Chapter 1: Introduction to the UK tax system

Purpose of taxation in a modern economy

1. Economic factors 2. social factors 3. environmental factors

A 'tax advantage includes

1. Relief or increased relief from tax 2. Repayment or increased repayment of tax 3. Avoidance or reduction of a charge to tax 4. Avoidance of a possible assessment to tax 5. Deferral of a payment of tax or advancement of a repayment of tax 6. Avoidance of an obligation to deduct or account for tax

Taxes may be

1. direct or indirect 2. revenue or capital.

Capital taxes

are those charged on capital gains or on transferring of wealth. ― Capital gains tax ― Corporation tax (on capital gains) ― Inheritance tax (on transferring of wealth).

Revenue taxes

are those charged on income including profits from business ventures. ― Income tax ― Corporation tax (on income profits) ― National insurance

Direct taxes

are those charged on income, gains and wealth, collected directly from the taxpayer. ―Income tax ―national insurance ―corporation tax ― capital gains tax ―inheritance tax

Indirect taxes

are those paid by the consumer to the supplier who then passes the tax to the government or HM Revenue & Customs (HMRC) . Value added tax is an example.

UK membership of the European Union (EU)

has a significant effect on UK taxes, in particular value added tax (VAT). This will continue at least until the UK leaves the EU

(HMRC) Her Majesty's Revenue and Customs

a part of HM Treasury and has responsibility for the self-assessment regime and collection of taxes.

corporation tax

is charged on both income and capital gains of UK companies

The practising accountant

often acts for taxpayers in their dealings with HMRC & situations can arise where the accountant has concerns as to whether the taxpayer is being honest in providing information to the accountant for onward transmission. How the accountant deals with such situations is a matter of professional judgement, but in deciding what to do, the accountant will be expected to uphold the standards of the Association of Chartered Certified Accountants. The accountant must act honestly & objectively, with due care & diligence & showing the highest standards of integrity.

an accountant

who suspects or is aware of tax evasion by a client may be committing an offence if does not report suspicions. He/She also must not disclose to the client or a third party that a money laundering report has been made as such disclosure may be a criminal offence ('tipping-off')

The government discourages

(a) Smoking and alcoholic drinks (b) Motoring

All taxpayers

(whether individuals or companies) are responsible for disclosing their taxable income and gains and the deductions and reliefs they are claiming against them. • Many arrange for their accountants to prepare and submit their tax returns. They are still the person responsible for submitting the return and for paying whatever tax becomes due; the accountant is only acting as the agent.

Who provides tax services?

CPA Firms

environmental factors

To deal with environmental concerns. The taxation system accommodates these concerns to a certain extent, especially concerns about renewable and non-renewable sources of energy and global warming

GAAR

General Anti-Abuse Rule: enables HMRC to counteract tax advantages from abusive tax arrangements.

Types of taxes

Income tax National insurance Corporation tax Capital gains tax Inheritance tax Value added tax

Social factors

Redistribution of income and wealth ―Social justice lies at the heart of politics, since what some think of as just is regarded by others as completely unjust. Attitudes to the redistribution of wealth are a clear example. ―In a free market some individuals generate greateramounts of income and capital than others and once, wealth has been acquired, it tends to grow through the reinvestment of investment income received.

Economic Factors

Used to encourage and discourage certain types of activity

Different taxes have different social effects:

―(a) Direct taxes: tax only those who have these resources ―(b) Indirect taxes paid by the consumer: discourage spending and encourage saving. ―(c) Progressive taxes such as income tax, where the proportion of the income or gains paid over in tax increases as income/gains rise. Target those who can afford to pay

The government encourages

―(a) Saving on the part of the individual ―(b) Donations to charities ―(c) Entrepreneurs who build their own business, ―(d) Investment in plant and machinery

Examples of tax changes which have been introduced for environmental reasons

―(a) The climate change levy ―(b) The landfill tax ―(c) The changes to rules on the lease or purchase of cars, and taxation of cars and private fuel provided for employees to be dependent on carbon dioxide (CO2) emissions

If client makes material error or omission in tax return, or fails to file tax return and does not correct error, omission or failure when advised, then accountant must:

―Cease to act for the client. ―Inform HMRC of this cessation (but not details of why). ―Consider making money laundering report to firm's money laundering reporting officer or the National Crime Agency if the accountant is a sole practitioner.

tax evasion

―Misleading HM Revenue & Customs (HMRC) by suppressing information or deliberately providing false information ―Illegal

tax avoidance

―Using the legislation to reduce your tax burden ―Legal

Examples of abusive arrangements include those that result in:

• Significantly less income, profits or gains; • Significantly greater deductions or losses, or • A claim for the repayment or crediting of tax that has not been, and is unlikely to be, paid.

Interaction with other tax jurisdictions

• There is no general system of taxation within the EU but VAT is an EU-wide tax. • Double taxation agreements give relief where the same revenue source is taxed in both the UK and another country. • There are provisions for exchange of information between the UK and other countries.