Taxman teaser - Why Chief Exec of HMRC needs a personal aide

The FT reports that Dame Lesley Strathie, ultimate boss of HMRC, has appointed Carol Bristow – a director-level tax expert – as her personal aide.

The FT questions whether there is any justification for the Chief Exec of HMRC having such a high level personal aide "(Not even Sir Gus O’Donnell, the cabinet secretary, has such a senior personal assistant.)"

The answer I supect comes back to the governance structure of HMRC and the way some people expect the person at the top to be able to speak knowledgeably on any subject related to operational matters. In practice however, the role of Lesley Strathie, Chief Executive and Permanent Secretary does not require her to understand all aspects of our tax system. And few people are able to do this anyway.

I would have expected Dave Hartnett, "the senior tax professional in HMRC", to be the one called to appear before Select Committees, not the Chief Exec. I suspect that the mistake being made is that of the MPs. The appointment of Carol Bristow may simply reflect Dame Lesley's desire to ensure that she is best placed to provide MPs with informed answers to their enquiries.

It would of course be better if the MPs could be persuaded that they should be talking to Dave Hartnett rather than Dame Lesley. BUT for them it's easier to appear to be 'in charge' if they quiz and challenge someone who they know does not have a full command of key tax matters under discussion. I'd bet they don't want to call Dave Hartnett as he would expose the Select Committee's lack of understanding of the tax system.

What do you think?

Tax tittle tattle: Ed Balls to be new Shadow Chancellor. So?

I was approached by one of the mainstream papers last night for my observations on the appointment of Ed Balls to replace Alan Johnson as Shadow Chancellor.

They needed 100-200 words which I duly supplied. Not sure if they will see the light of day in the press. Here they are for posterity:

Ed Balls will spar more effectively with George Osborne than Alan Johnson would have dared. At least Ed has some understanding of the tax system and of economic policy. We can expect him to pursue more realistic economic and tax policies than might otherwise have been the case. How many will be properly costed and realistic rather than simply populist remains to be seen.

It often seemed that some of the more effective tax policies pursued by Gordon Brown when he was Chancellor could be traced back to Ed Balls. Rightly or wrongly I assumed that the worst tax changes introduced by Brown were entirely his own idea. I trust therefore that Ed Balls had no hand in the IR35 fiasco or the short-lived introduction of a 0% starter rate of corporation tax. What we do know is that he has long claimed he would not have made the mistake of abolishing the 10p starter rate of income tax.

Will Ed’s, no doubt, continued connections with civil servants from his days at the Treasury come in useful? For example, will he be able to engineer ‘leaks’ that damage the Government?

I suspect there will continue to be a need to debunk tax stories whether they emanate from the Government or from the opposition. Tim Harford does this on his Radio 4 programme, ‘More or Less’ and I have a go too on the TaxBuzz blog.

Mark Lee, Chairman of the Tax Advice Network

Tax twist: BBC compares job losses re VAT vs National Insurance

I'm never sure whether politicians deliberately misquote figures or do so naively. Here's a good recent example related to the question of which was worse, an increase in the so-called 'jobs tax' (Employers' NICs) or the rise in VAT?

The Shadow Chancellor, Alan Johnson, has been saying:

“At the time the Conservatives called the National Insurance increase a tax on jobs. The Chartered Institute of Personnel and Development [CIPD] say that that would have taken 75,000 jobs, VAT would cost 250,000 jobs.”

An editorial in the Times on 5 January was dismissive of the CIPD figures suggesting that:

“[Alan Johnson's] claim that the VAT rise would cost 250,000 jobs appears to be a figure plucked from the ether without supporting evidence.”

This was harsh as shown on the fullfact.org website.

However, the full picture was revealed on 7 January by the BBC's More or Less programme, presented by Tim Harford. A good summary of the key points appears on the XpertHR blog. At the time of writing, the recording is available on BBC iplayer. Personally I enjoy listening to the weekly podcast as it complements the debunking nature of this TaxBuzz blog.

Bottom line

You cannot legitimately compare the forecast impact of job losses that might be caused by the two different tax rises. At least not without also comparing the quantum of tax being raised.

Labour's 'jobs tax' was forecast to start in April 2011 and expected to raise just over £3billion a year. The CIPD estimated this would cause 75,000 job losses by 2015/16.

The VAT rise to 20% started on 4 January and is expected to raise just over £12billion a year. That's 4 times as much as the 'jobs tax'. The CIPD has estimated the VAT rise: "will reduce UK employment by 250,000 over a five year period relative to the level of employment that would otherwise be achieved."

