Dissertation Sample On Taxation
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TABLE OF CONTENTS Introduction.................................................................................................................................3 Task 1............................................................................................................................................3 1.1 Description of UK tax environment........................................................................ 3 1.2 Analysis of roles and responsibilities of tax practitioner............................... 5 1.3 Explanation of tax obligations of tax payers and their agents along with the implications of non-compliance...............................................................................5 2.1 Computation of relevant expenses and allowances........................................ 6 2.2 Computation of taxable amount and tax payable for employed and self employed along with the payment dates....................................................................7 2.3 Completion of relevant documentation and tax returns of the organization............................................................................................................................ 9 Task 2......................................................................................................................................... 12 3.1 Computation of chargeable profits...................................................................... 12 3.2 Computation of corporate tax liabilities and computation of due payment dates.................................................................................................................... 12 3.3 Provisions of income tax deductions...................................................................14 4.1 Identification of chargeable assets......................................................................15 4.2 Computation of capital gains and losses and tax payable on it ..............15 Conclusion.................................................................................................................................17 References................................................................................................................................ 18
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INDEX OF TABLES Table Table Table Table Table Table Table
1: 2: 3: 4: 5: 6: 7:
Income statement of Mr. Jones.......................................................................... 7 Statement showing computation of taxable income.................................8 Data of Running Limited.................................................................................... 14 Financial facts and figures of Running Limited......................................... 14 Operating profit of Fast and Forward Ltd.................................................... 14 Chargeable profit of Fast and Forward Ltd................................................. 15 Taxable amount of Fast and Forward Ltd....................................................15
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ILLUSTRATION INDEX Illustration Illustration Illustration Illustration
1: 2: 3: 4:
Income tax rates.........................................................................................10 Form P45........................................................................................................11 Form 11 D......................................................................................................12 Form P60........................................................................................................13
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INTRODUCTION Taxation can be referred as act of taxing authority of levying of tax on individuals on their earnings or benefits attained by them. This term is applicable on all types forms of taxes such as income tax, capital tax and other indirect tax. Taxation in UK is governed by provisions of HM Revenue & customs (Xu and Xu, 2013). Individuals are required to comply guidelines provided by HMRC in order to satisfy their tax obligations in an appropriate manner. Present project report is focused on the evaluation of provisions of tax liability of individual and commercial entities. For this aspect, description will be provided regarding relevant tax norms. This description will be supported by practical examples for better understanding.
TASK 1 1.1 Description of UK tax environment Purpose and types of taxation Taxation is a system of compulsory contribution by public levied by government. It is a primary source of revenue for government expenses and other public purposes. Tax is charged by government to make reduction between income in-similarities between population and to provide necessary goods and services to the public. This revenue is raised from the direct and indirect taxes. For this aspect following types of taxes are collected by the government of UKIncome tax- Income tax is charged from individuals and trusts on the income earned and unearned by them from course of employment, trading activities, pensions, dividend, rents, investment and profits (Income Tax rates and Personal Allowances, 2015). Basic rate of income tax is 20%. However, in situation where income exceed from
