Friday, July 24, 2009

The tax simplification project is abandoned - not that it got very far

I don't think many people were surprised last week when the Financial Secretary announced that the Tax Law Rewrite project is to be wound up once the next two Bills become law next Spring.

Originally announced in 1995 the project was launched in former Chancellor Kenneth Clarke’s 1996 Budget speech. It was intended to herald the start of tax simplification and Mr Clarke suggested it was as ambitious as ‘translating War and Peace into lucid Swahili’. The project was forecast to take five years and would, he promised, translate 6,000 pages of Inland Revenue tax legislation into plain English. In the event the translation of Tolstoy's famous novel would have been easier and faster!

The Self Assessment (SA) system that had been planned for even longer was always going to be the SA system - but originally this was to stand for Simplified Assessing. But it was quickly renamed to avoid the inevitable criticism when simplification didn't happen. And it didn't.

Many people have assumed that the Tax Law rewrite project was intended to simplify the tax system. That was never it's objective. It was always focused only on simplifying the language of tax law. The first Rewrite led to the Capital Allowances Act 2001. Since then we have also had
  • The Income Tax (Earnings and Pensions) Act 2003
  • The Income Tax (Trading and Other Income) Act 2005
  • The Income Tax Act 2007
  • The Corporation Tax Act 2009
  • The PAYE Regulations
The list will be completed when the current exercises are complete, leading to:
  • A second Corporation Tax Bill; and
  • The Taxation (International and Other Provisions) Bill, which rewrites provisions that deal mainly with international taxation issues.
This will leave the Capital gains tax legislation in a bit of a mess as those elements relevant to companies will have been rewritten but those elements relevant to other taxpayers will be left in their present state.

In announcing the (sadly as we had expected) early termination of the project, the Financial Secretary said:
"The mainstream direct tax legislation is now far more accessible and easier to apply than the legislation that went before and when the project's next two Bills are enacted, the time will be right to bring this work to an end.

This has proved to be a major task which would not have been possible without the huge contribution and dedication of everyone involved in the project. Many tax professionals in the private sector have given their time and expertise in reviewing and improving the new provisions during their development. Their input, and the dedication and guidance of the project's Steering and Consultative Committees, have been vital in achieving the excellent quality of the rewritten legislation"

In the early days of the project I was still in practice and well remember wondering if all the time and effort devoted to the project was worthwhile. I think we hoped that the issues that were revealed would lead to simplification of the tax system. Sadly this was not to be. It's long been apparent that all we have is better written legislation. It's easier to follow, more logically sequenced and easier to understand.

These are, of course, all worthy outputs - even though it makes it more difficult for experienced practitioners to find their way around the rewritten legislation for a while. But it's easier for those new into the profession to get to grips with the law and that has to be a good thing.

On occasions however newer Government tax initiatives have been legislated so quickly that 'old' style drafting has been used to amend rewritten legislation. It's all quite sad really.

In 1996 Mr Clarke said the rewrite project would "bring the benefits of clarity and certainty to businesses and ordinary taxpayers". I'm not sure that's happened.

Looking back now, what are your views on the Tax Law rewrite project and the new-style legislation?

Tuesday, July 14, 2009

Tax avoidance schemes - a simple guide

Further to this morning's post about the difference between legal and illegal tax avoidance - where do tax avoidance schemes sit?

Most tax avoidance schemes are structured so as to be legal rather than illegal. And they tend to be more in the way of 'wipe-out' schemes than simple reductions in the overall tax liability. But that's not the whole story.

Anyone who gets involved in structured tax avoidance schemes needs to be aware of and willing to accept all of the consequences and risks as well as the headline (hoped for) tax savings. Many promoters focus only on these and minimise the risks - after all, they only earn their commission if you or your client go ahead.

At least one promoter I know claims to be more honest than most when talking to people who have expressed interest in his schemes. Apparently he explains that anyone who would be worried sick by the inevitable Revenue enquiry, the letters, the demands, the time it takes to resolve and the inconvenience should NOT get involved in his schemes – even though he also claims they are legal, have full Counsel’s opinion and are fully disclosed to HMRC.

