Friday, December 30, 2011

Top 5 TaxBuzz posts of 2011

Which TaxBuzz posts grabbed your attention this year?

During 2011 I added almost 90 new posts to this blog taking the total over the last 4 years to well over 400. At different times I got bored, distracted and overly enthusiastic. This is apparent from the wildly different number of monthly posts across the year.

Here is a reminder of the Top 5 most-visited TaxBuzz blog posts of 2011. Click on the titles if you want to read them again. Your comments are also still welcome too.
This post was inspired by a intriguing article in the Sunday Times and a conversation I had with a top Stamp Duty tax lawyer.
The programme included an interview with Graham Aaronson prior to the publication of his GAAR report

Tax tease: Late filing penalty stays at £100
31 March 2011
A classic case of debunking misleading media stories about a theoretically possible rise to£1,300

HMRC turn the Spotlight on the newest EBT related tax avoidance schemes
10 Mar 2011
Fair warning to anyone tempted to pay good money for putting funds into such schemes

The best tax advice you will ever hear
9 Aug 2011
All too often the tax advice shared by amateurs proves the truth of that old adage that 'a little knowledge is a dangerous thing'.

Wednesday, November 30, 2011

Tax fallacy of the week: The Frozen CGT threshold

The media is reporting that the Chancellor's decision to freeze the annual CGT exemption at £10,600 is bad news for 'normal' people. What rot.

I read in The Telegraph today, for example,
“It looks like this freeze will pay for the SEIS,” [Seed Enterprise Investment Scheme]
and that:
“That will be very good for start-up businesses, but will have limited appeal for ordinary investors. This is robbing the ordinary people to pay for perks for the very rich.”
Come on. The annual exemption is intended as a convenience to avoid 'normal' people being in default for failing to disclose relatively small capital gains. I had been more concerned the exemption was going to be reduced to £1,000 (as was proposed in the Lib Dem manifesto).

As it stands the only people to benefit from the exemption on a regular basis need to be wealthy enough to realise capital gains of more than £10,000 each year. 'Gains' here means capital profits, which means disposing of capital assets (eg shares) worth many times that sum. They do it as an alternative to generating a further £10,000 of income which would be subject to 40% or 50% tax. Few 'normal' people can do that year after year.

So today I speak to all those commentators mourning the freezing of the CGT annual allowance at £10,600. For attempting to paint this as a problem for 'normal' people you get my Tax Fallacy of the week award.

Monday, November 28, 2011

Tax temptation of the week: Stamp Duty Land Tax avoidance

The Saturday Times* was headlined with reference to a story about how the 'super-rich' avoid paying Stamp Duty Land Tax (SDLT) when they buy their mansions.

Simply stated the property doesn't change hands. The purchaser buys the shares in a limited company that owns the property. As long as the company itself doesn't sell the property there is no SDLT to pay.

Easy? Not at all. How to do you get the property into a limited company in the first place without paying SDLT? There are many complex tax related minefields to negotiate to make such a plan work. And it costs thousands of pounds to find out if it would be possible and to navigate the minefields.

Please do not be fooled into thinking that any of this is something to consider doing for the sort of properties that we normal mortals can afford. And there are no other simple ways to avoid SDLT any more, as I explained in May when answering the question: Are stamp duty avoidance schemes worth the money?

A similar view to mine was shared on CityWire in March. They explained: The chancellor has finally clamped down on stamp duty avoidance schemes widely used by rich individuals buying high value residential properties as well as buyers of commercial properties.

And I note that Solicitors have been advised by the Law Society not to get involved in SDLT schemes. That, I think, says it all.

The real issue here is the jealousy that the Times story generates. We don't like paying SDLT. The media are highlighting the facility available to the super-rich and we are in uproar that they can avoid this tax. But how many readers would choose to pay hundreds of thousands or millions of pounds in tax on a new property if there was a reliable legal way to avoid doing so?
So we agree that the 'loophole' should be plugged. Will it be? Don't hold your breath.

*As The Times story is behind their paywall I have linked to a rehash of the same story on the 'This Is Money' website.

Tax taunt of the week: “A quarter of drivers say cyclists should pay road tax”

The quote in my title refers to a survey attributed to which led to this headline in the Metro: 'Irresponsible' cyclists should pay road tax, say quarter of drivers

Surprisingly though I could find no reference to the survey or, what I would describe as, the Tax Taunt, on the website. Could this be because of the criticism and backlash the report produced?

Cycling website RoadCC, denounced "as PR campaign goes spectacularly wrong". The site goes on to say:

"Insurance comparison firm has provoked a storm of criticism from both cyclists and drivers alike with a ham-fisted and error-strewn press release aimed at promoting an equally confused road safety campaign and ostensibly highlighting the problem of road rage on Britain’s roads which has instead managed to alienate – not to mention confuse – almost everyone at whom it was aimed."

RoadCC then lists a number of alleged errors and further commentary in the same style and tone

Assuming the maths on RoadCC site are correct I think it's only fair to present with my Tax Taunt of the week award.

Thursday, November 24, 2011

Tax tosh of the week: 50p tax rate to STAY

Another day, another report about how the 50% top rate of income tax is BAD for the British Economy. This week it is the respected UK Centre for Economics and Business Research (CEBR). In September it was a group of 20 high profile economists.

Let me be clear I don't WANT to pay over half my income away in taxes - who would. (It's over half, by the way, as most high earners also pay an extra 2% NICs). I don't think the 50% rate is a good thing. BUT equally I cannot, for one moment, imagine that the Coalition Government are going to abolish the 50% rate any time soon. The CEBR report is balanced and fair but it's clearly intended to influence the Chancellor and the Coalition Government. In this it won't succeed.

Now, if someone were to be rather more imaginative, a different campaign might have more chance of success. How about showing what the impact would be of raising the income level at which the 50p rate starts from £150k to say, £250k? Clearly this would reduce the tax take but not by benefiting the 'super-rich' - by definition. It would however reduce the concerns of the vast majority of 'ORDINARY' business owners who MIGHT otherwise feel demotivated by the prospect of paying 50% tax. Remember that the rate is actually higher than this for many people earning between £100k and £150k.

As I've said before though at this stage NO-ONE yet knows how much tax the 50% rate is generating. All the reports, letters in the press and campaigns are based on speculation. The CEBR report admits as much.

I have explained the rationale for my observations and predictions before (see below). So today I will simply present the CEBR with my Tax Tosh of the week award.

Related posts

Tuesday, November 22, 2011

After 400 TaxBuzz blog posts - what now?

That last blog post was the 400th I've posted here. I thought I should recognise the fact as no one else will do so.

I started this blog around 4 years ago by offering comment, explanation and analysis of key UK tax developments. I made a classic mistake in that I was inconsistent. Sometimes I wrote for the general public. Sometimes I wrote for accountants. (Both can use the Tax Advice Network to source specialist tax advice). The blog was intended to help optimise the Search Engine attractiveness of the Tax Advice Network website.

Two years ago I wrote a Review of TaxBuzz blog 2009 in which I explained my thinking and explored the types of issues that had featured on the blog.

I have long enjoyed writing and sharing ideas and tips. Years ago I was complimented on my ability to explain complicated issues in an understandable way. I will let my readers be the judge of whether I have continued to exhibit that skill.

Two of the most common topics for my blog posts have been tax quirks benefiting MPs and explanations about the complexity of tax avoidance and tax evasion. I like to think I have adopted an even hand as regards the latter issue although I have not hidden my dislike of artificial and abusive avoidance schemes.

