Wednesday, February 18, 2009

Instead of customers, why doesn't the taxman call us...?

Have you noticed the way that the taxman refers to you as a 'customer'?

I know it's grated with many taxpayers and accountants ever since the old Inland Revenue started to use this word some years back. Then they merged with HM Customs & Excise and the new HMRC still calls us 'customers'.

The argument they use is that they want to be able to use just one word when referring to all sectors of the public to whom they have a responsibility. That's both taxpayers and tax credit claimants.

The first alternative I come up with was 'stakeholders'. But that goes further than taxpayers and tax credit claimants.

I recently asked for further suggestions on Ecademy and received the following responses:
- Tax Liability Owner
- Victims
- Lemons (as in "squeeze them until the pips squeak")
- They can call us whatever they like as we're never allowed to argue with them anyway. So how about 'the disenfranchised majority'?
- We need to find someone involved in organised crime. There must be a common term for the people who pay a bit of squeeze for "protection".
- How about "Codees"? Anyone who deals with the tax authorities has to have a code, so that's the common element.
- I wonder how they refer to "customers" internally. Punters?
- I was going to say Victims - but, as that's already taken, how about "Mugs"?
- Suckers seem appropriate for both parties only the first party should have blood tagged in front;
- Cash cow?
- How do pickpockets name their victims?
- Users of HMRC's services
- Citizens [although companies aren't citizens and you don't have to be a citizen to be subject to UK tax]

Having thought about this further I've realised that 'taxpayers' isn't strictly accurate anyway. We have to file tax returns whether or not there is any tax to pay,

HMRC's February 2009 Consultation Document on a Charter perpetuates the idea of 'customers' although it's clear that this isn't an obvious or universal collective noun even within HMRC:
They say they will "test the Charter with staff, stakeholders and customers prior to the launch";
They "have held a deliberative[?] event with customers, representative bodies and staff";
As part of their previous engagement they provided an opportunity "for stakeholders" to provide written comments" and they received 42 responses from "representative bodies, businesses and individuals";
The Executive summary states that "a tax Charter could play an important role in ensuring that the tax system is understandable and accessible to all taxpayers";
Then, in Chapter one we're all "customers" again;
By the way I have yet to find anyone who likes being called a customer of HMRC. Equally none of the conventional dictionary definitions I have traced support the idea that it's an appropriate term.

On balance my preferred solution is to call us all:
The CBI - Companies, Businesses and Individuals.
But I guess that could get confusing.

So please share your views as comments on this blog:
a) do you like or loathe the way that HMRC use the word 'customers'?
b) do you have any suggested, workable and printable alternatives?

Tuesday, February 17, 2009

The first returns subject to the new tax penalty regime

The new rules were largely set out in Finance Act 2007 and came into force on 1 April 2008. However, the old rules have continued to apply over the last year and many people are confused as to when the new regime will first become relevant.

Typically the first returns subject to the new rules will be as follows:

VAT - Returns for 3 months to March 2009;
Corporation tax - Returns for accounting periods starting on or after 1 April 2008;
Income tax and CGT - Tax year ending 5 April 2009.

Previous posts on this blog that have also addressed the new penalties regime include: The new penalties regime - making tax taxing; and 'Take care to avoid a penalty'

Monday, February 16, 2009

No £30k exemption from tax when you leave a job

There's a common and dangerous misconception. And I saw it again in the Sunday Times yesterday, in a piece entitled: MPs plump up their ‘golden parachute’ pay. This suggested that:
"When disgraced MP Derek Conway stands down from parliament at the next election he will receive £31,645, of which the first £30,000 is tax free."
I suppose it's possible that there is a special rule for MPs (it wouldn't be the first time) but I suspect that the reporters had fallen into the all too common trap; that of assuming that the first £30,000 is invariably exempt from tax if paid in connection with one's departure from a job.

It's not. There is no automatic exemption.

What is the position then?
Firstly statutory redundancy payments are automatically free frlom tax. But the quantum of such payments is limited. So for additional amounts, there is a tax rule that means that upto £30,000 MAY be exempt from tax. It's set out in Section 401 ITEPA 2003 (previously s148 ICTA 1988). BUT this rule only becomes relevant if certain criteria are met. No one can afford to assume that their situation will automatically pass the tests.

