Tax System and Administration in the UK. Introduction. This module explores tax systems in the UK and looks at the different types of tax and the law that surrounds this.
It gives a history of tax and how it's evolved over thousands of years, and it also looks at how tax impacts the economy and the seriousness of tax evasion and avoidance. Also, you will gain insight into HMRC and their responsibilities in relation to tax in the UK, as well as payments they are responsible for making too. Topics to be discussed in this module are.
What is tax? Origin and history of taxation. The economic function of taxation. The social justice purpose of taxation. Different types of taxes.
Principal sources of revenue law and practice. HMRC and its function. Tax avoidance and tax evasion. What is tax? Tax is money that is deducted or taken from us by the government.
It's a mandatory contribution to the state. but you do not receive goods or services in return for this payment. However, there are many different types of tax, and overall, it's quite complex. The modern tax system is governed by legislation, so there are several rules and regulations to follow. The good thing about the legislation is that it ensures that liability of tax to an individual is indicated in advance.
Origin and history of taxation. Taxation has been around for centuries. The earliest record of tax dates back to clay tablets from 3300 BCE, and they originate from Samaria, which we know in modern times as being Iraq.
Taxes are also thought to exist in ancient Egypt and even before money was invented. The payment was then taken in the form of crops, manual labor, or military services. This also happened in ancient Greece and Rome.
Cash levies started to emerge in these cities, and people also traded slaves and goods. Tax has always been around, and in Europe, tax transactions appeared after the Roman Empire was gone. Monarchs and governments slowly returned this, and then in the 19th and 20th centuries, taxation grew, especially in industrialist countries.
At the end of the 19th century, in the UK, tax revenue was less than 10% of the national income. It was the same in France, but it was less than 7% in the United States. Throughout the 20th century, this has grown by a factor of four.
This is in line with the economy and public sector growth. over the years in each country. The economic function of taxation.
Billions of pounds of taxes are collected every year by the UK government and then they spend it. Their spending patterns impact the whole UK economy as taxation policies influence the behaviour of individuals, of businesses and the country's economy. Let's look at some examples.
Changes in interest rates encourage spending or saving. Tax relief is offered on donations to charity. Capital gains tax relief helps entrepreneurs to build their businesses.
Incentives are offered to encourage investments or savings. Tax increases on non-economical cars encourage people to buy cars with low carbon dioxide emissions. Taxes added to cigarettes and alcohol to discourage buying.
Businesses can claim allowances for plants and machinery to encourage investment in equipment. The social justice purpose of taxation. There are four ways of structuring the tax system. They include.
When income increases, but the tax we pay falls. Fuel is an example of this as everyone pays the same, regardless of your earnings. 3. Progressive taxation.
When incomes increase and then tax rises too. For example, 0%, 20% or 40% tax is paid, depending on income level. 4. Ad valorem principle. Tax charged on the value of goods.
For example, if we think about VAT charges at either 20% or 5%. Different types of taxes. Let's look at the different taxes below.
They are discussed in more detail throughout the course. Income tax. This tax is based on income. Employed people pay this through their employment, while self-employed people pay this through their self-assessment. National insurance contributions.
National insurance contributions are paid by a business. including self-employed businesses, for employees. Corporation tax.
This is payable by companies and is based on income and gains. Capital gains tax. This is payable on chargeable assets by individuals. Inheritance tax.
This tax is based on capital. It's usually charged when wealth or estates are passed to others. Value-added tax. That is a proportion of tax charged to consumers on top of goods and services.
Stamp duty. This tax is charged to an individual when they buy shares, land or property. Direction taxation.
When the person paying their tax pays Her Majesty's revenues and customs, the agency who charges us tax and collects it directly. Direct taxes include capital gains tax, corporation tax, inheritance tax, and income tax. Indirect taxation.
When the consumer pays the indirect tax to the business because a charge is included in the price of their goods, the business is then responsible for paying the tax to HMRC. Principal sources of revenue law and practice. The structure of the UK tax system. There are three parts to the structure of the UK tax system.
They decide how much tax will be charged and what the tax will be spent on. 2. The Treasury. This is a group of people under the Chancellor. They impose taxation and collections as this is their responsibility. 3. HMRC, Her Majesty's Revenues and Customs.
This is a government agency that controls and enforces tax in the UK. They are responsible for mandatory payments too, like child benefits. The different sources of revenue law.
