Guide
to UK Taxation To contact us and
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Taxation in the United
Kingdom has developed over centuries and is now a very complex subject, based
not only on statute law and European law, but also on a large body of case
law and precedent, together with extra statutory concessions. This website
cannot hope to cover the entire subject, and specialist advice is essential
for any specific situation. We would refer you to the terms of use of this website in which we explain
that we can only cover issues in general. |
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Deadlines For a guide to the
legal deadlines and dates that should not be missed click here Tax rates For details of current rates of tax and allowances that are
available click here State benefits and
entitlements For details of
state benefits and entitlements click here |
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Local Taxes The United Kingdom
is a centralised nation state, and local taxation is entirely governed by
national laws. Local government taxes are
known as Council Tax for individuals and Unified Business Rate for
businesses. Council tax is set by local authorities according to national
rules. Unified Business Rate is effectively set at a national rate but
collected by local authorities. In Scotland there is a power granted to
devolved government to raise a levy as a Scottish Income Tax. This is
collected through the national income tax system, and is capped at 1p in the
£ by the United Kingdom government. Local taxes are not covered on this
website. |
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National taxation
There are a number
of different forms of direct and indirect taxation. Fuller details of each of
these are given in the links below this section. These national taxes include
:- Income Tax levied on earned income, and
collected by the Inland Revenue. National Insurance collected by the
Inland Revenue from all earners under 65 and from all employers to fund the
National health Service and the benefits system. Capital gains tax levied on gains
arising on the disposals of assets and investments, and collected by the
Inland Revenue. Inheritance tax levied on assets
that are gifted or pass on death, and collected by the Inland Revenue. Value Added Tax (VAT) a European
wide tax levied on the sale of goods and the provision of services. Although
a European tax the actual rates and bases of liabilities are set by
individual national governments within parameters set out by European
directives. VAT is collected by HM Customs and Excise. Stamp Duty levied on the sale of property
assets collected by the Inland Revenue. ( a quite distinct tax from Capital
Gains Tax) Corporation tax is levied on the profits of companies and organisations, and is
collected by the Inland Revenue. Excise and Customs
duties on imports of goods and the sale of items such as tobacco products, and
petrol and other oil products. These are collected by H M Customs and Excise.
These taxes are beyond the scope of this website. Other taxes beyond
the scope of this website include Environmental Levies, Land Fill Tax and
Petroleum Revenue Tax. |
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For key details of Capital Gains Rates and
Allowances Click here Capital gains tax is the tax levied on gains
on the disposal of capital assets, such as stocks and shares, freehold
property and so on. The basic principles of computing a gain
are relatively simple. If an asset is sold, the sale proceeds are reduced by any
sale costs, and by the original cost of the asset, and any improvements to
the asset since it was acquired. However, the simple gain as computed
above, is complicated by various adjustments that the legislation has
introduced to make the gain fairer. Firstly, the sale proceeds can be altered
to market value if the transaction is between connected persons. Secondly, the gain can be reduced by an
allowance for inflation. Until recently, this was an indexed calculation
based on the inflation index, and was called indexation relief. Now, the
relief is given by way of taper relief, so that the amount of the gain is
reduced by a certain percentage dependent on the nature of the asset and the
number of years it has been owned. This can mean that the timing of the sale
can produce savings in tax. Thirdly, in certain circumstances a gain
on the sale of an asset, instead of being taxed immediately, can be deferred
or ‘rolled over’ by reducing the cost of purchase of another asset, so that
there is a higher gain when that asset is itself disposed of. There are also rules about the sale of
stocks and shares which make the calculation in those cases a little more
complicated. All these complications mean that there is
an opportunity for reducing the tax eventually payable by planning sales and
disposals. That in itself means that proper advice should be taken before
decisions to buy or sell assets are taken. Certain assets are exempt from capital
gains tax. So, for example, if you have lived in a house for the entire time
you have owned it, any gain you make is tax free. This exemption can even be
preserved if you subsequently let the house out, because there is a
substantial relief for lettings. The taxation of properties in which you have
lived at some time but not at others can be effected by the precise dates and
periods, and it is sensible to seek proper advice before deciding to leave a
