INTRODUCTION TO UK TAX SYSTEM

Chapter 1 Introduction to Tax Tax is defined as the share of government in the income of a person and it is the main source of revenue for any country. Types of Taxes There are two types of taxes: 1. Direct Tax 2. Indirect Tax Direct Tax Tax that is levied on the income of a person and is paid directly to the government by the person is called a direct tax. Types of Direct Tax There are two types of direct taxes: 1. Revenue tax 2. Capital tax Types of Revenue Taxes 1. Income tax 2. Corporation tax Types of Capital Taxes 1. Capital Gains Tax 2. Inheritance Tax Indirect Tax Tax that is levied on other than the income of a person and is paid to the government through an intermediary. The most common example of an indirect tax is VAT. Person Every taxpayer is called a person and it includes companies, partnerships and individuals. The overall structure of the UK Tax System The treasury formally imposes and collects tax. The management of the treasury is the responsibility of the Chancellor of the Exchequer. The administrative function for the collection of tax is undertaken by HMRC. 1 tax paid on sale of capital assets by company, individual or partnership tax paid on the death of an individual on his property tax paid by an individual on his incomes tax paid by a company on its profits

The HMRC staff is referred to in the tax legislation as the Officers of the Revenue and Customs. They are responsible for supervising the self-assessment system and agreeing tax liabilities. Officers who collect tax may be referred to as the Receivable Management Officers. These officers are the local officers who are responsible for following up amounts of unpaid tax referred to them by the HMRC accounts office. The Revenue and Customs Prosecutions Office has been established to provide legal advice and institute and conduct criminal prosecutions in England and Wales where there has been an investigation by HMRC. Tax appeals are heard by a tax tribunal which is made up of two tiers: 1. First tier tribunal 2. Second tier tribunal Many tax payers arrange for their accountants to prepare and submit their tax returns. The taxpayer is still the person responsible for submitting the return and for paying whatever tax becomes due. The accountant is only acting as the taxpayers agent. Different sources of law Taxes are imposed by statute. This comprises not only acts of the parliament but also regulations laid down by statutory instruments. Statute is interpreted by case law. HMRC also issues: 1. Statement of practice, setting out how they intend to apply the law. 2. Extra-statutory concessions, setting out circumstances in which they will not apply the strict letter of the law where it would be unfair. 3. A wide range of explanatory leaflets. 4. Business economic notes. There are the notes on particular types of business, which are used as background information by HMRC and are also published. 5. The tax bulletin. This is a newsletter giving HMRCs views on specific points. 6. The internal guidance, a series of manuals used by HMRC staff. 7. Working together, for tax practitioners. Tax Avoidance Tax avoidance is the reduction in tax liability by using legal methods. Tax Evasion Tax evasion is the reduction in tax liability by using illegal methods. Tax evasion is a criminal fraud and it results in fine, imprisonment or both. The need for an ethical and profession approach Under self-assessment, all taxpayers are responsible for disclosing their taxable income and gains and the deductions and reliefs they are claiming against them.

The practicing accountant often acts for the taxpayers in their dealings with HMRC and situations can arise where the accountant has concerns as to whether the taxpayer is being honest in providing information to the accountant for onward transmission. How the accountants deal with such situations is a matter of profession judgment, but in deciding what to do, the accountant will be expected to uphold the standards of ACCA. He must act honestly and objectively, with due care and diligence and showing the highest standards of integrity.