Thursday, December 31, 2009

Review of TaxBuzz blog 2009

The TaxBuzz blog is now over two years old and contains over 200 posts covering a wide range of tax related topics. As 2009 draws to a close, you may be interested to see this summary and review of my posts over the last 12 months.

At the start of 2009 I set myself a target to add at least two topical tax related commentary or policy related posts to the blog each week. I've tried to steer clear of trying to achieve the impossible - ie: commenting on every tax related story highlighted by the media. Equally I did not want this to become a series of posts about tax planning. So how would I decide what to write about? And could I identify a consistent style or approach?

How did I do?
Well, in 2008 there were only 86 posts. In 2009 we moved up to 113 including this one. So, on average I exceeded my target although I didn't manage 2 posts every single week. Looking back I can see that some of the posts are much longer than I would have liked - and longer than I had anticipated. As Abraham Lincoln is reputed to have said: “I'm sorry I wrote such a long letter. I did not have the time to write a short one.” One of my ambitions for 2010 is to write shorter pieces for the TaxBuzz blog.

As you might expect from the note at the top of this blog many of the posts were inspired by tax related stories in the media. In some cases I simply offered support, clarification and, where appropriate, balance. More frequently though I questioned, challenged or disputed news reports that had the potential to mislead; I sought to offer a more informed view. This was particularly evident when I posted 3 items by reference to the TV programme 'Taking on the Taxman' last April. Here's a reminder of some others:
There were 4 other key areas of focus in 2009:
  • Forecasts, predictions and insights - Anticipating the impact and behavioural changes that will follow from tax developments and announcements;
  • MPs expenses - I first started writing about the tax related issues in a post on 11 February 2008, then in January and March 2009 before a series of posts in May 2009 when the Telegraph revelations were published. I've returned to the subject a couple of times more recently too.
  • Hard to believe - a number of posts highlighted bizarre but true topical stories about our tax system.
  • Tax avoidance - even I'm surprised by how often I have written about this subject. Many posts highlight the commonly overlooked risks and downsides of structured schemes; others refer to misunderstandings as to what the system allows; and others refer to changes in the tax rules that affect the likely success and penalties for abusive tax avoidance and tax evasion.
Many thanks to all those who have read, linked to, retweeted, ticked the reaction box at the end of a post or added comments to posts on the TaxBuzz blog this year.

It was quite instructive to look back at all the posts made during 2009. Many stood out and some I had forgotten. One of these amused me especially. It's from February and was titled: Instead of customers, why doesn't the taxman call us...? Having considered many options, including those suggested by others, my conclusion was that we should be known as CBI (Companies, Businesses and Individuals).

Please feel free to add below your thoughts and perceptions of the TaxBuzz blog 2009.

Wednesday, December 30, 2009

Inheritance tax - Who's right? Who is really at risk?

The two main parties are arguing as to the impact of inheritance tax and who would benefit if the rules were changed.

Back in October I posted an item here: IHT receipts FALL under Labour - what's going on? This followed a report in the Guardian that Inheritance tax drops to all-time low under Labour. Exploring the issue further I concluded that the number of estates paying IHT would fall in the immediate future. My conclusions were drawn from HMRC's data and the impact of recent changes to the IHT rules.

I suggested that the number of estates paying IHT would fall, probably to something around 4% which accords with the Chancellor's later assertion in his PBR that "fewer than three per cent of estates will pay inheritance tax." Leaving aside arguments as to whether the tax is wholly "avoidable" if one is very wealthy and employs top tax experts, this is not going to affect 'Middle-England'.

The Tories have now extrapolated data from the Office of National Statistics that seems to show that over 4 million adults have non-pension wealth above the current inheritance tax threshold of £325,000. And this leads to the conclusion that one in five families and one in 10 people above the age of 18 are potentially liable to IHT.

It's simply not true however to suggest that "More than 4million face inheritance tax bombshell under Labour." Over and above the £325k per head exemption the rules also provide further exemptions (in effect) for qualifying business and agricultural assets.

