Role of Tax Practitioners - Assignment Example

Task 1: Role of Tax Practitioners: Roth et. al (1989) has explained and emphasized that the role of practitioners is mainly to discuss the tax matters and this often leads to a series of risks and rewards which include, compliance, transmit value, and also the costs of the compliance (Lymer & Salter, 2003). The three main services provided by the tax practitioners include: a) Return Preparations, b) Tax Advise and c) Risk Advice. Roth also goes on to explain that the that the practitioners have a strong impact on the taxpayers scheme of tax and this is mainly by the interpretation of the compliance requirements and also the judgements that they provide for the various actions (Blankson, 2007). The services that the practitioners provide have a different effect on the compliance of the tax payers, these will be discussed further. a) Return Preparation: This is the first step of functions of the tax practitioners. It is at this period that the practitioners are expected to gain all the necessary information from the taxpayers to assist them with the completion of the returns with all the required forms and schedules. b) Tax Advice: This is the second function of the tax practitioners and it is here that they provide the knowledge of tax regulations to the clients and assist them in making favourable as well as legal interpretations of the laws and regulations. In simpler terms it allows for the clients to make all the issues, confusions and all ambiguities of the tax issues clear also assist the clients minimise the tax liabilities and the tax payments legally (Finney, 2009). This advice is available either at the time of filing the tax or even throughput the year and this helps the clients structure their transactions to ensure minimum tax liability. c) Risk Advice: The risk advice forms the third function of the tax practitioners and this is where they are expected to function not only as tax practitioners who have a strong knowledge of the laws and administrative practices but also need to be able to detect the probabilities and also sanction practices. Main Role of Tax Practitioners for Businesses: The tax practitioners in the current time provide the customers with a number of different facilities and services for the start up of businesses and also for the running of businesses. Firstly, the practitioners now assist the companies with the basic start up of the business which includes the forms and all registration for the businesses, all required documentations for the business as well. The practitioners now also assist the clients with more detailed planning which include, the strategic planning, and also others like the computer systems advice (Layman, Nicholson & Williams, 2006). The main planning assistance however is for the financial management and also the financial information systems. This is simply because the practitioners will be able to assist the clients learning in detail of the benefits and limitations of the business investments and which investment will help the business pay lesser taxes. This is a legal and appropriate manner to be able to pay as less tax as possible and increase the retained earnings of the company. The practitioners also assist the clients with the self assessment and the calculations of their individuals as well as business tax as well. The practitioners assists the clients with the various taxes like, Personal tax, Business tax, Company tax, Capital gains tax, Inheritance tax, HM Revenue and Customs investigations, Value Added Tax (VAT), PAYE and national insurance compliance. The practitioners also provide a number of other services and assistance which falls under their role in the businesses as well as individuals returns as well (Schnepper, 2007). The accounting functions that the practitioners provide include numerous functions like the preparation of the annual accounts, Preparation of periodic management accounts, Book-keeping services, and also maintaining PAYE and VAT records and associated returns. This however is not an exhaustive list and the functions that are provided to the company to a great extent also are based on the needs of the company and also are based on the needs of the business owners as well. Practitioners also provide other services like the preparation and filing of the statutory returns as well. This in most cases includes the business and individual returns. The practitioners in some cases also take on the role of the secretary and provide the minutes and resolutions of the company as well. Other functions like the