PTAX5037 - Analysis of UK Taxation Principles and Tax Law Sources

This report provides an overview of the UK taxation system, comparing progressive and regressive tax models, detailing sources of tax law, and differentiating between tax avoidance and tax evasion. It highlights that progressive taxation minimizes the tax burden for low-income earners, while regressive taxation disproportionately affects them. The UK's tax laws originate from parliamentary acts but are interpreted by the courts. Tax avoidance involves legally exploiting loopholes to reduce tax liability, whereas tax evasion uses illegal methods. The report also covers proportional tax, income tax, national insurance, VAT, excise duties, corporation tax, and stamp duty. It emphasizes the legal implications of tax evasion, including potential imprisonment and fines, and notes taxpayers' rights to appeal HMRC decisions through a tribunal system. Desklib provides access to similar solved assignments and past papers for students.

Running head: PRINCIPLES OF TAXATION
Principles of Taxation
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1PRINCIPLES OF TAXATION
Executive Summary:
The current report has provided a brief overview of the various taxation aspects associated with
the UK. It has been found that in case of progressive taxation system, the low-income earners
enjoy minimised tax burden, while the situation is just the opposite in case of regressive taxation
system. Moreover, the UK is identified to have certain sources of tax and the primary rules are
mentioned in the Acts of the Parliament; however, the ultimate decision lies in the hands of the
courts. Finally, it has been evaluated that tax avoidance and tax evasion are completely different
concepts. This is because tax avoidance involves using the loopholes of the current tax
regulations to minimise tax liability, while tax evasion intends to minimise tax liability by using
unfair means.

2PRINCIPLES OF TAXATION
Table of Contents
Introduction:....................................................................................................................................3
a) Comparison and contrast of the progressive taxation system and the regressive taxation
system:.............................................................................................................................................3
b) Sources of tax law in the UK:.....................................................................................................6
c) Comparison and contrast of tax avoidance and tax evasion:.......................................................8
Conclusion:....................................................................................................................................11
References:....................................................................................................................................12

3PRINCIPLES OF TAXATION
Introduction:
It has been observed that the taxation system and government spending have direct effect
on the economy of a nation. The taxation policies are utilised to affect a number of economic
factors like levels of employment, inflation, exports and imports. These factors are deemed to
affect the behaviour of individuals as well as businesses. The current report would provide a
brief comparison of the progressive tax system and the regressive tax system by citing certain
instances. The next section would focus on the sources of tax law in the UK by taking into
account the primary rules of the tax system of the nation established from a number of resources.
Finally, the report would shed light on the difference between tax avoidance and tax evasion by
providing practical examples.
a) Comparison and contrast of the progressive taxation system and the regressive taxation
system:
The progressive taxation system is a tax system where there is an increase in tax rate with
an increase in the amount of tax. More precisely, it is a tax system where the tax rate depends on
the ability of an individual to pay, which implies high tax is collected from higher-income
individuals and lower tax is obtained from lower-income individuals (Brockmeyer 2014). Hence,
the taxpayers are segregated based on their level of income. This mechanism of tax intends to
minimise the tax incidence of individuals with lower income, since tax incidence is transferred to
the individuals with greater income.
When there is an increase in the amount subject to taxation, there is a decrease in overall
tax rate and this mechanism is deemed to be regressive. Specifically, regressive taxation system
could be defined as the one where increased tax is obtained from low-income earners and lower

