INTRODUCTION TO THE UK TAX SYSTEM

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INTRODUCTION TO THE UK TAX SYSTEM
Theory and practice of taxation AModule code
C33TA1 Lec2

• Understanding objectiveDevelop awareness of
• 1 Principal UK Taxes
• 2 Structure and sources of tax law
• 3 Administration of the UK tax system

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1 Principal UK taxes

• The UK tax system includes
• direct taxes and indirect taxes.
• The main direct taxes are
• Income Tax,
• Capital Gains Tax and
• Inheritance Tax (which are paid by individuals)
  and
• Corporation Tax (which is paid by companies).
• The main indirect tax isValue Added Tax

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Principal UK taxes 1 - BASIS OF TAXATION IN THE
UK

• Direct TaxationTax on income, profits and
  gainsDirect taxes are suffered directly by the
  taxpayerand are paid by the taxpayer direct to
  the tax authorities
• The amount of direct tax paid by an individual is
  determined by their personal circumstances

• Indirect TaxationTax on expenditureIndirect
  taxes, as taxes on spending are charged when an
  individual buys an itemIndirect taxes are passed
  on by the vendor to the tax authorities
• The amount of indirect tax paid by an individual
  is NOT determined by their personal circumstances

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Principal UK taxes 2 - A TYPICAL TAXPAYERTotal
income per annum 20,000

• Direct income tax_at_ (say)25 5,000Disposable
  15,000income

• Indirect expenditure taxLiving expenses 15,000
  Cost of purchases 12,500net of indirect
  taxesTaxes on spending 2,500Total taxes
  5,000 2,500 7,500 i.e. 35

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Principal UK taxes 3 - PRINCIPAL UK TAXES

• Direct taxesTaxes on income, gains and profits
  
• Income tax
• Capital Gains Tax
• Inheritance Tax
• National Insurancesuffered by individuals and
  employers
• Corporation Taxsuffered by companies

• Indirect taxesTaxes on expenditure
• Value Added Tax
• Customs Duties
• Excise Dutiestax is passed on to the final
  consumer (see later slide)

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Principal UK taxes 4 - Direct taxes paid by
individuals - Income tax

• Income tax assessments are based on the
  taxpayers
• aggregate income
• for that year
• from all sources.
• Tax is paid
• by the individual
• direct to the tax authorities.

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Principal UK taxes 5 - Direct taxes paid by
individuals - Capital Gains Tax

• Capital Gains Tax assessments are based on the
  taxpayers aggregate gains for that year arising
  on the disposal of capital assets.
• Tax is paid by the individual direct to the tax
  authorities.

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Principal UK taxes 6 - Direct taxes paid by
individuals - Inheritance tax

• An Inheritance Tax liability can arise in a
  number of ways but the events which most commonly
  trigger such a liability are
• the transfer of assets on the death of their
  owner
• and
• the gift of assets during the lifetime of their
  owner.
• Tax is paid by the individual direct to the tax
  authorities.

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Principal UK taxes 7 - Direct taxes paid by
companies - Corporation tax

• Tax payable on the profits and chargeable gains
  of companies.
• Tax is paid by the Company direct to the tax
  authorities.

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Principal UK taxes 8 - Indirect taxes - payment
of VAT by the final consumer

• Trader A buys goods from B 100 and
  pays VAT.(assume 10) 10Total purchase
  price 110
• A sells to you for
  150and adds on VAT 15Total sales
  price 165
• You , the final consumer , suffer the whole tax
  of 15
• The government collects 15 -10 5 from A and
  10 -0 10 from B

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2 SOURCES OF TAX LAW

• Sources of tax lawTaxation law is a combination
  of statute law
  (currently being re-written in simpler
  language)and
• case law.
• Inland Revenue issue Statements of practice which
  have no legal force but provide information on
  interpretation

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Sources of tax law 1 - STATUTE LAW

• Tax statutes or Acts of Parliament / Annual
  Finance Act
• Statutory Instruments
• EC legislation

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Sources of tax law 2 - TAX STATUTES (ACTS OF
PARLIAMENT)

