Ch 2 - Introduction to taxation Flashcards
What are the objectives of tax?
- Management of the economy
- Social justice
- Environmental concerns
- Devolved taxes
- External influences
What does the system of taxation and spending by a gvmt impact?
The economy as a whole
What are taxation policies used for?
Influence many economic factors such as
- inflation
- employment levels
- imports
- exports
Directs the economic behaviour of businesses and individuals
What does the current tax system encourage?
- Individual saving habits by offering tax incentives on savings accounts such as ISAs
- Charitable donations by offering tax relief through Gift Aid scheme
Entrepreneurs and investors by offering tax relief/schemes such as Enterprise Investment Scheme
What does the UK gvmt discourage?
- Motoring by imposing additional fuel duties
- Smoking a drinking alcohol by imposing signif taxes on these items
What happens to tax as gvmt’s objectives change?
Taxation policies are altered in accordance
What are the main taxation principles?
- Direct v indirect principles
- Progressive v regressive principle
- Unit/value principle
- Income/capital/expenditure principle
- Ability to pay/benefit principle
- Other principles
- Neturality principle
- Equity principle
- Efficiency principle
What is the direct v indirect principle?
Direct taxes - these are paid by those who generate the funds e.g. income tax, capital gains tax, corporation tax
Indirect taxes - these relate to consumption e.g. VAT
What is progressive vs regressive principle?
Progressive taxes - these increase with income e.g. income tax rates rise as income rises
Regressive taxes - these decrease with income e.g. national insurance rates fall as income rises
What is the unit/value principle?
Unit taxes - these are calculated as a flat rate per item, regardless of value
Value taxes - these are added to the percentage value of goods or services e.g. 20% VAT on most goods sold in the UK
What is the income/capital/expenditure principle
Income taxes - these are paid by those who generate income
E.g. corporate tax is paid by companies on their profits
Capital taxes - these are paid on the disposal of capital assets e.g. capital gains tax
Expenditure taxes - these are paid to those who incur expenditure e.g. VAT
What is the ability to pay/benefit principle?
These are 2 opposing arguments
* Ability to pay principle - tax should be based on ability to pay e.g. income tax
- Benefit principle - tax should be based on the benefit that taxpayer receives e.g. people should have the option to pay towards NHS or take private health care
What is the neutrality principle?
tax shouldn’t distort choice, although section1 suggests that this isn’t always applied by UK gvmt
What is the equity principle?
Tax should be fair and just
What is the efficiency principle?
Cost of collection of tax should be less than the tax raised
How can taxes affect direct behaviour re env concerns?
Landfill tax
Climate change levy in relation to energy consumption
Linking CO2 emissions to the taxation of company cars
What are devolved taxes?
Devolution has resulted in Scotland and Wales operating different tax systems from there set of the UK
These are administered by Revenue Scotland and the Welsh Revenue Authority respectively
What are the external influences with UK taxation
Currently the main threat is the EU, but this will change once UK leaves the EU
many UK’s international tax treaties
Impact of the banking crisis, resulted in a bank levy being introduced in Jan 2011
How did the banking crisis have an influence on UK tax?
It resulted in a bank levy being introduced in Jan 2011
What are the various types of income is taxed?
Income tax and national insurance contributions on earnings VAT on goods bought Stamp duty land tax when buying a house Corporation tax Inherentence tax Capital gains tax
How is income tax collected?
Payable on individuals on their earnings, from both employment and self-employment
How is income tax collected?
PAYE is the system under which income tax is collected from employed workers
Who has to pay National Insurance Contributions? (NICs)
Payable by all individuals who are either employed or self-employed
Payable by businesses (sole traders or companies) in relation to their employees
How do businesses pay NICs?
In relation to their employees, whether they are sole trader or companies
What is capitain gains tax?
It is payable by individuals on the disposal of capital assets
Give some examples of capital assets
Land
Buildings
Shares
Smaller items, such as antiques
How is corporation tax payavle?
