Computation of Capital Gain Tax

Assets can be transferred or disposed through the indexation method, which involves determining income from the transfer, deducting costs, and applying an inflation index to calculate the gain or loss. The process is illustrated using Form P45 (Illustration 2).

Taxation

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Description of UK tax environment.......................................................................................3
1.2 Analysis of roles and responsibilities of tax practitioner.......................................................5
1.3 Explanation of tax obligations of tax payers and their agents along with the implications of
non-compliance............................................................................................................................5
2.1 Computation of relevant expenses and allowances...............................................................6
2.2 Computation of taxable amount and tax payable for employed and self employed along
with the payment dates.................................................................................................................7
2.3 Completion of relevant documentation and tax returns of the organization..........................9
Task 2.............................................................................................................................................12
3.1 Computation of chargeable profits.......................................................................................12
3.2 Computation of corporate tax liabilities and computation of due payment dates................12
3.3 Provisions of income tax deductions...................................................................................14
4.1 Identification of chargeable assets.......................................................................................15
4.2 Computation of capital gains and losses and tax payable on it ...........................................15
Conclusion.....................................................................................................................................17
References......................................................................................................................................18
2

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

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

INTRODUCTION
Taxation can be referred as act of taxing authority of levying of tax on individuals on
their earnings or benefits attained by them. This term is applicable on all types forms of taxes
such as income tax, capital tax and other indirect tax. Taxation in UK is governed by provisions
of HM Revenue & customs (Xu and Xu, 2013). Individuals are required to comply guidelines
provided by HMRC in order to satisfy their tax obligations in an appropriate manner. Present
project report is focused on the evaluation of provisions of tax liability of individual and
commercial entities. For this aspect, description will be provided regarding relevant tax norms.
This description will be supported by practical examples for better understanding.
TASK 1
1.1 Description of UK tax environment
Purpose and types of taxation
Taxation is a system of compulsory contribution by public levied by government. It is a
primary source of revenue for government expenses and other public purposes. Tax is charged
by government to make reduction between income in-similarities between population and to
provide necessary goods and services to the public. This revenue is raised from the direct and
indirect taxes. For this aspect following types of taxes are collected by the government of UK- Income tax- Income tax is charged from individuals and trusts on the income 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 of income tax is 20%. However, in situation where income exceed from 31785 then
40% tax is payable on additional income and if it exceeds from £150,000 then 45% is
payable on additional income. Corporation tax- This tax is payable by corporate entities which have separate legal
identity on the profits earned by them during particular accounting period. In accordance
with the HMRC, corporation tax is placed on the taxable profits of limited companies and
similar entities such as association, unincorporated entities, clubs and societies
(Henrekson and Sanandaji, 2011).
5