These exemptions also mean that some very wealthy people are not currently subject to IHT as there is no cap on the value of qualifying assets that can escape IHT.

In any event, it seems fair to review the Government's data to which I referred above. If it is wrong the Tories' plans will benefit Middle-England as they assert. On the other hand, if the data is reliable, the Tories' plans will simply improve the well being and perceptions of Middle-England as they are not really at risk of a substantial liability to IHT.

The real issue is the soaring value of houses (homes) owned by people when they die and the disparity in such values across the UK. The average price of a home is now £162k so to many people only the very wealthy own homes worth £800k (which together with other assets could take an estate upto £1m). However in parts of London and the South East this is not uncommon. And I assume this is why the Tories want to raise the headline threshold so high. It might be less contentious to do something I think John Major suggested in the 1990s and John Redwood proposed, to a degree, in 2007. To exempt the main home from IHT?

The key issue for both parties is to shift the fear of inheritance tax from the consciousness of average families - wherever they live. If this requires changes to the tax rules, and I think it does, then such changes should be welcomed.

And this would also lead to a consequential and welcome development. The end of inheritance tax avoidance seminars run by promoters of standard trust-based 'solutions' - many of which are dubious in the extreme - especially in so far as they purport to reduce the IHT payable by reference to the value of your main residence.

I've heard stories of how slick presentations result in long queues of audience members who sign up and pay for a supposedly legal document there and then. They are encouraged to do this without any real regard for their personal situations and without the benefit of any qualified tax or legal advice. That's NEVER a good idea. If you have any IHT concerns do speak to a suitably qualified and independent tax adviser.

Thursday, December 17, 2009

Tax Tangle - "a vague and very likely muddled arrangement"

This tax tangle was apparent from the decision of a recent VAT tribunal case. Balkwill v Revenue & Customs [2009] UKFTT 314 (TC) (19 November 2009)

The case concerned a plumber who claimed that he sold his business and retired in 2001. He deregistered from VAT but continued to declare profits from the business on his personal tax returns. HMRC noted that the turnover being disclosed was just above the VAT registration threshold and claimed that he should have remained registered until 2004.

The evidence pointed to a most unusual arrangement between the ‘retired’ plumber and the Mr Smith to whom the business was sold in 2001. According to the Tribunal Judge "it very much sounded as if no accountant or solicitor had been involved in clarifying the form of what at best may have been a vague and very likely muddled arrangement".

At the time of the Tribunal hearing in July 2009, the plumber was over 80 years of age, in poor health and recently out of hospital. The taxpayer contended that he was living off the state pension and was unable in any case to pay a VAT assessment for over £19,000 plus interest.

The Tribunal judge accepted that HMRC had acted in proper manner and had evidence that VAT was properly due. However, it was not evident that the taxpayer made false claims but rather significantly misunderstood his filing requirements.
"we suspect that whatever the arrangement was it will have been vague and entirely capable of being misunderstood."

"this is not a case where we have fundamentally dis-believed all the Appellant's evidence. We frankly do not know what happened in this case, but we believe that there was probably some vague arrangement between the Appellant and Mr. Smith, and that the current confused state of affairs probably results from misunderstandings, rather than simply from a false claim by the Appellant who appreciates that he was trading at all times until 2004."

"we very much hope that HMRC will not proceed to try to collect any of the tax in dispute. "
As will be apparent from these quotes the taxpayer's appeal was dismissed but was accompanied by a strong plea from the Tribunal Judge that HMRC show considerable restraint in seeking payment of the assessment and penalties due and not proceed to collect any tax due.

Sadly I fear that the Tribunal Judge's plea will fall on deaf ears. We know that HMRC consider that they have no power to exercise such discretion. Recently they even planned to end their long standing practice to only pursue an 'equitable liability'. What chance they will agree not to pursue a liability that has been confirmed by the Tribunal.

