Chapter 1 - An introduction to taxation Flashcards
Objections and functions of taxation
Taxation is the imposition of compulsory levies on individuals or entities, by governments in most countries in the world.
primary purpose - raise revenue for government expenditure, such as public protection, education, healthcare and infrastructure.
Other purposes:
-Redistribution of wealth from the rich to the poor: progessive tax system, higher earners paying a higher rate of tax
-Stabilise the economy - fiscal tax polices can be set to encourage expenditure
-Influence behaviour - example taxes are imposed to try and discourage smoking and drinking to reduce burden on healthcare system
Principles of taxation
Neutrality
Efficiency
Certainty and simplicity
Effectiveness
Fairness
Flexibility
Tax structures
Tax structure depends on the tax base, the tax rare and how the rate is applied.
-The tax base is the value of income or assets on which tax can be imposed
-The tax rate is the percentage that is applied to the tax base to give the tax liability
Progressive
-rate of tax increases when tax base increases
-Viewed as fairest system
-UK income tax is progressive as the rate increases as income reached set levels
Regressive
-Rate of tax is inversely proportional to income, so lower the income, the higher the tax in relation to income
-Highest impact on low-income individuals.
-example VAT, as a poor person pays the same rate as a rich person(so proportionally more of his income)
Proportional
-rate of tax is unrelated to income and stays the same whatever value of the tax base.
-This impacts low, middle and high earners relatively equally.
Proportional
Regulations and Guidance
Taxes in UK are administered by HMRC.
Tax rules and regulations come from a number of sources:
-Statute Law
Acts of parliament i.e the Annual Finance Act. Provides details of changes in tax, which have been proposed by the Chandler of the Exchequer in the budget and passed by parliament
-Case Law
Court decisions following disagreement between tax payer and HMRC.
The decision of the court in relation to that case will then become case law and will influence interpretations of the staute
-HMRC Guidance
HMRC publish wide range of guidance and explanatory notes, statements of practice and briefing notes. These assist in the interpretation and application of the tax laws.
Roles and responsibilities of the tax practitioner
The tax practitioner has a responsibility to act in the best interests of their client and to work in an open and constructive manner with HMRC, consistent with the law.
Practitioner should use facilities provided for agents and avoid knowing client’s personal access credentials.
The firm should have policies on cyber-security, anti-money laundering and GDPR (General data protection regulation)
AAT Fundamental principles
in reference material
Money Laundering
Proceeds from criminal activities are converted into assets which appear to have no criminal connections (making dirty money clean)
A tax practitioner is required by law to have controls and procedures in place to report suspicions of money laundering.
Before taking on a client, a tax practitioner should should carry out a review on the client and check their identity with official documentation such as a passport.
Money laundering (including suspected money laundering) should be reported to the Money Laundering Reporting Officer (MLRO) within a firm, or in the case of sole practitioners to the National Crime Agency (NCA)
Failure to report is a criminal offence which can result in fines and/or inprisonment.
Errors
In ref material
Errors is a term intended to include all errors and mistakes, whether the error has been made by the client, the tax practitioner, HMRC or anyone else involved in the client’s affairs and whether made innocently or deliberately.
Although a tax return may be prepared by the tax practitioner, ultimately the responsibility lies with the taxpayer. It should be approved by the tax payer before submitting.
The client can sue for professional negligence and breach of contract.
If error is suspected money laundering, tax practitioner must follow the procedures and obligations, set out in the legislation dealing with money laundering.
If tax practitioner becomes aware of possible irregularities in the client’s tax affairs, the client should be informed as soon as the practitioner becomes aware (expect for money laundering as practitioner should not ‘tip off’)
Following steps are recommended by AAT members to follow where a possible irregularity arises:
In ref material
-Establish the facts
-Is the irregularity trivial?
-If not trivial, advise the client to disclose to HMRC
-If client does not agree to disclose:
Cease to act for the client
Inform HMRC that you have resigned, but not the reason for the resignation as this is a breach of confidentiality.
Consider reporting to MLRO or NCA
Carefully consider the response to any professional enquiry letters received from future advisors.
Tax planning
Tax avoidance
Tax Evasion
Tax planning - Legal and perfectly accepted way of reducing tax liability. Taking advantage of tax reliefs and exemptions in the way the government intended.
Example - investing ina tax-free ISA, to avoid paying income tax on the interest earned.
Tax avoidance - bending the rules of the tax system to gain a tax advantage that parliament never intended.
Tax Evasion - illegal and involves breaking the law to reduce your tax bill.
Scope of income tax
Individuals are liable to income tax for a tax year it is called a ‘fiscal year’.
Fiscal year
6th April - 5th April
IMPORTANT
Residence
Four UK ties for arrivers and five UK ties for leavers
4 UK ties for arrivers:
1) Having close family (a spouse/civil partner/minor child) resident in the UK
2) Having UK accommodation in which the individual spends at least one night in the year.
3) Doing substantive work in the UK - working for 3 hours or more on 40 or more days in the UK.
4) Being in the UK for more than 90 days during either or both of the two previous tax years.
For leavers, there is one more tie
5) Spending more time in the UK than in any other country during the tax year - a day in the UK is any day on which a person is present in the UK at midnight
Domicile
More permanent test, considering the tax payers permanent home. Often looks to where a tax payer will eventually return to be buried
3 types of domicile
Origin - an individual is born with their father’s domicile (or mother’s if their parents were unmarried)
Dependence - as a child (under 16) an individual domicile changes with that the person on whom they are legally dependent
Choice - as an adult (over 16) an individual can change their permanent home by severing all ties with their old country and settling permanently
