Part 1: Value Added Tax (VAT) HND – Business UNIT – 30 – TAXATION (FA17) Learning outcome 4 Lecture notes (one) Evaluate the impact on organizations of the legal and ethical constraints associated with taxation responsibilities Overview • The principle of VAT • The charge to VAT • Rates of VAT • Exempt supplies • Zero rate supplies • Registration • Deregistration • Input and Output VAT The principle of VAT • VAT is an indirect tax (a tax on spending) • Registered traders are required to charge VAT when selling goods and services to customers and must account for this output tax to HMRC • But such traders recover from HMRC the input tax which they are charged by their own suppliers • So, in effect, VAT is charged on the value added at each stage of production and distribution • VAT is really borne by the consumer at the end of the chain, who pays VAT when buying goods or services but cannot reclaim it VAT ACCOUNT FOR THE QUARTER ENDED 31 MARCH 2018 INPUT VAT 325 500 Good when they are purchased –VAT paid is know as input VAT VAT Payable By HMRC OUTPUT VAT 500 200 Good when they are sold –VAT charged is know as output VAT 175 VAT Repayable Refundable by HMRC 300 The charge to VAT • VAT is charged when a taxable supply of goods or services is made in the UK by a taxable person in the course of business • A taxable person is a person making taxable supplies who is, or should be, registered for VAT • The term "person" can refer to an individual, partnership or company, as well as to any other body which supplies goods or services in the course of business • A taxable supply is any supply of goods or services in the UK other than a supply which is specifically exempted from VAT Rates of VAT • Standard rate. VAT is charged at 20% on the value of the supply, so VAT is 1/6 of the VAT-inclusive price • Reduced rate. VAT is charged at 5% on the value of the supply, so VAT is 1/21 of the VAT-inclusive price (e.g. domestic fuel) • Zero rate. VAT is charged at 0% on the value of the supply, so the VAT-inclusive price is the same as the value of the supply (e.g. basic food) • (Taxable supply = Standard Rated sale + Reduced Rated sale + Zero Rate sale) Exempt supplies • Exempt supplies include: - the sale or lease of land and buildings (with certain exceptions) - insurance - public postal services - financial services(bank , - Education (School, - health services(medicence, • A person making only exempt supplies cannot register for VAT, charges no output tax, is not a taxable person and cannot reclaim input tax Zero rate supplies • Zero rate supplies include: - basic foodstuffs - water - books and newspapers - passenger transport (with some exceptions) - exports - children's clothing • A person who is making zero rate supplies and who is registered for VAT is a taxable person and can reclaim input tax Compulsory Registration: • The total value of the taxable supplies made by a person is known as that person's taxable turnover • A person whose taxable turnover in a 12-month period exceeds the registration threshold of £85,000 must register with HMRC • But registration is not required if HMRC is satisfied that the person's taxable turnover for the following twelve months will not exceed the deregistration threshold of £83,000 • Registration is also required if there are reasonable grounds for believing that taxable turnover during the next 30 days alone will exceed the registration threshold Date of registration • If taxable turnover for the previous 12 months (or since the person began making taxable supplies, if less than 12 months ago) exceeds the registration threshold, the person must notify HMRC within 30 days of the end of the month in which the threshold is exceeded • Registration will usually take effect after the end of the month following the month in which the threshold was exceeded • If the person believes that taxable turnover for the next 30 days alone will exceed the registration threshold, HMRC should be notified by the end of the 30-day period and registration will usually take effect as from the start of that period Example: • Jan 2018 • Feb 2018 • Mar 2018 • May 2018 • June 2018 • July 2018 • August 2018 •. •. •. •. Voluntary registration • A person making taxable supplies which do not exceed the registration threshold may nonetheless register for VAT voluntarily • This enables the person to recover input tax but means that output tax must be charged when taxable supplies are made to customers • If the supplies made by the person concerned are zero-rated, or are made mainly to customers who are themselves taxable persons, the fact that output tax must be charged will probably not deter customers Deregistration • A registered person may deregister voluntarily if HMRC is satisfied that taxable turnover will not exceed the deregistration threshold of £83,000 in the next 12 months • Compulsory deregistration is triggered when a registered person entirely ceases to make taxable supplies=(stops to do business\no longer dose business in taxable supplies) • Deregistration is also compulsory on a change of legal status (e.g. when a sole trader admits a partner) Part 2: LEGAL AND ETHICAL ISSUES IN TAXATION Tax Avoidance and Tax Evasion • Tax Avoidance: • With the help of tax planning reducing and paying less tax • It is legal and does not involve misleading HMRC. • Paying tax through proper channel • It is allowed in the eyes of law. It will not attract any legal proceedings. • Ex: pay less tax by giving donation, investing in Individual Savings Account, claim loss relief, etc Tax Evasion: • Reducing and paying less tax by illegal means. • Suppressing/hiding information (Ex: not declaring the income to HMRC) • Submitting false information (Ex: Claiming more expenses without incurring such expenses) • Tax Evasion is an illegal activity, it may involve criminal prosecution along