Week 1 - Basics of Tax Systems

Question 1

Define tax?

Answer 1

A compulsory levy made by public authorities for which nothing is provided directly in return

Question 2

Desirable characteristics of a tax system?

Answer 2

Convenient - easy to pay
Certain - Can determine what is to be paid
Equitable - Fair in its impacts 
Flexible and stable
Economically efficient

Question 3

What are the three main tax bases in the UK

Answer 3

Capital - Inheritance tax
Income - Corporation tax and Income Tax
Consumption - VAT and Excise Duty

Question 4

Classifications of taxes

Answer 4

By unit - Levied on volume of what is being taxed
Ad Valorem - Levied on value of tax basis
Direct - Levied on person who is intended to pay tax (IT, CT, CGT & IHT)
Indirect - Bourne by person other than from whom tax is collected (VAT)
By Tax Basis - other note

Question 5

Compliance cost

Answer 5

Cost born by individual and companies in complying with tax regulation

Question 6

Factors impacting compliance costs

Answer 6

Economic Factors - Liquidity concerns, loss aversion and personal values
Fear of detection and punishment
Social Views and Norms

Question 7

Examples of compliance costs

Answer 7

Cost of keeping records
Completing forms
Advice

Question 8

What is the tax gap

Answer 8

Difference between expected and actual tax liability

Question 9

UK tax system structure

Answer 9

HMRC Responsible for:
- NIC
- IT, CT, IHT, CGT and Stamp Duty
- VAT, Excise Duty, Customs Duty, Insurance Premium Tax, Air Passenger Duty and Landfill tax
Department of Work and Pension:
- Determines the entitlement to benefits system and pays out benefits

Question 10

Name penalty regime for incorrect returns?

Answer 10

Careless (Max 30%)
Deliberate but not concealed (Max 70%)
Deliberate and concealed (Max 100%)

Question 11

Characteristics of Careless

Answer 11

Failure to take reasonable care
Keeping inaccurate books and records accidentally
Failure to check the return is consistent with the underlying records
Omitting occasional items of income/gain

Question 11

Characteristics of Careless

Answer 11

Failure to take reasonable care
Keeping inaccurate books and records accidentally
Failure to check the return is consistent with the underlying records
Omitting occasional items of income/gain

Question 12

Characteristics of Deliberate but not concealed

Answer 12

Max 70% fine
Systematically paying wages without PAYE
Including personal expenses in business
No book keeping

Question 13

Characteristics of Deliberate and Concealed

Answer 13

Max 100%
False invoices and backdating
Destroying books and records

Question 14

Appeals Regime - What can appeals be made against?

Answer 14

Decision made not to suspend a penalty
The imposition of a penalty
Amount of a penalty
Conditions set by HMRC in relation to the suspension of a penalty

Question 15

What is the appeals regime?

Answer 15

Independent tax chamber which is part of the tribunal service

Question 16

What are the tiers in the tribunal service?

Answer 16

First tier: 
- Less complex cases
Upper:
- Appeals from the first tier
- More complicated cases
- If not resolved, goes to court of appeals then Supreme Court

Question 17

Alternative Tax - Annual Wealth Tax

Answer 17

Based on an annual valuation of wealth

Question 18

Benefits of Annual Wealth Tax?

Answer 18

Horizontal Equity - Easier to measure who is the same
Efficiency - Does not affect motivation to work as taxed on the past
Redistribution of wealth - Income tax only taxes changes in wealth, not existing wealth

Question 19

Negatives of Annual Wealth Tax

Answer 19

What is wealth? Hard to measure

Value of certain assets, hard to measure

Question 20

Alternative tax - Comprehensive Income Tax

Answer 20

Measure increase in the value of assets and tax it

No need

Question 21

Benefits of Comprehensive Income Tax

Answer 21

No need to have tax on gifts and inheritance

No distinction between Capital and Income

Question 22

Alternative Tax - Expenditure Tax

Answer 22

Direct tax to replace income tax in which individuals must register assets purchased in year

Question 23

Benefits of Expenditure Tax

Answer 23

Tax on what you take from society
Removes disincentive to work and save
No need for a capital tax

Question 24

Negatives of Expenditure Tax

Answer 24

Distorts capital markets as the nature of the asset matters for registration
Double taxation policies with other countries hard to navigate