The administration of tax is done by Her Majesty’s Revenue and Customs (HMRC). The different sources of revenue and the interaction of the tax system of UK with that of other tax jurisdictions are considered in this blog along with the agreements of double taxation. Finally, the avoidance and evasion of tax for the individuals and companies after ltd UK registration is discussed.
Various Sources of Revenue Law
The acts of parliament, case law and statutory instruments are the sources of revenue law. The imposition of tax is done by the statute. This consists not only the acts of parliament but also the regulations that the statutory instruments lay down. The case law interprets and amplifies the statute.
The issuance of the following elements is done by the HM Revenue and Customs:
The HM Revenue and Customs website (www.hmrc.gov.uk) provides a huge deal of information and the publications of HMRC can also be found on the site.
Although the publications of HMRC, in general, do not have the force of law, some of the notices of VAT do have it where the delegation of power has been done according to the regulations. For example, this is applicable to some specific administrative aspects of the scheme of cash accounting.
Interaction of Tax System of UK with other Jurisdictions of Tax
Membership of UK with the European Union (EU)
The membership of Great Britain with the European Union has a remarkable effect on the taxes of UK, specifically the value added tax (VAT).
The EU’s membership has a significant impact although yet, there is not any general requirement imposed on the states of the European Union to shift to a common system of tax or to bring in harmony their individual systems of tax. However, the states may come under an agreement in a joint venture to enact some particular laws, called as the ‘directives’, that give a common taxation code within the specific areas of their systems of taxation.
The most important example, in this regard till date is the value added tax (VAT), in which case the UK has an obligation to pass its laws by getting its confirmation with the rules that have been laid down in the legislation of the European Union (EU). The directives of the VAT still permit for a specific amount of flexibility between the member states, such as in setting the taxation rates. Only a limited amount of examples exists as far as the directives in the area of direct taxes are concerned, in general concerned with dividend of cross-border, corporate reorganizations and payments of interest.
However, under the treaties of the European Union, the member states also have the obligation to allow freedom of movement for the workers, freedom of movement of the capital and freedom to establish the operations after business name registration UK within the EU. These provisions of treaty have a direct effect, i.e. a taxpayer has the entitlement of making a claim that a provision of UK tax is not effective as it results in the breaching of one or more of the freedoms affirmed according to the European law.
It has been held repeatedly by the European court of justice that the provisions of taxation that provide a discrimination against the non-residents (which means that the treatment of non-resident is done less favorably as compared to a resident under a similar situation) are in contradiction with the European law until and unless there exists a very strong justification of the interest of public.
There also exist some provisions related to the exchange of information between the authorities of the European Union Revenue.
Membership of UK with Other Countries
Generally, the tax jurisdiction rules of other countries do not interact directly with the UK tax. However, the United Kingdom has entered into an agreement of double tax with different countries, as brought into discussion below.
Agreements of Double Taxation
The designing of the agreements of double taxation is done for the protection against the risk of double taxation in the case where the same gains or income are liable to tax in two countries.
The designing of the agreements of double taxation is done primarily for the protection of risk. Consider an example, that an individual may possess a source of income which is made liable to tax in the country in which the arising of income took place but is also made subject to taxation in the country of residence of the individual. It can be provided by the agreement that the taxation of the income is only to be done in one country or that the credit should be given for the arising of tax in one country against the charge of tax in another country.
The agreements of double taxation may also involve the provisions of non-discrimination that refrain a foreign national from having the treatment in a harsher manner as compared to a national of the country. The agreement of double taxation also usually involves the rules for information exchange between the different authorities of revenue.
Avoidance and Evasion of Tax
The avoidance of tax is a minimization of the liabilities of tax in a legalized way while the evasion of tax is considered to be illegal.
The evasion of tax comprises of seeking to make a payment of tax which is too less by misleading the HMRC deliberately. This can be done by either:
The evasion of tax is not legal. In general, the minor cases of evasion of tax are settled out of the boundaries of court upon the payment of penalties. However, at present, there exists a statutory offence for the evasion of income tax, that enables such matters as deliberate failure for the operation of PAYE for the dealing of it in the courts of magistrates.