Sometime during 2009 I decided to focus the blog on debunking tax stories in the media. I felt this was a worthy service but I have received limited feedback and started to question who was I doing this for? In September 2011 I got bored and went for almost 2 months without posting any new items to this blog. I realised that much as I had enjoyed the blogging it was taking too much time and for no discernable benefit.

The nonsense written in the media about Vince Cable's VAT situation brought me back at the end of October. having written two posts on the topic I want to avoid slipping back into my old ways. Throughout the month of November I have been posting a new style of TaxBuzz in the form of, typically light-hearted, tax related awards. These rarely take much time to write. I have had little feedback to date ;-(

Whether I will continue posting an average of 2 items a week for the next 4 years I canot say. But 400 tax related posts is quite an achievement and I'm rather proud of myself.

Do let me know your thoughts.....

Tax scheme warning of the week - from the GAAR study report

I was especially taken by para 5.43 of the GAAR study report to which I referred in my last blog post:
I [Graham Aaronson QC, the author of the report] therefore see no unfairness in applying the GAAR to an arrangement which is not yet completed before the date when it comes into force; and it would in my view be appropriate to do so.
Is it just wishful thinking on my part? This strikes me as a warning to anyone who continues to promote 'abusive', 'artificial', 'egregious' or 'unacceptable' tax schemes (as referenced in the report).

The General Anti-Abuse Rule (GAAR) has yet to be finalised or to enter the staute books. However the GAAR's guardian has set out a clear warning that it should be capable of operating retrospectively. You have been warned!

Do you agree?

Related posts

Top ten tax understatements in GAAR Study report

Regular readers will know I have long awaited the outcome of Graham Aaronson's review. I have been referencing it on this blog since July 2010.

The Report has now been published and the media is awash with commentators rushing to offer their immediate conclusions. Suffice it to say that, as expected, the report offers an intelligent, practical and commercial way forwards. I look forward to hearing how the Government propose to move things on from here.

In the meantime I have identified my top ten tax understatements in the GAAR study report dated 11 November:
  1. [A GAAR] would deter (and, where deterrence fails, counteract) contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime. Para 1.7(i)
  2. Judges inevitably are faced with the temptation to stretch the interpretation [of tax law], so far as possible, to achieve a sensible result; and this is widely regarded as producing considerable uncertainty in predicting the outcome of such disputes. Para 1.7(iii)
  3. The tax rules in many areas have become extremely complex and in practice can give rise to very anomalous results. Para 1.10
  4. In some cases the Courts, under the guise of purposive interpretation, have been prepared to stretch the interpretation of tax legislation in order to thwart tax avoidance schemes which they regard as abusive. Para 3.13
  5. It is still early days to determine the value of the DOTAS scheme as a whole. However, it is plainly a useful source of information for HMRC. Para 3.17
  6. It is clear that purposive interpretation, specific anti-avoidance rules and DOTAS are not capable of dealing with some of the most egregious tax avoidance schemes. Para 3.20
  7. [A GAAR] should target those highly abusive contrived and artificial schemes which are widely regarded as intolerable, but that it should not affect the large centre ground of responsible tax planning. Para 5.1
  8. The UK tax rules offer, and indeed in many instances positively encourage, the opportunity for taxpayers to reduce their tax liability. Taking advantage of this can be described as a form of tax avoidance, but clearly it is not something to be criticised and therefore it should not be counteracted by a GAAR. Para 5.14
And my two favourite tax understatements:
9. There are some areas of taxation, such as trusts, where the present statutory rules are extremely complex and can give rise to many anomalous consequences. Para 5.30
10. The UK’s tax legislation is notoriously long and complex. In many places it is virtually impenetrable. Para 1.7(iv)
Have you identified any other understatements in the report? Do add your observations as comments below.

Monday, November 21, 2011

Titillating tax story of the week - was stripper employed or self-employed?

This true story concerns a young lady (29) who originally trained for accountancy but then chose a more adventurous life. She worked as a stripper and lap dancer, allegedly earning upto £200k pa at Peter Stringfellow's London club.

Ms Quashie has been trying to prove that the self-employment contract that she signed when she began work was a sham. She is claiming that she was unfairly dismissed by the club even though she was ostensibly self-employed when she worked there. The corollary to this claim is that the 'employer' was avoiding employment taxes and payroll taxes on the sums paid to Ms Quashie.

Although Ms Quashie lost her original claim, an Employment Appeal Tribunal has awarded her the right to appeal that decision.

It seems that the nature of the relationship involved a number of factors suggesting that she was employed rather than self-employed. According to Ms Quashie, these included:
  • she was rostered to work for Stringfellows and there was an obligation on the club's part to allow her to work on set dates and pay her accordingly;

  • she was required to give free lap dances whenever a certain song was played;

  • the club did not allow her to work anywhere else;

  • the mutual obligations prove she was a Stringfellows employee.
This report provides further details and notes that, unsurprisingly, Stringfellows denies her claims , apparently stating that that Ms Quashie signed a contract saying she was self-employed, so cannot go to a tribunal for a job she never had.

As is well known however employers cannot evade their obligations simply by requiring employees to agree that they are self-employed. The dividing line, for tax purposes, between employed vs self-employed can be quite fine. Stringfellows is likely to win the case if they took top advice as to the wording of their contracts AND the facts support the terms thereof. In practice many 'employers' of self-employed workers fail on one or both of these tests. I would expect HMRC to take an interest in this case - for various reasons! ;-)

Anyway, given the nature of Ms Quashie's activities, this story has to receive my inaugural award for titillating tax story of the week.

Friday, November 18, 2011

Tax Trial of the week: Harry Redknapp

Although the trial does not take place until January, the announcement that the Tottenham Hotspur manager, Harry Redknapp, has been formally accused of cheating the public revenue, wins my Tax Trial of the week award.

Mr Redknapp's alleged offence relates to tax payments due while he was manager of Portsmouth football club. He has been indicted along with the then Chairman of the club, Milan Mandaric.

The allegations specify two sums of money, $145k and $150k (totalling about £180k) allegedly paid by Mr Mandaric between 2002 and 2007, in connection with Redknapp's employment, into a Monaco bank account allegedly opened by Mr Redknapp in order to conceal the monies from HMRC and to evade the payment of taxes thereon.

Both Mr Redknapp and Mr Mandaric deny any wrongdoing.

Tax survey of the week - The Office of Tax Simplification

The Office of Tax Simplification has launched a survey for accountants and tax advisers to complete. The survey builds on the latest research and reviews that the OTS has been doing in connection with small business taxation and disincorporation.

Having attended one of the OTS roadshows recently I can see that the survey reflects the feedback received. It is clearly intended to generate evdience based research which the OTS can then use to support recommendations to Ministers.

The deadline for responses is Wednesday 30 November 2011. Responses will be treated in confidence as there is no facility to give your name when you complete the survey.

Thursday, November 17, 2011

HMRC tax awards of the week

Clearly this is THE week for tax awards - given my most recent blog posts.

HMRC have their own awards - now in the their second year, to recognise the contribution that business, professional and voluntary communities make in helping HMRC run the UK’s tax system.

This year's External Engagement Awards were presented last night at 11 Downing Street to:

* Sarah Gillett – UK Ambassador to Switzerland and Liechtenstein – for her pivotal role as part of the UK team negotiating with the Swiss Government to seek ways to increase tax transparency for UK taxpayers, including the recent tax agreement.

