Chapter 1: Features of Taxation and the regulatory environment Flashcards
What characteristics should a good tax have?
Fair
Absolute
Convenient
Efficient
What are the 3 major principles of a good tax policy?
Equity
Efficiency
Economic Effects
What are direct taxes?
Paid directly to the government by the person or entity liable for them.
e.g. tax on personal income such as salaries, tax on business profits
What are indirect taxes?
Borne by one party but collected and paid to the government by another party.
e.g. sales tax
What is the incidence of a tax?
Distribution of the tax burden - who actually pays the tax
What are the two elements that incidence is split into?
Formal Incidence
Actual/effective incidence
What is formal incidence?
On the person or organisation who has direct contact with tax authorities.
e.g. VAT is paid to HMRC by seller
What is actual/effective incidence?
On the person or organisation who ends up bearing the cost of the tax.
e.g. the consumer would bear the incidence
What is the tax base?
Identifies what is subject to tax
What is a taxable person?
The person accountable for the tax payment
What is hypothecation?
Certain taxes are devoted entirely to certain types of expenditure.
e.g. road tax is used solely for maintaining and improving the roads
What is the tax gap?
Gap between the tax theoretically collectable and the amount actually collected
What are the three types of taxes?
Progressive Taxes
Proportional Taxes
Regressive Taxes
What are progressive taxes?
Takes an increasing proportion of income as income rises.
e.g. UK income tax has higher rates of tax for higher levels of income
What is proportional taxes?
Takes the same proportion of income as income rises
What is regressive taxes?
Takes a decreasing proportion of income as income rises. Takes a higher percentage of tax revenue from those on low incomes
What are the sources of tax rules?
Legislation produced by government
Precedents based on previous legislation
Directives from international bodies such as EU guidelines on VAT/Sales tax
Agreements between different countries such as double tax treaties
What does trading income relate to?
Main business activity
What are the most common adjustments with trading income?
Exempt Income
Disallowable Expenses
Depreciation
Tax Depreciation
What are capital tax gains?
Gains made on the disposal of investments and other non-current assets
What are two types of indirect tax?
What are two types of indirect tax?
Unit Taxes
Ad Valorem taxes
What are unit taxes?
Tax based on the number or weight of items
What are ad valorem taxes?
Tax based on the value of items
What is the definition of indirect tax?
imposed on one part of the economy with the intention to pass on burden
Who is the tax burden passed on to?
Final consumer not registered for VAT
What is input tax?
VAT paid on purchases
What is output tax?
VAT charged on sales to customers
What is standard rated VAT?
Taxed at standard rate of VAT
What is higher rated VAT?
Taxed at a higher rate
What is zero rated VAT?
Taxed at a rate of 0%
e.g. children’s clothing
What is reduced rate VAT?
Taxed at a rate lower than the standard rate of VAT
What is 0% exempt VAT?
Not subject to VAT
e.g. insurance, finance
What are benefits in kind?
Non-cash benefits in lieu of further cash payments
e.g. company cars, living accommodation, loans
What is a personal allowance?
Tax free allowance
What are the benefits of PAYE?
Tax is collected at source
Tax authorities receive regular payments from employers
Tax authority only has to deal with the employer
Most of the admin costs are borne by the employer
What powers do tax authorities have?
Impose penalties and interest on late payment of tax
Review and query filed returns
Request special reports if they believe inaccurate information has been submitted
Examine records of previous years
Enter and search the entity’s premises and seize documents
Pass on information to foreign tax authorities
What is tax avoidance?
Tax planning to arrange affairs, within the scope of law, to minimise the tax liability
What is tax evasion?
Illegal manipulation of the tax system to minimise tax liability
What methods do tax authorities use to prevent tax avoidance and tax evasion?
Reducing opportunities
Simplifying tax structure by minimising the relief, allowances and exemptions
Increasing perceived risk by auditing tax returns and payments
Developing good communication between tax authorities and entities
Changing social attitudes
Reducing lost revenue by reviewing the penalty structure