 Capital gains tax- Individual or business organization is liable to pay capital gain tax in
situation they had earned benefit on transfer of non-current asset (Comprix, Mills and
Schmidt, 2012). In accordance with the provision of this tax, profit is taxable instead of
receivable amount. Inheritance tax- This tax is chargeable on the transfer of property after death. However,
this tax is subjected to various reliefs and exemptions. Inheritance tax will also be levied
in situation asset is transfer 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 of lifetime
transfers while 40% (Inherent tax, 2015) is charged at the event of death.
Different methods of tax collection
In UK, tax is collected by HMRC on the behalf of government. Generally it is collected
through the scheme of PAYE although some individuals are required to pay their tax liability
through self assessment tax return. PAYE tax 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 situation individual 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 by HMRC. They
are responsible for the collection of tax on the behalf of government. They provide guidelines to
assesses and tax practitioners by which they can fulfill their tax obligations in an appropriate
manner (Miller and Oats, 2012). In addition to this, they provide continuous amendments by
considering economic environment in industry for the purpose of providing better and justified
guidelines.
1.2 Analysis of roles and responsibilities of tax practitioner
Tax practitioner act as a mediator between assesse and government authorities. They are
well versed with the knowledge of taxation provisions thus are required to guide tax payer in an
appropriate manner. In this aspect, they have following roles and responsibilities-
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 Dealing with inland revenue- There main responsibility is to deal with inland revenues.
They fill the return on the behalf of the client. Further, they communicate amendments to
the clients so they comply their obligations in a proper manner (McGuire, 2013). Providing appropriate advise- Tax practitioners provides advise to the client regarding
tax requirements by analyzing their tax situation in a proper manner. In addition to this,
they also handle the cases of tax dispute with the government authorities. Computation of tax liability- By considering information of business scenarios, tax
practitioner also compute the liability of individuals (Dowell, 2013). Due to this aspect,
they are mandated to have background education in the field of taxation.
 Respecting confidentiality of client- It is both ethical and legal responsibility of tax
practitioner. They must not disclose information of client to the third party in order to
earn unjust benefits.
1.3 Explanation of tax obligations of tax payers and their agents along with the implications of
non-compliance
Obligation of tax payer
 To provide fair and accurate information to the tax agent so they can fill their return
appropriate.
 All material information should be disclosed without any window dressing or
manipulation (Cairncross, 2013).
 They should act in accordance with the standards described by HMRC while considering
various aspects such as VAT, PAYE, corporation tax, etc. Further, they are required to maintain accounting data for reasonable period of time for
the purpose of scrutiny.
Obligation of tax agent
 They should act in accordance with the guidelines provided by HMRC
 They should promote tax planning instead of tax evasion Tax agent are required to provide true and fair information to client without any
misleading guidelines in order to earn high profit.
Implications of non-compliance
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Both 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 with the provided guidelines by the
legislation then they will be liable to provide damages of £3,000. On the other hand, there will be
adverse impact on the business activities (Terra and Wattèl, 2005 ). Further, license of tax agents
can be canceled if they act in contradiction with the guidelines given by HMRC.
2.1 Computation of relevant expenses and allowances
For employee
Mary is employed in Chris and Cross Ltd. Stated company is engaged in providing of
ladders to the customers. For her service she gets payment on hourly basis i.e. £50 per hour. In a
week she work for 20 hours as Saturday and Sunday is off. In addition to this, she is entitled for
the dearness allowance 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 month
For self employed
Mr. Jones is running a digital store for the selling of computer appliances. Along with
this, they are also providing services to the clients for the repair of computer appliances.
However, this business is not able to generate sufficient returns. Income statement of their
company is enumerated below-
Table 1: Income statement of Mr. Jones
Particulars Amount
Store of computer appliances
Income from sales of computer appliances £400,000.00
Cost of products £210,000.00
Payment made to employees £10,000.00
Rental charges £5,000.00
Drawings £2,500.00
Office expenditure £4,000.00
Travel charges £500.00
Paid for donation £400.00
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Bank charges £230.00
Depreciation of office equipment £1,000.00
Capital Allowance £580.00
Services provider of computer appliances
Losses on these services of computer appliances £1,300.00
Table 2: Statement showing computation of taxable income
Particulars Amount (£)
Incomes
Income from sales of computer appliances £400,000.00
Less: Cost of products £210,000.00
Operating profit £190,000.00
Expenses
Payment made to employees £5,000.00
Rental charges £5,000.00
Drawings £2,500.00
Office expenditure £4,000.00
Travel charges £500.00
Bank charges £230.00
Depreciation of office equipment £1,000.00
Total expenses £18,230.00
Net profit £171,770.00
Less: Capital allowance £580.00
Less: Tax benefit of loss £1,300.00
Taxable income £169,890.00
2.2 Computation of taxable amount and tax payable for employed and self employed along with
the payment dates
Taxable amount and tax payable by employee
Taxable amount = Income of Mary * 12 - Deduction allowed by Income Tax Act 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
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By considering the above computation it can be said that after deduction of yearly allowance of
10000, taxable income of Mary is £1880. This amount is less 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 £171,770.00
Add- 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 £980.00
Adjusted 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 is liable to pay tax
obligation of 50826.5. Computation of this tax obligation is done by considering following tax
brackets-
10

Mary and Jones are required to submit their return prior to the midnight of 31st October
2015. In situation where they are filing online return then date for the submission of the return
will be extended to the 31st January 2016.
2.3 Completion of relevant documentation and tax returns of the organization
Tax payer is required to complete documentation formalities with the submission of
amount of tax payable by them on their earnings and benefits. These documents are required to
be submitted by tax agent or tax paper with relevant and reliable information. This submission is
required to be supported by taxation regimes (Joo-suk, 2012). Description of various taxation
documents is enumerated below-
1. P45- Tax payer is required to provide submission of this document if they are not willing
to continue their operational activities of business. It is compulsory for the tax payer to
fill this document in order to provide information of their earnings in previous assessment
year prior to the closing.
11
Illustration 1: Income tax rates
(Source: Income Tax rates and Personal Allowances, 2015)