property or let it out, or move back into a property in which you previously
lived. Once the gain has been calculated, in the
case of an individual the gain is reduced by an annual amount known as the
tax free exemption, to produce a gain that is subject to tax. In both the cases of an individual and of
a company, having calculated the gain that is subject to tax, the gain is
then added to the income of the individual or the company for the year
concerned, and taxed as if it were income. In circumstances where this could
cause hardship, it is sometimes possible to spread the payments of tax over a
number of years. Capital Gains Tax is basically a simple
tax that has become very complicated over the years, and detailed
professional advice should be taken. Peter Brown & Co would be happy to
help in these areas. |
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For key details of
VAT rates click here For details of Vehicle benefits for
VAT VAT is a European wide tax levied on the sale of goods and the provision
of services. Although a European tax the actual rates and bases of
liabilities are set by individual national governments within parameters set
out by European directives. VAT is collected by HM Customs and Excise. In the UK, VAT is
added to any charges for the sale of goods or the provision of services at a
rate of usually 17.5%, but sometimes at a lower rate of 5% for the supply of
domestic gas and electricity, and sometimes at zero per cent in connection
with the supply of food and similar items. Certain items, such as the
provision of financial services, are exempt. There is a technical difference
between items taxable at a zero rate and those that are exempt. A trader must
register for VAT to account if the aggregate supplies in a year exceed a
certain amount. The limit does vary from year to year but has been in the
region of just over £50,000 for a number of years. If a trader passes the
limits, or even expects to pass the limits, and fails to register, he will be
guilty of an offence, and liable to substantial fines. A trader with turnover
below the limits can register voluntarily, and it depends on the nature of
his business whether it is advantageous to do so. A registered
trader accounts for VAT by totalling up all the VAT he has added to his sales
in a period (usually a calender quarter) and then deducts from that figure
any VAT that he has paid out on his own purchases of goods and services. This
is why it can be beneficial to voluntarily register, because if a trader
sells goods such as food, which are zero rated, then he has no VAT to account
for on sales, but he can reclaim VAT on his expenses. If a registered
trader fails to submit a return or pay the VAT to Customs and Excise, he is
subject to penalties. The summary above
covers the basic principles. However, tax life is never as easy as that.
There are lots of special rules for various trades or types of transactions.
Some of the main special rules are:- ·
For antique
dealers and second hand dealers ·
For retailers
relating to the calculation of VAT on sales ·
For reclaiming VAT
on motor expenses and cars ·
For traders with
small levels of turnover ·
For land and
property transactions ·
For charities ·
For businesses who
operate a mixture of exempt and taxable trades ·
For groups of
companies ·
For calculating
VAT on a cash basis for certain trades, as opposed to an actual basis ·
For bad debts ·
For importers of
goods There are many
other rules to cover special situations. Peter Brown and Co can assist by advising
on the most tax efficient way of constituting a trade, and by establishing
systems to record the information need to account for VAT. We can also assist
you in preparing your VAT returns |
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For details of rates of stamp duty click here. Stamp Duty is a tax levied on sales and
transfers of assets such as stocks and shares, or freehold property. Stamp duty is an ‘ ad valorem’ tax. That is to say, the stamp duty payable is based on the value of the underlying transaction. For many people, the most significant
aspect of stamp duty is in relation to the sale of houses. Up to £60,000
there is no stamp duty payable. Above £60,000 stamp duty is payable on the
whole amount, so that if a house is sold for £59,999 there is no stamp duty,
but if it is sold for £2 more ( ie £60,001) then stamp duty is payable on the
whole £60,001 at 1% . That is to say that £600 tax is paid on £2, which is a
very high marginal rate! Stamp duty is a matter that is usually
dealt with by solicitors, as it tends to be related to land transactions, and
advice should be sought from a solicitor on how to reduce or eliminate
liability to stamp duty. |
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For details of Corporation Tax rates click here For
details of capital allowances click here Corporation Tax is a tax on the profits of
companies, usually incorporated limited companies, but also unincorporated
organisations, such as clubs. In simple terms, profits of a company are
worked out on the same basis and according to the same rules as apply to businesses under income tax. A company is obliged to send in an annual
return , a form CT600, which declares its profits, and works out the tax
liability. Corporation tax is levied on company profits at various rates,
starting with a nil rate band on the first £10,000 and increasing as the
