Friday, August 29, 2008

Tax engagement letters

Some time ago (I won't confess quite how long ago) I was asked to chair a working party comprising the members of the main accounting and tax bodies.

Our task? To review and update the guidance provided to our members as regards the issue and content of engagement letters for tax work.

I mention this now because the guidance has at long last just been published. We all underestimated quite how much time and effort this project would consume. This was probably because we decided to do more than simply update the previous 'standard' guidance.

I had this idea (which was shared by the other members of the working party) that the updated guidance should be helpful to our members and that whatever we produced should be commercial, client friendly and uptodate. Oh - and SHORTER than previous standard letters.

I must say that I'm pleased and proud of the outcome. It's taken an enormous amount of time and I hope that the reaction from members will be positive.

The professional bodies last updated their guidance on tax engagement letters in 2001, largely by adding additional paragraphs to previous versions. Before that the guidance was updated at the start of the self assessment system.

In more recent years many commercial publishers have been updating the original ‘standards’ – most of these are however seem to be based on those published by the professional bodies. There have been some innovative approaches too – including at least one that allows practitioners to use an online facility to pick and choose which sections they want to include and for a tailored letter to then be created very quickly and simply.

Anyway, I was asked to write a piece for Taxation magazine about the new guidance and speciman documents. I understand that this will appear next week. Copies of the guidance and documents should now be available from the professional bodies concerned: ICAEW, CIOT, ACCA, ICAS, ATT, IIT and CIMA.

Although the new guidance has been produced for the members of those professional bodies I have no doubt that it will become more widely available in due course. I am hopeful that our efforts will be welcomed and that commercial publishers will, in time, update their own offerings – in so far as this may be appropriate to reflect the latest guidance. I am happy to assist in resolving any queries in this regard.

Partnership tax returns - submission deadline 31 October

Following the publication of our practical tax update for general practictioners this week, I have been thanked for the reminder it contained about the new submisison deadline for hard copy (paper) tax returns.

I thought twice before incoluding the piece as I guess we've all known about the new deadline for some time. Still, if it helps one person...

The reader who thanked me had actually read something into the piece that was not explicity stated. And as it's likely to be relevant to so many firms of accountants I thought I'd highlight the point here.

If your partnership return is going to be filed other than electronically, you will need to get it ready to submit by 31 October. It's all very well focusing on the rules as they apply to clients but they also apply to practitioners.

And it's important to note that the late filing penalty of £100 per partner is NOT reduced to nil even if all partners pay any outstanding tax by 31 January 2009.

So, if you'd missed this critical implication as regards your own firm's tax returns, I'm pleased to have given you a few weeks warning! Good luck.

Please add your comments to this thread to indicate your views on this issue.

Monday, August 25, 2008

Council tax and the sex lives of taxpayers

Now there's a subject that I didn't anticipate I would ever address in this blog. Council Tax.
I picked this up from the Sunday Times who reported on it yesterday. It's also covered in other media too.

If further evidence were required of the inability of tax policy makers to appreciate the consequences of their decisions, this is it. OK, it's not one of the taxes dealt with by HMRC but it could quite easily be so. The paper reports that:
Local authorities have adopted the techniques after the government urged them to carry out “spot checks” on properties where a single-person council-tax discount is claimed.
Given the transient nature of many relationships and households these days a tax system that provides for discounts if you CLAIM to be living alone is ripe for abuse. There are only three options;
  1. Reform the system
  2. Accept the abuse
  3. Discourage the abuse by checking up on people
And it is option 3 that is being followed here:
Undercover snoopers are being used to find out how often lovers visit and whether supposedly single residents are sharing a bed every night with the same person.
To my mind a system that necessitates such checks requires revision. It is a disgraceful intrusion into how people run their lives. I entirely accept that there is a high probability of widespread evasion and abuse of the current system. Even if these spot checks were morally justifiable they will not have enough of an influence on behaviour. As such they are all but pointless and will merely serve to increase the overtime claims of voyeristic Council staff.

The only logical way forward is to reform the system.

Don't hold your breath.

Friday, August 22, 2008

Dispensations dispensed like smarties

I've long been an advocate of employers seeking dispensations to cover straightforward business expense reimbursements. But I've just learned something rather shocking. Let me explain.