4PRINCIPLES OF TAXATION
tax is accumulated from high-income earners (Brusov et al. 2015). The application of this
taxation system is made uniformly, which implies that there has been fair imposition of tax on all
consumers regardless of their income level and their assets. However, since this tax system is not
related to income, the impact is experienced severely by the low-income earners, since they have
to spend greater portion of their income in the form of tax on necessities.
By considering the basic concepts of the two types of taxation system, the following key
differences are observed between them listed in the form of a table:
Basis for comparison Progressive Taxation System Regressive Taxation System
Meaning It is a taxation mechanism, in
which there would be rise in tax
rate with increase in taxable
figure.
This is a taxation system, in
which fall in tax rate is obvious
with rise in amount subject to
tax (Devereux, Liu and Loretz
2014).
Assessment Taxes are imposed on profit or
income depending on the
increasing rate schedule.
In case of this taxation system,
the tax is imposed as a
percentage of the asset bought
owned by the assessee.
Ability to pay In this taxation system, the
ability to pay of the assesssee is
taken into consideration.
In case of regressive taxation
system, the level of income of
the taxpayers is not taken into
account (Devereux and Vella
2014).
Inclusion of taxes Progressive taxation system Regressive taxation system takes

5PRINCIPLES OF TAXATION
includes all direct taxes. into account all indirect taxes.
Rate In case of this taxation system,
the marginal tax rate is higher in
comparison to the average rate
of tax.
For this taxation system, the
average tax rate exceeds the
marginal tax rate.
Benefits In progressive taxation system,
the individuals having lower
income enjoys minimised tax
burden due to the shift of
incidence to the high-income
group (Delgado, Fernandez-
Rodriguez and Martinez-Arias
2014).
In regressive taxation system,
the high-income group enjoys
minimised tax burden due to the
shift of incidence to the low-
income group.
Example Income tax in UK is an instance
of progressive tax. In UK, any
individual is not needed to incur
income tax on the initial
£11,500 spent. Each pound
earned between £11,501 and
£45,000 is taxed at 20%, 40%
for each pound earned between
£45,000 and £150,000 and 45%
above £150,000 (Aspiring
The wealthiest 10% households
of UK hold half of the overall
household wealth of the nation.
In contrast, 90% of the
households incur a
disproportionate portion of
household wealth for a TV
license. This implies that the
bottom 90% incurs a
disproportionate large amount

6PRINCIPLES OF TAXATION
Accountants 2018). compared to the top 10%.
b) Sources of tax law in the UK:
The UK taxation system is applicable throughout the UK, which includes England,
Northern Ireland, Wales, few smaller islands of the British Coast and Scotland (although it has
some particular differences due to the unique legal system of the nation). Moreover, it includes
oil drilling platforms in the British territorial waters, although it does not take into consideration
the Isle of Man, the Republic of Ireland and the Channel Islands (Dyreng, Hoopes and Wilde
2016).
There are mainly three types of taxes in the UK, which are elucidated briefly as follows:
Proportional tax:
Proportional tax imposes the same percentage of tax on all individuals regardless of their
income level.
Progressive tax:
This system imposes a greater percentage of tax on high-income earning individuals. In
addition, this system is involved in utilising a marginal tax rate, which rises with the increase in
the taxable income amount.
Regressive tax:
Under this taxation system, higher taxes are imposed on low-income earning individuals
in comparison to the high-income earning individuals. For instance, if the sales tax in the state is

7PRINCIPLES OF TAXATION
5%, the individual having lower income would incur a higher percentage of the total income in
the form of sales tax (Egger et al. 2015).
There are some main types of taxes in UK, which include primarily the following:
 Income tax is a tax on the income of the individuals, in which the basic income tax rate
is 20% incurred on income over the income tax threshold, as decided on the part of the
government (HMRC)
 National insurance contributions are another kind of income tax, which are dependent on
an identical principle of taking a fixed income percentage
 Consumption tax in the form of Value Added Tax (VAT), which is 17.50% in the UK
 Excise duties on tobacco and alcohol
 Corporation tax, which is a tax on business profit (Corporation Tax Act 2010)
 Stamp duty, which is the tax incurred on the purchase of shares or houses
There has been no single source of UK tax law. The basic rules have been mentioned in the
Parliament Acts; however, the decision is on the courts for interpreting the acts along with
providing much of the details of the tax system (Farnsworth and Fooks 2015). Along with this,
HMRC is engaged in issuing a number of statements, leaflets and notices explaining the ways
through which the laws are enforced in practice. These statements assist in explaining the
interpretation of the law by the tax authority and they have to be complied with unless
challenged in the courts successfully.
The changes to the tax system, which contradict with the speech of the annual budget in
March, are intended primarily in taking effect as from the initiation of the next tax period
(Gemmell et al. 2018). In case of individuals, the tax year termed as year of assessment or fiscal

