Changes in the Taxation Systems - Essay Example

UK TAXATION SYSTEM Introduction: This essay is designed in such a way that it gives an overview of the System of Taxation that is being followed in the United Kingdom (UK). The paper starts with a brief introduction about the overall tax system followed in the United Kingdom, explains different types of direct and indirect taxes and then focuses on describing the changes that have been taking place over the past 25 years with reference to different factors like equity, efficiency and incentives to work. Also the structures of certain taxes are also explained in this essay. Apart from this, some figure with respect to the contribution of the different taxes to the total revenue raised are also indicated wherever necessary. All the figures and different information quoted in this paper are extracted from the survey conducted by the Institute for Fiscal Studies on the UK Tax System for the fiscal year 2006-2007. Alongside, the developments in the indirect taxation are also described. Tax System in UK: Almost 270 - 280 billion pounds of revenue is raised through taxation in the UK by its government. Income Tax is believed to be the largest source of earning equating up to 30% of the total tax revenue in UK. This is charged on salaries from employment, on rental income for let-out properties, on bank and building societies' interests and on company dividends. The one that comes next in this list is the Value Added Tax (VAT). VAT is charged to the customer by businesses on the supply of goods and services in the country. The revenue generated by the UK government by way of VAT comes somewhere around to 23% of the total tax revenue and also this is believed to be the second largest earner of revenue to the government. Apart from this the government of UK also generates revenue through some other kinds of taxes like the National Insurance Contributions (NIC), duties and Corporations Tax, the contribution of which are believed to be 21%, 16% and 8% respectively. There exist also other sources of contributions like the Capital Gains Tax (CGT), Inheritance Tax (IHT), Stamp Duty (SD) and Stamp Duty Land Tax (SDLT) etc., which form the rest of the total tax revenue. The Tax Year: The Tax Year in the United Kingdom starts on the 6th of April in the current year and ends on 5th of April in the following year. All the citizens of the country pay their income tax by reference to the same. The different kinds of rates and allowances relating to taxes are finalized in the Annual Budget which is scheduled every year in the month of March. The Tax System: A study conducted in the previous year reveals that almost 29.5 million individuals do pay tax in the form of income tax in UK. Indirect taxes are collected in the form of Excise duties, Vehicle excise duties, Insurance premium tax, Air passenger duty, Landfill Tax and Aggregates Levy etc. The government of UK levies excise duty particularly on five types of goods. They are tobacco, fuel, beer, wine and beer. A flat rate is followed for levying tax on these particular goods. When it comes to tobacco, they are additionally subject to a tax called ad valorem tax. This ad valorem tax is set up at an amount of 22% of the total retail price. The following table shows the tax rates of duties that were levied in the year 2006-07. Table.1 Excise duties, 2006-07 Good Duty (pence) Total duty as a % of price Total tax as a % of price Packet of 20 cigars: Specific + ad valorem 314 66.4 81.3 Pint of Beer 29 13.5 28.4 Wine (75cl bottle) 129 38.2 53.1 Spirits (70cl bottle) 548 48.0 62.9 Ultra-Low sulphur petrol 47 50.8 65.7 Ultra-Low sulphur diesel 47 49.1 64.0 Sources: HM Revenue and Customs website (customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal'_nfpb=true&_pageLabel=pageExcise_InfoGuides); UK Trade Info website - www.uktradeinfo.co.uk; National Statistics - www.statistics.gov.uk Capital Gains Tax: The concept of Capital Gains tax was introduced in the year 1965. These capital gains are supposed to be levied on the gains arising from the disposal of assets by individuals and trustees. To be clearer, capital gain tax is defined as the total value of the assets when it is sold, less the value of the asset when it was originally bought. This particular tax was also reformed in the budget of the year 1998. The reforms are the introduction of a system called taper system and also the removal of the indexation system that already existed. Different classes of capital expenditure attract different capital allowances in the following ways: - Expenditure on plant and machinery may be 'written down' on a 25% declining-balance basis.9 A higher, 40%, allowance is available in the first year for expenditure by small and medium-sized companies; in 2006-07 this was increased to 50% for small companies for one year only. - Expenditure on industrial buildings