Does the tax saving warrant the investment advice?

There was a naive piece of tax planning advice in the Money section of one of the Sunday broadsheets. At least I thought it was naive so I showed it to my 22yr old son to see what he thought. He was astonished that such advice could appear in the paper.

It was included in a piece titled: "Make the most of marriage tax breaks" and in a section sub-titled: "Transfer the right investments". Here it is:

"It is worth transferring assets between spouses even if one of you pays tax at 50% and the other at 40%". For example, if you have £50,000 of savings earning 3% gross interest a year - or £1,500 - a 50% taxpayer would be left with £750 after tax, whereas a 40% taxpayer would have £900".

It's technically correct of course and the example makes clear what's involved. Transfer £50,000 of investments from one spouse to another to save £150 pa of tax. Even my son could see that the tax saving paled into insignificance in the context of the value of the investments that would need to change hands. £150 is real money of course and would always come in handy.

There's an implicit assumption in the example that ownership of the assets could be legally transferred without incurring any transfer costs. In most cases however such costs would exceed the tax saving making it a daft thing to do.

I am a great fan of using examples when offering tax saving advice. This can help in understanding the tax at stake, whether it is to be saved, deferred or avoided.

As shown by the example above, when you consider the figures involved the tax at stake may not warrant the actions involved - especially when you take account of the costs (and of any risks) of implementing the advice as compared with the tax at stake.

Election tax tease: National Insurance - The 'tax on jobs'

George Osborne and the Conservative Party have pledged to reverse a planned rise in National Insurance Contributions (NICs). This has been welcomed by business leaders and has been criticised by Labour as putting the recovery at risk.

The so called 'tax on jobs' refers to Employers' NICs. It's the tax payable by employers by reference to their workers', employees' and directors' salaries. The current tax is 12.8% and Labour have announced two 0.5% rises which are both due to take effect from April 2011 when the tax will increase to 13.8%. Incidentally, 30 years ago, in 1980, the rate was 13.7%.

It is the aggregate 1% rise in the tax that the Tories have pledged to reverse and this announcement has been welcomed by a wide range of business leaders.

Labour's plans also affect the NICs payable by the self employed and by all employees. A 0.5% rise was announced in 2008 and a further 0.5% rise was announced in 2009. The aggregate 1% rise was to take effect from April 2011. This increase too would be cancelled under Tory plans.

Those who disagree with the Tories' plan focus on the need to fund the 'tax cut'. The tax due to be raised by the 1% increase in employers' NICs is c£4.5bn pa. The Treasury estimate that the total cost of this proposal is £7bn pa. You won't find that figure in the 2010 Budget 'red book' however, as, in an effort to fool everyone, the increase in NI was contained in two separate announcements and therefore the impact and the money to be raised are in separate tables (A2 and A11). £7bn is approx the aggregate of the relevant figures in those tables. Meanwhile Peter Mandelson is claiming the cost will be £30bn. If that were the case then surely the tables should show £30bn as the tax to be raised by the increase!

The Tories say that the related adjustments mean that the total cost of their NI proposals would only be £5.6bn pa, falling to £4bn over time. In isolation it's clearly a lot of money. But it's a small fraction of the forecast deficit of £167bn in 2011. And Labour have been just as evasive as regards how this is to be cut significantly as have the Tories. As such it is hard to see any justification in arguing that this £7bn alone will "put the recovery at risk" and lead to deeper public spending cuts.

What do you think?

I wrote a related piece yesterday titled: "Election tax tease: National Insurance and Income Tax alignment."

Election tax tease: National Insurance and Income Tax alignment

I've long criticised the way that Politicians try to imply that National Insurance is not a tax. So far as everyone who pays it is concerned it IS a tax.

What I dislike even more is when Politicians attempt to confuse the issue by referring to biased reviews and reports.

Four years ago, while Gordon Brown was still Chancellor, he announced in Budget 2006 that the Government would review the case for closer alignment of income tax and national insurance. The outcome of this review was the Treasury document, published in 2007: Income tax and national insurance alignment: an evidence-based assessment.

