Taxation in the United kingdom (3)

History. The income tax was first implemented in Britain by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic Wars. Income tax was levied under five schedules—income not falling within those schedules was not taxed. Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic Emancipation.

The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. The UK income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150.

UK income tax has changed over the years. Originally it taxed a person's income regardless of who was beneficially entitled to that income, but now a person only owes tax on income to which he or she is beneficially entitled. Most companies were taken out of the income tax net in 1965 when corporation tax was introduced. Also the Schedules under which tax is levied have changed. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003. For income tax purposes, the remaining schedules were superseded by the Income Tax Act 2005, which also repealed Schedule F completely. The Schedular system and Schedules A and D still remain in force for corporation tax. The highest rate peaked in the Second World War at 99.25% and remained at about 95% till the late 1970s.^]

In 1974 the top-rate of income tax increased to its highest rate since the war, 83%. This applied to incomes over £20,000, and combined with a 15% surcharge on 'un-earned' income (investments and dividends) could add to a 98% marginal rate of personal income tax. In 1974, just 750,000 people were eligible to pay the top-rate of income tax. Margaret Thatcher, who favoured indirect taxation reduced personal income tax rates during the 1980s. In the first budget after her election victory in 1979, the top-rate was reduced from 83% to 60% and the basic rate from 33% to 30%. The basic rate was also cut for three successive budgets - to 29% in the 1986 budget, 27% in 1987 and to 25% in 1988. The top-rate of income tax was cut to 40% in the 1988 budget.

The Finance Act 2004 introduced an income tax regime known as "pre-owned asset tax" which aims to reduce the use of common methods of inheritance tax avoidance.

TAXATION IN THE UNITED KINGDOM (4)

Value added tax

The third largest source of government revenues is value added tax (VAT), charged at the standard rate of 17.5% (temporarily cut to 15% between December 2008 and December 2009) on supplies of goods and services. It is therefore a tax on consumer expenditure. A document posted on the Parliament website on November 25 2008 suggested that the government was planning a higher 18.5% VAT after this time elapsed, but the Treasury has said this was "an option that was considered and rejected."

Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate, such as domestic gas supplies) or 0% ("zero-rated", such as most food and children's clothing). Exemptions are intended to relieve the tax burden on essentials while placing the full tax on luxuries, but disputes based on fine distinctions arise, such as the notorious "Jaffa Cake Case" which hinged on whether Jaffa Cakes were classed as (zero-rated) cakes—as was eventually decided—or (fully-taxed) chocolate-covered biscuits. Until 2001, VAT was charged at the full rate on women's sanitary towels, presumably because they were considered luxury or non-essential articles.

Corporation tax

The fourth largest source of government revenues is corporation tax, charged on the profits and chargeable gains of companies. The main rate is 30%, which is levied on taxable income above £1.5m. In 2005-06, income below this level was taxed at 0% and 19%, but with marginal reliefs in between the bands. The 0% starting rate has been abolished with effect from 1 April 2006.

There is also a Supplementary charge to Corporation Tax for companies involved in petroleum exploration (for example in the North Sea) which is levied at a rate of 20% for profits arising from 1 January 2006 (previously the rate was 10%).

Excise duties. Excise duties are charged on, amongst other things, motor fuel, alcohol, tobacco, betting and vehicles.

Stamp duty. Stamp duty is charged on the transfer of shares and certain securities at a rate of 0.5%. Modernised versions of stamp duty, stamp duty land tax and stamp duty reserve tax, are charged respectively on the transfer of real estate and shares and securities, at rates of up to 4% and 0.5% respectively.