There are many laws that relate to revenue, finance and tax. Once the yearly budget is released, an update to the Finance Act must be passed to allow changes. The government issues statutory instruments. This means details can be added to acts and legislation.
Case law is introduced if tax decisions are made before a court. Statements of practice explain how the law should be applied in specific situations. HMRC creates this and clarifies how the law should be applied.
Extra-statutory concessions used to soften some harsh or unfair tax laws. Some taxpayers are unaware of concessions and can't claim because they don't know about them. The interaction of the UK tax system with that of other tax jurisdictions.
Other countries have different tax systems and laws to the UK. The UK tax system looks at domicile and residence when determining how much tax a person or business pays. Some companies are liable for tax in more than one country which can be unfair.
Countries can draw up a double taxation agreement so that the company has a fairer deal. This should always include. Agreement on the level of taxation that will be applied to the company in both countries. A credit relief clause to protect the business in case the company suffers hardship. They're protected and are only charged once.
Exception clauses. Some taxations are exempt in one country but not another. HMRC and its function.
What is HMRC? You may hear references to HMRC, which is the tax office or even referred to as the tax man. HMRC is an abbreviation and its full name is Her Majesty's Revenue and Customs.
This is a department of the government that is responsible for tax in the UK, but they are also in charge of raising income for the UK too. HMRC started as two separate organizations. They were Her Majesty's Customs and Excise, and the Inland Revenue, but both of these departments were joined together to create HMRC in 2005. The function of HMRC HMRC is responsible for paying child benefits, tax credits, and it also oversees the national living wage.
They gather national insurance contributions and income tax, and they collect a wide range of taxes too. There are a variety of different taxations that HMRC are authorized to collect. They include VAT, income tax, stamp duty land tax, corporation tax, capital gains tax, inheritance tax.
Excise Duties. Tax Avoidance and Tax Evasion. The Difference Between Tax Avoidance and Tax Evasion. Tax evasion and avoidance are two different things.
Let's have a quick look at these. Tax Avoidance. This is when a person tries to minimize their tax liability while still complying with tax regulations. Tax avoidance is illegal.
Tax evasion. This is when a person tries to minimize their tax liability but is not following tax regulations. This is also illegal and if you are a tax advisor and your client is evading tax, you must make a report under money laundering regulations.
There are many consequences when it comes to tax evasion such as Prosecution Penalties and charges. Interest. Imprisonment. The General Anti-Abuse Rule, GAAR.
There are occasions when taxpayers use loopholes to reduce the liability of tax, or they behave in a way that was not really anticipated. This is called aggressive tax avoidance because it means the government is unable to collect the tax it expected. The tax system now includes an anti-abuse rule, GARR, which deters tax avoidance and this counteracts tax advantages that arise from tax arrangements that violate or abuse the tax system.
HMRC may counteract the tax advantages when GARR applies, but there is a strict procedure to follow. This includes going before an independent advisory panel, but it's HMRC's responsibility to prove GAAR applies. Important Terms in GAAR There are some important terms in GAAR that you need to know. Tax Advantages This includes tax deductions and deferral or advancement or tax payments. Tax Arrangements This is an arrangement where the main purpose is to obtain a tax advantage.
Abuse of the tax system. Arrangements would be categorized as being abusive if they are not a reasonable course of action. This is when advantages are taken from the shortcomings of tax legislation.
The need for an ethical and professional approach. There is no doubt that an ethical and professional approach is needed when it comes to dealing with tax, and that's why ACCA expects its members to ensure an ethical approach is taken to work, employers, and clients. Ensure they have an objective outlook and there is no bias.
Take responsibility for their professional duty to society. Maintain performance and services at all times to ensure professional, high standards of conduction. Five Principles of ACCA's Code of Ethics and Conduct. The ACCA has set out five principles.
Members should only complete work matching their competencies. They have a duty to act professionally and up update their skills and knowledge. 4. Professional Behavior. Members must maintain professional behaviors. They should not partake in behavior that would discredit this profession.
Now that you've reached the end of the module, you've learned that. What taxes and how taxation started in ancient times. How tax can influence the economy, as well as individuals and businesses.
Tax system structures including proportional, regressive, progressive, and the ad valorem principle. Different types of tax in the UK. HMRC, its history and functions over the year, including its responsibilities. The concept of tax evasion and avoidance and the difference between the two. What general anti-abuse rule and aggressive tax avoidance is and how it can be applied.
Thank you. You have reached the end of this module. See you in the next one.