In Alistair Darling's Pre-Budget Report in October 2007 he reported that "the benefits of further alignment would be outweighed by the disadvantages." Whilst this was an accurate statement about the report it was misleading given the restrictions imposed on the Treasury's review!

In practice the Treasury were under instructions to take the current policy framework as fixed in stone. The rationale being that income tax and NICs have different purposes as NICs provide entitlement to contributory benefits. Thus, contrary to the hopes of many, the Treasury review had NOT considered any ideas in the context of merging income tax and NICs into one charge. The conclusion of the review was simply that further alignment, based on the pre-conceptions adopted within the report:

• Would result in lower savings for employers than might be expected.
• May adversely impact lower-paid individuals.
• Would result in high costs for the exchequer.

The purpose of the document was only to consider how to make NICs operate in a similar way to income tax. The two areas specifically considered being a move onto an annual basis and collecting NICs by reference to cumulative income levels. A number of related administrative changes did follow. However many detailed rules continue to operate differently when computing income subject to income tax as distinct from NICs.

And, of course, the other practical problem is that it would be political suicide to scrap NI and as a consequence increase the basic rate of income tax, possibly upto 30%. Additionally Pensioners would need an exemption (as they don't pay NI) and an alternative method would be required to determine entitlement to those benefits and pensions that are dependent on your NI Contribution (NIC) record. So it's not as easy as some people seem to suggest. But considering the options should not be off limits. Do you agree?

Do you think it would be more honest to combine income tax and NICs? And to relate benefit entitlement to a feature of the income tax system rather than NICs themselves?

Truncated Finance Bill is an affront to democracy

As part of the 'wash up' before Parliament finished its pre-election business, the 2010 Finance Bill has passed through in record time with very little debate. To facilitate this and to avoid extended arguments with opposition parties a number of contentious clauses were dropped.

If Labour are re-elected the dropped clauses will form part of a second Finance Bill that will also include those Budget announcements that were not in the first Finance Bill.

The key Budget proposals dropped from the 167 page Finance Bill published last week were:

• The increased duty on cider (clause 9)
• The abolition of the special rules related to Furnished Holiday Lettings (clause 65)
• The new landline duty on phone lines to pay for super-fast broadband (clause 23)
• The obligation to provide security for payment of PAYE (clause 58)

In another sad day for democracy other contentious issues have passed into law despite the absence of any material debate or discussion. I anticipated this scenario in my post last week: Finance Bill 2010 proves Parliament doesn't decide our tax laws. And some people wonder why I stopped giving tax advice!

"Have a look at this scheme and tell me what you think"

Years ago, when I ran the 'tax support for professionals' team at WJB Chiltern, we were frequently asked to provide a view on the potential success of tax schemes.

Despite being a specialist tax consultancy with dozens of in house tax advisers we chose not to offer such a service. The rationale was simple: Such schemes always carry risks. The promoters invariably underplay these and tap into the taxpayer's natural greed.

A worthwhile independent review can take many hours - obviously, given the inevitable complexity of such schemes and the need to review and consider all related paperwork including both the instructions to Counsel as well as the formal Opinion itself.

I was talking recently with the head of tax at another reputable tax consultancy. He shares many of my views about tax schemes. I was amused when he said he thought he could make a lot more money if he closed his eyes to the risks that pre-packaged tax schemes run. As it is, like any reputable tax adviser, he dutifully considers schemes that his clients purport to have an interest in. He goes through the paperwork carefully to ensure he understands the scheme sufficiently. He then explains the process, the hoped for benefits and the risks to the client, in words of one syllable. This, he tells me, invariably results in the client saying:

"Now I understand it properly, why would I want to go into a scheme like that?"

And, just as I concluded a few years back, there is a limit as to how much you can charge a client in such circumstances for the time and effort involved in reviewing, checking and advising on the scheme - especially if the client decides not to proceed. This is one of the reasons that promoters pay high commissions. It is partly to compensate for all of the conversations and meetings that do NOT result in a client signing up for the scheme.

