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 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...