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Tax Environment
In the UK, taxes are collected by HM Customs and Excise and the Inland Revenue.
HM Customs and Excise collects customs duties, excise duties and value added taxes (VAT). The department is also responsible for enforcing import and export prohibitions, and controls the influx of international goods into the country.
All other taxes are collected by the Inland Revenue.
In comparison to the rest of Europe, the UK has low tax rates. Both personal and corporate rates are lower than across the continent and have served as an inducement for inward investment. All worldwide income, both personal and corporate, arising from a UK base will be liable for UK tax.
The UK tax year runs from 6 April to 5 April.
Taxes can be paid in a variety of ways. Payment can be arranged through your bank, through the post office, by debit card or by sending payment to the accounts office of the Inland Revenue.
While the UK tax system is clear, it is advisable to work with a tax expert in order to avoid discrepancies. For those processing their own taxes, forms can be obtained and enquiries answered via the web sites of the Inland Revenue, and HM Customs and Excise.
If you are coming from abroad, an understanding of your home country’s tax treatment of foreign residents is needed. US citizens should consult the US Internal Revenue Service (IRS). Depending on your British residency status, as well as income, you may have to pay some US taxes while living in the UK.
HM Customs and Excise
Tel: 0845 010 9000 (National Advice Service – UK only)
Tel: +44 (0) 20 8929 0152 (international callers)
E-mail: enquiries.lon@hmce.gsi.gov.ukWebsite: www.hmce.gov.uk
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 | Inland Revenue
Tel: +44 (0) 20 7667 4001
Website: www.inlandrevenue.gov.uk – advice, forms, newsletters and general information on all aspects of taxation in the UK. |
 | Accounts Office:
Accounts Office Cumbernauld
St Mungo’s Road
Town Centre
Cumbernauld
Glasgow G70 5TR
Tel: +44 (0) 1236 736 121
Fax: +44 (0) 1236 783 672 | | Inland Revenue Services (IRS)
Website: www.irs.gov | |
www.irs.gov/businesses/small/international/index.html (for foreign tax status) – for information about the tax status of Americans living overseas.
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Business Tax
Corporate tax is paid by all firms based in the UK. All worldwide profits by a UK resident company will be liable for this tax. Further, all profit made from trade with the UK is liable for corporation tax whether or not the firm is based in the UK.
The UK has, in recent decades, imposed a lower corporate tax rate than across the rest of Europe. The result has been a competitive advantage in attracting inward investment. However, in recent years, this situation has begun to change. According to a recent KPMG survey, the average level of corporation tax in the world’s 30 richest countries has fallen from 37.5% to 30.8% between 1996 and 2003, bringing the average close to the UK level.
The amount of corporation tax you pay is dependent upon the size of your company that, in turn, is determined by the amount of profit it generates:
For companies earning profits of between £10,000 and £50,000 ($78,773) corporate tax will be between 10% and 20%;
If profits total less than £300,000 ($450,924.39), you are eligible for a reduced tax rate of 20%;
If you run a business with profits ranging from £300,000 to £1.5 million ($2.254,621.90) your company will be taxed between 20% and 30%;
A large company with profits in excess of £1.5 million ($2.254,621.90) is taxed at 30%.
Corporate Tax is payable to the Inland Revenue. For precise details and further enquiries, visit www.ir.gov.uk/stats/corporate_tax/menu.htm.
As well as taxation on profits, companies are responsible for the payment of other commercial taxes, most notably those relating to their employees. Most employers will deduct National Insurance Contributions (NICs) as well as Income Tax (PAYE – Pay as You Earn Scheme) from their employees’ income.
For all commercial taxation and regulation, however, it is best to consult a tax expert.
Inland Revenue
Tel: +44 (0) 20 7667 4001
Website: www.inlandrevenue.gov.uk – advice, forms, newsletters and general information on all aspects of taxation in the UK. |
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Income Tax
Direct personal taxation comes in two varieties – Income Tax and National Insurance contributions.
As an employer, you will usually withhold your employees’ income tax and forward it to the Inland Revenue. This is called the Pay As You Earn system (PAYE), and comprises income tax and national insurance contributions. You may, however, choose not to withhold your employees’ income tax. In this case every individual is obliged to complete an annual tax return form declaring both earned and unearned income, which is then assessed for tax purposes by the Inland Revenue.
PAYE is normally returned monthly by employers to the Inland Revenue. See their website for month-by-month guidelines.
You are likely to be required by law to offer your employees access to a stakeholder pension scheme to help them save for their retirement. This is called employer access requirement and means you have to designate a scheme that your employees can join if they want to. Employees do not have to join and employers do not need to contribute to the fund. If you are employing less than five people you do not need to offer such a scheme. For more a more detailed description, visit www.pensionguide.gov.uk.
See the Inland Revenue web site pages for employers for more information. A comprehensive guide of the taxes and regulations for employers, along with the necessary forms, is available there.