Illustration 2: Form P45
(Source: Garrett and Mitchell, 2001)
2. P60- This taxation form is used by individuals who had earned income from the course of
employment. With this form, they are able to provide description regarding actual tax
12

liability in order to demand compensation for the excessive tax deduction at source by the
employer.
3. P11D- This form is filled up by employer in order to provide description of benefits
provided in kind to the employees such HRA, dearness allowance etc. This form is
submitted to the HMRC.
Illustration 3: Form 11 D
(Source: Blundell and et.al., 2009)
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TASK 2
Scenario
Fast and Forward Ltd is engaged in production of sports equipments. In 2014, 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 the
business were £60,000 (40000 direct overhead and 20000 indirect overhead). In this financial
year, company had also paid dividend to their shareholders of amount £60,000. Along with this,
14
Illustration 4: Form P60
(Source: Garrett and Mitchell, 2001)

interest charges on debt borrowed by them 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,
there is also charge of depreciation of £45,000. Company is entitled to take benefit of capital
allowance of £23,000.
Financial information of company
Information of other income and losses is as follows-
Table 3: Data of Running Limited
Particulars Amount (£)
Sales £950,000.00
Purchase £380,000.00
Direct overheads £40,000.00
Indirect overheads £20,000.00
Dividend paid £60,000.00
Interest paid £60,000.00
Dividend received (TDS on dividend 10%) £6,750.00
Capital Allowance for the year £23,000.00
Depreciation £45,000.00
Capital gains £10,000.00
Capital loss £2,500.00
Income from letting out building £4,000.00
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Wear & Tear allowance £1,800.00
Interest on investment (TDS on investment 10%) £2,700.00
Table 4: Financial facts and figures of Running Limited
Particulars Amount
Capital gain £10,000.00
Capital loss £2,500.00
Rental income £4,000.00
Wear & Tear allowance £1,800.00
Interest on investment (TDS on investment 10%) £2,700.00
Table 5: Operating profit of Fast and Forward Ltd
Particulars Amount (£)
Sales £950,000.00
Less: Cost of purchase £380,000.00
Less: Manufacturing expense £40,000.00
Gross profit £530,000.00
Less: Other expenditure £60,000.00
Less: Interest paid £60,000.00
Less: Depreciation £45,000.00
Operating profit £365,000.00
3.1 Computation of chargeable profits
Scope of corporation tax
Corporation tax is payable by corporate entities which have separate legal identity on the
profits earned by them during particular accounting period. In this aspect, resident companies are
required to pay tax on both domestic and foreign income. However, non resident companies are
required to pay tax only on domestic income (Citron, 2001).
Accounting period
Generally duration of accounting period is of 12 months which is started with the
financial year of the company. In assessment year, tax of previous year is paid by company.
Chargeable profits
16

Tax payable by company is computed on the amount of chargeable profit. This amount is
computed after making adjustment of non-allowed expenses and income by the HMRC. On this
amount further adjustment regarding deduction provided by government authorities is made.
Due dates
Action Date of submission
Submission of File annual accounts with
Companies House
Prior to the 9 months from the date of completion of
financial year
Payment of Corporation Tax
Prior to the 9 months from the date of 1 day after
completion of financial year (Blundell and et.al.,
2009).
Filing Company Tax Return Prior to the 12 months from the date of completion of
financial year
Adjusted profits
Adjusted profits are computed by making adjustment of disallowed expenses and income
from trading income or losses of the company. By considering the amount of adjusted profit
taxable amount is determined.
Treatment of losses
Losses are adjusted from the amount of adjusted profits. This amount is reduced from the
adjusted profit to determine net taxable income.
Corporation tax rates
Corporation tax rate for company is 24%. On this percentage company is required to pay
taxes on business income.
Capital expenditure and allowance
Capital expenditure allowance is a deduction provided to the company for the usage of
non current assets in the business. For this aspect two pool is prepared i.e. general pool and
special rate pool.
Treatment of income tax deductions
Provisions of tax deduction has been developed to make reduction in the tax liability of
the corporate entity. In this aspect, provisions of exemptions such as marginal relief, charity and
pension plan has been introduced (Alzahrani and Lasfer, 2012).
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3.2 Computation of corporate tax liabilities and computation of due payment dates
Step 1: Computation of chargeable adjusted profits by considering allowable and non
allowable income and expenses
Initially adjusted profits are computed by adding disallowed expenses and deducing
allowances and other expenses. By considering this aspect, in present scenario depreciation will
be added back and dividend & wear allowances will be reduced. In this amount other income
such as dividend and rental will be added.
Table 6: Adjusted profits of Fast and Forward Ltd
Particulars Amount (£)
Operating profit £365,000.00
Add: Disallowed expenses
Depreciation of asset £45,000.00
Total disallowed expenses £45,000.00
Allowances and other expenses
Less: Dividend paid £60,000.00
Less: Wear and tear allowances £1,800.00
Total allowed expenses £84,800.00
Trading profit £325,200.00
Add:
Income from letting out building 20000
Interest and dividend income [7500*+3000**] £10,500.00
Chargeable gain [12000-4500] £7,500.00
Adjusted profits £386,200.00
Step 2: Computation of chargeable profits by capital allowances
In second step chargeable profits are computed by reducing capital allowances from the
amount of adjusted profits.
Table 7: Computation of chargeable profits
Trading income
Adjusted profits before capital allowances £386,200.00
Less: capital allowances £230000.00
Chargeable profits £363,000.00
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Step 3: Computation of taxable amount
It is last step of tax computation. In this step final adjustments are made regarding tax
losses. By deducting this amount net profit will be determined and on this amount rate of
corporation tax will be applied.
Table 8: Taxable amount of Fast and Forward Ltd by considering additional items
Particulars Amount (£)
Taxable profit (a) £363,200.00
Tax losses 0
Corporation tax (24%) (b) £87,168.00
Marginal relief (c) (Consider task 3.3) 21604
Tax liabilities (d)=(a-b)+c £65,564.00
Relief from double taxation (e) £1,050.00
Taxable amount (f)= (d-e) £64,154.00
In the table 8, taxable profit is £363200. Due to absence of taxable losses this amount will
be considered for the computation of tax liability. Rate of corporation tax as per UK norms is
24%. From this taxable amount marginal relief and amount linked to double taxable has been
reduced and tax able amount is £64,154.00.
3.3 Provisions of income tax deductions
Income tax deduction are reduced from the taxable amount of the company in order to
reduce its obligation. These deductions are provided on the several transactions such as charity,
allowances, marginal relief.
Computation of marginal relief by considering above described scenario is as follows-
Marginal relief
= Standard Fraction x (U – A) x N / A
In this formula:
U Upper profit limit
A Profits
N Total profits
Standard Fraction (7/400)
19

