Chapter 2 - Introduction to taxation Flashcards
Which activities does the government seek to encourage via taxation?
- Donations to charity, for example through the Gift Aid Scheme
- Investment into business, for example through Venture Capital Trust relief and the Enterprise Investment Scheme
- Entrepreneurs who build their own businesses, through reliefs from capital taxes
- Savings, for example by offering tax incentives such as tax relief on pension contributions.
(DIES)
Which activities does the government seek to discourage via taxation?
- smoking and alcoholic drinks, through substantial taxes on each type of product.
- motoring, through vehicle excise duty and fuel duties
What are the many influences on taxation we will look at?
- social (social justice)
- environement
- tax devolution
- external factors
What are the eight principles that might be envoked in the debate over social justice that influence taxation?
- 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
What do you understand by the direct/indirect principle?
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
What do you understand by the progressive/regressive principle?
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
What do you understand by the unit/value principle?
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
What do you understand by the income/capital/expenditure principle?
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.
What do you understand by the ability to pay/benefit principle?
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.
What do you understand by the neutrality principle?
Tax should be neutral so as not to distort choice
What do you understand by the equity principle?
Tax should be equitable or just.
What do you understand by the efficiency principle?
The cost of collecting the tax should be low in relation to the tax raised.
Give three examples of taxes that aim at addressing environmental concerns.
- climate change levy on businesses in proportion to their energy consumption.
- landfill tax to discourage the use of landfill sites for waste disposal and to encourage recycling.
- 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
What are the effects of devolution of legislative powers away from Westminster?
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.
EXTERNAL FACTORS
Who are responsible for paying taxes (3)?
- individuals
- partnerships
- companies
What taxes is an individual liable to pay?
- 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
- Capital gains tax (CGT) on the disposal of capital assets owned by them as investments or used in their sole trade or partnership
- National insurance contributions (NICs) as an employee, as a sole trader or partner, and as an employer
- Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services
What is meant by the tax year?
Tax year: 6 April in one calendar year to 5 April in the next calendar year.
What is a partnership
A partnership is a group of persons (partners) carrying on a business together with a view to making a profit.
What taxes are the partners in a partnership individually liable for?
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.
What taxes are partners in a partner ship jointly and severally liable for?
- Income tax of employees deducted under the Pay As You Earn (PAYE) system
- National insurance contributions (NICs) as an employer (employer contributions and employee contributions are collected under the PAYE system)
- Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services
What is a company?
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).
What taxes is a company liable for?
- Corporation tax (CT) on its income and gains
- Income tax of employees deducted under the Pay As You Earn (PAYE) system
- National insurance contributions (NICs) as an employer (employer contributions and employee contributions collected under the PAYE system)
- Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services
What is meant by the term financial year?
The 12 month reporting period