First, some background.
If the application for a dispensation is agreed by HMRC the employer has a reduced compliance burden. The other advantage is that the employees do not have to include the expense reimbursements on their tax returns and claim tax relief - to avoid being taxed thereon.

Earlier this year there were reports that HMRC was cracking down on contractor umbrella scheme dispensations. HMRC announced that they would not tolerate negligence or misrepresentation. They would be looking to identify expenses and benefits provided under a dispensation when they should have been subject to income tax and NICs. In such cases, said, HMRC they would pursue retrospectively the income tax and NICs liabilities due when the expenses payments and benefits were originally provided.

And it is these same contractor umbrella companies (and agencies) that are the target of a recent discussion paper, published jointly by HMRC and the Treasury, on tax relief for travel expenses. It focuses specifically on 'temporary workers and overarching contracts'.

Following on from the earlier announcement we learn (at para 6.2) that:
"some umbrella companies and employment agencies often urge their employees to claim the maximum amount their dispensation allows, regardless of whether these expenses were actually incurred, or that the underlying journey actually qualified for relief."
And at para 6.4 that:
"Evidence, both from HMRC compliance activity and anecdotally from the sector, suggests that the abuse of dispensations by umbrella companies is widespread"
So, you might wonder, as did I, why do HMRC continue to dispense dispensations like smarties when they are rightly concerned about the potential for abuse?

It was when reading Anne Redston's excellent Comment article on this subject in the current issue of Taxation magazine that I learned the answer and identified a solution.

Anne asks the same question as do I. She notes that:
The difficulty, apparently, is that HMRC have no way of identifying the umbrella companies in advance. The tax office receives a fairly standard dispensation request, and, in the interests of reducing red tape, agrees it, only to find out later that it is an umbrella with 3,000 temporary workers."
Is my answer to that issue too simple? It must be or surely HMRC would already have changed their procedure. Couldn’t HMRC simply put a cap on the number of employees that would be covered and the aggregate amounts that can be paid within the exemption granted by the dispensation? How difficult can it be to amend the application form? Or am I missing something obvious?

Thursday, August 21, 2008

"Paying tax is entirely a question of personal choice"

There are not many things in life that I hate. But I do hate the way that some authors and publishers of tax books mislead their target audience with hyperbole.

Where this happens it must be due either to a deliberate ploy or due to naivety. I appreciate that some publishers may fall into the latter category. But there is no excuse when an author claims to be a tax expert and has evidently written the hyperbole themself. It is the deliberate intention to mislead that I hate.

In this context I recently came across an Advertising Standards Authority (ASA) report that upheld a number of complaints against the direct mail promotional pieces for a publication allegedly written by "a specialist tax advisor" who claims to have:
"been in this game for over twenty years. I have worked closely with ex-Inland Revenue and HM Customs and Excise Inspectors for most of my working life, so I do know what I'm talking about. My clients are mostly wealthy people who I assist to avoid paying tax ... my client list is full and I can take on no more people. And yet I have a yearning to distribute my specialist knowledge to as wide an audience as possible."
The ASA upheld complaints that a number of the promotional statements used in the direct mail piece were misleading in so far as the book "How to avoid paying taxes" was concerned:

The publishers asserted that the statement "Paying tax is entirely a question of personal choice" was correct. They said that individuals could use trusts, offshore tax structures and tax havens to avoid paying tax. They said a simple strategy to avoid paying taxes was to move offshore either physically, by incorporation, by using trusts or moving all assets offshore; they said strategies incorporating some or all of those options might allow an individual to eliminate paying any UK taxes.

The ASA considered that the claim "paying tax is entirely a question of personal choice" in the mailing implied that all readers could choose to stop paying all UK taxes if they wished. Because that was not true, the Authority concluded that the claim was misleading. It told the advertisers not to use the claim in future.

The publishers asserted that the statement "How to cut your income tax bill in half, literally" was true as the book explained how individuals could halve their income tax bills, for example, by redistributing assets between spouses, using dividends, using tax free investment vehicles, establishing trusts and incorporating private companies.

