Tax predictions from 2001

I've just found a list of predictions I made during a tax seminar at which I spoke in December 2001. If only I'd started the TaxBuzz blog back then I could have posted them here for posterity. OK - I'll post them now. How did I do?
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While everyone else is focused on short term predictions I'm going to have a go at predicting what will happen in 5-10 years time (ie: between 2006 and 2011) assuming there's no change of Government:

• The top rate of income tax will be increased to 45% on incomes over £100,000;
• The rate of CGT will remain linked to the income tax rate so as to avoid incentivising the conversion of income into capital;
• The small rate of corporation tax will be abolished after moving closer to the standard rate;
• The tax credits system will suffer constant tweaks in a continued effort to disguise the fact that it's not fit for purpose;
• Tax relief for pension contributions, favoured investments and personal allowances will only be given at basic rate;
• A statutory rule will be introduced to determine whether or not anyone is UK tax resident in each tax year;
• The merged Inland Revenue and HM Customs & Excise will become known colloquially as iTax;
• A tax scheme disclosure rule will require the promoters and users of all tax avoidance schemes to make themselves known to iTax - and this will move more tax avoidance underground;
  
• Non Doms will have to pay an annual fee if they want to avoid paying UK tax on worldwide income and gains;
• National Insurance charges will be increased by 0.5% and it still won't be called a 'tax';
• Electronic filing of all tax returns will become compulsory;
• Employers will receive an incentive payment to operate the PAYE system and pay witheld taxes over on time each month;
  
• The IHT nil rate threshold will become transferable between husband and wife;
  
• The tax rules will be changed so as to encourage one man businesses to incorporate and then, after a short time, there will be a crackdown on the tax efficiency of one-man companies;
  
• VAT will be reduced to 15% for a 13 month period to 'stimulate the economy';

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I didn't do badly now did I?!

OK - I admit it. I didn't predict all this 6 years ago. I doubt anyone could have done so - especially that last one!

This post was inspired by one written in a similar vein on a more general topic by Seth Godin. In it he notes how impossible it is for us to predict what life is going to be like just a few years into the future. He suggests that "being ready for anything is the only rational strategy."

Accountants and tax advisers have always known this. The constancy of change is one of the best known characteristics of tax work. It was one that attracted me into the profession over 25 years ago. And it was also one of the reasons I stopped being a tax adviser and set up the Tax Advice Network.

As we move into 2009 with the economy in recession I hope that the tax changes that are to come this year and over the next few years don't cause you to want to give up giving tax advice too.

If you're on Twitter you can tell your followers about this blog post by clicking here to: Tweet a link to this blogpost. You can send the tweet, which contains a shortened link, as is or edit it.
And you can follow me @bookmarklee and @TaxAdviceNet depending on your interest.

Most tax avoidance schemes are blocked or don't work

This assertion seems to have received precious little publicity in 2008. According to the then Acting Chairman of HMRC, Dave Hartnett:

"the overwhelming majority of schemes that have been flushed out through the disclosure rules have either been addressed by legislation, or are being addressed in litigation because we do not believe they work; or, as a precautionary measure, both litigation and legislation."

This was among his oral statements to the Public Accounts Committee on Monday 28 January 2008. It was in response to Q106 from Angela Browning:

Can I put to you a very blunt question? Of the schemes that you have identified on which the Government has then legislated to close the loophole—have they responded 100% to your list of loopholes you have identified, or are there outstanding ones you would like them to close; and, if so, how big is that list?

So 'the overwhelming majority of schemes' have either been blocked or are being challenged. Or, dare I add, WILL be challenged. It never ceases to amaze me how often the promoters of tax schemes seek to legitimise their efforts by claiming that the scheme has been 'registered' with HMRC and that it must work as HMRC has not blocked or challenged it.

As I pointed out to one naive adviser recently - the scheme he was planning to promote as 'safe from HMRC attack' had YET to be challenged by HMRC and that they had plenty of time in which to do this. It's for reasons like this that I have suggested previously on this blog: Beware of tax schemes you don't understand.

Transactions undertaken from 6 April 2007 to 5 April 2008 will be reported on tax returns that need to be filed (online) by 31 January 2009. HMRC then have 12 months (potentially until 31 January 2010) to start asking questions. The absence of questions, let alone of challenges, as of the end of 2008 is no great achievement on the part of the promoters of the scheme. And you can add another year to the respective deadlines for transactions undertaken after 5 April 2008.

Have any readers of this blog come across other similarly misleading promotional claims by promoters of tax avoidance schemes?

Who wants to pay the 'right' amount of tax?

The Freedom of Information Act only seems to reveal interesting results after 'battles'. I've just read about one in Private Eye (I was catching up during the Xmas break).

After a 7 month battle, HMRC has released the results of a survey conducted in 2004 amongst senior tax inspectors. Apparently they classified 16 of the 102 (sic) largest companies operating in Britain as "serial [tax] avoiders"and 40 as "opportunistic avoiders". Thus these Inspectors believed that 55% of the biggest companies were consciously avoiding tax (presumably in an "unacceptable" manner).

The Private Eye story suggests that this runs contrary to the alleged assumption within HMRC that:

"The majority of businesses want to pay the right amount of tax at the right time."

And that got me thinking. Does anyone really believe that mantra?

Coincidentally I was debating a similar point, concerning the general appetite for tax avoidance on another blog last week where I stated that:

I accept that many people do not want to ‘abuse the law’.

However I think that most people DO want to keep their tax liabilities to a minimum. They ask their accountants (and their friends) “What can I do to pay less tax?” “How can I pay less tax?” “How can I avoid having to pay all this tax?” And of course the weekend papers are full of ads for guides as to how to AVOID IHT.

To me this all indicates a desire amongst the general public to AVOID paying more tax than necessary.

Does that make 'most people' tax avoiders'? Of course not. But it does suggest to me that few people willingly pay their taxes without hoping that there are ways to reduce the sums due to HMRC.

Those who know me will know I am no fan of what some might describe as 'abusive' avoidance schemes. And, of course, I am no longer in practice myself as a tax adviser - for reasons that I described in detail last July. So I am keen to distinguish such schemes from simple 'good advice' of the sort that can be obtained from independent tax advisers.

Does it all come down to a question of what is the 'right' amount of tax? Is the 'right' amount of tax the same as the 'lowest' amount that can be paid without breaking the law, without lying, without hiding income and without overstating expenses?

What do you think? Do you agree with my definition or can you offer your own?

Why would anyone sign a direct debit mandate in favour of HMRC?

Whoop de doo. HMRC are now encouraging taxpayers to set up direct debit payments online. This facility will now be available to anyone who is registered to use Self Assessment Online, PAYE Online for employers or Corporation Tax Online.

Would you want to give HMRC the right to debit funds directly out of your bank account? That's what this amounts to.

Previously the facility has existed but has largely been restricted to taxpayers with payment problems who have agreed a time-to-pay arrangement. I can understand that HMRC might have insisted on the facility as a quid pro quo of allowing time to pay.

HMRC's guidance contains a number of valid arguments in favour of payment by direct debit which clearly has a number of advantages and benefits. But I'm less sure about this suggested 'benefit' to taxpayers that: "it puts you in control". Er, isn't this the approach that gives the taxpayer the LEAST amount of control out of all of the payment options that exist?

Yes, I know that all banks and building societies undertake to abide by the standard Direct Debit guarantee, but I'd hate to have to rely on it in this situation.

Or is it just me?

EU Savings Tax Directive to be tightened up

Some might say, about time too. I know I do. Others will be concerned as to the impact this will have on offshore tax planning. Given how long it took to put the Directive in place in 2005 I somehow doubt that very much will change in the near future. And I think that's a shame.

Since 2005 the Directive has effectively required EU citizens to make a choice. They could either choose to invest in banking institutions that levy a witholding tax or agree to their interest income being reported so as to ensure that they pay the full tax that is due thereon. At least that was the theory.