* Paddy Millard – retired Chief Executive Officer of Tax Help for Older People (TOP) – for supporting HMRC with specialist advice about customers on low incomes, in particular his work on security and disclosure constraints.

* Rebecca Benneyworth – a fellow contributing editor of mine at Accounting Web – for her work in supporting HMRC’s consultation exercise on the future relationship with the tax agent community.

* Mike Sufrin – recently retired Head of Tax at Rolls Royce – for his commitment in working with HMRC to improve clarity and customer focus in Large Business, in particular his significant contribution to the development and implementation of the Senior Accounting Officer and the Large Business Transformation programme.

I'm pleased for all of them, but especially for Rebecca and Mike who I have known for some time.

Wednesday, November 16, 2011

Tax trap of the week: Film Schemes - were they missold?

On the one hand tax breaks for the British film industry have just been extended until 2015. There have long been plenty of promoters of film scheme 'investments' that exploit the tax breaks - which have varied over the years. However tax schemes are rarely as simple as they may seem. Just this week I heard of a group of investors who don't understand why they are having to pay tax by reference to film schemes they invested in some years ago.

I suspect some will claim that they were victims of what might be termed 'misselling'. Although equally the investors may not have read the small print. At it's simplest the old film schemes could be described as the equivalent of getting an upfront loan (by way of a tax refund) from HMRC that would, effectively, be repaid over a 15 year period. The law was changed in 2006.

The problem is that, prior to the rule change, many advisers and investors focused only on the upfront tax refund. Investors either did not understand or chose to ignore the longer term cashflows. These were always going to result in tax being paid on profits from the film - and there had to be an expectation of profits or the scheme would not have been commercial. The profits would not be paid out however so the investors have to pay the tax out of their own resources - hence the confusion I noted earlier.

The schemes would still have appeared attractive as long as the investor expected to invest the tax refunds so as to generate a return that should exceed the tax payable over the next 15 years.

Although tax reliefs will continue to be available through to 2015, many past investors are losing faith in their film scheme investments. Some of the more aggressive and/or controversial schemes are being struck down. The courts are deciding that investors were not entitled to tax refunds (under the old rules) after all. The first tier tax tribunal found in favour of HMRC in September as regards two separate film partnerships promoted by Future Films (Samarkand Film Partnership No 3 and Proteus Film Partnership No 1). And 250 investors in another film partnership, that reportedly generated £117 tax benefits, are awaiting the outcome of another tribunal hearing.

The forecast does not look good for the outcome of these appeals or those re other more controversial tax avoidance schemes. As I have long maintained, a favourable Counsel's opinion does not mean you will win if HMRC challenge your tax scheme. It simply means you should be safe from charges of tax evasion if HMRC win. And therefore only liable to pay the tax and interest without any further penalty - if everything was fully disclosed.

Tuesday, November 15, 2011

Tax twit of the week - Bernie Ecclestone

Last week the F1 supremo, Bernie Ecclestone was challenged by a court in Munich as regards a payment of £27m he made to Mr Gribkowsky, a former banker.

Mr Ecclestone admitted that the money was paid to discourage Mr Grobkowsky from making accusations that would have led to a potentially costly UK tax investigation.

Mr Ecclestone claims that he had done nothing wrong. However he was clearly concerned that either the cost of defending his position, if challenged by HMRC, or of the back taxes, interest and penalties they would have secured would come to MUCH more than £27m.

Somehow I suspect that HMRC may take a look into his affairs now that the quantum of his concerns have been publicised. Don't you? For publicly explaining that he paid £27m in an effort to avoid damaging allegations about his tax affairs being made public, I will be sending Mr Ecclestone my Tax Twit of the week award.

Monday, November 14, 2011

'Lack of Tax Trust' Award of the Week - The Public Accounts Committee

I was surprised and disappointed to note that the Public Accounts Committee felt it necessary to break with tradition when interviewing Anthony Inglese last week. (As reported by the BBC).

Mr Inglese has been Head Lawyer at the Office of Fair Trading in 1991; then Head Lawyer at the Ministry of Defence in 1995; and in 1997 he was appointed Deputy Treasury Solicitor. He joined HMRC in 2008 and is said to be their 'top lawyer'. He leads on Professionalism and Ethics for the Government Legal Service and is a member of the Bar Standards Board. He also gives training at the National School of Government.

Despite Mr Inglese's credentials the Public Accounts Committee, last week, asked him to swear an oath on a Bible to tell the truth. This is not standard practice. I understand that nobody had been asked to swear an oath by a parliamentary committee for more than a decade.

Why did the Committee feel the need to do so on this occasion? Does it reflect worse on them or on Mr Inglese? Perhaps it was the only way to get the Committee to believe the truth. I tend to think that everyone giving evidence before such committees should be placed under oath.

But for now, I am confused as to why they picked on a Revenue official when even James Murdoch hasn't been asked to swear an oath when appearing before a select committee. So, for their heavy-handed approach I give the Public Accounts Committee the Lack of Tax Trust award of the week.

Sunday, November 13, 2011

Tax joker of the week: David Cameron

David Cameron finally snapped in the Commons last week. Evidently frustrated by the French support for proposals to put a tax on City of London trades, he quipped:
‘I’m sometimes tempted to ask the French if they would like a cheese tax,’
They certainly didn't respond well back in 2009 when the US announced plans to triple import duties on Roquefort cheese from 100 to 300 per cent. So I think we can confirm that the PM's instinct is right on this one.

Thursday, November 3, 2011

Gaines-Cooper case does NOT show futility of HMRC guidance

What it shows is the futility of trying to exploit HMRC general guidance for tax avoidance purposes.

Robert Gaines-Cooper has been challenging HMRC's demands that he pay UK taxes despite his attempts to become non-UK resident in 1976. And I have commented on his continued failure to overturn HMRC's decision in previous blog posts.

Accountancy Age have headlined their latest article on the story: "Gaines-Cooper ruling shows futility of guidance".

I disagree, hence my statement above. As Accountancy Age note towards the end of their article:
Gaines-Cooper left the UK partly to mitigate his tax liabilities; there is £30m at stake; and lest we forget this is a trial that has already lasted six years and looks set to run further. In other words, this is not a run-of-the-mill case. Guidance, on the other hand, is meant for run-of-the-mill cases – the "ordinary sophisticated taxpayer",
And that taxpayers are not not able to rely much on guidance when an action is undertaken in contentious areas because:
it is not in HMRC's interests to provide clear guidance for these cases. Taxpayers and advisors in these situations will have to argue on case law and legislation – a lesson Gaines Cooper has learnt the hard way.
Even this isn't news. It has long been recognised that HMRC guidance, statements of practice and concessions do not have the force of law. They help resolve issues and to provide comfort for most people affected, most of the time. But when tax avoidance plans rely on such non-statutory notices then all bets are off. And no one should be surprised.

Previous relevant posts

Thursday, October 27, 2011

Did Vince refuse to engage in tax 'avoidance'?

Leaving aside Vince's well publicised Tax Mistake on which I commented in my last blog post, there is another angle to the story.  Did Vince refuse to engage in what he perceived to be 'tax avoidance' even though the facility in question is set out very clearly in the rules?

I was wondering why Vince's accountant (Myrus Smith) hadn't encouraged him to register for VAT long before the problem became apparent.