and hotels is written down on a straight-line basis of 4% per year. - Expenditure on commercial buildings may not be written down at all. - Intangible assets expenditure is written down on a straight-line basis at either the accounting depreciation rate or a rate of 4%, whichever the company prefers. - Capital expenditure on plant, machinery and buildings for research and Development (R&D) is treated more generously: under the R&D allowance, it can all be written off against taxable profits immediately. Tax Reforms in the system: The Tax system from the perspective of incentives to work and efficiency: Since the year 1997, the government of UK has been taking many measures in order to bring more benefits from the tax system and also to bring the system closer to the public. The government has pursued certain policies like The Working Families' Tax Credit and the Disabled Person's Tax Credit etc. These policies were introduced in the year 1999. A support system which was more integrated was also setup in addition to these policies. In the year 2003, a new employment tax also accompanied these. Out of all the above mentioned policies which were designed to provide maximum tax benefits to the customers, The Working Families Tax Credit (WFTC) was the most important reform. The key elements of the recent reforms are: - The introduction of the Working Families' Tax Credit (WFTC) to replace Family Credit phased in over 6 months from October 1999. These changes have been accompanied by increases in out-of work benefits for families with children; - Reforms to employee and employers' national insurance contributions (NICs); - Reforms to income tax; - The announcement of a future employment tax credit for workers without dependent children, and an integrated child credit to bring together existing transfer mechanisms for families with children. All the above reforms clearly indicate that the UK tax system has become more efficient on a whole. UK Tax System - Equity perspective: The year 1988 saw the extension of tax-favored saving in the United Kingdom. This was possible because of the introduction personal pensions along with Personal Equity Plan (PEP) and Tax-Exempt Special Savings Account (TESSA). PEP was a means for direct equity holdings. This was later reformed with an intention to allow pooled investments also. Recent Trends in the UK Tax System - Summary: Though there occurred two world wars which led to the steep increase in the receipts of the government, the tax system did not get affected by these wars. It was at the same stage as it was in the pre-war period. There have also been many other changes like the restructuring of the income tax system, continuous adjustments in the taxation of savings, the increase in the Value Added Tax (VAT) rate to almost double the earlier value, rapid hike in some of the excise duty rates etc. Many other smaller changes also took place. Reform Highlights at a glance over the last 25 years: Income tax Basic rate 33% down to 22% Top rate 98% (unearned income), 83(earnings) down to 40% Starting rate 25% down to 10% Independent taxation introduced Married couple's allowance abolished Child tax credit and working tax credit introduced Mortgage interest tax relief abolished Life assurance premium relief abolished Personal Equity Plan (PEP), Tax Exempt Special Savings Account (TESSA) and Individual Savings Account (ISA) introduced National Insurance Employee contribution rate increased from 6.5% to 11% Employer contribution rate reduced from 13.5% to 12.8% Ceiling abolished for employer contributions Ceiling for employees raised and contributions extended beyond it 'Entry rate' abolished and floor aligned with income tax allowance Imposition of NI on benefits in kind VAT Higher rate of 12.5% abolished Standard rate increased from 8% to 17.5% Reduced rate introduced for domestic fuel and a few other goods Other Indirect Taxes Large real rise in duties on road fuels Smaller increase in tobacco duties Slight real decrease in duties on beer, larger decline for spirits Small real increase in duties on wine Landfill tax, climate change levy and aggregates levy introduced Corporation Tax Main rate cut from 52% to 30% Small companies' rate cut to 19% Lower rate introduced, cut to 0%, then abolished R&D tax credits introduced 100% first-year allowance replaced by 25% writing-down allowance Advance corporation tax and refundable dividend tax credit abolished Local Taxes Domestic rates replaced by council tax (via poll tax) Locally varying business rates replaced by national business rates Despite so many changes in the taxation systems in the United Kingdom, which have met with varying degrees of success, there still seems to be a scope for more aggressive changes. References: 1. www.lexisnexis.co.uk/taxtutor/pdf/free_pdf/1a01.pdf 2. pdf.mutual-learning-employment.net/pdf/exec-summ-uk-nov00-p.pdf Read More