So, even if the CIPD predictions are correct, the impact on jobs will be significantly less than 4 times the impact of a rise in employers' national insurance contributions.

Was Alan Johnson naive or deliberately comparing apples and pears?

Tax twang: Tax avoiders and evaders to be exposed on Wikileaks

The papers are reporting that Rudolf Elmer, a former executive at Bank Julius Baer, yesterday handed over a CD listing the details of 2,000 allegedly tax dodging individuals and firms to Wikileaks founder Julian Assange. Assange said he could publish the data within two weeks.

According to media reports Elmer was, until 2002, chief operating officer of the bank in the Cayman Islands. Bank Julius Baer is one of Switzerland’s top private banks and accuses Elmer of stealing the information he has now passed to Wikileaks.

As the Telegraph reports: Celebrities using tax avoidance schemes could be in the spotlight

Taking advantage of complex tax laws in order to reduce the individual burden is perfectly legal and has been standard practice among the super-rich for years.

Whilst that is true, I have mentioned on this TaxBuzz blog many times, that the dividing line between legal tax avoidance and illegal tax evasion is more blurred than some would have us believe.

Fancy tax avoidance schemes will often be determined as legal by top tax barristers. Such opinions will often be hedged with caveats but as long as all the related advice is followed to the letter, all should be well. By which I mean the rich taxpayer will have a strong defence and can claim to have stayed on the right side of the letter of the law. On the other side of the line we have blatant tax evaders. Contrary to the press stories implying that they are always rich, they operate at all levels of society. Tax evaders are those who fail to disclose all sources of taxable income, inflate their business expenses or otherwise pay less tax than is strictly due.

Rudolf Elmer's list apparently includes the names of celebrities and politicians from around the world. Many will be household names and, I've no doubt, many will be British. I suspect they will all be tarred with the same brush. Only they, their closest advisers and HMRC (the taxman) will know whether their deposits were the result of fancy tax schemes or the proceeds of blatant tax evasion.

Or does the list contain more extensive details of the "tax dodging individuals and firms"? Time will tell.

Related posts:

• Tax planning to be wary of
• Do you have to organise your affairs to pay the maximum tax?
• Doesn't everyone try to avoid or evade taxes?
• Tax planning schemes

Tax tease: Inaccurate Footie Tax story resurrected as 'news'

The headline in today's Sunday Times is "Top footballers dodge millions in income tax". And that "Rooney pays 2% on some earnings." Other footballers are then mentioned too.

The report seems to simply confirm the predictions of a very similar story the Times published in May 2009.

Football stars plan to dodge 50p tax rate
Scheme being considered by Manchester United, Arsenal and Liverpool means players can get salaries as interest-free loans

The Press Association are reporting the 'new' story as leading to a "Crackdown on top rate tax loophole". As the Sunday Times report though HMRC have been trying to do this for years.

The footballers are using two tax avoidance schemes. One involves their clubs paying large chunks of their earnings as 'image rights' rather than as employment income. The other scheme involves the footballers taking loans rather than salaries or dividends from companies they own. I need to debunk a key element of this part of the story to make clear that it's not as effective as the press reports suggest.

For the avoidance of doubt I'm no fan of this tax avoidance. Regular readers of the TaxBuzz blog may recall I mentioned this in the context of the 7th of my '8 fallacies that undermine the UKuncut tax protests' last month.

Debunking

When someone, a footballer or otherwise, takes a loan from their company they initially pay very little income tax. Instead of being taxed on the full amount they only pay tax on the interest they should have been charged.

In 2009 the Times suggested the tax would be as little as 2.5%. It now seems to be just 2%. The reports miss the key point though that this tax is paid every year for as long as the loan lasts. So the longer the loan lasts the more tax is paid. If the loan lasts for ten years and interest rates rise the total tax paid could end up being more than the tax they hoped to avoid.

Eventually the company will at some stage have to pay salaries or dividends to the footballer to clear the loans. This income will be taxed at the top rate - in addition to the tax already paid on the 'beneficial loans'.

I mention all this to help discourage anyone from thinking that it's always tax effective to take loans rather than salaries or dividends from their company. It seems to be attractive for footballers as long as they do NOT own the company and as long as they will leave the UK permanently before the loans need to be repaid.

When your own company lends you money the company is required to (effectively) also lend money to HMRC. This reduces the cash available in the company. And this loan to the taxman is only repaid when the loan to which it relates is repaid.

