Chapter 1: Features of Taxation and the regulatory environment

Question 1

What characteristics should a good tax have?

Answer 1

Fair
Absolute
Convenient
Efficient

Question 2

What are the 3 major principles of a good tax policy?

Answer 2

Equity
Efficiency
Economic Effects

Question 3

What are direct taxes?

Answer 3

Paid directly to the government by the person or entity liable for them.

e.g. tax on personal income such as salaries, tax on business profits

Question 4

What are indirect taxes?

Answer 4

Borne by one party but collected and paid to the government by another party.

e.g. sales tax

Question 5

What is the incidence of a tax?

Answer 5

Distribution of the tax burden - who actually pays the tax

Question 6

What are the two elements that incidence is split into?

Answer 6

Formal Incidence
Actual/effective incidence

Question 7

What is formal incidence?

Answer 7

On the person or organisation who has direct contact with tax authorities.

e.g. VAT is paid to HMRC by seller

Question 8

What is actual/effective incidence?

Answer 8

On the person or organisation who ends up bearing the cost of the tax.

e.g. the consumer would bear the incidence

Question 9

What is the tax base?

Answer 9

Identifies what is subject to tax

Question 10

What is a taxable person?

Answer 10

The person accountable for the tax payment

Question 11

What is hypothecation?

Answer 11

Certain taxes are devoted entirely to certain types of expenditure.

e.g. road tax is used solely for maintaining and improving the roads

Question 12

What is the tax gap?

Answer 12

Gap between the tax theoretically collectable and the amount actually collected

Question 13

What are the three types of taxes?

Answer 13

Progressive Taxes
Proportional Taxes
Regressive Taxes

Question 14

What are progressive taxes?

Answer 14

Takes an increasing proportion of income as income rises.

e.g. UK income tax has higher rates of tax for higher levels of income

Question 15

What is proportional taxes?

Answer 15

Takes the same proportion of income as income rises

Question 16

What is regressive taxes?

Answer 16

Takes a decreasing proportion of income as income rises. Takes a higher percentage of tax revenue from those on low incomes

Question 17

What are the sources of tax rules?

Answer 17

Legislation produced by government
Precedents based on previous legislation
Directives from international bodies such as EU guidelines on VAT/Sales tax
Agreements between different countries such as double tax treaties

Question 18

What does trading income relate to?

Answer 18

Main business activity

Question 19

What are the most common adjustments with trading income?

Answer 19

Exempt Income
Disallowable Expenses
Depreciation
Tax Depreciation

Question 20

What are capital tax gains?

Answer 20

Gains made on the disposal of investments and other non-current assets

Question 21

What are two types of indirect tax?

Question 22

What are two types of indirect tax?

Answer 22

Unit Taxes
Ad Valorem taxes

Question 23

What are unit taxes?

Answer 23

Tax based on the number or weight of items

Question 24

What are ad valorem taxes?

Answer 24

Tax based on the value of items

Question 25

What is the definition of indirect tax?

Answer 25

imposed on one part of the economy with the intention to pass on burden

Question 26

Who is the tax burden passed on to?

Answer 26

Final consumer not registered for VAT

Question 27

What is input tax?

Answer 27

VAT paid on purchases

Question 28

What is output tax?

Answer 28

VAT charged on sales to customers

Question 29

What is standard rated VAT?

Answer 29

Taxed at standard rate of VAT

Question 30

What is higher rated VAT?

Answer 30

Taxed at a higher rate

Question 31

What is zero rated VAT?

Answer 31

Taxed at a rate of 0%

e.g. children’s clothing

Question 32

What is reduced rate VAT?

Answer 32

Taxed at a rate lower than the standard rate of VAT

Question 33

What is 0% exempt VAT?

Answer 33

Not subject to VAT

e.g. insurance, finance

Question 34

What are benefits in kind?

Answer 34

Non-cash benefits in lieu of further cash payments

e.g. company cars, living accommodation, loans

Question 35

What is a personal allowance?

Answer 35

Tax free allowance

Question 36

What are the benefits of PAYE?

Answer 36

Tax is collected at source
Tax authorities receive regular payments from employers
Tax authority only has to deal with the employer
Most of the admin costs are borne by the employer

Question 37

What powers do tax authorities have?

Answer 37

Impose penalties and interest on late payment of tax
Review and query filed returns
Request special reports if they believe inaccurate information has been submitted
Examine records of previous years
Enter and search the entity’s premises and seize documents
Pass on information to foreign tax authorities

Question 38

What is tax avoidance?

Answer 38

Tax planning to arrange affairs, within the scope of law, to minimise the tax liability

Question 39

What is tax evasion?

Answer 39

Illegal manipulation of the tax system to minimise tax liability

Question 40

What methods do tax authorities use to prevent tax avoidance and tax evasion?

Answer 40

Reducing opportunities
Simplifying tax structure by minimising the relief, allowances and exemptions
Increasing perceived risk by auditing tax returns and payments
Developing good communication between tax authorities and entities
Changing social attitudes
Reducing lost revenue by reviewing the penalty structure