8PRINCIPLES OF TAXATION
year as well, begins from 6th April to the following 5th April inclusive. For instance, the tax year
2017-18 would start on 6th April 2017 and it would end on 5th April 2018. However, in case of
business organisations, the tax year tends to show slight variation. The tax year for an
organisation initiates from 1st April to the following 31st March.
The taxpayers are needed to maintain effective records for making accurate tax return and if
needed, they could substantiate the figures entered on return. A taxpayer involved in business or
renting property needs to maintain records for five years after 31st January following the end of
the concerned tax year. In opposition, records could be kept for one year after 31st January
following the completion of the tax year.
In addition, the taxpayers need to provide complete and accurate information. The
dishonest behaviour like concealing an income source is tax evasion, which is against the law.
On summary conviction in the court of a magistrate, the offenders might be imprisoned for six
months and they might be imposed a fine of maximum of £5,000 (Griffith, Miller and O'Connell
2014). On a higher court indictment, the penalties are raised to maximum seven years coupled
with unlimited fine.
The taxpayers possess the right of appeal against particular HRMC (Her Majesty’s
Revenue and Customs) decisions. The appeals that could not be settled between HMRC and the
taxpayer are dealt by seeking assistance from the two-tier tribunal system.
c) Comparison and contrast of tax avoidance and tax evasion:
Tax avoidance could be defined as a method where the assessee tries to beat the primary
intention of the law legally by seeking benefits of the drawbacks in the legislation. On the other
hand, tax evasion is a method of minimising tax liability by illicit practices like inflating

9PRINCIPLES OF TAXATION
expenses, suppressing income or showing minimised income (Johnson 2014). However, there are
certain points of differences between tax evasion and tax avoidance, which are stated briefly as
follows:
Basis for comparison Tax Avoidance Tax Evasion
Meaning Tax avoidance signifies the
minimisation of tax liability that do
not breach the taxation rules and
regulations.
Tax evasion denotes the
minimisation of tax liability by
using illegal means so that
lower taxes could be incurred.
Purpose Tax avoidance is basically denoted
by hedging of tax.
Tax evasion represents the
suppression of tax.
Attributes This is mainly immoral in nature,
since it includes bending the
regulations without breaking the
same.
Tax evasion is objectionable
and illegal based on both
morality and law (Langenmayr
and Lester 2017).
Concept Tax avoidance intends to minimise
the overall burden of tax by applying
the law script.
Tax evasion is involved in
minimising the overall tax
liability through the exercise of
unfair means.
Legal implication Tax avoidance includes obtaining
benefit of the shortcomings inherent
in the regulation.
Tax evasion takes into account
the deliberate concealment
related to the material facts.
Time of incidence The arrangement for avoiding tax is
made before the incidence of tax
In case of tax evasion,
arrangements are made after

10PRINCIPLES OF TAXATION
liability. the tax liability has taken place.
Type of act This system is deemed to be entirely
legal.
This system is deemed to be a
criminal activity (Miller and
Oats 2016).
Consequences Tax avoidance results in deferment
of tax liability or tax postponement.
Tax evasion leads to penalty or
imprisonment or both.
Example Some of the common examples of
tax avoidance include undertaking
legitimate tax deductions for
minimisation of business expenses
and therefore, lowering tax bill. In
addition, the set-up of a deferral tax
plan for making delay in taxes at a
later date and obtaining tax credits
for incurring money for legitimate
purposes in order to hire staffs are
other examples of tax avoidance.
Certain practices leading to tax
evasion include reporting
lower income compared to the
actual income received from a
particular source, providing
false information regarding
business income or expenses
and substantial understatement
of taxes. Such understatement
denotes the depiction of tax
amount on return, which is
lower than the amount owed on
the reported income (Mollan
and Tennent 2015).

