F1 - Tax Flashcards
What are 2 reasons that a government might raise a tax?
- To finance public expenditure
2. To moderate behaviour
What are the 5 main aspects of a good tax policy?
- Equity and fairness
- Transparency
- Certainty
- Efficiency of collection
- Minimum tax gap
What is the tax gap?
The difference between the amount theoretically collectable by the government and the amount actually collected
What is hypothecation?
Where tax is raised for specific purposes
What is the incidence of a tax?
The incidence of a tax is on the person who pays the tax, and can be formal (who has direct contact with the tax authority) or actual/effective (who bares the cost of the tax)
What are the 3 methods of tax proportion?
- Progressive tax (higher at higher levels)
- Proportional tax (same at all levels)
- Regressive tax (lower at higher levels)
What is a direct tax?
One which cannot be passed on to another taxable person and is paid directly to the government e.g. PAYE
What is an indirect tax?
A tax which is collected by intermediaries on behalf of the government but borne by the final consumer e.g. VAT
What are unit taxes?
Taxes charged per unit or weight
What are ad valorem taxes?
Taxes based on value
What are excise duties?
A type of unit tax charge to discourage overconsumption, improve infrastructure or to promote growth of home industries
What are the 3 conditions that normally apply to excise duties?
- Easy to define products
- Produced in large volumes by a few large producers
- Inelastic demand with few substitutes
What is VAT?
A multi-stage consumption tax, where VAT is charged at each stage but companies can reclaim input VAT - the entire burden of VAT is passed on to the final consumer
What must a company do as a ‘taxable person’?
- Keep VAT records
- Charge output VAT
- Reclaim input VAT
- Complete a VAT return and pay off the net amount of output - input VAT
What are zero rated supplies?
Supplies with 0% VAT, such as non luxury food and childrens clothes
What are exempt supplies?
Supplies not subject to VAT such as finance and insurance
What is the calculation for taxable amount of employment income?
Salary + bonuses + commission + benefits - business expenses
What are the 5 benefits of using a PAYE system?
- Cash flow and budgeting advantage to the authority (collected each month)
- Tax payment is easier for the individual
- Administration costs are borne by the employer
- High proportion of taxes are received
- Tax authority only have to deal with 1 employer
What are the 4 options for dealing with double tax on dividends?
- Classic system - dividend income is taxed twice
- Imputation system - individual is given full credit for the tax already paid by the company
- Partial imputation system - individual is given some credit for the tax already paid by the company
- Split rate system - company profits used for dividends are taxed at a different rate
What are the 4 main sources of tax rules?
- Domestic legislation (code law)
- Case law (precedents)
- Directives from supranational bodies (e.g. EU)
- International taxation agreements
What 3 things must companies do regarding tax to comply with legislation?
- Keep adequate records
- Keep the records for specified minimum time
- Submit tax payments by certain deadlines
What are the 3 reasons that there are deadlines for filing and paying tax?
- Tax payers know when payment is due therefore it is more likely
- Tax authorities can forecast cash flows
- Tax authorities can impose penalities on late payments
What 4 things do tax authorities have the power to do?
- Review and query tax returns
- Examine supporting documentation
- Impose penalties on late payments
- Enter and search a business
They CANNOT arrest individuals
How do you get from accounting profit to taxable profit?
Accounting Profit
- Exempt income (e.g. grants, rental income)
+ Disallowable expenses (e.g. entertaining, donations)
+ Accounting Depreciation
- Tax Depreciation
= Taxable profit
