Melville's Taxation: Finance Act 2020 ePub

Alan Melville

• Publisher: Pearson
• Year: 2020
• ISBN:
  9781292360737
• Edition: 26
• Topic: Commerce
• Subtopic: Fiscalité

For undergraduate and graduate courses in Taxation, and for professional use.

Get clarity on UK taxation rulesand policiesin this up-to-date guide for year 2020

Taxation, 26thEdition, by Alan Melville, updated with 2020's Finance Act, is the definitive, market-leadingtexton UK taxation and is known for its up-to-date coverage of the changes introduced by the annual Budget.Featuring clean, well-structured prose and a wealth of immensely practical examples, this comprehensive guide serves as both a core textbook if you are studying taxation for the first time and a reference text that clearly explains the UK tax system and taxation regulations.

Additionally, afree to access CompanionWebsite features opportunities for extra practice, pluschapter appendices anda range of useful links to explore taxation rules and the tax system further.

Pearson, the world's learning company.

Part 1

INCOME TAX AND NATIONAL INSURANCE

Chapter 1

Introduction to the UK tax system

Introduction

The purpose of this first chapter is to provide an overview of the UK tax system. The principal UK taxes are introduced and classified and the main sources of taxation law are explained. This chapter also deals with:

• (a)the structure and functions of Her Majesty's Revenue and Customs (HMRC) which is the organisation responsible for the administration of the UK tax system
• (b)the annual procedure which is used to determine the tax liability of an individual.

The chapter concludes by distinguishing between tax avoidance and tax evasion.

UK taxes

The UK taxation system is composed of a number of different taxes, some of which are direct taxes and some of which are indirect taxes:

• (a)Direct taxes are charged on income, profits or other gains and are either deducted at source or paid directly to the tax authorities. The main direct taxes which are payable by individuals are income tax, capital gains tax and inheritance tax. The main direct tax that is payable by companies is corporation tax. All of these taxes are administered by HM Revenue and Customs (HMRC), which was formed in April 2005 when the Inland Revenue and HM Customs and Excise were merged together. National Insurance contributions, which can also be looked upon as a form of direct taxation, are administered by the NICs and Employer Office of HMRC.
• (b)Indirect taxes are taxes on spending. They are charged when a taxpayer buys an item and are paid to the vendor as part of the purchase price of that item. It is then the vendor's duty to pass the tax on to the tax authorities. The indirect taxes include value added tax (VAT), stamp duty, customs duties and the excise duties levied on alcohol, tobacco and petrol. The only indirect tax considered in this book is VAT, which is also administered by HM Revenue and Customs.

Sources of tax law

There is no single source of UK taxation law. The basic rules are laid down in Acts of Parliament but it is left to the courts to interpret these Acts and to provide much of the detail of the tax system. In addition, HMRC issues a variety of statements, notices and leaflets which explain how the law is implemented in practice. These statements have no legal backing but they explain the tax authorities' interpretation of the law and will be adhered to unless successfully challenged in the courts.

Statute law

The basic rules of the UK tax system are embodied in a number of tax statutes or Acts of Parliament. The main statutes currently in force for each tax are as follows:

Tax	Statute	Abbreviation
Income tax	Capital Allowances Act 2001	CAA 2001
	Income Tax (Earnings and Pensions) Act 2003	ITEPA 2003
	Income Tax (Trading and Other Income) Act 2005	ITTOIA 2005
	Income Tax Act 2007	ITA 2007
National Insurance	Social Security Contributions and Benefits Act 1992	SSCBA 1992
Capital gains tax	Taxation of Chargeable Gains Act 1992	TCGA 1992
Inheritance tax	Inheritance Tax Act 1984	IHTA 1984
Corporation tax	Taxation of Chargeable Gains Act 1992	TCGA 1992
	Capital Allowances Act 2001	CAA 2001
	Corporation Tax Act 2009	CTA 2009
	Corporation Tax Act 2010	CTA 2010
Overseas aspects of tax	Taxation (International and Other Provisions) Act 2010	TIOPA 2010
Value added tax	Value Added Tax Act 1994	VATA 1994
Administration of }	Taxes Management Act 1970	TMA 1970
the tax system }	Customs and Excise Management Act 1979	CEMA 1979

These statutes are amended each year by the annual Finance Act, which is based upon the Budget proposals put forward by the Chancellor of the Exchequer. Some of the tax statutes provide for the making of detailed regulations by statutory instrument. A statutory instrument (SI) is a document which is laid before Parliament and (in most cases) automatically becomes law within a stated period unless any objections are raised to it.