Most people trying to copy the footie players' tax avoidance scheme will also have to pay a fortune to close down their companies using complex (and expensive) schemes without paying back the loans. When that happens they will still face years of sustained challenges from HMRC who will argue that the loans were a sham and subject to tax as earnings.

Can't say I have any sympathy for the footballers though.

Tax tease: The number of non-doms left in the UK

The press are making much of a disclosure by HMRC about the number of people registered as non-doms in the UK. Some reports suggest that 16,000 wealthy non-doms have fled the UK.

The FT's headline, as you might expect is more accurate, suggesting that ‘Non-dom’ numbers fall in wake of levy'. However the article also reveals the figures for 3 years:

• 2006/07 -117,000
• 2007/08 - 139,000
• 2008/09 - 123,000

Notice that overall this isn't a fall in the numbers.

It's also worth noting that, contrary to some reports, the figures do not represent 'the number of wealthy foreigners' who live in the UK. HMRC's figures are simply of those people who have ticked a specific box on their tax return each year. And many of them will be second or third generation immigrants who can technically claim non-dom status despite having no great wealth or assets outside of the UK. They might just be hedging their bets.

Anyway, the guidance as regards ticking the 'non-dom' box changed in 2008/09 so many people who ticked it in 2007/08 no longer had to tick it in 2008/09.

I doubt that they all left the country. And, in any event, by my reckoning there were 6,000 more non-doms here in 2008/09 than there were two years previously. Another two years have since passed. I wonder how many are here now?

Tax troubles: Seems there really has been a PAYE mess up after all

Seems there has been a real glitch in the PAYE system after all - at least in so far as it relates to the taxation of pensioners who have secondary pensions in addition to the state pension.

When the PAYE debacle became apparent over the summer I wrote a piece: The PAYE tax system is now working as it should...

I stand by the explanation I gave and continue to deplore the ill-informed and sensationalist reports in the media.

However, NOW it seems that there has been a real and widespread error on the part of HMRC. The reports I have seen so far seem to simply see it as more of the same. In fact it's much more fundamental.

The latest PAYE failing is an announcement that during 2008-9 and 2009-10 state pension income was omitted from the tax codes issued to 250,000 pensioners with second pensions or other earned income. The state pension is taxable; the tax due is normally collected through the tax code used to calculate the net income from their second pension. Where insufficient tax has been paid in such cases, the Government has announced that pensioners will not be asked to pay up.

This error may well be a symptom of the staff cutbacks imposed on HMRC by the previous Government. To reduce the burden on the remaining staff, HMRC started to write to taxpayers on PAYE saying that they need no longer file tax returns. This was welcomed by those who saw it as a chore. Accountants anticipated that it would mean that some taxpayers would miss out on tax repayments as no one would be checking whether they had under or over paid tax. What also seems to have happened is that someone somewhere in HMRC didn't programme the computer to include the state pension in PAYE codes for pensioners who no longer filed tax returns. Whoops!

Tax tease: Fallacious demand to "Abolish the 50p tax rate"

The FT publishes today a letter containing a passionate demand that the Government 'Abolish the 50p tax rate'.

The writer seems not to understand how most entrepreneurs and growing businesses operate as he concludes his letter:

British job creators must be allowed to keep more of what they earn so they can hire more staff, purchase more equipment and reinvest in their businesses. The chancellor must take heed by removing the 50p income tax rate.

Most 'British job creators' run companies that pay corporation tax on their profits. The main rate of Corporation Tax is not 50%. It's just 28%. Only monies paid out of the companies to the owners and directors are subject to 50% INCOME tax (on amounts above £150k pa).

Together with National Insurance, the 50p tax rate means that the highest earners keep less than half what they earn. This cannot be ideal but there do seem to be political reasons to keep the 50% rate for the moment.

It could be worse of course. When I first qualified as a Chartered Accountant the top rate of income tax on earnings was 83% and there was a 15% investment income surcharge. This meant that the richest taxpayers kept just £2 out of every £100 they received in dividends and interest!

Don't talk to me about 'the good old days'!

Twitter doesn't have to be taxing

The taxman joined twitter just before xmas and I'd encourage fellow tweeters, whether taxpayers or accountants, to follow twitter.com/hmrcgovuk (and by all means follow @TheTaxBuzz too!)

HMRC's twitter policy statement says that if you follow this account, you can expect 1-2 tweets a day covering information about HMRC and tax, including news, publications, web content, consultations, speeches and publicity campaigns.

Todate the emphasis has been on the forthcoming self assessment online tax return filing deadline but the taxman's tweets have also contained useful tips re the VAT flat rate scheme, payroll and corporation tax changes.