• Income tax
• Earned Income Income Tax (Earnings and Pension
  ) Act 2003 (ITEPA 2003)
• Other sources Income Tax (Trading and Other
  Income) Act 2005
• Corporation Tax Income and Corporation Taxes Act
  1998 (ICTA)
• Capital Allowances Act 2001 CAA 2001
• Capital gains tax
• Taxation of Chargeable Gains Act, 1992 (TGCA
  1992)
• Inheritance tax
• Inheritance Tax Act, 1984 (IHTA 1984)
• National Insurance
• Nationaal Insurance Contributions Act 2006
• Value added tax
• Value Added Tax Act, 1994 (VATA 1994)
• Administration of direct taxation
• Taxes Management Act, 1970 (TMA 1970)
• Administration of indirect taxation
• Customs and Excise Management Act, 1979 (CEMA
  1979)

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Sources of tax law 3 - ANNUAL FINANCE ACT

• Statutes are supplemented and amended each year
  by the annual Finance Act
• Receives Royal Assent in August
• Based on Budget proposals put forward in previous
  March
• Consolidation of law in a new statute

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Sources of tax law 4 - Tax statutes / Annual
Finance Act - an illustration

• ICTA 1988 section 257(2)Personal allowances(i)
  If the claimant is at any time during the year of
  assessment of the age of 65 or upwards he shall
  be entitled to a deduction from his total income
  of 4,100.

• Finance Act 2006 section 24Personal allowances
  for 2006-07 for those aged 65 or moreIn section
  257(2) of the Act (personal allowances) - (a)
  the amount in subsection (2) shall be
  7,280The 1988 Act is updated for these
  provisions for annual publication

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Sources of tax law 5 - Statutory Instruments

• ICTA 1988
• S.638 Personal pension schemes

• SI 2001/119
• Personal pension schemes made by Commissioners of
  Inland Revenue under ICTA 1988 S.638
• Made 23 January 2001
• Laid before parliament 24 January 2001

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Sources of tax law 6 - Nature of statute law

• Specific provisionsThe claimant shall be
  entitled to a deduction from his total income of
  3,525.ICTA 1988 section 257(1)

• Fundamental principlesAllowable deductions for
  individuals in employmentITEPA 2003 section
  336Interaction with case law

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Fundamental principles
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A deduction is allowed for money spent
necessarily as regards travelling expenses, and
wholly, exclusively and necessarily as regards
other expenses, expended in the performance of
duties of the office or employment. ITEPA 2003
section 336

• Wholly
• Exclusively
• Necessarily
• Performance of duties

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Sources of tax law 8 - STATEMENTS MADE BY TAX
AUTHORITIES

• Statements of practice (SPs)
• Extra-statutory concessions (ESCs) - where they
  do not apply the strict letter of the law
• Press releases
• Publications / Pamphlets / Explanatory notes

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Admin UK tax-1 3 ADMINISTRATION OF THE UK TAX
SYSTEM

• Direct taxes
• Income tax
• Capital Gains Tax
• Inheritance Tax
• Corporation Tax
• National Insurance
• Administered by HM Revenue and Customs

• Indirect taxes
• Value Added Tax
• Excise dutiesAdministered by HM Revenue and
  Customs

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Admin UK tax-2 THE TAX YEAR - YEAR OF
ASSESSMENT

• The Tax year (sometimes called the Fiscal Year)
  
  runs from
  6 April to
  the following 5 April.
• The Corporation Tax financial year runs from
  
  1 April to the following 31
  March.

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Admin UK tax-3PAYMENT OF TAX SELF ASSESSMENT 1

• If an individuals tax liability for a tax
  year cannot be completely collected by
  deduction at source
• (a) from interest, etc.
• (b) from wages and salaries under PAYE
• Then
• The tax must be formally assessed (charged)
  by the taxpayer

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Admin UK tax-4 DEDUCTION AT SOURCE

• IncomeSalary 20,000Interest
  2,000Total 22,000
• Tax (assume) _at_ 10 2,200
• How is this paid?