They seem to be a reputable firm and I suspect they did give him the advice any decent accountant would have done. But clearly Vince did not register early.  He also seems to have ignored the standard advice that he would need to monitor his income as the year progressed, and then register for VAT once his earnings were likely to exceed the registration threshold.  This is of course harder to do in practice than in theory - despite the rules.

I suspect that his accountants gave him good advice. I suspect that they explained to Vince that he could register for VAT even when his earnings were below the VAT registration threshold. And that if he did so it would reduce his taxes.

There are two angles here. The first is that once registered Vince would simply be charging his clients VAT and then paying over this VAT to HMRC. But it would also mean that he could claim a reduction for the VAT he paid on all business related expenses. This would have saved him money.

The second angle is that he could have registered to use HMRC's official VAT flat rate scheme. This is particularly beneficial for smaller businesses with very low outgoings. I suspect Vince was in this position and could have saved hundreds of pounds a year had he registered.

But to Saint Vince, both of the above tax savings might have sounded like 'tax avoidance'. As such he probably chose not to register for VAT before it was necessary and then lost out by leaving it too late.

If I'm right this is as good an example as any that the term 'tax avoidance' is being used too widely.

What do you think?

Vince wins Tax mistake of the week - tho there's more to this than meets the eye

I couldn't resist bringing this blog out of hibernation to comment on the story about Vince Cable and the £500 fine he paid for failing to register for VAT. (And who can blame the Sun for reporting this under the headline 'Vince Avoids Tax').

Of course he wins my Tax Mistake of the Week award.

But I have some questions that the mainstream media seem to have missed. And in so doing they have misreported the story.

1 - Did Vince or any of his staff issue invoices for the fees and royalties that he earned during the year in question? If not how will he satisfy HMRC re the adequacy of his books and records? (I mean his accounting books and records, not the book he wrote or his Dancing records!) Let's assume the answer to this questions is 'yes'.

2 - Was VAT added to the fees he charged? If so, the invoices will have falsely suggested to his clients and publisher that he was registered for VAT and they will have accounted for VAT in error. So this probably didn't happen.

3 - But, if VAT wasn't added then his taxable income will have been overstated. Has he claimed his tax refund? For example on just one invoice he would have paid income tax on £8,000 but HMRC have now deemed this to include VAT such that his taxable income should be reduced to £6,667.

4 - How much has this error really cost Vince?
If his taxable income is now lower than he thought he will also have gifted more to charity than he intended to do so. In the above example, Vince is said to have gifted the KPMG fee of £8,000 to charity (under Gift Aid presumably).  He has sufficient other income to cover this but his 'embarrassing' error has cost him more than the fine. He's out of pocket by the excess donations to charity. And if he hasn't claimed back the additional income tax then that's a further cost too.

There is also the question of whether Vince would have been treated as generously by HMRC under the new new penalty regime. And whether he received any special treatment.
I doubt we will ever know.

Let me be clear. I sympathise with Vince's embarrassment and agree that he did absolutely the right thing in sorting things out, unprompted, as soon as the oversight was brought to his attention.  He neither sought to nor did he avoid any tax. Indeed he may well have refused to engage in what was to him tax avoidance by registering early for VAT. (See next blog post).

The above points are relevant to each invoice Vince issued for his speeches and for his book royalties. For example it has been reported that Vince charged £8,000 for a speech to KPMG. Did he invoice £8,000 or £9,600 (being £8,000 plus VAT)? If he only charged £8,000 then HMRC are deeming this to be VAT inclusive. The VAT included in such a fee would be £1,333 leaving net earnings of £6,667.

Sunday, September 25, 2011

Taking a break

It's been almost a month since I last posted a blog here. Only one person has asked me if I've given up. Did anyone else notice?

Over the last 4 years I've posted almost 400 blogs here at the same time as posting regular blogs, articles and commentaries on other sites. I have enjoyed the intellectual stimulation and the facility to have an easy outlet for my thoughts, advice and insights.

I haven't given up but I am experimenting with some changes to my priorities. This blog generates very little in the way of comments, feedback and links so maybe it's not worthwhile after all.

I'm sure I'll return but for now I'm focusing my energies elsewhere. Do let me know if you miss me here! ;-)

Tuesday, August 30, 2011

Being skeptical about financial advisers and tax...

Financial journalist, Paul Lewis, presented what I'm sure was a fascinating talk to a group of skeptics in June 2011.

I have long harboured similar reservations to Paul about some financial advisers but I have never been able to articulate my concerns as well as Paul has done.

I strongly recommend that anyone interested in debunking tax and financial advice reads the transcript of Paul's talk. It's on his website here. In it Paul, who presents MoneyBox on Radio 4, argues that:
  • Financial Advisers do not address most areas of financial advice with which the public have problems;
  • Financial Advisers become seduced by the product providers and promote products that are not in the investors' best interest;
  • It is commission – not solutions to financial problems – which has driven the growth in the financial services industry;
  • Most people should clear their debts before starting to invest for the future;
  • Many advisers and the public confuse savings with investments. If you save money it remains yours. If you BUY an investment you no longer have the money you have an investment - which can go up or down...
  • Assessing what the industry calls customers’ ‘attitude to risk’ is not done well. Because most people haven’t got a clue.
  • The impact of inflation is not specific to savings accounts. It simply means that any investment return needs to outstrip inflation (and charges) to have been worthwhile. And this always carries a risk that it may not happen.
Paul concludes:
  • Do financial advisers really give the financial advice we need? Not often.
  • Do we all need to see a financial adviser? Absolutely not.
  • Will the Retail Distribution Review make things better? Yes. But there is still a long way to go.
From a tax perspective it was also interesting to note Paul's analysis of the top ten common financial topics he gets asked about. This included income tax, national insurance and inheritance tax (IHT). Of these, financial advisers will typically only advise in detail on the latter. I wonder how often the typical financial adviser involves a TAX adviser rather than simply looking at ways to fund the inheritance tax when it falls due? Maybe it's my background but I'd think that the starting point for people with concerns about IHT should be an inheritance TAX SPECIALIST rather than a financial adviser.

Finally I should state that I know a number of financial advisers who do not fit Paul's stereotype description. Equally I know a number of accountants and tax advisers who promote tax schemes with much the same mindset as that of which Paul complains. By which I mean they are seduced by promises of healthy commission and assurances given by the original promoters of the schemes that the scheme works and that the hoped for benefits outweigh the risks. But that's a whole separate subject - that I've addressed many times before on this blog.

What's your view?

Related posts:

Talking to Vanessa: Should the rich pay more tax?

There was never going to be time to make all of the following points during my interview with Vanessa Feltz on Radio London this morning. But I think I got through most of them:

Vanessa's intro piece referenced foreign multimillionaires who are volunteering to pay more tax: Warren Buffett, Liliane Bettencourt, France's richest woman and Luca di Montezemolo, the boss of Ferrari.

I was a tax adviser for 25 years before I gave it up as I was uncomfortable helping rich people to pay less tax. Now I run a Network of over 30 independent tax consultants.

With a top rate of 50% the UK already has one of the highest top rates of tax in Europe. A recent report by KPMG reveals that only three countries had higher personal income tax rates than the UK in 2010: Sweden (56.6%), Denmark (55.4%), and the Netherlands (52%). Three others had an equal highest rate of 50%: Austria, Belgium and Japan.

If all of those foreigners 'offering' to pay more tax did so they would still ONLY being paying 50% which is already the tax charged on highest incomes here.

