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INTRODUCTION TO UK TAX SYSTEMChapter 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 Tax2. 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 tax2. Capital tax

Types of Revenue Taxes

1. Income tax tax paid by an individual on his incomes2. Corporation tax tax paid by a company on its profits

Types of Capital Taxes

1. Capital Gains Tax tax paid on sale of capital assets by company, individual or partnership2. Inheritance Tax tax paid on the death of an individual on his property

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.

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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 tribunal2. 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 ofexplanatory 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.

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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.