Qualification - OTHM Level 5 Diploma In Accounting And Business
Unit Name - Taxation Principles and Practices
Unit Reference Number - H/617/3295
Assignment Title - Taxation Principles and Practices
Learning Outcome 1: Understand the principles of taxation.
Learning Outcome 2: Understand personal taxation.
Learning Outcome 3: Understand business taxation.
Principles of taxation
1.1 Differentiate between indirect and direct taxation.
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Difference between direct and indirect tax
In case of direct, it is considered as those taxes those are levied by the government to the citizens based on their income or profits. The tax is collected directly from the individuals to the government of UK. Citizens have to pay their taxes in direct form if they cross the limit of income or profit as prescribed by the government. The example of direct taxes in UK is Income tax, Property tax, Corporation tax, Inheritance tax etc. (James, 2016).
In case of indirect taxes,that are being levied to all citizens irrespective of their class and background in an indirect manner. It used to be imposed on the manufacturers or suppliers and from them it shifts to the common people. Generally, the indirect taxes were levied on products or services by the government. The manufacturer tends to charge the amount of tax from the consumers by adding them in the prices of their products. Example of indirect tax in UK includes Value Added Prices (VAT), excise duties, import levies and other smaller industry specific duties and levies.
1.2 Explain the principles of taxation.
Taxation principles
The system of taxation is recorded from historical period but now the governments were making more processes that are sophisticated and systems for properly defining on what basis the Taxation is going to be conducted and from whom the tax is being levied. The taxes were collected from the citizens for their welfare and to develop revenue for the government. The taxes were primarily levied upon the citizens in order to generate revenues those are used further for the raising of government expenditures (de Preez and Stiglingh, 2018). The taxation is used to finance the government along with that the taxes were also used regarding the mere fiscal purposes. The taxes were also helps in the achieving of goals regarding neutrality in the economy. Adam smiths is formulated the method of good taxation principles. He argues that the taxation should follow four principles of certainty, fairness, efficiency and convenience. The fairness determines the compatibility of the taxpayer is based on its condition according to their ability to pay inline of the family and personal needs. The term convenience relates to the easing of compliance for taxpayer's along with that it also ensures the simplicity of process of tax collection. Certainty relates to the term in which the taxpayers were being clearly informed regarding the basis on which the taxes were levied (Sikka, 2017).
Finally, the term efficiency defines the method of collection of taxes from the people. The ability to pay principle of Adam is the main principle of taxation today also because it clarifies the effectiveness of tax collection services. The regressive taxes are consider to have impact upon the low-individuals in spite of the wealthy ones. They are mainly focused onlower income groups. The regressive tax considers to be levied as the same percentage on goods or products that are purchased regardless of the income of buyer and it creates hesitation for low earners. The progressive tax model seems to affect the high-income groups of the society (Konvisarova et al., 2016). However, all of the above the lower income groups are consider paying more tax than the higher income groups in comparison of their incomes. The regressive tax is consider to have no relation with the income of any individual. The regressive tax includes sales tax, property tax, excise duties and others such similar taxes. Tax evasion and tax avoidance are two different concepts the latter seems to be legal while the latter is illegal and can create huge trouble for people those are flouting tax rules. Penalty and imprisonment can be awarded to the guilty (Kiprotich, 2016). Inflation of deduction without having a proper legal proof and it is also termed as a fraud of tax. While the first one not seems to be same act of not giving the tax while it consist if reducing the tax to some extent, but in legal manner by finding of available loopholes present in the system. The tax avoidance seems to be legal and needs to be done before tax liability.
2. Understand personal taxation.
Personal taxation in UK
2.1 Explain income tax and national insurance requirements for individuals.
Income tax and national insurance requirements for individuals in UK
The basic earning that an individual have to earn for being eligible regarding the payment of tax to the government is more than € 12500. An individual earning between € 12500- € 50000 then the rate of tax the concerned ones have to give is 20% of their annual income to the government as tax. The ones those annual incomes are less than the € 12500 they are expelled from giving direct taxes to the government. After the basic rate the higher rates were introduced which consists of individual those income were more than € 50001- € 150000 (Emmerson, 2016). The income of those were fall under this numbers have to give 40% of their income to the government as taxes in direct form. In addition, after those additional rates were applied and those have income more than € 150000 has to pay 45% of their overall taxes (Emmerson and Johnson, 2018). The individual also can apply for reliefs in their tax payments if they fit the standards of government of UK. The deferred tax of liabilities or assets, which are referred to be avoided from paying tax. This tax is seems to be avoid by the companies generally because of the difference in their value. The amounts those are attributed to goodwill are being adjusted by the amount of deferred tax.
