Introduction to taxation

Question 1

what are the sources of tax law?

Answer 1

• Tax legislation
• Case law

Question 2

what is HMRC?

Answer 2

body that controls and administers most areas of UK tax law, but don’t make the tax rules

Question 3

what is statements of practice?

Answer 3

Provides HMRC’s interpretation of tax law and often provides clarification or more detail on how it should be applied

Question 4

what is extra statutory concessions?

Answer 4

given to specific taxpayers to relax the tax legislation. Where undue hardship of anomalies would occur

Question 5

what is internal guidance manual?

Answer 5

HMRC’s own internal working manuals are produces for their staff but also for public

Question 6

Which activities does the government seek to encourage via taxation?

Answer 6

1.savings, for example by offering tax incentives such as tax relief on pension contributions.
2.donations to charity, for example through the Gift Aid Scheme
3.investment into business, for example through Venture Capital Trust relief and the Enterprise Investment Scheme
4.entrepreneurs who build their own businesses, through reliefs from capital taxes

Question 7

What do you understand by the direct/indirect principle?

Answer 7

Direct taxes (eg, income tax, capital gains tax, corporation tax, national insurance contributions) are only paid by those who generate the funds to pay the tax.

Indirect taxes (eg, value added tax, excise duty) relate to consumption and it is up to individuals whether they spend money on such goods.

Question 8

What do you understand by the progressive/regressive principle?

Answer 8

Progressive taxes increase with income whereas regressive taxes decrease with income

Question 9

What do you understand by the unit/value principle?

Answer 9

Unit taxes are calculated as a flat rate per item, regardless of value, whereas value taxes are a percentage of the value of goods or services such as value-added tax.

Question 10

What do you understand by the income/capital/expenditure principle?

Answer 10

Income tax is paid only by those who generate income.

Capital taxes are just because people should not be able to live off the sale of capital assets without generating income.

Taxes on expenditure are paid only by those who incur the expenditure.

Question 11

what does external influence include?

Answer 11

global concerns such as climate change and the effect of oil and food prices in cost of living

Question 12

What do you understand by the ability to pay/benefit principle?

Answer 12

These are two opposing arguments that tax should be based either on the ability of the taxpayer to pay, or on the benefit received. For example, everyone should pay towards defence or law and order.

Question 13

What do you understand by the efficiency principle?

Answer 13

The cost of collecting the tax should be low in relation to the tax raised.

Question 14

Give three examples of taxes that aim at addressing environmental concerns.

Answer 14

1.climate change levy on businesses in proportion to their energy consumption.
2.landfill tax to discourage the use of landfill sites for waste disposal and to encourage recycling.
3.taxes on motor vehicles based on carbon emissions, such as cars provided to employees and vehicle excise duty, to encourage the use of more environmentally friendly vehicles

Question 15

What taxes is an individual liable to pay?

Answer 15

1.Income tax (IT), for example on income from investments, income from employment and income from a business which they operate as a sole trader or as a member of a partnership
2.Capital gains tax (CGT) on the disposal of capital assets owned by them as investments or used in their sole trade or partnership
3.National insurance contributions (NICs) as an employee, as a sole trader or partner, and as an employer
4.Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services

Question 16

When does the tax year run to and from, and how does this differ from the financial year?

Answer 16

Tax year: 6th April - 5th April
Financial year: 1st April - 31st March

Question 17

What taxes are partners jointly and severally liable for?

Answer 17

1.Income tax of employees deducted under the Pay As You Earn (PAYE) system
2.National insurance contributions (NICs) as an employer (employer contributions and employee contributions are collected under the PAYE system)
3.Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services

Question 18

What taxes is a company liable for?

Answer 18

1.Corporation tax (CT) on its income and gains
2.Income tax of employees deducted under the Pay As You Earn (PAYE) system
3.National insurance contributions (NICs) as an employer (employer contributions and employee contributions collected under the PAYE system)
4.Value added tax (VAT) as the supplier of goods and services or as the final consumer of goods or services

Question 19

What are the five main responsibilities of HMRC?

Answer 19

1.to collect and administer taxes including IT, CGT, NIC, CT and VAT
2.to pay and administer universal credit, tax credits and child benefit
3.to collect repayments of student loans
4.to ensure all employers meet the minimum wage rules
5.to protect UK society from tax fraud, alcohol and tobacco smuggling and illegal importation of drugs

Question 20

What does MTDfB stand for?

Answer 20

Making Tax Digital for Businesses (MTDfB)

Question 21

For what businesses does MTDfB initially applies?