We need a tax system that doesn't incentivise rich people to find ways to pay less tax.

What do we mean when we talk about rich people? Those with annual incomes over £50,000? £100,000, £150,000 or a higher figure? Those who are worth £1m? £10m? £100m? £1bn?

We say we want a fairer tax system but there always has to be a trade off. We also want a simple tax system and we want certainty. In 1999 the ICAEW went further and identified ten principles that provide a framework for evaluating the tax system.

The effective top rate of income tax is actually 60% on incomes over £100,000 due to the rules related to the introduction of the 50% rate. Just goes to show how complicated the tax rules are!

No one yet knows how much tax the 50% rate raises here. We've only had it for one complete tax year fo 50% tax and the self employed will not being paying their 50% tax until 31 January 2012. (I explained this here in April: 50% tax rate announced in Budget 2009 but 2 years on and the self employed haven't paid it yet)

I'm equally concerned about those who take cash in hand, those who fiddle their expenses and those who use abusive tax schemes to reduce their tax bills. (Doesn't everyone try to avoid or evade taxes?)

I also admire all those who donate time and money to charity. Why don't those mentioned above give more of their wealth to charity? I suspect they are calling for higher tax rates in their countries to ensure that all other wealthy people pay more tax too. So that it stops being voluntary.

If anyone wants to pay more tax here they cannot simply send it to the taxman. If HMRC's computer doesn't show the additional tax as being due it will show up as an overpayment. And then it will be refunded. (I addressed this here in the context of Hazel Blears' gesture in 2009).

Monday, August 22, 2011

What's all this about 'disincorporation' of small companies?

Some people assume that everyone who is in 'business' runs a company, but this is not correct. There are actually four quite distinct common forms of business structure in the UK:

  • a sole trader;
  • a conventional partnership (where the individual works with one or more partners in the business);
  • a limited liability partnership - LLP - (this provides the individual and their partners with the protection of limited liability, just as with a company); or
  • a limited company.

Someone running their own business MIGHT be running a limited company, but often they are not. There are many practical, administrative and tax differences between businesses that are run as limited companies and those that are not.

Many people mistakenly run their business through a limited company when this is not really the most suitable or convenient option. Others only 'incorporated' their business into a limited company because there seemed to be some tax savings. These will vary each year as the relevant tax rates change.

The tax system recognises that someone might want to 'incorporate' their business. As a result, as long as the right steps are taken in the right order, there need be no tax charges when the business moves into a limited company. The position is quite different however when a business owner wants to 'disincorporate'. Essentially this means they want to continue their business without continuing with the limited company. The absence of specific tax rules, reliefs and allowances means there are a number of tax traps that often result in unwelcome tax charges.

The Office of Tax Simplification recently issued a discussion paper to clarify the level of interest in disincorporation reliefs. The paper identifies a number of situations where this might be of benefit:

  • The company with little or no value in capital assets, probably a one person operation, which might find life simpler if it was operated as a sole trader.
  • A slightly larger business, perhaps run by friends or a husband and wife or wider family, which has goodwill and so may benefit from a narrow form of relief, ensuring a tax neutral transfer across to the disincorporated trade, probably continued as a partnership.
  • A larger company with capital assets as well as intangible assets may need a wider form of relief, to enable a claim to hold-over the chargeable gains on transfer of the assets to the disincorporated trade, which may be carried on as an LLP or as an unincorporated business or partnership.

There are also capital gains tax issues for the shareholders in all cases, though only in the last situation are these likely to be significant.

The discussion paper invites responses by 7 October 2011. The next step is as yet unclear. Suffice it to say that there is no immediate prospect of a 'disincorporation' relief being introduced.

In the meantime let me just repeat the warning I give whenever I speak on this subject. Ignoring the potential tax charges when a business disincorporates is storing up trouble for the future. Many people find a way around the administrative and legal issues. It is unwise to proceed without also being very clear as to the tax rules which are commonly misunderstood.

Friday, August 19, 2011

Why the UK super-rich don't demand to pay more tax like Warren Buffett

Warren Buffett, in an article for the New York Times, ("Stop coddling the super-rich") suggests raising taxes for the rich. This is being reported in the UK as a potential alternative to the idea of cutting the top rate of 50% income tax in the UK.

The Sage of Omaha, the third richest man in the world, says he paid almost $7m income and payroll taxes last year. Although a big figure it's just 17% of his income. He notes that the tax rates paid by the other 20 people in his office ranged from 33% to 41% and averaged 36%. He describes a tax system designed to enrich the wealthiest at the expense of the middle and lower classes. Mr Buffett is very clear that the super-rich can afford higher taxes, and that they will not be put off investing by allegedly "uncompetitive" tax rates.

Let's be clear though. Mr Buffett's views concern the US tax paid on his investment income and capital gains.

Would any of the super-rich in the UK agree with his sentiments?

The top rate of income tax on investment income here is already 50%. On capital gains it is 28%. (There is a reason for this as I explained in a blog post last year: CGT rules unlikely to change again in this Parliament).

Thirty years ago the top rate of income tax was 83% and there was an additional 15% 'investment income surcharge'. This meant that investment income was subject to a whopping 98% tax rate. It is hard to understand how such taxes could ever have been justified. Even back then capital gains tax was only 30%.

I tend to doubt anyone in their right mind would volunteer to pay more than half of their income or gains away as tax. And there is no facility here for anyone to pay more tax than is strictly due (as I explained here: Hazel Blears and Gordon Brown - a genuine gesture or deliberately deceptive?)

What do you think?

Tax tease: How likely are you to be arrested for tax avoidance?

This week HMRC announced that five plumbers have been arrested for failing to pay the right amount of tax. A further 600 or so are under civil investigation by HM Revenue & Customs (HMRC) for failing to pay the right amount of tax. Some of those involved owe up to £150,000.

The arrests and investigations have taken place during HMRC's campaign titled the 'Plumbers Tax Safe Plan (PTSP)' . This invited plumbers, gas fitters, heating engineers and members of associated trades to get their tax affairs in order by the end of this month. But there was an earlier deadline of 31 May by when you had to notify HMRC you intended to 'fess up. The raids and arrests were of people who were known to be tax ‘ghosts’ - people who have not declared their earnings.

HMRC have announced that more raids are expected to take place over the coming weeks across the UK, including Yorkshire, Kent, Cambridgeshire, Tyne & Wear, Midlands and South Wales.

So how likely is it that you might be arrested for tax avoidance?

Simply stated it will NEVER happen. Not for tax AVOIDANCE anyway. But remember that the plumbers were not arrested for tax avoidance. What the plumbers did was to EVADE their tax obligations, and that's illegal. Which is why they have been arrested.

I have long argued that more publicity of this type of heavy-handed action by HMRC and the police would have a deterrent effect. I expect that it will encourage more people to come clean earlier. And hopefully more people will recognise the huge risk they take by conducting a business without telling HMRC what they are doing.

There are two problems however:

1 - Those people who would like to come clean and are now scared off by news of the arrests. Don't be scared. If you come forward voluntarily there is next to no chance of being arrested*.

2 - Those people who are paid cash in hand by 'employers' who refuse to comply with their obligations as employers. They would also 'sack' anyone working for them who threatens to tell HMRC what's going on. In such cases it is clearly the 'employer' who is in the wrong. They may be prosecuted by the workers would never be arrested in such cases.