The regime was intended to limit the opportunities for investors to avoid paying tax on interest income when investing 'offshore'. Many of the most popular offshore tax havens (whether inside or outside of the EU) had agreed to abide by the directive - either to comply with the information exchange (reporting) or the witholding tax option.

However, even before the Directive was adopted commentators and advisers recognised that it was full of loopholes. This effectively gave investors a further option. To invest offshore through trusts and corporate vehicles that were not covered by the Directive. The simple reason being that it currently only imposes an obligation to 'withold or report' where funds are deposited by individuals.

At its meeting on 2nd December, the European Council of Finance Ministers (Ecofin) expressed support for proposals by the European Commission (EC) to widen the scope of the legislation "with a view to closing existing loopholes and eliminating tax evasion."

The proposed amendment seeks to tighten the directive, so member states can tax more interest payments channelled through intermediate tax-exempted structures. The amendment would also extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurances products.

It is quite clear that the EU intends to close all of the obvious gaps in this Directive (and some less obvious ones). Once implemented the amended Directive will have far more teeth.

How long will it be before the amended Directive becomes operational and effective? I don't know but when that happens offshore tax planning will never be the same again.

Tax lost through the hidden economy

Here we go again. The House of Commons Public Accounts Committee (PAC) has published a new report today: HMRC: Tackling the hidden economy in which they state very clearly that:

There are no reliable estimates of the tax lost through the hidden economy

They add:

but it could be over £2 billion a year and involve around 2 million people.

So of course that's the figure that has been reported by all of the press. It is also used as a comparative for the number of 30,000 hidden economy cases that have been uncovered each a year since 2003–04. This leads to the suggestion that there is a detection rate of only around 1.5%. Whatever the truth of the numbers there is a long way to go and this PAC report sets out some very sensible actions that need to be taken. I don't agree with them all but that's not the point.

It was only last April that the National Audit Office published a not dissimilar report: HM Revenue & Customs: Tackling the hidden economy.

I'm sure the MPs on the PAC have done their best but it seems to me that the £2bn figure they have quoted above has been lifted from this report but not updated for inflation. The NAO stated that:

In common with other tax authorities, HM Revenue & Customs has sought to estimate the amount of tax lost from the hidden economy, but so far no one has been able to produce robust estimates. In 2002 the Department published estimates of VAT losses of between £400 million and £500 million from between 125,000 and 180,000 businesses that should have been VAT registered but were not. Since that time the Department has continued to work on ways of estimating the amount of tax lost. For other taxes, the Department estimated in 2005 that using certain assumptions there were some two million ghosts and moonlighters with losses of at least £1.5 billion

Of course there needs to be a starting point and £2bn is a good a figure as any other to suggest the scale of the problem is enormous.

Back in 2000 Lord Grabiner reported on the Informal Economy. That report suggested that every year billions of pounds have been lost to the informal economy. And that 120,000 are working while 'signing on' at a cost of nearly half a billion pounds to the taxpayer.

All such estimates are intended to be used to highlight how cost effective it SHOULD be to deploy more HMRC tax investigators to root out those who are not paying their fair share of tax (to use one of the Government's favoured phrases).

Instead of increasing the number of well trained staff that HMRC have available to investigate, challenge (and if necessary prosecute) those who choose not to fully declare their taxes, the Government continues to cut their staffing. The emphasis seems to be only on providing incentives to come clean. But these are rarely thought through and have only limited impact.

Until Mr and Mrs Average see and hear regular stories of how cheaters are being caught out and made to pay, all the hot air in the world will simply evaporate to limited effect. In this regard I am simply echoing a recommendation from the PAC report:

For every thousand cases detected only two are prosecuted. The Department achieves limited publicity on prosecutions reducing the deterrent effect.

The NAO report was a step in the right direction. The PAC report builds on this and, if its key recommendations are implemented they will herald a brave new world - and plenty of work for tax investigation specialists. Bring it on!

Buy to let landlords facing more tax investigations

Middle class investors in property that they 'buy to let' are easy prey for HMRC tax investigators. It's very easy for them, for example, to find out who owns property which is not the registered main residence of someone on the electoral roll.

Most property owners declare their rental income on their annual self assessment tax returns and claim relief for the allowable deductions. They then pay tax on their net profit from renting out property.

The House of Commons Public Accounts Committee has just published a report: HMRC: Tackling the hidden economy. The report highlights the fact that not everyone is honest and that HMRC should do more to collect the unpaid tax on rental income. They want incentives to be publicised to encourage people to come clean. They have also suggested that anyone who fails to declare their taxable income from rental properties should end up with a criminal record.

This is all stern stuff. It's also true that some landlords who fully declare their taxable income claim too much by way of expenses. The most common error being to include the capital element of mortgage repayments. Only the interest charges can be deducted from rental income. This mistake can lead to significant underpayments of tax - even though all of the rental income has been properly disclosed on tax returns.

The potential for a 'crack-down' on buy to let landlords is just one element of a desire to increase the incentives for those who favour the 'cash in hand' culture. I will comment further on this in a separate blog post. In the meantime I should stress that the tax investigation specialist members of the Tax Advice Network are available to advise and support anyone who either wants to come clean or has left it too late and is now the subject of an HMRC enquiry. Experience shows that lower settlements are invariably achieved by SPECIALISTS in such matters rather than dabblers.

HMRC Business Payment Support Service

What HMRC are saying is that if you want to spread your tax bills, phone a special number and explain what you want to them. Here's the relevant page on their website:
Business Payment Support Service

It's clearly a good idea and has been sanctioned by the Chancellor so HMRC debt management officers should do as they are told. Interest will of course continue to be charged on the late payment of all the taxes involved - so no 'free credit' here. It does mean though that HMRC should hold off sending in the bailiffs and the heavy mob as quickly as they might otherwise have done. At least this way they know you're going to take your time.

For those accountants whose clients may need to take advantage of this facility there is an important caveat. HMRC will only be prepared to discuss and agree payment terms with taxpayers. [EDIT: HMRC have since confirmed that they WILL deal with agents - see comment below]

I would suggest that accountants sending letters to clients notifying them of their forthcoming tax liabilities (eg: on 31 December and 31 January) should include reference to:
- the facility to ask for time to pay,
- details of the phone number to call,
- the information the clients will need to have to hand, AND
- a request to advise you of any such terms that are agreed.

HMRC no longer allowed to take taxpayer papers to meetings

I read about this in Taxation magazine and didn't know whether to laugh or cry.

Accountants have long recognised the logistical and psychological advantages that come from meeting with Inspectors of Taxes at the accountant's office. This is in preference to attending meetings at the Inspector's office. Historically Inspectors' have been quite relaxed about this and some of them even understood that it was more cost effective for the accountant and the client. Why should they have to pay for their accountant to travel to see the Inspector?

Plus of course with the closure of so many local offices means it's often wholly impractical for the accountant to go to see HMRC.

It seems that there's a new factor to take into account now. Do you want the Inspector to be able to refer to his papers? If you insist on having the meeting at your office the Inspector may arrive without bringing the taxpayer's file with him (or her). This is going to hamper their ability to negotiate by reference to the facts and information on their files unless they have exceptionally good memories.

The story in Taxation magazine is on their letters (feedback) page where a reader reports that officers from SCIO travelled from Widnes to London for a second meeting without the taxpayer's files. It lasted only 15 minutes with most points agreed in the taxpayer's favour.

This is what HMRC said to Taxation magazine:

"Taxpayer files are more than likely to contain restricted information. Staff are instructed to:

• Never take data outside of the office unless they really need to.
• Keep official papers secure at all times.
• Never leave them unattended.

Taking files out of an office would need the approval of the appropriate Data Guardian. Tax files are official papers and should be looked after in a manner commensurate with the protective marking applied to them.