He manages clients’ expectations and makes clear that these enquiries are almost inevitable and often last 3 – 7 years; and even though he claims they are usually resolved in favour of the taxpayer, he admits there are no guarantees.

All of these are generic risks and consequences of course. In addition there will be further risks and consequences inherent in each specific scheme. Too often these are underplayed, overlooked and misunderstood.

When I was in practice, I often found myself talking with clients about specific tax schemes. Often I had been approached to offer an independent view of a scheme put forward by promoters. In my experience, once clients really understood all the risks and consequences of getting involved in an otherwise tempting tax scheme, only around 10% of clients actually chose to go ahead.

I have since heard from various other advisers and promoters whose experience it seems is much the same. Less than 10% of well advised taxpayers choose to proceed. So maybe the appetite for legal tax wipe-outs has reduced in recent years.

What do you think and how do you manage your clients’ expectations? Please add your comments to this blog post.

Tax avoidance - what are you allowed to do? A simple guide.

This is a follow up to yesterday's posting about tax avoidance and tax evasion. In this connection I have long believed that most people want to find ways to pay less tax.

How much less is rarely clear. In practice there seem to be two targets:
  1. Any feasible and legal reduction in taxes as compared with current expectations; and
  2. As much of a 'wipe-out' of the tax otherwise due as can feasibly be achieved legally.
In this context it is worth clarifying what is and what is NOT legal:

Simply stated it is legal to legitimately minimise your tax liabilities through:

  • Claiming all available allowances and reliefs;
  • Claiming tax relief for expenditure incurred “wholly and exclusively” for business purposes; and
  • Planning your affairs to keep your tax liabilities as low as possible within the law.

On the other hand it is ILLEGAL to deliberately/dishonestly evade tax. This includes:

  • Claiming tax relief for non-business expenses;
  • Telling untruths on your tax return or in the way you describe transactions;
  • Failing to include all of your taxable income in your accounts;
  • Withdrawing money for personal use from an incorporated business (company) and not making any attempt to make sure it is treated correctly for tax purposes;
  • Failing to declare all of your taxable income and gains on your tax returns;
  • Failing to ask for or to complete tax returns to report your taxable income and gains.

The consequences of illegal activity typically include: Revenue investigations, back taxes, interest on late paid tax and penalties (up to 100% of tax), time, hassle, professional fees, and if you’re very unlucky, ill-advised or stupid – prosecution and prison.

It is also worth stressing that the level of penalties charged these days depends very much on whether or not you were deliberately avoiding your tax obligations.

Any questions?

Monday, July 13, 2009

Do you want to be taxed in principle or by the letter of the law?

One of things that struck me about the whole MPs' expenses debacle was the double standards and hypocrisy at play.

You'll recall that most MPs sought to justify their expenses as being within the rules. "Sod the principles set out in the Green Book. Sod the high ethical standards you might want to expect of elected officials. We just focused on keeping within the rules." That was pretty much the attitude.

On the other hand when it comes to tax planning and tax avoidance the Government and HMRC have adopted a very different approach. We all know the difference between tax avoidance and tax evasion. The former is legal, the latter is illegal. Tax avoidance often exploits flaws and loopholes in the law. In this context Treasury MPs and HMRC talk about abusive tax avoidance and artificial tax avoidance. That is, tax avoidance which is legal but which is contrary to the intention of the law.

If the MPs were consistent therefore they would have to either:
a) condemn each other for exploiting loopholes in the rules that determine which expenses they can claim; or
b) accept that taxpayers are entitled to adopt exactly the same approach when it comes to tax rules.

In effect, either one refers to the letter of the law/rules or to the spirit and intention of the law/rules. You can't have it both ways. It is evidently hypocritical to adopt one standard for taxpayers generally and a lower standard for MPs.

