Advanced Personal Taxation

Section A

Part 1: Isabelle’s Tax Liability for the Tax Year 2019/2020.

Gross Profit                                                                     = 8404 x 10 = 84,040

Add Rent income 10% of 84040                                                          = 8404

Total Income                                                                                                                 = 92,444

Less:

Depreciation 8% of 84040                                                                     = 6723

Wages and Salaries 10% of 84040                                                         = 8404

Rent and other expenses 30% of 84040                                                 = 25212

Utility Cost 12% of 84040                                                                     = 10085

Printing and Stationery 5% of 84040                                                    = 4202

Monitoring Expenses 7% of 84040                                                        = 5883            = 60,509

Net Profit                                                                                                                       = 31,935

Less Necessary and ordinary expenses

Membership fee                                                                                          = 1,200

Motor Expenses                                                                                           =1,400          =2,600

Net Income                                                                                                                        29,335

Taxable income by June 2019 29335 x 92.35%                                                            = 27,091

Additional Revenues in 2020

Dividends                                                  = 9,000

Interest accrued                                        = 4,000

Rent Income Premium                             = 60,000

Taxable income for 2020                        = 60,000                                                       = 133,000

Total Taxable Income for 2019/2020                                                                           = 160,091

Social Security Tax Payable (12.4% of 132,900)                   =16,480

Less Prepaid social security                                                      (5000)

Net Social Security Tax Payable                                           = 11,480

Medicare Tax Payable (2.9% of 160,091)                             = 4,643

Add late payment Interest                                                            500

Total Tax Liability for 2019/2020                                                                                 = 16,623

Less Employer Equivalent Deductions 50% of 16,623                                                 = 8311.5

Payable Tax liability                                                                                                          8311.5

Part 2: Report on the Tax Calculations

To get the tax liability, the first step is to determine the taxable income for the given trading period. The tax liability is calculated as a percentage of the net income (commonly referred to as the net profit). The taxable income in this regard is the difference between the gross income/gross profit and the business expenses for the year under review. Thus the initial step was meant to obtain the gross profit. The gross profit is then adjusted upwards with rent income since it is revenue to the business, which shall increase the business earnings. Once the gross profit is obtained, the business expenses are calculated, and they are total deducted from the gross profit to obtain the net income for the year (2019). The net profit is then adjusted downwards by multiplying it by 92.35 to obtain the taxable income. The downward adjustment is meant to take care of the deductions that an individual business person remits (Gough, 2018).

The taxable income is then multiplied by 15.3%, which is the tax rate for self-employed persons as provided by Internal Revenue Services which is mandated to regulate tax rates and other matters about revenue management and regulation. The 15.3% is made up of two parts: 12.4% which is the deductions for social security (social security tax) and the 2.9% that is taxed for Medicare. For 2019 accounting period, the SST would only apply for the first 132,900 pounds of the total net income (taxable income realized during that trading period). O the other hand, the Medicare tax shall be 2.9 per cent of the taxable income for that trading period.

It is imperative to note that in the trading period 2019/20, Isabella had a taxable income of 160,091. Therefore the SST was calculated on the first 132,900 pounds as per the provisions of the IRS. The since she had been charged interest of £500 for late remittance of tax, this would be included in the total amount of tax payable to her for that trading period. However, being self-employed, Isabella is entitled to adjust her tax downwards by subtracting the employee equivalent deductions, which is one-half of the tax liability. It is in this respect that the total tax liability is multiplied by half to arrive at £8,311.5

It is also important to note that there are additional deductions that Isabella is allowed to make on her net income before subjecting it to tax in order to ensure that she pays as minimum tax as possible. IRS accepts that all expenses that are ordinary and necessary can be deducted from the gross profit to come up with the real amount that should be subjected to tax. According to IRS, an ordinary expense is one that is common and acceptable in the line of business one is engaged. For instance, for Isabella, the motor expense falls in the class of ordinary expenditure since it is common to virtually all sorts of businesses, but at the same time, it is important in helping Froggy Recruitment in reaching out to potential clients located in afar places from the business’ headquarters. On the other hand, the necessary expense is one that is advantageous or helpful and appropriate to the business. For example, in isabella’s case, the move to register is helpful in so far as matters of legality are concerned. Therefore such expenses are deducted from the net profit to get the real amount of income that should be subjected to tax.

It is imperative to note that the amount of income that is subjected to social security tax varies year after year, for instance, in 2020, the amount is pegged at 137,700 pounds. Furthermore, for individuals whose income exceeds 200,000 for individual filing and 250,000 pounds for those filing their taxes jointly, there is an additional 0.9 per cent calculated in the amount in excess of the amount to cater for medicare needs. Therefore as the business grows, Isabella should be aware that when it hits these figures, then additional charges shall be levied on the income to cater for the tax liability she owes the government.

