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

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

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

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

Role of businesses

Pay Tax Collect Tax National/Regional (Jurisdictional) variations

on: Tax rules Tax rates Tax computations

Page 2: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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)

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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.

Page 4: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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 deceased’s estate subject to certain qualifying

circumstances

Page 5: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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

Page 6: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

Employee Taxes

Income tax under PAYE

National Insurance Contributions

National Insurance split in to 2 types EmployEES contributions EmployERS contributions

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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.

Page 8: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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

Page 9: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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

Page 10: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

Which means?

Tree grower sells wood for £100 + VAT = £117.50 Net £100.00 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 £260.00 VAT £45.50

Customer pays £305.50. 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 £17.50 + £28.00 = £45.50 (£305.50 X 7/47)

Page 11: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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

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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

Page 13: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

Recent goings on

July 24th 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.”

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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

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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)

Page 16: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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

Page 17: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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

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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

Page 19: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

Direct Taxes on Company Profits and Gains

Companies pay taxes on

Profits

Capital Gains

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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

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Tax Years

In UK tax year for companies runs from 1st April to 31st March

For Private Individuals it is 6th April to 5th April

Tax payable is based on the profits and capital gains of the Accounting Year ending in the Tax Year

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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

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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

Page 24: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

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?

Page 25: Role of businesses Pay Tax Collect Tax National/Regional (Jurisdictional) variations on: Tax rules Tax rates Tax computations.

Answer to Gnu

Accounting Profit 550,000 Add back UKIP payment 10,000 Add back Xmas party 15,000 Add back Inc in D debts 20,000

45,000 Taxable Profit 595,000 X 35% = tax payable £208,250

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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