I raised a similar question on this blog almost 18 months ago in February 2008: Is it one rule for MPs and another rule for the rest of us?

What do you think?

Undisclosed rental income from buy-to-let properties

The weekend press contained reports that could have a big impact on the buy to let market and other landlords who fail to declare their lettings income. And such stories are not simple press puff. HMRC have been known to be focusing on this area in recent months.

According to the Telegraph today lettings agents could soon be forced to hand over the names and addresses of all landlords on their books, past and present.

The move would make it easier to identify buy-to-let investors who are avoiding paying tax on their rental income or capital gains when they sell a property.

We might assume that those landlords who fail to declare their rental income probably arrange private lettings. Are there really many people who use a lettings agent and then omit to declare the rental income on their tax returns?

That's actually exactly the reason for the prospective change in the law. Lettings agents have long been exposed to prospective requests by HMRC to provide statements showing:

  • all monies received on behalf of landlords;
  • the names and addresses of each landlord; and
  • a declaration as to whether every such person is of full age, UK resident or incapacitated.

However the rules currently state that any such requests from HMRC can only cover the last 3 years.

So the reported change (to s13 TMA 1970) would extend this facility to:

  • go back more than 3 years; and
  • to cover details of landlords who have used the agent to source tenants even where the landlord collects their own rents.

Landlords who have not been declaring their taxable rental income should take professional advice now. Remember that tax is only charged on the net taxable rent. This means rental income less all deductible expenses such as:

  • buildings and contents insurance
  • maintenance and repairs (but not improvements)
  • accountant/tax advisers' fees
  • letting agent's fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • interest on property loans - mortgages
  • utility bills (like gas, water, electricity)
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery, advertising
Remember that since April 2009 a whole new penalties regime has been in place. When and how you approach HMRC to put things straight could have a massive impact on the level of penalties that they charge and the payment terms they allow for you to settle the back tax, interest and penalties that you owe. If you continue to keep quiet and simply hope that you won't be found out then the penalty when you are caught could be anything from 30% to 100% of the unpaid tax.

Edit: There's time to get your affairs in order before HMRC will have the power to obtain the additional information they require from letting agents. The press reports relate to a new consultation document published by HMRC on 9 July: Bulk and specialist information powers
Although this is the TaxBuzz blog I do occasionally feel it appropriate to remind readers that you can find expert tax advisers across the UK from within the Tax Advice Network. And many of them have the expertise you need to help decide how best to approach HMRC if you have not yet been paying all the tax due on your net taxable rental income. Simply click here for a list and choose whoever best suits you.

Thursday, July 9, 2009

Finance Bill 2010 - Don't hold your breath

Yesterday I suggested that the Government might be agreeable to including some surprising legislation therein.

Here's what I guess will happen - assuming that the General Election takes place next Spring.

The Chancellor will get to present a Pre-Budget Report (PBR) this Autumn and then a Budget next March. All sorts of populist promises will be made in a last ditch effort to maximise support for local Labour MPs - and thus for a Labour majority.

The Government may even go so far as to allow Parliamentary draughtsman to draft the necessary clauses for Finance Bill 2010. But the Election will intervene and most of the clauses will be dropped - so as to get a bare bones Finance Act passed before Parliament rises.

If there is another Labour majority (does anyone really think that's possible?) the more contentious elements of the Bill will be forgotten. If there is a Conservative majority then Labour will only half heartedly encourage them to include the contentious clauses in the first Conservative Budget (and then Finance Bill and Act).

I won't be holding my breath in the hope of seeing new legislation that brings the tax status of MPs expenses in line with those for everyone else.

What do you think will happen?

Wednesday, July 8, 2009

"MPs breaking tax laws" - Surprised?

Sadly, it should come as no surprise to learn that:
MPs are regularly breaking the law by failing to pay tax on their expenses, the country's chief tax inspector told the committee probing House of Commons allowances yesterday.
As is reported in the Telegraph today.

