Tax Environment Of The UK

HMRC: Roles and Responsibilities

In the following report, an effort has been made to chalk out the tax environment of the UK. In pursuance of that the roles and responsibilities of the tax practitioners, the details of the documents required for the purpose of calculation and other matters like the capital gain tax and calculation of adjusted taxable profit have been properly discussed.

The responsibility of the tax collection has been vested upon HMRC (Her Majesty Revenue and Custom). The department is a non-ministerial department and for the purpose of smooth functioning have two public bodies and agencies supporting it. They are as follows:

1. The valuation office agency:

The main purpose of the body is coordinated with its name and the main purpose of the organisation is to value the various properties as well as give the government property advice to help it calculate tax benefits of an individual. In pursuance of the task, it has to make use of appropriate and scientific methods to calculate the tax benefits for which the actual price of the property is found out. The authority also carries out business rating services and provides services of valuing and surveying to more than 400 public companies (Gitman et al. 2015).

1. The adjudicator’s office:

This is basically a redressal body that is impartial and open to every individual of the country. It is a body that hears all the complaints pertaining to the valuation office and the insolvency office. For the purpose of effective redresses the problem, it has to work in sync with the HMRC department.

The main function of the HMRC was to act as a non-ministerial body known as Commissioners of Revenue and Customs Act (CRCA). The HMRC was formed in place of Inland Revenue Customs and Excise. The CRCA was given the task of delegating the responsibility of tax collection to the commissioners appointed by the Queen (Saad 2014). The top-level management of the entity handled the task of picking up of these commissioners. The treasury minister is the person responsible for keeping a check on its expenditures. It acts as a link between the parliament and the HMRC. The treasury department is not responsible for the purpose of formulation of tax policy and the HMRC is responsible for the implication of the same. This particular form of delegated policy is known as policy partnership.

1. Income tax:

The tax is levied on the income accruing to assess in respect of salary received from the employee in the course of employment, income earned from renting a property, profit earned from carrying out own business, interest and dividend income etc (Braithwaite 2017). The whole of income is not taxed rather some allowances are given in this respect, which amounts to around £11500 for an individual and the income limit for  availing the same is £100000. For the purpose of tax computation, the tax rates in the UK have been divided into three categories i.e. 20%, 40% and an additional tax rate of 45%.

1. Capital gain tax:

Capital Gain Tax

It refers to the tax that is leviable on the amount of profit realised on the sale of a capital asset. There are certain tax-free allowances that are given by the statute and the same helps in realisation of certain amount of profit by the individual. The exemption amount for an individual is £11300 for the purpose of capital gain. For the individual assessee the tax rate for the purpose of capital gain tax is 10% and 20% (James et al. 20515). The capital gain arising out of sale of residential property by an individual is 18% and 28%. In respect of entrepreneurs, there is a 10% relief.  In case of the companies, the CGT rate is 20%.

1. Inheritance tax:

This tax is levied by the statute on the profit or amount realised by an individual because of someone’s death. However, the amount becomes taxable only if the amount received exceeds £325000. As per the rules laid down by the statute, the amount will become taxable even if it was transferred to the assesse within 7 years before e the death of the person (Katic and Leigh 2016). If someone leaves his home to his children and grandchildren’s then the threshold amount increases to £425000. The rate of tax in case of inheritance tax is 40% of the amount by which the value of the property exceeds the threshold limit. In case the person who has died contributes, 10% of the value of the property to charity the rate of tax becomes 36%.

1. Corporation tax:

This tax is paid by the corporates in place of the income tax that is paid by the individuals. The rate of tax is 19% of the net profits of the company. The expenses incurred by the company in its operations are allowed as deduction (Davis et al. 2015). The company also receives deduction in respect of fixed assets used by the company like equipment, machinery and vehicles used for business purposes. The company is also entitled to several other reliefs like research and development expenses, patent box, capital losses and trading losses.

