Here we comment on what the various taxes are like, in order from the nicest tax to the nastiest, based upon what we observe. We colour-code the taxes.
This is the gentleman’s tax, and would appear to be optional for large companies who employ an army of clever accountants and tax advisers (evidently cleverer than us). For anyone else, it is payable nine months after the year’s end and interest is charged on late payers, but there are no nasty surprises. Small businesses have scope to vary take-home pay from year to year to keep down tax bills. Incorporation means higher accountancy fees and more bother in general. Generally the time to incorporate is when you become a higher-rate income tax payer.
If you withdraw cash from your company, you will need to vote dividends to cover it. If you withdraw a lot of cash, more than about £46,000 per person per year, then the dividend tax rate jumps from 7.5% to 32.5% and your income tax bill can jump dramatically. If you withdraw cash without voting a dividend, then you will need to make a forced loan to HMRC at the 32.5% rate so they get you anyway. This forced loan is added to the corporation tax bill.
To pay your income tax bill, you might need to withdraw more cash from your company which triggers an additional income tax charge next year. This effect of taxes on top of taxes we call “hypertax”. A basic dividend rate of 7.5% becomes a hypertax rate of 8.1% while 32.5% becomes 48.1% which is nasty. Try to live frugally if you are a company director.
Corporation tax is a liability of the company and there isn’t any problem with hypertax. If you pay it late, it’s only interest which HMRC regard as commercial restitution. Big companies rarely get their corporation tax liability right first time and this business of charging interest on late payment gives a reasonable result when the tax liability is amended retrospectively.
A tax on consumption which is friendly if you don’t consume much and nasty if you do. You will find this out if you become a higher-rate taxpayer at 40%, although the self-employed near the top end of the basic rate band are starting to struggle with additional Class 4 National Insurance.
The manner of collection of income tax can leave people being asked to pay eighteen months’ worth of tax all in one go. We do what we can to soften the blow.
The deadline for submitting the income tax return is January 31st of the following year. Watch out for a deadline 30 days later (March 2nd or March 1st in leap years) when tax needs to be paid in full or a 5% penalty will be levied. We will warn you about this.
Value Added Tax
A simple tax run by yobs and a likely driver of the Brexit vote. You need to charge a customs duty to sell to your next-door neighbour. It was introduced in 1972 at a rate of 8% when we joined the Common Market. Since then the rate has crept up to 20% without ever appearing in any Manifesto at a General Election. In 1991 the VAT rate was increased to 17.5% by announcement on television, but HMCE did not have the courtesy to write to VAT-registered businesses to warn them of the change, which is why we say “yobs”. They haven’t changed since then and the ludicrous new MTD for VAT system is the evidence for saying that.
The rigmarole of input and output tax means processing vast numbers of transactions for not much tax actually collected. There is a Flat Rate Scheme which might avoid so much pointless bookkeeping, but HMRC have sabotaged it with their rules on limited cost traders. There is a distortion of competition between traders just over the threshold of £85,000 and those just under it, which again might have been alleviated by a generous Flat Rate Scheme if HMRC had not wrecked it.
If you start missing deadlines for submitting VAT returns, not much will happen at first, but you will be living in a fool’s paradise. Eventually a penalty will be levied which climbs up to 15%, and then it gets painful. How do you fancy paying VAT at 23% when everyone else is paying 20% ?
Is there a fair tax?
We would suggest Irish Relevant Contracts Tax which is levied at 20%. An Irish accountant can look online and see how much RCT has been collected from his or her client. The equivalent British tax is the Construction Industry Scheme tax, but a British accountant cannot look online to see how much CIS tax has been collected. We have applied for Gross Payment Status for some of our clients, which gets round this nonsense.
Politicians love to moralise about “fair” taxes, but notice that RCT never gets a mention.
If we plot a graph of net income after tax versus gross income before tax, we might hope to see a straight line. It will be for corporation tax, but it will zigzag all over the place for income tax. Try explaining how that is fair !
Life without taxes
Drive around Carlisle. Occasionally you will come upon a street full of potholes which is an “unadopted” street, and you will know all about it. That’s what life would be like all the time if we had no taxes at all. We are giving the full story, we hope.
If I shared a drive with a neighbour and I suggested we go halves to repair it, and the neighbour brought along a smarmy accountant to explain why I should pay more, that accountant would get a smack in the gob. Let’s just be honest !