I suggested this was the case when I was interviewed for BBC Newsnight last month. I posted a note on this blog too in which I explained why I was very doubtful that MPs had paid tax on the accountancy fees that they had claimed back as expenses.

I explained this on camera in the afternoon of 26 May and the Newsnight team then contacted the MPs concerned. Later I had a call from the journalist to say that MPs and their spokespeople were claiming that they had paid the tax due. I repeated that this was almost certainly because they didn't understand the rules. Still Newsnight had to report the MPs' assertions that they had done nothing wrong. One MP's spokesperson apparently claimed that there was no problem as the accountants' fees were paid out of taxed income so it was fine to claim them back!

I feel vindicated to note that Dave Hartnett told the Commons committee yesterday that MPs were frequently breaking the rules by failing to pay up after claiming back the cost of accountants' fees for personal tax advice on their Commons allowances.

And that Dave added:
"Over the last three months I have learned more about MPs expenses than I have over the rest of my career."
Like so many of us!

I'm hopeful that HMRC will put forward some proposals to bring MPs into line with the rest of us when it comes to determining which expenses are taxable and which are not.

Would this have Government support? I think it might - for the reasons I will explain in a separate posting about Finance Bill 2010.

What do you think?

Tuesday, July 7, 2009

A wild and wiki approach to developing tax law

Each year the Chancellor announces tax changes in the Budget and the legislation then appears in the Finance Bill. If there is time this is then amended to correct errors, oversights and revisions to reflect feedback from interested parties.

Sometimes draft legislation is exposed for consultation beforehand but this is very much the exception rather than the rule. This year the Finance Bill appears to have been drafted in such a rush that I'm told that some of the clauses are being corrected even without being flagged in committee (principally erroneous cross refs to section numbers in other legislation)**

Few of those who have an interest in following the progress of the Bill and of the various amendments that are tabled, withdrawn, revised or accepted, are able to do so. Indeed one wonders whether further errors will slip through due to the inability of anyone outside of Parliamentary draughtsman's office to keep track.

So here's a novel idea. Could the Finance Bill be published as a wiki? Access to the updating facility would be limited to Parliamentary draughtsman, however all commentators and interested parties would be permitted to read the Bill and to see how amendments will affect the legislation to which they refer.

I can see further applications to extend this concept. What do readers of this blog think please?

** Keith Gordon advises me that the most obvious examples are in Schedule 14 and Schedule 57 of the current Finance Bill

Monday, July 6, 2009

Grant Thornton's tax avoidance scheme - again

This is a brief update on a post I published earlier today as the BBC has reported on further aspects of the GT 'tax avoidance' scheme.

According to the BBC:
Newspaper reports have accused Grant Thornton of devising a scheme to save high earners 40% of their tax bills.
These will be the reports to which I referred in my earlier post.

But a Grant Thornton director said it was not aimed at bankers with huge bonuses and that no income tax would be avoided by those using it.

"It doesn't fit HMRC's characteristics of a tax avoidance scheme," said Justin Rix, a Grant Thornton director.

One of his colleagues. Mr Fathers has claimed that "It is not a tax wheeze. It is a share based incentive arrangement to align employees' interests with those of the company."

However, Dave Hartnett the permanent secretary for tax, is reported to have said:

"We are well aware of this aggressive avoidance scheme and we're looking at it closely,"

In my earlier post I noted that the media seemed to be suggesting that it was 'bad' to get involved in tax avoidance even though it's legal and akin to what every taxpayer does when they ask their accountant to help them to pay no more tax than is legally required.

The BBC report contains further details of the scheme and seems to be quite a balanced piece. Having said that, in my view we can be pretty certain of 3 things:

1 - The motivation for the creation of the scheme in question was to find a way to reward employees without them paying as much tax as would be payable if they either received conventional bonuses or awards of shares;

2 - It makes good commercial sense for unquoted businesses to create a facility for their employees to be able to acquire shares in the company (should they wish to do so). This is not easy to do as it means it's also necessary for the employees to be able to sell their shares, someone needs to set the price for buying and selling the shares, there are probably Financial Services Act (FSA) issues to consider and there are certainly tax traps to avoid.