1. Value Added Tax (VAT):

It is a kind of indirect tax that is paid by an individual engaged in the business of selling goods and services and in some cases land. It is calculated by deducting the input tax credit (the amount of tax paid by the supplier on the input) from his output tax liability (Coxon 2016). As it is an indirect tax, the amount is collected from the customer and the supplier acts as an agent for the statute. The VAT rate in UK is 20% that is applicable for most of the goods and services. The reduce VAT rate is 55 and it is applicable to some items like child car seats and home energy. The 05 rate is also applicable in some cases like child clothing. The VAT is however not applicable on some items like postage stamps, financial instruments and property.

1. Stamp duty:

Inheritance Tax

This is tax is leviable on the documentation of the assessee. The documentations are needed to be authorised by way of stamp to prove the payment of tax. The threshold limit for the residential and non- residential properties are different i.e. £150000 and £125000 respectively. In case of the first house of an assessee a relief is provided if the amount does not crosses £500000. The tax is leviable for every instance of sale of a freehold property, purchase of a property via share exchange scheme, buying of existing leasehold (Coxon 2016).

The UK government has levied two types of taxes on the assessee i.e. direct tax and indirect tax. In case of direct tax, the assesse directly pays tax to the government from his own pocket whereas in case of an indirect tax the supplier collects the tax from the receiver of goods and services and submits it to the government (McIntosh et al. 2015). In case of the indirect tax, the supplier merely acts as an agent of the government to for the collection of taxes. For e.g. VAT.

It is quite often that the assessee is not aware about the various provisions applicable on him and the way of computation of the tax payable by him. Hence, the government has given right to certain registered persons known as tax practitioners who can help their clients in complying with the tax laws of the statute and pay their dues on time (Richardson et al. 2015). The tax practitioners act as a link between the assessee and the HMRC and help the government in accomplishment of its task of collecting taxes from the mass. However, these tax practitioners have certain role and responsibilities that they should consciously adhere to.

The various roles played by the tax practitioners are as follows:

1. The tax practitioners should advise and guide their clients towards managing their tax liabilities efficiently. As they are aware of all the laws and regulations themselves, they can formulate policies for their clients that can help them to reduce their tax liability without any non-compliance (Picciotto 2015).
2. The tax practitioners have intricate knowledge about the various taxes applicable on the assessee and their respective chargeability. He must guide the individual about the various instances that might attract taxes and the kind of taxes that might be levied on him along with their corresponding rates (Chang et al. 2016).

The primary responsibilities of the tax practitioners are as follows:

1. Guidance must be given in respect of preparation of correct and honest returns.
2. The practitioner himself while providing service to his client must adhere to the compliance.
3. No personal and sensitive information of the client must be given to any third person without the prior approval of the client.
4. The practitioner must undertake to keep himself updated with all the recent amendments that have come in the provisions of the tax law.

The primary obligation of the taxpayer is to pay the tax that is due from the individual from the economic activities carried out within the boundary of the country. The assessee must comply in all circumstances all the laws and regulations laid down by the statute of the UK government (Dwyer et al. 2016). The amount of tax to be paid by an individual depends on the personal income that is earned by the individual over the allowance applicable for him. The government of the UK decides the personal allowance that is to be allotted to the individual.

Tax rate	Taxable income above your Personal Allowance for 2017 to 2018
Basic rate 20%	£0 to £33,500  Individuals that are allowed the standard Personal Allowance starts paying tax on income over £11,500
Higher rate 40%	£33,501 to £150,000  Individuals that have income over £45,000 and are eligible to the standard Personal Allowance starts paying tax on income over the mentioned limit.
Additional rate 45%	Over £150,000

Corporation Tax

The various tax obligations of the tax payers have been clearly laid down by the statute and they are as follows:

1. Cooperation:

The taxpayers should be ready to cooperate with the officials of the HMRC in order to minimise disputes and their corresponding costs. This helps the department to function smoothly and the individual to stay away from the penalties (Faccio and Xu 2015).