All staff are required to attend a data security workshop, have been issued with a Data Security Handbook, and information on data securoty is regualroly published on the internet.

Given the diversity of activity undertaken by HMRC, instructions are by necessity generic.

Staff who breech the rules will face conduct and disciplinary proceedings."

The end of tax advisers?

'Start the Week' this morning featured Professor Richard Susskind who was interviewed about his new book, The End of Lawyers? Rethinking the Nature of Legal Services. (Extracts from the book have been appearing in the Times).

In the book Professor Susskind argues that technology and standardisation will make lawyers less important and that this is already having a major impact on the structure and future of law firms. The discussion highlighted that he considers that the same principles will apply to other service professionals. Could the same be true of accountants and tax advisers for example?

Professor Susskind contends that the market is unlikely to tolerate expensive lawyers for tasks that can be better provided through automation, low cost online facilities and the support of modern systems and techniques. He claims that the legal profession will be driven by two forces in the coming decade:

1. by a market pull towards the commoditisation of legal services, and
2. by the pervasive development and uptake of new and disruptive legal technologies.

Are there lessons here that are equally applicable to accountants and tax advisers? I think the answer is 'yes' and I have previously commented as to the similarities on my blog for ambitious accountants.

I'm pleased to note that Professor Susskind still considers that there will continue to be a market for bespoke advice and that many people will continue to be willing to pay for expert judgment, intuition and the application and communication of complex expertise.

After all, that's just what the Tax Advice Network is all about!

Is it IR35 or the pressure to work as a quasi employee?

This is an important distinction and it was the first question to occur to me when I heard about a recent survey.

The Professional Contractors' Group has recently published their 2008 membership survey which makes for interesting reading. Over 1,700 members participated and the results are not as obvious as one might have expected. Unlike some other surveys about which I have previously blogged this one seems to have a high degree of credence - albeit that there appears to be one surprising omission.

Business structure
All respondents were asked the main reasons for choosing the business structure that they have (95% being limited companies). The headline weighted percentage responses were:

• Commercial necessity 32%
• Commercial preference 21%
• Tax advantage 26%
• Limited liability 19%
• Other 2%

Business problems
The press release that announced the results also highlighted the fact that 65% of respondents identified IR35 as a problem for their business. Apparently the proportion of respondents citing IR35 as a problem remains unchanged since 2006. IR35 is also identified by 81% of respondents as an issue on which PCG should campaign.

The omission
To be fair this is probably because so many of the contractors provide their services through their own limited companies. And many of them still perceive this as being tax effective - even if tax was not the primary motivation for using a limited company structure.

The simple fact is that many (most?) contractors are effectively obliged to provide their services through a limited company structure in order to secure work. Their customers do not want to risk being deemed to be the employer of the contractors they engage to provide services.

As long as the contractor provides their services through their own limited company the customer can sleep easy. They can treat the contractor as a genuine external service provider or indeed as a quasi employee without any worry as to whether the independent contractors' off-payroll status will be subject to an HMRC challenge.

By insisting on the provision of services by independent contractors through limited companies the 'employers' effectively pass all the risk of dealing with HMRC challenges to the contractor - and the 'employer' also avoids what they perceive to be onerous employment law obligations.

The only reason why IR35 should be a concern is if the contractors WOULD be treated as employees if they supplied their services direct to the customers. If however the contractors were genuinely providing their services as arms length service providers AND we all believed that HMRC would not seek to prove otherwise there would be no need to be concerned about IR35. Its targets are supposed to only be those situations where the contractor would be the customer's employee but for the imposition of the contractor's limited company.

This is the unspoken truth of the ongoing concerns about IR35. Fundamentally it is due to the onerous obligations and costs that employers face and that they choose to avoid. A combination of employment law and the added payroll cost of employers' NICs.

Anyone care to comment?

If you have contractors in your client base you may well find the full survey results enlightening

HMRCs dedicated phone numbers for agents

These are the numbers that accountants and other professional agents can call rather than the more generic helplines that taxpayers and the public call.

It's nearly a year since HMRC committed to provide this facility in response to complaints that agents were frustrated and wasting time calling the generic helplines. There are now over 60 distinct lines available - one in each HMRC Contact centre.

When you call an Agent Dedicated Line, you will be:

• given priority and answered faster;
• put through to an adviser who has at least 12 months experience; and
• transferred to technicians if necessary to ensure your query is answered wherever possible during your first call.

This initiative has been building up over the last year and the numbers are for use by agents only. The contact centres are open Monday to Friday 8am - 8pm and Saturday 8am - 4pm except Belfast which is open Monday to Friday 8.30am to 5pm.

There is a separate and distinct priority number for agents dealing with tax credits: 0845 300 3943.

I note that in the press release announcing the availability of the last of the agent dedicated lines, (HMRC - Why don't you give us a call?) there is a rather strange statistic. It states that

"over 170,000 agents have called HM Revenue & Customs (HMRC) Agents Dedicated Lines (ADLs) since they started being rolled out three months ago."

I'd accept that over 170,000 calls have been made to the ADLs. But the suggestion that there are anything like 170,000 agents in the UK strikes me as excessive. I'd welcome suggestions as to how to arrive at a more accurate figure.

Misuse of anti terrorism powers raises concerns about potential for misuse of HMRC powers

HMRC now have very wide powers and there is a widespread concern across the profession that taxpayers have insufficient safeguards. **

The police raid on the London home of MP Damian Green, on his Kent home and on his constituency office was conducted using anti-terrorism powers. There has been no suggestion that his involvement in leaks passed to him had anything to do with official secrets. The media, MPs generally and all commentators seem unanimous in their criticism of what appears to be a gross misuse of power by the police.

My reason for referring to this new story on the TaxBuzz blog is that it provides further evidence (if this were needed) that HMRCs powers are also capable of being misused. Indeed I am sure that there are already greater constraints on the Police in this regard than there are on HMRC. And yet still the police were able to rely on anti-terrorism laws to justify their raids on Mr Green.

Senior officials at HMRC have sought to explain why they need to have the new powers afforded to them by Schedule 36 of FA 2008. These follow on from the additional powers contained in FA2007. The entire powers review has been the subject of much discussion and debate. Throughout it seems that HMRC have rejected the profession's near unanimous calls for effective statutory safeguards to prevent misuses of power by HMRC staff and officials.

Such requests invariably seem to fall on deaf ears. On occasion we have heard variations on the usual old cliches:

....would only ever apply to established tax debts once all the normal avenues for appeal had been exhausted, and after repeated requests for payment had been ignored.

Any powers to access bank accounts should we acquire them, would only be used ....after we had exhausted all efforts at contacting the defaulter.

“The cultural message across HMRC is collect the right amount of tax, and not the maximum amount, and to ensure that taxpayers receive their entitlements”

“there are diametric views as to what is actually a safeguard”

it’ll be alright on the night

“Trust us – we shall be reasonable”.

I hope that the events of last week will serve as a lesson. A lesson as to why it is so important for the law to contain effective protection against those who would misuse the wide powers afforded them by the law. It's important as regards anti-terror laws, it's important as regards HMRC powers and it's important for civil liberties. And I've never before been concerned that as an innocent person I had anything to fear from the application of UK law.

**I addressed this point in a recent blog: HMRC powers - the rational arguments that these go too far. This by reference to the 2008 Hardman memorial lecture presented for the ICAEW Tax Faculty by International Tax Barrister Jonathan Schwarz.

VAT changes will HURT small businesses

Despite my comment in a previous post that I'm not a fan of instant Budget analyses I did find myself in a bizarre situation yesterday. I was providing instant comment and analysis as regards the likely impact of the VAT cut announced in the PBR. Or, as at least one radio station insisted upon describing the move, "VAT slashed". Somewhat of an over exaggeration I thought especially as many traders won't change their prices to reflect the change.

We had of course had time to consider some of the related issues as the reduction from 17.5% to 15% in the standard rate of VAT had been widely leaked beforehand.