The lesson for all is to avoid informal, muddled business arrangements. They invariably lead to trouble with the taxman.

Tuesday, December 15, 2009

Why so few people comment on this blog

I'm very conscious of the relatively low number of comments that this blog attracts as compared with many others that I look at on a regular basis. I have tested a variety of invitations in my blog posts and have written on a variety of contentious subjects. I am of course very grateful to those who take the trouble to comment and reply.

Last month I asked the following question as part of a survey of users of the Tax Advice Network. The majority of respondents were accountants.
"Have you ever tried to add your comment to any of the items on the TaxBuzz Blog?"
[I'm sorry that some browsers do not show the pie chart graphic here]
To assist those unable to read the key let me clarify:
  • Yes, my comments are on the blog: 4% (orange)
  • Yes, but I couldn't work out how to do it: 1% (sky blue)
  • No, I don't have any interest in this facility: 39% (lilac)
  • No, I don't think anyone would be interested in my view: 43% (red)
  • Other: 13% (green). All of the other's answered 'no' and gave alternative reasons to the two main ones above)
I have to admit that the two most common responses did not surprise me.

If anyone else is reading this post and would like to share their views on this issue, please feel free to do so. In particular if you want to encourage more readers to share their views. Are we interested in them? Of course!

Monday, December 14, 2009

What is meant by 'the spirit of the law?'

Many people feel that there is little merit in MPs arguing that their more outrageous expenses claims were within "the rules". Even if the rules were lax (and I've addressed that in earlier posts here) we tend to feel that what matters is the 'spirit of the rules'. And, as with the proverbial elephant, we can easily recognise what is within or outside the spirit of the rules in this case.

By arguing that the letter of the rules takes precedence over the 'spirit' I think MPs have lowered the bar as to what is acceptable behaviour. Certainly they would be hypocritical if they argued that we should all abide by the spirit of the law when it comes to tax planning and tax avoidance. Most tax experts are quite clear that what matters here is the letter of the law.

Regular readers will know that I am uncomfortable with the idea of aggressive avoidance schemes. These tend to rely on a strict interpretation of the letter of the law. As is commonly pointed out in the professional press, the contrary argument, to avoid breaching the spirit of the law, is not easy due to a lack of clarity as to its definition. To date it has been assumed that, in the context of tax laws at least, the spirit of the law equates with the intention of Parliament. This then leads to the observation that such intentions will rarely be clear when it comes to the issues under debate even in the context of tax avoidance.

Well, now there is a new definition of the spirit of the law. It was contained in one of the documents published on the day of last week's Pre-Budget Report.

Protecting Tax Revenues 2009 explains HMRC’s methodology for estimating the shortfall in revenue between the tax collected and the tax that which should be collected (the theoretical liability), commonly referred to as the tax gap.

At para 3.2 we are told that:
“The theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).”
This phrase, which is repeated later in the document, is an important admission and clearly differs from more traditional definitions of the spirit of the law as simply being in accord with “Parliament’s intention.” That is often difficult to discern. On the other hand HMRC's interpretation can often be gleaned or will be well publicised.

I note also that a similar point arose in the Consultation document on a Code of practice on taxation for banks. According to the response document published last week, many argued that:
"the interpretation of “spirit of the law” and “intention of Parliament” should remain with the courts. HMRC should not become responsible for legal interpretation, as this confers a quasi-legislative and judicial function on them that contravenes the principle of separation of powers."
HMRC's response was to agree that they:
"should not become responsible for legal interpretation. Banks [and once presumes all taxpayers] will continue to be taxed in accordance with the law."
The Code of Practice on Taxation for Banks itself now requires compliance:
"with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament"
I predict that there will be more debate about this phrase and approach in the coming months.
What do you think?

Saturday, December 12, 2009

Bank Payroll Tax - designed to create a pre-election distraction?

Maybe it's just me. On the one hand there is plenty of evidence to suggest that the announcement of a bank payroll tax is a genuine attempt to penalise the payment of "bankers' bonuses."

