Income Tax Liability Of Jeff Ross And Evaluation Of Business Vehicle For Sam

UK Tax Rules for Individual Incomes

The topic is to discuss the income tax liability of a salaried person domiciled in UK for the various income received by him in the country.

In the United Kingdom, the Income Tax Act 2007 is the premier tax legislations governing income tax related matters in the country. As per the income tax rules, the tax year in the country is from April 01 of a year to March 31 of next year. Section 10 of Income Tax Act 2007, here in after to be referred to as ITA 2007 in this document, individual incomes in the country is charged either at the basic or higher or additional rate of income tax depending on the level of income of an individual (James, 2016).   

Income up-to a basic limit of an individual is charged using basic income tax rate as per (sub section 2 of section 10 of ITA 2007. Sub section 3 of the section provides that in case the income of the person is in excess of basic limit then the higher rate of income tax shall be used to calculate the income tax liability of a person. Sub section 3A of section 10 further specifies that individual with income in excess of higher limit of income will be charged income tax at additional rate of for the amount of income in excess of the higher limit (McKee, Muir and Moore, 2017).  

Mr Jeff Ross is an UK domiciled individual working for a listed UK company, Typo PLC. Jeff has received salary from the company along with other income from different sources including dividend. Taking into consideration the facts about the income received by Jeff a detailed discussion of tax liability of different incomes of Jeff are provided below (Saad, 2014).

Annual salary of ?96,072 is taxable as per the ITA 2007. Hence, the amount of salary is to be considered for calculation of income tax liability of Jeff for the year.  

Note 2:

Bonus is taxable on the basis of receipt by the tax payer. Thus, the amount of bonus received by Jeff on 12^th May, 2017 shall be taxable in the financial year 2017-18 (Evans, 2018).

Note 3:  

The taxable value of the accommodation shall be liable to be taxed in the hands of the employee.

Note 4:

A Mirage 3 from Mitsubishi has been selected as the suitable car for Jeff. The car will have 1.2 litre MIVEC DOHC I3 engine. Since no value in relation to fuel has been given thus, no tax shall be payable by the employee in this regard.

Calculation of Jeff Ross’s Taxable Income and Tax Liability

Note 5:

The computer benefits is not liable for any tax by the employee as it has not been mentioned as on the assets for which an entity will required to pay any tax (Burkhauser et. al. 2016).

Tracing into consideration the above the taxable income of Jeff for the year 2017-18 is calculated below:

Particular	Amount (?)	Amount (?)
Gross salary	96,072.00
Bonus	12,000.00
Interest on building society (96072 x 5%)	4,803.60
Dividend income (96072 x 10%)	9,607.20
Rateable value of accommodation	11,600.00
Taxable income	134,082.80
Less:
Charitable donation allowed (96072 x 2%)	1,921.44
HMRC contribution in pension scheme (96072 x 6%)	5,764.32
		7,685.76
Taxable income	126,397.04

Particular	Amount (?)	Amount (?)
Gross salary	96,072.00
Bonus	12,000.00
Interest on building society (96072 x 5%)	4,803.60
Dividend income (96072 x 10%)	9,607.20
Rateable value of accommodation	11,600.00
Taxable income	134,082.80
Less: Charitable donation allowed (96072 x 2%)	1,921.44
Taxable income	132,161.36

On the basis of basic, higher and additional income tax rates applicable for different income slabs of a tax payer in the country the tax liability of Jeff would be as following:

Particular	Amount (?)	Amount (?)
Taxable income	126,397.04
Basic rate @20% (46350 -0 )	9,270.00
Higher rate (126397 – 46351) x 40%	32,018.40
Tax payable	41,288.40

Note: Personal allowance of ?11,850 is not allowed as the taxable income of Jeff has increased ?123,700 for the tax year.

Thus, income tax liability of Jeff Ross, the UK domiciled, is ?41,288.40, i.e. ?41,288 for the financial year 2017-18 (Ashworth and Perera, 2018).

The objective of Sam is to sun her own business and she is concerned with business vehicle. With the objective of providing her with most tax beneficial business vehicle by keeping in mind the business requirements the recommendation has been made in this document.   

Start a new business or to acquire an existing business:

Firstly, it is important to consider the implications of starting anew business as well acquisition of an existing business. Staring of new business involves lots of legal formalities and thus, is a time consuming as the business has to be registered first before staring operations of business. However, no such formalities needed to be fulfilled in case Sam acquires an existing business (Béland and Waddan, 2015). Thus, if appropriate business vehicle is available to be acquired then, Sam should acquire an existing business instead of staring her new business. It is important though to consider all possible implications of taxes before taking a final decision on the matter.