I wasn't alone in noting the practical issues for small businesses. These are two fold:

No compulsion to lower prices but retailers especially may be expected to explain that they've included the VAT rate cut in any wider discounts they are offering; and

Significant time, effort and hassle arising from the need to recognise the rate change in their accounting records and systems.

Beyond this I haven't however seen any other references (yet) to the VAT nightmare before Christmas that will ensue when everyone gears up for the change back to 17.5% over the festive holiday period next year.

The Government it seems takes a contrary view. Their impact assessment anticipates that the average cost per small business will be less than £100. This comprises £7 for familiarisation, £25 for repricing, £13 for extra bookkeeping, £25 for extra accountancy costs and £13 for system changes and upgrades. They've also allowed a further £10 for purchasing patches or upgrades to accounts packages whilst recognising that these may be provided free by software suppliers.

Would readers of this blog care to share their views by way of comments as regards these cost figures?

Would anyone have been interested?

Accountants who have heard me speak about marketing related issues for accountants will be aware of my disdain for instant Budget commentaries. These tend to do little more than regurgitate what was in the Budget day press releases. There is rarely time or space for informed comment.

Do clients really like them? Are they really of any value? The papers will invariably contain more detailed summaries, analysis and comment than any one firm's overnight Budget commentary. And within 48 hours it's often out of date as more related documents are published by HMRC and Treasury revealing more details of the announcements contained in the Budget. What makes the Budget announcements worthy of all that time and concerted effort to provide instant comment as distinct from the other tax chnages and developments that occur throughout the year?

So, thank you to anyone who came to this blog looking for our instant analysis and comments. Thank you but we didn't produce one. We have however commented on some of the specific issues and will continue to do so as further details and implications become apparent.

HMRC powers - the rational arguments that these go too far

Earlier this week I attended the 2008 Hardman memorial lecture presented for the ICAEW Tax Faculty by International Tax Barrister Jonathan Schwarz. His theme was 'Rights and powers: protecting the legitimate interests of taxpayers.' And his subtitle was "Taxpayer Rights in a Constitutional Democracy"

I have attended numerous seminars, meetings and discussions on related subjects - that is, the new HMRC powers as set out in part 2 of Schedule 36 FA 2008. I have also made a passing reference to these in a previous post on this blog: The end of the old paper bag jobs?

I thought I understood the arguments raised by those in the profession who fear that the powers go too far and could be misused. Equally I had some sympathy with HMRC's position, which was well defended during the ICAEW Wyman Symposium earlier this year. I would summarise this simply as: HMRC argues that it needs these powers to ensure that dedicated tax evaders do not escape on technicalities.

Jonathan's hard hitting views included a well argued observation as to the police state nature of the powers and the prospective consequences of the absence of effective safeguards.

A number of points specifically stuck in my mind:

• the new powers are the tax equivalent of the police's right to 'stop and search';
• as the powers are already on the statute book we need to focus on adding specific statutory safeguards;
• the unfettered power for HMRC officials to enter private homes should however be removed from the statute book;
• the proposed taxpayer's charter will, by definition be inadequate even if given simplistic statutory backing;
• taxpayer rights cannot be effectively addressed by an aspirational document (ie: the proposed charter). They need to be properly endorsed by parliament in the same was as were HMRC powers;

Whilst listening to Jonathan I realised that I had previously allowed myself to be misled by the HMRC arguments. I firmly believed that in reality no one within HMRC would have the time or inclination to abuse the new powers to the detriment of innocent taxpayers.

After the lecture Jonathan took questions from the floor. The last one was more of an observation by Anne Redstone. But, for me, it summed up the fears that I have not previously shared. She recalled a friend from her days at a girl's Convent school. The friend had asked her mother if she could go on the pill. Her mother wasn't happy and likened the idea to acquiring a beautiful ball gown, even though the school didn't have an annual prom. "The thing is, she told her daughter, once you have it you will want to use it."

The fear that so many commentators and practitioners have is that HMRC's powers will be misused. Many of us do not doubt the honest intentions of those at the top of HMRC who have championed the introduction of the new powers. We do not doubt the sincerity of their motives and we may even trust most of them. But it will be less senior officials who get to play with these new toys.

And, lest anyone should doubt how such powers can be used in ways not intentioned, we do not need to look very far for a worrying example. How about the use of the Prevention of Terrorism Act to freeze Icelandic assets?

Know your limits

A senior official at a big publisher told me recently how he once prevented what could have been a major PR disaster. His marketing team had been working on the copy they wanted to use to promote a new easy to use online tax service.

Their favoured headline?

"For when you want to advise on something you know nothing about"

Fortunately the official immediately recognised the potential downside of such a headline. If an accountant used the service and then gave advice which turned out to be wrong he might try to sue the publisher. Indeed the promotion also ran counter to the Guide to Professional Conduct for those working in tax. I have referred to this before on the TaxBuzz blog. (I sit on the pan professional body working party that is updating the 2004 version for the ICAEW, CIOT and 5 other professional bodies). One key paragraph often comes to mind:

“Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.

Thus it won't surprise regular readers if I offer an alternative solution 'for when you want to advise on something you know nothing about'. Don't. Don't risk getting it wrong. Our tax system is now so complex there is no shame in admitting to a client that the matter in hand requires specialist input. Doctors adopt this approach all the time. So do dentists. So do all wise professionals.

Indeed one has to question whether any 'professional' would ever advise a client on something the professional doesn't really know about.

And if you do want to speak with a VISTA (Vetted Independent Specialist Tax Adviser) I hope you know where to start!

Hutton on Estate Planning - all tax books should be written this way

I've been attending Matthew Hutton's very useful Monthly Tax Review sessions for some while now. We share a desire for sharing knowledge and for commenting on current tax developments.

One big difference between us is that Matthew has made time to write a heavyweight book on 'Estate Planning'. I have a copy in front of me as I type this. I can't imagine how Matthew managed to do this on top of his other regular activities. More than that though Matthew has set a new standard for tax books as he has committed to publishing monthly updates. Indeed the entire book is also available as a web based resource thus making it very easy to find just what you are looking for. The book was initially published in September 2008 and the online version already now benefits from 2 updates which are incorporated into the text.

When I was in practice and researching technical material I knew how important it was to check the publication date of any books to which I referred. And I sympathised with the publishers who were reduced to promoting out of date books when the authors had not updated them. Very few tax books require no updates at all during the year.

Hutton on Estate Planning was evidently written as a labour of love and Mathew is to be congratulated on his commitment and dedication. I love the sub-title "Practical Solutions to Today's Problems" as this highlights the approach he has adopted throughout the book. The text is also sprinkled with highlighted 'tax traps' as well as extensive case and legislative references.

If I were still involved in the provision of tax advice myself this is one book I would want on my shelf. More than that I would also want to be able to access the ebook version too. Without it you are reduced to having to check various sources to identify the impact of new case law, HMRC publications and related material that arises throughout the year. I suppose that if I was a dedicated reader of a pre-existing annual publication on the same subject matter I might remain 'loyal' but I'm not sure that there is a comprehensive alternative and especially one that is kept so uptodate throughout the year.

And for those who wonder about Matthew's commitment in this regard - do note that he has proved his credentials as he has been writing monthly tax updates for fifteen years already.

As I said above, this book (on and offline) sets a new standard for tax publications. It won't be easy for the mainstream publishers to replicate this but it's something they will need to consider.

Edit: I'm delighted that, having read the above post, Matthew has offered a discount to readers of the TaxBuzz blog who are members of the Tax Advice Network. If you are interested in the online version of the book, just quote 'TAN' when you email Matthew on mhutton@paston.co.uk to qualify for the 10% discount.

Beware of tax schemes you don't understand

A firm of accountants recently lost a court battle with their PI insurers to cover negligence claims arising from failed tax avoidance schemes. What can we learn from this?