Part 3: Implications for Failing to Notify HM Revenue and Customs for Chargeable Gains

When a client (Isabella for this matter) fails to inform HM Revenue and Customs for any changeable gains in their business assets and general undertakings, her business will be liable to a penalty of failure to notify. Such penalties are effected to the business when a business fails to notify HMRC that their business has increased in worth and makes considerably high amounts of profit and should, therefore, pay more taxes or when their business sells part of the assets and consequently realizes more profits. The penalty may do business to suffer financial losses since it would be required to offset all the penalties. Besides, it also taints a negative image on the business since it will be perceived as being noncompliant that would ruin its PR.

Section B

Part 1: Impact of Taxes and Tax Planning

Taxes are sources of revenue to the government. In this regard, taxes are very important since they help the government of the day in achieving its financial obligation and consequently the mandate to deliver services to the people. For effective tax collection, the federal government acknowledges the need for tax planning.  Tax planning is a systematic analysis of the financial plan of the potential businesses from a tax perspective. Tax planning is performed primarily to enhance efficacy in tax collection. It has been established that tax planning helps in reducing tax liability by encouraging all the clients to pay regularly and promptly. No doubt, employees of a financial consultancy firm have to develop a deeper and salient understanding of the significance of tax planning since it forms the backbone of any tax advice that clients shall seek from the consultancy firm.

When it comes to tax planning, some of the fundamental factors to consider are whether the taxpayers are salaried employed or self-employed. For salaried employed individuals, the taxation process is simple and easy since the taxation can be done trough check-off system from the employer before the money is transferred to the employee. However, for the self-employed individuals, the taxable income is the net income of the business owned by the individual. Again there are several business structures that individuals that are self-employed may choose from. The structures range from a sole proprietorship, partnership, and limited liability companies, just to mention a few. In light of taxation, it is important to note that the nonincorporated forms of business structures pay a lot of tax as compared to incorporated forms. It is thus advisable to resolve to limited liability companies since their tax liability is relatively manageable.

Remunerations are payments made to the employees for the services they offer to their employers.  There are different types of remunerations, such as bonuses, salaries, cash incentives, stipends, among others. All the remunerations received from the employer are supposed to subject to taxation, save for employer-paid health insurance benefits. However, non-cash incentives are somewhat difficult to tax. The taxation for salaried employees is a progressive kind of taxation that is, the more the remuneration package, the higher the salary and vice versa. The remunerations are taxed on the basis of the net income that the individual employee carries home. The net income is then subjected to tax bands with a progressive increase in rates as the income payable to an employee increases. It is imperative to note that employees with lower income, therefore, pay very little income tax.

Small businesses are liable to several risks and limitations that may make it difficult for business owners to achieve their targets. For instance, small business enterprises such as sole proprietorship have limited access to capital that curtail their growth rate. Consequently, businesses prefer working as corporate entities. Corporation of business is beneficial in several ways. First, it offers protection to the property of the shareholders since the corporation is perceived as a separate legal entity; thus the liabilities accruing to the business from its business operations are not spread to the shareholders. It also allows the owners with wider sources of capital, thereby making it much easier to expand. Corporations are more credible because they employ legit and qualified professionals that allow them to enjoy expertise economies of scale. Corporations also have a perpetual lifespan, thus making them more attractive to deal with as opposed to other forms of business units.

An individual has the prerogative to choose how they want to perform their business such as sole proprietorship, partnership or even as a corporative in some instances. However, when there are substantial reasons limiting the performance of the business because of being owned and managed by an individual, it may be transferred to a company. At the same time, some times, the company may opt to transfer its managerial duties to individuals with shares in the company (disincorporation).  As provided under section 162 of the Capital Gains Tax Act of 1992 when a business is transferred as a going concern to another company in consideration of payment of shares as well as other capital gains arising from such transaction that leads to transfer of a chargeable asset is transferable to a later date through rolling over. It is therefore important to note that during disincorporation, the tax liability is transferable and the owner of the new asset is responsible for payment of the tax due to it. However, the bottom line remains that the tax liability of an incorporated company is relatively less compared to the tax liability of an individually owned business (Relf, 2019).

It is also important to mention that there are different strategies that businesses can apply to maximize profit while remaining tax compliant. Businesses can apply pension schemes for the retirement benefits of their employees since the money deposited in the pension scheme fund is not subjected to tax. According to the 2019 financial act, the pensions are not included in profits hence not subjected to tax; this would relieve a business from paying hefty taxes if this money was treated otherwise. Secondly, a corporation may resolve in paying dividends to shareholders regularly. The secret is that money used in payment of dividends to shareholders is tax exempted by the National Insurance Contributions. Besides, they are available for use by the corporations any time of need, thus boosting their financial strength without being subjected to taxation. Again punctuating salaries with bonuses is another sure way of reducing the amount of tax payable to a corporation. Paying minimum salaries to directors would help a company to pay minimum taxes. Bonuses paid out in the form of benefits are not computed as part of the income of a company, thereby making the calculations of taxes a bit lower.

