1. Taxation
Introduction

2. This lecture AIMS Brief outline of main taxes Income and capital
Tax administration
Start on income tax
AIMS
- to give you a brief outline of the main types of tax
- to look at the distinction between INCOME and CAPITAL for tax purposes
- to learn a little about the way tax is paid/collected ie the administration of the tax system
- then we will make a start on INCOME TAX, the first main topic
Can make notes if you wish
But 1st 3 parts (intro section) just listen if you like
Then when we start on IT, everything you need to know is in the Intro to Tax booklet.

3. What does a solicitor need to know about tax?
Some are experts on particular tax areas, legislation, etc.
Some are good tax planners
At the very least a solicitor must:
a. be able to spot a potential tax liability
b. either advise the client or see that someone else does
Why do you need to know about taxes ?
- you may want to be a tax lawyer and specialise in that area
- you may do some tax planning, particularly if you work for a firm with a lot of wealthy private clients, might be overseas clients who need IHT advice and related trusts/wills advice
BUT even if you are not doing these things, if you are going to be a competent solicitor then you must be able to:
- spot potential tax liabilities and
- either advise the client yourself OR refer them to someone who can do so.
And to be able to do these things you at least need to know the basics, which is what you will learn on the LPC.
An example of how the last situation might arise:
Matrimonial matters – client selling assets off as part of divorce settlement, might sell a holiday home or some shares, made gain on it, liable to CGT – need to spot this and advise accordingly.

4. Main taxes on this course See Chapter 1
Income Tax
Capital Gains Tax
Inheritance Tax
Corporation Tax
Stamp Duty
VAT
BUT we are going to concentrate on 6 main taxes on this course – SEE SLIDE
The Intro to Tax booklet has at least 1 chapter on each of these areas and there are also chapters in your BLP manuals on some of them.
During this foundation course, I will introduce you to IT, CGT, VAT and STAMP DUTY only.
You won’t be lectured on IHT but need to read the chapter in your booklet and there will be something on it in one of the BLP workshops.
Corporation Tax – will get separate lecture on this during main lecture programme and also a full workshop.
I will now go through the 6 main taxes in brief:

5. Income Tax Tax on income, e.g. Employment (wages from job)
Interest (building society or bank)
Dividends (from shares)
Profits of business
Property (landlord’s rent)

6. Capital Gains Tax Taxes the gain (i.e. the profit)
On disposal of assets
e.g. sell land & buildings, shares, etc.
Buy land for £100,000 and sell for £150,000
Capital gain of £50,000
(Note: giving property away may also be a ‘disposal’ for CGT, treated as a sale at market value)

7. Inheritance Tax
Mainly a tax on property transferred on death where the estate is worth more than £300,000
But transfers in 7 years before death also taxed (anti-avoidance measure)
(‘Potentially Exempt Transfer’ - PET)
As are some trust transactions

8. Corporation Tax Tax paid by companies
(Companies do not pay income tax, capital gains tax or inheritance tax)
Paid on income (e.g. profits of business, rent, interest, dividends, etc. received)
And on capital gains (company sells land at a profit, etc.)

9. Value Added Tax (VAT) Tax on supply of goods, services, sometimes land
Supplier has to be registered for VAT (compulsory if turnover is £64,000)
Supplier charges customers VAT
sends VAT collected (output tax) less VAT paid to others (input tax) with quarterly statement

10. Stamp Duty Traditionally a tax on documents
Document had to be stamped to show payment of the tax
Most stamp duty is ‘ad valorum’ (percentage of the value of the transaction)
Paid by purchaser
Still same for transfers of shares
Stamp Duty Land Tax for transfers of interests in land

11. Income and capital Page 3
Next topic
Income and capital
Page 3
So, we have looked at the areas of tax in brief
But an important point that you need to understand is the distinction between income and capital

12. Income and Capital Fundamental distinction - many implications
Income tax taxes income
Capital gains tax and inheritance tax are taxes on capital
Important also to determine whether money spent is income expenditure or expenditure on capital

13. Income Not defined by statute, much case law Fruit tree analogy
Fruit from the tree is income
The tree itself is capital
e.g. Buy shares (capital expense)
Receive dividend on them (income)
Sell them at a profit (capital gain)
So the shares = capital

14. Capital is to be kept The tree that produces the fruit
Land and buildings
Fixtures and fittings
Plant and machinery
Shares
Copyright, patent, trade mark, website, etc

