In 2008-2009 total UK government receipts have been 37.3% of UK GDP. This is as same as approximately ? 10,900 for every adult or ? 8,900 per person in the UK. The big sources of revenue for the government are Income Tax, National Insurance contributions and VAT (Stuart and James, 2009).
The Tax System
Income Tax- The chief forms of taxable income are the earnings which come from employment, businesses, income from self employment, pensions, income from property, bank and building society interest and dividends on shares (Stuart and James, 2009).
Income tax performs on the basis of a system of allowances and bands of income. Everyone has a personal allowance that is subtracted from total income for showing taxable income. Taxable income depends upon different tax rates that are supported by the band in which it falls. The increment in bands and allowances starts in April which is tax year in statutory indexation provisions. This increment is declared at the time of the annual budget. Income tax is mostly deducted through the PAYE system. The UK Income tax system is cumulative where total tax which is payable for a particular financial year is calculated on the basis of the total income of that particular financial year. The cumulative system conveys that there is no end of year adjustment to the tax paid amount. Child tax credit (CTC) does not require any employment status. It is meant for both out of work families and lower paid working parents. Working tax credit (WTC) is advantageous for working adults with and without children (Stuart and James, 2009).
National Insurance Contributions: NICs works as tax on earnings. Practically contributions paid and benefits received do not have strong relation with each other for each contributor. For 2008-2009 some contributions are given to the National Health Service and the rest are paid into the National Insurance (NI) Fund (Stuart and James, 2009).
Case Law on the UK Taxation System
The UK taxation system has a direct connection with the domicile status of an individual, which does have far reaching implications on the financial and regulatory system. The law of domicile and the UK taxation are two separate concepts, but when the law of domicile is applied onto UK taxation, then it brings about a social difference by exposing the the tax burdens of two different individuals with identical incomes from the same sources purely on the grounds of national origin- while one individual pays less tax it is considered a social advantage, while it is unavailable to the other individual (Richard, 2007). HM Revenue and Customs is an active body of law, and involves in an indirect and unintentional way thru the process by determining a person’s domicile status, which is an indication that discrimination has its origins from a public authority. Those suffering discrimination are those from within the United Kingdom who account for almost 88% of the 60 million resident UK population.
The case of illegal discrimination gives rise to two conflicting consequences viz (Richard, 2007).
Those who are UK domiciled must be taxed in the same manner as those who are not domiciled in the UK.
Non-domiciled individuals must be taxed in a similar manner as those who are domiciled in the UK.
In either of the above situations, it is considered unlawful to tax an individual irrespective of one’s national origin, since it opposes the Race Relations Act 1976 (Richard, 2007, Para 6).
Domicile is the most important determinant in the taxation system of United Kingdom, and hence it is important to understand the manner of an individual’s tax treatment on income tax (also known as PAYE), capital gains tax and inheritance tax in the United Kingdom. Taxing an individual depends on three kinds of residential status available with the individual e.g., residence in the UK, ordinary residence in the UK, and domicile (Richard, 2007, Para 9).
The case law seeks to explain the concept and application of domicile to the relationship of HMRC with the Taxation system. The case law also seeks to explain the determination of a person’s domicile with respect to either of the two circumstances: on application or on submission of a tax return (Richard, 2007).
An Extra-statutory concession is a kind of relaxation for tax payers that decreases tax liability to which they would not be unrestricted according to the strict letter of the law. Most concessions are based on dealing with what are, on the whole, minor or transitory irregularities that is according to legislation. It meets with difficult cases at the margins of the code where it is hard to develop a statutory remedy (Extra-statutory concessions, 2009, p. 2).
The concessions come under a general application but in some specific cases, some special circumstances will be taken under consideration to work on the application of concession. Such kind of case will never be taken into consideration where tax avoidance is being done (Extra-statutory concessions, 2009, p. 2).
Concessions applicable to Individuals: Travelling expenses of Directors and Employees who are earning ? 8500 or more per year (Extra-statutory concessions, 2009, p. 20).
If an employee receives an Overseas Retirement Benefits Scheme or an Overseas Provident Fund, income tax will not be charged on those lump sum benefits (Extra-statutory concessions, 2009, p. 21).
Double Taxation Relief: Where maintenance payments are done under a United Kingdom court order, the income comes from a United Kingdom source. The credit relief is given where (Extra-statutory concessions, 2009, p. 23):
The person who was making the payment has left the United Kingdom and become the resident of another country.
The payments are made out of the person’s income in the country of his residence and is liable to pay tax there
The person is the resident of the United Kingdom and is the payee of the overseas tax (Extra-statutory concessions, 2009, p. 23).
