Topic 8 - Objectives of tax, the HMRC and ethics Flashcards
What are the main objectives of taxation? 4
Management of the economy, Social justice, Environmental concerns, External influences.
How does the government use the tax system to encourage economic activities? 5
By providing incentives for savings (ISAs/pensions), charitable donations, business investment, entrepreneurs, and environmental/social responsibility.
What activities does the government discourage through taxation? 2
Smoking and alcohol consumption, motoring.
How can taxation be a tool to aid the redistribution of wealth? 8
Through various principles such as Direct/Indirect principle, Progressive/Regressive principle, Unit/Value principle, Income/Capital/Expenditure principle, Ability to pay/Benefit principle, Neutrality principle, Equity principle, Efficiency principle.
– Direct/indirect principle
Direct is tax on income/profits e.g. corp tax, NIC. Indirect is tax on spending e.g. VAT
– Progressive/regressive principle
Progressive is as rate rises as proportion of income increases. Regressive is proportion of tax rises as income falls e.g. duty of cigarettes as it is fixed regardless of income
– Unit/value principle
Unit is flat rate per item. Value is more expenditure the more you pay e.g. VAT
– Income/capital/expenditure principle
Income is only paid on income generated. Capital is CGT on disposed assets and IHT. Expenditure is VAT, stamp duty.
– Ability to pay/benefit principle
Ability to pay is idea that the taxpayer has to be able to pay the tax e.g. income tax for people with an income. Benefit principle is that the taxpayer should benefit from the tax e.g. NHS/defence
– Neutrality principle
Should be neutral and does not affect choice of tax payers.
– Equity principle
Equitable - just and fair
– Efficiency principle
Collection of tax and use to be efficient e.g. PAYE
Which taxation policies help address environmental concerns?
Climate change levy on businesses, Landfill tax, Taxes on cars, Reduction in VAT on installation costs of energy-saving materials in homes to 0%.
What are the major external influences on UK taxation policy? 5
The EU, Covid-19 emergency measures, Banking crisis (Bank levy), Environmental concerns (Paris Agreement), OECD/G20 Inclusive Framework.
What is the purpose of the OECD/G20 Inclusive Framework?
To ensure multinational enterprises pay a fair share of tax wherever they operate.
Which of the following is an example of a tax policy that encourages economic activity?
A) Taxes on cars
B) Charitable donation tax relief
C) Smoking and alcohol tax
D) Landfill tax
B) Charitable donation tax relief
Which principle of taxation considers a taxpayer’s ability to pay?
A) Unit/Value principle
B) Neutrality principle
C) Ability to pay/Benefit principle
D) Efficiency principle
C) Ability to pay/Benefit principle
Which tax policy is aimed at reducing environmental impact?
A) VAT reduction on energy-saving materials
B) Bank levy
C) Progressive tax rates
D) Income tax relief
A) VAT reduction on energy-saving materials
What was one of the emergency measures introduced due to the Covid-19 pandemic?
A) Increase in motoring taxes
B) Reduction in landfill tax
C) Introduction of a bank levy
D) Various tax reliefs to mitigate economic effects
D) Various tax reliefs to mitigate economic effects
The UK government is considering abolishing the current VAT rules on all food bought in supermarkets (but not any other shop) and replacing it with the following form of taxation. Each item bought in the supermarket will be subject to a levy of £0.75. In other words, a person who purchases 10 items of any value will pay £7.50 in tax.
Select which of the following options correctly identifies the principle behind the proposed system.
Ability to pay principle OR Value principle OR Unit principle OR Neutrality principle
Unit principle
What is Making Tax Digital for Businesses (MTDfB)?
An initiative by HMRC to modernise the tax system by requiring businesses to keep and submit digital records. For unincorporated and corporated businesses.
When did Making Tax Digital initially apply, and to whom?
Since April 2022, it initially applied to VAT-registered businesses, requiring them to keep digital records and file returns using compatible software for VAT.
