Introduction to taxation Flashcards
Objectives and functions of taxation Regulations and guidance Roles and responsibilities of the tax practitioner Tax planning, tax avoidance and tax evasion Taxes in the UK Overview of income tax Proforma income tax computation Residence and domicile
What is the primary purpose of taxation?
To raise revenue for the government.
What 3 things can taxation be used for?
- Redistribution of wealth
- Stabilise the economy
- Influence behaviour
What are the 6 principles of taxation?
EN FE SE
- Efficiency - Compliance and administration costs should be minimised
- Neutrality (minimise discrimination) - minimisation of discrimination
- Flexibility- Dynamic and flexible enough to meet the current revenue
- Effectiveness - not be unnecessarily complicated
- Simplicity and Certainty - determined by a person’s ability to pay
- Equality and Fairness - avoiding double taxation and minimising tax avoidance (legal) and evasion (Illegal)
What is the tax base?
The value of income or assets on which tax can be imposed.
What is a tax rate?
The percentage that is applied to the tax base to give the tax liability
What is a progressive tax structure?
The rate of tax increases as the individuals tax base increases. E.g. UK income tax
What is a regressive tax structure?
The rate of tax is inversely proportionate to income.
What is a proportional tax structure?
The rate of tax is unrelated to income and stays the same whatever the tax base. E.g. If income tax was set at 20% no matter what level of income.
What is statute law?
Acts of parliament e.g. annual finance act
What is case law?
Since tax legislation can sometimes be vague or open to interpretation, courts provide authoritative rulings on how these laws should be applied.
What are the 5 AAT’s fundamental principles?
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- Integrity - straightforward and honest
- Objectivity - Not allow bias
- Professional competence and due care - maintain professional knowledge
- Professional behaviour - Comply with relevant laws and avoid any action that may discredit the profession
- Confidentially- Respect the confidentiality of information
When should information about a client be disclosed?
If there is:
- written authority to do so,
- legal obligation or,
- HMRC makes a formal request.
What is money laundering?
Making dirty money ‘clean’.
- Placement – put money in the UK system
- Laying – multiple transactions
- Integration – enters your own bank
What is a tax practitioner required to do when taking on a new client in respect to Money Laundering?
Carry out a review on the client and check their identity with official documentation such as a passport.
What is the result of not disclosing money laundering?
Fines and imprisonment of up to five years.
In respect to Professional conduct in relation to taxation, what are the 6 steps taken when errors are found?
- Establish the facts
- Is the irregularity trivial?
- Ask the client for clarity
- Decide whether to continue to act for the client - If not trivial, advise the client to disclose to HMRC
-
Client does not agree to disclose:
- Advise in writing of the consequences
- Cease to act for client
- Inform HMRC you have resigned but NOT why - Consider whether a report should be made to the MLRO or NCA
- Carefully consider the response to any professional enquiry letters received.
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What is tax planning?
A legal and acceptable way of reducing your tax liability that doesn’t exploit shortcomings within relevant legislation.
What is tax avoidance?
A legal but not acceptable way of reducing tax liability by exploiting loopholes within the tax legislation.
What is tax evasion?
An illegal and unacceptable way of reducing ones tax liability which involves breaking the law.
What makes one automatically resident in the UK?
- Are in the UK for 183 days or more during the year, or
- Their only home is in the UK, AND
- They owned, rented or lived in the home for at least 91 days and spent at least 30 days there in the tax year.
What makes one automatically not resident in the UK?
In the tax year, they are in the UK for less than:
- 16 days, or
- 46 days if you have not been UK resident during the three previous tax years (i.e. is arriving in the UK or is an occasional visitor), or
- 91 days, of which no more than 30 days were working in the UK, and the person works fulltime overseas (averaging at least 35 hours a week).
If a person’s residence cannot be determined using the automatic tests, what test should be used?
Sufficient ties test
Before a sufficient ties test, what must you do?
Determine whether the person is a previous UK resident
- A person is a previous UK resident if he was UK resident in one or more of the 3 previous tax years (usually someone leaving the UK).
- A person who was not UK resident in any of the 3 previous tax years, is not a previous resident (usually someone arriving in the UK).
What are the 4 UK ties for arrivers and the extra 5th UK tie for leavers?
- Having close family (a spouse/civil partner/ minor child) resident in the UK.
- Having UK accommodation in which the individual spends at least one night in the tax year.
- Doing substantive work in the UK.
- This means work for 3 hours or more on 40 or more days in the tax year.
- Being in the UK for more than 90 days during either or both of the two previous tax years.
- Spending more time in the UK than in any other country during the tax year. A day in the UK is any day on which a person is present in the UK at midnight.
