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Top Paye Questions Answered

Employers and especially new employers who may not be experienced with operating a payroll system enter a business area with tax rules and procedures with which they may not be familiar. The most common questions asked by employers who are operating or about to operate a PAYE scheme are here

What is an income tax code?

An income tax code is a reference number which may also include letters or be entirely letters which determines the amount of gross pay which is free of income tax deductions and may also determine the way in which income tax should be deducted. If the tax code contains a number this number represents the amount of tax free income an employee can earn in a financial year, for example 522L means an employee has a tax free personal allowance of 5,225 pounds. A tax code of BR means all the employee gross pay should be taxed within the PAYE scheme at the basic rate of income tax.

What does week 1 of month 1basis mean?

Week 1 and Month 1 basis is an instruction to the employer operating a PAYE scheme to not calculate the income tax on a cumulative basis which is the normal basis but instead the employer has to calculate the income tax to be deducted on a non cumulative basis. A non cumulative basis is the total gross pay for that week or month excluding any previous pay in earlier pay periods regardless of whether that previous gross pay was paid by the current or a previous employer.

Because the income tax is deducted on the gross pay in a specific pay period an employee on a week 1 or month 1 basis does not receive an income tax refund in respect of previous tax deductions. Normally an employee is placed on a week 1 or month 1 basis when the tax deductions history for the current financial year are incomplete and the week 1 month 1 basis is removed when the missing history is determined

Do I deduct income tax and national insurance if a new starter says they are self employed?

The decision as to whether a worker is an employee or self employed rests with the employer responsible for the PAYE administration. If that worker is determined to be an employee then income tax and national insurance deductions must be deducted from payments made to that employee.

If the employer decides that the worker is self employed then no income tax or national insurance deductions should be made from the payments. But it is not as simple as that and any employer who has doubts should clarify the position with the local Inland Revenue helpline. A wrong decision by the employer could be very costly and strict rules are enforced.

There are numerous conditions which are applied to determine if a worker is an employee or self employed and several years after that worker joined the business the potential tax liabilities can come back to haunt the employer. The tax authority can invoke a number of conditions any one of which if proved can result in the tax authority deciding the status of a worker is that of employee and not self employed.

When the status of a worker is determined by the tax authority to be employee and not self employed the employer will incur a liability for income tax and national insurance that should have been deducted from the employee and also a liability for employers national insurance contributions. The liability being increased as the Inland Revenue will determine that the amount paid to the employee was a net wages payment after deductions and the perceived gross pay thereby enhanced.

As the income tax and national insurance contributions may not be practically recoverable from the employee and the calculation would be applied retrospectively to previous years employment the cost to an employer can be considerable.

When should national insurance contributions be deducted from an employee?

National insurance must be deducted from all employees who are over the age of 16 and under the state retirement pension age of 60 for a woman and 65 for a man. Equality of employment does not apply to government legislation on equality of employment between men and women where national insurance contributions and pension payments are concerned.

In addition national insurance should only be deducted from an employee wage or salary if that income is at or above the national insurance earnings threshold. The earning threshold usually changes each year and should be checked in case of doubt with the current tax thresholds applicable.

What do I do if my new employee does not give me a P45?

If the new employee either does not possess or has lost the P45 from a previous employee then the employer operating the PAYE scheme must still deduct tax and national insurance from any wages payments made to that employee and also advice the Inland Revenue to establish the tax status of the employee. If the employee does not have a P45 the employer must complete a P46 and send the P46 to the Inland Revenue without delay. Following receipt of the P46 the Inland Revenue will notify the employer of the income tax deductions to be made.

In the period from when the employee commences employment and notification of the employee tax status is received the employer should adopt a week 1 or month 1 status for that employee and also use an emergency tax code. The emergency tax code would be the standard personal allowance for that tax year.

Is a medical certificate required before statutory sick pay payments are made?

It is advisable for an employer to obtain from an employee written documentation of sickness. This documentation can be in the form of self certification which should be filed as part of the PAYE administration. If an employee satisfies all the conditions to receive statutory sick pay and there is no reason for the employer to doubt the claim then strictly speaking statutory sick pay can be paid without medical evidence.

How as an employer do I fund working tax credits?

Working tax credits an employer may pay to an employee is deducted from the PAYE and other deductions that employer has made and is payable to the Inland Revenue. Eligible deductions include deductions from employees in respect of income tax, national insurance, student loans and CIS deductions and employer national insurance contributions. If the deductions are insufficient to cover the tot6al working tax credit to be paid to an employee the employer can apply to the Inland Revenue who will fund the shortfall.

Why the employer is charged penalty fines when the accountant submits the tax returns?

Penalty fines are chargeable to the employer responsible for submission of the annual PAYE tax returns. The responsibility for submitting the tax returns on time to avoid penalties may be delegated by the employer to the accountant. That is regarded as an internal arrangement between the parties which is not recognised by the income tax regulations with the employer always retaining the ultimate responsibility for submitting tax returns on time.

Related Inland Revenue Articles

5 Reasons to File Delinquent Tax Returns: There?s Still Hope if You Haven?t Paid Your Taxes This Year

The April 15 tax deadline has come and gone. For the millions of taxpayers who failed to file legally required tax returns, tax help is available for those who act now! Even taxpayers who received an extension for filing are not granted more time for the payment of taxes owed and may need income tax relief.

The act of not filing your tax returns can lead to more significant financial problems in the long run. Not to mention, failure to file tax returns may be construed as a criminal act by the IRS, punishable by one year in jail and ,000 for each year not filed. Needless to say, it’s one thing to owe the IRS money, but another thing to potentially lose your freedom for failure to file a tax return.

 The longer you put off dealing with overdue taxes, the more serious your IRS problems will be. So I recommend filing any tax returns that are due as soon as possible to avoid additional interest, penalties and potential IRS collection tactics, such as a levy on your bank account.

 With the federal budget deficit for the current year expected to top .8 trillion, Americans can expect more tax audits and increased IRS actions. So anyone who owes back taxes will want to avoid becoming targets of aggressive IRS collection efforts that can financially cripple them for life.

 Here are 5 reasons to file your delinquent tax returns:

 1) You can go to jail for not filing your taxes

Even if you haven’t filed your tax return for one year – it is still considered delinquent and could be construed by the IRS as a criminal offense. Actor Wesley Snipes didn’t report more than million to the IRS and he was convicted of three misdemeanor counts of failing to file a tax return. Richard Hatch, who won the first season of CBS’s hit show Survivor, is in prison for failing to report million in prize money.

The IRS goes after those U.S. taxpayers who try to avoid taxes, and Average Joes as are just as likely as high-profile individuals to be targets of the tax-collecting agency. At every level, the agency has become increasingly aggressive in pursuing tax cheats. Are you willing to lose your freedom because you failed to file your tax returns?

2) You can incur a 25% penalty for not filing your tax returns

In this economic downturn, Americans may opt to not file because they don’t have the funds to pay the taxes owed. The best thing for taxpayers in difficult financial situations to do is file their tax return, pay what they can and work with the IRS to establish a payment plan that will keep them compliant.

Additionally, if there are any delinquent tax returns that are due, they should consider filing these returns as soon as possible to avoid the wrath of any potential IRS action, such as a levy on their bank accounts.

3) You can incur additional penalties for not paying your taxes

If you fail to pay your taxes due, you will incur additional penalties for failure to pay. Taxpayers who request an extension of time to file should keep in mind that this it is not an extension of time to pay. To avoid additional penalties, taxpayers should file by the deadline and pay as much as they can, even if they are unable to pay the entire amount due. You will still have a failure to pay penalty, but it’s much less. Then you can work with a specialized tax resolution expert to help you negotiate a tax settlement.

4) You can be subject to an increased tax bill if the IRS prepares your taxes for you

The IRS may prepare a “Substitute For Return” for delinquent taxpayers, in which they won’t be able to file for all of their personal exceptions or allowable deductions. Because these returns are filed in the best interest of the government, the only deductions they’ll usually see are the standard deduction and one personal exemption, subjecting them to a larger tax liability. So it’s important for individuals to file their 2008 tax return as well as any prior delinquent tax returns as soon as possible to save money and avoid significant long-term consequences.

5) You must have all prior tax returns filed to be eligible for income tax relief

All back tax returns must be filed before the IRS will even entertain any type of tax settlement like an offer in compromise or monthly payment plan arrangement. The good news is the sooner you take care of your delinquent taxes, the less penalties and interest you’ll owe.

I believe there’s a solution to every problem. For delinquent taxpayer, it’s never too late for to resolve your tax debt and avoid IRS penalties.

For more information on receiving income tax relief or help resolving back taxes, visit www.taxresolution.com for a free tax relief consultation or call 866-IRS-PROBLEMS.

The role of government. Taxation. Business ethics

For the past two or three decades, determining the role of the government in business cycle has perhaps been the central political and economic issue in industrial democracies. Although the number of nationalized industries is steadily declining in most parts of the world, people with left-wing views still generally believe that the government has an essential role to play in providing the economic infrastructure (public transport, telecommunications, and so on) and ensuring the provision of services such as education, health care, social security and perhaps housing, and regulating working conditions, health and safety standards, and so on. People with right-wing views, on the contrary, generally argue that many (or most, or maybe all) of these activities can be left to private enterprise and the market system, and that the role of the government should perhaps be restricted to activities such as defense, the police, and the justice system. They argue that too much regulation is bad for business, and leads to inefficiency.

Foe example if we look at the role of the Department of Trade and Industry which is under the jurisdiction of the British government, we’ll see the following picture. The key areas of DTA involvement are developing of trade, investments and export, developing of industry inside the UK, and regulating or ensuring open, competing markets, mergers and monopoly policy. And the main focus of DTI’s work at the moment is to provide detailed analysis of the markets, the priority markets that Britain is aiming fir, for service of industry, and then help, particularly for the small and medium sized companies, to tackle those markets in an efficient way. The specific help is that each priority market, there are 80 of them around the world, have a desk officer who’s wholly responsible for providing information about that country,  detailed economic and political description of the market, sector information on whatever interest you. And then beyond that they can give you the help of the embassy of that country.