When will Making Tax Digital apply to income tax?
From April 2026, it will apply to individuals with trading or property income over £50,000 per year. From April 2027, it will apply to those with income over £30,000 per year.
What is the goal of Making Tax Digital for Businesses?
To create a more effective, efficient, and simpler tax system, reducing tax lost through errors.
Which businesses were the first to be required to comply with Making Tax Digital?
A) All businesses
B) VAT-registered businesses
C) Sole traders only
D) Property landlords only
B) VAT-registered businesses
When will Making Tax Digital start applying to income tax for individuals earning over £50,000?
A) April 2022
B) April 2024
C) April 2026
D) April 2027
C) April 2026
What is one of the key benefits of Making Tax Digital?
A) Increasing tax rates
B) Reducing tax lost through errors
C) Eliminating VAT on businesses
D) Exempting small businesses from tax
B) Reducing tax lost through errors
What is the purpose of HMRC compliance checks?
To ensure tax compliance by selecting returns randomly or investigating suspected underpayment of tax due to non-compliance with tax legislation.
What are the two main types of HMRC compliance checks?
- Pre-return checks
- Enquiries into returns, claims, or elections that have already been submitted.
By when must HMRC give notice of their intention to make an enquiry?
By the first anniversary of the actual submission date, or if filed late, the quarter day following the first anniversary (31 Jan, 30 April, 31 July, 31 October).
Lucy submitted her electronic tax return for 2023/24 on 12 May 2025. HMRC must give notice of an intention to conduct an enquiry by
31 January 2026 OR 12 May 2026, OR 31 May 2026 OR 31 July 2026
46234
How many opportunities does HMRC have to open a formal enquiry?
Only one.
What happens if no tax return is submitted?
HMRC raises a determination.
How is an HMRC determination treated?
It is treated as if self-assessment had been completed, and interest and penalties can be charged.
Within what timeframe must HMRC make a determination?
Within three years of the filing date.
Which of the following is NOT a reason why HMRC selects a return for compliance checks?
A) Random selection
B) Suspected underpayment of tax
C) To apply penalties automatically
D) Failure to comply with tax legislation
C) To apply penalties automatically
How many formal enquiries can HMRC open into a tax return?
A) One
B) Two
C) Unlimited
D) Depends on the case
A) One
If a tax return is not submitted, what action does HMRC take?
A) Issue a fine only
B) Raise a determination
C) Ignore the case
D) Extend the filing deadline
B) Raise a determination
What is the deadline for HMRC to make a determination if no return is submitted?
A) One year from the due date
B) Two years from the filing date
C) Three years from the filing date
D) No deadline
C) Three years from the filing date
What is a discovery assessment?
An assessment issued by HMRC when they discover that full disclosure was not made, allowing them to extend the usual time limit for compliance checks.
What are the time limits for discovery assessments based on the reason for tax loss (Applies for IT, CGT, CT, and VAT)? NOT IN TAX TABLES
- Not due to careless or deliberate behaviour - 4 years
- Due to ‘careless’ behaviour - 6 years
- Due to ‘deliberate’ behaviour - 20 years.
What decisions can a taxpayer appeal against? 5
- Request to submit documents
- Amendments to self-assessment from compliance check
- Discovery assessment
- VAT assessment
- Imposition of a penalty.
What is the time limit for appealing a tax decision?
30 days from the decision.
What tribunal hears tax appeals?
Tax Chamber of the First-tier Tribunal.
To which tribunal can a taxpayer appeal on a point of law?
Upper Tribunal.
What powers does HMRC have for information and inspections?
One set of powers for income tax, capital gains tax, corporation tax, VAT, and PAYE.
What methods can HMRC use to make compliance checks? 2
- Asking taxpayers and third parties for information and documents
- Visiting business premises to inspect premises, assets, and records.
What are taxpayer notices?
Requests for information and documents reasonably required to check a taxpayer’s position.
What are third-party notices?