The Authority acknowledged that the book explained how tax deductions on savings and assets could be reduced and how self-employed individuals could reduce their income tax payments. It considered that the claim "how to cut your income tax bill in half, literally" would be understood by readers to mean that the book explained how tax on earnings could be reduced by most readers and not just the self-employed. It concluded that the claim had not been substantiated and was misleading. It told the advertisers not to repeat the claim.

The publishers asserted that the statement "How any self-employed person can defer paying taxes indefinitely" was true as self-employed persons could defer income taxes by incorporating their businesses and using offshore vehicles. They said the statement "how any self-employed person could defer paying taxes indefinitely" referred specifically to the deferral of Capital Gains Tax on the sale of a business.

The Authority considered that the claim "how any self-employed person could defer paying taxes indefinitely" would be understood by readers to imply that the book explained how all self-employed persons could defer paying all taxes indefinitely, and not Capital Gains Tax on the sale of businesses only. The Authority told the publishers to qualify the claim in future to make clear that it referred to Capital Gains Tax on the sale of businesses only.

The ASA report in question is three years old (it's dated 24th August 2005) . However the same alleged author and (presumably the same publisher) are still promoting what appears to be much the same book via a number of websites. And on those websites we still find the three offending statements:
  • Paying Tax Is Entirely A Question Of Personal Choice;
  • How to cut your income tax bill in half, literally; and
  • How any self-employed person can defer paying taxes indefinitely.
I hate that anyone would be mislead by such nonsense. And I hate the fact that books and reports such as this one, that pander to those who fall for this hyperbole outsell the more honest books that tell it how it is. If it were simply marketing spin it would be bad enough but everyone involved in this book has known for at least 3 years that there are at least 3 unacceptable statements in the marketing material. It does neither the publishers nor the author any credit to continually ignore this fact.

Monday, August 18, 2008

"Minister wants supertax on Britain’s top earners"

Writing in the Sunday Times, the Health Minister Ivan Lewis, calls on the government to introduce a new economic package to bail out the hard-pressed middle classes – possibly paid for by new taxes on the rich.

There are two especially odd elements to this appeal.

The first is his definition of the “mainstream majority” of comfortably off voters who swept Labour to power in 1997. They are the families who take two holidays a year, belong to private gyms and eat in restaurants, but struggle to pay soaring bills. Note these are not the rich but those to be helped. Hmm. Sounds like a political ploy to me. Yes, the tax burden has increased for such people but they are all far better off than those who cannot afford even one holiday a year.

The other thing that struck me as odd was the suggestion that new taxes on the 'rich' (or super rich perhaps, depending on your definition) would simply be an increase in INCOME tax. The example given being an extra 10p in the pound tax for earnings above £250,000. According to the report in the paper, the Treasury estimates this would yield £3.5 billion a year, about the same amount as it collects from inheritance tax. I'm rather dubious of this estimate.

What seems to still escape everyone's attention is that in last year's Pre Budget Report the Chancellor CUT Capital Gains tax from 40% to 18%. I have yet to hear any logical or policy reason for allowing anyone who makes short-term speculative gains to pay only 18% tax thereon.

Prior to 6 April 2008 the rate of CGT was determined as if your taxable gains were an additional slice of income. Unless you qualified for any reliefs most gains were taxed at 40%. If you had owned the assets (that you sold at a profit) for more than ten years the rate of tax was reduced to 24%. Now it's 18% for everyone, on all gains, no matter how short a period the assets were owned.

Surprisingly it was Mr Brown who, dare I say it, wisely determined that CGT should be charged at income tax rates in his 1998 Budget. At the same time reliefs were introduced to help investment through encouraging longer-term holding of assets by reducing the effective rate of CGT on longer-held assets. This, we were told was to "stimulate entrepreneurial activity by rewarding longer-term investment in businesses. " As a result, the effective rate of tax on many business assets could be as low as 10% until 6 April 2008. For non business assets the lowest rate of CGT payable by 'the rich' was 24% on assets owned for more than ten years.

No more does the incentive to invest for the longer term exist. Instead we have a system that encourages short-term speculative gains. It also encourages the rich to find ways to convert income (that would be taxed at 40%) into capital gain that are only taxed at 18%.

I wonder how much tax would be generated to help the 'mainstream majority' or those further down the income scale if the basic rate of CGT was still aligned with income tax rates?

