What are the factors affecting the function of taxation system in setup UK?


The blog comprises on discussion on the tax system in the United Kingdom that is affected by the environmental, social and economic factors of a country and how they cause raising of taxes. The administration of tax in the UK when there is an interaction with the foreign tax jurisdictions is also considered. In a nutshell, after reading the blog, you will be aware of the broad features of the tax system. The main topics include the overall purpose and function of taxation in a modern economy including the social factors, economic factors and the environmental factors. The second part brings into discussion the different types of taxes in the UK including the revenue and capital taxes and the direct and indirect taxes, closing the article with the discussion of the overall system of tax and its structure in the Great Britain.

Factors affecting the Function of Taxation

The tax facilities of the government may be affected by the economic, social and environmental factors.

Economic Factors

The taxation of government, in terms of economic analysis, gives the representation of a withdrawal from the economy of UK while its expense acts as an injected element into it. So the net position of the government in terms of taxation and expense, along with its public sector acquiring facilities, affects the level of economic activity within the UK.

The government is in favor of long-term planning, at present publishing and then sticking with the plans of three years for expenditure. This represents the proportion of overall resources of the economy whose allocation will be done by the government and how much will the private sector gets.

This may affect the demand for some specific types of goods, such as, education and health on one hand that are the result of public spending, and consumer goods on the other hand that occurs due to private spending. The changing levels of demand will have an impact on the levels of employment within the various sectors, and also on the profitability of various suppliers of private sector.

The government makes use of the tax policies for the encouragement and discouragement of specific types of activity within the total proportion left with the private sector.

The government encourages:

  • Saving on the individual’s part, by making an offer of incentives of tax, for example, tax-free individual savings accounts and relief for tax on the pension contributions.
  • Entrepreneurs who register a business in UK, with the help of reliefs from capital gains tax.
  • Donations made to the charities with the help of Gift Aid Scheme.
  • Making investment in machinery and plant with the help of capital allowances.

The government discourages:

  • Motoring with the help of fuel duties.
  • Alcoholic drinks and smoking, with the help of duties placed on each kind of product.

The governments can argue (and they also do) that, to some extent, these latter duties and taxes mirror the extra prices to the country as a whole of such behaviors, for example, the price of coping with the illnesses related to smoking. However, it is required by the government to raise money in order to spend it in the areas where no consumers exist on whom the obligatory taxes can be levied, e.g. law and order, defense, aid from offshore company formation UK or a government overseas, and the price of running the parliament or the government.

Social Factors

It is considered just by some people and unjust by others, but the social justice is provided from the heart of politics. A clear example is the attitudes to the wealth’s redistribution.

Greater amounts of capital and income are generated by some individuals in a free market as compared to others and once wealth is obtained, it grows with the help of reinvestment of the acquired investment income. This can result in the rich getting richer and the poor poorer, with the economic power being rendered concentrated in comparatively few hands.

A value judgment is made by some electors that the countering of these trends should be done by the policies of taxation that redistribute wealth and income away from the rich towards the poor. This is one of the important arguments in the favor of some sort of inheritance tax and capital gains tax, the taxes that cost a great deal for their collection, as compared to the raised revenue.

There are different social effects of different taxes. These include:

  • Direct taxes on the basis of profits and income (income tax), wealth (inheritance tax) or gains (capital gains tax) tax only those who own these resources.
  • Indirect taxes whose payment is made by the consumers (VAT) encourage saving and discourage spending. Nil or lower rates of tax may be levied on essentials, for example, food.
  • Progressive taxes, for example, income tax, where the proportion of gains or income paid over in tax increases with the rise in gains or income, target those who can afford their payment. Personal allowances and the taxation rates can be adjusted in order to make sure that those on low incomes pay no or little tax.
  • Taxes on wealth and capital make sure that the people are not able to avoid taxation by having a zero income and just living off the capital assets’ sale.

Almost everyone will be involved in the argument that the taxation must be fair or equitable, but many different views exist when deciding what is equitable.

A tax is said to be an efficient tax in the case where the collection costs are low as compared to the payment of tax made over to the government. Figures for the costs of administration suffered by the departments of government for the operation of taxation systems, is published by the government. Also, there are compliance costs that should be considered. Compliance costs are the costs suffered by the taxpayer, whether they be the individual making the preparation of returns of tax according to the system of self-assessment or the employment carrying out the operation of PAYE system in order to collect income tax or the collection of value added tax after parties register a business in UK. It may be less efficient to collect some of the more equitable taxes.