Sam has the option of following business vehicles and should choose any one of the following forms of vehicles as per her requirements (Bohnsack, Pinkse and Kolk, 2014).

Sole proprietorship business:

Sole proprietorship business is a form of business in which there is only one owner of the business and he is responsible to take all business related decisions. Annual profit earned from such business is taxable in the hands of the sole proprietor, i.e. the owner of the business along with other taxable income of the owner. In sole proprietorship business the owner is individually and personally liable for the liabilities attracted in business operations. In case the sole proprietor withdraws any amount of money from business as salary then such amount shall be considered for calculation of income tax liability of the sole proprietor (Storey, 2016).    

Evaluation of Business Vehicle for Sam

The partnership business is one in which two or more partners come together to form an enterprise with the objective of earning profit from business. The biggest advantage of a partnership business is that the profits of partnership business which is distributed to the partners are not taxable. Hence, irrespective of the amount distributed as profit to the partners it shall not be considered for calculation income tax liability of partners. The assets and liabilities of partnership business are determined on the basis of agreement between the two or more partners (Kaiwartya et. al. 2016).

An entrepreneur also has the option to form a company to conduct the business operations. Forming and establishing a corporation is a lengthy and time consuming process. In UK the provisions of Companies Act has to be followed by the entrepreneurs in order to form and establish a corporation as per the act. The biggest advantage of a corporation is that the entity has a separate legal identity of its own which protects the owners of the company from liability in excess of their share capital in the company. Also another huge benefit of formation of a company is the ability to collect huge amount of capital from different sources available to a company. The amount of profit distributed to the shareholders or owners is termed as dividend and it is taxable in the hands of the receivers (Xydas et. al. 2016).   

Since, it seems that the requirement of capital is not huge and Sam is primarily concerned of running her own business without any other person. Hence, the most suitable form of business for Sam is sole proprietorship business. However, the benefits of partnership business are immense thus, Sam can also form a partnership business if she is willing to share the ownership of business with another individual in exchange of capital and other resources.   

Conclusion:

Taking into consideration the above discussion it is clear that Sam should either form a sole proprietorship business to run her own business and in fact if possible should buy an existing business to immediately start business operations without any legal complications.    

References: 

Ashworth, A. and Perera, S., 2018. Contractual procedures in the construction industry. Routledge.

Béland, D. and Waddan, A., 2015. Breaking down ideas and institutions: the politics of tax policy in the USA and the UK. Policy Studies, 36(2), pp.176-195.

Bohnsack, R., Pinkse, J. and Kolk, A., 2014. Business models for sustainable technologies: Exploring business model evolution in the case of electric vehicles. Research Policy, 43(2), pp.284-300. Available at https://www.sciencedirect.com/science/article/pii/S0048733313001935 [Accessed on 5 November 2018]

Burkhauser, R.V., Hérault, N., Jenkins, S.P. and Wilkins, R., 2016. What has been happening to UK income inequality since the mid-1990s? Answers from reconciled and combined household survey and tax return data (No. w21991). National Bureau of Economic Research.

Evans, E.J., 2018. The Forging of the Modern State: Early Industrial Britain, 1783-c. 1870. Routledge.

James, S., 2016. The complexity of tax simplification: the UK experience. In The Complexity of Tax Simplification (pp. 229-246). Palgrave Macmillan, London.

Kaiwartya, O., Abdullah, A.H., Cao, Y., Altameem, A., Prasad, M., Lin, C.T. and Liu, X., 2016. Internet of vehicles: Motivation, layered architecture, network model, challenges, and future aspects. IEEE Access, 4, pp.5356-5373.

McKee, K., Muir, J. and Moore, T., 2017. Housing policy in the UK: The importance of spatial nuance. Housing Studies, 32(1), pp.60-72.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Storey, D.J., 2016. Understanding the small business sector. Routledge.

Xydas, E., Marmaras, C., Cipcigan, L.M., Jenkins, N., Carroll, S. and Barker, M., 2016. A data-driven approach for characterising the charging demand of electric vehicles: A UK case study. Applied energy, 162, pp.763-771. Available at: https://www.sciencedirect.com/science/article/pii/S0306261915013938 [Accessed on 5 November 2018]