The Purposes of Taxation

Introduction to UK Taxation

1. Revenue raising 2. Re-distribution of income and wealth 3. Managing the economy 4. Harmonisation of European tax systems 5. Influencing the behaviour of taxpayers

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Direct Taxes
Direct taxes are paid on income or profits and are deducted at source or paid directly to HM Revenue 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 include value added tax (VAT) and duties paid on alcohol, tobacco and petrol. For example, VAT is paid to the seller of the item as part of the purchase price. It is then the seller's responsibility to pay the VAT collected to HM

Revenue and Customs.

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Tax Evasion
Tax evasion is illegal and the offender may be liable to prosecution.
It may be achieved by understating income,

overstating expenses, making false claims for allowances or failing to disclose a liability to tax.

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

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Tax Avoidance
The arrangement of an individual's tax affairs so as to

reduce or defer the liability to tax is tax avoidance and this is legal provided that the taxpayer acts within the framework of the law.

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Sources of Tax Law (Tax Rules)

Tax Corporation Tax Act of Parliament 1. Corporation Tax Act 2010 2. Corporation Tax Act 2009 3. Capital Allowances Act 2001 1. Income Tax (Earnings and Pensions) Act 2003 2. Income Tax (Trading and Other Income) Act 2005 3. Income Tax Act 2007 4. Capital Allowances Act 2001 Taxation of Chargeable Gains Act 1992 Value Added Tax Act 1994 Taxation (International and Other Provisions) Act 2010
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Abbreviation CTA 2010 CTA 2009 CAA 2001 ITEPA 2003 ITTOIA 2005 ITA 2007 CAA 2001 TCGA 1992 VATA 1994 TIOPA 2010
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Income Tax

Capital Gains Tax Value Added Tax Overseas Aspects of Taxation

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Sources of Tax Law (Tax Rules)

European Union Law 1. The UK is a member of the European Union (EU) and this means that it must comply with EU law. 2. At present the main effect is on VAT, where much of the law takes the form of EU Directives.

Statements issued by the Tax Authorities

1. Statements of practice. 2. Extra-Statutory Concessions. 3. Internal guidance manuals. 4. Leaflets These can be viewed on the HM Revenue and Customs website (www.hmrc.gov.uk). See also Alan Melville, Taxation (FA 2010), p. 5.

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The Tax (Fiscal) Year

Income tax is calculated for a fiscal year. The fiscal

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

You will be studying the income tax rules for the tax

year 2010/11.

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Financial Years for Companies

For corporation tax there is a financial year which

runs 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 for

the Financial Year 2010 (1 April 2010 - 31 March 2011).

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Persons liable to pay Income Tax

Each

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

is

Individuals who are resident in the UK during a

fiscal year are liable to pay UK income tax on their worldwide income.
Certain types of income are exempt from income tax.
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Non-taxable Income
Type of Income Social Security payments
Interest Payments from employment Other Exempt Income

Examples
Child benefit Housing benefit The state retirement pension and the job seeker's allowance are taxable. Interest earned on money held within an Individual Savings Account (ISA) Statutory redundancy payments Some benefits provided by employers (see handout on employment income) Scholarships and educational grants
Lump sums paid out under registered pension schemes Lottery winnings Premium Bond prizes
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The System of Income Tax

For income tax purposes, income is now described 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 of 20% income tax to

individuals. This means that for every 10 you earn, you will receive 8 cash and 2 is paid to the Government Non-taxpayers may elect to have the interest paid gross. Companies automatically receive this interest gross (no tax is deducted by the payer).

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The collection of Income Tax

Income Tax is collected by either

Deduction at source

Direct assessment

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Method of Tax Collection Income received net of 20% income tax

Examples Interest paid to individuals by UK companies on debentures and loan stocks. Bank and Building Society interest paid to individuals. The amount received is grossed up by multiplying by 100/80 and included gross in the income tax computation. Dividends on UK shares are received net of a 10% tax credit. The taxable income is the 'gross dividend' i.e. the dividend received multiplied by 100/90.

Dividend income

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Method of Tax Collection Pay As You Earn (PAYE)

Examples

Tax is deducted at source on employment income, by the employer, under the PAYE system. Income not taxed at source e.g. trading profits are selfassessed. Other examples of income not taxed at source are rental income.
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Direct Assessment

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