Inland Revenue
Tel: +44 (0) 20 7667 4001
Website: www.inlandrevenue.gov.uk/employers – this section of the Inland Revenue website has a complete A-Z and month-by-month of all employers need to know when applying tax rates to their staff in the UK |
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See also Personal Tax.
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Personal Tax
Most countries have a tax agreement with the UK and, as an expatriate, your tax status will change when you leave your home. Americans are given a tax credit by the IRS, subject to credit limitations, for foreign income taxes paid. However, if you are earning income in the UK, the UK authorities will have primary jurisdiction over that income.
If you are employed by a company in the UK, tax will be deducted by the Inland Revenue using the PAYE (Pay As You Earn) scheme. In addition, National Insurance (social security) contributions are deducted from your pay if you are an employee, or are payable with your income tax if you are self-employed. You should discuss your tax status with your employer as expatriates have different remuneration packages.
How is the UK tax basis determined?
The basis by which you are taxed is determined by your domicile and residency status.
How does my domicile affect my taxable income?
Your domicile is, in English Law, the country with which you are considered most strongly connected, although you may be a resident in another country. Being regarded as domiciled outside the UK can be favourable for UK tax purposes because you are generally not taxable on income arising overseas, unless you remit or bring the funds into the UK. Nevertheless, it is advisable that you seek a ruling from the Inland Revenue as soon as you arrive in order to plan your tax situation accordingly.
When does my residency status change?
Your residency status is generally determined by the length of time you are in the UK. As this is relative to UK tax years, which run from 6 April to 5 April each year, there is scope for organising your visits to ensure you are in the most advantageous category, for example, “non-resident”, “resident but not ordinarily resident” or “ordinarily resident”.
How can I minimise my UK tax burden?
i. Through your employment contract
This lays down, amongst other things, the nature of your duties. It is therefore useful for formalising an arrangement that satisfies the objectives in respect to tax planning. For instance, if you are ordinarily resident in the UK and you have a single contract, you will be assessed for tax on your total earnings, whether the duties are carried out in the UK or not. If, however, you have a separate employment contract with a non-resident employer, the duties of which are all performed overseas, your earnings are assessed for tax to the extent that they are remitted to the UK.
ii. Use of offshore funds
Through offshore funds, you can drip-feed the remittance of your income arising outside the UK and, by so doing, either delay or mitigate the payment of tax.
iii. Benefits in kind
It is common practice in the UK to remunerate a senior executive not only by cash but also through payment in kind. With payment in kind, you are only taxed on the benefit instead of meeting the full cost of the expenditure yourself.
iv. National Insurance contributions
Ordinarily, a UK employer is obliged to pay National Insurance and to deduct an amount from the employee for contribution. However, obtaining an exemption certificate in the US will mean that neither the employer nor the employee will have to pay this.
Income Tax Rates
Regular income tax rates within the UK are as follows:
Starting rate: 10% – £0-1,960
Basic Rate: 22% – £1,961-30,500
Higher Rate: 40% – £30,500+
For the Inland Revenue’s guidelines on Income Tax, visit: www.inlandrevenue.gov.uk/leaflets/c1.htm
For the Inland Revenue’s guidelines on National Insurance, visit: www.inlandrevenue.gov.uk/leaflets/nic.htm
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Sales Tax
Sales taxes and duties are a significant revenue-raising mechanism used by the Government in the UK. Where a sales tax is levied, it will normally be included in the price of the goods or service.
The most common sales tax is VAT (Value Added Tax), placed on the consumption of certain goods and services. It is collected at every stage of production and distribution and set to a standard rate of 17.5%. Most goods sold in the UK will be liable for VAT and prices will therefore be increased by 17.5%.
Fuel, gas and electricity carry a reduced rate of 8% for residential use. A small number of consumer goods, such as books or children’s clothes, are exempt from VAT, as are certain public services including healthcare, insurance and public transport. There is no VAT on exports.
VAT refunds are possible for those exiting the EU fiscal zone within three months of the payment of the tax. Refunds will be dealt with through the retailer where you paid the tax. Upon purchase of the goods, the retailer will issue you with a VAT refund form which must be signed by a customs officer after he has examined the goods in question as you leave the country. The officer will sign the VAT refund form and, once signed, you can send it to the retailer who will issue you a refund.
There are other more specific sales taxes that are placed on certain goods. Alcohol, cigarettes and petrol, for instance, all incur large taxes.
For more information regarding sales tax, contact HM Customs and Excise:
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Tax Experts
Britain is among the lower-taxing of the EU countries; it has two, reasonably easy-to-understand tax bands of 23% and 40%, depending on earnings. However, it is unusual in that the tax year runs from 6 April to 5 April, instead of during the calendar year, and the complicated set-up of the tax declaration makes it necessary for many foreign nationals to file a yearly tax return.
The most sensible advice on local taxation is to consult an expert.
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