The UK Income Tax on Their Worldwide Income Arising in a Tax Year - Essay Example

Individuals resident in UK are liable to UK income Tax on their worldwide income arising in a tax year Taxation is a shared obligation between the government and its citizens to promote the general welfare of its people. Infrastructures, education, health care and other social services enjoyed by its residents are paid through the taxes collected. As a consequence, a symbiotic relationship exists between the government and its people where the government is expected to provide a safe environment conducive for its citizens to be productive. This mutual relationship is seen to exist from the birth of a citizen, the adoption of domicile or the fulfilment of residency requirement from whence the infrastructure development and services of the government are enjoyed. When government is obliged to provide service or benefit then the individual who derives benefits should pay by way of taxes as a matter of course. Residential status liable for taxation Applying this principle to residents of United Kingdom (UK), they are liable to income taxation however it must be determined whether they are ordinarily residents, residents but not ordinarily residents or residents but not domiciled in the UK for taxation purpose. The distinction primarily lies on the tax liability for income and gains received outside the UK since ordinary residents are liable to tax only on income and gains generated from UK and those derived from abroad are taxable only when remitted to the UK. While residents and ordinarily residents or domiciled are liable to tax on all earnings or income as it arises or accrues, regardless of the source. Under HMRC61 Section 1.3 in relation to sub-section 1.5.3, an individual considered resident in the UK shall pay taxes on all income as it arises and on the gains as it accrue wherever the income and the gains may be found based on “arising basis of taxation.” This rule is not absolute and admits a few exceptions as hereafter discussed. While a resident who is not ordinarily resident as defined under Section 1.5.15 or a resident but not domiciled pursuant to Section 1.5.5, is allowed to choose between the “arising basis of taxation” to account for the individual’s worldwide income and gains and the remittance basis of taxation. This scheme involves payment of taxes on income and gains as it arise and accrue in the UK but payment of taxes on foreign income and gains are demandable only when these are remitted into the UK. HMRC6 recognizes that an individual who spends fewer than 183 days in the UK as a non-resident and is generally not subject to tax however the number of days present becomes irrelevant when settled lifestyles, family, property, business and social connections are taken into account. Absence therefore from the UK will not support a finding of non-residence if the individual still maintains properties, financial interests, social activities or travel to the UK regularly rather these are conditions residency thus liable to tax. There is no hard and fast rule in determining whether an individual is a resident or non-resident, hence Section 1.5.13 must be correlated to Section 1.5.22 to test the residency requirement. Thus, even when an individual is absent in the UK for intermittent period, such individual may still be held liable to tax as held in Gaines-Cooper v HMRC.2 Robert Gaines-Cooper, a British-born businessman, was ordinarily resident in the UK despite moving to the Seychelles in 1976 and spending less than 91 days in the UK each year. The decision highlights the burden upon the taxpayer to show that he has left the UK to work full time abroad and for the duration of the relevant tax year; that the taxpayer had made a distinct break from his former social and family ties in the UK; and the number of visits to the UK does not establish non-resident status, but once that status is acquired, the number of visits to the UK may result in it being lost. Mr Gaines-Cooper was held ordinarily resident despite his absence from the UK as he continued to hold properties and social ties within the UK and travel frequently back and forth too. The residency criteria clearly defined the responsibility of residents and regularly residents who enjoy and continue to enjoy the benefits and services provided by the government. Visitors’ use of the realm’s infrastructure and services for a limited period are also taxed through the imposition of VAT from the purchase of goods as a consequence of their stay. The mandated 3-year residency is generally lenient as far as taxing regularly residents who enjoy and continues to enjoy the infrastructure and services of the government in less than the period prescribed by the law. One Tax Rate for all residents Currently, the VAT is at 17%, the total income of the lowest income bracket is taxed at 10%. Since all purchases, except some goods, are VAT levied this translates to a total of 27% in taxes collected from the lowest strata of society. At the other end of the spectrum, the high income bracket has a 50% tax rate that translates to a 67% tax collection from this bracket. A uniform tax rate for all income brackets will be simpler to calculate since the final tax output will be just like how the VAT is computed. Also, the government’s tax revenue projection will be more accurate since the total collection will be the percentage of the aggregated total income and wages paid by institutions to individuals. The amount of tax paid by the rich and the poor should be equal as both enjoy the same infrastructure and quality of service by the government thus there is no reason why should one sector of society pay more than the other. Abbreviations: Civ = Civil Case EWCA = England and Wales Court of Appeals HMRC = Her Majesty’s Revenue and Customs HMRC6 = Guideline Residence on Domicile and the Remittance Basis UK = United Kingdom VAT = Value Added Tax References: Davies, James and Gaines-Cooper v HM Revenue & Customs [2010] EWCA Civ 83. Case No: C1/2008/2488 and C1/2008/2690 HM Revenue & Customs, (2009), ‘Guideline Residence on Domicile and the Remittance Basis’, HMRC6 , Customer Information Team, Retrieved October 31, 2010 from http://www.hmrc.gov.uk/cnr/hmrc6.pdf Read More