1. Honesty:

The taxpayers must ensure that the disclosure of income done by him is honest. He must look for tax avoidance rather than tax evasion. This would enable the HMRC to collect the right amount of tax from the individual without the possibility of future conflict (Forsyth et al. 2014).

One of the most important responsibilities of the taxpayer is to submit the required documents and pay the corresponding tax in time (Daley and Coates 2015). This helps the department to collect revenues on time and at the same time protects the assessee from late fines and penalties.

The various deadlines are as follows:

31^st January:

The payment of tax must be done within this date for the corresponding tax year and the same deadline is applicable for both paper and online returns with very few exceptions.

31^st July:

This deadline is in respect of any further payment for which the assessee is liable for in respect of that corresponding tax year.

The HMRC is entitled to take strict actions in respect of non-compliance on the part of the assessee. Numerous penalties and fines are imposed in case of non-compliance. The various penalties have been listed below:

Penalty in respect of paying the tax late:

Length of the delay	Penalty you will have to pay
30 days late	5% of the tax that is owed at the time of payment.
6 months late	5% of the tax that is due at that time including the above-mentioned amount.
12 months late	5 % of the tax unpaid at that date. This as well as the two penalties above.

Penalties in respect of missing the deadline for submission of the return:

Length of the delay	Penalties to be paid for the delay
1 day late	A penalty of 100
3 months late	10 for each following day subject to a maximum of 90days and 900. this will be in addition to the amount above
6 months late	300 or 5% of the tax due whichever is higher. In some cases even 100% of the tax due instead may be required.
12 months late	300 or 5% of the amount due, whichever is higher. In some cases even 100% of the tax due may be required.

Calculation of Paul’s Tax Adjusted Trading Profit
Particulars	Note	Amount	Amount
Net profit or loss for the year as per accounts			£     32,200.00
Add:
Motor Car expenses used for private purpose by Paul’s	1	£           3,297.00
Parking fine incurred by Paul	2	£              280.00
Property expenses	3	£           3,240.00
Repair and Renewals	4	£           1,320.00
Legal fees	5	£           2,590.00
Total Expenses disallowed			£     10,727.00
Adjusted trading Net profit			£     42,927.00
Less:
Capital Allowances	6
Motor car 1		£              756.00
Motor car 2		£           1,344.00
Total capital allowances			£       2,100.00
Tax Adjusted Trading Profit			£     40,827.00

Note:

1. Motor car expenses:

In respect of motor expenses, the deduction is available only in respect of the usage by the assessee for business purpose in case the car is used for both business as well as personal purpose. In the given case, Paul is using the motor car for both his personal as well as business purpose. He uses the car in the proportion of 70:30 in respect of personal and business expense respectively (O’faircheallaigh 2017). The provisions provide full exemption to the employer in respect of the motor car given to the employee by him for his private use.  In this case, the expenses of the chef will be fully deductible.

1. Fines and penalties:

Fines and penalties as per the provisions of the tax laws are not deductible in general cases. However, if the same have been paid on behalf of the employee for business purposes then it is deductible. In the present case, the same have been incurred for Paul and hence it is not deductible from the profits of the business for the purpose of determining taxable income (Cheshire et al. 2014).

1. Property expenses:

Value Added Tax (VAT)

As per the provisions if an property has been used by the assessee for both business and personal purposes then only the portion pertaining to the business is allowed as deduction and the part pertaining to the personal use shall be disallowed (Al-Mamun et al. 2014). Paul has only used the apartment above the restaurant for living hence one fifth of the expenditure relating to the property will be disallowed.

1. Repair and renewal:

The expenses incurred in this respect for personal purposes shall not be allowed as deduction hence, in this case the expenses relating to the repair and renewal will be disallowed (Blöchliger 2015).