Requests for information that require approval from the taxpayer or First-tier Tribunal.
What are unknown-identity notices?
Notices issued when HMRC suspects a serious loss of tax but does not have full identity details of the taxpayer.
What information can HMRC request under unknown-identity notices?
Name, address, and date of birth, even if they don’t suspect a serious loss of tax.
Can a taxpayer appeal against an information notice?
Yes, unless it was issued by the First-tier Tribunal or relates to statutory records.
What powers does HMRC have for business inspections? 2
- Can inspect premises, business assets, and documents
- Cannot inspect parts of premises used solely as a dwelling.
What notice is required for HMRC to inspect premises? 2
- 7 days’ written notice, or
- Approval by an authorised HMRC officer.
Can a taxpayer appeal against an HMRC inspection?
No, there is no right of appeal.
What is the time limit for a discovery assessment if the tax loss was NOT due to careless or deliberate behaviour?
A) 2 years
B) 4 years
C) 6 years
D) 20 years
B) 4 years
What is the appeal time limit for a taxpayer who wants to challenge an HMRC decision?
A) 14 days
B) 30 days
C) 60 days
D) 90 days
B) 30 days
Which tribunal handles tax disputes before they can be taken to the Upper Tribunal?
A) Crown Tribunal
B) First-tier Tribunal
C) Court of Appeal
D) Supreme Court
B) First-tier Tribunal
Which of the following is NOT a valid reason for HMRC to issue a discovery assessment?
A) Careless behaviour
B) Deliberate behaviour
C) Random selection
D) Incomplete disclosure
C) Random selection
Which of the following actions by HMRC requires taxpayer or tribunal approval?
A) Requesting taxpayer notices
B) Requesting third-party notices
C) Inspecting business premises with written notice
D) Conducting a compliance check
B) Requesting third-party notices
How much notice must HMRC provide before inspecting business premises?
A) 3 days
B) 7 days
C) 14 days
D) No notice required
B) 7 days
Which of the following is NOT inspected by HMRC during a business premises visit?
A) Business records
B) Business assets
C) Private home areas
D) Contracts and statutory records
C) Private home areas
A taxpayer may be able to appeal against an information notice
a) True b) False
A taxpayer may be able to appeal against an inspection notice
c) True d) False
True – A taxpayer may appeal against an information notice
False – A taxpayer has no right of appeal against an inspection notice
Under what circumstances can HMRC recover tax debts directly from a bank account? 3
- If the tax debt is at least £1,000
- The taxpayer must be aware of the debt and given time to object
- The taxpayer must be left with at least £5,000 in their account.
What actions can HMRC take if a tax agent is found guilty of dishonest conduct? 3
- Issue a conduct notice
- File an access notice to obtain working papers
- Publish the tax agent’s name and address and inform their professional body.
What is the penalty for dishonest conduct by a tax agent?
A civil penalty between £5,000 and £50,000.
Can a tax agent appeal against a dishonest conduct penalty?
Yes.
What is the purpose of the Payment Support Service (PSS)?
To help taxpayers who are unable to meet tax payments by allowing them to spread payments over longer periods without extra penalties.
Will interest still apply on payments spread over time under the PSS?
Yes, interest will still apply.
What is a budget payment plan?
A plan that allows taxpayers to set up regular direct debit payments to save in advance for future self-assessment tax liabilities.
What is the minimum tax debt that HMRC can recover directly from a taxpayer’s bank account?
A) £500
B) £1,000
C) £5,000
D) £10,000
B) £1,000
What is the minimum amount that must remain in a taxpayer’s bank account after HMRC recovers tax debts?
A) £1,000
B) £2,500
C) £5,000
D) £10,000
C) £5,000
Which of the following is NOT an action HMRC can take against a dishonest tax agent?
A) Issue a conduct notice
B) Fine the agent £100,000 immediately
C) Publish the agent’s details
D) File an access notice to obtain working papers
B) Fine the agent £100,000 immediately
What is the penalty range for a tax agent found guilty of dishonest conduct?