Thinking back, this isn't a scenario I have previously mentioned during my talks on how to protect your firm and avoid professional negligence claims. I've addressed many related points though, including the risks that advisers run when they promote tax schemes that they don't understand.

The recent case involved partners at Kidsons (now part of Baker Tilly) who sold tax schemes that the Inland Revenue subsequently ruled inadmissible. This led, as it does so often, to claims from clients that they had not been adequately informed of the risks.

Kidsons expected such claims to be covered by their PI policy but the insurers refused to pay out claiming that they had not been notified of the claims in good time. This is another point that I stress during my talks. The need to satisfy what is a key term in all PI policies - to notify all circumstances that could led to a claim - not simply to notify claims as they arise.

The tax schemes in question were marketed by a company called Solutions at Fiscal Innovation Limited which was owned and managed by Kidsons. I would assume that the schemes in question had the benefit of Counsel's opinion as to their legality and the expected tax outcome. Such schemes invariably do. But these Opinions are not guarantees and, as this case shows, woe betide anyone who underplays the risks when promoting such schemes to clients.

And, as I also regularly point out - the time lags in such cases can be significant. From what I can tell it seems likely that the schemes in question were being promoted in the late 1990s. It was seven years ago in October 2001 that the insurers were first notified that there could be problems. It it evident that the 'fiscal engineering' was unsuccessful and I would assume that the tax outcome was resolved in 2003 or 2004 (probably arounhd 5 years after the planning took place). The dispute between the accountants and their insurers rumbled on with a High Court case in August 2007 and now the Court of Appeal decision in October 2008.

The three key points that I would highlight here are:

• The dangers of advising clients about the expected outcome of tax avoidance schemes when you do not have the technical expertise to fully appreciate the risks and key issues;
• The importance of ensuring that clients appreciate the risks such that they cannot claim to have been a victim of 'mis-selling';
• The liklihood of 'schemes' being challenged by HMRC and of such challenges dragging on and on.
• The importance of notifying your PI insurers whenever you become aware of circumstances that could lead to a negligence claim.

Cancelling the small company tax rise won't help NOW

This morning I posted a blog in which I explained why none of the headline demands for tax cuts would have the desired impact. Quite simply because they won't reduce the taxes payable in the immediate future.

I have another example of such a tax cut to add to the list. And this one I'm afraid emphasises how out of touch are the MP's who vote on these matters.

The alternative view would require me to attribute a high degree of cynical game playing to the 18 MPs who signed a parliamentary motion. Is it really possible that they only did so for the PR that has followed despite knowing that the tax to which they refer will not be payable until 2010. So, even if the Government did as requested the impact would have NO IMPACT at all on cashflow during the recession.

Sadly - I think it more likely that the MPs genuinely think they are trying to help (and secure some positive PR) and are wholly unaware of how ineffective would be a successful outcome to their demands. ie: they do not understand even the most basic of points about our tax system - ie: when tax is payable.

According to press reports the MPs have called on the Government to "back down on the plan to increase corporation tax on small businesses from 21% to 22%". Amazingly the claim is being supported by the Federation of Small Business which I would have hoped did understand how the tax system works.

Quite simply corporation tax is payable on profits made during an accounting period. The rate of corporation tax on small company profits (upto £300,000) is to increase by 1% to 22% from 31 March 2009. It will only be payable ON PROFITS MADE AFTER THAT DATE. And corporation tax is not payable until 9 months after the end of an accounting period.

By way of example - assume 12 month accounting periods ending:

• 31 March 2009 - Subject to corporation tax of 21%. Payable 31 December 2009.
• 30 April 2009 - Subject to tax at 21% on 11 months profits and 22% tax on profits in April 2009. All payable 30 January 2010.
• 30 September 2009 - Subject to tax at 21% on 6 months profits and 22% tax on 6 months profits from April 2009. All tax payable 30 June 2010.
• 31 March 2010 - Subject to tax at 22%. Payable 31 December 2010

So tell me, how does cancelling the increase from 21% to 22% help small companies facing the recession at the end of 2008?

Talk of tax cuts hits the headlines but is unlikely to hit our pockets

I was interviewed on BC 3Counties radio on Monday about the stories that had appeared in the press suggesting that tax cuts were on the way. I said that many of politicians speaking on the subject were revealing how little they know about our tax system. Either they are woefully ill informed or simply ignorant on the subject.

I’ve amplified below some of the points I made during the interview:

There will be no income tax cut part way through the current tax year. Neither HMRC nor any commercial tax software would be able to cope with the necessary calculations. So any such change would either be deferred until the start of the next year (see below) or it would need to be back dated to the start of the current tax year (6 April 2008) as was the recent change in the personal allowances – to compensate for the abolition of the 10p tax rate. Even then a back dated rate change would be unprecedented and I’m doubtful the software would be able to cope as it’s never had to do so before. And no one with experience of HMRCs software would have an confidence that it could cope with a back dated change.

Even if the basic rate of income tax were to be cut from 6 April 2009, this would only flow through to employees’ pockets some time after May 2009 – due to the way that the PAYE system operates. So, no immediate impact or benefits other than headlines.

For the self employed the position is even worse – if the basic rate of income tax is cut from 6 April 2009 this will generally only affect the tax payable on, wait for it, 31 January 2011. That’s when the self employed settle their tax bills for 2009/10 so such a tax cut would not impact our pockets for almost two years. That’s hardly going to make a difference to how people feel about spending over the next few months.

What about a cut in VAT? Well, let’s leave aside the need for the Government to first obtain authority from Europe for such a cut and assume that follows. Would a cut help ‘now’? It might do IF all shops and suppliers pass on the cut to consumers. But there’s no guarantee they would do so. The basic rate of VAT has been unchanged for so long that most people are used to VAT inclusive prices.

Assume the rate drops from 17.5% to 10%. Will a shop that charges £58.75 (being £50 plus VAT) reduce their prices to £55 (£50 plus 10% VAT) straight away or will they find it easier to revise their price upwards from £50 to £53.40. VAT at 10% on this takes the full price figure upto £58.75. And then price tickets don’t need to be changed. INCREASES in VAT would be passed onto consumers straight away but I’m not sure that cuts would be. Having said that a cut in VAT is otherwise the fastest way to get a tax cut to the majority of the country. But it’s also VERY expensive for the Government.

Increases in tax credits would be targeted on those on lowest incomes and equate to an increase in ‘benefits’. Sadly. As I have said before, the tax credit system is not fit for purpose and claims can only be backdated by 3 months so many people lose out as they did not anticipate their income falling to a level that would qualify for tax credits.

Reducing Employers NICs would have an immediate impact on employers (big and small) but would do nothing to help the self employed or the small companies with no employees.

Talk of tax cuts hits the headlines but is unlikely to hit our pockets

Gaines-Cooper loses in Court of Appeal - Residence rules revisited

Two years ago the Special Commissioners determined that Robert Gaines-Cooper had retained his domicile of origin and that the frequency of his visits to the UK meant that he was resident and taxable here.

The Commissioners decision was upheld by the High Court and now also by the Court of Appeal. The Judges dismissed Mr Gaines-Cooper's appeal as 'nothing more than an illegitimate attempt to reargue the facts.'

Perversely the case may not be wholly good news for HMRC. In stressing the hurdles that need to be overcome to lose one's domicile of origin, the case also makes it more difficult for HMRC to successfully challenge the claims of non-doms in the UK that they retain their domiciles of origin overseas.

This case was the catalyst for the new rules for determining residence and domicile for tax purposes. These were announced in the 1997 Pre-Budget Report and then, after much backtracking and clarification they were introduced in the 2008 Budget and Finance Act.

In the meantime the Residence and Domicile 'bible' for advisers, IR20, has become out of date. However, as reported previously on the TaxBuzz blog, HMRC are inviting advisers to suggest the issues that an updated IR20 should cover.

