The U.K taxation system - Essay Example

? Taxation Taxation The U.K taxation system Who is taxed and under what circumstances? Any person who has worked in the UK for a length of time i.e. either a UK citizen or an immigrant who has a work permit is required to pay tax in the UK (Adam, Kaplan and Institute for Fiscal Studies, 2002). The tax year usually begins on April 6th depending on a person’s employment, which could either be PAYE or companies. What is taxable and what are the tax rates? Taxable income includes income from employment either from part-time, full-time, or temporary employment. However, if people receive benefits or perks from their employer, they may be taxable (Adam, Kaplan and Institute for Fiscal Studies, 2002). Income from partnerships or self-employment, pension income such as state pension, retirement annuity and personal or company pension, are also taxable as stated in the UK tax laws. Additionally, pensioner bonds, trust income and investment income, includes dividends on company shares except dividend income from ISAs, are also taxable. Other taxable income includes Rental income, State benefits such as Carer’s Allowance, Jobseeker’s allowance, Employment and Support Allowance, Incapacity Benefit, and weekly Bereavement Allowance among others. The income tax rates in the UK depend on an individual’s personal income. The UK personal annual tax rates for 2010-2011 range from 10% to 50% as shown in the table below ((Adam, Kaplan and Institute for Fiscal Studies, 2002). Rate Income (GBP) % Starting savings rate ?1-2400 10% Basic rate ?1-37,400 20% Higher rate ?37,401-150,000 40% Additional rate 0ver ?150,000 50% According to Adam, Kaplan and Institute for Fiscal Studies (2002), the 10% rate shows the tax rate for anybody who saves an income of up to GBP 2,400. The dividend income below GBP 37,400 is taxed at 10% while that above GBP 37,400 to GBP 150,000 is taxed at 32.5%. In addition, a tax of 42.5% is taxed on dividend income above GBP 150,000. Thus, this shows that income tax is lower in the UK than most countries including New Zealand and Australia. What is the relevant tax period? The relevant tax period in the UK starts from 6th April to 5th April in the next year. This includes both income tax and personal taxes. For instance, the 2010-2011 tax year started on 6th April in 2010 and ran through to 5th April 2011 (Adam, Kaplan and Institute for Fiscal Studies, 2002). In the UK, taxes and allowances are usually fixed for any given year, but they often change from one year to another. What is the relative importance of direct and indirect taxes in United Kingdom? What are the implications of this? Direct tax consists of income tax and wealth tax while indirect tax involves central excise duty, customs duty, service tax, purchase tax and value added tax (VAT). Income tax is a direct tax on all incomes that are received by private individuals after some allowances are made. Direct taxes are usually paid directly to the Exchequer by the taxpayer through PAYE, which applies to corporate tax, as well. However, tax liability cannot be forwarded to someone else. Indirect taxes are such as VAT and several excise duties on tobacco, oil and alcohol. Indirect tax, unlike direct tax can be passed onto the final customer by the supplier depending on the price of elasticity of demand and supply of goods. However, over the last twenty years, economists have differed on the optimum mix of taxation between direct and indirect taxes, which has resulted in a shift towards indirect taxation. Economists argue that indirect taxes help in changing the overall pattern of demand for certain products and services, thus, affecting consumer demand such as an increase in the real duty on petrol. Indirect taxes are also useful in controlling and correcting externalities of both production and consumption. Also, they are less likely to interfere with people’s choice between work and leisure than the direct tax. Thus, they have a little negative effect on work incentives. Additionally, they allow a reduction in direct tax rates. The indirect taxes are difficult to be avoided by the final taxpayer, who might not be aware of how much indirect tax they are paying, and provide a motivation to save; hence, avoid paying taxes. Feetham (2011) argues that a high level of saving can be used to finance a high level of capital investment by the economy. Most notable is that indirect taxes leave people free to make choices compared to direct taxes, which leave people with little gross income in their pockets. Direct and indirect taxation imply that the cost of capital in the country may be below the rate of interest. Thus, through this, cross-border investment especially in indirect financing may be favored over the domestic investment because multinationals have an essential opportunity to invest in a tax efficient basis via tax arbitrage. In short, this means that tax systems may encourage a lot of cross-border transactions than internationally neutral tax system. However, the government has tried to limit such through reducing the interest deductibility, withholding taxes and accrual income taxation of passive income. Moreover, the shift from direct tax to indirect tax also known as redistribution, has a few problems in the redistributive aspects. For instance, any reduction in income taxes together with a rise in VAT is likely to reduce the tax burden on high incomes while increasing it to those who earn poor or middle income. In addition, the redistributive properties of direct income taxes have indeed been, historically, a significant reason for their introduction, as well as considerable expansion during the 