M1: Intro to Tax

Question 1

What is taxation and why are we taxed?

Answer 1

Taxation is a compulsory government levy on individuals and businesses.

The primary purpose of taxes is to finance government expenditure on public goods or to encourage or discourage certain taxpayer behaviours.

Question 2

How does tax happen?

Answer 2

1. HM Treasury sets the government’s tax policy and the annual budget,
2. Parliament legislates the tax laws
3. HMRC administers the tax system,
   ensuring the correct amount of tax is collected.

Question 3

What are the main UK taxes?

Answer 3

Direct Taxes:
* Income Tax: Charged on the income of individuals from various sources.
* Corporation Tax: Charged on the total taxable profits of companies.
* Capital Gains Tax (CGT): Charged on individuals who make gains on the disposal of assets.
* Inheritance Tax (IHT): Charged on the estate of someone who has died.

Indirect Taxes:
* Value Added Tax (VAT): Charged on the consumers of goods and services.
* Stamp taxes: Charged on purchasers of property and shares.
* Insurance Premium Tax: Charged on purchasers of insurance policies.
* Duties: Charged on certain goods, such as airline travel and sugary drinks.

Question 4

Which taxes apply in different parts of the UK?

Answer 4

1. Scotland – Administered by Revenue Scotland:
   * Land and buildings transaction tax (LBTT).
   * Scottish landfill tax.
2. Wales – Administered by the Welsh Revenue Authority:
   * Landfill disposals tax.
   * Land transaction tax (LTT).

Question 5

What is self-assessment and ‘Making Tax Digital’ (MTD)?

Answer 5

Taxpayers are responsible for reporting their income and calculating their tax liability under the self- assessment system of taxation.

Complete a tax return to HMRC annually, either on paper by October 31st or online by January 31st following the end of the tax year.

Making Tax Digital is an ongoing project to transition from annual tax returns to digital record-keeping
and quarterly returns direct from the digital records.

1. MTD for VAT: Since April 2019, businesses with a taxable turnover above the VAT threshold
   have been required to keep digital records and submit VAT returns using MTD-compatible software. This requirement was extended to all VAT-registered businesses from April 2022.
2. MTD for Income Tax: Initially, only businesses and landlords with annual turnover of more than
   £50,000 will have to keep digital records for self-assessment.

Question 6

What are the 2 fundamental responsibilities of taxpayers in the UK tax system?

Answer 6

1. Submitting complete and correct returns disclosing all relevant information.
2. Paying the correct amount of tax on time.

Question 7

What are the differences between tax evasion, tax planning and tax avoidance?

Answer 7

• Tax Evasion: Illegally reducing tax liabilities by under declaring income or overstating expenses, which is a criminal offence.
• Tax Planning: Legally organising tax affairs to minimise liabilities within the intentions of the
  law.
• Tax Avoidance: Tax planning that is acceptable to the taxpayer and their adviser can arise due to loopholes or complexities of tax law. If the law did not intend the outcome that the taxpayer achieves, HMRC may consider the activity as unethical, ‘unacceptable’ or abusive ‘bending the rules’, especially if contrived or artificial arrangements are involved.

Differences of views as to whether tax avoidance is acceptable or not is often left to the Court.

Question 8

What can the government do to stop unacceptable tax avoidance?

Answer 8

1. Introduce specific anti-avoidance legislation to close any loopholes that become apparent within the tax law.
2. Apply the General Anti-Abuse Rule (GAAR). This is designed to counteract tax advantages arising from arrangements considered abusive and resulting in outcomes not intended by parliament. The GAAR involves a double reasonableness test asking whether the arrangements put in place to reduce tax liabilities go beyond what could reasonably be regarded as reasonable.
3. Tax advisers are legally required to register tax avoidance schemes under DOTAS (disclosure
   of tax avoidance schemes) and there are penalties for persistent promotion of unacceptable avoidance schemes under POTAS (promotion of tax avoidance schemes).

Question 9

What are the core ethical principles that a Chartered Accountant must follow in a tax context?