Besides that kind of help, government can be of help in other areas. One well-known American economist J.K. Galbraith tried to describe responsibilities of the state as he sees it. First of all, in no country does the market system provide good low-cost housing. This is a matter of prime importance and must everywhere be a public responsibility, because  badly-housed or homeless people are visibly at odds with the good society.

Health care is also a public responsibility in all civilized lands as well as many other essential functions – parks and recreational facilities, police, libraries, the arts. All those are more needed by the underclass than by the affluent. Those who attack the services of the state are usually those who can afford to provide similar services for themselves.

In the good society it also must be attention to science, including medical research. The market system invests for relatively short-run return. Therefore to support science is the responsibility of the state.

But all above mentioned information doesn’t mean that everyone share this opinion. According to another well-known economist R.Friedman, the role of government as it is now has greatly limited our human freedom. According to his words the limitations imposed on our economic freedom threaten to bring two centuries of economic progress to an end.

I’ll try to explain this point of view. An essential part of economic freedom is freedom to choose how to use our income: how much to spend on ourselves and on what items; how much to save and in what form; how much to give away and to whom. Currently, more than 40% of our income is disposed of on our behalf by government at federal, state and local levels combined.

As consumers we are not even free to choose how to spend that part of out income that is left after taxes as there are a lot of restrictions on buying or consuming some goods – for instance cars without seat belts.

And freedom to use the resources we possess in accordance with our own values – freedom to entry any occupation, engage in any business enterprise, buy from or sell to anyone else  – all these are regulated by the state. Today you are not free to offer your services as a lawyer, a dentist, for example, without getting first a permit or licence from a government official. You are not free to work overtime at terms mutually agreeable to you and your employer, unless the terms conform to rules and regulations laid down by a government official.

So it was another opinion, contrary to the first one. Both of them are quite logical and have right for existence.  Maybe we should combine them somehow  to create an ideal system suitable for everyone?

TAXATION

A tax is a payment of money legally demanded by a government authority to meet public expenses.

Everyone knows that taxation is necessary in ? modern state: without it, it would not be possible to pay the soldiers and policemen who protect us; nor the workers in government offices who look after our health, our food, our water, and all the other things that we cannot do for ourselves, nor also the ministers and members of parliament who govern the country for us. By means of taxation we pay for things that we need just as much as we need somewhere to live and something to eat.

But though everyone knows that taxation is necessary, different people have different ideas about how taxation should be arranged. There are two main ways, by which taxes may be paid:

1) each person have to ??? ? certain amount of money to the government each year;

2) there is ? tax on things that people buy and sell.

In most countries, ? direct tax on persons, which is called income tax exists. It is arranged in such ? way, that the poorest people ??? nothing, and the percentage of tax grows greater as the taxpayer’s income grows.

But countries with direct taxation nearly always have indirect taxation, too. Many things imported into the country have to pay taxes or “duties”. Of course, it is the men and women who buy these imported things in the shops who really have to pay the duties, in the form of higher prices. In some countries, too, there is ? tax on things sold in the shops. If the most necessary things are taxed, ? lot of money is collected, but the poor people suffer most. If unnecessary things like jewels and fur coats are taxed less money is obtained, but the tax is fairer, as the rich pay it.

Probably, this last kind of indirect tax together with a direct tax on income which is low for the poor and high for the rich is the best arrangement.

The primary function of taxation is, of course, to raise revenue to finance government expenditure, but taxes can also have other purposes. Indirect excise duties, for example, can be designed to dissuade people from smoking, drinking alcohol, and so on. Governments can also encourage capital investment by permitting various methods of accelerated depreciation accounting that allow companies to deduct more of the cost of investments from their profits, and consequently reduce their tax bills.

There is always ? lot of debate as to the fairness of tax systems. Business profits, for example, are generally taxed twice: companies pay tax on their profits (corporation tax in Britain, income tax in the USA), and shareholders pay income tax on dividends. Income taxes in most countries are progressive, and are one of the ways in which governments can redistribute wealth. The problem with progressive taxes is that the marginal rate - the tax people pay on any additional income – is always high, which is generally ? disincentive to both working and investing. On the other hand, most sales taxes are slightly regressive, because poorer people need to spend ? larger proportion of their income on consumption than the rich.

In many countries taxes are quite fair and do not harm interests of the citizens. It may exist in countries, where the expenditures of the government are not very high and consequently it need not to collect high taxes or the government has other sources of income, such as profitable business activities. Or the police of the state is to give more freedom to business to make the economic situation better. But some governmnents have insufficient money to finance it’s expenditures and they increase tax rates as an alternative of borrowing money. Or they may limit unnecessary business activities. This of course decreases incentive to work, because profits become very small.amd many businessmen try to hide their incomes. There are lots of methods, both legal and illegal, to hide profits from taxation. For example, tax avoidance (reducing the amount of tax you pay to a legal minimum) or tax evasion (making false declaration to tax authorities).

The higher the tax rates, the more people are tempted to cheat, but there is ? substantial «black» or «underground» economy nearly everywhere. In Italy, for example, self-employed people – whose income is more difficult to control than that of company employees – account for more than half of national income. Lots of people also have undeclared, part-time evening jobs (some people call this

«moonlighting») with small and medium-sized family firms, on which no one pays any tax or national insurance. At the end of 1986, the Director of the Italian National Institute of Statistics calculated the size of the underground economy, and added 16.7% to Italy’s gross national product (GNP) figure, and then claimed that Italy had overtaken Britain to become the world’s fifth largest economy.

To reduce income tax liability, some employers give highly-paid employees lots of  «perks» (short for perquisites) instead of taxable money, such as company cars, free health insurance, and subsidized lunches. Legal ways of avoiding tax, such as these, are known as loopholes in tax laws. Life insurance policies, pension plans and other investments by which individuals can postpone the payment of tax, are known as tax shelters. Donations to charities can be subtracted from the income on which tax is calculated.

Companies have ? variety of ways of avoiding tax on profits. They can bring forward capital expenditure (on new factories, machines, and so on) so that at the end of the year all the profits have been used up; this is known as making ? tax loss. Multinational companies often set up their head offices in countries such as Liechtenstein, Monaco, the Cayman Islands, and the Bahamas, where taxes are low; such countries are known as tax havens. Criminal organizations, meanwhile, tend to pass money through ? series of companies in very complicated transactions in order to disguise its origin from tax inspectors – and the ??li??; this is known as laundering money.

Business ethics

In the 1920s, many large American corporations began, on a wide scale, to establish pension funds, employees stock ownership, life insurance schemes, unemployment compensation funds, limitations on working hours, and high wages. They built houses, churches, schools and libraries, provided medical and legal services, and gave money to charities. Since this is fairly surprising behavior for business corporations, there must be a good explanation. And I guess we have it.

First of all I’d like to mention that such words as “ethic” or “culture” used to be considered as having less in common with business. But it’s not so. Nowadays the positive image of an entrepreneur is essential part of any businessman, necessary for success in business.  And hopefully this image isn’t just showing-off.

Business and moral values are connected much closer than it might seem at first sight. Business undertakings include dealing with people, creating different contacts, and as you know contacts with people are usually built upon the basis of trust. You don’t need to cheat to get profit. It is usually the result of situation when market price exceeds expenditures.

Though many examples of concluding a bargain on parole testify to the fact that promise given by the person you trust sometime more valued than money given by somebody else.

Cheating, compromises with one’s conscience are witnesses of immaturity of market relations, ignorance of businessmen. It seems to be quite logical, but many people running their own businesses forget about this elementary truism – unfair business has no future. Once betrayed, a person won’t trust you or even start to play this game himself.

So to make a conclusion of the all above mentioned I’d rather say that a company, any business has responsibilities to its suppliers, its customers, its employees, the local community and society in general as well as to its shareholders. It will provide profit in the way of fair bargains with partners, loyalty of workers, better environment, etc. Consequently large corporations introduced ‘welfare capitalism’ as a way of creating favorable public opinion. Even rational capitalists, starting with Henry Ford, realized that a better paid work force would be more loyal, and would be able to buy more goods and services, and that a better educated work force would be more efficient one.

Of course, pure free market theorists disapprove of welfare capitalism and all actions inspired by ‘social responsibility’ rather than the attempt to maximize profit. Since the benefits of such initiatives are not visible, Milton Friedman criticized them for being unbisinesslike and for threatening the survival not only of individual corporations but also the general vitality of capitalism. In newspaper article titled ‘The social responsibility of business is to increase its profits’ he argued that responsibility of any company is to conduct the business in accordance with their desires, which generally will be to make as much money as possible, while of course  conforming to the basic rules of the society, both those embodied in laws and those embodied in ethical custom.

Thus executives should not make expenditures on reducing pollution beyond the mount that is required by law or that is in the best interest of the firm. Nor should they deliberately hire less-qualified, long-term unemployed workers, or workers from ethnic minorities suffering from discrimination. To do is to be guilty of spending the stockholders’ (or the customers’ or the employees’, whatever)  money. Friedman does not consider the possibility that stockholders might prefer to receive lower dividends but live in a society with less pollution or less unemployment and fewer social problems.

An alternative view to the stockholder model exemplified by Friedman’s article is a stakeholder model, outlined, for example, in John Kenneth Galbraith’s book, The New Industrial State.  According to this approach, business managers have responsibilities to all the groups of people with a stake in or an interest in or a claim on the firm. A firm which is managed for the benefits of all its shareholders, will not, for example, pollute the area around its factories, or close down a factory employing several hundred people in a small town with no other significant employers, and relocate production elsewhere in order to make small financial savings. Proponents of the stakeholder approach suggest that suppliers, customers, employees and member of the local community should be strongly represented on a company’s board of directors.

Another aspect of business ethic I’d like to cover concerns the difference between legitimacy of some actions and their relevance, conformation to the basic rules of society. Sometimes some actions we do are wide-spread but it does not mean they are legal. For instance industrial espoinage or bribing corrupt officials, telling only half the truth in advertisements and keeping quiet about bad aspects of a product. Lobbing, I mean trying to persuade politicians to pass laws favorable to your particular industry, is legal, but can be condemned by public opinion. So it’s rather difficult to choose what rules to follow – laws, business practice, own conscience…

Tax Refund Auckland- How To Maximise Your Tax Refund

Tax Refund Auckland

Prior to 2001 all New Zealand residents who were paying tax were required to declare this at Inland Revenue every year through the IR5 form. This proved to be a difficult process to those who very not very efficient at maintaining records.

