Tax in simple terms refers to the government raising money to spend on public services which includes health and social security system and education. Tax levied on a number of goods and services in the form of Value Added Tax (VAT), such as income tax on the money we earn. Tax can also be imposed on various transactions i.e. inheritance and profits from selling homes or antiques. The tax system is a complicated procedure.
The purpose of task A is to provide features of the UK tax system in conjunction with any rules and regulations with regards to UK registered companies. It will also discuss the process in which the tax liability of an individual is implemented. The principle UK taxes will be explained clarifying the fundamental aspects of tax law. Task B analysis the UK tax system by contrasting it with USA‘s tax system to identify how a company is affected and operated within different tax structures.
The UK tax system is constituted of various different taxes, they are categorised as direct taxes or indirect taxes. Direct taxes are charged on profits, income and other acquisitions. Direct taxes mainly consist of Corporation Tax, Capital Gains Tax, Income Tax and Inheritance Tax. Another form of direct tax is National insurance contributions. These taxes are all controlled by Her Majesty’s Revenue and Customs (HMRC). National insurance contributions, however, are administered by the National insurance Contributions Office (NICO) of HMRC. The major tax payable by companies is corporation tax.
Indirect taxes are taxes on expenditure. The charge is incurred when a tax payer purchases a product and is paid to the merchant as part of buying the product. It is then the merchant’s responsibility to process the tax on to the tax authorities. Indirect taxes include VAT, Custom duties, Excise duties (alcohol, tobacco and petrol) and Stamp duties. VAT is now also administered by HMRC.
The fiscal year runs from 6 April to the following 5 April. The corporation tax financial year runs from 1 April to the following 31 March. HMRC calculates a taxpayer’s liability based on the information provided in an annual tax return. A tax payer must notify HMRC of chargeability within six months of the end of the tax year when the income arises if the tax payer has not yet received a tax return. This may be because the HMRC are not aware of their eligibility to claim on having taxable gains income.
Corporation Tax Corporation tax is charged on profits of UK resident companies, public organisations and independent associations. Firms which are inhabitants within UK pay corporation tax only on their UK profits. Income from trading, investments and capital gains all contribute towards corporation tax based on their profit. The standard rate in 2011-12 of corporation tax is 26%, with a condensed rate of 20% on profits below £300,000. A system of relief operates for corporations with profits between £300,000 and £1,500,000; therefore 27.5% marginal rate is imposed on profits over £300,000.
This evidently fluctuates the average tax rate till it progressively reaches 26%. The standard rate is forecasted to fall 25% in 2012-13, 24% in 2013-14 and 23% in 2013-14. Subsequently there will be continual change in the reductions of these taxes in the form of marginal relief.
Sources: HM Revenue and Customs, http://www.hmrc.gov.uk/rates/corp.htm; Tolley’s Corporation Tax 2011–12.
We can see that current expenditure (such as wages, raw materials and Interest payments) can be deducted from taxable profits, whereas capital Expenditure (such as buildings and machinery) cannot be deducted. For depreciation to take effect on capital assets firms can claim capital allowances, which in turn decrease taxable profit over number of years by a percentage of capital expenditure. The classification of capital expenditure attracts different capital allowances. Different classes of capital expenditure attract different Capital allowances:
•The annual investment allowance permits the first £100,000 of plant and machinery investment to be irrecoverable against taxable profits instantaneously in 2011-12. •What may not be written down at all would be expenditure on commercial buildings and hotel, although fixtures and fittings which are integral in buildings can be noted on a 10% straight line basis. This is forecasted to fall by 8% in 2012-13 •Intangible assets expenditure is also is written down on a straight-line basis with a depreciation rate of 4% or at the discretion of the company. •However Capital expenditure on plant, machinery and buildings for research and development (R&D), under the R&D allowance, can all be written off against taxable profits straightaway.
In the recent budget relating to the tax year 2011/12 the corporation tax is to be cut by 2% from April and will fall by 1% in each of the next three years to reach 23%. Corporation tax is a tax which is remunerated by limited companies. The tax is charged on the profits of the company. As mentioned previously, corporation tax consists of two types of profits/gains incurred by trading and investments etc. Dividends income is not included as part of corporation tax, it is taxed differently. This evidently can create alterations within the firms involved. Therefore any limited company which is making profit in the taxable year 2011-2012 must legally pay tax on the profits generated on their trading and investments. Subsequently this would mean that a cut in corporation tax would benefit the business. Although an increase in corporation tax would cause hindrance for the business and create equal impact as increased costs would.
Businesses will therefore try to pass tax on to consumers by high prices but in effect still balancing the tax payable. The current rate stated is at 26% but the decision was changed that new rate would be 23% as a result of a 1% fall every year for the next 3 years. This will undoubtedly be advantageous to limited companies as the cost of corporation task will decrease significantly. This will enhance the growth of the firm and generate more profit, establishing a firm constitution.
Fuel Duty The fuel duty rate corresponds with all fuel types, this applies to all UK hydrocarbon fuels in conjunction with unleaded petrol, and diesel and other fuels for cars etc. there will be 1p per litre fuel duty rate. During the budget process the rate of fuel duty is established which is applied to petrol before it is sold. Before VAT can be set the fuel duty is raised/reduced. Therefore whenever it is raised/reduced, VAT thereafter is applied. We can assimilate that the consumers of hydrocarbon oils and alternative fuel products will be the major sources who will have severe impact. Similarly organisations importing /exporting the merchandise will also be succumbed to the effect of the fuel duty rate. UK tax law constitutes of statute law and case law. The basic guidelines of the UK tax system are amalgamated in a number of tax statutes of Parliament.
Each year the annual Finance Act amends these statutes on the basis of the budget proposal put forward by the Chancellor of the Exchequer. With reference to the task scenario the corporation tax proposed for businesses indicates that the 1% rate which is the new rate as of April will attract foreign investors and companies to enter into UK and do business. However the increase in National insurance and VAT may hinder the progress of foreign companies and result in a negative outcome.
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