These principles of taxation notes are a collection of materials from lectures and the study manual provided by the ICAEW. They are a good way to revise and recap content learnt without having to go through the worked examples and questions in the study manual. These are complete notes for everythi...
The government aims to encourage or discourage certain types of economic activity through taxation
and plan long-term to achieve this to boost the levels of economic activity. By placing taxes on
products that provide us with a negative externality the extra costs to the country such as the NHS or
road networks are mirrored. Principally, they try to encourage;
Savings such as offering tax incentives such as tax relief on pension contributions
Donations to charity such as Gift Aid
Investment into business
Entrepreneurs who build their own business through reliefs from capital taxes
And discourage;
Smoking and alcoholic drinks, through substantial taxes
Motoring, through vehicle excise duty and fuel duties
Social Justice
Tax can be used in several ways to make the economy and/or individuals better off. The free market
approach is where there are low levels of taxation applied in an economy and hence people can keep
their profits and spend it as they wish. Arguably, since it would be reinvested into the economy,
everyone would be better off in the long term. Another strategy is to use it to redistribute income so
that the poor are better off. There are several principles that can be used;
Direct/Indirect Principle – Direct taxes (income tax, corporation tax, capital gains tax, national
insurance contributions) are only paid by those who generate the funds to pay the tax. Indirect taxes
(VAT, excise duty) relate to consumption and it is up to individuals whether they spend money on
such goods.
Progressive/Regressive Principle – Progressive taxes takes a larger percentage from high-income
earners than it does from low-income individuals. Regressive taxes rise as a proportion of income
falls, the amount of tax paid on a good is the same for all consumers and therefore low income
earners would pay more of a proportion of their income to purchase the product.
, Ability to pay/Benefit Principle – Taxes should be based on the ability of the taxpayer to pay (income
tax, capital gains). The benefit principle states that taxes should be based on the benefit that the tax
payer receives for example everyone should pay towards defence.
Neutrality Principle – Tax should be neutral to not distort choice about economic decisions.
Equity Principle – Tax should be equitable and just i.e. progressive tax
Efficiency Principle – The cost of collecting the tax should be low in relation to the tax raised
Environmental Concerns
The taxation system is attempting to accommodate environmental concerns such as sources of
energy and global warming. There are a few taxes that can be implemented to help the environment;
Climate change levy on businesses in proportion to their energy consumption.
Landfill tax to discourage the use of landfill sites for waste disposal and to encourage
recycling.
Taxes on motor vehicle based on carbon emissions, such as cars provided to employees and
vehicle excise duty, to encourage the use of more environmentally friendly vehicles.
External Influences
Membership of the EU and increasing globalisation has meant that the UK government has had to
take much more account of external influences in setting its taxation policies. The EU has the power
to introduce directives that become law in each member state, these still allow each country
sovereignty i.e. they can decide the amount of tax applied. An example of external influences is;
The Organisation for Economic Cooperation and Development’s model tax treaty forms the
basis of many of the UK’s international tax treaties.
Liability to Tax and Tax Administration
Individual – tax year is 6th April to the 5th April
An individual may be liable to the following taxes: Income Tax; this can be income from investments,
income from employment and income from a business of which they operate as a sole trader or as a
member of a partnership, Capital Gains Tax; on the disposal of capital assets owned by them as
investments, National Insurance Contributions; this can be paid as an employee, a sole trader or
partner and as an employer, Value Added Tax; this could be either as the supplier of goods and
services or as the final consumer of goods and services.
Partnership - tax year is 6th April to the 5th April
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