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
4.1 Identification of chargeable assets
Chargeable persons
Chargeable 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 which are capital in
nature. On certain assets, exemption is provided by government such as government securities,
car, investment in personal equity plan etc (McGuire, 2013). Further, liability for capital gain tax
is payable if value of disposal asset is more than equal to £6,000. In this transfer of shares other
NISA, PEP or ISA and business assets are also taxable.
Payment dates
Tax payer is required to pay tax charges on 5th April after the end of accounting 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 it
Case situation 1
James is running a furniture outlet. He had acquired paintings some year 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 on 1st September 4500
20

2012)
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 assets through indexation
method is as follows-
Step 1: Determination of Income from transfer of property (A). In second step cost of acquisition
is deducted from the income. In step three capital gain is determined. In fourth step indexation
benefit is determined. Indexation benefit is applicable in present case as asset is purchased in
later date. In last step net capital or gain is determined by considering other capital losses and
gains.
Particulars Amount (£)
Step 1: Income from transfer of
property (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 will be payable on
amount 710. This amount is computed after considering exemption on capital gain tax.
Computation of capital gain tax or loss for transfer of disposal assets through taper relief method
is as follows-
Particulars Amount (£)
Step 1: Income from transfer of property
(A)
5000
21

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 for client because they
are not able to take benefit of indexation because asset is purchased after 1998.
4.3 Computation of liability for capital gain tax
In accordance with the above computation company will not be liable to pay capital gain
tax because there is situation of net loss. Benefit of this loss can be taken by organization in next
accounting year. In situation of gain, James will be liable to pay tax at the rate of 18%. In the
above describe example, if there will be capital gain be of amount to 500 then computation of
capital gain tax will be as follows-
=500*18%
=90
*28% rate has not been considered because trading profit is less than the basic limit of the
James.
CONCLUSION
In accordance with the present study, it can be concluded that taxation is imposed by
government in order to generate revenue for the public expenditure and to provide necessary
service and products. Tax payers and tax agents are required to comply their obligations in an
appropriate manner by considering provisions described by HMRC. In situation where they to
comply these provisions, then they will be liable to provide damages or penalty charges
described by legislation.
22

REFERENCES
Books and journals
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a pragmatic view. Intereconomics. 46(2). pp. 92-97.
Blundell, R. and et.al., 2009. Optimal Income Taxation of Lone Mothers: An Empirical
Comparison of the UK and Germany. The Economic Journal.119(535). Pp.101-121.
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. 28(7‐8). Pp.821-852.
Comprix, J., Mills., L. F. and Schmidt, A. P., 2012. Bias in quarterly estimates of annual
effective tax rates and earnings management. Journal of the American Taxation
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Henrekson, M. and Sanandaji, T., 2011. Entrepreneurship and the theory of taxation. Small
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Online
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Working for yourself. 2015. [Online]. Available
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