Mod 6 - Tax

Question 1

What is tax?

Answer 1

Governments need money and taxes are one of the main ways in which they get it. The tax system is in part political and in part inherited. Occasionally, taxes are actually abolished.

There are many different types of tax, which we will all have come across in our daily lives – taxes paid by individuals, companies and trusts on their income and gains. These taxes include:

• shopping taxes – taxes that apply only when you buy something, like VAT, stamp duties, excise duties on fuel etc.;
• income taxes – taxes that apply when you are paid for doing something, for example
  earnings, profits of a trade, interest or dividends on investments, royalties;
• capital taxes – taxes on the value of capital items, for example capital gains tax, inheritance tax and council tax;
• activity taxes – taxes that apply when you do a particular thing, for example TV licences, road fund licence, bank levy, petroleum revenue tax, payroll tax (employer’s National Insurance contributions), business rates, landfill tax; and
• penalty taxes – taxes that are designed to discourage certain behaviour, such as smoking and drinking.

Question 2

Advantaged vs Non-Advantaged

Answer 2

Non-tax advantaged share plans are share plans subject to the normal tax rules. Tax advantaged plans have some special (usually favourable) tax treatments. These plans used to be called ‘approved’ because the rules of the plan for each company had to be approved in advance by HMRC.

They are now called ‘tax advantaged’ plans (or sometimes ‘tax qualified’ plans or ‘tax favoured’ plans) as a result of the abolition of the HMRC approval process.

Question 3

Who’s in charge of tax system?

Answer 3

His Majesty’s Revenue and Customs (HMRC) administers the tax system.

The authority for charging tax comes from Parliament and is contained in tax legislation. Each year there is a new Finance Act, so the amount of tax legislation is constantly increasing.