3 - If this was a disclosable tax avoidance scheme, then GT would have disclosed it to HMRC in accordance with the law that obliges them to so do.

Finally - I would imagine that GT now have very mixed emotions about the press coverage they have received about this scheme. On the one hand they are having to defend their approach publicly. On the other hand I'll bet they're loving the publicity which, from a commercial perspective, must be good for business. I would expect that many larger firms have created similar schemes. In practice the market for them is quite limited, possibly even more so given the reported views of HMRC.

Whatever any of us may think about legal but 'abusive' tax avoidance and 'harmful tax practices' - accountants and tax advisers are going to continue to advice on tax minimisation. It's what clients want. Personally though I struggle with the issue so gave up giving tax advice 3 years ago. What's your view?

Tax avoidance - the tangled terminology

It looks like some of the media have been swept away by the relentless bandwagon pushed by HMRC, the Treasury and Ministers that all 'tax avoidance' is bad and somehow equates with tax evasion.

I last commented on this here in a post: I'll huff and I'll puff - empty threats from the taxman?

Whilst part of me would like to agree that there is a clear distinction between acceptable tax planning and unacceptable tax avoidance (or "harmful tax practices") I know it's much more difficult in practice.

More recently we have seen ample evidence of MPs attempting to justify their expense claims by reference to the letter of the rules rather than to the spirit of them. I've commented before about the hypocrisy of such claims by Ministers who are in favour of applying tax law by reference to the spirit rather than the letter of the law. What's sauce for the goose...

Under a heading: City firms scheme to hide bonus boom from HMRC, the Sunday Times yesterday reported that Grant Thornton (GT) has sent a document to clients outlining one scheme that could afford a “potential tax saving of approximately 40%”. GT were quoted as saying that the incentive scheme in question was "not in any way related to the 50% income tax rate”.

The Independent today reports Francesca Lagerberg, the head of tax at Grant Thornton, going further and stating that the firm was not seeking to engineer tax avoidance schemes.

“These proposals, from us and all the other accountancy firms, are not the aggressive schemes that were sometimes employed a few years ago. There is no tax structure in place that will help bankers avoid the top rate of the income tax and other charges,”

“We are offering bespoke solutions to companies that want to incentivise employees. It often involves government-sponsored schemes such as salary sacrifice practices. The last thing our clients want to spark is an investigation by HMRC into clients’ remuneration polices.”

According to the Independent a spokesman for BDO Stoy Hayward, confirmed that the firm was also offering similar services to banks but also stressed that it was not trying to engineer tax avoidance schemes.

I tend to think that both GT and BDO have accepted here that 'tax avoidance' is being used by the media as short-hand for 'abusive' schemes and 'harmful tax practices'. I don't think they had any real choice.

Let's be honest - tax advisers (by definition) advice clients on tax issues. This will frequently involve them in advising clients on how to avoid paying any more tax than is absolutely necessary under the letter of the law. In its simplist form this is therefore tax avoidance. And equally I believe that most taxpayers want the right to obtain such advice. Let me stress (again) that one of the reasons I gave up giving tax advice myself was because of what I perceived as client demands for more agressive tax planning advice than I was myself comfortable to provide.
The time is coming however when there will be more public debate and discussion around the different terms and what is acceptable as distinct from unacceptable tax avoidance. I appreciate that the Guardian attempted to do this earlier in the year with their tax gap investigation. And there are some commentators (eg Richard Murphy) who suggest that the solution is easier than many of us would accept.

Having said that I did summarise a possible distinction on this blog almost exactly a year ago. If memory serves this originated with Richard - who knows that I share a number of his views even if we do not always agree on the most effective way of securing change.

What do readers of this blog think about the terminology used to describe different approaches and attitudes to tax avoidance?