Answer 21

MTDfB initially only applies to businesses for VAT purposes and even then only if their turnover is above the VAT threshold (currently £85,000).

Question 22

When will other businesses be asked to keep and update digital records?

Answer 22

Other businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least a year after MTDfB first goes live for VAT returns.

Question 23

How is tax law set out?

Answer 23

Tax law is set out in statute, supplemented by statutory instruments.

Question 24

What tax related information does the Finance act include?

Answer 24

The Finance Act includes a variety of changes to tax rules including rates and allowances for the current year and often a few relating to future years.

The Finance Act 2019 includes rates and allowances mainly relating to the tax year 2019/20 and the Financial Year 2019.

Question 25

What are statutory instruments?

Answer 25

statutory instruments most commonly take the form of Regulations, which deal with these detailed provisions. They are the biggest single source of tax law each year.

Question 26

What is the main benefit of statutory instruments?

Answer 26

The procedure for making changes to a SI is less complicated than for a statute.

A SI is simply laid before Parliament and usually automatically becomes law within a stated period, unless any objections are raised to it.

Question 27

Can HRMC be flexible on how it interprets tax law?

Answer 27

Yes HMRC must act according to tax law, but it has some discretion over how it applies the law.

Question 28

what type of compliance checks can HMRC conduct on any return? and when?

Answer 28

• prereturn checks
• enquiries intp returns already submitted
  1. if return is filed on time then HMRC must give intention to conduct an enquiry 12 months after the actual filing date
  2. if the return is filed late HMRC must give notice by the quarter day following the 12 month of the actual filing date

Question 29

what is a determination? and when must it be made

Answer 29

if tax return is not received by the filing date, HMRC can make a determination (estimate) of the tax due and treat this as the amount owed.
Must be made within 3 years of statutory filing date

Question 30

what is a discovery assessment and what are the time limits for raising it?

Answer 30

raised by HMRC if it comes into posession of information about a taxpayer’s tax affairs
Time limits:
- 4 years from the end of a relevant period if there has been no careless or deliberate behaviour
- 6 years from the end of a relevant period for careless behaviour
- 20 years from the end of a relevent period due to delilberate behaviour

Question 31

when can an appeal be made?

Answer 31

within 30 days and state the grounds for appeal

Question 32

what might a tax payer make an appeal against?

Answer 32

• an information notice
• a request for documentation in the course if a compliance check
• amendments made as the result of a compliance check
• HMRC right to raise a discovery assessment
• a discovery assessment
• a VAT assessment
• an imposition of a penalty

Question 33

what is a tax agent?

Answer 33

an individual who assists clients with their tax affairs

Question 34

Who set out the tax strategies in the UK?

Answer 34

The political party, as voted in by the UK as part of the democracy

Question 35

What does the efficiency principle state and how is it implemented?

Answer 35

• That the cost of collecting tax should be less than the tax raised
• HMRC controls most of the UK tax collection and provides guidance to make the tax legislation easier to understand for ease of taxpayers

Question 36

Name as many of the five types of guidance given by HMRC:

Answer 36

1. Statements of practice
2. Extra-statutory concessions
3. Internal guidance manuals
4. HMRC Website
5. HMRC press releases

Question 37

How do tax policies leverage the economy?

Answer 37

• Encouraging certain behaviours such as offering tax incentives on saving through ISAs, or charitable donations through the Gift Aid Scheme.
• Discouraging certain behaviours such as adding additional taxes on petrol/diesel and alcohol.

Question 38

What does the neutrality principle state?

Answer 38

Tax should not distort choice
(despite this, tax policies have been used to influence economic factors like inflation, employment levels, imports and exports)

Question 39

What is the HMRC Payment Support Service?

Answer 39

• A service which assists those taxpayers who cannot pay the tax they owe by the relevant deadline (must be contacted prior to the tax being due)
• HMRC may be able to offer a ‘Time To Pay’ (TTP) which prevents a taxpayer incurring a penalty, but they will have to pay interest on the additional time in which the payment is delayed

Question 40

What is the minimum and maximum penalty that HMRC can issue to a tax agent that has been dishonest?

Answer 40

£5,000 - £50,000 (depending on the tax agents behaviour)

Question 41

What can HMRC do if it has evidence that a tax agent has acted dishonestly?

Answer 41

• Issue a file access note to obtain the working papers of the tax agent
• Issue a conduct notice
• Publish information about the tax agent

Question 42

an appeal must be made in how many days?

Answer 42

30 days