Ch 3 - Taxation Flashcards
Personal taxation
tax levied on all of the financial resources of an individual such as:
-income both earned (wages + salaries) & unearned (investment income & rent)
-profit from operating as a sole-trader or partner
-CG (capital gains)
-inheritance
-wealth (property)
How are individuals (including partnerships) subject to tax?
-via income tax
-in addition, pay social security contributions
Explain how taxing CF’s and taxing in arrears can be done
CF’s
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tax is normally limited to CF’s due to it being indicative of cash being available to finance the tax payable (vs) property/wealth which may need to sell first in order for inheritance to be paid
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Arrears
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gov will want to ensure that citizens have sufficient retained income & wealth to meet their essential needs.
(they need to assess tax liabilities in arrears taking into a/c all relevant sources of wealth and/or income & there exempt some basic levels of income or wealth from calcs) -> tax rebates as well
How is income tax calculated (i.e taxable income)?
income in kind + investment income + (income earned + tax-free income +tax-free expenditure + allowance)
Tax-free income examples
-most profits from gambling
-most forms of social security benefit
-income from certain types of investments (ISA)
ISA= Individual savings a/c
[normally means-tested]
Tax-free expenditure
tax relief on some forms such as contributions to an approved pension scheme & charitable gifts
Income in kind
where employee receives additional ‘fringe’ benefits as well as a wage or salary (value of benefits are usually included)
e.g > company cars for private use, medical insurance premiums, subsidised mortgages
Investment income
grossed up and deducted at source can be offset against the person’s tax liability unless subject to tax-free allowances
What tax allowances normally need to be made before determining tax liability?
a) personal allowance (personal or family circumstances)
b) other additional allowances (age-related for older taxpayers)
(consideration must also be given to whether marginal tax rates should increase, remain the same or decrease as individual’s taxable base varies)
Capital gains tax (CGT)
individual subject to CGT on chargeable gains
[chargeable gain = sales price - purchase cost]
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exceptions (certain asset classes may be exempt) may occur such as:
>private motor cars
>main private residence
>forex obtain for personal use
>british securities & other qualifying fixed-interest stocks
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capital losses can be offfset against CG’s in the same year, but NOT other forms of tax
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sales price may be reduced to reflect any costs associated with sale or purchase cost increased & may have ALLOWANCES
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indexation allowance as well»_space; encourage individuals to retain assets
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CGT charged on individuals marginal tax rate»_space; between 10-20% for UK citizen
Company tax
on their taxable profits (income - allowable expenses - CG)
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Company’s accounting profit has to be adjusted to taxable profit by:
- adding any business EXPENSE / POTENTIAL EXPENDITURE that’s not allowable for tax
-adding back DEPRECIATION & deducting CAPITAL ALLOWANCE
-deducting any SPECIAL RELIEFS (R&D costs)
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Gov can use corporate tax to encourage/discourage certain behaviour (less tax on retained earnings than distributed for investment purposes)
Explain accelerated depreciation
allows the company to depreciate a large part of the machinery in the early years, thus increasing the company’s costs, decreasing its profit & therefore decreasing its tax liabilities in the early years
(profitability & the tax liablility will increase in the later years)
Give 3 types of other tax levied on companies & individuals
-stamp duty on contract documents
-inheritance taxes
-property taxes
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(May also be a system for levying tax on expenditure, either general (sales tax e.g VAT) or specific types of expenditure (custom duties or excise)
_*___*___*___*__
certain classes of ‘essential’ expenditure like food stuffs may be exempt from tax.
(specific taxes are designed to encourage certain patterns of consumer expenditure or to raise revenues for particular categories of gov expenditure)» i.e sugar tax but now artificial
Double tax relief (DTR)
Most countries have such agreements with each other. DTR indicates the local tax authority will allow companies & individuals with overseas income/capital gains to offset tax paid overseas against their liability to domestic tax on income or CG’s.
(max offset is the rate of tax that would have been paid locally)
Offshore investment funds
An offshore investment fund operates in a jurisdiction in which no little or corporate tax is
due and so the fund itself pays little or no tax.
Investors from a wide range of countries are then able to invest in the fund and pay tax on
the income and CG at the appropriate rates in their own countries.
