Tax tease: Late filing penalty STAYS at £100

The media have been reporting that the £100 penalty for late filed tax returns is about to rise from £100 "to a possible £1,300". Nice and newsworthy. Whilst arguably true it's not as big a deal as the reports suggest. Quelle suprise!

Most of the media stories are lifted directly from HMRC's press release about the new penalty regime for 2010/11 tax returns: File your tax return on time and avoid the new penalties.

This highlights two key changes. The first is that the £100 penalty will be charged even if you have no tax to pay or you have already paid all the tax you owe. And there will be further penalties for returns filed more than 3 months late. These penalties could rise to £1,300. previously the £100 was all that could be charged. Late paid tax continues to be subject to interest and to late payment surcharges.

I don't suppose it really matters that the changes addressed by the press release were actually announced by Alastair Darling in his April 2009 Budget. This followed a (so-called) Consultation document issued just a few months earlier as part of the 2008 Pre-Budget Report. That was in the days before the Coalition Government's new approach to tax policy making - the policy decision to abolish the £100 penalty had clearly already been taken by Mr Darling. The Consultation was a formality.

I accept that the £100 penalty is not much of a deterrent as plenty of people who were late filing their tax returns simply paid their tax on time and could then avoid a late filing penalty. This will no longer be possible.

I have two concerns though - which will affect those people who file their tax returns just a few days late:

The first relates back to the reason for the penalty being limited to the amount of outstanding tax at 31 January. When the self assessment system was introduced it was thought it would be unreasonable to charge disproportionate penalties. There were fears that a pensioner who owed, say, £10 of tax, would have a legitimate complaint if charged £100 just because her tax return was filed a few days late. What's changed here?

My second concern is that the taxman's computers are fallible. Erroneous penalty charges are inevitable. Under the present system many such errors go unnoticed as penalties are routinely refunded once the late tax return is processed and the computer recognises that sufficient tax was paid before the deadline. In future the £100 penalty will be payable regardless so there will be plenty of arguments about precisely when tax returns were filed.

Will the prospect of higher penalties for late filed returns motivate you to ensure that your next return is filed well before the 31 January deadline?

Blog release: Award winning accounting practice chooses Tax Advice Network

The Tax Advice Network has been selected as preferred specialist tax advisers by Elaine Clark, founder of the award winning and fast growing online accounting practice: Cheap Accounting.

Despite the name of the practice Elaine stresses that “Quality is in no way compromised. CheapAccounting operates to a set of very high service values”.

Inevitably, perhaps, most of Elaine’s clients have straight forward accountancy and taxation needs. Needs that her experienced network of CheapAccounting.co.uk accountants are well capable of addressing. However from time to time there may be a more complex tax issue which requires more specialist advice.

I am delighted to announce that Elaine has chosen my Tax Advice Network to provide tax support when required. We have agreed a working alliance which is clearly promoted on her website.

I really admire Elaine's approach. Many accountants are in much the same position - in that they have all the skills necessary to advise clients on day to day tax issues. But, unlike a GP who refers patients to a specialist every now and then, some accountants are reluctant to do the same when clients have unusual, complex or difficult tax problems. Elaine has chosen to focus her practice on the expert provision of services required by most clients. Her team know their limitations and, on those odd occasions when their clients require more specialist tax advice they can access this through the Tax Advice Network.

For obvious reasons I do not give permission for just anyone to include our logo on their website. Indeed Elaine is the first person to have that authority – beyond the tax adviser members of the Tax Advice Network of course.

And the award for best budget night commentary goes to.....

I've long been critical of the 'me too' type of overnight budget commentaries. Indeed, these days 'overnight' is slow and many commentaries appear online within hours.

I have seen dozens of such identikit commentaries since the Chancellor sat down yesterday. Almost all contain pretty standard lists of the headline measures, cut and paste extracts from the budget press releases and sundry similar 'commentaries' containing the initial views of the author or a 'senior tax partner'. There are a few that contain bog standard 'advice' and a few firms have provided commentaries on specific measures - although most of these note that we don't have enough detail yet to know how the proposals will work in practice. Others reference what the writer would like to have seen or how limited the proposals are in specific situations.

Of course there will be many more such commentaries that I haven't seen. There's a limit as to how many I can pick up through the email lists I am on and through links contained in tweets on twitter. Still, two very different budget commentaries stand out and deserve an award*

Runner up - and with a special commendation for dividing up the announcements: Informanagement

• Budget Summary March 2011 - New tax changes announced today
• Budget Summary March 2011 - Future changes announced today
• Budget Summary March 2011 - Changes previously announced for 2011-12, now confirmed

And the winner is.........

