What everyone needs to know about tax : an introduction to the UK tax system

158 Pages·2017·0.65 MB·English

by  Hannam

What Everyone Needs
to Know about Tax
What Everyone Needs
to Know about Tax
An Introduction to the UK Tax
System
James Hannam
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Bart Invictus
Contents
About the author xi
Introduction xiii
1 Taxes on your income and earnings 1
Income tax and national insurance 1
National insurance contributions 3
Paying tax 7
Taxes on high earners 10
The Laffer curve 13
Sports, prizes and betting 16
With betting, the tax inspector always wins 18
The poverty trap 20
2 Taxes on what you spend 23
Value added tax 23
How VAT works 27
Zero rated and exempt from VAT 30
Europe, Brexit and VAT 32
Customs and excise 34
Excise duties 36
Fuel duty and green taxes 41
Oil and gas extraction 44
Green taxes 45
Global warming 47
vii
Contents
3 Taxes on what you own 51
Capital gains tax 51
Paying capital gains tax 54
Taxes on homes and property 56
Inheritance tax 57
Stamp duty land tax 59
Council tax 62
Buy to let 63
The mansion tax and wealth taxes 65
Taxes on pensions and saving 67
Other ways to save 71
How to live comfortably while paying almost
no tax at all 72
4 Taxes on business 77
Taxing business 77
Tax on the self‐employed and small businesses 78
Tax on companies 79
Personal service companies 81
The tradesman’s entrance 84
Multinationals and international tax 86
Territorial taxes 88
Tax havens 90
A bit of BEPS 91
Where does big business make its profits? 93
Tax competition 97
Taxing what you can’t touch 99
Taxes on financial transactions 103
5 Taxes evaded, avoided and reformed 107
Film finance: how governments encourage
planning, avoidance and evasion 107
Tax evasion 113
Tax avoidance and the general anti‐abuse rule 117
A changing climate 119
Avoiding income tax 122
The new fight against aggressive avoidance 124
viii
Contents
Tax planning 126
Tax reform 128
1. Stop cutting income tax and start cutting
national insurance 130
2. Start the 45% tax rate at £100,000
instead of £150,000 130
3. Tax companies according to their
accounting profits 130
4. Expand the scope of VAT 131
5. Introduce a minimum income tax rate
for the wealthy while abolishing most income
tax anti‐avoidance rules and incentives 131
Conclusion: the Three Golden Rules of tax 133
The First Golden Rule: Lots of small taxes
together add up to make big tax bills 133
The Second Golden Rule: No matter what
name is on the bill, all taxes are ultimately
suffered by human beings 134
The Third Golden Rule: Taxes are kept as
invisible as possible 135
Index 139
ix
About the author
James Hannam is a graduate of the universities of Oxford and
Cambridge. He has worked as a tax advisor for 20 years at several
City of London institutions including KPMG, Barclays Bank and
Freshfields. For the last eight years he has been with EY. He lives in
Kent with his wife and two children.
By the same author:
God’s Philosophers: How the Medieval World Laid the Founda-
tions of Modern Science
xi
Introduction
Why you should read this book
You pay a lot of tax. Of course, you know that. But I bet you don’t
know just how much you pay or all the ways the government has to
extract the cash from you. I think that’s something you really need
to know. It will make you into a better‐informed voter who can see
through the cant of politicians and the distortions in the media. I’m
not asking whether we should pay more or less tax. I am saying
that, even before we can answer that question, we have to under-
stand about the tax we pay already.
By the end of this book, I hope you’ll also see why with tax, as
with so much in life, there are no straightforward solutions. We can’t
raise huge amounts of money just by taxing high earners and multi-
national companies, or by closing loopholes and chasing tax evaders.
Were it that simple, the government would already be doing it. So, if
we want the NHS, state education, a half‐decent army and a welfare
state, we just have to cough up. No one else is going to do it for us.
Before we start, an important word of warning: this book is not
intended to help you pay less tax. A common version of the UK tax
code, containing the law and various pieces of official guidance, is
about 24,000 pages long. On top of that, there are at least 82 vol-
umes of court decisions going back to 1875 and reams of material
from the UK’s tax authority, HM Revenue & Customs (usually
abbreviated to HMRC). This book only has about 160 pages and
xiii
Introduction
the print is rather larger than in the standard edition of the legisla-
tion. That means you should not, under any circumstances, take
action in respect of your tax affairs on the strength of what you
read in these pages. No really, don’t. It would be like attempting
cosmetic surgery with only the expertise that you have gleaned
from reading The Silence of the Lambs. Whether you are running a
large company or living off a modest pension, you owe it to your-
self to get some decent tax advice before risking any money. Even
when I make some apparently definitive statement in these pages
on, for example, ISAs or the VAT treatment of Jaffa Cakes, please
don’t take it at face value. The UK tax system is so unfeasibly com-
plex, so Byzantine in its intricacy and changes so quickly, that even
the simplest rules can have a dozen exceptions. In short, the pur-
pose of this book is to help you become a more knowledgeable
taxpayer and voter, not to save you money.
Income taxes
Let’s look at some of the taxes you pay. If you are a worker, your
employer will have been deducting tax and national insurance con-
tributions from your pay packet each month and paying it directly
over to the government. There’s more: your employer also has to
pay national insurance contributions on top of that. That’s in addi-
tion to the national insurance that you pay. For a worker on an
average wage of £26,500 a year, all those taxes comes to almost
£8,000 a year: an effective tax rate on earnings of 30%. You prob-
ably know the basic rate of income tax is 20%, so you might be
surprised to hear the effective tax rate for an average voter is rather
higher than that, even taking into account the tax‐free annual
allowance. Of course, this is for workers on £26,500. If you are
lucky enough to earn more, your effective tax rate will be even higher.
The cunning thing is the way the government collects all this
tax. You earn the money, but the government diverts its share into
the Treasury’s coffers before you ever get your hands on a penny.
The system of Pay As You Earn (usually abbreviated to PAYE)
xiv