So in 2001 the Inland Revenue introduced a new system called PAYE system Pay As You Earn. The new PAYE was designed that the employer would deduct the tax and pay it directly to the Inland Revenue.  The introduction of the new system was designed to do away with the old IR5 more, making it easier for people to maintain their records.

The new system proved to be welcome news to the New Zealand residents, to streamline this process the Inland Revenue would send them monthly account statements of taxes paid.  Residents would receive a yearly statement showing them the amount of tax paid, they would take this to their accountant to see if they would get a Tax Refund. If they had paid too much tax that year they would be entitled to a tax refund. 

In the past few years Inland Revenue has tried to improve its public image and to escape the tag of the tax man, most people imagined them as a scary department, sought on stripping the public of every last cent. Despite all of their best efforts there are still plenty of people today who would rather not deal with Inland Revenue.

So the residents were flocking to accountants who would check this for people and call their tax refund for them, for a fee.

Despite this New Zealand has taken to this craze by the thousands. Looking into these companies, even though some of their fees may be excessive, they still play an important role acting as mediator between residents and Inland Revenue for residents getting their Tax Refund.

So to ensure that you receive the maximum tax refund, contact the Tax Refund specialists, Tax Refund Auckland they help take the guesswork out of finding the best Accountant.  

Get Massive Relaxation on Corporate Taxation with International Tax Consultants

According to HMRC’s world famous slogan “Tax doesn’t have to be taxing”. Yet with 16 pages Standard Tax Calculation Guide and even more 34 pages comprehensive Tax Calculation Guide, this HMRC mantra doesn’t seem to be of much help anyways! So now that you have to pay the heavy corporate taxation you don’t have much option left anyways. The corporate taxation amount is a whopping 28% of your hard earned money in the UK! This amount is subjected to alter in other countries though. Yet you can save considerable chunk of your hard earned money from being channelized into your corporate taxation. And to your rescue come generally the several international tax consultants who derive ways of saving your money considerably.

What is corporate taxation?

Before explaining any further let’s just clarify what is “business” or more famously- “corporate”. Clubs, associations, societies, trade associations, housing corporations, anything which has groups of individuals as partners or shares in a business including single ownership come under the crowd of corporate tax payers. The profits made by these small, medium and even big businessmen are shoved to corporate taxation. The company has to pay the tax that is not before hand assessed by the Inland Revenue. Also payments are to be made within stipulated date failing which will expose you to several fines and penalties. The Classical System of tax was reintroduced in the year 1999 under which the corporate tax givers were charged double taxation of their profits! This corporate taxation implies to both resident and nonresident companies of the UK. The corporate tax under the UK government is applicable on worldwide profit of the corporate.

Way to walk out of the mess of corporate taxation safely

The clauses added here and there add up to the tax amount leaving company with virtually zero profit. Also, in case the business is international then coping up with the tax rules of the respective countries becomes virtually impossible and begin hampering the growth of the company. So you need to seriously safeguard your hard yearned money from literally draining away in the hands of these corporate taxations. Many international tax planning committees are working online to rescue you out of such dreaded situations. They have bunch of qualified accountants, auditors, and chartered tax advisers etc who provide customized taxation advices to corporate sectors along with the individuals. They have complicated methods of tackling the corporate tax situations and saving out maximum part of your profits.

Find More Taxation Articles

UK Tax Policy and the Euro-dollar Market

UK TAX POLICY AND THE EURO-DOLLAR MARKET *

A. Introduction

The view of the UK Treasury and the Inland Revenue was that, the way was now open for the nationalised industries and the local authorities to borrow in this way, if the UK wanted this to happen, and that the Boards and authorities concerned were prepared to go ahead.

This led to a very important issue, which had to be fully recognised. The amendment to the Finance Bill will allow interest payments to be paid free of tax only where the bond of stock was issued through an overseas agent subject to foreign law. It did appear to mean that, when a Euro-bond was issued in London, withholding tax will still apply where the interest was paid out of UK income. Thus the effect of the amendment would be to impair the status of the London issuing houses since if the amendment leads to a rise in this type of borrowing they will be effectively excluded from participating in the increase: an increase which will derive entirely from the UK sources. It was envisaged that the UK would have a presentational problem on its hands. As, if the UK government wanted a public sector authority to borrow in foreign currencies, it had to approve in their arranging for the issue to be made through an overseas agent and in an overseas centre. In short, the UK government had cut out the possibility of the public sector itself utilising the Euro-dollar resources of London with regard to its borrowing operations .

The tax change, under which interest paid on foreign currency borrowing for home investment would be treated as an expense for corporation tax purposes, though designed to encourage such borrowing by the nationalised industries, would create an incentive also for the UK commercial concerns. Given the rate structure in the Euro-dollar market, the new tax incentive may well create substantially increased interest by UK firms, particularly those with overseas income, in currency borrowing for home activity. A central question was, how would this be regarded under the exchange control rules? There had been little interest shown by UK firms in this type of activity but given the prime need to strengthen the reserves, it plainly made sense to allow firms to borrow fairly freely in the Euro-dollar market for home investment if they found it attractive to do so. The UK government’s attitude, was that, if UK firms want to borrow on appropriate terms in Euro-dollars for home investment, they would normally be allowed to do so .

Hence, due to Lever’s proposal: An insertion of a provision in the Finance Bill was needed, to allow a corporation tax deduction in respect of interest paid on Euro-dollar bond issues, where the funds were to be invested in the UK . The change would serve no useful purpose unless the UK firms concerned were prepared to arrange for their loan contracts to be signed outside the UK, e.g. in Switzerland or Luxembourg. The reason for this was as follows: Subscribers to Euro-bond issues were interested in no shares other than those on which interest was paid gross of local tax. Under the provisions of the 1952 Income Tax Act, UK borrowers may not pay interest gross to non-residents unless the interest had a non-UK source in the hands of the bond-holder. For UK companies (including the nationalised industries) the latter condition can be complied with only by the conclusion of the approximate loan contract abroad. There are strong Revenue arguments against any relaxation, in which, Lever and the official Treasury had been inclined to accept.

However, it should be noted that; firstly, the change would not affect materially the position of the potential UK borrower who has substantial overseas income. Secondly, in respect of other companies, including the nationalised industries other than the Air Corporations, the change would encourage foreign currency borrowing only if the relative contracts are established abroad under foreign law. Thirdly, much of the extra banking business, which was created by the change, would therefore benefit overseas rather than London banks .

This meant that, the UK were not in the position, or able to hold the situation of the proposed change, and would face early pressure for the relaxation of the income tax rules on payment of interest gross. This was what the Revenue had always foreseen, and what led them to resist any changes, even changes in the corporation tax .

B. Opinions of the Inland Revenue

On the 26th June 1968 a confidential meeting on Euro-dollar borrowing was held by Lever, the Inland Revenue, the Treasury and Mr. Stainton of the Parliamentary Counsel. Lever first raised the question of an arrangement by which interest might be paid gross on loans raised in the Euro-dollar market. It was emphasised that Lever was anxious not to allow payment of interest gross to UK residents, but that it was possible to pay interest gross to non-UK residents without excluding UK banks from taking part in the arrangement of these loans .

However, the Revenue stated that they were not going to accept a position where interest was paid gross in London to UK residents. This was based under the rule that interest could not be paid gross, except where existed a non-UK source. Various Court decisions, interpreted by the Revenue, meant that the Revenue were prepared to regard interest payments as having a non-UK source when they were made under a contract concluded abroad under foreign law, with a foreign paying agent, even where the income which were used to pay the interest was itself generated in the UK . This was a new different area, as statute law did not cover it in any detail, and decisions had to be taken on interpretation based on a few court decisions. Under these circumstances, it was possible that some modification of the Revenue’s existing rules were possible. For example, it was possible to accept that a UK bank in London might pay interest gross in external sterling to non-resident accounts, as in practice this was a very similar operation to a foreign bank paying gross abroad in a foreign currency. However, it was not possible to legislate in this area in the Finance Bill of the time, as there was no time to work out the necessary complicated clause .

Lever, nevertheless, stated that he was interested in further exploring the extent to which UK banks were able to take part in loans raised abroad. However, he was content that the law was not altered involving the definition of “foreign source” income in the Finance Bill. So, the clause was approved in principle. Lever raised the question of allowing in the clause for loans the interest on which might, at the option of the lender, be paid in sterling. There was no objection to this in the meeting, provided the option was exercised at the discretion of the lender .

The “machinery problem” of the Inland Revenue

However, this issue was not passed onto Lever, because of “the machinery problem” caused by certain large barriers that were raised by the Inland Revenue . There was three issues of principle: firstly, non-resident borrowers paying interest through London – (if they are not paying interest through London there is no reason why any aspect of UK taxation should affect them). Here there is a “machinery problem”, the Affidavit procedure, which has been removed. Secondly, UK borrowers paying abroad – provided that the bonds are denominated in foreign currency and held only by non-residents, and that the issue formally takes place in a foreign market, gross payment of interest without formality is possible and, under the proposed Finance Bill change, payment will count as an expense before assessment to Corporation Tax. Finally, UK borrowers paying through London – it is here that the problems still remained. The primary problem through London would almost certainly disqualify borrowers from payment gross of tax, with or without an Affidavit procedure. The Inland Revenue will be considering whether, provided the borrowing is in the form of foreign currency bonds, with interest payable in foreign currency, and to be held only by non-residents, they could agree to payment of interest gross, without requiring the additional non-UK features of issue abroad and payment abroad .

What was not clear was, assuming that the Inland Revenue were to decide that they could allow payment gross of tax even with Issue X and payment Y in London, but on the narrower limitations of foreign currency denomination and interest and non-resident holders, the Inland Revenue would still have to take special steps to remove the obligation of Affidavit procedure, or whether this would simply not apply in any case .

