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Changes to NIC. In 2011…..

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Hopefully you’re taking a well deserved break after the ACCA F6 exam last Monday. That is of course unless you’ve got another exam coming up next week!

However, even though you can relax a bit now when it comes to learning tax rules for the December 2009 exam, tax is in the headlines in the “non exam world”. On Wednesday, Alistair Darling, the UK Chancellor delivered his pre-Budget report.

The press in the UK has been full of stories recently about the high bonuses that a number of banks were planning on paying some of their staff. This was causing uproar amongst the majority of the public given that the public had bailed out the banks earlier this year. The Chancellor announced in his pre-Budget report that banks will have to pay a 50% tax on bonuses in excess of £25,000 that are paid between now and April next year.

However, probably of more interest to the “tax people” amongst us is that he announced that all rates of National Insurance (for employer, employee and self-employed) will increase by an additional 0.5% from April 2011 (this is in addition to the 0.5% increase announced in his pre-Budget report last year.

This change alone is expected to raise in the region of £4bn in the financial year 2011/12.

Whilst this is interesting to know make sure that you refer to the latest set of our ExPress notes to find out what rates of National Insurance are actually examinable in the exam you’re sitting!

Tax free but it won’t be examined.

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Last Thursday a small picturesque toll bridge across the River Thames about 65miles (100km) away from London was sold for more that £1m.

Cars pay 5p to cross the bridge whilst lorries pay up to 50p to cross. This may not seem like a lot of money but it mounts up and gross annual revenue is reported to be in the region of £200,000.

What is unusual about the bridge though is that the owner is exempt from paying income tax, CGT, inheritance tax or VAT on it due to an ancient law passed in the 1700s which only applies to this particular bridge. “Grossing up” the income to take account of the fact that it is tax free suddenly results in quite a nice rate of return!

You can rest assured though that this will NOT be examined in the F6 paper. Make sure however that  you’re aware of other exempt income such as Individual Savings Accounts (ISAs) which could easily be examined.

So, what deadline is on 31 October?

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So what exactly was important about yesterday (31 October 2009)?

Yesterday was an important day for any individuals that submit their income tax returns as a hard copy paper return rather than filing them online.

31 October 2009 was the deadline for submission of an individual’s paper income tax return for 2008/09. To be precise, the paper tax return should have reached HMRC by midnight on Saturday 31 October 2009 to avoid penalties.

If the paper returns are submitted late then there is an automatic penalty of £100 for late submission of returns.

What will be interesting this year however is the impact that the postal strikes have had. For those of you reading this outside of the UK who are not aware, there have been a number of days of industrial action by workers from the Royal Mail and this has resulted in postal delays. HMRC have stated that there will be no extension to the 31 October deadline. If however you can prove that the strike delayed your submission then you may be able to appeal the penalty.

Either way, the key thing to remember for your exam is that the deadline for submission of the paper returns is 31 October.

I’m sure that all F6 students are aware that the deadline for submitting an online return is after the paper return deadline. The deadline for submitting an online return for 2008/09 is 31 January 2010 and one thing is for sure and that is that if the online submission is late you are unlikely to be able to appeal against the late submission penalty on the basis of the postal strike!

Marks vs revenue

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We know the allocation of marks in the exam between the various taxes but what about the revenue generated?

ACCA F6 students will be well aware that the vast majority of marks available in the exam are in connection with income tax and corporation tax. Other taxes such as CGT and VAT also play an important part but not to the extent that income tax and corporation tax do.

Whilst these two taxes represent the bulk of the marks in the exam, how does it compare with the split of revenue generated by the various taxes?

HMRC have published their statistics for 2008/09 which provide the following information:

Total £439bn 100%
Income tax £148bn 33%
National insurance £97bn 22%
VAT £78bn 18%
Corporation tax £43bn 10%
CGT £8bn 2%

Over 50% of revenue is generated from income tax and national insurance alone. CGT on the other hand only generates 2% of the revenue.

