Taxation

Introduction
This lecture
AIMS
Brief outline of main taxes
Income and capital
Tax administration
Start on income tax

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
Main taxes on this course
See Chapter 1
Income Tax
Capital Gains Tax
Inheritance Tax
Corporation Tax
Stamp Duty
VAT

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)



Capital Gains Tax
Taxes the gain (i.e. the profit)
On disposal of 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 market
value)
Inheritance Tax
Mainly a tax on property transferred on
death where the estate is worth more
than 300,000
But transfers in 7 years before death also
taxed (anti-avoidance measure)
(Potentially Exempt Transfer - PET)
As are some trust transactions

Corporation Tax
Tax paid by companies
(Companies do not pay income tax,
capital gains tax or inheritance tax)
Paid on income (e.g. profits of business,
rent, interest, dividends, etc. received)
And on capital gains (company sells
land at a profit, etc.)
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 quarterly
statement
Stamp Duty
Traditionally a tax on documents
Document had to be stamped to show
payment of the tax
Most stamp duty is ad valorum (percentage
of the value of the transaction)
Paid by purchaser
Still same for transfers of shares
Stamp Duty Land Tax for transfers of
interests in land
Next topic
Income and capital

Page 3
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
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)
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
Example
BUSINESS (DIY store)
buys equipment (e.g.paint mixing machine)
= capital so spent = capital expense
buys stock for resale (paint)
not capital, spent = income expense
LANDLORD
pays for improvements to property (extension)
= capital expense
pays for repairs (fix alarm system)
= income expense
Next topic
Basic tax administration

Page 3
Tax year
IT, CGT, IHT based on tax year running
from 6th April to following 5th April
Corporation tax assessed on year 1st
April to 30th March
How do people pay their tax ?
SELF EMPLOYED sole 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

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 by
31st January with the tax due (calculated by
taxpayer or accountant)
COMPANIES
submit a company tax return and
tax is due 9 months after end of the companys
accounting period
Further details
See notes on Appeals, Commissioners,
etc. on pages 4 -5
Income Tax
The basic system
See Chapter 2 page 7
The Income Tax (Trading and Other
Income) Act 2005

The Categories
Property Income - receipts from land and
buildings in UK
Trading Income - profits of trade, profession
or vocation in the UK
Savings and Investment Income interest on
savings, dividends, etc
Employment Income income from offices,
employments and pensions ITEPA 2003

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
Rates for savings income
Interest received: 20% and 40%
Dividends: 10% and 32.5%

Top slicing
If an individual has different types of income,
they must be treated in a particular order
Some are top sliced
Dividends come at the very top
Other savings income next
Then non-savings income -employment,
trading and property income
What does this actually mean ?
Calculate income tax see chp2
Step 1: Ascertain total income - add up
income from all sources
Step 2: Ascertain net income - deduct
certain reliefs from the appropriate income
Step 3: Deduct personal allowances
starting with the non-savings income first,
the bottom slice
Step 4: Calculate tax payable using
appropriate tax rates for each type of
income
Calculate income tax
See example pg 10
Step 1: Add up all income
30,000 + 15,000 = 45,000 (total income)
Step 2: Deduct reliefs
None = 45,000 (net income)
Step 3: Deduct personal allowances
45,000 - 5,225 = 39,775 (taxable income)
Step 4: Apply tax rates

Apply tax rates
See 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
Practice question
Ahmet has trading income of 47,500 in
tax year 2007/08.
He has no other income from any other
sources and is entitled to the single
persons allowance.
Calculate the income tax payable.
(you only need to start from step 3)
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

Next lecture
Income tax on
Employment Income
Savings and Investment Income

Prepare by reading
Introduction to Tax, chapters 3 & 4