ch10: the tax and ethical framework

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Last updated 9:42 PM on 4/21/26
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53 Terms

1
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What is the main purpose of taxation?

To raise money for government spending (e.g. infrastructure, NHS).

2
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How does taxation control the economy?

  • Lower taxes → encourage spending

  • Higher taxes → reduce spending

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How does taxation influence behaviour?

Encourages/discourages activities (e.g. pensions vs smoking taxes).

4
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What is neutrality in taxation?

Tax should not influence decisions or favour one activity over another.

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What is efficiency in taxation?

Tax rules should be easy to understand and calculate.

6
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What is simplicity in taxation?
Tax rules should be easy to understand and calculate.
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What is certainty in taxation?
Taxpayers should know how much tax they owe.
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What is effectiveness in taxation?
Tax system raises required revenue.
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What is fairness (equity)?

Tax based on ability to pay

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principles of taxation

  1. neutral

  2. efficient

  3. simple and certain

  4. effective

  5. fair and equitable

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What is tax structure?
How a tax system is organised.
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What is tax base?
The amount being taxed.
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What is tax rate?
Percentage applied to the tax base.
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What is income tax based on?
Income received by individuals.
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What is capital gains tax based on?
Gains on disposal of assets.
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What is national insurance based on?
Earnings from employment/self-employment.
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What is inheritance tax based on?
Transfer of wealth.
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3 models of taxation

  1. progressive

  2. regressive

  3. proportional

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What is a progressive tax?
Rate increases as income increases.
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What is a regressive tax?
Rate decreases as income increases.
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What is a proportional tax?
Same rate regardless of income.
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Who administers taxes in the UK?
HMRC.
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When does the UK tax year run?
6 April to 5 April.
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What is another name for tax year?
Fiscal year / year of assessment.
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What is legislation?
Laws created by government.
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What are Acts of Parliament?
Primary laws passed by MPs.
27
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What are Statutory Instruments?
Detailed rules created by civil servant
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What is case law?
Court decisions interpreting tax law.
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Who decides tax disputes?
Tax Tribunal.
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Does HMRC guidance have legal force?
No
31
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What is HMRC guidance used for?
Explains how HMRC interprets the law.
32
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What is residence?
Whether a person is in the UK in a tax year.
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residence test order

  1. automatically no UK resident tests

  2. automatically UK resident tests

  3. sufficient ties test

34
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When is someone automatically non-UK resident?

  1. have been UK resident in 1 or more of the 3 tax years immeditely preceding the relevent ax year, and have spend Fewer than 16 days

  2. have been UK resident in 1 or more of the 3 tax years immeditely preceding the relevent ax year, fewer than 46 days (if previously non-resident)

  3. working full-time overseas, spend less than 91 days in the UK, have no significant breaks in overseas working and work less than 31 days in the UK

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When is someone automatically UK resident?

  1. 183+ days in the UK

  2. meeting UK home conditions: only home in the UK and owner/rented or lived in the home for atleast 91 days and spent at least 30 days there in the tax year

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What happens if neither test applies?
Use sufficient ties test.
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What are the five UK ties?

  1. Close Family (spouse/minor child)

  2. accommodation - atleasy 1 night

  3. substantive work in the uk - atleast 40 days working 3 hours a day

  4. being in the uk more than 90 days during either of the previous 2 tax years

  5. spending more time in the UK than any other country in the tax year.

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How are UK residents taxed?
On worldwide income and gains.
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How are non-UK residents taxed?
Only on UK income and gains.
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What is tax planning?
Legal use of rules to reduce tax.
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What is tax avoidance?
Using rules in unintended ways to reduce tax.
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Is tax avoidance illegal?
Not always, but may be unethical.
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What is a key feature of tax avoidance?
Artificial transactions.
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What is tax evasion?
Illegal non-payment of tax.
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Give an example of tax evasion.
Not declaring income.
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Who is responsible for tax return accuracy?
The taxpayer.
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What is the advisor’s role?
Prepare and advise, not responsible for final submission.
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What is confidentiality?
Not disclosing client information without permission.
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What should advisor do if error is found?
Inform client and advise disclosure to HMRC.
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What if client refuses to disclose?
Withdraw and report appropriately (MLRO/NCA).
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Who do you report suspicions to?
MLRO or NCA.
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Can advisor disclose info without consent?
Usually no, unless legally required.
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What is the difference between planning, avoidance, and evasion?

Planning = legal, avoidance = grey, evasion = illegal