Tax Law
Income tax, VAT, capital gains, corporation tax, HMRC powers, and the distinction between tax avoidance and evasion.
Introduction
Tax law in England & Wales governs the imposition, collection, and administration of taxes by Her Majesty's Revenue and Customs (HMRC). The principal direct taxes are income tax (charged on individuals' income), corporation tax (on company profits), and capital gains tax (on disposals of assets). Indirect taxes include value added tax (VAT) and excise duties. Tax law is primarily statutory, with the Income Tax Act 2007, the Taxation of Chargeable Gains Act 1992, and the Value Added Tax Act 1994 forming the core legislation. The Tribunals, Courts and Enforcement Act 2007 provides the appeals framework through the First-tier Tribunal (Tax Chamber) and Upper Tribunal.
In Brief
UK tax is statutory — no tax can be charged without Parliament's authority. Most individuals must file a self-assessment return by 31 January following the tax year and pay any tax owed by the same date. Selling assets (including property that is not your main home) may trigger a capital gains tax liability that must be reported to HMRC within 60 days of completion.
Core Principles
Statutory Basis of Taxation — No tax may be levied without the authority of Parliament (Bill of Rights 1689). Every charge to tax must have a clear statutory basis.
Self-Assessment — Most taxpayers are required to self-assess their tax liability and file returns with HMRC. Failure to file or pay on time incurs automatic penalties.
Tax Avoidance vs Tax Evasion — Tax avoidance (using lawful means to reduce tax) is legal; tax evasion (dishonestly concealing income or gains) is a criminal offence. The boundary is determined by the General Anti-Abuse Rule (GAAR) introduced by the Finance Act 2013.
Income Tax — Charged on employment income, self-employment profits, property income, savings, and dividends. Rates include the basic rate (20%), higher rate (40%), and additional rate (45%).
Capital Gains Tax — Charged on the disposal of assets at a gain. Annual exemption applies. Business Asset Disposal Relief (formerly Entrepreneurs' Relief) provides a reduced 10% rate on qualifying disposals up to a lifetime limit.
Corporation Tax — Charged on company profits (trading income, investment income, and chargeable gains). The main rate is 25% for profits over £250,000.
VAT — An indirect tax charged on the supply of goods and services. The standard rate is 20%, with reduced rates (5%) and zero rates for specified categories.
HMRC Powers — HMRC has extensive powers of investigation, information-gathering, and assessment under the Taxes Management Act 1970 and Finance Act 2008. Taxpayers have rights of appeal to the Tax Tribunal.
Key Statutes
Income Tax Act 2007
Taxation of Chargeable Gains Act 1992
Value Added Tax Act 1994
Corporation Tax Act 2010
Taxes Management Act 1970
Leading Cases
IRC v Duke of Westminster
[1936] AC 1
Ramsay v IRC
[1982] AC 300
HMRC v Vu
[2014] UKFTT 831 (TC)
Common Scenarios
Freelancer unsure whether to register for VAT
A business must register for VAT if taxable turnover exceeds £90,000 in any 12-month period. Voluntary registration below the threshold is possible and may be beneficial if most customers are VAT-registered. Failure to register when required incurs penalties.
Selling a second property and capital gains tax
The disposal of a property that is not your main residence is subject to capital gains tax. The gain is calculated as sale price minus purchase price and allowable costs. A CGT return must be filed with HMRC within 60 days of completion.
Using a scheme to reduce tax — avoidance or evasion?
Tax avoidance arrangements may be caught by the GAAR if they are 'abusive' — i.e., they cannot reasonably be regarded as a reasonable course of action. HMRC can counteract the tax advantage. Tax evasion (dishonestly concealing income) is a criminal offence under the Fraud Act 2006 and the Criminal Finances Act 2017.
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Frequently Asked Questions
What is the penalty for filing my self-assessment tax return late?
There is an automatic £100 fixed penalty for filing a self-assessment return late (even if no tax is owed). After 3 months, daily £10 penalties accrue for up to 90 days. After 6 months, an additional 5% surcharge (or £300 if greater) applies. After 12 months, further penalties apply. Under the Taxes Management Act 1970.
What is the difference between tax avoidance and tax evasion?
Tax avoidance uses legal means to reduce a tax liability (e.g. using allowances and reliefs). Tax evasion involves dishonest concealment of income or assets and is a criminal offence. The General Anti-Abuse Rule (Finance Act 2013) allows HMRC to counteract 'abusive' avoidance arrangements that cannot reasonably be regarded as a reasonable course of action.
When must I register for VAT?
You must register for VAT if your taxable turnover exceeds the registration threshold (currently £90,000 in any rolling 12-month period). You may also register voluntarily below the threshold. Failure to register when required results in penalties and interest on unpaid VAT.
How long does HMRC have to investigate my tax affairs?
HMRC can normally open an enquiry into a self-assessment return within 12 months of filing. For careless errors, they can go back 6 years; for deliberate errors, 20 years. A 'discovery assessment' allows HMRC to assess additional tax outside the normal enquiry window where they discover an underassessment.
Important Deadlines
Typical Costs
Official Resources
What To Do Next
Step-by-Step Guides
Know Your Rights
Common Scenarios
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