The basic rule is that any sums paid by an employer to an employee are subject to tax if paid in accordance with a contractual obligation, if paid for work done, if paid for work to be done or if such payments are part of the employer's standard practice when someone is asked to leave their job. That's the basic rule. Only statutory redundancy payments are definitely tax free.

So when an employer makes other payments to employees the basic rule doesn't catch them. This is where s401 comes into play. It states that any other payments are taxable too - except for the first £30,000 paid in connection with the termination of employment. But this is only the case if the payment isn't taxable in full under the normal rule. And HMRC also use another rule to challenge the tax free nature of termination payments when these are paid to people aged over 50. The argument goes that the sum is taxable as an unapproved retirement benefit.

Coming back to the case of the MP referenced above I would have expected the normal rule to apply as the payoffs are contractual and (consequently) standard practice for MPs. This may well come as a bit of a shock if they were expecting to get £30,000 tax free.

What happens if you get it wrong?
Taxpayers are required to report their 'tax free' lump sum on their tax returns. The taxman invariably checks back to determine whether relevant details were properly reported by the employer. And if HMRC are not satisfied that all is correct the taxman will then seek payment of tax from the employee. For people receiving redundancy payments in early 2009, the relevant tax returns are those for the current tax year. These will not be filed until later in the year - or as late as January 2010. It could be months later before the tax demands start being issued - long after the lump sum has been spent.

Further information
Expert advice is available to help anyone who wants to learn more about how to avoid the traps here. Simply get in touch with one of the members of the Tax Advice Network who specialise in this area.

On a related issue the Low Incomes Tax Reform Group offers a fuller explanation of the tax rules on redundancy.

Wednesday, February 11, 2009

Tax relief for Networking - can you or can't you?

I'm told that some accountants tell their clients that they shouldn't claim tax relief for the mileage involved in traveling to networking events. I'm astonished by such a suggestion.

As most of us know, what matters to the tax man (and more importantly the underlying tax rules) is the taxpayer's objective when incurring costs. Were these incurred for business purposes? Is there a specific rule that denies tax relief (eg: as there is for entertaining expenditure)?

Someone who is an employee probably won't be able to claim tax relief for networking related costs that come out of their own pocket. In most cases they'll be fine though as their employer will reimburse them. This is as important for directors of their own Limited companies as it is for all the business expenses they pay for personally (in error?).

The self employed (and the limited companies that pay or reimburse networking costs) can generally claim tax relief for the costs of attending and of getting to and from business networking events. The test is whether the expenses were incurred "Wholly and exclusively" for business purposes.

Even if someone enjoys networking (and some of us do) this does not disqualify the related costs. Tax relief is still available if the costs satisfy the tests above. So what matters is whether attendance is driven by a desire to build relationships and advocates that could lead directly to new work or introductions to prospective new clients? Invariably these are the primary purposes. And they are evidently directly related to increasing the level of business. Networking is just another form of business development; it's a marketing cost; face to face business promotion and advertising. And as such it's tax deductible.

The water can get muddied if the promoter effectively downgrades the Networking element of the event and focuses on the provision of free food and drink. And of course the retention of related receipts (and maybe even the promo material) would form part of the necessary record keeping to support valid claims for tax relief.

I'd welcome comments on this blog post especially from accountants who have advised on this topic and where they draw the line.

Tuesday, February 10, 2009

Real time feedback for HMRC from Twitter

Over the last couple of weeks of January I noticed a number of Tweets* that reflected real time complaints, frustrations and problems being faced by taxpayers who were trying to satisfy the 31 January online filing deadline.

People were also using Twitter* to share their views about paying tax last month. OK. It wasn't quite 'fascinating' but then again I don't have a vested interest in the tax system - beyond helping people to access specialist tax advice through the Tax Advice Network.

I'm aware too that many accountants and agents encountered their own issues when trying to use the online filing system in January. However few accountants would have had the time or inclination to Tweet about it on Twitter.

