Characteristics And Objectives Of The UK Taxation System

Characteristics And Objectives Of The UK Taxation System

UK beginning income is by and large capable to UK revenue enhancement no affair the citizenship nor the topographic point of abode of the single nor the topographic point of enrollment of the company.

For persons this means the UK income revenue enhancement liability of one who is neither resident nor ordinarily occupant in the UK is limited to any revenue enhancement deducted at beginning on UK income, together with revenue enhancement on income from a trade or profession carried on through a lasting constitution in the UK and revenue enhancement on rental income from UK existent estate.

Persons who are both resident and domiciled in the UK are to boot apt to taxation on their world-wide income and additions. For persons resident but non domiciled in the UK ( a “ non-dom ” ) , foreign income and additions have historically been taxed on the remittal footing, that is to state, merely income and additions remitted to the UK are taxed ( for such people the UK is sometimes called a revenue enhancement oasis ) . However from 6 April 2008, a non-dom want to retain the remittal footing is required to pay an one-year revenue enhancement of ?30,000. Domicile here is a term with a proficient significance. Very approximately ( and this is a considerable simplification ) an person is domiciled in the UK if it is his or her lasting place.

Income revenue enhancement forms the majority of grosss collected by the authorities. Each individual has an income revenue enhancement personal allowance, and income up to this sum in each revenue enhancement twelvemonth is free of revenue enhancement for everyone. For 2009-10 the revenue enhancement allowance for under 65s is ?6,475. Above this sum there are a figure of revenue enhancement sets – each taxed at a different rate ;

This tabular array reflects the remotion of the 10 % get downing rate from April 2008, which besides saw the 22 % income revenue enhancement rate bead to 20 % . Alistair Darling announced in the 2009 budget ( 22 April 2009 ) that, from April 2010 there would be a new 50 % income revenue enhancement rate for those gaining more than ?150,000.

The taxpayer ‘s income is assessed for revenue enhancement harmonizing to a prescribed order, with income from employment utilizing up the personal allowance and being taxed foremost, followed by nest eggs income ( from involvement or otherwise unearned ) and so dividends.

Exemptions on Investing

UK cardinal authorities outgo projection for revenue enhancement twelvemonth 2008-2009, harmonizing to the 2008 Budget.

Certain investings carry a revenue enhancement favoured position including:

UK Government Bonds ( Gilts )

While all income is nonexempt, additions are exempt for income revenue enhancement intents.

National Savings and Investings

Certain investings via the province owned National Savings strategy are non capable to revenue enhancement including Index linked Certificates ( up to ?15,000 per issue ) and Premium Bonds a strategy that issues monthly awards in topographic point of involvement on single retentions up to ?30,000.

Individual Savings Accounts.

These permit up to ?7,200 ( Maximum of ?3,600 in hard currency financess, and the balance being allocated either to common financess ( Unit of measurements Trusts and OEICs ) or single self-selected portions. No revenue enhancement is deducted, although the 10 % revenue enhancement withheld on UK dividends can non be reclaimed.

Pension Fundss

These have the same revenue enhancement intervention as ISAs in footings of growing. Full revenue enhancement alleviation is besides given at the person ‘s fringy rate on parts or, in the instance of an employer parts, it is treated as an disbursal and is non taxed on the employee as a benefit in sort. Aside from a revenue enhancement free ball amount of 25 % of the fund, benefits taken from pension financess are nonexempt.

Venture Capital Trusts

These are investings in smaller companies or financess of retentions in such companies over a minimal term of five old ages. These are non nonexempt and measure up for 30 % revenue enhancement alleviation against an person ‘s income.

Enterprise Investment Schemes

A non nonexempt investing into smaller company portions over three old ages that qualifies for 20 % revenue enhancement alleviation. The installation besides allows an indiviudal to postpone capital additions liabilities ( these additions can be stripped out in future old ages utilizing the one-year CGT allowance. )

Insurance bonds

These include offshore and onshore investing Bonds issued by insurance companies. The chief difference between the two is that corporation revenue enhancement onshore means that additions are treated as if basic rate revenue enhancement has been paid ( this can non be reclaimed by nothing or get downing rate revenue enhancement remunerators ) . With both versions up to 5 % for each complete twelvemonth of investing can be taken without an immediate revenue enhancement liability ( capable to a maximal sum of 100 % of the original investing. On this footing, investors can be after an income watercourse while postponing any indictable backdowns until they are on a lower rate of revenue enhancement, are no longer a UK occupant, or their decease.

Capital additions revenue enhancement

Capital additions are capable to revenue enhancement at the 18 % ( for persons ) or at the applicable fringy rate of corporation revenue enhancement ( for companies ) .

