Taxation

Introduction

The tax regime in the United Kingdom is well organized and constantly updated to capture the requirements of the government in collecting the revenue. It is important to understand the UK tax calendar which runs from the 6th of April to the 5th of April the following year. In this case, Imogen is changing from an employed tax payer to a self-employed tax payer.

Adjusted trading profit

The adjusted trading profits for the nine months period is calculated by making the correct tax adjustments as follows:

Net profit = £87,600

Add back non allowable deductions

Depreciation expense £5,250

Less capital allowance on the vehicle

The rate of capital allowance for a vehicle with this type of emission for the tax year 2016-7 is at 18% and therefore the amount will be

=£16,667 * 18%

=£3,000

Adjusted trading profit

The adjusted trading profit will therefore be

=87,600+5,250-3,000

=£89,850

The income tax payable by Imogen for the tax year 2016-17.

When calculating the income tax for the tax year 2016-17, we will have to consider the adjusted business income plus the taxes on the other items such as the motor vehicle. The rate of vehicle tax is based on the type of fuel and the CO2 emissions. From the rates provided, the tax for the car with CO2 emissions of 125 g/km will be taxed at the rate of 110 euros

The motor vehicle expenses will be calculated on a flat rate using the mileage rather than the actual cost of the car purchase and the maintenance costs. The flat rate for the first 10,000 miles is at 45%

The corporation tax rates for businesses is at 20%

The following table shows the calculations in the computation of the payable tax for the year 2016-17 by Imogen:

Calculation of Imogen’s income tax payable for the tax year 2016-17
self-employment  89,850
dividends  10,500
gross interest  3,000
totals  103,350
income tax due
basic rate 20%  20,670
total tax due on income  20,670
tax already paid
income tax payable (tax due less tax paid )  20,670
Net Income £82,680


 

 

Imogen’s national insurance contributions as an employed person for Dhissom plc and a self-employed person for the tax year 2017/18.

As an employee of Dhissom plc the national insurance contribution is paid based on the earnings received. She receives a gross salary of £57,000 and therefore the national insurance based on this amount is:

The rate for the earnings of more than £43,004 is at 2 %

=£860

As a self-employed person, two types of national insurance rates will apply: class 2 at 2.80 a week and class 4 at 9% on the profits between £8,060 and £43,000. For the profits which are over £43,000 the rate is at 2%. The assumed weeks per year is 52 and this is multiplied by the weekly rate of 2.8 for class one to get 146. The profits are over 43,000 and will therefore be charged at 2 %

=£89,850*2%

=£1,797

 

 

 

 

 

Consequences of not making the balancing payment for the tax year 2016/17 on the due date. Assume that the HMRC interest rate on late paid income tax is 3%.

In addition to the interest that will be charged on the amount that is due, there will be an automatic penalty of 100 euros for missing the deadline for the filing of tax returns. Missing the tax filing deadline will attract this penalty even if you have no taxes to pay.

 

 

Question 2

 

Calculation of Chargeable gains or losses for the tax year 2016-17.

Antique clock

proceeds cost purchase date gain/ (loss)
         17,940         1,500  1st Jan 2007          16,440

 

The antique clock will be subjected to capital gains tax since it is more than 15,000.

Warehouse

proceeds cost purchase date gain/ (loss)
      600,000    377,800 Sep-08        222,200
   470,000 Mar-17

 

 

 

Main residence

proceeds cost purchase date gain/ (loss)
      330,000      77,000 01-06-97        253,000

Shares

With the 1 for 4 rights issue on 31st may 2015, the number of shares outstanding in the company increased. The number of additional shares taken up is calculated as follows:

Number of outstanding shares as at 31st may 2015:  2,900

Number additional shares due to the rights issue: =2,900/4

=725 shares

The cost for the purchase of these additional shares is:

= 725 * 3.50

Date No. of shares Cost, £ proceeds
01-Jan-07 1,000 4,200
19-Jun-08 700 2,950
31-Dec-14 1,200 5,620
11-Aug-16 400 2,100
additional shares 725 2,538
totals 4,025 17,408          38,000

2,537.5

 

 

 

 

Total gain on the sale of the shares is: 38,000 – 17,408 = 20,592

The total chargeable gains for the items above will add up to:

=20,592 + 253,000 + 222,200 + 16,440

= £512, 232

There is a capital gain tax allowance up to 11,100 and has been the same since 6th April 2015. This means that the tax is paid on the gains above the tax free allowance of 11,100

Chargeable gains tax payable by Pulika for the tax year 2016-17.

The applicable tax rate based on the tax band is 18% on the total amount of chargeable gains of 512,232

=£512,232*18%

=£92,202

 

 

References

Katsikas, E. and Liu, W., 2016. The Relationship between Effective Tax Rate and Firm Size. Size as a Determinant Factor for Effective Tax Rate Change in the UK Wholesale and Retail Trade Sectors. Size as a Determinant Factor for Effective Tax Rate Change in the UK Wholesale and Retail Trade Sectors (January 5, 2016).

 

Wallis, G., 2016. Tax incentives and investment in the UK. Oxford Economic Papers, p.gpv090.

 

McNabb, D.E., 2016. UK Commerce and Industry in the New Millennium. In A Comparative History of Commerce and Industry, Volume II (pp. 55-76). Palgrave Macmillan US.

 

 

 

 

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