The Court of Appeal decision may be the end of the road for Mr Gaines-Cooper although one assumes that his legal advisers thought there was a strong enough case to appeal this far. Whether he has the stomach for an appeal to the House of Lords, or will be granted leave to make such an appeal seems unlikely.

Tax breaks for small business - an off the wall idea?

As we enter a period of recession expect to hear calls for more 'tax breaks' and promises of these from politicians on all sides. 'Tax break' is a more accurate term than the alternative of 'tax incentive' which has previously been used despite the inbuilt inaccuracy of the term. The truth is that so called 'incentives' are simply rewards for spending money in ways that the Government wishes to encourage.

Wikipedia's current definition of 'tax break', whilst US in style, seems quite clear to me:

A tax break is a tax saving. This includes:

• Tax exemption, an exemption from all or certain taxes of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone.
• Tax deduction, an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income,
• Tax credit, more valuable than an equivalent tax deduction because a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed.

Then reason I prefer this term to 'tax incentive' is that the latter is a complete misnomer when it comes to decisions made by most owners of micro and small businesses - who are often the main target of the so-called 'incentive'. The problem being that the targets are rarely aware of the incentives and even if they do hear about them they either don't qualify or can't afford to invest the money required to benefit from the 'incentive'.

A couple of examples will suffice:

• Research and development tax credits - these don't so much incentivise investment in R&D as reward those who have spent the money - some time after the money has been spent; If your expenditure qualifies your subsequent tax bill will be reduced or you will receive a tax refund - at such time as you would otherwise have paid your corporation tax;
• Annual Investment Allowance - again, not so much an incentive to acquire qualifying plant and machinery expenditure as a reward. Actually this is a very welcome simplification. The 100% relief removes the need for anyone to worry too much about the distinction between such capital expenditure and other business expenditure.

The problem with tax incentives and tax breaks is that so many people seem to misunderstand what's really going on. In business terms neither tax breaks or tax incentives actually impact decisions, other than at the margins. A pro-active accountant will, for example, encourage a client to advance expenditure plans into the current tax year so as to secure the tax benefits a year earlier than would otherwise be the case. But either the business has access to the funds or they don't.

The promise of tax relief at least 9 months (often more) down the line, by way of a tax break or a tax incentive is NOT going to have a significant impact on business owners' motivation. And, more than anything else it isn't going to provide the funds to facilitate the expenditure that is supposed to have been encouraged.

The only way I can see to do this is to effectively subsidise the cost of the items in question so that the purchaser only plays, say 70% of the normal price. The vendor then recovering the remaining 30% of the price from HMRC. This is not a million miles away from the way that the GiftAid system works for charities. We give them a donation and they recover a related sum (of tax) from HMRC.

Would this work? Is it worth considering further?

Tax advisory opportunities as we enter a recession?

I wasn't sure whether to post this here on the TaxBuzz blog or on my separate blog containing more general advice and tips for ambitious accountants. This tax insight is also related to one of the points I will be addressing in a forthcoming seminar on 19 November: Mastering the Credit Crunch - your practice, your advice, your future. (NB: Places filling fast!)

Obviously no one wants to pay MORE tax at any time. But with increased pressures on margins, cashflows and financing costs it becomes even more important to ensure that clients aren't paying more tax than they need to.

During my talks to accountants I often stress the need to ensure that clients perceive that their accountant is giving proactive tax saving advice. That often means the accountant needs to spell out to the client the tax implications of any advice and work rather than simply hope the client will somehow find out. There are plenty of accountants around who do a fine job but whose clients don't know this and maybe even assume their accountant isn't trying to save them tax each year.

Beyond the day to day issues relevant to many clients and taxpayers (eg: claiming all allowances, reliefs and deductions) the current financial situation also presents additional tax planning opportunities.

These incluse capital gains tax mitigation, inheritance tax planning and the managing the taxes that can arise when reorganising groups of companies, such as on demergers or sale.

Falling share and property values actually present specific tax planning opportunities for the wealthy - in terms of CGT and IHT, also for those companies wanting to incentivise staff through share option schemes.

Not all accountants have the necessary specialist expertise to advice on such matters. And it's rarely low cost advice so it's not for everyone. Many accountants outsource such specialist tax expertise. I'll be addressing these and many other subjects in a talk I'm giving to accountants next month: Mastering the credit crunch - your practice, your advice, your future.

So, are there more or fewer opportunities for tax planning as we enter a recession?
My own view is that certainly aren't fewer opportunities. There may be fewer people willing pay good money for advice, but if the cost/benefit equation is right then there's no need for accountants to worry. Service and value for money are as important as ever.
What do you think?

Partnership tax enquiries

I've been hearing that HMRC are focusing more attention than ever before on the tax affairs of professional firms. And this means the tax affairs of more accountancy firms (and their clients eg: law firms and other professional partnership clients) are likely to come under increased scrutiny.

When I was in practice we tended to discourage clients from claiming excessive deductions in respect of business use of car, business use of home phones and payments ostensibly for spousal support. In addition to these items which are often still relevant, HMRC are asking about two other partnership expenses:
- ex-gratia payments to departing partners (paid to encourage them to go quietly and quickly - and thus for the benefit of the trade); and
- recruitment fees paid to source and secure new partners from outside the firm.

In both of the latter cases HMRC's starting point is that the expenditure does not qualify for tax relief. I'm not aware of anyone securing tax relief in eaither case - simply becuase HMRC are keeping their enquiries open in the hope of securing a definitive view in each case, once the matter has been before the Commissioners.

Finally there are two other partnership specific issues that also feature in HMRC enquiries:
- the basis of computing accrued income under FRS5 and UITF 40; and
- the justification or otherwise as regards provisions that are supposed to comply with FRS12.

Some people mistakenly assume that only Limited Liability Partnerships (LLPs) need worry about those accounting related issues. After all only LLPs are required to produce accounts that comply with Generally Accepted Accounting Principles (GAAP). But all partnerships - indeed all traders - are required to compute their tax charge by reference to profits calculated in accordance with GAAP. Thus all partnerships are required to comply with the same accounting requirements, if not in their accounts then in their adjusted profit computations for tax purposes.

HMRC hires retired tax advisers

Now that's going to come as a shock to a few people. It was included in that report from Reuters to which I referred in my tax blog post yesterday.

I've long been aware that HMRC employ accountants to assist with the accounting issues that arise when Inspectors are reviewing business and company accounts. Indeed when an accountant in practice tells me that a Revenue official has made an ill informed comment about a client's accounts I suggest that the accountant asks for the matter to be referred to a revenue accountant. One of the roles is specifically to help their colleagues and to reduce the time wasted on 'non points'.

But - 'retired tax advisers'? Now that could put the cat among the pigeons. You shouldn't have anything to worry about of course as long as you have nothing to hide.

I suspect that initially the 'retired tax advisers' will be expected to provide insights and advice in connection with large corporates and corporation tax issues. Will they also suggest questions, challenges and arguments to adopt in negotiations with accountants who advise 'smaller clients'? We'll have to just wait and see.

Perhaps this is a further prompt of what to do when tempted to advice on tax related issues with which you're not totally familiar. You could try a bit of research. You could ask a mate. Or you could speak to an independent tax specialist adviser. And where better to find one than in the Tax Advice Network? ;-)

Conservative tax proposals to help small businesses

Has someone announced that we're going to have a general election next month? The detailed 'proposals' called for by the Conservative party this week are the sort of thing I would expect to hear about at election time.

These proposals, announced by David Cameron in the Observer and aired during an interview on BBC Breakfast this morning are quite detailed and, sad to say, entirely academic.

I suspect that the idea is to give some idea as to what the Tories would do if they were in power at this time. A series of proposals. And that's a good thing. But have these ideas been thought through or are they nice soundbites designed to generate some useful headlines?

