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S T U D Y PAPER F6 T E TAXATION (UK) X T FA 2009 In this edition approved by ACCA • We discuss the best strategies for studying for ACCA exams • We highlight the most important elements in the syllabus and the key skills you will need • We signpost how each chapter links to the syllabus and the study guide • We provide lots of exam focus points demonstrating what the examiner will want you to do • We emphasise key points in regular fast forward summaries • We test your knowledge of what you've studied in quick quizzes ••ThiNganHang.comWe examine your understanding in our exam question bankWe reference all the important topics in our full index BPP's i-Learn and i-Pass products also support this paper. FOR EXAMS IN JUNE AND DECEMBER 2010 ThiNganHang.com
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First edition March 2007 Fourth edition August 2009 Printed text ISBN 9780 7517 6368 3 (Previous ISBN 9780 7517 4727 0) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library All our rights reserved. No part of this publication may be Published by reproduced, stored in a retrieval system or transmitted, in BPP Learning Media Ltd any form or by any means, electronic, mechanical, BPP House, Aldine Place photocopying, recording or otherwise, without the prior London W12 8AA written permission of BPP Learning Media Ltd. www.bpp.com/learningmedia We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past Printed in the United Kingdom examination questions. The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, unless otherwise stated. Your learning materials, published by BPPLearning Media Ltd, are printed on papersourced from sustainable, managed forests.ThiNganHang.com © BPP Learning Media Ltd 2009 ii ThiNganHang.com
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Contents Page Introduction How the BPP ACCA-approved Study Text can help you pass v Studying F6 vii The exam paper viii Analysis of past papers ix Part A UK tax system 1 Introduction to the UK tax system 3 Part B Income tax and national insurance contributions 2 The computation of taxable income and the income tax liability 13 3 Employment income 27 4 Taxable and exempt benefits. The PAYE system 37 5 Pensions 57 6 Property income 65 7 Computing trading income 73 8 Capital allowances 85 9 Assessable trading income 109 10 Trading losses 121 11 Partnerships and limited liability partnerships 135 12 National insurance contributions 145 Part C Chargeable gains for individuals 13 Computing chargeable gains 155 14 Chattels and the principal private residence exemption 165 15 Business reliefs 175 16 Shares and securities 187 Part D Tax administration for individuals 17 Self assessment and payment of tax by individuals 199 Part E Corporation tax 18 Computing profits chargeable to corporation tax 219 19 Computing the corporation tax liability 229 20 Chargeable gains for companies 239 21 Losses 249 22 Groups 261 23 Overseas matters for companies 271 ThiNganHang.com2425Part F Value added taxAn introduction to VATSelf assessment and payment of tax by companies 279291 26 Further aspects of VAT 309 Exam question and answer bank 319 Tax tables 385 Index 389 Review form and free prize draw Contents iii ThiNganHang.com
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A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft – as well being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: • Photocopying our materials is a breach of copyright • Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your fellow students? We update for a reason.) But the i-learns are sold on a single user license basis: we do not supply ‘unlock’ codes to people who have bought them second hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them? ThiNganHang.com iv ThiNganHang.com
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How the BPP ACCA-approved Study Text can help you pass your exams – AND help you with your Practical Experience Requirement! NEW FEATURE – the PER alert! Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying F6 outlines the content of the paper and the necessary skills the examiner expects you to demonstrate. Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future. Using the Syllabus and Study Guide You can find the syllabus, Study Guide and other useful resources for F6 on the ACCA web site: www.accaglobal.com/students/acca/exams/f6/ The Study Text covers all aspects of the syllabus to ensure you are as fully prepared for the exam as possible. ThiNganHang.comTesting what you can doTesting yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Questions – lots of them – both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v ThiNganHang.com
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Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Tells you what you will be studying in this chapter and the Topic list Syllabusreference relevant section numbers, together the ACCA syllabus references. Introduction Puts the chapter content in the context of the syllabus as a whole. Study Guide Links the chapter content with ACCA guidance. Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. Summarises the content of main chapter headings, FAST FORWARD allowing you to preview and review each section easily. Examples Demonstrate how to apply key knowledge and techniques. Definitions of important concepts that can often earn you Key terms easy marks in exams. Tell you when and how specific topics were examined, or Exam focus points how they may be examined in the future. This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER). Question Give you essential practice of techniques covered in the chapter. Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review. Quick Quiz A quick test of your knowledge of the main topics in the chapter. ThiNganHang.comExam Question Bank Found at the back of the Study Text with morecomprehensive chapter questions. Cross referenced foreasy navigation. vi Introduction ThiNganHang.com
