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Introduction to UK Taxation

1. Revenue raising

2. Re-distribution of income and wealth3. Managing the economy

4. Harmonisation of European tax systems

5. Influencing the behaviour of taxpayers

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The Purposes of Taxation

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Direct Taxes

Direct taxes are paid on income or profits and arededucted at source or paid directly to HMRevenue and Customs.

Examples of direct taxes included income tax,capital gains tax, and corporation tax.

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Indirect Taxes Indirect taxes are taxes on consumption and are

charged when a taxpayer buys an item.

They includevalue added tax (VAT) and dutiespaid on alcohol, tobacco and petrol.

For example, VAT is paid to the seller of the item aspart of the purchase price. It is then the seller's

responsibility to pay the VAT collected to HMRevenue and Customs.

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Tax Evasion

Tax evasion is illegal and the offender may beliable to prosecution.

It may be achieved by understating income,overstating expenses, making false claims forallowances or failing to disclose a liability to tax.

Undeclared income probably accounts for thebulk of evaded taxes in the UK.

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Tax Avoidance

The arrangement of an individual's tax affairs so as toreduce or defer the liability to tax is tax avoidance andthis is legal provided that the taxpayer acts within theframework of the law.

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Sources of Tax Law (Tax Rules)Tax Act of Parliament Abbreviation

Corporation Tax 1. Corporation Tax Act 20102. Corporation Tax Act 20093. Capital Allowances Act 2001

CTA 2010CTA 2009CAA 2001

Income Tax 1. Income Tax (Earnings and Pensions)Act 2003

2. Income Tax (Trading and OtherIncome) Act 2005

3. Income Tax Act 2007

4. Capital Allowances Act 2001

ITEPA 2003

ITTOIA 2005

ITA 2007

CAA 2001Capital Gains Tax Taxation of Chargeable Gains Act 1992 TCGA 1992

Value Added Tax Value Added Tax Act 1994 VATA 1994

Overseas Aspectsof Taxation

Taxation (International and OtherProvisions) Act 2010

TIOPA 2010

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European Union Law 1. The UK is a member of the European Union(EU) and this means that it must comply withEU law.

2. At present the main effect is on VAT, where

much of the law takes the form of EUDirectives.

Statements issued by theTax Authorities

1. Statements of practice.2. Extra-Statutory Concessions.3. Internal guidance manuals.4. LeafletsThese can be viewed on the HM Revenue andCustoms website (www.hmrc.gov.uk). See also

Alan Melville, Taxation (FA 2010), p. 5.

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Sources of Tax Law (Tax Rules)

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The Tax (Fiscal) Year Income tax is calculated for a fiscalyear. The fiscal

year 2010/11 begins on 6 April 2010 and ends on 5April 2011.

You will be studying the income tax rules for the taxyear 2010/11.

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For corporation tax there is a financial yearwhichruns from 1 April in one year to 31 March in the next

year and is identified by the year in which it begins.

You will be studying the corporation tax rules forthe Financial Year 2010 (1 April 2010 - 31 March2011).

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Financial Years for Companies

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Persons liable to pay Income Tax

Each individual (including children) isresponsible for the tax on his/her own income.

Individuals who are resident in the UK during afiscal year are liable to pay UK income tax on theirworldwide income.

Certain types of income are exempt from incometax.

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Non-taxable Income

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Type ofIncome

Examples

Social Securitypayments

Child benefit Housing benefit The state retirement pension and the job

seeker's allowance are taxable.

Interest Interest earned on money held within an

Individual Savings Account (ISA)

Paymentsfrom

employment

Statutory redundancy payments Some benefits provided by employers (see

handout on employment income)

Other ExemptIncome

Scholarships and educational grants

Lump sums paid out under registered pensionschemes

Lottery winningsPremium Bond prizes

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The System of Income Tax

For income tax purposes, income is nowdescribed using terms such as:

Employment income. Trading income.

Property income.

Savings and investment income.

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Bank and Building Society Interest This is usually paid net of20% income tax to

individuals. This means that for every 10 you earn, you will

receive 8 cash and 2 is paid to theGovernment

Non-taxpayers may elect to have the interestpaid gross.

Companies automatically receive this interest

gross (no tax is deducted by the payer).

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The collection of Income Tax

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Income Tax is collected by

either

Deduction at

source

Direct

assessment

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Method of Tax Collection Examples

Income received net of 20%income tax

Interest paid to individuals by UKcompanies on debentures and loanstocks.

Bank and Building Society interestpaid to individuals.

The amount received is grossed upby multiplying by 100/80 andincluded gross in the income taxcomputation.

Dividend income Dividends on UK shares are received

net of a 10% tax credit. The taxable income is the 'gross

dividend' i.e. the dividend receivedmultiplied by 100/90.

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Method of TaxCollection

Examples

Pay As You Earn (PAYE) Tax is deducted at source onemployment income, by the

employer, under the PAYEsystem.

Direct Assessment Income not taxed at source e.g.trading profits are self-

assessed. Other examples of income not

taxed at source are rentalincome.