....Elaine Clark of Cheap Accounting for her blog post: Not A Budget Newsletter!

It won't suit everyone but I love it!

* 'Award' in this context simply means to be acknowledged on this blog with an online link! ;-)

If you've come across any others that are clearly distinctive do please reference them in the comments section below and provide links if possible. Many thanks. I'm also keen to receive feedback challenging my view that the effort devoted to these overnight commentaries is a waste of time. By all means share your experiences of how and why you feel differently. Any evidence of the value would be great too.

Budget prediction: No immediate merger of tax and national insurance

It was inevitable that, due to a short holiday last week, I would miss the opportunity to offer timely comment and debunking of some key tax stories. As I'm back just in time for the Budget there seems little point in writing about anything else today.

However there is one point about which I've been unable to resist tweeting this morning:

We can safely ignore the scare stories about a merger of income tax and national insurance. The coalition Government will NOT advocate simply adding NI to IT. There will be a consultation and many wrinkles to iron out first.

Last week The Office for Tax Simplification published their interim report on small business tax. The executive summary notes that:

"genuine and long lasting simplification can only be brought about through major structural changes to the UK tax system. Our key recommendations are that the Government starts to look at reforming the structure and we recommend that a timetable be set out by the end of the year. The two key areas that require attention are:

• The integration of income tax and national insurance contributions (“NICs”); and
• Introducing a radical new approach to taxation for the very smallest unincorporated businesses.

Studies on how best to achieve this could be carried out, for example, by setting up a working party and through consultation with advisers and professional bodies within a specified timeframe."

At chapter 3 the report sets out the proposed integration steps - being the issues that would need to be considered and addressed:

• Consistency in the definition of earnings;
• Consistency in the required calculations;
• Reliefs and exemptions on either income tax or NICs;
• Treatment of pensioners;
• Treatment of self-employment; and
• Treatment of savings and dividend income.

Many commentators seem to assume that this would all be done in isolation. For example, they suggest that a new combined rate of IT and NI would be charged on all dividends - whether received by small business owners from their own companies - or by pensioners with investment income. This is wooly thinking and most unlikely in my view.

Even though the objective would be to try to retain the same level of aggregate tax (incl NI) I firmly expect this will involve changes to relevant allowances and reliefs.

I'll resist commenting further now as I anticipate we will hear more about this in the Budget - or more precisely, we'll read more about it in the Budget paperwork later today!

HMRC turn the Spotlight on the newest EBT related tax avoidance schemes

Employee Benefit Trusts (EBTs) have long been used for tax avoidance purposes. They have evolved over the years as advisers tried to avoid the impact of tax cases and changes to the tax rules.

HMRC have clearly got fed up of playing catch-up and last December the Government announced onerous new rules to tax "disguised remuneration". In addition to EBTs, the rules would also impact Employer Financed Retirement Benefit Schemes (EFRBS).

Some commentators suggest that the proposed rules are draconian. This may be right. But in most cases those who would be caught are only those who persist in their attempts to frustrate the rules that would tax income when it is earned. Don't want to get caught by the new rules? Avoid fancy and artificial payment arrangements. Pay the tax otherwise due on what would be your income but for the fancy scheme.

Following a consultation on the draft new rules HMRC published a list of Frequently Asked Questions on February 21. These confirm that the new rules are intended to apply to arrangements

"involving a third party to reward employees and directors which seek to avoid, defer or reduce income tax and national insurance contributions",

and to arrangements that are

"used as a tax-advantaged way to save for retirement, using an employer-financed retirement benefit scheme as an alternative to, or to top up, savings in a registered pension scheme."

In advance of the new rules coming into effect, some newer avoidance schemes have been promoted. These are designed to shelter funds in current EBT schemes from the effect of the proposed legislation. These new schemes rely on the availability of credit for loan repayments made before 6 April 2012.

HMRC have wasted no time in adding such schemes to the Spotlights page of their website.

In HMRC's view, while these convoluted arrangements seek to weave a way through the legal changes, they do not succeed. Even if they did HMRC would still challenge them as delivering remuneration which should have been subject to PAYE from first principles.

Subject to parliamentary approval, the new legislation will be effective from 6 April 2011 and some aspects of the proposed new law will apply from 9 December 2010. These changes are designed to prevent the avoidance of PAYE and national insurance contributions on employment income.

Individuals considering entering into such income tax avoidance arrangements should be aware that HMRC will pursue people who seek to avoid tax on monies they earn, through the courts where necessary.

But, hey, if you want to risk such activity go ahead. Some promoters no doubt will sugest that (part of) the financial cost of such legal cases can be covered by tax risk insurance. That is of course just one of the issues to consider. Each to their own.

