UK tax law applies throughout the United Kingdom, but there are sometimes specific provisions that recognise the different legal systems in Scotland and, to a lesser extent, in Northern Ireland.
UK tax law must comply with the regulations and directives of the European Commission. EU member states must allow members of other EU states freedom of establishment and not tax them at higher rates than their own nationals. One EU state may require another state to take proceedings to recover both direct and indirect taxes owed in the first state, and an EU state may ask the UK tax authorities to deliver documents to a UK taxpayer on their behalf in relation to a tax liability in that EU state. UK tax law must also be compatible with the European Convention on Human Rights and the Human Rights Act 1998.
The Scottish Parliament has the power to increase or decrease the basic rate of income tax by up to 3%. This power has been available since 2000 but has not yet been exercised.
The work of HM Revenue and Customs was done by the Inland Revenue and HM Customs and Excise until those departments merged in 2005.
The merger was followed by the establishment of an independent authority, the Revenue and Customs Prosecutions Office, to deal with prosecution work. In January 2010 the RCPO merged with the Crown Prosecution Service to become a specialist Revenue and Customs Division within (from April 2010) the Central Fraud Group of the CPS. The RCD works with HMRC investigators in the same way that the CPS operates with the police.
HMRC are allowed to disclose information to the police in the UK and abroad in connection with criminal investigations and also to the intelligence services. Information is also available to government departments as a result of the money laundering regulations.
Knowing how the UK system works, what taxes can be charged and what deductions and allowances are available, as well as the tax effect of alternative courses of action, will help a taxpayer cope with his responsibilities and make sure that all relevant tax reliefs and allowances are obtained.
The main Acts dealing with taxation are the Inheritance Tax Act 1984, the Income and Corporation Taxes Act 1988, the Taxation of Chargeable Gains Act 1992, the Value Added Tax Act 1994, the Capital Allowances Act 2001, the Income Tax (Earnings and Pensions) Act 2003, the Income Tax (Trading and Other Income) Act 2005, the Income Tax Act 2007, the Corporation Tax Act 2009, the Corporation Tax 2010 and the Taxation (International and Other Provisions) Act 2010. In addition there are annual Finance Acts which alter some of the existing provisions and bring in new ones.
Statutory instruments are increasingly being used to provide detailed regulations on various aspects of the main Acts but also to make changes to the provisions of the Acts, partly because legislation is often introduced in haste and without the benefit of detailed consultation and/or parliamentary scrutiny. In the June 2010 Budget, the Government announced that it intends to impose 'sunset clauses' on regulations, under which they will cease to be law after seven years unless Parliament has confirmed that they are still necessary and proportionate, or they were explicitly set to have a longer timeframe.
Published statements of practice and extra-statutory concessions set out HMRC's views on particular aspects and sometimes allow matters to be treated more sympathetically than the strict letter of the law allows. Some concessions are now being written into legislation, while others are being withdrawn.
Much of the published material is posted on the HMRC website well in advance of the paper versions. Indeed some publications, including the self-assessment Help Sheets and Revenue and Customs Briefs, are only available online. It is the Government's declared aim to increase the use of electronic communication with taxpayers.
Despite the vast array of tax statutes and supplementary material, it is not always clear what the law means. Alternatively, the meaning of the law may not be in doubt, but the facts of the case may be unclear. It is therefore possible to take a different view from the tax authorities either on the interpretation of the law, or on the facts, or a mixture of the two.
As far as income tax, capital gains tax and corporation tax are concerned, since they are self-assessed it is up to the taxpayer to calculate how much tax is owed based on their view of the law. If there are areas of doubt, these should be drawn to the attention of HMRC. If a self-assessment tax return is completed, HMRC will initially deal with points of difference by raising an enquiry into the return, at the end of which they have the right to make amendments if they disagree with the taxpayer's figures. They also have the right to issue assessments themselves in cases of careless or deliberate actions of the taxpayer or if inadequate information is provided.