• Income Tax deducted at sourceSal
  20,000 2,000Int 2,000 200 22,000
  2,200
• Tax liability 2,200
• Less tax already paid by deductionat source
  2,200
• Tax now payable Nil

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Admin UK tax-5 DEDUCTION AT SOURCE

• Income Tax deducted at sourceSal
  20,000 2,000Int 2,000 200TI 5,000
  - 27,000 2,200 Trading
  Income self employed business income

• Tax liability _at_ 10 2,700
• Less tax already paid by deductionat source
  2,200
• Tax now payable 500
• By self assessment

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Admin UK tax-6 SELF ASSESSMENT 2

• The amount payable may be calculated by
• (a) the taxpayer ( or his accountant ) -
  then
• checked by Inland Revenue OR
• (b) by Inland Revenue - (then checked by the
  taxpayer or his accountant)
• In both cases the first step is the
  completion of a
• TAX RETURN by the tax payer (or his
  accountant)
• (The Return may be made by electronic ( ELS
  ) or manual means)
• From 2000-01 onwards individual taxpayers may
  lodge their Returns via the Internet - and pay
  their tax electronically. If they do so they
  receive a discount of 10.

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Admin UK tax-7 SELF ASSESSMENT 3

• The annual procedure is
• (i) In early April RCissues Returns to the
  taxpayers
• who may need them. The Return is a
  basic 8
• page document supplementary pages for
• different types of income ( from
  employment,
• property, etc ) and chargeable gains.
• (ii) The information required is for the
  tax year just
• ended. In April 2006 returns were issued to
  record income for the previous tax
  year i.e. 6 April 2005 to 5 April 2006 (2005-06)

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Admin UK tax-8 SELF ASSESSMENT 4

• (iii) The Return must be lodged with the R
  C on or before
• - 31 January following ie 31 Jan 2007 ( or 3
  months from date of issue, if later ) -
  for tax payers who have calculated their
  own liabilities
• - 30 September following ie 30 Sept 2006 ( or
  2 months from date of issue, if later )
  - for tax payers who wish Inland Revenue
  to calculate their liability
• If Returns are not lodged by 31 January (
  the filing date) automatic penalties apply.

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Admin UK tax-9 SELF ASSESSMENT 5

• (i) If a Return is NOT submitted by 30
  September,the tax payer MUST calculate
  their own tax.
• (ii) IR have the right to correct obvious
  mistakes within 9 months of date of
  lodgement.
• (iii) Taxpayer has the right to amend their
  Return within 12 months of Annual Filing
  Date. Where a error has led to an
  overcharge, tax payers may lodge error or
  mistake claims within 5 years of Annual
  Filing Date.

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Admin UK tax-10 SELF ASSESSMENT 6

• Tax due is normally payable
• (i) First payment on account ( P.O.A. ) is
  due on 31 January in the Tax year to
  which the self -assessment Return related. (31
  Jan 2006)
• (ii) A second P.O.A. is due on 31July
  following (31 Jul 2006)
• (iii) Final balancing payment is due on
  Annual Filing Date. 31 January following
  the end of the tax year. (31 Jan 2007)

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Admin UK tax-11 NOTIFICATION OF CHARGEABILITY TO
TAX 1

• Individuals who have NOT received a Tax return
  but who have taxable
• Income OR
• Gains
• of which Revenue and Customs are not aware
• Must notify R and C within 6 months of the end of
  the Tax Year in which the income/gain arises
• Penalties are imposed for non-compliance

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Admin UK tax-12 NOTIFICATION OF CHARGEABILITY TO
TAX 2

• Notification is NOT required if
• Taxpayer has no capital gains, and
• Taxpayer is not a High Rate taxpayer and
• All of the taxpayers income has been taxed at
  source or under PAYE

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Admin UK tax-13 ENQUIRIES 1

• IR adopt a Process now - check later approach
  to Returns
• Obvious errors are corrected
• All Returns are eventually checked and some
  selected for enquiry
• Those chosen may be to obtain specific
  information
• OR
• At random

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Admin UK tax-14 ENQUIRIES 2

• Generally enquiries must begin within 12 months
  of annual filling day
• BUT
• IR may raise a discovery assessment after the
  12 months if it is discovered that full
  disclosure has not been made
• Time limits for such assessments are
• 31 January of the 6th year of assessment
  following where there is no negligence or fraud
• 31 January of the 21st year following, in cases
  of fraud or negligence.

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Admin UK tax-15 APPEALS

• Taxpayers may appeal against these IR decisions
• 1. Imposition of a penalty
• 2. Imposition of a surcharge
• 3 . A request to furnish documents in an enquiry
• 4. Amendments made to a self assessment as the
  result of an enquiry
• 5. That the relevant conditions for the making of
  a discovery assessment do not exist
• 6. A discovery assessment
• Appeals should be made within 30 days of the
  relevant decision.