Obstacles to raising foreign currency loans by UK companies

The law and the practice of the Inland Revenue was unsatisfactory in relation to Section 52 (5) and provided obstacles to the raising of foreign currency loans by UK companies. It was considered, by the Inland Revenue that there was no justification for the continued separation between annual interest payable to residents and to non-residents . These obstacles were:

Firstly, relief is not available in cases where a loan has been raised for purely investment purposes, e.g. the acquisition of a new subsidiary. This construction is an obstacle to foreign borrowing in cases where the borrower has insufficient Case IV or Case V income, and it ignores the realities of much foreign investment where the acquisition of an existing business will almost always be made through the acquisition of shares. Furthermore, it ignores the Revenue’s own practice in allowing “short interest” incurred on loans used to purchase capital assets rather than as working capital .

Secondly, relief is not available for interest payable in the currency of a country outside the Scheduled Territories when it is payable either to a company which controls or is controlled by the UK company liable to make the interest payments or to a company which is under the control of a third company which also controls the UK company. This refusal to allow inter-group interest payments is an obstacle to foreign borrowing in cases where, for good practical and business reasons, a foreign subsidiary, having acted as the primary borrower from the foreign lenders with the guarantee of the UK parent company, relends the proceeds of the foreign currency loan to its UK parent company on the same terms as those applicable to the underlying loan. The subsidiary/parent company loan can be made on a short-term basis which could be renewed year by year so that the interest would qualify as “short interest” and therefore be allowed against corporation tax. However, this would not be satisfactory in the case where the foreign lenders wishes to take security by a charge on the parent company’s indebtedness to its foreign subsidiary. Also, there is some doubt whether a 360-day loan between parent and subsidiary, which is renewed year after year, would be regarded as a short-term loan .

Thirdly, to obtain relief, the interest must be paid to a non-resident. It is not practical for UK issuers of foreign public bonds to obtain evidence of residence from persons who obtain payment of interest at paying agencies outside the UK. The Inland Revenue will not unconditionally accept that interest paid in those circumstances is in fact paid to non-residents and cases have been known, to mark their position, where the Inland Revenue only allow 99% of the interest payments to be charged against corporation tax. This position is inequitable and penalises the UK borrower for a situation over which it has no control. It seems to fail completely to recognise the exchange control and paying collecting agent tax regulations relating to the holding by residents of the UK of foreign currency securities. Under those regulations, a UK resident can only hold foreign currency securities through an authorised depositary and upon receipt by the relevant bank of any interest or dividend payments the bank is obliged to deduct and account for any applicable UK income tax .

C. Public Sector and nationalised industry foreign currency borrowing

(1). Introduction

1969 was facing a difficult liquidity situation in which, the Treasury had favoured for some time steps to enable public and private borrowers to borrow foreign currencies in the Euro-bond market. This was a means of meeting some of their financing requirements and, at the same time, of increasing the nation’s reserves. However, the issue of tax was causing some problems with the British government.

The issue in which a local authority may be able to pay interest gross on an issue of bearer bonds denominated in foreign currency was a welcome opportunity, as if this was accepted, it was likely that one local authority, the GLC, would begin negotiations. The Bank of England took the view that it was advantageous that the first Euro-bond issue by a public borrower was the GLC. Due to this reason, they wanted to get the position on the tax difficulty cleared up as soon as possible. Their understanding seemed to be that, since GLC borrowing would be secured on a domestic asset (the GLC rate revenues), it would not qualify for the permission to pay interest gross conveyed in the 1968 Finance Act.

It was clear that there was a genuine obstacle standing in the way of GLC and other local authorities borrowing foreign currency abroad, and it was necessary to consider means of removing an impediment to foreign currency borrowing by UK local authorities in the Euro-bond markets. It was suggested that the required provision should be generalised in order to cover nationalised industries or private sector borrowers as well as local authorities; to cover a direct charge on UK assets as well as the indirect one that arised from a subsequent loan contract, which was the particular problem of local authorities; and to limit the arrangements to foreign currencies, excluding currencies of the Scheduled Territories. Looking at the tax position on foreign borrowing – any UK borrower wishing to tap sources of funds in the international capital markets needs to take into account the following two points:

(a.) He will have to contrive a means of paying interest to the lenders gross without formality, because this is a demand of lenders in the international capital markets.

(b.) He will naturally wish to be able to charge the interest payable on his borrowing as an expense for the purpose of UK tax assessments.

(2). Payment of interest gross

Euro-bond issues were not practicable unless the borrower undertook to pay interest gross, and it was therefore important to be clear as to the terms on which London, other local authorities and the nationalised industries could arrange borrowing on gross terms. It was possible for a local authority or nationalised industry to arrange to pay interest gross, without attracting any UK tax charge, provided that the interest has an overseas source in the hands of the bond-holder . This interest has an overseas source if; firstly the loan contract is made abroad, secondly if the loan contract is governed by foreign law, thirdly if the interest is payable abroad, and there is no UK paying agent. Finally if the loan is not secured on any specific assets or revenue in the UK.

The Revenue had to consider all the specific arrangements before they took a final view that it takes the relative interest outside the UK tax charge. In their sterling borrowing hitherto, the local authorities had secured their loans on their revenue, largely from rate income. The fourth condition would preclude this. On the basis of the forth requirement being fairly inflexible, there was no means by which the local authorities could secure their loans (if for good reasons they wished to do so) on any assets or income in the UK .

It was important to clarify the point of whether there was any difficulty for the GLC in making a Euro-bond issue provided that the borrowing contract was signed abroad. To enable the authority to pay interest gross, to give the interest a foreign source, it was necessary for the four conditions to be met. The fourth condition was of extreme concern – the provision that the loan should not be secured on any specific assets or revenue in the UK. The concern was that the GLC and other local authorities almost invariably secured their sterling borrowings of rate income, they would wish to do the same in the Euro-bond market, and the fourth provision would effectively preclude them from paying interest gross. It was far from clear that it would be necessary for the GLC or any other local authority to offer a lien on the rates if they undertook a Euro-bond issue .

It seemed that, it was almost certainly necessary to give an indirect lien in the following way. On the basis that the loans to the cities Oslo, Bergen and Copenhagen being regarded by the bond market as the relative precedents, it was necessary for the GLC to give a negative pledge to the effect that if on any subsequent borrowing a security is given, then this security will be available equally for the bond issue. It seems likely, that if the fourth provision was indeed inflexible, then the negative pledge would also fall foul of the Revenue requirements, and it would not be possible for the authority to pay interest gross. This seemed like a very tiresome procedure which involved three possibilities; firstly the Revenue may conclude, on reflection, that the “revenue” to which reference is made; in the fourth provision (that the loan is not secured on any specific assets or revenue in the UK.) relates to trading income, and does not therefore cover the rate or other income of local authorities; there will therefore be no problem. Secondly, the law could be amended in the 1969’s Finance Act. Thridly, the local authorities might discontinue their practice of securing sterling loans against rate income .

However, this problem did not arise for the nationalised industries, because they did not, secure their loans on specific assets or income. The Chancellor of the Exchequer (on the 15th January 1969) approved the conclusion that foreign currency bond issues by nationalised industries were desirable as a contribution to Britain’s foreign currency financing problem, and that the Government should offer to carry the exchange risk so as to facilitate the making of such issues and other local issues . It was noted that the GLC might be debarred for tax reasons from making such issues. If local authorities were in fact debarred, or the GLC decided not to make an issue, it will not be worth extending this arrangement to local authorities as well as nationalised industries. It was finally decided that, if the GLC were not debarred and they have firm plans to make an issue, then the door can be opened to local authorities .

The obvious thing to do was for the local authorities to make an issue unsecured. It seems that unsecured borrowing was a normal procedure in Continental capital markets. However, the borrower was normally expected to provide a “negative pledge”. E.g., the Euro-bond markets may take some issues by the cities of Oslo, Bergen and Copenhagen as precedents. These cities borrowed without security, but provided a negative pledge to the effect that if on any subsequent borrowing a security was given, then this security would be available equally for the bond issue. If a local authority must provide adequate security when it is borrowing in this country, then it seems that the negative pledge would result in a borrower providing security in the foreign currency market as well. This falls “foul” of the revenue requirements. This is a difficulty, which does not stand in the way of a possible foreign currency issue. An appropriate amendment to the Finance Act is necessary .

A tax problem arose, because the Revenue considered that income paid by a UK borrower does not qualify as foreign source income, and is therefore outside the UK tax net, unless the loan is not secured on any specific assets or revenue in the UK. The problem arises for the GLC and other local authorities from the authorities’ traditional practice of giving a “lien” on the rates and other revenues in respect of their London market loans, and the insistence of Euro-bond subscribers on receiving special most favoured nation treatment. This means that the local authorities will almost certainly be required to agree to insertion in the loan agreement of a security provision on the lines of those in the loan agreement for the cities of Copenhagen, Bergen and Oslo. The result, if Revenue stand by their interpretation of the statutory position, is that the act of creating a lien on rate income in the first Sterling loans after the Euro-bond issue will cause the interest paid by the local authority to revert to the status of UK income source, thus coming within the tax charge .

The position of the local authority would be impossible in this situation. It would be regarded as part of the preliminary negotiations as well as in the loan agreement itself, to indicate that interest would be payable gross and yet would be inserting in the agreement a second provision which would be bound in a relatively short time to frustrate its ability, within the law, to fulfil the first requirement. This problem did not arise for the nationalised industries, because it was never their practice to create a lien on UK assets because they borrow under Treasury guarantee. The solution was to remove the offending Revenue requirement in respect of overseas borrowing by the nationalised industries and commercial borrowers (for simplicity and to avoid highlighting the position of the local authorities) . There were four alternatives: firstly, to abandon the idea of foreign currency borrowing by the local authorities. Secondly for the local authorities to abandon their old-established practice of creating lien to secure their sterling issues. Thirdly, a less statutory interpretation by the Revenue of the statutory position to regard the interest payable on these issues as retaining its foreign source connotation even when the indirect pledge became effective. Finally, to amend the law.

