Income Tax on Worldwide Income of the UK Resident - Essay Example

INCOME TAX ON WORLDWIDE INCOME OF AN UK RESIDENT Answer to Question With effect from April 2005, HM Revenue and Customs (HMRC) is assigned with the responsibility for administration of both indirect and direct taxes in U.K. HRMC is regulated by the Treasury and the day-to-day activities of HRMC is administered by an Executive committee. HRMC is responsible for whether the tax is remitted correctly within the time at correct rates of taxes. (James 2009:77) HRMC chief functions are detailed below: HRMC collects and controls: Taxes on Income Taxes on Capital gains Taxes on profits of the corporations Taxes on inheritance Contribution to national insurance. HRMC also oversees indirect taxes paid by the assessees or by any U.K business on money expended on services or goods, which includes the following: Stamp duty Excise duties Petroleum Revenue Tax Insurance premium tax “Stamp duty land tax “ “Stamp duty Reserve tax “(www.hrmc.gov.uk) U.K resident under U.K Revenue Law A UK company is subject to corporation tax and an individual who is resident in the UK is required to pay income tax in UK on earnings earned anywhere in the globe. An individual who is not residing in UK is subject to income tax in UK or corporation tax in case of a company only on income arising within UK from a source. Likewise, a UK company is subject to corporation tax on capital gains if the gain is accrued from the sale of assets anywhere in the globe and an individual is liable pay capital gain tax on the capital gains earned. An individual is not subject to UK’s capital gains tax if he is not resident in the UK, unless the gain is generated on the sale of the assets of a UK resident’s permanent establishment. As per s 831 of the Income Tax A ct 2007, if a person who has stayed in UK for 183 or more number of days in a tax year will be recognised as a resident for that tax year. As per s 66 (1) of the Finance Act 1998, every corporation registered in UK will be viewed as a resident company in UK. If anyone does not fall in any of the above mentioned categories, then test derives from a chain of decided cases on the subject. HMRC also regards any person as a resident if he has stayed in the UK for more than ninety days on average per annum in four successive years. In decided cases as in IRC v Brown1, however, such simple arithmetical calculation is not followed. (Elizabeth, Martin & Law 2009:475). Advantages In UK, liability for income tax arises from the basis of residence. If one resides in UK for a particular period during a tax year, then he is liable to pay income tax for that tax year. There are set of guidelines and there are less cumbersome procedures to be observed for determining residential status. Disadvantages If anyone does not fall in any of the above mentioned residential categories, then test derives from a chain of decided cases on the subject. Since, in case of any dispute as regards to residential status under UK’s Income Tax Act, then one has to approach the court for redressal of his grievances. Answer to Question 2 Employees who are on overseas duty is still ought to pay PAYE if they receive payments from UK employer. A UK employee still remains employed by his UK employer, even if the employee is paid by the overseas company. A non-resident trade will be taxed on any profits originating from business carried on within UK under the normal UK trading rules. This will include gains from the UK portion of a business which is also carried on foreign countries despite any gains from the foreign portion itself which will avoid UK tax. (FL Memo Ltd 2005:561). If a person is a resident in one nation with which there has been a double taxation treaty with UK, then UK non-resident can seek for exemption or part relief from UK income tax or indirect tax on some sources of income from UK sources. If a UK resident, sole trader or individual companies of UK receive investment and saving income from foreign nations, then such person or entity has to declare it in his or its tax return. Income tax is to be payable on such foreign income and however, if one has already paid tax on his foreign income, then he is entitled to offset this in UK. A UK resident need not pay tax in UK on his worldwide income, and he can claim “foreign tax credit relief” under double taxation avoidance treaties entered by UK with such source nations. The main objective for this is to avoid payment of double taxation. A UK resident will get the following relief on the lower of on his worldwide income: Under the terms of Double taxation avoidance treaties, the foreign tax payable. The quantum of UK tax payable For instance , if an UK resident , sole trader or an individual UK company has paid more quantum of foreign tax than what is payable in UK , then , he or the entity will get relief on the quantum of UK tax payable. Even in the absence of any double taxation avoidance treaty, an UK national, sole trader or individual company is eligible to claim tax relief for the tax paid on foreign income in the source country under unilateral relief. If a resident, sole trader or an individual company has paid higher foreign withholding tax than for that type of income, then they may approach foreign tax authorities for refunding the tax paid above the withholding tax rate. Thus, it is possible that a UK resident or a sole trader or an individual company may not have to remit or pay income tax in UK on their income derived from foreign sources. This is mainly dependent on whether an individual is defined a “resident “for tax purpose in UK in a tax year. Further, the quantum of income may also be impacted by the status of individual’s domicile position or ordinary residence status. (Direct Gov 2010). In R (Davies, James & Gaines-Cooper) v HMRC2, it was held that individual attempting to leave UK or who have left already, need to make sure that they are non-resident for tax reasons. Court of Appeal held that if an individual had left UK permanently, he will no longer be viewed as resident for tax purpose. Answer to question 3 For individuals, UK Tax rates for their income and taxable bands for the year 2009-2010 Details Percentage of Income Tax Taxation Limit Starting or basic Income tax rate for savings 10% £ o to £ 2,440 Fundamental Rate 20% £ 0 to £ 37,400 Income-tax rate for higher income 40% Over and above the income of £ 37,400 Source: www.taxrates.cc/html/uk-tax-rates.html It is to be observed that if one’s non-saving income is above the aforesaid limit, then the ten percent income tax will not be applicable. It is suggested that UK should shift to flat rate tax system as the flat or single rate tax system is an easy, straightforward, and equitable and promises general growth, whereas the current tax system for individual is intricate and vague. UK’s present tax system distinguishes the assessees on different classes like source, use and quantum of income but, whereas under the flat or single rate system, all individuals would be handled equally and identical justice is guaranteed to all despite their status of standing in the society. The flat rate tax rates guarantee lowering of marginal tax rates and trim down tax bias against investment and saving. (Weisbach 2000: 599). Due to high incidence tax rates for residents in UK , which is as high as 40% , residents may be lured to move to tax heavens like Andorra where is no capital gain tax, no VAT , no income tax and no estate tax or Gibraltar or Malta where higher tax rate for individual is only 15& List of References Elizabeth A, Martin, Law J. (2009) A Dictionary of Law. Oxford: Oxford University Press FL Memo Ltd. (2005) Tax Memo 2005-2006. London: FL Memo Ltd James, Malcolm. (2009) UK Tax System: An Introduction. London: Spiramus Weisbach, D. A. (2000) Ironing out the Flat Tax. Stanford Law Review, 52(3), 599-664 www.direct.gov.uk (2010). Tax on foreign investment and savings income. [online] available from [accessed 1 November 2010] Read More