In 2009 Twitter is likely to go 'mainstream'. An increasing number of UK celebrities are using it and talking about it on tv, radio and in the wider media which is also covering the story generally eg: the Telegraph last weekend. I suspect that the number of users in the UK is set to explode. (Having said that, I don't expect UK accountants to become advocates of this new micro-blogging phenomenon - and I explained my reasons on this blog post: Twitter is not for accountants)

But, if HMRC seriously want to keep on top of website problems they could monitor Twitter to note the references to 'HMRC, 'taxman', 'Inland Revenue', 'file my tax return', 'tax office', 'pay my tax' and the like. It's not particularly complicated and could be done using a service such as Tweet Scan or TweetBeep.

(I doubt HMRC would be thanked if they started to 'follow' anyone on Twitter! ("HMRC is now following you" is not something anyone would want to hear!)

In 2008/09, as in previous years, HMRC was reliant on professional bodies like the ICAEW Tax Faculty and CIOT to pass on details of problems as and when these were reported by members. This is a much longer-winded process than it needs to be in future.

I suggest that someone within HMRC is deputed to explore this new phenomenon and how it could be used to identify and resolve website issues faster than has ever been possible in the past. Monitoring tax related tweets will also provide a unique insight into how real people relate to the taxman.

(For the same reason all large corporates, public figures and brands may wish to monitor what is being said about them in the Twitterverse. Many people within the twitter community would suggest that there are good reasons to go further than this and to engage with people who Tweet about big businesses - but this is all well beyond the scope of this TaxBuzz blog)

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


*Twitter is a micro blogging service that encourages users to simply Tweet their answers to the question - "What are you doing right now?" The potential uses of Twitter go a lot wider than this and there are many related websites and services that make it easier to use and to gain benefits from so doing.

Monday, February 9, 2009

Budget Day 2009 will be in April. Ssh. Don't tell anyone.

I suspect that Budget Day 2009 will be announced at a time of the Chancellor's choosing so as to maximise the chance of managing the news cycle. However as there a number of external factors to take into account I think we can now pin down the most likely date this year.

As Mike Truman notes in Taxation magazine, we are all used to the uncertainty that surrounds the date of the Chancellor's Budget statement each year. And we are also consistently unhappy both with the lack of notice we normally get and with the lack of knowledge about the amount of time we are going to get.

The Treasury press office claims that 'no decision has been made yet' even though this is arguably untrue. Decisions have been made as to when the Budget won't be held. It won't be held at the same time as the Chancellor hosts a meeting of G20 Finance Ministers on 14 March and it almost certainly won't be held immediately before or after that meeting either. The same can be said about the full G20 summit on 2 April.

Could the Budget be held earlier than usual? In theory 'yes' but the consultation period for the draft clauses on the taxation of foreign profits continues until 3 March. The responses to the consultation should then be informing decisions as regards the draft legislation which is expected to form a key element of the Finance Bill. Also the current economic climate is such that the Treasury, the Chancellor and the PM are sure to want MORE time rather than less to finalise their further plans.

They will also have to rationalise the usual Budget spin about how further tax cuts cannot be made as these would need to be funded and this would mean tax rises elsewhere. Such arguments will need to be spun even harder than usual as, in recent weeks, numerous unfunded unplanned promises have already been made.

So I tend to believe that this year's Budget will be deferred until after the start of the new tax year on 6 April. It wouldn't be unprecedented but it would be unusual. I expect the economic crisis to be blamed for the (in)decision. And we don't need to wait for the Budget to know about the key tax rates, bands and allowances for 2009/10 as these were announced in the Pre-Budget Report last November.

The Budget is invariably held immediately after Prime Minister's Questions ("PMQ"). This used to be a twice weekly event on Tuesdays and Thursdays. But Tony Blair revised the procedure in 1997 and since then PMQ has taken place for just half an hour from 12-12.30 each Wednesday. Since 2001 Budgets have been held on Wednesdays.

As the House of Commons will be in recess (not sitting) from 3-19 April the most likely date for this year's Budget is.....Wednesday 22 April. But keep it to yourself.

If I'm right and 22 April has been secretly pencilled in, please don't tell anyone. If my rationale is correct and were to be widely publicised I would expect another date to be chosen. After all there must be a good reason for the Chancellor and PM believing that they have to surprise us all when they announce the date. It would never do for us to have more than a couple of weeks notice now would it?!

Sunday, February 8, 2009

Tax experts head the 'dole queue' - Really?