1. Legal fees:

The expenditure incurred as legal and professional fees will not be deductible unless it is incurred for the purposes of business. Also it must not be in respect of a capital asset. In the present case the expenditure has been undertaken in relation to a house property hence it shall not be deductible as it is a capital asset.

1. Depreciation:

Depreciation is general not allowed as deduction as it is deducted as allowances in the capital assets. In this case, due to the absence of specific amount of depreciation in the profit and loss account it is not added back for the purpose of computation of the taxable income (Neuman et al. 2016). In addition, the assumption that the depreciation sis included in the cost sales could not be taken as the motor car was not directly related to the production.

The purpose of this letter is to resolve all the issues raised by you in our last discussion about the self-assessment tax returns. The process of self-assessment is used by the HMRC for the purpose of collection of income tax. In UK the tax year starts from 6^th April of the present year and ends on 5^th April next year. The provisions of the tax laws requires that very individual must file a return pf his income that he has earned in the last tax year. Therefor it is compulsory for Paul to file a return of his income disclosing correctly the amount of income earned by you.

As per Paul’s case, the registration shall have to be done as sole- trader or self-employed. It is possible to file the return both online and offline. It is recommended that the return is filed online as it is more users friendly and easier. There is a last for the submission of the return of income, which is midnight of 31^st January 2018 for the year 2016-17. In the event of late payment, the tax payer has to bear penalties.

Stamp Duty

It should be kept in mind that the HMRC has full right to review the information or details of the taxable income of Paul if it wants to for ascertaining that Paul has been giving right amount of tax. In pursuance of this, they can visit the premises of Paul’s business or ask Paul to visit their office with the required information (Gurran and Phibbs 2015). They will communicate with Paul by a call or letter. If they are of the opinion that Paul will have to pay more taxes then the same shall be paid within 30 days from the date of notice.

It is earnestly advised that Paul should pay the right amount of tax and file his return on time to avoid undue penalties. It is believed that all the concerns and queries have been properly dealt with in the letter above.

The department’s demands a lot of documents in case of self-assessment tax return these are the supporting details of the expenses incurred. The amount of tax that is payable is shown in the self-assessment return below:

Calculation of Tax Payable
Particulars	Amount
Tax Adjusted Trading profit	£             40,827.00
Less:
Tax free threshold	£             11,500.00
Taxable Income	£             29,327.00
Tax Rate	20%
Tax Payable	£               5,865.40

Statement showing Calculation of Income Tax due by Beth
Particulars	Non Saving Income	Dividend Income	Compensation	Total
Income from salary	£             42,000.00			£   42,000.00
Compensation			£           3,500.00	£     3,500.00
Dividend income		£           6,000.00		£     6,000.00
Ex Gratia			£         50,000.00	£   50,000.00
Total	£             42,000.00	£           6,000.00	£         53,500.00	£ 101,500.00
Less:
Personal Allowance	£             11,000.00			£   11,000.00
Redundancy PA			£         30,000.00	£   30,000.00
Taxable Income	£             31,000.00	£           6,000.00	£         23,500.00	£   60,500.00
Tax Payable
Total income tax due	£               6,200.00	£              325.00	£           9,400.00	£   15,925.00

Tax Rate in respect of first 31,000 of non-saving Income is equal to 20%. The tax rate in respect of dividend is exempt up to 5000. Above this limit the tax rate is equal to 32.5%. In respect of compensation the tax rate is equal to 40%.

