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Level 5 Business Tax Planning > Lecture 1 A > Flashcards

Lecture 1 A Flashcards

1
Q

What are the two primary purposes of tax

A

Taxation serves two primary purposes: funding government and social systems and influencing public and consumer behaviour

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2
Q

What is the primary source of income for the UK government

A

Taxation is the primary source of revenue for the UK government

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3
Q

What are taxes used for by the government

A

Taxes are used to:
- Fund public services
- Build and maintain infrastructure
- Support defence and national security
- Redistribute wealth
- Support local government

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4
Q

How does the government use tax to redistribute wealth

A

Through mechanisms like tax credits, pensions, and welfare benefits, which help reduce inequality

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5
Q

What are the key forms of tax used for funding

A

The key forms of tax used for funding are:
- Income Tax
- National Insurance
- Corporate Tax
- Value Added Tax (VAT)
- Excise Duties

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6
Q

What does the government use to influence consumer behaviour

A

The government influences consumer behaviour through tax incentives or disincentives, commonly known as “sin taxes” or environmental taxes

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7
Q

How does the government encourage positive behaviour

A

The government encourages positive behaviour through:
- Tax reliefs and incentives
- Reduced VAT rates

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8
Q

What activities does tax reliefs and tax incentives promote

A

Tax reliefs and incentives promote activities like saving for retirement or investing in environmentally friendly practices

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9
Q

What do reduced VAT rates apply to

A

Reduced VAT rates apply to apply to essential items

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10
Q

How does the government discourage negative behaviour

A

Discouraging negative behaviours:
- Excise duties
- Fuel duties and congestion charges
- Carbon taxes

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11
Q

What’s the aim of excise duties

A

Excise duties: Higher taxes on tobacco, alcohol, and sugary drinks aim to reduce consumption and address health issues

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12
Q

What’s the purpose of fuel duties and congestion charges

A

Fuel duties and congestion charges: Discourage excessive car use to reduce traffic and pollution

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13
Q

Why are carbon taxes imposed

A

Carbon taxes: Imposed on industries to limit greenhouse gas emissions and encourage sustainable practices

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14
Q

How does the government promote green energy and sustainability

A

Encouraging green energy and sustainability:
- Tax breaks and subsidies for renewable energy technologies and electric vehicles
- Taxes like the Climate Change Levy on businesses that use high amounts of energy, incentivizing efficiency

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15
Q

Where did Alan Smith his four fundamental principles of a good tax system

A

Adam Smith outlined four fundamental principles for a good tax system in his seminal work, The Wealth of Nations (1776)

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16
Q

What do Adam Smith’s Cannons of taxation describe

A

“Canons of Taxation,” describe the essential characteristics of a fair and efficient taxation system

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17
Q

What are the four cannons of taxation

A

The four cannons of taxation are:
- Equality
- Certainty
- Convenience
- Economy

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18
Q

What is the principle of the cannon of equality

A

Principle o the cannon of equality is that taxes should be proportional to an individual’s ability to pay

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19
Q

What does the cannon of equality ensure

A

The cannon of equality ensures fairness by imposing a greater burden on those who can afford it while relieving those with lower incomes

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20
Q

What’s a modern example of the cannon of equalirt

A

Modern example of the cannon of equality are progressive income taxes, where tax rates increase as income rises

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21
Q

What’s the principle of the cannon of certainty

A

Principle: The tax system should be clear and certain, leaving no ambiguity about how much is owed, when it is due, and how it will be collected

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22
Q

What does a predictable tax system prevent

A

A predictable tax system prevents arbitrary demands from tax authorities and helps individuals and businesses plan their finances effectively

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23
Q

What’s a modern example of a cannon of certainty

A

Modern Example: Transparent tax codes and published tax schedules

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24
Q

What’s the principle of the cannon of convenience

A

Taxes should be collected in a manner that is convenient for taxpayers

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25
Q

What’s the rational behind the cannon of convenience

A

Taxpayers should not face undue hardship in paying taxes

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26
Q

What’s a modern example of the cannon of convenience

A

Payroll tax deductions, online tax filing systems, and instalment payment options

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27
Q

What’s the principle of the cannon of economy

A

The cost of collecting taxes should be minimal relative to the revenue generated

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28
Q

What’s the rational of the cannon of economy

A

Excessive administrative costs reduce the net revenue available for public spending

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29
Q

What’s a modern example of the cannon of economy

A

Automated tax systems that streamline tax collection and minimize administrative expenses

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30
Q

What additional criteria do modern tax systems include

A

Modern tax systems often include additional criteria, such as:
- Neutrality
- Flexibility
- Simplicity

