Thursday, February 10, 2011

unfair tax burden - registered COMPANY taxed on net earnings - registered PERSON taxed on gross earnings

in terms of tax revenue, a COUNTRY is made up of its registered COMPANYs and its registered PERSONs.

registered entity that earns revenue for their COUNTRY of registration

registered entity that earns revenue for their COUNTRY of registration.

As you can see, both these registered entities earn revenue for their COUNTRY of registration. But there's a BIG DIFFERENCE in the tax burden of these two entities called RUNNING COSTS.

We all know what the running costs of a COMPANY are: assets (property and equipment) & liabilities (wages, amenities, loans etc...) A COMPANY can deduct these values from their gross earnings before being taxed: this is known as pre-tax profit.

Well, if the legal definition of COMPANY and PERSON are so alike, why are PERSONs not allowed to deduct their 'running costs' before they are taxed on their earnings? Yes, there's a P.A.Y.E. pre-tax 'allowance' for a registered PERSON so let's do the accounting with some generous figures to see the unfairness.

PERSON (with pre-tax allowance)
earns £25,000 p/a
pre-tax allowance £5,000
£25,000 earnings - £5,000 pre-tax allowance = £20,000
P.A.Y.E. contribution 25% of £20,000 = £5,000

Now, let's apply the pre-tax PROFIT trick to a PERSON'S tax calculation

PERSON (with running costs)
earns £25,000 p/a
running costs (rent/loan £10,000, transport £1,125, utilities £1,000, food £4,000) p/a
£25,000 -£10,000 -£1,125 -£1,000 -£4,000 = £8,875
tax contribution 25% of £8,875 = £2218.75

Wow, LESS THAN HALF THE TAX BURDEN per PERSON - isn't that amazing!

And saving a PERSON a couple of thousand pounds isn't even the point of this exercise. The point is, it's GROSSLY UNFAIR to tax one revenue-contributing entity one way and another revenue-contributing entity completely differently. Imagine if COMPANYs had to cover their own running costs, the way PERSONs are asked to do?

You know? Fair's fair.

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