Environmental Factors

The system of taxation is showing slow movement for the accommodation of environmental concerns that have come to fore over the period of last twenty years or so, specifically the concerns about sources of energy that are renewable or non-renewable and global warming.

The changes of tax that have been made for the environmental reasons include:

  • The levy of climate change, raised on businesses in proportion to their energy consumption. It’s claimed aim is the encouragement of reduced consumption.
  • The levied landfill tax on the landfill sites’ operators on each ton of waste of rubbish which is processed at the site. It’s claimed aim is the encouragement of recycling by charging a tax on the waste that is to be stored.
  • The changes made in the rules on purchase or lease of cars, and private fuel and cars taxation (provided for employees of a company in setup UK) that are running on the carbon dioxide emissions. Its claimed aim is the encouragement of manufacturing and purchase of low carbon dioxide emission cars for the reduction of emissions made in the atmosphere due to driving.

The individuals will only feel the last of these directly, even if the other taxes are passed on by being factored into the overheads of a business.

Taxes and their Different Types

Revenue is raised by the central government through a broad range of taxes. The making of tax law is done by the statute.

The main taxes, their suffering parties and respective sources are mentioned below:

  • Income tax suffered by individuals or partnerships (Source: Income Tax Trading and other income Act 2005 – ITTOIA 2005; Capital Allowances Act 2001 – CAA 2001; Income Tax earnings and Pensions Act 2003 – ITEPA 2003; Income tax Act 2007 – ITA 2007).
  • Corporation tax suffered by companies after companies house register limited company (Source: Corporation Tax Act 2010 – CTA 2010; Corporation Tax Act 2009 – CTA 2009; Capital Allowance Act 2001 - CAA 2001).
  • Inheritance tax suffered by the individuals and trustees (Source: Inheritance Tax Act 1984 – IHTA 1984).
  • Capital gains tax suffered by individuals, partnerships and companies after companies house register limited company (that make the payment of tax on capital gains in the form of corporation tax) – Source: Taxation of Chargeable Gains Act 1992, TCGA 1992
  • The value added tax suffered by businesses, either incorporated or unincorporated (Source: Value Added Tax Act 1994 – VATA 1994).

You may also have to meet national insurance. The national insurance is to be paid by employees, employers and the self-employed.

The acts of finance are passed every year that incorporate proposals set out as a part of the budget. They make changes which are applicable mainly to the upcoming year of tax.

Capital Taxes and Revenue

The type of taxes that are charged on income are known as the revenue taxes. This includes the income tax, national insurance and the corporation tax.

The type of taxes which are charged on wealth or on capital gains are known as the capital taxes. These cover the inheritance tax and the capital gains tax.

Direct and Indirect Taxes

The taxes charged on the gains, income and wealth are known as the direct taxes, such as the income tax, national insurance, capital gains tax, corporation tax and the inheritance tax. The collection of direct taxes is done directly from the taxpayer.

The taxes paid by the consumer to the supplier are known as the indirect taxes. The supplier then passes the payment of tax to the government. An example of the indirect tax is the Value added tax (VAT).

System of UK Tax and its Overall Structure

The administration of tax is done by the HM Revenue and Customs (HMRC). The imposing and collection of tax is done formally by the treasury. The chancellor of exchequer is responsible for the management of the treasury. Her Majesty’s Revenue and Customs (HMRC) operates and undertakes the administrative function for the collection of tax.

In the legislation of tax, the HMRC are known as the officers of the revenue and customs. It is their responsibility to supervise the system of self-assessment and agreeing liabilities of tax. Officers who perform the collection of tax may be called as the receivable management officers. These officers are the local officers who have the responsibility of following up the amounts of the tax unpaid which is referred to them by the accounts office of the HM Revenue and Customs.

The crown prosecution service or the CPS gives institute and legal advice and is responsible for the conduct of criminal prosecutions in the cities of Wales and England where the HMRC has conducted an investigation.

The tax tribunal hears the appeals of tax. This tribunal of tax is made up of two tiers namely the first tier tribunal and the upper tribunal.

The dealing of the first tier tribunal is with most of the cases but not the cases of complex nature. The dealing of the upper tribunal is with the cases of complex nature that either constitutes of important issue of tax law or a huge financial sum. The appeals against the decisions of the first tier tribunal are also heard by the upper tribunal.

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