Naive tax questions - there are no easy answers

Yesterday I mentioned a post on AccountingWeb in which my recent article was being discussed. The editor of Taxation magazine, Mike Truman, has contributed to the thread a couple of times, most recently in the context of, what I would call, naive tax questions. That is, straightforward questions clients might ask to which there are no straightforward answers.

I've copied Mike's list here and added 3 of my own to take it upto ten. I wonder if anyone can suggest any more:

1. How do I become non-resident?
2. More than 20% of the income of my company comes from letting an investment property, but the assets, time and expenses are all more than 80% trading. Will it qualify for entrepreneurs' relief?
3. As a sole trader, can I claim the cost of my lunches back when I am out on business?
4. I run a restaurant, and recently took a bottle of wine home to drink for my birthday. At what price do I have to account for it - the price on our wine list or the price in an off-licence?
5. And what about the bottle of wine I took home last birthday - do I have to account for that at anything more than cost?
6. My partner and I own a company in equal shares, but I have other income, I recently waived part of my dividend so that she could receive a larger one. Am I still taxable on it?
7. Rather than do A which would have given me a tax liability, I did B C and D, which had the same combined effect but with no tax liability, on a literal reading of the tax legislation. Am I liable to tax anyway?
8. How much tax will I save if I incorporate my business?
9. How much of my car costs, mobile phone costs, home related expenses etc can I get off my tax?
10. I'm not domiciled in the UK, is it worth me paying the £30k bung?
    

Going back to the point I made yesterday, the danger comes when someone attempts to answer such questions without first seeking clarification of the surrounding facts and without adding the necessary caveats. If a tax specialist who understands such issues would consider this necessary, I'm sure no generalist adviser would take a more relaxed view. Would they?

In any event, let's see how far we can extend this list.

Is it safe for general practitioner accountants to give tax advice?

Last week a regular contributor on AccountingWeb questioned whether or not it is safe for general practitioners to continue to give tax advice. This is in the light of my recent article in which I explained why, two years back, I gave up giving tax advice.

To paraphrase my response on that thread:
Of course it is safe for general practitioners to continue giving tax advice - as long as they recognise their limitations. I didn't want to struggle to keep upto date with day to day issues as was required for me to continue to give tax advice myself. That was my choice.

Over the last few years I've been presenting a talk to accountants around the UK on Avoiding tax related negligence claims. To paraphrase one of the topics I address: If you're accused of negligence the claimant has to prove that you owed them a duty of care and that they have suffered a loss and that the loss arises from your negligence (ie: that you have breached the duty of care). Your defence will often be that you did the same as any 'reasonably competent' accountant would have done in the same situation

'Reasonably competent' accountants comply with the Guide to Professional Conduct for those working in tax (which has been adopted by all of the main accounting and tax bodies). It includes a paragraph:
"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”.

This should surprise no one. And of course, it's one of the reasons why I established the Tax Advice Network as a resource for accountants in general practice. It enables them to access their own choice of cost-effective, vetted, independent tax specialists as and when faced by tricky tax issues or problems that would take them outside their comfort zone.

Why we are all the Taxman's "Customers"

Having written an extensive piece yesterday about why the Tax credits system is not fit for purpose I thought I would share a related observation.

One of the complaints I hear most frequently about HM Revenue & Customs (HMRC or the Taxman) is the way they refer to Taxpayers as Customers. Historically we were all Taxpayers. We knew where we stood and so did everyone at (what was then) the Inland Revenue.

Of course there are more serious complaints and issues but this one really seems to get up people's noses.

Back in 1999 Gordon Brown started the transition of responsibility for paying social security benefits to the Inland Revenue. The benefits were given a new name ('Tax Credits') and almost overnight the Taxman became responsible for interacting with many people who were NOT Taxpayers.

There's probably a good reason somewhere to explain why we can't be described, accurately, as Taxpayers and Tax Credit applicants. Instead we are all lumped together and described as 'Customers'.

No doubt the logic for this was to instil an appropriate mindset in those who work for the Taxman. All employees should treat their customers appropriately of course.

But wait a moment. Customers normally have a choice. Taxpayers don't. There is also an old adage: 'The Customer is always right'. Not when it comes to negotiating with the Taxman he isn't.

Tax credits time bomb threatens to explode

Reading the Sunday Times today I was reminded of the view I have long held and shared that the Tax Credits system is not fit for purpose. It never has been. It never can be.

The system was introduced by Gordon Brown in 2003 to replace what were then known as 'Social Security Benefits'. Responsibility for the payments moved from the Department for Social Security (DSS) to the Inland Revenue (now HMRC). There was logic in trying to bring some consistency to the tax and benefits system. Sadly the rules for computing and reporting income still differ as between the two systems.

