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!

Wednesday, June 8, 2011

Do 'economists' really think increasing tax rates is 'the' answer?

Last Sunday 52 'economists' signed a letter published by the Observer under the heading: Coalition's spending plans simply don't add up.

Today the Telegraph publishes a rebuttal signed by a number of different economists. The rebuttal is supported by the Adam Smith Foundation which is quoted by the Evening Standard as claiming that "only 15 of the 52 are actually practising mainstream economists". Apparently the 52 include left wingers, some who are overseas-based and a number of retired economists - as if any such qualities reduce the credibility of their views. How odd.

As it happens I don't agree with much of what the first letter says about tax but I'm happy to dispute it on the facts. It includes an assertion that:
".. a more effective strategy for sustainable growth would be clamping down on tax avoidance and evasion, as well as by raising taxes on those best able to pay"
I'm not any sort of an economist but I do know a thing or two about the tax world.

HMRC has been pushing just such a clampdown on tax avoidance and tax evasion for years. This was encouraged and supported by the Labour Government and there has been no discernible change under the Coalition Government. I have referenced many such examples on this blog in the past.

So what are the 'economists' really saying about tax? Ah yes:
"Raise the taxes on those best able to pay".
To an extent I share this desire. It's right - in theory.

I recall sharing my disappointment that the rate of CGT was only raised to 28% by this Government (up from the 18% rate brought in by Labour in place of the old 40% rate). As recorded on this blog last year I was told by a senior Treasury adviser that their modelling showed that had the rate increased above 28% the expected aggregate tax take from CGT would fall. This modelling is presumably driven by belief in the validity of the laffer curve.

I am sure that the rate of tax payable on one's income and gains does affect behaviour. Many high earners these days get to keep less than 50% of their income (after tax) and this is demotivating.

Thus 'The' solution is not a simple one of increasing the rate of income tax (or CGT) payable by the richest in society ("those best able to pay"). Instead HMRC and the Government have to continue their ongoing efforts to remove loopholes and overly generous tax reliefs. The complexity of our tax system makes even this 'simple' solution more complex than anyone would like. So it takes time. I wonder if 'economists' can agree on this?

Thursday, June 2, 2011

HMRC study shows majority of SMEs are tax compliant

My blog title is of course the converse of the FT report that: Business tax study says 35% would be dodgers. Apparently:
"More than one in three small businesses would understate their profits if they thought they could get away with it, according to official research." (The report was mentioned in Treasury select committee evidence (Q436-Q438) but does not seem to be available online)
The article goes on to quote the concerns of many in the business world re the consequences of HMRC believing that a third of small businesses are "attitudinally non-compliant" (ie: keen to cheat on their taxes).

I have a different perspective. To the extent that any genuine conclusions can be drawn from this research (which I doubt) - surely it's good news. Previously everyone assumed that HMRC started from the presumption that all or most small business owners were keen to fiddle their taxes. Now it seems that the converse is true. HMRC's research shows that two-thirds are honest, upstanding, Revenue fearing, tax compliant citizens. HMRC seem to agree. They are quoted in the FT article as stating that:
“Our research shows that 93 per cent of SMEs do not evade tax. We want to support the majority of honest businesses by reducing their administrative burdens and creating a more level playing field.”
If that's right this should all mean a change in Revenue attitudes FOR THE BETTER.

What do YOU think?