HMRC also point out that they will never advise anyone of tax refunds through twitter or discuss personal issues through the twitter account. They also note that if you follow @HMRCgovuk, they will NOT automatically follow you back.

There is one flaw in the HMRC twitter strategy - and it's one that is commonly made by twitter novices. Most followers will not read every tweet that appears in their twitter stream. This means that anyone, like the taxman, who tweets just once or twice a day will be lucky if many of their tweets are seen by all their followers.

I applaud this official move by the taxman onto twitter - it doesn't have to be taxing!

(I've shared many other twitter tips and advice on my personal blog - www.BookMarkLee.co.uk/twitter )

Bank restraint on bonuses would mean LESS tax paid

I'm no fan of big bank bonuses but the argument is more complex than some think. We actually generate far MORE tax by allowing banks to pay bonuses than if we discourage or prevent them from doing so. To this extent I was disappointed by the PM's comments on the Andrew Marr show this morning. David Cameron said "I want to see the bonus pool smaller than last year."

This may be what the public thinks it wants but at a time when the Government wants to increase tax receipts it makes no sense.

Imagine a bank has a profit of £10m. How much tax gets paid if it pays no bonus?
Just Corporation tax on the profits. That's 28% of £10m which is £2.8m

If the bank ignores requests for restraint and pays out £8m as bonuses, how much tax is paid?

Well, in addition to the bonuses the bank will pay employers' NICs on the bonuses. So that's 12.8% of the £8m, being £1,024,000.
The bank will still pay corporation tax on the remaining profits: That's £10m-£8m-£1,024,000 = £976,000. And 28% of that is just £273,280.
The total tax paid by the bank then is:
Employers' NICs : £1,024,000
Corporation tax: £273,280
Total.................. £1,297,280 - compared to the £2.8m tax if it paid none of the bonus.

But that's not the end of the story as the bankers will be subject to tax on the bonuses they receive: Income tax @50%, so that's £4m, plus 1% national insurance = £80,000

So the total tax paid if the bank pays £8m of bonuses is:

• Tax paid by the bank: £1,297,280
• Tax paid by bankers: £4,080,000
• Total:..................£5,377,280

That's almost double the £2.8m tax paid if the bank 'exercises restraint' and pays out no bonus.

Of course if Labour's one-off banker bonus tax were reintroduced it would generate even more tax. But that's a different argument. The PM should be explaining why he doesn't want to do this, rather than arguing for smaller bonus payouts. That makes no sense as the bigger the bonuses the more tax is paid.

Did VAT absolutely HAVE to go up?

In this week when the standard rate of VAT was increased to 20% the question has been asked as to whether it was necessary.

If you agree that TAXES had to increase the answer is 'Absolutely, yes, it had to be VAT'. If you favour other ways to resolve the deficit then the answer may be different.

Almost a year ago in February 2010 I wrote a post on this blog explaining WHEN tax rises actually generate money for the Exchequer. I focused on those key taxes that contribute the most money each year. So I looked at income tax, corporation tax, National Insurance and VAT.

I noted that VAT is the ONLY tax where a change of rate has an almost immediate impact on the taxes that flow into the Exchequer. For that reason, back in February 2010 I predicted, as did many other commentators, that the rate of VAT would rise to 20% - regardless of who won the election.

It is simply not credible to suggest that other taxes could have been increased instead of VAT to fill the gap in the short term. Some of the comments made this week by Ed Milliband and by his, self confessed, trainee Shadow Chancellor Alan Johnson, suggest that they do not understand this pretty basic point.

Beware misleading press reports about late filing fines

If you file your tax return late, you'll be fined £100 unless you have paid all your tax by 31 January. Nothing has changed in this regard for many years.

Still Unbiased.co.uk have published a press release that the Press Association has circulated as a 'story' that will be all over the press on Wednesday. It starts:

Late tax forms could see huge fines

"Workers could be fined more than £440 million this year for handing in their self-assessment tax forms late or miscalculating how much they owe, it has been estimated."

'Workers' implies lower paid employees doesn't it? But only a minority of employees have to send in tax returns. The estimate was calculated by reference to the total number of tax returns filed each year.

And anyone 'handing in their self assessment tax forms' in January will be deemed to be late. The deadline was 31 October. You have to file online in January to be safe.

Frankly late filing penalties are easy to avoid. If you have to file a tax return this year get on and sort things out in good time. Hardly anyone has a justifiable 'reasonable excuse' for leaving things to the last minute.