A) £500-£5,000
B) £5,000-£50,000
C) £50,000-£100,000
D) No fixed penalty
B) £5,000-£50,000
What is the main benefit of the Payment Support Service (PSS)?
A) Waives tax payments
B) Allows payment over time without extra penalties
C) Cancels interest on overdue payments
D) Reduces the tax owed
B) Allows payment over time without extra penalties
Which of the following statements about budget payment plans is correct?
A) They allow taxpayers to avoid tax liability
B) They help taxpayers set up regular payments in advance for future self-assessment liabilities
C) They provide interest-free tax deferral
D) They are only available to businesses
B) They help taxpayers set up regular payments in advance for future self-assessment liabilities
What are the five fundamental principles of a professional accountant?
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behaviour.
What is integrity in the context of professional ethics?
Being straightforward and honest in all professional and business relationships.
What is objectivity in professional ethics?
Ensuring that bias, conflict of interest, or undue influence does not override professional or business judgments.
What are the key duties of professional competence and due care?
- Maintaining professional knowledge and skills at the required level
- Ensuring clients or employers receive competent professional service based on current developments
- Acting diligently according to technical and professional standards.
What are the key aspects of confidentiality for a professional accountant?
- Respecting the confidentiality of information acquired in professional relationships
- Not disclosing information without proper and specific authority unless legally required
- Not using confidential information for personal advantage or to benefit third parties.
What is professional behaviour in professional ethics?
Complying with relevant laws and regulations and avoiding any action that discredits the profession.
Which of the following is NOT one of the five fundamental principles of a professional accountant?
A) Integrity
B) Professional scepticism
C) Objectivity
D) Confidentiality
B) Professional scepticism
What does integrity require from a professional accountant?
A) Being straightforward and honest
B) Following all client instructions without question
C) Maximizing personal financial gains
D) Keeping all client information secret regardless of legality
A) Being straightforward and honest
Which fundamental principle ensures accountants maintain and update their professional knowledge and skills?
A) Objectivity
B) Confidentiality
C) Professional competence and due care
D) Integrity
C) Professional competence and due care
Under the principle of confidentiality, when can an accountant disclose client information?
A) Anytime they wish
B) Only with proper and specific authority or if legally required
C) If it benefits their employer
D) If the client is no longer working with them
B) Only with proper and specific authority or if legally required
What is the main requirement of professional behaviour?
A) Complying with laws and regulations and avoiding actions that discredit the profession
B) Following client instructions without question
C) Keeping all business transactions secret
D) Ensuring financial gain over ethical considerations
A) Complying with laws and regulations and avoiding actions that discredit the profession
What are the main categories of threats to compliance with fundamental principles for accountants? 5
- Self-interest threats
- Self-review threats
- Advocacy threats
- Familiarity threats
- Intimidation threats.
What are self-interest threats?
Threats arising from financial or other personal interests that may inappropriately influence an accountant’s judgment or behavior.
What are self-review threats?
Threats that arise when an accountant needs to evaluate their own previous work or judgments, potentially affecting objectivity.
What are advocacy threats?
Threats that arise when an accountant promotes a client’s or employer’s position to the extent that objectivity is compromised.
What are familiarity threats?
Threats that arise when an accountant becomes too familiar with a client, leading to a loss of professional skepticism.
What are intimidation threats?
Threats that arise when an accountant is pressured or coerced to act in a way that compromises objectivity.
What are safeguards in the threats and safeguards framework?
Measures put in place to eliminate threats or reduce them to an acceptable level.
What are the two main sources of safeguards?
- Created by the profession, legislation, or regulation
- In the work environment.
What are some examples of safeguards created by the profession, legislation, or regulation? 5
- Education, training, and experience requirements for entry
- Continuing Professional Development (CPD) requirements
- Corporate governance regulations
- Professional standards, monitoring, and disciplinary procedures
- External reviews.