Death of Tax Payer before due date for payment of tax- if a tax payer dies before his tax payment due date and his executors cannot pay the duty, the due date will be later of (Extra-statutory concessions, 2009, p. 25):
The normal due date
Thirty days from grant of administration
Statements of Practice
It clarifies the Inland Revenues Interpretation of Legislation. It also explains the method with which the Department executes the law in practice. They do not influence a tax payer’s right in which he can argue for a different interpretation when it is required to appeal to the General or Special Commissioners. The following Statements of Practice (SPs) has a minor concessionary element (Extra-statutory concessions, 2009, p. 19):
SP A34: Relief for interest payments: loans for purchase or inherited properties
SPD1: Part disposals of land
SP4/79: Life Insurance premium relief on Children’s policies
SP10/84: Foreign bank accounts
Statute of the UK Taxation system
Taxation is the most important and direct source of income for any government. It is the national duty of every citizen and institution to pay their taxes that ensure the development of infrastructure, help lay down welfare policies of the government, etc. Over the years, the system of taxation has undergone many changes in order to simplify and yet tackle the challenges of manipulation in order to maintain a sound fiscal system (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009).
The role and significance enjoyed by banks is unparalleled in its contribution to the taxation system, and therefore set the highest standards of corporate governance (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009).
The salient features of the code on UK Taxation system are as follows:
It is a matter of concern that in the recent past, flaws and vulnerabilities have been exposed as a result of advances in the field of technology, and hence the London summit of G20 leaders proposed several measures on international banking supervision (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009, Page 6) to empower and enable the governments to quickly work on plugging all possible loopholes in the regulatory system (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009).
In the United Kingdom, this form of empowerment is taking place thru the statute or also referred to as ‘The Code of Practice on Taxation for Banks’, and the government of UK expects its citizens and businesses to comply with the Act in a responsible manner. The proposition of this Act actually brings out its advantages in the following ways (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009):
Banks can cut down on their tax liabilities- be it recovery of VAT incurred on transactions, minimizing on income tax and national insurance contributions.
Provide financial assistance to customers
Having access to a large pool of funds
The statute stresses on two themes as a result of government’s facilitating act between large businesses and HMRC. The 2 key benefits are: transparency and superior governance.
The statute is the origin thru which large businesses are required to come up with a risk framework on in order to comply and help build a robust financial system in a solid relationship with banks. In addition, the code or the statute also emphasizes on best practices of transparency and compliance (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009).
The code is a guideline for the system to be operational and contains 4 sections: a] Overview, b] Governance, c] Tax Planning, d] Relationship between bank and HMRC
Apart from the above, the code also discusses in detail about implementation and enforcement of the guidelines as laid down in the statute (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009).
Overview, talks about behaviors and best practices for the banking sector, and has outlined the responsibility of banks to implement it. Governance entails the detailed strategy that is expected by the banks to lay down and manage the framework. Tax Planning, is about an underlying methodology to be followed by the banks. Relationship between banks and HMRC is outlined on the features of business communication that emphasizes transparency and constructive approach (HM Revenue & Customs A Code of Practice on Taxation for Banks, 2009).
Statutory Instruments Practice
Statutory Instruments Practice (Sis) are very common form of subordinate legislation, which is also called secondary or delegated legislation. They are developed by or under powers bestowed by or under statutes on Her Majesty in Council or on a Minister, the National Assembly for Wales. It offers the thorough regulations that put into practice Acts of Parliament. They must be within the range of the facilitating power in the parent Act (Statutory Instruments Practice, 2009, Para 1).
Statutory Instruments Practice offers guidelines for preparing statutory instruments. It also guide in parliamentary procedures which are related to them. It works as a guidance for practice, it is not the text book of law (Statutory Instruments Practice, 2009, Para 3).
It generally refers to all Statutory Instruments, which are made by the National assembly for Wales. They are subject of different power and parliamentary control (Statutory Instruments Practice, 2009, Para 4).
The Statutory Instruments Act 1946 used the term the Statutory Instruments for the first time. Since 1 January 1948 when this act began, it covers most subordinate legislation made by the central Government. ‘Statutory Instruments’ sometimes refer to earlier instruments called statutory rules and orders. The two categories of documents that are known as Statutory Instruments are specified by Section 1 of the Act of 1946 and to which the Act is applied (Statutory Instrument Practice- 4 edition November 2006, p 5):
a) those made in exercise of powers conferred by the Act or by Acts passed after the commencement of the Act (section 1(1)) (Statutory Instrument Practice- 4 edition November 2006, p 5);
b) those made after the commencement of the Act but in exercise of powers conferred by Acts passed before that commencement (section 1(2)) (Statutory Instrument Practice- 4 edition November 2006, p 5).
