1) Introduction to the UK tax system

Question 1

What is the purpose of taxation in a modern economy (3 factors)?

Answer 1

1) Economic factors
2) Social factors
3) Environmental factors

Question 2

Purpose of taxation in a modern economy: explain economic factors

Answer 2

Tax can be used to encourage or discourage certain types of activity.

Question 3

Purpose of taxation in a modern economy: explain social factors

Answer 3

Tax can be used in the redistribution of income and wealth.

Question 4

Purpose of taxation in a modern economy: explain environmental factors

Answer 4

Taxes may be levied for environmental reasons, for example climate change levy or landfill tax.

Question 5

Describe the structure of the UK tax system

Answer 5

1) HM treasury
2) HM Revenue & Customs (HMRC)
3) The Crown Prosecution Service (CPS)

Question 6

Structure of the UK tax system: explain HM

treasury

Answer 6

HM treasury formally imposes and collects tax.

Question 7

Structure of the UK tax system: explain HM Revenue & Customs (HMRC)

Answer 7

HM Revenue & Customs (HMRC) is a part of HM

Treasury and has responsibility for the administrative function for the collection of tax.

Question 8

Structure of the UK tax system: explain The Crown Prosecution Service (CPS)

Answer 8

The Crown Prosecution Service (CPS) provides legal advice and institutes and conducts criminal prosecutions in England and Wales where there has been an investigation by HMRC.

Question 9

Structure of the UK tax system: describe the system of appeals with respect of direct and indirect taxes

Answer 9

1) Relating to direct taxes must first be made to HMRC.

2) Relating to indirect taxes must be made directly to the Tax Tribunal.

Question 10

Structure of the UK tax system: describe the system of appeals with respect to the Tax Tribunal (indirect taxes)

Answer 10

1) First Tier Tribunal: deals with most cases

2) Upper tribunal: deals with complex cases or appeals against decisions of the First Tier Tribunal

Question 11

Describe the types of taxes

Answer 11

1) Direct and indirect taxes

2) Revenue and capital taxes

Question 12

Explain direct taxes. Give examples and explain how are they collected.

Answer 12

Direct taxes are those charged on income, gains, and wealth. Income tax, national insurance, corporation tax, capital gains tax and inheritance tax are direct taxes. Direct taxes are collected directly from the taxpayer.

Question 13

Explain indirect taxes. Give an example.

Answer 13

Indirect taxes are those paid by the consumer to the supplier who then passes the tax to the HMRC. Value added tax is an indirect tax.

Question 14

What are revenue taxes?

Answer 14

Revenue taxes are those charged on income.

Question 15

What are capital taxes?

Answer 15

Capital taxes are those charged on capital gains or on wealth.

Question 16

Explain how is Corporation tax charged

Answer 16

Corporation tax is charged on both income and capital gains of UK companies.

Question 17

Describe and explain the sources of revenue law

Answer 17

a) Primary legislation (Acts of Parliament) which sets out the basic principles
b) Secondary legislation (Statutory Instruments) which gives the detail of how the law applies
c) Case law, which is the interpretation of legislation by the courts

Question 18

What is a tax year?

Answer 18

Tax year: is the period in respect of which individuals submit returns and pay tax (eg income tax, capital gains tax, national insurance).

Question 19

What is a financial year?

Answer 19

Financial year: runs from 1 April to the following 31 March and relates to companies.

Question 20

Describe and explain the sources of revenue law practice

Answer 20

a) Statements of practice which set out how HMRC intends to apply the law.
b) Extra statutory concessions which set out circumstances in which HMRC will not apply the law strictly where it would be unfair
c) Internal manuals used by HMRC staff

Question 21

What is tax planning? Give an example.

Answer 21

Tax planning is the reduction in an individual’s or company’s tax liabilities in accordance with the tax legislation such as claiming tax allowances on machinery.

Question 22

What is tax avoidance?

Answer 22

Tax avoidance is the legal minimisation of tax liabilities (including tax planning).

Question 23

What is tax evasion?

Answer 23

Tax evasion consists of seeking to mislead HMRC by either suppressing information or providing deliberately false information. It is illegal.

Question 24

What is the General Anti-Abuse Rule (GAAR)?

Answer 24

The General Anti-Abuse Rule (GAAR) enable HMRC to counteract tax advantages from abusive tax arrangements.

Question 25

How should an accountant report suspicions of tax evasion by a client?

Answer 25

The accountant must first try to make the client change the tax return and disclose the error or omission.

If the client does not correct the error, omission or failure when advised, the accountant should:

• cease to act for the client,
• inform HMRC of this cessation and
• consider making a money laundering report.

Question 26

What happens if an accountant doesn’t report their suspicions?

Explain which other criminal offence can be commited in the process.

Answer 26

Accountants who suspect, or are aware of, tax evasion by a client may be committing an offence if they do not report their suspicions.

Furthermore, the accountant must not disclose to the client or a third party that a money laundering report has been made. Doing so would constitute a criminal offence of ‘tipping-off’.

Question 27

Explain the interaction of the UK tax system with other tax jurisdictions like the European union (EU).

Answer 27

There is no general common system of taxation in the EU.

Value added tax (VAT) is an EU-wide tax and EU countries are obliged to pass laws to conform with the rules laid down in EU legislation

Question 28

Explain the interaction of the UK tax system with other tax jurisdictions like other countries.

Answer 28

The rules of tax jurisdictions of other countries do not have a direct interaction with UK tax.

Question 29

Explain what are the double taxation agreements.

Answer 29

Double taxation agreements are designed to protect against the risk of double taxation where the same income or gains are taxable in two countries.

Question 30

What kind of provisions exist with other tax jurisdictions between EU member states?

Answer 30

There are provisions regarding the exchange of information between the revenue authorities of EU member states, and double taxation agreements.