Examining these alternatives, the first alternative was unquestionable, especially since the GLC and Manchester had relative borrowing powers. The second alternative was “impracticable”. The third alternative was “a possibility”. So it seemed that the fourth choice was “fairly obviously the right solution” .

The point was that bond issues could be made in the Euro-bond market only if the borrower undertakes to pay interest gross. That the relative interest income has to be given a foreign source (based on the four requirements). The only point of difficulty arose on the fourth – the requirement that the loan should not be secured on any specific assets or revenue in the UK. The problem had arisen only for the nationalised industries where it may be necessary to create an indirect security where the borrower is called upon to give a direct security in a subsequent loan .

However the Revenue view stated that if by such a provision a loan became subsequently secured on assets or income in the UK, then the source could no longer be regarded as foreign. This problem did not arise for the nationalised industries, as they borrow under Treasury guarantee. Therefore, two possibilities were either to abandon the idea of local authority foreign currency borrowing in the face of this tax difficulty or, alternatively to modify the loan established practice under which the local authorities charge their London market borrowing on their rate income. The first possibility was clearly unsatisfactory, due to the potential gain for the reserves, which would have been forgone. The second was considered impracticable. Therefore the tax position was the only consideration. There was a strong case in the longer term for removing the “loophole” through which income has a UK source in all but the legal sense can be paid gross to non-residents .

The policy was to encourage foreign currency borrowing, and to encourage UK borrowers to use the artificial foreign source route to the fullest extent possible. There was no objection on principle to any modifications on the proposed legislations in order to get the maximum benefit from it. A subsidiary point had arisen as a result, as whether it was necessary or desirable to confine the amendment to the local authorities. The tentative view was that there were advantages in generalising the change to apply for all UK borrowers. As it would have been impractical if the nationalised industries or private sector borrowers were called upon to introduce a charge on UK assets in their loan contracts, and because the tax change was confined to the local authorities, were inhibited from further foreign currency borrowing .

The possibility of local authorities borrowing in foreign currencies unsecured was governed by Section 197 of the Local Government Act 1933 (extended by Schedule 4 (43) of the London Government Act 1963) to include the Greater London Council and the London Boroughs) which required that all moneys borrowed by a local authority in England and Wales should be secured on all revenues of the authority, except any money borrowed by way of a temporary loan or overdraft without security. It seemed that there was no possibility of local authorities being able to borrow unsecured, except at the very shortest term, either in sterling or in foreign currencies. Also that local authorities could have had difficulty in meeting the requirements of the international capital markets for payment of interest gross. A clause was needed in the 1969 Finance Bill to get over the difficulty, giving wider facility to the tax difficulties which obstructs foreign borrowing. As the present tax arrangements had the effect that in order to be able to pay interest gross, borrowers had to arrange loans in contracts ruled by foreign law and with interest payable overseas. This gave rise that there needed to be some changes in the fiscal rules to allow straightforward borrowing in London to qualify for payment of interest gross .

(3). Tax arrangements on borrowing by UK companies from non-residents

Lever with the Inland Revenue and the Treasury reached a conclusion in January 1969, which involved three separate suggestions which were designed to facilitate borrowing by UK companies from non-residents. The conclusion was that there was no particular need for further relaxation and that the three particular suggestions could not be recommended .

Payment of interest gross

The first suggestion was that UK companies should be permitted to pay interest due to non-residents on overseas loans gross of UK tax, irrespective of the source of the interest or the residence of the paying agent.

The suggestion arises because (a) in respect of interest which has a UK source, tax is deductible unless the interest is bank deposit interest, short interest, interest payable on certain British Government securities and interest exempted under a double taxation agreement. (b) Subscribers to Euro-bond issues require payment of interest gross without formality and will not subscribe on other terms .

UK borrowers at the time met the requirement at (b) provided that they arrange their loan contracts so as to give the interest a foreign source; in essence this means that the relative loan contract must be established under foreign law and the interest is paid overseas. Such arrangements are not particularly difficult to set up and they involve no tax or other penalty on the borrowing company. The disadvantages are: first, that it would be slightly easier, and certainly more straightforward, if UK companies could set up their arrangements through London agents; secondly, that the need to use an overseas base may seem to be a little undignified particularly for an important UK company or a nationalised industry; and thirdly, that the modest professional fees and commissions associated with the handling of these arrangements go abroad instead of remaining in London .

None of these objections was particularly powerful, and there was no evidence that they inhibit borrowing possibilities at all. The small inconvenience and possible indignity of arranging a loan contract governed by foreign law, once the decision to borrow from foreign sources has been taken, does not appear to affect potential borrowers – one nationalised industry commented revealingly that it meant no more than a day in Luxembourg for the directors. The amounts involved in professional fees are trifling and there is no suggestion that foreigners involved in the loan arrangements could use them as a point of entry for wider operations.

Against these modest and in part merely presentational advantages, there were strong objections against changes in the principles and practice of taxation of the kind which would be involved in the payment of interest gross .

In general and in common with other countries the UK sought to tax all income arising within its borders, wherever the recipient of the income resides, and the law was constructed accordingly. The right to charge income having a UK source was of course given up in many double taxation agreements in relation to investment income, but this was always subject to reciprocity by the other country and on the understanding that the other country will in general tax the income concerned in full. In the case of interest the UK had gone further and surrendered unilaterally its right to tax short interest, bank deposit interest and certain interest on Government securities going abroad. There was the further special case of loans based on contracts governed by foreign law, where UK tax law may in principle provide for the deduction of tax, but the UK had to recognise that the lender may be able to sustain a refusal to accept less than the full amount of the interest, and the UK had adopted the somewhat artificial convention that the interest on a loan where the contract was governed by foreign law was regarded as deriving from a source outside the UK, provided that it was paid outside the UK and that the loan was not secured on specific assets in the UK. It was under this arrangement that UK borrowers issued Euro-bonds with payment of interest gross .

Despite these special exceptions, the UK considered that the principle of its right to tax income arising within its borders remained broadly intact, and that any further erosion of it, except on the clear basis of reciprocity, would be mistaken.

The potential dangers were considerable. Willingness to give up its right unilaterally would undoubtedly make it more difficult to secure reciprocal exemption in double taxation agreements. There were many cases in which a concession given unilaterally would involve loss of revenue without countervailing advantage, thus: some deduction of UK tax may be acceptable to the lender if he is resident in a country with which the UK has a double taxation agreement and in which he can credit his UK tax against his own country’s tax charge – the effect of a concession from the UK would be a benefit to the revenue authorities of the other country. Some of the UK’s agreements provide for interest to be taxed in the country in which it arises at some low fixed rate, usually 10% or 15% – here the tax the UK would give up would be completely lost, because claims to a partial repayment of the UK’s 41¼ % charge on interest have to be made through the other country’s revenue and it must be assumed therefore that the lenders concerned are not striving to remain anonymous from their own authorities; and coming closer to the field of Euro-bond issues, the UK tax deduction is regarded as acceptable in the case of other fixed interest borrowing and to refrain from taking UK tax in such circumstances would be an absurd self-denial .

In the particular case of Euro-bond issue, there would of course be no direct tax loss, given the UK’s assumption that potential borrowers are already able to adopt the method of a loan contract under foreign law which avoids UK tax liability in any case. But it is difficult to envisage an arrangement under which a concession could be confined to Euro-bond issues without encroaching on important fiscal principles elsewhere .

Finally, although the UK are content to adopt the artificial convention that the interest on loan contracts set up under foreign law derives from a source outside the UK, the whole discussion is addressed to Euro-bond issues whose proceeds are used for domestic investment in the UK, and a more realistic appreciation would recognise that the true source of the interest is within the UK. On economic grounds, therefore it was considered reasonable and right for the UK to demand its tax entitlement. At the time in the late 1960s, the UK were content to waive this in the interest of encouraging a source of foreign borrowing .

However, there were still those in the Treasury and the Inland Revenue who considered, that the UK’s arrangements of the time had gone too far, and that there would be a weighty case in the medium term, when the UK could afford to be less encouraging towards foreign currency borrowings, for reverting to a more rational and defensible arrangement under which all interest paid out of income generated in the UK is subject to UK tax, unless reciprocal tax agreements apply. Generally, there were dangers in making fundamental changes in the tax system – or indeed peripheral changes which bear upon fundamental principles of the system – as part of arrangements designed to meet a balance of payments and reserves situation which was expected to improve over the years ahead. So, it was concluded that the balance of argument was overwhelmingly against the suggested change .

Interest on loans in Sterling Area Currencies

The second suggestion, was that the concession in Section 22 of the 1968 Finance Act should be extended to enable companies in computing their profits to deduct interest in respect of loans denominated in any currency of the Outer Sterling Area as well as loans covered in the Section 22 concession denominated in foreign currency. The object was to facilitate borrowing in currencies of the Outer Sterling Area as well as foreign currencies, particularly prompted by the thought that Kuwaiti funds might well be a promising source of overseas borrowing .

There was no ground of tax principle for dispensing less generous tax treatment (for the purpose of computing profits) in respect of loans denominated in sterling area currencies. Also, that, there would be no difficulty in principle in allowing a payer of interest a deduction in computing his profits for interest paid on a sterling area currency loan made to enable him to earn these profits. The difficulty was the serious practical one that further liberalisation of the treatment of interest going abroad would much enhance the dangers of avoidance and evasion of tax. The avoidance danger was that profits earned in the UK would be drawn out of the country without suffering any Corporation tax, through the creation of artificial loan liabilities. Thus, a company can lend money to an overseas associate (on interest free terms) and the associate can lend the money back to another UK member of the group which then incurs a liability to pay interest abroad, and may thus be able to pay in interest gross of UK tax. If the associate is resident in a tax haven, part of the profits of the group have then effectively been taken out of the UK tax net. This could be achieved under the existing law of the 1960s, but the scope for such avoidance schemes was considerably restricted by the fact that the associate either had to be in a non-sterling country (when exchange control comes into operation), or a double taxation agreement had to be invoked to enable the interest to be paid gross – and there were provisions in double taxation agreements designed to prevent the misuse of the reliefs allowed under them . Extension of the Section 22 concession to loans denominated in sterling would make it practicable for UK borrowers to pay interest gross to a sterling area country (for example a West Indian tax haven) without deduction of tax, and such avoidance schemes would be much more difficult to counter. Anti-avoidance provisions similar to those appearing in out double taxation agreements could be included in the necessary legislation, but these might well be ineffective since it would be difficult for Inspectors to link up a chain of associated lending operations designed to take advantage of the concession. It was then suggested that, the UK should not then be able to consult the other country’s Revenue to confirm that the relief was not being abused .