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Studying F6 As the name suggests, this paper examines the basic principles of taxation. This is a very important area for certified accountants as many areas of practice involve a consideration of taxation issues. It also provides a foundation for P6: Advanced Taxation which will be chosen by those who work in a tax environment. 1 What F6 is about The UK tax system The syllabus introduces the rationale behind – and the functions of – the tax system. The taxes It then covers the main UK taxes which apply to individuals and businesses. Income tax and corporation tax cover the widest areas of the syllabus, forming the basis for questions 1 and 2 totalling 55% of the marks. Value added tax is likely to be covered in one of these questions, in which case at least 10 of the 55 marks will be awarded for VAT, although it is possible that a separate question on VAT will be included instead. Capital gains will be covered in Question 3, for which 20 marks will be available. National insurance may be examined in any question on income tax or corporation tax. You will be expected to have a detailed knowledge of these taxes, but no previous knowledge is assumed. You should study the basics carefully and learn the proforma computations. It then becomes straightforward to complete these by slotting in figures from your detailed workings. As well as being able to calculate tax liabilities you will be expected to explain the basis of the calculations and how a taxpayer can minimise or defer tax liabilities Compliance The final part of the syllabus covers the compliance obligations of the taxpayer. Although not a major part of the syllabus it is likely to form an element in one or more questions in the exam. A knowledge of tax is incomplete without an understanding of how the tax is collected. 2 What skills are required? • Be able to integrate knowledge and understanding from across the syllabus to enable you to complete detailed computations of tax liabilities. • Be able to explain the underlying principles of taxation by providing a simple summary of the rules and how they apply to the particular situation. • Be able to apply tax planning techniques by identifying available options and testing them to see which has the greater effect on tax liabilities. ThiNganHang.com3 How to improve your chances of passing Study the entire syllabus – all the questions in the exam are compulsory. This gives the examiner the opportunity to test all major areas of the syllabus on every paper. Practise as many questions as you can under timed conditions – this is the best way of developing good exam technique. Make use of the Question Bank at the back of this Text. BPP's Practice and Revision Kit contains numerous exam standard questions (many of them taken from past exam papers) as well as three mock exams for you to try. Answer selectively – the examiner will expect you to consider carefully what is relevant and significant enough to include in your answer. Don't include unnecessary information. Introduction vii ThiNganHang.com
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Present your answers in a professional manner – use subheadings and leave spaces between paragraphs, make sure that your numerical workings are clearly set out. Even if you make a mistake in your calculations, you will still gain marks if you show that you understand the principles involved. Answer all parts of the question – leaving out a five mark part may be the difference between a pass and a fail. The exam paper The syllabus is assessed by a three-hour paper-based examination. The paper will be predominantly computational and will have five questions, all of which will be compulsory. • Question one will focus on income tax and question two will focus on corporation tax. The two questions will be for a total of 55 marks, with one of the questions being for 30 marks and the other being for 25 marks. • Question three will focus on chargeable gains (either personal or corporate) and will be for 20 marks. • Questions four and five will be on any area of the syllabus and will respectively be for 15 marks and 10 marks. There will always be at a minimum of 10 marks on value added tax. These marks will normally be included within question one or question two, although there might be a separate question on value added tax. National insurance contributions will not be examined as a separate question, but may be examined in any question involving income tax or corporation tax. Groups and overseas aspects of corporation tax will only be examined in question two, and will account for no more than one third of the marks available for that question. Questions one or two might include a small element of chargeable gains. Any of the five questions might include the consideration of issues relating to the minimisation or deferral of tax liabilities. ThiNganHang.com viii Introduction ThiNganHang.com