with fines and imprisonment. Identify whether there is a tax evasion or tax avoidance: • Ahmed decided to postpone the sale of an asset from 31/3/18 to 10/4/2018 • Tax year=6th April-5th April (2017-2018) • If we postphone tax charched pay time for 10 days, the postpone will be next year • If he sells an asset on 31/3/2018 (2017/18) he has to pay tax on 31/1/2019. • If he sells the same asset on 10/4/2018 (2018/19), he has to pay tax on 31/1/2020. • Finally, he decided to sell the asset on 10/4/2018 and postponing the tax. Identify whether there is a tax evasion or tax avoidance: • He altered a sales invoice of £5000 into £500, so that booked sales appear as £500 and he paid less tax. Fundamental principles of Professional and Ethical guidance: As a tax adviser, it is expected to: • Adopt an ethical approach to work, employers and clients. • Acknowledge their professional duty to society as a whole • Maintain an objective outlook and • Provide professional, high standards of service, conduct and performance at all times. 5 Fundamental principles To meet the expectations, it is required to abide the 5 Fundamental principles of ‘Code of ethics and conduct’: 1. Objectivity -O 2. Professional Competence and due care -P 3. Professional behaviour -P 4. Integrity -I 5. Confidentiality -C 1) Objectivity (O): Professionals should not allow bias, conflicts of interest or the influence of others to override objectivity. Husband and Wife, both are coming to you and asking your advise. It may create conflicts of interest. 2) Professional competence and due care (P): • Professionals have an ongoing duty to maintain professional knowledge and skills to ensure that a client/employer receives competent, professional service base on current developments. • Professionals should be diligent and act in accordance with applicable technical and professional standards when providing professional services 3. Professional behaviour (P): • Behave professionally. Don’t involve any malpractice joining with the clients. • Professionals should refrain from any conduct that might bring discredit to the profession 4. Integrity (I): • Professionals should act in a straightforward and honest manner in all professional and business relationships. • As a tax adviser, you should not be associated with a client who has engaged in deliberate tax evasion, as this creates a threat to the fundamental principles of integrity and professional behaviour. Therefore, you should refuse to act for such client unless they are willing to disclose the details regarding the reduction or non-payment of tax. 5) Confidentiality ©: • Professionals should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties unless: • -they have proper and specific authority, or • - there is a legal or professional right or duty to disclose (ex: Money Laundering) • Confidential information acquired as a result of professional and business relationships, should not be used for the personal advantage of members or third parties • Ex: Ahmed is your client. Mr. Hamood is your relative, if he asks about Mr. Ahmed’s tax information, you should not provide. Maintain confidentiality. • Rana and Jeena are married couples. You are tax adviser to Jeena. Rana visited your office and ask some tax information of Jeena. Don’t disclose the information of Jeena, you have to maintain confidentiality Dealing with HMRC • Information provided to HMRC is to be accurate. Tax Adviser has to make sure that his client has to provide accurate and complete information to HMRC. • Tax adviser should not support his clients to plan or commit any offence. • Offences may be: a) Not declaring income that is taxable b) Claiming more deduction to which he is not entitled c)Not bringing to the notice of HMRC about the underpayment of tax • Where the client has made an error, then find out whether such error was a genuine error or a deliberate error or fraudulent act. If Error Discovered: • If the tax adviser discovered that his client has committed an offence, it is required to discuss it with the client, advise the client to make proper disclosure and explain the consequences if not disclosed to HMRC • If the client refuse to make a full and prompt disclosure to HMRC, then the Tax adviser must write and explain the potential consequences and consider whether the amount is material, and decide whether to continue with that client or not. • If the client refuses to make a full disclosure, the tax adviser should: - Cease to act for the client - Then write to HMRC informing them that they are no more tax adviser to that client without informing any reason. Case study: • Mill has realised that she has not declared some of her income in respect of the tax year 2013/14, as a result the payment of tax was less to the extent of £15,000. As a tax adviser, what is your role in the above case? Ans: • Tax underpaid means there is an error to the extent of 15,000. • The error should be disclosed to HMRC by the client. • As a tax adviser, you cannot disclose such error to HMRC unless you are authorised to do so by your client. • If Mill refuse to make such disclosure, explain her the penalty consequences of nondisclosure. Inform her it is a tax evasion, not legal and criminal activity. • Still Mill is not ready to make necessary disclosure, then you don’t continue to act as her tax adviser. • Inform HMRC that you are no longer tax adviser for Mill • Not required to inform the reason why you left Mill College of Banking and Financial Studies Presentation (oral/viva) Brief – BTEC Higher National Diploma in Business (Level 5) Student Name /ID Number Unit Number and Title Unit 30 -Taxation Academic Year Fall 2018-19 Unit Assessor Ms. Sujata S/CA.Sujatha Bhat I. V. Name Mr. Gnanendran Assignment Title Evaluate the impact on organizations of the legal and ethical constraints associated with taxation responsibilities 30.12.2018 to 2/1/2019 Presentation Date Presentation Format: This assessment component is designed to assess the command verbs used in this learning outcome (LO4) through an Individual presentation (oral/viva/). Each student is required to prepare a power point presentation consisting 25-30 slides about the impact on organizations of the legal and ethical constraints associated with taxation responsibilities. Presentation has to be submitted to the assessor at least two days’ ahead of the presentation by the learner. Learners are required to align the presentation perfectly to the action verbs and the qualitative rubrics (see page 2). The assessment will also observe over and above the action verbs, the following transferable skills; 1. 