Since businesses have a lifespan just like human beings, it is important to note that there are safer business exit routes that would allow an individual to enjoy maximumly and minimize the tax payable. One such exit routes are to bequeath property to an alien. Since, in this case, the business will not be liable to pay, considering capital gains tax (CCGT). It is therefore appropriate for a business person who feels like retiring from business activities to sell off the business to a non-resident since the tax only applies to residents of the UK. For individual business, an individual can draw a will that allows the transfer of property ownership to the chosen next of kin upon the death of the former. In the UK, when an individual receives property after the demise of the former owner, the latter shall not pay any tax neither shall the former’s successors be required to pay any CCGT on the proceeds realized from the transaction. Another preferred exit route is through lifetime transfer arrangement. The IRS allows 100 per cent tax exemption on inheritance tax when it is on the basis of lifetime transfer arrangements.

Part 2: The importance of an individual’s domicile status

The concept of an individual’s residence/ domicile is of central importance where there are sources of income as well as assets that are coming from the overs eases for example through the services and investments of the expatriates. An alien who visits UK with intention of returning to his country is perceived to be non-UK domicile In such instances where the individual has indicated reasonable justifications to the effect that he/she shall return in his or her home country in due course when the duration of stay in the UK does not change the status of the individual to domiciled. This narrative has led to the concept of an overseas domiciled individual being deemed to be domiciled in the UK as per the inheritance tax.

The concept has since been elongated to the extent that an individual can be deemed domicile for purposes of computing income tax and capital gains tax as well as for inheritance tax. Furthermore, it is imperative to reiterate that the narrative has been changed to realign it with the new definition for income tax and capital gains tax.

The importance of an individual’s domicile status – income tax

In the UK, the sources of income from within the territory are all subjected to taxation irrespective the tax status of the individual. In circumstances where the individual is not a UK resident, the incomes for such an individual that come from outside the UK are not subjected to income tax. Under such circumstances, it is even needless to consider the domicile status of the person in question since income from overseas is not entitled to taxation. But in case the income is generated by a native of the UK, then the overseas income accruing to this individual is subject to income taxation. The approach is determined by the domicile status of the individual.  Individuals in neither domiciled nor deemed domicile are allowed to compile taxes through remittance (Robinson, 2019).

The importance of an individual’s domicile status – capital gains tax

Again it is imperative that according to the 2018 act, individuals are subject to UK capital gains tax only where they UK resident. Again this can apply to those individuals that are temporary non-resident. Furthermore, a non-alien to the UK may be subject to capital gains tax in all UK assets in a business owned by the individual within the UK or residential property that is found within the UK.  It is important to underscore that CCGT applies to worldwide assets.  Therefore, once an individual is subject to CCGT, as outlined above, then the question of the domicile states becomes an interesting point of consideration in aiding the consideration of the assets owned by the individual in the overseas. The remittance basis is only available if the individual is neither domiciled nor deemed domiciled in the UK in the same way as it is for income tax.

The importance of an individual’s domicile status – inheritance tax

The underlying fact is that the domicile status of an individual will determine their ability to the UK UHT on overseas assets (Robinson, 2019). Generally, the overseas assets are exempted from IHT except where the individual in question is either domiciled or deemed domiciled in the UK.

Deemed domicile status – income tax and capital gains tax

As per the new rules, all individuals who are long term residents in the UK and former residents of the UK shall be deemed domiciled in the UK for the purposes of both income tax and capital gains tax Long term residents – deemed domiciled in the relevant tax year are individuals who have stayed in the UK for 15 years of the 20 tax years under review. That notwithstanding, it is worth noting that the concept of long term residents shall not apply if there is no tax year beginning after April 5, 2017, in which they were residents in the UK (Robinson, 2019). Thus an individual who would become deemed domiciled as a long term resident but has not been resident since April 6, 2017, will not actually become deemed domicile unless they become UK resident subsequently. For formerly domiciled residents the clause of deemed domiciled applies as follows:  if the individual(s) was/were born in the UK, have domicile of origin as UK or residents of the UK for the relevant tax year. It is worth noting that the £90,000 remittance basis charge is no longer needed where an individual has been resident in the UK for 17 of the previous 20 years. Since after such a period of stay such individual will be deemed domiciled in the UK and therefore shall cease to make claims for the remittance basis.  However, the remittance basis charges of £30,000 and £60,000 still remain in force.

Deemed domicile status – inheritance tax

There have been several changes in relation to this clause. For instance, a UK domiciled individuals who leave the UK to acquire non-UK domicile shall remain deemed to the UK domiciled even after leaving for the next three years. Secondly, in relation to the concept of long term residents, shall be deemed UK domiciled where they have stayed for at least 15 years of the 20 tax years and have been living in the UK for at least one of the four tax years that end in the relevant tax year (Murray, 2020).

References

Gough, O. (September 6, 2018). Tax-efficient ways to extract profits from your business. Small Business UK

Murray, J (January 1, 2020). Calculate Overtime Pay for Hourly and Salaried Employees. The Balance Small Business

Relf, S (May 14, 2019). Disincorporation: is it worth it? Accounting Web

Robinson, C (March 11, 2019). How the Tax Cuts and Jobs Act Will Impact Tax Planning in 2019 and Beyond. Kiplinger

Spengel, C (2016). THE IMPACT OF TAX PLANNING ON FORWARD-LOOKING EFFECTIVE TAX RATE. Center for European Economic Research