For the National Insurance contributions (NIC) are the class 1 of 12% earnings that the individuals pay in the national contributions having income more than € 183 in a week and it is termed as the primary threshold (Ghodsi and Webster, 2018). The individuals can pay their contributions of 2% on their earnings of more than € 962 per week. Moreover, when the income fails below the level of primary threshold the contributions are not required to pay for the individuals. The penalties were also there if someone fails to fulfill the payment in required amount of time. The late fine is being imposed to the individuals. If the individual fails to fulfill the payment of quarterly or monthly based within six months then the additional penalty of 5% seems to be imposed on the unpaid amounts. After that, a further penalty is also being imposed if the payment is not paid within 12 months. In UK it is necessary for every working individual above the age of 16 and earn the concerned amount have to pay the national insurance.
2.2 Explain inheritance tax planning and payments.
Inheritance tax planning and payments
The inheritance tax is consider as the tax of the people, which seems to be dead and their property is levied by the estate tax on the property of the dead man. The government wants to inherit the assets of the person who dies. The rate of tax depends on the size of the property and values of inheritance along with that the relationship of beneficiary to the deceased one. The rate of inheritance tax in UK is 40% and the government is charging it if the property's size exceeds the threshold size. The threshold value of € 325000 is free from tax and the property values more than that have to pay 40% tax (Fink et al., 2019). The amount that is being gained from inheritance has to be paid as tax to the government of UK if the value exceeds the threshold amount. The payment of the concerned tax has to make via online payment or in their respective banks.
2.3 Explain how an individual determines their capital gains tax liability.
Determination of capital gains of individual from tax liabilities
The capital gains are the amounts those are included in taxable income and in most cases, they are seems to be taxed in lower rates. The realization of capital gains were actually realized when the assets of capital are sold out or being exchanged in a higher price than its basis. Basis is consider as the purchase price of the asset along with that the commission and the cost of improvements are also included with less depreciations. In order to determine the gains that are being collected from the tax liabilities it requires to find or identify the difference between the amounts that how much is spent in the purchasing and how much the individual gains from the selling of that assets. The capital gains are generally termed to be included in the taxable income of the individual. The individuals can be termed their capital gains by selling their assets in great prices.
2.4 Analyse an individual's obligation in relation to their personal tax liability.
Personal tax liability
Liability of tax is termed as the total amount of debt tax that is being debt by corporation, individual or any other entity related to the taxing authority. Along with that, the tax liability is termed as the total amount of tax that the individual is responsible to pay to the government. All type of taxes istermed as the liability of tax. The taxes that are consider by the government authorities, which further use the overall funds in order to pay for different type of services such as repairing of roads or defending of nation (Yoon, 2017). The liabilities of the individuals can be reduced by submitting the applications to the government along with the individuals have to be fall under the category of government deduction category. The sales tax and payrolls of company can be termed as the liabilities.
2.5 Evaluate the implications of a failure to meet an individual's taxation obligations.
Failures in taxation obligations
The company can termed that the individual can suffer huge complications if they fail to declare or pay their taxes in time in UK. It can also affect the liabilities of individuals in a drastic manner. Along with that penalty will be charged to the individuals in order to not able to express or declare their assets in a precise manner. The fine for the failure of taxation obligation can sent someone to minimum 7 years of jail and unlimited amount of money. In case of providing false documents or papers individual can be charged a strict fine € 20,000 or more and additional 6 months of jail.
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3. Understand business taxation.
3.1 Explain how assessable profits and gains for both incorporated and unincorporated businesses are identified.
Business taxation in UK
The incorporate business in UK is termed as that type of business those are providing great benefits just of being a sole proprietor and it includes the protection of liability along with deductions in the tax rates. The assessable profits are known as a calculation that is used in the law of tax in order to determine the taxable income of an individual in terms of their gains or profits. The accessible profits are term as the measures that are taken where the taxable profits were come from the investments that were present in taxable investment accounts. The unincorporated business is consider to be privately owned by only one person having unlimited liability and the business is not legally registered also. The unincorporated business is termed to be fully a separated entity. The identification of profits and gains of the both incorporated and unincorporated business is based upon their profits and gains as well. Taxation of the businesses were used to be identified in terms of overall profit they have achieved in a specific period of time and if they are able to past the threshold value then the business have to pay some amount of their profits in form of taxes to the government.
3.2 Explain the details of the corporation tax system.
Corporation tax system
The corporation tax seems to be provided by the corporation to the government of UK. The profit is calculated based on the annual performance and profits of the company. Just like the individuals, the corporations also have to identify and analyze their overall profits and to give tax to the government according to their performance. The tax rate for the individuals is fixed at 19% from April 2016 in UK and is reduced to 17% from April 2020 (Überbacher and Scherer, 2019). The businesses are unable to receive any kind of allowance regarding the tax-free and for them all profits are seems to be taxable. The corporation tax is considered to be paid by all UK based or limited companies. The associations those are not incorporated also have to pay the corporation tax in UK such as housing associations, trade associations, member societies and group of individuals carrying a business. However, if the trading solely or in a partnership manner then, there is no need of giving the corporation tax. Instead of that, they need to pay the individual income tax.