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31
Q

What’s meant by neutrality in the tax system

A

Taxes should not distort economic decisions or markets unnecessarily

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32
Q

What’s meant by flexibility in the tax system

A

The system should adapt to changes in economic conditions or government needs

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33
Q

What’s meant by simplicity in the tax system

A

The system should be easy for taxpayers to understand and comply with

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34
Q

What are direct taxes

A

Taxes that are paid directly to the government by the individual or organization on whom they are imposed

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35
Q

What are direct taxes based on

A

These are based on income, profits, or wealth

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36
Q

What are some key features of direct taxes

A

Key Features:
- Cannot be shifted to another person
- Paid directly by the taxpayer to HMRC
- The amount is often proportional to the taxpayer’s ability to pay

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37
Q

What are examples of direct tax

A

Examples of direct tax:
- Income Tax
- Corporation Tax
- Capital Gains Tax
- Inheritance Tax
- National Insurance Contributions

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38
Q

Who is income tax paid by

A

Income Tax: Paid by individuals on earnings, pensions, and savings interest above tax-free allowances

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39
Q

Who pays corporation tax

A

Corporation Tax: Paid by companies on their profits

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40
Q

Who pays capital gains tax

A

Capital Gains Tax: Charged on the profit made from selling certain assets

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41
Q

Who pays inheritance tax

A

Inheritance Tax: Paid on the estate of a person who has died, above a certain threshold

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42
Q

Who pays national insurance

A

National Insurance Contributions (NICs): Paid by workers and employers to fund social security benefits

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43
Q

What are indirect taxes

A

Taxes that are levied on goods or services

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44
Q

What are some key features of indirect taxes

A

Key Features:
- Applied to transactions rather than income or profits
- The tax burden is included in the price of goods or services
- Often regressive, meaning they take a larger percentage of income from lower-income earners

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45
Q

What are some examples of income tax

A

Examples in the UK:
- Value Added Tax (VAT)
- Excise Duties
- Stamp Duty Land Tax
- Customs Duty
- Air Passenger Duty (APD)

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46
Q

What is VAT charged on

A

Value Added Tax (VAT): Charged on most goods and services at varying rates

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47
Q

What are the different rates for VAT

A

Standard rate of 20%, reduced rate of 5%, and zero rate for certain essentials

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48
Q

What is excise duties applied to

A

Applied to specific goods like alcohol, tobacco, and fuel

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49
Q

What is stamp duty and land tax paid on

A

Paid on property transactions above a certain value

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50
Q

What is custom duty charged on

A

Charged on goods imported into the UK

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51
Q

What is air passenger duty

A

Applied to flights originating in the UK

52
Q

What’s the fairness of direct and indirect taxes

A

Direct taxes are often progressive, targeting higher earners, while indirect taxes can disproportionately affect low-income groups

53
Q

Why are indirect taxes more stable

A

Indirect taxes are more stable because consumption tends to remain steady even during economic downturns

54
Q

What’s the behavioural influence of indirect taxes

A

Indirect taxes like excise duties can discourage harmful consumption

55
Q

What are some different sources of law in the UK

A

Different sources of law in the UK are:
- Legislation (Primary Source)
- Case Law (Judicial Decisions)
- HM Revenue and Customs (HMRC) Guidance
- International Agreements
- European Union Law (Historic Influence)
- Common Law Principles
- Professional and Academic Influence

56
Q

What are key sources of legislation

A

Key sources include:
- Acts of Parliament
- Statutory Instruments (SIs)

57
Q

What are examples of Acts of Parliament being a source of tax law

A

Examples:
- Income Tax Act 2007
- Corporation Tax Act 2009
- Value Added Tax Act 1994
- Finance Acts

58
Q

How often are finance acts

A

Annual legislation updating tax rules, including new rates and allowances

59
Q

What are statutory instruments

A

Secondary legislation made under powers granted by an Act of Parliament

60
Q

What are statutory instruments used for

A

Used to implement detailed rules or changes without requiring a full Act

61
Q

What’s an example of statutory instruments

A

Amendments to VAT thresholds

62
Q

How does case law influence the tax law

A

Courts interpret tax legislation and resolve disputes between taxpayers and HM Revenue and Customs

63
Q

What are some important courts for tax law

A

Important courts for tax law:
- Tax Tribunals
- Higher Courts

64
Q

What do tax tribunals deal with

A

First-tier Tribunal (Tax Chamber) and Upper Tribunal handle disputes with HMRC

65
Q

What do judicial decisions set

A

Judicial decisions set precedents that influence how tax laws are applied in similar future cases

66
Q

How does HMRC influence tax law

A

HMRC publishes manuals, statements, and notices explaining how tax laws are applied