company formation and company searches are also included in the functions (Torgler, 2007). Conclusions: The scope and need of the practitioners is based completely on the needs of the company and the owners of the company. Most Tax firms provide all of the above functions and as said by Purdie and Roberts (1995, p. 137), “Clients are looking for a tax accountant who will approach them with new ideas for tax savings and business opportunities rather than tax accountants who sit by the telephone waiting to leap into action only when and if the client calls. Clients also are placing increasing importance on the clarity, style and frequency of communication from their tax accountants regarding technical and business advice” (Lymer & Salter, 2003). Hence it is the choice of the clients to choose the functions and services that they need from the practitioners and the scope of the business information that needs to be shared with the practitioners as well. Various researches in the past have also shown that the clients have higher expectations from the practitioners both in terms of the technical as well as functional services. It has also been noted that the clients are more impressed with practitioners who actually provide advice and complete the returns well in larger role of the evaluation of the quality of tax services. It has also been noted that the customers are not very focused on the physical attributes and neatness of the office and practitioners attire but are more concerned with the effectiveness of the solutions provided by the practitioners. In conclusion it can be seen that the practitioners have a number of roles that they play in an organisation and their work is not just filing the returns. Hence this lists out the major roles of the practitioners in the businesses and also in terms of the individuals as well (Lymer & Salter, 2003). Task 2: (i) Prepare a draft tax computation for the tax year 2009-2010 indicating clearly the amount of tax that Wood will have to pay in respect of the business profits to 30 June 2009. In order to compute the tax for the year 2009 – 2010, the adjusted profit and loss statement is prepared. The expenses incurred are revised based on the actual costs incurred in running the business and eliminating personal expenses. Cost of Sales: Personal expenses of £ 15,000 (Kitchen unit costing), as it is a personal expense The following expenses are eliminated as they are private elements. 1. Rent and Rates: £ 1,000 2. Heat, Light and Cleaning: £ 300 3. Vehicle running expenses: £ 1,800 The parking fine of £ 2,500 is treated as a disallowed business expense and hence is eliminated for the purpose of tax calculations. Taking these private elements and personal expenses into account, the adjusted profit and loss statement is prepared as follows: Adjusted Profit and Loss Statement Sales £ 285,000   Cost of Sales £ 197,000   Gross Profit   £ 88,000       Rent and Rates £ 400   Heat, Light and Cleaning £ 200   Telephone and Internet £ 500   Wages of Employee £ 21,950   Vehicle Running Expenses £ 1,680   Depreciation of Business Vehicles £ 1,250       £ 25,980 Adjusted Profit for Year   £ 62,020 In order to compute the taxable profit, the depreciation (£ 1,250) is added to the profit to arrive at the adjusted profits. Adjusted Profit = £ 62,020 + £ 1,250 = £ 63,270 From this adjusted profit and the eligible tax deductibles, the total taxable income is computed. The capital allowance for the vehicles has been computed as £ 2,000. The personal allowance for Wood is £ 6,475 (personal allowance for aged below 65 in 2009 / 10). The total taxable income is computed as shown below: Taxable Income Adjusted Profits £ 63,270 Capital Allowance £ 2,000 Personal Allowance (below 65) £ 6,475 Total Deductibles £ 8,475 Taxable Income £ 54,795 The tax payable on this income is computed as shown below: First £ 37,400: Tax = £ 37,400 * 20 % = £ 7,480 Remaining £ 17,395: Tax = £ 17,395 * 40 % = £ 6,958 Hence the total tax payable for the year ended June 30, 2009 is found to be £ 14,438. Wood also indicates that a capital gain has been made on some business premises purchased some time ago as an investment. The premises had cost £160,000 plus an extra £2,000 for legal fees. It had been sold during tax year 2009-2010 for £235,000. Costs of the disposal were estate agent’s fees of £4,700 and legal costs of £7,050. (ii) Calculate the capital gains tax that Wood is likely to incur in respect of this disposal. In order to compute the capital gains tax, the net income or gain from disposing the asset is calculated. This income is referred