Related posts:

• 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

Budget prediction: NO IHT changes and I'll tell you why...

In its report, published last week, the Office of Tax Simplification (OTS) said:

"On the basis of the low number of estates caught by IHT and the useful but relatively low revenues [after reliefs] that it raises, we consider that a more appropriate approach may be to review the whole of IHT rather than to consider individual IHT reliefs. Such a review may also encompass a review of capital gains tax and we envisage this as a longer term project."

I am surprised that anyone could use this statement as the basis for predicting that:

"Inheritance tax squeeze expected in budget"

That was however the Guardian's online headline on Sunday in a piece that heavily quotes Danny Cox, head of advice at the independent financial adviser Hargreaves Lansdown.

In fact, at para 2.33 of the OTS report, they state that the review they are suggesting:

"a proper review of inheritance tax, whether by HMRC, HM Treasury or the OTS....would clearly be a longer term project."

What do I think?

I doubt anyone in HMRC, let alone the Government, Treasury or OTS has the time to "review the whole of IHT" in the near future. The OTS were tasked with reviewing tax reliefs and this included those available when computing liabilities to IHT. This is the only reason why they make reference to it. There is no agenda to review IHT or to increase the tax generated by IHT.

IHT is expected to generate about £2.3 billion tax this year. A large sum in itself but this comes from only around 12,000 estates out of the 560,000 adult deaths (these are both 2009 figures). So just 1 in every 46 deaths gives rise to IHT. And the main reliefs from IHT do not have a significant impact on the amount of tax collected.

Back in 2007, when in opposition, George Osborne talked about raising the IHT threshold to £1m. The objective being that:

“only millionaires pay death duties”

It really is all but inconceivable that, now he is Chancellor, Mr Osborne would suddenly decide to change the rules and attempt to increase the take from IHT. It would take such an about-turn that he would get very dizzy!

Tax tease: OTS provides headline fodder re tax reliefs

The Office of Tax Simplification (OTS) has produced the first of two reports due in advance of the Budget later this month. Next week should see the much awaited interim report on possible simplification of small business taxation - including the IR35 rules and 'income splitting' between husbands and wives.

But first we have Recommendations to simplify UK’s “spaghetti bowl” of tax reliefs. And inevitably the media have sought out what they hope are issues that will cause most concern amongst their readers and viewers. For example:

• BBC business news notes that the 15p a day luncheon voucher relief may be removed.
• Money Marketing notes the calls for IHT and CGT reviews and the suggestion that merging income tax and national insurance would be a long term project that would deliver “major simplification”.
• The FT headline writer went for: Call to scrap blind person’s tax allowance

In each case however the report explains the thought process behind the recommendation and none are made lightly.

It is also worth noting, from the executive summary, reference to a number of key themes that emerged during the OTS review of tax reliefs:

• Merging income tax and NIC – this is a long term project of structural reform that would deliver major simplification;
• Employee benefits and expenses – The longer term aim would be to align the treatment of employee benefits, with shorter term aims of simplifying many minor benefits with a de minimis limit of £100/£500, or amending the current £8,500 threshold;
• Inheritance tax and trusts – the reliefs for inheritance tax are integral to the policy and we consider that a more appropriate approach would be to review the tax as a whole;
• Capital gains tax, particularly as applicable to companies – the capital gains systems for individuals and companies have drifted apart, with gains by individuals taxed at a lower rate than income to reflect inflation, whereas companies are still required to calculate indexation. Our aim would be to realign the treatments and simplify the tax, but as there are changes in relation to corporate capital gains expected in Finance Bill 2011, this is clearly a longer term project; and
• Environmental taxes – Both landfill tax and aggregates levy should be reviewed, as both regimes contain basic charging provisions with numerous exemptions and it may be more appropriate to define what is caught rather than what is excluded.

"Our review has suggested that these areas are particularly complex areas, for example due to the number and complexity of the reliefs involved. Whilst each area is deserving of a full review, we recognise that these are complex and time consuming areas involving important matters of government policy that go beyond the current remit of the OTS"

My observation is that commentators should ensure that they read the detail behind these headlines. The OTS team are neither stupid or naive. Each of the above themes is explored in the report and recommendations made that the related issues be the subject of consultations before any changes are made. This is as it should be. None of these suggestions is going to happen overnight and certainly not in the Budget on 23 March.

HMRC impact assessment is a disgrace

If you knew the taxman was going to come round to your office to check your business records, how much do you think it would cost you?

The taxman has made up some numbers that it is hard to take seriously. They suggest that the only costs to small businesses will typically be related to the "up to" 4 hours that each 'business record check' will take. HMRC have then placed a value of £11.70 per hour on all the accounts and wages clerks, book-keepers, other financial clerks and sole traders who will be involved in each 4 hour meeting.

