Chapter 2 - Introduction to taxation Flashcards

1
Q

Which activities does the government seek to encourage via taxation?

A
  1. Donations to charity, for example through the Gift Aid Scheme
  2. Investment into business, for example through Venture Capital Trust relief and the Enterprise Investment Scheme
  3. Entrepreneurs who build their own businesses, through reliefs from capital taxes
  4. Savings, for example by offering tax incentives such as tax relief on pension contributions.

(DIES)

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2
Q

Which activities does the government seek to discourage via taxation?

A
  1. smoking and alcoholic drinks, through substantial taxes on each type of product.
  2. motoring, through vehicle excise duty and fuel duties
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3
Q

What are the many influences on taxation we will look at?

A
  • social (social justice)
  • environement
  • tax devolution
  • external factors
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4
Q

What are the eight principles that might be envoked in the debate over social justice that influence taxation?

A
  • The direct/indirect principle
  • The progressive/regressive principle
  • The unit/value principle
  • The income/capital/expenditure principle
  • The ability to pay/benefit principle
  • The neutrality principle
  • The equity principle
  • The efficiency principle
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5
Q

What do you understand by the direct/indirect principle?

A

Direct taxes (eg, income tax, capital gains tax, corporation tax, national insurance contributions) are only paid by those who generate the funds to pay the tax - taxes on income

Indirect taxes (eg, value added tax, excise duty) relate to consumption and it is up to individuals whether they spend money on such goods - taxes on expenses

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6
Q

What do you understand by the progressive/regressive principle?

A

Progressive taxes rise as a proportion of income as that income rises. - the more you earn the more tax you will pay as a proportion of the income

Regressive taxes rise as a proportion of income as income falls - the less you earn the more tax you will pay as a proportion of the income

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7
Q

What do you understand by the unit/value principle?

A

A unit tax is calculated as a flat rate per item, regardless of value - tax per unit (no. of items)

A value tax is based on a percentage of the value of the item, such as value-added tax - tax as a percentage of the value of the item

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8
Q

What do you understand by the income/capital/expenditure principle?

A

Income tax, paid only by those who generate income.

Capital taxes, taxes on capital items. People should not be able to live off the sale of capital assets without generating income.

Taxes on expenditure, paid only by those who incur the expenditure.

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9
Q

What do you understand by the ability to pay/benefit principle?

A

Taxes should be based on the ability of the taxpayer to pay them eg, income tax, capital gains tax.

Taxes should be based, at least partly, on the benefit that the taxpayer receives. For example, everyone should pay towards defence or law and order.

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10
Q

What do you understand by the neutrality principle?

A

Tax should be neutral so as not to distort choice

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11
Q

What do you understand by the equity principle?

A

Tax should be equitable or just.

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12
Q

What do you understand by the efficiency principle?

A

The cost of collecting the tax should be low in relation to the tax raised.

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13
Q

Give three examples of taxes that aim at addressing environmental concerns.

A
  1. climate change levy on businesses in proportion to their energy consumption.
  2. landfill tax to discourage the use of landfill sites for waste disposal and to encourage recycling.
  3. taxes on motor vehicles based on carbon emissions, such as cars provided to employees and vehicle excise duty, to encourage the use of more environmentally friendly vehicles
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14
Q

What are the effects of devolution of legislative powers away from Westminster?

A

Devolution of legislative powers away from Westminster in favour of the Welsh and Scottish governments has resulted in those parts of the UK operating different tax systems to those of the rest of the country.

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15
Q

EXTERNAL FACTORS

A
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16
Q

Who are responsible for paying taxes (3)?

A
  • individuals
  • partnerships
  • companies
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17
Q

What taxes is an individual liable to pay?

A
  1. Income tax (IT), for example on income from investments, income from employment and income from a business which they operate as a sole trader or as a member of a partnership
  2. Capital gains tax (CGT) on the disposal of capital assets owned by them as investments or used in their sole trade or partnership
  3. National insurance contributions (NICs) as an employee, as a sole trader or partner, and as an employer
  4. Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services
18
Q

What is meant by the tax year?

A

Tax year: 6 April in one calendar year to 5 April in the next calendar year.

19
Q

What is a partnership

A

A partnership is a group of persons (partners) carrying on a business together with a view to making a profit.

20
Q

What taxes are the partners in a partnership individually liable for?

A

Each partner is individually liable to tax on their share of income and gains of the partnership in a tax year, but not for tax on the shares of income and gains of the other partners.