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31785 then 40% tax is payable on additional income and if it exceeds from ÂŁ150,000 then 45% is payable on additional income. Corporation tax- This tax is payable by corporate entities which have separate legal identity on the profits earned by them during particular accounting period. In accordance with the HMRC, corporation tax is placed on the taxable profits of limited companies and similar entities such as association, unincorporated entities, clubs and societies (Henrekson and Sanandaji, 2011). Capital gains tax- Individual or business organization is liable to pay capital gain tax in situation they had earned benefit on transfer of noncurrent asset (Comprix, Mills and Schmidt, 2012). In accordance with the provision of this tax, profit is taxable instead of receivable amount. Inheritance tax- This tax is chargeable on the transfer of property after death. However, this tax is subjected to various reliefs and exemptions. Inheritance tax will also be levied in situation asset is transfer before 7 years of the death of party (Becker and Fuest, 2011). It is computed on the cumulative basis i.e. 20% is charged in respect of lifetime transfers while 40% (Inherent tax, 2015) is charged at the event of death. Different methods of tax collection In UK, tax is collected by HMRC on the behalf of government. Generally it is collected through the scheme of PAYE although some individuals are required to pay their tax liability through self assessment tax return. PAYE tax is applicable if earning is attained through the course of employment (Alzahrani and
Lasfer, 2012). In this scheme, tax will be automatically
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deducted by employer side on the earning. However, in following situation individual is required to pay through form of self assessment tax return: ➢ Individual is self employed (Working for yourself, 2015). ➢ Rental or foreign income is received. ➢ Untaxed income that cannot be collected through PAYE scheme. Tax legislation Taxation legislation in UK is mainly governed by provisions provided by HMRC. They are responsible for the collection of tax on the behalf of government. They provide guidelines to assesses and tax practitioners by which they can fulfill their tax obligations in an appropriate manner (Miller and Oats, 2012). In addition to this, they provide continuous amendments by considering economic environment in industry for the purpose of providing better and justified guidelines. 1.2 Analysis of roles and responsibilities of tax practitioner Tax practitioner act as a mediator between assesse and government authorities. They are well versed with the knowledge of taxation provisions thus are required to guide tax payer in an appropriate manner. In this aspect, they have following roles and responsibilitiesDealing with inland revenue- There main responsibility is to deal with inland revenues. They fill the return on the behalf of the client. Further, they communicate amendments to the clients so they comply their obligations in a proper manner (McGuire, 2013). Toll Free : +44 203 3555 345 Email : help@onlinedissertationwriting.co.uk Website : http://www.onlinedissertationwriting.co.uk
Providing appropriate advise- Tax practitioners provides advise to the client regarding tax requirements by analyzing their tax situation in a proper manner. In addition to this, they also handle the cases of tax dispute with the government authorities. Computation of tax liability- By considering information of business scenarios, tax practitioner also compute the liability of individuals (Dowell, 2013). Due to this aspect, they are mandated to have background education in the field of taxation. Respecting confidentiality of client- It is both ethical and legal responsibility of tax practitioner. They must not disclose information of client to the third party in order to earn unjust benefits.
1.3 Explanation of tax obligations of tax payers and their agents along with the implications of non-compliance Obligation of tax payer To provide fair and accurate information to the tax agent so they can fill their return appropriate. All material information should be disclosed without any window dressing or manipulation (Cairncross, 2013). They should act in accordance with the standards described by HMRC while considering various aspects such as VAT, PAYE, corporation tax, etc. Further, they are required to maintain accounting data for reasonable period of time for the purpose of scrutiny. Toll Free : +44 203 3555 345 Email : help@onlinedissertationwriting.co.uk Website : http://www.onlinedissertationwriting.co.uk
Obligation of tax agent They should act in accordance with the guidelines provided by HMRC They should promote tax planning instead of tax evasion Tax agent are required to provide true and fair information to client without any misleading guidelines in order to earn high profit. Implications of non-compliance Both tax payer and their agents are liable to fulfill their obligations in a proper manner. In situation where tax payer fails to act in accordance with the provided guidelines by the legislation then they will be liable to provide damages of £3,000. On the other hand, there will be adverse impact on the business activities (Terra and Wattèl, 2005). Further, license of tax agents can be canceled if they act in contradiction with the guidelines given by HMRC.
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TASK2 2.1 Computation of relevant expenses and allowances For employee Mary is employed in Chris and Cross Ltd. Stated company is engaged in providing of ladders to the customers. For her service she gets payment on hourly basis i.e. £50 per hour. In a week she work for 20 hours as Saturday and Sunday is off. In addition to this, she is entitled for the dearness allowance
of
£10
per
week.