The basic rule is the same for persons and companies – the revenue enhancement applies merely on the disposal of a capital plus, and the sum of the addition is calculated as the difference between the disposal returns and the “ base cost ” , being the original purchase monetary value plus allowable related outgo. However, from 6 April 2008, the rate and reliefs applicable to the indictable addition differ between persons and companies. Companies apply “ indexation alleviation ” to the base cost, increasing it in conformity with the Retail Prices Index so that ( loosely talking ) the addition is calculated on a post-inflation footing ( with different regulations apply for additions accrued prior to March 1982 ) . The addition is so capable to revenue enhancement at the applicable fringy rate of corporation revenue enhancement. Persons are taxed at a level rate of 18 % , with no indexation alleviation ( but subject to a limited alleviation for the first ?1m of additions for “ enterprisers ” )

The revenue enhancement twelvemonth

The Tax Year in the UK, which applies to income revenue enhancement and other personal revenue enhancements, runs from 6 April in one twelvemonth to 5 April the following ( for income revenue enhancement intents ) . Hence the 2008-09 revenue enhancement twelvemonth runs from 6 April 2008 to 5 April 2009.

The uneven day of the months are due to events in the mid-18th century. The English one-fourth yearss are traditionally used as the day of the months for roll uping rents ( on, for illustration, agricultural belongingss ) . The revenue enhancement system was besides based on a revenue enhancement twelvemonth stoping on Lady Day ( 25 March ) . When the Gregorian calendar was adopted in the UK in September 1752 in topographic point of the Julian calendar, the two were out of measure by 11 yearss. However, it was felt unacceptable for the revenue enhancement governments to lose out on 11 yearss ‘ revenue enhancement grosss, so the start of the revenue enhancement twelvemonth was moved, foremost to 5 April and so, in 1800, to 6 April.

The revenue enhancement twelvemonth is sometimes besides called the Fiscal Year. The Fiscal Year, used chiefly for corporation revenue enhancement intents, tallies from 1 April to 31 March. Financial Year 2008 runs from 1 April 2008 to 31 March 2009, as Fiscal Old ages are named harmonizing to the calendar twelvemonth in which they start.

Value added revenue enhancement

The 3rd largest beginning of authorities grosss is value added revenue enhancement ( VAT ) , charged at the standard rate of 17.5 % ( temporarily cut to 15 % between December 2008 and December 2009 ) on supplies of goods and services. It is hence a revenue enhancement on consumer outgo. A papers posted on the Parliament web site on November 25 2008 suggested that the authorities was be aftering a higher 18.5 % VAT after this clip elapsed, but the Treasury has said this was “ an option that was considered and rejected. ” Certain goods and services are exempt from VAT, and others are capable to VAT at a lower rate of 5 % ( the reduced rate, such as domestic gas supplies ) or 0 % ( “ zero-rated ” , such as most nutrient and kids ‘s vesture ) . Exemptions are intended to alleviate the revenue enhancement load on necessities while puting the full revenue enhancement on luxuries, but differences based on all right differentiations arise, such as the ill-famed “ Jaffa Cake Case ” which hinged on whether Jaffa Cakes were classed as ( zero-rated ) cakes-as was finally decided-or ( fully-taxed ) chocolate-covered biscuits. Until 2001, VAT was charged at the full rate on adult females ‘s healthful towels, presumptively because they were considered luxury or non-essential articles.

Stamp responsibility

Stamp responsibility is charged on the transportation of portions and certain securities at a rate of 0.5 % . Modernized versions of cast responsibility, stomp responsibility land revenue enhancement and stomp responsibility modesty revenue enhancement, are charged severally on the transportation of existent estate and portions and securities, at rates of up to 4 % and 0.5 % severally.

Driving revenue enhancement

Driving revenue enhancements include: fuel responsibility ( which itself besides attracts VAT ) , and vehicle excise responsibility. Other fees and charges include the London congestion charge, assorted statutory fees including that for the compulsory vehicle trial and that for vehicle enrollment, and in some countries on-street parking ( every bit good as associated charges for misdemeanors ) .

Business rates

Business rates is the normally used name of non-domestic rates, a United Kingdom rate or revenue enhancement charged to residents of non-domestic belongings. Business rates were introduced in England and Wales in 1990, and are a modernized version of a system of evaluation that dates back to the Elizabethan Poor Law of 1601. As such, concern rates retain many old characteristics from, and follow some instance jurisprudence of, older signifiers of evaluation.

Business rates form portion of the support for local governments, and are collected by them, but instead than grosss being retained straight they are pooled centrally and so redistributed. In 2005/06, ?19.9 billion was collected in concern rates, stand foring 4.35 % of the entire UK revenue enhancement income.