Cameron proposes 1p cut for firms
This is a 1% cut in employers' NICs for businesses employing four or fewer staff. And only for 6 months. Given where we are now that would mean partially in the current tax year and partially in the next tax year. I hate to imagine the administrative hassle this would cause - even if it were possible to get HMRC and taxpayers' software systems to cope. And that's a BIG if.

I think the costs of managing this and dealing with the inevitable errors will exceed the (upto) £600 saving to the employer that the proposal is said to be worth. Thank goodness it's just a proposal by an oppoition party and not a realistic policy.

Six-month VAT holiday for small and medium-sized firms
No need to pay to HMRC the VAT collected from customers for six months to assist cashflow.
I can see good and bad in this 'proposal'. What do you think?

Small companies’ rate of corporation tax to be reduced to 20p
Not mentioned by David Cameron in the TV interview but included in the statement issued yesterday by Alan Duncan, the Shadow Secretary for Business. And it was also in The Observer.

I can just imagine the Treasury's reaction this one. The rate is being increased to counter the impact of Gordon Brown's ill judged introduction of a zero rate of corporation tax. This led to hundreds of thousands of small businesses to 'incorporate' and save tax. Various attempts to counter this were subsequently introduced, most recently a steady increase in the small companies rate of corporation tax.

What I did like about these announcements is the evident focus on the "vast majority of businesses that are 'small and medium sized'". But don't be misled. The definitions commonly used for small and medium sized companies are not what you might think. This becomes obvious if you consider the Government's definition (as imposed by the EU) simply of 'small' companies:

A company (or group) qualifies as a small or medium-sized company (or group) if it meets two out of three criteria relating to turnover, balance sheet total and number of employees:

• Turnover: Upto £5.6 million. (Five point six million pounds)
• Balance sheet total: Upto £2.8 milliion.
• Number of employees: Upto 50.

What I find most odd though is that David Cameron, in his Observer piece refers to "a typical small business with 50 employees". Er, no. Something like 95% of small businesses have less than 5 employees (sorry, can't trace the statistics that show this at the moment). Once a 'small business' gets upto 50 employees it's about to be reclassified as medium sized.

Tax advisers beat HMRC 60% of the time

Reuters reported today that the Parliamentary Public Accounts Committee has urged the Revenue to get tough on businesses dodging corporation tax and to sharpen up its investigations into compliance.

Whilst the message may be right I can't agree with the two quotes attributed to the committee's chairman, Edward Leigh:

"The fact nearly 60 percent of the Department's enquiries into compliance turn out to produce less than one percent of the additional tax raised constitutes very poor targeting,"

"It's extraordinary there's no correlation between the resources HMRC commits to each inquiry and the amount of corporation tax in question."

I'm trying to be objective here. Turn that first percentage around and you find that 40% of HMRCs enquiries are generating meaningful returns on the investment of time and effort. In the other cases it is possible that there was no material tax capable of being collected. Equally the taxpaying company, their accountants or tax advisers may have succeeded in defending HMRCs challenges. The tax at stake could have been high but HMRC eventually had to back down. They won't always have been wrong to open the enquiry. Will they?

On the second point, I think it's 'extraordinary' that the Committee seems to expect HMRC to become psychics. The quantum of tax collected as a result of an enquiry or an investigation cannot be determined at the outset. The amount at stake MAY become apparent during the course of an enquiry or investigation - even then this won't always be the case. But what does the committee expect HMRC to do? Close down all enquiries where the tax at stake is below a deminimus amount? Wouldn't we all like to know how much that is......................

I'm no apologist for HMRC and I've long been among the first to criticise and complain about their procedures and approach. But I'd like to think I'm fair too.

What do you think?

The new penalties regime - making tax taxing

Have you seen the latest adverts by HMRC for filing tax returns? Moira Stuart is the new celebrity face of HMRC and the print ads focus on a reminder to:

"Keep your tax affairs in order and you'll avoid a penalty"

The TV ads however simply contain a reminder of the new filing deadline of 31 October for paper returns. And at the end of the ads Moira repeats that old line that so annoys those of us who know something about the tax system:

"Tax doesn't have to be taxing"

It's not her fault though. By her own admission she's not a tax expert and knows precious little about the tax system beyond how to avoid penalties - presumably by fling before the deadlines.

I found a short video piece of Moira being interviewed about the ads. This video then continues with an interview with Clare Merrills who has featured in previous HMRC podcast too. I thought she came across exceptionally well. If I was writing for the general public I'd highlight some of the points she made but they aren't really relevant to his blog. You can watch it though by clicking on this link to the HMRC video.

Getting back to the print ads, these contain some important warnings that are worth stressing to all clients and taxpayers - even though they are more relevant to next year's tax returns - as the quality of records being maintained NOW will impact the care with which those returns can be completed:

"Completing your Tax Return is a lot less stressful if you keep all your records in order and check with us [HMRC or your accountant!] if there's anything you are uncertain about.
And this is more important than ever.
From April 2009, if you make a mistake on your Tax Return and can't show that you took reasonable care to get it right, you will have to pay a penalty."

If you're not yet familiar with the new penalties regime, you should be. Briefly, penalties for tax errors (related to tax returns due after 1 April 2009) will be imposed on four different scales according to the category of behaviour the taxpayer is judged to fall into. These categories are:

a) Making a mistake in spite of taking reasonable care: no penalty

b) Failing to take reasonable care: up to 30% penalty

c) Deliberate inaccuracy: 20% to 70% penalty

d) Deliberate and concealed inaccuracy: 30% to 100% penalty.

HMRC have released guidance on how they will interpret the new rules in the Compliance Handbook Manual. You may be surprised to learn what HMRC consider to be a deliberate inaccuracy in para CH 81150:

“deliberately withdrawing money for personal use from an incorporated business and not making any attempt to make sure it is treated correctly for tax purposes.”

How many of your clients are slightly slack with their paperwork and thus would fall into the ‘deliberate inaccuracy’ category, attracting a penalty of up to 70%?

The use of the company to pay personal expenses can be viewed by HMRC as a deliberate and concealed inaccuracy as demonstrated in para CH 81160:

“describing expenditure in the business records in such a way as to make it appear to be business related when it is in fact private (possibly with the supplier agreeing to change the description on the relevant invoices)”

The inference is that an incorrect entry in the prime records of the company could be enough to put your client in the worst category of behaviour potentially attracting a penalty of up to 100%.

Back in August we addressed this issue in one of our weekly tax updates for accountants in general practice. I have also addressed the point in an earlier blog post: 'Take care to avoid a penalty' in which I provided some salutary warnings and advice to accountants who were not yet familiar with the new regime.

Telling the taxman about undisclosed earnings

The lead comment piece in this week's Taxation magazine comes from Mike Thexton who, like me, regularly lectures to accountants. The article is a wonderfully told story about a recent experience he had after a friend sought his help with resolving a tax problem. And there is a key lesson I want to highlight in this blog post. If it resonates with you please add a comment below.

Mike says it all started with 'the dreaded question'. When someone who knows you are an accountant (or in his case a VAT lecturer) asks for your help in resolving a tax problem that requires knowledge and experience way outside your comfort zone. As Mike says, it's because people tend to assume that accountants know about all things tax, just like they assume that doctors know about all things medical.

Mike describes himself as "A VAT lecturer who prepares a few personal tax returns each year - I have never dealt with disclosure and settlement of underdeclared liabilities." He then asks himself a key question: "Should I simply pass [this] on to someone else?"

When I read this my mind immediately went back to a key paragraph in the Guide to Professional Conduct in Relation to Taxation'. (I sit on the pan professional body working party that is updating the 2004 version for the ICAEW, CIOT and 5 other professional bodies):

“Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.

Mike complied with this advice and sought the input of a friend who chairs the tax investigation service at Baker Tilly, a top ten firm of accountants.

