Structure of HMRC
Her Majesty’s Revenue and Customs (HMRC) is a Government agency of the United Kingdom (UK) responsible for collection of taxes and regulation of other administrative matters. Subsequent to the merger of Inland Revenue and Her Majesty’s Customs and Excise (HMCE) HMRC was formed on April 18, 2005. HMRC is a non-ministerial agency of the Government operates under the statutory rules of Majesty’s Revenue and Customs.Members of Executive Committee and Non-executive Committee combined to form the Board of HMRC. The members have the responsibility to develop and approve the overall strategy of HMRC with the objective of maximizing Government revenue from direct and indirect taxes in the country. Chief executive, chairman, executive chair and permanent secretary, non-executive board members and other personnel combine to administer and collect taxes under HMRC. Income tax and corporation tax collection are the primary responsibilities of HMRC. Both administrative and collection aspects of direct taxes are overseen by the department. There are number of taxes which are part of direct and indirect taxes such as capital gain tax, inheritance tax, indirect tax, value added tax, environmental tax, excise duty and other taxes are administered and collected by HMRC (McGowan, Thomson and Hardwick, 2016).
HMRC consists of cadre of criminal investigators as well as investigating officers for income tax and other tax related matters who have been given wide variety of powers to administer and investigate tax related matters and tax related frauds in the country. Since HMRC has been formed with the merger of HMCE and Inland Revenue hence, both direct and indirect taxes are administered by the officers of HMRC with the wide powers given to them by the department (Pogge and Mehta, 2016). In 2016/17 HMRC collected ?557 billion on behalf of the Treasury with estimated theoretical tax liabilities of ?590 billion in the year. However, the gap between the tax liabilities and the amount of tax collected, i.e. ?33 billion is due to the tax gap that is allowed as per the income tax provisions in the country. Thus, approximately 95% of the tax liabilities are collected by HMRC successfully by using its administrative powers. The tax collection of HMRC over the years have been increased significantly with proportionate reduction in tax gap. The actual tax gap over the years in the country has reduced due to the effective administration of HMRC (James and Nobes, 2016).
Taxes in the country are primarily classified into two different types of taxes, these are direct taxes and indirect taxes. Direct taxes primarily consists of income tax on the residents of the country including individuals and corporations (Sikka et. al. 2016).Income tax is the tax paid by individuals, sole proprietors and corporations on their taxable incomes. Generally the following incomes are considered in calculating income tax of individuals and others.
- Income from employment such as salary wages and other employment benefits received by the employees and workers.
- Profits earned from business by self-employed individuals.
- State benefits received by individuals in the country.
- Rental income received by residents and non-residents in the country.
- Other benefits received from professional services.
- Income from trust.
- Interest income on savings from banks and other public financial institutions.
Income tax allowances and reliefs are allowed to the individuals and other tax payers to calculate the taxable liabilities of individuals and other tax payers to reduce the taxable income and resultant income tax liabilities of the tax payers in the country. Total HMRC receipts over the years have increased significantly with continuous increase in total collection of the Department. HMRC has managed to increase its overall collection every year since 1999-2000. The collection of income tax by HMRC over the years have increased significantly. The primary source of revenue for the HMRC is income tax and as can be seen from the above chart that each year HMRC has managed to increase the collection from income tax. However, the collection from capital gain tax in the country has fluctuated significantly over the years (Amir, Lazar and Levi, 2018).
Operation of HMRC
Apart from direct tax HMRC is also responsible to collect and administer indirect taxes in the country. The indirect taxes include customs, excise, international trade duties, environmental tax, Value Added Tax and Insurance Premium Tax in the country.
Excise and customs duty is payable by the corporates and other business organizations for movement of goods from European Union to United Kingdom. Not all goods are liable to customs and excise duty thus, it is important to have knowledge about different goods which are subjected to Excise and Customs duty as non-compliance with customs and excise duty attracts significant penalty on the part of business and corporates. Rates of excise and custom deities vary with the nature of goods hence, it is important to use appropriate rates to calculate the liability in respect of customs and excise duty and pay as per the rules and regulations of HMRC (Chen, Chung and Novy, 2018).
