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 do you understand by the direct/indirect principle?

Answer 3

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.

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

Question 4

What do you understand by the progressive/regressive principle?

Answer 4

Progressive taxes rise as a proportion of income as that income rises.

Regressive taxes rise as a proportion of income as income falls. The amount of duty paid on a packet of cigarettes is the same, regardless of the income of the purchaser.

Question 5

What do you understand by the unit/value principle?

Answer 5

A unit tax is calculated as a flat rate per item, regardless of value.

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

Question 6

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

Answer 6

Income tax is paid only by those who generate income.

Capital taxes are just because people should not be able to live off the sale of capital assets without generating income.

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

Question 7

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

Answer 7

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 8

What do you understand by the neutrality principle?

Answer 8

Tax should be neutral so as not to distort choice

Question 9

What do you understand by the equity principle?

Answer 9

Tax should be equitable or just.

Question 10

What do you understand by the efficiency principle?

Answer 10

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

Question 11

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

Answer 11

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 12

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

Answer 12

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 13

What taxes is an individual liable to pay?

Answer 13

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 14

What do you understand by the term tax year?

Answer 14

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

The tax year running from 6 April 2019 to 5 April 2020 is called the 2019/20 tax year.

Question 15

What taxes are partners individually liable for?

Answer 15

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 16

What taxes are partners jointly and severally liable for?

Answer 16

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 17

What is a company?

Answer 17

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 18

What taxes is a company liable for?

Answer 18

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 19

What do you understand by the term financial year?

Answer 19

Financial year: 1 April in one calendar year to 31 March in the next calendar year. The financial year running from 1 April 2019 to 31 March 2020 is called Financial Year (FY) 2019.

Question 20

What are the five main responsibilities of HMRC?

Answer 20

1. to collect and administer taxes including IT, CGT, NIC, CT and 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 21

What does HMRC stand for?

Answer 21

Her Majesty’s Revenue and Customs

Question 22

What does MTDfB stand for?

Answer 22

Making Tax Digital for Businesses (MTDfB)

Question 23

For what businesses does MTDfB initially applies?

Answer 23

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 24

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

Answer 24

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 25

How much tax is estimated to be lost a year through avoidable taxpayer error?

Answer 25

It is estimated that over £8 billion a year of tax is lost through avoidable taxpayer error.

Question 26

How is tax law set out?

Answer 26

Tax law is set out in statute, supplemented by statutory instruments.

Question 27

How often is a Finance act passed?

Answer 27

A Finance Act is passed each year, following Budget proposals.

Question 28

What tax related information does the Finance act include?

Answer 28

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.

The Finance Act 2019 includes rates and allowances mainly relating to the tax year 2019/20 and the Financial Year 2019.

Question 29

When is the UK’s single annual fiscal event?

Answer 29

From Autumn 2017, the UK moved to a single annual fiscal event, the Autumn Budget.

Question 30

What are statutory instruments?

Answer 30

SIs most commonly take the form of Regulations, which deal with these detailed provisions. They are the biggest single source of tax law each year.

Question 31

What is the main benefit of statutory instruments?

Answer 31

The procedure for making changes to a SI is less complicated than for a statute.

A SI is simply laid before Parliament and usually automatically becomes law within a stated period, unless any objections are raised to it.

Question 32

Should case law be followed?

Answer 32

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 33

Can HRMC be flexible on how it interprets tax law?

Answer 33

Yes.

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

Question 34

What is the purpose of HRMC publications?

Answer 34

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

Question 35

Do HMRC publications have any legal backing?

Answer 35

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 36

What are five things that HRMC publications include?

Answer 36

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