What are some examples of safeguards in the work environment? 2
- Effective complaints system
- Duty to report breaches of requirements.
What is the role of professional judgment in applying safeguards?
Accountants must use professional judgment to determine whether safeguards are sufficient and perceived as acceptable.
Scott is a Chartered Accountant and is married to Becki, who is also his client. Becki runs an assortment of businesses on behalf of her father. Scott knows that Becki comes from a wealthy criminal family. However, Scott has never queried the funding of Becki’s businesses as he trusts her implicitly.
Select which two of the following options correctly identify the types of threat Scott is experiencing according to the Code of Ethics.
a) Self-interest threat
b) Self-review threat
c) Advocacy threat
d) Familiarity threat
e) Intimidation threat
Scott is experiencing familiarity threats which occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others. As Becki’s husband, he is himself also financially involved, which poses a self-interest threat.
Self-interest threat and Familiarity threat
Which of the following is NOT a category of threat to compliance with fundamental principles?
A) Self-interest threats
B) Self-review threats
C) Objectivity threats
D) Advocacy threats
C) Objectivity threats
Which of the following is an example of a familiarity threat?
A) An accountant auditing their own firm’s financial statements
B) An accountant becoming too close to a client and losing professional skepticism
C) An accountant promoting a client’s position in legal proceedings
D) An accountant being pressured by a superior to misstate financial information
B) An accountant becoming too close to a client and losing professional skepticism
Which of the following is an example of a safeguard created by the profession, legislation, or regulation?
A) Effective complaints system
B) CPD requirements
C) Duty to report breaches
D) Encouraging client loyalty
B) CPD requirements
What is the primary role of professional judgment in the threats and safeguards framework?
A) To ignore threats that do not result in financial loss
B) To conclude if safeguards are perceived as acceptable
C) To allow threats to persist if necessary
D) To eliminate the need for safeguards
B) To conclude if safeguards are perceived as acceptable
What are the key considerations in the ethical conflict resolution process? 6
- Relevant facts
- Relevant parties
- Ethical issues involved
- Fundamental principles related to the matter in question
- Established internal procedures
- Alternative courses of action.
What is a conflict of interest in the context of professional ethics?
A situation where an accountant’s objectivity or compliance with fundamental principles is threatened due to competing interests.
How should an accountant handle a conflict of interest?
Identify the conflict, assess its impact, implement safeguards if possible, and disclose it to relevant parties if required.
What is money laundering?
The process of possessing the proceeds of tax evasion or any other crime and attempting to disguise its origins.
What should a professional accountant do if they suspect a client is involved in money laundering?
Report the suspicion to the Money Laundering Reporting Officer (MLRO) in their firm, who may escalate the issue to the National Crime Agency (NCA) through a Suspicious Activity Report (SAR).
What is a Suspicious Activity Report (SAR)?
A report submitted to the National Crime Agency (NCA) when there is a suspicion that a transaction involves proceeds of crime or money laundering.
Which of the following is NOT a key factor in ethical conflict resolution?
A) Relevant facts
B) Personal financial gain
C) Established internal procedures
D) Alternative courses of action
B) Personal financial gain
Which of the following best describes a conflict of interest?
A) A disagreement between two accountants
B) A situation where an accountant’s objectivity is compromised due to competing interests
C) A minor mistake in financial reporting
D) An accountant disagreeing with a client’s business decision
B) A situation where an accountant’s objectivity is compromised due to competing interests
Who should a professional accountant report a money laundering suspicion to within their firm?
A) National Crime Agency (NCA)
B) The police
C) Money Laundering Reporting Officer (MLRO)
D) The client
C) Money Laundering Reporting Officer (MLRO)
What is the purpose of a Suspicious Activity Report (SAR)?
A) To report suspected tax evasion to HMRC
B) To notify the client about their illegal activities
C) To report suspected money laundering to the National Crime Agency (NCA)
D) To inform the general public about financial crimes
C) To report suspected money laundering to the National Crime Agency (NCA)
What are the two main methods of tax evasion?