profits get larger. Only one nil rate band of £10,000 is allowed to companies
which are connected by common ownership. The tax is usually payable nine months
after the accounting year end of the company, and the CT600 must be filed
within one year of the accounting year end. If a director or a shareholder of a
company makes loans to themselves( which will usually be illegal) then corporation tax is usually payable on
the loan as if it were profits, but is repayable if the loan is repaid. Because rates of Corporation Tax are
normally lower than rates of income tax and national insurance, it is often
the case in small family companies that tax can be saved by paying dividends
to shareholders rather than by paying the profits out as a salary. However,
the mathematics of this can be complicated, and professional advice is always
essential to keep the tax bill to a minimum. This is only a brief overview of
corporation tax which is a very complex subject . For more detailed information
please contact us for our professional advice. |
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of related matters see
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Inheritance tax is the tax that is levied
on estates that pass upon death. The basic principle is that the value of
an estate at death is assessed at the value of all the assets, less the value
of all the liabilities. The resulting net value of the estate is then reduced
by a personal exemption (this tends to increase with each budget but has been
about £240,000 for some years). The figure that is left after the exemption
is taxed to inheritance tax at the rate of 40%. If a person makes gifts during his or her life,
then these are treated as if they were part of the assets of the estate on
death, but with the amount of the gift being reduced by the number of years
the gift was made before death, so that after seven years, no amount is
taxed. This means that if a person makes a gift to another and survives seven
years, then no tax is payable. There are certain exemptions which are
available. Small gifts made out of regular income are ignored. Gifts of up to
£3,000 per annum are also ignored, even if they are made out of capital.
Gifts made in connection with the marriage of a family member are exempt, and
transfers between husband and wife are also ignored. Nowadays, with the current level of house
prices in the UK, it is quite common for taxpayers to die leaving an estate
which is subject to inheritance tax, particularly if there are also
significant life insurance policies. Inheritance tax used to be considered a
rich person’s tax, but this is no longer the case. It is therefore important to take steps to
plan to reduce the inheritance tax that will be payable upon death by the
family members who survive. Enormous amounts of inheritance tax can be
saved by very simple and basic planning of a will. A recent case of which
Peter Brown & Co are aware saved over £80,000 in tax simply because a
client made a will in a cancer hospice three days before his death. Perhaps
not of great concern to him, but it was very significant to his widow, who
might live many more years. Careful estate planning can help to ensure that the
family of anybody who dies benefits, quite legally, at the expense of the
Inland Revenue. Making a will is essential part of this process. More details
of the benefits of making a will and how to set about making a will can be
found on our will webpage Tax can also be saved by dividing an
estate, so that a part goes to each spouse, each of whom have their own
personal exemption. By careful planning almost half a million pounds worth of
an estate can be taken out of Inheritance tax. The sums involved and the savings to be
achieved are very substantial, and good professional advice is needed so that
the best outcome for the entire family can be achieved, so that when somebody
dies, as little as possible goes to the taxman, and as much as possible goes
to those family members who survive. Peter Brown & Co are pleased to be
able to assist in such areas. For details of inheritance tax rates click here |
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Income tax is levied on all earnings at
various rates, starting at 10% percent, and rising to 40%. Before applying
the rates, the income is first reduced by a number of allowances, some that
are available to everybody and others that are only available in certain
circumstances. The type of income ( eg investment income,
earned income, income from property etc) determines the rules by which the
income is taxed . The income is said to be allocated to different schedules,
a term that traces its history back to various schedules in early taxing Acts
of Parliament. One of the most complicated schedules is Schedule D Cases I
and II which determines the rules for taxing trading and business income, and
setting out the rules for what constitutes legitimate expenses against
income. Income is taxed in relation to each tax
year ending on 5th April. Most taxpayers are obliged to submit a
Self Assessment Tax Return by the 31st January following the end
of the tax year on the 5th April. If they submit the tax return by
the earlier date of 30th September following 5th April,
the Inland Revenue will work out the tax liability, but otherwise the
taxpayer has to work out his own liability, which is then checked by the
Inland Revenue. Tax is paid, wherever possible, by deduction.
