The UK Tax System

Question 1

Two main economic roles are…

Answer 1

Funding of government expenditure.

Macroeconomic management of domestic economy.

Question 2

UK Tax System encourages…

Answer 2

Saving and pension contributions by offering tax incentives.

Charitable donations through gift aid.

Entrepreneurs and investors by offering tax reliefs.

Question 3

UK Tax System discourages…

Answer 3

Motoring by imposing fuel duties.

Smoking and drinking by imposing taxes.

Question 4

Direct taxes…

Answer 4

Levied on income, chargeable gains and capital transfers.

Direct taxes include:
- Income Tax
- National Insurance
- Capital gains tax
- Inheritance tax
- Corporation tax

HMRC collect directly from tax payer.

Question 5

Indirect taxes…

Answer 5

Applied to spending on goods and services supplied to individuals and businesses.

Indirect taxes include:
- VAT

HMRC collects from supplier who collect it from the taxpayer.

Question 6

Capital taxes…

Answer 6

Taxes on assets owned rather than earned.

Question 7

Revenue taxes…

Answer 7

Taxes on income and profits.

Question 8

Income Tax

Answer 8

Individuals on employment income, self-employed income and investment income.

Direct

Revenue

Question 9

Corporation Tax

Answer 9

Companies on their profits and gains.

Direct

Both capital and revenue

Liability to UK corp tax or chargeable gains is established if:
Income or gains arise within the territory of the UK
Income or gains arise outside of the UK and the company entitled to the Income or making the gain is resident in the UK for tax purposes.

Question 10

Capital Gains Tax (CGT)

Answer 10

Individuals on chargeable gains derived from the sale or gift of chargeable assets.

Direct

Capital

Liability to UK CGT is established if the gain arises inside or outside the UK and taxpayer is resident in the UK.

Question 11

Inheritance Tax (IHT)

Answer 11

Individuals on capital transfers by way of gift or as a result of death

Direct

Capital

A liability is established if the transfer is of property located inside the UK, or outside the UK is the transferor is domiciled (i.e. had a permanent home) in the UK.

Question 12

Value Added Tax (VAT)

Answer 12

Consumers (sole traders, partners and companies) on taxable supplies of goods and services in the UK and on importation into the UK.

Indirect

Neither capital or revenue

Liability to UK VAT on a potentially taxable supply is established if the place of supply is in the UK.

VAT is assessed for a tax period, normally of three months.

Question 13

National Insurance Contributions (NIC)

Answer 13

Individuals on earnings of employment (class 1 NIC) and profits of self employment (classes 2 and 4 NIC). And businesses as employers on employee earnings and benefits. (Classes 1 and 1A NIC).

Direct

Revenue

Question 14

Liability to UK Income Tax is established if…

Answer 14

Income arises within territory of UK

Income arises outside UK and person entitled to the Income is resident in the UK for tax purposes.

Question 15

Tax Years for Personal Tax

Answer 15

Income Tax, CGT and NIC are assessed for the tax year 6 April to 5 April

IHT is assessed as and when a chargeable lifetime gift is made or when a person dies, but the tax year 6 April to 5 April is relevant for the application of certain exemptions and for identifying when some tax is payable.

Question 16

Accounting Periods for Corp Tax

Answer 16

Assessed for the chargeable accounting period of the company - can never exceed 12 months in length.

Financial year runs from 1 April to 31 March - rates of corp tax apply to financial years.

Question 17

Automatic overseas test (not UK resident in current tax year)

Answer 17

If individual was UK resident in any of the previous 3 tax years and fewer than 16 days spent in the UK.

If individual was not UK resident in any of the previous 3 tax years and fewer than 46 days spent in UK.

If individual is working full-time overseas with no significant breaks, with fewer than 91 days spent in the UK and fewer than 31 working days in the UK.

Question 18

Automatic UK test (treated as UK resident in current tax year)

Answer 18

Spending 183 days or more in UK during the tax year.

If the individuals only home is in the UK.

Working full time in the UK for any period of at least 365 days.

Question 19

Sufficient ties test

Answer 19

Family tie (UK resident spouse, partner or child under 18)

Accommodation tie (a place available to live in the UK for at least 91 days)

Work tie (substantive work in UK 40 or more days at any time)

90 day tie (spent more than 90 days in UK in either of previous 2 tax years)

Country tie (spending more days in the UK than in any other country in the tax year - only relevant to a person who is UK resident in any of the three previous years)

Question 20

Residence of a Company

Answer 20

Company is resident in the UK for Tax purposes if…

It is incorporated in the UK

Central management and control of the company is exercised in the UK

Question 21

Structure of UK Tax Systems

Answer 21

HMRC is responsible for admin and collection of taxes and duties.

HMRC pays and administers child benefit and tax credit and is responsible for national minimum wage enforcement and recovery of student loans.

Taxpayers can appeal against decisions - after initial appeal to HMRC, it can go through the first tier tribunal or the upper tier tribunal (more complex cases)

Question 22

Tax Evasion

Answer 22

Illegal underpayment of tax achieved by negligence of fraud. It includes making false returns and deliberate failure to submit returns.

Question 23

Tax Avoidance

Answer 23

Seems to minimise tax liabilities through the organisation of a taxpayer’s financial affairs within the limits of tax law.