The time bomb to which the Sunday Times refers has been ticking since the system was introduced. Just two years ago the fuse was extended (see below) but this is another of those predictable problems waiting to explode.

Today's news story concerns overpayments that are evidently caused by officials' errors and by computer errors. This contrasts with the recent NAO report about HMRC's 2007/08 accounts. This criticised HMRC for the levels of estimated fraud and error in tax credit claims and prompted the Low Incomes Tax Reform Group (LITRG)to note that:

We still do not know enough about how much [of the estimated fraud and error in tax credit claims] is down to claimant error rather than claimant fraud, and we suspect that HMRC error is more prevalent than they claim.

The stories in the paper today refer to such HMRC errors and are quite shocking, but they, and LITRG, omit reference to the underlying problem.

The Tax Credit system, of necessity, REQUIRES claimants to ESTIMATE their income for the year ahead and then to update HMRC whenever those estimates change. The system seems to pre-suppose that all claimants have a low wage and do not change jobs during the year. What about those who have a succession of short-term and part-time jobs?

What about those who are self-employed and cannot forecast with any accuracy what their accounting profit for the current tax year will be? In such cases it's simply NOT possible to accurately estimate your income for the year.

In effect these endemic overpayments are attributed to 'claimant error'. That may be the case in some cases. In many others the 'error' is inevitable as few people can accurately estimate their future income over a complete tax year.

Let's explore this a little further. If someone can't accurately predict their income for the year ahead and they're entitled to tax credits, they could probably do with a few extra quid. Most people in such a situation would make pessimistic estimates of their future income. Such estimates will inevitably generate slightly more rather than slightly less tax credits. These estimates will generally only be revealed maybe 2 or more years later.

I would also note that almost no one in the country (expert or claimant) can check that the 'right' amount of tax credits have been awarded. The computation process is so just so damned complex.

And why do we now have a £25,000 'income disregard' as part of the system? As BBC News reported in 2006:

The decision to boost the income disregard from £2,500 to £25,000 was taken to restore faith in the tax credit system and save the Chancellor from more embarrassing headlines.

In effect claimants are entitled to the same Tax Credits award next year as this year even if their income is anything upto £25,000 higher than it was this year. Where is the logic and the equity in this? There is none. The rationale for the change in 2006 was simply to reduce the number of Tax Credit overpayments that otherwise had to be pursued and repaid.

Given my views on the systemic problems here I will end by repeating a list of the reasons that the Low Incomes Tax Reform Group give as reasons for so much claimant error:

• The system is extremely complex
• The workings of the system are not intuitive
• The claim form is difficult
• The claimant guidance is inadequate
• An inflexible computer system rules the process
• The award notices are unintelligible to someone with normal levels of functional literacy
• The demands upon claimants to notify changes to HMRC are many and complex
• Telephone support is not sufficiently accessible or accurate
• Face to face support is almost non-existent

As I said in my opening comments above:

The Tax Credits system is not fit for purpose. It never has been. It never can be.

The Sunday Times includes reference to a self help group (Tax Credit Casualties) for people who are being pursued to repay alleged overpayments of Tax Credits. Assistance is also available from the charity, Tax Aid.

"Policy by panic"

It was only when I was gifted a subscription to 'Private Eye' for my 50th birthday that I became an avid reader and fan. What have I been missing all these years?!

This week's first page had an item that caught my eye:

"The last-minute shambles surrounding publication of the long-awaited [xxxx] last week was another example of Gordon Brown's unique style of policy-by-panic."

"Despite the complexity of the [xxxx] and despite the [xxxx] being many months in the preparation, a final draft of the 81-page document was still doing the rounds only 24 hours before it was due to be launched."

"Insiders suggest that changes relating to the plans to [xxxx] were inserted at the 11th hour, with experts being given all of 90 minutes to respond."

"As one might expect from policy made by rabbots in headlights, the plan was a hotchpotch."

This being a blog about tax issues you would be forgiven for assuming that the above relates to the publication last year of the residence and domicile review, the income shifting proposals or perhaps related to the 10% tax band debacle.

The point is that it all resonated with me as if it were about one of the above. It could so easily have been. In fact the article refers to the Government's Youth Crime Action Plan.

I'm prepared to accept that one bad experience isn't necessarily evidence of something going wrong unless it is corroborated by a repeat experience or evdience from a secondary source.

So what does my reaction to the above story tell us about the tax system?

Increasing PI rates?

I spotted an interesting piece in the Lawyer this week about tax related professional negligence claims - a topic close to my heart as I regularly speak about it to groups of accountants.