Business rates are a belongings revenue enhancement, where each non-domestic belongings is assessed with a ratable value, expressed in lbs. The ratable value loosely represents the one-year rent the belongings could hold been let for on a peculiar rating day of the month harmonizing to a set of premises. The existent measure collectible is so calculated utilizing a multiplier set by cardinal authorities, and using any alleviation.

Income Tax on net incomes. At present there are three sets of income revenue enhancement so the more you earn the more you pay. The first unfairness is revealed here ; the more you earn more non merely do you pay more but you pay exponentially more because the revenue enhancement is levied at a higher rate. A simplistic illustration ( non leting for, I know, the lower rate and allowances etc ) , you might pay 22 % of ?10,000 and ?2,200 goes in the pot. Earn ?50,000, you pay 22 % and, just plenty, ?11,000 goes in the pot ; but, oh no, you pay 40 % on the surplus over ?28,000 uneven. Good you might state, the higher earner can afford it, but why should they be penalized.

Tax on Shareholdings. Here there is quadruplicate revenue enhancement. Say I buy some portions, hold them for a few old ages and earn some dividends, and so make up one’s mind to sell them. I bought the portions with already taxed income but so had to pay stamp responsibility on their purchase, so pay income revenue enhancement once more on the dividends, and so ( potentially ) pay capital additions revenue enhancement on the addition in value of the portions.


A Direct revenue enhancement is a sort of charge, which is imposed straight on the taxpayer. The illustrations of direct revenue enhancement include belongings revenue enhancement and income revenue enhancement. Alternatively, it can be said that a direct revenue enhancement is one that is taken off from one ‘s wage or rewards. When the revenue enhancement is imposed by the authorities upon the belongings, so it is called belongings revenue enhancement, which is besides a direct revenue enhancement.

Meaning of Direct revenue enhancement:

The term direct revenue enhancement can be defined from two different positions. One is from Colloquial point and the other is from U.S. constitutional jurisprudence point. Certain revenue enhancements may fall under indirect revenue enhancement classs in the constitutional sense, but autumn under direct revenue enhancement class in the conversational sense.

Examples of Direct Taxes

Some of the illustrations of direct revenue enhancements include capital additions revenue enhancement, personal income revenue enhancement, revenue enhancement on corporate income, and revenue enhancement inducements.

Difference: Direct and Indirect revenue enhancement

In the conversational sense, a direct revenue enhancement is levied by the authorities straight to the taxpayers, whereas the indirect revenue enhancement ( or collected revenue enhancement ) is collected by mediators, who finally file revenue enhancement returns and base on ballss to the several section. Examples of direct revenue enhancements include income revenue enhancements, some corporate revenue enhancements and reassign revenue enhancements. Examples of indirect revenue enhancements include Value Added Tax and Gross saless Tax.

B ) Progressive Tax V Rfegressive Tax

A progressive revenue enhancement is a revenue enhancement by which the revenue enhancement rate additions as the nonexempt sum additions. “ Progressive ” describes a distribution consequence on income or outgo, mentioning to the manner the rate progresses from low to high, where the mean revenue enhancement rate is less than the fringy revenue enhancement rate. It can be applied to single revenue enhancements or to a revenue enhancement system as a whole ; a twelvemonth, multi-year, or life-time. Progressive revenue enhancements try to cut down the revenue enhancement incidence of people with a lower ability-to-pay, as they shift the incidence progressively to those with a higher ability-to-pay.

The term is often applied in mention to personal income revenue enhancements, where people with more disposable income wage a higher per centum of that income in revenue enhancement than do those with less income. It can besides use to accommodation of the revenue enhancement base by utilizing revenue enhancement freedoms, revenue enhancement credits, or selective revenue enhancement that would make progressive distributional effects. For illustration, a gross revenues revenue enhancement on luxury goods or the freedom of basic necessities may be described as holding progressive effects as it increases a revenue enhancement load on high terminal ingestion or decreases a revenue enhancement load on low terminal ingestion severally. The antonym of a progressive revenue enhancement is a regressive revenue enhancement, where the revenue enhancement rate lessenings as the sum capable to revenue enhancement additions. In between is a relative revenue enhancement, where the revenue enhancement rate is fixed as the sum capable to revenue enhancement additions. The antonym of relative revenue enhancement is fixed revenue enhancement.