So, for example, employers will deduct tax from wages through the Pay As You
Earn scheme (PAYE) , and banks will deduct tax from interest payments. When the tax liability is worked out any
deductions reduce the amount payable, as do any payments made on account in
the previous year, and the balance has to be paid by 31st January
following the end of the tax year on the previous 5th April.
Usually, a taxpayer will also have to pay an estimated payment on account for
the following year, payable in two instalments, on 31st January
and 31st July. This is only a brief overview of income
tax which is a very complex subject . For current and recent rates of income tax
and related items see Income Tax rates Tax Free Mileage Allowances Pensions
contributions & ISA Reliefs |
For discussion
of related matters see
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For the current
rates of National Insurance Contributions click here National
Insurance is notionally a levy to fund the National Health Service and the Pensions
and Benefits system, but in reality it is a tax and the funds raised go into
general taxation funds. National
Insurance is paid by both employees and employers at a flat percentage rate
on earnings over an initial threshold, and is collected by the PAYE system in
the same way as income tax deducted under PAYE. A separate category of
National Insurance is also charged on a percentage basis on benefits in kind,
such as the provision of a company car. The self
employed pay a different weekly or monthly flat rate levy which is not based
on income, in addition to a variable amount based on the level of profits.
The flat rate weekly or monthly levy is usually paid by direct debit, whereas
the variable amount is collected along with income tax under the self
assessment system. Although the variable amount payable, known as Class IV
NIC, can be substantial, the self employed get little benefit for these
payments. Unlike the employee, a self employed person is not eligible for a
whole range of benefits and pension rights. This discrimination is a major
hidden tax on the self employed Persons with low
income can elect to be exempted from National Insurance, and those who might
not otherwise pay can elect to pay voluntary National insurance Contributions
in order to preserve pension and benefit rights. For details of NIC rates click here |
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IntroductionIncome tax is levied on all earnings at
various rates, starting at 10% percent, and rising to 40%. Before applying
the rates, the income is first reduced by a number of allowances, some that
are available to everybody and others that are only available in certain circumstances.
The type of income ( eg investment income,
earned income, income from property etc) determines the rules by which the
income is taxed . The income is said to be allocated to different schedules,
a term that traces its history back to various schedules in early taxing Acts
of Parliament. One of the most complicated schedules is Schedule D Cases I
and II which determines the rules for taxing trading and business income, and
setting out the rules for what constitutes legitimate expenses against income. Income is taxed in relation to each tax
year ending on 5th April. Most taxpayers are obliged to submit a
Self Assessment Tax Return by the 31st January following the end
of the tax year on the 5th April. If they submit the tax return by
the earlier date of 30th September following 5th April,
the Inland Revenue will work out the tax liability, but otherwise the
taxpayer has to work out his own liability, which is then checked by the
Inland Revenue. Tax is paid, wherever possible, by
deduction. So, for example, employers will deduct tax from wages through the
Pay As You Earn scheme (PAYE) , and banks will deduct tax from interest
payments. When the tax liability is
worked out any deductions reduce the amount payable, as do any payments made
on account in the previous year, and the balance has to be paid by 31st
January following the end of the tax year on the previous 5th
April. Usually, a taxpayer will also have to pay an estimated payment on
account for the following year, payable in two instalments, on 31st
January and 31st July. The
current tax rates - to be inserted shortly
The current levels of personal
allowance - to be inserted shortly
The
different schedules of income tax -
Each schedule has different rules about what
is allowable as a deduction, and how the tax is calculated. Often losses in
one schedule cannot be set off against income in another schedule, but must
be carried forward against the income from the same schedule. Schedule A – income from rented property –
for further details see rental income Schedules B and C are so uncommon that if
they affect you we would suggest you contact us for advice Schedule D Case I and Case II – this is business income – for
further details see business income Schedule D Case III – this deals with income from bank
interest etc – for further details see investments Schedule D Case VI – this covers anything that is not covered
elsewhere, including income from furnished and holiday lettings Schedule E – This deals with earned income, and differentiates
between UK income and overseas income Schedule F- This
deals with investment income – for further details see investments Special
rules for spreading income tax
Certain taxpayers, such as authors, artists, and farmers
, whose income can fluctuate dramatically from year to year, are able to
spread their earnings over several tax years, and average out their income
for tax purposes. This can lead to significant savings.