It's written by Steve Holland who is a director in the ­professions division of Lockton International. As they are insurers to many accountancy firms as well as law firms his views may be of interest.

This was the quote that caught my eye:

Insurers will also be looking at tax issues – an area where there has been large ­numbers of claims arising from a lack of clarity on legal firms’ retainers and whether that has been included in the terms of engagement. Insurers are saying, “Okay, if you’re giving tax advice, is it in relation to implementation of schemes by others or is it in relation to their own schemes?”

I tend to think this is equally relevant to lawyers, accountants and tax advisers. Those who have heard me speak on the subject will have heard me state that HMRC often challenge schemes that may well work in theory. The challenge succeeds though as all of the necessary component elements were not properly implemented. The meetings didn't take place. The papers weren't signed by the right people in the right place or whatever. And who is it who is left 'holding the baby?'

The promoters of the scheme are often long gone and out of the picture. Who gets lumbered with trying to resolve things - often without getting paid for the time that this absorbs?

Coming back to Steve Holland's note above, where does this leave the regular adviser who does not create such schemes?

Making Taxes Simpler

Last week I attended the launch, at the ICAEW, of Geoffrey Howe's report and witnessed George Osborne's commitment to accept and adopt the principles set out therein.

He stated that 'the next Conservative Government will create an Office of Tax Simplification' (as proposed in the report). It will include HMRC and Treasury officials as well as members of the professions. Their remit will be to systematically examine the existing tax code and to make proposals for simplification.

Of course, in an ideal world, such a body would not be necessary but our tax code is now amongst the longest in the world. Each year far more is added than is removed. The Tax Law Rewrite project has simplified the language of the law but was forbidden from proposing changes to simplify the law itself.

I have noted elsewhere that this is all too late for me. Two years ago I gave up giving tax advice myself. I have explained my decision (which led to the creation of the Tax Advice Network) in an article that is in our T.A.N.K.

Maybe things would have been different had the OTS already existed. Somehow I doubt it. Whilst I welcome the commitment I anticipate that, even if it comes to fruition, it will take some years to have much impact.

Distinguishing Tax Evasion, Tax Avoidance and Tax Planning

In the past I have only sought to distinguish the illegal 'Tax Evasion' from the legal 'Tax Avoidance'. Indeed, I show a slide to this effect during some of my talks as it's important to ensure that clients appreciate the distinction.

More recently I came across a more detailed distinction:

Tax Planning - When the legislation allows more than one possible treatment of a proposed transaction, tax planning takes place when you compare various means of complying with tax law. It also includes ensuring that a client claims all allowances and reliefs clearly provided for by the law.

Tax Avoidance - (Previously assumed to be synonomous with tax planning) Seeking to minimise a tax bill without deliberate deception - as this would amount to tax evasion or fraud. Of course, if the law provides that no tax is due on a transaction then no tax can have been avoided by undertaking it. The term is now often used to refer to the practice of seeking to not pay tax contrary to the spirit of the law. Alternative prepositions are sometimes added to emphasise this - eg: 'abusive tax avoidance' or 'contrived tax avoidance'.

Tax Evasion - The illegal non-payment or under-payment of taxes, usually by making a false declaration or no-declaration to tax authorities.

Edit: September 2009 - I have addressed related points in many more recent posts about tax avoidance on this blog.

Get your appeals to the General Commissioners listed NOW!

The General Commissioners are being abolished as part of the wholesale review of the tribunals system.

As of April 2009 there will no longer be a facility to elect for taxpayer appeals to be heard before the general Commissioners and there are no plans for an equivalent body under the new system.

It currently takes around 3 months for an appeal to be listed before the General Commissioners. So if you want to have a case listed before the Generals you will need to apply before the end of November. Indeed, the sooner the better.

Some of the practical issues addressed by our recent newsletters

The Tax Advice Network newsletters are a key benefit provided to those who register on the website. Every week we address 3 topical practical issues. The following have all been addressed in recent weeks:

# Letting agents and the non-resident landlords scheme
# Overseas bank accounts and withholding tax
# VAT option to tax - revised rules
# Tax return glitches
# P11D dispensations
# Changes to form P46 procedures

How confident are you?

One of the most powerful factors that affects whether an accountant will refer tax queries to tax adviser members of the Tax Advice Network is the level of confidence that they have. Are they

* Rightly confident that they know enough and that there is little chance of being wrong?
* Over confident and reluctant to seek a second opinion?
* Lacking in confidence and worried that clients will think less of them if they admit what they don''t know? (They''ll certainly be unhappy if the accountant gets it wrong, that''s for sure. Most clients recognise that their accountant is like their GP and that sometimes there is a need to go to a specialist);

What about you?