Computation of taxable income of Mary is as follows=(Monthly Basic Pay + Overtime Pay + Holiday Pay + Night Differential)(Allowances provided to her as Income Tax Act) = (50*20)+40 =£1040 per month For self employed Mr. Jones is running a digital store for the selling of computer appliances. Along with this, they are also providing services to the clients for the repair of computer appliances. However, this business is not able to generate
sufficient
returns.
Income
statement
of
their
company
enumerated below-
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is
Table 1: Income statement of Mr. Jones Particulars Store of computer appliances Income from sales of computer appliances Cost of products Payment made to employees Rental charges Drawings Office expenditure Travel charges Paid for donation Bank charges Depreciation of office equipment Capital Allowance Services provider of computer appliances Losses on these services of computer appliances
Amount £400,000.00 £210,000.00 £10,000.00 £5,000.00 £2,500.00 £4,000.00 £500.00 £400.00 £230.00 £1,000.00 £580.00
£1,300.00
Table 2: Statement showing computation of taxable income Particulars Incomes Income from sales of computer appliances Less: Cost of products Operating profit Expenses Payment made to employees Rental charges Drawings Office expenditure Travel charges Bank charges Depreciation of office equipment Total expenses Net profit Less: Capital allowance Less: Tax benefit of loss Taxable income
Amount (£) £400,000.00 £210,000.00 £190,000.00 £5,000.00 £5,000.00 £2,500.00 £4,000.00 £500.00 £230.00 £1,000.00 £18,230.00 £171,770.00 £580.00 £1,300.00 £169,890.00
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2.2 Computation of taxable amount and tax payable for employed and self employed along with the payment dates Taxable amount and tax payable by employee Taxable amount = Income of Mary * 12 - Deduction allowed by Income Tax Act of UK (Rates and thresholds for employers 2015 to 2016, 2015) £12480 (1040 (monthly income of Mary)*12) – £10600 (yearly allowance) =£1880 Amount of tax payable= £1880 *20% =£376 By considering the above computation it can be said that after deduction of yearly allowance of 10000, taxable income of Mary is £1880. This amount is less than 10000, thus they will be liable to provide tax on rate of 20% (Tae Uk, 2009). Henceforth, tax liability during the assessment year of Mary is £376. Taxable amount and tax payable by self employed Particulars Amount (£) Net profit £171,770.00 Add- Disallowed expenses (a) Drawing £2,500.00 (b) Depreciation £1,000.00 £3,500.00 Less- allowable expenses (a) Capital allowance (b) Charitable donation Adjusted profit
£580.00 £400.00
£980.00 £167,290.00
Taxable amount =(Adjusted-tax losses) =£167,290.00-£1300.00 =£165990 Toll Free : +44 203 3555 345 Email : help@onlinedissertationwriting.co.uk Website : http://www.onlinedissertationwriting.co.uk
Tax payable= (150000-42385)*.40 + (167290-150000)*.45 =43046 + 7780.5 =50826.5 In accordance with the above calculation it can be said that, Jones is liable to pay tax obligation of 50826.5. Computation of this tax obligation is done by considering following tax brackets-
Illustration 1: Income tax rates (Source: Income Tax rates and Personal Allowances, 2015) Mary and Jones are required to submit their return prior to the midnight of 31st October 2015. In situation where they are filing online return then date for the submission of the return will be extended to the 31st January 2016.
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2.3
Completion
of
relevant
documentation
and
tax
returns
of
the
organization Tax payer is required to complete documentation formalities with the submission of amount of tax payable by them on their earnings and benefits. These documents are required to be submitted by tax agent or tax paper with relevant and reliable information. This submission is required to be supported by taxation regimes (Joo-suk, 2012). Description of various taxation documents is enumerated below1. P45- Tax payer is required to provide submission of this document if they are not willing to continue their operational activities of business. It is compulsory for the tax payer to fill this document in order to provide information of their earnings in previous assessment year prior to the closing.
