Taxation

A2: The UK Tax System and its Administration | Principal Sources of Revenue Law and Practice (ACCA TX)

Accounks - ACCA TX A2 - Principal Sources of Revenue Law and Practice

The Principal Sources of Revenue Law and Practice describes the overall structure of the UK tax system; states the different sources of revenue law; describes the organisation HM Revenue & Customs (HMRC) and its terms of reference; explains the difference between tax avoidance and tax evasion, and the purposes of the General Anti-Abuse Rule (GAAR); explains how to appreciate the interaction of the UK tax system with that of other tax jurisdictions; explains how to appreciate the need for double taxation agreements and explains the need for an ethical and professional approach.

Principal Sources of Revenue Law and Practice

a. Describe the overall structure of the UK tax system.

The UK Tax system is made up of four (4) main arms:

  • Her Majesty’s Treasury – imposes and collects taxation and is headed by the Chancellor of the Exchequer
  • Her Majesty’s Revenue & Customs (HMRC) – administration for the collection of taxes. Headed by commissioners who implement statute law and oversee the process of tax administration via district offices and accounting and payment offices
  • Crown Prosecution Service – provides legal advice and conducts criminal prosecution
  • Tax Tribunal – Hears tax appeals and consists of the First Tier Tribunal (simple cases) and the Upper Tribunal (complex cases and appeals against decisions in the First Tier Tribunal)

 b. State the different sources of revenue law.

 In the UK, the sources of revenue law are:

  • Acts of Parliament
  • Regulations laid down by Statutory Instruments which detail tax legislation
  • Case law which interprets and amplifies tax legislation

In some cases, the HMRC has been delegated some power under certain regulations.

c. Describe the organisation HM Revenue & Customs (HMRC) and its terms of reference.

Her Majesty’s Revenue and Customs (HMRC) responsibilities under certain regulations are:

  • Statements of practice – Detail how the HMRC will apply the law
  • Extra statutory concessions – Details the circumstances where the HMRC will not apply the letter of the law where it would be deemed unfair
  • Revenue and customs briefs – Give HMRC’s views on specific points
  • Internal guidance manuals – HMRC’s operating manuals which are available to the public
  • Press releases – Provide details of specific tax issues
  • Pamphlets – Explain various tax issues in non-technical terms
  • Agent updates – Provide guidance for tax practitioners

d. Explain the difference between tax avoidance and tax evasion, and the purposes of the General Anti-Abuse Rule (GAAR).

Tax evasion involves any action to evade taxes through illegal means. This includes:

  • Suppressing information required by the HMRC
  • Deliberately providing the HMRC with false information

Tax avoidance involves the use of any action to reduce one’s tax burden through legal means. This includes:

  • Using available allowances, exemptions and reliefs
  • Spouses dividing ownership of assets to benefit from lower tax rates

The General Anti-Abuse Rule (GAAR) allows the HMRC to counteract tax advantages that arise from abusive tax arrangements. The HMRC may counteract tax advantages but it has to follow certain requirements which must be made on a “just and reasonable” basis.

Tax advantages include:

  • “Relief of additional relief from tax
  • Repayment or increased repayment of tax
  • Avoidance or reduction of a charge to tax
  • Avoidance of an assessment to tax
  • Deferral of a payment of tax of advancement of a repayment of tax
  • Avoidance of an obligation to deduct or account for tax”

Abusive tax arrangements are arrangements that cannot be regarded as a reasonable course of action if they lead to unintended results with at least one abnormal step, and therefore exploit loopholes in the tax provisions.

Examples of abusive tax arrangements include those that result in:

  • Less income, profits and gains
  • Greater deductions and losses
  • Claims for the repayment of tax that has not and may not be paid
 Quick Tip: Tax evasion is illegal and tax avoidance is legal, but some tax avoidance arrangements may be subject to the GAAR. 

e. Appreciate the interaction of the UK tax system with that of other tax jurisdictions.

Membership of the European Union (EU) has impacted UK taxes. EU members are not required to align their tax systems. But in some situations, directives, which are agreements to jointly enact specific laws may be issued. Directives provide for a common code of taxation within particular areas of the countries’ taxation systems. An example of this is the Value Added Tax.

For more information on how value added tax is treated in the EU, please refer to BPP’s ACCA Taxation study guide.

 f. Appreciate the need for double taxation agreements.

“Double taxation agreements between countries are designed to protect against double taxation where the same income or gains are taxable in two countries.” These agreements take precedence of UK law and may either exempt overseas income from UK tax or provide tax relief if items have been taxed in two countries.

g. Explain the need for an ethical and professional approach

Given the increased prevalence of financial crimes and money laundering, regulators, tax payers and finance professionals like accountants, must always take an ethical and professional approach to the tax return process.

Tax payers and accountants should always bear the following in mind:

  • The tax payer is responsible for submitting the return and paying taxes where required
  • Accountants must uphold the standards of the ACCA and adhere to the ACCA’s Code of Ethics and Conduct
  • If the accountant becomes aware of a material error or omission in the client’s tax return, they must advise the client of it and recommend that the HMRC be notified
  • If the accountant advises the client of the material error or omission and the client does not correct it, the accountant should inform the client in writing that they will not represent the client any longer
  • The accountant should notify the HMRC in writing that they no longer represent the client
  • The accountant should also report the client’s refusal to correct the error and the facts surrounding the incident to the Money Laundering Officer or the appropriate authority if the accountant is a sole practitioner
  • Accountants are guilty of an offence if they suspect or are aware that their client has engaged in tax evasion activities and do not report them
 Quick Tip: The fundamental principles of the ACCA’s Code of Ethics and Conduct are integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour. 

Note: Excluded Topics – Specific anti-avoidance legislation.

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