Serious cases of evasion of tax, specifically the ones that involve fraud, will continue to be the subject of prosecutions of criminal nature that may result in imprisonment and fines on conviction.
Avoidance of Tax
The definition of the avoidance of tax is more difficult to explain. In a very wide sense as the case for individuals or set up company London or UK, it could be explain as any legalized method for the reduction of burden of tax, such as taking benefit of opportunities for the tax shelter, as offered explicitly by the legislation of tax such as ISAs. However, in a common manner, the term is used in a narrower sense, to denote ingenious arrangements whose designing is done for the production of unintended advantages of tax for the taxpayer.
The examination of the effectiveness of the schemes of tax avoidance has been done many times in the courts. Traditionally, the rules of tax were applied to the transactions’ legal form, although the qualification of this principle was done in later cases. It was held that the courts could decide to disregard transactions that were preordained and designed merely for the avoidance of tax.
Traditionally, the response of the HM Revenue and customs has been seek to make amendment in the loopholes or spaces in the law as they are brought forward to their attention. Generally, it is pre-assumed that the effect of such changes must not be backdated.
The promoters of some specific schemes of tax avoidance have to face some obligations regarding disclosure, and on the taxpayers, in order to provide details to HMRC of any such schemes bought into utilization by the taxpayer. This lets the HMRC to introduce measures for anti-avoidance as soon as a chance comes.
What is the Difference between Evasion and Avoidance?
In general, the difference between the evasion and avoidance of tax is clear cut, as the avoidance of tax is an activity which is completely legal and does not involve anything that may mislead the HMRC. However, some arrangements for the avoidance of tax may be subject to the General Anti-Abuse Rule (GAAR).
Special care should be taken when giving an advice in some specific scenarios. For example, a taxpayer either having company formation of United Kingdom or working somewhere else, and does not return gains or income due to the fact that he has a wrong perception that he has avoided the need of payment of tax successfully. Then he may be guilty for the evasion of tax.
Approach should always be Professional and Ethical!
In the case that a client makes a material error or omission while filing a tax return, or does not succeed in the correction of error, failure or omission when advised, the accountant has the right to stop acting for the client, inform HMRC of this cessation and make a report of money laundering.
According to self-assessment, all the taxpayers, individuals and companies after ltd UK registration, have the responsibility of disclosure of taxable income and gains and subtractions and the reliefs that they make a claim of against them.
Many taxpayers make arrangements for their accountants for the preparation and submission of their tax returns. Still, the taxpayer is responsible for the submission of the return and for the payment of whatever tax becomes due: the accountant is only acting as the agent of taxpayer.
The practicing accountant acts for the taxpayers often while dealing with HMRC and situations can occur in which the accountant has concerns as to whether the taxpayer is behaving honestly while providing the information to the accountant for further transmission.
The dealing of the accountant is such scenarios is a case of professional judgement, but in making the decision for the action to be taken, the accountant will be required to uphold the standards of the Association of Chartered Certified accountants. He should act objectively and honestly, with diligence and care, and must possess the highest standards of integrity.
If the accountant gets to know of a material omission or error in the tax return of a client or of a failure in filing a desired return of tax, he is then responsible for giving an advice to the client for the omission or the error and recommend that a disclosure is made to HMRC.
After having some reasonable time to reflect, if the client does not correct the error, failure or omission, or give an authority to the accountant to do so on his behalf, the accountant must inform the client in a written form that he cannot act for the client any longer.
The accountant should also give a notification to HMRC that he no longer works for the client but must not tell the reason for the cessation of acting.
The accountants who have a suspicion of activities of tax evasion by a client, will commit an offence if they do not report the suspicions. The report should not be disclosed to the client or anyone else, as this can lead to the criminal offence of ‘tipping-off’.