Saturday, August 16, 2008

Employee tax confusion following increase to Personal Allowance

Get ready for more employees to be confused about their tax situation than ever before.
This is because of the combination of the late change to personal allowances this year and the way that PAYE tax is calculated on a cumulative basis.

The £600 increase to the 2008-09 Personal Allowance takes effect on 7 September and will be backdated to 6 April. This means that the next pay packet (eg: at the end of September for monthly paid staff) will include 6 months worth of the increased allowance (for the period from April to September).

Staff will be aware that the increase in their net take-home pay will be because of the tax changes. The confusion will follow when they get their next pay packet as they will pay more tax than they did in September. The October pay packet will only reflect ONE more month's worth of the increased allowance.

Reduced tax in September: £300 x 20% = £60
Reduced tax in October and subsequent months: £600/12 x 20% = £10

In previous years the change to personal allowances and tax rates normally takes effect from May so the contrast between the first and subsequent months of change is much less pronounced.

Thursday, August 14, 2008

More and more accountants will find themselves having to advise on tax credits

The current issue of the ICAEW's Tax Faculty's Taxline magazine includes a topical and timely reminder as to the potential impact of the new Annual Investment Allowance (AIA). It serves to reinforce a point I make in my talks about How to avoid professional negligence claims.

Question one
I always ask for a show of hands as to how many accountants in the audience advise clients about their entitlement to claim tax credits. I've spoken to groups of all sizes, from 20-180 and to date no more than 5 hands ever go up. This suggests to me that the vast majority of accountants are not currently advising clients about their entitlement to claim tax credits.

I know why. Tax credits are merely a new(ish) dressing for a social security benefit. Accountants have not traditionally advised on benefits. It's not cost effective to do so and we don't know all the rules.

Some, but not all, accountants make clear in their engagement letters that they do not advise on tax credit related issues. That is their prerogative and in so doing they probably reduce the prospect of a client making a successful claim for negligence at a later date.

Question two
I then ask the accountants whether they advise their clients on how best to offset losses, on capital allowance disclaimers, pension reliefs and (now) AIAs. Of course they all do. Indeed, securing tax refunds tends to go down well with clients. In fact, clients tend to value anything their accountant does that reduces the tax payable or that secures the biggest tax refunds. And if they perceive that their accountant isn't doing all they could in this regard, they are inclined to switch to one who does.

And, tax credits (so far as clients are concerned) are TAX credits.This means they are seen as TAX refunds. Exactly the sort of thing that clients expect to get help on from their accountant. And if their accountant doesn't help in this regard then it won't be long until the client switches to one who does. Especially if the client becomes aware that he missed out on claiming tax credits as his accountant didn't tell him when he should have done so. (The 3 month limit on 'back claims' for tax credits is a real problem here).

If the commitments I note at the end of my seminars and training sessions are anything to go by, an increasing number of accountants will be advising clients on their entitlement to claim tax credits. It doesn't have to be time consuming and it can be done profitably.

Please share your views as comments on this blog whether you already advise on tax credits or you have no intention of doing so.

Tuesday, August 12, 2008

Engaging with representative bodies

I was frustrated to read the following paragraph (4.5) in HMRC's consultative document Meeting the obligations to file returns and pay tax:
HMRC is continuously looking at ways to improve the experience
taxpayers have when interacting with the department, including support
and guidance available to taxpayers and such things as the design of
forms. This work is undertaken in collaboration with key stakeholders in a
variety of ways, including through standing stakeholder forums such as the
Corporation Tax Operational Consultative Committee (CTOCC).
Engaging with representative bodies, taxpayer and stakeholder groups in
this way helps to ensure that guidance, support and forms better meet
taxpayer needs.
The reason for my frustration is due to the number of occasions of which I am aware (and there are probably more) where the 'representative bodies' have been given almost no time at all to review, consider and feedback comments about the design of forms and the content of guidance.

The fact that the rep bodies are asked for feedback and input is to be applauded. However. all too often the timescales are too tight for meaningful input. I'm not sure that those at the top of HMRC are aware if this. They are probably told that the rep bodies have been asked for input and that their views have been incorporated in the final versions of the forms or guidance.

