Chapter 1: Must know Flashcards
What is taxation
Taxation is the imposition of compulsory levies on individuals or entities, by governments in most countries in the world.
4 purposes of taxation
Primary purpose - raise revenue for government expenditure, such as public protection
Redistribution of wealth from rich to poor, progressive tax system cam help level incomes.
Stabilise the economy - fiscal (tax) policies can be set to encourage spending, example relief for expenditure on company assets
Influence behaviour - example taxes to try discourage drinking and smoking which in turn reduce burden on NHS
Principles of taxation - 6 of them
set of criteria as a guide to the government when creating a tax system
Neutrality
Efficiency
Certainty and simplicity
Effectiveness
Fariness
Flexibility
Purpose of taxation - Neutrality def
Minimisation of discrimination in favour of, or against particular economic choices
Purpose of taxation - Efficiency def
Compliance and administration costs should be minimised as far as possible. These costs should be low in relation to the tax raised
Purpose of taxation - Certainty and simplicity def
System should not be unnecessarily complicated or incomprehensible. Rules and obligations should be known, easily understood and liability is clear.
Purpose of taxation - Effectiveness def
Should produce right amount of tax at the right time, whilst avoiding double taxation and minimising tax avoidance and evasion
Purpose of taxation - Fairness def
Determined by the person’s ability to pay, with wealthier individuals or firms paying more taxes and those with lower incomes paying comparatively less
Purpose of taxation - Flexibility def
Dynamic and flexible enough to meet current revenue needs of the government while adapting to changing needs
Tax structure - 3 of them
Depends on tax base and tax rate and how it is applied
Progressive - fairest system, rate increases as income increases, UK income tax
Regressive - inversely proportional to income, lower the income, higher the tax, VAT
Proportional - unrelated to income, stays the same whatever the value of the tax base
Effects everyone equally
Tax system UK
Administered by who?
Where does our tax rules and regulations come from?
Administered by HMRC
Sources:
-Statute law - acts of parliment i.e the Annual Finance Act - provide details in changes in taxes, proposed by Chancellor of the Exchequor in the budget and passed by parliment
-Case Law
Disagreement between tax payer and HMRC
Tax is complicated - sometimes disagreements.
Settled in court - then becomes case law and influence future interpretations
-HMRC Guidance
Wide range or guidance and explanatory notes, hmrc website
Roles and responsibilities of the tax practitioner
Act in best interest of client - and open and constructive manner with HMRC, consistent of law
moving towards MTD
practitioner should use facilities provided for agents, avoid knowing client details
Policies on Money laundering, cyber security and Data protection
Money laundering
Proceeds from criminal activities are converted into assets which appear to have no criminal connections
Tax practitioner to have controls and procedures in place to report suspicions
Must carry out a review - check identity with a passport for example
Errors
Responsibility lies with taxpayer, approved before submitted
possible irregularities in clients tax affairs, client should be informed as soon as possible unless Money laundering
Tax avoidance
Bending the rules of the tax system to gain an advantage that parliment never intended
Legal
Example: Using gift aid when there is no real gift
Tax planning
Legal, perfectly accepted way of reducing tax liability
in the way government intended
Tax evasion
Illegal
Breaking the law to reduce tax bill
Residence
where taxpayer is living in the tax year
Residence is defined as where the taxpayer is deemed to be resident
Residence - number of ties
4 UK ties for arrivers
5 UK leavers
- Having close family resident in UK
- Having UK accomm in which the individual spent at least one night in the tax year
- Doing substantive work in the UK ( 3 hours or more on 40 days or more)
- More than 90 days during either or both or the previous tax years
Levers
- Spending more time in the UK than any other country
(day is if present at midnight)
Domicile
3 types
Domicile is defined as where the taxpayer has their permanent home
permanent test - tax payers home and where they return to be buried
Origin - individual is born with fathers domicile (or mothers if their parents are unmarried)
Dependance - as a child (under 16), who they are legally dependent on
Choice - Over 16, change their permanent home by severing all ties with the old country and settling permantly in new country
impact of residence and domicile test
Taxed on arising basis
All worldwide income and gains are taxable in the UK
Resident not domiciled - choice to use arising or remittance basis