*Whether you are a plumber, a gas fitter, a life coach, an ebay trader, a restauranteur, a medical professional or indeed anyone who has been evading tax, or you know someone who has, TAKE PROPER ADVICE. The same goes for you if you run a business that is evading VAT.

I haven't picked any of those categories at random. They are all referenced in recent pronouncements by HMRC. I've written about some of them in previous blog posts - see below. Even if your situation has yet to be addressed by a specific HMRC campaign, the penalties will generally be less severe for taxpayers who come forward voluntarily to put their affairs in order with HMRC. And in such cases these penalties will NEVER include imprisonment.

Taking PROPER ADVICE means speaking with an experienced tax consultant with specialist experience of negotiating 'back duty' settlements with HMRC. (Back duty is an outdated but still useful term to focus attention). Few local accountants are able to do this sort of work unaided. Which is why I recommend the Tax Advice Network.

Related posts:

Wednesday, August 17, 2011

Why we will have at least 3 years of 50p tax

As some politicians continue to talk about 'scrapping the 50p rate', I thought I'd add a postscript to my earlier pieces where I explained why the 50p rate is "not really raking in huge sums" YET.

Despite being announced in Budget 2009, the 50% top rate tax was first charged in the tax year 2010/11. Many people will not be paying the extra tax arising from the 50p rate until 31 January 2012. It is only after that date that anyone will be able to determine how much tax has been raised at 50%.

The 50% rate has also applied during the current tax year which ends on 5 April 2012. The 2012 Budget will need to be planned and will be announced before that date. These days it is almost impossible to introduce changes to the rates of income tax that take immediate effect. So even if the Chancellor decides to abolish the 50% rate (or reduce it to 45%) this will almost certainly not take effect until 6 April 2013. By which time the 50% rate will have been in operation for 3 tax years.

HMRC gets enough grief for the way the PAYE tax system operates without the extra challenge of trying to manage the impact of last minute changes to tax rates. This is why the 50% rate did not take effect immediately it was announced. Abolition will also be delayed a year so that HMRC's systems can be suitably modified.

Tuesday, August 16, 2011

PMA Tax: The ten tax questions that are more complicated than you might think

This is my list of ten common tax questions where it is almost impossible to provide a simple answer that is of any value. And I say this as someone who has a reputation for providing clear, easy to understand and pragmatic advice!

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

Wednesday, August 10, 2011

PMA Tax: "Give your House to your children to avoid IHT"

This is a great example of the sort of Popular Misconceptions About (PMA) Tax I referenced in an earlier blog post. As I said: "It's more complicated than it seems"

The simple idea is to ensure that the house isn't owned by the parents when they die and IHT becomes payable. It should come as no surprise that the tax rules are wise to this idea.

Firstly the gift would be ignored for IHT purposes of the parents continue to live there. So the House gets caught by 'Gift with a Reservation Of Benefit' rules and is still subject to IHT.

But the position is now probably worse than it was. For example:
  1. When the house is sold by the children the gain will be subject to Capital Gains Tax (CGT) unless they happen to live there with Mum & Dad. If no gift had been made there would no CGT if the property was sold shortly after the parents death.
  2. The parents security of tenure in what is no longer 'their' property is now vulnerable to any court rulings that follow of their children divorce or become bankrupt.
It's also worth noting that under the current rules no IHT is payable unless someone's taxable estate when they die is more than £325,000 (£650,000 for married couples and registered civil partners).

So if anyone acted on this PMA Tax idea they would simply have created more problems and more tax liabilities than if they'd done nothing. Far preferable to seek out professional advice from someone who really understands the IHT rules and gives this sort of advice on a daily basis. If you want expert IHT advice you will find the ideal tax expert through the Tax Advice Network.

Tuesday, August 9, 2011

The best tax advice you will ever hear

The best tax advice you will ever hear is that: "It's more complicated than it seems."

It's not what you want to hear of course. And, to be fair, it isn't true for every person in every situation. But, it IS worth bearing in mind when someone offers you unsolicited tax advice that seems to be too good to be true.

Whenever someone promises you fantastic tax savings, that you can avoid paying tax on your income or that the taxman will never know, BEWARE. You will invariably end up worse off if you act on the basis of what I am calling PMA Tax (Popular Misconceptions About Tax).

Even the simple 'best tax advice you will ever hear' that I wanted to share in this blogpost is in danger of getting complicated. I've written many time before about tax avoidance schemes and will refrain from getting sidetracked down that path today.

All too often the tax advice shared by amateurs proves the truth of that old adage that 'a little knowledge is a dangerous thing'.

Simplistic PMA Tax advice is often shared by people who are unaware that the tax rules are more complicated than they realise. They only know part of the story. They are unaware of the caveats that should accompany their views; thus, if acted on, their naive tax advice will cause more problems than it solves.

I will be sharing some examples of PMA Tax in future blogposts and wanted to provide some background first.

Monday, August 8, 2011

Tax rant of the week: Taxing the phonehacking bribes

The Guardian has reported that:
"Police officers who allegedly took payments from newspapers and private investigators could face hefty fines and criminal prosecution after it emerged HM Revenue & Customs is reopening personal tax records to check if payments were fully disclosed."

As I read further though I began to doubt the truth of the newspaper story. (Not for the first time).

Of course such bribes are taxable income and should have been disclosed. But it's hard to imagine anyone would have asked for a tax return and volunteered to pay tax on the bribes they received. So what would be the point of 'reopening personal tax records to check if payments were fully disclosed'? Of course they weren't.

The 'story' seems to derive from the reply provided when HMRC were asked whether there would be an investigation. The "HMRC spokesperson said he could not confirm the nature or extent of any investigation into a private individual's tax affairs. But he confirmed that HMRC will act on any new information and that illegal earnings can still be liable for tax."

I think the journalist may have been excited to learn that "Under HMRC rules any payments earned in connection with an individual's employment are required to be disclosed for tax purposes, even if the payment is deemed illegal." It is of course tax law and not HMRC rules that determine whether or not any sources of income are taxable. But either way it is correct that any monies derived from your job or business are taxable - unless there is a specific exemption. The fact that the sums were illegal bribes is irrelevant.

I'm not at all sure that the police officer's tax returns will be reviewed or that they will be asked to pay tax by reference to the bribes they received. After all, how many MPs have been asked to pay tax on all those non-existent expenses they received on top of their MP salary?

Friday, July 29, 2011

Tax tease of the week: Cutting the 50p top rate tax

First the Evening Standard suggested that the Chancellor was considering the removal of the 50p top rate tax band. Then London Mayor, Boris Johnson, renewed his campaign for the 50p rate to be cut, saying it made Britain more expensive for executives than most rival countries.

The Evening Standard reported that Boris claimed that the tax, which hits people earning £150,000 or more a year, was "not really raking in huge sums". Of course it isn't (yet) Boris. The first year to which it related was 2010/11 and much of the 50p rate tax payable for that year isn't due until 31 January 2012.

I'm no fan of the 50p top rate and have heard many business people reference it as a reason for moving overseas and for foreign executives refusing to come to London. With the addition of the 1% surcharge on high earnings the effect is that those high earners get to keep less than half of their bonuses etc. Psychologically this is bound to be demotivating.

BUT, as yet no one can say for certain how much additional tax will be collected re the first year in which the 50p rate operated.

Thursday, July 28, 2011

The Taxman's trouble of the week: The paper shortage

I was in two minds whether to post this here or on my accountancy and tax fun blog.

