Introduction to the UK tax system.
|
Tax is classified into two categories:
|
|
|
1. Direct Tax
|
|
|
2. Indirect Tax
|
|
Tax on individual's wealth/income.
|
|
|
Examples:
|
1. Income Tax
|
|
2. Capital Gains Tax
|
|
|
Tax on an individual's transactions
|
|
|
Example:
|
1. VAT
|
|
2. Insurance Tax
|
|
|
Trading profits of UK residents are subject/chargeable to income tax
|
|
By applying the '6 Badges of Trade'.
|
|
|
If one or more apply, then the transaction is considered a trade, though final decision is made by the courts.
|
|
Tax: Self-employed face lighter taxes (20% income tax vs 25% corporation tax).
|
|
|
Liability:
|
Companies limited liability vs. sole traders risk losing everything.
|
|
Setup and Maintenance:
|
Sole trader simpler set-ups vs. Companies require legal administration paperwork and costs to maintain.
|
|
Ownership & Flexibility:
|
Companies owned via shares, thus, are offer more flexibility for raising capital, investment, or selling, unlike sole traders.
|
|
1. Subject of Matter of Transaction
|
|
|
2. Length of Period of Ownership
|
|
|
3. Frequency of Transactions
|
|
|
4. Supplementary Work
|
|
|
5. Reason for Sale
|
|
|
6. Motive of Transaction
|
|
Illegal actions like hiding income or falsifying tax return, is punishable by fines or imprisonment.
|
|
Activities that involve repeated buying and selling, particularly to make profit.
|
|
Legal but crafty use of loopholes to reduce tax, often through artificial schemes, although legal, the HMRC see it as exploitation of rules against their intended purposes.
|
|
Her Majesty's Revenue and Customs
|
|
|
Responsible for collecting taxes, administering benefits, and enforcement of tax and customs law.
|
|
Individuals Fiscal Year
|
6th April to 5th April (e.g. Assessment Year).
|
|
1. TAAR
|
Targeted Anti-avoidance Rule
|
|
2. GAAR
|
General Anti-abuse Rule
|
|
3. DOTAS
|
Disposal of Tax Avoidance Schemes
|
|
Decline of creative tax planning by making avoidance schemes increasingly difficult and risky.
|
|
Control
|
|
|
Holidays and Sickness
|
|
|
Equipment
|
|
|
Work Performance and Correction
|
|
|
Exclusivity
|
|
|
Remuneration and Financial Risk
|
|
Limited companies pays:
|
|
|
1. Salary to employees (20% income tax & 8% national insurance).
|
|
|
2. Dividends (taxed at 8.5% - basic rate).
|
|
|
3. Corporation tax (25%) on profits before dividends.
|
|
Corporation Tax Year
|
1st April to 31st March inclusive (e.g. Financial Year).
|
|
Corporation Tax Year
|
1st April to 31st March inclusive (e.g. Financial Year).
|
|
Self Employment
|
• Higher risk and reward.
|
|
• More expenses allowed (lower tax).
|
|
|
• Taxes paid later.
|
|
|
• No compulsory national insurance.
|
|
|
• More control over Activities.
|
|
|
Employment
|
• Fewer expenses allowed.
|
|
• Taxes paid via PAYE.
|
|
|
• Compulsory national insurance (8%).
|
|
|
• Holiday and sick pay.
|
|
|
• Social security benefits.
|
|
|
Sole traders are taxed on business profits under income tax rules, with no corporation tax or dividends.
|
|
|
- Income tax is 20% on profits.
|
No comments yet.
Cheatography n. The art of mapping complex subjects into clear, instantly navigable reference guides.