Varieties of Statutory Instrument: Statutory Instruments have lots of forms from which the commonest are Orders in Council, regulations, rules and orders. The adopted form has been advised in the enabling Act (Statutory Instrument Practice- 4 edition November 2006, p 6).
Orders in Council: some orders in council are used for mixture purposes. Especially an ordinary statutory instrument which is made by the Minister would be not be suitable. it is in the case of an order that transfers ministerial functions to a Minister to make subordinate legislation (Statutory Instrument Practice- 4 edition November 2006, p 6).
Orders of Council: Orders of Council can be associated with the regulation of professions (Statutory Instrument Practice- 4 edition November 2006, p 6).
HM Revenue & Customs manuals
HM Revenue and Customs (HMRC) was founded in 18 April, 2005. It had the merger of Inland Revenue and HM Customs and Excise Departments. It makes sure that accurate tax is paid at accurate time whether it is related to payment of taxes received by the department or to the paid benefits (HM Revenue and Customs, n.d., Para 1).
It collects and administers:
Direct Taxes: these kinds of taxes include corporation tax, income tax, inheritance tax, capital gain tax etc (HM Revenue and Customs, n.d., Para 2).
Indirect Taxes: these kinds of taxes include Insurance Premium Tax, Stamp Duty, Excise Duties, VAT etc (HM Revenue and Customs, n.d., Para 3).
Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) is referred to in this document as the European Company Statute (ECS). The European Company Statute came into effect on 8 October 2004. It established a new kind of corporate entity, the European Company.
The ECS directly applies in the United Kingdom. The ECS is concerned with company law provisions for SEs. The implementation of the ECS regulation corresponded with the acceptance of a directive (2001/86/EC) with reference to employee involvement in the administration of SEs. This Directive does not do any changes to UK tax legislation (Implementation of the European Company statute, 2005, Page 4).
European Court of Justice decisions
Cross border tax issues have become very important for multi national corporate decision making. Many private sector employees work for very big companies that operate in multiple jurisdictions. That is why cross border tax issues develop frequently.
The Treaty Establishing the European Community was signed in 1957. This treaty establishes the international laws and its signatory countries are known as ‘Member States’ and the country which is not a Member State is a ‘Third Country’. The goal of community law is to settle a single market for all nationals, including companies within the community where they can do trading without any restriction of any national boundaries (George, 2007, Page 6).
Group Relief: In the Marks and Spencer’s case it is clear that one can have group relief between companies in different countries (George, 2007, Page 6).
Withholding Taxes and Dividend Taxation: It is related to Denkavit case. It says one cannot be free from dividends from withholding tax in one’s country (George, 2007, Page 6).
Thin Cap: It is from Lankhorst-Hohorst. It says that in many situations a certain debt: equity ratio is maintained (George, 2007, Page 7).
List of References
Adam S and Browne J, 2009. A Survey of the UK Tax System, Institute of Fiscal Studies, Available from: http://www.ifs.org.uk/bns/bn09.pdf [Accessed 14 November, 2009].
“A Code of Practice on Taxation for Banks”, 2009. Consultation Document June 29, HM Revenue and Customs, Available from: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_029639 [Accessed 14 November, 2009].
“Extra-Statutory Concessions”, 2009. Available from: http://www.hmrc.gov.uk/specialist/esc.pdf [Accessed 14 November, 2009].
Gillham, G, 2007. European Court of Justice Tax Cases 2006: A Review, Tax Planning International: Special Report, February 2007, Available from: http://www.bnai.com/images/special_reports/ECJ0207_contents-sample.pdf [Accessed 14 November, 2009].
HM Revenue and Customs, Available from: http://www.hmrc.gov.uk/menus/aboutmenu.htm, [Accessed 14 November, 2009].
“Implementation of the European Company statute”, 2005.Technical Note and Draft Tax Clauses to implement the EU Regulation on the European Company, Available from: http://www.hmrc.gov.uk/drafts/imp-ecs-tech-note.pdf [Accessed 14 November, 2009].
Murphy R, 2007. National Origin, Equality and the UK’s Domicile Law as it relates to Taxation, Available from: http://www.taxresearch.org.uk/Documents/UKDomicileLaw03-07.pdf [Accessed 14 November, 2009].
“Statutory Instruments Practice”, 2009, Office of Public Sector Information, Available from: http://www.opsi.gov.uk/si/statutory-instrument-practice, [Accessed 14 November, 2009].