I was initially shocked to see a piece in the Sunday Times today headed: Professions head the dole queue. The second paragraph noted that
"The number of tax advisers, commercial pilots and underwriters out of work and claiming benefits has also more than doubled in a year, according to the Office for National Statistics."
Wow! Could this be true?

In a table contained in the article, half way down the list we find 'Tax Experts', and that the number who are now claiming unemployment benefit (sic) has risen by 200%.

This statistic struck me as odd to the say the least. (And that's leaving aside the fact that 'Job seekers allowance' replaced the dole and unemployment benefit in 1996!)

The table published in the Sunday Times (but not available online) is drawn from a report by the Office for National Statistics which shows the actual numbers of claimants per 'occupation'. During 2007, unemployed people who described themselves as 'taxation experts' numbered 25. In 2008 the number was 75. That's across the UK. It is this fact on which the 200% increase in the number of 'tax advisers' claiming benefits is based. Given the number of other claimants (in total just over 1.1 million) I think it's safe to say that the number of tax advisers and tax experts who lost their jobs last year is not a cause for concern within the profession.

What is it they say about Statistics?

Of course if there are any tax experts out there who satisfy the criteria for tax adviser membership of the Tax Advice Network and who want to build up their own independent practice with some marketing and business support from us, I would welcome the conversation.

Thursday, February 5, 2009

Why are capital gains taxed at less than half the main rate of income tax?

In an unexpected move, the Chancellor 'simplified' the capital gains tax regime with effect from 6 April 2008. When the announcement was made in his 2007 Pre-Budget Report everyone seemed to focus on the effective increase from 10% to 18% on business assets. But that was never the main story.

No one seems to have explained the related policy reason for reducing the rate of capital gains tax (CGT) on short-term speculative gains from 40% down to 18%.

Little media attention appears to have been focused on this change presumably because no one wants to be seen to look a gift horse in the mouth. But I don't understand the logic for the change given that the income that we work for can quickly become subject to 40% income tax. This is more than double the 18% rate of CGT that you pay for making short-term speculative investments on shares, property or other assets. This seems to be rewarding the risk takers who do not work to earn their gains.

Before the change short-term capital gains were taxed at the same rate as income (40%). Only business assets held for more than two years qualified for the taper relief that resulted in an effective rate of only 10%. Prior to 5 April 1999 all capital gains were treated as the top slice of income and taxed at the appropriate income tax rate - typically 40%.

In 1998 Gordon Brown reduced the tax payable on investments held for at least ten years. This was "to encourage longer term investment". Then in 1999 he reduced the holding period down to five years:
"the Budget will make a more radical reform to promote not just hi-tech investment, but long term investment across the economy in Britain.

I will say to Britain's prospective and actual investors and entrepreneurs: invest for three years and the capital gains tax rate will not be 40 per cent but 22 per cent.

Invest for five years and the tax rate will not be 40 per cent, or 22 per cent - it will be 10 per cent"

In my view Lord Forsyth correctly predicted (22 Apr 2008 : Column 1461) the inevitable consequence of now halving the rate of CGT on short-term gains. With the standard rate of CGT at only 18% there is an enormous incentive for high earners to seek to find ways to recategorise their income as capital. Doing that means paying tax at less than half the 40% higher rate that applies to most income. HMRC were well aware of this and published a list of FAQs including one on this issue, where the answer said:
"There are already a number of tax rules to counter schemes to convert income into capital gains. However, the Chancellor has asked officials to continue to monitor the CGT rules and reliefs to ensure they cannot be abused by those who wish to pay less than their fair share of tax."
I would expect more changes in the forthcoming Budget but even more in the future once tax returns have been filed for the 2008/09 tax year.

The only response I have seen so far to the question as to 'why make this change?' is the, frankly insulting and disingenuous, suggestion that it was done in response to requests to simplify the tax system. The fact is that no one was seeking this change or anything like it. And it doesn't make fiscal sense.

Still, accountants and tax advisers like it as it provides tax planning opportunities!

I'll be returning to this subject in a future post on this blog. In the meantime do share your views as comments below please.