The scope for evasion of tax on interest received by individuals resident in this country would also be extended if UK borrowers were able to claim a deduction in computing their profits for interest paid on sterling area currency loans and it thus became practicable to pay interest gross to sterling area countries. Interest from an overseas source paid through a UK paying agent or collected by a UK collecting agent was subject to UK’s “foreign dividends” machinery; interest on British Government securities payable gross to persons not ordinarily resident in the UK was policed in a similar way. This machinery ensured that where dividends or interest are paid direct to a UK resident, tax was deducted and accounted for to the Revenue by the paying or collecting agent. To evade tax on such income, therefore, a UK resident had either to make it appear that the income was payable to a non-resident or that he had to keep it entirely outside the paying and collecting agent machinery – either by retaining the income abroad or by having it remitted to this country in a form which does not bring it within the taxing machinery. If the income was left abroad, the UK were not likely to find out about it (unless the UK learn of it indirectly, e.g. in the course of a back duty investigation) . Often however, the individual would want to use the income in the UK and this was difficult to arrange without coming within the taxing machinery, particularly if the income was in a non-sterling currency.

While therefore evasion of tax on interest payable abroad was possible under existing arrangements the scope for it was restricted. Furthermore, many individuals prefered to buy bonds of UK companies rather than of foreign companies. To extend the Section 22 concession in the manner proposed would have enabled UK borrowers to pay interest gross on sterling area currency loans under overseas loan contracts, and this would substantially increase the field in which evasion could take place. Admittedly, UK residents were already able to buy Euro-dollar bonds issued by UK companies, but for this purpose they must either pay the investment currency premium (which would make the investment unattractive) or evade the exchange control. Bonds issued in sterling currencies by UK companies would be more attractive to UK residents and it would be more difficult to counter evasion of tax on interest on such bonds .

Against these severe practical difficulties, the UK had to counter the possible benefits to the balance of payments and reserves of overseas borrowing in sterling area currencies. If the proposed additional facility did not increase the total amount of overseas borrowing, but merely replaced some foreign currency borrowing by some borrowing in sterling area currencies, this would be unwelcome. To the extent that the UK obtaining sterling area currency prevented the sterling area country concerned from an equivalent diversification of its reserves into foreign currency. The UK’s borrowing in this form would be as good as foreign currency borrowing. But the more likely situation would be that the sterling lending to the UK would be only partly an alternative to diversification and would mainly be offset by a reduction in sterling holdings .

There was however the question of the extent to which the additional facility would open the way to increased overseas borrowing. This was not easy to judge. There was no shortage of available funds for foreign currency borrowing, but an important element in the reluctance of potential UK borrowers to commit themselves was the exchange risk associated with foreign currency borrowing, particularly where the proceeds were to be used for domestic investment. It was thought that the deterrent effect of this risk would be smaller in the case of sterling area currency borrowing, but even this judgement was doubtful. The fact was that experience of the reaction of other countries to UK’s devaluation in November 1967 had demonstrated the probability that, on any future similar occasion, the stronger sterling area currencies would not move with UK sterling . Adding to this, the fact that the sterling area currencies which were most likely to be available for overseas borrowing are those of the countries in relatively strong balance of payments and reserves positions, such as Kuwait, it becomes rather doubtful whereas UK borrowers will in general see the additional facility of sterling area currency borrowing as being so attractive as to increase their overall willingness to borrow.

On balance, it seemed likely that the additional facility of borrowing in sterling area currencies would induce some switching by UK borrowers from foreign currency to sterling area currency which would be disadvantageous, and might be offset to some extent by willingness to borrow on a rather larger scale in this form. There certainly seemed to be no ground for thinking that the additional facility would create a substantially greater level of overseas borrowing, and it was concluded that it was not worth embarking on this against the background of substantial difficulties in tax evasion which would unavoidably be associated with it .

Loans for Non-Trade Activities

The third suggestion was a further extension of Section 22 concession to allow deduction for Corporation Tax purposes for interest paid on loans in support of other and general purposes, as well as the purpose of the borrowers’ trade already covered by Section 22.

Even if there were an argument on balance of payments grounds for making some further relaxation in the treatment of interest, there was no reason why the right to pay interest to non-residents gross should be extended beyond the field of borrowing for trade purposes. Overseas borrowing of money which will be used in a UK business, and thus tend to strengthen the whole UK economy, was one thing. Borrowing abroad and thereby placing a continuing burden on the current balance of payments for the purpose of, say, buying a villa at Cannes, was quite another. Restriction of the concession to loans for trade purposes meant that the concession was available for direct investment, but not portfolio, but it was far from clear that the UK wanted to encourage domestic portfolio investment by UK borrowers using foreign currency finance. The UK certainly did not want to encourage such borrowing to finance or facilitate the payment of import deposits, and indeed in general it seems untimely of such thinking of unrestricted access to foreign borrowing which might in many directions have interfered with attempts to control domestic credit .

D. Conclusion

The general conclusion was therefore negative on all three suggestions, which was open to strong objections of fiscal principle or practice and did not offer commensurate advantages. Levels of overseas borrowing by UK companies for domestic purposes had hitherto been modest. The joint judgement of Lever, the Inland Revenue and the Treasury was that tax differences have played little or no part, and that the most important influences had been fears of exchange risks on the one hand and relatively easy access to funds on the domestic market on the other. Therefore it was considered that there was no mechanical or technical changes which could usefully lead UK companies in the direction of greater borrowing abroad.

In response towards this, Lever recommended the following inclusion in the 1969 Finance Bill of a clause which would authorise the Treasury to direct, in respect of any specified loan raised by a local authority in the currency of a country outside the Scheduled Territories: firstly, that the interest should be payable without deduction of tax at source. Secondly, that it should be exempt from UK tax so long as the stock or bonds in question are held by a non-resident. Thirdly, that the Capital should not be subject to any present or future UK tax on capital where the beneficial owner was neither domiciled nor ordinarily resident in the UK .

The purpose of this clause was that it was in the “public interest” for nationalised industries and large authorities to borrow on the Euro-dollar market . The Chancellor of the Exchequer in his Budget Speech clarified this point and further explained that the proposed Finance Bill clause was designed to facilitate foreign currency borrowing by local authorities :

“A point which has been urged upon me from time-to-time is that some of our public authorities should be enabled to take advantage of funds available in the international capital markets for long-term borrowing, and in doing so bring support to our reserves. The House is aware that a number of nationalised industries are being encouraged in this direction, with the assistance of special arrangements which have been devised to relieve them of exchange uncertainties, and indeed the Gas Council has completed arrangements, and in part funds, from total borrowings of over £30m recently. I am anxious that this facility should be available to local authorities also, and I propose to include in the Finance Bill a clause which will remove a minor tax obstacle which at the moment prevents this”.

ENDNOTE

* Here are two very similar definitions of the term Euro-dollars:

Robert Gilpin, (The Political Economy of International Relations, Princetown University Press, 1987, p. 314-315), states that: The Euro-dollar market received its name from American dollars on deposit in European (especially in London) banks yet remaining outside the domestic monetary system, and the stringent control of national monetary authorities.

Enzig and Quinn (The Euro-dollar System: practice and theory of international interest rates, MacMillan Press, 6th edition, 1977, p. 1) state that: the Euro-dollar system is a term used to describe the market in dollar deposits and credits which exists outside the United States of America.

This paper is based on the following PRO files:

T 295/628: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds; (B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (5/06/1968 – 8/01/69). File Number: 2FEC 123/76/01 “PART B”

T 295/560: Tax Measures To Encourage Eurodollar Borrowing: (A) Payment Of Interest Gross On UK Bearer Bonds;(B) Allowance Of Annual Interest As A Deduction From Corporation Tax. (10/01/69 – 30/04/69). File Number: 2FEC 123/76/01 “PART C”

T 295/628: Confidential letter on Euro-dollar borrowing for home investment, from Mr. D.A. Walker to Mr. Littler of the Treasury, on 5th June 1968.

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Do Contractors Really Need IR35 Insurance?

The expression “IR35″ is only whispered in circles frequented by self employed contractors and freelancers, primarily because it’s likely to elicit one of two responses. Either their face will fill with dread and they will run shrieking to the horizon. Or they might smile contentedly and shrug, showing no real signs of fear. The latter will have taken out IR35 Insurance.

IR35 can be the source of constant concern for UK contractors and the threat of an HM Revenue and Customs (HMRC) investigation can be a heavy onus. Some may even remember the most famous HMRC case against Dragonfly Consultancy Ltd, which left the unfortunate company director with a tax liability of £99,000! So, it’s no surprize that most associate negative connotations with the four symbols I R 3 and 5.

Does it have to be like this, though? Take a deeper look into what it is, what it is actually supposed to do and how a self employed contractor can protect him/her self against it with a good insurance policy and suddenly it really isn’t all that bad. Honest!

IR35 was born in September 1999 and was put in place by the then Inland Revenue and Customs (now the HMRC) to close a tax loophole that was being expolited by Contractors and Freelancers throughout the nineties. This new legislation was put in place to stop “intermediaries” (i.e. composite companies and personal services companies) from avoiding tax.The new law stipulated that, where an intermediary was being employed by a corporation to carry out a service (IT consultancy or contract engineering services for example), and the employment relationship between the worker and their client would have normally been direct employment, the worker should pay tax and NICs like any other employee.

The key is to demonstrate whether a contractor is classified as inside or outside IR35 and this is where it can get a little technical. It boils down to whether a contractor has a contract “for” service or a contract “of” service. The former is where the individual is an indpendent self-employed contractor and the latter is where the individual is working for a client. When a contract “of” service is in place, IR35 is deemed applicable. When a contract “for” service is in place, it is not applicable and contractors can optimize their tax efficiency with an accountant that specializes in Freelancers and contractors.