A regressive revenue enhancement is a revenue enhancement imposed in such a mode that the revenue enhancement rate lessenings as the sum capable to revenue enhancement additions. In simple footings, a regressive revenue enhancement imposes a greater load ( comparative to resources ) on the hapless than on the rich – there is an reverse relationship between the revenue enhancement rate and the taxpayer ‘s ability to pay as measured by assets, ingestion, or income. “ Regressive ” describes a distribution consequence on income or outgo, mentioning to the manner the rate progresses from high to moo, where the mean revenue enhancement rate exceeds the fringy revenue enhancement rate. It can be applied to single revenue enhancements or to a revenue enhancement system as a whole ; a twelvemonth, multi-year, or life-time. Regressive revenue enhancements try to cut down the revenue enhancement incidence of people with higher ability-to-pay, as they shift the incidence disproportionately to those with lower ability-to-pay. The antonym of a regressive revenue enhancement is a progressive revenue enhancement, where the revenue enhancement rate additions as the sum capable to revenue enhancement additions. In between is a level or relative revenue enhancement, where the revenue enhancement rate is fixed as the sum capable to revenue enhancement additions.

The term is often applied in mention to fixed revenue enhancements, where every individual has to pay the same sum of money. The regressivity of a peculiar revenue enhancement frequently depends on the leaning of the revenue enhancement remunerators to prosecute in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the hapless and less likely to be carried out by the rich, so the revenue enhancement may be considered regressive. To find whether a revenue enhancement is regressive, the income-elasticity of the good being taxed every bit good as the income-substitution consequence must be considered.

degree Celsius ) Tax Avoidance Vs Tax equivocation

Tax turning away is the legal use of the revenue enhancement government to one ‘s ain advantage, to cut down the sum of revenue enhancement that is collectible by agencies that are within the jurisprudence. By contrast revenue enhancement equivocation is the general term for attempts to non pay revenue enhancements by illegal agencies. Harmonizing to the former British Chancellor of the Exchequer Denis Healey, the difference between revenue enhancement turning away and revenue enhancement equivocation is the thickness of a prison wall. The term revenue enhancement extenuation is a equivalent word for revenue enhancement turning away. Its original usage was by revenue enhancement advisers as an option to the dyslogistic term revenue enhancement turning away. Recently the term has besides been used in the revenue enhancement ordinances of some legal powers to separate revenue enhancement turning away foreseen by the legislators from revenue enhancement turning away which exploits loopholes in the jurisprudence.

Some of those trying non to pay revenue enhancement believe that they have discovered readings of the jurisprudence that show that they are non capable to being taxed: these persons and groups are sometimes called revenue enhancement dissenters. An unsuccessful revenue enhancement protestor has been trying openly to hedge revenue enhancement, while a successful one avoids revenue enhancement. Tax opposition is the declared refusal to pay a revenue enhancement for painstaking grounds ( because the obstructionist does non desire to back up the authorities or some of its activities ) . Tax resistances typically do non take the place that the revenue enhancement Torahs are themselves illegal or do non use to them ( as revenue enhancement dissenters do ) and they are more concerned with non paying for peculiar authorities policies that they oppose.

Tax turning away

Tax turning away is the legal use of the revenue enhancement government to one ‘s ain advantage, to cut down the sum of revenue enhancement that is collectible by agencies that are within the jurisprudence. The United States Supreme Court has stated that “ The legal right of an person to diminish the sum of what would otherwise be his revenue enhancements or wholly avoid them, by agencies which the jurisprudence permits, can non be doubted. ” See Gregory v. Helvering. Examples of revenue enhancement turning away include:

State of abode

One manner a individual or company may take down their revenue enhancements due is by altering one ‘s revenue enhancement abode to a revenue enhancement oasis, such as Monaco, or by going a ageless traveller. However some states, such as the U.S. , revenue enhancement their citizens, lasting occupants, and companies on all their world-wide income. In these instances, revenue enhancement can non be avoided by merely reassigning assets or traveling abroad.

Double revenue enhancement

Most states impose revenue enhancements on income earned or additions realized within that state irrespective of the state of abode of the individual or house. Most states have entered into bilateral dual revenue enhancement pacts with many other states to avoid taxing nonresidents twice — one time where the income is earned and once more in the state of abode ( and possibly, for US citizens, taxed yet once more in the state of citizenship ) — nevertheless, there are comparatively few double-taxation pacts with states regarded as revenue enhancement oasiss. To avoid revenue enhancement, it is normally non plenty to merely travel one ‘s assets to a revenue enhancement oasis. One must besides personally travel to a revenue enhancement oasis ( and, for U.S. subjects, renounce one ‘s citizenship ) to avoid revenue enhancement.

