatic view. Intereconomics.

● Blundell, R. and et.al., 2009. Optimal Income Taxation of Lone Mothers:An Empirical Comparison of the UK and Germany. The Economic Journal.

● Cairncross, A., 2013. Essays in economic management. Routledge.● Citron, D. B., 2001. The valuation of deferred taxation: Evidence from the

UK partial provision approach. Journal of Business Finance & Accounting.Online● Income Tax rates and Personal Allowances. 2015. [Online]. Available

at:<https://www.gov.uk/income-tax-rates>.● Preshaw, J., 2015. Management of Taxes Sub-Committee. [Online].

Available at:<https://www.tax.org.uk/tax-policy/remit-of-technical-committee/ManagementofTaxes>.

● Working for yourself. 2015. [Online]. Availableat:<https://www.gov.uk/working-for-yourself/overview>.

● Inherent tax. 2015. [Online]. Availableat:<https://www.gov.uk/inheritance-tax/overview>.

● Rates and thresholds for employers 2015 to 2016. 2015. [Online].Available at:<https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2015-to-2016>.


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