So, if it’s all that straight forward, why all the fuss? Why the need for insurance? Well, as with all things it’s a question of risk moderation. HMRC carries out roughly 1,000 IR35 investigations a year. When you take into account that there are about 1,400,000 contractors and freelances in Britain, 1,000 doesn’t seem like much of a risk. Having said that, when an intermediary comes under the HMRC’s microscope it has to show its innocence and pay all of the legal costs for doing so. Also bear in mind that, in the event that it is found to be outside IR35, severe tax liabilites may be applicable (and let’s not forget about backdated interest).

So, taking all of this into account, it’s pretty clear why a contractor would want to take out comprehensive insurance to cover the unfortuneate liklihood of an HMRC investigation. There are plenty of insurance providers in this sector and a policy can cost up to £600 per annum. This amount is almost a drop in the ocean compared to the potential costs and strain that an probe could bring.

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Three (3) Secrets to a Successful Tax Return!

How do you find a tax preparer that is right for you?

First, not all tax preparers are the same. I wrote an article about this last year titled: Tax Returns: Are They All Created Equal?

HOW DO YOU FIND A TAX PREPARER THAT IS RIGHT FOR YOU?

First, not all tax preparers are the same. I previously wrote an article about this last year titled: “Tax Returns – Are they really all created equal”, and you may be as surprised as other readers about just how much tax return preparation can vary.

In fact, I calculated the average savings I typically find from annual tax savings, reducing professional fees and audit assessments. In total, the average savings are:

- ,750 Annual tax savings

- ,000 Audit defense savings

- ,000 Reduced audit assessment savings

- ,000 Reduced legal fees

- ,000 Reduced tax return preparation fees

This is a total average potential savings of ,750! Your tax preparer does make a difference! How much more could you do with these savings?

Second, the right tax preparer for you depends on what is important to you. Take a minute to answer this question:

WHAT MAKES YOUR TAX RETURN SUCCESSFUL?

How you answer this question will impact what type of tax preparer you need on your team. I’ve asked this questions to clients, prospects and colleagues. I have compiled the most popular answers and what it means to you as you find the tax preparer for your team.

ANSWER #1: Paying the least amount of tax legally

Your tax preparer needs to:

- Know the tax law very well and know how to be creative legally.

- Ask you a lot of questions about your situation in order to understand your situation and goals.

- Have a review process where at least one other person reviews your return solely for the purpose of how to reduce your taxes legally.

HERE ARE SEVEN (7) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER TO DETERMINE IF IT’S A GOOD FIT:

Q1: Can you tell me about the other ___________ (your industry) you service?

A: Your tax preparer needs to know how the tax law applies to your situation. Having other clients in your industry or with similar investments indicates that the tax preparer is likely to be familiar with the tax laws that impact you.

Q2: Who will be working on my tax return?

A: It’s very common (and a good business practice) for tax preparers to have staff prepare your tax return. You want to make sure the other people working on your return have the same level of expertise.

Q3: What is your tax return review process?

A: Tax preparers who are focused on reducing your taxes will have this built into their review process. Usually it involves having another experienced tax preparer review the return solely for the purpose of finding ways to reduce your taxes.

Q4: What would you have done differently on my past tax return?

A: Show the tax preparer you are interviewing your prior year tax return. Creative tax preparers will be able to give you at least one idea of what you can do to reduce your taxes by looking at your tax return for just a few minutes. If it’s creativity you are after, this is a great question to ask! But don’t expect the tax preparer to give you all the details right then and there – that’s why you pay them!

Q5: How much can you save me in taxes?

A: While it’s difficult for any tax preparer to answer this in just a few minutes of looking at your past tax return, it is possible for them to know if they can save you taxes after spending 30 minutes with you.

Q6: What deadlines do you impose on clients?

A: This may seem like an odd question for minimizing your taxes but it has a direct impact. If your tax preparer allows you to provide your information a week before the tax return is due, it’s very unlikely that the tax preparer will have the time to focus on your return to truly minimize your taxes. Tax preparers that want to reduce your taxes want your tax return information early and will communicate that to you.

Q7: What recent tax law changes should I be aware of? A: To minimize your taxes, your tax preparer needs to know the tax law inside and out, which includes the latest changes. Your tax preparer needs to be able to answer this question without hesitation.

ANSWER #2: Minimizing tax return preparation fees Your tax preparer needs to:

- Focus on the tax work and recommend someone else for the non-tax work (such as bookkeeping).

- Request tax information in a certain format.

- Require you to input your information online.

HERE ARE TWO (2) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER REGARDING MINIMIZING RETURN PREPARATION FEES TO DETERMINE IF IT’S A GOOD FIT:

Q1: What can I do to reduce my tax return preparation fees?

A: To minimize your tax return preparation fees, your tax preparer always needs to have your fees in mind. Ask your tax preparer what you can do to reduce your fees. If you don’t get at least 2 suggestions, your tax preparer probably isn’t thinking about how to keep your fees low.

Common suggestions include:

- Have someone other than the tax preparer do your bookkeeping. I am always skeptical when a tax preparer does the bookkeeping. First, they either charge an arm and leg or if they reduce their rates to accommodate you, it means they don’t spend their time entirely on tax issues, which could indicate their tax skills aren’t up to par.

- Organize your information. Don’t bring your tax preparer a shoebox! A tax preparer that is really focused on keeping your fees down will have forms, spreadsheets and other tools available for you to use to organize your tax return information.

- Enter your information online. Many tax preparers now require clients to input their information online. Accurately entered information can help reduce fees. Caution: Information that is entered inaccurately can increase your fees!

Q2: What is your fee structure?

A: Your tax preparer needs to be able to answer this question with confidence. Any wavering could indicate that the tax preparer knows the fees are too high for you but just doesn’t want to tell you. Unfortunately in these situations, you find out too late!

ANSWER #3: Reducing audit risk Your tax preparer needs to:

- Know the tax law very well and how to properly report your activity.

- Understand the IRS’s current “hot buttons” or “red flags.”

- Offer an audit defense plan.

HERE ARE FOUR (4) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER IN REGARDS TO REDUCING AUDIT RISK TO DETERMINE IF IT’S A GOOD FIT:

Q1: How many audits have you been through and what triggered the audit?

A: The most important part of this question is what triggered the audit. If it was triggered by how something was reported, then that may be something the tax preparer had control over (and may be a bad sign for you).

Q2: What was the outcome of the audits you have been through?

A: A return can be randomly selected for audit or selected because of a certain activity (even though it was reported correctly). So it’s important to understand the outcome of the audits. Was additional tax assessed or were there no changes? Additional tax may indicate that something was not reported properly.

Q3: Do you offer an audit defense plan?

A: Tax preparers that are confident in their work will offer an “insurance” program that covers their professional fees to handle your audit if your return is selected for audit.

Q4: What is your tax return review process?

A: Although tax returns can be selected randomly for audit, many are selected due to how items are reported on the tax return. Tax preparers who are focused on reducing audit risk will have a review process that includes another tax preparer reviewing your return solely for accuracy of reporting.

Be selective with the tax preparer you put on your team. The average savings I find for my clients is over ,000! Your tax preparer makes a difference!

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Importance of Accounting for Tax On Income In Finance Accounts

Accounting for tax can be defined as the method of accounting for tax on income, finance accounts or indeed anything based on finance accounts that has to be reported to the Inland Revenue. Many laws look after taxes and there are many principles that govern tax on income and as an income tax payer the importance of accounting in your new small business is worth noting. Financial accounting and specifically technical accounting terms such as ledgers, control accounts, balance sheets and double entry bookkeeping can often appear daunting and becomes quite complex should your small business grow. Methods of recording tax employed in companies does vary and it’s best to research buying any software and even trying before you buy. The importance of accounting in business becomes clear when thinking of the amount of work involved but accountant planning systems are available to start ups and small businesses that are very useful and still quite comprehensive compared to larger systems.

The International Accounts Standards Board has set definite principles and standards that cover all aspects of accounting for tax and are referred to as generally accepted principles that small, medium and large businesses or corporations must adhere to. Many developing countries are yet to launch this idea of tax revenue system, whereas here in the UK its application and tax definition is employed strictly by the Inland Revenue meaning as a small business owner or a start up company, you need to become familiar with accounting for tax purposes as soon as possible.

Accounting for tax follows fairly difficult procedures and the importance of accounting consistently using tested financial procedures. Applying tax definitions within your business finance accounts now and familiarising yourself with different aspects of accounting for tax purposes is key, and will help when it comes to recording self assessment, income tax and many other items that need to be sent to the Inland Revenue annually, or as required to do so. Accounting for tax has its importance in that failing can create serious problems that threaten the existence of the business while tax is often the largest amount ever paid by a business.

Filing tax returns is always easier using finance accounts software that is readily available and producing reports and recording regular transactions of purchases, payments, cash sales etc is something that is important to running a business smoothly and effectively. For recommendations on accountant planning, advice on tax definitions and what is required of you and your business, the Inland Revenue are accessible and approachable. They can advise on the importance of accounting in your new business and can answer your questions on how income tax is recorded and even how to complete your first return so don’t be frightened to contact them should you need to as you are starting out and as you begin to grow.

Vat and the Central Taxes in Mumbai, India

1. INTRODUCTION:

 

1.1           VAT Council of States, the body of State Finance Ministers and Standing Council of Commissioners have agreed that the VAT should be implemented all over India from 1-4-2001. However, subsequently, after taking into consideration the fact that the groundwork is still in progress, the date has been extended to 1-4-2002. One thing is certain that the word ‘VAT’ [Value Added Tax] is a symbol of Globalisation and Liberalisation, which is a universal phenomenon for the current age is bond to be implemented in India.

