Tax - Mostly compliance Flashcards
What is tax compliance?
Willingness of individuals and other taxable entities to act in accordance with the spirit as well as the letter of the law
Tax avoidance
Legal but on a scale between tax planning and evasion. “aggressive” measures may contravene the “spirit” of the law
What is the tax gap?
Difference between the amount of tax that should be collected against what is actually collected.
Tax gap stats
Gap was 4.8% (a record low) 21-22. (35.8 Bil)
Long term reduction in tax gap
Analysis of tax gap - 3 methods
Tax type
Taxpayer groups
Behaviour type
Tax type analysis stats
Corporation Tax second largest component of tax gap at 30%
Income tax, NICs and CGT make up 35%
2021-22
Tax gap by group stats
Small businesses represent largest proportion (56% - £20.2 Bil) 2021-22
Most common cause for the Tax Gap
Failure to take reasonable care is the largest proportion at 30% in 21-22 increased from 24 in 19-20
Economic model of compliance
Allingham & Sandmo.
Predicts relatively low level of compliance as probability of getting caught likely to be small in practice.
Behavioural models of compliance
Psychology, Sociology,
Non-economic factors compliance decisions:
- Tax knowledge
- Perceived opportunity to evade
- Mental accounting
- Fairness perceptions
Kirchler 2007 characteristics affecting compliance
- Attitudes: Beliefs and evaluations
- Motivation to comply (Gender, age, education levels, income and wealth levels)OECD 2024
- Norms: personal norms and societal norms and identity
Objectives of HMRC (5)
- Collect right tax and pay out right financial support
- Make easy to get right and hard to bend or break the rules
- Maintain taxpayers consent through fair treatment and protect society from harm
- make HMRC a great place to work
- Support wider government economic aims through a resilient
3 Key decisions from HMRC’s strategic objectives
- Focus on customers
- Promote compliance and prevent non-compliance
- Reduce likelihood of disputes
Domicile
Country where an individual has their main home
- only one at a time
- usually given at birth, from father
Individual is UK resident if…
- Do not meet an automatic non-UK res test AND
- Meet one or more of auto UK res test OR
- Meet one or more of sufficient ties test and have been in UK for sufficient length of time
Sufficient ties tests
If you have sufficient ties to the UK you are UK res:
- UK close family
- Accessible accommodation in UK for 91 consecutive days
- Substantive work in UK (0ver 40 days)
- UK presence in prev tax years of more than 90 days over 2 prev years
- more time in UK than any other country
What is your tax liability depending on whether you are resident or not in the UK?
UK resident - Tax on both UK and all overseas income arising in tax year
Not UK res - may pay UK tax if they have UK income
Remittance basis charges
Introduced 2008.
Increased 2015/16
- 30,000 for 7/9 years
- 60,000 12/14
- 90,000 17/20 (now superseded)
Exceptions to a Remittance - what is Exempt?
- Items of clothing, footweat, jewellery or watches that are brought to the UK for personal use.
- Property with value of < £1,000.
- Property which is in the UK for < 275 days in total.
Recent developments in partnership tax
- Must clarify who/which are the partners chargeable to tax
- Clarify the position where partnerships are themselves a partner in a business structure - to reveal who/what is behind the structure
- Addressing problems with manipulation of profits, partners must have profit allocated as the agreement states
- taxing partnerships with no trading income, just investment income
All to make more transparent and stop misuse of partnerships
Remi Ashton V HMRC 2016
- HMRC said he wasnt paying enough tax as a partner of karate company
- Ashton appealed on basis he was in reality just an employee (no sight of accounts or attendance of meetings)
- He won, although named a partner, he was in every respect just an employee.
Partnership in trouble from this
Critically evaluate who/what a partner is for partnership tax purposes and explain why this matters. (simple bullet points)
- Partnership = “relationship which subsists between persons carrying on a business in common with a view to making a profit” (Partnership Act, 1890)
- “persons” can include Companies, or even LLPs.
- Remi Ashton v HMRC (2016) - Mr Ashton was not a partner carrying out a business in come with others with a view of making a profit, because:
1. was told what to do by others, and received basic pay every month
2. no evidence of partnership agreement or meetings
3. Mr Ashton has no visibility over the partnership’s accounts.
Briefly outline the main areas of reform that have been made to partnership tax law since 2015 and discuss why this has been important.
- Office of Tax Simplification Review on Partnership Tax law in Jan 2015, followed by a review of how partnerships calculate tax liabilities.
- Objective: address complex business structures.
- Main changes:
1. clarify who/which partners are chargeable to UK tax.
2. clarify the position where partnerships themselves are a partner.
3. address problems arising from manipulation of partnership profit allocation.
4. taxing partnerships with no trading income, only investment income.
What loophole has been closed by introducing the Notional Losses rule in Partnership tax?
Partnerships were previously created to hide losses in a single company, to make the other individuals/companies within the partnership appear profitable.
Aspects of the slippery slope theory (Kirchler 2007-08)
Levels of power of authorities and trust in authorities leads to certain level of cooperation.
5 Approaches to tax administration
- Adversarial - ‘Cops and Robbers’
- Behavioural - ‘psychological nudging’
- Informing - ‘Illuminating the black box’
- Reciprocity - Co-dependence of government and tax payers
- Cooperative compliance
What is cooperative compliance?
Risk management through building and maintaining relationships with customers , promoting delivery of right tax at right time. Classify customers within compliance spectrum to deploy resources appropriately
- With just large companies in mind
Australian Tax Office Compliance Model
Quite agressive but successful
Using a heavy hand. If you break the rules, they will prosecute.
HMRC’s 5 Strategic Objectives
- Collect the right tax and pay out the right financial support.
- Make it easy to get tax right and hard to break/bend the rules.
- Maintain taxpayers’ concent through fair treatment and protect society from harm.
- Make HMRC a great place to work.
- Support wider government economic aims through a resilient, agile administration system.
5 Approaches to Tax Administration
- Adversarial - “cops and robbers”
- Behavioural - “psychological nudging” - Hallsworth, Metcalfe and Vlaev (2017) - different letters.
- Informing - “illuminating the black box”
- Reciprocity - co-dependence of government and taxpayers.
- Cooperative Compliance - idea from the Netherlands.
Panama Papers
- 11.5m leaked documents of 215,000 offshore accounts.
- including David Cameron’s dad, Vladamir Putin and President of Iceland.
Paradise Papers
- Industrial Consortium of Investigative Journalists
- 25,000 entities connected to ‘Appleby’ founded in Bermuda
In 2021, how many people were claiming non-dom status?
63,800
Critically appraise how tax administrations can use complementary approaches to encourage compliance by taxpayers. (brief bulletpoints)
- Roles of tax administration
- Definitions of compliance (James and Alley, 2002)
- Theories underlying a taxpayer compliance decision (Economic, Behavioural models - mental accounting, norms etc)
- Broad approaches of models of tax administration (Adversarial, Behavioural etc)
- Relationships with clients (Cooperative Compliance) - HMRC want to be direct with client (Holland et al, 2011)
- Slippery Slope Framework (Kirchler, 2007)
- ATO
- SAO
- DOTAS
- Anti Avoidance RUles
- Publish your Tax Strategy