If you are in one of these special categories, Peter
Brown & Co can advise you on the most efficient way of reducing your tax
bill.
The
rules on payment of tax – to be inserted shortly
Planning to reduce your income tax – This is an
important subject, and there is a section of the website
devoted to it. |
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The tax
system prohibits tax evasion, which is a criminal offence. Saying you earned
£1000 when in fact you earned £4000 would be tax evasion. Tax
avoidance on the other hand is the legal planning of a taxpayer’s affairs so
as to reduce tax liabilities. A senior judge once stated in a judgement that
there is nothing in law that requires a taxpayer to plan his affairs so that
the taxman can stick the biggest shovel possible into his funds. If
Parliament has taxed a particular situation, then the taxpayer must pay. If
Parliament has not taxed a particular situation and a taxpayer so arranges
his affairs to move from a taxable situation into a none taxable situation ,
then that is perfectly permissible, both legally and morally. This is where Peter Brown & Co can
assist. With our extensive knowledge of the tax legislation, we can examine a
client’s affairs, and plan to mitigate a tax liability. |
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Businesses are taxed on their profits. These are not necessarily the profits that
might appear in a set of accounts prepared by an accountant. This is because
certain expenses that are regarded by a businessman as legitimate business
expenses are not so regarded by the Inland Revenue, and because certain types
of income are treated as none business income. There are three kinds of expenses that are
disallowed. These are :- 1)
Expenses specifically disallowed by
statute – for example business entertaining. 2)
Expenses where the relief for tax is given
in a different way according to specific tax rules. An example of this would
be depreciation, where depreciation is not allowed by the taxman, but a claim
for capital allowances on capital expenditure is allowed according to
prescribed rules. 3)
Expenses that in the particular
circumstances the Inland Revenue believe on the facts not to be incurred on
business. An example of this might be where a wage is paid to a spouse of a
businessman. The taxman will want to know what duties were performed and was
the rate of pay appropriate. Another might be a proportion of motor expenses,
which the taxman might believe to be none business. The kinds of income that are excluded from
business profits might be rents or interest received which are taxed
separately according to different rules than business income. So, the accounts prepared by an accountant
are adjusted to arrive at the profits computed according to tax rules. This
is known as the ‘adjusted profits’ Having arrived at these profits, they are
then reduced or increased by allowances or charges for the expenditure of
funds on fixed assets, such as equipment, or on the sale of assets. These are capital allowances, the
tax equivalent of the depreciation that was disallowed as mentioned above.
The level of profits after deducting or adding these items is known as the ‘
taxable profits’. The profits are then allocated to a tax
year, again according to specific rules. In normal circumstances, a set of
accounts for a year will form the basis for the tax liability on the business
for the tax year in which the accounting year ended. So, if a set of accounts
are drawn up for a year ended 30th June 2003, as 30th
June 2003 falls within the tax year ended on 5th April 2004, those
accounts to 30th June 2003 will normally form the basis for the
tax liability for the year ended 5th April 2004. However, nothing
is ever simple in tax, and there are exceptions to this rule. It is possible for a businessman to
calculate his own taxable profits, but it is very unwise for him to do so.