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Analysis of past papers The table below provides details of when each element of the syllabus has been examined and the question number and section in which each element appeared. Further details can be found in the Exam Focus Points in the relevant chapters. Covered in Text Dec Dec Pilot chapter 2008 June 2008 2007 Paper UK TAX SYSTEM 1 Introduction to the UK tax system INCOME TAX AND AND NATIONAL INSURANCE CONTRIBUTIONS 2 The computation of taxable income and the income tax liability 1a 1b, 1c 1a 1a 3 Employment income 1a 1a 1a 1a 4 Taxable and exempt benefits. The PAYE system 1a 1a 1a 1a 5 Pensions 5 1a 6 Property income 1a 4 1a 7 Computing trading income 1a 8 Capital allowances 1a 1a 9 Assessable trading income 1a 1a, 4 10 Trading losses 5 11 Partnerships and limited liability partnerships 4 12 National insurance contributions 1b 1a CHARGEABLE GAINS FOR INDIVIDUALS 13 Computing chargeable gains 3 3 3 14 Chattels and the principal private residence exemption 3 3 15 Business reliefs 3 16 Shares and securities 3 3 TAX ADMINISTRATION FOR INDIVIDUALS 17 Self assessment and payment of tax for individuals 4 1a 1b CORPORATION TAX 18 Computing profits chargeable to corporation tax 2a 2a, 5 2a 2a 19 Computing the corporation tax liability 3a 5 2a 20 Chargeable gains for companies 3a, 3b 21 Losses 2a 5 22 Groups 2b 23 Overseas matters for companies 2a ThiNganHang.com2425 An introduction to VATSelf assessment and payment of tax by companiesVALUE ADDED TAX 2b2a 2b 1b 26 Further aspects of VAT 2b 1b 2b Introduction ix ThiNganHang.com
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Introduction to the UK tax system Topic list Syllabus reference 1 The overall function and purpose of taxation in a A1(a) modern economy 2 Different types of taxes A2(a), (b) 3 Principal sources of revenue law and practice A3(a)-(c) 4 Tax avoidance and tax evasion A4(a), (b) Introduction We start our study of tax with an introduction to the UK tax system. First we consider briefly the purpose of raising taxes, both economic and social. We next consider the specific UK taxes, both revenue and capital, and also direct and indirect. We see how the collection of tax is administered in the UK, and where the UK tax system interacts with overseas tax jurisdictions.ThiNganHang.com Finally we highlight the difference between tax avoidance and tax evasion. When you have finished this chapter you should be able to discuss the broad features of the tax system. In the following chapters we will consider specific UK taxes, starting with income tax. 3 ThiNganHang.com
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Study guide Intellectual level A1 The overall function and purpose of taxation in a modern economy (a) Describe the purpose (economic, social etc) of taxation in a modern 2 economy. A2 Different types of taxes (a) Identify the different types of capital and revenue tax. 1 (b) Explain the difference between direct and indirect taxation. 2 A3 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) Appreciate the interaction of the UK tax system with that of other tax 2 jurisdictions. A4 Tax avoidance and tax evasion (a) Explain the difference between tax avoidance and tax evasion. 1 (b) Explain the need for an ethical and professional approach. 2 Exam guide You are unlikely to be asked a whole question on this part of the syllabus. You may, however, be asked to comment on one aspect, such as the difference between tax avoidance and tax evasion, as part of a question. 1 The overall function and purpose of taxation in a modern economy FAST FORWARD Economic, social and environmental factors may affect the 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 effect on the level of economic ThiNganHang.comactivity within the UK. The government favours longer-term planning, currently publishing and then sticking to three year 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 different private sector suppliers. Within that overall proportion left in the private sector, the government uses tax policies to encourage and discourage certain types of activity. 4 1: Introduction to the UK tax system ⏐ Part A UK tax system ThiNganHang.com
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It encourages: (a) saving on the part of the individual, by offering tax incentives such as tax-free Individual Savings Accounts and tax relief on pension contributions (b) donations to charities, through the Gift Aid scheme (c) entrepreneurs who build their own business, through reliefs from capital gains tax (d) investment in industrial buildings and plant and machinery through capital allowances; while it discourages: (a) smoking and alcoholic drinks, through the duties placed on each type of product; (b) 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 a 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 running the government and Parliament. 1.2 Social factors Social justice lies at the heart of politics, since what some think of as just is regarded by others as completely unjust. Attitudes to the redistribution of wealth are a clear example. In a free 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 can 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 from the rich towards the poor. This is one 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 very great deal to collect. Different taxes have different social effects: (a) 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 (VAT) discourage spending and encourage saving. Lower or nil 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 taxation can be adjusted so as to ensure that those on very low incomes pay little or no tax. (d) Taxes on capital or wealth ensure that that people cannot avoid taxation by having an income of ThiNganHang.comAlmost everyone would argue that taxation should beas to what is equitable.zero and just living off the sale of capital assets.equitable or ‘fair’, but there are many different views 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 operating the taxation systems, but there are also compliance costs to be taken into account. Compliance costs are those incurred by the taxpayer, whether they be the individual preparing tax returns under the self assessment system or the employer operating the PAYE system to collect income tax or the business collecting value added tax. Some of the more equitable taxes may be less efficient to collect. Part A UK tax system ⏐ 1: Introduction to the UK tax system 5 ThiNganHang.com