21
Q

What taxes are partners in a partner ship jointly and severally liable for?

A
  1. Income tax of employees deducted under the Pay As You Earn (PAYE) system
  2. National insurance contributions (NICs) as an employer (employer contributions and employee contributions are collected under the PAYE system)
  3. Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services
22
Q

What is a company?

A

A company is a legal entity formed by incorporation under the Companies Acts. It is legally separate from its owners (shareholders) and its managers (directors).

23
Q

What taxes is a company liable for?

A
  1. Corporation tax (CT) on its income and gains
  2. Income tax of employees deducted under the Pay As You Earn (PAYE) system
  3. National insurance contributions (NICs) as an employer (employer contributions and employee contributions collected under the PAYE system)
  4. Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services
24
Q

What is meant by the term financial year?

A

The 12 month reporting period

25
Q

What are the five main responsibilities of HMRC?

A
  1. to collect and administer taxes including icome tax (IT), capital gains tax (CGT), National insurance contributions (NIC), corporation tax (CT) and value added tax (VAT)
  2. to pay and administer universal credit, tax credits and child benefit
  3. to collect repayments of student loans
  4. to ensure all employers meet the minimum wage rules
  5. to protect UK society from tax fraud, alcohol and tobacco smuggling and illegal importation of drugs
26
Q

What is MTDfB?

A

Making Tax Digital for Businesses (MTDfB) is a government project designed to modernise and streamline tax record keeping and ensure accurate and timely information is provided to HMRC

27
Q

For what businesses does MTDfB initially applies?

A

MTDfB initially only applies to businesses for VAT purposes and even then only if their turnover is above the VAT threshold (currently £85,000).

28
Q

When will other businesses be asked to keep and update digital records?

A

Other businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least a year after MTDfB first goes live for VAT returns.

29
Q

What are the two main sources of tax law?

A
  • legislation
  • case law
30
Q

How is tax law set out?

A

Tax law is set out in statutes (often consolidated into consolidated statutes), supplemented by statutory instruments.

31
Q

How is tax legislation changed?

A

The tax legislation is amended each year by the Finance Act.

This is based on proposals from the Government put forward by the Chancellor of the Exchequer in the Budget speech. The Budget forms the basis for the Finance Bill which becomes the Finance Act after Royal Assent is received.

32
Q

How often is a Finance act passed and to which period do these changes in legistaltion take place?

A

The Finance Act are implented every year and generally relates to the tax year and financial year starting in April of the following tax year.

There is usually one Finance Act for each tax year unless there is a general election when there may be more than one budget and Finance Act - currently the budget takes place in autumn

33
Q

What tax related information does the Finance act include?

A

The Finance Act includes a variety of changes to tax rules including rates and allowances for the current year and often a few relating to future years.

34
Q

What are consolidated statutes in regards to tax law?

A

Where existing, related statutes are brought together into one coherent text

35
Q

What are statutory instruments in regards to tax law?

A

Supplementary secondary legislation desinged to add further detail or amendments to ‘parent’ statutory tax laws without the need for constant overhauling

36
Q

What is case law?

A

Case law is a law that’s based on judicial decisions from previous cases, rather than statutes, constitutions, or regulations.

37
Q

Should case law be followed?

A

Generally, yes.

Many judgements are precedent for future cases which means that they must be followed unless superseded by legislation or the decision of a higher court.

38
Q

Can HRMC be flexible on how it interprets tax law?

A

Yes.

HMRC must act according to tax law, but it has some discretion over how it applies the law.

39
Q

What is the purpose of HRMC publications?

A

HMRC publishes details of how the law is to be implemented in practice

40
Q

Do HMRC publications have any legal backing?

A

No.

These publications have no legal backing but do provide information on HMRC’s interpretation of the law, which will be adhered to unless successfully challenged by a taxpayer in the courts.

41
Q

What are five things that HRMC publications include?

A
  1. Manuals, primarily for the guidance of its own staff but also mostly available to taxpayers and tax professionals on the HMRC website
  2. Statements of practice (SP) setting out HMRC’s interpretation of tax legislation
  3. Extra-statutory concessions (ESC) which provide for a relaxation of the strict legal position to resolve anomalies and relieve hardship. An ESC may be given statutory effect by means of a Treasury Order. ESCs are gradually being either codified or withdrawn
  4. Press releases and explanatory notes dealing with changes in tax law, for example Budget proposals
  5. Leaflets which are mainly aimed at ordinary taxpayers and explain the tax system in non-technical language