15. Example BUSINESS (DIY store) buys equipment (e.g.paint mixing machine)
= capital so £ spent = capital expense
buys stock for resale (paint)
not capital, £ spent = income expense
LANDLORD
pays for improvements to property (extension)
= capital expense
pays for repairs (fix alarm system)
= income expense
These are INCOME TAX issues
BUSINESS – eg a DIY store
- BUYS EQUIPMENT eg paint mixing machine
the equipment = capital so £ spent on buying it = a capital expense
For INCOME TAX purposes nothing happens
can’t claim £ spent back against income profits made in that year
HOWEVER, there will be other tax consequences
- capital allowances and
- possibly Capital Gains Tax
- BUYS STOCK for resale eg paint
This is not capital
£ spent on the paint = an income expense
and so for income tax purposes the business can claim back the £ spent on the paint against income profits made in the same year
So in a particular year a business may spend £ on all sorts of things, like plant & machinery and stock but only certain items can be set off against the profits made in that year, for income tax purposes.
LANDLORD – owns a property and rents it out
- PAYS for IMPROVEMENTS eg an extension to the building
this is a capital expense
- PAYS for REPAIRS eg fix the central heating system
this is an income expense
So for the Landlord’s purposes here, the cost of repairs could be set off against income profits but not the cost of improvements.
There can be payments made where the distinction is not clear and would need to refer to an accountant or the IR for help.

16. Basic tax administration Page 3
Next topic
Basic tax administration
Page 3
So, looked at the distinction between income and capital
Now look at the tax administration system

17. Tax year
IT, CGT, IHT based on tax year running from 6th April to following 5th April
Corporation tax assessed on year 1st April to 30th March

18. How do people pay their tax ?
SELF EMPLOYED – sole traders/partners
Self Assessment System
EMPLOYED
PAYE system re income from employment
Self Assessment re income from other sources, if any eg rent, dividends and also re capital gains

19. Self-assessment INDIVIDUALS
submit self-assessment tax return every year
either by 30th September and HMRC calculates tax (pay by 31st January next) or send return by 31st January with the tax due (calculated by taxpayer or accountant)
COMPANIES
submit a company tax return and
tax is due 9 months after end of the company’s accounting period

20. Further details
See notes on Appeals, Commissioners, etc. on pages 4 -5
There is further info in you tax booklets on the appeals procedure, the commissioners etc but don’t need to take that any further

21. The basic system See Chapter 2 page 7
Income Tax
The basic system
See Chapter 2 page 7
Now moving on to look at our first main topic - IT

22. The Income Tax (Trading and Other Income) Act 2005
The Categories
Property Income - receipts from land and buildings in UK
Trading Income - profits of trade, profession or vocation in the UK
Savings and Investment Income – interest on savings, dividends, etc
Employment Income – income from offices, employments and pensions – ITEPA 2003
NB – Trading income relates to self employed individuals so imp for BLP purposes
Also – E re salaries (PAYE)

23. Tax rates See rates on page 7:
Note personal allowances - tax free income (single allowance of £5,225)
Above that:
10% ,230
22% 2, ,600
40% over 34,600

24. Rates for savings income
Interest received: 20% and 40%
Dividends: 10% and 32.5%

25. Top slicing
If an individual has different types of income, they must be treated in a particular order
Some are ‘top sliced’
Dividends come at the very top
Other savings income next
Then non-savings income -employment, trading and property income
What does this actually mean ?

26. Calculate income tax – see chp2
Step 1: Ascertain total income - add up income from all sources
Step 2: Ascertain net income - deduct certain reliefs from the appropriate income
Step 3: Deduct personal allowances – starting with the non-savings income first, the ‘bottom slice’
Step 4: Calculate tax payable using appropriate tax rates for each type of income
Step 2 – deduct charges – these are things like interest paid by the individual on certain qualifying loans (won’t go into this in detail during the course)

27. Calculate income tax See example pg 10
Step 1: Add up all income
30, ,000 = 45,000 (total income)
Step 2: Deduct reliefs
None = 45,000 (net income)
Step 3: Deduct personal allowances
45, ,225 = 39,775 (taxable income)
Step 4: Apply tax rates

28. Apply tax rates See pg 10 Taxable income = £39,775
10% 0 - 2,230 (2,230) =
22% 2, ,600 (32,370)= 7,121.40
40% 34, ,775 (5,175)= 2,070.00
Total tax payable = £9,414.40

29. Practice question
Ahmet has trading income of £47,500 in tax year 2007/08.
He has no other income from any other sources and is entitled to the single person’s allowance.
Calculate the income tax payable.
(you only need to start from step 3)

30. Answer Total income = £47,500 Deduct personal allowance £5,225
Taxable income = £42, 275
10% 0 - 2,230 (2,230) =
22% 2, ,600 (32,370)= 7,121.40
40% 34, ,275 (7,675)= 3,070.00
Total tax payable = £10,414.40

31. Next lecture Income tax on Employment Income
Savings and Investment Income
Prepare by reading
Introduction to Tax, chapters 3 & 4
Summary of today:
Looked at why you need to know about tax,
Ran through the main taxes we will be looking at,
The distinction between income and capital and why difficulties can arise
Some basics re the tax admin system
And we have also started on our first major topic – Income Tax