Incidentally, the rules change next year, when the fine will be £100 for late returns regardless of whether you have paid all your tax by 31 January.

Taxes up - VAT goes to 20%

I'm indebted to The Tax Journal for collating these extracts from the papers today:

‘Retailers are bracing themselves for a deterioration in trade in the coming year as the government’s VAT increase, coupled with swingeing spending cuts, put people off spending on the high street.’

Financial Times

‘The cost of many goods and services will rise by more than three times the rate of the VAT increase as businesses use the tax to mask a more dramatic price review, leading industry experts warn today.’
Daily Telegraph

‘John Lewis, Marks & Spencer, Tesco and other big retailers have said they will delay (sic) the introduction of today's VAT increases on most or all of their products for at least a few weeks as they wait to see what action their rivals take.’
The Guardian

‘Middle-class households will have to pay nearly £600 in extra taxes this year after today’s 2.5 per cent rise in VAT, according to new research carried out for The Times.’
The Times

‘Shoppers face chaos from today as many stores are neglecting to adjust the price tags on goods for the VAT rise and will simply charge more at the till. Retailers will also use the VAT rise to disguise hefty price hikes of more than three times the necessary amount, it was claimed last night.’
Daily Mail

‘STRUGGLING Brits are being hit with a triple whammy – a painful VAT increase along with huge rises in train fares and petrol prices.’
The Sun

Comment:

Headlines sell papers. Notice the confusion though. Some report that retailers are increasing their prices by more than the increase in VAT. Others report that retailers will have to absorb the increase and will suffer reduced profits as a result. Depends who you ask I guess.

And let's not forget that:

• VAT also went up by 2.5% last January.
• The average rate of VAT in the EU is almost 21%.

Tax Buzz Blog review - 2010 and plans for 2011

As we move into the 4th year of this Tax blog I've revisited the 118 posts added in 2010 to check on the range of topics I've covered.

As in previous years many of the posts were inspired by tax related stories in the media.

If there's one consistent theme it is one of debunking myths and misconceptions about our tax system. Many of these are spread by partly informed journalists and commentators (online, on radio or on tv).

The other key areas covered by blog posts were much the same as in 2009 - with a heavy emphasis on tax avoidance, the prospects of a General Anti Avoidance Rule, HMRC Spotlights and tax amnesties.

I also highlighted a number of key lessons about the tax system drawn from decisions of the Courts and Tribunals, offered predictions and shared my view on various topical issues including tax issues specific to MPs (again).

Here are what I consider to be my top ten posts of 2010:

9 Nov: Many people may have paid the wrong tax - why is that? - One of 3 posts that debunk elements of the confusing Panorama report on the PAYE story about 6 million wrong tax codes.

26 Oct: The IoD needs to be careful what it wishes for re IR35 - An objective look at the rationale for the rules known as 'IR35'

4 Oct: "The taxman is happy with my return' - Sure? - Debunking the idea that your tax return has been agreed.

20 Sept: No - ISAs are not a form of tax avoidance - Debunking this myth once and for all

20 Sept: Doesn't everyone try to avoid or evade taxes? - Well, a large majority anyway. Let's stop the double standards.

1 Sept: Tax planning schemes - The latest in a series of posts that debunk the idea that 'abusive' schemes are attractive or worthwhile in the majority of cases.

1 June: CGT: Since when does an automatic relief constitute tax avoidance? - Debunking misleading press stories

21 March: Why did the BBC's Sian Williams' appeal get to the Tax Tribunal? - Debunking reports of this tax case

31 Jan: Is it ever morally acceptable to fiddle your tax form? (Radio4) - Debunking the biased reporting in the radio programme concerned.

29 Jan: Retrospective tax avoidance legislation ruled LEGAL - Highlighting the implications of a key decision by the Tax Tribunal

What can readers expect in 2011? Well, subject to a multitude of requests to the contrary, I see this blog evolving in 3 key ways:

1. There will be fewer topics aimed directly at accountants. Most of these will instead appear on my blog for ambitious professionals (which I started in May 2006)
   
2. Blog posts here will be shorter and with briefer commentaries.
3. The main focus will be debunking tax stories in the mainstream media - online, on tv, on radio and in the press.

And if you're involved in social media at all, you'll notice that we've recently added the facility to share individual blog posts on twitter, linkedIn, facebook etc. This was in direct response to a request from a regular reader. I just hope he's not the only one to use them!

A similar, but more in depth, review last year also examined the original motivation and targets for this blog: Review of TaxBuzz blog 2009