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Introductory Points - Employment Income - Trading Income Introductions… The Schedular Approach
Income Tax Act 2007 takes a schedular approach to the categories of income tax. S.3:
(1) Income tax is charged under• (a) Part 2 of ITEPA 2003 (employment income),
• (b) Part 9 of ITEPA 2003 (pension income),
• (c) Part 10 of ITEPA 2003 (social security income),
• (d) Part 2 of ITTOIA 2005 (trading income)
• (e) Part 3 of ITTOIA 2005 (property income)
• (f) Part 4 of ITTOIA 2005 (savings and investment income), and
• (g) Part 5 of ITTOIA 2005 (miscellaneous income)
Income is calculated differently under each of these heads. Means that all the calculations are different. It is a vastly complex system - maybe second only to Australia.
Global systems have 1 method of calculation.
There is a need for priority rules between the different schedules (see below).
There is no automatic loss offsetting of + in one schedule against - in another schedule, unless specific provision is made (we only consider this in the context of trade). This can be inconvenient
Comprehensive The Priority Rules
If payments made and received are the building blocks of the income tax, then we need to figure out which schedule they relate to. There should only be one such schedule, otherwise we may have double counting.
Income Tax (Trading and Other Income) Act 2005, s. 2: Overview of priority rules
(1) This Act contains some rules establishing an order of priority in respect of certain amounts which would otherwise-
(a) fall within a charge to income tax under two or more Chapters or Parts of this Act, or
(b) fall within a charge to income tax under a Chapter or Part of this Act and ITEPA 2003.
(2) See, in particular—
* section 4 (provisions which must be given priority over Part 2), (gives priority to property business provisions over trade provisions and ITEPA over trade s.366, which gives priority to employment, trade or property over investment (except dividends that have priority over ITEPA)
* section 261 (provisions which must be given priority over Part 3),
* section 262 (priority between Chapters within Part 3),
* section 366 (provisions which must be given priority over Part 4), (also look at this)
* section 367 (priority between Chapters within Part 4), (which gives priority to dividends from UK companies over other bits of investment (in particular interests))
* section 575 (provisions which must be given priority over Part 5), and
*section 576 (priority between Chapters within Part 5) ….
Provisions which must be given priority over Part 2
(1) Any receipt or other credit item, so far as it falls within—
(a) Chapter 2 of this Part (receipts of trade, profession or vocation), and
(b) Chapter 3 of Part 3 so far as it relates to a UK property business,
is dealt with under Part 3.
(2) Any receipt or other credit item, so far as it falls within—
(a) this Part, and
(b) Part 2, 9 or 10 of ITEPA 2003 (employment income, pension income or social security income),
is dealt with under the relevant Part of ITEPA 2003
So the order is:
employment (except dividends which leapfrog)
other investment income Tiley (2010) BTR on the re-write
When one has read all three of the primary income tax Rewrite Acts one is left with a variety of feelings. It is not just a matter of exhaustion. Sometimes the drafting is very clever and one experiences sometimes a little exhilaration, but when one stands back one is left with the overwhelming feeling that the UK
income tax has no principled structure.
the chances of reform are negligible as no government is going to be able to give money away for quite some time and the political costs of raising rates in other parts of the tax system will be seen as unacceptable. However, a government keen on reducing the conceptual junk-heap which the UK tax system has become could try harder. The 'Poverty Trap'
A major problem is the effect of the burden of tax on the lowest paid. It too much income tax, NI and other taxes are imposed on the lowest paid then they may find themselves in a position where it is better off not to work. The take home pay can end up being less than the social security benefits they can get if they didn't work. This is called the poverty trap.
Many steps have been taken to reduce this - i.e. income tax personal allowances for families and children were changed to tax credits. Increase in the exemptions and rates of income tax to remove lower paid workers. Calculation
ITA 2007, s.23: The calculation of income tax liability
Gives a step-by-step process for calculation
To find the liability of a person ('the taxpayer') to income tax for a tax year, take the following steps.
Step 1 Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.
The sum of those amounts is 'total income'.
Each of those amounts is a 'component' of total income.
Step 2 Deduct from the components the amount of any relief under a provision listed … in section 24 …
The sum of the amounts of the components left after the step is 'net income'.
Step 3 Deduct from the amounts of the components left after Step 2 any allowances to which the taxpayer is entitled (...) (individuals: personal allowance (…))
RESULT: taxable income
Step 4 Calculate tax at each applicable rate on the amounts of the components left after Step 3. [i.e. the thresholds apply to income as reduced by reliefs and allowances]
Step 5 Add together the amounts of tax calculated at Step 4.
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