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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.