67
Q

Are HMRCs statements legally binding

A

While not legally binding, these provide practical guidance for taxpayers and professionals

68
Q

What are double taxation treaties

A

Agreements with other countries to avoid double taxation of income, profits, and gains

69
Q

Who are double taxation treaties governed by

A

Governed by the International Tax Enforcement (Mutual Assistance) Act 2010

70
Q

How do OECD guidelines influence tax law

A

Influence UK tax policy, particularly on issues like transfer pricing and base erosion

71
Q

When does the tax year start and end

A

Start: 6 April
End: 5 April

72
Q

Who does the tax year dates apply to

A

These dates apply to:
- Individuals
- Self-Employed Individuals
- Employers

73
Q

When is the corporation tax year

A

Corporation Tax Year: Runs from 1 April to 31 March

74
Q

When is the government fiscal year

A

Government Fiscal Year: Used for public sector budgeting and runs from 1 April to 31 March

75
Q

What is the tax year critical for

A

The tax year is critical for:
- Tax Returns
- Allowances and Thresholds
- Investment and Savings Deadlines

76
Q

When must self assessment tax return be filed by

A

Self-assessment tax returns must be filed for the preceding tax year by:
- 31 October (paper returns).
- 31 January (online returns).

77
Q

When must ISA contributions be used by

A

ISA Contributions: The allowance must be used by 5 April each year

78
Q

What do pension contributions affect

A

Pension Contributions: Contributions tied to the tax year affect annual limits and tax relief

79
Q

What is HMRC

A

It is the UK government department responsible for tax collection, administration, and enforcement

80
Q

What are the key responsibilities of HMRC

A

Key responsibilities of HMRC:
- Tax Collection
- Customs and Trade
- Social Benefits Administration
- Enforcement and Compliance
- Advisory Role
- Support for Savings and Pensions

81
Q

What tax does HMRC collect

A

Tax Collection:
- Income Tax
- Corporation Tax
- Value Added Tax (VAT)
- National Insurance Contributions (NICs)
- Capital Gains Tax
- Inheritance Tax
- Excise Duties

82
Q

What does HMRC do with customs and trade

A

Customs and Trade:
- Overseeing customs duties and import/export regulations.
- Ensuring compliance with trade agreements

83
Q

What does HMRC do with social benefits administration

A

Social Benefits Administration:
- Administering tax credits
- Overseeing payments like Child Benefit
- Administering the Statutory Sick Pay and Maternity Pay systems through employers

84
Q

What does HMRC do with avoidance and compliance

A

Enforcement and Compliance:
- Investigating tax evasion and fraud
- Ensuring businesses and individuals comply with tax laws
- Penalty and interest enforcement for late or incorrect filings

85
Q

How does HMRC have an advisory role

A

Advisory Role:
- Providing guidance on tax rules for individuals and businesses
- Publishing manuals, guidelines, and notices to help with compliance

86
Q

How does HMRC support savings and pensions

A

Support for Savings and Pensions:
- Overseeing Individual Savings Accounts (ISAs) and tax-efficient pension schemes

87
Q

When was HMRC founded

A

Founded: 18 April 2005

88
Q

How was HMRC formed

A

Formed through the merger of:
- Inland Revenue
- HM Customs and Excise

89
Q

What was inland revenue responsible for

A

Inland Revenue (responsible for income tax, corporation tax)

90
Q

What was HM Customs and Excise responsible for

A

HM Customs and Excise (responsible for VAT, excise duties, and customs)

91
Q

What is the leadership of HMRC like

A

Led by the Chief Executive of HMRC, who reports to the Chancellor of the Exchequer

92
Q

What does HMRC use to administer the tax system

A

HMRC administers the tax system through the following key activities:
- Tax Collection
- Taxpayer Registration
- Taxpayer Support
- Filing and Payment
- Compliance and Enforcement
- Tax Relief and Refund

93
Q

How can individuals and businesses register for tax

A

Individuals and businesses must register for tax:
- Individuals: Register for self-assessment or PAYE through employment
- Businesses: Register for VAT, Corporation Tax, and PAYE as employers

94
Q

What are some tools and systems for tax administration

A

Tools and Systems for Tax Administration:
- PAYE (Pay As You Earn) System
- Self-Assessment System
- Making Tax Digital (MTD)
- Online Services

95
Q

What is MTD

A

A digital initiative to simplify tax administration by requiring businesses to maintain and submit digital tax records

96
Q

How can tax payers appeal

A

Taxpayers who disagree with HMRC’s decisions can appeal through:
- Internal Reviews
- Tax Tribunals
- Judicial Review