The rules in all the areas referred to above are complex, and there is a
large body of statute law and case law covering many common situations. It is
easy to calculate the taxable profits on an incorrect basis, and end up paying
too much tax. These are the kinds of areas that a
qualified firm of accountants, such as Peter Brown & Co, can assist with. |
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For individuals, rental income is taxed on
the income that arises in each year ended 5th April, although it
is permitted to make the calculation based on the year ended 31st
March, provided this basis is used consistently from year to year. For
companies, rental income is calculated on the basis of the accounting period
of the company. Rental income includes wayleaves and
licences related to land, and can include some very complicated aspects
related to the surrender or changes of leases, which are beyond the scope of
these notes, and upon which specialist advice can be sought from Peter Brown
& Co. If the rental income is related to holiday
lettings, then, by concession, the income is treated according to the rules
of business income, provided that the premises are let
as holiday lets for a minimum period each year, and provided no one guest
stays more than 28 days. This concession is quite valuable, as it can trigger
a number of capital gains reliefs that are not available for property that is
rented on any other basis. If the rental income relates to furnished
property, then the income can be reduced by 10% to cover wear and tear of the
premises. If the rental income relates to a part of
the home of the landlord, then there can be exemption from tax on a
significant part of the income, and the advice of Peter Brown & Co should
be obtained to ensure that the full benefits can be claimed. The expenses that can be claimed against
the income differ from those that apply to businesses. Normally, mortgage and
loan interest, insurance, heat light and power, professional charges,
including accountancy and estate agent’s fees, water rates and management
charges are the main categories of expense that can be claimed. No Class 4 National Insurance
Contributions are payable on rental income, and it is not classed as earned
income for the purposes of relieving pension contributions. Preparing rental accounts and ensuring
that all the appropriate reliefs are claimed is an important aspect of any
accountancy practice, and Peter Brown & Co are happy to provide services
in this area. As a very rough guide, the annual fees for preparing rental
accounts will be between £50 and £100 per property, but reducing if there are
a number of properties. |
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Investment income comprises such income as
interest received or share dividends. Taxpayers usually receive interest after
tax has been deducted by the bank or other institution paying the interest,
although those who are not taxpayers, such as people on low incomes, are entitled to receive interest gross,
without tax being ducted by the payer . Certain types of interest, such as
interest on certain National savings accounts are exempt from tax. Dividends are paid out by companies who
have paid corporation tax on their profits, so any dividends received have a
tax credit attached to them, making the payment equivalent in many ways to
interest which has had tax deducted. Dividends and interest, with their associated
tax credits or tax deductions, are added to the total income of a taxpayer,
and included in the general tax calculation, giving allowances and so
on. The effect of this is that for a
basic rate taxpayer, there is no further tax to pay, the liability to income
tax being discharged by the tax credit or the tax deduction. Indeed, if there
is insufficient total income to cover personal and other allowances, then
there may even be a refund. However, if the total income of the
taxpayer means that there is a liability at a higher rate, the effect of the
tax credit or deduction is that there is further tax to pay on the interest
or the dividends. |
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The taxation of income arising abroad is
complex. Whether UK tax arises will depend on the
type of the income, and whether the income is remitted to the UK, and will
also depend on the residence status of the taxpayer under UK law. It will
also depend on whether or not there is a ‘double tax treaty’ with the country
where the income arises, which might deal with how income is taxed in that
country and the UK taken together. If the income arises overseas to a UK
citizen, then an assessment will have to be made of the precise residential
status of the taxpayer, which may depend on the number of days spent in the
UK in any year, and whether or not the taxpayer maintains a residence in the
UK or other evidence of continuing permanent ties. If UK tax does arise, it will then be a
question of determining whether or not the usual personal allowances can be
claimed. This will depend on whether or not the taxpayer is a Commonwealth
citizen, or a citizen of a country whose
double tax treaty with the UK permits the claiming of personal
allowances. The taxation of foreign income is a
subject on which precise professional advice should be obtained, and Peter
Brown will be able to assist. |
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The UK taxation laws lay down a large
number of areas where compliance with specific procedures and routines is
required . Employers have to follow detailed
procedures under PAYE, whereby tax is deducted from employees. There are a
whole range of forms to be filled in and deadlines to be met. Individuals and companies must provide
returns and declarations in relation to their income and gains in many
different circumstances. Records must be kept in specific ways, and
disclosure of all relevant facts is required. Also, to claim a large number of reliefs,
it is necessary to claim the entitlement within certain specific time
deadlines, which vary tremendously from case to case. Some examples of these
are shown on our ‘legal deadlines’ web
page. If a taxpayer fails to comply with any
relevant regulations or time limits, the consequences can be very serious.
Entitlement to allowances and reliefs may be lost, fines or penalties can be
levied, some on a daily basis, and in very extreme cases, a taxpayer can be
prosecuted and even jailed. |