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School of Business, Introduction to Taxation, Topic 1 – Lecture

Introduction to Taxation

Introduction to Taxation


Learning Outcomes

By the end of this lecture, you should be able to understand:

the UK tax structuretypes of taxationincome tax computation


UK Governmen

t

Tax Tribunal

First Tier Tribunal

Upper Tribunal

HMRC

Officers

UK Tax Structure

School of Business, Introduction to Taxation, Topic 1 – Lecture Source: www.taxwiz.org

UK Tax System – Tax Avoidance and Evasion


General Anti Abuse Rule (GAAR)

HMRC

Taxpayer

Powers to counteract tax advantages arising from abusive tax arrangementsMaterial error or omission

Fails to File Tax Return

Written notice by HMRC45 days – Written

response to HMRC

21 days – written response

to Advisory Panel

Appeal

UK Tax System – Rules on Abuse


UK Tax System – Tax Year


Types of Tax Affected by

Income Tax IndividualsCorporation Tax UK CompaniesCapital Gains Tax Individuals and UK Companies

Inheritance Tax IndividualsVAT Businesses

UK Tax System – Types of Tax


Income Tax

• Capital Allowance

• Income Tax • National

Insurance

Capital Gains Tax

• Chargeable Gains

Inheritance Tax

• Inheritance Tax

Corporation Tax

• Chargeable Gains

• Capital Allowance

• Corporation Tax

VAT

• VAT

UK Tax System – Sources of Tax Law


Resident?

Income Tax – Scope of Income Tax

UK non residents• Liable for tax on UK income only

UK residents • Liable for tax on UK and overseas income

UK residents not UK domiciled• Liable for tax on UK income only• UK income on remittance basis


Overseas Test

Present in UK less than 16 days in a tax

year

Present in the UK for less than 46 days in a tax year and not

resident during previous 3 years

Work overseas full time. Not present in UK for more than 90 days in a tax year

UK Resident Test

Present in UK for 183 days or

more in a tax year

Only home is in the UK

Full time work in UK

Sufficient Ties Test

How many ties in the UK

How many days present in the

UK in a tax year

Income Tax – Statutory Test of Residency


Resident?

Income Tax – Scope of Income Tax

Example:

Victor lives in Japan all his life where he owns a house. He came to the UK on 1st May 2014 having sold his house in Japan the day before.He decided to buy a flat in London.He lived in the London flat until 30th Sept 2014.Victor then went on an overseas holiday for a year.

Is Victor a UK resident for 2014/2015?


Non Savings Income

Savings Income

Dividend Income

Trading Income xLess: loss relief (x)

xEmployment Income xProperty income xBuilding society/Bank interest received x 100/80 xDividends from UK companies x 100/90 xTotal income x x xLess qualifying interest paid (x)Less loss relief (x) Net income x x xLess personal allowance -10,000 Taxable Income x x x

Income Tax – ComputationProforma income tax computation for 2014/2015


Income Tax – Exempt Income

• Income from National Savings Certificate

• Statutory redundancy money

• Winnings

• Scholarships

• Interest on damages for personal injuries

• Income from investment made through ISAs

• Local authority grant


Non Savings Income Savings Income Dividend IncomeTrading Income 0Less: loss relief -

0Employment Income 9600Property income 0Building society/Bank interest received x 100/80 10000Dividends from UK companies x 100/90 5000Total income 9600 10000 5000Less qualifying interest paid 0Less loss relief 0 Net income 9600 10000 5000Less personal allowance -9,600 -400 Taxable Income 0 9600 5000

Income Tax – Computation: answer


Income Tax – PA example

Rhiannon has the following income in the tax year 2014/2015:

Salary: £9,600 (PAYE £75)Bank interest received: £8,000 netDividends: £4,500 netISA interest received: £2,000

Calculate Rhiannon’s net income for 2014/2015.


Rate Band Non Savings Income

Savings Income Dividend Income

Additional Rate £150,000 onwards

45% 45% 37.5%

Higher Rate £31865 - £149,999

40% 40% 32.5%

Basic Rate£2880 - £31864

20% 20% 10%

Lower Rate< £2879

20% 10% 10%

Tax Bands and Tax Rates


Income Tax Calculation:

Savings Income 2880@ 10% 288

Savings Income - 9600 - 2880 6720@ 20% 1344

Dividend Income 5000@ 10% 500

Income Tax Liability 2132

Less dividend tax paid at source 5000@ 10% -500

Less interest tax paid at source 10000@ 20% -2000

Less PAYE - tax paid at source -75

Income Tax payable/repayable -443

Income Tax – Computation: answer


Income Tax – Personal Allowance

For 2014/2015 - £10,000

• All individuals • Include children

Tapering:Net income > £100,000

• Personal allowance reduced by £1 for every £2 excess income.

• Net income > £120,000 = 0 personal allowance



Rhiannon earns £105,000 a tax year in salary.

What personal allowance is she entitled to for 2014/2015?


Basic PA £10,000Income: £105,000Less limit (£100,000)

------------£5,000 x ½ (£2500)

---------Personal Allowance £7,500


Rhiannon earns £105,000 a tax year in salary.What personal allowance is she entitled to for 2014/2015?

Answer:



Higher personal allowance

Born between 6 April 1938 to 5 April 1948 = £10,500

Born before 6 April 1938 = £10,660

Net income > £27,000 = Restriction on higher PA

Restriction: (Net income - £27000) x half



Example:

Karen was born on 2nd Sept 1932. She has a net income of £28,000.

What personal allowance does Karen receive for 2014/2015?


Answer:

Higher PA £10,660

Income £28,000Less (£27,000)

----------£1,000 x ½ (£500)

--------PA £10,160



Gift aid

donations are

charitable gifts of

money

which

qualify for tax

relief

Donors

must make a gift aid

declaration to the

charity

Tax Reliefs – Gift Aid


Gift Aid Example

Jane has employment income of £90,000.She made a gift aid donation of £7,200 net to a charity.

Calculate her tax liability for 2014/2015.


Gift Aid Example

Answer:

Gift Aid relief: £7,200 x 100/80 = £9000

Extend Tax band limits:BR: £31865 + £9000 = £40,865HR: £150,000 + £9000 = £159,000Employment Income £90,000PA (£10,000)

-----------Taxable income £80,000


Gift Aid Example

Answer:

Income Tax:

£40,865 x 20% £8,173£39,135 x 40% £15,654

----------Total income tax liability £23, 827


Post-lecture Work

Seminar 1, covering today’s lecture:

Read chapters 1 and 2 ofTaxation – Finance Act 2014by Alan Melville,20th Edition, Pearson


End of presentation

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