Chapter 2 - Introduction to taxation

Question 1

Which activities does the government seek to encourage via taxation?

Answer 1

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

Question 2

Which activities does the government seek to discourage via taxation?

Answer 2

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

Question 3

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

Answer 3

• social (social justice)
• environement
• tax devolution
• external factors

Question 4

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

Answer 4

• 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

Question 5

What do you understand by the direct/indirect principle?

Answer 5

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

Question 6

What do you understand by the progressive/regressive principle?

Answer 6

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

Question 7

What do you understand by the unit/value principle?

Answer 7

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

Question 8

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

Answer 8

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.

Question 9

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

Answer 9

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.

Question 10

What do you understand by the neutrality principle?

Answer 10

Tax should be neutral so as not to distort choice

Question 11

What do you understand by the equity principle?

Answer 11

Tax should be equitable or just.

Question 12

What do you understand by the efficiency principle?

Answer 12

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

Question 13

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

Answer 13

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

Question 14

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

Answer 14

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.

Question 15

EXTERNAL FACTORS

Question 16

Who are responsible for paying taxes (3)?

Answer 16

• individuals
• partnerships
• companies

Question 17

What taxes is an individual liable to pay?

Answer 17

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

Question 18

What is meant by the tax year?

Answer 18

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

Question 19

What is a partnership

Answer 19

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

Question 20

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

Answer 20

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.

Question 21

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

Answer 21

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

Question 22

What is a company?

Answer 22

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

Question 23

What taxes is a company liable for?

Answer 23

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

Question 24

What is meant by the term financial year?

Answer 24

The 12 month reporting period

Question 25

What are the five main responsibilities of HMRC?

Answer 25

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

Question 26

What is MTDfB?

Answer 26

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

Question 27

For what businesses does MTDfB initially applies?

Answer 27

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

Question 28

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

Answer 28

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.

Question 29

What are the two main sources of tax law?

Answer 29

• legislation
• case law

Question 30

How is tax law set out?

Answer 30

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

Question 31

How is tax legislation changed?

Answer 31

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.

Question 32

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

Answer 32

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

Question 33

What tax related information does the Finance act include?

Answer 33

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.

Question 34

What are consolidated statues in regards to tax law?

Answer 34

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

Question 35

What are statutory instruments in regards to tax law?

Answer 35

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

Question 36

What is case law?

Answer 36

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

Question 37

Should case law be followed?

Answer 37

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.

Question 38

Can HRMC be flexible on how it interprets tax law?

Answer 38

Yes.

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

Question 39

What is the purpose of HRMC publications?

Answer 39

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

Question 40

Do HMRC publications have any legal backing?

Answer 40

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.

Question 41

What are five things that HRMC publications include?

Answer 41

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