Believe it or not, but HMRC has run out of paper! This means that some self employed people who are due to pay tax on 31 July will not get their reminder statement until August.

Much the same thing happened in January 2008 - as HMRC admit in their FAQs about the current farce.

HMRC are saying that anyone who is affected will not be subject to interest on the late payment as long as the tax due is paid within 30 days of when the statement arrives. Some of the people affected by the paper shortage will already be planning to pay their tax as it's an annual liability. The amount due will typically also be clear from the statements issued earlier in the year by reference to the tax due on 31 January 2011.

If you do pay the tax late I suspect that the computer will automatically charge the interest that would otherwise be due. You will then need to call or write to the taxman to get the interest charge wiped from your record.

I was going to finish by hoping that HMRC will have enough notepaper to record the details of telephone conversations when taxpayers challenge the interest charges. But the records are probably all stored online now.

Friday, July 8, 2011

Tax Failure of the week: Begbies sells tax division due to falling demand

The Evening Standard reports that quoted top 20 firm Begbies Traynor is selling its tax division, under the headline: "No money in loopholes". The Standard goes on to report that Begbies suffered from a lower demand than anticipated for its tax services:
"primarily due to a tougher stance towards tax planning activities adopted by the Government and HMRC."
Regular readers will know that I am no fan of the sort of tax schemes being attacked by HMRC as well as by successive Governments. Whist there are some boutique tax practices that focus on promoting such schemes I am surprised to read that Begbies are effectively admitting that this was a key part of their business.

There has always been and will continue to be plenty of work for good tax advisers. They do not need to advocate fancy schemes either when solving tax problems or when helping with genuine tax planning.

I would guess that the issue here is that Begbies tax division was tasked with achieving unrealistic fee income targets - perhaps by reference to the sort of fees that are only achieved when putting wealthy clients into fancy schemes. I would agree that there are fewer such schemes and that demand has fallen sharply as people become more aware of the risks and downsides. I also anticipate that HMRC will win further 'avoidance' cases in the courts over the next couple of years. Remember that these cases typically relate to tax 'avoided' between 5 and 10 years previously.

Anyway. If you want to get in touch with vetted independent expert tax advisers, you know where to go.

Related posts
  • Are Stamp Duty planning schemes worth the money?
  • NO. The Revenue do NOT approve Disclosed tax schemes
  • Tax planning to be wary of
  • Were you wasting time advocating this tax scheme?
  • Naive promoters of tax avoidance schemes
  • Tax avoidance is a card game - the metaphors multiply

  • Monday, July 4, 2011

    Some of the practical tax issues addressed recently...

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

    PAYE reconciliations
    The PAYE reconciliation process for the tax year 2010/11 is due to start this month, which means some of your clients may soon receive tax calculations on forms P800.

    VAT registration campaign starts
    The proposed VAT registration 'amnesty' has been launched this week under the title ' VAT Initiative'. It amounts to a disclosure opportunity for businesses that have failed to register for VAT on time.

    Accompanying papers with tax returns
    A recent case represents a clear warning to anybody enclosing information with clients' tax returns.

    Capital Allowances trap
    You will be aware the Annual Investment Allowance (AIA) cap is being reduced from £100,000 to £25,000 on 1 April 2012 (6 April for unincorporated businesses), but have you warned your clients?

    The HMRC toolkits are a bit like marmite - you either love them or hate them.

    IHT guidance
    Dealing with inheritance tax and trusts tends to be a specialist strand of tax practice, but occasionally you may have to address these issues on behalf of your client.

    SDLT and other online issues
    A new style Stamp Duty Land Tax return form (SDLT1) was introduced on 1 April 2011, which is due to become compulsory from 4 July 2011.

    Friday, July 1, 2011

    Two new thoughts about a possible UK tax GAAR

    Both of the following were inspired by listening to Graham Aaronson speak at the Wyman Symposium earlier this week.

    The acronym
    Listening to Graham speak I realised that if he does draft a GAAR it will not be a General Anti-Avoidance Rule. It will be a General Anti-ABUSE Rule. An important distinction. Same initials though....

    Who drafts GAARs?
    The Irish, Australian and Canadian GAARs were drafted by their Revenue authorities. In each case their judges have subsequently sought to temper the impact of the GAAR - perhaps because it is felt to be overly draconian and impractical.

    Graham and his expert committee have now established the principles a UK GAAR would need to satisfy. I summarised an earlier version of these as the GAAR commandments.

    Graham is still unsure whether the committee will be able to draft a GAAR that satisfies the key principles. If they succeed the GAAR will be very different to those in other countries. As such the experiences in those places will not be wholly relevant. This is a key point that those who are against the idea of a GAAR really need to take on board.

    Thursday, June 30, 2011

    HMRC are not the ones making the PAYE 'errors'

    Here we go again. Today the papers are again full of stories alleging errors made by HMRC related to the tax paid through the PAYE system.

    It's only 9 months since the last series of stories started along similar lines. Then, as I explained here, it was the first time HMRC had been able to reconcile their figures for some time. They were using a new computer system. Things are settling down and they have now reconciled the figures for 2009/10 - Not that any of the news reports explain this important point.

    HMRC can only reconcile information that they have in their records. This includes tax returns and the last ones filed were for the 2009/10 tax year that ended on 5 April 2010. It is quite an achievement for HMRC to have completed their reconciliations within less than 6 months of the filing deadline for those tax returns (31 January 2011). It's never been done that fast before.

    Journalists like to suggest that HMRC are incompetent. Sometimes they are. But it's the PAYE tax system that needs to change and HMRC are working on this. With the system as it stands there will ALAWYS be a need for annual reconciliations and there will ALWAYS be some people who have overpaid and some who have underpaid tax through PAYE.

    As I have explained previously the PAYE system cannot be relied upon to ensure that the right amount of tax is deducted from earnings and pensions across the year. And HMRC know this. That's why they are keen to introduce 'Real Time Information' (RTI) reporting. It won't solve all the problems with the system but it would reduce the number of reconciliations required each year. It's going to be tested next year with the intention of introducing it in 2014. It would be a mistake to rush it or to add to the burdens of small employers by obliging them to report RTI. As it stands the intention is to only make this compulsory for larger employers.

    So we will continue to have PAYE reconciliations each year - but hopefully these will affect fewer numbers of people each year. And yes, some HMRC staff will make some mistakes too. But the main problem is the PAYE system. As one tax official told me recently: It would be fine if taxpayers only ever had one job or pension at a time, only ever changed jobs at midnight on 5 April and never had any taxable benefits in kind. That, I do not think is ever going to happen!

    Thursday, June 16, 2011

    Ed Balls does an Alan Johnson....

    Words fail me. Shadow chancellor Ed Balls has called for a temporary emergency cut in VAT to "boost consumer confidence and jump-start the economy".

    Even though it's only Thursday I am sure this will qualify for my Tax Mistake of the Week award.

    Let's ignore the fact that Mr Balls has made no suggestion as to how he would fund the £12billion a year cost of a 2.5% cut (being the amount due to be raised when the rate went up in January).

    Let's ignore the fact that small businesses are hit worst because of the associated costs (time and money) of implementing price reductions caused by temporary reductions in the rate of VAT.

    Let's ignore the fact that few retailers would pass on any rate cut in full as their margins are already so tight - such that they would take the opportunity to either keep prices constant or increase their margins.