I would therefore restate the final sentence of the extract I have quote above:
Engaging with representative bodies, taxpayer and stakeholder groups ON A MORE TIMELY BASIS would help to ensure that guidance, support and forms better meet taxpayer needs.

Monday, August 11, 2008

Tax return stats

The following quotes are worthy of note, either as a source of information, amusement or incredulity. You decide which. They are taken from the HMRC Consultation document
Meeting the obligations to file returns and pay tax, published on 19 June 2008 as part of the wider exercise: Modernising Powers, Deterrents and Safeguards. In most cases I have added my own obseravtions.

1.3 - The first substantial measure, legislated in Finance Act 2007, was a single new penalty regime for incorrect returns for income tax, corporation tax, Pay As You Earn (PAYE), national insurance contributions (NICs) and value added tax (VAT) (the main taxes). [NB: this includes NICs which the Government refuses to accept is a tax]

2.3 - In 2006/07, HMRC expected to receive almost 23 million returns across all of the taxes. Of these, some 3 million were filed late or not at all. [That's an unlucky 13%. And seems very high so 'something needs to be done'. Ok, some returns will have been filed late and some may still be outstanding but how many were never due at all? I suspect that the 23m figure is the aggregate of all notifications to file that were issued by the computer. Looking back to prior years, what proportion of issued notifications have not resulted in a filed return after 3 or 4 years? New penalties (or incentives) are not going to make a difference here. The real figure of late returns is probably much lower.]

2.6 - It is important that HMRC receives a return even when there is no tax due. This is because HMRC needs to check the basis of the calculation by which the taxpayer calculated a zero liability. [Hmmm. Self assessment has always been described as meaning 'process now, check later'. Except that we know that HMRC do not (indeed they probably cannot) check all returns. So what are they saying here, if you have a nil liability your return will always be checked? Surely not.]

2.15 - The vast majority of people in the UK pay the right tax at the right time because they believe it is the right thing to do and because they are aware of the link between tax and public services. [Hmmm. I think the reason that most people pay the right amount of tax is fear of the consequences of not doing so. And one reason why tax compliance statistics have worsened since the introduction of self assessment is that fewer people are getting caught - so there are fewer people telling their 'war stories'. The direct consequence of this is that more people think they can get away with non compliance for longer.

3.4 - Despite the continuing efforts of HMRC to shorten and/or simplify returns, they can still appear complex and difficult to understand. ["Appear"??]

5.3 - It is important that before considering how any new penalty structure for late or non filing and payment could work time is taken to ensure that appropriate safeguards are in place to protect the taxpayer. [Hooray. The message is getting through]

6.6 For 2006/07, HMRC issued over 1.7 million penalties for late or non filing of an ITSA return. Of these some 153,000 were cancelled. This could be for a number of reasons, the most common of which is that the taxpayer successfully appealed against the imposition of the penalty. [Hmmm. According to para 6.8: 'of the 1.7 million penalties issued in 2006/07, 917,000 (over half) were capped.' - ie: not payable as the amount of outstanding tax was wither nilo or less than the £100 penalty. This suggests that almost 20% of the uncapped notices were cancelled (as distinct from the stated figure of 9% given in para 6.20).
That seems remarkably high, even more so when we are told that the most common reason was successful 'reasonable excuse' appeals.

7.2 - The available research and evidence suggests that the structure of a penalty is far more important than the level at which it is set in determining its effect on behaviour. [How strange. If the late filing penalty for self assessment tax returns was £500 rather than £100, I'm sure that most people would make more effort to ensure they file their tax returns in good time.]

7.13 - The suggestion made in consultation responses was for a' failure to notify penalty' to be suspended on condition that payment and filing obligations were met on time for a set period. [Yup. This makes sense to me too. Why then does HMRC continue in this paragraph to merely set out the difficulties that it sees with such a solution? Incidentally these are all expressed in terms of consequences that 'may' happen.]

7.34 - Assessments and determinations have the advantage of beginning the process of bringing something generally approximating to the right amount of tax into charge. [Wow. HMRC have crystal balls. I don't buy it. Where a tax return is outstanding HMRC will guess a figure that may be reasonable. It could just as easily be a gross underestimate or significantly more than the sum actually due. Indeed at para 7.52 we get the following worrying statement: "In most cases if the estimate is too high, the taxpayer can submit a return to overturn the estimate." - Most???