So much so that the tax has been widely welcomed by the media, the public and by most commentators. The provisions include a targetted anti-avoidance rule that effectively denies banks the facility to find ways around the tax. And the tax will apply to UK resident banks, building societies and "financial trading companies" as well as to foreign banks and financial trading companies with a UK permanent establishment.

So far so good.

On the other hand there are a couple of ENORMOUS let outs in the Bank Payroll Tax. I can't call them loopholes as those tend to only become apparent after the event and are rarely an integral and clearly stated element of new legislation. Here however we have both draft legislation and a detailed technical note that explains the provisions contained therein.

1 - Why is the starting point for the tax so high?
It will only affect bonuses that exceed £25,000.
I understand that some lower paid bank employees may be entitled to performance related bonuses. However such employees are outside the definition of "relevant banking employees."

So I suspect that the starting point was set sufficiently high to enable some favoured "relevant banking employees" to secure their discretionary bonuses without any penalty.

2 - Why is the affected period so short?
The bank payroll tax only applies to bonus payments made in the period from 9 December to 5 April 2010. (Although the press statements accompanying the PBR indicate that the Government will consider extending the period of the charge so that the tax remains in place until the provisions of the Financial Services Bill dealing with remuneration policy come into force).

For the moment though only discretionary bonuses paid during a four month period are to be penalised. Those that are awarded after 5 April 2010 will be subject to the new top rate of 50% income tax but will escape the bank payroll tax itself.

I can appreciate that there could have been problems in framing a penalty that applied to bonuses paid before the date of the PBR.

There is also to be an exception where the bank has no discretion as to the amount of the bonus due to a contractual obligation in place at the time the Pre-Budget Report was delivered. Again I assume that there was a good reason for such an exclusion.

But why do we have a cut off period just 4 months away? I suspect that this proposal was drafted earlier in the year and that the Government held it back so as to present it as a key measure in the PBR. In the event this was itself postponed by a few weeks and the window for penalising bankers' bonuses has been accordingly reduced.

In his PBR speech the Chancellor estimated that the tax would raise a little over £500m. This infers a figure of around £1bn bonuses which is much below those in previous years when they were in excess of £5bn. The more generous explanation is that the measure is expected to have the desired effect of discouraging discretionary bonuses over the next few months.

And that I suspect is the real intention. Once the cut-off date has passed, bankers bonuses will once again hit the headlines next April and May just as the real pre-election campaigns begin. The Government will then take the opportunity to note that bankers traditionally vote Conservative - the hope being, I assume, that this will discourage swing voters from being seen to do the same as those 'bad bankers'.

Or maybe I'm being too cynical.

The alternative view is that the the bank payroll tax has simply been designed to create headlines rather that to collect much in the way of tax. The furore over what constitutes a "taxable company", as defined in the draft legislation, could also be the result of a deliberate ploy to distract us all from the two issues highlighted above.

Time will tell.

Wednesday, December 9, 2009

Company car tax perk to return

I say this following the Chancellor's announcement in the PBR that Employees and Directors who are provided with an electric powered company car for their private use will pay no tax on the benefit from 2010/11 through to 2014/15.

There will also be no Class 1A National Insurance Contributions (NICs) on the taxable benefit of such company cars which must be propelled solely by electricity.

I admit I'm not a petrol-head but you'd have to be very keen on 'real' cars to choose to pay thousands of pounds of tax on a conventional company car or to run your own car when there's an option of a free to use company car - with no tax charged thereon.

And the absence of Employer National Insurance Charges will make the idea popular with employers too. Remember that the effective tax rate on high earners will be 50% next year and NI rates are going up too so the savings in prospect can be quite significant.

The range of electric cars available in the UK is growing all the time. Many currently have only 2 or 3 doors but Mondeo Man won't have to wait long for larger electric cars especially given the likely increase in demand after today's announcement. Earlier this year the Government announced that Motorists will be offered subsidies of up to £5,000 to encourage them to buy electric or plug-in hybrid cars.

