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hmrc_12_full

hmrc_12_full

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05/09/2014

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Introduction
The UK Government provides a range of public goods and services. The main ones include:
\u2022 education
\u2022 benefits
\u2022 law and order
\u2022 defence
\u2022 roads
\u2022 National Health Service.

Within the UK, public expenditure is largely financed through taxation and
Her Majesty\u2019s Revenue and Customs (HMRC) collects most taxes. This case study focuses
upon the role of HMRC in collecting taxes and how these help the UK government to control
the economy. The case also looks at the types of taxation used within the economy and the
way in which HMRC communicates with businesses.

HMRC was formed in 2005 following the integration of Inland Revenue and
HM Customs & Excise Department. HMRC employs nearly 100,000 staff, which is around
20% of the civil service. The department is not headed by a minister. HMRC isaccountable
to the Treasury and this is headed by the Chancellor of the Exchequer. HMRC is
responsible for implementing the policies of government, without any prejudices towards or
against one political group or another.

HMRC has many roles. The main ones are to:
\u2022 collect taxes
\u2022 inform taxpayers of their legal responsibilities to pay tax
\u2022 administer benefits including Child Benefit, Child Trust Fund and Tax Credits
\u2022 protect the UK\u2019s borders against the trade in illicit goods, including drugs and other illegal

items
\u2022 enforce the National Minimum Wage
\u2022 recover student loans.
Control of the economy

The UK economy changes year after year. The UK government seeks to achieve many policies
including economic growth, improving the standard of living of people within the country,
controllinginflation and reducingunemployment. Its policies will determine the nature
and type of decisions that it makes. The government controls the economy in a number of
different ways. One way is through legal statute orlegislation using an Act of Parliament
that creates new laws. Another way is through the provision ofsubsidies that make goods
or services available for people. A third way is through taxation.

53
HMRC
How HMRC collects tax revenue
to support Government policy
www.thetimes100.co.uk
CURRICULUM TOPICS
\u2022 Control of the economy
\u2022 Taxation
\u2022 Monetary and fiscal policy
\u2022 External communication
GLOSSARY
Accountable:responsible
for its actions.
Chancellor of the
Exchequer:the

Chancellor is head of the
Treasury and the minister
responsible for financial
aspects of government
policy. The post of
Chancellor is considered to
be second only to the
Prime Minister.

Inflation:the rate of
increase in costs of goods
and services.
Unemployment:the

number of workers who do
not have a job that
provides money.

Legislation:the making

of laws by an elected body
through the creation of Acts
of Parliament.

Subsidies:monetary
grants used to reduce
prices for consumers.
=
+
54
Taxes collected by HMRC for the government fall under two headings:
Direct taxationis levied upon incomes or the resources of individuals and organisations.
Income tax is paid upon a person\u2019s income or, for Partnership businesses, upon the partners\u2019
incomes. Corporation tax is levied upon the profits of UK companies. HMRC also collects
National Insurancecontributions. Although these are not really a tax they are often

portrayed as one. National Insurance is the major source of funds used by the government to
provide state benefits such as pensions and jobseekers\u2019 allowances. Direct taxation is paid
by all employees who earn above a declared level of income. These taxes have to be paid

by law.
Indirect taxationis not as noticeable as direct taxation. Indirect taxes are added to the

price of the goods and services that consumers purchase. Value Added Tax (VAT) at a rate of
17.5% is added to the price of most goods that a consumer purchases. For example, the
price of a DVD includes 17.5% VAT. There are, however, certain goods that are zero-rated.
For example, VAT does not apply to food, baby clothes or prescription products.

Governments have continually reviewed the main issues behind taxation. This especially
involves deciding who pays the taxes. This process aims to develop a fair system that applies
not just for individuals but also for companies.

Monetary and fiscal policy
The main objectives of the Government are to:
\u2022 maintain full employment

\u2022 control inflation
\u2022 achieve a balance of payments equilibrium
\u2022 stabilise exchange rates
\u2022 steady economic growth
\u2022 improve the standard of living of people within the country.

Successive governments have used two broad types of strategy to achieve these objectives.
These are through the use of:
a)monetary policy
b)fiscal policy.
GLOSSARY
Direct taxation:taxes

levied on income and the
resources of individuals
and organisations.

National Insurance:

a charge levied on wages
that entitles those who pay
it to access state benefits.

Indirect taxation:taxes

where the burden may be
passed on to some other
person. For example,
excise duties on alcohol
are collected from
manufacturers and passed
on to consumers in higher

prices.
Full employment:
a situation when everybody
in a country has a job.
Monetary policy:the

regulation of the money
supply, interest rates and
exchange rates in order to
control economic

problems.
Fiscal policy:action by a

government to spend
money or collect money in
taxes, in order to influence
the condition of the

economy.
www.thetimes100.co.uk
1. Direct taxation
2. Indirect taxation
Taxation
17.5% VAT
Trade Price
Retail Price
Monetary policy

Monetary policy involves manipulating the price and supply of money and controlling
exchange rates. For example, raising interest rates makes borrowing more expensive.
Consumers will borrow less and demand for goods in the shops will fall. The exchange rate is
the price at which the pound is bought and sold against other currencies. Rising exchange
rates make the pound more expensive and make imports cheaper. This reduces prices in
domestic markets.

Fiscal policy

The Latin word \u2018fisc\u2019 refers to the public purse (public refers to the government here). Fiscal
policy is concerned with how the government collect moneys in taxes and how it decides to
spend that money. All economies need money to support society with hospitals, schools,
police, armed forces, social security and state pensions. This is why taxes are needed and why
everybody should contribute their fair share.

Collecting income taxes and administering benefits

One of the most important principles of taxation is that of convenience. Taxes must be
collected in a convenient form and at a convenient time. Income tax is a tax that is paid on
income. It is paid by:

a) employees
b) people who are self employed (partners and sole traders)
c) individuals who may not be working but have an income.

When people are employed they are liable for income tax and pay this tax under the pay-as- you-earn (PAYE) system. Under this system, income tax is collected from an individual\u2019s pay and is then passed on to HMRC by the employer. The employer deals with the payments as well as all the paperwork.

Somebody who is a sole trader or partner and self-employed is responsible for running and
managing their own business. He or she deals with their own tax affairs and is required to
contact HMRC to tell them that they are self-employed. The law requires all people who
become self-employed to register for tax within three months of starting their business.

Sole traders and partners are responsible for paying their own income tax and National
Insurance contributions. If their business has aturnover of more than \u00a361,000 per year,
they will also have to register for VAT. If they employ other people they pay their income tax
and keep full accounting records.

The process of completing tax payments is simple and is illustrated below:
a) The trader notifies HMRC they are in business
b) HMRC sends a Self Assessment tax form

55
GLOSSARY
PAYE:pay-as-you-earn

system in which income tax
is collected from an
individual\u2019s pay and then
passed on to HMRC.

Sole trader: the business

and its owner are one and the same. The individual is liable for the business

debts.
Turnover:sales.
www.thetimes100.co.uk
Economic Problems
Monetary policy
Fiscal policy
HMRC

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