Introduction to taxation

Question 1

What is the primary purpose of taxation?

Answer 1

To raise revenue for the government.

Question 2

What 3 things can taxation be used for?

Answer 2

• Redistribution of wealth
• Stabilise the economy
• Influence behaviour

Question 3

What are the 6 principles of taxation?

EN FE SE

Answer 3

• 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)

Question 4

What is the tax base?

Answer 4

The value of income or assets on which tax can be imposed.

Question 5

What is a tax rate?

Answer 5

The percentage that is applied to the tax base to give the tax liability

Question 6

What is a progressive tax structure?

Answer 6

The rate of tax increases as the individuals tax base increases. E.g. UK income tax

Question 7

What is a regressive tax structure?

Answer 7

The rate of tax is inversely proportionate to income.

Question 8

What is a proportional tax structure?

Answer 8

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.

Question 9

What is statute law?

Answer 9

Acts of parliament e.g. annual finance act

Question 10

What is case law?

Answer 10

Since tax legislation can sometimes be vague or open to interpretation, courts provide authoritative rulings on how these laws should be applied.

Question 11

What are the 5 AAT’s fundamental principles?

Part of reference material

Answer 11

• 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

Question 12

When should information about a client be disclosed?

Answer 12

If there is:

• written authority to do so,
• legal obligation or,
• HMRC makes a formal request.

Question 13

What is money laundering?

Answer 13

Making dirty money ‘clean’.

• Placement – put money in the UK system
• Laying – multiple transactions
• Integration – enters your own bank

Question 14

What is a tax practitioner required to do when taking on a new client in respect to Money Laundering?

Answer 14

Carry out a review on the client and check their identity with official documentation such as a passport.

Question 15

What is the result of not disclosing money laundering?

Answer 15

Fines and imprisonment of up to five years.

Question 16

In respect to Professional conduct in relation to taxation, what are the 6 steps taken when errors are found?

Answer 16

1. Establish the facts
2. Is the irregularity trivial?
   - Ask the client for clarity
   - Decide whether to continue to act for the client
3. If not trivial, advise the client to disclose to HMRC
4. 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
5. Consider whether a report should be made to the MLRO or NCA
6. Carefully consider the response to any professional enquiry letters received.

within reference material

Question 17

What is tax planning?

Answer 17

A legal and acceptable way of reducing your tax liability that doesn’t exploit shortcomings within relevant legislation.

Question 18

What is tax avoidance?

Answer 18

A legal but not acceptable way of reducing tax liability by exploiting loopholes within the tax legislation.

Question 19

What is tax evasion?

Answer 19

An illegal and unacceptable way of reducing ones tax liability which involves breaking the law.

Question 20

What makes one automatically resident in the UK?

Answer 20

• 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.

Question 21

What makes one automatically not resident in the UK?

Answer 21

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).

Question 22

If a person’s residence cannot be determined using the automatic tests, what test should be used?

Answer 22

Sufficient ties test

Question 23

Before a sufficient ties test, what must you do?

Answer 23

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).

Question 24

What are the 4 UK ties for arrivers and the extra 5th UK tie for leavers?

Answer 24

1. Having close family (a spouse/civil partner/ minor child) resident in the UK.
2. Having UK accommodation in which the individual spends at least one night in the tax year.
3. Doing substantive work in the UK.

• This means work for 3 hours or more on 40 or more days in the tax year.

4. Being in the UK for more than 90 days during either or both of the two previous tax years.
5. 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.

Question 25

Once you have decided a person’s previous residence status and the number of sufficient ties, how do you determine residence status for the tax year for leavers?

Answer 25

• 4 ties needed if spend 16-45 days in the UK
• 3 ties needed if spend 46-90 days in the UK
• 2 ties needed if spend 91-120 days in the UK
• 1 tie needed if spend over 120 days in the UK

Question 26

Once you have decided a person’s previous residence status and the number of sufficient ties, how do you determine residence status for the tax year for arrivers?

Answer 26

• 4 ties needed if spend 46-90 days in the UK
• 3 ties needed if spend 91-120 days in the UK
• 2 ties needed if spend over 120 days in the UK

Question 27

Where are you taxed if you are / aren’t residence in the UK?

Answer 27

• Resident in UK - Liable to tax on worldwide income.
• Non-UK resident - Liable to tax on income arising in the UK.

Question 28

What is a more permanent test of residence? And why is it a better method?

Answer 28

A Domicile test is a more permanent test of residence.

It often looks to where a taxpayer will eventually return to be buried.

Question 29

What are the 3 types of domicile:

Answer 29

1. Origin – an individual is born with their father’s domicile (or mother’s if their parents were unmarried).
2. Dependence – as a child (<16), an individual’s domicile changes with that of the person on whom they are legally dependent.
3. Choice – as an adult (≥16) an individual can change their permanent home by severing all ties with the old country and settling permanently in a new country.

Question 30

What is condition A & B for being ‘deemed domicile’?

Answer 30

Condition A:

• Was born in the UK
• Domicile of origin was in the UK
• Was resident in the UK for tax year in question.

Condition B:

• Has been a UK resident for at least 15 years of the 20 years immediately before the tax year.

Question 31

What is the impact on a taxpayer if they are both a UK resident and UK domiciled?

Answer 31

Where a taxpayer is resident and domiciled in the UK, they are normally taxed on the arising basis. This means that all worldwide income and gains are taxable in the UK. If the person earns overseas income or owns overseas assets, this could mean that these suffer tax twice.

Question 32

What is the impact on a taxpayer if they are a UK resident?

Answer 32

If UK resident but not domiciled they have the choice of whether to be taxed on an arising basis or a remittance basis.

Using the remittance basis allows these individuals to avoid:

• Income tax on income not brought into the UK
• Capital gains tax on proceeds not brought into the UK

Question 33

What is the impact on a taxpayer that is a non UK resident?

Answer 33

Any overseas income and capital gains will not be taxed in the UK.

Question 34

What is the Income tax computation proforma?

Answer 34

Split - Non Savings Income, Savings Income and Dividend income.

Trading Inc. X
Employment Inc. X
Property Inc. X
Saving Inc. X
UK Dividends. X
Net Income. X. X. X
Less: PA. (12,500). (Bal). (Bal)
Taxable Income. X. X. X