THE UK TAX SYSTEM

PURPOSE OF TAXATION

Economic - The system of taxation and spending by the government impacts the economy of a country as a whole.
Taxation is used to influence many economic factor such as inflation, emplyement levels, imports/exports.
Taxation is also used to direct the economic behaviour of individuals and businesses.

The current UK tax system encourages:

> Individual savings by offering tax incentives on savings accounts such as ISAs
> Charitable donations - by offering tax releifs - gift aids
> Investments - offering tax reliefs to enterpreneurs and investors

The UK tax system discourages:

> Motoring - by imposing fuel duties
> Smoking and drinking alcohol - by imposing significant taxes on cigarettes and alcoholic drinks.
> Environmental pollution - by imposing variety of taxes.

Social Justice - The tax structure has a direct impact on the accumulation and redistribution of wealth within a country
The main taxation principles are listed below. The argument for and against each of these is a matter for political debate.

Direct Vs Indirect principle

> Direct taxes - these are paid by those who genrate funds e.g income tax, capital gains tax, corporate tax.
> Indirect taxes - these relate to consumption e.g value added tax. They are known as indirect taxes because they are collected
by intermedary eg shops

Progressive Vs regressive principle

> Progressive taxes - these increase with income eg income tax rates rise as income rises
> Regressive tax rates - decreases with income eg national insurance rates fall as income rises

Proportional Vs Valorem principle

> Proprtional taxes - the proprtion of tax remains the same , irrespective of level of income on which it is based eg 10% on all
earnings regardless of the amount
> Ad Valorem - A tax which is based on the value of the item, eg 20% VAT on most goods sold in the UK

Tyes of Taxes

The Uk Taxsystem - governed by HMRC (Her majesty Revenue and customs), comprises a number of different taxes. The following
are the ones that are examinable within TX.

> Income tax - income tax is payable by individuals on their earnings, both fro self employement and employement.
PAYE is the system under which income tax is collected from employed workers.

> National insurance contributions - (NICs) are also payable by individuals who are either employed or self employed.
NICs are also payable by businesses (sole traders or companies) in relation to their employees.

> Capital gains tax - (CGT) is payable by individuals on the disposal of most capital assets.
Capital assets include land, building and shares but also could include smaller items such as antiques.

> Corporation tax - payable by companies on their chargable income and gains.

> Inheritance Tax - (IHT) is payable on the value of someone's death estate but also can relate to certain gifts made
by a person during his/her lifetime

> Value added tax (VAT) - is payable on most goods and services by the final consumer.

HM Revenue and Customs - are a single body that controls and administers all areas of the UK tax law.
It is organised as follows.

Commissioners - These are appointed by the Queen. Their main duties are:
> To implement statute law
 > To oversee the process of UK tax administration

Officers of Revenue and customs are appointed by the commissioners to work in offices all over the UK, many
of which have specialist functions. Their main dutes are:
> To implement the day to day work of the HMRC
> To act as a point of contact between the HMRC and tax payers.

With the move to online filing, many individuals will not have direct contact with their local HMRC office but will use the
HMRC website or relevant helpline to resolve any outstanding issues or queries.
All companies must file their returns and pay their taxes electronically but individuals can still submit paper
returns for most taxes if they wish.

Responsibilities of the taxpayers and HMRC

Under self assesment it is the responsibility of the tax payer to ensure that the correct amount of income is
reported to HMRC and the correct amount of taxis paid. Individual tax payers can however request that officers
of revenue and customs do the calculations of tax payable based on the income they have reported.

Other responsibilities of HMRC include:

> Collecting and administering IT, CGT, NIC, CT and VAT
> Paying and administering universal credit, tax credits and child benefit
> Collecting the repayment of student loans
> Ensuring adherence to minimum wage rules
> Protecting society from tax fraud, smuggling and illegal importation of drugs.

Sources of tax laws and practice

Tax law
The basic rules of the UK tax system have been established from the following main areas.

Tax Legislation
> Tax legislation/statutes are law and therefore adherence is mandatory
> They are updated each year by the annual finance act which follows from the proposals
made by the chancellor of the exchequer in the budget
> They include statutory instruments which are issued where detailed notes are required on an area of
the tax statute

Case Law
> Case laws refers to the decisions made in tax cases brought before the courts
> Often the case challenges current tax legislation or argues a certain interpretation
of the tax law should be applied.
> Most of these rulings are binding and therefore provide guidance on the interpretation of the tax statutes

HMRC Publications
As the tax legislation can be difficult to understand and open to misinterpretation, further guidance is issued
by HMRC in order to:
> explain how to implement the law
> give their interpretation of the law
The main sources of guidance are discussed below

Statement of Practice
> Provide HMRC's interpretatio of the tax law and often provide clarification or detail of how it should be applied.

Extra Statutory concessions

> GIven to specific tax payers to relax the tax legislation. They are often given where undue hardship or
anomalies would otherwise occur.
> The legality of extra-statutory concessions was successfully challenged in 2005, so they are gradually being withdrawn
or made law.