Illustration 2: Form P45 (Source: Garrett and Mitchell, 2001)
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2. P60- This taxation form is used by individuals who had earned income from the course of employment. With this form, they are able to provide description regarding actual tax liability in order to demand compensation for the excessive tax deduction at source by the employer. 3. P11D- This form is filled up by employer in order to provide description of benefits provided in kind to the employees such HRA, dearness allowance etc. This form is submitted to the HMRC.
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Illustration 3: Form 11 D (Source: Blundell and et.al., 2009)
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Illustration 4: Form P60 (Source: Garrett and Mitchell, 2001)
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TASK 3 Scenario Fast and Forward Ltd is engaged in production of sports equipments. In 2014, sales of the company was £950,000. In order to attain this revenue, management of the company had made incurred cost of production of £380,000 on purchases. In this aspect other trading expenses of the business were £60,000 (40000 direct overhead and 20000 indirect overhead). In this financial year, company had also paid dividend to their shareholders of amount £60,000. Along with this, interest charges on debt borrowed by them was £60,000. Along with the sales company had received amount of £6,750 in form of dividend. As per accounting policies formed by them, there is also charge of depreciation of £45,000. Company is entitled to take benefit of capital allowance of £23,000. Financial information of company Information of other income and losses is as followsTable 3: Data of Running Limited Particulars Sales Purchase Direct overheads Indirect overheads Dividend paid Interest paid Dividend received (TDS on dividend 10%) Capital Allowance for the year Depreciation Capital gains Capital loss Income from letting out building Wear & Tear allowance Interest on investment (TDS on investment 10%)
Amount (£) £950,000.00 £380,000.00 £40,000.00 £20,000.00 £60,000.00 £60,000.00 £6,750.00 £23,000.00 £45,000.00 £10,000.00 £2,500.00 £4,000.00 £1,800.00 £2,700.00
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Table 4: Financial facts and figures of Running Limited Particulars
Amount
Capital gain
£10,000.00
Capital loss
£2,500.00
Rental income
£4,000.00
Wear & Tear allowance
£1,800.00
Interest
on
investment
(TDS
on
investment 10%)
£2,700.00
Table 5: Operating profit of Fast and Forward Ltd Particulars Sales Less: Cost of purchase Less: Manufacturing expense Gross profit Less: Other expenditure Less: Interest paid Less: Depreciation Operating profit
Amount (£) £950,000.00 £380,000.00 £40,000.00 £530,000.00 £60,000.00 £60,000.00 £45,000.00 £365,000.00
3.1 Computation of chargeable profits Scope of corporation tax Corporation tax is payable by corporate entities which have separate legal identity on the profits earned by them during particular accounting period. In this aspect, resident companies are required to pay tax on both domestic and foreign income. However, non resident companies are required to pay tax only on domestic income (Citron, 2001).
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Accounting period Generally duration of accounting period is of 12 months which is started with the financial year of the company. In assessment year, tax of previous year is paid by company. Chargeable profits Tax payable by company is computed on the amount of chargeable profit. This amount is computed after making adjustment of non-allowed expenses and income by the HMRC. On this amount further adjustment regarding deduction provided by government authorities is made. Due dates Action Date of submission Submission of File annual Prior to the 9 months from the date of accounts with Companies House completion of financial year Prior to the 9 months from the date of 1 day Payment of Corporation Tax after completion of financial year (Blundell and et.al., 2009). Prior to the 12 months from the date of Filing Company Tax Return completion of financial year Adjusted profits Adjusted profits are computed by making adjustment of disallowed expenses and income from trading income or losses of the company. By considering the amount of adjusted profit taxable amount is determined. Treatment of losses Losses are adjusted from the amount of adjusted profits. This amount is reduced from the adjusted profit to determine net taxable income.
