The previous UK tax system had been based upon the premise that HMRC would assess the taxpayer. There was an obligation on the taxpayer to report sources of income to HMRC, and HMRC would normally issue a tax return on the amount of Income declared to HMRC source by source.
Under Self-Assessment, the prime responsibility for assessment (i.e. calculation of tax due) is now with the taxpayer. With that change, the need for HMRC to issue a notice before the taxpayer had a legal liability to account for tax due is removed. Therefore interest now runs automatically on the tax eventually quantified as payable from the normal due date to the actual date of payment.
The Self-Assessment system introduced a unique tax reference number (UTR) for each taxpayer and they will submit all their tax details to only one tax office.
Certainty as to liability is only available after the end of the period in which HMRC can open an enquiry (subject to any subsequent discovery by HMRC).
An individual taxpayer is now required to file his tax return by 31 January following the end of the tax year. For 2011/2012 the tax return is due by 31.01.2013. If you file a paper copy it is due by 31.10.2012.
The return is in many sections. The tax return itself contains a number of questions regarding income, capital gains, charges and allowances. This is backed up by supplementary pages, setting out the details, and where necessary by “Help Sheets” giving detailed guidance with the warning that these are only HMRC interpretation of the law.
Additional notes are available on HMRC website www.hmrc.gov.uk or in paper format in the “tax return guide” and a “tax calculation guide” with a worksheet to help calculate the tax payable. One of the strengths of HMRC is that their worksheets to calculate a taxpayer liability are first class.
All items will be shown for the actual tax year in question, or on a current year basis. From the data contained in the tax return, the taxpayer or HMRC can compute the tax liability for the year of assessment, and the amount of tax payable or repayable on 31 January following the end of the tax year.
If the taxpayer wishes HMRC to compute his tax liability, then he should tick the no box where appropriate. (Do you want to calculate your tax?) In these circumstances the return should be filed by 30th September following the end of the tax year. Although HMRC may be requested to compute the tax liability, they are undertaking the job as agent for the taxpayer, and the resultant calculation is still known as “self assessment”
UK Companies are subject to corporation tax, which is levied at varying rates on business profits and other types of income, as well as on Capital Gains (known as chargeable gains) belonging to UK companies.
The chargeable period is an accounting period. Unlike income tax on sole traders and partners, there are no special rules for the assessment of the early years of a company’s existence. An accounting period begins on the company acquiring a source of income. Usually this will be the date at which it starts to trade.
The accounting period continues until the earliest of the following events:
- 12 months have elapsed since the beginning of the accounting period;
- The occurrence of the company’s accounting reference date (to which it makes up its accounts);
- The company beginning or ceasing to trade;
- The company ceasing to be resident in the UK for tax purposes, or
- The company ceasing to be within the charge to corporation tax;
- The company becomes formally insolvent, liquidation, administration.
Companies with taxable profits of up to £300,000 pay tax at a 20 percent small profits rate, with marginal relief up to £1,500,000. Companies with profits of £1,500,000 or more pay tax at the full rate of 26 percent (Financial Year 2011). All these limits are reduced where there are associated companies. There will be a staged reduction in the main rate of corporation tax from 26 percent to 23 percent over three years, with the rate falling to 25 percent from 1 April 2012.
Capital Gains Tax
Capital Gains Tax liability for UK residents occurs when you sell or dispose of an asset. A tax is levied on the profit or gain you make.
You usually dispose of an asset when you cease to own it - for example if you:
- sell it (at market value) special rules apply if you sell it to a connected party;
- give it away as a gift;
- transfer it to someone else;
- exchange it for something else;
- receive compensation for it - for example you receive an insurance payout when an asset has been destroyed.
Most assets (for UK residents) are liable to Capital Gains Tax when you sell or dispose of them - whether they're in the UK or overseas. Double tax agreements may give some relief.
However, some assets are exempt, such as your car, personal possessions disposed of for £6,000 or less and, usually, your main home.
The definition of a disposal is extremely wide and can catch out the unprepared and result in a tax liability.
Events can lead to a gain or loss, besides the obvious one of selling an asset. A gain may sometimes occur when you least expect it.
When making a gift to a child - or to other people or companies - is classed as a ‘disposal’ for Capital Gains Tax purposes. You'll need to work out if Capital Gains Tax is due. However, making a gift to a spouse, civil partner or charity usually won't lead to Capital Gains Tax liability.
If you’re left an asset or inherit an asset, it’s not liable to Capital Gains Tax until you sell or dispose of it. You’ll usually need to get a valuation of the asset at the date of receiving the asset, to work out the capital gain or loss on the eventual disposal.
