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For most of us students, the realm of taxes and the ordeal that is paying them is a foreign, distant landscape far off into the future. However, taxes play an essential role in a nation’s upkeep as a vital tool for supporting civilians and providing social services. There are many, many different kinds of taxes from income and self-employment tax to sales and gift tax. As a sixth-form student who has never once had to worry about filing taxes, the entire concept of them - and particularly the law behind them - befuddles me. So, in an attempt to expand my own understanding, I've written this article that will explore the taxes every ordinary citizen pays (or, at least, is expected to pay), and the laws that are in place to monitor and support the tax system, with a focus on UK taxes and law.
The first tax expected of individuals is the income tax, imposed on individuals for their earnings and variable dependant on how much you earn. Your 'taxable income' excludes some things, though, such as contributions to retirement accounts and mortgage payments. Your tax bracket, which depends on how much money you make, determines the rate of tax to pay; people who make more have to pay more. Furthermore, heirs or heiresses who inherit estate or funds from deceased loved ones must pay inheritance tax. However, this depends on whether the gifts were inherited within seven years of death, and if the estates had been transferred into lifetime trusts. This only applies to some - a 40% tax is imposed on any estate worth $325,000, or a reduced 36% tax if you make a charitable donation. There is also a council tax expected of individuals, which is used to fund government services like rubbish collection, libraries, police and fire services, education services, administration, and transport and highway services. The amount you owe in council tax is determined by a valuation bond. Your house or residential property sets what band you fall in and, in 2008, the average council tax for a property in England was £1,146. If you’re single, you’re in luck - you qualify for a single-person discount on your council tax!
Outside of these personal taxes, taxes are also added to goods and services. A famous example of this is the value-added tax (VAT), which was the third largest source of government revenue. It is a 20% tax applied to goods or services in consumer expenditure. Interestingly, certain goods and services are exempt from it or only have a reduced version imposed on them. For instance, in the UK, VAT is imposed on chocolate-covered biscuits but not chocolate-covered cakes (I have no clue why). The beloved treat Jaffa Cakes were first classified as cakes, meaning they were exempt from VAT. However, in 1991, the VAT Tribunal argued that Jaffa Cakes were actually biscuits. In response, McVities (producer of Jaffa Cakes) argued that their product was cake because of its spongelike bulk and texture, its runny batter and its name. Even the Irish Revenue Commissioners decided the Jaffa Cakes were, in fact, cake because of their high moisture content! So, it was determined that value-added tax was not to be imposed on Jaffa Cakes in the UK. As of now, VAT in the United Kingdom is set at 20% (it was last updated by former Chancellor of the Exchequer George Osborne in 2011). Beyond this, there is a myriad of other taxes expected of businesses and individuals that pertain to their careers and financial circumstances.
How does law relate to all of this? Well, if you fail to pay your taxes to the HMRC (His Majesty’s Revenue & Customs), you are breaking the law and may well find debt collection agencies knocking on your door. You can be found guilty of tax evasion for many activities, such as false invoices, failing to declare imported goods, not reporting taxable trading income, or using a fake identity to file taxes. Tax evasion is a form of tax fraud and, consequently, carries heavy fines and penalties with up to seven years in prison possible. Cheating public revenue, which means avoiding paying taxes through fraudulent methods or schemes, even carries life in prison! The HMRC looks for inconsistent tax filings and similar suspicious activity to investigate tax evasion. So, when the time comes, be sure to pay them in a timely and adequate manner.
Be aware, though, that tax avoidance and tax evasion are not the same thing! Tax avoidance is when a person or business takes advantage of the tax system, but legally. Meanwhile, tax evasion is when a person or business doesn't pay their taxes, sometimes through fraudulent means. This means that tax avoidance is perfectly legal, whereas tax evasion is not. You may have heard of large companies having offshore accounts, which are essentially bank accounts opened in a different country that allows them to pay less tax and reap the tax benefits of that country — this is a form of tax evasion. It's a massively popular practice amongst the wealthy elite. In 2017, Paradise Papers revealed that many powerful figures who employed offshore accounts - such as former Prime Minister Tony Blair, Queen Elizabeth II, and King Charles III - had committed tax evasion. These offshore accounts are often most popular in the Cayman Islands or Bermuda.
Taxes play a pivotal role in maintaining and supporting governments and the economy, so I’d say it’s decidedly important to pay them!