One of the important component of indirect tax in the country Value Added Tax has been collected by HMRC. In 2017-18 HMRC collected ?125,363 million.
Adam Smith introduced four canons of taxation to make an effective tax structure in the country to ensure effective and proper imposition and collection of taxes to maximize the revenue of the Government. Thus, the objective of four canons of taxation is to improve the tax collection system in the country to maximize collection of tax and reduce tax avoidance and tax evasion the country (Kay and King, 1990). Building a simple and effective tax structure to collect tax in the country is the main goal of a country. In his book “Wealth of Nation” Adam Smith has discussed about four canons of taxation which are essential to build an effective and simple tax system in a country. A brief discussion about the four canons of taxation is made here (Downer, 2016).
Generally equality means treating each and every one equally however, in respect of four canons of taxation equality means ability to pay taxes. Equality in case of taxation would result in huge burden on low income earners thus, in this case equality means imposition of higher rate of tax for high income earners and low rate of tax for low income earners to maintain general living of standards for low income earners. Hence, the tax system in a country must divide its tax payers in different groups based on the taxable income of those tax payers. Tax payers with higher taxable income should pay tax at higher rate and low income earners should pay low income tax. Adam Smith has urged that tax system must have equality to reduce the gap between the rich and the poor (Hallsworth et. al. 2017).
Canon of certainty is another canon discussed by Adam Smith in his famous book “Wealth of Nation.” According to the author the taxes to be paid must be certain and arbitrary. Certainty in respect of the following is essential in building an effective tax system within a country:
- The amount of tax to be paid.
- The payment method and manner.
- The authority to whom tax is to be paid.
- The due date for payment of taxes.
Direct Taxes in the UK
The above must be certain in order to ensure that there is no confusion amongst the tax payers in the country in respect of above important aspects in tax structure in the country (Hopkins, 2014).
Third canon of taxation in “Wealth of Nation” by Adam Smith talked about canon of convenience. Convenience in general means easy, comfortable and simple for the tax payers to report taxable income and pay taxes in the country. Adam Smith talks about the importance of imposition of tax at correct time and in correct manner to make it convenient for the tax payer to pay such tax. The tax payers must feel convenient to pay tax in the manner to ensure effective and easy payment of tax without any problem. Throughout the globe the countries which have most convenient taxation systems for the contributor have managed to increase the tax revenues each year significantly. Thus, Adam Smith has specifically given importance to the convenient aspect of taxation system in a country (Idowu et. al. 2017).
Canon of Economy is the last and final canon of taxation discussed by Adam Smith while discussing about canons of taxation in his book. The importance of reducing tax collection expenses has been mentioned by Adam Smith as a key contributor to increasing the overall tax revenue in a country. Thus all efforts should be made to reduce the cost of collection of taxes to earn large amount of net tax revenue. The author has advocated that an ideal tax system shall be the one which should contrive to minimize both the expenses of tax payers as well as the expense of the government to maximize tax revenue for the government (King, 2016).
Consumption tax is based on the concept of consumption rather than income. Thus, tax payers in ta country is required to pay tax on the amount of consumption and not on the amount of income. However, consumption tax will not be an effective method to comply with the four canons of taxation as generally consumptions does not necessarily reflect the element of equality (Manaf et. al. 2016). This is especially considering that there would definitely not be huge different in consumption between the rich and the poor as the consumption would be similar especially for food and daily necessary items. However, certainty, convenience and economy aspects of taxation system in the country would depend on the effective implementation of tax provisions by HMRC.