The main responsibility regarding the corporation is in the head of the director of the company to pay the corporation in time. In order to reduce the corporation tax of companies they need to claim all their business expenses without any hesitation. The research and development relief is consider as the relief that the companies can claim regarding their betterment of business and along with that the requirements that are present can also be fulfilled. Reliefs are also there for the creative industries those are making profit from film, video games, theatre or animation. Along with that, disincorporation relief is also given to the industries those are closing or becomes a sole trader, limited partnership or ordinary business partnership. The business can also claim marginal relief if there income remains between € 300000 and € 1.5 million(2020). The cost of running of their business also claims to reduce the cost of the business that is being running from the costs.
3.3 Compare different value added tax schemes.
Different value added tax schemes
There are different value-added schemes is present in UK and also helps in creating a better culture of taxation in the country. The capital gains tax is consider as the tax on the profit of that an individual sells something to someone in an increased value. This is the gain that the company is making tax in spite of receiving of money. In some cases, the assets are tax-free and there is no requirement of paying capital gains tax if all of the gains are consider having tax-free allowance. In order to dispose the assets the individual have to sell the assets or to present those assets to someone else(Capital Gains Tax, 2020). The selling of the concerned assets and the profits that the individual gains from has to pay the government a particular amount fin form of tax. Presently, in UK the rate of capital gains tax is consider to be 28 % in case of residential properties. In concerned that basic tax rates are not consider and the income below the basic income tax band and below that the rate is 18%. In terms of trustees and representatives of personal the rate is 28% (Langenmayr and Liu, 2020), whereas for the non-residential property and other type of assets the rates of individuals are consider as 10% and 20%(Income Tax rates and Personal Allowances, 2020). The rates are in long-term capital gains for property cost € 0 - € 53600 is 0% and for € 53600 to € 469050 is 15% and for more than € 469050 is consider being 20% (Langenmayr and Liu, 2020). In case of short-term capital gains they are taxed as ordinary income as per the federal tax brackets. If the capital gains tax is remain due by the end of 31 January in the tax year penalty for late payment of tax is charged by 5%.
Along with the capital gains another value added tax scheme is present named VAT retail scheme and it is divided into 3 more standards schemes. The standards VAT schemes are namely point of sale scheme, which helps in the identification and recording of VAT during the time of sale. Apportionment Scheme is another standard scheme it terms to be buy the goods for the resale. Along with that Direct calculation scheme which claims to make a small proportion of sales. The VAT is also have another type of scheme named flat VAT scheme, here the businesses have to give a fixed price to the HMRC. They tends to create difference among the charge that is been taken from consumers and pay to HMRC and it defines that the reclamation on Vat is not allowed. Another scheme of VAT is present namely cash accounting scheme, this helps in the solving of problems and those are related to cash flows being associated with standard scheme (Devereux et al., 2016). VAT deemed to be cleared by the end of the quarter and is been paid for the invoice in actual manner. The businesses those are using flat rate scheme and fall within the limited cost trader have to pay VAT at the rate of 16.5% and the rule is being applied if the cost services and direct goods is less than 2% of total turnover or less than the amount of € 1000 per year (Devereux et al., 2016). In addition, the standard rate of VAT is 20% on most of the goods and services(Income Tax rates and Personal Allowances, 2020). The HM revenue and customs (HMRC) records or marks a default if they are not receive the returns of VAT on time. A surcharge period of overall 12 months are given in case of default and if the company defaults again during the surcharge period then the surcharge period is proposed to extend further more along with that a surcharge amount on extra basis is consider on the top of the VAT that the business owes. The surcharge is consider as the percentage outstanding on the due date for the period of accounting and the rate tends to increase as the company fails in surcharge period.
3.4 Evaluate the implications of a failure to meet business taxation obligations.
Failures to meet corporation taxation obligations
If the corporation is unable to pay the taxes in time to the HMRC then the company will going to charge the interest of the company. The interest is being charger from the very day since the tax should be paid. Along with that, the corporations also have to face serious allegations and resistance. The penalty of 200% of the due amount of tax can also be fined upon the company. The evasion of tax can jail upto minimum 6 months to maximum 7 years and can invite fine from € 5000 to unlimited amount (Davies et al., 2019). Along with that the criminal acts were also been imposed upon the corporation and upon the employees as well. Tax evasion is illegal in UK and strict measures are available for the criminals in the country.