    Let's ignore the fact that the related complexities and cut-offs around the date on which VAT rate changes give rise to mistakes that allow HMRC to penalise hard working small businesses who have typically done their best despite the inherent complexities in the system.

    Beyond all of those points Mr Balls has revealed that he simply doesn't understand how VAT works. Reports of his speech suggest he said, of a reduction in the rate of VAT:
    "It has an immediate impact on people's purchasing powers or the bottom line of businesses."
    But it doesn't. Businesses collect VAT for the Government and pay this over after deducting the VAT they pay on the costs of running their business. Reducing the rate of VAT will NOT have ANY impact on the bottom line of most businesses.

    As Shadow Chancellor Mr Balls really should have known better. At this rate he may have to go the way of Alan Johnson who famously got the National Insurance rate wrong during an interview, and wrongly claimed VAT is charged on food.

    Ed Balls therefore gets my award for "Tax Mistake of the Week".

    Nominations for next week have opened early...

    Wednesday, June 15, 2011

    Life coaches, fitness coaches and tutors targeted by taxman

    Those who can, do, and those who can't, cheat on their taxes. This is the inference one could draw from HMRC's latest news release announcing the next subjects of a tax crackdown.

    HMRC say that they are going to target those who provide private tuition and coaching. This addresses the risk posed by all professionals who, because of their field of expertise, are able to earn money from providing tuition and coaching – either as a main or a secondary income.

    The sort of people in the firing line are stated to be those who provide private lessons, regardless of whether they have a teaching qualification, and could include, for example, fitness/dance/lifestyle coaches through to national curriculum subject tutors and others.

    I would make the same observation as on my last blog post (re: HMRC robots to catch out online traders). To an extent this announcement is only likely to scare the target tax evaders so that they start to disclose their extra-curricular earnings. In this regard you have until 31 October 2011 to disclose earnings from 6 April 2010 to 5 April 2011 even if you had previously been hoping to keep them secret. If you have been failing to disclose sizeable amounts of income for some years you may want to take professional advice about how and when to tell the taxman. Do follow the links above to find a tax adviser who can help you.

    Tuesday, June 14, 2011

    HMRC robots to catch out online traders

    It's more than two years since I reported on HMRC investigating posts on social media.

    Now it seems that HMRC are using sophisticated web robots to track users of ebay and other online trading platforms. The objective is to trace people who are trading but not reporting their taxable profits to HMRC. This counts as tax evasion but don't worry if you only sell a few items as you are unlikely to be classed as trading so will not be liable to tax or targeted by this campaign.

    In HMRC's latest news release they claim that:
    "The “web robot”, used with the department’s 'Connect' computer system, also helps find people who are trading without telling HMRC.

    'Connect' alerts HMRC to previously invisible tax evasion by matching a vast amount of HMRC and third-party data, enabling a fast and focused response to tax evasion. It shines a light onto previously hidden relationships, uncovering anomalies between such elements as bank interest, property income and lifestyle indicators before homing in on unexplained inconsistencies."
    Do bear in mind that there are inbuilt delays in our tax system. The web robots may be doing one or both of the following:

    1 - Looking back to track what happened in 2009/10 and then comparing this with what was disclosed on tax returns for that year;

    2 - Looking at what has been happening since 6 April 2010 so that this data can be compared in due course with tax returns for 2010/11 and 2011/12 when these are eventually submitted.

    On balance I suspect the news release is intended to scare taxpayers into future compliance. Anyone who may have been planning to omit reference to online trading activities since 6 April 2010 may now be persuaded to report them properly on their tax returns. The return for the period 6 April 2010 to 5 April 2011 needs to be submitted by 5 October 2011.

    Monday, June 13, 2011

    At last a tax protest that might actually make some sense

    I'm referring to the highly publicised protests that are likely to be a feature of this year's Galstonbury festival. ArtUncut are planning to publicly criticise Bono and his band U2 for their alleged tax avoidance activities.

    In some respects the protests will be similar to those waged by UKuncut against various high street stores earlier this year. There is one BIG difference however. The UKuncut protests did not directly target the people whose tax avoidance actions were being criticised.

    ArtUncut will be protesting right in the face of the alleged tax avoiders U2 and their campaigning leader, Bono. As the Guardian reports:
    "The band was heavily criticised after moving parts of its business affairs from Ireland to the Netherlands in 2006, apparently in response to a cap on already generous tax breaks for artists in the republic. Though the band insists this simply reflects the global nature of their income as the world's highest-earning musicians, their decision not to pay all their tax in their home country looks even worse in the light of Ireland's financial meltdown. Bono is happy to tell the government how it should spend taxpayers' money – campaigning for an increase to the aid budget – yet he has taken his tax euros not just from Ireland's development fund, but also its hospitals and schools."
    They also note that:
    "The case in Bono's favour – and it is a strong one – is that he's almost certainly done more for the world's poorest people than anyone who has come to protest against him in the Glastonbury crowd. Which makes his choices over tax even more curious."
    There does seem to be a case to answer here. There are no apparent mitigating circumstances, external shareholders or commercial reasons that might justify the band's (legal) tax avoidance activities. About the only justification I could imagine that would legitimise these would be if the monies otherwise payable as taxes are being donated directly to charitable aid projects. This would be akin to Bono saying to the Irish Government - "I'm cutting out the middleman. Instead of keeping my companies in Ireland and paying taxes here, I've set things up so that I can pay similar amounts (or more) directly to help the needy. I don't trust the Government to do enough for them." It's a nice thought.

    I have no idea whether Bono and U2 are making huge (cash) donations to help the needy instead of paying taxes in Ireland. I'm a fan of 'celebrities' like Bono securing positive publicity for altruistic campaigns such as 'make poverty history'. Bono is rightly renowned for his humanitarian work and I hope he retains his passion to 'do good' for many years to come. But he has set himself and his band up as legitimate targets for criticism given their overt tax avoidance activities. How will they respond to ArtUncut I wonder?

    Sunday, June 12, 2011

    HMRC's agent strategy shows they HAVE been listening

    The professional press has been full of knee jerk comments on the latest HMRC consultation document: “Establishing the future relationship between the Tax Agent community and HMRC”.

    Like many commentators I welcome this document and agree that it foreshadows enormous changes in the relationship between accountants, tax advisers and HMRC.

    I am also pleased to see that the document reflects much of the feedback submitted two years ago in response to an ill-judged and confused document: "Working with Tax Agents". This was far more adversarial and unhelpful than is the current effort.

    I submitted a detailed response to that document on behalf of The Tax Advice Network. Although most of our tax advisers are members of one or more of the professional bodies, some are Qualified by Experience. This typically includes substantial training whilst working within HMRC or it's predecessors, the Inland Revenue or HM Customs and Excise. As such my comments were intended to offer an independent and more objective view than the professional bodies are able to do.

    Looking back at my response I note it was very critical of the style, tone and content of the Working with Tax Agents document. I can also see that the new one addresses many, but not all, of the points I made. This proves that HMRC have been listening.

    That said two specific points I made seem to have disappeared off the radar. I asked that HMRC:
    • establish a Tax Adviser Review BodY (TARBY) to receive and consider reports from HMRC about tax agents whose performance may be unacceptable; and
    • simplify the procedure for taxpayers to recover wasted costs when HMRC procedures and mistakes lead to increased fees from their tax agents.
    HMRC say they will be undertaking a separate consultation over the summer re 'dishonest tax agents'. Perhaps we will then get a TARBY after all!