Creating a supportive business environment for SMEs
A HM Customs & Excise case study

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Page 3: Creating an efficient and fair system for collecting taxes

Up until the end of the nineteenth century, the functions of the state were mainly defence and law and order. Today, we live in a society where government spending provides us with a range of services and benefits, such as education, protection against the hazards of sickness, local authority services, support for agriculture, police, law-enforcement and fire brigades. Financing these services requires the government to raise funds through taxation and to influence the allocation of resources within our society.

The activities of organisations and individuals create both benefits and costs for society. For example, a new factory may create jobs and help to improve the overall profitability of an organisation, but at the same time roads may need to be improved and maintained, schools and housing stock may have to be improved and other services for the community may be required. There may also be detrimental effects from the factory such as extra traffic congestion, increased litter or some form of pollution.

Both the individuals and the organisation who benefit from this activity also therefore, have an ethical responsibility to contribute towards some of the costs.

It was Adam Smith in his book, An Inquiry into the Nature and Causes of the Wealth of Nations, who said that the principles of taxation should be confined to four simple tenets:

  • persons should pay according to their ability
  • the tax should be certain and clear to everybody concerned
  • the convenience of the contributor should be studied as regards payment
  • the cost of collection should be small and relative to yield.

While the clear purpose of taxation is to raise money, a good system of taxation should have many different attributes. For example:

  • the cost of collection should be low
  • taxpayers should know when and how to pay their taxes
  • tax payment should be convenient
  • taxes should be adjustable and be capable of being used to regulate the economy
  • taxes should also be harmless to effort and initiative and be fair.

The two UK departments that deal with collecting taxes are Inland Revenue and Customs & Excise.

Whereas the Department of Inland Revenue is concerned with collecting direct taxes, HM Customs & Excise collects indirect taxes. Both of these departments help in developing an efficient and fair taxation system that provides businesses and other taxpayers with an efficient and responsive service to meet each of their needs.

HM Customs & Excise | Creating a supportive business environment for SMEs