Friday, April 29, 2011

Are super-injunctions 'just like tax avoidance'?

I was taken by the analogy drawn by Chris Blackhurst in The London Evening Standard:
"People secure super-injunctions because they can. It's just like tax avoidance. Wealthy folk minimise their tax bills because they're able to, because the law allows them to, because their adviser would be negligent if they did not show them how.

Most of us cannot avail ourselves of that service and the schemes the rich use. And that annoys us - but it doesn't mean we wouldn't do it. Human nature decrees that we look after our own - and anyone who claims otherwise is delusional".
I made a similar point to the one highlighted above (by me) on this blog last year: Doesn't everyone try to avoid or evade taxes? Some of the critics of the rich who pay for tax schemes think nothing of fiddling their taxes (or expenses - which amounts to the same thing as it creates additional income that should have been taxed).

The big difference is that the promoters of most tax avoidance schemes generally try to stick WITHIN the letter of the law. Those who fiddle their taxes, eg: by failing to declare all of their taxable income or claiming deductions for non-business expenses are clearly breaking the law and evading their taxes. The complaint therefore is really that some people can afford to PAY for advice to get around the law - as with those philanderers who secure super-injunctions to cover up their infidelities.

The article in the Standard rightly concludes:
"If they're honest, lawyers should tell their clients not to bother - that transparency really is a better policy. As they see constant hints dropped in their direction and live under constant pressure of exposure, those holders of existing super-injunctions might concur."
And, as regular readers of this blog will know, I think accountants and tax advisers should be careful with their advice re tax avoidance schemes. All too often clients get caught up in something more complex, 'dodgy' and time consuming than they had anticipated. See this earlier post: "Have a look at this scheme and tell me what you think". It includes a routine quote from a client who has been given chapter and verse on the risks and downsides of a tax scheme: "Now I understand it properly, why would I want to go into a scheme like that?"

On balance, I think I disagree with the analogy drawn by Chris Blackhurst. What about you?

Wednesday, April 20, 2011

Tax tease: Britons waste £1.3 billion in IHT - really?

The website '' has released headline extracts from its Tax Action Report 2011 (prepared on its behalf by Purple Market Research).

I've chosen the IHT headline to debunk this week - although I admit I haven't seen the report itself. The press release containing the headlines is available online but not the report it seems ;-(

"Almost nine out of ten people have done nothing in the past 12 months to reduce the amount of [IHT] tax they pay"
My question is whether any of the people who responded to the question actually have an estate that would attract a liability to IHT? I suspect that it's a complete irrelevance to most of them and therefore the statistic is misleading at best.

We have to bear in mind that, according to official figures in the recent OTS report, IHT is expected to be paid on only around 12,000 estates out of 560,000 adult deaths (these are both 2009 figures). So just 1 in every 46 deaths gives rise to IHT.

Now it could be said that many more estates would have been subject to IHT if the deceased had not take steps to reduce or remove a liability. But the survey in question suggests that nine out of ten people have done nothing of the sort.

Let's assume that none of the typical 12,000 people who die leaving estates that typically pay IHT each year did anything to reduce their liability to the tax. This would mean that they represent the nine out of ten people noted in the survey. And that would mean that the maximum number of people who DID take any action or advice was just 1,333 a year. That can't be right. There are more than that number of people routinely advising on IHT and some of their clients must be taking action.

So the nine out of ten figure quoted above seems to be grossly misleading. I can't trace the origin of the £1.3 billion quoted in the press release but if it related to the typical 12,000 estates paying IHT, it would mean that every single one of them could have reduced their liability by more than £100,000. Seems unlikely to me.

I'm all for taking advice and planning to keep your IHT liability to a legal minimum. To the extent that you can do this it makes sense to do so - as long as you avoid contrived and risky tax avoidance schemes. But IHT is still not a mainstream tax and relatively few people will leave a big enough estate behind to pay IHT. So why worry about it?

Ok - that was a little flippant. The absolute number of people who could leave a chargeable estate behind is ever growing and there are plenty of opportunities to advise them how to keep their liability down. To this extent maybe the press release will do no harm. Maybe. What do you think?

Thursday, April 14, 2011

Unreliable evidence: A GAAR is on the way to reduce tax avoidance

The possible introduction of a General Anti-Avoidance Rule (GAAR) was the subject matter of part two of a recent Radio4 programme, Unreliable Evidence - hosted by Clive Anderson. I referenced the first half of the programme in a blogpost last week before going on a short holiday.