European Union law

Membership of the European Union (EU) involves adherence to EU law. Member states are not required to adopt a common tax system but must nonetheless comply with a variety of EU Directives, some of which are concerned with taxation (principally VAT). Although the UK has now left the EU, there is currently a transition period^† during which EU law is still applicable in the UK. This will last until at least 31 December 2020.

In addition to the EU rules relating to VAT, EU "State aid" approval must be sought for amendments to UK tax-advantaged schemes such as the Enterprise Investment Scheme (see Chapter 6) or the R&D tax credits scheme (see Chapter 23). Furthermore, decisions made in the European courts may trigger changes to UK tax law, as occurred in relation to the tax treatment of the losses of overseas subsidiary companies (see Chapter 32).

^†At the end of the transition period, it is presumed that EU laws will no longer apply in the UK and that the UK will be at liberty to modify its tax system in any way that it pleases.

Case law

Over the years, taxpayers and the tax authorities have frequently disagreed over the interpretation of the tax Acts. As a result, many thousands of tax cases have been brought before the courts. The decisions made by judges in these cases form an important part of the tax law of the UK and some of the more significant cases are referred to in this book.

Statements made by the tax authorities

The main statements and other documents produced by HM Revenue and Customs as a guide to the law on taxation are as follows:

• (a)Statements of Practice. An HMRC Statement of Practice (SP) sets out the HMRC interpretation of tax legislation and clarifies the way in which the law will be applied in practice. For example, SP 4/97 (the fourth SP issued in 1997) deals with the taxation treatment of commissions, cashbacks and discounts.
• (b)Extra-Statutory Concessions. An Extra-Statutory Concession (ESC) consists of a relaxation which gives taxpayers a reduction in liability to which they are not entitled under the strict letter of the law. In general, concessions are made so as to resolve anomalies or to relieve hardship. For example, ESC A91 deals with the taxation treatment of living accommodation provided by reason of employment.
  A process of giving statutory effect to certain ESCs is currently underway. This is generally being done by means of statutory instruments.
• (c)Announcements. Announcements (and other notices and documents) are issued by HMRC throughout the year on a wide variety of tax-related subjects. Of especial interest are the documents issued on Budget day, which provide a detailed explanation of the Budget proposals.
• (d)Internal Guidance Manuals. HMRC produces a comprehensive set of internal tax manuals for the guidance of its own officers. These manuals may be accessed on the HMRC website (see below).
• (e)Explanatory publications. Leaflets, factsheets and booklets are aimed at the general public and explain the tax system in non-technical language. These can usually be accessed online, though some are still available in printed form.

Most of the above information is now available on the HMRC website, the address of which is www.gov.uk/government/organisations/hm-revenue-customs.

The tax year

The changes to the tax system that are proposed in the annual Budget speech are usually intended to take effect as from the start of the next tax year. Tax years for individuals and for companies are identified as follows:

• (a)For individuals, a tax year runs from 6 April to the following 5 April. For instance, tax year 2019-20 began on 6 April 2019 and ended on 5 April 2020. Tax years are also referred to as fiscal years or years of assessment.
• (b)For companies, a corporation tax financial year runs from 1 April to the following 31 March and is identified by the year in which it begins. For instance, the financial year referred to as FY 2019 began on 1 April 2019 and ended on 31 March 2020.

This book takes into account the provisions of Finance Act 2020^‡ (which is based on the March 2020 Budget^†) and describes the UK taxation system for fiscal year 2020-21 and corporation tax financial year FY2020.

^†In 2016, the Government announced its intention of moving back the annual Budget from March (its traditional slot in the legislative timetable) to Autumn of the previous year. However, the Budget planned for November 2019 was delayed by a General Election and eventually took place on 11 March 2020. Future Budgets are expected to revert to an Autumn date.

^‡At the time of writing, Finance Act 2020 (which implements the March 2020 Budget proposals) has not yet passed through all of its parliamentary stages but is...