Internal Guidance Manuals

> HMRC's own working manuals produced for their staff, but they are also available publicly.
HMRC website, leaflets and booklets
> Aimed at the genral public and provide an explanation of various tax issues in non technological language

Detailed technical guidance

> HMRC issues notices and guidance notes, aimed at tax agents and advisers, to explain tax issues in more technical
detail than is normally required for the genral public
> HMRC briefs provide detailed technical guidance on a specific tax issue that has arisen during the year.

Example:
Which of the following statements are true?
1. Case law is written by HMRC and gives guidance and interpretation on difficult aspects of tax legislation = False - case laws writen by law
2. Extra statutory concessions are given to specific tax payers to relax tax law = True
3. Case law decisions are not binding on future cases = False
4. Adherence to tax legislation/statutes is mandatory = True

Interaction of UK & overseas tax systems

Double taxation agreements
The laws of two countries may conflict which means a taxpayer can be paying tax on the same source of income
in two different jurisdictions. In this situation a double taxation agreement (also known as bilateral double taxation treaty)
may be agreed between the 2 countries to resolve the issue by either exempting the income in one of the two states or providing
relief in one for tax paid in another.

Even if a treaty doesn't exist between the relevant country and the UK, the UK still allows some measure of relief for the overseas
taxes which have already been paid on the relevant source of income.

TAX AVOIDANCE VS TAX EVASION

Tax evasion is illegally seeking to pay less tax than is due by deliberately misleading HMRC. It carries a risk ofcriminical prosecution
(fines and/or imprisonment)
The main forms of tax evasion are :
> Suppressing information eg failing to declare taxable income to HMRC
> Submitting false information eg claiming expenses that have not been incurred

The proceeds from tax evasionare treated the same as proceeds from theft, drug trafficking and other
criminal conduct.
Therefore, failure to report tax evasion is also an offense under the money laundering regulations.

Tax avoidance
Tax avoidance is any legal method to reduce the tax burden, for example utilising tax shelters such as ISAs.
Tax avoidance measures, whilst legal, are not always effective.

> Promoters of tax avoidance schemes are now required to disclose details to HMRC, enabling HMRC to close
loopholes quickly
> The courts may disregard elements of transactions that have no commercial purpose (ie were designed with the main aim to avoid tax)
> General anti abuse rules (GAAR) enables HMRC to challenge abusive tax avoidance arrangements

Professional and ethical guidance

Fundamental Principles
The ACCA's professional code of ethics and conduct sets out five fundamental principles by which members should abide

1. Objectivity - members should not allow prejudice or bias or the influence of others to override objectivity

2. Professional Competance and due care

> Members have an ongoing duty to maintain professional knowlegde and skills
> Members should be diligent and act in accordance with applicable technical and professional standards

3. Professional Behaviour
> Members should refrain from any conduct that might bring discredit tothe profession.
4. Integrity
Members should act in a straight forward and honest manner in performing their work

5. Confidentiality
> members should respect the confidentiality of information acquired as a result of professional and business
relationships
> members should not disclose any such information to third parties unless:
> they have proper and specific authority. or
> there is a legal or professional right or duty to disclose eg money laundering
> confidential information acquired asa result of professional and business relationships should not be used
for the personal advantage of members and third party.

Advise on Taxation issues

A member owes duties and responsibilities to both hos client and HMRC
This entails the following:
> Ensuring that information provided to HMRC is accurate and complete
> Not assisting a client to plan, or commit an offense

If, in the course of his work, any client errors come to light, a member should take the following action;
> Explain to the client the need to notify HMRC as soon as possible and the consequences of not doing so.
> If the client refuses to make a full and frank disclosure, the members should set out the consequences in writing and consider
whether it is appropriate to continue to act for the client.
> If the client still refuses, the member should cease to act, should advise HMRC that they no longer acting (without giving the reason why)
and consider their position under the money laundering regulations.

Money Laundering Regulations

A person is engaged in money laundering where they:
> Conceal, disguise, convert, transfer, remove (from the UK) criminal property
> Enter into/become concerned in an arrangement which they know or suspect facilitates the acquisition,
retention, use or control of criminal property
> Acquire, use or have possession of criminal property

Criminal property includes the proceeds of tax evasion

A business within the regulated sector must appoint a money laundering reporting officer (MLRO)
within the firm. Suspicions of money laundering need to be reported to the MLRO who then decides whether a report
should be made to the National Crime Agency (NCA)

A client should not be advised of such a report which has been made otherwise this would amount to the offense of
tipping off.

Dishonest conduct of tax agents

> Civil penalty of up 50,000 pounds
> HMRC may publish details of the penalised tax agents in certain circumstances
> HMRC may have rights of access to all working papers of a dishonest agent
> HMRC can access the working papers of a dishonest agent with the agreement of the tax tribunal.