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Taxation

Introduction

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This lecture

AIMS

Brief outline of main taxes

Income and capital

Tax administration

Start on income tax

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What does a solicitor need to

know about tax?

Some are experts on particular tax

areas, legislation, etc. Some are good tax planners

At the very least a solicitor must:

a. be able to spot a potential tax liability

b. either advise the client or see that

someone else does

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Main taxes on this course

See Chapter 1 Income Tax

Capital Gains Tax Inheritance Tax

Corporation Tax

Stamp Duty VAT

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Income Tax

Tax on income, e.g.

Employment (wages from job)

Interest (building society or bank)

Dividends (from shares)

Profits of business Property (landlords rent)

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Capital Gains Tax

Taxes the gain(i.e. the profit)

On disposalof assets

e.g. sell land & buildings, shares, etc.

Buy land for 100,000 and sell for 150,000

Capital gain of 50,000

(Note: giving property away may also be a

disposal for CGT, treated as a sale at marketvalue)

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Value Added Tax (VAT)

Tax on supply of goods, services,sometimes land

Supplier has to be registered for VAT

(compulsory if turnover is 64,000)

Supplier charges customers VAT

sends VAT collected (output tax) less VAT

paid to others (input tax) with quarterlystatement

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Stamp Duty

Traditionally a tax on documents

Document had to be stamped to show

payment of the tax

Most stamp duty is ad valorum (percentageof the value of the transaction)

Paid by purchaser

Still same for transfers of shares Stamp Duty Land Tax for transfers of

interests in land

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Next topic

Income and capital

Page 3

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Income and Capital

Fundamental distinction - many

implications

Income tax taxes income

Capital gains tax and inheritance tax are

taxes on capital

Important also to determine whether

money spent is income expenditure or

expenditure on capital

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Income

Not defined by statute, much case law

Fruit tree analogy

Fruit from the tree is income The tree itself is capital

e.g. Buy shares (capital expense)

Receive dividend on them (income) Sell them at a profit (capital gain)

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Capital is to be kept

The tree that produces the fruit

Land and buildings

Fixtures and fittings

Plant and machinery

Shares Copyright, patent, trade mark, website,

etc

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Next topic

Basic tax administration

Page 3

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Tax year

IT, CGT, IHT based on tax year running

from 6th April to following 5th April

Corporation tax assessed on year 1stApril to 30th March

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How do people pay their tax ?

SELF EMPLOYEDsole traders/partners

Self Assessment System

EMPLOYED

PAYE system re income from employment

Self Assessment re income from other

sources, if any eg rent, dividends and also

re capital gains

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Self-assessment

INDIVIDUALS

submit self-assessment tax return every year

either by 30th September and HMRC calculates

tax (pay by 31st January next) or send return by31st January with the tax due (calculated bytaxpayer or accountant)

COMPANIES

submit a company tax return and

tax is due 9 months after end of the companysaccounting period

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Income Tax

The basic system

See Chapter 2 page 7

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The Income Tax (Trading and Other

Income) Act 2005

The Categories

Property Income - receipts from land andbuildings in UK

Trading Income - profits of trade, professionor vocation in the UK

Savings and Investment Incomeinterest on

savings, dividends, etc Employment Incomeincome from offices,

employments and pensionsITEPA 2003

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Tax rates

See rates on page 7:

Note personal allowances - tax free

income (single allowance of 5,225)

Above that:

10% 0 - 2,230

22% 2,230 - 34,600

40% over 34,600

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Calculate income taxsee chp2

Step 1: Ascertain total income - add upincome from all sources

Step 2: Ascertain net income - deductcertain reliefs from the appropriate income

Step 3: Deduct personal allowancesstarting with the non-savings income first,the bottom slice

Step 4: Calculate tax payable usingappropriate tax rates for each type ofincome

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Apply tax ratesSee pg 10

Taxable income = 39,775

10% 0 - 2,230 (2,230) = 223.00

22% 2,230 - 34,600 (32,370)= 7,121.40

40% 34,600 - 39,775 (5,175)= 2,070.00

Total tax payable = 9,414.40

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Practice question

Ahmet has trading income of 47,500 in

tax year 2007/08.

He has no other income from any othersources and is entitled to the single

persons allowance.

Calculate the income tax payable.(you only need to start from step 3)

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Answer

Total income = 47,500

Deduct personal allowance 5,225

Taxable income = 42, 275

10% 0 - 2,230 (2,230) = 223.00

22% 2,230 - 34,600 (32,370)= 7,121.40

40% 34,600 - 42,275 (7,675)= 3,070.00

Total tax payable = 10,414.40

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