When you divorce, separate or dissolve a civil partnership, you may end up transferring assets between you. These are disposals for Capital Gains Tax purposes. Whether you're liable depends on the date of transfer and whether you’re living together at the time
Inheritance Tax is actually little more than a rebranding of its predecessor, Capital Transfer Tax which, in turn, had replaced Estate Duty. It is known also as Death Duties.
The principal difference between Inheritance Tax and its predecessors is in the fact that there is a general exemption for most lifetime transfers to other individuals.
Inheritance Tax is payable on a transfer of value made by a person usually UK resident at any time. Most lifetime transfers to other individuals are exempt, or at least only become chargeable in the event of death of the person making the transfer within seven years of the date of the transfer.
Most chargeable events occur on the death of a person as this is when there is the largest transfer of value.
For UK domiciled individuals, Inheritance Tax liability arises on:
The net value of their entire estate at the time of their death, wherever situated:
- The Nil band rate (£325,000 for deaths occurring between 6th April 2009 and 5th April 2015)
- Any transferable nil rate band available
- Any other applicable exemptions & reliefs
- Certain lifetime gifts and other transfers
Non Domiciled individuals, then Inheritance Tax will generally only arise on any UK assets that you hold, including land and buildings situated within the UK.
When purchasing or leasing property, commercial or residential, in the UK there is a tax over the purchase price. This is called Stamp Duty Land Tax (SDLT).
If you buy either a freehold or a leasehold property and the purchase price is more than £125,000, you pay SDLT of between 1 and 15 per cent of the whole purchase price. See the table below for more detail.
If the purchase price is £125,000 or less you don't pay any SDLT.
Purchase price of residential property Rate of SDLT (percentage of the total purchase price)
- £0 - £125,000 - 0%
- £125,001 - £250,000 - 1%
- £250,001 - £500,000 - 3%
- £500,001 - £1 million - 4%
- Over £1 million to £2 million - 5%
- Over £2 million from 22 March 2012 - 7%
- Over £2 million (purchased by certain persons, including corporate bodies) from 21 March 2012 - 15%
SDLT Disadvantaged Areas Relief
If you buy property in an area designated by the government as 'disadvantaged' you may qualify for Disadvantaged Areas Relief. In this case the threshold for SDLT is £150,000.
There is a relief from SDLT for zero-carbon homes. All qualifying houses under £500,000 are exempt and houses bought for £500,000 or above will have their SDLT bill reduced by £15,000.
What counts as zero-carbon?
A zero-carbon home can be connected to mains electricity and gas but needs to have sufficient additional renewable power to cover the average consumption of a house over a year. In order to achieve this, the fabric of the building has to be insulated and built to very high standards and the house needs to incorporate renewable energy technologies. The house must be 'zero-carbon' over the course of the year.
As the buyer of the property, you are responsible for completing the land transaction return and paying the SDLT. However, in practice, your solicitor or licensed conveyancer will usually handle this for you and send it to HMRC on your behalf. You should check that all the information on the form is correct and complete before signing the declaration.
VAT is a sales or indirect tax you pay when you buy goods or services from a VAT-registered business in the European Union, including within the UK. There are varying rates of VAT and you don't have to pay VAT at all on some goods and services, see below, and sometimes you only pay a reduced rate.
In some circumstances you might be able to get a refund of VAT you have paid, for example if you live outside the European Union and are visiting the UK. Each European Union country has its own rates of VAT. In the UK there are three rates.
You pay VAT on most goods and services in the UK at the standard rate. The standard rate of VAT Increased to 20 percent on 4 January 2011 but was 17.5 percent for the period 1 January 2010 to
3 January 2011.
In some cases, for example children's car seats and gas and electricity for your home, you pay a reduced rate of 5 per cent.
There are some goods on which you don't pay any VAT, like:
- basic food items
- books, newspapers and magazines
- children's clothes
- some goods provided in special circumstances - for example, equipment for disabled people
Working Tax Credits
If you are in employment or in self employment and on a low income then you may qualify for Working Tax Credits (WTC). What you get will depend on your individual circumstances, your income from all sources and on how many hours you work each week. If you work less than 16 hours per week then you would have to look at other benefits, such as Income Support or Jobseeker’s Allowance.
In addition you may also qualify for Housing Benefit and Council Tax Benefit to assist with your housing costs and local authority charges.
Child Tax Credits
Child Tax Credits (CTC) is a benefit for households with children which are paid to one or other of a child parent, or if there is a family breakdown the person who is responsible for the child. This benefit is means tested and you don’t have to be working to qualify for this.