Legal entities

Without altering state of abode ( or, if a U.S. citizen, giving up one ‘s citizenship ) , personal revenue enhancement may be lawfully avoided by creative activity of a separate legal entity to which one ‘s belongings is donated. The separate legal entity is frequently a company, trust, or foundation. Assetss are transferred to the new company or trust so that additions may be realized, or income earned, within this legal entity instead than earned by the original proprietor. Normally one is merely personally taxed on belongings and net incomes that one really owns ; therefore, by donating assets to a separate legal entity, personal revenue enhancement can be avoided, although corporate revenue enhancements may still be applicable. If the legal entity is of all time liquidated and the assets transferred back to an person, so capital additions revenue enhancements would use on all net incomes.

Tax equivocation

By contrast revenue enhancement equivocation is the general term for attempts by persons, houses, trusts and other entities to hedge revenue enhancements by illegal agencies. Tax equivocation normally entails taxpayers intentionally beliing or hiding the true province of their personal businesss to the revenue enhancement governments to cut down their revenue enhancement liability, and includes, in peculiar, dishonest revenue enhancement coverage ( such as declaring less income, net incomes or additions than really earned ; or exaggerating tax write-offs ) .

Illegal income and revenue enhancement equivocation

In the United States, individuals subject to the Internal Revenue Code who earn income by illegal agencies ( chancing, larceny, drug trafficking etc. ) are required to describe improper additions as income when registering one-year revenue enhancement returns but they frequently do non make so. Suspected violators, most famously Al Capone, have hence been successfully prosecuted for revenue enhancement equivocation when there was deficient grounds to seek them for their non-tax related offenses. Those who attempt to describe illegal income as coming from a legitimate beginning could be charged with money laundering. By contrast: In the UK jurisprudence enforcement bureaus do non by and large have entree to revenue enhancement returns and so illegal net incomes can purportedly be safely declared but in pattern those transporting on condemnable activities by and large prefer non to make so, and so can sometimes be prosecuted for revenue enhancement equivocation instead than for other offenses.

Evasion of imposts responsibility

Customss responsibilities are an of import beginning of gross in the development states. The importers purport to hedge imposts responsibility by ( a ) under-invoicing and ( B ) misdeclaration of measure and product-description. When there is ad valorem import responsibility, the revenue enhancement base is reduced through underinvoicing. Misdeclaration of measure is more relevant for merchandises with specific responsibility. Production description is changed lucifer an H. S. Code commensurate with a lower rate of responsibility

Part C

Capital Addition

A capital addition is a net income that consequences from investings into a capital plus, such as stocks, bonds or existent estate, which exceeds the purchase monetary value. It is the difference between a higher merchandising monetary value and a lower purchase monetary value, ensuing in a fiscal addition for the marketer. Conversely, a capital loss arises if the returns from the sale of a capital plus are less than the purchase monetary value.

Capital additions may mention to “ investing income ” that arises in relation to existent assets, such as belongings ; fiscal assets, such as portions or bonds ; and intangible assets such as good will.

Many states impose a revenue enhancement on capital additions of persons or corporations, although alleviation may be available to relieve capital additions: in relation to retentions in certain assets such as important common stock retentions, to supply inducements for entrepreneurship, or to counterbalance for the effects of rising prices.

Part D


Capital Allowances

In the United Kingdom and Ireland, an allowance against income or corporation revenue enhancement available to concerns or exclusive bargainers who have purchased works and machinery for concern usage. The rates are set yearly and vary harmonizing to the type of fixed plus purchased, for illustration, whether it is machinery or edifices. This system efficaciously removes subjectiveness from the computation of depreciation for revenue enhancement intents.

Capital Allowances Rates for 2008/09

Plant and Machinery:

Power salvaging points which are non harmful to the environment, vehicles which run electricity and emit low CO2 ( up to 110 g/km ) , natural gas and H refuelling machinery qualify for a revenue enhancement tax write-off of 100 % in the twelvemonth of purchase.

Annual investing allowance ( AIA ) of 100 % is given on the first ?50,000 of outgo provided those points do non already measure up for a 100 % tax write-off by manner of another alleviation.


Non one-year investing allowance outgo can measure up for a standard capital composing down allowance ( see below ) .

Items classified as holding a long life can have and one-year allowance of 10 %

The standard revenue enhancement allowable tax write-off for capital points non belonging to any other class is 20 % . The sum of the tax write-off is limited to ?3000 in any one twelvemonth for autos.


The capital allowance for Industrial and agricultural edifices and hotels is calculated on the original cost of the point and is given at a rate of 3 % .

A maximal allowance of 100 can be claimed against outgo in a designated Enterprise Zone, where subdivisions of commercial edifices are converted to flats and for the significant fixs of commercial edifices and premises.