It refers to payment that is made as a result of termination of employment and is taxable as employment income but there is a special deduction of 30000 which is received by the assesse in the present case (McCluskey and Franzsen 2017).

calculation of taxable profit
Particulars	Amount
Bank Interest
received 30 June 2016	£   455
received 31 December 2016	£2,752
accrued 31 March 2017	£1,980
Dividend Income
Les:
Tax relief
Trading profit after capital allowance	£1,561,400
Add back:
Chargeable gain	£516,494
Statutory Total Income	£2,210,081
Less:
Gift aid tax relief	£4,500
Taxable Income	£2,205,581

Workings:

Statement showing  Chargeable gain on sale of factory
Particulars	Amount
Sales price	£              1,192,050
Less:
Cost	£               450,200
Less	£             225,100
Indexation
Chargeable gain	£                 516,750

1,192,050 / 450,200 =741,850

(264, 4 -176, 2) / 176, 2 =88, 2 / 176, 2 = 0,500

0,500 x 450,200 = 225,100

741,850 – 225,100 = 516,750

Capital gain on sale of factory
Particulars	Amount
Sales price	£              1,192,050.00
Less:
Indexed cost	£                 675,555.51
Capital gain	£                 516,494.49

       Calculation of total tax payable

Particulars	Amount
Taxable Income	£2,205,581
Basic rate for 0 to 33500	£ 6,700
Higher rate from 33501 to 150000	£ 60,000
Additional rate for over 150000	£ 909,936
Tax payable	£976,636
Total Tax payable	£976,636

The expenses that are incurred for generating the taxable income are allowed as deduction as per the tax law. The deductions also include various reliefs that are provided to the taxpayer. The determination of the allowable deduction is a very important step for determining the taxable income (Baum et al. 2017). 

Calculation showing Capital Gains
Particulars	Amount
Disposal Proceeds	£ 240,000
Less Acquisition cost	£ 25,000
Capital Gains	£ 215,000
Less Annual Ex Allowance	£ (11300)
Taxable Gains	£ 203,700
Capital Gains @ 20%	£ 40,740

Calculation showing Capital Gains
Particulars	Amount
Disposal Proceeds	£ 240,000
Less Acquisition cost	£ 25,000
Capital Gains	£ 215,000
Less Annual Ex Allowance	£ (11300)
Taxable Gains	£ 203,700
Capital Gains @ 10%	£ 20,370

If Mr. Delroy had paid his son in case it would have attracted much less tax than in case of Mr. Delroy gifting shares to his son. Also, Mr. Delroy has to ensure that he doesn’t die in the next 7 years so that his son doesn’t have to pay heritage fee which amounts to 40% of the value of the property.

Statement showing chargeable gain for Marlon
Particulars	Amount
Sales proceed	£497000
Less:
cost of acquisition	£146000
legal fees/ other charges	£6600
Gains	£344400
Less PPRR 2/3x 344400	£(229600)
Capital gain	£114800
Less PA	£11300
Total Chargeable Gain	£103500

Direct and Indirect Taxes

  Being a higher tax payer Mr Marlon, will pay 103500×28%= £28980

1. ii) 

If 50% of the property is transferred then the capital gain in respect of the property will reduce by 50%.  Hence, this will reduce the amount of capital gain.

Calculation of chargeable gain for Marlon
Particulars	Mr.	Mrs.
Sales proceed	£248500	£248500
Less:
cost of acquisition	£73000	£73000
legal fees/ other charges	£3300	£3300
Gains	£172200	£172200
Less PPRR 2/3x 344400	£(114800)	£(114800)
Capital gain	£5700	£5700
Less PA	£11300	£11300
Total Chargeable Gain	£46100	£46100

Being a higher rate tax payer Mr. Marlon has to pay at a rate of 28%.

46100×28%= £12908

Being a standard tax payer Mrs. Alvita has to pay at  a rate of only 18%.

46100×18%=£8298

Total £ 21206

Hence, it can be inferred that Mr Marlon will be left with £7774 more in his pocket.

Conclusion:

The completion of the entire assignment helped to get a better grasp of the present taxation environment of the UK. It is clear that there are fundamentally two types of taxes. They are one is direct tax and the other is indirect tax. The project has helped in understanding the conceptual difference between accounting profits and tax adjusted trading profit. It is also been made very clear in the project that the tax is levied on adjusted trading profit. It is also clear that the income can be classified into three categories i.e. savings income, non-saving income and dividend income.

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