Wednesday, 29 June 2016

Taxation in the United Kingdom

Taxation in the United Kingdom may involve payments to a minimum of three different levels of government: the central government (Her Majesty's Revenue and Customs), devolved national governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England and Wales, Council Tax and increasingly from fees and charges such as those from on-street parking. In the fiscal year 2014-15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.

Income tax was announced in Britain by William Pitt the Younger in his budget of December 1798 and introduced in 1799, to pay for weapons and equipment in preparation for the Napoleonic Wars. Pitt's new graduated (progressive) income tax began at a levy of 2 old pence in the pound (1/120) on incomes over £60 (equivalent to £5,696 as of 2015), and increased up to a maximum of 2 shillings (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.

Income tax was levied under five schedules. Income not falling within those schedules was not taxed. The schedules were:

Schedule A (tax on income from United Kingdom land)
Schedule B (tax on commercial occupation of land)
Schedule C (tax on income from public securities)
Schedule D (tax on trading income, income from professions and vocations, interest, overseas income and casual income)
Schedule E (tax on employment income)
Later a sixth Schedule, Schedule F (tax on United Kingdom dividend income) was added.

Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.

Considerable controversy was aroused by the malt, house and windows, and income taxes. The malt tax was easy to collect from brewers; even after it was reduced in 1822, it produced over 10% of government's annual revenues through the 1840s. The house tax mostly hit London townhouses; the windows tax mostly hit upscale country manors.

The income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax of 7d in the pound (about 3%), based on Addington's model, was imposed on incomes above £150 (equivalent to £12,735 as of 2015),

Council tax is the system of local taxation used in England, Scotland and Wales to part fund the services provided by local government in each country. It was introduced in 1993 by the Local Government Finance Act 1992, as a successor to the unpopular Community Charge ("poll tax"), which had (briefly) replaced the Rates system. The basis for the tax is residential property, with discounts for single people. As of 2008, the average annual levy on a property in England was £1,146. In 2006/2007 council tax in England amounted to £22.4 billion and an additional £10.8 billion in sales, fees and charges,

The third largest source of government revenues is value added tax (VAT), charged at 20% on supplies of goods and services. It is therefore a tax on consumer expenditure.

Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate, such as domestic gas supplies) or 0% ("zero-rated", such as most food and children's clothing). Exemptions are intended to relieve the tax burden on essentials while placing the full tax on luxuries, but disputes based on fine distinctions arise, such as the notorious "Jaffa Cake Case" which hinged on whether Jaffa Cakes were classed as (zero-rated) cakes—as was eventually decided—or (fully taxed) chocolate-covered biscuits. Until 2001, VAT was charged at the full rate on unused sanitary towels.

It was introduced in 1973, in consequence of Britain's entry to the European Economic Community, at a standard rate of 10%. In July 1974, the standard rate became 8%, and from October that year petrol was taxed at a new higher rate of 25%. In the budget of April 1975 the higher rate was extended to a wide range of "luxury" goods. In the budget of April 1976 the 25% higher rate was reduced to 12.5%. On 18 June 1979, the higher rate was scrapped and VAT set at a single rate of 15%. In 1991 this became 17.5%, though when domestic fuel and power was added to the scheme in 1994, it was charged at a new, lower rate of 8%. In September 1997 this lower rate was reduced to 5%, and was extended to cover various energy-saving materials (from 1 July 1998), sanitary protection (from 1 January 2001), children's car seats (from 1 April 2001), conversion and renovation of certain residential properties (from 12 May 2001), contraceptives (from 1 July 2006) and smoking cessation products (from 1 July 2007).

On 1 December 2008, VAT was reduced to 15%, as a reaction to the late-2000s recession, by Chancellor Alistair Darling.

On 1 January 2010 VAT returned to 17.5%.

On 4 January 2011 VAT was raised to 20% by Chancellor George Osborne, where it remains.

Capital gains are subject to tax at 18 or 28% (for individuals) or at the applicable marginal rate of corporation tax (for companies).

The basic principle is the same for individuals and companies - the tax applies only on the disposal of a capital asset, and the amount of the gain is calculated as the difference between the disposal proceeds and the "base cost", being the original purchase price plus allowable related expenditure. However, from 6 April 2008, the rate and reliefs applicable to the chargeable gain differ between individuals and companies. Companies apply "indexation relief" to the base cost, increasing it in accordance with the Retail Prices Index so that (broadly speaking) the gain is calculated on a post-inflation basis (with different rules apply for gains accrued prior to March 1982). The gain is then subject to tax at the applicable marginal rate of corporation tax.

Individuals are taxed at a flat rate of 18% (or since 22 June 2010, 28% for higher rate taxpayers) with no indexation relief. However, if claiming Entrepreneurs' Relief the rate remains 10%. Capital losses from prior years can be brought forward.

Expenditure on a business (such as a property business) made by an individual can be claimed as an allowance against Capital Gains. Whether expenditure is claimable against income (potentially reducing income tax) or capital (potentially reducing capital gains tax) depends on whether there was improvement of the property: if there was none, it is against income; if there was some, then it is against capital.

Transfers between husband and wife or between civil partners do not crystallise a capital gain, but instead transfer the purchase price (book cost). Otherwise, transfers made as gifts are treated for CGT purposes as being made at the market value at the date of transfer.

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