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Corporation tax rates Corporation tax rate for company is 24%. On this percentage company is required to pay taxes on business income. Capital expenditure and allowance Capital expenditure allowance is a deduction provided to the company for the usage of non current assets in the business. For this aspect two pool is prepared i.e. general pool and special rate pool. Treatment of income tax deductions Provisions of tax deduction has been developed to make reduction in the tax liability of the corporate entity. In this aspect, provisions of exemptions such as marginal relief, charity and pension plan has been introduced (Alzahrani and Lasfer, 2012). 3.2 Computation of corporate tax liabilities and computation of due payment dates Step 1: Computation of chargeable adjusted profits by considering allowable and non allowable income and expenses Initially adjusted profits are computed by adding disallowed expenses and deducing allowances and other expenses. By considering this aspect, in present scenario depreciation will be added back and dividend & wear allowances will be reduced. In this amount other income such as dividend and rental will be added.
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Table 6: Adjusted profits of Fast and Forward Ltd Particulars Amount (£) Operating profit £365,000.00 Add: Disallowed expenses Depreciation of asset £45,000.00 Total disallowed expenses £45,000.00 Allowances and other expenses Less: Dividend paid £60,000.00 Less: Wear and tear allowances £1,800.00 Total allowed expenses £84,800.00 Trading profit £325,200.00 Add: Income from letting out building 20000 Interest and dividend income [7500*+3000**] £10,500.00 Chargeable gain [12000-4500] £7,500.00 Adjusted profits £386,200.00 Step 2: Computation of chargeable profits by capital allowances In second step chargeable profits are computed by reducing capital allowances from the amount of adjusted profits. Table 7: Computation of chargeable profits Trading income Adjusted profits before capital allowances Less: capital allowances
£386,200.00 £230000.00
Chargeable profits
£363,000.00
Step 3: Computation of taxable amount It is last step of tax computation. In this step final adjustments are made regarding tax losses. By deducting this amount net profit will be determined and on this amount rate of corporation tax will be applied.
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Table 8: Taxable amount of Fast and Forward Ltd by considering additional items Particulars Taxable profit (a) Tax losses Corporation tax (24%) (b) Marginal relief (c) (Consider task 3.3) Tax liabilities (d)=(a-b)+c Relief from double taxation (e) Taxable amount (f)= (d-e)
Amount (£) £363,200.00 0 £87,168.00 21604 £65,564.00 £1,050.00 £64,154.00
In the table 8, taxable profit is £363200. Due to absence of taxable losses this amount will be considered for the computation of tax liability. Rate of corporation tax as per UK norms is 24%. From this taxable amount marginal relief and amount linked to double taxable has been reduced and tax able amount is £64,154.00. 3.3 Provisions of income tax deductions Income tax deduction are reduced from the taxable amount of the company in order to reduce its obligation. These deductions are provided on the several transactions such as charity, allowances, marginal relief. Computation of marginal relief by considering above described scenario is as follows-
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Marginal relief = Standard Fraction x (U – A) x N / A In this formula: U
Upper profit limit
A
Profits
N
Total profits
Standard Fraction
(7/400)
Marginal relief = ((7/400)*(1500000-300000)*(250200/243200)) =21604 Working note: Total profits = Total profits + the grossed-up dividends received = 243200 + (6750*100/90) =243200+7000 =250200
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TASK4 4.1 Identification of chargeable assets Chargeable persons Chargeable person can be defined as a tax payer who is obliged to pay statutory charges on the benefit earned on the disposal of assets (Dowell, 2013). Assets and disposals For the computation of capital gain tax, those assets are covered which are capital in nature. On certain assets, exemption is provided by government such as government securities, car, investment in personal equity plan etc (McGuire, 2013). Further, liability for capital gain tax is payable if value of disposal asset is more than equal to ÂŁ6,000. In this transfer of shares other NISA, PEP or ISA and business assets are also taxable. Payment dates Tax payer is required to pay tax charges on 5th April after the end of accounting year. Further, general due date of capital gain tax liability is 31st January after the taxation year (Preshaw, 2015).
