Tax Compliance

Question 1

What’s the difference between tax policy, tax practice and tax administration

Answer 1

Tax policy is the government creating tax legislation which is to be followed.
Tax practice is the method or activity used to comply with tax policy.
Tax administration is HRMC collecting taxes.

Question 2

Definition of tax compliance

Answer 2

Degree to which taxpayers comply with tax law.

Question 3

What is James and Alley’s (2002) definition of tax compliance

Answer 3

Willingness of individual and other taxable entities to comply to act in accordance with the spirit of the law, as well as the letter of the law and administration without the application of enforcement activity

Question 4

What would tax lawyers state about tax compliance

Answer 4

The spirit of the law is irrelevant. The law is the law. Non compliance would not be complying with what is in black and white.

Question 5

What would social sciences say about tax compliance

Answer 5

Look at spirit of the law, which is what the laws intentions were.

Question 6

Do people have different perspectives on tax legislation

Answer 6

Yes. People think of different spirits of the law, which can lead to issues of tax avoidance. Tax is easier to understand now than it was 30 years ago.

Question 7

Who has final say on tax disputes

Answer 7

The courts

Question 8

What is tax evasion

Answer 8

Illegal means to obtain a tax advantage

Question 9

What is tax avoidance

Answer 9

Legal means to get a tax advantage

Question 10

What is the reference for a critical perspective on tax planning, tax avoidance and tax evasion

Answer 10

Hanlon, Michelle and Heitzman 2010.

Question 11

What did Hanlon, Michelle and Heitzman 2010 say

Answer 11

They stated that the relationship between tax avoidance, tax evasion and tax planning is a continuum.
Tax planning is legal. Tax avoidance is legal but not emphasised. Tax evasion is illegal. It operates as a continuum and each person is somewhere on the continuum.

Question 12

What is Tax Morale?

Answer 12

Intrinsic motivation to comply with tax law and pay your taxes.

Question 13

Why is tax morale important?

Answer 13

Each country relies on some tax morale in terms of a country paying tax. Not every person could be interrogated if they did not pay their taxes. Governments rely on some motivation of people to want to pay their taxes.

Question 14

Tax Morale - OECD 2024

Answer 14

Tax morale is higher in countries where there is more tax.
Age, education, gender and religion all make a difference to tax morale.

Question 15

HMRC’s definition of tax avoidance

Answer 15

Bending the rules of the tax system to gain an advantage that parliament never intended.
It often involves operating within the letter of the law, but not the spirit of the law.

Question 16

What is tax planning

Answer 16

Tax planning is using tax reliefs for the purpose that they were designed for. E.g., claim non dom status.

Question 17

What was largest reason for tax gap in 2021-22

Answer 17

30% of tax gap due to people not taking reasonable care of the accounts.

Question 18

Government June 2023 tax gap summary

Answer 18

Tax gap estimated to be 4.8%, meaning HMRC collected 95.2% of taxes they expected to collect. In nominal terms, this is £35.8bil.
Tax gap reduced from 7.5% in 2005-6 to 4.8% in 2021 2022.
Tax gap now higher in terms of corporation tax and exercise duty than 2006, whereas income tax, NIC and CGT, and VAT tax gaps have reduced.

Question 19

Tax gap now vs 2006

Answer 19

Tax gap now is higher in terms of nominal amount but less in terms of proportion of taxes collected. This is due to inflation.

Question 20

Corporation tax in tax gap

Answer 20

Second largest contributor at 30%. Increasing year on year.

Question 21

IT, CGT and VAT in tax gap

Answer 21

35% of tax gap

Question 22

Which group represent largest proportion of tax gap

Answer 22

Small businesses at 56%. This is followed by criminals, medium sized businesses and large businesses at 11% each. Wealthy people account for 5%.

Question 23

Behaviour type for tax gap

Answer 23

Careless errors at 30%, higher now than in 19/20 (24%). Purposeful error second (15% overall) with evasion accounts are third (13%). Tax interpretation at 12% and non payment at 9% (debt repayment to hmrc)

Question 24

What are the types of compliance

Answer 24

Economic models of compliance
Interdisciplinary approaches
Behavioural models of compliance (psychological and social)

Question 25

Economic models of compliance reference

Answer 25

Allingham and Sandmo

Question 26

What does economic model of compliance do

Answer 26

Looks at morivtauons of people motivated by the economic consequences of their behaviour. Uses economic based formulas.

Question 27

What does the A&S formula say for economic models of compliance

Answer 27

Bad behaviour leads to high penalties so people do not undertake bad behaviour. However, as risk of penalties in tax is low, this is why people do not comply. This theory therefore does not hold in practice.

Question 28

What are behavioural models of compliance

Answer 28

Sociology and psychology - factors which are non economic that influence compliance decisions.

Question 29

Kitchler 2007

Answer 29

A positive tax morale is likely to reduce the chance of tax evasion.

Question 30

Kirchler 2007

Answer 30

A positive tax morale is likely to reduce the probability of tax evasion

Question 31

Gordon 1989

Answer 31

More people evade taxes, the less attractive it is to follow the social norm.

Question 32

Frey and Torgler 2007 and Halla 2010

Answer 32

Tax morale affects tax compliance. A positive morale reduces tax evasion. A negative morale increases tax evasion.

Question 33

Frey and Torgler 2007 and Halla 2010

Answer 33

Tax morale affects tax compliance. A positive morale reduces tax evasion. A negative morale increases tax evasion.

Question 34

Attitudes of those around you

Answer 34

These impact what a person sees as social norms and what constitutes fairness in tax. These can include, gender, race, education, religion. These are suggested under OECD 2024.

Question 35

Gender

Answer 35

Different countries in the world find females are more compliant, whereas some countries find that males are more compliant.

Question 36

Age

Answer 36

Comply more with age because do not want trouble in old age

Question 37

Education

Answer 37

People better understand the tax system and more likely to comply. However, they may also know more so that they can avoid. Can lead to creative accounting.