eC) the UK tax system The overal function and purpose of taxation nw modern economy 2 Diterent types of taxes TONG) ‘3 Principal sources of revenue law and practice ‘A2(a)~e), (0) “Tax avoidance and tax avasion 4240),(8) Introduction ‘We start our study of tax with an introduction tothe UK tax system, First, we consider briefly the purpose of raising taxes, focussing on economic, social and environmental factors. We next consider the specific UK tes, bath revenue and capital and also direct and indirect. ‘We see how the collection of taxis administered inthe UK, and where the UK tax system interacts with overseas tex jurisdictions. Finally, we highlight the diference between tax avoidance and tax evasion and ‘explain the need fora professional and ethical approach in dealing with tx. In particular, we look at the situation where a client has failed to disclose information tothe tax author, "when you nave tinea this chapter you shoula beable to aiscuss the road ‘features ofthe tax system. Inthe following chapters we will consider specific UK taxes, starting with income tax,Study guide At ‘The overall function and purpose of taxation in a modern economy (a) Describe the purpose (economic, social etc) of taxation in a modern 1 economy. (b) Explain the difference between direct and Indirect taxation. 2 (©) | Ident the diferent types of capital and revenue tox 1 A2 Principal sources of revenue law and practice (a) Describe the overall structure of the UK tax system. 1 (b) State the different sources of revenue law. 1 (c) | Describe the organisation of HM Revenue & Customs (HMRC) and its terms 1 of reference. (d) Explain the difference between tax avoidance and tax evasion, and the 1 purposes of the General Anti-Abuse Rule (GAAR). (e) Appreciate the interaction of the UK tax system with that of other tax 2 Jurisdictions. (fy Appreciate the need for double taxation agreements. 2 (a) | Explain the need for an ethical and professional approach. 2 Exam guide ‘You may be asked a question on a specific topic from this part of the syllabus in either Section A or ‘Section 8. An example would be to identity sources of revenue law. You are unlikely to be asked a whole Section C question on this part of the syllabus, You may, however, be asked to comment on one aspect, ‘such as the diference between tax avoidance and tax evasion or how to act fa client has failed to disclose information to the tax authorities, as part of a question 1 The overall function and purpose of taxation in a modern economy MESEIWD economic, social and environmental actors may affect he government's tax policies. 1.1 Economic factors In terms of economic analysis, government taxation represents a withdrawal from the UK economy while its expenditure acts as an injection into it. So the government's net position in terms of taxation and expenditure, together with its public sector borrowing policies, has an etfect on the level of economic activity within Ue UK, ‘The government favours longer-term planning, and regularly sets aut proposed plans for expenditure, ‘These show the proportion of the economy's overall resources which will be allocated by the government and how much will be left for the private sector. This can have an effect on demand for particular types of goods, eg health and education on the one hand, which are predominately the result of public spending, and consumer goods on the other, which results from private spending. Changing demand levels will have an impact on employment levels within the different sectors, as well as on the profitability of diferent private sector suppliers ed wegWithin that overall proportion left inthe private sector, the government uses tax policies to encourage and discourage certain types of activity al Itencourages: (a) Saving on the part of the individual, by offering tax incentives such as tax-free individual savings accounts (ISAs) and tax relief on pension contributions (b) Donations to charities through the Gift Aid scheme (c)_ Enlrepreneurs who build their own business, through relies from capital gains tax (4) Investment in plant and machinery through capital allowances (2) Marriage and civil partnerships through the transferable personal allowance (marriage allowance), Civil partners are members of a same sex couple which has registered as a civil partnership under the Civil Partnerships Act 2004, Same sex couples can also marry in England, Wales and Scotland (but not Northern Ireland), It discourages: (2) Smoking and alcoholic drinks, through the duties placed on each type of product (>) Motoring, through fuel duties Governments can and do argue that these latter taxes and duties to some extent mirror the extra costs to the country as @ whole of such behaviours, such as the cost of coping with smoking related illnesses, However, the government needs to raise money for spending in areas where there are no consumers on whom the necessary taxes can be levied, such as defence, law and order, overseas aid and the cost of Tunning the government and Parliament, 1.2 Social factors Social justice lies at the heart of politics, since what some think of as just s regarded by others as completely unjust. Attitudes to the redistribution of wealth are a clear example. Ina tree market some individuals generate greater amounts of income and capital than others and once wealth has been acquired, it tends to grow through the reinvestment of investment income received. This ccan lead to the rich getting richer and the poor poorer, with economic power becoming concentrated in relatively few hands. ‘Some electors make the value judgement that these trends should be countered by taxation policies which redistribute income and wealth away trom the rich towards the poor. This is ane of the key ‘arguments in favour of some sort of capital gains tax and inheritance tax, taxes which, relative to the revenue raised, cost a great deal to collect Ditferent taxes have different social effects: (@) Direct taxes based on income and profits (income tax), gains (capital gains tax) or wealth (inheritance tax) tax only those who have these resources, (b) Indirect taxes paid by the consumer (value added tax - VAT) discourage spending and encourage saving. Lower or nl rates of tax can be levied on essentials, such as food (c) Progressive taxes such as income tax, where the proportion of the income or gains paid over in tax increases as income/gains rise, target those who can afford to pay, Personal allowances and the rates of taxatian can be adjusted so as to ensure that those an very low incomes pay litle oF na tax, (a) Taxes on capital or wealth ensure that people cannot avoid taxation by having an income of zero and just living off the sale of capital assets. Almost everyone would argue that taxation should be equitable or ‘ir’, but there are many different views as to what is equitable ‘An efficient tax is one where the costs of collection are low relative to the tax paid over to the government, The government publishes figures for the administrative costs incurred by government departments in we reais | monet meee nee