Answer 9

1. Integrity: Being straightforward and honest in all professional and business relationships.
2. Objectivity: Not allowing bias, conflict of interest, or undue influence of others to override professional or business judgements.
3. Professional competence and due care: Maintaining professional knowledge and skill at the level required to ensure competent professional service.
4. Confidentiality: Respecting the confidentiality of information acquired during professional and business relationships.
5. Professional behaviour: Complying with relevant laws and regulations and avoiding actions that
   discredit the profession.

Question 10

What guidance exists in PCRT about giving tax planning advice?

Answer 10

1. A member must balance their responsibilities to serve their clients with professional competence and due care with their duties to comply with relevant laws when giving tax planning advice.
2. A member must never be knowingly involved in tax evasion.
3. Guidance exists in PCRT to help the member avoid situations involving ‘unacceptable’ tax avoidance.

Question 11

What are the five Standards for Tax Planning?

Answer 11

1. Client specific: Tailoring tax planning to the client’s facts and circumstances, alerting them to wider risks and implications of any course of action.
2. Lawful: Acting lawfully and with integrity, basing tax planning on a realistic assessment of the relevant facts and a credible view of the law – drawing attention to tax planning where it is known that HMRC take a different view.
3. Disclosure and transparency: Ensuring that the success of tax advice given does not rely on HMRC having less than the relevant facts. Any disclosure to HMRC must fairly represent all relevant facts.
4. Tax planning arrangements: Avoid the creation, encouragement, or promotion of tax planning
   arrangements or structures that are contrary to the clear intention of parliament or are highly artificial or contrived and seek to exploit shortcomings in the relevant legislation.
5. Professional judgement and documentation: Exercising professional judgement and keeping
   adequate and timely documentation to demonstrate how the standards for tax planning were adhered to.

Question 12

What implications are there for a tax advisers own tax affairs?

Answer 12

1. Not evade their own tax liabilities.
2. Keep their tax affairs up to date.
3. Consider engaging an agent if in dispute with HMRC over their affairs.
4. Consider whether any tax arrangements they might be associated with could bring them or the
   profession into disrepute

Question 13

What can HMRC do if tax advisers are dishonest?

Answer 13

• Civil penalties of up to £50,000 on tax advisers who are proved to be dishonest.
• Request access to a member’s client working papers under certain conditions, including
  where there has been a conviction for fraud or dishonesty offences or where a dishonest conduct
  notice has been issued.

Question 14

What are the requirements for tax advisers when taking on a new client?

Answer 14

1. Verify the identity of the taxpayer and their business interests, and take steps to ensure that the
   taxpayer is not involved in money laundering.
2. Ensure that acting for the taxpayer would not create an unacceptable level of risk:
   - considering the taxpayers personal circumstances and business situation;
   - financial standing;
   - Integrity and attitude to compliance with tax law generally.
3. Communicate (with the client’s permission) with previous adviser to obtain relevant
   information about the client’s tax affairs – if this permission is denied by the client, then the CA
   should decline to act.

Question 15

Why is awareness of money laundering important?

& what must CA’s do?

Answer 15

Awareness is important because CAs must be vigilant to the risks posed by money laundering activities, which involve possessing, concealing or dealing with the proceeds of crime, this includes tax evasion.

CA’s must:
1. Be fully aware of their legal responsibilities in relation to money laundering and the potential
dangers they are exposed to as tax advisers.
2. Follow the requirements to report any suspicions or knowledge of money laundering activities,
including tax offences, to the appropriate authorities.

Question 16

What are the key requirements of a tax engagement letter?

Answer 16

1. Scope of Work: The specific responsibilities and the extent of services provided by the adviser.
2. Client’s Duties: The obligation of the client to provide all relevant information accurately and on
   time.
3. Fees: Clear terms for billing and fee arrangements (ICAS Code of Ethics requires these to be in writing).
4. Money Laundering: The requirement to report any suspicious activities as per anti-money laundering regulations.

Question 17

What responsibilities arise for tax advisers when performing tax services for a client?