Appeals may be made to an independent appeals tribunal in cases of disagreement with an HMRC assessment etc. The distinction between questions of law and fact is important, because what an appeal tribunal decides on questions of fact is generally binding on both the taxpayer and HMRC. A tribunal's decision on points of law, however, can be referred by the losing party to the courts. It is important, however, to think very carefully before taking an appeal on a question of law to the appeal tribunal, because it may take a very long time before it is settled, it will cost a lot of money, and at the end of the day the case may still be lost.
In addition, a taxpayer's victory may be short-lived if the Government decide to change the law to reverse the effect of the court's decision. For example, in December 2004 the Government took the unprecedented step of announcing that future legislation to counter arrangements aimed at frustrating the Government's intention 'that employers and employees should pay the proper amount of tax and NICs on the rewards of employment' would take retrospective effect from that date. The Government announced their intention to change the 'settlement' rules, following the taxpayer's victory in the Arctic Systems case, to counter so-called 'income shifting', but it announced later that proposed reforms would be delayed to allow for further consultation.
The Tribunals, Courts and Enforcement Act 2007 provided for the functions of the general and special commissioners, and those of the VAT tribunals, to be transferred to a new tribunals service administered by the Ministry of Justice. The new system comprises a First Tier Tribunal and an Upper Tribunal. In the event of an appeal from the Upper Tribunal, the appeal will go to the Court of Appeal rather than the High Court. Where leave is granted, further appeal may be made to the Supreme Court. There is the further possibility of going to the European Court on the grounds that UK law is not in accordance with European Union rules. Most referrals to the European Court relate to VAT, but some relate to direct taxes. There is also the possibility of appealing to the European Court of Human Rights if it is felt that rights under the European Human Rights Convention have been breached.
Taxpayers and their advisers wishing to undertake tax planning need to bear in mind that HMRC have a good deal of 'anti-avoidance' legislation at their disposal. They may also be able to challenge a series of transactions with a tax avoidance motive so that only the end result of the series is taken into account. Broadly speaking, advance planning by way of a series of transactions is still possible providing the transactions are not so pre-ordained and interlinked that they can only really be regarded as a single transaction.
Such advance planning is, however, affected by further significant measures to counter tax avoidance, introduced in 2004, which require promoters of tax avoidance schemes, and in some cases the taxpayers using such schemes, to provide details to HMRC.
Most people do not want to be involved in disputes with the tax authorities, and merely wish to make sure that they comply with their obligations without paying more than is legally due. It is necessary, however, to understand the difference between tax avoidance and tax evasion. Tax avoidance means using the tax rules to best advantage, whereas tax evasion means illegally reducing tax bills, for example by understating income, over claiming expenses or deliberately disguising the true nature of transactions. It seems reasonable to distinguish tax avoidance from more straightforward tax planning or mitigation, with some avoidance being regarded as unacceptable by HMRC — some 'structured avoidance' schemes might be regarded, for example, as setting out to defeat the purpose of the legislation — and planning or mitigation being regarded as acceptable. However, there are no firm definitions in this area.
Some ministers and HMRC officials have been accused of blurring the distinction between evasion and avoidance in an effort to highlight what they have regarded as unethical practice on the part of some taxpayers and professional advisers engaged in 'aggressive' or 'artificial' avoidance schemes.
There is an increased public awareness of the issue of tax avoidance following the widespread publicity given to the practice of some MPs, already under media scrutiny over their parliamentary expenses claims, who 'flipped' the designation of their main homes to save capital gains tax.
A further indication of the Government's determination to tackle tax avoidance came with the publication of a code of practice on tax for the UK's banks. The voluntary code, which was finalised in late 2009, requires a bank to undertake not to promote arrangements that 'will give a result contrary to the intentions of parliament'.
Where tax has been illegally evaded, it can result in criminal prosecution as well as payment of the relevant tax plus interest and penalties. The tax authorities collect billions of pounds from their investigation, audit and review work, and undertake a number of major criminal prosecutions.
The UK also has wide-ranging international arrangements to help combat tax evasion, and information is exchanged with countries with whom the UK has double taxation agreements or tax information exchange agreements. A country with which the UK has a double taxation or tax information exchange agreement may also ask HMRC to require a UK taxpayer to provide information relating to tax liabilities with the overseas country.