I would admit that the potential attraction of electric cars is probably limited to those for whom a company car is a 'perk'. Electric cars currently have a limited range of less than 100 miles thus making them less than suitable for sales reps and others who drive long distances for business purposes.

This new facility to have a tax free company car, will need to be factored into the decision making process for businesses trying to decide which is the most attractive business structure going forwards. Other related PBR announcements include the deferral of the 1% increase in small companies rate of CT, forthcoming hikes in employer's NICs and the freezing of personal allowances.

Live PBR twitter updates re impact on x-factor personalities

Having been asked to tweet a live commentary during the PBR I chose to avoid simply replicating what ever other commentator would be doing.

Indeed the twitterstream for #PBR09 was awash with various accountants repeating much the same thing at the same time. And there's not exactly much scope for adding instant analysis or comment given the contraints of twitter.

So instead I chose to make my comments more specific......

Will this be the year that Alastair Darling shows he has the #Xfactor? I doubt it. #PBR09

Does the #xfactor house count as commercial premises that will be exempt from business rates once it's emptied after the final? #PBR09

"No one under 24 needs to be unemployed for more than 6 months before being guaranteed work" - Even if they don't win #Xfactor #PBR09

Stacey on #xfactor will lose out if no increase in tax credits and if she doesn't get a record contract after the finals #PBR09

Danyl the ex-teacher from #xfactor should be ok as "A short spell on unemployment is not turning into a lifetime of unemployment" #PBR09

Chancellor is talking about spending money he doesn't have (yet) #PBR09 Guess he'll be taking more from the rich like Simon Cowell #xfactor

Chancellor #PBR09 predicts UK econonmy will grow by between 1% and 1.5% during 2010. Didn't he also predict Jedward to win #xfactor?

Investment in super fast broadband (to secure more votes on #xfactor ?) will be funded by 50p tax on landlines. Deathknell for BT #PBR09

#PBR09 - 10,000 low income undergrads to take up internships for careers that they might not have considered - like popstars? #xfactor

Will 50% tax on bankers bonuses over £25k really only hit banks - or all businesses paying big bonuses - such as Syco? #xfactor #PBR09

Chancellor taking tough decisions "from a position of strength" - In the same way as Jedward had a strong chance of winning #xfactor #PBR09

Will #xfactor winners be less generous with gifts to family etc once they join top 2% and become subject to IHT on gifts over £325k? #PBR09

#xfactor losers will be ok as No one earning under £20,000 will pay any more NI contributions #PBR09

No free school meals for Stacey's son if she wins #xfactor - only for primary school children of low income working parents #PBR09

Will the new 10p CT rate for companies exploiting patents in the UK include income from image rights for winners of #xfactor? #PBR09

Didn't hear any announcements in #PBR09 re non-doms. All those on #xfactor should breathe a sigh of relief (incl Dermot, Louis and Danni)

George Osborne provides a Simon Cowell #xfactor type "Can I be honest with you?" critique of the Chancellor’s performance #PBR09

Osborne: "Absence of a spending review is the massive missing piece in #PBR09 " - Like running #xfactor comp'n without a finals programme

Osborne challenges Chancellor who is pitching one part of country against the other in #PBR09 - same as #xfactor finals !

"Every Labour Gov't ignores basic rule - if u keep on spending more than you earn, you will run out of money" #PBR09 Like #xfactor wannabees

Dr Vince Cable is 2nd judge to speak - the Louis Walsh of the Chamber, as compared with Osborne's Simon Cowell approach #xfactor #PBR09

Vince Cable says Gov't assumes economic growth based entirely on optimism - sounds like #xfactor wannabees assuming they can win #PBR09

Audience after #PBR09 in the Chamber of House of Commons is dwindling due to lack of continued interest - not like xtrafactor after #xfactor