Income tax is based on the concept of income over consumption. The individuals need to pay income tax on the basis of taxable income computed as per the provisions of income tax in the country. In order to comply with equality canon income tax rates have been determined for individuals in the country (Nguyen, Onnis and Rossi, 2017). Taxable income up-to ?11,850 does not attract any income tax liability in the country where as income in excess of ?11,850 and up-to ?46,350 is taxed at the rate 20% with taxable income between ?46,351 and ?150,000 taxable at the rate of 40% and taxable income over ?150,000 is taxed at the rate of 45%. HMRC has made provisions which must be followed and complied with while calculating taxable income of individuals (Daly, 2016). The payment of income tax needed to be made to the credit of the Treasury of the country on or before the due date to avoid penal provisions. HMRC has tried to ensure that the taxpayers find no difficulty in payment of income tax in the country. In order to motivate the tax payers in the country to pay income tax correctly all necessary steps have been taken to make the tax system convenient. HMRC has a successful rate of 95% in collection of tax liabilities in the country shows how effective the tax system in the country. However, additional steps need to be taken to reduce the tax gap between the tax liabilities and tax revenue further in the future (Parada, 2015).
Income Tax
The four canons of taxation described by Adam Smith in his book of “Wealth of Nation” have number of desirable characteristics to make an effective taxation system in the country however, there are certain cons to the four canons. A brief description below shall be helpful in understanding the pros and cons of taxation system in the country (Toder and Rosenberg, 2010).
Pros:
Canon of Equality makes it possible to reduce the gap between the rich and the poor that exists in the society. Without this canon it would have been a huge burden on the low income earners to pay tax at equal rates as paid by high income earners. Thus, the balance in society in terms of equality by assessing the ability to pay tax of the individuals is maintained effectively (Procter and Radnor, 2014).
Canon of certainty helps in ensuring that there is no confusion amongst the tax payers in respect of tax provisions in the country. Thus when it comes to the rate of taxes, the due date of payment of taxes, the method and manner of payment and the authority to whom taxes are to be paid help individuals to pay taxes as per the rules and regulations of HMRC.
Convenient canon is certainly helpful and inspiring for the tax payers to pay tax correctly. Individuals will be motivated to pay taxes correctly and properly by following the simple and effective tax structure in the country (Revenue and Customs, 2014).
Reducing the expenditures to administer and collect taxes in the country has helped HMRC to improve the revenue of Treasury. The economy canon has ensure that the overall revenue of the government of UK increases to meet the requirements of planned expenditures in the country (Crawford, Keen and Smith, 2010).
Cons:
However, there are certain negative aspects of these canons for effective tax structure in the country. The convenience aspect of four canons often used by tax payers to avoid payment of taxation as well for tax evasion purposes. Thus, the tax authority must make sure that convenience dos not contribute to tax avoidance and tax evasion in the country (Russell, 2016).
Progressive tax in the country is about improving the tax revenue with increase in taxable income. The progressive tax in a country is directly related to the canon of equality as can be seen from the following income tax rate as per the rules and regulations of HMRC in the country (Lymer and Oats, 2018).
|
Taxable income |
Tax rate in the country |
|
Income up to ?11,850 |
Nil |
|
Income between ?11,851 and ?46,350 |
20% |
|
Income between ?46,351 and ?150,000 |
40% |
|
Income in excess of ?150,000 |
45% |
The progressive tax is in essence directly connected with equality canon of Adam Smith.
Consumption tax on the other hand is not in conjunction with equality canon as the tax payers only pay taxes on the amount of consumption thus, whether poor or rich all need to pay tax at equal rates on the amount of consumption. However, administration of consumption tax is significantly easier with equal tax rates applicable on consumption (Sandford, 2015).
Discussion in this document has certainly enlighten us about different elements in administration and collection of taxes by HMRC in the United Kingdom. The taxation system in the country has very much incorporated the four canons of taxation as discussed by Adam Smith in his famous book “Wealth of Nation.” The canons of equality, certainty, convenience and economy of taxation have been mentioned as important elements in developing an effective and simple taxation system in a country. The rules and regulations used by the HMRC has helped the Treasury of UK to improve its revenue over the years with increase proportion of tax payers complying with different provisions of income taxes in the country. However, it is important to understand that canons of taxation must be used in improving the taxation system and to reduce the tax gap in the country.
Corporation Tax
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