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:

Are Stamp Duty planning schemes worth the money?

NO. The Revenue do NOT approve Disclosed tax schemes

Tax planning to be wary of

Naive promoters of tax avoidance schemes

Tax avoidance is a card game - the metaphors multiply

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).

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.

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:

Life coaches, fitness coaches and tutors targeted by taxman
HMRC robots to catch out online traders
HMRC targets VAT cheats - or rather, it will do soon...
Last chance for tax cheats to get their tax affairs straight
Doesn't everyone try to avoid or evade taxes?

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.

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?

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.

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.

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."

The article was headlined: Phone hacking: police who took tip-off fees to be investigated by taxman

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?