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1.3 Environmental factors The taxation system is moving slowly to accommodate the environmental concerns which have come to the fore over the last twenty years or so, especially the concerns about renewable and non-renewable sources of energy and global warming. Examples of tax changes which have been introduced for environmental reasons are: (a) the climate change levy, raised on businesses in proportion to their consumption of energy. Its claimed purpose is to encourage reduced consumption; (b) the landfill tax levied on the operators of landfill sites on each tonne of rubbish/waste processed at the site. Its claimed purpose is to encourage recycling by taxing waste which has to be stored; (c) the changes to rules on the lease or purchase of cars, and taxation of cars and private fuel provided for employees to be dependent on CO emissions. Its claimed purpose is to encourage 2 the manufacture and purchase of low CO emission cars to reduce emissions into the atmosphere 2 caused by driving. Only the last of these will be directly felt by individuals, even if the other taxes are passed on by being factored into a business’s overheads. 2 Different types of taxes FAST FORWARD Central government raises revenue through a wide range of taxes. Tax law is made by statute. 2.1 Taxes in the UK Central government raises revenue through a wide range of taxes. Tax law is made by statute. The main taxes, their incidence and their sources, are set out in the table below. Tax Suffered by Source Income tax Individuals Capital Allowances Act 2001 (CAA 2001); Income Tax Partnerships (Earnings and Pensions) Act 2003 (ITEPA 2003); Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005); Income Tax Act 2007 (ITA 2007) Corporation tax Companies Income and Corporation Taxes Act 1988 (ICTA 1988), CAA 2001 as above, Corporation Tax Act 2009 (CTA 2009) Capital gains tax Individuals Taxation of Chargeable Gains Act 1992 (TCGA 1992) Partnerships Companies (which pay ThiNganHang.comtax on capital gains in the form of corporation tax) Value added tax Businesses, both Value Added Tax Act 1994 (VATA 1994) incorporated and unincorporated You will also meet National Insurance. National insurance is payable by employers, employees and the self employed. Further details of all these taxes are found later in this Text. The other taxes referred to in the previous section, such as inheritance tax and landfill tax, are not examinable at F6. Finance Acts are passed each year, incorporating proposals set out in the Budget. They make changes which apply mainly to the tax year ahead. This Study Text includes the provisions of the Finance Act 2009. This is examinable in June and December 2010. 6 1: Introduction to the UK tax system ⏐ Part A UK tax system ThiNganHang.com
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2.2 Revenue and capital taxes Revenue taxes are those charged on income. In this Text this covers: (a) income tax, (b) corporation tax, and (c) national insurance. Capital taxes are those charged on capital gains or on wealth. In this Text this covers capital gains tax (CGT). 2.3 Direct and indirect taxes Direct taxes are those charged on income, gains and wealth, whilst indirect taxes are those paid by the consumer to the supplier, and thence to the Government. VAT is an indirect tax, whilst income tax, national insurance, corporation tax and CGT are direct taxes. 3 Principal sources of revenue law and practice FAST FORWARD Tax is administered by HM Revenue and Customs (HMRC). 3.1 The overall structure of the UK tax system The Treasury formally imposes and collects taxation. 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 Her Majesty's Revenue and Customs (HMRC). The HMRC staff are referred to in the tax legislation as '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 receivable management officers. These officers are 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 (R&CPO) 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 the Tax Tribunal which is made up of two tiers: (a) First-tier Tribunal, and (b) Upper Tribunal The First Tier Tribunal deals with most cases other than complex cases. The Upper Tribunal deals with complex cases which either involve an important issue of tax law or a large financial sum. The Upper Tribunal also hears appeals against decisions of the First Tier Tribunal. We look at the appeals system in more detail later in this Study Text. ThiNganHang.comMany taxpayers 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 taxpayer's agent. 3.2 Different sources of revenue law As stated above, taxes are imposed by statute. This comprises not only Acts of Parliament but also regulations laid down by Statutory Instruments. Statute is interpreted and amplified by case law. HM Revenue and Customs also issue: (a) Statements of practice, setting out how they intend to apply the law (b) Extra-statutory concessions, setting out circumstances in which they will not apply the strict letter of the law where it would be unfair Part A UK tax system ⏐ 1: Introduction to the UK tax system 7 ThiNganHang.com
