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Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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Presentation on theme: "Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations."— Presentation transcript:

1 Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations

2 Tax Regulation Tax Jurisdiction Area within which rules apply Competent Authority Authority responsible for administration & collection of Tax Sources of Rules Domestic legislation (Common or Codified) Case Law (in common law countries) Statements of Practice by Tax Authority Supranational Regulations (eg EU) International Treaties (eg double taxation agreements)

3 Direct or Indirect? Direct Tax suffered directly by Taxable Person (ie the person/entity intended to pay the tax) Indirect Tax is not levied directly on a specific Person who is intended to pay the tax. The initial person on whom it is levied is not the ultimate sufferer of the tax.

4 Direct or Indirect? – Examples 1 Income tax levied on the earnings and investment income of individuals, whether from wages or salaries, or from the profits of a trade, profession or vocation or on capital gains Corporation tax levied on the profits of companies, investment income and capital gains Inheritance tax Levied on deceaseds estate subject to certain qualifying circumstances

5 Direct or Indirect? – Examples 2 Value-added tax levied on the provision of goods and services at varying rates based on the output value of such goods and services Excise duties levied on particular goods such as petrol, tobacco and alcohol National insurance effectively a payroll tax levied on both employers and employees Council tax a form of quasi-personal tax which has replaced the Community Charge, which itself replaced the domestic rate system of taxation and is a local rather than a national tax Local business rate a local tax on businesses which replaced the previous rate system, but based on property values

6 Employee Taxes Income tax under PAYE National Insurance Contributions National Insurance split in to 2 types EmployEES contributions EmployERS contributions

7 Classes of National Insurance Contributions (NICs) Class 1 primary contributions Affects - Employees earning over the Earnings Threshold (ET) How - Employees pay Class 1 NICs at one rate on their gross earnings above the ET up to and including the Upper Earnings Limit (UEL) and at a reduced rate for earnings over the UEL. They are "deducted at source" from employee's salaries. Class 2 contributions Affects - Self-employed How - Payable by the majority of self-employed individuals at a flat rate, either monthly or quarterly. Class 3 contributions Affects – Is voluntary, so could be anyone How - Payable at a flat rate by those who have not paid enough NICs to qualify for certain benefits, such as a state pension. Class 4 contributions Affects - Self-employed How - Payable by self-employed individuals who have made a certain amount of profit in a year. Calculated annually using the self-assessment tax return form.

8 Value Added Tax What is VAT? VAT is a tax on consumer expenditure. It is collected on business transactions, imports and acquisitions. Most business transactions involve supplies of goods or services. VAT is payable if they are: supplies made in the United Kingdom by a taxable person in the course of a business are not specifically exempted or zero-rated. What are the VAT rates? There are 3 rates of VAT: a standard rate, currently 17.5% a reduced rate, currently 5% a zero rate. Registration required if turnover is greater than £64,000

9 How does it work? A trader buys goods and incurs VAT He sells goods and charges VAT He calculates the difference and pays it to or receives it from HM Revenue & Customs

10 Which means? Tree grower sells wood for £100 + VAT = £ Net £ VAT £17.50 Tree grower pays £17.50 to HMCR (his sales are £100) Furniture maker buys it and makes table & sells it for £260 + VAT Net £ VAT £45.50 Customer pays £ Furniture maker has Input tax £17.50 Output tax £45.50 Difference = £28.00 paid to HMCR Customer is not VAT registered so cannot claim back VAT HMCR receives £ £28.00 = £45.50 (£ X 7/47)

11 International Tax Tax Residence Resident (generally where registered) tax on all profits wherever earned Country of operation taxed on profits earned in that country Double taxation of some earnings

12 Double Taxation Agreement Defines which country has the right to tax what types of income These agreements apply to people who are legally subject to tax liability in 2 different countries In double taxation agreements, the rule is that the country of residence taxes the income but also grants an allowance for the income on which the other country has the right to tax

13 Recent goings on July 24 th 2006 UK Government News Network announced Programme to 31 March 2007 We plan to complete work on new DTAs with Macedonia, Moldova, Poland, Slovenia and Thailand.

14 Or alternatively… Tax Havens Very low or zero tax offshore companies incorporated in jurisdictions often described as tax haven islands, such as the differing types of offshore company that can be formed in offshore company formation centres such as the BVI or British Virgin Islands, Belize or the Seychelles Territorial Taxation Operate/Register in countries with favourable tax rates Eg Hong Kong

15 Enforcing Tax Rules Companies are required to Calculate tax liability Calculate and deduct employee taxes Collect and pay indirect taxes (Can be extended to self employed)

16 Enforcing Tax Rules Therefore to facilitate this Competent Tax Authority needs to ensure Correct maintenance of records Timely and correct returns Correct payment of tax by specified deadlines And that it has sufficient powers to enforce these activities This is done by statutory powers

17 Statutory powers Generally: Powers to query and inspect records Rights of Entry and search in relation to this Exchange of information with other competent authorities Powers to charge interest on late/under payments

18 Tax Avoidance and Tax Evasion Tax avoidance: Taking advantage of legal or arguably legal tax loopholes. Tax evasion: The intentional misrepresentation or concealment of a person's tax obligations Tax evasion is clearly illegal whereas tax avoidance falls into 2 categories Intentional relaxation of regulations to offer incentives Legal exploitation of weakness in the legal system to reduce tax liability

19 Direct Taxes on Company Profits and Gains Companies pay taxes on Profits Capital Gains

20 Profits & Capital Gains Profits arise from trading activities and other sources of revenue income (interest, etc) Capital Gains arise from the disposal of capital assets Tangible and intangible assets Long-term investments Tax is calculated by applying the appropriate rate of tax to both profits and capital gains

21 Tax Years In UK tax year for companies runs from 1st April to 31st March For Private Individuals it is 6 th April to 5 th April Tax payable is based on the profits and capital gains of the Accounting Year ending in the Tax Year

22 Taxable Profit Companies taxed on profits of an accounting year Some adjustments may need to be made Difference between Accounting Profit Taxable Profit Some expenses may not be allowable for tax purposes Expenses may be allowable for tax purposes but in different year Income in financial accounts may be recognised for tax purposes but in different year

23 Revenue and Capital Revenue expenditure is chargeable against taxable profit Capital expenditure treated as non-current asset Disallowable Revenue Expenditure Any expense, not wholly and exclusively incurred for the purposes of the trade or profession Any private or domestic expenditure e.g. food, clothing (except protective clothing), Business entertainment expenditure i.e. the provision of accommodation, food, drink or any other form of hospitality to clients or customers. However entertainment of staff is an allowable deduction for tax purposes Most donations to charity All political donations Cost of write off of loan to employee considered irrecoverable Changes in allowances for doubtful debts

24 Gnu Ltd Gnu Ltd has an accounting profit of £ 550,000 After: deducting £ 10,000 donation to UKIP, £ 15,000 expenses for directors Xmas party, increase in doubtful debts provision of £ 20,000 and £ 20,000 urgent repairs to factory. Dividends amounted to £ 50,000. CT rate is 35% How much tax must Gnu Ltd pay?

25 Answer to Gnu Accounting Profit550,000 Add back UKIP payment 10,000 Add back Xmas party15,000 Add back Inc in D debts20,000 45,000 Taxable Profit595,000 X 35% = tax payable £ 208,250

26 Disallowable Capital Expenditure Capital Expenditure is (usually) expenditure on non- current assets These are items Found in Balance Sheet Depreciated over their useful economic lives Tax treatment : There is a tax depreciation charge allowable against tax

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