- Understating income
- Overstating expenses. By not stating either the money kept from not paying tax is proceeds of crime.
What should an accountant do if they are aware of tax evasion?
They risk committing an offence under money-laundering legislation and should set up anti-money laundering procedures. Client authority is not needed to disclose confidential information in such cases.
How can someone mislead HMRC as part of tax evasion? 2
- Suppressing information
- Providing false information.
What are the consequences of tax evasion? 4
- Penalties
- Fines
- Imprisonment
- Money laundering offences.
How does tax avoidance differ from tax evasion?
Tax avoidance is the legal reduction of tax burden, while tax evasion is the illegal suppression or falsification of information to reduce tax liability.
What must be done with certain tax avoidance schemes?
They must be disclosed to HMRC.
What is GAAR?
The General Anti-Abuse Rule (GAAR) allows HMRC to challenge tax avoidance measures that are deemed abusive.
What is professional scepticism?
An attitude that includes a questioning mind and being alert to conditions that may indicate possible misstatement due to error or fraud.
Why is professional scepticism important for tax accountants?
It is particularly important in situations where tax evasion or money laundering may be encountered.
Which of the following is an example of tax evasion?
A) Using a government-approved tax relief scheme
B) Understating income to reduce taxable earnings
C) Claiming available deductions legally
D) Investing in tax-free savings accounts
B) Understating income to reduce taxable earnings
Which of the following best describes tax avoidance?
A) Illegally hiding income from tax authorities
B) Legally reducing tax liability using permitted methods
C) Overstating business expenses
D) Providing false information to HMRC
B) Legally reducing tax liability using permitted methods
What does GAAR stand for?
A) General Audit and Assessment Regulations
B) General Anti-Avoidance Rules
C) General Anti-Abuse Rule
D) Government Anti-Audit Review
C) General Anti-Abuse Rule
What is the consequence of providing false information to HMRC?
A) No consequences if it’s corrected later
B) A warning letter only
C) Penalties, fines, and possible imprisonment
D) Automatic tax exemption
C) Penalties, fines, and possible imprisonment
Why is professional scepticism important in taxation?
A) It helps accountants question all tax policies
B) It allows tax accountants to detect possible misstatements due to error or fraud
C) It enables accountants to ignore tax laws if necessary
D) It allows accountants to avoid auditing responsibilities
B) It allows tax accountants to detect possible misstatements due to error or fraud
3 Sandra, a chartered accountant, is completing the corporation tax computation for a client company. She realises that the client company’s sales director, Heather, is a close family friend. Heather asks Sandra whether she has seen any information from the Financial Director about any planned bonuses.
Which two of the fundamental principles of the ICAEW Code of Ethics may be under threat here?
A Objectivity
B Integrity
C Professional behaviour
D Confidentiality
A Objectivity
D Confidentiality
Sandra may be biased in her dealings with the company because of her relationship with Heather, and this threatens objectivity.
Sandra may acquire information in her work which may be to Heather’s advantage, but she must respect the confidentiality of such information.
17 Lauren is unhappy with an explanation given to her by a client in relation to the current year’s accounts. If she accepts the explanation and submits the accounts to HMRC she feels that this will compromise the principle of integrity.
Which of the following factors is she not required to consider in resolving the ethical conflict?
A The facts that she has uncovered
B The relationship that her firm has with the client
C The client’s internal procedures
D Alternative courses of action
B The relationship that her firm has with the client
The other three are explicitly stated in the ICAEW Code of Ethics as factors to consider.
19 Which of the following is a source of tax law?
A The Budget
B Statutory instruments
C HMRC extra-statutory concessions
D HMRC statements of practice
B Statutory instruments
While the Budget forms the basis for the Finance Act each year, it is not in itself a form of legislation. Statutory instruments are the biggest single source of tax law each year. Extra-statutory concessions, as their name implies, are not statutory documents. Neither are statements of practice.