11PRINCIPLES OF TAXATION
Conclusion:
From the above discussion, it is inherent that there are certain differences between the
progressive taxation system and the regressive taxation system. It has been found that in case of
progressive taxation system, the low-income earners enjoy minimised tax burden, while the
situation is just the opposite in case of regressive taxation system. Moreover, the UK is identified
to have certain sources of tax and the primary rules are mentioned in the Acts of the Parliament;
however, the ultimate decision lies in the hands of the courts. Finally, it has been evaluated that
tax avoidance and tax evasion are completely different concepts. This is because tax avoidance
involves using the loopholes of the current tax regulations to minimise tax liability, while tax
evasion intends to minimise tax liability by using unfair means.

12PRINCIPLES OF TAXATION
References:
Aspiring Accountants., 2018. Taxes - Progressive vs Regressive vs Proportional - Aspiring
Accountants. [online] Available at: http://www.aspiringaccountants.co.uk/taxes-progressive-
regressive-proportional/ [Accessed 4 Mar. 2019].
Brockmeyer, A., 2014. The investment effect of taxation: evidence from a corporate tax
kink. Fiscal Studies, 35(4), pp.477-509.
Brusov, P., Filatova, T., Orekhova, N. and Eskindarov, M., 2015. Modern corporate finance,
investments and taxation(pp. 1-368). Berlin: Springer International Publishing.
Corporation Tax Act., 2010. 2019. Legislation.gov.uk. Retrieved 4 March 2019, from
https://www.legislation.gov.uk/ukpga/2010/4/contents
Delgado, F.J., Fernandez-Rodriguez, E. and Martinez-Arias, A., 2014. Effective tax rates in
corporate taxation: A quantile regression for the EU. Engineering Economics, 25(5), pp.487-496.
Devereux, M. P., Liu, L., and Loretz, S., 2014. The elasticity of corporate taxable income: New
evidence from UK tax records. American Economic Journal: Economic Policy, 6(2), pp.19-53.
Devereux, M.P. and Vella, J., 2014. Are we heading towards a corporate tax system fit for the
21st century?. Fiscal studies, 35(4), pp.449-475.
Dyreng, S.D., Hoopes, J.L. and Wilde, J.H., 2016. Public pressure and corporate tax
behavior. Journal of Accounting Research, 54(1), pp.147-186.

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Egger, P., Merlo, V., Ruf, M. and Wamser, G., 2015. Consequences of the new UK tax
exemption system: evidence from micro‐level data. The Economic Journal, 125(589), pp.1764-
1789.
Farnsworth, K. and Fooks, G., 2015. Corporate taxation, corporate power, and corporate
harm. The Howard Journal of Criminal Justice, 54(1), pp.25-41.
Gemmell, N., Kneller, R., McGowan, D., Sanz, I. and Sanz‐Sanz, J.F., 2018. Corporate Taxation
and Productivity Catch‐Up: Evidence from European Firms. The Scandinavian Journal of
Economics, 120(2), pp.372-399.
Griffith, R., Miller, H. and O'Connell, M., 2014. Ownership of intellectual property and
corporate taxation. Journal of Public Economics, 112, pp.12-23.
Johnson, P., 2014. Tax without design: recent developments in UK tax policy. Fiscal
Studies, 35(3), pp.243-273.
Langenmayr, D. and Lester, R., 2017. Taxation and corporate risk-taking. The Accounting
Review, 93(3), pp.237-266.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Mollan, S. and Tennent, K.D., 2015. International taxation and corporate strategy: evidence from
British overseas business, circa 1900–1965. Business History, 57(7), pp.1054-1081.