to as the capital gain. All the costs, including the asset acquiring costs and disposal costs are deducted from the asset selling price to arrive at the capital gains. It is computed as follows: Income from Asset Sales   £ 235,000 Original Cost £ 162,000   Costs of Disposal £ 11,750   Total Costs involved   £ 173,750 Capital Gains   £ 61,250 As this transaction falls under the tax year 2009 – 2010, the allowances are computed based on the 2009 – 10 rates. The allowance is deducted from the capital gains and the tax percentage (18%) is applied to arrive at the capital gains tax. The calculations are shown below: Capital Gains Tax Capital Gains £ 61,250 Allowance £ 10,100 Taxable CG £ 51,150 CGT @ 18% £ 9,207 Hence the capital gains tax for the tax year 2009 – 2010 is computed as £ 9,207. Task 3: a) The capital allowances to be claimed against tax: The Capital allowances for the assets at the start of the year are found to be £ 450,000. Chatsworth Limited has also purchased £ 600,000 worth of plant and machinery in the year. The initial capital allowance of £ 50,000 is applicable on this investment. Writing down allowance of 20 % (on remaining £ 550,000) which comes up to £ 110,000 is also applicable on this new plant and machinery purchased. Taking these factors into account the capital allowances for the year has been computed as: Capital Allowances Capital Allowances to be claimed £450,000 Plant and Machinery   Initial Investment Allowance £50,000 Writing Down Allowance £110,000 Total CAs £610,000 The total capital allowance for Chatsworth Limited for the tax year is found to be £ 610,000. b) The adjusted profits for Corporation Tax purposes: The profit and loss statement is adjusted for corporation tax purposes, by eliminating the expenses which are not tax exempt. The expenses which have to be removed in the adjusted profit and loss statement are as follows: 1. Provision for Bad Debts - £ 75,000 2. Misc. Expenses: £ 675,000 a. Political donations: £ 450,000 b. Fine for negligence: £ 225,000 3. Depreciation Expenses (both Plant and Machinery and Vehicles) The adjusted profits for corporation taxes are computed as shown below: Adjusted Profit and Loss Statement Sales   £7,500,000 Cost of Sales   £3,037,500 Gross Profit   £4,462,500 Salaries and Wages £750,000   Heat, Light and Cleaning £375,000   Premises running costs £75,000   Vehicle running expenses £150,000   Administrative expenses £450,000   Bad debts written off £225,000   Miscellaneous expenses £450,000       £2,475,000 Operating Profit   £1,987,500 Loan interest payable   £450,000 Profit before taxation   £1,537,500 Hence the adjusted profits for the tax year are £ 1,537,500. c) The Profits Chargeable to Corporation Tax (PCTCT): The profit chargeable refers to the net profits including capital gains less the deductibles. The deductibles include the capital allowances computed earlier (£ 610,000) and loss relief carried on from previous year, if any (£ 15,000). The profits chargeable are computed as shown below: Profits Chargeable Profit before taxes £1,537,500 Chargeable Capital Gain £50,000 Deductions   Capital Allowances £610,000 Loss Relief £15,000 Total PCTCT £962,500 Hence the profit chargeable to corporation tax (PCTCT) is £ 962,500. d) The Corporation Tax payable: The corporation tax is computed on the total PCTCT (£ 962,500). The income falls into the full rate (28 %) and there is an upper marginal relief applicable (7/400) on the tax payable. The full tax comes up to £ 269,500 (28 % of £ 962,500). The marginal relief is computed as follows: Upper Marginal Relief = (7/400) * (£ 1,500,000 - £ 962,500) = £ 9,406.25 The tax payable is computed as follows: Corporation Tax Payable PCTCT   £962,500 Full Rate Tax 28.00% £269,500 Marginal Relief (7/400) £9,406.25 Total Corporation Tax Payable £260,093.75 Hence the tax payable is £ 260,093.75. Bibliography Blankson, S., 2007, Tax Avoidance, A practical guide for UK residents, 11th April 2007, Practical Books Publishers Finney, M.J., 2009, Wealth Management Planning: The UK Tax Principles, 24th February 2009, Wiley Publications Layman, R., Nicholson, D., & Williams, R., 2006, Guide to Us/Uk Private Wealth Tax Planning, January 2006, Tottel Publishing Lymer, A., Salter, D., 2003, Contemporary Issues in Taxation Research, Library of Congress Cataloging - in – Publication Data Ashgate Publishing Limited Schnepper, J., 2007, How to Pay Zero Taxes, 28th Novemeber 2007, 25th Edition, McGraw-Hill Publishers Torgler, B., 2007, Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis, 30th September 2007, Edward Elgar Publishing Read More