Comprehensive Report on UK Taxation: Environment and Computations

This report provides a comprehensive overview of the UK taxation system, covering various aspects such as the tax environment, the roles and responsibilities of tax practitioners, and the tax obligations of both taxpayers and their agents, including the implications of non-compliance. It includes detailed computations of relevant expenses, allowances, taxable amounts, and tax payable for both employed and self-employed individuals, along with the completion of relevant documentation and tax returns. The report also addresses corporate tax liabilities, capital gains tax, and provides practical examples and illustrations to aid understanding of the complex tax regulations. The document covers income tax, corporation tax, and capital gains tax, and explains how these are applied in the UK. The report also provides practical examples and calculations to illustrate tax computations for different scenarios, including those for employees and self-employed individuals and businesses.

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