 

2.SUCCESSFUL TAX SYSTEM:

 

2.1           Among many other things, the successful tax system always tries to avoid cascading effect of the tax. The VAT, being Value Added Tax, it presupposes that, if the tax is levied on sale value, all the taxes paid while making purchases as well as all the taxes paid during the process of manufacture or import are to be refunded. The CREDIT method or INVOICE method of VAT system ensures that the taxes shown in the purchase bills are given the credit to the dealers. The uncontrolled incidence of tax always shrinks the industry and trade and keeps away from the developing process of the national economy. The tax system has to be neutral so far as its effect on the choice of inputs and outputs for the manufacturer and choice of the goods for a consumer is concerned.

 

2.2           At the same time multiplicity of the rates has to be removed in a model system of taxation. That’s why the Finance Ministers Committee has agreed to keep the number of rates to four. Widespread taxation encourages the vertical integration of industries and thus discourages small-scale ancillary industries. Heterogeneity in the structure of tax, that is having different taxes like Sales Tax, Turnover Tax, Surcharge, Additional Tax, makes the system so much complicated that either there is tendency towards evasion or it makes a way for clashes between the administration and the assesses.

 

3         STEPS TOWARDS VAT:

 

3.1             As pointed above VAT Council of States, and Standing Council of Commissioners have agreed that the VAT should be implemented from 1-4-2002. It was also agreed that there should be floor rates common to all the States. Though Maharastra State had introduced the floor rates from 1-1-2000.

 

But due to the pressure from people they were corrected on 13-1-2000 and 22-1-2000. However some fine-tuning of the classification has yet to be done giving another look at the grouping of the goods in to four-rate categories and floor-rates.

 

3.2             Abolition of the tax-related incentives scheme is another step in the direction of bringing VAT in to operation. In fact the States have taken this opportunity to stop the incentives to be given in the name of Backward Area. This will not only raise the revenue of the States but will also put end to the war among the States in the form of harmful competition of reducing tax rates to give tax incentives.

 

3.3             Draft model of VAT legislation has been prepared by the National Institute of Public Finance and Policy. The circulation of papers on VAT will certainly be creating the atmosphere towards readiness to accept VAT.

 

4. EXPERIENCE OF VAT IN MAHARASTRA:

 

4.1                      During the period from 1-10-1995 to 31-3-1999 Maharastra had VAT in a limited sense. Initially the limit covering the dealers under VAT was Rs. one crore but was brought down on 1-7-1997 to Rs. 40 lacs. Though the additional tax and Turnover Tax was abolished, the rates were over all increased to cover those taxes [most of the goods taxable at 10% were taxed at 13%]. Some 12 industries and 100% export units were allowed the full set-off of the sale tax paid on inputs.

 

4.2                      It is said that the VAT was abolished from 1-4-1999 due to fall in the Sales Tax revenue. But the Economists do not agree to such reasoning. Since there was a general recession in the industry during 1996 to 1999, the govt could not have expected the increase in the tax revenue on implementation of VAT. In fact the fall in the tax revenue augmented by the set-off policy of giving refund to manufacturers manufacturing tax-free goods, 100% exporting Units, 12 preferred industries and reduction in the burden of taxes on inputs from 4% to 3% to all manufacturers. The decision to abolish Vat in Maharastra was thus a non-economic one, tinted with political surroundings.

 

5. CENTRAL SALES TAX:

 

5.1                       Central Sales Tax was introduced in India in 1957. Every one knows the chaos created by the different basis for levy of tax on interstate sales, like situs of sale, manufacture or consumption criteria etc. With a view to provide the levy and collection of taxes on interstate sales and to put restrictions on the goods declared as of special importance the Central Sales Tax was brought in. But the main and indirect object of the Central Sales Tax Act was to keep watch on the movement of goods sold in interstate sales and thereby regulate and monitor the interstate trade so as to avoid the evasion of taxes. That is why the rate of tax was only 1% in case of transactions between the registered dealers.

 

6. HAS CENTRAL SALES TAX OUTLIVED ITS UTILITY?:

 

6.1           The rate of Central Sales Tax is now increased to 4%. Thus instead of regulatory object of the Central Sales Tax Act, it has turned in to revenue earning tax. Because of higher rate of tax there is more evasion. The availability of bogus ‘C’ forms and misuse of ‘F’ forms by taking shelter of branch transfers or consignment sales, is the direct result of the higher rate of Central Sales Tax. The higher rate has also affected the national economy, as the goods produced in Indian state are costlier than the goods imported from foreign countries.

 

6.2           The levy of Central Sales Tax on the inputs has tendency to increase the cost of production. This also has a cascading effect because the finished goods of one state may be the raw materials for goods being manufactured in other state. Thus the final product has heavy tax burden because no state is willing to refund the tax burden levied by other state. This also results in unbalanced growth of industries without having any relation to the best-suited environment for the production of goods.

 

6.3           The incidence of Central Sales Tax is discriminating against the consuming states. The consumers of industrial backward states have to pay the Central Sales Tax on the goods purchased from other states. This tax is collected in the coffers of the developed states. Within the semi-federal feature of the Indian Constitution, it is socially unjustified to burden the poor people of the backward state with the tax going to the industrially developed state.

 

6.4           Obtaining ‘C’ or ‘D’ forms from any Sales Tax office is very difficult processes. In fact obtaing the ‘C’ form is itself a topic for separate and independent article. Misuse of ‘C’ forms has another story towards evasion of tax. Instead of smoothening the interstate trade, the ‘C’ form hampers the free flow of trade from one state to another.

 

6.5           The advantage of the situation like one that is available to the European Common Market is denied to Indian states because of Central Sales Tax. The Central Sales Tax does not allow the states to unite to form the common market that is essential in the wake of Globalisation and Liberalisation.

 

6.6           The export trade of India is also affected by the levy of Central Sales Tax. The export is exempted from tax but the inputs required for the goods to be exported is not exempted. The penultimate sale of the goods to be exported is exempt, but the raw materials used for manufacture of the goods to be exported are not exempted. This results in increasing the cost of production which directly affects the export trade.

 

6.7           The penultimate sale in the course of export is exempt under Central Sales Tax Act. But to claim such exemption form ‘H’ has to be produced. It is very difficult for the dealers selling the goods to exporters to obtain ‘H’ form.

 

Ordinarily the exporters do not have a confirmed order in hand unless the samples as drawn from the bulk are and shown to the foreign buyers. More over the exporters are reluctant to give ‘H’ form as the details about the foreign importer, mode of dispatch and destination are to be mentioned in ‘H’ form.

 

7  VAT AND CENTRAL SALES TAX:

 

7.1           As discussed in para 6 above the Central Sales Tax needs to be abolished. If it cannot be abolished before 1-4-2002, that is before coming in to force the VAT, the provision to grant refund of the Central Sales Tax paid on the inputs must be made in the VAT. In Canada, the country on whose pattern the ensuing VAT is said to be drafted, there is no tax on the sales made in the course of interstate trade and commerce. Inter state sales are exempt from taxes. It will be also in consonance with the basic idea of VAT that it is a tax on the ‘value added’ and once the tax is levied on the higher value of the sale point, the credit for the all kinds of taxes paid on the purchases should be refunded.

 

8. SERVICE TAX:

 

8.1         For the first time in the year 1994 the Service Tax was introduced in India as an associate of Central Excise Act. The telephone service, non-life insurance and Stock Brokers were the first to be brought under the purview of the Service Tax. Since then the net of Service Tax is being widened and today about 41 services are on the list of taxable services. The rate of tax is uniform at 5% of the receipts for the value of taxable service provided by the service provider. The separate registration by the service provider is necessary, which is given by the Central Excise authorities. The Service Tax can be colleted from the clients and has to be paid quarterly to the govt. Failure to follow the procedure and late payment of taxes attract interest, penalty and punishment.

 

8.2         The trader or the manufacturer, who will be paying VAT, will ordinarily be paying the Service Tax on the expenses for following services that are directly utilized by him in the process of value addition.

 

i]   Telephone and Telegraph Charges, Fax charges, Property,Insurance, Courier charges;

 

ii]  Advertising expenses, Photography and Video shooting charges;

 

iii] Charges of Consulting Engineer, Architect, Interior decorator, Security agency;

 

iv]  Charges of Management Consultant, Chartered Accountant, Cost Accountant, Company Secretary,  Market Research Agency, Scientific or Technical  Consultant, Banking and Financial Institution charges, On-line Information Service charges;

 

v]   Custom House Agency charges, Shipping Line and Container charges, C & F Agency commission paid, Air Travel Agency charges, Automobile Service charges.

 

8.3         When all such charges going into the manufacturing or trading expenses bear the Service Tax burden of 5%, levy of VAT on the sale price comprising the said charges will have a cascading effect on the price structure of the commodities. Therefore in a perfect VAT system there is no place for the Service Tax. It has to vacate the place for VAT. If that is not possible, in the larger interest of economic growth, the refund of the Service Tax paid on all kinds of inputs must be given credit in full.

 

8.4         In Canada there is GST, which means Goods and Service Tax. It is about 7% and is collected by the Federal or Central Govt. States used to levy RST or VAT at 8%. Now there is only one tax system known as HST [Harmonised Sales Tax]. It is levied at 15%. It is comprehensive tax covering as much as possible at the bases. The tax on services is also included in HST.

 

9    CENTRAL EXCISE DUTY:

 

9.1         The levy of excise duty is undoubtedly claiming the substantial share in value addition process. The present scheme of Modvat is only restricted to the credit and refund of the excise duty paid on the raw material used in manufacture or process resulting in new commodities.

 

9.2         When VAT comes into existence, the levy of tax being on the sale price that is on the increased value, to avoid the ill effects of multi-taxation it is essential that the Central Excise Duty paid on the inputs is given credit or is refunded when the VAT is paid on the output.

 

10  CONCLUSION:

 

Since VAT will be comprehensive tax levied on the sale price, to avoid its ill effects on the growth of the economy, the abolition of Central Sales Tax and Service Tax must be given a serious thought. If its abolition is not possible then, to be in conformity with the optimal tax theory, it is very essential that all kinds of taxes paid on the inputs must be given credit or be refunded. In this article, the taxes levied by the Central Acts are only considered. What is true of Taxes under Central Acts is also true of the other taxes levied by the States, like Works Contract Tax, Lease Tax, Luxury Tax, Motor Sprit Tax etc. But that will be another story.

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