Wednesday, December 31, 2008

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?
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';
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.

Monday, December 29, 2008

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?

Friday, December 26, 2008

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?

Tuesday, December 16, 2008

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?

Monday, December 15, 2008

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.

Tuesday, December 9, 2008

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.

Monday, December 8, 2008

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.

Thursday, December 4, 2008

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."

Monday, December 1, 2008

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