2. 3. 4. Oral communication Critical thinking Reasoning Creativity The presentation/oral/viva is for 20 minutes and 10 minutes is for questions and answers. Note: The power point presentation and all other evidences/support documents of this assessment component must be appended to this evaluation (presentation/oral/viva) brief. Please fill this document in soft copy so that same may be uploaded to the ERP with evidences/support documents. This evaluation form has to be filled for each learner irrespective of whether it is a group or individual presentation. Unit Learning Outcome: LO4 Evaluate the impact on organisations of the legal and ethical constraints associated with taxation responsibilities Page 1 of 6 1 Grades Pass Merit Distinction LO4 Evaluate the impact on organisations of the legal and ethical constraints associated with taxation responsibilities P4 M4 D3 Evaluate the impact of Critically evaluate the impacts Provide supporting and justified key legal and ethical of key legal and ethical recommendations for responding constraints on application to constraints on different to and minimizing the impact of different organisations, organisations. legal and ethical constraints for a providing supporting range of international examples. conclusions and recommendations. Page 2 of 6 2 Case Scenario For the purpose of this assignment, assume today’s date as 15/12/2018. Mr James and Mrs Jeena are married couple. James was an employee in a MNC UK based company with salary of £8,000 per month till 30th June 2018 (employer deducted PAYE of £4,800 for the salary income). On 30th June 2018, James resigned his job and commenced his own business from 1st July 2018 with an expected Sales turnover of £20,000 per month. You are a fresh graduate tax trainee and a part of the tax advisory team. The advisor has helped Mr James in filing returns for the last 5 years, taking care of all his personal and business income. Every year, Mr James has a habit of pressurising you to reduce his tax liability by investing in schemes like Individual Savings Account and National Savings Certificates, so that he can save tax to the extent of £3,000. Mrs Jeena is a housewife, and did not have any taxable income till 30th June 2018. She however had misunderstanding with her husband and used to visit his office frequently to gather any information on his savings, investment, tax liability, bank details, NIC, VAT, PAYE, etc. As you are Mr James’s tax advisor, Mrs Jeena had approached you several times to collect information in this regard, but has been unsuccessful till date. Recently Mrs Jeena inherited a building (in UK) and a business (in Singapore) on the death of her mother on 1st August 2018. Her mother had given the building on rent and Mrs Jeena agreed to continue with the same tenant for a monthly rent of £5,000 from 1st August 2018. As she was keen to know all tax related information of her husband, she decided to give her Tax work (tax calculation for Rental Income and tax filing etc.) to you. She submitted all documents relating to the building and business inherited by her from her mother and requested to consider the rental income effective from 1st January 2019 onwards. Mrs Jeena suggested that since the inherited business was in Singapore, there is less possibility of tracing out the income from Singapore business, and therefore insisted not to disclose the business inherited from her mother for tax purpose. Her knowledge on taxation is poor. She is not aware of the legislation at various levels - Local, Regional and International and how these legislations applies for both her husband’s and her income in UK and for her business in Singapore. Page 3 of 6 3 As part of tax advisory team, you are asked to provide supporting and justified recommendations to Mrs Jeena for responding to and minimising the impact of legal and ethical constraints for the range of scenarios provided above. (For details refer to Grades and qualitative rubrics given in page 2) 4 Page 4 of 6 Observation record: Student name: Qualification: Higher National Diploma in Business (Level 5) Unit number & title: Unit 30- Taxation Description of activity undertaken 5 Assessment & grading criteria How the activity meets the requirements of the criteria Student signature: Date: Assessor signature: Date: Assessor name: Page 5 of 6 ASSESSMENT RECORD SHEET – SUMMATIVE FEEDBACK Deadline Targeted criteria Date submitted Criteria Assessment comments achieved General comments Learner Declaration Learner signature Assessor declaration Assessor signature 6 I certify that the evidence submitted for this presentation/oral/viva is my own. I have clearly referenced any sources used in the work. I understand that false declaration is a form of malpractice. Date I certify that the evidence submitted for this presentation/oral/viva is the learner’s own. The learner has clearly referenced any sources used in the work. I understand that false declaration is a form of malpractice. Date Date of feedback to learner Page 6 of 6 
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