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Taxation Lecture Notes

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Everything related to taxation e.g. marriage allowances, corporation taxes, taper reliefs, allowable deductions etc. Worked examples.

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  • September 22, 2022
  • 50
  • 2021/2022
  • Lecture notes
  • Martin kwabena
  • All classes
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Taxation

30/09/21
Introduction to Taxation
Purpose of Taxation
Taxation is the principal means by which governments raise revenue. Taxation policies are used to
influence both economic and social factors of businesses and individuals.
Economic:
- Taxation policies can influence economic factors (inflation, employment, imports/exports)
- Can be used to influence the behaviour of businesses and individuals
- Can encourage an individual to save by offering incentives on savings accounts such as ISAs
(individual savings accounts)
- Can encourage entrepreneurs and investors to invest in businesses by offering tax relief for
investments in specified schemes
- Can encourage donations to charities by offering tax relief (via gift aid)
Social:
- Taxation policies can discourage environmental pollution by imposing a variety of taxes like
landfill tax, climate change levy and linking co2 emissions to taxation of company cars
- Can be used to improve the health of the population by discouraging smoking and drinking
of alcohol by imposing significant taxes on cigarettes, alcoholic drinks etc.
- Can be used to discourage motoring by imposing fuel duties

Taxation Structures
Progressive taxation: as income rises the proportion of taxation raised also rises. For example,
income tax rates increase from 20% to 40% to 45% depending on the level of income.
Regressive taxation: as income rises the proportion of taxation paid falls. E.g., tax on a litre of petrol
represents a greater proportion of income for a low-income earner than a high-income earner.
Proportional taxation: as income rises the proportion of tax remains constant. E.g., 10% of earnings
regardless of income level.
Ad valorem principle (according to value): tax calculated as a percentage of the value of the item.
E.g., VAT is charged on many goods at the standard rate of 20%.

Types of Tax
Income tax: payable by individuals on their earnings and investment income
National insurance: payable by employed and self-employed individuals, businesses with employees
Capital gains tax (CGT): payable by individuals who dispose of capital assets (land, buildings, shares)
Inheritance tax: payable by executors on the value of the estate of a deceased person
Corporation tax: payable by companies on their income and gains
Value-added tax (VAT): payable by the final consumer on many goods and services
Income tax, NIC and VAT are main % of total tax revenue.

Direct and Indirect Taxes
Direct Taxes
- Charged on income, profits or other gains and are either deducted at source or paid directly
to the tax authorities
- The main direct taxes which are payable by individuals are income tax, capital gains tax, and
inheritance tax
- Main direct tax payable by companies is corporation tax
- All of these taxes are administered by HMRC, formed by Inland Revenue and HM Customs.
National Insurance contributors are administered by the National Insurance Contributions
Office (NICO) of HMRC

,Indirect Taxes
- Taxes on spending; charged when a taxpayer buys an item and are paid to the vendor as part
of the purchase price of the item. Vendor’s duty to pass the tax on to tax authorities.
- Indirect taxes include value added tax (VAT), stamp duty, customs duties and the excise
duties levied on alcohol, tobacco, and petrol
- The only indirect tax considered in this module is VAT.

Structure of the UK Tax System
- HMRC consists of a large body of civil servants headed by Commissioners for Revenue and
Customs, where Commissioners are appointed by the Queen in accordance with
recommendations made by the Treasury
- This government department is managed by the Chancellor of the Exchequer and has overall
responsibility for the public finances of the UK
- Routine work is carried out by officials known as Officers of Revenue and Customs
- Main function is to “assess” a taxpayer’s tax liability and to ensure that the correct amount
of the tax is paid
- Under self-assessment, a taxpayer may calculate their own tax liability, in which case HMRC
officials will check that the self-assessment is correct

Sources of Tax Law
HMRC interpret the law and issue guidance on how to implement the law via:
Statute Law (tax legislation)
- Adherence to statute law is mandatory
- Usually updated annually by one finance act which follows the proposals made by the
Chancellor of Exchequer in the annual budget statement
Case Law
- Refers to decisions made in tax cases brought before the courts
- Statements of practice provide HMRC’s interpretation of the law and how they apply
Extra-statutory Concessions
- Allow a relaxation of the strict letter of the law in certain circumstances; a concession is
usually given where undue hardship would otherwise occur
HMRC
- Briefs provide detailed technical guidance on a specific tax issue that has arisen in the year
- Manuals give guidance on the interpretation of the law, produced for HMRC staff
- Websites, leaflets, and booklets are aimed at the general public. Provide explanations of
various tax issues in non-technical language