The informed guests who shared their views during the show were:
The first 3 are, respectively, Chairman and members of the official UK GAAR study group set up in January by David Gauke the Exchequer Secretary to the Treasury. Thus their views were especially relevant and illuminating.

Tax Journal magazine has now reported a summary of the radio programme.

Listening to the discussion I was struck by Graham Aaronson's generally positive comments. I was left with the impression that he anticipates formulating a workable GAAR and that this will be included in the report we are promised will be published by the GAAR study group this October. This is contrary to the view I have expressed previously on the Tax-Buzz blog.

This approach is clearly a sensible way to be proceeding. Any resulting rule will have been formulated by tax lawyers rather than by HMRC and the parliamentary draughtsman. As such it is likely to be more effective, focused and workable than might otherwise be the case.

ps: Hat-tip to Keith Gordon who pointed out to me that G AARonson was an obvious choice to chair this committee!

Thursday, April 7, 2011

MP's can still benefit from 'disguised remuneration' trusts

I was shocked to read a note in AccountancyAge online this morning claiming: "MPs excluded from tax avoidance legislation".

That would be outrageous. I've checked the Finance Bill in question and cannot find the words originally quoted in the article*. However what it does say is almost as bad.

We're talking here about the legislation to tax what is called 'disguised remuneration'. It often, but not always involves payments and loans to and from Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS). I wrote about this last month:
HMRC turn the Spotlight on the newest EBT related tax avoidance schemes.

The legislation appears in the Finance Bill 2011 and this also sets out various exemptions - intended, one assumes, to ensure that innocent transactions are not caught by widely drawn anti-avoidance powers. Amongst the exemptions is this one set out in Schedule 2 which introduces section 554(8). It says that the anti-avoidance legislation:
"...does not apply by reason of a relevant step taken by the Independent Parliamentary Standards Authority in relation to a member of the House of Commons."
I do hope there is an innocent explanation for this exclusion. It would seem to have been a late addition to the Bill as it's not referenced in the explanatory notes to the Finance Bill. These only go as far as section 554(7).

Maybe someone (who?) wanted to avoid the possible complications that would ensue if the IPSA should ever decide to put trust arrangements in place and to lend MPs money re their expenses before they have been verified. Maybe. I still wonder who asked for the exemption to be drafted and why it was needed over and above all of the other exemptions that apply for everyone else. IF MP's are getting special treatment it would be outrageous - not for the first time of course.

*EDIT: Following my intervention AccountancyAge have revised the article to reflect the quoted words I referenced above.

Unreliable evidence: A high level Radio 4 discussion about tax avoidance

The Radio 4 programme, Unreliable Evidence, hosted by Clive Anderson, last night contained an informed and fascinating discussion about tax avoidance - the way in which people and companies make arrangements within the law to keep their tax bills low.

The first 25 minutes of the programme addressed a number of issues and misconceptions about corporate tax avoidance and also touched on the question of non-doms.

The guests were all senior, informed and credible tax experts - focused on looking at things from a strict legal perspective.
I recommend you listen to this on BBC iplayer if you have an interest in such matters. It was quite refreshing to hear such an informed discussion on the radio. Free of rhetoric it was illuminating. All of the speakers seemed to be adamant about the supremacy of the rule of law. They say there is no room for interpreting the 'will of Parliament' other than through a legal interpretation of the letter of the law.

Anyone hoping for some recognition that there is a difference between acceptable and unacceptable tax avoidance would have been disappointed by this first half of the programme. BUT, the second half was a revelation as regards the likelihood of us having a General Anti-Avoidance Rule in the near future. I'll be writing about this in a separate blog post.

What did you think of the first part of the programme? Please let me know in the comments box below.

Tuesday, April 5, 2011

50% tax rate announced in Budget 2009 but 2 years on and the self employed haven't paid it yet

For all the fuss about the impact of a new top rate of 50% income tax, no self employed person earning above the £150,000 threshold has yet paid tax at 50%. They need not have taken action to reduce their tax bills. It's just the way the tax system works.

Let me explain:
The new 50% rate was introduced by Alastair Darling in his 2009 Budget speech. As happens all the time now, the tax change did not take immediate effect. The first year’s taxable income to be affected was that for 2010/11 – the tax year that started on 6 April 2010 and ended on 5 April 2011.

The self employed and those living off rental or investment income pay their income tax in 3 instalments each year. When their tax liability increases it is only the final instalment that rises to reflect this. And for 2010/11 this tax will not be payable until 31 January 2012.