I’m sure however that the key % in students minds at the moment is the 50% they need in the exams next month so good luck with your studies in the next couple of weeks!

The Premier League and the UK income tax rate…

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Cristiano Ronaldo’s well publicized move from Manchester United to Real Madrid in the summer understandably received a lot of publicity. A world record football transfer fee of £80m is bound to catch the attention.

Ronaldo’s first year remuneration from Real Madrid is reported to be in the region of £11m. Students sitting the 2009 exams should be well aware that the 40% tax rate for the 2008/09 tax years applies to taxable income above £34,800. An individual in the UK with annual earnings of £11m would exceed the 40% threshold in just 2 days!

There were no doubt many factors that persuaded Ronaldo to move to Spain to play for Real Madrid. From a tax point of view though, Spain has favorable tax legislation that enables foreign players to pay tax in the region of 23%. When you compare this figure with the 40% top rate in the UK (and the upcoming 50% tax rate which is not examinable in the December exams) and apply the difference to the amounts of remuneration that Ronaldo is earning then the tax bill  would be significantly lower in Spain than in the UK. Approximate figures show a difference in tax next year when the 50% rate is in place of nearly £3m per year. This adds up to a significant amount when looked at over his contract period of 6 years.

Of course the football purists amongst us would argue that it’s the football team and supporters that are important rather than the tax bill but then again I can’t be sure about this until somebody offers me £11m a year to live in the sun in Spain!

Is 40% average?

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Students should be well aware that the maximum personal UK income tax rate is 40% but how does this compare to the rest of the EU?

The EU have released the 2009 edition of their report on the “Taxation Trends in the European Union”. There are some interesting findings.

The top personal income tax rates in the EU range from a high of 59% in Denmark to a low of 10% in Bulgaria. The 40% top rate of income tax is also present in Greece, Hungary and Poland.

The arithmetic average of the 27 member states is 37.8% so the UK rate is slightly higher than the average for the EU. What is interesting is that the newer member states such as the Czech Republic, Romania and Slovakia all have relatively low income tax rates (15%, 16% and 19% respectively). When compared with the older EU member states the UK rate is relatively low.

This is all very interesting but the key thing to remember for the exams is that the top rate of income tax in the UK is 40%. In fact, ask anyone that has qualified since 1988 what the highest income tax rate is and they should say 40%. The top rate has been 40% since 1988!

Of course it should be the 6th April!?

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There appears to be a bit of a love/hate relationship between students and the UK tax papers. Students tend to either love them or hate them. There’s seldom any half way position.

It’s also one of those subjects where generally either you know it or you don’t know it. There’s not a lot of scope for guessing or trying to “waffle” to get the correct answer.

One of the most frequently asked questions by students is “Why does the UK tax year start on 6 April instead of say 1 January?” Note that this will not be asked in the actual exam so the answer is for personal use only or to impress your friends!

HM Revenue & Customs are a very helpful lot and explained the reason why the tax year starts on 6 April as follows:

The reason for the tax year running from 6 April to 5 April is primarily historical and has its origin in the switch from the Julian to the Gregorian calendar in 1752.

It had been calculated in the 16th Century that the Julian calendar had lost 9 days since its introduction in 46 BC. Most of Europe changed to the new, more accurate, Gregorian calendar in 1582, but the UK continued with the old one until September 1752 by which time the error had increased to 11 days.

These 11 days were ‘caught up’ by being removed from the calendar altogether – 2 September was followed by 14 September. In order not to lose 11 days’ tax revenue in that tax year, though, the authorities decided to tack the missing days on at the end, which meant moving the beginning of the tax year from the 25 March, Lady Day, (which since the Middle Ages has been regarded as the beginning of the legal year) to 6 April.

The dates were adopted for income tax on its re-imposition in 1842 and have not changed since.

So now you know!