Operation and Administration of the Tax System - Essay Example

1. Scope of the tax system and how it applies to - individuals This study evaluates the effects of taxation on individual and company investment under the taxation system of the UK. It explores the various factors that apply in the individual business taxation as well as the payment of tax by a registered limited company. Depending on the system that will generate the lowest tax obligation, Sally will make her investment decision. Hypothetically, it is viewed in the UK taxation system that individual business investment operating in cash will not pay any tax or will pay the minimal tax amounts (Daunton 2002, p74). This study will also perform examples of calculation to demonstrate the actual effects of the tax payments on individual and limited company, considering the aspects of Insurance, capital gains and inheritance. When Sally realizes capital gain from the investment through the exercise of the share option, the capital gain ought to form part of the taxable income. Taxation exempts many specified benefits under this condition, including insurance and the application of computer and technology. 1.1. Operation and administration of the tax system The tax system operates with exemptions of certain income elements from taxable income for individual investors, which in the case of limited company, there is minimal exemption or no exemption at all. Income sources including interest, house rent and dividends are added to the income of the spouse with the highest earned income. Workers, students and Employees earning a maximum of $37,000 yearly benefit from subsidized tax rate. Sally’s income exceeds this threshold, hence the subsidies does not apply. 1.1.1. How the system applies to individuals The personal income tax will be charged a flat rate of 15% of the income per month from the earnings gained from investment (Melville 2014, p32). If sally operates in cash, she will have two alternative decisions, either to declare the entire income from the investment, or part of it, or she may decide not to declare the income of personal income in the tax return. 1.1.2. How the system applies to the companies In the case of registering a limited company, there is no decision to make on the income to declare. All the income sources including taxable income, forms part of the taxable income. The UK system of calculating corporate taxes operates on the basis of a single tax rate applying to all the taxable incomes. The rate is decided on by the amounts of total earnings. Registration of a limited company will enable Sally’s investment to attract smaller tax rates applied to the taxable incomes lower than the minimum limit. Investment earnings between $10000 and $37000 are exempt from taxation in the individual investment, but in the limited company, the corporate tax return must contain all income elements, charged a flat rate of 15% (Melville 2014, p27). However, the company is allowed to deduct the mandatory expenditure such as insurance and inheritance before calculating the taxes. 2. Advise on the impact of VAT From the analysis of this study Sally ought to operate as an individual and avoid the corporate tax rates applied in the registered limited company. This is because the investment as a limited company provides minimal room for exemption. 2.1. Business If Sally decides to operate as a company, she has to acquire maximum social obligations such as insurance and inheritance. This will maximize the amount exempted from taxation. However, it will be impossible to the completely reduce the tax amount to a zero. The taxable income will consist of: Non Savings Income Savings income Dividend income Compensation Debenture interest (gross) The rate of taxation applies to the above elements as follows: Income Rate Type Rate Non Savings Income :Ordinary rate 20%   :Upper rate 40%   :Additional rate 45%   Savings income :Starting rate 10%   :Basic Rate 20%   : Higher rate 40%   :Additional rate 45%   Dividend income :Ordinary rate 10%   :Upper rate 32.5%   :Additional rate 37.5%   Compensation :Ordinary rate 20%   :Upper rate 40%   :Additional rate 45% 2.2. Individual (30 marks) If Sally decides to operate her investment as an individual, she has to operate in cash for all transactions, acquire necessary social obligations, including marriage and insurance. The obligations will attract exemptions of allowances and will maximize the amount exempted from taxation. However, it will be impossible to the completely reduce the tax amount to a zero. In case of taxation, the tax system will only consider the income generated by the business as personal income. The taxable income will exempt the following: Salary / Wages / Pension (gross) Rental Income Family Relief Insurance contribution Savings interest (gross) Personal allowance From the tax calculated, the elements eliminated in the final tax calculation are: PAYE deducted at source   Tax credits on dividends X 10%   Tax deducted at source X 20% 3. Understand how the National Insurance system complements the Income Tax system If Sally operates the business as an individual, the national insurance the normal regulation by the UK government requires that any operation she carries out within the UK has to be liable to the national insurance contribution. This calculation is done against 100% of the income (Peter 2006, 34). The rule takes effect immediately from the start of the business. If, however, she runs the business as a limited company, the operations involve approval. Sally is therefore allowed to make contributions of the pension funds for about 1 year, a period that can be extended at any time (Dunbar 2004, p45). The amount contributed in the pension funds and the National insurance contribution is exempted from taxation and the taxable income reduces. 3.1. Demonstration by examples 3.1.1. Individual Business Operation The sample tax calculation for Sally as an individual investor is as follows: Pro Forma for Income Tax Computation September 2014 Income tax computation for 2013-14                       £ Personal Allowance aged Read More