Answer 17

Tax advisers have the following responsibilities:

1. Ensure the taxpayer reviews the tax returns prepared by the adviser prior to signing them.
2. Ensure that the tax return is accurate based on information provided by the client and draw
   attention to any judgemental areas in the return.
3. Take reasonable care and exercise professional scepticism to ensure that tax return presents
   the facts correctly and no attempt is made to mislead HMRC.
4. Consider additional disclosure to HMRC when there is doubt over the correct tax treatment of an item, or where the taxpayer proposes to adopt a different view to HMRC’s known position.

Question 18

What risks arise when performing tax services for a client and how can tax advice risk be mitigated?

Answer 18

The risk of violating the Fundamental Principle of professional competence and due care is critical when managing the risks associated with providing tax advice.

A CA should only provide advice when they:

1. have an adequate understanding of the client’s personal and business circumstances and tax
   position; and
2. fully understand the issues under consideration and the objectives of the advice.

Advice should have the following characteristics to mitigate this:

1. Normally be in writing and set out facts and assumptions, alternatives, risks, caveats and
   exclusions.
2. Written evidence of how the advice was formulated should be retained on file.
3. Be clear that the advice given is based on the law at the current time and may be affected by subsequent changes in the law.
4. A second opinion should be sought for significant opinions e.g. significant tax at stake,
   sufficient importance to the client, aggressive tax planning.

Question 19

When can a Chartered Accountant disclose confidential client information?

Answer 19

Information can be disclosed where permitted by law and either the Client gives proper and specific authority, or a legal/professional right or duty to disclose exists.

When there is a legal/professional right or duty to disclose. This includes:
- Actual or suspected money laundering activity (disclosure is required);
- or to defend a criminal charge against, or remove suspicion of dishonest activity by, a member.

Question 20

What must a Chartered Accountant consider when tax errors are discovered?

Answer 20

CA’s must ensure they do nothing to assist a client in committing or concealing tax evasion. Where errors are discovered that resulted in an underpayment of tax the PCRT help sheet C provides a detailed guide on how to respond.

Also consider that HMRC could charge additional professional costs due to these errors.

Question 21

What are the 4 things that a Chartered Accountant should do to resolve conflicts of interest?

Answer 21

1. Assess the nature, extent and direct and indirect implications of the conflict of interest.
2. Identify all parties whose interests might be prejudiced, informing them of the risk and obtaining
   their consent to act.
3. Consider ICAS Guidance on Conflicts of Interest.
4. Put safeguards in place when acting for more than one party and review regularly.

Question 22

What things should tax advisers have in place/understand for themselves when tax advising?

Answer 22

1. Should have a practising certificate if they are a partner in an accountancy firm or a sole
   practitioner e.g. not providing services as an employee.
2. Assumes a legal duty of care towards the client for the professional expertise they apply on the
   client’s behalf.
3. Must understand the duties and responsibilities owed to the client.
4. Must understand and manage the risks of failing to act appropriately.
5. Must have requisite knowledge and exercise reasonable skill and care when acting for a
   client.

Question 23

Explain what Primary legislation, secondary legislation, Administrative-quasi legislation and legal precedent

Answer 23

Primary - Acts of parliament.

Secondary - Statutory Instruments or Regulations that are decided by ministers where parliament has delegated the detail downwards.

Administrative-quasi - used by HMRC in its role of administering the tax system. These generally set out HMRC views on particular tax matters and include Statements of Practice and Press Releases.

Legal precedent - the decisions of judges in various courts of the UK.

Question 24

Whats a 64-8 form?

Answer 24

Client has authorised tax adviser to act as tax gent and receive copies of relevant tax info from HMRC, on their behalf.

Question 25

If a client is doing something like excluding income, what should the tax adviser do?

Answer 25

1. Lay out consequences verbally.
2. Allow client reasonable time to accept pov.
3. Lay out consequences in a letter
4. Unless error is trivial, cease to act if they refuse to correct the error and disclose the situation.
5. Consider money laundering regulations.

Question 26

If there is a tax error by HMRC, what should tax adviser do?

Answer 26

1. If error is trivial it doesn’t need to be disclosed.
2. Get permission from client about this error.
3. Cease to act and notify HMRC of ceasing to act but not required to inform reason why.