Wednesday, February 4, 2009

One way or another "Talk of tax cuts for savers" is shortsighted gesture politics

Has the Chancellor fallen into a clever trap set by the Tories or are both Labour and the Tories confused? Or, is it business as usual. They know exactly what they're doing and talk of cutting tax on savings income is intended as a vote grabbing ploy despite the consequences that would ensue?

At the start of January David Cameron said that income tax on savings for basic rate taxpayers should be abolished. Top rate taxpayers would continue to pay "the same" [as they do now]. This mirrors a promise made by William Hague nearly ten years ago. Then Labour ignored it. But yesterday, giving evidence before the House of Lords Economic Affairs Committee, The Chancellor implied that he may make such an announcement in his forthcoming Budget.

I don't get it. Everyone already has the opportunity to invest in tax free savings accounts. The annual limit for investment in ISAs is £7,200 Even to invest just the maximum cash element of £3,600 each year out of surplus income is tough for most people who are subject to only basic rate income tax.

Beyond that, assume someone has £10,000 of savings invested (other than in an ISA). Assume that they are currently able to receive a 3% return (which is high in the current market). The interest they would earn on this in a year would be £300. The basic rate tax retained by the bank would be 20% of this ie: £60. So if this were abolished the tax saving would be equivalent to £1.15 a week - on savings of £10,000. For most people the saving would be even lower as their taxable savings are significantly lower than this.

And what about higher rate taxpayers? That's anyone whose total income is over about £41,000. In theory there would be no change for them. In practice the impact would be enormous.

If the banks no longer have to deduct and withhold 20% tax at source it means they will be paying out interest gross. This puts more money in everyone's pockets - not just the basic rate taxpayers. But higher rate taxpayers would then have to pay twice as much tax on their interest. This could be dealt with through their PAYE codes if they are employees. But everyone else will simply have to pay the extra tax on 31 January after the end of the tax year. ie: long after the additional interest was received, spent and forgotten.

Using the same example of £10,000 savings (outside of an ISA), a 3% return would generate £300 of interest over the year. At present a higher rate taxpayer would receive only £240 (after the deduction of 20% tax) and would have to pay a further £60 of higher rate tax. In future they would receive the full £300 and have to pay £120 of tax.

Hence my view that one way or another " Talk of tax cuts for savers" is shortsighted gesture politics. Do you agree or have a contrary view? Please add your comments to this blog post.

Monday, February 2, 2009

HMRC investigating posts on social media

I picked up this news through Twitter * at the end of last year. Ok, I guess most readers of the TaxBuzz blog haven't previously encountered that micro-blogging medium. Nor do I think you need to as I've explained on my separate blog for ambitious accountants.

But this news does mean that you need to be more aware of what your clients could be doing online that is exposing them to HMRC scrutiny. In effect this new development is a natural extension of HMRC monitoring the small ads in local papers and more recently Ebay and other online 'auction' sites. We're also used to the stories of how HMRC staff walk around the streets in Wimbledon to see which home owners have let their home and/or gardens to tennis fans during the annual tournament.

Do you know which of your clients are promoting their hobby through social media such that they might appear to be trading? I'm referring here as much to the so-called 'non-working spouses' whose tax returns have always been simple and straightforward to complete.

Might there be evidence online of when a new trade started (earlier than was notified to HMRC)? Could your clients be incriminating themselves when talking about hobby activities without intending to do so? Maybe simply boasting or talking up their sales and business experience?

Your clients could be doing this using any of the HUNDREDS of different online social media websites and facilities.

Don't be misled. Many 'social networking' sites have a big focus on business as distinct from or in addition to 'social' activities. The most common of such sites are probably: Myspace, Facebook, Twitter, LinkedIn, BT Tradespace, Ecademy and UK Business Forums. In addition to these your clients may have personal websites and blogs (which can be quickly and easily set up for free) through which they are promoting what appears to be a business or a trading activity - eg: through affiliate sales (eg: for Amazon) or through a Google adsense programme. The possibilities are endless. Even Facebook provides business promotion facilities.

Maybe it's time to review the questions you will ask your clients about their trading activities when you start the process of collating information for next year's tax returns?
*Twitter is a micro blogging service that encourages users to simply Tweet their answers to the question - "What are you doing right now?" The potential uses of Twitter go a lot wider than this and there are many related websites and services that make it easier to use and to gain benefits from so doing.