Within the Tax Advice Network the tax advisers are generally just as reluctant to review third party schemes brought to them by prospective clients. And yet they are all tax experts and well aware of many schemes relevant to their specific areas of expertise. Why would anyone less experienced feel able to provide an informed objective view of a pre-packaged scheme?

What do you do when a client wants your opinion of such schemes?

Previous relevant posts:

• "Raise the white flag" - Are tax schemes worth the effort any more?
• Give me pure tax evasion any day
• Discovery assessments issued re film schemes in 2003-04
  
• HMRC challenge sideways loss relief tax avoidance
• HMRC confuse tax avoidance and tax evasion again
• Beware of HMRC spotlights - EBTs now included
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules

No 'reasonable excuse' for this waste of public funds

A recent Tribunal case will reinforce the view of many people that HMRC are continuing to take an unfairly hard line with compliant taxpayers. The cost and time and effort involved in this case (TC00425: Adrian Waddington) are wholly disproportionate to the 5% surcharge in dispute (£219.52). And, as the Tribunal determined, the taxpayer had evidently made every effort to fully comply with his obligations and to pay his taxes on time.

Mr Waddington is an employee. He's a chartered mechanical engineer and pays PAYE income tax on his earnings in the normal way. He also receives dividends and net interest from his savings. The Tribunal noted that he always filed his tax returns and paid his taxes on time.

The issue in this appeal was whether Mr Waddington had a reasonable excuse for failing to pay the tax due on his self-assessment for 2007/08 by its due date. In the 1990s he had received and filed self-assessment forms each year. Then HMRC stopped sending the forms to him. Instead in April 2008 he was sent a Tax Review form for 2007/08 which he completed and filed on 25 September 2008 (before the deadline). He heard nothing further until January 2009 when HMRC asked him to complete a self assessment return - with the same information already disclosed on the Tax Review form - and to pay any tax due by 31 January 2009.

Mr Waddington filed the return within the 3 month period afforded by the notice but was unable to compute the tax due. Instead he awaited HMRC's computation which arrived in June 2009 at which point he immediately sought assistance from a local HMRC office. And as they were no help he went to a tax accountant. The 5% surcharge however was deemed to have been triggered beforehand as the tax wasn't paid by 29 May. Looked at objectively however there would have been no possibility of a surcharge had HMRC dealt with Mr Waddington's affairs in a more timely manner.

It seems to me that the surcharge rules operate unfairly in a case like this where HMRC issue tax returns late through no fault of the taxpayer. This would not be a problem if HMRC were themselves 'reasonable' when considering whether a taxpayer has a 'reasonable excuse' for the late payment of their tax. The Tribunal was quite clear that such an excuse existed. When HMRC adopt a heavy handed approach as they did in this case, they risk bringing the system into disrepute.

What do you think?

Finance Bill 2010 proves Parliament doesn't decide our tax laws

Publishing the Finance Bill 2010 on 1 April was always going to look like a bad joke. Even more so if Parliament is about to be dissolved for a General Election.

Commentators, eg: the ICAEW Tax Faculty and CIOT, are rightly critical of how little time will be available to debate the Bill before it becomes law. The common consensus being that there will be just 3 days to 'consider' the 167 pages containing 73 sections and 22 schedules. These include detailed and complex legislation related to 3 brand new taxes: the bank payroll tax, a duty on landlines and the 'high income excess relief charge' on pension contributions. The latter is so needlessly complicated it could easily have been designed by the March Hare from Alice in Wonderland. There are also many other contentious tax changes that go way beyond those necessary by reference to the Provisional Collection of Taxes Act.

This pre-election Finance Bill simply provides the purest evidence of something many of us have long suspected when it comes to tax law. It rarely receives adequate Parliamentary scrutiny.

When trying to interpret complex tax law we are often referred back to the alleged 'intention of Parliament'. In my view this is commonly used as a cloak to hide the 'objective of HMRC' when the rules in question were drafted. The small (if any) amount of Parliamentary time, in the House or in Committee, focused on the issues in question is rarely considered. We are instead presented with the circular argument that if we have a law then that law accords with 'the intention of Parliament'. NO IT DOESN'T!