97
Q

What are taxpayers rights

A

Rights:
- Access to clear and accurate information
- Fair treatment and privacy
- Right to appeal and dispute decisions

98
Q

What are the obligations of taxpayers

A

Obligations:
- Accurate and timely tax filings
- Maintaining proper financial records
- Paying taxes by the due date

99
Q

What are the challenges in tax administration

A

Challenges in Tax Administration:
- Compliance Issues
- Digital Transformation
- Post-Brexit Adjustments
- Economic Uncertainty

100
Q

Who are some people who need to file a self assessment tax return

A

You must file a Self-Assessment tax return if you:
- Are self-employed and earned more than £1,000
- Earned over £2,500 from rental income or untaxed savings/investments.
- Are a director of a company

101
Q

What is the deadline for self assessment registration

A

Self-employed individuals: Register by 5 October after the end of the tax year in which income started

102
Q

What are the filing deadlines for self assesment

A

Filing Deadlines:
- Paper Returns: 31 October following the end of the tax year
- Online Returns: 31 January following the end of the tax year

103
Q

What are the payment deadlines for self assesment

A

Payment Deadlines:
- Balancing payment (outstanding tax): 31 January
- First payment on account (for next year’s tax): 31 January
- Second payment on account: 31 July

104
Q

What’s the penalty for late tax filing

A

£100 penalty if up to 3 months late (even if no tax is owed)

105
Q

What’s the benefits of self assesment

A

Benefits of Filing Self-Assessment:
- Enables claims for eligible tax reliefs
- Avoids penalties for unreported income
- Provides transparency for complex financial situations

106
Q

When can you appeal the HMRC

A

You can appeal if HMRC has made a decision you disagree with

107
Q

What is the standard deadline for making appeals

A

The standard deadline for making an appeal is 30 days from the date of HMRC’s decision notice

108
Q

If you’re unhappy with HMRCs decision what can you raise it to

A

If you’re dissatisfied with HMRC’s response, you can escalate your case to the independent First-tier Tribunal (Tax Chamber)

109
Q

What HMRC Expects from Taxpayers

A

Taxpayers are expected to:
- Be Honest and Accurate
- Take Responsibility for Your Tax Affairs
- Engage with HMRC Promptly
- Treat HMRC Staff with Respect

110
Q

What is tax evasion

A

Tax evasion is the illegal practice of deliberately avoiding paying taxes owed to HMRC

111
Q

What does tax evasion involve

A

It involves actions such as underreporting income, hiding assets, or falsifying records

112
Q

What does tax evasion involve

A

Tax evasion undermines public finances and is treated as a serious crime in the UK

113
Q

What are some examples of tax evasion

A

Examples of tax evasion are:
- Failing to Declare Income
- Hiding or Transferring Assets
- Deliberately Misclassifying Expenses

114
Q

What are the consequences of tax evasion

A

Consequences of Tax Evasion:
- Financial Penalties
- Criminal Prosecution
- Damage to Reputation

115
Q

How big are the penalties for tax evasion

A

Can be up to 100% of the tax evaded (or up to 200% for offshore tax evasion)

116
Q

What’s the imprisonment charge for serious tax evasion cases

A

For serious cases, custodial sentences of up to 7 years or more may be imposed

117
Q

How does HMRC detect tax evasion

A

How HMRC Detects Tax Evasion:
- Connect System
- Whistle-blowers
- International Cooperation

118
Q

What is a connect system

A

A powerful data analytics tool that cross-references financial data from banks, employers, and other sources

119
Q

What is tax planning

A

Tax planning refers to legitimate and lawful activities undertaken to reduce tax liabilities

120
Q

What does tax planning involve

A

It involves using government-approved allowances, deductions, exemptions, and reliefs to organize your financial affairs efficiently

121
Q

What are the key features of tax planning

A

Key Features:
- Legal and Encouraged
- Ethical

122
Q

What is tax avoidance

A

Tax avoidance involves arranging financial affairs to reduce tax liabilities in a way that is technically legal but goes against the spirit or intent of the law

123
Q

What does tax avoidance involve

A

Tax avoidance often involves exploiting loopholes or grey areas in tax legislation

124
Q

What are the key features of tax avoidance

A

Key features of tax avoidance are:
- Technically Legal, But Questionable
- Risk of Challenge by HMRC

125
Q

What are some examples of tax avoidance

A

Examples of tax avoidance are:
- Loan Schemes
- Offshore Arrangements
- Artificial Transactions

126
Q

How does the government discourage tax avoidance

A

The government discourages tax avoidance through:
- General Anti-Abuse Rule (GAAR)
- Disclosure of Tax Avoidance Schemes (DOTAS)
- Penalties

Level 5 Business Tax Planning (3 decks)

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