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(c) A wide range of explanatory leaflets (d) Business economic notes. These are notes on particular types of business, which are used as background information by HMRC and are also published (e) The Tax Bulletin. This is a newsletter giving HMRC's view on specific points (f) The Internal Guidance, a series of manuals used by HMRC staff (g) Working Together, for tax practitioners A great deal of information and HMRC publications can be found on the HM Revenue and Customs Internet site (www.hmrc.gov.uk). Although the HMRC publications do not generally have the force of law, some of the VAT notices do where power has been delegated under regulations. This applies, for example, to certain administrative aspects of the cash accounting scheme. 3.3 The interaction of the UK tax system with that of other tax jurisdictions 3.3.1 The European Union Membership of the European Union has a significant effect on UK taxes although there is not yet a general requirement imposed on the EU member states to move to a common system of taxation or to harmonise their individual tax systems. The states may, however, agree jointly to enact specific laws, known as ‘Directives’, which provide for a common code of taxation within particular areas of their taxation systems. The most important example to date is VAT, where the UK is obliged to pass its laws in conformity with the rules laid down in the European legislation. The VAT Directives still allow for a certain amount of flexibility between member states, eg in setting rates of taxation. There are only limited examples of Directives in the area of Direct Taxes, generally concerned with cross-border dividend and interest payments and corporate reorganisations. However, under the EU treaties, member states are also obliged to permit freedom of movement of workers, freedom of movement of capital and freedom to establish business operations within the EU. These treaty provisions have ‘direct effect’, ie a taxpayer is entitled to claim that a UK tax provision is ineffective because it breaches one or more of the freedoms guaranteed under European Law. The European Court of Justice has repeatedly held that taxation provisions which discriminate against non-residents (ie treat a non-resident less favourably than a resident in a similar situation) are contrary to European Law, unless there is a very strong public interest justification. There are provisions regarding the exchange of information between European Union Revenue authorities. 3.3.2 Other countries ThiNganHang.comThe UK has entered intowhich prevent income and gains being taxed twice, but often include non-discrimination provisions,preventing a foreign national from being treated more harshly than a national. There are also usually rulesdouble tax treaties with various countries, such as the USA. These contain rules for the exchange of information between the different Revenue authorities. Even where there is no double tax relief, the UK tax system gives some relief for foreign taxes paid. 8 1: Introduction to the UK tax system ⏐ Part A UK tax system ThiNganHang.com
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4 Tax avoidance and tax evasion FAST FORWARD Tax avoidance is the legal minimisation of tax liabilities, tax evasion is illegal. 4.1 Tax evasion Tax evasion consists of seeking to pay too little tax by deliberately misleading HMRC by either: (a) suppressing information to which they are entitled (eg failing to notify HMRC that you are liable to tax, understating income or gains or omitting to disclose a relevant fact, eg that business expenditure had a dual motive), or (b) providing them with deliberately false information (eg deducting expenses which have not been incurred or claiming capital allowances on plant that has not been purchased). Tax evasion is illegal. Minor cases of tax evasion have generally been settled out of court on the payment of penalties. However, there is now a statutory offence of evading income tax, which enables such matters as deliberate failure to operate PAYE to be dealt with in magistrates’ courts. Serious cases of tax evasion, particularly those involving fraud, will continue to be the subject of criminal prosecutions which may lead to fines and/or imprisonment on conviction. 4.2 Tax avoidance Tax avoidance is more difficult to define. In a very broad sense, it could include any legal method of reducing your tax burden, eg taking advantage of tax shelter opportunities explicitly offered by tax legislation such as ISAs. However, the term is more commonly used in a more narrow sense, to denote ingenious arrangements designed to produce unintended tax advantages for the taxpayer. The effectiveness of tax avoidance schemes has often been examined in the courts. Traditionally the tax rules were applied to the legal form of transactions, although this principle was qualified in later cases. It was held that the Courts could disregard transactions which were preordained and solely designed to avoid tax. Traditionally, the response of HMRC has been to seek to mend the loopholes in the law as they come to their attention. In general, there is a presumption that the effect of such changes should not be backdated. The Finance Act 2004 introduced new disclosure obligations on promoters of certain tax avoidance schemes, and on taxpayers, to provide details to HMRC of any such schemes used by the taxpayer. This enables HMRC to introduce anti avoidance measures at the earliest opportunity. 4.3 The distinction between avoidance and evasion The distinction between tax evasion and tax avoidance is generally clear cut, since tax avoidance is an ThiNganHang.comentirely legal activity and does not entail misleading HMRC.However, care should be taken in giving advice in some circumstances. For example, a taxpayer who doesnot return income or gains because he wrongly believes that he has successfully avoided having to pay tax on them may, as a result, be guilty of tax evasion. 4.4 The need for an ethical and professional approach Under self assessment, all taxpayers (whether individuals or companies) are responsible for disclosing their taxable income and gains and the deductions and reliefs they are claiming against them. The practising accountant often acts for 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. Part A UK tax system ⏐ 1: Introduction to the UK tax system 9 ThiNganHang.com
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