These numbers are contained in HMRC's Impact Assessment of Business Records Checks. It was published in December alongside the consultation document on the subject of 'Business record Checks'. The deadline for responses was 28 February which is why the Institute of Chartered Accountants in Scotland (ICAS) view has now been made public.

HMRC's estimate is that each half a day, will cost a business £54. ICAS has re-costed an average visit using “realistic” estimates of business disruption and adviser’s time - coming up with a total of more than £560 per visit.

ICAS' revised estimate of £562 for each HMRC visit is as follows:

• 1 hour preparatory meeting between the business (£50 per hour) and its accountant (£75 per hour) = £125
• 3½ hours spent by the business (£50 per hour) and its accountant (£75 per hour) in dealing with HMRC visit = £437

I think this is still woefully short of the real cost to most small businesses. Don't you?

One of the problems with HMRC's impact assessment is that it only reflects estimated figures for the smallest of small businesses and assumes they do not have an accountant. Perhaps this is deliberate and HMRC do not intend to visit businesses that already have someone, like an accountant, to check their business records. If this were the case though the impact assessment should make it clear. It's not an assumption that accountants are making.

I don't check every HMRC impact assessment and missed this one when it was published in December. The last one I looked at related to Mr Darling's plan to reduce the rate of VAT to 15% for 13 months. That too was woefully inaccurate. I blogged about it here.

Last chance for tax cheats to get their tax affairs straight

Last week HMRC published a statement about how they are going to manage deliberate defaulters by a new programme of special rules. The intention is that anyone who is identified as a deliberate tax defaulter will will have their tax affairs closely scrutinised - not just when they are caught but for the next five years too.

This week HMRC announced the Plumbers Tax Safe Plan (PTSP) - which I mentioned in an earlier blog post. This Plan contains a very useful facility. ANYONE can ask to get their tax affairs straight - and benefit from the same offer of a 20% cap on the penalties that will be charged. This should mean you can avoid being subject to ongoing scrutiny for the following five years.

Previous tax disclosure facilities have been criticised as they were specific to people in certain situations or businesses. This time round though the paperwork is very clear and HMRC says:

Customers who voluntarily come forward and put right their tax position can expect very similar terms to those on offer through PTSP. If you do not come forward and HMRC later find that you owe additional tax, you may face higher penalties or even criminal investigation.

I doubt that there will ever be a better time to take specialist advice to help you bring your tax affairs in order. Anyone who wants to use the PTSP to come clean on past tax arrears must register for the scheme by 31 May and will need to pay any back taxes plus interest and penalties by 31 August.

The maximum penalty under this scheme, of 20%, will be reserved for cases where more serious and “deliberate” irregularities have occurred. In such circumstances, the taxman will seek back tax over 20 years. This is why it is so important to work with experienced tax specialists who have plenty of experience of negotiating settlements with HMRC in respect of previously undeclared taxable income.

Anybody with extra income or gains to disclose, whether in the plumbing industry or not, should seriously consider coming forward now. Those who do not and who are subsequently found out will be liable to penalties of between 35% and 100% of the tax evaded. And may well be subject to increased scrutiny for the next five years. The rules are changing. Tax cheats - whether local tradespeople, property owners, entrepreneurs or anyone else are all in the same boat. Make sure yours has a paddle - or even a motor!

Tax amnesty for Plumbers is a good thing but it's not an amnesty

You'll see lots of reference to this so-called tax amnesty' for plumbers over the next few days.

HMRC says:

The Plumbers Tax Safe Plan (PTSP) is designed for people working within the plumbing industry who have not told HM Revenue & Customs (HMRC) about all their income in the past and who now want to get back on track. It is intended to cover people who work (or worked) in the plumbing, heating or gas installation trades and this includes anyone who installs and repairs pipes and fixtures for water, drainage or gas systems in a building.

This is part of HMRC's plan to catch up with everyone who has been doing cash in hand work and who wants to get straight with the taxman. There is NO TAX AMNESTY though.

Everyone who 'fesses up' will be required to pay all of the taxes they had hoped to avoid, plus interest on the late paid tax and a penalty. The 'Plan' simply means that the penalty will be limited - in most cases to 20% of the late paid tax.

As HMRC says:

It's basically a 'fresh start'. If you decide to take advantage of PTSP, you can stop worrying about what might have happened had HMRC found out that you'd not been telling them about all of your income. It's a chance to start getting things right from now on, whilst knowing exactly how much it's going to cost to sort out things for the past.

The guidance around the Plan is quite complex and many people will benefit from professional help especially if their confession covers many tax years.