What about employees who pay tax through the PAYE system? Some of them also have yet to pay 50% tax. The Budget announcement in 2009 gave HMRC just a few months to establish systems to adapt PAYE codes. They were unable to do this for PAYE codes that employers used in 2010/11 where the individual had two or more employments. Instead HMRC added a note to their website for employees with income above £150,000:
"HMRC will work out how much tax you are actually due to pay when you send in your 2010-11 Self Assessment tax return. This may mean you'll owe some extra tax."
What does this mean?
I think it means that any research into the impact of the 50% rate would be premature. Some wealthy taxpayers may have taken steps to reduce their liability to tax at 50%. Beyond that the majority may well be thinking that it hasn't had much impact on them (yet). And that's because, despite being announced in April 2009, only high earning employees with just one job have so far paid any tax at 50%.

There is also every chance of a further uproar when unrepresented high earning employees file their tax returns and find that they owe thousands of pounds in tax. Someone earning £250,000 across two jobs for example might owe £10,000 despite paying tax through the PAYE system on both employments.

Monday, April 4, 2011

Tax tease: "Worse off Wednesday" is widiculous

I read about this in the Evening Standard on Friday 1st April but it's no April Fool. Then again I've not found anyone else writing about it, yet. But I bet they do on Wednesday although the origin of the phrase is unclear.

The Standard reports that:
Many households will see income fall from "Worse Off Wednesday" - April 6 - as the one per cent rise in National Insurance contributions comes in.
Nice alliteration but the story is a typical media tease. It references the changes in tax rates and allowances that take effect from 6 April, as well as the freeze in child benefit and changes to tax credits. The examples given in the article include a couple earning £20,000 who will be better off by £537 and others where the increase in tax will be less than £3 a week.

But the amounts involved are not the reason this article is a tease. It's the fact that it's been conceived by someone with no knowledge of our tax system.

Whilst the rules that determine various tax changes take effect from 6 April, no one will feel it in their pocket that day. Anyone on a salary will only be part way through spending their March pay-packet. The same goes for pensioners. It is only when the salary or pension for April is received that the changes will come into effect.

And the impact on self employed people will take even longer to be felt. Because of the rules that determine when they pay their tax, they will have until 31 January 2013 (yes, thirteen) before they need settle any additional tax and NICs. That's because tax increases only affect the final instalment of their tax liabilities. This isn't payable until 31 January after the end of the new tax year that runs from 6 April 2011 to 5 April 2012.

"Worse off Wednesday"? I don't think so. What about you?

Friday, April 1, 2011

Overlooked Budget paper will force Gordon Brown to apologise

One of the problems with the Budget is that there is just so much paperwork. Inevitably most people focus on the economic issues and the tax issues. Occasionally items get missed. And I think I've spotted one that has yet to be reported. I hope mainstream journals pick it up today or else it will be too late.

Hidden away on page 1420/11 of the appendices to the 2011 Budget book is a paragraph that seems out of place. The heading "Analysis of tax impact assessments" gives no real indication of the measure to which it refers. That is a review of tax policy changes that were then quickly revised during the ten year period 1 April 1998 to 1 April 2007.

This is the bulk of the period during which time Gordon Brown was Chancellor.

The text of the paragraph in question seems to have been written by one of GB's own cronies as it is much less clear than the rest of the Budget book.

A special Treasury committee is to be convened today to determine who is responsible for some of the worst tax changes introduced over the ten years in question.

If I have understood the measure correctly, those responsible, at the highest level (ie: Gordon Brown) will be called to account. They will then be required to apologise to taxpayers, to accountants, to tax advisers, to the Queen, to the House and to the Treasury Committee. They will also have to send personal letters of apology to all HMRC staff and all of their customers (ie: taxpayers). They will have to bear the cost of doing so out of their own pocket.

This measure seems designed to force GB to make a fool of himself.

I have long been critical of GB's approach to tax policy making. I disliked the short-term nature of the changes he introduced and the way he routinely had to make U-turns but was never open about this. I referenced a number of examples in 2008 when I wrote about my reasons for giving up giving tax advice after a career spanning 25 years.

I would hope the Treasury Committee will reflect on the short-lived £2,500 income disregard for tax credit purposes, the 0% corporation tax rate and the 10% income tax rate. There are plenty of other examples too.

I cannot wait to hear Gordon Brown apologise for the mess he made of the tax system during his time in office. It will take years to resolve. I am delighted to have spotted this news, on today of all days.