20th century. Recent experience suggests that this aspect is likely to receive public attention in countries such as Slovakia, where tax reform, apart from introducing a flat income tax, have enhanced the reliance on indirect taxation, which is centered on the redistributive implications of the reform. This has eventually led to compensations for low-income earners. However, shows that it reduces the positive impact from the reform, and the political acceptability of a tax shift is also weakened by the fact that the middle class, which is the largest group of voters, would lose out (OECD, Organization for Economic Co-operation and Development, 2010). Also, recently, the increased intention of nations to increase their price due to the introduction of the Euro has reduced the positive impact of the reform. Discuss how much revenue each type of tax generates as an absolute amount and as a percentage of the total government expenditure (use 2009/10 UK government expenditure figures if 2010-11 figures are not available). According to Adam, Kaplan and Institute for Fiscal Studies (2002), in 2010-2011 tax year, the UK Government collected a total of ?446 Billion in taxes, which includes all taxes such as VAT and duties. The number of all the registered individual taxpayers in the UK during that period was reported as 30.6 Million registered. The table below shows the tax collection statistics for the 2010 to 2011 tax year for each type of tax. Type of Tax Absolute amount(?) Percentage of the total government revenue Income tax, Capital gains, National Insurance Contributions. 247 Billion 55.4% VAT 83 Billion 18.7% Corporation Tax 42 Billion 9.4% For the 2010/2011 financial year, the total spending by the British government was ?691.67 billion, which was up by 0.3% on the 2009/2010 financial year probably due to inflation. The following table shows the type of tax generated in 2010/2011 financial year. Type of Tax Absolute amount(?) Percentage of the total government expenditure Income tax, Capital gains, National Insurance Contributions. 247 Billion 35.7% VAT 83 Billion 12% Corporation Tax 42 Billion 6.1% Compare the progressivity of incoming tax and corporation tax in the United Kingdom Progressivity is based on the ability to pay. Thus, a progressive tax refers to one in which the average rate of tax increases as the income increases. I.e. one’s income taken in tax rises as a person becomes richer. According to Adam, Kaplan and Institute for Fiscal Studies (2002), in the progressive incoming tax system, in the UK, the average rate of tax rises with income. In fact, income tax is progressive in its effects on disposable income. As stated by OECD, Organization for Economic Co-operation and Development (2010), the average tax increases from 5% on incomes that are between ?7,500 and ?9,999 to about three times for those who earn between ?20 and ?30 thousand income. However, over the years, the progressivity of incoming tax system has reduced. For instance, before 1979, the top rate of income tax was 83%, with a 15% supplement for investment income. Currently, most of the taxpayers are faced with a similar marginal tax rate of 22% compared to the top rate of 40%, and there is 11% national insurance contributions (NICs), as well as a 1% extra for the higher earners; thus, making the total cost as 33% and 41%. This shows that there is no much progression. Hence, in order for the government to attain a final distribution of income using the income tax system, it should raise the top rate of income above 40%, increase the tax free allowance and introduce low marginal rates of tax for low-income families. Corporate tax is still a progressive aspect of the tax code. He argues that the average tax rates for taxpayers usually increase with their income, which shows progressivity. This occurs in situations where the corporate tax falls mainly primarily on labor or capital. However, there is an exception when the corporate tax falls entirely on labor because the average tax drops for taxpayers in the 95th to 99.9th percentile relative to those in the fourth quintile. Moreover, since the corporate tax accounts for only a small part of the total government revenue, it has every little effect on overall progressivity of the tax code, despite its incidence (According to OECD, Organization for Economic Co-operation and Development, 2010). For income and corporation tax, identify who is responsible for notification of income and payment of tax and when? The notification of income and payment of tax is done by the trustees of trusts. It is the responsibility of the trustee to notify the HM Revenue & Customs (HMRC) about a trust in order to make chargeable capital gains in order to calculate the right amount of tax and pay (HM Revenue & Customs, 2011). The HMRC should be notified as soon as the trust is created if the trustee expects to receive a new trust to receive money, make chargeable capital profits from the sale of assets like buildings, land and shares within the tax year. The exception to this is a bare trust in which the beneficiary has the right to income and capital of the trust. In this case, the beneficiary of the trust must state any capital gains or income on their own personal returns (HM Revenue & Customs, 2011). Moreover, if an already existing trust begins to receive income or make chargeable gains, the HMRC requires to be informed by 5th October after the end of the tax year on 5th April. However, it is not necessary to notify the HMRC if a trust is not going to receive any income or make chargeable profits. After, the HMRC has been notified about a trust, they send a tax return form i.e. SA900 Trust and Estate