Interaction of UK and Overseas tax systems
Bilateral double taxation treaties
- Take precedence over UK tax law by either exempting certain overseas income from UK tax,
or providing relief where tax is suffered in two countries on the same income
Influence of the European Union
- The EU claims to remove trade barriers and distortions due to the different economic and
political policies in member states
- Although EU members don’t have to align their tax systems, members can agree to jointly
enact specific laws known as directives e.g., VAT policies are aligned to European legislation

,Tax Avoidance vs. Tax Evasion
Tax avoidance is legal, whereas tax evasion is not.
Tax evasion
- Taxpayers are required to provide information which is correct and complete
- Dishonest behaviour (such as money laundering) is known as tax evasion
- The law relating to tax evasion was strengthened by the Finance Act 2000, which introduced
a statutory offence of fraudulently evading income tax
- Minor offenders may be sentenced to up to six months in prison and may be fined up to
£5,000 (“statutory maximum”), major penalties are increased to a maximum of seven years
in prison and/or an unlimited fine.
Tax Avoidance
- Taxpayers are entitled to organise their financial affairs in any way they please and may do
so in such a way that their tax burden is minimised e.g., a taxpayer might legally avoid
income tax by moving funds from a bank account which pays taxable interest to an ISA
which pays tax-free interest
- Tax avoidance is acceptable within limits but, over years, tax advisors have shown great
ingenuity in devising complex tax avoidance schemes to exploit “loopholes” in the tax
system. These schemes often result in a significance loss of tax revenue until eventually
blocked by anti-avoidance legislation.
- In an attempt to limit the effectiveness of tax avoidance schemes, a disclosure regime has
been introduced which requires certain disclosures by those who devise/use such schemes

Professional and Ethical Guidance
Fundamental principles of the ACCA is to adopt an ethical approach to work, employers and clients;
acknowledge their professional duty to society; maintain an objective outlook; provide professional,
high standards of service, conduct, and performance at all times.

Code of Ethics: OPPIC
O: Objectivity
Members should not allow bias, conflicts of interest or the influence of others to override objectivity
P: Professional competence and duty of care
Members have an ongoing duty to maintain professional knowledge and skills to ensure that a
client/employer receives competent, professional service based on current developments.
Members should be diligent and act in accordance with applicable technical and professional
standards when providing professional services.
P: Professional behaviour
Members should refrain from any conduct that might bring discredit to the profession.
I: Integrity
Members should act in a straightforward and honest manner in all professional and business
relationships.
C: Confidentiality
Members should respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information to third parties

Money Laundering Regulations
Money laundering includes benefiting from or concealing the proceeds of a crime.
All businesses within regulated sectors must appoint a Money Laundering reporting Officer (MLRO)
within the firm, who decides whether a transaction should be reported to the National Crime Agency
(NCA). When a report is made the client should not be informed as this may account to “tipping off”,
which is an offence. A report to NCA does not remove the requirement to disclose the information
to HMRC.

, Dishonest Conduct of Tax Agents
There is a civil penalty of up to £50,000 for dishonest conduct of tax agents. In cases where the
penalty exceeds £5,000 HMRC may publish details of penalised tax agent. With the agreement of the
Tax Tribunal, HMRC can access the working papers of a dishonest agent.

07/10/2021

Income Tax
Basis of Assessment
- Individuals are assessed to income tax on their income arising in a tax year. Tax year runs
from April 6th to April 5th in the following year e.g. April 6 th 2020 – April 5th 2021 is the tax
year 2020/21.
- Personal allowance (PA) is the amount of tax free income that every taxpayer is entitled to
each year (£12,500)
Assessable Persons
- All individuals (including children) are chargeable to income tax
- Both spouses within a marriage are treated as separate individuals for tax purposes
- Tax residency of an individual determines how much income will be assessed to UK tax
- All persons resident for tax purposes in the UK are assessed to UK tax on worldwide income
Married Couples & Children
- Special rules governing the allocation of income where assets are jointly owned
- Income generated from assets jointly owned is split 50:50 regardless of the actual
percentage ownership (unless HMRC elects to apply)
- Children and students are taxable persons, but their income is expected to be below their PA
in any tax year therefore no tax liability actually arises on their income

Taxable Income Table




Classification of Income
There are different sources of income:
- Income from employment and self-employment
- Income arising from the ownership of property
- Investment income
- Income from pensions
- Income exempt from income tax
Sources of income are classified as non-savings income, savings income, or dividend income because
they’re taxed at different rates.

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