I've never been convinced that in most such cases the MPs (or even the Treasury Ministers) always understand all the related issues. How could they in fact? Our tax system is overly complex and few MPs understand the process sufficiently to debate the key issues from a position of knowledge.

And if the current Finance Bill 2010 passes into law within the next week we will have prima facie evidence of the lack of Parliamentary scrutiny that tax law invariably receives. In future let no one attempt to argue that Parliament decides our tax laws.

Back in 2008 I attended a 'Making taxes simpler' presentation at the ICAEW. This was when George Osborne and Lord Howe first announced a new Conservative policy to establish an Office of Tax Simplification (OTS) and also a Joint Parliamentary Select Committee on Taxation (JPSCT). I am well aware that each could end up as diverted from their task as was the recently axed Tax law rewrite project. But I'm hopeful that such developments, if they come to fruition, could lead to much needed improvements to our tax law making process and to some simplification of the system too.

What do you think?

Tax related April fool stories 2010

I wasn't the only one.
Yesterday I posted: New HMRC penalties for anyone responding to scam emails. I've added a note below of some of the best responses I received. My apologies to anyone who was 'fooled' despite my best effort that it simply raise a smile and flag the importance of avoiding scam emails.

Taxation magazine went with: Window fitters' disclosure opportunity

AccoutingWeb had: Proposed ‘iTax’ will damage UK economy

Any more?

Best responses I received to my post (which I also sent out by email):

I think this might be an April Fool. However given some of the strange things HMRC have been doing recently…….
- Paul Gayton

Please note that we now charge a £100 penalty for sending us unsolicited emails.
- Chris Young

The email falls under the definition of “deliberate wrongdoing” and will result in the prosecution of another innocent adviser!
- Peter Tucker

Mark I think this cannot be legally enforced and have written to my lawyers to undertake a judicial review. They said it would cost £25,000 but I have told them to go ahead on the strength of your e mail. Somebody has to take a stand.
- Joseph Robinson

New HMRC penalties for anyone responding to scam emails

Regular readers will know that I always try to share insights into topical tax related news stories. Today, I need to share with you details of a secret (until now) plan that HMRC been working on. It is a rather sneaky way to secure tax geared penalties from taxpayers and agents (ie: accountants and tax advisers). The problem is that there is no easy way to avoid this.

As you may know HMRC have become increasingly concerned by the scam tax rebate emails being sent out by fraudsters. HMRC are also annoyed as they get the blame whenever anyone gets ripped off after disclosing their personal data in response to the fraudsters requests. Todate HMRC have simply publicised the fake emails and warned taxpayers not to respond or to provide any confidential data. But too many people ignore this advice so it is about to become an offence to respond to such scam emails.

HMRC's new plan will see them checking on whether taxpayers and agents are taking HMRC's advice. As of today HMRC will call taxpayers and agents at random and ask them to quote their 12 digit internet filing passwords. Whatever happens you must not reveal the password to HMRC as this would breach all security protocols. And, according to some little publicised small print in the Budget Red Book it will result in you becoming liable for a new tax geared penalty.

On the other hand, if HMRC call you today and you do the right thing, ie: refuse to divulge your password, you will be transferred to a pre-recorded facility. This will invite you to press a number on your telephone keypad. The different numbers signifying your feedback:

Press 1 if you have forgotten the first part of your password
Press 2 if you have forgotten the second part of your password
Press 3 if you have forgotten more than two characters from your password
Press 4 if you have forgotten where you wrote your password down
Press 5 if you have forgotten the code you used when you wrote your password down
Press 6 if you would not disclose your password to anyone even if you could remember it
Press 7 if you have an offshore account and have forgotten to tell HMRC about it
Press 8 if you would like to hear these options again as you have forgotten why you need to choose a number on your telephone keypad
Press 9 if you think this might be an April Fool.

In the unlikely event that you get a call from HMRC asking you about your password today. I suggest you press 9.

Have a good day! And, if you're a registered user of the Tax Advice Network website, do look out for this week's genuine practical tax tips newsletter that will be with you this afternoon. We wouldn't want you to think any of the commercial, timely and topical advice it contains is a joke!