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4.2 Computation of capital gains and losses and tax payable on it Case situation 1 James is running a furniture outlet. He had acquired paintings some year ago and now he is planning for the sale of the paintings to the Janet. Financial information of this transaction is enumerated below:
Particulars
Amount (ÂŁ)
Trading Profit
5000
Cost of acquisition of paintings (purchased on
4500
1st September 2012) Above assets was sold on 31st March 2014 Exemption on Capital gains tax
5000 790
Computation of capital gain tax or loss for transfer of disposal assets through indexation method is as followsStep 1: Determination of Income from transfer of property (A). In second step cost of acquisition is deducted from the income. In step three capital gain is determined. In fourth step indexation benefit is determined. Indexation benefit is applicable in present case as asset is purchased in later date. In last step net capital or gain is determined
by considering other capital
losses and gains.
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Particulars
Amount (ÂŁ)
Step 1: Income from transfer of
5000
property (A) Step 2: Cost of acquisition (B)
4500
Step 3: Capital gain (A-B)
500
Step 4:Indexation benefit
0
Step 5: Net capital loss (500-
-290
790) By considering above calculation it can be said that capital gain tax will be payable on amount 710. This amount is computed after considering exemption on capital gain tax. Computation of capital gain tax or loss for transfer of disposal assets through taper relief method is as follows-
Particulars
Amount (ÂŁ)
Step 1: Income from transfer of
5000
property (A) Step 2: Cost of acquisition (B)
4500
Step 3: Capital gain (A-B)
500
Step 4: Taper relief (30%)
150
Step 5: Net capital loss (500-790)
-640
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This aspect shows that method of taper relief is more appropriate for client because they are not able to take benefit of indexation because asset is purchased after 1998. 4.3 Computation of liability for capital gain tax In accordance with the above computation company will not be liable to pay capital gain tax because there is situation of net loss. Benefit of this loss can be taken by organization in next accounting year. In situation of gain, James will be liable to pay tax at the rate of 18%. In the above describe example, if there will be capital gain be of amount to 500 then computation of capital gain tax will be as follows=500*18% =90 *28% rate has not been considered because trading profit is less than the basic limit of the James.
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CONCLUSION In accordance with the present study, it can be concluded that taxation is imposed by government in order to generate revenue for the public expenditure and to provide necessary service and products. Tax payers and tax agents are required to comply their obligations in an appropriate manner by considering provisions described by HMRC. In situation where they to comply these provisions, then they will be liable to provide damages or penalty charges described by legislation.
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REFERENCES Books and journals ● Alzahrani, M. and Lasfer, M., 2012. Investor protection, taxation, and dividends. Journal of Corporate Finance. ● Becker, J. and Fuest, C., 2011. The taxation of foreign profits—The old view, the new view and a pragmatic view. Intereconomics. ● Blundell, R. and et.al., 2009. Optimal Income Taxation of Lone Mothers: An Empirical Comparison of the UK and Germany. The Economic Journal. ● Cairncross, A., 2013. Essays in economic management. Routledge. ● Citron, D. B., 2001. The valuation of deferred taxation: Evidence from the UK partial provision approach. Journal of Business Finance & Accounting. Online ● Income Tax rates and Personal Allowances. 2015. [Online]. Available at:<https://www.gov.uk/income-tax-rates>. ● Preshaw, J., 2015. Management of Taxes Sub-Committee. [Online]. Available at:<https://www.tax.org.uk/tax-policy/remit-of-technicalcommittee/ManagementofTaxes>. ● Working for yourself. 2015. [Online]. Available at:<https://www.gov.uk/working-for-yourself/overview>. ● Inherent tax. 2015. [Online]. Available at:<https://www.gov.uk/inheritance-tax/overview>. ● Rates and thresholds for employers 2015 to 2016. 2015. [Online]. Available at:<https://www.gov.uk/guidance/rates-and-thresholds-foremployers-2015-to-2016>.
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