Payable by all companies on their income and gains
When is VAT payable?
On most goods and services by the final customer
Who classes as individuals?
Employees
Sole traders
Partners
WHEN is the tax year for inidividuals?
Taxed annually
6 April - 5 April
When does the tax year run to?
5 April
When does the financial year run to?
1 April - 31 March
What is the difference between the tax year and the financial year?
Tax year is what individuals get taxed on
Financial year is what companys pay corporation tax on
What is the structure of HMRC like?
Single body that controls and administers most of the UK tax law
What are the 2 HMRC teams and describe them
- Commissioners
- Appointed by the Queen]
- Main duties are to implement the law & oversee the process of UK tax administration - Officers of Revenue and Customs
- Appointed by commissioners to work in district offices covering all areas of the UK
- Main duties are implement day-to-day work of HMRC ad act as a point of contact between HMRC and taxpayers
What are the main roles of Commissioners?
- implement the law
- oversee the process of UK tax administration
What are the main roles of the Officers of Revenue and Customs
- Implement the day-to-day work of HMRC
- Act as point of contact between HMRC and taxpayers
What are the responsibilities of HMRC ?
- Collecting and administering IT, CGT, NIC, CT and VAT
- Paying and administering universal credit, tax credits and child benefit
- Collecting repayment fo student loans
- Ensuring adherence to minimum wages rules
- Protecting society from tax fraud, smuggling and illegal importation of drugs
What is MTD?
HMRC project to provide businesses with modern, streamlined system to maintain their tax records to date and provide information to HMRC
Initially only applies to businesses for VAT purposes and even then only their turnover is above the annual registration limit of £85k
What is the annual VAT registration limit from 1 April 2017?
£85,000
When it is fully implemented, who will MTD apply to?
All businesses (both companies and unincorporated businesses), the self-employed and landlords
But businesses won’t be asked to keep digital records, or to update HMRC quarterly for taxes other than VAT until at least a year after MTD first goes live for VAT returns
How often and how are tax legislations updated?
Each year by the annual Finance Act
Follows from the proposals of the Chancellor of the Exchequer in the Budget
What is case law?
Refers to the decisions made in tax cases brought before the courts
They often challenge current tax legislation or argue certain interpretation of the tax law
Rulings are binding, so provide guidance on the interpretation of tax statutes
Is case law legally binding?
Yes, so provide guidance on the interpretation of tax statutes
Why are HMRC publications used?
As tax legislation can be complex and open to misinterpretation
So helps explain how to implement the law, and give their interpretation of the law
What are the main statements of guidance from HMRC publications?
Statement of practice Extra-statutory concessions Internal guidance manuals Press releases Leaflets
What do statements of practice do?
Provide HMRC interpretation of ax law
Often provide clarification on how it should be applied
What do extra-statutory concessions do?
- Given to specific taxpayers to relax the tax legislation
They are often given where undue hardship or anomalies would occur otherwise
Legality of extra-statutory concessions was successfully challenged in 2005, so they are gradually being withdrawn or made law as appropriate
What are internal guidance manuals used for?
They are HMRC’s own internal working manuals produced by their staff
Also made available to the public
Why are press releases used?
Usually to provide details of a specific tax issue which has arisen in the year
Most commonly used to communicate the budget
Why are leaflets sometimes used
Aimed to the general public
Help explain various tax issues in non-technical language
Is the following true or false?
Case law is written by HMRC and gives guidance and interpretation on difficult aspects of tax legislation
False
Statements of practice are written by HMRC and give guidance and interpretation on difficult aspects of tax legislation
Is the following true or false?
Extra-statutory concessions are given to specific taxpayers to relax the law
True
Is the following true or false?
Case law decisions are not binding on future cases
False - case law is binding
Is the following true or false?
Adherence to tax legislation/statutes is mandatory
True