7.54 - It is important to note that from 2008 there will be two filing dates for Self Assessment. Those filing on paper will have to do so by the 31st October whilst those filing online can do so by the 31st January of the following year. There will therefore need to be two penalty dates – one for submitting a paper return after the 31st October and a second for failing to file a return at all by the 31st January. [As I predicted last year, the 31 October deadline is a red herring. There is no effective penalty regime in place for paper based tax returns filed between 1 November and 31 January.]

8.7 - There is a good argument that penalties should escalate for repeated failures, to discourage such behaviour. If this is appropriate, the challenge will be to combine this with recognition that prolonged failure should also be treated more seriously, and still produce a framework that is fair, proportionate and simple. [There is also a good argument that penalties should be remitted in the event of subsequent compliant behaviour - so as to encourage such behaviour. I can see no recognition of this 'carrot' approach as distinct from the 'sticks' set out in this con doc.]

Sunday, August 10, 2008

"Why is it important that tax returns are filed on time?"

I was amused to see a list of 8 reasons given in a recent HMRC Consultation document.
1 - to enable HMRC to put the right amount of tax into charge;
2 - to enable HMRC to make timely repayments where appropriate;
3 - to enable HMRC to check the basis of the calculation by which the taxpayer has arrived at their liability to ensure that it is correct;
4 - to identify whether the taxpayer or people in their employment are due certain entitlements – for example failure to file employers’ end of year returns such as P35 and P14s may result in an employee being denied proper entitlements;
5 - to calculate the taxpayer’s tax code for the following year (for employees completing income tax self assessment returns). This ensures that the taxpayer pays the correct amount of tax in the following period;
6 - to calculate any payments on account (in year payments) that are due in the following year;
7 - to identify which taxpayers need a return to be sent to them in the following period. If a taxpayer fails to file a return on time in one year it may result in them receiving a return when they don’t need one in the following period, and
8 - to collate and report statistical information on intra-community trade (in the case of VAT returns).
Of course it's important for returns to be filed so that all of the above activities can be undertaken but not one of them justifies the basic contention. That is unless the filing deadlines have been set at the last possible time by which most of those actions could take place. And they have not.

Indeed, the objective should be to encourage taxpayers to file before the deadlines not 'just in time'.

Taking the reasons above in turn:

Under the pre-self assessment system tax returns were required to enable the Revenue authorities to compute and charge the right amount of tax. Now taxpayers self assess (so reason 1 above makes no sense).

There's a hint of nannying here too. Look at reason 2 above. If a taxpayer wants a refund he has to file his return. The sooner he files it the sooner he gets his refund. Simple. There is no financial benefit to taxpayers in delaying submission.

Of course HMRC need to be able to check our self assessments (reason 3 above) but arguably this could be done at any time - indeed, spreading the workload would mean more returns could be checked by fewer HMRC staff.

Reason 4 - in connection with PAYE returns is a good reason in so far as repayments are due to employees.

Reason 5 - to enable PAYE codes to be correctly set foir the following year. This made me laugh. It's a great ideal but for as long as I can recall the computer has generated PAYE codes long before the filing deadline for tax returns. As a result employees who file tax returns routinely get 2 or 3 codes each year. One before last year's return has been processed; one afterwards and one more by reference to changes announced in the March Budget.

Reason 6 - again this is nonsense. Payments on account are self assessed and claims to reduce payments on account are accepted without the need for any supporting evidence.

Reason 7 - this seems to be an attempt to offer a 'green' reason for filing tax returns on time. Except that many of us have continued to receive the wrong SA tax return pages in subsequent years. And short tax returns are routinely issued in error to company directors. And HMRC hold off issuing tax returns to taxpayers who routinely make repayment claims.

Reason 8 - Is this any more than a statistical monitooring exercise? For who's benefit?

I'll return to this document on another occasion. I'm quite happy to support moves to encourage tax returns to be filed before the deadlines. I think that would be helpful to accountants and their clients as well as to HMRC but let's be clear as to why this is important. And the simple answer is:
To encourage the right taxes to be paid on time and for HMRC to be able to check this without delay.