I've summarised below some of the key lessons drawn from Mike's article:

• "Do not do this by yourself if you have no experience" - This accords with the Guidance above and was the recommended advice given to Mike by John Newth;
• "Find someone who knows what to do. The client may baulk at the level of fees, but it is likely to be worth it in reduced trouble and penalties"
• "What was unfamiliar to [Mike] was routine to someone who works in investigations."
• You need to address the underpayment of Class 2 NICs totally separately to the underpaid income tax and Class 4 NICs which were to be covered by the main settlement.
• The relative speed of securing a full settlement with maximum mitigation of penalties when you know what you're doing.

And possibly the most surprising observation of all - that Mike found his "limited adventure in investigations was an unusually positive experience". He also found the local tax office "helpful, efficient and reasonable." This is probably a reflection on the way that Mike and his friend approached the matter and that they did so as guided by a tax investigations specialist. What do you think?

For others faced with similar situations I would suggest that the independent tax investigation specialist members of the Tax Advice Network should be your first port of call.

No £100 penalty notices until February 2009

In my posting on the blog yesterday I suggested that the 31 October filing deadline for tax returns is a white elephant.

There is one other piece of the jigsaw that I should clarify. It was the one thing I wasn't absolutely clear about until recently. That is at what point would HMRC's computer start issuing £100 penalty notices for paper based tax returns filed late (in November, December and January)?

As the late filing penalty legislation was unchanged I was pretty sure (but not 100% confident) that HMRC's computer would NOT issue penalty notices until after the 31 January deadline.

Imagine filing a paper based tax return in November 2008. In theory this might trigger a £100 penalty notice. This would appear on the next statement of account issued to identify the tax payable on 31 January, once the late tax return was processed. Assume then that the full balance of the tax and penalty was paid by 31 January. Well, the £100 would then be refundable as there was no unpaid tax at 31 January. Equally I couldn't imagine HMRC using heavy handed collection procedures to chase for prompt payment of the £100 penalty knowing that it could well be repayable within a matter of weeks.

As I say, I was pretty sure that HMRC's computer would only charge the £100 penalty if a paper based tax return was filed after 31 October AND there was outstanding tax at 31 January. And despite all the hype and the focus on who would or wouldn't have a 'reasonable excuse' for late filed paper based tax returns, I've now seen definitive confirmation as follows:

A penalty for late filing of a paper return will not be generated by HMRC systems until after 31 January 2008. This is to allow HMRC to determine the amount of the penalty, which is £100 or the amount of tax outstanding at 31 January, whichever amount is smaller. The penalty will therefore be reduced to nil if all tax due has been paid by that date.

The self-assessment statements that go out from 24 February will therefore either show a penalty that is still outstanding, or a penalty that has been reduced to nil.

NB: The position is NOT the same for partnerships - as explained in yesterday's post and an earlier one specifically about partnership tax returns.

Is the 31 October deadline largely a white elephant?

In Summer 2007 I was speaking at a series of seminars around the UK as part of the ICAEW Tax Faculty's annual Roadshows. One of the issues I addressed was the potential impact of the new filing deadline.

Everyone was aware that Lord Carter's original proposal had been watered down in response to pressure largely from the profession (and co-ordinated by my friend, Paul Aplin). On each occasion I spoke I asked the question:

"But what does the 31 October filing deadline mean in practice?"

The answer I gave surprised most delegates and was often challenged by members of HMRC who heard me in advance of their own speaking spots during the seminars.

More recently my conclusions have been challenged by some accountants who have been taken in by HMRC publicity for the 31 October deadline. However HMRC have now effectively confirmed what I've been saying for over a year:

If you file a paper based tax return in November, December or January you will not be liable to pay the £100 late filing penalty as long as all tax due is paid by 31 January 2009.

So is the 31 October filing deadline a white elephant?

Well - not if you're involved in a partnership. The £100 penalty has always applied to the partnership and to each of the partners if the partnership return is filed late. And it's not rebated to nil. This is the reason why I highlighted, in an earlier blog, the importance of the deadline for professional firms that do not file their own partnership returns online.

It's also worth remembering that the enquiry window now closes 12 months after a tax return is filed so 'late' filed paper based tax returns extend the time period during which HMRC can open an enquiry into that return.

In their latest Self Assessment online filing update for agents HMRC skirt around the issue of the effective impact of the 31 October deadline. The focus is on whether a taxpayer who files a paper based return after this date has a 'reasonable excuse'. But this all seems to me to be a red herring. As long as all the tax due is paid by 31 January no penalty will be charged so there will be no need to consider whether there was a 'reasonable excuse'.

Finally I should stress that it would be unprofessional to suggest that clients can ignore the 31 October deadline simply because there is no effective penalty as long as they pay all of the tax they owe by 31 January 2009. But, in practice if you intend to file online and subsequently find that this is not possible for whatever reason you need not panic.

Ten tax mistakes that could result in professional negligence claims

• Omitting to consider the VAT implications of significant property transactions;
• Loss of tax credits as entitlement not claimed early enough – eg: when unincorporated business client suffers a loss;
• Failure to claim research and development tax credits before deadline;
• Omitting to reorganise group companies to reduce ‘avoidable’ tax charges;
• Failure to advise clients to correct their payroll procedures so as to reduce penalties;
• Omitting to provide ‘standard’ tax planning advice on arrival or departure from UK, on mergers, on acquisitions, pre sales;
• Ignoring consequential adverse implications leading to avoidable tax liabilities (eg: VAT, SDLT, IHT, NICs, Customs duties etc) when giving commercial or ‘basic’ tax advice;
• Omitting to compute and report the tax consequences of transactions such as disincorporation;
• Failure to ensure that all relevant criteria are satisfied to facilitate a claim for specific reliefs (eg: Enterprise Investment Scheme);
• Assuming that there would be no liability to inheritance tax and failing to advice as to how the real liability could be reduced;

The above list forms part of the material covered in my regular talks for accountants and tax advisers on the subject of 'How to avoid professional negligence claims'

Doesn't the taxman trust tax advisers?

A recent Special Commissioners decision contains a number of important lessons for accountants and tax advisers as it effectively revolves around the issue of whether HMRC believe assertions made by accountants.

You can access the full facts and details of the case of Mr M Ransom v Revenue & Customs [2008] UKSPC SPC00708 if you have time to read them. If you do and you have any further observations, please add them by way of comments to this blog post.

The only matter on which the Special Commissioner had to reach a decision was whether an amended tax return for 2000/01 had been filed before the effective deadline of 31 January 2003. The taxpayer's accountant claimed that the return had been hand delivered to the Woking Tax enquiry office on the evening of Friday 31 January 2003. The Revenue however argued that the amended return was posted to the office and did not arrive until 7 February 2003.

For the record the return was being amended to reflect the decision in Mansworth v Jelley. This was only published in December 2002. And let's remember that many accountants and tax advisers were under extreme pressure in January 2003. Everyone was trying to complete the necessary amendments and claims for clients who could benefit from the Revenue's published interpretation of the implications of the decision.

Returning to the present. What are the lessons that accountants and tax advisers can learn from the Ransom case?

1 - As I have recorded on this blog before (in the context of discovery assessments), it is crucial to be able to evidence all statements that are to be made before the Commissioners. There will be no second chance to represent the evidence;

2 - It is risky waiting until 31 January to file paper based tax returns and amendments to tax returns. Given the new 31 October deadline for paper based returns this issue is less likely to recur;

3 - The time lag between the start of a dispute or a challenge with HMRC and the case reaching the Commissioners can be years. In this case the argument started FIVE years ago. And this was a relatively straightforward question: When was the amended tax return filed?

4 - If HMRC have reason to question your honesty or your judgment they will pursue the matter. Ultimately the Revenue's position in this case effectively impugnes the character of the accountant in question;

5 - Even when you are in the right, do not under estimate the time and effort that will be required to produce all necessary evidence to support your contentions. In this case the accountant and four colleagues all gave evidence to counter the Revenue's challenge;

Do you have any observations about the implications of this case? Please add your comments to this blog post.