Tax Return, after the end of the tax year. There are two ways in which HMRC can be notified. First, the trustee can inform them that a trust has been set up through filling in form 41G (Trust) and sending it to HMRC Trusts Office that deals with the trust. Second, the trustee can send a letter to HMRC, which contains all the information that should have been on form 41G (Trust). Other information include the name of the trust and trustees, addresses of the trustees, contact information of the trustees or professional agents, whether the trust is related employment, or for a vulnerable beneficiary among others. In addition, whether a person is filling in the form or sending a letter, they should give all the information about all the available assets in the trust. Assets such as buildings and land should have the full address whereas those of shares should have the class and number of shares, and the registration number of the company. It is not necessary to send copies of the trust deeds unless they are requested by the HMRC (HM Revenue & Customs, 2011). For corporate tax, the partners, who may be companies, clubs, societies or associations, must pay corporation tax on their own profits from the partnership, and then record the relevant figures on their Corporation Tax return. The Corporation Tax Return can be submitted to HMRC online and pay the taxes online. HM Revenue & Customs (2011) stated that from, 1st April 2011, all the partners must submit their Company Tax Return to HMRC online for accounting periods that ended on 31st March 2010. In addition, they must also pay any due corporation tax electronically, and the tax computations and accounts that are part of the Company Tax Return must be submitted in inline extensible Business Reporting Language format. Has United Kingdom felt the need to respond to competitive pressures mentioned in the statement above and how? The United Kingdom is one of the twelve members inside the Euro Zone. This means that it is under the European Central Bank (ECB), which is in charge of setting a common interest rate for all the twelve members by achieving price stability. According to OECD, Organization for Economic Co-operation and Development (2010), price stability refers to a year-on-year increase in Harmonized Index of Consumer Prices that are below 2%. The ECB aims at growing a broad money supply so as to direct the future of interest rates. This broad money is determined by the growth of bank deposits most of which are created through overdrafts and bank loans. In 2003, it was noted that the EMU membership for the UK could promote productivity through an increase of trade flows between other EU nations and the UK. Also, it could enhance investment and stimulate competition in product markets, as well as promote supply-side reforms in the EU. Additionally, Institute for Fiscal Studies (2004) argues that the UK membership boosts specialization and exploration of its comparative advantage in a number of sectors of the economy. Thus, this shows that the by joining and becoming a member of the EMU the UK is has felt the need to respond to competitive pressures in goods and services. Moreover, Feetham, (2011) states that Euro membership makes it easy for businesses and customers to compare relative prices levels among nations, which is likely to promote trade across borders and increase pressures across several different markets. Additionally, it leads to potential gains in consumer welfare if the price transparency leads to improvements in allocative efficiency. Also, the Euro helps to reduce exchange rate uncertainty for businesses in British and reduce transactions costs for companies and tourist. Thus, being a member of the Euro, the UK takes part in trade of services, and goods, which are conducted together with other members of the Euro, which is expected to increase in future. The Euro also functions as a complement to the working of the single market, which means that it is highly essential in the success of the Single European Market. Therefore, it leads to an increase in intra-European trade flows, as well as high inward investment within the European region (Institute for Fiscal Studies, 2004). Moreover, the flexible labor market for Britain is likely to enhance their performance inside a single currency area that would help to attract more inward investment from outside the European region. According to Feetham (2011), the UK has a key recipient of foreign direct investment in recent times. However, some people believe that this is threatened in case the UK is to be left out of the system at the end. The EMU can also promote the development of UK-owned multinational enterprises by removing the currency barrier to trade and improving access to funding. In addition, it can lead to long-term benefits for households, as well as low prices and high wages through employment for the UK workers. However, UK stands to lose political and economic influence by shaping future economic integration in case it remains outside the monetary system. Bibliography Adam, S., Kaplan, G & Institute for Fiscal Studies. (2002). A survey of the UK tax system, institute for Fiscal Studies, London. Feetham, N. (2011).Tax Arbitrage: The Trawling of the International Tax System, Spiramus Press Ltd. HM Revenue & Customs. (2011). Tax Information and Impact Notes (TIINS), HMRC Publication. Institute for Fiscal Studies. (2004). Tax Law Review Committee. Institute for Fiscal Studies Publications & Research. OECD, Organization for Economic Co-operation and Development. (2010). OECD Tax Policy Studies Choosing a Broad Base - Low Rate Approach to Taxation. OECD Publishing, London. Read More