[ctt template=”8″ link=”Pbbca” via=”no” ]Nothing is certain but death and taxes.[/ctt]

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Except for those ultra high net-worth clients who use tax havens to avoid (or evadesee this news article) tax, most of us cannot escape taxes.

I recently received an email from my German client asking me to resend him my invoice as he needed it to complete his tax return. Our following lesson was then spent discussing the German tax system for ordinary citizens like you and me (mere mortals, as I like to call ourselves!) As you can imagine, it was a riveting lesson as only any lesson about the topic of tax can be.

However, as we’ve established that tax is a necessary evil in our lives regardless of where we live, I thought it would be useful  to discuss the topic here with you. Furthermore, tomorrow (5 April) marks the end of the fiscal (tax) year in the UK, and in the next few weeks my attention will be focused on preparing the necessary paperwork to complete my tax return. I wrote a post about the UK Income Tax system and what I do every year to submit my tax return which you can read here. It gives you some tax vocabulary that you may find useful.

In this post, I’d like to focus on the words and phrases we use connected with tax in business and have highlighted them.

To Direct or Be Indirect
Whether you’re an individual or a business owner, you’re going to be subject to tax one way or another whether it’s through direct or indirect taxes. While direct taxes are easy to identify because they are levied on the income of individuals (Income Tax) and companies (Corporation Tax), indirect taxes are not. Indirect taxes are imposed by governments on goods and services like alcohol, cigarettes, luxury products, consultancy services and so on. Most governments impose taxes on goods such as tobacco and alcohol to try and discourage consumers from buying them. The rate of tax varies depending on the country and can make a huge difference to the price of the product.

Take cigarettes, for instance. A packet of 20 cigarettes costs £9.40 (€11,27) in the UK compared to Greece €4,00! In 2003, the price of cigarettes was £4.65 (€5,57)in the UK. The difference in price is predominantly because of the increase in duty or tax. That’s where we get the expression “duty free or tax free“.

Let’s Aim for Basic or Higher Rate
Most countries introduce a basic and higher rate of tax on individuals that is based on a person’s income. In the UK, the basic rate of tax for the 2016/2017 tax year is 20% and 40% for a higher-rate taxpayer. There is an additional rate of 45% for high earners.

If you want to know whether you’re a basic rate or higher rate tax payer, you need to look at the income bands. In the UK, if you earn between 0 – £32,000 per annum (per year), you will be taxed at the basic rate of 20%. If your earnings are between £32,001 – £150,000, your tax rate will be 40% and you will be considered a higher rate taxpayer. For the high-flyers who earn over £150,001 and more, they will be taxed at 45%.

Ahhh those tax havens…
One of the reasons my German client wanted a copy of my invoice is that he can offset any eligible expenses against his income which will lower his tax bill. As a self-employed individual, all my business expenses can be set against my income. So, it’s important that you keep all receipts as documentary evidence.

Being able to offset your expenses against your income (revenue) is especially important when you run a business as it can significantly reduce your tax liability. Businesses are taxed on their net assets (gross assets minus debts).  If you want to pay less tax, you ideally want to declare lower net assets. However, a business that’s not growing and increasing its profits is not something most of us want. So, most of us accept that the more money we make or the more profit we generate, the more tax we will incur and be liable for.

That’s unless, of course, you register your company in an offshore tax haven like Monaco, the Cayman Islands, Luxembourg or the Bahamas and report record annual earnings but miraculously, pay hardly any tax! Now which international companies am I thinking of……

Do you live and work in a highly taxed country? What’s your tax regime like? I’d love you to share your experiences with me and your fellow readers.

I hope you found this post helpful and if you think your friends and colleagues would benefit from it, please share it with them.

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Ciao for now